tidelands10q033108.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 ended March 31, 2008
|
|
OR
|
|
o
|
TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT
|
|
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 o
Smaller Reporting Company 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
As of May
9, 2008, there were 179,808,334 shares of Common Stock issued and
outstanding.
Transitional
Small Business Disclosure Format: Yes o No
x
TIDELANDS OIL &
GAS CORPORATION
FORM 10-Q
Table of
Contents
TIDELANDS OIL & GAS CORPORATION
|
|
CONSOLIDATED
BALANCE SHEETS
|
|
|
|
|
|
|
|
|
ASSETS
(Unaudited)
|
|
|
|
March
31,
|
|
|
December
31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(Unaudited)
|
|
|
|
|
Current
Assets:
|
|
|
|
|
|
|
Cash
|
|
$ |
11,752 |
|
|
$ |
5,794 |
|
Accounts
and Other Receivable
|
|
|
37,817 |
|
|
|
7,116 |
|
Prepaid
Expenses
|
|
|
120,293 |
|
|
|
177,099 |
|
Current
Portion of Assets of Discontinued Operations
|
|
|
- |
|
|
|
734,713 |
|
Total
Current Assets
|
|
|
169,862 |
|
|
|
924,722 |
|
|
|
|
|
|
|
|
|
|
Property
Plant and Equipment, Net of Accumulated Depreciation of $87,253 and
$81,202, Respectively – Continuing Operations
|
|
|
3,017,417 |
|
|
|
2,953,661 |
|
Property
Plant and Equipment, Net – Discontinued Operations–Held for
Sale
|
|
|
- |
|
|
|
4,118,666 |
|
Total
Property, Plant and Equipment, Net
|
|
|
3,017,417 |
|
|
|
7,072,327 |
|
|
|
|
|
|
|
|
|
|
Investment
in Affiliate - Cost Method
|
|
|
2,809,801 |
|
|
|
2,809,801 |
|
Other
Assets:
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
210,965 |
|
|
|
200,379 |
|
Cash
Restricted
|
|
|
- |
|
|
|
43,467 |
|
Goodwill
|
|
|
- |
|
|
|
800,428 |
|
Non-Current
Portion of Assets of Discontinued Operations–Held for
Sale
|
|
|
- |
|
|
|
386,048 |
|
Total
Other Assets
|
|
|
210,965 |
|
|
|
1,430,322 |
|
|
|
|
|
|
|
|
|
|
Total
Assets
|
|
$ |
6,208,045 |
|
|
$ |
12,237,172 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY (DEFICIT)
|
|
Current
Liabilities:
|
|
|
|
|
|
|
|
|
Current
Maturities – Note Payable
|
|
$ |
1,192,277 |
|
|
$ |
7,533,039 |
|
Accounts
Payable and Accrued Expenses
|
|
|
592,708 |
|
|
|
1,985,829 |
|
Reserve
for Litigation
|
|
|
2,250,000 |
|
|
|
2,250,000 |
|
Current
Portion of Liabilities of Discontinued Operations
|
|
|
- |
|
|
|
743,380 |
|
Due
to Related Party |
|
|
27,258 |
|
|
|
- |
|
Total
Current Liabilities
|
|
|
4,062,243 |
|
|
|
12,512,248 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-Term
Debt
|
|
|
- |
|
|
|
- |
|
Total
Liabilities
|
|
|
4,062,243 |
|
|
|
12,512,248 |
|
|
|
|
|
|
|
|
|
|
Commitments
and Contingencies
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
Stockholders’
Equity (Deficit):
|
|
|
|
|
|
|
|
|
Common
Stock, $.001 Par Value per Share,
|
|
|
|
|
|
|
|
|
250,000,000
Shares Authorized, 178,739,345 and
|
|
|
|
|
|
|
|
|
108,226,836
Shares Issued and Outstanding at March 31,
|
|
|
|
|
|
|
|
|
2008
and December 31, 2007, Respectively
|
|
|
178,740 |
|
|
|
108,227 |
|
Additional
Paid-in Capital
|
|
|
60,380,369 |
|
|
|
55,868,098 |
|
Accumulated
Deficit
|
|
|
(58,413,307 |
) |
|
|
(56,251,401 |
) |
Total
Stockholders’ Equity (Deficit)
|
|
|
2,145,802 |
|
|
|
(275,076 |
) |
|
|
|
|
|
|
|
|
|
Total
Liabilities and Stockholders’ Equity (Deficit)
|
|
$ |
6,208,045 |
|
|
$ |
12,237,172 |
|
|
|
See
Accompanying Notes to Consolidated Financial Statements
|
|
TIDELANDS OIL & GAS CORPORATION
|
|
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
|
(UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended
|
|
|
Three
Months Ended
|
|
|
|
March 31, 2008
|
|
|
March 31, 2007
|
|
|
|
|
(Restated)
|
|
Revenues:
|
|
|
|
|
|
|
Consulting
Fees
|
|
$ |
45,000 |
|
|
$ |
- |
|
Total
Revenues
|
|
|
45,000 |
|
|
|
- |
|
Costs
and Expenses:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
6,051 |
|
|
|
6,329 |
|
Selling,
General and Administrative–Related Parties
|
|
|
- |
|
|
|
2,667,000 |
|
Selling,
General and Administrative
|
|
|
2,773,142 |
|
|
|
2,303,433 |
|
Total
Costs and Expenses
|
|
|
2,779,193 |
|
|
|
4,976,762 |
|
|
|
|
|
|
|
|
|
|
Loss
From Operations
|
|
|
(2,734,193 |
) |
|
|
(4,976,762 |
) |
|
|
|
|
|
|
|
|
|
Other
Income (Expenses)
|
|
|
|
|
|
|
|
|
Interest
Expense
|
|
|
(142,610 |
) |
|
|
(345,497 |
) |
Interest
and Dividend Income
|
|
|
1,215 |
|
|
|
253 |
|
Miscellaneous
|
|
|
10,739 |
|
|
|
- |
|
Total
Other Income (Expenses)
|
|
|
(130,656 |
) |
|
|
(345,244 |
) |
|
|
|
|
|
|
|
|
|
Net
Loss from Continuing Operations
|
|
|
(2,864,849 |
) |
|
|
(5,322,006 |
) |
Net
Income from Operations of Discontinued Segments
|
|
|
|
|
|
|
|
|
Including Gain on Disposal of $844,652 at March 31,
2008 |
|
|
702,943 |
|
|
|
203,650 |
|
Net
Loss
|
|
$ |
(2,161,906 |
) |
|
$ |
(5,118,356 |
) |
|
|
|
|
|
|
|
|
|
Net
Loss Per Common Share: Basic and
Diluted
|
|
|
|
|
|
|
|
|
Net
Loss from Continuing Operations
|
|
$ |
(0.02 |
) |
|
$ |
(0.06 |
) |
Net
Loss from Discontinued Operations
|
|
|
(0.00 |
) |
|
|
(0.00 |
) |
Total
|
|
$ |
(0.02 |
) |
|
$ |
(0.06 |
) |
Weighted
Average Number of Common
|
|
|
|
|
|
|
|
|
Shares
Outstanding, Basic and
Diluted
|
|
|
120,527,961 |
|
|
|
