UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-QSB
(Mark one)
[X] Quarterly Report Under Section 13 or 15(d) of The Securities Exchange
Act of 1934
For the quarterly period ending March 31, 2005
[_] Transition Report Under Section 13 or 15(d) of The Securities Exchange
Act of 1934
For the transition period from __________ to _________
Commission File Number: 0-29613
TIDELANDS OIL & GAS CORPORATION
(Exact name of small business issuer as specified in its charter)
Nevada 66-0549380
-------------------------- ------------------------
(State of incorporation) (IRS Employer ID Number)
1862 West Bitters Rd., San Antonio, TX 78248
--------------------------------------------
(Address of principal executive offices)
(210) 764-8642
--------------
(Issuer's telephone number)
Securities registered under Section 12 (b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock - $0.001 par value
Check whether the issuer has (1) filed all reports required to be 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 March 31, 2005, there were 62,363,359 shares of Common Stock issued and
outstanding.
Transitional Small Business Disclosure Format : Yes No X
--- ---
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
TIDELANDS OIL & GAS CORPORATION
FORM 10-QSB
INDEX
Page
----
PART I - Financial Information
Item 1 - Financial Statements
Condensed Consolidated Balance Sheets as of
March 31, 2005 and December 31, 2004............................... 3
Condensed Consolidated Statements of Operations
For the Three Months Ended March 31, 2005 and 2004................. 4
Condensed Consolidated Statements of Cash Flows
For the Three Months Ended March 31, 2005 and 2004................. 5-6
Notes to Condensed Consolidated Financial Statements...............7-11
Item 2 - Management's Discussion and Analysis or Plan of Operation.......... 12
Item 3 - Controls and Procedures............................................ 13
PART II - Other Information
Item 1 - Legal Proceedings ................................................. 14
Item 2 - Changes in Securities and Use of Proceeds.......................... 14
Item 3 - Defaults Upon Senior Securities.................................... 14
Item 4 - Submission of Matters to a Vote of Security Holdings............... 14
Item 5 - Other Information.................................................. 14
Item 6 - Exhibits and Reports on Form 8K ................................... 14
Signature................................................................... 15
-2-
TIDELANDS OIL & GAS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(ASSETS)
March 31, December 31,
2005 2004
------------ ------------
(Unaudited)
Current Assets:
Cash $ 4,623,198 $ 5,459,054
Cash Restricted 75,000 25,000
Accounts and Loans Receivable 404,488 516,387
Inventory 60,159 82,523
Prepaid Expenses 418,362 487,488
------------ ------------
Total Current Assets 5,581,207 6,570,452
------------ ------------
Property Plant and Equipment, Net 9,245,326 9,086,313
------------ ------------
Other Assets:
Deposits 6,608 4,108
Deferred Charges 38,750 116,250
Note Receivable 287,170 286,606
Goodwill 1,158,937 1,158,937
------------ ------------
Total Other Assets 1,491,465 1,565,901
------------ ------------
Total Assets $ 16,317,998 $ 17,222,666
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts Payable and Accrued Expenses $ 438,830 $ 574,224
Notes Payable 0 0
------------ ------------
Total Current Liabilities 438,830 574,224
Long-Term Debt 11,817,301 11,731,883
------------ ------------
Total Liabilities 12,256,131 12,306,107
------------ ------------
Commitments and Contingencies -- --
Stockholders' Equity:
Common Stock, $.001 Par Value Per Share,
100,000,000 Shares Authorized, 62,363,359
and 61,603,359 Shares Issued and
Outstanding at March 31, 2005
and December 31, 2004 Respectively 62,364 61,604
Paid-in Capital in Excess of Par Value 22,918,580 22,537,340
Subscriptions Receivable (550,000) (550,000)
Accumulated (Deficit) (18,369,077) (17,132,385)
------------ ------------
Total Stockholders' Equity 4,061,867 4,916,559
------------ ------------
Total Liabilities and Stockholders' Equity $ 16,317,998 $ 17,222,666
============ ============
See Accompanying Notes to Condensed Consolidated Financial Statements
-3-
TIDELANDS OIL & GAS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended Three Months Ended
March 31, 2005 March 31, 2004
------------------ ------------------
Revenues:
Gas Sales and Pipeline Fees $ 586,949 $ 0
Construction Services 41,126 0
