SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-QSB
(Mark one)
[X] Quarterly Report Under Section 13 or 15(d) of The Securities Exchange Act
of 1934
For the quarterly period ending September 30, 2005
[v] Transition Report Under Section 13 or 15(d) of The Securities Exchange Act
of 1934
For the transition period from ______________ to _____________
Commission File Number: 0-29613
TIDELANDS OIL & GAS CORPORATION
(Exact name of small business issuer as specified in its charter)
Nevada 66-0549380
------------------------- -------------------------
(State of incorporation) (IRS Employer ID Number)
1862 West Bitters Rd., San Antonio, TX 78248
--------------------------------------------
(Address of principal executive offices)
(210) 764-8642
(Issuer's telephone number)
Securities registered under Section 12 (b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act: Common Stock -
$0.001 par value
Check whether the issuer has (1) filed all reports required to be files by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period the Company was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS Check whether the registrant filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Exchange Act
after the distribution of securities under a plan confirmed by a court. Yes___
No ___
APPLICABLE ONLY TO CORPORATE ISSUERS
As of September 30, 2005, there were 77,156,341 shares of Common Stock issued
and outstanding.
Transitional Small Business Disclosure Format : Yes No X
----- -----
TIDELANDS OIL & GAS CORPORATION
FORM 10-QSB
INDEX
Page
----
PART I - Financial Information
Item 1 - Financial Statements
Condensed Consolidated Balance Sheets as of
September 30, 2005 and December 31, 2004..............................3
Condensed Consolidated Statements of Operations
For the Three Months Ended September 30, 2005 and 2004................4
Condensed Consolidated Statements of Operations
For the Nine Months Ended September 30, 2005 and 2004.................5
Condensed Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 2005 and 2004...............6-7
Notes to Condensed Consolidated Financial Statements...............8-13
Item 2 - Management's Discussion and Analysis or Plan of Operation.........14-20
Item 3 - Controls and Procedures...........................................20-21
PART II - Other Information
Item 1 - Legal Proceedings.................................................21-24
Item 2 - Changes in Securities and Use of Proceeds............................24
Item 3 - Defaults Upon Senior Securities......................................25
Item 4 - Submission of Matters to a Vote of Security Holdings.................25
Item 5 - Other Information....................................................25
Item 6 - Exhibits and Reports on Form 8K .....................................26
Signature.....................................................................27
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
TIDELANDS OIL & GAS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(ASSETS)
--------
September 30, December 31,
2005 2004
------------- -------------
(Unaudited)
Current Assets:
Cash $ 2,336,430 $ 5,459,054
Cash Restricted 101,471 25,000
Accounts and Loans Receivable 208,668 516,387
Inventory 90,332 82,523
Prepaid Expenses 208,879 487,488
------------- -------------
Total Current Assets 2,945,780 6,570,452
------------- -------------
Property Plant and Equipment, Net 10,097,779 9,086,313
------------- -------------
Other Assets:
Deposits 6,708 4,108
Deferred Charges 0 116,250
Note Receivable 284,944 286,606
Goodwill 1,158,937 1,158,937
------------- -------------
Total Other Assets 1,450,589 1,565,901
------------- -------------
Total Assets $ 14,494,148 $ 17,222,666
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Accounts Payable and Accrued Expenses $ 642,457 $ 574,224
Convertible Debentures Payable 980,000 0
------------- -------------
Total Current Liabilities 1,622,457 574,224
Long-Term Debt 4,421,054 11,731,883
------------- -------------
Total Liabilities 6,043,511 12,306,107
------------- -------------
Commitments and Contingencies -- --
Stockholders' Equity:
Common Stock, $.001 Par Value Per Share,
100,000,000 Shares Authorized, 77,156,341
and 61,603,359 Shares Issued and
Outstanding at September 30, 2005
and December 31, 2004 Respectively 77,157 61,604
Paid-in Capital in Excess of Par Value 30,369,493 22,537,340
Subscriptions Receivable (550,000) (550,000)
Accumulated (Deficit) (21,446,013) (17,132,385)
------------- -------------
Total Stockholders' Equity 8,450,637 4,916,559
------------- -------------
Total Liabilities and Stockholders' Equity $ 14,494,148 $ 17,222,666
============= =============
See Accompanying Notes to Condensed Consolidated Financial Statements
-3-
TIDELANDS OIL & GAS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended Three Months Ended
September 30, 2005 September 30, 2004
------------------ ------------------
Revenues:
Gas Sales and Pipeline Fees $ 248,015 $ 824,848
Construction Services 0 0
------------------ ------------------
Total Revenues 248,015 824,848
------------------ ------------------
Expenses:
Cost of Sales 219,865 801,698
Operating Expenses 81,408 15,800
Depreciation 124,422 88,611
Interest 110,090 100,981
Sales, General and Administrative 923,701 1,130,918
------------------ ------------------
Total Expenses 1,459,486 2,138,008
------------------ ------------------
(Loss) From Operations (1,211,471) (1,313,160)
Interest and Dividend Income 26,589 5,667
Income - Litigation Settlement 109,369 0
------------------ ------------------
Net (Loss) $ (1,075,513) $ (1,307,493)
================== ==================
Net (Loss) Per Common Share:
Basic and Diluted $ (0.01) $ (0.02)
================== ==================
Weighted Average Number of Common
Shares Outstanding 75,717,742 54,778,647
================== ==================
See Accompanying Notes to Condensed Consolidated Financial Statements
-4-
TIDELANDS OIL & GAS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Nine Months Ended Nine Months Ended
September 30, 2005 September 30, 2004
------------------ ------------------
Revenues:
Gas Sales and Pipeline Fees $ 1,097,505 $ 1,332,560
Construction Services 119,121 0
------------------ ------------------
Total Revenues 1,216,626 1,332,560
------------------ ------------------
Expenses:
Cost of Sales 635,113 1,299,518
Operating Expenses 210,545 18,416
Depreciation 360,817 136,529
Interest 503,950 149,418
Sales, General and Administrative 4,022,271 4,837,296
------------------ ------------------
Total Expenses 5,732,696 6,441,177
------------------ ------------------
(Loss) From Operations (4,516,070) (5,108,617)
(Loss) on Sale of Asset (3,167) 0
Interest and Dividend Income 96,240 16,740
Income Litigation Settlement 109,369 0
------------------ ------------------
