10-Q/A 1 v347819_10qa.htm FORM 10-Q/A

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q/A

(Amendment No. 4)

 

(Mark One)

x Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the quarterly period ended  September 30, 2012

or

 

¨ Transition Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934

For the transition period from                to              

 

Commission File No. 333-149857

 

TEXAS GULF ENERGY, INCORPORATED

(Exact name of registrant as specified in its charter)

 

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

1602 Old Underwood Road, La Porte, TX 77571

(Address of principal executive offices and zip code)

 

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

 

Not Applicable

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

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), &and (2) has been subject to such filing requirements for the past 90 days.    Yes    x      No    ¨

 

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

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “accelerated filer”, “large accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   ¨   Accelerated filer   ¨
       
Non-accelerated filer   ¨   Smaller reporting company   x

  

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

 

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

 

 
 

 

EXPLANATORY NOTE

 

Texas Gulf Energy, Incorporated (referred to herein as the “Company” or in first person notations “we,” “us” and “our”) is filing this Amendment No. 4 of Form 10-Q/A to its Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2012, as previously amended by Amendment Nos. 1 - 3 (the “Original Filing”), to restate the Company’s Consolidated Statements of Operations for the period ended September 30, 2012, Consolidated Balance Sheets as of September 30, 2012, and Consolidated Statements of Cash Flows for the period ended September 30, 2012. 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. 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 changed net income (loss) by $284,277 and $284,277 for the three and nine months ended September 30, 2012, respectively, and total assets and total liabilities by $288,968 and $4,692 respectively. See note 1 of Notes to Consolidated Financial Statements in Part I, Item 1 of this Form 10-Q/A for information regarding the revisions to the previously issued financial statements, and such revisions and adjustments are reflected in the financial statements.

 

All of the information in this Form 10-Q/A is as of September 30, 2012 (unless explicitly identified as of another date) and does not reflect events or circumstances that may have occurred after the Original Filing or otherwise update disclosures (including the exhibits to the Original Filing other than Exhibits 31.1, 31.2, 32.1 and 32.2 described below), except with respect to the restatement and related matters in the following sections:

 

PART I

Item 1 - Financial Statements

Item 1 - Notes to Consolidated Financial Statements

Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operation

Item 4 - Controls and Procedures

 

PART II

Item 6 - Exhibits

 

This Form 10-Q/A includes new Rule 13a-14(a)/15d-14(a) certificates as Exhibits 31.1 and 31.2, and new certifications pursuant to Section 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 as Exhibits 32.1 and 32.2.

 

FORWARD-LOOKING STATEMENTS

 

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

 

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

 

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

 

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

 

  •   expansion and other development trends of the industries we serve;

 

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

 

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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:

 

  •   the risk factors discussed in our Form 10-K for the fiscal year ended December 31, 2011 and listed from time to time in our filings with the Securities and Exchange Commission;

 

  •   the inherently uncertain outcome of current and future litigation;

 

  •   the adequacy of our reserves for contingencies;

 

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

 

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

 

  •   other factors, many of which are beyond our control.

 

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

 

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TABLE OF CONTENTS

 

      PAGE
PART I   FINANCIAL INFORMATION  
     
Item 1.   Financial Statements 5
    Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2012 (restated) and 2011 (Unaudited) 5
    Consolidated Balance Sheets as of September 30, 2012 (Restated and Unaudited) and December 31, 2011 6
    Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2012 (restated) and 2011 (Unaudited) 7
    Notes to Consolidated Financial Statements (Restated and Unaudited) 8
Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations 17
Item 3.   Quantitative and Qualitative Disclosures About Market Risk 21
Item 4.   Controls and Procedures 21
     
PART II   OTHER INFORMATION  
     
Item 1.   Legal Proceedings 22
Item 1A.   Risk Factors 22
Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds 22
Item 3.   Defaults Upon Senior Securities 22
Item 4.   Mine Safety Disclosures 22
Item 5.   Other Information 23
Item 6.   Exhibits 23

 

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PART I. FINANCIAL INFORMATION

 

ITEM 1. Financial Statements

 

Texas Gulf Energy, Incorporated

Consolidated Statements of Operations

(unaudited)

 

   Three Months Ended
September 30,		   Nine Months Ended
September 30,		 
   2012   2011   2012   2011 
   (Restated)       (Restated)     
Revenues  $8,080,254   $8,875,042   $25,410,018   $22,976,389 
                     
