FORWARD-LOOKING STATEMENTS

 

This report contains “forward looking statements,” that is statements regarding future, not past, events. Forward-looking statements often address our expected future business and financial performance and financial condition, and often contain words such as "expect," "anticipate," "intend," "plan," "believe," "seek," "see," "will," "would," "estimate," "forecast" or "target." All statements that are not statements of historical fact are “forward looking statements.”

 

For us, particular uncertainties that could cause our actual results to be materially different than those expressed in our forward-looking statements include:

 

●

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

●

factors that are described in the Risk Factor section of our Annual Report on Form 10-K for the year ended September 30, 2017, and this report.

 

These and other uncertainties may cause our actual results to be materially different from those expressed in 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 do not ordinarily make projections of our future operating results and do not undertake 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.

 

Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, 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 statutory provisions may not be applicable to us at certain times.

 

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

 

 

PART 1-FINANCIAL INFORMATION
Item 1-Financial Statements
TX HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
December 31, 2017 and September 30, 2017

 

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

 

 

TX  HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

For the Three Months Ended December 31, 2017 and 2016

 

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

 

 

TX HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT

For the Three Months Ended December 31, 2017 (UNAUDITED)

 

 

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

 

 

TX HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Three Months Ended December 31, 2017 and 2016

 

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

 

 

TX HOLDINGS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

 

 

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 consolidated financial statements and notes thereto and schedules appearing elsewhere in this report. When we refer to the “Company” “TX Holdings,” “we,” “our” or “us,” we mean TX Holdings, Inc., and its subsidiary.

 

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

 

Except for historical information, the statements and other information contained in this MD&A 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, 2017, contained an explanatory paragraph in which 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 the Risk Factors section in our Form 10-K for the year ended September 30, 2017, and in this report.

 

Business and Operational 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 United States’ coal mining companies for use in their production and transportation processes. Our coal mining customers are primarily located in Ohio, Pennsylvania, Kentucky and West Virginia. Our principal executive offices and warehousing facility is located in Ashland, Kentucky.

 

Recent Developments in U.S. Coal Industry

 

Due to declining U.S. coal production and bankruptcies and restructurings among certain U.S. coal companies, we experienced a reduction in demand for our mining and rail products during fiscal 2015 and 2016 and the first quarter of fiscal 2017. The demand for, and production of, coal has been adversely affected by several factors, including increased environmental regulation in the U.S., declining coal consumption in the electric power sector, increased competition from natural gas, and a strong U.S. dollar. Commencing in the second fiscal quarter of 2017, demand for our products increased due to U.S. coal production, as discussed below, following a period of production decline.

 

 

The U.S. Energy Information Administration (EIA) has reported in its Short-Term Energy Outlook (STEO) released January, 2018 that U.S. coal production increased by 45 million short tons (MMst) (6%) in 2017 to 773 MMst as demand for U.S. coal exports increased. In 2018 U.S. coal production is expected to decrease by 14 MMst (2%). In 2019, coal production is expected to decline by 18MMst (2%).

 

The EIA reported in its STEO for January 2018 that coal consumption in the electric power sector is estimated to have declined by 12 MMst (2%) in 2017 as several coal power plants retired. Consumption in the electric power sector is forecast to decrease by 10 MMst (1%) in 2018 and by 27 MMst (4%) in 2019. The decrease in power sector consumption reflects lower natural gas prices and coal power plant retirements.

 

Coal exports through the first 10 months of 2017 were 70% higher than in the same period in 2016, and the 78 MMst exported through October is 18 MMst (29%) more than coal exports for all of 2016. EIA estimates total coal exports for 2017 were 95 MMst, with steam coal exports at 41 MMst. EIA expects that metallurgical coal exports will be more than 50 MMst in both 2018 and 2019, but steam exports will decline by 34% in 2018 and by 15% in 2019. Total coal exports are expected to be 80 MMst in 2018 and 75 MMst in 2019.

 

Total U.S. imports are estimated to have been 8 MMst in 2017 and are forecast to be 9 MMst in both 2018 and 2019.

 

Low natural gas prices, warmer-than-normal temperatures during the 2015-16 winter that reduced electricity demand, the retirements of some coal-fired generators, and lower international coal demand had contributed to declining U.S. coal production. As a result, several major U.S. coal producers sought protection under bankruptcy laws or engaged in restructurings of their businesses and operations, and certain plants closed or were or are being sold or operations curtailed.

 

Continued or renewed distress in the U.S. coal mining industry will materially affect the demand for our products.

 

The EIA estimates the delivered coal price averaged $2.10 per million British thermal units (MMBtu) in 2017, which was 1 cent/MMBtu lower than the 2016 price. Coal prices are forecast to increase to $2.21/MMBtu in 2018 and to remain at that level in 2019.

