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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 SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2014
 
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 August 1, 2014, 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, 2014

TABLE OF CONTENTS

PART I
FINANCIAL INFORMATION
       
 
Item 1.
Financial Statements
 
       
   
Balance Sheets as of  June 30, 2014 and   September 30, 2013 (Unaudited)
4
       
   
 Statements of Operations for the Three Months  and Nine Months Ended June 30,  2014 and 2013 (Unaudited)
5
       
   
Statement of Changes in Stockholders’ Deficit for the Nine Months Ended June 30, 2014 (Unaudited)
6
       
   
Statements of Cash Flows for the Nine Months Ended June 30, 2014 and 2013 (Unaudited)
7
       
   
Notes to  Unaudited Financial Statements
8
       
 
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
13
       
 
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
24
       
 
Item 3.
Defaults upon Senior Securities
24
       
 
Item 4.
Mine Safety Disclosures
24
       
 
Item 5.
Other Information
24
       
 
Item 6.
Exhibits
25
       
 
SIGNATURES
26
 
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, 2013,  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, 2013, 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, 2013, 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
 

 

 
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
TX HOLDINGS, INC.
BALANCE SHEETS
June 30, 2014 and September 30, 2013
   
Unaudited
 
   
June 30,
   
September 30,
 
   
2014
   
2013
 
ASSETS
           
Current assets:
           
Cash and cash equivalents
  $ 148,827     $ 175,028  
Accounts receivable, net of allowance for  doubtful accounts of $32,343 and $13,993, respectively
    658,968       425,930  
Inventory
    2,309,854       1,849,987  
Commission advances
  -       3,546  
Notes receivable-current
    10,000       10,000  
Other current assets
    37,790       23,275  
Total current assets
    3,165,439       2,487,766  
                 
Property and equipment, net
    67,564       43,387  
Notes receivable, less current portion
    24,514       27,380  
Other
 
-
      200  
                 
Total Assets
  $ 3,257,517     $ 2,558,733  
                 
LIABILITIES AND STOCKHOLDERS’ DEFICIT
               
                 
Current liabilities:
               
Accrued liabilities
  $ 573,187     $ 889,885  
Accounts payable
    1,101,824       692,180  
Advances from stockholder/officer
    45,337       499,583  
Bank- line of credit
    248,500       248,500  
Total current liabilities
    1,968,848       2,330,148  
                 
Notes payable to a stockholder
    2,000,000       1,351,997  
Total Liabilities
    3,968,848       3,682,145  
                 
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, and 48,053,084 shares issued and outstanding at June 30, 2014 and September 30, 2013
    9,293,810       9,293,810  
Additional paid-in capital
    4,319,251       4,304,280  
Accumulated deficit
    (14,324,392 )     (14,721,502 )
Total stockholders’ deficit
    (711,331 )     (1,123,412 )
                 
Total Liabilities and Stockholders’ Deficit
  $ 3,257,517     $ 2,558,733  
   
The accompanying notes are an integral part of the financial statements
 
4
 

 

 
TX HOLDINGS, INC.
STATEMENTS OF OPERATIONS
For the Three and Nine Months Ended June 30, 2014 and 2013
   
Unaudited
 
   
THREE MONTHS ENDED
   
NINE MONTHS ENDED
 
   
June 30,
   
June 30,
   
June 30,
   
June 30,
 
   
2014
   
2013
   
2014
   
2013
 
                         
Revenue
  $ 1,236,267     $ 1,330,650     $ 3,340,715     $ 3,060,971  
                                 
Cost of goods sold
    954,499       823,892       2,432,360       2,097,649  
                                 
Gross profit
    281,768       506,758       908,355       963,322  
                                 
Operating expenses, except items shown separately below
    140,717       106,557       371,871       315,301  
Commission expense
    109,144       170,145       379,460       338,910  
Professional fees
    30,386       28,156       141,070       115,465  
Depreciation expense
    2,699       4,445       7,439       13,335  
Total operating expenses
    282,946       309,303       899,840       783,011  
                                 
Income (loss) from operations
    (1,178 )     197,455       8,515       180,311  
                                 
Other income and (expense):
                               