Cost of revenues   6,569,790    6,700,449    19,741,646    19,138,303 
                     
Gross profit   1,510,464    2,174,593    5,668,372    3,838,086 
                     
General and administrative expense   2,175,442    1,188,264    6,666,469    2,430,577 
                     
Income (loss) from operations   (664,978)   986,329    (998,097)   1,407,509 
                     
Other income (expense)                    
Other income (expense)   404,820    845    405,502    1,044 
Interest income (expense)   (16,630)   (10,904)   (89,086)   (12,057)
Total other income (expense)   388,190    (10,059)   316,416    (11,013)
                     
Income before income tax   (276,788)   976,270    (681,681)   1,396,496 
                     
Income tax benefit (expense)   60,344    (377,956)   200,987    (532,459)
                     
Net income (loss)  $(216,444)  $598,314   $(480,694)  $864,037 
                     
Earnings (loss) per share                    
Basic  $(0.00)  $0.02   $(0.01)  $0.03 
Diluted  $(0.00)  $0.02   $(0.01)  $0.03 
                     
Weighted average shares outstanding                    
Basic   48,847,954    29,411,765    47,309,704    29,411,765 
Diluted   48,847,954    29,411,765    47,309,704    29,411,765 

 

See accompanying notes.

 

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Texas Gulf Energy, Incorporated

Consolidated Balance Sheets

 

   September 30, 
2012
(restated and
unaudited)		   December 31, 
2011		 
Assets          
Current assets:          
Cash and cash equivalents  $182,615   $2,747,880 
Accounts receivable, net   4,888,177    4,402,230 
Deferred income taxes   130,000    130,000 
Federal income tax receivable   176,389    — 
Prepaid expenses and other current assets   602,457    875,327 
Total current assets   5,979,638    8,155,437 
           
Property and equipment, net   1,556,219    191,158 
Goodwill and other assets   942,228    — 
Total assets  $8,478,085   $8,346,595 
           
Liabilities and stockholders’ equity          
           
Current liabilities:          
Accounts payable  $765,536   $201,085 
Accrued liabilities   1,071,770    2,939,184 
Due to related parties, net   190,461    1,430,773 
Federal income taxes payable   —    455,000 
Lines of Credit   1,835,889    — 
Note payable   145,808    — 
Total current liabilities   4,009,464    5,026,042 
           
Convertible debt   1,500,000    — 
Deferred federal income tax   29,000    29,000 
Total liabilities   5,538,464    5,055,042 
           
Stockholders’ equity:          
Common stock - $.00001 par value; 500,000,000 shares authorized; 47,227,006 shares issued and outstanding as of September 30, 2012, and 39,307,554 December 31, 2011   472    393 
Preferred stock – par value of .00001;100,000,00 shares authorized; Series A convertible preferred stock 2,900,000   29    29 
issued and outstanding Series B convertible preferred stock 10,000,000 issued and outstanding   100    

100

 
Additional paid in capital   3,034,508    2,905,825 
Retained earnings (Accumulated deficit)   (95,488)   385,206 
Total stockholders’ equity   2,939,621    3,291,553 
Total liabilities and stockholders’ equity  $8,478,085   $8,346,595 

 

See accompanying notes.  

 

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Texas Gulf Energy, Incorporated

Consolidated Statements of Cash Flows

(unaudited)

 

   Nine months ended 
   September 30,
2012		   September 30,
2011		 
   restated     
Cash flow from operating activities          
  Net income (loss)  $(480,694)  $864,037 
  Adjustments to reconcile net income (loss) to net cash provided by operating activities:          
Depreciation   377,004    75,380 
Stock based compensation   900,751    — 
Bad debt   —    145,563 
Gain on sale of assets   (43,192)   — 
Gain on sale of business   (348,001)   — 
Changes in working capital accounts:          
Change in accounts receivables   132,756    (2,260,633)
Change in federal income taxes receivable   —    1,298,095 
Change in prepaid expenses and other current assets   175,449    (208,796)
Changes in deferred taxes   —    (63,000)
Change in accounts payable   553,723    (111,021)
Change in accrued liabilities   (1,974,602)   1,161,172 
Change in due to related parties   (1,290,574)   (1,134,442)
Changes in federal income taxes payable   (631,389)   568,796 
Net cash provided by (used in) operating activities   (2,628,769)   335,151 
           