Net (Loss) $ (4,313,628) $ (5,091,877)
================== ==================
Net (Loss) Per Common Share:
Basic and Diluted $ (0.06) $ (0.10)
================== ==================
Weighted Average Number of Common
Shares Outstanding 69,378,850 51,926,974
================== ==================
See Accompanying Notes to Condensed Consolidated Financial Statements
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TIDELANDS OIL & GAS CORPORATION
STATEMENTS OF CONDENSED CONSOLIDATED CASH FLOWS
(UNAUDITED)
Nine Months Ended Nine Months Ended
September 30, 2005 September 30, 2004
------------------ ------------------
Cash Flows Provided (Required) By
Operating Activities:
Net (Loss) $ (4,313,628) $ (5,091,877)
Adjustments to Reconcile Net (Loss)
to Net Cash Provided (Required) By
Operating Activities:
Depreciation 360,817 136,529
Write-Off of Subscription Receivable 0 18,000
Loss on Disposal of Equipment 3,167 0
Return of Issued Stock -
Litigation Settlement (109,369) 0
Issuance of Common Stock:
For Services Provided 1,424,575 3,747,066
Changes in:
Accounts Receivable 307,719 (39,662)
Inventory (7,809) 0
Prepaid Expenses 278,609 (116,682)
Deferred Charges 116,250 (245,600)
Deposits (2,600) (308)
Accounts Payable and
Accrued Expenses 68,233 (387,031)
------------------ ------------------
Net Cash (Required)
By Operating Activities (1,874,036) (1,979,565)
------------------ ------------------
Cash Flows Provided (Required)
By Investing Activities:
Increase in Investments 0 98,629
Acquisitions of Property, Plant
and Equipment (1,376,250) (692,597)
Disposals of Equipment 800 0
------------------ ------------------
Net Cash (Required)
By Investing Activities (1,375,450) (593,968)
------------------ ------------------
See Accompanying Notes to Condensed Consolidated Financial Statements
-6-
TIDELANDS OIL & GAS CORPORATION
STATEMENTS OF CONDENSED CONSOLIDATED CASH FLOWS
(CONTINUED)
(UNAUDITED)
Nine Months Ended Nine Months Ended
September 30, 2005 September 30, 2004
------------------ ------------------
Cash Flows Provided (Required)
by Financing Activities:
Proceeds from Issuance of Common Stock 0 4,088,317
Proceeds From Long-Term Loans 201,671 0
Repayment of Short-Term Loans 0 (100,000)
Repayment of Loan by Related Party 1,662 0
------------------ ------------------
Net Cash Provided by
Financing Activities 203,333 3,988,317
------------------ ------------------
Net Increase (Decrease) in Cash (3,046,153) 1,414,784
Cash at Beginning of Period 5,484,054 894,457
------------------ ------------------
Cash at End of Period $ 2,437,901 $ 2,309,241
================== ==================
Supplemental Disclosures of
Cash Flow Information:
Cash Payments for Interest $ 307,319 $ 22,011
================== ==================
Cash Payments for Income Taxes $ 0 $ 0
================== ==================
Non-Cash Investing & Financing Activities:
Return of Issued Stock for
Litigation Settlements $ (109,369) $ 0
Issuance of Common Stock:
Operating Activities 1,424,575 3,747,066
Repayment of Note and Loan 2,512,500 75,000
Repayment of Convertible Debentures 4,020,000 0
Payment of Account Payable 0 38,311
Acquisition of Property, Plant, Equipment
and Goodwill for Note Payable 0 6,523,773
Prepayment of Legal Fees 0 86,000
------------------ ------------------
Total Non-Cash Financing Activities $ 7,847,706 $ 10,470,150
================== ==================
See Accompanying Notes to Condensed Consolidated Financial Statements
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TIDELANDS OIL & GAS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005
NOTE 1 - BASIS OF PRESENTATION
------ ---------------------
The accompanying unaudited condensed consolidated financial statements
for the nine month periods ended September 30, 2005 and 2004 have been
prepared in conformity with accounting principles generally accepted in
the United States of America for interim financial information and with
the instructions to Form 10-QSB and Regulation S-B. The financial
information as of December 31, 2004 is derived from the registrant's
Form 10-KSB for the year ended December 31, 2004. Certain information
or footnote disclosures normally included in financial statements
prepared in accordance with accounting principles generally accepted in
the United States of America have been condensed or omitted pursuant to
the rules and regulations of the Securities and Exchange Commission.
The preparation of condensed consolidated financial statements in
conformity with accounting principles generally accepted in the United
States of America requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities at the date
of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates. In the opinion of management, the accompanying
financial statements include all adjustments necessary (which are of a
normal and recurring nature) for the fair presentation of the results
of the interim periods presented. While the registrant believes that
the disclosures presented are adequate to keep the information from
being misleading, it is suggested that these accompanying financial
statements be read in conjunction with the registrant's audited
consolidated financial statements and notes for the year ended December
31, 2004, included in the registrant's Form 10-KSB for the year ended
December 31, 2004.
Operating results for the nine-month periods ended September 30, 2005
are not necessarily indicative of the results that may be expected for
the remainder of the fiscal year ending December 31, 2005. The
accompanying unaudited condensed consolidated financial statements
include the accounts of the registrant, its wholly-owned subsidiaries,
Rio Bravo Energy, LLC, Sonora Pipeline, LLC, Arrecefe Management, LLC,
Marea Associates, L.P., Reef Ventures, L.P., Reef International, LLC,
Reef Marketing, LLC, and Terranova Energia S. de R. L. de C. V. All
significant inter-company accounts and transactions have been
eliminated in consolidation.
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TIDELANDS OIL & GAS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005
NOTE 2 - LONG-TERM DEBT
------ --------------
A summary of long-term debt at September 30, 2005 and December 31, 2004
is as follows:
September 30, December 31,
2005 2004
------------- -------------
Note Payable, Secured, Interest Bearing
at 2% Over Prime Rate, Maturing
May 25, 2008 $ 4,421,054 $ 6,731,883
Convertible Debentures, Unsecured,
7% Interest Bearing,
Maturing May 17, 2006 980,000 5,000,000
------------- -------------
5,401,054 11,731,883
Less: Current Maturities 980,000 0
------------- -------------
Total Long-Term Debt $ 4,421,054 $ 11,731,883
============= =============
NOTE 3 - LITIGATION
------ ----------
On January 6, 2003, we were served as a third party defendant in a
lawsuit titled Northern Natural Gas Company vs. Betty Lou Sheerin vs.
