tide10-q6302007.htm
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
DC 20549
(Mark
one)
x
Quarterly
Report Under
Section 13 or 15(d) of The Securities Exchange Act of
1934
For
the quarterly period ending June 30, 2007
o
Transition Report Under Section 13 or 15(d) of The Securities Exchange
Act
of
1934
For
the transition period from ______________ to _____________
Commission
File Number: 0-29613
TIDELANDS
OIL & GAS CORPORATION
(Exact
name of small business issuer as specified in its charter)
Nevada
|
66-0549380
|
(State
of incorporation)
|
(IRS
Employer ID Number)
|
1862
West Bitters Rd., San Antonio, TX 78248
(Address
of principal executive offices)
(210)
764-8642
(Issuer's
telephone number)
Securities
registered under Section 12 (b) of the Exchange Act: None
Securities
registered under Section 12(g) of the Exchange Act:
Common
Stock - $0.001 par value
Check
whether the issuer has (1) filed all reports required to be filed by Section
13
or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period the Company was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. Yes x Noo
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
APPLICABLE
ONLY TO CORPORATE ISSUERS
As
of August 14, 2007, there were
106,084,806 shares
of Common Stock issued and
outstanding.
Transitional
Small Business Disclosure Format: Yes o No
x
TIDELANDS
OIL & GAS CORPORATION
FORM
10-Q
PART
I - FINANCIAL INFORMATION
Item
1. Financial Statements
CONDENSED
CONSOLIDATED BALANCE SHEETS
ASSETS
|
|
|
|
|
|
|
|
June
30,
|
|
|
December
31,
|
|
|
2007
|
|
|
2006
|
|
|
(Unaudited)
|
|
|
|
|
Current
Assets:
|
|
|
|
|
|
Cash
|
$ |
85,762
|
|
|
$ |
367,437
|
|
Accounts
and Other Receivable
|
|
163,438
|
|
|
|
388,754
|
|
Inventory
|
|
115,782
|
|
|
|
84,030
|
|
Prepaid
Expenses
|
|
411,571
|
|
|
|
148,551
|
|
Total
Current Assets
|
|
776,553
|
|
|
|
988,772
|
|
|
|
|
|
|
|
|
|
Property
Plant and Equipment, Net
|
|
10,995,265
|
|
|
|
12,364,359
|
|
|
|
|
|
|
|
|
|
Other
Assets:
|
|
|
|
|
|
|
|
Deposits
|
|
187,324
|
|
|
|
56,708
|
|
Cash
Restricted
|
|
53,703
|
|
|
|
52,642
|
|
Deferred
Charges
|
|
0
|
|
|
|
565,221
|
|
Goodwill
|
|
1,158,937
|
|
|
|
1,158,937
|
|
Total
Other Assets
|
|
1,399,964
|
|
|
|
1,833,508
|
|
|
|
|
|
|
|
|
|
Total
Assets
|
$ |
13,171,782
|
|
|
$ |
15,186,639
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
|
|
|
|
Current
Maturities - Note Payable
|
$ |
7,303,290
|
|
|
$ |
225,000
|
|
Accounts
Payable and Accrued Expenses
|
|
2,381,748
|
|
|
|
1,624,752
|
|
Customer
Deposits
|
|
9,150
|
|
|
|
0
|
|
Reserve
for Litigation
|
|
2,250,000
|
|
|
|
2,250,000
|
|
Total
Current Liabilities
|
|
11,944,188
|
|
|
|
4,099,752
|
|
|
|
|
|
|
|
|
|
Long-Term
Debt
|
|
0
|
|
|
|
8,934,294
|
|
|
|
|
|
|
|
|
|
Total
Liabilities
|
|
11,944,188
|
|
|
|
13,034,046
|
|
|
|
|
|
|
|
|
|
Stockholders’
Equity:
|
|
|
|
|
|
|
|
Common
Stock, $.001 Par Value per Share,
|
|
|
|
|
|
|
|
250,000,000
Shares Authorized, 104,908,344
|
|
|
|
|
|
|
|
and
86,457,922 Shares Issued and Outstanding at
|
|
|
|
|
|
|
|
June
30, 2007 and December 31, 2006 Respectively
|
|
104,909
|
|
|
|
86,459
|
|
Additional
Paid-in Capital
|
|
51,796,193
|
|
|
|
46,703,202
|
|
Subscriptions
Receivable
|
|
(110,000 |
) |
|
|
(220,000 |
) |
Minority
Interest
|
|
-
|
|
|
|
-
|
|
Accumulated
(Deficit)
|
|
(50,563,508 |
) |
|
|
(44,417,068 |
) |
Total
Stockholders’ Equity
|
|
1,227,594
|
|
|
|
2,152,593
|
|
|
|
|
|
|
|
|
|
Total
Liabilities and Stockholders’ Equity
|
$ |
13,171,782
|
|
|
$ |
15,186,639
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
Accompanying Notes to Consolidated Financial Statements
|
|
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
|
Three
Months Ended
|
|
|
Three
Months Ended
|
|
|
June
30, 2007
|
|
|
June
30, 2006
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
Gas
