Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.00001 par value per share
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 the definitions
of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2
of the Exchange Act.
The aggregate market value of the common
stock held by non-affiliates of the registrant as of June 28, 2013, the last business day of the registrant’s most recently
completed fiscal year, was $3,572,086, based on the closing sale price for the registrant’s common stock on that date. For
purposes of determining this number, all officers and directors of the registrant are considered to be affiliates of the registrant.
This number is provided only for the purpose of this report on Form 10-K and does not represent an admission by either the registrant
or any such person as to the status of such person.
The number of outstanding shares of the registrant’s Common
Stock on April 14, 2014 was 56,470,070.
Portions of the registrant’s Proxy
Statement for its 2014 Annual Meeting of stockholders are incorporated by reference into Part III of this Annual Report on Form
10-K.
PART I
ITEM 1. Business
FORWARD-LOOKING STATEMENTS
This Annual Report
on Form 10-K (this “
Annual Report
”) 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 Annual Report which address activities, events or developments
which we expect, believe or anticipate will or may occur in the future are forward-looking statements. The word “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:
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amounts
and nature of future revenues and margins from our Construction Services segment;
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the likely impact of new or existing regulations or market forces on the demand for our services;
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expansion and other development trends of the industries we serve; and
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our ability to generate sufficient cash from operations or to raise cash in order to meet our short and long-term capital requirements.
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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:
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the risk factors discussed in Item 1A of this Annual Report and listed from time to time in our filings with the U.S. Securities and Exchange Commission (the “
Commission
” or “
SEC
”);
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the inherently uncertain outcome of current and future litigation;
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the adequacy of our reserves for contingencies;
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economic, market or business conditions in general and in the oil, gas and power industries in particular;
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changes in laws or regulations; and
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other factors, many of which are beyond our control.
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Consequently, all
of the forward-looking statements made in this Annual Report 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 or effects on 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.
The following discussion
should be read in conjunction with our audited financial statements and the related notes that appear elsewhere in this Annual
Report. The following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual
results could differ materially from those discussed in the forward looking statements. Factors that could cause or contribute
to such differences include, but are not limited to those discussed below and elsewhere in this Annual Report, particularly in
the section entitled "Risk Factors". Our audited financial statements are prepared in accordance with United States Generally
Accepted Accounting Principles.
BACKGROUND
Texas Gulf Energy,
Incorporated, a Nevada corporation (the “
Company
,” “
we
,” “
us
,” “
our
”), was incorporated as Nature of Beauty, Inc. under the laws of the State of Nevada on May 22, 2007. Initially,
the Company was engaged in the business of purchasing and distributing all-natural and organic everyday skin care products from
Russia. In October 2009, the Company changed the focus of its business to developing "green" products and technologies,
including unique cleaning and environmental remediation products and changed its name to “Bio-Clean, Inc.” Subsequently,
on October 8, 2010, the Company changed its name to “Global NuTech, Inc.” and executed two different joint venture
agreements and provided the sales and marketing operations for the sale of various products. In December 2011 the Company acquired
International Plant Services, L.L.P. (“
IPS
”) and changed its focus to providing construction services to the
downstream energy business. Subsequently, in the first quarter of 2012 the Company changed its name to “Texas Gulf Energy,
Incorporated” to better reflect its new focus in the market. Since the acquisition of IPS, the Company has completed several
acquisitions and divestitures as well as organically established other business units.
BUSINESS ENVIRONMENT
We have seen what
we consider to be a strong recovery from the global recession in the underlying business environment in which the Company operates..
Recent divestitures have reduced the Company’s operating assets and headcount such that future growth will come from acquisitions
or organic growth.
OPERATING SEGMENTS
As of the fiscal year
December 31, 2013, we had two (2) reportable segments, the “International Plant Services, L.L.C.,” and “Texas
Gulf Specialty Services, Inc.” segments. The sale of all of the assets of our Texas Gulf Energy Industrial Services segment
and our subsidiary Fishbone Solutions, Inc. reduced the number of our operating segments.
International
Plant Services, L.L.C.
Our wholly owned subsidiary
International Plant Services L.L.C. or “Construction Services” segment provides turnkey and specialty construction
services to a wide range of industrial and energy sector clients. Our scope of services includes project planners, engineers, welders,
fitters, millwrights and other craft and supervisory personnel. These services are provided for projects of varying complexities,
schedule durations, and budgets. Our project experience includes retrofits, modifications and expansions to existing facilities
as well as the construction of new facilities.
Texas Gulf Specialty
Services, Inc.
Texas Gulf Specialty
Services, Inc. has been created to provide specialty construction services to a wide range of industry and energy sector clients.
These services are provided for projects of varying complexities, schedule durations and budgets.
OTHER BUSINESS MATTERS
Customers and
Marketing
The Company derives
a significant portion of its revenues from performing services for engineering firms, general contractors, and petrochemical and
industrial gas companies and ultimately the integrated oil companies, independent petroleum refiners, and pipeline, terminal and
oil and gas marketing companies. The loss of significant work from any of these classes of customers or an overall decline in the
petroleum industry could have a material adverse effect on the Company. The Company provided services to approximately forty (40)
customers in 2013 with approximately twenty (20) being served by the continuing operations.
Three (3) customers
represented 21%, 19% and 14% of the Company’s gross sales for the year ended December 31, 2013. Three (3) companies represented
23%, 17% and 12% of outstanding accounts receivable at December 31, 2013. Two (2) customers represented 15% and 14% of the Company’s
gross sales for the year ended December 31, 2012. Two (2) companies represented 25% and 12% of outstanding accounts receivable
at December 31, 2012.
The Company markets
its services and products primarily through its marketing and business development personnel, senior professional staff and its
operating management. The business development personnel concentrate on developing new customers and assisting management with
existing customers. We competitively bid most of our projects. However, we have a number of preferred provider relationships with
customers who award us work through long-term agreements. Our projects have durations of a few days to multiple years.
Competition
We compete with local,
regional, national and international contractors in the Construction Services segment. Competitors generally vary within the markets
we serve with few competitors competing in all of the markets we serve or for all of the services we provide. Contracts are generally
awarded based on price, reputation for quality, customer satisfaction, safety record and programs, and schedule. We believe that
our turnkey capabilities, expertise, experience and reputation for providing safe, timely, and quality services allow us to compete
effectively in the markets that we serve.
Seasonality
Planned maintenance
projects at customer facilities are typically scheduled in the spring and the fall when the demand for gasoline is lower. As a
result, quarterly operating results in our Construction Services segment can fluctuate materially. 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.
Insurance
The Company maintains
insurance coverage for various aspects of its operations. However, exposure to potential losses is retained through the use of
deductibles, coverage limits and self-insured retentions.
Employees
As
of December 31, 2013, we had thirty-two (32) employees, eight (8) of which were employed in non-field positions and twenty-four
(24) of which were employed in field or shop positions. The number of employees varies significantly throughout the year because
of the number, type and size of projects we have in process at any particular time.
Regulation
Health and Safety Regulations
Our
operations are subject to the requirements of the United States Occupational Safety and Health Act (“
OSHA
”),
and comparable state laws. Regulations promulgated by this agency require employers and independent contractors to implement work
practices, medical surveillance systems and personnel protection programs to protect employees from workplace hazards and exposure
to hazardous chemicals and materials. In recognition of the potential for accidents within various scopes of work, these agencies
have enacted strict and comprehensive safety regulations. The Company has established comprehensive programs for complying with
health and safety regulations to protect the safety of its workers, subcontractors and customers. While the Company believes that
it operates safely and prudently, there can be no assurance that accidents will not occur or that the Company will not incur substantial
liability in connection with the operation of its business.
Environmental
The
Company’s operations are subject to extensive and changing environmental laws and regulations. These laws and regulations
relate primarily to air and water pollutants and the management and disposal of hazardous materials. The Company is exposed to
potential liability for personal injury or property damage caused by any release, spill, exposure or other accident involving such
pollutants, substances or hazardous materials.
The Company believes
that it is currently in compliance, in all material aspects, with all applicable environmental laws and regulations. The Company
does not expect any material charges in subsequent periods relating to environmental conditions that currently exist and does not
foresee any significant future capital spending relating to environmental matters.
Recent Developments
On November 22, 2013,
the Company closed a transaction involving an Asset Purchase Agreement by and among the Company and two of its subsidiaries, Fishbone
Solutions, Inc., a Texas corporation (“FSI”), and Texas Gulf Industrial Services, Inc., a Texas corporation (“TGIS”),
and TGE Industrial Services, LLC, a Texas limited liability company (the “Buyer”). Pursuant to the terms of the Agreement,
the Company sold substantially all of the assets of FSI, TGIS and TGE Electrical and Instrumentation (“TGEI”), an operating
division of the Company, to the Buyer. As consideration for the transaction, the Buyer agreed to pay to the Company an aggregate
purchase price of $4,137,335, consisting of (i) the assumption of $1,597,000 in certain promissory note obligations of the Company
and FSI, including certain convertible promissory notes issued to John Sloan and a promissory note in favor of David Mathews ,
and (ii) cash in the amount of $2,540,335.
