UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C. 20549

 

FORM 10-Q 

 

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2015
☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Commission File No. 000-32335

 

TX HOLDINGS, INC.

(Exact Name of Registrant as Specified in its Charter) 

	Georgia				58-2558702
(State or Other Jurisdiction of Incorporation or Organization)				(I.R.S. Employer Identification No.)

	12080 Virginia Blvd., Ashland, KY 41102				(606) 928-1131
(Address of Principal Executive Offices and Zip Code)				(Registrant’s Telephone Number, Including Area Code)

 

(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 ☒  NO ☐

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES ☒  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 “large accelerated filer, “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 ☒

 

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) YES ☐ NO ☒

 

On August 3, 2015, there were 48,053,084 shares of the registrant’s common stock outstanding.

 

 

TX HOLDINGS, INC. FORM 10-Q

FOR THE QUARTER ENDED JUNE 30, 2015

 

TABLE OF CONTENTS

PART I FINANCIAL INFORMATION
	Item 1.	Financial Statements
		Consolidated Balance Sheets as of June 30, 2015 and September 30, 2014 (Unaudited)	4
		Consolidated Statements of Operations for the Three and Nine Months Ended June 30, 2015 and 2014 (Unaudited)	5
		Consolidated Statement of Changes in Stockholders’ Deficit for the Nine Months Ended June 30, 2015 (Unaudited)	6
		Consolidated Statements of Cash Flows for the Nine Months Ended June 30, 2015 and 2014 (Unaudited)	7
		Notes to Unaudited Consolidated Financial Statements	8
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	12
	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	22
	Item 4.	Controls and Procedures	22
PART II OTHER INFORMATION
	Item 1.	Legal Proceedings	23
	Item 1A.	Risk Factors	23
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	23
	Item 3.	Defaults Upon Senior Securities	24
	Item 4.	Mine Safety Disclosures	24
	Item 5.	Other Information	24
	Item 6.	Exhibits	25
		SIGNATURES	26

 

 

NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

Our disclosure and analysis in this report as well as information relating to us contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (“Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (“Exchange Act”), and other applicable law, which provide our current expectations or forecasts of future events. Forward-looking statements in this report include, without limitation:

 

•

information concerning possible or assumed future results of operations, trends in financial results and business plans, including those related to earnings, earnings growth, revenue and revenue growth;

•

statements about the level of our costs and operating expenses relative to our revenues, and about the expected composition of our revenues;

•

statements about expected future sales trends for our products;

•

statements about our future capital requirements and the sufficiency of our cash, cash equivalents, and available bank borrowings to meet these requirements;

•

other statements about our plans, objectives, expectations and intentions; and

•

other statements that are not historical fact.

 

Forward-looking statements generally can be identified by the use of forward-looking terminology such as “believes,” “expects,” “may,” “will,” “intends, “plans,” “should,” “seeks,” “pro forma,” “anticipates,” “estimates,” “continues,” or other variations thereof (including their use in the negative), or by discussions of strategies, plans or intentions. Such statements include but are not limited to statements under Part I, Item 1A - Risk Factors of our Form 10-K for the year ended September 30, 2014, Part II, Item 1A – Risk Factors of this report, Part I, Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations in this report, and elsewhere in this report. A number of factors could cause results to differ materially from those anticipated by such forward-looking statements. The absence of these words does not necessarily mean that a statement is not forward-looking. Forward-looking statements are subject to known and unknown risks and uncertainties and are based on potentially inaccurate assumptions that could cause actual results to differ materially from those expected or implied by the forward-looking statements. Our actual results could differ materially from those anticipated in the forward-looking statements for many reasons, including factors described in Part I, Item 1A - Risk Factors of our Form 10-K for the year ended September 30, 2014, and Part II, Item 1A – Risk Factors of this report. You should carefully consider the factors described in Part II, Item 1A - Risk Factors of our Form 10-K for the year ended September 30, 2014, and Part II, Item 1A – Risk Factors of this report, in evaluating our forward-looking statements.

 

You should not unduly rely on these forward-looking statements, which speak only as of the date of this report. We undertake no obligation to publicly revise any forward-looking statement to reflect circumstances or events after the date of this report, or to reflect the occurrence of unanticipated events. You should, however, review the factors and risks we describe in the reports we file from time to time with the Securities and Exchange Commission (“SEC”).

Notwithstanding the above, Section 27A of the Securities Act and Section 21E of the Exchange Act expressly state that the safe harbor for forwarding looking statements does not apply to companies that issue penny stocks. Because we may from time to time be considered an issuer of penny stock, the safe harbor for forward looking statements under such provisions may not be applicable to us at certain times.

 

We obtained certain statistical data, market data and other industry data and forecasts used in this Form 10-Q from publicly available information. While we believe that such data is reliable, we have not independently verified the data, and we do not make any representation as to the accuracy of the information.

 

 

PART 1- FINANCIAL INFORMATION

Item 1- Financial Statements 

TX HOLDINGS, INC.

CONSOLIDATED BALANCE SHEETS

June 30, 2015 and September 30, 2014

		Unaudited
		June  30,				September 30,
		2015				2014
ASSETS
Current assets:
Cash and cash equivalents		$	44,812			$	72,784
Accounts receivable, net of allowance for doubtful accounts of $ 32,343 as of 6/30/15 and 9/30/14			504,839				502,617
Inventory			2,545,243				2,762,535
Commission advances			36,460				-
Note receivable-current			10,000				10,000
Other current assets			28,032				45,327
Total current assets			3,169,386				3,393,263
Property and equipment, net			67,441				72,530
Note receivable, less current portion			19,983				21,289
Other assets			500				-
Total Assets		$	3,257,310			$	3,487,082
LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current liabilities:
Accrued liabilities		$	643,497			$	606,099
Accounts payable			898,355				1,054,556
Advances from stockholder/officer			71,637				43,337
Bank-line of credit			719,549				548,500
Total current liabilities			2,333,038				2,252,492
Note payable to a stockholder			2,000,000				2,000,000
Total Liabilities			4,333,038				4,252,492
Commitments and contingencies
Stockholders’ deficit:
Preferred stock: no par value, 1,000,000 shares authorized no shares outstanding			-				-
Common stock: no par value, 250,000,000 shares authorized, 48,053,084 shares issued and outstanding at June 30, 2015 and September 30, 2014			9,293,810				9,293,810
Additional paid-in capital			4,320,982				4,320,982
Accumulated deficit			(14,690,520	)			(14,380,202	)
Total stockholders’ deficit			(1,075,728	)			(765,410	)
Total Liabilities and Stockholders’ Deficit		$	3,257,310			$	3,487,082

 

The accompanying notes are an integral part of the consolidated financial statements

 

 

TX  HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

For the Three and Nine Months Ended June 30, 2015 and 2014

		Unaudited
		THREE MONTHS ENDED								NINE MONTHS ENDED
		June 30,				June 30,				June 30,				June 30,
		2015				2014				2015				2014
Revenue		$	636,388			$	1,236,267			$	2,229,033			$	3,340,715
Cost of goods sold			503,301				954,499				1,810,712				2,432,360
Gross profit			133,087				281,768				418,321				908,355
Operating expenses, except items shown separately below:			116,356				140,717				406,268				371,871
Commission expense			52,553				109,144				158,486				379,460
Professional fees			14,201				30,386				72,511				141,070
Depreciation expense			4,032				2,699				9,238				7,439
Total operating expenses			187,142				282,946				646,503				899,840
Income (loss) from operations			(54,055	)			(1,178	)			(228,182	)			8,515
Other income and (expense):
Legal Settlement			-				374,025				-				374,025
Gain on extinguishment of accounts payable			-				-				-				93,167
Gain on sale of property and equipment			-				-				-				10,807
Bad debt expense			-				(18,350	)							(18,350	)
Other income			2,952				-				15,505				-
Interest expense			(31,810	)			(28,288	)			(97,641	)			(71,054	)
Total other income and (expenses), net			(28,858	)			327,387				(82,136	)			388,595
Income (loss) before provision for income taxes		$	(82,913	)		$	326,209			$	(310,318	)		$	397,110
Provision for income taxes			-				133,745				-				162,815
Utilization of net operating loss carry forward			-				(133,745	)			-				(162,815	)
Net income (loss)		$	(82,913	)		$	326,209			$	(310,318	)		$	397,110
Net earnings (loss) per common share
Basic and Diluted		$	0.00			$	0.01			$	(0.01	)		$	0.01
Weighted average of common shares outstanding-
Basic			48,053,084				48,053,084				48,053,084				48,053,084
Diluted			48,053,084				48,053,084				48,053,084				48,053,084

 

The accompanying notes are an integral part of the consolidated financial statements

 

  

TX HOLDINGS, INC.