Sales and Pipeline Fees
|
$ |
405,372
|
|
|
$ |
392,108
|
|
Construction
Services
|
|
78,627
|
|
|
|
15,016
|
|
Total
Revenues
|
|
483,999
|
|
|
|
407,124
|
|
Expenses:
|
|
|
|
|
|
|
|
Cost
of Sales
|
|
206,876
|
|
|
|
206,413
|
|
Operating
Expenses
|
|
92,732
|
|
|
|
99,587
|
|
Depreciation
|
|
123,135
|
|
|
|
116,038
|
|
Impairment
Loss
|
|
2,605,061 |
|
|
|
2,395,791 |
|
Interest
Expense
|
|
182,322
|
|
|
|
373,950
|
|
Stock-Based
Compensation – Related Parties
|
|
134,498
|
|
|
|
597,500
|
|
Sales,
General and Administrative
|
|
834,858
|
|
|
|
1,002,303
|
|
Total
Expenses
|
|
4,179,482
|
|
|
|
2,395,791
|
|
|
|
|
|
|
|
|
|
(Loss)
From Operations
|
|
(3,695,483 |
) |
|
|
(1,988,667 |
) |
|
|
|
|
|
|
|
|
Other
Income (Expense)
|
|
|
|
|
|
|
|
(Loss)
on Sale of Assets
|
|
(6,888 |
) |
|
|
0
|
|
Interest
and Dividend Income
|
|
7,249
|
|
|
|
28,118
|
|
Miscellaneous
|
|
38
|
|
|
|
0
|
|
Total
Other Income (Expenses)
|
|
399
|
|
|
|
28,118
|
|
|
|
|
|
|
|
|
|
Net
(Loss)
|
$ |
(3,695,084 |
) |
|
$ |
(1,960,549 |
) |
|
|
|
|
|
|
|
|
Net
(Loss) Per Common Share:
|
|
|
|
|
|
|
|
Basic
and Diluted
|
$ |
(0.04 |
) |
|
$ |
(0.03 |
) |
|
|
|
|
|
|
|
|
Weighted
Average Number of Common
|
|
|
|
|
|
|
|
Shares
Outstanding
|
|
101,798,627
|
|
|
|
80,080,815
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
Accompanying Notes to Condensed Consolidated Financial
Statements
|
|
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
|
|
Six
Months Ended
|
|
|
Six
Months Ended
|
|
|
|
June
30, 2007
|
|
|
June
30, 2006
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
Gas
Sales and Pipeline Fees
|
|
$ |
1,407,254
|
|
|
$ |
1,064,614
|
|
Construction
Services
|
|
|
180,716
|
|
|
|
144,404
|
|
Total
Revenues
|
|
|
1,587,970
|
|
|
|
1,209,018
|
|
Expenses:
|
|
|
|
|
|
|
|
|
Cost
of Sales
|
|
|
774,597
|
|
|
|
583,279
|
|
Operating
Expenses
|
|
|
176,103
|
|
|
|
184,118
|
|
Depreciation
|
|
|
245,744
|
|
|
|
231,802
|
|
Impairment
Loss
|
|
|
2,605,061 |
|
|
|
0 |
|
Interest
Expense
|
|
|
528,426
|
|
|
|
485,009
|
|
Stock-Based
Compensation – Related Parties
|
|
|
1,234,498
|
|
|
|
1,187,400
|
|
Sales,
General and Administrative
|
|
|
2,171,005
|
|
|
|
2,255,345
|
|
Total
Expenses
|
|
|
7,735,434
|
|
|
|
4,926,953
|
|
|
|
|
|
|
|
|
|
|
(Loss)
From Operations
|
|
|
(6,147,464 |
) |
|
|
(3,717,935 |
) |
|
|
|
|
|
|
|
|
|
Other
Income (Expense)
|
|
|
|
|
|
|
|
|
(Loss)
on Sale of Assets
|
|
|
(6,888 |
) |
|
|
0
|
|
Interest
and Dividend Income
|
|
|
7,874
|
|
|
|
61,739
|
|
Miscellaneous
|
|
|
38
|
|
|
|
0
|
|
Total
Other Income (Expenses)
|
|
|
1,024
|
|
|
|
61,739
|
|
|
|
|
|
|
|
|
|
|
Net
(Loss)
|
|
$ |
(6,146,440 |
) |
|
$ |
(3,656,196 |
) |
|
|
|
|
|
|
|
|
|
Net
(Loss) Per Common Share:
|
|
|
|
|
|
|
|
|
Basic
and Diluted
|
|
$ |
(0.06 |
) |
|
$ |
(0.05 |
) |
|
|
|
|
|
|
|
|
|
Weighted
Average Number of Common
|
|
|
|
|
|
|
|
|
Shares
Outstanding
|
|
|
95,683,133
|
|
|
|
79,876,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
Accompanying Notes to Condensed Consolidated Financial
Statements
|
|
STATEMENTS
OF CONDENSED CONSOLIDATED CASH FLOWS
(UNAUDITED)
|
Six
Months Ended
|
|
|
Six
Months Ended
|
|
|
June
30, 2007
|
|
|
June
30, 2006
|
|
Cash
Flows Provided (Required) By
|
|
|
|
|
|
Operating
Activities:
|
|
|
|
|
|
Net
(Loss)
|
$ |
(6,146,440 |
) |
|
$ |
(3,656,196 |
) |
Adjustments
to Reconcile Net (Loss)
|
|
|
|
|
|
|
|
to
Net Cash Provided (Required) By
|
|
|
|
|
|
|
|
Operating
Activities:
|
|
|
|
|
|
|
|
Depreciation
|
|
245,744
|
|
|
|
231,802
|
|
Impairment Loss
|
|
2,605,061
|
|
|
|
0 |
|
Issuance
of Common Stock:
|
|
|
|
|
|
|
|
For
Services Provided – Related Parties
|
|
1,234,498
|
|
|
|
1,187,400
|
|
For
Services Provided – Other
|
|
908,967
|
|
|
|
311,900
|
|
Changes
in:
|
|
|
|
|
|
|
|
Accounts
Receivable
|
|
225,316
|
|
|
|
