TIDELANDS
OIL & GAS CORPORATION
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2007
NOTE
2
-
GOING
CONCERN
The
Company has sustained recurring losses and negative cash flows from operations.
Over 2006, the Company’s growth had been funded through issuance of convertible
debentures. As of March 31, 2007, the Company had approximately $302,202
of
unrestricted cash. However, the Company has experienced and continues to
experience negative cash flows from operations, as well as an ongoing
requirement for substantial additional capital investment. The Company needs
to
raise substantial additional capital to accomplish its business plan this
year
and over the next several years. The Company is seeking to obtain such
additional funding through private equity sources, from financial partners
for
some of its projects and the possible sale of certain operating assets along
with a continued reduction of operating expenses. There can be no assurance
as
to the availability or terms upon which such financing and capital might
be
available or that asset sales will be possible at suitable pricing.
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
or
financial partners. These financial statements do not include any adjustments
that might be necessary if the Company is unable to continue as a going concern.
NOTE
3
-
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.
TIDELANDS
OIL & GAS CORPORATION
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2007
NOTE
3
-
DEBT
FINANCING (CONTINUED)
As
of
March 31, 2007, two of the six institutional investors had converted $3,586,709
of their debentures for 4,122,654 shares of the Company’s common stock at $0.87
per share. In addition, one investor had its $608,750 of debentures redeemed
by
the Company as a result of a default. After accounting for the above conversions
and redemption, $2,374,291 of convertible debentures convertible into 2,729,070
shares of Tidelands’ common stock at $0.87 per share remain outstanding. On
February 20, 2007, the “Series B Common Stock Warrants” exercisable at $1.275
per share for an aggregate purchase total of 7,551,432 shares of the Company’s
common stock expired.
NOTE
4
-
COMMON
STOCK TRANSACTIONS
On
January 2, 2007, the Company issued 500,000 shares of its common stock valued
at
$135,000 to the former President in accordance with his Severance
Agreement.
On
January 11, 2007, the Company issued 589,288 shares of its common stock valued
at $162,500 to a law firm for 2007 legal services related to securities law
matters.
On
January 22, 2007, the current President cancelled 500,000 of his shares of
the
Company’s restricted common stock valued at $110,000 which was offset against
the stock subscription due from him to the Company.
On
February 2, 2007 and on four other occasions until March 5, 2007, the Company
issued a total of 2,298,848 shares of its common stock to a holder of its
Convertible Debentures for conversion of $2,000,000.
On
February 6, 2007, the Company issued 120,000 shares of its restricted common
stock valued at $27,000 for 2006 investor public relations
services.
On February 13, 2007, the Company issued 500,000 shares of its common stock
valued at $115,000 each to two Directors for a total of 1,000,000 common
shares
valued at $230,000.
On
February 15, 2007, the Company issued 681,818 shares of its common stock
valued
at $150,000 to a law firm for legal services related to the Northern Natural
Gas
Company/Betty Lou Sherrin Litigation matter (see NOTE 3 -
Litigation).
On
February 21, 2007, the Company issued 69,000 shares of its restricted Company
stock valued at $14,490 for preparation of a Research Report.
TIDELANDS
OIL & GAS CORPORATION
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2007
NOTE
4
-
COMMON
STOCK TRANSACTIONS (CONTINUED)
On
March
1, 2007, the Company issued 642,858 shares of its common stock valued at
$135,000 each to two Directors for a total of 1,285,716 common shares valued
at
$270,000.
On
March
8, 2007, the Company issued 2,133,938 shares of its common stock valued at
$426,787 to a law firm for past and future general and coordinating legal
services.
On
March
12, 2007, the Company issued 952,381 shares to a Director for $200,000 as
a
result of his exercise of stock options at $0.21 per share.
On
March
14, 2007, the Company issued 1,500,000 shares of its common stock valued
at
$300,000 to each of two Directors for a total of 3,000,000 shares valued
at
$600,000.