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDER’S DEFICIT (UNAUDITED)

For the Nine Months Ended June 30, 2015

																		Additional
		Preferred Stock								Common Stock								Paid in				Accumulated
		Shares				Amount				Shares				Amount				Capital				Deficit				Total
Balance at
September 30, 2014			-			$	-				48,053,084			$	9,293,810			$	4,320,982			$	(14,380,202	)		$	(765,410	)
Net Loss			-				-				-				-				-				(310,318	)			(310,318	)
Balance at
June 30, 2015			-			$	-				48,053,084			$	9,293,810			$	4,320,982			$	(14,690,520	)		$	(1,075,728	)

 

The accompanying notes are an integral part of the consolidated finanical statements.

 

  

TX HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Nine Months Ended June 30, 2015 and 2014

		(Unaudited)				(Unaudited)
		June 30,				June 30,
		2015				2014
Cash flows provided by (used in) operating activities:
Net income (loss)		$	(310,318	)		$	397,110
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Depreciation expense			9,238				7,439
Bad debt reserve			-				18,350
Fair value of warrants issued to an officer			-				14,971
Gain on extinguishment of accounts payable			-				(93,167	)
Gain on sale of property and equipment			-				(10,807	)
Changes in operating assets and liabilities:
Inventory			217,292				(459,867	)
Commission advances			(36,460	)			3,546
Accounts receivable			(2,222	)			(251,388	)
Other current assets			17,295				(14,515	)
Accrued liabilities			31,398				38,626
Accounts payable			(156,201	)			409,644
Other assets			(500	)			200
Stockholder/officer advances for operations			6,000				18,000
Net cash provided by (used in) operating activities			(224,478	)			78,142
Cash flows used in investing activities:
Note receivable			1,306				2,866
Purchase of equipment			(4,149	)			(38,809	)
Proceeds received on sale of equipment			-				18,000
Net cash used in investing activities			(2,843	)			(17,943	)
Cash flows provided by (used in) financing activities:
Proceeds from bank line of credit			171,049				-
Proceeds from stockholder/officer advances			64,300				24,450
Repayment of stockholder/officer advances			(36,000	)			(110,850	)
Net cash provided by (used in) financing activities			199,349				(86,400	)
Decrease in cash and cash equivalents			(27,972	)			(26,201	)
Cash and cash equivalents at beginning of period			72,784				175,028
Cash and cash equivalents at end of period		$	44,812			$	148,827
Non-cash investing and financing activities:
Accrued interest exchanged for notes payable to a stockholder		$	-			$	262,157
Advances from stockholder exchanged for notes payable to stockholder		$	-			$	385,846

 

The accompanying notes are an integral part of the consolidated financial statements

 

 

TX HOLDINGS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1- BACKGROUND AND SIGNIFICANT ACCOUNTING POLICIES

 

INTERIM FINANCIAL STATEMENTS

 

The accompanying interim unaudited consolidated financial statements and footnotes of TX Holdings, Inc., and its subsidiaries (the “Company”), have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) and applicable rules and regulations of the Securities and Exchange Commission regarding interim financial reporting. The consolidated financial statements reflect all adjustments that are, in the opinion of management, necessary to fairly present such information. All such adjustments are of a normal recurring nature. Although the Company believes that the disclosures are adequate to make the information presented not misleading, certain information and footnote disclosures, including a description of significant accounting policies normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations.

 

The balance sheet as of September 30, 2014, included herein was derived from audited consolidated financial statements as of that date, but does not include all disclosures including notes required by GAAP.

 

These consolidated financial statements should be read in conjunction with the audited financial statements and the notes thereto included in the Company’s September 30, 2014 Annual Report on Form 10-K. The accompanying unaudited consolidated financial statements reflect all normal recurring adjustments necessary to present fairly the financial position, results of operations, and cash flows for the interim periods, but are not necessarily indicative of the results for any subsequent quarter or the entire year ending September 30, 2015.

 

Conformity with GAAP requires the use of estimates and judgments that affect the reported amounts in the financial statements and accompanying notes. These estimates form the basis for judgments we make about the carrying values of our assets and liabilities, which are not readily apparent from other sources. We base our estimates and judgments on historical information and on various other assumptions that we believe are reasonable under the circumstances. GAAP requires us to make estimates and judgments in several areas, including, but not limited to, those related to revenue recognition, collectability of accounts receivable, contingent liabilities, fair value of share-based awards, fair value of financial instruments, fair value of acquired intangible assets and goodwill, useful lives of intangible assets and property and equipment, and income taxes. These estimates are based on management’s knowledge about current events and expectations about actions we may undertake in the future. Actual results could differ materially from those estimates.

 

OVERVIEW OF BUSINESS  

 

The Company is in the business of supplying, distributing and selling drill bits, related tools, and other mining supplies, rail and rail material directly and through other suppliers to the United States’ coal mining industry for use in their production and transportation processes. The products are supplied to the Company by certain manufacturers and suppliers and warehoused and distributed from the Company’s principal business location in Ashland, Kentucky. In addition, on November 21, 2014, and with a view to diversifying its business, the Company acquired all of the membership interest in The Bag Rack, LLC. The acquired company has developed a new product, “The Bag Rack,” and is in the preliminary stages of distributing and selling the new product. The Bag Rack is a unique device that enable bags with handles to be stored in the trunk of a car preventing the bags from tipping over and causing spillage. The Company expects to market and sell the new product online, through distributors, and through certain national retailers and discount stores. See Note 2.

 

 

The Company was incorporated in the State of Georgia on May 15, 2000, under the name HOM Corporation. On January 22, 2003, the Company changed its name to R Wireless, Inc., and, on July 27, 2005, changed its name to TX Holdings, Inc.

  

REVENUE RECOGNITION

 

The Company recognizes revenue from direct sales of our products to our customers, including shipping fees. Title passes to the customer (usually upon shipment or delivery, depending upon the terms of the sales order) when persuasive evidence of an arrangement exists; when sales amounts are fixed or determinable; and when collectability is reasonably assured. The Company expenses shipping and handling costs as incurred which are included in cost of goods sold on the consolidated statements of operations.

 

GOING CONCERN CONSIDERATIONS

 

The unaudited financial statements included in this report have been prepared assuming that the Company will continue as a going concern and, accordingly, do not include any adjustments that might result from the outcome of this uncertainty. Our independent registered public accounting firm’s report on the financial statements included in our annual report on Form 10-K for the year ended September 30, 2014, contains an explanatory paragraph wherein it expressed an opinion that there is substantial doubt about our ability to continue as a going concern. Accordingly, careful consideration of such opinion should be given in determining whether to continue or become our stockholder.

