As filed with the Securities and Exchange Commission on July 7, 2006
Registration No. 333-135363
U.S. SECURITIES AND EXCHANGE
COMMISSION Washington, D.C. 20549
--------------------
Form S-1/A
Amendment No. 1 to Form SB-2 amending to Form S-1
(see explanatory note below)
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
--------------------
TIDELANDS OIL & GAS CORPORATION
(Name of small business issuer in its charter)
---------------------
Nevada 66-0549380
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
4922
(Primary Standard Industrial
Classification Code Number)
---------------------
1862 W. Bitters Rd 1862 W. Bitters Rd
San Antonio, TX 78248 San Antonio, TX 78248
(210) 764-8642 (210) 764-8642
(Address and telephone number of (Address of principal place
principal executive office) of business)
Michael Ward, President
1862 W. Bitters Rd.
San Antonio, TX 78248
(Name, address and telephone number of agent for service)
----------------------------
COPIES TO:
Counsel to Issuer
Gregory M. Wilson, Esq.
18610 East 32nd Ave.
Greenacres, WA 99016
Tel (509) 891-8373
Fax (509) 891-8382
Approximate Date of Proposed Sale to the Public.
Approximate date of commencement of proposed sale to the public: From time to
time after the effective date of this registration statement.
If any of the securities being registered on this form are to be offered on a
delayed or continuous basis under Rule 415 under the Securities Act of 1933, as
amended, check the following box: [X]
If this form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act of 1933, as amended, please check the
following box and list the Securities Act registration statement number of the
earlier effective registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434, check
the following box. [ ]
CALCULATION OF REGISTRATION FEE
-------------------------------------------- ---------------- ----------------- ----------------- -------------
Title of Each Class of Securities to be Number of Proposed Maximum Proposed Maximum Amount of
Registered Shares to be Offering Price Aggregate Registration
Registered Per Share Offering Price Fee
-------------------------------------------- ---------------- ----------------- ----------------- -------------
Common Stock underlying original issue 9,816,840 (1) $ 0.87 $ 8,540,651 $ 914
discount convertible debentures
-------------------------------------------- ---------------- ----------------- ----------------- -------------
Common Stock underlying Series "A" common 3,239,558 (2) $ 0.935 $ 3,028,989 $ 324
stock purchase warrants
-------------------------------------------- ---------------- ----------------- ----------------- -------------
Common Stock underlying Series "A" common 85,405 (3) $ 0.935 $ 79,854 $ 10
Stock purchase warrants
-------------------------------------------- ---------------- ----------------- ----------------- -------------
Common Stock underlying Series "B" common 9,816,840 (4) $1.275 $12,516,471 $ 1,339
stock purchase warrants
-------------------------------------------- ---------------- ----------------- ----------------- -------------
Total Registration and Fee 22,958,643 $24,177,453 $ 2,587
-------------------------------------------- ---------------- ----------------- ----------------- -------------
(1) These shares are issuable upon conversion of original issue discount
convertible debentures held by the selling security holders. The amount
registered also includes such additional shares as may hereafter be offered or
issued resulting from anti-dilution provisions of the convertible debentures in
accordance with Rule 416 under the Securities Act of 1933. The debentures are
convertible at $0.87 per share. For purposes of estimating the number of shares
of common stock to be included in this registration statement, we calculated a
good faith estimate of the number of shares of our common stock that we believe
will be issuable upon conversion of the convertible debenture to account for
anti-dilution and price protection adjustments based upon 130% of shares
issuable at the conversion rate. Should such adjustments result in our having
insufficient shares registered to meet our contractual obligations, we will not
rely upon Rule 416, but will file a new registration statement to cover the
resale of such additional shares. The offering price and gross offering proceeds
for these shares are estimated solely for the purpose of calculating the
registration fee in accordance with paragraphs (c) and (g) of Rule 457 under the
Securities Act of 1933 based on the conversion rate per share of common stock,
which is higher than the average of the closing bid and asked prices of our
common stock on July 6, 2006 in the over-the-counter market.
(2) These shares are issuable upon exercise of the Series "A" warrants held by
the selling security holders. For purposes of estimating the number of shares of
common stock to be included in this registration statement, we calculated a good
faith estimate of the number of shares of our common stock that we believe will
be issuable upon exercise of the Series "A" warrants to account for
anti-dilution and price protection adjustments based upon 130% of shares
issuable at the conversion rate of $0.935 per share. Should such adjustments
result in our having insufficient shares registered to meet our contractual
obligations, we will not rely upon Rule 416, but will file a new registration
statement to cover the resale of such additional shares. The offering price and
gross offering proceeds for these shares are estimated solely for the purpose of
calculating the registration fee in accordance with paragraphs (c) and (g) of
Rule 457 under the Securities Act of 1933 based on the conversion rate per share
of common stock, which is higher than the average of the closing bid and asked
prices of our common stock on July 6, 2006 in the over-the-counter market.
(3) These shares are issuable on exercise of Series "A" warrants held by a
registered broker that participated in placing the original issue discount
convertible debentures and warrants with the selling security holders. The
offering price and gross offering proceeds for these shares are estimated solely
for the purpose of calculating the registration fee in accordance with
paragraphs (c) and (g) of Rule 457 under the Securities Act of 1933 based on the
conversion rate per share of common stock, which is higher than the average of
the closing bid and asked prices of our common stock on July 6, 2006 in the
over-the-counter market. For purposes of estimating the number of shares of
common stock to be included in this registration statement, we calculated a good
faith estimate of the number of shares of our common stock that we believe will
be issuable upon conversion of the convertible debenture to account for
anti-dilution and price protection adjustments based upon 130% of shares
issuable at the conversion rate. Should such adjustments result in our having
insufficient shares registered to meet our contractual obligations, we will not
rely upon Rule 416, but will file a new registration statement to cover the
resale of such additional shares.
(4) These shares are issuable upon exercise of the Series "B" warrants held by
the selling security holders. For purposes of estimating the number of shares of
common stock to be included in this registration statement, we calculated a good
faith estimate of the number of shares of our common stock that we believe will
be issuable upon exercise of the Series "B" warrants to account for
anti-dilution and price protection adjustments based upon 130% of shares
issuable at the conversion rate of $1.275 per share. Should such adjustments
result in our having insufficient shares registered to meet our contractual
obligations, we will not rely upon Rule 416, but will file a new registration
statement to cover the resale of such additional shares. The offering price and
gross offering proceeds for these shares are estimated solely for the purpose of
calculating the registration fee in accordance with paragraphs (c) and (g) of
Rule 457 under the Securities Act of 1933 based on the conversion rate per share
of common stock, which is higher than the average of the closing bid and asked
prices of our common stock on June, 2006 in the over-the-counter market.
The registrant hereby amends this registration statement on such date or dates
as may be necessary to delay its effective date until the registrant shall file
a further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with section 8(a) of the
securities act, or until the registration statement shall become effective on
such date as the commission, acting pursuant to said section 8(a), may
determine.
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any state in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such state.
EXPLANATORY NOTE: This registration statement was originally filed on Form SB-2
on July 7, 2006. Subsequent to the filing, the registrant determined that it was
not eligible to use Form SB-2 because it had exceeded the public float
limitations of Regulation S-B. As a result of this limitation, the registrant is
amending the Form SB-2 to a Form S-1 in accordance with the recommendations of
the Securities and Exchange Commission.
PRELIMINARY PROSPECTUS SUBJECT TO COMPLETION, DATED August ___, 2006.
PROSPECTUS
22,958,643
Common Shares
TIDELANDS OIL & GAS CORPORATION
1862 W. Bitters Rd., San Antonio, TX 78248
The Resale of Shares of Common Stock
The selling price of the shares will be determined by market factors at the time
of their resale.
This prospectus relates to the resale by the selling shareholders of up to
shares of common stock. The selling shareholders may sell the stock from time to
time in the over-the-counter market at the prevailing market price or in
negotiated transactions. With regard to the offered shares,
o up to 9,816,840 shares are issuable upon conversion of outstanding
Original Issue Discount Convertible Debentures, which are convertible
into our common stock at $0.87 per share;
o up to 3,239,558 shares are issuable upon exercise of outstanding
Series "A" Warrants at an exercise price of $0.935 per share;
o up to 85,405 shares are issuable to HPC Capital Management Corp. upon
exercise of outstanding Series "A" Warrants at an exercise price of
$0.935 per share;
o up to 9,816,840 shares are issuable upon exercise of outstanding
Series "B" Warrants at an exercise price of $1.275 per share.
For purposes of estimating the number of shares of common stock to be included
in this registration statement, we calculated a good faith estimate of the
number of shares of our common stock that we believe will be issuable upon
conversion of the convertible debenture to account for anti-dilution and price
protection adjustments based upon 130% of shares issuable at the conversion and
exercise rates.
This offering is not being underwritten. The common shares offered under this
prospectus may be sold by the selling shareholders on the public market, in
negotiated transactions with a broker-dealer or market maker as a principal or
agent, or in privately negotiated transactions not involving a broker or dealer.
We will receive no proceeds from the sale of the shares by the selling
shareholders. However, we may receive up to $12,019,417 Dollars of proceeds from
the shares issuable upon the exercise of all the Series "A" and "B" warrants,
and $6,569,732 attributable to the conversion of the Original Issue Discount
Convertible Debentures, the proceeds of which would be applied to the
outstanding balances due on the Debenture debt.
There is no assurance that any or all of the Warrants will be exercised or the
Debentures will be converted at any price.
Our common stock is quoted on the over-the-counter Electronic Bulletin Board
under the symbol TIDE. On August 18, 2006, the average of the bid and asked
prices of the common stock on the Bulletin Board was $0.61 per share.
Investing in the common stock involves a high degree of risk. You should not
invest in the common stock unless you can afford to lose your entire investment.
See "Risk Factors" beginning on page 5 of this prospectus.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
Please read this prospectus carefully. It describes our company, finances,
products and services. Federal and state securities laws require us to include
in this prospectus all the important information that you will need to make an
investment decision.
You should rely only on the information contained or incorporated by reference
in this prospectus to make your investment decision. We have not authorized
anyone to provide you with different information. The selling shareholders are
not offering these securities in any state where the offer is not permitted. You
should not assume that the information in this prospectus is accurate as of any
date other than the date on the front page of this prospectus.
Brokers or dealers effecting transactions in the Shares should confirm the
registration of the Shares under the securities laws of the states in which such
transactions occur or the existence of an exemption from such registration, or
should cause such registration to occur in connection with any offer or sale of
the Shares.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The Date of this Prospectus is August 23, 2006
The following table of contents has been designed to help you find
important information contained in this prospectus. We encourage you to read the
entire prospectus.
TABLE OF CONTENTS
Special Note Regarding Forward-looking Statements..............................2
Prospectus Summary.............................................................2
The Company...........................................................3
The Offering..........................................................3
Recent Developments...................................................3
Use of Proceeds.......................................................5
Risk Factors..........................................................5
Market For Common Equity and Related Shareholder Matters......................13
Dividends and Dividend Policy.................................................14
Securities Authorized for Issuance Under Equity Compensation Plans............14
Summary Financial Information.................................................15
Business......................................................................16
Properties....................................................................19
Management's Discussion and Analysis and Results of Operations...............19
Quantitative and Qualitative Disclosures About Market Risk....................29
Selling Shareholders..........................................................30
Plan of Distribution..........................................................33
Directors and Executive Officers..............................................34
Principal Shareholders........................................................37
Certain Relationships and Related Transactions................................40
Legal Proceedings.............................................................41
Description of Securities.....................................................44
Legal Matters.................................................................46
Experts.......................................................................46
Where You Can Find More Information...........................................46
Index to Consolidated Financial Statements...................................F-1
1
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
In this prospectus we make a number of statements, referred to as
"forward-looking statements", which are intended to convey our expectations or
predictions regarding the occurrence of possible future events or the existence
of trends and factors that may impact our future plans and operating results.
These forward-looking statements are derived, in part, from various assumptions
and analyses we have made in the context of our current business plan and
information currently available to us and in light of our experience and
perceptions of historical trends, current conditions and expected future
developments and other factors we believe to be appropriate in the
circumstances. You can generally identify forward-looking statements through
words and phrases such as "seek", "anticipate", "believe", "estimate", "expect",
"intend", "plan", "budget", "project", "may be", "may continue", "may likely
result", and similar expressions. When reading any forward looking statement you
should remain mindful that all forward-looking statements are inherently
uncertain as they are based on current expectations and assumptions concerning
future events or future performance of our company, and that actual results or
developments may vary substantially from those expected as expressed in or
implied by that statement for a number of reasons or factors, including those
relating to:
o whether or not markets for our products develop and, if they do
develop, the pace at which they develop;
o our ability to attract the qualified personnel to implement our growth
strategies,
o our ability to develop sales, marketing and distribution capabilities;
o the accuracy of our estimates and projections;
o our ability to fund our short-term and long-term financing needs;
o changes in our business plan and corporate strategies; and
o other risks and uncertainties discussed in greater detail in the
sections of this prospectus, including those captioned "Risk Factors"
and "Management's Discussion And Analysis Of Financial Condition And
Results Of Operations".
o Each forward-looking statement should be read in context with, and with
an understanding of, the various other disclosures concerning our
company and our business made elsewhere in this prospectus as well as
other pubic reports filed with the United States Securities and
Exchange Commission (the "SEC"). You should not place undue reliance on
any forward-looking statement as a prediction of actual results or
developments. We are not obligated to update or revise any
forward-looking statement contained in this prospectus to reflect new
events or circumstances unless and to the extent required by applicable
law.
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to, and should
be read in conjunction with, the more detailed information and the Financial
Statements (including the notes thereto) appearing elsewhere in this Prospectus.
Unless otherwise specifically referenced, all references to dollar amounts refer
to United States dollars.
The Company
Tidelands Oil & Gas Corporation (the "Company"), formerly known as C2
Technologies, Inc., was incorporated under the laws of the State of Nevada on
February 25, 1997. C2 Technologies, Inc. changed its name to Tidelands Oil & Gas
Corporation on November 19, 1998. The Company has ten subsidiaries which it
directly and indirectly owns as follows: (1) Rio Bravo Energy LLC, (2) Arrecefe
Management LLC, (3) Marea Associates, L.P. , (4) Terranova Energia, S.de R.L. de
C.V., (5) Esperanza Energy LLC and (6) Sonterra Energy Corporation. We also own
2
a 97% limited partnership interest in Reef Ventures, L.P.(7) Arrecefe Management
LLC owns a 1% general partner interest in Reef Ventures, L.P. Rio Bravo Energy,
LLC owns 100% of the member interest in Sonora Pipeline LLC. (8) Reef Ventures,
L.P. owns 100% of the member interest in Reef International LLC(9), Reef
Marketing LLC(10).
The Company's products and services are primarily focused on development and
operation of transportation, processing, distribution and storage projects for
natural gas and natural gas liquids in the northeastern states of Mexico
(Chihuahua, Coahuila, Nuevo Leon and Tamaulipas) and the State of Texas.
Unless otherwise noted, the "Company" as used in this Prospectus, will refer to
Tidelands Oil & Gas Corporation as described above.
Our principal offices are located at 1862 W. Bitters Rd., San Antonio, TX 78248.
Our telephone number is 210-764-8642.
The Offering
This prospectus relates to the offer and sale by some of our shareholders during
the period in which the registration statement containing this prospectus is
effective up to 22,958,643 common shares consisting of:
o up to 9,816,840 shares are issuable upon conversion of
outstanding Original Issue Discount Convertible Debentures,
which are convertible into our common stock at $0.87 per
share;
o up to 3,239,558 shares are issuable upon exercise of
outstanding Series "A" Warrants at an exercise price of $0.935
per share;
o up to 85,405 shares are issuable to HPC Capital Management
Corp. upon exercise of outstanding Series "A" Warrants at an
exercise price of $0.935 per share;
o up to 9,816,840 shares are issuable upon exercise of
outstanding Series "B" Warrants at an exercise price of $1.275
per share.
For purposes of estimating the number of shares of common stock to be included
in this registration statement, we calculated a good faith estimate of the
number of shares of our common stock that we believe will be issuable upon
conversion of the convertible debenture to account for anti-dilution and price
protection adjustments based upon 130% of shares issuable at the conversion and
exercise rates.
The common shares offered under this prospectus may be sold by the selling
shareholders on the public market, in negotiated transactions with a
broker-dealer or market maker as principal or agent, or in privately negotiated
transactions not involving a broker or dealer. Information regarding the selling
shareholders, the common shares they are offering to sell under this prospectus,
and the times and manner in which they may offer and sell those shares is
provided in the sections of this prospectus captioned "Selling Shareholders" and
"Plan of Distribution". We will not receive any of the proceeds from those
sales. Should the selling shareholders in their discretion, exercise any of the
common share purchase warrants underlying the common shares offered under this
prospectus, we would, however, receive the exercise price for those warrants.
The registration of common shares pursuant to this prospectus does not
necessarily mean that any of those shares will ultimately be offered or sold by
the selling shareholders.
Information on Outstanding Shares
---------------------------------
The number of shares of our common stock outstanding before and after this
offering is set forth below:
o Common shares issued and outstanding before this offering: 80,525,815
o Common shares issued and outstanding after this Offering: 103,486,458
The number set forth above for the shares of common stock outstanding before
this offering is the number of shares of our common stock outstanding on June
15, 2006. The number of shares issued and outstanding after this Offering
assumes that all of the warrants are exercised and the debentures are converted
including the additional shares assuming adjustments for the additional shares.
Recent Developments
In the first two fiscal quarters of 2006, several significant developments
occurred with respect to our businesses operated by our Company.
3
Financing Transaction
---------------------
On January 20, 2006, the 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"). We sold $6,569,732
Dollars, in the aggregate principal amount, of discounted convertible
debentures("Debentures") and Series "A" and Series "B" Warrants to purchase
common stock ("Warrants") for an aggregate payment of $5,396,098 after deduction
for the interest discount. The Company paid an 8% commission to the placement
agent, HPC Capital Management, LLC., a registered broker-dealer. The Company
granted HPC Capital Management Series A Common Stock Purchase Warrants as
additional transaction compensation. The Company received net proceeds of
$4,949,291 after deduction of legal costs, commissions and interest discount. We
are using the proceeds for working capital. This registration statement and
prospectus covers the re-offer and re-sale of the common shares underlying the
Debentures and Warrants.
On April 17, 2006, we filed an amendment to our articles of incorporation
increasing our authorized common stock capital from One Hundred Million
(100,000,000) shares, par value $0.001 per share to Two Hundred Fifty Million
(250,000,000) shares, par value $0.001 per share. The amendment was approved by
written consent of 77.5% of our Company shareholders.
Esperanza Energy LLC
--------------------
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 liquefied natural gas (LNG) regas terminal near Long Beach,
California. Esperanza would utilize TORP Technology's HiLoad LNG Regas unit
which 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 is
conducting the feasibility study for this project with the assistance of
best-in-class LNG, environmental, pipeline and legal advisors.
Sonora Pipeline LLC and Terranova Energia, S. de R.L. de C.V.
-------------------------------------------------------------
The cross-border gas pipeline and storage development activities of the above
entities to establish the Burgos Hub Export/Import project progressed forward in
two principal areas:
Permitting Activities:
----------------------
Sonora Pipeline LLC continued its efforts to finish all activities necessary to
move from NEPA pre-filing status to a submission for Certification for its two
international pipeline U.S. segments, the Progreso International Pipeline and
the Mission International Pipeline. Sonora believes it has filed all needed
revisions to the Draft Environmental Report for the Progreso International
Pipeline with FERC for purposes of the NEPA Environmental Assessment
requirements. This proposed pipeline will be the eastern leg of the U.S.
pipelines which will interconnect with the Tennessee Gas Pipeline transmission
lines at the Alamo Station and will deliver natural gas to the proposed Brasil
Storage facility approximately 17 miles south of the U.S./Mexico border at
Progreso, Texas. The proposed Mission International Pipeline segment was
re-designed in the first quarter of 2006 due to a routing conflict with a fiber
optic line. It will be approximately 24 miles long and will commence at the
existing HPL Valero-Gilmore gas plant in Hidalgo County, Texas and will extend
southward to the Arguelles crossing of the Rio Grande River into Mexico near the
city of Mission, Texas. The completion of NEPA pre-filing activities for the
Mission segment including responses to FERC inquiries and scoping of affected
stakeholders is anticipated during the second quarter of 2006. The current
catalog of FERC correspondence for Sonora's activities is located at
www.ferc.gov under Docket No. PF05-15.
On June 5, 2006, Tidelands Oil & Gas Corporation subsidiary, Terranova Energia,
S.de R.L. de C.V. was awarded a Permit (#G/183/TRA 2006) by the Comision
Reguladora de Energia de Mexico (CRE) to begin construction of the Terranova
Occidente and Oriente pipeline portions of its Burgos Hub Export/Import Project.
The Permit is for the Occidente and Oriente Sections of the Terranova pipelines.
The Occidente section will feature a 30-inch diameter pipeline, spanning
approximately 323 kilometers in length and will run from the Brasil storage
field to Nuevo Progreso, Mexico, with a proposed international pipeline crossing
into South Texas from Mexico at the Donna Station, which will provide the
opportunity for interconnects into Texas with TETCO, TGPL and Texas Gas
4
Services. The pipeline will also include a section that will stretch from the
Brasil storage field to Station 19 and up to Arguelles where another proposed
international pipeline crossing into South Texas is planned with opportunities
to interconnect with Houston Pipeline, Calpine and Kinder Morgan. A 36-inch
diameter pipeline spanning some 149 kilometers will characterize the Oriente
Section of the Terranova pipelines. It will run from the proposed offshore LNG
Regasification Terminal to Norte Puerto Mezquital and proceed to the Brazil
storage field. Both Terranova pipelines are designed to flow natural gas
bi-directionally between Texas and Mexico at a rate of approximately 1.2 BCFD
(billion cubic feet per day).
Additionally, we submitted the storage permit to the CRE on August 5, 2005 and
it was accepted for full review on October 14, 2005. Several unique questions
are presented by the filing of this permit due to the proposed location and the
lack of previous storage permit applications having been considered by the CRE.
We believe the CRE will consider and issue a decision on the storage permit
application by the first quarter of 2007.
Commercial Activities:
----------------------
The Company continues to present the pipeline and storage segments of the Burgos
Hub Export/Import project to commercial audiences in efforts to solicit their
interest and participation in the project at various levels. There have been
numerous introductory meetings with staff of the CFE and the Monterrey
industrial consumers of natural gas with a view toward clarifying their need and
usage of the proposed project facilities. Future efforts will concentrate on the
development and negotiation of precedent agreements for capacity reservation of
the project facilities. Preliminary evaluation of demand for storage capacity
reservation based upon direct discussion with the various customers is
conservatively estimated at 40 Bcf for the market area influenced by the
project. Similarly, several discussions continue with interested parties in the
U.S. and Mexico regarding the execution of a joint development agreement between
Terranova and their firms for the funding, development and ownership of the
Project.
Use of Proceeds
We will not realize any of the proceeds from the sale of the shares offered by
the selling stockholders. See "Use of Proceeds". However, may receive cash
proceeds from the exercise of common stock warrants in the form of cash or
credit to outstanding financial obligations. Proceeds from the conversion of the
Debentures will offset all or a portion of the Debenture obligations. All other
uncommitted proceeds will be used for working capital.
RISK FACTORS
An investment in the Securities offered in this Prospectus involves a high
degree of risk and should only be made by persons who can afford the loss of
their entire investment. Accordingly, prospective investors should consider
carefully the following factors, in addition to the other information concerning
the Company and its business contained in this Prospectus, before purchasing the
Securities offered hereby. An investment in the common stock the selling
shareholders are offering to resell is risky. You should be able to bear a
complete loss of your investment. Before purchasing any of the common stock, you
should carefully consider the following risk factors, among others.
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.
OPERATING LOSSES
We have had significant losses ever since starting business and we expect to
continue losing money for some time. To date, we have incurred significant
losses. For the year ended December 31, 2005, we lost $7,662,904 and for the
year ended December 31, 2004, we lost $14,302,037. These losses were caused
primarily by:
o Financing costs in connection with acquisitions made in prior
years and the issuance of convertible debentures;
o Limited volumes of gas transported through the international
pipeline crossing;
o Pre-development and operating expenses associated with the
development of additional pipeline and storage projects in
Mexico;
o Idle assets not producing revenue, such as the gas plant and
associated pipeline.
5
LIMITED OPERATING HISTORY.
We have a limited operating history and our financial health will be subject to
all the risks inherent in the establishment of a new business enterprise. The
likelihood of success of our company must be considered in the light of the
problems, expenses, difficulties, complications, and delays frequently
encountered in connection with the startup and growth of a new business, and the
competitive environment in which we will operate. Our success is dependent upon
the successful financing and development of our business plan. No assurance of
success is offered. Unanticipated problems, expenses, and delays are frequently
encountered in establishing a new business and marketing and developing
products. These include, but are not limited to, competition, the need to
develop customers and market expertise, market conditions, sales, marketing and
governmental regulation. The failure of the Company to meet any of these
conditions would have a materially adverse effect upon the Company and may force
the Company to reduce or curtail operations. No assurance can be given that the
Company can or will ever operate profitably.
WE DEPEND HEAVILY ON THE CONTINUED SERVICE OF OUR CHIEF EXECUTIVE OFFICER.
We place substantial reliance upon the efforts and abilities of Michael Ward,
our Chief Executive Officer. The loss of Mr. Ward's services could have a
serious adverse effect on our business, operations, revenues or prospects. We
maintain key man insurance on his life in the amount of One Million Dollars.
RELIANCE ON MANAGEMENT.
All decisions with respect to the management of our Company will be made by our
Company's directors and officers. Accordingly, no person should purchase any
shares offered by this Prospectus unless the subscriber is willing to entrust
all aspects of management to the Directors and Officers of our Company. The loss
of their services could have a material adverse effect on our Company's business
and prospects.
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 securities on the OTC Bulletin Board is often more
sporadic than the trading of securities listed on an exchange or NASDAQ. You may
have difficulty reselling any of the shares that you purchase from the selling
shareholders.
THERE HAS BEEN AN 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 initial offering price. 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:
o operating results that vary from the expectations of
securities analysts and investors;
o changes in expectations as to our future financial
performance, including financial estimates by securities
analysts and investors;
o the operations, regulatory, market and other risks discussed
in this section;
o announcements by us or our competitors of significant
contracts, acquisitions, strategic partnerships, joint
ventures or capital commitments;
o announcements by third parties of significant claims or
proceedings against us; and
o 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
6
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.
RISKS RELATING TO LOW-PRICE STOCKS.
Because our stock is quoted on the NASD OTC Electronic Bulletin Board and
subject to the Penny Stock Regulations, an investor may find it difficult to
dispose of, or to obtain accurate quotations as to the market value of, our
Company's securities. The regulations governing low-priced or penny stocks could
limit the ability of broker-dealers to sell the Company's securities and thus
the ability of the purchasers of this Offering to sell their securities in the
secondary market.
WE MAY NOT HAVE ENOUGH FUNDING TO COMPLETE OUR BUSINESS PLAN.
We will need additional financing to fully implement our business plan. We
cannot give any assurance that this additional financing could be obtained of
attractive terms or at all. In addition, our ability to raise additional funds
through a private placement may be restricted by SEC rules which limit a
company's ability to sell securities similar to those being sold in a registered
offering before the time that offering is completed or otherwise terminated.
Additionally, we may not have a sufficient quantity of common stock capital if
all of the warrants are exercised and debentures converted. We would have to
amend our articles of incorporation and increase our authorized common stock
capital. Lack of funding could force us to curtail substantially or cease our
operations.
FUTURE CAPITAL NEEDS COULD RESULT IN DILUTION TO INVESTORS; ADDITIONAL FINANCING
COULD BE UNAVAILABLE OR HAVE UNFAVORABLE TERMS.
Our Company's future capital requirements will depend on many factors, including
cash flow from operations, progress in its gas operations, competing market
developments, and the Company's ability to market its proposed products
successfully. Although the Company currently has specific plans and arrangements
for financing its working capital is presently insufficient to fund the
Company's activities. It may be necessary to raise additional funds through
equity or debt financings. Any equity financings could result in dilution to our
Company's then-existing stockholders. Sources of debt financing may result in
higher interest expense. Any financing, if available, may be on terms
unfavorable to the Company. If adequate funds are not obtained, the Company may
be required to reduce or curtail operations. The Company anticipates that its
existing capital resources, together with the net proceeds of this Offering,
will be adequate to satisfy its operating expenses and capital requirements for
at least 6 months after the date of this Prospectus. However, such estimates may
prove to be inaccurate.
SUBSTANTIAL CAPITAL REQUIREMENTS
We may make substantial capital expenditures for the development, acquisition
and production of natural gas pipeline, processing systems and, or storage
facilities. We believe that the Company will have sufficient cash provided by
operating activities and equity financing to fund planned capital expenditures
in the near future. If revenues or the Company's equity financing decrease as a
result of lower natural gas prices, operating difficulties, the Company may have
limited ability to expend the capital necessary to undertake or complete
proposed plans and opportunities. There can be no assurance that additional debt
or equity financing or cash generated by operations will be available to meet
these requirements.
WE CAN GIVE NO ASSURANCE REGARDING THE AMOUNTS OF CASH THAT WE WILL GENERATE.
The actual amounts of cash we generate will depend upon numerous factors
relating to our business which may be beyond our control, including:
o the demand for natural gas;
o profitability of operations;
o required principal and interest payments on any debt we may incur;
o the cost of acquisitions;
o our issuance of equity securities;
o fluctuations in working capital;
o capital expenditures;
o continued development of gas transportation network systems;
o prevailing economic conditions;
o government regulations.
7
WE DO NOT EXPECT TO PAY DIVIDENDS FOR SOME TIME, IF AT ALL.
No cash dividends have been paid on the Common Stock. We expect that any income
received from operations will be devoted to our future operations and growth. We
do not expect to pay cash dividends in the near future. Payment of dividends
would depend upon our profitability at the time, cash available for those
dividends, and other factors.
COMPETITION
Our Company will be competing with other established businesses that market
similar products. Many of these companies have greater capital, marketing and
other resources than we do. There can be no assurance that these or other
companies will not develop new or enhanced products that have greater market
acceptance than any that may be marketed by the Company. There can be no
assurance that our Company will successfully differentiate itself from its
competitors or that the market will consider our products to be superior or to
or more appealing than those of our competitors. Market entry by any significant
competitor may have an adverse effect on our sales and profitability. See
"Competition."
WE OPERATE IN HIGHLY COMPETITIVE MARKETS IN COMPETITION WITH A NUMBER OF
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 PROCESSING FACILITIES
SUBJECTS US TO CONSTRUCTION RISKS AND RISKS THAT RAW NATURAL GAS SUPPLIES WILL
NOT 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.
A SIGNIFICANT COMPONENT OF OUR GROWTH STRATEGY WILL BE ACQUISITIONS AND WE MAY
NOT BE ABLE TO COMPLETE FUTURE ACQUISITIONS SUCCESSFULLY.
Our business strategy will emphasize growth through strategic acquisitions, but
we cannot assure you that we will be able to identify attractive or willing
acquisition candidates or that we will be able to acquire these candidates on
economically acceptable terms. Competition for acquisition opportunities in our
industry exists and may increase. Any increase in the level of competition for
acquisitions may increase the cost of, or cause us to refrain from, completing
acquisitions.
Our strategy of acquisitions is dependent upon, among other things, our ability
to obtain debt and equity financing and possible regulatory approvals. Our
ability to pursue our growth strategy may be hindered if we are not able to
obtain financing or regulatory approvals, including those under federal and
state antitrust laws. Our ability to grow through acquisitions and manage such
growth will require us to invest in operational, financial and management
information systems and to attract, retain, motivate and effectively manage our
employees. The inability to manage the integration of acquisitions effectively
could have a material adverse effect on our financial condition, results of
operations and business. Pursuit of our acquisition strategy may cause our
financial position and results of operations to fluctuate significantly from
period to period.
IF WE ARE UNABLE TO MAKE ACQUISITIONS ON ECONOMICALLY AND OPERATIONALLY
ACCEPTABLE TERMS, OUR FUTURE FINANCIAL PERFORMANCE MAY BE LIMITED.
8
There can be no assurance that:
o we will identify attractive acquisition candidates in the
future;
o we will be able to acquire assets on economically acceptable
terms;
o any acquisitions will not be dilutive to earnings and
operating surplus; or
o any debt incurred to finance an acquisition will not affect
our ability to make distributions to you.
If we are unable to make acquisitions on economically and operationally
acceptable terms, our future financial performance will be limited to the
performance of our present gas gathering network.
Our acquisition strategy involves many risks, including:
o difficulties inherent in the integration of operations and
systems;
o the diversion of management's attention from other business
concerns; and
o the potential loss of key employees of acquired businesses.
In addition, future acquisitions may involve significant expenditures. Depending
upon the nature, size and timing of future acquisitions, we may be required to
secure financing. We cannot assure you that additional financing will be
available to us on acceptable terms.
OUR BUSINESS IS DEPENDENT UPON PRICES AND MARKET DEMAND FOR NATURAL GAS AND
PROPANE, 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
processing 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:
o the impact of weather on the demand for oil and natural gas;
o the level of domestic oil and natural gas production;
o the availability of imported oil and natural gas;
o the availability of local, intrastate and interstate
transportation systems;
o the availability and marketing of competitive fuels;
o the impact of energy conservation efforts; and
o the extent of governmental regulation and taxation.
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.
RISKS RELATED TO THE RETAIL PROPANE AND ASSOCIATED BUSINESSES
o Decreases in the demand for propane because of warmer weather
may adversely affect our financial condition and results of
operations.
o Weather conditions have a significant impact on the demand for
propane for heating purposes. All of our propane customers
rely heavily on propane as a heating fuel. The volume of
propane sold is at its highest during the six-month peak
heating season of October through March and is directly
affected by the severity of the winter weather. We estimate
that approximately two-thirds of our annual retail propane
volume will be sold during these months. Actual weather
conditions can vary substantially from quarter to quarter and
year to year, significantly affecting our financial
performance. Furthermore, warmer than normal temperatures in
our service area can significantly decrease the total volume
of propane we sell. Consequently, our operating results may
vary significantly due to actual changes in temperature.
Weather conditions in any quarter or year may have a material
adverse effect on our operations.
o Sudden and sharp propane price increases that cannot be passed
on to customers may adversely affect our profits, income, and
cash flow.