92,573,416 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
Accompanying Notes to Consolidated Financial Statements
|
|
|
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
(UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended
|
|
|
Three
Months Ended
|
|
|
|
March 31, 2008
|
|
|
March 31, 2007
|
|
|
|
|
|
|
(Restated)
|
|
Cash
Flows Provided From
|
|
|
|
|
|
|
Operating
Activities:
|
|
|
|
|
|
|
Net
Income/(Loss)
|
|
|
|
|
|
|
From
Continuing Operations
|
|
$ |
(2,864,849 |
) |
|
$ |
(5,322,006 |
) |
From
Discontinued Operations
|
|
|
702,943 |
|
|
|
203,650 |
|
Adjustments
to Reconcile Net Loss
|
|
|
|
|
|
|
|
|
To
Net Cash Used In
|
|
|
|
|
|
|
|
|
Operating
Activities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
|
|
|
|
|
|
From
Continuing Operations
|
|
|
6,051 |
|
|
|
6,329 |
|
From
Discontinued Operations
|
|
|
43,764 |
|
|
|
116,280 |
|
Gain
on Disposal of Assets
|
|
|
(417,262 |
) |
|
|
- |
|
Gain
on Sale of Subsidiary |
|
|
(427,390 |
) |
|
|
- |
|
Issuance
of Common Stock:
|
|
|
|
|
|
|
|
|
For
Services Provided – Related Parties
|
|
|
- |
|
|
|
2,667,000 |
|
For
Services Provided – Other
|
|
|
2,428,465 |
|
|
|
1,699,033 |
|
Changes
in:
|
|
|
|
|
|
|
|
|
Accounts
Receivable
|
|
|
319,588 |
|
|
|
103,803 |
|
Inventory
|
|
|
224,132 |
|
|
|
(35,448 |
) |
Prepaid
Expenses
|
|
|
136,919 |
|
|
|
52,917 |
|
Deferred
Charges
|
|
|
- |
|
|
|
308,829 |
|
Deposits
|
|
|
(10,228 |
) |
|
|
(150 |
) |
Accounts
Payable and Accrued Expenses
|
|
|
(736,221
|
) |
|
|
706,753 |
|
Customer Deposits
|
|
|
(10,800 |
) |
|
|
8,100 |
|
|
|
|
|
|
|
|
|
|
Net
Cash Provided (Used) In Operating Activities
|
|
|
(604,888 |
) |
|
|
515,090 |
|
|
|
|
|
|
|
|
|
|
Cash
Flows From
|
|
|
|
|
|
|
|
|
Investing
Activities:
|
|
|
|
|
|
|
|
|
Proceeds - Sale of Subsidiary and Other Assets |
|
|
4,902,875 |
|
|
|
- |
|
Decrease of Goodwill |
|
|
1,158,937 |
|
|
|
- |
|
(Increase)
Decrease in Restricted Cash
|
|
|
70,648 |
|
|
|
(608 |
) |
Acquisitions
of Property, Plant and Equipment
|
|
|
(69,807 |
) |
|
|
(906,031 |
) |
Net
Cash Provided Used In Investing Activities
|
|
|
6,062,653 |
|
|
|
(906,639 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
Accompanying Notes to Consolidated Financial Statements
|
|
TIDELANDS
OIL & GAS CORPORATION
|
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
(CONTINUED)
|
|
(UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended
|
|
|
Three
Months Ended
|
|
|
|
March 31, 2008
|
|
|
March 31, 2007
|
|
|
|
|
|
|
(Restated)
|
|
Cash
Flows From
|
|
|
|
|
|
|
Financing
Activities:
|
|
|
|
|
|
|
Cost
of Warrant Buy-Backs |
|
|
(20,714 |
) |
|
|
- |
|
Proceeds
from Exercise of Stock Options
|
|
|
- |
|
|
|
200,000 |
|
Proceeds
from Long-Term Loans
|
|
|
- |
|
|
|
26,314 |
|
Repayment
of Convertible Debentures and Loan |
|
|
(5,538,530 |
) |
|
|
- |
|
Loan
from Related Party
|
|
|
27,258 |
|
|
|
100,000 |
|
|
|
|
|
|
|
|
|
|
Net
Cash Provided (Used) by Financing Activities
|
|
|
(5,531,986 |
) |
|
|
326,314 |
|
|
|
|
|
|
|
|
|
|
Net
(Decrease) in Cash
|
|
|
(74,221 |
) |
|
|
(65,235 |
) |
|
|
|
|
|
|
|
|
|
Cash
at Beginning of Period
|
|
|
85,973 |
|
|
|
367,437 |
|
|
|
|
|
|
|
|
|
|
Cash
at End of Period
|
|
$ |
11,752 |
|
|
$ |
302,202 |
|
|
|
|
|
|
|
|
|
|
Supplemental
Disclosures of Cash Flow Information:
|
|
|
|
|
|
|
|
|
Cash
Payments for Interest
|
|
$ |
151,616 |
|
|
$ |
75,043 |
|
|
|
|
|
|
|
|
|
|
Cash
Payments for Income Taxes
|
|
$ |
- |
|
|
$ |
- |
|
|
|
|
|
|
|
|
|
|
Non-Cash
Activities:
|
|
|
|
|
|
|
|
|
Issuance
of Common Stock:
|
|
|
|
|
|
|
|
|
Operating
Activities
|
|
$ |
2,428,465 |
|
|
$ |
1,699,033 |
|
Payments
of Accrued Expenses & Accounts Payable
|
|
|
197,203 |
|
|
|
343,244 |
|
Conversion
of Debentures
|
|
|
- |
|
|
|
2,000,000 |
|
Payment
of Note Payable |
|
|
1,994,509 |
|
|
|
- |
|
Cashless
Warrant Exercise
|
|
|
16,679 |
|
|
|
- |
|
Conversion
of Accounts Payable to Notes Payable |
|
|
1,192,277 |
|
|
|
- |
|
Cancellation
of Common Stock:
|
|
|
|
|
|
|
|
|
In
Settlement of Stock Subscriptions
|
|
|
- |
|
|
|
(110,000 |
) |
Total
Non-Cash Activities
|
|
$ |
5,829,733 |
|
|
$ |
3,932,277 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
Accompanying Notes to Consolidated Financial Statements
|
|
TIDELANDS OIL & GAS CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2008
(UNAUDITED)
NOTE 1 –BASIS OF
PRESENTATION
The
accompanying unaudited consolidated financial statements for the three-month
periods ended March 31, 2008, and 2007, 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 Consolidated Statement of Operations and the Consolidated Statements of Cash
Flows were changed to conform to current year’s presentation. The
financial information as of December 31, 2007, is derived from the registrant’s
Form 10-K for the year ended December 31, 2007. Certain information
or footnote disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United States of
America that would substantially duplicate the disclosures contained in the
registrant’s Form 10-K for the year ended December 31, 2007, have been condensed
or omitted pursuant to the rules and regulations of the Securities and Exchange
Commission.
