UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-QSB
(Mark one)
[X] Annual Report Under Section 13 or 15(d) of The Securities Exchange Act
of 1934
For the quarterly period ending June 30, 2004
[ ] Transition Report Under Section 13 or 15(d) of The Securities Exchange
Act of 1934
For the transition period from ______________ to _____________
Commission File Number: 0-29613
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TIDELANDS OIL & GAS CORPORATION
(Exact name of small business issuer as specified in its charter)
Nevada 66-0549380
------------------------ ------------------------
(State of incorporation) (IRS Employer ID Number)
1862 West Bitters Rd., San Antonio, TX 78410
--------------------------------------------
(Address of principal executive offices)
(210) 764-8642
(Issuer's telephone number)
Securities registered under Section 12 (b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock - $0.001 par value
Check whether the issuer has (1) filed all reports required to be files by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period the Company was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No
--- ---
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court. Yes No
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS
As of June 30, 2004, there were 50,528,647 shares of Common Stock issued and
outstanding.
Transitional Small Business Disclosure Format : Yes No X
--- ---
TIDELANDS OIL & GAS CORPORATION
FORM 10-QSB
INDEX
-----
Page
PART I - Financial Information
Item 1 - Financial Statements
Condensed Consolidated Balance Sheets as of
June 30, 2004 and December 31, 2003.............................. 3-4
Condensed Consolidated Statements of Operations
For the Three Months Ended June 30, 2004 and 2003................ 5
Condensed Consolidated Statements of Operations
For the Six Months Ended June 30, 2004 and 2003.................. 6
Condensed Consolidated Statements of Cash Flows
For the Six Months Ended June 30, 2004 and 2003.................. 7-8
Notes to Condensed Consolidated Financial Statements............. 9-14
Item 2 - Management's Discussion and Analysis or Plan of Operation........ 15-18
Item 3 - Controls and Procedures.......................................... 19
PART II - Other Information
Item 1 - Legal Proceedings ............................................... 20
Item 2 - Changes in Securities and Use of Proceeds........................ 21
Item 3 - Defaults Upon Senior Securities.................................. 21
Item 4 - Submission of Matters to a Vote of Security Holdings............. 21
Item 5 - Other Information................................................ 22
Item 6 - Exhibits and Reports on Form 8K ................................. 22
Signature................................................................. 22
- 2 -
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
TIDELANDS OIL & GAS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
------
June 30, 2004 December 31, 2003
----------------- -----------------
(Unaudited)
Current Assets:
Cash $ 1,850,519 $ 894,457
Cash - Restricted 1,000,000 0
Accounts Receivable 540,756 228
Prepaid Expenses 350,613 22,209
----------------- -----------------
Total Current Assets 3,741,888 916,894
----------------- -----------------
Property Plant and Equipment, Net 6,903,775 604,192
----------------- -----------------
Investment - Reef Ventures, L.P. 0 98,629
----------------- -----------------
Other Assets:
Goodwill 673,992 0
Deposits 4,108 3,800
----------------- -----------------
Total Other Assets 678,100 3,800
----------------- -----------------
Total Assets $ 11,323,723 $ 1,623,515
================= =================
See Accompanying Notes to Condensed Consolidated Financial Statements
-3-
TIDELANDS OIL & GAS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(CONTINUED)
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
June 30, 2004 December 31, 2003
----------------- -----------------
(Unaudited)
Current Liabilities:
Accounts Payable and
Accrued Expenses $ 742,320 $ 813,905
Current Maturities of Long-Term Debt 150,000 325,000
----------------- -----------------
Total Current Liabilities 892,320 1,138,905
----------------- -----------------
Long-Term Debt 6,523,773 0
----------------- -----------------
Total Liabilities 7,416,093 1,138,905
----------------- -----------------
Commitments and Contingencies -- --
Stockholders' Equity:
Common Stock, $.001 par value per share,
100,000,000 shares authorized;
50,528,647 shares issued and outstanding
June 30, 2004, 44,825,302 shares issued
and outstanding December 31, 2003 50,529 44,826
Additional Paid-in Capital 18,274,728 11,072,987
Subscriptions Receivable (18,000) (18,000)
Accumulated (Deficit) (14,399,587) (10,615,203)
----------------- -----------------
Total Stockholders' Equity 3,907,670 484,610
----------------- -----------------
Total Liabilities and
Stockholders' Equity $ 11,323,763 $ 1,623,515
================= =================
See Accompanying Notes to Condensed Consolidated Financial Statements
-4-
TIDELANDS OIL & GAS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended Three Months Ended
June 30, 2004 June 30, 2003
------------------ ------------------
Revenues:
Gas Sales $ 507,712 $ 0
Other 0 14,827
------------------ ------------------
Total Revenues 507,712 14,827
------------------ ------------------
Expenses:
Purchases 497,820 0
Operating Expenses 2,616 9,268
Depreciation 36,638 10,664
Interest 43,718 7,966
Officers & Directors Salaries & Fees 133,750 75,000
General and Administrative 2,050,419 179,875
------------------ ------------------
Total Operating Expenses 2,764,961 282,773
------------------ ------------------
Net (Loss) From Operations (2,257,249) (267,946)
Extraordinary Item - Gain on Partial Sale
Of Subsidiary 0 1,533,731
Interest Income 7,206 0
------------------ ------------------
Net Income (Loss) $ (2,250,043) $ 1,265,785
================== ==================