9
o Energy efficiency and technology may reduce the demand for
propane and our revenues.
o The national trend toward increased conservation and
technological advances, including installation of improved
insulation and the development of more efficient furnaces and
other heating devices, has adversely affected the demand for
propane by retail customers. Future conservation and
efficiency measures or technological advances in heating,
conservation, energy generation, or other devices might reduce
demand for propane and our revenues.
o The propane business is highly regulated. New or stricter
environmental, health, or safety regulations may increase our
operating costs and reduce our net income.
o The propane business is subject to a wide range of federal,
state, and local environmental, transportation, health and
safety laws and regulations governing the storage,
distribution, and transportation of propane. We may have
increased costs in the future due to new or stricter safety,
health, transportation, and environmental regulations or
liabilities resulting from non compliance with operating or
other regulatory permits. The increase in any such costs may
reduce our net income.
o We will be subject to all operating hazards and risks normally
associated with handling, storing, transporting, and
delivering combustible liquids such as propane for use by
consumers. As a result, we may be a defendant in various legal
proceedings and litigation arising in the ordinary course of
business. Our insurance may not be adequate to protect us from
all material expenses related to potential future claims for
personal injury and property damage or that insurance will be
available in the future at economical prices. In addition, the
occurrence of a serious accident, whether or not we are
involved, may have an adverse effect on the public's desire to
use our products.
GOVERNMENT REGULATION AND ENVIRONMENTAL MATTERS
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.
FEDERAL, STATE OR LOCAL REGULATORY MEASURES COULD ADVERSELY AFFECT OUR BUSINESS.
While the Federal Energy Regulatory Commission, or FERC, does not directly
regulate the major portions of our operations, federal regulation, directly or
indirectly, influences certain aspects of our business and the market for our
products. As a raw natural gas gatherer and not an operator of interstate
transmission pipelines, we generally are exempt from FERC regulation under the
Natural Gas Act of 1938, but FERC regulation still significantly affects our
business. 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. We are currently attempting to permit
two pipeline segments in South Texas as part of our Burgos Hub and storage
project that will be subject to FERC regulation it built and operated.
10
While state public utility commissions do not regulate our business, state and
local regulations do affect our business. We are subject to ratable take and
common purchaser statutes in the states where we operate. Ratable take statutes
generally require gatherers to take, without undue discrimination, natural gas
production that may be tendered to the gatherer for handling. Similarly, common
purchaser statutes generally require gatherers to purchase without undue
discrimination as to source of supply or producer. These statutes are designed
to prohibit discrimination in favor of one producer over another producer or one
source of supply over another source of supply. These statutes also have the
effect of restricting our right as an owner of gathering facilities to decide
with whom we contract to purchase or transport natural gas. Federal law leaves
any economic regulation of raw natural gas gathering to the states, and some of
the states in which we operate have adopted complaint-based or other limited
economic regulation of raw natural gas gathering activities. States in which we
operate that have adopted some form of complaint-based regulation, like
Oklahoma, Kansas and Texas, generally allow natural gas producers and shippers
to file complaints with state regulators in an effort to resolve grievances
relating to natural gas gathering access and rate discrimination. The states in
which we conduct operations administer federal pipeline safety standards under
the Pipeline Safety Act of 1968, and the "rural gathering exemption" under that
statute that our gathering facilities currently enjoy may be restricted in the
future. The "rural gathering exemption" under the Natural Gas Pipeline Safety
Act of 1968 presently exempts substantial portions of our gathering facilities
from jurisdiction under that statute, including those portions located outside
of cities, towns, or any area designated as residential or commercial, such as a
subdivision or shopping center.
OUR BUSINESS INVOLVES HAZARDOUS SUBSTANCES AND MAY BE ADVERSELY AFFECTED BY
ENVIRONMENTAL REGULATION.
Many of the operations and activities of our gathering systems, plants and other
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 our business due to our handling of natural gas and other petroleum products,
air emissions related to our operations, historical industry operations, waste
disposal practices and the prior use of natural gas flow meters containing
mercury. 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.
RISK OF ADDITIONAL COSTS AND LIABILITIES RELATED TO ENVIRONMENTAL AND SAFETY
REGULATIONS AND CLAIMS
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.
11
GOVERNMENTAL REGULATION OF OUR PIPELINES COULD INCREASE OUR OPERATING COSTS
Currently our operations involving the gathering of natural gas from wells are
exempt from regulation under the Natural Gas Act. Section 1(b) of the Natural
Gas Act provides that the provisions of the Act shall not apply to facilities
used for the production or gathering of natural gas. Our physical dimensions and
operations support the conclusion that our facilities perform primarily a
gathering function. We should not, therefore, be subject to Natural Gas Act
regulation. There, however, can be no assurance that this will remain the case.
The Federal Energy Regulatory Commission's oversight of entities subject to the
Natural Gas Act 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 Federal Energy Regulatory Commission
under the Natural Gas Act 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.
Our gas gathering operations are subject to regulation at the state level, which
increases the costs of operating our pipeline facilities. Matters subject to
regulation include rates, service and safety. We have been granted an exemption
from regulation as a public utility in Texas. Presently, our rates are not
regulated in Texas. Changes in state regulations, or our status under these
regulations due to configuration changes in our operating facilities, that
subject us to further regulation could have a material adverse effect on our
financial condition. Litigation or governmental regulation relating to
environmental protection and operational safety may result in substantial costs
and liabilities.
Our operations are subject to federal and state environmental laws under which
owners of natural gas pipelines can be liable for clean-up costs and fines in
connection with any pollution caused by the pipelines. We can also be liable for
clean-up costs resulting from pollution which occurred before our acquisition of
the gathering systems. 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. While we believe
that the gathering systems comply in all material respects with applicable laws,
we cannot assure you that future events will not occur for which we may be
liable. Possible future developments, including stricter laws or enforcement
policies, or claims for personal or property damages resulting from our
operations could result in substantial costs and liabilities to us.
SOVEREIGN RISK
The Company is focusing on the development of infrastructure projects through
its Mexican entity, Terranova Energia S.de R.L. de C.V., in the nation of the
United Mexican States (Mexico). The risk of indirect or regulatory actions by
local, 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,
extraofficial 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.
While the Company has taken precautions to limit its investments to prudent
levels, there is a continuing risk of adverse activities arising from the above
sources that could impair or result in the entire loss of investment in
otherwise commercially viable projects initiated by the Company in Mexico.
PIPELINE SYSTEM OPERATIONS ARE SUBJECT TO OPERATIONAL HAZARDS AND UNFORESEEN
INTERRUPTIONS
The 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.
12
OPERATING RISKS OF 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 the Company's properties. In accordance
with customary industry practices, the Company maintains insurance against some,
but not all, of such risks and losses. The Company does not carry business
interruption insurance. The occurrence of such an event not fully covered by
insurance could have a material adverse effect on the financial condition and
results of operations of the Company.
OUR BUSINESS INVOLVES MANY HAZARDS AND OPERATIONAL RISKS, SOME OF WHICH MAY NOT
BE COVERED BY INSURANCE.
Our operations are 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
are not fully insured against all risks incident to our business. If a
significant accident or event occurs that is not fully insured, it could
adversely affect our operations and financial condition.
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. The Company maintains $2,000,000 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 it to satisfy
any claims for which it might be held liable resulting from the conduct of its
business operations.
USE OF PROCEEDS
We will not receive any proceeds from the sale of the shares by the selling
shareholders. However, we may receive proceeds from the sale of our common stock
underlying the shares issuable upon the exercise of the Series "A" and "B"
warrants. If all of the warrants were exercised, we could realize $12,019,497
Dollars. There is no guaranty that the warrants will be exercised.
We will pay all the expenses incident to this registration. We plan to use any
net proceeds received upon the exercise of the warrants for general corporate
purposes.
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is traded on the OTC Electronic Bulletin Board. The following
table sets forth the high and low bid prices of our common stock for each
quarter for the years 2005 and 2004, including the two most recent quarters. The
quotations set forth below reflect inter-dealer prices, without retail mark-up,
mark-down or commission and may not represent actual transactions.
Common Stock:
Our common stock trades Over-the-Counter (OTC) on the OTC Bulletin Board under
the symbol TIDE. Table 1. 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.
13
Table 1.
Bid Information
Fiscal Quarter Ended
High Low
June 30, 2006 0.83 0.81
March 31, 2006 0.87 0.80
December 31, 2005 1.01 0.76
September 30, 2005 1.39 0.80
June 30, 2005 1.77 0.95
March 31, 2005 2.59 1.74
December 31, 2004 1.36 0.60
September 30, 2004 2.18 0.73
June 30, 2004 3.18 1.70
March 31, 2004 4.45 1.72
On August 18, 2006, the closing bid and closing ask prices for shares of our
common stock in the over-the-counter market, as reported by NASD OTC BB were
0.61 per share, respectively.
We believe that there are presently 39 market makers for our common stock. When
stock is traded in the public market, characteristics of depth, liquidity and
orderliness of the market may depend upon the existence of market makers as well
as the presence of willing buyers and sellers. We do not know if these or other
market makers will continue to make a market in our common stock. Further, the
trading volume in our common stock has historically been both sporadic and
light.
As of December 31, 2005, we had an aggregate of 86 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 which 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, 2005, 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.
Securities Authorized for Issuance under Equity Compensation Plans
The following table summarizes our equity compensation plan information as of
December 31, 2005. Information is included for equity compensation plans not
approved by our security holders.
14
Table 1.
Equity Compensation Plan Information
---------------------------- ------------------------ --------------------- -----------------------
Plan Category Number of Securities to Weighted-average Number of Securities
be issued upon exercise Exercise price of remaining available for
of outstanding options, outstanding options, future issuance under
warrants and rights warrants, and rights equity compensation
plans (excluding
securities reflected in
column (a)
(a) (b) (c)
---------------------------- ------------------------ --------------------- -----------------------
Equity Compensation
Plans approved by security
holders None None None
---------------------------- ------------------------ --------------------- -----------------------
Equity Compensation
Plans not approved by 5,000,000 (1) $ 0.287 -0-
security holders 5,000,000 (2) $ 0.87 4,350,122
---------------------------- ------------------------ --------------------- -----------------------
Total 10,000,000 4,350,122
---------------------------- ------------------------ --------------------- -----------------------
(1) On May 27, 2003, the Company adopted the 2003 Non-Qualified Stock Grant and
Option Plan. The Plan reserved 5,000,000 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.
Participants are eligible to be granted warrants, options, common stock as
compensation. We granted 210,122 shares from this plan during 2005, 200,000 for
legal services, 10,000 shares to Robert Dowies under the terms of his Employment
Agreement and 122 shares to James Smith as a part of his 150,000 share employee
bonus. The balance of this bonus was issued from the Plan outlined in footnote 2
below.
(2) On November 2, 2004, the company adopted the 2004 Non-Qualified Stock Grant
and Option Plan. The Plan reserved 5,000,000 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.
Participants are eligible to be granted warrants, options, common stock as
compensation. During 2005, we granted 148,878 shares to James Smith the balance
of his 150,000 share employee bonus. On January 16, 2006, the Company issued
250,000 shares for legal services valued at $215,000.
SELECTED CONSOLIDATED FINANCIAL INFORMATION
The following tables present our selected consolidated financial
information as of the end of the periods indicated. The selected consolidated
financial information for, and as of the end of, each of the twelve months ended
December 31, 2005, December 31, 2004, December 31, 2003, December 31, 2002 and
December 31, 2001, are from our audited consolidated financial statements.
The selected consolidated financial information is not necessarily
indicative of the results that may be expected for any future period. The
selected consolidated financial information should be read in conjunction with
"Management's Discussion and Analysis" and the historical and consolidated
financial statements and notes incorporated by reference in this prospectus.
(Dollars in thousands, except
share and per share data)
Operating Data: 2005 2004 2003 2002 2001
-------- -------- -------- -------- --------
Revenue $ 1,861 $ 1,884 $ 179 $ 710 $ 1,059
Operating Expenses 15,172 31,626 3,061 4,454 2,760
Operating Income (Loss) (13,311) (29,742) (2,882) (3,744) (1,701)
Other Income (Expense), Net 5,648 15,440 1,534 (316) (905)
-------- -------- -------- -------- --------
Net Income (Loss) $ (7,663) $(14,302) $ (1,348) $ (4,060) $ (2,606)
======== ======== ======== ======== ========
Statement of Cash Flows Data:
Cash Provided (Used) by Operating
Activities $ (2,784) $ (3,108) $ 441 $ (423) $ (934)
Cash Provided (Used) by Investing
Activities $ (1,836) $ (9,629) $ 366 $ (354) $ (48)
Cash Provided (Used) by Financing
Activities $ 275 $ 17,302 $ (106) $ 573 $ 1,068
Balance Sheet Data:
Total Assets $ 13,489 $ 22,423 $ 1,624 $ 1,379 $ 1,659
Long-Term Debt $ 4,272 $ 11,732 $ -- $ -- $ 199
Total Stockholders' Equity $ 7,767 $ 4,949 $ 485 $ (2,536) $ (2,182)
15
SELECTED CONSOLIDATED QUARTERLY FINANCIAL INFORMATION
The information below is from unaudited consolidated financial statements.
Year Ended December 31, 2005 Mar June 30 Sept Dec
---------------------------- 31 30 31 31
-------- -------- -------- --------
Revenues $ 628 $ 341 $ 248 $ 644
Cost of Goods Sold 285 130 220 368
-------- -------- -------- --------
Gross Margin 343 211 28 276
Operating Expenses 6,947 3,825 1,580 1,817
Other Income (Expense), Net (2,862) 8,096 324 90
-------- -------- -------- --------
Net earnings (loss) $ (9,466) $ 4,482 $ (1,228) $ (1,451)
======== ======== ======== ========
Basic income (loss) per share $ (0.15) $ 0.08 $ (0.02) $ (0.11)
Diluted income (loss) per share $ (0.15) $ 0.08 $ (0.02) $ (0.11)
Year Ended December 31, 2004
----------------------------
Revenues $ 0 $ 508 $ 825 $ 551
Cost of Goods Sold 0 498 802 209
-------- -------- -------- --------
Gross Margin 0 10 23 342
Operating Expenses 1,538 4,209 3,545 20,825
Other Income (Expense), Net 4 15,397 6 33
-------- -------- -------- --------
Net earnings (loss) $ (1,534) $ 11,198 $ (3,516) $(20,450)
======== ======== ======== ========
Basic (loss) per share $ (0.03) $ 0.18 $ (0.02) $ (0.34)
Diluted (loss) per share $ (0.03) $ 0.18 $ (0.02) $ (0.34)
SELECTED CONSOLIDATED QUARTERLY FINANCIAL INFORMATION
(CONTINUED)
Interim Periods 2006 Mar 30 June 30
--------------------
Revenues $ 802 $ 407
Cost of Goods Sold 377 206
-------- --------
Gross Margin 425 201
Operating Expenses 2,154 2,189
Other Income (Expense), Net 33 28
-------- --------
Net earnings (loss) $ (1,696) $ 1,960
======== ========
Basic (loss) per share $ (0.02) $ (0.03)
Diluted (loss) per share $ (0.02) $ (0.03)
BUSINESS
Business Overview
Tidelands Oil & Gas Corporation (the "Company"), formerly known as C2
Technologies, Inc., was incorporated under the laws of the State of Nevada on
February 25, 1997. C2 Technologies, Inc. changed its name to Tidelands Oil & Gas
Corporation on November 19, 1998. The Company has ten subsidiaries which it
directly and indirectly owns as follows: (1) Rio Bravo Energy LLC, (2) Arrecefe
Management LLC, (3) Marea Associates, L.P., (4) Terranova Energia, S.de R.L. de
C.V., (5) Esperanza Energy LLC and (6) Sonterra Energy Corporation. We also own
a 97% limited partnership interest in Reef Ventures, L.P.(7) Arrecefe Management
LLC owns a 1% general partner interest in Reef Ventures, L.P. Rio Bravo Energy,
LLC owns 100% of the member interest in Sonora Pipeline LLC. (8) Reef Ventures,
L.P. owns 100% of the member interest in Reef International LLC (9) and Reef
Marketing LLC (10).
The Company's products and services are primarily focused on development and
operation of transportation, processing, distribution and storage projects for
natural gas and natural gas liquids in the northeastern states of Mexico
(Chihuahua, Coahuila, Nuevo Leon and Tamaulipas) and the State of Texas.
Reef Ventures 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, L.P. derives 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.
16
Tidelands Oil & Gas Storage Enterprise
--------------------------------------
In December 2003, we entered into a Memorandum of Understanding (MOU) with PEMEX
to design, build and operate an underground natural gas storage facility in the
vicinity of Reynosa, Tamaulipas, Mexico, in the Burgos Basin area and eventually
at other regions in Mexico. The MOU provides for exclusivity in the development
of the projects and the related transportation and interconnecting pipelines to
and from the storage facilities.
We have completed the initial study of the Burgos facility and expect to receive
permits to construct, own and operate the storage facility and the
interconnecting pipelines from the Comision Reguladora de Energia (the Mexican
regulatory branch of the Secretary of Energy). The capital budget for these two
projects exceeds $800 Million Dollars and is expected to be funded through
issuance of additional equity of the Company, the addition of joint venture
partners and/or debt financing. Marea Associates, L.P. was formed to own the
majority interest in Terranova Energia, S. de R.L. de C.V., a Mexican company
which will conduct all business dealings in Mexico on behalf of Tidelands. Rio
Bravo Energy LLC, an existing wholly owned subsidiary owns the general partner
interest in Marea Associates, L.P. and a minority interest in Terranova Energia,
S. de R.L. de C.V.
Rio Bravo Energy, LLC
---------------------
Rio Bravo Energy, LLC was formed on August 10, 1998 to operate the Chittim Gas
Processing Plant which was purchased in 1999 and was processing natural gas
primarily from Conoco Oil's Sacatosa Field. The Sacatosa Field was primarily an
oilfield which produced high BTU casinghead gas from which gas processing
operations would yield valuable hydrocarbon components such as propane, butane
and natural gasolines. As the field depleted lower volumes of casinghead gas
were being delivered by Conoco, and other gas producers could not be contracted
with for processing of additional replacement volumes of gas. Therefore, in
October 2002, the plant was temporarily shut down due to the declining economics
associated with low volume operation of the plant. During 2002 through the
fourth quarter of 2005 management planned to reopen the plant when adequate
volumes of gas from third party producers was obtained to make plant operations
economically attractive. However, we have been unsuccessful in locating a
locally available and adequate supply of high BTU natural gas and have elected
to dispose of the gas plant assets. Accordingly, our financial statements
reflect an impairment charge with respect to the carrying value of these assets.
Rio Bravo Energy LLC continues to serve as the parent company for Sonora
Pipeline LLC, as the one percent general partner of Marea Associates, L.P. and
owns a less than one percent minority interest in Terranova Energia, S. de R.L.
de C.V.
Sonora Pipeline, LLC
--------------------
Sonora Pipeline, LLC was formed in January 1998 to operate the Sonora pipeline
network which has the capability of delivering adequate volumes of natural gas
for economic operation of the Chittim Gas Processing Plant. The pipeline network
consists of approximately 80 miles of gas pipeline. This pipeline network was
acquired in conjunction with the Chittim Gas Processing Plant acquisition and,
when operational, could generate revenue from transportation fees to be charged
to third party gas producers shipping natural gas to the gas plant owned by Rio
Bravo Energy LLC. As noted above, management has evaluated the carrying value of
these assets and has recorded an impairment charge in our financial statements
with respect to pipeline network in addition to the gas plant. These assets will
also be sold at a later date.
In connection with the Mexican storage and pipeline project mentioned above,
Sonora Pipeline LLC is the applicant before the Federal Energy Regulatory
Commission for two proposed U.S. pipelines that will transport gas
bidirectionally to/from the United States to Mexico at two different
international crossing points along the Rio Grande River in South Texas. The
Progreso pipeline segment will be approximately 8.7 miles long and will comprise
the eastern leg of the proposed U.S. pipelines which will interconnect with the
Tennessee Gas Pipeline transmission lines at the Alamo Station and deliver
natural gas to the proposed Brasil Storage facility approximately 17 miles south
of the U.S./Mexico border at Progreso, Texas. The Mission pipeline segment will
be approximately 24 miles long and will commence at the existing HPL
Valero-Gilmore gas plant in Hidalgo County, Texas and extend southward to the
Arguelles crossing of the Rio Grande River into Mexico near the City of Mission,
Hidalgo County, Texas.
17
Both pipeline segments are expected to be 30 inches in diameter. Sonora Pipeline
LLC continued its efforts to finish all activities necessary to move from NEPA
pre-filing status to a submission for Certification for these two proposed
International Pipeline U.S. segments, the Progreso International Pipeline and
the Mission International Pipeline. Sonora believes it has filed all needed
revisions to the Draft Environmental Report for the Progreso International
Pipeline with FERC for purposes of the NEPA Environmental Assessment
requirements. The Mission International Pipeline segment was re-designed in the
first quarter of 2006 due to a routing conflict with a fiber optic line. The
completion of NEPA pre-filing activities for the Mission segment including
responses to FERC inquiries and scoping of affected stakeholders is anticipated
in the second quarter of 2006. The current catalog of FERC correspondence for
Sonora's activities is located at www.ferc.gov under Docket No. PF05-15.
Sonterra Energy Corporation Business
The assets of our Sonterra Energy Corporation subsidiary consist 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:
o Arbolago*
o Austin's Colony Phase II
o Costa Bella
o Hills of Lakeway
o Jacarandas
o Lake Pointe
o La Ventana
o Lakewinds Estates
o The Hollows to Northshore
o Riverbend
o Rob Roy Rim
o Senna Hills
o Sterling Acres
o The Point
o The Preserve at Barton Creek
These subdivisions contain approximately 1,700 lots. At December 31, 2005, 1,067
of these lots are metered for use. There are approximately 633 unmetered future
lots within the above subdivisions where propane service can be connected. As
new homes are constructed on these lots our customer base will grow. An
additional component of future growth will come from the establishment of
propane distribution systems in other developments such as the recent agreement
between Sonterra and Cordillera Ranch Development Corp. in which Sonterra is
currently installing a tank site and gas mains to supply approximately 200 homes
in Units 201-204 of that subdivision. Future phases of lot development at
Cordillera Ranch will result in propane service being extended to approximately
300 more homes. Sonterra is in active negotiations for the installation of
propane distribution systems with other developers of residential lots in the
Texas Hill Country area between San Antonio and Austin, Texas. Sonterra is the
exclusive seller of propane in these subdivisions and is not considered a
regulated utility. The Texas Railroad Commission regulates all aspects of the
production, transportation and processing of petroleum products, including
propane, in the State of Texas. Sonterra purchases propane products from a
number of distributors in Austin, Texas.
Segment Reporting for Reef Ventures, LP and Sonterra Energy Corporation:
The following table is a summary of the results of operations and other
financial information by major segment:
2005 Propane Sales Pipeline
and Related Transportation All Other
Services Fees and Corporate Total
Revenue $ 1,630,246 $ 231,077 $ -- $ 1,861,323
Depreciation $ 116,853 $ 305,313 $ 63,315 $ 485,481
Interest $ 2,514 $ -- $ 608,849 $ 611,363
Operating (Loss) $ (380,900) $ (164,523) $(12,765,170) $(13,310,593)
Total Assets $ 2,997,001 $ 5,621,536 $ 4,870,312 $ 13,488,849
2004 Natural Gas
Sales and
Propane Sales Pipeline
and Related Transportation All Other
Services Fees and Corporate Total
Revenue $ 438,611 $ 1,400,227 $ -- $ 1,838,838
Depreciation $ 20,158 $ 178,099 $ 46,632 $ 244,889
Interest $ 300 $ -- $ 300,266 $ 300,566
Operating Income (Loss) $ 98,229 $ (141,502) $(29,699,024) $(29,742,297)
Total Assets $ 2,775,281 $ 5,881,774 $ 13,765,611 $ 22,422,666
Note: Reef Ventures and Sonterra commenced operations in 2004.
18
Competition
-----------
Reef Ventures, L.P. Eagle Pass Pipeline Crossing
Our Eagle Pass international pipeline crossing competes with a pipeline owned by
West Texas Gas, Inc. pipeline crossing which is located two miles north of Eagle
Pass. We believe that the West Texas Gas crossing will be able to compete with
us only marginally beginning in 2006 due to a very limited transmission
capability and marketing efforts currently being undertaken by Management.
Sonterra Energy Corporation Propane Distribution
Our propane distribution business is not subject to competition within the
residential subdivisions served because we are the sole propane supplier. The
residential subdivisions are subject to a propane supply covenant granting us
the exclusive supply of propane for each subdivision. In the future, we will
compete in the bidding process for new propane distribution systems as new
residential subdivisions are developed. We may also be able to acquire
additional existing propane distribution systems from competitors.
Employees
Tidelands has ten full time employees including our corporate officers. Our
Sonterra Energy subsidiary, which operates the Austin propane gas distribution
company, has eleven full-time employees.
PROPERTIES
Reef Ventures, L.P. owns and operates the international natural gas pipeline and
related facilities located in Maverick County, Texas and Coahuila, Mexico.
Tidelands owns a 97% limited partnership interest and a 1% general partner
interest (thru Arrecefe Management LLC) in this entity. We acquired these
interests from Impact International, LLC. Impact financed our purchase of this
system and we owe Impact $4,605,433.
Rio Bravo Energy, LLC owns and operates the Chittim Gas Processing Plant which
is located in Maverick, County, Texas. The plant is currently shut down. The gas
plant has the capability to fractionate natural gas into commercial grade
propane and butane. In the near future, we expect to sell these assets.
Sonora Pipeline, LLC owns the Sonora Pipeline network consisting of
approximately 80 miles of pipeline. No significant encumbrances exist with
respect to the assets of this company. The pipeline is currently inactive and
could be used to transport natural gas from third party producers to supply
feedstock for the Chittim Gas Processing Plant owned by Rio Bravo Energy LLC. In
the near future, we expect to sell these assets. Sonora Pipeline LLC also plans
to construct, own and operate approximately 33 miles of thirty inch diameter
natural gas pipelines in Hidalgo County, Texas which will interconnect at the
U.S.-Mexico border with the pipeline and storage assets to be constructed, owned
and operated by Terranova Energia, S. de R.L. de C.V, another subsidiary of
Tidelands Oil & Gas Corporation.
Sonterra Energy Corporation operates a propane distribution systems providing
propane to 15 residential subdivisions in Austin, Texas. The propane
distribution system is comprised of approximately 25 miles of gas main pipe,
75,000 feet of yard lines, 850 meters and storage tanks with a combined capacity
of 156,000 gallons of LPG. Sonterra is currently constructing a propane
distribution system for approximately 200 residential units in Cordillera Ranch,
a rural subdivision located in Kendall County, Texas.
We lease our San Antonio executive office. We entered into this office lease on
August 1, 2003. The term expired November 30, 2005. We held over our tenancy in
the building under the month to month clause and renewed this lease on February
1, 2006 for a term until December 31, 2007. Our monthly lease payment is $3,400.
Our rent expense for 2005 was $40,800. Sonterra Energy Corporation entered into
a sublease agreement for its offices in an adjacent building for $2,500 per
month until its renewal in October 2005 at which time the rent increased to
$3,000 per month through March 31, 2006. However, on February 1, 2006, Sonterra
Energy Corporation entered into a direct lease with the building owner at a rent
of $3,300 per month for a term ending December 31, 2007. Sonterra's rent expense
for this office for 2005 was $31,500. Sonterra leased a field office and storage
yard in Dripping Springs, Texas on May 15, 2006 for a five year term at an
annual rent rate of $8,100.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Business Overview
-----------------
Our products and services are primarily focused on development and operation of
transportation, processing, distribution and storage projects for natural gas
and natural gas liquids in the northeastern states of Mexico (Chihuahua,
Coahuila, Nuevo Leon and Tamaulipas) and the state of Texas in the United
Statesof America.
19
We derive our revenue from transportation fees for delivery of natural gas to
CONAGAS, the local distribution company in Piedras Negras, Coahuila, through the
pipeline owned by Reef Ventures, L.P. and the sale of propane gas to residential
customers through the assets owned by Sonterra Energy Corporation. Sonterra also
designs and constructs residential propane delivery systems for new residential
developments in Central Texas. We derive revenue from this activity in two ways,
the first being from construction revenue for yard lines and meter sets
installed to a homeowner's lot, and the second being the sale of LPG gas to
customers in the residential subdivisions.
With respect to our pipeline system owned by Reef Ventures, L.P., management has
evaluated an expansion of the pipeline in Coahuila to serve new markets long the
state highway No. 57 corridor to Monclova, Coahuila. We currently expect that
Reef Ventures, L.P. will not be participating in the construction of additional
pipelines in Mexico to reach these new markets. The required pipeline will be
constructed by end users or an intermediate purchaser of the natural gas. Reef
Ventures, L.P. will simply continue to transport the additional volumes of
natural gas required for these markets through its existing facilities which
will be interconnected in Mexico to the new pipeline that is required to reach
these potential markets. Management believes the timeline for the initiation of
construction for such pipeline project in Mexico is likely to be a 2007 event.
The increased volume for the Reef Ventures pipeline from such an event would
approximate 2-3 times the entire baseload of demand for natural gas currently
taken by the local distribution company, CONAGAS.The expected end users would be
a brewery and bottling operation. While these entities have begun feasibility
studies for the construction and operation of their businesses, no final
decision has been made concerning the building of these facilities. There is a
risk that the facilities will never be built because other sites in Mexico are
deemed to be more advantageous for the location of these facilities. In that
event, the expected growth in volumes for the Reef Ventures pipeline will not
materialize. In addition to these potential developments, management believes
that increasing volumes of natural gas can be transported in its existing
facilities. In 2005, which was the final year of a two year contractual
nomination period, the Reef Ventures pipeline was carrying only half the actual
baseload volume (and none of the swing volume) being transported to CONAGAS in
Piedras Negras. We believe that if given adequate supplies, the Reef Ventures
pipeline can transport all the current base load and the swing requirements of
CONAGAS which would result in a doubling of volumes and revenues for the
pipeline. Negotiations are currently underway to achieve that objective. The
planned natural gas liquid line between Eagle Pass, Texas and Piedras Negras,
Coahuila has been re-evaluated in light of new supply sources emerging in Texas
and Mexico and the subsidy in effect for LPG and natural gas currently in use in
Mexico. It appears that the project will need to be developed as a
transportation fee business model instead of a merchant facility where LPG is
purchased in Texas and re-sold in a direct contract with the propane importation
arm of PEMEX. This determination was made in order to reduce the risk of any
future cost incurred on the LPG project. Management will continue to seek a
transportation contract which would support development and operation of this
project.
Sonterra Energy Corporation, a wholly owned subsidiary of Tidelands entered into
the residential propane distribution business on November 1, 2004 with its
acquisition of 850 existing customers located in 15 subdivisions in the vicinity
of Austin, Texas. At December 31, 2005, Sonterra had increased its number of
meter hookups to 1,067 and is expecting a 15% rate of increase in the number of
new meter hookups in 2006. Sonterra's existing and future market area includes
several central Texas locations that do not have access to natural gas as a fuel
for home heating and appliance usage. Current expansion of over 600 lots within
the existing subdivisions is possible. Sonterra has also entered into a new
agreements with the developers of Cordillera Ranch and Northshore at Lake Travis
to expand the serviced lots by an additional 1,500 units over time. Active
negotiations with developers in our trade area will likely result in additional
lots becoming available for installation of residential propane delivery in the
nearby central Texas vicinity. Revenue growth from propane sold was $250,000
higher than projected primarily due to unit growth as opposed to price increases
applied to product sold. The principal risk in the growth picture for this
business unit comes from a slowing in the absorption rate for developed lots due
to the interest rate cycle. This in turn would slow the rate of meter hookups in
the subdivisions served.
Sonora Pipeline LLC proposes to own and operate the U.S. (Texas) pipeline
segments to be constructed in connection with the Mexican pipeline, LNG
regasification terminal and gas storage projects which will interconnect to the
U.S. via two proposed international pipeline crossings in Hidalgo County, Texas.
Management will be filing with the Federal Energy Regulatory Commission for
permission to construct and operate these proposed pipelines and for the
granting of presidential permits for the international crossings near Mission
and Progreso, Texas for delivery of natural gas into the state of Tamaulipas and
the proposed Mexican pipelines of our Mexican subsidiary, Terranova Energia S.
de R.L. de C.V.
20
The Company is focusing on the development of infrastructure projects through
its Mexican entity, Terranova Energia S.de R.L. de C.V., in the nation of the
United Mexican States (Mexico). Terranova Energia is focused on project
development and implementation of a natural gas storage and transportation
infrastructure to support the integration of Northeastern Mexico and South Texas
and the related economic growth of the border regions.
Tidelands and Terranova Energia have hired project development advisors in the
United States and Mexico. The Terranova Energia advisors include ALB Energia,
Rich, Heather Muller, Abogados and Miriam Grunstein, Abogada. The Tidelands
advisors include Netherland Sewell & Associates, CenterPoint Energy, LLC, Mayer
Brown Rowe & Maw, LLP, BNC Engineering, LLC, HSBC Securities, USA, Inc. and R.W.
Beck, Inc.
The Terranova Energia project was developed to serve the need to of CFE, the
Mexican federal electricity commission, to manage swing and seasonal spread in
its procurement and dispatch of natural gas to its combined cycle power plants
in Northern Mexico. The region's forecasted growth will require additional
natural gas for power generation in the region. The same need to manage swing
and seasonal spread is present for the industrial users of natural gas in
Northern Mexico, in particular, the industrial users located in the Monterrey,
Nuevo Leon area.
Our project area is called the Burgos Hub and Storage Project. Our medium term
goals, subject to a variety of factors, including, but not limited to,
regulatory permitting, engineering design, financing, construction and operating
agreements, are focused on the Brasil storage field and Terranova Occidente
pipeline.
The pipelines proposed are (A) the Occidente Section comprised of: (1) a
pipeline from the Brasil Storage field to Nuevo Progresso, proposed
international pipeline crossing into the U.S., (2) a pipeline from Brasil
storage to Station 19 up to Arguelles which is another proposed international
pipeline crossing into U.S. and (3) a pipeline from Pemex's Station 19 south of
Reynosa which will extend southward to the Monterey Nuevo Leon area; and (B) the
Oriente Section from the offshore regasification station to Norte Puerto
Mezquital proceeding to the Brazil storage field. The Occidente Section will
include approximately 323 kilometers of pipeline and the Oriente Section will
contain approximately 149 kilometers of pipeline. Our long term goal includes
the construction of the offshore LNG regasification station.
The proposed international pipeline crossings into South Texas are the Donna
Station and Arguelles and VGP station. At the Donna station our potential
interconnects into Texas are with TETCO, TGPL and Texas Gas Services. At the
Arguelles and VGP station our potential interconnects are with HPL, Calpine and
Kinder Morgan. The Terranova pipeline capacity is estimated at 1.2 BCFD (billion
cubic feet per day).
The Terranova pipelines have been designed for 30 and 36 inch diameter with
bi-directional flow. The pipeline from the proposed LNG regasification terminal
to the Brasil field is a 36 inch diameter pipeline and from the Brasil field to
Monterey and international crossings are 30 inch diameter pipelines.
