Tidelands 10-ksb 12-31-2006
UNITED
STATES
SECURITIES AND EXCHANGE COMMISSION
Washington,
D. C. 20549
ANNUAL
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE
ACT OF 1934
For
the year ended December 31, 2006
Commission
File Number 0-29613
TIDELANDS
OIL & GAS CORPORATION
(Name
of
small business issuer in its charter)
Nevada
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66-0549380
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(State
or other jurisdiction of
incorporation or organization)
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(I.
R. S. Employer
Identification No.)
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1862
West Bitters Rd., San Antonio, TX 78248
(Address
of principal executive office)
(210)
764-8642
(Issuer's
Telephone Number)
Securities
Registered Pursuant of Section 12(b) of the Act:
None
Securities
Registered Pursuant of Section 12(g) of the Act:
Common
Stock, $0.001 Par Value
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined
in
Rule 405 of the Securities Act. Yes o No x
Indicate
by check mark if the registrant is not required to file reports pursuant
to
Section 13 or Section 15(d) Yes o No
x
Indicate
by check mark whether the issuer (1) filed all reports required to be filed
by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required
to file
such reports), and (2) has been subject to such filing requirements for
the past
90 days. Yes x No o
Check
if
there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-K in this form, and no disclosure will be contained, to the
best of
registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment
of this
Form 10-K. o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definitions of "accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
one): Large accelerated filer o,
Accelerated filer o, Non-accelerated
filer x
Indicate
by check mark whether the registrant is a shell company (as defined by
Rule
12b-2of the Exchange Act. Yes o
No x
The
aggregate market value of the issuer's common stock held by non-affiliates
was
$49,433,203 based on the closing sales price as reported by the NASD OTC
Electronic Bulletin Board on June 30, 2006. The sum excludes the shares
held by
officers, directors, and stockholders whose ownership exceeded 10% of the
outstanding shares, as such persons may be deemed affiliates of the Company.
This determination of affiliate status is not necessarily a conclusive
determination for other purposes.
As
of
March 31, 2007, there were 105,104,494 shares of the issuer's common stock
outstanding.
FORM
10-K
December
31, 2006
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Page
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PART
I
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ITEM
1.
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3
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ITEM
1A.
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8
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ITEM
1B.
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15
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ITEM
2.
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15
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ITEM
3.
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16
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ITEM
4.
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17
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PART
II
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ITEM
5.
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18
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ITEM
6.
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20
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ITEM
7.
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22
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ITEM
7A.
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29
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ITEM
8.
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29
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ITEM
9.
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29
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ITEM
9A.
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29
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ITEM
9B.
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29
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PART
III
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ITEM
10.
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30
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ITEM
11.
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31
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ITEM
12.
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39
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ITEM
13.
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40
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ITEM
14.
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41
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Part
IV
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ITEM
15.
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42
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43
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PART
I
CAUTIONARY
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This
2006
Annual Report on Form 10-K, including the sections entitled "Risk Factors,"
"Management's Discussion and Analysis Financial Condition and Results of
Operation" and "Business," contains "forward-looking statements" that include
information relating to future events, future financial performance, strategies,
expectations, competitive environment, regulation and availability of resources.
These forward-looking statements include, without limitation, statements
regarding: projections, predictions, expectations, estimates or forecasts
for
our business, financial and operating results and future economic performance;
statements of management's goals and objectives; and other similar expressions
concerning matters that are not historical facts. Words such as "may," "will,"
"should," "could," "would," "predicts," "potential," "continue," "expects,"
"anticipates," "future," "intends," "plans," "believes" and "estimates,"
and
similar expressions, as well as statements in future tense, identify
forward-looking statements.
Forward-looking
statements should not be read as a guarantee of future performance or results,
and will not necessarily be accurate indications of the times at, or by which,
that performance or those results will be achieved. Forward-looking statements
are based on information available at the time they are made and/or management's
good faith belief as of that time with respect to future events, and are
subject
to risks and uncertainties that could cause actual performance or results
to
differ materially from those expressed in or suggested by the forward-looking
statements. Important factors that could cause these differences include,
but
are not limited to:
· |
our
failure to implement our business plan within the time period we
originally planned to accomplish; and
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· |
other
factors discussed under the headings "Risk Factors," "Management's
Discussion and Analysis of
Financial Condition and Results of Operation" and
"Business."
|
Forward-looking
statements speak only as of the date they are made. You should not put undue
reliance on any forward-looking statements. We assume no obligation to update
forward-looking statements to reflect actual results, changes in assumptions
or
changes in other factors affecting forward-looking information, except to
the
extent required by applicable securities laws. If we do update one or more
forward-looking statements, no inference should be drawn that we will make
additional updates with respect to those or other forward-looking
statements.
All
references to "we," "our," "us" and the "Company" in this Annual Report on
Form
10-K refer to Tidelands Oil & Gas Corporation and its
subsidiaries.
Tidelands
Oil & Gas Corporation, formerly known as C2 Technologies, Inc., was
incorporated under the laws of the State of Nevada on February 25, 1997.
C2
Technologies, Inc. changed its name to Tidelands Oil & Gas Corporation on
November 19, 1998. On April 17, 2006, we filed an amendment to our articles
of
incorporation increasing our authorized common stock capital from One Hundred
Million (100,000,000) shares to Two Hundred Fifty Million (250,000,000)
shares.
We have eleven subsidiaries that we directly and indirectly own as follows:
(1)
Rio Bravo Energy LLC, (2) Arrecefe Management LLC, (3) Marea Associates,
L.P.,
(4) Terranova Energia, S. de R.L. de C.V., (5) Esperanza Energy LLC and
(6)
Sonterra Energy Corporation. We also own a 97% limited partnership interest
in
(7) Reef Ventures, L.P. Arrecefe Management LLC owns a 1% general partner
interest in Reef Ventures, L.P. Rio Bravo Energy, LLC owns 100% of the
member
interest in (8) Sonora Pipeline LLC. Reef Ventures, L.P. owns 100% of the
member
interest in (9) Reef International LLC and (10) Reef Marketing LLC. In
February
2006, we formed subsidiary number (11) Tidelands Exploration & Production
Corporation.
Our
products and services are primarily focused on development and operation
of
transportation, processing, distribution and storage of natural gas and natural
gas liquids in the northeastern states of Mexico (Coahuila, Nuevo Leon and
Tamaulipas) and the States of Texas and California.
Reef
Ventures International Pipeline
The
assets of this business consist of two different pipelines: (1) an 8 mile
twelve
inch diameter natural gas pipeline with metering and dehydration facilities
and
(2) a two mile segment of six inch diameter pipeline to be used in a future
LPG
project. The twelve inch pipeline connects and receives natural gas from
a third
party pipeline for transmission to the border between Texas and Coahuila,
Mexico. The pipeline is buried underneath the Rio Grande River with its
termination at the delivery point in Piedras Negras, Coahuila owned by CONAGAS
(the local distribution company). Reef Ventures, L.P. derives its revenues
from
transportation fees charged to CONAGAS for delivery of natural gas. The LPG
project will require the future construction of receiving terminal facilities
in
Texas, boring and installation of additional six inch diameter pipeline under
the Rio Grande River and approximately one mile of additional pipeline in
Mexico
with an unloading terminal and storage facilities at its termination
point.
Esperanza
Energy, LLC
Esperanza
Energy, LLC ("Esperanza") was formed as a wholly-owned subsidiary of the
Company
in March 2006 to evaluate the feasibility of developing an offshore, deep-water
liquefied natural gas (LNG) receiving and regasification terminal near Long
Beach, California. Esperanza would utilize TORP Technology's HiLoad LNG Regas
unit that attaches to an LNG tanker, directly vaporizes the LNG as it is
offloaded and injects the regasified natural gas into an undersea pipeline
for
transportation of the natural gas to onshore metering stations and transmission
pipelines to supply nearby gas markets. The TORP HiLoad LNG Regas unit
eliminates the need for extensive above-ground storage tanks or large marine
structures required for berthing and processing of the LNG. Esperanza has
conducted its feasibility study for this project with the assistance of
best-in-class LNG, environmental, pipeline and legal advisors and has concluded
that the project is technically, environmentally and commercially feasible.
Esperanza plans to develop the necessary information in 2007 to file
applications with California state and U.S. Federal agencies for appropriate
permits to construct, own and operate the LNG facilities.
Terranova
Energia, S. de R.L. de C.V and the Burgos Hub
Project
In
December 2003, we entered into a Memorandum of Understanding (MOU) with PEMEX
to
design, build and operate an underground natural gas storage facility in
the
vicinity of Reynosa, Tamaulipas, Mexico, in the Burgos Basin area and eventually
at other regions in Mexico.
We
completed the initial study of the Burgos facility and expect to receive
permits
in 2007 to construct, own and operate the storage facility and the
interconnecting pipelines from the Comision Reguladora de Energia (the Mexican
regulatory branch of the Secretary of Energy). The capital budget for the
first
two phases of this project exceeds $700 Million Dollars and may be funded
through issuance of additional equity of the Company, the addition of joint
venture partners and/or debt financing. Marea Associates, L.P. was formed
to own
the majority interest in Terranova Energia, S. de R.L. de C.V., a Mexican
company which will conduct all business dealings in Mexico on behalf of
Tidelands. Rio Bravo Energy LLC, an existing wholly owned subsidiary owns
the
general partner interest in Marea Associates, L.P. and a minority interest
in
Terranova Energia, S. de R.L. de C.V.
On
June
5, 2006, Tidelands Oil & Gas Corporation subsidiary, Terranova Energia, S.
de R.L. de C.V. was awarded a Permit (#G/183/TRA 2006) by the Comision
Reguladora de Energia de Mexico (CRE) to begin construction of the Terranova
Occidente and Oriente pipeline portions of its Burgos Hub Project.
The
Permit is for the Occidente and Oriente Sections of the Terranova pipelines.
The
Occidente section will feature a 30-inch diameter pipeline, spanning
approximately 323 kilometers in total length. One segment will run from
the
Brasil storage field to Nuevo Progreso, Mexico, where it will connect
with the
Sonora Pipeline LLC Progreso International Pipeline, a proposed international
pipeline crossing into South Texas from Mexico extending to the Donna
Station,
which will provide the opportunity for interconnects into Texas natural
gas
pipelines owned by TETCO, TGPL and Texas Gas Services. The permitted
pipeline
will also include a section that will stretch from the Brasil storage
field to
Station 19 and up to Arguelles where another proposed international pipeline
crossing into South Texas is planned (Sonora Pipeline, LLC’s Mission
International Pipeline) with opportunities to interconnect with Houston
Pipeline, Calpine and Kinder Morgan. A 36-inch diameter pipeline spanning
some
149 kilometers will characterize the Oriente Section of the Terranova
pipelines.
It will run from the proposed offshore LNG Regasification Terminal to
Norte
Puerto Mezquital and proceed to the Brazil storage field. Both Terranova
pipelines are designed to flow natural gas bi-directionally between Texas
and
Mexico at a rate of approximately 1.0 BCFD (billion cubic feet per
day).
In
the
second quarter of 2007, Terranova expects to file an application with
the CRE to
amend its existing Mexican pipeline permit to allow for the construction
of an
additional segment of pipeline which will extend from Station 19 (located
to the
southwest of Reynosa, Tamaulipas) to Monterrey, Nuevo Leon. This filing
is being
pursued in response to commercial interest from industrial customers
and
potential service opportunity for the power generation facilities proposed
by
the Comision Federal de Electridad (CFE) in northeast Mexico. Discussion
with
staff at the regulatory body, CRE, indicates a timeline for action on
the
amended permit by the fourth quarter of 2007.
Terranova
submitted the storage permit to the CRE on August 5, 2005 and it was accepted
for full review on October 14, 2005. Several unique questions are presented
by
the filing of this permit due to the proposed location and the lack of previous
storage permit applications having been considered by the CRE. The CRE, with
cooperation from Terranova, is conducting discussions with PEMEX, the energy
ministry of the United Mexican States (SENER) and the Mexican Petroleum
Institute (MPI) to determine the mechanism for the grant of use rights for
the
depleted reservoir as a natural gas storage facility and the proper legal
vesting of such rights with the holder of the CRE permit to construct own
and
operate a gas storage facility. Terranova expects that these issues and a
decision regarding the Company’s storage permit application will be resolved by
the CRE Commissioners in the third quarter of 2007.
The
Company continues to present the pipeline and storage segments of the Burgos
Hub
project to commercial audiences in efforts to solicit their interest and
participation in the project at various levels. There have been numerous
meetings with staff of the Comision Federal de Electricidad (CFE) with
respect
to its planned natural gas usage in northeast Mexico and the Monterrey
industrial consumers of natural gas with a view toward clarifying their
need and
usage of the proposed project facilities. Efforts continue to secure precedent
agreements for capacity reservation of the project facilities. Preliminary
evaluation of demand for storage capacity reservation based upon direct
discussion with the various customers is estimated at 40 Bcf for the market
area
influenced by the project. Similarly, discussions are continuing with interested
parties in the U.S. and Mexico regarding the execution of a joint development
agreement between Terranova and their firms for the funding, development
and
ownership of the Project.
Sonora
Pipeline, LLC and the Burgos Hub Project
In
connection with the Mexican storage and pipeline project mentioned above,
Sonora
Pipeline, LLC is the applicant before the Federal Energy Regulatory Commission
for two proposed U.S. pipelines that will transport gas bidirectionally
to/from
the United States to Mexico at two different international crossing points
along
the Rio Grande River in South Texas - the Progreso International Pipeline
and
the Mission International Pipeline. The Progreso pipeline segment will
be
approximately 8.7 miles long and will comprise the eastern leg of the U.S.
pipelines, which will interconnect with the Tennessee Gas Pipeline transmission
lines at the Donna Station and will ultimately deliver natural gas to the
proposed Brasil Storage facility approximately 17 miles south of the U.S./Mexico
border at Progreso, Texas. The proposed Mission International Pipeline
segment
was re-designed in the first quarter of 2006 due to a routing conflict
with a
fiber optic line. It will be approximately 20.2 miles long and will commence
at
the existing HPL Valero-Gilmore gas plant in Hidalgo County, Texas, and
will
extend southward to the Arguelles crossing of the Rio Grande River into
Mexico
near the city of Mission, Texas. Both U.S. pipelines will connect with
the
pipelines being developed by Tidelands’ subsidiary in Mexico, Terranova Energia,
S. de R.L. de C.V. On January 31, 2007, Sonora Pipeline, LLC (“Sonora”) filed
application with FERC for a certificate of public convenience and necessity
to
construct and operate these natural gas pipeline facilities and to transport
natural gas in interstate commerce for others including an application
for a
presidential permit at each pipeline segment’s crossing point from the U.S. into
Mexico. Simultaneously, Sonora filed its Applicant Prepared Draft Environmental
Assessment for review by the FERC. Sonora continues to respond to FERC
inquiries
and analysis with respect to these applications and has asked the FERC
to grant
the authorizations requested in the applications by July 1, 2007. The current
catalog of FERC correspondence for Sonora's activities is located at
www.ferc.gov under Docket No. PF07-74 et sequence.
Rio
Bravo Energy, LLC and Sonora Pipeline, LLC
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. The Sacatosa Field was primarily an oilfield
which
produced high BTU casinghead gas from which gas processing operations would
yield valuable hydrocarbon components such as propane, butane and natural
gasolines. As the field depleted, lower volumes of casinghead gas were being
delivered by Conoco, and other gas producers could not be contracted with
for
processing of additional replacement volumes of gas. Therefore, in October
2002,
the plant was temporarily shut down due to the declining economics associated
with low volume operation of the plant. During 2002 through the fourth quarter
of 2005, management planned to reopen the plant when adequate volumes of
gas
from third party producers were obtained to make plant operations economically
attractive. However, we have been unsuccessful in locating a locally available
and adequate supply of high BTU natural gas and have elected to dispose of
the
gas plant assets. Accordingly, our financial statements for
2005
reflect an impairment charge with respect to the carrying value of these
assets.
Rio Bravo Energy, LLC continues to serve as the parent company for Sonora
Pipeline, LLC, as the one percent general partner of Marea Associates, L.P.
and
owns a less than one percent 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. This pipeline network
was
acquired in conjunction with the Chittim Gas Processing Plant acquisition
and,
when operational, could generate revenue from transportation fees to be charged
to third party gas producers shipping natural gas to the gas plant owned
by Rio
Bravo Energy, LLC. As noted above, management has evaluated the carrying
value
of these assets and has recorded an impairment charge in our 2005 financial
statements with respect to pipeline network in addition to the gas plant.
These
assets will also be sold at a later date.
Sonterra
Energy Corporation Business
The
assets of our Sonterra Energy Corporation ("Sonterra") subsidiary consist
of
propane distribution systems, including gas mains, yard lines, meters and
storage tanks, serving the following residential subdivisions in the Austin,
Texas area. The subdivisions include:
7. |
The
Hollows at Northshore
|
17. |
The
Preserve at Barton Creek
|
These
subdivisions contain approximately 2,250 lots which can be supplied with
gas
service from Sonterra. Currently 1,155 of these lots are metered for use.
There
are approximately 1,095 unmetered future lots within the above subdivisions
where propane service can be connected. As new homes are constructed on these
lots our customer base will grow. Construction activities continue in the
existing subdivisions where expansion phases of development will result in
the
addition of approximately 170 customers in 2007. Sonterra's participation
in the
launch of new subdivisions is also occurring, as exemplified by the signing
of a
construction contract with the developers of Las Brisas at Ensenada Shores
(located on Canyon Lake), where 75 new lots with propane service have been
completed for sale to new customers. This subdivision's second phase of
development is expected to add another 175 lots. Construction continues on
Section 205 of the Cordillera Ranch subdivision which added 50 more residential
customers in the fourth quarter of 2006. Sonterra has expanded into additional
markets as evidenced by the signing of a construction contract to build a
central propane system for a multi-use retail center in Lago Vista, Texas.
The
system will serve five to ten large commercial customers including two
restaurants.
Sonterra
is the exclusive seller of propane in these subdivisions and is not considered
a
rate-regulated utility. The Texas Railroad Commission regulates all aspects
of
the production, transportation and processing of petroleum products, including
propane, in the State of Texas. Sonterra purchases propane products from
a
number of distributors in Austin, Texas. Seasonality and weather conditions
have
a significant impact on the demand for propane for heating purposes. All
of our
propane customers rely heavily on propane as a heating fuel. The volume
of
propane sold is at its highest during the six-month peak heating season
of
October through March, during which approximately two-thirds of our annual
retail propane volume is sold.
Tidelands
Exploration & Production Corporation
On
July
9, 2006, Tidelands Exploration & Production Corporation acquired a 50%
interest in a 26-mile natural gas pipeline located in Medina, Atascosa
and Bexar
Counties in the state of Texas. In addition, the Company also acquired
an
undivided 50% working interest in two leases with 5 recompleted natural
gas
wells on approximately 1,000 acres with at least 10 additional natural
gas wells
for re-entry. These leases are located in Atascosa and Medina counties.
The
Company has elected not to participate in this venture on an ongoing basis
and
expects to resell these properties in 2007.
Segment
Reporting for Reef Ventures, LP and Sonterra Energy Corporation:
The
following table is a summary of the results of operations and other financial
information by major segment:
2006
|
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|
Propane
Sales
and Related Services
|
|
|
Pipeline
Transportation
Fees
|
|
|
All
Other and
Corporate
|
|
|
Total
|
|
Revenue |
|
$ |
1,921,763 |
|
$ |
285,098 |
|
$ |
15,737 |
|
$ |
2,222,598 |
|
Depreciation |
|
$ |
126,844 |
|
$ |
305,313 |
|
$ |
34,084 |
|
$ |
466,241 |
|
Interest |
|
$ |
1,629 |
|
$ |
- |
|
$ |
3,404,149 |
|
$ |
3,405,778 |
|
|
|
$ |
(263,535 |
) |
$ |
(93,524 |
) |
$ |
(11,582,775 |
) |
$ |
(11,939,834 |
) |
Total
Assets |
|
$ |
5,284,938 |
|
$ |
5,702,978 |
|
$ |
4,198,723 |
|
$ |
15,186,639 |
|
2005
|
|
Propane
Sales
and Related Services
|
|
Pipeline
Transportation
Fees
|
|
All
Other and
Corporate
|
|
Total
|
|
Revenue
|
|
$ |
1,630,246 |
|
$ |
231,077 |
|
$ |
-- |
|
$ |
1,861,323 |
|
Depreciation
|
|
$ |
116,853 |
|
$ |
305,313 |
|
$ |
63,315 |
|
$ |
485,481 |
|
Interest
|
|
$ |
2,514 |
|
$ |
-- |
|
$ |
608,849 |
|
$ |
611,363 |
|
|
|
$ |
(380,900 |
) |
$ |
(164,523 |
) |
$ |
(12,765,170 |
) |
$ |
(13,310,593 |
) |
Total
Assets |
|
$ |
2,997,001 |
|
$ |
5,621,536 |
|
$ |
4,870,312 |
|
$ |
13,488,849 |
|
2004
|
|
Propane
Sales
and Related Services
|
|
Natural
Gas Sales and Pipeline
Transportation Fees
|
|
All
Other and
Corporate
|
|
Total
|
|
Revenue
|
|
$ |
438,611 |
|
$ |
1,400,227 |
|
$ |
-- |
|
$ |
1,838,838 |
|
Depreciation
|
|
$ |
20,158 |
|
$ |
178,099 |
|
$ |
46,632 |
|
$ |
244,889 |
|
Interest
|
|
$ |
300 |
|
$ |
-- |
|
$ |
300,266 |
|
$ |
300,566 |
|
|
|
$ |
98,229 |
|
$ |
(141,502 |
) |
$ |
(29,699,024 |
) |
$ |
(29,742,297 |
) |
Total
Assets
|
|
$ |
2,775,281 |
|
$ |
5,881,774 |
|
$ |
13,765,611 |
|
$ |
22,422,666 |
|
Note:
Reef Ventures and Sonterra commenced operations in 2004.
Competition
Reef
Ventures, L.P. Eagle Pass Pipeline Crossing
Our
Eagle
Pass international pipeline crossing competes with a pipeline owned by
West
Texas Gas, Inc. which is located two miles north of Eagle Pass. We believe
that
the West Texas Gas crossing will be able to compete with us but due to
a very
limited transmission capability, that organization cannot supply the total
demand of the market area. Further efforts to increase revenues from the
system
by increasing transportation fees are currently being
undertaken.
Sonterra
Energy Corporation Propane Distribution
Our
propane distribution business is not subject to competition within the
residential subdivisions served because we are the sole propane supplier.
The
residential subdivisions are subject to a propane supply covenant granting
us
the exclusive supply of propane for each subdivision. In the future, we will
compete in the bidding process for new propane distribution systems as new
residential subdivisions are developed. We may also be able to acquire
additional existing propane distribution systems from competitors.
In
addition, we compete with other established businesses that market similar
products. Many of these companies have greater capital, marketing and other
resources than we do. There can be no assurance that these or other companies
will not develop new or enhanced products that have greater market acceptance
than any that may be marketed by us.
Employees
Tidelands
has six full-time employees including our corporate officers. Our Sonterra
Energy subsidiary, which operates the Austin propane gas distribution company,
has eight full-time employees.
ITEM
1A. RISK FACTORS
In
addition to the other information presented in this report, the following
should
be considered carefully in evaluating our business or purchasing shares of
our
common stock. Investing in our common stock involves a high degree of risk.
This
report contains various forward looking statements that involve risk and
uncertainties. Our actual results may differ materially from the results
discussed in the forward looking statements. Factors that might cause such
a
difference include, but are not limited to, those discussed below and elsewhere
in this report.
OPERATING
LOSSES
We
have
had significant losses ever since starting business and we expect to continue
losing money for some time. To date, we have incurred significant losses.
For
the year ended December 31, 2006, we lost $11,836,925 and for the year ended
December 31, 2005, we lost $7,662,904. These losses were caused primarily
by:
s |
Financing
costs in connection with acquisitions made in prior years and the
issuance
of convertible debentures;
|
s |
Limited
volumes of gas transported through the international pipeline
crossing;
|
s |
Pre-development
and operating expenses associated with the development of additional
pipeline and storage projects in Mexico;
|
s |
Idle
assets not producing revenue, such as the gas plant and associated
pipeline;
|
s |
Default
interest penalties regarding a convertible debenture
financing;
|
s |
Increased
employee related salaries, stock-based compensation and related
costs.
|
WE
MAY NOT HAVE ENOUGH FUNDING TO COMPLETE OUR BUSINESS PLAN OR CONTINUE
OPERATIONS.
We
will
need additional financing to fully implement our business plan. We cannot
give
any assurance that this additional financing could be obtained of attractive
terms or at all. Lack of funding could force us to curtail substantially
or
cease our operations.
The
financial statements included in this report have been prepared on the basis
that we will continue as a going concern, which assumes the realization of
assets and the satisfaction of liabilities in the normal course of business.
We
have incurred significant accumulated losses as of December 31, 2006. We
do not
expect to generate sufficient revenue to meet our cash requirements for the
next
twelve months. We will need to raise additional capital to continue meeting
operational expenses. Our independent auditors have added an explanatory
paragraph to their report of our financial statements for the year ended
December 31, 2006 stating that our net losses, lack of revenues and dependence
on our ability to raise additional capital to continue our existence, raise
substantial doubt about our ability to continue as a going concern. If we
are
not successful in raising sufficient additional capital, we may we may not
be
able to continue as a going concern, our stockholders may lose their entire
investment in us.
LIMITED
OPERATING HISTORY
We
have a
limited operating history and our financial health will be subject to all
the
risks inherent in the establishment of a new business enterprise. The likelihood
of success of our Company must be considered in the light of the problems,
expenses, difficulties, complications, and delays frequently encountered
in
connection with the startup and growth of a new business, and the competitive
environment in which we will operate. Our success is dependent upon the
successful financing and development of our business plan. No assurance of
success is offered. Unanticipated problems, expenses, and delays are frequently
encountered in establishing a new business and marketing and developing
products. These include, but are not limited to, competition, the need to
develop customers and market expertise, market conditions, sales, marketing
and
governmental regulation. The failure of the Company to meet any of these
conditions would have a materially adverse effect upon the Company and may
force
the Company to reduce or curtail operations. No assurance can be given that
the
Company can or will ever operate profitably.
RELIANCE
ON MANAGEMENT
We
recently appointed James B. Smith as our President and Chief Executive Officer.
Mr. Smith also continues to serve as Chief Financial Officer. Assuming the
roles
of both Chief Executive Officer and Chief Financial Officer could place undue
burden on Mr. Smith’s time and resources. In addition, the Company faces risks
associated with the transition of management from our prior Chief Executive
Officer to Mr. Smith. The Company depends substantially upon the efforts
and
abilities of Mr. Smith and the loss of Mr. Smith's services could have a
serious
adverse effect on our business, operations, revenues or prospects. We do
not
currently maintain any key man life insurance on Mr. Smith.
TRADING
IN OUR COMMON STOCK ON THE OTC BULLETIN BOARD MAY BE
LIMITED.
Our
common stock trades on the OTC Bulletin Board. The OTC Bulletin Board is
not an
exchange. Trading of securities on the OTC Bulletin Board is often more sporadic
than the trading of securities listed on an exchange or Nasdaq. You may have
difficulty reselling any of our common stock shares.
THERE
HAS BEEN A VOLATILE PUBLIC MARKET FOR OUR COMMON STOCK AND THE PRICE OF OUR
STOCK MAY BE SUBJECT TO FLUCTUATIONS.
We
cannot
assure you that a liquid transparent trading market for our common stock
will
develop or be sustained. You may not be able to resell your shares at
or
above
the price you paid for them. The market price of our common stock is likely
to
be volatile and could be subject to fluctuations in response to factors such
as
the following, most of which are beyond our control:
s operating
results that
vary from the expectations of securities analysts and investors;
s changes
in expectations as
to our future financial performance, including financial estimates by securities
analysts and investors;
s the
operations,
regulatory, market and other risks discussed in this section;
s announcements
by us or our
competitors of significant contracts, acquisitions, strategic partnerships,
joint ventures or capital commitments;
s announcements
by third
parties of significant claims or proceedings against us; and
s future
sales of our common
stock.
In
addition, the market for our stock has from time to time experienced extreme
price and volume fluctuations. These broad market fluctuations may adversely
affect the market price of our common stock.
OUR
COMMON STOCK IS SUBJECT TO PENNY STOCK REGULATION.
Our
common stock is subject to regulations of the Securities and Exchange Commission
relating to the market for penny stocks. The Securities Enforcement and Penny
Stock Reform Act of 1990 (the "Reform Act") also requires additional disclosure
in connection with any trades involving a stock defined as a "penny stock"
(generally, according to recent regulations adopted by the Commission, any
equity security that has a market price of less than $5.00 per share, subject
to
certain exceptions), including the delivery, prior to any penny stock
transaction, of a disclosure schedule explaining the penny stock market and
the
risks associated therewith. These regulations generally require broker-dealers
who sell penny stocks to persons other than established customers and accredited
investors to deliver a disclosure schedule explaining the penny stock market
and
the risks associated with that market. These regulations also impose various
sales practice requirements on broker-dealers. The regulations that apply
to
penny stocks may severely affect the market liquidity for our securities
and
that could limit your ability to sell your securities in the secondary
market.
RISKS
RELATING TO LOW-PRICE STOCKS
Because
our stock is quoted on the NASD OTC Electronic Bulletin Board and subject
to the
Penny Stock Regulations, an investor may find it difficult to dispose of,
or to
obtain accurate quotations as to the market value of, our Company's securities.
The regulations governing low-priced or penny stocks could limit the ability
of
broker-dealers to sell the Company's securities and thus the ability of holders
of our common stock to sell their securities in the secondary
market.
FUTURE
CAPITAL NEEDS COULD RESULT IN DILUTION TO STOCKHOLDERS; ADDITIONAL FINANCING
COULD BE UNAVAILABLE OR HAVE UNFAVORABLE TERMS.
Our
future capital requirements will depend on many factors, including cash flow
from operations, progress in our gas operations, competing market developments,
and our ability to market our proposed products successfully. Our
working capital is presently insufficient to fund the Company's activities.
It
will be necessary to raise additional funds through equity or debt financings.