161,714
|
|
Inventory
|
|
(31,752 |
) |
|
|
57,858
|
|
Prepaid
Expenses
|
|
(208,854 |
) |
|
|
(115,873 |
) |
Deferred
Charges
|
|
565,221
|
|
|
|
(1,264,245 |
) |
Deposits
|
|
(50
|
) |
|
|
(60,000 |
) |
Restricted
Cash
|
|
(1,061 |
) |
|
|
25,096
|
|
Accounts
Payable and Accrued Expenses
|
|
1,100,240
|
|
|
|
(89,539 |
) |
Customer
Deposits
|
|
9,150
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
Net
Cash Provided (Required) By Operating Activities
|
|
506,040
|
|
|
|
(3,210,083 |
) |
|
|
|
|
|
|
|
|
Cash
Flows Provided (Required)
|
|
|
|
|
|
|
|
By
Investing Activities:
|
|
|
|
|
|
|
|
Proceeds
from Sale of Assets
|
|
2,200
|
|
|
|
0
|
|
Acquisitions
of Property, Plant and Equipment
|
|
(1,483,911 |
) |
|
|
(1,383,436 |
) |
Net
Cash (Required) By Investing Activities
|
|
(1,481,711 |
) |
|
|
(1,383,436 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
Accompanying Notes to Condensed Consolidated Financial
Statements
|
|
TIDELANDS
OIL & GAS CORPORATION
STATEMENTS
OF CONDENSED CONSOLIDATED CASH FLOWS
(CONTINUED)
(UNAUDITED)
|
Six
Months Ended
|
|
|
Six
Months Ended
|
|
|
June
30, 2007
|
|
|
June
30, 2006
|
|
Cash
Flows Provided (Required)
|
|
|
|
|
|
by
Financing Activities:
|
|
|
|
|
|
Proceeds
from Stock Subscriptions Receivable
|
|
0
|
|
|
|
110,000
|
|
Proceeds
from Exercise of Stock Option
|
|
550,000
|
|
|
|
0
|
|
Proceeds
from Long-Term Loans
|
|
0
|
|
|
|
6,678,415
|
|
Proceeds
from Short-Term Loan
|
|
143,996
|
|
|
|
0
|
|
Repayment
of Loan by Related Party
|
|
0
|
|
|
|
3,219
|
|
|
|
|
|
|
|
|
|
Net
Cash Provided by Financing Activities
|
|
693,996
|
|
|
|
6,791,634
|
|
|
|
|
|
|
|
|
|
Net
Increase (Decrease) in Cash
|
|
(281,675 |
) |
|
|
2,198,115
|
|
|
|
|
|
|
|
|
|
Cash
at Beginning of Period
|
|
367,437
|
|
|
|
1,113,911
|
|
|
|
|
|
|
|
|
|
Cash
at End of Period
|
$ |
85,762
|
|
|
$ |
3,312,026
|
|
|
|
|
|
|
|
|
|
Supplemental
Disclosures of Cash Flow Information:
|
|
|
|
|
|
|
|
Cash
Payments for Interest
|
$ |
103,301
|
|
|
$ |
408,657
|
|
|
|
|
|
|
|
|
|
Cash
Payments for Income Taxes
|
$ |
0
|
|
|
$ |
0
|
|
|
|
|
|
|
|
|
|
Non-Cash
Investing and Financing Activities:
|
|
|
|
|
|
|
|
Issuance
of Common Stock:
|
|
|
|
|
|
|
|
Payments
of Accrued Expenses & Accounts Payable
|
$ |
343,244
|
|
|
$ |
445,000
|
|
Conversion
of Debentures
|
|
2,000,000
|
|
|
|
0
|
|
Legal
Fee – Retainer
|
|
130,566
|
|
|
|
0
|
|
Prepaid
Legal Fees
|
|
54,166
|
|
|
|
0
|
|
Cancellation
of Common Stock:
|
|
|
|
|
|
|
|
In
Payment of Stock Subscription
|
|
(110,000 |
) |
|
|
0
|
|
Total
Non-Cash Investing and Financing Activities
|
$ |
2,417,976
|
|
|
$ |
445,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
Accompanying Notes to Condensed Consolidated Financial
Statements
|
|
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2007
(UNAUDITED)
NOTE
1–BASIS OF PRESENTATION
The
accompanying unaudited condensed consolidated financial statements for the
six
month periods ended June 30, 2007, and 2006, have been prepared in conformity
with accounting principles generally accepted in the United States of America
for interim financial information and with the instructions to Form 10-Q
and
Regulation S-X. Please note that the prior year’s presentations for
the Condensed Consolidated Statement of Operations and the Condensed
Consolidated Statements of Cash Flows were changed to conform to current
year’s
presentation. The financial information as of December 31, 2006, is
derived from the registrant’s Form 10-K for the year ended December 31,
2006. Certain information or footnote disclosures normally included
in financial statements prepared in accordance with accounting principles
generally accepted in the United States of America have been condensed or
omitted pursuant to the rules and regulations of the Securities and Exchange
Commission.
