|
|
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
(UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended
|
|
|
Three
Months Ended
|
|
|
|
September
30, 2007
|
|
|
September
30, 2006
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
Gas
Sales and Pipeline Fees
|
|
$ |
332,693
|
|
|
$ |
355,937
|
|
Construction
Services
|
|
|
59,903
|
|
|
|
13,289
|
|
Total
Revenues
|
|
|
392,596
|
|
|
|
369,226
|
|
Costs
and Expenses:
|
|
|
|
|
|
|
|
|
Cost
of Sales
|
|
|
272,083
|
|
|
|
272,631
|
|
Operating
Expenses
|
|
|
85,144
|
|
|
|
102,010
|
|
Depreciation
|
|
|
24,564
|
|
|
|
18,129
|
|
Impairment
Loss
|
|
|
-
|
|
|
|
-
|
|
Stock-Based
Compensation – Related Parties
|
|
|
139,265
|
|
|
|
348,000
|
|
Selling,
General and Administrative
|
|
|
586,053
|
|
|
|
881,528
|
|
Total
Costs and Expenses
|
|
|
1,107,109
|
|
|
|
1,622,298
|
|
|
|
|
|
|
|
|
|
|
Loss
From Operations
|
|
|
(714,513 |
) |
|
|
(1,253,072 |
) |
|
|
|
|
|
|
|
|
|
Other
Income (Expenses)
|
|
|
|
|
|
|
|
|
Loss
on Sale of Assets
|
|
|
(172,555 |
) |
|
|
(4,500 |
) |
Interest
Expense
|
|
|
(245,749 |
) |
|
|
(2,572,249 |
) |
Interest
and Dividend Income
|
|
|
3,077
|
|
|
|
53,500
|
|
Gain
on Sale of Subsidiary
|
|
|
156,480
|
|
|
|
-
|
|
Miscellaneous
|
|
|
95,485
|
|
|
|
(743 |
) |
Total
Other Income (Expenses)
|
|
|
(163,262 |
) |
|
|
(2,523,992 |
) |
|
|
|
|
|
|
|
|
|
Net
Loss
|
|
$ |
(877,775 |
) |
|
$ |
(3,777,064 |
) |
|
|
|
|
|
|
|
|
|
Net
Loss Per Common Share:
|
|
|
|
|
|
|
|
|
Basic
and Diluted
|
|
$ |
(0.01 |
) |
|
$ |
(0.05 |
) |
|
|
|
|
|
|
|
|
|
Weighted
Average Number of Common
|
|
|
|
|
|
|
|
|
Shares
Outstanding
|
|
|
106,425,048
|
|
|
|
82,551,543
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
Accompanying Notes to Condensed Consolidated Financial
Statements
|
|
|
|
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
(UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
30, 2007
|
|
|
September
30, 2006
|
|
|
|
(Restated
- Note 8)
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
Gas
Sales and Pipeline Fees
|
|
$ |
1,739,947
|
|
|
$ |
1,420,551
|
|
Construction
Services
|
|
|
240,619
|
|
|
|
157,693
|
|
Total
Revenues
|
|
|
1,980,566
|
|
|
|
1,578,244
|
|
Costs
and Expenses:
|
|
|
|
|
|
|
|
|
Cost
of Sales
|
|
|
1,237,620
|
|
|
|
1,047,377
|
|
Operating
Expenses
|
|
|
261,247
|
|
|
|
286,128
|
|
Depreciation
|
|
|
79,368
|
|
|
|
58,464
|
|
Impairment
Loss
|
|
|
2,605,061
|
|
|
|
-
|
|
Stock-Based
Compensation – Related Parties
|
|
|
5,011,763
|
|
|
|
1,535,400
|
|
Selling,
General and Administrative
|
|
|
2,757,058
|
|
|
|
3,136,873
|
|
Total
Costs and Expenses
|
|
|
11,952,117
|
|
|
|
6,064,242
|
|
|
|
|
|
|
|
|
|
|
Loss
From Operations
|
|
|
(9,971,551 |
) |
|
|
(4,485,998 |
) |
|
|
|
|
|
|
|
|
|
Other
Income (Expenses)
|
|
|
|
|
|
|
|
|
Loss
on Sale of Assets
|
|
|
(179,443 |
) |
|
|
(4,500 |
) |
Interest
Expense
|
|
|
(774,175 |
) |
|
|
(3,057,258 |
) |
Interest
and Dividend Income
|
|
|
10,951
|
|
|
|
115,239
|
|
Gain
on Sale of Subsidiary
|
|
|
156,480
|
|
|
|
-
|
|
Miscellaneous
|
|
|
95,523
|
|
|
|
(743 |
) |
Total
Other Income (Expenses)
|
|
|
(690,664 |
) |
|
|
(2,947,262 |
) |
|
|
|
|
|
|
|
|
|
Net
Loss
|
|
$ |
(10,662,215 |
) |
|
$ |
(7,433,260 |
) |
|
|
|
|
|
|
|
|
|
Net
Loss Per Common Share:
|
|
|
|
|
|
|
|
|
Basic and Diluted
|
|
$ |
(0.11 |
) |
|
$ |
(0.09 |
) |
|
|
|
|
|
|
|
|
|
Weighted
Average Number of Common
|
|
|
|
|
|
|
|
|
Shares
Outstanding
|
|
|
97,199,835
|
|
|
|
81,516,543
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
Accompanying Notes to Condensed Consolidated Financial
Statements
|
|
TIDELANDS
OIL & GAS CORPORATION
|
|
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
(UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
30, 2007
|
|
|
September
30, 2006
|
|
|
|
(Restated)
|
|
|
|
|
Cash
Flows Provided From
|
|
|
|
|
|
|
Operating
Activities:
|
|
|
|
|
|
|
Net
Loss
|
|
$ |
(10,662,215 |
) |
|
$ |
(7,433,260 |
) |
Adjustments
to Reconcile Net Loss
|
|
|
|
|
|
|
|
|
To
Net Cash Used In
|
|
|
|
|
|
|
|
|
Operating Activities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
333,214
|
|
|
|
345,887
|
|
Loss
on Disposal of Equipment
|
|
|
179,443
|
|
|
|
4,500
|
|
Gain
on Sale of Affiliate
|
|
|
(156,480 |
) |
|
|
-
|
|
Impairment
Loss
|
|
|
2,605,061
|
|
|
|
-
|
|
Issuance
of Common Stock:
|
|
|
|
|
|
|
|
|
For
Services Provided – Related Parties
|
|
|
5,011,763
|
|
|
|
1,535,400
|
|
For
Services Provided – Other
|
|
|
1,049,791
|
|
|
|
375,400
|
|
For
Payment of Interest
|
|
|
-
|
|
|
|
1,696,982
|
|
Changes
in:
|
|
|
|
|
|
|
|
|
Accounts Receivable
|
|
|
(33,708 |
) |
|
|
177,490
|
|
Inventory
|
|
|
(18,285 |
) |
|
|
67,615
|
|
Prepaid Expenses
|
|
|
(153,974 |
) |
|
|
(128,980 |
) |
Deferred Charges
|
|
|
565,221
|
|
|
|
(880,256 |
) |
Deposits
|
|
|
(65,438 |
) |
|
|
(50,000 |
) |
Accounts
Payable and Accrued Expenses
|
|
|
1,272,791
|
|
|
|
219,622
|
|
Customer
Deposits
|
|
|
10,350
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Net
Cash Used In Operating Activities
|
|
|
(62,466 |
) |
|
|
(4,069,600 |
) |
|
|
|
|
|
|
|
|
|
Cash
Flows From
|
|
|
|
|
|
|
|
|
Investing
Activities:
|
|
|
|
|
|
|
|
|
Investment
in Affiliate
|
|
|
(62,601 |
) |
|
|
-
|
|
(Increase)
Decrease in Restricted Cash
|
|
|
(1,478 |
) |
|
|
24,644
|
