UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
| x | ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended September
30, 2015
OR
| ¨ | TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from __________
to __________
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 |
(I.R.S. Employer Identification No.) |
Organization) |
|
|
12080
Virginia Blvd., Ashland, KY 41102 |
|
|
(606) 928-1131 |
|
(Address of Principal Executive Offices and Zip Code) |
(Registrant’s Telephone Number, Including Area
Code) |
Securities registered pursuant
to Section 12(b) of the Securities Exchange Act: None
Securities registered pursuant
to Section 12(g) of the Securities Exchange Act: Common Stock, no par value per share
Indicate by check mark if the registrant is
a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x
Indicate by check mark if the registrant is
not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act. Yes ¨ No x
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 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 if disclosure of delinquent
filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s
knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment
to this Form 10-K. ¨
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 the
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
The
aggregate market value of the voting common equity held by non-affiliates based upon the average bid and asked prices for the
Common Stock on June 30, 2015, the last business day of the registrant’s most recently completed third fiscal quarter as
reported on the OTC Markets Group, Inc.’s OTCQB was approximately $1,385,281.
As of December 29, 2015, the number of shares
of the registrant’s common stock outstanding was 48,053,084.
DOCUMENTS INCORPORATED BY REFERENCE
None
CAUTIONARY NOTE REGARDING FORWARD-LOOKING
STATEMENTS
Our disclosure and analysis in this Annual Report
on Form 10-K as well as information related 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 and Exchange Act 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 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 liqidity 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,” “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,
and, Part II, Item 7 - 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. You should carefully consider the factors described in Part I, Item 1A - Risk Factors and Part
II, Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations of this report,
in evaluating our forward-looking statements.
You should not unduly rely on these forward-looking
statements, which speak only as of the date of this report. We undertake no obligation to publicly revise any forward-looking
statement to reflect circumstances or events after the date of this report, or to reflect the occurrence of unanticipated events.
You should, however, review the factors and risks we describe in the reports we file from time to time with the Securities and
Exchange Commission (“SEC”). Notwithstanding the above, Section 27A of the Securities Act and Section 21E of the Exchange
Act expressly state that the safe harbor for forwarding looking statements does not apply to companies that issue penny stocks.
Because we may from time to time be considered an issuer of penny stock, the safe harbor for forward looking statements under
such provisions may not be applicable to us at certain times.
We obtained certain statistical data, market
data and other industry data and forecasts used in this Form 10-K from publicly available information prepared by third parties.
While we believe 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.
FORM 10-K
FOR THE FISCAL YEAR ENDED SEPTEMBER 30,
2015
TABLE OF CONTENTS
Cautionary Note Regarding Forward-Looking Statements
PART I
ITEM 1. BUSINESS
Introduction
TX Holdings, Inc., a Georgia corporation (“TX
Holdings,” the “Company,” “we,” “our,” or “us”), is a supplier and distributor
of drill bits, related tools and other mining supplies and rail products directly and through other suppliers to United States’
coal mining companies and operators for use in their extraction and transportation processes.
Our products are supplied to us by certain manufacturers
and suppliers and warehoused and distributed from the Company’s principal business location in Ashland, Kentucky.
We were incorporated in the State of Georgia
on May 15, 2000.
Our web site address is www.txholdings.com.
Information contained on our web site is not part of this Annual Report on Form 10-K or our other filings with the Securities
and Exchange Commission (“SEC”).
Recent Financing Activities
Since November 2011, Mr. Shrewsbury, our CEO,
has provided financing to us in the form of notes, and advances that, in addition to a bank line of credit, we have relied upon
to fund and expand our business operations. On February 25, 2014, the Company and Mr. Shrewsbury entered into an agreement to
consolidate and restructure $2,000,000 of this indebtedness, including the principal due under a Revolving Demand Note (“Revolving
Note”) in the principal amount of $1,062,000 and accrued but unpaid interest due thereunder as of January 31, 2014 in the
amount of $168,905, the principal due under a 10% Promissory Note (“10% Note”) in the amount of $289,997 and accrued
but unpaid interest due thereunder as of January 31, 2014 in the amount of $93,252; and $385,846 of non-interest bearing advances
previously made by Mr. Shrewsbury and outstanding as of January 31, 2014. The Company issued in exchange and in replacement therefor
a Consolidated Secured Promissory Note (the “Consolidated Note”) in the principal amount of $2,000,000. Upon issuance
of the Consolidated Note, the Revolving Note and 10% Note were cancelled and Mr. Shrewsbury agreed to waive any prior defaults
under the terms of such notes and to release the Company from any claims related thereto. The Consolidated Note bears interest
at the rate of 5% per annum or prime rate if higher than 5% per annum is repayable in full ten years from the date of issuance
and is subject to certain events of default. Payment of the Consolidated Note has been secured by the Company by the death benefit
proceeds of a $2 million key man term life insurance policy purchased by the Company on the life of Mr. Shrewsbury and that has
been assigned to Mr. Shrewsbury. In addition, in consideration of Mr. Shrewsbury agreeing to consolidate and restructure the foregoing
indebtedness, the Company granted to Mr. Shrewsbury options to purchase an aggregate of 500,000 shares of the Company’s
common stock pursuant to the terms of a Non-Qualified Stock Option Agreement, issued February 25, 2014. The options are exercisable
for a period of three years commencing April 1, 2014. The options at 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, merger, or
sale of all or substantially all of the assets.
As of September 30, 2015, Mr. Shrewsbury had
advanced to the Company an additional $124,637 which is not interest bearing.
During fiscal 2015 and through December 3, 2015, we continued to
maintain a $750,000 line of credit with a bank. 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. As of September 30, 2015, we had borrowed $712,449 under the line of credit. The rate of interest
under the loan was 3.25% per annum. Principal, interest and collection costs under the loan were guaranteed by Mr. Shrewsbury.
On December 3, 2015, we obtained a new term loan from the bank in the amount of $711,376. We utilized the proceeds of the new
loan to repay the line of credit. The new loan is for a term of five year and matures on December 3, 2020. During the term of
the loan, we have agreed to make equal monthly repayments of principal and interest of $6, 967 commencing January 3, 2016 and
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. Interest under the new loan is variable and is based upon the Wall Street Journal Prime rate, currently 3.25% 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 our inventory and accounts receivable and is guaranteed by our CEO.