Cash flows from investing activities          
Purchase of property and equipment   (891,514)   (246)
Acquisitions   (371,022)   — 
Disposal of business   12,661    — 
Proceeds from sale of assets   90,384    — 
 Net cash used in investing activities   (1,159,491)   (246)
           
Cash flows from financing activities          
Payments of notes payable   (223,894)   — 
Proceeds from loans   —    45,273 
Line of credit, net   1,446,889    — 
 Net cash from financing activities   1,222,995    45,273 
           
Net change in cash and cash equivalents   (2,565,265)   380,178 
           
Cash and cash equivalents:          
 Beginning   2,747,880    245,360 
 Ending  $182,615   $625,538 
           
Supplemental disclosure of cash flow information          
Cash payments (receipts) for:          
Federal income tax  $194,414   $(1,473,095)
Interest expense  $89,086   $12,057 
State income tax  $—   $40,811 

 

See accompanying notes.

 

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Texas Gulf Energy, Incorporated

Notes to Consolidated Financial Statements

(unaudited)

 

Note 1 – Restatement of Financial Information

 

Texas Gulf Energy, Incorporated (“Company”) has restated its unaudited consolidated financial statements for the three and nine months ended September 30, 2012 to correct its accounting for errors that occurred during this quarter. This statement 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. 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 changed net income (loss) by $284,277 and $284,277 for the three and nine months ended September 30, 2012 respectively and total assets and total liabilities by $288,968 and $4,692 respectively.

 

Impact of the restatement

 

Impact on Consolidated Statement of Operations

   Three Months Ended
September 30, 2012		 
   As
Reported ($)		   Adjustment ($)   As
Restated ($)		 
             
Revenue   8,385,964    (305,710)   8,080,254 
Cost of revenues   6,584,343    (14,553)   6,569,790 
Gross profit   1,801,621    (291,157)   1,510,464 
General and administrative expense   2,086,802    88,640    2,175,442 
Income (loss) from operations   (285,181)   (379,797)   (664,978)
Income (loss) before income tax   103,009    (379,797)   (276,788)
Income tax benefit (expense)   (35,176)   95,520    60,344 
Net income (loss)   67,833    (284,277)   (216,444)

 

   Nine Months Ended
September 30, 2012		 
   As
Reported ($)		   Adjustment ($)   As
Restated ($)		 
             
Revenue   25,715,728    (305,710)   25,410,018 
Cost of revenues   19,756,199    (14,553)   19,741,646 
Gross profit   5,959,529    (291,157)   5,668,372 
General and administrative expense   6,577,829    88,640    6,666,469 
Income (loss) from operations   (618,300)   (379,797)   (998,097)
Income (loss) before income tax   (301,884)   (379,797)   (681,681)
Income tax benefit (expense)   105,467    95,520    200,987 
Net income (loss)   (196,417)   (284,277)   (480,694)

 

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Impact on Consolidated Balance Sheets 

 

   September 30, 2012 
   As
Reported ($)		   Adjustment ($)   As
Restated ($)		 
             
Accounts receivable, net   5,193,887    (305,710)   4,888,177 
Federal income tax receivable   —    176,389    176,389 
Prepaid expenses and other current assets   762,104    (159,647)   602,457 
Total current Assets   6,268,606    (288,968)   5,979,638 
Total assets   8,767,053    (288,968)   8,478,085 
                
Accrued liabilities   1,163,233    (91,463)   1,071,770 
Due to related parties, net   90,305    100,156    190,461 
Federal income taxes payable   13,386    (13,386)   — 
Total current liabilities   4,014,156    (4,692)   4,009,464 
Total liabilities   5,543,156    (4,692)   5,538,464 
                
Retained earnings (accumulated deficit)   188,788    (284,276)   (95,488)
Total Equity   3,223,897    (284,276)   2,939,621 
Total liabilities and Equity    8,767,053    (288,968)   8,478,085 

 

Impact on Consolidated Statements of Cash Flows

 

   Nine Months Ended 
   September 30, 2012 
   As
Reported ($)		   Adjustment ($)   As
Restated ($)		 
             
Net income (loss)   (196,417)   (284,277)   (480,694)
Accounts receivable   (172,954)   305,710    132,756 
                
Prepaid expense and other current assets   15,802    159,647    175,449 
Accrued liabilities   (1,883,139)   (91,463)   (1,974,602)
Due to related parties   (1,390,730)   100,156    (1,290,574)
Federal income tax payable   (441,614)   (189,775)   (631,389)