Tidelands Oil & Gas Corporation, ZG Gathering, Ltd. and Ken Lay, in the
150th Judicial District Court, Bexar county, Texas, Cause Number
2002-C1-16421. The lawsuit was initiated by Northern Natural Gas when
it sued Betty Lou Sheerin for her failure to make payments on a note
she executed payable to Northern in the original principal amount of
$1,950,000. Northern's suit was filed on November 13, 2002. Sheerin
answered Northern's lawsuit on January 6, 2003. Sheerin's answer
generally denied Northern's claims and raised the affirmative defenses
of fraudulent inducement by Northern, estoppel, waiver and the further
claim that the note does not comport with the legal requirements of a
negotiable instrument. Sheerin seeks a judicial ruling that Northern be
denied any recovery on the note. Sheerin's answer included a
counterclaim against Northern, ZG Gathering, and Ken Lay generally
alleging, among other things, that Northern, ZG Gathering, Ltd. and Ken
Lay, fraudulently induced her execution of the note. Northern has filed
a general denial of Sheerin's counterclaims. Sheerin's answer included
a third party cross claim against Tidelands. She alleges that Tidelands
entered into an agreement to purchase the Zavala Gathering System from
ZG Gathering Ltd. and that, as a part of the agreement, Tidelands
agreed to satisfy all of the obligations due and owing to Northern,
thereby relieving Sheerin of all obligations she had to Northern on the
$1,950,000 promissory note in question. Tidelands and Sheerin agreed to
delay the Tideland's answer date in order to allow time for mediation
of the case. Tideland's participated in a mediation on March 11, 2003.
The case was not settled at that time. Tideland's answered the Sheerin
suit on March 26, 2003. Tideland's answer denies all of Sheerin's
allegations.
-9-
TIDELANDS OIL & GAS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005
NOTE 3 - LITIGATION (CONTINUED)
------ ----------------------
On May 24 and June 16, 2004 respectively, Betty Lou Sheerin filed her
first and second amended original answer, affirmative defenses, special
exceptions and second amended original counterclaim, second amended
original third party cross-actions and requests for disclosure. In
these amended pleadings, she sued Michael Ward, Royis Ward, James B.
Smith, Carl Hessel and Ahmed Karim in their individual capacities. Her
claims against these individuals are for fraud, breach of contract,
breach of the Uniform Commercial Code, breach of duty of good faith and
fair dealing and conversion. Sheerin has now non-suited her claims
against Michael Ward, Royis Ward, and James B. Smith.
In September 2002, as a pre-closing deposit to the purchase of the ZG
pipelines, the Company executed a $300,000 promissory note to Betty L.
Sheerin, a partner of ZG Gathering, Ltd. In addition, the Company
issued 1,000,000 shares of its common stock to various partners of ZG
Gathering, Ltd. On December 3, 2003, Sheerin filed a separate lawsuit
against Tidelands in the 150th District Court of Bexar County, Texas on
this promissory note seeking a judgment against Tidelands for the
principle amount of the note, plus interest. On December 29th, 2003,
Tidelands answered this lawsuit denying liability on the note. On April
1, 2004, Tidelands filed a plea in abatement asking the court to
dismiss or abate Sheerin's lawsuit on the $300,000 promissory note as
it was related to and its outcome was dependent on the outcome of the
Sheerin third party cross action against Tidelands in Cause Number
2002-C1-16421. The Company believes that the promissory note and shares
of common stock should be cancelled based upon the outcome of the
litigation described above. Accordingly, our financial statements
reflect this belief.
On September 15, 2004 and again on October 15, 2004 respectively,
Sheerin amended her pleadings to include a third and fourth amended
third party cross action against Tidelands adding a claim for the
$300,000 promissory note. In these amended pleadings, Sheerin also
deleted her claims against Carl Hessel and Ahmed Karim.
Sheerin seeks damages against Tidelands for indemnity for any sums
found to be due from her to Northern Natural Gas Company, unspecified
amounts of actual damages, statutory damages, unspecified amounts of
exemplary damages, attorneys fees, costs of suit, and prejudgment and
post judgment interest.
On August 5, 2005, Northern Natural Gas Company filed its Fourth
Amended Original Petition which, for the first time, named Tidelands as
a defendant to Northern. Northern seeks to impose liability on
Tidelands for $1,950,000 promissory note signed by McDay Energy
Partners, Ltd. (the predecessor to ZG Gathering, Ltd.) and Sheerin and
the $1,700,000 promissory note signed by
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TIDELANDS OIL & GAS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005
NOTE 3 - LITIGATION (CONTINUED)
------ ----------------------
McDay only. Northern contends that Tidelands is alternatively liable to
Northern for payment of both such promissory notes totaling $3,709,914
plus interest because Northern is a third-party beneficiary under a
December 3, 2001 purchase and sale agreement between ZG and Tidelands
claiming that in such agreement Tidelands agreed to assume and satisfy
all indebtedness due and owing Northern by Sheerin and ZG. Northern
also claims that it is entitled to foreclosure of a lien on the gas
gathering system and pipeline that was the subject of the promissory
notes in question.
Some discovery has been completed at this time. Based on initial
investigation, and discovery to date, Tidelands appears to have a
number of potential defenses to the claims of Sheerin and Northern.
Tideland's intends to aggressively defend the lawsuit. At this stage in
the litigation, and in light of our continuing investigation and
incomplete discovery, we cannot give a more definitive evaluation of
the extent of Tideland's liability exposure.
During April and May, 2005, three separate legal actions were initiated
against Sonterra Energy Corporation (Sonterra), a wholly-owned
subsidiary of the Company. Two of the actions concern claims made by
developers against Sonterra for their failure to pay rent and easement
use fees as a result of their asset purchase from Oneok Propane
Distribution Company on November 1, 2004. The third action involves a
claim made by a builder that Sonterra does not have a proper easement
for the current use of certain property. The Company believes that the
three actions filed are without merit and intend to vigorously defend
itself. Litigation regarding these three actions are still in their
early stages, therefore, potential financial impacts, if any, cannot be
determined at this time.
NOTE 4 - COMMON STOCK TRANSACTIONS
------ --------------------------
On July 1, 2005, the Company issued 1,000,000 shares of its restricted
common stock valued at $307,500 pursuant to an employment contract with
an officer of the Company.
On July 1, 2005, the Company issued 50,000 shares of its restricted
common stock valued at $15,375 pursuant to an employment contract with
an officer of the Company.
On July 1, 2005, the Company issued 10,000 shares of its restricted
common stock valued at $3,075 to an officer of the Company.
-11-
TIDELANDS OIL & GAS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005
NOTE 4 - COMMON STOCK TRANSACTIONS (CONTINUED)
------ -------------------------------------
On August 18, 2005, Tidelands settled the legal dispute with L. L.
Capital Group, LLC whereby L. L. Capital Group, LLC canceled 285,000
shares of the 1,000,000 shares of the Company's restricted common stock
which it had received for a one year consulting contract executed
August 4, 2004. The 285,000 shares canceled were valued at $109,369.