ITEM 1A. Risk Factors
The following risk factors should be
considered with the other information included in this Annual Report on Form 10-K. As we operate in a continuously changing environment,
other risk factors may emerge which could have material adverse effects on our results of operations, financial condition and cash
flow.
Risk Factors Related to Our Business
Unsatisfactory safety performance may subject us to penalties,
can affect customer relationships, result in higher operating costs, negatively impact employee morale and result in higher employee
turnover.
Workplace safety is
important to the Company, our employees, and our customers. As a result, we maintain comprehensive safety programs and training
for all applicable employees throughout our organization. While we focus on protecting people and property, our work is performed
at construction sites and in industrial facilities and our workers are subject to the normal hazards associated with providing
these services. Even with proper safety precautions, these hazards can lead to personal injury, loss of life, damage to or destruction
of property, plant and equipment, and environmental damage. We are intensely focused on maintaining a strong safety environment
and reducing the risk of accidents to the lowest possible level.
Although we have taken
what we believe are appropriate precautions to adequately train and equip our employees, we may experience accidents in the future.
Serious accidents may subject us to penalties, civil litigation or criminal prosecution. Claims for damages to persons, including
claims for bodily injury or loss of life, could result in costs and liabilities, which could materially and adversely affect our
financial condition, results of operations or cash flows.
Demand for our products and services is cyclical and is
vulnerable to the level of capital and maintenance spending of our customers and to downturns in the industries and markets we
serve as well as conditions in the general economy.
The demand for our
products and services depends upon the existence of construction and repair and maintenance projects in the downstream petroleum,
power and other heavy industries in the United States and Canada. Therefore, it is likely that our business will continue to be
cyclical in nature and vulnerable to general downturns in the United States, Canadian and world economies and declines in commodity
prices, which could adversely affect the demand for our products and services.
International Plant
Services, LLC revenue and cash flow are dependent upon engineering and construction projects. The availability of these projects
is dependent upon the economic condition in the oil, gas, and power industries, specifically, the level of capital expenditures
on energy infrastructure. A prolonged period of sluggish economic conditions in North America has had and may continue to have
an adverse impact on the level of capital expenditures of our customers and/or their ability to finance these expenditures. Our
failure to obtain projects, the delay of project awards, the cancellation of projects or delays in the completion of contracts
are factors that may result in under-utilization of our resources, which would adversely impact our revenue, operating results
and cash flow. There are numerous factors beyond our control that influence the level of capital expenditures of oil, gas and power
companies, including:
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current or projected commodity prices, including oil, gas and power prices;
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the demand for oil, gas and electricity;
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the ability of oil, gas and power companies to generate, access and deploy capital;
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exploration, production and transportation costs;
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tax incentives, including those for alternative energy projects;
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regulatory restraints on the rates that power companies may charge their customers; and
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local, national and international political and economic conditions.
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Our results of operations depend upon the award of new
contracts and the timing of those awards.
Our revenues are derived
primarily from contracts awarded on a project-by-project basis. Generally, it is difficult to predict whether and when we will
be awarded a new contract due to lengthy and complex bidding and selection processes, changes in existing or forecasted market
conditions, access to financing, governmental regulations, permitting and environmental matters. Because our revenues are derived
from contract awards, our results of operations and cash flows can fluctuate materially from period to period.
The uncertainty associated
with the timing of contract awards may reduce our short-term profitability as we balance our current capacity with expectations
of future contract awards. If an expected contract award is delayed or not received, we could incur costs to maintain an idle workforce
that may have a material adverse effect on our results of operations. Alternatively, we may decide that our long-term interests
are best served by reducing our workforce and incurring increased costs associated with severance and termination benefits which
also could have a material adverse effect on our results of operations for the period when incurred. Reducing our workforce could
also impact our results of operations if we are unable to adequately staff projects that are awarded subsequent to a workforce
reduction.
We face substantial competition in each of our business
segments, which may have a material adverse effect on our business.
We face competition
in all areas of our business from regional, national and international competitors. Our competitors range from small family owned
businesses to well-established, well-financed entities, both privately and publicly held, including many major equipment manufacturers,
large engineering and construction companies and specialty contractors. We compete primarily on the basis of price, customer satisfaction,
safety performance and programs, quality of our products and services, and schedule. As a result of the continuing effects of the
economic slowdown on capital and maintenance spending, we may continue to experience pressure on our operating margins.
The loss of one or more of our significant customers could
adversely affect us.
One or more customers
have in the past and may in the future contribute a material portion of our revenues in any one year. Because these significant
customers generally contract with us for specific projects or for specific periods of time, we may lose these customers from year
to year as the projects or maintenance contracts are completed. The loss of business from any one of these customers could have
a material adverse effect on our business or results of operations.
Our profitability could be negatively
impacted if we are not able to maintain appropriate utilization of our workforce.
The extent to which
we utilize our workforce affects our profitability. If we under utilize our workforce, our project gross margins and overall profitability
suffer in the short-term. If we over utilize our workforce, we may negatively impact safety, employee satisfaction and project
execution, which could result in a decline of future project awards. The utilization of our workforce is impacted by numerous factors
including:
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our estimate of the headcount requirements for various operating units based upon our forecast of the demand for our products and services;
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our ability to maintain our talent base and manage attrition;
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our ability to schedule our portfolio of projects to efficiently utilize our employees and minimize downtime between project assignments; and
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our need to invest time and resources into
functions such as training, business development, employee recruiting, and sales that are not chargeable to customer projects.
Our ability to generate the working capital
necessary to continue to operate effectively
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We are exposed to credit risk from
customers. If we experience delays and/or defaults in customer payments, we could suffer liquidity problems or we could be unable
to recover amounts owed to us.
Under the terms of
our contracts, at times we commit resources to customer projects prior to receiving payments from customers in amounts sufficient
to cover expenditures on these projects as they are incurred. Delays in customer payments require an investment in working capital.
If customers default in making payments on projects, it could have an adverse effect on our financial position, results of operations
and cash flows.
Actual results could differ from
the estimates and assumptions that we use to prepare our financial statements.
To prepare financial
statements in conformity with generally accepted accounting principles, management is required to make estimates and assumptions,
as of the date of the financial statements, which affect the reported values of assets, liabilities, revenues and expenses and
disclosures of contingent assets and liabilities. Areas requiring significant estimation by our management include:
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provisions for uncollectible receivables from customers for invoiced amounts;
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the amount and collectability of unapproved change orders and claims against customers;
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provisions for income taxes and related valuation allowances;
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valuation of assets acquired and liabilities assumed in connection with business combinations; and
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accruals for estimated liabilities, including litigation and insurance reserves.
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Our actual
results could materially differ from these estimates.
An inability to attract and retain
qualified personnel, and in particular, engineers, project managers and skilled craft workers, could impact our ability to perform
on our contracts, which could harm our business and impair our future revenues and profitability.
Our ability to attract
and retain qualified engineers, project managers, skilled craftsmen and other experienced professionals in accordance with our
needs is an important factor in our ability to maintain profitability and grow our business. The market for these professionals
is competitive, particularly during periods of economic growth when the supply is limited. We cannot provide any assurance that
we will be successful in our efforts to retain or attract qualified personnel when needed. Therefore, when we anticipate or experience
growing demand for our services, we may incur additional cost to maintain a professional staff in excess of our current contract
needs in an effort to have sufficient qualified personnel available to address this anticipated demand. If we do incur additional
compensation and benefit costs, our customer contracts may not allow us to pass through these costs.
Competent and experienced
engineers, project managers, and craft workers are especially critical to the profitable performance of our contracts, particularly
on our fixed-price contracts where superior design and execution of the project can result in profits greater than originally estimated
or where inferior design and project execution can reduce or eliminate estimated profits or even result in a loss.
Our project managers
are involved in most aspects of contracting and contract execution including:
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supervising the bidding process, including providing estimates of significant cost components, such as material and equipment needs, and the size, productivity and composition of the workforce;
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supervising project performance, including performance by our employees, subcontractors and other third-party suppliers and vendors;
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negotiating requests for change orders and the final terms of approved change orders; and
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determining and documenting claims by us for increased costs incurred due to the failure of customers, subcontractors and other third-party suppliers of equipment and materials to perform on a timely basis and in accordance with contract terms.
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Future events, including those associated with our growth
strategy, could negatively affect our liquidity position.
We can provide no
assurance that we will have sufficient cash from operations or the credit capacity to meet all of our future cash needs should
we encounter significant working capital requirements or incur significant acquisition costs. Additionally, recent divestitures
will lead to reduced revenue and profits which will likely impact the Company’s cash position negatively. Insufficient cash
from operations, significant working capital requirements, and contract disputes have in the past, and could in the future, reduce
availability under our credit facility.
There are integration and consolidation risks associated
with our acquisition and divestiture strategy. Future acquisitions and divestitures may result in significant transaction expenses,
unexpected liabilities and risks associated with entering new markets, and we may be unable to profitably operate these businesses.
