UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-QSB
(Mark one)
[X] Annual Report Under Section 13 or 15(d) of The Securities Exchange Act
of 1934
For the quarterly period ending September 30, 2004
[_] Transition Report Under Section 13 or 15(d) of The Securities Exchange
Act of 1934
For the transition period from ______________ to ______________
Commission File Number: 0-29613
TIDELANDS OIL & GAS CORPORATION
(Exact name of small business issuer as specified in its charter)
Nevada 66-0549380
(State of incorporation) (IRS Employer ID Number)
1862 West Bitters Rd., San Antonio, TX 78410
--------------------------------------------
(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 files 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 No
--- ---
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS Check whether the registrant filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Exchange Act
after the distribution of securities under a plan confirmed by a court.
Yes No
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS
As of September 30, 2004, there were 59,028,0647 shares of Common Stock issued
and outstanding.
Transitional Small Business Disclosure Format : Yes No X
--- ---
TIDELANDS OIL & GAS CORPORATION
FORM 10-QSB
INDEX
-----
Page
PART I - Financial Information
Item 1 - Financial Statements
Condensed Consolidated Balance Sheets as of
September 30, 2004 and December 31, 2003......................... 3-4
Condensed Consolidated Statements of Operations
For the Three Months Ended September 30, 2004 and 2003........... 5
Condensed Consolidated Statements of Operations
For the Nine Months Ended September 30, 2004 and 2003............ 6
Condensed Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 2004 and 2003............ 7-8
Notes to Condensed Consolidated Financial Statements............. 9-17
Item 2 - Management's Discussion and Analysis or Plan of Operation........ 18-20
Item 3 - Controls and Procedures.......................................... 21
PART II - Other Information
Item 1 - Legal Proceedings ............................................... 22
Item 2 - Changes in Securities and Use of Proceeds........................
Item 3 - Defaults Upon Senior Securities.................................. 22
Item 4 - Submission of Matters to a Vote of Security Holdings............. 22
Item 5 - Other Information................................................ 22
Item 6 - Exhibits and Reports on Form 8K ................................. 22
Signature................................................................. 23
2
TIDELANDS OIL & GAS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
------
September 30, 2004 December 31, 2003
------------------ ------------------
(Unaudited)
Current Assets:
Cash $ 1,284,241 $ 894,457
Cash - Restricted 1,025,000 0
Accounts Receivable 39,890 228
Stock Subscriptions Receivable 2,000,000 0
Prepaid Expenses 144,891 22,209
------------------ ------------------
Total Current Assets 4,494,022 916,894
------------------ ------------------
Property Plant and Equipment, Net 7,004,041 604,192
------------------ ------------------
Investment - Reef Ventures, L.P. 0 98,629
------------------ ------------------
Other Assets:
Goodwill 673,992 0
Deposits 4,108 3,800
Deferred Charges 245,600 0
------------------ ------------------
Total Other Assets 923,700 3,800
------------------ ------------------
Total Assets $ 12,421,763 $ 1,623,515
================== ==================
See Accompanying Notes to Condensed Consolidated Financial Statements
3
TIDELANDS OIL & GAS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(CONTINUED)
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
September 30, 2004 December 31, 2003
------------------ ------------------
(Unaudited)
Current Liabilities:
Accounts Payable and
Accrued Expenses $ 388,563 $ 813,905
Current Maturities of Long-Term Debt 150,000 325,000
------------------ ------------------
Total Current Liabilities 538,563 1,138,905
------------------ ------------------
Long-Term Debt 6,523,773 0
------------------ ------------------
Total Liabilities 7,062,336 1,138,905
------------------ ------------------
Commitments and Contingencies -- --
Stockholders' Equity:
Common Stock, $.001 par value per share,
100,000,000 shares authorized;
59,028,647 shares issued and outstanding
September 30, 2004, 44,825,302 shares
Issued and outstanding December 31, 2003 59,029 44,826
Additional Paid-in Capital 21,557,478 11,072,987
Subscriptions Receivable (550,000) (18,000)
Accumulated (Deficit) (15,707,080) (10,615,203)
------------------ ------------------
Total Stockholders' Equity 5,359,427 484,610
------------------ ------------------
Total Liabilities and
Stockholders' Equity $ 12,421,763 $ 1,623,515
================== ==================
See Accompanying Notes to Condensed Consolidated Financial Statements
4
TIDELANDS OIL & GAS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended Three Months Ended
September 30, 2004 September 30, 2003
------------------ ------------------
Revenues:
Gas Sales $ 815,747 $ 0
Pipeline Fees 9,101 0
Management Fees 0 103,830
------------------ ------------------
Total Revenues 824,848 103,830
------------------ ------------------
Expenses:
Purchases 801,698 0
Operating Expenses 15,800 11,791
Depreciation 88,611 11,153
Interest 100,981 9,675
Officers & Directors Salaries & Fees 177,625 69,000
General and Administrative 953,293 284,780
------------------ ------------------
Total Expenses 2,138,008 386,399
------------------ ------------------
(Loss) From Operations (1,313,160) (282,569)