------------------ ------------------
Total Revenues 628,075 0
------------------ ------------------
Expenses:
Cost of Sales 284,679 0
Operating Expenses 66,774 0
Depreciation 115,441 11,280
Interest 209,787 4,719
Sales, General and Administrative 1,220,911 1,522,209
------------------ ------------------
Total Expenses 1,897,592 1,538,208
------------------ ------------------
(Loss) From Operations (1,269,517) (1,538,208)
(Loss) on Sale of Asset (3,167) 0
Interest and Dividend Income 35,992 3,867
------------------ ------------------
Net (Loss) $ (1,236,692) $ (1,534,341)
================== ==================
Net (Loss) Per Common Share:
Basic and Diluted $ (0.02) $ (0.03)
================== ==================
Weighted Average Number of Common
Shares Outstanding 61,983,359 46,850,314
================== ==================
See Accompanying Notes to Condensed Consolidated Financial Statements
-4-
TIDELANDS OIL & GAS CORPORATION
STATEMENTS OF CONDENSED CONSOLIDATED CASH FLOWS
(UNAUDITED)
Three Months Ended Three Months Ended
March 31, 2005 March 31, 2004
------------------ --------------------
Cash Flows Provided (Required) By
Operating Activities:
Net (Loss) $ (1,236,692) $ (1,534,341)
Adjustments to Reconcile Net (Loss)
to Net Cash Provided (Required) By
Operating Activities:
Depreciation 115,441 11,280
Loss on Disposal of Equipment 3,167 0
Issuance of Common Stock:
For Services Provided 382,000 1,226,816
Changes in:
Accounts Receivable 111,899 (517)
Inventory 22,364 0
Prepaid Expenses 69,126 (300,499)
Deferred Charges 77,500 0
Deposits (2,500) 0
Accounts Payable and
Accrued Expenses (135,394) (591,783)
------------------ --------------------
Net Cash (Required)
By Operating Activities (593,089) (1,189,044)
------------------ --------------------
Cash Flows Provided (Required)
By Investing Activities:
Acquisitions of Property, Plant
and Equipment (278,421) (140,258)
Disposals of Equipment 800 0
------------------ --------------------
Net Cash (Required)
By Investing Activities (277,621) (140,258)
------------------ --------------------
See Accompanying Notes to Condensed Consolidated Financial Statements
-5-
TIDELANDS OIL & GAS CORPORATION
STATEMENTS OF CONDENSED CONSOLIDATED CASH FLOWS
(UNAUDITED)
Three Months Ended Three Months Ended
March 31, 2005 March 31, 2004
------------------ ------------------
Cash Flows (Required) Provided
by Financing Activities:
Proceeds from Issuance of Common Stock 0 4,083,334
Proceeds From Long-Term Loans 85,418 0
Repayment of Short-Term Loans 0 (100,000)
Loan to Related Party (564) 0
------------------ ------------------
Net Cash Provided by
Financing Activities 84,854 3,983,334
------------------ ------------------
Net Increase (Decrease) in Cash (785,856) 2,654,032
Cash at Beginning of Period 5,484,054 894,457
------------------ ------------------
Cash at End of Period $ 4,698,198 $ 3,548,489
================== ==================
Supplemental Disclosures of
Cash Flow Information:
Cash Payments for Interest $ 115,994 $ 4,719
================== ==================
Cash Payments for Income Taxes $ 0 $ 0
================== ==================
Non-Cash Financing Activities:
Issuance of Common Stock:
Operating Activities $ 382,000 $ 1,226,816
Repayment of Loans 0 75,000
Payment of Accounts Payable 0 38,311
Prepayment of Legal Fees 0 258,000
------------------ ------------------
Total Non-Cash Financing Activities $ 382,000 $ 1,598,127
================== ==================
See Accompanying Notes to Condensed Consolidated Financial Statements
-6-
TIDELANDS OIL & GAS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005
NOTE 1 - BASIS OF PRESENTATION
------ ---------------------
The accompanying unaudited condensed consolidated financial statements
for the three month periods ended March 31, 2005 and 2004 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, 2004 is derived from the registrant's
Form 10-KSB for the year ended December 31, 2004. 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 three-month period ended March 31, 2005 are
not necessarily indicative of the results that may be expected for the
remainder of the fiscal year ending December 31, 2005. 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.
-7-
TIDELANDS OIL & GAS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005
NOTE 2 - RESTRICTED CASH
------ ----------------
Restricted cash consists of certificates of deposit to secure three
letters of credit issued to the Railroad Commission of Texas regarding
our gas processing plant and two pipeline systems.