An aspect of our business
strategy is to make strategic acquisitions and divestitures in markets where we currently operate as well as in markets in which
we have not previously operated.
We may lack sufficient
management, financial and other resources to successfully integrate future acquisitions. Any future acquisitions may result in
significant transaction expenses, unexpected liabilities and risks associated with entering new markets in addition to the integration
and consolidation risks.
Recent and future
divestitures will have an impact on the Company’s resources and may impact the ability of the Company to provide all of the
services previously offered.
If we make any future
acquisitions, we likely will have exposure to third parties for liabilities of the acquired business or assets that may or may
not be adequately covered by insurance or by indemnification, if any, from the former owners of the acquired business or assets.
Any of these unexpected liabilities could have a material adverse effect on our business.
We are involved, and are likely to continue to be involved
in legal proceedings, which will increase our costs and, if adversely determined, could have a material effect on our financial
condition and results of operations.
We are currently a
defendant in legal proceedings arising from the operation of our business and it is reasonable to expect that we would be named
in future actions. Many of the actions against us arise out of the normal course of performing services on project sites, and include
claims for workers’ compensation, personal injury and property damage. From time to time, we are also named as a defendant
for actions involving the violation of federal and state labor laws related to employment practices and wages and benefits and
in contract disputes with customers.
We maintain insurance
against operating hazards in amounts that we believe are customary in our industry. However, our insurance has deductibles and
coverage exclusions so we cannot provide assurance that we are adequately insured against all types of risks that are associated
with the conduct of our business. A successful claim brought against us in excess of, or outside of, our insurance coverage could
have a material adverse effect on our financial condition and results of operations.
Litigation, regardless
of its outcome, is expensive, typically diverts the efforts of our management away from operations for varying periods of time,
and can disrupt or otherwise adversely impact our relationships with current or potential customers and suppliers. Payment and
claim disputes with customers may also cause us to incur increased interest costs resulting from incurring indebtedness under our
revolving line of credit or receiving less interest income resulting from fewer funds invested due to the failure to receive payment
for disputed claims and accounts.
International Plant Services, LLC (IPS) depends on the
Foreign Guest Worker Visa Program for a significant portion of its revenue. We have been unable to obtain new Visas since 2011.
If the current policies of the United States Department of Labor and the U.S. Department of Homeland Security regarding the Guest
Worker Visa Program do not change, IPS will continue to see a decline in available workers which will likely have an adverse effect
on our revenues.
IPS continues to process Visas for guest workers but has not
had a new visa or renewal approved since 2011. While we continue to deploy American workers, IPS will lose most of its current
foreign workers by the 3
rd
quarter of 2014 if there is no change in US Policy. This will reduce revenue and earnings
from IPS to near zero, if we are not successful in deploying American Workers or winning approval of new Visas.
Our projects expose us to potential professional liability,
product liability, warranty and other claims, which could be expensive, damage our reputation and harm our business. We may not
be able to obtain or maintain adequate insurance to cover these claims.
We perform construction
services at large industrial facilities where accidents or system failures can be disastrous and costly. Any catastrophic occurrence
in excess of our insurance limits at locations engineered or constructed by us or where our products are installed or services
performed could result in significant professional liability, product liability, warranty and other claims against us by our customers,
including claims for cost overruns and the failure of the project to meet contractually specified milestones or performance standards.
Further, the rendering of our services on these projects could expose us to risks and claims by third parties and governmental
agencies for personal injuries, property damage and environmental matters, among others. Any claim, regardless of its merit or
eventual outcome, could result in substantial costs, divert management’s attention and create negative publicity, particularly
for claims relating to environmental matters where the amount of the claim could be extremely large. We may not be able to or may
choose not to obtain or maintain insurance coverage for the types of claims described above. If we are unable to obtain insurance
at an acceptable cost or otherwise protect against the claims described above, we will be exposed to significant liabilities, which
may materially and adversely affect our financial condition and results of operations.
Employee, subcontractor or partner misconduct or our overall
failure to comply with laws or regulations could harm our reputation, damage our relationships with customers, reduce our revenues
and profits, and subject us to criminal and civil enforcement actions.
Misconduct, fraud,
non-compliance with applicable laws and regulations, or other improper activities by one of our employees, subcontractors or partners
could have a significant negative impact on our business and reputation. Such misconduct could include the failure to comply with
safety standards, laws and regulations, customer requirements, regulations pertaining to the internal controls over financial reporting,
environmental laws and any other applicable laws or regulations. The precautions we take to prevent and detect these activities
may not be effective, since our internal controls are subject to inherent limitations, including human error, the possibility that
controls could be circumvented or become inadequate because of changed conditions, and fraud.
Our failure to comply
with applicable laws or regulations or acts of misconduct could subject us to fines and penalties, harm our reputation, damage
our relationships with customers, reduce our revenues and profits and subject us to criminal and civil enforcement actions.
We rely on internally and externally developed software
applications and systems to support critical functions including project management, estimating, human resources, accounting, and
financial reporting. Any sudden loss, disruption or unexpected costs to maintain these systems could significantly increase our
operational expense as well as disrupt the management of our business operations.
We rely on various
software systems to operate our critical operating and administrative functions. We depend on our software vendors to provide long-term
software maintenance support for our information systems. Software vendors may decide to discontinue further development, integration
or long-term software maintenance support for our information systems, in which case we may need to abandon one or more of our
current information systems and migrate some or all of our project management, human resources, estimating, accounting and financial
information to other systems, thus increasing our operational expense as well as disrupting the management of our business operations.
Our business may be affected by difficult work sites and
environments, which may adversely affect our overall business.
We perform our work
under a variety of conditions, including, but not limited to, difficult terrain, difficult site conditions and busy urban centers
where delivery of materials and availability of labor may be impacted. Performing work under these conditions can slow our progress,
potentially causing us to incur contractual liability to our customers. These difficult conditions may also cause us to incur additional,
unanticipated costs that we might not be able to pass on to our customers.
We are susceptible to adverse weather conditions, which
may harm our business and financial results.
Our business may be adversely affected
by severe weather in areas where we have significant operations. Repercussions of severe weather conditions may include:
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curtailment of services;
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suspension of operations;
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inability to meet performance schedules in accordance with contracts;
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weather related damage to our facilities;
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disruption of information systems;
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inability to receive machinery, equipment and materials at jobsites; and
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Environmental factors and changes in laws and regulations
could increase our costs and liabilities.
Our operations are
subject to environmental laws and regulations, including those concerning emissions into the air; discharges into waterways; generation,
storage, handling, treatment and disposal of hazardous material and wastes; and health and safety.
We are subject to
numerous other laws and regulations including those related to the business registrations and licenses, environment, workplace,
employment, health and safety. These laws and regulations are complex, change frequently and could become more stringent in the
future. It is impossible to predict the effect on us of any future changes to these laws and regulations. We can provide no absolute
assurance that our operations will continue to comply with future laws and regulations or that the costs to comply with these laws
and regulations and/or a failure to comply with these laws will not significantly adversely affect our business, financial condition
and results of operations.
International operations are subject to a number of risks
that could negatively affect future operating results or subject us to criminal and civil enforcement actions.
We are seeking to
expand our business internationally. International business is subject to a variety of risks, including:
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lack of developed legal systems to enforce contractual rights;
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greater risk of uncontrollable accounts and longer collection cycles;
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Subject to claims under the Foreign Corrupt Practices Act;
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foreign currency exchange volatility;
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uncertain and changing tax rules, regulations and rates;
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logistical and communication challenges;
|
|
|
•
|
potentially adverse changes in laws and regulatory practices;
|
|
|
•
|
general economic, political and financial conditions in foreign markets; and
|
|
|
•
|
exposure to civil or criminal liability under the Foreign Corrupt Practices Act, trade and export control regulations as well as other international regulations.
|
International risks
and violations of international regulations may negatively affect future operating results or subject us to criminal or civil enforcement
actions. Although we have policies and procedures to monitor legal and regulatory compliance, our employees, subcontractors and
agents could take actions that violate these requirements. As a result, our international risk exposure may be more or less than
the percentage of revenues attributed to our international operations.
We may need to raise additional capital in the future
for working capital, capital expenditures and/or acquisitions, and we may not be able to do so on favorable terms or at all, which
would impair our ability to operate our business or achieve our growth objectives.
To the extent that
cash flow from operations are insufficient to make future investments, make acquisitions or provide needed additional working capital,
we may require additional financing from other sources. Our ability to obtain such additional financing in the future will depend
in part upon prevailing capital market conditions, as well as conditions in our business and our operating results; and those factors
may affect our efforts to arrange additional financing on terms that are satisfactory to us. If adequate funds are not available,
or are not available on acceptable terms, we may not be able to make future investments, take advantage of acquisitions or other
opportunities, or respond to competitive challenges.
We have experienced an absence of significant revenues,
recurring losses from operations and need additional financing, which raise substantial doubt about our ability to continue as
a going concern.
As discussed in Note 1 to the financial statements included
in this Annual Report on Form 10-K, the Company’s absence of significant revenues, recurring losses from operations, and
its need for additional financing in order to fund its projected loss in 2014 raise substantial doubt about its ability to continue
as a going concern.
