UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q/A

Amendment Number 1

(Mark One)

[X]	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the Quarterly Period Ended March 31, 2014

 

OR

 

[  ]	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the Transition Period from to

 

Commission file number 001-14665

 

	TransCoastal Corporation
	(Exact name of registrant as specified in its charter)
	Delaware	75-2649230
	(State or other jurisdiction of	(I.R.S. Employer
	incorporation or organization)	Identification No.)
	17304 Preston Rd, Suite 700
	Dallas, Texas	75252
	(Address of principal executive offices)	(Zip Code)

 

972-818-0720

(Registrant's telephone number, including area code)

 

 

(Former name, former address and former fiscal year, if changed since last report)

 

 

Indicate by check mark whether the registrant: (1) has 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 ☐

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [ ] No [ ]

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company (as defined in Rule 12b-2 of the Securities Exchange Act of 1934).

Large accelerated filer [_]

Accelerated filer [_]

Non-accelerated filer [_]

Smaller Reporting Company [X]

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No X

 

State the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: Common Stock, $.001 par value, 22,723,148 shares outstanding as of May 12 2014.

 

 

TRANSCOASTAL CORPORATION AND SUBSIDIARY

TABLE OF CONTENTS

 

PART I. FINANCIAL INFORMATION
	Item 1.	Financial Statements
		Condensed Consolidated Balance Sheets as of March 31, 2014 (Unaudited) and December 31, 2013	3
		Condensed Consolidated Statements of Operations (Unaudited) for the Three Months Ended March 31, 2014 and 2013	4
		Condensed Consolidated Statements of Changes in Stockholders' Equity for the Three Months Ended March 31, 2014 (Unaudited)	5
		Condensed Consolidated Statements of Cash Flows (Unaudited) for the Three Months Ended March 31, 2014 and 2013	6
		Notes to Condensed Consolidated Financial Statements	7
	Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	14
	Item 3.	Quantitative and qualitative disclosures about market risk	16
	Item 4.	Controls and procedures	16
PART II. OTHER INFORMATION			17
	Item 1.	Legal proceedings	17
	Item 1A.	Risk factors	17
	Item 2	Unregistered sales of equity securities and use of proceeds	24
	Item 3.	Defaults upon senior securities	24
	Item 4.	(Removed and reserved)	24
	Item 5.	Other information	24
	Item 6.	Exhibits	25
SIGNATURES			26

 

 

PART I - FINANCIAL INFORMATION

 

ITEM 1: FINANCIAL STATEMENTS

 

TransCoastal Corporation and Subsidiary

 Condensed Consolidated Balance Sheets

(in thousands, except share and per share information)

 

		March 31, 2014				December 31, 2013
ASSETS
Current assets
Cash and cash equivalents		$	194			$	432
Accounts receivable			382				436
Other current assets			20				20
Total current assets			596				888
Oil and natural gas properties and other property and equipment
Oil and natural gas properties, full cost method, net of accumulated depletion			23,596				23,600
Other property and equipment, net of accumulated depreciation			436				470
Total oil and natural gas properties and other equipment, net			24,032				24,070
Other assets
Goodwill			485				485
Other non-current assets			385				387
Total other assets			870				872
Total assets		$	25,498			$	25,830
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued liabilities		$	1,453			$	1,620
Current asset retirement obligations			113				107
Current derivative liabilities			167				125
Current maturities of notes payable			16,838				17,512
Total current liabilities			18,571				19,364
Long-term liabilities
Notes payable			52				56
Stock to be issued			2,091				2,496
Asset retirement obligations			854				852
Derivative liabilities			14				18
Total long-term liabilities			3,011				3,422
Commitments and contingencies
Shareholders' equity
Preferred stock, $.001 par value; 25,000,000 shares authorized:
Series A, 0 preferred shares issued and outstanding
Series F, 0 preferred shares issued and outstanding
Series G, 1,247,250 and 687,250, respectively, preferred shares issued and outstanding			1				1
Common stock, $.001 par value; 250,000,000 shares authorized; 22,723,148 and 22,453,773, respectively, shares issued and outstanding			23				23
Additional paid-in-capital			46,570				45,592
Accumulated deficit			(42,678	)			(42,572	)
Total shareholders' equity			3,916				3,044
Total liabilities and shareholders' equity		$	25,498			$	25,830

  

See accompanying notes to the condensed consolidated financial statements.

  

 

TransCoastal Corporation and Subsidiary

Condensed Consolidated Statements of Operations

(in thousands, except share and per share information)

 

Quarter ended March 31,		2014				2013
Revenues
Oil, natural gas, and related product sales		$	1,109			$	786
Derivative income (loss)			(93	)			11
Other revenue			15				55
Total revenues			1,031				852
Expenses
Lease operating			247				287
Depreciation, depletion and amortization			162				176
Accretion of discount on asset retirement obligations			8				11
General and administrative			523				619
Total expenses			940				1,093
Operating income (loss)			91				(241	)
Other income (expense)
Interest expense			(197	)			(141	)
Other income							15
Total other expense			(197	)			(126	)
Net loss		$	(106	)		$	(367	)
Basic and diluted earnings per share:
Net loss per basic and diluted common share		$	(0.00	)		$	(0.02	)
Weighted average basic and diluted common shares outstanding			22,723,148				22,634,091

 

See accompanying notes to the condensed consolidated financial statements.

 

 

TransCoastal Corporation and Subsidiary

Condensed Consolidated Statements of Changes in Shareholders' Equity

(in thousands, except share and per share data) 

 

		Common Stock								Series A Preferred Stock								Series F Preferred Stock								Series G Preferred Stock								Additional Paid-in Capital
		Shares				Amount				Shares				Amount				Shares				Amount				Shares				Amount								Accumulated Deficit				Total
Balances, December 31, 2013			22,453,773			$	23				-			$	-				-			$	-				687,250			$	1			$	45,592			$	(42,572	)		$	3,044
Issuance of common stock			5,000																																8								8
Issuance of common stock with warrants			251,875																																397								397
Issuance of Series G preferred stock including beneficial conversion feature																											560,000								1,195								1,195
Constructive dividends on Series G preferred stock																																			(635	)							(635	)
Stock based compensation			12,500																																13								13
Net loss																																							(106	)			(106	)
Balances, March 31, 2014			22,723,148			$	23				-			$	-				-			$	-				1,247,250			$	1			$	46,570			$	(42,678	)		$	3,916

  

See accompanying notes to the condensed consolidated financial statements.

 

 

TransCoastal Corporation and Subsidiary

Condensed Consolidated Statements of Operations

(in thousands, except share and per share information)

 

Quarter ended March 31,		2014				2013
Cash flows from operating activities
Net loss		$	(106	)		$	(367	)
Adjustments to reconcile net loss to net cash and cash equivalents provided by (used in) operating activities:
Depreciation, depletion and amortization			162				176
Stock based compensation			13
Accretion of discount on asset retirement obligations			8				11
Unrealized loss on derivative assets and liabilities			38				1
Increase (decrease) in cash and cash equivalents attributable to changes in operating assets and liabilities
Accounts receivable			54				(145	)
Other current assets							(17	)
Other non-current assets			2				5
Accounts payable and accrued liabilities			(167	)			(148	)
Net cash and cash equivalents provided by (used in) operating activities			4				(484	)
Cash flows used in investing activity
Development of oil and natural gas properties			(124	)			(711	)
Cash flows from financing activities
Borrowings under notes payable							1,250
Repayments of notes payable			(678	)			(150	)
Issuance of preferred stock, net of constructive dividend			560				188
Net cash and cash equivalents provided by (used in) financing activities			(118	)			1,288
Net increase (decrease) in cash and cash equivalents			(238	)			93
Cash and cash equivalents, beginning of period			432				133
Cash and cash equivalents, end of period		$	194			$	226
Supplemental disclosure of cash flow information
Cash paid for interest		$	197			$	141
Supplemental disclosure of non-cash investing and financing transactions
Issuance of common stock with warrants in settlement of liability		$	397			$
Issurance of common stock in settlement of liability		$	8			$
Forgiveness of notes payable, related party		$				$	125

 

See accompanying notes to the condensed consolidated financial statements.

