tidelands10k123107.htm
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington, D. C.
20549
FORM
10-K
ANNUAL
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE
ACT OF 1934
For the year ended: December
31, 2007
Commission
File Number: 0-29613
TIDELANDS
OIL & GAS CORPORATION
(Name of
small business issuer in its charter)
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Nevada
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66-0549380
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(State
or other jurisdiction of
incorporation or
organization)
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(I.
R. S. Employer Identification
No.)
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1862 West Bitters
Rd.,
San
Antonio,
TX 78248
(Address
of principal executive office)
(210)
764-8642
(Issuer's
Telephone Number)
Securities
Registered Pursuant of Section 12(b) of the Act:
None
Securities
Registered Pursuant of Section 12(g) of the Act: Common
Stock, $0.001 Par Value
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes o No x
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) Yes o No x
Indicate
by check mark whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes x No
o
Check if
there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-K in this form, and no disclosure will be contained, to the best of
registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment of this
Form 10-K. o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definitions of "accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
one):
Large
accelerated filer o Accelerated
filer o Non-accelerated
filer x
Indicate
by check mark whether the registrant is a shell company (as defined by Rule
12b-2of the Exchange Act. Yes o No x
The
aggregate market value of the issuer's common stock held by non-affiliates was
$7,227,149 based on the closing sales price as reported by the NASD OTC
Electronic Bulletin Board on April 1, 2008.
As of April 1, 2008, there were
178,739,345 shares of the issuer's common stock outstanding.
Documents
Incorporated By Reference: None
TIDELANDS OIL & GAS CORPORATION
FORM
10-K
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PART
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ITEM
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ITEM
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PART
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PART
III
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ITEM
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ITEM
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Part
IV
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ITEM
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PART
I
CAUTIONARY
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This 2007
Annual Report on Form 10-K, including the sections entitled "Risk Factors,"
"Management's Discussion and Analysis Financial Condition and Results of
Operation" and "Business," contains "forward-looking statements" that include
information relating to future events, future financial performance, strategies,
expectations, competitive environment, regulation and availability of resources.
These forward-looking statements include, without limitation, statements
regarding: projections, predictions, expectations, estimates or forecasts for
our business, financial and operating results and future economic performance;
statements of management's goals and objectives; and other similar expressions
concerning matters that are not historical facts. Words such as "may," "will,"
"should," "could," "would," "predicts," "potential," "continue," "expects,"
"anticipates," "future," "intends," "plans," "believes" and "estimates," and
similar expressions, as well as statements in future tense, identify
forward-looking statements.
Forward-looking
statements should not be read as a guarantee of future performance or results,
and will not necessarily be accurate indications of the times at, or by which,
that performance or those results will be achieved. Forward-looking statements
are based on information available at the time they are made and/or management's
good faith belief as of that time with respect to future events, and are subject
to risks and uncertainties that could cause actual performance or results to
differ materially from those expressed in or suggested by the forward-looking
statements. Important factors that could cause these differences include, but
are not limited to:
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our
failure to implement our business plan within the time period we
originally planned to accomplish;
and
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other
factors discussed under the headings "Risk Factors," "Management's
Discussion and Analysis of Financial Condition and Results of
Operation" and "Business."
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Forward-looking
statements speak only as of the date they are made. You should not put undue
reliance on any forward-looking statements. We assume no obligation to update
forward-looking statements to reflect actual results, changes in assumptions or
changes in other factors affecting forward-looking information, except to the
extent required by applicable securities laws. If we do update one or more
forward-looking statements, no inference should be drawn that we will make
additional updates with respect to those or other forward-looking
statements.
All
references to "we," "our," "us" and the "Company" in this Annual Report on Form
10-K refer to Tidelands Oil & Gas Corporation, its subsidiaries and minimum
ownership interests in other entities.
Business
Strategy
Our
primary business operations are focused on the (i) development and operation of
transportation and storage infrastructure for natural gas in South Texas and the
Northern Mexican states of Tamaulipas and Nuevo Leon through our 20% ownership
interest in Frontera Pipeline, LLC (“Frontera”) and (ii) the regasification of
liquefied natural gas (“LNG”) project in the offshore waters of Southern
California. Our business strategies are to:
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capitalize
on expected demand growth for natural gas in Mexico, Texas and California
through development of niche energy infrastructure projects designed to
address those markets; and
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share
capital costs and risks of these development projects through joint
ventures or alliances with strategic financial
partners.
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Given the
large capital requirements for the construction of new midstream energy assets,
we anticipate that funding of our projects will be derived primarily through
joint ventures and alliances with strategic partners. Additionally,
management will evaluate related acquisition opportunities that compliment our
current business strategy. To date, the Company has not identified
any acquisition opportunities and any such opportunities will be conditioned
upon obtaining requisite financing.
Frontera
Pipeline, LLC and the Burgos Hub Project
The
Burgos Hub project is a proposed natural gas pipeline system which would
interconnect existing South Texas and Northern Mexico pipeline infrastructure
with a proposed natural gas storage facility in Northern Mexico. The Texas
pipeline segments, known as the Mission International Pipeline and the Progreso
International Pipeline, are proposed to cross the Rio Grande River
international boundary and connect to proposed pipelines in Northern Mexico that
will also interconnect with the gas storage facility. The expected users of this
additional pipeline and storage capacity are industrial firms in Monterrey,
Nuevo Leon, the Comision Federal de Electricidad (“CFE”) which has gas-fired
power generation plants throughout the market area of the proposed facilities,
and Pemex Gas (“PGPB”) which we believe needs the additional infrastructure to
divert gas flows from existing pipeline routes and to access additional markets
via interconnection with U.S. supply sources. The Burgos Hub project
business strategy is based on providing infrastructure and related services to
these customers who are expected to enter into long term capacity reservation
agreements with the project company with the goal of providing stable cash flows
with predictable returns to the project company. It is expected that
the development of this project will cost a minimum of $600,000,000 and require
up to four years to complete.
Previously,
the Company had been developing the 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 involves 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. In connection with the Purchase Agreement, the Company formed
a new subsidiary, Frontera, and transferred all rights, permits and assets of
the Burgos Hub Project to Frontera. The Company then sold 80% of the
equity interest in Frontera to Cheniere, effectively providing Cheniere with an
80% ownership interest in the Burgos Hub Project. As part of these
agreements with Cheniere, the Company also contributed 100% of the ownership of
Sonora to Frontera. Sonora previously obtained Federal Energy
Regulatory Commission (“FERC”) permits for the Mission and Progreso
International pipelines to be located between the US and Mexico which are part
of the Burgos Hub Project. In December 2007, the Company contributed 100% of the
ownership of Marea Associates, LP, Marea GP, LLC and Terranova to Frontera in
accordance with its obligations under the Purchase Agreement.
Pursuant
to the agreements with Frontera and Cheniere, the Company (i) received an
up-front payment of $1 million and (ii) is eligible to earn three additional,
separate earn-out payments of $4.8 million, $1.2 million, and $2.0
million. The Company is also entitled to receive royalty payments
based on the capacity of transportation or storage service subscribed with the
Burgos Hub Project, ranging from $0.008 per Mmbtu/d for Phase I to $0.002 per
Mmbtu/d for Phase II to $0.02 per Mmbtu/year for Phase III, subject to certain
caps. The earn-out payments are dependent upon Cheniere electing to
proceed with development of the Burgos Hub Project, which is divided into three
phases. The three phases are generally described as
follows:
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Phase I – construction
of the portion of a pipeline extending from the Valero Gilmore Plant,
located at Hidalgo County, Texas to Estacion Arguelles, located in
Tamaulipas, Mexico, to Station 19 of Pemex Gas y Petroquimica Basica to
Monterrey, Mexico.
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Phase II - construction
of the portion of a pipeline extending from the Donna Station to Brazil
Storage to Station 19 of Pemex Gas y Petroquimica
Basica.
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Phase III -
construction of the Brazil Storage Facility (underground natural gas
storage facility to be located in Rio Bravo,
Mexico).
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Under
Frontera’s limited liability company agreement (the “Operating Agreement”),
Cheniere will be the manager of Frontera, with sole decision-making and
management control of the Burgos Hub Project. If Cheniere elects to
proceed with development of the Burgos Hub Project, it will be responsible for
funding the development costs of the three phases; the Company is not required
to provide any additional funding other than payment for the
Company’s 20% interest in construction expenditures through additional capital
contributions to Frontera. Should the Company not have sufficient
funds, it may elect to fund such additional capital contributions to fund
construction expenses by borrowing such funds from Cheniere and executing a
promissory note in Cheniere’s favor on the following terms:
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Mandatory
Prepayments. The Company shall make mandatory
prepayments to the note by allowing Cheniere to credit the total amount
payable to the Company from any distributions by the Company to the
outstanding interest and principal amount of the note. Such
payments shall be made immediately upon the Company’s issuance of a
capital distribution.
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Maturity. The
outstanding principal amounts of the note shall become due and payable,
together with any accrued and unpaid interest on that portion of the
principal amount, 730 days after the
date of the note.
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Interest.
The Company shall pay interest on the outstanding and unpaid principal
amount of the note at a rate per annum equal to 12% compounded annually,
payable on the maturity date as well as on each date Cheniere effects a
mandatory prepayment of the note.
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Penalty
Interest. If any amount under the note shall not be paid when
due (at stated maturity, by acceleration or otherwise), interest shall
accrue on such amount from and including such due date until paid in full
at a rate per annum equal to eighteen percent
(18%).
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Security
Interest. As security for the principal amount of the
note, all accrued and unpaid interest thereon, and the payment and
performance of any other obligation of the Company under the
note, the Company shall pledge, assign, transfer and deliver to
Cheniere and shall grant to the Cheniere a first lien and continuing and
unconditional security interest in, all of its right, title and interest
in and to the Company’s interests in
Frontera.
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The
Company is not obligated to make any further development-oriented
expenses. Cheniere will proceed with, and fully fund, all three
phases of the Burgos Hub Project; however, Cheniere retains sole discretion
regarding whether to proceed with any of the development
phases. Subject to certain terms and conditions, if Cheniere enters
into definitive financing agreements with third parties with a debt to
capitalization ratio of at least 80% for a specific phase of the Project, but
elects not to move forward with the development of such phase, then the Company
has certain repurchase rights for Cheniere’s 80% equity interest.
Additionally,
the Operating Agreement contains the following terms:
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Pre-Emptive
Rights. The Company and Cheniere shall each have the
pre-emptive right and option to purchase their pro rata share of any new
issuance of interests in Frontera at the then price determined by
Cheniere.
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Company Call
Right. If on or after August 1, 2009, there is (i) a
final investment decision date for Phase I or Phase II of the Project that
has not occurred and (ii) a definitive binding agreement for the financing
of any phase of the Project which provides for a debt to total
capitalization ratio of at least eighty percent (80%), the Company shall
have the right, but not the obligation, to tender a written directive to
Cheniere instructing Cheniere to cause such final investment decision date
to occur. Cheniere shall have a period of ninety (90) days to
resolve and adopt the applicable final investment decision
date. If Cheniere fails to cause such final investment decision
date to occur within such 90 day period, then the Company shall have the
right upon notice to Cheniere, to purchase all, but not l0ess than all, of
the interest owned by Cheniere for the purchase price set forth in the
operating agreement.
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Cheniere Right of First
Refusal. If the Company proposes to sell its interest in
Frontera to any party other than a permitted transferee, the Company shall
give notice to Cheniere of the proposed sale and the terms
thereof. Cheniere shall then have the right to purchase such
interest on the same proposed terms within 30 days of receiving notice of
the proposed sale.
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Tag-Along
Rights. If Cheniere elects not to exercise its Right of
First Refusal as described above, Cheniere shall have the right to
participate in the proposed sale of interest by giving notice to the
Company and the proposed purchaser of its intent to participate in the
sale.
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Required Sale. If
Frontera decides to (i) transfer all of its outstanding interests to
another entity, (ii) effect a merger or consolidation with or into another
entity, or sell all or substantially all of its assets to another entity,
it shall give notice to its members and all such members shall be
obligated to sell their interest and take all other action necessary to
consummate such transaction.
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In
connection with the Purchase Agreement, Frontera entered into a consulting
agreement (the “Consulting Agreement”) with the Company, pursuant to which the
Company will be paid $25,000 per month for 24 months, subject to certain
conditions, for consulting services in connection with the Burgos Hub Project.
The Consulting Agreement provides that the Company will not compete with the
Burgos Hub Project for a period of three years after termination or expiration
of the Consulting Agreement. As a result of the death of Julio
Bastarrachea in December 2007, the amount paid to the Company has been reduced
to $10,000 per month for the remainder of the term of the
agreement. In the event (i) the Company terminates its services under
the Consulting Agreement without good reason or (ii) Frontera terminates the
Consulting Agreement for cause, the Company shall immediately forfeit all of its
interest in Frontera. For purposes of the Consulting Agreement, cause
shall mean Frontera has made a good faith determination that the Company, or its
key personnel: (i) has been convicted of a misdemeanor involving moral turpitude
or any felony; (ii) has committed an act of fraud upon Frontera; (iii) has
misappropriated funds or property of Frontera; (iv) has failed to comply in any
material way with written policies of Frontera and such written policies have
been provided to the Company such that the Company has received reasonable
notice of such policies; (v) has failed to use its commercially reasonable
efforts in performing its responsibilities; (vi) has materially breached the
Consulting Agreement; (vii) engaged in any action which would constitute a
breach of ethical business conduct or any applicable laws; (viii) files a
petition in bankruptcy, becomes insolvent, or ceases to do business for any
reason or (ix) has sold all of its interest in Frontera.
Sonora
has received the following authorizations from the FERC, with respect to the
Mission and Progreso International Pipelines:
(1)
presidential permit and authorization to site, construct, operate and maintain
two bi-directional border crossing natural gas facilities at the international
boundary between the United States and Mexico; and
(2)
certificate of public convenience and necessity to site, construct, operate and
maintain the United States portion of a pipeline system consisting of
approximately 29 miles of 30-inch diameter pipeline and appurtenant facilities
that will extend into Mexico via two border crossings, all to be located in
Hidalgo County, Texas.
These
natural gas pipelines in the United States will interconnect with the pipeline
system being developed by Terranova. Terranova previously received
approval from the Comision Reguladora de Energia (“CRE”) for the interconnecting
pipeline segments in Mexico in May 2006. Terranova has also filed a
permit application with the CRE for the construction and operation of the
natural gas storage facility in the Brasil field. The storage facility would be
served by the proposed pipeline system for which a permit has already been
granted by the CRE.
With
respect to the permit application for the storage facility, the
CRE recently informed representatives of Frontera that consideration of the
policy options for granting an award of a storage permit has been delayed due to
SENER (the Mexican Energy Ministry) focusing on the energy reform legislative
proposals currently being considered by the Mexican legislature. The Company
expects that prior to final review of the storage permit filing for the Burgos
Hub project, the regulatory scheme for the use of depleted hydrocarbon
reservoirs as gas storage facilities will need to be designed and implemented.
While the Company is expecting action on the permit in the near future based on
statements of the CRE to Frontera representatives, no assurance can be made
concerning the actual timing of a decision on the permit nor the conditions of
any permit granted.
With
respect to the existing pipeline permits now held by Frontera and the expected
amendment of those permits to extend service from Station 19 to Monterrey, Nuevo
Leon, the CRE indicated its willingness to consider an extension of time to file
its final proposal for costs and incomes, tariffs and maximum income for CRE’s
evaluation. This final proposal is due to be filed on or before May 23,
2008. If the extension of time to file these final proposals is not
granted, Frontera would not be in compliance with the terms of the original
resolution and permit, which could lead to termination of those permitted
rights. Frontera representatives have begun the process to extend the time for
filing of the required information and we expect to timely file for an extension
of time as requested. If the extension of the current permit is
granted, Frontera would proceed with the activities necessary to file for
amendment of the current pipeline permit in order to add a new pipeline segment
beginning at Station 19 of the National Pipeline System south of Reynosa,
Tamaulipas, and extending to a central distribution point in Monterrey, Nuevo
Leon. Frontera expects to conduct a valuation of the rights of way for this new
pipeline segment, additional gas flow modeling and engineering design work prior
to the filing of the application for amendment of the current pipeline permit.
These activities are expected to take several more months and must occur prior
to the filing of the amendment to the pipeline permits held by Frontera. There
is no assurance that Frontera will be awarded such amended permit
rights.
As a
result of the regulatory hurdles, it is not expected that this project will be
developed until 2010. Frontera expects to file for amendment of the
pipeline permit by the end of 2008, with a normal time for review by CRE lasting
into 2009 prior to granting of the amended permit if one is granted.
Construction activity would not begin until receipt of the amended permit if one
is granted and sufficient capacity reservation is secured with creditworthy
counterparties.
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. It is
contemplated that Esperanza would utilize TORP Technology's HiLoad LNG Regas
unit that attaches to an LNG tanker, directly vaporizes the LNG as it is
offloaded and injects the regasified natural gas into an undersea pipeline for
transportation of the natural gas to onshore metering stations and transmission
pipelines to supply nearby gas markets. The TORP HiLoad LNG Regas unit
eliminates the need for extensive above-ground storage tanks or large marine
structures required for berthing and processing of the LNG. Esperanza has
conducted its feasibility study for this project with the assistance of LNG,
environmental, pipeline and legal advisors and has preliminarily concluded that
the project is technically, environmentally and commercially feasible. In 2007,
Esperanza finished its initial evaluation of project feasibility and is now
considering additional design improvements to deal with expected regulatory
legislation relating to greenhouse gas emissions by energy projects in
California. To date, the Company has spent approximately $1.5 million
of funds in connection with this project.
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. California state and local agency approvals can also
impact the permit approval process beyond the normal time expectations. The
focus of the Port Esperanza project team has been to design a project that has
anticipated and mitigated these risks during its design phase. We have assembled
team members with previous offshore LNG terminal development experience with a
view of profiting from their experience in dealing with the various issues
raised in the development of an LNG receiving facility in
California. The projected capital expenditures for the project are
significant and depending on the final configuration may cost as much as $1
billion with the cost of the permitting process for the USCG/MARAD permit
estimated in excess of $20 million. It is expected that the initial
development cost and the required equity in the project will be obtained from
co-venturers, and there can be no assurance that such financing can be obtained
on favorable terms, if at all. The Company’s interest in this project
will be diluted significantly as a result of any such financing.
The Port
Esperanza project is being designed with input from numerous federal, state and
local community stakeholders in order to minimize the types of issues that
opponents have used to stop other proposed California LNG projects and, thus,
maximize the chance that Port Esperanza will successfully receive it’s key
development permit – the US Coast Guard Maritime Administration Deep Water Port
License (“MARAD permit”) in as an efficient time frame possible.
Preliminary
development timeline is:
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File
MARAD application within six months of funding date (the date
approximately $20 million is raised by
Esperanza);
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Twelve
to eighteen months for MARAD permit processing;
and
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Eighteen
months construction commencing upon receipt of MARAD
permit.
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Our
initial design of the LNG regasification facility proposes that:
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Facility
was sited at least 10 miles offshore to avoid offloading large LNG cargo
vessels close to populated and/or non-industrialized
areas;
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Did
not require siting LNG storage tanks or permanently moored LNG storage
vessels;
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Presented
a physically small physical profile so as to minimize shore side
views;
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Did
not produce any air emissions in the regasification process or any other
facility operations;
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Addresses
evolving legislation concerning greenhouse gas emissions from the LNG
value chain; and
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Landed
its natural gas delivery pipeline onshore in an already industrialized
area.
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We are
adopting these parameters as the principal drivers of the project’s design. We
believe the project will have significant investment value because:
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The
State of California has officially acknowledged the value of having an LNG
terminal in California;
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The
project meets a well-defined need to supply additional natural gas to the
California market;
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The
project provides its product into the heart of a very liquid natural gas
market;
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The
project economics make it competitive with other natural gas supply
options available to California energy consumers;
and
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The
project was designed from its most basic elements up to the most
technically complex to ensure that it has the lowest environmental impact
possible.
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Nevertheless,
further progress on the project is dependent upon the Company securing
additional funding for the MARAD permit application process and complying with
state and federal regulations, including environmental
laws. Furthermore, given the complex and lengthy process of
development of similar projects in the State of California, no assurance can be
given that even with adequate funding, the project will be awarded the required
entitlements or site control necessary to finance, build and operate the
project.
Discontinued
Business Operations
Rio
Bravo Energy, LLC and Sonora Pipeline, LLC
Rio Bravo
Energy, LLC was formed in August 1998 to operate the Chittim Gas Processing
Plant which was purchased in 1999 and was processing natural gas primarily from
Conoco Oil's Sacatosa Field. The Sacatosa Field was primarily an oilfield which
produced high BTU casinghead gas from which gas processing operations would
yield valuable hydrocarbon components such as propane, butane and natural
gasolines. As the field depleted, lower volumes of casinghead gas were being
delivered by Conoco, and other gas producers could not be contracted with for
processing of additional replacement volumes of gas. Therefore, in October 2002,
the plant was shut down due to the declining economics associated with low
volume operation of the plant. During 2002 through the fourth quarter of 2005,
management planned to reopen the plant when adequate volumes of gas from third
party producers were obtained to make plant operations economically attractive.
However, the Company was unsuccessful in locating a locally available and
adequate supply of high BTU natural gas and elected to dispose of the gas plant
assets. The plant assets were conveyed to Reef International, LLC in 2007 and
then subsequently sold to West Texas Gas, Inc. (“WTG”) in March
2008. Rio Bravo Energy, LLC served as the parent company for Sonora,
as the one percent general partner of Marea Associates, LP and as a less than
one percent minority interest in until disposition of the assets in the
transaction creating Frontera in September 2007.
Sonora
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 original pipeline network consisted of
approximately 80 miles of gas pipeline. This pipeline network was acquired in
conjunction with the Chittim Gas Processing Plant acquisition and was also
conveyed to Reef International, LLC in 2007 and subsequently sold to West Texas
Gas, Inc. in March 2008. All the Company’s interest in Sonora was conveyed to
Frontera in September 2007.
Reef
Ventures, LP International Pipeline
The
assets of this business consist 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. The twelve-inch pipeline connects and receives natural
gas from a third party pipeline for transmission to the border between Texas and
Coahuila, Mexico. The pipeline is buried underneath the Rio Grande River
with its termination at the delivery point in Piedras Negras, Coahuila owned by
CONAGAS (the local distribution company). Reef Ventures, LP derived its revenues
from transportation fees charged to CONAGAS for delivery of natural gas. The LPG
project will require the future construction of receiving terminal facilities in
Texas, boring and installation of additional six inch diameter pipeline under
the Rio Grande River and approximately one mile of additional pipeline in
Mexico with an unloading terminal and storage facilities at its termination
point. These assets were impaired in 2006 with a significant charge to earnings
and have been sold to West Texas Gas, Inc. in March 2008, leaving Reef Ventures,
LP with no assets. These assets contributed approximately 4 % of the Company’s
revenues in 2007.