Loss From Asset Abandonment 0 (850)
Interest Income 5,667 0
------------------ ------------------
Net Income (Loss) $ (1,307,493) $ (283,419)
================== ==================
Net Income (Loss) Per Common Share:
Basic and Diluted $ (0.02) $ (0.01)
----------------- ================== ==================
Weighted Average Number of Common
Shares Outstanding, Basic 54,778,647 41,390,507
================== ==================
See Accompanying Notes to Condensed Consolidated Financial Statements
5
TIDELANDS OIL & GAS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Nine Months Ended Nine Months Ended
September 30, 2004 September 30, 2003
------------------ ------------------
Revenues:
Gas Sales $ 1,323,459 $ 0
Pipeline Fees 9,101 0
Management Fees 0 123,922
------------------ ------------------
Total Revenues 1,332,560 123,922
------------------ ------------------
Expenses:
Purchases 1,299,518 0
Pipeline Operating Expenses 18,416 26,484
Depreciation 136,529 32,473
Interest 149,418 43,316
Officers & Directors Salaries & Fees 513,983 219,000
General and Administrative 4,323,313 660,447
Total Expenses 6,441,177 981,720
------------------ ------------------
(Loss) From Operations (5,108,617) (857,798)
Extraordinary Item - Gain on Partial Sale
Of Subsidiary 0 1,533,731
Loss From Asset Abandonment 0 (850)
Interest Income 16,740 0
------------------ ------------------
Net Income (Loss) $ (5,091,877) $ 675,083
================== ==================
Net Income (Loss) Per Common Share:
Basic and Diluted
-----------------
(Loss) From Operations $ (0.10) $ (0.02)
Gain - Extraordinary Item 0.00 0.04
------------------ ------------------
Total $ (0.10) $ 0.02
================== ==================
Weighted Average Number of Common
Shares Outstanding, Basic 51,926,974 38,040,218
================== ==================
See Accompanying Notes to Condensed Consolidated Financial Statements
6
TIDELANDS OIL & GAS CORPORATION
STATEMENTS OF CONDENSED CONSOLIDATED CASH FLOWS
(UNAUDITED)
Nine Months Ended Nine Months Ended
September 30, 2004 September 30, 2003
------------------ ------------------
Cash Flows Provided (Required) By
Operating Activities:
Net Income (Loss) $ (5,091,877) $ 675,083
Adjustments to Reconcile Net (Loss)
to Net Cash Provided (Required) By
Operating Activities:
Depreciation 136,529 32,473
Write Off of Subscription Receivable 18,000 0
Issuance of Common Stock
for Services Provided 3,747,066 317,814
Officers' Salaries Accrual 0 100,000
Changes in:
Accounts Receivable (39,662) 15,419
Prepaid Expenses (116,682) 15,124
Deposits (308) (1,805)
Deferred Charges (245,600) 0
Accounts Payable and
Accrued Expenses (387,031) (552,191)
------------------ ------------------
Net Cash Provided (Required)
by Operating Activities (1,979,565) 601,917
------------------ ------------------
Cash Flows Provided (Required)
By Investing Activities:
Increase (Decrease) in Investments 98,629 (98,629)
Acquisitions of Property, Plant & Equipment (692,597) (98,360)
Proceeds From Disposals of Property, Plant
and Equipment 0 697,285
------------------ ------------------
Net Cash Provided (Required)
by Investing Activities (593,968) 500,296
------------------ ------------------
See Accompanying Notes to Condensed Consolidated Financial Statements
7
TIDELANDS OIL & GAS CORPORATION
STATEMENTS OF CONDENSED CONSOLIDATED CASH FLOWS
(UNAUDITED)
(CONTINUED)
Nine Months Ended Nine Months Ended
September 30, 2004 September 30, 2003
------------------ ------------------
Cash Flows Provided (Required)
by Financing Activities:
Proceeds from Issuance of Common Stock
Net of Subscriptions Receivable 4,088,317 50,000
Repayment of Short-Term Loans (100,000) (302,924)
Proceeds of Loans from Related Parties 0 19,300
Repayment of Loans Fees and Accrued
Salaries Due Related Parties 0 (848,597)
------------------ ------------------
Net Cash Provided (Required)
by Financing Activities 3,988,317 (1,082,221)
------------------ ------------------
Net Increase in Cash 1,414,784 19,992
Cash at Beginning of Period 894,457 193,669
------------------ ------------------
Cash at End of Period $ 2,309,241 $ 213,661
================== ==================
Supplemental Disclosures of
Cash Flow Information:
Cash Payments for Interest $ 22,011 $ 33,143
================== ==================
Cash Payments for Income Taxes $ 0 $ 0
================== ==================
Non-Cash Financing Activities:
Issuance of Common Stock:
Operating Activities $ 3,747,066 $ 317,814
Payment of Accounts Payable 38,311 62,500
Repayment of Loans 75,000 198,767
Prepayment of Legal Fees 86,000 18,750
Repayment of Loans and Accrued
Salaries From Related Parties 0 866,157
Acquisition of Property, Plant, Equip-
ment, and Goodwill For Note Payable 6,523,773 0
------------------ ------------------
Total Non-Cash Financing Activities $ 10,470,150 $ 1,493,988
================== ==================
See Accompanying Notes to Condensed Consolidated Financial Statements
8
TIDELANDS OIL & GAS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004
NOTE 1 - BASIS OF PRESENTATION
------ ---------------------
The accompanying unaudited condensed consolidated financial statements
for the nine month periods ended September 30, 2004 and 2003 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-QSB and Regulation S-B. The financial
information as of December 31, 2003 is derived from the registrant's
Form 10-KSB for the year ended December 31, 2003. 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, 2003, included in the registrant's Form 10-KSB for the year ended
December 31, 2003.