On June 5, 2006, Tidelands Oil & Gas Corporation subsidiary, Terranova Energia,
S.de R.L. de C.V. was awarded a Permit (#G/183/TRA 2006) by the Comision
Reguladora de Energia de Mexico (CRE) to begin construction of the Terranova
Occidente and Oriente pipeline portions of its Burgos Hub Export/Import Project.
The Permit is for the Occidente and Oriente Sections of the Terranova pipelines.
The proposed underground natural gas storage facility will be located in the
depleted reservoir at the B1 Horizon-Brasil Field and include above ground
facilities. Our design proposal for the use of this depleted reservoir as a
storage facility was prepared by Netherland Sewell. Netherland Sewell, after
geological and mechanical modeling, reported the reservoir at the B1 horizon as
suitable for natural gas storage. The design capacity of the storage field
contemplates incremental increases in capacity over three seasons. The first
season capacity is 25 BCF (billion cubic feet), second season capacity is 40 BCF
and third season onward is 50 BCF. The design proposes that natural gas be
injected into the reservoir at 350 MMCFD(million cubic feet per day) at
pressures from 2,400 psi up to 3,200 psi. Extraction flows of natural gas will
be kept at 500 MMCFD to maintain structural integrity of the reservoir. The
storage facility plans call for 22 injection and extraction wells. The above
ground facilities will include compression stations.
21
We submitted the storage permit to the CRE on August 5, 2005 and it was accepted
for full review on October 14, 2005. Several unique questions are presented by
the filing of this permit due to the proposed location and the lack of previous
storage permit applications having been considered by CRE. As a result,
management has no reliable estimate concerning when this permit application will
be presented for decision by staff to the CRE Commissioners.
The proposed Offshore LNG Regasification Station will be based on technology
developed by the Norwegian company TORP Technology. It utilizes an unmanned
floating station called a HiLoad. It has a peak capacity of 1.4 BCFD (billion
cubic feet per day). This technology permits any LNG carrier vessel to connect
and carry out regasification operations without any vessel modifications. It
utilizes LNG vaporizers of the shell and tube type, with sea water as the
heating medium. The LNG station will be located no less than 40 nautical miles
from the coast at a depth of 450 feet. A support station with a power generation
system and central control will be located on-shore. A buoy will support the
mooring of the LNG carrier vessels. Electrical power cables, control umbilicals
and pipelines will connect the HiLoad to the on-shore support station.
There are significant challenges for the natural gas supply to the power
generation industry in Northeastern Mexico. We believe the CFE has taken a
proactive role in this region with a view to substantially improving the
reliability, flexibility and pricing of the natural gas supply. Presently, there
are three LNG regasification projects permitted or under construction in Mexico
at Altamira, Rosarito and Manzanillo. Additionally, there new electrical
generation plants and associated pipelines under construction. The CFE has
forecasted natural gas demand growth in the region from 2004 through year 2013.
The CFE forecasts gas demand will increase from 1.7 BCFD in 2004 to 4.2 BCFD in
2013. Natural gas storage facilities in northern Mexico will provide a reliable,
flexible gas supplies while creating conditions for competitive natural gas
pricing.
With the assistance of our financial advisory firm , we have determined that
financing of the project should be possible under a commercial structure
acceptable to debt providers that would involve long-term capacity reservation
agreements with creditworthy counterparties for each constituent element of the
project. Another essential factor that is critcal for the project's ability to
raise debt financing is the ability of Terranova to attract equity capital from
strategic and/or financial investors in the amounts which are likely to be
required by debt providers. Our financial advisory firm has assisted us in
making presentations of the project to the potential strategic and financial
equity investors. We have received positive feedback from several such parties.
On this basis, we could conclude that the project, in its currently envisioned
configuration, could attract considerable equity capital from the potential
investors. Investor appetite will depend on our ability to obtain an commercial
structure, relevant permits and other regulatory approvals and the fulfillment
of other conditions standard for non-recourse project financing.
We have undertaken a risk analysis of the project and have identified the
following project specific risks:
Construction Risks:
- Delays in completion within the budget
- Failure of the EPC contractor to meet the required
contractual performance levels
Operating Risks:
- Project performing below expected levels of
efficiency
- Increased operating costs due to insufficiency of
technology
- Delays due to inclement weather, breakdown or failure
of equipment and third party risks
Market Risks:
- Cushion gas price exposure
Regulatory Risks:
- Inability of Terranova to obtain the necessary
permits and/or rights of way
- Changes in the regulatory conditions and requirements
may directly affect the profitability of the project
Environmental Risks:
- The construction and operation of the project may
result in adverse environmental or social impact,
which could delay completion of the construction,
curtail operation and result in payments of fines or
remediation.
Inflation Risks:
- Increased operating costs adversely affecting the
project's earnings
Financial Risks:
- Interest rate risk
- Foreign exchange risk
Political Risks:
- The risks of expropriation, nationalization,
inability to obtain foreign exchange and transfer it
outside of the project country. (Also see "Sovreign
Risk" section in Risk Factors)
While the above risks are typically dealt with through contractual mechanisms in
project finance and other documents, no assurance can be had that these risks
will be successfully mitigated.
22
RECENT DEVELOPMENTS
-------------------
In the six months ended June 30, 2006, several significant developments occurred
with respect to the businesses operated by the Company.
Financing Transaction
On January 20, 2006, the Company entered into Securities Purchase Agreements
with seven accredited investors (collectively, "Purchasers or Holders"). We sold
$6,569,750 Dollars, in the aggregate principal amount, of discounted convertible
debentures ("Debentures") and Series A and Series B Warrants to purchase common
stock ("Warrants") for an aggregate payment of $5,396,098 after deduction for
the interest discount. The Company paid an 8% commission to the placement agent,
HPC Capital Management, LLC, a registered broker-dealer. The Company granted HPC
Capital Management Series A Common Stock Purchase Warrants as additional
transaction compensation. The Company received net proceeds of $4,949,291.88
after deduction of legal costs, commissions and interest discount. We intend to
use the proceeds for working capital.
The sale of these securities required the Company to increase its authorized
common stock capital because it had insufficient authorized capital to comply
with all of the Debenture conversion and Warrant exercise provisions contained
in the Transaction Documents. We have reserved 9,000,000 common shares of our
unissued authorized common stock capital for the transaction. On April 17, 2006,
an amendment to the articles of incorporation of the Company was approved via
written consent in lieu of a special meeting of the shareholders of the Company
and on April 19, 2006, the Company amended its articles of incorporation by
increasing its authorized common stock capital from One Hundred Million
(100,000,000) shares, par value $0.001 per share to Two Hundred Fifty Million
(250,000,000) shares, par value $0.001 per share, thus satisfying the
requirements of the financing documents.
We have also agreed to file a registration statement on Form S-1 with the U.S.
Securities and Exchange Commission ("SEC") to register the common stock
underlying the Debentures and Warrants.
We sold these securities in an exempt transaction under the Securities Act of
1933, (the "Act") as amended, pursuant to Section 4(2) and Regulation D Rule
506. These are restricted securities and may not be resold without registration
under the Act or an exemption from the registration requirements of the Act.
The Debentures are Original Issue Discount Convertible Debentures with an
aggregate face amount of $6,569,750. The purchasers paid an aggregate principal
sum of $5,396,098. The face amount of the Debentures is due January 20, 2008.
The difference between the face amount and the aggregate principal paid
represents the interest expense. The Debenture Holder may convert all or part of
the Debenture face amount into shares of Tidelands common stock at any time at
an initial conversion rate of $0.87 per share.
The Purchasers have agreed to restrict their ability to convert their Debentures
or Exercise their Warrants and receive our shares such that the number of shares
of common stock held by each of them individually in the aggregate after such
conversion or exercise does not exceed 4.99% of the then issued and outstanding
Company common shares. This beneficial ownership limitation may be waived by the
Holder.
Subject to specific terms and conditions in the Debenture, the Company has the
option to force conversion of the Debentures into common shares if the Company's
share price as quoted on the Over-the-Counter Electronic Bulletin Board exceeds
250% of the then Conversion Price for a period of time based on a Volume
Weighted Average Price (VWAP) formula. The VWAP share price must exceed this
250% price for at least 20 consecutive Trading Days.
23
The conversion price will be subject to adjustment for corporate events, such as
stock splits, stock dividends, and stock combinations, as more specifically
outlined in the transaction documents.
We granted the Purchasers Series A Common Stock Purchase Warrants (Series A
Warrants) to purchase 2,491,974 shares of our common stock at $0.935 per share.
We also granted HPC Capital Management 65,697 Series A Common Warrants to
purchase our common stock at $0.935 per share.
The Series A Warrants may be exercised immediately by the Purchasers and
terminate on January 20, 2009.
Subject to specific terms and conditions in the Series A Warrant including an
effective registration statement registering underlying shares, the Company has
the call option to force conversion of this Warrant into common shares if the
Company's share price as quoted on the Over-the-Counter Electronic Bulletin
Board exceeds 250% of the then effective Exercise Price for a period of time
based on a Volume Weighted Average Price (VWAP) formula. The VWAP share price
must exceed this 250% threshold price for at least 20 consecutive Trading Days.
If at any time after one year from the date of issuance there is no effective
registration statement registering, or no current prospectus available for the
resale of the underlying shares, then this Warrant may also be exercised by
means of "cashless exercise" as determined by a formula described in the
Warrant.
The exercise price will be subject to adjustment for corporate events, such as
stock splits, stock dividends, and stock combinations, as more specifically
outlined in the transaction documents.
We granted the Purchasers Series B Common Stock Purchase Warrants ("Series B
Warrants") to purchase 7,551,432 shares of our common stock at $1.275 per share.
The Purchasers have the right to exercise the Series B Warrants commencing at
any time on, or after January 20, 2007 and on, or before February 19, 2007.
Subject to specific terms and conditions in the Series B Warrant, including an
effective registration statement registering underlying shares, the Company has
the option to force the exercise of this Warrant into common shares if the
Company's share price as quoted on the Over-the-Counter Electronic Bulletin
Board exceeds 150% of the then effective Exercise Price for a period of time
based on a Volume Weighted Average Price (VWAP) formula. The VWAP share price
must exceed this 150% threshold price for at least 20 consecutive Trading Days.
If at any time after one year from the date of issuance there is no effective
registration statement registering, or no current prospectus available for the
resale of the underlying shares, then this Warrant may also be exercised by
means of "cashless exercise" as determined by a formula described in the
Warrant.
The exercise price will be subject to adjustment for corporate events, such as
stock splits, stock dividends, and stock combinations, as more specifically
outlined in the transaction documents.
We have granted the Purchasers and HPC Capital Management registration rights on
the shares underlying the Debentures and the Warrants. The Common Stock
underlying the Debentures and Warrants will be registered under the Securities
Act of 1933, as amended, for re-offer and re-sale by the Purchasers and HPC
Capital Management. If the Company fails to timely file a registration statement
or is unable to have the registration statement declared effective by the SEC
within the stated periods of time, we will trigger a default and be subject to
among other things, acceleration of the Debentures, at the Purchasers' options,
additional default interest payment and monetary liquidated damages. The
liquidated damages will be capped at 20% of the Debentures face amounts.
Esperanza Energy LLC
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 liquefied natural gas (LNG) regas terminal in the offshore waters
near Long Beach, California. Esperanza would utilize TORP Technology's HiLoad
LNG Regas unit which 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 is conducting the feasibility study for this project with the
assistance of best-in-class LNG, environmental, pipeline and legal experts that
include:
24
o David Maul, former Manager of the California Energy Commission Natural
Gas Office,
o ENTRIX, Inc., a professional environmental consulting company
specializing in environmental permitting and compliance for major
offshore oil and gas projects in California and the United States,
o Project Consulting Services, Inc., a leader in engineering,
construction, management, and inspection of onshore and offshore
pipelines, and
o Pillsbury Winthrop Shaw Pittman, LLP, an interdisciplinary law firm
with leading practices in environmental, land use and energy legal
advice and in project development and finance.
Active consultations continue with California stakeholders, commercial
counterparties, financial investors, and the above mentioned team regarding the
optimal design and operational configuration of the project. A primary objective
of the project feasibility study is to design the project to exceed California
environmental, public health and safety requirements.
Sonora Pipeline LLC and Terranova Energia, S. de R.L. de C.V. The cross-border
gas pipeline and storage development activities of the above entities to
establish the Burgos Hub Export/Import project progressed forward in two
principal areas:
Permitting Activities -
Sonora Pipeline, LLC continued its efforts to finish all activities necessary to
move from NEPA pre-filing status to a submission for Certification for its two
International Pipeline U.S. segments, the Progreso International Pipeline and
the Mission International Pipeline. Sonora believes it has filed all needed
revisions to the Draft Environmental Report for both pipeline segments with FERC
for purposes of the NEPA Environmental Assessment requirements. The Progreso
International Pipeline is the eastern leg of the U.S. pipelines which will
interconnect with the Tennessee Gas Pipeline transmission lines at the Alamo
Station and deliver natural gas to the Brasil Storage facility approximately 17
miles south of the U.S./Mexico border at Progreso, Texas. The Mission
International Pipeline segment was re-designed in the first quarter of 2006 due
to a routing conflict with a fiber optic line. It will be approximately 24 miles
long and will commence at the existing HPL Valero-Gilmore gas plant in Hidalgo
County, Texas and extend southward to the Arguelles crossing of the Rio Grande
River into Mexico near the city of Mission, Texas. We anticipate the issuance of
an Environmental Assessment by the staff of FERC in the third quarter of 2006 to
be followed by a complete application for a Certificate of Public Convenience
and Necessity to construct, own, operate and maintain the proposed pipelines.
The current catalog of FERC correspondence for Sonora's activities is located at
www.ferc.gov under Docket No. PF05-15.
On May 23, 2006, Terranova Energia, S. de R.L. de C.V. ("Terranova"), a wholly
owned subsidiary of the Company was awarded a permit by the Comision Reguladora
de Energia de Mexico ("CRE") to construct its 30 inch diameter natural gas
pipeline segment in Mexico to link to the Sonora Pipeline LLC United States
pipelines and Terranova's proposed underground natural gas storage facility in
the Brasil field (located approximately 17 miles south of Nuevo Progreso on the
U.S./Mexico border in Texas). Terranova submitted the application for the
storage facility permit to the CRE on August 5, 2005 and it was accepted for
full review on October 14, 2005. Several unique questions are presented by the
filing of this permit due to the proposed location and the lack of previous
storage permit applications having been considered by the CRE. The CRE has
recently selected GEOSTOCK (an entity owned 50% by Total, 25% by BP, and 25% by
Entrepose Contracting) as its technical consultant to review the storage
facility permit application. GEOSTOCK is an international engineering group with
over 40 years experience in the design, construction and operation of all types
of underground storage facilities for liquid, liquefied or gaseous hydrocarbons.
The technical review of the permit application is expected to be completed by
the end of 2006. Management expects the storage permit application will be
presented for decision by staff to the CRE Commissioners in the first quarter of
2007.
Commercial Activities -
The Company continues to present the pipeline and storage segments of the Burgos
Hub Export/Import project to commercial audiences in efforts to solicit their
interest and participation in the project at various levels. There have been
numerous introductory meetings with staff of the CFE and the Monterrey
industrial consumers of natural gas with a view toward clarifying their need and
usage of the proposed project facilities. Future efforts will concentrate on the
development and negotiation of precedent agreements for capacity reservation of
the project facilities. Preliminary evaluation of demand for storage capacity
reservation based upon direct discussion with the various customers is
conservatively estimated at 40 Bcf for the market area influenced by the
project. Similarly, several discussions continue with interested parties in the
U.S. and Mexico regarding the execution of a joint development agreement between
Terranova and their firms for the funding, development and ownership of the
project.
25
RESULTS OF OPERATIONS
---------------------
SIX MONTHS ENDED JUNE 30, 2006 COMPARED WITH SIX MONTHS ENDED JUNE 30, 2005
---------------------------------------------------------------------------
REVENUES: The Company reported revenues of $1,209,018 for the six months ended
June 30, 2006 as compared with revenues from continuing operations of $968,611
for the six months ended June 30, 2005. The revenue increase resulted primarily
from increasing revenues of Sonterra Energy Corporation due to an increase in
total customers served and product prices in the first six months of 2006 versus
the first six months of 2005.
TOTAL COSTS AND EXPENSES: Total costs and expenses from continuing operations
decreased from $11,187,489 for the six months ended June 30, 2005 to $4,926,953
for the six months ended June 30, 2006. The principal reason for this amount of
decrease was the lack of expense for Beneficial Conversion Feature Interest and
Impairment Loss in the six months ended June 30, 2006 versus the six months
ended June 30, 2005.
COST OF SALES: Total Cost of Sales increased from $415,248 for the six months
ended June 30, 2005 to $583,279 for the six months ended June 30, 2006. This
increase resulted from the increased cost and volume of propane sold by Sonterra
Energy Corporation in the six months ended June 30, 2006 versus June 30, 2005.
OPERATING EXPENSES: Operating expenses from continuing operations increased from
$129,137 for the six months ended June 30, 2005 to $184,118 for the six months
ended June 30, 2006. This increase was primarily due to additional operating
expenses incurred by Sonterra Energy Corporation in its operations for the
period which were not present in the comparative six months for 2005.
Depreciation expense declined in the first six months of 2006 versus the first
six months of 2005, decreasing from $236,395 for the six months ended June 30,
2005 to $231,802 for the six months ended June 30, 2006 reflecting a minor
decrease in depreciable assets for the respective periods due to impairment
charges.
INTEREST EXPENSE: Interest expense increased from $393,860 for the six months
ended June 30, 2005 to $485,009 for the six months ended June 30, 2006 as a
result of interest rate increases related to the note owed to Impact
International LLC. No expense for Beneficial Conversion Feature Interest was
recorded for the six months ended June 30, 2006 as compared to $135,789 for the
six months ended June 30, 2005 (as restated). The market price for the Company's
common stock at the relevant measurement dates during the six months ended June
30, 2006 was less than the conversion price for the debentures issued on January
20, 2006. Accordingly, there was no benefit to the holders of the debentures in
the event of conversion during those periods and no beneficial conversion
interest charge was recorded.
SALES, GENERAL AND ADMINISTRATIVE: Sales, General & Administrative Expenses
decreased by $1,234,325 during the six months ended June, 2006 to a total amount
of $3,442,745 as compared $4,677,070 for the six months ended June 30, 2005.
This decrease was due primarily to the absence of financing costs paid to Impact
International LLC during the period ended June 30, 2006 as compared to financing
costs of $1,272,500 paid to Impact International LLC during the period ended
June 30, 2005.
IMPAIRMENT LOSS: No expense for impairment loss was recorded for the six months
ended June 30, 2006 compared to $5,200,000 of impairment of goodwill recorded as
a loss for the period ended June 30, 2005.
DERIVATIVE GAIN: Gain from embedded derivative instrument liabilities decreased
from ($5,168,000) for the six months ended June 30, 2005 (as restated) to zero
for the six months ended June 30, 2006. The warrants issued in connection with
the January 20, 2006 financing had an exercise price that was greater the fair
market value of the Company's common stock at the relevant measurement dates.
Accordingly, no derivative gain or reduction in liability for the issuance of
the warrants in this financing transaction was recorded for the six months ended
June 30, 2006.
NET LOSS: Net loss of ($4,984,404) for the six months ended June 30, 2005 (as
restated) decreased to ($3,656,196) for the six months ended June 30, 2006, a
decrease in the amount of loss of $1,328,208. The principal reason for this
amount of decline in net loss was the reduction in Sales, General and
Administrative Expenses achieved in the six months ended June 30, 2006 versus
the six months ended June 30, 2005.Included in the net loss of ($3,656,196) for
the six months ended June 30, 2006 is $1,499,300 of expenses for employment
contract costs and legal fees paid by issuance of common stock.
LIQUIDITY AND CAPITAL RESOURCES: With regard to liquidity and adequacy of
capital resources, management believes that adequate liquidity and cash
resources exist to sustain current corporate activities for the remainder of the
fiscal year. However, in the event that a decision to proceed with the offshore
LNG regas terminal project in Southern California is made during the upcoming
months, additional funding for the permit process will be needed. Management
will evaluate the required budget and funding alternatives for such an effort as
an integral part of the project feasibility study underway. Direct capital
expenditures during the six months ended June 30, 2006 totaled $1,383,436. The
capital expenditures were composed of increased pre-construction costs regarding
potential international pipeline crossings and storage facilities in Mexico,
pre-construction costs regarding an offshore LNG terminal in Southern
California, and additional machinery, equipment, trucks, autos and trailers for
the operation of the Sonterra Energy Corporation propane systems. Total debt
increased from $5,722,322 at December 31, 2005 to $ 11,866,198 at June 30, 2006.
The increase in total debt is due primarily to the issuance of $6,569,750 of
convertible debentures in the financing transaction of January 20, 2006. Net
loss for the six months ended June 30, 2006 was ($3,656,196) a decrease in net
loss of 27% from the net loss of ($4,984,404) for the six months ended June 30,
2005. Basic and diluted net loss per common share decreased 28.6% to ($0.05).
The net loss per share calculation for the six months ended June 30, 2006
included an increase in actual and equivalent shares outstanding.
26
YEAR ENDED DECEMBER 31, 2005 COMPARED WITH YEAR ENDED DECEMBER 31, 2004
REVENUES: The Company reported revenues of $1,861,323 for the twelve months
ended December 31, 2005 as compared with revenues from continuing operations of
$1,883,838 for the twelve months ended December 31, 2004. The primary
differences in year to year results occurred from the conversion of Reef
Ventures, L.P. income from gas sales to transportation fees. In the year ended
December 31, 2005, Reef Ventures sold no natural gas ($0) compared to $1,323,459
of gas sales for the twelve months ended December 31, 2004. However, Reef
Ventures, L.P. increased transportation fees to $231,077 for the twelve months
ended December 31, 2005 compared to transportation fees of $76,767 for the
twelve months ended December 31, 2004, an increase of $154,310. In addition, the
mix of revenues earned by Sonterra Energy Corporation showed a significant
change in terms of propane gas sales due to the reporting of a full year of
operations in 2005 versus three months for the 2004 year. Propane sales for
Sonterra Energy Corporation for the twelve months ended December 31, 2005 were
$1,494,679 compared to sales of $400,637 for the twelve months ended December
31, 2004, an increase of $1,094,042. Construction service revenues for Sonterra
Energy Corporation increased to $135,567 for the twelve months ended December
31, 2005 compared to $82,975 for the twelve months ended December 31, 2004, an
increase of $52,592.
TOTAL COSTS AND EXPENSES: Total costs and expenses from continuing operations
decreased from $31,626,135 for the twelve months ended December 31, 2004 (as
restated) to $15,171,916 for the twelve months ended December 31, 2005. The most
significant decreases occurred in Beneficial Conversion Feature Interest, Sales,
General and Administrative and Impairment Losses. Each of the decreases in these
categories of expenses resulted primarily from results related to the matters
discussed in Footnotes 1 and 2 of the financial statements for the year ended
December 31, 2005 and as described in the related sections below.
COST OF SALES: Total Cost of Sales decreased from $1,508,891 for the twelve
months ended December 31, 2004 to $1,003,386 for the twelve months ended
December 31, 2004. Due to the conversion of Reef Ventures, L.P. to a
transportation arrangement for its business versus the purchase and sale of
natural gas, its cost of sales decreased from $1,299,518 for the twelve months
ended December 31, 2004 to zero ($0) for the twelve months ended December 31,
2005. Cost of sales for Sonterra Energy Corporation rose from $209,373 for the
twelve months ended December 31, 2004 to $1,003,386 for the twelve months ended
December 31, 2005, an increase of $794,013. As stated in the Revenue discussion
above, this increase was primarily the result of twelve months of operations
reported in 2005 versus only three months of operations reported in 2004.
OPERATING EXPENSES: Operating expenses from continuing operations which are
expenses related to the operation of Company assets in an active business
segment increased from $99,665 for the twelve months ended December 31, 2004 to
$202,766 for the twelve months ended December 31, 2005 which is a total increase
of $103,101. This increase was primarily from the operating expenses incurred by
Sonterra Energy Corporation. Depreciation expense increased from $244,889 for
the the twelve months ended December 31, 2004 to $485,481 for the twelve months
ended December 31, 2005 due to a full year of depreciation being incurred in the
2005 year versus seven months of depreciation expense in 2004 on the natural gas
pipeline owned by Reef Ventures, L.P. and the depreciable assets acquired by
Sonterra Energy Corporation for the operation of the residential propane
distribution systems in Austin, Texas.
INTEREST EXPENSE: Interest expense increased from $300,566 during the twelve
months ended December 31, 2004 to $611,363 primarily due to twelve months of
carrying cost in 2005 for the debt incurred to acquire the natural gas pipeline
owned by Reef Ventures, L.P. versus seven months of interest cost reported in
the 2004 acquisition year for these assets. As described in Footnote 2, the
Company has restated its December 31, 2004 financial statements and all
subsequent quarterly financial statements to account for the cost of the
embedded beneficial conversion feature inherent in the convertible notes issued
to the MAG Capital, LLC investors on November 18, 2004. This beneficial
conversion feature represents the difference between the conversion price for
the debentures and the fair market value of the common stock at the commitment
date and subsequent quarterly measurement dates. This discount was charged to
interest expense because the conversion feature is at the option of the holder
and can be exercised at any time. The Company has accordingly recognized
interest expense in its restated December 31, 2004 financial statements in the
amount of $3,092,105 and ($756,329) for the twelve months ended December 31,
2005. The negative figure for 2005 interest expense recognizes the fluctuation
in the market price of the common stock into which the notes are converted at
the quarterly measurement dates. The interest cost associated with the issuance
and conversion of these debentures due to this beneficial conversion feature is
limited to the relevant 2004 and 2005 years due to the completed conversion of
all the debentures into common stock in the fourth quarter of 2005.
27
SALES, GENERAL AND ADMINISTRATIVE: Sales, General and Administrative expense for
the restated twelve months ended December 31, 2004 was $11,022,019. This amount
includes restated amounts for stock issued for services and finance costs
associated with the valuation of stock issued as part of the Impact
International LLC acquisition in 2004. Sales, General & Administrative expenses
for the twelve months ended December 31, 2005 was $8,033,249 which is a decrease
of $2,988,770 as compared to the twelve months ended December 31, 2004. During
2005, the Company recognized significant decreases in consulting fees and
finance costs which were offset by increased employee expenses, board of
director compensation, and overhead from full year operations of Sonterra Energy
Corporation in 2005.
IMPAIRMENT LOSSES: As described in Footnote 1, the Company has recognized
impairment of goodwill recorded in connection with the Impact International LLC
acquisition in the amount of $5,200,000 and the impairment of the carrying value
of the Chittim gas plant owned by Rio Bravo Energy LLC and the gas pipeline
system connecting to the Chittim gas plant owned by Sonora Pipeline LLC in the
amount of $392,000 for the twelve months ended December 31, 2005.
GAIN ON REDUCTION OF WARRANT LIABILITY: As part of the Impact International LLC
acquisition in the year ended December 31, 2004, the Company issued warrants at
a conversion price less than the fair market value of the common stock issueable
upon the exercise of those warrants. Accordingly, the Company has restated its
December 31, 2004 financial statements to recognize both the additional goodwill
and the related warrant liability associated with that acquisition. An
evaluation of the difference between the price of the common stock and the
warrant exercise price on a quarterly basis was performed resulting in the Gain
on Reduction of Warrant Liability amounts shown in the restated December 31,
2004 financial statements ($15,390,000) and the amount shown in the December 31,
2005 financial statements ($5,168,000). The warrants originally issued in
connection with this acquisition have been exercised and all common stock
related to their exercise has been issued as of the end of the year December 31,
2005.
NET LOSS FROM OPERATIONS: Net loss of ($14,302,037) for the twelve months ended
December 31, 2004 decreased to ($7,662,904) for the twelve months ended December
31, 2005, a decrease in the amount of loss of $6,639,133. Included in the net
loss from operations is $4,022,525 of expenses for financing costs, investor
relations fees, legal fees, director fees and employee compensation paid by
issuance of common stock.
YEAR ENDED DECEMBER 31, 2004 COMPARED WITH YEAR ENDED DECEMBER 31, 2003
REVENUES: The Company reported revenues of $1,883,838 for the twelve months
ended December 31, 2004 as compared with revenues from continuing operations of
$178,856 for the twelve months ended December 31, 2003. The revenue increase
resulted primarily from the acquisition of a 98% interest in Reef Ventures, L.P.
which owns and operates a natural gas pipeline serving the Piedras Negras,
Coahuila market. Natural gas sold ($1,323,459) and transportation fees ($76,767)
charged from these operations totaled $1,400,227 for the twelve months ended
December 31, 2004. Sales of propane by Sonterra Energy Corporation to its
residential customer base ($363,413), service call income for its customers
($34,373), and installation income for new yard lines and meter sets ($2,850)
totaled to $400,636 for the twelve months ended December 31, 2004. A new revenue
source from Sonterra Energy Corporation was construction services related to
propane main lines and tank sites for subdivisions under development, which
resulted in $82,975 of revenues for the twelve months ended December 31, 2004.
Other Revenues decreased by $178,856 for the twelve months ended December 31,
2004 as compared to the twelve months ended December 31, 2003.
TOTAL COSTS AND EXPENSES: Total costs and expenses from continuing operations
increased from $3,061,068 for the twelve months ended December 31, 2003 to
$31,626,135 for the twelve months ended December 31, 2004. Each category of cost
and expense increased significantly due to the rapid growth in assets and
operation expenses experienced by the Company during the twelve months ended
December 31, 2004. Cost of Sales increased from $0 for the twelve months ended
December 31, 2003 to $1,508,891 for the twelve months ended December 31, 2004.
Operating Expenses increased from $27,767 for the twelve months ended December
31, 2003 to $99,665 for the twelve months ended December 31, 2004. Depreciation
Expense increased from $43,006 for the twelve months ended December 31, 2003 to
$244,889 for the twelve months ended December 31, 2004. Interest Expense
increased from $53,163 for the twelve months ended December 31, 2003 to
$3,392,671 for the twelve months ended December 31, 2004. Each of these
increases resulted primarily from growth related to the acquisition of 98% of
the partnership interest in the Reef Ventures, L.P. international pipeline
operations and the acquisition of the residential propane sales business near
Austin, Texas by Sonterra Energy Corporation. However, $3,092,105 of the
increase in Interest Expense for the year ended December 31, 2004 was from the
recognition of Beneficial Conversion Feature interest expense associated with
the November 18, 2004 financing transaction in which convertible notes were
issued to affiliates of MAG Capital, LLC. General and Administrative Expenses
increased from $2,937,132 for the twelve months ended December 31, 2003 to
$11,022,019 for the twelve months ended December 31, 2004 due to the startup and
initial operation of the additional business units mentioned above, the addition
of additional directors and officers combined with the increased use of stock
based compensation in the employment agreements of officers, and the expenses
for expanded Company operations associated with the development of new midstream
energy projects in the U.S. and Mexico during that period.
28
COST OF SALES: Total Cost of Sales increased from $0 for the twelve months ended
December 31, 2003 to $1,508,891 for the twelve months ended December 31, 2004.
Cost of sales increased by $1,299,518 for the purchase cost of natural gas
resold thru our international pipeline operated by Reef Ventures, L.P. and by
$209,373 for the purchase cost of propane, meter sets and yard lines sold to
residential customers by Sonterra Energy Corporation.
OPERATING EXPENSES: Operating expenses from continuing operations increased from
$27,767 for the twelve months ended December 31, 2003 to $99,665 for the twelve
months ended December 31, 2004 which is a total increase of $71,898. This
increase was due to the operating expenses incurred for the international
pipeline crossing operated by Reef Ventures, L.P. and the operating expenses
incurred by Sonterra Energy Corporation. Depreciation expense increased by
$201,883 during the twelve months ended December 31, 2004 due to the acquisition
of the natural gas pipeline owned by Reef Ventures, L.P. and the depreciable
assets acquired by Sonterra Energy Corporartion for the operation of the
residential propane distribution systems in Austin, Texas. Interest expense
increased by $3,339,508 during the twelve months ended December 31, 2004 due to
the debt incurred to acquire the natural gas pipeline owned by Reef Ventures,
L.P. and the issuance of convertible debt to entities associated with the MAG
Capital LLC.
SALES, GENERAL AND ADMINISTRATIVE: Sales, General & Administrative Expenses
increased by $8,084,887 during the twelve months ended December 31, 2004 as
compared with Sales, General and Administrative expenses for the twelve months
ended December 31, 2003. Officers & Directors Salaries & Fees increased by
$1,605,973 during the twelve months ended December 31, 2004 as compared to the
twelve months ended December 31. 2003 as a result of the addition of one
director and two officers to the Company combined with the increased use of
stock based compensation in the employment agreements of officers and directors.
Consulting fees, legal fees, and financing fees increased by $5,960,039 for the
twelve months ended December 31, 2004 as compared with the twelve months ended
December 31, 2003. This increase resulted primarily from the use of stock based
compensation for these services during a period of higher common stock prices.
The remaining increase in G & A costs of $518,875 for the twelve months ended
December 31, 2004 was from increases in travel costs, office rent, insurance
premiums, entertainment, and payroll plus other expenses associated with
additional employees. The significant expansion of scope in the business plan
for the Company and the need to conserve cash working capital for certain
project predevelopment costs required the use of significant issuances of stock
for general and administrative expenses during the twelve months ended December
31, 2004.
GOODWILL IMPAIRMENT LOSS: In connection with the acquisition of the Impact
International LLC partnership interests in May 2004, the Company issued warrants
to the sellers of the partnership interests at a conversion price that required
the establishment of an asset and offsetting liability account to account for
the difference in the strike price of the warrants versus the price of the
common stock issuable as of the date of issue on May 24, 2004. The original
amount of $20,558,000 was determined under the procedures of EITF 00-19
(utilizing the Black-Scholes option pricing method) and was recorded as Goodwill
in connection with the acquisition on the Company's books for the period ended
June 30, 2004. At December 31, 2004, the Company reviewed the value of the
Goodwill from the Impact acquisition and after applying the recognition and
measurement guidelines stated in SFAS 142 "Goodwill and Other Intangibles"
determined that an impairment charge to Goodwill of $15,358,000 was necessary.
GAIN ON REDUCTION OF WARRANTS LIABILITY: As described in the preceding section,
a liability for the warrants issued and outstanding at May 24, 2004 was recorded
in accordance with EITF 00-19, "Accounting for Derivative Financial Instruments
Indexed to, and Potentially Settled In, A Company's Own Stock". As a result of
the mark to market process called for in that guidance, the Company determined
that a reduction in warrants liability and corresponding gain in the amount of
$15,390,000 should be recorded at December 31, 2004.