Any equity financings could result in dilution to our then-existing
stockholders. Sources of debt financing may result in higher interest expense.
Any financing, if available, may be on terms unfavorable to the Company.
If
adequate funds are not obtained, the Company may be required to reduce or
curtail operations.
SUBSTANTIAL
CAPITAL REQUIREMENTS
We
may
make substantial capital expenditures for the development, acquisition and
production of natural gas pipeline, processing systems and, or storage
facilities. If revenues or the Company's equity financing decrease as a result
of lower natural gas prices or operating difficulties, the Company may have
limited ability to expend the capital necessary to undertake or complete
proposed plans and opportunities. There can be no assurance that additional
debt
or equity financing or cash generated by operations will be available to
meet
these requirements.
WE
CAN GIVE NO ASSURANCE REGARDING THE AMOUNTS OF CASH THAT WE WILL
GENERATE.
The
actual amounts of cash we generate will depend upon numerous factors relating
to
our business which may be beyond our control, including:
s the
demand for natural
gas;
s profitability
of
operations;
s required
principal and interest payments on
any debt we may incur;
s the
cost of
acquisitions;
s our
issuance of equity
securities;
s fluctuations
in working
capital;
s capital
expenditures;
s continued
development of
gas transportation network systems;
s prevailing
economic
conditions; and
s government
regulations.
WE
DO NOT EXPECT TO PAY DIVIDENDS FOR SOME TIME, IF AT ALL.
No
cash
dividends have been paid on the Common Stock. We expect that any income received
from operations will be devoted to our future operations and growth. We do
not
expect to pay cash dividends in the near future. Payment of dividends would
depend upon our profitability at the time, cash available for those dividends,
and other factors.
COMPETITION
We
will
be competing with other established businesses that market similar products.
Many of these companies have greater capital, marketing and other resources
than
we do. There can be no assurance that these or other companies will not develop
new or enhanced products that have greater market acceptance than any that
may
be marketed by us. There can be no assurance that we will successfully
differentiate ourselves from our competitors or that the market will consider
our products to be superior or to or more appealing than those of our
competitors. Market entry by any significant competitor may have an adverse
effect on our sales and profitability.
WE
OPERATE IN HIGHLY COMPETITIVE MARKETS IN COMPETITION WITH A NUMBER OF DIFFERENT
COMPANIES.
We
face
strong competition in our geographic areas of operations. Our competitors
include major integrated oil companies, interstate and intrastate pipelines.
We
compete with integrated companies that have greater access to raw natural
gas supply and are less susceptible to fluctuations in price or volume, and
some
of our competitors that have greater financial resources may have an advantage
in competing for acquisitions or other new business opportunities.
GROWING
OUR BUSINESS BY CONSTRUCTING NEW PIPELINES AND PROCESSING FACILITIES SUBJECTS
US
TO CONSTRUCTION RISKS AND RISKS THAT RAW NATURAL GAS SUPPLIES WILL NOT BE
AVAILABLE UPON COMPLETION OF THE FACILITIES.
One
of
the ways we intend to grow our business is through the construction of additions
to our existing gathering systems, modification of our existing gas processing
plant and construction of new processing facilities. The construction of
gathering and processing facilities requires the expenditure of significant
amounts of capital, which may exceed our expectations. Generally, we may
have
only limited raw natural gas supplies committed to these facilities prior
to
their construction. Moreover, we may construct facilities to capture anticipated
future growth in production in a region in which anticipated production growth
does not materialize. As a result, there is the risk that new facilities
may not
be able to attract enough raw natural gas to achieve our expected investment
return, which could adversely affect our results of operations and financial
condition.
A
SIGNIFICANT COMPONENT OF OUR GROWTH STRATEGY WILL BE ACQUISITIONS AND WE
MAY NOT
BE ABLE TO COMPLETE FUTURE ACQUISITIONS SUCCESSFULLY.
Our
business strategy will emphasize growth through strategic acquisitions, but
we
cannot assure you that we will be able to identify attractive or willing
acquisition candidates or that we will be able to acquire these candidates
on
economically acceptable terms. Competition for acquisition opportunities
in our
industry exists and may increase. Any increase in the level of competition
for
acquisitions may increase the cost of, or cause us to refrain from, completing
acquisitions.
Our
strategy of acquisitions is dependent upon, among other things, our ability
to
obtain debt and equity financing and possible regulatory approvals. Our ability
to pursue our growth strategy may be hindered if we are not able to obtain
financing or regulatory approvals, including those under federal and state
antitrust laws. Our ability to grow through acquisitions and manage such
growth
will require us to invest in operational, financial and management information
systems and to attract, retain, motivate and effectively manage our employees.
The inability to manage the integration of acquisitions effectively could
have a
material adverse effect on our financial condition, results of operations
and
business. Pursuit of our acquisition strategy may cause our financial position
and results of operations to fluctuate significantly from period to
period.
IF
WE ARE UNABLE TO MAKE ACQUISITIONS ON ECONOMICALLY AND OPERATIONALLY ACCEPTABLE
TERMS, OUR FUTURE FINANCIAL PERFORMANCE MAY BE LIMITED.
There
can
be no assurance that:
s we
will identify
attractive acquisition candidates in the future;
s we
will be able to acquire
assets on economically acceptable terms;
s any
acquisitions will not
be dilutive to earnings and operating surplus; or
s any
debt incurred to
finance an acquisition will not affect our ability to make distributions
to
you.
If
we are
unable to make acquisitions on economically and operationally acceptable
terms,
our future financial performance will be limited to the performance of our
present gas gathering network.
Our
acquisition strategy involves many risks, including:
s difficulties
inherent in
the integration of operations and systems;
s the
diversion of
management's attention from other business concerns; and
s the
potential loss of key employees of
acquired businesses.
In
addition, future acquisitions may involve significant expenditures. Depending
upon the nature, size and timing of future acquisitions, we may be required
to
secure
financing. We cannot assure you that additional financing will be available
to
us on acceptable terms.
OUR
BUSINESS IS DEPENDENT UPON PRICES AND MARKET DEMAND FOR NATURAL GAS AND PROPANE,
WHICH ARE BEYOND OUR CONTROL AND HAVE BEEN EXTREMELY
VOLATILE.
We
are
subject to significant risks due to fluctuations in commodity prices, primarily
with respect to the prices of gas that we may own as a result of our processing
and distribution activities.
The
markets and prices for residue gas depend upon factors beyond our control.
These
factors include demand for oil, and natural gas, which fluctuate with changes
in
market and economic conditions and other factors, including:
s the
impact of weather on
the demand for oil and natural gas;
s the
level of domestic oil
and natural gas production;
s the
availability of
imported oil and natural gas;
s the
availability of local,
intrastate and interstate transportation systems;
s the
availability and
marketing of competitive fuels;
s the
impact of energy
conservation efforts; and
s the
extent of governmental
regulation and taxation.
WE
GENERALLY DO NOT OWN THE LAND ON WHICH OUR PIPELINES ARE CONSTRUCTED AND
WE ARE
SUBJECT TO THE POSSIBILITY OF INCREASED COSTS FOR THE LOSS OF LAND
USE.
We
generally do not own the land on which our pipelines are constructed. Instead,
we obtain the right to construct and operate the pipelines on other people's
land for a period of time. If we were to lose these rights, our business
could
be affected negatively.
RISKS
RELATED TO THE RETAIL PROPANE AND ASSOCIATED BUSINESSES
s Decreases
in the demand
for propane because of warmer weather may adversely affect our financial
condition and results of operations.
s Weather
conditions have a
significant impact on the demand for propane for heating purposes. All of
our
propane customers rely heavily on propane as a heating fuel. The volume of
propane sold is at its highest during the six-month peak heating season of
October through March and is directly affected by the severity of the winter
weather. We estimate that approximately two-thirds of our annual retail propane
volume will be sold during these months. Actual weather conditions can vary
substantially from quarter to quarter and year to year, significantly affecting
our financial performance. Furthermore, warmer than normal temperatures in
our
service area can significantly decrease the total volume of propane we sell.
Consequently, our operating results may vary significantly due to actual
changes
in temperature. Weather conditions in any quarter or year may have a material
adverse effect on our operations.
s Sudden
and sharp propane
price increases that cannot be passed on to customers may adversely affect
our
profits, income, and cash flow.
s Energy
efficiency and
technology may reduce the demand for propane and our revenues.
s The
national trend toward
increased conservation and technological advances, including installation
of
improved insulation and the development of more efficient furnaces and other
heating devices, has adversely affected the demand for propane by retail
customers. Future conservation and efficiency measures or technological advances
in heating, conservation, energy generation, or other devices might reduce
demand for propane and our revenues.
s The
propane business is
highly regulated. New or stricter environmental,
health, or safety regulations may increase our operating costs and reduce
our
net income.
s The
propane business is
subject to a wide range of federal, state, and local environmental,
transportation, health and safety laws and regulations governing the storage,
distribution, and transportation of propane. We may have increased costs
in the
future due to new or stricter safety, health, transportation, and environmental
regulations or liabilities resulting from non-compliance with operating or
other
regulatory permits. The increase in any such costs may reduce our net
income.
s We
will be subject to all
operating hazards and risks normally associated with handling, storing,
transporting, and delivering combustible liquids such as propane for use
by
consumers. As a result, we may be a defendant in various legal proceedings
and
litigation arising in the ordinary course of business. Our insurance may
not be
adequate to protect us from all material expenses related to potential future
claims for personal injury and property damage or that insurance will be
available in the future at economical prices. In addition, the occurrence
of a
serious accident, whether or not we are involved, may have an adverse effect
on
the public's desire to use our products.
GOVERNMENT
REGULATION AND ENVIRONMENTAL MATTERS
Our
business is regulated by certain local, state and federal laws and regulations
relating to the exploration for, and the development, production, marketing,
pricing, transportation and storage of, natural gas and oil. We are also
subject
to extensive and changing environmental and safety laws and regulations
governing plugging and abandonment, the discharge of materials into the
environment or otherwise relating to environmental protection. In addition,
we
are subject to changing and extensive tax laws, and the effect of newly enacted
tax laws cannot be predicted. The implementation of new, or the modification
of
existing, laws or regulations, including regulations which may be promulgated
under the Oil Pollution Act of 1990, could have a material adverse effect
on the
Company.
FEDERAL,
STATE OR LOCAL REGULATORY MEASURES COULD ADVERSELY AFFECT OUR BUSINESS.
While
the
Federal Energy Regulatory Commission, or FERC, does not directly regulate
the
major portions of our operations, federal regulation, directly or indirectly,
influences certain aspects of our business and the market for our products.
As a
raw natural gas gatherer and not an operator of interstate transmission
pipelines, we generally are exempt from FERC regulation under the Natural
Gas
Act of 1938, but FERC regulation still significantly affects our business.
In
recent years, FERC has pursued pro-competition policies in its regulation
of
interstate natural gas pipelines. However, we cannot assure you that FERC
will
continue this approach as it considers proposals by pipelines to allow
negotiated rates not limited by rate ceilings, pipeline rate case proposals
and
revisions to rules and policies that may affect rights of access to natural
gas
transportation capacity.
While
state public utility commissions do not regulate our business, state and
local
regulations do affect our business. We are subject to ratable take and common
purchaser statutes in the states where we operate. Ratable take statutes
generally require gatherers to take, without undue discrimination, natural
gas
production that may be tendered to the gatherer for handling. Similarly,
common
purchaser statutes generally require gatherers to purchase without undue
discrimination as to source of supply or producer. These statutes are designed
to prohibit discrimination in favor of one producer over another producer
or one
source of supply over another source of supply. These statutes also have
the
effect of restricting our right as an owner of gathering facilities to decide
with whom we contract to purchase or transport natural gas. Federal law leaves
any economic regulation of raw natural gas gathering to the states, and some
of
the states in which we operate have adopted complaint-based or other limited
economic regulation of raw natural gas gathering activities. States in which
we
operate that have adopted some form of complaint-based regulation, like
Oklahoma, Kansas and Texas, generally allow natural gas producers and shippers
to
file
complaints with state regulators in an effort to resolve grievances relating
to
natural gas gathering access and rate discrimination. The states in which
we
conduct operations administer federal pipeline safety standards under the
Pipeline Safety Act of 1968, and the "rural gathering exemption" under that
statute that our gathering facilities currently enjoy may be restricted in
the
future. The "rural gathering exemption" under the Natural Gas Pipeline Safety
Act of 1968 presently exempts substantial portions of our gathering facilities
from jurisdiction under that statute, including those portions located outside
of cities, towns, or any area designated as residential or commercial, such
as a
subdivision or shopping center.
GOVERNMENTAL
REGULATION OF OUR PIPELINES COULD INCREASE OUR OPERATING COSTS.
Currently
our operations involving the gathering of natural gas from wells are exempt
from
regulation under the Natural Gas Act. Section 1(b) of the Natural Gas Act
provides that the provisions of the Act shall not apply to facilities used
for
the production or gathering of natural gas. Our physical dimensions and
operations support the conclusion that our facilities perform primarily a
gathering function. We should not, therefore, be subject to Natural Gas Act
regulation. There, however, can be no assurance that this will remain the
case.
The Federal Energy Regulatory Commission's oversight of entities subject
to the
Natural
Gas Act includes the regulation of rates, entry and exit of service,
acquisition, construction and abandonment of transmission facilities, and
accounting for regulatory purposes. The implementation of new laws or policies
that would subject us to regulation by the Federal Energy Regulatory Commission
under the Natural Gas Act could have a material adverse effect on our financial
condition and operations. Similarly, changes in the method or circumstances
of
operation, or in the configuration of facilities, could result in changes
in our
regulatory status. In addition, we are subject to federal and state safety
laws
that dictate the type of pipeline, quality of pipe protection, depth, methods
of
welding and other construction-related standards.
Our
gas
gathering operations are subject to regulation at the state level, which
increases the costs of operating our pipeline facilities. Matters subject
to
regulation include rates, service and safety. We have been granted an exemption
from regulation as a public utility in Texas. Presently, our rates are not
regulated in Texas. Changes in state regulations, or our status under these
regulations due to configuration changes in our operating facilities, that
subject us to further regulation could have a material adverse effect on
our
financial condition. Litigation or governmental regulation relating to
environmental protection and operational safety may result in substantial
costs
and liabilities.
OUR
BUSINESS INVOLVES HAZARDOUS SUBSTANCES AND MAY BE ADVERSELY AFFECTED BY
ENVIRONMENTAL REGULATION.
Many
of
the operations and activities of our gathering systems, plants and other
facilities are subject to significant federal, state and local environmental
laws and regulations. These include, for example, laws and regulations that
impose obligations related to air emissions and discharge of wastes from
our
facilities and the cleanup of hazardous substances that may have been released
at properties currently or previously owned or operated by us or locations
to
which we have sent wastes for disposal. Various governmental authorities
have
the power to enforce compliance with these regulations and the permits issued
under them, and violators are subject to administrative, civil and criminal
penalties, including civil fines, injunctions or both. Liability may be incurred
without regard to fault for the remediation of contaminated areas. Private
parties, including the owners of properties through which our gathering systems
pass, may also have the right to pursue legal actions to enforce compliance
as
well as to seek damages for non-compliance with environmental laws and
regulations or for personal injury or property damage.
There
is
inherent risk of the incurrence of environmental costs and liabilities in
our
business due to our handling of natural gas and other petroleum products,
air
emissions related to our operations, historical industry operations, waste
disposal practices and the prior use of natural gas flow meters containing
mercury. In addition, the possibility exists that stricter laws, regulations
or
enforcement policies could significantly increase our compliance costs and
the
cost of any remediation that may become necessary. We cannot assure you that
we
will not incur material environmental costs and liabilities. Furthermore,
we
cannot assure you that our insurance will provide sufficient coverage in
the
event an environmental claim is made against us.
Our
business may be adversely affected by increased costs due to stricter pollution
control requirements or liabilities resulting from non-compliance with required
operating or other regulatory permits. New environmental regulations might
adversely affect our products and activities, including processing, storage
and
transportation, as well as waste management and air emissions. Federal and
state
agencies also could impose additional safety requirements, any of which could
affect our profitability.
RISK
OF ADDITIONAL COSTS AND LIABILITIES RELATED TO ENVIRONMENTAL AND SAFETY
REGULATIONS AND CLAIMS
Our
pipeline operations are subject to various federal, state and local
environmental, safety, health and other laws, which can increase the cost
of
planning, designing, installing and operating such facilities. There can
be no
assurance that costs and liabilities relating to compliance will not be incurred
in the future. Moreover, it is possible that other developments, such as
increasingly strict environmental and safety laws, regulations and enforcement
policies thereunder, and claims for damages to property or persons resulting
from our operations, could result in additional costs to and liabilities
for
us.
SOVEREIGN
RISK
We
are
focusing on the development of infrastructure projects through our Mexican
entity, Terranova Energia S. de R.L. de C.V., in the nation of the United
Mexican States (Mexico). The risk of indirect or regulatory actions by local,
state or federal authorities in Mexico which may inhibit, delay, hinder or
block
projects under development in Mexico is very high given the history of
operations conducted by past businesses other than the Company in Mexico.
There
is a substantial risk that a set of actions taken by commission or omission
by
the various actors in the public, private, nongovernmental and/or social
sectors
could negatively impact a project or investment in Mexico. The legal system
employed in Mexico is dramatically different in its structure and method
of
operation compared to the common law foundation present in the United States
of
America. The level of legal protection afforded investors by the North American
Free Trade Agreement has not materially improved from a foreign investor's
viewpoint.
There
can
be no assurance that a commercially viable project will be completed due
to the
above factors which could result in commercial competitors trying to circumvent
the market system through the exploitation of undocumented, extra-official
channels of influence that constitute unfair competition. Federal, state
and
local authorities are not well coordinated in their legal protections and
improper influence and competition may arise from any level of government
to
disrupt or destroy the commercial viability of investments by foreign investors.
While the Company has taken precautions to limit its investments to prudent
levels, there is a continuing risk of adverse activities arising from the
above
sources that could impair or result in the entire loss of investment in
otherwise commercially viable projects initiated by the Company in
Mexico.
PIPELINE
SYSTEM OPERATIONS ARE SUBJECT TO OPERATIONAL HAZARDS AND UNFORESEEN
INTERRUPTIONS.
The
operations of our pipeline systems are subject to hazards and unforeseen
interruptions, including natural disasters, adverse weather, accidents or
other
events, beyond our control. A casualty occurrence might result in injury
and
extensive property or environmental damage. Although we intend to maintain
customary insurance coverages for gathering systems of similar capacity,
we can
offer no assurance that these coverages will be sufficient for any casualty
loss
we may incur.
OPERATING
RISKS OF NATURAL GAS OPERATIONS
The
natural gas business involves certain operating hazards. The availability
of a
ready market for our natural gas products also depends on the proximity of
reserves to, and the capacity of, natural gas gathering systems, pipelines
and
trucking or terminal facilities. As a result, substantial liabilities to
third
parties or governmental entities may be incurred, the payment of which could
reduce or eliminate the funds available for exploration, development or
acquisitions or result in the loss of our properties. In accordance with
customary industry practices, we maintain insurance against some, but not
all,
of such risks and losses. We do not carry business interruption insurance.
The
occurrence of such an event not fully covered by insurance could have a material
adverse effect on our financial condition and results of
operations.
OUR
BUSINESS INVOLVES MANY HAZARDS AND OPERATIONAL RISKS, SOME OF WHICH MAY NOT
BE
COVERED BY INSURANCE.
Our
operations are subject to the many hazards inherent in the gathering,
compressing, treating and processing of raw natural gas and NGLs and storage
of
residue gas, including ruptures, leaks and fires. These risks could result
in
substantial losses due to personal injury and/or loss of life, severe damage
to
and destruction of property and equipment and pollution or other environmental
damage and may result in curtailment or suspension of our related operations.
We
are not fully insured against all risks incident to our business. If a
significant accident or event occurs that is not fully insured, it could
adversely affect our operations and financial condition.
INSURANCE
Companies
engaged in the petroleum products distribution and storage business may be
sued
for substantial damages in the event of an actual or alleged accident or
environmental contamination. We maintain $2,000,000 of liability insurance.
There can be no assurance that we will be able to continue to maintain liability
insurance at a reasonable cost in the future, or that a potential liability
will
not exceed the coverage limits. Nor can there be any assurance that the amount
of insurance carried by us will enable us to satisfy any claims for which
we
might be held liable resulting from the conduct of our business
operations.
ITEM
1B. UNRESOLVED STAFF COMMENTS
Not
Applicable to Non-Accelerated Filers.
ITEM
2. DESCRIPTION OF PROPERTIES
Reef
Ventures, L.P. owns and operates the international natural gas pipeline and
related facilities located in Maverick County, Texas and Coahuila, Mexico.
Tidelands owns a 97% limited partnership interest and a 1% general partner
interest (through Arrecefe Management, LLC) in this entity. We acquired these
interests from Impact International, LLC. Impact financed our purchase of
this
system and, as of December 31, 2006, we owe Impact $4,785,003.
Rio
Bravo
Energy, LLC owns and operates the Chittim Gas Processing Plant which is located
in Maverick County, Texas. The plant is currently shut down. The gas plant
has
the capability to fractionate natural gas into commercial grade propane and
butane. In the near future, we expect to sell these assets.
Sonora
Pipeline, LLC owns the Sonora Pipeline network in Maverick, Dimmitt and
Zavala
Counties, Texas, consisting of approximately 80 miles of pipeline. No
significant encumbrances exist with respect to the assets of this subsidiary.
The pipeline is currently inactive and could be used to transport natural
gas
from third party producers to supply feedstock for the Chittim Gas Processing
Plant owned by Rio Bravo Energy, LLC. In the near future, we expect to
sell
these assets. Sonora Pipeline, LLC also plans to construct, own and operate
approximately 29 miles of natural gas pipelines in Hidalgo County, Texas
which
will interconnect at the U.S.-Mexico border with the pipeline and storage
assets
to be constructed, owned and operated by Terranova Energia, S. de R.L.
de C.V,
another subsidiary of Tidelands Oil & Gas Corporation.
Sonterra
Energy Corporation operates propane distribution systems providing propane
to 17
residential subdivisions in Central Texas. Sonterra is currently constructing
a
propane distribution system for approximately 350 residential units in
Cordillera Ranch, a rural subdivision located in Kendall County,
Texas.
Tidelands
Exploration & Production Corporation owns a 50% interest in a 26 mile
natural gas pipeline located in Medina, Atascosa and Bexar Counties, Texas
and
also owns a 50% interest in two leases with 5 recompleted natural gas wells
in
Atascosa and Medina Counties, Texas. These assets are held for sale at
present
with active negotiations underway.
.
We
lease
our San Antonio executive office. We renewed this lease on February 1, 2006
for
a term until December 31, 2007, with a current monthly lease payment of $3,400.
Sonterra Energy Corporation entered into a sublease agreement for its offices
in
an adjacent building. On February 1, 2006, Sonterra Energy Corporation entered
into a direct lease with the building owner at a rent of $3,300 per month
for a
term ending December 31, 2007.
Sonterra
leased a field office and storage yard in Dripping Springs, Texas on May
15,
2006, for a five-year term at an annual rent rate of $8,100.
ITEM
3. 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 (“Northern”) when it sued Betty Lou Sheerin
(“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 Oil
and
Gas Corporation (“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 Tidelands' 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. Tidelands answered
the
Sheerin suit on March 26, 2003. Tidelands' 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 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 Zavala
Gathering
System, 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 (“Company Directors”). 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.
Tidelands
won a partial summary judgment against Sheerin as to all of her tort claims
pled
against Tidelands, save and except only her claim for conversion of 500,000
shares of Tidelands stock.
Sheerin
seeks damages against Tidelands for indemnity for any sums found to be due
from
her to Northern, 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 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 Gathering, Ltd., and Tidelands claiming that in such agreement Tidelands
agreed to assume and satisfy all indebtedness due and owing Northern by Sheerin
and ZG Gathering, Ltd. 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. Tidelands won a summary judgment motion it
filed
against Northern and the court has now dismissed Northern's claims against
Tidelands.
On
November 28, 2005, ZG Gathering, Ltd. and ZG Pipeline Management ("ZG") filed
its answer to Northern's Fifth Amended Petition, its counter-claim against
Northern, and its answer and cross claim against Tidelands. ZG contends that
the
promissory notes given by ZG and Sheerin to Northern were procured by Northern's
fraudulent misrepresentations and it claims unspecified amounts of damages
against Northern. ZG's cross action against Tidelands claims Tidelands entered
into an agreement to purchase the Zavala Gathering System from ZG and that,
as
part of that agreement, Tidelands agreed to satisfy the $3,700,914 Northern
indebtedness of ZG, and to defend, indemnify, and hold ZG and Sheerin harmless
from such indebtedness, to pay off a Sheerin loan of $300,000, and to issue
1
million shares of Tidelands stock, of which 500,000 was to be free trading
shares. ZG claims that Tidelands breached this agreement by failing to satisfy
the Northern indebtedness, failing to defend and indemnify it from such debt,
failing to pay off the $300,000 note, failing to issue the free trading shares
in Tidelands, and by placing a stop transfer order on the restricted stock
that
was issued by Tidelands. ZG seeks specific performance of the agreement,
recovery of an unspecified amount of damages, and its attorney's fees.
On
March
6, 2006, the Court granted Tidelands’ motion for summary judgment against NNG
and dismissed NNG’s suit against Tidelands. On March 16, 2006, the Court denied
Tidelands’ motion for summary judgment against Sheerin on Tidelands’ affirmative
defense of mutual mistake. On July 19, 2006, the Court denied ZG’s motion for
summary judgment to strike Tidelands’ affirmative defense of mutual
mistake.
Trial
is
scheduled to begin May 7, 2007, unless a settlement is completed. A
settlement agreement which is conditioned on funding and which involves
Tidelands’ sale of certain assets has been signed by all but one of the
litigation parties. Based on negotiations, the Company has reserved $2,250,000
as an estimated litigation settlement and that amount has been included in
this
report.
Matter
No. 2:
Cause
No.
GM 501625, Senna Hills, Ltd., Plaintiff, vs. Sonterra Energy Corp., Defendant,
was filed in the 53rd Judicial District of Travis County, Texas and Cause
No. GN
501626, HBH Development Co., LLC, Plaintiff, vs. Sonterra Energy Corp.,
Defendant, was filed in the 98th
Judicial
District Court of Travis County, Texas. The above matters were each filed
against Sonterra in May 2005 and involve the same claims arising from the
same
propane service agreement. In each case, the plaintiff initially brought
claims
against Sonterra arising from Sonterra’s failure, as an assignee of the
agreement, to pay easement use fees to the plaintiff. Sonterra obtained summary
judgment as to the plaintiffs’ respective breach of contract and failure of
assignment claims arising from the failure to pay easement use fees. The
cases
were not, however, fully dismissed because the plaintiffs added new causes
of
action for failure to pay easement use fees, claims for unpaid developer
bonus,
reformation of the agreements to require payment of easement use fees and
alleged failure of assignment. These separate lawsuits have since been
consolidated into one suit for purposes of pretrial and trial. The May 2007
trial date has been continued and will likely be reset in September 2007.
Matter
No. 3:
Cause
No.
GN 500948, Goodson Builders, Ltd., Plaintiff, vs. Jim Blackwell, BNC
Engineering, Et. Al, Defendants, was filed April 7, 2005, in the 345th District
Court of Travis County, Texas. This case involves a claim that Defendant
Toll
Brothers Property, LP (“Toll Brothers”) sold Plaintiff Goodson Builder, Ltd.
(“Plaintiff” or “Goodson”) property without disclosing a propane easement.
Plaintiff sued Sonterra Energy Corp. (“Sonterra”) for trespassing through the
use of the easement. Goodson’s primary claim is against the seller for fraud and
non-disclosure. Toll Brothers has responded with a claim for sanctions because
the claim is frivolous. Toll Brothers offers a witness who is Plaintiff’s former
employee and took pictures of the propane tank prior to the Plaintiff’s
purchase. Goodson seeks damages in the hundreds of thousands of dollars.
Insurance would not cover these damages.
The
case
is pending summary judgment. The Company is contesting the case vigorously;
however, the Company is willing to settle if the Plaintiff is willing to
drop
the claim.
ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS
No
matters were brought to a vote of the security holders during the quarter
ended
December 31, 2006.
PART
II
ITEM
5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER
PURCHASES
OF EQUITY SECURITIES
Market
For Common Equity And Related Stockholder Matters
Our
common stock is traded on the OTC Electronic Bulletin Board. The following
table
sets forth the high and low bid prices of our common stock for each quarter
for
the years 2006 and 2005. The quotations set forth below reflect inter-dealer
prices, without retail mark-up, mark-down or commission and may not represent
actual transactions.
Common
Stock
Our
common stock trades Over-the-Counter (OTC) on the OTC Bulletin Board under
the
symbol TIDE. The table below sets forth the high and low bid information
for the
past two years. These quotations reflect inter-dealer prices, without retail
mark-up, mark-down or commission and may not represent actual transactions.
These quarterly trade and quote data provided by NASDAQ OTC Bulletin
Board.
Bid
Information |
|
|
|
|
|
|
|
Fiscal
Quarter Ended |
|
|
|
|
High
|
|
Low
|
December
31, 2006 |
0.57
|
|
0.26 |
September
30, 2006 |
0.84
|
|
0.51 |
June
30, 2006 |
1.18
|
|
0.51 |
March
31, 2006 |
1.18
|
|
0.78 |
December
31, 2005 |
1.01
|
|
0.76 |
September
30, 2005 |
1.39
|
|
0.80 |
June
30, 2005 |
1.77
|
|
0.95 |
March
31, 2005 |
2.59
|
|
1.74 |
As
of
December 31, 2006, we had an aggregate of 95 stockholders of record as reported
by our transfer agent, Signature Stock Transfer Co., Inc. Certain shares
are
held in the "street" names of securities broker dealers and we estimate the
number of stockholders which may be represented by such securities broker
dealer
accounts may exceed 5,000.
Dividends
and Dividend Policy
There
are
no restrictions imposed on the Company that limit its ability to declare
or pay
dividends on its common stock, except as limited by state corporation law.
During the year ended December 31, 2006, no cash or stock dividends were
declared or paid and none are expected to be paid in the foreseeable
future.