NOTE 3 - PROPERTY, PLANT AND EQUIPMENT
------ -----------------------------
A summary of property, plant and equipment at March 31, 2005 and
December 31, 2004 is as follows:
Estimated
March 31, December 31, Economic
2005 2004 Life
------------ ------------ ------------
Pre Construction Costs:
International Crossings to Mexico $ 27,601 $ 27,601 N/A
Mexican Gas Storage Facility
and Related Pipelines 1,096,703 928,232 N/A
Propane Distribution Systems 207,415 207,415 N/A
------------ ------------
Total 1,331,719 1,163,248
Office Furniture, Equipment and
Leasehold Improvements 87,217 46,141 5 Years
Pipelines - Domestic 431,560 431,560 15 Years
Pipeline - Eagle Pass, TX to Piedras
Negras, Mexico 6,106,255 6,106,255 20 Years
Gas Processing Plant 186,410 186,910 15 Years
Tanks & Lines - Propane Distribution
System 1,596,439 1,596,439 5 Years
Machinery and Equipment 57,180 57,180
Trucks, Autos and Trailers 127,798 63,175
------------ ------------
Total 9,924,578 9,650,408
Less: Accumulated Depreciation 679,252 564,095
------------ ------------
Net Property,
Plant and Equipment $ 9,245,326 $ 9,086,313
============ ============
Depreciation expense for the three months ended March 31, 2005 and
March 31, 2004 was $115,441 and $11,280 respectively.
-8-
TIDELANDS OIL & GAS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005
NOTE 4 - LONG-TERM DEBT
------ --------------
A summary of long-term debt at March 31, 2005 and December 31, 2004 is
as follows:
March 31, December 31,
2005 2004
------------ ------------
Note Payable, Secured, Interest Bearing
at 2% Over Prime Rate, Maturing
May 25, 2008 $ 6,817,301 $ 6,731,883
Convertible Debentures, Unsecured,
7% Interest Bearing,
Maturing May 17, 2006 5,000,000 5,000,000
------------ ------------
11,817,301 11,731,883
Less: Current Maturities 0 0
------------ ------------
Total Long-Term Debt $ 11,817,301 $ 11,731,883
============ ============
NOTE 5 - 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 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 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 obligations she had to Northern on the
$1,950,000 promissory note in question. 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.
-9-
TIDELANDS OIL & GAS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005
NOTE 5 - LITIGATION (CONTINUED)
------ ---------------------
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 contract,
breach of the Uniform Commercial Code, breach of duty of good faith and
fair dealing and conversion.
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. On December 3, 2003, Sheerin filed a separate lawsuit
against Tidelands in the 150th District Court of Bexar County, Texas on
this promissory note seeking a judgment against Tidelands for the
principle amount of the note, plus interest. On December 29th, 2003,
Tidelands answered this lawsuit denying liability on the note. On April
1, 2004, Tidelands filed a plea in abatement asking the court to
dismiss or abate Sheerin's lawsuit on the $300,000 promissory note as
it was related to and its outcome was dependent on the outcome of the
Sheerin third party cross action against Tidelands in Cause Number
2002-C1-16421. The Company believes that the promissory note and shares
of common stock should be cancelled based upon the outcome of the
litigation described above. Accordingly, our financial statements
reflect this belief.
On September 15, 2004 and again on October 15, 2004 respectively,
Sheerin amended her pleadings to include a third and fourth amended
third party cross action against Tidelands adding a claim for the
$300,000 promissory note. In these amended pleadings, Sheerin also
deleted her claims against Carl Hessell and Ahmed Karim.
Sheerin seeks damages against Tidelands for indemnity for any sums
found to be due from her to Northern Natural Gas Company, unspecified
amounts of actual damages, statutory damages, unspecified amounts of
exemplary damages, attorneys fees, costs of suit, and prejudgment and
post judgment interest.
Some discovery has been completed at this time. Based on initial
investigation, and discovery to date, Tidelands appears to have a
number of potential defenses to Sherrin's claims. Tideland's intends to
aggressively defend the lawsuit. At this stage in the litigation, and
in light of our continuing investigation and incomplete discovery, we
cannot give a more definitive evaluation of the extent of Tideland's
liability exposure.
NOTE 6 - COMMON STOCK TRANSACTIONS
------ -------------------------
On January 3, 2005, the Company issued 200,000 shares of its common
stock for 2005 legal fees valued at $100,000 under the 2004 Stock Grant
and Option Plan.
On February 1, 2005, the Company issued 500,000 shares of its
restricted common stock valued at $200,000 to Impact International, LLC
pursuant to the terms of the purchase of Reef Ventures, L.P.
On February 25, 2005, the Company approved the issuance of 60,000
shares of its restricted common stock valued at $82,000 for investor
public relations services. These shares are to be issued during the
second quarter of 2005.