NET LOSS: Net loss of ($1,348,481) for the twelve months ended December 31, 2003
increased to ($14,302,037) for the twelve months ended December 31, 2004, an
increase in the amount of loss of $12,953,556. Included in the net loss from
operations is $9,327,818 of expenses for financing costs, consulting fees, legal
fees, and employee compensation paid by issuance of common stock.
FORWARD-LOOKING STATEMENTS:
We have included forward-looking statements in this report. For this purpose,
any statements contained in this report that are not statements of historical
fact may be deemed to be forward looking statements. Without limiting the
foregoing, words such as "may", "will", "expect", "believe", "anticipate",
"estimate", "plan" or "continue" or the negative or other variations thereof or
comparable terminology are intended to identify forward-looking statements.
These statements by their nature involve substantial risks and uncertainties,
and actual results may differ materially depending on a variety of factors.
Factors that might cause forward-looking statements to differ materially from
actual results include, among other things, overall economic and business
conditions, demand for the Company's products, competitive factors in the
industries in which we compete or intend to compete, natural gas availability
and cost and timing, impact and other uncertainties of our future acquisition
plans.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK:
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 June 30, 2006,
we had cash and cash equivalents aggregated $3,312,026.
The Company does not issue or invest in financial instruments or their
derivatives for trading or speculative purposes. The operations of the Company
are conducted primarily in the United States, and, are not subject to material
foreign currency exchange risk. Although the Company has outstanding debt and
related interest expense, market risk of interest rate exposure in the United
States is currently not material.
Debt
The interest rate on our Impact International debt obligation is generally
determined based on the prime interest rate plus two percent and may be subject
to market fluctuation as the prime rate changes.
29
SELLING SHAREHOLDERS
The following table provides certain information about the selling shareholder's
beneficial ownership of our common stock as of June 30, 2006 and as adjusted to
give effect to the sale of all of the shares being offered by this prospectus.
The number of shares that Palisades Master Fund, Crescent International, Ltd.,
Double U Master Fund, LP, JGB Capital, LP, Nite Capital, LP and RHP Master Fund,
Ltd ("Purchasers"), will own at any time are subject to limitation in the
governing agreements for the Debentures and Warrants, respectively, so that the
aggregate number of shares of common stock of which such selling stockholder and
all persons affiliated with such selling stockholder (calculated pursuant to
Rule 13d-3 of the Securities Exchange Act of 1934, as amended) does not at any
time exceed 4.99% of our then outstanding common stock.
The following table identifies the selling stockholders and indicates (i) the
nature of any position, office or other material relationship that each selling
stockholder has had with us during the past three years (or any of our
predecessors or affiliates) and (ii) the number of shares and percentage of our
outstanding shares of common stock owned by the selling stockholder prior to the
offering, the number of shares to be offered for the selling stockholder's
account and the number of shares and percentage of outstanding shares to be
owned by the selling stockholder after completion of the offering.
Table 1.
--------------------- ------------------ ------------------ ------------- --------------- -------------- ------------
Name of Selling Shares Shares Reserved Percent of Maximum Shares Percent of
Shareholder Beneficially for Adjustments/ Class of Number of Beneficially Class of
Owned Before Dilution Shares Shares to be Owned After Shares Owned
Offering (A) (B) Owned Sold in this the Offering After this
Before the Offering (C) Offering
Offering
--------------------- ------------------ ------------------ ------------- --------------- -------------- ------------
Palisades Master 11,527,808 3,458,342 4.99% 14,986,150 -0- -0-
Fund (1)
--------------------- ------------------ ------------------ ------------- --------------- -------------- ------------
Crescent 1,630,331 489,099 1.98% 2,119,430 -0- -0-
International,
Ltd.(2)
--------------------- ------------------ ------------------ ------------- --------------- -------------- ------------
Double U Master
Fund, LP(3) 815,116 244,535 1.0% 1,059,651 -0- -0-
--------------------- ------------------ ------------------ ------------- --------------- -------------- ------------
JGB Capital, LP(4) 1,339,081 401,724 1.64% 1,740,805 -0- -0-
--------------------- ------------------ ------------------ ------------- --------------- -------------- ------------
Nite Capital, LP(5) 652,132 195,640 0.80% 847,772 -0- -0-
--------------------- ------------------ ------------------ ------------- --------------- -------------- ------------
RHP Master Fund, 1,630,331 489,099 1.98% 2,119,430 -0- -0-
Ltd.(6)
--------------------- ------------------ ------------------ ------------- --------------- -------------- ------------
HPC Capital 65,696 19,709 0.08% 85,405 -0- -0-
Management Corp.(7)
--------------------- ------------------ ------------------ ------------- --------------- -------------- ------------
Total 17,660,495 5,298,148 22,958,643
--------------------- ------------------ ------------------ ------------- --------------- -------------- ------------
(A) The number and percentage of shares beneficially owned is determined in
accordance with Rule 13d-3 of the Securities Exchange Act of 1934, and the
information is not necessarily indicative of beneficial ownership for any other
purpose. Under such rule, beneficial ownership includes any shares as to which
the individual has sole or shared voting power or investment power and also any
shares that the individual has the right to acquire within 60 days of the date
of this prospectus through the exercise of any stock option or other right.
Unless otherwise indicated in the footnotes, each person has sole voting and
investment power (or shares such powers with his or her spouse) with respect to
the shares shown as beneficially owned. Percentage of beneficial ownership is
based on 80,525,815 shares of common stock outstanding as of June 30, 2006.
(B) This figure also includes a good faith calculation of additional number of
shares of common stock included in this registration statement that we are
required to registered issuable upon conversion of the convertible debentures
and warrants to account for anti-dilution and price protection adjustments based
upon 130% of shares issuable at the conversion rate.
(C) Assumes that the selling shareholder will convert all debentures and
exercise all warrant and sell all of the shares of the common stock offered by
this prospectus. We cannot assure you that the selling shareholders will sell
all or any of these shares.
(1) Represents up to 11,527,808 shares of common stock issuable as
follows: (a) 4,947,557 shares upon conversion of the Debentures, (b)
1,632,694 shares of common stock issuable upon exercise of the Series
"A" Warrants at $0.935 per share; and (c) 4,947,557 shares of common
stock issuable upon exercise of the Series "B" Warrants at $1.275 per
share. PEF Advisors, LLC, ("PEF") serves as the investment manager
Palisades Master Fund, LP ("the Fund"). As a result of its role as
investment manager to the Fund, PEF may be deemed to be the beneficial
owner, as defined in Rule 13d-3 under the Securities Exchange Act of
1934, of such securities held by the Fund. However, PEF does not have
the right to receive dividends from, or the proceeds from the sale of,
such securities held by the Fund and disclaims any beneficial
ownership of such shares of common stock. As of April 20, 2005, Mr.
David Batista was delegated authority from PEF regarding the portfolio
management decisions of PEF Advisors with respect to the securities
owned by the Fund. By reason of such delegated authority, Mr. Batista
may be deemed to have dispositive and voting power over the securities
owned by the Fund. However, Mr. Batista does not have the right to
receive dividends from, or the proceeds from the sale of, such
securities held by the Fund and disclaims any beneficial ownership of
such securities. Palisades Master Fund, LP has certified that it
acquired the securities in the ordinary course of business and at the
time it acquired the securities, it had no agreements or
understandings, directly or indirectly, with any person to distribute
the securities.
30
(2) Represents 1,630,331 shares of common stock issuable as follows: (a)
699,713 shares upon conversion of the Debentures, (b) 230,905 shares
of common stock issuable upon exercise of the Series "A" Warrants at
$0.935 per share; and (c) 699,713 shares of common stock issuable upon
exercise of the Series "B" Warrants at $1.275 per share. Crescent
International, Ltd. is a corporation organized under the laws of
Bermuda. Maxi Brezzi and Bachir Taleb-Ibrahimi, in their capacities as
managers of Cantara (Switzerland) S.A., the investment advisor to
Crescent International, Ltd., have voting control and investment
authority over the securities owned by Crescent. Messres. Brezzi and
Taleb-Ibrahimi disclaim beneficial ownership of the securities. The
selling stockholder has agreed not to convert the Debentures or to
exercise warrants to the extent such stockholder's beneficial
ownership of our common stock would exceed 4.99% of our common stock
then outstanding. The selling stockholder is not a registered
broker-dealer and is not affiliated with any registered broker-dealer.
The securities to be acquired on conversion or exercise of outstanding
securities will be acquired for investment. The selling stockholder
does not have any agreement or understanding, direct or indirect, with
any party to distribute the securities.
(3) Represents 815,116 shares of common stock issuable as follows: (a)
349,835 shares upon conversion of the Debentures, (b) 115,446 shares
of common stock issuable upon exercise of the Series "A" Warrants at
$0.935 per share; and (c) 349,835 shares of common stock issuable upon
exercise of the Series "B" Warrants at $1.275 per share. Double U
Master Fund, LP is a master feeder structure organized in the British
Virgin Islands with B&W Equities, LLC as its General Partner. Isaac
Winehouse is the manager of B&W Equities, LLC. Mr. Weinhouse has
voting and investment control over the shares held by the Double U
Master Fund, LP by virtue of his manager role with B&W Equities, LLC.
Mr. Weinhouse disclaims beneficial ownership of the securities. The
selling stockholder has agreed not to convert the Debentures or to
exercise warrants to the extent such stockholder's beneficial
ownership of our common stock would exceed 4.99% of our common stock
then outstanding. The selling stockholder is not a registered
broker-dealer and is not affiliated with any registered broker-dealer.
The securities to be acquired on conversion or exercise of outstanding
securities will be acquired for investment. The selling stockholder
does not have any agreement or understanding, direct or indirect, with
any party to distribute the securities.
(4) Represents 1,339,081 shares of common stock issuable as follows: (a)
574,713 shares upon conversion of the Debentures, (b) 189,655 shares
of common stock issuable upon exercise of the Series "A" Warrants at
$0.935 per share; and (c) 574,713 shares of common stock issuable upon
exercise of the Series "B" Warrants at $1.275 per share. JBG Capital,
LP is a Delaware limited partnership. Mr. Brett Cohen has voting and
investment control over the shares held by the JGB Capital, LP. Mr.
Cohen disclaims beneficial ownership of the securities. The selling
stockholder has agreed not to convert the Debentures or to exercise
warrants to the extent such stockholder's beneficial ownership of our
common stock would exceed 4.99% of our common stock then outstanding.
The selling stockholder is not a registered broker-dealer and is not
affiliated with any registered broker-dealer. The securities to be
acquired on conversion or exercise of outstanding securities will be
acquired for investment. The selling stockholder does not have any
agreement or understanding, direct or indirect, with any party to
distribute the securities.
(5) Represents 652,132 shares of common stock issuable as follows: (a)
279,885 shares upon conversion of the Debentures, (b) 92,362 shares of
common stock issuable upon exercise of the Series "A" Warrants at
$0.935 per share; and (c) 279,885 shares of common stock issuable upon
exercise of the Series "B" Warrants at $1.275 per share. Nite Capital,
LP is a Delaware limited partnership. Keith Goodman is the manager of
the General Partner of Nite Capital, LP. Mr. Goodman has voting and
investment control over the shares held by the Nite Capital, LP. Mr.
Goodman disclaims beneficial ownership of the securities. The selling
stockholder has agreed not to convert the Debentures or to exercise
warrants to the extent such stockholder's beneficial ownership of our
common stock would exceed 4.99% of our common stock then outstanding.
The selling stockholder is not a registered broker-dealer and is not
affiliated with any registered broker-dealer. The securities to be
acquired on conversion or exercise of outstanding securities will be
acquired for investment. The selling stockholder does not have any
agreement or understanding, direct or indirect, with any party to
distribute the securities. The selling stockholder has agreed not to
convert the Debentures or to exercise warrants to the extent such
stockholder's beneficial ownership of our common stock would exceed
4.99% of our common stock then outstanding. The selling stockholder is
not a registered broker-dealer and is not affiliated with any
registered broker-dealer. The securities to be acquired on conversion
or exercise of outstanding securities will be acquired for investment.
The selling stockholder does not have any agreement or understanding,
direct or indirect, with any party to distribute the securities.
31
(6) Represents 1,630,331 shares of common stock issuable as follows: (a)
699,713 shares upon conversion of the debentures, (b) 230,905 shares
of common stock issuable upon exercise of the Series "A" Warrants at
$0.935 per share; and (c) 699,713 shares of common stock issuable upon
exercise of the Series "B" Warrants at $1.275 per share. RHP Master
Fund, Ltd. is an exempted company organized under the laws of the
Cayman Islands. RHP Master Fund, Ltd. is a party to an investment
management agreement with Rock Hill Investment Management, L.P., a
limited partnership of which the general partner is RHP General
Partner, LLC. Pursuant to such agreement, Rock Hill Investment
Management directs the voting and disposition of shares owned by RHP
Master Fund. Messrs. Wayne Bloch and Peter Lockhart own all of the
interests in RHP General Partner. The aforementioned entities and
individuals disclaim beneficial ownership of the Company's Common
Stock owned by the RHP Master Fund. The selling stockholder has agreed
not to convert the Debentures or to exercise warrants to the extent
such stockholder's beneficial ownership of our common stock would
exceed 4.99% of our common stock then outstanding. The selling
stockholder is not a registered broker-dealer and is not affiliated
with any registered broker-dealer. The selling stockholder does not
have any agreement or understanding, direct or indirect, with any
party to distribute the securities.
(7) Represents 65,696 shares of common stock issuable upon exercise of
Series "A" Warrants at $0.935 per share issued in connection with the
private placement of the securities. HPC Capital Management Corp. is a
registered broker-dealer. It is a corporation organized under the laws
of the State of Georgia. Mr. Vincent Sbarra has voting and investment
control over the shares held by HPC Capital. Mr. Sbarra disclaims
beneficial ownership of the securities. The selling stockholder has
agreed not to convert the Debentures or to exercise warrants to the
extent such stockholder's beneficial ownership of our common stock
would exceed 4.99% of our common stock then outstanding.
32
PLAN OF DISTRIBUTION
Each Selling Stockholder of the common stock of Tidelands Oil & Gas Corporation,
a Nevada corporation (the "Company") and any of their pledgees, assignees and
successors-in-interest may, from time to time, sell any or all of their shares
of Common Stock on the Trading Market or any other stock exchange, market or
trading facility on which the shares are traded or in private transactions.
These sales may be at fixed or negotiated prices. A Selling Stockholder may use
any one or more of the following methods when selling shares:
o ordinary brokerage transactions and transactions in which the
broker-dealer solicits purchasers;
o block trades in which the broker-dealer will attempt to sell
the shares as agent but may position and resell a portion of
the block as principal to facilitate the transaction;
o purchases by a broker-dealer as principal and resale by the
broker-dealer for its account;
o an exchange distribution in accordance with the rules of the
applicable exchange;
o privately negotiated transactions;
o settlement of short sales entered into after the effective
date of the registration statement of which this prospectus is
a part;
o broker-dealers may agree with the Selling Stockholders to sell
a specified number of such shares at a stipulated price per
share;
o a combination of any such methods of sale;
o through the writing or settlement of options or other hedging
transactions, whether through an options exchange or
otherwise; or
o any other method permitted pursuant to applicable law.
The Selling Stockholders may also sell shares under Rule 144 under the
Securities Act of 1933, as amended (the "Securities Act"), if available, rather
than under this prospectus.
Broker-dealers engaged by the Selling Stockholders may arrange for other
brokers-dealers to participate in sales. Broker-dealers may receive commissions
or discounts from the Selling Stockholders (or, if any broker-dealer acts as
agent for the purchaser of shares, from the purchaser) in amounts to be
negotiated, but, except as set forth in a supplement to this Prospectus, in the
case of an agency transaction not in excess of a customary brokerage commission
in compliance with NASDR Rule 2440; and in the case of a principal transaction a
markup or markdown in compliance with NASDR IM-2440.
In connection with the sale of the Common Stock or interests therein, the
Selling Stockholders may enter into hedging transactions with broker-dealers or
other financial institutions, which may in turn engage in short sales of the
Common Stock in the course of hedging the positions they assume. The Selling
Stockholders may also sell shares of the Common Stock short and deliver these
securities to close out their short positions, or loan or pledge the Common
Stock to broker-dealers that in turn may sell these securities. The Selling
Stockholders may also enter into option or other transactions with
broker-dealers or other financial institutions or the creation of one or more
derivative securities which require the delivery to such broker-dealer or other
financial institution of shares offered by this prospectus, which shares such
broker-dealer or other financial institution may resell pursuant to this
prospectus (as supplemented or amended to reflect such transaction).
The Selling Stockholders and any broker-dealers or agents that are involved in
selling the shares may be deemed to be "underwriters" within the meaning of the
Securities Act in connection with such sales. In such event, any commissions
received by such broker-dealers or agents and any profit on the resale of the
shares purchased by them may be deemed to be underwriting commissions or
discounts under the Securities Act. Each Selling Stockholder has informed the
Company that it does not have any written or oral agreement or understanding,
directly or indirectly, with any person to distribute the Common Stock. In no
event shall any broker-dealer receive fees, commissions and markups which, in
the aggregate, would exceed eight percent (8%).
The Company is required to pay certain fees and expenses incurred by the Company
incident to the registration of the shares. The Company has agreed to indemnify
the Selling Stockholders against certain losses, claims, damages and
liabilities, including liabilities under the Securities Act.
Because Selling Stockholders may be deemed to be "underwriters" within the
meaning of the Securities Act, they will be subject to the prospectus delivery
requirements of the Securities Act. In addition, any securities covered by this
prospectus which qualify for sale pursuant to Rule 144 under the Securities Act
may be sold under Rule 144 rather than under this prospectus. Each Selling
Stockholder has advised us that they have not entered into any written or oral
agreements, understandings or arrangements with any underwriter or broker-dealer
regarding the sale of the resale shares. There is no underwriter or coordinating
broker acting in connection with the proposed sale of the resale shares by the
Selling Stockholders.
We agreed to keep this prospectus effective until the earlier of (i) the date on
which the shares may be resold by the Selling Stockholders without registration
and without regard to any volume limitations by reason of Rule 144(e) under the
Securities Act or any other rule of similar effect or (ii) all of the shares
have been sold pursuant to the prospectus or Rule 144 under the Securities Act
or any other rule of similar effect. The resale shares will be sold only through
registered or licensed brokers or dealers if required under applicable state
securities laws. In addition, in certain states, the resale shares may not be
sold unless they have been registered or qualified for sale in the applicable
state or an exemption from the registration or qualification requirement is
available and is complied with.
Under applicable rules and regulations under the Exchange Act, any person
engaged in the distribution of the resale shares may not simultaneously engage
in market making activities with respect to the Common Stock for the applicable
restricted period, as defined in Regulation M, prior to the commencement of the
distribution. In addition, the Selling Stockholders will be subject to
applicable provisions of the Exchange Act and the rules and regulations
thereunder, including Regulation M, which may limit the timing of purchases and
sales of shares of the Common Stock by the Selling Stockholders or any other
person. We will make copies of this prospectus available to the Selling
Stockholders and have informed them of the need to deliver a copy of this
prospectus to each purchaser at or prior to the time of the sale.
33
DIRECTORS AND EXECUTIVE OFFICERS
Date became director
Name Age Position or officer
--------------------------------------------------------------------------------
Michael Ward 50 Director, President, CEO October 21, 1998
James B. Smith, C.P.A. 52 Director, CFO, V.P. August 16, 2003
Ahmed Karim 34 Director, Vice President October 21, 1998
Carl Hessel 41 Director January 28, 2004
Robert Dowies 56 V.P. October 18, 2004
MICHAEL WARD: Mr. Ward is the President, Chief Executive Officer and Chairman of
our Board of Directors. Michael Ward has served in his present capacities since
October 21, 1998. He is Vice President and Chief Executive Officer of Tidelands
Gas Corporation. He is a Manager and Vice President of Development of Rio Bravo
Energy, LLC. Mr. Ward has more than 25 years of diversified experience as an oil
and gas professional. He was educated in business management and administration
at Southwest Texas State University and the University of Texas. He has wide
experience in the capacity in which he successfully served in operating oil and
gas companies in the United States. During the past 20 years, he has been
associated with Century Energy Corporation where his duties and responsibilities
were production and drilling superintendent and supervised 300 re-completions
and new drills in Duval County, Texas. In association with Omega Minerals, Inc.,
where he was vice president and part owner, he operated 65 wells in 23 counties
in South and West Texas: 17 wells in Seminole and Osage Counties, Oklahoma, 44
wells in Neosho and Wilson Counties, Kansas and 125 wells in Brown, Pike,
Schuyler and Scott Counties. Illinois. He was president and owner of Major
Petroleum Company. He drilled, completed and produced 42 wells in South and West
Texas counties. The company was sold. With Tidelands Oil Corporation, his duties
included supervising and performing remedial well work, work-overs and economic
evaluation of the corporate properties. The primary area of interest was in
Maverick County, Texas. He has performed project financing analysis and
consulting of refinery acquisitions for the Yemen government. Currently, he is
negotiating new gas purchase and sale contracts, supervising and administering
the sale of gas line connections and hookups.
JAMES B. SMITH: On August 16, 2003, we employed James B. Smith to act as an
Senior Vice President and Chief Financial Officer. On June 27, 2005, Mr. Smith
joined the board of directors. Mr. Smith received a Bachelor of Science from
Texas AM University and a Master of Professional accounting degree from the
McCombs School of Business at the University of Texas, Austin. He is licensed as
a Certified Public Accountant in Texas and Colorado. From 1996 through 2001, he
directed the financial affairs and tax planning for several closely held
corporations engaged in land development in Colorado. From 2000 through 2003, he
served as Chief Financial Officer for Starr Produce Company, a major produce
company with significant subsidiaries in real estate development and
agr-business.
AHMED KARIM: Mr. Karim has been a director of the Company since October 21,
1998. He resigned his Vice President position on June 27, 2005, a position he
held since October 21, 1998. He is a graduate of Simon Fraser University. He
holds a degree in Business Administration, specializing in marketing and
international business. Since 1995 his business experience includes work with
Quest Investments Group and Interworld Trade and Finance where his
responsibilities included marketing, finance and investor relations.
CARL HESSEL: On January 28, 2004, Mr. Hessel joined our board of directors. Mr.
Hessel founded Margaux Investment Management Group, S.A. which is located in
Geneva, Switzterland in 2001. Prior to 2001, he served as Vice President of
MerrillLynch were he was responsible for creating global high net worth
management platform. He began his career at Goldman Sachs and help 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. He was awarded the Marcus Wallenberg Foundation's
Scholarship.
ROBERT W. DOWIES: On October 18, 2004, we employed Robert W. Dowies as our Vice
President of Gas Markets and Supply. Mr. Dowies has 30 years experience in the
energy marketing, ten years as the owner of a natural gas trading company and 20
years with a public utility. Until his employment with Tidelands Oil &Gas
Corporation, since 1998, Mr. Dowies worked for Trebor Energy Resources, Inc. in
Houston, Texas. His 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. He
developed and implemented marketing strategies which resulted in $40 million
dollars of annual revenue. He designed and coordinated the construction and
implementation of a natural gas gathering system. We entered into a three year
employment contract paying him an annual salary of $100,000 which includes an
annual stock grant of 100,000 shares.
34
Compliance with Section 16(a) of the Securities Exchange Act of 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
directors and executive officers, and persons who own more than 10% of the
Company's Common Stock, to file with the Securities and Exchange Commission
initial reports of beneficial ownership and reports of changes in beneficial
ownership of Common Stock of the Company. Officers, directors and greater than
10% shareholders are required by the Securities and Exchange Commission to
furnish the Company with copies of all section 16(a) reports they file. Based
solely on copies of such forms furnished as provided above, or written
representations that no Forms 5 were required, the Company believes that during
the fiscal year ended December 31, 2005 all Section 16(a) filing requirements
applicable to its executive officers, directors and beneficial owners of more
than 10%of its Common Stock were complied with, except as follows:
1. Michael Ward, Ahmed Karim, Carl Hessel and Robert Dowies did not file Forms 5
during 2005. 2. James Smith filed on late Form 4 on November 11, 2005 for a June
27, 2005 transaction.
Executive Officer Compensation
The following table contains compensation data for our named executive officers
for the fiscal years ended December 31, 2005, 2004 and 2003.
Table 1.
SUMMARY COMPENSATION TABLE
Annual Compensation Long-Term Compensation
Securities
Name and Fiscal Other Annual Restricted Underlying All Other
Principal Year Salary Bonus Compensation Stock Awards Options (#) Compensation
Position (1) ($) ($) ($)(2) ($)(3) (4) ($)(5)
Michael Ward 2005 252,000 10,500 -- 1,230,000 -- 199,500
President & CEO 2004 252,500 28,500 -- 845,000 -- --
2003 120,000 -- -- -- 500,000 --
James B. Smith 2005 68,000 19,500 -- -- 199,500
Chief Financial 2004 130,200 11,996 -- -- -- --
Officer 2003 131,333 (6) -- 525,816 -- 500,000 --
Robert Dowies 2005 100,000 4,167 8,350 --
Vice President, 2004 19,444 4,167 -- --
Marketing 2003 -- (7) -- -- 94,900 --
Ahmed Karim, V.P. 2005 -- -- -- -- 199,500
(8) 2004 -- -- -- -- 36,000
2003 -- -- -- 500,000 48,000
Royis Ward, 2005 -- -- -- --
Sec/Treas (9) 2004 -- -- -- --
2003 90,000 (9) 25,000 -- 500,000
(1) During the periods reflected, certain of the officers named in this table
received perquisites and other personal benefits not reflected in the amounts of
their respective annual salaries or bonuses. The dollar amount of these benefits
did not, for any individual in any year, exceed the lesser of $50,000 or 10% of
the total annual salary and bonus reported for that individual in any year,
unless otherwise noted.
(2) This column shows the market value of "Other Annual Compensation" awarded to
officers in that fiscal year as follows: On January 8, 2004, the Company issued
Mr. Smith 52,800 shares of its common stock valued at $90,816 and on November 1,
2004, issued 500,000 common shares valued at $435,000. Mr. Dowies received
$10,000 shares valued at $8,350. The shares were issued from the company Stock
Grant and Option Plan.
(3) This column shows the market value of restricted stock awards granted for
performance in that fiscal year as follows: Year 2005: Mr. Ward, 1,000,000
shares and Mr. Dowies,100,000 shares; 2004: Mr. Ward 1,000,000.
(4) This column shows common stock options granted on February 5, 2003 to
Michael Ward, Royis Ward and Ahmed Karim common stock options to purchase
500,000 shares each at $0.22 per share. On August 16, 2003, we granted Mr. Smith
common stock options to purchase 500,000 shares at $0.22 per share. These stock
options were exercised on September 14, 2004.
(5) This column shows the market value of "All Other Compensation" awarded to
officers in that fiscal year as follows: During 2005, each director received a
common stock grant of 150,000 shares. During 2004 and 2003, Mr. Karim received
$36,000 and $48,000 respectively, as director compensation.
(6) Mr. Smith's annual salary was $80,000 commencing August 16, 2003, his
initial employment date. This figure represents salary for approximately four
months employment.
(7) Mr. Dowies annual salary was $100,000 commencing October 18, 2004, his
initial employment date. This figure represents approximately three months
employment.
(8) Mr. Karim resigned his position as Vice President on June 27, 2005. He
remains a member of the board of directors.
(9) Mr. Royis Ward resigned his officer and director positions on October 1,
2003 and received and $25,000 severance payment.
35
Executive Officer Compensation
------------------------------
During 2005, the Company had four executive officers, Michael Ward, James B.
Smith, Ahmed Karim and Robert Dowies. Michael Ward's was paid $252,000 salary
and a bonus of $10,500. James B. Smith was paid $168,000, plus a $19,500 bonus.
Messrs. Ward and Smith have new and different employment agreements for 2004
discussed below in the Employment Agreement paragraphs. During 2005, Michael
Ward received 1,000,000 shares of common stock as his annual stock grant under
the terms of his employment agreement and 150,000 common shares as directors
fees. Mr. Smith received 500,000 common shares as his annual stock grant under
the terms of his employment agreement and 150,000 shares as a stock grant bonus.
During 2005, we paid Mr. Dowies $104,167 which consisted of his annual salary of
$100,000, a $4,167 dollar bonus and his annual stock grant of 100,000 shares.
Mr. Dowies employment agreement stock grant vested on April 18, 2005.
Mr. Karim did not receive any officer salary during 2005. Mr. Karim resigned as
a Vice President on June 27, 2005. We paid Mr. Karim $36,000 and granted 150,000
common shares as director compensation for 2005.
Director Compensation
---------------------
On April 11, 2001, the Company agreed to compensate Ahmed Karim, a director, for
services provided at the rate of $5,000 per month until June 30, 2003 and $3,000
per month thereafter. For the year ended December 31, 2005, we incurred $36,000
for cash director compensation and issued a total of 450,000 common shares to
three directors, Michael Ward, Ahmed Karim and Carl Hessel. We plan to
compensate directors with an annual stock grant of 150,000 shares each.
Committees of the Board of Directors
------------------------------------
Tidelands does not have a Compensation committee. The Board of Directors acts as
the Compensation Committee. Tidelands has no compensation written policies
outlining factors and criteria underlying awards or payments in relation to
executive officers.
Employment Agreements with Management
----------------------------------------------------
The Company has entered into employment agreements with the following officers:
MICHAEL WARD - Under the terms of Mr. Ward's employment agreement, commencing
January 1, 2004, he was employed as the Company's President and Chief Executive
Officer for a term of five (5) years. His base annual salary is $252,000. The
annual salary may be increased from year to year, as determined by our board of
directors acting as the Compensation Committee, by at least the Consumer Price
Index. As additional compensation, Mr. Ward will be entitled to an annual stock
grant of One Million (1,000,000) shares. Stock grant dates are June 30 and
December 31 each year. As incentive compensation, Mr. Ward will be entitled to
additional compensation equal to two percent of our net profits and one percent
of the increase in sales over a previous year's sales, effective with the fiscal
year ending 2004. Mr. Ward is entitled to all employee benefits as provided by
the Company. He is entitled to four weeks paid vacation and an annual automobile
allowance of $12,000.
JAMES B. SMITH: Under the terms of Mr. Smith's employment agreement, commencing
October 1, 2004, he was employed as the Company's Senior Vice President and
Chief Financial Officer for a term of four (4) years. His base annual salary is
$168,000. The annual salary may be increased from year to year, as determined by
our board of directors acting as the Compensation Committee, by at least the
36
Consumer Price Index. As additional compensation, Mr. Smith will be entitled to
an annual stock grant of Five Hundred (500,000) shares. Stock grant dates are
October 1 during the four year term. The first year stock grant was paid October
1, 2004. As incentive compensation, Mr. Smith will be entitled to additional
compensation equal to two percent of our net profits and one percent of the
increase in sales over a previous year's sales, effective October 1, 2004. Mr.
Smith is entitled to all employee benefits as provided by the Company. He is
entitled to four weeks paid vacation and an annual automobile allowance of
$12,000. Mr. Smith joined our board of directors on June 27, 2005.
ROBERT W. DOWIES: We employed Mr. Dowies on October 26, 2004 as our Vice
President of Gas Markets and Supply. His employment agreement is for a term of
three (3) years. His annual salary is $100,000. He is entitled to an annual
stock grant of 100,000 common shares. The first 50,000 shares will vest and be
payable April 18, 2005. Thereafter, stock grants will be payable every six
months, October 18 and April 18 for the term of the employment agreement. Mr.
Dowies is entitled to two (2) weeks paid vacation and all employee benefits as
provided by the Company.
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.
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 it 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.
PRINCIPAL SHAREHOLDERS
The following table sets forth the Common Stock ownership information as of June
15, 2006, with respect to (i) each person known to the Company to be the
beneficial owner of more than 5% of the Company's Common Stock; (ii) each
director of the Company; and (iii) all directors, executive officers and
designated stockholders of the Company as a group. This information as to
beneficial ownership was furnished to the Company by or on behalf of the persons
named. Unless otherwise indicated, we believe that each has sole voting and
investment power with respect to the shares beneficially owned.
The percentage interest of each principal shareholder is based on the beneficial
ownership of such shareholder divided by the sum of the current outstanding
shares of common stock plus the additional shares, if any, which would be issued
to such shareholder (but not any other shareholder) when exercising warrants or
other rights in the future. Applicable percentage of ownership is based on
80,525,815 shares of common stock outstanding as of June 30, 2006 together with
securities exercisable or convertible into shares of common stock within 60 days
of June 15, 2006, for each shareholder. Beneficial ownership is determined in
accordance with the rules of the Securities and Exchange Commission and
generally includes voting or investment power with respect to securities. Shares
of common stock subject to securities exercisable or convertible into shares of
common stock that are currently exercisable or exercisable within 60 days of
June 30, 2006 are deemed to be beneficially owned by the person holding such
securities for the purpose of computing the percentage of ownership of such
person, but are not treated as outstanding for the purpose of computing the
percentage ownership of any other person. Note that affiliates are subject to
Rule 144 and Insider trading regulations and percentage computation is for form
purposes only.
(a) Beneficial Ownership of more than 5% based on 80,525,815 common shares.
Beneficial Ownership of 5%.
Table 1.
(1) (2) (3) (4)
Title of Class Name and Address Amount and Nature Percent of Class
Common Stock
Common Mercator Momentum 751,974 0.93%
Fund, LP (1) Common Stock
555 S. Flower St. Warrants (3)
Suite 4500
Los Angeles, CA 90071
37
Common Mercator Momentum 521,928 0.64%
Fund III, LP(1) Common Stock/
555 S. Flower St. Warrants (4)
Suite 4500
Los Angeles, CA 90071
Common Monarch Pointe 1,690,462(5) 2.0%
Fund, Ltd. (1) Common Stock
c/o Bank of Ireland Warrants
Securities Services Ltd.
New Century House
International Fin. Ser.Ctr.
Mayor Street Lower
Dublin 1
Republic of Ireland
Common M.A.G. Capital, LLC(1) 3,371,710 (6) 4.01%
555 S. Flower St. Common Stock
Suite 4500 Warrants
Los Angeles, CA 90071
Common Robinson Reed (1) 200,000 (7) 0.25%
AV.DU Leman 8B Common Stock
CH-1003-Lausanne Warrants
Switzerland
Common David F. Firestone (1) 6,532,238 (1) 7.5%
555 S. Flower St Common Stock
Suite 4500 Warrants
Los Angeles, CA 90071
Common Impact International, LLC(2) 9,829,500 12.2%
111 W. 5th St. Ste.720
Tulsa, OK 74103
Common Michael Ward (8) 6,317,038 7.84%
1862 W. Bitters Rd.
San Antonio, TX78248
Notes:
(1) Mercator Momentum Fund, LP, Mercator Momentum Fund III, LP, Monarch Pointe
Fund, Ltd., MAG Capital, LLC, formerly Mercator Advisory Group, LLC, Robinson
Reed and David F. Firestone are referred to "Reporting Persons". Mercator
Momentum Fund, LP, Mercator Momentum Fund III, LP, Monarch Pointe Fund, Ltd. and
MAG Capital, LLC, formerly Mercator Advisory Group, LLC, each hold warrants to
purchase shares of our common stock. The right to vote and the right to dispose
of the shares beneficially owned by Mercator Momentum Fund, LP, Mercator
Momentum Fund III, LP, Monarch Pointe Fund, Ltd. and Robinson Reed are, in each
case, shared among either of the three funds, as applicable, and both M.A.G.