We
expect
to continue to retain all earnings generated by our future operations for
the
development and growth of our business. The Board of Directors will determine
whether or not to pay dividends in the future in light of our earnings,
financial condition, capital requirements and other factors.
Recent
Sales of Unregistered Securities
We
made
the following issuances of unregistered (restricted) securities during the
fourth quarter of the fiscal year ended on December 31, 2006:
On
November 27, 2006, the Company issued 40,000 shares of its restricted common
stock valued at $16,000 to an employee of the Company.
No
commissions were paid in connection with any of these sales. We did not employ
any form of general solicitation or advertising in connection with the offer
and
sale of the securities described below. Except as otherwise noted above,
the
offer and sale of the securities listed below were made in reliance on the
exemption from registration provided by Section 4(2) of the Securities Act
and/or Regulation D promulgated by the Securities and Exchange Commission
as
transactions by an issuer not involving any public offering.
PERFORMANCE
GRAPH
The
following graph compares total stockholder returns for Tidelands Oil and
Gas
Corporation’s common stock for the past five years to two indices: the Russell
Microcap Index and the Nasdaq Combined Industrial Index. All of the cumulative
total returns are computed assuming the value of the investment in Tidelands’
common stock and each index as $100.00 on December 31, 2001, and the
reinvestment of all dividends (to date, the Company has not declared any
dividends). The comparisons shown on the graph below are based on historical
data and are not intended to be indicative of future performance of Tidelands’
common stock.
|
|
|
|
INDEXED
RETURNS Years
Ending December 31
|
Company/Index
|
|
Base Period 12/31/01
|
|
2002
|
|
2003
|
|
2004
|
|
2005
|
|
2006
|
TIDELANDS
OIL AND GAS CORP.
|
|
100
|
|
22.00
|
|
151.36
|
|
92.33
|
|
56.41
|
|
17.41
|
RUSSELL
MICROCAP INDEX
|
|
100
|
|
88.10
|
|
121.58
|
|
144.05
|
|
161.65
|
|
183.26
|
NASDAQ
COMBINED INDUSTRIAL INDEX
|
|
100
|
|
76.04
|
|
114.41
|
|
130.69
|
|
134.51
|
|
149.49
|
The
Stock
Performance Graph shall not be deemed incorporated by reference into any
filing
made by the Company under the Securities Act of 1933 or the Securities
Exchange
Act of 1934, notwithstanding any general statement contained in any such
filing
incorporating this Annual Report on Form 10-K by reference, except to the
extent
the Company incorporates the Graph by specific reference.
ITEM
6. SELECTED FINANCIAL DATA
SELECTED
CONSOLIDATED FINANCIAL INFORMATION
The
following tables present our selected consolidated financial information
as of
the end of the periods indicated. The selected consolidated financial
information for, and as of the end of, each of the twelve months ended December
31, 2006, December 31, 2005, December 31, 2004, December 31, 2003, and December
31, 2002, are from our audited consolidated financial statements.
The
selected consolidated financial information is not necessarily indicative
of the
results that may be expected for any future period. The selected consolidated
financial information should be read in conjunction with "Management's
Discussion and Analysis" and the historical and consolidated financial
statements and notes incorporated by reference in this prospectus.
(Dollars
in thousands, except share and per share
data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Data:
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
Revenue
|
|
$
|
2,223
|
|
$
|
1,861
|
|
$
|
1,884
|
|
$
|
179
|
|
$ |
710 |
|
Operating
Expenses
|
|
|
14,163
|
|
|
15,172
|
|
|
31,626
|
|
|
3,061
|
|
|
4,454
|
|
Operating
Income (Loss)
|
|
|
(11,940
|
)
|
|
(13,311
|
)
|
|
(29,742
|
)
|
|
(2,882
|
)
|
|
(3,744
|
) |
Other
Income (Expense), Net
|
|
|
103
|
|
|
5,648
|
|
|
15,440
|
|
|
1,534
|
|
|
(316
|
) |
Net
Income (Loss)
|
|
$
|
(11,837
|
)
|
$
|
(7,663
|
)
|
$
|
(14,302
|
)
|
$
|
(1,348
|
)
|
$ |
(4,060 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statement
of Cash Flows Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
Provided (Used) by Operating Activities
|
|
$
|
(4,821
|
)
|
$
|
(2,784
|
)
|
$
|
(3,108
|
)
|
$
|
441
|
|
$ |
(423 |
) |
Cash
Provided (Used) by Investing Activities
|
|
$
|
(2,793
|
)
|
$
|
(1,836
|
)
|
$
|
(9,629
|
)
|
$
|
366
|
|
$ |
(354 |
) |
Cash
Provided (Used) by Financing Activities
|
|
$
|
6,868
|
|
$
|
275
|
|
$
|
17,302
|
|
$
|
(106
|
)
|
$ |
573 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Assets
|
|
$
|
15,187
|
|
$
|
13,489
|
|
$
|
22,423
|
|
$
|
1,624
|
|
$ |
1,379 |
|
Long-Term
Debt
|
|
$
|
8,934
|
|
$
|
4,272
|
|
$
|
11,732
|
|
$
|
-
|
|
$ |
- |
|
Total
Stockholders' Equity
|
|
$
|
2,153
|
|
$
|
7,767
|
|
$
|
4,949
|
|
$
|
485
|
|
$ |
(2,536 |
) |
SELECTED
CONSOLIDATED QUARTERLY FINANCIAL INFORMATION
The
information below is from unaudited consolidated financial
statements.
Year
Ended December 31, 2006
|
|
March
31
|
|
June
30
|
|
September
30
|
|
December
31
|
|
Revenues
|
|
$
|
802
|
|
$
|
407
|
|
$
|
369
|
|
$
|
645
|
|
Cost
of Goods Sold
|
|
|
377
|
|
|
206
|
|
|
177
|
|
|
414
|
|
Gross
Margin
|
|
|
425
|
|
|
201
|
|
|
192
|
|
|
231
|
|
Operating
Expenses
|
|
|
2,155
|
|
|
2,190
|
|
|
4,017
|
|
|
2,377
|
|
Other
Income (Expense), Net
|
|
|
34
|
|
|
28
|
|
|
48
|
|
|
(7
|
|
Net
earnings (loss)
|
|
$
|
(1,696
|
)
|
$
|
(1,961
|
)
|
$
|
(3,777
|
)
|
$
|
(2,153
|
)
|
Basic
(loss) per share
|
|
$
|
(0.02
|
)
|
$
|
(0.03
|
)
|
$
|
(0.05
|
)
|
$
|
(0.03
|
)
|
Diluted (loss)
per share
|
|
$
|
(0.02
|
)
|
$
|
(0.03
|
)
|
$
|
(0.05
|
)
|
$
|
(0.03
|
)
|
Year
Ended December 31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
628
|
|
$
|
341
|
|
$
|
248
|
|
$
|
644
|
|
Cost
of Goods Sold
|
|
|
285
|
|
|
130
|
|
|
220
|
|
|
368
|
|
Gross
Margin
|
|
|
343
|
|
|
211
|
|
|
28
|
|
|
276
|
|
Operating
Expenses
|
|
|
6,947
|
|
|
3,825
|
|
|
1,580
|
|
|
1,817
|
|
Other
Income (Expense), Net
|
|
|
(2,862
|
|
|
8,096
|
|
|
324
|
|
|
90
|
|
Net
earnings (loss)
|
|
$
|
(9,466
|
)
|
$
|
4,482
|
|
$
|
(1,228
|
)
|
$
|
(1,451
|
)
|
Basic
income (loss) per share
|
|
$
|
(0.15
|
)
|
$
|
0.08
|
|
$
|
(0.02
|
)
|
$
|
(0.11
|
)
|
Diluted
income (loss) per share
|
|
$
|
(0.15
|
)
|
$
|
0.08
|
|
$
|
(0.02
|
)
|
$
|
(0.11
|
)
|
Year
Ended December 31, 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
0
|
|
$
|
508
|
|
$
|
825
|
|
$
|
551
|
|
Cost
of Goods Sold
|
|
|
0
|
|
|
498
|
|
|
802
|
|
|
209
|
|
Gross
Margin
|
|
|
0
|
|
|
10
|
|
|
23
|
|
|
342
|
|
Operating
Expenses
|
|
|
1,538
|
|
|
4,209
|
|
|
3,545
|
|
|
20,825
|
|
Other
Income (Expense), Net
|
|
|
4
|
|
|
15,397
|
|
|
6
|
|
|
33
|
|
Net
earnings (loss)
|
|
$
|
(1,534
|
)
|
$
|
11,198
|
|
$
|
(3,516
|
)
|
$
|
(20,450
|
)
|
Basic
income (loss) per share
|
|
$
|
(0.03
|
)
|
$
|
0.18
|
|
$
|
(0.02
|
)
|
$
|
(0.34
|
)
|
Diluted
income (loss) per share
|
|
$
|
(0.03
|
)
|
$
|
0.18
|
|
$
|
(0.02
|
)
|
$
|
(0.34
|
)
|
ITEM
7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Business
Overview
Our
products and services are primarily focused on development and operation
of
transportation, processing, distribution and storage projects of natural
gas and
natural gas liquids in the northeastern states of Mexico (Coahuila, Nuevo
Leon
and Tamaulipas) and the states of Texas and California 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. Sonterra
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. Sonterra Energy Corporation has
recently begun performing construction services for third party utility
companies in order to more efficiently utilize its existing compentencies
and
assets.
With
respect to our pipeline system owned by Reef Ventures, L.P., management
has
evaluated 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 Reef Ventures, L.P. will not be participating in the construction
of
additional pipelines in Mexico to reach these new markets. The required
pipeline
will be constructed by end users or an intermediate purchaser of the natural
gas. If constructed, Reef Ventures, L.P. is expecting to simply continue
to
transport the additional volumes of natural gas required for these markets
through its existing facilities which would be interconnected in Mexico
to the
new pipeline that is required to reach these potential markets. Management
believes the timeline for the initiation of construction for such pipeline
project in Mexico is likely to be a 2009 event with completion in 2010.
The
increased volume for the Reef Ventures pipeline from such an event could
approximate 5 million cubic feet per day. The current baseload for the
Conagas
system in Piedras Negras is approximately 5.5 million cubic feet per day
of
which Reef Ventures LP transports 1/3 to 1/2 of the total volume. The expected
end users for increased market demand in the Piedras Negras, Coahuila area
would
be a cardboard packaging and bottling operation for a proposed beer brewing
facility. In December 2006, Grupo Modelo announced its intention to build
the
first phase of a new brewery in the year 2010. In addition to these potential
developments, management believes that increasing volumes of natural gas
can be
transported in its existing facilities. In 2005, which was the final year
of a
two-year contractual nomination scheme, the Reef Ventures pipeline was
carrying
only half the actual baseload volume (and none of the swing volume) was
being
transported to CONAGAS in Piedras Negras. In 2006, management did not
successfully increase the volumes transported on the natural gas line.
We
believe that if given adequate supplies, the Reef Ventures pipeline can
transport all of the current base load and the swing requirements of CONAGAS
which would result in a doubling of volumes and revenues for the pipeline.
However the current dependence on volume increases in order to achieve
the
necessary rate of return on this investment has been unsuccessful. Accordingly,
management has sought to increase revenues by imposing a minimum demand
charge
for the reservation of capacity on the pipeline. Negotiations are currently
underway to achieve that objective. In the event these negotiations are
unsuccessful, a sale of all or part of the Reef Ventures, LP pipeline will
be
considered in order to retire the current indebtedness of $4,785,003 currently
owed to Impact International, LLC. This debt matures at the end of May
2008 and
is currently increasing each quarter due to negative amortization as a
result of
the poor revenue return from the current transportation fee
arrangements.
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. At December 31, 2006, Sonterra had increased its number
of
meter hookups to 1,155 and is expecting a 15% rate of increase in the number
of
new meter hookups in 2007. There are approximately 1,095 unmetered future
lots
within the above subdivisions where propane service can be connected. As
new
homes are constructed on these lots our customer base will grow. Construction
activities continue in the existing subdivisions where expansion phases of
development will result in the addition of approximately 170 customers in
2007.
Sonterra's participation in the launch of new subdivisions is also occurring,
as
exemplified by the signing of a construction contract with the developers
of Las
Brisas at Ensenada Shores (located on Canyon Lake), where 75 new lots with
propane service have been completed for sale to new customers. This
subdivision's second phase of development is expected to add another 175
lots.
Construction continues on Section 205 of the Cordillera Ranch subdivision,
which
added 50 more residential customers in the fourth quarter of 2006. Sonterra
has
expanded into additional markets as evidenced by the signing of a construction
contract to build a central propane system for a multi-use retail center
in Lago
Vista, Texas. The system will serve five to ten large commercial customers
including two restaurants.
Sonora
Pipeline, LLC, will own and operate the U.S. (Texas) pipeline segments
to be
constructed in connection with the Burgos Hub pipeline, LNG regasification
terminal and gas storage projects which will interconnect to the U.S.
via two
international pipeline crossings in Hidalgo County, Texas. Management
has filed
applications for a certificate of public convenience and necessity and
two
presidential permits for cross-border pipeline construction into Mexico
with the
Federal Energy Regulatory Commission. If the permits are granted and
the
pipelines are completed and fully operational, these international pipeline
crossings near Mission and Progreso, Texas would result in the 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 the Burgos Hub projects through
its
Mexican entity, Terranova Energia S. de R.L. de C.V., in 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 Project Consulting
Services, Inc., and Ritch Mueller, SC, Abogados. The Tidelands/Sonora advisors
include Netherland Sewell & Associates, Mayer Brown Rowe & Maw, LLP, BNC
Engineering, LLC, HSBC Securities, USA, Inc. and Ross, Marsh &
Foster.
The
Terranova Energia project was developed to serve the needs of CFE, the Mexican
federal electricity commission, to manage swing and seasonal spread in its
procurement and dispatch of natural gas to its combined cycle power plants
in
Northern Mexico. The region's forecasted growth will require additional natural
gas for power generation in the region. The same need to manage swing and
seasonal spread is present for the industrial users of natural gas in Northern
Mexico, in particular, the industrial users located in the Monterrey, Nuevo
Leon
area.
Our
various projects in South Texas and Northeast Mexico are collectively called
the
Burgos Hub Project. 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 Occidente pipeline.
The
pipelines proposed are (A) the Occidente Section comprised of: (1) a pipeline
from the Brasil Storage field to Nuevo Progresso with a 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 (3) a pipeline from Pemex's Station 19 south of Reynosa which
will
extend southward to the Monterey Nuevo Leon area; 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 will interconnect
with other pipelines at the Donna Station and the Valero Gilmore Plant. At
the
Donna Station, our potential interconnects into Texas pipelines are with
TETCO,
TGPL and Texas Gas Services. At the Arguelles crossing and the Valero Gilmore
Plant, our potential interconnects are with HPL, Calpine and Kinder Morgan.
The
Terranova pipeline capacity is estimated at 1.0 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 anticipated to be a 36 inch diameter pipeline and
from
the Brasil field to Monterey and international crossings are anticipated
to be
30 inch diameter pipelines.
On
June
5, 2006, Tidelands Oil & Gas Corporation subsidiary, Terranova Energia, S.
de R.L. de C.V. was awarded a Permit (#G/183/TRA 2006) by the Comision
Reguladora de Energia de Mexico (CRE) to begin construction of the Terranova
Occidente and Oriente pipeline portions of its Burgos Hub Project In the
second
quarter of 2007, Terranova expects to file an application with the CRE
to amend
its existing Mexican pipeline permit to allow for the construction of an
additional segment of pipeline which will extend from Station 19 to Monterrey,
Nuevo Leon. This filing is being pursued in response to commercial interest
from
industrial customers and potential service opportunity for the power generation
facilities proposed by the Comision Federal de Electridad (CFE) in northeast
Mexico. Discussion with staff at the regulatory body, CRE, indicates a
timeline
for approval of the amended permit by the fourth quarter of
2007.
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
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.
Additionally,
we submitted the storage permit to the CRE on August 5, 2005 and it was
accepted
for full review on October 14, 2005. Several unique questions are presented
by
the filing of this permit due to the proposed location and the lack of
previous
storage permit applications having been considered by the CRE. The CRE,
with
cooperation from Terranova, is conducting discussions with PEMEX, the energy
ministry of the United Mexican States (SENER) and the Mexican Petroleum
Institute (MPI) to determine the mechanism for the grant of use rights
for the
depleted reservoir as a natural gas storage facility and the proper legal
vesting of such rights with the holder of the CRE permit to construct own
and
operate a gas storage facility. Terranova expects that these issues regarding
the Company’s storage permit application will be resolved by the CRE
Commissioners in the fourth quarter of 2007.
The
proposed Offshore LNG Regasification Station will be based on technology
developed by the Norwegian company TORP 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.
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. We expect this phase
of the
project to be developed as the last phase of the project given the tightness
of
LNG supply in the Atlantic Basin for the next four years. A further influence
on
the timing and implementation of this phase of the project will be the degree
of
progress made in actual construction of permitted LNG receiving terminals
in the
Corpus Christi, Texas area.
There
are
significant challenges for the natural gas supply to the power generation
industry in Northeastern Mexico. Presently, there are three LNG regasification
projects permitted or under construction in Mexico at Altamira, Rosarito
and
Manzanillo. Additionally, there are 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. We believe
that
natural gas storage facilities in northern Mexico will provide a reliable,
flexible gas supplies while creating conditions for competitive natural
gas
pricing.
With
the
assistance of our financial advisory firm, we have determined that financing
of
the project should be possible under a commercial structure acceptable
to debt
providers that would involve long-term capacity reservation agreements
with
creditworthy counterparties for each constituent element of the project.
Another
essential factor that is critical for the project's ability to raise debt
financing is the ability of Terranova to attract equity capital from strategic
and/or financial investors in the amounts which are likely to be required
by
debt providers. Our financial advisory firm continues to assist us in making
presentations of the project to the potential strategic and financial equity
investors. We have received positive feedback from several such parties
and
active negotiations are continuing under confidentiality agreements with
several
firms, including energy enterprises headquartered in Mexico. On this basis,
we
could conclude that the project, in its currently envisioned configuration,
could attract considerable equity capital from the potential investors.
Investor
appetite will depend on our ability to obtain an acceptable commercial
structure, relevant permits and other regulatory approvals and the fulfillment
of other conditions standard for non-recourse project financing. We believe
that
in 2007 the Company will bring to completion our efforts to obtain the
required
major permit approvals and the co-investment in the project of industry
partners. Given the timeline necessary to obtain debt financing, execute
an EPC
contract, and the actual construction time for the first phase of the project
(the pipeline from South Texas to Monterrey, Nuevo Leon), we are projecting
the
first operating cash flows from our Burgos Hub Project to be received in
the
year 2010.
Esperanza
Energy, LLC ("Esperanza") was formed as a wholly-owned subsidiary of the
Company
in March 2006 to evaluate the feasibility of developing an offshore, deep-water
liquefied natural gas (LNG) receiving and regasification terminal near Long
Beach, California. Esperanza would utilize TORP Technology's HiLoad LNG Regas
unit that attaches to an LNG tanker, directly vaporizes the LNG as it is
offloaded and injects the regasified natural gas into an undersea pipeline
for
transportation of the natural gas to onshore metering stations and transmission
pipelines to supply nearby gas markets. The TORP HiLoad LNG Regas unit
eliminates the need for extensive above-ground storage tanks or large marine
structures required for berthing and processing of the LNG. Esperanza has
conducted its feasibility study for this project with the assistance of
best-in-class LNG, environmental, pipeline and legal advisors and has concluded
that the project is technically, environmentally and commercially feasible.
Esperanza will develop the necessary information in 2007 to file applications
with California state and U.S. Federal agencies for appropriate permits to
construct, own and operate the LNG facilities.
The
expected timeline for development of the Port Esperanza project is influenced
by
the preparation of the application in a form sufficient to be “deemed complete”
by the Maritime Administration and Coast Guard which are the principal
Federal
agencies with permit jurisdiction for LNG terminal development in the
offshore
United States of America waters. After an application is deemed complete,
the
process of obtaining the approvals is often longer than the statutory
time
period of approximately one year due to “time out” or suspension of the running
of the clock on the application process due to issues raised during the
review
of the permit application. California state and local agency approvals
can also
impact the permit approval process beyond the normal time expectations.
The
focus of the Port Esperanza project team has been to design a project
that has
anticipated and mitigated these risks during its design phase. We have
assembled
best-in-class team members with previous offshore LNG terminal development
experience with a view of profiting from their experience in dealing
with the
various issues raised in the development of an LNG receiving facility
in
California. Nevertheless, in view of the relative shortage of LNG supply
in the
Pacific Basin through the year 2011, we anticipate that the first operational
cash flows from the Port Esperanza project would occur in the year 2012.
The
projected capital expenditures for the project are significant and depending
on
the final configuration may cost as much as $1 billion USD with the cost
of the
permitting process for the USCG/MARAD permit estimated in excess of $20
million
USD. It is expected that a major portion of the initial development cost
and the
required equity in the project will be obtained from co-venturers. Active
discussions are underway with several potential partners who would invest
in the
project. An announcement concerning partners is expected by the end of
the
second quarter 2007, to be followed by the initiation of the process
of
developing the application for the USCG/MARAD permit which is estimated
to
require a six month timeline prior to submission of the application.
Given
the
large capital outlays required for development of the Burgos Hub Project
and
Port Esperanza, it is likely that the Company will be diluted with respect
to
the project level cash flows by virtue of the sale of interests in the projects
to third party partners. Similarly, the Company as an integrated enterprise
continues to experience negative cash flows and will require sequential rounds
of deficit fundings which will likely result in further dilution to the Company
shareholders. The Board of Directors is considering all options for dealing
with
these issues including the merger or acquisition of profitable and complementary
business operations with a view towards eliminating Company operating deficits
and efficient utilization of tax loss carryforwards.
Results
of Operations
YEAR
ENDED DECEMBER 31, 2006 COMPARED WITH YEAR ENDED DECEMBER 31,
2005
REVENUES:
The Company reported revenues of $2,222,598 for the twelve months ended
December
31, 2006, as compared with revenues from continuing operations of $1,861,323
for
the twelve months ended December 31, 2005. The increase was divided between
each
revenue stream: Reef Ventures, LP, increased income from gas transportation
fees
from $231,077 for the twelve months ended December 31, 2005, to $285,098
for the
twelve months ended December 31, 2006, an increase of $54,021; Sonterra
Energy
Corporation increased propane gas sales to $1,740,870 for the twelve months
ended December 31, 2006, from $1,494,679 for the twelve months ended December
31, 2005, an increase of $246,191 due mainly to an increase in total customers
served and product prices. Construction service revenues for Sonterra Energy
Corporation increased to $180,693 for the twelve months ended December
31, 2006
compared to $135,567 for the twelve months ended December 31, 2005, an
increase
of $45,126. Tidelands Exploration & Production Corporation had $15,737 of
natural gas revenues for its first quarter of operations.
TOTAL
COSTS AND EXPENSES: Total costs and expenses from continuing operations
decreased from $15,171,916 for the twelve months ended December 31, 2005,
to
$14,162,432 for the twelve months ended December 31, 2006. The most significant
decreases occurred in Sales, General and Administrative and Impairment Losses,
which decreases more than offset increased interest expense due to default
costs
incurred with a private placement of convertible debt (See Note 16 of Audited
Financial Statements) whereas a reserve for litigation of $2,250,000 was
recorded which reduced the decrease of expenses to $1,009,484.
COST
OF
SALES: Total Cost of Sales increased from $1,003,386 for the twelve months
ended
December 31, 2005, to $1,173,561 for the twelve months ended December 31,
2006,
an increase of $170,175, of which $164,216 was attributable to Sonterra Energy
Corporation. This increase resulted from increased cost and volume of propane
sold and, to a lesser extent, increased construction services.
OPERATING
EXPENSES: Operating expenses from continuing operations which are expenses
related to the operation of Company assets in an active business segment
increased from $202,766 for the twelve months ended December 31, 2005, to
$420,200 for the twelve months ended December 31, 2006, an increase of $217,434;
$165,215 of this increase was from the operating expenses incurred by Sonterra
Energy Corporation due to increased revenues. Depreciation expense decreased
from $485,481 for the twelve months ended December 31, 2005, to $466,241
for the
twelve months ended December 31, 2006, reflecting a decrease in depreciable
assets for the respective periods due to impairment of certain long-lived
assets
in 2005.
INTEREST
EXPENSE: Interest expense increased from $611,363 for the twelve months
ended December 31, 2005, to $3,405,778 for the twelve months ended December
31,
2006, primarily as a result of three factors: (a) interest penalties in the
amount of $1,696,982 in connection with the payment of stock to the various
investors upon the defaults described in Notes 16 of the Audited Financial
Statements, (b) liquidated damage payments in the amount of $478,155 paid
in
cash to the various investors as described in Note 16 of the Financial
Statements, and (c) interest paid in connection with the convertible debenture
financing as described in Note 16 of the Audited Financial Statements, in
the
amount of $763,499 during the twelve-month period ended December 31, 2006.
No
income or expense for Beneficial Conversion Feature Interest was recorded
for
the twelve months ended December 31, 2006, as compared to income of $756,339
for
the twelve months ended December 31, 2005, due to a reversal of previously
charged Beneficial Conversion Feature Interest. The market price for the
Company’s common stock at the relevant measurement dates during the twelve
months ended December 31, 2006, was less than the conversion price for the
debentures issued on January 20, 2006. Accordingly, there was no benefit
to the
holders of the debentures in the event of conversion during those periods
and no
beneficial conversion interest charge was recorded.
SALES,
GENERAL AND ADMINISTRATIVE: Sales, General and Administrative Expenses decreased
by $1,586,597 during the twelve months ended December 31, 2006, to a total
amount of $6,446,652 as compared to $8,033,249 for the twelve months ended
December 31, 2005. This decrease was due primarily to the absence of financing
costs paid to Impact International, LLC, during the period ended December
31,
2006 as compared to financing costs of $1,272,500 paid to Impact International,
LLC, during the twelve months ended December 31, 2005. The remaining decrease
in
Sales, General & Administrative expense was due to a reduction in the
issuance of common stock for consulting services during the twelve months
ended
December 31, 2006, versus the twelve months ended December 31, 2005.
IMPAIRMENT
LOSS: No expense for impairment loss was recorded for the twelve months ended
December 31, 2006, compared to $5,200,000 of impairment of goodwill and $392,000
impairment of long-lived assets, recorded as losses for the twelve months
ended
December 31, 2005.
DERIVATIVE
GAIN: Gain from embedded derivative instrument liabilities decreased from
$5,168,000 for the twelve months ended December 31, 2005, to $0 for the twelve
months ended December 31, 2006. The warrants issued in connection with the
January 20, 2006, financing had an exercise price that was greater the fair
market value of the Company’s common stock at the relevant measurement dates.
Accordingly, no derivative gain or reduction in liability for the issuance
of
the warrants in this financing transaction was recorded for the twelve months
ended December 31, 2006.
NET
LOSS:
Net loss of ($7,662,904) for the twelve months ended December 31, 2005,
increased to ($11,836,925) for the twelve months ended December 31, 2006,
an
increase in the amount of loss of $4,174,021. The principal reason for this
amount of increase in net loss was the lack of Derivative Gains to offset
Loss
from Operations for the twelve months ended December 31, 2006, versus the
twelve
months ended December 31, 2005 recording of a $2,250,000 reserve for litigation.
Included in the net loss of ($11,836,925) for the twelve months ended December
31, 2006, is $2,164,300 of expenses for employment contract costs, directors
fees and legal fees paid by issuance of common stock.
LIQUIDITY
AND CAPITAL RESOURCES: The independent auditors report on our December 31,
2006
financial statements included in this Form 10-K states that our difficulty
in
generating sufficient cash flow to meet our obligations and sustain operations
raises substantial doubts about the our ability to continue as a going
concern
With
regard to liquidity and adequacy of capital resources, management believes
that
the Company will need additional equity or debt financing after the first
quarter of 2007. Management plans to raise additional capital through a
variety
of fund raising methods during fiscal 2007 and to pursue all available
financing
alternatives in this regard. Management may also consider a variety of
potential
partnership or strategic alliances to strengthen its financial position.
In the
event that a decision to proceed with the offshore LNG regas terminal project
in
Southern California is made during the upcoming months, additional funding
for
the permit process will be needed beyond the amounts currently required.
Furthermore, the Company will need to raise additional capital to fund
ongoing
development activities for its Mexican subsidiary, Terranova Energia and
also to
fund operating overhead at the parent company level and the possible cost
of a
litigation settlement or adverse verdict if the case goes to trial. New
issuance
of common stock sufficient to retire the outstanding debentures and to
provide
additional required capital is under active negotiation. No assurance can
be
made that such capital can be acquired in a timely fashion or at all.
Furthermore, if capital is available through these sources, if may be at
terms
that are disadvantageous to the Company and its shareholders.
In
light
of these possible outcomes and the current cash resources available for
the
sustenance of corporate operations, management has taken action to reduce
overhead costs and otherwise obtain cash resources for the Company. Actions
completed include reduction of staff, assignment of the Suite License Agreement
with the San Antonio Spurs, LLC, to a former officer, collection of a stock
subscription receivable from a past officer, collection of an account receivable
from an officer, accelerated collection of past due accounts from customers
of
Sonterra Energy and Reef Ventures, LP, and collection of the $283,854 balance
of
the Note Receivable for the related party aircraft charter services including
termination of those services to the Company.
Direct
capital expenditures during the twelve months ended December 31, 2006, totaled
$2,814,512. The capital expenditures were composed of increased pre-construction
costs regarding potential international pipeline crossings and storage
facilities in Mexico, pre-construction costs regarding an offshore LNG terminal
in Southern California, additional machinery, equipment, trucks, autos and
trailers for the operation of the Sonterra Energy Corporation propane systems
and $502,060 invested in a natural gas pipeline and nearby leases for
development. Total debt increased from $5,722,322 at December 31, 2005, to
$13,034,046 including the aforementioned reserve for litigation at December
31,
2006. The increase in total debt is due primarily to the issuance of $6,569,750
of convertible debentures in the financing transaction of January 20, 2006.
