tidelands10q-a033107.htm
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
DC 20549
Form
10-Q/A
(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, 2007
o
Transition
Report Under
Section 13 or 15(d) of The Securities Exchange Act
of 1934
For
the transition period from ______________ to _____________
Commission
File Number: 0-29613
TIDELANDS
OIL & GAS
CORPORATION
(Exact
name of small business issuer as specified in its charter)
|
Nevada
|
|
66-0549380
|
|
(State
of
incorporation)
|
|
(IRS Employer ID
Number)
|
1862
West Bitters Rd., San
Antonio, TX 78248
(Address
of principal executive offices)
(210)
764-8642
(Issuer's
telephone number)
Securities
registered under Section 12 (b) of the Exchange Act: None
Securities
registered under Section 12(g) of the Exchange Act:
Common
Stock - $0.001 par value
Check
whether the issuer has (1) filed all reports required to be filed by Section
13
or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period the Company was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. Yes x No o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definitions of "accelerated
filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check
one):
Large
accelerated filer o, Accelerated
filer
o, Non-accelerated
filer x
Indicate
by check mark whether the registrant is a shell company (as defined by Rule
12b-2of the Exchange Act. Yes o No x
APPLICABLE
ONLY TO CORPORATE ISSUERS
As
of May
18, 2007, there were 102,633,706 shares of Common Stock issued and
outstanding.
Transitional
Small Business Disclosure Format: Yes o No
x
EXPLANATORY
NOTE
As
previously disclosed in our report on Form 8-K filed on November 19, 2007,
the
Board of Directors of Tidelands Oil & Gas Corporation, after discussions
with our registered independent public accounting firm, determined that
the
accounting treatment of certain options issued to its directors (the “Options”)
originally reported on its Quarterly Report of Form 10-Q for the three
months
ended March 31, 2007 was incorrect and required revision. We are
filing this amendment to the prior report on Form 10-Q for the period ended
March 31, 2007 to make this correction.
This
Amendment corrects the accounting treatment of the Options to comply with
the
provisions of Financial Accounting Standards Board Statement No. 123 Share
Based
Payment (FAS 123(R)). FAS 123(R) was adopted by the Company on January 1,
2006; however, with respect to the Options, the Company inadvertently failed
to
record the appropriate expense for such Options in accordance with FAS
123(R).
The
Company uses the Black-Scholes option pricing model to compute the fair
value of
stock options, which requires the Company to make the following
assumptions:
|
§
|
The
risk-free interest rate is based on the short-term Treasury bond
at date
of grant.
|
|
§
|
The
dividend yield on the Company’s common stock is assumed to be zero since
the Company does not pay dividends and has no current plans to
do
so.
|
|
§
|
The
market price volatility of the Company’s common stock is based on daily
historical prices for the twelve months previous to the grant
date.
|
|
§
|
The
term of the grants is the current year since all grants are vested
at the
time of the grants; therefore, the entire fair value of stock-based
compensation was recorded in 2007.
|
We
have
also revised the related narrative as it relates to these changes in the
condensed consolidated financial statements, including additional disclosure
in
the Notes thereto under the heading “Summary of Restated Interim Report” and
have revised the disclosure in Part I, Item 2 “Management’s Discussion and
Analysis” and Part I, Item 4 “Controls and Procedures” . In addition,
currently-dated certifications from our Chief Executive Officer and Chief
Financial Officer have been included as exhibits to this Amendment.
Other
than as set forth above, there are no other significant changes to the
original
10-Q and this 10-Q/A does not reflect events occurring after the filing
of the
original 10-Q, or modify or update disclosures therein in any other
way.
TIDELANDS
OIL & GAS CORPORATION
FORM
10-Q
TIDELANDS
OIL & GAS CORPORATION
|
|
|
CONDENSED
CONSOLIDATED BALANCE SHEETS
|
|
| |
|
|
|
|
|
|
|
|
|
ASSETS
|
|
| |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
| |
|
|
|
(Restated–Note
5)
|
|
|
|
|
| |
|
|
|
(Unaudited)
|
|
|
|
|
|
Current
Assets:
|
|
|
|
|
|
|
|
Cash
|
|
$ |
302,202 |
|
|
$ |
367,437 |
|
|
Accounts
and Other Receivable
|
|
|
284,951 |
|
|
|
388,754 |
|
|
Inventory
|
|
|
119,478 |
|
|
|
84,030 |
|
|
Prepaid
Expenses
|
|
|
95,634 |
|
|
|
148,551 |
|
|
Total
Current Assets
|
|
|
802,265 |
|
|
|
988,772 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
Property
Plant and Equipment, Net
|
|
|
13,147,781 |
|
|
|
12,364,359 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
Other
Assets:
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
56,858 |
|
|
|
56,708 |
|
|
Cash
Restricted
|
|
|
53,250 |
|
|
|
52,642 |
|
|
Deferred
Charges
|
|
|
256,392 |
|
|
|
565,221 |
|
|
Goodwill
|
|
|
1,158,937 |
|
|
|
1,158,937 |
|
|
Total
Other Assets
|
|
|
1,525,437 |
|
|
|
1,833,508 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
Total
Assets
|
|
$ |
15,475,483 |
|
|
$ |
15,186,639 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
|
|
|
|
|
|
Current
Maturities - Note Payable
|
|
$ |
2,599,291 |
|
|
$ |
225,000 |
|
|
Accounts
Payable and Accrued Expenses
|
|
|
1,988,261 |
|
|
|
1,624,752 |
|
|
Customer
Deposits
|
|
|
8,100 |
|
|
|
0 |
|
|
Reserve
for Litigation
|
|
|
2,250,000 |
|
|
|
2,250,000 |
|
|
Total
Current Liabilities
|
|
|
6,845,652 |
|
|
|
4,099,752 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
Due
to Related Party
|
|
|
100,000 |
|
|
|
0 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
Long-Term
Debt
|
|
|
4,586,315 |
|
|
|
8,934,294 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
Total
Liabilities
|
|
|
11,531,967 |
|
|
|
13,034,046 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
Stockholders'
Equity:
|
|
|
|
|
|
|
|
|
|
Common
Stock, $.001 Par Value per Share,
|
|
|
|
|
|
|
|
|
|
250,000,000
Shares Authorized, 98,688,909
|
|
|
|
|
|
|
|
|
|
and
86,457,922 Shares Issued and Outstanding at
|
|
|
|
|
|
|
|
|
|
March
31, 2007 and December 31, 2006 Respectively
