UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-KSB/A
Amendment No. 1
ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the year ended December 31, 2005
Commission File Number 0-29613
TIDELANDS OIL & GAS CORPORATION
(Name of small business issuer in its charter)
Nevada 66-0549380
(State or other jurisdiction of (I. R. S. Employer
incorporation or organization) Identification No.)
1862 West Bitters Rd., San Antonio, TX 78248
(Address of principal executive office)
(210) 764-8642
(Issuer's Telephone Number)
Securities Registered Pursuant of Section 12(b) of the Act: None
Securities Registered Pursuant of Section 12(g) of the Act:
Common Stock, $0.001 Par Value
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes [X] No [ ]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B in this form, and no disclosure will be contained, to the best of
registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment of
this Form 10-KSB. [ ]
Indicate by check mark whether the registrant is a shell company (as defined by
Rule 12b-2of the Exchange Act. Yes No X
--- ---
The issuer had operating revenues of $1,725,756 for the year ended December 31,
2005.
This report contains a total of 31 pages. The Exhibit Index appears on page 33.
As of June 15, 2006, there were 80,525,815 shares of the issuer's common stock
outstanding.
The aggregate market value of the issuer's voting stock held by non-affiliates
was $58,827,842 based on the low bid price on that date as reported by the NASD
OTC Electronic Bulletin Board April 14, 2006. The sum excludes the shares held
by officers, directors, and stockholders whose ownership exceeded 10% of the
outstanding shares at December 31, 2005, in that such persons may be deemed
affiliates of the Company. This determination of affiliate status is not
necessarily a conclusive determination for other purposes.
EXPLANATORY NOTE:
We have amended our Annual Report on Form 10-KSB for the year ended December 31,
2005, filed on April 17, 2006. This amendment replaces the Company's "Report of
Independent Registered Public Accounting Firm" (the Audit Report) contained in
the original filing with a revised Audit Report. The revised Audit Report
includes disclosure in the Notes to the Financial Statements regarding the
Company's revenue recognition policy as well as separately disclosing impairment
charges associated with long-lived assets and goodwill. Additionally, we have
revised Item 12 titled, "Certain Relationships and Related Transactions"
correcting stock issuance dates.
TIDELANDS OIL & GAS CORPORATION
FORM 10-KSB/A
December 31, 2005
Page
PART I
ITEM 7. Financial Statements..............................................
PART III
ITEM 12. Certain Relationships and Related Transactions...................
ITEM 13. Exhibits.................................
SIGNATURES.................................................................
EXHIBIT INDEX..............................................................
ITEM 7. FINANCIAL STATEMENTS
TIDELANDS OIL & GAS CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2005 AND 2004
TABLE OF CONTENTS
INDEPENDENT AUDITOR'S REPORT.............................................. 3
CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Balance Sheets.......................................... 4
Statements of Consolidated Stockholders' Equity...................... 5
Statements of Consolidated Operations ............................... 6
Statements of Consolidated Cash Flows ............................... 7-8
Notes to Consolidated Financial Statements........................... 9-31
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 and 2004. 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 and 2004 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
-3-
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
-4-
TIDELANDS OIL AND GAS CORPORATION
STATEMENTS OF CONSOLIDATED STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2005 AND 2004 (RESTATED)
Stock
Additional Total
Common Stock Paid-In Subscription Accumulated Stockholders'
Shares Amount Capital Receivable (Deficit) Equity
------------ ------------ ------------ ------------ ------------ ------------
Balance
December 1, 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
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
-5-
TIDELANDS OIL & GAS CORPORATION
STATEMENTS OF CONSOLIDATED OPERATIONS
YEARS ENDED
December 31, December 31,
2005 2004
------------ ------------
(Restated) (Restated)
