UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
DC 20549
Form
10-Q
|
(MARK
ONE)
|
|
|
x
|
QUARTERLY REPORT UNDER
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
|
|
For
the quarterly period ended September 30, 2008
|
|
|
|
OR
|
|
|
|
o
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT
|
|
|
For
the transition period from ______________ to
______________
|
Commission
File Number:
0-29613
TIDELANDS
OIL & GAS CORPORATION
(Exact
name of small business issuer as specified in its charter)
|
Nevada
|
66-0549380
|
|
(State
of incorporation)
|
(IRS
Employer ID Number)
|
1862 West Bitters Rd., San
Antonio, TX 78248
(Address
of principal executive offices)
(210)
764-8642
(Issuer's
telephone number)
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
o
Smaller
Reporting Company
x
Indicate
by check mark whether the registrant is a shell company (as defined by Rule
12b-2of the Exchange Act. Yes
o
No
x
As of
November 14, 2008, there were 217,754,324 shares of Common Stock issued and
outstanding.
Transitional
Small Business Disclosure Format: Yes
o
No
x
FORM
10-Q
Table of
Contents
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Page
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PART
I Financial Information
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Item
1
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3
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3
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5
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6
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7
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10
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Item
2
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20
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Item
3
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23
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Item
4
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24
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PART
II Other Information
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Item
1
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25
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Item
1A
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25
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Item
2
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25
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Item
3
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26
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Item
4
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26
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Item
5
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26
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Item
6
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26
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27
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PART
I – FINANCIAL INFORMATION
Item
1. Financial Statements
|
TIDELANDS
OIL & GAS CORPORATION
|
|
CONSOLIDATED
BALANCE SHEETS
|
|
(UNAUDITED)
|
|
ASSETS
|
|
|
|
|
|
|
|
September
30,
|
|
|
December
31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Current
Assets:
|
|
|
|
|
|
|
|
Cash
|
|
$
|
8,628
|
|
|
$
|
5,794
|
|
|
Accounts
and Other Receivable
|
|
|
93,222
|
|
|
|
7,116
|
|
|
Note
Receivable
|
|
|
800,000
|
|
|
|
-
|
|
|
Prepaid
Expenses
|
|
|
114,599
|
|
|
|
177,099
|
|
|
Current
Portion of Assets of Discontinued Operations
|
|
|
-
|
|
|
|
734,713
|
|
|
Total
Current Assets
|
|
|
1,016,449
|
|
|
|
924,722
|
|
|
|
|
|
|
|
|
|
|
|
|
Property
Plant and Equipment, Net of Accumulated Depreciation
|
|
|
|
|
|
|
|
|
|
of
$95,677 and $81,202, Respectively – Continuing Operations
|
|
|
3,152,845
|
|
|
|
2,953,661
|
|
|
Property
Plant and Equipment, Net – Discontinued
|
|
|
|
|
|
|
|
|
|
Operations-Held
for Sale
|
|
|
-
|
|
|
|
4,118,666
|
|
|
Total
Property, Plant and Equipment, Net
|
|
|
3,152,845
|
|
|
|
7,072,327
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
in Affiliate – Cost Method
|
|
|
250,000
|
|
|
|
2,809,801
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Assets:
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
146,724
|
|
|
|
200,379
|
|
|
Cash
Restricted
|
|
|
-
|
|
|
|
43,467
|
|
|
Deferred
Charges
|
|
|
181,333
|
|
|
|
-
|
|
|
Goodwill
|
|
|
-
|
|
|
|
800,428
|
|
|
Non-Current
Portion of Assets of Discontinued
|
|
|
|
|
|
|
|
|
|
Operations-Held
for Sale
|
|
|
-
|
|
|
|
386,048
|
|
|
Total
Other Assets
|
|
|
328,057
|
|
|
|
1,430,322
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Assets
|
|
$
|
4,747,351
|
|
|
$
|
12,237,172
|
|
|
TIDELANDS
OIL & GAS CORPORATION
|
|
CONSOLIDATED
BALANCE SHEETS
|
|
(CONTINUED)
|
|
(UNAUDITED)
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY (DEFICIT)
|
|
|
|
|
|
|
|
September
30,
|
|
|
December
31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Current
Liabilities:
|
|
|
|
|
|
|
|
Current
Maturities – Note Payable
|
|
$
|
1,192,277
|
|
|
$
|
7,533,039
|
|
|
Accounts
Payable and Accrued Expenses
|
|
|
866,333
|
|
|
|
1,985,829
|
|
|
Accrued
Expenses – Due to Related Parties
|
|
|
1,500,000
|
|
|
|
-
|
|
|
Reserve
for Litigation
|
|
|
-
|
|
|
|
2,250,000
|
|
|
Current
Portion of Liabilities of Discontinued
|
|
|
|
|
|
|
|
|
|
Operations
|
|
|
-
|
|
|
|
743,380
|
|
|
Due
to Related Party
|
|
|
172,375
|
|
|
|
-
|
|
|
Total
Current Liabilities
|
|
|
3,730,985
|
|
|
|
12,512,248
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-Term
Debt
|
|
|
1,000,000
|
|
|
|
-
|
|
|
Total
Liabilities
|
|
|
4,730,985
|
|
|
|
12,512,248
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments
and Contingencies
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
Equity (Deficit):
|
|
|
|
|
|
|
|
|
|
Common
Stock, $.001 Par Value per Share,
|
|
|
|
|
|
|
|
|
|
250,000,000
Shares Authorized, 214,999,909
|
|
|
|
|
|
|
|
|
|
and
108,226,836 Shares Issued and
|
|
|
|
|
|
|
|
|
|
Outstanding
at September 30, 2008 and
|
|
|
|
|
|
|
|
|
|
December
31, 2007, Respectively
|
|
|
215,001
|
|
|
|
108,227
|
|
|
Additional
Paid-in Capital
|
|
|
60,964,482
|
|
|
|
55,868,098
|
|
|
Accumulated
Deficit
|
|
|
(61,163,117
|
)
|
|
|
(56,251,401
|
)
|
|
Total
Stockholders’ Equity (Deficit)
|
|
|
16,366
|
|
|
|
(275,076
|
)
|
|
|
|
|
|
|
|
|
|
|
Total
Liabilities and Stockholders’ Equity
(Deficit)
|
|
$
|
4,747,351
|
|
|
$
|
12,237,172
|
|
See
Accompanying Notes to Consolidated Financial Statements
|
|
|
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
|
(UNAUDITED)
|
|
|
|
Three
Months Ended
|
|
|
Three
Months Ended
|
|
|
|
|
September
30, 2008
|
|
|
September
30, 2007
|
|
|
Revenues:
|
|
|
|
|
|
|
|
Consulting
Fees
|
|
$
|
30,000
|
|
|
$
|
-
|
|
|
Total
Revenues
|
|
|
30,000
|
|
|
|
-
|
|
|
Costs
and Expenses:
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
6,050
|
|
|
|
6,242
|
|
|
Selling,
General and Administrative
|
|
|
1,263,816
|
|
|
|
638,416
|
|
|
Impairment
– Investment in Affiliate
|
|
|
2,559,801
|
|
|
|
-
|
|
|
Total
Costs and Expenses
|
|
|
3,829,667
|
|
|
|
644,658
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
From Operations
|
|
|
(3,799,667
|
)
|
|
|
(644,658
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Other
Income (Expenses)
|
|
|
|
|
|
|
|
|
|
Gain
on the Sale of Assets
|
|
|
900
|
|
|
|
156,480
|
|
|
Interest
Expense
|
|
|
(59,029
|
)
|
|
|
(245,357
|
)
|
|
Interest
and Dividend Income
|
|
|
10,211
|
|
|
|
167
|
|
|
Reduction
of Reserve for Litigation
|
|
|
2,239,600
|
|
|
|
-
|
|
|
Miscellaneous
|
|
|
(8,803
|
)
|
|
|
93,390
|
|
|
Total
Other Income
|
|
|
2,182,879
|
|
|
|
4,680
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Loss from Continuing Operations
|
|
|
(1,616,788
|
)
|
|
|
(639,978
|
)
|
|
Net
Loss from Operations of Discontinued
|
|
|
|
|
|
|
|
|
|
Segments
Including Loss on Disposal of
|
|
|
|
|
|
|
|
|
|
Equipment
$179,443 at September 30, 2007
|
|
|
-
|
|
|
|
(237,797
|
)
|
|
Net
Loss
|
|
$
|
(1,616,788
|
)
|
|
$
|
(877,775
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Loss
Per Common Share:
Basic and
Diluted
|
|
|
|
|
|
|
|
|
|
Loss
from Continuing Operations
|
|
$
|
(0.01
|
)
|
|
$
|
(0.01
|
)
|
|
Loss
from Discontinued Operations
|
|
|
0.00
|
|
|
|
(0.00
|
)
|
|
Total
|
|
$
|
(0.01
|
)
|
|
$
|
(0.01
|
)
|
|
Weighted
Average Number of Common
|
|
|
|
|
|
|
|
|
|
Shares
Outstanding,
Basic and
Diluted
|
|
|
196,869,627
|
|
|
|
106,425,046
|
|
See
Accompanying Notes to Consolidated Financial Statements
|
|
|
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
(UNAUDITED)
|
|
|
|
Nine
