UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-QSB
(Mark one)
[X] Annual Report Under Section 13 or 15(d) of The Securities Exchange Act
of 1934
For the quarterly period ending March 31, 2004
[_] Transition Report Under Section 13 or 15(d) of The Securities Exchange
Act of 1934
For the transition period from ______________ to _____________
Commission File Number: 0-29613
TIDELANDS OIL & GAS CORPORATION
(Exact name of small business issuer as specified in its charter)
Nevada 66-0549380
------------------------ ------------------------
(State of incorporation) (IRS Employer ID Number)
1862 West Bitters Rd., San Antonio, TX 78410
--------------------------------------------
(Address of principal executive offices)
(210) 764-8642
(Issuer's telephone number)
Securities registered under Section 12 (b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock - $0.001 par value
Check whether the issuer has (1) filed all reports required to be files by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period the Company was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No
--- ---
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court. Yes No
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS
As of March 31, 2004, there were 48,875,325 shares of Common Stock issued and
outstanding.
Transitional Small Business Disclosure Format : Yes No X
--- ---
TIDELANDS OIL & GAS CORPORATION
FORM 10-QSB
INDEX
Page
PART I - Financial Information
Item 1 - Financial Statements
Condensed Consolidated Balance Sheets as of
March 31, 2004 and December 31, 2003.............................. 3-4
Condensed Consolidated Statements of Operations
For the Three Months Ended March 31, 2004 and 2003................ 5
Condensed Consolidated Statements of Cash Flows
For the Three Months Ended March 31, 2004 and 2003................ 6-7
Notes to Condensed Consolidated Financial Statements.............. 8-12
Item 2 - Management's Discussion and Analysis or Plan of Operation......... 13
Item 3. - Controls and Procedures.......................................... 16
PART II - Other Information
Item 1 - Legal Proceedings................................................. 17
Item 2 - Changes in Securities and Use of Proceeds......................... 17
Item 3 - Defaults Upon Senior Securities................................... 17
Item 4 - Submission of Matters to a Vote of Security Holdings.............. 17
Item 5 - Other Information................................................. 17
Item 6 - Exhibits and Reports on Form 8K .................................. 17
Signature.................................................................. 18
- 2 -
TIDELANDS OIL & GAS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
------
March 31, 2004 December 31, 2003
----------------- -----------------
(Unaudited)
Current Assets:
Cash $ 3,548,489 $ 894,457
Accounts Receivable 745 228
Prepaid Expenses 580,708 22,209
----------------- -----------------
Total Current Assets 4,129,942 916,894
----------------- -----------------
Property Plant and Equipment, Net 733,170 604,192
----------------- -----------------
Investment - Reef Ventures, L.P. 98,629 98,629
----------------- -----------------
Other Assets:
Deposits 3,800 3,800
----------------- -----------------
Total Assets $ 4,965,541 $ 1,623,515
================= =================
See Accompanying Notes to Condensed Consolidated Financial Statements
-3-
TIDELANDS OIL & GAS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(CONTINUED)
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
March 31, 2004 December 31, 2003
----------------- -----------------
(Unaudited)
Current Liabilities:
Accounts Payable and
Accrued Expenses $ 183,811 $ 813,905
Current Maturities of Long-Term Debt 150,000 325,000
----------------- -----------------
Total Current Liabilities 333,811 1,138,905
Long-Term Debt 0 0
----------------- -----------------
Total Liabilities 333,811 1,138,905
----------------- -----------------
Commitments and Contingencies -- --
Stockholders' Equity:
Common Stock, $.001 par value per share,
100,000,000 shares authorized;
48,875,325 shares issued and outstanding
March 31, 2004, 44,825,302 shares issued
and outstanding December 31, 2003 48,876 44,826
Additional Paid-in Capital 16,750,398 11,072,987
Subscriptions Receivable (18,000) (18,000)
Accumulated (Deficit) (12,149,544) (10,615,203)
----------------- -----------------
Total Stockholders' Equity 4,631,730 484,610
----------------- -----------------
Total Liabilities and
Stockholders' Equity $ 4,965,541 $ 1,623,515
================= =================
See Accompanying Notes to Condensed Consolidated Financial Statements