Sonterra
Energy Corporation Business
The
assets of Sonterra Energy Corporation ("Sonterra") subsidiary were sold in
January 2008 and consisted of propane distribution systems, including gas mains,
yard lines, meters and storage tanks, serving the following residential
subdivisions in the Austin, Texas area. The subdivisions include:
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7.
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The
Hollows at Northshore
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17.
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The
Preserve at Barton Creek
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These
subdivisions contained approximately 2,250 lots which can be supplied with gas
service from Sonterra. Currently 1,155 of these lots are metered for use. There
are approximately 1,095 unmetered future lots within the above subdivisions
where propane service can be connected. These assets contributed approximately
94% of 2007 revenues for the Company and were sold in January 2008. The net
proceeds from the sale of this business were used primarily to retire
convertible debentures maturing in January 2008.
Tidelands
Exploration & Production Corporation
On July
9, 2006, Tidelands Exploration & Production Corporation acquired a 50%
interest in a 26-mile natural gas pipeline located in Medina, Atascosa and
Bexar Counties in the state of Texas. In addition, the Company also
acquired an undivided 50% working interest in two leases with 5 recompleted
natural gas wells on approximately 1,000 acres with at least 10 additional
natural gas wells for re-entry. These leases are located in Atascosa and Medina
counties. These assets were sold to Bentley Energy Corp. in September
2007 and contributed less than 2% of 2007 revenues to the Company.
Competition
Frontera
Pipeline LLC
The
international pipeline crossing assets that are proposed for development by
Frontera compete with existing pipeline companies in the United States such as
Kinder Morgan Energy Partners and Tennessee Gas Pipeline for export of natural
gas into Mexico. Due to capacity constraints and operational issues on these
pipelines as well as existing interconnection issues in Mexico, we believe that
Frontera can compete favorably to attract shippers looking for additional
capacity and additional markets from which to purchase gas for import into
Mexico. Similarly, the export of natural gas from Mexico to U.S. markets
represents an opportunity for the proposed assets to compete favorably for
shipments of gas by the export marketing division of Pemex. The size
and scope of the import and export market for natural gas between the United
States and Mexico is certain to continue to attract the interest of large, well
capitalized natural gas pipeline operators and there is no assurance that these
companies will not develop new or better projects that have greater market
acceptance than the project being developed by Frontera.
Esperanza
Energy LLC
The Port
Esperanza project has two primary competitors, Clearwater Port, sponsored
by NorthernStar Natural Gas, Inc. and the Oceanway Secure Energy sponsored by
Woodside Natural Gas. Both projects are similar to the Port Esperanza project in
that they are designed as offshore LNG receiving and regasification facilities
that would deliver natural gas to onshore interconnections with the natural gas
pipeline systems in the Los Angeles Basin. There is no assurance that a
final design for the Port Esperanza project will be superior to our competitors’
designs with respect to compliance with greenhouse gas or other regulatory
requirements. Furthermore, one of our competitive projects has its own projects
in Australia under development to secure a supply of LNG for its California
re-gas terminal project. We expect competition from entities that
will be better capitalized and have larger resources than us, including
political resources that we may lack.
Employees
We have
six full-time employees including our corporate officers.
Regulation
Natural Gas Pipelines and Storage
Facilities
Under the
Natural Gas Act (“NGA”), FERC generally regulates the transportation of natural
gas in interstate commerce. For FERC regulatory purposes, “transportation”
service includes storage service. The proposed Mission and Progreso
International pipelines permitted by Sonora and now owned by Frontera will
transport natural gas in interstate commerce and thus qualifies as a “natural
gas company” under the NGA and is subject to the regulatory jurisdiction of
FERC. In general, FERC has authority over natural gas companies that provide
natural gas pipeline transportation services in interstate commerce and its
authority to regulate those services includes:
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rates
of return on equity;
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the
services that our regulated assets are permitted to
perform;
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the
acquisition, construction and disposition of assets;
and
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to
an extent, the level of competition in that regulated
industry.
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Under the
NGA, FERC has authority to regulate natural gas companies that provide natural
gas pipeline transportation services in interstate commerce. Its authority to
regulate those services includes the rates charged for the services, terms and
conditions of service, certification and construction of new facilities, the
extension or abandonment of services and facilities, the maintenance of accounts
and records, the acquisition and disposition of facilities, the initiation and
discontinuation of services, and various other matters. Natural gas companies
may not charge rates that have not been determined to be just and reasonable by
FERC. In addition, FERC prohibits natural gas companies from unduly preferring
or unreasonably discriminating against any person with respect to pipeline rates
or terms and conditions of service.
The
rates, terms and conditions of service provided by natural gas companies are
required to be on file with FERC in FERC-approved tariffs. Pursuant to FERC’s
jurisdiction over rates, existing rates may be challenged by complaint and
proposed rate increases may be challenged by protest. We cannot assure you that
FERC will continue to pursue its approach of pro-competitive policies as it
considers matters such as pipeline rates and rules and policies that may affect
rights of access to natural gas transportation capacity, transportation and
storage facilities. Any successful complaint or protest against Sonora’s future
FERC-approved rates could have a prospective impact on our revenues associated
with providing transmission services on the Mission and Progreso International
pipelines.
Failure
to comply with the NGA can result in the imposition of administrative, civil and
criminal remedies.
In
addition, our intrastate natural gas pipeline operations in Texas are subject to
regulation by various agencies in Texas, principally the Texas Railroad
Commission (“TRRC”), where they are located. Our intrastate pipeline operations
in Texas are also subject to the Texas Utilities Code, as implemented by the
TRRC. Generally, the TRRC is vested with authority to ensure that rates,
operations and services of gas utilities, including intrastate pipelines, are
just and reasonable and not discriminatory. The TRRC has authority to ensure
that rates charged by intrastate pipelines for natural gas sales or
transportation services are just and reasonable. The rates we charge for
transportation services are deemed just and reasonable under Texas law unless
challenged in a complaint. We cannot predict whether such a complaint will be
filed against us or whether the TRRC will change its regulation of these rates.
Failure to comply with the Texas Utilities Code can result in the imposition of
administrative, civil and criminal remedies.
The TRRC
administers federal pipeline safety standards under the Natural Gas Pipeline
Safety Act of 1968, as amended (the “NGPSA”), which requires certain pipelines
to comply with safety standards in constructing and operating the pipelines and
subjects the pipelines to regular inspections. Failure to comply with the NGPSA
may result in the imposition of administrative, civil and criminal
remedies.
Since
1995, the CRE has performed the regulatory functions for natural gas pipelines
and storage facilities in Mexico with powers similar to the Federal Energy
Regulatory Commission in the United States of America. The Company’s former
subsidiary, Terranova has been granted a permit by the CRE to construct and
operate a natural gas pipeline system in Northern Mexico and has a permit
application for an underground natural gas storage facility pending before the
CRE.
Offshore
LNG Terminal Permit Process
The
proposed Port Esperanza offshore LNG terminal is subject to significant federal
and state level regulatory processes with respect to the permitting process for
the development of the facility. The Deepwater Port Act of 1974, as amended,
establishes a licensing system for ownership, construction, and operation of
manmade structures beyond the U.S. territorial sea. The act promotes the
construction and operation of deepwater ports as a safe and effective means of
importing oil and natural gas into the U.S. and transporting oil and natural gas
from the outer continental shelf, while minimizing tanker traffic and associated
risks.
All
deepwater ports must be licensed. The act requires a license applicant to submit
detailed plans for its facility to the Secretary of Transportation. The act also
requires the Secretary to designate an adjacent coastal state(s) for
consultation, and requires the consent of the governor of that state(s) for
license approval. The California State Lands Commission acts as the lead agency
for the permitting of an LNG terminal located offshore in California coastal
waters. The act also mandates compliance with the National
Environmental Policy Act (NEPA).
The
Secretary has delegated the processing of deepwater port applications to the
U.S. Coast Guard and the Maritime Administration. The Secretary also delegated
to MARAD his authority to issue, transfer, amend, or reinstate a license for the
construction and operation of a deepwater port.
The
license review process is driven by a series of legally mandated deadlines,
totaling a maximum of 356 calendar days from the date that the application is
filed. The act mandates that there be one NEPA process for all federal agencies
in the license application review process. Hence, there is a need to fully
incorporate all of the necessary information and analysis to meet federal (and
state) environmental requirements in the one NEPA document. The granting of the
federal or state permits or other authorities based on the NEPA analysis may
occur at a later date. However, the NEPA process for the license application
review must conclude that the proposal is substantially in
compliance.
The Coast
Guard has a maximum of 21 days from the date of application submittal to perform
a completeness review. If determined complete, the Coast Guard then has a
maximum of 5 days to publish a notice of filing in the Federal
Register.
The
Federal Register notice triggers a maximum 240-day period in which to perform an
application review, complete a NEPA process, and hold a final public hearing in
the designated adjacent coastal state(s).
The act
mandates that there be at least one public hearing in the adjacent coastal
state(s) for each application. The final public hearing must occur no later than
240 days after the publication of the Notice of Filing in the Federal Register.
The final public hearing then triggers a maximum 90-calendar day deadline for
the Secretary of Transportation (as delegated to the Administrator of MARAD) to
make a decision whether to grant, grant with conditions, or deny the
application.
This
90-day period is divided into two 45-day periods. Federal agencies and the
governor of the adjacent coastal state(s) have 45 days after the final public
hearing to make their final comments on the application. The Secretary of
Transportation (as delegated to the Administrator of MARAD) has a subsequent 45
days to make the decision.
All
together, these various periods of time consume a total of 356 calendar days
from the date that an application is submitted to the Coast Guard.
Insurance
Companies
engaged in the petroleum products distribution and storage business may be sued
for substantial damages in the event of an actual or alleged accident or
environmental contamination. We maintain $1,000,000 of liability insurance.
There can be no assurance that we will be able to continue to maintain liability
insurance at a reasonable cost in the future, or that a potential liability will
not exceed the coverage limits. Nor can there be any assurance that the amount
of insurance carried by us will enable us to satisfy any claims for which we
might be held liable resulting from the conduct of our business
operations.
General
The
Company was incorporated under the laws of the State of Nevada in February
1997.
In
addition to the other information presented in this report, the following should
be considered carefully in evaluating our business or purchasing shares of our
common stock. Investing in our common stock involves a high degree of risk. This
report contains various forward looking statements that involve risk and
uncertainties. Our actual results may differ materially from the results
discussed in the forward looking statements. Factors that might cause such a
difference include, but are not limited to, those discussed below and elsewhere
in this report.
Financial
Condition Risks
We
have a history of operating losses and expect operating losses for the
foreseeable future.
We
incurred significant historical losses and we expect to incur losses for the
foreseeable future. For the year ended December 31, 2007, we
lost $11,834,333 and for the year ended December 31, 2006, we lost $11,836,925.
These losses were caused primarily by:
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financing
costs in connection with acquisitions made in prior years and the issuance
of convertible debentures;
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limited
volumes of gas transported through the international pipeline
crossing;
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pre-development
and operating expenses associated with the development of additional
pipeline, LNG, and storage projects in Texas, Mexico and
California;
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idle
assets not producing revenue, such as the gas plant and associated
pipeline;
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default
interest penalties regarding a convertible debenture
financing;
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expenses
of litigation defense and disposition of unprofitable and non-core
business segments; and
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increased
employee related salaries, stock-based compensation and related
costs.
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We
lack sufficient capital to fund operations for the balance of 2008.
At
December 31, 2007, we had current assets of $924,722, current liabilities of
$12,512,248 and a working capital deficit of $11,587,526. We
believe that we will require approximately $150,000 of working capital per month
which requires that we obtain approximately $1,350,000 of capital to meet
working capital needs for 2008. We do not have any credit facilities
in place nor do we have any commitments for equity
investments. Accordingly, we will be reliant upon best efforts debt
and/or equity financings to fund working capital needs. We cannot
give any assurance that this additional financing could be obtained on
attractive terms or at all. Lack of funding could force us to curtail
substantially, or cease, our operations.
We
will need to discharge $1,850,000 of current liabilities in 2008.
After
giving effect to the Sonterra transaction in January 2008 and the WTG
transaction in March 2008, the Company has approximately $1,850,000 of current
notes payable, accounts payable and accrued expenses that require payment or
other satisfaction during 2008. This amount is in addition to the
$1,350,000 of working capital required in 2008. We will need to raise
capital or issue shares of our common stock to discharge these
obligations. Failure to satisfy these obligations on a timely basis
will adversely affect our financial condition.
Our
financial statements have been prepared assuming that we will continue as a
going concern.
The
financial statements included in this report have been prepared on the basis
that we will continue as a going concern, which assumes the realization of
assets and the satisfaction of liabilities in the normal course of business. We
have incurred significant accumulated losses as of December 31, 2007. We do not
expect to generate sufficient revenue to meet our cash requirements for the next
twelve months. We will need to raise additional capital to continue meeting
operational expenses. Our independent auditors have added an explanatory
paragraph to their report of our financial statements for the year ended
December 31, 2007 stating that our net losses, lack of revenues and dependence
on our ability to raise additional capital to continue our existence, raise
substantial doubt about our ability to continue as a going concern. We estimate
that in order to pay outstanding accounts payable, accrued expenses, current
maturities of promissory notes and fund ongoing operations, the Company will
need to raise additional capital in the approximate amount of $3,200,000 during
the remainder of calendar year 2008. If we are not successful in
raising sufficient additional capital, we may not be able to continue as a going
concern, our stockholders may lose their entire investment in us.
We
do not expect to generate revenue for the foreseeable future.
The
Frontera and Esperanza projects will not result in revenues for the Company for
the foreseeable future, if at all. Accordingly, the Company will
continue to rely upon external sources of best-efforts financings to fund
working capital requirements for the foreseeable future. Any equity
financings will result in substantial dilution to our then-existing stockholders
given the current market price for our common stock. Sources of debt financing
may result in higher interest expense. Any financing, if available, may be on
terms unfavorable to the Company.
Business
Risks
Cheniere
has the ability, in its sole discretion, to determine to cease development of
the Burgos Hub Project.
Cheniere
has the sole managerial authority and right to make all decisions regarding the
continuation, financing and general development of the Burgos Hub
Project. Accordingly, there can be no assurance that the Burgos Hub
project will be developed or, if it is developed, that it will be developed to
the extent described herein.
There
is no assurance that Frontera can obtain financing for and regulatory approval
of completion of the Burgos Hub project.
The
Burgos Hub project will require significant financing, of which there is no
assurance that Cheniere will provide, or obtain, the required financing in order
to complete the development of this project. Likewise, completion of
this project requires regulatory approval that is subject to factors outside of
our control.
The Esperanza project is in
preliminary stages and there can be no assurance that the project can be
completed.
The
Company lacks the capital resources to develop the Esperanza project and the
development of this project will be dependent upon our obtaining a financial
partner, of which there can be no assurance that we can negotiate acceptable
terms, if at all. The permitting and development of
the Esperanza project will require federal and state regulatory approval,
of which there is no assurance that we can obtain such
approvals. Accordingly, the completion of the Esperanza project
is subject to numerous contingencies outside of our control.
We
face competition from entities that are better capitalized and have larger
resources.
We will
be competing with other established operators in our market. Many of these
companies have greater capital, marketing and other resources than we do. There
can be no assurance that we will successfully differentiate ourselves from our
competitors. Market entry by any significant competitor may have an adverse
effect on our business strategy.
We
operate in highly competitive markets in competition with several different
companies.
We face
strong competition in our geographic areas of operations. Our competitors
include major integrated oil companies, interstate and intrastate pipelines. We
compete with integrated companies that have greater access to raw natural gas
supply and are less susceptible to fluctuations in price or volume, and some of
our competitors that have greater financial resources may have an advantage in
competing for acquisitions or other new business opportunities.
Growing
our business by constructing new pipelines and LNG regasification facilities
subjects us to construction risks and there is no guaranty that raw natural gas
supplies will be available upon completion of the facilities.
One of
the ways we intend to grow our business is through the construction of additions
to our existing gathering systems, modification of our existing gas processing
plant and construction of new processing facilities. The construction of
gathering and processing facilities requires the expenditure of significant
amounts of capital, which may exceed our expectations. Generally, we may have
only limited raw natural gas supplies committed to these facilities prior to
their construction. Moreover, we may construct facilities to capture anticipated
future growth in production in a region in which anticipated production growth
does not materialize. As a result, there is the risk that new facilities may not
be able to attract enough raw natural gas to achieve our expected investment
return, which could adversely affect our results of operations and financial
condition.
Our
business is dependent upon prices and market demand for natural gas, which are
beyond our control and have been extremely volatile.
We are
subject to significant risks due to fluctuations in commodity prices, primarily
with respect to the prices of gas that we may own as a result of our
transportation and distribution activities. The markets and prices
for residue gas depend upon factors beyond our control. These factors include
demand for oil, and natural gas, which fluctuate with changes in market and
economic conditions and other factors, including:
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the
impact of weather on the demand for oil and natural
gas;
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the
level of domestic oil and natural gas
production;
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the
availability of imported oil and natural
gas;
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the
availability of local, intrastate and interstate transportation
systems;
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the
availability and marketing of competitive
fuels;
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the
impact of energy conservation efforts;
and
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the
extent of governmental regulation and
taxation.
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We
generally do not own the land on which our pipelines are constructed and we are
subject to the possibility of increased costs for the loss of land
use.
We
generally do not own the land on which our pipelines are constructed. Instead,
we obtain the right to construct and operate the pipelines on other people's
land for a period of time. If we were to lose these rights, our business could
be affected negatively.
Our
business projects subject us to state and federal government regulations,
including environmental laws, which could adversely affect our
business.
Our
business is regulated by certain local, state and federal laws and regulations
relating to the exploration for, and the development, production, marketing,
pricing, transportation and storage of, natural gas and oil. We are also subject
to extensive and changing environmental and safety laws and regulations
governing plugging and abandonment, the discharge of materials into the
environment or otherwise relating to environmental protection. In addition, we
are subject to changing and extensive tax laws, and the effect of newly enacted
tax laws cannot be predicted. The implementation of new, or the modification of
existing, laws or regulations, including regulations which may be promulgated
under the Oil Pollution Act of 1990, could have a material adverse effect on the
Company. In recent years, FERC has pursued pro-competition policies
in its regulation of interstate natural gas pipelines. However, we cannot assure
you that FERC will continue this approach as it considers proposals by pipelines
to allow negotiated rates not limited by rate ceilings, pipeline rate case
proposals and revisions to rules and policies that may affect rights of access
to natural gas transportation capacity.
Governmental
Regulation of our pipelines could increase our operating
costs.
The
FERC’s oversight of entities subject to the NGA includes the regulation of
rates, entry and exit of service, acquisition, construction and abandonment of
transmission facilities, and accounting for regulatory purposes. The
implementation of new laws or policies that would subject us to regulation by
the FERC under the NGA could have a material adverse effect on our financial
condition and operations. Similarly, changes in the method or circumstances of
operation, or in the configuration of facilities, could result in changes in our
regulatory status. In addition, we are subject to federal and state safety laws
that dictate the type of pipeline, quality of pipe protection, depth, methods of
welding and other construction-related standards. Litigation or
governmental regulation relating to environmental protection and operational
safety may result in substantial costs and liabilities.
Our
business involves hazardous substances and may be adversely affected by
environmental regulation.
Many of
the operations and activities of our proposed facilities are subject to
significant federal, state and local environmental laws and regulations. These
include, for example, laws and regulations that impose obligations related to
air emissions and discharge of wastes from our facilities and the cleanup of
hazardous substances that may have been released at properties currently or
previously owned or operated by us or locations to which we have sent wastes for
disposal. Various governmental authorities have the power to enforce compliance
with these regulations and the permits issued under them, and violators are
subject to administrative, civil and criminal penalties, including civil fines,
injunctions or both. Liability may be incurred without regard to fault for the
remediation of contaminated areas. Private parties, including the owners of
properties through which our gathering systems pass, may also have the right to
pursue legal actions to enforce compliance as well as to seek damages for
non-compliance with environmental laws and regulations or for personal injury or
property damage.
There is
inherent risk of the incurrence of environmental costs and liabilities in the
business of handling natural gas and other petroleum products, air emissions,
historical industry operations, waste disposal. In addition, the possibility
exists that stricter laws, regulations or enforcement policies could
significantly increase our compliance costs and the cost of any remediation that
may become necessary. We cannot assure you that we will not incur material
environmental costs and liabilities. Furthermore, we cannot assure you that our
insurance will provide sufficient coverage in the event an environmental claim
is made against us.
Our
business may be adversely affected by increased costs due to stricter pollution
control requirements or liabilities resulting from non-compliance with required
operating or other regulatory permits. New environmental regulations might
adversely affect our products and activities, including processing, storage and
transportation, as well as waste management and air emissions. Federal and state
agencies also could impose additional safety requirements, any of which could
affect our profitability.
Our
pipelines may be subject additional costs and liabilities related to
environmental and safety regulations.
Our
pipeline operations are subject to various federal, state and local
environmental, safety, health and other laws, which can increase the cost of
planning, designing, installing and operating such facilities. There can be no
assurance that costs and liabilities relating to compliance will not be incurred
in the future. Moreover, it is possible that other developments, such as
increasingly strict environmental and safety laws, regulations and enforcement
policies thereunder, and claims for damages to property or persons resulting
from our operations, could result in additional costs to and liabilities for
us.
Our
business operations are also subject to regulatory actions by state and federal
authorities in Mexico.
Frontera
will be involved in the development of infrastructure projects through its
wholly owned Mexican entity, Terranova, in Mexico. The risk of indirect or
regulatory actions by state or federal authorities in Mexico which may inhibit,
delay, hinder or block projects under development in Mexico is very high given
the history of operations conducted by past businesses other than the Company in
Mexico. There is a substantial risk that a set of actions taken by commission or
omission by the various actors in the public, private, nongovernmental and/or
social sectors could negatively impact a project or investment in Mexico. The
legal system employed in Mexico is dramatically different in its structure and
method of operation compared to the common law foundation present in the United
States of America. The level of legal protection afforded investors by the North
American Free Trade Agreement has not materially improved from a foreign
investor's viewpoint.
There can
be no assurance that a commercially viable project will be completed due to the
above factors which could result in commercial competitors trying to circumvent
the market system through the exploitation of undocumented, extra-official
channels of influence that constitute unfair competition. Federal, state and
local authorities are not well coordinated in their legal protections and
improper influence and competition may arise from any level of government to
disrupt or destroy the commercial viability of investments by foreign
investors.
Our
pipeline system operations will be subject to operational hazards and unforeseen
interruptions.