The
preparation of 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, 2007, included in
the registrant’s Form 10-K for the year ended December 31, 2007.
Operating
results for the three-month periods ended March 31, 2008, are not necessarily
indicative of the results that may be expected for the remainder of the fiscal
year ending December 31, 2008. The accompanying unaudited
consolidated financial statements include the accounts of the registrant and its
wholly-owned subsidiary, Esperanza Energy, LLC. All significant
inter-company accounts and transactions have been eliminated in
consolidation. The accounts of Sonterra Energy Corporation, Reef
International, LLC, and Reef Marketing, LLC, are shown up through their dates of
sale. The accounts of Reef Ventures, LP, and Arrecefe Management,
LLC, its General Partner, are shown up through the sale of their assets with the
exception of continuing incidental expenses.
NOTE 2 – GOING
CONCERN
The
Company has sustained recurring losses and negative cash flows from
operations. Over 2007, the Company’s growth had been funded through
issuance of convertible debentures. As of March 31, 2008, the Company
had approximately $11,752 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 from 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.
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 CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2008
(UNAUDITED)
NOTE 3 – SALE OF SONTERRA ENERGY
CORPORATION
On
January 9, 2008, the Company sold its wholly-owned subsidiary, Sonterra Energy
Corporation ("Sonterra”), to Bentley Energy Corporation, a company controlled by
our former CEO. Sonterra is a propane distribution company operating
in Central Texas.
The sales
price for Sonterra was $3 million of which $2,925,000 was paid at
closing. The remaining $75,000 is due on or before January 9, 2009,
and is subject to use to defend and pay possible claims from previous legal
actions against Sonterra (See NOTE
11 – Litigation).
The
proceeds of the transaction were primarily utilized to repay all the outstanding
principal balance on the Company’s convertible debentures totaling
$2,374,291.
NOTE 4 – SALE OF THE ASSETS OF REEF
VENTURES, LP
On March
25, 2008, Reef Ventures, L.P. ("Reef Ventures"), a subsidiary of Tidelands Oil
& Gas Corporation (the "Company"), entered into and consummated a Purchase
and Sale Agreement (the "Purchase and Sale Agreement") with West Texas Gas, Inc.
("WTG") for the sale of all of the issued and outstanding membership interests
of Reef International, LLC ("Reef International") and Reef Marketing, LLC ("Reef
Marketing", and collectively with Reef Ventures and Reef International, the
"Reef Entities"), both of which were wholly-owned subsidiaries of Reef Ventures,
and all the assets of the Reef Entities, which consist of assets related to the
"River Crossing Project", the "Carrizo Springs Pipeline System", the "Peña Creek
Gathering System" and the "Chittim Gas Plant" (collectively referred to as the
"Assets").
The total
purchase price for the Assets, after adjustments required by the Purchase and
Sale Agreement, was $2,484,262 (the "Purchase Price") in cash, and the execution
by WTG of a Throughput Payment Agreement (the "Throughput Payment Agreement")
with Impact International, LLC ("Impact").
The
Company caused Reef Ventures to deliver $2,436,825 of the Purchase Price to
Impact on behalf of the Company, as partial repayment of the outstanding
principal and interest of a promissory note made by the Company to Impact dated
May 25, 2004, in the original principal amount of $6,523,773 (the "Note"). The
Company repaid the remainder of the outstanding principal and interest on the
Note by requiring WTG to enter into the Throughput Payment Agreement with Impact
for which Impact credited the outstanding Note balance $876,231, and by issuing
39,890,180 shares (the "New Shares") of the Company's common stock valued at
$0.05 per share, for a total of $1,994,509, to Impact upon the closing of the
Purchase and Sale Agreement. The total consideration described above of
$5,307,505 liquidated the outstanding Note balance in full. The remaining
$47,437 of the Purchase Price received by Reef Ventures was used to pay legal
fees associated with the transaction and for working capital
purposes.
TIDELANDS
OIL & GAS CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2008
(UNAUDITED)
NOTE 5 – DISCONTINUED OPERATIONS AND
ASSETS HELD
Sonterra
Energy Corporation
The sale
of the Company’s wholly-owned subsidiary, Sonterra Energy Corporation, resulted
in gain of approximately $427,000 which was subject to possible future reduction
(See NOTE 11 – Litigation) for the fiscal period ended March 31,
2008.
Reef
Ventures, LP
The sale
of the assets of Reef Ventures, LP, the Company’s 97% owned subsidiary, resulted
in a gain of approximately $417,000 for the fiscal period ended March 31,
2008.
We have
accounted for the sale of these assets in accordance with FAS 144 – Accounting
for the Impairment or Disposal of Long-Lived Assets. Pursuant to FAS
144, we have separated the detail of the individual assets, liabilities and
results from operations of these projects from our consolidated balance sheet
and statement of operations at March 31, 2008, as follows:
|
|
March
31,
|
|
|
December
31,
|
|
|
2008
|
|
|
2007
|
Assets
of Discontinued Subsidiaries:
|
|
|
|
|
|
Cash
|
|
$ |
- |
|
|
$ |
80,179 |
Accounts
and Other Receivables
|
|
|
- |
|
|
|
350,289 |
Inventory
|
|
|
- |
|
|
|
224,132 |
Prepaid
Expenses
|
|
|
- |
|
|
|
80,113 |
Property,
Plant and Equipment, Net
|
|
|
- |
|
|
|
4,118,666 |
Other
Assets
|
|
|
- |
|
|
|
386,048 |
Total
Assets
|
|
$ |
- |
|
|
$ |
5,239,427 |
|
|
|
|
|
|
|
|
Liabilities
of Discontinued Subsidiaries:
|
|
|
|
|
|
|
|
Accounts
Payable and Accrued Expenses
|
|
$ |
- |
|
|
$ |
732,580 |
Customer
Deposits
|
|
|
- |
|
|
|
10,800 |
Total
Liabilities
|
|
$ |
- |
|
|
$ |
743,380 |
|
|
Three
Months Ended
|
|
|
|
March
31,
|
|
|
March
31,
|
|
|
|
2008
|
|
|
2007
|
|
Revenues
of Discontinued Subsidiaries
|
|
$ |
1,397 |
|
|
$ |
1,103,971 |
|
Costs
and Expenses
|
|
|
(143,106 |
) |
|
|
(900,321 |
) |
Gain
on Sale of Reef Ventures, LP’s Assets
|
|
|
417,262 |
|
|
|
- |
|
Gain
on Sale of Sonterra Energy Corporation
|
|
|
427,390 |
|
|
|
- |
|
Net
Income from Discontinued Operations
|
|
$ |
702,943 |
|
|
$ |
203,650 |
|
TIDELANDS
OIL & GAS CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2008
(UNAUDITED)
NOTE 6 – PROPERTY, PLANT AND
EQUIPMENT
A summary
of property, plant and equipment at March 31, 2008 and December 31, 2007 is as
follows:
|
|
|
|
|
|
|
|
Estimated
|
|
|
March
31,
|
|
|
December
31,
|
|
|
Economic
|
|
|
2008
|
|
|
2007
|
|
|
Life
|
Pre-Construction
Costs:
|
|
|
|
|
|
|
|
|
Domestic
LNG System
|
|
$ |
2,968,353 |
|
|
$ |
2,898,546 |
|
|
N/A
|
Total
|
|
|
2,968,353 |
|
|
|
2,898,546 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Office
Furniture, Equipment and Leasehold Improvements
|
|
|
136,317 |
|
|
|
136,317 |
|
|
5
Years
|
Total
|
|
|
3,104,670 |
|
|
|
3,034,863 |
|
|
|
|
Less:
Accumulated Depreciation
|
|
|
87,253 |
|
|
|
81,202 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Property, Plant and Equipment
|
|
$ |
3,017,417 |
|
|
$ |
2,953,661 |
|
|
|
|
Depreciation
expense for the three months ended March 31, 2008 and 2007 was $6,051 and
$6,329, respectively.