Net
loss for the twelve months ended December 31, 2006, was ($11,836,925) an
increase in net loss of 54.5% from the net loss of ($7,662,904) for the twelve
months ended December 31, 2005. Basic and diluted net loss per common share
increased to ($0.15) for the twelve months ended December 31, 2006, as compared
to ($0.11) for the twelve months ended December 31, 2005. The net loss per
share
calculation for the twelve months ended December 31, 2006, included an increase
in actual and equivalent shares outstanding.
YEAR
ENDED DECEMBER 31, 2005 COMPARED WITH YEAR ENDED DECEMBER 31,
2004
REVENUES:
The Company reported revenues of $1,861,323 for the twelve months ended December
31, 2005 as compared with revenues from continuing operations of $1,883,838
for
the twelve months ended December 31, 2004. The primary differences in year
to
year results occurred from the conversion of Reef Ventures, L.P. income from
gas
sales to transportation fees. In the year ended December 31, 2005, Reef Ventures
sold no natural gas ($0) compared to $1,323,459 of gas sales for the twelve
months ended December 31, 2004. However, Reef Ventures, L.P. increased
transportation fees to $231,077 for the twelve months ended December 31,
2005
compared to transportation fees of $76,767 for the twelve months ended December
31, 2004, an increase of $154,310. In addition, the mix of revenues earned
by
Sonterra Energy Corporation showed a significant change in terms of propane
gas
sales due to the reporting of a full year of operations in 2005 versus three
months for the 2004 year. Propane sales for Sonterra Energy Corporation for
the
twelve months ended December 31, 2005 were $1,494,679 compared to sales of
$400,637 for the twelve months ended December 31, 2004, an increase of
$1,094,042. Construction service revenues for Sonterra Energy Corporation
increased to $135,567 for the twelve months ended December 31, 2005 compared
to
$82,975 for the twelve months ended December 31, 2004, an increase of
$52,592.
TOTAL
COSTS AND EXPENSES: Total costs and expenses from continuing operations
decreased from $31,626,135 for the twelve months ended December 31, 2004
(as
restated) to $15,171,916 for the twelve months ended December 31, 2005. The
most
significant decreases occurred in Beneficial Conversion Feature Interest,
Sales,
General and Administrative and Impairment Losses. Each of the decreases in
these
categories of expenses resulted primarily from results related to the matters
discussed in Footnotes 1 and 2 of the financial statements for the year ended
December 31, 2005 and as described in the related sections below.
COST
OF
SALES: Total Cost of Sales decreased from $1,508,891 for the twelve months
ended
December 31, 2004 to $1,003,386 for the twelve months ended December 31,
2004.
Due to the conversion of Reef Ventures, L.P. to a transportation arrangement
for
its business versus the purchase and sale of natural gas, its cost of sales
decreased from $1,299,518 for the twelve months ended December 31, 2004 to
zero
($0) for the twelve months ended December 31, 2005. Cost of sales for Sonterra
Energy Corporation rose from $209,373 for the twelve months ended December
31,
2004 to $1,003,386 for the twelve months ended December 31, 2005, an increase
of
$794,013. As stated in the Revenue discussion above, this increase was primarily
the result of twelve months of operations reported in 2005 versus only three
months of operations reported in 2004.
OPERATING
EXPENSES: Operating expenses from continuing operations which are expenses
related to the operation of Company assets in an active business segment
increased from $99,665 for the twelve months ended December 31, 2004 to $202,766
for the twelve months ended December 31, 2005 which is a total increase of
$103,101. This increase was primarily from the operating expenses incurred
by
Sonterra Energy Corporation. Depreciation expense increased from $244,889
for
the twelve months ended December 31, 2004 to $485,481 for the twelve months
ended December 31, 2005 due to a full year of depreciation being incurred
in the
2005 year versus seven months of depreciation expense in 2004 on 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: Interest expense increased from $300,566 during the twelve months
ended
December 31, 2004 to $611,363 primarily due to twelve months of carrying
cost in
2005 for the debt incurred to acquire the natural gas pipeline owned by Reef
Ventures, L.P. versus seven months of interest cost reported in the 2004
acquisition year for these assets. As described in Footnote 2, the Company
has
restated its December 31, 2004 financial statements and all subsequent quarterly
financial statements to account for the cost of the embedded beneficial
conversion feature inherent in the convertible notes issued to the MAG Capital,
LLC investors on November 18, 2004. This beneficial conversion feature
represents the difference between the conversion price for the debentures
and
the fair market value of the common stock at the commitment date and subsequent
quarterly measurement dates. This discount was charged to interest expense
because the conversion feature is at the option of the holder and can be
exercised at any time. The Company has accordingly recognized interest expense
in its restated December 31, 2004 financial statements in the amount of
$3,092,105 and ($756,329) for the twelve months ended December 31, 2005.
The
negative figure for 2005 interest expense recognizes the fluctuation in the
market price of the common stock into which the notes are converted at the
quarterly measurement dates. The interest cost associated with the issuance
and
conversion of these debentures due to this beneficial conversion feature
is
limited to the relevant 2004 and 2005 years due to the completed conversion
of
all the debentures into common stock in the fourth quarter of 2005.
SALES,
GENERAL AND ADMINISTRATIVE: Sales, General and Administrative expense for
the
restated twelve months ended December 31, 2004 was $11,022,019. This amount
includes restated amounts for stock issued for services and finance costs
associated with the valuation of stock issued as part of the Impact
International LLC acquisition in 2004. Sales, General & Administrative
expenses for the twelve months ended December 31, 2005 was $8,033,249 which
is a
decrease of $2,988,770 as compared to the twelve months ended December 31,
2004.
During 2005, the Company recognized significant decreases in consulting fees
and
finance costs which were offset by increased employee expenses, board of
director compensation, and overhead from full year operations of Sonterra
Energy
Corporation in 2005.
IMPAIRMENT
LOSSES: As described in Footnote 1, the Company has recognized impairment
of
goodwill recorded in connection with the Impact International LLC acquisition
in
the amount of $5,200,000 and the impairment of the carrying value of the
Chittim
gas plant owned by Rio Bravo Energy LLC and the gas pipeline system connecting
to the Chittim gas plant owned by Sonora Pipeline LLC in the amount of $392,000
for the twelve months ended December 31, 2005.
GAIN
ON
REDUCTION OF WARRANT LIABILITY: As part of the Impact International LLC
acquisition in the year ended December 31, 2004, the Company issued warrants
at
a conversion price less than the fair market value of the common stock issueable
upon the exercise of those warrants. Accordingly, the Company has restated
its
December 31, 2004 financial statements to recognize both the additional goodwill
and the related warrant liability associated with that acquisition. An
evaluation of the difference between the price of the common stock and the
warrant exercise price on a quarterly basis was performed resulting in the
Gain
on Reduction of Warrant Liability amounts shown in the restated December
31,
2004 financial statements ($15,390,000) and the amount shown in the December
31,
2005 financial statements ($5,168,000). The warrants originally issued in
connection with this acquisition have been exercised and all common stock
related to their exercise has been issued as of the end of the year December
31,
2005.
NET
LOSS
FROM OPERATIONS: Net loss of ($14,302,037) for the twelve months ended December
31, 2004 decreased to ($7,662,904) for the twelve months ended December 31,
2005, a decrease in the amount of loss of $6,639,133. Included in the net
loss
from operations is $4,022,525 of expenses for financing costs, investor
relations fees, legal fees, director fees and employee compensation paid
by
issuance of common stock.
YEAR
ENDED DECEMBER 31, 2004 COMPARED WITH YEAR ENDED DECEMBER 31,
2003
REVENUES:
The Company reported revenues of $1,883,838 for the twelve months ended December
31, 2004 as compared with revenues from continuing operations of $178,856
for
the twelve months ended December 31, 2003. The revenue increase resulted
primarily from the acquisition of a 98% interest in Reef Ventures, L.P. which
owns and operates a natural gas pipeline serving the Piedras Negras, Coahuila
market. Natural gas sold ($1,323,459) and transportation fees ($76,767) charged
from these operations totaled $1,400,227 for the twelve months ended December
31, 2004. Sales of propane by Sonterra Energy Corporation to its residential
customer base ($363,413), service call income for its customers ($34,373),
and
installation income for new yard lines and meter sets ($2,850) totaled to
$400,636 for the twelve months ended December 31, 2004. A new revenue source
from Sonterra Energy Corporation was construction services related to propane
main lines and tank sites for subdivisions under development, which resulted
in
$82,975 of revenues for the twelve months ended December 31, 2004. Other
Revenues decreased by $178,856 for the twelve months ended December 31, 2004
as
compared to the twelve months ended December 31, 2003.
TOTAL
COSTS AND EXPENSES: Total costs and expenses from continuing operations
increased from $3,061,068 for the twelve months ended December 31, 2003 to
$31,626,135 for the twelve months ended December 31, 2004. Each category
of cost
and expense increased significantly due to the rapid growth in assets and
operation expenses experienced by the Company during the twelve months ended
December 31, 2004. Cost of Sales increased from $0 for the twelve months
ended
December 31, 2003 to $1,508,891 for the twelve months ended December 31,
2004.
Operating Expenses increased from $27,767 for the twelve months ended December
31, 2003 to $99,665 for the twelve months ended December 31, 2004. Depreciation
Expense increased from $43,006 for the twelve months ended December 31, 2003
to
$244,889 for the twelve months ended December 31, 2004. Interest Expense
increased from $53,163 for the twelve months ended December 31, 2003 to
$3,392,671 for the twelve months ended December 31, 2004. Each of these
increases resulted primarily from growth related to the acquisition of 98%
of
the partnership interest in the Reef Ventures, L.P. international pipeline
operations and the acquisition of the residential propane sales business
near
Austin, Texas by Sonterra Energy Corporation. However, $3,092,105 of the
increase in Interest Expense for the year ended December 31, 2004 was from
the
recognition of Beneficial Conversion Feature interest expense associated
with
the November 18, 2004 financing transaction in which convertible notes were
issued to affiliates of MAG Capital, LLC. General and Administrative Expenses
increased from $2,937,132 for the twelve months ended December 31, 2003 to
$11,022,019 for the twelve months ended December 31, 2004 due to the startup
and
initial operation of the additional business units mentioned above, the addition
of additional directors and officers combined with the increased use of stock
based compensation in the employment agreements of officers, and the expenses
for expanded Company operations associated with the development of new midstream
energy projects in the U.S. and Mexico during that period.
COST
OF
SALES: Total Cost of Sales increased from $0 for the twelve months ended
December 31, 2003 to $1,508,891 for the twelve months ended December 31,
2004.
Cost of sales increased by $1,299,518 for the purchase cost of natural gas
resold thru our international pipeline operated by Reef Ventures, L.P. and
by
$209,373 for the purchase cost of propane, meter sets and yard lines sold
to
residential customers by Sonterra Energy Corporation.
OPERATING
EXPENSES: Operating expenses from continuing operations increased from $27,767
for the twelve months ended December 31, 2003 to $99,665 for the twelve months
ended December 31, 2004 which is a total increase of $71,898. This increase
was
due to the operating expenses incurred for the international pipeline crossing
operated by Reef Ventures, L.P. and the operating expenses incurred by Sonterra
Energy Corporation. Depreciation expense increased by $201,883 during the
twelve
months ended December 31, 2004 due 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 $3,339,508
during the twelve months ended December 31, 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 MAG Capital
LLC.
SALES,
GENERAL AND ADMINISTRATIVE: Sales, General & Administrative Expenses
increased by $8,084,887 during the twelve months ended December 31, 2004
as
compared with Sales, General and Administrative expenses for the twelve months
ended December 31, 2003. Officers & Directors Salaries & Fees increased
by $1,605,973 during the twelve months ended December 31, 2004 as compared
to
the twelve months ended December 31. 2003 as a result of the addition of
one
director and two officers to the Company combined with the increased use
of
stock based compensation in the employment agreements of officers and directors.
Consulting fees, legal fees, and financing fees increased by $5,960,039 for
the
twelve months ended December 31, 2004 as compared with the twelve months
ended
December 31, 2003. This increase resulted primarily from the use of stock
based
compensation for these services during a period of higher common stock prices.
The remaining increase in G & A costs of $518,875 for the twelve months
ended December 31, 2004 was from increases in travel costs, office rent,
insurance premiums, entertainment, and payroll plus other expenses associated
with additional employees. The significant expansion of scope in the business
plan for the Company and the need to conserve cash working capital for certain
project predevelopment costs required the use of significant issuances of
stock
for general and administrative expenses during the twelve months ended December
31, 2004.
GOODWILL
IMPAIRMENT LOSS: In connection with the acquisition of the Impact International
LLC partnership interests in May 2004, the Company issued warrants to the
sellers of the partnership interests at a conversion price that required
the
establishment of an asset and offsetting liability account to account for
the
difference in the strike price of the warrants versus the price of the common
stock issuable as of the date of issue on May 24, 2004. The original
amount
of
$20,558,000 was determined under the procedures of EITF 00-19 (utilizing
the
Black-Scholes option pricing method) and was recorded as Goodwill in connection
with the acquisition on the Company's books for the period ended June 30,
2004.
At December 31, 2004, the Company reviewed the value of the Goodwill from
the
Impact acquisition and after applying the recognition and measurement guidelines
stated in SFAS 142 "Goodwill and Other Intangibles" determined that an
impairment charge to Goodwill of $15,358,000 was necessary.
GAIN
ON
REDUCTION OF WARRANTS LIABILITY: As described in the preceding section, a
liability for the warrants issued and outstanding at May 24, 2004 was recorded
in accordance with EITF 00-19, "Accounting for Derivative Financial Instruments
Indexed to, and Potentially Settled In, A Company's Own Stock". As a result
of
the mark to market process called for in that guidance, the Company determined
that a reduction in warrants liability and corresponding gain in the amount
of
$15,390,000 should be recorded at December 31, 2004.
NET
LOSS:
Net loss of ($1,348,481) for the twelve months ended December 31, 2003 increased
to ($14,302,037) for the twelve months ended December 31, 2004, an increase
in
the amount of loss of $12,953,556. Included in the net loss from operations
is
$9,327,818 of expenses for financing costs, consulting fees, legal fees,
and
employee compensation paid by issuance of common stock.
Contractual
Obligations
|
|
Total
|
|
|
Due
in 2007
|
|
|
Due
in 2008-2009
|
|
|
Due
in 2010-2011
|
|
|
Thereafter
|
Long-term
debt
|
$
|
9,159,294
|
|
$
|
225,000
|
|
$
|
8,934,294
|
|
|
|
|
|
|
Operating
Lease obligations:
|
$
|
312,147
|
|
$
|
103,793
|
|
$
|
46,786
|
|
$
|
41,724
|
|
$
|
119,844
|
Total
Contractual Obligations
|
$
|
9,471,441
|
|
$
|
328,793
|
|
$
|
8,981,080
|
|
$
|
41,724
|
|
$
|
119,844
|
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.
ITEM
7A. QUANTITATIVE AND QUALITATIVE ANALYSIS
ABOUT MARKET
RISK
Cash
and Cash Equivalents
We
have
historically invested our cash and cash equivalents in short-term, fixed
rate,
highly rated and highly liquid instruments which are reinvested when they
mature
throughout the year. Although our existing investments are not considered
at
risk with respect to changes in interest rates or markets for these instruments,
our rate of return on short-term investments could be affected at the time
of
reinvestment as a result of intervening events. As of December 31, 2006,
we had
cash and cash equivalents aggregated $367,437.
We
do not
issue or invest in financial instruments or their derivatives for trading
or
speculative purposes. Our operations are conducted primarily in the United
States, and, are not subject to material foreign currency exchange risk.
Although we have outstanding debt and related interest expense, market risk
of
interest rate exposure in the United States is currently not
material.
Debt
The
interest rate on our Impact International debt obligation is generally
determined based on the prime interest rate plus two percent and may be subject
to market fluctuation as the prime rate changes.
ITEM
8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA
Our
Financial Statements, the accompanying Notes to the Financial Statements
and the
Report of Independent Registered Public Accounting Firm are filed as part
of
this report beginning on the pages immediately following the signature pages
of
this Report.
ITEM
9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM
9A.
CONTROLS AND PROCEDURES
Evaluation
Of Disclosure Controls And Procedures.
James
B.
Smith, our Chief Executive Officer and Chief Financial Officer (Principal
Executive Officer and Principal Financial Officer) performed an evaluation
of
the Company’s disclosure controls and procedures, as that term is defined in
Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended (the
“Exchange Act”), as of December 31, 2006 and has concluded that such
disclosure controls and procedures are effective to ensure that information
required to be disclosed in our periodic reports filed under the Exchange
Act is
recorded, processed, summarized and reported within the time periods specified
by the Securities and Exchange Commission’s rules and forms.
Changes
In Internal Control Over Financial Reporting.
During
the quarter ended December 31, 2006, there were no changes in the Company’s
internal control over financial reporting that have materially affected,
or are
reasonably likely to materially affect, the Company’s internal control over
financial reporting.
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. However,
we believe that our disclosure controls and procedures are designed to provide
reasonable assurance of achieving this objective. 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. 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.
ITEM
9B. OTHER INFORMATION
None
PART
III
ITEM
10. DIRECTORS AND EXECUTIVE OFFICERS OF THE
REGISTRANT
Name
|
|
Age
|
|
Position
|
|
Date
became director or officer
|
James
B. Smith
|
|
53
|
|
Director,
President, CFO
|
|
August
16, 2003
|
Robert
Dowies
|
|
56
|
|
V.P.
|
|
October
18, 2004
|
Julio
Bastarrachea
|
|
49
|
|
V.P.
|
|
January
16, 2004
|
Carl
Hessel
|
|
43
|
|
Director
|
|
January
28, 2004
|
Ahmed
Karim
|
|
34
|
|
Director
and Secretary
|
|
October
21, 1998
|
Michael
Ward
|
|
51
|
|
Former
Director, President, CEO
|
|
October
21, 1998 (resigned December
2006)
|
JAMES
B.
SMITH: On December 8, 2006, Mr. Smith was appointed Chief Executive Officer
and
President in addition to his role as Chief Financial Officer. Mr. Smith first
joined Tidelands on August 16, 2003, as a Senior Vice President and Chief
Financial Officer. Mr. Smith received a Bachelor of Science degree from Texas
A&M University and a Master of Professional Accounting degree from the
McCombs School of Business at the University of Texas at Austin. His
professional experience includes public accounting practice with Ernst &
Young where he was a Tax Manager serving publicly traded and private energy
clients. He is licensed as a Certified Public Accountant and Real Estate
Broker
in Texas and Colorado. From 1992 through 2003, Mr. Smith operated his own
consulting and tax practice for energy related clients. From 1996 through
2003,
he directed the financial affairs and tax planning for several closely held
corporations engaged in land development in Colorado. During this period,
Mr.
Smith also participated as a partner, shareholder and financial officer for
several closely held entities engaged in natural gas exploration and production
activities including the operation of a large natural gas gathering system.
From
2000 through 2003, he also served as Chief Financial Officer for a major
produce
company with significant subsidiaries in real estate development and
agri-business.
ROBERT
W.
DOWIES: On October 18, 2004, we employed Robert W. Dowies as our Vice President
of Gas Markets and Supply. Mr. Dowies has 30 years experience in energy
marketing, ten years as the owner of a natural gas trading company and 20
years
with a public utility. Until his employment with Tidelands Oil & Gas
Corporation, since 1998, Mr. Dowies worked for Trebor Energy Resources, Inc.
in
Houston, Texas. His principal responsibilities were the development of financial
alliances with various energy merchants and producers providing a $50 million
dollar credit support for gas marketing activities, financial trading accounts,
pipeline transportation agreements, storage strategies and capital projects.
He
developed and implemented marketing strategies which resulted in $40 million
dollars of annual revenue. He designed and coordinated the construction and
implementation of a natural gas gathering system.
JULIO
BASTARRACHEA: Mr. Bastarrachea joined Terranova Energia, Tidelands Mexican
subsidiary, as the Director General in 2004. His primary responsibilities
include project development and administration of the permitting process
with
the Mexican regulatory authorities. Prior to assuming the role as Director
General of Terranova, he served as the Vice President of Business Development
for Tidelands in San Antonio where he assisted in the early development
of
underground natural gas storage projects in Mexico. From 1999 to 2003,
Mr.
Bastarrachea was employed with the State Of Texas Commercial Office in
Mexico
City where he coordinated the promotion of business opportunities for Texas
companies in Mexico. In cooperation with the Texas Railroad Commission
he
organized a yearly trade mission to Mexico focused on the energy industry.
From
1993 to 1999 he served as the Consulate General of Mexico in San Antonio
and
with Mexico’s Ministry of Foreign Affairs. He began his career in 1988 as an
assistant architect with ARP Architects in London. He received a degree
in
architecture in 1980 from the University of Yucatan in Yucatan, Mexico.
He also
earned a MSc. in Economics of Urban Development in 1986 from the University
of
London and a Diploma in International Affairs from the Instituto Matias
Romero,
Ministry of Foreign Affairs in Mexico City
CARL
HESSEL: On January 28, 2004, Mr. Hessel joined our board of directors. Mr.
Hessel founded Margaux Investment Management Group, S.A. which is located
in
Geneva, Switzerland in 2001. Prior to 2001, he served as Vice President of
Merrill Lynch where he was responsible for creating global high net worth
management platform. He began his career at Goldman Sachs and helped build
the
Scandinavian ultra-high net worth market. Mr. Hessel received his M.B.A.
from
Wharton Business School and a degree in Finance and Management from the
University of Pennsylvania. He was awarded the Marcus Wallenberg Foundation's
Scholarship.
AHMED
KARIM: Mr. Karim is a director and Secretary of the Company. He is a graduate
of
Simon Fraser University. He holds a degree in Business Administration,
specializing in marketing and international business. Since 1995, his business
experience includes work with Quest Investments Group and Interworld Trade
and
Finance where his responsibilities included marketing, finance and investor
relations.
MICHAEL
WARD: Mr. Ward served as the President, Chief Executive Officer and Chairman
of
our Board of Directors from October 1998 until December 2006. Mr. Ward has
more
than 25 years of diversified experience as an oil and gas professional. He
was
educated in business management and administration at Southwest Texas State
University and the University of Texas. He has wide experience in the capacity
in which he successfully served in operating oil and gas companies in the
United
States. During the past 20 years, he has been associated with Century Energy
Corporation where his duties and responsibilities were production and drilling
superintendent and supervised 300 re-completions and new drills in Duval
County,
Texas.
Audit
Committee and Financial Expert
The
Company has no audit committee financial expert, as defined under Section
228.401, serving on its audit committee because it has no audit committee
and is
not required to have an audit committee because its common stock is not a
listed
security as defined in Section 240.10A-3. Accordingly, all material decisions
affecting the Company's audited financial statements, periodic disclosure
with
the SEC and its relationship with its auditors are addressed by the entire
Board
of Directors.
Compliance
with Section 16(a) of the Securities Exchange Act of 1934
Section
16(a) of the Securities Exchange Act of 1934 requires the Company's directors
and executive officers, and persons who own more than 10% of the Company's
Common Stock, to file with the Securities and Exchange Commission initial
reports of beneficial ownership and reports of changes in beneficial ownership
of Common Stock of the Company. Officers, directors and greater than 10%
shareholders are required by the Securities and Exchange Commission to furnish
the Company with copies of all section 16(a) reports they file. Based solely
on
copies of such forms furnished as provided above, or written representations
that no Forms 5 were required, the Company believes that during the fiscal
year
ended December 31, 2006, the Company’s officers, directors and greater than ten
percent owners timely filed all reports they were required to file under
Section
16(a), except as follows: a
Form 4
relating to four transactions was filed late by Mr. Smith on February 14,
2006;
a Form 4 relating to five transactions was filed late by Mr. Smith on March
27,
2006; a Form 4 relating to two transactions was filed late by Mr. Smith on
October 12, 2006; Mr. Smith failed to file one report relating to four
transactions, but did report the transactions in his year-end report on Form
5,
which was timely filed; a Form 4 relating to one transaction was filed late
by
Mr. Dowies on June 8, 2006 (as amended on June 9, 2006); and Mr. Karim failed
to
file one report relating to one transaction, but did report the transaction
in
his year-end report on Form 5, which was timely filed.
ITEM
11. EXECUTIVE COMPENSATION
Compensation
Discussion and Analysis
Compensation
Philosophy and Objectives. Our
Board
of Directors has the responsibility for establishing and reviewing the Company’s
compensation philosophy and objectives. The overall objectives of our
compensation program for our executive officers are to attract and retain
highly
qualified executives committed to our success and our mission, to motivate
our
executives to build and grow our business, to reward loyalty and to incentivize
our officers during both periods of growth, as well as uncertainty, and to
align
the interests of our executives with the interests of our stockholders.
Ultimately, the goal of the compensation committee is to provide our executive
officers with appropriate annual and longer-term compensation, both equity
and
non-equity based, to incentivize these officers and align their interests
with
those of our shareholders. The Board of Directors has not established a
formula for allocating between cash and non-cash compensation. We refer to
our President and Chief Executive Officer, our Chief Financial Officer and
our
other officers in the Executive Compensation Table as our named executive
officers.
Role
of Executive Officers and Management. The
President and Chief Executive Officer provide recommendations to the Board
of
Directors on matters of compensation philosophy, plan design and the general
guidelines for executive officer compensation. These recommendations are
then considered by the Board of Directors. The President and Chief
Executive Officer is also a member of the Board of Directors and therefore
generally attends meetings related to compensation but abstains from voting
with
respect his own compensation. In addition, the other members of the Board
of
Directors may discuss compensation of the President and Chief Executive Officer
in sessions where he is not present.
Elements
of Executive Compensation. The
compensation we provide to our executive officers primarily consists of the
following:
·
annual
base salary,
·
annual
cash bonuses which are discretionary and/or based on the achievement of annual
performance objectives,
·
stock
awards,
·
stock
options,
·
perquisites
and other personal benefits, and
· 401K
with
certain matching contributions by the Company.
We
do not
offer pension or any other retirement plans for executives. We do not currently
provide any deferred compensation plan for executives.
The
Board
of Directors has not hired any compensation consultants to assess the current
salary levels or other compensation elements for our executive officers.
In the
future, we anticipate that the Board of Directors may review and consider
summaries of competitive salary levels prepared by management based on various
survey data.
Base
Salary. The
Company provides named executive officers and other employees with base salary
to compensate them for services rendered during the fiscal year. Base
salary ranges for named executive officers are determined for each executive
based on his or her position, leadership, years of experience and level of
responsibility. Merit increases normally take effect in January of
each
year.
During
its review of base salaries for executives, the Board of Directors primarily
considers:
·
internal
review of the executive’s compensation, both individually and relative to other
officers;
·
individual
performance of the executive;
·
qualifications
and experience of the officer; if
·
the
complexity of our operations;
·
our
ability to compete with other companies, including larger, more established
and
better capitalized companies, for the recruitment and retention of skilled
management; and
·
the
financial condition and results of operations of the Company.
Salary
levels are typically considered annually as part of the Company’s performance
review process as well as upon a promotion or other change in job
responsibility.
Incentive
Cash Bonuses. In
addition to base salary, the Company has maintained a practice of paying
incentive cash bonuses tied to an executive's performance. These bonuses
are discretionary and based upon individual performance as well as Company
performance. In 2006, incentive cash bonuses were awarded to the named
executive officers generally based upon the named executive officer’s base
salary, with most of the named executive officers receiving the same percentage
of respect base salaries.
Equity
Awards. The
Company believes that equity awards are an important component of executive
compensation and serve to better align the interests of executives with those
of
our stockholders, eliciting maximum effort and dedication from our executive
officers. The medium and long-term incentive compensation portion of the
Company’s compensation program consists primarily of grants of stock awards, as
well as grants of stock options under the Company’s stock grant and option
plans. These grants and awards are designed to provide incentives for
longer-term positive performance by the executive and other senior officers
and
to align their financial interests with those of the Company’s stockholders by
providing the opportunity to participate in any appreciation in the stock
price
of the Company’s common stock that may occur after the date of grant of stock or
options. In addition, the Company believes that such equity compensation
enhances our ability to attract and retain highly qualified executives and
other
persons and to motivate them to improve our business results and earnings
by
providing them equity holdings in the Company.
Generally
all of the stock awards that we are granted to our executive officers have
been
fully vested at the time of grant. Stock option grants may be fully vested
or
subject to vesting over time and/or other conditions. Generally, stock options
are granted with an exercise price equal to the fair market value of the
Company’s common stock on the date of grant; however, under our stock greens and
option plans, the Board of Directors retains discretion to grant options
with
exercise prices either above or below the then-current fair market
value.
In
the
past, our equity incentive compensation has primarily consisted of stock
awards,
with stock options being granted at a lesser rate. We emphasized stock
awards primarily as a mechanism to conserve cash, while providing recipients
with both short-term liquidity, as well as long-term incentives to maximize
shareholder value and the market value of our common stock. Our Board of
Directors does not have any preset times during which it issues equity
compensation, but instead considers recommendations made by senior management
from time to time throughout the year, as well as performing annual reviews
with
respect to compensation and equity compensation.
Profit
and Revenue Sharing.
As
described further under “Employment Agreements”, in 2006 Mr. Ward and Mr. Smith
were entitled to compensation based on a percentage of our profits and increases
in sales. Mr. Ward was entitled to two percent of the net profits of the
Company, after deduction for all taxes and was also entitled to a distribution
equal to one percent of the increase in sales over the previous year. Mr.
Smith
was entitled to one percent of the net profits of the Company, after deduction
for all taxes and was also entitled to a distribution equal to one percent
of
the increase in sales over the previous year. Neither executive received
any
compensation pursuant to the use profit and revenue sharing provisions of
their
employment agreements, since the Company did not achieve profitability or
increase its sales in 2006.
As
discussed below under “Employment and Severance Agreements”, the Company
eliminated this profit-and revenue sharing compensation as part of Mr. Smith’s
new employment agreement in 2007, and increased the number of shares of stock
to
be issued to Mr. Smith in 2007. The Company made this shift in compensation
because the Company believes that incentivizing a short-term focus on increasing
sales may not be in the best interests of the Company in achieving longer-term
goals that will maximize shareholder value. The Company believes that the
long-term viability and success of the Company and maximum shareholder value
are
dependent upon the financing and development of various energy infrastructure
projects. These projects may require a longer-term focus and may not result
in
increased sales or revenue in the short term. Therefore, the Company believes
that our executive officers will have their interests more closely aligned
with
that of our shareholders, if a larger portion of their compensation is
equity-based rather than revenue sharing based.