On
March
19, 2007, the Company issued 100,000 shares of its restricted common stock
valued at $26,500 to an employee of a subsidiary as a stock bonus.
NOTE
5
-
RELATED
PARTY TRANSACTION
During
the quarter, the Company issued 2,642,858 shares of common stock valued at
$550,000 to each of its two outside Directors. In addition to their
customary duties as directors, these board members provided regular and ongoing
management services to the Company. This compensation to the two outside
Directors represents their compensation for 2007.
TIDELANDS
OIL & GAS CORPORATION
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2007
NOTE
6
-
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.
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.
TIDELANDS
OIL & GAS CORPORATION
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2007
NOTE
6
-
LITIGATION
(CONTINUED)
Matter
No. 1: (Continued)
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 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2007
NOTE
6
-
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
Northern and dismissed Northern’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 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2007
NOTE
6
-
LITIGATION
(CONTINUED)
Matter
No. 1: (Continued)
The
trial
date has been extended to July 9, 2007, by mutual agreements of the litigants
unless a settlement is reached 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 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2007
NOTE
6
-
LITIGATION
(CONTINUED)
Matter
No. 3: (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.
Item
2.
Management's Discussion and Analysis of Financial Condition
and Results of Operation
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.
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 expertise and
assets.
Recent
Developments
In
the
three months ended March 31, 2007, certain significant developments occurred
with respect to the businesses operated by the Company.
On
January 31, 2007, Sonora Pipeline LLC (“Sonora”) filed an application before the
Federal Energy Regulatory Commission for certificate of convenience and
necessity to construct and operate the Mission and Progreso International
Pipelines including application for two presidential permits for a cross-border
connection to the planned Terranova Energia pipelines in Mexico. 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.
On
March
7, 2007, Esperanza Energy LLC (“Esperanza”) announced plans to file applications
with state and federal agencies to build a floating liquefied natural gas
(LNG)
receiving facility 15 miles off the Port of Long Beach, California. The
project,
named Port Esperanza, will bring natural gas to the Southern California
marketplace. Esperanza plans to formally file its application in late 2007.
The
LNG receiving facility has attracted the commercial interest of several
parties
who could participate as co-venturers and/or gas purchasers. More information
is
available at www.esperanza-energy.com.
Results
of Operations
THREE
MONTHS ENDED MARCH 31, 2007 COMPARED TO THREE MONTHS ENDED MARCH 31,
2006
REVENUES:
The Company reported revenues of $1,103, 971 for the three months ended
March
31, 2007 as compared with revenues of $801,894 for the three months ended
March
31, 2006, which is a 37% increase in revenue for the three months ended
March
31, 2007 compared to the three months ended March 31, 2006. Revenues from
Reef
Ventures, LP decreased to $41,508 for the three months ended March 31,
2007
compared to $58,589 for the three months ended March 31, 2006. The decrease
was
due to lower volumes of gas transported in Mexico through the 12 inch natural
gas pipeline owned by Reef Ventures, LP. Revenues from Sonterra Energy
Corporation increased to $1,045,776 for the three months ended March 31,
2007
compared to $743,305 for the three months ended March 31, 2006. Gas sales
at
Sonterra increased to $943,687 for the three months ended March 31, 2007
compared to $613,917 for the three months ended March 31, 2006. The increase
in
gas sales was primarily due to an increase in total customers served by
Sonterra
Energy Corporation. Construction services revenues at Sonterra decreased
to
$102,089 for the three months ended March 31, 2007 compared to $129,388
for the
three months ended March 31, 2006.
TOTAL
COSTS AND EXPENSES: Total costs and expenses increased to $3,555,952 for
the
three months ended March 31, 2007 compared to $2,531,162 for the three
months
ended March 31, 2006. The most significant increase occurred in stock based
compensation due to issuances of common stock for services of directors.
COST
OF
SALES: Cost of sales increased to $567,721 for the three months ended March
31,
2007 compared to $376,866 for the three months ended March 31, 2006. The
increase was due almost entirely to increased cost and volume of propane
sold
through our Sonterra Energy Corporation subsidiary.
