NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2007
(UNAUDITED)
NOTE
1
–
BASIS
OF PRESENTATION
The
accompanying unaudited condensed consolidated financial statements for the
six
month periods ended June 30, 2007, and 2006, have been prepared in conformity
with accounting principles generally accepted in the United States of America
for interim financial information and with the instructions to Form 10-Q
and
Regulation S-X. Please note that the prior year’s presentations for
the Condensed Consolidated Statement of Operations and the Condensed
Consolidated Statements of Cash Flows were changed to conform to current
year’s
presentation. The financial information as of December 31, 2006, is
derived from the registrant’s Form 10-K for the year ended December 31,
2006. 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, 2006, included in the registrant’s Form 10-K for the
year ended December 31, 2006.
Operating
results for the six-month period ended June 30, 2007, are not necessarily
indicative of the results that may be expected for the remainder of the fiscal
year ending December 31, 2007. The accompanying unaudited condensed
consolidated financial statements include the accounts of the registrant,
its
wholly-owned subsidiaries, Rio Bravo Energy, LLC, Sonora Pipeline, LLC, Sonterra
Energy Corporation, Arrecefe Management, LLC, Marea Associates, LP, Reef
Ventures, LP, Reef International, LLC, Reef Marketing, LLC, Terranova Energia
S.
de R. L. de C. V., Esperanza Energy, LLC, and Tidelands Exploration &
Production Corporation. All significant inter-company accounts and
transactions have been eliminated in consolidation.
TIDELANDS
OIL & GAS CORPORATION
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2007
(UNAUDITED)
NOTE
2
–
GOING
CONCERN
The
Company has sustained recurring losses and negative cash flows from
operations. Over 2006, the Company’s growth had been funded through
issuance of convertible debentures. As of June 30, 2007, the Company
had approximately $85,762 of unrestricted cash. However, the Company
has experienced and continues to experience negative cash flows from operations,
as well as an ongoing requirement for substantial additional capital
investment. The Company needs to raise substantial additional capital
to accomplish its business plan this year and over the next several
years. The Company is seeking to obtain such additional funding
through private equity sources, from financial partners for some of its projects
and the possible sale of certain operating assets along with a continued
reduction of operating expenses. There can be no assurance as to the
availability or terms upon which such financing and capital might be available
or that asset sales will be possible at suitable
pricing.
The
Company’s ability to continue as a going concern will depend on management’s
ability to successfully implement a business plan which will increase revenues,
control costs, and obtain additional forms of debt and/or equity financing
or
financial partners. These financial statements do not include any
adjustments that might be necessary if the Company is unable to continue
as a
going concern.
NOTE
3
–
IMPAIRMENT
CHARGE
The
Company incurred a non-cash impairment charge as of June 30, 2007, to reflect
the difference between the carrying value and the market value of the affected
asset which is its natural gas pipeline between Eagle Pass, Texas and
Mexico. The charge taken was $2,605,061 which reduced the gross value
on the Company’s books to $3,501,194 from $6,106,255 before taking accumulated
depreciation into account.