Retirement
and Other Benefits.
The
Company offers a 401K plan with certain matching contributions by the Company
to
all of our employees including the named executive officers.
We
also
offer various fringe benefits to all of our employees, including our named
executive officers, on a non-discriminatory basis, including group policies
for
medical insurance. Our Chief Executive Officer and Chief Financial Officer
received an automobile allowance of $12,000 per year. The compensation
committee believes such benefits are appropriate and assist such officers
in
fulfilling their employment obligations.
Stock
Ownership Guidelines. The
Company has not established any formal policies or guidelines addressing
expected levels of stock ownership by the named executive officers or for
other
executive officers. However, due to purchases, the exercise of options,
the vesting of restricted stock awards and the allocation of shares under
the
Company’s ESOP, our named executive officers, as well as our directors and other
employees, have a substantial equity interest in the Company.
Tax
Deductibility of Pay. Section
162(m) of the Internal Revenue Code of 1986, as amended (the “Code”), places a
limit of $1.0 million on the amount of compensation that the Company may
deduct
in any one year with respect to each of its five most highly paid executive
officers. There is an exception to the $1.0 million limitation for
performance-based compensation meeting certain requirements. Stock options
are
performance-based compensation meeting those requirements and, as such, are
fully deductible. Service-based only stock awards are not considered
performance-based compensation under Section 162(m) of the Code.
In
the
past, Section 162(m) has prevented the Company from fully deducting the expense
of the executive compensation paid. To maintain flexibility in compensating
executive officers in a manner designed to promote varying corporate goals,
the
Company has not adopted a policy requiring all compensation to be
deductible.
Other
Components of Compensation.
As
described below under “Employment and Severance Agreements with Management” that
Company’s employment agreements with certain executive officers provide for
severance benefits and change control benefits. The severance payments of
the
agreements are intended to align the executive officers’ and the stockholders’
interests by enabling executive officers to consider corporate transactions
that
are in the best interests of the stockholders and other constituents of the
Company without undue concern over whether the transactions may jeopardize
the
executive officers’ own employment or impose financial hardship on him or her.
The grounds under which severance payments are triggered in the employment
and
change in control agreements are similar to or the same as those included
in
many employment agreements for senior executive officers of comparable
companies.
Employment
and Severance Agreements with Management
James
B. Smith.
Mr.
Smith was appointed Chief Executive Officer and President in December 2006.
In
March 15, 2007, we entered into a new employment agreement with Mr. Smith
in his
capacities as Chief Executive Officer and President. Mr. Smith’s employment
agreement has a term of five (5) years, with an annual cash salary of $300,000.
In addition, Mr. Smith is entitled to an annual stock grant with a fair market
value of $1 million. Therefore, the number of shares granted to Mr. Smith
each
year will vary based on our stock price. Mr. Smith is entitled to all employee
benefits generally provided by the Company to employees. He is also entitled
to
four weeks paid vacation, an annual automobile allowance of $12,000,
supplemental disability insurance and a life insurance policy payable to
his
heirs in the amount of $2 million. Mr. Smith continues to serve as Chief
Financial Officer, but does not receive any additional compensation specifically
for such duties. If the Company terminates Mr. Smith’s employment without cause,
as defined in the employment agreement, Mr. Smith is entitled to continue
to
receive payment of his cash and annual equity compensation for the remainder
of
the five year term. Mr. Smith joined our board of directors on June 27,
2005.
During
all of 2006, and through March 15, 2007, Mr. Smith served under his prior
employment agreement, which was entered into in October 2004 in his capacity
of
Chief Financial Officer. Under the terms of Mr. Smith's prior employment
agreement, his base annual salary in 2006 was $168,000, and was subject to
increases from year to year, as determined by our Board of Directors, by
at
least the Consumer Price Index. As additional compensation, Mr. Smith received
his annual stock grant of 500,000 shares in accordance with the terms of
the
prior employment agreement. As incentive compensation, Mr. Smith was entitled
to
additional compensation equal to one percent of our net profits and one percent
of the increase in sales over a previous year's sales, effective October
1,
2004. As with his new employment agreement, Mr. Smith was entitled to four
weeks
paid vacation and an annual automobile allowance of $12,000.
Robert
W. Dowies.
We
employed Mr. Dowies on October 26, 2004 as our Vice President of Gas Markets
and
Supply. His employment agreement is for a term of three (3) years. His annual
salary is $100,000. He is entitled to an annual stock grant of 100,000 common
shares. The first 50,000 shares will vest and be payable April 18, 2005.
Thereafter, stock grants will be payable every six months, October 18 and
April
18 for the term of the employment agreement. Mr. Dowies is entitled to two
(2)
weeks paid vacation and all employee benefits as provided by the
Company.
Michael
Ward.
Mr.
Ward resigned from all positions with the Company in December 2006 and
entered
into an agreement regarding his separation from the Company, severance
amounts
and certain other matters. Pursuant to this agreement, Mr. Ward has agreed
to
repay the Company for certain amounts owed under promissory notes. In addition,
Mr. Ward agreed to bring current and assume all obligations of not Company
under
that certain SBC Center Terrace Suite License Agreement between TIDE and
San
Antonio Spurs, LLC. Under this agreement, the Company will pay Mr. Ward
the
total sum of $134,415.72 representing six (6) months salary, plus COBRA
payments
for the same period of time, commencing January 1, 2007 according to the
Company's payroll schedule. If Mr. Ward had been unable to secure an assignment
of the Skybox Agreement, the salary and COBRA payments could have been
suspended
by the Company until the contemplated assignment was completed. In addition,
the
Company agreed to issue Mr. Ward the 500,000 shares of common stock due
under
his employment agreement on December 31, 2006. Mr. Ward was successful
in having
the Skybox Agreement assigned in January 2007, and therefore, the 500,000
shares
were released to him at that time. However, the Company has suspended making
required payments under the separation and severance agreement until such
time
as the sale of the Tidelands Exploration & Production Corporation’s
properties for original value has been completed.
Prior
to
his resignation, under the terms of Mr. Ward's employment agreement, commencing
January 1, 2004, he was employed as the Company's President and Chief Executive
Officer for a term of five (5) years. His base annual salary in 2006 is
$252,000. As additional compensation, Mr. Ward was entitled to an annual
stock
grant of One Million (1,000,000) shares. Stock grant dates were June 30 and
December 31 each year. As incentive compensation, Mr. Ward was entitled to
additional compensation equal to two percent of our net profits and one percent
of the increase in sales over a previous year's sales, effective with the
fiscal
year ending 2004. Mr. Ward was entitled to all employee benefits as provided
by
the Company. He was entitled to four weeks paid vacation and an annual
automobile allowance of $12,000.
Change
of control agreements
We
do not
have any agreements providing for compensation or benefits to our employees
in
the event of a change of control of the Company.
Summary
Compensation Table
The
following table contains compensation data for our named executive officers
for
the fiscal year ended December 31, 2006.
Name
and Principal Position
|
|
Fiscal
Year
|
|
Salary
($)
|
|
Bonus
($)
|
|
Stock
Awards ($) (3)
|
|
All
Other Compensation
($)
(4)
|
|
Total
($)
|
James
B Smith
President,
CEO and CFO (1)
|
|
|
2006
|
|
|
185,880
|
|
|
7,745
|
|
|
324,500
|
|
|
14,220
|
|
|
532,345
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Michael
R. Ward
CEO
(2)
|
|
|
2006
|
|
|
253,333
|
|
|
11,015
|
|
|
1,219,500
|
|
|
169,752
|
|
|
1,653,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Julio
Bastarrachea
|
|
|
2006
|
|
|
61,909
|
|
|
2,579
|
|
|
142,500
|
|
|
1,158
|
|
|
208,146
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Robert
W. Dowies
V.P.
Marketing
|
|
|
2006
|
|
|
99,999
|
|
|
4,167
|
|
|
63,400
|
|
|
1,742
|
|
|
169,308
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
Appointed Chief Executive Officer and President on December 8,
2006.
|
(2)
Resigned on December 6, 2006.
|
(3)
For each of Mr. Smith and Mr. Ward, this amount includes a stock
award of
150,000 shares each on September 25, 2006, with a value of $87,000,
for
services rendered in their capacities as members of the Board of
Directors.
|
(4)
Includes a $12,000 per year automobile allowance for each of Mr.
Smith and
Mr. Ward, and severance of $145,431 that accrued in 2006 for Mr.
Ward.
Also includes matching 401(k) contributions for each executive
officer.
|
GRANTS
OF PLAN-BASED AWARDS
|
|
|
|
|
Estimated
Future Payouts Under Equity Incentive Plan Awards
|
|
|
|
|
|
|
|
|
Name
|
|
Grant
Date
|
|
|
|
Target (#)
|
|
Maximum (#)
|
|
All
Other Stock Awards: Number of Shares of Stock
|
|
All
Other Option Awards; Number of Securities Underlying
Options
|
|
Exercise
or Base Price of Option Awards ($/sh)
|
|
Grant
Date Fair Value of Stock and Option Awards (1)
|
James
B Smith
|
|
1/3/2006
|
|
|
|
|
|
|
|
500,000
|
|
|
|
|
|
$445,000
|
|
|
9/18/2006
|
|
|
|
|
|
|
|
150,000
(2)
|
|
|
|
|
|
$87,000
|
|
|
10/11/2006
|
|
|
|
|
|
|
|
500,000
|
|
|
|
|
|
$237,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Michael
R. Ward
|
|
1/2/2006
|
|
|
|
|
|
|
|
500,000
|
|
|
|
|
|
$455,000
|
|
|
6/7/2006
|
|
|
|
|
|
|
|
500,000
|
|
|
|
|
|
$542,500
|
|
|
9/25/2006
|
|
|
|
|
|
|
|
150,000
(2)
|
|
|
|
|
|
$87,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Julio
Bastarrachea
|
|
1/30/2006
|
|
|
|
|
|
|
|
150,000
|
|
|
|
|
|
$142,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Robert
W. Dowies
|
|
5/10/2006
|
|
|
|
|
|
|
|
60,000
|
|
|
|
|
|
$47,400
|
|
|
11/27/2006
|
|
|
|
|
|
|
|
40,000
|
|
|
|
|
|
$16,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
This column reflects the grant date fair value of stock awards
under SFAS
123R. With respect to stock awards, the value was calculated as
the number
of shares multiplied by the closing price on grant
date.
|
(2)
Stock award granted as compensation for services as a member of
the Board
of Directors.
|
|
|
Outstanding
Equity Awards at Fiscal Year End
As
of
December 31, 2006, none of our named executive officers had any outstanding,
unexercised options or any unvested stock awards.
Option
Exercises and Vested Stock
OPTION
EXERCISES AND STOCK VESTED
|
|
|
Option
Awards
|
|
Stock
Awards
|
Name
|
|
Number
of Shares
Acquired
on
Exercise
(#)
|
|
Value
Realized
on
Exercise
($)
|
|
Number
of Shares Acquired on Vesting (1)
|
|
Value
Realized on Vesting (2)
|
James
B Smith
|
|
-
|
|
-
|
|
500,000
|
|
$445,000
|
|
|
-
|
|
-
|
|
150,000
(3)
|
|
$87,000
|
|
|
-
|
|
-
|
|
500,000
|
|
$237,500
|
|
|
|
|
|
|
|
|
|
Michael
R. Ward
|
|
-
|
|
-
|
|
500,000
|
|
$455,000
|
|
|
-
|
|
-
|
|
500,000
|
|
$542,500
|
|
|
-
|
|
-
|
|
150,000
(3)
|
|
$87,000
|
|
|
|
|
|
|
|
|
|
Julio
Bastarrachea
|
|
-
|
|
-
|
|
150,000
|
|
$142,500
|
|
|
|
|
|
|
|
|
|
Robert
W. Dowies
|
|
-
|
|
-
|
|
60,000
|
|
$47,400
|
|
|
-
|
|
-
|
|
40,000
|
|
$16,000
|
|
|
|
|
|
|
|
|
|
(1)
All stock awards were fully vested at the time of
grant.
|
(2)
This column reflects the grant date fair value of stock awards
under SFAS
123R.
With respect to stock awards, the value was calculated as the number
of
shares multiplied by the closing price on grant date.
|
(3)
Stock award granted as compensation for services as a member of
the Board
of Directors.
|
Director
Compensation
Name
|
|
Fees
Earned or Paid in Cash ($)
|
|
Stock
Awards ($) (1)
|
|
Option
Awards ($)
|
|
All
Other Compensation ($)
|
|
Total
($)
|
James
B Smith
|
|
|
|
87,000
|
|
|
|
|
|
87,000
|
|
|
|
|
|
|
|
|
|
|
|
Ahmed
Karim
|
|
36,000
|
|
87,000
|
|
|
|
|
|
123,000
|
|
|
|
|
|
|
|
|
|
|
|
Carl
Hessel
|
|
|
|
87,000
|
|
|
|
|
|
87,000
|
|
|
|
|
|
|
|
|
|
|
|
Michael
Ward
|
|
|
|
87,000
|
|
|
|
|
|
87,000
|
|
|
|
|
|
|
|
|
|
|
|
(1)
On September 25, 2006, each director received a grant of 150,000
shares of
our common stock, valued at $0.58 per share. These awards vested
immediately upon grant. Accordingly, the grant date fair value
of each of
these awards, calculated in accordance with Financial Accounting
Standards
Board Statement of Financial Accounting Standards No. 123 Share
Based
Payment (FAS 123(R)), is the same as the amount of compensation
expense we
reflected in our financial statements with respect to each of these
awards. The grant date fair value of each of these awards is estimated
based on the fair market value of our common stock at the time
of the
grant.
|
Committees
of the Board of Directors
Tidelands
does not have a Compensation committee. The Board of Directors acts as the
Compensation Committee. Tidelands has no compensation written policies outlining
factors and criteria underlying awards or payments in relation to executive
officers.
Code
of Ethical Conduct
Our
board
of directors adopted a Code of Ethical Conduct which applies to all our Company
directors, officers and employees, including our principal executive officer
and
principal financial officer, principal accounting officer or comptroller,
or
other persons performing similar functions.
ITEM
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The
following table sets forth certain information with respect to beneficial
ownership of shares of the Company's common stock as of March 30, 2007 for
(i) each person who is known by the Company to own beneficially more than
five percent of the outstanding shares of common stock, (ii) each director
and named executive officers and (iv) all directors and executive officers
of the Company as a group. The information is the table is based on our records,
information filed with the Securities and Exchange Commission and information
provided to us. Except as otherwise indicated, we believe that the persons
named
in this table have sole voting and investment power with respect to all
shares.
Impact
International, LLC (1)
|
8,812,980
|
8.38%
|
111
W. 5th
St. Ste.720
|
|
|
Tulsa,
OK 74103
|
|
|
|
|
|
M.A.G.
Capital, LLC (2)
|
6,578,898
|
5.89%
|
555
S. Flower St.
|
|
|
Suite
4500
|
|
|
Los
Angeles, CA 90071
|
|
|
|
|
|
David
Firestone (2)
|
6,578,898
|
5.89%
|
555
S. Flower St.
|
|
|
Suite
4500
|
|
|
Los
Angeles, CA 90071
|
|
|
|
|
|
Robinson
Reed, Inc. (2)
|
246,710
|
0.23%
|
AV.DU
Leman 8B
|
|
|
CH-1003-Lausanne
|
|
|
Switzerland
|
|
|
|
|
|
Monarch
Pointe Fund, Ltd. (2)(3)
|
3,615,708
|
3.33%
|
555
S. Flower St.
|
|
|
Suite
4500
|
|
|
Los
Angeles, CA 90071
|
|
|
|
|
|
Mercator
Momentum Fund, LP (2)(34)
|
1,608,338
|
1.51%
|
555
S. Flower St.
|
|
|
Suite
4500
|
|
|
Los
Angeles, CA 90071
|
|
|
|
|
|
Mercator
Momentum Fund III, LP(2)(5)
|
1,108,142
|
1.04%
|
555
S. Flower St.
|
|
|
Suite
4500
|
|
|
Los
Angeles, CA 90071
|
|
|
|
|
|
James
B. Smith (6)
|
9,065,585
|
8.2%
|
1862
W. Bitters Rd.
|
|
|
San
Antonio, TX 78248
|
|
|
|
|
|
Ahmed
Karim (7)
|
9,445,358
|
8.6%
|
1463
Terrace Ave
|
|
|
Vancouver
A1 V7R 1B5
|
|
|
|
|
|
Carl
Hessel (8)
|
11,282,079
|
10.3%
|
c/o
Margaux Investment
|
|
|
Management
Group, S.A.
|
|
|
9
Rue de Commerce
|
|
|
CH
1211 Geneva 11
|
|
|
Switzerland
|
|
|
|
|
|
Robert
W. Dowies
|
240,000
|
0.2%
|
1862
W. Bitters Rd.
|
|
|
San
Antonio, TX 78248
|
|
|
|
|
|
Julio
Bastarrachea
|
150,000
|
0.1%
|
1862
W. Bitters Rd.
|
|
|
San
Antonio, TX 78248
|
|
|
|
|
|
Michael
Ward
|
8,192,038
|
7.8%
|
1862
W. Bitters Rd.
|
|
|
San
Antonio, TX 78248
|
|
|
|
|
|
All
Directors & officers
|
38,375,060
|
32.2%
|
as
a group (6 persons)
|
|
|
(1)
Based
on Schedule 13D filed on January 22, 2007.
(2) M.A.G.
Capital, LLC is the General Partner and Manager of the following funds: Robinson
Reed, Inc., Monarch Pointe Fund, Ltd., Mercator Momentum Fund, LP and Mercator
Momentum Fund III, LP. David Firestone is the Managing Member of M.A.G. Capital,
LLC. To our knowledge, David Firestone and M.A.G. Capital LLC do not own
any of
our securities directly.
(3)
Monarch Pointe Fund, Ltd. owns warrants to purchase 3,615,708 shares of our
common stock. Half of the warrants are exercisable at $.80 per share and
half
are exercisable at $.87 per share.
(4)
Mercator Momentum Fund, LP owns warrants to purchase 1,608,338 shares of
our
common stock. Half of the warrants are exercisable at $.80 per share and
half
are exercisable at $.87 per share.
(5)
Mercator Momentum Fund III, LP owns warrants to purchase 1,108,142 shares
of our
common stock. Half of the warrants are exercisable at $.80 per share and
half
are exercisable at $.87 per share.
(6)
Includes options to purchase 5,000,000 shares of our common stock.
(7)
Includes options to purchase 5,000,000 shares of our common stock.
(8)
Includes options to purchase 4,047,619 shares of our common stock.
Securities
Authorized for Issuance under Equity Compensation Plans
The
following table summarizes our equity compensation plan information as of
December 31, 2006.
Equity
Compensation Plan Information
|
Plan
Category
|
Number
of Securities to be issued upon exercise of outstanding options,
warrants
and rights
|
Weighted-average
Exercise price of outstanding options, warrants and
rights
|
Number
of Securities remaining available for future issuance under
equity
compensation plans (excluding securities reflected in first
column)
|
Equity
Compensation Plans approved by security holders
|
None
|
None
|
None
|
Equity
Compensation Plans not approved by security holders
|
5,000,000
(1)
|
N.A.
(No options outstanding)
|
-0-
|
5,000,000
(2)
|
N.A.
(No options outstanding)
|
2,850,122
|
Total
|
10,000,000
|
|
2,850,122
|
|
|
|
|
(1)
On May 27, 2003, the Company adopted the 2003 Non-Qualified
Stock Grant
and Option Plan. The Plan reserved 5,000,000 shares. The Plan
is
administered by our Board of Directors. Directors, officers,
employees,
consultants, attorneys, and others who provide services to
our Company are
eligible participants. Participants are eligible to be granted
warrants,
options, common stock as compensation. The purpose of this
Plan is to
provide these persons with equity-based compensation and incentives
to
make significant contributions to our long-term performance
and growth by
aligning their economic interests more closely with those of
our
shareholders, and to attract and retain personnel.
|
(2)
On November 2, 2004, the Company adopted the 2004 Non-Qualified
Stock
Grant and Option Plan. The Plan reserved 5,000,000 shares.
The Plan is
administered by our Board of Directors. Directors, officers,
employees,
consultants, attorneys, and others who provide services to
our Company are
eligible participants. Participants are eligible to be granted
warrants,
options, common stock as compensation. The purpose of this
Plan is to
provide these persons with equity-based compensation and incentives
to
make significant contributions to our long-term performance
and growth by
aligning their economic interests more closely with those of
our
shareholders, and to attract and retain personnel. In some
instances,
awards under the Plan may also be used to conserve cash by
paying all or a
portion of an individual’s and other service provider’s fees in
stock.
|
ITEM
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND
DIRECTOR INDEPENDENCE
On
February 5, 2003, we granted Royis Ward common stock options to purchase
500,000
shares at $0.22 per share. The options were exercised on September 14, 2004
and
payment was made by promissory note for $110,000 bearing interest at the
annual
rate of Five percent. Presently, Royis Ward, formerly an officer and director
of
the Company, and father of Michael Ward (our former CEO), is indebted to
the
Company as outlined above.
The
Company executed an agreement in January 2004 with Royis Ward, formerly an
officer and director of the Company and the father of Michael R. Ward, who
was
President and CEO at that time, to provide charter air transportation for
its
employees, customers and contractors to job sites and other business related
destinations. A $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 December 31, 2006, the loan balance was
$287,432, including accrued interest, and was paid in full on that date by
Michael R. Ward, who had subsequently acquired the airplane from Royis Ward
after the initial transaction.
Policies
and Procedures for Related Party Transactions
The
Company conducts an appropriate review of all related party transactions
that
are required to be disclosed pursuant to Regulation S-K, Item 404 for potential
conflict of interest situations on an ongoing basis and all such transactions
must be disclosed to and approved by the entire Board of Directors of the
Company.
Director
Independence
Our
Board
of Directors is currently composed of three directors, none of whom would
qualify as an independent director based on the definition of independent
director set forth in Rule 4200(a)(15) of the Nasdaq Marketplace rules. Because
our common stock is traded on the
NASD OTC
Electronic Bulletin Board,
which
is not a securities exchange, we are not subject to corporate governance
rules
that require that a board of directors be composed of a majority of independent
directors.
ITEM
14. PRINCIPAL ACCOUNTING FEES AND
SERVICES
The
Company paid or accrued the following fees in each of the prior two fiscal
years
to its principal accountant, Baum & Co., P.A. of Coral Springs,
Florida.
|
Year
End 12-31-06
|
|
Year
End
12-31-05
|
(1)
Audit Fees |
$ |
114,350 |
|
$ |
102,553 |
(2)
Audit-related Fees |
|
53,625 |
|
|
-0- |
(3)
Tax Fees |
|
-0-
|
|
|
-0- |
(4)
All other fees |
|
-0- |
|
|
-0- |
Total
Fees |
$ |
167,975 |
|
$ |
102,553 |
The
Company's principal accountant, Baum & Co., P.A. did not engage any other
persons or firms other than the principal accountant's full-time, permanent
employees.
AUDIT
FEES. Audit fees consist of fees billed for professional services rendered
for
the audit of the Company's consolidated financial statements and review of
the
interim consolidated financial statements included in quarterly reports and
services that are normally provided by the Company's principal accountants
in
connection with statutory and regulatory filings or engagements.
AUDIT-RELATED
FEES. Audit related fees consist of fees billed for assurance and related
services that are reasonably related to the performance of the audit or review
of the Company's consolidated financial statements and are not reported under
"Audit Fees."
TAX
FEES.
Tax fees are fees billed for professional services for tax compliance, tax
advice and tax planning.
ALL
OTHER
FEES. All other fees include fees for products and services other than the
services reported above. There were no management consulting services provided
in fiscal 2006 or 2005.
Policy
on
Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services
of
Independent Auditors
The
Company currently does not have a designated Audit Committee. However, as
defined in Sarbanes-Oxley Act of 2002, the entire Board of Directors is the
Company's de facto audit committee.
Accordingly,
the Company's Board of Directors' policy is to pre-approve all audit and
permissible non-audit services provided by the independent auditors. These
services may include audit services, audit-related services, tax services
and
other services. Pre-approval is generally provided for up to one year and
any
pre-approval is detailed as to the particular service or category of services
and is generally subject to a specific budget. The independent auditors and
management are required to periodically report to the Company's Board of
Directors regarding the extent of services provided by the independent auditors
in accordance with this pre-approval, and the fees for the services performed
to
date. The Board of Directors may also pre-approve particular services on
a
case-by-case basis.
PART
IV
ITEM
15. EXHIBITS AND FINANCIAL STATEMENT
SCHEDULES
(a)
Financial Statements and Schedules
REPORT
OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
CONSOLIDATED
BALANCE SHEETS
Years
Ended December 31, 2006 and 2005
CONSOLIDATED
STATEMENTS OF OPERATIONS
Years
Ended December 31, 2006, 2005 and 2004
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY
Years
Ended December 31, 2006, 2005 and 2004
CONSOLIDATED
STATEMENTS OF CASH FLOWS
Years
Ended December 31, 2006, 2005 and 2004
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
The
Consolidated Financial Statements, the Notes and the Report of Independent
Registered Public Accounting Firm listed above are filed as part of this
Report
and are set forth on the pages immediately following the signature pages
of this
Report.
(b)
Exhibit Listing
Exhibit
|
|
Description
|
|
Location
of Exhibit
|
2.0
|
|
Amendment
No. 2 to the Asset Purchase and Sale and between Sonterra Energy
Corporation and Oneok Propane Distribution Company.
|
|
Incorporated
by reference to Exhibit 10.1 8-K
filed November 15, 2004
|
2.1
|
|
Amendment
No. 1 to the Asset Purchase and Sale and between Sonterra Energy
Corporation and Oneok Propane Distribution Company.
|
|
Incorporated
by reference to Exhibit 10.2 8-K
filed November 15, 2004
|
2.3
|
|
Asset
Purchase and Sale Agreement by and between Sonterra Energy Corporation
and
Oneok Propane Distribution Company.
|
|
Incorporated
by reference to Exhibit 10.3 8-K
filed November 15, 2004
|
2.4
|
|
Purchase
and Sale Agreement for Reef Ventures, L.P. by and Between Impact
International, LLC (“Impact”) and Coahuila Pipeline, LLC, (“Coahuila”),
(jointly “Seller”) and Tidelands Oil & Gas Corporation (“Tidelands”)
and Arrecefe Management, LLC (“Arrecefe”), (jointly “Buyer”) dated May 25,
2004 with Exhibits.
|
|
Incorporated
by reference Exhibit 10 to 8-K filed June 25, 2004
|
2.5
|
|
Purchase
and Sale Agreement for Reef Marketing, L.L.C. and Reef International,
L.L.C. by and between Tidelands Oil & Gas Corporation and Impact
International, L.L.C and Coahuila Pipeline, L.L.C. dated April
16,
2003.
|
|
Incorporated
by reference to Exhibit 10.1 to 8-K filed on May 8,
2003
|
2.6
|
|
Agreement
of Limited Partnership of Reef Ventures, L.P.
|
|
Incorporated
by reference to Exhibit 10.2 to 8-K filed on May 8, 2003
|
3.0
|
|
Certificates
of Amendment to Articles of Incorporation
|
|
Incorporated
by reference to Exhibit 3.0 to 8-K filed on April 24,
2006
|
3.1
|
|
Restated
Articles of Incorporation of Tidelands Oil & Gas Corporation., a
Nevada corporation.
|
|
Incorporated
by reference to Exhibit 3.0 to SB-2 filed on December 17,
2004
|
3.2
|
|
Restated
Bylaws of Tidelands Oil & Gas Corporation.
|
|
Incorporated
by reference to Exhibit 3.1 to SB-2 filed on December 17,
2004
|
4.0
|
|
Form
of Original Issue Discount Convertible Debentures with Palisades
Master
Fund, LP, JGB Capital, LP, Nite Capital, LP and RHP Master Fund,
Ltd
|
|
Incorporated
be reference to Exhibit 10.2 to 8-K filed on January 25,
2006
|
4.1
|
|
7%
Convertible Debenture Mercator Momentum Fund, LP
|
|
Incorporated
by reference to Exhibit 10.2 to 8-K filed on December 3,
2004
|
4.2
|
|
7%
Convertible Debenture Mercator Momentum Fund III, LP
|
|
Incorporated
by reference to Exhibit 10.3 to 8-K filed on December 3,
2004
|
4.3
|
|
7%
Convertible Debenture Monarch Pointe Fund, LP
|
|
Incorporated
by reference to Exhibit 10.4 to 8-K filed on December 3,
2004
|
10.1
|
|
Form
of Series “A” Common Stock Purchase Warrant Palisades Master Fund,
Crescent International, Ltd., Double U Master Fund, LP, JGB Capital,
LP,
Nite Capital, LP and RHP Master Fund,
Ltd.
|
|
Incorporated
by reference to Exhibit 10.4 to 8-K filed on January 25,
2006
|
10.2
|
|
Form
of Securities Purchase Agreement with Palisades Master Fund,
Crescent
International, Ltd., Double U Master Fund, LP, JGB Capital, LP,
Nite
Capital, LP and RHP Master Fund, Ltd.
|
|
Incorporated
by reference to Exhibit 10.2 to 8-K filed on January 25,
2006
|
10.3
|
|
Form
of Series “A” Common Stock Purchase Warrant Palisades Master Fund,
Crescent International, Ltd., Double U Master Fund, LP, JGB Capital,
LP,
Nite Capital, LP and RHP Master Fund,
Ltd.
|
|
Incorporated
by reference to Exhibit 10.4 to 8-K filed on January 25, 2006
|
10.4
|
|
Form
of Series “B” Common Stock Purchase Warrant Palisades Master Fund,
Crescent International, Ltd., Double U Master Fund, LP, JGB Capital,
LP,
Nite Capital, LP and RHP Master Fund, Ltd.
|
|
Incorporated
by reference to Exhibit 10.5 to 8-K filed on January 25,
2006
|
10.5
|
|
Form
of Registration Rights Agreement with Palisades Master Fund,
Crescent
International, Ltd., Double U Master, LP, JGB Capital, LP, Nite
Capital,
LP and RHP Master Ltd.