The
preparation of condensed consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those
estimates. In the opinion of management, the accompanying financial
statements include all adjustments necessary (which are of a normal and
recurring nature) for the fair presentation of the results of the interim
periods presented. While the registrant believes that the disclosures
presented are adequate to keep the information from being misleading, it is
suggested that these accompanying financial statements be read in conjunction
with the registrant’s audited consolidated financial statements and notes for
the year ended December 31, 2006, included in the registrant’s Form 10-K for the
year ended December 31, 2006.
Operating
results for the six-month period ended June 30, 2007, are not necessarily
indicative of the results that may be expected for the remainder of the fiscal
year ending December 31, 2007. The accompanying unaudited condensed
consolidated financial statements include the accounts of the registrant, its
wholly-owned subsidiaries, Rio Bravo Energy, LLC, Sonora Pipeline, LLC, Sonterra
Energy Corporation, Arrecefe Management, LLC, Marea Associates, LP, Reef
Ventures, LP, Reef International, LLC, Reef Marketing, LLC, Terranova Energia
S.
de R. L. de C. V., Esperanza Energy, LLC, and Tidelands Exploration &
Production Corporation. All significant inter-company accounts and
transactions have been eliminated in consolidation.
TIDELANDS
OIL & GAS CORPORATION
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2007
(UNAUDITED)
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 June 30, 2007, the Company
had approximately $85,762 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– IMPAIRMENT CHARGE
The
Company incurred a non-cash impairment charge as of June 30, 2007, to reflect
the difference between the carrying value and the market value of the affected
asset which is its natural gas pipeline between Eagle Pass, Texas and
Mexico. The charge taken was $2,605,061 which reduced the gross value
on the Company’s books to $3,501,194 from $6,106,255 before taking accumulated
depreciation into account.
TIDELANDS
OIL & GAS CORPORATION
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2007
(UNAUDITED)
NOTE
4– PROPERTY, PLANT AND EQUIPMENT
A
summary
of property, plant and equipment at June 30, 2007 and December 31, 2006 is
as
follows:
|
June
30, 2007
|
|
|
December
31, 2006
|
|
Estimated
Economic Life
|
Pre-Construction
Costs:
|
|
|
|
|
|
|
International
Crossings to Mexico
|
$ |
960,744
|
|
|
$ |
818,271
|
|
N/A
|
Mexican
Gas Storage Facility
|
|
|
|
|
|
|
|
|
and
Related Pipelines
|
|
2,679,894
|
|
|
|
2,359,451
|
|
N/A
|
Domestic
LNG System
|
|
2,572,852
|
|
|
|
1,567,642
|
|
N/A
|
Total
|
|
6,213,490
|
|
|
|
4,745,364
|
|
|
Office
Furniture, Equipment and
|
|
|
|
|
|
|
|
|
Leasehold
Improvements
|
|
182,798
|
|
|
|
185,174
|
|
5
Years
|
Pipeline
– Eagle Pass, TX to Piedras
|
|
|
|
|
|
|
|
|
Negras,
Mexico
|
|
3,501,194
|
|
|
|
6,106,255
|
|
20
Years
|
Tanks
& Lines – Propane Distribution
|
|
|
|
|
|
|
|
|
System
|
|
1,913,163
|
|
|
|
1,908,247
|
|
5
Years
|
Machinery
and Equipment
|
|
75,185
|
|
|
|
67,357
|
|
5
Years
|
Trucks,
Autos and Trailers
|
|
126,464
|
|
|
|
126,464
|
|
5
Years
|
Pipeline
– South TX Gas Production
|
|
490,000
|
|
|
|
490,000
|
|
15
Years
|
Well
Equipment
|
|
2,371
|
|
|
|
2,060
|
|
5
Years
|
Leaseholds
|
|
11,700
|
|
|
|
10,000
|
|
N/A
|
|
|
|
|
|
|
|
|
|
Total
|
|
12,516,365
|
|
|
|
13,640,921
|
|
|
Less:
Accumulated
Depreciation
|
|
|
|
|
|
1,276,562
|
|
|
|
|
|
|
|
|
|
|
|
Net
Property, Plant and Equipment
|
$ |
10,995,265
|
|
|
$ |
12,364,359
|
|
|
Depreciation
expense for the six months ended June 30, 2007 and for the year ended December
31, 2006 was $245,744 and $466,241 respectively.
