Attached files
| file | filename |
|---|---|
| EX-32.2 - EXHIBIT 32.2 - TX Holdings, Inc. | t1600451_ex32-2.htm |
| EX-32.1 - EXHIBIT 32.1 - TX Holdings, Inc. | t1600451_ex32-1.htm |
| EX-31.2 - EXHIBIT 31.2 - TX Holdings, Inc. | t1600451_ex31-2.htm |
| EX-31.1 - EXHIBIT 31.1 - TX Holdings, Inc. | t1600451_ex31-1.htm |
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, 2016
| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| Commission File No. 000-32335 |
| TX HOLDINGS, INC. | ||
| (Exact Name of Registrant as Specified in its Charter) | ||
| Georgia | 58-2558702 | |||||
(State or Other Jurisdiction of Incorporation
or Organization) |
(I.R.S. Employer Identification No.) | |||||
| 12080 Virginia Blvd., Ashland, KY 41102 | (606) 928-1131 | |||||
| (Address of Principal Executive Offices and Zip Code) | (Registrant’s Telephone Number, Including Area Code) | |||||
| (Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report) | ||
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. YES x NO ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES x NO ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer ¨ | Accelerated filer ¨ | Non-accelerated filer ¨ |
Smaller reporting company x
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) YES ¨ NO x
On July 29, 2016, there were 48,053,084 shares of the registrant’s common stock outstanding.
TX HOLDINGS, INC.
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION | |||
| Item 1. | Financial Statements | ||
| Consolidated Balance Sheets as of June 30, 2016 and September 30, 2015 (Unaudited) | 5 | ||
| Consolidated Statements of Operations for the Three Months and Nine Months Ended June 30, 2016 and 2015 (Unaudited) | 6 | ||
| Consolidated Statement of Changes in Stockholders’ Deficit for the Nine Months Ended June 30, 2016 (Unaudited) | 7 | ||
| Consolidated Statements of Cash Flows for the Nine Months Ended June 30, 2016 and 2015 (Unaudited) | 8 | ||
| Notes to Unaudited Consolidated Financial Statements | 9 | ||
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 13 | |
| Item 3. | Quantitative and Qualitative Disclosures about Market Risk | 23 | |
| Item 4. | Controls and Procedures | 24 | |
PART II OTHER INFORMATION |
|||
| Item 1. | Legal Proceedings | 24 | |
| Item 1A. | Risk Factors | 24 | |
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 25 | |
| Item 3. | Defaults Upon Senior Securities | 25 | |
| Item 4. | Mine Safety Disclosures | 25 | |
| Item 5. | Other Information | 25 | |
| Item 6. | Exhibits | 26 | |
| SIGNATURES | 27 | ||
| 2 |
NOTE REGARDING FORWARD-LOOKING STATEMENTS
Our disclosure and analysis in this report as well as information relating to us contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (“Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (“Exchange Act”), and other applicable law, which provide our current expectations or forecasts of future events. Forward-looking statements in this report include, without limitation:
| · | cyclical economic conditions affecting the coal mining industry and competitive pressures and changes affecting the coal mining industry, including demand for coal; |
| · | general economic conditions, including those affecting the domestic and global coal mining industry generally; |
| · | changes in environmental laws and regulations promulgated by the Environmental Protection Agency and similar state agencies or their interpretation and enforcement as they affect the mining industry and, in particular, the coal mining industry; |
| · | our ability to generate cash from operations, obtain funding on favorable terms and manage our liquidity needs; |
| · | challenges arising from acquisitions or our development and marketing of new products; |
| · | 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,” “could,” “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, 2015, Part II, Item 1A – Risk Factors of this report, Part I, Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations in this report, and elsewhere in this report. A number of factors could cause results to differ materially from those anticipated by such forward-looking statements. The absence of these words does not necessarily mean that a statement is not forward-looking. Forward-looking statements are subject to known and unknown risks and uncertainties and are based on potentially inaccurate assumptions that could cause actual results to differ materially from those expected or implied by the forward-looking statements. Our actual results could differ materially from those anticipated in the forward-looking statements for many reasons, including factors described in Part I, Item 1A - Risk Factors of our Form 10-K for the year ended September 30, 2015, and Part II, Item 1A – Risk Factors of this report. You should carefully consider the factors described in Part II, Item 1A - Risk Factors of our Form 10-K for the year ended September 30, 2015, and Part II, Item 1A – Risk Factors of this report, in evaluating our forward-looking statements.
You should not unduly rely on these forward-looking statements, which speak only as of the date of this report. We undertake no obligation to publicly revise any forward-looking statement to reflect circumstances or events after the date of this report, or to reflect the occurrence of unanticipated events. You should, however, review the factors and risks we describe in the reports we file from time to time with the Securities and Exchange Commission (“SEC”). Notwithstanding the above, Section 27A of the Securities Act and Section 21E of the Exchange Act expressly state that the safe harbor for forwarding looking statements does not apply to companies that issue penny stocks. Because we may from time to time be considered an issuer of penny stock, the safe harbor for forward looking statements under such provisions may not be applicable to us at certain times.
| 3 |
We obtained certain statistical data, market data and other industry data and forecasts used in this Form 10-Q from publicly available information. While we believe that such data is reliable, we have not independently verified the data, and we do not make any representation as to the accuracy of the information.
| 4 |
PART 1-FINANCIAL INFORMATION
Item 1-Financial Statements
| TX HOLDINGS, INC. |
| CONSOLIDATED BALANCE SHEETS |
| June 30, 2016 and September 30, 2015 |
| Unaudited | ||||||||
| June 30, | September 30, | |||||||
| 2016 | 2015 | |||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 856 | $ | 61,564 | ||||
| Accounts receivable, net of allowance for doubtful accounts of $13,643 at June 30, 2016 and September 30, 2015 | 412,283 | 585,043 | ||||||
| Inventory | 2,238,469 | 2,223,037 | ||||||
| Commission advances | 48,854 | 48,338 | ||||||
| Note receivable-current | 10,000 | 10,000 | ||||||
| Other current assets | 26,136 | 27,674 | ||||||
| Total current assets | 2,736,598 | 2,955,656 | ||||||
| Inventory, non-current | 300,000 | 300,000 | ||||||
| Property and equipment, net | 59,228 | 66,575 | ||||||
| Note receivable, less current portion | 19,983 | 19,983 | ||||||
| Other | 500 | 500 | ||||||
| Total Assets | $ | 3,116,309 | $ | 3,342,714 | ||||
| LIABILITIES AND STOCKHOLDERS' DEFICIT | ||||||||
| Current liabilities: | ||||||||
| Accrued liabilities | $ | 776,023 | $ | 696,624 | ||||
| Accounts payable | 671,572 | 946,576 | ||||||
| Advances from officer | 229,437 | 124,637 | ||||||
| Bank-Line of Credit | – | 712,449 | ||||||
| Bank-Term Loan | 681,889 | – | ||||||
| Total current liabilities | 2,358,921 | 2,480,286 | ||||||
| Note payable to officer | 2,000,000 | 2,000,000 | ||||||
| Total Liabilities | 4,358,921 | 4,480,286 | ||||||
| Commitments and contingencies | ||||||||
| Stockholders' deficit: | ||||||||
| Preferred stock: no par value, 1,000,000 shares authorized no shares outstanding | – | – | ||||||
| Common stock: no par value, 250,000,000 shares authorized, 48,053,084 shares issued and outstanding at June 30, 2016 and September 30, 2015 | 9,293,810 | 9,293,810 | ||||||
| Additional paid-in capital | 4,321,329 | 4,321,329 | ||||||
| Accumulated deficit | (14,857,751 | ) | (14,752,711 | ) | ||||
| Total stockholders' deficit | (1,242,612 | ) | (1,137,572 | ) | ||||
| Total Liabilities and Stockholders' Deficit | $ | 3,116,309 | $ | 3,342,714 | ||||
The accompanying notes are an integral part of the consolidated financial statements.