Operating results for the nine-month period ended September 30, 2004
are not necessarily indicative of the results that may be expected for
the remainder of the fiscal year ending December 31, 2004. The
accompanying unaudited condensed consolidated financial statements
include the accounts of the registrant, its wholly-owned subsidiaries,
Rio Bravo Energy, LLC, Sonora Pipeline, LLC, Arrecefe Management, LLC,
Marea Associates, L.P., Reef Ventures, L.P., Reef International, LLC,
Reef Marketing, LLC, and Terranova Energia S. de R. L. de C. V. All
significant inter-company accounts and transactions have been
eliminated in consolidation.
9
TIDELANDS OIL & GAS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004
NOTE 2 - RESTRICTED CASH
------ ---------------
Restricted cash consists of a certificate of deposit to secure a letter
of credit issued to a vendor. The letter of credit terminated on
October 4, 2004 which cancelled the cash restriction.
NOTE 3 - PROPERTY, PLANT AND EQUIPMENT
------ -----------------------------
Summaries of property, plant and equipment at September 30, 2004 and
December 31, 2003 are as follows:
Estimated
September 30, December 31, Economic
2004 2003 Life
------------- ------------- ----------
Pre-Construction Costs-
International Crossing to Mexico $ 20,600 $ 133,308
Pre-Construction Costs - Mexican
Storage Facility and Related Pipelines 669,225 0
Equipment and Leasehold
Improvements 38,802 19,449 3-10 Years
Pipelines - Domestic 431,560 431,560 15 years
Pipeline - Eagle Pass, Tx to Piedras
Negras, Mexico 6,113,255 0 20 Years
Processing Plant 186,410 166,410 15 Years
------------- -------------
Total $ 7,459,852 750,727
Less Accumulated Depreciation 455,811 146,535
------------- -------------
Total $ 7,004,041 $ 604,192
============= =============
Depreciation expense for the nine months ended September 30, 2004 and September
30, 2003 amounted to $136,529 and $32,473.
NOTE 4 - LONG-TERM DEBT
------ ---------------
Maturities of long-term debt are as follows, provided cash flows are
sufficient. According to provisions in note, any deficiencies will be
paid at maturity of note as described in footnote 6.
Period Ending
September 30,
2005 $ 27,182
2006 326,188
2007 326,188
2008 5,844,215
--------------
$ 6,523,773
==============
10
TIDELANDS OIL & GAS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004
NOTE 5 - LITIGATION
------ ----------
On January 6, 2003, the Company was 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 others, in
the 150th Judicial District Court, Bexar County, Texas, Cause Number
2002-C1-16421. The lawsuit was initiated by Northern Natural Gas when
it sued Betty Lou Sheerin for her failure to make payments on a note
she executed payable to Northern in the original principal amount of
$1,950,000. Northern's suit was filed on November 13, 2002. Sheerin
answered Northern's lawsuit on January 6, 2003. Sheerin's answer
generally denied Northern's claims and raised the affirmative defenses
of fraudulent inducement by Northern, estoppel, waiver and the further
claim that the note does not comport with the legal requirements of a
negotiable instrument. Sheerin seeks a judicial ruling that Northern be
denied any recovery on the note. Sheerin's answer included a
counterclaim against Northern, ZG Gathering, and others generally
alleging, among other things, that Northern, ZG Gathering, Ltd. and
others, fraudulently induced her execution of the note. Northern has
filed a general denial of Sheerin's counterclaims. Sheerin's answer
included a third party cross claim against Tidelands. She alleges that
Tidelands entered into an agreement to purchase the Zavala Gathering
System from ZG Gathering , Ltd. and that, as a part of the agreement,
Tidelands agreed to satisfy all of the obligations due and owing to
Northern, thereby relieving Sheerin of all obligations she had to
Northern on the promissory note in question. She alleges that Tidelands
is liable to her for all of her actual damages, costs of the lawsuit
and other unstated relief. Tidelands participated in a mediation on
March 11, 2003. The case was not settled at that time. Tidelands
answered the Sheerin suit on March 26, 2003 and denied all of Sheerin's
allegations. No discovery has been completed at this time. Based on
initial investigations, however, Tidelands appears to have a number of
potential defenses to Sheerin's claims, and intends to aggressively
defend the lawsuit.
In September 2002, as a pre-closing deposit to the purchase of the ZG
pipelines, the Company executed a $300,000 promissory note to Betty L.
Sheerin, a partner of ZG Gathering, Ltd. In addition, the Company
issued 1,000,000 shares of its restricted common stock to various
partners of ZG Gathering, Ltd. The company believes that the
aforementioned promissory note and shares of restricted common stock
will be cancelled based upon the outcome of the litigation described
above. Accordingly, the Company's financial statements reflect that
position.
11
TIDELANDS OIL & GAS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004
NOTE 6 - ACQUISITION
------ ---------------
On May 25, 2004, the Company entered into a Purchase and Sale Agreement
for Reef Ventures, L.P. by and between Impact International, LLC
("Impact") and Coahuila Pipeline, LLC. ("Coahuila"), (jointly "Seller")
and Tidelands Oil & Gas Corporation ("Tidelands") and Arrecefe
Management, LLC ("Arrecefe"), (jointly "Buyer"). Impact is considered
an affiliate of Tidelands because it possessed warrants to acquire a
19% interest in Tidelands common stock. The closing documents were
executed and placed into trust pending receipt of proof of insurance.
Tideland's received an insurance commitment regarding the purchased
assets that was accepted by Impact on June 18, 2004, the effective
closing date.