TIDELANDS
OIL & GAS CORPORATION
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2007
(UNAUDITED)
NOTE
4
–
PROPERTY,
PLANT AND EQUIPMENT
A
summary of property, plant and equipment at June 30, 2007 and December 31,
2006
is as follows:
|
|
|
|
|
|
|
|
Estimated
|
|
|
June
30,
|
|
|
December
31,
|
|
|
Economic
|
|
|
2007
|
|
|
2006
|
|
|
Life
|
Pre-Construction
Costs:
|
|
|
|
|
|
|
|
|
International
Crossings to Mexico
|
|
$
|
960,744
|
|
|
$
|
818,271
|
|
|
|
N/A
|
Mexican
Gas Storage Facility
|
|
|
|
|
|
|
|
|
|
|
|
and
Related Pipelines
|
|
|
2,679,894
|
|
|
|
2,359,451
|
|
|
|
N/A
|
Domestic
LNG System
|
|
|
2,572,852
|
|
|
|
1,567,642
|
|
|
|
N/A
|
Total
|
|
|
6,213,490
|
|
|
|
4,745,364
|
|
|
|
|
Office
Furniture, Equipment and
|
|
|
|
|
|
|
|
|
|
|
|
Leasehold
Improvements
|
|
|
182,798
|
|
|
|
185,174
|
|
|
5
Years
|
Pipeline
– Eagle Pass, TX to Piedras
|
|
|
|
|
|
|
|
|
|
|
|
Negras,
Mexico
|
|
|
3,501,194
|
|
|
|
6,106,255
|
|
|
20
Years
|
Tanks
& Lines – Propane Distribution
|
|
|
|
|
|
|
|
|
|
|
|
System
|
|
|
1,913,163
|
|
|
|
1,908,247
|
|
|
5
Years
|
Machinery
and Equipment
|
|
|
75,185
|
|
|
|
67,357
|
|
|
5
Years
|
Trucks,
Autos and Trailers
|
|
|
126,464
|
|
|
|
126,464
|
|
|
5
Years
|
Pipeline
– South TX Gas Production
|
|
|
490,000
|
|
|
|
490,000
|
|
|
15
Years
|
Well
Equipment
|
|
|
2,371
|
|
|
|
2,060
|
|
|
5
Years
|
Leaseholds
|
|
|
11,700
|
|
|
|
10,000
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
12,516,365
|
|
|
|
13,640,921
|
|
|
|
|
Less:
Accumulated Depreciation
|
|
|
1,521,100
|
|
|
|
1,276,562
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Property, Plant and Equipment
|
|
$
|
10,995,265
|
|
|
$
|
12,364,359
|
|
|
|
|
Depreciation
expense for the six months ended June 30, 2007 and for the year ended December
31, 2006 was $245,744 and $466,241 respectively.
NOTE
5
–
LONG-TERM
DEBT
A
summary of long-term debt at June 30, 2007 and December 31, 2006 is as
follows:
|
|
June
30,
|
|
|
December
31,
|
|
|
2007
|
|
|
2006
|
Note
Payable, Secured by Reef International
|
|
|
|
|
|
Pipeline,
Interest Bearing at 2% Over Prime
|
|
|
|
|
|
Rate,
Maturing May 25, 2008
|
|
$
|
4,928,999
|
|
|
$
|
4,785,003
|
|
|
|
|
|
|
|
|
Convertible
Debentures, Unsecured,
|
|
|
|
|
|
|
|
Including
Prepaid Interest, Maturing
|
|
|
|
|
|
|
|
January
20, 2008
|
|
|
2,374,291
|
|
|
|
4,374,291
|
|
|
|
7,303,290
|
|
|
|
9,159,294
|
|
|
|
|
|
|
|
|
Less:
Current Maturities
|
|
|
7,303,290
|
|
|
|
225,000
|
|
|
|
|
|
|
|
|
Total Long-Term
Debt
|
|
$
|
0
|
|
|
$
|
8,934,294
|
TIDELANDS
OIL & GAS CORPORATION
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2007
(UNAUDITED)
NOTE
6
–
COMMON
STOCK TRANSACTIONS
On
April 2, 2007, the Company issued 246,212 shares of its common stock valued
at
$54,167 to law firm for 2007 legal services related to securities law
matters.
On
April 4, 2007, the Company issued 125,000 shares of its restricted common
stock
valued at $25,000 for 2007 investor public relations
services.
On
April 10, 2007, the Company issued 1,190,476 shares of its common stock to
a
Director for $250,000 as a result of his exercise of stock options at $0.21
per
share.
On
April 16, 2007, the Company issued 53,441 shares of its common stock to a
Director/Officer valued at $8,551 as compensation for services and related
costs.
On
April 18, 2007, the Company issued 50,000 shares of its common stock to an
officer valued at $8,000 in accordance with his employment
contract.