| 5 |
| TX HOLDINGS, INC. |
| CONSOLIDATED STATEMENTS OF OPERATIONS |
| For the Three Months and Nine Months Ended June 30, 2016 and June 30, 2015 |
| Unaudited | ||||||||||||||||
| THREE MONTHS ENDED | NINE MONTHS ENDED | |||||||||||||||
| June 30, | June 30, | June 30, | June 30, | |||||||||||||
| 2016 | 2015 | 2016 | 2015 | |||||||||||||
| Revenue | $ | 381,529 | $ | 636,388 | $ | 1,728,707 | $ | 2,229,033 | ||||||||
| Cost of goods sold | (306,289 | ) | (503,301 | ) | (1,244,746 | ) | (1,810,712 | ) | ||||||||
| Gross profit | 75,240 | 133,087 | 483,961 | 418,321 | ||||||||||||
| Operating expenses, except items shown separately below | 105,210 | 116,356 | 359,508 | 406,268 | ||||||||||||
| Commission expense | 21,879 | 52,553 | 85,251 | 158,486 | ||||||||||||
| Professional fees | 5,000 | 14,201 | 46,421 | 72,511 | ||||||||||||
| Bad Debt Expense | – | – | 1,926 | – | ||||||||||||
| Depreciation expense | 2,449 | 4,032 | 7,347 | 9,238 | ||||||||||||
| Total operating expenses | 134,538 | 187,142 | 500,453 | 646,503 | ||||||||||||
| Loss from Operations | (59,298 | ) | (54,055 | ) | (16,492 | ) | (228,182 | ) | ||||||||
| Other income and (expense): | ||||||||||||||||
| Other income | 6,102 | 2,952 | 6,102 | 15,505 | ||||||||||||
| Interest expense | (31,373 | ) | (31,810 | ) | (94,650 | ) | (97,641 | ) | ||||||||
| Total other income and (expense), net | (25,271 | ) | (28,858 | ) | (88,548 | ) | (82,136 | ) | ||||||||
| Net loss | $ | (84,569 | ) | $ | (82,913 | ) | $ | (105,040 | ) | $ | (310,318 | ) | ||||
| Net loss per common share | ||||||||||||||||
| Basic and Diluted | $ | 0.00 | $ | 0.00 | $ | 0.00 | $ | (0.01 | ) | |||||||
| Weighted average of common shares outstanding- | ||||||||||||||||
| Basic and Diluted | 48,053,084 | 48,053,084 | 48,053,084 | 48,053,084 | ||||||||||||
The accompanying notes are an integral part of the consolidated financial statements.
| 6 |
| TX HOLDINGS, INC. |
| CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIT |
| For the Nine Months Ended June 30, 2016 |
| Unaudited | ||||||||||||||||||||||||||||
| Additional | ||||||||||||||||||||||||||||
| Preferred Stock | Common Stock | Paid in | Accumulated | |||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Deficit | Total | ||||||||||||||||||||||
| Balance at September 30, 2015 | – | $ | – | 48,053,084 | $ | 9,293,810 | $ | 4,321,329 | $ | (14,752,711 | ) | $ | (1,137,572 | ) | ||||||||||||||
| Net loss | – | – | – | – | – | (105,040 | ) | (105,040 | ) | |||||||||||||||||||
| Balance at June 30, 2016 | – | $ | – | 48,053,084 | $ | 9,293,810 | $ | 4,321,329 | $ | (14,857,751 | ) | $ | (1,242,612 | ) | ||||||||||||||
The accompanying notes are an integral part of the consolidated financial statements.
| 7 |
| TX HOLDINGS, INC. |
| CONSOLIDATED STATEMENTS OF CASH FLOWS |
| For the Nine Months Ended June 30, 2016 and 2015 |
| (Unaudited) | ||||||||
| June 30, | June 30, | |||||||
| 2016 | 2015 | |||||||
| Cash flows used in operating activities: | ||||||||
| Net loss | $ | (105,040 | ) | $ | (310,318 | ) | ||
| Adjustments to reconcile loss to net cash used in operating activities: | ||||||||
| Depreciation expense | 7,347 | 9,238 | ||||||
| Bad debt expense | 1,926 | – | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | 170,834 | (2,222 | ) | |||||
| Inventory | (15,432 | ) | 217,292 | |||||
| Commission advances | (516 | ) | (36,460 | ) | ||||
| Other current assets | 1,538 | 17,295 | ||||||
| Accrued liabilities | 61,399 | 31,398 | ||||||
| Accounts payable | (275,004 | ) | (156,201 | ) | ||||
| Other assets | – | (500 | ) | |||||
| Stockholder/officers advances for operations | 18,000 | 6,000 | ||||||
| Net cash used in operating activities | (134,948 | ) | (224,478 | ) | ||||
| Cash flows used in investing activities: | ||||||||
| Notes receivable | – | 1,306 | ||||||
| Purchase of equipment | – | (4,149 | ) | |||||
| Net cash used in investing activities | – | (2,843 | ) | |||||
| Cash flows provided by financing activities: | ||||||||
| Proceeds from term-loan Payment on Term Loan | (29,487 | ) | – | |||||
| Proceeds from bank line of credit | – | 171,049 | ||||||
| Repayment of bank line of credit | (1,073 | ) | – | |||||
| Proceeds from stockholder/officer advances | 170,100 | 64,300 | ||||||
| Repayment of stockholder/officer advances | (65,300 | ) | (36,000 | ) | ||||
| Net cash provided by financing activities | 74,240 | 199,349 | ||||||
| Decrease in cash and cash equivalents | (60,708 | ) | (27,972 | ) | ||||
| Cash and cash equivalents at beginning of period | 61,564 | 72,784 | ||||||
| Cash and cash equivalents at end of period | $ | 856 | $ | 44,812 | ||||
| Supplemental Disclosure of Cash Flow Information | ||||||||
| Cash paid during the year for interest | $ | 94,650 | $ | 97,641 | ||||
| Suppemental Schedule of Non-Cash investing and Financing Activities | ||||||||
| Payments of line of credit through issuance of note payable | $ | 711,376 | $ | – | ||||
The accompanying notes are an integral part of the consolidated financial statements.
| 8 |
TX HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1- BACKGROUND AND SIGNIFICANT ACCOUNTING POLICIES
INTERIM FINANCIAL STATEMENTS
The accompanying interim unaudited consolidated financial statements and footnotes of TX Holdings, Inc., and its subsidiaries (the “Company”), have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) and applicable rules and regulations of the Securities and Exchange Commission regarding interim financial reporting. The consolidated financial statements reflect all adjustments that are, in the opinion of management, necessary to fairly present such information. All such adjustments are of a normal recurring nature. Although the Company believes that the disclosures are adequate to make the information presented not misleading, certain information and footnote disclosures, including a description of significant accounting policies normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations.
The balance sheet as of September 30, 2015, included herein was derived from audited consolidated financial statements as of that date, but does not include all disclosures including notes required by GAAP.