|
|
|
98,690 |
|
|
|
86,459 |
|
|
Additional
Paid-in Capital
|
|
|
53,490,250 |
|
|
|
46,703,202 |
|
|
Subscriptions
Receivable
|
|
|
(110,000 |
) |
|
|
(220,000 |
) |
|
Minority
Interest
|
|
|
- |
|
|
|
- |
|
|
Accumulated
(Deficit)
|
|
|
(49,535,424 |
) |
|
|
(44,417,068 |
) |
|
Total
Stockholders' Equity
|
|
|
3,943,516 |
|
|
|
2,152,593 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
Total
Liabilities and Stockholders' Equity
|
|
$ |
15,475,483 |
|
|
$ |
15,186,639 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
See
Accompanying Notes to Unaudited Consolidated Financial
Statements
|
|
| |
|
|
|
TIDELANDS
OIL & GAS CORPORATION
|
|
|
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
|
(UNAUDITED)
|
|
| |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
| |
|
|
|
Three
Months Ended
|
|
|
Three
Months Ended
|
|
| |
|
|
|
March
31,
2007
|
|
|
March
31,
2006
|
|
| |
|
|
|
(Restated)
|
|
|
|
|
| |
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
Gas
Sales and Pipeline Fees
|
|
$ |
1,001,882 |
|
|
$ |
672,506 |
|
|
Construction
Services
|
|
|
102,089 |
|
|
|
129,388 |
|
|
Total
Revenues
|
|
|
1,103,971 |
|
|
|
801,894 |
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
Cost
of Sales
|
|
|
567,721 |
|
|
|
376,866 |
|
|
Operating
Expenses
|
|
|
83,371 |
|
|
|
84,531 |
|
|
Depreciation
|
|
|
122,609 |
|
|
|
115,764 |
|
|
Interest
|
|
|
346,104 |
|
|
|
111,059 |
|
|
Stock-Based
Compensation – Related Parties
|
|
|
3,767,000 |
|
|
|
445,000 |
|
|
Sales,
General and Administrative
|
|
|
1,336,147 |
|
|
|
1,397,942 |
|
|
Total
Expenses
|
|
|
6,222,952 |
|
|
|
2,531,162 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
(Loss)
From Operations
|
|
|
(5,118,981 |
) |
|
|
(1,729,268 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
Interest
and Dividend Income
|
|
|
625 |
|
|
|
33,620 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
Net
(Loss)
|
|
$ |
(5,118,356 |
) |
|
$ |
(1,695,648 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
Net
(Loss) Per Common Share:
|
|
|
|
|
|
|
|
|
|
Basic
and
Diluted
|
|
$ |
(0.06 |
) |
|
$ |
(0.02 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
Weighted
Average Number of Common
|
|
|
|
|
|
|
|
|
|
Shares
Outstanding
|
|
|
92,573,416 |
|
|
|
79,712,485 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
See
Accompanying Notes to Unaudited Condensed Consolidated Financial
Statements
|
|
TIDELANDS
OIL & GAS CORPORATION
|
|
|
STATEMENTS
OF CONDENSED CONSOLIDATED CASH FLOWS
|
|
|
(UNAUDITED)
|
|
| |
|
Three
Months Ended
|
|
|
Three
Months Ended
|
|
| |
|
March
31,
2007
|
|
|
March
31,
2006
|
|
| |
|
(Restated)
|
|
|
|
|
|
Cash
Flows Provided (Required) By
|
|
|
|
|
|
|
|
Operating
Activities:
|
|
|
|
|
|
|
|
Net
(Loss)
|
|
$ |
(5,118,356 |
) |
|
$ |
(1,695,648 |
) |
|
Adjustments
to Reconcile Net (Loss)
|
|
|
|
|
|
|
|
|
|
to
Net Cash Provided (Required) By
|
|
|
|
|
|
|
|
|
|
Operating
Activities:
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
122,609 |
|
|
|
115,764 |
|
|
Change
in Derivative Liability
|
|
|
0 |
|
|
|
0 |
|
|
Issuance
of Common Stock:
|
|
|
|
|
|
|
|
|
|
For
Services Provided – Related Parties
|
|
|
3,767,000 |
|
|
|
445,000 |
|
|
For
Services Provided – Other
|
|
|
599,033 |
|
|
|
424,500 |
|
|
Changes
in:
|
|
|
|
|
|
|
|
|
|
Accounts
Receivable
|
|
|
103,803 |
|
|
|
128,825 |
|
|
Inventory
|
|
|
(35,448 |
) |
|
|
25,599 |
|
|
Prepaid
Expenses
|
|
|
52,917 |
|
|
|
31,132 |
|
|
Deferred
Charges
|
|
|
308,829 |
|
|
|
(1,625,458 |
) |
|
Deposits
|
|
|
(150 |
) |
|
|
(50,000 |
) |
|
Restricted
Cash
|
|
|
(608 |
) |
|
|
(561 |
) |
|
Accounts
Payable and Accrued Expenses
|
|
|
706,753 |
|
|
|
24,626 |
|
|
Customer
Deposits
|
|
|
8,100 |
|
|
|
0 |
|
| |
|
|
|
|
|
|
|
|
|
Net
Cash Provided (Required) By Operating Activities
|
|
|
514,482 |
|
|
|
(2,176,221 |
) |
| |
|
|
|
|
|
|
|
|
|
Cash
Flows (Required)
|
|
|
|
|
|
|
|
|
|
By
Investing Activities:
|
|
|
|
|
|
|
|
|
|
Acquisitions
of Property, Plant and Equipment
|
|
|
(906,031 |
) |
|
|
(637,301 |
) |
|
Net
Cash (Required) By Investing Activities
|
|
|
(906,031 |
) |
|
|
(637,301 |
) |
| |
|
|
|
|
|
|
|
|
|
See
Accompanying Notes to Unaudited Condensed Consolidated Financial
Statements
|
|
|
TIDELANDS
OIL & GAS CORPORATION
|
|
STATEMENTS
OF CONDENSED CONSOLIDATED CASH FLOWS
|
|
(CONTINUED)
|
| |
|
|
|
|
|
|
(UNAUDITED)
|
| |
|
|
|
|
|
|
| |
|
|
|
|
|
|
| |
|
|
|
Three
Months Ended
|
|
|
Three
Months Ended
|
|
| |
|
|
|
March
31,
2007
|
|
|
March
31,
2006
|
|
| |
|
|
|
(Restated)
|
|
|
|
|
| |
|
|
|
|
|
Cash
Flows Provided
|
|
|
|
|
|
|
|
by
Financing Activities:
|
|
|
|
|
|
|
|
Proceeds
from Stock Subscriptions Receivable
|
|
|
0 |
|
|
|
110,000 |
|
|
Proceeds
from Exercise of Stock Option
|
|
|
200,000 |
|
|
|
0 |
|
|
Proceeds
from Long-Term Loans
|
|
|
26,314 |
|
|
|
6,644,502 |
|
|
Loan
from Related Party
|
|
|
100,000 |
|
|
|
(3,606 |
) |
|
Repayment
of Loan by Related Party
|
|
|
0 |
|
|
|
0 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
Net
Cash Provided by Financing Activities
|
|
|
326,314 |
|
|
|
6,750,896 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
Net
Decrease (Increase) in Cash
|
|
|
(65,235 |
) |
|
|
3,937,374 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
Cash
at Beginning of Period
|
|
|
367,437 |
|
|
|
1,113,911 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
Cash
at End of Period
|
|
$ |
302,202 |
|
|
$ |
5,051,285 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
Supplemental
Disclosures of Cash Flow Information:
|
|
|
|
|
|
|
|
|
|
Cash
Payments for Interest
|
|
$ |
75,043 |
|
|
$ |
84,657 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
Cash
Payments for Income Taxes
|
|
$ |
0 |
|
|
$ |
0 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
Non-Cash
Investing and Financing Activities:
|
|
|
|
|
|
|
|
|
|
Issuance
of Common Stock:
|
|
|
|
|
|
|
|
|
|
Payments
of Accrued Expenses & Accounts Payable
|
|
$ |
343,244 |
|
|
$ |
445,000 |
|
|
Conversion
of Debentures
|
|
|
2,000,000 |
|
|
|
0 |
|
|
Cancellation
of Common Stock:
|
|
|
|
|
|
|
|
|
|
In
Payment of Stock Subscription
|
|
|
(110,000 |
) |
|
|
0 |
|
| |
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
Total
Non-Cash Investing and Financing Activities
|
|
$ |
2,233,244 |
|
|
$ |