 

Since the commencement of its mining and rail products distribution business, the Company has relied substantially upon financing provided by Mr. Shrewsbury, the Company’s CEO and, since November 2012, a secured bank line of credit in connection with the development and expansion of its business.

 

These factors raise substantial doubt about the Company’s ability to continue as a going concern. The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates continuing operations and realization of assets and liquidation of liabilities in the ordinary course of business. The Company’s ability to continue as a going concern is dependent upon its ability to raise sufficient capital and to implement a successful business plan to generate profits sufficient to become financially viable. The consolidated financial statements do not include adjustments relating to the recoverability of recorded assets or the implications of associated bankruptcy costs if the Company is unable to continue as a going concern.

 

PRINCIPLES OF CONSOLIDATION

 

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary. All significant inter-company transactions and balances have been eliminated in consolidation.

 

NOTE 2 –ACQUISITIONS

 

On November 21, 2014, the Company acquired 100% ownership of The Bag Rack, LLC, a Kentucky limited liability company owned 50% by the Company’s CEO and major stockholder. The acquired company had been recently established and was in the process of initiating the development and distribution of “The Bag Rack”, a unique patent pending device which enables bags with handles to be stored in the trunk of a car neatly and preventing content spillage. The transaction was completed with the Company paying a purchase price of $500.

 

The Bag Rack, LLC acquired all rights to the product shortly prior to the acquisition transaction. Since its formation and at the date of acquisition, the acquired company held no assets or liabilities other than rights to the product which were valued at $500 as they pertained to a new unproven product. In addition, the Company agreed to pay 20% of the net profit for each product sold to a customer by The Bag Rack LLC to the former pending patent holder and 20% of the net income, after payment to the former pending patent holder, to each former member of The Bag Rack, LLC. The payments to the former pending patent holder and prior members of The Bag Rack LLC will be in perpetuity.

 

 

NOTE 3 – STOCKHOLDERS’ DEFICIT

 

POTENTIALLY DILUTIVE OPTIONS AND WARRANTS

 

On May 16, 2012, the Board of Directors authorized the issuance of an aggregate of 400,000 common stock purchase warrants to a sales agent, Mr. Tom Chafin. Over a period of four years, Mr. Chafin is expected to receive 50,000 warrants every six months, for an aggregate of 400,000 warrants. The warrants are exercisable at a price of $0.10 per share, become exercisable upon issuance, and expire two years after the date of issuance. The initial tranche of 50,000 warrants were issuable effective July 1, 2012. As of June 30, 2015 Mr. Chafin has 200,000 warrants outstanding and unexercised and 100,000 warrants have expired pursuant to the agreement. The warrants were not included in the calculation of diluted earnings per share since their inclusion will be anti-dilutive.

 

On February 25, 2014, the Company issued 500,000 common stock purchase options to Mr. Shrewsbury. Commencing April 1, 2014, the options became exercisable at a price of $.0924 per share, the fair market value of the Company’s shares of Common Stock on the date authorized by the Board of Directors, February 21, 2014. The options expire on March 31, 2017. The options are not included in the calculation of diluted earnings per share since their inclusion will be anti-dilutive.

  

NOTE 4 – RELATED PARTY TRANSACTIONS

 

ADVANCES FROM STOCKHOLDER/OFFICER

 

As of June 30, 2015, Mr. Shrewsbury had an outstanding advance to the Company of $71,637. The advance bears no interest and is due on demand.

 

NOTES PAYABLE TO A STOCKHOLDER AND OFFICER

 

On February 25, 2014, the Company and Mr. Shrewsbury consolidated an aggregate of $2,000,000 of the indebtedness to Mr. Shrewsbury, including the principal due under a Revolving Demand Note (“Revolving Note”) in the principal amount of $1,062,000 and accrued but unpaid interest due thereunder as of January 31, 2014 in the amount of $168,905, the principal due under a 10% Promissory Note (“10% Note”) in the amount of $289,997 and accrued but unpaid interest due thereunder as of January 31, 2014 in the amount of $93,252; and $385,846 of non-interest bearing advances outstanding as of January 31, 2014. The Company issued in exchange and in replacement therefor a Consolidated Secured Promissory Note (the “Consolidated Note”) in the principal amount of $2,000,000. The Revolving Note and 10% Note were cancelled and Mr. Shrewsbury agreed to waive any prior defaults under the terms of such notes and to release the Company from any claims related thereto. The Consolidated Note bears interest at the rate of 5% per annum or prime rate if higher than 5% per annum is repayable in full ten years from the date of issuance and is subject to certain events of default. Payment of the Consolidated Note is to be secured or otherwise payable by the Company out of the death benefit proceeds of key man insurance of $2 million that has been purchased by the Company on the life of Mr. Shrewsbury. The terms of the debt consolidation and restructuring were unanimously approved by the disinterested members of the Board of Directors of the Company.

 

CONVERTIBLE DEBT ISSUED TO STOCKHOLDER AND FORMER OFFICER

 

In September 2007, Mark Neuhaus, the former Chairman of the Board of Directors and former Chief Executive Officer of the Company, caused the Company to issue to him a convertible promissory note in the amount of $1,199,886 (the “Neuhaus Note”) bearing interest at 8% per annum and due and payable within two years for payments in cash and common stock purportedly made on behalf of the Company by Mr. Neuhaus through that date. The conversion price was $0.28 per common share (the market price of the Company’s common stock on the date of the note) and would have automatically converted into common stock on the two-year anniversary of the note if not paid in full by the Company. The conversion price was subject to anti-dilution adjustments.

 

 

On November 17, 2009 the Company filed a legal claim in the Eleventh Judicial Circuit Court in and for Miami-Dade County, Florida against Mark Neuhaus, the Company’s prior CEO, Michael Cederstrom, the Company’s prior CFO, Dexter & Dexter, Hewitt Energy Group, LLC, Douglas Hewitt, Mercantile Ascendancy, Inc., Thomas Collins, Global Investment Holdings, LLC, Brian Vollmer, MA & N, LLC, and Nicole Bloom Neuhaus (the “Neuhaus Litigation”). The Company asserted, among other things, that the Neuhaus Note was not supported by consideration and that it was not properly authorized under Georgia law.

 

During the first half of calendar 2012, the Company retained new legal counsel to represent the Company on current litigation against the defendants listed above. Also, the Company filed a separate but related claim in the United States District Court for the District of Utah against Michael Cederstrom, Dexter and Dexter, and certain other defendants (“Cederstrom Litigation”).

 

On May 18, 2012, the Company reached a settlement with Mark Neuhaus with regard to the Neuhaus Litigation. Pursuant to a settlement agreement among the parties, the Company and Mark Neuhaus agreed to settle the Neuhaus litigation, Mr. Neuhaus returned to the Company 6,718,813 shares previously issued to him and Mr. Neuhaus released all claims against the Company related to the Neuhaus Note, including accrued interest along with any other liability owed to him. Mr. Neuhaus was permitted to retain 2,500,000 shares of the Company owned by him. The Company agreed that it would, within ten days of the effective date of the agreement, take steps to lift the restrictions on the transferability or public resale of such shares. The returned shares were canceled by the Company. In return, the Company paid Mr. Neuhaus $100,000. The settlement agreement provided for mutual general releases among the parties, except for claims the Company has or might have against Dexter and Dexter Attorneys At Law, P.C., and Michael Cederstrom. Also, the Company agreed to execute, exchange and deliver mutual general releases with Hewitt Energy Group, LLC, Douglas C. Hewitt, MA&N, LLC, and Nicole Bloom Neuhaus.

 

The Company accounted for the settlement as a “multiple element” transaction consisting of a debt extinguishment element and a stock repurchase element. The $100,000 cash payment was apportioned based on the relative fair value of the debt and repurchased shares. The difference between the cash portion for the debt extinguishment was credited to “additional paid-in capital” pursuant to ASC 470-50-40-2. The difference between the stated value of the

repurchased shares and the cash portion paid to repurchase the shares was credited to “additional paid-in capital” pursuant to ASC 505-30-30-9.