OPERATING
EXPENSES: Operating expenses decreased to $83,371 for the three months
ended
March 31, 2007 compared to $84,531 for the three months ended March 31,
2006.
This decrease was attributable to slightly reduced operating costs from
Sonterra
Energy Corporation. Depreciation Expense increased to $122,609 for the
three
months ended March 31, 2007 compared to $115,674 for the three months ended
March 31, 2006. The increase in depreciation expense is primarily from
the
additions of depreciable property in Sonterra Energy Corporation and our
Tidelands Exploration & Production Corporation subsidiary.
INTEREST
EXPENSE: Interest expense increased to $346,104 for the three months ended
March
31, 2007 compared to $111,059 for the three months ended March 31, 2006.
The
increase resulted primarily from additional interest expense associated
with the
issuance of convertible debentures in the financing described in Footnote
3 to
Condensed Consolidated Financial Statements for the three months ended
March 31,
2007.
SALES,
GENERAL AND ADMINISTRATIVE: Sales, General and Administrative Costs (including
Stock-Based Compensation) increased to $2,436,147 for the three months
ended
March 31, 2007 compared to $1,842,942 for the three months ended March
31, 2006.
Staff and Officer Salaries and Officer Stock Bonuses decreased by $926,332
for
the three months ended March 31, 2007 compared to the three months ended
March
31, 2006. This was a result of staff reductions undertaken in the fourth
quarter
of 2006. Director compensation for corporate management and reorganization
efforts and legal fees associated primarily with litigation expenses were
paid
by issuance of common stock in the amount of $1,658,043 for the three months
ended March 31, 2007. Of the total Sales, General and Administrative Costs
(including stock based compensation of directors) of $2,436,147 for the
three
months ended March 31, 2007, $1,672,533 of these costs were paid by issuance
of
common stock and the remaining $763,614 of costs were paid with
cash.
INTEREST
AND DIVIDEND INCOME: Interest and Dividend income decreased to $625 for
the
three months ended March 31, 2007 as compared to $33,620 for the three
months
ended March 31, 2006 due to lower cash balances held in interest bearing
accounts during the three months ended March 31, 2007.
NET
LOSS:
Net loss of ($2,451,356) for the three months ended March 31, 2007 represents
an
increase in loss of $755,708 as compared to net loss of ($1,695,648) for
the
three months ended March 31, 2006. This increased loss was primarily due
to the
increased issuance of common stock by the Company for directors’ services and
legal fees.
LIQUIDITY
AND CAPITAL RESOURCES: The independent auditors report on our March 31,
2007
financial statements included in this Form 10-Q 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, the Company will
need
additional equity or debt financing during the second quarter of 2007.
Management plans to raise additional capital through debt and common stock
offerings 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. Additional funding for
the
permit process for the offshore LNG regas terminal in Southern California
will
be needed by the third quarter of 2007. Furthermore, the Company will need
to
raise additional capital to fund ongoing development activities for our
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 a pending case goes to trial. New issuance of common stock and
debt
sufficient to retire the outstanding debentures and to provide additional
required capital is being actively pursued by the Company. 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 conserve cash resources for the Company including
the use of stock issuances, when feasible, to pay for services rendered
to the
Company.
Direct
capital expenditures during the three months ended March 31, 2007, totaled
$906,031. 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 and equipment for the operation
of
the Sonterra Energy Corporation propane systems and an investment in a
natural
gas pipeline and nearby leases for development. Total debt decreased from
$13,034,046 at December 31, 2006, to $11,531,967 at March 31, 2007. The
decrease
in total debt is due primarily to the conversion of $2,000,000 of convertible
debentures from the financing transaction of January 20, 2006 into common
stock
and was offset by an increase in accounts payable. Net loss for the three
months
ended March 31, 2007, was ($2,451,356) an increase in net loss of 44.6%
from the
net loss of ($1,695,648) for the three months ended March 31, 2006. Basic
and
diluted net loss per common share increased to ($0.03) for the three months
ended March 31, 2007, as compared to ($0.02) for the three months ended
March
31, 2006. The net loss per share calculation for the three months ended
March
31, 2007, included an increase in actual and equivalent shares
outstanding.