The
proposed operations of our pipeline systems are subject to hazards and
unforeseen interruptions, including natural disasters, adverse weather,
accidents or other events, beyond our control. A casualty occurrence might
result in injury and extensive property or environmental damage. Although we
intend to maintain customary insurance coverages for gathering systems of
similar capacity, we can offer no assurance that these coverages will be
sufficient for any casualty loss we may incur.
There
are many operational risks related to our natural gas operations.
The
natural gas business involves certain operating hazards. The availability of a
ready market for our natural gas products also depends on the proximity of
reserves to, and the capacity of, natural gas gathering systems, pipelines and
trucking or terminal facilities. As a result, substantial liabilities to third
parties or governmental entities may be incurred, the payment of which could
reduce or eliminate the funds available for exploration, development or
acquisitions or result in the loss of our properties. In accordance with
customary industry practices, we maintain insurance against some, but not all,
of such risks and losses. We do not, and likely will not, carry business
interruption insurance. The occurrence of such an event not fully covered by
insurance could have a material adverse effect on our financial condition and
results of operations.
Our
business involves many hazards and operational risks, some of which may not be
covered by insurance.
Our
operations will be subject to the many hazards inherent in the gathering,
compressing, treating and processing of raw natural gas and NGLs and storage of
residue gas, including ruptures, leaks and fires. These risks could result in
substantial losses due to personal injury and/or loss of life, severe damage to
and destruction of property and equipment and pollution or other environmental
damage and may result in curtailment or suspension of our related operations. We
will likely not be fully insured against all risks incident to our proposed
business. If a significant accident or event occurs that is not fully insured,
it could adversely affect our operations and financial condition.
OTC
Bulletin Board Market Risks
Trading
in our common stock on the OTC Bulletin Board may be limited.
Our
common stock trades on the OTC Bulletin Board. The OTC Bulletin Board is not an
exchange. Trading of our securities on the OTC Bulletin Board is sporadic and
volatile. You may have difficulty reselling any of our common stock
shares.
There
has been a volatile public market for our common stock and the price of our
stock may be subject to fluctuations.
We cannot
assure you that a liquid transparent trading market for our common stock will
develop or be sustained. You may not be able to resell your shares at or above
the price you paid for them. The market price of our common stock is likely to
be volatile and could be subject to fluctuations in response to factors such as
the following, most of which are beyond our control:
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the
operations, regulatory, market and other risks discussed in this
section;
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announcements
by us or our competitors of significant contracts, acquisitions, strategic
partnerships, joint ventures or capital
commitments;
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announcements
by third parties of significant claims or proceedings against us;
and
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·
|
future
sales of our common stock.
|
In
addition, the market for our stock has from time to time experienced extreme
price and volume fluctuations. These broad market fluctuations may adversely
affect the market price of our common stock.
Our
common stock is subject to penny stock regulation.
Our
common stock is subject to regulations of the Securities and Exchange Commission
relating to the market for penny stocks. The Securities Enforcement and Penny
Stock Reform Act of 1990 (the "Reform Act") also requires additional disclosure
in connection with any trades involving a stock defined as a "penny stock"
(generally, according to recent regulations adopted by the Commission, any
equity security that has a market price of less than $5.00 per share, subject to
certain exceptions), including the delivery, prior to any penny stock
transaction, of a disclosure schedule explaining the penny stock market and the
risks associated therewith. These regulations generally require broker-dealers
who sell penny stocks to persons other than established customers and accredited
investors to deliver a disclosure schedule explaining the penny stock market and
the risks associated with that market. These regulations also impose various
sales practice requirements on broker-dealers. The regulations that apply to
penny stocks may severely affect the market liquidity for our securities and
that could limit your ability to sell your securities in the secondary
market.
None.
We lease
our San Antonio executive office on a month-to-month basis, with a current
monthly lease payment of $3,400.
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 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 Gathering, Ltd.
filed a Suggestion of Bankruptcy which stayed the case. On December
13, 2007, Betty Lou Sheerin non-suited with prejudice all of her claims against
Tidelands Oil and Gas Corporation and Tidelands Oil and Gas Corporation
non-suited with prejudice all of its claims against Betty Lou
Sheerin. The claims between Northern Natural Gas Company, Betty Lou
Sheerin, the Estate of Kenneth Lay, and the Estate of Charlton Hadden were
severed from the claims between Northern, ZG Gathering, Ltd., and Tidelands Oil
and Gas Corporation. The claims between Northern Natural Gas Company
and Betty Lou 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 Natural Gas is the owner of the note in question, that Betty Lou
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 Gathering, Ltd. filed a Notice of Removal to the Federal Bankruptcy Court of
the remaining claims between Northern Natural Gas Company, Tidelands Oil &
Gas Corporation and ZG Gathering, Ltd. There is no setting yet for
the trial of the removal action, and the parties are in advanced settlement
discussions.
Matter
No. 2
Cause No.
GN 500948, Goodson Builders, Ltd., Plaintiff, vs. Jim Blackwell, BNC
Engineering, Et. Al, Defendants, was filed April 7, 2005, in the 345th District
Court of Travis County, Texas. This case principally involves a claim
by Goodson Builders, Ltd. (“Goodson”) against Toll Brothers Property, LP (“Toll
Brothers”) alleging that Toll Brothers engaged in fraud and wrongful
non-disclosure of material information by failing to disclose a propane easement
affecting certain real estate Toll Brothers sold to Goodson. Goodson
also sued Sonterra alleging trespass by Sonterra by its use of the
easement. Toll Brothers has filed a counterclaim against Goodson
seeking sanctions on the ground that Goodson’s claims are
frivolous. Toll Brothers has offered a witness who is Goodson’s
former employee and it has obtained photographs of the propane tank prior to the
Goodson’s purchase. Goodson seeks damages in the hundreds of
thousands of dollars. Insurance would not cover the
damages.
On May 9,
2007, the trial court awarded summary judgment against Goodson and in favor of
all Defendants as to the existence of the easement. The court issued
orders to this effect on July 3, 2007. The judgment explicitly
recognizes the existence of an easement for the propane tank and for Sonterra’s
maintenance of the tank. Goodson has amended its claims to allege
violation of setback requirements for the tank.
Both
Blackwell and Toll Brothers have filed motions for sanctions against
Goodson. On July 5, 2007, Blackwell was granted partial hearing on
his motion and the trial court indicated that it would grant sanctions if
Goodson did not adequately address the motion in its pleadings.
Goodson
has made a settlement offer to Toll Brothers and the other Defendants, including
Sonterra, which is currently under negotiation by the parties.
Matter
No. 3
Cause No.
GM 501625, Senna Hills, Ltd., Plaintiff, vs. Sonterra Energy Corp., Defendant,
was filed in the 53rd Judicial District of Travis County, Texas and Cause No. GN
501626, HBH Development Co., LLC, Plaintiff, vs. Sonterra Energy Corp.,
Defendant, was filed in the 98th Judicial District Court of Travis County,
Texas. These separate lawsuits have since been consolidated into one
suit for purposes of pretrial and trial.
The above
matters were each filed against Sonterra in May 2005 and involve the same claims
arising from the same propane service agreement. In each case, the
plaintiff initially brought claims against Sonterra arising from Sonterra’s
alleged failure, as an assignee of the propane service agreement, to pay
easement use fees to the plaintiff.
Sonterra
has obtained summary judgment as to the plaintiffs’ respective breach of
contract and failure of assignment claims arising from the alleged failure to
pay easement use fees. Sonterra has also won a second summary
judgment as to the plaintiffs’ respective claims alleging unpaid developer
bonuses and seeking reformation of the agreements to require payment of easement
use fees. The parties to the lawsuit have agreed to dismiss the
remainder of the claims in order to make the summary judgments final and is
anticipated that the court will issue a final judgment in the next several
weeks. The plaintiffs have indicated they will appeal the final
judgment after it is issued.
Impact
of Sale of Sonterra on Matters 2 and 3
With
respect to matters 2 and 3 above, which name Sonterra as a defendant (the
“Sonterra Litigation”), in January 2008, the Company sold all of the issued and
outstanding stock of Sonterra to Bentley Energy Corporation (“Bentley”) pursuant
to a stock purchase agreement (the “Stock Purchase Agreement”). The
Stock Purchase Agreement obligates the Company to indemnify Bentley and Sonterra
and its successors for the Sonterra Litigation, as described in the Stock
Purchase Agreement. The Company’s indemnification obligations must
first be satisfied through a $75,000 holdback amount, but there is no financial
limitation on the amount of the Company’s liability under the Stock Purchase
Agreement or temporal limitation on the duration of the Company’s liability
under the Stock Purchase Agreement other than the statutory limitations
period. The Company does not anticipate that its liability under the
Stock Purchase Agreement will exceed the $75,000 holdback amount.
None.
PART
II
ITEM 5. MARKET
FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES
Market
For Common Equity And Related Stockholder Matters
Our
common stock trades Over-the-Counter (OTC) on the OTC Bulletin Board under the
symbol TIDE. The table below sets forth the high and low bid information for the
past two years. These quotations reflect inter-dealer prices, without retail
mark-up, mark-down or commission and may not represent actual transactions.
These quarterly trade and quote data provided by NASDAQ OTC Bulletin
Board.
|
Fiscal Quarter Ended:
|
|
High
|
|
|
Low
|
|
|
|
|
|
|
|
|
December
31, 2007
|
|
|
0.31 |
|
|
|
0.10 |
|
September
30, 2007
|
|
|
0.38 |
|
|
|
0.10 |
|
June
30, 2007
|
|
|
0.24 |
|
|
|
0.09 |
|
March
31, 2007
|
|
|
0.30 |
|
|
|
0.18 |
|
|
|
|
|
|
|
|
|
|
December
31, 2006
|
|
|
0.57 |
|
|
|
0.26 |
|
September
30, 2006
|
|
|
0.84 |
|
|
|
0.51 |
|
June
30, 2006
|
|
|
1.18 |
|
|
|
0.51 |
|
March
31, 2006
|
|
|
1.18 |
|
|
|
0.78 |
As of
April 1, 2007, we had an aggregate of 102 stockholders of record as reported by
our transfer agent, Signature Stock Transfer Co., Inc. Certain shares
are held in the "street" names of securities broker dealers and we estimate the
number of stockholders which may be represented by such securities broker dealer
accounts may exceed 5,000.
Dividends
and Dividend Policy
There are
no restrictions imposed on the Company that limit its ability to declare or pay
dividends on its common stock, except as limited by state corporation law.
During the year ended December 31, 2007, no cash or stock dividends were
declared or paid and none are expected to be paid in the foreseeable
future. We expect to continue to retain all earnings generated by our
future operations for the development and growth of our business. The Board of
Directors will determine whether or not to pay dividends in the future in light
of our earnings, financial condition, capital requirements and other
factors.
Recent
Sales of Unregistered Securities & Equity Repurchases
None.
Not
Applicable.
Business
Overview
Our
active business segments are primarily focused on development and operation of
transportation and storage infrastructure for natural gas in South Texas and the
Northern Mexican states of Tamaulipas and Nuevo Leon and the receipt and
regasification of liquefied natural gas in the offshore waters of Southern
California.
In 2007,
we derived most of our revenue from transportation fees from delivery of natural
gas to Conagas, the local distribution company in Piedras Negras, Coahuila,
through the pipeline owned by Reef Ventures, LP and the sale of propane gas to
residential customers through the assets owned by Sonterra. Sonterra also
performed construction services for third party utility companies. We also
billed consulting services to Frontera in connection with the Burgos Hub
project
In 2007,
the Company focused its efforts on debt and risk reduction and disposition of
underperforming and non-core assets. Progress towards these objectives was
realized through minimization of overhead cash burn rate, through asset
dispositions and through formation of a joint venture to shift the costs of
project development to a partner.
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 business unit. In March 2008, we sold our pipeline system owned by
Reef Ventures, LP to 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”).
In
September 2007, we disposed of the pipeline assets and natural gas properties of
another underperforming business segment, Tidelands Exploration &
Production, Inc. as part of a settlement agreement with Michael and Royis Ward
and their controlled entities. The $280,000 of proceeds from that settlement and
the extinguishment of further liabilities of the Company were used for general
working capital purposes. These assets produced revenues that were insignificant
when compared to the associated liabilities of this business
segment.
Also
during 2007, we attempted to negotiate a restructuring of the existing
convertible debenture indebtedness 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 Energy
Corporation, our propane distribution business segment for $3,000,000 and
utilized the proceeds from that sale to retire the convertible debentures and
repurchase certain outstanding warrants.
In
September 2007, we entered into a series of agreements with Cheniere Energy,
Inc. which resulted in the transfer of 80% of our interest in the Burgos Hub
project to Cheniere in exchange for an up front payment of $1,000,000, the
payment of a consulting fee to the Company for 24 months, and the potential for
further payments and royalties to the Company in the event that Cheniere makes
final investment decision with respect to various phases of the Burgos Hub
project and capacity reservation agreements are
executed. Furthermore, the agreements with Cheniere provide for the
Company’s responsibility of funding 20% of construction expenditures of the
various phases of the Burgos Hub project up to the point of final investment
decision through additional capital contributions to Frontera. Should
the Company not have sufficient funds, it may make such additional capital
contributions to fund construction expenses by borrowing such funds from
Cheniere on the terms set forth in Item I above. Management believes
that the assumption of development stage costs and responsibility by Cheniere is
a meaningful future contribution to the reduction of risk and that the upfront
payment and future potential payments called for in the agreements are
advantageous to the Company in debt reduction and eventual cost recovery of the
Company’s investment in the Burgos Hub project. The Company will not
receive and revenues or cash flow from Frontera for the foreseeable future, if
at all, and it will be responsible for funding certain expenses.
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.
Results
of Operations
YEAR ENDED DECEMBER 31, 2007
COMPARED WITH YEAR ENDED DECEMBER 31, 2006
REVENUES:
As of the date of March 31, 2008, the Company has discontinued all revenue
generating business segments. Accordingly, its Statement of Consolidated
Operations for the years ended December 31, 2007 and 2006 reflect no revenues
from continuing operations.
TOTAL
COSTS AND EXPENSES: Total costs and expenses from continuing operations
increased from $8,131,861 for the twelve months ended December 31, 2006 to
$8,200,707 for the twelve months ended December 31, 2007, an increase of
$68,846. Decreases in selling, general and administrative costs and the absence
of any reserve for litigation were offset by the increase in stock based
compensation to related parties during the twelve months ended December 31,
2007.
SELLING,
GENERAL AND ADMINISTRATIVE – RELATED PARTIES: Selling, General and
Administrative – Related Parties increased from $0 for the twelve
months ended December 31, 2006 to $3,638,000 for the twelve months ended
December 31, 2007, an increase of $3.638,000. The entire amount of this increase
was attributable to the cost of stock option grants to
directors.
SELLING,
GENERAL AND ADMINISTRATIVE EXPENSES: Selling, general and administrative
Expenses decreased from $5,856,101 for the twelve months ended December 31, 2006
to $4,537,635 for the twelve months ended December 31, 2007, a decrease of
$1,318,466. Reductions in payroll and other administrative costs accounted for
most of the decrease.
RESERVE
FOR LITIGATION: No reserve for litigation was recorded for the twelve months
ended December 31, 2007 which resulted in a decrease in cost for litigation
reserves of $2,250,000 as compared to the twelve months ended December 31,
2006.
OTHER
INCOME (EXPENSES): Other income (Expenses) decreased from ($3,306,221) for the
twelve months ended December 31, 2006 to ($901,410) for the twelve months ended
December 31, 2007, a decrease in expense of $2,404,811. The majority of this
decrease in other expenses was the result of a decrease in interest expense
which decreased from $3,404,149 for the twelve months ended December 31, 2006 to
$1,064,510 for the twelve months ended December 31, 2007. The decrease of
$2,339,639 was due to a reduction in interest expense payable with respect to
the convertible debentures issued in 2006.
NET LOSS
FROM CONTINUING OPERATIONS: Net loss from continuing operations decreased by
$2,335,965 for the twelve months ended December 31, 2007 as compared with the
twelve months ended December 31, 2006. The principal source of reduced loss was
a decrease in interest expense for the twelve months ended December 31, 2007 as
compared to the twelve months ended December 31, 2006.
NET LOSS
FROM DISCONTINUED OPERATIONS: Net loss from discontinued operations
increased by $2,333,373 for the twelve months ended December 31, 2007 as
compared with the twelve months ended December 31, 2006. The principal source of
increased loss was an impairment loss of $2, 605,601 with respect to the
carrying value of the assets of Reef Ventures, LP which were subsequently sold
on March 25, 2008.
DIRECT
CAPITAL EXPENSES: Direct capital expenditures during the twelve
months ended December 31, 2007, totaled $1,987,338. The capital expenditures
were composed primarily of increased pre-construction costs regarding potential
international pipeline crossings and storage facilities in Mexico,
pre-construction costs regarding an offshore LNG terminal in Southern
California, and additional equipment for the operation of the Sonterra Energy
Corporation propane systems. Total debt decreased from $13,034,036 at December
31, 2006, to $12,512,248 at December 31, 2007. The decrease in total debt is due
primarily to the receipt of funds from the partnership transactions with
Cheniere Energy as reported on Form 8K dated September 28, 2007. Net loss from
continuing operations for the twelve months ended December 31, 2007, was
($9,102,117) a decrease in net loss of 20.4% from the net loss from continuing
operations of ($11,438,082) for the twelve months ended December 31, 2006. Basic
and diluted net loss from continuing operations per common share decreased to
($0.09) for the twelve months ended December 31, 2007, as compared to ($0.14)
for the twelve months ended December 31, 2006. Net loss from discontinued
operations for the twelve months ended December 31, 2007, was ($2,732,216) an
increase in net loss from discontinued operations of 585% from the net loss from
discontinued operations of ($398,843) for the twelve months ended December 31,
2006. Basic and diluted net loss from discontinued operations per common share
increased to ($0.03) for the twelve months ended December 31, 2007, as compared
to ($0.01) for the twelve months ended December 31, 2006. The net loss per share
calculation for both continuing and discontinued operations for the twelve
months ended December 31, 2006, included an increase in actual and equivalent
shares outstanding.
Liquidity
and Capital Resources
The
Company is not currently generating any significant revenues from continuing
operations 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 significant 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
December 31, 2007, we had current assets of $924,722, current liabilities of
$12,512,248 and working capital deficit of $11,587,526. After
giving effect to the Sonterra transaction in January 2008 and the WTG
transaction in March 2008, the Company has approximately $1,850,000 of current
notes payable, accounts payable and accrued expenses that require payment or
other satisfaction during 2008. We will need to raise capital or
issue shares of our common stock to discharge these
obligations. Additionally, we believe that we will require
approximately $150,000 of working capital per month which requires that we
obtain approximately $1,350,000 of capital to meet working capital needs for
2008. We do not have any credit facilities or commitments for equity
investments in place. 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 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 sale of assets or otherwise
curtailing operations.
Contractual
Commitments
A tabular
disclosure of our contractual obligations at December 31, 2007, is as
follows:
| |
|
Payments
due by period
|
| |
|
|
1
year or less
|
|
|
|
2
– 3 Years
|
|
|
|
4
– 5 Years
|
|
|
|
More
than 5 Years
|
|
Credit
Facilities
|
|
|
7,533,309 |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
Operating
Leases
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
Employment
and consulting contracts (1)
|
|
|
3,512,500 |
|
|
|
7,087,500 |
|
|
|
6,525,000 |
|
|
|
-- |
|
Total
|
|
|
11,045,809 |
|
|
|
7,087,500 |
|
|
|
6,525,000 |
|
|
|
-- |
(1) Does
not include perquisites.
Off
Balance-Sheet Arrangements
As of
December 31, 2007 and 2006, the Company did not have any significant off
balance-sheet arrangements except for a liability for a Suite License Agreement
with the San Antonio Spurs, LLC, which was assumed by the Company’s former
President.
New
Accounting Standards and Recently Issued Accounting Pronouncements
In
December 2007, the Financial Accounting Standards Board (“FASB”) issued a
revision to SFAS No. 141 “Business Combinations”
(“SFAS No. 141(R)”). The revision broadens the definition of a
business combination to include all transactions or other events in which
control of one or more businesses is obtained. Further, the statement
establishes principles and requirements for how an acquirer recognizes assets
acquired, liabilities assumed and any non-controlling interests acquired.
SFAS No. 141(R) is effective for business combination transactions for
which the acquisition date is on or after the beginning of the first reporting
period beginning on or after December 15, 2008. Early adoption is
prohibited. The Company is currently evaluating the provisions of
SFAS No. 141(R) and assessing the impact it may have on the
Company.
Also in
December 2007, the FASB issued SFAS No. 160 “Non-controlling Interests
in Consolidated Financial Statements”
(“SFAS No. 160”). This statement amends Accounting Research
Bulletin No. 51, “Consolidated Financial Statements.”
SFAS No. 160 establishes accounting and reporting standards for the
non-controlling interests in a subsidiary and for the deconsolidation of a
subsidiary. It clarifies that a non-controlling interest in a subsidiary is an
ownership interest in the consolidated entity that should be reported as equity
in the Consolidated Financial Statements. SFAS No. 160 is effective
for fiscal years, and interim periods within those fiscal years, beginning on or
after December 15, 2008. Early adoption is prohibited. The Company is
currently evaluating the provisions of SFAS No. 160 and assessing the
impact it may have on the Company.
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option
for Financial Assets and Financial Liabilities” (“SFAS No. 159”), which permits
entities to measure various financial instruments and certain other items at
fair value. SFAS No. 159 will be effective for the Company in the
first quarter of 2008. At the present time, the Company does not expect to apply
the provisions of SFAS No. 159.
In
September 2006, the FASB issued SFAS No. 157 “Fair Value Measurements”
(“SFAS No. 157”). SFAS No. 157 defines fair value,
establishes a framework for measuring fair value, and expands disclosures about
fair value measurements. The statement does not require any new fair value
measurements for Apache. This statement is effective for financial statements
issued for fiscal years beginning after November 15, 2007. The adoption of
SFAS No. 157 is not expected to materially impact the Company’s
consolidated financial statements; however, it could result in additional
disclosures related to the use of fair values in the financial
statements.
In July
2006, the FASB issued FASB Interpretation No. 48 “Accounting for
Uncertainty in Income Taxes” (“FIN 48”). FIN 48 clarifies
the accounting for income taxes, by prescribing a minimum recognition threshold
a tax position is required to meet before being recognized in the financial
statements. The interpretation also provides guidance on derecognizing,
measurement, classification, interest and penalties, accounting in interim
periods, disclosure and transition. The adoption of FIN 48 did not have a
material impact to the Company’s financial statements.
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 December 31, 2007, we had
cash of $5,794.
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 Impact International debt obligation is generally
determined based on the prime interest rate plus two percent and may be subject
to market fluctuation as the prime rate changes.
Our
Financial Statements, the accompanying Notes to the Financial Statements and the
Report of Independent Registered Public Accounting Firm are filed as part of
this report beginning on the pages immediately following the signature pages of
this Report.