 

Our Business

 

We purchase mining supplies such as drill bits, augurs and related products from domestic as well as overseas manufacturers and rail material such as tee rail, switches, ties and other rail products from several suppliers of such products and distribute and sell such products to U.S. coal mining companies and other suppliers. Our products are either shipped to our warehouse in Ashland, Kentucky, for distribution to our customers or shipped directly to our customers, including products 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 an independent sales agent who is compensated on a commission basis.

 

We were incorporated in the State of Georgia in 2000.

 

Results of Operations

 

Revenues for the first fiscal quarter of 2018 were $999,476 as compared to $496,916 for the same period in 2017, an increase of approximately 101.1%.

 

Gross profit during the first fiscal quarter of 2018 was $140,022 compared to $100,104 during the same period in 2017. Gross profit in the current quarter increased by 39.9% when compared to the same period in fiscal 2017.

As a percentage of revenue, gross profit decreased to 14% during the first quarter of fiscal 2018 from 20.1% during the first quarter of fiscal 2017.

 

 

During the first fiscal quarter of 2018, we had a net loss of $31,521 as compared to a net loss of $60,657 for the same period in fiscal 2017.

 

Liquidity and Capital Resources

 

At December 31, 2017, cash and cash equivalents were $9,547 compared to $40,345 at September 30, 2017.

 

Net cash used in operating activities was $26,510 during the three months ended December 31, 2017. Net cash provided in operating activities during the same three-month period in 2016 was $63,931.

 

There was no cash flow from investing activities for either of the three-month period ended December 31, 2017, or 2016.

 

During the three months ended December 31, 2017, net cash used by financing activities was $4,288 due to a repayment of $14,788 on our bank term loan and net cash proceeds from our CEO, William Shrewsbury in the amount of $10,500.

 

Mr. William Shrewsbury, our Chairman and CEO, is providing financing to us in the form of a Consolidated Secured Promissory Note of $2,000,000 (“Consolidated Note”) and periodic advances. The principal and interest under the Consolidated Note is due February 24, 2024.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 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 December 31, 2017, Mr. Shrewsbury had also provided non-interest-bearing advances to us of $44,487.

 

In November 2012, we obtained a bank line of credit of $250,000 which was subsequently increased to $750,000. The line of credit was secured by a lien on our inventory and accounts 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 December 31, 2017, the loan balance was $591,217.

 

RESULTS OF OPERATIONS

 

Results of Operations – For the three months ended December 31, 2017, versus the three months ended December 31, 2016

 

Revenues from Operations

 

Revenues for the first quarter of fiscal 2018, were $999,476 as compared to $496,916 for the same period in fiscal 2017, an increase of $502,560 or 101.1%. The increase in revenues is attributable to higher sales during the current period due to increased or renewed operations at previously downsized or shut-down coal mines as the coal industry experiences increased demand, a more favorable regulatory environment, and due to relatively higher natural gas prices.

 

Cost of Goods Sold

 

During the quarter ended December 31, 2017, our cost of goods sold was $859,454 as compared to cost of goods sold of $396,812 for the quarter ended December 31, 2016, an increase of $462,642 or 116.6%. The higher cost of goods sold resulted from an increase in sales during the current period. As a percentage of sales, cost of goods sold increased from 79.9% in 2016 to 86.0% during the current period. The approximately 6.1% increase is the direct result of higher sales of a product mix with relatively higher unit cost during the current quarter.

 

 

Gross Profit

 

Gross profit for the period ended December 31, 2017, decreased as a percentage of revenue to 14.00% from 20.1% for the same period of the prior fiscal year. The decrease in gross profit resulted from an unfavorable mix of higher cost rail related products with lower margins sold during the current quarter.

 

 

Operating Expenses

 

Operating expenses for the three months ended December 31, 2017 were $146,112 as compared to $128,881 for the three months ended December 31, 2016, an increase of $17,231 or 13.4%. As a percentage of revenues, operating expenses decreased from 25.9% in 2017 to 14.6% in 2018. The decrease is attributable to the impact of certain fixed operating expenses while generating higher revenue during the first fiscal quarter of 2018.

 

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

 

 

 

		Three Months Ended
		12/31/2017				12/31/2016				$ Change				%Change
Operating Expense
Commission expense		$	41,602			$	23,517			$	18,085				76.9
Professional fees			11,500				4,067			$	7,433				182.8
Bad debt expense			0				905				(905	)			(100.0	)
Depreciation expense			1,792				2,449			$	(657	)			(26.8	)
Other operating expense			91,218				97,943			$	(6,725	)			(6.9	)
Total		$	146,112			$	128,881			$	17,231				13.4

 

 

Commission expense for the three months ended December 31, 2017, was $41,602 compared to $23,517 for the same period in 2016, an increase of $18,805 or 76.9%. The higher commission expense is a direct result of the 101.1% increase in sales during the current period.