|
Proceeds
from Sale of Assets
|
|
|
1,310,236
|
|
|
|
21,500
|
|
Acquisitions
of Property, Plant and Equipment
|
|
|
(1,774,175 |
) |
|
|
(2,556,439 |
) |
Net
Cash Used In Investing Activities
|
|
|
(528,018 |
) |
|
|
(2,510,295 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
Accompanying Notes to Condensed Consolidated Financial
Statements
|
|
TIDELANDS
OIL & GAS CORPORATION
|
|
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
(CONTINUED)
|
|
|
|
|
|
|
|
|
(UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
30, 2007
|
|
|
September
30, 2006
|
|
|
|
(Restated)
|
|
|
|
|
Cash
Flows From
|
|
|
|
|
|
|
Financing
Activities:
|
|
|
|
|
|
|
Proceeds
from Stock Subscriptions Receivable
|
|
|
-
|
|
|
|
220,000
|
|
Proceeds
from Exercise of Stock Options
|
|
|
790,000
|
|
|
|
-
|
|
Proceeds
from Long-Term Loans
|
|
|
-
|
|
|
|
6,737,276
|
|
Proceeds
from Short-Term Loans
|
|
|
251,220
|
|
|
|
-
|
|
Repayment
of Long-Term Loans
|
|
|
-
|
|
|
|
(608,750 |
) |
Proceeds
from Repayment of Loan by Related Party
|
|
|
-
|
|
|
|
4,652
|
|
|
|
|
|
|
|
|
|
|
Net
Cash Provided by Financing Activities
|
|
|
1,041,220
|
|
|
|
6,353,178
|
|
|
|
|
|
|
|
|
|
|
Net
Increase (Decrease) in Cash
|
|
|
450,736
|
|
|
|
(226,717 |
) |
|
|
|
|
|
|
|
|
|
Cash
at Beginning of Period
|
|
|
367,437
|
|
|
|
1,113,911
|
|
|
|
|
|
|
|
|
|
|
Cash
at End of Period
|
|
$ |
818,173
|
|
|
$ |
887,194
|
|
|
|
|
|
|
|
|
|
|
Supplemental
Disclosures of Cash Flow Information:
|
|
|
|
|
|
|
|
|
Cash
Payments for Interest
|
|
$ |
125,817
|
|
|
$ |
1,153,116
|
|
|
|
|
|
|
|
|
|
|
Cash
Payments for Income Taxes
|
|
$ |
-
|
|
|
$ |
-
|
|
|
|
|
|
|
|
|
|
|
Non-Cash
Operating, Investing and Financing Activities:
|
|
|
|
|
|
|
|
|
Issuance of Common Stock:
|
|
|
|
|
|
|
|
|
Payments of Accrued Expenses & Accounts Payable
|
|
$ |
343,244
|
|
|
$ |
445,000
|
|
Conversion of Debentures
|
|
|
2,000,000
|
|
|
|
-
|
|
Legal Fee – Retainer
|
|
|
130,616
|
|
|
|
385,542
|
|
Prepaid Legal Fees
|
|
|
27,083
|
|
|
|
-
|
|
Cancellation of Common Stock:
|
|
|
|
|
|
|
|
|
In Settlement of Stock Subscriptions
|
|
|
(220,000 |
) |
|
|
-
|
|
Total
Non-Cash Operating, Investing and Financing Activities
|
|
$ |
2,280,943
|
|
|
$ |
830,542
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
Accompanying Notes to Condensed Consolidated Financial
Statements
|
|
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2007
(UNAUDITED)
NOTE
1–BASIS OF PRESENTATION
The
accompanying unaudited condensed consolidated financial statements for
the
three-month and nine-month periods ended September 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 three-month and nine-month periods ended September 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, Sonterra
Energy Corporation, Arrecefe Management, LLC, 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. The accounts of Tidelands
Exploration and Production Corporation and Sonora Pipeline LLC are shown
up
through the date of sale of the assets or the subsidiary.
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 September 30, 2007, the
Company had approximately $818,173 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.
TIDELANDS
OIL & GAS CORPORATION
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2007
(UNAUDITED)
NOTE
3– IMPAIRMENT CHARGE
The
Company incurred a non-cash impairment charge as of September 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
of the Company’s cost basis to $3,501,194 from $6,106,255 before taking
accumulated depreciation into account.
NOTE
4– SALE OF 80% INTEREST IN THE BURGOS HUB IMPORT/EXPORT PROJECT
On
September 28, 2007, Tidelands Oil & Gas Corporation (the "Company") and its
subsidiary, Terranova Energia S. de R.L. de C.V., entered into an Equity
Purchase Agreement (the "Purchase Agreement") with Grand Cheniere Pipeline,
LLC,
("Cheniere") pursuant to which the Company has sold an 80% interest in
the
Company's "Burgos Hub Project", which, as described in greater detail in
the
Company's annual report filed on Form 10-K, involves the development and
construction of an integrated pipeline project traversing the United States
and
Mexico border and the construction of a related subterranean storage facility
in
Mexico.
In
connection with the Purchase Agreement, the Company formed a new subsidiary,
Frontera Pipeline, LLC, a Delaware limited liability company ("Frontera"),
and
agreed, upon approval of applicable governmental authorities, to transfer
all
rights, permits and assets of the Burgos Hub Project to Frontera. The Company
then sold 80% of the equity interest in Frontera to Cheniere, effectively
providing Cheniere with an 80% ownership stake in the Burgos Hub
Project.
At
the
closing of the transaction, the Company contributed 100% of the ownership
of its
subsidiary, Sonora Pipeline, LLC, (“Sonora”) to Frontera. Sonora has
been engaged in obtaining Federal Energy Regulatory Commission (“FERC”) permits
for two pipelines to be located between the US and Mexico which would be
part of
the Burgos Hub Project.
Pursuant
to the sale of the 80% equity interest in Frontera, the Company (i) received
an
up-front payment of $1 Million and (ii) is eligible to earn three additional,
separate earn-out payments of $4.8 Million, $1.2 Million, and $2.0 Million.