NOTE
5– LONG-TERM DEBT
A
summary
of long-term debt at June 30, 2007 and December 31, 2006 is as
follows:
|
June
30,
|
|
December
31,
|
|
2007
|
|
2006
|
Note
Payable, Secured by Reef International
|
|
|
|
Pipeline,
Interest Bearing at 2% Over Prime
|
|
|
|
Rate,
Maturing May 25, 2008
|
$ |
4,928,999
|
|
$ |
4,785,003
|
|
|
|
|
|
|
Convertible
Debentures, Unsecured,
|
|
|
|
|
|
Including
Prepaid Interest, Maturing
|
|
|
|
|
|
January
20, 2008
|
|
2,374,291
|
|
|
4,374,291
|
|
|
|
7,303,290
|
|
|
9,159,294
|
|
|
|
|
|
|
|
Less:
Current
Maturities
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Long-Term Debt
|
$ |
0
|
|
$ |
8,934,294
|
TIDELANDS
OIL & GAS CORPORATION
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2007
(UNAUDITED)
NOTE
6– COMMON STOCK TRANSACTIONS
On
April
2, 2007, the Company issued 246,212 shares of its common stock valued at $54,167
to law firm for 2007 legal services related to securities law
matters.
On
April
4, 2007, the Company issued 125,000 shares of its restricted common stock valued
at $25,000 for 2007 investor public relations services.
On
April
10, 2007, the Company issued 1,190,476 shares of its common stock to a Director
for $250,000 as a result of his exercise of stock options at $0.21 per
share.
On
April
16, 2007, the Company issued 53,441 shares of its common stock to a
Director/Officer valued at $8,551 as compensation for services and related
costs.
On
April
18, 2007, the Company issued 50,000 shares of its common stock to an officer
valued at $8,000 in accordance with his employment contract.
On
May 9,
2007, the Company issued 103,478 shares of its common stock to a
Director/Officer valued at $10,348 as compensation for services and related
costs.
On
May
10, 2007, the Company issued 476,190 shares of its common stock to a Director
for $100,000 as a result of his exercise of stock options at $0.21 per
share.
On
May
22, 2007, the Company issued 641,667 shares of its common stock valued at
$77,000 to a law firm for future services regarding ongoing
litigation.
On
May
30, 2007, the Company issued 2,692,308 shares of its common stock valued at
$350,000 for future legal services connected with listing its stock on European
stock exchanges.
On
June
1, 2007, the Company issued 40,663 shares of its common stock to a
Director/Officer valued at $6,099 as compensation for services and related
costs.
On
June
6, 2007, the Company issued a total of 600,000 shares of its restricted common
stock valued at $90,000 as stock bonuses to two officers and an
employee.
TIDELANDS
OIL & GAS CORPORATION
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2007
(UNAUDITED)
NOTE
7– RELATED PARTY TRANSACTION
During
the quarter, the Company issued 197,582 shares of common stock valued at $24,998
to one outside Director for Corporate Secretary services and related
costs.
NOTE
8– 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
OIL & GAS CORPORATION
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2007
(UNAUDITED)
NOTE
8– 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. 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
JUNE
30, 2007
(UNAUDITED)
NOTE
8– LITIGATION (CONTINUED)
Matter
No. 1: (Continued)
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
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.
The
trial
date has been extended to January 9, 2008, by mutual agreement of the litigants
unless a settlement is reached before that date. The parties are
continuing with settlement negotiations and the Company is hopeful that an
agreement will be concluded prior to the end of the year. Based on
negotiations, the Company has reserved $2,250,000 as an estimated litigation
settlement and that amount has been included in this report.
TIDELANDS
OIL & GAS CORPORATION
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2007
(UNAUDITED)
NOTE
8– LITIGATION (CONTINUED)
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.
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 trial date will likely be reset in September
2007; however, the Company expects to file a motion for summary judgment prior
to September 1st.
TIDELANDS
OIL & GAS CORPORATION
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2007
(UNAUDITED)
NOTE
8– LITIGATION (CONTINUED)
Matter
No. 4:
Cause
No.
2007-CI-07451, Michael R. Ward vs. Tidelands Oil & Gas Corporation, was
filed on May 17, 2007 in the 224th District
Court of
Bexar County, Texas. This case involves two claims by the Plaintiff, Michael
R.
Ward, the former President and CEO of Tidelands Oil & Gas Corporation
against the Company. The first claim is for a breach of the Letter Agreement
dated December 8, 2006 alleging a failure to pay Ward’s salary for the months of
March through June 2007 pursuant to the terms of said Letter Agreement. The
second claim involves an allegation by Ward that the Company prevented Ward
from
selling 1,650,000 shares of Company stock during the period of February 20,
2007
through April 4, 2007 and that Ward suffered economic damages as a result
of a
decline in share price during the relevant time periods. The Company filed
a
general denial on June 27, 2007. On July 18, 2007, Plaintiff Ward filed a
Motion
for Partial Summary Judgment with respect to the first claim for breach of
the
Letter Agreement, a Motion setting the case for trial on the second claim
for
September 28, 2007, and discovery notices. On August 7, 2007, the Company
filed
an abatement request requesting Court ordered mediation pursuant to the Letter
Agreement of December 8, 2006. The Company expects that its request for
mediation will be honored by the Court and that the case will be set for
mediation in September 2007.