On
May 9, 2007, the Company issued 103,478 shares of its common stock to a
Director/Officer valued at $10,348 as compensation for services and related
costs.
On
May 10, 2007, the Company issued 476,190 shares of its common stock to a
Director for $100,000 as a result of his exercise of stock options at $0.21
per
share.
On
May 22, 2007, the Company issued 641,667 shares of its common stock valued
at
$77,000 to a law firm for future services regarding ongoing
litigation.
On
May 30, 2007, the Company issued 2,692,308 shares of its common stock valued
at
$350,000 for future legal services connected with listing its stock on European
stock exchanges.
On
June 1, 2007, the Company issued 40,663 shares of its common stock to a
Director/Officer valued at $6,099 as compensation for services and related
costs.
On
June 6, 2007, the Company issued a total of 600,000 shares of its restricted
common stock valued at $90,000 as stock bonuses to two officers and an
employee.
TIDELANDS
OIL & GAS CORPORATION
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2007
(UNAUDITED)
NOTE
7
–
SUMMARY
OF RESTATED INTERIM REPORT
On
November 14, 2007, the Board of Directors of Tidelands Oil & Gas Corporation
(the “Company”), determined that the accounting treatment of certain options
issued to its directors (the “Options”) originally reported on its (i) Quarterly
Report of Form 10-Q for the three months ended March 31, 2007, and (ii)
Quarterly Report for the three and six months ended June 30, 2007 (the “Prior
Reports”), was incorrect and required revision. Therefore, the Board of
Directors has determined that the financial statements in the Company’s Prior
Reports should not be relied upon and should be
restated.
The
adjustments to the Prior Reports listed below correct the accounting treatment
of the Options to comply with the provisions of Financial Accounting Standards
Board Statement No. 123 Share Based Payment (FAS 123(R)). FAS 123(R) was
adopted by the Company on January 1, 2006; however, with respect to the Options,
the Company inadvertently failed to record the appropriate expense for such
Options in accordance with FAS 123(R).
The
Company uses the Black-Scholes option pricing model to compute the fair value
of
stock options, which requires the Company to make the following
assumptions:
§
|
The
risk-free interest rate is based on the short-term Treasury bond
at date
of grant.
|
§
|
The
dividend yield on the Company’s common stock is assumed to be zero since
the Company does not pay dividends and has no current plans to
do
so.
|
§
|
The
market price volatility of the Company’s common stock is based on daily
historical prices for the twelve months previous to the grant
date.
|
§
|
The
term of the grants is the current year since all grants are vested
at the
time of the grants; therefore, the entire fair value of stock-based
compensation was recorded in 2007.
|
The
Company has now recognized the fair value stock option compensation expense
as
follows:
Quarterly
Report of 10-Q for the Three Months Ended March 31, 2007
|
|
$
|
2,667,000
|
Quarterly
Report of 10-Q for the Three Months Ended June 30, 2007
|
|
|
971,000
|
Total
for the Six Months Ended June 30, 2007
|
|
$
|
3,638,000
|
TIDELANDS
OIL & GAS CORPORATION
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2007
(UNAUDITED)
NOTE
7
–
SUMMARY
OF RESTATED INTERIM REPORTS (CONTINUED)
The
transactions referred to above relate to non-cash charges and did not affect
the
Company’s revenues, cash flows from operations, liquidity, assets, liabilities
or total stockholders’ equity.