These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended September 30, 2015. The accompanying unaudited consolidated financial statements reflect all normal recurring adjustments necessary to present fairly the financial position, results of operations, and cash flows for the interim periods, but are not necessarily indicative of the results for any subsequent quarter or the entire year ending September 30, 2016.
Conformity with GAAP requires the use of estimates and judgments that affect the reported amounts in the financial statements and accompanying notes. These estimates form the basis for judgments we make about the carrying values of our assets and liabilities, which are not readily apparent from other sources. We base our estimates and judgments on historical information and on various other assumptions that we believe are reasonable under the circumstances. GAAP requires us to make estimates and judgments in several areas, including, but not limited to, those related to revenue recognition, collectability of accounts receivable, contingent liabilities, fair value of share-based awards, fair value of financial instruments, fair value of acquired intangible assets and goodwill, useful lives of intangible assets and property and equipment, and income taxes. These estimates are based on management’s knowledge about current events and expectations about actions we may undertake in the future. Actual results could differ materially from those estimates.
OVERVIEW OF BUSINESS
The Company is in the business of supplying, distributing and selling drill bits, related tools, and other mining supplies, rail and rail material directly and through other suppliers to United States’ coal mining companies for use in their production and transportation processes. The products are supplied to the Company by various manufacturers and suppliers. The products are warehoused and distributed from the Company’s principal business location in Ashland, Kentucky or shipped directly to its customers. In addition, on November 21, 2014, and with a view to diversifying its business, the Company acquired all of the membership interest in The Bag Rack, LLC. The acquired company has developed a new product, “The Bag Rack,” and the Company is in the preliminary stages of distributing and selling the new product. The Bag Rack is a unique device that enables bags with handles to be stored in the trunk of a car preventing the bags from tipping over and causing spillage. The Company has not generated any revenue from the sale of the new products but continue to explore opportunities for the marketing and distribution of the product. See Note 2.
| 9 |
The Company was incorporated in the State of Georgia on May 15, 2000, under the name HOM Corporation. On January 22, 2003, the Company changed its name to R Wireless, Inc., and, on July 27, 2005, changed its name to TX Holdings, Inc.
REVENUE RECOGNITION
The Company recognizes revenue from direct sales of our products to our customers, including shipping fees. Title passes to the customer (usually upon shipment or delivery, depending upon the terms of the sales order) when persuasive evidence of an arrangement exists; when sales amounts are fixed or determinable; and when collectability is reasonably assured. The Company expenses shipping and handling costs as incurred which are included in cost of goods sold on the consolidated statements of operations.
GOING CONCERN CONSIDERATIONS
The unaudited consolidated 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 consolidated financial statements included in our annual report on Form 10-K for the year ended September 30, 2015, contains an explanatory paragraph wherein it expressed an opinion that there is substantial doubt about our ability to continue as a going concern. Accordingly, careful consideration of such opinion should be given in determining whether to continue or become our stockholder.
Since the commencement of its mining and rail products distribution business, the Company has relied substantially upon financing provided by Mr. Shrewsbury, the Company’s CEO and, from November 2012 to December 2015, a secured bank line of credit in connection with the development and expansion of its business. On December 3, 2015, the Company entered into a new loan agreement with Town Square Bank under which it obtained a term loan in the amount of $711,376. The Company utilized proceeds of the new loan to repay its line of credit. The loan is for a term of five years and matures on December 3, 2020.
These factors raise substantial doubt about the Company's ability to continue as a going concern. The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates continuing operations and realization of assets and liquidation of liabilities in the ordinary course of business. The Company's ability to continue as a going concern is dependent upon its ability to raise sufficient capital and to implement a successful business plan to generate profits sufficient to become financially viable. The consolidated financial statements do not include adjustments relating to the recoverability of recorded assets or the implications of associated bankruptcy costs if the Company is unable to continue as a going concern.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary. All significant inter-company transactions and balances have been eliminated in consolidation.
NOTE 2 –ACQUISITIONS
On November 21, 2014, the Company acquired 100% ownership of The Bag Rack, LLC, a Kentucky limited liability company, from the Company’s CEO (who prior to the acquisition, owned 50% of the membership interest in the acquired company) and the remaining membership interests from an unrelated third party. The acquired company had been recently established and was in the process of initiating the development and distribution of “The Bag Rack”, a unique patent pending device which enables bags with handles to be stored in the trunk of a car neatly and preventing content spillage. The transaction was completed with the Company paying a purchase price of $500.
| 10 |
The Bag Rack, LLC acquired all rights to the product shortly prior to its acquisition by the Company. Since its formation and at the date of acquisition, the acquired company held no assets or liabilities other than rights to the product which were valued at $500 as they pertained to a new unproven product. In addition, the Company agreed to pay 20% of the net profit for each product sold to a customer by The Bag Rack LLC to the former pending patent holder and 20% of the net income, after payment to the former pending patent holder, to each of the two former members of The Bag Rack, LLC. The payments to the former pending patent holder and prior members of The Bag Rack, LLC will be in perpetuity.
NOTE 3 – STOCKHOLDERS’ DEFICIT
POTENTIALLY DILUTIVE OPTIONS AND WARRANTS
On May 16, 2012, the Board of Directors authorized the issuance of an aggregate of 400,000 common stock purchase warrants to a sales agent, Mr. Tom Chafin. Over a period of four years, Mr. Chafin was 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 immediately exercisable, and expire two years after the date of issuance. The initial tranche of 50,000 warrants were issuable effective July 1, 2012. As of June 30, 2016 an aggregate of 200,000 warrants were issuable to Mr. Chafin, and 200,000 of the previously issuable warrants have expired under the terms of the agreement. The warrants were not included in the calculation of diluted earnings per share since their inclusion will be anti-dilutive.
On February 25, 2014, the Company issued 500,000 common stock purchase options to Mr. Shrewsbury. Commencing April 1, 2014, the options became exercisable at a price of $.0924 per share, the fair market value of the Company’s shares of Common Stock on the date authorized by the Board of Directors, February 21, 2014. The options expire on March 31, 2017. The options are not included in the calculation of diluted earnings per share since their inclusion will be anti-dilutive.
NOTE 4 – RELATED PARTY TRANSACTIONS
ADVANCES FROM STOCKHOLDER/OFFICER
As of June 30, 2016 and September 30, 2015, Mr. Shrewsbury had outstanding advances to the Company of $229,437 and $124,637, respectively. The advances bear no interest and are due on demand.