 

 

TransCoastal Corporation and Subsidiary

Notes to Condensed Consolidated Financial Statements

 

1. Restatement of previously issued financial statements

 

Prior to June 2014, the Company received communication from the majority participant of its lending group that the financial covenant failures at March 31, 2014 and December 31, 2013 were going to be waived by its lending group. However, in June 2014, the Company was advised that certain non-majority participants in the Company's note payable did not waive their right to call the Company's note payable due to the financial covenant failures as of March 31, 2014 and December 31, 2013. Accordingly, the note payable balance has been reclassified as a current liability as of March 31, 2014 and December 31, 2013. The reclassification is a non-cash adjustment and will have no impact on the Company’s cash flows. On June 9, 2014 the Company completed its assessment of the impact of the reclassification of the current maturities of long-term debt as of March 31, 2014 and December 31, 2013 and believes the effects of the restatement are as summarized in the following tables:

 

Consolidated Balance Sheet as of December 31, 2013

 

		Previously Reported				Adjustment				As Restated
Current Maturities of Notes Payable		$	387			$	17,125			$	17,512
Total Current Liabilities		$	2,239			$	17,125			$	19,364
Notes Payable		$	17,181			$	(17,125	)		$	56
Total Long-Term Liabilities		$	20,547			$	(17,125	)		$	3,422

 

Consolidated Balance Sheet as of March 31, 2014

 

		Previously Reported				Adjustment				As Restated
Current Maturities of Notes Payable		$	13			$	16,825			$	16,838
Total Current Liabilities		$	1,746			$	16,825			$	18,571
Notes Payable		$	16,877			$	(16,825	)		$	52
Total Long-Term Liabilities		$	19,836			$	(16,825	)		$	3,011

  

2. Basis of presentation

 

In the opinion of management, the accompanying unaudited condensed consolidated financial statements include all necessary adjustments (consisting of normal recurring adjustments) and present fairly the condensed consolidated financial position of TransCoastal Corporation and Subsidiary (the "Company" or “TransCoastal”) as of March 31, 2014 and December 31, 2013 and the results of their operations for the three months ended March 31, 2014 and 2013 in conformity with generally accepted accounting principles for interim financial information applied on a consistent basis. The results of operations for the three months ended March 31, 2014 are not necessarily indicative of the results to be expected for the full year.

 

Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been omitted. These condensed consolidated financial statements should be read in conjunction with the audited condensed consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K/A, as filed with the Securities and Exchange Commission on May 9, 2014. Certain reclassifications have been made to the condensed consolidated financial statements for prior periods in order to conform to the current period presentation. 

 

Recently adopted accounting pronouncements

 

From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board or other standard setting bodies that may have an impact on the Company’s accounting and reporting. The Company believes that such recently issued accounting pronouncements and other authoritative guidance for which the effective date is in the future either will not have an impact on its accounting or reporting or that such impact will not be material to its financial position, results of operations, and cash flows when implemented. 

 

3.  Going concern consideration

 

The consolidated financial statements have been prepared assuming the Company will continue as a going concern. As of March 31, 2014 and December 31, 2013, the Company had a working capital deficit of approximately $17,975,000 and $18,476,000, respectively, and an accumulated deficit of approximately $42,678,000 and $42,572,000, respectively. For the quarter ended March 31, 2014, the Company had a net loss of approximately $106,000. The working capital deficit at March 31, 2014 and December 31, 2013 is primarily the result of increased aged accounts payable and accrued liabilities due to a reduction in available cash to pay third party vendors and the Company's long term debt being current. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. During the year ended December 31, 2013, the Company entered into an investment agreement (“the Investment Agreement”) with a third party which allows the Company to put common shares to the third party for an aggregate purchase price up to $5,000,000.

 

If the Company wishes to act upon this agreement the Company will need to register the necessary shares specified in the agreement within a registration statement with the SEC. As of March 31, 2014, and through the date of this report, the Company has not decided to act upon this agreement, if the company chose to act upon the agreement it would require an S-1 Registration Statement to be filed and deemed effective by the SEC. If the Company is unable to obtain this additional equity financing, it may require the Company to liquidate a portion of its oil and natural gas properties to meet its liquidity needs, which could affect the Company’s long-term strategic plan and require the Company to liquidate certain oil and natural gas properties at an amount less than would normally be achieved if sold in the ordinary course of business. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

 

 

4. Summary of significant accounting policies

 

Fair Value Measurements

 

The Company has adopted and follows ASC 820, Fair Value Measurements and Disclosures, for measurement and disclosures about fair value of its financial instruments. ASC 820 establishes a framework for measuring fair value in GAAP, and expands disclosures about fair value measurements. To increase consistency and comparability in fair value measurements and related disclosures, ASC 820 establishes a fair value hierarchy which prioritizes the inputs to valuation techniques used to measure fair value into three (3) broad levels. The fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The three (3) levels of fair value hierarchy defined by ASC 820 are:

 

Level 1 — Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date.

 

Level 2 — Inputs (other than quoted market prices included in Level 1) are either directly or indirectly observable for the asset or liability through correlation with market data at the measurement date and for the duration of the instrument’s anticipated life.

 

Level 3 — Inputs reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. Consideration is given to the risk inherent in the valuation technique and the risk inherent in the inputs to the model. Valuation of instruments includes unobservable inputs to the valuation methodology that are significant to the measurement of fair value of assets or liabilities.

  

As defined by ASC 820, the fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale, which was further clarified as the price that would be received to sell an asset or paid to transfer a liability (“an exit price”) in an orderly transaction between market participants at the measurement date. The carrying amounts of the Company’s financial assets and liabilities, such as cash and cash equivalents, oil and natural gas sales receivable, and accounts payable and accrued liabilities, approximate their fair values because of the short maturity of these instruments.

 

Cash and Cash Equivalents

 

The Company considers all highly-liquid debt instruments with original maturities of three months or less to be cash equivalents.

 

The Company maintains its cash balances in financial institutions which are insured by the Federal Deposit Insurance Corporation (“FDIC”). All accounts maintain FDIC coverage of up to $250,000 per institution. As of March 31, 2014 and December 31, 2013, the Company had $0 and $44,000, respectively, of cash and cash equivalents in excess of its FDIC coverage.

 

Accounts Receivable

 

Accounts receivable is comprised of billings for services as the operator on certain wells, that TransCoastal has no working interest in, and accrued natural gas and crude oil sales. The Company performs ongoing credit evaluations of its customers’ and extends credit to virtually all of its customers. Credit losses to date have not been significant and have been within management’s expectations. In the event of complete non-performance by the Company’s customers, the maximum exposure to the Company is the outstanding accounts receivable, net balance at the date of non-performance. The amounts billed to third parties for services as the operator have rights of offset against revenues generated from the sale of oil and gas commodities. For the three months ended March 31, 2014 and 2013, the Company had no bad debt expense.

 

 

Derivative Activities

 

The Company utilized oil and natural gas derivative contracts to mitigate it’s exposure to commodity price risk associated with its future oil and natural gas production. These derivative contracts have historically consisted of options, in the form of price floors or collars. The Company’s derivative financial instruments are recorded on the consolidated balance sheets as either an asset or a liability measured at fair value. The Company does not apply hedge accounting to its oil and natural gas derivative contracts and accordingly the changes in the fair value of these instruments are recognized in the consolidated statements of operations in the period of change.

 

The Company’s derivative instruments are issued to manage the price risk attributable to our expected natural gas and oil production. While there is risk that the financial benefit of rising natural gas and oil prices may not be captured, Company management believes the benefits of stable and predictable cash flow are more important. Among these benefits are more efficient utilization of existing personnel and planning for future staff additions, the flexibility to enter into long-term projects requiring substantial committed capital, smoother and more efficient execution of our ongoing development drilling and production enhancement programs, more consistent returns on invested capital and better access to bank and other capital markets. Every unsettled derivative instrument is recorded on the accompanying consolidated balance sheets as either an asset or a liability measured at its fair value. Changes in a derivative’s fair value are recognized in earnings unless specific hedge accounting criteria are met. Cash flows from natural gas and oil derivative contract settlements are reflected in operating activities in the accompanying consolidated statements of cash flows.

 

Realized and unrealized gains and losses on derivatives are accounted for using the mark-to-market accounting method. We recognize all unrealized and realized gains and losses related to these contracts in each period in derivative gains or (losses) in the accompanying condensed consolidated statements of operations.