NOTE 7 - SUMMARY OF TERMS OF CONVERTIBLE DEBENTURE AND WARRANTS
------ ------------------------------------------------------
On November 18, 2004, the Company entered into a Securities Purchase
Agreement with Mercator Momentum Fund, LP, Mercator Momentum Fund III,
LP, Monarch Pointe Fund, LP, (collectively, "the Funds") and Mercator
Advisory Group, LLC ("Mercator"). In exchange for $5,000,000, the
Company issued to the "Funds" and Mercator Advisory Group, 7%
convertible debentures with a maturity date of May 18, 2006. Under the
terms of the agreement, the Company is obligated to make monthly
interest payments until maturity of $29,166,67.
-10-
TIDELANDS OIL & GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005
NOTE 7 - SUMMARY OF TERMS OF CONVERTIBLE DEBENTURE AND WARRANTS (CONTINUED)
------ ------------------------------------------------------
The 7% Convertible Debentures are convertible into the Company's common
stock at a 15% discount to the market price at the time of conversion,
subject to a $0.45 floor and a $0.76 ceiling.
The Company has granted the Funds and Mercator registration rights on
these securities. If the company does not have its registration
statement effective within 90 days from filing, or extend its best
efforts to do so, the discount will be increased to 25% of the market
price at the time of conversion.
In connection with this financing the Company issued 6,578,948 common
stock warrants which expire November 18, 2007. The warrants are
exercisable at prices ranging from $.80 to $.87.
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 $ 168,540
2006 178,652
2007 189,371
2008 200,733
----------
$ 737,296
==========
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 5% interest bearing loan due in January 2007 was
made by the Company regarding the transaction. The loan balance is
credited by airtime charges at standard industry rates offset by
interest charges computed on the average monthly balance. At March 31,
2005, the loan balance was $287,170.
NOTE 10 - SUBSEQUENT EVENTS
------- -----------------
During April and May, 2005, three separate legal actions were initiated
against Sonterra Energy Corporation (Sonterra), a wholly-owned
subsidiary of the Company. Two of the actions concern claims made by
developers against Sonterra for their failure to pay rent and easement
use fees as a result of their asset purchase from Oneok Propane
Distribution Company on November 1, 2004. The third action involves a
claim made by a builder that Sonterra does not have a proper easement
for the current use of certain property. The Company believes that the
three actions filed are without merit and intend to vigorously defend
itself. Litigation regarding these three actions are still in their
early stages, therefore, potential financial impacts, if any, cannot be
determined at this time.
-11-
Item 2. Management's Discussion and Analysis or Plan of Operation
Business Overview
Our products and services are primarily focused on development and operation of
transportation, processing, distribution and storage projects for natural gas
and natural gas liquids in the northeastern states of Mexico (Chihuahua,
Coahuila, Nuevo Leon and Tamaulipas) and the state of Texas in the United States
of America.
We derive our revenue from sales of natural gas to Conagas, the local
distribution company in Piedras Negras, Coahuila, through the pipeline owned by
Reef Ventures, L.P. and the sale of propane gas to residential customers through
the assets owned by Sonterra Energy Corporation. We also design and construct
residential propane delivery systems for new residential developments in Central
Texas. .
With respect to our pipeline system owned by Reef Ventures, L.P., management is
evaluating an expansion of the pipeline in Coahuila to serve new markets along
the state highway No. 57 corridor to Monclova, Coahuila. We currently expect
that this project will not be activated until the fourth quarter of 2005. 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 Texas
and Mexico. We are evaluating the utility of the project as either a tolling
business model for existing demand in Coahuila or as a merchant facility in a
direct contract with the propane importation arm of PEMEX. We expect further
development of the project to be announced by the fourth quarter of 2005.
Sonterra Energy Corporation, a wholly owned subsidiary of Tidelands entered into
the residential propane distribution business on November 1, 2004 with its
acquisition of 850 existing customers located in 15 subdivisions in the vicinity
of Austin, Texas. Sonterra's existing and future market area includes several
central Texas locations that do not have access to natural gas as a fuel for
home heating and appliance usage. Current expansion of over 400 lots within the
existing subdivisions is possible. Sonterra has also entered into a new
agreement with the developer of Northshore on Lake Travis to expand the
currently serviced lots by an additional 1,000 units. Up to 2,625 additional
lots may be available for installation of residential propane delivery in
developments currently in the planning stages in the nearly central Texas
vicinity. Management is actively seeking new subdivision installation of propane
systems in the Central Texas and has recently identified 4 new subdivisions in
the San Antonio/Austin Hill Country corridor as prospective for system
installation.