Net Income (Loss) Per Common Share
Basic
Loss From Operations $ (0.05) $ (0.01)
Gain - Extraordinary Item 0.00 0.04
------------------ ------------------
Total $ (0.05) $ 0.03
================== ==================
Weighted Average Number of Common
Shares Outstanding, Basic 49,701,986 37,765,368
================== ==================
Diluted
Loss From Operations $ (0.03) $ (0.01)
Gain - Extraordinary Item 0.00 0.04
------------------ ------------------
Total $ (0.03) $ 0.03
================== ==================
Weighted Average Number of Common
Shares Outstanding, Diluted 62,201,986 39,765,368
================== ==================
See Accompanying Notes to Condensed Consolidated Financial Statements
-5-
TIDELANDS OIL & GAS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Six Months Ended Six Months Ended
June 30, 2004 June 30, 2003
---------------- ----------------
Revenues:
Gas Sales $ 507,712 $ 0
Other 0 20,092
---------------- ----------------
Total Revenues 507,712 20,092
---------------- ----------------
Operating Expenses:
Purchases 497,820 0
Pipeline Operating Expenses 2,616 14,693
Depreciation 47,918 21,320
Interest 48,437 33,641
Officers & Directors Salaries & Fees 336,358 150,000
General and Administrative 3,370,020 375,667
---------------- ----------------
Total Operating Expenses 4,303,169 595,321
---------------- ----------------
Net (Loss) From Operations (3,795,457) (575,229)
Extraordinary Item - Gain on Partial Sale
Of Subsidiary 0 1,533,731
Interest Income 11,073 0
---------------- ----------------
Net Income (Loss) $ (3,784,384) $ 958,502
================ ================
Net Income (Loss) Per Common Share
Basic
Loss From Operations $ (0.08) $ (0.01)
Gain - Extraordinary Item 0.00 0.04
---------------- ----------------
Total $ (0.08) $ 0.03
================ ================
Weighted Average Number of Common
Shares Outstanding, Basic 47,676,976 37,033,618
================ ================
Diluted
Loss From Operations $ (0.06) $ (0.01)
Gain - Extraordinary Item 0.00 0.04
---------------- ----------------
Total $ (0.06) $ 0.03
================ ================
Weighted Average Number of Common
Shares Outstanding, Diluted 59,310,378 38,033,618
================ ================
See Accompanying Notes to Condensed Consolidated Financial Statements
-6-
TIDELANDS OIL & GAS CORPORATION
STATEMENTS OF CONDENSED CONSOLIDATED CASH FLOWS
(UNAUDITED)
Six Months Ended Six Months Ended
June 30, 2004 June 30, 2003
---------------- ----------------
Cash Flows Provided (Required) By
Operating Activities:
Net Income (Loss) $ (3,784,384) $ 958,502
Adjustments to Reconcile Net (Loss)
to Net Cash Provided (Required) By
Operating Activities:
Depreciation 47,918 21,320
Issuance of Common Stock
for Services Provided 3,005,816 109,297
Officers' Salaries 0 40,000
Changes in:
Accounts Receivable (540,528) 15,419
Prepaid Expenses (328,404) 12,176
Other Assets (308) 937
Accounts Payable and
Accrued Expenses (33,274) (556,818)
Current Maturities of Long-Term Debt 0 (302,924)
---------------- ----------------
Net Cash Provided (Required)
by Operating Activities (1,633,164) 297,909
---------------- ----------------
Cash Flows Provided (Required)
By Investing Activities:
Increase in Investments (575,363) (98,629)
Acquisitions of Property, Plant & Equipment (6,347,501) (92,926)
Proceeds From Disposals of Property, Plant
and Equipment 0 696,436
---------------- ----------------
Net Cash Provided (Required)
by Investing Activities (6,922,864) 504,881
---------------- ----------------
See Accompanying Notes to Condensed Consolidated Financial Statements
-7-
TIDELANDS OIL & GAS CORPORATION
STATEMENTS OF CONDENSED CONSOLIDATED CASH FLOWS
(UNAUDITED)
(CONTINUED)
Six Months Ended Six Months Ended
June 30, 2004 June 30, 2003
------------- -------------
Cash Flows Provided (Required)
by Financing Activities:
Proceeds from Issuance of Common Stock 4,088,317 50,000
Repayment of Short-Term Loans (100,000) 0
Proceeds of Long-Term Loans 6,523,773 0
Proceeds of Loans from Related Parties 0 15,000
Repayment of Loans Fees and Accrued
Salaries Due Related Parties 0 (848,671)
------------- -------------
Net Cash Provided (Required)
by Financing Activities 10,512,090 (783,671)
------------- -------------
Net Increase in Cash 1,956,062 19,119
Cash at Beginning of Period 894,457 193,669
------------- -------------
Cash at End of Period $ 2,850,519 $ 212,788
============= =============
Supplemental Disclosures of
Cash Flow Information:
Cash Payments for Interest $ 14,123 $ 33,141
============= =============
Cash Payments for Income Taxes $ 0 $ 0
============= =============
Non-Cash Financing Activities:
Issuance of Common Stock:
Operating Activities $ 3,005,816 $ 109,297
Payment of Accounts Payable 38,311 62,500
Repayment of Short-Term Loans 75,000 198,767
Repayment of Loans and Accrued
Salaries From Related Parties 0 866,157
------------- -------------
Total Non-Cash Financing Activities $ 3,119,127 $ 1,236,721
============= =============
See Accompanying Notes to Condensed Consolidated Financial Statements
-8-
TIDELANDS OIL & GAS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004
NOTE 1 - BASIS OF PRESENTATION
------ ---------------------
The accompanying unaudited condensed consolidated financial statements
for the six month periods ended June 30, 2004 and 2003 have been
prepared in conformity with accounting principles generally accepted in
the United States of America for interim financial information and with
the instructions to Form 10-QSB and Regulation S-B. The financial
information as of December 31, 2003 is derived from the registrant's
Form 10-KSB for the year ended December 31, 2003. Certain information
or footnote disclosures normally included in financial statements
prepared in accordance with accounting principles generally accepted in
the United States of America have been condensed or omitted pursuant to
the rules and regulations of the Securities and Exchange Commission.