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
|
September
30, 2008
|
|
|
September
30, 2007
|
|
|
Revenues:
|
|
|
|
|
|
|
|
Consulting
Fees
|
|
$
|
105,000
|
|
|
$
|
-
|
|
|
Total
Revenues
|
|
|
105,000
|
|
|
|
-
|
|
|
Costs
and Expenses:
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
18,152
|
|
|
|
18,770
|
|
|
Selling,
General and Administrative–Related
|
|
|
|
|
|
|
|
|
|
Parties
|
|
|
-
|
|
|
|
3,638,000
|
|
|
Selling,
General and Administrative
|
|
|
5,175,506
|
|
|
|
3,766,691
|
|
|
Impairment
– Investment in Affiliate
|
|
|
2,559,801
|
|
|
|
-
|
|
|
Total
Costs and Expenses
|
|
|
7,753,459
|
|
|
|
7,423,461
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
From Operations
|
|
|
(7,648,459
|
)
|
|
|
(7,423,461
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Other
Income (Expenses)
|
|
|
|
|
|
|
|
|
|
Gain
on Sale of Assets
|
|
|
900
|
|
|
|
156,480
|
|
|
Interest
Expense
|
|
|
(238,425
|
)
|
|
|
(772,304
|
)
|
|
Interest
and Dividend Income
|
|
|
21,145
|
|
|
|
752
|
|
|
Reduction
of Reserve for Litigation
|
|
|
2,239,600
|
|
|
|
|
|
|
Miscellaneous
|
|
|
7,751
|
|
|
|
93,390
|
|
|
Total
Other Income (Expenses)
|
|
|
2,030,971
|
|
|
|
(521,682
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net
Loss from Continuing Operations
|
|
|
(5,617,488
|
)
|
|
|
(7,945,143
|
)
|
|
Net
Income (Loss) from Operations of
|
|
|
|
|
|
|
|
|
|
Discontinued
Segments Including Gain on
|
|
|
|
|
|
|
|
|
|
Disposal
of Equipment of $847,087 at
|
|
|
|
|
|
|
|
|
|
September
30, 2008 and Loss on Disposal
|
|
|
|
|
|
|
|
|
|
of
Equipment of $179,443 and an Impairment
|
|
|
|
|
|
|
|
|
|
Loss
– Long Lived Assets of $2,605,061 at
|
|
|
|
|
|
|
|
|
|
September
30, 2007
|
|
|
705,772
|
|
|
|
(2,717,072
|
)
|
|
Net
Loss
|
|
$
|
(4,911,716
|
)
|
|
$
|
(10,662,215
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Loss
Per Common Share:
Basic and
Diluted
|
|
|
|
|
|
|
|
|
|
Loss
from Continuing Operations
|
|
$
|
(0.03
|
)
|
|
$
|
(0.08
|
)
|
|
Loss
from Discontinued Operations
|
|
|
0.00
|
|
|
|
(0.03
|
)
|
|
Total
|
|
$
|
(0.03
|
)
|
|
$
|
(0.11
|
)
|
|
Weighted
Average Number of Common
|
|
|
|
|
|
|
|
|
|
Shares
Outstanding,
Basic and
Diluted
|
|
|
165,928,519
|
|
|
|
97,199,835
|
|
See
Accompanying Notes to Consolidated Financial Statements
|
|
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
(UNAUDITED)
|
|
|
|
Nine
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
|
September
30, 2008
|
|
|
September
30, 2007
|
|
|
Cash
Flows From Operating Activities:
|
|
|
|
|
|
|
|
Net
Income/(Loss)
|
|
|
|
|
|
|
|
From
Continuing Operations
|
|
$
|
(5,617,488
|
)
|
|
$
|
(7,945,143
|
)
|
|
From
Discontinued Operations
|
|
|
705,772
|
|
|
|
(2,717,072
|
)
|
|
Adjustments
to Reconcile Net Loss To Net Cash
|
|
|
|
|
|
|
|
|
|
Used
In Operating Activities:
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
|
|
|
|
|
|
|
From
Continuing Operations
|
|
|
18,152
|
|
|
|
18,770
|
|
|
From
Discontinued Operations
|
|
|
43,764
|
|
|
|
314,444
|
|
|
Impairment
Loss
|
|
|
2,559,801
|
|
|
|
2,605,061
|
|
|
Reversal
of Litigation Reserve
|
|
|
(2,239,600
|
)
|
|
|
-
|
|
|
(Gain)
Loss on Disposal of Assets
|
|
|
(418,162
|
)
|
|
|
179,443
|
|
|
(Gain)
on Sale of Subsidiary
|
|
|
(429,825
|
)
|
|
|
(156,480
|
)
|
|
Issuance
of Common Stock:
|
|
|
|
|
|
|
|
|
|
For
Services Provided – Related Parties
|
|
|
-
|
|
|
|
5,011,763
|
|
|
For
Services Provided – Other
|
|
|
3,218,963
|
|
|
|
1,049,791
|
|
|
Changes
in:
|
|
|
|
|
|
|
|
|
|
Accounts
Receivable
|
|
|
264,183
|
|
|
|
(33,708
|
)
|
|
Inventory
|
|
|
224,132
|
|
|
|
(18,285
|
)
|
|
Prepaid
Expenses
|
|
|
142,613
|
|
|
|
(153,974
|
)
|
|
Deferred
Charges
|
|
|
(181,333
|
)
|
|
|
565,221
|
|
|
Deposits
|
|
|
54,013
|
|
|
|
(65,438
|
)
|
|
Accounts
Payable and Accrued Expenses
|
|
|
840,201
|
|
|
|
1,272,791
|
|
|
Customer
Deposits
|
|
|
(10,800
|
)
|
|
|
10,350
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Cash (Used) In Operating Activities
|
|
|
(825,614
|
)
|
|
|
(62,466
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Cash
Flows From Investing Activities:
|
|
|
|
|
|
|
|
|
|
Proceeds
– Sale of Subsidiary and Other Assets
|
|
|
5,205,595
|
|
|
|
1,310,236
|
|
|
Investment
in Affiliate
|
|
|
-
|
|
|
|
(62,601
|
)
|
|
(Increase)
Decrease in Restricted Cash
|
|
|
70,648
|
|
|
|
(1,478
|
)
|
|
Acquisitions
of Property, Plant and Equipment
|
|
|
(217,336
|
)
|
|
|
(1,774,175
|
)
|
|
Net
Cash Provided (Used) In Investing Activities
|
|
|
5,058,907
|
|
|
|
(528,018
|
)
|
|
TIDELANDS
OIL & GAS CORPORATION
|
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
(CONTINUED)
|
|
(UNAUDITED)
|
|
|
|
Nine
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
|
September
30, 2008
|
|
|
September
30, 2007
|
|
|
Cash
Flows From Financing Activities:
|
|
|
|
|
|
|
|
Cost
of Warrant Buy-Backs
|
|
|
(20,714
|
)
|
|
|
-
|
|
|
Proceeds
from Exercise of Stock Options
|
|
|
-
|
|
|
|
790,000
|
|
|
Proceeds
from Short-Term Loan
|
|
|
-
|
|
|
|
251,220
|
|
|
Proceeds
from Long-Term Loan
|
|
|
200,000
|
|
|
|
-
|
|
|
Repayment
of Convertible Debentures and Loan
|
|
|
(4,662,299
|
)
|
|
|
-
|
|
|
Loan
from Related Party
|
|
|
172,375
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Cash Provided (Used) by Financing Activities
|
|
|
(4,310,638
|
)
|
|
|
1,041,220
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Increase (Decrease) in Cash
|
|
|
(77,345
|
)
|
|
|
450,736
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
at Beginning of Period
|
|
|
|
|
|
|
|
|
|
From
Continued Operations
|
|
|
5,794
|
|
|
|
367,437
|
|
|
From
Discontinued Operations
|
|
|
80,179
|
|
|
|
-
|
|
|
Total
|
|
|
85,973
|
|
|
|
367,437
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
at End of Period
|
|
|
|
|
|
|
|
|
|
From
Continued Operations
|
|
|
8,304
|
|
|
|
795,559
|
|
|
From
Discontinued Operations
|
|
|
324
|
|
|
|
22,614
|
|
|
Total
|
|
$
|
8,628
|
|
|
$
|
818,173
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
Disclosures of Cash Flow Information:
|
|
|
|
|
|
|
|
|
|
Cash
Payments for Interest
|
|
$
|
165,223
|
|
|
$
|
125,817
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
Payments for Income Taxes
|
|
$
|
-
|
|
|
$
|
-
|
|
|
TIDELANDS
OIL & GAS CORPORATION
|
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
(CONTINUED)
|
|
(UNAUDITED)
|
|
|
|
Nine
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
|
September
30, 2008
|
|
|
September
30, 2007
|
|
|
Non-Cash
Activities:
|
|
|
|
|
|
|
|
|
|
Issuance
of Common Stock:
|
|
|
|
|
|
|
|
|
|
Operating
Activities
|
|
$
|
3,218,963
|
|
|
$
|
2,423,554
|
|
|
Payments
of Accrued Expenses & Accounts Payable
|
|
|
-
|
|
|
|
343,244
|
|
|
Conversion
of Debentures
|
|
|
-
|
|
|
|
2,000,000
|
|
|
Payment
of Note Payable
|
|
|
1,994,509
|
|
|
|
-
|
|
|
Cashless
Warrant Exercise
|
|
|
24,761
|
|
|
|
-
|
|
|
Conversion
of Accounts Payable to Notes Payable
|
|
|
1,192,277
|
|
|
|
-
|
|
|
Legal
Fee – Retainer
|
|
|
-
|
|
|
|
130,616
|
|
|
Prepaid
Legal Fees
|
|
|
-
|
|
|
|
27,083
|
|
|
Litigation
Settlement
|
|
|
10,400
|
|
|
|
-
|
|
|
Assumption
of Note Payable by Third Party
|
|
|
876,231
|
|
|
|
-
|
|
|
Long-Term
Loan Payable
|
|
|
800,000
|
|
|
|
-
|
|
|
Less
Related Long-Term Loan Receivable
|
|
|
(800,000
|
)
|
|
|
-
|
|
|
Cancellation
of Common Stock: In Settlement of Stock
|
|
|
|
|
|
|
|
|
|
Subscriptions
|
|
|
-
|
|
|
|
(220,000
|
)
|
|
Total
Non-Cash Activities
|
|
$
|
7,317,141
|
|
|
$
|
4,704,497
|
|
See
Accompanying Notes to Consolidated Financial Statements
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2008
(UNAUDITED)
NOTE 1
–
BASIS OF
PRESENTATION
The
accompanying unaudited consolidated financial statements for the nine-month
periods ended September 30, 2008, and 2007, have been prepared in conformity
with accounting principles generally accepted in the United States of America
for interim financial information and with the instructions to Form 10-Q and
Regulation S-X. Please note that the prior year’s presentations for
the Consolidated Statement of Operations and the Consolidated Statements of Cash
Flows were changed to conform to current year’s presentation. The
financial information as of December 31, 2007, is derived from the registrant’s
Form 10-K for the year ended December 31, 2007. Certain information
or footnote disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United States of
America that would substantially duplicate the disclosures contained in the
registrant’s Form 10-K for the year ended December 31, 2007, have been condensed
or omitted pursuant to the rules and regulations of the Securities and Exchange
Commission.