445,000 |
|
| |
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
See
Accompanying Notes to Unaudited Condensed Consolidated Financial
Statements
|
|
TIDELANDS
OIL & GAS CORPORATION
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2007
NOTE
1–BASIS OF
PRESENTATION
The
accompanying unaudited condensed consolidated financial statements for the
three
month periods ended March 31, 2007, and 2006, have been prepared in conformity
with accounting principles generally accepted in the United States of America
for interim financial information and with the instructions to Form 10-Q
and
Regulation S-X. The financial information as of December 31, 2006, is
derived from the registrant’s Form 10-K for the year ended December 31,
2006. Certain information or footnote disclosures normally included
in financial statements prepared in accordance with accounting principles
generally accepted in the United States of America have been condensed or
omitted pursuant to the rules and regulations of the Securities and Exchange
Commission.
The
preparation of condensed consolidated financial statements in conformity
with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities at the date of the financial statements
and
the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those
estimates. In the opinion of management, the accompanying financial
statements include all adjustments necessary (which are of a normal and
recurring nature) for the fair presentation of the results of the interim
periods presented. While the registrant believes that the disclosures
presented are adequate to keep the information from being misleading, it
is
suggested that these accompanying financial statements be read in conjunction
with the registrant’s audited consolidated financial statements and notes for
the year ended December 31, 2006, included in the registrant’s Form 10-K for the
year ended December 31, 2006.
Operating
results for the three-month period ended March 31, 2007, are not necessarily
indicative of the results that may be expected for the remainder of the fiscal
year ending December 31, 2007. The accompanying unaudited condensed
consolidated financial statements include the accounts of the registrant,
its
wholly-owned subsidiaries, Rio Bravo Energy, LLC, Sonora Pipeline, LLC, Sonterra
Energy Corporation, Arrecefe Management, LLC, Marea Associates, LP, Reef
Ventures, LP, Reef International, LLC, Reef Marketing, LLC, Terranova Energia
S.
de R. L. de C. V., Esperanza Energy, LLC, and Tidelands Exploration &
Production Corporation. All significant inter-company accounts and
transactions have been eliminated in consolidation.
TIDELANDS
OIL & GAS CORPORATION
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2007
NOTE
2– GOING
CONCERN
The
Company has sustained recurring losses and negative cash flows from
operations. Over 2006, the Company’s growth had been funded through
issuance of convertible debentures. As of March 31, 2007, the Company
had approximately $302,202 of unrestricted cash. However, the Company
has experienced and continues to experience negative cash flows from operations,
as well as an ongoing requirement for substantial additional capital
investment. The Company needs to raise substantial additional capital
to accomplish its business plan this year and over the next several
years. The Company is seeking to obtain such additional funding
through private equity sources, from financial partners for some of its projects
and the possible sale of certain operating assets along with a continued
reduction of operating expenses. There can be no assurance as to the
availability or terms upon which such financing and capital might be available
or that asset sales will be possible at suitable pricing.
The
Company’s ability to continue as a going concern will depend on management’s
ability to successfully implement a business plan which will increase revenues,
control costs, and obtain additional forms of debt and/or equity financing
or
financial partners. These financial statements do not include any
adjustments that might be necessary if the Company is unable to continue
as a
going concern.
NOTE
3– DEBT
FINANCING
On
January 20, 2006, the Company completed a private placement of $6,569,750
of
convertible debt with six institutional investors. The net proceeds
realized by the Company were $4,949,291 after deduction of legal costs,
commissions and interest discount. The Company issued original issue
discount debentures with a maturity date of January 20, 2008, and a conversion
feature which permitted the holders to convert into common stock of the Company
at a price of $0.87 per share. The investors also received three-year
“Series A Common Stock Warrants” to purchase, in the aggregate, 2,491,975 shares
of common stock of the Company at a conversion price of $0.935 per
share. Additionally, the Company issued to the investors “Series B
Common Stock Warrants” which provided for a thirteen-month exercise period, at a
conversion price of $1.275 per share, and an aggregate purchase total of
7,551,432 shares of common stock of the Company.
TIDELANDS
OIL & GAS CORPORATION
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2007
NOTE
3– DEBT FINANCING
(CONTINUED)
As
of
March 31, 2007, two of the six institutional investors had converted $3,586,709
of their debentures for 4,122,654 shares of the Company’s common stock at $0.87
per share. In addition, one investor had its $608,750 of debentures
redeemed by the Company as a result of a default. After accounting
for the above conversions and redemption, $2,374,291 of convertible debentures
convertible into 2,729,070 shares of Tidelands’ common stock at $0.87 per share
remain outstanding. On February 20, 2007, the “Series B Common Stock
Warrants” exercisable at $1.275 per share for an aggregate purchase total of
7,551,432 shares of the Company’s common stock expired.
NOTE
4– COMMON
STOCK
TRANSACTIONS
On
January 2, 2007, the Company issued 500,000 shares of its common stock valued
at
$135,000 to the former President in accordance with his Severance
Agreement.
On
January 11, 2007, the Company issued 589,288 shares of its common stock valued
at $162,500 to a law firm for 2007 legal services related to securities law
matters.
