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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
 
FORM 10-Q
 
     
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2013
 
o
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
(State or Other Jurisdiction of Incorporation or
Organization)
58-2558702
(I.R.S. Employer Identification No.)
 
 
12080 Virginia Blvd., Ashland, KY  41102
 (Address of principal executive offices and zip code)
(606) 928-1131
(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 x NO o
 
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 x NO o
 
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 o                                                      Accelerated filer o                                        Non-accelerated filer o
 
Smaller reporting company x
 
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) YES o NO x
 
On July 26, 2013, 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, 2013
 
Table of Contents
         
PART I
   
FINANCIAL INFORMATION
   
     
 
Item 1.
Financial Statements
   
         
         
   
Condensed Balance Sheets as of June 30, 2013 and  as of September 30, 2012
 
4
         
   
Unaudited Statements of Operations for the Three Months  and  Nine Months Ended  June 30,  2013 and 2012
 
5
         
   
Unaudited Statement of Changes in Stockholders’ Deficit for the Nine Months Ended June 30, 2013.
 
6
         
   
Unaudited Statements of Cash Flows for the Nine Months Ended  June 30, 2013 and 2012.
 
7
         
   
Notes to  Unaudited Financial Statements
 
8
         
 
Item 2
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
16
         
 
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
 
24
         
 
Item 4.
Controls and Procedures
 
24
         
PART II
   
OTHER INFORMATION
   
         
 
Item 1.
Legal Proceedings
 
25
         
 
Item 1A.
Risk Factors
 
25
         
 
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
 
26
         
 
Item 3.
Defaults upon Senior Securities
 
26
         
 
Item 4.
Mine Safety Disclosures
 
26
         
 
Item 5.
Other Information
 
26
         
 
Item 6.
Exhibits
 
26
         
   
SIGNATURES
 
27
 
2
 

 

 
NOTE REGARDING FORWARD-LOOKING STATEMENTS
 
Our disclosure and analysis in this report contains forward-looking statements 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, 2012,  Part I, 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, 2012, and Part I, Item 1A – Risk Factors of this report, You should carefully consider the factors described in Part I, Item 1A - Risk Factors of our Form 10-K for the year ended September 30, 2012, and Part I, 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”).
 
3
 

 

 
 
TX Holdings, Inc.
CONDENSED BALANCE SHEETS
June 30, 2013 and September 30, 2012
             
   
Unaudited
   
Unaudited
 
   
June 30,
   
September 30,
 
   
2013
   
2012
 
          ASSETS
           
Current assets:
           
Cash and cash equivalents
  $ 21,510     $ 3,135  
Accounts Receivable, net
    306,278       200,275  
Inventory
    1,681,241       771,977  
Commission advances
    31,781       56,375  
Notes receivable-current
    10,000       10,000  
Other current assets
    36,876       43,771  
Total current assets
    2,087,686       1,085,533  
                 
Property and equipment
    50,606       55,797  
Notes receivable, less current portion
    27,380       30,000  
Other
    200       50,200  
                 
          Total Assets
  $ 2,165,872     $ 1,221,530  
                 
          LIABILITIES AND STOCKHOLDERS’ DEFICIT
               
Current liabilities:
               
Notes payable to a stockholder
  $ 1,351,997     $ 1,351,997  
Accrued liabilities
    807,432       788,185  
Accounts payable
    561,073       279,655  
Advances from stockholder/officer
    523,583       307,082  
Bank-line of credit
    248,500    
 
Total current liabilities
    3,492,585       2,726,919  
                 
Asset retirement obligation
 
      5,000  
Total Liabilities
    3,492,585       2,731,919  
                 
Commitments and contingencies (Note 3)
               
                 
Stockholders’ deficit:
               
Preferred stock: no par value, 1,000,000 shares authorized no shares outstanding as of June 30, 2013 and September 30, 2012
   
     
 
Common stock: no par value, 250,000,000 shares authorized, 48,053,084 and 46,553,084, shares issued and outstanding at June 30,2013 and September 30, 2012 respectively.
    9,293,810       9,233,810  
Additional paid-in capital
    4,304,280       4,304,280  
Accumulated deficit
    (14,924,803 )     (15,048,479 )
Total stockholders’ deficit
    (1,326,713 )     (1,510,389 )
                 
    Total Liabilities and Stockholders’ Deficit
  $ 2,165,872     $ 1,221,530  
                 
The accompanying notes are an integral part of these financial statements.
               
 
4
 

 

 
TX  HOLDINGS, INC.
UNAUDITED STATEMENTS OF OPERATIONS
For the Three and Nine Months Ended June 30, 2013 and 2012
 
   
Three Months Ended
   
Nine Months Ended
 
   
June 30,
   
June 30,
   
June 30,
   
June 30,
 
   
2013
   
2012
   
2013
   
2012
 
                         
Revenue
  $ 1,330,650     $ 797,532     $ 3,060,971     $ 1,826,048  
                                 
Cost of goods sold
    823,892       645,455       2,097,649       1,459,208  
                                 
Gross profit
    506,758       152,077       963,322       366,840  
                                 
Operating expenses, except items shown separately below
    106,557       124,924       315,301       331,637  
Commission expense
    170,145       109,004       338,910       183,202  
Professional fees
    28,156       80,224       115,465       195,939  
Stock-Based Compensation
 
   
   
      27,040  
Depreciation expense
    4,445       2,731       13,335       6,610  
Total operating expenses
    309,303       316,883       783,011       744,428  
                                 
Income (loss) from operations
    197,455       (164,806 )     180,311       (377,588 )
                                 
Other income and (expense):
                               
Gain on extinguishment of debt
    32,458    
      32,458       62,719  
Gain/Loss on disposal of fixed assets
 
      (12,064 )     500       (12,064 )
Bad Debt Expense
    (20,993 )  
      (20,993 )  
 
Other income
            3,743    
      7,506  
Interest expense
    (22,921 )     (29,611 )     (68,600 )     (94,228 )
                                 
Total other income and (expense), net
    (11,456 )     (37,932 )     (56,635 )     (36,067 )
                                 
Net income/(loss)
  $ 185,999     $ (202,738 )   $ 123,676     $ (413,655 )
                                 