The Consolidated Note and advances due to Mr. Shrewsbury are subordinate
to the Company’s bank indebtedness.
Our Business
Background
Mining and Rail Supplies
We supply and distribute rail products including
rail, switches, ties and related products, and drill bits, augurs, related tools and mining supplies to U.S. coal mine operators
and distributors primarily located in Ohio, Pennsylvania, Kentucky and West Virginia.
The U.S. coal production has decreased in recent
years due in part to the retirement of U.S. coal-fired electricity generators, increased environmental regulation and related
compliance costs on the part of coal mining companies, the increase use of natural gas generators and the availability of relative
inexpensive natural gas, a modest demand growth for electricity, and reduced demand for coal abroad, including China. The U.S.
coal industry produced approximately 984 million short tons of coal in 2013 (as compared to 1.016 billion in 2012) from coal mining
operations. The average price of coal per short ton in 2013 was $37.24 (as compared to $39.95 in 2012). (See, U.S. Energy Information
Administration, Annual Coal Report 2013, http://www.eia.gov/coal/annual/pdf/acr.pdf.)
In the U.S., coal is produced from mines located
in approximately 25 states. The principal coal producing states are Wyoming, West Virginia, Kentucky, Illinois and Texas. Coal
is used to generate approximately 39% of the electricity in the U.S., but is also used for coke production and for certain industrial
applications, such as cement making.
As of 2013, there were approximately 1,061 active
coal producing mines in the U.S. ( as compared to1,207 in 2012), and approximately 700 coal producers, of which the top 4 coal
producers accounted for approximately 54.5% of the total U.S. coal production. (See U.S. Energy Information Administration,
Annual Coal Report 2013, http://www.eia.gov/coal/annual/pdf/acr.pdf.)
Recent Development
In November 2014, and with a view to diversifying
our business, we acquired The Bag Rack, LLC. The acquired company has developed a new product, “The Bag Rack,” a device
that enables bags with handles to be stored efficiently in a car preventing the bags from tipping over and causing spillage. We
are in the preliminary stages of developing the new product. We expect to market and sell the new product online, through broadcast
shopping networks, and other distribution outlets, and through certain national retailers and discount stores. During fiscal 2015,
we did not generate any revenue from the sale of the product and there can be no assurance we will be able to generate any revenue
from this new product.
Principal Products
Drilling Products
We distribute and sell drill steel mining
products for use in the coal mining industry, including:
| · | drill
steel, used for drilling holes for bolts supporting mine ceilings; |
| · | drill
bit products and accessories, used for hard and soft rock mining operations; |
| · | tungsten
carbide drill bits and augurs, and |
| · | related
accessories and tools. |
Rail Products
We distribute and sell rail products used
by the coal industry in its mine transportation operations, including:
| · | tee
rails, used for railroad tracks for the transportation of coal by coal mine operators; |
| · | steel
ties for securing rail; |
| · | related
accessories and tools. |
Cyclicality
Changes in economic conditions affecting the
global and domestic mining industry can occur abruptly and unpredictably, which may have significant effects on our sales. Cyclicality
is driven, primarily, by price volatility of coal, as well as product life cycles, competitive pressures and other economic factors
affecting the mining industry, such as company consolidations and mergers, bankruptcies, increased regulation of the coal mining
or electrical utility industry, and competition affecting demand for coal, and the broader economy, including changes in government
monetary or fiscal policies and from market expectations with respect to such policies. Falling prices for coal have in the past,
and may in the future, lead to reduced production levels of existing mines, a contraction in the number of existing mines and
the closure of less efficient mines, and are likely to lead to a decrease in demand for our mining supplies and rail products.
Conversely, rising coal prices typically lead to the expansion of existing mines, opening of new mines or re-opening of less efficient
mines. Increased mining activity typically leads to an increase in demand for our mining supplies and rail products.
Seasonality
Our business is subject to moderate seasonality,
with the second quarter of our fiscal year (January to March), generally experiencing higher sales than the first, third or fourth
quarters of our fiscal year.
Manufacturers and Suppliers
Our drill steel mining products, drill bits,
and related products are manufactured and supplied to us by several manufacturers located overseas. Our rail products are supplied
to us by several suppliers located overseas and in the U.S.
Management does not believe that the loss of
any of such manufacturers or suppliers would adversely affect the Company’s business and believes that alternative manufacturers
and suppliers would be readily available to us.
Distribution and Sales
We sell our mining supplies and rail products
primarily through two independent sales agents and, to a limited extent, directly to our customers. Our sales agents are independent
contractors and are compensated on a commission basis. Our sales agents sell our mining supplies to resellers as well as directly
to coal mine operators. Our business is not materially affected by seasonality.
Our products are delivered to us and warehoused
in Ashland, Kentucky, from where they are shipped to our customers primarily by road. Shipping costs are normally paid for by
the purchaser.
Customers
We distribute and sell our mining supplies and
rail products principally to certain coal mining companies located in Ohio, Pennsylvania, Kentucky and West Virginia and certain
distributors. Our customers include both large and small mining companies and operators. During the year ended September 30, 2015,
one customer accounted for approximately 23% of our revenues (21% in 2014), one customer accounted for approximately 16% of our
revenues (14% in 2014), two customers accounted for approximately 10% of our revenues (0% in 2014) and one customer accounted
for 9% of our revenues (0% in 20140. The loss of any one or more of these customers could have a material adverse effect on our
business and financial condition. We continue to seek to increase our customer base and reduce our reliance on a limited number
of customers.
Competitive Business Conditions
We compete with large and small manufacturers
and suppliers of drill bits and other cutting tools and related products to the U.S. coal mining industry. We compete with several
manufacturers and distributors of mine rail and related products. Many of our competitors are
large manufacturers or distributors or divisions of large companies, however, our industry remains relatively fragmented with
several hundred fabricators and toolmakers. Many of these competitors have substantially greater financial, technical and marketing
resources, larger customer bases, longer operating histories, greater name recognition, and more established relationships in
the industry than we have. We believe we compete on the basis of the reliability, quality and performance of our products, competitive
pricing, prompt delivery and good customer service and support.
Patents and Proprietary Rights
In connection with our mining and rail supplies
business, we rely on a combination of common law trademark, service mark, copyright and trade secret law to establish and protect
our proprietary rights and promote our reputation and the growth of our business. We do not own any patents with regard to our
rail or mining products that would prevent or inhibit our competitors from using our products or entering our market, although
we may seek such protection in the future.