On July 5, 2005, September 19, 2005 and September 29, 2005, Mercator
Momentum Fund III, L.P., Monarch Pointe Fund, Ltd (the "Funds") and
Robinson Reed, Inc. (a managed account of the "Funds") notified the
Company of their intent to convert portions of their remaining 7%
convertible debentures into common stock which were converted as
follows:
Number of
Entity Amount Price/Share Shares
------ ------ ----------- ------
July 5, 2005
------------
Robinson Reed, Inc. $ 200,000 $0.76 263,158
September 19, 2005
------------------
Mercator Momentum Fund, L.P. 92,000 0.70 131,429
Mercator Momentum Fund III, L.P. 60,000 0.70 85,714
Monarch Pointe Fund, Ltd. 196,000 0.70 280,000
Robinson Reed, Inc. 52,000 0.70 74,286
September 29, 2005
------------------
Mercator Momentum Fund, L.P. 207,000 0.71 291,549
Mercator Momentum Fund, III, L.P. 144,000 0.71 202,817
Mercator Momentum Fund, Ltd. 459,000 0.71 646,479
Robinson Reed, Inc. 90,000 0.71 126,761
---------- ----------
Total $1,500,000 $2,102,193
========== ==========
The "Funds" shares issued were all included in the Company's
registration statement filed on Form SB-2 which was declared effective
by the Securities & Exchange Commission on May 27, 2005.
NOTE 5 - CONVERTIBLE DEBENTURES
------ ----------------------
After taking into account all of the 7% convertible debentures
converted during the current quarter, $980,000 of principal amount
remains. All of these remaining 7% convertible debentures were
converted on November 2, 2005 at the "Ceiling Price" of $0.76 per
share.
-12-
TIDELANDS OIL & GAS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEFPTEMBER 30, 2005
NOTE 6 - RELATED PARTY TRANSACTION
------ -------------------------
The Company executed an agreement in January 2004 with a related party
to provide charter air transportation for its employees, customers and
contractors to job sites and other business related destinations. A
prepayment of $300,000 5% interest bearing loan due in January 2007 was
made by the Company regarding the transaction. The loan balance is
credited by airtime charges at standard industry rates offset by
interest charges computed on the average monthly balance. At September
30, 2005, the loan balance was $284,944.
-13-
Item 2. Management's Discussion and Analysis or Plan of Operation
Item 2. Management's Discussion and Analysis or Plan of Operation
Business Overview
Our products and services are primarily focused on development and operation of
transportation, processing, distribution and storage projects for natural gas
and natural gas liquids in the northeastern states of Mexico (Chihuahua,
Coahuila, Nuevo Leon and Tamaulipas) and the state of Texas in the United States
of America.
We derive our revenue from transportation fees from delivery of natural gas to
Conagas, the local distribution company in Piedras Negras, Coahuila, through the
pipeline owned by Reef Ventures, L.P. and the sale of propane gas to residential
customers through the assets owned by Sonterra Energy Corporation. This company
also designs and constructs residential propane delivery systems for new
residential developments in Central Texas. We derive revenue from this activity
in two ways, the first being from construction revenue for yard lines and meter
sets installed to a homeowner's lot, and the second being the sale of LPG gas to
customers in the residential subdivisions.
With respect to our pipeline system owned by Reef Ventures, L.P., management is
evaluating an expansion of the pipeline in Coahuila to serve new markets along
the state highway No. 57 corridor to Monclova, Coahuila. We currently expect
that this project will not be activated until the fourth quarter of 2005. The
planned natural gas liquid line between Eagle Pass, Texas and Piedras Negras,
Coahuila is being re-evaluated in light of new supply sources emerging in Texas
and Mexico. We are evaluating the utility of the project as either a tolling
business model for existing demand in Coahuila or as a merchant facility in a
direct contract with the propane importation arm of PEMEX. We expect further
development of the project to be announced by the fourth quarter of 2005.
Sonterra Energy Corporation, a wholly owned subsidiary of Tidelands entered into
the residential propane distribution business on November 1, 2004 with its
acquisition of 850 existing customers located in 15 subdivisions in the vicinity
of Austin, Texas. Sonterra's existing and future market area includes several
central Texas locations that do not have access to natural gas as a fuel for
home heating and appliance usage. Current expansion of over 400 lots within the
existing subdivisions is possible. Sonterra has also entered into a new
agreement with the developer of Northshore on Lake Travis to expand the
currently serviced lots by an additional 1,000 units. Up to 2,625 additional
lots may be available for installation of residential propane delivery in
developments currently in the planning stages in the nearly central Texas
vicinity. Management is actively seeking new subdivision installation of propane
-14-
systems in the Central Texas and has recently identified 4 new subdivisions in
the San Antonio/Austin Hill Country corridor as prospective for system
installation.
Rio Bravo Energy, LLC was formed on August 10, 1998 to operate the Chittim Gas
Processing Plant which was purchased in 1999 and was processing natural gas
primarily from Conoco Oil's Sacatosa Field. In October 2002, the plant was shut
down due to the declining economics associated with low volume operation of the
plant. We plan to either reopen the plant in 2005 when adequate volumes of LPG
feedstock from third parties makes plant operations economically attractive or
sell the assets to a third party. As noted above, Rio Bravo Energy LLC owns a
general partner interest in Marea Associates, L.P. and the minority interest in
Terranova Energia, S. de R.L. de C.V.
Sonora Pipeline, LLC was formed in January 1998 to operate the Sonora pipeline
network which has the capability of delivering adequate volumes of natural gas
for economic operation of the Chittim Gas Processing Plant. The pipeline network
consists of approximately 80 miles of gas pipeline. Presently, the line is not
in use. The pipeline was acquired in conjunction with the Chittim Gas Processing
Plant acquisition. When operational, it would generate revenue from
transportation fees charged to third party gas producers shipping natural gas to
the Chittim Gas Plant owned by Rio Bravo Energy LLC. Management is evaluating
whether to sell or utilize these assets and a decision is expected by the fourth
quarter of 2005.
Sonora Pipeline LLC will also own and operate the U.S. (Texas) pipeline segments
to be constructed in connection with the Mexican pipeline, LNG regasification
terminal and gas storage projects which will interconnect to the U.S. via two
international pipeline crossings near McAllen, Texas. Management expects a
filing with the Federal Energy Regulatory Commission in the fourth quarter of
2005 for permission to operate these new pipelines and the granting of
presidential permits for the international crossings near Penitas and Progreso,
Texas for delivery of natural gas into the state of Tamaulipas and the pipelines
owned by our Mexican subsidiary, Terranova Energia S. de R.L. de C.V.
The Company is focusing on the development of infrastructure projects through
its Mexican entity, Terranova Energia S.de R.L. de C.V., in the nation of the
United Mexican States (Mexico).
Terranova Energia is focused on project development and implementation
of a natural gas storage and transportation infrastructure to support the
integration of Northeastern Mexico and South Texas and the related economic
growth of the border regions.