Gain/(loss) per common share
                               
Basic
  $     $     $     $  
Diluted
 
   
   
   
 
Total
  $     $     $     $  
                                 
                                 
Weighted average number of common shares outstanding
                               
Basic
    48,053,084       49,547,338       47,838,898       52,016,733  
Diluted
 
   
   
   
 
Total
    48,053,084       49,547,338       47,838,898       52,016,733  
                                 
The accompanying notes are an integral part of these financial statements
                 
 
5
 

 

 
 
TX HOLDINGS INC.
UNAUDITED STATEMENT OF CHANGES IN STOCKHOLDERS’ DEFICIT
For Nine Months Ended June 30, 2013
 
               
Additional
             
   
Common Stock
   
Paid in
   
Accumulated
       
   
Shares
   
Amount
   
Capital
   
Deficit
   
Total
 
Balance at September 30, 2012
    46,553,084     $ 9,233,810     $ 4,304,280     $ (15,048,479 )   $ (1,510,389 )
                                         
Common Stock issued for professional service
    1,500,000       60,000                       60,000  
                                         
Net Income
                            123,676       123,676  
 
                                       
Balance at June 30, 2013
    48,053,084     $ 9,293,810     $ 4,304,280     $ (14,924,803 )   $ (1,326,713 )
                                         
The accompanying notes are an integral part of these financial statements.
         
 
6
 

 

 
 
TX HOLDINGS, INC.
UNAUDITED STATEMENTS OF CASH FLOWS
For the Nine Months Ended June 30, 2013 and 2012
 
   
Nine Months Ended
 
   
June 30, 2013
   
June 30, 2012
 
Cash flows used by operating activities:
           
Net income/(loss)
  $ 123,676     $ (413,655 )
Adjustments to reconcile net income/(loss) to net cash used in operating activities:
               
Depreciation expense
    13,335       6,610  
Bad debt reserve
    20,993    
 
Gain on extinguishment of debt
    (32,458 )     (62,719 )
Loss on settlement of accounts payable
    10,116    
 
Loss on sale of fixed assets
 
      12,064  
Gain on sale of equipment
    (500 )  
 
Accounting for warrants issued to an officer and the Board
 
      27,040  
                 
Changes in operating assets and liabilities:
               
Commission advances
    24,594       (51,315 )
Deposits
    50,000       (200 )
Accounts receivable
    (126,996 )     (433,033 )
Inventories
    (909,264 )     (900,847 )
Other current assets
    6,895    
 
Accounts payable
    331,302       334,691  
Accrued liabilities
    51,705       284,849  
Notes Receivable
    2,620    
 
Stockholder advances for operations
    18,000    
 
Net cash used in operating activities
    (415,982 )     (1,196,515 )
                 
Cash flows used in investing activities:
               
Proceeds received on sale of equipment
    500       40,000  
Purchase of equipment
    (13,144 )     (19,000 )
Net cash used in investing activities
    (12,644 )     21,000  
                 
Cash flows provided by financing activities:
               
Proceeds from line of credit
    248,500    
 
Proceeds from stockholder/officer advances
    284,501       1,237,439  
Payments of stockholders advances
    (86,000 )     (50,000 )
Net cash provided by financing activities
    447,001       1,187,439  
                 
Increase in cash and cash equivalents
    18,375       11,924  
Cash and cash equivalents at beginning of period
    3,135       3,019  
                 
Cash and Cash Equivalents at end of period
  $ 21,510     $ 14,943  
                 
Non-cash investing and financing activities:
               
Accounts payable exchanged for common stock
  $ 49,884    
 
Increase in notes payable to a stockholder from reclass from Advances from stockholder/officer
 
    $ (1,062,000 )
Decrease in property and equipment from recognition of asset retirement obligation
 
    $ 18,012  
                 
The accompanying notes are an integral part of these financial statements.
               
 
7
 

 

TX HOLDINGS, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
 
NOTE 1- BACKGROUND AND SIGNIFICANT ACCOUNTING POLICIES

INTERIM FINANCIAL STATEMENTS

The accompanying interim unaudited financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) and applicable rules and regulations of the Securities and Exchange Commission regarding interim financial reporting. The 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, 2012, included herein was derived from audited financial statements as of that date, but does not include all disclosures including notes required by GAAP.

These financial statements should be read in conjunction with the audited financial statements and the notes thereto included in the Company’s 2012 Annual Report on Form 10-K. The accompanying unaudited 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, 2013.

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.

CAUTIONARY NOTE TO U.S. INVESTORS

THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION PERMITS OIL AND GAS COMPANIES, IN THEIR FILINGS WITH THE SEC, TO DISCLOSE ONLY PROVED RESERVES THAT A COMPANY HAS DEMONSTRATED BY ACTUAL PRODUCTION OR CONCLUSIVE FORMATION TESTS TO BE ECONOMICALLY AND LEGALLY PRODUCIBLE UNDER EXISTING ECONOMIC AND OPERATING CONDITIONS. WE USE CERTAIN TERMS HEREIN, SUCH AS “PROBABLE”, “POSSIBLE”, “RECOVERABLE”,AND “RISKED,” AMONG OTHERS, THAT THE SEC’S GUIDELINES STRICTLY PROHIBIT US FROM INCLUDING IN FILINGS WITH THE SEC. READERS ARE URGED TO CAREFULLY REVIEW AND CONSIDER THE VARIOUS DISCLOSURES MADE BY US WHICH ATTEMPT TO ADVISE INTERESTED PARTIES OF THE ADDITIONAL FACTORS WHICH MAY AFFECT OUR BUSINESS
 
8
 

 


OVERVIEW OF BUSINESS

TX Holdings, Inc. (“TX Holdings” or 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.

Commencing in December 2011, the Company’s business was expanded to include the distribution of rail material and mining supplies consumed by the coal mining industry in the production and transportation process. The Company distributes and sells its products through two independent sales agents who are compensated based on commission.