-12-
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 gas processing
operations 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. We plan to reopen the plant
in 2005 when adequate volumes of LPG feedstock from third parties makes plant
operations economically attractive. We are evaluating the feasibility of opening
the gas plant for LPG production for our Sonterra LPG business in Austin, Texas.
Additionally, the market for the products of the Chittim plant operation could
include our future propane/butane terminal and pipeline crossing into Mexico. As
noted above, Rio Bravo Energy LLC 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. Presently, the line is not
in use. The pipeline was acquired in conjunction with the Chittim Gas Processing
Plant acquisition. When operational, it would generate revenue from
transportation fees charged to third party gas producers shipping natural gas to
the Chittim Gas Plant owned by Rio Bravo Energy LLC. Sonora Pipeline LLC will
also own and operate the U.S. (Texas) pipeline segments to be constructed in
connection with the Mexican pipeline, LNG regasification terminal and gas
storage projects which will interconnect to the U.S. via two international
pipeline crossings near McAllen, Texas. The estimated capital cost of these U.S.
segments is approximately $60 million USD. Management expects a filing with the
Federal Energy Regulatory Commission in the second quarter of 2005 for
permission to operate these new pipelines and the granting of presidential
permits for the international crossings near Penitas and Progreso, Texas for
delivery of natural gas into the state of Tamaulipas and the pipelines owned by
our Mexican subsidiary, Terranova Energia S. de R.L. de C.V.
In October 2003, we entered into a confidentiality agreement with Pemex
Exploration and Production ("PEP") to facilitate the exclusive exchange of well
control and seismic data for the purpose of evaluating the feasibility and
design of one or more underground natural gas storage facilities in the Burgos
Basin of Northeast Mexico. In December 2003, we entered into a Memorandum of
Understanding (MOU) 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.
We have completed the initial study of the Burgos facility and expect to
complete final contract negotiations with the Secretary of Energy and PEMEX for
the construction and operation of the facility in the second or third quarter of
2005. A system of two interconnecting pipelines is also proposed to enhance the
-13-
overall pipeline grid in Mexico and the operational efficiency of the storage
facility. Permit applications for all these projects will be filed in 2005 with
the Mexican Energy Regulatory Commission. The capital budget for these projects
exceeds $700 Million Dollars. We anticipate funding these projects with
additional equity of the Company, the addition of joint venture partners and/or
debt financing. 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 conduct all business dealings in
Mexico on behalf of the Tidelands. 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.
We are in the preliminary design phase for an LNG regasification terminal to be
located in offshore Mexican waters of the Gulf of Mexico near Matamoros,
Tamaulipas. The Dorado LNG Terminal would provide additional supply for
Northeast Mexico natural gas markets which are currently importing approximately
1.0 BCF per day from the U.S. The capital cost to build the terminal and
interconnecting pipeline to the planned storage facility is expected to be over
$200 million USD. Management estimates a cumulative capital investment of
approximately $1 billion USD for the LNG regasification terminal, the pipelines
in the U.S. and Mexico and the Mexican storage facility. These projects are
targeted to address the critical infrastructure needs for the natural gas and
power markets in Northeast Mexico through the year 2013. A collateral
opportunity to import natural gas into the U.S. via the project's route and
facilities is also contemplated. Management is in active negotiations for LNG
supply, U.S. supply and off take gas contracts in Mexico and the U.S. The
projects will be developed and operated with a tolling business model as the
revenue premise, however, joint venture or contractual relationships with third
parties may allow the Company to participate in merchant operations in the
energy supply business for Mexican and U.S. customers.
The Company has engaged Sanders Morris Harris, Inc., an energy investment
banking firm in Houston, Texas, as its primary financial advisor with respect to
the capital raise requirements for the above projects. We have also had
substantive and ongoing discussions with interested third parties for private
equity and debt and will continue those discussions in the upcoming year as
further development of the projects occurs.
Results of Operations
REVENUES: The Company reported revenues of $ 628,075 for the three months ended
March 31, 2005 as compared with revenues from continuing operations of $ 0 for
the three months ended March 31, 2004. The revenue increase resulted from the
acquisition of an additional 73% interest in Reef Ventures, L.P. which owns and
operates a natural gas pipeline serving the Piedras Negras, Coahuila market and
the acquisition of residential propane delivery pipeline assets from ONEOK
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Propane Company in the fourth quarter of 2004 Transportation fees ($74,211)
charged from the Reef Ventures, L.P. operations plus sales of propane by
Sonterra Energy Corporation to its residential customer base ($ 512,738) and
construction service income of $41,126 resulted in Total Revenues of $628,075
for the three months ended March 31, 2005.