Matter
No. 5:
Cause
No.
2007-CI 11661, Bentley Energy Corp. vs. Tidelands Exploration & Production,
Inc. (Please note that the suit was filed with incorrect corporate
name. It should be Tidelands Exploration & Production Corp.)
was filed on August 7, 2007 in the 407th District
Court of
Bexar County, Texas. This case involves a claim for breach of the Joint
Operating Agreement and Participation Agreement between Tidelands Exploration
& Production Corp. (“TEP”) and Bentley Energy Corp. (“BENTLEY”), as Assignee
of Regency Energy, Inc. (“REGENCY”). BENTLEY is majority owned by Michael R.
Ward, the former President and CEO of Tidelands Oil & Gas Corporation, which
is the parent company for TEP. REGENCY is majority owned by Royis Ward, a
former
director of Tidelands Oil & Gas Corporation and the father of Michael R.
Ward. Pursuant to the terms of the Joint Operating Agreement, TEP, as
non-operator, granted REGENCY a lien or security interest in all the oil
and gas
leases and pipelines covered by the Joint Operating Agreement. BENTLEY seeks
foreclosure of these interests due to TEP’s failure to pay joint interest
billings under the Joint Operating Agreement. TEP has not yet filed an answer
to
this lawsuit, but expects to reply in the near future.
TIDELANDS
OIL & GAS CORPORATION
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2007
(UNAUDITED)
NOTE
8– 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, 3, 4 and 5
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 Operations
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, LP and the sale of propane gas to residential customers
through the assets owned by Sonterra Energy Corporation (“Sonterra”). 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
On
July
12, 2007, Sonora Pipeline, LLC (“Sonora”), a wholly-owned subsidiary of the
Company, announced that it had received the following authorizations from
the
Federal Energy Regulatory Commission (“FERC”), with respect to the Mission and
Progreso International Pipelines:
A
Presidential Permit and authorization
to site, construct, operate and maintain two bi-directional border crossing
natural gas facilities at the international boundary between the United States
and Mexico; and
A
Certificate of public convenience and
necessity to site, construct, operate and maintain the United States portion
of
a pipeline system consisting of approximately 29 miles of 30-inch diameter
pipeline and appurtenant facilities that will extend into Mexico via two
border
crossings, all to be located in Hidalgo County, Texas.
These
natural gas pipelines in the United States will interconnect with the pipeline
system being developed by another wholly-owned subsidiary of the Company,
Terranova Energia, S. de R.L. de C.V. (“Terranova”). Terranova previously
received approval from the Comision Reguladora de Energia (“CRE”) for the
interconnecting pipeline segments in Mexico on May 23, 2006.
The
pipeline systems in the United States and Mexico are known as the Burgos
Hub
Export/Import Project which is being developed to serve the demand for
importation of natural gas into Mexico, which is expected to increase
dramatically beginning in the year 2010. The pipelines will also be
interconnected with a proposed underground natural gas storage facility being
developed by Terranova to serve Mexican power generation and industrial customer
needs for management of swings in demand and seasonal spread in natural gas
prices. Terranova has previously applied for a permit to construct and operate
the storage facility with the CRE and is expecting a decision on the application
in the third quarter of 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 early 2008. 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 JUNE 30, 2007 COMPARED TO THREE MONTHS ENDED JUNE 30,
2006
REVENUES:
The Company reported revenues of $483,999 for the three months ended June
30,
2007 compared to revenues of $407,124 for the three months ended June 30,
2006
which is an improvement of 18.9 percent for the three months ended June 30,
2007
versus the three months ended June 30, 2006. The revenue increase resulted
from
increasing volumes and product prices for propane sold by our Sonterra Energy
Corporation subsidiary to residential customers.
TOTAL
COSTS AND EXPENSES: Total Costs and Expenses for the three months ended June
30,
2007 were $4,179,482 versus $2,395,791 for the three months ended June 30,
2006.
The primary reason for the increase in Total Costs and Expenses was the non-cash
impairment loss of $2,605,061 incurred during the three months ended June
30,
2007 versus no impairment loss for the three months ended June 30,
2006.
NET
INCOME (LOSS): Net Loss for the three months ended June 30, 2007 was
($3,695,084) versus the Net Loss of ($1,960,548) for the three months ended
June
30, 2006. The Impairment Loss of ($2,605,061) materially affected the increase
in Net Loss but was offset by significant revenue increases and decreases
in
other costs and expenses for the three months ended June 30, 2007 versus
the
three months ended June 30, 2006.
