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 March 31, 2013

 

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 No. 333-149857

 

TEXAS GULF ENERGY, INCORPORATED

(Exact name of registrant as specified in its charter)

 

Nevada		26-0338889
(State of incorporation)		(I.R.S. Employer Identification No.)

 

1602 Old Underwood Road, La Porte, TX 77571

(Address of principal executive offices and zip code)

 

Registrant’s telephone number, including area code: (281) 867-8500

 

Not Applicable

(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 Inter Active 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   x     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. See definition of “accelerated filer”, “large accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

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

 

As of June 14, 2013 there were 64,947,025 shares of the Company’s common stock, $0.00001 par value per share, issued and outstanding.

 

 

FORWARD-LOOKING STATEMENTS

 

This Form 10-Q includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements, other than statements of historical facts, included in this Form 10-Q which address activities, events or developments which we expect, believe or anticipate will or may occur in the future are forward-looking statements. The words “believes,” “intends,” “expects,” “anticipates,” “projects,” “estimates,” “predicts” and similar expressions are also intended to identify forward-looking statements.

 

These forward-looking statements include, among others, such things as:

 

•

amounts and nature of future revenues and margins from our Construction Services and Fishbone Solutions segments;

 

•

the likely impact of new or existing regulations or market forces on the demand for our services;

 

•

expansion and other development trends of the industries we serve;

 

•

our ability to generate sufficient cash from operations or to raise cash in order to meet our short and long-term capital requirements; and

 

These statements are based on certain assumptions and analyses we made in light of our experience and our perception of historical trends, current conditions and expected future developments as well as other factors we believe are appropriate. However, whether actual results and developments will conform to our expectations and predictions is subject to a number of risks and uncertainties which could cause actual results to differ materially from our expectations, including:

 

•

the risk factors discussed in our Form 10-K for the fiscal year ended December 31, 2012 and listed from time to time in our filings with the Securities and Exchange Commission;

 

•

the inherently uncertain outcome of current and future litigation;

 

•

the adequacy of our reserves for contingencies;

 

•

economic, market or business conditions in general and in the oil, gas and power industries in particular;

 

•

changes in laws or regulations; including the granting of Visas for foreign guest workers and

 

•

other factors, many of which are beyond our control.

 

Consequently, all of the forward-looking statements made in this Form 10-Q are qualified by these cautionary statements and there can be no assurance that the actual results or developments anticipated by us will be realized or, even if substantially realized, that they will have the expected consequences to or effects on us or our business operations. We assume no obligation to update publicly, except as required by law, any such forward-looking statements, whether as a result of new information, future events or otherwise.

 

 

TABLE OF CONTENTS

 

		PAGE
PART I	FINANCIAL INFORMATION
Item 1.	Financial Statements	1
	Consolidated Statements of Operations for the Three Months Ended March 31, 2013 and 2012 (Unaudited)	1
	Consolidated Balance Sheets as of March 31, 2013 (Unaudited) and December 31, 2012	2
	Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2013 and 2012 (Unaudited)	3
	Notes to Consolidated Financial Statements (Unaudited)	4
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	11
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	14
Item 4.	Controls and Procedures	14
PART II	OTHER INFORMATION
Item 1.	Legal Proceedings	15
Item 1A.	Risk Factors	16
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	16
Item 3.	Defaults Upon Senior Securities	16
Item 4.	Mine Safety Disclosures	16
Item 5.	Other Information	16
Item 6.	Exhibits	16

 

 

PART I. FINANCIAL INFORMATION

 

ITEM 1. Financial Statements

 

Texas Gulf Energy, Incorporated

 

Consolidated Statements of Income

 

(unaudited)

 

		Three Months Ended
		March 31,  2013				March  31,  2012
Revenues		$	7,296,113			$	9,066,188
Cost of revenues			5,512,121				7,109,381
Gross profit			1,783,992				1,956,807
Selling, general and administrative expenses			1,420,911				1,895,853
Operating income			363,081				60,954
Other income (expense):
Interest expense			(85,041	)			(5,425	)
Other			134,376				-
Income before income tax expense			412,416				55,529
Benefit (Provision) for federal, state and foreign income taxes			(137,644	)			24,834
Net income		$	274,772			$	80,363
Basic earnings per common share		$	0.01			$	0.00
Diluted earnings per common share		$	0.00			$	0.00
Weighted average common shares outstanding:
Basic			49,991,206				45,680,709
Diluted			141,627,037				137,930,549

 

See accompanying notes to the Consolidated Financial Statements.