 

On May 22, 2014 the Company entered into a settlement agreement and release, dated effective May 20, 2014, with Dexter & Dexter and Mr. Cederstrom that settles all claims among the parties arising from the Cederstrom Litigation. Pursuant to the terms of the settlement agreement Dexter & Dexter’s insurer paid the Company $374,025 in settlement of all claims among the parties. Also, effective upon receipt of the settlement payment, each party agreed to release each other party and affiliates from all claim arising out of the litigation or otherwise. None of the parties made any admission of liability in entering into the settlement agreement. Subsequently, the parties filed a joint motion to dismiss the case with prejudice, and the motion was granted by the courts on June 16, 2014.

 

LEASE AGREEMENT WITH STOCKHOLDER AND OFFICER

 

In November 2012, the Company entered into a lease agreement with William Shrewsbury and Peggy Shrewsbury whereby Mr. Shrewsbury and Mrs. Shrewsbury agreed to lease to the Company real estate and warehouse space to store the Company’s inventory. The initial lease had a two year term starting October 1, 2012 and ending August 31, 2014. On September 1, 2014 the parties agreed to extend the lease for an additional two years. The lease rental is $2,000 per month payable the first of each month. As of June 30, 2015, the Company has made lease payments, since the beginning of the lease, in the amount of $66,000 and has an outstanding payable on the lease to Mr. Shrewsbury in the amount of $6,000.

 

 

FREIGHT PAID TO COMPANY CONTROLLED BY OFFICER/STOCKHOLDER

 

The Company utilizes the services of a trucking company owned and controlled by Mr. Shrewsbury, our Chief Executive Officer, to transport certain of the Company’s products to its customers. During the three months and nine months ended June 30, 2015 and 2014, such trucking company was paid $12,362 and $30,122 and $21,780 and $65,607, respectively, for such trucking services. 

 

COMMISSIONS PAID TO COMPANY CONTROLLED BY OFFICER/SHAREHOLDER

 

In connection with the transportation and delivery of certain of the Company’s products, the Company utilizes the services of a national transportation company. The chief executive officer and a principal stockholder of the Company owns and controls a company that is an agent of such transportation company. Such controlled company places orders for such transportation services on behalf of the Company and is paid a commission for such transportation services. During the three and nine months ended June 30, 2015 and 2014 the commissions’ amounts were $1,027 and $5,823 and $1,767 and $7,800, respectively.

 

ADVANCES FROM STOCKHOLDER/OFFICER

 

As of June 30, 2015 and September 30, 2014 advances from stockholder/officer were $71,637 and $43,337, respectively. The advances do not bear interest and are repayable upon demand. 

 

NOTE 5 – BANK-LINE OF CREDIT

 

In November 2012, we obtained a $250,000 line of credit from a bank. On August 26, 2014, the bank increased the Company’s existing bank line of credit from $250,000 to $750,000 and extended the term of the line of credit. The line of credit is secured by a priority security interest in the Company’s inventory and accounts receivable and matures on November 7, 2015. Interest on the line of credit is payable monthly and is calculated on the basis of a prime rate variable index. As of June 30, 2015 the Company had borrowed $719,549 under the line of credit. The current rate of interest under the loan is 3.25% per annum. Principal, interest and collection costs under the loan are guaranteed by Mr. Shrewsbury.

 

The Consolidated Note and advances due to Mr. Shrewsbury are subordinate to the Company’s bank indebtedness. 

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Introduction

 

You should read the following summary together with the more detailed information and financial statements and notes thereto and schedules appearing elsewhere in this report. Throughout this report when we refer to the”Company,” “TX Holdings,” “we,” “our” or “us,” we mean TX Holdings, Inc., a Georgia corporation, and its subsidiaries.

 

This discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements which have been prepared in accordance with GAAP. The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our critical accounting policies and estimates, including those related to revenue recognition and contingencies. We base our estimates on historical experience, where available, and on various other assumptions we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions and conditions.

 

 

Except for historical information, the statements and other information contained in this Management’s Discussion and Analysis are forward-looking. Our actual results could differ materially from the results discussed in the forward-looking statements, which include certain risks and uncertainties.

 

Our independent registered public accounting firm’s report on the financial statements included in our Annual Report Form 10-K for the year ended September 30, 2014, contains an explanatory paragraph wherein they expressed an opinion that there is substantial doubt about our ability to continue as a going concern. Accordingly, careful consideration of such opinion should be given in determining whether to continue or become our stockholder.

 

Please refer to and carefully consider the factors described in Part I, Item 1A - Risk Factors of our Form 10-K for the year ended September 30, 2014, and Part II, Item 1A – Risk Factors in this report.

 

Overview

 

The Company is in the business of supplying, distributing and selling drill bits, related tools, and other mining supplies, rail and rail material directly and through other suppliers to the United States’ coal mining industry for use in their production and transportation processes. The products are supplied to the Company by certain manufacturers and suppliers and warehoused and distributed from the Company’s principal business location in Ashland, Kentucky.

 

We purchase mining supplies from several manufacturers and rail material from several suppliers of such products. The products are shipped to our warehouse in Ashland, Kentucky and then distributed to our customers. Our products are transported primarily by road to our customers. Shipping costs are born by our customers.

 

We distribute and sell our products through two independent sales agents who are compensated on a commissioned basis.

 

Revenue for the three months ended June 30, 2015, was $636,388 as compared to $1,236,267 for the same period in 2014, a decrease of approximately 49%.

 

During the three months ended June 30, 2015, we had a net loss of $82,913 as compared to net income of $326,209 for the same period in 2014.

 

At June 30, 2015, cash and cash equivalents were $44,812 compared to $72,784 at September 30, 2014.

 

Net cash used in operating activities was $224,478 during the nine months ended June 30, 2015. Net cash provided by operating activities during the same nine month period in 2014 was $78,142.

 

Cash flow used in investing activities for the nine months ended June 30, 2015 was $2,843. Cash flow used in investing activities during the nine months period ended June 30, 2014 was $17,943.

 

During the nine months ended June 30, 2015, net cash provided by financing activities was $199,349 due to the Company’s $171,049 drawdown from its line of credit. Cash flows used by financing activities during the same nine month period in 2014 were $86,400 resulting from an advances repayment by the Company of $110,850 to a stockholder/officer.

 

Mr. William Shrewsbury, the Company’s Chairman and CEO, has provided financing in the form of demand notes and advances. Effective February 25, 2014, the Company and Mr. Shrewsbury agreed to restructure the principal and interest under such demand notes and certain advances due as of January 31, 2014, and the Company issued in exchange a single Consolidated Secured Promissory Note in the principal amount of $2,000,000 (“Consolidated Note”). The principal and interest thereunder is due ten years from the date of issuance, the principal bears interest at the rate of 5% per annum or prime rate if higher than 5% per annum, and is subject to certain events of default. Payment of the Consolidated Note is to be secured or otherwise payable by the Company out of the death benefit proceeds of key man insurance of $2 million that has been purchased by the Company on the life of Mr. Shrewsbury. As of June 30, 2015, Mr. Shrewsbury had also provided non-interest bearing advances to the Company of $71,637.

 

 

In November, 2012, the Company obtained a bank line of credit in the amount of $250,000 which was subsequently increased to $750,000. The line of credit is secured by a lien on the Company’s inventory and account receivable and guaranteed by Mr. Shrewsbury. As of June 30, 2015, $719,549 had been drawn upon by the Company.