|
|
|
Three
Months Ended March 31,
2007
|
|
|
|
|
Previously
|
|
|
|
Restatement
|
|
|
Restated
|
|
|
|
|
Reported
|
|
|
|
Adjustment
|
|
|
Amount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
Balance Sheets:
|
|
|
|
|
|
|
|
|
|
|
Total
Assets
|
|
$
|
15,475,483
|
|
|
|
$
|
-
|
|
|
$
|
15,475,483
|
|
Total
Liabilities
|
|
|
11,531,967
|
|
|
|
|
-
|
|
|
|
11,531,967
|
|
Stockholders’
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock
|
|
|
98,690
|
|
|
|
|
-
|
|
|
|
98,690
|
|
Additional
Paid-in Capital
|
|
|
50,823,250
|
|
|
|
|
2,667,000
|
|
(1)
|
|
53,490,250
|
|
Subscriptions
Receivable
|
|
|
(110,000
|
)
|
|
|
|
-
|
|
|
|
(110,000
|
)
|
Accumulated
Deficit
|
|
|
(46,868,424
|
)
|
|
|
|
(2,667,000
|
)
|
(3)
|
|
(49,535,424
|
)
|
Total
Stockholders’ Equity
|
|
$
|
3,943,516
|
|
|
|
$
|
-
|
|
|
$
|
3,943,516
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
Statement of Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
1,103,971
|
|
|
|
$
|
-
|
|
|
$
|
1,103,971
|
|
Expenses
|
|
|
3,555,952
|
|
|
|
|
2,667,000
|
|
(2)
|
|
6,222,952
|
|
Net
(Loss) from Operations
|
|
|
(2,451,981
|
)
|
|
|
|
(2,667,000
|
)
|
|
|
(5,118,981
|
)
|
Other
Income
|
|
|
625
|
|
|
|
|
-
|
|
|
|
625
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(Loss)
|
|
$
|
(2,451,356
|
)
|
|
|
$
|
(2,667,000
|
)
|
|
$
|
(5,118,356
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(Loss) per Common Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and
Diluted
|
|
$
|
(0.03
|
)
|
|
|
|
|
|
|
$
|
(0.06
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
Average Number of Common Shares Outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and
Diluted
|
|
|
92,573,416
|
|
|
|
|
|
|
|
|
92,573,416
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Adjust
additional paid-in capital to record fair value of stock options
issued.
|
(2)
|
Adjust
expenses to reflect fair value of stock-based
compensation.
|
(3)
|
Adjust
accumulated deficit to reflect additional losses as a result
of
stock-based compensation expense.
|
TIDELANDS
OIL & GAS CORPORATION
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2007
(UNAUDITED)
NOTE
7
–
SUMMARY
OF RESTATED INTERIM REPORTS (CONTINUED)
SUMMARY
OF RESTATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six
Months Ended June 30,
2007
|
|
|
|
|
Previously
|
|
|
|
Restatement
|
|
|
Restated
|
|
|
|
|
Reported
|
|
|
|
Adjustment
|
|
|
Amount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
Balance Sheets:
|
|
|
|
|
|
|
|
|
|
|
Total
Assets
|
|
$
|
13,171,782
|
|
|
|
$
|
-
|
|
|
$
|
13,171,782
|
|
Total
Liabilities
|
|
|
11,944,188
|
|
|
|
|
-
|
|
|
|
11,944,188
|
|
Stockholders’
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock
|
|
|
|
104,909
|
|
|
|
|
-
|
|
|
|
104,909
|
|
Additional
Paid-in Capital
|
|
|
|
51,796,193
|
|
|
|
|
3,638,000
|
|
(1)
|
|
55,434,193
|
|
Subscriptions
Receivable
|
|
|
|
(110,000
|
)
|
|
|
|
-
|
|
|
|
(110,000
|
)
|
Accumulated
Deficit
|
|
|
|
(50,563,508
|
)
|
|
|
|
(3,638,000
|
)
|
(3)
|
|
(54,201,508
|
)
|
Total
Stockholders’ Equity
|
|
$
|
1,227,594
|
|
|
|
$
|
-
|
|
|
$
|
1,227,594
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
Statement of Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
1,587,970
|
|
|
|
$
|
-
|
|
|
$
|
1,587,970
|
|
Expenses
|
|
|
7,735,434
|
|
|
|
|
3,638,000
|
|
(2)
|
|
11,373,434
|
|
Net
(Loss) from Operations
|
|
|
(6,147,464
|
)
|
|
|
|
(3,638,000
|
)
|
|
|
(9,785,464
|
)
|
Other
Income
|
|
|
1,024
|
|
|
|
|
-
|
|
|
|
1,024
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(Loss)
|
|
$
|
(6,146,440
|
)
|
|
|
$
|
(3,638,000
|
)
|
|
$
|
(9,784,440
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(Loss) per Common Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and
Diluted
|
|
$
|
(0.06
|
)
|
|
|
|
|
|
|
$
|
(0.10
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
Average Number of Common Shares Outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and
Diluted
|
|
|
95,683,133
|
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95,683,133
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(1)
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Adjust
additional paid-in capital to record fair value of stock options
issued.