Item
3.
Quantitative and Qualitative Disclosures 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 March 31, 2007, we
had
cash and cash equivalents aggregated $302,202.
The
Company does not issue or invest in financial instruments or their derivatives
for trading or speculative purposes. The operations of the Company are
conducted
primarily in the United States, and, are not subject to material foreign
currency exchange risk. Although the Company has outstanding debt and related
interest expense, market risk of interest rate exposure in the United States
is
currently not material.
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
4.
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 March 31, 2007 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 March 31, 2007, 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.
PART
II - OTHER INFORMATION
Item
1. Legal Proceedings
Except
as
set forth below, there have been no material changes to the legal proceeding
or
investigations reported in Part I, Item 3 - "Legal Proceedings" in the
Company's
Form 10-K filed with the SEC on April 17, 2007 (the "Prior 10-K"). Other
than as
set forth below and in the Prior 10-K, the Company is not a party to any
material pending legal proceeding.
Matter
No. 1
As
described in the Prior 10-K and in Note 6 above to the Company’s condensed
consolidated financial statements, the Company is a party to a pending
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. During the quarter
ended
March 31, 2007, the trial date has been extended to July 9, 2007, by mutual
agreements of the litigants unless a settlement is reached 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.
During
the quarter ended March 31, 2007, there were no material changes to the
risk
factors described in Part I, Item 1A “Risk Factors” of the Company’s Annual
Report on Form 10-K for the fiscal year ended December 31,
2006.
Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds
The
Company made the following issuances of unregistered securities during
the
quarter ended March 31, 2007 (not previously reported in a Form
8-K):
On
February 6, 2007, the Company issued 120,000 shares of its restricted common
stock valued at $27,000 for 2006 investor public relations
services.
On
February 21, 2007, the Company issued 69,000 shares of its restricted Company
stock valued at $14,490 for preparation of a Research Report.
On
March
19, 2007, the Company issued 100,000 shares of its restricted common stock
valued at $26,500 to an employee of a subsidiary as a stock bonus.
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.
The
Company did not make any purchases of its common stock during the quarter
ended
March 31, 2007. However, on January 22, 2007, the current President cancelled
500,000 of his shares of the Company’s restricted common stock valued at
$110,000, which was offset by cancellation of the stock subscription due
from
him to the Company.
None.
Item
4. Submission of Matters to a Vote of Security Holders
No
matters were submitted to a vote of security holders during the quarter
covered
by this report.
Item
5. Other Information
None.
Item
6. Exhibits
Exhibit
|
|
Description
|
|
Location
of Exhibit
|
10.1
|
|
Employment
Agreement with James B. Smith*
|
|
Incorporated
by reference to Exhibit 10.1 to 8-K filed April 3, 2007
|
10.2
|
|
2007
Non-Qualified Stock Grant and Option Plan *
|
|
Incorporated
by reference to Exhibit 10.1 of Form 8-K filed on February 16,
2007
|
10.3
|
|
Form
of Option Grant under 2007 Non-Qualified Stock Grant and Option
Plan
*
|
|
Incorporated
by reference to Exhibit 10.2 of Form 8-K filed on February 16,
2007
|
10.4
|
|
Form
of Stock Award Agreement under 2007 Non-Qualified Stock Grant
and Option
Plan *
|
|
Incorporated
by reference to Exhibit 10.3 of Form 8-K filed on February 16,
2007
|
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 the Securities Exchange Act of 1934, the Company has duly
caused this report to be signed on its behalf by the undersigned thereunto
duly
authorized.
|
|
|
|
TIDELANDS
OIL & GAS CORPORATION
|
|
|
|
Date: May
18, 2007
|
By:
|
/s/ James
B.
Smith
|
|
James
B. Smith, President and Chief Executive
Officer
|