Legal Settlement
    374,025    
-
      374,025    
-
 
Gain on extinguishment of debt
 
-
      32,458       93,167       32,458  
Gain on sale of property and equipment
 
-
   
-
      10,807       500  
Bad debt expense
    (18,350 )     (20,993 )     (18,350 )     (20,993 )
Interest expense
    (28,288 )     (22,921 )     (71,054 )     (68,600 )
                                 
Total other income and (expense), net
    327,387       (11,456 )     388,595       (56,635 )
                                 
Income (loss) before provision for income taxes
  $ 326,209     $ 185,999     $ 397,110     $ 123,676  
                                 
Provision for income taxes
    133,745    
-
      162,815    
-
 
Utilization of net operating loss carry forward
    (133,745 )  
-
      (162,815 )  
-
 
                                 
Net income/(loss)
  $ 326,209     $ 185,999     $ 397,110     $ 123,676  
                                 
Income/(loss) per common share                                
Basic and diluted
  $ 0.01    
$
-     $ 0.01     $
-
 
                                 
Weighted average of common shares outstanding-
                               
Basic and diluted
    48,053,084       48,053,084       48,053,084       47,838,898  
                                 
The accompanying notes are an integral part of the financial statements.
 
5
 

 

 
TX HOLDINGS, INC.
 
STATEMENT OF CHANGES IN STOCKHOLDER’S DEFICIT
 
For the Nine Months Ended June 30, 2014
 
   
Unaudited
 
                           
Additional
             
   
Preferred Stock
   
Common Stock
   
Paid in
   
Accumulated
       
   
Shares
   
Amount
   
Shares
   
Amount
   
Capital
   
Deficit
   
Total
 
                                           
Balance at
                                         
September 30, 2013
    -     $ -       48,053,084     $ 9,293,810     $ 4,304,280     $ (14,721,502 )   $ (1,123,412 )
                                                         
Accounting for warrants issued to an officer
    -       -       -       -       14,971       -       14,971  
                                                         
Net Income
    -       -       -       -       -       397,110       397,110  
                                                       
Balance at
June 30, 2014
    -     $ -       48,053,084     $ 9,293,810     $ 4,319,251     $ (14,324,392 )   $ (711,331 )
                                                         
The accompanying notes are an integral part of these financial statements.
 
6
 

 

 
TX HOLDINGS, INC.
 
STATEMENTS OF CASH FLOWS
 
For the Nine Months Ended June 30, 2014 and 2013
 
   
Unaudited
 
   
June 30,
   
June 30,
 
   
2014
   
2013
 
Cash flows provided (used) by operating activities:
           
Net income
  $ 397,110     $ 123,676  
Adjustments to reconcile net income to net cash provided
               
     (used) in operating activities:
               
     Depreciation expense
    7,439       13,335  
     Bad debt reserve
    18,350       20,993  
     Fair value of warrants issued to an officer
    14,971       -  
     Loss on settlement of accounts payable
    -       10,116  
     Gain on sale of property and equipment
    (10,807 )     (500 )
     Gain on extinguishment of debt
    (93,167 )     (32,458 )
     Other assets
    200       -  
Changes in operating assets and liabilities:
               
     Commission advances
    3,546       24,594  
     Deposits
    -       50,000  
     Inventory
    (459,867 )     (909,264 )
    Other current assets
    (14,515 )     6,895  
    Accounts receivable
    (251,388 )     (126,996 )
    Accrued liabilities
    38,626       51,705  
    Accounts payable
    409,644       331,302  
    Stockholder advances for operations
    18,000       18,000  
Net cash provided (used) by operating activities
    78,142       (418,602 )
                 
Cash flows provided (used) in investing activities:
               
     Purchase of equipment
    (38,809 )     (13,144 )
     Proceeds received on sale of equipment
    18,000       500  
Net cash used in investing activities
    (20,809 )     (12,644 )
                 
Cash flows provided (used) in financing activities:
               
     Proceeds from line of credit
    -       248,500  
     Proceeds from stockholder/officer advances
    24,450       284,501  
     Notes receivable
    2,866       2,620  
     Repayments of stockholders advances
    (110,850 )     (86,000 )
Net cash provided (used) in financing activities
    (83,534 )     449,621  
                 
Increase/(decrease) in cash and cash equivalents
    (26,201 )     18,375  
Cash and cash equivalents at beginning of period
    175,028       3,135  
                 
Cash and cash equivalents at end of period
  $ 148,827     $ 21,510  
                 
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       -  
Accounts payable exchanged for common stock
    -     $ 49,884  
                 
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 and footnotes of TX Holdings, Inc. (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 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, 2013, 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 2013 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, 2014.