Risk Factors Related to Our Common Stock
Our common stock, which is quoted
on the Over the Counter Market, has from time-to-time experienced significant price and volume fluctuations. These fluctuations
are likely to continue in the future, and our stockholders may not be able to resell their shares of common stock at or above the
purchase price paid.
The market price of
our common stock may change significantly in response to various factors and events beyond our control, including the following:
|
|
•
|
the risk factors described in this Item 1A;
|
|
|
•
|
the significant concentration of ownership of our common stock in the hands of a small number of investors;
|
|
|
•
|
a shortfall in operating revenue or net income from that expected by securities analysts and investors;
|
|
|
•
|
changes in securities analysts’ estimates of our financial performance or the financial performance of our competitors or companies in our industry;
|
|
|
•
|
general conditions in our customers’ industries; and
|
|
|
•
|
general conditions in the security markets.
|
Some companies that
have volatile market prices for their securities have been subject to security class action suits filed against them. If a suit
were to be filed against us, regardless of the outcome, it could result in substantial costs and a diversion of our management’s
attention and resources. This could have a material adverse effect on our business, results of operations and financial condition.
Future sales of our common stock may depress our stock
price.
Sales of a substantial
number of shares of our common stock in the public market or otherwise, either by us, a member of management or a major stockholder,
or the perception that these sales could occur, could depress the market price of our common stock and impair our ability to raise
capital through the sale of additional equity securities.
We may issue additional equity securities, which would
lead to dilution of our issued and outstanding stock.
The issuance of additional
common stock or securities convertible into our common stock would result in dilution of the ownership interest in us held by existing
stockholders. We are authorized to issue, without stockholder approval 100,000,000 shares of preferred stock, par value $0.00001
per share, in one or more series, which may give other stockholders dividend, conversion, voting, and liquidation rights, among
other rights, which may be superior to the rights of holders of our common stock. In addition, we are authorized to issue, without
stockholder approval, a significant number of additional shares of our common stock and securities convertible into either common
stock or preferred stock.
ITEM 1B. Unresolved Staff Comments
None.
ITEM 2. Properties
The principal properties of the Company
and its subsidiaries are as follows:
|
Location
|
|
Description of Facility
|
|
Interest
|
|
La Porte, Texas
|
|
Headquarters
|
|
Leased
|
ITEM 3. 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, L.L.C. (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 appealed the dismissal to the Texas Court
of Appeals, First District. The matter is to be submitted on April 29, 2014, there will be no oral argument permitted.
Cause No. 2012-23084; Ardent Services, LLC vs. David D. Mathews
and Larry J. Laqua.
The Company has settled all matters related
to the Company in the Ardent matter and will not continue providing the defense of its employees, Mr. Mathews (former 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 discontinue its sponsorship and no longer assist in the defense of Mr. Mathews and Mr. Laqua. The
suit was initially instituted on April 20, 2012. The plaintiff is seeking relief in the form of injunctive and unspecified monetary
relief. On October 24, 2013, the Company and the plaintiff entered into a Settlement Agreement whereby the plaintiff released the
Company from all claims arising of this lawsuit. In exchange therefore, the Company agreed (i) to pay plaintiff the sum of
$10,000 for attorney’s fees and (ii) through December 31, 2014 to not directly or indirectly solicit any electrical and instrumentation
business from 11 facilities in the State of Texas.
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 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 material effect on our
financial position, results of operations or liquidity.
The Company has received notification that
a legal action has been initiated with the Republic of the Philippines, Department of Labor and Employment, National Labor Relations
Commission by Benjamin A. Villego against International Plant Services, L.L.C. (“IPS”), a wholly owned subsidiary of
the Company, MBC Human Resources Corporation (“MBC”), a Philippines corporation, and Nida P. Sarmiento, President of
MBC. The action alleges that wages and food allowances are owed to Mr. Villego. MBC is majority owned and controlled by Noureddine
Ayed and Karim Ayed, who are majority shareholders of the Company. IPS and the Company have agreements with MBC to provide the
training and processing of guest workers from the Philippines and to pay MBC a fee based upon hours worked by the guest workers.
The Company believes that Mr. Villego's claim is without merit and intends to vigorously defend IPS.
ITEM 4. Mine Safety Disclosures
Not applicable.
The accompanying notes are an integral part
of these consolidated financial statements
The accompanying notes are an integral part
of these consolidated financial statements
The accompanying notes are an integral part
of these consolidated financial statements
The accompanying notes are an integral part
of these consolidated financial statements
Notes to Consolidated Financial Statements
December 31, 2013 and 2012
NOTE 1 – SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
Texas Gulf Energy, Incorporated (“Company”)
has restated its consolidated financial statements for the year ended December 31, 2012 to correct its accounting for errors that
occurred during this reporting period. This restatement is necessary due to material weaknesses in the Company’s internal
controls that resulted in accounting errors that occurred when the Company failed to reconcile certain accounts. An account analysis
was not adequately performed and not properly verified and there was an insufficient review by supervisory personnel during the
accounting closing process. The effected accounts were
“Prepaid Expenses - Credit Cards,” “Accrued Revenue,”
“Advance to Global NuTech, Inc.,”
and
“Accrued Expenses.”
As part of the restatement process
resulting from our review of such errors, we assessed which items should be corrected in our previously issued financial statements.
The aggregate adjustments in our financial statements decreased net income by $472,409 for the year ended December 31, 2012. Additionally,
total assets and total liabilities decreased by $609,786 and $137,377 respectively.
Nature of Business
–
Texas Gulf Energy, Inc. (a Nevada corporation) (“TGE” or “the Company”) is located in La Porte, Texas and
is in the business of providing craftsmen, architects and engineers in the energy construction sector. Approximately seventy percent
of the revenue is from new construction and the remainder is from repair and maintenance services. The work is generally performed
under time and material priced contracts, based on hours worked plus mobilization fees at the outset of the projects. The lengths
of the Company’s contracts vary but are typically less than one year.
On December 30, 2011, International Plant
Services, LLC (“IPS”) entered into a merger with Global NuTech, Inc.(”Global NuTech”), a Nevada corporation,
pursuant to which IPS and Global NuTech have set forth certain terms relating to a merger transaction between the parties with
IPS becoming a wholly-owned subsidiary of Global NuTech. The transaction was recorded as a reverse merger whereby IPS was considered
to be the accounting acquirer as its shareholders retained control of Global NuTech after the exchange, although Global NuTech
is the legal parent company. The share exchange was treated as a recapitalization of IPS, and IPS (and its historical financial
statements) is the continuing entity for financial reporting purposes. In the first quarter of 2012, Global NuTech changed its
name to Texas Gulf Energy, Inc.
Principles of consolidation
The consolidated financial statements include
the accounts of the Company and its wholly-owned subsidiaries International Plant Services, L.L.C., NuTech Energy, Inc., and Texas
Gulf Specialty Services, Inc. All intercompany accounts and transactions have been eliminated in consolidation.
On
November 22, 2013, the Company closed a transaction involving an Asset Purchase Agreement by and among the Company and three of
its subsidiaries, Fishbone Solutions, Inc. (“FSI”), Texas Gulf Industrial Services, Inc (“TGIS”), and TGE
Electrical and Instrumentation (“TGEI”). Pursuant to the terms of the Agreement, the Company sold substantially all
of the assets of FSI, TGIS and TGEI, operating divisions of the Company as described in Note 10.
Going Concern
The financial statements have been prepared on a going concern
basis which assumes the Company will be able to realize its assets and discharge its liabilities in the normal course of business
for the foreseeable future. The Company has incurred losses since inception resulting in an accumulated deficit of $247,620
as of December 31, 2013 and further losses are anticipated in the development of its business raising substantial doubt about the
Company’s ability to continue as a going concern. The ability to continue as a going concern is dependent upon the
Company generating profitable operations in the future and/or to obtain the necessary financing to meet its obligations and repay
its liabilities arising from normal business operations when they come due. Management intends to finance operating costs over
the next twelve months with existing cash on hand and loans from directors and or private placement of common stock.
Cash and Cash Equivalents
–
The Company considers all highly liquid short-term instruments with an original maturity of three months or less at the date of
purchase to be cash equivalents.
Goodwill
Goodwill represents the excess of the cost
of businesses acquired over the fair value of their net assets at the dates of acquisition. Goodwill is reviewed at least annually
to assess the carrying value of goodwill associated with each of its distinct business units that comprise its business segments
of the company to determine if impairment in value has occurred.
Revenue Recognition
–
Revenue is recognized when persuasive evidence of an arrangement exists, services are performed, sales price is determinable, and
collection is reasonably assured. Services performed and not yet billed are included in accounts receivable as unbilled revenue.
Mobilization fees are recognized upon the mobilization of the labor and the labor revenue is recognized at the unit price of labor
hours worked. Per diem revenue is recorded in a similar fashion for meals, travel and lodging.