The
preparation of consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates. In the opinion of
management, the accompanying financial statements include all adjustments
necessary (which are of a normal and recurring nature) for the fair presentation
of the results of the interim periods presented. While the registrant
believes that the disclosures presented are adequate to keep the information
from being misleading, it is suggested that these accompanying financial
statements be read in conjunction with the registrant’s audited consolidated
financial statements and notes for the year ended December 31, 2007, included in
the registrant’s Form 10-K for the year ended December 31, 2007.
Operating
results for the nine-month period ended September 30, 2008, are not necessarily
indicative of the results that may be expected for the remainder of the fiscal
year ending December 31, 2008. The accompanying unaudited
consolidated financial statements include the accounts of the registrant and its
wholly-owned subsidiary, Esperanza Energy, LLC. All significant
inter-company accounts and transactions have been eliminated in
consolidation. The accounts of Sonterra Energy Corporation, Reef
International, LLC, and Reef Marketing, LLC, are shown up through their dates of
sale. The accounts of Reef Ventures, LP, and Arrecefe Management,
LLC, its General Partner, are shown up through the sale of their assets with the
exception of continuing incidental expenses.
NOTE 2
–
GOING
CONCERN
The
Company has sustained recurring losses and negative cash flows from
operations. Over 2007, the Company’s growth had been funded through
issuance of convertible debentures. As of September 30, 2008, the
Company had approximately $8,628 of unrestricted cash. However, the
Company has experienced and continues to experience negative cash flows from
operations, as well as an ongoing requirement for substantial additional capital
investment. The Company needs to raise substantial additional capital
to accomplish its business plan this year and over the next several
years. The Company is seeking to obtain such additional funding
through private equity sources, from financial partners for some of its projects
and from continued reduction of operating expenses. There can be no
assurance as to the availability or terms upon which such financing and capital
might be available.
The
Company’s ability to continue as a going concern will depend on management’s
ability to successfully implement a business plan which will increase revenues,
control costs, and obtain additional forms of debt and/or equity financing or
financial partners. These financial statements do not include any
adjustments that might be necessary if the Company is unable to continue as a
going concern.
NOTE 3
–
SALE OF SONTERRA ENERGY
CORPORATION
On
January 9, 2008, the Company sold its wholly-owned subsidiary, Sonterra Energy
Corporation ("Sonterra”), to Bentley Energy Corporation, a company controlled by
our former CEO. Sonterra is a propane distribution company operating
in Central Texas.
The sales
price for Sonterra was $3 million of which $2,925,000 was paid at
closing. The remaining $75,000 is due on or before January 9, 2009,
and is subject to use to defend and pay possible claims from previous legal
actions against Sonterra. (See NOTE 12 – Litigation)
The
proceeds of the transaction were primarily utilized to repay all the outstanding
principal balance on the Company’s convertible debentures totaling
$2,374,291.
TIDELANDS
OIL & GAS CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2008
(UNAUDITED)
NOTE 4
–
SALE OF THE ASSETS OF REEF
VENTURES, LP
On March
25, 2008, Reef Ventures, L.P. ("Reef Ventures"), a subsidiary of Tidelands Oil
& Gas Corporation (the "Company"), entered into and consummated a Purchase
and Sale Agreement (the "Purchase and Sale Agreement") with West Texas Gas, Inc.
("WTG") for the sale of all of the issued and outstanding membership interests
of Reef International, LLC ("Reef International") and Reef Marketing, LLC ("Reef
Marketing", and collectively with Reef Ventures and Reef International, the
"Reef Entities"), both of which were wholly-owned subsidiaries of Reef Ventures,
and all the assets of the Reef Entities, which consist of assets related to the
"River Crossing Project", the "Carrizo Springs Pipeline System", the "Peña Creek
Gathering System" and the "Chittim Gas Plant" (collectively referred to as the
"Assets").
The total
purchase price for the Assets, after adjustments required by the Purchase and
Sale Agreement, was $2,484,262 (the "Purchase Price") in cash, and the execution
by WTG of a Throughput Payment Agreement (the "Throughput Payment Agreement")
with Impact International, LLC ("Impact").
The
Company caused Reef Ventures to deliver $2,436,825 of the Purchase Price to
Impact on behalf of the Company, as partial repayment of the outstanding
principal and interest of a promissory note made by the Company to Impact dated
May 25, 2004, in the original principal amount of $6,523,773 (the "Note"). The
Company repaid the remainder of the outstanding principal and interest on the
Note by requiring WTG to enter into the Throughput Payment Agreement with Impact
for which Impact credited the outstanding Note balance $876,231, and by issuing
39,890,180 shares (the "New Shares") of the Company's common stock valued at
$0.05 per share, for a total of $1,994,509, to Impact upon the closing of the
Purchase and Sale Agreement. The total consideration described above of
$5,307,505 liquidated the outstanding Note balance in full. The remaining
$47,437 of the Purchase Price received by Reef Ventures was used to pay legal
fees associated with the transaction and for working capital
purposes.
NOTE 5
–
DISCONTINUED OPERATIONS AND
ASSETS HELD
Sonterra
Energy Corporation
The sale
of the Company’s wholly-owned subsidiary, Sonterra Energy Corporation, resulted
in gain of $429,825 which was subject to possible future reduction (See NOTE 12
– Litigation) for the fiscal period ended September 30, 2008.
Reef
Ventures, LP
The sale
of the assets of Reef Ventures, LP, the Company’s 97% owned subsidiary, resulted
in a gain of $417,262 for the fiscal period ended September 30,
2008.
We have
accounted for the sale of these assets in accordance with FAS 144 – Accounting
for the Impairment or Disposal of Long-Lived Assets. Pursuant to FAS
144, we have separated the detail of the individual assets, liabilities and
results from operations of these projects from our consolidated balance sheet
and statement of operations at September 30, 2008, as follows:
|
|
|
September
30,
|
|
|
December
31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Assets
of Discontinued Subsidiaries:
|
|
|
|
|
|
|
|
Cash
|
|
$
|
-
|
|
|
$
|
80,179
|
|
|
Accounts
and Other Receivables
|
|
|
-
|
|
|
|
350,289
|
|
|
Inventory
|
|
|
-
|
|
|
|
224,132
|
|
|
Prepaid
Expenses
|
|
|
-
|
|
|
|
80,113
|
|
|
Property,
Plant and Equipment, Net
|
|
|
-
|
|
|
|
4,118,666
|
|
|
Other
Assets
|
|
|
-
|
|
|
|
386,048
|
|
|
Total
Assets
|
|
$
|
-
|
|
|
$
|
5,239,427
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
of Discontinued Subsidiaries:
|
|
|
|
|
|
|
|
|
|
Accounts
Payable and Accrued Expenses
|
|
$
|
-
|
|
|
$
|
732,580
|
|
|
Customer
Deposits
|
|
|
-
|
|
|
|
10,800
|
|
|
Total
Liabilities
|
|
$
|
-
|
|
|
$
|
743,380
|
|
|
|
|
Nine Months
Ended
|
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Revenues
of Discontinued Subsidiaries
|
|
$
|
1,397
|
|
|
$
|
1,992,898
|
|
|
Costs
and Expenses
|
|
|
(142,712
|
)
|
|
|
(2,097,908
|
)
|
|
Impairment
Loss
|
|
|
0
|
|
|
|
(2,605,061
|
)
|
|
Gain
(Loss) on Sale of Reef Ventures, LP’s Assets
|
|
|
417,262
|
|
|
|
(7,001
|
)
|
|
Gain
on Sale of Sonterra Energy Corporation
|
|
|
429,825
|
|
|
|
-
|
|
|
Net
Income from Discontinued Operations
|
|
$
|
705,772
|
|
|
$
|
(2.717,072
|
)
|
TIDELANDS
OIL & GAS CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2008
(UNAUDITED)
NOTE 6
–
FINANCING TRANSACTION -
GOLDEN GATE INVESTORS, INC.
On May 9,
2008, the Company completed a financing transaction in which it entered into a
Securities Purchase Agreement ("Purchase Agreement") with Golden Gate Investors,
Inc. ("Golden Gate") which provided for the issuance and sale by the Company of
up to $3 million of 6% convertible debentures, with the initial issuance of a $1
million debenture ("Debenture") and the payment of cash by Golden Gate of
$200,000 and issuance by Golden Gate to the Company of a $800,000 promissory
note ("Note"). The Purchase Agreement provides Golden Gate with the right to
lend, in two separate transactions, an additional $1 million of funding to the
Company, in its sole discretion, through advancing cash of $200,000 and issuing
a note for the balance, similar to the Note. The Company had the right until
August 8, 2008, to redeem, at a price equal to the principal and accrued
interest, the Debenture provided that no event of default had occurred. This
redemption did not occur.
The
Debenture is unsecured and bears interest at the annual rate of 6%, payable
monthly, in cash or, at Golden Gate’s election, in shares of the Company’s stock
valued at the applicable conversion price described further below, with the
principal amount due on May 9, 2011. The Debenture may not be prepaid without
the written consent of Golden Gate. The Debenture is convertible,
either in whole or in part, at any time at a per share price equal to the lesser
of $.50 or 80% of the average of the three lowest volume weighted average prices
during the twenty trading days prior to Golden Gate's election to convert. If
Golden Gate elects to convert a portion of the Debenture, and on the date of the
election, the volume weighted average price per share of the Company’s common
stock is below $0.07, the Company has the right to prepay the portion of the
Debenture that Golden Gate elected to convert, plus any accrued and unpaid
interest, at 100% of the amount due and the conversion notice will be
withdrawn.