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 and rail material to the United States’ (“U.S.”) 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.

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.
 
8
 

 

 
Prior to expanding into its current business and commencing in 2004, the Company focused its business on oil and gas exploration and production and, in February and April 2006, acquired certain oil and gas leases and began development of a plan for oil and gas producing operations.

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 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.

On May 30, 2012, the Company sold 100% of its interest in the Parks lease, the Company’s sole remaining oil and gas lease interest, for $80,000 and received as consideration 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, 2014, the note has a remaining outstanding balance of $34,514.

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 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, 2013, 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.

Prior to the fiscal year ended September 30, 2013 the Company had not produced sufficient cash to fund its operations and had incurred net losses.  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.
 
9
 

 

 
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.

NOTE 2 – STOCKHOLDERS’ DEFICIT

POTENTIALLY DILUTIVE OPTIONS AND WARRANTS

On December 10, 2011, 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 or nine months ended June 30, 2014 calculation of diluted earnings (loss) per common share. The warrants were exercisable for a two year period that ended on December 30, 2013. The warrants were not included in the calculation of diluted earnings per share.
 
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. On each of January 1, 2013,  July 1, 2013, and January 1, 2014 an additional 50,000 warrants were issuable to Mr. Chafin pursuant to the agreement. The warrants were included in the calculation of diluted earnings per share.

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 of authorized by the Board of Directors, February 21, 2014. The options expire on March 31, 2017. The options are included in the calculation of diluted earnings per share for the nine month and three month periods ended June 30, 2014.

NOTE 3 – RELATED PARTY TRANSACTIONS

ADVANCES FROM STOCKHOLDER/OFFICER

As of June 30, 2014, Mr. Shrewsbury had an outstanding advance to the Company of $45,337. The advance bears no interest and is due on demand. During the current nine month period, the Company repaid Mr. Shrewsbury’s advances of $110,850.

NOTES PAYABLE TO A STOCKHOLDER AND OFFICER

On February 25, 2014, the Company and Mr. Shrewsbury entered into an agreement to consolidate certain indebtedness due to Mr. Shrewsbury in the aggregate amount of $2,000,000, 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 previously made by Mr. Shrewsbury and 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. Upon issuance of the Consolidated Note, 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 and conditions of the foregoing debt consolidation and restructuring were submitted to and unanimously approved by the disinterested members of the Board of Directors of the Company who are also “qualified directors” within the definition set forth in Section 14-2-862 0f the Georgia Corporation Code.
 
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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.

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 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 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.
 
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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 month payable the first of each month. As of June 30, 2014, the Company has made lease payments in the amount of $48,000.
 
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, 2014 the amount of such commission was $7,799. The Company believes such commission rates charged are consistent with industry-wide charges for similar services and do not adversely affect the Company’s transportation costs.

NOTE 4 – BANK-LINE OF CREDIT

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, 2014. 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.

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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.

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 GAAP. 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 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 and 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, 2013, 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, 2013, 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 and began focusing its business on the distribution of rail material and mining supplies consumed by the U.S. coal mining industry in the production and transportation processes, which includes rail and its various components and mining supplies such as steel and tungsten miner bits and related tools and material.

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 gross profit basis.
 
Revenue for the nine months ended June 30, 2014, was $3,340,715 as compared to $3,060,971 for the same period in 2013, an increase of approximately 9%.
 
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During the nine months ended June 30, 2014, we had net income of $397,110 as compared to a net income of $123,676 for the same period in 2013.  The quarter ended June 30, 2014, is the sixth consecutive quarter in which the Company has reported net income and reflects the Company’s increased sales activities, the impact of the settlement of a law suit against the Company’s former CFO and counsel and Dexter and Dexter, and the Company’s   ability to control or obtain reductions in its product costs, and control operating and other expenses.