 

 

Texas Gulf Energy, Incorporated

Consolidated Balance Sheets

 

		March 31,  2013				December 31,  2012
		(unaudited)				(Restated)
Assets
Current assets:
Cash and cash equivalents		$	86,607			$	394,306
Accounts receivable, net			6,323,942				6,652,483
Federal income taxes receivable			-				115,224
Deferred income taxes			130,000				130,000
Prepaid expenses and other current assets			398,219				616,648
Total current assets			6,938,803				7,908,661
Property and equipment, net			1,296,808				1,431,741
Goodwill and other assets			942,227				942,227
Total assets		$	9,177,803			$	10,282,629
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable		$	1,255,204			$	1,292,686
Accrued liabilities			672,546				1,353,044
Due to related parties, net			9,396				204,561
Federal income taxes payable			20,453				-
Lines of Credit			1,974,061				2,623,552
Note payable			209,135				233,135
Total current liabilities			4,140,795				5,706,978
Convertible debt			1,283,126				1,283,126
Deferred federal income tax			29,000				29,000
Total liabilities			5,452,921				7,019,104
Commitments and Contingencies
Stockholders’ equity:
Common stock - $.00001 par value; 500,000,000 shares authorized; 51,373,307 shares issued and outstanding as of March 31, 2013, and 49,300,156 December 31, 2012			514				493
Preferred stock – par value of $.00001;100,000,000 shares authorized; Series A convertible preferred stock 2,900,000 issued and outstanding			29				29
Series B convertible preferred stock 10,000,000 issued and outstanding			100				100
Additional paid in capital			3,407,753				3,221,189
Retained earnings			316,486				41,714
Total stockholders’ equity			3,724,882				3,263,525
Total liabilities and stockholders’ equity		$	9,177,803			$	10,282,629

 

    

See accompanying notes to the Consolidated Financial Statements.

 

 

Texas Gulf Energy, Incorporated

Consolidated Statements of Cash Flows

(unaudited)

 

		Three months ended
		March 31, 2013				March 31, 2012
Cash flow from operating activities
Net income		$	274,772			$	80,363
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization			160,073				89,987
Stock based compensation			186,585				213,584
Changes in working capital accounts:
Change in accounts receivables			328,541				(419,055	)
Change in federal income taxes receivable			135,677				(230,580	)
Change in prepaid expenses and other current assets			218,429				(78,177	)
Change in accounts payable			(37,481	)			720,066
Change in accrued liabilities			(680,497	)			137,532
Change in due to related parties			(195,166	)			(1,354,423	)
Net cash provided by (used in) operating activities			390,933				(840,703	)
Cash flows from investing activities
Purchase of property and equipment			(25,140	)			(668,600	)
Acquisitions			-				(371,022	)
Proceeds from sale of assets			-				94,094
Net cash used in investing activities			(25,140	)			(945,528	)
Cash flows from financing activities
Payment of notes payable			(24,000	)			(189,279	)
Proceeds from line of credit, net			(649,492	)			2,073,482
Net cash from financing activities			(673,492	)			1,884,203
Net change in cash and cash equivalents			(307,699	)			97,972
Cash and cash equivalents:
Beginning			394,306				2,747,880
Ending		$	86,607			$	2,845,852
Supplemental disclosure of cash flow information
Cash payments (receipts) for:
Federal income tax		$	-			$	300,000
Interest expense		$	85,566			$	5,481

  

 

See accompanying notes to the Consolidated Financial Statements.

 

 

Texas Gulf Energy, Incorporated

Notes to Consolidated Financial Statements

(unaudited)

 

Note 1 – Basis of Presentation

 

The consolidated financial statements include the accounts of Texas Gulf Energy, Incorporated (“TGE”, “we”, “our”, “us”, “its” or the “Company”) and its subsidiaries, all of which are wholly owned. Intercompany balances and transactions have been eliminated in consolidation.

 

The accompanying unaudited consolidated financial statements have been prepared in accordance with Rule 8-03 of Regulation S-X for interim financial statements required to be filed with the Securities and Exchange Commission and do not include all information and footnotes required by generally accepted accounting principles for complete financial statements. However, the information furnished reflects all adjustments, consisting of normal recurring adjustments and other adjustments described herein that are, in the opinion of management, necessary for a fair statement of the results for the interim periods.

 

The accompanying unaudited consolidated financial statements should be read in conjunction with the audited financial statements for the year ended December 31, 2012, included in the Company’s Annual Report on Form 10-K for the year then ended. The Company’s business is cyclical due to the scope and timing of projects released by its customer base. Planned maintenance projects at customer facilities are typically scheduled in the spring and the fall when the demand for energy is lower. Our business can also be affected by seasonal weather conditions including hurricanes, snowstorms, abnormally low or high temperatures or other inclement weather, which can result in reduced activities. Accordingly, results for any interim period may not necessarily be indicative of future operating results.

 

Note 2 – Recently Issued Statements of Financial Accounting Standards

 

Recent accounting pronouncements issued by the FASB (including its Emerging Issues Task Force), and the SEC did not or are not believed by management to have a material impact on the Company’s present or future financial statements.

 

Note 3 – Convertible Debt

 

Fishbone Note

 

On February 3, 2012 the Company issued convertible notes totaling $1,283,126 and promissory notes totaling $216,874 associated with the purchase of Fishbone Solutions, Inc. (“Fishbone”), on the closing date of the transaction, the Company issued individually to the equity-holders of Fishbone, promissory notes (also referred to herein as the “Notes”), in the proportional principal amounts directed by the equity-holders, in the aggregate amount of $1,500,000 together with interest thereon at the rate of .19% per annum, the principal and accrued interest thereon being convertible into shares of our common stock, par value $0.00001 per share (“Common Stock”), at $0.12 per share, with the issue and registration of such restricted Common Stock being subject to Rule 144 of the Securities Act of 1933 and any other pertinent rules of law regarding restricted securities.