 

We were incorporated in the State of Georgia in 2000 under the name HOM Corporation. On January 22, 2003, we changed our name to R Wireless, Inc., and, on July 27, 2005, we changed our name to TX Holdings, Inc.

 

Recent Acquisitions

 

On November 21, 2014, and with a view to diversifying its business, the Company acquired The Bag Rack, LLC. The acquired company owns all rights to a new product, “The Bag Rack” and was in the preliminary stages of developing the new product. The Bag Rack is a unique device that enables bags with handles to be stored in the trunk of a motor vehicle preventing the bags from tipping over and causing spillage. The Company expects to market and sell the new product online and through certain national retailers, distributors, and discount stores. The Bag Rack, LLC was acquired from Mr. Shrewsbury, our CEO and Mr. Rickie Hagan, the founding members of The Bag Rack, LLC, who each owned 50% of the company. In addition to a purchase price of $500, as consideration for the acquisition, the Company agreed to pay 20% of the net profits to each founding member (after royalty payment) of The Bag Rack. The Bag Rack has a provisional patent pending related to the new product and is obligated to pay a royalty to the original developer of the product equal to 20% of the net profit of each product sold. 

 

RESULTS OF OPERATIONS

 

Three Months Ended June 30, 2015 Compared To Three Months Ended June 30, 2014

 

Revenues from Operations

 

Revenue for the three months ended June 30, 2015 was $636,388 as compared to $1,236,267 for the same period in 2014, a decrease of $599,879 or 48.5%. The decrease in revenue is attributable to overall lower sales demand during the current period.

 

Cost of Goods Sold

 

During the quarter ended June 30, 2015, the Company’s cost of goods sold was $503,301 as compared to cost of goods sold of $954,499 for the quarter ended June 30, 2014, a decrease of $451,198 or 47.3 %. The lower cost resulted from lower sales demand during the current period. As a percentage of sales, cost of goods sold increased from 77.2% in 2014 to79.1% during the current period, the 1.9% increase is the direct result of higher cost product mix sold during the current quarter. 

 

Gross Profit

 

Gross profit for the period ended June 30, 2015 decreased as a percentage of revenue to 20.9% from 22.8% for the same period of the prior year. The decrease in margin resulted from higher cost product mix and some erosion in sales margins due to lower prices to meet competition.  

 

Operating Expenses

 

Operating expenses for the three months ended June 30, 2015 were $187,142 as compared to $282,946 for the three months ended June 30, 2014, a decrease of $95,804 or 33.9%.

 

 

The table below details the components of operating expense, as well as the dollar and percentage changes for the three-month periods.

		Three Months Ended
		6/30/2015				6/30/2014				$ Change				% Change
Operating Expense
Commission Expense		$	52,553			$	109,144			$	(56,591	)			(51.8	)
Professional fees			14,201				30,386			$	(16,185	)			(53.3	)
Depreciation expense			4,032				2,699			$	1,333				49.4
Other operating expense			116,356				140,717			$	(24,361	)			(17.3	)
Total		$	187,142			$	282,946			$	(95,804	)			(33.9	)

 

Commission expense for the three months ended June 30, 2015 was $52,553 compared to $109,144 for the same period in 2014, a decrease of $56,591 or 51.8%. The lower commission is a direct result of lower sales, lower margins and the introduction of revised lower sales commission rates payable to our sales agents.

 

Professional fees decreased $16,185 or 53.3% during the three months ended June 30, 2015, as compared to the same period in 2014. The lower professional fees result from lower legal fees of $17,185 and lower investor relations cost of $4,000 partially offset by higher advertising expense of $5,000.

 

Depreciation expenses increased $1,333 or 49.4% during the quarter ended June 30, 2015, as compared to the same period in 2014. Depreciation on a new refurbished delivery truck, account for the increase.

 

During the three months ended June 30, 2015, other operating expenses of $116,356 decreased by $24,361 or 17.3% from the $140,717 for the same period in 2014. The lower other operating expenses resulted from $14,971 stock based compensation recorded in 2014 and, lower travel expense and operating expense in the current period of $5,530 and $1,967, respectively.

 

Loss from operations

 

Loss from operations for the quarter ended June 30, 2015 was $54,055 compared to loss from operations of $1,178 during the same period in 2014. The loss resulted from lower revenue attributable to lower sales demand. The loss from operations was partially offset by lower operating expenses of $95,804.

 

Other income and (expense)

 

Other income and expense for the three months ended June 30, 2015, reflected a net expense of $28,858 as compared to other net income of $327,387 for the quarter ended June 30, 2014, a decrease of $356,245. The decrease resulted from a favorable $374,025 legal settlement recorded in 2014 partially offset by bad debt expense of $18,350 also recorded in 2014.

 

Net Income or Loss

 

For the quarter ended June 30, 2015, net loss was $82,913 compared to net income of $326,209 for the quarter ended June 30, 2014. The loss resulted from increased loss from operations of $52,877 when compared to the same period in 2014 and, a favorable $374,025 legal settlement recorded in 2014. The loss from operations was the direct result of lower sales demand during the current period.

 

Net earnings (loss) per common share

 

The net loss of $82,913 for the quarter ended June 30, 2015, as well as the net income of $326,209 for the quarter ended June 30, 2014, when divided by the number of common shares outstanding of 48,053,084 basic and diluted shares in both years resulted in a net loss per share of less than $0.01 in the current quarter and a $0.01 earnings per share for the quarter ended June 30, 2014.

 

 

Nine Months Ended June 30, 2015 Compared To Nine Months Ended June 30, 2014

 

Revenues from Operations

 

Revenue for the nine months ended June 30, 2015 was $2,229,033 as compared to $3,340,715 for the same period in 2014, a decrease of $1,111,682 or 33.3%. The decrease in revenue is attributable to overall lower sales demand and changes in our customer base during the current period.

 

Cost of Goods Sold

 

During the nine months ended June 30, 2015, the Company’s cost of goods sold was $1,810,712 as compared to cost of goods sold of $2,432,360 for the nine months ended June 30, 2014, a decrease of $621,648 or 25.6 %. The lower cost resulted from lower sales demand. As a percentage of sales, cost of goods increased from 72.8% in 2014 to 81.2% in 2015, the 8.4% increase is the direct result of the sale of scrap products during the current nine month period.

  

Gross Profit

 

Gross profit for the period ended June 30, 2015 decreased as a percentage of revenue to 18.89% from 27.2% for the same period the prior year. The decrease in margin resulted from a $55,000 loss from the sale of obsolete inventory sold as scrap and some erosion in sales margins due to lower prices to meet competition.

  

Operating Expenses

 

Operating expenses for the nine months ended June 30, 2015 were $646,503 as compared to $899,840 for the nine months ended June 30, 2014, a decrease of $253,337 or 28.2%.

 

The table below details the components of operating expense, as well as the dollar and percentage changes for the nine-month period.

		Nine Months Ended
		6/30/2015				6/30/2014				$ Change				% Change
Operating Expense
Commission Expense			158,486				379,460				(220,974	)			(58.2	)
Professional fees			72,511				141,070				(68,559	)			(48.6	)
Depreciation expense			9,238				7,439				1,799				24.2
Other operating expense			406,268				371,871				34,397				9.3
Total			646,503				899,840				(253,337	)			(28.2	)

 

Commission expense for the nine months ended June 30, 2015 was $158,486 compared to $379,460 for the same period in 2014, a decrease of $220,974 or 58.2%. The lower commission is a direct result of lower sales, lower margins and the introduction of revised lower sales commission rates payable to our sales agents.

 

Professional fees decreased $68,559 or 48.6% during the nine months ended June 30, 2015, as compared to the same period in 2014. The lower professional fees result from lower legal fees of $81,388, partially offset by higher advertising expense of $6,136 and investor relations cost of $5,150 associated with the Company hiring a firm during the third quarter, 2014 to provide investor relation services.  