 

Oil and Gas Natural Gas Properties

 

The Company uses the full-cost method of accounting for its oil and natural gas producing activities as further defined under ASC 932, Extractive Activities -Oil and natural gas. Under these provisions, all costs incurred for both successful and unsuccessful exploration and development activities, including salaries, benefits and other internal costs directly identified with these activities, and oil and natural gas property acquisitions are capitalized. All costs related to production, general corporate overhead or similar activities are expensed as incurred.

 

Proved properties are amortized using the units of production method (“UOP”). The UOP calculation, in its simplest terms, multiplies the percentage of estimated proved reserves produced at year end by the cost of those reserves.

 

The amortization base in the UOP calculation includes the sum of proved property, net of accumulated depreciation, depletion and amortization (“DD&A”), estimated future development costs (future costs to access and develop reserves) and asset retirement costs that are not already included in oil and natural gas property, less related salvage value.

 

The cost of unproved properties and properties under development are excluded from the amortization calculation until it is determined whether or not proved reserves can be assigned to such properties or until development projects are placed in service. Geological and geophysical costs not associated with specific properties are recorded to proved properties. Unproved properties and properties under development are reviewed for impairment at least quarterly. In countries where proved reserves exist, exploratory drilling costs associated with dry holes are transferred to proved properties immediately upon determination that a well is dry and amortized accordingly. As of March 31, 2014 and December 31, 2013, no unproved properties or properties under development were included in the oil and natural gas properties of the accompanying condensed consolidated financial statements.

 

Proceeds from the sale or disposition of oil and natural gas properties are accounted for as a reduction to capitalized costs unless a significant portion (greater than 25 percent) of the Company’s reserve quantities in a particular country are sold, in which case a gain or loss is recognized in income. For the three months ended March 31, 2014 and 2013 no gain or loss from the sale or disposition of oil and natural gas properties occurred.

 

 

Under the full-cost method of accounting, the net book value of oil and natural gas properties, less related deferred income taxes, may not exceed a calculated “ceiling.” The ceiling limitation is the estimated after-tax future net cash flows from proved oil and natural gas reserves, discounted at 10 percent per annum based on industry standards and adjusted for cash flow hedges. Estimated future net cash flows exclude future cash outflows associated with settling accrued asset retirement obligations. Any excess of the net book value of proved oil and gas properties, less related deferred income taxes, over the ceiling is charged to expense and reflected as additional DD&A in the accompanying condensed consolidated statements of operations. For the three months ended March 31, 2014 and 2013 no impairment charge occurred.

 

During the three months ended March 31, 2014 and 2013, the Company determined approximately $0 and $8,000 of interest costs were incurred during the development period of our wells.  

 

Other Property and Equipment

 

Other property and equipment, which includes buildings, field equipment, vehicles, and office equipment, is stated at cost less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. Vehicles and office equipment are generally depreciated over a useful life of five or six years, field equipment is generally depreciated over a useful life of ten years and buildings are generally depreciated over a useful life of twenty years.

 

Impairment of Long-Lived Assets

 

The Company assesses the impairment of long-lived assets when circumstances indicate that the carrying value may not be recoverable. The Company determines if impairment has occurred through adverse changes. When it is determined that the estimated future net cash flows of an asset will not be sufficient to recover its carrying amount, an impairment loss must be recorded to reduce the carrying amount to its estimated fair value. For the three months ended March 31, 2014, and 2013 no circumstances indicated an unrecoverable carrying value of the long-lived assets.

 

Goodwill

 

Goodwill was generated as part of the CTO (CoreTerra Operating LLC) acquisition during the year ended December 31, 2011 and represents the excess of the purchase price over the estimated fair value of the net assets acquired in the acquisition. Goodwill is not amortized; rather, it is tested for impairment annually and when events or changes in circumstances indicate that fair value of a reporting unit with goodwill has been reduced below carrying value. To assess impairment, the Company has the option to qualitatively assess if it is more likely than not that the fair value of the reporting unit is less than the book value. Absent a qualitative assessment, or, through the qualitative assessment, if the Company determines it is more likely than not that the fair value of the reporting unit is less than the book value, a quantitative assessment is prepared to calculate the fair market value of the reporting unit. If it is determined that the fair value of the reporting unit is less than the book value, the recorded goodwill is impaired to its implied fair value with a charge to operating expenses. For the three and nine months ended March 31, 2014, and 2013 no impairment charge occurred.

 

Asset Retirement Obligations

 

The Company follows the provisions of ASC 410-20, Asset Retirement Obligations. ASC 410-20 requires entities to record the fair value of obligations associated with the retirement of tangible long-lived assets in the period in which it is incurred. When the liability is initially recorded, the entity capitalizes a cost by increasing the carrying amount of the related long-lived asset. Over time, the liability is accreted to its present value each period, and the capitalized cost is depleted as part of the oil and natural gas property. Upon settlement of the liability, an entity either settles the obligation for its recorded amount or incurs a gain or loss upon settlement. The Company’s asset retirement obligations relate to the plugging, dismantlement, removal, site reclamation and similar activities of its oil and natural gas properties.

 

 

Asset retirement obligations are estimated at the present value of expected future net cash flows and are discounted using the Company’s credit adjusted risk free rate. The Company uses unobservable inputs in the estimation of asset retirement obligations that include, but are not limited to, costs of labor, costs of materials, profits on costs of labor and materials, the effect of inflation on estimated costs, and the discount rate. Accordingly, asset retirement obligations are considered a Level 3 measurement under ASC 820. Additionally, because of the subjectivity of assumptions and the relatively long lives of the Company’s wells, the costs to ultimately retire the Company’s wells may vary significantly from prior estimates.

 

Revenue Recognition and Natural Gas Imbalances

 

The Company utilizes the accrual method of accounting for natural gas and crude oil revenues, whereby revenues are recognized based on the Company’s net revenue interest in the wells. The Company will also enter into physical contract sale agreements through its normal operations. These contracts are not considered derivative contracts by the Company in accordance with the normal purchases and normal sales provision of ASC 815-10-15.

 

Gas imbalances are accounted for using the sales method. Under this method, revenues are recognized based on actual volumes of oil and gas sold to purchasers. However, the Company has no history of significant gas imbalances.

 

Net Income (Loss) Per Common Share

 

Basic net income (loss) per common share is computed by dividing the net income (loss) attributable to shareholders by the weighted average number of common shares outstanding during the period. Diluted net income per common share is calculated in the same manner, but also considers the impact to net income (loss) and common shares for the potential dilution from convertible preferred stock and warrants. For the quarter ended March 31, 2014, there were 2,494,500 potentially dilutive shares considered in the diluted weighted average common shares. For the year ended December 31, 2013, there were 1,374,500 potentially dilutive shares considered in the diluted weighted average common shares.

 

Stock-Based Compensation

  

The Company accounts for stock-based compensation in accordance with ASC 718, Compensation – Stock Compensation. The standard requires the measurement and recognition of compensation expense in the Company’s consolidated statements of operations for all share-based payment awards made to the Company’s employees, directors and consultants including employee stock options, non-vested equity stock and equity stock units, and employee stock purchase grants. Stock-based compensation expense is measured at the grant date, based on the estimated fair value of the award, reduced by an estimate of the annualized rate of expected forfeitures, and is recognized as an expense over the employees’ expected requisite service period, generally using the straight-line method. In addition, ASC 718 requires the benefits of tax deductions in excess of recognized compensation expense to be reported as a financing cash flow, rather than as an operating cash flow as prescribed under previous accounting rules.

 

The Company’s forfeiture rate represents the historical rate at which the Company’s stock-based awards were surrendered prior to vesting. ASC 718 requires forfeitures to be estimated at the time of grant and revised on a cumulative basis, if necessary, in subsequent periods if actual forfeitures differ from those estimates.

 

During the quarter ended March 31, 2014 and 2013, the Company incurred a stock based compensation expense of approximately $13,000 and $0, respectively, related to stock grant issuances and is included in the accompanying consolidated statement of operations in general and administrative expenses.