 

Professional fees increased $7,433 or 182.8% during the three months ended December 31, 2017 as compared to the same period in 2016. The increase in expense can be attributed to higher legal expenses related to SEC compliance and other related matters.

 

Depreciation expense as of December 31, 2017, was $1,792 and $657 lower than the same period the prior year. The lower depreciation is the result of shipping related equipment becoming fully depreciated.

 

There was zero bad debt expense for the three-month period ended December 31, 2017 as compared to $905 expense for the same period in 2016.

  

During the three months ended December 31, 2017, other operating expenses of $91,218 decreased by $6,725 or 6.9% from $97,943 for the same period in 2016. The lower other operating expenses resulted primarily from lower payroll related expenses of $14,281. The lower expenses were partially offset by higher truck repair expense of $3,369 and higher operating supplies of $4,489.

 

 

Income/(loss) from operations

 

Loss from operations for the quarter ended December 31, 2017 was $6,090 compared to loss from operations of $28,777 during the same period in 2016.When compared to the loss for the same period in the prior year, the loss reduction in the current period is the direct result of increased sales of rail products partially offset by higher operating expenses.

 

Other income and (expense)

 

Other income and expense for the three months ended December 31, 2017, reflected a net expense of $25,431 as compared to net expense of $31,880 for the quarter ended December 31, 2016. A $6,476 recorded gain from the sale of scrap material related to the shut-down of the Bag Rack business account for the lower expense in the current period.

 

Net income (loss)

 

For the quarter ended December 31, 2017, we had a net loss of $31,521 compared to a net loss of $60,657 for the quarter ended December 31, 2016. The loss reduction of $29,136 in the current period resulted from higher sales due to higher increased demand partially offset by higher operating expenses.

 

Net income (loss) per common share

 

The net loss of $31,521 for the quarter ended December 31, 2017, as well as the net loss of $60,657 for the quarter ended December 31, 2016, when divided by the number of common shares outstanding of 48,053,084 basic shares in both years resulted in a net income and loss per share of less than $0.01 in both periods.

 

 

LIQUIDITY AND CAPITAL RESOURCES

 

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

 

 

		Three Months Ended
Liquidity and capital resources		12/31/2017				12/31/2016
Net cash provided /(used) in operating activities		$	(26,510	)		$	63,931
Net cash used in investing activities		-				-
Net cash used in financing activities			(4,288	)			(64,738	)
Net decrease in cash equivalents		$	(30,798	)		$	(807	)

 

 

At December 31, 2017, we had cash and cash equivalents of $9,547 as compared to $40,345 at September 30, 2017, a decrease of $30,798 or 76.3%.

 

Cash Flows Provided/(Used) in Operating Activities

 

Net cash used in operating activities for the three months ended December 31, 2017, was $26,510 compared to cash provided in operations of $63,931 in 2016, a decrease of $90,441.

 

During the three months ended December 31, 2017, we had a net loss of $31,521 as compared to a net loss of $60,567 for the same period during the prior year.

 

 

In the current three-month period, the Company had non-cash expenses for depreciation of $1,792 and zero bad debt expense.

 

An increase in accounts payable of $253,424 was partially offset by increases in accounts receivable of $170,956 and inventory of $40,577. Other current assets, due to an advance to a vendor, increased by $39,034 while commission advances decreased by $7,103.

 

Cash Flows Provided/(Used) in Investing Activities

 

There was no cash flow used in investing activities for the period ended December 31, 2017 or 2016.

 

Cash Flows Provided/(Used) in Financing Activities

 

During the three months ended December 31, 2017, cash used in financing activities was $4,288 compared to cash used by financing activities of $64,738 during the same period in 2016. During the current three-month period, the Company made payment on its term loan of $14,788, and received net advances from our CEO of $10,500.

 

In November 2012, we obtained a $250,000 line of credit from a bank and, on August 26, 2014, increased the line of credit 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, we entered into a new fixed term loan agreement with the bank of $711,376 the proceeds of which were used to repay our line of credit. The loan is for a term of five years and matures on December 3, 2020. As of December 31, 2017, the loan balance was $591,217. The current rate of interest under the loan is 4.25% per annum. Principal, interest and collection costs under the loan are guaranteed by Mr. Shrewsbury.

 

On February 25, 2014, we entered into an agreement with Mr. Shrewsbury 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 Consolidated Secured Promissory Note (“Consolidated Note”). The Consolidated Note bears interest at 5% per annum or prime rate if higher than 5% per annum and 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 three months ended December 31, 2017, we received advances of $78,000 and repaid $67,500 cash advances from Mr. Shrewsbury, bringing the total outstanding advance balance to $44,487. Cash advances from Mr. Shrewsbury are repayable upon demand and do not bear interest.

 

As of December 31, 2017, the Company had recorded an unpaid accrued liability in the amount of $416,579 due to Jose Fuentes, CFO, as payment for past services.