In the
event the Company’s stock trades at a price that is less than $0.01 per share at
any time during the nine-month period following May 9, 2008, the interest rate
on the Debenture will increase to 9 ¾ % for the remaining term of the
Debenture. In the event this provision is triggered, within three
business days of a written request from Golden Gate, the Company is required to
prepay the amount of interest that would otherwise be due from the date of the
request through the maturity date. If any portion of the Debenture is
converted into the Company’s common stock prior to maturity, the Company will be
entitled to a refund of the pro rata portion of the interest prepayment
attributable to the portion of the principal amount converted. On
August 26, 2008, the Company received notice from Golden Gate that effective
July 28, 2008, the interest rate on the Debenture was increased to 9 ¾ %
pursuant to the terms of Debenture and that the Interest Prepayment amount of
$270,328.77 was due to Golden Gate within three days of the notice. To date, the
Company has not made such prepayment of interest to Golden Gate and Golden Gate
has not given notice of default on the Debenture to the
Company.
In
accordance with the terms of the Debenture, the Company has reserved 35,000,000
shares of its common stock for possible conversion. The Company’s
stock transfer agent has received irrevocable instructions regarding the shares
reserved.
The Note
is secured and bears interest at the annual rate of 6.25%, payable monthly, with
the principal amount due on May 31, 2011. Golden Gate has the option to prepay
this note, subject to the satisfaction of certain conditions. On
August 26, 2008, Golden Gate gave notice that the interest rate on the Note was
decreased to 43/4%, effective as of July 28, 2008 in accordance with the terms
of the Note which provides for such reduction in the event that the Company’s
common stock trades at a price that is less than $0.01 per share at any time
during the nine-month period after May 9, 2008.
The
Company analyzed the provision of the Debenture in accordance with the
provisions of SFAS 133, “Accounting for Derivative Instruments and Hedging
Activities” and EITF 00-19, “Accounting for Derivative Financial Instruments
Indexed to and Potentially Settled in, a Company’s Own Stock” and determined
that the Debenture did not contain any derivative features that would require
separate accounting under this literature.
TIDELANDS
OIL & GAS CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2008
(UNAUDITED)
NOTE 7
–
PROPERTY, PLANT AND
EQUIPMENT
A summary
of property, plant and equipment at September 30, 2008 and December 31, 2007 is
as follows:
|
|
|
|
|
|
|
|
|
Estimated
Economic
Life
|
|
|
Pre-Construction
Costs:
|
|
|
|
|
|
|
|
|
|
|
Domestic
LNG System
|
|
$
|
3,115,882
|
|
|
$
|
2,898,546
|
|
|
|
N/A
|
|
|
Total
|
|
|
3,115,882
|
|
|
|
2,898,546
|
|
|
|
|
|
|
Office
Furniture, Equipment and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leasehold
Improvements
|
|
|
132,640
|
|
|
|
136,317
|
|
|
5
Years
|
|
|
Total
|
|
|
3,248,522
|
|
|
|
3,034,863
|
|
|
|
|
|
|
Less:
Accumulated Depreciation
|
|
|
95,677
|
|
|
|
81,202
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Property, Plant and Equipment
|
|
$
|
3,152,845
|
|
|
$
|
2,953,661
|
|
|
|
|
|
Depreciation
expense for the nine months ended September 30, 2008 and 2007 was $18,152, and
$18,770, respectively.
A summary
of property, plant and equipment at September 30, 2008 and December 31, 2007 for
Discontinued Operations is as follows:
|
|
|
September
30,
2008
|
|
|
December
31,
2007
|
|
Estimated
Economic
Life
|
|
Office
Furniture, Equipment and
|
|
|
|
|
|
|
|
|
Leasehold
Improvements
|
|
$
|
-
|
|
|
$
|
55,086
|
|
5
Years
|
|
Pipeline
– Eagle Pass, TX to Piedras
|
|
|
|
|
|
|
|
|
|
|
Negras,
Mexico
|
|
|
-
|
|
|
|
3,501,194
|
|
20
Years
|
|
Tanks
& Lines – Propane Distribution
|
|
|
|
|
|
|
|
|
|
|
System
|
|
|
-
|
|
|
|
1,942,936
|
|
5
Years
|
|
Machinery
and Equipment
|
|
|
-
|
|
|
|
71,580
|
|
5
Years
|
|
Trucks,
Autos and Trailers
|
|
|
-
|
|
|
|
126,464
|
|
5
Years
|
|
Total
|
|
|
-
|
|
|
|
5,697,260
|
|
|
|
Less:
Accumulated Depreciation
|
|
|
-
|
|
|
|
1,578,594
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Property, Plant and Equipment
|
|
$
|
-
|
|
|
$
|
4,118,666
|
|
|
Depreciation
expense for the nine months ended September 30, 2008 and 2007 was $43,764 and
$314,444 respectively, and has been included in Net Income from Operations of
Discontinued Segments.
TIDELANDS
OIL & GAS CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2008
(UNAUDITED)
NOTE 8
–
LONG-TERM
DEBT
A summary
of long-term debt at September 30, 2008 and December 31, 2007 is as
follows:
|
|
|
September
30,
|
|
|
December
31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Note
Payable, Secured by Reef International
|
|
|
|
|
|
|
|
Pipeline,
Interest Bearing at 2% Over Prime
|
|
|
|
|
|
|
|
Rate
Per Annum, Maturing May 25, 2008
|
|
$
|
-
|
|
|
$
|
5,158,748
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible
Debentures, Unsecured, Including
|
|
|
|
|
|
|
|
|
|
Prepaid
Interest at 9% Per Annum, Maturing
|
|
|
|
|
|
|
|
|
|
January
20, 2008
|
|
|
-
|
|
|
|
2,374,291
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible
Debentures, Unsecured, Interest
|
|
|
|
|
|
|
|
|
|
Bearing
at 6% Per Annum, Maturing
|
|
|
|
|
|
|
|
|
|
May
9, 2011
|
|
|
1,000,000
|
|
|
|
-
|
|
|
Note
Payable, Unsecured, Interest Bearing at
|
|
|
|
|
|
|
|
10%
Per Annum, Maturing March 31, 2009
|
|
|
|
|
|
|
|
(see
below)
|
|
|
1,192,277
|
|
|
|
-
|
|
|
|
|
|
2,192,277
|
|
|
|
7,533,039
|
|
|
Less:
Current Maturities
|
|
|
1,192,277
|
|
|
|
7,533,039
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Long-Term Debt
|
|
$
|
1,000,000
|
|
|
$
|
-
|
|
On
January 21, 2008, the Company issued notes totaling $1,192,277 in payment of
accounts payable and accrued interest due to entities providing various services
to its Port Esperanza LNG Project. These notes, bearing interest at
10% per annum, were originally due April 30, 2008 and have been extended until
March 31, 2009. The Company has paid all interest due as of August
31, 2008, a total of $72,516 of which $40,178 was paid on October 15,
2008.
NOTE 9
–
COMMON STOCK
TRANSACTIONS
A
summary of common stock transactions for the three months ended March 31, 2008
is as follows:
The
Company issued 245,252 shares of its common stock valued at $15,816 for
preparation of a study of internal controls and procedures.
TIDELANDS
OIL & GAS CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2008
(UNAUDITED)
NOTE 9
–
COMMON STOCK TRANSACTIONS
(CONTINUED)
The
Company issued 3,083,333 shares each of its common stock to two of its Directors
for Directors Fees valued at $385,417 each.
The
Company issued 3,083,333 shares of its common stock to the President for a
Directors Fee valued at $385,417.
The
Company issued 2,302,217 shares of its common stock for past consulting services
valued at $138,384.66 regarding the Port Esperanza project and in payment of
$27,767 transaction costs.
The
Company issued 5,300,000 shares of its restricted common stock for consulting
services valued at $386,900.
The
Company issued 211,134 shares of its restricted common stock valued at $16,680
to two holders of the Company’s Stock Warrants under cashless exercise
provisions which reduced the total number of warrant shares outstanding by
243,616 for purpose of cancellation (See NOTE 10 – Stock Options…).
The
Company cancelled 2,071,407 Stock Warrants for $20,714, which reduced additional
paid-in capital (See NOTE 10 – Stock Options…).
The
Company issued 2,599,440 shares of its common stock to settle debts of $46,400
and in payment of an $87,471 financing fee.
The
Company issued 39,890,180 shares of its restricted common stock valued at
$1,994,509 in payment of the balance due Impact International, LLC, after
remitting the net proceeds from the sale of its International Pipeline between
the United States and Mexico to West Texas Gas, Inc.
The
Company issued 3,571,429 shares each of its restricted common stock valued at
$250,000 to two of its Directors in payment of consulting fees for the three
months ended March 31, 2008.
The
Company issued 3,571,429 shares of its common stock valued at $250,000 to the
President pursuant to his employment contract.
A
summary of common stock transactions for the three months ended June 30, 2008 is
as follows:
The
Company issued 3,600,689 shares of its common stock for consulting services
valued at $118,133 regarding the Port Esperanza project and in payment of
$23,626 transaction costs.
TIDELANDS
OIL & GAS CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2008
(UNAUDITED)
NOTE 9
–
COMMON STOCK TRANSACTIONS
(CONTINUED)
The
Company issued 217,391 shares of its common stock for consulting services valued
at $7,609 and in payment of $2,391 transaction costs.
The
Company issued 230,905 shares of its restricted common stock valued at $8,082 to
a holder of the Company’s Stock Warrants under cashless exercise
provisions. There are no further Stock Warrants outstanding (See NOTE
10 – Stock Options…).