NOTES PAYABLE TO A STOCKHOLDER AND OFFICER
On February 25, 2014, the Company and Mr. Shrewsbury consolidated an aggregate of $2,000,000 of the indebtedness to Mr. Shrewsbury, including the principal due under a Revolving Demand Note (“Revolving Note”) in the principal amount of $1,062,000 and accrued but unpaid interest due thereunder as of January 31, 2014 in the amount of $168,905, the principal due under a 10% Promissory Note (“10% Note”) in the amount of $289,997 and accrued but unpaid interest due thereunder as of January 31, 2014 in the amount of $93,252; and $385,846 of non-interest bearing advances outstanding as of January 31, 2014. The Company issued in exchange and in replacement therefor a Consolidated Secured Promissory Note (the “Consolidated Note”) in the principal amount of $2,000,000. The Revolving Note and 10% Note were cancelled and Mr. Shrewsbury agreed to waive any prior defaults under the terms of such notes and to release the Company from any claims related thereto. The Consolidated Note bears interest at the rate of 5% per annum or prime rate if higher than 5% per annum, is repayable in full ten years from the date of issuance, and is subject to certain events of default. Payment of the Consolidated Note is to be secured or otherwise payable by the Company out of the death benefit proceeds of key man insurance of $2 million that has been purchased by the Company on the life of Mr. Shrewsbury. The terms of the debt consolidation and restructuring were unanimously approved by the disinterested members of the Board of Directors of the Company.
| 11 |
LEASE AGREEMENT WITH STOCKHOLDER AND OFFICER
In November 2012, the Company entered into a lease agreement with William Shrewsbury and Peggy Shrewsbury whereby Mr. Shrewsbury and Mrs. Shrewsbury agreed to lease to the Company real estate and warehouse space to store the Company’s inventory. The initial lease had a two year term starting October 1, 2012 and ending August 31, 2014. On September 1, 2014 the parties agreed to extend the lease for an additional two years. The lease rental is $2,000 per month payable the first of each month. As of June 30, 2016, the Company has made lease payments, since the beginning of the lease, in the amount of $84,000 and has an outstanding payable on the lease to Mr. Shrewsbury in the amount of $30,000.
FREIGHT PAID TO COMPANY CONTROLLED BY OFFICER/STOCKHOLDER
The Company utilizes the services of a trucking company owned and controlled by Mr. Shrewsbury, our Chief Executive Officer, to transport certain of the Company’s products to its customers. During the three months and nine months ended June 30, 2016 and 2015, such trucking company was paid $10,592 and $39,003 and $12,362 and $30,122, respectively, for such trucking services.
COMMISSIONS PAID TO COMPANY CONTROLLED BY OFFICER/SHAREHOLDER
In connection with the transportation and delivery of certain of the Company’s products, the Company utilizes the services of a national transportation company. The chief executive officer and a principal stockholder of the Company owns and controls a company that is an agent of such transportation company. Such controlled company places orders for such transportation services on behalf of the Company and is paid a commission for such transportation services. During the three and nine months ended June 30, 2016 and 2015 the commissions’ amounts were $1,534 and $7,507 and $1,027 and $5,823, respectively.
NOTE 5 – BANK LOAN
In November 2012, the Company obtained a $250,000 line of credit from a bank. On August 26, 2014, the bank increased the Company’s existing bank line of credit from $250,000 to $750,000 and extended the term of the line of credit. The line of credit was secured by a priority security interest in the Company’s inventory and accounts receivable and matured on November 7, 2015. On December 3, 2015, the Company entered into a new loan agreement with the Bank under which it obtained a term loan in the amount of $711,376. The Company utilized proceeds of the new loan to repay its line of credit. The loan is for a term of five years and matures on December 3, 2020. As of June 30, 2016, the loan balance is $681,889.
During the term of the loan, the Company has agreed to make equal monthly repayments of principal and interest of $6,967 commencing January 3, 2016, and to make a final payment on December 3, 2020, of the outstanding balance of the interest and principal then due, estimated to be approximately $391,896. Early repayment of amounts due under the loan will not affect the monthly repayment amount, unless otherwise agreed to by the bank.
An event of default under the loan will occur upon the occurrence of any of the following events:
| · | the Company fails to make any payment when due under the loan; |
| · | the Company fails to comply with any term, obligation, covenant or condition in the loan documents or any other agreement between the bank and the Company: |
| · | the Company defaults under any loan, extension of credit, security agreement, purchase or sales agreement or other agreement with any creditor that materially affects the Company’s property or its ability to repay the note or perform its obligation under the note or related documents; |
| · | a warranty, representation or statement made to the bank under the loan document is or becomes materially false or misleading; |
| · | the dissolution or termination of the Company’s existence, or its insolvency, the appointment of a receiver for any part of its property, any assignment for the benefit of creditors, any type of creditor workout, or the commencement of any proceeding under any bankruptcy or insolvency laws by or against the Company; |
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| · | the commencement of foreclosure or forfeiture proceedings by any creditor or any governmental agency against any collateral securing the loan; |
| · | any of the preceding events occurs with respect to any loan guarantor; |
| · | a 25% or more change in the ownership of the Company’s common stock; |
| · | a material adverse change in the Company’s financial condition, or the bank believes the prospect of payment or performance of the loan is impaired; or |
| · | the bank in good faith believes itself insecure. |
The loan agreements contain certain affirmative covenants, including an obligation to: notify the bank of a material adverse change in the Company’s financial condition and of any threatened litigation or claim or other proceeding which could materially affect the Company’s financial condition; maintain certain liability insurance in amounts acceptable to the bank; maintain qualified executive and management personnel; comply with applicable environmental laws and perform environmental studies required by the bank; and certify annually to the bank compliance with the representations and warranties in the bank loan documents. The loan agreements contain certain other customary covenants and conditions.
In addition, the loan agreements contain certain negative covenants, including that the Company will not, without the bank’s consent:
| · | incur any indebtedness other than to the bank or for trade debt incurred in the ordinary course; |
| · | sell, transfer, mortgage, assign, pledge, lease, grant a security interest in, or encumber any of its assets, except for permitted liens; |
| · | sell its accounts receivable, except to the bank; |
| · | engage in business activities substantially different from the Company’s current activities; |
| · | cease operations, liquidate, merge, transfer, acquire or consolidate with another entity, change the Company’s name, dissolve, or sell the inventory or accounts receivable secured under the loan; |
| · | pay any dividend other than in stock; |
| · | lend money, invest or advance money or assets to another person or entity; |
| · | purchase, create or acquire an interest in any other entity; |
| · | incur any obligation as a surety or guarantor other than in the ordinary course; or |
| · | enter into any agreement containing any provision which would be violated or breached by the performance of the Company’s obligations under the loan agreements. |
Interest under the loan is variable and is based upon the Wall Street Journal Prime rate, currently 3.50% per annum. In the event of a default, interest under the loan may be increased by 2%. The line of credit is secured by a priority security interest in the Company’s inventory and accounts receivable and has been guaranteed by our CEO. Also, all claims due from the Company to Mr. Shrewsbury are subordinate to the bank’s indebtedness, including under the Consolidated Note and any advances due to Mr. Shrewsbury.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Introduction
You should read the following summary together with the more detailed information and financial statements and notes thereto and schedules appearing elsewhere in this report. Throughout this report when we refer to the “Company” “TX Holdings,” “we,” “our” or “us,” we mean TX Holdings, Inc., a Georgia corporation, and its subsidiary.
This discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements which have been prepared in accordance with GAAP. The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our critical accounting policies and estimates, including those related to revenue recognition and contingencies. We base our estimates on historical experience, where available, and on various other assumptions we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions and conditions.
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Except for historical information, the statements and other information contained in this Management’s Discussion and Analysis are forward-looking. Our actual results could differ materially from the results discussed in the forward-looking statements, which include certain risks and uncertainties.
Our independent registered public accounting firm’s report on the consolidated financial statements included in our Annual Report Form 10-K for the year ended September 30, 2015, 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, 2015, and Part II, Item 1A – Risk Factors in this report.