Tidelands and Terranova Energia have hired project development advisors
in the United States and Mexico. The Terranova Energia advisors include ALB
Energia, Rich, Heather Muller, Abogados and Miriam Grunstein, Abogada. The
Tidelands advisors include Netherland Sewell & Associates, CenterPoint Energy,
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LLC, Mayer Brown Rowe & Maw, LLP, BNC Engineering, LLC, HSBC Securities, USA,
Inc. and R.W. Beck, Inc.
The Terranova Energia project was inspired by the fact that PEMEX, the
Mexican national oil company, needs to manage its natural gas production in the
Burgos Basin and the CFE, the Mexican federal electricity commission, needs to
support a natural gas policy which encourages reliability, flexibility and
competitive pricing for natural gas in northern Mexico. The region's forecasted
growth will require additional natural gas for power generation in the region.
Our project area is called the Northeast Hub. Our medium term goals,
subject to a variety of factors, including, but not limited to, regulatory
permitting, engineering design, financing, construction and operating
agreements, are focused on the Brasil storage field and Terranova Energia
pipeline.
The pipelines proposed are (A) the Occidente Section comprised of: (1)
a pipeline from the Brasil Storage field to Nuevo Progresso, proposed
international pipeline crossing into the U.S., (2) a pipeline from Brasil
storage to Station 19 up to Arguelles which is another proposed international
pipeline crossing into U.S.; and (B) the Oriente Section from the offshore
regasification station to Norte Puerto Mezquital proceeding to the Brazil
storage field. The Occidente Section will include approximately 323 kilometers
of pipeline and the Oriente Section will contain approximately 149 kilometers of
pipeline. Our long term goal includes the construction of the offshore LNG
regasification station.
The proposed international pipeline crossings into South Texas are the
Donna Station and Arguelles and VGP station. At the Donna station our potential
interconnects into Texas are with TETCO, TGPL and Texas Gas Services. At the
Arguelles and VGP station our potential interconnects are with HPL, Calpine and
Kinder Morgan. The Terranova pipeline capacity is estimated at 1.2 BCFD (billion
cubic feet per day).
The Terranova pipelines have been designed for 30 and 36 inch diameter
with bi-directional flow. The pipeline from the proposed LNG regasification
terminal to the Brasil field is a 36 inch diameter pipeline and from the Brasil
field to Monterey and international crossings are 30 inch diameter pipelines.
We submitted the permits for the Terranova pipeline Occidente and
Oriente sections to the CRE, the Mexican energy regulatory entity, on March 18,
2005 and they were accepted for full review on June 14, 2005.
The proposed underground natural gas storage facility will be located
in the depleted reservoir at the B1 Horizon-Brasil Field and include above
ground facilities. Our design proposal for the use of this depleted reservoir as
a storage facility was prepared by Netherland Sewell. Netherland Sewell, after
geological and mechanical modeling, reported the reservoir at the B1 horizon as
suitable for natural gas storage. The design capacity of the storage field
contemplates incremental increases in capacity over three seasons. The first
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season capacity is 25 BCF (billion cubic feet), second season capacity is 40 BCF
and third season onward is 50 BCF. The design proposes that natural gas be
injected into the reservoir at 350 MMCFD(million cubic feet per day) at
pressures from 2,400 psi up to 3,200 psi. Extraction flows of natural gas will
be kept at 500 MMCFD to maintain structural integrity of the reservoir. The
storage facility plans call for 22 injection and extraction wells. The above
ground facilities will include compression stations.
We submitted the storage permit to the CRE on August 5, 2005 and it was
accepted for full review on October 14, 2005.
The proposed Offshore LNG Regasification Station will be based on
technology developed by the Norwegian company Remora Technology. It utilizes an
unmanned floating station called a HiLoad. It has a peak capacity of 1.4 BCFD
(billion cubic feet per day). This technology permits any LNG carrier vessel to
connect and carry out regasification operations without any vessel
modifications. It utilizes LNG vaporizers of the shell and tube type, with sea
water as the heating medium. The LNG station will be located no less than 40
nautical miles from the coast at a depth of 450 feet. A support station with a
power generation system and central control will be located on-shore. A buoy
will support the mooring of the LNG carrier vessels. Electrical power cables,
control umbilicals and pipelines will connect the HiLoad to the on-shore support
station.
There are significant challenges for the natural gas supply to the
power generation industry in Northeastern Mexico. We believe the CFE has taken a
proactive role in this region with a view to substantially improving the
reliability, flexibility and pricing of the natural gas supply. Presently, there
are three LNG regasification projects permitted in this region at Altamira,
Rosarito and Manzanillo. Additionally, there new electrical generation plants
and associated pipelines under construction. The CFE has forecasted natural gas
demand growth in the region from 2004 through year 2013. The CFE forecasts gas
demand will increase from 1.7 BCFD in 2004 to 4.2 BCFD in 2013. Natural gas
storage facilities in northern Mexico will provide a reliable, flexible gas
supplies while creating conditions for competitive natural gas pricing.
Forward Looking Statements:
We have included forward-looking statements in this report. For this
purpose, any statements contained in this report that are not statements of
historical fact may be deemed to be forward looking statements. Without limiting
the foregoing, words such as "may", "will", "expect", "believe", "anticipate",
"estimate", "plan" "propose" or "continue" or the negative or other variations
thereof or comparable terminology are intended to identify forward-looking
statements. These statements by their nature involve substantial risks and
uncertainties, and actual results may differ materially depending on a variety
of factors. Factors that might cause forward-looking statements to differ
materially from actual results include, among other things, overall economic and
business conditions, demand for the Company's products, competitive factors in
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the industries in which we compete or intend to compete, natural gas
availability and cost and timing, impact and other uncertainties of our future
acquisition plans.
Results of Operations
REVENUES: The Company reported revenues of $1,216,626 for the nine months ended
September 30, 2005 as compared with revenues from continuing operations of
$1,332,560 for the nine months ended September 30, 2004. The revenue decrease
occurred as a result of the conversion of the Reef Ventures, L.P. revenue stream
from sale of natural gas to the collection of transportation fees only.
Offsetting this decrease is the inclusion of sales of propane gas to the
customers of Sonterra Energy Corporation, and this revenue source was not
present in the revenue for the period ended September 30, 2004. Management
expects that revenues from Reef Ventures, L.P. will increase substantially in
the 2006 fiscal year due to anticipated increases in volumes of natural gas
transported through the international pipeline crossing into Piedras Negras,
Coahuila, MX.
TOTAL COSTS AND EXPENSES: Total costs and expenses from continuing operations
decreased from $6,441,177 for the nine months ended September 30, 2004 to
$5,732,696 for the nine months ended September 30, 2005.
COST OF SALES: Total Cost of Sales decreased from $1,299,518 for the nine months
ended September 30, 2004 to $635,113 for the nine months ended September 30,
2005. This decrease resulted due to the change in operations of the Reef
Ventures, L.P. pipeline from gas marketing to transportations fees as the
operating model for this business segment. The entire cost of sales expense
category now represents cost of propane and directly related expenses incurred
by Sonterra Energy Corporation.
