U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended December 31, 1998
Commission File Number 0-17325
ENVIRONMENTAL REMEDIATION HOLDING CORP.
(Exact name of issuer in its charter)
COLORADO 88-0218499
(State of Incorporation) (IRS Employer ID Number)
3-5 Audrey Avenue
Oyster Bay, New York 11771
(Address of principal executive offices)
(Zip Code)
Registrant's telephone number, including area code: (516) 922-4170
Indicate by check mark whether the registrant (1) has filed reports required to
be filed by Section 13 of 15 (d) of the Securities Exchange Act during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes X No ____
Indicate the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date:
Common stock, $0.0001 par value
As of December 31, 1998 was 39,613,436
Documents Incorporated by Reference:
See Exhibit List
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
INDEX TO FINANCIAL STATEMENTS
Page
Consolidated Balance Sheets ...............................................F-2
Consolidated Statements of Operations ......................................F-3
Consolidated Statements of Stockholders' Equity ............................F-4
Consolidated Statements of Cash Flows .....................................F-5
Notes to Consolidated Financial Statements .................................F-6
F-1
<PAGE>
ENVIRONMENTAL REMEDIATION HOLDING CORPORATION
Consolidated Balance Sheets
<TABLE>
<S> <C> <C>
September 30, December 31,
1998 1998
----------------- ------------------
ASSETS (Unaudited)
CURRENT ASSETS
Cash $ 36,359 $ 30,655
Restricted cash 18,826 18,826
Accounts receivable 193,736 166,441
Prepaid expenses and other current assets 256,059 279,112
----------------- ------------------
Total current assets 504,980 495,034
----------------- ------------------
PROPERTY AND EQUIPMENT
Oil and gas properties 1,240,175 1,240,175
Equipment 6,435,113 6,435,113
----------------- ------------------
Total property and equipment before depreciation and depletion 7,675,288 7,675,288
Less: accumulated depreciation and depletion (1,020,626) (1,157,288)
----------------- ------------------
Net property and equipment 6,654,662 6,518,000
----------------- ------------------
OTHER ASSETS
Master service agreement 300 300
Investment in STPetro, S.A. 49,000 49,000
Due from STPetro, S.A. 452,276 871,719
DRSTP concession fee 4,000,000 4,000,000
Deferred offering costs 30,000 0
----------------- ------------------
Total other assets 4,531,576 4,921,019
----------------- ------------------
Total Assets $ 11,691,218 $ 11,934,053
================= ==================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Stockholder loans payable $ 731,328 $ 699,958
Current portion of long-term debt 308,636 735,808
Suspended revenue 141,409 154,686
Accounts payable and accrued liabilities :
Accounts payable 1,365,764 1,497,684
Accrued officer salaries 1,673,985 1,898,801
Accrued interest 1,116,196 1,750,946
----------------- ------------------
Total current liabilities 5,337,318 6,737,883
----------------- ------------------
LONG TERM LIABILITIES
Long term loans 41,631 38,347
Convertible debt, net 7,543,178 8,165,204
----------------- ------------------
Total long term liabilities 7,584,809 8,203,551
----------------- ------------------
Total Liabilities 12,922,127 14,941,434
----------------- ------------------
Common stock issued under a repurchase agreement; issued and
outstanding 1,000,000 and 750,000 shares 1,500,000 1,500,000
----------------- ------------------
STOCKHOLDERS' EQUITY (DEFICIT)
Preferred stock, $0.0001 par value; authorized 10,000,000 shares;
none issued and outstanding 0 0
Common stock, $0.0001 par value; authorized 950,000,000 shares;
issued and outstanding 25,999,900 and 28,469,586 2,600 2,847
Additional paid-in capital in excess of par 25,020,717 26,052,276
Additional paid-in capital - warrants 207,502 207,502
Deficit (29,224,228) (32,063,756)
Stock subscriptions receivable 0 0
Beneficial conversion feature 1,387,500 1,387,500
Deferred compensation, net (125,000) (93,750)
----------------- ------------------
Total Stockholders' Equity (Deficit) (2,730,909) (4,507,381)
----------------- ------------------
Total Liabilities and Stockholders' Equity (Deficit) $ 11,691,218 $ 11,934,053
================= ==================
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-2
<PAGE>
ENVIRONMENTAL REMEDIATION HOLDING CORPORATION
Consolidated Statements of Operations
(Unaudited)
<TABLE>
<S> <C> <C>
Three months ended December 31,
-----------------------------------------
1997 1998
----------------- -----------------
REVENUE
Environmental remediation services $ 146,083 $ 0
Crude oil 96,914 0
----------------- -----------------
Total revenue 242,997 0
----------------- -----------------
COSTS AND EXPENSES
Compensation :
Officers 301,250 408,250
Directors 0 0
Consulting fees 251,171 580,854
General and administrative expense 1,281,363 938,738
Depreciation and depletion 123,503 136,662
Interest expense 702,004 775,025
----------------- -----------------
Total costs and expenses 2,659,291 2,839,529
----------------- -----------------
Net income (loss) $ (2,416,294) $ (2,839,529)
================= =================
Weighted average number of shares outstanding 24,017,700 27,642,692
================= =================
Net income (loss) per share - basic $ (0.10) $ (0.10)
================= =================
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-3
<PAGE>
ENVIRONMENTAL REMEDIATION HOLDING CORPORATION
Consolidated Statement of Changes in Stockholders' Equity (Deficit)
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Common Stock Beneficial Total
APIC Conv. Stk .Subs. Defr'd Accum. S/H Equity
APIC Warrants Feature Receivable Comp. Deficit (Deficit)
------------------ ------------ ---------- ----------- ----------- -------- ------------ -------------
Number
of Shares Amount
---------- ------- ------------ ---------- ----------- ----------- -------- ------------ -------------
BALANCE, September 30, 1997 21,989,526 $ 2,199 19,952,865 0 0 (913,300) (250,000)(17,645,204) 1,146,560
Year ended September 31, 1998
Common stock issued for:
10/97 - stock subs rec'd - 0 0 0 0 913,300 0 0 913,300
10/97 - Uinta acquisition 1,000,000 100 1,999,900 0 0 0 0 0 2,000,000
10/97 - Nueces acquisition 50,000 5 148,745 0 0 0 0 0 148,750
11/97 - bene conv feat create - 0 0 0 1,075,000 0 0 0 1,075,000
1st quarter - services 355,000 36 921,964 0 0 0 0 0 922,000
1st quarter - cash 177,008 18 167,676 0 0 0 0 0 167,694
01/98 - building equity 24,000 2 69,998 0 0 0 0 0 70,000
2nd quarter - services 23,200 2 28,494 0 0 0 0 0 28,496
2nd quarter - cash 666,664 67 438,432 0 0 0 0 0 438,499
06/98 - bene conv feat create - 0 0 0 312,500 0 0 0 312,500
3rd quarter - services 162,420 16 102,868 0 0 0 0 0 102,884
3rd quarter - cash 234,200 23 135,577 200,000 0 0 0 0 135,600
09/98 - accounts payable 491,646 49 337,958 0 0 0 0 0 338,007
09/98 - option fee and penalty 229,536 30 219,193 0 0 0 0 0 219,223
4th quarter - services 479,700 48 473,552 0 0 0 0 0 473,600
4th quarter - cash 47,000 5 23,495 7,502 0 0 0 0 23,500
09/98 - deferred comp. amort - 0 0 0 0 0 125,000 0 125,000
Net loss - 0 0 0 0 0 0 (11,582,428) (11,582,428)
---------- ------- ------------ ---------- ----------- ----------- -------- ------------ -------------
BALANCE September 30, 1998 25,999,900 2,600 25,020,717 207,502 1,387,500 0 (125,000)(29,224,228) (2,730,909)
Three months ended December 31, 1998 (Unaudited)
Common stock issued for:
1st quarter - services 1,059,000 106 523,581 0 0 0 0 0 523,687
10/98 - conv. debt converted 1,210,686 121 365,999 0 0 0 0 0 366,120
11/98 - accounts payable 200,000 20 141,980 0 0 0 0 0 142,000
12/98 - deferred comp. amort. - 0 0 0 0 0 31,250 0 31,250
Net loss - 0 0 0 0 0 0 (2,839,529) (2,839,529)
---------- ------- ------------ ---------- ----------- ----------- -------- ------------ -------------
BALANCE, December 31, 1998
(unaudited) 28,469,586 $ 2,847 26,052,277 207,502 1,387,500 0 (93,750) (32,063,757) (4,507,381)
========== ======= ============ ========== =========== =========== ======== ============ =============
Common stock issued under a repurchase agreement:
BALANCE, September 30, 1997 1,000,000 $ 100 1,999,900 0 0 0 0 0 2,000,000
12/97 - cash repurchase (250,000) 0 (500,000) 0 0 0 0 0 (500,000)
---------- ------- ------------ ---------- ----------- ----------- -------- ------------ -------------
BALANCE, September 30, 1998 750,000 100 1,499,900 0 0 0 0 0 1,500,000
BALANCE, December 31, 1998
(Unaudited) 750,000 $ 100 1,499,900 0 0 0 0 0 1,500,000
========== ======= ============ ========== =========== =========== ======== ============ =============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-4
<PAGE>
ENVIRONMENTAL REMEDIATION HOLDING CORPORATION
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<S> <C> <C>
Three months ended December 31,
-------------------------------------
1997 1998
------------------ ----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (2,416,294) (2,839,529)
Adjustments to reconcile net loss to net cash used by operating activities:
Amortization of deferred compensation 31,250 31,250
Amortization of bene. conv. feat. and conv. debt expenses 646,517 116,208
Stock issued for services rendered 0 523,687
Write-off of deferred offering costs 0 30,000
Depreciation and depletion 123,503 136,662