Capital, LLC and David F. Firestone. The documentation governing the terms of
the warrants contain provisions prohibiting any exercise of the warrants that
would result in the Reporting Persons owning beneficially more than 9.99% of the
outstanding common stock as determined under Section 13(d) of the Securities
Exchange Act of 1934. The Reporting Persons have never had beneficial ownership
of more than 9.99% of our outstanding common stock.
(2) Robert May has voting and dispositive authority over Impact International,
LLC.
(3) Mercator Momentum Fund, LP is a private investment limited partnership
organized under California law. MAG Capital, LLC, a California limited liability
company, formerly Mercator Advisory Group, LLC, is its general partner. David F.
Firestone is the Managing Member of the MAG Capital, LLC. Mercator Momentum
Fund, LP holds common stock warrants to purchase up to 751,974 shares of our
common stock. Half the warrants are exercisable at $0.80 per share and half
exercisable at $0.87 per share.
(4) Mercator Momentum Fund III, LP is a private investment limited partnership
organized under California law. MAG Capital, LLC, a California limited liability
company, is its general partner. David F. Firestone is the Managing Member of
the MAG Capital, LLC. Mercator Momentum Fund III, LP holds warrants to purchase
up to 518,092 shares of our common stock and 3,836 shares of common stock. Half
the warrants are exercisable at $0.80 per share and half exercisable at $0.87
per share.
38
(5) Monarch Pointe Fund, Ltd. is a corporation organized under of the British
Virgin Islands. Mercator Advisory Group controls the investments of Monarch
Pointe Fund. Monarch Pointe Fund holds warrants to purchase up to 1,690,462
shares of our common stock. Half the warrants are exercisable at $0.80 per share
and half exercisable at $0.87 per share.
(6) MAG Capital, LLC, formerly Mercator Advisory Group, LLC, holds warrants to
purchase up to 3,371,710 shares of our common stock. Half the warrants are
exercisable at $0.80 per share and half exercisable at $0.87 per share.
(7) Robinson Reed holds 200,000 common stock warrants, 100,000 exercisable at
$0.80 per share and 100,000 exercisable at $0.87 per share.
(8) Mr. Ward is the President, Chief Executive officer and Chairman of our Board
of Directors.
(b) Security Ownership of Management. Based on 80,525,815 shares as set forth in
(a) above as of June 30, 2006.
Table 2.
Title of Class Name and Address Amount and Nature Percent of Class
Common Michael Ward 6,817,038 8.46%
1862 W. Bitters Rd.
San Antonio, TX 78248
Common James B. Smith 1,408,382(1) 1.75%
1862 W. Bitters Rd.
San Antonio, TX 78248
Common Ahmed Karim 502,500 0.64%
1532 Woods Dr.
N. Vancouver, B.C.
Canada V7R 1A9
Common Robert W. Dowies 200,000 0.25%
1862 W. Bitters Rd.
San Antonio, TX 78248
Common Carl Hessel (2) 2,450,000 3.12%
c/o Margaux Investment
Management Group, S.A.
9 Rue de Commerce
CH 1211 Geneva 11
Switzerland
Total 11,565,588 14.36%
Notes:
(1) Includes 500,000 shares in the name of James B. Smith, 39,000 held in Smith
IRA account, 500,000 shares in the name of Aigle Partners, Ltd. in which Mr.
Smith has a partnership interest and 369,382 shares in the name of du Midi
Trust, in which Mr. Smith has a beneficial interest.
(2) Mr. Hessel is a partner in Margaux Investment Management Group, S.A. and as
such beneficial ownership reflects 2,000,000 common stock warrants owned by
Margaux and 450,000 shares owned personally by Mr. Hessel.
39
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On July 9, 2006, Tidelands Exploration and Production, Inc., a corporation in
organization by Tidelands Oil & Gas Corporation, entered into a Participation
Agreement and a Joint Operating Contract with Regency Energy, Inc., a Texas
corporation, concerning Tidelands' acquisition of a fifty-percent interest in
(a) a 24-mile natural gas pipeline located in Medina, Atascosa and Bexar
Counties, Texas and (b) two leases with five recompleted natural gas wells
located on approximately 1,000 acres. The interest consideration is $500,000.
Royis Ward is the principal shareholder of Regency Energy, Inc. Royis Ward is
the father of Michael Ward, the Tidelands Oil & Gas Corporation President, CEO
and Director.
On June 7, 2006, we issued Michael Ward, the Company's President, CEO and member
of the board of directors, 500,000 common shares representing a partial stock
grant under his employment contract.
On May 22, 2006, we issued Robert Dowies, a Company Vice President, 60,000
common shares under the terms of his employment contract.
On January 2, 2006, we issued Michael Ward, the Company's President, CEO and
member of the board of directors, 500,000 common shares representing a partial
stock grant under his employment contract. The shares were valued at $455,000 or
$0.91 per share.
On January 3, 2006, we issued James B. Smith, the Company's Sr. Vice President,
CFO and member of the board of directors, 500,000 common shares representing the
annual stock grant under his employment contract. The shares were valued at
$445,000 or $0.89 per share.
On December 20, 2005, the Company issued 10,000 common shares valued at $8,350
and 40,000 shares of valued at $33,400,to Robert Dowies, a company vice
president under the terms of his employment agreement.
On September 14, 2005, Michael Ward, James B. Smith and Ahmed Karim, executed
amended promissory notes to the Company bearing interest at a rate of 5%
annually and payable in full on, or before September 14, 2005. The notes were
originally executed on September 14, 2004 in connection with the exercise of
common stock options. The shares of stock issued previously to these individuals
remained subject to security agreements. Prior to December 31, 2005, each of the
above individuals paid $5,500 in interest accrued and owing to the Company on
the original promissory note maturity date of September 14, 2005.
On July 1, 2005, the company issued 1,000,000 shares of its restricted common
stock valued at $1,230,000 pursuant to the employment contract with Michael
Ward, company president and CEO.
On July 1, 2005, the Company issued 50,000 shares of its restricted common stock
valued at $61,500 pursuant to an employment contract with Robert Dowies, a
company vice president under the terms of his employment agreement.
On July 1, 2005, the Company issued 10,000 shares of its restricted common stock
valued at $12,150 Jason Jones, a Sonterra employee.
On June 27, 2005, the Company authorized the issuance of 150,000 shares of its
restricted common stock valued at $199,500 to each of the three members of the
Board of Directors, Michael R. Ward, Ahmed Karim and Carl Hessel.
On June 27, 2005, the Company authorized the issuance of 150,000 shares of
common stock to James B. Smith, the Company's Senior Vice President, CFO and
newly appointed member of the Board of Directors. The transaction was valued at
$199,125.
On November 1, 2004, we issued 500,000 common shares to James B. Smith which
represents the annual stock grant under the terms of his employment agreement
valued at $435,000.
One November 3, 2004, the Company issued 500,000 common shares to Michael Ward
under the terms of his employment contract. The shares were valued at $417,000.
On October 18, 2004 we entered into an employment agreement with Robert Dowies.
Mr .Dowies became a Company Vice President. His annual salary is $ 100,000
including an annual stock grant of 100,000 shares.
On September 14, 2004, we sold Four Million (4,000,000) Tidelands Oil & Gas
common shares to ACH Securities, S.A., a company domiciled in Geneva,
Switzerland, for Two Million ($2,000,000) Dollars. On October 14, 2004, in
connection with the ACH Securities transaction, we issued Margaux Investment
Group, S.A. common stock warrants to purchase One Million (1,000,000) Tidelands
Oil & Gas common shares for Fifty ($0.50) Cents per share and One Million
(1,000,000) shares for $2.50 per share. Mr. Carl Hessel, a company director, is
a partner in Margaux Investment Management Group, S.A. and, as such he has an
indirect financial interest in the common stock warrants.
On September 14, 2004, we issued 500,000 shares of common stock to Michael Ward
under the terms of his employment agreement. The shares were valued at $427,500.
On September 14, 2004, the following individuals exercised common stock options:
On September 14, 2004, Michael Ward, the Company's President and Director,
exercised his common stock option to purchase 500,000 common shares for $110,000
payable on a promissory note bearing interest at the rate of 5% payable in full
on, or before September 14, 2005. The shares are subject to a security
agreement.
40
On September 14, 2004 Ahmed Karim, the Company's Vice President and Director,
exercised his common stock option to purchase 500,000 common shares for $110,000
payable on a promissory note bearing interest at the rate of 5% payable in full
on, or before September 14, 2005. The shares are subject to a security
agreement.
On September 14, 2005, James B. Smith, the Company's Chief Financial Officer,
exercised his common stock option to purchase 500,000 common shares for $110,000
payable on a promissory note bearing interest at the rate of 5% payable in full
on, or before September 14, 2005. The shares are subject to a security
agreement.
On April 15, 2004, we issued 3,322 common shares to Carl Hessel for $ 4,983.
Carl Hessel was a member of our board of directors at the time of issuance.
The Company executed an agreement in January 2004 with Royis Ward, to provide
charter air transportation in his Beechcraft King Air, for Tidelands employees,
customers and contractors to job sites and other business related destinations.
A $300,000 5% interest bearing loan due in January 2007 was made by the Company
to Mr. Ward regarding the transaction. The loan balance was credited by airtime
charges at standard industry rates offset by interest charges computed on the
average monthly balance. On April 14, 2006, Michael Ward, through Scoot
Aviation, LLC, acquired the Royis Ward aircraft and the loan obligation. As of
June 30, 2006, the outstanding loan balance was $285,240.
On January 8, 2004, we authorized the issuance of 300,000 common shares to Carl
Hessel for services valued at $450,000. These shares were issued before Mr.
Hessel joined our Board of Directors.
On January 8, 2004, the Company issued James B. Smith 52,800 shares of its
common stock valued at $90,816 to a Company officer under the Stock Grant and
Option Plan.
During 2004, the Company had four executive officers, Michael Ward, James B.
Smith, Robert Dowies and Ahmed Karim. Michael Ward's annual salary is $252,000.
James B. Smith's annual salary was $168,000. Mr. Dowies annual salary is
$100,000.
On February 5, 2003, we granted Michael Ward, Royis Ward and Ahmed Karim common
stock options to purchase 500,000 shares each at $0.22 per share. On August 16,
2003, we granted James B. Smith common stock options to purchase 500,000 shares
at $0.22 per share. The options were exercised on September 14, 2004 and payment
was made by promissory note. Each grantee delivered a promissory note for
$110,000 bearing interest at the annual rate of Five percent. Presently, Michael
Ward, our President and director, James B. Smith, our Sr. V.P and CFO,Ahmed
Karim, a member of our board of directors, and Royis Ward, former company
officer and father of Michael Ward, are indebted to the company as outlined
above.
LEGAL PROCEEDINGS
Matter No. 1:
On January 6, 2003, we were served as a third party defendant in a lawsuit
titled Northern Natural Gas Company vs. Betty Lou Sheerin vs. Tidelands Oil &
Gas Corporation, ZG Gathering, Ltd. and Ken Lay, in the 150th Judicial District
Court, Bexar County, Texas, Cause Number 2002-C1-16421. The lawsuit was
initiated by Northern Natural Gas when it sued Betty Lou Sheerin for her failure
to make payments on a note she executed payable to Northern in the original
principal amount of $1,950,000. Northern's suit was filed on November 13, 2002.
Sheerin answered Northern's lawsuit on January 6, 2003. Sheerin's answer
generally denied Northern's claims and raised the affirmative defenses of
fraudulent inducement by Northern, estoppel, waiver and the further claim that
the note does not comport with the legal requirements of a negotiable
instrument. Sheerin seeks a judicial ruling that Northern be denied any recovery
on the note. Sheerin's answer included a counterclaim against Northern, ZG
Gathering, and Ken Lay generally alleging, among other things, that Northern, ZG
Gathering, Ltd. and Ken Lay, fraudulently induced her execution of the note.
Northern has filed a general denial of Sheerin's counterclaims. Sheerin's answer
included a third party cross claim against Tidelands. She alleges that Tidelands
entered into an agreement to purchase the Zavala Gathering System from ZG
Gathering Ltd. and that, as a part of the agreement, Tidelands agreed to satisfy
all of the obligations due and owing to Northern, thereby relieving Sheerin of
all obligations she had to Northern on the $1,950,000 promissory note in
question. Tidelands and Sheerin agreed to delay the Tideland's answer date in
order to allow time for mediation of the case. Tidelands participated in
mediation on March 11, 2003. The case was not settled at that time. Tideland's
answered the Sheerin suit on March 26, 2003. Tideland's answer denies all of
Sheerin's allegations.
On May 24 and June 16, 2004 respectively, Betty Lou Sheerin filed her first and
second amended original answer, affirmative defenses, special exceptions and
second amended original counterclaim, second amended original third party
cross-actions and requests for disclosure. In these amended pleadings, she sued
Michael Ward, Royis Ward, James B. Smith, Carl Hessel and Ahmed Karim in their
individual capacities. Her claims against these individuals are for fraud,
breach of contract, breach of the Uniform Commercial Code, breach of duty of
good faith and fair dealing and conversion. Sheerin has now non-suited her
claims against Michael Ward, Royis Ward, and James B. Smith.
41
In September 2002, as a pre-closing deposit to the purchase of the Zavala
Gathering System, the Company executed a $300,000 promissory note to Betty L.
Sheerin, a partner of ZG Gathering, Ltd. In addition, the Company issued
1,000,000 shares of its common stock to various partners of ZG Gathering, Ltd.
On December 3, 2003, Sheerin filed a separate lawsuit against Tidelands in the
150th District Court of Bexar County, Texas on this promissory note seeking a
judgment against Tidelands for the principle amount of the note, plus interest.
On December 29th, 2003, Tidelands answered this lawsuit denying liability on the
note. On April 1, 2004, Tidelands filed a plea in abatement asking the court to
dismiss or abate Sheerin's lawsuit on the $300,000 promissory note as it was
related to and its outcome was dependent on the outcome of the Sheerin third
party cross action against Tidelands in Cause Number 2002-C1-16421. The company
believes that the promissory note and shares of common stock should be cancelled
based upon the outcome of the litigation described above. Accordingly, our
financial statements reflect this belief.
On September 15, 2004 and again on October 15, 2004 respectively, Sheerin
amended her pleadings to include a third and fourth amended third party cross
action against Tidelands adding a claim for the $300,000 promissory note. In
these amended pleadings, Sheerin also deleted her claims against Carl Hessel and
Ahmed Karim. After adding the claim on the $300,000 promissory note to the third
party claims of Sheerin against Tidelands in Cause No. 2002-C1-16421, Sheerin
dismissed Cause Number 2002-C1-16421.
Tidelands won a partial summary judgment against Sheerin as to all of her tort
claims pled against Tidelands, save and except only her claim for conversion of
500,000 shares of Tidelands stock. Tidelands has filed a Motion for Partial
Summary Judgment seeking the court's ruling that Sheerin was not a third party
beneficiary to the alleged purchase and sale agreement. On June 1, 2006, the
court, pursuant to a Letter Ruling, found that Sheerin was not a third party
beneficiary to the alleged purchase and sale agreement executed by Tidelands and
ZG Gathering, Ltd. and expressed an intent to deny Sheerin's motion for summary
judgment seeking to establish herself as a third party beneficiary. Sheerin has
filed a motion for reconsideration on this Letter Ruling. These rulings are
interlocutory and potentially subject to change.
Sheerin seeks damages against Tidelands for indemnity for any sums found to be
due from her to Northern Natural Gas Company, unspecified amounts of actual
damages, statutory damages, unspecified amounts of exemplary damages, attorneys
fees, costs of suit, and prejudgment and post judgment interest.
On August 5, 2005, Northern Natural Gas Company filed its Fourth Amended
Original Petition which, for the first time, named Tidelands as a defendant to
Northern. Northern seeks to impose liability on Tidelands for $1,950.000
promissory note signed by McDay Energy Partners, Ltd. (the predecessor to ZG
Gathering, Ltd.) and Sheerin and the $1,700,000 promissory note signed by McDay
only. Northern contends that Tidelands is alternatively liable to Northern for
payment of both such promissory notes totaling $3,709,914 plus interest because
Northern is a third party beneficiary under a December 3, 2001 purchase and sale
agreement between ZG and Tidelands claiming that in such agreement Tidelands
agreed to assume and satisfy all indebtedness due and owing Northern by Sheerin
and ZG. Northern also claims that it is entitled to foreclosure of a lien on the
gas gathering system and pipeline that was the subject of the promissory notes
in question.
Tidelands won a summary judgment motion it filed against Northern and the court
dismissed Northern's claims against Tidelands. Pursuant to the Letter Ruling on
June 1, 2006, the judge reaffirmed her decision that Northern was not a third
party beneficiary under the alleged Tidelands/ZG purchase and sale agreement.
This is an interlocutory judgment potentially subject to change.
On November 28, 2005, ZG Gathering, Ltd. and ZG Pipeline Management ("ZG") filed
its answer to Northern's Fifth Amended Petition, its counter-claim against
Northern, and its answer and cross claim against Tidelands. ZG contends that the
promissory notes given by ZG and Sheerin to Northern were procured by Northern's
fraudulent misrepresentations and it claims unspecified amounts of damages
against Northern. ZG's cross action against Tidelands claims Tidelands entered
into an agreement to purchase the Zavala Gathering System from ZG and that, as
part of that agreement, Tidelands agreed to satisfy the $3,700,914 Northern
indebtedness of ZG, and to defend, indemnify, and hold ZG and Sheerin harmless
from such indebtedness, to pay off a Sheerin loan of $300,000, and to issue 1
million shares of Tidelands stock, of which 500,000 was to be free trading
shares. ZG claims that Tidelands breached this agreement by failing to satisfy
the Northern indebtedness, failing to defend and indemnify it from such debt,
failing to pay off the $300,000 note, failing to issue the free trading shares
in Tidelands, and by placing a stop transfer order on the restricted stock that
was issued by Tidelands. ZG seeks specific performance of the agreement,
recovery of an unspecified amount of damages, and its attorney's fees.
Much of the discovery has been completed at this time. Based on investigation,
and discovery to date, Tidelands appears to have a number of potential defenses
to the claims of Sheerin and Northern. Tideland's intends to aggressively defend
these lawsuits. The complexity of the issues in this case and the inherent
uncertainties in litigation of this kind prevent a more definitive evaluation of
the extent of Tidelands' liability exposure.
42
Matter No. 2:
On May 4, 2005, HBH Development Company, LLC initiated legal action against
Sonterra Energy Corporation in the District Court of Travis County, Texas, 98th
Judicial District, Cause No. GN 501626 HBH Development Co., LLC vs. Sonterra
Energy Corp. This action involves the developer of the Austin's Colony
Subdivision in Travis County, Texas and the propane distribution system
originally constructed by Southern Union Company. Southern Union entered into a
letter agreement with HBH concerning the construction and operation of a propane
distribution system in the subdivision to be owned and operated by Southern
Union. Southern Union assigned the letter agreement and its interests in the
propane system to Oneok, Inc., the parent company of Oneok Propane Company.
Sonterra acquired its interest in the propane system from Oneok Propane
Distribution Company. HBH is claiming that Sonterra has failed or refused to pay
HBH rent and easement use fees under the terms of the letter agreement. HBH
alleges that Sonterra's actions cause a failure of the assignment whereby it
acquired rights in the propane system or alternatively, if the assignment is
effective, for breach of contract. HBH seeks to have the court terminate
Sonterra's rights in the propane distribution system, award unspecified monetary
damages, cancellation of the contract and rights associated with the propane
distribution system, issue to HBH a writ of possession for the property, and for
attorneys fees. HBH has amended its complaint adding claims for mutual mistake
and reformation as to the letter agreement and a developer's bonus under terms
of the letter agreement. Sonterra is defending the legal action. It believes
that under the terms of the letter agreement between HBH Development Company and
Southern Union Company, that the easement use fees terminated when Southern
Union conveyed its interest in the propane distribution system to Oneok Propane
Company.
Matter No. 3:
On May 4, 2005, Senna Hills, Ltd. initiated legal action against Sonterra Energy
Corporation in the District Court of Travis County, Texas, 53rd Judicial
District Cause No. GN 501625 Senna Hills, Ltd. vs Sonterra Energy Corp. This
action involves the developer of the Senna Hills Subdivision in Travis County,
Texas and the propane distribution system originally constructed by Southern
Union Company. Southern Union entered into a letter agreement with Senna Hills
concerning the construction and operation of a propane distribution system in
the subdivision to be owned and operated by Southern Union. Southern Union
assigned the letter agreement and its interests in the propane system to Oneok,
Inc., the parent company of Oneok Propane Company. Sonterra acquired its
interest in the propane system from Oneok Propane Distribution Company. Senna
Hills is claiming that Sonterra has failed or refused to pay Senna Hills rent
and easement use fees under the terms of the letter agreement. Senna Hills
alleges that Sonterra's actions cause a failure of the assignment whereby it
acquired rights in the propane system or alternatively, if the assignment is
effective, for breach of contract. Senna Hills seeks to have the court terminate
Sonterra's rights in the propane distribution system, award unspecified monetary
damages, and cancellation of the contract and rights associated with the propane
distribution system, issue to Senna Hills a writ of possession for the property,
and attorneys fees.
Senna Hills sold certain undeveloped sections of Senna Hills Subdivision to a
new owner. Sonterra believes that it has the right to expand its distribution
system into such undeveloped sections of the subdivision. Sonterra plans to
expand the distribution system into these sections under an agreement with the
new owner. Senna Hills has stated that although it is not presently objecting to
Sonterra's expansion of the system at this time, it is reserving its claim that
Sonterra does not have the right to do so and that it intends to ask the court
to cancel Sonterra's right to use and possession of the propane distribution
system, including the system in the new sections of the subdivision. Senna Hills
has amended its complaint adding claims for mutual mistake and reformation as to
the letter agreement and a developer's bonus under terms of the letter
agreement.
Sonterra is defending the legal action. It believes that under the terms of the
letter agreement between Senna Hills and Southern Union Company, that the
easement use fees terminated when Southern Union conveyed its interest in the
propane distribution system to Oneok Propane Company.
Matter No. 4:
On April 7, 2005, Goodson Builders, Ltd. named Sonterra Energy Corporation in a
legal action titled, Goodson Builders, Ltd, Plaintiff vs. Jim Blackwell and BNC
Engineering, LLC, Defendants. The legal action is in the District Court of
Travis County, Texas 345th Judicial District. This legal action arises from a
claim that an underground propane storage tank and underground distribution
lines is situated on the Plaintiff's lot in the Hills of Lakeway subdivision,
Travis County, Texas. Plaintiff alleges that there is no recorded easement
setting forth the rights and obligations of the parties for use of the propane
tank and lines. However, there is reference to a "suburban propane easement" on
the plat document. Plaintiff alleges that the property is being used without
permission and the use constitutes an on-going trespass. Plaintiff asks the
court to determine that his lot is not subject to a "suburban propane easement",
declare the propane equipment the property of plaintiff, enjoin Sonterra from
use of Plaintiff's land, and award damages. The Plaintiff seeks damages of
$165,000 based on a market rental rate he claims to be $5,000 per month, $50,000
damages for depreciation of the value of the lot, an unspecified amount of
exemplary damages, and attorneys' fees. Sonterra is defending the claims.
43
DESCRIPTION OF SECURITIES
Common Stock
The Company is authorized to issue Two Hundred Fifty Million (250,000,000)
shares of common stock, par value $0.001 per share. As of June 30, 2006, there
were 80,525,815 shares of common stock issued and outstanding. The holders of
the common stock are not entitled to pre-emptive or preferential rights to
subscribe to any unissued stock or other securities. The shareholders are not
entitled to cumulative voting rights. The common stock is not assessable and not
subject to the payment of any corporate debts. The holders of our common stock
are entitled to one vote for each share on all matters submitted to the
shareholders for vote. Holders are entitled to share ratably in any dividends
which may be declared, from time to time, by the board of directors in its
discretion, from legally available funds. If we are liquidated, dissolved, or
wound up, the holders of common shares are entitled to share pro rata all assets
remaining after full payment of all liabilities. There are no conversion rights
or redemption or sinking fund provisions for the common stock.
Common Stock Warrants
Warrants
--------
As part of our January 20, 2006 financing with Palisades Master Fund, Crescent
International, Ltd., Double U Master Fund, LP, JGB Capital, LP, Nite Capital, LP
and RHP Master Fund, Ltd ("Purchasers"), we issued Series "A" common stock
purchase warrants to purchase up to 2,557,663 shares of our common stock at
$0.935 per share and Series "B" common stock purchase warrants to purchase up to
7,551,415 shares of our common stock at $1.275 per share. We also issued HPC
Capital Management Corp., the financing broker, 65,696 Series "A" warrants. The
shares issuable upon exercise of these warrants have been registered in this
registration statement on Form S-1, of which this prospectus is a part.
o Palisades Master Fund, LP holds 1,632,694 Series "A" warrants
exercisable at $0.935 per share and 4,947,557 Series "B" warrants
exercisable at $1.275 per share;
o Crescent International, Ltd. holds 230,905 Series "A" warrants
exercisable at $0.935 per share and 699,713 Series "B" warrants
exercisable at $1.275 per share;
o Double U Master Fund, LP. holds 115,446 Series "A" warrants exercisable
at $0.935 per share and 349,835 Series "B" warrants exercisable at
$1.275 per share;
o JGB Capital, LP. holds 189,655 Series "A" warrants exercisable at
$0.935 per share and 574,713 Series "B" warrants exercisable at $1.275
per share;
o Nite Capital, LP. holds 92,362 Series "A" warrants exercisable at
$0.935 per share and 279,885 Series "B" warrants exercisable at $1.275
per share;
o RHP Master Fund, LP. holds 230,905 Series "A" warrants exercisable at
$0.935 per share and 699,713 Series "B" warrants exercisable at $1.275
per share;
o HPC Capital Management Corp. holds 65,696 Series "A" warrants
exercisable at $0.935 per share.
Series "A" Common Stock Purchase Warrants:
------------------------------------------
The Series "A" Warrants may be exercised immediately by the Purchasers and
terminate on January 20, 2009.
Subject to specific terms and conditions in the Series "A" Warrant including an
effective registration statement registering underlying shares, the Company has
the call option to force conversion of the Warrants into common shares if the
Company's share price as quoted on the Over-the-Counter Electronic Bulletin
Board exceeds 250% of the then effective Exercise Price for a period of time
based on a Volume Weighted Average Price (VWAP) formula. The VWAP share price
must exceed this 250% threshold price for at least 20 consecutive Trading Days.
If at any time after one year from the date of issuance there is no effective
registration statement registering, or no current prospectus available for the
resale of the underlying shares, then this Warrant may also be exercised by
means of "cashless exercise" as determined by a formula described in the
Warrant. If the Company fails to deliver the certificates on conversion in a
timely manner, we will pay liquidated damages and be liable for buy-ins imposed
on the holder.
The exercise price will be subject to adjustment for corporate events, such as
stock splits, stock dividends, and stock combinations, as more specifically
outlined in the transaction documents.
44
Series "B" Common Stock Purchase Warrants:
------------------------------------------
The Purchasers have the right to exercise the Series B Warrants commencing at
any time on, or after January 20, 2007 and on, or before February 19, 2007.
Subject to specific terms and conditions in the Series B Warrant, including an
effective registration statement registering underlying shares, the Company has
the option to force the exercise of this Warrant into common shares if the
Company's share price as quoted on the Over-the-Counter Electronic Bulletin
Board exceeds 150% of the then effective Exercise Price for a period of time
based on a Volume Weighted Average Price (VWAP) formula. The VWAP share price
must exceed this 150% threshold price for at least 20 consecutive Trading Days.
If at any time after one year from the date of issuance there is no effective
registration statement registering, or no current prospectus available for the
resale of the underlying shares, then this Warrant may also be exercised by
means of "cashless exercise" as determined by a formula described in the
Warrant. If the Company fails to deliver the certificates on conversion in a
timely manner, we will pay liquidated damages and be liable for buy-ins imposed
on the holder.
The exercise price will be subject to adjustment for corporate events, such as
stock splits, stock dividends, and stock combinations, as more specifically
outlined in the transaction documents.
Convertible Debentures
As a part of our January 20, 2006 financing with the above named entities, we
issued Original Issue Discount Convertible Debentures with an aggregate face
amount of $6,569,750. The purchasers paid an aggregate principal sum of
$5,396,098. The face amount of the Debentures is due January 20, 2008. The
difference between the face amount and the aggregate principal paid represents
the interest expense. The Debenture Holder may convert all or part of the
Debenture face amount into shares of Tidelands common stock at any time at an
initial conversion rate of $0.87 per share.
The Purchasers have agreed to restrict their ability to convert their Debentures
or exercise their Warrants and receive our shares such that the number of shares
of common stock held by each of them individually in the aggregate after such
conversion or exercise does not exceed 4.99% of the then issued and outstanding
Company common shares. This beneficial ownership limitation may be waived by the
Holder.
Subject to specific terms and conditions in the Debenture, the Company has the
option to force conversion of the Debentures into common shares if the Company's
share price as quoted on the Over-the-Counter Electronic Bulletin Board exceeds
250% of the then Conversion Price for a period of time based on a Volume
Weighted Average Price (VWAP) formula. The VWAP share price must exceed this
250% price for at least 20 consecutive Trading Days.
The conversion price will be subject to adjustment for corporate events, such as
stock splits, stock dividends, and stock combinations, as more specifically
outlined in the transaction documents.
Registration Rights
-------------------
We granted the Purchasers and HPC Capital Management registration rights on the
shares underlying the Debentures and the Warrants. The common stock underlying
the Debentures and Warrants must be registered under the Securities Act of 1933,
as amended, for re-offer and re-sale by the Purchasers and HPC Capital
Management. If the Company fails to timely file a registration statement or is
unable to have the registration statement declared effective by the SEC within
the stated periods of time, we will trigger a default and be subject to among
other things, acceleration of the Debentures, at the Purchasers' options,
additional default interest payment and monetary liquidated damages. The
liquidated damages will be capped at 20% of the Debentures face amounts.
The registration agreement we made with the purchase agreement used in
connection with the placement of the convertible debentures and warrants
described above provides that no later than 150 days following the closing we
45
will file a registration statement under the Securities Act of 1933 to enable
the resale of the shares issuable upon conversion of the convertible debentures
and exercise of the warrants, and that we will use all commercially reasonable
efforts to cause the registration statement to be declared effective as promptly
as possible after filing. In the event the registration statement is not
declared effective within 150 days following the closing of the private
placements, then we may be required to pay partial liquidated damages to the
selling security holders equal 1.5% of the aggregate purchase price of the
securities pursuant to the Purchase Agreement for the registerable securities.
The amount payable by the Company will increase to 2% on the first monthly
anniversary of the event and to 2.5% on the second monthly anniversary and each
succeeding monthly anniversary, provided however, that the partial liquidated
damages will not exceed in the aggregate for each Holder, 20% of the principal
amount of the Debentures. If the Company fails to pay the partial liquidated
damages within 7 calendar days after the payable date, the Company is obligated
to pay 18% interest on the partial liquidated damages.
Penny Stock Rules
Our common stock is covered by the Securities and Exchange Commission's penny
stock rules. These rules include a rule that imposes additional sales practice
requirements on broker-dealers who sell our securities to persons other than
established customers and accredited investors. Accredited investors are
generally institutions with assets in excess of $5,000,000 or individuals with
net worth in excess of $1,000,000 or annual income exceeding $200,000 or
$300,000 jointly with their spouses. For transactions covered by the rule, the
broker-dealer must make a special suitability determination for the purchaser
and transaction prior to the sale. The rule may affect the ability of
broker-dealers to sell our securities and may also affect the availability
ability of purchasers of our stock to sell their shares in the secondary market.
It may also cause fewer brokers to be willing to make a market in our common
stock and it may affect the level of news coverage we receive.
Stock Transfer Agent
Our stock transfer agent is Signature Stock Transfer Co., Inc. located at One
Preston Park, 2301 Ohio Dr., Suite 100, Plano, Texas 75093. The agent's
telephone number is (972) 612-4120.
LEGAL MATTERS
The legality of the securities offered hereby has been passed upon by Gregory M.
Wilson, Attorney at Law. Mr. Wilson is a shareholder of our Company.
EXPERTS
Our balance sheet as of December 31, 2005, 2004, 2003 and the statements of our
operations, shareholders' equity and cash flows for the years then ended, have
been included in this prospectus in reliance on the report of Baum & Company,
P.A., certified public accountants, given on the authority of that firm as
experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements and other
information with the Securities and Exchange Commission. Our SEC filings are
available to the public over the Internet at the SEC's web site at
http://www.sec.gov. You may also read and copy any document we file at the SEC's
public reference room at 450 Fifth Street, N.W., Washington, D.C. 20549. Please
call the SEC at 1-800-SEC-0330 for further information about the public
reference room. Additionally, we will provide you with copies of any of these
reports we file, free of charge, as soon as practical after we file with the
SEC.
We have filed with the SEC a registration statement on Form S-1 under the
Securities Act with respect to the securities offered by this prospectus. This
prospectus does not contain all the information set forth in the registration
statement and the accompanying exhibits, as permitted by the rules and
regulations of the SEC. For further information, please see the registration
statement and accompanying exhibits. Statements contained in this prospectus
regarding any contract or other document which has been filed as an exhibit to
the registration statement are qualified in their entirety by reference to these
exhibits for a complete statement of their terms and conditions. The
registration statement and the accompanying exhibits may be inspected without
charge at the offices of the SEC and copies may be obtained from the SEC's
principal office at 100 F. Street, N.E., Washington, D.C. 20549, upon payment of
the fees prescribed by the SEC. Electronic reports and other information filed
through the Electronic Data Gathering, Analysis, and Retrieval System, known as
EDGAR, are publicly available on the SEC's website, http://www.sec.gov.