 

 

5. Oil and natural gas properties

 

The Company has invested in proved properties:

 

(in thousands)		Acquisition and Development Costs				Accumulated Depletion				Total
Balance at December 31, 2013		$	25,930			$	(2,330	)		$	23,600
Activity from January 1, 2014 through March 31, 2014			124				(128	)			(4	)
		$	26,054			$	(2,458	)		$	23,596

 

6. Shareholder’s equity

 

During the quarter ended March 31, 2014 the Company issued 256,875 shares of their common stock as settlement of stock to be issued. 251,875 of the common shares were issued with 52,125 warrants that will allow the holder(s), for a period of two years from the date of issue, to acquire one additional share of the Company’s common stock for each warrant at a purchase price of $3.75 per share.

 

During the quarter ended March 31, 2014, the Company issued 12,500 shares of their common stock as stock based compensation.

 

During the quarter ended March 31, 2014, the Company issued 560,000 shares of Series G convertible preferred stock at 8%, payable annually, for $560,000. The preferred stock may be converted any time after the first year at the request of the shareholder or the Company into two (2) shares of common stock of the Company and two (2) warrants that will allow the holder, for a period of two years from the date of issue, to acquire one additional share of the Company’s common stock for each warrant at a purchase price of $3.75 per share. The Series G preferred stock issued in 2014 resulted in a beneficial conversion feature at the date of issuance. As a result, a constructive dividend on the Series G preferred stock of approximately $635,000 is reflected in the accompanying condensed consolidated statements of changes in shareholders’ equity.  

 

7. Notes payable

 

On May 19, 2011, as amended from time to time through February 12, 2014, the Company entered into a loan agreement (the “Agreement”) with Green Bank with an initial borrowing base of $15,000,000 and amended to $16,950,000 on February 12, 2014. The Agreement bears interest at the prime rate minus 0.5%, but not less than 4.5%. Interest payments are due monthly with all principal and any unpaid interest being due on June 1, 2015. The interest rate was 4.5% at December 31, 2013 and 2012. Additionally, in accordance with the Agreement, for the period from March 1, 2012 through September 30, 2012, monthly borrowing base reductions of $125 occurred automatically on the first day of each month. Effective October 1, 2012, the monthly borrowing base reduction increased to $150 through January 15, 2013. The monthly borrowing base reductions were amended to $0 on February 11, 2013. On February 12, 2014, the monthly borrowing base reductions were amended to $125 payable on the first of each month for the period of March 1, 2014 through May 1, 2014.

  

 

The Agreement is collateralized by essentially all of the oil and natural gas related assets of the Company, contains personal guarantees from the principal officers, and requires compliance with certain financials covenants including, among others: (1) a requirement to maintain a current ratio of not less than 1.0 to 1.0; (2) a maximum permitted ratio of total liabilities to tangible net worth of not more than 2.0 to 1.0; and (3) a requirement to maintain a ratio of EBITDAX, as defined by the Agreement, to interest expense of not less than (a) 3.00 to 1.00 for all fiscal quarters prior to December 31, 2011, (b) 3.25 to 1.00 for the fiscal quarter ending March 31, 2012, and (c) 3.50 to 1.00 for all fiscal quarters ending on or after June 30, 2012. As of March 31, 2014 and December 31, 2013, the Company was not in compliance with its current ratio. Accordingly, the balance as of March 31, 2014 and December 31, 2013 is classified as current.    

 

As of March 31, 2014 and December 31, 2013, the Company had an outstanding principal balance due to Green Bank of approximately $16,825,000 and $17,500,000, respectively. As of March 31, 2014 and December 31, 2013, the current maturities of the outstanding principal balance were approximately $0 and $375,000, respectively.

  

Additionally, on October 21, 2013, the Company entered into a vehicle loan agreement (“Car Note”) with Western Equipment Finance, Inc. for a total borrowing base of $74. The Car Note bears interest at an approximate rate of 9%. Interest and principal payments are due monthly with any unpaid principal and interest due on August 18, 2018. As of March 31, 2014 and December 31, 2013, the Company had an outstanding principal balanced due to Western Equipment Finance, Inc. of approximately $64,000 and $68,000, respectively. As of March 31, 2014 and December 31, 2013, the current maturities of the outstanding principal balance were approximately $13,000. 

 

8. Related party transactions

 

There have been no related party transactions for the three months ended March 31, 2014 and 2013. 

 

9. Subsequent Events

 

On May 12, 2014, the Company completed a sale of its Shelby County oil and natural gas properties for a total cash consideration of $508,000. This sale represents a disposition of all of the Company’s “Savell” properties that comprised 100% of the Company’s Shelby County assets.

 

 

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

FORWARD-LOOKING STATEMENTS

 

Certain statements contained in this Annual Report on Form 10-Q are not statements of historical fact and constitute forward-looking statements within the meaning of the various provisions of the Securities Act of 1933, as amended, (the “Securities Act”) and the Securities Exchange Act of 1934, as amended (the “Exchange Act”), including, without limitation, the statements specifically identified as forward-looking statements within this report. Many of these statements contain risk factors as well. In addition, certain statements in our future filings with the SEC, in press releases, and in oral and written statements made by or with our approvals which are not statements of historical fact constitute forward-looking statements within the meaning of the Securities Act and the Exchange Act. Examples of forward-looking statements, include, but are not limited to: (i) projections of capital expenditures, revenues, income or loss, earnings or loss per share, capital structure, and other financial items, (ii) statements about the plans and objectives of our management or board of directors including those relating to planned development of our oil and gas properties, (iii) statements of future economic performance and (iv) statements of assumptions underlying such statements. Words such as “believes,” “anticipates,” “expects,” “intends,” “targeted,” “may,” “will” “might,” “should,” “plan,” “predict,” “project,” “envision,” and similar expressions are intended to identify forward-looking statements but are not the exclusive means of identifying such statements. Important factors that could cause actual results to differ materially from the forward looking statements include, but are not limited to:

	•		changes in production volumes, worldwide demand and commodity prices for oil and natural gas;
	•		changes in estimates of proved reserves;
	•		declines in the values of our oil and natural gas properties resulting in impairments;
	•		the timing and extent of our success in discovering, acquiring, developing and producing oil and natural gas reserves;
	•		our ability to acquire leases, drilling rigs, supplies and services on a timely basis and at reasonable prices;
	•		risks incident to the drilling and operation of oil and natural gas wells;
	•		future unanticipated production and development costs;
	•		the availability of sufficient pipeline and other transportation facilities to carry our production and the impact of these facilities on prices or costs;
	•		the effect of existing and future laws, governmental regulations and the political and economic climate of the United States of America and its individual states;
	•		changes in environmental laws and the regulation and enforcement related to those laws;
	•		the identification of and severity of environmental events and governmental responses to the events;
	•		legislative or regulatory changes, including retroactive royalty or production tax regimes, hydraulic-fracturing regulation, derivatives reform, and changes in state, federal and foreign income taxes;
	•		the effect of oil and natural gas derivatives activities; and
	•		conditions in the capital markets.

Such forward-looking statements speak only as of the date on which such statements are made, and we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made to reflect the occurrence of unanticipated events.