On
January 22, 2007, the current President cancelled 500,000 of his shares of
the
Company’s restricted common stock valued at $110,000 which was offset against
the stock subscription due from him to the Company.
On
February 2, 2007 and on four other occasions until March 5, 2007, the Company
issued a total of 2,298,848 shares of its common stock to a holder of its
Convertible Debentures for conversion of $2,000,000.
On
February 6, 2007, the Company issued 120,000 shares of its restricted common
stock valued at $27,000 for 2006 investor public relations
services.
On
February 13, 2007, the Company issued 500,000 shares of its common stock
valued
at $115,000 each to two Directors for a total of 1,000,000 common shares
valued
at $230,000.
On
February 15, 2007, the Company issued 681,818 shares of its common stock
valued
at $150,000 to a law firm for legal services related to the Northern Natural
Gas
Company/Betty Lou Sherrin Litigation matter (see NOTE 3 –
Litigation).
On
February 21, 2007, the Company issued 69,000 shares of its restricted Company
stock valued at $14,490 for preparation of a Research Report.
TIDELANDS
OIL & GAS CORPORATION
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2007
NOTE
4– COMMON
STOCK TRANSACTIONS
(CONTINUED)
On
March
1, 2007, the Company issued 642,858 shares of its common stock valued at
$135,000 each to two Directors for a total of 1,285,716 common shares valued
at
$270,000.
On
March
8, 2007, the Company issued 2,133,938 shares of its common stock valued at
$426,787 to a law firm for past and future general and coordinating legal
services.
On
March
12, 2007, the Company issued 952,381 shares to a Director for $200,000 as
a
result of his exercise of stock options at $0.21 per share.
On
March
14, 2007, the Company issued 1,500,000 shares of its common stock valued
at
$300,000 to each of two Directors for a total of 3,000,000 shares valued
at
$600,000.
On
March
19, 2007, the Company issued 100,000 shares of its restricted common stock
valued at $26,500 to an employee of a subsidiary as a stock bonus.
NOTE
5– SUMMARY
OF RESTATED INTERIM
REPORT
On
November 14, 2007, the Board of Directors of Tidelands Oil & Gas Corporation
(the “Company”), determined that the accounting treatment of certain options
issued to its directors (the “Options”) originally reported on its Quarterly
Report of Form 10-Q for the three months ended March 31, 2007, was incorrect
and
required revision. Therefore, the Board of Directors has determined that
the financial statements in the Company’s Quarterly Report of Form 10-Q for the
three months ended March 31, 2007 should not be relied upon and should be
restated.
The
adjustments to this Report listed below correct the accounting treatment
of the
Options to comply with the provisions of Financial Accounting Standards Board
Statement No. 123 Share Based Payment (FAS 123(R)). FAS 123(R) was adopted
by the Company on January 1, 2006; however, with respect to the Options,
the
Company inadvertently failed to record the appropriate expense for such Options
in accordance with FAS 123(R).
TIDELANDS
OIL & GAS CORPORATION
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2007
NOTE
5– SUMMARY
OF RESTATED INTERIM
REPORTS (CONTINUED)
The
Company uses the Black-Scholes option pricing model to compute the fair value
of
stock options, which requires the Company to make the following
assumptions:
|
§
|
The
risk-free interest rate is based on the short-term Treasury bond
at date
of grant.
|
|
§
|
The
dividend yield on the Company’s common stock is assumed to be zero since
the Company does not pay dividends and has no current plans to
do
so.
|
|
§
|
The
market price volatility of the Company’s common stock is based on daily
historical prices for the twelve months previous to the grant
date.
|
|
§
|
The
term of the grants is the current year since all grants are vested
at the
time of the grants; therefore, the entire fair value of stock-based
compensation was recorded in 2007.
|
The
Company has now recognized the fair value stock option compensation expense
as
follows:
|
Quarterly
Report of 10-Q for the Three Months Ended March 31, 2007
|
|
$ |
2,667,000 |
TIDELANDS
OIL & GAS CORPORATION
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2007
NOTE
5– SUMMARY
OF RESTATED INTERIM
REPORTS (CONTINUED)
The
transaction referred to above relates to non-cash charges and did not affect
the
Company’s revenues, cash flows from operations, liquidity, assets, liabilities
or total stockholders’ equity.
| |
|
|
Three
Months Ended March 31,
2007
|
|
| |
|
|
Previously
|
|
|
|
Restatement
|
|
|
Restated
|
|
| |
|
|
Reported
|
|
|
|
Adjustment
|
|
|
Amount
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
Balance Sheets:
|
|
|
|
|
|
|
|
|
|
|
|
Total
Assets
|
|
$ |
15,475,483 |
|
|
|
$ |
- |
|
|
$ |
15,475,483 |
|
|
Total
Liabilities
|
|
|
11,531,967 |
|
|
|
|
- |
|
|
|
11,531,967 |
|
|
Stockholders’
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock
|
|
|
98,690 |
|
|
|
|
- |
|
|
|
98,690 |
|
|
Additional
Paid-in Capital
|
|
|
50,823,250 |
|
|
|
|
2,667,000 |
|
(1) |
|
53,490,250 |
|
|
Subscriptions
Receivable
|
|
|
(110,000 |
) |
|
|
|
- |
|
|
|
(110,000 |
) |
|
Accumulated
Deficit
|
|
|
(46,868,424 |
) |
|
|
|
(2,667,000 |
) |
(3) |
|
(49,535,424 |
) |
|
Total
Stockholders’ Equity
|
|
$ |
3,943,516 |
|
|
|
$ |
- |
|
|
$ |
3,943,516 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
Statement of Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
1,103,971 |
|
|
|
$ |
- |
|
|
$ |
1,103,971 |
|
|
Expenses
|
|
|
3,555,952 |
|
|
|
|
2,667,000 |
|
(2) |
|
6,222,952 |
|
|
Net
(Loss) from Operations
|
|
|
(2,451,981 |
) |
|
|
|
(2,667,000 |
) |
|
|
(5,118,981 |
) |
|
Other
Income
|
|
|
625 |
|
|
|
|
- |
|
|
|
625 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(Loss)
|
|
$ |
(2,451,356 |
) |
|
|
$ |
(2,667,000 |
) |
|
$ |
(5,118,356 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(Loss) per Common Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and
Diluted
|
|
$ |
(0.03 |
) |
|
|
|
|
|
|
$ |
(0.06 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
Average Number of Common Shares Outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and
Diluted
|
|
|
92,573,416 |
|
|
|
|
|
|
|
|
92,573,416 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (1) |
Adjust
additional paid-in capital to record fair value of stock options
issued.
|
| (2) |
Adjust
expenses to reflect fair value of stock-based
compensation.
|
| (3) |
Adjust
accumulated deficit to reflect additional losses as a result of
stock-based compensation expense.
|
TIDELANDS
OIL & GAS CORPORATION
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2007
NOTE
6– RELATED
PARTY
TRANSACTION
During
the quarter, the Company issued 2,642,858 shares of common stock valued at
$550,000 to each of its two outside Directors. In addition to their
customary duties as directors, these board members provided regular and ongoing
management services to the Company. This compensation to the two outside
Directors represents their compensation for 2007.