The
Company issued 850,000 shares of its common stock for consulting services valued
at $25,000 regarding the Port Esperanza project and in payment of $5,000
transaction costs.
The
Company issued 1,074,695 shares of its common stock for legal services valued at
$30,170 and in payment of $9,205 transaction costs.
The
Company issued 280,715 shares of its common stock for corporate secretary
services and related costs valued at $5,813 and in payment of $1,163 transaction
costs.
The
Company issued 434,706 shares of its common stock to an Officer for salary
valued at $9,196 and in payment of $1,839 transaction costs.
The
Company issued 875,720 shares of its common stock to an Officer for salary
valued at $18,525 and in payment of $3,705 transaction costs.
A
summary of common stock transactions for the three months ended September 30,
2008 is as follows:
The
Company issued 666,667 shares of its common stock for consulting services valued
at $10,000 regarding the Port Esperanza project and in payment of $2,000
transaction costs.
The
Company issued 1,111,111 shares of its common stock for legal services valued at
$6,980 and in payment of $13,020 transaction costs.
The
Company issued 200,000 shares of its common stock for corporate secretary
services and related costs valued at $2,500 and in payment of $500 transaction
costs.
The
Company issued 2,060,577 shares of its common stock to an Officer for salary
valued at $29,056 and in payment of $7,811 transaction costs.
TIDELANDS
OIL & GAS CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2008
(UNAUDITED)
NOTE 9
–
COMMON STOCK TRANSACTIONS
(CONTINUED)
The
Company issued 2,887,835 shares of its common stock to an Officer for salary
valued at $38,992 and in payment of $8,481 transaction costs.
The
Company issued 3,769,553 shares of its common stock to three employees for
salaries and related expenses valued at $26,665 and in payment of $41,189
transaction costs.
The
Company issued 16,000,000 shares of its common stock to settle debts of $31,598
and in payment of a $108,102 financing fee.
The
Company issued 1,000,000 shares of its restricted common stock valued at $5,200
in partial payment of the settlement of litigation with Betty Sheerin et al
regarding the ZG Pipeline.
The
Company executed a Stop Payment Cancellation which released 1,000,000 shares of
its restricted common stock valued at $5,200 as the final payment of the
settlement of litigation with Betty Sheerin et al regarding the ZG
Pipeline.
NOTE 10
–
STOCK OPTIONS, STOCK
WARRANTS AND SHARES RESERVED FOR CONVERTIBLE
DEBENTURES
The
following table presents the activity for options, warrants and shares reserved
for issuance upon conversion of outstanding convertible debentures for the nine
months ending September 30, 2008:
|
|
|
|
|
|
|
|
|
Shares
Reserved
|
|
|
|
|
|
Weighted
|
|
|
|
|
Stock
|
|
|
Stock
|
|
|
for
Convertible
|
|
|
Total
|
|
|
Average
|
|
|
|
|
Options
|
|
|
Warrants
|
|
|
Debentures
|
|
|
Shares
|
|
|
Exercise
Price
|
|
|
Outstanding
– December 31, 2007
|
|
|
20,380,953
|
|
|
|
2,545,928
|
|
|
|
2,729,068
|
|
|
|
25,655,949
|
|
|
$
|
0.324
|
|
|
First Quarter
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
/ Issued
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Exercised/Converted
|
|
|
-
|
|
|
|
(243,616
|
)
|
|
|
-
|
|
|
|
(243,616
|
)
|
|
|
0.935
|
|
|
Expired
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,729,068
|
)
|
|
|
(2,729,068
|
)
|
|
|
0.870
|
|
|
Cancelled/Extinguished
|
|
|
-
|
|
|
|
(2,071,407
|
)
|
|
|
-
|
|
|
|
(2,071,407
|
)
|
|
|
0.935
|
|
|
Outstanding
– March 31, 2008
|
|
|
20,380,953
|
|
|
|
230,905
|
|
|
|
-
|
|
|
|
20,611,858
|
|
|
$
|
0.183
|
|
|
Second Quarter
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
/ Issued
|
|
|
-
|
|
|
|
-
|
|
|
|
35,000,000
|
|
|
|
35,000,000
|
|
|
|
0.285
|
|
|
Exercised/Converted
|
|
|
-
|
|
|
|
(230,905
|
)
|
|
|
-
|
|
|
|
(230,905
|
)
|
|
|
0.935
|
|
|
Expired
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Cancelled/Extinguished
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Outstanding
– June 30, 2008
|
|
|
20,380,953
|
|
|
|
-
|
|
|
|
35,000,000
|
|
|
|
55,380,953
|
|
|
$
|
0.823
|
|
There
were no changes in options, warrants and shares reserved for issuance upon
conversion of outstanding convertible debentures for the three months ending
September 30, 2008.
TIDELANDS
OIL & GAS CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2008
(UNAUDITED)
NOTE 10
–
STOCK OPTIONS, STOCK
WARRANTS AND SHARES RESERVED FOR CONVERTIBLE DEBENTURES
(CONTINUED)
|
Summary
of Outstanding Stock Options and Stock
Warrants
|
|
|
|
|
|
|
Shares
Reserved for
Convertible
Debenture
|
|
|
|
|
|
Stock
Options
|
|
|
|
|
|
|
|
|
|
|
Expiration Date
|
|
|
|
|
|
|
|
|
|
|
February
28, 2017
|
|
|
12,380,953
|
|
|
-
|
|
|
$
|
0.210
|
|
|
May
23, 2017
|
|
|
8,000,000
|
|
|
-
|
|
|
|
0.120
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
Reserved for Convertible Debenture
|
|
|
|
|
|
|
|
|
|
|
|
|
Expiration Date
|
|
|
|
|
|
|
|
|
|
|
|
|
May
11, 2011
|
|
|
-
|
|
|
|
35,000,000
|
|
|
|
0.286
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
– September 30, 2008
|
|
|
20,380,953
|
|
|
|
35,000,000
|
|
|
Avg. $ 0.823
|
|
Outstanding
stock options had zero intrinsic value at September 30, 2008.
NOTE 11
–
RELATED PARTY
TRANSACTIONS
Loan
from President
During
the three months ended March 31, 2008, the Company borrowed $27,258 from its
President. Subsequently through May 12, 2008, the Company borrowed an
additional $122,742 from its President bringing the total to
$150,000. The Company executed a promissory note due August 31, 2008,
bearing an 8% annual interest rate. From May 12, 2008 through
September 30, 2008, the Company borrowed $22,375 from its
President. The Company executed an additional promissory note due
August 31, 2008, bearing an 8% interest rate. On October 15, 2008,
the Company paid the notes and all accrued interest.
Consulting
Agreement
On
January 26, 2008, the Company entered into a consulting agreement with two
directors to provide business development, merger and acquisition capital
raising and other services to the Company. The term of the agreement
is five years. Services to be provided are compensated under the
agreement at a rate of $1 million per annum which may be paid in shares of
stock. During the three months ended September 30, 2008, fees of
$250,000 were accrued for each of the two directors and are included in
‘Accounts Payable and Accrued Liabilities’ at September 30, 2008.
TIDELANDS
OIL & GAS CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2008
(UNAUDITED)
NOTE 12
–
LITIGATION
On
January 6, 2003, we were served as a third party defendant in a lawsuit titled
Northern Natural Gas Company vs. Betty Lou Sheerin vs. Tidelands Oil & Gas
Corporation, ZG Gathering, Ltd. and Ken Lay, in the 150th Judicial District
Court, Bexar County, Texas, Cause Number 2002-C1-16421. The lawsuit was
initiated by Northern Natural Gas (“Northern”) when it sued Betty Lou Sheerin
(“Sheerin”) for her failure to make payments on a note she executed payable to
Northern in the original principal amount of $1,950,000.
On May 9,
2008, the Company received a Compromise Settlement Agreement and Mutual Release
of All Claims from Betty Lou Sheerin which ended litigation between Mrs. Sheerin
and the Company.
On
February 26, 2008, ZG Gathering, Ltd., which has the sole remaining
non-adjudicated claims in this litigation, filed a Notice of Removal to the
Federal Bankruptcy Court of the remaining claims between Tidelands and ZG
Gathering, Ltd.
Based on
prior negotiations, the Company has reserved $2,250,000 as an estimated
litigation settlement. The Company reached a settlement with all parties on
September 8, 2008. The Settlement required the Company to lift its
previous stop transfer order on 1,000,000 shares of its restricted common stock
valued at $5,200 and issue an additional 1,000,000 shares of its restricted
common stock similarly valued at $5,200. These actions occurred on
September 12, 2008. As a result of the settlements $2,239,600 of the
litigation reserve was reversed.
All
remaining matters regarding litigation against Sonterra Energy Corporation
(“Sonterra”) followed Sonterra when the Company sold the subsidiary on January
9, 2008. At the closing of the sale, the Company agreed to escrow
$75,000 with the buyer to cover legal costs plus adjudicated and/or settlement
amounts along with other contingencies. As of September 30, 2008,
$49,365 remained in escrow after deducting $25,635 for legal costs and other
chargeable costs. All remaining funds as of January 9, 2009, will be
returned to the Company.
NOTE 13
-
SUBSEQUENT
EVENTS
On
October 14, 2008, the Company sold its 20% interest in Frontera Pipeline, LLC
(“Frontera”) for $250,000. During this reporting period, the Company
reduced its carry cost of its investment in Frontera by $2,559,801 thereby
reducing the value of its investment to $250,000.
Item
2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Forward-Looking
Statements
We have
included forward-looking statements in this report. For this purpose, any
statements contained in this report that are not statements of historical fact
may be deemed to be forward-looking statements. Without limiting the foregoing,
words such as "may", "will", "expect", "believe", "anticipate", "estimate",
"plan" or "continue" or the negative or other variations thereof or comparable
terminology are intended to identify forward-looking statements. These
statements by their nature involve substantial risks and uncertainties, and
actual results may differ materially depending on a variety of factors. Factors
that might cause forward-looking statements to differ materially from actual
results include, among other things, overall economic and business conditions,
demand for the Company's products, competitive factors in the industries in
which we compete or intend to compete, natural gas availability and cost and
timing, impact and other uncertainties of our future acquisition
plans.
