UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 (Mark One)

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

 

For the Quarterly Period Ended June 30, 2015

 

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.)
	4975 Voyager Drive
	Dallas, Texas	75237
	(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, 30,009,264 shares outstanding as of August 13, 2015.  

 

---

 

TRANSCOASTAL CORPORATION AND SUBSIDIARY

TABLE OF CONTENTS

 

 

PART I. FINANCIAL INFORMATION
	Item 1.	Financial Statements
		Condensed Consolidated Balance Sheets as of June 30, 2015 (Unaudited) and December 31, 2014	3
		Condensed Consolidated Statements of Operations (Unaudited) for the Three and Six Months Ended June 30, 2015 and 2014	4
		Condensed Consolidated Statements of Changes in Stockholders' Equity for the Six Months Ended June 30, 2015 (Unaudited)	5
		Condensed Consolidated Statements of Cash Flows (Unaudited) for the Six Months Ended June 30, 2015 and 2014	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	17
	Item 4.	Controls and procedures	17
PART II. OTHER INFORMATION			19
	Item 1.	Legal proceedings	19
	Item 1A.	Risk factors	19
	Item 2	Unregistered sales of equity securities and use of proceeds	27
	Item 3.	Defaults upon senior securities	27
	Item 4.	Removed and reserved	27
	Item 5.	Other information	27
	Item 6.	Exhibits	28
SIGNATURES			29

 

 

PART I - FINANCIAL INFORMATION

 

ITEM 1: FINANCIAL STATEMENTS 

 

TRANSCOASTAL CORPORATION AND SUBSIDIARY

 

CONDENSED CONSOLIDATED BALANCE SHEETS

(AMOUNTS SHOWN IN THOUSANDS, EXCEPT SHARE AND PER SHARE INFORMATION)

 

  

See accompanying notes to the condensed consolidated financial statements. 

 

 

TRANSCOASTAL CORPORATION AND SUBSIDIARY

 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(AMOUNTS SHOWN IN THOUSANDS, EXCEPT SHARE AND PER SHARE INFORMATION)

 

 

See accompanying notes to the condensed consolidated financial statements. 

 

 

TRANSCOASTAL CORPORATION AND SUBSIDIARY

 

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

(AMOUNTS SHOWN IN THOUSANDS, EXCEPT SHARE AND PER SHARE INFORMATION) 

 

  

See accompanying notes to the condensed consolidated financial statements. 

 

 

TRANSCOASTAL CORPORATION AND SUBSIDIARY

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS 

(AMOUNTS SHOWN IN THOUSANDS, EXCEPT SHARE AND PER SHARE INFORMATION)

 

 

See accompanying notes to the condensed consolidated financial statements. 

 

 

TransCoastal Corporation and Subsidiary

Notes to Condensed Consolidated Financial Statements

  

 

 

 

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.

 

See also “Risk Factors.”

 

 

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 June 30, 2015 compared to the three months ended June 30, 2014

 

Revenue. During the three months ended June 30, 2015, the Company generated revenues of $202,000, a decrease of $904,000 or 82%, compared to the same period in 2014. The Company’s annual revenues have decreased as a result of the precipitous decline in commodity prices during the last 12 months.

 

During the three months ended June 30, 2015, the Company generated revenues from oil and gas sales of $353,000, a decrease of $709,000 or 67%, compared to the same period in 2014. The Company’s revenues decreased as a result of the precipitous decline in commodity prices, as well as a decline in oil and natural gas production due to the lack of capital available to perform routine maintenance on existing wells. The Company sold 4,021 net BBL at an average price of $53.75 during the quarter ended June 30, 2015 compared to 5,436 net BBL at an average price of 99.81 during the same time period in 2014. The Company sold 30,359 net MCF of natural gas liquids at an average price of $5.75 during the quarter ended June 30, 2015 compared to 33,836 net MCF of natural gas liquids at an average price of $11.31 during the same time period in 2014.

 

Total Expenses. During the three months ended June 30, 2015, total expenses, which are comprised of depreciation, operating costs and general and administrative expenses, were $1,464,000, an increase of $411,000 or 39% compared to the same period in 2014. The increase is primarily due to enhanced legal expenditures for the Company’s ongoing search for financing.