Revenues:
Gas Sales and Pipeline Fees $ 1,725,756 $ 1,800,863
Construction Service 135,567 82,975
Other 0 0
------------ ------------
Total Revenues 1,861,323 1,883,838
------------ ------------
Expenses:
Cost of Sales 1,003,386 1,508,891
Operating Expenses 202,766 99,665
Depreciation 485,481 244,889
Interest 611,363 300,566
Beneficial Conversion Feature Interest (756,329) 3,092,105
Sales, General and Administrative 8,033,249 11,022,019
Impairment Losses - Long-Lived Assets 392,000 0
Impairment Losses - Goodwill 5,200,000 15,358,000
------------ ------------
Total Expenses 15,171,916 31,626,135
------------ ------------
(Loss) from Operations (13,310,593) (29,742,297)
Gain on Reduction of Derivative Liability 5,168,000 15,390,000
Loss on Equipment Sale (3,167) 0
Other Income 61,956 0
Interest and Dividend Income 123,075 50,260
Minority Interest -- --
Litigation Settlement 297,825 0
------------ ------------
Net (Loss) $ (7,662,904) $(14,302,037)
============ ============
Net (Loss) Per Common Share:
Basic and Diluted $ (0.11) $ (0.27)
----------------- ============ ============
Weighted Average Number of Common
Shares Outstanding -
Basic and Diluted 70,049,587 53,214,230
----------------- ============ ============
See Accompanying Notes to Consolidated Financial Statements
-6-
TIDELANDS OIL & GAS CORPORATION
STATEMENTS OF CONSOLIDATED CASH FLOWS
YEARS ENDED
December 31, December 31,
2005 2004
------------ ------------
(Restated)
Cash Flows Provided (Required) By
Operating Activities:
Net (Loss) $ (7,662,904) $(14,302,037)
Adjustments to Reconcile Net (Loss)
To Net Cash Provided (Required) By
Operating Activities:
Depreciation 485,481 244,889
Goodwill 0 (5,200,000)
Impairment Losses 5,592,000 15,358,000
Change in Derivative Instrument (5,168,000) (10,222,000)
Loss on Disposal of Equipment 3,167 0
Issuance of Common Stock:
For Services Provided 4,022,525 9,327,816
Beneficial Conversion Feature - Interest (756,329) 3,092,105
Return of Issued Stock
Litigation Settlement (297,825) 0
Changes In:
Accounts Receivable 47,929 (516,159)
Inventory (59,681) (82,523)
Prepaid Expenses 303,550 (465,279)
Deferred Charges 116,250 (116,250)
Deposits (61,699) (25,308)
Accounts Payable and Accrued Expenses 651,330 (201,370)
------------ ------------
Net Cash (Required)
By Operating Activities (2,784,206) (3,108,116)
------------ ------------
Cash Flows Provided (Required)
By Investing Activities:
(Increase) In Investments 0 (901,871)
Acquisitions of Property, Plant & Equipment (1,837,222) (8,727,010)
Disposals of Equipment 800 0
------------ ------------
Net Cash (Required)
By Investing Activities (1,836,422) (9,628,881)
------------ ------------
See Accompanying Notes to Consolidated Financial Statements
-7-
TIDELANDS OIL & GAS CORPORATION
STATEMENTS OF CONSOLIDATED CASH FLOWS
(CONTINUED)
YEARS ENDED
December 31, December 31,
2005 2004
------------ ------------
(Restated)
Cash Flows Provided (Required)
By Financing Activities:
Proceeds from Issuance of Common Stock 0 6,088,317
Proceeds from Long-Term Loans 277,385 6,731,883
Proceeds from Issuance Of
Convertible Debentures 0 5,000,000
Repayment of Short-Term Loans 0 (250,000)
Reduction of Stock Subscription Receivable 0 18,000
Loan to Related Party (1,900) (286,606)
------------ ------------
Net Cash Provided By
Financing Activities 275,485 17,301,594
------------ ------------
Net Increase (Decrease) in Cash (4,345,143) 4,564,597
Cash at Beginning of Period 5,459,054 894,457
------------ ------------
Cash at End of Period $ 1,113,911 $ 5,459,054
============ ============
Supplemental Disclosures of
Cash Flow Information:
Cash Payments for Interest $ 356,504 $ 38,320
============ ============
Cash Payments For Income Taxes $ 0 $ 0
============ ============
Non-Cash Financing Activities:
Return of Issued Stock For
Beneficial Conversion Feature - Interest $ (756,329) $ 3,092,105
Litigation Settlements (297,825) 0
Increase of Stock Subscription Receivable -- 550,000
Issuance of Common Stock: 0 0
Operating Activities 4,022,525 9,327,816
Repayment of Notes 2,512,500 75,000
Conversion of Debentures 5,000,000 0
Payment of Accounts Payable 0 38,311
Acquisition Cost 0 126,437
------------ ------------
Total Non-Cash Financing Activities $ 10,480,871 $ 13,209,669
============ ============
See Accompanying Notes to Consolidated Financial Statements
-8-
TIDELANDS OIL & GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
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.