We do not require our employees, consultants
and independent contractors to enter into agreements containing non-disclosure, non-competition and non-solicitation restrictions
and covenants, accordingly, we rely only upon common law protections to prevent misappropriation of our proprietary rights or
to deter independent third-party development of products similar to the products we distribute and sell. We have agreed with one
of our sales agents not to solicit its customers for a period of 12 months following the termination of our agreement with such
sales agent.
Governmental Regulation
We are unaware of and do not anticipate having
to expend significant resources to comply with any governmental regulation of the distribution of mining supplies and rail products.
We are subject to the laws and regulations of those jurisdictions in which we sell our products, which are generally applicable
to business operations, such as business licensing requirements, income taxes and payroll taxes. In general, the development and
operation of our business is not subject to special regulatory and/or supervisory requirements. We do not believe our current
business is subject to any environmental or similar laws. However, we may become subject to product liability claims related to
the products we distribute and sell.
In connection with our prior oil and gas business
operations, we were subject to various federal, state and local laws and regulations governing the protection of the environment,
such as the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended (“CERCLA”), and
the Federal Water Pollution Control Act of 1972, as amended (the “Clean Water Act”). In particular, our exploration,
development and production operations, our activities in connection with storage and transportation of oil and other hydrocarbons
and our use of facilities for treating, processing or otherwise handling hydrocarbons and related wastes may be subject to regulation
under these and similar state legislation.
If it is subsequently determined that we failed
to comply with these laws and regulations we may be subject to the assessment of administrative, civil and criminal fines and
penalties or the imposition of injunctive relief that could have a material adverse impact on us and our financial condition.
CERCLA, also known as “Superfund,”
imposes liability for response costs and damages to natural resources, without regard to fault or the legality of the original
act, on some classes of persons that contributed to the release of a “hazardous substance” into the environment. These
persons include the “owner” or “operator” of a disposal site and entities that disposed or arranged for the
disposal of the hazardous substances found at the site. CERCLA also authorizes the Environmental Protection Agency (“EPA”)
and, in some instances, third parties to act in response to threats to the public health or the environment and to seek to recover
from the responsible classes of persons the costs they incur. It is not uncommon for neighboring landowners and other third parties
to file claims for personal injury and property damage allegedly caused by the hazardous substances released into the environment.
In the course of our ordinary operations, we may generate waste that may fall within CERCLA’s definition of a “hazardous
substance.” We may be jointly and severally liable under CERCLA or comparable state statutes for all or part of the costs
of cleaning up sites at which these wastes have been disposed.
Until recently, the Company leased properties
that for many years have been used for the exploration and production of oil and natural gas. Although we believe that our predecessors
have used operating and disposal practices that were standard in the industry at the time, hydrocarbons or other wastes may have
been disposed or released on, under or from the properties owned or leased by us or on, under or from other locations where these
wastes have been taken for disposal. In addition, many of these properties have been operated by third parties whose actions with
respect to the treatment and disposal or release of hydrocarbons or other wastes were not under our control. These properties
and wastes disposed on these properties may be subject to CERCLA and analogous state laws. Under these laws, we could be required:
| o | to
remove or remediate previously disposed wastes, including wastes disposed or released
by prior owners or operators; |
| o | to
clean up contaminated property, including contaminated groundwater; or to perform remedial
operations to prevent future contamination; |
| o | to
clean up contaminated property, including contaminated groundwater; or to perform remedial
operations to prevent future contamination. |
At this time, we do not believe that we are associated
with any Superfund site and we have not been notified of any claim, liability or damages under CERCLA.
The Resource Conservation and Recovery Act (“RCRA”)
is the principal federal statute governing the treatment, storage and disposal of hazardous wastes. RCRA imposes stringent operating
requirements and liability for failure to meet such requirements on a person who is either a “generator” or “transporter”
of hazardous waste or an “owner” or “operator” of a hazardous waste treatment, storage or disposal facility.
At present, RCRA includes a statutory exemption that allows most oil and natural gas exploration and production waste to be classified
as non-hazardous waste. A similar exemption is contained in many of the state counterparts to RCRA. As a result, we are not required
to comply with a substantial portion of RCRA’s requirements because our operations generate minimal quantities of hazardous wastes.
At various times in the past, proposals have been made to amend RCRA to rescind the exemption that excludes oil and natural gas
exploration and production wastes from regulation as hazardous waste. Repeal or modification of the exemption by administrative,
legislative or judicial process, or modification of similar exemptions in applicable state statutes, could have a material adverse
effect on us if it is determined we failed to comply with applicable federal or state statutes.
The Clean Water Act imposes restrictions and
controls on the discharge of produced waters and other wastes into navigable waters. Permits must be obtained to discharge pollutants
into state and federal waters and to conduct construction activities in waters and wetlands. The Clean Water Act requires us to
construct a fresh water containment barrier between the surface of each drilling site and the underlying water table. This involves
the insertion of a seven-inch diameter steel casing into each well, with cement on the outside of the casing. Certain state regulations
and the general permits issued under the Federal National Pollutant Discharge Elimination System program prohibit the discharge
of produced waters and sand, drilling fluids, drill cuttings and certain other substances related to the oil and natural gas industry
into certain coastal and offshore waters. Further, the EPA has adopted regulations requiring certain oil and natural gas exploration
and production facilities to obtain permits for storm water discharges. Costs may be associated with the treatment of wastewater
or developing and implementing storm water pollution prevention plans.
The Clean Water Act and comparable state statutes
provide for civil, criminal and administrative penalties for unauthorized discharges for oil and other pollutants and impose liability
on parties responsible for those discharges for the costs of cleaning up any environmental damage caused by the release and for
natural resource damages resulting from the release. We believe that our operations complied in all material respects with the
requirements of the Clean Water Act and state statutes enacted to control water pollution.
Our prior operations were also subject to laws
and regulations requiring removal and cleanup of environmental damages under certain circumstances. Laws and regulations protecting
the environment have generally become more stringent in recent years, and may in certain circumstances impose “strict liability,”
rendering a corporation liable for environmental damages without regard to negligence or fault on the part of such corporation.