46
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Auditors...............................................F-2
Consolidated Balance Sheets at December 31, 2005 and
December 31, 2004............................................................F-3
Consolidated Statement of Changes in Stockholders' Equity
for the Years Ended December 31, 2005, 2004 and 2003.........................F-4
Consolidated Statement of Operations for the Years Ended
December 31, 2005, 2004 and 2003.............................................F-6
Consolidated Statement of Cash Flows for the Years Ended
December 31, 2005, 2004 and 2003.............................................F-7
Notes to Consolidated Audited Financial Statements...........................F-9
Unaudited Consolidated Balance Sheet as of June 30, 2006 and
December 31, 2005...........................................................F-32
Unaudited Consolidated Statement of Operations for the Three Months
Ended June 30, 2006 and 2005................................................F-33
Unaudited Consolidated Statement of Operations for the Six Months
Ended June 30, 2006 and 2005................................................F-34
Unaudited Consolidated Statements of Cash Flow for the Six Months
Ended June 30, 2006 and 2005................................................F-35
Notes to Unaudited Financial Statements.....................................F-37
F-1
BAUM & COMPANY, P.A.
1515 UNIVERSITY DRIVE, SUITE 209
CORAL SPRINGS, FLORIDA 33071
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors
Tidelands Oil & Gas Corporation
San Antonio, Texas
We have audited the accompanying consolidated balance sheets of Tidelands Oil &
Gas Corporation as of December 31, 2005, and 2004, and the related statements of
consolidated stockholders' equity, operations, and cash flows for the years
ended December 31, 2005, 2004 and 2003. 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. 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, 2005 and 2004, and the
results of their consolidated operations and their consolidated cash flows for
the years ended December 31, 2005, 2004 and 2003 in conformity with accounting
principles generally accepted in the United States of America.
As more fully described in Note 2 to the financial statements, the accompanying
consolidated balance sheets and related statements of consolidated shareholders'
equity, operations and cash flows have been restated to reflect the proper
accounting for certain transactions which occurred during the year ended
December 31, 2004. In our original report dated April 13, 2005, we expressed an
unqualified opinion on the consolidated financial statements, and our opinion on
the revised statements, as expressed herein, remains unqualified.
Baum & Company, P.A.
Coral Springs, Florida
April 14, 2006
F-2
TIDELANDS OIL & GAS CORPORATION
CONSOLIDATED BALANCE SHEETS
YEARS ENDED
ASSETS
------
December 31, December 31,
2005 2004
------------ ------------
(Restated)
Current Assets:
Cash $ 1,113,911 $ 5,459,054
Accounts and Loans Receivable 468,458 516,387
Inventory 142,204 82,523
Prepaid Expenses 183,938 487,488
------------ ------------
Total Current Assets 1,908,511 6,545,452
------------ ------------
Property Plant and Equipment, Net 10,042,088 9,086,313
------------ ------------
Other Assets:
Deposits 14,004 4,108
Cash Restricted 76,803 25,000
Deferred Charges 0 116,250
Note Receivable 288,506 286,606
Goodwill 1,158,937 6,358,937
------------ ------------
Total Other Assets 1,538,250 6,790,901
------------ ------------
Total Assets $ 13,488,849 $ 22,422,666
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Current Maturities - Note Payable $ 225,000 $ 0
Accounts Payable and Accrued Expenses 1,225,554 574,224
------------ ------------
Total Current Liabilities 1,450,554 574,224
Long-Term Debt 4,271,768 11,731,883
------------ ------------
Total Liabilities 5,722,322 12,306,107
------------ ------------
Commitments and Contingencies
Derivative Liability 0 5,168,000
------------ ------------
Stockholders' Equity:
Common Stock, $.001 Par Value per Share,
100,000,000 Shares Authorized, 78,495,815
and 61,603,359 Shares Issued and
Outstanding at 2005 and 2004 Respectively 78,497 61,604
Additional Paid-in Capital 40,818,174 30,354,195
Subscriptions Receivable (550,000) (550,000)
Minority Interest -- --
Accumulated (Deficit) (32,580,144) (24,917,240)
------------ ------------
Total Stockholders' Equity 7,766,527 4,948,559
------------ ------------
Total Liabilities and Stockholders' Equity $ 13,488,849 $ 22,422,666
============ ============
See Accompanying Notes to Consolidated Financial Statements
F-3
TIDELANDS OIL AND GAS CORPORATION
STATEMENTS OF CONSOLIDATED STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2005, 2004 (RESTATED) AND 2003
Stock
Additional Total
Common Stock Paid-In Subscription Accumulated Stockholders'
Shares Amount Capital Receivable (Deficit) Equity
------------ ------------ ------------ ------------ ------------ ------------
Balance
January 1, 2003 33,683,329 $ 33,684 $ 6,715,108 $ (18,000) $ (9,266,722) $ (2,535,930)
Common Stock Issued
for Cash 781,395 781 1,049,219 -- -- 1,050,000
Common Stock Issued
for Services re: $1M
Sale of Common Stock 300,000 300 335,700 -- -- 336,000
Fee for Services re: Sale
of Common Stock -- -- (336,000) -- -- (336,000)
Issuances of Common Stock
for Services 4,323,500 4,324 2,187,273 -- -- 2,191,597
Issuances of Common Stock
for Conversion of Deferred
Officers' Salaries 3,596,169 3,596 787,561 -- -- 791,157
Issuance of Common Stock
for Conversion of Deferred
Director's Fees 340,909 341 74,659 -- -- 75,000
Issuance of Common Stock
for Conversion of Accrued
Legal Fees 500,000 500 62,000 -- -- 62,500
Issuance of Common Stock
for Conversion of Notes
Payable 1,300,000 1,300 197,467 -- -- 198,767
Net Loss -- -- -- -- (1,348,481) (1,348,481)
------------ ------------ ------------ ------------ ------------ ------------
Balance
December 31, 2003 44,825,302 $ 44,826 $ 11,072,987 $ (18,000) $(10,615,203) $ 484,610
Common Stock Issued
for Cash 6,725,545 6,725 6,081,592 -- -- 6,088,317
Common Stock Issued
for Services Regarding
$4,083,335 Sale of Stock 300,000 300 449,700 -- -- 450,000
Fee for Services
Regarding Sale of
Common Stock -- -- (450,000) -- -- (450,000)
Issuance of Common
Stock for Services 6,602,800 6,603 9,321,213 -- -- 9,327,816
Issuance of Common
Stock for Subscription 2,500,000 2,500 547,500 (550,000) -- --
Issuance of Common
Stock for Conversion of
Note Payable and
Accrued Interest 75,000 75 113,236 -- -- 113,311
Beneficial Conversion
Feature - Convertible
Debentures -- -- 3,092,105 -- -- 3,092,105
Write Off Stock
Subscription Receivable -- -- -- 18,000 -- 18,000
See Accompanying Notes to Consolidated Financial Statements
F-4
TIDELANDS OIL AND GAS CORPORATION
STATEMENTS OF CONSOLIDATED STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2005, 2004 (RESTATED) AND 2003
(CONTINUED)
Stock
Additional Total
Common Stock Paid-In Subscription Accumulated Stockholders'
Shares Amount Capital Receivable (Deficit) Equity
------------ ------------ ------------ ------------ ------------ ------------
Issuance of Common Stock
to Acquire 50% of
Sonterra Energy Corp. 574,712 575 125,862 -- -- 126,437
Net Loss -- -- -- -- (14,302,037) (14,302,037)
------------ ------------ ------------ ------------ ------------ ------------
Balance
December 31, 2004 61,603,359 $ 61,604 $ 30,354,195 $ (550,000) $(24,917,240) $ 4,948,559
Issuance of Common
Stock for Services 2,970,000 2,971 4,019,554 -- -- 4,022,525
Issuance of Common
Stock for Conversion of
Convertible Debentures 6,707,456 6,707 4,993,293 -- -- 5,000,000
Beneficial Conversion
Feature -Convertible
Debentures -- -- (756,328) -- -- (756,328)
Cancellation of Stock
Previously Issued for
Services per Litigation
Settlement (285,000) (285) (297,540) -- -- (297,825)
Exercise of Stock
Purchase Warrants 7,500,000 7,500 2,505,000 -- -- 2,512,500
Net Loss -- -- -- -- (7,662,904) (7,662,904)
------------ ------------ ------------ ------------ ------------ ------------
Balance
December 31, 2005 78,495,815 $ 78,497 $ 40,818,174 $ (550,000) $(32,580,144) $ 7,766,527
============ ============ ============ ============ ============ ============
See Accompanying Notes to Consolidated Financial Statements
F-5
TIDELANDS OIL & GAS CORPORATION
STATEMENTS OF CONSOLIDATED OPERATIONS
YEARS ENDED
December 31, December 31, December 31,
2005 2004 2003
------------ ------------ ------------
(Restated) (Restated)
Revenues:
Gas Sales and Pipeline Fees $ 1,725,756 $ 1,800,863 $ 0
Construction Service 135,567 82,975 0
Other 0 0 178,856
------------ ------------ ------------
Total Revenues 1,861,323 1,883,838 178,856
------------ ------------ ------------
Expenses:
Cost of Sales 1,003,386 1,508,891 0
Operating Expenses 202,766 99,665 27,767
Depreciation 485,481 244,889 43,006
Interest 611,363 300,566 53,163
Beneficial Conversion Feature Interest (756,329) 3,092,105 0
Sales, General and Administrative 8,033,249 11,022,019 2,937,132
Impairment Losses - Long-Lived Assets 392,000 0 0
Impairment Losses - Goodwill 5,200,000 15,358,000 0
------------ ------------ ------------
Total Expenses 15,171,916 31,626,135 3,061,068
------------ ------------ ------------
(Loss) from Operations (13,310,593) (29,742,297) (2,882,212)
Gain on Sale of Subsidiary 0 0 1,533,731
Gain on Reduction of Derivative Liability 5,168,000 15,390,000 0
Loss on Equipment Sale (3,167) 0 0
Other Income 61,956 0 0
Interest and Dividend Income 123,075 50,260 0
Minority Interest -- -- --
Litigation Settlement 297,825 0 0
------------ ------------ ------------
Net (Loss) $ (7,662,904) $(14,302,037) $ (1,348,481)
============ ============ ============
Net (Loss) Per Common Share:
Basic and Diluted $ (0.11) $ (0.27) $ (0.03)
----------------- ============ ============ ============
Weighted Average Number of Common
Shares Outstanding -
Basic and Diluted 70,049,587 53,214,230 39,254,316
----------------- ============ ============ ============
Accompanying Notes to Consolidated Financial Statements
F-6
TIDELANDS OIL & GAS CORPORATION
STATEMENTS OF CONSOLIDATED CASH FLOWS
YEARS ENDED
December 31, December 31, December 31,
2005 2004 2003
------------ ------------ ------------
(Restated)
Cash Flows Provided (Required) By
Operating Activities:
Net (Loss) $ (7,662,904) $(14,302,037) $ (1,348,481)
Adjustments to Reconcile Net (Loss)
To Net Cash Provided (Required) By
Operating Activities:
Depreciation 485,481 244,889 43,006
Goodwill 0 (5,200,000) 0
Impairment Losses 5,592,000 15,358,000 0
Change in Derivative Instrument (5,168,000) (10,222,000) 0
Loss on Disposal of Equipment 3,167 0 0
Issuance of Common Stock:
For Services Provided 4,022,525 9,327,816 2,191,597
Beneficial Conversion Feature - Interest (756,329) 3,092,105 0
Return of Issued Stock
Litigation Settlement (297,825) 0 0
Changes In:
Accounts Receivable 47,929 (516,159) 16,078
Inventory (59,681) (82,523) 12,155
Prepaid Expenses 303,550 (465,279) 21,392
Other Assets 0 0 (1,805)
Deferred Charges 116,250 (116,250) 0
Deposits (61,699) (25,308) 0
Accounts Payable and Accrued Expenses
651,330 (201,370) (492,815)
------------ ------------ ------------
Net Cash (Required)
By Operating Activities (2,784,206) (3,108,116) 441,127
------------ ------------ ------------
Cash Flows Provided (Required)
By Investing Activities:
(Increase) In Investments 0 (901,871) (98,629)
Acquisitions of Property, Plant & Equipment (1,837,222) (8,727,010) (134,505)
Disposals of Oil and Gas Properties 0 0 598,924
Disposals of Equipment 800 0 0
------------ ------------ ------------
Net Cash (Required)
By Investing Activities (1,836,422) (9,628,881) 365,790
------------ ------------ ------------
Accompanying Notes to Consolidated Financial Statements
F-7
TIDELANDS OIL & GAS CORPORATION
STATEMENTS OF CONSOLIDATED CASH FLOWS
(CONTINUED)
YEARS ENDED
December 31, December 31, December 31,
2005 2004 2003
------------ ------------ ------------
(Restated)
Cash Flows Provided (Required)
By Financing Activities:
Proceeds from Issuance of Common Stock 0 6,088,317 1,050,000
Proceeds from Long-Term Loans 277,385 6,731,883 0
Proceeds from Issuance Of
Convertible Debentures 0 5,000,000 0
Repayment of Short-Term Loans 0 (250,000) 0
Reduction of Stock Subscription Receivable 0 18,000 0
Repayment of Loan Due to Related Parties 0 0 (933,554)
Proceeds of Loans From Related Parties 0 0 80,349
Loan to Related Party (1,900) (286,606) 0
Repayment of current Maturities of Long-Term
Debt 0 0 (302,924)
------------ ------------ ------------
Net Cash Provided By
Financing Activities 275,485 17,301,594 (106,129)
------------ ------------ ------------
Net Increase (Decrease) in Cash (4,345,143) 4,564,597 700,788
Cash at Beginning of Period 5,459,054 894,457 193,669
------------ ------------ ------------
Cash at End of Period $ 1,113,911 $ 5,459,054 $ 894,457
============ ============ ============
Supplemental Disclosures of
Cash Flow Information:
Cash Payments for Interest $ 356,504 $ 38,320 $ 38,773
============ ============ ============
Cash Payments For Income Taxes $ 0 $ 0 $ 0
============ ============ ============
Non-Cash Financing Activities:
Return of Issued Stock For
Beneficial Conversion Feature - Interest $ (756,329) $ 3,092,105 $ 0
Litigation Settlements (297,825) 0 0
Increase of Stock Subscription Receivable 0 550,000 0
Issuance of Common Stock:
Repayment of Notes 2,512,500 75,000 198,767
Conversion of Debentures 5,000,000 0 0
Payment of Accounts Payable 0 38,311 62,500
Repayment of Loans From Related Parties 0 0 866,157
Acquisition Cost 0 126,437 0
------------ ------------ ------------
Total Non-Cash Financing Activities $ 6,458,346 $ 3,881,853 $ 1,127,424
============ ============ ============
See Accompanying Notes to Consolidated Financial Statements
F-8
TIDELANDS OIL & GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005, 2004 (RESTATED) AND 2003
NOTE 1 - 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. 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 gas distribution
organization (see Note 15-Acquisitions). 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) (see Note 15-Acquisitions).
Nature of Operations
--------------------
The Company currently operates a natural gas pipeline between Eagle
Pass, Texas and Piedras Negras, Mexico and a propane distribution
system serving residential customers in the Austin, Texas area. In
addition, the Company is engaged in the development of natural gas
storage facilities in Mexico and other natural gas pipelines between
the United States and Mexico.
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.
F-9
TIDELANDS OIL & GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005, 2004 (RESTATED) AND 2003
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
------ ------------------------------------------------------
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.
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 144 (SFAS 144) "Accounting
for the Impairment or Disposal of Long-Lived Assets" 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 144 and the evaluation by the Company resulted
in impairment losses of $392,000, all of which is attributable to the
Rio Bravo Energy, LLC, Consolidated Group.
Income Taxes
------------
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards 109 (SFAS 109) "Accounting for Income
Taxes," 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.
F-10
TIDELANDS OIL & GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005, 2004 (RESTATED) AND 2003
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
------ ------------------------------------------------------
Net (Loss) Per Common Share
---------------------------
The Company accounts for net (loss) per share in accordance with
Statement of Financial Accounting Standard 128 (SFAS 128) "Earnings Per
Share". 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.
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 (SFAS 142), "Goodwill and Other Intangible Assets" 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 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 an acquisition during the
second quarter of 2004, the Company recorded goodwill in the amount of
$20,561,800. The Company evaluates the carrying value of goodwill on a
quarterly basis. As part of the evaluation, the company compares the
carrying value of the intangible asset with its fair value to determine
whether there has been impairment. As a result of management's
impairment review of goodwill during 2004 and 2005, the Company
recognized impairment losses of $15,358,000 and $5,200,000 in 2004 and
2005 respectively.
Revenue Recognition
-------------------
The Company's revenues for 2005 were derived principally (80%) from the
sale of propane gas to residential customers, as well as charges
generated from transportation fees (13%). During 2004, the Company's
main source of revenue (71%) was derived from the sale of natural gas
to commercial accounts, as well as the sale of propane gas to
residential customers (21%) and the charging of transportation fees
(4%). Additional revenues, 7% and 4% in 2005 and 2004 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 at the time of monthly billings based on meter
readings provided by independent contractors.
F-11
TIDELANDS OIL & GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005, 2004 (RESTATED) AND 2003
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
------ ------------------------------------------------------
New Accounting Standards
------------------------
In June 2001, Statement of Financial Accounting Standards 143,
"Accounting for Asset Retirement Obligations", (SFAS 143) was issued
and is effective for fiscal years beginning after June 15, 2002. SFAS
143 addresses financial accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. The adoption of SFAS 143 does not
have a material effect on our consolidated financial statements.
In July 2002, Statement of Financial Accounting Standards No. 146,
"Accounting for Costs Associated with Exit or Disposal Activities",
(SFAS 146) was issued and is effective for periods beginning after
December 31, 2002. SFAS 146 requires, among other things, that costs
associated with an exit activity (including restructuring and employee
and contract termination costs) or with a disposal of long-lived assets
be recognized when the liability has been incurred and can be measured
at fair value. Companies must record in earnings from continuing
operations costs associated with an exit or disposal activity that does
not involve a discontinued operation. Costs associated with an activity
that involves a discontinued operation would be included in the results
of discontinued operations. The implementation of the provisions of
SFAS No. 146 does not have a material effect on the consolidated
financial statements.
In December 2002, Statement of Financial Accounting Standards No. 148,
"Accounting for Stock-Based Compensation", (SFAS No. 148) was issued
and is effective for fiscal years beginning after December 15, 2002.
SFAS No. 148 amends the disclosure requirements of SFAS No. 123,
"Accounting for Stock-Based Compensation", (SFAS No. 123) to require
prominent disclosures in both interim and annual financial statements
about the method of accounting for stock-based employee compensation
and the effect of the method used on reported results. SFAS No. 148
also amends SFAS No. 123 to provide alternative methods of transition
for a voluntary change to the fair value based method of accounting for
stock-based employee compensation. The Company had decided not to
voluntarily adopt the SFAS No. 123 fair value method of accounting for
stock-based employee compensation. Therefore, the new transition
alternatives allowed in SFAS No. 148 will not affect the consolidated
financial statements.
F-12
TIDELANDS OIL & GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005, 2004 (RESTATED) AND 2003
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
------ ------------------------------------------------------
New Accounting Standards (Continued)
------------------------------------
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement
133 On Derivative Instruments And Hedging Activities". SFAS No. 149
amends and clarifies accounting for derivative instruments, including
certain derivative instruments embedded in other contracts, and for
hedging activities under SFAS No. 133. SFAS No. 149 is generally
effective for contracts entered into or modified after June 30, 2003
and for hedging relationships designated after June 30, 2003. In May
2003, the FASB issued SFAS No. 150, "Accounting For Certain Financial
Instruments With Characteristics Of Both Liabilities And Equity". SFAS
No. 150 improves the accounting for certain financial instruments that
previously might have been accounted for as equity. SFAS No. 150
required that those instruments be classified as liabilities in
statements of financial position. SFAS No. 150 is effective for
financial instruments entered into or modified after May 31, 2003. The
Company adopted both SFAS 149 and SFAS 150 in 2003. The adoption of
these standards have resulted in beneficial conversion feature charges
(credits) of $3,092,105 and ($756,329) in 2004 and 2005 respectively.
NOTE 2 - SUMMARY OF RESTATED CONSOLIDATED FINANCIAL STATEMENTS
------ ------------------------------------------------------
During the fourth quarter of 2005, management reevaluated its
accounting treatment for several complex transactions which occurred
during the year ended December 31, 2004. After considerable review and
outside consultation, management determined that their interpretation
of the accounting guidelines for these involved issues was not correct
and thereby their recording of the initial transaction needed to be
restated. Accordingly, management has chosen to restate in this note
the consolidated financial statements for the year ended December 31,
2004, as well as the interim reports for the quarters ended March 31,
June 30, and September 30, 2005. Following are the transactions which
precipitated the restatements:
(A) Goodwill associated with the acquisition of Reef Ventures, LP, (May
2004), and the related derivative liability for warrants issued as
part of the purchase price. Management, after their review of EITF
00-19 "Accounting For Derivative Financial Instruments Indexed To,
and Potentially Settled In, A Company's Own Stock", has concluded
that it is necessary to account for goodwill and the related
derivative liability associated with the May 2004 acquisition (see
Note 15). At December 31, 2004, the net effect of this adjustment
results in an increase in goodwill of $5,200,000, an increase in
the derivative liability of $5,168,000, a gain on reduction of the
derivative liability of $15,390,000 and a goodwill impairment loss
of $15,358,000.
F-13
TIDELANDS OIL & GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005, 2004 (RESTATED) AND 2003
NOTE 2 - SUMMARY OF RESTATED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
------ -----------------------------------------------------------------
(B) Issuance of convertible debentures with freestanding warrants and
embedded beneficial conversion features. Management, after
reviewing SFAS 133 and EITF 00-19, has determined that the
convertible debentures issued in November, 2004, contain an
embedded beneficial conversion feature. Accordingly, at December
31, 2004, this charge to the statement of operations amounted to
$3,092,105.
(C) Valuation of stock issued for services and financing costs.
Management reviewed all stock issued for services and financing
costs in 2004, and in accordance with the provisions outlined in
EITF 96-18 and SFAS 123, management increased the charges
associated with these stock issuances by $4,724,750 at December 31,
2004.
All of the transactions referred to above relate to non-cash charges
and do not affect the Company's revenues, cash flows from operations or
liquidity.
SUMMARY OF RESTATED FINANCIAL STATEMENTS
DECEMBER 31, 2004
-----------------
Previously Restatement Restated
Reported Adjustment Total
Consolidated Balance Sheets:
Total Assets $ 17,222,666 (1) $ 5,200,000 $ 22,422,666
Total Liabilities 12,306,107 (2) 5,168,000 17,474,107
------------ ------------ ------------
Stockholders' Equity $ 4,916,559 $ 32,000 $ 4,948,559
============ ============ ============
Consolidated Results of Operations:
Revenues 1,883,838 0 1,883,838
Expenses 8,451,280 (3,4) 23,174,855 31,626,135
------------ ------------ ------------
Net (Loss) from Operations (6,567,442) (23,174,855) (29,742,297)
Derivative Gain 0 (5) 15,390,000 15,390,000
Other Income 50,260 0 50,260
------------ ------------ ------------
Net (Loss) $ (6,517,182) $ (7,784,855) $(14,302,037)
============ ============ ============
Net (Loss) per Common Share:
Basic and Diluted $ (0.12) $ (0.27)
============ ============
Weighted Average Number of Common
Shares Outstanding:
Basic and Diluted 53,214,230 53,214,230
============ ============
F-14
TIDELANDS OIL & GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
NOTE 2 - SUMMARY OF RESTATED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
------ -----------------------------------------------------------------
SUMMARY OF RESTATED INTERIM REPORTS - 2005
MARCH 31, 2005 JUNE 30, 2005
-------------------------------------------- --------------------------------------------
Previously Restatement Restated Previously Restatement Restated
Reported Adjustment Total Reported Adjustment Total
ASSETS
Current Assets:
Cash and Cash
Equivalents $ 4,623,198 -- $ 4,623,198 $ 3,468,839 -- $ 3,468,839
Accounts and
Loans Receivable 404,488 -- 404,488 309,323 -- 309,323
Inventory 60,159 -- 60,159 75,573 -- 75,573
Prepaid Expenses 418,362 -- 418,362 302,531 -- 302,531
------------ ------------ ------------ ------------ ------------ ------------
Total Current
Assets 5,506,207 -- 5,506,207 4,156,266 -- 4,156,266
------------ ------------ ------------ ------------ ------------ ------------
Property, Plant
and Equipment, Net 9,245,326 -- 9,245,326 9,630,591 -- 9,630,591
------------ ------------ ------------ ------------ ------------ ------------
Other Assets:
Deposits 6,608 -- 6,608 6,608 -- 6,608
Deferred Charges 38,750 -- 38,750 0 -- 0
Restricted Cash 75,000 -- 75,000 75,846 -- 75,846
Note Receivable 287,170 -- 287,170 286,114 -- 286,114
Goodwill 1,158,937 (1) 5,200,000 6,358,937 1,158,937 -- 1,158,937
------------ ------------ ------------ ------------ ------------ ------------
Total Other
Assets 1,566,465 5,200,000 6,766,465 1,527,505 -- 1,527,505
------------ ------------ ------------ ------------ ------------ ------------
Total Assets $ 16,317,998 $ 5,200,000 $ 21,517,998 $ 15,314,362 $ 0 $ 15,314,362
============ ============ ============ ============ ============ ============
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current
Liabilities:
Current
Maturities of
Note Payable $ 225,000 $ -- $ 225,000 $ 112,500 $ -- $ 112,500
Convertible
Debenture Payable 5,000,000 -- 5,000,000 2,480,000 -- 2,480,000
Accounts
Payable and
Accrued Expenses 438,830 -- 438,830 656,302 -- 656,302
Derivative
Liability 0 (2) 8,062,500 8,062,500 0 -- 0
------------ ------------ ------------ ------------ ------------ ------------
Total Current
Liabilities 5,663,830 8,062,500 13,726,330 3,248,802 -- 3,248,802
------------ ------------ ------------ ------------ ------------ ------------
Long-Term Debt:
Note Payable,
less Current
Maturities 6,592,301 -- 6,592,301 4,255,990 -- 4,255,990
------------ ------------ ------------ ------------ ------------ ------------
Total
Liabilities 12,256,131 8,062,500 20,318,631 7,504,792 -- 7,504,792
------------ ------------ ------------ ------------ ------------ ------------
Stockholders' Equity:
Common Stock 62,364 62,364 74,281 74,281 77,157 77,157
Additional
Paid-in Capital 22,918,580 13,151,198 36,069,778 28,655,789 9,531,144 38,186,933
Subscriptions
Receivable (550,000) (550,000) (550,000) (550,000) (550,000) (550,000)
Minority Interest -- -- -- -- -- --
Accumulated
Deficit (18,369,077) (16,013,698) (34,382,775) (20,370,500) (9,531,144) (29,901,644)
------------ ------------ ------------ ------------ ------------ ------------
Total
Stockholders'
Equity 4,061,867 (2,862,500) 1,199,367 7,809,570 -- 7,809,570
------------ ------------ ------------ ------------ ------------ ------------
Total Liabilities
and Stockholders'
Equity $ 16,317,998 $ 5,200,000 $ 21,517,998 $ 15,314,362 $ 0 $ 15,314,362
============ ============ ============ ============ ============ ============
F-15
TIDELANDS OIL & GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
NOTE 2 - SUMMARY OF RESTATED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
------ -----------------------------------------------------------------
SUMMARY OF RESTATED INTERIM REPORTS - 2005
SEPTEMBER 30, 2005
--------------------------------------------
Previously Restatement
Reported Adjustment Total
ASSETS
Current Assets:
Cash and Cash
Equivalents $ 2,336,430 -- $ 2,336,430
Accounts and
Loans Receivable 208,668 -- 208,668
Inventory 90,332 -- 90,332
Prepaid Expenses 208,879 -- 208,879
------------ ------------ ------------
Total Current
Assets 2,844,309 -- 2,844,309
------------ ------------ ------------
Property, Plant
and Equipment, Net 10,097,779 -- 10,097,779
------------ ------------ ------------
Other Assets:
Deposits 6,708 -- 6,708
Deferred Charges 0 -- 0
Restricted Cash 101,471 -- 101,471
Note Receivable 284,944 -- 284,944
Goodwill 1,158,937 -- 1,158,937
------------ ------------ ------------
Total Other
Assets 1,552,060 -- 1,552,060
------------ ------------ ------------
Total Assets $ 14,494,148 $ 0 $ 14,494,148
============ ============ ============
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current
Liabilities:
Current
Maturities of
Note Payable $ 168,750 $ -- $ 168,750
Convertible
Debenture Payable 980,000 -- 980,000
Accounts
Payable and
Accrued Expenses 642,457 -- 642,457
Derivative
Liability 0 -- 0
------------ ------------ ------------
Total Current
Liabilities 1,791,207 -- 1,791,207
------------ ------------ ------------
Long-Term Debt:
Note Payable,
less Current
Maturities 4,252,304 -- 4,252,304
------------ ------------ ------------
Total
Liabilities 6,043,511 -- 6,043,511
------------ ------------ ------------
Stockholders' Equity:
Common Stock
Additional
Paid-in Capital 30,369,493 9,682,940 40,052,433
Subscriptions
Receivable
Minority Interest
Accumulated
Deficit (21,446,013) (9,682,940) (31,128,953
------------ ------------ ------------
Total
Stockholders'
Equity 8,450,637 -- 8,450,637
------------ ------------ ------------
Total Liabilities
and Stockholders'
Equity $ 14,494,148 $ 0 $ 14,494,148
============ ============ ============
F-16
TIDELANDS OIL & GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
NOTE 2 - SUMMARY OF RESTATED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
------ -----------------------------------------------------------------
SUMMARY OF RESTATED INTERIM REPORTS - 2005 (CONTINUED)
Three Months Ended March 31, 2005 Six Months Ended June 30, 2005
-------------------------------------------- --------------------------------------------
Previously Restated Previously Restated
Reported Restatement Total Reported Restatement Total
------------ ------------ ------------ ------------ ------------ ------------
Revenues:
Gas Sales and
Pipeline Fees $ 586,949 $ -- $ 586,949 $ 849,490 $ -- $ 849,490
Construction Services 41,126 -- 41,126 119,121 -- 119,121
------------ ------------ ------------ ------------ ------------ ------------
Total Revenues 628,075 -- 628,075 968,611 -- 968,611
------------ ------------ ------------ ------------ ------------ ------------
Expenses:
Cost of Sales 284,679 -- 284,679 415,248 -- 415,248
Operating Expenses 66,774 -- 66,774 129,137 -- 129,137
Depreciation 115,441 -- 115,441 236,395 -- 236,395
Interest 209,787 -- 209,787 393,860 -- 393,860
Beneficial Conversion
Feature Interest 0 (3) 4,736,843 4,736,843 0 (3) 135,789 135,789
Sales, General
and Administrative 1,220,911 (4) 597,500 1,818,411 3,098,570 (4) 1,578,500 4,677,070
Impairment
Losses 0 0 0 0 (1) 5,200,000 5,200,000
------------ ------------ ------------ ------------ ------------ ------------
Total Expenses 1,897,592 5,334,343 7,231,935 4,273,210 6,914,289 11,187,49
------------ ------------ ------------ ------------ ------------ ------------
(Loss) from
Operations (1,269,517) (5,334,343) (6,603,860) (3,304,599) (6,914,289) (10,218,888)
Derivative Gain
(Loss) -- (5)(2,894,500) (2,894,500) -- (5) 5,168,000 5,168,000
Gain (Loss) on
Equipment Sale (3,167) -- (3,167) (3,167) -- (3,167)
Interest and
Dividend Income 35,992 -- 35,992 69,651 -- 69,651
Minority Interest -- -- -- -- -- --
Litigation
Settlement 0 -- 0 0 -- 0
------------ ------------ ------------ ------------ ------------ ------------
Net (Loss) $ (1,236,692) $ (8,228,843) $ (9,465,535) $(3,238,11) $ (1,746,289) $(4,984,40)
============ ============ ============ ============ ============ ============
Net (Loss) Per
Common Share,
Basic and Diluted: $ (0.02) $ -- $ (0.15) $ (0.05) $ -- $ (0.07)
============ ============ ============ ============ ============ ============
Weighted Average
Number of Common
Shares Outstanding:
Basic and Diluted 61,893,359 -- 61,893,359 67,941,251 -- 67,941,251
============ ============ ============ ============ ============ ============
F-17
TIDELANDS OIL & GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
NOTE 2 - SUMMARY OF RESTATED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
------ -----------------------------------------------------------------
SUMMARY OF RESTATED INTERIM REPORTS - 2005 (CONTINUED)
Nine Months Ended September 30, 2005
--------------------------------------------
Previously
Reported Restatement Total
------------ ------------ ------------
Revenues:
Gas Sales and
Pipeline Fees $ 1,097,505 $ -- $ 1,097,505
Construction Services 119,121 -- 119,121
------------ ------------ ------------
Total Revenues 1,216,626 -- 1,216,626
------------ ------------ ------------
Expenses:
Cost of Sales 635,113 -- 635,113
Operating Expenses 210,545 -- 210,545
Depreciation 360,817 -- 360,817
Interest 503,950 -- 503,950
Beneficial Conversion
Feature Interest 0 (3) (501,659) (501,659)
Sales, General
and Administrative 4,022,271 (4) 2,556,200 6,578,471
Impairment
Losses 0 (1) 5,200,000 5,200,000
------------ ------------ ------------
Total Expenses 5,732,696 7,254,541 12,987,237
------------ ------------ ------------
(Loss) from
Operations (4,516,070) (7,254,541) (11,770,611)
Derivative Gain
(Loss) -- (5) 5,168,000 5,168,000
Gain (Loss) on
Equipment Sale (3,167) -- (3,167)
Interest and
Dividend Income 96,240 -- 96,240
Minority Interest
Litigation
Settlement 109,369 (4) 188,456 297,825
------------ ------------ ------------
Net (Loss) $ (4,313,62) $ (1,898,085) $ (6,211,713)
============ ============ ============
Net (Loss) Per
Common Share,
Basic and Diluted: $ (0.06) $ -- $ (0.09)
============ ============ ============
Weighted Average
Number of Common
Shares Outstanding:
Basic and Diluted 69,378,850 -- 69,378,850
============ ============ ============
(1) Adjust goodwill to period ending balances.
(2) Adjust to recognize fair value of derivative financial instruments as
liabilities at December 31, 2004 ($5,168,000) and first quarter
adjustment ($2,894,500) necessitated by marking to market the fair
value of the derivative.
(3) Adjustments associated with the issuance of convertible debentures.
(4) Adjustments to recognize the fair value of services and related
expenses paid for by the issuance of stock.
(5) Adjustments to recognize the gain / (loss) on changes in the derivative
liability when the conversion price became variable.