 

 

Such equity-holders will be limited to selling stock converted from the Notes as follows:

 

(a)

zero percent (0%) until the one year anniversary; (February 3, 2013)

(b)

no more than fifteen percent (15%) of the principal amount and accrued interest of each Note from the one year anniversary date (February 3, 2013) until the day before the two year anniversary;

(c)

an additional fifteen percent (15%) from the two year anniversary (February 13, 2014) until the day before the three year anniversary of the Notes; (February 13, 2015) and

(d)

the entire remaining balance of accrued interest and principal thereon becoming due and the stock converted from the Notes become unrestricted for sale on the three year anniversary of the Notes, at which time all such limitations on sale will be lifted.

 

Notwithstanding, the equity-holders must commence any conversion process of any remaining balance on the Notes no later than the third year anniversary (February 3, 2015). The Notes may also become due and subject to rights of conversion in the event of a liquidation event or change of control.

 

Convertible debt at March 31, 2013 and December 31, 2012 consist of the following:

 

		March 31, 2013				December 31, 2012
Fishbone Note		$	1,283,126			$	1,283,126
Less: current maturities of long-term debt			-				-
Total long-term debt		$	1,283,126			$	1,283,126

 

Note 4 - Lines of Credit

 

On February 29, 2012, the Company entered into a $3 million receivables purchase agreement with a merchant bank. Under the agreement, the Company can sell all rights, title and interests in their accounts receivables for the total amount of the receivable invoices, less a discounting factor of 15% to the factoring company. The factoring company will remit a rebate to the Company of an amount between 14.30% and 10% of the receivable invoice amounts depending on how long it takes the factoring company to collect the receivable. The sooner the amount is collected, the greater the rebate received by the Company. If after 90 days it isn’t collected, the Company agreed to repurchase the receivables for $.90 for each $1.00 invoiced. The Company retains the right to repurchase any of its invoices at any time from the merchant bank. The balance on the purchase agreement was $800,588 and $2,212,362 was available at March 31, 2013.

 

On September 14, 2012, the Company entered into a $1 million receivable purchase agreement with ta merchant bank. Under the agreement, the Company can sell all rights, title and interests in their accounts receivables for the total amount of the receivable invoices, less a discounting factor of 15% to the factoring company. The factoring company will remit a rebate to the Company of an amount between 10% and 14.30% of the receivable invoice amounts depending on how long it takes the factoring company to collect the receivable. The sooner the amount is collected, the greater the rebate received by the Company. If after 90 days it isn’t collected, the Company agreed to repurchase the receivables for $.90 for each $1.00 invoiced. The Company retains the right to repurchase any of its invoices at any time from the merchant bank. The balance on the purchase agreement was $0 and $1,000,000 was available at March 31, 2013. This agreement can be terminated at any time by the Company.

 

In November 2012, the Company renewed its $1,000,000 line of credit with Patriot Bank through May 9, 2013. The line of credit bears interest at 6.5% or the Wall Street Journal prime rate plus 2%. Accrued and unpaid interest on the revolving note is due and payable monthly in arrears and all amounts outstanding under the revolving note are due and payable on May 9, 2013. In March 2013, the Company increased the line of credit to $1,250,000 and modified the maturity date to July 26, 2013. The balance on the revolving line of credit is $1,199,520 at March 31, 2013.

 

Note 5 - Note Payable

 

The Company assumed a loan due to a former shareholder of Fishbone that matures in June of 2013 has been extended to April of 2014. The amount assumed was $422,529 and is guaranteed by Fishbone. The balance outstanding at March 31, 2013 is $209,135.

 

Note 6 - Stock Based Compensation

 

The stock based compensation cost that has been charged against income by the Company was $186,585 and $213,584 for the three months ended March 31, 2013 and 2012, respectively, for common stock awarded by the Company. The Company entered into employment agreements with the chief executive officer, chief financial officer, and other key employees and granted in prior year 28,477,806 restricted shares vesting over 36 months. The fair value of the common stock on the date of grant was $0.09 per share or $2,563,002. During 2012, 3,600,000 restricted shares with a fair value of $324,000 were accelerated, thus the remaining 24,877,806 restricted shares with a fair value of $2,239,002 is being recognized over the remaining 24 months. During the three months end March 31, 2013 the Company issued 2,073,151 restricted shares per vesting of the granted shares. As of March 31, 2013 there are 14,512,054 restricted shares and $1,306,085 remaining to be recognized.

 

 

On July 5, 2012 the Company granted 4,100,000 restricted shares to key employees for services, vesting equally on July 15, 2012, July 15, 2013, and July 15, 2014.

  

Note 7 - Earnings (Loss) Per Share

 

Basic earnings per share includes no dilution and is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding for the periods presented. The calculation of basic earnings per share for the three months ended March 31, 2013 includes the weighted average of common shares outstanding. Diluted earnings per share reflect the potential dilution of securities that could share in the earnings of an entity, such as convertible preferred stock or convertible debt. Dilutive securities existed for the three months ended March 31, 2013 and 2012 in the form of convertible preferred stock series A, and B and convertible debt.