The
Company is also entitled to receive royalty payments based on the capacity
of
transportation or storage service subscribed with the Burgos Hub Project,
ranging from $0.008 per Mmbtu/d for Phase I to $0.002 per Mmbtu/d for Phase
II
to $0.02 per Mmbtu/year for Phase III, subject to certain caps. The earn-out
payments are dependent upon Cheniere electing to proceed with development
of the
Burgos Hub Project, which is divided into three phases, as set forth in
Frontera's Limited Liability Company Agreement (the "Operating Agreement"),
which is filed as an exhibit to Form 8-K filed on October 4, 2007.
Concurrently
with the execution of the Purchase Agreement, Frontera executed an Independent
Consulting Agreement (the "Consulting Agreement") with the Company, pursuant
to
which the Company will be paid $25,000 per month for 24 months for consulting
services in connection with the Burgos Hub Project. The Consulting Agreement
also provides that the Company will not compete with the Burgos Hub Project
for
a period of three years after termination or expiration of the Consulting
Agreement.
TIDELANDS
OIL & GAS CORPORATION
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2007
(UNAUDITED)
NOTE
5– PROPERTY, PLANT AND EQUIPMENT
A
summary
of property, plant and equipment at September 30, 2007 and December 31,
2006 is
as follows:
|
|
|
|
|
|
|
Estimated
|
|
|
September
30,
|
|
|
December
31,
|
|
Economic
|
|
|
2007
|
|
|
2006
|
|
Life
|
Pre-Construction
Costs:
|
|
|
|
|
|
|
|
International
Crossings to Mexico
|
|
$ |
-
|
|
|
$ |
818,271
|
|
N/A
|
Mexican Gas Storage Facility
|
|
|
|
|
|
|
|
|
|
and Related Pipelines
|
|
|
2,761,829
|
|
|
|
2,359,451
|
|
N/A
|
Domestic LNG System
|
|
|
2,709,313
|
|
|
|
1,567,642
|
|
N/A
|
Total
|
|
|
5,471,142
|
|
|
|
4,745,364
|
|
|
Office
Furniture, Equipment and
|
|
|
|
|
|
|
|
|
|
Leasehold
Improvements
|
|
|
182,799
|
|
|
|
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
|
|
|
1,939,750
|
|
|
|
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
|
|
15
Years
|
Well
Equipment
|
|
|
-
|
|
|
|
2,060
|
|
5
Years
|
Leaseholds
|
|
|
-
|
|
|
|
10,000
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
11,296,534
|
|
|
|
13,640,921
|
|
|
Less:
Accumulated Depreciation
|
|
|
1,577,853
|
|
|
|
1,276,562
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Property, Plant and Equipment
|
|
$ |
9,718,681
|
|
|
$ |
12,364,359
|
|
|
Depreciation
expense for the nine months ended September 30, 2007 and 2006 was $333,214
and
$345,887, respectively. Depreciation expense for the three months
ended September 30, 2007 and 2006 was $87,470 and $114,085,
respectively.
TIDELANDS
OIL & GAS CORPORATION
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2007
(UNAUDITED)
NOTE
6– LONG-TERM DEBT
A
summary
of long-term debt at September 30, 2007 and December 31, 2006 is as
follows:
|
|
September
30,
|
|
|
December
31,
|
|
|
2007
|
|
|
2006
|
Note
Payable, Secured by Reef International
|
|
|
|
|
|
Pipeline,
Interest Bearing at 2% Over Prime
|
|
|
|
|
|
Rate
Per Annum, Maturing May 25, 2008
|
|
$ |
5,036,223
|
|
|
$ |
4,785,003
|
|
|
|
|
|
|
|
|
Convertible
Debentures, Unsecured, Including
|
|
|
|
|
|
|
|
Prepaid
Interest at 9% Per Annum, Maturing
|
|
|
|
|
|
|
|
January
20, 2008
|
|
|
2,374,291
|
|
|
|
4,374,291
|
|
|
|
7,410,514
|
|
|
|
9,159,294
|
Less:
Current Maturities
|
|
|
7,410,514
|
|
|
|
225,000
|
|
|
|
|
|
|
|
|
Total
Long-Term Debt
|
|
$ |
-
|
|
|
$ |
8,934,294
|
NOTE
7– COMMON STOCK TRANSACTIONS
A
summary
of common stock transactions for the nine months ended September 30,
2007 is as follows:
The
Company issued 500,000 shares of its common stock valued at $135,000 to
the
former President in accordance with the terms of his Severance
Agreement.
The
Company issued 7,436,618 shares of its common stock valued at $1,274,620
to four
law firms for legal services related to securities law matters, various
litigation and other Company legal needs.
The
Company cancelled 1,000,000 shares of its common stock valued at $220,000
held
by the President and a former officer which were offset against stock
subscriptions due from them to the Company.
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.
The
Company issued 345,000 shares of its restricted common stock valued at
$70,000
for 2006 and 2007 investor public relations services.
TIDELANDS
OIL & GAS CORPORATION
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2007
(UNAUDITED)
NOTE
7– COMMON STOCK TRANSACTIONS (CONTINUED)
The
Company issued 2,642,858 shares of its common stock valued at $550,000
to each
of two Directors for a total of 5,285,716 shares valued at
$1,100,000. 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 Directors represents their
compensation for 2007.
The
Company issued 69,000 shares of its restricted common stock valued at $14,490
for preparation of a Research Report.
The
Company issued 4,619,047 shares to a Director for $790,000 as a result
of his
exercise of 2,619,047 stock options at $0.21 per share and 2,000,000 stock
options at $0.12 per share.
The
Company issued 376,819 shares of its common stock valued at $54,873 to
a
Director for Corporate Secretary services and related costs.
The
Company issued 527,778 shares of its common stock valued at $100,139 to
two
Officer/employees in accordance with their employment contracts.
The
Company issued 312,500 shares of its restricted common stock valued at
$62,313
to three employees as stock bonuses.
The
Company issued 112,500 shares of its common stock valued at $20,813 to
two
employees as stock bonuses.
The
Company issued a total of 550,000 shares of its restricted common stock
valued
at $84,250 to two of its Officers as stock bonuses.
The
Company issued a total of 50,000 shares of its common stock valued at $8,000
to
Officers as a stock bonus.
TIDELANDS
OIL & GAS CORPORATION
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2007
(UNAUDITED)
NOTE
8– SUMMARY OF RESTATED INTERIM REPORTS
On
November 14, 2007, the Board of Directors of the Company determined that
the
accounting treatment of certain options issued to its directors (the “Options”)
originally reported on its (i) Quarterly Report of Form 10-Q for the three
months ended March 31, 2007, and (ii) Quarterly Report for the three and
six
months ended June 30, 2007 (the “Prior Reports”), was incorrect and required
revision. Therefore, the Board of Directors has determined that the
financial statements in the Company’s Prior Reports should not be relied upon
and should be restated.
The
adjustments to the Prior Reports listed below correct the accounting
treatment
of the Options to comply with the provisions of Financial Accounting
Standards
Board Statement No. 123 Share Based Payment (FAS 123(R)). FAS 123(R) was
adopted by the Company on January 1, 2006; however, with respect to the
Options,
the Company inadvertently failed to record the appropriate expense for
such
Options in accordance with FAS 123(R).