NOTE
7– LITIGATION
Matter
No. 1:
On
January 6, 2003, we were served as a third party defendant in a lawsuit titled
Northern Natural Gas Company vs. Betty Lou Sheerin vs. Tidelands Oil & Gas
Corporation, ZG Gathering, Ltd. and Ken Lay, in the 150th Judicial District
Court, Bexar County, Texas, Cause Number 2002-C1-16421. The lawsuit was
initiated by Northern Natural Gas (“Northern”) when it sued Betty Lou Sheerin
(“Sheerin”) for her failure to make payments on a note she executed payable to
Northern in the original principal amount of $1,950,000. Northern's suit
was
filed on November 13, 2002. Sheerin answered Northern's lawsuit on January
6,
2003. Sheerin's answer generally denied Northern's claims and raised the
affirmative defenses of fraudulent inducement by Northern, estoppel, waiver
and
the further claim that the note does not comport with the legal requirements
of
a negotiable instrument. Sheerin seeks a judicial ruling that Northern be
denied
any recovery on the note. Sheerin's answer included a counterclaim against
Northern, ZG Gathering, and Ken Lay generally alleging, among other things,
that
Northern, ZG Gathering, Ltd. and Ken Lay, fraudulently induced her execution
of
the note. Northern has filed a general denial of Sheerin's counterclaims.
Sheerin's answer included a third party cross claim against Tidelands Oil
and
Gas Corporation (“Tidelands”). She alleges that Tidelands entered into an
agreement to purchase the Zavala Gathering System from ZG Gathering Ltd.
and
that, as a part of the agreement, Tidelands agreed to satisfy all of the
obligations due and owing to Northern, thereby relieving Sheerin of all
obligations she had to Northern on the $1,950,000 promissory note in question.
Tidelands and Sheerin agreed to delay the Tidelands' answer date in order
to
allow time for mediation of the case. Tidelands participated in mediation
on
March 11, 2003. The case was not settled at that time. Tidelands answered
the
Sheerin suit on March 26, 2003. Tidelands' 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 Hessel 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. Sheerin has now non-suited her claims against
Michael Ward, Royis Ward, and James B. Smith.
TIDELANDS
OIL & GAS CORPORATION
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2007
NOTE
7– LITIGATION
(CONTINUED)
Matter
No. 1: (Continued)
In
September 2002, as a pre-closing deposit to the purchase of the Zavala Gathering
System, the Company executed a $300,000 promissory note to Betty L. Sheerin,
a
partner of ZG Gathering, Ltd. In addition, the Company issued 1,000,000 shares
of its common stock to various partners of ZG Gathering, Ltd. On December
3,
2003, Sheerin filed a separate lawsuit against Tidelands in the 150th District
Court of Bexar County, Texas on this promissory note seeking a judgment against
Tidelands for the principle amount of the note, plus interest. On December
29th,
2003, Tidelands answered this lawsuit denying liability on the note. On April
1,
2004, Tidelands filed a plea in abatement asking the court to dismiss or
abate
Sheerin's lawsuit on the $300,000 promissory note as it was related to and
its
outcome was dependent on the outcome of the Sheerin third party cross action
against Tidelands in Cause Number 2002-C1-16421. The Company believes that
the
promissory note and shares of common stock should be cancelled based upon
the
outcome of the litigation described above. Accordingly, our financial statements
reflect this belief.
On
September 15, 2004 and again on October 15, 2004 respectively, Sheerin amended
her pleadings to include a third and fourth amended third party cross action
against Tidelands adding a claim for the $300,000 promissory note. In these
amended pleadings, Sheerin also deleted her claims against Carl Hessel and
Ahmed
Karim (“Company Directors”). After adding the claim on the $300,000 promissory
note to the third party claims of Sheerin against Tidelands in Cause No.
2002-C1-16421, Sheerin dismissed Cause Number 2002-C1-16421.
Tidelands
won a partial summary judgment against Sheerin as to all of her tort claims
pled
against Tidelands, save and except only her claim for conversion of 500,000
shares of Tidelands’ stock.
Sheerin
seeks damages against Tidelands for indemnity for any sums found to be due
from
her to Northern, unspecified amounts of actual damages, statutory damages,
unspecified amounts of exemplary damages, attorneys fees, costs of suit,
and
prejudgment and post judgment interest.
TIDELANDS
OIL & GAS CORPORATION
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2007
NOTE
7– LITIGATION
(CONTINUED)
Matter
No. 1: (Continued)
On
August
5, 2005, Northern filed its Fourth Amended Original Petition which, for the
first time, named Tidelands as a defendant to Northern. Northern
seeks to impose liability on Tidelands for $1,950.000 promissory note signed
by
McDay Energy Partners, Ltd. (the predecessor to ZG Gathering, Ltd.) and Sheerin
and the $1,700,000 promissory note signed by McDay only. Northern
contends that Tidelands is alternatively liable to Northern for payment of
both
such promissory notes totaling $3,709,914 plus interest because Northern
is a
third party beneficiary under a December 3, 2001 purchase and sale agreement
between ZG Gathering, Ltd., and Tidelands claiming that in such agreement
Tidelands agreed to assume and satisfy all indebtedness due and owing Northern
by Sheerin and ZG Gathering, Ltd. Northern also claims that it is entitled
to
foreclosure of a lien on the gas gathering system and pipeline that was the
subject of the promissory notes in question. Tidelands won a summary
judgment motion it filed against Northern and the court has now dismissed
Northern's claims against Tidelands.
On
November 28, 2005, ZG Gathering, Ltd. and ZG Pipeline Management ("ZG") filed
its answer to Northern's Fifth Amended Petition, its counter-claim against
Northern, and its answer and cross claim against Tidelands. ZG contends that
the
promissory notes given by ZG and Sheerin to Northern were procured by Northern's
fraudulent misrepresentations and it claims unspecified amounts of damages
against Northern. ZG's cross action against Tidelands claims Tidelands entered
into an agreement to purchase the Zavala Gathering System from ZG and that,
as
part of that agreement, Tidelands agreed to satisfy the $3,700,914 Northern
indebtedness of ZG, and to defend, indemnify, and hold ZG and Sheerin harmless
from such indebtedness, to pay off a Sheerin loan of $300,000, and to issue
1
million shares of Tidelands’ stock, of which 500,000 was to be free trading
shares. ZG claims that Tidelands breached this agreement by failing to satisfy
the Northern indebtedness, failing to defend and indemnify it from such debt,
failing to pay off the $300,000 note, failing to issue the free trading shares
in Tidelands, and by placing a stop transfer order on the restricted stock
that
was issued by Tidelands. ZG seeks specific performance of the agreement,
recovery of an unspecified amount of damages, and its attorney's
fees.