Readers are cautioned not to place undue reliance on forward-looking statements, as there can be no assurance that the plans, intentions or expectations upon which they are based will occur. By their nature, forward-looking statements involve numerous assumptions, known and unknown risks and uncertainties, both general and specific, that contribute to the possibility that the predictions, forecasts, projections and other forward-looking statements will not occur, which may cause the Company’s actual performance and financial results in future periods to differ materially from any estimates or projections of future performance or results expressed or implied by such forward-looking statements. These assumptions, risks and uncertainties include, among other things: volatility of, and assumptions regarding natural gas and liquids prices, including substantial or extended decline of the same and their adverse effect on the Company’s operations and financial condition and the value and amount of its reserves; assumptions based upon the Company’s current guidance; fluctuations in currency and interest rates; risk that the Company may not conclude divestitures of certain assets or other transactions or receive amounts contemplated under the transaction agreements (such transactions may include third-party capital investments, farm-outs or partnerships, which the Company may refer to from time to time as “partnerships” or “joint ventures” and the funds received in respect thereof which the Company may refer to from time to time as “proceeds”, “deferred purchase price” and/or “carry capital”, regardless of the legal form) as a result of various conditions not being met; product supply and demand; market competition; risks inherent in the Company’s and its subsidiaries’ marketing operations, including credit risks; imprecision of reserves estimates and estimates of recoverable quantities of natural gas and liquids from resource plays and other sources not currently classified as proved, probable or possible reserves or economic contingent resources, including future net revenue estimates; marketing margins; potential disruption or unexpected technical difficulties in developing new facilities; unexpected cost increases or technical difficulties in constructing or modifying processing facilities; risks associated with technology; the Company’s ability to acquire or find additional reserves; hedging activities resulting in realized and unrealized losses; business interruption and casualty losses; risk of the Company not operating all of its properties and assets; counterparty risk; downgrade in credit rating and its adverse effects; liability for indemnification obligations to third parties; variability of dividends to be paid; its ability to generate sufficient cash flow from operations to meet its current and future obligations; its ability to access external sources of debt and equity capital; the timing and the costs of well and pipeline construction; the Company’s ability to secure adequate product transportation; changes in royalty, tax, environmental, greenhouse gas, carbon, accounting and other laws or regulations or the interpretations of such laws or regulations; political and economic conditions in the countries in which the Company operates; terrorist threats; risks associated with existing and potential future lawsuits and regulatory actions made against the Company; risk arising from price basis differential; risk arising from inability to enter into attractive hedges to protect the Company’s capital program; and other risks and uncertainties described from time to time in the reports and filings made with securities regulatory authorities by the Company. Although the Company believes that the expectations represented by such forward-looking statements are reasonable, there can be no assurance that such expectations will prove to be correct. Readers are cautioned that the foregoing list of important factors is not exhaustive. In addition, assumptions relating to such forward-looking statements generally include the Company’s current expectations and projections made in light of, and generally consistent with, its historical experience and its perception of historical trends, including the conversion of resources into reserves and production as well as expectations regarding rates of advancement and innovation, generally consistent with and informed by its past experience, all of which are subject to the risk factors identified elsewhere in this report.

 

 

This Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with all of our reports to the SEC and the related notes included elsewhere in this report.

 

RESULTS OF OPERATIONS

 

Three months ended March 31, 2014 compared to three months ended March 31, 2013

 

Revenue. During the three months ended March 31, 2014, the Company generated revenues of 1,031,000, an increase of $179,000 or 21%compared to the same quarter last year. The Company’s revenues increased primarily due to increases in commodity prices.

 

The Company generated revenues from oil and gas sales of $1,109,000, an increase of $323,000 or 41%. This increase is primarily due to an increase in commodity prices. The Company sold 7,111 net bbl at an average price of $95.15 during the quarter ended March 31, 2014 compared to 5,502 net bbl at an average price of 90.86 during the same time period in 2013. The Company sold 31,075 net mcf at an average price of $9.92 during the quarter ended March 31, 2014 compared to 36,141 net mcf at an average price of $7.99 during the same time period in 2013.

 

Total Expenses. During the three months ended March 31, 2014, total expenses, which are comprised of depreciation, operating costs and general and administrative expenses, were $940,000 compared to $1,093,000 during the three months ended March 31, 2013. This change represents a decrease of $153,000 or 14%. The decrease is primarily due to a reduction of General and Administrative Expenses. 

 

LIQUIDITY AND CAPITAL RESOURCES

 

Net cash provided by operating activities of $4,000 for the first three months of 2014 increased by $488,000 compared to the same time period in 2013. The increase is a result of the reduction in net loss for the quarter due to increased oil and natural gas sales.

 

Net cash used in investing activities of $124,000 was utilized to develop our oil and gas assets during the first three months of 2014. This is a decrease of $587,000 from the first three months of 2013.

 

Net cash used in financing activities in the first three months of 2014 of $118,000 related to repayments on our line of credit. This was a decrease from our net cash provided by financing activities of $1,288,000 during the first three months of 2013. 

 

As of March 31, 2014, the Company currently has no material agreements for capital expenditures.

 

As of March 31, 2014, the current terms of the Company’s credit facility with Green Bank are $16,950,000, that has been agreed to be reduced to $16,825,000, that matures on June 1, 2015 with a 4-4.5% annual floating interest rate which requires an approximate monthly payment of $63,000.

 

 

OFF-BALANCE SHEET ARRANGEMENTS

 

From time-to-time, we enter into off-balance sheet arrangements and transactions that can give rise to off-balance sheet obligations. As of March 31, 2014, the off-balance sheet arrangements and transactions that we had entered into included operating lease agreements, personal guarantees of our line of credit with Greenbank by three of the Officers and majority stockholders and gas transportation commitments. The Company does not believe that these arrangements are reasonably likely to materially affect its liquidity or availability of, or requirements for, capital resources currently or in the future.

 

ITEM 3. Quantitative and Qualitative disclosures about Market Risk

 

Not applicable.

 

ITEM 4. Controls and Procedures

 

Our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)), which we refer to as disclosure controls, are controls and procedures designed with the objective of ensuring that information required to be disclosed in our reports filed under the Exchange Act, such as this quarterly report, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls are also designed with the objective of ensuring that such information is accumulated and communicated to our management, including our CEO and CFO, as appropriate to allow timely decisions regarding required disclosure. There are inherent limitations to the effectiveness of any control system. A control system, no matter how well conceived and operated, can provide only reasonable assurance that its objectives are met. No evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected.

 

Management’s Annual Report on Internal Control Over Financial Reporting

 

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of March 31, 2014 based on the guidelines established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. (COSO).

 

Because of its inherent limitations, internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Internal control over financial reporting also can be circumvented by collision or improper management override. Because of such limitations, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with established policies or procedures may deteriorate.

 

A material weakness is a control deficiency, or a combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. As a result of our management’s assessment of the effectiveness of internal control over financial reporting, we have identified the following material weaknesses that existed as of March 31, 2014:

 

1. Inadequate and ineffective controls over the financial statement close process.

 

In conjunction with the year-end financial close, our procedures and controls to ensure that accurate financial statements in accordance with generally accepted accounting principles could be prepared and reviewed on timely basis were not operating effectively. Such ineffective procedures and controls include (a) ineffective segregation of duties; (b) insufficient documentation of accounting policies and procedures and retention of historical accounting portions. As a result of the above deficiencies, material and less significant post-closing adjustments were identified by our independent registered public accounting firm, Rothstein Kass, and recorded in our financial statements as of and for the year ended December 31, 2013

 

2. Inadequate staffing within the accounting organization.

 

During 2013, there were numerous changes in our accounting personnel, both on staff and third party support. This has led to our not having a sufficient number of experienced personnel in the accounting organization to provide reasonable assurance that transactions are being recorded as necessary to ensure timely preparation of financial statements in accordance with generally accepted accounting principles. We consider this weakness to be a material weakness in the operation of entity-level controls and operation level controls. The ineffectiveness of such controls can result in misstatement to assets, liabilities, revenues, and expenses.

 

Our management concluded that, due to the material weaknesses described above, we did not maintain effective internal control over financial reporting as of March 31, 2014.

  

 

3. Remedial actions

 

In an effort to remediate the identified deficiencies, we have commenced, and are continuing to implement, a number of changes to our internal control over financial reporting. These following changes will be made before the end of 2014:

	•	Proper accounting procedures will be put in place
	•	Monthly reconciliation of the financials

 

Additionally, in response to the identified deficiencies, we intend to implement additional remedial measures, including but not limited to the following: 

	•	Hiring additional accounting personnel; and
	•	Improving our documentation and training related to policies and procedures for the controls related to our significant accounts and processes.

  

Changes in Internal Control over Financial Reporting

 

Except as described above, during its assessment of our internal control over financial reporting our management identified no change in our internal control over financial reporting that occurred during the first quarter of 2014 that has materially affected, or is reasonably likely to affect, our internal control over financial reporting.

 

Changes in Internal Control over Financial Reporting. There have been no changes in our internal control over financial reporting that occurred during the last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

PART II - OTHER INFORMATION

 

Item 1. Legal Proceedings.

 

The Company is not a party to any material pending legal or governmental proceedings, other than ordinary routine litigation incidental to the industry. While the ultimate outcome and impact of any proceeding cannot be predicted with certainty, management believes that the resolution of any proceeding will not have a material adverse effect on the financial condition or results of operations.

 

Item 1A.Risk Factors.