Purchase and Sale Agreement - Background
Reef Ventures, L.P. was formed in Texas on April 16, 2003. Coahuila
owned one percent (1%) of Reef Ventures, L.P. Impact was a limited
partner of Reef Ventures and owned seventy-two percent (72%) of Reef
Ventures. L.P. Tidelands formed Arrecefe Management, L.L.C., a Texas
limited liability company, to act as the general partner for Reef
Ventures, L.P. Tidelands had already owned twenty-five percent (25%) of
Reef Ventures, L.P.
Summary of Purchase and Sale Agreement
The Company and Arrecefe purchased Impact's and Coahuila's units of
interest in Reef Ventures, L.P., respectively. Impact financed the sale
of the Reef interests for $6,523,773 payable as follows:
(a) Tidelands executed a Promissory Note to Impact for $6,523,773 (the
"Tidelands Note"). The Tidelands Note bears interest at the prime rate
of interest plus two (2%) percent. The note would call for quarterly
interest payments the first fifteen (15) months, and thereafter,
principal and interest would be due quarterly amortized over twenty
(20) years, but not to exceed an amount equal to One Hundred (100%)
percent of Reef's net cash flow. The unpaid balance of the note would
be due at the end of the fourth year.
(b) The Tideland's note is secured by (i) a deed of trust (the "Deed of
Trust") from the Partnership to Impact, covering the pipeline and
related facilities, easements, rights-of-way and the Gas Contracts
which comprise the project, being that 12-inch pipeline Project for
transporting natural gas from Eagle Pass Texas to Piedras Negras,
Mexico, defined in the Partnership Agreement. The
12
TIDELANDS OIL & GAS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004
NOTE 6 - ACQUISITION (CONTINUED
------ ----------------------
Summary of Purchase and Sale Agreement (Continued)
Deed of Trust would include a present assignment of Reef's rights to
receive cash flow from the Gas Project which would be exercisable by
Impact only upon default under the Tidelands Note, Reef guarantee, or
Reef Deed of Trust. (ii) a guaranty of payment and performance from the
Partnership (the "Partnership Guaranty"), and (iii) a pledge agreement
whereby the Partnership pledges to Impact its 98% membership interest
in Reef.
Summary of Amendment to Warrant and Registration Rights Agreements
The Stock Purchase Warrant Agreement dated April 16, 2003 was amended.
The amended Agreement states that the total number of shares which
Impact is entitled to receive under the warrant is Ten Million
(10,000,000) shares of Tideland's common stock, plus such additional
shares of common stock which may be issued upon the occurrence of an
untimely registration event, less the 500,000 shares issued to Impact
on April 13, 2004. The exercise price is $0.335 per share. The
expiration date of the warrant is extended to April 16, 2006.
The Company has agreed to use its best efforts to register the shares
under the warrant with the Securities and Exchange Commission so that
Impact will be permitted to publicly resell the common shares.
Tidelands agreed to use its best efforts to keep the registration
statement effective as long as it is necessary for Impact to sell the
shares.
If the registration statement is declared effective (i) by April 7,
2005, if the registration is on Form S-3, or (ii) July 7, 2005, if the
registration statement is on Form SB-2 or any other registration form,
the registration statement will be deemed timely (a "Timely
Registration"). In the event of a Timely Registration, Impact will
exercise the warrant for all of the remaining shares under the warrant
on a cash basis payable by Impact through the execution of a promissory
note payable to Tidelands (the "Impact Note"), as of the effective date
of the registration statement. In the event that the Company does not
accomplish a Timely Registration, then Impact may exercise the warrant
at anytime after the date which is the last date for a Timely
Registration, at its option on a cash basis or pursuant to Section 1.2
of the warrant agreement on a net exercise cashless basis for all the
remaining shares under the warrant. If Impact elects to exercise the
warrants on a net exercise cashless basis, we will increase the number
of shares available for issuance under the warrant, regardless of
whether issued for cash or on a net exercise basis, so that the total
number of shares issued would total 10,000,000 shares.
13
TIDELANDS OIL & GAS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004
NOTE 6 - ACQUISITION (CONTINUED
------ ----------------------
If the registration statement is not filed or declared effective on or
before July 14, 2004, the Company will be obligated to issue 500,000
common shares under the cashless exercise provisions of the amended
Stock Purchase Warrant. For each 90 day period that the registration
statement was not filed or declared effective, the Company would
continue to issue 500,000 share blocks of common stock, until declared
effective. Accordingly, the Company issued 500,000 restricted common
shares during July since the registration statement was not filed by
July 14, 2004.
The unaudited pro-forma condensed consolidated results of operations of
the Company have been prepared as if the acquisition of the
seventy-three percent (73%) of Reef Ventures, L.P. had occurred January
1, 2004:
Tidelands Oil & Gas Corporation
Condensed Consolidated Statement of Operations
Nine Months Ended September 30, 2004
"Proforma"
(Unaudited)
Revenues $ 3,975,062
Net (Loss) $ (5,152,407)
Net (Loss) Per Common Share - Basic $ (0.10)
Weighted Average Shares Outstanding - Basic 51,926,974
Net (Loss) Per Common Shares - Diluted $ (0.08)
Weighted Average Shares Outstanding - Diluted 63,310,378
NOTE 7 - COMMON STOCK TRANSACTIONS
------ -------------------------
During January and February 2004, the Company issued 2,722,223 shares
of its restricted common stock for $4,083,335.
On January 8, 2004, the Company authorized the issuance of 200,000
shares of its common stock for 2004 legal fees valued at $344,000 under
the Stock Grant and Option Plan.