OPERATING EXPENSES: Operating expenses from continuing operations increased from
$18,416 for the nine months ended September 30, 2004 to $210,545 for the nine
months ended September 30, 2005. This increase was primarily due to additional
operating expenses incurred by Sonterra Energy Corporation in its operations for
the period which were not present in the comparative nine months for 2004.
Depreciation expense increased by $224,288 for the period ended September 30,
2005 versus the nine months ended September 30, 2004 due to additional
depreciation related to the acquisition of the natural gas pipeline owned by
Reef Ventures, L.P. and the depreciable assets acquired by Sonterra Energy
Corporation for the operation of the residential propane distribution systems in
Austin, Texas. Interest expense increased by $354,532 during the nine months
ended September 30, 2005 versus the nine months period ended September 30, 2004
due to the debt incurred to acquire the natural gas pipeline owned by Reef
Ventures, L.P. and the issuance of convertible debt to entities associated with
the Mercator Advisory Group, LLC, now known as MAG Capital, LLC.
SALES, GENERAL AND ADMINISTRATIVE: Sales, General & Administrative Expenses
decreased by $815,025 during the nine months ended September 30, 2005 as
compared with the period ended September 30, 2004. Consulting fees decreased by
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over $2,630,000 for the comparative periods but were partially offset by
increases in employee and director compensation of $816,000, selling, general
and administrative expenses from the new operations of Sonterra Energy
Corporation in the amount of $463,000, increased travel and entertainment of
$192,000, and increases in several other general and administrative cost
categories aggregating approximately $344,000.
NET LOSS FROM OPERATIONS: Net loss from operations of ($5,108,617) for the nine
months ended September 30, 2004 decreased to ($4,516,070) for the nine months
ended September 30, 2005, a decrease in the amount of loss of $592,547. Included
in the net loss from operations is $1,424,575 of expenses for employee stock
bonuses, director fees, financing costs, public relations fees, and legal fees
paid by issuance of common stock.
LIQUIDITY AND CAPITAL RESOURCES: Direct capital expenditures during the nine
months ended September 30, 2005 totaled $1,376,250. The capital expenditures
were composed of increased office furniture, equipment and leasehold costs plus
pre-construction costs regarding potential international pipeline crossings and
storage facilities in Mexico, and additional machinery, equipment, trucks, autos
and trailers for the operation of the Sonterra Energy Corporation propane
systems. Total debt decreased from $12,306,107 at December 31, 2004 to
$6,043,511 at September 30, 2005. The decrease in total debt is due primarily to
conversion of debentures to common stock in the amount of $4,020,000 and the
exercise of warrants which reduced an outstanding note payable in the amount of
$2,512,500. Net loss for the nine months ended September 30, 2005 was
($4,313,628) a decrease in net loss of 15% from the net loss of ($5,091,877) for
the nine months ended September 30, 2004. Basic and diluted net loss per common
share decreased 40% to ($0.06). The net loss per share calculation for the nine
months ended September 30, 2005 included an increase in actual and equivalent
shares outstanding.
FORWARD-LOOKING STATEMENTS:
We have included forward-looking statements in this report. For this purpose,
any statements contained in this report that are not statements of historical
fact may be deemed to be forward looking statements. Without limiting the
foregoing, words such as "may", "will", "expect", "believe", "anticipate",
"estimate", "plan" or "continue" or the negative or other variations thereof or
comparable terminology are intended to identify forward-looking statements.
These statements by their nature involve substantial risks and uncertainties,
and actual results may differ materially depending on a variety of factors.
Factors that might cause forward-looking statements to differ materially from
actual results include, among other things, overall economic and business
conditions, demand for the Company's products, competitive factors in the
industries in which we compete or intend to compete, natural gas availability
and cost and timing, impact and other uncertainties of our future acquisition
plans.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK:
The Company does not issue or invest in financial instruments or their
derivatives for trading or speculative purposes. The operations of the Company
are conducted primarily in the United States, and, are not subject to material
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foreign currency exchange risk. Although the Company has outstanding debt and
related interest expense, market risk of interest rate exposure in the United
States is currently not material.
Item 3. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures.
As of the end of the reporting period, September 30, 2005, we carried out an
evaluation, under the supervision and with the participation of our management,
including the Company's Chairman and Chief Executive Officer and the Chief
Financial Officer, of the effectiveness of the design and operation of our
disclosure controls and procedures pursuant to Rule 13a-15(e) of the Securities
Exchange Act of 1934 (the "Exchange Act"), which disclosure controls and
procedures are designed to insure that information required to be disclosed by a
company in the reports that it files under the Exchange Act is recorded,
processed, summarized and reported within required time periods specified by the
SEC's rules and forms. Based upon that evaluation, the Chairman and the Chief
Financial Officer concluded that our disclosure controls and procedures are
effective in timely alerting them to material information relating to the
Company required to be included in the Company's period SEC filings.
(b) Changes in Internal Control.
Subsequent to the date of such evaluation as described in
subparagraph(a)above, there were no changes in our internal controls or other
factors that could significantly affect these controls, including any corrective
action with regard to significant deficiencies and material weaknesses.
(c) Limitations.
Our management, including our Principal Executive Officer and Principal
Financial Officer, does not expect that our disclosure controls or internal
controls over financial reporting will prevent all errors or all instances of
fraud. A control system, no matter how well designed and operated, can provide
only reasonable, not absolute, assurance that the control system's objectives
will be met. Further, the design of a control system must reflect the fact that
there are resource constraints, and the benefits of controls must be considered
relative to their costs. Because of the inherent limitations in all control
systems, no evaluation of controls can provide absolute assurance that all
control issues and instances of fraud, if any, within our company have been
detected. These inherent limitations include the realities that judgments in
decision-making can be faulty, and that breakdowns can occur because of simple
error or mistake. Controls can also be circumvented by the individual acts of
some persons, by collusion of two or more people, or by management override of
the controls. The design of any system of controls is based in part upon certain
assumptions about the likelihood of future events, and any design may not
succeed in achieving its stated goals under all potential future conditions.
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Over time, controls may become inadequate because of changes in conditions or
deterioration in the degree of compliance with policies or procedures. Because
of the inherent limitation of a cost-effective control system, misstatements due
to error or fraud may occur and not be detected.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Matter No. 1:
On January 6, 2003, we were served as a third party defendant in a
lawsuit titled Northern Natural Gas Company vs. Betty Lou Sheerin vs. Tidelands
Oil & Gas Corporation, ZG Gathering, Ltd. and Ken Lay, in the 150th Judicial
District Court, Bexar County, Texas, Cause Number 2002-C1-16421. The lawsuit was
initiated by Northern Natural Gas when it sued Betty Lou Sheerin for her failure
to make payments on a note she executed payable to Northern in the original
principal amount of $1,950,000. Northern's suit was filed on November 13, 2002.