The preparation of condensed consolidated financial statements in
conformity with accounting principles generally accepted in the United
States of America requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities at the date
of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates. In the opinion of management, the accompanying
financial statements include all adjustments necessary (which are of a
normal and recurring nature) for the fair presentation of the results
of the interim periods presented. While the registrant believes that
the disclosures presented are adequate to keep the information from
being misleading, it is suggested that these accompanying financial
statements be read in conjunction with the registrant's audited
consolidated financial statements and notes for the year ended December
31, 2003, included in the registrant's Form 10-KSB for the year ended
December 31, 2003.
Operating results for the six-month period ended June 30, 2004 are not
necessarily indicative of the results that may be expected for the
remainder of the fiscal year ending December 31, 2004. The accompanying
unaudited condensed consolidated financial statements include the
accounts of the registrant, its wholly-owned subsidiaries, Rio Bravo
Energy, LLC, Sonora Pipeline, LLC, Arrecefe Management, LLC, Marea
Associates, L.P., Reef Ventures, L.P., Reef International, LLC, Reef
Marketing, LLC, and Terranova Energia S. de R. L. de C. V. All
significant inter-company accounts and transactions have been
eliminated in consolidation.
-9-
TIDELANDS OIL & GAS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004
NOTE 2 - PROPERTY, PLANT AND EQUIPMENT
------ -----------------------------
A summary of property, plant and equipment at June 30, 2004 is as
follows:
Estimated
Economic Life
-------------
Pre-Construction Costs-
International Crossing to Mexico $ 20,600
Pre-Construction Costs - Mexican
Storage Facility and Related Pipelines 509,190
Equipment and Leasehold
Improvements 36,961 3-10 Years
Pipelines - Domestic 431,560 15 Years
Pipeline - Eagle Pass, Tx to Piedras
Negras, Mexico 6106,255 20 Years
Processing Plant 166,410 15 Years
----------
Total $7,270,976
Less Accumulated Depreciation 367,201
----------
Total $6,903,775
==========
NOTE 3 - LITIGATION
------ ----------
On January 6, 2003, the Company was served as a third party defendant
in a lawsuit titled Northern Natural Gas Company vs. Betty Lou Sheerin
vs. Tidelands Oil & Gas Corporation, ZG Gathering, Ltd. and others, in
the 150th Judicial District Court, Bexar County, Texas, Cause Number
2002-C1-16421. The lawsuit was initiated by Northern Natural Gas when
it sued Betty Lou Sheerin for her failure to make payments on a note
she executed payable to Northern in the original principal amount of
$1,950,000. Northern's suit was filed on November 13, 2002. Sheerin
answered Northern's lawsuit on January 6, 2003. Sheerin's answer
generally denied Northern's claims and raised the affirmative defenses
of fraudulent inducement by Northern, estoppel, waiver and the further
claim that the note does not comport with the legal requirements of a
negotiable instrument. Sheerin seeks a judicial ruling that Northern be
denied any recovery on the note. Sheerin's answer included a
counterclaim against Northern, ZG Gathering, and others generally
alleging, among other things, that Northern, ZG Gathering, Ltd. and
others, fraudulently induced her execution of the note. Northern has
filed a general denial of Sheerin's counterclaims. Sheerin's answer
included a third party cross claim against Tidelands. She alleges that
Tidelands entered into an agreement to purchase the Zavala Gathering
System from ZG Gathering , Ltd. and that, as a part of the agreement,
Tidelands agreed to satisfy all of the obligations due and owing to
Northern, thereby relieving Sheerin of all obligations she had to
Northern on the promissory note in question. She alleges that Tidelands
is liable to her for all of her actual damages, costs of the lawsuit
and other
-10-
TIDELANDS OIL & GAS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004
NOTE 3 - LITIGATION (CONTINUED)
------ ----------------------
unstated relief. Tidelands participated in a mediation on March 11,
2003. The case was not settled at that time. Tidelands answered the
Sheerin suit on March 26, 2003 and denied all of Sheerin's allegations.
No discovery has been completed at this time. Based on initial
investigations, however, Tidelands appears to have a number of
potential defenses to Sheerin's claims, and intends to aggressively
defend the lawsuit.