At June 30, 2014, cash and cash equivalents were $148,827 compared to $175,028 at September 30, 2013.

Net cash provided in operating activities was $78,142 during the nine months ended June 30, 2014. Net cash used in operating activities during the same nine month period in 2014 was $418,602.

Cash flow used by investing activities for the nine months ended June 30, 2014 was $20,809 as compared to cash flow used in investing activities of $12,644 during the same period in 2013.

During the nine months ended June 30, 2014, net cash used in financing activities was $83,534 due to the Company’s reduction of a stockholder’s advance by $110,850.

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 there for 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. The Consolidated Note is to be secured or otherwise payable by the Company out of the death benefit proceeds of key man insurance on the life of Mr. Shrewsbury purchased by the Company. As of June 30, 2014 Mr. Shrewsbury had also provided non-interest bearing advances to the Company of $45,337.
 
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 inventor and guaranteed by Mr. Shrewsbury, of which $248,500 had been drawn upon as of June 30, 2014.

RESULTS OF OPERATIONS

Three Months Ended June 30, 2014 Compared To Three Months Ended June 30, 2013

Revenues from Operations

Revenue for the three months ended June 30, 2014 was $1,236,267 as compared to $1,330,650 for the same period in 2013, a decrease of $94,383 or 7.1%.  The decrease in revenue is attributable to changes in our customer base.

Cost of Goods Sold

During the quarter ended June 30, 2014, the Company’s cost of goods sold was $954,499 as compared to cost of goods sold of $823,892 for the quarter ended June 30, 2013, an increase of $130,607 or 15.9 %. The temporary dislocation of one of our product line resulted in an increase in cost of goods sold due to higher cost product mix sold in the current period, as compared to the same period the prior year.
 
Gross Profit

Gross profit for the period ended June 30, 2014 decreased as a percentage of revenue to 22.8% from 38.1%   for the same period the prior year. The decrease in margin resulted from a temporary dislocation in one of our product lines.

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Operating Expenses

Operating expenses for the three months ended June 30, 2014 were $282,946 as compared to $309,303 for the three months ended June 30, 2013, a decrease of $26,357 or 8.5%.

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
 
   
6/30/2014
   
6/30/2013
   
$ Change
   
%Change
 
Operating Expense
                       
Commission Expense
  $ 109,144     $ 170,145     $ (61,001 )     (35.8 )
 Professional fees
    30,386       28,156     $ 2,230       7.9  
Depreciation expense
    2,699       4,445     $ (1,746 )     (39.3 )
Other operating expense
    140,717       106,557     $ 34,160       32.1  
   Total
  $ 282,946     $ 309,303     $ (26,357 )     (8.5 )
 
Commission expense for the three months ended June 30, 2014 was $109,144 compared to $170,145 for the same period in 2013, a decrease of $61,001 or 35.8%. The lower commission is a direct result of lower sales and lower margins during the current period.

Professional fees increased $2,230 or 7.9% during the three months ended June 30, 2014, as compared to the same period in 2013. The higher professional expenses are associated with the Company hiring a firm during the current quarter to provide investor relation services.

Depreciation expenses decreased $1,746 or 39.3% during the quarter ended June 30, 2014, as compared to the same period in 2013. In September 2012, the Company purchased a brazing machine to be used in the newly entered rail and mining supplies business.  No depreciation was taken on the brazing machine during the quarter ended June 30, 2014, as the Company out-sourced the work and is no longer operating the brazing machine. In March, 2014, the Company sold a building previously used to store equipment related to its prior oil and gas business. The $1,746 lower depreciation expense is directly related to the sale of the building and, no depreciation of the brazing machine taken during the current quarter.

During the three months ended June 30, 2014, other operating expenses of $140,717 increased by $34,160 or 32.1% from the $106,557 for the same period in 2013.  The higher other operating expenses resulted from higher stock based compensation of $14,971 associated with the issuance of stock options to an officer and, higher insurance expense of $26,000 recorded during the quarter.

Income from operations
 
Loss from operations for the quarter ended June 30, 2014, was $1,178 compared to income from operations of $197,455 during the same period in 2013, a decrease of $198,633 or 100.6%. The income decrease resulted from lower revenue attributable to changes in our customer base and higher cost product mix sold in the current period, partially offset by lower operating expenses of $26,357.