Overview
We are in the business of supplying, distributing and selling drill bits, related tools, and other mining supplies, rail and rail material directly and through other suppliers to the United States’ coal mining companies for use in their production and transportation processes. We have experienced, and continue to experience, reduced demand for sales of our mining and rail products due to a continuing decline in U.S. coal production. The demand for, and production of, coal has been adversely affected by several factors, including increased environmental regulation, declining coal consumption in the electric power sector, increased competition from natural gas, and the strong dollar. The U.S. Energy Information Administration has forecast that coal production is expected to decrease by approximately 17% in 2016 and that coal consumption in the electric power sector, which accounts for more than 90% of total U.S. coal consumption, is forecast to decline 10% in 2016. As a result, several major U.S. coal producers, including certain of our customers, have sought protection under bankruptcy laws or are engaged in restructuring their businesses and operations resulting in plant closures. Distress in the U.S. coal mining industry has and will continue to materially affect our business and operations.
We purchase mining supplies from several manufacturers and rail material from several suppliers of such products. Our products are either shipped to our warehouse in Ashland, Kentucky for distribution to our customers or shipped directly to our customers, including products that we import once they have been received by us at a port and cleared customs. Our products are transported primarily by ground transportation to our customers. Shipping costs are born by our customers.
We distribute and sell our products through a Company’ salesman and two independent sales agents who are compensated on a commissioned basis.
Revenues for the three months ended June 30, 2016 was $381,529 as compared to $636,388 for the same period in 2015, a decrease of approximately 40.0%. Revenue for the nine months ended June 30, 2016, was $1,728,707 as compared to $2,229,033 for the same period in 2015, a decrease of approximately 22.4%.
During the nine months ended June 30, 2016, we had a net loss of $105,040 as compared to net loss of $310,318 for the same period in 2015.
At June 30, 2016, cash and cash equivalents were $856 compared to $61,564 at September 30, 2015.
Net cash used in operating activities was $134,948 during the nine months ended June 30, 2016. Net cash used in operating activities during the same nine-month period in 2015 was $224,478.
There was no cash flow from investing activities for the nine months ended June 30, 2016. Cash flow used in investing activities during the nine-month period ended June 30, 2015 was $2,843.
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During the nine months ended June 30, 2016, net cash provided by financing activities was $74,240 primarily due to cash advances from our CEO, William Shrewsbury. Cash flow provided by financing activities for the nine months ended June 30, 2015 was $199,349 primarily from a drawdown of $171,049 under our line of credit, which line of credit we converted subsequently to a term loan.,
Mr. William Shrewsbury, the Company’s Chairman and CEO, has provided financing in the form of demand notes and advances. Effective February 25, 2014, Mr. Shrewsbury agreed to restructure the principal and interest under such demand notes and certain advances due as of January 31, 2014, and we issued in exchange a single Consolidated Secured Promissory Note in the principal amount of $2,000,000 (“Consolidated Note”). The principal and interest thereunder is due ten years from the date of issuance, the principal bears interest at the rate of 5% per annum or prime rate if higher than 5% per annum, and is subject to certain events of default. Payment of the Consolidated Note is to be secured or otherwise payable by us out of the death benefit proceeds of key man insurance of $2 million that has been purchased by us on the life of Mr. Shrewsbury. As of June 30, 2016, Mr. Shrewsbury had also provided non-interest bearing advances to us of $229,437.
In November, 2012, we obtained a bank line of credit in the amount of $250,000 which was subsequently increased to $750,000. The line of credit was secured by a lien on our inventory and account receivable and guaranteed by Mr. Shrewsbury. On December 3, 2015, we entered into a new loan agreement with a bank under which we obtained a term loan in the amount of $711,376. We utilized proceeds of the new loan to repay our line of credit. The loan is for a term of five years and matures on December 3, 2020. As of June 30, 2016, the loan balance is $681,889.
We were incorporated in the State of Georgia in 2000.
Recent Acquisitions
On November 21, 2014, and with a view to diversifying our business, we acquired The Bag Rack, LLC. The acquired company owns all rights to a new product, “The Bag Rack” and was in the preliminary stages of developing the new product. The Bag Rack is a unique device that enables bags with handles to be stored in the trunk of a motor vehicle preventing the bags from tipping over and causing spillage. We expect to market and sell the new product online and through certain national retailers, distributors, and discount stores. The Bag Rack, LLC was acquired from Mr. Shrewsbury, our CEO and Mr. Rickie Hagan, the founding members of The Bag Rack, LLC, who each owned 50% of the company. In addition to a purchase price of $500, as consideration for the acquisition, we agreed to pay 20% of the net profits to each founding member (after royalty payment) of The Bag Rack. The Bag Rack has a provisional patent pending related to the new product and is obligated to pay a royalty to the original developer of the product equal to 20% of the net profit of each product sold.
RESULTS OF OPERATIONS
Three Months Ended June 30, 2016 Compared to Three Months Ended June 30, 2015
Revenues from Operations
Revenue for the three months ended June 30, 2016 was $381,529 as compared to $636,388 for the same period in 2015, a decrease of $254,829 or 40.0%. The decrease in revenue is attributable to overall lower sales demand during the current period, due to declining coal production in the U.S. as a result of a number of factors, discussed above.
Cost of Goods Sold
During the quarter ended June 30, 2016, our cost of goods sold was $306,289 as compared to cost of goods sold of $503,301 for the quarter ended June 30, 2015, a decrease of $197,012 or 39.1%. The lower cost of goods sold resulted from lower sales during the current period. As a percentage of sales, cost of goods sold increased from 79.1% in 2015 to 80.3% during the current period, the 1.2% increase is the direct result of higher sales of a product mix with relatively higher unit cost during the current quarter.
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Gross Profit
Gross profit for the period ended June 30, 2016 decreased as a percentage of revenue to 19.7% from 20.9% for the same period of the prior year. The decrease in gross profit resulted from sales of lower gross margin products during the current quarter.
Operating Expenses
Operating expenses for the three months ended June 30, 2016 were $134,538 as compared to $187,142 for the three months ended June 30, 2015, a decrease of $52,604 or 28.1%.
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 | ||||||||||||||||
| 6/30/2016 | 6/30/2015 | $ Change | %Change | |||||||||||||
| Operating Expense | ||||||||||||||||
| Commission Expense | $ | 21,879 | $ | 52,553 | $ | (30,674 | ) | (58.4 | ) | |||||||
| Professional fees | 5,000 | 14,201 | $ | (9,201 | ) | (64.8 | ) | |||||||||
| Depreciation expense | 2,449 | 4,032 | $ | (1,583 | ) | (39.3 | ) | |||||||||
| Other operating expense | 105,210 | 116,356 | $ | (11,146 | ) | (9.6 | ) | |||||||||
| Total | $ | 134,538 | $ | 187,142 | $ | (52,604 | ) | (28.1 | ) | |||||||
Commission expense for the three months ended June 30, 2016 was $21,879 compared to $52,553 for the same period in 2015, a decrease of $30,674 or 58.4%. The lower commission expense is a direct result of lower sales and the introduction of revised lower sales commission rates payable to our sales agent in 2015.
Professional fees decreased $9,201or 64.8% during the three months ended June 30, 2016, as compared to the same period in 2015. The decrease in expense can be attributed to lower legal expenses of $4,235 and lower advertising expense of $5,000.
Depreciation expense decreased $1,583 or 39.3% during the quarter ended June 30, 2016, as compared to the same period in 2015.
During the three months ended June 30, 2016, other operating expenses of $105,210 decreased by $11,146 or 9.6% from $116,356 for the same period in 2015. The lower other operating expenses resulted primarily from lower travel expenses of $8,802 and lower operating supplies of $4,318 during the current quarter.