|
|
Incorporated
by reference to Exhibit 10.2 to 8-K filed on January 25,
2006
|
10.6
|
|
Employment
Agreement with James B. Smith as CEO and President *
|
|
Incorporated
by reference to Exhibit 10.1 to 8-K filed April 3, 2007
|
10.7
|
|
Employment
Agreement with Michael Ward *
|
|
Incorporated
by reference to Exhibit 10.0 of SB-2 filed December 17,
2004
|
10.8
|
|
Employment
Agreement with James B. Smith (as CFO) *
|
|
Incorporated
by reference to Exhibit 10.1 of SB-2 filed December 17,
2004
|
10.9
|
|
Employment
Agreement with Robert Dowies *
|
|
Incorporated
by reference to Exhibit 10.2 of SB-2 filed December 17,
2004
|
10.10
|
|
2003
Non-Qualified Stock Grant and Option Plan *
|
|
Incorporated
by reference to Exhibit 10 of Form S-8 filed on June 11,
2003
|
10.11
|
|
2004
Non-Qualified Stock Grant and Option Plan *
|
|
Incorporated
by reference to Exhibit 10 of Form S-8 filed on June 11,
2003
|
10.12
|
|
2007
Non-Qualified Stock Grant and Option Plan *
|
|
Incorporated
by reference to Exhibit 10.1 of Form S-8 filed on February 16,
2007
|
10.13
|
|
Form
of Option Grant under 2007 Non-Qualified Stock Grant and Option
Plan
*
|
|
Incorporated
by reference to Exhibit 10.2 of Form S-8 filed on February 16,
2007
|
10.14
|
|
Form
of Stock Award Agreement under 2007 Non-Qualified Stock Grant
and Option
Plan *
|
|
Incorporated
by reference to Exhibit 10.3 of Form S-8 filed on February 16,
2007
|
10.15 |
|
Securities
Purchase Agreement
|
|
Incorporated
by reference to Exhibit 10.1 to 8-K/A filed on December 3,
2004 |
10.16
|
|
Warrant
Margaux
|
|
Incorporated
by reference to Exhibit 10.5 of SB-2 filed December 17,
2004
|
10.17
|
|
Warrant
Margaux
|
|
Incorporated
by reference to Exhibit 10.6 of SB-2 filed December 17,
2004
|
10.18
|
|
Stock
Purchase Warrant Impact
|
|
Incorporated
by reference to Exhibit 10.3 to 8-K filed on May 8,
2003
|
10.19
|
|
Registration
Rights Agreement Impact
|
|
Incorporated
by reference to Exhibit 10.4 to 8-K filed on May 8,
2003
|
10.20
|
|
Amended
Stock Purchase Warrant Impact International
|
|
Incorporated
by reference to Exhibit 10 to 8-K filed on June 25,
2004
|
10.21
|
|
Registration
Rights Agreement with Mercator Group
|
|
Incorporated
by reference to Exhibit 10.5 to 8-K filed on December 3,
2004
|
10.22
|
|
Warrant
to Purchase Common Stock Mercator Momentum Funds, LP $0.87
|
|
Incorporated
by reference to Exhibit 10.6 to 8-K filed on December 3,
2004
|
10.23
|
|
Warrant
to Purchase Common Stock Mercator Momentum Funds,
LP $0.80
|
|
Incorporated
by reference to Exhibit 10.7 to 8-K filed on December 3,
2004
|
10.24
|
|
Warrant
to Purchase Common Stock Mercator Momentum Fund,
III, LP $0.87
|
|
Incorporated
by reference to Exhibit 10.8 to 8-K filed on December 3,
2004
|
10.25
|
|
Warrant
to Purchase Common Stock Mercator Momentum Fund
III, LP $0.80
|
|
Incorporated
by reference to Exhibit 10.9 to 8-K filed on December 3,
2004
|
10.26
|
|
Warrant
to Purchase Common Stock Monarch Pointe Fund
III, LP $0.87
|
|
Incorporated
by reference to Exhibit 10.10 to 8-K filed on December 3,
2004
|
10.27
|
|
Warrant
to Purchase Common Stock Monarch Pointe Fund
III, LP $0.80
|
|
Incorporated
by reference to Exhibit 10.11 to 8-K filed on December 3,
2004
|
10.28
|
|
Warrant
to Purchase Common Stock Mercator Advisory Group,
LLC. $0.87
|
|
Incorporated
by reference to Exhibit 10.12 to 8-K filed on December 3,
2004
|
10.29
|
|
Warrant
to Purchase Common Stock Mercator Advisory Group, LLC
$0.80
|
|
Incorporated
by reference to Exhibit 10.13 to 8-K filed on December 3,
2004
|
10.30
|
|
Promissory
Note for Aircraft Prepaid Lease
|
|
Incorporated
by reference to Exhibit 10.4 to 10-Q filed on August 21,
2006
|
10.31
|
|
Aircraft
Prepaid Lease/Use Agreement
|
|
Incorporated
by reference to Exhibit 10.3 to 10-Q filed on August 21,
2006
|
21
|
|
List
of Subsidiaries
|
|
Included
with this filing
|
24.1
|
|
Power
of Attorney
|
|
Included
with signature page
|
31.1
|
|
Chief
Executive Officer and Chief Financial Officer Section 302 Certification
pursuant to Sarbanes - Oxley Act.
|
|
Included
with this filing
|
32.1
|
|
Chief
Executive Officer-Section 906 Certification pursuant To Sarbanes-Oxley
Act
|
|
Furnished
herewith
|
*
Management or compensatory plan or arrangement.
Pursuant
to the requirements of Section 13 or 15(d) to the Securities Exchange Act
of
1934, the Company has duly caused this Form 10-K Report for the period ending
December 31, 2006 to be signed on its behalf by the undersigned, thereunto
duly
authorized.
|
|
|
|
TIDELANDS
OIL & GAS CORPORATION |
|
|
|
Date: April
17, 2007 |
By: |
/s/ James
B.
Smith
|
|
James B. Smith, President and Chief
Executive
Officer |
|
|
KNOWN
BY
ALL PERSONS THESE PRESENTS, that each person whose signature appears below
constitutes and appoints James B. Smith their attorneys-in-fact and agents
with
full power of substitution and re-substitution, for him and his name, place
and
stead, in any and all capacities, to sign any or all amendments to this Annual
Report on Form 10-K and to file the same, with all exhibits thereto, and
other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorney-in-fact and agent full power and authority to
do and
perform each and every act and thing requisite and necessary to be done in
and
about the foregoing, as fully to all intents and purposes as he might or
could
do in person, hereby ratifying and confirming all that said attorney-in-fact
and
agent, or his substitutes, may lawfully do or cause to be done by virtue
hereof.
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has
been
signed below by the following persons on behalf of the Company and in the
capacities and on the dates indicated.
|
|
|
|
TIDELANDS
OIL & GAS CORPORATION |
|
|
|
Date: April
17, 2007 |
By: |
/s/
James B.
Smith,
|
|
James B. Smith, President, CEO (Principal
Executive Officer), CFO (Principal Financial and Accounting Officer)
and Director |
|
|
|
|
|
|
|
|
|
|
Date: April
17, 2007 |
By: |
/s/
Ahmed
Karim
|
|
Ahmed Karim, Director |
|
|
|
|
|
|
|
|
|
|
Date: April
17, 2007 |
By: |
/s/
Carl
Hessel
|
|
Carl Hessel, Director |
|
|
TIDELANDS
OIL & GAS CORPORATION
CONSOLIDATED
FINANCIAL STATEMENTS
YEARS
ENDED DECEMBER 31, 2006, 2005 AND 2004 (RESTATED)
TIDELANDS
OIL & GAS CORPORATION
INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS
1515
UNIVERSITY DRIVE, SUITE 209
CORAL
SPRINGS, FLORIDA 33071
INDEPENDENT
AUDITOR’S REPORT
Board
of
Directors
Tidelands
Oil & Gas Corporation
San
Antonio, Texas
We
have
audited the accompanying consolidated balance sheets of Tidelands Oil & Gas
Corporation as of December 31, 2006 and 2005, and the related statements of
consolidated stockholders’ equity, operations, and cash flows for the years
ended December 31, 2006, 2005 and 2004 (Restated). These consolidated financial
statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall consolidated financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In
our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Tidelands
Oil
& Gas Corporation as of December 31, 2006 and 2005, and the results of their
consolidated operations and their consolidated cash flows for the years ended
December 31, 2006, 2005 and 2004 (Restated) in conformity with accounting
principles generally accepted in the United States of America.
The
accompanying financial statements have been prepared assuming that the Company
will continue as a going concern. As discussed in Note 2 to the financial
statements, the Company has suffered recurring losses from operations and has
a
net working capital deficiency that raise substantial doubt about its ability
to
continue as a going concern. Management’s plans in regard to these matters are
also described in Note 2. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
Baum
& Company, P.A.
Coral
Springs, Florida
April
13,
2007
CONSOLIDATED
BALANCE SHEETS
YEARS
ENDED
ASSETS
|
December
31,
|
|
|
2006
|
|
2005
|
|
Current
Assets:
|
|
|
|
|
|
|
Cash
|
$
|
367,437
|
|
$
|
1,113,911
|
|
Accounts
and Other Receivable
|
|
388,754
|
|
|
468,458
|
|
Inventory
|
|
|
|
|
142,204
|
|
Prepaid
Expenses
|
|
148,551
|
|
|
183,938
|
|
Total
Current Assets
|
|
988,772
|
|
|
1,908,511
|
|
|
|
|
|
|
|
|
Property
Plant and Equipment, Net
|
|
12,364,359
|
|
|
10,042,088
|
|
|
|
|
|
|
|
|
Other
Assets:
|
|
|
|
|
|
|
Deposits
|
|
56,708
|
|
|
14,004
|
|
Cash
Restricted
|
|
52,642
|
|
|
76,803
|
|
Deferred
Charges
|
|
565,221
|
|
|
0
|
|
Note
Receivable
|
|
0
|
|
|
288,506
|
|
Goodwill
|
|
1,158,937
|
|
|
1,158,937
|
|
Total
Other Assets
|
|
1,833,508
|
|
|
1,538,250
|
|
|
|
|
|
|
|
|
Total
Assets
|
$
|
15,186,639
|
|
$
|
13,488,849
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
|
|
|
Current
Maturities - Note Payable
|
$
|
225,000
|
|
$
|
225,000
|
|
Accounts
Payable and Accrued Expenses
|
|
1,624,752
|
|
|
1,225,554
|
|
Reserve
for Litigation
|
|
2,250,000
|
|
|
0
|
|
|
|
|
|
|
|
|
Total
Current Liabilities
|
|
4,099,752
|
|
|
1,450,554
|
|
|
|
|
|
|
|
|
Long-Term
Debt
|
|
8,934,294
|
|
|
4,271,768
|
|
|
|
|
|
|
|
|
Total
Liabilities
|
|
13,034,046
|
|
|
5,722,322
|
|
|
|
|
|
|
|
|
Stockholders’
Equity:
|
|
|
|
|
|
|
Common
Stock, $.001 Par Value per Share,
|
|
|
|
|
|
|
250,000,000 Shares
Authorized, 86,457,922
|
|
|
|
|
|
|
and
78,495,815 Shares Issued and
|
|
|
|
|
|
|
Outstanding
at 2006 and 2005 Respectively
|
|
86,459
|
|
|
78,497
|
|
Additional
Paid-in Capital
|
|
46,703,202
|
|
|
40,818,174
|
|
Subscriptions
Receivable
|
|
(220,000
|
)
|
|
(550,000
|
)
|
Minority
Interest
|
|
-
|
|
|
-
|
|
Accumulated
(Deficit)
|
|
(44,417,068
|
)
|
|
(32,580,144
|
)
|
Total
Stockholders’ Equity
|
|
2,152,593
|
|
|
7,766,527
|
|
Total
Liabilities and Stockholders’ Equity
|
$
|
15,186,639
|
|
$
|
13,488,849
|
|
See
Accompanying Notes to Consolidated Financial Statements
STATEMENTS
OF CONSOLIDATED OPERATIONS
YEARS
ENDED
|
|
December
31,
|
|
|
|
|
|
|
|
2004
|
|
|
|
|
|
|
|
|
|
(Restated)
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
Gas
Sales and Pipeline Fees
|
|
$
|
2,041,705
|
|
$
|
1,725,756
|
|
$
|
1,800,863
|
|
Construction
Service
|
|
|
|
|
|
135,567
|
|
|
82,975
|
|
Total
Revenues
|
|
|
2,222,598
|
|
|
1,861,323
|
|
|
1,883,838
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
Cost
of Sales
|
|
|
1,173,561
|
|
|
1,003,386
|
|
|
1,508,891
|
|
Operating
Expenses
|
|
|
420,200
|
|
|
202,766
|
|
|
99,665
|
|
Depreciation
|
|
|
466,241
|
|
|
485,481
|
|
|
244,889
|
|
Interest
|
|
|
3,405,778
|
|
|
611,363
|
|
|
300,566
|
|
Beneficial
Conversion Feature Interest
|
|
|
0
|
|
|
(756,329
|
)
|
|
3,092,105
|
|
Sales,
General and Administrative
|
|
|
6,446,652
|
|
|
8,033,249
|
|
|
11,022,019
|
|
Impairment
Losses - Long-Lived Assets
|
|
|
0
|
|
|
392,000
|
|
|
0
|
|
Impairment
Losses - Goodwill
|
|
|
0
|
|
|
5,200,000
|
|
|
15,358,000
|
|
Reserve
for Litigation
|
|
|
2,250,000
|
|
|
0
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Expenses
|
|
|
14,162,432
|
|
|
15,171,916
|
|
|
31,626,135
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss)
from Operations
|
|
|
|
|
|
|
|
|
(29,742,297
|
)
|
Gain
on Reduction of Derivative Liability
|
|
|
|
|
|
|
|
|
15,390,000
|
|
Loss
on Asset Sales
|
|
|
|
|
|
|
|
|
0
|
|
Other
Income/ (Expense)
|
|
|
|
|
|
|
|
|
0
|
|
Interest
and Dividend Income
|
|
|
|
|
|
|
|
|
50,260
|
|
Minority
Interest
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Litigation
Settlement
|
|
|
|
|
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(Loss)
|
|
|
|
|
|
|
|
$
|
(14,302,037
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net
(Loss) Per Common Share:
|
|
|
|
|
|
|
|
|
|
|
Basic
and Diluted
|
|
$
|
(0.15
|
)
|
$
|
(0.11
|
)
|
$
|
(0.27
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
Average Number of Common
|
|
|
|
|
|
|
|
|
|
|
Shares
Outstanding - Basic
and Diluted
|
|
|
80,475,359
|
|
|
70,049,587
|
|
|
53,214,230
|
|
See
Accompanying Notes to Consolidated Financial Statements
STATEMENTS
OF CONSOLIDATED STOCKHOLDERS’ EQUITY
YEARS
ENDED DECEMBER 31, 2006, 2005 AND 2004 (RESTATED)
|
Common
Shares
|
|
Stock
Amount
|
|
Additional
Paid-In
Capital
|
|
Subscription
Receivable
|
|
Accumulated
(Deficit)
|
|
Stockholders’ Equity |
|
|
44,825,302 |
|
$
|
44,826 |
|
|
$ |
11,072,987 |
|
$ |
(18,000 |
) |
$ |
(10,615,203 |
) |
$ |
484,610 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock Issued for Cash
|
6,725,545 |
|
|
6,725 |
|
|
|
6,081,592
|
|
|
--
|
|
|
-- |
|
|
6,088,317 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock Issued for Services Regarding $4,083,335 Sale
of Stock
|
300,000 |
|
|
300 |
|
|
|
449,700
|
|
|
--
|
|
|
-- |
|
|
450,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fee
for Services Regarding
Sale of Common
Stock
|
-- |
|
|
-- |
|
|
|
(450,000 |
) |
|
-- |
|
|
-- |
|
|
(450,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of Common Stock
for Services
|
6,602,800 |
|
|
6,603 |
|
|
|
9,321,213
|
|
|
-- |
|
|
-- |
|
|
9,327,816 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of Common Stock
for Subscription
|
2,500,000
|
|
|
2,500 |
|
|
|
547,500 |
|
|
(550,000 |
) |
|
-- |
|
|
-- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of Common Stock
for Conversion of Note
Payable and Accrued
Interest
|
75,000 |
|
|
75 |
|
|
|
113,236 |
|
|
--
|
|
|
-- |
|
|
113,311
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beneficial
Conversion Feature - Convertible Debentures
|
-- |
|
|
-- |
|
|
|
3,092,105
|
|
|
-- |
|
|
-- |
|
|
3,092,105 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Write
Off Stock Subscription Receivable
|
-- |
|
|
-- |
|
|
|
-- |
|
|
18,000
|
|
|
-- |
|
|
18,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of Common Stock to
Acquire 50% of Sonterra
Energy Corp.
|
574,712 |
|
|
575 |
|
|
|
125,862
|
|
|
-- |
|
|
-- |
|
|
126,437 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Loss
|
-- |
|
|
-- |
|
|
|
-- |
|
|
-- |
|
|
(14,302,037 |
) |
|
(14,302,037 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
December 31, 2004
|
61,603,359 |
|
$
|
61,604 |
|
|
$ |
30,354,195 |
|
$ |
(550,000 |
) |
$ |
(24,917,240 |
) |
$ |
$4,948,559 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of Common Stock
for Services
|
2,970,000 |
|
|
2,971 |
|
|
|
4,019,554 |
|
|
-- |
|
|
-- |
|
|
4,022,525 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of Common Stock for Conversion of Convertible
Debentures
|
6,707,456 |
|
|
6,707 |
|
|
|
4,993,293
|
|
|
-- |
|
|
-- |
|
|
5,000,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beneficial
Conversion Feature
-Convertible Debentures
|
-- |
|
|
-- |
|
|
|
(756,328 |
) |
|
-- |
|
|
-- |
|
|
(756,328 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cancellation
of Stock Previously
Issued for Services
per Litigation Settlement
|
(285,000 |
) |
|
(285 |
) |
|
|
(297,540 |
) |
|
-- |
|
|
--
|
|
|
(297,825 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise
of Stock Purchase Warrants
|
7,500,000 |
|
|
7,500 |
|
|
|
2,505,000 |
|
|
-- |
|
|
-- |
|
|
2,512,500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Loss
|
-- |
|
|
-- |
|
|
|
-- |
|
|
-- |
|
|
(7,662,904 |
) |
|
(7,662,904 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
December 31, 2005
|
78,495,815 |
|
$
|
78,497 |
|
|
$ |
40,818,174 |
|
$ |
(550,000 |
) |
$ |
(32,580,144 |
) |
$
|
7,766,527 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of Common Stock for Services
|
2,810,000 |
|
|
2,810 |
|
|
|
2,161,490 |
|
|
-- |
|
|
-- |
|
|
2,164,300 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of Common Stock in Payment of Interest Based Liquidated
Damages
|
2,828,304 |
|
|
2,828 |
|
|
|
1,694,154 |
|
|
-- |
|
|
-- |
|
|
1,696,982 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of Common Stock for Repayment of Convertible
Debentures
|
1,823,803 |
|
|
1,824 |
|
|
|
1,584,885 |
|
|
-- |
|
|
-- |
|
|
1,586,709 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of Common Stock for Repayment of Accrued Expense
|
500,000
|
|
|
500
|
|
|
|
444,500 |
|
|
-- |
|
|
-- |
|
|
445,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collection
of Stock Subscriptions
|
-- |
|
|
-- |
|
|
|
-- |
|
|
330,000 |
|
|
-- |
|
|
330,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rounding
|
-- |
|
|
-- |
|
|
|
(1 |
) |
|
-- |
|
|
1 |
|
|
-- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Loss
|
-- |
|
|
-- |
|
|
|
-- |
|
|
-- |
|
|
(11,836,925 |
) |
|
(11,836,925 |
) |
Balance
December 31, 2006
|
86,457,922 |
|
$
|
86,459 |
|
|
$ |
46,703,202 |
|
$ |
(220,000 |
) |
$ |
(44,417,068 |
) |
$
|
2,152,593
|
|
See
Accompanying Notes to Consolidated Financial Statements
STATEMENTS
OF CONSOLIDATED CASH FLOWS
YEARS
ENDED
|
|
December
31,
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
|
|
|
|
(Restated)
|
|
Cash
Flows Provided (Required)
|
|
|
|
|
|
|
|
|
|
|
By
Operating Activities:
|
|
|
|
|
|
|
|
|
|
|
Net
(Loss)
|
|
|
|
|
|
|
|
|
|
|
Adjustments
to Reconcile Net (Loss)
|
|
|
|
|
|
|
|
|
|
|
To
Net Cash Provided (Required) By
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
466,241
|
|
|
485,481
|
|
|
244,889
|
|
Goodwill
|
|
|
0
|
|
|
0
|
|
|
(5,200,000
|
)
|
Impairment
Losses
|
|
|
0
|
|
|
5,592,000
|
|
|
15,358,000
|
|
Change
in Derivative Instrument
|
|
|
0
|
|
|
(5,168,000
|
)
|
|
(10,222,000
|
)
|
Loss
on Disposal of Equipment
|
|
|
4,500
|
|
|
3,167
|
|
|
0
|
|
Issuance
of Common Stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For
Payment of Interest
|
|
|
1,696,982
|
|
|
0
|
|
|
0
|
|
Beneficial
Conversion Feature - Interest
|
|
|
0
|
|
|
(756,329
|
)
|
|
3,092,105
|
|
Return
of Issued Stock
|
|
|
|
|
|
|
|
|
|
|
Litigation
Settlement
|
|
|
|
|
|
|
|
|
|
|
Changes
In:
|
|
|
|
|
|
|
|
|
|
|
Accounts
Receivable
|
|
|
|
|
|
|
|
|
|
|
Inventory
|
|
|
|
|
|
|
|
|
|
|
Prepaid
Expenses
|
|
|
|
|
|
|
|
|
|
|
Restricted
Cash
|
|
|
|
|
|
|
|
|
0
|
|
Deposits
|
|
|
(565,221
|
)
|
|
(61,699
|
)
|
|
(25,308
|
)
|
Deferred
Charges
|
|
|
(42,704
|
)
|
|
116,250
|
|
|
(116,250
|
)
|
Accounts
Payable and Accrued Expenses
|
|
|
844,198
|
|
|
651,330
|
|
|
(201,370
|
)
|
Reserve
for Litigation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Cash (Required)
|
|
|
|
|
|
|
|
|
|
|
By
Operating Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
Flows Provided (Required)
|
|
|
|
|
|
|
|
|
|
|
By
Investing Activities:
|
|
|
|
|
|
|
|
|
|
|
(Increase)
In Investments
|
|
|
|
|
|
|
|
|
|
|
Acquisitions
of Property, Plant & Equipment
|
|
|
|
|
|
|
|
|
|
|
Disposals
of Equipment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Cash (Required)
|
|
|
|
|
|
|
|
|
|
|
By
Investing Activities
|
|
|
|
|
|
|
|
|
|
|
See
Accompanying Notes to Consolidated Financial Statements
STATEMENTS
OF CONSOLIDATED CASH FLOWS
(CONTINUED)
YEARS
ENDED
|
|
December
31,
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
|
|
|
|
(Restated)
|
|
Cash
Flows Provided (Required)
|
|
|
|
|
|
|
|
|
|
|
By
Financing Activities:
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from Issuance of Common Stock
|
|
|
0
|
|
|
0
|
|
|
6,088,317
|
|
Proceeds
from Long-Term Loans
|
|
|
288,235
|
|
|
277,385
|
|
|
6,731,883
|
|
Proceeds
from Issuance of
|
|
|
|
|
|
|
|
|
|
|
Convertible
Debentures
|
|
|
6,569,750
|
|
|
0
|
|
|
5,000,000
|
|
Repayment
of Convertible Debentures
|
|
|
(608,750
|
)
|
|
0
|
|
|
0
|
|
Repayment
of Short-Term Loans
|
|
|
0
|
|
|
0
|
|
|
(250,000
|
)
|
Proceeds
from Stock Subscriptions Receivable
|
|
|
330,000
|
|
|
0
|
|
|
18,000
|
|
Repayment
of Loan to Related Party
|
|
|
288,506
|
|
|
(1,900
|
)
|
|
(286,606
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net
Cash Provided
|
|
|
|
|
|
|
|
|
|
|
By
Financing Activities
|
|
|
6,867,741
|
|
|
275,485
|
|
|
17,301,594
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Increase (Decrease) in Cash
|
|
|
(746,474
|
)
|
|
(4,345,143
|
)
|
|
4,564,597
|
|
Cash
at Beginning of Period
|
|
|
1,113,911
|
|
|
5,459,054
|
|
|
894,457
|
|
Cash
at End of Period
|
|
$
|
367,437
|
|
$
|
1,113,911
|
|
$
|
5,459,054
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
Disclosures of
|
|
|
|
|
|
|
|
|
|
|
Cash
Flow Information:
|
|
|
|
|
|
|
|
|
|
|
Cash
Payments for Interest
|
|
$
|
1,409,645
|
|
$
|
356,504
|
|
$
|
38,320
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
Payments for Income Taxes
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Cash
Financing Activities:
|
|
|
|
|
|
|
|
|
|
|
Return
of Issued Stock For
|
|
|
|
|
|
|
|
|
|
|
Beneficial
Conversion Feature - Interest
|
|
$
|
0
|
|
$
|
(756,329
|
)
|
$
|
3,092,105
|
|
Litigation
Settlements
|
|
|
0
|
|
|
(297,825
|
)
|
|
0
|
|
Increase
of Stock Subscription Receivable
|
|
|
-
|
|
|
-
|
|
|
550,000
|
|
Issuance
of Common Stock:
|
|
|
|
|
|
|
|
|
|
|
Operating
Activities
|
|
|
3,861,282
|
|
|
4,022,525
|
|
|
9,327,816
|
|
Repayment
of Notes
|
|
|
0
|
|
|
2,512,500
|
|
|
75,000
|
|
Conversion
of Debentures
|
|
|
1,586,709
|
|
|
5,000,000
|
|
|
0
|
|
Payment
of Accounts Payable
|
|
|
445,000
|
|
|
0
|
|
|
38,311
|
|
Acquisition
Cost
|
|
|
0
|
|
|
0
|
|
|
126,437
|
|
Total
Non-Cash Financing Activities
|
|
$
|
5,892,991
|
|
$
|
10,480,871
|
|
$
|
13,209,669
|
|
See
Accompanying Notes to Consolidated Financial Statements
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2006, 2005 AND 2004 (RESTATED)
NOTE
1
-
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
This
summary of significant accounting policies is presented to assist in
understanding these consolidated financial statements. The consolidated
financial statements and notes are representations of management who is
responsible for their integrity and objectivity. The accounting policies used
conform to accounting principles generally accepted in the United States of
America and have been consistently applied in the preparation of these
consolidated financial statements.
Organization
Tidelands
Oil and Gas Corporation (the Company and formerly C2 Technologies, Inc.), was
incorporated in the state of Nevada on February 25, 1997. On December 1, 2000,
the Company completed its acquisition of Rio Bravo Energy, LLC, and their
related entities thereby making Rio Bravo Energy, LLC, a wholly-owned subsidiary
of the Company. Rio Bravo Energy, LLC, and its wholly-owned subsidiary, Sonora
Pipeline, LLC, no longer operate their gas processing plant and pipeline
system.
During
2004, the Company acquired all of the stock of Sonterra Energy Corporation
(“Sonterra”) and through this wholly-owned subsidiary, the Company purchased all
of the assets of a propane gas distribution organization serving residential
customers in the Austin, Texas area.
The
Company also, during 2004, increased its ownership interest from 25% to 98%
in
Reef Ventures, LP, and their wholly-owned subsidiaries (Reef International,
LLC
and Reef Marketing, LLC) that operate a natural gas pipeline between Eagle
Pass,
Texas and Piedras Negras, Mexico.
During
2004, the Company formed Terranova Energia S. De R.L. De C.V. (“Terranova”), a
Mexican subsidiary wholly-owned by certain of the Company’s other wholly-owned
subsidiaries. Terranova is engaged in the development of natural gas storage
facilities in Mexico and other natural gas pipelines between the United States
and Mexico.
On
March
27, 2006, the Company organized Esperanza Energy, LLC, a wholly-owned
subsidiary, for the purpose of developing and operating an offshore California
natural gas (LNG) receiving terminal.
On
July
9, 2006, the Company acquired a 50% interest in a 26-mile natural gas pipeline
located in South Texas along with a 50% working interest in two leases with
five
re-completed natural gas wells on 1,000 acres which can be serviced by the
pipeline described above. The Company utilized Tidelands Exploration &
Production Corporation, a wholly-owned subsidiary, to acquire the pipeline
and
gas well assets.
TIDELANDS
OIL & GAS CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2006, 2005 AND 2004 (RESTATED)
NOTE
1
-
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Principles
of Consolidation
The
consolidated financial statements include the accounts of the Company and its
wholly-owned subsidiaries. All significant inter-company accounts and
transactions have been eliminated.
Fair
Value of Financial Instruments
Statement
of Financial Accounting Standards No. 107, “Disclosure About Fair Value of
Financial Instruments,” requires the disclosure of the fair value of off-and-on
balance sheet financial instruments. Unless otherwise indicated, the fair values
of all reported consolidated assets and consolidated liabilities, which
represent financial instruments (none of which are held for trading purposes),
approximate the carrying values of such amounts.
Cash
and Cash Equivalents
The
Company considers all highly liquid instruments purchased with an original
maturity of three months or less to be cash equivalents.
Use
of
Estimates
The
preparation of consolidated financial statements in accordance with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect certain reported
amounts and disclosures. Accordingly, actual results could differ from those
estimates.
Property,
Plant and Equipment
Property,
plant and equipment are recorded at historical cost. Depreciation of property,
plant and equipment is provided on the straight-line method over the estimated
useful lives of the related assets. Maintenance and repairs are charged to
operations. Additions and betterments, which extend the useful lives of the
assets, are capitalized. Upon retirement or disposal of the property, plant
and
equipment, the cost and accumulated depreciation are eliminated from the
accounts, and the resulting gain or loss is reflected in operations.