 

 

Depreciation expenses increased $1,799 or 24.2% during the nine months ended June 30, 2015, as compared to the same period in 2014. Depreciation on a new refurbished delivery truck, account for the increase.

 

During the nine months ended June 30, 2015, other operating expenses of $406,268 increased by $34,397 or 9.2% from the $371,871 for the same period in 2014. The higher other operating expenses resulted from higher insurance expense of $14,462, higher travel expense of $8,645, higher delivery truck maintenance of $5,138 and, higher expenses related to the Bag Rack operation of $5,648. The higher insurance expense represent life insurance cost for officers and automobile and liability coverage. The higher travel expense is associated with overseas travel by an officer and agent to meet with suppliers.

 

Loss from operations

 

Loss from operations for the nine months ended June 30, 2015 was $228,182 compared to profit from operations of $8,515 during the same period in 2014. The loss resulted from lower revenue attributable to changes in our customer base, and a $55,000 loss incurred from the sale of obsolete inventory sold as scrap. The gross profit loss reflected in the loss from operation was partially offset by lower operating expenses of $253,337.

 

Other income and (expense)

 

Other income and expense for the nine months ended June 30, 2015, reflected a net expense of $82,136 as compared to net income of $388,595 for the nine months ended June 30, 2014, a decrease of $470,731. The decrease resulted from a $374,025 favorable legal settlement and a gain on an extinguishment of debt of $93,167 recorded in 2014 and higher interest expense for the current nine month period ended June 30, 2015 account for an additional negative variance of $26,587 over the same period the prior year. Interest expense increased as a result of the consolidation of loans and non-interest bearing advances in the aggregate amount of $2,000,000 and, higher interest from increased borrowing under the outstanding bank line of credit.

 

Net Income or Loss

 

For the nine months ended June 30, 2015, the Company had a net loss of $310,318 compared to net income of $397,110 for the nine months ended June 30, 2014. The loss resulted from lower income from operations of $236,697, higher interest expense of $26,587, a favorable $374,025 legal settlement and a $93,167 gain on an extinguishment of debt recorded in the 2014 fiscal year. The lower income from operations was the direct result of changes in our customer base and a $55,000 loss incurred from the sale of obsolete inventory sold as scrap in the current period.

 

Net earnings per common share

 

The net loss of $310,318 for the nine months ended June 30, 2015, as well as the net income of $397,110 for the nine months ended June 30, 2014, when divided by the number of common shares outstanding of 48,053,084 basic and diluted shares in both years resulted in a net loss per share of $0.01 in the current nine month period and a $0.01 earning per share for the nine months ended June 30, 2014.

 

 

LIQUIDITY AND CAPITAL RESOURCES

 

The following table presents a summary of our net cash provided (used) in operating, investing and financing activities:

		Nine Months Ended
		6/30/2015				6/30/2014
Net cash provided by (used in) operating activities		$	(224,478	)		$	78,142
Net cash used in investing activities			(2,843	)			(17,943	)
Net cash provided by (used in) financing activities			199,349				(86,400	)
Decrease in cash		$	(27,972	)		$	(26,201	)

  

At June 30, 2015, we had cash and cash equivalents of $44,812 as compared to $72,784 at September 30, 2014, a decrease of $27,972 or 38.4%. The decrease in cash is the direct result of the net cash used for operating activities of $224,478. The decrease in cash was partially offset by line of credit borrowing of $171,049 and stockholder/officer net advances of $28,300 during the nine months ended June 30, 2015.

 

Cash Flows Provided by (Used in) Operating Activities

 

Net cash used in operating activities for the nine months ended June 30, 2015, was $224,478 compared to cash provided by operations of $78,142 in 2014, an increase of $302,620.

 

During 2014, the Company received $374,025 (included in other income) from the favorable settlement of a legal matter and had net income of $397,110.

 

During the nine months ended June 30, 2015 the Company incurred a net loss of $310,318.

 

The increase in cash used during the current period was partially offset by a working capital decrease of $71, 102 and depreciation of $9,238.

 

A decrease in inventory of $217,292 and an increase in accrued liabilities of $31,398, during the nine months period ended June 30, 2015 were offset by a $156,201 decrease in accounts payable and a $36,460 increase in sales commission advances. The decrease in inventory is associated with inventory reduction to meet lower sales demand. The higher accrual represents accrued interest on the Consolidated Note payable to a stockholder.

 

During the same period in 2014, a $93,167 legal service debt write-off recorded on December 31, 2013 accounts for the reported gain on extinguishment of debt. The gain from the reversal of the debt was recorded on a disputed debt the Company deems no longer payable.

 

Cash Flows Used in Investing Activities

 

Cash used in investing activities was $2,843 for the period ended June 30, 2015. During the current nine month period, the Company capitalized $4,149 incurred in refurbishing a new truck used for product delivery. A $1,306 payment was received during the current quarter as a partial payment on the note receivable held by the Company arising from the sale of a previously owned oil lease.

 

Cash Provided by (Used in) Financing Activities

 

During the nine months ended June 30, 2015, cash provided by financing activities was $199,349 compared to cash used by financing activities of $86,400 during the same period in 2014. During such periods, the Company repaid stockholder/officer advances of $36,000 and $110,850, respectively, and received stockholder advances of $64,300 and $24,450, respectively, As a result of operating losses during the current period, the Company has increased reliance on advances from Mr. Shrewsbury to fund operations. Also, the Company financed its operation during the nine-months period ended June 30, 2015, by drawing-down $171,049 under its bank credit line.

 

 

In November 2012, the Company obtained a $250,000 line of credit from a bank. On August 26, 2014, the bank increased the Company’s existing bank line of credit from $250,000 to $750,000 and extended the term of the line of credit. The line of credit is secured by a priority security interest in the Company’s inventory and accounts receivable and matures on November 7, 2015. Interest on the line of credit is payable monthly and is calculated on the basis of a variable index. As of June 30, 2015 the Company had borrowed $719,549 under the line of credit. The current rate of interest under the loan is 3.25% per annum. Principal, interest and collection costs under the loan are guaranteed by Mr. Shrewsbury.

 

On February 25, 2014 the Company and Mr. Shrewsbury entered into an agreement to consolidate an aggregate of $2,000,000 of amounts due to Mr. Shrewsbury, including $1.062 million due under a Revolving Promissory Demand Note issued to Mr. Shrewsbury on or about April 30, 2012, $289,997 due under a 10% Promissory Note issued to Mr. Shrewsbury on or about February 27, 2009, accrued but unpaid interest of $262,157 as of January 31, 2014, under such notes and advances by Mr. Shrewsbury in the amount of $385,846 as of January 31, 2014, and issued in replacement a Secured Consolidated Note (“Consolidated Note”) for such amount. The Consolidated Note bears interest at 5% per annum or prime rate if higher than 5% per annum, principal and interest are repayable ten years from February 25, 2014, and it is subject to customary events of default. Payment of the Consolidated Note is to be secured or otherwise payable by the Company out of the death benefit proceeds of key man insurance of $2 million that has been purchased by the Company on the life of Mr. Shrewsbury

 

During the nine months ended June 30, 2015, the Company received $64,300 cash advance from Mr. Shrewsbury and repaid $36,000, bringing the total outstanding advance balance to $71,637. Cash advances from Mr. Shrewsbury are repayable upon demand and do not bear interest.

 

Financial Condition and Going Concern Uncertainties

 

Except for the consolidated six consecutive quarters ended June 30, 2014, since inception, the Company has not generated sufficient cash to fund its operations and has incurred operating losses. Currently, the Company relies substantially upon financing provided by Mr. Shrewsbury, the Company’s Chief Executive Officer, and a secured bank line of credit in connection with the development and expansion of its business. In view of these matters, realization of certain assets in the accompanying balance sheet is dependent upon continued operations, which, in turn, is dependent upon our ability to meet our financial requirements, upon the continued provision of financing from Mr. Shrewsbury and under the Company’s bank line of credit, and the success of our future operations.