 

Financial Condition and Going Concern Uncertainties

 

Since inception, except for each of the six consecutive quarters ended June 30, 2014, the first quarter of fiscal 2016 and during the third fiscal quarter in 2017, we have not generated sufficient cash to fund our operations and have 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 guaranteed by Mr. Shrewsbury to finance its business operations. In view of these matters, realization of certain assets in the accompanying balance sheet is dependent upon continued operations which are 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, 2017, contained an explanatory paragraph in which our auditors 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 December 31, 2017, we had cash and cash equivalents of $9,547 as compared to $40,345 as of September 30, 2017.

 

Our accounts receivable was $629,159 as of December 31, 2017, as compared to $458,203 as of September 30, 2017, an increase of $170,956 or 37.3%. The higher December 31, 2017 receivable balance is the direct result of a 101.1% increase in the current period sales as compared to 2016.

 

Inventory was $1,730,927 as of December 31, 2017, as compared to $1,690,350 as of September 30, 2017, an increase of $40,577 or 2.4%. The inventory increase can be directly attributed to an increase in sales demand for rail related products during the current fiscal quarter.

 

Accounts payable for the three months ended December 31, 2017, was $908,157 as compared to $654,773 as of September 30, 2016, an increase of $253,424 or 38.7%. The increase in accounts payable resulted primarily from current quarter inventory purchases to address the higher sales demand.

 

During the three months ended December 31, 2017, our accumulated deficit increased from $15,555,936 to $15,587,457, an increase of $31,521 due to the reported net loss during the three months ended December 31, 2017.

 

During the three months ended December 31, 2017, the Company’s net loss was $31,521 compared to a net loss of $60,657 for the comparable period in 2016. The net loss reduction can be directly attributed to higher sales of our rail and mining related products. Higher operating expenses during the current three month period of $17,231 partially offset the loss reduction variance generated by the higher sales.

 

Currently, in addition to product purchases for resale, we are spending approximately $40,000-$60,000 per month on operations. Management believes that the Company’s available cash, cash flows from operations, loans and advances provided by Mr. Shrewsbury, and the loan provided by the bank to be sufficient to fund the Company’s 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 obtained a new term loan from Town Square Bank of $711,376. We used 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 December 31, 2017, the loan balance was $591,217.

 

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, estimated to be approximately $391,896. Early repayment of 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;

●

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;

●

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 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 other customary covenants, terms and conditions.

 

In addition, the loan agreements contain 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 our 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 4.25% 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

 

Mr. Shrewsbury, our Chairman and CEO, has 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 under which an aggregate of $2,000,000 of our indebtedness (including amounts of accrued interest) to Mr. Shrewsbury was consolidated and restructured and we issued in exchange for the indebtedness a Consolidated Secured Promissory Note (the “Consolidated Note) in the principal amount of $2,000,000.

 

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 life 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. As of December 31, 2017, accrued interest on the note was $384,931.

 

 

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

 

●

we fail to pay when due any principal or interest;

●

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.

 

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 were exercisable commencing April 1, 2014, and for a period of three years thereafter. The options were exercisable at a price of $0.0924 per share subject to 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. The options expired on March 31, 2017.

 

As of December 31, 2017, Mr. Shrewsbury had advanced an aggregate of $44,487 to the Company. The advances do not bear interest and are repayable upon demand. As of December 31, 2017, the Company also has a payable of $66,000 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 December 31, 2017 and September 30, 2017.

 

 

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.

 

 

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 2016 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 us. If any of the following risks (or the risk factors we disclosed in our 2016 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 December 31, 2017, 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 $44,487. We have outstanding accounts payable of $908,197 and other accrued liabilities of $900,703, including $406,179 due to our CFO, Jose Fuentes, for services. Also, the Company owes $591,217 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. The Company also has a $66,000 payable, for warehouse lease rental, due to Mr. Shrewsbury.

 

 

We have a history of net losses and, due to the impact of increased federal regulation of the U.S. coal mining industry, a decrease in the number of coal powered electricity generation plants, a relatively weak U.S. dollar, and other factors affecting the coal mining industry in the U.S., we cannot assure that 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 $31,521 for the three months ended December 31, 2017 and a net loss of $60,657 for the same period in 2016. At December 31, 2017 and September 30, 2017, we had accumulated deficits of $15,587,457 and $15,555,936, 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, July 1, 2015 and, 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 December 31, 2017, 350,000 warrants have expired and 50,000 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.

 

 

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 Officer 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

 

**

 

 

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 William L. Shrewsbury Chief Executive Officer (Principal Executive Officer)   Dated: January 31, 2018

By:

/s/ Jose Fuentes Jose Fuentes Chief Financial Officer (Principal Financial and Accounting Officer)   Dated:  January 31, 2018

 

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