-9-
TIDELANDS OIL & GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
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.
-10-
TIDELANDS OIL & GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
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.
-11-
TIDELANDS OIL & GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
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.
-12-
TIDELANDS OIL & GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
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.
-13-
TIDELANDS OIL & GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
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.
-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 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
============ ============
-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
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
============ ============ ============ ============ ============ ============
-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
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
============ ============ ============
-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)
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
============ ============ ============ ============ ============ ============
-18-
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.
-19-
TIDELANDS OIL & GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
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 and December
31, 2004 was $485,581 and $244,889 respectively.
NOTE 5 - RESTRICTED CASH
------ ----------------
Restricted cash consists of certificates of deposit to secure letters
of credit issued to the Railroad Commission of Texas.
-20-
TIDELANDS OIL & GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
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.
-21-
TIDELANDS OIL & GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
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.
-22-
TIDELANDS OIL & GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
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.
-23-
TIDELANDS OIL & GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
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.
-24-
TIDELANDS OIL & GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
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.
-25-
TIDELANDS OIL & GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
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 - 2009 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
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TIDELANDS OIL & GAS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
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
alFleging, 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 a mediation
on March 11, 2003. The case was not settled at that time. Tideland's
answered the Sheerin suit on March 26, 2003. Tideland's answer denies
all of Sheerin's allegations.
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 ZG
pipelines, the Company executed a $300,000 promissory note to Betty L.
Sheerin, a partner of ZG Gathering, Ltd. In addition, the Company
issued 1,000,000 shares of its common stock to various partners of ZG
Gathering, Ltd. 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.
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TIDELANDS OIL & GAS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
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
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
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TIDELANDS OIL & GAS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
NOTE 14 - LITIGATION (CONTINUED)
------- ----------------------
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.
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TIDELANDS OIL & GAS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
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.
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TIDELANDS OIL & GAS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
NOTE 16 - 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 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.
-31-
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
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, 2006. 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 October 13, 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.
-32-
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 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 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.
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.
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.
ITEM 13. EXHIBITS
Exhibit Description Location of Exhibit
------- ----------- -------------------
31.1 Chief Executive Officer-Section 302 Certification pursuant to Sarbanes- Oxley Act. "
31.2 Chief Financial Officer- Section 302 Certification pursuant to Sarbanes-Oxley Act. "
32.1 Chief Executive Officer-Section 906 Certification pursuant to Sarbanes-Oxley Act. "
32.2 Chief Financial Officer- Section 906 Certification pursuant to Sarbanes-Oxley Act. "
-33-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) to the Securities Exchange
Act of 1934, the Company has duly caused this Form 10-KSB Report for the period
ending December 31, 2005 to be signed on its behalf by the undersigned,
thereunto duly authorized on this 16th day of June, 2006.
TIDELANDS OIL & GAS CORPORATION
BY: /s/ Michael Ward
------------------------------------------
Michael Ward, President, CEO
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Company and in
the capacities and on the dates indicated.
Date: June 16, 2006 /s/ Michael Ward
------------------------------------------
Michael Ward, President, Director
/s/ James B. Smith
------------------------------------------
James B. Smith, Senior Vice President, CFO
/s/ Ahmed Karim
------------------------------------------
Ahmed Karim
Vice President, Director
-34-