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable 0 27,295
(Increase) decrease in prepaid expenses and other current assets (231,523) (23,053)
(Increase) decrease in due from STPetro, S.A. 0 (419,445)
Increase (decrease) in suspended revenue 0 13,277
Increase (decrease) in accounts payable 458,166 131,920
Increase (decrease) in accrued salaries 270,000 224,816
Increase (decrease) in accrued interest payable 49,271 775,025
------------------ ----------------
Net cash provided by (used by) operating activities (1,069,110) (1,271,887)
------------------ ----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
DRSTP concession fee payment (2,008,300) 0
Increase on deposits on fixed assets (164,145) 0
Acquisition of property and equipment (58,694) 0
------------------ ----------------
Net cash provided by (used by) investing activities (2,231,139) 0
------------------ ----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of bank borrowings (175,000) (1,112)
Proceeds from loans payable to stockholders 217,775 197,295
Payments on stockholder loans payable (207,861) (230,000)
Common stock and warrants sold for cash 167,694 0
Convertible debt sold for cash 3,767,000 1,300,000
------------------ ----------------
Net cash provided by (used by) financing activities 3,769,608 1,266,183
------------------ ----------------
Net increase (decrease) in cash 469,359 (5,704)
CASH, beginning of period 327,743 55,185
------------------ ----------------
CASH, end of period $ 797,102 49,481
================== ================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for interest $ 11,825 0
================== ================
Non cash financing and investing activities:
Stock issued to acquire:
Accounts payable settlement $ 0 142,000
================== ================
Conversion of convertible debt $ 0 366,120
================== ================
Conversion of accrued interest payable $ 0 6,938
================== ================
Conversion of convertible debt discount $ 0 53,168
================== ================
Oil and gas properties and equipment $ 2,148,750 0
================== ================
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-5
<PAGE>
ENVIRONMENTAL REMEDIATION HOLDING CORPORATION
Notes to Consolidated Financial Statements
(Unaudited)
(1) Summary of Significant Accounting Policies
Nature of operations.
ERHC operates in the environmental remediation industry and the oil and
natural gas production industry from its corporate headquarters in
Oyster Bay, New York and its operating offices in Lafayette, Louisiana.
Use of estimates
The consolidated financial statements have been prepared in conformity
with generally accepted accounting principles. In preparing the
financial statements, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities
as of the dates of the statements of financial condition and revenues
and expenses for the years then ended. Actual results could differ
significantly from those estimates.
Principles of consolidation
The consolidated financial statements include the accounts of SSI and
BAPCO, its wholly owned subsidiaries. Intercompany accounts and
transactions have been eliminated in the consolidation. The
consolidated financial statements for the three months ended December
31, 1997 and 1998 include all adjustments which in the opinion of
management are necessary for fair presentation
Cash equivalents
The Company considers all highly liquid debt instruments with an
original maturity of three months or less to be cash equivalents.
Concentration of risks
The Company primarily transacts its business with one financial
institution.
Accounts receivable
No allowance for uncollectible accounts has been provided. Management
has evaluated the accounts and believes they are all collectible.
Compensation for services rendered for stock
The Company issued shares of common stock in lieu of services rendered.
The costs of the services are valued according to the terms of relative
agreements, market value on the date of obligation, or based on the
requirements of Form S-8, if applicable. The cost of the services has
been charged to operations.
Net loss per share
Net loss per common share - basic is computed by dividing the net loss
by the number of shares of common stock outstanding during the period.
Net loss per share - diluted is not presented because the inclusion of
common share equivalents would be anti-dilutive.
(2) Going Concern
The Company's current liabilities exceed its current assets by
$6,242,850. The Company has incurred net losses of $2,416,294 and
$2,839,529 in the three months ended December 31, 1997 and 1998
respectively. These conditions raise substantial doubt as to the
ability of the Company to continue as a going concern. The Company is
in ongoing negotiations to raise general operating funds and funds for
specific projects. However, there is no assurance that such financing
will be obtained. The Company is in preliminary discussions with
several parties regarding the potential sale of some to all of its US
based crude oil production fields. In prior years, the Company was able
to raise funds in a timely manner, there is no evidence that they will
continue to do so in the future.
(3) Restricted Cash
A total balance of $18,826 in restricted cash, which is invested in
interest-bearing certificates of deposit, pledged as collateral for a
performance bond covering the Utah properties.
(4) Property, Equipment, Depreciation and Depletion
Property and equipment are valued at cost. Maintenance and repair costs
are charged to expense as incurred. When items of property or equipment
are sold or retired, the related costs are removed from the accounts
and any gains or losses are reflected as income. Depreciation is
computed on the straight-line method for financial reporting purposes,
based on the estimated useful lives of the assets. Autos and trucks are
depreciated over a three to five year life, field equipment over a five
to fifteen year life, office furniture over a three to five year life,
and the building over a thirty year life. Depreciation expense totaled
$122,793, and $136,046 for the three months ended December 31, 1997 and
1998, respectively. Depletion (including provisions for future abandon-
ment and restoration costs) of all capitalized costs of proved oil and
gas producing properties is expensed using the unit-of-productionmethod
by individual fields as the proven developed reserves are
F-6
<PAGE>
ENVIRONMENTAL REMEDIATION HOLDING CORPORATION
Notes to Consolidated Financial Statements
(Unaudited)
(4) Property, Equipment, Depreciation and Depletion (continued) produced. Deple-
tion expense was $710 and $616 for the three months ended December 31,
1997 and 1998, respectively.
At December 31, major classes of property and equipment consisted of
the following:
1997 1998
-------------------- --------------------
Oil and gas properties $ 1,044,375 $ 1,240,175
Land 2,500 2,500
Building 96,282 96,282
Field equipment 6,229,859 6,229,859
Office furniture and equipment 35,896 67,800
Vehicles 0 38,672
Deposit on purchase of equipment 300,705 0
-------------------- --------------------
Total 7,709,617 7,675,288
Less: accumulated depreciation (625,221) (1,157,288)
-------------------- --------------------
Net property and equipment $ 7,084,396 $ 6,518,000
==================== ====================
(5) Notes payable
The Company issued two notes payable to stockholders who are also
officers and directors in exchange for cash amounting to $2,039,700.
These notes carry no stated maturity date and an 8.5% rate of interest.
The Company has repaid $1,334,247 on these notes, including interest
and principal on one. The remaining note is convertible into restricted
stock at 50% of the average bid price for the month in which the loan
was made. The conversion is at the option of the noteholder. Accrued
interest on this note is $8,412 and $50,511 for the three months ended
December 31, 1997 and 1998 respectively.
In October 1998, the Company issued 20% convertible subordinated
unsecured notes due October 2000 in exchange for $500,000 cash. These
notes are convertible into shares of the Company's common stock at a
conversion price to be determined by so stated formula. If all of these
notes are converted using the conversion price as of the issuance date
($1.00), the Company will be required to issue 500,000 shares of common
stock. These notes also carried warrants for an additional 1,500,000
shares of common stock with an exercise price of $0.40 per share, or
total additional proceeds to the Company of $600,000 in cash in the
event all of the warrants are exercised.
In October 1998, the Company issued 12% convertible subordinated
unsecured notes due December 31, 1999 in exchange for $800,000 cash.
These notes are convertible into shares of the Company's common stock
at a conversion price to be determined by so stated formula. If all of
these notes are converted using the conversion price of the issuance
date ($1.25), the Company will be required to issue 640,000 shares of
common stock. These notes also carried "A" and "B" warrants for an
additional 1,200,000 and 1,200,000 shares of common stock with exercise
prices of $0.50 and $3.00 per share, or total additional proceeds to
the Company of $4,200,000 in cash in the event all of the warrants are
exercised.