ITEM 9. CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTING AND FINANCIAL
DISCLOSURE
Baum
& Company, P.A. (“Baum”) served as the Company’s independent auditor until
June 2007, when we terminated our relationship with Baum and engaged RBSM, LLP
(“RBSM”) to serve as our independent auditor. In January 2008, we
replaced RBSM with Malone & Bailey, PC (“Malone & Bailey”) who currently
serves as our independent auditor.
The
reports of Baum dated April 13, 2007 and April 14, 2006, on our condensed
consolidated financial statements for the years ended December 31, 2006 and
December 31, 2005, did not contain an adverse opinion or disclaimer of opinion,
or qualification or modification as to uncertainty, audit scope, or accounting
principles for the years ended December 31, 2006 and December 31,
2005. However, the report for the year ended December 31, 2006
contained an explanatory paragraph disclosing the uncertainty regarding the
ability of the Company to continue as a going concern. During the two
fiscal years ended December 31, 2006 and 2005, and through the subsequent
interim period up to the time of its replacement, there were no disagreements
with Baum on any matters of accounting principles or practices, financial
statement disclosure, or auditing scope and procedures, which, if not resolved
to their satisfaction, would have caused them to make reference to the matter in
their report.
RBSM did
not issue any reports on the Company’s consolidated financial statements during
the most recent two fiscal years and through the subsequent interim
period up to the time of its replacement. During RBSM’s period of
engagement, there were no disagreements with the Company on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedure, which disagreement(s), if not resolved to the satisfaction
of RBSM, would have caused it to make reference to the subject matter of the
disagreement(s) in connection with its reports.
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 year ended December 31, 2007, 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.
Changes
in Internal Controls over Financial Reporting
During
the year ended December 31, 2007, 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.
Management’s
Annual Report on Internal Control Over Financial Reporting
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting, as such term is defined in
Rules 13a-15(f) and 15d-15(f) of the Exchange Act. Our internal control
system was designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes, in accordance with generally accepted accounting principles. Because
of inherent limitations, a system of internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate due to change in conditions, or that the degree of compliance with
the policies or procedures may deteriorate.
Our
management conducted an evaluation of the effectiveness of our internal control
over financial reporting. Based on its evaluation, our management
concluded that there is a material weakness in our internal control over
financial reporting. 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
annual 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.
Evaluation
Of Disclosure Controls And Procedures
The
Company maintains disclosure controls and procedures (as defined in Rule
13a-15(e) and Rule 15d-15(e) under the Securities Exchange Act of 1934, as
amended) that are designed to ensure that information required to be disclosed
in our periodic reports filed under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the SEC's rules and
forms, and that such information is accumulated and communicated to our
management, including our principal executive/financial officer, to allow timely
decisions regarding required disclosure.
None.
PART
III
|
Name
|
|
Age
|
|
Position
|
|
Date
became director or officer
|
|
James
B. Smith
|
|
54
|
|
Director,
President, CFO
|
|
August
16, 2003
|
|
Robert
Dowies
|
|
57
|
|
V.P.
|
|
October
18, 2004
|
|
Carl
Hessel
|
|
44
|
|
Director
|
|
January
28, 2004
|
|
Ahmed
Karim
|
|
35
|
|
Director
and Secretary
|
|
October
21, 1998
|
JAMES B.
SMITH: In December 2006, Mr. Smith was appointed Chief Executive Officer and
President in addition to his role as Chief Financial Officer. Mr. Smith first
joined Tidelands in August 2003, as a Senior Vice President and Chief Financial
Officer and joined our board of directors in June 2005. Mr. Smith
received a Bachelor of Science degree from Texas A&M University
and a Master of Professional Accounting degree from the McCombs School of
Business at the University of Texas at Austin. His professional experience
includes public accounting practice with Ernst & Young where he was a Tax
Manager serving publicly traded and private energy clients. He is licensed as a
Certified Public Accountant and Real Estate Broker in Texas and Colorado. From
1992 through 2003, Mr. Smith operated his own consulting and tax practice for
energy related clients. From 1996 through 2003, he directed the financial
affairs and tax planning for several closely held corporations engaged in land
development in Colorado. During this period, Mr. Smith also participated as a
partner, shareholder and financial officer for several closely held entities
engaged in natural gas exploration and production activities including the
operation of a large natural gas gathering system.
ROBERT W.
DOWIES: In October 2004, Robert W. Dowies was appointed to serve as our Vice
President of Gas Markets and Supply. Mr. Dowies has over 30 years
experience in energy marketing, ten years as the owner of a natural gas trading
company and 20 years with a public utility. From 1998 to October
2004, Mr. Dowies worked for Trebor Energy Resources, Inc. in Houston, Texas. Mr.
Dowies’ principal responsibilities were the development of financial alliances
with various energy merchants and producers providing a $50 million dollar
credit support for gas marketing activities, financial trading accounts,
pipeline transportation agreements, storage strategies and capital projects. Mr.
Dowies developed and implemented marketing strategies and designed and
coordinated the construction and implementation of a natural gas gathering
system.
CARL
HESSEL: In January 2004, Mr. Hessel joined our board of directors. Mr. Hessel
founded Margaux Investment Management Group, S.A. which is located in Geneva,
Switzerland in 2001 and continues to operate this investment
fund. Prior to 2001, Mr. Hessel served as Vice President of Merrill
Lynch where he was responsible for creating global high net worth management
platform. Mr. Hessel began his career at Goldman Sachs and helped build the
Scandinavian ultra-high net worth market. Mr. Hessel received his
M.B.A. from Wharton Business School and a degree in Finance and
Management from the University of Pennsylvania. Mr. Hessel was
awarded the Marcus Wallenberg Foundation's Scholarship.
AHMED
KARIM: Mr. Karim has served as a director and Secretary since
1998. Mr. Karim is a graduate of Simon Fraser University
and he holds a degree in Business Administration, specializing in marketing and
international business. Mr. Karim has been involved in private equity
investments for over five years, and since 1995, his business experience has
included work with Quest Investments Group and Interworld Trade and Finance
where his responsibilities included marketing, finance and investor
relations.
Audit
Committee and Financial Expert
The
Company has no audit committee financial expert, as defined under Section
228.401, serving on its audit committee because it has no audit committee and is
not required to have an audit committee because its common stock is not a listed
security as defined in Section 240.10A-3. Accordingly, all material decisions
affecting the Company's audited financial statements, periodic disclosure with
the SEC and its relationship with its auditors are addressed by the entire Board
of Directors.
Compliance
with Section 16(a) of the Securities Exchange Act of 1934
Section
16(a) of the Securities Exchange Act of 1934 requires the Company's directors
and executive officers, and persons who own more than 10% of the Company's
Common Stock, to file with the Securities and Exchange Commission initial
reports of beneficial ownership and reports of changes in beneficial ownership
of Common Stock of the Company. Officers, directors and greater than 10%
shareholders are required by the Securities and Exchange Commission to furnish
the Company with copies of all section 16(a) reports they file. Based solely on
copies of such forms furnished as provided above, or written representations
that no Forms 5 were required, the Company believes that during the fiscal year
ended December 31, 2006, the Company’s officers, directors and greater than ten
percent owners timely filed all reports they were required to file under Section
16(a), except as follows: a Form 4 relating to four
transactions was filed late by Mr. Smith on February 14, 2006; a Form 4 relating
to five transactions was filed late by Mr. Smith on March 27, 2006; a Form 4
relating to two transactions was filed late by Mr. Smith on October 12, 2006;
Mr. Smith failed to file one report relating to four transactions, but did
report the transactions in his year-end report on Form 5, which was timely
filed; a Form 4 relating to one transaction was filed late by Mr. Dowies on June
8, 2006 (as amended on June 9, 2006); and Mr. Karim failed to file one report
relating to one transaction, but did report the transaction in his year-end
report on Form 5, which was timely filed.
Compensation
Discussion and Analysis
Compensation Philosophy and
Objectives. Our Board of Directors has the responsibility for
establishing and reviewing the Company’s compensation philosophy and
objectives. The overall objectives of our compensation program for our
executive officers are to attract and retain highly qualified executives
committed to our success and our mission, to motivate our executives to build
and grow our business, to reward loyalty and to incentivize our officers during
both periods of growth, as well as uncertainty, and to align the interests of
our executives with the interests of our stockholders. Ultimately, the goal of
the compensation committee is to provide our executive officers with appropriate
annual and longer-term compensation, both equity and non-equity based, to
incentivize these officers and align their interests with those of our
shareholders. The Board of Directors has not established a formula for
allocating between cash and non-cash compensation. We refer to our
President and Chief Executive Officer, our Chief Financial Officer and our other
officers in the Executive Compensation Table as our named executive
officers.
Role of Executive Officers and
Management. The President and Chief Executive Officer provide
recommendations to the Board of Directors on matters of compensation philosophy,
plan design and the general guidelines for executive officer compensation.
These recommendations are then considered by the Board of Directors. The
President and Chief Executive Officer is also a member of the Board of Directors
and therefore generally attends meetings related to compensation but abstains
from voting with respect his own compensation. In addition, the other members of
the Board of Directors may discuss compensation of the President and Chief
Executive Officer in sessions where he is not present.
Elements of Executive
Compensation. The compensation we provide to our executive officers
primarily consists of the following:
|
·
|
annual cash bonuses
which are discretionary and/or based on the achievement of annual
performance objectives,
|
|
·
|
perquisites
and other personal benefits, and
|
|
·
|
401(k)
with certain matching contributions by the
Company.
|
We do not
offer pension or any other retirement plans for executives. We do not currently
provide any deferred compensation plan for executives.
The Board
of Directors has not hired any compensation consultants to assess the current
salary levels or other compensation elements for our executive officers. In the
future, we anticipate that the Board of Directors may review and consider
summaries of competitive salary levels prepared by management based on various
survey data.
Base Salary. The Company
provides named executive officers and other employees with base salary to
compensate them for services rendered during the fiscal year. Base salary
ranges for named executive officers are determined for each executive based on
his or her position, leadership, years of experience and level of
responsibility. Merit increases normally take effect in January of each
year.
During
its review of base salaries for executives, the Board of Directors primarily
considers:
|
·
|
internal review of
the executive’s compensation, both individually and relative to other
officers;
|
|
·
|
individual
performance of the executive;
|
|
·
|
qualifications and
experience of the officer;
|
|
·
|
the complexity of our
operations;
|
|
·
|
our
ability to compete with other companies, including larger, more
established and better capitalized companies, for the recruitment and
retention of skilled management;
and
|
|
·
|
the financial
condition and results of operations of the
Company.
|
Salary
levels are typically considered annually as part of the Company’s performance
review process as well as upon a promotion or other change in job
responsibility.
Incentive Cash Bonuses.
In addition to base salary, historically, the Company has maintained a practice
of paying incentive cash bonuses tied to an executive's performance. These
bonuses are discretionary and based upon individual performance as well as
Company performance. In 2007, incentive cash bonuses were not awarded to
the named executive officers.
Equity Awards. The
Company believes that equity awards are an important component of executive
compensation and serve to better align the interests of executives with those of
our stockholders, eliciting maximum effort and dedication from our executive
officers. The medium and long-term incentive compensation portion of the
Company’s compensation program consists primarily of grants of stock awards, as
well as grants of stock options under the Company’s stock grant and option
plans. These grants and awards are designed to provide incentives for
longer-term positive performance by the executive and other senior officers and
to align their financial interests with those of the Company’s stockholders by
providing the opportunity to participate in any appreciation in the stock price
of the Company’s common stock that may occur after the date of grant of stock or
options. In addition, the Company believes that such equity compensation
enhances our ability to attract and retain highly qualified executives and other
persons and to motivate them to improve our business results and earnings by
providing them equity holdings in the Company.
Generally
all of the stock awards that are granted to our executive officers have been
fully vested at the time of grant. Stock option grants may be fully vested or
subject to vesting over time and/or other conditions. Generally, stock options
are granted with an exercise price equal to the fair market value of the
Company’s common stock on the date of grant; however, under our stock greens and
option plans, the Board of Directors retains discretion to grant options with
exercise prices either above or below the then-current fair market
value.
In the
past, our equity incentive compensation has primarily consisted of stock awards,
with stock options being granted at a lesser rate. We emphasized stock
awards primarily as a mechanism to conserve cash, while providing recipients
with both short-term liquidity, as well as long-term incentives to maximize
shareholder value and the market value of our common stock. Our Board of
Directors does not have any preset times during which it issues equity
compensation, but instead considers recommendations made by senior management
from time to time throughout the year, as well as performing annual reviews with
respect to compensation and equity compensation.
Profit and Revenue
Sharing. The Company does not compensate its executive
officers through profit and revenue sharing. The Company believes
that the long-term viability and success of the Company and maximum shareholder
value are dependent upon the financing and development of various energy
infrastructure projects. These projects may require a longer-term focus and may
not result in increased sales or revenue in the short term. Therefore, the
Company believes that our executive officers will have their interests more
closely aligned with that of our shareholders, if a larger portion of their
compensation is equity-based rather than revenue sharing based.
Retirement and Other Benefits.
The
Company offers a 401(k) plan with certain matching contributions by the Company
to all of our employees including the named executive officers.
We also
offer various fringe benefits to all of our employees, including our named
executive officers, on a non-discriminatory basis, including group policies for
medical insurance. Mr. Smith, our Chief Executive Officer and Chief
Financial Officer received an automobile allowance of $12,000 per year.
The compensation committee believes such benefits are appropriate and assist Mr.
Smith in fulfilling his employment obligations.
Stock Ownership Guidelines.
The Company has not established any formal policies or guidelines
addressing expected levels of stock ownership by the named executive officers or
for other executive officers. However, due to purchases, the exercise of
options, the vesting of restricted stock awards and the allocation of shares
under the Company’s ESOP, our named executive officers, as well as our directors
and other employees, have a substantial equity interest in the
Company.
Tax Deductibility of Pay.
Section 162(m) of the Internal Revenue Code of 1986, as amended (the
“Code”), places a limit of $1.0 million on the amount of compensation that the
Company may deduct in any one year with respect to each of its five most highly
paid executive officers. There is an exception to the $1.0 million limitation
for performance-based compensation meeting certain requirements. Stock options
are performance-based compensation meeting those requirements and, as such, are
fully deductible. Service-based only stock awards are not considered
performance-based compensation under Section 162(m) of the Code.
Other Components of
Compensation. As described below under “Employment and
Consulting Agreements,” the Company’s employment and consulting agreements
provide for severance benefits in the event the executives or consultants are
terminated without cause.
Employment
and Consulting Agreements
James B.
Smith. In March 2007, we entered into an employment agreement
with Mr. Smith in his capacities as Chief Executive Officer and President. Mr.
Smith’s employment agreement has a term of five years, with an annual cash
salary of $300,000. In addition, Mr. Smith is entitled to an annual stock grant
with a fair market value of $1 million. Therefore, the number of shares granted
to Mr. Smith each year will vary based on our stock price. Mr. Smith is entitled
to all employee benefits generally provided by the Company to employees. He is
also entitled to an annual automobile allowance of $12,000 and supplemental
disability insurance and a life insurance policy payable to his heirs in the
amount of $2 million. Mr. Smith continues to serve as Chief Financial Officer,
but does not receive any additional compensation specifically for such duties.
If the Company terminates Mr. Smith’s employment without cause, as defined in
the employment agreement, Mr. Smith is entitled to continue to receive payment
of his cash and annual equity compensation for the remainder of the five year
term.
Robert W.
Dowies. Mr. Dowies entered into a three-year employment
agreement with the Company in September 2007. His annual salary is
$150,000. He is also entitled to receive the following equity
compensation: (i) during the first year of the agreement, he is
entitled to receive shares of the Company’s common stock in an amount valued at
$50,000; (ii) during the second year of the agreement, he is entitled to receive
shares of the Company’s common stock in an amount valued at $100,000; (iii)
during the third year of the agreement, he is entitled to receive shares of the
Company’s common stock in an amount valued at $150,000. If the
Company terminates Mr. Dowies’ employment agreement without cause, as defined in
therein, Mr. Dowies is entitled to receive (i) his base salary on a semi-monthly
basis for the remainder of the three-year term and (ii) the remaining unissued
grant of equity compensation to which he is entitled pursuant to the
agreement.
Ahmed
Karim. Mr. Karim entered into a five-year consulting agreement
with the Company in January 2008 whereby he agreed to provide the Company with
various business development services. Mr. Karim’s annual salary is
$1,000,000, which may be paid through the issuance of shares of the Company’s
common stock. If the Company terminates Mr. Karim’s consulting
agreement without cause, as defined in therein, Mr. Karim is entitled to
continue to receive all amounts payable for the remainder of the five year
term.
Carl
Hessel. Mr. Hessel entered into a five-year consulting
agreement with the Company in January 2008 whereby he agreed to provide the
Company with various business development services. Mr. Hessel’s
annual salary is $1,000,000, which may be paid through the issuance of shares of
the Company’s common stock. If the Company terminates Mr. Hessel’s
consulting agreement without cause, as defined in therein, Mr. Hessel is
entitled to continue to receive all amounts payable for the remainder of the
five year term.
Change
of control agreements
We do not
have any agreements providing for compensation or benefits to our employees in
the event of a change of control of the Company.
Summary
Compensation Table
The
following table contains compensation data for our named executive officers for
the fiscal year ended December 31, 2007.
Summary
Compensation Table
|
Name
and
Principal
Position
|
|
Year
|
|
Salary
And
Consulting
Payments
($)
|
|
|
Bonus
($)
|
|
|
Stock
Awards
($)
|
|
|
All
Other Compensation
($) (4)
|
|
|
Total
($)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
James
B Smith
|
|
2007
|
|
|
276,225 |
|
|
|
-- |
|
|
|
-- |
|
|
|
16,800 |
|
|
|
293,025 |
|
President, CEO and
CFO
|
|
2006
|
|
|
185,880 |
|
|
|
7,745 |
|
|
|
324,500 |
(2) |
|
|
14,220 |
|
|
|
532,345 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Julio
Bastarrachea
|
|
2007
|
|
|
59,481 |
|
|
|
-- |
|
|
|
86,250 |
(3) |
|
|
-- |
|
|
|
145,731 |
|
V.P.
Business Development
|
|
2006
|
|
|
61,909 |
|
|
|
2,579 |
|
|
|
142,500 |
(3) |
|
|
1,158 |
|
|
|
208,146 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Robert
W. Dowies
|
|
2007
|
|
|
112,500 |
|
|
|
-- |
|
|
|
106,139 |
(2) |
|
|
-- |
|
|
|
218,639 |
|
V.P.
Marketing
|
|
2006
|
|
|
99,999 |
|
|
|
4,167 |
|
|
|
63,400 |
(3) |
|
|
1,742 |
|
|
|
169,308 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ahmed
Karim
|
|
2007
|
|
|
54,000 |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
54,000 |
|
Secretary
|
|
2006
|
|
|
36,000 |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
36,000 |
______________
|
(2)
|
Includes
a stock award of 150,000 shares on September 25, 2006, with a value of
$87,000, for services rendered in his capacity as member of the Board of
Directors.
|
|
(3)
|
Fair
market value of common stock
grants.
|
|
(4)
|
Includes
(i) $12,000 per year automobile allowance and life insurance premiums for
Mr. Smith and (ii) matching 401(k) contributions for each executive
officer.
|
Grants
of Plan-Based Awards
The
following table contains data relating to the grants of plan-based awards for
our named executive officers for the fiscal year ended December 31,
2007.
| |
|
|
|
Estimated
Future Payouts Under Equity Incentive Plan Awards
|
|
|
|
|
|
|
|
|
|
|
|
|
Name
|
|
Grant
Date
|
|
Threshold
(#)
|
|
Target
(#)
|
|
Maximum
(#)
|
|
Stock
Awards: Number of Shares of Stock
|
|
|
Option
Awards; Number of Securities Underlying Options
(#) (1)
|
|
|
Exercise
or Base Price of Option Awards ($/sh)
|
|
|
Grant
Date Fair Value of Stock and Option Awards
($)
(2)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
James
B. Smith
|
|
2/28/2007
|
|
|
|
|
|
|
|
|
|
|
|
5,000,000 |
|
|
|
0.21 |
|
|
|
889,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Julio
Bastarrachea
|
|
6/6/2007
|
|
|
|
|
|
|
|
|
250,000 |
|
|
|
|
|
|
|
|
|
|
|
37,500 |
|
|
|
9/21/2007
|
|
|
|
|
|
|
|
|
250,000 |
|
|
|
|
|
|
|
|
|
|
|
48,750 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Robert
W. Dowies
|
|
4/18/2007
|
|
|
|
|
|
|
|
|
50,000 |
|
|
|
|
|
|
|
|
|
|
|
8,000 |
|
|
|
6/6/2007
|
|
|
|
|
|
|
|
|
250,000 |
|
|
|
|
|
|
|
|
|
|
|
37,500 |
|
|
|
9/25/2007
|
|
|
|
|
|
|
|
|
277,778 |
|
|
|
|
|
|
|
|
|
|
|
51,389 |
|
|
|
9/25/2007
|
|
|
|
|
|
|
|
|
50,000 |
|
|
|
|
|
|
|
|
|
|
|
9,250 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ahmed
Karim
|
|
2/13/2007
|
|
|
|
|
|
|
|
|
500,000 |
|
|
|
|
|
|
|
|
|
|
|
115,000 |
|
|
|
2/28/2007
|
|
|
|
|
|
|
|
|
|
|
|
|
5,000,000 |
|
|
|
0.21 |
|
|
|
889,000 |
|
|
|
3/1/2007
|
|
|
|
|
|
|
|
|
642,858 |
|
|
|
|
|
|
|
|
|
|
|
135,000 |
|
|
|
3/4/2007
|
|
|
|
|
|
|
|
|
1,500,000 |
|
|
|
|
|
|
|
|
|
|
|
300,000 |
|
|
|
5/23/2007
|
|
|
|
|
|
|
|
|
|
|
|
|
5,000,000 |
|
|
|
0.12 |
|
|
|
485,500 |
_______________
|
(1)
|
Stock
award granted as compensation for services as a member of the Board of
Directors.
|
|
(2)
|
This
column reflects the grant date fair value of stock awards under SFAS 123R.