-4-
TIDELANDS OIL & GAS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended Three Months Ended
March 31, 2004 March 31, 2003
------------------ ------------------
Revenues $ 0 $ 5,265
------------------ ------------------
Operating Expenses:
Operating Expenses 0 5,425
Depreciation 11,280 10,656
Interest 4,719 25,675
Officers & Directors Salaries & Fees 202,608 75,000
General and Administrative 1,319,601 195,792
------------------ ------------------
Total Operating Expenses 1,538,208 312,548
------------------ ------------------
(Loss) From Operations (1,538,208) (307,283)
Interest Income 3,867 0
------------------ ------------------
Net (Loss) $ (1,534,341) $ (307,283)
================== ==================
Net (Loss) Per Common Share
Basic $ (0.03) $ (0.01)
================== ==================
Weighted Average Number of Common
Shares Outstanding, Basic 46,850,314 34,415,079
================== ==================
Diluted $ (0.03) $ (0.01)
================== ==================
Weighted Average Number of Common
Shares Outstanding, Diluted 58,733,717 35,415,079
================== ==================
See Accompanying Notes to Condensed Consolidated Financial Statements
-5-
TIDELANDS OIL & GAS CORPORATION
STATEMENTS OF CONDENSED CONSOLIDATED CASH FLOWS
(UNAUDITED)
Three Months Ended Three Months Ended
March 31, 2004 March 31, 2003
------------------ ------------------
Cash Flows Provided (Required) By
Operating Activities:
Net (Loss) $ (1,534,341) $ (307,283)
Adjustments to Reconcile Net (Loss)
to Net Cash Provided (Required) By
Operating Activities:
Depreciation 11,280 10,656
Issuance of Common Stock
for Services Provided 1,226,816 109,297
Officers' Salaries 0 60,000
Changes in
Accounts Receivable (517) 15,419
Prepaid Expenses (300,499) 4,451
Other Assets 0 812
Accounts Payable and
Accrued Expenses (591,783) 68,870
------------------ ------------------
Net Cash (Required)
by Operating Activities (1,189,044) (37,778)
------------------ ------------------
Cash Flows Provided (Required)
By Investing Activities:
Acquisitions of Property, Plant & Equipment (140,258) (92,789)
Proceeds From Disposals of Property, Plant
and Equipment 0 102,327
------------------ ------------------
Net Cash Provided (Required)
by Investing Activities (140,258) 9,538
------------------ ------------------
See Accompanying Notes to Condensed Consolidated Financial Statements
-6-
TIDELANDS OIL & GAS CORPORATION
STATEMENTS OF CONDENSED CONSOLIDATED CASH FLOWS
(UNAUDITED)
(CONTINUED)
Three Months Three Months
Ended Ended
March 31, 2004 March 31, 2003
-------------- --------------
Cash Flows Provided (Required)
by Financing Activities:
Proceeds from Issuance of Common Stock 4,083,334 50,000
Repayment of Short-Term Loans (100,000) 0
Proceeds of Loans from Related Parties 0 53,654
Repayment of Loans from Related Parties 0 (56,767)
-------------- --------------
Net Cash Provided by Financing Activities 3,983,334 46,887
-------------- --------------
Net Increase in Cash 2,654,032 18,647
Cash at Beginning of Period 894,457 193,669
-------------- --------------
Cash at End of Period $ 3,548,489 $ 212,316
============== ==============
Supplemental Disclosures of
Cash Flow Information
Cash Payments for Interest $ 4,719 $ 659
============== ==============
Cash Payments for Income Taxes $ 0 $ 0
============== ==============
Non-Cash Financing Activities:
Issuance of Common Stock:
Operating Activities $ 1,226,816 $ 109,297
Payment of Accounts Payable 38,311 62,500
Prepayment of Legal Fees 258,000 0
Repayment of Short-Term Loan 75,000 0
-------------- --------------
Total Non-Cash Financing Activities $ 1,598,127 $ 171,797
============== ==============
See Accompanying Notes to Condensed Consolidated Financial Statements
-7-
TIDELANDS OIL & GAS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004
NOTE 1 - BASIS OF PRESENTATION
------ ---------------------
The accompanying unaudited condensed consolidated financial statements
for the three month periods ended March 31, 2004 and 2003 have been
prepared in conformity with accounting principles generally accepted in
the United States of America for interim financial information and with
the instructions to Form 10-QSB and Regulation S-B. The financial
information as of December 31, 2003 is derived from the registrant's
Form 10-KSB for the year ended December 31, 2003. Certain information
or footnote disclosures normally included in financial statements
prepared in accordance with accounting principles generally accepted in
the United States of America have been condensed or omitted pursuant to
the rules and regulations of the Securities and Exchange Commission.