Other income and (expense)

The other income and expense category for the quarter ended June 30 2014, reflected income of $327,387 as compared to an expense of $11,456 for the quarter ended June 30, 2013, an increase of $338,843. The increase resulted from a gain on a litigation settlement of $374,025 recorded in the current quarter partially offset by a gain on an extinguishment of debt of $32,458 recorded in the same period the prior year.
 
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Interest expense for the current three month period ended June 30, 2014, increased by $5,367 over the same quarter the prior year.  The interest increase resulted from the consolidation of preexisting loans and non-interest bearing advances to a new $2,000,000 loan at a lower interest rate. A tax provision of $133,745 on pre-tax income of $326,209 generated during the quarter ended June 30, 2014, was fully offset by the utilization of tax credits resulting from operating losses recorded in prior periods.

Net Income or Loss

For the quarter ended June 30, 2014, net income was $326,209 compared to net income of $185,999 for the quarter ended June 30, 2013, an increase of $140,210 or  75.4%. The increase resulted from higher other income of $338,843 resulting from a favorable legal settlement of $374,025, partially offset by lower Income from operations of $198,633. The lower income from operations was the direct result of changes in our customer base resulting in lower gross margins and higher cost product mix sold in the current period.
.
Net earnings per common share

The net income of $326,209 for the quarter ended June 30, 2014, as well as the net income of $185,999 for the quarter ended June 30, 2013, when divided by the number of common shares outstanding of 48,053,084 basic and diluted shares in both years resulted in a net earnings per share of $0.01 in the current quarter and a negligible earnings per share of less than $0.01 for the quarter ended June 30, 2013.

Nine Months Ended June 30, 2014 Compared To Nine Months Ended June 30, 2013

Revenues from Operations

Revenue for the nine months ended June 30, 2014 was $3,340,715 as compared to $3,060,971 for the same period in 2013, an increase of $279,744 or a 9.1%.  In December 2011, we began expanding our business to include the distribution of rail material and mining supplies consumed by the U.S. coal mining industry. The increase in revenue is attributable to increased sales of rail and mining supplies to existing customers and the expansion of its product and customer base.

Cost of Goods Sold

During the nine months ended June 30, 2014, the Company’s cost of goods sold was $2,432,360 as compared to cost of goods sold of $2,097,649 for the nine months ended June 30, 2013, an increase of $334,711 or 16.0 %.  The increase in cost of goods sold resulted from higher sales volumes and higher cost product-mix sold during the nine-months ended June 30, 2014.

Gross Profit

Gross profit for the nine months ended June 30, 2014 decreased as a percentage of revenue to 27.2%  from 31.5% when compared to the same period the prior year. The decrease in margin resulted from a temporary dislocation in one of our product line, and, higher cost product mix sold in the current nine month period.

Operating Expenses

Operating expenses for the nine months ended June 30, 2014 were $899,840 as compared to $783,011 for the nine months ended June 30, 2013 an increase of $116,829 or 14.9%.
 
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The table below details the components of operating expense, as well as the dollar and percentage changes for the nine-month periods.
 
   
Nine Months Ended
 
   
6/30/2014
   
6/30/2013
   
$ Change
   
%Change
 
Operating Expense
                       
Commission Expense
    379,460       338,910       40,550       12.0  
 Professional fees
    141,070       115,465       25,605       22.2  
Depreciation expense
    7,439       13,335       (5,896 )     (44.2 )
Other operating expense
    371,871       315,301       56,570       17.9  
   Total
    899,840       783,011       116,829       14.9  

Commission expense for the nine months ended June 30, 2014 was $379,460 compared to $338,910 for the same period in 2013, an increase of $40,550 or 12.0%. The higher commission is a direct result of the increased sales during the current period.

Professional fees increased $25,605 or 22.2% during the nine months ended June 30, 2014, as compared to the same period in 2013 as a result of higher legal expenses of $25,105 associated with the Company’s settlement of a lawsuit against its prior CFO and counsel, Michael Cederstrom, and the law firm of Dexter and Dexter for which he worked.