F-18
TIDELANDS OIL & GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005, 2004 (RESTATED) AND 2003
NOTE 3 - PREPAID EXPENSES
------ ----------------
A summary of prepaid expenses at December 31, 2005 and December 31,
2004 is as follows:
December 31, December 31,
2005 2004
------------ ------------
Prepaid Expenses-Other $ 2,741 $ 4,802
Prepaid Insurance 88,340 82,318
Prepaid License Fee 84,270 79,500
Prepaid Financing 0 310,000
Prepaid Rent 7,500 8,301
Prepaid Interest 1,087 2,567
------------ ------------
$ 183,938 $ 487,488
============ ============
NOTE 4 - PROPERTY, PLANT AND EQUIPMENT
------ -----------------------------
A summary of property, plant and equipment at December 31, 2005 and
December 31, 2004 is as follows:
Estimated
December 31, December 31, Economic
2005 2004 Life
------------ ------------ ---------
Pre-Construction Costs:
International Crossings to Mexico $ 540,880 $ 27,601 N/A
Mexican Gas Storage Facility
and Related Pipelines 1,926,616 928,232 N/A
Domestic LNG System 18,319 0
Propane Distribution Systems 0 207,415 N/A
------------ ------------
Total 2,485,815 1,163,248
Office Furniture, Equipment and
Leasehold Improvements 174,412 46,141 5 Years
Pipelines - Domestic 0 431,560 15 Years
Pipeline - Eagle Pass, TX to Piedras
Negras, Mexico 6,106,255 6,106,255 20 Years
Gas Processing Plant 0 186,410 15 Years
Tanks & Lines - Propane Distribution
System 1,895,494 1,596,439 5 Years
Machinery and Equipment 66,493 57,180 5 Years
Trucks, Autos and Trailers 136,940 63,175 5 Years
------------ ------------
Total 10,865,409 9,650,408
Less: Accumulated Depreciation 823,321 564,095
------------ ------------
Net Property, Plant and Equipment $ 10,042,088 $ 9,086,313
============ ============
Depreciation expense for the years ended December 31, 2005, December
31, 2004 and December 31, 2003 was $485,581, $244,889 and $43,006
respectively.
NOTE 5 - RESTRICTED CASH
------ ----------------
Restricted cash consists of certificates of deposit to secure letters
of credit issued to the Railroad Commission of Texas.
F-19
TIDELANDS OIL & GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005, 2004 (RESTATED) AND 2003
NOTE 6 - LONG-TERM DEBT
------ --------------
A summary of long-term debt at December 31, 2005 and December 31, 2004
is as follows:
December 31, December 31,
2005 2004
------------ ------------
Note Payable, Secured, Interest Bearing
at 2% Over Prime Rate, Maturing
May 25, 2008 $ 4,496,468 $ 6,731,883
Convertible Debentures, Unsecured,
7% Interest Bearing,
Maturing May 18, 2006 0 5,000,000
------------ ------------
4,496,468 11,731,883
Less: Current Maturities 225,000 0
------------ ------------
Total Long-Term Debt $ 4,271,468 $ 11,731,883
============ ============
NOTE 7 - INCOME TAXES
------ ------------
The Company files a consolidated federal income tax return. At December
31, 2005, the Company had a net operating loss carry forward of
approximately $24,200,000 available to offset future federal taxable
income through 2025.
The components of the deferred tax assets and liabilities accounts at
December 31, 2005 are as follows:
Total Deferred Tax Assets $ 8,470,000
Less: Valuation Allowance 8,470,000
-----------
Deferred Tax Asset (Liability) $ 0
===========
NOTE 8 - COMMON STOCK TRANSACTIONS
------ -------------------------
On January 3, 2005, the company issued 200,000 shares of its common
stock for 2005 legal fees valued at $100,000 under the 2004 Stock Grant
and Option Plan.
On February 1, 2005, the company issued 500,000 shares of its
restricted common stock valued at $797,500 to Impact International, LLC
pursuant to the terms of the purchase of Reef Ventures, L.P.
On February 25, 2005, the Company approved the issuance of 60,000
shares of its restricted common stock valued at $82,000 for investor
public relations services.
On May 1, 2005, the Company issued 500,000 shares of its restricted
common stock valued at $900,000 to Impact International, LLC pursuant
to the terms of the purchase of Reef Ventures, L.P.
F-20
TIDELANDS OIL & GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005, 2004 (RESTATED) AND 2003
NOTE 8 - COMMON STOCK TRANSACTIONS (CONTINUED)
------ -------------------------------------
On June 23, 2005, the Company issued Impact International, LLC Seven
Million Five Hundred Thousand (7,500,000) common shares in response to
Impact's exercise of their common stock purchase warrants. Impact
tendered payment in the form of a promissory note in the amount of
$2,512,500. The note will reduce and offset the principal balance owed
by the Company under the Purchase and Sale Agreement dated May 25, 2004
whereby it acquired the Eagle Pass pipeline by purchasing an additional
73% of Reef Ventures, LP.
On June 27, 2005, the Company authorized the issuance of 150,000 shares
of its restricted common stock valued at $199,500 to each of the three
members of the Board of Directors, Michael R. Ward, Ahmed Karim and
Carl Hessel.
On June 27, 2005, the Company authorized the issuance of 150,000 shares
of common stock under a 2004 non-qualified stock grant and option plan
which was registered on Form S-8, November 5, 2004. The shares were
valued at $199,125 and were issued to James B. Smith, the Company's
Senior Vice President, CFO and newly appointed member of the Board of
Directors.
On July 1, 2005, the company issued 1,000,000 shares of its restricted
common stock valued at $1,230,000 pursuant to an employment contract
with an officer of the Company.
On July 1, 2005, the Company issued 50,000 shares of its restricted
common stock valued at $61,500 pursuant to an employment contract with
an officer of the Company.
On July 1, 2005, the Company issued 10,000 shares of its restricted
common stock valued at $12,150 to an employee of the Company.
On August 18, 2005, Tidelands settled the legal dispute with L. L.
Capital Group, LLC whereby L. L. Capital Group, LLC canceled 285,000
shares of the 1,000,000 shares of the Company's restricted common stock
which it had received for a one year consulting contract executed
August 4, 2004. The 285,000 shares canceled were valued at $297,825.
On December 20, 2005, the Company issued 10,000 shares of its common
stock valued at $8,350 under the 2004 Stock Grant and Option Plan
pursuant to an employment contract with an officer of the Company.
On December 20, 2005, the Company issued 40,000 shares of its
restricted common stock valued at $33,400 pursuant to an employment
contract with an officer of the Company.
F-21
TIDELANDS OIL & GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005, 2004 (RESTATED) AND 2003
NOTE 8 - COMMON STOCK TRANSACTIONS (CONTINUED)
------ -------------------------------------
On June 14, 2005, June 27, 2005, July 5, 2005, September 19, 2005,
September 29, 2005 and November 2, 2005, Mercator Momentum Fund III,
L.P., Monarch Pointe Fund, Ltd (the "Funds") and Robinson Reed, Inc. (a
managed account of the "Funds") notified the Company of their intent to
convert portions of their remaining 7% convertible debentures into
common stock which were converted as follows:
Price
Per Number of
Entity Amount Share Shares
------ ------ ----- ------
June 14, 2005
-------------
Mercator Momentum Fund, III, L.P. $ 273,600 $0.76 360,000
Mercator Momentum Fund, L.P. 380,000 0.76 500,000
Monarch Pointe Fund, Ltd 866,400 0.76 1,140,000
June 27, 2005
-------------
Mercator Momentum Fund, III, L.P. 175,000 0.76 230,263
Mercator Momentum Fund, L.P. 250,000 0.76 328,947
Monarch Pointe Fund, Ltd 575,000 0.76 756,579
July 5, 2005
------------
Robinson Reed, Inc. 200,000 0.76 263,158
September 19, 2005
------------------
Mercator Momentum Fund, L.P. 92,000 0.70 131,429
Mercator Momentum Fund III, L.P. 60,000 0.70 85,714
Monarch Pointe Fund, Ltd. 196,000 0.70 280,000
Robinson Reed, Inc. 52,000 0.70 74,286
September 29, 2005
------------------
Mercator Momentum Fund, L.P. 207,000 0.71 291,549
Mercator Momentum Fund, III, L.P. 144,000 0.71 202,817
Mercator Momentum Fund, Ltd. 459,000 0.71 646,479
Robinson Reed, Inc. 90,000 0.71 126,761
November 2, 2005
----------------
Mercator Momentum Fund, L.P. 214,000 0.76 261,579
Mercator Momentum Fund, III, L.P. 134,900 0.76 177,500
Monarch Pointe Fund, LTD 473,100 0.76 622,500
Robinson Reed, Inc. 158,000 0.76 217,895
---------- ----------
$5,000,000 6,687,456
========== ==========
The "Funds" shares and the "Impact" shares issued were all included in
the Company's registration statement filed on Form SB-2 which was
declared effective by the Securities & Exchange Commission on May 27,
2005.
F-22
TIDELANDS OIL & GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005, 2004 (RESTATED) AND 2003
NOTE 9 - 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 year ending December 31, 2005 and 2004:
Shares Reserved Weighted
Stock Stock for Convertible Average
Options Warrants Debentures Exercise Price
----------- ----------- ----------- --------------
Outstanding - December 31, 2003 2,500,000 8,516,807 0 $0.31
Granted / Issued 250,000 10,562,141 11,111,111 0.69
Exercised (2,500,000) (1,500,000) 0 0.14
----------- ----------- ----------- -----
Outstanding - December 31, 2004 250,000 17,578,948 11,111,111 $0.50
----------- ----------- ----------- -----
Granted / Issued 0 0 0 -
Exercised / Converted 0 (8,500,000) (6,687,456) 0.49
Expired 0 0 0 -
Cancelled 0 (50,000) (4,423,655) 0
----------- ----------- ----------- -----
Outstanding - December 31, 2005 250,000 9,028,948 0 $1.01
=========== =========== =========== =====
The 2004 Non-Qualified Stock Grant and Option Plan has 4,350,872 shares
remaining available for future issuance.
On November 18, 2004, the Company entered into a Securities Purchase Agreement
with Mercator Momentum Fund, LP, Mercator Momentum Fund III, LP, Monarch Pointe
Fund, LP, (collectively, "the Funds") and M.A.G. Capital, LLC ("M.A.G.")
(formerly Mercator Advisory Group, LLC). In exchange for $5,000,000 the Company
issued to the Funds, 7% convertible debentures with a maturity date of May 18,
2006. As of November 2, 2005, the $5,000,000 of convertible debentures was
converted for 6,587,456 shares of the Company's common stock.
In connection with this financing the Company issued 6,578,948 common stock
warrants which expire November 18, 2007. The warrants are exercisable at prices
ranging from $0.80 to $0.87. The Company granted the Funds and M.A.G.
registration rights on both groups of securities; such registration was declared
effective May 27, 2005.
Accounting for Stock-Based Compensation
As allowed by Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation", the Company has elected to apply the
intrinsic-value-based method of accounting. Under this method, the Company
measures stock-based compensation for option grants to employees assuming that
options granted at market price at the date of grant have no intrinsic value.
Restricted stock awards were valued based on the market price of a share of
non-restricted stock on the date earned. No compensation expense has been
recognized for stock-based incentive compensation plans other than for
restricted stock awards pursuant to executive employment agreements.
F-23
TIDELANDS OIL & GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005, 2004 (RESTATED) AND 2003
NOTE 10 - COMMITMENT FOR SUITE LICENSE AGREEMENT
------- --------------------------------------
On June 4, 2004, the Company entered into a Suite License Agreement
with the San Antonio Spurs, L.C.C. commencing July 1, 2004 for a period
of five years. The annual license fee for the first year is $159,000
and is subject to a 6% per annum price escalation thereafter. The
annual fee is payable in installments as indicated in the agreement.
The future annual license fee commitments are as follows:
2005 $168,540
2006 178,652
2007 189,371
2008 200,733
--------
$737,296
========
NOTE 11 - RELATED PARTY TRANSACTION
------- -------------------------
The Company executed an agreement in January 2004 with a related party
to provide charter air transportation for its employees, customers and
contractors to job sites and other business related destinations. A
$300,000 5% interest bearing loan due in January 2007 was made by the
Company regarding the transaction. The loan balance is credited by
airtime charges at standard industry rates offset by interest charges
computed on the average monthly balance. At December 31, 2005, the loan
balance was $288,506.
NOTE 12 - LEASES
------- ------
The Company entered into an operating lease on August 1, 2003 for the
rental of its executive office at a monthly rent of $3,400, which
expired November 30, 2005.
The Company retained tenancy in the building under the month-to-month
clause until February 1, 2006. On February 1, 2006, the Company renewed
the lease until December 31, 2007 at the same $3,400 per month rental.
The Company's wholly-owned subsidiary, Sonterra Energy Corporation,
entered into a sublease agreement for its executive officers in an
adjacent building for $2,500 per month until its renewal in October
2005 at which time the monthly rent increased to $3,000 per month
through March 31, 2006. However, on February 1, 2006, Sonterra Energy
Corporation entered into a direct operating lease with the building
owner at a monthly rental of $3,300 for a term ending December 31,
2007.
F-24
TIDELANDS OIL & GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005, 2004 (RESTATED) AND 2003
NOTE 12 - LEASES (CONTINUED)
-------- ------------------
Sonterra Energy Corporation previously had entered into an operating
lease beginning October 1, 2004 for a propane tank site at an annual
rent of $10,000 expiring September 30, 2019.
Future commitments under the operating leases are as follows:
Year Ending Total
----------- ---------
2006 $ 83,400
2007 90,400
2008 - 2019 107,500
---------
Total Minimum Lease Payments $ 281,300
=========
Rent expense for the years ended December 31, 2005 and 2004 was $82,300
and $43,300, respectively.
NOTE 13 - 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 14 - LITIGATION
-------- ----------
On January 6, 2003, we were served as a third party defendant in a
lawsuit titled Northern Natural Gas Company vs. Betty Lou Sheerin vs.
Tidelands Oil & Gas Corporation, ZG Gathering, Ltd. and Ken Lay, in the
150th Judicial District Court, Bexar County, Texas, Cause Number
2002-C1-16421. The lawsuit was initiated by Northern Natural Gas when
it sued Betty Lou Sheerin for her failure to make payments on a note
she executed payable to Northern in the original principal amount of
$1,950,000. Northern's suit was filed on November 13, 2002. Sheerin
answered Northern's lawsuit on January 6, 2003. Sheerin's answer
generally denied Northern's claims and raised the affirmative defenses
of fraudulent inducement by Northern, estoppel, waiver and the further
claim that the note does not comport with the legal requirements of a
F-25
TIDELANDS OIL & GAS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005, 2004 (RESTATED) AND 2003
NOTE 14 - LITIGATION (CONTINUED)
-------- ----------------------
negotiable instrument. Sheerin seeks a judicial ruling that Northern be
denied any recovery on the note. Sheerin's answer included a
counterclaim against Northern, ZG Gathering, and Ken Lay generally
alleging, among other things, that Northern, ZG Gathering, Ltd. and Ken
Lay, fraudulently induced her execution of the note. Northern has filed
a general denial of Sheerin's counterclaims. Sheerin's answer included
a third party cross claim against Tidelands. She alleges that Tidelands
entered into an agreement to purchase the Zavala Gathering System from
ZG Gathering Ltd. and that, as a part of the agreement, Tidelands
agreed to satisfy all of the obligations due and owing to Northern,
thereby relieving Sheerin of all obligations she had to Northern on the
$1,950,000 promissory note in question. Tidelands and Sheerin agreed to
delay the Tidelands' answer date in order to allow time for mediation
of the case. Tidelands participated in a mediation on March 11, 2003.
The case was not settled at that time. Tidelands' answered the Sheerin
suit on March 26, 2003. Tidelands' answer denies all of Sheerin's
allegations.
On May 24 and June 16, 2004 respectively, Betty Lou Sheerin filed her
first and second amended original answer, affirmative defenses, special
exceptions and second amended original counterclaim, second amended
original third party cross-actions and requests for disclosure. In
these amended pleadings, she sued Michael Ward, Royis Ward, James B.
Smith, Carl Hessel and Ahmed Karim in their individual capacities. Her
claims against these individuals are for fraud, breach of contract,
breach of the Uniform Commercial Code, breach of duty of good faith and
fair dealing and conversion. Sheerin has now non-suited her claims
against Michael Ward, Royis Ward, and James B. Smith.
In September 2002, as a pre-closing deposit to the purchase of the
Zavala Gathering System, the Company executed a $300,000 promissory
note to Betty L. Sheerin, a partner of ZG Gathering, Ltd. In addition,
the Company issued 1,000,000 shares of its common stock to various
partners of ZG Gathering, Ltd. On December 3, 2003, Sheerin filed a
separate lawsuit against Tidelands in the 150th District Court of Bexar
County, Texas on this promissory note seeking a judgment against
Tidelands for the principle amount of the note, plus interest. On
December 29th, 2003, Tidelands answered this lawsuit denying liability
on the note. On April 1, 2004, Tidelands filed a plea in abatement
asking the court to dismiss or abate Sheerin's lawsuit on the $300,000
promissory note as it was related to and its outcome was dependent on
the outcome of the Sheerin third party cross action against Tidelands
in Cause Number 2002-C1-16421. The Company believes that the promissory
note and shares of common stock should be cancelled based upon the
outcome of the litigation described above. Accordingly, our financial
statements reflect this belief.
F-26
TIDELANDS OIL & GAS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005, 2004 (RESTATED) AND 2003
NOTE 14 - LITIGATION (CONTINUED)
------- ----------------------
On September 15, 2004 and again on October 15, 2004 respectively,
Sheerin amended her pleadings to include a third and fourth amended
third party cross action against Tidelands adding a claim for the
$300,000 promissory note. In these amended pleadings, Sheerin also
deleted her claims against Carl Hessel and Ahmed Karim. After adding
the claim on the $300,000 promissory note to the third party claims of
Sheerin against Tidelands in Cause No. 2002-C1-16421, Sheerin dismissed
Cause Number 2002-C1-16421.
Tidelands won a partial summary judgment against Sheerin as to all of
her tort claims pled against Tidelands, save and except only her claim
for conversion of 500,000 shares of Tidelands stock.
Sheerin seeks damages against Tidelands for indemnity for any sums
found to be due from her to Northern Natural Gas Company, unspecified
amounts of actual damages, statutory damages, unspecified amounts of
exemplary damages, attorneys fees, costs of suit, and prejudgment and
post judgment interest.
On August 5, 2005, Northern Natural Gas Company filed its Fourth
Amended Original Petition which, for the first time, named Tidelands as
a defendant to Northern. Northern seeks to impose liability on
Tidelands for $1,950,000 promissory note signed by McDay Energy
Partners, Ltd. (the predecessor to ZG Gathering, Ltd.) and Sheerin and
the $1,700,000 promissory note signed by McDay only. Northern contends
that Tidelands is alternatively liable to Northern for payment of both
such promissory notes totaling $3,709,914 plus interest because
Northern is a third-party beneficiary under a December 3, 2001 purchase
and sale agreement between ZG and Tidelands claiming that in such
agreement Tidelands agreed to assume and satisfy all indebtedness due
and owing Northern by Sheerin and ZG. Northern also claims that it is
entitled to foreclosure of a lien on the gas gathering system and
pipeline that was the subject of the promissory notes in question.
On March 6, 2006, Tidelands won a summary judgment motion it filed
against Northern and the court has now dismissed Northern's claims
against Tidelands.
On November 28, 2005, ZG Gathering, Ltd. and ZG Pipeline Management
("ZG") filed its answer to Northern's Fifth Amended Petition, its
counter-claim against Northern, and its answer and cross claim against
Tidelands. ZG contends that the promissory notes given by ZG and
Sheerin to Northern were procured by Northern's fraudulent
misrepresentations and it claims unspecified amounts of damages against
Northern. ZG's cross action against Tidelands claims Tidelands entered
into an agreement to purchase the Zavala Gathering System from ZG and
that, as part of that agreement, Tidelands agreed to satisfy the
$3,700,914 Northern indebtedness of ZG, and to defend, indemnify, and
F-27
TIDELANDS OIL & GAS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005, 2004 (RESTATED) AND 2003
NOTE 14 - LITIGATION (CONTINUED)
------- ----------------------
hold ZG and Sheerin harmless from such indebtedness to pay off a
Sheerin loan of $300,000, and to issue 1 million shares of Tidelands
stock, of which 500,000 was to be free-trading shares. ZG claims that
Tidelands breached this agreement by failing to satisfy the Northern
indebtedness, failing to defend and indemnify it from such debt,
failing to pay off the $300,000 note, failing to issue the free-trading
shares in Tidelands, and by placing a stop transfer order on the
restricted stock that was issued by Tidelands. ZG seeks specific
performance of the agreement, recovery of an unspecified amount of
damages, and its attorney's fees.
Much of the discovery has been completed at this time. Based on
investigation, and discovery to date, Tidelands appears to have a
number of potential defenses to the claims of Sheerin and Northern.
Tidelands intends to aggressively defend these lawsuits. The complexity
of the issues in this case and the inherent uncertainties in litigation
of this kind prevent a more definitive evaluation of the extent of
Tidelands' liability exposure.
During April and May, 2005, three separate legal actions were initiated
against Sonterra Energy Corporation (Sonterra), a wholly-owned
subsidiary of the Company. Two of the actions concern claims made by
developers against Sonterra for their failure to pay rent and easement
use fees as a result of their asset purchase from Oneok Propane
Distribution Company on November 1, 2004. The third action involves a
claim made by a builder that Sonterra does not have a proper easement
for the current use of certain property. The Company believes that the
three actions filed are without merit and intend to vigorously defend
itself. Litigation regarding these three actions are still in their
early stages, therefore, potential financial impacts, if any, cannot be
determined at this time.
In accordance with Statement of Financial Accounting Standards No. 5,
"Accounting for Contingencies," management has reached the conclusion
that there is a remote possibility that any or all of the
aforementioned claims would be upheld at trial and has also determined
that the amount of the claims cannot be reasonably estimated.
Accordingly, the Company's financial statements reflect no accrual of a
loss contingency with response to the above legal matters.
NOTE 15 - ACQUISITIONS
------- -------------
REEF VENTURES, L.P. TRANSACTION
-------------------------------
On May 25, 2004, the Company entered into a Purchase and Sale Agreement
for Reef Ventures, L.P. by and between Impact International, LLC
("Impact") and Coahuila Pipeline, LLC. ("Coahuila"), (jointly "Seller")
and Tidelands Oil & Gas Corporation ("Tidelands") and Arrecefe
Management, LLC ("Arrecefe"), (jointly "Buyer"). The transaction closed
on June 18, 2004.
F-28
TIDELANDS OIL & GAS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005, 2004 (RESTATED) AND 2003
NOTE 15 - ACQUISITIONS (CONTINUED)
------- ------------------------
Purchase and Sale Agreement - Background
Reef Ventures, L.P. was formed in Texas on April 16, 2003. Coahuila
owned one percent (1%) of Reef Ventures, L.P. Impact was a limited
partner of Reef Ventures and owned seventy-two percent (72%) of Reef
Ventures, L.P. Tidelands formed Arrecefe Management, L.L.C., a Texas
limited liability company, to act as the general partner for Reef
Ventures, L.P. Tidelands had already owned twenty-five percent (25%) of
Reef Ventures, L.P.
Summary of Purchase and Sale Agreement
The Company and Arrecefe purchased Impact's and Coahuila's units of
interest in Reef Ventures, L.P., respectively. Impact financed the sale
of the Reef interests by taking back a promissory note (the "Tidelands
Note") in the amount of $6,523,773 payable as follows:
(a) The "Tidelands Note" bears interest at prime plus two (2%) percent.
The note calls for quarterly interest payments during the first fifteen
(15) months, and thereafter, principal and interest would be due
quarterly amortized over twenty (20) years, but not to exceed an amount
equal to One Hundred (100%) percent of Reef's net cash flow. All
quarterly interest payments due which are limited by the amounts of
Reef's net cash flow have been and will be added to the note balance if
applicable. The unpaid balance of the note would be due at the end of
the fourth year.
(b) The Tidelands' note is secured by (i) a deed of trust (the "Deed of
Trust") from the Partnership to Impact, covering the pipeline and
related facilities, easements, rights-of-way and the Gas Contracts
which comprise the project, being that 12-inch pipeline Project for
transporting natural gas from Eagle Pass Texas to Piedras Negras,
Mexico, defined in the Partnership Agreement. The Deed of Trust would
include a present assignment of Reef's rights to receive cash flow from
the Gas Project which would be exercisable by Impact only upon default
under the Tidelands' Note, Reef guarantee, or Reef Deed of Trust. (ii)
a guaranty of payment and performance from the Partnership (the
"Partnership Guaranty"), and (iii) a pledge agreement whereby the
Partnership pledges to Impact its 98% membership interest in Reef.
Minority Interest
The remaining two percent (2%) of Reef Ventures, LP, is owned by an
unaffiliated third party. No value or allocation of net income or loss
will be attributed until the total investment by existing ownership has
been recovered.
F-29
TIDELANDS OIL & GAS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005, 2004 (RESTATED) AND 2003
NOTE 16 - SEGMENT REPORTING
------- -----------------
The following table is a summary of the results of operations and other
financial information by major segment:
2005 Propane Sales Pipeline
and Related Transportation All Other
Services Fees and Corporate Total
Revenue $ 1,630,246 $ 231,077 $ -- $ 1,861,323
Depreciation $ 116,853 $ 305,313 $ 63,315 $ 485,481
Interest $ 2,514 $ -- $ 608,849 $ 611,363
Operating (Loss) $ (380,900) $ (164,523) $(12,765,170) $(13,310,593)
Total Assets $ 2,997,001 $ 5,621,536 $ 4,870,312 $ 13,488,849
2004 Natural Gas
Sales and
Propane Sales Pipeline
and Related Transportation All Other
Services Fees and Corporate Total
Revenue $ 438,611 $ 1,400,227 $ -- $ 1,838,838
Depreciation $ 20,158 $ 178,099 $ 46,632 $ 244,889
Interest $ 300 $ -- $ 300,266 $ 300,566
Operating Income (Loss) $ 98,229 $ (141,502) $(29,699,024) $(29,742,297)
Total Assets $ 2,775,281 $ 5,881,774 $ 13,765,611 $ 22,422,666
2003
There was no segment reporting in 2003.
NOTE 17 - SELECTED QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
------- ----------------------------------------------------
(Dollars in thousands, except share and per share data)
The following tables present our selected consolidated financial information as
of the end of the periods indicated. The information below is from unaudited
consolidated financial statements.
Year Ended December 31, 2005 Mar June Sept Dec
---------------------------- 31 30 30 31
-------- -------- -------- --------
Revenues $ 628 $ 341 $ 248 $ 644
Cost of Goods Sold 285 130 220 368
-------- -------- -------- --------
Gross Margin 343 211 28 276
Operating Expenses 6,947 3,825 1,580 1,817
Other Income (Expense), Net (2,862) 8,096 324 90
-------- -------- -------- --------
Net earnings (loss) $ (9,466) $ 4,482 $ (1,228) $ (1,451)
======== ======== ======== ========
Basic income (loss) per share $ (0.15) $ 0.08 $ (0.02) $ (0.11)
Diluted income (loss) per share $ (0.15) $ 0.08 $ (0.02) $ (0.11)
Year Ended December 31, 2004
----------------------------
Revenues $ 0 $ 508 $ 825 $ 551
Cost of Goods Sold 0 498 802 209
-------- -------- -------- --------
Gross Margin 0 10 23 342
Operating Expenses 1,538 4,209 3,545 20,825
Other Income (Expense), Net 4 15,397 6 33
-------- -------- -------- --------
Net earnings (loss) $ (1,534) $ 11,198 $ (3,516) $(20,450)
======== ======== ======== ========
Basic (loss) per share $ (0.03) $ 0.18 $ (0.02) $ (0.34)
Diluted (loss) per share $ (0.03) $ 0.18 $ (0.02) $ (0.34)
F-30
TIDELANDS OIL & GAS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005, 2004 (RESTATED) AND 2003
NOTE 18 - SUBSEQUENT EVENTS
------- -----------------
During January, 2006, the Company completed a private placement of
$6,569,750 of securities with several institutional investors led by
Palisades Master Fund, L.P. The private placement consists of Original
Issue Discount Convertible Debentures, convertible into common stock of
the Company at a conversion price of $0.87 per share. The investors
will also receive three-year 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. Additional 13 month callable warrants to purchase,
in the aggregate, 7,551,432 shares were issued to the investors with an
exercise price of $1.275 which warrants include a forced exercise
provision by the Company if certain price and equity conditions are
met. The Company will receive net proceeds of $4,964,410 from the
transactions.
F-31
TIDELANDS OIL & GAS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
June 30, December 31,
2006 2005
------------ ------------
(Unaudited)
Current Assets:
Cash and Cash Equivalents $ 3,312,026 $ 1,113,911
Accounts and Loans Receivable 306,744 468,458
Inventory 84,346 142,204
Prepaid Expenses 299,811 183,938
------------ ------------
Total Current Assets 4,002,927 2,197,017
------------ ------------
Property Plant and Equipment, Net 11,193,722 10,042,088
------------ ------------
Other Assets:
Deposits 74,004 14,004
Restricted Cash 51,707 76,803
Note Receivable 285,287 288,506
Deferred Charges 1,264,245 0
Goodwill 1,158,937 1,158,937
------------ ------------
Total Other Assets 2,834,180 1,249,744
------------ ------------
Total Assets $ 18,030,829 $ 13,488,849
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current Maturities - Notes Payable $ 225,000 $ 225,000
Accounts Payable and Accrued Expenses 691,015 1,225,554
------------ ------------
Total Current Liabilities 916,015 1,450,554
Long-Term Debt 10,950,183 4,271,768
------------ ------------
Total Liabilities 11,866,198 5,722,322
------------ ------------
Commitments and Contingencies -- --
Stockholders' Equity:
Common Stock, $.001 Par Value per Share,
250,000,000 Shares Authorized, 80,565,815
and 78,495,815 Shares Issued and
Outstanding at June 30, 2006
and December 31, 2005 Respectively 80,567 78,497
Paid-in Capital in Excess of Par Value 42,760,404 40,818,174
Subscriptions Receivable (440,000) (550,000)
Minority Interest -- --
Accumulated (Deficit) (36,236,340) (32,580,144)
------------ ------------
Total Stockholders' Equity 6,164,631 7,766,527
------------ ------------
Total Liabilities and Stockholders' Equity $ 18,030,829 $ 13,488,849
============ ============
See Accompanying Notes to Condensed Consolidated Financial Statements
F-32
TIDELANDS OIL & GAS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended Three Months Ended
June 30, 2006 June 30, 2005
------------- -------------
(Restated)
Revenues:
Gas Sales and Pipeline Fees $ 392,108 $ 262,541
Construction Services 15,016 77,995
------------- -------------
Total Revenues 407,124 340,536
------------- -------------
Expenses:
Cost of Sales 206,413 130,569
Operating Expenses 99,587 62,363
Depreciation 116,038 120,954
Interest 373,950 184,073
Beneficial Conversion Feature Interes 0 (4,601,054)
Sales, General and Administrative 1,599,803 2,858,659
Impairment Losses 0 5,200,000
------------- -------------
Total Expenses 2,395,791 3,955,564
------------- -------------
(Loss) From Operations (1,988,667) (3,615,028)
Derivative Gain (Loss) 0 8,062,500
(Loss) on Sale of Asset 0 0
Interest and Dividend Income 28,118 33,659
------------- -------------
Net Income (Loss) $ (1,960,549) $ 4,481,131
============= =============
Net Income (Loss) Per Common Share:
Basic and Diluted $ (0.03) $ 0.07
============= =============
Weighted Average Number of Common
Shares Outstanding 80,080,815 68,321,251
============= =============
See Accompanying Notes to Condensed Consolidated Financial Statements
F-33
TIDELANDS OIL & GAS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Six Months Ended Six Months Ended
June 30, 2006 June 30, 2005
------------- -------------
(Restated)
Revenues:
Gas Sales and Pipeline Fees $ 1,064,614 $ 849,490
Construction Services 144,404 119,121
------------- -------------
Total Revenues 1,209,018 968,611
------------- -------------
Expenses:
Cost of Sales 583,279 415,248
Operating Expenses 184,118 129,137
Depreciation 231,802 236,395
Interest 485,009 393,860
Beneficial Conversion Feature Interest 0 135,789
Sales, General and Administrative 3,442,745 4,677,070
Impairment Losses 0 5,200,000
------------- -------------
Total Expenses 4,926,953 11,187,499
------------- -------------
(Loss) From Operations (3,717,935) (10,218,888)
Derivative Gain (Loss) 0 5,168,000
(Loss) on Sale of Equipment 0 (3,167)
Interest and Dividend Income 61,739 69,651
------------- -------------
Net (Loss) $ (3,656,196) $ (4,984,404)
============= =============
Net (Loss) Per Common Share:
Basic and Diluted $ (0.05) $ (0.07)
============= =============
Weighted Average Number of Common
Shares Outstanding 79,896,700 67,941,251
============= =============
See Accompanying Notes to Condensed Consolidated Financial Statements
F-34
TIDELANDS OIL & GAS CORPORATION
STATEMENTS OF CONDENSED CONSOLIDATED CASH FLOWS
(UNAUDITED)
Six Months Ended Six Months Ended
June 30, 2006 June 30, 2005
------------- -------------
(Restated)
Cash Flows Provided (Required) By
Operating Activities:
Net (Loss) $ (3,656,196) $ (4,984,404)
Adjustments to Reconcile Net (Loss)
to Net Cash Provided (Required) By
Operating Activities:
Depreciation 231,802 236,395
Loss on Disposal of Equipment 0 3,167
Change in Derivative Liability 0 (5,168,000)
Issuance of Common Stock:
For Services Provided 1,499,300 2,677,125
Beneficial Conversion Feature Interest 0 135,789
Changes in:
Accounts Receivable 161,714 207,064
Inventory 57,858 6,950
Prepaid Expenses (115,873) 184,957
Deferred Charges (1,264,245) 116,250
Deposits (60,000) (2,500)
Restricted Cash 25,096 0
Accounts Payable and
Accrued Expenses (89,539) 82,078
Impairment Losses 0 5,200,000
------------- -------------
Net Cash (Required) By Operating Activities (3,210,083) (1,305,129)
------------- -------------
Cash Flows Provided (Required)
By Investing Activities:
Acquisitions of Property, Plant
and Equipment (1,383,436) (784,640)
Disposals of Equipment 0 800
------------- -------------
Net Cash (Required) By Investing Activities (1,383,436) (783,840)
------------- -------------
See Accompanying Notes to Condensed Consolidated Financial Statements
F-35
TIDELANDS OIL & GAS CORPORATION
STATEMENTS OF CONDENSED CONSOLIDATED CASH FLOWS
(CONTINUED)
(UNAUDITED)
Six Months Ended Six Months Ended
June 30, 2006 June 30, 2005
------------- -------------
(Restated)
Cash Flows Provided (Required)
by Financing Activities:
Proceeds from Stock Subscriptions
Receivable 110,000 0
Proceeds from Long-Term Loans 6,678,415 149,108
Repayment of Loan to Related Party 3,219 492
------------- -------------
Net Cash Provided by Financing Activities 6,791,634 149,600
------------- -------------
Net Increase (Decrease) in Cash 2,198,115 (1,939,369)
Cash at Beginning of Period 1,113,911 5,484,054
------------- -------------
Cash at End of Period $ 3,312,026 $ 3,544,685
============= =============
Supplemental Disclosures of
Cash Flow Information:
Cash Payments for Interest $ 408,657 $ 266,938
============= =============
Cash Payments for Income Taxes $ 0 $ 0
============= =============
Non-Cash Investing and Financing Activities:
Issuance of Common Stock:
Repayment of Note $ 0 $ 2,512,500
Repayment of Convertible Debentures 0 2,520,000
Payment of Accrued Expense 445,000 0
------------- -------------
Total Non-Cash Investing and
Financing Activities $ 445,000 $ 5,032,500
============= =============
See Accompanying Notes to Condensed Consolidated Financial Statements
F-36
TIDELANDS OIL & GAS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2006
NOTE 1 - BASIS OF PRESENTATION
------ ---------------------
The accompanying unaudited condensed consolidated financial statements
for the six month periods ended June 30, 2006, and 2005, have been
prepared in conformity with accounting principles generally accepted in
the United States of America for interim financial information and with
the instructions to Form 10-Q and Regulation S-X. The financial
information as of December 31, 2005, is derived from the registrant's
Form 10-K for the year ended December 31, 2005. Certain information or
footnote disclosures normally included in financial statements prepared
in accordance with accounting principles generally accepted in the
United States of America have been condensed or omitted pursuant to the
rules and regulations of the Securities and Exchange Commission.