 

Note 8 – Income Taxes

 

The Company complies with ASC 740, “Income Taxes”. Deferred income taxes are computed using the liability method whereby deferred tax assets and liabilities are recognized based on temporary differences between the financial and tax basis of assets and liabilities using presently enacted tax rates. Valuation allowances are established against deferred tax assets to the extent management believes that it is not probable that the assets will be recovered.

 

The Company provides for income taxes regardless of whether it has received a tax assessment. Taxes are provided when it is considered probable that additional taxes will be due in excess of amounts included in the tax return. The Company continually reviews exposure to additional income taxes due, and as further information is known or events occur, adjustments may be recorded.

 

The Company’s current federal income tax expense is approximately $138,000 for the three months ended March 31, 2013.

  

Note 9 – Segment Information

 

During the quarter the Company has reportable segments, International Plant Services, LLC, TGE Electrical & Instrumentation, and Fishbone Solutions, Inc. segments.

 

International Plant Services

 

Our International Plant Services, LLC segment provides turnkey and specialty construction services to a wide range of industrial and energy sector clients. Our scope of services includes managing and executing major capital and turnaround projects, the provision of project management personnel, and other construction resources, like project planners/schedulers, engineers, welders, fitters and millwrights. A portion of the engineers and skilled craftsmen (welders, fitters, millwrights and electricians) are guest workers working with visas in the United States. These services are provided for projects of varying complexities, schedule durations, and budgets. Our project experience and expertise includes turnarounds, retrofits, modifications and expansions to existing facilities as well as the construction of new facilities in the refinery, petrochemical, mining and power industries.

 

TGE Electrical & Instrumentation Services

 

TGE Electrical & Instrumentation is a business unit of TGE that provides specialty electrical services, including new construction, maintenance, turnarounds, commissioning, skid/module construction, inspection services, troubleshooting, project management. Services for process industry include capital project construction, multi-year programs, maintenance services programs, calibration, commissioning and startup services. The support services include constructability reviews, cost estimating and budget development, project and construction management.

 

Fishbone Solutions

 

Fishbone Solutions, Inc. provides project management services, experienced management personnel and systems to ensure repeatable performance in the following services: program and project management, planning and scheduling, field design and drafting, P&ID updates, CAD work for fabrication, SCOPE Software for field planning, subcontract management, project management, project controls, material procurement and management, and construction related administration functions. We use enhanced digital photography in our SCOPE Development Process and we supply high quality teams to define, schedule and manage projects from "cradle to grave" nationwide.

 

 

Fishbone Solutions, LTD was acquired by the Company on February 3, 2012 and the name was changed to Fishbone Solutions, Inc. effective March 28, 2012.

 

Segment revenue is as follows: (in $000’s)

 

Three months ended March 31, 2013:

 

		International Plant Services				TGE Electrical & Instrumentation				Fishbone Solutions				Totals
Revenues			4,116				984				2,196				7,296
Net income (loss)			(349	)			278				345				274
Total Assets			7,330				505				4,088				11,923

    

Total assets after elimination is $9,223

 

Three months ended March 31, 2012:

 

		Fishbone Solutions				International Plant Services				TGE Electrical & Instrumentation Services				Totals
Revenues			695				8,371				-				9,066
Net income (loss)			(7	)			124				(37	)			80
Total Assets			2,339				13,380				(37	)			15,682

 

Total assets after elimination is $12,582

 

 

Note 10 – Contingencies

 

Various legal actions, claims, and other contingencies arise in the normal course of our business. Contingencies are recorded in the consolidated financial statements, or are otherwise disclosed, in accordance with ASC 450-20, “Loss Contingencies”. Specific reserves are provided for loss contingencies to the extent we conclude that a loss is both probable and estimable. We use a case-by-case evaluation of the underlying data and update our evaluation as further information becomes known, and the known claims as of this date are as follows:

 

 

Civil Action 4:12-CV-00055; Renato Acain et al vs. International Plant Services LLC et al.

 

International Plant Services, LLC (IPS) is a subsidiary of the Company. IPS has been sued in a matter presently pending in United States District Court, Southern District of Texas, Houston Division by fifty-five (55) Filipino workers alleging violations of RICO and other fiduciary errors. The suit was initially instituted on May 27, 2011 and removed to U.S. District Court on January 6, 2012. The plaintiff is seeking relief in the form of unspecified monetary relief. The United States District Court remanded the ACAIN case to the 113th District Court on September 15, 2012. Subsequently, Judge Patricia J. Kerrigan, 113th District Court, State of Texas, dismissed the case. While the Company continues to believe this lawsuit is without merit, the ACAIN plaintiffs have the right to appeal this dismissal.

 

Cause No. 2012-23084; Ardent Services, LLC vs. David D. Mathews and Larry J. Laqua.

 

The Company is providing the defense of its employees, Mr. Mathews (President and CEO of the Company) and Mr. Laqua (Vice President of a Company business unit), in a matter involving their former employer, Ardent.  Ardent is suing Mr. Mathews and Mr. Laqua in the 234th District Court, Harris County, Houston, Texas for breach of confidentiality and non-solicitation clauses in certain employment agreements, along with other breaches of duties allegedly owed.  The Company intends to sponsor and fully assist in the defense of Mr. Mathews and Mr. Laqua.  On behalf of Mathews and Laqua, Company legal counsel has filed a motion to dismiss based on a forum selection clause in a subject agreement. The suit was initially instituted on April 20, 2012. The plaintiff is seeking relief in the form of injunctive and unspecified monetary relief. The Company intends to vigorously defend against these claims.