The preparation of condensed consolidated financial statements in
conformity with accounting principles generally accepted in the United
States of America requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities at the date
of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates. In the opinion of management, the accompanying
financial statements include all adjustments necessary (which are of a
normal and recurring nature) for the fair presentation of the results
of the interim periods presented. While the registrant believes that
the disclosures presented are adequate to keep the information from
being misleading, it is suggested that these accompanying financial
statements be read in conjunction with the registrant's audited
consolidated financial statements and notes for the year ended December
31, 2003, included in the registrant's Form 10-KSB for the year ended
December 31, 2003.
Operating results for the three-month period ended March 31, 2004 are
not necessarily indicative of the results that may be expected for the
remainder of the fiscal year ending December 31, 2004. The accompanying
unaudited condensed consolidated financial statements include the
accounts of the registrant and its wholly-owned subsidiaries. All
significant inter-company accounts and transactions have been
eliminated in consolidation.
-8-
TIDELANDS OIL & GAS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004
NOTE 2 - PROPERTY, PLANT AND EQUIPMENT
------ -----------------------------
A summary of property, plant and equipment at March 31, 2004 is as
follows:
Estimated
Economic Life
-------------
Pre-Construction Costs-
International Crossing to Mexico $ 265,021
Equipment and
Leasehold Improvements 27,929 3-10 Years
Pipelines 431,560 15 Years
Processing Plant 166,410 15 Years
--------------
Total 890,920
Less Accumulated Depreciation 157,750
--------------
Total $ 733,170
==============
NOTE 3 - LITIGATION
------ ----------
On January 6, 2003, the Company was served as a third party defendant
in a lawsuit titled Northern Natural Gas Company vs. Betty Lou Sheerin
vs. Tidelands Oil & Gas Corporation, ZG Gathering, Ltd. and 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
promissory note in question. She alleges that Tidelands is liable to
her for all of her actual damages, costs of the lawsuit and other
unstated relief. Tidelands participated in a mediation on March 11,
2003 and the case settled at that time. Tidelands answered the Sheerin
suit on March 26, 2003 and denied all of Sheerin's allegations. No
discovery has been completed at this time. Based on initial
investigations, however, Tidelands appears to have a number of
potential defenses to Sheerin's claims and intends to aggressively
defend the lawsuit.
-9-
TIDELANDS OIL & GAS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004
NOTE 3 - LITIGATION (CONTINUED)
------ ----------------------
In September 2002, as a pre-closing deposit to the purchase of the ZG
pipelines, the Company executed a $300,000 promissory note to Betty L.
Sheerin, a partner of ZG Gathering, Ltd. In addition, the Company
issued 1,000,000 shares of its restricted common stock to various
partners of ZG Gathering, Ltd. The company believes that the
aforementioned promissory note and shares of restricted common stock
will be cancelled based upon the outcome of the litigation described
above. Accordingly, the Company's financial statements reflect that
position.
NOTE 4 - OTHER
------ -----
During January and February 2004, the Company issued 2,722,223 shares
of its restricted common stock for $4,083,335.
On January 8, 2004, the Company authorized the issuance of 200,000
shares of its common stock for 2004 legal fees valued at $344,000 under
the Stock Grant and Option Plan.
On January 8, 2004, the Company issued 300,000 shares of its restricted
common stock for services valued at $450,000 regarding the private
placement of the Company's common stock.
On January 8, 2004, the Company authorized the issuance of 700,000 of
its restricted common stock for consulting services valued at
$1,050,000. These shares were issued during January and February 2004.
On January 8, 2004, the Company issued 52,800 shares of its common
stock valued at $90,816 to a Company officer under the Stock Grant and
Option Plan.
On January 8, 2004, the Company approved the issuance of 75,000 shares
of its restricted common stock in payment of a $75,000 promissory note
and $38,311 of accrued interest. These shares were issued February 3,
2004.