On
March
6, 2006, the Court granted Tidelands’ motion for summary judgment against
Northern and dismissed Northern’s suit against Tidelands. On March
16, 2006, the Court denied Tidelands’ motion for summary judgment against
Sheerin on Tidelands’ affirmative defense of mutual mistake. On July
19, 2006, the Court denied ZG’s motion for summary judgment to strike Tidelands’
affirmative defense of mutual mistake.
TIDELANDS
OIL & GAS CORPORATION
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2007
NOTE
7– LITIGATION
(CONTINUED)
Matter
No. 1: (Continued)
The
trial
date has been extended to July 9, 2007, by mutual agreements of the litigants
unless a settlement is reached before that date. The parties are
currently in advanced settlement negotiations and the Company is hopeful
that an
agreement will be concluded in the near future. Based on
negotiations, the Company has reserved $2,250,000 as an estimated litigation
settlement and that amount has been included in this report.
Matter
No. 2:
Cause
No.
GN 500948, Goodson Builders, Ltd., Plaintiff, vs. Jim Blackwell, BNC
Engineering, Et. Al, Defendants, was filed April 7, 2005, in the 345th District
Court of Travis County, Texas. This case involves a claim that
Defendant Toll Brothers Property, LP (“Toll Brothers”) sold Plaintiff Goodson
Builder, Ltd. (“Plaintiff” or “Goodson”) property without disclosing a propane
easement. Plaintiff sued Sonterra Energy Corp. (“Sonterra”) for
trespassing through the use of the easement. Goodson’s primary claim
is against the seller for fraud and non-disclosure. Toll Brothers has
responded with a claim for sanctions because the claim is
frivolous. Toll Brothers offers a witness who is Plaintiff’s former
employee and took pictures of the propane tank prior to the Plaintiff’s
purchase. Goodson seeks damages in the hundreds of thousands of
dollars. Insurance would not cover these damages.
The
case
is pending summary judgment. The Company is contesting the case
vigorously; however, the Company is willing to settle if the Plaintiff is
willing to drop the claim.
Matter
No. 3:
Cause
No.
GM 501625, Senna Hills, Ltd., Plaintiff, vs. Sonterra Energy Corp., Defendant,
was filed in the 53rd Judicial District of Travis County, Texas and Cause
No. GN
501626, HBH Development Co., LLC, Plaintiff, vs. Sonterra Energy Corp.,
Defendant, was filed in the 98th
Judicial District Court of Travis County, Texas. The above matters
were each filed against Sonterra in May 2005 and involve the same claims
arising
from the same propane service agreement. In each case, the plaintiff
initially brought claims against Sonterra arising from Sonterra’s failure, as an
assignee of the agreement, to pay easement use fees to the
plaintiff. Sonterra obtained summary judgment as to the plaintiffs’
respective breach of contract and failure of assignment claims arising from
the
failure to pay easement use fees. The cases were not, however, fully
dismissed because the plaintiffs added new causes of action for failure to
pay
easement use fees, claims for unpaid developer bonus, reformation of the
agreements to require payment of easement use fees and alleged failure of
assignment. These separate lawsuits have since been consolidated into
one suit for purposes of pretrial and trial. The May 2007 trial date
has been continued and will likely be reset in September 2007.
TIDELANDS
OIL & GAS CORPORATION
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2007
NOTE
7– LITIGATION
(CONTINUED)
Matter
No. 3: (Continued)
In
accordance with Statement of Financial Accounting Standards No. 5, “Accounting
for Contingencies,” management has reached the conclusion that there is a remote
possibility that the claims enumerated in Matters No. 2 and 3 above would
be
upheld at trial and has also determined that the amount of the claims cannot
be
reasonably estimated. Accordingly, the Company’s financial statements
reflect no accrual of a loss contingency with respect to these legal
matters.
Item
2. Management's Discussion and Analysis of Financial Condition
and Results of Operation
Forward-Looking
Statements
We
have
included forward-looking statements in this report. For this purpose, any
statements contained in this report that are not statements of historical fact
may be deemed to be forward looking statements. Without limiting the foregoing,
words such as "may", "will", "expect", "believe", "anticipate", "estimate",
"plan" or "continue" or the negative or other variations thereof or comparable
terminology are intended to identify forward-looking statements. These
statements by their nature involve substantial risks and uncertainties, and
actual results may differ materially depending on a variety of factors. Factors
that might cause forward-looking statements to differ materially from actual
results include, among other things, overall economic and business conditions,
demand for the Company's products, competitive factors in the industries in
which we compete or intend to compete, natural gas availability and cost and
timing, impact and other uncertainties of our future acquisition
plans.
Business
Overview
Our
products and services are primarily focused on development and operation of
transportation, processing, distribution and storage projects of natural gas
and
natural gas liquids in the northeastern states of Mexico (Coahuila, Nuevo Leon
and Tamaulipas) and the states of Texas and California in the United States
of
America.
We
derive
our revenue from transportation fees from delivery of natural gas to Conagas,
the local distribution company in Piedras Negras, Coahuila, through the pipeline
owned by Reef Ventures, L.P. and the sale of propane gas to residential
customers through the assets owned by Sonterra Energy Corporation. Sonterra
also
designs and constructs residential propane delivery systems for new residential
developments in Central Texas. We derive revenue from this activity in two
ways,
the first being from construction revenue for yard lines and meter sets
installed to a homeowner's lot, and the second being the sale of LPG gas to
customers in the residential subdivisions. Sonterra Energy Corporation has
recently begun performing construction services for third party utility
companies in order to more efficiently utilize its existing expertise and
assets.
Recent
Developments
In
the
three months ended March 31, 2007, certain significant developments occurred
with respect to the businesses operated by the Company.
On
January 31, 2007, Sonora Pipeline LLC (“Sonora”) filed an application before the
Federal Energy Regulatory Commission for certificate of convenience and
necessity to construct and operate the Mission and Progreso International
Pipelines including application for two presidential permits for a cross-border
connection to the planned Terranova Energia pipelines in Mexico. Sonora
continues to respond to FERC inquiries and analysis with respect to these
applications and has asked the FERC to grant the authorizations requested in
the
applications by July 1, 2007. The current catalog of FERC correspondence for
Sonora’s activities is located at www.ferc.gov under
Docket No. PF07-74 et sequence.