 

Cause No. 4:13-cv-00505, Michael Rushing, Stephanie Rushing, Penn Rushing and Florence Rushing v. Texas Gulf Energy, Inc. on behalf of CS Bankers V, LLC, Texas Gulf Fabricators, Inc., David Mathews, Craig Crawford and Timothy Connolly, United States District Court for the Southern District.

 

The Company had originally filed against the Rushings for a Declaratory Judgment alleging they had failed to perform relative to a letter of intent with Texas Gulf Fabricators, Inc., or alternatively, that the letter of intent was not enforceable.  The Company also filed a conversion action against the Rushings for removing property from a fabrication facility.  The Rushing Family filed two separate counterclaims in the underlying state court actions before removing both actions to federal court in March 2013.  On April 13, 2013, the federal court denied jurisdiction and remanded the matter back to the Texas State Court in the proceedings known as: (i) Cause No. 2013-00543; Texas Gulf Energy, Inc. on behalf of CS Bankers V, LLC and Texas Gulf Fabricators, Inc. VS. Penn Rushing, et al, in the 270^th Judicial District Court of Harris County and (ii) Cause No. 2013-004690; Texas Gulf Energy, Inc. vs. Penn Rushing, et al, in the 270^th Judicial District Court of Harris County.  The Rushings' allegations include fraudulent inducement, negligent misrepresentation, breach of fiduciary duty, conversion, equitable estoppel and securities violations.  

 

These claims relate to a letter of intent and foreclosure proceeding on a shop property in Baytown, Texas.  The Rushings have not disclosed an amount of damages sought. The Company is required to pay for the defense of Mr. Mathews, Mr. Crawford and Mr. Connolly.  The Company opposes the removal to federal court.  The Company believes the Rushing's claims are without merit and intends to pursue its claims and defenses vigorously.

 

Based on our knowledge as of the date of this filing, we believe that any amounts exceeding our recorded accruals should not materially affect our financial position, results of operations or liquidity. It is the opinion of management that the eventual resolution of the above claims is unlikely to have a material adverse effect on our financial position or operating results. However, the results of litigation are inherently unpredictable and the possibility exists that the ultimate resolution of one or more of these matters could result in a negative material effect on our financial position, results of operations or liquidity.

 

Note 11 - Related Party Transactions

 

The Company's two majority owners as of March 31, 2013 maintain a 74.8% voting control of the Company. The Company utilizes corporations owned by the two majority shareholders that provide certain services to the Company’s construction services segment, which include the following:

 

	•	Testing
	•	Recruiting
	•	Mobilization
	•	Training
	•	Lodging
	•	Facilities
	•	Foreign payroll

 

 

Management believes that the amounts paid for these services are at or below those rates that would be payable to unrelated third parties and that our shareholder interests are best served by continuing to use these services provided by companies who are related parties.

 

Due to related parties balance is $9,396 at March 31, 2013 for services performed by affiliates of the Company.

 

The Company primarily utilizes a foreign corporation affiliated by common ownership for testing, recruiting, mobilization and training the foreign workforce for construction projects. TGE pays $1.40 per hour billed by these employees for all of these services. Total charges for the three months ended March 31, 2013 was $61,052.88.

 

Note 12 – Significant Customers

 

During the three months ended March 31, 2013 the Company derived a significant amount of revenue from four customers comprising of 13.6%, 8.6%, 8.4% and 8.2%. Compared to four customers during the three months ended March 31, 2012 comprising of 18%, 15%, 14%, and 10%.

 

Note 13 - Subsequent Events

 

As of June 14, 2013 the $3 million receivables purchase agreement with a merchant bank had $617,213 outstanding and $2,382,787 available.

 

As of June 14, 2013 the $1 million receivables purchase agreement with a merchant bank had $0 outstanding and $1,000,000 available.

  

As of June 14, 2013 the $1.25 million line of credit with Patriot Bank had $1,245,540 outstanding and $4,460 was available.

  

  

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

CRITICAL ACCOUNTING ESTIMATES

 

There have been no material changes in our critical accounting policies from those reported in our fiscal 2012 Annual Report on Form 10-K/A filed with the SEC. For more information on our critical accounting policies, see Part II, Item 7 of our fiscal 2012 Annual Report on Form 10-K/A. The following section provides certain information with respect to our critical accounting estimates as of the close of our most recent quarterly period.

 

RESULTS OF OPERATIONS

 

Three Months Ended March 31, 2013 Compared to the Three Months Ended March 31, 2012

 

Consolidated

 

Consolidated revenues were approximately $7.3 million for the three months ended March 31, 2013, a decrease of $1.8 million, or 19.8%, from consolidated revenues of $9.1 million in the same period in the prior fiscal year. The decrease in consolidated revenues was a result of a decrease in utilization at International Plant Services, L.L.C.