Such laws and regulations may expose us to liability for the conduct of operations or conditions caused by others, or for acts
which may have been in compliance with all applicable laws at the time such acts were performed. The modification of existing
laws or regulations or the adoption of new laws or regulations relating to environmental matters could have a material adverse
effect on our operations.
In addition, our prior operations could result
in liability for fires, blowouts, oil spills, discharge of hazardous materials into surface and subsurface aquifers and other
environmental damage, any one of which could result in personal injury, loss of life, property damage or destruction or suspension
of operations. We believe we complied with all applicable federal and state environmental laws, rules and regulations related
thereto.
The foregoing is only a brief summary of some
of the existing environmental laws, rules and regulations to which our prior oil and gas business operations were subject, and
there are many others, the effects of which could have an adverse impact on our business. Future legislation in this area may
be enacted and amendments will be made to current laws. No assurance can be given as to what effect these present and future laws,
rules and regulations will have on us or our financial condition.
Insurance
Our prior oil and gas operations were subject
to all the risks inherent in the exploration for, and development and production of, oil and gas including blowouts, fires and
other casualties. We did not maintain insurance coverage related to such activities. Losses could arise from uninsured risks.
We maintain general liability insurance and
auto coverage liability insurance in the amount of $1,000,000 to cover certain liabilities associated with the distribution
of our mining supplies and rail products.
We purchased a $2 million key man term life
insurance policy on the life of our CEO (William Shrewsbury) that has been assigned to Mr. Shrewsbury as security for a loan he
has made to us. In addition, we purchased a $500,000 key man term life insurance policy on the life of our CFO (Jose Fuentes),
that has been assigned to Mr. Fuentes to cover prior years’ accrued but unpaid compensation.
Research and Development Expenditure
During 2015, the Company incurred $7,312 in
research and development cost. No research and development cost was incurred in 2014. Research and development cost incurred in
2015 was expensed as the amount was considered immaterial and no proven product was developed.
Employees
As of September 30, 2015, we employed three full-time
employees and two part-time employees. None of our employees is a party to a collective bargaining agreement and we believe our
relationship with our employees is good. Also, we employ certain consultants and independent contractors on a regular basis to
assist in the marketing and sale of our products. Our sales agents are compensated on a commission basis.
Available Information
Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q,
Current Reports on Form 8-K, and amendments to reports filed pursuant to Sections 13(a) and 15(d) of the Exchange Act of 1934,
as amended (“Exchange Act”), are filed with the “SEC”. We are subject to the informational requirements
of the Exchange Act and files or furnishes reports, proxy statements, and other information with the SEC. Such reports and other
information filed by us with the SEC are available free of charge via our website at www.txholdings.com when such reports are
available on the SEC’s website. The public may read and copy any materials filed by us with the SEC at the SEC’s Public
Reference Room at 100 F Street, NE, Room 1580, Washington, D.C. 20549. The public may obtain information on the operation of the
Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy and
information statements and other information regarding issuers that file electronically with the SEC at www.sec.gov. The contents
of these websites are not incorporated into this report. Further, references to the URLs for these websites are intended to be
inactive textual references only.
Principal Executive Offices
Our principal executive offices are located at
12080 Virginia Blvd, Ashland, Kentucky 41102. Our principal telephone number at such location is (606) 928-1131.
An investment in our common stock involves
a high degree of risk. You should carefully consider the risks described below and other information contained in this filing
before deciding to invest in our common stock. The risks described below are not the only ones facing our company. Additional
risks not presently known to us or which we currently consider immaterial may also adversely affect our company. If any of the
following risks actually occur, our business, financial condition and operating results could be materially adversely affected.
In such case, the trading price of our common stock could decline, and you could lose a part of your investment.
Risks Related to Our Operations
We have a limited operating history and
our success is subject to substantial risks inherent in the establishment of a new business. We can give no assurance we will
be profitable in the future.
We are in the business of distributing and selling
mining supplies and rail products to U.S. coal mining companies and operators and were a development stage company until March
31, 2012. We have encountered unforeseen costs, expenses, problems, difficulties and delays frequently associated with new ventures,
and these costs, expenses, problems, difficulties and delays may continue. Although during the prior two fiscal years our operations
had been profitable, we incurred a loss for fiscal 2015, and there is no assurance we will be successful in the future. We anticipate
our operating expenses will increase if and as our business expands or if we pursue additional business opportunities we will
need to generate revenues sufficient to meet all of our expenses to achieve profitability and obtain additional financing to fund
such expenses. However, such financing may not be available to us or may be available upon terms that are not acceptable to us.
We incurred a net loss for 2015 and a net
income for 2013 and 2014 fiscal years. Prior to fiscal 2013, we had a history of net losses. We can provide no assurance we will
be profitable in the future. If we fail to achieve profitability, we may need to reduce or eventually cease our operations.
We had a net loss of $372,509 for 2015 and net
income of $341,300 for 2014 and $326,977 for 2013. At September 30, 2015 and 2014, we had accumulated deficits of $14,752,711
and $14,380,202, respectively. Based on current expectations, we need to obtain additional financing to expand our mining and
mining rail supplies distribution business. Also, we require additional financing to fund ongoing operations if our current sales
and revenue growth are insufficient to meet our operating costs.
In the past we have been able to raise financing
from our chief executive officer through notes and advances and from a bank line of credit that our chief executive officer guaranteed. 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 strategies,
which may affect our overall business results of operations and financial condition. Also, under our new loan agreement with a
bank, we may not incur additional indebtedness without the bank’s consent.
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 advances
due to our CEO if he makes a demand on the outstanding advances.
As of September 30, 2015, we have incurred debt due to Mr. Shrewsbury,
our CEO, in the form of a note and advances in the aggregate amount of $2,124,637 of which $2,000,000 is covered by a note due
in February 24, 2024 and advances, which are due on demand, of $124,637. We have outstanding accounts payable of $946,576 and
other accrued liabilities of $696,624. Also, as of September 30, 2015, we owed $712,449 under a bank line of credit which was
secured by our inventory and accounts receivable and which was guaranteed by our CEO and became due on November 7, 2015. Subsequently,
on December 3, 2015, we obtained a new term loan from the bank in the amount of $711,376, the proceeds of which were used to repay
our line of credit. Under the new loan, we are required 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. The new loan is secured by our inventory and accounts receivable and guaranteed
by our CEO. Also, under the new loan, without the consent of the bank, we are not permitted to incur any indebtedness other than
trade debt incurred in the ordinary course. We are subject to the risks associated with substantial indebtedness, including insufficient
funds to repay the outstanding loans when they become due and advances of our chief executive officer demands their repayment.
