TXGE Texas Gulf Energy Inc (CE)

Notes to Consolidated Financial Statements

(Unaudited)

Note 1 – Basis of Presentation

The consolidated financial statements include the accounts of Texas Gulf Energy, Incorporated (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 fiscal year ended December 31, 2013, 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 implemented by its customer base who are primarily in the energy sector. Planned maintenance projects at many of the Company’s customers’ facilities are typically scheduled in the Spring and the Fall, when the demand for energy is lower. The Company’s 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 results for the fiscal year or future operating results.

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 resulting in an accumulated deficit of $820,404 as of March 31, 2014 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, loans and or private placement of common stock.

Taxes

The statutory tax rate for the period ended March 31, 2014 was 34%. The effective tax rate was due to a net operating loss that resulted in a benefit for the period ended March 31, 2014, however the Company has recorded a 100% valuation allowance for that benefit.

Note 2 – Recently Issued Statements of Financial Accounting Standards

The Company has implemented all new accounting pronouncements that are in effect and that may impact its unaudited consolidated financial statements.  The Company does not believe that there are any new accounting pronouncements that have been issued that might have a material impact on its consolidated financial position or results of operations.

Note 3 – Convertible Debt

Fishbone Notes

On February 3, 2012, the Company issued two convertible promissory notes, in the aggregate principal amount of $1,283,126 (the “Notes”), to the owners of Fishbone Solutions, Ltd. (“Fishbone”), in exchange for all of the equity interests in Fishbone. On the closing date of the acquisition of Fishbone, the Company issued the Notes to the equity-holders of Fishbone, in the proportional principal amounts directed by the equity-holders. The Notes accrue interest at the rate of 0.19% per annum, and the principal and accrued interest of the Notes are payable only through the conversion of the Notes into shares of the Company’s common stock, par value $ 0.00001 per share (“Common Stock”), at $0.12 per share.

Pursuant to the terms of the Notes, the Fishbone equity-holders agreed to limit conversions and sales of the Common Stock issued by the Company upon conversion of the Notes as follows:

The Notes may also become due and fully convertible in the event of a liquidation event or change of control of the Company. During 2013, the Company sold substantially all of the assets of Fishbone and two other subsidiaries of the Company, pursuant to which the buyer assumed $597,000 in principal amount of the Notes, and $103,649 in principal amount the Notes, plus accrued interest of $2,087, was converted into Common Stock at $0.12 per share. On February 6, 2014, the Company authorized the issuance of 1,861,240 shares of Common Stock upon the conversion of $223,349 in principal and $103 in accrued interest of the remaining Note.

The Company’s outstanding convertible debt was $362,622 as of March 31, 2014 and $585,971 as of December 31, 2013.  

Note 4 - Lines of Credit   

On February 29, 2012, the Company entered into a $3 million receivables purchase agreement with a merchant bank. Under the agreement, the Company can sell all rights, title and interests in their accounts receivables for the total amount of the receivable invoices, less a discounting factor of 15% to the factoring company. The factoring company will remit a rebate to the Company of an amount between 14.30% and 10% of the receivable invoice amounts depending on how long it takes the factoring company to collect the receivable. The sooner the amount is collected, the greater the rebate received by the Company. If after 90 days it isn’t collected, the Company agreed to repurchase the receivables for $.90 for each $1.00 invoiced. The Company retains the right to repurchase any of its invoices at any time from the merchant bank. The balance on the purchase agreement has been paid down to $0 at March 31, 2014 and $0 was available at March 31, 2014. This agreement has been terminated by the Company as a result of the disposition at note 11.

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 has been paid down to $0 at March 31, 2014 and $0 was available at March 31, 2014. This agreement has been terminated by the Company as a result of the disposition at note 11.

On September 14, 2012, the Company entered into an accounts receivable purchase agreement with a merchant bank, under which the Company could draw up to $1 million. This facility was renewed on March 19, 2014, with $500,000 in availability. Under the agreement, the Company can sell all rights, title and interests in its accounts receivables for the total amount of the receivable invoices, less a discount of 15% to the merchant bank. Upon collection, the merchant bank will remit a rebate to the Company in an amount between 10% and 14.30% of the receivable invoice amounts, depending on how long it takes to collect the receivable. The sooner the amount is collected, the greater the rebate received by the Company. If a receivable is not collected within 90 days, the Company must repurchase the unpaid receivable for a price of $0.90 for each $1.00 invoiced. The Company retains the right to repurchase any of its invoices at any time from the merchant bank. As of March 31, 2014, the balance due under the purchase agreement was $148,690, and $351,310 was available. This agreement can be terminated at any time by the Company .