 

Consolidated net income increased from approximately $80,000 in the three months ended March 31, 2012 to $274,000 in the three months ended March 31, 2013. The increase of $194,000 was primarily due to decreased G&A expenses. Gross profit increased to 24.5% in the three months ended March 31, 2013 from 22% in the same period a year earlier. Consolidated selling, general & administrative (“SG&A”) expenses were $1.4 million in the three months ended March 31, 2013 compared to $1.9 million in the same period a year earlier. The decrease of $.5 million, or 26%, was primarily related to lower operating costs due to a reduction in additional finance and legal expenses related to becoming a fully reporting public company, acquisitions, decreased business volumes and strategic initiatives. SG&A expenses in the three months ended march 31, 2013 included $186,585 in non-cash compensation compared to $213,584 in the same period of 2012. SG&A expense as a percentage of revenue decreased to 19% in the three months ended March 31, 2013 compared to 21% in the same period in the prior fiscal year. We expect SG&A as a percent of revenue in future quarters to drop as new business units bring on projects and associated revenues in accordance with our 2013 plan.

 

The effective tax rate was an expense of 34% for the three months ended March 31, 2013 and was a benefit of 34% in the same period in 2012.

   

Non-GAAP Financial Measure

 

EBITDA is a supplemental, non-GAAP financial measure. EBITDA is defined as earnings before interest expense, income taxes, depreciation and amortization. We have presented EBITDA because it is used by the financial community as a method of measuring our performance and of evaluating the market value of companies considered to be in similar businesses. We believe that the line item on our Consolidated Statements of Income entitled “Net income” is the most directly comparable GAAP measure to EBITDA. Since EBITDA is not a measure of performance calculated in accordance with GAAP, it should not be considered in isolation of, or as a substitute for, net earnings as an indicator of operating performance. EBITDA, as we calculate it, may not be comparable to similarly titled measures employed by other companies. In addition, this measure is not necessarily a measure of our ability to fund our cash needs. As EBITDA excludes certain financial information compared with net income, the most directly comparable GAAP financial measure, users of this financial information should consider the type of events and transactions that are excluded. Our non-GAAP performance measure, EBITDA, has certain material limitations as follows:

 

•

It does not include interest expense. Because we have borrowed money to finance our operations, pay commitment fees to maintain our credit facility, and incur fees to issue letters of credit under the credit facility, interest expense is a necessary and ongoing part of our costs and has assisted us in generating revenue. Therefore, any measure that excludes interest expense has material limitations.

 

•

It does not include income taxes. Because the payment of income taxes is a necessary and ongoing part of our operations, any measure that excludes income taxes has material limitations.

 

•

It does not include depreciation or amortization expense. Because we use capital and intangible assets to generate revenue, depreciation and amortization expense is a necessary element of our cost structure. Therefore, any measure that excludes depreciation or amortization expense has material limitations.

 

A reconciliation of EBITDA to net income follows: (in 000’s)

 

		Three Months Ended
		March  31, 2013				March 31, 2012
Net income (loss)		$	274			$	80
Interest expense			85				5
Income tax expense (benefit)			138				(25	)
Depreciation and amortization			160				90
EBITDA		$	657			$	150

   

FINANCIAL CONDITION AND LIQUIDITY

 

Overview

 

We define liquidity as the ongoing ability to pay our liabilities as they become due, fund business operations and meet all monetary contractual obligations. Our primary sources of liquidity for the three months ended March 31, 2013 was cash generated from operations, cash on hand at the beginning of the quarter and our accounts receivable line of credit. Cash on hand at March 31, 2013 totaled $86,607. We expect to fund our operations for the next twelve months through the use of cash generated from operations and existing cash balances. However, there can be no assurance that we will achieve our forecasted cash flow, which could result in borrowings under our credit facility.

 

Factors that routinely impact our short-term liquidity and that may impact our long-term liquidity include, but are not limited to:

 

•

Changes in working capital

 

•

Contract terms that determine the timing of billings to customers and the collection of those billings

 

•

Some cost plus and fixed price customer contracts are billed based on milestones which may require us to incur significant expenditures prior to collections from our customers.

 

•

Time and material contracts are normally billed in arrears. Therefore, we are routinely required to carry these costs until they can be billed and collected.

 

•

Some of our large construction projects may require significant retentions or security in the form of letters of credit.

 

•

Capital expenditures

 

Other factors that may impact both short and long-term liquidity include:

 

·

Acquisitions of new businesses

 

·

Inability to obtain guest worker visas for skilled craftsmen

 

·

Strategic investments in new operations

 

·

Contract disputes or collection issues

 

 

Dividend Policy

 

We have not declared any dividends on our Common Stock since our inception. Any future dividend payments will depend on our financial condition, capital requirements and earnings as well as other factors the Company’s board of directors (the “Board”) may deem relevant. There are no dividend restrictions that limit our ability to pay dividends on our Common Stock in our Articles of Incorporation or Bylaws. Our governing statute, Chapter 78 of the Nevada Revised Statutes (the “NRS”), does provide limitations on our ability to declare dividends. Section 78.288 of the NRS prohibits us from declaring dividends where, after giving effect to the distribution of the dividend:

 

(a) we would not be able to pay our debts as they become due in the usual course of business; or

 

(b) our total assets would be less than the sum of our total liabilities plus the amount that would be needed, if we were to be dissolved at the time of distribution, to satisfy the preferential rights upon dissolution of stockholders who may have preferential rights and whose preferential rights are superior to those receiving the distribution (except as otherwise specifically allowed by our Articles of Incorporation).