A summary
of property, plant and equipment at March 31, 2008 and December 31, 2007 for
Discontinued Operations is as follows:
|
|
|
|
|
|
|
|
Estimated
|
|
|
March
31,
|
|
|
December
31,
|
|
|
Economic
|
|
|
2008
|
|
|
2007
|
|
|
Life
|
Office
Furniture, Equipment and Leasehold
Improvements
|
|
$ |
- |
|
|
$ |
55,086 |
|
|
5
Years
|
Pipeline
– Eagle Pass, TX to Piedras Negras, Mexico
|
|
|
- |
|
|
|
3,501,194 |
|
|
20
Years
|
Tanks
& Lines – Propane Distribution System
|
|
|
- |
|
|
|
1,942,936 |
|
|
5
Years
|
Machinery
and Equipment
|
|
|
- |
|
|
|
71,580 |
|
|
5
Years
|
Trucks,
Autos and Trailers
|
|
|
- |
|
|
|
126,464 |
|
|
5
Years
|
Total
|
|
|
- |
|
|
|
5,697,260 |
|
|
|
|
Less:
Accumulated Depreciation
|
|
|
- |
|
|
|
1,578,594 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Property, Plant and Equipment
|
|
$ |
- |
|
|
$ |
4,118,666 |
|
|
|
|
Depreciation
expense for the three months ended March 31, 2008 and 2007 was $43,765 and
$116,280 respectively, and has
been included in Net Income from
Operations of Discontinued Segments.
TIDELANDS
OIL & GAS CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2008
(UNAUDITED)
NOTE 7 – LONG-TERM
DEBT
A summary
of long-term debt at March 31, 2008 and December 31, 2007 is as
follows:
|
|
March
31,
|
|
|
December
31,
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
Note
Payable, Secured by Reef International Pipeline, Interest Bearing at 2%
Over Prime Rate Per Annum, Maturing May 25, 2008
|
|
$ |
- |
|
|
$ |
5,158,748 |
|
|
|
|
|
|
|
|
Convertible
Debentures, Unsecured, Including Prepaid Interest at 9% Per Annum,
Maturing January 20, 2008
|
|
|
- |
|
|
|
2,374,291 |
|
|
|
|
|
|
|
|
Note
Payable, Unsecured, Interest Bearing at 10% Per Annum, Maturing August 31,
2008 (see below)
|
|
|
1,192,277 |
|
|
|
- |
|
|
|
1,192,277 |
|
|
|
7,533,039 |
Current
Maturities
|
|
|
1,192,277 |
|
|
|
7,533,039 |
|
|
|
|
|
|
|
|
Total
Long-Term Debt
|
|
$ |
- |
|
|
$ |
- |
On
January 21, 2008, the Company issued notes totaling $1,192,277 in payment of
accounts payable and accrued interest due to entities providing various services
to its Port Esperanza LNG Project. These notes, bearing interest at
10% per annum, were originally due April 30, 2008 and have been extended until
August 31, 2008. The Company has paid all interest due as of April
30, 2008, a total of $32,338.
NOTE 8 – COMMON STOCK
TRANSACTIONS
A summary
of common stock transactions for the three months ended March 31, 2008 is as
follows:
The
Company issued 245,252 shares of its common stock valued at $15,816 for
preparation of a study of internal controls and procedures.
The
Company issued 3,083,333 shares each of its common stock to two of its Directors
for Directors Fees valued at $385,417 each.
The
Company issued 3,083,333 shares of its common stock to the President for a
Directors Fee valued at $385,417.
The
Company issued 2,302,217 shares of its common stock for past consulting services
valued at $138,384.66 regarding the Port Esperanza project.
TIDELANDS
OIL & GAS CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2008
(UNAUDITED)
NOTE 8 – COMMON STOCK TRANSACTIONS
(CONTINUED)
The
Company issued 5,300,000 shares of its restricted common stock for consulting
services valued at $386,900.
The
Company issued 211,134 shares of its restricted common stock valued at
$16,679.58 to two holders of the Company Stock Warrants under cashless exercise
provisions which reduced the total number of warrant shares outstanding by
243,616 for purpose of cancellation (See NOTE 9).
The
Company cancelled 2,071,407 Stock Warrants for $20,714, which reduced additional
paid-in capital (See NOTE 9).
The
Company issued 2,599,440 shares of its common stock to settle debts of
$46,400.35 and in payment of an $87,471 financing fee.
The
Company issued 39,890,180 shares of its restricted common stock valued at
$1,994,509 in payment of the balance due Impact International, LLC, after
remitting the net proceeds from the sale of its International Pipeline between
the United States and Mexico to West Texas Gas, Inc.
The
Company issued 3,571,429 shares each of its restricted common stock valued at
$250,000 to two of its Directors in payment of consulting fees for the three
months ended March 31, 2008.
The
Company issued 3,571,429 shares of its common stock valued at $250,000 to the
President pursuant to his employment contract.