-10-
TIDELANDS OIL & GAS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004
NOTE 5 - SUBSEQUENT EVENTS
------ -----------------
On April 7, 2004, the Company entered into a Letter of Intent with
Impact International, LLC regarding (1) the exercise of the Impact
Stock Purchase Warrant issued on April 16, 2003, and (2) the Company's
purchase and the sale of Impact's interest in Reef Ventures, L.P., a
Texas limited partnership for $6,580,222.02, adjusted for revenue and
interest expense calculated from the construction project funding dates
through date of closing. The warrant exercise and Reef sale terms are
subject to the execution of definitive agreements which may include an
amendment to the Stock Purchase Warrant and Registration Rights
Agreements and the preparation of appropriate Reef sale agreements. In
connection with the execution of the Letter of Intent, Impact exercised
Five Hundred Thousand (500,000) common shares on a cashless basis. The
Company issued the shares to Impact on April 12, 2004.
Stock Purchase Warrant
Impact International, LLC had given the Company notice of its intent to
exercise all of the common stock purchase warrants under the Stock
Purchase Warrant and Registration Rights Agreement between the Company
and Impact International, LLC dated April 16, 2003 and reported on a
Form 8-K Current Report filed May 8, 2003.
The Stock Purchase Warrant provides for the exercise of 6,830,000
common shares, or a 19% interest in the Company's issued and
outstanding common stock at the time of exercise. The Warrant is
subject to anti-dilution provisions and a pricing formula. The Warrant
provides for both cash and cashless exercise methods. Since executing
the Stock Purchase Warrant, the Company has issued additional common
stock, entitling Impact to an increased number of warrants.
Pursuant to the terms of the Letter of Intent, and subject to the
definitive terms and conditions of amended and future agreements, the
Company would agree: (1) that the Impact Stock Purchase Warrant, as
adjusted, covers Ten Million (10,000,000) Tidelands' common shares at
an exercise price of $0.335 per share; (2) that the Company would
register the Impact common shares on the appropriate form of
registration statement with the Securities and Exchange Commission, and
(3) that if the registration statement were not filed or declared
effective within 90 days of April 7, 2004, that the Company would issue
500,000 common shares under the cashless exercise provisions of the
amended Stock Purchase Warrant. For each 90 day period that the
registration statement were not filed or declared effective, the
Company would continue to issue 500,000 share blocks of common stock,
until declared effective.
-11-
TIDELANDS OIL & GAS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004
NOTE 5 - SUBSEQUENT EVENTS (CONTINUED)
------ -----------------------------
Stock Purchase Warrant (Continued)
If the registration of the shares was accomplished by certain deadlines
stated in the Letter of Intent, Impact would be obligated to exercise
the balance of the Warrant for cash payable by Impact through the
execution of a promissory note payable to Tidelands (the "Impact
Note"). If the registration was not completed by the deadline, which
would be either 12 or 15 months from April 7, 2004. Impact would not be
obligated to exercise the balance of the Warrant for cash, rather
Tidelands would be obligated to issue the remaining shares on a
cashless basis. In either case, the Company would be required to
continue to register the shares.
Purchase and Sale of Reef Ventures, LLC Interests
Impact would sell its 72% limited partnership interest and Coahuila
Pipeline, LLC would sell its 1% general partnership interest in Reef to
the Company for $6,580,222.02, less revenue received from Reef through
March 9, 2004. An amount equal to interest would be added at closing,
calculated from the date of net funding by Impact at a per annum rate
of 12%. The purchase price would be further adjusted to take into
account project expenses and revenues incurred or received after March
10, 2004.
Impact would finance the Tidelands' purchase price. The purchase price
would be payable through a promissory note delivered by Tidelands at
closing (the Tidelands Note") bearing interest at the prime rate of
interest plus two (2%) percent. The note would call 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. The unpaid balance of the note would
be due at the end of the fourth year. The note would be secured by a
deed of trust covering the Gas Project and a guarantee of payment of
the Tidelands note by Reef.
The Reef 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.
At such time, if ever, as Impact has executed and delivered the Impact
Note, Tidelands would exchange a cancellation of the Impact Note for an
amended Tidelands Note, reducing the Principal sun owed under the
Tidelands Note by the dollar amount evidenced by the Impact Note.
-12-
Item 2. Management's Discussion and Analysis or Plan of Operation
Business Overview
Tidelands Oil & Gas Corporation (the "Company"), formerly known as C2
Technologies, Inc., was incorporated under the laws of the State of Nevada on
February 25, 1997. C2 Technologies, Inc. changed its name to Tidelands Oil & Gas
Corporation on November 19, 1998. The Company has two wholly owned subsidiaries
named Rio Bravo Energy, LLC, and Sonora Pipeline, LLC. The Company also owns a
25% limited partnership interest in Reef Ventures, L.P. as described below.
