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TEXAS GULF ENERGY INC - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations

August 14, 2014

Certain statements in our Management's Discussion and Analysis of Financial Condition and Results of Operations, including estimates, projections, statements relating to our business plans, objectives and expected operating results, and the assumptions upon which those statements are based, are "Forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements generally are identified by the word "believe", "project", "expect", "anticipate", "estimate", "intend", "strategy", "plan", "may", "should", "will", "would", "will be", "will continue", "will likely result", and similar expressions. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties that could cause actual results and events to differ materially from such forward-looking statements is included in the section entitled "Risk Factors" in our Annual Report on Form 10-K for the fiscal year ended December 31, 2013 and elsewhere in this Form 10-Q. We undertake no obligations to update or revise publicly any forward-looking statements whether as a result of new information, future events, or otherwise.

OVERVIEW



Through our two subsidiaries, International Plant Services, LLC and Texas Gulf Specialty Services, Inc., we provide specialty constructions services to a wide range of industrial and energy sector customers. We provide most of our services through International Plant Services, LLC, or IPS, which includes managing and executing major capital and turnaround projects, the provision of project management personnel, and other construction project resources, such as project planners/schedulers, engineers, welders, fitters and millwrights. A significant portion of the engineers and skilled personnel that IPS provides are foreign nationals working as guest workers pursuant to visas granted by the United States government. Our project experience includes turnarounds, retrofits, modifications to existing facilities, as well as construction of new facilities in the refinery, petrochemical, mining, and power production industries.

CRITICAL ACCOUNTING ESTIMATES



There have been no material changes in our critical accounting policies from those reported in our Annual Report on Form 10-K for our fiscal year ended December 31, 2013. For more information on our critical accounting policies, see Part II, Item 7 of that Annual Report on Form 10-K.

RESULTS OF OPERATIONS



Six Months Ended June 30, 2014 Compared to the Six Months Ended June 30, 2013

Our consolidated revenues were $2,214,253 for the six months ended June 30, 2014, a decrease of approximately $3.9 million, or approximately 64%, from consolidated revenues of approximately $6 million in the same period in the prior fiscal year. The decrease in consolidated revenues was primarily a result of a decrease in the personnel available to IPS due to the recent lack of availability of guest worker visas from the United States government.

Our consolidated gross profit was $328,297 for the six months ended June 30, 2014, a decrease of approximately $663,433, or approximately 67% from consolidated gross profit of $991,730 in the same period in the prior fiscal year. The decrease in consolidated gross profit was primarily a result of a decrease in gross revenue of the company

Our consolidated general and administrative expenses were $1,224,491 in the six months ended June 30, 2014, compared to $2,616,977 in the same period a year earlier. The decrease of $1,392,486, or approximately 53%, was primarily due to decreased business volumes and fewer strategic initiatives, such as acquisitions, in 2014, resulting in lower finance and legal expenses in that period. These expenses in the six months ended June 30, 2014 included non-cash compensation of $186,300, compared to $373,170 in such expenses in the same period of 2013. General and administrative expenses as a percentage of revenue increased to approximately 55% for the six months ended June 30, 2014, compared to approximately 43% for the same period in the prior fiscal year.

Our consolidated net loss was $1,383,670 for the six months ended June 30, 2014, compared to a net loss of $245,768 for the six months ended June 30, 2013. The increase in losses of $1,137,902 was primarily due to the loss of gross profit generated by the operations we sold in 2013 and a decrease in revenue at IPS. Our gross profit decreased to $328,297, approximately 15% of revenue, for the six months ended June 30, 2014, compared to $991,730, or approximately 16% of revenue, in the same period in the prior year.

Three Months Ended June 30, 2014 Compared to the Three Months Ended June 30, 2013

Our consolidated revenue were $1,237,830 for the three months ended June 30, 2014, a decrease of $1,480,556, or approximately 54%, from consolidated revenue of $2,718,386 in the same period in the prior fiscal year. The decrease in consolidated revenue was a result of decreased headcount at IPS resulting from the unavailability of guest worker visas.