With respect to stock awards, the value was calculated as the number of
shares multiplied by the average of the bid and ask of the
day.
|
Outstanding
Equity Awards at Fiscal Year End
The
following table contains data relating to the outstanding equity awards for our
named executive officers for the fiscal year ended December 31,
2007.
|
|
|
|
|
|
|
|
Name
|
|
Number
of
Securities
Underlying
Unexercised
Options
(#)
Exercisable
|
|
|
Number
of
Securities
Underlying
Unexercised
Options
(#)
Unexercisable
|
|
|
Equity
Incentive
Plan
Awards:
Number
of
Securities
Underlying
Unexercised
Unearned
Options
(#)
|
|
|
Option
Exercise
Price
($)
|
|
|
Option
Expiration
Date
|
|
|
Number
of
Shares
or Units of Stock That Have Not Vested
(#)
|
|
|
Market
Value of Shares or Units of Stock That Have Not Vested
($)
|
|
|
Equity
Incentive Plan Awards:
Number
of Unearned Shares, Units or Other Rights That Have Not
Vested
(#)
|
|
|
Equity
Incentive Plan Awards: Market of Payout Value of Unearned Shares, Units or
Other Rights That Have Not Vested
($)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
James
B. Smith
|
|
|
5,000,000 |
|
|
|
-- |
|
|
|
-- |
|
|
|
0.21 |
|
|
2/28/17
|
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
Julio
Bastarrachea
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
Robert
W. Dowies
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
Ahmed
Karim
|
|
|
10,000,000 |
|
|
|
-- |
|
|
|
-- |
|
|
|
|
(1) |
|
|
|
(1) |
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
__________________
|
(1)
|
5,000,000
of these shares are exercisable at $0.21 per share and expire on February
28, 2017, and 5,000,000 of these shares are exercisable at $0.12 per share
and expire on May 23, 2017.
|
Director
Compensation
|
Name
|
|
Fees
Earned or Paid in Cash ($)
|
|
|
Stock
Awards ($) (1)
|
|
|
Option
Awards ($)
|
|
|
All
Other Compensation ($)
|
|
|
Total
($)
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
James
B Smith
|
|
|
-- |
|
|
|
|
|
|
889,000 |
|
|
|
(2)
|
|
|
|
889,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ahmed
Karim
|
|
|
-- |
|
|
|
550,000 |
|
|
|
1,374,500 |
|
|
|
(2)
|
|
|
|
1,924,500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carl
Hessel
|
|
|
-- |
|
|
|
550,000 |
|
|
|
1,374,500 |
|
|
|
-- |
|
|
|
1,924,500 |
|
__________________
|
(1)
|
Each
director received a grant of our common stock shares throughout the year
as compensation for director fees and each award vested immediately upon
the grant. Accordingly, the grant date fair value of each of these awards,
calculated in accordance with Financial Accounting Standards Board
Statement of Financial Accounting Standards No. 123 Share Based Payment
(FAS 123(R)), is the same as the amount of compensation expense we
reflected in our financial statements with respect to each of these
awards. The grant date fair value of each of these awards is estimated
based on the fair market value of our common stock at the time of the
grant.
|
|
(2)
|
Messrs.
Smith and Karim received compensation as named executive
officers.
|
Committees
of the Board & Director Independence
Our Board
of Directors is currently composed of three directors, none of whom would
qualify as an independent director based on the definition of independent
director set forth in Rule 4200(a)(15) of the Nasdaq Marketplace
rules. Because our common stock is traded on the NASD OTC Electronic
Bulletin Board, which is not a securities exchange, we are not subject to
corporate governance rules that require that a board of directors be composed of
a majority of independent directors. The Board has not established
any committees and, accordingly, the Board serves as the audit, compensation,
and nomination committee.
Code
of Ethical Conduct
Our board
of directors adopted a Code of Ethical Conduct which applies to all our Company
directors, officers and employees, including our principal executive officer and
principal financial officer, principal accounting officer or comptroller, or
other persons performing similar functions.
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
As of
April 1, 2008, there were 178,739,345 shares of our common stock outstanding The
following table sets forth certain information with respect to beneficial
ownership of shares of the Company's common stock as of April 1, 2008 for
(i) each person who is known by the Company to own beneficially more than
five percent of the outstanding shares of common stock, (ii) each director
and named executive officers and (iii) all directors and executive officers
of the Company as a group. The information is the table is based on our records,
information filed with the Securities and Exchange Commission and information
provided to us. Except as otherwise indicated, we believe that the persons named
in this table have sole voting and investment power with respect to all
shares.
|
Name
and Address of Beneficial Owner
|
|
Number
of Shares of Common Stock Beneficially Owned
|
|
|
Percentage
Of
Class
|
|
| |
|
|
|
|
|
|
|
Beneficial Owners of more than
5%:
|
|
|
|
|
|
|
|
Impact
International, LLC (1)
|
|
|
48,703,160 |
|
|
|
27.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
Named Executive Officers and
Directors:
|
|
|
|
|
|
|
|
|
|
James
B. Smith (2)
|
|
|
12,703,762 |
|
|
|
7.1 |
% |
|
Ahmed
Karim (3)
|
|
|
18,940,498 |
|
|
|
10.6 |
% |
|
Carl
Hessel (4)
|
|
|
20,022,952 |
|
|
|
11.2 |
% |
|
Robert
W. Dowies (5)
|
|
|
867,778 |
|
|
|
* |
|
|
Julio
Bastarrachea (6)
|
|
|
650,000 |
|
|
|
* |
|
|
All
directors & executive officers as
a group (5 persons) (7)
|
|
|
53,184,990 |
|
|
|
29.8 |
% |
___________________________
* Less
than 1%
|
(1)
|
The
business address for Impact International LLC is 111 W. 5th
St. Ste.720, Tulsa, OK 74103.
|
|
(2)
|
Includes
options to purchase 5,000,000 shares of our common stock. The
business address for Mr. Smith is 1862 W. Bitters Rd., San Antonio,
TX 78248.
|
|
(3)
|
Includes
options to purchase 10,000,000 shares of our common stock. The
business address for Mr. Karim is 1463 Terrace Ave, Vancouver A1 V7R
1B5.
|
|
(4)
|
Includes
options to purchase 5,380,953 shares of our common stock. The business
address for Hessel is c/o Margaux Investment Management Group, S.A., 9 Rue
de Commerce, CH 1211 Geneva 11,
Switzerland.
|
|
(5)
|
The
business address for Mr. Dowies is 1862 W. Bitters Rd., San Antonio,
TX 78248.
|
|
(6)
|
Mr.
Bastarrachea passed away in December 2007 and these shares are now held by
his estate, the address of which is 3103 Eisenhauer L24, San Antonio,
Texas 78209.
|
|
(7)
|
Includes
options to purchase 20,380,593 shares of our common
stock.
|
Securities
Authorized for Issuance under Equity Compensation Plans
The
following table summarizes our equity compensation plan information as of
December 31, 2007.
Equity
Compensation Plan Information
|
Plan
Category
|
|
Number
of Securities to be issued upon exercise of outstanding options, warrants
and rights
|
|
|
Weighted-average
Exercise price of outstanding options, warrants and rights
|
|
|
Number
of Securities remaining available for future issuance under equity
compensation plans (excluding securities reflected in first
column)
|
|
| |
|
|
|
|
|
|
|
|
|
|
Equity
Compensation Plans approved by security holders
|
|
None
|
|
|
None
|
|
|
None
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
Compensation Plans not approved by security holders
|
|
|
5,000,000 |
(1) |
|
N.A.
(No options outstanding)
|
|
|
|
-0- |
|
|
|
|
|
35,000,000 |
(2) |
|
$ |
0.175 |
|
|
|
19,157,556 |
|
|
Total
|
|
|
40,000,000 |
|
|
$ |
0.175 |
|
|
|
19,157,556 |
|
_______________________
|
(1)
|
On
November 2, 2004, the Company adopted the 2004 Non-Qualified Stock Grant
and Option Plan. The Plan reserved 5,000,000 shares. As of
January 1, 2007, there were 3,351,122 shares available for grants which
were all utilized in 2007.
|
|
(2)
|
On
February 14, 2007, the Company adopted the 2007 Non-Qualified Stock Grant
and Option Plan. The Plan reserved 35,000,000 shares. The Plan is
administered by our Board of Directors. Directors, officers, employees,
consultants, attorneys, and others who provide services to our Company are
eligible participants. The purpose of this Plan is to provide
these persons with equity-based compensation and incentives to make
significant contributions to our long-term performance and growth by
aligning their economic interests more closely with those of our
shareholders, and to attract and retain personnel. In some instances,
awards under the Plan may also be used to conserve cash by paying all or a
portion of an individual’s and other service provider’s fees in
stock. At the end of December 31, 2007, shares of 19,157,556
remained available for future stock
grants.
|
ITEM 13. CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
Pursuant
to Mr. Smith’s employment agreement, he was issued 3,571,429 shares of the
Company’s common stock valued at $250,000 as of March 31,
2008. Pursuant to Mr. Karim’s consulting agreement, he was issued
3,571,429 shares of the Company’s common stock valued at $250,000 as of March
31, 2008. Pursuant to Mr. Hessel’s consulting agreement, he was
issued 3,571,429 shares of the Company’s common stock valued at $250,000 as of
March 31, 2008.
In March
2008, the Company entered into an agreement with WTG for the sale of all of the
issued and outstanding membership interests of Reef International, LLC and Reef
Marketing, LLC., 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 was $2,484,265
(the “Purchase Price”), and the execution by WTG of a Throughput Payment
Agreement (the “Throughput Payment Agreement”) with Impact. Prior to the
date of this transaction, Impact owed 8,812,980 shares of Company common
stock. The Company delivered $2,436,825 of the Purchase Price to
Impact, 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 $6,523,773.30. 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
of the Company’s common stock valued at $0.05 per share or a total of $1,994,509
to Impact upon the closing. The total consideration described above of
$5,307,505 liquidated the outstanding note balance in full. Upon closing,
Impact owns a total of 48,703,160 shares of Company common stock, which equates
to approximately 27.1% of our issued and outstanding common stock.
Policies
and Procedures for Related Party Transactions
The
Company conducts an appropriate review of all related party transactions that
are required to be disclosed pursuant to Regulation S-K, Item 404 for potential
conflict of interest situations on an ongoing basis and all such transactions
must be disclosed to and approved by the entire Board of Directors of the
Company.
The
Company paid or accrued the following fees for 2006 and $20,125 of the 2007 fees
to its accountant, Baum & Co., P.A. of Coral Springs,
Florida. The Company paid or accrued $111,824.50 of the 2007 fees to
RBSM, LLP, for interim review services and accrued $70,000 for
its principal accountant, Malone & Bailey, P.C., for the 2007
audit.
|
|
|
Year
End 12-31-07
|
|
|
Year
End 12-31-06
|
|
(1)
Audit Fees
|
|
$ |
201,950 |
|
|
$ |
114,350 |
|
(2)
Audit-related Fees
|
|
|
-0- |
|
|
|
53,625 |
|
(3)
Tax Fees
|
|
|
-0- |
|
|
|
-0- |
|
(4)
All other fees
|
|
|
-0- |
|
|
|
-0- |
|
Total
Fees
|
|
$ |
201,950 |
|
|
$ |
167,975 |
The
Company’s principal accountant, Malone & Bailey, P.C., did not engage any
other persons or firm other than the principal accountant’s full-time permanent
employees.
AUDIT
FEES. Audit fees consist of fees billed for professional services rendered for
the audit of the Company's consolidated financial statements and review of the
interim consolidated financial statements included in quarterly reports and
services that are normally provided by the Company's principal accountants in
connection with statutory and regulatory filings or engagements.
AUDIT-RELATED
FEES. Audit related fees consist of fees billed for assurance and related
services that are reasonably related to the performance of the audit or review
of the Company's consolidated financial statements and are not reported under
"Audit Fees."
TAX FEES.
Tax fees are fees billed for professional services for tax compliance, tax
advice and tax planning.
ALL OTHER
FEES. All other fees include fees for products and services other than the
services reported above. There were no management consulting services provided
in fiscal 2006 or 2005.
Policy on
Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services of
Independent Auditors
The
Company currently does not have a designated Audit Committee. However, as
defined in Sarbanes-Oxley Act of 2002, the entire Board of Directors is the
Company's de facto audit committee.
Accordingly,
the Company's Board of Directors' policy is to pre-approve all audit and
permissible non-audit services provided by the independent auditors. These
services may include audit services, audit-related services, tax services and
other services. Pre-approval is generally provided for up to one year and any
pre-approval is detailed as to the particular service or category of services
and is generally subject to a specific budget. The independent auditors and
management are required to periodically report to the Company's Board of
Directors regarding the extent of services provided by the independent auditors
in accordance with this pre-approval, and the fees for the services performed to
date. The Board of Directors may also pre-approve particular services on a
case-by-case basis.
PART
IV
(a)
Financial Statements and Schedules
REPORTS
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMS
CONSOLIDATED
BALANCE SHEETS
Years
Ended December 31, 2007 and 2006
CONSOLIDATED
STATEMENTS OF OPERATIONS
Years
Ended December 31, 2007 and 2006
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY
Years
Ended December 31, 2007 and 2006
CONSOLIDATED
STATEMENTS OF CASH FLOWS
Years
Ended December 31, 2007 and 2006
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
The
Consolidated Financial Statements, the Notes and the Report of Independent
Registered Public Accounting Firm listed above are filed as part of this Report
and are set forth on the pages immediately following the signature pages of this
Report.
(b)
Exhibit Listing
|
Exhibit
|
|
Description
|
|
Location
of Exhibit
|
|
2.0
|
|
Amendment
No. 2 to the Asset Purchase and Sale and between Sonterra Energy
Corporation and Oneok Propane Distribution Company.
|
|
Incorporated
by reference to Exhibit 10.1 8-K filed November 15,
2004
|
|
2.1
|
|
Amendment
No. 1 to the Asset Purchase and Sale and between Sonterra Energy
Corporation and Oneok Propane Distribution Company.
|
|
Incorporated
by reference to Exhibit 10.2 8-K filed November 15,
2004
|
|
2.3
|
|
Asset
Purchase and Sale Agreement by and between Sonterra Energy Corporation and
Oneok Propane Distribution Company.
|
|
Incorporated
by reference to Exhibit 10.3 8-K filed November 15,
2004
|
|
2.4
|
|
Purchase
and Sale Agreement for Reef Ventures, LP 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”) dated May 25,
2004 with Exhibits.
|
|
Incorporated
by reference Exhibit 10 to 8-K filed June 25, 2004
|
|
2.5
|
|
Purchase
and Sale Agreement for Reef Marketing, LLC and Reef International, LLC by
and between Tidelands Oil & Gas Corporation and Impact International,
LLC and Coahuila Pipeline, LLC dated April 16, 2003.
|
|
Incorporated
by reference to Exhibit 10.1 to 8-K filed on May 8,
2003
|
|
2.6
|
|
Agreement
of Limited Partnership of Reef Ventures, LP
|
|
Incorporated
by reference to Exhibit 10.2 to 8-K filed on May 8,
2003
|
|
3.0
|
|
Certificates
of Amendment to Articles of Incorporation
|
|
Incorporated
by reference to Exhibit 3.0 to 8-K filed on April 24,
2006
|
|
3.1
|
|
Restated
Articles of Incorporation of Tidelands Oil & Gas Corporation., a
Nevada corporation.
|
|
Incorporated
by reference to Exhibit 3.0 to SB-2 filed on December 17,
2004
|
|
3.2
|
|
Restated
Bylaws of Tidelands Oil & Gas Corporation.
|
|
Incorporated
by reference to Exhibit 3.1 to SB-2 filed on December 17,
2004
|
|
4.0
|
|
Form
of Original Issue Discount Convertible Debentures with Palisades Master
Fund, LP, JGB Capital, LP, Nite Capital, LP and RHP Master Fund,
Ltd
|
|
Incorporated
be reference to Exhibit 10.2 to 8-K filed on January 25,
2006
|
|
4.1
|
|
7%
Convertible Debenture Mercator Momentum Fund, LP
|
|
Incorporated
by reference to Exhibit 10.2 to 8-K filed on December 3,
2004
|
|
4.2
|
|
7%
Convertible Debenture Mercator Momentum Fund III, LP
|
|
Incorporated
by reference to Exhibit 10.3 to 8-K filed on December 3,
2004
|
|
4.3
|
|
7%
Convertible Debenture Monarch Pointe Fund, LP
|
|
Incorporated
by reference to Exhibit 10.4 to 8-K filed on December 3,
2004
|
|
10.1
|
|
Form
of Series “A” Common Stock Purchase Warrant Palisades Master Fund,
Crescent International, Ltd., Double U Master Fund, LP, JGB Capital, LP,
Nite Capital, LP and RHP Master Fund, Ltd.
|
|
Incorporated
by reference to Exhibit 10.4 to 8-K filed on January 25,
2006
|
|
10.2
|
|
Form
of Securities Purchase Agreement with Palisades Master Fund, Crescent
International, Ltd., Double U Master Fund, LP, JGB Capital, LP, Nite
Capital, LP and RHP Master Fund, Ltd.
|
|
Incorporated
by reference to Exhibit 10.2 to 8-K filed on January 25,
2006
|
|
10.3
|
|
Form
of Series “A” Common Stock Purchase Warrant Palisades Master Fund,
Crescent International, Ltd., Double U Master Fund, LP, JGB Capital, LP,
Nite Capital, LP and RHP Master Fund, Ltd.
|
|
Incorporated
by reference to Exhibit 10.4 to 8-K filed on January 25, 2006
|
|
10.4
|
|
Form
of Series “B” Common Stock Purchase Warrant Palisades Master Fund,
Crescent International, Ltd., Double U Master Fund, LP, JGB Capital, LP,
Nite Capital, LP and RHP Master Fund, Ltd.
|
|
Incorporated
by reference to Exhibit 10.5 to 8-K filed on January 25,
2006
|
|
10.5
|
|
Form
of Registration Rights Agreement with Palisades Master Fund, Crescent
International, Ltd., Double U Master, LP, JGB Capital, LP, Nite Capital,
LP and RHP Master Ltd.
|
|
Incorporated
by reference to Exhibit 10.2 to 8-K filed on January 25,
2006
|
|
10.6
|
|
Employment
Agreement with James B. Smith as CEO and President *
|
|
Incorporated
by reference to Exhibit 10.1 to 8-K filed April 3, 2007
|
|
10.7
|
|
Employment
Agreement with Michael Ward *
|
|
Incorporated
by reference to Exhibit 10.0 of SB-2 filed December 17,
2004
|
|
10.8
|
|
Employment
Agreement with James B. Smith (as CFO) *
|
|
Incorporated
by reference to Exhibit 10.1 of SB-2 filed December 17,
2004
|
|
10.9
|
|
Employment
Agreement with Robert Dowies *
|
|
Incorporated
by reference to Exhibit 10.2 of SB-2 filed December 17,
2004
|
|
10.10
|
|
2003
Non-Qualified Stock Grant and Option Plan *
|
|
Incorporated
by reference to Exhibit 10 of Form S-8 filed on June 11,
2003
|
|
10.11
|
|
2004
Non-Qualified Stock Grant and Option Plan *
|
|
Incorporated
by reference to Exhibit 10 of Form S-8 filed on June 11,
2003
|
|
10.12
|
|
2007
Non-Qualified Stock Grant and Option Plan *
|
|
Incorporated
by reference to Exhibit 10.1 of Form S-8 filed on February 16,
2007
|
|
10.13
|
|
Form
of Option Grant under 2007 Non-Qualified Stock Grant and Option Plan
*
|
|
Incorporated
by reference to Exhibit 10.2 of Form S-8 filed on February 16,
2007
|
|
10.14
|
|
Form
of Stock Award Agreement under 2007 Non-Qualified Stock Grant and Option
Plan *
|
|
Incorporated
by reference to Exhibit 10.3 of Form S-8 filed on February 16,
2007
|
|
10.15
|
|
Securities
Purchase Agreement
|
|
Incorporated
by reference to Exhibit 10.1 to 8-K/A filed on December 3,
2004
|
|
10.16
|
|
Warrant
Margaux
|
|
Incorporated
by reference to Exhibit 10.5 of SB-2 filed December 17,
2004
|
|
10.17
|
|
Warrant
Margaux
|
|
Incorporated
by reference to Exhibit 10.6 of SB-2 filed December 17,
2004
|
|
10.18
|
|
Stock
Purchase Warrant Impact
|
|
Incorporated
by reference to Exhibit 10.3 to 8-K filed on May 8,
2003
|
|
10.19
|
|
Registration
Rights Agreement Impact
|
|
Incorporated
by reference to Exhibit 10.4 to 8-K filed on May 8,
2003
|
|
10.20
|
|
Amended
Stock Purchase Warrant Impact International
|
|
Incorporated
by reference to Exhibit 10 to 8-K filed on June 25,
2004
|
|
10.21
|
|
Registration
Rights Agreement with Mercator Group
|
|
Incorporated
by reference to Exhibit 10.5 to 8-K filed on December 3,
2004
|
|
10.22
|
|
Warrant
to Purchase Common Stock Mercator Momentum Funds, LP $0.87
|
|
Incorporated
by reference to Exhibit 10.6 to 8-K filed on December 3,
2004
|
|
10.23
|
|
Warrant
to Purchase Common Stock Mercator Momentum Funds, LP $0.80
|
|
Incorporated
by reference to Exhibit 10.7 to 8-K filed on December 3,
2004
|
|
10.24
|
|
Warrant
to Purchase Common Stock Mercator Momentum Fund, III, LP
$0.87
|
|
Incorporated
by reference to Exhibit 10.8 to 8-K filed on December 3,
2004
|
|
10.25
|
|
Warrant
to Purchase Common Stock Mercator Momentum Fund III, LP
$0.80
|
|
Incorporated
by reference to Exhibit 10.9 to 8-K filed on December 3,
2004
|
|
10.26
|
|
Warrant
to Purchase Common Stock Monarch Pointe Fund III, LP $0.87
|
|
Incorporated
by reference to Exhibit 10.10 to 8-K filed on December 3,
2004
|
|
10.27
|
|
Warrant
to Purchase Common Stock Monarch Pointe Fund III, LP $0.80
|
|
Incorporated
by reference to Exhibit 10.11 to 8-K filed on December 3,
2004
|
|
10.28
|
|
Warrant
to Purchase Common Stock Mercator Advisory Group, LLC.
$0.87
|
|
Incorporated
by reference to Exhibit 10.12 to 8-K filed on December 3,
2004
|
|
10.29
|
|
Warrant
to Purchase Common Stock Mercator Advisory Group, LLC
$0.80
|
|
Incorporated
by reference to Exhibit 10.13 to 8-K filed on December 3,
2004
|
|
10.30
|
|
Promissory
Note for Aircraft Prepaid Lease
|
|
Incorporated
by reference to Exhibit 10.4 to 10-Q filed on August 21,
2006
|
|
10.31
|
|
Aircraft
Prepaid Lease/Use Agreement
|
|
Incorporated
by reference to Exhibit 10.3 to 10-Q filed on August 21,
2006
|
|
21.1
|
|
List
of Subsidiaries
|
|
Included
with this filing
|
|
23.1
|
|
Consent
of Malone & Bailey
|
|
Included
with this filing
|
|
31.1
|
|
Chief
Executive Officer and Chief Financial Officer Section 302 Certification
pursuant to Sarbanes - Oxley Act.
|
|
Included
with this filing
|
|
32.1
|
|
Chief
Executive Officer-Section 906 Certification pursuant To Sarbanes-Oxley
Act
|
|
Included
with this filing
|
*
Management or compensatory plan or arrangement.