 

Six months ended June 30, 2015 compared to the six months ended June 30, 2014

 

Revenue. During the six months ended June 30, 2015, the Company generated revenues of $866,000, a decrease of $1,271,000 or 59%, compared to the same period in 2014. The Company’s annual revenues have decreased as a result of the precipitous decline in commodity prices during the last 12 months.

 

During the six months ended June 30, 2015, the Company generated revenues from oil and gas sales of $756,000, a decrease of $1,415,000 or 65%, compared to the same period in 2014. The Company’s revenues decreased as a result of the precipitous decline in commodity prices, as well as a decline in oil and natural gas production due to the lack of capital available to perform routine maintenance on existing wells . The Company sold 8,782 net BBL at an average price of $49.68 during the six months ended June 30, 2015 compared to 12,547 net BBL at an average price of 97.16 during the same time period in 2014. The Company sold 59,244 net MCF of natural gas liquids at an average price of $4.34 during the six months ended June 30, 2015 compared to 64,911 net MCF of natural gas liquids at an average price of $10.64 during the same time period in 2014.

 

Total Expenses. During the six months ended June 30 2015, total expenses, which are comprised of depreciation, operating costs and general and administrative expenses, were $2,270,000, an increase of $277,000 or 14% compared to the same period in 2014. The increase is primarily due to enhanced legal expenditures for the Company’s ongoing search for financing.

 

 

LIQUIDITY AND CAPITAL RESOURCES

 

Net cash used in operating activities was $150,000 for the first six months of 2015, a decrease of $1,039, 000 compared to the same time period in 2014 due to proceeds of $316,000 from the sale of oil and gas properties in the six months ended June 30, 2014.

 

Net cash used in investing activities of $55,000 was used to develop our oil and natural gas properties during the first six months of 2015. This is an increase of $180,000 compared to 2014, due to proceeds of $316,000 from the sale of oil and gas properties in the six months ended June 30, 2014.

 

 

Net cash provided by financing activities in the first six months of 2015 was $335,000. This is a decrease of $1,307,000 from our net cash provided by financing activities during the first six months of 2014 when the Company received proceeds from the Series H equity issuance.

 

As of June 30, 2015, the Company currently has no material agreements for capital expenditures.

 

 

As of June 30, 2015, the current terms of the Company’s credit facility with Melody are $17,371,000 that matured on June 1, 2015 with a 15% annual floating interest rate which requires an approximate monthly payment of $270,000. The note is current and in compliance with the requirements and covenants by way of a forbearance agreement executed on February 24, 2015 and filed with the SEC on the Company's Form 8-K. The forbearance applies to all existing and anticipated events of default in regards to the loan until June 1, 2015. The note matured June 1, 2015. Stuart G. Hagler, A.W. Westmoreland, and David J. May, are officers and directors of the Company and all three provide personal guarantees on our debt. Please see “Notes payable” Note 6 for more information relating to this Debt Instrument.

   

 

 

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 June 30, 2015, the off-balance sheet arrangements and transactions that we had entered into included operating lease agreements, personal guarantees of our line of credit with Green Bank 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.

 

IMPAIRMENT

 

As part of its current efforts to financially reorganize the company, management has been in discussions with a hired consultant who is evaluating the valuation of the company’s oil and gas assets. While no specific valuation has been quantified as of the issuance of this 10-Q based on our discussions with the consultant an impairment of the Company’s oil and gas assets or goodwill could result once the valuation is complete.

 

ITEM 3. Quantitative and Qualitative disclosures about Market Risk

 

Not applicable.

 

ITEM 4. CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives.

 

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 June 30, 2015:

 

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.

 

2. Inadequate staffing within the accounting organization.

 

During 2014, 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, including the preparation of our Quarterly Report on Form 10-Q. 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.  

 

   

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. We are attempting to make the following changes before the end of 2015:

 

	•	Proper accounting procedures 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.

 

Under the supervision and with the participation of our management, including our chief executive, we evaluated the effectiveness of our disclosure controls and procedures as of June 30, 2015. Based on that evaluation we have concluded that our disclosure controls and procedures were ineffective.

 

 

Changes in Internal Controls over Financial Reporting

 

During the six months ended June 30,2015, there have been no changes in our internal control over financial reporting that have materially affected or are reasonably likely to materially affect internal control over financial reporting.

 

PART II - OTHER INFORMATION

 

Item 1. Legal Proceedings.

  

Aside from the aforementioned legal proceedings in footnote #8, 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.