On
March
7, 2007, Esperanza Energy LLC (“Esperanza”) announced plans to file applications
with state and federal agencies to build a floating liquefied natural gas (LNG)
receiving facility 15 miles off the Port of Long Beach, California. The project,
named Port Esperanza, will bring natural gas to the Southern California
marketplace. Esperanza plans to formally file its application in late 2007.
The
LNG receiving facility has attracted the commercial interest of several parties
who could participate as co-venturers and/or gas purchasers. More information
is
available at www.esperanza-energy.com.
Results
of Operations
THREE
MONTHS ENDED MARCH 31,
2007 COMPARED TO THREE MONTHS ENDED MARCH 31, 2006
REVENUES:
The Company reported revenues of $1,103, 971 for the three months ended March
31, 2007 as compared with revenues of $801,894 for the three months ended March
31, 2006, which is a 37% increase in revenue for the three months ended March
31, 2007 compared to the three months ended March 31, 2006. Revenues from Reef
Ventures, LP decreased to $41,508 for the three months ended March 31, 2007
compared to $58,589 for the three months ended March 31, 2006. The decrease
was
due to lower volumes of gas transported in Mexico through the 12 inch natural
gas pipeline owned by Reef Ventures, LP. Revenues from Sonterra Energy
Corporation increased to $1,045,776 for the three months ended March 31, 2007
compared to $743,305 for the three months ended March 31, 2006. Gas sales at
Sonterra increased to $943,687 for the three months ended March 31, 2007
compared to $613,917 for the three months ended March 31, 2006. The increase
in
gas sales was primarily due to an increase in total customers served by Sonterra
Energy Corporation. Construction services revenues at Sonterra decreased to
$102,089 for the three months ended March 31, 2007 compared to $129,388 for
the
three months ended March 31, 2006.
TOTAL
COSTS AND EXPENSES: Total costs and expenses increased to $6,222,952 for
the
three months ended March 31, 2007 compared to $2,531,162 for the three
months
ended March 31, 2006. The most significant increase occurred in stock based
compensation due to issuances of common stock and options for services
of
directors.
COST
OF
SALES: Cost of sales increased to $567,721 for the three months ended March
31,
2007 compared to $376,866 for the three months ended March 31, 2006. The
increase was due almost entirely to increased cost and volume of propane sold
through our Sonterra Energy Corporation subsidiary.
OPERATING
EXPENSES: Operating expenses decreased to $83,371 for the three months ended
March 31, 2007 compared to $84,531 for the three months ended March 31, 2006.
This decrease was attributable to slightly reduced operating costs from Sonterra
Energy Corporation. Depreciation Expense increased to $122,609 for the three
months ended March 31, 2007 compared to $115,674 for the three months ended
March 31, 2006. The increase in depreciation expense is primarily from the
additions of depreciable property in Sonterra Energy Corporation and our
Tidelands Exploration & Production Corporation subsidiary.
INTEREST
EXPENSE: Interest expense increased to $346,104 for the three months ended
March
31, 2007 compared to $111,059 for the three months ended March 31, 2006. The
increase resulted primarily from additional interest expense associated with
the
issuance of convertible debentures in the financing described in Footnote 3
to
Condensed Consolidated Financial Statements for the three months ended March
31,
2007.
SALES,
GENERAL AND ADMINISTRATIVE:
Sales, General and Administrative Costs (including Stock-Based Compensation)
increased to $5,103,147for
the three months ended March 31,
2007 compared to $1,842,942 for the three months ended March 31, 2006.
Staff and
Officer Salaries and Officer Stock Bonuses decreased by $926,332 for
the three
months ended March 31, 2007 compared to the three months ended March
31, 2006.
This was a result of staff reductions undertaken in the fourth quarter
of 2006.
Director compensation for corporate management and reorganization efforts
and
legal fees associated primarily with litigation expenses were paid by
issuance
of common stock in the amount of $1,658,043 for the three months ended
March 31,
2007. Of the total Sales, General and Administrative Costs (including
stock
based compensation of directors) of $5,103,147for
the three months ended March 31,
2007, $4,339,533of
these costs were paid by issuance of
common stock and options
and
the remaining $763,614
of costs were paid with cash.
INTEREST
AND DIVIDEND INCOME: Interest and Dividend income decreased to $625 for the
three months ended March 31, 2007 as compared to $33,620 for the three months
ended March 31, 2006 due to lower cash balances held in interest bearing
accounts during the three months ended March 31, 2007.
NET
LOSS:
Net loss of $5,118,356 for the three months ended March 31, 2007 represents
an
increase in loss of $3,422,708 as compared to net loss of $1,695,648 for
the
three months ended March 31, 2006. This increased loss was primarily due
to the
increased issuance of common stock and options by the Company for directors’
services and legal fees.
LIQUIDITY
AND CAPITAL RESOURCES: The independent auditors report on our March 31, 2007
financial statements included in this Form 10-Q states that our difficulty
in
generating sufficient cash flow to meet our obligations and sustain operations
raises substantial doubts about the our ability to continue as a going
concern.
With
regard to liquidity and adequacy of capital resources, the Company will need
additional equity or debt financing during the second quarter of 2007.
Management plans to raise additional capital through debt and common stock
offerings and to pursue all available financing alternatives in this regard.
Management may also consider a variety of potential partnership or strategic
alliances to strengthen its financial position. Additional funding for the
permit process for the offshore LNG regas terminal in Southern California will
be needed by the third quarter of 2007. Furthermore, the Company will need
to
raise additional capital to fund ongoing development activities for our Mexican
subsidiary, Terranova Energia and also to fund operating overhead at the parent
company level and the possible cost of a litigation settlement or adverse
verdict if a pending case goes to trial. New issuance of common stock and debt
sufficient to retire the outstanding debentures and to provide additional
required capital is being actively pursued by the Company. No assurance can
be
made that such capital can be acquired in a timely fashion or at all.
Furthermore, if capital is available through these sources, if may be at terms
that are disadvantageous to the Company and its shareholders.
In
light
of these possible outcomes and the current cash resources available for the
sustenance of corporate operations, management has taken action to reduce
overhead costs and otherwise conserve cash resources for the Company including
the use of stock issuances, when feasible, to pay for services rendered to
the
Company.
Direct
capital expenditures during the three months ended March 31, 2007, totaled
$906,031. The capital expenditures were composed of increased pre-construction
costs regarding potential international pipeline crossings and storage
facilities in Mexico, pre-construction costs regarding an offshore LNG
terminal
in Southern California, additional machinery and equipment for the operation
of
the Sonterra Energy Corporation propane systems and an investment in a
natural
gas pipeline and nearby leases for development. Total debt decreased from
$13,034,046 at December 31, 2006, to $11,531,967 at March 31, 2007. The
decrease
in total debt is due primarily to the conversion of $2,000,000 of convertible
debentures from the financing transaction of January 20, 2006 into common
stock
and was offset by an increase in accounts payable. Net loss for the three
months
ended March 31, 2007, was $5,118,356, an increase in net loss of 202% from
the
net loss of $1,695,648 for the three months ended March 31, 2006. Basic
and
diluted net loss per common share increased to $0.06 for the three months
ended
March 31, 2007, as compared to $0.02 for the three months ended March 31,
2006.