 

Note 2 – Basis of Presentation

 

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

 

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

 

The accompanying unaudited consolidated financial statements should be read in conjunction with the audited financial statements for the year ended December 31, 2011, included in the Company’s Annual Report on Form 10-K for the year then ended. The Company’s business is cyclical due to the scope and timing of projects released by its customer base. Planned maintenance projects at customer facilities are typically scheduled in the spring and the fall when the demand for energy is lower. Our business can also be affected by seasonal weather conditions including hurricanes, snowstorms, abnormally low or high temperatures or other inclement weather, which can result in reduced activities. Accordingly, results for any interim period may not necessarily be indicative of future operating results.

 

Note 3 – Recently Issued Statements of Financial Accounting Standards

 

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

 

Note 4 – Convertible Debt

 

Fishbone Note

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

Convertible debt at September 30, 2012 and December 31, 2011 consist of the following:

 

   September 30, 2012   December 31, 2011 
           
Fishbone Note  $1,500,000   $— 
Less: current maturities of long-term debt   —    — 
Total long-term debt  $1,500,000   $— 

  

Note 5 - Lines of Credit

 

On February 29, 2012, the Company entered into a $5 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 agrees 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 $1,206,091 and $1,793,909 was available at September 30, 2012.

 

The Company’s subsidiary has a $1,000,000 revolving line of credit with a financial institution secured by all assets of the subsidiary bearing interest at 6.5%, maturing May 2013. The balance on the line of credit was $618,595 and $381,405 was available at September 30, 2012.

 

Note 6 - Note Payable

 

On June 13, 2008 Fishbone Solutions LTD, now known as Fishbone Solutions, Inc. executed a promissory note payable to John W. Bones and Patricia Bones in the amount of $575,000 payable monthly for the term of fifty-nine months with interest at 4.48% per annum. The loan balance as of September 30, 2012 was $145,808.

  

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Note 7 - Stock Based Compensation

 

The stock based compensation cost that has been charged against income by the Company was $900,751 and $-0- for the nine months ended September 30, 2012 and 2011, respectively, for common stock awarded by the Company. The Company entered into employment agreements with the chief executive officer, chief financial officer, and other key employees and granted 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 the nine months ended September 30, 2012, the Company recognized $640,751 in stock based compensation. The Company will recognize $1,679,252 in future periods through December 2014.

 

During July and August 2012 the Company issued 6,819,452 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.

 

In July 2012 the Company accelerated the vesting of 3,000,000 restricted shares to a consultant of the 28,477,806 restricted shares granted recognizing an additional $243,000 in stock based compensation. 

 

On July 5, 2012 the Company granted 100,000 common shares to a consultant for services. The fair value of the common stock on the date of grant was $0.17 or $17,000. 

 

Note 8 - 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 nine months ended September 30, 2012 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 nine months ended September 30, 2012 in the form of convertible preferred stock series A, and B and convertible debt. Due to net loss for the three and nine months ended September 30, 2012 these securities had an anti-dilutive effect on diluted earnings per share.

 

Note 9 – Segment Information

 

The Company has four reportable segments, Texas Gulf Oil & Gas, Inc. International Plant Services, LLC, TGE Electrical & Instrumentation, and Fishbone Solutions, Inc. segments.

 

Texas Gulf Oil & Gas

 

The primary assets of Texas Gulf Oil & Gas, Inc. include leases, options and interests in nineteen (19) oil wells throughout the Austin Chalk near Luling, Texas, as well as options on wells to be drilled or re-entered in three leases identified as the Tilmon, Lay, and Rodenberg. Texas Gulf Oil & Gas, Inc. also provides well services on its own crude oil wells as well as to other companies and individual oil well owners.  This line of business was sold on September 30, 2012 and Texas Gulf Energy, Inc. has retained a nine (9)% equity interest. It will no longer be reported as a separate segment.