 

Our Current Financial Condition Places All Our Equity Holders at Significant Risk of Losing All of Their Investment in the Company. Due to the current low prices for oil and gas, we are currently having significant problems generating sufficient revenues from our oil and gas operations to meet the payments on our debt obligations and payment of our accounts payable. Our major lender has currently given us a forbearance agreement that protects us from any default on our loan; however, the forbearance agreement expired on June 1, 2015. If we are unable to get an extension of the forbearance until prices recover or otherwise refinance the loan, it is likely we would need to seek the protection of the United States Bankruptcy Court.

 

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 is not currently available 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, which is also dependent on the price we receive for our oil and natural gas. We are currently receiving less than one half of the price we were receiving 12 months ago. 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.

  

 

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

 None.

 

Item 3. Defaults Upon Senior Securities.

None.

 

Item 4. Removed and Reserved.

None.

 

Item 5. Other Information

 

The Company has entered into a Forbearance Agreement with Melody Business Finance, LLC (the “New Lender”) pursuant to the New Lender assuming the Loan Agreement, which was originally disclosed in the Company's Form 8-K filed with the SEC on February 24, 2015. The principal amount of the note is $15,750,000 with a maturity date of June 1, 2015. The New Lender has agreed to forbear all “Existing Events of Default” as well as agreed upon “Anticipated Events of Default” pursuant to the default provisions of the Loan Agreement. The Forbearance Agreement alters or adds several material terms to the Loan Agreement and stockholders are strongly urged to read the Forbearance Agreement attached as an exhibit to the above described Form 8-K.

 

The continuance of the Forbearance Agreement by Melody is conditioned upon a restructuring of the Company agreeable to Melody. Currently the Company is in discussions with Melody regarding the restructuring and as of the date of this Form 10-Q the components of the restructuring have not been agreed upon. The restructuring will likely have a substantial negative impact on the stockholders of the Company.

 

Should the Company fail to come to an agreement with Melody then Melody will have the option to foreclose on the Loan Agreement or continue the forbearance. It should be noted that in the event that the Company and Melody fail to come to an agreement on the restructuring the Forbearance Agreement requires the Company to pay Melody a non-refundable closing fee in the amount of $2,000,000. In such an event it is likely that the Company will have no choice but to seek the protection of the United States Bankruptcy Court.

  

 

Item 6. Exhibits.

 

EXHIBIT INDEX

 EXHIBIT INDEX 

 

 

 

Exhibit Number	Description
(3)	Articles of Incorporation and Bylaws
3.1* *	Certificate of Incorporation as amended (incorporated by reference to an exhibit to our Form 8-K filed on July 3, 2013 File No. 001-14665, Ex. 10.1)
3.1(a)**	Certificate of Designation of Series F Preferred Stock (incorporated by reference to an exhibit to our Form 8K filed on May 15, 2013 File No. 001-14665, Ex. 3(i))
3.1(b)**	Certificate of Designation of Series G Preferred Stock (incorporated by reference to an exhibit to our Form S-1 filed on October 4, 2013 File No. 001-14665, Ex. 3.1(b))
3.1(c)**	Certificate of Designation of Series H Preferred Stock (incorporated by reference to an exhibit to our Form S-1/A filed on May 9, 2014 File No. 001-14665, Ex. 3.1(c))
3.2**	Bylaws as amended (incorporated by reference to an Annex B to our Definitive 14A filed on August 9, 2013 File No. 001-14665)
(10)	Material Contracts
10.1**	Eighth Amendment to Loan Agreement and Forbearance Agreement with Melody Business Finance, LLC (incorporated by reference to an exhibit to our Form 8-K filed on February 20, 2015 File No. 001-14655, Ex. 10.1)
10.2**	Ninth Amendment to Loan Agreement and Forbearance Agreement with Melody Business Finance, LLC (incorporated by reference to an exhibit to our Form 8-K filed on April 6, 2015 File No. 001-14655, Ex. 10.1)
(31)	(i) Rule 13a-14(a)/15d-14(a) Certifications (ii) Rule 13a-14/15d-14 Certifications
31.1*	Certification of Chief Executive Officer and Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
(32)	Section 1350 Certifications
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.

 

 

 

	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)
August 14, 2015
By: /s/ Stuart G. Hagler
Stuart G. Hagler
Chief Executive Officer,
(duly authorized Officer)

  

 

29