In
accordance with the Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized, as of April 15, 2008.
Tidelands Oil & Gas
Corporation
By: /s/ James B.
Smith
James
B. Smith
President
CEO, CFO and Director
___________________________
Pursuant
to the requirements of the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/ James B. Smith
|
|
President,
CEO, CFO and Director
|
|
April
15, 2008
|
|
James
B. Smith
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/ Ahmed Karim
|
|
Director
|
|
April
15, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/ Carl Hessel
|
|
Director
|
|
April
15, 2008
|
|
Carl
Hessel
|
|
|
|
|
TIDELANDS
OIL & GAS CORPORATION
CONSOLIDATED
FINANCIAL STATEMENTS
YEARS
ENDED DECEMBER 31, 2007 AND 2006
TIDELANDS
OIL & GAS CORPORATION
INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
F-1
|
|
|
|
|
CONSOLIDATED
BALANCE SHEETS
|
|
|
|
F-2
|
|
|
|
|
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
|
|
|
F-3
|
|
|
|
|
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY
|
|
|
|
F-4
|
|
|
|
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
|
|
F-5 to
F-6
|
|
|
|
|
|
F-7
to F-28
|
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
Board of
Directors
Tidelands
Oil & Gas Corporation
San
Antonio, Texas
We have
audited the accompanying consolidated balance sheet of Tidelands Oil & Gas
Corporation (the “Company”) as of December 31, 2007, and the related statements
of consolidated operations, stockholders’ equity (deficit), and cash flows for
the year ended December 31, 2007. These consolidated financial
statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material
misstatement. The Company is not required to have, nor were we
engaged to perform, an audit of its internal control over financial
reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purposes of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall consolidated financial
statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Tidelands Oil
& Gas Corporation as of December 31, 2007, and the results of their
consolidated operations and their consolidated cash flows for the year ended
December 31, 2007, in conformity with accounting principles generally accepted
in the United States of America.
The
accompanying financial statements have been prepared assuming that the Company
will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company has suffered recurring losses from operations
and has a net working capital deficiency that raises substantial doubt about its
ability to continue as a going concern. Management’s plans in regard
to these matters are also described in Note 2. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
Malone
& Bailey, PC
Houston,
Texas
April 14,
2008
TIDELANDS OIL & GAS CORPORATION
|
|
|
CONSOLIDATED
BALANCE SHEETS
|
|
|
YEARS
ENDED
|
|
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
December
31,
|
|
|
December
31,
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Current
Assets:
|
|
|
|
|
|
|
|
Cash
|
|
$ |
5,794 |
|
|
$ |
257,015 |
|
|
Accounts
and Other Receivable
|
|
|
7,116 |
|
|
|
4,692 |
|
|
Prepaid
Expenses
|
|
|
177,099 |
|
|
|
55,546 |
|
|
Current
Portion of Assets of Discontinued Operations–Held for
Sale
|
|
|
734,713 |
|
|
|
671,519 |
|
|
Total
Current Assets
|
|
|
924,722 |
|
|
|
988,772 |
|
|
|
|
|
|
|
|
|
|
|
|
Property
Plant and Equipment, Net of accumulated depreciation of $81,202 and
$56,129, respectively – Continuing Operations
|
|
|
2,953,661 |
|
|
|
4,812,632 |
|
|
Property
Plant and Equipment, Net – Discontinued Operations–Held for
Sale
|
|
|
4,118,666 |
|
|
|
7,551,727 |
|
|
Total
Property, Plant and Equipment, Net
|
|
|
7,072,327 |
|
|
|
12,364,359 |
|
|
|
|
|
|
|
|
|
|
|
|
Investment
in Affiliate
|
|
|
2,809,801 |
|
|
|
- |
|
|
Other
Assets:
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
200,379 |
|
|
|
53,800 |
|
|
Cash
Restricted
|
|
|
43,467 |
|
|
|
26,447 |
|
|
Deferred
Charges
|
|
|
- |
|
|
|
565,221 |
|
|
Goodwill
|
|
|
800,428 |
|
|
|
800,428 |
|
|
Non-Current
Portion of Assets of Discontinued Operations–Held for
Sale
|
|
|
386,048 |
|
|
|
387,612 |
|
|
Total
Other Assets
|
|
|
1,430,322 |
|
|
|
1,833,508 |
|
|
|
|
|
|
|
|
|
|
|
|
Total
Assets
|
|
$ |
12,237,172 |
|
|
$ |
15,186,639 |
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY (DEFICIT)
|
|
|
Current
Liabilities:
|
|
|
|
|
|
|
|
|
|
Current
Maturities – Note Payable
|
|
$ |
7,533,039 |
|
|
$ |
225,000 |
|
|
Accounts
Payable and Accrued Expenses
|
|
|
1,985,829 |
|
|
|
1,195,334 |
|
|
Reserve
for Litigation
|
|
|
2,250,000 |
|
|
|
2,250,000 |
|
|
Current
Portion of Liabilities of Discontinued Operations–Held for
Sale
|
|
|
743,380 |
|
|
|
429,418 |
|
|
Total
Current Liabilities
|
|
|
12,512,248 |
|
|
|
4,099,752 |
|
|
|
|
|
|
|
|
|
|
|
|
Long-Term
Debt
|
|
|
- |
|
|
|
8,934,294 |
|
|
|
|
|
|
|
|
|
|
|
|
Total
Liabilities
|
|
|
12,512,248 |
|
|
|
13,034,046 |
|
|
|
|
|
|
|
|
|
|
|
|
Commitments
and Contingencies
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
Equity (Deficit):
|
|
|
|
|
|
|
|
|
|
Common
Stock, $.001 Par Value per Share,
|
|
|
|
|
|
|
|
|
|
250,000,000
Shares Authorized, 108,226,836 and 86,457,922
|
|
|
|
|
|
|
|
|
|
Shares
Issued and Outstanding at 2007 and 2006, respectively
|
|
|
108,227 |
|
|
|
86,459 |
|
|
Additional
Paid-in Capital
|
|
|
55,868,098 |
|
|
|
46,703,202 |
|
|
Subscriptions
Receivable
|
|
|
- |
|
|
|
(220,000 |
) |
|
Accumulated
Deficit
|
|
|
(56,251,401 |
) |
|
|
(44,417,068 |
) |
|
Total
Stockholders’ Equity (Deficit)
|
|
|
(275,076 |
) |
|
|
2,152,593 |
|
|
|
|
|
|
|
|
|
|
|
|
Total
Liabilities and Stockholders’ Equity (Deficit)
|
|
$ |
12,237,172 |
|
|
$ |
15,186,639 |
|
|
|
|
|
|
|
|
|
|
|
|
See
Accompanying Notes to Consolidated Financial Statements
|
|
TIDELANDS OIL & GAS CORPORATION
|
|
|
STATEMENTS
OF CONSOLIDATED OPERATIONS
|
|
|
YEARS
ENDED
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31,
|
|
|
December
31,
|
|
|
|
|
2007
|
|
|
2006
|
|
| |
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
Gas
Sales and Pipeline Fees
|
|
$ |
- |
|
|
$ |
- |
|
|
Total
Revenues
|
|
|
- |
|
|
|
- |
|
|
Costs
and Expenses:
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
25,072 |
|
|
|
25,760 |
|
Selling,
General and Administrative - Related
Parties
|
|
|
3,638,000 |
|
|
|
- |
|
|
Selling,
General and Administrative
|
|
|
4,537,635 |
|
|
|
5,856,101 |
|
|
Reserve
for Litigation
|
|
|
- |
|
|
|
2,250,000 |
|
|
Total
Costs and Expenses
|
|
|
8,200,707 |
|
|
|
8,131,861 |
|
|
|
|
|
|
|
|
|
|
|
|
Loss
From Operations
|
|
|
(8,200,707 |
) |
|
|
(8,131,861 |
) |
|
|
|
|
|
|
|
|
|
|
|
Other
Income (Expense):
|
|
|
|
|
|
|
|
|
|
Loss
on Sale of Assets
|
|
|
- |
|
|
|
(1,407 |
) |
|
Interest
Expense
|
|
|
(1,064,510 |
) |
|
|
(3,404,149 |
) |
|
Interest
and Dividend Income
|
|
|
997 |
|
|
|
106,198 |
|
|
Miscellaneous
|
|
|
162,103 |
|
|
|
(6,863 |
) |
|
Other
Income (Expenses)
|
|
|
(901,410 |
) |
|
|
(3,306,221 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net
Loss from Continuing Operations
|
|
|
(9,102,117 |
) |
|
|
(11,438,082 |
) |
|
Net
Loss from Discontinued Operations
|
|
|
(2,732,216 |
) |
|
|
(398,843 |
) |
|
Net
Loss
|
|
$ |
(11,834,333 |
) |
|
$ |
(11,836,925 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net
Loss Per Common Share: Basic and
Diluted
|
|
|
|
|
|
|
|
|
|
Net
Loss from Continuing Operations
|
|
$ |
(0.09 |
) |
|
$ |
(0.14 |
) |
|
Net
Loss from Discontinued Operations
|
|
|
(0.03 |
) |
|
|
(0.01 |
) |
|
Total
|
|
$ |
(0.12 |
) |
|
$ |
(0.15 |
) |
|
Weighted
Average Number of Common
|
|
|
|
|
|
|
|
|
|
Shares
Outstanding, Basic and
Diluted
|
|
|
99,745,829 |
|
|
|
80,475,359 |
|
|
|
|
|
|
|
|
|
|
|
|
See
Accompanying Notes to Consolidated Financial Statements
|
|
TIDELANDS OIL AND GAS CORPORATION
STATEMENTS
OF CONSOLIDATED STOCKHOLDERS’ EQUITY (DEFICIT)
YEARS
ENDED DECEMBER 31, 2007 AND 2006
|
|
|
Common
|
|
|
Stock
|
|
|
Additional
|
|
|
Subscription
|
|
|
Accumulated
|
|
|
Stockholders’
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Paid-In Capital
|
|
|
Receivable
|
|
|
(Deficit)
|
|
|
Equity (Deficit)
|
|
|
Balance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2005
|
|
|
78,495,815 |
|
|
$ |
78,497 |
|
|
$ |
40,818,174 |
|
|
$ |
(550,000 |
) |
|
$ |
(32,580,144 |
) |
|
$ |
7,766,527 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of Common
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
for Services
|
|
|
2,810,000 |
|
|
|
2,810 |
|
|
|
2,161,490 |
|
|
|
-- |
|
|
|
-- |
|
|
|
2,164,300 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of Common
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
in Payment of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
Based
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liquidated
Damages
|
|
|
2,828,304 |
|
|
|
2,828 |
|
|
|
1,694,154 |
|
|
|
-- |
|
|
|
-- |
|
|
|
1,696,982 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of Common
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
for Repayment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of
Convertible Debentures
|
|
|
1,823,803 |
|
|
|
1,824 |
|
|
|
1,584,885 |
|
|
|
-- |
|
|
|
-- |
|
|
|
1,586,709 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of Common
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
for Repayment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of
Accrued Expense
|
|
|
500,000 |
|
|
|
500 |
|
|
|
444,500 |
|
|
|
-- |
|
|
|
-- |
|
|
|
445,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collection
of Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subscriptions
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
330,000 |
|
|
|
-- |
|
|
|
330,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rounding
|
|
|
-- |
|
|
|
-- |
|
|
|
(1 |
) |
|
|
-- |
|
|
|
1 |
|
|
|
-- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Loss
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
(11,836,925 |
) |
|
|
(11,836,925 |
) |
|
Balance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2006
|
|
|
86,457,922 |
|
|
$ |
86,459 |
|
|
$ |
46,703,202 |
|
|
$ |
(220,000 |
) |
|
$ |
(44,417,068 |
) |
|
$ |
2,152,593 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of Common
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
for Services
|
|
|
13,731,027 |
|
|
|
13,731 |
|
|
|
2,491,073 |
|
|
|
-- |
|
|
|
-- |
|
|
|
2,504,804 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of Common
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
for Repayment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of
Convertible Debentures
|
|
|
2,298,848 |
|
|
|
2,299 |
|
|
|
1,997,701 |
|
|
|
-- |
|
|
|
-- |
|
|
|
2,000,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of Common
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
for Repayment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of
Accrued Expense
|
|
|
1,526,283 |
|
|
|
1,526 |
|
|
|
341,718 |
|
|
|
-- |
|
|
|
-- |
|
|
|
343,244 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cancellation
of Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subscriptions
|
|
|
(1,000,000 |
) |
|
|
(1,000 |
) |
|
|
(219,000 |
) |
|
|
220,000 |
|
|
|
-- |
|
|
|
-- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of Common
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
for Legal Retainer
|
|
|
593,709 |
|
|
|
594 |
|
|
|
130,022 |
|
|
|
-- |
|
|
|
-- |
|
|
|
130,616 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of Common
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
as Result of Exercise
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of
Stock Options
|
|
|
4,619,047 |
|
|
|
4,619 |
|
|
|
785,381 |
|
|
|
-- |
|
|
|
-- |
|
|
|
790,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-Based
Compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
in
Issuance of 25 Million
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10-year
Stock Options
|
|
|
-- |
|
|
|
-- |
|
|
|
3,638,000 |
|
|
|
-- |
|
|
|
-- |
|
|
|
3,638,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rounding
|
|
|
-- |
|
|
|
(1 |
) |
|
|
1 |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Loss
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
(11,834,333 |
) |
|
|
(11,834,333 |
) |
|
Balance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2007
|
|
|
108,226,836 |
|
|
$ |
108,227 |
|
|
$ |
55,868,098 |
|
|
$ |
-- |
|
|
$ |
(56,251,401 |
) |
|
$ |
(275,076 |
) |
See
Accompanying Notes to Consolidated Financial Statements
TIDELANDS OIL & GAS CORPORATION
|
|
|
STATEMENTS
OF CONSOLIDATED CASH FLOWS
|
|
|
YEARS
ENDED
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31,
|
|
|
December
31,
|
|
|
|
|
2007
|
|
|
2006
|
|
| |
|
|
|
|
|
Cash
Flows Provided From
|
|
|
|
|
|
|
|
Operating
Activities:
|
|
|
|
|
|
|
|
Net
Loss
|
|
|
|
|
|
|
|
From
Continuing Operations
|
|
$ |
(9,102,117 |
) |
|
$ |
(11,438,082 |
) |
|
From
Discontinued Operations
|
|
|
(2,732,216 |
) |
|
|
(398,843 |
) |
|
Adjustments
to Reconcile Net Loss
|
|
|
|
|
|
|
|
|
|
To
Net Cash Used In
|
|
|
|
|
|
|
|
|
|
Operating
Activities:
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
|
|
|
|
|
|
|
From
Continuing Operations
|
|
|
25,072 |
|
|
|
25,760 |
|
|
From
Discontinued Operations
|
|
|
390,086 |
|
|
|
440,481 |
|
|
Loss
on Disposal of Equipment
|
|
|
179,444 |
|
|
|
4,500 |
|
|
Impairment
Loss – Discontinued Operations
|
|
|
2,605,061 |
|
|
|
- |
|
|
Issuance
of Common Stock:
|
|
|
|
|
|
|
|
|
|
For
Services Provided – Related Parties
|
|
|
5,011,763 |
|
|
|
1,796,800 |
|
|
For
Services Provided – Other
|
|
|
1,131,041 |
|
|
|
367,500 |
|
|
For
Payment of Interest
|
|
|
- |
|
|
|
1,696,982 |
|
|
Changes
in:
|
|
|
|
|
|
|
|
|
|
Accounts
Receivable
|
|
|
31,349 |
|
|
|
79,704 |
|
|
Inventory
|
|
|
(140,102 |
) |
|
|
58,174 |
|
|
Prepaid
Expenses
|
|
|
(108,661 |
) |
|
|
35,387 |
|
|
Deferred
Charges
|
|
|
565,221 |
|
|
|
(42,704 |
) |
|
Deposits
|
|
|
(13,413 |
) |
|
|
(565,221 |
) |
|
Accounts
Payable and Accrued Expenses
|
|
|
1,436,901 |
|
|
|
844,198 |
|
|
Reserve
for Litigation
|
|
|
- |
|
|
|
2,250,000 |
|
|
Customer
Deposits
|
|
|
10,800 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
Net
Cash Used In Operating Activities
|
|
|
(709,771 |
) |
|
|
(4,845,364 |
) |
|
|
|
|
|
|
|
|
|
|
|
Cash
Flows From
|
|
|
|
|
|
|
|
|
|
Investing
Activities:
|
|
|
|
|
|
|
|
|
|
Reduction
of Investment in Affiliate
|
|
|
959,670 |
|
|
|
- |
|
|
(Increase)
Decrease in Restricted Cash
|
|
|
(18,006 |
) |
|
|
24,161 |
|
|
Proceeds
from Sale of Assets
|
|
|
310,236 |
|
|
|
- |
|
|
Acquisitions
of Property, Plant and Equipment
|
|
|
(1,987,338 |
) |
|
|
(2,814,512 |
) |
|
Disposals
of Equipment
|
|
|
- |
|
|
|
21,500 |
|
| |
|
|
|
|
|
|
|
|
|
Net
Cash Used In Investing Activities
|
|
|
(735,438 |
) |
|
|
(2,768,851 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
Accompanying Notes to Consolidated Financial Statements
|
|
|
TIDELANDS
OIL & GAS CORPORATION
|
|
|
STATEMENTS
OF CONSOLIDATED CASH FLOWS
|
|
|
(CONTINUED)
|
|
|
YEARS
ENDED
|
|
| |
|
|
|
|
December
31,
|
|
|
December
31,
|
|
|
|
|
2007
|
|
|
2006
|
|
| |
|
|
|
|
|
Cash
Flows From
|
|
|
|
|
|
|
|
Financing
Activities:
|
|
|
|
|
|
|
|
Proceeds
from Collections of Stock Subscriptions Receivable
|
|
|
- |
|
|
|
330,000 |
|
|
Proceeds
from Exercise of Stock Options
|
|
|
790,000 |
|
|
|
- |
|
|
Proceeds
from Long-Term Loans
|
|
|
- |
|
|
|
288,235 |
|
|
Proceeds
from Short-Term Loans
|
|
|
373,745 |
|
|
|
- |
|
|
Proceeds
from Issuance of Convertible Debentures
|
|
|
- |
|
|
|
6,569,750 |
|
|
Repayment
of Convertible Debentures
|
|
|
- |
|
|
|
(608,750 |
) |
|
Proceeds
from Repayment of Loan by Related Party
|
|
|
- |
|
|
|
288,506 |
|
|
|
|
|
|
|
|
|
|
|
|
Net
Cash Provided by Financing Activities
|
|
|
1,163,745 |
|
|
|
6,867,741 |
|
|
|
|
|
|
|
|
|
|
|
|
Net
Increase (Decrease) in Cash
|
|
|
(281,464 |
) |
|
|
(746,474 |
) |
|
|
|
|
|
|
|
|
|
|
|
Cash
at Beginning of Period
|
|
|
367,437 |
|
|
|
1,113,911 |
|
|
|
|
|
|
|
|
|
|
|
|
Cash
at End of Period
|
|
$ |
85,973 |
|
|
$ |
367,437 |
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
Disclosures of Cash Flow Information:
|
|
|
|
|
|
|
|
|
|
Cash
Payments for Interest
|
|
$ |
125,817 |
|
|
$ |
1,409,645 |
|
|
|
|
|
|
|
|
|
|
|
|
Cash
Payments for Income Taxes
|
|
$ |
- |
|
|
$ |
- |
|
|
|
|
|
|
|
|
|
|
|
|
Non-Cash
Activities:
|
|
|
|
|
|
|
|
|
|
Issuance
of Common Stock:
|
|
|
|
|
|
|
|
|
|
Operating
Activities
|
|
$ |
6,142,804 |
|
|
$ |
3,861,282 |
|
|
Payments
of Accrued Expenses & Accounts Payable
|
|
|
343,244 |
|
|
|
445,000 |
|
|
Conversion
of Debentures
|
|
|
2,000,000 |
|
|
|
1,586,709 |
|
|
Legal
Fee – Retainer
|
|
|
130,616 |
|
|
|
- |
|
|
Reclassification
of Assets Transferred to Affiliate
|
|
|
(3,769,471 |
) |
|
|
- |
|
|
Cancellation
of Common Stock:
|
|
|
|
|
|
|
|
|
|
In
Settlement of Stock Subscriptions
|
|
|
(220,000 |
) |
|
|
- |
|
| |
|
|
|
|
|
|
|
|
|
Total
Non-Cash Activities
|
|
$ |
4,627,193 |
|
|
$ |
5,892,991 |
|
|
|
|
|
|
|
|
|
|
|
|
See
Accompanying Notes to Consolidated Financial Statements
|
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007 AND 2006
NOTE 1 – NATURE OF COMPANY AND
SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES
This
summary of significant accounting policies is presented to assist in
understanding these consolidated financial statements. The
consolidated financial statements and notes are representations of management
who is responsible for their integrity and objectivity. The
accounting policies used conform to accounting principles generally accepted in
the United States of America and have been consistently applied in the
preparation of these consolidated financial statements.
Organization
Tidelands
Oil and Gas Corporation (the Company and formerly C2 Technologies, Inc.), was
incorporated in the state of Nevada on February 25, 1997. On December
1, 2000, the Company completed its acquisition of Rio Bravo Energy, LLC, and
their related entities thereby making Rio Bravo Energy, LLC, a wholly-owned
subsidiary of the Company. Rio Bravo Energy, LLC, and its
wholly-owned subsidiary, Sonora Pipeline, LLC, no longer operate their gas
processing plant and pipeline system.
During
2004, the Company acquired all of the stock of Sonterra Energy Corporation
(“Sonterra”) and through this wholly-owned subsidiary, the Company purchased all
of the assets of a propane gas distribution organization serving residential
customers in the Austin, Texas area.
The
Company also, during 2004, increased its ownership interest from 25% to 98% in
Reef Ventures, LP, and their wholly-owned subsidiaries (Reef International, LLC
and Reef Marketing, LLC) that operate a natural gas pipeline between Eagle Pass,
Texas and Piedras Negras, Mexico.
During
2004, the Company formed Terranova Energia S. de R.L. de C.V. (“Terranova”), a
Mexican subsidiary wholly-owned by certain of the Company’s other wholly-owned
subsidiaries. Terranova is engaged in the development of natural gas
storage facilities in Mexico and other natural gas pipelines between the United
States and Mexico.
On March
27, 2006, the Company organized Esperanza Energy, LLC, a wholly-owned
subsidiary, for the purpose of developing and operating an offshore California
liquefied natural gas (LNG) receiving terminal.