 

Oil and Gas Drilling Is A High-Risk Activity. Our future success will depend on the success of TransCoastal's drilling programs. In addition to the numerous operating risks described in more detail below, these activities involve the risk that no commercially productive oil or gas reservoirs will be discovered. In addition, we are often uncertain as to the future cost or timing of drilling, completing and producing wells. Furthermore, our drilling operations may be curtailed, delayed or canceled as a result of a variety of factors, including, but not limited to, the following:

 

- unexpected drilling conditions;

 

- pressure or irregularities in formations;

 

- equipment failures or accidents;

 

- adverse weather conditions;

 

- inability to comply with governmental requirements; and

 

- shortage or delays in the availability of drilling rigs and the delivery of equipment.

 

 

If TransCoastal experiences any of these problems, our ability to conduct operations could be adversely affected.

 

Factors Beyond Our Control Affect Our Ability To Market Oil And Gas. Our ability to market oil and gas from our TransCoastal subsidiary wells depends upon numerous factors beyond our control. These factors include, but are not limited to, the following:

 

- the level of domestic production and imports of oil and gas;

 

- the proximity of gas production to gas pipelines;

 

- the availability of pipeline capacity;

 

- the demand for oil and gas by utilities and other end users;

 

- the availability of alternate fuel sources;

 

- the effect of inclement weather;

 

- state and federal regulation of oil and gas marketing; and

 

- federal regulation of gas sold or transported in interstate commerce.

 

If these factors were to change dramatically, our ability to market oil and gas or obtain favorable prices for our oil and gas could be adversely affected.

 

The Marketability Of Our Production May Be Dependent Upon Transportation Facilities Over Which We Have No Control. The marketability of our production depends in part upon the availability, proximity, and capacity of pipelines, natural gas gathering systems and processing facilities. Any significant change in market factors affecting these infrastructure facilities could harm our business. TransCoastal delivers some of their oil and natural gas through gathering systems and pipelines that we do not own. These facilities may not be available to us in the future.

 

Oil and natural gas prices are volatile. A substantial decrease in oil and natural gas prices could adversely affect our financial results. Our future financial condition, results of operations and the carrying value of our oil and natural gas properties depend primarily upon the prices we receive for our oil and natural gas production. Oil and natural gas prices historically have been volatile and likely will continue to be volatile in the future, especially given world geopolitical conditions. Our cash flow from operations is highly dependent on the prices that we receive for oil and natural gas. This price volatility also affects the amount of our cash flow available for capital expenditures and our ability to borrow money or raise additional capital. The amount we can borrow or have outstanding under or bank credit facility is subject to semi-annual redeterminations. Oil prices are likely to affect us more than natural gas prices because approximately 70% of our proved reserves are oil. The prices for oil and natural gas are subject to a variety of additional factors that are beyond our control. These factors include:

 

- the level of consumer demand for oil and natural gas;

 

- the domestic and foreign supply of oil and natural gas;

 

- the ability of the members of the Organization of Petroleum Exporting Countries to agree to and maintain oil price and production controls;

 

- the price of foreign oil and natural gas;

 

- domestic governmental regulations and taxes;

 

- the price and availability of alternative fuel sources;

 

- weather conditions, including hurricanes and tropical storms in and around the Gulf of Mexico;

 

- market uncertainty;

 

- political conditions in oil and natural gas producing regions, including the Middle East; and

 

- worldwide economic conditions.

 

These factors and the volatility of the energy markets generally make it extremely difficult to predict future oil and natural gas price movements with any certainty. Also, oil and natural gas prices do not necessarily move in tandem. Declines in oil and natural gas prices would not only reduce revenue, but could reduce the amount of oil and natural gas that we can produce economically and, as a result, could have a material adverse effect upon our financial condition, results of operations, oil and natural gas reserves and the carrying values of our oil and natural gas properties. If the oil and natural gas industry experiences significant price declines, we may, among other things, be unable to meet our financial obligations or make planned expenditures.

 

Significant capital expenditures are required to conduct our business. The development of our subsidiary TransCoastal's business and operations, excluding acquisition activities, requires substantial capital expenditures. We will fund our future capital expenditures through a combination of cash flows from operations and borrowings under our bank credit facilities and, to the extent those sources are not sufficient, we may fund capital expenditures from the proceeds of debt and equity issuances. Future cash flows from operations are subject to a number of risks and variables, such as the level of production of our customers, prices of natural gas and oil, and the other risk factors discussed herein. Our ability to obtain capital from other sources, such as the capital markets, is dependent upon many of those same factors as well as the orderly functioning of credit and capital markets. To the extent we fail to have adequate funds, we could be required to reduce our capital spending, or pursue other funding alternatives, which in turn could adversely affect our business and results of operations.

 

 

We Face Strong Competition From Other Energy Companies That May Negatively Affect Our Ability To Carry On Operations. TransCoastal operates in the highly competitive areas of oil and gas exploration, development and production. Factors that affect our subsidiary's ability to successfully compete in the marketplace include, but are not limited to, the following:

 

- the availability of funds and information relating to a property;

 

- the standards established by us for the minimum projected return on investment;

 

- the availability of alternate fuel sources; and

 

- the intermediate transportation of gas.

 

Competitors include major integrated oil companies, substantial independent energy companies, affiliates of major interstate and intrastate pipelines and national and local gas gatherers. Many of these competitors possess greater financial and other resources than we do.

 

The inability to control other associated entities could adversely affect our business. To the extent that TransCoastal does not operate all of its properties, our success depends in part upon operations on certain properties in which TransCoastal may have an interest along with other business entities. Because we have no control over such entities, we are able to neither direct their operations, nor ensure that their operations on our behalf will be completed in a timely and efficient manner. Any delay in such business entities’ operations could adversely affect our operations.

 

There Are Risks In Acquiring Producing Properties. Through our subsidiary TransCoastal we constantly evaluate opportunities to acquire oil and natural gas properties and frequently engage in bidding and negotiating for these acquisitions. If successful in this process, we may alter or increase our capitalization through the issuance of additional debt or equity securities, the sale of production payments or other measures. Any change in capitalization affects our risk profile.

 

A change in capitalization, however, is not the only way acquisitions affect our risk profile. Acquisitions may alter the nature of our business. This could occur when the character of acquired properties is substantially different from our existing properties in terms of operating or geologic characteristics.

 

Operating Hazards May Adversely Affect Our Ability To Conduct Business. TransCoastal’s operations are subject to risks inherent in the oil and gas industry, including but not limited to the following:

 

- blowouts;

 

- cratering;

 

- explosions;

 

- uncontrollable flows of oil, gas or well fluids;

 

- fires;

 

- pollution; and

 

- other environmental risks.

 

These risks could result in substantial losses to us from injury and loss of life, damage to and destruction of property and equipment, pollution and other environmental damage and suspension of operations. Governmental regulations may impose liability for pollution damage or result in the interruption or termination of operations.

 

Losses And Liabilities From Uninsured Or Underinsured Drilling And Operating Activities Could Have A Material Adverse Effect On Our Financial Condition And Operations. Although we intend to maintain several types of insurance to cover TransCoastal's operations, we may not be able to maintain adequate insurance in the future at rates we consider reasonable, or losses may exceed the maximum limits under our insurance policies. If a significant event that is not fully insured or indemnified occurs, it could materially affect our financial condition and results of operations.

 

 

Compliance with environmental and other government regulations could be costly and could negatively impact production. TransCoastal's operations are subject to numerous laws and regulations governing the discharge of materials into the environment or otherwise relating to environmental protection. Without limiting the generality of the foregoing, these laws and regulations may:

 

- require the acquisition of a permit before drilling commences;

 

- restrict the types, quantities and concentration of various substances that can be released into the environment from drilling and production activities;

 

- limit or prohibit drilling activities on certain lands lying within wilderness, wetlands, and other protected areas;

 

- require remedial measures to mitigate pollution from former operations, such as plugging abandoned wells; and

 

- impose substantial liabilities for pollution resulting from our operations.

 

The recent trend toward stricter standards in environmental legislation and regulation is likely to continue. The enactment of stricter legislation or the adoption of stricter regulation could have a significant impact on our operating costs, as well as on the oil and gas industry in general.