|
(2)
|
Adjust
expenses to reflect fair value of stock-based
compensation.
|
(3)
|
Adjust
accumulated deficit to reflect additional losses as a result of
stock-based compensation expense.
|
TIDELANDS
OIL & GAS CORPORATION
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2007
(UNAUDITED)
NOTE
8
–
RELATED
PARTY TRANSACTION
During
the quarter, the Company issued 197,582 shares of common stock valued at
$24,998
to one outside Director for Corporate Secretary services and related
costs.
NOTE
9
–
LITIGATION
Matter
No. 1:
On
January 6, 2003, we were served as a third party defendant in a lawsuit titled
Northern Natural Gas Company vs. Betty Lou Sheerin vs. Tidelands Oil & Gas
Corporation, ZG Gathering, Ltd. and Ken Lay, in the 150th Judicial District
Court, Bexar County, Texas, Cause Number 2002-C1-16421. The lawsuit was
initiated by Northern Natural Gas (“Northern”) when it sued Betty Lou Sheerin
(“Sheerin”) for her failure to make payments on a note she executed payable to
Northern in the original principal amount of $1,950,000. Northern's suit
was
filed on November 13, 2002. Sheerin answered Northern's lawsuit on January
6,
2003. Sheerin's answer generally denied Northern's claims and raised the
affirmative defenses of fraudulent inducement by Northern, estoppel, waiver
and
the further claim that the note does not comport with the legal requirements
of
a negotiable instrument. Sheerin seeks a judicial ruling that Northern be
denied
any recovery on the note. Sheerin's answer included a counterclaim against
Northern, ZG Gathering, and Ken Lay generally alleging, among other things,
that
Northern, ZG Gathering, Ltd. and Ken Lay, fraudulently induced her execution
of
the note. Northern has filed a general denial of Sheerin's counterclaims.
Sheerin's answer included a third party cross claim against Tidelands Oil
and
Gas Corporation (“Tidelands”). She alleges that Tidelands entered into an
agreement to purchase the Zavala Gathering System from ZG Gathering Ltd.
and
that, as a part of the agreement, Tidelands agreed to satisfy all of the
obligations due and owing to Northern, thereby relieving Sheerin of all
obligations she had to Northern on the $1,950,000 promissory note in
question.
TIDELANDS
OIL & GAS CORPORATION
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2007
(UNAUDITED)
NOTE
9
–
LITIGATION
(CONTINUED)
Matter
No. 1: (Continued)
In
September 2002, as a pre-closing deposit to the
purchase of the Zavala Gathering System, the Company executed a $300,000
promissory note to Betty L. Sheerin, a partner of ZG Gathering, Ltd. In
addition, the Company issued 1,000,000 shares of its common stock to various
partners of ZG Gathering, Ltd. On December 3, 2003, Sheerin filed a separate
lawsuit against Tidelands in the 150th District Court of Bexar County, Texas
on
this promissory note seeking a judgment against Tidelands for the principle
amount of the note, plus interest. On December 29th,
2003, Tidelands answered this lawsuit
denying
liability on the note. On April 1, 2004, Tidelands filed a plea in abatement
asking the court to dismiss or abate Sheerin's lawsuit on the $300,000
promissory note as it was related to and its outcome was dependent on the
outcome of the Sheerin third party cross action against Tidelands in Cause
Number 2002-C1-16421. The Company believes that the promissory note and shares
of common stock should be cancelled based upon the outcome of the litigation
described above. Accordingly, our financial statements reflect this
belief.