Rio Bravo Energy, LLC was formed on August 10, 1998 to operate the
Chittim Gas Processing Plant which was purchased in 1999 and was processing
natural gas primarily from Conoco Oil's Sacatosa Field. The Sacatosa Field was
primarily an oilfield which produced high BTU casinghead gas from which
processing would yield valuable hydrocarbon components such as propane, butane
and natural gasolines. As the field depleted lower volumes of casinghead gas
were being delivered by Conoco and other gas producers could not be contracted
with for processing of additional replacement volumes of gas. Therefore, in
October 2002, the plant was temporarily shut down due to the declining economics
associated with low volume operation of the plant. Management plans to reopen
the plant when adequate volumes of gas from third party producers makes plant
operations economically attractive. The market for the products of plant
operation could include our future propane/butane terminal and pipeline crossing
into Mexico.
Sonora Pipeline, LLC was formed in January 1998 to operate the Sonora
pipeline network which has the capability of delivering adequate volumes of
natural gas for economic operation of the Chittim Gas Processing Plant. The
pipeline network consists of approximately 80 miles of gas pipeline. The assets
of this company were acquired in conjunction with the Chittim Gas Processing
Plant acquisition and, when operational, would generate revenue from
transportation fees to be charged to third party gas producers shipping natural
gas to the gas plant owned by Rio Bravo Energy LLC.
On April 16, 2003, the Company sold a Seventy-five (75%) interest in
our wholly owned subsidiaries, Reef International, L.L.C. and Reef Marketing,
L.L.C. for $1,960,867. The L.L.C. interests were acquired by Impact
International, L.L.C. (99% of the 75%) and Coahuila Pipeline, L.L.C. (1% of the
75%). Immediately after the transactions, Tidelands, Impact International and
Coahuila transferred their respective interests in both Reef L.L.C.'s to Reef
Ventures, L.P., a Texas limited partnership. Tidelands retained a 25% interest
in Reef Ventures, L.P. Reef International, L.L.C. is the holder of United
States, Texas permits for the construction, ownership, operation and maintenance
of a twelve (12") pipeline and a six (6") liquids line (together with loading
and unloading facilities) from Eagle Pass, Texas to Piedras Negras, Mexico. Reef
Marketing, L.L.C. was organized for the marketing, gathering and transportation
of natural gas and natural gas liquids from Eagle Pass, Texas to Piedras Negras,
Mexico.
-13-
Impact International LLC and Coahuila Pipeline LLC fully funded the
capital required for construction of the Reef Ventures, L.P. natural gas
pipeline and related metering facilities. Full operation of these assets by the
partnership began on November 1, 2003. Under the terms of the partnership
agreement, no income or loss is allocable to Tidelands Oil & Gas Corporation's
25% limited partnership interest until such time as Impact and Coahuila have
recovered 150% of their capital contributions. Additionally, Impact has agreed
to finance the construction of the 6 inch propane/butane liquids pipeline
subject to the negotiation and execution of definitive agreements. The liquids
pipeline financial commitment is $2,723,226. Impact's total financial commitment
to Tidelands regarding the sale of the Reef interests and pipeline construction
is not to exceed $8,000,000.
As disclosed above in Note 5 - Subsequent Events of the Condensed
Consolidated Financial Statements for the three months ended March 31, 2004, the
Company has entered into a Letter of Intent to purchase all of the partnership
interests held by Impact International LLC and Coahuila Pipeline LLC in the Reef
Ventures, L.P. partnership. The Company would also restructure the Stock
Purchase Warrant agreement as described above. Management expects these
transactions to be completed on or before May 28, 2004. When completed, the
transactions would result in the Company owning 98% of the Reef Ventures, L.P.
business activities which include the currently operating 12 inch natural gas
pipeline crossing and the future 6 inch LPG pipeline crossing between Eagle
Pass, TX and Piedras Negras, Coahuila. Management believes this acquisition to
be of strategic importance to the Company due to the potential for meaningful
increases in volumes transported through the natural gas pipeline to additional
markets in Coahuila and the cost and efficiency of substitution of pipeline
transport for truck transport with respect to the existing LPG demand in the
Coahuila market area. This acquisition will allow these business opportunities
to be more fully realized by the Company as they occur.