There may be some doubts about our ability
to continue as a going concern and, if we are unable to continue our business, our shares may have little or no value.
Our independent registered public accounting
firm’s report on our financial statements included in our annual report on Form 10-K for the years ended September 30, 2015
and 2014, contain an explanatory paragraph wherein they expressed an opinion that there is substantial doubt about our ability
to continue as a going concern. Our financial statements do not include any adjustments to reflect
the possible future effects on recoverability and classification of assets or the amounts and classification of liabilities that
might occur if we are unable to continue in business as a going concern. Accordingly, careful consideration of such opinions should
be given in determining whether to continue or become our stockholder.
We depend on a small number of customers
for a substantial portion of our revenues.
During the year ended September 30, 2015, one
customer accounted for approximately 23% of our revenues, one customer accounted for approximately16% of our revenues, two customers
accounted for approximately 10% of our revenues and one customer accounted for 9% of our revenue. Although we are seeking
to diversify our customer base and reduce our reliance upon sales to a small number of large mine operators, we expect sales to
such customers to continue to constitute a significant portion of our revenues in the near term. The loss of any one or more of
such customers could have a material adverse effect our business, financial condition and results of operations. During 2015,
two of our major customers filed for bankruptcy protection under Chapter 11 of the U.S. Bankruptcy Code; although, the two customers
have continued to purchase our products, there is no guarantee they will continue to do so or that their bankruptcy restructuring
will be approved by the courts or at all.
Exchange rate fluctuations could cause a decline in our financial
condition and results of operations.
We import most of our mining supplies products
from overseas. Fluctuations in exchange rates on foreign currencies could adversely affect our results in the event that our imported
products sales prices cannot be increased to offset a potential exchange fluctuation negative impact. From time to time, as and
when we determine it is appropriate and advisable to do so, we will seek to mitigate the effect of exchange rate fluctuations
through the use of derivative financial instruments. We cannot assure that we will continue this practice or be successful in
these efforts.
We are implementing a growth strategy which,
if successful, will place significant demands on us and subject us to numerous risks.
Growing businesses often have difficulty managing
their growth. If our growth strategy is successful, significant demands will be placed on our management, accounting, financial,
information and other systems and on our business. We will have to expand our management and recruit and employ experienced executives
and key employees capable of providing the necessary support. In addition, to manage our anticipated growth we will need to continue
to improve our financial, accounting, information and other systems in order to effectively manage our growth and, in doing so,
could incur substantial additional expenses that could harm our financial results. We cannot assure you that our management will
be able to manage our growth effectively or successfully, or that our financial, accounting, information or other systems will
be able to successfully accommodate our external and internal growth. Our failure to meet these challenges could materially impair
our business.
We may undertake acquisitions which pose
risks to our business.
As part of our growth strategy, we have and may
in the future acquire or enter into joint venture arrangements with, form strategic alliances with, invest in, or acquire complementary
businesses. Any such acquisition, investment, strategic alliance or related effort will be accompanied by the risks commonly encountered
in such transactions. These risks may include:
| · | Difficulty
of identifying appropriate acquisition candidates; |
| · | Paying
more than the acquired company is worth; |
| · | Difficulty
in assimilating the operations of the new business; |
| · | Costs
associated with the development and integration of the operations of the new entity; |
| · | Existing
business may be disrupted; |
| · | Entering
markets in which we have little or no experience; |
| · | Accounting
for acquisitions could require us to amortize substantial intangible assets (goodwill),
adversely affecting our results of operations; |
| · | Inability
to retain the management and key personnel of the acquired business; |
| · | Inability
to maintain uniform standards, controls, policies and procedures; or |
| · | Customer
attrition with respect to customers acquired through the acquisition. |
We cannot assure you that we would successfully
overcome these risks or any other problems associated with any acquisition, investment, strategic alliances, or related efforts.
Also, if we use our common stock in connection with an acquisition, your percentage ownership in us will be reduced and you may
experience additional dilution.
Our business may be impacted by political events, war, terrorism,
public health issues, natural disasters and other circumstances that are not within our control.
War, terrorism, geopolitical uncertainties, public health issues,
and other business interruptions have caused and could cause damage or disruption to international commerce and the global economy,
and thus could have a material adverse effect on us, our suppliers, and manufacturing vendors. Our business operations are subject
to interruption by natural disasters, fire, power shortages, nuclear power plant accidents, terrorist attacks, and other hostile
acts, labor disputes, public health issues, and other events beyond our control. Such events could decrease demand for our products,
make it difficult or impossible for us to make and deliver products to our customers, or to receive products from our manufacturers
and suppliers, and create delays and inefficiencies in our supply chain. If major public health issues, including pandemics, arise,
we could be adversely affected by more stringent employee travel restrictions, additional limitations in freight services, governmental
actions limiting the movement of products between regions, delays in production ramps of new products, and disruptions in the
operations of our manufacturing vendors and suppliers. In the event of a natural disaster, we could incur significant losses,
require substantial recovery time and experience significant expenditures in order to resume operations.
Increased IT security threats and sophisticated
computer crime pose a risk to our systems, networks, products and services.
We rely on information technology (“IT”)
systems and networks in connection with our business activities, and we collect and store sensitive data. IT security threats
and sophisticated computer crime, including advanced persistent threats such as attempts to gain unauthorized access to our systems,
are increasing in sophistication and frequency. These threats pose a risk to the security of our systems and networks and the
confidentiality, availability and integrity of our data. As we grow, we may experience attempts from hackers and other third parties
to gain unauthorized access to our IT systems and networks. Any such attacks could have a material adverse effect on our financial
condition, results of operations or liquidity. While we actively manage IT risks within our control, we can provide no assurance
that our actions will be successful in eliminating or mitigating risks to our systems, networks and data. A failure of or breach
in IT security could expose us and our customers and suppliers to risks of misuse of information or systems, the compromise of
confidential information, manipulation and destruction of data and operations disruptions. Any of these events in turn could adversely
affect our reputation, competitive position, business and results of operations. In addition, such breaches in security could
result in litigation, regulatory action and potential liability, as well as the costs and operational consequences of implementing
further data protection measures.