TIDELANDS
OIL & GAS CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2006, 2005 AND 2004 (RESTATED)
NOTE
1
-
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Long-Lived
Assets
Statement
of Financial Accounting Standards No. 144, “Accounting for the Impairment or
Disposal of Long-Lived Assets” (“SFAS No. 144”), requires that long-lived assets
to be held and used by the Company be reviewed for impairment whenever events
or
changes in circumstances indicate that the related carrying amount may not
be
recoverable. When required, impairment losses on assets to be held and used
are
recognized based on the fair value of the asset, and long-lived assets to be
disposed of are reported at the lower of carrying amount or fair value less
cost
to sell.
The
requirements of SFAS No. 144 and the evaluation by the Company’s management did
not determine any material adverse effects to the consolidated financial
statements.
Income
Taxes
The
Company accounts for income taxes in accordance with Statement of Financial
Accounting Standards No. 109, “Accounting for Income Taxes” (“SFAS No. 109”),
which requires the establishment of a deferred tax asset or liability for the
recognition of future deductions of taxable amounts and operating loss carry
forwards, deferred tax expense or benefit is recognized as a result of the
change in the deferred asset or liability during the year. If necessary, the
Company will establish a valuation allowance to reduce any deferred tax asset
to
an amount which will, more likely than not, be realized.
Net
(Loss) Per Common Share
The
Company accounts for net (loss) per share in accordance with Statement of
Financial Accounting Standard No. 128, “Earnings Per Share” (“SFAS No. 128”).
Basic (loss) per share is based upon the net (loss) applicable to the weighted
average number of common shares outstanding during the period. Diluted (loss)
per share reflects the effect of the assumed conversions of convertible
securities and exercise of stock options only in the periods in which such
affect would have been dilutive.
TIDELANDS
OIL & GAS CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2006, 2005 AND 2004 (RESTATED)
NOTE
1
-
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Goodwill
Goodwill
represents the excess of purchase price and related costs over the value
assigned to the net tangible and identifiable assets of businesses acquired.
Statement of Financial Accounting Standards No. 142, “Goodwill and Other
Intangible Assets” (“SFAS No. 142”), requires goodwill to be tested for
impairment on an annual basis and between annual tests in certain circumstances,
and written down when impaired, rather than being amortized as previous
accounting standards required. Furthermore, SFAS No. 142 requires purchased
intangible assets other than goodwill to be amortized over their useful lives
unless these lives are determined to be indefinite. As the result of an
acquisition during the second quarter of 2004, the Company recorded goodwill
in
the amount of $20,561,800. The Company evaluates the carrying value of goodwill
on a quarterly basis. As part of the evaluation, the Company compares the
carrying value of the intangible asset with its fair value to determine whether
there has been impairment. As a result of management’s impairment review of
goodwill during 2005 and 2006, the Company recognized impairment losses of
$5,200,000 and $0 in 2005 and 2006 respectively.
Revenue
Recognition
The
Company’s revenues for 2006 were derived principally (79%) from the sale of
propane gas to residential customers, as well as charges generated from
transportation fees (13%). The Company’s revenues for 2005 were derived
principally (80%) from the sale of propane gas to residential customers, as
well
as charges generated from transportation fees (13%). During 2004, the Company’s
main source of revenue (71%) was derived from the sale of natural gas to
commercial accounts, as well as the sale of propane gas to residential customers
(21%) and the charging of transportation fees (4%). Additional revenues, 8%
and
7% in 2006 and 2005 respectively, were the result of construction services
performed in the various subdivisions which were the recipients of the propane
gas hook-ups.
Revenues
are recognized at the time of monthly billings based on meter readings provided
by independent contractors.
TIDELANDS
OIL & GAS CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2006, 2005 AND 2004 (RESTATED)
NOTE
1
-
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
New
Accounting Standards and Recently Issued Accounting
Pronouncements
In
December 2002, Statement of Financial Accounting Standards No. 148, “Accounting
for Stock-Based Compensation” (“SFAS No. 148”), was issued and is effective for
fiscal years beginning after December 15, 2002. SFAS No. 148 amends the
disclosure requirements of SFAS No. 123, “Accounting for Stock-Based
Compensation” (“SFAS No. 123”), to require prominent disclosures in both interim
and annual financial statements about the method of accounting for stock-based
employee compensation and the effect of the method used on reported results.
SFAS No. 148 also amends SFAS No. 123 to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. The Company had decided not to
voluntarily adopt the SFAS No. 123 fair value method of accounting for
stock-based employee compensation. Therefore, the new transition alternatives
allowed in SFAS No. 148 will not affect the consolidated financial statements.
In
April
2003, the FASB issued SFAS No. 149, “Amendment of Statement 133 On Derivative
Instruments And Hedging Activities” (“SFAS No. 149”). SFAS No. 149 amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities under SFAS
No. 133. SFAS No. 149 is generally effective for contracts entered into or
modified after June 30, 2003 and for hedging relationships designated after
June
30, 2003. In May 2003, the FASB issued SFAS No. 150, “Accounting For Certain
Financial Instruments With Characteristics Of Both Liabilities And Equity”
(“SFAS No. 150”). SFAS No. 150 improves the accounting for certain financial
instruments that previously might have been accounted for as equity. SFAS No.
150 required that those instruments be classified as liabilities in statements
of financial position. SFAS No. 150 is effective for financial instruments
entered into or modified after May 31, 2003. The Company adopted both SFAS
No.
149 and SFAS No. 150 in 2003. The adoption of these standards have resulted
in
beneficial conversion feature charges (credits) of $392,000 and ($0) in 2005
and
2006 respectively.
In
November 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No.
151, “Inventory Costs - an amendment of ARB No. 43” (“SFAS No. 151”) which is
the result of its efforts to converge U.S. accounting standards for inventories
with International Accounting Standards. SFAS No. 151 requires idle facility
expenses, freight, handling costs and wasted material (spoilage) costs to be
recognized as current-period charges. It also requires that allocation of fixed
production overheads to the costs of conversion be based on the normal capacity
of the production facilities. SFAS No. 151 will be effective for inventory
costs
incurred during fiscal years beginning after June 15, 2005. The Company has
evaluated the impact of this standard on its consolidated financial statements
and does not believe the adoption of SFAS No. 151 will have a material impact
on
its results of operations.
TIDELANDS
OIL & GAS CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2006, 2005 AND 2004 (RESTATED)
NOTE
1
-
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
New
Accounting Standards and Recently Issued Accounting Pronouncements
(Continued)
In
June
2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections -
a replacement of APB Opinion No. 20 and FASB Statement No. 3” (“SFAS No. 154”).
Opinion No. 20 previously required that most voluntary changes in accounting
principle be recognized by including in net income of the period of the change
the cumulative effect of changing to the new accounting principle. SFAS No.
154
requires retrospective application to prior periods’ financial statements of
changes in accounting principle, unless it is impracticable to determine either
the period-specific effects or the cumulative effect of the change. SFAS No.
154
is effective for accounting changes and corrections of errors made in fiscal
years beginning after December 15, 2005. The Company does not expect the
adoption of SFAS No. 154 to have an impact on its consolidated financial
statements.
NOTE
2
-
GOING
CONCERN
The
accompanying audited consolidated financial statements have been prepared on
a
going concern basis, which anticipates the realization of assets and the
liquidation of liabilities during the normal course of operations. However,
as
shown in these consolidated financial statements, the Company during the year
ended December 31, 2006, incurred a net loss of $11,836,925,
although as of that date, the Company’s total assets exceeded its total
liabilities by $2,152,593. In addition, the Company has an accumulated deficit
of $44,417,068. These factors raise doubt about the Company’s ability to
continue as a going concern if changes in operations are not forthcoming.
The
Company’s ability to continue as a going concern will depend on management’s
ability to successfully implement a business plan which will increase revenues,
control costs, and obtain additional forms of debt and/or equity financing.
These financial statements do not include any adjustments that might be
necessary if the Company is unable to continue as a going concern.
TIDELANDS
OIL & GAS CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2006, 2005 AND 2004 (RESTATED)
NOTE
3
-
SUMMARY
OF RESTATED CONSOLIDATED FINANCIAL STATEMENTS
During
the fourth quarter of 2005, management reevaluated its accounting treatment
for
several complex transactions which occurred during the year ended December
31,
2004. After considerable review and outside consultation, management determined
that their interpretation of the accounting guidelines for these involved issues
was not correct and thereby their recording of the initial transaction needed
to
be restated. Accordingly, management has chosen to restate in this note the
consolidated financial statements for the year ended December 31, 2004, as
well
as the interim reports for the quarters ended March 31, June 30, and September
30, 2005. Following are the transactions which precipitated the
restatements:
(A) |
Goodwill
associated with the acquisition of Reef Ventures, LP, (May 2004),
and the
related derivative liability for warrants issued as part of the purchase
price. Management, after their review of EITF 00-19 “Accounting For
Derivative Financial Instruments Indexed To, and Potentially Settled
In, A
Company’s Own Stock”, has concluded that it is necessary to account for
goodwill and the related derivative liability associated with the
May 2004
acquisition. At December 31, 2004, the net effect of this adjustment
results in an increase in goodwill of $5,200,000, an increase in
the
derivative liability of $5,168,000, a gain on reduction of the derivative
liability of $15,390,000 and a goodwill impairment loss of
$15,358,000.
|
(B) |
Issuance
of convertible debentures with freestanding warrants and embedded
beneficial conversion features. Management, after reviewing SFAS
No. 133
and EITF 00-19, has determined that the convertible debentures issued
in
November 2004, contain an embedded beneficial conversion feature.
Accordingly, at December 31, 2004, this charge to the statement of
operations amounted to $3,092,105.
|
(C) |
Valuation
of stock issued for services and financing costs. Management reviewed
all
stock issued for services and financing costs in 2004, and in accordance
with the provisions outlined in EITF 96-18 and SFAS No. 123, management
increased the charges associated with these stock issuances by $4,724,750
at December 31, 2004.
|
All
of
the transactions referred to above relate to non-cash charges and did not affect
the Company’s revenues, cash flows from operations or liquidity.
TIDELANDS
OIL & GAS CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2006, 2005 AND 2004 (RESTATED)
NOTE
3
-
SUMMARY
OF RESTATED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SUMMARY
OF RESTATED FINANCIAL STATEMENTS
DECEMBER
31, 2004
|
|
|
|
|
|
|
|
Consolidated
Balance Sheets:
|
|
|
|
|
|
|
|
|
|
|
Total
Assets
|
|
$
|
17,222,666
|
(1)
|
$
|
5,200,000
|
|
$
|
22,422,666
|
|
Total
Liabilities
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
Equity
|
|
$
|
4,916,559
|
|
$
|
32,000
|
|
$
|
4,948,559
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
Results of Operations:
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
1,883,838
|
|
$
|
0
|
|
$
|
1,883,838
|
|
Expenses
|
|
|
8,451,280
|
(3,4)
|
|
|
|
|
|
|
Net
(Loss) from Operations
|
|
|
(6,567,442
|
)
|
|
(23,174,855
|
)
|
|
(29,742,297
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Derivative
Gain
|
|
|
0
|
(5)
|
|
15,390,000
|
|
|
15,390,000
|
|
Other
Income
|
|
|
50,260
|
|
|
0
|
|
|
50,260
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(Loss)
|
|
$
|
(6,517,182
|
)
|
$
|
(7,784,855
|
)
|
$
|
(14,302,037
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net
(Loss) per Common Share:
|
|
|
|
|
|
|
|
|
|
|
Basic
and Diluted
|
|
$
|
(0.12
|
)
|
|
|
|
$
|
(0.27
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
Average Number of Common Shares
Outstanding:
|
|
|
|
|
|
|
|
|
|
|
Basic
and Diluted
|
|
|
53,214,230
|
|
|
|
|
|
53,214,230
|
|
TIDELANDS
OIL & GAS CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2006, 2005 AND 2004 (RESTATED)
NOTE
3
-
SUMMARY
OF RESTATED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SUMMARY
OF RESTATED INTERIM REPORTS - 2005
|
|
|
March
31, 2005
|
|
|
June
30, 2005
|
|
|
September
30, 2005
|
|
|
|
Previously Reported
|
|
|
|
Restatement Adjustment
|
|
Restated Total
|
|
Previously Reported
|
|
Restatement Adjustment
|
|
Restated Total
|
|
Previously Reported
|
|
Restatement Adjustment
|
|
Total
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and Cash Equivalents
|
|
$
|
4,623,198
|
|
|
|
|
|
|
$
|
4,623,198
|
|
$
|
3,468,839
|
|
|
|
|
$
|
3,468,839
|
|
$
|
2,336,430
|
|
|
|
|
$
|
2,336,430
|
|
Accounts
and Loans Receivable
|
|
|
404,488
|
|
|
|
|
|
|
|
404,488
|
|
|
309,323
|
|
|
|
|
|
309,323
|
|
|
208,668
|
|
|
|
|
|
208,668
|
|
Inventory
|
|
|
60,159
|
|
|
|
|
|
|
|
60,159
|
|
|
75,573
|
|
|
|
|
|
75,573
|
|
|
90,332
|
|
|
|
|
|
90,332
|
|
Prepaid
Expenses
|
|
|
418,362
|
|
|
|
|
|
|
|
418,362
|
|
|
302,531
|
|
|
|
|
|
302,531
|
|
|
208,879
|
|
|
|
|
|
208,879
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Current Assets
|
|
|
5,506,207
|
|
|
|
|
-
|
|
|
5,506,207
|
|
|
4,156,266
|
|
|
-
|
|
|
4,156,266
|
|
|
2,844,309
|
|
|
-
|
|
|
2,844,309
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property,
Plant and Equipment, Net
|
|
|
9,245,326
|
|
|
|
|
-
|
|
|
9,245,326
|
|
|
9,630,591
|
|
|
-
|
|
|
9,630,591
|
|
|
10,097,779
|
|
|
-
|
|
|
10,097,779
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
6,608
|
|
|
|
|
|
|
|
6,608
|
|
|
6,608
|
|
|
|
|
|
6,608
|
|
|
6,708
|
|
|
|
|
|
6,708
|
|
Deferred
Charges
|
|
|
38,750
|
|
|
|
|
|
|
|
38,750
|
|
|
-
|
|
|
|
|
|
-
|
|
|
-
|
|
|
|
|
|
-
|
|
Restricted
Cash
|
|
|
75,000
|
|
|
|
|
|
|
|
75,000
|
|
|
75,846
|
|
|
|
|
|
75,846
|
|
|
101,471
|
|
|
|
|
|
101,471
|
|
Note
Receivable
|
|
|
287,170
|
|
|
|
|
|
|
|
287,170
|
|
|
286,114
|
|
|
|
|
|
286,114
|
|
|
284,944
|
|
|
|
|
|
284,944
|
|
Goodwill
|
|
|
1,158,937
|
|
(1 |
)
|
|
5,200,000
|
|
|
6,358,937
|
|
|
1,158,937
|
|
|
-
|
|
|
1,158,937
|
|
|
1,158,937
|
|
|
-
|
|
|
1,158,937
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Other Assets
|
|
|
1,566,465
|
|
|
|
|
5,200,000
|
|
|
6,766,465
|
|
|
1,527,505
|
|
|
-
|
|
|
1,527,505
|
|
|
1,552,060
|
|
|
-
|
|
|
1,552,060
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Assets
|
|
$
|
16,317,998
|
|
|
|
$
|
5,200,000
|
|
$
|
21,517,998
|
|
$
|
15,314,362
|
|
$
|
-
|
|
$
|
15,314,362
|
|
$
|
14,494,148
|
|
$
|
-
|
|
$
|
14,494,148
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
Maturities of Note Payable
|
|
$
|
225,000
|
|
|
|
$
|
-
|
|
$
|
225,000
|
|
$
|
112,500
|
|
$
|
-
|
|
$
|
112,500
|
|
$
|
168,750
|
|
$
|
-
|
|
$
|
168,750
|
|
Convertible
Debenture Payable
|
|
|
5,000,000
|
|
|
|
|
|
|
|
5,000,000
|
|
|
2,480,000
|
|
|
|
|
|
2,480,000
|
|
|
980,000
|
|
|
|
|
|
980,000
|
|
Accounts
Payable and Accrued Expenses
|
|
|
438,830
|
|
|
|
|
|
|
|
438,830
|
|
|
656,302
|
|
|
|
|
|
656,302
|
|
|
642,457
|
|
|
|
|
|
642,457
|
|
Derivative
Liability
|
|
|
-
|
|
(2 |
)
|
|
8,062,500
|
|
|
8,062,500
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Current Liabilities
|
|
|
5,663,830
|
|
|
|
|
8,062,500
|
|
|
13,726,330
|
|
|
3,248,802
|
|
|
-
|
|
|
3,248,802
|
|
|
1,791,207
|
|
|
-
|
|
|
1,791,207
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-Term
Debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note
Payable, less Current Maturities
|
|
|
6,592,301
|
|
|
|
|
-
|
|
|
6,592,301
|
|
|
4,255,990
|
|
|
-
|
|
|
4,255,990
|
|
|
4,252,304
|
|
|
-
|
|
|
4,252,304
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Liabilities
|
|
|
12,256,131
|
|
|
|
|
8,062,500
|
|
|
20,318,631
|
|
|
7,504,792
|
|
|
-
|
|
|
7,504,792
|
|
|
6,043,511
|
|
|
-
|
|
|
6,043,511
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
Equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock
|
|
|
62,364
|
|
|
|
|
|
|
|
62,364
|
|
|
74,281
|
|
|
|
|
|
74,281
|
|
|
77,157
|
|
|
|
|
|
77,157
|
|
Additional
Paid-in Capital
|
|
|
22,918,580
|
|
|
|
|
13,151,198
|
|
|
36,069,778
|
|
|
28,655,789
|
|
|
9,531,144
|
|
|
38,186,933
|
|
|
30,369,493
|
|
|
9,682,940
|
|
|
40,052,433
|
|
Subscriptions
Receivable
|
|
|
(550,000
|
)
|
|
|
|
|
|
|
(550,000
|
)
|
|
(550,000
|
)
|
|
|
|
|
(550,000
|
)
|
|
(550,000
|
)
|
|
|
|
|
(550,000
|
)
|
Minority
Interest
|
|
|
-
|
|
|
|
|
|
|
|
-
|
|
|
-
|
|
|
|
|
|
-
|
|
|
-
|
|
|
|
|
|
-
|
|
Accumulated
Deficit
|
|
|
(18,369,077
|
)
|
|
|
|
(16,013,698
|
)
|
|
(34,382,775
|
)
|
|
(20,370,500
|
)
|
|
(9,531,144
|
)
|
|
(29,901,644
|
)
|
|
(21,446,013
|
)
|
|
(9,682,940
|
)
|
|
(31,128,953
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Stockholders’ Equity
|
|
|
4,061,867
|
|
|
|
|
(2,862,500
|
)
|
|
1,199,367
|
|
|
7,809,570
|
|
|
-
|
|
|
7,809,570
|
|
|
8,450,637
|
|
|
-
|
|
|
8,450,637
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Liabilities and Stockholders’ Equity
|
|
$
|
16,317,998
|
|
|
|
$
|
5,200,000
|
|
$
|
21,517,998
|
|
$
|
15,314,362
|
|
$
|
-
|
|
$
|
15,314,362
|
|
$
|
14,494,148
|
|
$
|
-
|
|
$
|
14,494,148
|
|
TIDELANDS
OIL & GAS CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2006, 2005 AND 2004 (RESTATED)
NOTE
3
-
SUMMARY
OF RESTATED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SUMMARY
OF RESTATED INTERIM REPORTS - 2005 (CONTINUED)
|
|
Three
Months Ended March 31, 2005
|
|
Six
Months Ended June 30, 2005
|
|
Nine
Months Ended September 30, 2005
|
|
|
|
Previously
Reported
|
|
|
|
Restatement
Adjustment
|
|
Restated Total
|
|
Previously Reported
|
|
|
|
Restatement Adjustment
|
|
Restated Total
|
|
Previously Reported
|
|
|
|
Restatement Adjustment
|
|
Total
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gas
Sales and Pipeline Fees
|
|
$
|
586,949
|
|
|
|
$
|
-
|
|
$
|
586,949
|
|
$
|
849,490
|
|
|
|
$
|
-
|
|
$
|
849,490
|
|
$
|
1,097,505
|
|
|
|
$
|
-
|
|
$
|
1,097,505
|
|
Construction
Services
|
|
|
41,126
|
|
|
|
|
|
|
|
41,126
|
|
|
119,121
|
|
|
|
|
|
|
|
119,121
|
|
|
119,121
|
|
|
|
|
|
|
|
119,121
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Revenues
|
|
|
628,075
|
|
|
|
|
-
|
|
|
628,075
|
|
|
968,611
|
|
|
|
|
-
|
|
|
968,611
|
|
|
1,216,626
|
|
|
|
|
-
|
|
|
1,216,626
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of Sales
|
|
|
284,679
|
|
|
|
|
|
|
|
284,679
|
|
|
415,248
|
|
|
|
|
|
|
|
415,248
|
|
|
635,113
|
|
|
|
|
|
|
|
635,113
|
|
Operating
Expenses
|
|
|
66,774
|
|
|
|
|
|
|
|
66,774
|
|
|
129,137
|
|
|
|
|
|
|
|
129,137
|
|
|
210,545
|
|
|
|
|
|
|
|
210,545
|
|
Depreciation
|
|
|
115,441
|
|
|
|
|
|
|
|
115,441
|
|
|
236,395
|
|
|
|
|
|
|
|
236,395
|
|
|
360,817
|
|
|
|
|
|
|
|
360,817
|
|
Interest
|
|
|
209,787
|
|
|
|
|
|
|
|
209,787
|
|
|
393,860
|
|
|
|
|
|
|
|
393,860
|
|
|
503,950
|
|
|
|
|
|
|
|
503,950
|
|
Beneficial
Conversion Feature Interest
|
|
|
-
|
|
(3
|
)
|
|
4,736,843
|
|
|
4,736,843
|
|
|
-
|
|
(3
|
)
|
|
135,789
|
|
|
135,789
|
|
|
-
|
|
(3
|
)
|
|
(501,659
|
)
|
|
(501,659
|
)
|
Sales,
General and Administrative
|
|
|
1,220,911
|
|
(4
|
)
|
|
597,500
|
|
|
1,818,411
|
|
|
3,098,570
|
|
(4
|
)
|
|
1,578,500
|
|
|
4,677,070
|
|
|
4,022,271
|
|
(4
|
)
|
|
2,556,200
|
|
|
6,578,471
|
|
Impairment
Losses
|
|
|
-
|
|
|
|
|
|
|
|
-
|
|
|
-
|
|
(1
|
)
|
|
5,200,000
|
|
|
5,200,000
|
|
|
-
|
|
(1
|
)
|
|
5,200,000
|
|
|
5,200,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Expenses
|
|
|
1,897,592
|
|
|
|
|
5,334,343
|
|
|
7,231,935
|
|
|
4,273,210
|
|
|
|
|
6,914,289
|
|
|
11,187,499
|
|
|
5,732,696
|
|
|
|
|
7,254,541
|
|
|
12,987,237
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss)
from Operations
|
|
|
(1,269,517
|
)
|
|
|
|
(5,334,343
|
)
|
|
(6,603,860
|
)
|
|
(3,304,599
|
)
|
|
|
|
(6,914,289
|
)
|
|
(10,218,888
|
)
|
|
(4,516,070
|
)
|
|
|
|
(7,254,541
|
)
|
|
(11,770,611
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative
Gain/(Loss)
|
|
|
-
|
|
(5 |
)
|
|
(2,894,500
|
)
|
|
(2,894,500
|
)
|
|
-
|
|
(5 |
)
|
|
5,168,000
|
|
|
5,168,000
|
|
|
|
|
(5 |
)
|
|
5,168,000
|
|
|
5,168,000
|
|
Gain
(Loss) on Equipment Sale
|
|
|
(3,167
|
)
|
|
|
|
|
|
|
(3,167
|
)
|
|
(3,167
|
)
|
|
|
|
|
|
|
(3,167
|
)
|
|
(3,167
|
)
|
|
|
|
|
|
|
(3,167
|
)
|
Interest
and Dividend Income
|
|
|
35,992
|
|
|
|
|
|
|
|
35,992
|
|
|
69,651
|
|
|
|
|
|
|
|
69,651
|
|
|
96,240
|
|
|
|
|
|
|
|
96,240
|
|
Minority
Interest
|
|
|
-
|
|
|
|
|
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
-
|
|
Litigation
Settlement
|
|
|
-
|
|
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
-
|
|
|
109,369
|
|
|
|
|
188,456
|
|
|
297,825
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(Loss)
|
|
$
|
(1,236,692
|
)
|
|
|
$
|
(8,228,843
|
)
|
$
|
(9,465,535
|
)
|
$
|
(3,238,115
|
)
|
|
|
$
|
(1,746,289
|
)
|
$
|
(4,984,404
|
)
|
$
|
(4,313,628
|
)
|
|
|
$
|
(1,898,085
|
)
|
$
|
(6,211,713
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(Loss) Per Common Share, Basic and Diluted:
|
|
$
|
(0.02
|
)
|
|
|
$
|
-
|
|
$
|
(0.15
|
)
|
$
|
(0.05
|
)
|
|
|
$
|
-
|
|
$
|
(0.07
|
)
|
$
|
(0.06
|
)
|
|
|
$
|
-
|
|
$
|
(0.09
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
Average Number of Common Shares Outstanding, Basic and
Diluted:
|
|
|
61,893,359
|
|
|
|
|
-
|
|
|
61,893,359
|
|
|
67,941,251
|
|
|
|
|
-
|
|
|
67,941,251
|
|
|
69,378,850
|
|
|
|
|
-
|
|
|
69,378,850
|
|
(1) Adjust
goodwill to period ending balances.
(2) Adjust
to
recognize fair value of derivative financial instruments as liabilities at
December 31, 2004 ($5,168,000) and first quarter adjustment ($2,894,500)
necessitated by marking to market the fair value of the derivative.
(3) Adjustments
associated with the issuance of convertible debentures.
(4) Adjustments
to recognize the fair value of services and related expenses paid for by
the
issuance of stock.
(5) Adjustments
to recognize the gain / (loss) on changes in the derivative liability when
the
conversion price became variable.
TIDELANDS
OIL & GAS CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2006, 2005 AND 2004 (RESTATED)
NOTE
4
-
PREPAID
EXPENSES
A
summary
of prepaid expenses at December 31, 2006 and December 31, 2005 is as
follows:
|
December
31,
|
|
|
2006
|
|
|
2005
|
Prepaid
Expenses-Other
|
$
|
19,341
|
|
$
|
2,741
|
Prepaid
Insurance
|
|
116,122
|
|
|
88,340
|
Prepaid
License Fee
|
|
0
|
|
|
84,270
|
Prepaid
Rent
|
|
11,508
|
|
|
7,500
|
Prepaid
Interest
|
|
1,580
|
|
|
1,087
|
|
$
|
148,551
|
|
$
|
183,938
|
NOTE
5
-
PROPERTY,
PLANT AND EQUIPMENT
A
summary of
property, plant and equipment at December 31, 2006 and December 31, 2005 is
as
follows:
|
December
31,
|
|
|
|
2006
|
|
2005
|
|
Estimated Economic
Life
|
Pre-Construction
Costs:
|
|
|
|
|
|
|
|
International
Crossings to Mexico
|
$
|
818,271
|
|
$
|
540,880
|
|
N/A
|
Mexican
Gas Storage Facility and
Related Pipelines
|
|
2,359,451
|
|
|
1,926,616
|
|
N/A
|
Domestic
LNG System
|
|
1,567,642
|
|
|
18,319
|
|
N/A
|
Total
|
|
4,745,364
|
|
|
2,485,815
|
|
|
Office
Furniture, Equipment and Leasehold Improvements
|
|
185,174
|
|
|
174,412
|
|
5
Years
|
Pipeline
- Eagle Pass, TX to Piedras
Negras, Mexico
|
|
6,106,255
|
|
|
6,106,255
|
|
20
Years
|
Tanks
& Lines - Propane Distribution System
|
|
1,908,247
|
|
|
1,895,494
|
|
5
Years
|
Machinery
and Equipment
|
|
67,357
|
|
|
66,493
|
|
5
Years
|
Trucks,
Autos and Trailers
|
|
126,464
|
|
|
136,940
|
|
5
Years
|
Pipeline
- South TX Gas Production
|
|
490,000
|
|
|
0
|
|
15
Years
|
Well
Equipment
|
|
2,060
|
|
|
0
|
|
5
Years
|
Leaseholds
|
|
10,000
|
|
|
0
|
|
N/A
|
Total
|
|
13,640,921
|
|
|
10,865,409
|
|
|
Less:
Accumulated Depreciation
|
|
1,276,562
|
|
|
823,321
|
|
|
Net
Property, Plant and Equipment
|
$
|
12,364,359
|
|
$
|
10,042,088
|
|
|
Depreciation
expense for the years ended December 31, 2006 and December 31, 2005 was $466,241
and $485,581 respectively.
NOTE
6
-
RESTRICTED
CASH
Restricted
cash consists of certificates of deposit to secure letters of credit issued
to
the Railroad Commission of Texas.
TIDELANDS
OIL & GAS CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2006, 2005 AND 2004 (RESTATED)
NOTE
7
-
LONG-TERM
DEBT
A
summary
of long-term debt at December 31, 2006 and December 31, 2005 is as follows:
|
December
31,
|
|
2006
|
|
2005
|
Note
Payable, Secured, Interest Bearing at 2% Over Prime Rate,
Maturing May 25, 2008
|
$
|
4,785,003
|
|
$
|
4,496,468
|
|
|
|
|
|
|
Convertible
Debentures, Unsecured, Including Prepaid Interest, Maturing January
20,
2008
|
|
4,374,291
|
|
|
0
|
|
|
9,159,294
|
|
|
4,496,468
|
|
|
|
|
|
|
Less:
Current Maturities
|
|
225,000
|
|
|
225,000
|
Total
Long-Term Debt
|
$
|
8,934,294
|
|
$
|
4,271,468
|
NOTE
8
-
DEFERRED
INCOME TAXES
Deferred
income taxes reflect the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes
and
the amounts used for Federal income tax purposes. Significant components of
the
Company’s deferred taxes as of December 31, 2006, are as follows:
Deferred
Tax Assets:
|
|
|
|
|
Net
Operating Loss Carry-Forwards
|
|
$
|
40,112,572
|
|
Temporary
Differences:
|
|
|
|
|
Difference
between Book and Tax Assets
|
|
|
|
|
Non-deductible
Accruals Net of Additional Depreciation
|
|
|
(3,058,609
|
)
|
Net
Operating Loss Carry-Forward after Temporary Differences
|
|
$
|
37,053,963
|
|
Statutory
Tax Rate
|
|
|
34
|
%
|
Total
Deferred Tax Assets
|
|
|
12,598,347
|
|
Less:
Valuation Allowance for Deferred Tax Assets
|
|
|
12,598,347
|
|
Net
Deferred Tax Asset / (Liability)
|
|
$
|
0
|
|
Management
believes that the realization of all or a portion of the future tax benefits
for
net operating loss carry-forwards is “not likely” as indicated in the above
table after deducting a 100% valuation allowance. There were no future tax
benefits for net operating loss carry-forwards realizable prior to
2006.