On July
9, 2006, the Company acquired a 50% interest in a 26-mile natural gas pipeline
located in South Texas along with a 50% working interest in two leases with five
re-completed natural gas wells on 1,000 acres which can be serviced by the
pipeline described above. The Company utilized Tidelands Exploration
& Production Corporation, a wholly-owned subsidiary, to acquire the pipeline
and gas well assets.
TIDELANDS
OIL & GAS CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007 AND 2006
NOTE 1 – NATURE OF COMPANY AND
SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Organization
(Continued)
On
September 11, 2007 the Company’s wholly-owned subsidiary, Tidelands Exploration
and Production Corporation, sold its 50% interest in the 26-mile natural gas
pipeline and the various leases and natural gas wells as described
above.
On
September 26, 2007, the Company formed a new subsidiary, Frontera Pipeline, LLC
(“Frontera”), a Delaware limited liability company, and agreed, upon approval of
applicable governmental authorities, to transfer all rights, permits and assets
of the Burgos Hub Project (described further below) to Frontera.
On
September 28, 2007, the Company sold 80% of the equity interest in
Frontera. At closing, the Company contributed 100% of the ownership
of its subsidiary, Sonora Pipeline, LLC (“Sonora”) to
Frontera. Sonora had been engaged in obtaining Federal Energy
Regulatory Commission (“FERC”) permits to construct two pipelines to be located
between the U.S. and Mexico which would be part of the Burgos Hub
Project.
On
December 31, 2007, the Company contributed Terranova and other related
wholly-owned subsidiaries to Frontera.
Reclassification
Certain
amounts for prior periods have been reclassified to conform to the current year
presentation.
Principles of
Consolidation
The
consolidated financial statements include the accounts of the Company and its
wholly-owned subsidiaries. All significant inter-company accounts and
transactions have been eliminated.
Fair Value of Financial
Instruments
Statement
of Financial Accounting Standards No. 107, “Disclosure About Fair Value of
Financial Instruments,” requires the disclosure of the fair value of off-and-on
balance sheet financial instruments. Unless otherwise indicated, the fair values
of all reported consolidated assets and consolidated liabilities which represent
financial instruments (none of which are held for trading purposes), approximate
the carrying values of such amounts.
TIDELANDS
OIL & GAS CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007 AND 2006
NOTE 1 – NATURE OF COMPANY AND
SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Cash and Cash
Equivalents
The
Company considers all highly liquid instruments purchased with an original
maturity of three months or less to be cash equivalents.
Use of
Estimates
The
preparation of consolidated financial statements in accordance with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect certain reported
amounts and disclosures. Accordingly, actual results could differ
from those estimates.
Inventory
Inventory,
which primarily consists of propane related to our wholly-owned propane
distribution subsidiary, is carried at the lower of cost or
market. Inventory relates to Sonterra, the Company’s propane gas
distribution organization, which has been shown as discontinued operations in
the accompanying financial statements. See NOTE 6.
Property, Plant and
Equipment
Property,
plant and equipment are recorded at historical cost. Depreciation of
property, plant and equipment is provided on the straight-line method over the
estimated useful lives of the related assets. Maintenance and repairs
are charged to operations. Additions and betterments, which extend
the useful lives of the assets, are capitalized. Upon retirement or
disposal of the property, plant and equipment, the cost and accumulated
depreciation are eliminated from the accounts, and the resulting gain or loss is
reflected in operations.
Long-Lived
Assets
Statement
of Financial Accounting Standards No. 144, “Accounting for the Impairment or
Disposal of Long-Lived Assets” (“SFAS No. 144”), requires that long-lived assets
to be held and used by the Company be reviewed for impairment whenever events or
changes in circumstances indicate that the related carrying amount may not be
recoverable. When required, impairment losses on assets to be held
and used are recognized based on the fair value of the asset, and long-lived
assets to be disposed of are reported at the lower of carrying amount or fair
value less cost to sell.
The
requirements of SFAS No. 144 and the evaluation by the Company’s management did
not determine any material adverse effects to the consolidated financial
statements.
TIDELANDS
OIL & GAS CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007 AND 2006
NOTE 1 – NATURE OF COMPANY AND
SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Income
Taxes
The
Company accounts for income taxes in accordance with Statement of Financial
Accounting Standards No. 109, “Accounting for Income Taxes” (“SFAS No. 109”),
which requires the establishment of a deferred tax asset or liability for the
recognition of future deductions of taxable amounts and operating loss carry
forwards, deferred tax expense or benefit is recognized as a result of the
change in the deferred asset or liability during the year. If
necessary, the Company will establish a valuation allowance to reduce any
deferred tax asset to an amount which will, more likely than not, be
realized.
Net Loss Per Common
Share
The
Company accounts for net loss per share in accordance with Statement of
Financial Accounting Standard No. 128, “Earnings Per Share” (“SFAS No.
128”). Basic loss per share is based upon the net loss applicable to
the weighted average number of common shares outstanding during the
period. Diluted loss per share reflects the effect of the assumed
conversions of convertible securities and exercise of stock options only in the
periods in which such affect would have been dilutive. Due to the
Company’s losses during the periods presented, basic and diluted losses per
share are equivalent as the affect of common stock equivalents would have been
anti-dilutive.
Goodwill
Goodwill
represents the excess of purchase price and related costs over the value
assigned to the net tangible and identifiable assets of businesses
acquired. Statement of Financial Accounting Standards No. 142,
“Goodwill and Other Intangible Assets” (“SFAS No. 142”), requires goodwill to be
tested for impairment on an annual basis and between annual tests in certain
circumstances, and written down when impaired, rather than being amortized as
previous accounting standards required. Furthermore, SFAS No. 142
requires purchased intangible assets other than goodwill to be amortized over
their useful lives unless these lives are determined to be
indefinite. As the result of acquisitions during 2004 and 2005, the
Company recorded goodwill in the amount of $1,158,937. The Company
evaluates the carrying value of goodwill on a quarterly basis. As
part of the evaluation, the Company compares the fair value of each reporting to the
related net book value, including goodwill. If the net book value of the
reporting unit exceeds the fair value, an impairment loss is measured and
recognized.. Based upon management’s impairment review of
goodwill, the Company concluded no impairment was necessary during 2007 or
2006.
TIDELANDS
OIL & GAS CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007 AND 2006
NOTE 1 – NATURE OF COMPANY AND
SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Revenue
Recognition
The
Company’s revenues for 2007, including discontinued operations, were derived
principally (86%) from the sale of propane gas to residential customers, as well
as charges generated from transportation fees (13%). The Company’s
revenues for 2006 were derived principally (79%) from the sale of propane gas to
residential customers, as well as charges generated from transportation fees
(13%). Additional revenues, 12% and 8% in 2007 and 2006 respectively,
were the result of construction services performed in the various subdivisions
which were the recipients of the propane gas hook-ups.
Revenues
are recognized for sales of propane gas to residential customers at the time of
monthly billings based on meter readings provided by company
employees.
Revenues
are recognized for transportation charges related to our international pipeline
at the time of monthly billings based on meter readings provided by independent
contractors.
Construction
service revenues are recognized and billed monthly after completion of the
contracted job.
Concentrations of Credit
Risk
Periodically,
the Company may have cash deposits with banks in excess of FDIC insured
limits. The Company has not experienced any losses on its deposits of
cash and cash equivalents.
New Accounting Standards and
Recently Issued Accounting Pronouncements
In
December 2007, the Financial Accounting Standards Board (“FASB”) issued a
revision to SFAS No. 141 “Business Combinations”
(“SFAS No. 141(R)”). The revision broadens the definition of a
business combination to include all transactions or other events in which
control of one or more businesses is obtained. Further, the statement
establishes principles and requirements for how an acquirer recognizes assets
acquired, liabilities assumed and any non-controlling interests acquired.
SFAS No. 141(R) is effective for business combination transactions for
which the acquisition date is on or after the beginning of the first reporting
period beginning on or after December 15, 2008. Early adoption is
prohibited. The Company is currently evaluating the provisions of
SFAS No. 141(R) and assessing the impact it may have on the
Company.
TIDELANDS
OIL & GAS CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007 AND 2006
NOTE 1 – NATURE OF COMPANY AND
SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
New Accounting Standards and
Recently Issued Accounting Pronouncements (Continued)
Also in
December 2007, the FASB issued SFAS No. 160 “Non-controlling Interests
in Consolidated Financial Statements”
(“SFAS No. 160”). This statement amends Accounting Research
Bulletin No. 51, “Consolidated Financial Statements.”
SFAS No. 160 establishes accounting and reporting standards for the
non-controlling interests in a subsidiary and for the deconsolidation of a
subsidiary. It clarifies that a non-controlling interest in a subsidiary is an
ownership interest in the consolidated entity that should be reported as equity
in the Consolidated Financial Statements. SFAS No. 160 is effective
for fiscal years, and interim periods within those fiscal years, beginning on or
after December 15, 2008. Early adoption is prohibited. The Company is
currently evaluating the provisions of SFAS No. 160 and assessing the
impact it may have on the Company.
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option
for Financial Assets and Financial Liabilities” (“SFAS No. 159”), which permits
entities to measure various financial instruments and certain other items at
fair value. SFAS No. 159 will be effective for the Company in the
first quarter of 2008. At the present time, the Company does not expect to apply
the provisions of SFAS No. 159.
In
September 2006, the FASB issued SFAS No. 157 “Fair Value Measurements”
(“SFAS No. 157”). SFAS No. 157 defines fair value,
establishes a framework for measuring fair value, and expands disclosures about
fair value measurements. The statement does not require any new fair value
measurements for Apache. This statement is effective for financial statements
issued for fiscal years beginning after November 15, 2007. The adoption of
SFAS No. 157 is not expected to materially impact the Company’s
consolidated financial statements; however, it could result in additional
disclosures related to the use of fair values in the financial
statements.
In July
2006, the FASB issued FASB Interpretation No. 48 “Accounting for
Uncertainty in Income Taxes” (“FIN 48”). FIN 48 clarifies
the accounting for income taxes, by prescribing a minimum recognition threshold
a tax position is required to meet before being recognized in the financial
statements. The interpretation also provides guidance on derecognizing,
measurement, classification, interest and penalties, accounting in interim
periods, disclosure and transition. The adoption of FIN 48 did not have a
material impact to the Company’s financial statements.
TIDELANDS
OIL & GAS CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007 AND 2006
NOTE 2 – GOING
CONCERN
The
accompanying audited consolidated financial statements have been prepared on a
going concern basis, which anticipates the realization of assets and the
liquidation of liabilities during the normal course of
operations. However, as shown in these consolidated financial
statements, the Company during the year ended December 31, 2007, incurred a net
loss of $11,834,333, and
as of that date, the Company’s total liabilities exceeded its total assets by
$275,076. In addition, the Company has an accumulated deficit of
$56,251,401. These factors raise doubt about the Company’s ability to
continue as a going concern if changes in operations are not
forthcoming.
The
Company’s ability to continue as a going concern will depend on management’s
ability to successfully implement a business plan which will restructure certain
of its business operations through sales
or joint ventures and obtain additional forms of debt and/or equity
financing. 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 50% INTEREST IN A
26-MILE NATURAL GAS PIPELINE AND ASSOCIATED LEASES AND NATURAL GAS
WELLS
On
September 11, 2007, the Company’s wholly-owned subsidiary, Tidelands Exploration
and Production Corporation, sold its interests in a natural gas pipeline,
working interests in gas wells and related leaseholds with a net book value of
$480,590 to Bentley Energy Corporation for $280,000 and assumption of a $28,036
joint-interest billing owed to the project operator. The sale
resulted in a loss on disposal of $172,554, which has been included in Net Loss
from Discontinued Operations in the income statement. Revenue and
pretax loss for 2007 and 2006 related to these assets and included in Net
Loss from Discontinued Operations was ($10,838) and ($46,765)
respectively. See Note 5 for further information regarding the
property, plant and equipment related to this former subsidiary. See
Note 6 for further discussion of Discontinued Operations.
The
transaction described above was part of an overall settlement with the Company’s
former President, Michael R. Ward, regarding Cause No. 2007-CI-07451 filed on
May 17, 2007 in the 224th
District Court of Bexar County, Texas.
TIDELANDS
OIL & GAS CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007 AND 2006
NOTE 4 – SALE OF 80% INTEREST IN THE
BURGOS HUB IMPORT/EXPORT PROJECT
On
September 28, 2007, Tidelands Oil & Gas Corporation (the "Company") and its
subsidiary, Terranova Energia S. de R.L. de C.V. (“Terranova”), entered into an
Equity Purchase Agreement (the "Purchase Agreement") with Grand Cheniere
Pipeline, LLC ("Cheniere"), pursuant to which the Company has sold an 80%
interest in the Company's "Burgos Hub Project", which involves 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.
In
connection with the Purchase Agreement, the Company formed a new subsidiary,
Frontera Pipeline, LLC, a Delaware limited liability company ("Frontera"), and
agreed, upon approval of applicable governmental authorities, to transfer all
rights, permits and assets of the Burgos Hub Project to Frontera. The Company
then sold 80% of the equity interest in Frontera to Cheniere, effectively
providing Cheniere with an 80% ownership stake in the Burgos Hub
Project.
The
approval of the applicable governmental authorities was received December 6,
2007. On December 31, 2007, the Company transferred the ownership of Terranova
to Frontera in accordance with the Purchase Agreement.
At the
closing of the transaction, the Company contributed 100% of the ownership of its
subsidiary, Sonora Pipeline, LLC, (“Sonora”) to Frontera. Sonora has
been engaged in obtaining Federal Energy Regulatory Commission (“FERC”) permits
for two pipelines to be located between the US and Mexico which would be part of
the Burgos Hub Project.
Pursuant
to the sale of the 80% equity interest in Frontera, the Company (i) received an
up-front payment of $1 Million and (ii) is eligible to earn three additional,
separate earn-out payments of $4.8 Million, $1.2 Million, and $2.0 Million. The
Company is also entitled to receive royalty payments based on the capacity of
transportation or storage service subscribed with the Burgos Hub Project,
ranging from $0.008 per Mmbtu/d for Phase I to $0.002 per Mmbtu/d for Phase II
to $0.02 per Mmbtu/year for Phase III, subject to certain caps. The earn-out
payments are dependent upon Cheniere electing to proceed with development of the
Burgos Hub Project, which is divided into three phases, as set forth in
Frontera's Limited Liability Company Agreement (the "Operating
Agreement"). Under the Operating Agreement, Cheniere will be the
manager of Frontera, with sole decision-making and management control of the
Burgos Hub Project.
TIDELANDS
OIL & GAS CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007 AND 2006
NOTE 4 – SALE OF 80% INTEREST IN THE
BURGOS HUB IMPORT/EXPORT PROJECT
(CONTINUED)
Subject
to certain terms and conditions, if, on or after August 1, 2009, Cheniere has
(i) not made a final investment decision with regard to Phase I or Phase II; and
(2) has entered into definitive financing agreements with third parties with a
debt to capitalization ratio of at least 80% for a specific phase of the
Project, but elects not to move forward with the development of such phase, then
the Company has certain repurchase rights for Cheniere’s 80% equity interest in
Frontera. The repurchase would be for a price of (i) $1 million, plus
(ii) repayment by the Company of any loans, plus interest, extended by Cheniere,
plus (iii) all other costs and expenses incurred by Cheniere (including amounts
paid by Cheniere to the Company or contributed by Cheniere to the Company as
development costs or project equity costs) inclusive of 12% interest rate
thereon.
Concurrently
with the execution of the Purchase Agreement, Frontera executed an Independent
Consulting Agreement (the "Consulting Agreement") with the Company, pursuant to
which the Company will be paid $25,000 per month for 24 months for consulting
services in connection with the Burgos Hub Project. The Consulting Agreement
also provides that the Company will not compete with the Burgos Hub Project for
a period of three years after termination or expiration of the Consulting
Agreement.
In
December 2007, the Consulting Agreement was adjusted to $10,000 per month due to
unavailability of a key officer of the Company.
The
Company has determined, due to its limited influence over the operating and
financial policies of Frontera that its investment in Frontera should be
accounted for under the cost method. At December 31, 2007, the
Company’s carrying value of its investment in Frontera is $2,809,801, which is
shown as Investment in Affiliate in the accompanying balance
sheet. The initial payment received from Cheniere of $1 million has
been treated by the Company as a reduction in the carrying value of investment
in Frontera.
TIDELANDS
OIL & GAS CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007 AND 2006
NOTE 5 – PROPERTY, PLANT AND
EQUIPMENT
A summary
of property, plant and equipment at December 31, 2007 and December 31, 2006 for
Continuing Operations is as follows:
|
|
|
|
|
|
|
|
|
Estimated
|
|
|
|
December
31,
|
|
|
December
31,
|
|
|
Economic
|
|
|
|
2007
|
|
|
2006
|
|
|
Life
|
|
Pre-Construction
Costs:
|
|
|
|
|
|
|
|
|
|
International
Crossings to Mexico (a)
|
|
$ |
- |
|
|
$ |
811,270 |
|
|
N/A
|
|
Mexican
Gas Storage Facility
|
|
|
|
|
|
|
|
|
|
|
|
and
Related Pipelines (a)
|
|
|
- |
|
|
|
2,359,451 |
|
|
N/A
|
|
Domestic
LNG System
|
|
|
2,898,546 |
|
|
|
1,567,642 |
|
|
N/A
|
|
Total
|
|
|
2,898,546 |
|
|
|
4,738,363 |
|
|
|
|
Office
Furniture, Equipment and
|
|
|
|
|
|
|
|
|
|
|
|
Leasehold
Improvements
|
|
|
136,317 |
|
|
|
130,398 |
|
|
5
Years
|
|
Total
|
|
|
3,034,863 |
|
|
|
4,868,761 |
|
|
|
|
Less:
Accumulated Depreciation
|
|
|
81,202 |
|
|
|
56,129 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Property, Plant and Equipment
|
|
$ |
2,953,661 |
|
|
$ |
4,812,632 |
|
|
|
(a) These
assets relate to the Company’s Burgos Hub Import/Export Project which is further
described in NOTE 4 above.
Depreciation
expense for the year ended December 31, 2007 and 2006 was $25,072 and $25,760,
respectively.
A summary
of property, plant and equipment at December 31, 2007 and December 31, 2006 for
Discontinued Operations is as follows:
|
|
|
Estimated
|
|
|
|
|
|
|
|
|
|
December
31,
|
|
|
December
31,
|
|
|
Economic
|
|
|
|
2007
|
|
|
2006
|
|
|
Life
|
|
|
|
|
|
|
|
|
|
|
|
Pre-Construction
Costs:
|
|
|
|
|
|
|
|
|
|
International
Crossings to Mexico
|
|
$ |
- |
|
|
$ |
7,001 |
|
|
N/A
|
|
Office
Furniture, Equipment and
|
|
|
|
|
|
|
|
|
|
|
|
|
Leasehold
Improvements
|
|
|
55,086 |
|
|
|
54,776 |
|
|
5
Years
|
|
Pipeline
– Eagle Pass, TX to Piedras
|
|
|
|
|
|
|
|
|
|
|
|
|
Negras,
Mexico
|
|
|
3,501,194 |
|
|
|
6,106,255 |
|
|
20
Years
|
|
Tanks
& Lines – Propane Distribution
|
|
|
|
|
|
|
|
|
|
|
|
|
System
|
|
|
1,942,936 |
|
|
|
1,908,247 |
|
|
5
Years
|
|
Machinery
and Equipment
|
|
|
71,580 |
|
|
|
67,357 |
|
|
5
Years
|
|
Trucks,
Autos and Trailers
|
|
|
126,464 |
|
|
|
126,464 |
|
|
5
Years
|
|
Pipeline
– South TX Gas Production
|
|
|
- |
|
|
|
490,000 |
|
|
15
Years
|
|
Well
Equipment
|
|
|
- |
|
|
|
2,060 |
|
|
5
Years
|
|
Leaseholds
|
|
|
- |
|
|
|
10,000 |
|
|
N/A
|
|
Total
|
|
|
5,697,260 |
|
|
|
8,772,160 |
|
|
|
|
|
Less:
Accumulated Depreciation
|
|
|
1,578,594 |
|
|
|
1,220,433 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Property, Plant and Equipment
|
|
$ |
4,118,666 |
|
|
$ |
7,551,727 |
|
|
|
|
Depreciation
expense for the year ended December 31, 2007 and 2006 was $390,086 and $440,481
respectively
TIDELANDS
OIL & GAS CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007 AND 2006
NOTE 6 – DISCLOSURE OF DISCONTINUED
OPERATIONS IN THE PERIOD IN WHICH CERTAIN OF THE COMPANY’S SUBSIDIARIES OR THEIR
ASSETS ARE HELD FOR SALE
In
addition to the transaction in NOTE 3 above, during the fourth quarter of 2007,
the Company explored alternatives regarding debt repayments of over $7,600,000
due during the first six months of 2008. A decision was reached to
sell its wholly-owned propane distribution subsidiary, Sonterra Energy
Corporation (“Sonterra”), and its International Pipeline assets owned by Reef
Ventures, LP (“Reef”), a 98% owned subsidiary. These sales
transactions were completed January 9, 2008 and March 25, 2008,
respectively. Sonterra’s sales reported in discontinued operations
for the years ended December 31, 2007, and December 31, 2006, were $2,544,619
and $1,921,763, respectively while Reef’s sales reported in discontinued
operations for the years ended December 31, 2007, and December 31, 2006, were
$119,652 and $285,088, respectively. The pretax income/loss for Sonterra
included in discontinued operation for the years ended December 31, 2007 and
2006, was $311,634 and ($259,411), respectively. The pretax loss for
Reef included in discontinued operations for the years ended December 31, 2007
and 2006, was ($2,860,457) and ($92,667) respectively. The 2007
pretax loss for Reef includes an impairment charge of $2,605,061 based upon the
Company’s assessment of the fair value of this operation.
In
conjunction with the discontinuances of operations described above, the Company
projects gains of $416,525 on the transactions. The assets of the
discontinued operations are presented separately under the captions "Assets of
Discontinued Subsidiaries” and “Liabilities of Discontinued Subsidiaries”,
respectively in the accompanying Balance Sheets at December 31, 2007 and 2006,
and consist of the following:
|
|
|
2007
|
|
|
2006
|
|
Assets
of Discontinued Subsidiaries:
|
|
|
|
|
|
|
Cash
|
|
$ |
80,179 |
|
|
$ |
110,422 |
|
Accounts
and Other Receivables
|
|
|
350,289 |
|
|
|
384,062 |
|
Inventory
|
|
|
224,132 |
|
|
|
84,030 |
|
Prepaid
Expenses
|
|
|
80,113 |
|
|
|
93,005 |
|
Property,
Plant and Equipment, Net
|
|
|
4,118,666 |
|
|
|
7,551,727 |
|
Other
Assets
|
|
|
386,048 |
|
|
|
387,612 |
|
Total
Assets
|
|
$ |
5,239,427 |
|
|
$ |
8,610,858 |
|
|
|
|
|
|
|
|
|
|
Liabilities
of Discontinued Subsidiaries:
|
|
|
|
|
|
|
|
|
Accounts
Payable and Accrued Expenses
|
|
$ |
732,580 |
|
|
$ |
429,418 |
|
Customer
Deposits
|
|
|
10,800 |
|
|
|
- |
|
Total
Liabilities
|
|
$ |
743,380 |
|
|
$ |
429,418 |
TIDELANDS
OIL & GAS CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007 AND 2006
NOTE 7 – RESTRICTED
CASH
Restricted
cash consists of a certificate of deposit to secure a letter of credit issued to
the Railroad Commission of Texas and Forfeiture Deposits in the Company’s 401K
Plan.