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 three
months ending March 31, 2008:
|
|
|
|
|
|
|
|
Shares
Reserved
|
|
|
|
|
|
Weighted
|
|
|
Stock
|
|
|
Stock
|
|
|
for
Convertible
|
|
|
Total
|
|
|
Average
|
|
|
Options
|
|
|
Warrants
|
|
|
Debentures
|
|
|
Shares
|
|
|
Exercise
Price
|
Outstanding
– December 31, 2007
|
|
|
20,380,953 |
|
|
|
2,545,928 |
|
|
|
2,729,068 |
|
|
|
25,655,949 |
|
|
$ |
0.324 |
First
Quarter
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
/ Issued
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
Exercised/Converted
|
|
|
- |
|
|
|
(243,616 |
) |
|
|
- |
|
|
|
(243,616 |
) |
|
|
0.935 |
Expired
|
|
|
- |
|
|
|
- |
|
|
|
(2,729,068 |
) |
|
|
(2,729,068 |
) |
|
|
0.870 |
Cancelled/Extinguished
|
|
|
- |
|
|
|
(2,071,407 |
) |
|
|
- |
|
|
|
(2,071,407 |
) |
|
|
0.935 |
Outstanding
– March 31, 2008
|
|
|
20,380,953 |
|
|
|
230,905 |
|
|
|
- |
|
|
|
20,611,858 |
|
|
$
|
0.183 |
TIDELANDS
OIL & GAS CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2008
(UNAUDITED)
NOTE 9 – STOCK OPTIONS, STOCK
WARRANTS AND SHARES RESERVED FOR CONVERTIBLE DEBENTURES
(CONTINUED)
Summary
of Outstanding Stock Options, and Stock
Warrants
|
|
|
Stock
|
|
|
Stock
|
|
|
Exercise
|
|
|
Options
|
|
|
Warrants
|
|
|
Price
|
Stock
Options
|
|
|
|
|
|
|
|
|
Expiration
Date
|
|
|
|
|
|
|
|
|
February
28, 2017
|
|
|
12,380,953 |
|
|
|
|
|
$ |
0.210 |
May
23, 2017
|
|
|
8,000,000 |
|
|
|
|
|
|
0.120 |
|
|
|
|
|
|
|
|
|
|
|
Stock
Warrants
|
|
|
|
|
|
|
|
|
|
|
Expiration
Date
|
|
|
|
|
|
|
|
|
|
|
January
20, 2009
|
|
|
|
|
|
|
230,905 |
|
|
|
0.935 |
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
– March 31, 2008
|
|
|
20,380,953 |
|
|
|
230,905 |
|
|
Avg. $ 0.183
|
Outstanding
stock options and warrants had zero intrinsic value at March 31,
2008.
NOTE 10 – RELATED PARTY
TRANSACTIONS
Loan
from President
During
the three months ended March 31, 2008, the Company borrowed $27,258 from its
President. Subsequently through May 12, 2008, the Company borrowed an
additional $122,742 from its President bringing the total to
$150,000. The Company executed a promissory note due August 31, 2008,
bearing an 8% annual interest rate.
Consulting
Agreement
On
January 26, 2008, the Company entered into a consulting agreement with two
directors to provide business development, merger and acquisition capital
raising and other services to the Company. The term of the agreement
is five years. Services to be provided are compensated under the
agreement at a rate of $1 million per annum which may be paid in shares of
stock. During
the three months ended March 31, 2008, stock-based payments of $250,000 were
made to each of the two directors.
TIDELANDS
OIL & GAS CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2008
(UNAUDITED)
NOTE 11 – LITIGATION
On
January 6, 2003, we were served as a third party defendant in a lawsuit titled
Northern Natural Gas Company vs. Betty Lou Sheerin vs. Tidelands Oil & Gas
Corporation, ZG Gathering, Ltd. and Ken Lay, in the 150th Judicial District
Court, Bexar County, Texas, Cause Number 2002-C1-16421. The lawsuit was
initiated by Northern Natural Gas (“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.
On May 9,
2008, the Company received a Compromise Settlement Agreement and Mutual Release
of All Claims from Betty Lou Sheerin which ended litigation between Mrs. Sheerin
and the Company.
On
February 26, 2008, ZG Gathering, Ltd., which has the sole remaining
non-adjudicated claims in this litigation, filed a Notice of Removal to the
Federal Bankruptcy Court of the remaining claims between Tidelands and ZG
Gathering, Ltd. There is no setting yet for the trial of the removal
action, and the parties are in advanced settlement discussions.
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.
All
remaining matters regarding litigation against Sonterra Energy Corporation
(“Sonterra”) followed Sonterra when the Company sold the subsidiary on January
9, 2008. At the closing of the sale, the Company agreed to escrow
$75,000 with the buyer to cover legal costs plus adjudicated and/or settlement
amounts along with other contingencies. As of March 31, 2008, $49,365
remained in escrow after deducting $25,635 for legal costs and other chargeable
costs. All remaining funds as of January 9, 2009, will be returned to
the Company.
NOTE 12 - SUBSEQUENT
EVENTS
On May 9,
2008, the Company completed a financing transaction in which it entered into a
Securities Purchase Agreement ("Purchase Agreement") with Golden Gate Investors
Inc. ("Golden Gate") which provided for the issuance and sale by the Company of
up to $3 million of 6% convertible debentures, with the initial issuance of a $1
million debenture ("Debenture") and the payment of cash by Golden Gate of
$200,000 and issuance by Golden Gate to the Company of a $800,000 promissory
note ("Note"). The Purchase Agreement provides Golden Gate with the right to
lend, in two separate transactions, an additional $1 million of funding to the
Company, in its sole discretion, through advancing cash of $200,000 and issuing
a note for the balance, similar to the Note. The Company has the right until
August 8, 2008, to redeem, at a price equal to the principal and accrued
interest, the Debenture provided that no event of default has occurred. The
Debenture is unsecured and bears interest at the annual rate of 6%, payable
monthly, with the principal amount due on May 9, 2011. The Debenture is
convertible at a per share equal to the lesser of $.50 or 80% of the average of
the three lowest volume weighted average prices during the twenty trading days
prior to Golden Gate's election to convert. The Note is secured and bears
interest at the annual rate of 6.25%, payable monthly, with the principal amount
due on May 31, 2011. Golden Gate has the option to prepay this note, subject to
the satisfaction of certain conditions.
The
Company also announced that on May 12, 2008, in exchange for prior advances, the
Company issued to James B. Smith, the Company's President, an unsecured
promissory note in the principal amount of $150,000, bearing interest at the
rate of 8% per annum, which amount is due upon demand, and if no demand is made,
on August 31, 2008.
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
primary business operations are focused on the (i) development and operation of
transportation and storage infrastructure for natural gas in South Texas and the
Northern Mexican states of Tamaulipas and Nuevo Leon through our 20% ownership
interest in Frontera Pipeline, LLC (“Frontera”) and (ii) the regasification of
liquefied natural gas (“LNG”) project in the offshore waters of Southern
California.
Given the
large capital requirements for the construction of new midstream energy assets,
we anticipate that funding of our projects will be derived primarily through
joint ventures and alliances with strategic partners. Additionally,
management will evaluate related acquisition opportunities that compliment our
current business strategy. To date, the Company has identified one
acquisition opportunity and the completion of any such acquisition will be
conditioned upon obtaining requisite financing.