The net loss per share calculation for the three months ended March 31,
2007,
included an increase in actual and equivalent shares
outstanding.
Cash
and Cash Equivalents
We
have
historically invested our cash and cash equivalents in short-term, fixed rate,
highly rated and highly liquid instruments which are reinvested when they mature
throughout the year. Although our existing investments are not considered at
risk with respect to changes in interest rates or markets for these instruments,
our rate of return on short-term investments could be affected at the time
of
reinvestment as a result of intervening events. As of March 31, 2007, we had
cash and cash equivalents aggregated $302,202.
The
Company does not issue or invest in financial instruments or their derivatives
for trading or speculative purposes. The operations of the Company are conducted
primarily in the United States, and, are not subject to material foreign
currency exchange risk. Although the Company has outstanding debt and related
interest expense, market risk of interest rate exposure in the United States
is
currently not material.
Debt
The
interest rate on our Impact International debt obligation is generally
determined based on the prime interest rate plus two percent and may be subject
to market fluctuation as the prime rate changes.
Evaluation
Of Disclosure Controls And Procedures
James
B.
Smith, our Chief Executive Officer and Chief Financial Officer (Principal
Executive Officer and Principal Financial Officer) performed an evaluation
of
the Company’s disclosure controls and procedures, as that term is defined in
Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended (the
“Exchange
Act”), as of March 31, 2007. Based on that evaluation, in light of
the restatement of the Company's financial statements to correct the accounting
treatment of certain stock options issued to the Board of Directors, Mr.
Smith
has concluded that these disclosure controls and procedures were ineffective
as
of the end of the period covered by this Report.
Changes
In Internal Control Over Financial Reporting
During
the quarter ended March 31, 2007, there were no changes in the Company’s
internal control over financial reporting that have materially affected, or
are
reasonably likely to materially affect, the Company’s internal control over
financial reporting.
PART
II - OTHER INFORMATION
Except
as
set forth below, there have been no material changes to the legal proceeding
or
investigations reported in Part I, Item 3 - "Legal Proceedings" in the Company's
Form 10-K filed with the SEC on April 17, 2007 (the "Prior 10-K"). Other than
as
set forth below and in the Prior 10-K, the Company is not a party to any
material pending legal proceeding.
Matter
No. 1
As
described in the Prior 10-K and in Note 6 above to the Company’s condensed
consolidated financial statements, the Company is a party to a pending lawsuit
titled Northern Natural Gas Company vs. Betty Lou Sheerin vs. Tidelands Oil
& Gas Corporation, ZG Gathering, Ltd. and Ken Lay, in the 150th Judicial
District Court, Bexar County, Texas, Cause Number 2002-C1-16421. During the
quarter ended March 31, 2007, the trial date has been extended to July 9, 2007,
by mutual agreements of the litigants unless a settlement is reached before
that
date. The parties are currently in advanced settlement negotiations and the
Company is hopeful that an agreement will be concluded in the near future.
Based
on negotiations, the Company has reserved $2,250,000 as an estimated litigation
settlement and that amount has been included in this report.
During
the quarter ended March 31, 2007, there were no material changes to the risk
factors described in Part I, Item 1A “Risk Factors” of the Company’s Annual
Report on Form 10-K for the fiscal year ended December 31,
2006.
Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds
The
Company made the following issuances of unregistered securities during the
quarter ended March 31, 2007 (not previously reported in a Form
8-K):
On
February 6, 2007, the Company issued 120,000 shares of its restricted common
stock valued at $27,000 for 2006 investor public relations
services.
On
February 21, 2007, the Company issued 69,000 shares of its restricted Company
stock valued at $14,490 for preparation of a Research Report.
On
March
19, 2007, the Company issued 100,000 shares of its restricted common stock
valued at $26,500 to an employee of a subsidiary as a stock bonus.
No
commissions were paid in connection with any of these sales. We did not employ
any form of general solicitation or advertising in connection with the offer
and
sale of the securities described below. Except as otherwise noted above, the
offer and sale of the securities listed below were made in reliance on the
exemption from registration provided by Section 4(2) of the Securities Act
and/or Regulation D promulgated by the Securities and Exchange Commission as
transactions by an issuer not involving any public offering.
The
Company did not make any purchases of its common stock during the quarter ended
March 31, 2007. However, on January 22, 2007, the current President cancelled
500,000 of his shares of the Company’s restricted common stock valued at
$110,000, which was offset by cancellation of the stock subscription due from
him to the Company.
None.
Item
4. Submission of Matters to a Vote of Security
Holders
No
matters were submitted to a vote of security holders during the quarter covered
by this report.
Item
5.
Other Information
None.
|
Exhibit
|
|
Description
|
|
Location
of Exhibit
|
|
10.1
|
|
Employment
Agreement with James B. Smith*
|
|
Incorporated
by reference to Exhibit 10.1 to 8-K filed April 3, 2007
|
|
10.2
|
|
2007
Non-Qualified Stock Grant and Option Plan *
|
|
Incorporated
by reference to Exhibit 10.1 of Form 8-K filed on February 16,
2007
|
|
10.3
|
|
Form
of Option Grant under 2007 Non-Qualified Stock Grant and Option Plan
*
|
|
Incorporated
by reference to Exhibit 10.2 of Form 8-K filed on February 16,
2007
|
|
10.4
|
|
Form
of Stock Award Agreement under 2007 Non-Qualified Stock Grant and
Option
Plan *
|
|
Incorporated
by reference to Exhibit 10.3 of Form 8-K filed on February 16,
2007
|
|
31.1
|
|
Chief
Executive Officer and Chief Financial Officer Section 302 Certification
pursuant to Sarbanes - Oxley Act.
|
|
Included
with this filing
|
|
32.1
|
|
Chief
Executive Officer-Section 906 Certification pursuant To Sarbanes-Oxley
Act
|
|
Furnished
herewith
|
*
Management or compensatory plan or arrangement.
Pursuant
to the requirements of the Securities Exchange Act of 1934, the Company has
duly
caused this report to be signed on its behalf by the undersigned thereunto
duly
authorized.
|
|
|
|
|
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TIDELANDS
OIL & GAS CORPORATION
|
|
|
|
|
|
Date: January
23, 2008
|
By:
|
/s/ James
B.
Smith
|
|
|
James
B. Smith
President
and Chief Executive Officer
|