Consolidated gross profit decreased from $383,620 for the three months ended June 30, 2013 to $223,703 for the three months ended June 30, 2014. The decrease of almost $160,000, or 42%, was primarily due to decreased revenues at IPS. However, the consolidated gross margin increased from approximately 14% in the three months ended June 30, 2013 to approximately 18% in the same period of the current year. We believe that the increase is attributable to higher gross margins on projects completed in 2014.

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Consolidated general and administrative expenses were $559,586 in the three months ended June 30, 2014, compared to $1,541,221 in the same period a year earlier. The decrease of $981,635, or approximately 64%, was primarily due to lower salaries and legal expenses in the second quarter of fiscal 2014. General and administrative expense as a percentage of revenue decreased to approximately 45% in the three months ended June 30, 2014, compared to approximately 57% in the same period in the prior fiscal year.

The effective tax rate was 37% for the six months ended June 30, 2014 from a benefit of 32% for the six months ended June 30, 2013 due to the Company recording a change in the valuation allowance increasing the allowance to 100% for the period ended June 30, 2014. The Company recorded an income tax expense of $370,225 and benefit of $516,689 for the periods ended June 30, 2014 and 2013, respectively.

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 six months ended June 30, 2014 were cash generated from operations, cash on hand at the beginning of the period and our accounts receivable purchase facility. We had cash of $7,832 and working capital deficit of $103,242 as of June 30, 2014. We expect to fund our operations for the next twelve months with cash generated from operations. However, there can be no assurance that we will achieve our forecasted cash flow.

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

Capital expenditures;



Changes in levels of our working capital components;

Terms of our contracts regarding the timing of our billing our customers and

the collection of those billings;



We bill some of our cost plus and fixed price contract based on milestones

achieved, which may require us to incur significant expenditures prior to collections from our customers;



We normally bill our time and material contracts in arrears, which routinely

requires us to cover the costs associated with those contracts until they can be billed and collected; and



Some of our large construction projects may require significant retentions or security in the form of letters of credit. Other factors that may impact both our short-term and long-term liquidity include:

Strategic investments in new operations;

Our inability to obtain guest worker visas for skilled workers needed for the

business of IPS;



Costs of litigation against us and those for whom we may have to provide

indemnification; and



Contract disputes or collection issues.

Cash Flow Results



Net cash provided by our operating activities was $434,978 for the six months ended June 30, 2014, compared to $576,168 of net cash provided by operating activities for the six months ended June 30, 2013, a decrease of $141,190. The decrease in net cash provided by operating activities was due primarily to the higher net loss in 2014, net of items not affecting cash, in fiscal 2013, partially offset by a favorable variance in cash provided by working capital accounts in 2014, primarily through the reduction in our accounts receivable of $1,376,355.

Net cash used in investment activities for the six months ended June 30, 2014 consisted of purchases of property and equipment of $1,611, compared to net cash used for such purchases in 2013 of $65,546.

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Our financing activities used $765,220 of net cash for the six months ended June 30, 2014, primarily for repayment of debt, compared to $531,398 of net cash used in financing activities for the six months ended June 30, 2013.

Going Concern



The independent auditors' audit report accompanying our December 31, 2013 audited consolidated financial statements contained an explanatory paragraph expressing substantial doubt about our ability to continue as a going concern. The financial statements have been prepared "assuming that we will continue as a going concern," which contemplates that we will realize our assets and satisfy our liabilities and commitments in the ordinary course of business.

Outlook



We saw improvement in our construction services business in 2013, and believe that growth in this business continues to be in our best interest. Apart from the limited construction opportunities in portions of our downstream petroleum market, we believe that the overall outlook for our core markets is positive. However, our reliance on foreign temporary workers as a primary revenue driver is inhibiting us from taking advantage of the positive growth in this market.


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Source: Edgar Glimpses


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