In connection with the Company’s business expansion, Mr. William Shrewsbury, the Company’s Chairman and CEO, provided financing in the form of a revolving promissory note for the amount of $1,062,000. The note bears interest at the rate of 5% per annum and becomes due and payable on demand or on April 30, 2015 whichever shall first occur. The new financing is secured by a lien on the Company’s assets. Effective September 30, 2011 a note payable was issued to William Shrewsbury in the amount of $289,997 to cover the principal due on certain advances from Mr. Shrewsbury.  The note bears interest at the rate of 10% per year and is due on the earlier of the date demanded or April 15, 2015. As of June 30, 2013 Mr. Shrewsbury has also advanced the Company an additional $523,583, which is not interest bearing. The notes and advances due to Mr. Shrewsbury are subordinate to the Company’s bank indebtedness.

Commencing in December 2004, the Company began focusing its business on oil and gas exploration and production. In February and April 2006, the Company acquired certain oil and gas leases and began development of a plan for oil and gas producing operations.  The Company continues to be interested in possible opportunities in the Oil and Gas industry.

On February 2006, the Company acquired an 8.5% working interest on the Contract Area-1 lease in the counties of Callahan and Eastland, Texas. The lease included a total of 247 acres and a total of 36 wells. After repeated unsuccessful attempts over several years, the Company elected to cease operation of the Contract area-1 lease resulting in impairment of the lease. The Company wrote-off the asset and recorded a loss of $252,181 for the year ended September 30, 2010 related to the lease and an impairment loss of $315,866 in 2009.

The Company owned a 100% working interest and was the operator of the 843 acre Williams lease acquired in  February, 2006 and located in Callhan County, Texas. A dispute with the land owner of the lease had prevented the Company from operating or reporting any production on this lease. On September 30, 2009, the Company elected to cease operation of the Williams lease resulting in impairment of the lease. The Company recorded an impairment loss of $68,222 for the year ended September 30, 2009 related to this lease.

In November 2006, the Company entered into a Purchase and Sale Agreement with Masada Oil & Gas, Inc. (“Masada) to acquire a 75% working interest in the Parks lease located in the Callahan County, Texas. The Parks lease covered 320 acres and had 22 wells which were considered capable of minimal production rates (2 to 3 bbls per day). On January 28, 2011, the company purchased from Masada Oil the remaining 25% working interest and thereby increasing the Company working interest on the Parks lease to 100%. In addition to the 25% working interest, the Company purchased 2 acres of land and a 1,400 square foot storage building on the property. In consideration for the purchase, the Company paid $10,400 cash, relinquished an 8.5% working interest on the Contract Area 1(non-producing ) lease with a book Value of $0 and, assumed a $17,000 liability previously owed by the 25% prior lease owner. The Company also adjusted the recorded asset retirement obligation by $27,969 for the release of the liability for Contract Area 1 and the increase in the liability for the Parks lease.

On May 30, 2012, the Company sold 100% of the interest in the Parks lease for $80,000.  The Company received a down payment of $40,000 and a note for the balance of $40,000. The Note is secured by future Park’s lease production. As of June 30, 2013, the note has a remaining balance of $37,380.
 
9
 

 

 
On or about May 7, 2007, the Company entered into a Strategic Alliance Agreement with Hewitt Energy Group, LLC (“Hewitt”), a company owned by Douglas C. Hewitt, a Director of TX Holdings, Inc. at the time of the transaction.  The Strategic Alliance Agreement provided that TX Holdings, Inc. would acquire a 50% Working Interest in eight projects in Kansas and Oklahoma. The purchase and development of all of the prospects were estimated at approximately $15,000,000 in cash and stock to be paid over a six month period. Mr. Hewitt resigned as a director on July 27, 2007. Subsequently, the Company and Hewitt mutually agreed to terminate the Strategic Alliance Agreement and negotiate the participation in individual projects. As one of the projects, the Company acquired an 8% interest on the Perth Lease which was relinquished as part of a legal settlement in May, 2012. On September 30, 2011 and September 30, 2010, the Company recorded impairment losses on the Perth lease of $50,000 and $302,560 respectively.

The Company would need to obtain a combination of debt and equity financing if it is able to finance an oil and gas field to acquire new oil fields and develop those fields. Currently, management cannot provide any assurance regarding a possible successful acquisition and financing the development of any future field.

The Company ceased to be a “development stage company” on March 31, 2012.

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 sales on the statements of operations.

Currently, the Company has no revenue from oil and gas operations. Revenue from oil and gas operations was recognized upon delivery of the oil and gas to the purchaser of the oil and gas.

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 reports on the financial statements included in our annual report on Form 10-K for the year ended September 30, 2012, 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.

The Company has suffered recurring losses while devoting substantially all of its efforts to raising capital and identifying and pursuing business opportunities. Currently, management believes that its best opportunities lie in the oil and gas industry and the distribution of rail material and mining supplies consumed in the coal mining industry. The Company’s total liabilities exceed its total assets and the Company is reliant upon loans and advances furnished to the Company by its Chairman, William Shrewsbury in an aggregate amount of $1,875,580. One of the loans from Mr. Shrewsbury in the amount of $1,062,000 is secured by a lien on all of the Company’s assets.
 
On November 7, 2012 the Company obtained a loan in the amount of $250,000 from a bank. The loan is secured by a priority security interest in the Company’s inventory and matures on November 7, 2013. Interest on the loan is payable monthly and is calculated on the basis of an independent variable indexed rate which is currently 3.250% per annum. 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 Company is negotiating an extension of the term of the bank loan.
 
These factors raise substantial doubt about the Company’s ability to continue as a going concern.  The accompanying 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 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.
 
10
 

 

 
NOTE 2 – STOCKHOLDERS’ DEFICIT

In May 2012, 6,718,813 shares of the Company’s common stock were returned to the Company as part of a legal settlement with the Company’s former Chief Executive Officer and certain other co-defendants and subsequently cancelled. See Note 3.

On November 9, 2012, 1,500,000 shares of common stock were issued by the Company as payment for a legal fee obligation arising from the May 18, 2012, legal settlement with the Company’s prior CEO and several other co-defendants. The Company recognized a loss on settlement of accounts payable of $10,116.

POTENTIALLY DILUTIVE OPTIONS AND WARRANTS

On December 10, 2012,, the Company authorized the issuance of an aggregate of 1,300,000 common stock purchase warrants to officers and directors which were not included in the three months and nine months ended June 30 2013 calculation of diluted net gain/loss per share. The warrants’ exercise price exceeds the average market price for the periods and inclusion of the warrants would be anti-dilutive.