In September 2002, as a pre-closing deposit to the purchase of the ZG
pipelines, the Company executed a $300,000 promissory note to Betty L.
Sheerin, a partner of ZG Gathering, Ltd. In addition, the Company
issued 1,000,000 shares of its restricted common stock to various
partners of ZG Gathering, Ltd. The company believes that the
aforementioned promissory note and shares of restricted common stock
will be cancelled based upon the outcome of the litigation described
above. Accordingly, the Company's financial statements reflect that
position.
NOTE 4 - ACQUISITION
------ ---------------
On May 25, 2004, the Company entered into a Purchase and Sale Agreement
for Reef Ventures, L.P. by and between Impact International, LLC
("Impact") and Coahuila Pipeline, LLC. ("Coahuila"), (jointly "Seller")
and Tidelands Oil & Gas Corporation ("Tidelands") and Arrecefe
Management, LLC ("Arrecefe"), (jointly "Buyer"). Impact is considered
an affiliate of Tidelands because it possessed warrants to acquire a
19% interest in Tidelands common stock. The closing documents were
executed and placed into trust pending receipt of proof of insurance.
Tideland's received an insurance commitment regarding the purchased
assets that was accepted by Impact on June 18, 2004, the effective
closing date.
Purchase and Sale Agreement - Background
Reef Ventures, L.P. was formed in Texas on April 16, 2003. Coahuila
owned one percent (1%) of Reef Ventures, L.P. Impact was a limited
partner of Reef Ventures and owned seventy-two percent (72%) of Reef
Ventures. L.P. Tidelands formed Arrecefe Management, L.L.C., a Texas
limited liability company, to act as the general partner for Reef
Ventures, L.P. Tidelands had already owned twenty-five percent (25%) of
Reef Ventures, L.P.
Summary of Purchase and Sale Agreement
The Company and Arrecefe purchased Impact's and Coahuila's units of
interest in Reef Ventures, L.P., respectively. Impact financed the sale
of the Reef interests for $6,523,773.30 payable as follows:
-11-
TIDELANDS OIL & GAS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004
NOTE 4 - ACQUISITION (CONTINUED)
------ -----------------------
Summary of Purchase and Sale Agreement (Continued)
(a) Tidelands executed a Promissory Note to Impact for $6,523,773.30
(the "Tidelands Note"). The Tidelands Note bears interest at the prime
rate of interest plus two (2%) percent. The note would call for
quarterly interest payments the first fifteen (15) months, and
thereafter, principal and interest would be due quarterly amortized
over twenty (20) years, but not to exceed an amount equal to One
Hundred (100%) percent of Reef's net cash flow. The unpaid balance of
the note would be due at the end of the fourth year.
(b) The Tideland's note is secured by (i) a deed of trust (the "Deed of
Trust") from the Partnership to Impact, covering the pipeline and
related facilities, easements, rights-of-way and the Gas Contracts
which comprise the project, being that 12-inch pipeline Project for
transporting natural gas from Eagle Pass Texas to Piedras Negras,
Mexico, defined in the Partnership Agreement. The Deed of Trust would
include a present assignment of Reef's rights to receive cash flow from
the Gas Project which would be exercisable by Impact only upon default
under the Tidelands Note, Reef guarantee, or Reef Deed of Trust. (ii) a
guaranty of payment and performance from the Partnership (the
"Partnership Guaranty"), and (iii) a pledge agreement whereby the
Partnership pledges to Impact its 98% membership interest in Reef.
Summary of Amendment to Warrant and Registration Rights Agreements
The Stock Purchase Warrant Agreement dated April 16, 2003 was amended.
The amended Agreement states that the total number of shares which
Impact is entitled to receive under the warrant is Ten Million
(10,000,000) shares of Tideland's common stock, plus such additional
shares of common stock which may be issued upon the occurrence of an
untimely registration event, less the 500,000 shares issued to Impact
on April 13, 2004. The exercise price is $0.335 per share. The
expiration date of the warrant is extended to April 16, 2006.
The Company has agreed to use its best efforts to register the shares
under the warrant with the Securities and Exchange Commission so that
Impact will be permitted to publicly resell the common shares.
Tidelands agreed to use its best efforts to keep the registration
statement effective as long as it is necessary for Impact to sell the
shares.
If the registration statement is declared effective (i) by April 7,
2005, if the registration is on Form S-3, or (ii) July 7, 2005, if the
registration statement is on Form SB-2 or any other registration form,
the registration statement will be deemed timely (a "Timely
Registration"). In the event of a Timely Registration, Impact will
exercise the warrant for all of the remaining shares under the warrant
on a cash basis payable by Impact through the execution of a promissory
note payable to Tidelands (the "Impact Note"),
-12-
TIDELANDS OIL & GAS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004
NOTE 4 - ACQUISITION (CONTINUED)
------ -----------------------
Summary of Amendment to Warrant and Registration Rights Agreements
(Continued)
as of the effective date of the registration statement. In the event
that the Company does not accomplish a Timely Registration, then Impact
may exercise the warrant at anytime after the date which is the last
date for a Timely Registration, at its option on a cash basis or
pursuant to Section 1.2 of the warrant agreement on a net exercise
cashless basis for all the remaining shares under the warrant. If
Impact elects to exercise the warrants on a net exercise cashless
basis, we will increase the number of shares available for issuance
under the warrant, regardless of whether issued for cash or on a net
exercise basis, so that the total number of shares issued would total
10,000,000 shares.