 

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International Plant Services

 

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

 

TGE Electrical & Instrumentation Services

 

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

 

Fishbone Solutions

 

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

 

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

   

Nine months ended September 30, 2012:

   Texas Gulf
Oil & Gas		   International
Plant Services		   TGE Electrical &
Instrumentation		   Fishbone
Solutions		   Corporate   Totals 
Revenues (restated)   28,605    19,847,354    1,174,909    3,528,694    830,456    25,410,018 
Net income (loss) (restated)   (271,266)   2,673,237    88,409    292,255    (3,263,329)   (480,694)
Total Assets (restated)   0    7,197,455    32,328    2,918,768    (1,670,466)   8,478,085 

 

Nine months ended September 30, 2011:

   Texas Gulf
Oil & Gas		   International
Plant Services		   TGE Electrical &
Instrumentation
Services		   Fishbone
Solutions		   Corporate   Totals 
Revenues   0    22,976,389    0    0    0    22,976,389 
Net income (loss)   0    921,231    0    0    (57,194)   864,037 
Total Assets   0    5,305,215    0    0    0    5,305,215 

 

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Three months ended September 30, 2012:

   Texas Gulf
Oil & Gas		   International
Plant Services		   TGE Electrical &
Instrumentation
Services		   Fishbone
Solutions		   Corporate   Totals 
Revenues (restated)   6,075    4,993,732    826,486    1,423,505    830,456    8,080,254 
Net income (loss) (restated)   (92,165)   496,328    85,516    342,241    (1,048,364)   (216,444)

 

Three months ended September 30, 2011:

   Texas Gulf
Oil & Gas		   International
Plant Services		   TGE Electrical &
Instrumentation
Services		   Fishbone
Solutions		   Corporate   Totals 
Revenues   —    8,875,042    —    —    —    8,875,042 
Net income   —    598,314    —    —    —    598,314 

 

Note 10 – 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 is 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 $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 

 

The following unaudited pro forma summary presents consolidated information of the Company as if the consolidation of Fishbone had occurred on January 1, 2011. The pro forma financial information gives effect to the Company’s consolidation of Fishbone by the application of the pro forma adjustments to the historical consolidated financial statements of the Company. Such unaudited pro forma financial information is based on the historical financial statements of the Company and Fishbone and certain adjustments, which the Company believes to be reasonable based on current available information, to give effect to these transactions. Pro forma adjustments were made from January 1, 2011 up to the date of the consolidation with the actual results reflected thereafter in the pro forma financial information. 

 

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The unaudited pro forma condensed consolidated financial data does not purport to represent what the Company’s results of operations actually would have been if the consolidation of Fishbone had occurred on January 1, 2011, or what such results will be for any future periods. The actual results in the periods following the consolidation date may differ significantly from that reflected in the unaudited pro forma condensed consolidated financial data for a number of reasons including, but not limited to, differences between the assumptions used to prepare the unaudited pro forma condensed consolidated financial data and the actual amounts. 

The financial information of Fishbone has been derived from the historical financial statements of Fishbone, which were prepared in accordance with US GAAP.

 

Unaudited adjustments have been made to adjust the results of Fishbone to reflect additional amortization expense that would have been incurred assuming the fair value adjustments to intangible assets as well as additional interest expense on the debt assumed had been applied from January 1, 2011, as well as additional pro forma adjustments, to give effect to these transactions occurring on January 1, 2011.

 

   Nine Months Ended
September 30,		 
   2012   2011 
Revenues   25,410,018    25,922,801 
Costs and expenses, net   25,890,712    24,471,426 
Net income (loss)   (480,694)   911,565 

 

Note 11 – Dispositions

 

On August 31, 2012 the company sold all of it’s asset related to their Texas Gulf Oil & Gas, Inc. subsidiary for the return of 6,000,000 shares and a total value of $1,124,990. In connection with the transaction, the Company recorded a gain on the sale of the business of approximately $348,000. 

 

Note 12 – 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 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 United States District Court remanded this case to Texas State Court in September, 2012. The plaintiff is seeking relief in the form of unspecified monetary relief. The Company believes that this lawsuit is without merit. The Company intends to pursue its claims and defenses vigorously.

 

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

 

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

 

Based on our knowledge as of the date of this filing, we believe that any amounts exceeding our recorded accruals should not materially affect our financial position, results of operations or liquidity. I t 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 13 – Related Party Transactions

 

The Company's two majority owners as of September 30, 2012 maintain a 74.8% voting control of the Company. The Company utilizes corporations owned by the two majority shareholders that provide certain services to the Company’s construction services segment, which include the following:

 

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

 

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

 

Due to related parties is $90,305 at September 30, 2012 for services performed by affiliates of the Company. The balance owed was reduced by $1,300,312 during the preceding nine months.

 

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 $2 per hour billed by these employees for all of these services.