In October 1998, the Company received conversion notices on $412,350 of
the convertible debt issued in July and August, 1998. This debt, and
accrued interest amounting to $6,938, was converted into 1,210,686
shares of common stock.
(6) Accrued Salaries
At December 31, 1997 and 1998 the Company has accrued salaries of
$1,230,000 and $1,898,801, respectively, for three officers. These
officers can, at their option, convert these salaries into common stock
of the Company at the rate of one-half of the average bid price of the
Company's common stock for the months in which the salary was earned.
(7) Accrued Interest
Accrued interest consisted of the following at December 31 :
1997 1998
--------------------- --------------------
Accrued interest - other $ 54,328 $ 56,774
Accrued interest - convertible debt 32,171 458,672
Accrued penalties - convertible debt 0 1,235,500
--------------------- --------------------
Total $ 86,499 $ 1,750,946
===================== ====================
F-7
<PAGE>
ENVIRONMENTAL REMEDIATION HOLDING CORPORATION
Notes to Consolidated Financial Statements
(Unaudited)
(8) Oil Production
The Company is utilizing the successful effort method of accounting for
its oil and gas producing activities. The Company regularly assesses
oil and gas reserves for possible impairment on an aggregate basis in
accordance with SFAS 121.
(9) Income Taxes
The Company has a consolidated net operating loss carry-forward
amounting to $32,063,756, expiring as follows: $3,404 in 2015, $728,748
in 2016, $16,913,052 in 2017, $11,582,428 in 2018 and $2,839,529 in
2019. The Company has an $12,825,000 deferred tax asset resulting from
the loss carry-forward, for which it has established a 100% valuation
allowance. Until the Company's current plans begin to produce earnings
it is unclear as to the ability of the Company to utilize these
carry-forwards. The Tax Reform Act of 1986 provided for a limitation on
the use of net operating loss carryforwards following certain ownership
changes. Such a change in ownership under the IRS rules and regulations
potentially could occur pursuant to the Company's S-1 amendment.
(10) Stockholders' Equity
The Company has authorized 950,000,000 shares of $0.0001 par value
common stock and 10,000,000 shares of $0.0001 par value preferred
stock.
During the first quarter of fiscal 1999, the Company issued 1,059,000
shares of common stock in exchange for services valued at $523,687. The
Company also issued 200,000 shares in settlement of a then outstanding
accounts payable amounting to $142,000. In October 1998, convertible
debt holders converted $412,350 of debt and $6,938 of accrued interest
into 1,210,686 shares of common stock.
Rescinded and returned shares
In September 1998, the Board of Directors authorized the issuance of
100,000 shares to a director. This director returned the shares to the
Company due to personal tax considerations. In September 1998, the
Board of Directors authorized the issuance of 2,000,000 shares each to
four officers and directors in connection with the DRSTP Agreement. In
December 1998, the Board of Directors rescinded the issuance as if it
had never occurred.
Procura Financial Consultants, cc (PFC)
Under the May 1997 Agreement between the DRSTP and the Company, PFC is
a junior partner to the Agreement. The Company and PFC are negotiating
an agreement whereby the Company would issue shares to PFC in exchange
for PFC foregoing its rights under the May 1997 Agreement. The Company
has issued, but not delivered 2,000,000 shares in anticipation of
settling this negotiation. However, at the date of this report no final
agreement has been reached.
Arbitration settlements
The Company has notified Kingsbridge that it intends to cancel the
equity line of credit previously negotiated. The negotiated
cancellation agreement requires the Company to pay $100,000 in cash and
issue warrants for 100,000 shares of common stock. This settlement
agreement has not yet been funded and Kingsbridge filed for arbitration
in December 1998.
In April 1998, Uinta Oil and Gas, Inc. (Uinta) filed suit in Utah
relating to the Company's October 1997 acquisition of twenty two oil
and gas wells in Utah. The other two joint sellers of these wells,
along with Uinta, filed a formal demand for arbitration as the purchase
agreement requires.The Company has entered into negotiations to settle
this matter and expects to issue additional shares in this settlement.
However at the date of this report no final agreement has been reached.
(11) Commitments and Contingencies
The Company is committed to lease payments for 10 vehicles under
operating leases totaling $50,598, $7,826 and $3,913 for the years
ended September 30, 1999, 2000 and 2001. The Company paid $19,160 and
$12,650 in vehicle lease expense for the three months ended December
31, 1997 and 1998, respectively. The Company currently leases its
office space and operating facilities on a two year lease and three
year lease respectively. The Company is committed to lease payments on
the two facilities totalling $67,108 and $60,808 for the years ending
September 30, 1999 and 2000. The Company paid $11,487 and $17,227 in
leased facility rent for the three months ended December 31, 1997 and
1998 respectively.
F-8
<PAGE>
ENVIRONMENTAL REMEDIATION HOLDING CORPORATION
Notes to Consolidated Financial Statements
(Unaudited)
(12) Segment Information
The Company has three distinct lines of business through its two wholly
owned subsidiaries, Site Services, Inc., (SSI), and Bass American
Petroleum Company, (BAPCO), and a joint venture agreement. SSI operates
in the environmental remediation industry and BAPCO will operate in the
oil and gas production industry. SSI's principal identifiable assets
consist of $3,224,000, net, of environmental equipment, and the Chevron
P&A master service agreement valued at $300, net. BAPCO's principal
identifiable assets consist of crude oil reserves valued at $1,240,175,
equipment valued at $2,508,000 and land and building valued at $98,782.
The Company also expects to operate in the supply industry through a
joint venture agreement to supply fuel and other goods to ships
transiting the Panama Canal. No principal identifiable assets yet exist
for this line of business.
(13) Sao Tome Concession
Concession fee payment
When the Company entered into the joint venture agreement in May 1997
with the Democratic Republic of Sao Tome and Principe, (DRSTP), the
Company was required to pay a $5,000,000 concession fee to the DRSTP
goverment. In September 1997, the Company received a Memorandum of
Understanding from the DRSTP government which allows the Company to pay
this concession fee within five days after the DRSTP files the relevant
official maritime claims maps with the United Nations and the Gulf of
Guinea Commission. In December 1997, the Company paid $2,000,000 of
this concession fee to the DRSTP from the proceeds of the convertible
note offering. On July 2, 1998 the Company paid $1,000,000 of the
Concession fee to the government of the DRSTP. On July 31, 1998 the
Company paid an additional $1,000,000 of the concession fee to the
government of the DRSTP.
Investment in STPetro, S.A.
In July 1998, the Government of the Democratic Republic of Sao Tome and
Principe established STPetro, S.A. as the national petroleum company.
The charter established the initial ownership of STPetro, S.A. as 51%
by the government and 49% by ERHC in exchange for $51,000 and $49,000
respectively. The Company immediately forwarded $20,000 of its $49,000
in cash, and believes that $29,000 of expenses it has paid on behalf of
STPetro, S.A. prior to its formation will be credited to it for the
balance owed.
Due from STPetro,S.A.
The Company has expended approximately $871,700 on behalf of STPetro,
S.A., principally prior to the formation of STPetro, S.A. The Company
believes that these expenses are recoverable from STPetro, S.A.
under its May 1997 agreement with the DRSTP.
(14) Suspended Revenue
The Company's oil and gas production revenue, amounting to $154,686 as
of December 31, 1998, has been placed in suspense as the Company has
not yet received valid complete division orders on its leases and wells
(18) Subsequent Events
Subsequent discovery
Subsequent to the filing of the Company's Form S-1 Amendment No. 3, and
Form 10-K Amendment No. 1 for the year ended September 30, 1998, it was
discovered that there may be a question of the ownership rights of the
Company in the BAPCO tool.
The Board of Directors was given notice under Section 10A(b)(2) of the
Securities and Exchange Act of 1934, as amended, and has filed a Form
8-K in compliance with the requirements of Section 10A(b)(3)
The Company and its independent auditors are conducting a full
investigation. Upon completion of the investigation, the Company
intends to amend its financial statements and other disclosures, should
changes be warranted.
No changes have been made to the financial statements for the three
months ended December 31, 1997 and 1998, pending the completion of this
investigation.