Note 5 - Notes Payable

The Company assumed a $422,529 loan due to a former shareholder of Fishbone in 2012 that matured in June 2013. That loan was in default as of March 31, 2014. The loan has a 4.58% annual interest rate (10% per annum upon default). The balance outstanding at March 31, 2014 was $ 10,308. 

The Company has financed its insurance with a loan with an annual interest rate of 4.45%. That loan had a balance of $107,648 as of March 31, 2014, which will be paid down with nine equal monthly payments of $35,883.

On January 1, 2012, the Company entered into a three year consulting agreement with a consultant. The consulting agreement provides that the consultant is entitled to compensation of $12,000 per month for the remainder of the term of the agreement, even if the agreement is terminated by the consultant under certain circumstances. The consultant terminated the agreement in December 2013, and requested payment for the remaining term of the agreement. As a result, the Company recorded a note payable of $144,000 on December 31, 2013, of which there is a balance of $108,000 as of March 31, 2014.

Note 6 - Stock Based Compensation

The Company charged stock based compensation cost against income in the amount of $45,000 and $186,585 for the three months ended March 31, 2014 and 2013, respectively, for vesting of shares of Common Stock awarded by the Company during prior year.

Note 7 – Earnings (Loss) Per Share

Basic earnings per share includes no dilution and is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding for the periods presented. The calculation of basic earnings per share for the three months ended March 31, 2014 includes the weighted average of common shares outstanding. Diluted earnings per share reflect the potential dilution of securities that could share in the earnings of an entity, such as convertible preferred stock or convertible debt. Dilutive securities existed for the three months ended March 31, 2014 in the form of 10,000,000 Series B Preferred Stock, convertible into 58,823,529 shares of Common Stock and a convertible note of $362,622, convertible at $0.12 per share into 3,021,850 shares of Common Stock, which 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 – 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 was 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 of Texas.

The Company originally filed against the Rushings for a Declaratory Judgment alleging the Rushings 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 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.

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 Commissions by Benjamin A. Villejo against International Plant Services LLC (“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. Villejo. 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. Villejo’s claim is without merit and intends to vigorously defend IPS.

Note 9 – Related Party Transactions  

The Company's two majority owners as of March 31, 2014 maintain a 74.8 % voting control of the Company. The Company utilizes corporations owned by the majority stockholders to 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 the Company would pay to unrelated third parties and that the interests of the Company’s stockholders are best served by continuing to use these services provided by these companies.

As of March 31, 2014, the Company owed a balance of $25,657 to related parties for services performed by affiliates of the Company.

The Company primarily utilizes a foreign company affiliated by common ownership for testing, recruiting, mobilization and training the Company’s foreign workforce for construction projects. The Company pays $ 1.40 per hour billed by these employees for all of these services. Total charges these services for the three months ended March 31, 2014 was $1,316.

Note 10 – Significant Customers

During the three months ended March 31, 2014 the Company derived a significant amount of revenue from three customers comprising 15% , 21%, and 34% of the total revenue for the period, compared to four customers during the three months ended March 31, 2013 comprising of 13.6%, 8.6%, 8.4% and 8.2% of the total revenue for the period. One customer comprised of 20% of total accounts receivable for the three months ended March 31, 2014.

Note 11 – Dispositions

On November 22, 2013 (the “ Closing Date ”), the Company closed a disposition pursuant to an Asset Purchase Agreement dated as of the Closing Date (the “ Agreement ”), by and among the Company, two of its subsidiaries at the time, Fishbone Solutions, Inc. (“FSI”) and Texas Gulf Industrial Services, Inc. (“TGIS”), and TGE Industrial Services, LLC (the “Buyer”). Pursuant to the terms of the Agreement, the Company sold substantially all of the assets of FSI and TGIS to the Buyer.

Note 12 – Change in Management

On April 24, 2014, the new Board of Directors of the Company appointed Karim Ayed as Chairman of the Board, Rilene Burgess as President and Chief Executive Officer, and Maylene Guzman Santiago as Chief Financial Officer, Treasurer and Secretary. On April 24, 2014, as a result of this action by the Board of Directors, Craig Crawford, who had previously verbally tendered his resignation to the Company, was terminated as Interim Chief Executive Officer of the Company and John A. Haney was terminated as Chief Financial Officer of the Company.