TOTAL COSTS AND EXPENSES: Total costs and expenses from continuing operations
increased from $ 1,538,208 for the three months ended March 31, 2004 to
$1,897,592 for the three months ended March 31, 2005. Cost of Sales increased
from $0 for the three months ended March 31, 2004 to $284,679 for the three
months ended March 31, 2005 Operating Expenses increased from $0 for the three
months ended March 31, 2004 to $66,774 for the three months ended March 31,
2005. Depreciation Expense increased from $ 11,280 for the three months ended
March 31, 2004 to $115,441 for the three months ended March 31, 2005. Interest
Expense increased from $4,719 for the three months ended March 1, 2004 to
$209,787 for the three months ended March 31, 2005. Each of these increases
resulted primarily from growth related to the acquisition of 98% of the
partnership interest in the Reef Ventures, L.P. international pipeline
operations and the acquisition of the residential propane sales business near
Austin, Texas by Sonterra Energy Corporation. Sales, General and Administrative
Expenses decreased from $ 1,522,209 for the three months ended March 31, 2004 to
$1,220,911 for the three months ended March 31, 2005.
COST OF SALES: Total Cost of Sales increased from $0 for the three months ended
March 31, 2004 to $284,679 for the three months ended March 31, 2005 due to the
purchase cost of propane and the installation cost of new meter hookups for the
assets owned by Sonterra Energy Corporation.
OPERATING EXPENSES: Operating expenses from continuing operations increased from
$0 for the three months ended March 31, 2004 to $66,774 for the three months
ended March 31, 2005. This increase was primarily due to the operating expenses
incurred by Sonterra Energy Corporation. Depreciation expense increased by
$104,161 during the three onths ended March 31, 2005 due to the acquisition of
the natural gas pipeline owned by Reef Ventures, L.P. and the depreciable assets
acquired by Sonterra Energy Corporation for the operation of the residential
propane distribution systems in Austin, Texas. Interest expense increased by $
205,068 during the three months ended March 31, 2005 when compared to the period
ended March 31, 2004 due to the debt incurred to acquire the natural gas
pipeline owned by Reef Ventures, L.P. and the issuance of convertible debt to
entities associated with the Mercator Advisory Group, LLC, now known as MAG
Capital, LLC. ENERAL AND ADMINISTRATIVE: General & Administrative Expenses
decreased by $ 301,298 during the three months ended March 31, 2005 as compared
with the period ended March 31, 2004. Decreased consulting fees were primarily
responsible for the difference between the respective periods.
NET LOSS FROM OPERATIONS: Net loss of ($1,534,341) for the three months ended
March 31, 2004 decreased to ($1,236,692) for the three months ended March 31,
2005, a decrease in the amount of loss of $297,649. Included in the net loss
from operations is $382,000 of expenses for financing costs, consulting fees,
and legal fees paid by issuance of common stock.
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LIQUIDITY AND CAPITAL RESOURCES: Direct capital expenditures during the three
months ended March 31, 2005 totaled $278,421. The capital expenditures were
composed of increased office furniture, equipment and leasehold costs ($41,076),
pre-construction costs regarding potential international pipeline crossings and
storage facilities in Mexico ($168,471), and additional machinery, equipment,
trucks, autos and trailers for the operation of the Sonterra Energy Corporation
propane systems ($68,878). Total debt decreased from $12,306,107 at December 31,
2004 to $ 12,256,131 at December 31, 2005. The decrease in total debt is
primarily due to payment of accounts payable and accrued expenses. Net loss for
the three months ended March 31, 2005 was ($1,236,692) a decrease in net loss of
19% from the net loss of ($1,534,341) for the three months ended March 31, 2004.
Basic and diluted net loss per common share decreased 33% to ($0.02). The net
loss per share calculation for the three months ended March 31, 2005 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.
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Item 3. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures.
As of the end of the reporting period, March 31, 2005, 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-15(e) 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 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.
(c) Limitations.