At
December 31, 2006, the Company had available net operating loss carry-forwards
of approximately $37,053,963 for Federal income tax purposes. Utilization by
the
Company is subject to limitations based upon the Company’s future income. The
loss carry-forwards, if not used, will expire as follows: $256,136 in 2017;
$122,042 in 2018; $641,595 in 2019; $722,941 in 2020; $2,431,560 in 2021;
$3,826,221 in 2022; $1,684,474 in 2023; $11,369,605 in 2024; $7,218,073 in
2025;
and $8,778,316 in 2026.
TIDELANDS
OIL & GAS CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2006, 2005 AND 2004 (RESTATED)
NOTE
9
-
COMMON
STOCK TRANSACTIONS
On
January 2, 2006, the Company issued 500,000 shares of its restricted common
stock valued at $455,000 pursuant to an employment contract with an officer
of
the Company for shares accrued at December 31, 2005.
On
January 3, 2006, the Company issued 500,000 shares of its common stock valued
at
$445,000 under the 2004 Stock Grant and Option Plan pursuant to an employment
contract with an officer of the Company for 2005.
On
January 16, 2006, the Company issued 250,000 shares of its common stock for
2006
legal fees valued at $215,000 under the 2004 Stock Grant and Option
Plan.
On
January 30, 2006, the Company issued 60,000 shares of its common stock valued
at
$57,000 for legal services.
On
January 30, 2006, the Company issued 150,000 shares of its restricted common
stock valued at $142,500 pursuant to an employment contract with an officer
of
the Company.
On
May
10, 2006, the Company issued 10,000 shares of its restricted common stock valued
at $7,900 as a bonus to an officer of a subsidiary of the Company.
On
May
10, 2006, the Company issued 60,000 shares of its restricted common stock valued
at $47,400 pursuant to an employment contract with an officer of the
Company.
On
June
7, 2006, the Company issued 500,000 shares of its restricted common stock valued
at $542,500 pursuant to an employment contract with an officer of the
Company.
On
June
26, 2006, the Company issued 20,000 shares of its restricted common stock valued
at $16,000 as a bonus to an employee of the Company.
On
June
26, 2006, the Company issued 20,000 shares of its restricted common stock valued
at $16,000 as a bonus to an employee of the Company.
On
August
6, 2006, the Company issued 100,000 shares of its common stock valued at $63,500
as a bonus to an employee of the Company.
On
September 18, 2006, the Company issued 349,856 shares of its common stock to
a
holder of its Convertible Debentures for conversion of $304,375.
On
September 25, 2006, the Company issued 93,295 shares of its common stock to
a
holder of its Convertible Debentures for conversion of $81,167.
TIDELANDS
OIL & GAS CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2006, 2005 AND 2004 (RESTATED)
NOTE
9
-
COMMON
STOCK TRANSACTIONS (CONTINUED)
On
September 25, 2006, the Company issued 150,000 shares of its restricted common
stock valued at $87,000 to each of three Directors for a total of 450,000 common
shares valued at $261,000 as Directors Fees.
On
September 25, 2006, the Company issued 150,000 shares of its common stock valued
at $87,000 to a fourth Director as a Director Fee.
On
September 28, 2006, the Company issued 2,828,304 shares of its restricted common
stock valued at $1,696,982 to five investors in order to cure all existing
events of default in accordance with the terms of a Waiver and Amendment
Agreement relating to the Convertible Debentures they previously acquired (See
NOTE 16 - Debt Financing).
On
October 10, 2006, the Company issued 93,295 shares of its common stock to a
holder of its Convertible Debentures for conversion of $81,167.
On
October 11, 2006, the Company issued 500,000 shares of its common stock valued
at $237,500 pursuant to an employment contract with an officer of the
Company.
On
October 20, 2006, the Company issued 287,357 shares of its common stock to
a
holder of its Convertible Debentures for conversion of $250,000.
On
November 27, 2006, the Company issued 1,000,000 shares of its common stock
to a
holder of its Convertible Debentures for conversion of $870,000.
On
November 27, 2006, the Company issued 40,000 shares of its restricted common
stock valued at $16,000 pursuant to an employment contract with an officer
of
the Company.
NOTE
10
-
STOCK
OPTIONS, STOCK WARRANTS AND SHARES RESERVED FOR CONVERTIBLE
DEBENTURES
The
following table presents the activity for options, warrants and shares reserved
for issuance upon conversion of outstanding convertible debentures for the
year
ending December 31, 2006, 2005 and 2004 (Restated):
2004 |
|
Stock
Options
|
|
Stock
Warrants
|
|
Shares
Reserved for
Convertible Debentures
|
|
|
Weighted
Average
Exercise
Price
|
Outstanding
- December 31, 2003
|
|
2,500,000
|
|
8,516,807
|
|
0
|
|
$
|
0.31
|
Granted
/ Issued
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
(2,500,000
|
)
|
(1,500,000
|
)
|
0
|
|
|
0.14
|
Outstanding
- December 31, 2004
|
|
250,000
|
|
17,578,948
|
|
11,111,111
|
|
$
|
0.50
|
TIDELANDS
OIL & GAS CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2006, 2005 AND 2004 (RESTATED)
NOTE
10
-
STOCK
OPTIONS, STOCK WARRANTS AND SHARES RESERVED FOR CONVERTIBLE DEBENTURES
(CONTINUED)
2005 |
|
|
Stock
Options
|
|
|
Stock
Warrants
|
|
|
Shares
Reserved for
Convertible Debentures
|
|
|
Weighted
Average
Exercise
Price
|
Granted
/ Issued
|
|
|
|
|
|
0
|
|
|
0
|
|
$
|
|
Exercised
/ Converted
|
|
|
0
|
|
|
(8,500,000
|
)
|
|
(6,687,456
|
)
|
|
0.49
|
Expired
|
|
|
|
|
|
0
|
|
|
0
|
|
|
|
Cancelled
|
|
|
0
|
|
|
|
|
|
|
|
|
|
Outstanding
- December 31, 2005
|
|
|
250,000
|
|
|
9,028,948
|
|
|
0
|
|
$
|
1.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
/ Issued
|
|
|
0
|
|
|
10,109,103
|
|
|
7,551,432
|
|
$
|
1.05
|
Exercised
/ Converted
|
|
|
0
|
|
|
0
|
|
|
(1,823,803
|
)
|
|
0.87
|
Expired
|
|
|
|
|
|
|
|
|
|
|
|
|
Cancelled
|
|
|
0
|
|
|
|
|
|
|
|
|
|
Outstanding
- December 31, 2006
|
|
|
250,000
|
|
|
18,138,051
|
|
|
5,027,916
|
|
$
|
$1.07
|
The
2004
Non-Qualified Stock Grant and Option Plan has 3,351,122 shares remaining
available for future issuance.
On
November 18, 2004, the Company entered into a Securities Purchase Agreement
with
Mercator Momentum Fund, LP, Mercator Momentum Fund III, LP, Monarch Pointe
Fund,
LP, (collectively, “the Funds”) and M.A.G. Capital, LLC (“M.A.G.”) (formerly
Mercator Advisory Group, LLC). In exchange for $5,000,000 the Company issued
to
the Funds, 7% convertible debentures with a maturity date of May 18, 2006.
As of
November 2, 2005, the $5,000,000 of convertible debentures was converted for
6,687,456 shares of the Company’s common stock.
In
connection with this financing, the Company issued 6,578,948 common stock
warrants which expire November 18, 2007. The warrants are exercisable at prices
ranging from $0.80 to $0.87. The Company granted the Funds and M.A.G.
registration rights on both groups of securities; such registration was declared
effective May 27, 2005. As of December 31, 2006, no warrants were
exercised.
On
January 20, 2006, Tidelands entered into Securities Purchase Agreements with
the
following accredited investors: Palisades Master Fund, Crescent International,
Ltd., Double U Master Fund, LP, JGB Capital, LP, Nite Capital, LP and RHP Master
Fund, Ltd. (collectively, “Purchasers”). In exchange for $6,569,750, net of
$1,173,651 prepaid interest, the Company issued to the investors $6,569,750
of
convertible debentures with a maturity date of January 20, 2008, at a conversion
price of $0.87 per share.
TIDELANDS
OIL & GAS CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2006, 2005 AND 2004 (RESTATED)
NOTE
10
-
STOCK
OPTIONS, STOCK WARRANTS AND SHARES RESERVED FOR CONVERTIBLE DEBENTURES
(CONTINUED)
In
connection with this financing, the Company issued 2,491,975 common stock
warrants exercisable at $0.935 with an expiration date of January 20, 2009,
and
7,551,432 common stock warrants exercisable at $1.275 with an expiration date
of
February 19, 2007. The Company granted the investors registration rights on
both
groups of securities; such registration was declared effective on September
15,
2006.
Accounting
for Stock-Based Compensation
The
Company adopted Statement of Financial Accounting Standards No. 123R,
“Share-Based Payment” (“SFAS No. 123R”), as of January 1, 2006. SFAS No. 123R
requires companies to estimate the fair value of share-based payment option
awards on the date of grant using an option-pricing model. The value of the
portion of the award that is expected to vest is recognized as an expense in
the
Company’s consolidated statement of operations over the periods during which the
employee or director is required to perform service in exchange for the award.
Prior to the adoption of SFAS No. 123R, the Company accounted for share-based
awards to employees and directors using the intrinsic value method in accordance
with APB No. 25.
NOTE
11
-
COMMITMENT
FOR SUITE LICENSE AGREEMENT
On
June
4, 2004, the Company entered into a Suite License Agreement with the San Antonio
Spurs, LCC commencing July 1, 2004 for a period of five years. The annual
license fee for the first year is $159,000 and is subject to a 6% per annum
price escalation thereafter. The annual fee is payable in installments as
indicated in the agreement.
The
Company’s former President assumed all the Company’s remaining obligations under
the Suite License Agreement pursuant to the terms of Agreement effective
December 8, 2006. The Suite License Agreement was assigned to the former
President although the Company remains liable if the obligations are not met
in
whole, or in part.
NOTE
12
-
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 $300,000 5% interest bearing
loan due in January 2007 was made by the Company regarding the transaction.
The
loan balance was credited by airtime charges at standard industry rates offset
by interest charges computed on the average monthly balance.
TIDELANDS
OIL & GAS CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2006, 2005 AND 2004 (RESTATED)
NOTE
12
-
RELATED
PARTY TRANSACTION (CONTINUED)
The
balance as of December 31, 2006, of $287,435 including interest, was paid in
full at that time by the former President as part of the aforementioned
Agreement (See Note 11 above).
NOTE
13
-
LEASES
The
Company entered into an operating lease on August 1, 2003 for the rental of
its
executive offices at a monthly rent of $3,400, which expires December 31,
2007.
The
Company’s wholly-owned subsidiary, Sonterra Energy Corporation (“Sonterra”)
entered into an operating lease agreement for its executive offices in an
adjacent building at a monthly rental of $3,300 for a term ending December
31,
2007.
Sonterra
entered into a 5-year operating lease on May 17, 2006, at a monthly rent of
$675
for its field office.
Sonterra
also entered into an operating lease for a propane tanks site with a $5,000
annual rent expiring when propane service terminates. In addition, Sonterra
has
entered into 12 tank-site rental agreements with a total annual rent of $93
as
long as propane service is provided to each respective subdivision.
Sonterra
previously had entered into an operating lease beginning October 1, 2004 for
a
propane tank site at an annual rent of $10,000 expiring September 30, 2019.
Reef
Ventures, LP, and its subsidiary, Reef International, LLC, previously had
entered into a lease agreement for a meter site at an annual rental of $200
as
long as their pipeline is operational.
Future
commitments under the operating leases are as follows:
Year
Ending
|
|
Total
|
2007
|
|
$
|
103,793
|
2008
|
|
|
23,393
|
2009
- 2011
|
|
|
65,117
|
Total
Minimum Lease Payments
|
|
$
|
192,303
|
Rent
expense for the years ended December 31, 2006, 2005 and 2004 (Restated) was
$105,892, $82,300 and $43,300, respectively.
TIDELANDS
OIL & GAS CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2006, 2005 AND 2004 (RESTATED)
NOTE
14
-
COMMITMENTS
AND CONTINGENCIES
The
Company is subject to the laws and regulations relating to the protection of
the
environment. The Company’s policy is to accrue environmental and related cleanup
costs of a non-capital nature when it is both probable that a liability has
been
incurred and when the amount can be reasonably estimated. Although it is not
possible to quantify with any degree of certainty the financial impact of the
Company’s continuing compliance efforts, management believes any future
remediation or other compliance related costs will not have a material adverse
effect on the consolidated financial condition or reported results of
consolidated operations of the Company.
NOTE
15
-
LITIGATION
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 (“Northern”) when it sued Betty Lou Sheerin
(“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 Oil and
Gas Corporation (“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 Tidelands' 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. Tidelands answered the
Sheerin suit on March 26, 2003. Tidelands' answer denies all of Sheerin's
allegations.
TIDELANDS
OIL & GAS CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2006, 2005 AND 2004 (RESTATED)
NOTE
15
-
LITIGATION
(CONTINUED)
Matter
No. 1: (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 Zavala Gathering
System, 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 (“Company Directors”). 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.
Tidelands
won a partial summary judgment against Sheerin as to all of her tort claims
pled
against Tidelands, save and except only her claim for conversion of 500,000
shares of Tidelands stock.
Sheerin
seeks damages against Tidelands for indemnity for any sums found to be due
from
her to Northern, unspecified amounts of actual damages, statutory damages,
unspecified amounts of exemplary damages, attorneys fees, costs of suit, and
prejudgment and post judgment interest.
TIDELANDS
OIL & GAS CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2006, 2005 AND 2004 (RESTATED)
NOTE
15
-
LITIGATION
(CONTINUED)
Matter
No. 1: (Continued)
On
August
5, 2005, Northern 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 Gathering, Ltd., and Tidelands claiming that in such agreement Tidelands
agreed to assume and satisfy all indebtedness due and owing Northern by Sheerin
and ZG Gathering, Ltd. 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. Tidelands won a summary judgment motion it filed
against Northern and the court has now dismissed Northern's claims against
Tidelands.
On
November 28, 2005, ZG Gathering, Ltd. and ZG Pipeline Management ("ZG") filed
its answer to Northern's Fifth Amended Petition, its counter-claim against
Northern, and its answer and cross claim against Tidelands. ZG contends that
the
promissory notes given by ZG and Sheerin to Northern were procured by Northern's
fraudulent misrepresentations and it claims unspecified amounts of damages
against Northern. ZG's cross action against Tidelands claims Tidelands entered
into an agreement to purchase the Zavala Gathering System from ZG and that,
as
part of that agreement, Tidelands agreed to satisfy the $3,700,914 Northern
indebtedness of ZG, and to defend, indemnify, and hold ZG and Sheerin harmless
from such indebtedness, to pay off a Sheerin loan of $300,000, and to issue
1
million shares of Tidelands stock, of which 500,000 was to be free trading
shares. ZG claims that Tidelands breached this agreement by failing to satisfy
the Northern indebtedness, failing to defend and indemnify it from such debt,
failing to pay off the $300,000 note, failing to issue the free trading shares
in Tidelands, and by placing a stop transfer order on the restricted stock
that
was issued by Tidelands. ZG seeks specific performance of the agreement,
recovery of an unspecified amount of damages, and its attorney's fees.
On
March
6, 2006, the Court granted Tidelands’ motion for summary judgment against NNG
and dismissed NNG’s suit against Tidelands. On March 16, 2006, the Court denied
Tidelands’ motion for summary judgment against Sheerin on Tidelands’ affirmative
defense of mutual mistake. On July 19, 2006, the Court denied ZG’s motion for
summary judgment to strike Tidelands’ affirmative defense of mutual
mistake.
TIDELANDS
OIL & GAS CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2006, 2005 AND 2004 (RESTATED)
NOTE
15
-
LITIGATION
(CONTINUED)
Matter
No. 1: (Continued)
Trial
is
scheduled to begin on May 7, 2007, unless the parties reach a settlement before
that date. The parties are currently in advanced settlement negotiations and
the
Company is hopeful that an agreement will be concluded in the near future.
Based
on negotiations, the Company has reserved $2,250,000 as an estimated litigation
settlement and that amount has been included in this report.
Matter
No. 2:
Cause
No.
GN 500948, Goodson Builders, Ltd., Plaintiff, vs. Jim Blackwell, BNC
Engineering, Et. Al, Defendants, was filed April 7, 2005, in the 345th District
Court of Travis County, Texas. This case involves a claim that Defendant Toll
Brothers Property, LP (“Toll Brothers”) sold Plaintiff Goodson Builder, Ltd.
(“Plaintiff” or “Goodson”) property without disclosing a propane easement.
Plaintiff sued Sonterra Energy Corp. (“Sonterra”) for trespassing through the
use of the easement. Goodson’s primary claim is against the seller for fraud and
non-disclosure. Toll Brothers has responded with a claim for sanctions because
the claim is frivolous. Toll Brothers offers a witness who is Plaintiff’s former
employee and took pictures of the propane tank prior to the Plaintiff’s
purchase. Goodson seeks damages in the hundreds of thousands of dollars.
Insurance would not cover these damages.
The
case
is pending summary judgment. The Company is contesting the case vigorously;
however, the Company is willing to settle if the Plaintiff is willing to drop
the claim.
Matter
No. 3:
Cause
No.
GM 501625, Senna Hills, Ltd., Plaintiff, vs. Sonterra Energy Corp., Defendant,
was filed in the 53rd Judicial District of Travis County, Texas and Cause No.
GN
501626, HBH Development Co., LLC, Plaintiff, vs. Sonterra Energy Corp.,
Defendant, was filed in the 98th Judicial District Court of Travis County,
Texas. The above matters were each filed against Sonterra in May 2005 and
involve the same claims arising from the same propane service agreement. In
each
case, the plaintiff initially brought claims against Sonterra arising from
Sonterra’s failure, as an assignee of the agreement, to pay easement use fees to
the plaintiff. Sonterra obtained summary judgment as to the plaintiffs’
respective breach of contract and failure of assignment claims arising from
the
failure to pay easement use fees. The cases were not, however, fully dismissed
because the plaintiffs added new causes of action for failure to pay easement
use fees, claims for unpaid developer bonus, reformation of the agreements
to
require payment of easement use fees and alleged failure of assignment. These
separate lawsuits have since been consolidated into one suit for purposes of
pretrial and trial. The May 2007 trial date has been continued and will likely
be reset in September 2007.
TIDELANDS
OIL & GAS CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2006, 2005 AND 2004 (RESTATED)
NOTE
15 - LITIGATION (CONTINUED)
In
accordance with Statement of Financial Accounting Standards No. 5, “Accounting
for Contingencies,” management has reached the conclusion that there is a remote
possibility that the claims enumerated in Matters No. 2 and 3 above would
be
upheld at trial and has also determined that the amount of the claims cannot
be
reasonably estimated. Accordingly, the Company’s financial statements reflect no
accrual of a loss contingency with respect to these legal
matters.
NOTE
16
-
DEBT
FINANCING
On
January 20, 2006, the Company completed a private placement of $6,569,750 of
convertible debt with six institutional investors. The net proceeds realized
by
the Company were $4,949,291 after deduction of legal costs, commissions and
interest discount. The Company issued original issue discount debentures with
a
maturity date of January 20, 2008, and a conversion feature which permitted
the
holders to convert into common stock of the Company at a price of $0.87 per
share. The investors also received three year “Series A Common Stock Warrants”
to purchase, in the aggregate, 2,491,975 shares of common stock of the Company
at a conversion price of $0.935 per share. Additionally, the Company issued
to
the investors “Series B Common Stock Warrants” which provided for a thirteen
month exercise period, at a conversion price of $1.275 per share, and an
aggregate purchase total of 7,551,432 shares of common stock of the
Company.
In
accordance with this private placement, the Company entered into a “Registration
Rights Agreement” with the investors, whereby, among other terms and conditions,
the Company must comply with various effective dates and periods or, if in
default of said dates and/or periods, be subject to liquidated damages as
outlined in the master agreement. Between June 2006 and September 22, 2006,
the
investors billed and were paid $478,155 of liquidated damages including $182,625
paid to RHP Master Fund, Ltd., as described below for not meeting the required
effective date.
On
September 20, 2006, RHP Master Fund, Ltd. (“RHP”) gave the Company its notice of
default for failure to timely pay liquidated damages associated with the
Company’s failure to timely register the underlying debenture shares and
warrants with the Securities and Exchange Commission. RHP accelerated payment
of
the RHP Debenture at the Mandatory Default Amount. The Mandatory Default Amount
was 130% of the aggregate principal amount of the Debenture. On September 22,
2006, the Company paid RHP the sum of $791,375 including an $182,625 Default
Amount, thereby discharging the RHP debenture obligation.
TIDELANDS
OIL & GAS CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2006, 2005 AND 2004 (RESTATED)
NOTE
16
-
DEBT
FINANCING (CONTINUED)
On
September 26, 2006, Palisades Master Fund, LP (“Palisades”) gave the Company its
notice of election accelerating payment of the Palisades Debenture at the
Mandatory Default Amount asserting a cross default event triggered by the RHP
Notice of Default Event received by the Company on September 20, 2006, as
disclosed in the Current Report filed on Form 8-K on September 25, 2006.
Palisades demanded immediate payment of its Debentures at the Mandatory Default
Amount of $5,597,687.
On
September 28, 2006, Company entered into a Waiver and Amendment Agreement
(“Agreement”) with Palisades and all of the remaining Holders, which include
Crescent International, Ltd., Double U Master Fund, LP, JGB Capital, LP and
Nite
Capital, LP.
In
consideration of that Agreement, all existing events of default known to the
Holders were waived in consideration of the issuance of 2,828,304 common shares
valued at $1,696,982. The Company issued the shares as follows: Palisades -
2,000,000 shares, Crescent International, Ltd. - 304,375 shares, Double U Master
Fund, LP - 152,179 shares, JGB Capital, LP - 250,000 shares, and Nite Capital,
LP - 121,750 shares (See NOTE 9 - Common Stock Transactions).
NOTE
17
-
SEGMENT
REPORTING
The
following table is a summary of the results of operations and other financial
information by major segment:
2006
|
|
|
Propane
Sales and Related Services
|
|
|
Pipeline
Transportation Fees
|
|
|
All
Other
and
Corporate
|
|
|
Total
|
|
Revenue
|
|
$
|
1,921,763
|
|
$
|
285,098
|
|
$
|
15,737
|
|
$
|
2,222,598
|
|
Depreciation
|
|
$
|
126,844
|
|
$
|
305,313
|
|
$
|
34,084
|
|
$
|
466,241
|
|
Interest
|
|
$
|
1,629
|
|
$
|
-
|
|
$
|
3,404,149
|
|
$
|
3,405,778
|
|
Operating
(Loss)
|
|
$
|
(263,535
|
)
|
$
|
(93,524
|
)
|
$
|
(11,582,775
|
)
|
$
|
(11,939,834
|
)
|
Total
Assets
|
|
$
|
5,284,938
|
|
$
|
5,702,978
|
|
$
|
4,198,723
|
|
$
|
15,186,639
|
|
2005
|
|
|
Propane
Sales and Related Services
|
|
|
Pipeline
Transportation Fees
|
|
|
All
Other
and
Corporate
|
|
|
Total
|
|
Revenue
|
|
$
|
1,630,246
|
|
$
|
231,077
|
|
$
|
-
|
|
$
|
1,861,323
|
|
Depreciation
|
|
$
|
116,853
|
|
$
|
305,313
|
|
$
|
63,315
|
|
$
|
485,481
|
|
Interest
|
|
$
|
2,514
|
|
$
|
-
|
|
$
|
608,849
|
|
$
|
611,363
|
|
Operating
(Loss)
|
|
$
|
(380,900
|
)
|
$
|
(164,523
|
)
|
$
|
(12,765,170
|
)
|
$
|
(13,310,593
|
)
|
Total
Assets
|
|
$
|
2,997,001
|
|
$
|
5,621,536
|
|
$
|
4,870,312
|
|
$
|
13,488,849
|
|
2004
|
|
|
Propane
Sales and Related Services
|
|
|
Natural
Gas Sales and Pipeline Transportation Fees
|
|
|
All
Other
and
Corporate
|
|
|
Total
|
|
Revenue
|
|
$
|
438,611
|
|
$
|
1,400,227
|
|
$
|
-
|
|
$
|
1,838,838
|
|
Depreciation
|
|
$
|
20,158
|
|
$
|
178,099
|
|
$
|
46,632
|
|
$
|
244,889
|
|
Interest
|
|
$
|
300
|
|
$
|
-
|
|
$
|
300,266
|
|
$
|
300,566
|
|
Operating
Income (Loss)
|
|
$
|
98,229
|
|
$
|
(141,502
|
)
|
$
|
(29,699,024
|
)
|
$
|
(29,742,297
|
)
|
Total
Assets
|
|
$
|
2,775,281
|
|
$
|
5,881,774
|
|
$
|
13,765,611
|
|
$
|
22,422,666
|
|
TIDELANDS
OIL & GAS CORPORATION
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2006, 2005 AND 2004 (RESTATED)
NOTE
18
-
SELECTED
QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
(Dollars
in thousands, except per share data)
The
following tables present our selected consolidated financial information as
of
the end of the periods indicated. The information below is from unaudited
consolidated financial statements.
Year
Ended December 31, 2006
|
|
March
31
|
|
June
30
|
|
September
30
|
|
December
31
|
|
Revenues
|
|
$
|
802
|
|
$
|
407
|
|
$
|
369
|
|
$
|
645
|
|
Cost
of Goods Sold
|
|
|
377
|
|
|
206
|
|
|
177
|
|
|
414
|
|
Gross
Margin
|
|
|
425
|
|
|
201
|
|
|
192
|
|
|
231
|
|
Operating
Expenses
|
|
|
2,155
|
|
|
2,190
|
|
|
4,017
|
|
|
4,627
|
|
Other
Income (Expense), Net
|
|
|
34
|
|
|
28
|
|
|
48
|
|
|
(7
|
)
|
Net
earnings (loss)
|
|
$
|
(1,696
|
)
|
$
|
(1,961
|
)
|
$
|
(3,777
|
)
|
$
|
(4,403
|
)
|
Basic
(loss) per share
|
|
$
|
(0.02
|
)
|
$
|
(0.03
|
)
|
$
|
(0.05
|
)
|
$
|
(0.05
|
)
|
Diluted (loss)
per share
|
|
$
|
(0.02
|
)
|
$
|
(0.03
|
)
|
$
|
(0.05
|
)
|
$
|
(0.05
|
)
|
Year
Ended December 31, 2005
|
|
March
31
|
|
June
30
|
|
September
30
|
|
December
31
|
|
Revenues
|
|
$
|
628
|
|
$
|
341
|
|
$
|
248
|
|
$
|
644
|
|
Cost
of Goods Sold
|
|
|
285
|
|
|
130
|
|
|
220
|
|
|
368
|
|
Gross
Margin
|
|
|
343
|
|
|
211
|
|
|
28
|
|
|
276
|
|
Operating
Expenses
|
|
|
6,947
|
|
|
3,825
|
|
|
1,580
|
|
|
1,817
|
|
Other
Income (Expense), Net
|
|
|
(2,862
|
)
|
|
8,096
|
|
|
324
|
|
|
90
|
|
Net
earnings (loss)
|
|
$
|
(9,466
|
)
|
$
|
4,482
|
|
$
|
(1,228
|
)
|
$
|
(1,451
|
)
|
Basic
income (loss) per share
|
|
$
|
(0.15
|
)
|
$
|
0.08
|
|
$
|
(0.02
|
)
|
$
|
(0.11
|
)
|
Diluted
income (loss) per share
|
|
$
|
(0.15
|
)
|
$
|
0.08
|
|
$
|
(0.02
|
)
|
$
|
(0.11
|
)
|
Year
Ended December 31, 2004
|
|
March
31
|
|
June
30
|
|
September
30
|
|
December
31
|
|
Revenues
|
|
$
|
0
|
|
$
|
508
|
|
$
|
825
|
|
$
|
551
|
|
Cost
of Goods Sold
|
|
|
0
|
|
|
498
|
|
|
802
|
|
|
209
|
|
Gross
Margin
|
|
|
0
|
|
|
10
|
|
|
23
|
|
|
342
|
|
Operating
Expenses
|
|
|
1,538
|
|
|
4,209
|
|
|
3,545
|
|
|
20,825
|
|
Other
Income (Expense), Net
|
|
|
4
|
|
|
15,397
|
|
|
6
|
|
|
33
|
|
Net
earnings (loss)
|
|
$
|
(1,534
|
)
|
$
|
11,198
|
|
$
|
(3,516
|
)
|
$
|
(20,450
|
)
|
Basic
income (loss) per share
|
|
$
|
(0.03
|
)
|
$
|
0.18
|
|
$
|
(0.02
|
)
|
$
|
(0.34
|
)
|
Diluted
income (loss) per share
|
|
$
|
(0.03
|
)
|
$
|
0.18
|
|
$
|
(0.02
|
)
|
$
|
(0.34
|
)
|
NOTE
19
-
SUBSEQUENT
EVENTS
The
Company issued 2,298,848 shares of common stock to a holder of its convertible
debentures for conversion of $2,000,000 at $0.87/share, thereby reducing its
long-term debt by that amount.