If the registration statement is not filed or declared effective on or
before July 14, 2004, the Company will be obligated to issue 500,000
common shares under the cashless exercise provisions of the amended
Stock Purchase Warrant. For each 90 day period that the registration
statement were not filed or declared effective, the Company would
continue to issue 500,00 share blocks of common stock, until declared
effective.
The unaudited pro-forma condensed consolidated results of operations of
the Company have been prepared as if the acquisition of the
seventy-three percent (73%) of Reef Ventures, L.P. had occurred January
1, 2004:
Tidelands Oil & Gas Corporation
Condensed Consolidated Statement of Operations
Six Months Ended June 30, 2004
"Proforma"
(Unaudited)
Revenues $ 3,150,214
Net (Loss) $ (3,844,914)
Net (Loss) Per Common Share - Basic $ (0.08)
Weighted Average Shares Outstanding - Basic 47,676,976
Net (Loss) Per Common Shares - Diluted $ (0.06)
Weighted Average Shares Outstanding - Diluted 59,310,378
-13-
TIDELANDS OIL & GAS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004
NOTE 5 - COMMON STOCK TRANSACTIONS
------ -------------------------
During the quarter, the Company issued 3,322 shares of its restricted
common stock for $4,983.
On April 12, 2004, the Company issued 500,000 shares of its restricted
common stock valued at $497,000 to Impact International, Inc. pursuant
to the terms of the purchase of Reef Venture, L.P. described above.
On April 15, 2004, the Company issued 700,000 shares of its restricted
common stock for consulting services valued at $728,000.
On April 15, 2004, the Company issued 450,000 shares of its restricted
common stock for consulting services valued at $468,000.
NOTE 6 - COMMITMENT FOR SUITE LICENSE AGREEMENT
------ --------------------------------------
On June 4, 2004, the Company entered into a Suite License Agreement
with the San Antonio Spurs, L.C.C. commencing July 1, 2004 for a period
of five years. The annual license fee for the first year is $159,000
and is subject to a 6% per annum price escalation thereafter. The
annual fee is payable in installments as indicated in the agreement.
The future annual license fee commitments are as follows:
2005 $ 161,385
2006 171,068
2007 181,332
2008 192,212
2009 101,872
----------
$ 807,869
==========
NOTE 7 - RELATED PARTY TRANSACTIONS
------ --------------------------
The Company executed an agreement in January 2004 with a related party to
provide charter air trasportation for its employees, customers and contractors
to job sites and other business related destinations. A payment of $300,000 was
prepaid to secure a block of six hundred hours of airtime based on standard
industry rates.
-14-
Item 2. Management's Discussion and Analysis or Plan of Operation
Business Overview
Tidelands Oil & Gas Corporation (the "Company"), formerly known as C2
Technologies, Inc., was incorporated under the laws of the State of Nevada on
February 25, 1997. C2 Technologies, Inc. changed its name to Tidelands Oil & Gas
Corporation on November 19, 1998. The Company has five wholly owned
subsidiaries, Rio Bravo Energy LLC, Sonora Pipeline LLC, Arrecefe Management
LLC, Marea Associates, L.P. and Terranova Energia, S.de R.L. de C.V. The Company
also owns a 97% limited partnership interest in Reef Ventures, L.P. Arrecefe
Management LLC owns a 1% general partner interest in Reef Ventures, L.P. Reef
Ventures, L.P. owns 100% of the member interest in Reef International LLC and
Reef Marketing LLC.
The Company's products and services are primarily focused on development and
operation of transportation, processing, distribution and storage projects for
natural gas and liquids in the northeastern states of Mexico (Chihuahua,
Coahuila, Nuevo Leon and Tamaulipas) and the state of Texas in the United States
of America.
The Company currently derives its revenue from sales of natural gas to the local
distribution company in Piedras Negras, Coahuila through the pipeline owned by
Reef Ventures, L.P. Management expects to convert the revenue source for this
pipeline to a transportation fee basis in the near future. This will remove the
restriction of use of $1,000,000 of cash to fund a credit facility in favor of
the seller of natural gas to Reef Ventures, L.P. It is also anticipated that by
converting the revenue source to a transporation fee, net revenues will be
doubled based upon current volumes committed for delivery to the customer in
Piedras Negras, Coahuila. Management is evaluating an expansion of the pipeline
in Coahuila to serve new markets along the state highway No. 57 corridor to
Monclova, Coahuila. The planned natural gas liquid line between Eagle Pass,
Texas and Piedras Negras, Coahuila is being re-evaluated in light of new supply
sources emerging in Nuevo Laredo and Reynosa, Tamaulipas. A decision to proceed,
modify or abandon the LPG project at this location is expected prior to year
end. The above projects were acquired in connection with the buyout of the
Impact general and limited partnership interests in Reef Ventures, L.P. which is
described in further detail in Footnote 4 to the Condensed Consolidated
Financial Statements above.