Contract costs include all labor costs,
mobilization costs, travel, per diem for travel meals and lodging, and those indirect costs related to contract performance, such
as indirect labor, supplies, tools and repairs. General and administrative costs are charged to expense as incurred. Costs and
estimated earnings in excess of billings are recorded as current assets and billings in excess of costs and estimated earnings
are recorded as a liability.
Texas Gulf Energy, Inc.
Notes to Consolidated Financial Statements
December 31, 2013 and 2012
NOTE 1 – SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES - (CONTINUED)
Accounts Receivable
–
The Company extends unsecured credit to its customers, which is non- interest bearing. Accounts receivable are recorded when invoices
are issued and are presented in the balance sheet net of allowance for doubtful accounts. The Company establishes an allowance
for doubtful accounts to ensure accounts receivable are not overstated due to accounts that are not collectible. The Company maintains
a bad debt reserve based on a variety of factors, including the age of the receivable, payment history, trends and financial condition
of customers, macroeconomic conditions, and significant one-time events.
The Company determines the allowance based
upon a review of outstanding receivables, historical write-off experience and existing economic conditions. Normal contract retainers
are not typically used by the Company. Receivables past due over 90 days are considered delinquent and reviewed individually for
collectability. After all means of collection have been exhausted delinquent, receivables are written off. Management has determined
that the allowance for doubtful accounts as of December 31, 2013 and 2012 is $692,664 and $388,227, respectively. Bad debt expense
for the years ended December 31, 2013 and 2012 is $500,282 and $-, respectively.
Property and Equipment
–
Property and equipment are recorded at cost. Improvements or betterments of a permanent nature are capitalized. Expenditures for
maintenance and repairs are charged to expense as incurred. The cost of assets retired or otherwise disposed of and the related
accumulated depreciation are eliminated from the accounts in the year of disposal. Gains or losses resulting from property disposals
are credited or charged to operations in the year of disposal.
The Company provides for depreciation using the straight-line
method over the following estimated useful lives of assets:
|
|
|
Years of Life
|
|
|
Furniture and fixtures
|
|
|
5-10
|
|
|
Software
|
|
|
3
|
|
|
Computer and equipment
|
|
|
5-10
|
|
|
Vehicles
|
|
|
5-7
|
|
|
Leasehold improvements
|
|
|
3-30
|
|
Impairment of Long-Lived Assets
–
In accordance with Financial Standards Board Accounting Standards Codification (“FASB ASC”) 360,
Property,
Plant and Equipment
, long-lived assets to be held and used are reviewed for impairment on an annual basis or whenever events
or changes in circumstances indicate that the carrying amount of such asset may not be recoverable. The determination of recoverability
of long-lived assets is based on an estimate of undiscounted future cash flows resulting from the use of the asset or its disposition.
Measurement of an impairment loss for long-lived assets that management expects to hold and use is based on the fair value of the
asset. Long-lived assets to be disposed of are reported at the lower of carrying amount or net realizable value.
Texas Gulf Energy, Inc.
Notes to Consolidated Financial Statements
December 31, 2013 and 2012
NOTE 1 – SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES - (CONTINUED)
Fair Value of Financial Instruments
– Under FASB ASC 820,
Fair Value Measurements and Disclosures
, we are permitted to elect to measure financial instruments
and certain other items at fair value, with the change in fair value recorded in earnings. We elected not to measure any eligible
items using the fair value option. Consistent with the Fair Value Measurement Topic of the FASB ASC 820, we implemented guidelines
relating to the disclosure of our methodology for periodic measurement of our assets and liabilities recorded at fair market value.
Fair value is defined as the price that
would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the
measurement date. A three-tier fair value hierarchy prioritizes the inputs used in measuring fair value. The hierarchy
gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurements)
and the lowest priority to unobservable inputs (level 3 measurements). These tiers include:
|
|
·
|
Level 1, defined as observable inputs such as quoted prices for identical instruments in active markets;
|
|
|
·
|
Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable such as quoted prices for similar instruments in active markets or quoted prices for identical or similar instruments in markets that are not active; and
|
|
|
·
|
Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions, such as valuations derived from valuation techniques in which one more significant inputs or significant value drivers are unobservable.
|
Our Level 1 assets primarily include our
cash and cash equivalents (including our money market accounts). Valuations are obtained from readily available pricing sources
for market transactions involving identical assets or liabilities. The carrying amount of accounts receivable, accounts payable,
accrued liabilities, lines of credit, and convertible debt approximate their fair value due to the immediate or short-term maturities
of these financial instruments.
Advertising Charges
–
The Company charges advertising costs to expense as incurred. Advertising costs amounted to $56,802 and $73,517 for the years ended
December 31, 2013 and 2012, respectively, and are included with general and administrative expenses in the accompanying financial
statements.
Income Taxes
– The
Company is taxed as a corporation effective January 1, 2007. The company uses the liability method in accounting for income taxes,
whereby tax rates are applied to cumulative temporary differences based on when and how they are expected to affect future tax
returns. Deferred tax assets and liabilities are adjusted for tax rate changes in the year the changes are enacted. The realizability
of the deferred assets are evaluated annually and a valuation allowance is provided if it is more likely than not that the deferred
tax assets will not give rise to future benefits in the company’s tax returns.
Texas Gulf Energy, Inc.
Notes to Consolidated Financial Statements
December 31, 2013 and 2012
NOTE 1 – SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES - (CONTINUED)
As part of the process of preparing its
financial statements, the Company is required to estimate its income taxes in each of the jurisdictions in which it operates. This
process requires the Company to estimate its actual current tax liability and to assess temporary differences resulting from differing
book versus tax treatment of items, such as deferred revenue, compensation and benefits expense and depreciation. These temporary
differences result in deferred tax assets and liabilities, which are included within the Company’s statements of financial
condition. Significant management judgment is required in determining the Company’s provision for income taxes, its deferred
tax assets and liabilities and any valuation allowance recorded against its net deferred tax assets. In assessing the realization
of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets
will be realized and, when necessary, valuation allowances are established. The ultimate realization of the deferred tax assets
is dependent upon the generation of future taxable income during the periods in which temporary differences become deductible.
Management considers the level of historical taxable income, scheduled reversals of deferred taxes, projected future taxable income
and tax planning strategies that can be implemented by the Company in making this assessment. If actual results differ from these
estimates or the Company adjusts these estimates in future periods, the Company may need to adjust its valuation allowance, which
could materially impact the Company’s consolidated financial position and results of operations.
Tax contingencies can involve complex issues
and may require an extended period of time to resolve. Changes in the level of annual pre-tax income can affect the Company’s
overall effective tax rate. Significant management judgment is required in determining the Company’s provision for income
taxes, its deferred tax assets and liabilities and any valuation allowance recorded against its net deferred tax assets. Furthermore,
the Company’s interpretation of complex tax laws may impact its recognition and measurement of current and deferred income
taxes.
Dividends
– Cash distributions
are made to stockholders in the form of dividends, net of federal withholding. The Company can pay dividends to its shareholders
at its own discretion upon approval by the Board of Directors.
Use of Estimates
–
The preparation of the financial statements in conformity with accounting principles
generally accepted in the United States
of America requires management to make estimates and assumptions that affect certain reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from those estimates. Management believes that these estimates
and assumptions provide a reasonable basis for the fair presentation of the financial statements.
Foreign Currency
- Transaction
gains and losses arising from exchange rate fluctuation on transactions denominated in a currency other than the functional currency
are included in the consolidated statements of operations. The financial statements of foreign subsidiaries whose functional currency
is the local currency are translated into United States dollars using period-end rates of exchange for assets and liabilities and
average rates of exchange for the period for revenues and expenses.
Texas Gulf Energy, Inc.
Notes to Consolidated Financial Statements
December 31, 2013 and 2012
NOTE 1 – SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES - (CONTINUED)
Stock based compensation
The Company accounts for share-based expense and activity in
accordance with FASB ASC Topic 718, which establishes accounting for equity instruments exchanged for services. Under this provision,
share-based compensation costs are measured at the grant date, based on the calculated fair value of the award, and are recognized
as an expense over both the employee and non-employee’s requisite service period, generally the vesting period of the equity
grant.
The Company estimates the fair value of stock options using
the Black-Scholes valuation model. Key input assumptions used to estimate the fair value of stock options include the exercise
price of the award, expected option term, expected volatility of the stock over the option’s expected term, risk-free interest
rate over the option’s expected term, and the expected annual dividend yield. The Company believes that the valuation technique
and approach utilized to develop the underlying assumptions are appropriate in calculating the fair values of the stock options
granted.
Earnings per share
The Company has adopted FASB ASC Topic 260, which provides for
the calculation of basic and diluted earnings per share. Basic and diluted loss per share has been calculated based on the weighted
average number of shares of common stock outstanding during the period.
Reclassifications
Certain amounts previously reported in our annual report on
Form 10-K for the year ended December 31, 2012 has been reclassified to conform to the 2013 presentation. These reclassifications
have no impact on net income.
Recent Pronouncements
-
The Company is not aware
of any new accounting pronouncements that would have a material impact on its consolidated financial statements.
Texas Gulf Energy, Inc.