The preparation of condensed consolidated financial statements in
conformity with accounting principles generally accepted in the United
States of America requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities at the date
of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates. In the opinion of management, the accompanying
financial statements include all adjustments necessary (which are of a
normal and recurring nature) for the fair presentation of the results
of the interim periods presented. While the registrant believes that
the disclosures presented are adequate to keep the information from
being misleading, it is suggested that these accompanying financial
statements be read in conjunction with the registrant's audited
consolidated financial statements and notes for the year ended December
31, 2005, included in the registrant's Form 10-K for the year ended
December 31, 2005.
Operating results for the six-month period ended June 30, 2006, are not
necessarily indicative of the results that may be expected for the
remainder of the fiscal year ending December 31, 2006. The accompanying
unaudited condensed consolidated financial statements include the
accounts of the registrant, its wholly-owned subsidiaries, Rio Bravo
Energy, LLC, Sonora Pipeline, LLC, Arrecefe Management, LLC, Marea
Associates, LP, Reef Ventures, LP, Reef International, LLC, Reef
Marketing, LLC, Terranova Energia S. de R. L. de C. V., and Esperanza
Energy, LLC. All significant inter-company accounts and transactions
have been eliminated in consolidation.
F-37
TIDELANDS OIL & GAS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2006
NOTE 2 - 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. Northern's suit was filed on
November 13, 2002. Sheerin answered Northern's lawsuit on January 6,
2003. Sheerin's answer generally denied Northern's claims and raised
the affirmative defenses of fraudulent inducement by Northern,
estoppel, waiver and the further claim that the note does not comport
with the legal requirements of a negotiable instrument. Sheerin seeks a
judicial ruling that Northern be denied any recovery on the note.
Sheerin's answer included a counterclaim against Northern, ZG
Gathering, Ltd., and Ken Lay generally alleging, among other things,
that Northern, ZG Gathering, Ltd ., and Ken Lay, fraudulently induced
her execution of the note. Northern has filed a general denial of
Sheerin's counterclaims. Sheerin's answer included a third party cross
claim against Tidelands Oil and Gas Corporation (Tidelands). She
alleges that Tidelands entered into an agreement to purchase the Zavala
Gathering System from ZG Gathering, Ltd., and that, as a part of the
agreement, Tidelands agreed to satisfy all of the obligations due and
owing to Northern, thereby relieving Sheerin of all obligations she had
to Northern on the $1,950,000 promissory note in question. Tidelands
and Sheerin agreed to delay the Tidelands' answer date in order to
allow time for mediation of the case. Tidelands participated in
mediation on March 11, 2003. The case was not settled at that time.
Tidelands answered the Sheerin suit on March 26, 2003. Tidelands'
answer denies all of Sheerin's allegations.
On May 24 and June 16, 2004, respectively, Betty Lou Sheerin filed her
first and second amended original answer, affirmative defenses, special
exceptions and second amended original counterclaim, second amended
original third party cross-actions and requests for disclosure. In
these amended pleadings, she sued Michael Ward, Royis Ward, James B.
Smith, Carl Hessel and Ahmed Karim in their individual capacities. Her
claims against these individuals are for fraud, breach of contract,
breach of the Uniform Commercial Code, breach of duty of good faith and
fair dealing and conversion. Sheerin has now non-suited her claims
against Michael Ward, Royis Ward, and James B. Smith.
F-38
TIDELANDS OIL & GAS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2006
NOTE 2 - LITIGATION (CONTINUED)
------ ----------------------
In September 2002, as a pre-closing deposit to the purchase of the
Zavala Gathering System, the Company executed a $300,000 promissory
note to Betty L. Sheerin, a partner of ZG Gathering, Ltd. In addition,
the Company issued 1,000,000 shares of its common stock to various
partners of ZG Gathering, Ltd. On December 3, 2003, Sheerin filed a
separate lawsuit against Tidelands in the 150th District Court of Bexar
County, Texas on this promissory note seeking a judgment against
Tidelands for the principle amount of the note, plus interest. On
December 29, 2003, Tidelands answered this lawsuit denying liability on
the note. On April 1, 2004, Tidelands filed a plea in abatement asking
the court to dismiss or abate Sheerin's lawsuit on the $300,000
promissory note as it was related to and its outcome was dependent on
the outcome of the Sheerin third party cross action against Tidelands
in Cause Number 2002-C1-16421. The Company believes that the promissory
note and shares of common stock should be cancelled based upon the
outcome of the litigation described above. Accordingly, our financial
statements reflect this belief.
On September 15, 2004, and again on October 15, 2004, respectively,
Sheerin amended her pleadings to include a third and fourth amended
third party cross action against Tidelands adding a claim for the
$300,000 promissory note. In these amended pleadings, Sheerin also
deleted her claims against Carl Hessel and Ahmed Karim. After adding
the claim on the $300,000 promissory note to the third party claims of
Sheerin against Tidelands in Cause No. 2002-C1-16421, Sheerin dismissed
Cause Number 2002-C1-16421.
Tidelands won a partial summary judgment against Sheerin as to all of
her tort claims pled against Tidelands, save and except only her claim
for conversion of 500,000 shares of Tidelands' stock.
Sheerin seeks damages against Tidelands for indemnity for any sums
found to be due from her to Northern Natural Gas Company, unspecified
amounts of actual damages, statutory damages, unspecified amounts of
exemplary damages, attorneys fees, costs of suit, and prejudgment and
post judgment interest.
F-39
TIDELANDS OIL & GAS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2006
NOTE 2 - LITIGATION (CONTINUED)
------ ----------------------
On August 5, 2005, Northern Natural Gas Company filed its Fourth
Amended Original Petition which, for the first time, named Tidelands as
a defendant to Northern. Northern seeks to impose liability on
Tidelands for $1,950,000 promissory note signed by McDay Energy
Partners, Ltd. (the predecessor to ZG Gathering, Ltd.) and Sheerin and
the $1,700,000 promissory note signed by McDay only. Northern contends
that Tidelands is alternatively liable to Northern for payment of both
such promissory notes totaling $3,709,914 plus interest because
Northern is a third-party beneficiary under a December 3, 2001 purchase
and sale agreement between ZG Gathering, Ltd., and Tidelands claiming
that in such agreement Tidelands agreed to assume and satisfy all
indebtedness due and owing Northern by Sheerin and ZG Gathering, Ltd.
Northern also claims that it is entitled to foreclosure of a lien on
the gas gathering system and pipeline that was the subject of the
promissory notes in question.
On March 6, 2006, Tidelands won a summary judgment motion it filed
against Northern and the court has now dismissed Northern's claims
against Tidelands.
On November 28, 2005, ZG Gathering, Ltd. and ZG Pipeline Management
("ZG") filed its answer to Northern's Fifth Amended Petition, its
counter-claim against Northern, and its answer and cross claim against
Tidelands. ZG contends that the promissory notes given by ZG and
Sheerin to Northern were procured by Northern's fraudulent
misrepresentations and it claims unspecified amounts of damages against
Northern. ZG's cross action against Tidelands claims that Tidelands
entered into an agreement to purchase the Zavala Gathering System from
ZG and that, as part of that agreement, Tidelands agreed to satisfy the
$3,700,914 Northern indebtedness of ZG, and to defend, indemnify, and
hold ZG and Sheerin harmless from such indebtedness to pay off a
Sheerin loan of $300,000, and to issue 1 million shares of Tidelands'
stock, of which 500,000 was to be free-trading shares. ZG claims that
Tidelands breached this agreement by failing to satisfy the Northern
indebtedness, failing to defend and indemnify it from such debt,
failing to pay off the $300,000 note, failing to issue the free-trading
shares in Tidelands, and by placing a stop transfer order on the
restricted stock that was issued by Tidelands. ZG seeks specific
performance of the agreement, recovery of an unspecified amount of
damages, and its attorney's fees.
Much of the discovery has been completed at this time. Based on
investigation, and discovery to date, Tidelands appears to have a
number of potential defenses to the claims of Sheerin and Northern.
Tidelands intends to aggressively defend these lawsuits. The complexity
of the issues in this case and the inherent uncertainties in litigation
of this kind prevent a more definitive evaluation of the extent of
Tidelands' liability exposure.
F-40
TIDELANDS OIL & GAS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2006
NOTE 2 - LITIGATION (CONTINUED)
------ ----------------------
During April and May, 2005, three separate legal actions were initiated
against Sonterra Energy Corporation (Sonterra), a wholly-owned
subsidiary of the Company. Two of the actions concern claims made by
developers against Sonterra for their failure to pay rent and easement
use fees as a result of their asset purchase from Oneok Propane
Distribution Company on November 1, 2004. The third action involves a
claim made by a builder that Sonterra does not have a proper easement
for the current use of certain property. The Company believes that the
three actions filed are without merit and intend to vigorously defend
itself. Litigation regarding these three actions are still in their
early stages, therefore, potential financial impacts, if any, cannot be
determined at this time.
In accordance with Statement of Financial Accounting Standards No. 5,
"Accounting for Contingencies," management has reached the conclusion
that there is a remote possibility that any or all of the
aforementioned claims would be upheld at trial and has also determined
that the amount of the claims cannot be reasonably estimated.
Accordingly, the Company's financial statements reflect no accrual of a
loss contingency with response to the above legal matters.
F-41
TIDELANDS OIL & GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2006
NOTE 3 - COMMON STOCK TRANSACTIONS
------ -------------------------
On May 10, 2006, the Company issued 10,000 shares of its restricted
common stock valued at $7,900 to an employee/officer of a subsidiary of
the Company.
On May 10, 2006, the Company issued 60,000 shares of its restricted
common stock valued at $47,400 pursuant to an employment contract with
an officer of the Company.
On June 7, 2006, the Company issued 500,000 shares of its restricted
common stock valued at $542,500 pursuant to an employment contract with
an officer of the Company.
On June 27, 2006, the Company issued 20,000 shares of its restricted
common stock valued at $16,000 to an employee of the Company.
On June 27, 2006, the Company issued 20,000 shares of its restricted
common stock valued at $16,000 to an employee of the Company.
NOTE 4 - RELATED PARTY TRANSACTION
------ -------------------------
The Company executed an agreement in January 2004 with a related party
to provide charter air transportation for its employees, customers and
contractors to job sites and other business related destinations. A
$300,000 5% interest bearing loan due in January 2007 was made by the
Company regarding the transaction. The loan balance is credited by
airtime charges at standard industry rates offset by interest charges
computed on the average monthly balance. At June 30, 2006, the loan
balance was $285,287.
During 2006, the President acquired the airplane being utilized to
provide charter air transportation for the Company. The transaction
includes assumption of the $300,000 5% interest bearing loan due in
January 2007 to the Company.
F-42
TIDELANDS OIL & GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2006
NOTE 5 - DEBT FINANCING
------ --------------
On January 20, 2006, the Company completed a private placement of
$6,569,750 of convertible debt with seven institutional investors. The
net proceeds realized by the Company were $4,964,410. 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.
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. During June 2006, the investors billed and were paid $64,566
liquidated damages for not meeting the required effective date.
NOTE 6 - SUBSEQUENT EVENTS
------ -----------------
On July 9, 2006, the Company acquired a 50% interest in a 24-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. The Company expects to participate in acquiring additional
leases which could be developed around the area serviced by the
pipelines. Total consideration for these transactions is $500,000 which
is being paid to a related party.
F-43
TABLE OF CONTENTS
22,958,643 Share of Common Stock
FORWARD LOOKING STATEMENTS
PROSPECTUS SUMMARY
USE OF PROCEEDS
RISK FACTORS _________________
MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS PROSPECTUS
DIVIDENDS AND DIVIDEND POLICY _________________
BUSINESS
PROPERTIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SELLING SHAREHOLDERS
PLAN OF DISTRIBUTION Dated August __, 2006
DIRECTORS AND EXECUTIVE OFFICERS
PRINCIPAL SHAREHOLDERS
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
LEGAL PROCEEDINGS
DESCRIPTION OF SECURITIES
LEGAL MATTERS
EXPERTS
WHERE YOU CAN FIND MORE INFORMATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
EXHIBITS
Tidelands Oil & Gas Corporation
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers.
The Nevada Corporation Law and the Company's Certificate of Incorporation and
Bylaws authorize indemnification of a director, officer, employee or agent of
the Company against expenses incurred by him or her in connection with any
action, suit, or proceeding to which such person is named a party by reason of
having acted or served in such capacity, except for liabilities arising from
such person's own misconduct or negligence in performance of duty. In addition,
even a director, officer, employee or agent of the Company who was found liable
for misconduct or negligence in the performance of duty may obtain such
indemnification if, in view of all the circumstances in the case, a court of
competent jurisdiction determines such person is fairly and reasonably entitled
to indemnification. Insofar as indemnification for liabilities arising under the
Securities Act of 1933 (the "Act") may be permitted to directors, officers, or
persons controlling the Company pursuant to the foregoing provisions, the
Company has been informed that in the opinion of the Securities and Exchange
Commission, such indemnification is against public policy as expressed in the
Act and is therefore unenforceable.
Item 25. Other Expenses of Issuance and Distribution
SEC Registration Fee $2,587
Blue Sky Fees and Expenses $
Accounting Fees and Expenses $
Legal Fees and Expenses $
Miscellaneous $
Total $
Item 26. Recent Sales of Unregistered Securities
During the period the preceding three years we issued the following securities
in exempt transactions not requiring registration:
On June 30, 2003, we issued 1,300,000 common shares as full payment for an
outstanding promissory note obligation to Guernsey Partners. The transaction
value was $198,767, representing unpaid principal. Unpaid interest was waived.
The shares were issued to nine individuals.
On September 10, 2003, we issued 600,000 common shares to 34479 Yukon, Inc., for
consulting services valued at $62,400.
On September 12, 2003, we issued 500,000 common shares to C. Siddons for
consulting services valued at $52,000.
On September 22, 2003, we issued 300,000 common shares to Marcello Kochen for
consulting services valued at 31,200. On October 1, 2003, we issued 60,000
common shares to Barry Gross for investor public relations services valued at
$38,700.
On October 29, 2003, we issued 150,000 common shares to Carl Hessel for
investment banking services valued at $148,500.
On October 29, 2003, we issued 200,000 common shares to C. Siddons for
consulting services valued at $198,000.
On November 1, 2003, we issued 500,000 common shares to David Zirilnikoff for
consulting services valued at $625,000.
On November 1, 2003, we issued 200,000 common shares to Marcello Kochen for
consulting services valued at $250,000.
On November 4, 2003, we issued 300,000 common shares to C. Siddons for
consulting services valued at $375,000.
On November 14, 2003, we issued 150,000 common shares to Carl Hessel for
investment banking services valued at $187,500.
On November 14, 2003, we issued 300,000 common shares to Milo Resources for
consulting services valued at $375,000.
On November 24, 2003, we sold Carl Allers Etablissement, a private Danish
company, 581,395 common shares for $1,000,000.
On January 8, 2004, we authorized the issuance of 300,000 common shares to Carl
Hessel for services valued at $450,000.
On January 8, 2004, we authorized the issuance of 300,000 common shares to
Stanley Merdinger for services valued at $450,000.
On January 8, 2004, we authorized the issuance of 400,000 common shares to Milo
Resources for consulting services valued at $600,000.
On January 8, 2004, we authorized the issuance of 75,000 common shares to Jerome
Tannenbaum and Elizabeth Tannenbaum in payment of a $75,000 promissory note,
including $38,311 of accrued interest.
On January 23, 2004, we sold Carl Allers Etablissement 1,333,334 shares of our
common stock for $2,000,000 Dollars.
On January 28, 2004, we sold the Margaux Group shares 1,388,889 for $2,083,335
Dollars.
On April 12, 2004, we issued 500,000 shares of common stock to Impact
International, Inc. valued at $1,220,000 in a cashless exercise of their common
stock warrants.
On April 15, 2004, we issued 700,000 common shares to Majestic Holdings, LLC.
for consulting services valued at $1,205,000.
II-1
On April 15, 2004, we issued 450,000 common shares to New Age Group, LLC for
consulting services valued at $1,210,000.
On April 15, 2004, we issued 3,322 common shares to Carl Hessel for $ 4,983.
Carl Hessel is a member of our board of directors.
On July 2, 2004, we issued 500,000 shares of common stock to Impact
International, LLC. valued at $1,002,500 in a cashless exercise of their common
stock warrants.
On August 1, 2004, we issued 1,000,000 shares of common stock to L.L. Capital
Group, LLC pursuant to a Consulting Services Agreement. We also issued L.L.
Capital Group 500,000 common stock warrants exercisable at $1.45 per share. The
warrants expire August 9, 2006. The transaction was valued at $1,520,000.
On September 14, 2004, the following individuals exercised common stock options:
Michael Ward, the Company's President and Director, exercised his
common stock option to purchase 500,000 common shares for $110,000
payable on a promissory note bearing interest at the rate of 5% payable
in full on, or before September 14, 2005. The shares are subject to a
security agreement.
Ahmed Karim, the Company's Vice President and Director, exercised his
common stock option to purchase 500,000 common shares for $110,000
payable on a promissory note bearing interest at the rate of 5% payable
in full on, or before September 14, 2005. The shares are subject to a
security agreement.
James Smith, the Company's Chief Financial Officer, exercised his
common stock option to purchase 500,000 common shares for $110,000
payable on a promissory note bearing interest at the rate of 5% payable
in full on, or before September 14, 2005. The shares are subject to a
security agreement.
Samuel Simon exercised his common stock option to purchase 500,000
common shares for $110,000 payable on a promissory note bearing
interest at the rate of 5% payable in full on, or before September 14,
2005. The shares are subject to a security agreement.
Royis Ward exercised his common stock option to purchase 500,000 common
shares for $110,000 payable on a promissory note bearing interest at
the rate of 5% payable in full on or before September 14, 2005. The
shares are subject to a security agreement.
On September 14, 2004, we issued 500,000 shares of common stock to Michael Ward
as a stock grant under his employment agreement. The shares were valued at
$427,500.
On September 14, 2004 we sold Four Million (4,000,000) Tidelands Oil & Gas
common shares to ACH Securities, S.A., a company domiciled in Geneva,
Switzerland, for Two Million ($2,000,000) Dollars. On October 14, 2004, in
connection with the ACH Securities transaction, we issued Margaux Investment
Group, S.A. common stock warrants to purchase One Million (1,000,000) Tidelands
Oil & Gas common shares for Fifty ($0.50) Cents per share.
On October 14, 2004, we authorized the issuance of 500,000 shares of common
stock to Gregory M. Wilson for legal services valued at $160,000.
On October 26, 2004, we issued ACH Securities, S.A. common stock warrants to
purchase One Million (1,000,000) Tidelands Oil & Gas common shares for Two
Dollars Fifty ($2.50) Cents per share.
On November 1, 2004, we issued James Blackwell, P.E. 574,712 Tidelands Oil & Gas
common shares in a stock purchase transaction where we acquired 500 shares of
Sonterra Energy Corporation. The transaction was valued at $126,437.
On November 1, 2004, we authorized the issuance to Impact International, LLC of
500,000 shares of common stock valued at $417,500 in a cashless exercise of
their common stock warrants.
II-2
On November 18, 2004, we entered into Securities Purchase Agreement with
Mercator Momentum Fund, LP, Mercator Momentum Fund III, LP, Monarch Pointe Fund,
LP, (collectively, "the Funds") and Mercator Advisory Group, LLC. ("Mercator").
We issued the Funds 7% Convertible Debentures in the aggregate principal amount
of $5,000,000. The Debentures mature May 18, 2006. We are required to pay
interest monthly. The aggregate monthly interest payment is $29,166.67. The
allocation of the debentures is as follows: (a) Mercator Momentum Fund, LP
acquired $1,270,000 7% Convertible Debentures; (b) Mercator Momentum Fund III,
LP acquired $875,000 7% Convertible Debentures; and (C)) Monarch Pointe Fund, LP
acquired $2,855,000 7% Convertible Debentures.
In connection with this financing we issued 6,578,948 common stock warrants
which expire November 18, 2007. We issued the warrants as follows:
o Mercator Momentum Fund, LP 417,763 warrants exercisable at $0.87 and
417,763 warrants exercisable at $0.80;
o Mercator Momentum Fund III, LP 287,829 warrants exercisable at $0.87
and 287,829 warrants exercisable at $0.80;
o Monarch Pointe Fund, LP 939,145 warrants exercisable at $0.87 and
939,145 warrants exercisable at $0.80.
o Mercator Advisory Group, LLC 1,644,737 warrants exercisable at $0.87
and 1,644,737 warrants exercisable at $0.80.
On February 1, 2005, the company issued 500,000 shares of its restricted common
stock valued at $797,500 to Impact International, LLC pursuant to the terms of
the purchase of Reef Ventures, L.P.
On February 25, 2005, the Company approved the issuance of 60,000 shares of its
restricted common stock valued at $82,000 for investor public relations
services.
On May 1, 2005, the Company issued 500,000 shares of its restricted common stock
valued at $900,000 to Impact International, LLC pursuant to the terms of the
purchase of Reef Ventures, L.P.
On June 27, 2005, the Company authorized the issuance of 150,000 shares of its
restricted common stock valued at $199,500 to each of the three members of the
Board of Directors, Michael R. Ward, Ahmed Karim and Carl Hessel.
On July 1, 2005, the company issued 1,000,000 shares of its restricted common
stock valued at $1,230,000 pursuant to an employment contract with an officer of
the Company.
On July 1, 2005, the Company issued 50,000 shares of its restricted common stock
valued at $61,500 pursuant to an employment contract with Robert Dowies, an
officer of the Company.
On July 1, 2005, the Company issued 10,000 shares of its restricted common stock
valued at $12,150 to an employee of the Company.
On December 20, 2005, the Company issued 40,000 shares of its restricted common
stock valued at 33,400 pursuant to an employment contract with Robert Dowies.
On January 2, 2006, we issued Michael Ward, the Company's President, CEO and
member of the board of directors, 500,000 common shares representing a partial
stock grant under his employment contract. The shares were valued at $445,000 or
$0.89 per share.
On January 20, 2006, the Company entered into Securities Purchase Agreements
with seven accredited investors (collectively "Purchases or Holders"). We sold
$6,569,750 in the aggregate principal amount, of discounted convertible
debentures ("Debentures") and Series A and Series B Warrants to purchase common
stock ("Warrants") for an aggregate payment of $5,396,098 after deduction for
the interest discount. The Debenture Holders may convert all or part of the
Debenture face amount into shares of Tidelands common stock at any time at an
initial conversion rate of $0.87 per share. The Series "A" Warrants may be
exercised immediately by the Purchasers for $0.935 per share and terminate on
January 20, 2009. The Series "B" Warrants are exercisable at $1.275 per share
commencing at any time on, or after January 20, 2007 and on, or before February
19, 2007.
On January 30, 2006, we issued Gene Kaslow 60,000 shares as compensation for
legal services valued at $57,000 or $0.95 per share.
On January 30, 2006, we issued Julio Bastarrachea 150,000 shares as additional
employee compensation valued at $142,500 or $0.95 per share.
On May 10, 2006, we issued Jason Jones, a Tidelands subsidiary employee, 10,000
common shares valued at $7,900 pursuant to his employment agreement.
On May 10, 2006, we issued Robert Dowies, a Tidelands officer, 60,000 common
shares valued at $97,400 under the terms of his employment agreement.
On June 7, 2006, we issued Michael Ward, a Tidelands officer, 500,000 common
shares valued at $542,500 under the terms of his employment agreement.
On June 27, 2006, we issued Fran Jenkins, a Tidelands employee, 20,000 common
shares valued at $16,000 as employee compensation.
On June 27, 2006, the Company issued 20,000 common shares to Natasha Dempsey, a
Tidelands employee, as compensation.
We believe the securities issued above were issued in a private transaction
pursuant to Section 4(2) of the Securities Act of 1933, as amended, (the
"Securities Act"). These shares are considered restricted securities and may not
be publicly resold unless registered for resale with appropriate governmental
agencies or unless exempt from any applicable registration requirements.
II-3
Item 27. Exhibits
Exhibit Description Location of Exhibit
2.0 Amendment No. 2 to the Asset Purchase and Sale and between Incorporated by reference to
Sonterra Energy Corporation and Oneok Propane Distribution Exhibit 10.1
Company. 8-K filed November 15, 2004
2.1 Amendment No. 1 to the Asset Purchase and Sale and between Incorporated by reference to
Sonterra Energy Corporation and Oneok Propane Distribution Exhibit 10.2
Company. 8-K filed November 15, 2004
2.3 Asset Purchase and Sale Agreement by and between Sonterra Energy Incorporated by reference to
Corporation and Oneok Propane Distribution Company. Exhibit 10.3
8-K filed November 15, 2004
2.4 Purchase and Sale Agreement for Reef Ventures, L.P. by and Incorporated by reference
between Impact International, LLC ("Impact") and Coahuila Exhibit 10 to 8-K filed
Pipeline, LLC, ("Coahuila"), (jointly "Seller") and Tidelands June 25, 2004
Oil &Gas Corporation ("Tidelands") and Arrecefe
Management, LLC ("Arrecefe"), (jointly "Buyer") dated
May 25, 2004 with Exhibits.
2.5 Purchase and Sale Agreement for Reef Marketing, L.L.C. Incorporated by reference
and Reef International, L.L.C. by and between Tidelands Exhibit 10.1 to 8-K filed
Oil &Gas Corporation and Impact International, L.L.C. May 8, 2003
and Coahuila Pipeline, L.L.C. dated April 16, 2003.
2.6 Agreement of Limited Partnership of Reef Ventures, L.P. Incorporated by reference
to Exhibit 10.2 to 8-K filed
on May 8, 2003
3.0 Certificate 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 Incorporated by reference to
&Gas Corporation., a Nevada corporation. 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 Incorporated by reference to
with Palisades Master Fund, Crescent International, Ltd., Exhibit 10.2 to 8-K filed on
Double U Master Fund, LP, JGB Capital, LP, Nite January 25, 2006
Capital, LP and RHP Master Fund, Ltd
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
5.1 Opinion of Wilson Law Offices dated August 18, 2006 Included with this filing
10.0 Form of Securities Purchase Agreement with Incorporated by reference to
Palisades Master Fund, Crescent International, Ltd., Exhibit 10.2 to 8-K filed on
Double U Master Fund, LP, JGB Capital, LP, Nite January 25, 2006
Capital, LP and RHP Master Fund, Ltd.
10.1 Form of Series "A" Common Stock Purchase Warrant Incorporated by reference to
Palisades Master Fund, Crescent International, Ltd., Exhibit 10.4 to 8-K filed on
Double U Master Fund, LP, JGB Capital, LP, Nite January 25, 2006
Capital, LP and RHP Master Fund, Ltd.
10.2 Form of Series "B" Common Stock Purchase Warrant Incorporated by reference to
Palisades Master Fund, Crescent International, Ltd., Exhibit 10.5 to 8-K filed on
Double U Master Fund, LP, JGB Capital, LP, Nite January 25, 2006
Capital, LP and RHP Master Fund, Ltd.
10.3 Form of Registration Rights Agreement with Incorporated by reference to
Palisades Master Fund, Crescent International, Ltd., Exhibit 10.2 to 8-K filed on
Double U Master Fund, LP, JGB Capital, LP, Nite January 25, 2006
Capital, LP and RHP Master Fund, Ltd.
II-4
10.1 Employment Agreement with Michael Ward Incorporated by reference to
Exhibit 10.0 of SB-2 filed
December 17, 2004
10.2 Employment Agreement with James B. Smith Incorporated by reference to
Exhibit 10.1 of SB-2 filed
December 17, 2004
10.3 Employment Agreement with Robert Dowies Incorporated by reference to
Exhibit 10.2 of SB-2 filed
December 17, 2004
10.4 2003 Non-Qualified Stock Grant and Option Plan Incorporated by reference to
Form S-8 filed on June 11, 2003
10.5 Securities Purchase Agreement Incorporated by reference to
10.6 Warrant Margaux Incorporated by reference to
Exhibit 10.5 of SB-2 filed
December 17, 2004
10.7 Warrant Margaux Incorporated by reference to
Exhibit 10.6 of SB-2 filed
December 17, 2004
10. Stock Purchase Warrant Impact Incorporated by reference to
Exhibit 10.3 to 8-K filed on
May 8, 2003.
10. Registration Rights Agreement Impact Incorporated by reference to
Exhibit 10.4 to 8-K filed on
May 8, 2003.
10.8 Amended Stock Purchase Warrant Impact International Incorporated by reference
Exhibit 10 to 8-K filed
June 25, 2004
10.9 Registration Rights Agreement with Mercator Group Incorporated by reference to
Exhibit 10.5 to 8-K filed on
December 3, 2004
10.10 Warrant to Purchase Common Stock Mercator Momentum Incorporated by reference to
Fund, LP. $0.87 Exhibit 10.6 to 8-K filed on
December 3, 2004
10.11 Warrant to Purchase Common Stock Mercator Momentum Incorporated by reference to
Fund, LP $0.80 Exhibit 10.7 to 8-K filed on
December 3, 2004
10.12 Warrant to Purchase Common Stock Mercator Momentum Incorporated by reference to
Fund, III, LP $0.87 Exhibit 10.8 to 8-K filed on
December 3, 2004
10.13 Warrant to Purchase Common Stock Mercator Momentum Incorporated by reference to
Fund III, LP $0.80 Exhibit 10.9 to 8-K filed on
December 3, 2004
10.14 Warrant to Purchase Common Stock Monarch Pointe Incorporated by reference to
Fund, LP $0.87 Exhibit 10.10 to 8-K filed on
December 3, 2004
10.15 Warrant to Purchase Common Stock Monarch Pointe Incorporated by reference to
Fund, LP $0.80 Exhibit 10.11 to 8-K filed on
December 3, 2004
10.16 Warrant to Purchase Common Stock Mercator Advisory Incorporated by reference to
Group, LLC. $0.87 Exhibit 10.12 to 8-K filed on
December 3, 2004
10.17 Warrant to Purchase Common Stock Mercator Advisory Incorporated by reference to
Group, LLC $0.80 Exhibit 10.13 to 8-K filed on
December 3, 2004
II-5
10.18 Regency Participation Agreement Incorporated by reference to
Exhibit 10.1 to 10-Q filed on
August 21, 2006
10.19 Regency Joint Operating Agreement Incorporated by reference to
Exhibit 10.1 to 10-Q filed on
August 21, 2006
10.20 Aircraft Prepaid Lease/Use Agreement Incorporated by reference to
Exhibit 10.3 to 10-Q filed on
August 21, 2006
10.21 Promissory Note relating to Aircraft Prepaid Lease Incorporated by reference to
Exhibit 10.4 to 10-Q filed on
August 21, 2006
21 List of Subsidiaries Included with this filing
23.1 Consent of Wilson Law Offices Included in Exhibit 23.1
23.2 Consent of Independent Auditor Included with this filing
II-6
Item 28. Undertakings
The undersigned registrant hereby undertakes to:
(1) Insofar as indemnification for liabilities arising under the
Act may be permitted to directors, officers and controlling
persons of the Company pursuant to the foregoing provisions,
or otherwise, the Company has been advised that in the opinion
of the Securities and Exchange Commission such indemnification
is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the
payment by the registrant of expenses incurred or paid by a
director, officer or controlling person of the registrant in
the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in
connection with the securities being registered, the Company
will, unless in the opinion of its counsel the matter has been
settled by controlling precedent submit to a court of
appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in
the Act and will be governed by the final adjudication of such
issue.
(2) File, during any period in which it offers or sells
securities, a post effective amendment to this registration
statement to:
(i) Include any prospectus required by section 10(a)(3) of the
Act;
(ii) Reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in
the information in the registration statement; and
(iii) Include any additional or changed material information on the
plan of distribution.
For determining liability under the Securities, treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial bona
fide offering.
File a post-effective amendment to remove from registration any of the
securities that remain unsold at the end of the offering.
(b) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy expressed in
the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
(c) The undersigned registrant hereby undertakes that it will:
(1) For determining any liability under the Securities Act, treat the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b) (1) or (4) or 497 (h)
under the Securities Act as part of this registration statement as of the time
the Commission declared it effective.
(2) For determining any liability under the Securities Act, treat each
post-effective amendment that contains a form of prospectus as a new
registration statement for the securities offered in the registration statement,
and that offering of the securities at that time as the initial bona fide
offering of those securities.
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form S-1 and authorized this registration
statement to be signed on its behalf by the undersigned in the City of San
Antonio, Texas on August 21, 2006.
Tidelands Oil & Gas Corporation
By: /s/ Michael Ward
-----------------------------
Michael Ward, President, CEO
By: /s/ James B. Smith
-----------------------------
James B. Smith, Sr. V.P., CFO
and Principal Accounting Officer
Pursuant to the requirements of the Securities Act of 1933, as amended, this
registration statement has been signed by the following persons in the
capacities and as of the dates indicated.
Signature Title Date
/s/ Michael Ward President, CEO, Director August 21, 2006
------------------------
Michael Ward
/s/ James B. Smith Sr. V.P, CFO, Director August 21, 2006
------------------------ Principal Accounting Officer
James B. Smith
Director August 21, 2006
------------------------
Carl Hessel
/s/ Ahmed Karim Director August 21, 2006
------------------------
Ahmed Karim