On January 8, 2004, the Company issued 300,000 shares of its restricted
common stock for services valued at $450,000 regarding the private
placement of the Company's common stock.
On January 8, 2004, the Company authorized the issuance of 700,000 of
its restricted common stock for consulting services valued at
$1,050,000. These shares were issued during January and February 2004.
14
TIDELANDS OIL & GAS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004
NOTE 7 - COMMON STOCK TRANSACTIONS (CONTINUED)
------ -------------------------------------
On January 8, 2004, the Company issued 52,800 shares of its common
stock valued at $90,816 to a Company officer under the Stock Grant and
Option Plan.
On January 8, 2004, the Company approved the issuance of 75,000 shares
of its restricted common stock in payment of a $75,000 promissory note
and $38,311 of accrued interest. These shares were issued February 3,
2004.
During the quarter, the Company issued 3,322 shares of its restricted
common stock for $4,983.
On April 12, 2004, the Company issued 500,000 shares of its restricted
common stock valued at $497,000 to Impact International, Inc. pursuant
to the terms of the purchase of Reef Venture, L.P. described above.
On April 15, 2004, the Company issued 700,000 shares of its restricted
common stock for consulting services valued at $728,000.
On April 15, 2004, the Company issued 450,000 shares of its restricted
common stock for consulting services valued at $468,000.
On July 2, 2004, the Company issued 500,000 shares of its restricted
common stock valued at $250,625 to Impact International, Inc. pursuant
to the terms of purchase of Reef Ventures, L.P. described above.
On August 1, 2004, the Company issued 1,000,000 shares of its
restricted common stock valued at $383,750 pursuant to a one-year
contract to provide consulting services. In addition, the Company
issued warrants to purchase 500,000 shares of common stock at a price
of $1.45 per share. These warrants expire August 10, 2006.
On September 14, 2004, the Company issued 4,000,000 shares of its
restricted common stock for $2,000,000 which was received during
October, 2004. In addition, the Company issued warrants to purchase
1,000,000 shares of common stock at a price of fifty-cents ($0.50) per
share. These warrants expire August 14, 2006.
On September 14, 2004, the Company issued 500,000 shares of its
restricted common stock valued at $106,875 pursuant to an employment
contract with an officer of the Company.
15
TIDELANDS OIL & GAS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004
NOTE 7- COMMON STOCK TRANSACTIONS (CONTINUED)
------ -------------------------------------
On September 14, 2004, three current officers and directors, a prior
officer/director and an employee of the Company each exercised a
warrant to acquire 500,000 shares of restricted common stock for
$110,000. The parties also executed a one-year promissory note bearing
5% per annum interest in favor of the Company and a security agreement
against the newly issued stock until full payment has been remitted.
NOTE 8 - COMMITMENT FOR SUITE LICENSE AGREEMENT
------ --------------------------------------
On June 4, 2004, the Company entered into a Suite License Agreement
with the San Antonio Spurs, L.C.C. commencing July 1, 2004 for a period
of five years. The annual license fee for the first year is $159,000
and is subject to a 6% per annum price escalation thereafter. The
annual fee is payable in installments as indicated in the agreement.
The future annual license fee commitments are as follows:
2005 $ 161,385
2006 171,068
2007 181,332
2008 192,212
2009 101,872
----------
$ 807,869
==========
NOTE 9 - RELATED PARTY TRANSACTION
------ -------------------------
The Company executed an agreement in January 2004 with a related party
to provide charter air transportation for its employees, customers and
contractors to job sites and other business related destinations. A
prepayment of $300,000 was made to secure a block of six hundred hours
of airtime based on standard industry rates, and as at September 30,
2004, there remains unused airtime in the amount of $275,600.
NOTE 10 - SUBSEQUENT EVENTS
------- -----------------
On October 1, 2004, the Company formed Sonterra Energy Corporation,
("Sonterra"), a Texas Corporation. Sonterra immediately issued 500
shares each to the Company and James Blackwell, PE. Sonterra was
organized for the purpose of acquiring the assets of Oneok Propane
Distribution Company, a division of Oneok Propane Company. In
connection with the purchase of the Oneok assets, James Blackwell sold
his 500 Sonterra shares to Tidelands in exchange for 574,712 Tidelands'
shares; thereby causing Sonterra to become a wholly owned subsidiary of
Tidelands.
16
TIDELANDS OIL & GAS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004
NOTE 10 - SUBSEQUENT EVENTS
------- -----------------
On November 1, 2004, Sonterra entered into an Asset Purchase and Sale
Agreement with Oneok Propane Distribution Company to purchase its
assets for two million dollars, ($2,000,000). The assets consist of
propane distribution systems; including gas mains, yard lines, meters
and storage tanks serving various residential subdivisions in the
Austin, Texas area. The purchase price was funded by Tidelands on
behalf of Sonterra from proceeds of the previous sale of 4,000,000
shares of its restricted common stock received during October 2004.
17
Item 2. Management's Discussion and Analysis or Plan of Operation
Business Overview
Tidelands Oil & Gas Corporation (the "Company"), formerly known as C2
Technologies, Inc., was incorporated under the laws of the State of Nevada on
February 25, 1997. C2 Technologies, Inc. changed its name to Tidelands Oil & Gas
Corporation on November 19, 1998. The Company has five wholly owned
subsidiaries, Rio Bravo Energy LLC, Sonora Pipeline LLC, Arrecefe Management
LLC, Marea Associates, L.P., and Terranova Energia, S.de R.L. de C.V. The
Company also owns a 97% limited partnership interest in Reef Ventures, L.P.