F-9
<PAGE>
Item 2. Management's Discussion and Analysis of the Financial Condition and
Results of Operations
Overview
The Company is an independent oil and gas company engaged in the
exploration, development, production and sale of crude oil and natural gas
properties with current operations focused in Texas, Utah and Sao Tome in West
Africa. The Company's goal is to maximize its value through profitable growth in
its oil and gas reserves and production. The Company has taken steps to achieve
this goal through its growth strategy of: (i) managing the exploration,
exploitation and development of non-producing properties in known oil-producing
areas, such as the Gulf of Guinea in West Africa, with industry or government
partners, (ii) at such times as pil prices are more favorable, continuing to
pursue environmental remediation service contracts for oil and gas well rework
and "plug and abandonment" services in the United States and internationally and
(iii) exploiting the BAPCO Tool.
The Company has acquired all of its oil and gas properties since 1997.
The Company's current development plans require substantial capital expenditures
in connection with the exploration, development and exploitation of oil and
natural gas properties. The Company has historically funded capital expenditures
through a combination of equity contributions and short-term financing
arrangements.
The following discussion should be read in conjunction with the
Consolidated Financial Statements and notes thereto appearing elsewhere in this
Prospectus.
Results of Operations
First Quarter Ended December 31, 1998 compared to First Quarter Ended December
31, 1997
During the first quarter ended December 31, 1998, the Company incurred
a net loss of $2,839,529, compared to a net loss of $2,416,294 in the first
quarter ended December 31, 1997, reflecting the Company's increased level of
business operations. In the first quarter ended December 31, 1998 a total of
$230,000 was accrued, but not paid in cash, as compensation to three officers of
the Company. Depreciation and depletion equaled $136,662 in the first quarter
ended December 31, 1998 compared to $123,503 in the first quarter ended December
31, 1997. Amortization of the beneficial conversion feature discount on
convertible debt was $23,438 for the quarter ended December 31, 1998 compared to
$646,517 for the quarter ended December 31, 1997. The net cash operating loss of
the Company for the first quarter ended December 31, 1998 was $1,271,887
compared to $1,069,110 for the first quarter ended December 31, 1997.
Officers' compensation, professional fees, travel, consultant fees and
miscellaneous expenses for the quarter ended December 31, 1998 compared to the
quarter ended December 31, 1997 increased significantly due to the Company's
business operations continuing to increase. Professional fees in the quarter
ended December 31, 1998 included legal, audit, petroleum engineering and other
engineering costs.
The Company had revenues of $ 0.00 in the first quarter ended December
31, 1998 compared to $242,997 in the first quarter ended December 31, 1997.
Liquidity and Capital Resources
Historically, the Company has financed its operations from the sale of
its debt and equity securities (including the issuance of its securities in
consideration for services and/or products) and bank and other debt. The Company
expects to finance its operations and further development plans during fiscal
1999 in part through additional debt or equity capital and in part through cash
flow from operations.
The Company presently intends to utilize any cash flow from operations
as follows: (i) seismic studies and fees for the Sao Tome joint venture; (ii)
production of wells in the Uintah Basin, (iii) production in the oil fields in
Texas; and (vi) working capital and general corporate purposes.
<PAGE>
Capital Expenditures and Business Plan
In May 1997, the Company entered into an exclusive joint venture with
the Democratic Republic of Sao Tome & Principe ("Sao Tome") to manage the
exploration, exploitation and development of the potential oil and gas reserves
onshore and offshore Sao Tome, either through the venture or in collaboration
with major international oil exploration companies. At that time, the Company
was required to pay a $5,000,000 concession fee to the Sao Tome government. In
September 1997, the Company received a Memorandum of Understanding from the Sao
Tome government which allows the Company to pay this concession fee within five
days after Sao Tome files the relevant official maritime claims maps with the
United Nations and the Gulf of Guinea Commission. In December 1997, the Company
paid $2,000,000 of this concession fee to Sao Tome from the net proceeds of the
1997 Private Placement, in June 1998, paid $1,000,000 of this concession fee
from the net proceeds of the Third June 1998 Private Placement, in August, paid
$1,000,000 of this concession fee from the net proceeds of the July/August 1998
Financing. $250,000 was paid from the net proceeds of the September 1998
Financing and $500,000 was paid from the net proceeds of the October 1998
Financing to pay other expenses and obligations relative to Sao Tome which the
Company believes will be credited to the concession fee.
The Company is currently in the initial phase of project development
and is conducting seismic surveys, processing existing seismic data and
reviewing environmental and engineering feasibility studies. During fiscal 1997,
the Company issued 1,000,000 shares of its common stock at a guaranteed value of
$2.00 per share to acquire geologic data concerning Sao Tome. The Company
anticipates spending approximately $2,200,000 over the next 12 months for
additional studies necessary to determine the location and depth of the targeted
oil and gas deposits. The Company has spent to date $250,000 in preparatory
expenses including determining the boundaries of the concession and facilitating
the passage of a law in Sao Tome regarding the boundaries of the country. The
costs of further development of this project cannot be determined until a more
definite development plan is established. The costs depend on the Company's
determination to either independently develop the concession, take on
operational partners or lease a portion of the concession for third-party
development.
In April 1998, the Government of Sao Tome granted approval to the joint
venture to proceed with the preparation and sale of leases of its oil concession
rights, which sales were expected to occur in early 1999. In June 1998, the
Company and Sao Tome signed a letter of intent to award a contract to
Schlumberger to perform a marine seismic survey in anticipation of the license
round to be held in Sao Tome, and to act as the technical advisor and
coordinator of such license round. Schlumberger is a seismic data service
company located in Great Britain. The exact number and size of the lease blocks
to be offered have not yet been determined. The Company intends to run the
survey and acquire the seismic data in late 1998 in order to proceed with the
licensing round commencing in early 1999. In July 1998, the Company closed and
formed the joint venture national oil company with the Government of Sao Tome.
The oil company is called the STPETRO. STPETRO is owned 51% by the Government of
Sao Tome and 49% by the Company. In addition, the Company was granted under the
original agreement with the government, a long term management arrangement with
STPETRO. In July 1998, the Ministry of Cabinets and the Prime Minister executed
the STPETRO formation documents and they were promulgated into law by the
President. In September 1998, the Government of Sao Tome and STPETRO entered
into a Technical Assistance Agreement with Mobil. Under such agreement, Mobil
will perform a technical evaluation and feasibility study of oil and gas
exploration on certain designated acreage. The agreement is for an initial term
of 18 months and superceded the need for lease sales in early 1999. Mobil
retains a right of first refusal to acquire development rights to all or a
portion of the acreage which it is evaluating. Mobil then executed an agreement
with Schlumberger to perform the marine seismic survey as previously agreed
under the letter of intent with the Company signed in June 1998. Under the
Mobil/Schlumberger agreement, Schlumberger began performing seismic work on the
option blocks designated in the TAA Agreement in January 1999. The Company
continues to maintain a right to construct the Off-Shore Logistics Center and is
seeking an appropriate joint venture partner for the project.
Revenues from the Company's operations in Sao Tome and substantially
all raw material purchases for use in Sao Tome will be U.S. dollar-denominated
and managed through the Company's Louisiana operational facility. The Company
believes that it will not be significantly affected by exchange rate
fluctuations in local African currencies relative to the U.S. dollar. The
Company believes that the effects of such fluctuations will be limited to wages
for local laborers and operating supplies, neither of which is expected to be
material to the Company's results of operations when the joint venture begins
more substantial operations in Sao Tome.
<PAGE>
In October 1997, the Company acquired a 37.5% interest in a 49,000 acre
natural gas lease, known as the "Nueces River Prospect," in the Nueces River
area of south Texas. The Company paid $200,000 and issued 50,000 shares of its
common stock to acquire the lease. The Company has spent more than $200,000
reworking the first of two existing shut-in wells on the property. Due to
mechanical failure downhole, this well has been shut in again. In 1998, the
Company planned on spending $650,000 to $1,200,000 to make the wells
operational, utilizing funds to be acquired under the Investment Agreement with
Kingsbridge. See "The Company --- The Kingsbridge Equity Line of Credit
Agreement." The Company is currently considering whether to conduct geophysics
surveys to aid in the selection of future drilling locations. The Company
believes that, assuming the entire lease is productive, there are about 75
locations to be drilled. In 1998, depending on the availability of funding, the
Company expected to drill 15 to 20 new wells at this site, at a cost of
approximately $650,000 to $1,200,000 per well. The Company is responsible for
only half of the drilling cost of each well, as it shares this cost with its
operational co-venturer, Autry Stephens & Co. The operational dates, as well as
the daily production rates, of the second well cannot be determined until the
completion of the reentry. The Company is currently meeting with two potential
farm-out partners to work the project and believes it will negotiate
arrangements to drill additional wells on the northern and southern portions of
the leasehold.