Depreciation expenses decreased $5,896 or 44.2% during the nine months ended June 30, 2014, as compared to the same period in 2013. In September 2012, the Company purchased a brazing machine to be used in the newly entered rail and mining supplies business.  No depreciation was taken on the brazing machine during the nine months ended June 30, 2014, as the Company out-sourced the work and is no longer operating the brazing machine. The $5,896 lower depreciation expense during the current  nine month period resulted from the depreciation of the brazing machine taken during the nine months ended March 31, 2013, and no depreciation taken on a building sold during the current fiscal period.

During the nine months ended June 30, 2014, other operating expenses of $371,871 increased by $56,570 or 17.9% from the $315,301 for the same period in 2013.  The higher other operating expenses resulted from higher insurance expense of $36,398, higher travel expenses of $18,942 and  higher stock based compensation of $14,971 associated with stock options issued to an officer during the current period. The higher expenses were partially offset by lower operating supplies of $26,615.

Income from Operations

Income from operations for the nine months ended June 30, 2014, was $8,515 compared to income from operations of $180,311 during the same period in 2013, a decrease of $171,796. The decrease in income from operations is attributed to a decrease in margin of $54,967 resulting from a temporary dislocation in one of our product line and, higher cost product mix sold in the current nine month period. Higher operating expenses resulting from higher stock based compensation, legal, insurance and commission expenses further reduced income from operations by $116,829 when compared to the same period the prior year.

Other Income and Expense

Other income for the nine-months ended June 30, 2014, was $388,595 as compared to other expense of $56,635 for the nine months ended June 30, 2013, an increase of $445,230. The increase resulted from a favorable legal settlement of $374,025 recorded in the current period and, a reversal on December 31, 2013, of a $93,167 prior period recorded debt. A similar reversal of a prior debt of $32,458 was recorded in the prior year fiscal period. The debts had been disputed by the Company and were deemed no longer payable. The sale of a storage building by the Company during the current period contributed to a favorable gain of $10,807.

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Net Income

For the nine months ended June 30, 2014, net income was $397,110 compared to a net income of $123,676 for the nine months ended June 30, 2013, an increase of $273,434. The increase in net income resulted from a favorable legal settlement of $374,025 recorded in the current period, an increase in reversal of prior period recorded debt of $60,709, that were deemed no longer payable by the Company and, a $10,807 gain on the sale of a storage building.  The higher net income was partially offset by lower income from operations of $171,796. The lower income from operations was the direct result of a decrease in margins of $54,967 resulting from a temporary dislocation in one of our product line and, higher cost product mix sold in the current nine month period. Higher operating expenses resulting from higher stock based compensation, legal, insurance and commission expenses further reduced income from operations by $116,829 when compared to the same period the prior year. A tax provision of $162,815 on pre-tax income of $397,110 generated during the nine-months period ended June 30, 2014, was fully offset by the utilization of tax credits resulting from operating losses recorded in prior periods.

Net earnings/(loss) per common share

The net income of $397,110 for the nine months ended June 30, 2014, as well as the net income  of $123,676 for the nine-months ended June 30, 2013, when divided by the number of basic and diluted weighted common shares outstanding of 48,053,084 as of June 30, 2014 and 47,838,898 shares as of June 30, 2013 result in a $0.01 earnings per share for the current nine months period and a  negligible earnings per share of less than $0.01 for the nine months period ended June 30, 2013.

 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
 
   
6/30/2014
   
6/30/2013
 
Cash provided/(used) in operating activities
  $ 78,142     $ (418,602 )
Cash used in investing activities
    (20,809 )     (12,644 )
Cash provided/(used) in financing activities
    (83,534 )     449,621  
Net Increase (decrease) in cash
  $ (26,201 )   $ 18,375  
 
At June 30, 2014, we had cash and cash equivalents of $148,827 as compared to $175,028 September 30, 2013, a decrease of $26,201 or 15.0%. The decrease in cash is associated with the Company’s objective of increasing inventory by $459,867 from September 30, 2013 levels in anticipation of higher sales demand and to increase its product portfolio.

Cash Provided (Used) by Operating Activities

Cash provided by operating activities for the nine months ended June 30, 2014, was $78,142 compared to cash used  in operations of $418,602 in 2013, an increase of $496,744 or 635.7%.