The Company continues with feasibility studies for the development of
an underground natural gas storage facility near Reynosa, Tamaulipas pursuant to
the existing Memorandum of Understanging with PEMEX. Chronic underfunding of
investment in midstream energy projects and increasing demand for natural gas
have created a need for a storage facility which can cover receipt/delivery
balancing needs and efficient interconnection with major gas pipelines. The
Company's planned project includes an underground storage facility and
interconnections between the existing and planned natural gas pipeline and
processing infrastructure. Management believes the project has the potential to
evolve into a market center (hub) for natural gas in Northern Mexico.
RESULTS OF OPERATIONS
REVENUES:
The Company reported revenues of $0 for the three months ended March
31, 2004 as compared with revenues of $5,265 for the three months ended March
31, 2003. The revenue reductions were due to the elimination of providing
administrative services related to processing of proceeds from natural gas sales
for a third party.
TOTAL COSTS AND EXPENSES:
Total costs and expenses increased from $312,548 for the three months
ended March 31, 2003 to $1,538,208 for the three months ended March 31, 2004.
-14-
OPERATING EXPENSES:
(Gas Processing Plant) Operating expenses decreased from $5,425 for the
three months ended March 31, 2003 to $0 for the three months ended March 31,
2004 due to the temporary closing of our Gas Processing Plant.
SELLING, GENERAL AND ADMINSTRATIVE EXPENSES:
Selling, general and administrative expense increased from $195,792 for
the three months ended March 31, 2003 to $1,319,601 for the three months ended
March 31, 2004. The increase of $1,123,809 was primarily due to increased
consulting fees.
INCOME TAX:
The pretax loss increased from ($307,283) for the three months ended
March 31, 2003 to ($1,534,341) for the three months ended March 31, 2004, an
increased loss of $1,227,058.
LIQUIDITY AND CAPITAL RESOURCES:
Capital expenditures during the three months ended March 31, 2004
totaled $140,258 as compared with $92,789 for the three months ended March 31,
2003. The increase of $47,469 consists of 2004 pre-construction costs related to
our proposed underground storage facility to be built for PEMEX, Mexico's
state-owned petroleum company, as compared to 2003 pre-construction costs
incurred for our international pipeline crossings to Mexico.
Total debt decreased from $1,138,905 at December 31, 2003 to $333,811
at March 31, 2004. Total debt as of March 31, 2004 and December 31, 2003
expressed as a percentage of the sum of total debt and shareholders' equity was
6.72% and 70.2% respectively.
Net loss for the three months ended March 31, 2004 was ($1,534,341) an
increase of 499.33% from the net loss of ($307,283) for the three months ended
March 31, 2003. Diluted net loss per common share increased 300% to ($0.03). The
net loss per share calculation for the three months ended March 31, 2004
included an increase in actual and equivalent shares outstanding.
As detailed above, the Company has experienced a significant
improvement with respect to its financial condition in the past three months.
Improvement in the ability to fund ongoing operations has also occurred as a
result of actions taken in the three months ended March 31, 2004. At December
31, 2003, the Company had received $1,000,000 of the $5,000,000 total funding
commitment with respect to the private placement of 3,303,618 restricted common
shares with Margaux Investment Management Group, S.A. On February 11, 2004, the
Company received the final disbursement of funds which fulfilled the full
$5,000,000 commitment plus an oversubscription of $83,335. Management
anticipates that sufficient liquidity and capital resources currently exist to
fund our operations with respect to recurring operating expenses and project
pre-construction expenditures for planned projects in the upcoming fiscal year,
however, additional borrowing and, or sale of additional shares of stock will be
necessary to fund actual construction of newly planned projects such as the
Burgos Gas Storage facility which is currently in the pre-construction phase of
development. Management expects that financing for the construction costs of
this project will be available in the form of a conventional project finance
structure, - i.e.- a construction loan followed with term debt. Other projects
currently in the feasibility study phase would likely utilize similar financing
structures. Until the various projects are constructed and operating, the
Company does not expect to receive significant revenues and must rely on
existing cash resources and future borrowings and/or equity issuance. Management
believes that market forces continue to emerge and justify the Company's efforts
to provide midstream energy projects for the cross-border and Mexico natural gas
marketplace and the Company's efforts will continue to address these
opportunities in the future.