Sheerin answered Northern's lawsuit on January 6, 2003. Sheerin's answer
generally denied Northern's claims and raised the affirmative defenses of
fraudulent inducement by Northern, estoppel, waiver and the further claim that
the note does not comport with the legal requirements of a negotiable
instrument. Sheerin seeks a judicial ruling that Northern be denied any recovery
on the note. Sheerin's answer included a counterclaim against Northern, ZG
Gathering, and Ken Lay generally alleging, among other things, that Northern, ZG
Gathering, Ltd. and Ken Lay, fraudulently induced her execution of the note.
Northern has filed a general denial of Sheerin's counterclaims. Sheerin's answer
included a third party cross claim against Tidelands. She alleges that Tidelands
entered into an agreement to purchase the Zavala Gathering System from ZG
Gathering Ltd. and that, as a part of the agreement, Tidelands agreed to satisfy
all of the obligations due and owing to Northern, thereby relieving Sheerin of
all obligations she had to Northern on the $1,950,000 promissory note in
question. Tidelands and Sheerin agreed to delay the Tideland's answer date in
order to allow time for mediation of the case. Tidelands participated in
mediation on March 11, 2003. The case was not settled at that time. Tideland's
answered the Sheerin suit on March 26, 2003. Tideland's answer denies all of
Sheerin's allegations.
On May 24 and June 16, 2004 respectively, Betty Lou Sheerin filed her
first and second amended original answer, affirmative defenses, special
exceptions and second amended original counterclaim, second amended original
third party cross-actions and requests for disclosure. In these amended
pleadings, she sued Michael Ward, Royis Ward, James B. Smith, Carl Hessell and
Ahmed Karim in their individual capacities. Her claims against these individuals
are for fraud, breach of contract, breach of the Uniform Commercial Code, breach
of duty of good faith and fair dealing and conversion. Sheerin has now
non-suited her claims against Michael Ward, Royis Ward, and James B. Smith.
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In September 2002, as a pre-closing deposit to the purchase of the ZG
pipelines, the Company executed a $300,000 promissory note to Betty L. Sheerin,
a partner of ZG Gathering, Ltd. In addition, the Company issued 1,000,000 shares
of its common stock to various partners of ZG Gathering, Ltd. On December 3,
2003, Sheerin filed a separate lawsuit against Tidelands in the 150th District
Court of Bexar County, Texas on this promissory note seeking a judgment against
Tidelands for the principle amount of the note, plus interest. On December 29th,
2003, Tidelands answered this lawsuit denying liability on the note. On April 1,
2004, Tidelands filed a plea in abatement asking the court to dismiss or abate
Sheerin's lawsuit on the $300,000 promissory note as it was related to and its
outcome was dependent on the outcome of the Sheerin third party cross action
against Tidelands in Cause Number 2002-C1-16421. The company believes that the
promissory note and shares of common stock should be cancelled based upon the
outcome of the litigation described above. Accordingly, our financial statements
reflect this belief.
On September 15, 2004 and again on October 15, 2004 respectively,
Sheerin amended her pleadings to include a third and fourth amended third party
cross action against Tidelands adding a claim for the $300,000 promissory note.
In these amended pleadings, Sheerin also deleted her claims against Carl Hessell
and Ahmed Karim. After adding the claim on the $300,000 promissory note to the
third party claims of Sheerin against Tidelands in Cause No. 2002-C1-16421,
Sheerin dismissed Cause Number 2002-C1-16421.
Sheerin seeks damages against Tidelands for indemnity for any sums
found to be due from her to Northern Natural Gas Company, unspecified amounts of
actual damages, statutory damages, unspecified amounts of exemplary damages,
attorneys fees, costs of suit, and prejudgment and post judgment interest.
On August 5, 2005, Northern Natural Gas Company filed its Fourth
Amended Original Petition which, for the first time, named Tidelands as a
defendant to Northern. Northern seeks to impose liability on Tidelands for
$1,950.000 promissory note signed by McDay Energy Partners, Ltd. (the
predecessor to ZG Gathering, Ltd.) and Sheerin and the $1,700,000 promissory
note signed by McDay only. Northern contends that Tidelands is alternatively
liable to Northern for payment of both such promissory notes totaling $3,709,914
plus interest because Northern is a third party beneficiary under a December 3,
2001 purchase and sale agreement between ZG and Tidelands claiming that in such
agreement Tidelands agreed to assume and satisfy all indebtedness due and owing
Northern by Sheerin and ZG. Northern also claims that it is entitled to
foreclosure of a lien on the gas gathering system and pipeline that was the
subject of the promissory notes in question.
Some discovery has been completed at this time. Based on initial
investigation, and discovery to date, Tidelands appears to have a number of
potential defenses to the claims of Sheerin and Northern. Tideland's intends to
aggressively defend these lawsuits. At this stage in the litigation, and in
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light of our continuing investigation and incomplete discovery, we cannot give a
more definitive evaluation of the extent of Tideland's liability exposure.
Matter No. 2:
On May 4, 2005, HBH Development Company, LLC initiated legal action
against Sonterra Energy Corporation in the District Court of Travis County,
Texas, 98th Judicial District. This action involves the developer of the
Austin's Colony Subdivision in Travis County, Texas and the propane distribution
system originally constructed by Southern Union Company. Southern Union entered
into a letter agreement with HBH concerning the construction and operation of a
propane distribution system in the subdivision to be owned and operated by
Southern Union. Southern Union assigned the letter agreement and its interests
in the propane system to Oneok, Inc., the parent company of Oneok Propane
Company. Sonterra acquired its interest in the propane system from Oneok Propane
Distribution Company. HBH is claiming that Sonterra has failed or refused to pay
HBH rent and easement use fees under the terms of the letter agreement. HBH
alleges that Sonterra's actions cause a failure of the assignment whereby it
acquired rights in the propane system or alternatively, if the assignment is
effective, for breach of contract. HBH seeks to have the court terminate
Sonterra's rights in the propane distribution system, award unspecified monetary
damages, cancellation of the contract and rights associated with the propane
distribution system, issue to HBH a writ of possession for the property, and for
attorneys fees.
Sonterra is defending the legal action. It believes that under the
terms of the letter agreement between HBH Development Company and Southern Union
Company, that the easement use fees terminated when Southern Union conveyed its
interest in the propane distribution system to Oneok Propane Company.