 

Note 14 – Significant Customers

 

During the nine months ended September 30, 2012 the Company derived a significant amount of revenue from three customers comprising of 15%, 11% and 9%. Compared to three customers during the nine months ended September 30, 2011 comprising of 25%, 15%, and 13%. 

 

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Note 15 – Subsequent Events

 

On March 13, 2013 the company was advised by council that the Civil Action 4:12-CV-00055; Renato Acain et al vs. International Plant Services LLC et al matter has been dismissed, however, an appeal of that decision has been filed with the Texas Appeals Court.

 

Effective April 12, 2013, Noureddine Ayed, The Company’s Chairman of the Board and a member of the Company’s Executive Committee, resigned from both positions and as a member of the Board. The letter of resignation of Noureddine Ayed did not indicate, and our executives officers have not received any communication indicating, that the resignation was the result of any disagreements on any matter relating to the Company’s operations, policies or practices.

 

Effective April 12, 2013, the Board of Directors of the Company, by unanimous written consent, (i) accepted the resignation of Noureddine Ayed as Chairman of the Board and as the Company’s Executive Committee and as a member of the Board and (ii) voted to eliminate the Company’s Executive Committee.

 

As of June 14, 2013 the $5 million receivables purchase agreement with a merchant bank had $617,213 outstanding and $2,382,787 available.

 

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

  

As of March 28, 2013 the $1 million line of credit with Patriot Bank was increased to $1.25 million. As of June 14, 2013 the amount outstanding was $1,245,540 and $4,460 was available.

 

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

 

CRITICAL ACCOUNTING ESTIMATES

 

There have been no material changes in our critical accounting policies from those reported in our fiscal 2011 Annual Report on Form 10-K filed with the SEC. For more information on our critical accounting policies, see Part II, Item 7 of our fiscal 2011 Annual Report on Form 10-K. The following section provides certain information with respect to our critical accounting estimates as of the close of our most recent quarterly period.

 

RESULTS OF OPERATIONS

 

Nine Months Ended September 30, 2012 Compared to the Nine Months Ended September 30, 2011

 

Consolidated

 

Consolidated revenues were $25.4 million for the nine months ended September 30, 2012, an increase of $2.4 million, or 10.4%, from consolidated revenues of $23 million in the same period in the prior fiscal year. The increase in consolidated revenues was a result of an increase in utilization at International Plant Services, L.L.C., the underlying business environment, increased revenues in new business segments and the acquisitions completed by the Company.

 

Consolidated net income (loss) was approximately $900,000 in the nine months ended September 30, 2011 and decreased to approximately ($481,000) in the nine months ended September 30, 2012. The decrease of $1.3 million was primarily due to increased General and Administrative expenses. The largest single expense increase is related to the ACAIN matter legal expenses, which amounted to more than $800,000 in the first nine months of 2012. Gross margins increased to 22% in the nine months ended September 30, 2012 from 17% in the same period a year earlier. Consolidated selling, general & administrative (“SG&A”) expenses were $6.7 million in the nine months ended September 30, 2012 compared to $2.4 million in the same period a year earlier. The increase of $4.3 million, or 179%, was primarily related to higher operating costs due to the addition of new operating segments or units that did not generate revenue, additional finance and legal expenses related to becoming a fully reporting public company, acquisitions, increased business volumes and strategic initiatives. SG&A expenses in the nine months ended September 30, 2012 included $900,751 in non-cash compensation not incurred in 3 quarters of 2011. SG&A expense as a percentage of revenue increased to 26% in the nine months ended September 30, 2012 compared to 10% in the same period in the prior fiscal year. We expect SG&A as a percent of revenue in future quarters to drop as new business units bring on projects and associated revenues in accordance with our 2013 plan.

 

The effective tax rate was a benefit of 34% for the nine months ended September 30, 2012 and was an expense of (34)% in the same period in 2011.

 

Three Months Ended September 30, 2012 Compared to the Three Months Ended September 30, 2011

 

Consolidated

 

Consolidated revenues were $8.1 million for the three months ended September 30, 2012, a decrease of $.8 million, or 9%, from consolidated revenues of $8.9 million in the same period in the prior fiscal year. The decrease in consolidated revenues was a result of decreased utilization and delayed visa availability at International Plant Services, L.L.C., during the quarter as we mobilized for new projects.