 

TransCoastal's operations could result in liability for personal injuries, property damage, oil spills, discharge of hazardous materials, remediation and clean-up costs and other environmental damages. We could also be liable for environmental damages caused by previous property owners. As a result, substantial liabilities to third parties or governmental entities may be incurred which could have a material adverse effect on our financial condition and results of operations. We intend to continue to maintain insurance coverage for TransCoastal's operations, but we do not believe that insurance coverage for environmental damages that occur over time or complete coverage for sudden and accidental environmental damages is available at a reasonable cost. Accordingly, we may be subject to liability or may lose the privilege to continue exploration or production activities upon substantial portions of our subsidiary's properties if certain environmental damages occur.

 

TransCoastal's operations are subject to United States federal, state and local laws and regulations relating to health, safety, transportation and protection of natural resources and the environment, including those relating to waste management and transportation and disposal of salt-water and other materials. For example, TransCoastal is subject to environmental regulation relating to the operation of their wells, which can pose some risks of environmental liability, including leakage from the wells to surface or subsurface soils, surface water or groundwater. Liability under these laws and regulations could result in cancellation of well operations, fines and penalties, expenditures for remediation, and liability for property damage and personal injuries.

 

Failure to comply with these laws and regulations could result in the assessment of significant administrative, civil or criminal penalties, imposition of cleanup and site restoration costs and liens, revocation of permits, and orders to limit or cease certain operations. In addition, certain environmental laws impose strict and/or joint and several liability, which could cause us to become liable for the conduct of others or for consequences of our own actions that were in compliance with all applicable laws at the time of those actions. Future events, such as the discovery of currently unknown matters, spills caused by future pipeline ruptures, changes in existing environmental laws and regulations or their interpretation, and more vigorous enforcement policies by regulatory agencies, may give rise to additional expenditures or liabilities, which could impair our operations and adversely affect our business and results of operations.

 

Improvements in or new discoveries of alternative energy technologies could have a material adverse effect on our financial condition and results of operations. Because a significant part our business now depends on the level of activity in the oil and natural gas industry, any improvement in or new discoveries of alternative energy technologies (such as wind, solar, geothermal, fuel cells and biofuels) that increase the use of alternative forms of energy and reduce the demand for oil and natural gas could have a material adverse impact on our business, financial condition and results of operations. In addition, technological changes could decrease the quantities of water required for hydro fracturing operations or otherwise affect demand for our services.

 

 

Increased regulation of hydraulic fracturing, including regulation of the quantities, sources and methods of water use and disposal, could result in reduction in drilling and completing new oil and natural gas wells or minimize water use or disposal, which could adversely impact the demand for our services.

 

TransCoastal's success and thus our success depend, in large part, on our level of exploration and production of oil and gas. TransCoastal's operations use hydraulic fracturing to drill new oil and gas wells. Hydraulic fracturing is a process that is used to release hydrocarbons, particularly natural gas, from certain geological formations. The process involves the injection of water (typically mixed with significant quantities of sand and small quantities of chemical additives) under pressure into the formation to fracture the surrounding rock and stimulate movement of hydrocarbons through the formation. The process is typically regulated by state oil and gas commissions and has been exempt (except when the fracturing fluids or propping agents contain diesel fuels) since 2005 from United States federal regulation pursuant to the Safe Drinking Water Act.

 

The EPA is conducting a comprehensive study of the potential environmental impacts of hydraulic fracturing activities, and a committee of the United States House of Representatives is also conducting an investigation of hydraulic fracturing practices. The results of the EPA study and House investigation could lead to restrictions on hydraulic fracturing. The EPA is currently working on new guidance for application of the Safe Drinking Water Act permits for drilling or completing processes that use fracturing fluids or propping agents containing diesel fuels. In addition, the EPA proposed regulations under the federal Clean Air Act in July 2011 regarding certain criteria and hazardous air pollutant emissions from hydraulic fracturing wells and, in October 2011, announced its intention to propose regulations by 2014 under the federal Clean Water Act to regulate wastewater discharges from hydraulic fracturing and other gas production. Legislation has been introduced before Congress to provide for federal regulation of hydraulic fracturing, including, for example, requiring disclosure of chemicals used in the fracturing process or seeking to repeal the exemption from the Safe Drinking Water Act. If adopted, such legislation would add an additional level of regulation and necessary permitting at the federal level and could make it more difficult to complete wells using hydraulic fracturing. Similar laws and regulations with respect to chemical disclosure also exist or are being considered by the United States Department of Interior and in several states, including certain states in which we operate, that could restrict hydraulic fracturing.

 

Future United States federal, state or local laws or regulations could significantly restrict, or increase costs associated with hydraulic fracturing and make it more difficult or costly for producers to conduct hydraulic fracturing operations, which could result in a decline of our exploration and production. New laws and regulations, and new enforcement policies by regulatory agencies, could also expressly restrict the quantities, sources and methods of water use and disposal in hydraulic fracturing and otherwise increase our costs and our customers’ cost of compliance, which could minimize water use and disposal needs even if other limits on drilling and completing new wells were not imposed. Any decline in exploration and production or any restrictions on water use and disposal could result in a decline in our drilling and rework activity and have a material adverse effect on our business, financial condition, results of operations and cash flows.

 

You Should Not Place Undue Reliance On Reserve Information Because Reserve Information Represents Estimates. While estimates of the gas reserves, and future net cash flows attributable to those reserves, were prepared for our subsidiary TransCoastal by independent petroleum engineers, there are numerous uncertainties inherent in estimating quantities of proved reserves and cash flows from such reserves, including factors beyond our control and the control of engineers. Reserve engineering is a subjective process of estimating underground accumulations of oil and gas that cannot be measured in an exact manner. The accuracy of an estimate of quantities of reserves, or of cash flows attributable to these reserves, is a function of many factors, including but not limited to, the following:

 

- the available data;

 

- assumptions regarding future oil and gas prices;

 

- expenditures for future development and exploitation activities; and

 

- engineering and geological interpretation and judgment.

 

Reserves and future cash flows may also be subject to material downward or upward revisions based upon production history, development and exploitation activities and oil and gas prices. Actual future production, revenue, taxes, development expenditures, operating expenses, quantities of recoverable reserves and value of cash flows from those reserves may vary significantly from the estimates. In addition, reserve engineers may make different estimates of reserves and cash flows based on the same available data. For the reserve calculations, oil was converted to gas equivalent at six mcf of gas for one bbl. of oil. This ration approximates the energy equivalency of gas to oil on a Btu basis. However, it may not represent the relative prices received from the sale of our oil and gas production.

 

 

The estimated quantities of proved reserves and the discounted present value of future net cash flows attributable to those reserves included in this document were prepared by independent petroleum engineers in accordance with the rules of the SFA69 and the SEC. These estimates are not intended to represent the fair market value of our reserves.

 

There are risks inherent in reworking, completing and operating hydrocarbon wells. Reworking and completing hydrocarbon wells involves a degree of risk, and sometimes results in unsuccessful efforts, for a variety of reasons. TransCoastal cannot control the outcome of operations entirely, and there can be no assurance that any operation will be successful. The results of any well operations cannot be determined in advance. A well may also be ruined or rendered unusable during operations due to technical or mechanical difficulties. Should a well be successfully completed or perforated, there is still no assurance that the zone in which the well is completed or perforated will produce hydrocarbons at a rate that will support profitable operations. All wells can encounter problems that render the well unusable, even after a period of successful operation. There can be no assurance that TransCoastal will be able to successfully rework, complete or operate any specific well, or will be able to operate sufficient wells to achieve a consistent positive cash flow or to achieve profitability.

 

TransCoastal's exploration and development activities are subject to many risks which may affect its ability to profitably extract oil reserves or achieve targeted returns. In addition, continued growth requires that it acquire and successfully develop additional oil reserves. Oil and gas exploration may involve unprofitable efforts, not only from dry wells, but from wells that are productive but do not produce sufficient net revenues to return a profit after drilling, operating and other costs. Completion of a well does not assure a profit on the investment or recovery of drilling, completion and operating costs. In addition, drilling hazards or environmental damage could greatly increase the cost of operations, and various field operating conditions may negatively affect the production from successful wells. These conditions include delays in obtaining governmental approvals or consents, shut-ins of connected wells resulting from extreme weather conditions, insufficient storage or transportation capacity or other geological and mechanical conditions. While diligent well supervision and effective maintenance operations can contribute to maximizing production rates over time, production delays and declines from normal field operating conditions cannot be eliminated and can be expected to negatively affect revenue and cash flow levels to varying degrees.