Loss from operations
Loss from operations for the quarter ended June 30, 2016 was $59,298 compared to loss from operations of $54,055 during the same period in 2015. When compared to the loss for the same period in the prior year, the loss increase in the current period is the direct result of lower sales partially offset by lower operating expenses.
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Other income and (expense)
Other income and expense for the three months ended June 30, 2016, reflected a net expense of $25,271 as compared to net expense of $28,858 for the quarter ended June 30, 2015, a decrease of $3,587. Gain from scrap sales during the current quarter account for a profit gain of $6,102 as compared to a gain of $2,952 from scrap sales during the same period the prior year.
Net loss
For the quarter ended June 30, 2016, we incurred a net loss of $84,569 compared to a net loss of $82,913 for the quarter ended June 30, 2015. Lower product sales partially offset by lower operating expenses in the current period account for the increase net loss.
Net loss per common share
The net loss $84,569 for the quarter ended June 30, 2016, as well as the net loss of $82,913 for the quarter ended June 30, 2015, when divided by the number of common shares outstanding of 48,053,084 basic shares in both years resulted in a net loss per share, respectively, of less than $0.01 in both periods.
Nine Months Ended June 30, 2016 Compared to Nine Months Ended June 30, 2015
Revenues from Operations
Revenue for the nine months ended June 30, 2016 was $1,728,707 as compared to $2,229,033 for the same period in 2015, a decrease of $500,326 or 22.4%. The decrease in revenue is attributable to overall lower sales in the current period due to the declining coal production in the U.S. as a result of a number of factors, discussed above.
Cost of Goods Sold
During the nine months ended June 30, 2016, the Company’s cost of goods sold was $1,244,746 as compared to cost of goods sold of $1,810,712 for the nine months ended June 30, 2015, a decrease of $565,966 or 31.3 %. The lower cost of goods sold resulted from lower sales during the current period. As a percentage of sales, cost of goods sold decreased from 81.2% in 2015 to72.0% in 2016, the 9.2% decrease is the direct result of lower cost purchases from a new supplier, and higher sales of a product mix with relatively higher gross margins during the current nine-month period.
Gross Profit
Gross profit for the period ended June 30, 2016 increased as a percentage of revenue to 28.0% from 18.8% for the same period the prior year. The increase in gross profit resulted from lower cost of sales from lower cost purchases, sales of product mix with relatively higher gross margins during the current period, and a $55,000 loss from the sale of obsolete inventory sold as scrap during the prior nine-month period ended June 30, 2015.
Operating Expenses
Operating expenses for the nine months ended June 30, 2016 were $500,453 as compared to $646,503 for the nine months ended June 30, 2015, a decrease of $146,050 or 22.6%.
The table below details the components of operating expense, as well as the dollar and percentage changes for the nine-month periods.
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| Nine Months Ended | ||||||||||||||||
| 6/30/2016 | 6/30/2015 | $ Change | %Change | |||||||||||||
| Operating Expense | ||||||||||||||||
| Commission expense | $ | 85,251 | $ | 158,486 | $ | (73,235 | ) | (46.2 | ) | |||||||
| Professional fees | 46,421 | 72,511 | $ | (26,090 | ) | (36.0 | ) | |||||||||
| Bad debt expense | 1,926 | – | 1,926 | 100.0 | ||||||||||||
| Depreciation expense | 7,347 | 9,238 | $ | (1,891 | ) | (20.5 | ) | |||||||||
| Other operating expense | 359,508 | 406,268 | $ | (46,760 | ) | (11.5 | ) | |||||||||
| Total | $ | 500,453 | $ | 646,503 | $ | (146,050 | ) | (22.6 | ) | |||||||
Commission expense for the nine months ended June 30, 2016 was $85,251 compared to $158,486 for the same period in 2015, a decrease of $73,235 or 46.2%. The lower commission expense is a direct result of lower sales, the introduction of revised lower sales commission rates payable to our sales agents in 2015, and a favorable adjustment to the prior year accrued commission resulting from the resignation of a sales agent.
Professional fees decreased $26,090 or 36.0% during the nine months ended June 30, 2016, as compared to the same period in 2015. The lower professional fees resulted from lower legal fees of $22,584 and investor relations expense of $9,150, partially offset by higher advertising expense of $5,644.
Depreciation expense decreased $1,891 or 20.5% during the nine months ended June 30, 2016, as compared to the same period in 2015. A fully depreciated delivery truck during the current period accounted for the decrease.
During the nine months ended June 30, 2016, other operating expenses of $359,508 decreased by $46,760 or 11.5% from the $406,268 for the same period in 2015. The lower other operating expenses resulted from lower travel expense of $45,222. The lower travel expense is associated with the prior year overseas travel by an officer and agent to meet with suppliers.
Loss from operations
Loss from operations for the nine months ended June 30, 2016 was $16,492 compared to loss from operations of $228,182 during the same period in 2015. The loss decrease is the result of current period lower cost of sales from lower cost purchases, sales of a product mix with relatively higher gross margins and, lower operating expenses. The loss decrease also results from a $55,000 loss incurred in the prior period from the sale of obsolete inventory sold as scrap.
Other income and (expense)
The other income and expense category for the nine months ended June 30, 2016, reflected a net expense of $88,548 as compared to a net expense of $82,136 for the nine months ended June 30, 3015, an increase of $6,412. The other expense increase result from miscellaneous income from the sale of scrap of $15,505 recorded in the nine-month period ended June 30, 2015.
Net Loss
For the nine months ended June 30, 2016, the Company had a net loss of $105,040 compared to a net loss of $310,318 for the nine months ended June 30, 2015. The reduced loss is the result of a decrease in loss from operations in the current period of $211,690 due to lower cost of sales from lower cost purchase, sales of a product mix with relatively higher gross margins and lower operating expenses.
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Net loss per common share
The net loss of $105,040 for the nine months ended June 30, 2016, as well as the net loss of $310,308 for the nine months ended June 30, 2015, when divided by the number of common shares outstanding of 48,053,084 basic and diluted shares in both years resulted in a net loss per share of less than $0.01 in the current nine-month period and a negligible loss per share of $0.01 for the nine months ended June 30, 2015.
LIQUIDITY AND CAPITAL RESOURCES
The following table presents a summary of our net cash provided (used) by operating, investing and financing activities:
| Nine Months Ended | ||||||||
| Liquidity and capital resources | 6/30/2016 | 6/30/2015 | ||||||
| Net cash used in operating activities | $ | (134,948 | ) | $ | (224,478 | ) | ||
| Net cash used in investing activities | – | (2,843 | ) | |||||
| Net cash provided by financing activities | 74,240 | 199,349 | ||||||
| Net decrease in cash equivalents | $ | (60,708 | ) | $ | (27,972 | ) | ||
At June 30, 2016, we had cash and cash equivalents of $856 as compared to $61,564 at September 30, 2015, a decrease of $60,708 or 98.6%. The decrease in cash is the direct result of the net cash used for operating activities of $134,948. The decrease in cash was partially offset by stockholder/officer net advances of $104,800 during the nine months ended June 30, 2016.
Cash Flows Used in Operating Activities
Net cash used in operating activities for the nine months ended June 30, 2016, was $134,948 compared to cash used in operations of $224,478 in 2015, a decrease of $89,530 or 39.9%.
During the nine months ended June 30, 2016, we had a net loss of $105,040 as compared to a net loss of $310,318 for the same period during the prior year.
In the current nine-month period the company had non-cash expenses for depreciation of $7,347 and bad debt expense of $1,926.