The
Company uses the Black-Scholes option pricing model to compute the fair
value of
stock options, which requires the Company to make the following
assumptions:
§
|
The
risk-free interest rate is based on the short-term Treasury bond
at date
of grant.
|
§
|
The
dividend yield on the Company’s common stock is assumed to be zero since
the Company does not pay dividends and has no current plans to
do
so.
|
§
|
The
market price volatility of the Company’s common stock is based on daily
historical prices for the twelve months previous to the grant
date.
|
§
|
The
term of the grants is the current year since all grants are vested
at the
time of the grants; therefore, the entire fair value of stock-based
compensation was recorded in 2007.
|
The
Company has now recognized the fair value stock option compensation expense
as
follows:
Quarterly
Report of 10-Q for the Three Months
|
|
|
Ended
March 31, 2007
|
|
$ |
2,667,000
|
Quarterly
Report of 10-Q for the Three Months
|
|
|
|
Ended
June 30, 2007
|
|
|
971,000
|
Total
for the Six Months Ended June 30, 2007
|
|
$ |
3,638,000
|
TIDELANDS
OIL & GAS CORPORATION
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2007
(UNAUDITED)
NOTE
8– SUMMARY OF RESTATED INTERIM REPORTS (CONTINUED)
The
transactions referred to above relate to non-cash charges and did not affect
the
Company’s revenues, cash flows from operations, liquidity, assets, liabilities
or total stockholders’ equity.
|
|
Three
Months Ended March 31, 2007
|
|
|
Previously
|
|
|
|
|
Restatement
|
|
|
Restated
|
|
|
|
Reported
|
|
|
|
|
Adjustment
|
|
|
Amount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
Balance Sheets:
|
|
|
|
|
|
|
|
|
|
|
|
Total
Assets
|
|
$ |
15,475,483
|
|
|
|
|
$ |
-
|
|
|
$ |
15,475,483
|
|
Total
Liabilities
|
|
|
11,531,967
|
|
|
|
|
|
-
|
|
|
|
11,531,967
|
|
Stockholders’
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
98,690
|
|
|
|
|
|
-
|
|
|
|
98,690
|
|
Additional Paid-in Capital
|
|
|
50,823,250
|
|
(1) |
|
|
|
2,667,000
|
|
|
|
53,490,250
|
|
Subscriptions Receivable
|
|
|
(110,000 |
) |
|
|
|
|
-
|
|
|
|
(110,000 |
) |
Accumulated Deficit
|
|
|
(46,868,424 |
) |
(3) |
|
|
|
(2,667,000 |
) |
|
|
(49,535,424 |
) |
Total
Stockholders’ Equity
|
|
$ |
3,943,516
|
|
|
|
|
$ |
-
|
|
|
$ |
3,943,516
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
Statement of Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
1,103,971
|
|
|
|
|
$ |
-
|
|
|
$ |
1,103,971
|
|
Expenses
|
|
|
3,555,952
|
|
(2) |
|
|
|
2,667,000
|
|
|
|
6,222,952
|
|
Net
(Loss) from Operations
|
|
|
(2,451,981 |
) |
|
|
|
|
(2,667,000 |
) |
|
|
(5,118,981 |
) |
Other
Income
|
|
|
625
|
|
|
|
|
|
-
|
|
|
|
625
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(Loss)
|
|
$ |
(2,451,356 |
) |
|
|
|
$ |
(2,667,000 |
) |
|
$ |
(5,118,356 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(Loss) per Common Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and Diluted
|
|
$ |
(0.03 |
) |
|
|
|
|
|
|
|
$ |
(0.06 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
Average Number of Common Shares Outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and Diluted
|
|
|
92,573,416
|
|
|
|
|
|
|
|
|
|
92,573,416
|
|
(1)
|
Adjust
additional paid-in capital to record fair value of stock
options
issued.
|
(2)
|
Adjust
expenses to reflect fair value of stock-based
compensation.
|
(3)
|
Adjust
accumulated deficit to reflect additional losses as a result
of
stock-based compensation expense.
|
TIDELANDS
OIL & GAS CORPORATION
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2007
(UNAUDITED)
NOTE
8– SUMMARY OF RESTATED INTERIM REPORTS (CONTINUED)
|
|
Six
Months Ended June 30, 2007
|
|
|
|
Previously
|
|
|
|
|
Restatement
|
|
|
Restated
|
|
|
Reported
|
|
|
|
|
Adjustment
|
|
|
Amount
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
Balance Sheets:
|
|
|
|
|
|
|
|
|
|
|
|
Total
Assets
|
|
$ |
13,171,782
|
|
|
|
|
$ |
-
|
|
|
$ |
13,171,782
|
|
Total
Liabilities
|
|
|
11,944,188
|
|
|
|
|
|
-
|
|
|
|
11,944,188
|
|
Stockholders’ Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
104,909
|
|
|
|
|
|
-
|
|
|
|
104,909
|
|
Additional Paid-in Capital
|
|
|
51,796,193
|
|
(1) |
|
|
|
|
3,638,000
|
|
|
|
55,434,193
|
|
Subscriptions Receivable
|
|
|
(110,000
|
) |
|
|
|
|
|
-
|
|
|
|
(110,000
|
) |
Accumulated Deficit
|
|
|
(50,563,508
|
) |
(3) |
|
|
|
|
(3,638,000
|
) |
|
|
(54,201,508
|
) |
Total
Stockholders’ Equity
|
|
$ |
1,227,594
|
|
|
|
|
|
$ |
-
|
|
|
$ |
1,227,594
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
Statement of Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
1,587,970
|
|
|
|
|
|
$ |
-
|
|
|
$ |
1,587,970
|
|
Expenses
|
|
|
7,735,434
|
|
(2) |
|
|
|
|
3,638,000
|
|
|
|
11,373,434
|
|
Net
(Loss) from Operations
|
|
|
(6,147,464
|
) |
|
|
|
|
|
(3,638,000
|
) |
|
|
(9,785,464
|
) |
Other Income
|
|
|
1,024
|
|
|
|
|
|
|
-
|
|
|
|
1,024
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(Loss)
|
|
$ |
(6,146,440 |
) |
|
|
|
|
$ |
(3,638,000 |
) |
|
$ |
(9,784,440 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(Loss) per Common Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and Diluted
|
|
$ |
(0.06 |
) |
|
|
|
|
|
|
|
|
$ |
(0.10 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
Average Number of Common Shares Outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and Diluted
|
|
|
95,683,133
|
|
|
|
|
|
|
|
|
|
|
95,683,133
|
|
(1)
|
Adjust
additional paid-in capital to record fair value of stock
options
issued.
|
(2)
|
Adjust
expenses to reflect fair value of stock-based
compensation.
|
(3)
|
Adjust
accumulated deficit to reflect additional losses as a result
of
stock-based compensation expense.
|
TIDELANDS
OIL & GAS CORPORATION
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2007
(UNAUDITED)
NOTE
9– STOCK OPTIONS, STOCK WARRANTS AND SHARES RESERVED FOR CONVERTIBLE
DEBENTURES
The
following table presents the activity for options, warrants and shares
reserved
for issuance upon conversion of outstanding convertible debentures for
the nine
months ending September 30, 2007.