Notes to Consolidated Financial Statements
December 31, 2013 and 2012
NOTE 2 – Property and Equipment, net
Property and equipment consist of the following at December
31, 2013 and 2012:
|
|
|
2013
|
|
|
2012
|
|
|
|
|
|
|
|
|
|
|
Furniture and fixtures
|
|
$
|
31,989
|
|
|
$
|
33,729
|
|
|
Software
|
|
|
461,406
|
|
|
|
1,651,937
|
|
|
Computers and equipment
|
|
|
81,879
|
|
|
|
79,971
|
|
|
Vehicles
|
|
|
-
|
|
|
|
33,502
|
|
|
Machinery and equipment
|
|
|
33,541
|
|
|
|
145,378
|
|
|
Leasehold improvements
|
|
|
268,198
|
|
|
|
244,358
|
|
|
|
|
|
|
|
|
|
|
|
|
Total property and equipment
|
|
|
877,013
|
|
|
|
2,188,875
|
|
|
Less: accumulated depreciation
|
|
|
(506,797
|
)
|
|
|
(757,134
|
)
|
|
Total property and equipment, net
|
|
$
|
370,216
|
|
|
$
|
1,431,741
|
|
Depreciation for the year ended December
31, 2013 and 2012 amounted to $588,003 and $520,944 respectively, and is included with administrative and general expenses in the
accompanying financial statements.
NOTE 3 – Goodwill
At December 31, 2013 and 2012, goodwill totaled $0 and $862,889,
respectively. The increase in goodwill during 2012 is attributable to the acquisition of Fishbone Solutions LTD (as described in
Note 9). The excess purchase price over the value of the net tangible assets of Fishbone Solutions LTD was recorded to goodwill.
The goodwill has been written off as of December 31, 2013 in relation to the discontinued operations as described in Note 10.
NOTE 4 – Convertible Notes and Notes Payable
Fishbone Notes
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”), for an aggregate amount of $1,500,000, promissory notes (also referred to herein as the “Notes”),
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)
|
Texas Gulf Energy, Inc.
Notes to Consolidated Financial Statements
December 31, 2013 and 2012
|
(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. During
the year, convertible note amounts of $597,000 was assumed by the buyer in relation to the discontinued operations as described
in Note 10 and $103,649 principal and accrued interest of $2,087 was converted into common shares at $0.12 per share by the holder.
As of December 31, 2013, the convertible note balance was $585,971.
Notes Payable
The Company assumed a loan with a financial
institution of $114,047 that was paid off during 2012.
The Company assumed a loan due to a former
shareholder of Fishbone that matures in June 2013. The amount assumed was $422,529 and is guaranteed by Fishbone and has a 4.58%
interest annum (10% annum upon default). The balance outstanding at December 31, 2013 is $34,308.
On November 22, 2013, the Company entered
into an agreement with Dave Matthew’s, the Company's former Chief Executive Officer, whereby the Company redeemed and retired
certain capital stock in the Company, in amounts consisting of 15,667,806 shares of Common Stock and 966,666 shares of Series A
Convertible Preferred Stock, in exchange for the Company’s issuance to Mathews of a Promissory Note in the amount of $1,000,000,
which was assumed by the buyer in the relations to the disposition as described in Note 10.
On January 1, 2012, pursuant to a 3 year
consulting agreement terminated by the consultant, the consultant is entitled to compensation of $12,000 per month for the remainder
of the term of the agreement from January 1, 2014 through December 31, 2014, for total of $144,000. As a result the Company has
recorded a note payable for $144,000 as of December 31, 2013.
NOTE 5 - 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 $182,075 at December 31, 2013 and $2,817,925 was available at December
31, 2013. This agreement can be terminated at any time by the Company.
On September 14, 2012, the Company entered
into a $1 million receivable 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 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 $56,883 and $943,117 was available at December 31, 2013. This agreement
can be terminated at any time by the Company.
On September 18, 2013, the Company entered
into a $1.5 million receivable purchase agreement with 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 $476,001 and $1,023,999 was available at December 31, 2013. This agreement
can be terminated at any time by the Company.
Texas Gulf Energy, Inc.
Notes to Consolidated Financial Statements
December 31, 2013 and 2012
NOTE 6 - Stock Based Compensation
The stock based compensation cost that has been charged against
income by the Company was $699,670 and $1,087,452 for the years ended December 31, 2013 and 2012, respectively, for common stock
awarded by the Company. In 2012 the Company entered into employment agreements with the chief executive officer, chief financial
officer, and other key employees and granted 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 2013, the Company issued 7,857,385 common shares per
the vesting of the 28,477,806 restricted shares vesting over 36 months to the chief executive officer, chief financial officer,
and other key employees for total stock compensation expense of $699,670. On November 22, 2013, the Company, for a $1,000,000 note
payable redeemed and retired 10,009,987 common shares vested and issued to David Matthews the Company’s former CEO, the remaining
5,657,819 common shares owed and not yet vested have been canceled.
As of year end there remains 3,070,000 unvested commons shares
and stock compensation expense of $276,300 to be recorded.
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 year ended December 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 year ended December 31, 2013 in the form of 10,000,000 series B preferred stock convertible
at $0.17 per share into 58,823,529 common shares and a convertible note of $585,971 convertible at $0.12 per share into 4,883,092
common shares outstanding that could have a dilutive effect on loss per share. However in periods where losses are reported, the
weighted-average number of shares outstanding excludes equivalents, because their inclusion would be anti-dilutive.
NOTE 8 – Segment Information
The Company has two reportable segments,
Texas Gulf Specialty Services and International Plant Services, LLC as of December 31, 2013. The sale of all of the assets of Texas
Gulf Energy Industrial Services and Fishbone Solutions, Inc. account for the reduction in our operating segments.
Texas Gulf Specialty Services
Texas Gulf Specialty
Services provides specialty construction services to a wide range of industry and energy sector clients. These services are provided
for projects of varying complexities, schedule durations and budgets.
Texas Gulf Energy, Inc.
Notes to Consolidated Financial Statements
December 31, 2013 and 2012
International Plant Services, LLC
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.
Segment revenue is as follows: (in
$000’s)
Year ended December 31, 2013:
|
|
|
Texas
Gulf
Specialty
Services
|
|
|
International
Plant
Services
|
|
|
Corporate
|
|
|
Totals
|
|
|
Revenues
|
|
$
|
326
|
|
|
$
|
8,990
|
|
|
$
|
187
|
|
|
$
|
9,503
|
|
|
Income (loss) from continuing operations
|
|
$
|
5
|
|
|
$
|
826
|
|
|
$
|
(3,782
|
)
|
|
$
|
(2,951
|
)
|
|
Total Assets
|
|
$
|
169
|
|
|
$
|
6,128
|
|
|
$
|
(2,396
|
)
|
|
$
|
3,901
|
|
Year ended December 31, 2012 (restated)
|
|
|
Texas Gulf
Oil & Gas
|
|
|
International
Plant
Services
|
|
|
Corporate
|
|
|
Totals
|
|
|
Revenues
|
|
$
|
29
|
|
|
$
|
23,887
|
|
|
$
|
2,899
|
|
|
$
|
26,815
|
|
|
Income (loss) from continuing operations
|
|
$
|
(271
|
)
|
|
$
|
3,081
|
|
|
$
|
(3,823
|
)
|
|
$
|
(1,013
|
)
|
|
Total Assets
|
|
$
|
-
|
|
|
$
|
7,426
|
|
|
$
|
3,031
|
|
|
$
|
10,457
|
|
Texas Gulf Energy, Inc.
Notes to Consolidated Financial Statements
December 31, 2013 and 2012
NOTE 9 – Acquisitions
On January 27, 2012, the Company entered
into a share exchange agreement with Texas Gulf Oil & Gas, Inc., a Nevada corporation (“TGOG”), and the equity-holders
of TGOG. Pursuant to the terms of the agreement, the Company acquired all of the common stock of TGOG from its equity-holders,
representing one hundred percent (100%) of the issued and outstanding shares of capital stock of TGOG, in exchange for 4,000,000
newly-issued shares of Common Stock, of which 2,200,000 shares are being issued to seven (7) of the equity-holders and 1,800,000
shares are to be issued to one other equity-holder at a later date, which shall occur not later than 180 days following the closing
date and is subject to certain conditions. As a result of the transaction, TGOG became a wholly-owned subsidiary of the Company.
The Company’s acquisition of TGOG
did not have a material impact on the Company’s consolidated financial statements, and therefore pro forma disclosures are
not presented.
On February 3, 2012, the Company completed
the acquisition of Fishbone Solutions LTD. The consideration paid was approximately $1,921,000 for 100% of the company. The consideration
consisted of approximately $421,000 cash and a convertible note with restrictions for the amount of $1,500,000.
The allocation of the purchase price to
the assets acquired and liabilities assumed based on the fair values was as follows:
|
Accounts receivable, net
|
|
$
|
619,806
|
|
|
Prepaid assets
|
|
|
47,653
|
|
|
Property and equipment
|
|
|
1,175,000
|
|
|
Goodwill
|
|
|
862,889
|
|
|
Total assets acquired
|
|
|
2,705,348
|
|
|
Liabilities assumed
|
|
|
(784,160
|
)
|
|
Total
|
|
$
|
1,921,188
|
|
Texas Gulf Energy, Inc.