Regulations related to conflict-free
minerals may force us to incur additional expenses.
In August 2012, the SEC adopted disclosure
requirements related to certain minerals sourced from the Democratic Republic of Congo or adjoining countries, as required by
Section 1502 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The rule requires us to perform due diligence,
and report whether “conflict minerals,” which are defined as tin, tantalum, tungsten and gold, necessary to the functionality
of a product we purchase originated from the Democratic Republic of Congo or an adjoining country. We are required to file certain
initial specialized disclosure reports on Form SD with the SEC regarding such matters, and we will be required to prepare and
file such a report on an annual basis in the future. We may incur significant costs to determine the source and custody of conflict
minerals that are used in the manufacture of our products in order to comply with these regulatory requirements. We may also face
reputational challenges if we are unable to verify the origins for all conflict minerals used in our products, or if we are unable
to conclude that our products are “conflict free.” Over time, conflict minerals reporting requirements may affect
the sourcing, price and availability of our products, and may affect the availability and price of conflict minerals that are
certified as conflict free. Accordingly, we may incur significant costs as a consequence of regulations related to conflict-free
minerals, which may adversely affect our business, financial condition or results of operations.
Risks Related to Our Company
Investor confidence in the price of our
stock may be adversely affected if we are unable to comply with Section 404 of the Sarbanes-Oxley Act of 2002.
As an SEC registrant, we are subject to the rules
adopted by the SEC pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, which require us to include in our annual report
on Form 10-K our management’s report on, and assessment of the effectiveness of, our internal control over financial reporting
(“management’s report”). If we fail to achieve and maintain the adequacy of our internal control over financial
reporting, there is a risk that we will not comply with all of the requirements imposed by Section 404. Moreover, effective internal
control over financial reporting, particularly that relating to revenue recognition, is necessary for us to produce reliable financial
reports and is important in helping to prevent financial fraud. Any of these possible outcomes could result in an adverse reaction
in the financial marketplace due to a loss in investor confidence in the reliability of our financial statements, which ultimately
could harm our business and could negatively impact the market price of our common stock. Investor confidence and the price of
our common stock may be adversely affected if we are unable to comply with Section 404 of the Sarbanes-Oxley Act of 2002.
In order to comply with public reporting
requirements, we must continue to strengthen our financial systems and controls, and failure to do so could adversely affect our
ability to provide timely and accurate financial statements.
Refinement of our internal controls and procedures
will be required as we manage future growth successfully and operate effectively as a public company. Such refinement of our internal
controls, as well as compliance with the Sarbanes-Oxley Act of 2002 and related requirements, will be costly and will place a
significant burden on management. We cannot assure you that measures already taken, or any future measures, will enable
us to provide accurate and timely financial reports, particularly if we are unable to hire additional personnel in our accounting
and financial department, or if we lose personnel in this area. Any failure to improve our internal controls or other problems
with our financial systems or internal controls could result in delays or inaccuracies in reporting financial information, or
non-compliance with SEC reporting and other regulatory requirements, any of which could adversely affect our business and stock
price.
Current shareholdings may be diluted if
we make future equity issuances or if outstanding warrants are exercised for shares of our common stock.
“Dilution” refers to the reduction
in the voting effect and proportionate ownership interest of a given number of shares of common stock as the total number of shares
increases. Our issuance of additional stock, convertible preferred stock and convertible debt may result in dilution to the interests
of shareholders and may also result in the reduction of your stock price. The sale of a substantial number of shares into the
market, or even the perception that sales could occur, could depress the price of the common stock. Also, the exercise of warrants
and options may result in additional dilution.
As of September 30, 2015, an aggregate of 700,000
shares of common stock are issuable upon exercise of outstanding warrants and options. The holders of outstanding warrants (and
other convertible securities or derivatives, if any are subsequently issued) have the opportunity to profit from a rise in the
market price of our common stock, if any, without assuming the risk of ownership, with a resulting dilution in the interests of
other shareholders. We may find it more difficult to raise additional equity capital if it should be needed for our business while
the options, warrants and convertible securities are outstanding. At any time at which the holders of the options, warrants or
convertible securities might be expected to exercise or convert them, we would probably be able to obtain additional capital on
terms more favorable than that provided by those securities.
Certain provisions of our charter and
bylaws may discourage mergers and other transactions.
Certain provisions of our certificate of incorporation
and bylaws may make it more difficult for someone to acquire control of us. These provisions may make it more difficult for stockholders
to take certain corporate actions and could delay or prevent someone from acquiring our business. These provisions could limit
the price that certain investors might be willing to pay for shares of our common stock. The ability to issue “blank check”
preferred stock is a traditional anti-takeover measure. This provision may be beneficial to our management and the board of directors
in a hostile tender offer, and may have an adverse impact on stockholders who may want to participate in such tender offer, or
who may want to replace some or all of the members of the board of directors.
Our board of directors may issue additional
shares of preferred stock without stockholder approval.
Our certificate of incorporation authorizes
the issuance of up to 1,000,000 shares of preferred stock. Accordingly, our board of directors may, without shareholder approval,
issue one or more new series of preferred stock with rights which could adversely affect the voting power or other rights of the
holders of outstanding shares of common stock. In addition, the issuance of shares of preferred stock may have the effect of rendering
more difficult or discouraging, an acquisition or change of control of TX Holdings. Although we do not have any current plans
to issue any shares of preferred stock, we may do so in the future.
We depend on key personnel and independent
sales agents.
Our success depends on the contributions of our
key management personnel, including Mr. William “Buck” Shrewsbury, Chairman and Chief Executive Officer, and Mr. Jose
Fuentes, our Chief Financial Officer. If we lose the services of any of such personnel we could be delayed in or precluded from
achieving our business objectives.
In addition, the loss of either of our independent
sales agents could temporarily jeopardize our relations with our customers. Our agreements with such sales agents are terminable
upon 30 days’ notice. Any loss of a sales agent would jeopardize the stability of our infrastructure and our ability to
provide the service levels our customers expect.
The loss of any of our key officers or sales
agent could impair our ability to successfully execute our business strategy.
We may need to attract and retain additional
skilled personnel to develop our business and attract customers.