On
September 15, 2004 and again on October 15, 2004 respectively, Sheerin amended
her pleadings to include a third and fourth amended third party cross action
against Tidelands adding a claim for the $300,000 promissory note. 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, unspecified amounts of actual damages, statutory damages,
unspecified amounts of exemplary damages, attorneys fees, costs of suit,
and
prejudgment and post judgment interest.
TIDELANDS
OIL & GAS CORPORATION
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2007
(UNAUDITED)
NOTE
9
–
LITIGATION
(CONTINUED)
Matter
No. 1: (Continued)
On
November 28, 2005, ZG Gathering, Ltd. and ZG Pipeline Management ("ZG") filed
its answer to Northern's Fifth Amended Petition, its counter-claim against
Northern, and its answer and cross claim against Tidelands. ZG contends that
the
promissory notes given by ZG and Sheerin to Northern were procured by Northern's
fraudulent misrepresentations and it claims unspecified amounts of damages
against Northern. ZG's cross action against Tidelands claims Tidelands entered
into an agreement to purchase the Zavala Gathering System from ZG and that,
as
part of that agreement, Tidelands agreed to satisfy the $3,700,914 Northern
indebtedness of ZG, and to defend, indemnify, and hold ZG and Sheerin harmless
from such indebtedness, to pay off a Sheerin loan of $300,000, and to issue
1
million shares of Tidelands’ stock, of which 500,000 was to be free trading
shares. ZG claims that Tidelands breached this agreement by failing to satisfy
the Northern indebtedness, failing to defend and indemnify it from such debt,
failing to pay off the $300,000 note, failing to issue the free trading shares
in Tidelands, and by placing a stop transfer order on the restricted stock
that
was issued by Tidelands. ZG seeks specific performance of the agreement,
recovery of an unspecified amount of damages, and its attorney's
fees.
On
March 16, 2006, the Court denied Tidelands’ motion for summary judgment against
Sheerin on Tidelands’ affirmative defense of mutual mistake. On July
19, 2006, the Court denied ZG’s motion for summary judgment to strike Tidelands’
affirmative defense of mutual mistake.
The
trial date has been extended to January 9, 2008, by mutual agreement of the
litigants unless a settlement is reached before that date. The
parties are continuing with settlement negotiations and the Company is hopeful
that an agreement will be concluded prior to the end of the
year. Based on negotiations, the Company has reserved $2,250,000 as
an estimated litigation settlement and that amount has been included in this
report.
TIDELANDS
OIL & GAS CORPORATION
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2007
(UNAUDITED)
NOTE
9
–
LITIGATION
(CONTINUED)
Matter
No. 2:
Cause
No. GN 500948, Goodson Builders, Ltd., Plaintiff, vs. Jim Blackwell, BNC
Engineering, Et. Al, Defendants, was filed April 7, 2005, in the 345th District
Court of Travis County, Texas. This case involves a claim that
Defendant Toll Brothers Property, LP (“Toll Brothers”) sold Plaintiff Goodson
Builder, Ltd. (“Plaintiff” or “Goodson”) property without disclosing a propane
easement. Plaintiff sued Sonterra Energy Corp. (“Sonterra”) for
trespassing through the use of the easement. Goodson’s primary claim
is against the seller for fraud and non-disclosure. Toll Brothers has
responded with a claim for sanctions because the claim is
frivolous. Toll Brothers offers a witness who is Plaintiff’s former
employee and took pictures of the propane tank prior to the Plaintiff’s
purchase. Goodson seeks damages in the hundreds of thousands of
dollars. Insurance would not cover these
damages.
The
case is pending summary judgment. The Company is contesting the case
vigorously.