A decrease in accounts receivable of $170,834, other current assets of $1,538 and, an increase in accrued liabilities of $61,399, and of stockholder/officers advances for operations of $18,000, were more than offset by an increase in inventory of $15,432, an increase in commission advances of $516, and a decrease in accounts payable of $275,004.
Cash Flows Used in Investing Activities
There was no cash flow from investing activities for the period ended June 30, 2016. During the comparable nine- month period in the prior year, we capitalized $4,149 incurred in refurbishing a new truck used for product delivery and, a $1,306 payment was received as a partial payment on the note receivable held by us arising from the sale of a previously owned oil lease.
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Cash Flows Provided by Financing Activities
During the nine months ended June 30, 2016, cash provided by financing activities was $74,240 compared to cash provided by financing activities of $199,349 during the same period in 2015. During the current nine-month period, the Company made payment on its term loan of $29,487, on its line of credit of $1,073 and received stockholder net advances of $104,800. For the nine months ended June 30, 2015, the Company received stockholder net advances of $28,300 and as a result of cash flows shortfalls, we had increased reliance on advances from Mr. Shrewsbury to fund operations. Also, we financed our operation during the nine-months period ended June 30, 2015, by drawing-down $171,049 under our bank credit line.
In November 2012, we obtained a $250,000 line of credit from a bank. On August 26, 2014, the bank increased our existing bank line of credit from $250,000 to $750,000 and extended the term of the line of credit. The line of credit was secured by a priority security interest in our inventory and accounts receivable and matured on November 7, 2015. Interest on the line of credit was payable monthly and was calculated on the basis of a variable index. On December 3, 2015, we entered into a new loan agreement with the bank under which we obtained a term loan in the amount of $711,376. We utilized proceeds of the new loan to repay our line of credit. The loan is for a term of five years and matures on December 3, 2020. As of June 30, 2016, the loan balance is $681,889. The current rate of interest under the loan is 3.50% per annum. Principal, interest and collection costs under the loan are guaranteed by Mr. Shrewsbury.
On February 25, 2014, we and Mr. Shrewsbury entered into an agreement to consolidate an aggregate of $2,000,000 of amounts due to Mr. Shrewsbury, including $1.062 million due under a Revolving Promissory Demand Note issued to Mr. Shrewsbury on or about April 30, 2012, $289,997 due under a 10% Promissory Note issued to Mr. Shrewsbury on or about February 27, 2009, accrued but unpaid interest of $262,157 as of January 31, 2014, under such notes and advances by Mr. Shrewsbury in the amount of $385,846 as of January 31, 2014, and issued in replacement a Secured Consolidated Note (“Consolidated Note”) for such amount. The Consolidated Note bears interest at 5% per annum or prime rate if higher than 5% per annum, principal and interest are repayable ten years from February 25, 2014. The Consolidated Note is subject to customary events of default. Payment of the Consolidated Note is to be secured or otherwise payable by us out of the death benefit proceeds of key man insurance of $2 million that has been purchased by us on the life of Mr. Shrewsbury.
During the nine months ended June 30, 2016, we received $104,800 cash advance from Mr. Shrewsbury, bringing the total outstanding advance balance to $229,437. Cash advances from Mr. Shrewsbury are repayable upon demand and do not bear interest.
Financial Condition and Going Concern Uncertainties
Except for each of the six consecutive quarters ended June 30, 2014 and the first three month-period of the current year, 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 loan in connection with the financing of its business operations. 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 loan, and the success of our future operations.
Our independent registered public accounting firm’s report on the consolidated financial statements included in our Annual Report on Form 10-K for the year ended September 30, 2015, 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, 2016, we had cash and cash equivalents of $856 as compared to $61,564 as of September 30, 2015. The decrease in cash as of June 30, 2016, resulted from a $275,000 decrease in accounts payable as several invoices became due during the current period. The decrease in payable was partially offset by a decrease in receivables and an increase in accrued liabilities. During the current nine-month period, we had a net increase in advances from Mr. Shrewsbury of $104,800.
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Our accounts receivable was $412,283 as of June 30, 2016, as compared to $585,043 as of September 30, 2015, a decrease of $172,760 or 29.5%. The lower June 30, 2016 receivable balance is the direct result of lower sales due to lower sales demand.
Inventory was $2,238,469 as of June 30, 2016 as compared to $2,223,037 as of September 30, 2015, an increase of $15,432 or 0.7%. Due to lower sales demand, we are maintaining inventory at September 30, 2015 levels.
During the nine months ended June 30, 2016, our accumulated deficit increased from $14,752,711 to $14,857,751, an increase of $105,040 or 0.7% due to the reported net loss during the nine months ended June 30, 2016.
During the nine months ended June 30, 2016, the Company’s net loss was $105,040 compared to a net loss of $310,318 for the comparable period in 2015. The decrease in net loss can be directly attributed to higher sales of a product mix with relatively higher gross margins, lower operating expenses, and a $55,000 loss from the sale of obsolete inventory sold as scrap during the nine-month period ended June 30, 2015.
Currently, we are spending approximately $60,000 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 loan provided by the bank to be sufficient to fund the Company operations during the next 12 months.
We continue to rely substantially upon financings provided by Mr. Shrewsbury and a bank loan to fund our operations. The terms of such financings are discussed below.
BANK LOAN
Under the terms of a business loan agreement, originally entered on November 7, 2012, and as amended through August 26, 2014, we obtained a secured revolving line of credit in the amount of $750,000 from Town Square Bank. Interest on the loan was payable monthly in arrears. Interest under the loan was variable and was based upon Wall Street Journal Prime Rate.
On December 3, 2015, we entered into a new loan agreement with Town Square Bank pursuant to which we obtained a term loan in the amount of $711,376. We utilized proceeds of the new loan to repay our former line of credit. The loan is for a term of five years and matures on December 3, 2020. As of June 30, 2016, the loan balance was $681.889.
During the term of the loan, we agreed to make equal monthly repayments of principal and interest of $6,967 commencing January 3, 2016, and to make a final payment on December 3, 2020, of the outstanding balance of the interest and principal then due, estimated to be approximately $391,896. Early repayment of amounts due under the loan will not affect the monthly repayment amount, unless otherwise agreed to by the bank.
An event of default under the loan will occur upon the occurrence of any of the following events:
| · | we fail to make any payment when due under the note; |
| · | we fail to comply with any term, obligation, covenant or condition in the loan documents or any other agreement with the bank; |
| · | we default under any loan, extension of credit, security agreement, purchase or sales agreement or other agreement with any creditor that materially affects our property or our ability to repay the note or perform our obligations under the note or related documents; |
| · | a warranty, representation or statement made to the bank under the loan documents is or becomes materially false or misleading; |
| · | the dissolution or termination of our existence, our insolvency, the appointment of a receiver for any part of our property, any assignment for the benefit of creditors, any type of creditor workout, or the commencement of any proceeding under any bankruptcy or insolvency laws by or against us; |
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| · | the commencement of foreclosure or forfeiture proceedings by any creditor or any governmental agency against any collateral securing the loan; |
| · | any of the preceding events occurs with respect to any loan guarantor; |
| · | a 25% or more change in the ownership of our common stock; |
| · | a material adverse change in our financial condition, or the bank believes the prospect of payment or performance of the loan is impaired or |
| · | the bank in good faith believes itself insecure. |
The loan agreements contain certain affirmative covenants, including an obligation to: notify the bank of a material adverse change in our financial condition and of any threatened litigation or claim or other proceeding which could materially affect our financial condition; maintain certain liability insurance in amounts acceptable to the bank; maintain qualified executive and management personnel; comply with applicable environmental laws and perform environmental studies required by the bank; and certify annually to the bank compliance with the representations and warranties in the bank loan documents. The loan agreements contain certain other customary covenants, terms and conditions.