In the future, we may need to attract, train,
motivate and retain additional highly skilled managerial and sales personnel. Competition for such personnel with appropriate
qualifications and skills is intense. Locating candidates with the appropriate qualifications, particularly in the desired geographic
location, can be costly and difficult. We may not be able to hire the necessary personnel to implement our business strategy,
or we may need to provide higher compensation to such personnel than we currently anticipate. If we fail to attract and retain
sufficient numbers of qualified employees or sales agents, our ability to provide the necessary products may be limited and, as
a result, we may be unable to attract customers and grow our business.
There is a limited market for our shares.
Our shares of common stock are quoted on the
OTC Markets Group, Inc.’s OTCQB marketplace. As a result, relatively small trades in our stock could have disproportionate
effect on our stock price. No assurance can be given that an active market will develop for our common stock or, if it develops,
that it will continue. A limited trading volume may limit the ability of our shareholders to resell their shares at times and
in such amounts as they may desire.
We have never declared or paid cash dividends
on our common stock.
We have never declared or paid a cash dividend
on our common stock and do not anticipate paying cash dividends on our common stock in the foreseeable future. Payment of future
cash dividends, if any, will be at the discretion of our board of directors and will depend on our financial condition, results
of operations, contractual restrictions, capital requirements, business prospects and other factors that our board of directors
considers relevant. Accordingly, investors will only see a return on their investment if the value of our securities appreciates.
Our directors and named executive officers
own a substantial percentage of our common stock.
As of November 20, 2015, our directors and executive
officers beneficially owned approximately 24.91% of our shares of common stock including shares issuable upon exercise of warrants.
Our directors and executive officers are entitled to cast an aggregate of approximately 11,598,317 votes on matters submitted
to our stockholders for a vote or approximately 24.14% of the total number of votes entitled to be cast at a meeting of our stockholders.
These stockholders, if they acted together, could exert substantial control over matters requiring approval by our stockholders.
These matters would include the election of directors and the approval of mergers or other business combination transactions.
This concentration of ownership may discourage or prevent someone from acquiring our business.
Our common stock is subject to the SEC’s
penny stock regulations.
Our common stock is subject to the SEC’s “penny stock”
rules. These regulations define a “penny stock” to be any equity security that has a market price (as defined) of
less than $5.00 per share, subject to certain exceptions. For any transaction involving a penny stock, unless exempt, these rules
require the delivery, prior to the transaction, of a disclosure schedule prepared by the SEC relating to the penny stock market.
The broker-dealer also must disclose the commissions payable to the broker-dealer and the sales person, current quotations for
the securities, information on the limited market in penny stocks and, if the broker-dealer is the sole market-maker, the broker-dealer
must disclose this fact and the broker-dealer’s presumed control over the market. In addition, the broker-dealer must obtain
a written statement from the customer that such disclosure information was provided and must retain such acknowledgment for at
least three years. Further, monthly statements must be sent disclosing current price information for the penny stock held in the
account. The penny stock rules also require that broker-dealers engaging in a transaction in a penny stock make a special suitability
determination for the purchaser and receive the purchaser’s written consent to the transaction prior to the purchase. The foregoing
rules may materially and adversely affect the market for, and liquidity of, our common stock, including the ability of broker-dealers
to sell our common stock, the ability of holders of our shares to obtain accurate price quotations and may therefore impede the
ability of holders of our common stock to sell such securities in the secondary market.
FINRA sales practice requirements may also limit a shareholder’s
ability to buy and sell our stock.
In addition to the penny stock rules promulgated by the SEC, FINRA
rules require that in recommending an investment to a customer, a broker-dealer must have reasonable grounds for believing that
the investment is suitable for that customer. Prior to recommending speculative low priced securities to their non-institutional
customers, broker-dealers must make reasonable efforts to obtain information about the customer’s financial status, tax
status, investment objectives and other information. Under interpretations of these rules, FINRA believes that there is a high
probability that speculative low priced securities will not be suitable for at least some customers. FINRA requirements make it
more difficult for broker-dealers to recommend that their customers buy our common stock, which may limit the ability to buy and
sell our stock and have an adverse effect on the market for our shares.
As an issuer of “penny stock,” the protection
provided by federal securities laws related to forward looking statements does not apply to us.
Although federal securities laws provide a safe harbor for forward-looking
statements made by a public company that files reports under the federal securities laws, this safe harbor is not available to
issuers of “penny stock.” As a result, we may not have the benefit of this safe harbor protection in the event of
any legal action based upon a claim that the material provided by us contained a material misstatement of fact or was misleading
in any material respect because of our failure to include any statements necessary to make the statements not misleading. Such
an action could hurt our financial condition.
Our stock price is volatile.
The stock market from time to time experiences
significant price and volume fluctuations that are unrelated to the operating performance of particular companies. These broad
market fluctuations may cause the market price of our common stock to drop. In addition, the market price of our common stock
is highly volatile. Factors that may cause the market price of our common stock to drop include:
| · | Fluctuations
in our results of operations; |
| · | Timing
and announcements of new customer orders, new products, or those of our competitors; |
| · | Any
acquisitions that we make or joint venture arrangements we enter into with third parties; |
| · | Changes
in stock market analyst recommendations regarding our common stock; |
| · | Failure
of our results of operations to meet the expectations of stock market analysts and investors; |
| · | Increases
in the number of outstanding shares of our common stock resulting from sales of new shares,
or the exercise of warrants, stock options or convertible securities; |
| · | Reluctance
of any market maker to make a market in our common stock; |
| · | Changes
in investors’ perception of the United States coal mining industry and related
supply businesses; and |
| · | General
stock market conditions. |
Risks Related to Our Industry
Our business is materially impacted by
cyclical economic conditions affecting the U.S. and global mining industry.
Changes in economic conditions affecting the
domestic and global mining industry can occur abruptly and unpredictably, which may have significant effects on our sales. Cyclicality
is driven, primarily, by price volatility of coal, as well as product life cycles, competitive pressures and other economic factors
affecting the U.S. mining industry, such as company consolidations and mergers, bankruptcies, increased regulation of the U.S.
coal mining or electrical utility industry, and competition affecting demand for coal, and the broader economy, including changes
in government monetary or fiscal policies and from market expectations with respect to such policies. Falling prices for coal
have in the past, and may in the future, lead to reduced production levels of existing mines, a contraction in the number of existing
mines and the closure of less efficient mines, and are likely to lead to a decrease in demand for our mining supplies and rail
products. Conversely, rising coal prices typically lead to the expansion of existing mines, opening of new mines or re-opening
of less efficient mines. Increased mining activity typically leads to an increase in demand for our mining supplies and rail products.