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 every six months 50,000 warrants, for an aggregate of 400,000 warrants.  The warrants are exercisable at 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 are issuable effective July 1, 2012. On January 1, 2013 and July 1. 2013 an additional 50,000 warrants per period were issuable to Mr. Chafin pursuant to the agreement. The warrants were not included in the calculation of diluted earnings per share since the inclusion would be anti-dilutive.

NOTE 3 – RELATED PARTY TRANSACTIONS

ADVANCES FROM STOCKHOLDER/OFFICER

As of June 30, 2013, the Company had an outstanding note payable to Mr. Shrewsbury, the Company’s Chairman and CEO, for the amount of $289,997. The note bears interest at the rate of 10% per annum and is payable on demand. Interest on the notes payable has been accrued.

As of June 30, 2013, Mr. Shrewsbury had advanced an aggregate of $523,583 to the Company.

In the nine months ended June 30, 2013, interest expense of $68,600, in the accompanying statements of operations, relates to the promissory notes and the revolving credit arrangement.

PARK’S LEASE

On January 28, 2011, TX Holdings entered into an agreement with Masada Oil & Gas Inc. to acquire the remaining 25% working interest in the Park’s lease in which the Company owned a 75% working interest.  As part of the agreement, the Company also acquired a storage building and approximately two acres of land. In return, the Company agreed to relinquish an 8.5% working interest which it had in the Contract Area 1 lease, pay the sum of $10,000 and, assume the current 25% lease owners’ liability in the amount of $17,000. On May 30, 2012, the Company sold 100% of the interest on the Parks lease for $80,000.  The Company received a down payment of $40,000 and a note for the balance of $40,000. The Note is secured by future Park’s lease production.

NOTES PAYABLE TO A STOCKHOLDER AND OFFICER

On April 30, 2012 TX Holdings, Inc issued a Revolving Promissory Demand Note to Mr. Shrewsbury, the Company’s Chairman and CEO for the amount of $1,062,000. The note bears interest at the rate of 5% per annum and becomes due and payable on demand or on April 30, 2015 whichever shall first occur. The note is secured by a security interest in all of the Company’s assets but is subordinate to the Company’s bank loan including with regard to the Company’s inventory and assets.
 
11
 

 


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 made on behalf of the Company 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) which would have automatically converted 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.

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, 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 between 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.

LEASE AGREEMENT WITH  STOCKHOLDER AND OFFICER

On 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 some warehouse space to store the Company’s inventory. The lease has a two year term starting October 1, 2012 and ending August 31, 2014.  The lease rental is $2,000 per moth payable the first of each month. As of June 30, 2013, the Company has accrued lease payments in the amount of $36,000 included in the advances from stockholders/officers.
 
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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 nine months ended June 30, 2013 the amount of such commission was $2,046. The Company believes such commissions rates charged are consistent with industry-wide charges for similar services and do not adversely affect the Company’s transportation costs.

NOTE 4 – NOTES PAYABLE TO THIRD PARTY

On November 7, 2012 the Company obtained a loan in the amount of $250,000 from a bank. The loan is secured by a priority security interest in the Company’s inventory and matures on November 7, 2013. Interest on the loan is payable monthly and is calculated on the basis of an independent variable indexed rate which is currently 3.250% per annum. The loan is guaranteed as to principal and 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 Company is negotiating an extension of the term of the loan.

NOTE 5 – SEGMENT INFORMATION

ASC 280-10, “Disclosures about Segments of an Enterprise and Related Information,” establishes standards for the manner in which companies report information about operating segments in annual and interim financial statements.  It also establishes standards for related disclosures about products and services, geographic areas, and major customers.  The method for determining what information to report is based on the way management organizes the operating segments within the Company for making operating decisions and assessing financial performance.  The Company’s chief operating decision-maker is considered to be the Company’s chief executive officer (“CEO”).  The CEO reviews financial information presented on an entity level basis accompanied by disaggregated information about revenues by product type for purposes of making operating decisions and assessing financial performance.  The entity level financial information is identical to the information presented in the accompanying statements of operations.  The Company currently has one revenue stream in the mining industry which includes rail and its various components and, mining supplies including miner bits.
 
13
 

 


                 
   
Unaudited
   
Unaudited
 
   
Nine months ended
   
Nine months ended
 
   
June 30, 2013
   
June 30, 2012
 
             
Revenues from unaffiliated customers
           
      Mining
  $ 3,060,971     $ 1,809,657  
      Oil and Gas
 
      16,391  
    $ 3,060,971     $ 1,826,048  
Operating profit or loss
               
      Mining
  $ 292,276     $ (105,902 )
      Oil and Gas
    (111,965 )     (271,686 )
      180,311       (377,588 )
                 
Other income (expense), net
    (56,635 )     (36,067 )
Net income/(loss)
  $ 123,676     $ (413,655 )

                 
   
Unaudited
June 30, 2013
   
Unaudited
September 30, 2012
 
Identifiable assets:
           
       Mining
  $ 2,093,724     $ 1,102,878  
       Oil and gas
    48,562       109,047  
Total segment assets
  $ 2,142,286     $ 1,211,925  
Total general corporate assets
    23,586       9,605  
Total Assets
  $ 2,165,872     $ 1,221,530  
                 
   
Unaudited
June 30, 2013
   
Unaudited
June 30, 2012
 
Capital expenditures:
               
       Mining
  $ 13,144     $ 19,000  
       Oil and gas
 
   
 
    $ 13,144     $ 19,000  
                 
Depreciation, Depletion and amortization:
               
       Mining
  $ 10,470     $ 3,166  
       Oil and gas
    2,865       3,444  
    $ 13,335     $ 6,610  
 
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NOTE 6 -- RECENTLY ISSUED ACCOUNTING STANDARDS

During the year ended September 30, 2012 and through July 26, 2013, several new accounting pronouncements were issued by the Financial Standards Board (FASB). Each of these pronouncements, as applicable, has been or will be adopted by the Company. Management does not believe the adoption of any of these accounting pronouncements has had or will have a material impact on the Company’s financial statements.
 
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ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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., and its subsidiaries.