 

Outlook

 

We have seen what we consider to be a strong recovery in the underlying business environment in which the Company operates. We continue to see signs of recovery and growth and plan to capitalize on opportunities that are presented by the market as it recovers further in the coming months and years. There is a significant increased bidding activity domestically and internationally that we believe will bring additional revenue opportunities to the Company.

 

FORWARD-LOOKING STATEMENTS

 

This Form 10-Q includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements, other than statements of historical facts, included in this Form 10-Q which address activities, events or developments which we expect, believe or anticipate will or may occur in the future are forward-looking statements. The words “believes,” “intends,” “expects,” “anticipates,” “projects,” “estimates,” “predicts” and similar expressions are also intended to identify forward-looking statements.

 

These forward-looking statements include, among others, such things as:

 

•

amounts and nature of future revenues and margins from our Construction Services and Fishbone Solutions segments;

 

•

the likely impact of new or existing regulations or market forces on the demand for our services;

 

•

expansion and other development trends of the industries we serve;

 

•

our ability to generate sufficient cash from operations or to raise cash in order to meet our short and long-term capital requirements; and

 

These statements are based on certain assumptions and analyses we made in light of our experience and our perception of historical trends, current conditions and expected future developments as well as other factors we believe are appropriate. However, whether actual results and developments will conform to our expectations and predictions is subject to a number of risks and uncertainties which could cause actual results to differ materially from our expectations, including:

 

•

the risk factors discussed in our Form 10-K for the fiscal year ended December and listed from time to time in our filings with the Securities and Exchange Commission;

 

•

the inherently uncertain outcome of current and future litigation;

 

•

the adequacy of our reserves for contingencies;

 

•

economic, market or business conditions in general and in the oil, gas and power industries in particular;

 

•

changes in laws or regulations; and

 

•

other factors, many of which are beyond our control.

 

 

Consequently, all of the forward-looking statements made in this Form 10-Q are qualified by these cautionary statements and there can be no assurance that the actual results or developments anticipated by us will be realized or, even if substantially realized, that they will have the expected consequences to or effects on us or our business operations. We assume no obligation to update publicly, except as required by law, any such forward-looking statements, whether as a result of new information, future events or otherwise.

 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

 

We are a “smaller reporting company” as defined by Rule 12b-2 of the Exchange Act and are not required to provide information under this item.

 

Item 4.

Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Securities Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure based on the definition of “disclosure controls and procedures” in Rule 13a-15(e).

 

The disclosure controls and procedures are designed to provide reasonable, not absolute, assurance of achieving the desired control objectives. The Company’s management, including the Chief Executive Officer and Chief Financial Officer, does not expect that the disclosure controls and procedures or our internal controls over financial reporting will prevent or detect all errors or fraud. The design of our internal control system takes into account the fact that there are resource constraints and the benefits of controls must be weighed against the costs. Additionally, controls can be circumvented by the acts of key individuals, collusion or management override.

 

We carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of March 31, 2013. We determined that our disclosure controls and procedures were not effective as of March 31, 2013 as a result of the material weaknesses and deficiencies in our internal control over financial reporting, as discussed in “Changes in Internal Control Over Financial Reporting” below. In light of such weaknesses, management performed an additional analysis subsequent to our recent changes in internal control (described below) regarding the preparation and content of the financial statements contained in this Quarterly Report on Form 10-Q, and management concluded that our disclosure controls and procedures are effective and that the financial statements present, in all material respects, the Company’s financial condition for the period reported in this Quarterly Report on Form 10-Q.

 

Changes in Internal Control Over Financial Reporting

 

We did not effect any change in our internal controls over financial reporting during the period covered by this report that materially affected, or that would reasonably be likely to affect materially, our internal control over financial reporting. However, there have been changes made in our internal controls and financial reporting that have materially affected or are reasonably likely to materially affect our internal controls over financial reporting subsequent to the quarter ended March 31, 2013, that effect our report for such period.  Material weaknesses in our internal controls were identified by the Company’s management, and reported to the Board of Directors and auditors in May, 2013.  These material weaknesses were primarily related to errors in accounting as the Company failed to reconcile certain accounts, which resulted in a number of accounting entries that were not properly reversed in the quarter ended June 30, 2012. Additionally, there were related balance sheet accounts that were not checked and verified.  The Company has implemented new processes regarding the reconciliation, review and reporting of the accounts on a monthly basis and assigned new qualified personnel to operate the Company’s new accounting system to prevent these accounting errors from re-occurring, but there can be no assurance that every error will be detected.  The Company’s financials contained in this report are the result of a thorough review conducted by management.   Management has taken steps which it believes will ensure, to the extent reasonably possible, that this type of error will not occur in the future.

  

 

PART II

 

OTHER INFORMATION

 

Item 1.