 

Our independent registered public accounting firm’s report on the financial statements included in our Annual Report on Form 10-K for the year ended September 30, 2014, contained an explanatory paragraph wherein they expressed an opinion that there is a substantial doubt about our ability to continue as a going concern. Accordingly, careful consideration of such opinion should be given in determining whether to continue or to become our stockholder.

 

As of June 30, 2015, the Company had cash and cash equivalents of $44,812 as compared to $72,784 as of September 30, 2014. The decrease in cash as of June 30, 2015, results from losses from operations of $310,318 partially offset by a drawdown on the Company’s line of credit of $171,049, a decrease in working capital of $71,102, primarily due to lower inventory , a $28,300 net increase in advances from Mr. Shrewsbury and an increase in depreciation expense of $9,238.

 

The Company’s accounts receivable were $504,839 as of June 30, 2015, as compared to $502,617 as of September 30, 2014, an increase of $2,222 or 0.4%. The higher receivables as of June 30, 2015 are the direct result of slower payment by a major customer.

 

Inventory was $2,545,243 as of June 30, 2015 as compared to $2,762,535 as of the year ended September 30, 2014, a decrease of $217,292 or 7.9%. The lower inventory is attributable to inventory reduction to meet lower sales demand.

 

During the nine-months ended June 30, 2015, our stockholders’ deficit increased from $14,380,202 to $14,690,520, an increase of $310,318 or 2.1%. Reported net loss due to lower sales for the nine months ended June 30, 2015 accounts for the increase in stockholders’ deficit.

 

 

During the nine months ended June 30, 2015, the Company’s net loss was $310,318 compared to a net income of $397,110 for the comparable period in 2014. The net loss variance can be directly attributed to a $374,025 favorable legal settlement and, accounts reversal of prior period recorded debt of $93,167, which was deemed not payable by the Company recorded in the prior period ended June 30, 2014. A $55,000 loss on obsolete inventory sold as scrap and lower profits due to lower sales during the current period account for the remaining loss variance.

 

Currently, in addition to funds utilized to purchase inventory, the Company is spending between $100,000 and $120,000 per month on operations. Management believes that the Company’s available cash, cash flows from operations, the loans and advances provided by Mr. Shrewsbury and the line of credit provided by the bank to be sufficient to fund the Company operations during the next 12 months. The Company expects to extend the term of the loan from the bank which is due to mature on November 7, 2015.

 

The Company continues to rely substantially upon financings provided by Mr. Shrewsbury and a bank loan to fund its operations. The terms of such financings are discussed below.

  

BANK LOAN

 

Under the terms of a business loan agreement, originally entered into on November 7, 2012, and as amended through August 26, 2014, the Company obtained a secured revolving line of credit in the amount of $750,000 from Town Square Bank. Interest on the loan is payable monthly in arrears. Interest under the loan is variable and is based upon Wall Street Journal Prime Rate. An event of default under the loan will occur if or upon the occurrence of any of the following events:

•

the Company fails to make any payment when due under the loan;

•

The Company fails to comply with any term obligation, covenant or condition in the loan document or any other agreement between the bank and the Company:

•

the Company defaults under any loan or similar agreement, purchase or sales agreement or other agreement with any creditor that materially affects the Company’s property or its ability to repay the loan or perform its obligation under the loan documents;

•

a statement representation or warranty made by the Company in the loan documents is or becomes material false or misleading;

•

the dissolution, termination or insolvency or occurrence of bankruptcy event with respect to the Company;

•

the commencement of foreclosure with regard to any property securing the loan;

•

any of the preceding events occurs with respect to a loan guarantor;

•

a 25% or more change in the ownership of the stock of the Company;

•

a material adverse change in the financial condition of the Company ; or

•

the bank in good faith believes itself insecure.

 

The line of credit is secured by a priority security interest in the Company’s inventory and accounts receivable and matures on November 7, 2015. Interest on the line of credit is payable monthly and is calculated on the basis of a variable index. The loan is guaranteed as to principal, interest and all collection costs and legal fees by Mr. Shrewsbury. All notes and other indebtedness due to Mr. Shrewsbury by the Company are subordinated to the bank loan including with regard to the Company’s inventory and assets. The loan agreement contains other customary covenants and provisions.

 

ADVANCES AND LOANS FROM MR. SHREWSBURY

 

In connection with the expansion of the Company’s business, Mr. Shrewsbury, the Company’s Chairman and CEO, provided financing to the Company in the form of demand notes and advances. On February 25, 2014, the Company entered into a Note Exchange Agreement (“Exchange Agreement”) with Mr. Shrewsbury pursuant to which certain outstanding indebtedness due to Mr. Shrewsbury was consolidated and restructured. Under the terms of the agreement, the Company and Mr. Shrewsbury consolidated the following indebtedness: the principal due under the Revolving Promissory Demand Note issued to Mr. Shrewsbury on April 30, 2012 (“Revolving Note”), in the amount of $1,062,000 and accrued but unpaid interest due thereunder as of January 31, 2014, in the amount of $168,905; the principal due under the 10% Promissory Note issued to Mr. Shrewsbury effective February 27, 2009 (the “10% Note”), in the amount of $289,997 and accrued but unpaid interest due thereunder as of January 31, 2014, in the amount of $93,252; and $385,846 of the non-interest bearing advances previously made by Mr. Shrewsbury and outstanding as of January 31, 2014. The Company issued in exchange and in replacement for such indebtedness a Consolidated Secured Promissory Note (the “Consolidated Note) in the principal amount of $2,000,000. Upon issuance of the Consolidated Note, the Revolving Note and 10% Note were cancelled. Mr. Shrewsbury agreed to waive any prior defaults under the terms of such cancelled notes and to release the Company from any claims related thereto.

 

 

The principal and interest under the Consolidated Note is due and payable ten years from the date of issuance and is to be secured by the proceeds of key man insurance purchased by the Company on the life of Mr. Shrewsbury. The Consolidated Note bears interest at the rate of 5% per annum except that, if the prime rate reported by the Wall Street Journal (“WSJ Prime Rate”) exceeds 5%, then the Consolidated Note will bear interest at the WSJ Prime Rate.

 

An event of default will occur under the Consolidated Note upon:

 

•

the Company failure to pay when due any principal or interest under the Consolidated Note;

•

the violation by the Company of any covenant or agreement contained in the Consolidated Note, the Exchange Agreement or related transaction documents;

•

an assignment for the benefit of creditors by the Company;

•

the application for the appointment of a receiver or liquidator for the Company or for property of the Company;

•

the filing of a petition in bankruptcy by or against the Company;

•

the issuance of an attachment or the entry of a judgment against the Company in excess of $250,000;

•

a default by the Company with respect to any other indebtedness or with respect to any installment debt whether or not owing to Mr. Shrewsbury;

•

the sale of all or substantially all of the Company’s assets or a transfer of more than 51% of the Company’s equity interests to a person not currently a holder of equity interests of the Company;

•

the termination of existence or the dissolution of the Company;

•

the death of Mr. Shrewsbury; or the failure to pay when due any premium under the key man policy required to be purchased on the life of Mr. Shrewsbury under the Exchange Agreement.

 

In addition, in consideration of Mr. Shrewsbury agreeing to consolidate and restructure the indebtedness, the Company granted to Mr. Shrewsbury options to purchase an aggregate of 500,000 shares of the Company’s common stock pursuant to the terms of a Non-Qualified Stock Option Agreement, issued February 25, 2014. The options are exercisable commencing April 1, 2014, and for a period of three years thereafter. The options are exercisable at a price of $0.0924 per share subject to certain anti-dilution adjustments in the event of stock dividends, subdivisions, capital reorganizations, a consolidation or merger, or sale of all or substantially all of our assets.