In February and March 1997, the Company acquired leases in oil fields,
which together comprise approximately 1,200 acres and 200 wells, located in Rusk
County and Wichita County, Texas. The Company issued 500,000 shares of its
common stock to acquire the leases. Through December 1997, the Company had
recompleted 18 wells, all of which were operational as of March 20, 1998. Of
these wells, 13 had mechanical failures. The Company has located its BAPCO Tool
on site. The Company anticipates spending $1,200,000 in order to bring
production on the fields up to a commercial level. At the current time, the
Company is evaluating feasible economic options including the potential sale of
the Rusk County and Wichita County properties.
In July 1997, the Company entered into a joint venture with MIII
Corporation, a Native American oil and gas company, to workover, recomplete and
operate 335 existing oil and gas wells on the Uintah and Ouray Reservation in
northeastern Utah. At this time, none of the wells are operational. The Company
had designed a development program, under which it planned to recomplete and
restimulate 36 wells and to drill five to seven development and extension wells
at this site. This plan would require spending a minimum of $1,000,000 to
$1,500,000 in order to make the project operational. Subject to the availability
of such funds, the Company anticipated that the first wells would be on line by
fall 1998. The leases on the MIII project were never transferred to the Company
and it is currently evaluating its options with regard to this project.
In September 1997, the Company acquired net revenue interests ranging
from 76% to 84% (and 100% working interest in all but 2 of the wells) in oil and
gas properties totaling 13,680 acres, located near the MIII fields in the Uinta
Basin with 22 oil and natural gas wells. These wells are currently producing
approximately 70 barrels of oil per day from six producing wells which began
realizing revenues for the Company in November 1997. The Company planned on
spending approximately $1,000,000 on additional equipment and up to $80,000 per
well on well stimulation in order to bring 12 more wells on line in 1999. The
Company plans to plug and abandon 2 more wells and to perform further study on
the other 2 wells. The Company planned on funding this plan through the use of
funds acquired under the Kingsbridge Equity Line of Credit Agreement. To date,
the Company has received no funds under the Kingsbridge Investment Agreement, no
longer intends to take down any funds under this agreement, has negotiated terms
to cancel this agreement and Kingsbridge is seeking arbitration of the agreement
and its cancellation. See Part II, Item 1. "Legal Proceedings." Provided
additional financing of $5,000,000 to $10,000,000 is secured from another
source, the Company would schedule to implement a recompilation and drilling
program on this project. The Company is currently evaluating the existing
reserve reports, the underlying data on these leases and the economic
feasibility of increasing production in light of the current oil prices or of
the sale or other disposition of these properties. The Company is engaged in
arbitration regarding this project and believes that a settlement on all issues
may be completed in the first quarter of 1999.
<PAGE>
In April 1997, the Company entered into a master service agreement with
Chevron to rework, in order to draw additional production from, approximately
400 depleting oil and gas wells and to remediate and "plug and abandon" these
and other wells when depleted, in Chevron's oil fields in southern Louisiana
along the Gulf of Mexico. The Chevron agreement provides for a three-year work
schedule, commencing upon the completion of the Company's 140 foot "plug and
abandonment" barge. This barge will be used to remediate offshore oil rigs and
be capable of working in coastal waters as shallow as 19 inches. A substantial
deposit was made by the Company to secure the barge. The Company believes the
original barge supplier will not be able to deliver since the owner of the
company died. The Company is attempting to recover the deposit and is seeking an
alternate supplier. Additional funding is being sought to purchase and equip the
barge. It is estimated that the Company's barge could be ready to operate 180
days following funding. Due to the price structure of the oil and gas business
at this time, the Company does not believe that it is in its best interest to
construct this barge. However, a substantial increase in oil prices would cause
the Company to reevaluate its decision regarding such construction. To date, the
Company has not yet determined the extent of financing that will be necessary
for this project. The Chevron agreement was originally entered into by BAPCO and
BEW in September 1996, prior to the acquisition of BAPCO by the Company in April
1997, and was assigned to the Company with Chevron's consent at the time of the
acquisition. The Company issued 3,000,000 shares of Common Stock to BEW in
connection with the assignment of this agreement.
During fiscal 1997, the Company issued 4,000,000 shares of its common
stock to acquire BAPCO, a non-operating oil production company with significant
well rework equipment assets.
The Company's current development plans require substantial capital
expenditures in connection with the exploration, development and exploitation of
its oil and natural gas properties. Historically, the Company has funded capital
expenditures through a combination of equity contributions and short-term
financing arrangements. The Company believes that it will require a combination
of additional financing and cash flow from operations to implement future
development plans. Although Company management is exploring the private and/or
public equity markets as potential capital sources in connection with its
development plans, the Company currently does not have any binding arrangements
with respect to, or sources of, additional financing, and there can be no
assurance that any additional financing will be available to it on reasonable
terms or at all. Future cash flows and the availability of financing will be
subject to a number of variables, such as the level of production from existing
wells, prices of oil and natural gas and success in locating and producing new
reserves. To the extent that future financing requirements are satisfied through
the issuance of equity securities, shareholders of the Company may experience
dilution that could be substantial. The incurrence of debt financing could
result in a substantial portion of operating cash flow being dedicated to the
payment of principal and interest on such indebtedness, could render the Company
more vulnerable to competitive pressures and economic downturns and could impose
restrictions on operations. If revenue were to decrease as a result of lower oil
and natural gas prices, decreased production or otherwise, and the Company had
no availability under a bank arrangement or other credit facility, the Company
could have a reduced ability to execute current development plans, replace
reserves or to maintain production levels, any of which could result in
decreased production and revenue over time.
Reserves and Pricing
Oil and natural gas prices fluctuate throughout the year. Generally,
higher natural gas prices prevail during the winter months of September through
February. A significant decline in prices would have a material effect on the
measure of future net cash flows which, in turn, could impact the value of the
Company's oil and gas properties. Such decline occurred in fiscal 1998. This was
primarily due to excess oil supplies worldwide.
The Company retains flexibility to participate in oil and gas activities at
a level that is supported by its cash flow and financial ability. The Company
intends to continue to use financial leverage to fund its operations as
investment opportunities become available on terms that management believes
warrant investment of the Company's capital resources.
The Company expects to utilize the "successful efforts" method of
accounting for its oil and gas producing activities once it has reached the
producing stage. The Company expects to regularly assess proved oil and gas
reserves for possible impairment on an aggregate basis in accordance with SFAS
No. 121.
<PAGE>
Net Operating Losses
The Company has net operating loss carryforwards of $32,063,756 which
expire in the years 2010 through 2019. The Company has a $12,825,000 deferred
tax asset resulting from the loss carryforwards, for which it has established a
100% valuation allowance. Until the Company's current operations begin to
produce earnings, it is unclear as to the ability of the Company to utilize such
carryforwards.
Year 2000 Compliance
The Company is currently in the process of evaluating its information
technology for Year 2000 compliance. The Company does not expect that the cost
to modify its information technology infrastructure to be Year 2000 compliant
will be material to its financial condition or results of operations. The
Company does not anticipate any material disruption in its operations as a
result of any failure by the Company to be in compliance.
Forward-Looking Statements
This Form 10-Q includes "forward-looking statements" within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. All statements, other than
statements of historical facts, included or incorporated by reference in this
Form 10-Q which address activities, events or developments which the Company
expects or anticipates will or may occur in the future, including such things as
future capital expenditures (including the amount and nature thereof), wells to
be drilled or reworked, oil and gas prices and demand, exploitation and
exploration prospects, development and infill potential, drilling prospects,
expansion and other development trends of the oil and gas industry, business
strategy, production of oil and gas reserves, expansion and growth of the
Company's business and operations, and other such matters are forward-looking
statements. These statements are based on certain assumptions and analyses made
by the Company in light of its experience and its perception of historical
trends, current conditions and expected future developments as well as other
factors it believes are appropriate in the circumstances. However, whether
actual results or developments will conform with the Company's expectations and
predictions is subject to a number of risks and uncertainties, general economic
market and business conditions; the business opportunities (or lack thereof)
that may be presented to and pursued by the Company; changes in laws or
regulation; and other factors, most of which are beyond the control of the
Company. Consequently, all of the forward-looking statements made in this Form
10-Q are qualified by these cautionary statements and there can be no assurance
that the actual results or developments anticipated by the Company will be
realized or, even if substantially realized, that they will have the expected
consequence to or effects on the Company or its business or operations. The
Company assumes no obligations to update any such forward-looking statements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
None
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Piedra Drilling Company, Inc. ("PDC") commenced an action against the
Company in Denver, Colorado in July 1997. PDC brought this action to enforce a
contract for the issuance of 450,000 shares of the Company's common stock in
consideration for the sale by PDC to the Company of certain drilling equipment
and designs. The Company did not issue the shares to PDC because the necessary
equipment and designs were not delivered and/or validly assigned to the Company.