Our management, including our Principal Executive Officer and Principal
Financial Officer, does not expect that our disclosure controls or internal
controls over financial reporting will prevent all errors or all instances of
fraud. A control system, no matter how well designed and operated, can provide
only reasonable, not absolute, assurance that the control system's objectives
will be met. Further, the design of a control system must reflect the fact that
there are resource constraints, and the benefits of controls must be considered
relative to their costs. Because of the inherent limitations in all control
systems, no evaluation of controls can provide absolute assurance that all
control issues and instances of fraud, if any, within our company have been
detected. These inherent limitations include the realities that judgments in
decision-making can be faulty, and that breakdowns can occur because of simple
error or mistake. Controls can also be circumvented by the individual acts of
some persons, by collusion of two or more people, or by management override of
the controls. The design of any system of controls is based in part upon certain
assumptions about the likelihood of future events, and any design may not
succeed in achieving its stated goals under all potential future conditions.
Over time, controls may become inadequate because of changes in conditions or
deterioration in the degree of compliance with policies or procedures. Because
of the inherent limitation of a cost-effective control system, misstatements due
to error or fraud may occur and not be detected.
Item 1. Legal Proceedings
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Matter No. 1:
On January 6, 2003, we were served as a third party defendant in a
lawsuit titled Northern Natural Gas Company vs. Betty Lou Sheerin vs. Tidelands
Oil & Gas Corporation, ZG Gathering, Ltd. and Ken Lay, in the 150th Judicial
District Court, Bexar County, Texas, Cause Number 2002-C1-16421. The lawsuit was
initiated by Northern Natural Gas 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 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 obligations she had to Northern on the $1,950,000 promissory note in
question. 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.
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 contract, breach of the Uniform Commercial Code, breach
of duty of good faith and fair dealing and conversion.
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. On December 3,
2003, Sheerin filed a separate lawsuit against Tidelands in the 150th District
Court of Bexar County, Texas on this promissory note seeking a judgment against
Tidelands for the principle amount of the note, plus interest. On December 29th,
2003, Tidelands answered this lawsuit denying liability on the note. On April 1,
2004, Tidelands filed a plea in abatement asking the court to dismiss or abate
Sheerin's lawsuit on the $300,000 promissory note as it was related to and its
outcome was dependent on the outcome of the Sheerin third party cross action
against Tidelands in Cause Number 2002-C1-16421. The company believes that the
promissory note and shares of common stock should be cancelled based upon the
outcome of the litigation described above. Accordingly, our financial statements
reflect this belief.
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On September 15, 2004 and again on October 15, 2004 respectively,
Sheerin amended her pleadings to include a third and fourth amended third party
cross action against Tidelands adding a claim for the $300,000 promissory note.
In these amended pleadings, Sheerin also deleted her claims against Carl Hessell
and Ahmed Karim.
Sheerin seeks damages against Tidelands for indemnity for any sums
found to be due from her to Northern Natural Gas Company, unspecified amounts of
actual damages, statutory damages, unspecified amounts of exemplary damages,
attorneys fees, costs of suit, and prejudgment and post judgment interest.
Some discovery has been completed at this time. Based on initial
investigation, and discovery to date, Tidelands appears to have a number of
potential defenses to Sheerin's claims. Tideland's intends to aggressively
defend the lawsuit. At this stage in the litigation, and in light of our
continuing investigation and incomplete discovery, we cannot give a more
definitive evaluation of the extent Tideland's liability exposure.
Matter No. 2:
On May 4, 2005, HBH Development Company, LLC initiated legal action
against Sonterra Energy Corporation in the District Court of Travis County,
Texas, 98th Judicial District. This action involves the developer of the
Austin's Colony Subdivision in Travis County, Texas and the propane distribution
system originally constructed by Southern Union Company. Southern Union entered
into a letter agreement with HBH concerning the construction and operation of a
propane distribution system in the subdivision to be owned and operated by
Southern Union. Southern Union assigned the letter agreement and its interests
in the propane system to Oneok, Inc., the parent company of Oneok Propane
Company. Sonterra acquired its interest in the propane system from Oneok Propane
Distribution Company. HBH is claiming that Sonterra has failed or refused to pay
HBH rent and easement use fees under the terms of the letter agreement. HBH
alleges that Sonterra's actions cause a failure of the assignment whereby it
acquired rights in the propane system or alternatively, if the assignment is
effective, for breach of contract. HBH seeks to have the court terminate
Sonterra's rights in the propane distribution system, award unspecified monetary
damages, cancellation of the contract and rights associated with the propane
distribution system, issue to HBH a writ of possession for the property, and for
attorneys fees.
Sonterra is defending the legal action. It believes that under the
terms of the letter agreement between HBH Development Company and Southern Union
Company, that the easement use fees terminated when Southern Union conveyed its
interest in the propane distribution system to Oneok Propane Company.