|
|
|
|
|
|
|
|
Shares
Reserved
|
|
|
|
|
|
Weighted
|
|
|
Stock
|
|
|
Stock
|
|
|
for
Convertible
|
|
|
|
|
|
Average
|
|
|
Options
|
|
|
Warrants
|
|
|
Debentures
|
|
|
Shares
|
|
|
Exercise
Price
|
Outstanding
– December 31, 2006
|
|
|
250,000
|
|
|
|
18,138,051
|
|
|
|
5,027,916
|
|
|
|
23,415,967
|
|
|
$ |
1.070
|
First
Quarter
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
/ Issued
|
|
|
15,000,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
15,000,000
|
|
|
|
0.210
|
Exercised/Converted
|
|
|
(952,381 |
) |
|
|
-
|
|
|
|
(2,298,848 |
) |
|
|
(3,251,229 |
) |
|
|
0.677
|
Expired
|
|
|
-
|
|
|
|
(7,551,432 |
) |
|
|
-
|
|
|
|
(7,551,432 |
) |
|
|
1.275
|
Cancelled
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
Outstanding
– March 31, 2007
|
|
|
14,297,619
|
|
|
|
10,586,619
|
|
|
|
2,729,068
|
|
|
|
27,613,306
|
|
|
|
0.598
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second
Quarter
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
/ Issued
|
|
|
10,000,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
10,000,000
|
|
|
|
0.120
|
Exercised/Converted
|
|
|
(1,666,666 |
) |
|
|
-
|
|
|
|
-
|
|
|
|
(1,666,666 |
) |
|
|
0.210
|
Expired
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
Cancelled
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
Outstanding
– June 30, 2007
|
|
|
22,630,953
|
|
|
|
10,586,619
|
|
|
|
2,729,068
|
|
|
|
35,946,640
|
|
|
|
0.483
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third
Quarter
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
/ Issued
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
Exercised/Converted
|
|
|
(2,000,000 |
) |
|
|
-
|
|
|
|
-
|
|
|
|
(2,000,000 |
) |
|
|
0.120
|
Expired
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
Cancelled
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
Outstanding
– September 30, 2007
|
|
|
20,630,953
|
|
|
|
10,586,619
|
|
|
|
2,729,068
|
|
|
|
33,946,640
|
|
|
$ |
0.504
|
TIDELANDS
OIL & GAS CORPORATION
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2007
(UNAUDITED)
NOTE
10– SEGMENT REPORTING
The
following tables are summaries of the results of operations and other financial
information by major segment for the three months and nine months ended
September 30, 2007 and 2006:
Third
Quarter 2007
|
|
Propane
Sales
|
|
|
Pipeline
|
|
|
All
Other
|
|
|
|
|
|
|
and
Related
|
|
|
Transportation
|
|
|
and
|
|
|
|
|
|
|
Services
|
|
|
Fees
|
|
|
Corporate
|
|
|
Total
|
|
Revenue
|
|
$ |
366,356
|
|
|
$ |
17,848
|
|
|
$ |
8,392
|
|
|
$ |
392,596
|
|
Depreciation
|
|
$ |
31,877
|
|
|
$ |
43,765
|
|
|
$ |
11,828
|
|
|
$ |
87,470
|
|
Interest
|
|
$ |
392
|
|
|
$ |
-
|
|
|
$ |
245,357
|
|
|
$ |
245,749
|
|
Net
(Loss)
|
|
$ |
(16,654 |
) |
|
$ |
(41,883 |
) |
|
$ |
(819,238 |
) |
|
$ |
(877,775 |
) |
Total
Assets
|
|
$ |
2,475,818
|
|
|
$ |
2,399,878
|
|
|
$ |
8,192,342
|
|
|
$ |
13,068,038
|
|
2007
Year to Date
|
|
Propane
Sales
|
|
|
Pipeline
|
|
|
All
Other
|
|
|
|
|
|
|
and
Related
|
|
|
Transportation
|
|
|
and
|
|
|
|
|
|
|
Services
|
|
|
Fees
|
|
|
Corporate
|
|
|
Total
|
|
Revenue
|
|
$ |
1,838,848
|
|
|
$ |
96,381
|
|
|
$ |
45,337
|
|
|
$ |
1,980,566
|
|
Depreciation
|
|
$ |
95,630
|
|
|
$ |
196,421
|
|
|
$ |
41,163
|
|
|
$ |
333,214
|
|
Interest
|
|
$ |
1,871
|
|
|
$ |
-
|
|
|
$ |
772,304
|
|
|
$ |
774,175
|
|
Net
Income (Loss)
|
|
$ |
266,154
|
|
|
$ |
(2,799,833 |
) |
|
$ |
(8,128,536 |
) |
|
$ |
(10,662,215 |
) |
Total
Assets
|
|
$ |
2,475,818
|
|
|
$ |
2,399,878
|
|
|
$ |
8,192,342
|
|
|
$ |
13,068,038
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third
Quarter 2006
|
|
Propane
Sales
|
|
|
Pipeline
|
|
|
All
Other
|
|
|
|
|
|
|
and
Related
|
|
|
Transportation
|
|
|
and
|
|
|
|
|
|
|
|
Services
|
|
|
Fees
|
|
|
Corporate
|
|
|
|
Total
|
|
Revenue
|
|
$ |
288,664
|
|
|
$ |
80,562
|
|
|
$ |
-
|
|
|
$ |
369,226
|
|
Depreciation
|
|
$ |
31,221
|
|
|
$ |
76,329
|
|
|
$ |
6,535
|
|
|
$ |
114,085
|
|
Interest
|
|
$ |
312
|
|
|
$ |
-
|
|
|
$ |
2,571,937
|
|
|
$ |
2,572,249
|
|
Net
(Loss)
|
|
$ |
(153,478 |
) |
|
$ |
(5,748 |
) |
|
$ |
(3,617,838 |
) |
|
$ |
(3,777,064 |
) |
Total
Assets
|
|
$ |
2,922,274
|
|
|
$ |
5,386,091
|
|
|
$ |
7,923,154
|
|
|
$ |
16,231,519
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
Year to Date
|
|
Propane
Sales
|
|
|
Pipeline
|
|
|
All
Other
|
|
|
|
|
|
|
and
Related
|
|
|
Transportation
|
|
|
and
|
|
|
|
|
|
|
|
Services
|
|
|
Fees
|
|
|
Corporate
|
|
|
|
Total
|
|
Revenue
|
|
$ |
1,374,606
|
|
|
$ |
203,638
|
|
|
$ |
-
|
|
|
$ |
1,578,244
|
|
Depreciation
|
|
$ |
97,551
|
|
|
$ |
228,985
|
|
|
$ |
19,351
|
|
|
$ |
345,887
|
|
Interest
|
|
$ |
1,402
|
|
|
$ |
-
|
|
|
$ |
3,055,856
|
|
|
$ |
3,057,258
|
|
Net
(Loss)
|
|
$ |
(142,543 |
) |
|
$ |
(56,068 |
) |
|
$ |
(7,234,649 |
) |
|
$ |
(7,433,260 |
) |
Total
Assets
|
|
$ |
2,922,274
|
|
|
$ |
5,386,091
|
|
|
$ |
7,923,154
|
|
|
$ |
16,231,519
|
|
TIDELANDS
OIL & GAS CORPORATION
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2007
(UNAUDITED)
NOTE
11– RELATED PARTY TRANSACTION
During
the nine months ended September 30, 2007, the Company issued 376,819 shares
of
its common stock valued at $54,874 to a Director for Corporate Secretary
services and related costs.