Arrecefe Management LLC owns a 1% general partner interest in Reef Ventures,
L.P. Reef Ventures, L.P. owns 100% of the member interest in Reef International
LLC and Reef Marketing LLC.
The Company's products and services are primarily focused on development and
operation of transportation, processing, distribution and storage projects for
natural gas and liquids in the northeastern states of Mexico (Chihuahua,
Coahuila, Nuevo Leon and Tamaulipas) and the state of Texas in the United States
of America.
The Company derived its revenue from sales of natural gas to the local
distribution company in Piedras Negras, Coahuila through the pipeline owned by
Reef Ventures, L.P. during the months of July and August 2004. The revenue
source from these operations for the month of September 2004 was converted to a
transportation fee based upon volumes metered. It is anticipated that the
conversion of the revenue source to a transporation fee basis will enable the
Company to realize a doubling of net revenues based upon current volumes
committed for delivery to the customer in Piedras Negras, Coahuila. Management
is evaluating an expansion of the pipeline in Coahuila to serve new markets
along the state highway No. 57 corridor to Monclova, Coahuila including the
brewery and bottling operation planned for that area. The volume increase from
this expanded pipeline network is estimated to be 4 to 7 times the current
average throughput to the local distribution company in Piedras Negras,
Coahuila. The planned natural gas liquid line between Eagle Pass, Texas and
Piedras Negras, Coahuila is being re-evaluated in light of new supply sources
emerging in Nuevo Laredo and Reynosa, Tamaulipas. A decision to proceed, modify
or abandon the LPG project at this location is under evaluation. The existing
natural gas and natural gas liquid projects were acquired in connection with the
buyout of the Impact general and limited partnership interests in Reef Ventures,
L.P. which is described in further detail in Footnote 6 to the Condensed
Consolidated Financial Statements above.
In December 2003, the Company entered into a Memorandum of Understanding with
PEMEX to design, build and operate an underground natural gas storage facility
in the vicinity of Reynosa, Tamaulipas, Mexico, in the Burgos Basin area and
eventually at other regions in Mexico. The MOU provides for exclusivity in the
development of the projects and the related transportation and interconnecting
pipelines to and from the storage facilities.
18
The Company has completed its initial study of the Burgos facility and expects
to complete final contract negotiations with PEMEX and third party vendors for
the construction and operation of the facility shortly. A system of two
interconnecting pipelines is also proposed to enhance the overall pipeline grid
and the efficiency of operation of the storage facility. Permit applications
will be filed for all these projects with the Mexican Energy Regulatory
Commission in the fourth quarter of 2004. The capital budget for these projects
exceeds $300 million USD and is expected to be funded through additional equity
and debt issuances by the Company. Marea Associates, L.P. was formed during the
fiscal quarter ended June 30, 2004 to own the majority interest in Terranova
Energia, S. de R.L. de C.V. a Mexican company which will enter into all
contracts for business dealings in Mexico on behalf of the Company. Rio Bravo
Energy LLC, an existing wholly owned subsidiary owns the general partner
interest in Marea Associates, L.P. and a minority interest in Terranova Energia,
S. de R.L. de C.V.
Rio Bravo Energy, LLC was formed on August 10, 1998 to operate the Chittim Gas
Processing Plant which was purchased in 1999 and was processing natural gas
primarily from Conoco Oil's Sacatosa Field. The Sacatosa Field was primarily an
oilfield which produced high BTU casinghead gas from which processing would
yield valuable hydrocarbon components such as propane, butane and natural
gasolines. As the field depleted lower volumes of casinghead gas were being
delivered by Conoco and other gas producers could not be contracted with for
processing of additional replacement volumes of gas. Therefore, in October 2002,
the plant was temporarily shut down due to the declining economics associated
with low volume operation of the plant. Subsequent to September 30, 2004, the
Company closed a $2,000,000 Regulation S equity financing with ACH Securities,
S.A. The proceeds of this financing were used to fund the acquisition of
residential propane distribution systems in western Travis County, Texas via the
Company's new wholly owned corporate subsidiary, Sonterra Energy Corporation as
of November 1, 2004. Management is evaluating the re-opening of the Chittim gas
plant in order to provide lower cost feedstock fuel for sale through Sonterra
Energy Corporation operations. Management is also evaluating two different
supply sources for the reopening of the Chittim gas plant. As noted above, Rio
Bravo Energy LLC also owns a general partner interest in Marea Associates, L.P.
and the minority interest in Terranova Energia, S. de R.L. de C.V.
Sonora Pipeline, LLC was formed in January 1998 to operate the Sonora pipeline
network which has the capability of delivering adequate volumes of natural gas
for economic operation of the Chittim Gas Processing Plant. The pipeline network
consists of approximately 80 miles of gas pipeline. The assets of this company
were acquired in conjunction with the Chittim Gas Processing Plant acquisition
and, when operational, would generate revenue from transportation fees to be
charged to third party gas producers shipping natural gas to the gas plant owned
by Rio Bravo Energy LLC.
19
RESULTS OF OPERATIONS
REVENUES: The Company reported revenues of $1,332,560 for the nine months ended
September 30, 2004 as compared with revenues from continuing operations of
$123,922 for the nine months ended September 30, 2003. The revenue increase
resulted from the acquisition of a 98% interest in Reef Ventures, L.P. which
owns and operates a natural gas pipeline serving the Piedras Negras, Coahuila
market.