Business
Overview
Our
primary business operations are focused on the development of the Port Esperanza
liquefied natural gas (“LNG”) receiving facility in the offshore waters of
Southern California.
Given the
large capital requirements for the construction of new midstream energy assets,
we anticipate that funding of any such projects will be derived primarily
through joint ventures with strategic partners or the issuance of stock by the
Company. Additionally, management will evaluate related acquisition
opportunities that compliment our current business strategy. The
completion of any such acquisition will be conditioned upon obtaining requisite
financing.
Frontera
Pipeline, LLC and the Burgos Hub Project
Previously,
the Company had been developing a natural gas pipeline system (the “Burgos Hub
Project”) project with its own resources through its subsidiary in the United
States, Sonora Pipeline, LLC (“Sonora”) and its subsidiary in Mexico, Terranova
Energia, S. de R.L. de C.V. (“Terranova”). In September 2007, the
Company and Terranova entered into an agreement (the “Purchase Agreement”) with
Grand Cheniere Pipeline, LLC (“Cheniere”), pursuant to which the Company
conveyed an 80% interest in the Company’s Burgos Hub Project, which involved the
development and construction of an integrated pipeline project traversing the
United States and Mexico border and the construction of a related subterranean
storage facility in Mexico. On October 14, 2008, the Company sold its
remaining 20% interest in Frontera Pipeline, LLC (“Frontera”) to Cheniere,
effectively ending its participation in the development of the Burgos Hub
project. Management arrived at the divestment decision based upon a number of
factors, including the increasing perception by both partners in Frontera that
commercial development of the project would not be adequately supported by
capacity commitments from either the Comision Federal de Electricidad (“CFE”) or
Monterrey industrial customers, a lack of clear commitment by PGPB (“Pemex Gas”)
to a timeline or method of utilization of the existing pipeline entitlements or
the proposed storage facility development proposals put forth by Terranova and
Sonora, the financial and operational reorganization occurring within the parent
company of the controlling majority partner of Frontera, a lack of substantive
legal reform within the recent Mexican energy legislation which would have
further enabled Frontera to acquire exclusivity or other valuable contract
rights with Pemex in the development of the proposed storage facility in Mexico,
and the need for working capital to sustain the Company as a going
concern.
Esperanza
Energy, LLC and the Port Esperanza Project
Esperanza
Energy, LLC ("Esperanza") was formed as a wholly-owned subsidiary of the Company
in March 2006 to evaluate the feasibility of developing an offshore, deep-water
LNG receiving and regasification terminal near Long Beach,
California. The expected timeline for development of the Port
Esperanza project is influenced by the preparation of the application in a form
sufficient to be “deemed complete” by the Maritime Administration and Coast
Guard which are the principal Federal agencies with permit jurisdiction for LNG
terminal development in the offshore United States of America waters. After an
application is deemed complete, the process of obtaining the approvals is often
longer than the statutory time period of approximately one year due to “time
out” or suspension of the running of the clock on the application process due to
issues raised during the review of the permit application or due to resource
constraints present at the Maritime Administration and Coast Guard. California
state and local agency approvals can also impact the permit approval process
beyond the normal time expectations. Progress on the project is also dependent
upon the Company securing additional funding for the permit application process
and complying with state and federal regulations, including environmental
laws. The Company does not expect to receive any revenues or cash
flow from the Esperanza project in the foreseeable future, if at all, and the
Company will be required to expend additional capital in order to further this
project. For the nine months ended September 30, 2008, the Company incurred
approximately $217,000 of development costs related to the Port Esperanza
project. On January 21, 2008, the Company issued notes totaling $1,192,277 in
payment of accounts payable and accrued interest due to entities providing
various services to its Port Esperanza LNG Project. These notes, bearing
interest at 10% per annum, were originally due April 30, 2008, and were
subsequently extended until August 31, 2008 and then again extended for a new
maturity date of March 31, 2009. The Company has paid all interest due at August
31, 2008.
The
Company has entered into a letter of intent with a California based firm to
provide financing on a best efforts basis for a portion of the development cost
of the Port Esperanza project through the issuance of convertible preferred
stock of the Company in a Regulation D offering to accredited investors.
Management is currently seeking bridge funding for the costs of this offering
and the operations of the Company until the offering minimum is sold and closed.
The Regulation D offering would be subject to the prior approval of the majority
vote of the Company’s common shares and would be highly dilutive to existing
shareholders; thus, there is no assurance that the requisite capital structure
proposed in the offering would be approved by the existing shareholders.
Furthermore, no assurance can be given that bridge funding can be obtained to
initiate the Regulation D offering process, nor can there be any assurance that
the minimum offering amount under the proposed Regulation D private placement
can be sold and closed.
The
Company is also continuing to cooperate with the due diligence process initiated
by two potential industry joint venture investors in the Port Esperanza project.
A decision by these parties to invest or to decline to participate is not
expected until 2009.
Reef
Ventures, LP International Pipeline
The
assets of this business originally consisted of two different pipelines: (1) an
8-mile twelve-inch diameter natural gas pipeline with metering and dehydration
facilities and (2) a two-mile segment of six-inch diameter pipeline to be used
in a future LPG project. These assets were impaired in 2006 with a significant
charge to earnings and contributed approximately 4 % of the Company’s revenues
in 2007. The Chittim Gas Processing plant, which had been inactive since 2002
and was formerly owned by Rio Bravo Energy, LLC (a 100% owned subsidiary of the
Company), was conveyed to Reef International, LLC in 2007 along with the Carrizo
Springs Pipeline System that was also inactive and formerly held by Sonora.
During 2007, we attempted to negotiate for capacity reservation charges with
potential shippers of natural gas to obtain commitments that would service
existing indebtedness on the Reef Ventures’ International Pipeline, but we were
unsuccessful in obtaining any new commitments. In fact, revenues from this
business unit declined from the prior years. During the quarter ended March 31,
2008, no gas was transported for a fee and no revenues were earned by the Reef
Ventures, LP (“Reef”) business unit. In March 2008, we sold our international
pipeline system, the Chittim Gas Plant and the Carrizo Springs pipeline system
owned by Reef to West Texas Gas, Inc. (“WTG”) and utilized the proceeds of sale
along with an associated issuance of our common stock to retire over $5,300,000
of indebtedness owed to Impact International, LLC (“Impact”).
Sonterra
Energy Corporation Business
The
assets of our Sonterra Energy Corporation ("Sonterra") subsidiary consisted of
propane distribution systems, including gas mains, yard lines, meters and
storage tanks, serving certain residential subdivisions in the Austin, Texas
area. During 2007, we attempted to negotiate a restructuring of the existing
convertible debenture indebtedness of $2,374,291 to a group of investors led by
Palisades Master Fund, LP. We were unable to come to mutually acceptable terms
in that restructuring effort and in January 2008, we sold the stock of Sonterra
for $3,000,000 and utilized the proceeds from that sale to retire the
convertible debentures and repurchase certain outstanding warrants. All
remaining matters regarding litigation against Sonterra followed Sonterra when
the Company sold the subsidiary on January 9, 2008. At the closing of
the sale, the Company agreed to escrow $75,000 with the buyer to cover legal
costs plus adjudicated and/or settlement amounts along with other
contingencies. As of September 30, 2008, $49,365 remained in escrow
after deducting $25,635 for legal costs and other chargeable
costs. All remaining funds as of January 9, 2009, will be returned to
the Company pursuant to the escrow agreement.
Golden
Gate Investors, Inc. Financing
On May 9,
2008, the Company completed a financing transaction in which it entered into a
Securities Purchase Agreement ("Purchase Agreement") with Golden Gate Investors,
Inc. ("Golden Gate") which provided for the issuance and sale by the Company of
up to $3 million of 6% convertible debentures, with the initial issuance of a $1
million debenture ("Debenture") and the payment of cash by Golden Gate of
$200,000 and issuance by Golden Gate to the Company of a $800,000 promissory
note ("Note"). The Purchase Agreement provides Golden Gate with the right to
lend, in two separate transactions, an additional $1 million of funding to the
Company, in its sole discretion, through advancing cash of $200,000 and issuing
a note for the balance, similar to the Note. The Company had the right until
August 8, 2008, to redeem, at a price equal to the principal and accrued
interest, the Debenture provided that no event of default had occurred. This
redemption did not occur.
The
Debenture is unsecured and bears interest at the annual rate of 6%, payable
monthly, in cash or, at Golden Gate’s election, in shares of the Company’s stock
valued at the applicable conversion price described further below, with the
principal amount due on May 9, 2011. The Debenture may not be prepaid without
the written consent of Golden Gate. The Debenture is convertible,
either in whole or in part, at any time at a per share price equal to the lesser
of $.50 or 80% of the average of the three lowest volume weighted average prices
during the twenty trading days prior to Golden Gate's election to convert. If
Golden Gate elects to convert a portion of the Debenture, and on the date of the
election, the volume weighted average price per share of the Company’s common
stock is below $0.07, the Company has the right to prepay the portion of the
Debenture that Golden Gate elected to convert, plus any accrued and unpaid
interest, at 100% of the amount due and the conversion notice will be
withdrawn.
In the
event the Company’s stock trades at a price that is less than $0.01 per share at
any time during the nine-month period following May 9, 2008, the interest rate
on the Debenture will increase to 9 ¾ % for the remaining term of the
Debenture. In the event this provision is triggered, within three
business days of a written request from Golden Gate, the Company is required to
prepay the amount of interest that would otherwise be due from the date of the
request through the maturity date. If any portion of the Debenture is
converted into the Company’s common stock prior to maturity, the Company will be
entitled to a refund of the pro rata portion of the interest prepayment
attributable to the portion of the principal amount converted. On
August 26, 2008, the Company received notice from Golden Gate that effective
July 28, 2008, the interest rate on the Debenture was increased to 9 ¾% pursuant
to the terms of Debenture and that the Interest Prepayment amount of $270,328.77
was due to Golden Gate within three days of the notice. To date, the Company has
not made such prepayment of interest to Golden Gate and Golden Gate has not
given notice of default on the Debenture to the Company.