PDC obtained a default judgment in the amount of approximately $1.2 million,
which was vacated in November 1997. Colorado counsel for the Company filed an
answer, counterclaims and discovery demands in November 1997. The Company
believed it has a number of meritorious defenses and potential counterclaims and
vigorously defended this action. This case went to trial in August 1998 in
Denver and judgment was found in favor of the Company. The award is in excess of
$17,000, however, there local counsel believes that such judgment may not be
recoverable since PDC has few assets. The time for appeal has lapsed and the
Company is evaluating whether to seek recovery on the judgment.
<PAGE>
Uinta Oil & Gas, Inc., ("Uinta") one of the three "joint" sellers under
the agreement to acquire the Uinta leases and certain other assets took certain
actions that were in contravention of the agreement when certain anticipated
funding to the Company did not occur. The Company gave Uinta notice of its
demand for arbitration under the agreement. Uinta commenced an action agains the
Company, BAPCO, Sam L. Bass, Jr., Noreen Wilson, Jim Griffin, Robert E. McKnight
and Robert Ballou (the Company's geologist) in Uintah County, Utah in April
1998. The complaint alleges fraud in the inducement, rescission of the
agreement, breach of contract and securities fraud and requests punitive damages
and appointment of a receiver. The Company then filed a formal demand for
arbitration. Uinta filed a request for a receiver to be appointed. This motion
was denied; however, the court held the issue of arbitration in abeyance pending
an evidentiary hearing on the allegations of Uinta's allegations of fraud since
Utah law contains an exception to mandatory arbitration when there are
allegations of fraud. Prior to the hearing on receivership, the other two
"joint" sellers, Coconino, S.M.A., Inc. and Pine Valley Exploration, Inc. filed
their formal demand for arbitration. In the interim, the Company made an offer
to settle this matter. A settlement on all issues was completed in January 1999.
The suit was dismissed with prejudice on February 9, 1999. Under the terms of
the executed settlement, for the 500,000 shares of restricted stock which were
issued at a guarantee price of $2 per share, additional restricted shares were
issued which reflect the difference between $2 and the price on October 16, 1998
and December 30, 1998 and the 500,000 shares of restricted stock which were to
be issued in early 1998 were issued and treated as if issued at the time such
deliverance was initially required. In addition, the parties will receive
additional shares equal to the difference between the value calculated on the
closing date in January 1999 and $2 (calculated at $.3267 per share, the "Strike
Price") for the second block of 500,000. The Company reimbursed certain filing
fees, attorneys fees and paid for certain office equipment. The Company received
a quitclaim deed and assignments to perfect the Company's interest in the
leases. In addition, (1) Uinta will be issued shares of the Company's Common
Stock the amount of which shall be determined by dividing $250,000 by the Strike
Price, half of which shares shall be included in the Company's registration
statement on Form S-1/A (the "Registration Statement") and half of which shall
be restricted securities, (2) in exchange for assignment of a 4% overriding
royalty interest, Uinta will receive restricted shares the amount of which shall
be determined by dividing $677,000 by the Strike Price, (3) a deficiency value
equal to $41,200 for the Utah office building will be liquidated by issuance of
shares the amount of which shall be equal to $41,200 divided by the Strike
Price, which shares were included in the Registration Statement, (4) Uinta
received no more than $10,000 to cover its court costs and attorneys fees, and
(5) payment of outstanding production service invoices to third parties
totalling $27,000 shall be paid in the form of shares included in the
Registration Statement, which shares shall be equal to $27,000 divided by the
Strike Price. See Part II, Item 2. "Changes in Securities and Use of Proceeds -
January 1999 Shares Issuances."
On August 11, 1998, the Company and Kingsbridge agreed to enter into an
agreement to cancel the Kingsbridge Private Equity Line of Credit dated March
23, 1998. Pursuant to the terms of the proposed cancellation, the Company will
pay a penalty in the amount of $100,000 and will issue warrants to purchase up
to an additional 100,000 shares of the Company's Common Stock (the "Kingsbridge
Warrants"). The Company has decided to cancel the Kingsbridge Private Equity
Line of Credit because terms of certain of the third quarter 1998 fundings
require the Company to cancel this agreement so as to limit the number of shares
of the Company's Common Stock outstanding upon conversion of the Company's
convertible notes in the future. However, as of December 31, 1998, the Company
had not completed the terms of the anticipated cancellation, and therefore
continues to be obligated to register the potential Kingsbridge shares issuable
under the put option exercise notice and the Kingsbridge Warrant. Under the
terms of the cancellation, the Company will be responsible for the registration
of the additional warrants. On December 10, 1998, Kingsbridge made application
to the American Arbitration Association for arbitration of outstanding issues
between the parties, claiming beaches of contracts. The Company has filed an
Answer in such proceedings. The Company believes it has just and meritorious
defenses to the claims and intends to vigorously defend these claims. An initial
arbitration conference is scheduled for mid February 1999.
Other than the above legal proceeding, the Company is not a party to
any other material pending or threatened legal proceeding.
Item 2. Changes in Securities and Use of Proceeds
There have been no changes with respect to defining the rights of
holders of any class of registered securities or otherwise.
In the first quarter of fiscal 1999 and through the most practicable date,
the Company issued the following rights, shares and warrants of unregistered
securities:
<PAGE>
The September 1998 Financing
By documents dated September 1998, the Company raised gross proceeds of
$500,000 in October 1998 in a private placement of the Company's 20% convertible
note due in October 2000 (the "September 1998 Note") and a warrant to purchase
shares of Common Stock (the "September 1998 Warrant") to one "accredited"
investor. The conversion price is calculated pursuant to a formula as the lower
of (i) 90% of the average closing bid price for the five days prior to
conversion or (ii) $1.00. In the event that the lower price were $1.00 maximum
number of shares of Common Stock which may be issued by the Company upon
conversion of the September 1998 Note would be 750,000 (assuming the lower price
is $1.00 and pursuant to the terms of the September 1998 Note which require
registration to initially cover 150% of the shares underlying the September 1998
Note). For purposes of registering the maximum number of shares of Common Stock
under the Registration Statement, the conversion rate is assumed to be $1.00.
Because the conversion rate of the September 1998 Note is based in part on
future average trading prices of the Common Stock, the number of shares which
may actually be sold pursuant to the Registration Statement could differ
significantly. For example, in the event the average closing bid price for the
five days prior to notice of intent to convert were $.50, 90% of such number
would equal a share price of $.45, resulting in a total of 1,111,111 shares of
Common Stock issuable upon conversion, exclusive of the exercise of any of the
September 1998 Warrant and the requirement of registration of 150% would equal
1,666,666 shares of Common Stock. The maximum number of shares of Common Stock
which may be issued by the Company upon the exercise of the September 1998
Warrant (at an exercise price of $.40) is 1,500,000 shares. The Registration
Statement covers the up to 2,250,000 total shares of Common Stock issuable, with
certainty, upon the conversion of the September 1998 Note and the exercise of
the September 1998 Warrant. As of the date hereof, none of the September 1998
Note had been converted and none of the September 1998 Warrant had been
exercised.
The September 1998 Note precludes the holder from converting all or any
part of said note prior to the first anniversary date of issuance (October 26,
1999). The conversion rate of the September 1998 Note equal to $1.00 per share
was used for purposes of registering the maximum number of shares of Common
Stock upon conversion of the September 1998 Note under the Registration
Statement. The September 1998 Note is subordinates to any senior debt incurred
by the Company. Commencing on the first anniversary of the issuance of said
note, the remaining principal amount and all accrued and unpaid interest and
fees, if any, shall automatically and without further action on the part of the
holder be payable in twelve monthly installments commencing with a first payment
on November 1, 1999 and a final payment on the maturity date. The Company has
the option at any time prior to the first anniversary of said note to prepay all
or any portion of the remaining principal plus an amount equal to twenty percent
on the portion so paid.
Under the terms of the September 1998 Warrant , the holder may exercise
at any time from the issuance date until October 26, 2008, for up to 750,000
shares of Common Stock and from October 26, 1999 until October 26, 2008, 750,000
shares of Common Stock. The exercise price of the September 1998 Warrant is
equal to $.40 per share and this price was used for purposes of registering the
maximum number of shares of Common Stock under the Registration Statement for
exercise of the September Warrant.