 

Consolidated net income (loss) was approximately $598,000 in the three months ended September 30, 2011 and decreased to approximately ($216,444) in the three months ended September 30, 2012. The decrease of $815,000, or 136%, was primarily due to decreased business volumes in July and August, reduced margins, and increased cost of sales during this seasonably slow period.

 

 

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Consolidated selling, general & administrative (“SG&A”) expenses were $2.2 million in the three months ended September 30, 2012 compared to $1.1 million in the same period a year earlier. The increase of $1.1 million, or 100%, was primarily related to higher operating costs in the third quarter of fiscal 2012 due to the addition of new operating units that did not generate revenue in the quarter, additional finance and legal expenses related to becoming a fully reporting public company, acquisitions, increased business volumes and strategic initiatives. SG&A expenses in the three months ended September 30, 2012 included $473,583 in non-cash compensation not incurred in the third quarter of 2011. SG&A expense as a percentage of revenue increased to 27% in the three months ended September 30, 2012 compared to 13% in the same period in the prior fiscal year. We expect SG&A as a percent of revenue in future quarters to drop as new business units bring on projects and associated revenues in accordance with our 2012 plan.

 

The effective tax rate was a benefit of 34% for the three months ended September 30, 2012 and was an expense of (34%) in the same period in 2011.

 

Non-GAAP Financial Measure

 

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

 

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

 

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

 

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

 

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

 

   Nine Months Ended 
   September  30,
2012		   September 30,
2011		 
   (restated)     
Net income(loss)  $(481)  $864 
Interest expense   89    12 
Income tax expense (benefit)   (201)   532 
Depreciation and amortization   377    75 
           
EBITDA  $(216)  $1,483 

 

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FINANCIAL CONDITION AND LIQUIDITY

 

Overview

 

We define liquidity as the ongoing ability to pay our liabilities as they become due, fund business operations and meet all monetary contractual obligations. Our primary sources of liquidity for the nine months ended September 30, 2012 was cash generated from operations, cash on hand at the beginning of the quarter and our accounts receivable line of credit. Cash on hand at September 30, 2012 totaled $182,615. There are seasonal impacts on our business that decrease the revenue, earnings and cash flow in the 3 rd quarter of most years.  In 2012, we have additionally had a decrease in the number of approved Foreign Guest Worker Visas for our IPS subsidiary, decreasing revenue and earnings.  The additional bank line of credit plus new contracts with Holly Frontier, Salt Lake City, Utah, and Invista, Orange, Texas will provide adequate funds for our operations in the months ahead. We expect to fund our operations for the next twelve months through the use of cash generated from operations and existing cash balances. However, there can be no assurance that we will achieve our forecasted cash flow, which could result in borrowings under our credit facility.

 

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

 

•Changes in working capital

 

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

 

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

 

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

 

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

 

•Capital expenditures

 

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

  

•Acquisitions of new businesses

 

•Inability to obtain guest worker visas for skilled craftsmen

 

•Strategic investments in new operations

 

•Contract disputes or collection issues

Material weaknesses in internal controls and accounting processes

  

Dividend Policy

 

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

 

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

 

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

 

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Outlook

 

We have seen what we consider to be a strong recovery in the underlying business environment in which the Company operates. Texas Gulf Energy, Inc. was awarded a $1.7 million dollar contract for a turnaround at a refinery located in Salt Lake City, Utah, it was also awarded a significant turnaround contract at a chemical plant in Orange, Texas. These contracts are expected to bring an additional $2 million in revenue in the fourth quarter, but the margins can fluctuate depending on our performance of the work. We continue to see signs of recovery and growth and plan to capitalize on opportunities that are presented by the market as it recovers further in the coming months and years. There is a significant increased bidding activity domestically and internationally that we believe will bring additional revenue opportunities to the Company.

 

FORWARD-LOOKING STATEMENTS

 

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

 

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

 

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

 

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

 

•expansion and other development trends of the industries we serve;

 

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

 

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

 

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

 

•the inherently uncertain outcome of current and future litigation;

 

•the adequacy of our reserves for contingencies;

 

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

 

•changes in laws or regulations; and

 

•other factors, many of which are beyond our control.