In
accordance with the terms of the Debenture, the Company has reserved 35,000,000
shares of its common stock for possible conversion. The Company’s
stock transfer agent has received irrevocable instructions regarding the shares
reserved.
The Note
is secured and bears interest at the annual rate of 6.25%, payable monthly, with
the principal amount due on May 31, 2011. Golden Gate has the option to prepay
this note, subject to the satisfaction of certain conditions. On
August 26, 2008, Golden Gate gave notice that the interest rate on the Note was
decreased to 43/4%, effective as of July 28, 2008 in accordance with the terms
of the Note which provides for such reduction in the event that the Company’s
common stock trades at a price that is less than $0.01 per share at any time
during the nine-month period after May 9, 2008.
The
Company analyzed the provision of the Debenture in accordance with the
provisions of SFAS 133, “Accounting for Derivative Instruments and Hedging
Activities” and EITF 00-19, “Accounting for Derivative Financial Instruments
Indexed to and Potentially Settled in, a Company’s Own Stock” and determined
that the Debenture did not contain any derivative features that would require
separate accounting under this literature.
On
November 6, 2008, Golden Gate converted $2,000 of the Debenture into 781,250
shares of common stock pursuant to the terms of the Debenture. On November 13,
2008, Golden Gate converted $5,000 of the Debenture into 1,973,165 shares of
common stock pursuant to the terms of the Debenture.
Results
of Operations
THREE MONTHS ENDED SEPTEMBER
30, 2008 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 2007
REVENUES:
The Company reported revenues of $30,000 for the three months ended September
30, 2008 compared to revenues of $0 for the three months ended September 30,
2007.The revenue increase resulted from the receipt of consulting fees from
Frontera during the period ended September 30, 2008 whereas no such fees were
received during the period ended September 30, 2007.
TOTAL
COSTS AND EXPENSES: Total Costs and Expenses for the three months ended
September 30, 2008 were $3,829,667 versus $644,658 for the three months ended
September 30, 2007 which is an increase of 594% in Total Costs and Expenses for
the three months ended September 30, 2008 versus the three months ended
September 30, 2007. The primary reason for the increase in Total Expenses was
the Impairment – Investment in Affiliate charge to record the write down in
value of the Company’s investment in Frontera during the three months ended
September 30, 2008 versus the absence of an impairment charge during the three
months ended September 30, 2007.
SELLING,
GENERAL AND ADMINISTRATIVE: Selling, General and Administrative costs for the
three months ended September 30, 2008 were $1,263,816 compared to $638,416 for
the three months ended September 30, 2007. Most of the increase in these
expenses was attributable to increases in non-cash compensation paid to
directors and officers.
OTHER
INCOME (EXPENSE): Total Other Income (Expense) for the three months ended
September 30, 2008 was $2,182,879 versus $4,680 for the three months ended
September 30, 2007. The primary reason for the increase in Other Income is the
Reduction of Reserve for Litigation in the amount of $2,239,600 during the three
months ended September 30, 2008 as a result of the settlement of litigation with
Northern Natural Gas (“Northern”), Betty Lou Sheerin (“Sheerin”) and ZG
Gathering, Ltd (“ZG”). A secondary factor in the increase in Total Other Income
was the decrease in Interest Expense to $59,029 for the three months ended
September 30, 2008 versus $245,357 for the three months ended September 30,
2007.
NET LOSS
FROM CONTINUING OPERATIONS: Net Loss from Continuing Operations was ($1,616,788)
for the three months ended September 30, 2008 compared to ($639,978) for the
three months ended September 30, 2007 which is an increase in Net Loss from
Continuing Operations of $976,810. This increase is due primarily to the
impairment loss on the Company’s investment in Frontera combined with increases
in non-cash compensation to directors and officers during the period ended
September 30, 2008 versus the three months ended September 30,
2007.
NET
INCOME FROM OPERATIONS OF DISCONTINUED SEGMENTS: Net Income from Operations of
Discontinued Segments was $0 for the three months ended September 30, 2008
versus ($237,797) for the three months ended September 30, 2007. There were no
discontinued operations originating in the three months ended September 30,
2008.
NET LOSS:
Net Loss for the three months ended September 30, 2008 was ($1,616,788) versus
the Net Loss of ($877,775) for the three months ended September 30, 2007, which
is an increase in Net Loss of $739,013 for the three months ended September 30,
2008 versus the three months ended September 30, 2007.
NINE MONTHS ENDED SEPTEMBER
30, 2008 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 2007
REVENUES:
The Company reported revenues of $105,000 for the nine months ended September
30, 2008 compared to revenues of $0 for the nine months ended September 30,
2007.The revenue increase resulted from the receipt of consulting fees from
Frontera during the period ended September 30, 2008 whereas no such fees were
received during the period ended September 30, 2007.
TOTAL
COSTS AND EXPENSES: Total Costs and Expenses for the nine months ended September
30, 2008 were $7,753,459 versus $7,423,461 for the nine months ended September
30, 2007 which is an increase of 4.45% in Total Costs and Expenses for the nine
months ended September 30, 2008 versus the nine months ended September 30, 2007.
The primary reason for the small increase in Total Expenses was the Impairment –
Investment in Affiliate charge of $2,559,801 in the nine months ended September
30, 2008 versus the nine months ended September 30, 2007.
SELLING,
GENERAL AND ADMINISTRATIVE – RELATED PARTIES: Selling, General and
Administrative – Related Parties for the nine months ended September
30, 2008 was $0 compared to $3,638,000 for the nine months ended September 30,
2007. The decrease was due to the absence of stock option issuances in the nine
months ended September 30, 2008 versus the nine months ended September 30,
2007.
SELLING,
GENERAL AND ADMINISTRATIVE: Selling, General and Administrative costs for the
nine months ended September 30, 2008 were $5,175,506 compared to $3,766,691 for
the nine months ended September 30, 2007. Most of the increase in these expenses
was attributable to increases in non-cash compensation paid to directors and
officers.
OTHER
INCOME (EXPENSE): Total Other Income (Expense) for the nine months ended
September 30, 2008 was $2,030,971 versus ($521,682) for the nine months ended
September 30, 2007. The primary reasons for the increase in Total Other Income
are: (a) the decrease in interest expense to ($238,425) for the nine months
ended September 30, 2008 versus ($772,304) for the nine months ended September
30, 2007 which reflects the payoff of the convertible debentures in the amount
of $2,374,291 in January 2008, and (b) the Reduction of Reserve for Litigation
income increase in the amount of $2,239,600 which reflects settlement of the
final litigation matter outstanding between the Company and Northern, Sheerin
and ZG.
NET LOSS
FROM CONTINUING OPERATIONS: Net Loss from Continuing Operations was ($5,617,488)
for the nine months ended September 30, 2008 compared to ($7,945,143) for the
nine months ended September 30, 2007 which is a decrease in Net Loss from
Continuing Operations of $2,327,655. This decrease in Net Loss from Continuing
Operations is due primarily to the $2,239,600 of income from Reduction of
Reserve for Litigation during the period ended September 30, 2008 versus the
nine months ended September 30, 2007.
NET
INCOME FROM OPERATIONS OF DISCONTINUED SEGMENTS: Net Income from Operations of
Discontinued Segments was $705,772 for the nine months ended September 30, 2008
versus ($2,717,072) for the nine months ended September 30, 2007 which is an
increase of $3,422,844 in Net Income from Operations of Discontinued Segments.
The increase resulted from Gains on Disposal of the assets and reduction in the
operating losses originating from Reef and Sonterra as further detailed in Note
5 of the Consolidated Financial Statements.
NET LOSS:
Net Loss for the nine months ended September 30, 2008 was ($4,911,716) versus
the Net Loss of ($10,662,215) for the nine months ended September 30, 2007. The
primary reasons for the substantial reduction in loss for the nine months ended
September 30, 2008 versus the nine months ended September 30, 2007 were: (a) the
income from Reduction of Reserve for Litigation in the amount of $2,239,600, and
(b) the income from the difference in Net Income from Operations of Discontinued
Segments as noted above in the amount of $3,422,844.
Liquidity
and Capital Resources
The
Company is not currently generating any revenues and has incurred significant
operating losses. The Company’s financial statements have been
prepared assuming that the Company will continue as a going
concern. As discussed in the Company’s financial statements, the
Company’s absence of revenues, recurring losses from operations, and its need
for additional financing in order to fund its working capital needs in 2008
raise substantial doubt about its ability to continue as a going
concern.
At
September 30, 2008, we had current assets of $1,016,449, current liabilities of
$3,730,985 and working capital deficit of $2,714,536. After
giving effect to the Sonterra transaction in January 2008, the WTG transaction
in March 2008, the financing with Golden Gate and the sale of the Company’s
interest in Frontera, the Company currently has approximately $2,005,000 of
current notes payable, accounts payable and accrued expenses that require
payment or other satisfaction during 2009. We will need to raise
capital to discharge these obligations. Additionally, we believe that
after taking into account the recent financing sale of the Company’s interest in
Frontera, we will require approximately $300,000 of additional capital between
the present time and March 31, 2009. Accordingly, we will be
reliant upon best efforts debt and/or equity financings to fund the payment of
current liabilities and working capital needs. We cannot give any
assurance that this additional needed financing could be obtained on attractive
terms or at all. The Company’s viability is contingent upon its
ability to receive external financing. Failure to obtain sufficient
working capital may result in management resorting to the additional sale of
assets or otherwise curtailing operations.