This discussion and analysis of our financial condition and results of operations is based upon our financial statements which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these 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, intangible assets, and contingencies.  We base our estimates on historical experience, where available, and on various other assumptions that 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 is 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, 2012, 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, 2012, and Part I, Item 1A – Risk Factors in this report.

Overview

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.  We ceased to be a “development stage company” for financial reporting purposes on March 31, 2012.

In December 2011, the Company expanded its business to include the distribution of rail material and mining supplies consumed by the coal mining industry in the production and transportation process, which includes rail and its various components and, mining supplies including miner bits.
 
The Company purchases its rail material and mining supplies from several manufacturers of such products. The products are shipped to our warehouse in Ashland, Kentucky which we then distribute to our customers.

The Company distributes and sells its products through two independent sales agents who are compensated on a commission basis.
 
During the quarter ended June 30, 2013, the Company had net income of $185,999 as compared to a net loss of $202,738 for the same period in 2012.  The quarter ended June 30, 2013, is the second consecutive quarter in which the Company has reported net income and reflects the Company’s increased sales activities, its ability to control or obtain reductions in its product costs, and control expenses. The Company’s net income for the nine months ended June 30, 2013, was $123,676 compared to a net loss of $413,655 for the comparable period in 2012.
 
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Revenues for the quarter ended June 30, 2013, were $1,330,650 as compared to $797,532 for the same period in 2012, and for the nine months ended June 30, 2013, were $3,060,971 as compared to $1,826,048 in 2012 an approximately 68% increase.

Net cash used in operating activities was $ 415,982 during the nine months ended June 30, 2013.  Operating cash funded by the Company’s credit line and a stockholder’s advance amounted to $248,500 and $216,501 respectively.

In connection with the Company’s new line of business, Mr. William Shrewsbury, the Company’s Chairman and CEO, has agreed to provide financing in the form of  a revolving promissory note in the amount of  $1,062,000. The promissory note is secured by a lien on the Company’s assets that is subordinated to the bank’s indebtedness. Also, we have indebtedness due to Mr. Shrewsbury in the amount of $289,997 pursuant to a note, dated effective February 27, 2009, and as of June 30, 2013 advances due to Mr. Shrewsbury in the amount of $523,583. On November, 2012, the Company obtained a bank line of credit in the amount of $250,000 that is secured by a lien on the Company’s inventory.

The Company’s success is dependent upon its ability to grow rail products and mining supplies sales. There can be no assurance that the Company will be successful in this new venture.

The Company plans to use all revenues for general corporate purposes.

RESULTS OF OPERATIONS

Three Months Ended June 30, 2013 Compared To Three Months Ended June 30, 2012

Revenues from Operations

Revenues for the three months ended June 30, 2013 were $1,330,650 as compared to $797,532 for the same period in 2012, an increase of $533,118 or a 66.8%.  In December 2011, the Company began expanding its business to include the distribution of rail material and mining supplies consumed in the coal mining industry. The increase in revenue is attributed to our increased sales of mining supplies. The increase in sales can be attributed to the Company expanding its products and customer base.

Cost of Goods Sold

During the quarter ended June 30, 2013, the Company’s cost of goods sold was $823,892 as compared to cost of goods sold of $645,455 for the quarter ended June 30, 2012, an increase of $178,437 or 27.6 %.  The increase in cost of goods sold resulted from the higher sales volumes during the quarter ended June 30, 2013.

Operating Expenses

Operating expenses for the three months ended June 30, 2013 were $309,303 as compared to $316,883 for the three months ended June 30, 2012 a decrease of $7,580 or 2.4%.
 
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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
 
   
June 30, 2013
   
June 30, 2012
   
$ Change
   
%Change
 
Operating Expense
                               
Commission Expense
  $ 170,145     $ 109,004     $ 61,141       56.1 %
Professional fees
    28,156       80,224       (52,068 )     (64.9 )
Depreciation expense
    4,445       2,731       1,714       62.8  
Other operating expense
    106,557       124,924       (18,367 )     (14.7 )
Total
  $ 309,303     $ 316,883     $ (7,580 )     (2.4 )

Commission expense for the three months ended June 30, 2013 were $170,145 compared to $109,004 for the same period in 2012, an increase of $ 61,141 or 56.1%. The higher commission is a direct result of the increased sales during the current period.
 
The  professional fees decrease of $52,068 or 64.9%  for the three months ended June 30, 2013, as compared to the same period the prior year, is the result of lower legal expenses associated with the legal settlement expenses between the Company and Mark Neuhaus and several other defendants recorded in the first half of 2012.
 
On September, 2012, the Company purchased a brazing machine to be used in the newly entered rail and mining supplies business. Depreciation of the new brazing machine accounted for an increase in depreciation of $1,250 for the quarter ended June 30, 2013 over the same quarter the prior year.
 
For the three months ended June 30, 2013, other operating expenses of $106,557 decreased by $18,367 or 14.7% from the $124,924 for the same period in 2012. The lower operating expenses resulted from lower well work-over related expenses, incurred in the period ended June 30, 2012 of $43,377. The lower expenses were partially offset by higher operating supplies of $28,642 during the current period.
 
Other Income and Expense
 
Other Expense was $11,456 for the three months ended June 30, 2013 as compared to Other Expense of $37,932 for the three months ended June 30, 2012. The decrease of $26,476 resulted primarily from reversal of a $32,458 prior period debt recorded in June 30, 2013 and  lower interest expense of $6,690. On May, 2012, the Company reached a legal settlement with Mark Neuhaus (prior CEO) and several defendants and, as part of the settlement accrued interest on debt due to Mark Neuhaus was written-off. The lower interest as of June 30, 2013, when compared to the same period during the prior year can be attributed of having recorded no interest on the debt to Mark Neuhaus during 2013. Estimated uncollectable receivable, for one customer, in the amount of $20,993 was recorded as bad debt for the period ended June 30, 2013, whereas no bad debt expense was incurred in the period ended June 30, 2012.
 
Net Income or Loss
 
For the quarter June 30, 2013, the Company had a net income of $185,999 compared to a net loss of $202,738 for the quarter ended June 30, 2012, a positive increase of $388,737. The increase resulted from higher gross profit generated by sales of mining supplies, over the same period of the prior year.
 