Notes to Consolidated Financial Statements
December 31, 2013 and 2012
NOTE 10 –
Dispositions
On November 22, 2013 (the “ Closing
Date ”), Texas Gulf Energy, Incorporated, a Nevada corporation (the “ Company ”), closed a transaction (the “
Transaction ”) involving an Asset Purchase Agreement dated the Closing Date (the “ Agreement ”) by and among
the Company andtwo of its subsidiaries, Fishbone Solutions, Inc., a Texas corporation (“ FSI ”), and Texas Gulf Industrial
Services, Inc,, a Texas corporation (“ TGIS ”), and TGE Industrial Services, LLC (“TGEI”), a Texas limited
liability company (the “ Buyer ”). Pursuant to the terms of the Agreement, the Company sold substantially all of the
assets of FSI, TGIS and TGEI, operating divisions of the Company, to the Buyer. As consideration for the transaction, the Buyer
agreed to pay to the Company an aggregate purchase price of $4,137,335, consisting of (i) the assumption of certain promissory
note obligations of the Company, which consist of a certain convertible promissory notes issued to John Sloan (“Sloan ”)
of $597,000 and a promissory note in favor of David Mathews (“ Mathews ”) of $1,000,000 and (ii) cash in the amount
of $2,540,335. The transaction resulted in discontinued operations classification and presentation. Also as of Closing Date, pursuant
to the Agreement, the Company and the Buyer entered into a Transition Agreement (the “Transition Agreement”) whereby
the Company agreed to provide certain services related to the continuing operation of FSI, TGIS and TGEI for a period of sixty
(60) days, which by written notice of the Buyer may be extended for an additional thirty (30) days thereafter. As consideration
for these services rendered pursuant to the Transition Agreement, on the Closing Date the Buyer pre-paid the sum of $150,000 to
the Company.
|
Aggregate purchase price
|
|
$
|
4,137,335
|
|
|
|
|
|
|
|
|
Reportable segment assets
|
|
|
Carrying value of assets disposed
|
|
|
Fishbone Solutions, Inc.
|
|
|
|
|
|
Machinery and Equipment
|
|
|
(503,930
|
)
|
|
Goodwill
|
|
|
(862,889
|
)
|
|
Texas Gulf Industrial Services, Inc.
|
|
|
|
|
|
Machinery and Equipment
|
|
|
(48,280
|
)
|
|
Other Assets
|
|
|
(587,454
|
)
|
|
TGE Industrial Services, LLC
|
|
|
|
|
|
Other Assets
|
|
|
(16,888
|
)
|
|
Total
|
|
|
(2,019,441
|
)
|
|
Gain on disposal
|
|
$
|
2,117,894
|
|
|
|
|
December 31,
2013
|
|
|
December 31,
2012
(restated)
|
|
|
Discontinued operations:
|
|
|
|
|
|
|
|
|
|
Net Revenues
|
|
|
15,580,779
|
|
|
|
9,228,996
|
|
|
Income from discontinued operations, net of tax
|
|
|
1,263,821
|
|
|
|
669,580
|
|
|
Gain on sale of discontinued operations, net of tax
|
|
|
1,397,810
|
|
|
|
-
|
|
|
Income from discontinued operations
|
|
|
2,661,631
|
|
|
|
669,580
|
|
NOTE 11 – 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 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 appealed the dismissal
to the Texas Court of Appeals, First District. The matter is to be submitted on April 29, 2014, there will be no oral argument
permitted. .
Texas Gulf Energy, Inc.
Notes to Consolidated Financial Statements
December 31, 2013 and 2012
Cause No. 2012-23084; Ardent Services, LLC vs. David D. Mathews
and Larry J. Laqua.
The Company has settled all matters related
to the Company in the Ardent matter and will not continue providing the defense of its employees, Mr. Mathews (former 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 discontinue its sponsorship and no longer assist in the defense of Mr. Mathews and Mr. Laqua. The
suit was initially instituted on April 20, 2012. The plaintiff is seeking relief in the form of injunctive and unspecified monetary
relief. On October 24, 2013, the Company and the plaintiff entered into a Settlement Agreement whereby the plaintiff released the
Company from all claims arising of this lawsuit. In exchange therefore, the Company agreed (i) to pay plaintiff the sum of
$10,000 for attorney’s fees and (ii) through December 31, 2014 to not directly or indirectly solicit any electrical and instrumentation
business from 11 facilities in the State of Texas
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 12 – RELATED PARTY TRANSACTIONS
The Company’s two majority owners
as of December 31, 2013 maintain a 74.8% voting control of the Company. The Company utilizes corporations owed by the two majority
shareholders that provide certain services to the company, which include the following:
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 is $25,657 and $204,561
as of December 31, 2013 and 2012, respectively, 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. Amounts payable to the related party as
of December 31, 2013 and 2012 were $0 and $19,689 respectively.
Costs of revenue of $96,531 and $642,708
for services provided by related parties are included in the income statements for the years ended December 31 2013 and 2012, respectively.
Amounts payable to the related party of
$0 and $2,278 are included in the balances as of December 31, 2013 and 2012, respectively. Costs of revenues for these services
include $0 and $1,271,440 for hotel and lodging and rent of $132,000 and $132,000 the years ended December 31, 2013 and 2012, respectively.
Texas Gulf Energy, Inc.
Notes to Consolidated Financial Statements
December 31, 2013 and 2012
NOTE 13 - INCOME TAXES
Income tax expense
(benefit) attributable to income from continuing operations differed from the amounts computed by applying the U.S. Federal income
tax of 34% to pretax income from continuing operations as a result of the following:
|
|
|
December 31, 2013
|
|
|
December 31, 2012
(restated)
|
|
|
Provision (benefit) at statutory rate
|
|
$
|
(1,402,000
|
)
|
|
$
|
(139,821
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-deductible expenses
|
|
|
255,000
|
|
|
|
-
|
|
|
Other
|
|
|
(26,989
|
)
|
|
|
|
|
|
Change in valuation allowance
|
|
|
-
|
|
|
|
-
|
|
|
|
|
$
|
(1,173,989
|
)
|
|
$
|
(139,821
|
)
|
The tax effects of
temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December
31, 2013 and 2012, are presented below:
|
|
|
December 31, 2013
|
|
|
December 31, 2012 (restated)
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$
|
314,000
|
|
|
$
|
130,000
|
|
|
Property and equipment
|
|
|
45,000
|
|
|
|
|
|
|
Net operating loss carry forward
|
|
|
1,935,000
|
|
|
|
564,000
|
|
|
Deferred tax assets
|
|
|
2,294,000
|
|
|
|
694,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
|
Property and equipment
|
|
|
-
|
|
|
|
(29,000
|
)
|
|
Deferred tax liabilities
|
|
|
-
|
|
|
|
(29,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
|
2,294,000
|
|
|
|
665,000
|
|
|
Valuation allowance
|
|
|
(1,935,000
|
)
|
|
|
(564,000
|
)
|
|
|
|
$
|
359,000
|
|
|
$
|
101,000
|
|
The Company has determined
that a valuation allowance of $1,935,000 at December 31, 2013, is necessary to reduce the net deferred tax assets to the amount
that will more than likely than not be realized. There was a change of $1,371,000 in the valuation allowance for 2013. As of December
31, 2013, the Company has an approximate net operating loss carry-forward of $5,690,000 which is available to offset future federal
taxable income, if any, with expiration in starting in 2034.
The ability of the Company to utilize net
operating loss (“NOL”) carry-forwards to reduce future federal taxable income and federal income tax is subject to
various limitations under the Internal Revenue Code of 1986, as amended. The utilization of such carry-forwards may be limited
upon the occurrence of certain ownership changes, including the issuance or exercise of rights to acquire stock, the purchase or
sale of stock by 5% stockholders, as defined in the Treasury regulations, and the offering of stock during any three-year period
resulting in an aggregate change of more than 50% in the beneficial ownership of the Company.
In the event of an ownership change (as
defined for income tax purposes), Section 382 of the Code imposes an annual limitation on the amount of a corporation's taxable
income that can be offset by these carry-forwards. The limitation is generally equal to the product of (i) the fair market value
of the equity of the company multiplied by (ii) a percentage approximately equivalent to the yield on long-term tax exempt bonds
during the month in which an ownership change occurs. In addition, the limitation is increased if there are recognized built-in
gains during any post-change year, but only to the extent of any net unrealized built-in gains (as defined in the Code) inherent
in the assets sold. Certain NOLs acquired through various acquisitions are also subject to limitations.
There are no significant differences between
the Company’s operating results for financial reporting purposes and for income tax purposes.
Texas Gulf Energy, Inc.