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Management believes that the financial effect of the proposed buy-out
of the Impact International LLC and Coahuila Pipeline LLC interests in Reef
Ventures, L.P. will be affordable due to a cap limitation of required cash
payments from the Company to the Sellers in the amount of existing project net
cash flow during the term of the purchase money note. Similarly, the opportunity
to offset the Stock Warrant Purchase note owed the Company against the purchase
money note for the acquisition of the Impact/Coahuila partnership interests will
limit the effective total purchase price for the natural gas pipeline crossing
to an acceptable level.
FORWARD-LOOKING STATEMENTS:
We have included forward-looking statements in this report. For this
purpose, any statements contained in this report that are not statements of
historical fact may be deemed to be forward looking statements. Without limiting
the foregoing, words such as "may", "will", "expect", "believe", "anticipate",
"estimate", "plan" or "continue" or the negative or other variations thereof or
comparable terminology are intended to identify forward-looking statements.
These statements by their nature involve substantial risks and uncertainties,
and actual results may differ materially depending on a variety of factors.
Factors that might cause forward-looking statements to differ materially from
actual results include, among other things, overall economic and business
conditions, demand for the Company's products, competitive factors in the
industries in which we compete or intend to compete, natural gas availability
and cost and timing, impact and other uncertainties of our future acquisition
plans.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK:
The Company does not issue or invest in financial instruments or their
derivatives for trading or speculative purposes. The operations of the Company
are conducted primarily in the United States, and, are not subject to material
foreign currency exchange risk. Although the Company has outstanding debt and
related interest expense, market risk of interest rate exposure in the United
States is currently not material.
Item 3. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures.
Within the 90 days prior to the date of this Quarterly Report for the
period ended March 31, 2004, we carried out an evaluation, under the supervision
and with the participation of our management, including the Company's Chairman
and Chief Executive Officer and the Chief Financial Officer, of the
effectiveness of the design and operation of our disclosure controls and
procedures pursuant to Rule 13a-14 of the Securities Exchange Act of 1934 (the
"Exchange Act"), which disclosure controls and procedures are designed to insure
that information required to be disclosed by a company in the reports that it
files under the Exchange Act is recorded, processed, summarized and reported
within required time periods specified by the SEC's rules and forms. Based upon
that evaluation, the Chairman and the Chief Financial Officer concluded that our
disclosure controls and procedures are effective in timely alerting them to
material information relating to the Company required to be included in the
Company's period SEC filings.
(b) Changes in Internal Control.
Subsequent to the date of such evaluation as described in subparagraph
(a)above, there were no significant changes in our internal controls or other
factors that could significantly affect these controls, including any corrective
action with regard to significant deficiencies and material weaknesses.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
No material changes in previously reported legal proceedings.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
During the first quarter of 2004 the Company authorized, offered and
sold the following securities pursuant to exemptions from the registration
requirements of the Securities Act of 1933, as amended (the "Securities Act").
During January and February 2004, we authorized the issuance of
2,722,223 common shares two foreign investors for $4,083,335.
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.
We believe the shares issued above were issued in private transactions
pursuant to Section 4(2) of the Securities Act of 1933, as amended, (the
"Securities Act"). These shares are considered restricted securities and may not
be publicly resold unless registered for resale with appropriate governmental
agencies or unless exempt from any applicable registration requirements.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of the security holders, through the
solicitation of proxies or otherwise, during the first quarter of the fiscal
year covered by this report.
Item 5. Other Information
On January 28, 2004, Carl M. Hessel was appointed to our Board of
Directors to fill the vacancy created when Royis Ward resigned.
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
Exhibit No. Exhibit Name
31.1 Chief Executive Officer-Section 302 Certification
pursuant to Sarbane-Oxley Act.
31.2 Chief Financial Officer- Section 302 Certification
pursuant to Sarbane-Oxley Act.
32.1 Chief Executive Officer-Section 906 Certification
pursuant to Sarbane-Oxley Act.
32.2 Chief Financial Officer- Section 906 Certification
pursuant to Sarbane-Oxley Act.
(b) Reports on Form 8-K. During the first quarter of 2004 we filed one
Current Report on Form 8-K on February 11, 2004 reporting under Item 5, Other
Events.
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
TIDELANDS OIL & GAS CORP.
/s/ Michael Ward
Dated: May 14, 2004 -------------------------
By: Michael Ward
Title: President, CEO
/s/ James Smith
Dated: May 14, 2004 -------------------------
By: James Smith
Title: CFO
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