In December 2003, the Company entered into a Memorandum of Understanding with
PEMEX to design, build and operate an underground natural gas storage facility
in the vicinity of Reynosa, Tamaulipas, Mexico, in the Burgos Basin area and
eventually at other regions in Mexico. The MOU provides for exclusivity in the
development of the projects and the related transportation and interconnecting
pipelines to and from the storage facilities.
-15-
The Company has completed its initial study of the Burgos facility and expects
to complete final contract negotiations with PEMEX and third party vendors for
the construction and operation of the facility before year end. A system of two
interconnecting pipelines is also proposed to enhance the overall pipeline grid
and the efficiency of operation of the storage facility. Permit applications
will be filed for all these projects with the Mexican Energy Regulatory
Commission in the third quarter of 2004. The capital budget for these projects
exceeds $200 million USD and is expected to be funded through additional equity
and debt issuances by the Company. Marea Associates, L.P. was formed during the
fiscal quarter ended June 30, 2004 to own the majority interest in Terranova
Energia, S. de R.L. de C.V. a Mexican company which will enter into all
contracts for business dealings in Mexico on behalf of the Company. Rio Bravo
Energy LLC, an existing wholly owned subsidiary owns the general partner
interest in Marea Associates, L.P. and a minority interest in Terranova Energia,
S. de R.L. de C.V.
The Company has additional natural gas and natural gas liquid projects in
feasibility studies including two international pipeline crossings for natural
gas transportation and one LPG transportation/terminal project in the interior
of Mexico. The Company is also evaluating two projects in Texas - one for the
distribution of LPG in a metropolitan residential market and the other for the
interconnection of natural gas transportation for a variety of end users in
another metropolitan market.
Rio Bravo Energy, LLC was formed on August 10, 1998 to operate the Chittim Gas
Processing Plant which was purchased in 1999 and was processing natural gas
primarily from Conoco Oil's Sacatosa Field. The Sacatosa Field was primarily an
oilfield which produced high BTU casinghead gas from which processing would
yield valuable hydrocarbon components such as propane, butane and natural
gasolines. As the field depleted lower volumes of casinghead gas were being
delivered by Conoco and other gas producers could not be contracted with for
processing of additional replacement volumes of gas. Therefore, in October 2002,
the plant was temporarily shut down due to the declining economics associated
with low volume operation of the plant. Management plans to reopen the plant
when adequate volumes of gas from third party producers makes plant operations
economically attractive. The market for the products of 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. The assets of this company
were acquired in conjunction with the Chittim Gas Processing Plant acquisition
and, when operational, would generate revenue from transportation fees to be
charged to third party gas producers shipping natural gas to the gas plant owned
by Rio Bravo Energy LLC.
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RESULTS OF OPERATIONS
REVENUES: The Company reported revenues of $507,712 for the six months ended
June 30, 2004 as compared with revenues from continuing operations of $20,092
for the six months ended June 30, 2003. The revenue increase resulted from the
acquisition of a 98% interest in Reef Ventures, L.P. which owns and operates a
natural gas pipeline serving the Piedras Negras, Coahuila market.
TOTAL COSTS AND EXPENSES: Total costs and expenses from continuing operations
increased from $595,321 for the six months ended June 30, 2003 to $4,303,169 for
the six months ended June 30, 2004.
COST OF SALES: The cost of sales (purchases) from continuing operations
increased from -0- for the six months ended June 30, 2003 to $497,820 for the
six months ended June 30, 2004. The increase was due to the purchase cost of
natural gas resold through the natural gas pipeline owned by Reef Ventures, L.P.
OPERATING EXPENSES: Other operating expenses from continuing operations
increased from $595,321 for the six months ended June 30, 2003 to $3,805,349 for
the six months ended June 30, 2004 which is total increase of $3,210,028.
Depreciation increased by $26,598 due to the acquisition of the natural gas
pipeline owned by Reef Ventures, L.P. Interest expense increased by $14,796 due
to the debt incurred to acquire the natural gas pipeline owned by Reef Ventures,
L.P. Pipeline operating expenses decreased by $12,077 due to different operating
requirements of the assets owned during the respective six month periods.
Officers and Directors Salaries & Fees increased by $186,358 for the six months
ended June 30, 2004 versus the six months ended June 30, 2003 due to hiring of
additional officers and directors. General & Administrative expenses increased
substantially as detailed below.
SELLING GENERAL AND ADMINISTRATIVE: General & Administrative Expenses increased
by $2,994,353 for the six months ended June 30, 2004 versus the six months ended
June 30, 2003 due to the issuance of common stock for consulting fees
($2,246,000), legal fees ($172,000) and financing fees($497,000) which are
non-cash expenses accounting for all but $79,353 of the increase in general and
administrative expenses. The remaining increase in G & A costs was primarily
from cash paid for travel costs and legal fees.
NET LOSS FROM OPERATIONS: Net loss of ($575,229) for the six months ended June
30,2003 increased to ($3,795,457) for the six months ended June 30, 2004, an
increase in the amount of loss of $3,220,228. The non-cash component of the
increase in loss was $2,915,000 as noted in the above discussion of general and
administrative expenses.
LIQUIDITY AND CAPITAL RESOURCES: Capital expenditures during the six months
ended June 30, 2004 totaled $6,347,501 as compared with $92,926 for the six
months ended June 30, 2003. The increase of $6,254,575 was due to acquisition of
the Reef Ventures, L.P. natural gas pipeline ($6,106,255), increased equipment
and leasehold cost of $17,512 and higher pre-construction costs regarding
potential international pipeline crossings and storage facilities in Mexico
($396,482).