In addition, the loan agreements contain certain negative covenants, including that we will not, without the bank’s consent:
| · | incur any indebtedness other than to the bank or for trade debt incurred in the ordinary course; |
| · | sell, transfer, mortgage, assign, pledge, lease, grant a security interest in, or encumber any of its assets, except for permitted liens; |
| · | sell our accounts receivable, except to the bank; |
| · | engage in business activities substantially different from our current activities; |
| · | cease operations, liquidate, merge, transfer, acquire or consolidate with another entity, change our name, dissolve, or sell the inventory or accounts receivable secured under the loan; |
| · | pay any dividend other than in stock; |
| · | lend money, invest or advance money or assets to another person or entity; |
| · | purchase, create or acquire an interest in any other entity; |
| · | incur any obligation as a surety or guarantor other than in the ordinary course; or |
| · | enter into any agreement containing any provision which would be violated or breached by the performance of our obligations under the loan agreements. |
Interest under the loan is variable and is based upon the Wall Street Journal Prime rate, currently 3.50% per annum. In the event of a default, interest under the loan may be increased by 2%. The loan is secured by a priority security interest in the Company’s inventory and accounts receivable and has been guaranteed by our CEO.
ADVANCES AND LOANS FROM MR. SHREWSBURY
In connection with the expansion of our business, Mr. Shrewsbury, the Company’s Chairman and CEO, provided financing to us in the form of demand notes and advances. On February 25, 2014, we 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, we 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. We 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.
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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 us 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:
| · | we fail to pay when due any principal or interest under the Consolidated Note; |
| · | we violate any covenant or agreement contained in the Consolidated Note, the Exchange Agreement or related transaction documents; |
| · | an assignment for the benefit of creditors by us; |
| · | the application for the appointment of a receiver or liquidator for us or our property; |
| · | the filing of a petition in bankruptcy by or against us; |
| · | the issuance of an attachment or the entry of a judgment against us in excess of $250,000; |
| · | a default by us 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 our assets or a transfer of more than 51% of our equity interests to a person not currently a holder of our equity interests; |
| · | our termination of existence or dissolution; |
| · | the death of Mr. Shrewsbury; or |
| · | the failure to pay when due any premium under the key man policy required to be purchased on the life of Mr. Shrewsbury under the Exchange Agreement. |
In addition, in consideration of Mr. Shrewsbury agreeing to consolidate and restructure the indebtedness, the Company granted to Mr. Shrewsbury options to purchase an aggregate of 500,000 shares of our common stock pursuant to the terms of a Non-Qualified Stock Option Agreement, issued February 25, 2014. The options are exercisable commencing April 1, 2014, and for a period of three years thereafter. The options are exercisable at a price of $0.0924 per share subject to certain anti-dilution adjustments in the event of stock dividends, subdivisions, capital reorganizations, a consolidation or merger, or sale of all or substantially all of our assets.
As of June 30, 2016, Mr. Shrewsbury had advanced an aggregate of $229,437 to the Company. The advances do not bear interest and are repayable upon demand. As of June 30, 2016, the Company also has a payable of $30,000 to Mr. Shrewsbury for warehouse storage rental.
The Consolidated Note and advances are subordinate to the Company’s bank indebtedness.
Off-Balance Sheet Arrangements
We do not maintain any off-balance sheet arrangements, transactions, obligations or other relationships with unconsolidated entities that would be expected to have a material current or future effect upon our financial condition, or results of operations as of June 30, 2016 and September 30, 2015.
| ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
We are a “smaller reporting company” as defined by Rule 12b-2 under the Exchange Act, and as such, we are not required to provide the information required under this Item.
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| ITEM 4. | CONTROLS AND PROCEDURES |
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this Report, the Chief Executive Officer and Chief Financial Officer of the Company (the “Certifying Officers”) conducted evaluations of the Company’s disclosure controls and procedures. As defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), the term “disclosure controls and procedures” means controls and other procedures of an issuer that are designed to ensure the information required to be disclosed by the issuer in the reports that it files or submits under Section 13(a) or 15(d) of the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s (“SEC”) rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under Section 13(a) or 15(d) of the Exchange Act is accumulated and communicated to the issuer’s management, including the Certifying Officers, to allow timely decisions regarding required disclosure.
Based on this evaluation, the Certifying Officers determined that, as of the end of the period covered by this Report, the Company’s disclosure controls and procedures were effective to ensure that the information required to be disclosed by the Company in the reports that it files or submits under Section 13(a) or 15(d) of the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms and to ensure that information required to be disclosed by the Company in the Reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including the Company’s principal executive and principal financial officers, or persons performing similar functions, as appropriate, to allow timely decisions regarding disclosure.
Changes in Internal Controls
There were no changes in the Company’s internal controls over financial reporting during the period covered by this Report that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.
PART II - OTHER INFORMATION
| ITEM 1. | LEGAL PROCEEDINGS |
The Company is not a party to any material pending legal proceeding.
| ITEM 1A. | RISK FACTORS |
An investment in our common stock involves a high degree of risk. You should carefully consider the risks described below (which supplement and reflect changes to certain of the risk factors we disclosed in our 2015 Annual Report on Form 10-K) and other information contained in this Report in deciding whether to invest in our common stock. 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 2015 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 loan when it becomes due.
As of June 30, 2016, we have incurred debt due to Mr. Shrewsbury in the form of $2 million Consolidated Note and non-interest bearing advances in the amount of $229,437. We have outstanding accounts payable of $671,572 and other accrued liabilities of $776,023, including $460,410 due to our CFO, Jose Fuentes, for services. Also, the Company owes $681,889 under a bank term loan which is secured by the Company’s inventory and accounts receivable and which becomes due on December 3, 2020. 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.
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We have a history of net losses and cannot assure, due to current unfavorable trend in federal regulations on the coal mining industry, we will be profitable in the future. Any failure on the part of the Company, due to industry conditions, which will prevent us from achieving profitability may cause us to reduce or eventually cease operations.
We had a net loss of $105,040 for the nine months ended June 30, 2016 and a net loss of $310,318 for the same period in 2015. At June 30, 2016 and September 30, 2015, we had accumulated deficits of $14,857,751 and $14,752,711, 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 revenue is 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 loan 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 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 were 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, January 1, 2015 and July 1, 2015, January 1, 2016, 50,000 warrants were issuable to the sales agent. The warrants are exercisable at a price of $0.10 per share subject to certain anti-dilution adjustments in the event of stock dividends, subdivisions, capital reorganizations, a consolidation or merger, or the sale of all or substantially all of our assets, become exercisable upon the date of issuance and expire two years after the date of such issuance. As of June 30, 2016, 200,000 warrants have expired and 200,000 warrants remain issuable. The warrants are issuable in reliance upon the exemption from the registration requirements under the Securities Act set forth in Section 4(a)(2) of the Securities Act and/or Rule 506 of Regulation D promulgated thereunder.
| ITEM 3. | DEFAULTS UPON SENIOR SECURITIES |
None.
| ITEM 4. | MINE SAFETY DISCLOSURES |
None.
| ITEM 5. | OTHER INFORMATION |
None.
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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: | July 29, 2016 | Dated: | July 29, 2016 |
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