 

TransCoastal's Future Success Depends Upon Our Ability To Find, Develop And Acquire Additional Oil And Gas Reserves That Are Economically Recoverable. The rate of production from oil and natural gas properties declines as reserves are depleted. As a result, TransCoastal must continually locate and develop or acquire new oil and gas reserves to replace those being depleted by production. TransCoastal must do this even during periods of low oil and gas prices when it is difficult to raise the capital necessary to finance activities. Without successful exploration or acquisition activities, our reserves and revenues will decline. A future increase in our reserves will depend not only on our ability to explore and develop any properties we may have from time to time, but also on our ability to select and acquire suitable producing properties or prospects. TransCoastal cannot guaranty that it will be able to continue to locate satisfactory properties for acquisition or participation. Moreover, if such acquisitions or participations are identified, TransCoastal may determine that current markets, terms of acquisition and participation or pricing conditions make such acquisitions or participations economically disadvantageous. TransCoastal cannot guaranty that commercial quantities of oil will be discovered or acquired by them.

 

Risks Related to TransCoastal's Debt

 

TransCoastal may not be able to generate sufficient cash flow to meet their debt service obligations. Our ability to make payments on our subsidiary's indebtedness, and to fund planned capital expenditures, will depend on our ability to generate cash in the future. This, to a certain extent, is subject to conditions in the oil and natural gas industry, general economic and financial conditions, competition in the markets where we operate, the impact of legislative and regulatory actions on how we conduct our business and other factors, all of which are beyond our control. This risk could be exacerbated by any economic downturn or instability in United States and global credit markets.

 

 

We cannot assure you that our business will generate sufficient cash flow from operations to service our subsidiary's outstanding indebtedness, or that future borrowings will be available to us in an amount sufficient to enable us to pay our indebtedness or to fund our other capital needs. If our business does not generate sufficient cash flow from operations to service our outstanding indebtedness, we may have to undertake alternative financing plans, such as:

 

● refinancing or restructuring our debt;

 

● selling assets;

 

● reducing or delaying acquisitions or capital investments; or

 

● seeking to raise additional capital.

 

We may not be able to implement alternative financing plans, if necessary, on commercially reasonable terms or at all, and implementing any such alternative financing plans may not allow us to meet our debt obligations. Our inability to generate sufficient cash flow to satisfy TransCoastal's debt obligations, or to obtain alternative financings, could materially and adversely affect our business, financial condition, results of operations and future prospects for growth.

 

In addition, a downgrade in our credit rating would make it more difficult for us to raise additional debt financing in the future. However, such a credit downgrade would not have an effect on our currently outstanding senior secured credit facility.

 

The amount of our debt and the covenants in the agreements governing our debt could negatively impact our financial condition, results of operations and business prospects.

 

Our level of indebtedness, and the covenants contained in the agreements governing our debt, could have important consequences for our operations, including:

 

● making it more difficult for us to satisfy our obligations under our indebtedness and increasing the risk that we may default on our debt obligations;

 

● requiring us to dedicate a substantial portion of our cash flow from operations to required payments on indebtedness, thereby reducing the availability of cash flow for working capital, capital expenditures and other general business activities;

 

● limiting our ability to obtain additional financing in the future for working capital, capital expenditures, acquisitions and general corporate and other activities;

 

● limiting management’s flexibility in operating our business;

 

● limiting our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;

 

● diminishing our ability to withstand successfully a downturn in our business or the economy generally;

 

● placing us at a competitive disadvantage against less leveraged competitors; and

 

● making us vulnerable to increases in interest rates, because certain debt will vary with prevailing interest rates.

 

We may be required to repay all or a portion of TransCoastal's debt on an accelerated basis in certain circumstances. If we fail to comply with the covenants and other restrictions in the agreements governing our debt, it could lead to an event of default and the consequent acceleration of our obligation to repay outstanding debt. Our ability to comply with debt covenants and other restrictions may be affected by events beyond our control, including general economic and financial conditions.

 

In particular, under the terms of our indebtedness, we must comply with certain financial ratios and satisfy certain financial condition tests, several of which become more restrictive over time and could require us to take action to reduce our debt or take some other action in order to comply with them. Our ability to satisfy required financial ratios and tests can be affected by events beyond our control, including prevailing economic, financial and industry conditions, and we cannot assure you that we will continue to meet those ratios and tests in the future. A breach of any of these covenants, ratios or tests could result in a default under our indebtedness.

 

If we default, our credit facility lenders will no longer be obligated to extend credit to us and they could elect to declare all amounts outstanding under the indenture or senior secured credit facility, as applicable, together with accrued interest, to be immediately due and payable. The results of such actions would have a significant negative impact on our results of operations, financial position and cash flows.

 

 

Our variable rate indebtedness subjects us to interest rate risk, which could cause our debt service obligations to increase significantly.

 

Borrowings under TransCoastal's senior secured credit facility bear interest at variable rates, exposing us to interest rate risk. If interest rates increase, our debt service obligations on the variable rate indebtedness would increase even though the amount borrowed remained the same, and our net income and cash available for servicing our indebtedness would decrease.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

 

The Company has made the following unregistered sales of its securities from January 1, 2014 through March31 ,2014.

 

DATE OF SALE

TITLE OF SECURITIES

NO. OF SHARES

CONSIDERATION

CLASS OF PURCHASER

1/1/2014

-

3/31/2014

Preferred Stock Series G

560,000

$

560,000

Shareholder

 

Exemption from Registration Claimed

 

The initial issuance of the Preferred Shares described above were issued by us in reliance upon an exemption from the registration requirements of the Securities Act of 1933, as amended, provided by Sections 4(2) and 4(6) in that all participants were Accredited Investors as that term is defined in Rule 501 Regulation D. All of the individuals and/or entities listed above that purchased the unregistered securities were all known to us and our management, through pre-existing business relationships, as long standing business associates, friends, and employees. All purchasers were provided access to all material information, which they requested, and all information necessary to verify such information and were afforded access to our management in connection with their purchases. All purchasers of the unregistered securities acquired such securities for investment and not with a view toward distribution, acknowledging such intent to us. All certificates or agreements representing such securities that were issued contained restrictive legends, prohibiting further transfer of the certificates or agreements representing such securities, without such securities either being first registered or otherwise exempt from registration in any further resale or disposition. The issuance of our common stock upon conversion of the Preferred Stock was in in reliance upon an exemption from the registration requirements of the Securities Act of 1933, as amended, provided by Section 3(a)(9) thereunder.

 

Item 3. Defaults Upon Senior Securities.

None.

 

Item 4. (Removed and Reserved).

 

Item 5. Other Information

 

 

Item 6. Exhibits.

 

EXHIBIT INDEX

 

Exhibit  Number	Description
(3)	Articles of Incorporation and Bylaws
3.1* *	Certificate of Incorporation as amended (incoporated by reference to an exhibit to our Form 8-K filed on July 3, 2013)
3.1(a)**	Certificate of Designation of Series G Preferred Stock (incorporated by reference to an exhibit to our Form 8-K filed on October 4, 2013)
3.1(b)**	Certificate of Designation of Series H Preferred Stock (incorporated by reference to an exhibit to our Form S-1 filed on May 9, 2014)
3.2**	Bylaws as amended (incorporated by reference to an Annex B to our Definitive 14A filed on August 9, 2013)
31.1*	Certification of Chief Executive Officer and Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1*	Certification of Chief Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(99)	Additional Exhibits
99.1**	Appraisal Report Summary (Reserve Report) dated January 1, 2014 (incorporated by reference to an exhibit on Form 10-K filed on May 15, 2013.)

 

101

101.1NS XBRL Instance Document 101.SCH XBRL Taxonomy Schema 101.CAL XBRL Taxonomy Calculation Linkbase 101.LAB XBRL Taxonomy Label Linkbase 101.PRE XBRL Taxonomy Presentation Linkbase 101.DEF XBRL Taxonomy Definition Linkbase

 

* Filed herewith.

** Filed prior.

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

TransCoastal Corporation (Registrant)
June 16, 2014
By: /s/ Stuart G. Hagler
Stuart G. Hagler
Chief Executive Officer,
(duly authorized Officer)

 

  

 

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