Matter No. 3:
On May 4, 2005, Senna Hills, Ltd. initiated legal action against
Sonterra Energy Corporation in the District Court of Travis County, Texas, 53rd
Judicial District. This action involves the developer of the Senna Hills
Subdivision in Travis County, Texas and the propane distribution system
originally constructed by Southern Union Company. Southern Union entered into a
letter agreement with Senna Hills concerning the construction and operation of a
propane distribution system in the subdivision to be owned and operated by
Southern Union. Southern Union assigned the letter agreement and its interests
in the propane system to Oneok, Inc., the parent company of Oneok Propane
Company. Sonterra acquired its interest in the propane system from Oneok Propane
Distribution Company. Senna Hills is claiming that Sonterra has failed or
refused to pay Senna Hills rent and easement use fees under the terms of the
letter agreement. Senna Hills alleges that Sonterra's actions cause a failure of
the assignment whereby it acquired rights in the propane system or
alternatively, if the assignment is effective, for breach of contract. Senna
Hills seeks to have the court terminate Sonterra's rights in the propane
distribution system, award unspecified monetary damages, and cancellation of the
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contract and rights associated with the propane distribution system, issue to
Senna Hills a writ of possession for the property, and attorneys fees.
Senna Hills sold certain undeveloped sections of Senna Hills
Subdivision to a new owner. Sonterra believes that it has the right to expand
its distribution system into such undeveloped sections of the subdivision.
Sonterra plans to expand the distribution system into these sections under an
agreement with the new owner. Senna Hills has stated that although it is not
presently objecting to Sonterra's expansion of the system at this time, it is
reserving its claim that Sonterra does not have the right to do so and that it
intends to ask the court to cancel Sonterra's right to use and possession of the
propane distribution system, including the system in the new sections of the
subdivision.
Sonterra is defending the legal action. It believes that under the
terms of the letter agreement between Senna Hills and Southern Union Company,
that the easement use fees terminated when Southern Union conveyed its interest
in the propane distribution system to Oneok Propane Company.
Matter No. 4:
On April of 2005, Goodson Builders, Ltd. named Sonterra Energy
Corporation in a legal action titled, Goodson Builders, Ltd, Plaintiff vs. Jim
Blackwell and BNC Engineering, LLC, Defendants. The legal action is in the
District Court of Travis County, Texas 345th Judicial District. This legal
action arises from a claim that an underground propane storage tank and
underground distribution lines is situated on the Plaintiff's lot in the Hills
of Lakeway subdivision, Travis County, Texas. Plaintiff alleges that there is no
recorded easement setting forth the rights and obligations of the parties for
use of the propane tank and lines. However, there is reference to a "suburban
propane easement" on the plat document. Plaintiff alleges that the property is
being used without permission and the use constitutes an on-going trespass.
Plaintiff asks the court to determine that his lot is not subject to a "suburban
propane easement", declare the propane equipment the property of plaintiff,
enjoin Sonterra from use of Plaintiff's land, and award damages. The Plaintiff
seeks damages of $165,000 based on a market rental rate he claims to be $5,000
per month, $50,000 damages for depreciation of the value of the lot, an
unspecified amount of exemplary damages, and attorneys' fees. Sonterra is
defending the claims.
Matter No. 5:
On August 18, 2005, Tidelands settled the legal dispute with L.L. Capital Group,
LLC. Tidelands and L.L. Capital Group agreed to cancel 285,000 shares of the
1,000,000 share consulting fee. L.L. Capital Group, LLC retained 715,000 shares.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
On July 1, 2005, we issued 10,000 common shares to Jason Jones, a Sonterra
Energy employee for services rendered valued at $3,075.00.
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On July 1, 2005, we issued Robert Dowies, a company employee, 50,000 common
shares associated with his employment agreement. The shares were valued at
$15,375.
On July 1, 2005, we issued Michael Ward, our company President and CEO,
1,000,000 common shares associated with his employment contract. The shares were
valued at $307,500.
We relied on Section 4(2) as the securities transaction exemption afforded by
the Securities Act of 1933, as amended.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of the security holders, through the
solicitation of proxies or otherwise, during the quarter of the fiscal year
covered by this report.
Item 5. Other Information
During the third quarter the Mercator group of companies, converted the
following debentures into common stock:
July 5 Conversion:
o Robinson Reed converted $200,000 of the 7% Convertible
Debentures into common shares at $0.76 per share.
September 19 Conversions:
o Robinson Reed converted $52,000 of the 7% Convertible
Debentures into 74,286 common shares at $0.70 per share.
o Monarch Pointe Fund converted $196,000 of the 7% Convertible
Debentures into 280,000 common shares at $0.70 per share.
o Mercator Momentum Fund, LP converted $92,000 of the 7%
Convertible Debentures into 131,429 common shares at $0.70 per
share.
o Mercator Momentum Fund III converted $60,000 of the 7%
Convertible Debentures into 85,714 common shares at $0.70 per
share.
September 29 Conversions:
o Robinson Reed converted $90,000 of the 7% Convertible
Debentures into 126,761 common shares at $0.71 per share.
o Monarch Pointe Fund converted $459,000 of the 7% Convertible
Debentures into 646,479 common shares at $0.71 per share.
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o Mercator Momentum Fund, LP converted $207,000 of the 7%
Convertible Debentures into 291,549 common shares at $0.71 per
share.
o Mercator Momentum Fund III converted $144,000 of the 7%
Convertible Debentures into 202,817 common shares at $0.71 per
share.
On November 2, 2005, the Mercator group of companies converted the balance of
the outstanding 7% Convertible Debentures into common stock as follows:
o Robinson Reed converted $158,000 of the 7% Convertible
Debentures into 207,895 common shares at the "Ceiling Price"
of $0.76 per share.
o Monarch Pointe Fund converted $473,100 of the 7% Convertible
Debentures into 622,500 common shares at the "Ceiling Price"
of $0.76 per share.
o Mercator Momentum Fund, LP converted $214,000 of the 7%
Convertible Debentures into 281,579 common shares at the
"Ceiling Price" of $0.76 per share.
o Mercator Momentum Fund III converted $134,900 of the 7%
Convertible Debentures into 177,500 common shares at the
"Ceiling Price" of $0.76 per share.
Item 6. Exhibits
a) Exhibits
Exhibit No. Exhibit Name
31.1 Chief Executive Officer-Section 302 Certification
pursuant to Sarbanes-Oxley Act.
31.2 Chief Financial Officer- Section 302 Certification
pursuant to Sarbanes-Oxley Act.
32.1 Chief Executive and Financial Officer-Section 906
Certification pursuant to Sarbanes-Oxley Act.
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
TIDELANDS OIL & GAS CORP.
Dated: November 14, 2005 By: /s/ Michael Ward
-------------------------
Michael Ward
Title: President, CEO
Dated: November 14, 2005 By: /s/ James B. Smith
-------------------------
James B. Smith
Title: CFO
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