TOTAL COSTS AND EXPENSES: Total costs and expenses from continuing operations
increased from $981,720 for the nine months ended September 30, 2003 to
$6,441,177 for the nine months ended September 30, 2004.
COST OF SALES: The cost of sales (purchases) from continuing operations
increased from -0- for the nine months ended September 30, 2003 to $1,299,518
for the nine months ended September 30, 2004. The increase was due to the
purchase cost of natural gas resold through the natural gas pipeline owned by
Reef Ventures, L.P.
OPERATING EXPENSES: Other operating expenses from continuing operations
increased from $981,720 for the nine months ended September 30, 2003 to
$5,141,659 for the nine months ended September 30, 2004 which is total increase
of $4,159,939. Depreciation increased by $104,056 due to the acquisition of the
natural gas pipeline owned by Reef Ventures, L.P. Interest expense increased by
$106,102 due to the debt incurred to acquire the natural gas pipeline owned by
Reef Ventures, L.P. Pipeline operating expenses decreased by $8,068 due to
different operating requirements of the assets owned during the respective nine
month periods. Officers and Directors Salaries & Fees increased by $294,983 for
the nine months ended September 30, 2004 versus the nine months ended September
30, 2003 due to hiring of additional officers and directors. The non-cash
component of this increase was $197,691 due to issuance of common stock to
officers and directors. General & Administrative expenses increased
substantially as detailed below.
SELLING GENERAL AND ADMINISTRATIVE: General & Administrative Expenses increased
by $3,662,866 for the nine months ended September 30, 2004 versus the nine
months ended September 30, 2003 due to an increase in the issuance of common
stock for consulting fees, legal fees, and financing fees by $3,231,561 which
are non-cash expenses accounting for all but $431,305 of the increase in general
and administrative expenses. The remaining increase in G & A costs was primarily
from cash paid for travel costs, insurance premiums, entertainment, accounting
fees and legal fees.
NET LOSS FROM OPERATIONS:Net loss of ($857,798) for the nine months ended
September 30, 2003 increased to ($5,108,617) for the nine months ended September
30, 2004, an increase in the amount of loss of $4,250,819. The non-cash
component of the increase in loss was $3,747,066.
20
LIQUIDITY AND CAPITAL RESOURCES: Capital expenditures during the nine months
ended September 30, 2004 totaled $6,829,125 as compared with $95,360 for the
nine months ended September 30, 2003. The increase of $6,733,765 was due to
acquisition of the Reef Ventures, L.P. natural gas pipeline ($6,113,255),
increased equipment and leasehold cost of $19,946, higher pre-construction costs
regarding potential international pipeline crossings and storage facilities in
Mexico ($580,564), and additional equipment for our gas processing plant
($20,000).
Total debt increased from $1,138,905 at December 31, 2003 to $7,062,336 at
September 30, 2004. The increase in total debt is due to the acquisition
indebtedness created in the acquisition of the Reef Ventures, L.P. partnership
interests from Coahuila Pipeline LLC and Impact International LLC as described
in Note 6 to the Condensed Consolidated Financial Statements for the period
ended September 30, 2004. Total debt as of September 30, 2004 and December 31,
2003 expressed as a percentage of the sum of total debt and shareholders' equity
was 56.85% and 70.15% respectively.
Net loss for the nine months ended September 30, 2004 was ($5,091,877) a
decrease of 854% from the net income of $675,083 for the nine months ended
September 30, 2003. Diluted net loss per common share increased 500% to ($0.10).
The net loss per share calculation for the nine months ended September 30, 2004
included an increase in actual and equivalent shares outstanding.
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.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK:
The Company does not issue or invest in financial instruments or their
derivatives for trading or speculative purposes. The operations of the Company
are conducted primarily in the United States, and, are not subject to material
foreign currency exchange risk. Although the Company has outstanding debt and
related interest expense, market risk of interest rate exposure in the United
States is currently not material.
Item 3. Controls and Procedures
21
(a) Evaluation of Disclosure Controls and Procedures.
Within the 90 days prior to the date of this Quarterly Report for the
period ended September 30, 2004, we carried out an evaluation, under the
supervision and with the participation of our management, including the
Company's Chairman and Chief Executive Officer and the Chief Financial Officer,
of the effectiveness of the design and operation of our disclosure controls and
procedures pursuant to Rule 13a-14 of the Securities Exchange Act of 1934 (the
"Exchange Act"), which disclosure controls and procedures are designed to insure
that information required to be disclosed by a company in the reports that it
files under the Exchange Act is recorded, processed, summarized and reported
within required time periods specified by the SEC's rules and forms. Based upon
that evaluation, the Chairman and the Chief Financial Officer concluded that our
disclosure controls and procedures are effective in timely alerting them to
material information relating to the Company required to be included in the
Company's period SEC filings.
(b) Changes in Internal Control.
Subsequent to the date of such evaluation as described in subparagraph
(a) above, there were no significant changes in our internal controls or other
factors that could significantly affect these controls, including any corrective
action with regard to significant deficiencies and material weaknesses.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
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 when it sued Betty Lou Sheerin for her failure
to make payments on a note she executed payable to Northern in the original
principal amount of $1,950,000. Northern's suit was filed on November 13, 2002.
Sheerin answered Northern's lawsuit on January 6, 2003. Sheerin's answer
generally denied Northern's claims and raised the affirmative defenses of
fraudulent inducement by Northern, estoppel, waiver and the further claim that
the not does not comport with the legal requirements of a negotiable instrument.