Frontera
Pipeline, LLC and the Burgos Hub Project
Previously,
the Company had been developing a natural gas pipeline system (the “Burgos Hub
Project”) project with its own resources through its subsidiary in the United
States, Sonora Pipeline, LLC (“Sonora”) and its subsidiary in Mexico, Terranova
Energia, S. de R.L. de C.V. (“Terranova”). In September 2007, the
Company and Terranova entered into an agreement (the “Purchase Agreement”) with
Grand Cheniere Pipeline LLC (“Cheniere”), pursuant to which the Company conveyed
an 80% interest in the Company’s Burgos Hub Project, which 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. Under Frontera’s limited liability
company agreement, Cheniere will be the manager of Frontera, with sole
decision-making and management control of the Burgos Hub Project. In April
2008, Frontera, through its wholly-owned subsidiary, Terranova Energia, filed
with the Energy Regulatory Commission in Mexico (“CRE”) for a one-year extension
of time in which to file its final proposal for project costs and incomes,
tariffs, and maximum income. Similarly, on May 16, 2008, Frontera, through its
wholly-owned subsidiary, Sonora, requested a two-year extension of time to
complete construction and place in service its proposed facilities to be located
in Hidalgo County, Texas. Construction of the pipelines would not commence until
final investment decision is made by Cheniere after obtaining all required
authorizations to construct and operate the facilities from the appropriate U.S.
and Mexican authorities, arranging appropriate financing, and entering into
acceptable commercial arrangements with creditworthy counterparties. The
Company will not receive and revenues or cash flow from Frontera for the
foreseeable future, if at all, and it will be responsible for funding certain
expenses in the event that final investment decision is made to construct the
facilities. In accordance with the existing agreements, the Company received
consulting fees of $45,000 paid by Frontera in the first quarter of 2008 and
incurred no development related costs for the Burgos Hub project during the
first quarter of 2008.
Esperanza
Energy, LLC and the Port Esperanza Project
Esperanza
Energy, LLC ("Esperanza") was formed as a wholly-owned subsidiary of the Company
in March 2006 to evaluate the feasibility of developing an offshore, deep-water
LNG receiving and regasification terminal near Long Beach,
California. The expected timeline for development of the Port
Esperanza Project is influenced by the preparation of the application in a form
sufficient to be “deemed complete” by the Maritime Administration and Coast
Guard which are the principal Federal agencies with permit jurisdiction for LNG
terminal development in the offshore United States of America waters. After an
application is deemed complete, the process of obtaining the approvals is often
longer than the statutory time period of approximately one year due to “time
out” or suspension of the running of the clock on the application process due to
issues raised during the review of the permit application or due to resource
constraints present at the Maritime Administration and Coast Guard. California
state and local agency approvals can also impact the permit approval process
beyond the normal time expectations. Progress on the project is also dependent
upon the Company securing additional funding for the permit application process
and complying with state and federal regulations, including environmental
laws. The Company does not expect to receive any revenues or cash
flow from the Esperanza project in the foreseeable future, if at all, and the
Company will be required to expend additional capital in order to further this
project. In the first quarter of 2008, the Company incurred approximately
$70,000 of development costs related to the Port Esperanza project. On January
21, 2008, the Company issued notes totaling $1,192,277 in payment of accounts
payable and accrued interest due to entities providing various services to its
Port Esperanza LNG Project. These notes, bearing interest at 10% per annum, were
originally due April 30, 2008 and have been extended until August 31, 2008. The
Company has paid all interest due April 30, 2008.
Reef
Ventures, LP International Pipeline
The
assets of this business originally consisted of two different pipelines: (1) an
8-mile twelve-inch diameter natural gas pipeline with metering and dehydration
facilities and (2) a two-mile segment of six-inch diameter pipeline to be used
in a future LPG project. These assets were impaired in 2006 with a significant
charge to earnings and contributed approximately 4 % of the Company’s revenues
in 2007. The Chittim Gas Processing plant which had been inactive since 2002 and
was formerly owned by Rio Bravo Energy, LLC (a 100% owned subsidiary of the
Company) was conveyed to Reef International, LLC in 2007 along with the Carrizo
Springs Pipeline System that was also inactive and formerly held by Sonora.
During 2007, we attempted to negotiate for capacity reservation charges with
potential shippers of natural gas to obtain commitments that would service
existing indebtedness on the Reef Ventures’ International Pipeline, but we were
unsuccessful in obtaining any new commitments. In fact, revenues from this
business unit declined from the prior years. During the quarter ended March 31,
2008, no gas was transported for a fee and no revenues were earned by the Reef
Ventures, LP business unit. In March 2008, we sold our international pipeline
system, the Chittim Gas Plant and the Carrizo Springs pipeline system owned by
Reef Ventures, LP to West Texas Gas, Inc. (“WTG”) and utilized the proceeds of
sale along with an associated issuance of our common stock to retire over
$5,300,000 of indebtedness owed to Impact International, LLC
(“Impact”).
Sonterra
Energy Corporation Business
The
assets of our Sonterra Energy Corporation ("Sonterra") subsidiary consisted of
propane distribution systems, including gas mains, yard lines, meters and
storage tanks, serving certain residential subdivisions in the Austin, Texas
area. During 2007, we attempted to negotiate a restructuring of the existing
convertible debenture indebtedness of $2,374,291 to a group of investors led by
Palisades Master Fund, LP. We were unable to come to mutually acceptable terms
in that restructuring effort and in January 2008, we sold the stock of Sonterra
for $3,000,000 and utilized the proceeds from that sale to retire the
convertible debentures and repurchase certain outstanding warrants. All
remaining matters regarding litigation against Sonterra followed Sonterra when
the Company sold the subsidiary on January 9, 2008. At the closing of
the sale, the Company agreed to escrow $75,000 with the buyer to cover legal
costs plus adjudicated and/or settlement amounts along with other
contingencies. As of March 31, 2008, $49,365 remained in escrow after
deducting $25,635 for legal costs and other chargeable costs. All
remaining funds as of January 9, 2009, will be returned to the
Company.
Golden
Gate Investors, Inc. Financing
On May 9,
2008, the Company completed a financing transaction in which it entered into a
Securities Purchase Agreement ("Purchase Agreement") with Golden Gate Investors,
Inc. ("Golden Gate") which provided for the issuance and sale by the Company of
up to $3 million of 6% convertible debentures, with the initial issuance of a $1
million debenture ("Debenture") and the payment of cash by Golden Gate of
$200,000 and issuance by Golden Gate to the Company of a $800,000 promissory
note ("Note"). The Purchase Agreement provides Golden Gate with the right to
lend, in two separate $1 million fundings, an additional $2 million to the
Company, in its sole discretion, through advancing cash of $200,000 and issuing
a note for the balance, similar to the Note. The Company has the right until
August 8, 2008, to redeem, at a price equal to the principal and accrued
interest, the Debenture provided that no event of default has occurred. The
Debenture is unsecured and bears interest at the annual rate of 6%, payable
monthly, with the principal amount due on May 9, 2011. The Debenture is
convertible at a per share equal to the lesser of $0.50 or 80% of the average of
the three lowest volume weighted average prices during the twenty trading days
prior to Golden Gate's election to convert. The Note is secured and bears
interest at the annual rate of 6.25%, payable monthly, with the principal amount
due on May 31, 2011. Golden Gate has the option to prepay this note, subject to
the satisfaction of certain conditions.