NOTE
12– 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.
This
matter is further described in Tidelands’ Form 10-K for the year ended December
31, 2006 and the Form 10-Q for the three and six months ended June 30,
2007.
No major
developments took place in the quarter ended September 30, 2007, and settlement
negotiations have not been successful to date. A trial date has been set
for January 7, 2008. Based on prior negotiations, the Company has reserved
$2,250,000 as an estimated litigation settlement and that amount has been
included in this report. However, if the matter proceeds to trial,
such reserve may or may not be adequate.
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.
On
May 9,
2007, the trial court found summary judgment against Plaintiff and in favor
of
all Defendants as to the existence of an easement. The judgment
explicitly states that there is an easement for the propane tank and for
our
maintenance of the tank. Plaintiff has now amended his petition to
include a claimed violation of setback requirements for the tank. Jim
Blackwell is in contact with the Texas Railroad Commission regarding the
tank’s
compliance with the setback requirements. At this time, both
Blackwell and Toll Brothers have pending motions for sanctions. On July 5,
2007, Blackwell had a partial hearing on his motion and the trial court
indicated that it would grant sanctions if Plaintiff did not adequately
address
the motion in its pleadings. The matter is ripe for another hearing
on the sanctions motion, but Plaintiff has made a settlement offer to Toll
Brothers that may settle the case. 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 March
2008; however, the Company expects to file a motion for summary judgment
prior
to December 1, 2007.
TIDELANDS
OIL & GAS CORPORATION
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2007
(UNAUDITED)
NOTE
12– 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 the Company’s 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 expected that its request
for
mediation will be honored by the Court; in fact, the case was set for
mediation
in September 2007 (see below).
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.
Both
Matter No. 4 and Matter No. 5 were settled on September 11, 2007, as a
result of
mediation held during September 2007.
Bentley
Energy Corp. purchased a natural gas pipeline interest, working interests
in
operating natural gas wells and a related leasehold with a net book value
of
$480,590 from the Company’s wholly-owned subsidiary, Tidelands Exploration and
Production Corp., for $280,000 and assumption of the $28,036 joint interest
billing owed.
Michael
R. Ward waived unpaid severance salary of $88,116 and all other claims
described
in Matter No. 4 above. Full releases by all parties were included in
the settlement. A copy of the Final Settlement and Release Agreement
was filed as an exhibit to Form 8-K filed with the SEC on October 5,
2007.
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.
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
Port
Esperanza
On
March
7, 2007, Esperanza Energy, LLC (“Esperanza”), a wholly owned subsidiary of the
Company, 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,
is
intended to bring natural gas to the Southern California marketplace.
The
project was designed from inception to address the primary concerns that
have
created public and regulatory stakeholder opposition to other proposed
California LNG import projects. The project has been now been thoroughly
vetted
with the key stakeholders in California, including the environmental
community.
Esperanza plans to formally file its application for a permit to construct,
own
and operate the facilities under the Deep Water Port Act in 2008. The
LNG
receiving facility has attracted the commercial interest of several parties
who
could participate as a gas suppliers or gas purchasers. The Company has
commenced active negotiations with several potential joint venture partners
to
fund the development of the permit application process for the required
Maritime
Administration (“MARAD”) and California state permits. Further progress on this
project is dependent upon the Company securing such additional funding
from
third parties. The anticipated development timeline for the project would
be to
file the MARAD application within six months of receipt of funding for
the
permit application process, followed by approximately eighteen months
for MARAD
permit processing, and then the commencement of construction upon receipt
of the
MARAD permit with targeted commissioning of the project eighteen months
later.
More information is available at www.esperanza-energy.com
Burgos
Hub Authorizations
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:
(1)
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
(2)
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 first quarter of 2008. The current catalog of FERC
correspondence for Sonora’s activities is located at www.ferc.gov under
Docket No. PF07-74 et sequence. See below for additional developments
regarding
the sale of an 80% interest in the Burgos Hub Project.
Ward
Settlement
On
September 11, 2007, the Company settled litigation with Michael R. Ward
and
Bentley Energy Corporation, which resulted in the conveyance of substantially
all the assets of Tidelands Exploration and Production Corporation to
Bentley
Energy Corporation and ended the participation of the Company in an exploration,
production and gas gathering project with Regency Energy, Inc., an entity
owned
by Royis Ward, the father of Michael R. Ward. As a result of the settlement
agreement, the Company received a cash settlement from Mr. Ward in the
amount of
$280,000 on October 1, 2007, the relief of the Company’s liability for joint
interest billings in the amount of $28,036, plus the relief of the Company’s
liability for severance payments to Michael R. Ward in the amount of
$88,116,
which totals to a recovery amount for the Company of $396,152 pursuant
to the
settlement agreement.
Burgos
Hub Project – Sale of 80% Interest
On
September 28, 2007, the Company and its subsidiary, Terranova Energia
S. de R.L.
de C.V., entered into an Equity Purchase Agreement (the "Purchase Agreement")
with Grand Cheniere Pipeline, LLC, ("Cheniere") pursuant to which the
Company
has sold an 80% interest in the Company's "Burgos Hub Project", which,
as
described in greater detail in the Company's annual report filed on Form
10-K,
involves the development and construction of an integrated pipeline project
traversing the United States and Mexico border and the construction of
a related
subterranean storage facility in Mexico.
In
connection with the Purchase Agreement, the Company formed a new subsidiary,
Frontera Pipeline, LLC, a Delaware limited liability company ("Frontera"),
and
agreed, upon approval of applicable governmental authorities, to transfer
all
rights, permits and assets of the Burgos Hub Project to Frontera. The
Company
then sold 80% of the equity interest in Frontera to Cheniere, effectively
providing Cheniere with an 80% ownership stake in the Burgos Hub
Project.
At
the
closing of the transaction, the Company contributed 100% of the ownership
of its
subsidiary, Sonora Pipeline, LLC, (“Sonora”) to Frontera. Sonora has
been engaged in obtaining FERC permits for two pipelines to be located
between
the US and Mexico which would be part of the Burgos Hub Project.
Pursuant
to the sale of the 80% equity interest in Frontera, the Company (i) received
an
up-front payment of $1 Million and (ii) is eligible to earn three additional,
separate earn-out payments of $4.8 Million, $1.2 Million, and $2.0 Million.