Matter
No. 3:
Cause
No. GM 501625, Senna Hills, Ltd., Plaintiff, vs. Sonterra Energy Corp.,
Defendant, was filed in the 53rd Judicial District of Travis County, Texas
and
Cause No. GN 501626, HBH Development Co., LLC, Plaintiff, vs. Sonterra Energy
Corp., Defendant, was filed in the 98
th
Judicial District Court of Travis County, Texas. The above matters
were each filed against Sonterra in May 2005 and involve the same claims
arising
from the same propane service agreement. In each case, the plaintiff
initially brought claims against Sonterra arising from Sonterra’s failure, as an
assignee of the agreement, to pay easement use fees to the
plaintiff. Sonterra obtained summary judgment as to the plaintiffs’
respective breach of contract and failure of assignment claims arising from
the
failure to pay easement use fees. The cases were not, however, fully
dismissed because the plaintiffs added new causes of action for failure to
pay
easement use fees, claims for unpaid developer bonus, reformation of the
agreements to require payment of easement use fees and alleged failure of
assignment. These separate lawsuits have since been consolidated into
one suit for purposes of pretrial and trial. The trial date will
likely be reset in September 2007; however, the Company expects to file a
motion
for summary judgment prior to September 1
st
.
TIDELANDS
OIL & GAS CORPORATION
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2007
(UNAUDITED)
NOTE
9
–
LITIGATION
(CONTINUED)
Matter
No. 4:
Cause
No. 2007-CI-07451, Michael R. Ward vs. Tidelands Oil & Gas Corporation, was
filed on May 17, 2007 in the 224
th
District Court of Bexar County, Texas. This case involves two claims by the
Plaintiff, Michael R. Ward, the former President and CEO of Tidelands Oil
&
Gas Corporation against the Company. The first claim is for a breach of the
Letter Agreement dated December 8, 2006 alleging a failure to pay Ward’s salary
for the months of March through June 2007 pursuant to the terms of said Letter
Agreement. The second claim involves an allegation by Ward that the Company
prevented Ward from selling 1,650,000 shares of Company stock during the
period
of February 20, 2007 through April 4, 2007 and that Ward suffered economic
damages as a result of a decline in share price during the relevant time
periods. The Company filed a general denial on June 27, 2007. On July 18,
2007,
Plaintiff Ward filed a Motion for Partial Summary Judgment with respect to
the
first claim for breach of the Letter Agreement, a Motion setting the case
for
trial on the second claim for September 28, 2007, and discovery notices.
On
August 7, 2007, the Company filed an abatement request requesting Court ordered
mediation pursuant to the Letter Agreement of December 8, 2006. The Company
expects that its request for mediation will be honored by the Court and that
the
case will be set for mediation in September 2007.
Matter
No. 5:
Cause
No. 2007-CI 11661, Bentley Energy Corp. vs. Tidelands Exploration &
Production, Inc.
(Please
note
that the suit was filed with incorrect corporate name. It should be
Tidelands Exploration & Production Corp.)
was filed on August 7, 2007
in the 407
th
District Court of Bexar County, Texas. This case involves a claim for breach
of
the Joint Operating Agreement and Participation Agreement between Tidelands
Exploration & Production Corp. (“TEP”) and Bentley Energy Corp. (“BENTLEY”),
as Assignee of Regency Energy, Inc. (“REGENCY”). BENTLEY is majority owned by
Michael R. Ward, the former President and CEO of Tidelands Oil & Gas
Corporation, which is the parent company for TEP. REGENCY is majority owned
by
Royis Ward, a former director of Tidelands Oil & Gas Corporation and the
father of Michael R. Ward. Pursuant to the terms of the Joint Operating
Agreement, TEP, as non-operator, granted REGENCY a lien or security interest
in
all the oil and gas leases and pipelines covered by the Joint Operating
Agreement. BENTLEY seeks foreclosure of these interests due to TEP’s failure to
pay joint interest billings under the Joint Operating Agreement. TEP has
not yet
filed an answer to this lawsuit, but expects to reply in the near future.
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 the claims enumerated in Matters No. 2, 3, 4 and 5 above
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 respect to these
legal
matters.