Results
of Operations
THREE MONTHS ENDED MARCH 31,
2008 COMPARED TO THREE MONTHS ENDED MARCH 31, 2007
REVENUES:
The Company reported revenues of $45,000 for the three months ended March 31,
2008 compared to revenues of $0 for the three months ended March 31, 2007. The
revenue increase resulted from the receipt of consulting fees from Frontera
during the period ended March 31, 2008, whereas no such fees were received
during the period ended March 31, 2007.
TOTAL
COSTS AND EXPENSES: Total Costs and Expenses for the three months ended March
31, 2008 were $2,779,193 versus $4,976,762 for the three months ended March 31,
2007 which is a decrease of 44% in Total Costs and Expenses for the three months
ended March 31, 2007 versus the three months ended March 31, 2007. The primary
reason for the decrease in Total Expenses was the absence of stock option
issuance expenses in the three months ended March 31, 2008 versus the three
months ended March 31, 2007.
SELLING,
GENERAL AND ADMINISTRATIVE – RELATED PARTIES: Selling, General and
Administrative – Related Parties for the three months ended March 31,
2008 was $0 compared to $2,667,000 for the three months ended March 31, 2007.
The decrease was due to the absence of stock option issuances in the three
months ended March 31, 2008 versus the three months ended March 31,
2007.
SELLING,
GENERAL AND ADMINISTRATIVE: Selling, General and Administrative costs for the
three months ended March 31, 2008 were $2,773,142 compared to $2,303,433 for the
three months ended March 31, 2007. Most of the increase in these expenses was
attributable to increases in compensation paid to directors.
OTHER
INCOME (EXPENSE): Total Other Income (Expense) for the three months ended March
31, 2008 was ($130,656) versus ($345,244) for the three months ended March 31,
2007. The primary reason for the decrease in Other (Expense) is the decrease in
interest expense to ($142,610) for the three months ended March 31, 2008 versus
($345,497) for the three months ended March 31, 2007 which reflects the payoff
of the convertible debentures in the amount of $2,374,291 in January
2008.
NET LOSS
FROM CONTINUING OPERATIONS: Net Loss from Continuing Operations was ($2,864,849)
for the three months ended March 31, 2008 compared to ($5,322,006) for the three
months ended March 31, 2007 which is a decrease in Net Loss from Continuing
Operations of $2,457,157. This decrease is due primarily to the absence of stock
option issuances during the period ended March 31, 2008 versus the three months
ended March 31, 2007.
NET
INCOME FROM OPERATIONS OF DISCONTINUED SEGMENTS: Net Income from Operations of
Discontinued Segments was $702,943 for the three months ended March 31, 2008
versus $203,650 for the three months ended March 31, 2007 which is an increase
of $499,293 in Net Income from Operations of Discontinued Segments. The increase
resulted from Gains on Disposal of the assets of Reef Ventures, LP and the sale
of Sonterra Energy Corporation as further detailed in Note 5 of the Consolidated
Financial Statements.
NET LOSS:
Net Loss for the three months ended March 31, 2008 was ($2,161,906) versus the
Net Loss of ($5,118,356) for the three months ended March 31, 2007. The primary
reason for the substantial reduction in loss for the three months ended March
31, 2008 versus the three months ended March 31, 2007 was the decrease in
Selling General and Administrative – Related Parties expense and the Gains on
Disposal of the assets of Reef Ventures, LP and the sale of Sonterra Energy
Corporation.
Liquidity
and Capital Resources
The
Company is not currently generating any significant revenues and has incurred
significant operating losses. The Company’s financial statements have
been prepared assuming that the Company will continue as a going
concern. As discussed in the Company’s financial statements, the
Company’s absence of significant revenues, recurring losses from operations, and
its need for additional financing in order to fund its working capital needs in
2008 raise substantial doubt about its ability to continue as a going
concern.
At March
31, 2008, we had current assets of $169,862, current liabilities of $4,062,243
and working capital deficit of $3,892,381. After giving effect
to the Sonterra transaction in January 2008, the WTG transaction in March 2008,
and the recent financing with Golden Gate, the Company currently has
approximately $1,875,000 of current notes payable, accounts payable and accrued
expenses that require payment or other satisfaction during 2008. We
will need to raise capital or issue shares of our common stock to discharge
these obligations. Additionally, we believe that after taking into
account the recent financing transaction with Golden Gate, we will require
approximately $650,000 of additional capital between the present time and
November 2008 to meet working capital needs for
2008. Accordingly, we will be reliant upon best efforts debt
and/or equity financings to fund the payment of current liabilities and working
capital needs. We cannot give any assurance that this additionally
needed financing could be obtained on attractive terms or at all. The
Company’s viability is contingent upon its ability to receive external
financing. Failure to obtain sufficient working capital may result in
management resorting to the sale of assets or otherwise curtailing
operations.
Contractual
Commitments
A tabular
disclosure of our contractual obligations at March 31, 2008, is as
follows:
|
|
Payments
due by period
|
|
|
1
year or less
|
|
|
2
– 3 Years
|
|
|
4
– 5 Years
|
|
|
More
than 5 Years
|
Credit
Facilities
|
|
$ |
1,191,277 |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
Operating
Leases
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
Employment
and consulting contracts (1)
|
|
$ |
3,512,500 |
|
|
$ |
7,087,500 |
|
|
$ |
6,525,000 |
|
|
|
-- |
Total
|
|
$ |
4,703,777 |
|
|
$ |
7,087,500 |
|
|
$ |
6,525,000 |
|
|
|
-- |
(1) Does
not include perquisites.
Off
Balance-Sheet Arrangements
As of
March 31, 2008 and 2007, the Company did not have any significant off
balance-sheet arrangements.
Cash
and Cash Equivalents
We have
historically invested our cash and cash equivalents in short-term, fixed rate,
highly rated and highly liquid instruments which are reinvested when they mature
throughout the year. Although our existing investments are not considered at
risk with respect to changes in interest rates or markets for these instruments,
our rate of return on short-term investments could be affected at the time of
reinvestment as a result of intervening events. As of March 31, 2008, we
had cash of $11,752.
We do not
issue or invest in financial instruments or their derivatives for trading or
speculative purposes. Our operations are conducted primarily in the United
States, and, are not subject to material foreign currency exchange risk.
Although we have outstanding debt and related interest expense, market risk of
interest rate exposure in the United States is currently not
material.
Debt
The
interest rate on our promissory note debt obligations at March 31, 2008 is
a fixed rate of 10% per annum.