In connection with the sale of the September 1998 Note and the
September 1998 Warrant, the Company agreed (i) to use its best efforts to
register 150% of the September 1998 Note shares under the Securities Act for
resale by, and for the benefit of, such shareholders within one year of issuance
and to have such registration remain effective until the earlier of the date
upon which the Note is sold or the term of said note and further, granted the
holder certain piggy-back registration rights; and (ii) to use its best efforts
to register 100% of the September 1998 Warrant under the Securities Act for
resale by, and for the benefit of, such shareholders within two years of
issuance and to have such registration remain effective until the earlier of the
date upon which the Warrant is sold or for the life of said warrant and further
granted the holder certain piggy-back registration rights.
The Company used $250,000 of the net proceeds to make certain payments
necessary for Sao Tome other than the concession fee and the balance was used
for working capital.
<PAGE>
The October 1998 Financing
In October 1998, the Company commenced a the private placement for up
to $1,500,000 under which it has raised gross proceeds in three (3) closings
totaling 800,000 of the Company's 12% subordinated convertible notes, which are
due on December 31, 1999 (the "October 1998 Notes"), and "A" and "B" warrants to
purchase shares of Common Stock (the "October 1998 "A" and "B" Warrants") to a
limited number of "accredited" investors. The maximum number of shares of Common
Stock which may be issued by the Company upon the conversion of the October 1998
Notes (at a base conversion price of $1.25 per share), subject to certain
adjustments, the exercise of the October 1998 "A" Warrants (at an exercise price
of $.50 per share) and the exercise of the October 1998 "B" Warrants (at an
exercise price of $3.00 per share) is up to 640,000 shares, 1,200,000 shares and
1,200,000 shares, respectively. The Registration Statement covers the 3,040,000
shares of Common Stock issuable upon the conversion of the October 1998 Notes
and the exercise of the October 1998 "A" and "B" Warrants. As of the date
hereof, none of the October 1998 Notes or the October 1998 "A" or "B" Warrants
had been exercised.
All of the shares to be held upon conversion by the holders of the
October 1998 Notes may be offered in that, under their terms, such holders may
convert 100% of the principal amount of said notes at any time after the
issuance date. The conversion rate of the October 1998 Notes is equal to $1.25
per share and this price was used for purposes of registering the maximum number
of shares of Common Stock upon conversion of the October 1998 Notes under the
Form S-1. The October 1998 Notes are subordinated to any senior debt incurred by
the Company. All of the shares to be held upon exercise by the holders of the
October "A" 1998 Warrants may be offered in that, under the terms of the October
1998 "A" Warrants, holders may exercise at any time until December 31, 2003. The
exercise price of the October 1998 "A" Warrants is equal to $.50 per share
(subject to adjustment) and these prices were used for purposes of registering
the maximum number of shares of Common Stock under the Registration Statement
for exercise of the October 1998 "A" Warrants. All of the shares to be held upon
exercise by the holders of the October "B" 1998 Warrants may be offered in that,
under the terms of the October 1998 "B" Warrants, holders may exercise at any
time until the earlier of (i) five years from the date of exercise of the
October 1998 "A" Warrant or (ii) December 31, 2008. The exercise price of the
October 1998 "B" Warrants is equal to $3.00 per share (subject to adjustment)
and these prices were used for purposes of registering the maximum number of
shares of Common Stock under the Registration Statement for exercise of the
October 1998 "B" Warrants. The October 1998 Notes and the October 1998 "A" and
"B" Warrants have certain piggy-back registration rights. The October 1998 "A"
and "B" Warrants contain cashless exercise and anti-dilution provisions which
include, but are not limited to, anti-dilutive protection against stock or
management option issuances below $.50 per share. The Company has the right to
call the October 1998 "A" Warrant at any time after the underlying shares are
registered if the Common Stock of the Company exceeds a price of $4.50 per share
for an average of twenty consecutive trading days. The Company has the right to
call the October 1998 "B" Warrants at any time after eighteen months after the
holder has exercised its October 1998 "A" Warrant and after the underlying
shares are registered if the Common Stock of the Company exceeds a price of
$9.00 per share for an average of twenty consecutive trading days. The Company
has agreed not to call the "A" and "B" warrants simultaneously. In connection
with the sale of the October 1998 Notes and the October 1998 "A" and "B"
Warrants, the Company committed to register the October 1998 shares under the
Securities Act for resale by, and for the benefit of, such shareholders.
The Company used $500,000 of the net proceeds to fulfill its
obligations under its contract with Sao Tome and the balance was used to fund
operating costs relative to the Sao Tome operation and to provide working
capital.
October Share Issuances
In October, 1998, the Company issued 109,000 shares of its Common Stock
for consulting services valued at $45,984.
In October 1998, the Company, under a mistaken interpretation of a
contingent obligation of the Company to issue shares in connection with the
efforts to close the Sao Tome contract, issued 2,000,000 shares to each of Sam
L. Bass, Jr., James R. Callender, Sr., Noreen Wilson and James A. Griffin. When
it was discovered that such shares were issued in error, by vote of the Board of
Directors, on December 18, 1998, such issuance was rescinded. Mr. Bass, Mr.
Callender and Mr. Griffin have agreed to tender their shares immediately to the
transfer agent for cancellation. The transfer agent has been notified to place a
stop upon the shares of Ms. Wilson in the event her shares are not tendered in a
timely fashion. On the same date, the Company issued 425,000 shares to Robert
McKnight and 100,000 to Kenneth M. Waters in connection with their serving on
the Board of Directors. Such shares are not subject to the rescission. Mr.
Waters has tendered his shares back to the Company for cancellation because of
personal tax considerations.
<PAGE>
November Share Issuances
In November, 1998, the Company issued 100,000 shares of its Common
Stock for consulting services valued at $71,000.
In November, 1998, the Company registered on Form S-8 550,000 shares
and options exercisable for an additional 300,000 shares of the Company's Common
Stock which were issued to consultants.
By Agreement dated August 18, 1998, Procura Financial Consultants, cc.
("Procura") assigned and transferred all of its rights and obligations in the
joint venture between the Democratic Republic of Sao Tome and Principe, the
Company and Procura to the Company. In consideration of such assignment, the
Company issued 2,000,000 shares of its restricted stock to Procura. As of
December 31, 1998 said shares had not been delivered to Procura because Procura
has made certain claims to the Company that it or its principals are entitled to
additional shares. The Company has authorized further negotiations to settle any
disputes with Procura. Under the terms of the approved offer, Procura would
receive 4,000,000 shares of restricted Common Stock, $12,000 per month for 6
months and warrants to purchase 2,000,000 shares of Common Stock on a graduated
basis beginning at $1.00 and increasing to $3.00 exercisable in increments of
250,000 based upon production levels. Based upon prior meetings with the
principals of Procura, the Company believes such offer will be accepted. As of
the date hereof, such negotiations have not been completed.
December Share Issuances
In December 1998, the Board of Directors appointed Mateus M. (Nando)
Rita as Vice President of International Affairs and authorized the issuance of
500,000 shares of restricted Common Stock to him in connection with services to
the Board of Directors valued at $158,203.
In December, 1998, the Board of Directors authorized an Form S-8
registration to cover shares to be issued to three consultants. As of the date
of the minutes, the Company is obligated to issue such shares at such time as
such registration is effective. However, the Board determined that it was in the
best interest of the Company to wait to complete such registration until such
time as the Form S-1/A, the Form 10K for the fiscal year ended September 30,
1998 and this Form 10-Q were filed. Such registration will cover 1,166,000
shares of the Company's Common Stock.
January 1999 Share Issuances
In January 1999, the Company agreed to a settlement with Uinta.
Pursuant to such settlement, the Company issued shares of Common Stock on
January 18, 1999 and agreed to issue additional shares based upon the Strike
Price determined on January 18, 1999. The Registration Statement covers the up
to 1,144,000 total shares of Common Stock issuable, with certainty, upon the
completion of the Uinta settlement.
Under the terms of the executed settlement, for the 500,000 shares of
restricted stock which were issued at a guarantee price of $2 per share,
additional restricted shares were issued which reflect the difference between $2
and the price on October 16, 1998 and December 30, 1998 (under the formula set
forth in the agreement, 861,111 and 1,312,500 shares of restricted stock
respectively) and the 500,000 shares of restricted stock which were to be issued
in early 1998 were issued and treated as if issued at the time such deliverance
was initially required, which shares bear registration rights and are included
in the Registration Statement. In addition, the parties will receive additional
shares equal to the difference between the value on the closing dated of January
18, 0999 and $2 for the second block of 500,000 (2,560,912 at Strike Price of
restricted stock). The Company reimbursed certain filing fees, attorneys fees
and paid for certain office equipment. The Company received a quitclaim deed and
assignments to perfect the Company's interest in the leases. In addition, (1)
Uinta will be issued shares of the Company's Common Stock the amount of which
was determined by dividing $250,000 by the Strike Price, half of which shares
were included in the Registration Statement and half which shall be restricted
securities (at the Strike Price, 382,614 shares of restricted stock and 382,614
shares which bear registration rights and are included in the Registration
Statement) , (2) in exchange for assignment of a 4% overriding royalty interest,
Uinta will receive restricted shares the amount of which shall be determined by
dividing $677,000 by the Strike Price (2,072,238 shares of restricted stock),
(3) a deficiency value equal to $41,200 for the Utah office building will be
liquidated by issuance of shares the amount of which shall be equal to $41,200
divided by the Strike Price, (126,110 shares of Common Stock, which shares bear
registration rights and are included in the Registration Statement, (4) Uinta
received no more than $10,000 to cost its court costs and attorneys fees, and
(5) payment of outstanding production service invoices to third parties totally
$27,000 shall be paid in the form of shares with registration rights, which
shares shall be equal to $27,000 divided by the Strike Price (82,644 shares
which are included in the Registration Statement).