The
Company is also entitled to receive royalty payments based on the capacity
of
transportation or storage service subscribed with the Burgos Hub Project,
ranging from $0.008 per Mmbtu/d for Phase I to $0.002 per Mmbtu/d for
Phase II
to $0.02 per Mmbtu/year for Phase III, subject to certain caps. The earn-out
payments are dependent upon Cheniere electing to proceed with development
of the
Burgos Hub Project, which is divided into three phases, as set forth
in
Frontera's Limited Liability Company Agreement (the "Operating Agreement"),
which is filed as an exhibit to Form 8-K filed on October 4, 2007.
Concurrently
with the execution of the Purchase Agreement, Frontera executed an Independent
Consulting Agreement (the "Consulting Agreement") with the Company, pursuant
to
which the Company will be paid $25,000 per month for 24 months, subject
to
certain conditions, for consulting services in connection with the Burgos
Hub
Project. The Consulting Agreement also provides that the Company will
not
compete with the Burgos Hub Project for a period of three years after
termination or expiration of the Consulting Agreement. The Consulting
Agreement is also filed as an exhibit to Form 8-K filed on October 4,
2007.
As
a
result of the transactions with Cheniere Energy, Inc, as noted above,
effective
as of September 28, 2007, the Company now owns a 20% interest in the
Burgos Hub
project which will be held through its ownership in Frontera Pipeline,
LLC.
The
Company believes that significant regulatory changes are likely to occur
within
the next year in connection with the ability of customers in Mexico to
obtain
firm capacity rights for transportation of natural gas on both the National
Pipeline System (operated by PEMEX Gas) and private party owned pipelines.
The
Company believes that these changes would likely result in an increase
in demand
for the reservation of firm capacity rights beyond the current capacities
available in the market area for the Burgos Hub project. If this unbundling
of
pipeline services occurs and customers are then required to pay for firm
capacity rights in order to assure adequate flow of natural gas to their
power
plants, local distribution companies and manufacturing facilities, the
Company
would expect an acceleration of the commercial development opportunity
for the
Burgos Hub pipeline project phases. The Company expects that as part
of this
commercial opportunity, the current pipeline permit in Mexico would be
amended
to include a new segment running from the area near Station 19 of the
National
Pipeline System (southwest of Reynosa, Tamaulipas) to a central distribution
point in Monterrey, Nuevo Leon. This new segment would be constructed
to serve
the power generation, local distribution company and industrial demand
sectors
in the Monterrey area.
The
Company expects that prior to final review of the storage permit filing
for the
Burgos Hub project in 2008, the regulatory scheme for the use of depleted
hydrocarbon reservoirs as gas storage facilities will need to be designed
and
implemented. The Company believes that the outcome of such regulation
could
result in the opportunity for multiple storage facilities to be constructed
in
Mexico. Given the advanced stage of the Burgos Hub storage facility design
and
the already permitted pipelines to and from the proposed Burgos Hub gas
storage
facility, the Company believes that the Burgos Hub project could have
a
significant first-mover advantage over other potentially competitive
proposals
to enlist significant capacity reservation in the storage facility which,
in
turn, would assist in commercial development of the facility.
As
described in greater detail in the Operating Agreement, Cheniere now
has sole
management and control over the Burgos Hub Project. Decisions
regarding whether to proceed with any additional development of the Burgos
Hub
Project are in Cheniere’s sole discretion, although the Company intends to
continue to offer strategic advice and recommendations to Cheniere in
accordance
with the Consulting Agreement.
THREE
MONTHS ENDED SEPTEMBER 30, 2007 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30,
2006
REVENUES:
The Company reported revenues of $392,596 for the three months ended
September
30, 2007 compared to revenues of $369,226 for the three months ended
September
30, 2006 which is an improvement of 6.3 percent for the three months
ended
September 30, 2007 versus the three months ended September 30, 2006.
The revenue
increase resulted from increasing volumes of propane sold by our Sonterra
Energy
Corporation subsidiary to residential customers plus related construction
service increases and initial revenues from the Company’s natural gas wells of
$8,392, which offset a decline in transportation revenue from the Reef
Ventures,
L.P. pipeline crossing into Piedras Negras, Coahuila, Mexico.
TOTAL
EXPENSES: Total Expenses for the three months ended September 30, 2007
were
$1,107,109 versus $1,622,298 for the three months ended September 30,
2006 which
is an improvement of 31.7% for the three months ended September 30, 2007
versus
the three months ended September 30, 2006. The primary reason for the
decrease
in Total Expenses was decreases in operating expenses, stock-based compensation
for related parties and selling, general and administrative expenses
during the
three months ended September 30, 2007 versus these same expense categories
for
the three months ended September 30, 2006.
COST
OF
SALES: Cost of Sales for the three months ended September 30, 2007 were
$272,083
compared to $272,631 for the three months ended September 30, 2006. The
decrease
in cost of sales for Sonterra Energy Corporation was offset by an increase
in
cost of sales from Tidelands Exploration & Production Corporation during the
three months ended September 30, 2007.
OPERATING
EXPENSES: Operating Expenses for the three months ended September 30,
2007 were
$85,144 compared to $102,010 for the three months ended September 30,
2006. The
decrease is attributable to operating efficiencies gained in Sonterra
Energy
Corporation.
DEPRECIATION
EXPENSE: Depreciation Expense for the three months ended September 30,
2007 was
$24,564 compared to $18,129 for the three months ended September 30,
2006. The
increased depreciation expense is attributable to depreciation of additional
depreciable assets held by Tidelands Exploration & Production Corporation
for the three months ended September 30, 2007 as compared with the three
months
ended September 30, 2006.
STOCK-BASED
COMPENSATION – RELATED PARTIES: Stock-Based Compensation – Related Parties for
the three months ended September 30, 2007 was $139,265 compared to $348,000
for
the three months ended September 30, 2006. The decrease was due to reduced
payment of director and officer salaries and fees in the form of stock
options
for the three months ended September 30, 2007 as compared to the three
months
ended September 30, 2006.
SELLING,
GENERAL AND ADMINISTRATIVE: Selling, General and Administrative costs
for the
three months ended September 30, 2007 were $586,053 compared to $881,528
for the
three months ended September 30, 2006. Most of the reduction in these
expenses
was derived from reductions in staff and related overhead costs for the
three
months ended September 30, 2007 versus the three months ended September
30,
2006.
OTHER
INCOME (EXPENSE): Total Other Expenses for the three months ended September
30,
2007 were ($163,262) versus ($2,523,992) for the three months ended September
30, 2006. The primary reason for the substantial decrease in Other Expenses
was
the lack of default interest charges associated with the convertible
debentures
in the three months ended September 30, 2007 versus the three months
ended
September 30, 2006. These default interest charges were a nonrecurring
charge
and were related to a specific nonrecurring event of default on the convertible
debentures.
NET
LOSS:
Net Loss for the three months ended September 30, 2007 was $877,775 versus
the
Net Loss of $3,777,064 for the three months ended September 30, 2006.
The
primary reason for the substantial reduction in loss for the three months
ended
September 30, 2007 versus the three months ended September 30, 2006 was
the
reduction of interest expense from the convertible debentures in combination
with improved operating margins.