Legal Proceedings

 

Various legal actions, claims, and other contingencies arise in the normal course of our business. Contingencies are recorded in the consolidated financial statements, or are otherwise disclosed, in accordance with ASC 450-20, “Loss Contingencies”. Specific reserves are provided for loss contingencies to the extent we conclude that a loss is both probable and estimable. We use a case-by-case evaluation of the underlying data and update our evaluation as further information becomes known, and the known claims as of this date are as follows:

 

Civil Action 4:12-CV-00055; Renato Acain et al vs. International Plant Services LLC et al.

 

International Plant Services, LLC (IPS) is a subsidiary of the Company. IPS has been sued in a matter presently pending in United States District Court, Southern District of Texas, Houston Division by fifty-five (55) Filipino workers alleging violations of RICO and other fiduciary errors. The suit was initially instituted on May 27, 2011 and removed to U.S. District Court on January 6, 2012. The plaintiff is seeking relief in the form of unspecified monetary relief. The United States District Court remanded the ACAIN case to the 113^th District Court on September 15, 2012. Subsequently, Judge Patricia J. Kerrigan, 113^th District Court, State of Texas, dismissed the case. While the Company continues to believe this lawsuit is without merit, the ACAIN plaintiffs have the right to appeal this dismissal.

 

Cause No. 2012-23084; Ardent Services, LLC vs. David D. Mathews and Larry J. Laqua.

 

The Company is providing the defense of its employees, Mr. Mathews (President and CEO of the Company) and Mr. Laqua (Vice President of a Company business unit), in a matter involving their former employer, Ardent.  Ardent is suing Mr. Mathews and Mr. Laqua in the 234th District Court, Harris County, Houston, Texas for breach of confidentiality and non-solicitation clauses in certain employment agreements, along with other breaches of duties allegedly owed.  The Company intends to sponsor and fully assist in the defense of Mr. Mathews and Mr. Laqua.  On behalf of Mathews and Laqua, Company legal counsel has filed a motion to dismiss based on a forum selection clause in a subject agreement. The suit was initially instituted on April 20, 2012. The plaintiff is seeking relief in the form of injunctive and unspecified monetary relief. The Company intends to vigorously defend against these claims.

 

Based on our knowledge as of the date of this filing, we believe that any amounts exceeding our recorded accruals should not materially affect our financial position, results of operations or liquidity. It is the opinion of management that the eventual resolution of the above claims is unlikely to have a material adverse effect on our financial position or operating results. However, the results of litigation are inherently unpredictable and the possibility exists that the ultimate resolution of one or more of these matters could result in a negative material effect on our financial position, results of operations or liquidity.

 

Cause No. 4:13-cv-00505, Michael Rushing, Stephanie Rushing, Penn Rushing and Florence Rushing v. Texas Gulf Energy, Inc. on behalf of CS Bankers V, LLC, Texas Gulf Fabricators, Inc., David Mathews, Craig Crawford and Timothy Connolly, United States District Court for the Southern District.

 

 

The Company had originally filed against the Rushings for a Declaratory Judgment alleging they had failed to perform relative to a letter of intent with Texas Gulf Fabricators, Inc., or alternatively, that the letter or intent was not enforceable.  The Company also filed a conversion action against the Rushings for removing property from a fabrication facility.  The Rushing Family filed two separate counterclaims in the underlying state court actions before removing both actions to federal court in March 2013.  On April 13, 2013, the federal court denied jurisdiction and remanded the matter back to the Texas State Court in the proceedings known as: (i) Cause No. 2013-00543; Texas Gulf Energy, Inc. on behalf of CS Bankers V, LLC and Texas Gulf Fabricators, Inc. VS. Penn Rushing, et al, in the 270^th Judicial District Court of Harris County and (ii) Cause No. 2013-004690; Texas Gulf Energy, Inc. vs. Penn Rushing, et al, in the 270^th Judicial District Court of Harris County.  The Rushings' allegations include fraudulent inducement, negligent misrepresentation, breach of fiduciary duty, conversion, equitable estoppel and securities violations.  These claims relate to a letter of intent and foreclosure proceeding on a shop property in Baytown, Texas.  The Rushings have not disclosed an amount of damages sought. The Company is required to pay for the defense of Mr. Mathews, Mr. Crawford and Mr. Connolly.  The Company opposes the removal to federal court.  The Company believes the Rushing's claims are without merit and intends to pursue its claims and defenses vigorously.

 

Item 1A.

Risk Factors

 

We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide information under this item.

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

None

 

Item 3.

Defaults Upon Senior Securities

 

None

 

Item 4.

Mine Safety Disclosures

 

Not applicable

 

Item 5.

Other Information

 

None

 

Item 6. Exhibits

 

EXHIBIT NO.	DESCRIPTION
31.1	Certification by Principal Executive Officer pursuant to Rule 13a-14(a)/ 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification by Principal Financial and Accounting Officer pursuant to Rule 13a-14(a)/ 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1	Certification by Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2	Certification by Principal Financial and Principal Accounting Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101	The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2013formatted in Extensible Business Reporting Language (XBRL): (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Operations, (iii) the Condensed Consolidated Statements of Cash Flows and (iv) related notes.

 

 

Signature

 

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.

 

	Texas Gulf Energy, Incorporated
Date: June 21, 2013	By:	/s/    Craig Crawford
		Craig Crawford, Chief Financial Officer signing on behalf of the registrant and as the registrant’s Principal Financial Officer