The increase in cash provided in operating activities is the direct result of net income cash of $374,025 received by the Company from a favorable legal settlement recorded in the period ended June 30, 2014. The increase in operating cash was partially reduced by the continued effort by the Company to increase the finished goods inventory by $459,867 from the prior year-end levels to meet projected increases in sales demand and an increase in accounts receivable of $251,388 resulting from increased sales. An accounts payable increase of $409,644 over the prior  fiscal year end levels partially offset the increases in inventory and receivable.

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.
 
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The $459,867 inventory increase for the nine months ended June 30, 2014, represents a decrease of $449,397 from the increase reported in the same period in the prior year. The increase in both periods was the result of management’s decision to increase inventory levels and purchase of new inventory products to meet anticipated increased customer demand.

Accounts receivable as of June 30, 2014 increased $251,388 as compared to an increase of $126,966 as of June 30, 2013. The higher increase in the current period is the result of increased sales during the period ended June 30, 2014 of $3,340,715 as compared to sales of $3,060,971 for the same period the prior year.  Due to the continued expansion of the Company’s wholesale and retail rail and mining supplies business, sales for the current nine month period have increased resulting in proportionately increased accounts receivable.

Accrued liabilities decreased during the nine months ended June 30, 2014, by $316,698 as compared to an increase of $19,247 during the nine months ended June 30, 2013. The decrease in liabilities of $335,945 between the two periods resulted from recorded interest accrued in prior period of $262,157 reclassified as a component of the Consolidated Secured Promissory note of $2,000,000 issued to Mr. Shrewsbury on February 25, 2014. A $93,167 write-off, during the current period, of a legal debt which the Company deemed no longer payable, partially offset by a similar $32,458 write-off the prior year, account for the remaining accrued liabilities decrease between the two periods.

During the nine months ended June 30, 2014, accounts payable increased by $409,644, an increase of $78,342, when compared to the increase of $331,302 during the same period the prior year. The increases for the nine months ended June 30, 2014 and 2013 are directly related to the inventory increases of $459,867 and $909,264 during the respective nine months as the Company continued to increase inventory to meet anticipated customer demand.

Cash Provided/ (Used) in Investing Activities

Cash used in investing activities was $20,809 for the period ended June 30, 2014 as compared to cash used in investing activities of $12,644 for the nine months ended June 30, 2013. The $20,809 cash used in investing activities for the nine months ended June 30, 2014 resulted from the purchase of a delivery truck for $$38,809 partially offset by the sale of a storage building for $18,000. Similarly, the purchase of delivery equipment  of $13,144 during the nine  months ended June 30, 2013 account for the cash used in investing activities during the period.

Cash Provided/Used by Financing Activities

During the nine months ended June 30, 2014, cash used in financing activities was $83,534 compared to cash provided by financing activities of $449,621 during the same period in 2013.   During such periods, the Company repaid stockholder/officer advances of $110,850 and $86,000, respectively, and received stockholder advances of $24,450 and $284,501, respectively, reflecting  a decreased reliance during the period on advances from Mr. Shrewsbury to fund operations. Also, the Company financed its operation during the nine-months period ended June 30, 2013, by drawing-down $248,500 from its bank credit line.

On November 7, 2012, the Company obtained a line of credit in the amount of $250,000 from a bank. The line is secured by a priority security interest in the Company’s inventory and matures on November 17, 2014. Interest on the loan is payable monthly and is calculated on the basis of a variable index. As of June 30, 2014, the Company had borrowed $248,500 under the line of credit and the current rate of interest under the line is 3.25% per annum.

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 thereof a Secured 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. The note is to be secured or otherwise payable by the Company out of the death benefit proceeds of key man insurance on the life of Mr. Shrewsbury.
 
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During the nine months ended June 30, 2014, the Company repaid $110,850 of advances due to Mr. Shrewsbury bringing the total outstanding advance balance to $45,337.  Cash advances from Mr. Shrewsbury are repayable upon demand and do not bear interest.