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Total debt increased from $1,134,436 at June 30, 2003 to $7,416,093 at June 30,
2004. The net increase in total debt is due to the acquisition indebtedness
created in the acquisition of the Reef Ventures, L.P. partnership interests from
Coahuila Pipeline LLC and Impact International LLC as described in Note 4 to the
Condensed Consolidated Financial Statements for the period ended June 30, 2004.
Total debt as of June 30, 2004 and June 30, 2003 expressed as a percentage of
the sum of total debt and shareholders' equity was 65.5% and 134.5%
respectively.
Net loss for the six months ended June 30, 2004 was ($3,784,384) an increase of
494.8% from the net income of $958,502 for the six months ended June 30, 2003.
Diluted net loss per common share increased 300% to ($0.06). The net loss per
share calculation for the six months ended June 30, 2004 included an increase in
actual and equivalent shares outstanding.
As detailed above, the Company has experienced a significant improvement with
respect to its financial condition in the past six months. Improvement in the
ability to fund ongoing operations has also occurred as a result of actions
taken in the six months ended June 30, 2004. At December 31, 2003 the Company
had received $1,000,000 of the $5,000,000 total funding commitment with respect
to the private placement of 3,308,601 restricted common shares with Margaux
Investment Management Group, S.A. On February 11, 2004, the Company received the
final disbursement of funds which fulfilled the full $5,000,000 commitment plus
an oversubscription of $88,318. Management anticipates that sufficient liquidity
and capital resources currently exist to fund our operations with respect to
recurring operating expenses and project pre-construction expenditures for
planned projects in the remainder of the fiscal year, however, additional
borrowing and, or sale of additional shares of stock will be necessary to fund
actual construction of newly planned projects such as the Burgos Gas Storage
facility which is currently in the pre-construction phase of development.
Management expects that financing for the construction costs of this project
will be available in the form of a conventional project finance structure, -
i.e.- a construction loan followed with term debt. Other projects currently in
the feasibility study phase would likely utilize similar financing structures.
Until the various projects are constructed and operating, the Company does not
expect to receive significant revenues and must rely on existing cash resources
and future borrowings and/or equity issuance. Management believes that market
forces continue to emerge and justify the Company's efforts to provide midstream
energy projects for the cross-border and Mexico natural gas marketplace and the
Company's efforts will continue to address these opportunities in the future.
Management believes that the financial effect of the acquisition of the Impact
International LLC and Coahuila Pipeline LLC interests in Reef Ventures, L.P.
will be affordable due to a cap limitation of required cash payments from the
Company to the Sellers in the amount of existing project net cash flow during
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the term of the purchase money note. Similarly, the opportunity to offset the
Stock Warrant Purchase note owed the Company against the purchase money note for
the acquisition of the Impact/Coahuila partnership interests will limit the
effective total purchase price for the natural gas pipeline crossing to an
acceptable level.
FORWARD-LOOKING STATEMENTS:
We have included forward-looking statements in this report. For this purpose,
any statements contained in this report that are not statements of historical
fact may be deemed to be forward looking statements. Without limiting the
foregoing, words such as "may", "will", "expect", "believe", "anticipate",
"estimate", "plan" or "continue" or the negative or other variations thereof or
comparable terminology are intended to identify forward-looking statements.
These statements by their nature involve substantial risks and uncertainties,
and actual results may differ materially depending on a variety of factors.
Factors that might cause forward-looking statements to differ materially from
actual results include, among other things, overall economic and business
conditions, demand for the Company's products, competitive factors in the
industries in which we compete or intend to compete, natural gas availability
and cost and timing, impact and other uncertainties of our future acquisition
plans.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK:
The Company does not issue or invest in financial instruments or their
derivatives for trading or speculative purposes. The operations of the Company
are conducted primarily in the United States, and, are not subject to material
foreign currency exchange risk. Although the Company has outstanding debt and
related interest expense, market risk of interest rate exposure in the United
States is currently not material.
Item 3. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures.
Within the 90 days prior to the date of this Quarterly Report for the
period ended June 30, 2004, we carried out an evaluation, under the supervision
and with the participation of our management, including the Company's Chairman
and Chief Executive Officer and the Chief Financial Officer, of the
effectiveness of the design and operation of our disclosure controls and
procedures pursuant to Rule 13a-14 of the Securities Exchange Act of 1934 (the
"Exchange Act"), which disclosure controls and procedures are designed to insure
that information required to be disclosed by a company in the reports that it
files under the Exchange Act is recorded, processed, summarized and reported
within required time periods specified by the SEC's rules and forms. Based upon
that evaluation, the Chairman and the Chief Financial Officer concluded that our
disclosure controls and procedures are effective in timely alerting them to
material information relating to the Company required to be included in the
Company's period SEC filings.
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(b) Changes in Internal Control.