SIX
MONTHS ENDED JUNE 30, 2007 COMPARED TO SIX MONTHS ENDED JUNE 30,
2006
REVENUES: The
Company reported revenues of $1,587,970 for the six months ended June 30,
2007
as compared with revenues of $1,209,018 for the six months ended June 30,
2006,
which is a 31% increase in revenue for the six months ended June 30, 2007
compared to the six months ended June 30, 2006. Revenues from Reef Ventures,
LP
decreased to $78,533 for the six months ended June 30, 2007 compared to $123,076
for the six months ended June 30, 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 $1,472,492
for the six months ended June 30, 2007 compared to $ 1,085,942 for the six
months ended June 30, 2006. Gas sales at Sonterra increased to $1,291,776
for
the six months ended June 30, 2007 compared to $941,538 for the six months
ended
June 30, 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 increased to $180,716 for the six months ended June
30,
2007 compared to $144,404 for the six months ended June 30, 2006. Revenues
from
Tidelands Exploration & Production Corporation were $36,945 for the six
months ended June 30, 2007 compared to $0 for the six months ended June 30,
2006.
TOTAL
COSTS AND EXPENSES: Total costs and expenses increased to $7,735,434
for the six months ended June 30, 2007 compared to $4,926,953 for the six
months
ended June 30, 2006. The most significant increase in costs occurred from
an
impairment loss of $2,605,061 incurred with respect to the natural gas pipeline
owned by Reef Ventures, LP.
COST
OF
SALES: Cost of sales increased to $774,597 for the six months ended
June 30, 2007 compared to $583,279 for the six months ended June 30, 2006.
The
increase was due primarily to increased cost and volume of propane sold through
our Sonterra Energy Corporation subsidiary. Cost of sales for Tidelands
Exploration & Production Corporation were $13,740 for the six months ended
June 30, 2007 compared to $0 for the six months ended June 30,
2006.
OPERATING
EXPENSES: Operating expenses decreased to $176,103 for the six months
ended June 30, 2007 compared to $184,118 for the six months ended June 30,
2006.
This decrease was primarily attributable to reduced operating costs from
Sonterra Energy Corporation.
DEPRECIATION
EXPENSE: Depreciation Expense increased to $245,744 for the six months ended
June 30, 2007 compared to $231,802 for the six months ended June 30, 2006.
The
increase in depreciation expense is primarily from the additions of depreciable
property in the Tidelands Exploration & Production Corporation
subsidiary.
INTEREST
EXPENSE: Interest expense increased to $528,426 for the six months
ended June 30, 2007 compared to $485,009 for the six months ended June 30,
2006.
The increase of $43,417 resulted primarily from additional interest expense
associated with the promissory note due to Impact International, LLC and
the
increased write-off of prepaid interest relating to a 2006 financing
transaction.
STOCK-BASED
COMPENSATION – RELATED PARTIES: Stock-based compensation to related parties
increased to $1,234,498 for the six months ended June 30, 2007 compared to
$1,187,400 for the six months ended June 30, 2006. The increase resulted
primarily from Directors’ Fees of $1,100,000 less a reduction of stock-based
compensation paid to the Chief Executive Officer.
STOCK-BASED
COMPENSATION – OTHER: Stock-based compensation for services provided by others
increased to $908,967 for the six months ended June 30, 2007 compared to
$311,900 for the six months ended June 30, 2006. The increase of $597,067
was
primarily due to legal fees paid by issuance of common stock.
SALES,
GENERAL AND ADMINISTRATIVE: Sales, General and Administrative Costs
decreased to $2,171,005 for the six months ended June 30, 2007 compared to
$2,255,345 for the six months ended June 30, 2006. This decrease resulted
from
cumulative cost reductions across many categories of Sales, General and
Administrative expenses and was offset by an increase in legal fees and costs
for the three months ended June 30, 2007 as compared with the three months
ended
June 30, 2006.. Of the total Sales, General and Administrative Costs of
$2,171,005 for the six months ended June 30, 2007, $908,917 of these costs
were
paid by issuance of common stock and the remaining $1,262,080 of costs were
paid
with cash.
IMPAIRMENT
LOSS: Impairment Loss increased to $2,605,061 for the six months ended June
30,
2007 as compared to $0 for the six months ended June 30, 2006. The increase
in
loss resulted from a non-cash impairment charge to reflect the difference
between the carrying value and the fair value of the natural gas pipeline
assets
owned by the Company’s subsidiary operations of Reef Ventures, LP. The amount of
impairment charge was derived by reference to a third party valuation of
the
assets based upon current and expected future cash flows from the operation
of
the assets.
INTEREST
AND DIVIDEND INCOME: Interest and Dividend income decreased to $7,874
for the six months ended June 30, 2007 as compared to $61,739 for the six
months
ended June 30, 2006 due to lower cash balances held in interest-bearing accounts
during the six months ended June 30, 2007.
NET
LOSS: Net loss of ($6,146,440) for the six months ended June 30, 2007
represents an increase in loss of ($2,490,244) as compared to net loss of
($3,656,196) for the six months ended June 30, 2006. This increased loss
was
primarily due to the impairment loss of ($2,605,061) for the period ended
June
30, 2007.