 

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

 

 

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Item 3.Quantitative and Qualitative Disclosures about Market Risk

 

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

 

Item 4.Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

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

 

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

 

We carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of September 30, 2012. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level at September 30, 2012, as reported in our Quarterly Report on Form 10-Q for the period ended September 30, 2012, originally filed on December 19, 2012. In connection with our decision to restate our consolidated financial statements for the period ended September 30, 2012 as described in the “Explanatory Note” immediately preceding Part I, Item 1 of this Quarterly Report on Form 10-Q/A and Note 1, “Restatement of Financial Information,” of the Notes to Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q/A, our management, including our Chief Executive Officer and Chief Financial Officer, performed a reevaluation and concluded that our disclosure controls and procedures were not effective as of September 30, 2012 as a result of the material weaknesses and deficiencies in our internal control over financial reporting, as discussed below. In light of such weaknesses, management performed an additional analysis subsequent to our changes in internal control (described below) regarding the preparation and content of the restated financial statements contained in this Quarterly Report on Form 10-Q/A, and management concluded that our disclosure controls and procedures are effective and that the restated financial statements present, in all material respects, the Company’s financial condition for the period reported in this Quarterly Report on Form 10-Q/A.

 

Restatement of Financial Information

 

On May 13 , 2013, the Board of Directors of the Company concluded, after consulting with management, that the Company’s consolidated financial statements for the year ended December 31, 2012 that were included in the Company’s Annual Report on Form 10-K for the year then ended and the consolidated financial statements for the period ended September 30, 2012 that were included in the Company’s Quarterly Report on Form 10-Q for that quarter (collectively, the “Prior Financial Statements”) should no longer be relied upon and should be restated because of an error in the Prior Financial Statements relating to the Company’s accounting involved in a conversion to a new accounting system. A more detailed description of the restatements made to the financial statements for the period ended September 30, 2012 is provided in Note 1 to the Consolidated Financial Statements included with this report.

 

Changes in Internal Control over Financial Reporting

 

We did not effect any change in our internal controls over financial reporting during the period covered by this report that materially affected, or that would reasonably be likely to affect materially, our internal control over financial reporting. However, there have been changes made in our internal controls and financial reporting that have materially affected or are reasonably likely to materially affect our internal controls over financial reporting subsequent to the quarter ended September 30, 2012, that effect our report for such period. Material weaknesses in our internal controls were identified by the Company’s management, and reported to the Board of Directors and auditors in May, 2013. These material weaknesses are described in Note 1 of the Consolidated Financial Statements contained herein, but are primarily related to errors in accounting as the Company changed accounting systems in June of 2012, which resulted in a number of accounting entries that were not properly reversed in the quarter ended September 30, 2012. Additionally, there were related balance sheet accounts that were not checked and verified. The Company has implemented new processes including management led monthly financial reviews and assigned new qualified personnel to operate the Company’s new accounting system to prevent these accounting errors from re-occurring, but there can be no assurance that every error will be detected. The Company’s restated financials contained in this report are the result of a thorough review conducted by management, and discussed with the auditor to correct all known accounting errors. Management has taken steps which it believes will ensure, to the extent reasonably possible, that this type of error will not occur in the future.

 

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PART II

OTHER INFORMATION

 

Item 1.Legal Proceedings

 

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

 

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

 

International Plant Services, LLC (IPS) is a subsidiary of the Company. IPS has been sued in a matter presently pending in United States District Court, Southern District of Texas, Houston Division by 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 Company believes that this lawsuit is without merit. The Company intends to pursue its claims and defenses vigorously.

 

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

 

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

 

Based on our knowledge as of the date of this filing, we believe that any amounts exceeding our recorded accruals should not materially affect our financial position, results of operations or liquidity. I t 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. 

  

Item 1A.Risk Factors

    

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

 

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

 

None

 

Item 3.Defaults Upon Senior Securities

 

None

 

Item 4.Mine Safety Disclosures

 

Not applicable

 

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Item 5.Other Information

  

None

 

Item 6.Exhibits

  

EXHIBIT

NO.

   DESCRIPTION
     
31.1   Certification by Principal Executive Officer pursuant to Rule 13a-14(a)/ 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
     
31.2   Certification by Principal Financial and Accounting Officer pursuant to Rule 13a-14(a)/ 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
     
32.1   Certification by Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
     
32.2   Certification by Principal Financial and Principal Accounting Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

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Signature

 

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

 

  Texas Gulf Energy, Incorporated
   
Date: July 5, 2013 By:

/s/    Craig Crawford

    Craig Crawford, Chief Financial Officer signing on behalf of the registrant and as the registrant’s Principal Financial Officer

 

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