Notes to Consolidated Financial Statements
December 31, 2013 and 2012
NOTE 14 – STOCKHOLDERS’ EQUITY
Common Stock
The total number of authorized shares of
the Company’s common stock is 500,000,000 shares, $0.00001 par value per share. As of December 31, 2013 there were 50,977,165
common shares issued and outstanding.
On December 30, 2011, pursuant to the merger
transaction between IPS and Global NuTech, shareholders of IPS received 29,411,765 of Global NuTech common stock and 10,000,000
shares of Global Nu-Tech Series B preferred stock which are convertible into shares of common stock at a conversion price of $0.17
per share (or 58,823,529 common shares), subject to the terms therein. Shareholders of Global NuTech retained 9,895,789 shares
of common stock. The share exchange was treated as a recapitalization of IPS, and IPS (and its historical financial statements)
is the continuing entity for financial reporting purposes. In the first quarter of 2012, Global NuTech changed its name to Texas
Gulf Energy, Inc.
On November 22, 2013, the Company entered
into an agreement with Dave Matthews, the Company's former Chief Executive Officer, whereby the Company redeemed and retired certain
capital stock in the Company, in amounts consisting of 15,667,806 (10,009,987 of which have been vested) shares of Common in exchange
for the Company’s issuance to Mathews of a Promissory Note in the amount of $1,000,000, which was assumed by the buyer in
the relations to the disposition as described in Note 10.
During 2013, a holder of $689,620 of a
convertible promissory note converted $103,649 principal and accrued interest of $2,087 into 863,740 common shares at $0.12 per
share by the holder.
Preferred Stock
The total number of authorized shares of
the Company’s preferred stock is 100,000,000 shares, $0.00001 par value per share. The total number of designated shares
of the Company’s series A preferred stock is 2,900,000. The total number of designated shares of the Company’s series
B preferred stock is 10,000,000. As of December 31, 2013, there were 0 shares of series A preferred stock issued and outstanding
and 10,000,000 shares of series B preferred shares issued and outstanding. Series B preferred shares are senior to the common stock
of the Company. Series A preferred shares are senior to the series B preferred shares of the Company.
Series A convertible preferred stock
In December 2011, the Company issued 2,900,000
shares of Series A preferred shares for proceeds of $2,906,347 to the Company’s majority owners.
Holders of outstanding shares of the Company’s
series A preferred are entitled to receive dividends at the annual rate of 4%, when, as, and if declared, therefore non-cumulative,
by the Company’s board of directors. No dividends or similar distributions may be made on shares of capital stock or securities
junior to the Company’s series A preferred until dividends in the same amount per share on the Company’s series A preferred
have been declared and paid. In connection with a liquidation, winding-up, dissolution or sale of the Company, each share of the
Company’s series A preferred is entitled to receive $1.00 plus all declared and unpaid dividends thereon prior to similar
liquidation payments due on shares of the Company’s common stock or any other class of securities junior to the Company’s
series A preferred shares. The Company’s series A preferred are not entitled to participate with the holders of the Company’s
common stock with respect to the distribution of any remaining assets of the Company. Shares of Series A Preferred have the option
to convert into shares of common stock, at a conversion price of $.085 per share, on the earlier of : (a) the passing of three
years from the issuance date of shares of the series A preferred shares or (b) the change of control, or sale, of the Company;
Holders of outstanding shares of the Company’s series A preferred shall be entitled to vote on a 100-to-1 (preferred share-to-common
share) basis relative to the holders of common stock.
On November 22, 2013, the Company entered into an agreement
with David Matthews, the Company's former Chief Executive Officer, whereby the Company redeemed and retired certain capital stock
in the Company, in amounts consisting of 966,666 shares of Series A Convertible Preferred Stock, in exchange for the Company’s
issuance to Mathews of a Promissory Note in the amount of $1,000,000, which was assumed by the buyer in the relations to the disposition
as described in Note 10.
On November 25, 2013, the Company entered into and closed a
(i) Stock Redemption Agreement with Karim Ayed, the Company's Chairman of the Board, whereby the Company redeemed and retired 966,667
shares of Series A Convertible Preferred Stock in exchange for cash in the amount of $1,000,000 and (ii) a Stock Redemption Agreement
with Mohamed Noureddine Ayed, the Company's former Chairman of the Board, whereby the Company redeemed and retired 966,667 shares
of Series A Convertible Preferred Stock in exchange for cash in the amount of $1,000,000.
As a result of the redemptions of the Series A Convertible Preferred
Stock previously owned by Mathews, Karim Ayed and Mohamed Noureddine Ayed, all previously issued and outstanding shares of the
Series A Convertible Preferred Stock have been redeemed and retired.
Texas Gulf Energy, Inc.
Notes to Consolidated Financial Statements
December 31, 2013 and 2012
Series B convertible preferred stock
Holders of outstanding shares of the Company’s
series B preferred are entitled to receive dividends at the annual rate of 4%, when, as, and if declared, therefore non-cumulative,
by the Company’s board of directors. No dividends or similar distributions may be made on shares of capital stock or securities
junior to the Company’s series B preferred until dividends in the same amount per share on the Company’s series B preferred
have been declared and paid. In connection with a liquidation, winding-up, dissolution or sale of the Company, each share of the
Company’s series B preferred is entitled to receive $1.00 plus all declared and unpaid dividends thereon prior to similar
liquidation payments due on shares of the Company’s common stock or any other class of securities junior to the Company’s
series B preferred shares. The Company’s series B preferred are not entitled to participate with the holders of the Company’s
common stock with respect to the distribution of any remaining assets of the Company. Shares of series A preferred have the option
to convert into shares of common stock, at a conversion price of $.17 per share, on the earlier of : (a) the passing of three years
from the issuance date of shares of the series B preferred shares or (b) the change of control, or sale, of the Company; Holders
of outstanding shares of the Company’s series A preferred shall be entitled to vote on a 1-to-1 (preferred share-to-common
share) basis relative to the holders of common stock.
NOTE 15 – COMMITMENTS
Operating Leases and Other Commitments
The Company leases office facilities under
an operating lease agreement from a corporation affiliated by common ownership. This office lease consists of monthly installments
of $11,000 expiring on April 30, 2018. The Company has five options to renew the office lease for no more than five years in each
option. All taxes, utilities and interior improvements and repairs are paid by the Company. The abovementioned lease agreements
require future annual payments as follows:
|
|
2014
|
|
|
$
|
132,000
|
|
|
|
2015
|
|
|
|
132,000
|
|
|
|
2016
|
|
|
|
132,000
|
|
|
|
2017
|
|
|
|
176,000
|
|
|
|
Thereafter
|
|
|
|
-
|
|
|
|
|
|
|
$
|
572,000
|
|
The Company is subject to certain litigation
arising in the ordinary course of business. Management does not believe that any litigation will have a material adverse effect
on the Company’s consolidated financial position.
Employment Agreements
The Company entered into employment agreements
with the chief executive officer, chief financial officer, and other key employees and granted 28,477,806 restricted shares vesting
over 36 months. The fair value of the common stock on the date of grant was $0.09 or $2,563,002. During 2012, the Company and applicable
parties amended the Company’s employment agreements with the chief executive officer and the chief financial officer as well
its consulting agreement with Corporate Strategies, LLC. In part, the amendments provide for the right of the Company to clawback
or reclaim any unvested shares during the stated 3 year vesting period.
During 2013, the Company issued 7,857,385 common shares per
the vesting of the 28,477,806 restricted shares vesting over 36 months to the chief executive officer, chief financial officer,
and other key employees for total stock compensation expense of $699,670. On November 22, 2013, the Company, for a $1,000,000 note
payable redeemed and retired 10,009,987 common shares vested and issued to David Matthews the Company’s former CEO, the remaining
5,657,819 common shares owed and not yet vested have been canceled. In January, 2014 the Company agreed to cancel the employment
agreement with the current chief executive officer, and released him from any claims by the Company against him. In return, the
current CEO has agreed to continue serving as CEO part-time until July 31, 2014 and remains a director of the Company and is paid
$1,500 per month, plus any applicable expenses. John Haney was elected Chief Financial Officer in January, 2014 as previously disclosed.
As of year end there remains 3,070,000
unvested commons shares and stock compensation expense of $276,300 to be recorded.
NOTE 16 – SIGNIFICANT CUSTOMERS
AND VENDOR
Three customers represented 21%, 19% and
14% of the Company’s gross sales for the year ended December 31, 2013. Three companies represented 23%, 17% and 12% of outstanding
accounts receivable at December 31, 2013. Two customers represented 15% and 14% of the Company’s gross sales and two companies
represented 25% and 12% of outstanding accounts receivable for the year ended December 31, 2012.
One vendor represented 12% of the Company’s
purchases for the year ended December 31, 2013. One vendor represented 15% of accounts payable due at December 31, 2013. At December
31, 2012 there were no significant vendors.
Texas Gulf Energy, Inc.
Notes to Consolidated Financial Statements
December 31, 2013 and 2012
NOTE 17 – SUBSEQUENT EVENTS
During 2014, a holder of $585,971 of a convertible promissory
note converted $223,349 principal and accrued interest into 1,861,240 common shares at $0.12 per share.