Contractual
Commitments
A tabular
disclosure of our contractual obligations at September 30, 2008, is as
follows:
|
|
|
Payments
due by period
|
|
|
|
|
1
year or less
|
|
|
2
– 3 Years
|
|
|
4
– 5 Years
|
|
|
More
than 5 Years
|
|
|
Credit
Facilities
|
|
$
|
1,192,277
|
|
|
$
|
1,000,000
|
|
|
$
|
--
|
|
|
$
|
--
|
|
|
Operating
Leases
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
Employment
and consulting contracts
(1)
|
|
|
2,825,000
|
|
|
|
5,250,000
|
|
|
|
3,200,000
|
|
|
|
--
|
|
|
Total
|
|
$
|
4,017,277
|
|
|
$
|
6,250,000
|
|
|
$
|
3,200,000
|
|
|
$
|
--
|
|
(1)
Does not include perquisites.
Off
Balance-Sheet Arrangements
As of
September 30, 2008 and 2007, the Company did not have any significant off
balance-sheet arrangements.
Item
3. Quantitative and Qualitative Disclosures About Market
Risk
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 September 30, 2008,
we had cash of $8,628.
We do not
issue or invest in financial instruments or their derivatives for trading or
speculative purposes. Our operations are conducted primarily in the United
States, and, are not subject to material foreign currency exchange risk.
Although we have outstanding debt and related interest expense, market risk of
interest rate exposure in the United States is currently not
material.
Debt
The
interest rate on our promissory note debt obligations at September 30, 2008
is a fixed rate of 10% per annum. The interest rate on our convertible debenture
obligation at September 30, 2008 is a fixed rate of 9¾% per annum.
Item
4. Controls and Procedures
Evaluation
of Disclosure Controls and Procedures
Disclosure
controls and procedures include, without limitation, controls and procedures
designed to ensure that information required to be disclosed by an issuer in the
reports that it files or submits under the Securities Exchange Act of 1934, as
amended (the "Act") is accumulated and communicated to the issuer's management,
including its principal executive and principal financial officers, or persons
performing similar functions, as appropriate to allow timely decisions regarding
required disclosure. It should be noted that the design of any system of
controls is based in part upon certain assumptions about the likelihood of
future events, and there can be no assurance that any design will succeed in
achieving its stated goals under all potential future conditions, regardless of
how remote. For the quarter ended September 30, 2008, we carried out
an evaluation of the effectiveness of the design and operation of our disclosure
controls and procedures. Based on this evaluation, management has
concluded that the Company’s disclosure controls and procedures are not
effective because of the identification of a material weakness in our internal
control over financial reporting which is identified below, which we view as an
integral part of our disclosure controls and procedures. A material
weakness is a deficiency, or a combination of control deficiencies, in internal
control over financial reporting such that there is a reasonable possibility
that a material misstatement of the Company’s annual or interim financial
statements will not be prevented or detected on a timely basis.
The
material weakness relates to certain errors in accounting for equity-based
compensation that were reported for the three month period ended March 31, 2007
and six month period ended June 30, 2007. The errors were discovered
in connection with the preparation of the Company’s September 30, 2007 unaudited
financial statements. Upon reviewing and updating our accounting and disclosures
related to equity-based compensation for the nine months ended September 30,
2007, the Company discovered its errors. Upon this determination, management and
the Board of Directors were alerted to the facts and circumstances regarding the
errors in accounting for the equity-based compensation. As a result,
we determined that our disclosure controls were not effective.
Based on
the impact of the aforementioned accounting error, we determined to restate our
consolidated financial statements as of three month period ended March 31, 2007
and six month period ended June 30, 2007. Subsequent thereto, we
implemented the following remedial measures to address the identified material
weaknesses:
|
·
|
We
reviewed all equity-based compensation agreements to assure the issuance
of the equity instruments have been properly accounted for and disclosed
in our financial statements in accordance with generally accepted
accounting principles.
|
|
·
|
We
have improved the supervision and training of our accounting staff to
understand and implement accounting requirements, policies and procedures
applicable to the accounting and disclosure of equity based
instruments.
|
This
quarterly report does not include an attestation report of the Company’s
registered public accounting firm regarding internal control over financial
reporting. Management’s report was not subject to the attestation by
the Company’s registered public accounting firm pursuant to temporary rules of
the SEC that permit the Company to provide only management’s report in this
annual report.
Changes
in Internal Controls over Financial Reporting
During
the quarter ended September 30, 2008, we did not make any changes in our
internal controls over financial reporting that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
PART
II - OTHER INFORMATION
Item
1. Legal Proceedings
Other
than as set forth below and in the prior reports filed with the Securities and
Exchange Commission pursuant to the Securities Exchange Act of 1934, the Company
is not a party to any material pending legal proceeding.
Matter
No. 1
As
described in the Company’s prior reports, the Company was a party to a pending
lawsuit titled Northern Natural Gas Company vs. Betty Lou Sheerin vs. Tidelands
Oil & Gas Corporation, ZG Gathering, Ltd. and Ken Lay, in the 150th Judicial
District Court, Bexar County, Texas, Cause Number 2002-C1-16421. A trial
date was set for January 7, 2008. On December 3, 2007, ZG filed a
Suggestion of Bankruptcy which stayed the case. On December 13, 2007,
Sheerin non-suited with prejudice all of her claims against Tidelands Oil &
Gas Corporation (“Tidelands”) and Tidelands non-suited with prejudice all of its
claims against Sheerin. On May 9, 2008 the Company received a Compromise
Settlement Agreement and Mutual Release of All Claims from Sheerin ratifying the
actions taken December 13, 2007. The claims between Northern, Sheerin, the
Estate of Kenneth Lay, and the Estate of Charlton Hadden were severed from the
claims between Northern, ZG, and Tidelands. The claims between
Northern and Sheerin then proceeded to trial on January 7, 2008 in the State
District Court. The jury in that case concluded, among other things,
that Northern is the owner of the note in question, that Sheerin agreed to be
obligated on the note, that she failed to comply with the note, and that the
unpaid principal and accrued interest on the note was
$1,950,000.00. The jury’s complete findings are on file in the
court’s record in Cause No. 2002-CI-16421. No final Judgment has been
entered in this matter. On February 26, 2008, ZG filed a Notice of
Removal to the Federal Bankruptcy Court of the remaining claims between
Northern, Tidelands and ZG. On July 18, 2008, ZG and Tidelands
executed a Compromise Settlement Agreement and Mutual Release of All Claims
under which the Company removed the stop transfer order on 1,000,000 shares of
previously issued common stock of the Company, executed a quit claim deed with
respect to the 225 mile gathering system owned by ZG, and further issued
1,000,000 shares of common stock to ZG in exchange for the settlement of all
claims by ZG. No further legal actions are expected between the Company and any
of the above parties.
Other
Legal Matters
All
remaining matters regarding litigation against Sonterra followed Sonterra when
the Company sold the subsidiary on January 9, 2008. At the closing of
the sale, the Company agreed to escrow $75,000 with the buyer to cover legal
costs plus adjudicated and/or settlement amounts along with other
contingencies. As of September 30, 2008, $49,365 remained in escrow
after deducting $25,635 for legal costs and other chargeable
costs. All remaining funds as of January 9, 2009, will be returned to
the Company.
During
the nine months ended September 30, 2008, there were no material changes to the
risk factors described in Part I, Item 1A “Risk Factors” of the Company’s Annual
Report on Form 10-K for the fiscal year ended December 31,
2007.
Item
2. Unregistered Sales of Equity Securities and Equity
Repurchases
Set forth
below is certain information concerning issuances of common stock during the
nine months ended September 30, 2008, and to the date of this report, that were
not registered under the Securities Act of 1933 (“Securities Act”):
The
Company issued 5,300,000 shares of its restricted common stock for consulting
services valued at $386,900.
The
Company issued 211,134 shares of its restricted common stock valued at $16,680
to two holders of the Company’s Stock Warrants under cashless exercise
provisions which reduced the total number of warrant shares outstanding by
243,616 for purpose of cancellation.
The
Company issued 39,890,180 shares of its restricted common stock valued at
$1,994,509 in payment of the balance due Impact, after remitting the net
proceeds from the sale of its International Pipeline between the United States
and Mexico to WTG.
The
Company issued 3,571,429 shares each of its restricted common stock valued at
$250,000 to two of its directors in payment of consulting fees for the three
months ended March 31, 2008.
The
Company issued 230,905 shares of its restricted common stock valued at $8,082 to
a holder of the Company’s Stock Warrants under cashless exercise
provisions.
The
Company issued 1,000,000 shares of its restricted common stock valued at $5,200
in partial payment of the settlement of litigation with Northern, Sheerin and
ZG.
The
Company executed s Stop Payment Cancellation which released 1,000,000 shares of
its restricted common stock valued at $5,200 as the final payment required in
settlement of litigation with Northern, Sheerin and ZG.
The
issuances referenced above were consummated pursuant to Section 4(2) of the
Securities Act and the rules and regulations promulgated thereunder on the basis
that such transactions did not involve a public offering and the offerees were
sophisticated, accredited investors with access to the kind of information that
registration would provide. The recipients of these securities represented their
intention to acquire the securities for investment only and not with a view to
or for sale in connection with any distribution thereof and appropriate legends
were affixed to the share certificates and other instruments issued in such
transactions. No sales commissions were paid.
Item
3. Defaults Upon Senior Securities
None.
Item
4. Submission of Matters to a Vote of Security Holders
None.
Item
5. Other Information
None.
Item
6. Exhibits
|
Exhibit
|
|
Description
|
|
Location
of Exhibit
|
|
31.1
|
|
|
|
Included
with this filing.
|
|
32.1
|
|
|
|
Included
with this filing.
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, the Company has duly
caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.
|
|
TIDELANDS
OIL & GAS CORPORATION
|
|
|
|
|
|
Date: November
19, 2008
|
By:
|
/s/ James
B. Smith
|
|
|
James
B. Smith
President
and Chief Executive Officer
|
Tidelands Oil and Gas (CE) (USOTC:TIDE)
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Tidelands Oil and Gas (CE) (USOTC:TIDE)
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From Nov 2023 to Nov 2024