Financial Condition and Going Concern Uncertainties

Except for the 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 continued 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, 2013, 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, 2014, the Company had cash and cash equivalents of $148,827 as compared to $175,028 as of September 30, 2013.  The decrease in cash as of June 30, 2014, results from the continued effort by the Company to increase the finished goods inventory from the prior year-end levels to meet projected increases in sales demand and the repayment of cash advances previously made by Mr. Shrewsbury (our Chairman and CEO).

The Company’s accounts receivable were $658,968 as of June 30, 2014, as compared to $425,930 as of September 30, 2013, an increase of $233,038 or 54.7%.  Higher receivables as of June 30, 2014 are the direct result of higher sales during the period.
 
Inventory was $2,309,854 as of June 30, 2014 as compared to $1,849,987 as of the year ended September 30, 2013, an increase of $459,867 or 24.9%.  In anticipation of the continued growth of the rail and mining supplies business, the Company has increased inventory levels to meet anticipated higher sales demand.

During the nine-months ended June 30, 2014, our stockholders’ deficit decreased from $14,721,502 to $14,324,392,   a decrease of $397,110 or 2.7%.  Reported net income for the nine months ended June 30, 2014 accounts for the decrease in stockholders’ deficit.

During the nine months ended June 30, 2014, the Company’s net income was $397,110 compared to a net income of $123,676 for the comparable period in 2013. The favorable increase can be directly attributed to a favorable legal settlement of $374,025 recorded in the current period, an increase in reversal of prior period recorded debt of $60,709, which were deemed not payable by the Company, and, a $10,807 gain on the sale of a storage building.

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 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.

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BANK LOAN

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, 2014. 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 failure to pay when due any principal or interest under the Consolidated Note; 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.
 
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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.

In addition, as of June 30, 2014, Mr. Shrewsbury had advanced an aggregate of $45,337 to the Company. The advances do not bear interest and are repayable upon demand.

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, 2014 and September 30, 2013.
 
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

The Company is not 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.  Claims against other parties have been resolved through settlement. The Company had asserted claims against Cederstrom that included 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 were based substantially upon the same theories and on a theory that Dexter was vicariously liable for the acts of Cederstrom and that Dexter failed to adequately supervise Cederstrom.  The claims against Dexter and Cederstrom were based upon allegations that, among other things, in connection with the exchange in December 2007 by Mr. Mark Neuhaus (“Neuhaus”), the Company’s former Chief Executive Officer, of 10,715,789 shares of common stock for 1,000 shares of preferred stock, Cederstrom  failed to disclose to the Company that the preferred shares issued to Neuhaus as compensation for work allegedly performed in 2004 and 2005 were issued without the proper consent of the previous board of directors of the Company and that Neuhaus had not performed services for which the shares of preferred stock were issued. Additionally, the Company claims Cederstrom executed, on behalf of the Company, a $1,199,885. 55 convertible promissory note in favor of Neuhaus that was not authorized.  The Company also claimed conflict of interest, breach of fiduciary duties, breach of contract and seeked an accounting for the fees paid to Dexter and certain shares issued to Cederstrom by the Company. The Company was seeking damages in an unspecified sum, punitive damages, pre and post judgment interest, attorneys’ fees and costs and other relief the court deems just and proper. In response to the litigation, Cederstrom and Dexter had asserted a counterclaim alleging the Company owes attorney’s fees in the amount of $63,538.

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 litigation. Pursuant to the terms of the settlement agreement Dexter & Dexter’s insurer paid the Company $374,024 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.

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 2013 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 2013 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 2013 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.
 
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As of June 30, 2014, we have incurred debt due to Mr. Shrewsbury in the form of non-interest bearing advances in the amount of $45,337. We have outstanding accounts payable of $1,101,824 and other accrued liabilities of $573,187, including $451,743 due to our CFO, Jose Fuentes, for services.  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, 2014.  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 our part to achieve profitability may cause us to reduce or eventually cease operations.

We had net income of $397,110 for the nine months ended June 30, 2014 and net income of $123,676 for the same period in 2013. At June 30, 2014 and September 30, 2013, we had accumulated deficits of $14,324,392 and $14,721,502, respectively. We may need to obtain additional financing to expand our wholesale and retail mining supplies 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, 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. The warrants were granted 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.

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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.
 
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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 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 1, 2014
   
Dated: August 1, 2014
 
 
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