Sheerin seeks a judicial ruling that Northern be denied any recovery on the
note. Sheerin's answer included a counterclaim against Northern, ZG Gathering,
and Ken Lay generally alleging, among other things, that Northern, ZG Gathering,
Ltd. and Ken Lay, fraudulently induced her execution of the note. Northern has
filed a general denial of Sheerin's counterclaims. Sheerin's answer included a
third party cross claim against Tidelands. She alleges that Tidelands entered
into an agreement to purchase the Zavala Gathering System from ZG Gathering Ltd.
and that, as a part of the agreement, Tidelands agreed to satisfy all of the
obligations due and owing to Northern, thereby relieving Sheerin of all
22
obligations she had to Northern on the promissory note in question. She alleges
that Tidelands is liable to her for all of her actual damages, costs of the
lawsuit and other unstated relief. Tidelands and Sheerin agreed to delay the
Tideland's answer date in order to allow time for mediation of the case.
Tideland's participated in a mediation on March 11, 2003. The case was not
settled at that time. Tideland's answered the Sheerin suit on March 26, 2003.
Tideland's answer denies all of Sheerin's allegations. No discovery has been
completed at this time. Based on initial investigation, however, Tidelands
appears to have a number of potential defenses to Sheerin's claims. Tideland's
intends to aggressively defend the lawsuit. At this early stage in the
litigation, and in light of our continuing investigation of the facts and the
issues in the case, we cannot give a more definitive evaluation of the extent
Tideland's liability exposure.
On May 24 and June 16, 2004 respectively, Betty Lou Sheerin filed her
first and second amended original answer, affirmative defenses, special
exceptions and second amended original counterclaim, second amended original
third party cross-actions and requests for disclosure. In these amended
pleadings, she sued Michael Ward, Royis Ward, James B. Smith, Carl Hessell and
Ahmed Karim in their individual capacities. Her claims against these individuals
are for fraud, breach of the Uniform Commercial Code, breach of duty of good
faith and fair dealing and conversion. These claims are being vigorously
defended.
In September 2002, as a pre-closing deposit to the purchase of the ZG
pipelines, the Company executed a $300,000 promissory note to Betty L. Sheerin,
a partner of ZG Gathering, Ltd. In addition, the Company issued 1,000,000 shares
of its common stock to various partners of ZG Gathering, Ltd. The company
believes that the promissory note and shares of common stock will be cancelled
based upon the outcome of the litigation described above. Accordingly, our
financial statements reflect this belief.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
During the third quarter of 2004 the Company authorized, offered and sold the
following securities pursuant to exemptions from the registration requirements
of the Securities Act of 1933, as amended (the "Securities Act").
On July 2, 2004, we issued 500,000 shares of common stock to Impact
International, LLC. valued at $250,625 in a cashless exercise of their common
stock warrants.
On August 1, 2004, we issued 1,000,000 shares of common stock to L.L. Capital
Group, LLC pursuant to a Consulting Services Agreement. The transaction was
valued at $383,750.
On September 14, 2004, the following individuals exercised common stock options:
(1) Michael Ward, the Company's President and Director, exercised
his common stock option to purchase 500,000 common shares for
$110,000 payable on a promissory note bearing interest at the
rate of 5% payable in full on, or before September 14, 2005.
The shares are subject to a security agreement.
23
(2) Ahmed Karim, the Company's Vice President and Director,
exercised his common stock option to purchase 500,000 common
shares for $110,000 payable on a promissory note bearing
interest at the rate of 5% payable in full on, or before
September 14, 2005. The shares are subject to a security
agreement.
(3) James Smith, the Company's Chief Financial Officer, exercised
his common stock option to purchase 500,000 common shares for
$110,000 payable on a promissory note bearing interest at the
rate of 5% payable in full on, or before September 14, 2005.
The shares are subject to a security agreement.
(4) Samuel Simon exercised his common stock option to purchase
500,000 common shares for $110,000 payable on a promissory
note bearing interest at the rate of 5% payable in full on, or
before September 14, 2005. The shares are subject to a
security agreement.
On September 14, 2004, we issued 500,000 shares of common stock to Michael Ward
as a stock grant under his employment agreement. The shares were valued at
$106,875.
We believe the shares issued above were issued in private transactions
pursuant to Section 4(2) of the Securities Act of 1933, as amended, (the
"Securities Act"). These shares are considered restricted securities and may not
be publicly resold unless registered for resale with appropriate governmental
agencies or unless exempt from any applicable registration requirements.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of the security holders, through the
solicitation of proxies or otherwise, during the first quarter of the fiscal
year covered by this report.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
24
Exhibit No. Exhibit Name
31.1 Chief Executive Officer-Section 302 Certification
pursuant to Sarbane-Oxley Act.
31.2 Chief Financial Officer- Section 302 Certification
pursuant to Sarbane-Oxley Act.
32.1 Chief Executive Officer-Section 906 Certification
pursuant to Sarbane-Oxley Act.
32.2 Chief Financial Officer- Section 906 Certification
pursuant to Sarbane-Oxley Act.
(b) Reports on Form 8-K. During the third quarter of 2004 we filed two Current
Reports on Form 8-K: August 13, 2004 reporting under Item 7, September 20, 2004
reporting under Item 3.02.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
TIDELANDS OIL & GAS CORP.
Dated: November 15, 2004 /s/ Michael Ward
--------------------------- -------------------------
By: Michael Ward
Title: President, CEO
Dated: November 15, 2004 /s/ James B. Smith
--------------------------- -------------------------
By: James B. Smith
Title: CFO