Gross profit for the period ended June 30, 2013 was $506,758, an increase of $354,681 or 233.2% over the gross profit of $152,077 for the three months ended June 30, 2012. The higher gross profit in the current period resulted from higher sales volume arising from the Company expanding its rail and mining supplies product base and lower supplier costs.
 
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In addition to the gross profit increase of $354,681, during the  three months of June 30, 2013 when compared to the same period the prior year, the Company realized a favorable reduction in operating expenses and Other Expense of $7,580 and $26,476 respectively.
 
Nine Months Ended June 30, 2013 Compared to Nine Months Ended June 30, 2012
 
Revenues from Operations
 
Revenues for the nine months ended June 30, 2013 were $3,060,971 as compared to $1,826,048 for the same period in 2012, an increase of $1,234,923 or 67.6%.  In December 2011, the Company began expanding its business to include the distribution of rail material and mining supplies consumed in the coal mining industry. The increase in revenue is attributed to our increased sales of rail and mining supplies. The increase in sales was attributable to higher sales volumes as the Company expands its products and customer base.
 
Cost of Goods Sold
 
During the nine months ended June 30, 2013 the Company’s cost of goods sold was $2,097,649 as compared to cost of goods sold of $1,459,208 for the nine months ended June 30, 2012, an increase of $ 638,441 or 43.8 %.  The increase in cost of goods sold is a direct result of the increase in sales volume as the Company continues to expand its products and customer base in the rail material and mining supplies products consumed in the coal mining industry.
 
Operating Expenses
 
Operating expenses for the nine months ended June 30, 2013 were $783,011 as compared to $744,428 for the nine months ended June 30, 2012 an increase of $38,583 or 5.2%.
 
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   
   
June 30, 2013
   
June 30, 2012
   
$ Change
   
%Change
 
Operating Expense
                       
Commission Expense
    338,910       183,202       155,708       85.0 %
Professional fees
    115,465       195,939       (80,474 )     (41.1 )
Stock-Based Compensation
 
      27,040       (27,040 )     (100.0 )
Depreciation expense
    13,335       6,610       6,725       101.7  
Other operating expense
    315,301       331,637       (16,336 )     (4.9 )
Total
    783,011       744,428       38,583       5.2  
 
Commission expense for the nine months ended June 30, 2013 was $338,910 compared to $183,202 for the same period in 2012, an increase of $155,708 or 85.0%.  The increase in commission expense during the nine months ended June 30, 2013 resulted from higher sales as the Company continues to expand its products and customer base in the retail and wholesale distribution of rail and mining supplies business.

The $80,474 or 41.1% decrease in professional fees when comparing the nine months ended June 30, 2013 to the nine months ended June 30, 2012 resulted from higher litigation expense in 2012 arising from the settlement of litigation between the Company and Mark Neuhaus (prior CEO) and several other defendants.
 
Stock-based compensation decreased $27,040 during the nine months ended June 30, 2013 as compared to the same period in the prior year, and resulted from the issuance of stock  for  services by the Company during 2012, and no such stock being issued during the nine month period ended June 30, 2013.
 
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Depreciation expense of $13,335 for the nine months ended June 30, 2013 represents an increase of $6,725 or 101.7% when compared to depreciation expense of $6.610 during the nine months ended June 30, 2012. On September, 2012, the Company purchased a brazing machine to be used in the newly entered rail and mining supplies business. Depreciation of the new brazing machine accounted for an increase in depreciation of $3,750 for the nine months ended June 30, 2013 over the same nine months during the prior year. Higher depreciation of $1,971 resulted from the purchase of new shipping handling equipment.
 
Other operating expenses increased by $16,336 or 5.2% when comparing the nine months ended June 30, 2013 to the same period in the prior year. The increase results from higher contract labor cost ($19,456) and higher equipment rental cost ($9,300) incurred in the nine months ended June 30, 2013.  The higher contract labor and equipment rental were partially offset by lower cost in several other operating expense categories.
 
Other Income and Expense
 
Other Expense was $56,635 for the nine months ended June 30, 2013 as compared to $36,067 for the nine months ended June 30, 2012, an increase of $20,568 or 57%. The increase is the direct result of a reversal of a $62,719 prior period debt in the nine months ended June 30, 2012 partially offset by a reversal of a $32,458 prior period debt recorded in June 2013. Lower interest expense contributed an additional favorable variance of $18,396 for the nine months ended June 30, 2013. In May, 2012, the Company reached a legal settlement with Mark Neuhaus (prior CEO) and several other defendants and, as part of the settlement interest being accrued on the debt to Mark Neuhaus was written-off. The lower interest as of June 30, 2013 when compared to the same period the prior year is a direct result of no additional interest being incurred on the debt to Mark Neuhaus during the nine months ended June 30, 2013.
 
Net Income or Loss
 
For the nine months ended June 30, 2013, the Company had a net income of $123,676 compared to a net loss of $413,655 for the nine months ended June 30, 2012, a favorable increase of $537,331.  The increase resulted from higher gross profit generated by sales of mining supplies, over the same period in the prior year.

Gross profit for the nine months period ended June 30, 2013 was $963,322, an increase of $596.482 or 162.6% over the gross profit of $366,840 for the nine months ended June 30, 2012. The higher gross profit is a result of higher current period sales volume as a result of the Company expanding its rail and mining supplies product base and identifying a new lower cost supplier.
 
The gross profit increase of $596,482, during the nine months ended June 30, 2013 when compared to the same period the prior year, was partially offset by higher operating expenses of $38,583 resulting primarily from higher sales commission expense. An increase in other expenses was due to a gain on extinguishment of debt of $62,719 recorded in June of 2012 partially offset by a a reversal of a $32,458 prior period debt recorded in June, 2013.  Lower interest expense from the write-off of debt to Mark Neuhaus (prior CEO) as part of a legal settlement in May, 2012 accounted for an additional favorable variance of $25,628.
 