LIQUIDITY
AND CAPITAL RESOURCES: The Notes on our financial statements in this Form
10-Q
state that our difficulty in generating sufficient cash flow to meet our
obligations and sustain operations raises substantial doubts about 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 third 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 S. de R.L. de C.V., and also to fund operating overhead at the parent
company level and the possible cost of a litigation settlement or adverse
verdict if a 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 obtain 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 six months ended June 30, 2007, totaled
$1,483,911. 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, and additional machinery and equipment for the operation
of the Sonterra Energy Corporation propane systems. Total debt decreased
from
$13,034,046 at December 31, 2006, to $11,944,188 at June 30, 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 six months
ended June 30, 2007, was ($6,146,440), an increase in net loss of 68.1% from
the
net loss of ($3,656,196) for the six months ended June 30, 2006. Basic and
diluted net loss per common share increased to ($0.06) for the six months
ended
June 30, 2007, as compared to ($0.05) for the six months ended June 30, 2006.
The net loss per share calculation for the six months ended June 30, 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 June 30, 2007, we had
cash
and cash equivalents aggregated $85,762.
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.
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 June 30, 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 June 30, 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 and the 10-Q filed with the
SEC
on May 18, 2007 (the "Prior Reports"). Other than as set forth below and
in the
Prior Reports, 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 8 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 June 30, 2007, the trial date
was been extended to January 9, 2008, 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
Nos. 2 and 3 are described in Note 8 above and the Prior Reports. No
material updates took place in the quarter ended June 30, 2007.
Matter
No. 4
Cause
No.
2007-CI-07451, Michael R. Ward vs. Tidelands Oil & Gas Corporation, was
filed on May 17, 2007 in the 224th District
Court of
Bexar County, Texas. This case involves two claims by the Plaintiff, Michael
R.
Ward, the former President and CEO of Tidelands Oil & Gas Corporation
against the Company. The first claim is for a breach of the Letter Agreement
dated December 8, 2006 alleging a failure to pay Ward’s salary for the months of
March through June 2007 pursuant to the terms of said Letter Agreement. The
second claim involves an allegation by Ward that the Company prevented Ward
from
selling 1,650,000 shares of Company stock during the period of February 20,
2007
through April 4, 2007 and that Ward suffered economic damages as a result
of a
decline in share price during the relevant time periods. The Company filed
a
general denial on June 27, 2007. On July 18, 2007, Plaintiff Ward filed a
Motion
for Partial Summary Judgment with respect to the first claim for breach of
the
Letter Agreement, a Motion setting the case for trial on the second claim
for
September 28, 2007, and discovery notices. On August 7, 2007, the Company
filed
an abatement request requesting Court ordered mediation pursuant to the Letter
Agreement of December 8, 2006. The Company expects that its request for
mediation will be honored by the Court and that the case will be set for
mediation in September 2007.
Matter
No. 5
Cause
No.
2007-CI 11661, Bentley Energy Corp. vs. Tidelands Exploration & Production,
Inc. was filed on August 7, 2007 in the 407th District
Court of
Bexar County, Texas. (Note that the suit was filed with incorrect corporate
name. It should be Tidelands Exploration & Production Corp.) This
case involves a claim for breach of the Joint Operating Agreement and
Participation Agreement between Tidelands Exploration & Production Corp.
(“TEP”) and Bentley Energy Corp. (“BENTLEY”), as Assignee of Regency Energy,
Inc. (“REGENCY”). BENTLEY is majority owned by Michael R. Ward, the former
President and CEO of Tidelands Oil & Gas Corporation, which is the parent
company for TEP. REGENCY is majority owned by Royis Ward, a former director
of
Tidelands Oil & Gas Corporation and the father of Michael R. Ward. Pursuant
to the terms of the Joint Operating Agreement, TEP, as non-operator, granted
REGENCY a lien or security interest in all the oil and gas leases and pipelines
covered by the Joint Operating Agreement. BENTLEY seeks foreclosure of these
interests due to TEP’s failure to pay joint interest billings under the Joint
Operating Agreement. TEP has not yet filed an answer to this lawsuit, but
expects to reply in the near future.
Item
1A. Risk Factors
Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds
The
Company made the following issuances of unregistered securities during the
quarter ended June 30, 2007 (not previously reported in a Form
8-K):
On
April
4, 2007, the Company issued 25,000 shares of its restricted common stock
valued
at $24,875 for consulting services.
On
June
6, 2007, the Company issued 600,000 shares of its restricted common stock
valued
at $90,000 as stock bonuses to three employees.
No
commissions were paid in connection with any of these issuances. 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.
Item
3.
Defaults Upon Senior Securities
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
|
|
|
Chief
Executive Officer and Chief Financial Officer Section 302 Certification
pursuant to Sarbanes - Oxley Act.
|
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Included
with this filing
|
32.1
|
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Chief
Executive Officer-Section 906 Certification pursuant to Sarbanes-Oxley
Act
|
|
Furnished
herewith
|
SIGNATURES
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.
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|
|
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TIDELANDS
OIL & GAS CORPORATION
|
|
|
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Date: August
20, 2007
|
By:
|
/s/ James
B.
Smith
|
|
James
B. Smith, President and Chief Executive
Officer
|