Evaluation
of Disclosure Controls and Procedures
Disclosure
controls and procedures include, without limitation, controls and procedures
designed to ensure that information required to be disclosed by an issuer in the
reports that it files or submits under the Securities Exchange Act of 1934, as
amended (the "Act") is accumulated and communicated to the issuer's management,
including its principal executive and principal financial officers, or persons
performing similar functions, as appropriate to allow timely decisions regarding
required disclosure. It should be noted that the design of any system of
controls is based in part upon certain assumptions about the likelihood of
future events, and there can be no assurance that any design will succeed in
achieving its stated goals under all potential future conditions, regardless of
how remote. For the quarter ended March 31, 2008, we carried out an
evaluation of the effectiveness of the design and operation of our disclosure
controls and procedures. Based on this evaluation, management has
concluded that the Company’s disclosure controls and procedures are not
effective because of the identification of a material weakness in our internal
control over financial reporting which is identified below, which we view as an
integral part of our disclosure controls and procedures. A material
weakness is a deficiency, or a combination of control deficiencies, in internal
control over financial reporting such that there is a reasonable possibility
that a material misstatement of the Company’s annual or interim financial
statements will not be prevented or detected on a timely basis.
The
material weakness relates to certain errors in accounting for equity-based
compensation that were reported for the three month period ended March 31, 2007
and six month period ended June 30, 2007. The errors were discovered
in connection with the preparation of the Company’s September 30, 2007 unaudited
financial statements. Upon reviewing and updating our accounting and disclosures
related to equity-based compensation for the nine months ended September 30,
2007, the Company discovered its errors. Upon this determination, management and
the Board of Directors were alerted to the facts and circumstances regarding the
errors in accounting for the equity-based compensation. As a result,
we determined that our disclosure controls were not effective.
Based on
the impact of the aforementioned accounting error, we determined to restate our
consolidated financial statements as of three month period ended March 31, 2007
and six month period ended June 30, 2007. Subsequent thereto, we
implemented the following remedial measures to address the identified material
weaknesses:
·
|
We
reviewed all equity-based compensation agreements to assure the issuance
of the equity instruments have been properly accounted for and disclosed
in our financial statements in accordance with generally accepted
accounting principles.
|
·
|
We
have improved the supervision and training of our accounting staff to
understand and implement accounting requirements, policies and procedures
applicable to the accounting and disclosure of equity based
instruments.
|
This
quarterly report does not include an attestation report of the Company’s
registered public accounting firm regarding internal control over financial
reporting. Management’s report was not subject to the attestation by
the Company’s registered public accounting firm pursuant to temporary rules of
the SEC that permit the Company to provide only management’s report in this
annual report.
Changes
in Internal Controls over Financial Reporting
During
the quarter ended March 31, 2008, we did not make any changes in our internal
controls over financial reporting that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
PART
II - OTHER INFORMATION
Other
than as set forth below and in the prior reports filed with the Securities and
Exchange Commission pursuant to the Securities Exchange Act of 1934, the Company
is not a party to any material pending legal proceeding.
Matter
No. 1
As
described in the Company prior reports, the Company was 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. A trial
date was set for January 7, 2008. On December 3, 2007, ZG Gathering, Ltd.
(“ZG”) filed a Suggestion of Bankruptcy which stayed the case. On
December 13, 2007, Betty Lou Sheerin (“Sheerin”) non-suited with prejudice all
of her claims against Tidelands Oil and Gas Corporation (“Tidelands”) and
Tidelands non-suited with prejudice all of its claims against Sheerin. On
May 9, 2008 the Company received a Compromise Settlement Agreement and Mutual
Release of All Claims from Sheerin ratifying the actions taken December 13,
2007. The claims between Northern Natural Gas Company (“Northern”),
Sheerin, the Estate of Kenneth Lay, and the Estate of Charlton Hadden were
severed from the claims between Northern, ZG and Tidelands. The
claims between Northern and Sheerin then proceeded to trial on January 7, 2008
in the State District Court. The jury in that case concluded, among
other things, that Northern is the owner of the note in question, that Sheerin
agreed to be obligated on the note, that Sheerin failed to comply with the note,
and that the unpaid principal and accrued interest on the note was
$1,950,000.00. The jury’s complete findings are on file in the
court’s record in Cause No. 2002-CI-16421. No final Judgment has been
entered in this matter. On February 26, 2008, ZG filed a Notice of
Removal to the Federal Bankruptcy Court of the remaining claims between
Northern, Tidelands and ZG. There is no setting yet for the trial of
the removal action, and the parties are in advanced settlement
discussions.
Other
Legal Matters
All
remaining matters regarding litigation against Sonterra followed Sonterra when
the Company sold the subsidiary on January 9, 2008. At the closing of
the sale, the Company agreed to escrow $75,000 with the buyer to cover legal
costs plus adjudicated and/or settlement amounts along with other
contingencies. As of March 31, 2008, $49,365 remained in escrow after
deducting $25,635 for legal costs and other chargeable costs. All
remaining funds as of January 9, 2009, will be returned to the
Company.
During
the three months ended March 31, 2008, there were no material changes to the
risk factors described in Part I, Item 1A “Risk Factors” of the Company’s Annual
Report on Form 10-K for the fiscal year ended December 31,
2007.
Set forth
below is certain information concerning issuances of common stock during the
first quarter ended March 31, 2008, and to the date of this report, that were
not registered under the Securities Act of 1933 (“Securities Act”):
The
Company issued 5,300,000 shares of its restricted common stock for consulting
services valued at $386,900.
The
Company issued 211,134 shares of its restricted common stock valued at
$16,679.58 to two holders of the Company Stock Warrants under cashless exercise
provisions which reduced the total number of warrant shares outstanding by
243,616 for purpose of cancellation.
The
Company issued 39,890,180 shares of its restricted common stock valued at
$1,994,509 in payment of the balance due Impact, after remitting the net
proceeds from the sale of its International Pipeline between the United States
and Mexico to WTG.
The
Company issued 3,571,429 shares each of its restricted common stock valued at
$250,000 to two of its directors in payment of consulting fees for the three
months ended March 31, 2008.
The
issuances referenced above were consummated pursuant to Section 4(2) of the
Securities Act and the rules and regulations promulgated thereunder on the basis
that such transactions did not involve a public offering and the offerees were
sophisticated, accredited investors with access to the kind of information that
registration would provide. The recipients of these securities represented their
intention to acquire the securities for investment only and not with a view to
or for sale in connection with any distribution thereof and appropriate legends
were affixed to the share certificates and other instruments issued in such
transactions. No sales commissions were paid.
None.
None.
None.
Exhibit
|
|
Description
|
|
Location
of Exhibit
|
31.1
|
|
Chief
Executive Officer and Chief Financial Officer Section 302 Certification
pursuant to Sarbanes - Oxley Act.
|
|
Included
with this filing.
|
32.1
|
|
Chief
Executive Officer-Section 906 Certification pursuant to Sarbanes-Oxley
Act
|
|
Included
with this filing.
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, the Company has duly
caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.
|
|
|
|
TIDELANDS
OIL & GAS CORPORATION
|
|
|
|
Date: May
20, 2008
|
By:
|
/s/ James
B.
Smith
|
|
James
B. Smith
President
and Chief Executive Officer
|