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LIQUIDITY AND CAPITAL RESOURCES
 
The following table presents a summary of our net cash provided by (used in) operating, investing and financing activities:
 
   
Nine Months Ended
 
   
June 30, 2013
   
June 30, 2012
 
Cash used in operating activities
  $ (415,982 )   $ (1,196,515 )
Cash used in investing activities
    (12,644 )     21,000  
Cash provided by financing activities
    447,001       1,187,439  
Net Increase (decrease) in cash
  $ 18,375     $ 11,924  

Cash Used in Operating Activities
 
Cash used in operating activities for the nine months ended June 30, 2013 of $415,982 resulted from the continued effort by the Company to increase the finished goods inventory ($909,264) from the prior year-end levels to meet   projected increases in sales demand. Cash needs for inventory growth was minimized by an increase in accounts payable ($331,302) on purchases of inventory for resale.
 
Increase in inventory ($900,847) and receivables ($433,033) during the nine months ended June 30, 2012 were the direct result of the Company’s business expansion commencing in December 2011, to include the retail and wholesale distribution of rail fasteners and tooling, engineered components and advanced components and materials consumed by the coal mining industry in the production and transportation processes. The cash needs for the new business was partially mitigated by an increase in accounts payable ($284,849) associated with the purchase of finished goods inventory for resale.
 
Cash Used in Investing Activities
 
Cash used in investing activities was directed to the purchase of operating equipment during the  nine months ended June 30, 2013  ($13,144) and 2012 ($19,000). The new equipment was required for the shipping and warehousing of finished goods products related to the Company’s new rail and mining products business recently entered by the Company.
 
Cash Provided by Financing Activities
 
During the nine months ended June 30, 2013 and 2012. there were two  sources of cash  provided by financing activities, a bank credit line and loans and advances from William Shrewsbury (our Chairman and CEO).
 
On November 7, 2012, the Company obtained a loan in the amount of $250,000 from a bank. The loan is secured by a priority security interest in the Company’s inventory and matures on November 17, 2013. Interest on the loan is payable monthly and is calculated on the basis of a variable index. As of June 30, 2013 the Company had borrowed $248,500 under the line of credit and the current rate of interest under the loan is 3.25% per annum.
 
The second source of cash is from loans and advances to the Company by William Shrewsbury (our Chairman and CEO). As of June 30, 2013, pursuant to the terms of a revolving demand note, the Company had an outstanding loan from Mr. Shrewsbury of $1,062,000. The revolving demand note bears interest at the rate of 5% per annum and becomes due and payable on demand or on April 30, 2015 whichever shall first occur. As of June 30, 2013 the Company had borrowed $1,062,000 under the loan facility. During the nine months ended June 30, 2013, Mr. Shrewsbury had also advanced an additional $216,501 to the Company that is repayable upon demand and does not bear interest.
 
Financial Condition and Going Concern Uncertainties
 
The Company ceased to be a development stage company effective March 31, 2012, following the Company’s decision to enter into the new business of distributing rail material and mining supplies consumed in the coal mining industry.
 
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Except for the two consecutive quarters ended June 30, 2013, since inception, the Company has not produced sufficient funds for profitable 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 rail and mining supplies distribution 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, 2012, contains 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, 2013, the Company had cash and cash equivalents of $21,510 as compared to $3,135 as of September 30, 2012.  The increase in cash as of March 31, 2013 results from cash borrowed from the outstanding bank credit line of $250,000 and advances from William Shrewsbury (our Chairman and CEO).
 
The Company’s accounts receivable were $306,278 as of June 30, 2013, as compared to $200,275 as of September 30, 2012, an increase of $106,003 or 52.9%. Higher receivables as of June 30, 2013 are the direct result of the Company’s continued business growth in the rail and mining supplies distribution business and higher year-to-date sales ($3,060,971 in 2013 vs $1,826,048 in 2012).
 
Inventory was $1,681,241 as of the period ended June 30, 2013 as compared to $771,977 as of the year ended September 30, 2012, an increase of $909,264 or 117.8%.  In anticipation of the continued growth of the rail and mining supply business, the Company has increased the inventory levels to meet anticipated higher sales demand.
 
During the nine months ended June 30, 2013, our stockholders’ deficit decreases, from $15,048,479 to $14,924,803,   a decrease of $123,676 or .8%. The reported income for the nine months ended June 30, 2013 of $123,676 accounts for the decrease in stockholder’s deficit.
 
 During the quarter ended June 30, 2013, the Company’s net income was $185,999 compared to a net loss of $202,738 for the comparable period in 2012. The Company’s net income for the nine months ended June 30, 2013, was $123,676 as compared to a loss of $413,655 for the same period in 2012 representing an increase of $537,331.  The favorable increase can be directly attributed to the higher sales revenue of $3,060,971 for the nine months ended, June 30, 2013 compared to $1,826,048 for the nine months ended June 30, 2012, and reflect the continued expansion by the Company into the rail and mining supplies distribution business.
 
Currently, the Company is spending approximately $120,000 per month on operations. Management believes that the Company’s 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 for the next 12 months.
 
The Company continues to rely substantially upon financings provided by Mr. Shrewsbury and the bank to fund its operations. The terms of such financings are discussed below.
 
BANK LOANS
 
On November 7, 2012, pursuant to the terms of a business loan agreement, the Company obtained a loan in the amount of $250,000 from Home Federal Savings and Loan Association, a federally chartered savings and loans association. 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 the Company fails to make any payment when due under the loan, it 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; the insolvency or occurrence of bankruptcy  event; commencement of foreclosure with regard to any property securing the loan; a 25% or more change in the beneficial 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 loan is secured by the Company’s inventory and matures on November 7, 2013. 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. The Company is negotiating an extension of the term of the bank loan.
 
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ADVANCES AND LOANS FROM MR. SHREWSBURY
 
On April 30, 2012 we issued a Revolving Promissory Demand Note to Mr. Shrewsbury, Chairman and CEO, in the principal amount of $1,062,000, covering advances made by Mr. Shrewsbury during the period December 21, 2012. The note bears interest at the rate of 5% per annum. The principal and accrued but unpaid interest become due and payable on demand or on April 30, 2015, whichever should first occur. An event of default under the note would occur if the interest or principal under the note is not paid when due; the Company is dissolved; any representation or warranty by the Company in the note or related agreement is false or erroneous in any material respect; the Company fails or omits to perform or observe any agreement in the note or related agreement; a judgment should be entered against the Company in any court of record; any deposit account of the Company is attached or levied upon; any voluntary petition by or involuntary petition against the Company is filed pursuant to bankruptcy law; the Company makes an assignment for the benefit of creditors;  there should be any other marshaling of  the assets and liabilities of the Company for the benefit of its creditors; or the Company enters in any merger or consolidation or sell, leases or otherwise disposes of all or substantially all of its assets other than in the ordinary course of business. Upon the occurrence of an event of default, the holder may declare the note due and payable and the principal and interest should be immediately due and payable. The note is secured by all of the Company’s assets and is subordinated to the bank loan including with regard to claims with regard to the Company’s inventory and assets.
 