NOTE 8 – LONG-TERM
DEBT
A summary
of long-term debt at December 31, 2007 and December 31, 2006 is as
follows:
|
|
|
December
31,
|
|
|
December
31,
|
|
|
|
2007
|
|
|
2006
|
|
Note
Payable, Secured by Reef International
|
|
|
|
|
|
|
Pipeline,
Interest Bearing at 2% Over Prime
|
|
|
|
|
|
|
Rate
Per Annum, Maturing May 25, 2008
|
|
$ |
5,
158,748 |
|
|
$ |
4,785,003 |
|
|
|
|
|
|
|
|
|
|
Convertible
Debentures, Unsecured, Including
|
|
|
|
|
|
|
|
|
Prepaid
Interest at 9% Per Annum, Maturing
|
|
|
|
|
|
|
|
|
January
20, 2008 (see NOTE 11)
|
|
|
2,374,291 |
|
|
|
4,374,291 |
|
|
|
|
7,533,039 |
|
|
|
9,159,294 |
|
Less:
Current Maturities
|
|
|
7,533,039 |
|
|
|
225,000 |
|
|
|
|
|
|
|
|
|
|
Total Long-Term
Debt
|
|
$ |
- |
|
|
$ |
8,934,294 |
For 2007,
the average interest rate incurred on our Note Payable was approximately
9.3%. During 2007, $353,885 of interest was capitalized to the
principal amount of our Note Payable.
NOTE 9 – DEFERRED INCOME
TAXES
Deferred
income taxes reflect the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and
the amounts used for Federal income tax purposes. Significant
components of the Company’s deferred taxes as of December 31, 2007, are as
follows:
|
Deferred
Tax Assets:
|
|
|
|
|
Net
Operating Loss Carry-Forwards
|
|
$ |
49,067,312 |
|
|
Temporary
Differences:
|
|
|
|
|
|
Difference
between Book and Tax Assets
|
|
|
- |
|
|
Non-deductible
Accruals Net of Additional Depreciation
|
|
|
6,075,437 |
|
|
Net
Operating Loss Carry-Forward after Temporary Differences
|
|
$ |
42,991,875 |
|
|
Statutory
Tax Rate
|
|
|
35 |
% |
|
Total
Deferred Tax Assets
|
|
|
15,047,156 |
|
|
|
|
|
|
|
|
Less:
Valuation Allowance for Deferred Tax Assets
|
|
|
(15,047,156 |
) |
|
Net
Deferred Tax Asset / (Liability)
|
|
$ |
0 |
|
TIDELANDS
OIL & GAS CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007 AND 2006
NOTE 9 – DEFERRED INCOME TAXES
(CONTINUED)
Management
believes that the realization of all or a portion of the future tax benefits for
net operating loss carry-forwards is “not likely” as indicated in the above
table after deducting a 100% valuation allowance. The valuation
allowance increased by $2,448,809 from 2006 to 2007. There were no
future tax benefits for net operating loss carry-forwards realizable prior to
2007.
During
2007 and 2006, the Company incurred net losses and therefore, had no federal
income tax liability. At December 31, 2007, the Company had available
net operating loss carry-forwards of approximately $42,991,875 for Federal
income tax purposes. Utilization by the Company is subject to
limitations based upon the Company’s future income. The loss
carry-forwards, if not used, will expire as follows: $256,136 in
2017; $122,042 in 2018; $641,595 in 2019; $722,941 in 2020; $2,431,560 in 2021;
$3,826,221 in 2022; $1,684,474 in 2023; $11,369,605 in 2024; $7,218,073 in 2025;
$8,968,333 in 2026; and $5,750,895 in 2027.
NOTE 10 – COMMON STOCK
TRANSACTIONS
A
summary of common stock transactions for the year ended December 31, 2007 is as
follows:
The
Company issued 500,000 shares of its common stock valued at $135,000 to the
former President in accordance with the terms of his Severance
Agreement.
The
Company issued 7,721,706 shares of its common stock valued at $1,328,787 to four
law firms for legal services related to securities law matters, various
litigation and other Company legal needs of which $130,616 remains as a retainer
for 2008 legal charges and $181,244 was applied to prior charges.
The
Company cancelled 1,000,000 shares of its common stock valued at $220,000 held
by the President and a former officer which were offset against stock
subscriptions due from them to the Company.
The
Company issued a total of 2,298,848 shares of its common stock to a holder of
its Convertible Debentures for conversion of $2,000,000.
The
Company issued 345,000 shares of its restricted common stock valued at $70,000
for 2006 and 2007 investor public relations services.
The
Company issued 2,642,858 shares of its common stock valued at $550,000 to each
of two Directors for a total of 5,285,716 shares valued at
$1,100,000. In addition to their customary duties as directors, these
board members provided regular and ongoing management services to the
Company. This compensation to the two Directors represents their
compensation for 2007.
TIDELANDS
OIL & GAS CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007 AND 2006
NOTE 10 – COMMON STOCK TRANSACTIONS
(CONTINUED)
The
Company issued 69,000 shares of its restricted common stock valued at $14,490
for preparation of a Research Report.
The
Company issued 4,619,047 shares to a Director for $790,000 as a result of his
exercise of 2,619,047 stock options at $0.21 per share and 2,000,000 stock
options at $0.12 per share.
The
Company issued 376,819 shares of its common stock valued at $54,873 to a
Director for Corporate Secretary services and related costs.
The
Company issued 527,778 shares of its common stock valued at $100,139 to two
Officer/employees in accordance with their employment contracts.
The
Company issued 100,000 shares of its restricted common stock valued at $15,000
to an employee as a stock bonus.
The
Company issued 225,000 shares of its common stock valued at $41,625 to two
employees as stock bonuses.
The
Company issued a total of 550,000 shares of its restricted common stock valued
at $84,250 to three of its Officers as stock bonuses.
The
Company issued a total of 50,000 shares of its common stock valued at $8,000 to
an Officer as a stock bonus.
A
summary of common stock transactions for the year ended December 31, 2006 is as
follows:
The
Company issued 25,000 shares of its common stock for legal fees valued at
$215,000.
The
Company issued 60,000 shares of its restricted common stock for legal fees
valued at $57,000.
The
Company issued 1,800,000 shares of its restricted common stock
for employee stock bonuses valued at $1,480,800.
The
Company issued 100,000 shares of its common stock for an employee stock bonus
valued at $63,500.
The
Company issued 450,000 shares of its common stock for Directors Fees valued at
$261,000.
The
Company issued 150,000 shares of its common stock for a Directors Fee valued at
$87,000.
TIDELANDS
OIL & GAS CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007 AND 2006
NOTE 10 – COMMON STOCK TRANSACTIONS
(CONTINUED)
The
Company issued 2,828,304 shares of its restricted common stock valued at
$1,696,982 to five investors in order to cure all existing events of default in
accordance with the terms of a Waiver and Amendment Agreement relating to the
Convertible Debentures they previously acquired.
The
Company issued 1,823,803 shares of its common stock to holders of its
Convertible Debentures for conversion of $1,586,709.
The
Company issued 500,000 shares of its common stock valued at $445,000 under the
2004 Stock Grant and Option Plan pursuant to an employment contract with an
officer of the Company for 2005.
NOTE 11 – 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
twelve months ending December 31, 2007.
|
|
|
|
|
|
|
|
|
Shares
Reserved
|
|
|
|
|
|
Weighted
|
|
|
|
Stock
|
|
|
Stock
|
|
|
for
Convertible
|
|
|
Total
|
|
|
Average
|
|
|
|
Options
|
|
|
Warrants
|
|
|
Debentures
|
|
|
Shares
|
|
|
Exercise
Price
|
|
Outstanding
– December 31, 2006
|
|
|
250,000 |
|
|
|
18,138,051 |
|
|
|
5,027,916 |
|
|
|
23,415,967 |
|
|
$ |
1.070 |
|
First
Quarter
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
/ Issued
|
|
|
15,000,000 |
|
|
|
- |
|
|
|
- |
|
|
|
15,000,000 |
|
|
|
0.210 |
|
Exercised/Converted
|
|
|
(952,381 |
) |
|
|
- |
|
|
|
(2,298,848 |
) |
|
|
(3,251,229 |
) |
|
|
0.677 |
|
Expired
|
|
|
- |
|
|
|
(7,563,167 |
) |
|
|
- |
|
|
|
(7,563,167 |
) |
|
|
1.275 |
|
Cancelled
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Outstanding
– March 31, 2007
|
|
|
14,297,619 |
|
|
|
10,574,884 |
|
|
|
2,729,068 |
|
|
|
27,601,571 |
|
|
|
0.598 |
|
Remaining
Life in years
|
|
|
11.2 |
|
|
|
1.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Second
Quarter
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
/ Issued
|
|
|
10,000,000 |
|
|
|
- |
|
|
|
- |
|
|
|
10,000,000 |
|
|
|
0.120 |
|
Exercised/Converted
|
|
|
(1,666,666 |
) |
|
|
- |
|
|
|
- |
|
|
|
(1,666,666 |
) |
|
|
0.210 |
|
Expired
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Cancelled
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Outstanding
– June 30, 2007
|
|
|
22,630,953 |
|
|
|
10,574,884 |
|
|
|
2,729,068 |
|
|
|
35,934,905 |
|
|
|
0.483 |
|
Third
Quarter
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
/ Issued
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Exercised/Converted
|
|
|
(2,000,000 |
) |
|
|
- |
|
|
|
- |
|
|
|
(2,000,000 |
) |
|
|
0.120 |
|
Expired
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Cancelled
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Outstanding
– September 30, 2007
|
|
|
20,630,953 |
|
|
|
10,574,884 |
|
|
|
2,729,068 |
|
|
|
33,934,905 |
|
|
|
0.483 |
TIDELANDS
OIL & GAS CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007 AND 2006
NOTE 11 – STOCK OPTIONS, STOCK
WARRANTS AND SHARES RESERVED FOR CONVERTIBLE DEBENTURES
(CONTINUED)
|
|
|
|
|
|
|
|
|
Shares
Reserved
|
|
|
|
|
|
Weighted
|
|
|
|
Stock
|
|
|
Stock
|
|
|
for
Convertible
|
|
|
Total
|
|
|
Average
|
|
|
|
Options
|
|
|
Warrants
|
|
|
Debentures
|
|
|
Shares
|
|
|
Exercise
Price
|
|
Fourth
Quarter
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
/ Issued
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Exercised/Converted
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Expired
|
|
|
(250,000 |
) |
|
|
(8,028,956 |
) |
|
|
- |
|
|
|
(8,278,956 |
) |
|
|
0.76 |
|
Cancelled
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Outstanding
– December 31, 2007
|
|
|
20,380,953 |
|
|
|
2,545,928 |
|
|
|
2,729,068 |
|
|
|
25,655,949 |
|
|
$ |
0.324 |
|
Summary
of Outstanding Stock Options, Stock Warrants and Shares Reserved for
Convertible Debentures
|
| |
|
|
|
|
|
|
|
|
|
Shares
Reserved
|
|
|
|
|
|
Stock
|
|
|
Stock
|
|
|
for
Convertible
|
|
Exercise
|
|
|
|
Options
|
|
|
Warrants
|
|
|
Debentures
|
|
Price
|
|
Stock
Options
|
|
|
|
|
|
|
|
|
|
|
|
Expiration
Date
|
|
|
|
|
|
|
|
|
|
|
|
February
28, 2017
|
|
|
12,380,593 |
|
|
|
|
|
|
|
$ |
0.210 |
|
May
23, 2017
|
|
|
8,000,000 |
|
|
|
|
|
|
|
|
0.120 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
Warrants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expiration
Date
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January
20, 2009
|
|
|
|
|
|
|
2,545,928 |
|
|
|
|
|
0.935 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
Reserved for Convertible Debentures
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expiration
Date
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January
20, 2008
|
|
|
|
|
|
|
|
|
|
2,729,068
|
|
|
0.870 |
|
Outstanding
– December 31, 2007
|
|
|
20,380,953 |
|
|
|
2,545,928 |
|
|
2,729,068
|
|
Avg. $ 0.324
|
The
3,351,122 shares remaining available for issuance in the 2004 Non-Qualified
Stock Grant and Option Plan as of December 31, 2006 were all issued during
2007.
The 2007
Non-Qualified Stock Grant and Option Plan was initiated with 35 million
shares. As of December 31, 2007, 19,157,656 shares remained available
for future issuance.
On
January 20, 2006, Tidelands entered into Securities Purchase Agreements with the
following accredited investors: Palisades Master Fund, Crescent International,
Ltd., Double U Master Fund, LP, JGB Capital, LP, Nite Capital, LP and RHP Master
Fund, Ltd. (collectively, “Purchasers”). In exchange for $6,569,750,
net of $1,173,651 prepaid interest, the Company issued to the investors
$6,569,750 of convertible debentures with a maturity date of January 20, 2008,
at a conversion price of $0.87 per share.
TIDELANDS
OIL & GAS CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007 AND 2006
NOTE 11 – STOCK OPTIONS, STOCK
WARRANTS AND SHARES RESERVED FOR CONVERTIBLE DEBENTURES
(CONTINUED)
In
connection with this financing, the Company issued 2,491,975 common stock
warrants exercisable at $0.935 with an expiration date of January 20, 2009, and
7,551,432 common stock warrants exercisable at $1.275 with an expiration date of
February 19, 2007. The Company granted the investors registration
rights on both groups of securities; such registration was declared effective on
September 15, 2006.
Accounting for Stock-Based
Compensation
The
Company adopted Statement of Financial Accounting Standards No. 123R,
“Share-Based Payment” (“SFAS No. 123R”), as of January 1, 2006. SFAS
No. 123R requires companies to estimate the fair value of share-based payment
option awards on the date of grant using an option-pricing model. The
value of the portion of the award that is expected to vest is recognized as an
expense in the Company’s consolidated statement of operations over the periods
during which the employee or director is required to perform service in exchange
for the award. Prior to the adoption of SFAS No. 123R, the Company
accounted for share-based awards to employees and directors using the intrinsic
value method in accordance with APB No. 25.
The
Company uses the Black-Scholes Option Pricing model to estimate the fair value
of options and warrants issued. The variables used in the
Black-Scholes Option Pricing model for options granted during 2007, all of which
vested immediately, included: (1) risk free discount rate of 4.56% to 4.86%, (2)
expected option life of five years estimated pursuant to the ‘plain vanilla’
provisions of SAB 107, “Share-Based Payment,” (3) expected volatility of 116.59%
to 117.55%, and (4) expected dividend rate of zero. At December 31,
2007, all compensation expense related to the Company’s outstanding options has
been fully recognized.
At
December 31, 2007, outstanding options had zero intrinsic value.
NOTE 12 – COMMITMENT FOR SUITE LICENSE
AGREEMENT
On June
4, 2004, the Company entered into a Suite License Agreement with the San Antonio
Spurs, LCC commencing July 1, 2004 for a period of five years. The
annual license fee for the first year was $159,000 and has been subject to a 6%
per annum price escalation thereafter. The annual fee is payable in
installments as indicated in the agreement.
The
Company’s former President assumed all the Company’s remaining obligations under
the Suite License Agreement pursuant to the terms of Agreement effective
December 8, 2006. The Suite License Agreement was assigned to the
former President although the Company remains liable if the obligations are not
met in whole, or in part.
TIDELANDS
OIL & GAS CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007 AND 2006
NOTE 13 – RELATED PARTY
TRANSACTION
During
the year ended December 31, 2007, the Company issued 25,000,000 stock options to
its Directors; 5,000,000 to each of the three Directors at an option price of
$0.21 per share expiring February 28, 2017, and 5,000,000 each to two Directors
at an option price of $0.12 per share expiring May 23, 2017. NOTE 11
herein details all 2007 transactions concerning these stock
options. The “Fair Value” of these options in accordance with the
“Black-Scholes” method of valuation was $3,638,000.
NOTE 14 - LEASES
The
Company entered into an operating lease on August 1, 2003 for the rental of its
executive offices at a monthly rent of $3,400, which expired December 31,
2007. Currently the Company is leasing on a month-to-month
basis.
All other
lease obligations were those of the Company’s subsidiaries, Sonterra Energy
Corporation which was sold on January 9, 2008 and Reef Ventures whose assets
were sold on March 27, 2008.
There are
no future operating lease commitments related to continuing operations as of
December 31, 2007.
Rent
expense for the years ended December 31, 2007 and 2006 was $40,800 and $40,800,
respectively for continuing operations and $63,145 and $65,095 for the years
ended December 31, 2007 and 2006, respectively for discontinued
operations.
NOTE 15 – COMMITMENTS AND
CONTINGENCIES
The
Company is subject to the laws and regulations relating to the protection of the
environment. The Company’s policy is to accrue environmental and
related cleanup costs of a non-capital nature when it is both probable that a
liability has been incurred and when the amount can be reasonably
estimated. Although it is not possible to quantify with any degree of
certainty the financial impact of the Company’s continuing compliance efforts,
management believes any future remediation or other compliance related costs
will not have a material adverse effect on the consolidated financial condition
or reported results of consolidated operations of the Company.
NOTE 16 – 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.
TIDELANDS
OIL & GAS CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007 AND 2006
NOTE 16 – LITIGATION
(CONTINUED)
A trial
date had been set for January 7, 2008. On December 3, 2007,
however, ZG Gathering, Ltd. (“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 and Tidelands non-suited with prejudice all of
its claims against Sheerin. 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. There is
no setting yet for the trial of the removal action, and the parties are in
advanced settlement discussions.
Based on
prior negotiations, the Company has reserved $2,250,000 as an estimated
litigation settlement and that amount has been included in this
report. However, if the matter proceeds to trial, such reserve may or
may not be adequate.
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. All remaining funds as of January 9, 2009 will be returned
to the Company.
NOTE 17 – DEBT
FINANCING
On
January 20, 2006, the Company completed a private placement of $6,569,750 of
convertible debt with six institutional investors. The net proceeds
realized by the Company were $4,949,291 after deduction of legal costs,
commissions and interest discount. The Company issued original issue
discount debentures with a maturity date of January 20, 2008, and a conversion
feature which permitted the holders to convert into common stock of the Company
at a price of $0.87 per share. The investors also received three year
“Series A Common Stock Warrants” to purchase, in the aggregate, 2,491,975 shares
of common stock of the Company at a conversion price of $0.935 per
share. Additionally, the Company issued to the investors “Series B
Common Stock Warrants” which provided for a thirteen month exercise period, at a
conversion price of $1.275 per share, and an aggregate purchase total of
7,551,432 shares of common stock of the Company.
TIDELANDS
OIL & GAS CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007 AND 2006
NOTE 17 – DEBT FINANCING
(CONTINUED)
In
accordance with this private placement, the Company entered into a “Registration
Rights Agreement” with the investors, whereby, among other terms and conditions,
the Company must comply with various effective dates and periods or, if in
default of said dates and/or periods, be subject to liquidated damages as
outlined in the master agreement. Between June 2006 and September 22,
2006, the investors billed and were paid $478,155 of liquidated damages
including $182,625 paid to RHP Master Fund, Ltd., as described below for not
meeting the required effective date.
On
September 20, 2006, RHP Master Fund, Ltd. (“RHP”) gave the Company its notice of
default for failure to timely pay liquidated damages associated with the
Company’s failure to timely register the underlying debenture shares and
warrants with the Securities and Exchange Commission. RHP accelerated
payment of the RHP Debenture at the Mandatory Default Amount. The
Mandatory Default Amount was 130% of the aggregate principal amount of the
Debenture. On September 22, 2006, the Company paid RHP the sum of
$791,375 including an $182,625 Default Amount, thereby discharging the RHP
debenture obligation.
On
September 26, 2006, Palisades Master Fund, LP (“Palisades”) gave the Company its
notice of election accelerating payment of the Palisades Debenture at the
Mandatory Default Amount asserting a cross default event triggered by the RHP
Notice of Default Event received by the Company on September 20, 2006, as
disclosed in the Current Report filed on Form 8-K on September 25,
2006. Palisades demanded immediate payment of its Debentures at the
Mandatory Default Amount of $5,597,687.
On
September 28, 2006, Company entered into a Waiver and Amendment Agreement
(“Agreement”) with Palisades and all of the remaining Holders, which include
Crescent International, Ltd., Double U Master Fund, LP, JGB Capital, LP and Nite
Capital, LP.
In
consideration of that Agreement, all existing events of default known to the
Holders were waived in consideration of the issuance of 2,828,304 common shares
valued at $1,696,982. The Company issued the shares as
follows: Palisades - 2,000,000 shares, Crescent International, Ltd. -
304,375 shares, Double U Master Fund, LP - 152,179 shares, JGB Capital, LP -
250,000 shares, and Nite Capital, LP - 121,750 shares.
The
Convertible Debentures were paid in full on January 20, 2008. In
addition the Company repurchased warrants to purchase 2,071,407 shares of the
Company’s common stock. Subsequently, the Company acquired 243,616 of
the remaining 474,521 Series A Warrants leaving 230,905
outstanding.
TIDELANDS
OIL & GAS CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007 AND 2006
NOTE 18 - SUBSEQUENT
EVENTS
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.
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
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, L.L.C. ("Reef International") and Reef Marketing, L.L.C.
("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 $2,484,265 (the "Purchase Price"), and the execution by WTG
of a Throughput Payment Agreement (the "Throughput Payment Agreement") with
Impact International, L.L.C. ("Impact").
TIDELANDS
OIL & GAS CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007 AND 2006
NOTE 18 - SUBSEQUENT EVENTS
(CONTINUED)
Sale
of the Assets of Reef Ventures, LP: (Continued)
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, or 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
$47,440 of the Purchase Price received by Reef Ventures was used to pay legal
fees associated with the transaction and for working capital
purposes.
Stock
Issuance
On
February 26, 2008, the Company entered into an agreement with a consultant to
provide investor communications and public relations services to the
Company. The Company issued 5,300,000 shares to the consultant as
part of the agreement.
On
January 15, 2008, the Company issued a total of 6,249,999 shares to three
directors as additional compensation for services to be provided during
2008.
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.