Subsequent to the date of such evaluation as described in subparagraph
(a) above, there were no significant changes in our internal controls or other
factors that could significantly affect these controls, including any corrective
action with regard to significant deficiencies and material weaknesses.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
On January 6, 2003, we were served as a third party defendant in a
lawsuit titled Northern Natural Gas Company vs. Betty Lou Sheerin vs. Tidelands
Oil & Gas Corporation, ZG Gathering, Ltd. and Ken Lay, in the 150th Judicial
District Court, Bexar County, Texas, Cause Number 2002-C1-16421. The lawsuit was
initiated by Northern Natural Gas when it sued Betty Lou Sheerin for her failure
to make payments on a note she executed payable to Northern in the original
principal amount of $1,950,000. Northern's suit was filed on November 13, 2002.
Sheerin answered Northern's lawsuit on January 6, 2003. Sheerin's answer
generally denied Northern's claims and raised the affirmative defenses of
fraudulent inducement by Northern, estoppel, waiver and the further claim that
the not does not comport with the legal requirements of a negotiable instrument.
Sheerin seeks a judicial ruling that Northern be denied any recovery on the
note. Sheerin's answer included a counterclaim against Northern, ZG Gathering,
and Ken Lay generally alleging, among other things, that Northern, ZG Gathering,
Ltd. and Ken Lay, fraudulently induced her execution of the note. Northern has
filed a general denial of Sheerin's counterclaims. Sheerin's answer included a
third party cross claim against Tidelands. She alleges that Tidelands entered
into an agreement to purchase the Zavala Gathering System from ZG Gathering Ltd.
and that, as a part of the agreement, Tidelands agreed to satisfy all of the
obligations due and owing to Northern, thereby relieving Sheerin of all
obligations she had to Northern on the promissory note in question. She alleges
that Tidelands is liable to her for all of her actual damages, costs of the
lawsuit and other unstated relief. Tidelands and Sheerin agreed to delay the
Tideland's answer date in order to allow time for mediation of the case.
Tideland's participated in a mediation on March 11, 2003. The case was not
settled at that time. Tideland's answered the Sheerin suit on March 26, 2003.
Tideland's answer denies all of Sheerin's allegations. No discovery has been
completed at this time. Based on initial investigation, however, Tidelands
appears to have a number of potential defenses to Sheerin's claims. Tideland's
intends to aggressively defend the lawsuit. At this early stage in the
litigation, and in light of our continuing investigation of the facts and the
issues in the case, we cannot give a more definitive evaluation of the extent
Tideland's liability exposure.
On May 24 and June 16, 2004 respectively, Betty Lou Sheerin filed her
first and second amended original answer, affirmative defenses, special
exceptions and second amended original counterclaim, second amended original
third party cross-actions and requests for disclosure. In these amended
pleadings, she sued Michael Ward, Royis Ward, James B. Smith, Carl Hessel and
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Ahmed Karim in their individual capacities. Her claims against these individuals
are for fraud, breach of the Uniform Commercial Code, breach of duty of good
faith and fair dealing and conversion. These claims are being vigorously
defended.
In September 2002, as a pre-closing deposit to the purchase of the ZG
pipelines, the Company executed a $300,000 promissory note to Betty L. Sheerin,
a partner of ZG Gathering, Ltd. In addition, the Company issued 1,000,000 shares
of its common stock to various partners of ZG Gathering, Ltd. The company
believes that the promissory note and shares of common stock will be cancelled
based upon the outcome of the litigation described above. Accordingly, our
financial statements reflect this belief.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
During the second quarter of 2004 the Company authorized, offered and
sold the following securities pursuant to exemptions from the registration
requirements of the Securities Act of 1933, as amended (the "Securities Act").
On April 12, 2004, we issued 500,000 shares of common stock to Impact
International, Inc. valued at $497,000 in a cashless exercise of their common
stock warrants.
On April 15, 2004, we issued 700,000 common shares to Majestic
Holdings, LLC. for consulting services valued at $728,000.
On April 15, 2004, we issued 450,000 common shares to New Age Group,
LLC for consulting services valued at $468,000.
On June 30, 2004, we issued 3,322 common shares to Carl Hessel for $
4,983. Carl Hessell is a member of our board of directors.
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.
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Item 5. Other Information
On April 7, 2004, we formed Terranova Energia, S. de R.L. de C.V., an
entity organized under the laws of the United Mexican States. We plan to conduct
all of our Mexican business through Terranova.
On April 13, 2004, we formed Marea Associates, L.P., a Texas limited
partnership. Marea Associates is the 99% owner of Terranova Energia S. de R.L.
de C.V. Rio Bravo Energy, LLC owns the other 1% of Terranova.
On May 19, 2004, we formed Arrecefe Management, LLC, a Texas limited
liability company. Arrecefe acts as the general partner for Reef Ventures, L.P.
Item 6. Exhibits and Reports on Form 8-K
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 Officer-Section 906 Certification
pursuant to Sarbane-Oxley Act.
32.2 Chief Financial Officer- Section 906 Certification
pursuant to Sarbane-Oxley Act.
(b) Reports on Form 8-K. During the second quarter of 2004 we filed two Current
Reports on Form 8-K, the first on April 21, 2004 reporting under Item 5, Other
Events and the second on June 25, 2004 reporting under Items 2 and 7.
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: August 16, 2004 ---------------------------
By: Michael Ward
Title: President, CEO
/s/ James B. Smith
Dated: August 16, 2004 ---------------------------
By: James B. Smith
Title: CFO
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