As of June 30, 2013, the Company had an outstanding note payable to Mr. Shrewsbury, the Company’s Chairman and CEO, for the amount of $289,997. The note bears interest at the rate of 10% per year and is due on the earlier of the date demanded or April 15, 2015. An event of default under the note will occur upon a failure to pay when due any principal or interest; a violation of any covenant or agreement contained in the note; an assignment for the benefit of creditors by the Company; an application for the appointment of a receiver or liquidator for the Company or its property; 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 with respect to any installment debt whether or not owing to the holder; 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; or the termination of existence or the dissolution of the Company  Upon the occurrence of an event of default, the holder is required to give written notice to the Company of the default, and the Company will have ten days to cure the default. If the default is not cured within the ten day cure period, the note will be in default and the entire unpaid principal sum hereof, together with accrued interest, will at the option of the holder become immediately due and payable in full. The note is subordinated to the bank loan including with regard to claims with the Company’s inventory and assets.
 
As of June 30, 2013, Mr. Shrewsbury had advanced an aggregate of $523,583 to the Company. The advances do not bear interest and are repayable upon demand. The 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, 2013 and September 30, 2012.
 
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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 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 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 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.
 
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PART II - OTHER INFORMATION
 
ITEM 1.                      LEGAL PROCEEDINGS
 
Except as discussed below, other than ordinary routine litigation incidental to the business, neither the Company nor any of its subsidiaries is a party to any material pending legal proceeding.
 
On January 17, 2012, the Company filed a lawsuit in the United States District Court for the District of Utah against Michael Cederstrom (“Cederstrom”), the Company’s former chief financial officer and corporate counsel, Dexter and Dexter Attorneys at Law (“Dexter”), the law firm that employed Mr. Cederstrom, and certain other parties.  The Company has asserted claims against Cederstrom that include a claim of fraud in the inducement, breach of fiduciary duty, professional negligence, and negligent misrepresentation by omission or commission.  The Company’s claims against Dexter are based substantially upon the same theories and on a theory that Dexter is vicariously liable for the acts of Cederstrom.  The claims against Dexter and Cederstrom are based upon allegations that, among other things, in connection with the exchange in December 2007 by Mr. Mark Neuhaus (“Neuhaus”), the Company former Chief Executive Officer, of shares of common stock for shares of preferred stock, Cederstrom misrepresented to the Company that the preferred shares issued to Neuhaus as compensation for work performed in 2004 and 2005 were issued with the proper consent of the previous board of directors of the Company and that Neuhaus performed services for which the shares of preferred stock were issued.    The Company also claims breach of contract and seeks an accounting for the fees paid to Dexter and certain shares issued to Cederstrom by the Company. The Company is seeking damages, punitive damages, pre and post judgment interest, attorneys’ fees and costs and other relief the court deems just and proper.
 
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 2012 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 2012 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 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 of your investment.
 
Risks Related to Our Company and Our 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  demand notes due to our chief executive officer if he makes a demand under such note.
 
As of June 30, 2013, we have incurred debt due to Mr. Shrewsbury in the form of notes and advances in the aggregate amount of $1,875,580, of which $1,351,997 is covered by two notes that are repayable upon demand. We have outstanding accounts payable of $561,073 and other accrued liabilities of $807,432. Also, the Company owes $248,500 under a bank line of credit which is secured by the Company’s inventory and which becomes due on November 7, 2013.  We are subject to the risks associated with substantial indebtedness, including insufficient funds to repay the outstanding principal under the demand note due to Mr. Shrewsbury in the event he makes a demand for payment; it may be more expensive and difficult to obtain additional financing; and we are more vulnerable to economic downturns. The Company is negotiating an extension of the term of the loan. There can be no assurance that we will be able to extend our bank line of credit.
 
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Our independent registered public accounting firm has expressed uncertainty regarding our ability to continue as a going concern.
 
In its report on our financial statements for the year ended September 30, 2012, included in our Annual Report on Form 10-K for 2012, our independent registered public accounting firm expressed uncertainty regarding our ability to continue as a going concern. Our financial statements do not include any adjustments to reflect the possible future effects on recoverability and classification of assets or the amounts and classification of liabilities that might occur if we are unable to continue in business as a going concern.
 
Our directors and named executive officers own a substantial percentage of our common stock.
 
As of June 30, 2013, our directors and executive officers beneficially owned approximately 22.9% of our shares of common stock. Our directors, executive officers and a most highly compensated employee are entitled to cast an aggregate of 9,924,317 votes on matters submitted to our stockholders for a vote, or approximately 20.7 % of the total number of votes entitled to be cast at a meeting of our stockholders. These stockholders, if they acted together, could exert substantial control over matters requiring approval by our stockholders. These matters would include the election of directors and the approval of mergers or other business combination transactions. This concentration of ownership may discourage or prevent someone from acquiring our business.
 
Risks Related to Our Industries
 
We depend on a small number of customers for a substantial portion of our revenues.
 
Approximately 56% of our revenue for the nine months ended June 30, 2013, was derived from five customers.  The loss of any one or more of such customers could have a material affect our business, financial condition and results of operations.
 
ITEM 2.                      UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
 
None
 
ITEM 3.                      DEFAULTS UPON SENIOR SECURITIES
 
None.
 
ITEM 4.                      MINE SAFETY DISCLOSURES
 
None.
 
ITEM 5.                      OTHER INFORMATION
 
None.
 
ITEM 6.                      EXHIBITS
 
None
 
**
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.
 
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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 Shrewsbury   By:
/s/ Jose Fuentes
 
 
William Shrewsbury
 
Jose Fuentes
 
Chief Executive Officer
 
Chief Financial Officer
 
(Principal Executive Officer)
 
(Principal Financial and Accounting Officer)
           
        Dated: July 26, 2013
 
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