Matter No. 3:
On May 4, 2005, Senna Hills, Ltd. initiated legal action against
Sonterra Energy Corporation in the District Court of Travis County, Texas, 53rd
Judicial District. This action involves the developer of the Senna Hills
Subdivision in Travis County, Texas and the propane distribution system
originally constructed by Southern Union Company. Southern Union entered into a
letter agreement with Senna Hills concerning the construction and operation of a
propane distribution system in the subdivision to be owned and operated by
Southern Union. Southern Union assigned the letter agreement and its interests
in the propane system to Oneok, Inc., the parent company of Oneok Propane
Company. Sonterra acquired its interest in the propane system from Oneok Propane
Distribution Company. Senna Hills is claiming that Sonterra has failed or
refused to pay Senna Hills rent and easement use fees under the terms of the
letter agreement. Senna Hills alleges that Sonterra's actions cause a failure of
the assignment whereby it acquired rights in the propane system or
alternatively, if the assignment is effective, for breach of contract. Senna
Hills seeks to have the court terminate Sonterra's rights in the propane
distribution system, award unspecified monetary damages, and cancellation of the
contract and rights associated with the propane distribution system, issue to
Senna Hills a writ of possession for the property, and attorneys fees.
Senna Hills sold certain undeveloped sections of Senna Hills
Subdivision to a new owner. Sonterra believes that it has the right to expand
its distribution system into such undeveloped sections of the subdivision.
Sonterra plans to expand the distribution system into these sections under an
agreement with the new owner. Senna Hills has stated that although it is not
presently objecting to Sonterra's expansion of the system at this time, it is
reserving its claim that Sonterra does not have the right to do so and that it
intends to ask the court to cancel Sonterra's right to use and possession of the
propane distribution system, including the system in the new sections of the
subdivision.
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Sonterra is defending the legal action. It believes that under the
terms of the letter agreement between Senna Hills and Southern Union Company,
that the easement use fees terminated when Southern Union conveyed its interest
in the propane distribution system to Oneok Propane Company.
Matter No. 4:
On April of 2005, Goodson Builders, Ltd. named Sonterra Energy
Corporation in a legal action titled, Goodson Builders, Ltd, Plaintiff vs. Jim
Blackwell and BNC Engineering, LLC, Defendants. The legal action is in the
District Court of Travis County, Texas 345th Judicial District. This legal
action arises from a claim that an underground propane storage tank and
underground distribution lines is situated on the Plaintiff's lot in the Hills
of Lakeway subdivision, Travis County, Texas. Plaintiff alleges that there is no
recorded easement setting forth the rights and obligations of the parties for
use of the propane tank and lines. However, there is reference to a "suburban
propane easement" on the plat document. Plaintiff alleges that the property is
being used without permission and the use constitutes an on-going trespass.
Plaintiff asks the court to determine that his lot is not subject to a "suburban
propane easement", declare the propane equipment the property of plaintiff,
enjoin Sonterra from use of Plaintiff's land, and award damages. The Plaintiff
seeks damages of $165,000 based on a market rental rate he claims to be $5,000
per month, $50,000 damages for depreciation of the value of the lot, an
unspecified amount of exemplary damages, and attorneys fees. Sonterra is
defending the claims.
Matter No. 5:
On April 20th, 2005, Tidelands filed suit against L.L. Capital Group, L.L.C. in
Bexar County, Texas, 224th Judicial District Court. On August 11th, 2004,
Tidelands entered into a consulting services agreement with L.L. Capital. The
agreement provided for L.L. Capital to provide advisory services to Tidelands
regarding certain business opportunities, including various types of financial
arrangements. As compensation for the services that were to be provided, L.L.
Capital was to receive $500,000 of unrestricted common stock and $550,000 of
restricted common stock, and $500,000 of Warrants Shares exercisable at $1.45
per share.
L. L. failed to perform the required services for which Tidelands has sued to
rescind the agreement and have all stock and warrants returned to Tidelands, for
discharge from any obligation under the agreement, and for its attorneys fees
and costs.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
During the first quarter of 2005 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 February 25, 2005, we authorized the issuance 60,000 common shares to Barry
Gross for public relations services valued at $82,000.
On May 9, we authorized the issuance of 500,000 shares of common stock to Impact
International, LLC valued at $202,500 in a cashless exercise.
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.
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Item 6. Exhibits
a) Exhibits
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 and Financial Officer-Section 906
Certification pursuant to Sarbane-Oxley Act.
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.
/s/ Michael Ward
Dated: May 13, 2005 -------------------------
By: Michael Ward
Title: President, CEO
/s/ James B. Smith
Dated: May 13, 2005 -------------------------
By: James B. Smith
Title: CFO