 

As of June 30, 2015, Mr. Shrewsbury had advanced an aggregate of $71,637 to the Company. The advances do not bear interest and are repayable upon demand. As of June 30, 2015, the Company also has a payable of $6,000 to Mr. Shrewsbury for warehouse storage rental.

 

The Consolidated Note and advances are subordinate to the Company’s bank indebtedness.

 

Off-Balance Sheet Arrangements

 

We do not maintain any off-balance sheet arrangements, transactions, obligations or other relationships with unconsolidated entities that would be expected to have a material current or future effect upon our financial condition, or results of operations as of June 30, 2015 and September 30, 2014.

 

  

ITEM 3.          QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

The Company is a “smaller reporting Company” as defined by Rule 12b-2 under the Exchange Act, and as such, is not required to provide the information required under this Item. 

 

ITEM 4.         CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

As of the end of the period covered by this Report, the Chief Executive Officer and Chief Financial Officer of the Company (the “Certifying Officers”) conducted evaluations of the Company’s disclosure controls and procedures. As defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), the term “disclosure controls and procedures” means controls and other procedures of an issuer that are designed to ensure the information required to be disclosed by the issuer in the reports that it files or submits under Section 13(a) or 15(d) of the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s (“SEC”) rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under Section 13(a) or 15(d) of the Exchange Act is accumulated and communicated to the issuer’s management, including the Certifying Officers, to allow timely decisions regarding required disclosure.

 

Based on this evaluation, the Certifying Officers determined that, as of the end of the period covered by this Report, the Company’s disclosure controls and procedures were effective to ensure that the information required to be disclosed by the Company in the reports that it files or submits under Section 13(a) or 15(d) of the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms and to ensure that information required to be disclosed by the Company in the Reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including the Company’s principal executive and principal financial officers, or persons performing similar functions, as appropriate, to allow timely decisions regarding disclosure.

 

Changes in Internal Controls

 

There were no changes in the Company’s internal controls over financial reporting during the period covered by this Report that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.

 

  

PART II - OTHER INFORMATION

 

ITEM 1.          LEGAL PROCEEDINGS

 

The Company is not a party to any material pending legal proceeding

.

ITEM 1A.       RISK FACTORS

 

An investment in our common stock involves a high degree of risk. You should carefully consider the risks described below (which supplement and reflect changes to certain of the risk factors we disclosed in our 2014 Annual Report on Form 10-K) and other information contained in this Report in deciding whether to invest in our common stock, as well as certain risk factors set forth under Part I, Item 1A –Risk Factors of our 2014 Form 10-K. Additional risks not presently known to us or which we currently consider immaterial may also adversely affect our company. If any of the following risks (or the risk factors we disclose in our 2014 Form 10-K) actually occur, our business, financial condition and operating results could be materially adversely affected. In such case, the trading price of our common stock could decline, and you could lose a part or all your investment. 

 

Risks Related to Our Company and Our Operations

 

We are dependent on financing provided or guaranteed by our CEO to fund our business and ongoing operations. We have incurred substantial debt which could affect our ability to obtain additional financing and may increase our vulnerability to business downturns. We may be unable to repay our bank line of credit when it becomes due.

 

As of June 30, 2015, we have incurred debt due to Mr. Shrewsbury in the form of $2 million Consolidated Note and non-interest bearing advances in the amount of $71,637. We have outstanding accounts payable of $898,355 and other accrued liabilities of $643,397, including $451,743 due to our CFO, Jose Fuentes, for services. Also, the Company owes $719,549 under a bank line of credit which is secured by the Company’s inventory and accounts receivable and which becomes due on November 7, 2015. We are subject to the risks associated with substantial indebtedness, including insufficient funds to repay the amounts due to Mr. Fuentes and Mr. Shrewsbury in the event they make a demand for payment; it may be more expensive and difficult to obtain additional financing; and we are more vulnerable to economic downturns.

 

Although we reported net income for the nine months ended June 30, 2014, we have a history of net losses and cannot assure we will be profitable in the future. Any failure on the part of the Company, due to industry conditions, which will prevent us from achieving profitability may cause us to reduce or eventually cease operations.

 

We had a net loss of $310,318 for the nine months ended June 30, 2015 and net income of $397,110 for the same period in 2014. At June 30, 2015 and September 30, 2014, we had accumulated deficits of $14,690,520 and $14,380,202, respectively. We may need to obtain additional financing to expand our wholesale and retail mining supplies business and our recently acquired Bag Rack business. We may also require additional financing to fund ongoing operations if our current sales and revenue growth are insufficient to meet our operating costs. In the past we have been able to raise financing from our CEO through notes and advances and a bank line of credit guaranteed by our CEO. Our inability to obtain necessary capital or financing to fund these needs will adversely affect our ability to fund operations and continue as a going concern. Additional financing may not be available when needed or may not be available on terms acceptable to us. If adequate funds are not available, we may be required to delay, scale back or eliminate one or more of our business strategies, which may affect our overall business results of operations and financial condition.

 

 

ITEM 2.          UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

On May 16, 2012, the Board of Directors authorized the issuance of an aggregate 400,000 common stock purchase warrant to a sales agent. The warrants are issuable over a four year period in equal tranches of 50,000. On each of July 1, 2012, January 1, 2013, July 1, 2013, January 1, 2014 and July 1, 2014 and January 1, 2015, 50,000 warrants were issuable to the sales agent. The warrants are exercisable at a price of $0.10 per share subject to certain anti-dilution adjustments in the event of stock dividends, subdivisions, capital reorganizations, a consolidation or merger, or the sale of all or substantially all of our assets, become exercisable upon the date of issuance and expire two years after the date of such issuance. As of June 30, 2015, 100,000 warrants have expired leaving 200,000 warrants outstanding. The warrants will be issuable in reliance upon the exemption from the registration requirements under the Securities Act set forth in Section 4(a)(2) of the Securities Act and/or Rule 506 of Regulation D promulgated thereunder.

 

ITEM 3.          DEFAULTS UPON SENIOR SECURITIES

 

None.

 

ITEM 4.          MINE SAFETY DISCLOSURES

 

None.

 

ITEM 5.          OTHER INFORMATION

 

None.

 

 

 

ITEM 6.          EXHIBITS

 

The following exhibits are filed or “furnished” herewith: 

		Incorporated by Reference From
Exhibit No.	Exhibit Description	Form	Filing Date	Filed/ “Furnished” Herewith
31.1	Certification by Principal Executive Officer Pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, As Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (CEO)			X
31.2	Certification of Principal Financial Officer Pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, As Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (CFO)			X
32.1	Certification of Principal Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (CEO)			X
32.2	Certification of Principal Financial Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (CFO)			X
101.INS	XBRL Instance Document **			X
101.SCH	XBRL Taxonomy Extension Schema Document **			X
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document **			X
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document **			X
101.LAB	XBRL Taxonomy Extension Label Linkbase Document **			X
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document **			X

 

**

Users of this data are advised pursuant to Rule 406T of Regulation S-X that this interactive data file is deemed not filed or part of a registration statement or prospectus for the purpose of section 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.

 

  

SIGNATURES

 

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.

TX HOLDINGS, INC.
By:	/s/ William L. Shrewsbury		By:	/s/ Jose Fuentes
	William L. Shrewsbury			Jose Fuentes
	Chief Executive Officer			Chief Financial Officer
	(Principal Executive Officer)			(Principal Financial and Accounting Officer)
	Dated: August 3, 2015			Dated: August 3, 2015