NINE
MONTHS ENDED SEPTEMBER 30, 2007 COMPARED TO NINE MONTHS ENDED SEPTEMBER
30,
2006
REVENUES: The
Company reported revenues of $1,980,566 for the nine months ended September
30,
2007 as compared with revenues of $1,578,244 for the nine months ended
September
30, 2006, which is a 25.5% increase in revenue for the nine months ended
September 30, 2007 compared to the nine months ended September 30, 2006.
Revenues from Reef Ventures, LP decreased to $96,381 for the nine months
ended
September 30, 2007 compared to $203,638 for the nine months ended September
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 $1,838,848 for the nine months
ended
September 30, 2007 compared to $1,374,606 for the nine months ended September
30, 2006. Gas sales at Sonterra increased to $1,598,229 for the nine
months
ended September 30, 2007 compared to $1,216,913 for the nine months ended
September 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 $240,619 for the nine months ended
September
30, 2007 compared to $157,693 for the nine months ended September 30,
2006. Revenues from Tidelands Exploration and Production Corp. sales
of natural gas from the Company's working interest in gas wells for the
nine
months ended September 30, 2007, increased to $45,337 as compared to
zero for
the nine months ended September 30, 2006.
TOTAL
EXPENSES: Total expenses increased to $11,952,117 for the nine months
ended September 30, 2007 compared to $6,064,242 for the nine months ended
September 30, 2006. The most significant increases in costs were due
to an
impairment loss of $2,605,061 incurred with respect to the natural gas
pipeline
owned by Reef Ventures, LP and increased in stock-based compensation
paid to
related parties in the amount of $5,011,763 in the form of stock options
for the
nine months ended September 30, 2007 compared to $1,535,400 for the nine
months
ended September 30, 2006.
COST
OF
SALES: Cost of sales increased to $1,237,620 for the nine months
ended September 30, 2007 compared to $1,047,377 for the nine months ended
September 30, 2006. The increase was due primarily to increased volume
of
propane sold through our Sonterra Energy Corporation subsidiary.
OPERATING
EXPENSES: Operating expenses decreased to $261,247 for the nine
months ended September 30, 2007 compared to $286,128 for the nine months
ended
September 30, 2006. This decrease was primarily attributable to reduced
operating costs from Sonterra Energy Corporation attributable to more
efficient
operation of facilities by personnel of Sonterra.
DEPRECIATION
EXPENSE: Depreciation Expense increased to $79,368 for the nine months
ended
September 30, 2007 compared to $58,464 for the nine months ended September
30,
2006. The increase in depreciation expense is primarily from the addition
of
depreciable property in the Tidelands Exploration & Production Corporation
subsidiary.
IMPAIRMENT
LOSS: Impairment Loss increased to $2,605,061 for the nine months ended
September 30, 2007 as compared to $0 for the nine months ended September
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.
STOCK-BASED
COMPENSATION – RELATED PARTIES: Stock-based compensation to related parties
increased to $5,011,763 for the nine months ended September 30, 2007
compared to
$1,535,400 for the nine months ended September 30, 2006 which is an increase
of
$3,476,363. The increase resulted primarily from an increase in stock-based
compensation in the form of stock options granted to the Company
directors.
SELLING,
GENERAL AND ADMINISTRATIVE: Selling, General and Administrative Costs
decreased to $2,757,058 for the nine months ended September 30, 2007
compared to
$3,136,873 for the nine months ended September 30, 2006. This decrease
resulted
from cumulative cost reductions across many categories of expenses partially
offset by an increase in legal fees for the nine months ended September
30, 2007
as compared with the nine months ended September 30, 2006. Of the total
Selling,
General and Administrative Costs of $2,757,058 for the nine months ended
September 30, 2007, $1,049,791 of these costs were paid by issuance of
common
stock and the remaining $1,707,267 of costs were paid with cash or incurred
through reliance on trade credit.
OTHER
INCOME (EXPENSE): Total Other Income (Expenses) decreased to ($690,664)
for the
nine months ended September 30, 2007 compared to ($2,947,262) for the
nine
months ended September 30, 2006. Interest Expense decreased to ($774,175)
for
the nine months ended September 30, 2007 compared to ($3,057,258) for
the nine
months ended September 30, 2006 which is a decrease of $2,283,083 in
Interest
Expense for the nine months ended September 30, 2007 as compared to the
nine
months ended September 30, 2006. This decrease resulted primarily from
the
elimination of default interest charges associated with the convertible
debentures issued in a 2006 financing transaction. (Loss) on Sale of
Assets
increased to ($179,443) for the nine months ended September 30, 2007
compared to
($4,500) for the nine months ended September 30, 2006 due to the disposition
of
the assets of Tidelands Exploration & Production Corp in a legal settlement.
Miscellaneous Income of $95,523, consisting for the most part of the
waiver of
severance salary and related costs by Michael R. Ward pursuant to the
Settlement
Agreement completed with the Company, and Gain on Sale of Subsidiary of $156,480
for the nine months ended September 30, 2007 resulted from the conveyance
of
Sonora Pipeline LLC to Frontera Pipeline LLC as part of the Burgos Hub
Sale with
Cheniere Energy, Inc. and the adjustment of liabilities related to the
assets
sold. Interest and Dividend income decreased to $10,951 for the nine
months
ended September 30, 2007 as compared to $115,239 for the nine months
ended
September 30, 2006 due to lower cash balances held in interest-bearing
accounts
during the nine months ended September 30, 2007 as compared to the nine
months
ended September 30, 2006.
NET
LOSS: Net loss of $10,662,215 for the nine months ended September 30,
2007 represents an increase in loss of $3,228,955 as compared to net
loss of
$7,433,260 for the nine months ended September 30, 2006. This increased
loss was
primarily due to the impairment loss of $2,605,061 and the increase in
stock-based compensation paid to related parties in the amount of $3,476,363
for
the nine months ended September 30, 2007. These increases in costs and
expenses
were partially offset by a reduction in financing costs and interest
expense in
the amount of $2,283,083 and increased operating margins obtained by
the Company
which were, in turn, the result of staff and overhead cost reductions
throughout
the various subsidiaries of the Company and in the parent company, Tidelands
Oil
& Gas Corporation.
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 fourth quarter of 2007.
In
addition to funds required for operating expenses, the Company will need
to
raise funds to pay off the convertible debentures that are due in full
in
January 2008, as well as the notes payable that are due and payable in
full in
May 2008. Management will seek 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 fourth quarter of 2007. Furthermore,
the Company will need to raise additional capital 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, it 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 nine months ended September 30, 2007,
totaled
$1,774,175. 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 liabilities
decreased
from $13,034,046 at December 31, 2006, to $12,225,163 at September 30,
2007. The
decrease in total liabilities is due primarily to the conversion of $2,000,000
of convertible debentures into common stock and was offset by an increase
in
accounts payable. Net loss for the nine months ended September 30, 2007,
was
($10,662,215), an increase in net loss of 43.4% from the net loss of
($7,433,260) for the nine months ended September 30, 2006. Basic and
diluted net
loss per common share increased to ($0.11) for the nine months ended
September
30, 2007, as compared to ($0.09) for the nine months ended September
30,
2006.