<PAGE>
In July 1997, the Company acquired certain geological data and other
information relative to Sao Tome valued at $2,000,000 from Christian Hellinger.
At that time, the Company issued 1,000,000 shares of its Common Stock at a
guaranteed price of $2.00 per share. Subsequently, the price of the Company's
shares dropped. Through December 31, 1998, the Company had repaid $908,925 of
the $2,000,000 debt. In January 1999, the Board of Directors reached a
settlement with Mr. Hellinger relative to the balance of $1,091,075 in which he
agreed to take 3,308,712 share of restricted Common Stock in full liquidation of
the balance due.
February 1999 Share Issuances
Pursuant to an agreement with the holder of the Third June 1998 Note,
the Company has agreed to issue 387,501 shares of Common Stock which have
registration rights and which have been included in the Registration Statement
in lieu of certain penalties associated with the Company's failure to have its
Registration Statement effective within sixty days. See Part II, Item 3.
"Defaults Upon Senior Securities."
Item 3. Defaults Upon Senior Securities
None.
A requirement of funding provided to the Company in November, 1997 from
Avalon Research Group, Inc. ("Avalon") was that the Company would file its
registration statement within forty-five (45) days of the funding. The Form S-1
was filed by the Company on January 8, 1998; however, this eight (8) day
lateness was waived by the Avalon investors. In addition, the Company had agreed
to use its best efforts to have its registration statement declared effective
within one hundred twenty (120) days of the November 15, 1997 closing. The
Company believes that it has used its best efforts to have its registration
declared effective. The Avalon registration rights agreement required that in
the event that the registration statement was not effective within one hundred
twenty (120) days, that the Company would pay as liquidated damages an amount
equal to three percent (3%) of the aggregate amount of the notes per month. As a
result of the delay in declaring the Form S-1 as amended effective, the Company
owes the Avalon investors $136,500 for a part of the month of March and for the
full months of April, May and June 1998 and a additional amount of $39,000 for
the month of July 1998. These outstanding amounts do not represent a default
under the convertible senior subordinated notes issued to the Avalon investors;
however do represent a debt due by the Company and a default under the
Collateral Assignment Security Agreement under which the Company granted to the
Avalon investors a security interest in the rights to certain oil and gas
reserves located in Duchesne and Uintah Counties, Utah pursuant to which the
Company and its subsidiary currently enjoys the right to exploit certain oil and
gas reserves thereon.
In June 1998, the Company raised gross proceeds of $1,250,000 in a
private placement of the Company's 5.5% convertible notes due in June 2000 (the
"Third June 1998 Notes") and warrants to purchase shares of Common Stock (the
"Third June 1998 Warrants") to one "accredited" investor. Pursuant to the terms
of the agreements, certain penalties were to be paid to the Third June 1998 Note
Investor in the event the registration statement was not effective within sixty
days. In lieu of such payments, the Investor has elected to take 282,016
additional shares in full liquidation of all penalties due through December 1998
and an additional 105,485 for the month of January 1999.
In July and August 1998, the Company raised gross proceeds of
$1,200,000, $275,000 and $1,010,000 respectively in a private placement of up to
$3,000,000 in three(3) tranches of the Company's 8.0% convertible notes due in
July and August 2000 (the "July Notes") to a limited number of "accredited"
investors. Warrants were issued to the placement agent at the close of each
tranche (the "July Warrants"). The Company has failed to register the shares
into which the July Notes are convertible and the July Warrants are exercisable
during the 60-day period following the completion of this transaction as
required by the agreements. As a result, the Company is required to make certain
payments to the July/August Investors. The Company is currently in negotiations
with these Investors to determine the amounts to be paid.
Item 4. Submission of Matters to a Vote of Security Holders
None
<PAGE>
Item 5. Other Information
Subsequent to the filing of the Company's Amendment No. 3 to
its Form S-1 ("S- 1/A3") and Amendment No. 1 to the Form 10K for the Fiscal Year
Ended September 30, 1998 ("10K/A1"), it was discovered that there may be a
question of the ownership rights of the Company in the BAPCO tool.
The Board of Directors of the Company was given notice under
Section 10A(b)(2) of the Securities and Exchange Act of 1934 and filed a Form 8K
on February 16, 1999 in compliance with the requirements of Section 10A(b)(3).
The Company and its independent auditors, Durland & Company, CPAs,
P.A., are conducting a full investigation. Upon completion of the investigation,
the Board of Directors intends that any changes in the legal or financial
disclosure relative to the financial and legal effects of such ownership rights
shall be disclosed in the form of further amendment to its Form S-1 and Form 10K
for the Fiscal Year Ended September 30, 1998, this Form 10Q for the Quarter
Ended December 31, 1998 and any other reports which need to be corrected.
This Form 10Q does not contain any changes to the legal and financial
disclosure regarding the BAPCO tool pending the results of the investigation.
All parties who are relying upon the previously filed audit opinion
letter, financial statements and the disclosures as to the BAPCO tool contained
in the Company's S-1/A3 and the 10K/A1 are hereby notified that such audit
opinion letter, financial statements and such disclosure may no longer be relied
upon and that any further reliance may only be made when the appropriate
amendments shall be filed with the Securities and Exchange Commission.
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
10.24 * Technical Assistance Agreement by and among Democratic Republic
of Sao Tome Principe and Sao Tome and Principe National Petro-
leum Company, S.A. and Mobil Exploration and Producing Services
Inc.[Partially Redacted - Subject to a Confidential Treatment
Application filed with the SEC]
10.25 * Form of the Securities Purchase Agreement ("September 1998
Financing")
10.26 * Form of the Company's 20% Convertible Note ("September 1998
Note")
10.27 * Form of the Company's Warrant ("September 1998 Warrant") and
the Warrant Agreement
10.28 * Form of the Company's 12% Convertible Note ("October 1998
Notes")
10.29 * Form of the Company's Warrants ("October 1998 "A" and "B"
Warrants) and Warrant Agreement
10.30 * Memorandum of Compromise and Settlement Agreement between
Environmental Redmediation Holding Corporation, Pine Valley
Exploration, Inc., Coconino, S.M.A., Inc., Uinta Oil & Gas,
Inc. Craig Phillips and Joseph H. Lorenz dated January 4, 1999.
b. Reports on Form 8-K
None
* Previously filed as Exhibits to the Amendment 3 of the Form S-1 filed January
25, 1999, Registration No. 333-43919
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1934, the
Registrant has duly caused this Form 10-Q to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Lafayette, State of
Louisiana, on the 23rd day of February 1999.
ENVIRONMENTAL REMEDIATION HOLDING CORPORATION
By: /s/ James R. Callender,
------------------------------------------
James R. Callender, Sr.
President, Chief Executive Officer
and Director
Pursuant to the requirements of the Securities Act of 1934, this Form
10Q has been signed by the following persons in the capacities and on the dates
indicated.
Signature Title Date
- - --------- ----- ----
/s/ Sam L. Bass, Jr. Chairman of the Board February 23, 1999
- - --------------------------- and Vice President
Sam L. Bass, Jr.
/s/ James R. Callender, Sr President and Chief Executive February 23, 1999
- - --------------------------- Officer and Director
James R. Callender, Sr.
/s/ Robert McKnight Acting Chief Financial Officer, February 23, 1999
- - --------------------------- President of BAPCO and
Robert McKnight Director (principal financial
or accounting officer)
/s/ William Beaton Director February 23, 1999
- - ---------------------------
William Beaton
<PAGE>
<TABLE> <S> <C>
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<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED FINANCIAL STATEMENTS OF ENVIRONMENTAL REMEDIATION HOLDING CORPORATION
FOR DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
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<NAME> Environmental Remediation Holding Corporation
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<PERIOD-START> OCT-01-1998
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