In addition to declining orders for our products and services, adverse economic conditions for our customers may make it more
difficult for us to collect accounts receivable in a timely manner, or at all, which may adversely affect our working capital.
As a result of this cyclicality in the global mining industry, we have experienced significant fluctuations in our business, results
of operations and financial condition, and we expect our business to continue to be subject to these fluctuations in the future.
We are largely dependent on the continued
demand for coal, which is subject to economic and climate related risks
Many of our customers supply coal for the generation
of electricity and/or steel production. Demand for steel is affected by the global level of economic activity and economic growth.
The pursuit of the most cost effective form of electricity generation continues to take place throughout the world and coal-fired
electricity generation faces intense price competition from other fuel sources, particularly natural gas. In addition, coal combustion
generates significant greenhouse gas emissions and governmental and private sector goals and mandates to reduce greenhouse gas
emissions may increasingly affect the mix of electricity generation sources. Further developments in connection with legislation,
regulations, international agreements or other limits on greenhouse gas emissions and other environmental impacts or costs from
coal combustion, both in the United States and in other countries, could diminish demand for coal as a fuel for electricity generation.
If lower greenhouse gas emitting forms of electricity generation, such as nuclear, solar, natural gas or wind power, become more
prevalent or cost effective, or diminished economic activity reduces demand for steel, demand for coal will decline. Reduced demand
for coal would result in reduced demand for our products and adversely affect our business, financial condition and results of
operations.
Environmental regulations impacting the
mining industry may adversely affect demand for our products.
Our customers’ operations are subject to
or affected by a wide array of regulations in the U.S., including those directly impacting coal mining activities and those indirectly
affecting their businesses, such as applicable environmental laws. In addition, new environmental legislation or administrative
regulations relating to coal mining or affecting demand for mined supplies, or more stringent interpretations of existing laws
and regulations, may require our customers to significantly change or curtail their operations. The high cost of compliance with
environmental regulations may discourage our customers from expanding existing coal mines or developing new mines and may also
cause customers to limit or even discontinue their mining operations. As a result of these factors, demand for the mining equipment
and rail products we distribute could be adversely affected by environmental regulations directly or indirectly impacting the
coal mining industry. Any reduction in demand for our products as a result of environmental regulations is likely have an adverse
effect on our business, financial condition or results of operations.
Demand for our products may be adversely
impacted by regulations related to mine safety.
Our principal customers are surface and underground
coal mining companies. The coal mining industry has encountered increased scrutiny as it relates to safety regulations, primarily
due to recent high profile mining accidents. New legislation or regulations relating to mine safety standards and the increased
cost of compliance with such standards may induce customers to discontinue or limit their mining operations and may discourage
companies from developing new mines, which in turn could diminish demand for our products.
We may face competition from manufacturers
and other distributors of mining supplies and rail products.
The market for our mining supplies is highly
fragmented and we face competition from other companies offering products they manufacture or distribute that are competitive
with our products. We also face potential competition from other companies that manufacture and sell rail products. Business in
general is highly competitive, and we compete with both large manufacturers and smaller companies that manufacturer and/or distribute
drill bits and related products to the coal industry, in some instances in accordance with customer requirements and specifications.
Some of our competitors have more capital, longer operating and market histories, greater manufacturing capabilities, and greater
resources than we have, and may offer a broader range of products and at lower prices than we offer.
Liability claims may occur if our products
are defective.
Any failure by our engineered metalwork products
and tools could expose us to claims for negligence, breach of contract, personal injury, wrongful death, and products liability.
Any such claims could be costly to defend and divert management time and resources. In addition, we cannot make assurances that
we will have appropriate insurance available to us in the future at commercially reasonable rates. Currently, we maintain general
liability insurance in the amount of $1,000,000. Such coverage may not be adequate to cover any
claim that may be made against us. Claims brought against us that are
not covered by insurance or that result in recoveries in excess of our insurance coverage could have a material adverse effect
on our business, financial condition and results of operations.
Our future operating results may be affected
by fluctuations in the prices and availability of raw materials.
The raw materials used in the manufacture of
our products include ore for our steel products and carbide for our drilling bit products. Our manufacturing vendors are
supplied with a significant portion of their raw materials from sources outside the U.S. The raw materials industry as a whole
is highly cyclical and at times pricing and supply can be volatile due to a number of factors beyond our control, including natural
disasters, general economic and political conditions, labor costs, competition, import duties, tariffs and currency exchange rate
fluctuations. This volatility can significantly affect our suppliers’ raw material costs. In an environment of increasing
raw material prices, competitive conditions can affect how much of the price increases in raw materials that we can recover in
the form of higher sales prices for our products. To the extent our manufacturer vendors pass on the cost of such increases and
we are unable to pass on any raw material price increases to our customers, our profitability would be adversely affected. Furthermore,
restrictions on the supply of tungsten and other raw materials could adversely affect our operating results. If the prices for
such raw materials increase or our manufacturing vendors are unable to secure adequate supplies of raw materials on favorable
terms, our profitability could be impaired.
| ITEM 1B. | UNRESOLVED STAFF COMMENTS |
Disclosure in response to this item is not required
of a smaller reporting company.
ITEM 2. PROPERTIES
We lease approximately 4,800 square feet of office
and warehouse space and certain land located at 12080 Virginia Blvd, Ashland, Kentucky, from Mr. Shrewsbury, our CEO, and Mrs.
Shrewsbury pursuant to the terms of a lease we entered into with them on November 19, 2012, for a monthly lease payment of $2,000.
The 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 24 month period upon the same terms and conditions. As of September 30, 2015, the
Company had accrued but unpaid lease payments due to Mr. and Mrs. Shrewsbury in the amount of $12,000; accordingly, the Company
may be deemed to be in default under the terms of the lease agreement with Mr. and Mrs. Shrewsbury. However, the Company has not
received a notice of default or termination under the lease agreement as of the date of the filing of this report. The Company
believes that such office, warehouse and land space will be sufficient for its current needs.
The Company is not a party to any material
pending legal proceeding.
| ITEM 4. | MINE SAFETY DISCLOSURES |
Not applicable.
PART II
ITEM 5. MARKET
FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
Our common stock is quoted on the OTC Market
Group, Inc.’s OTCQB under the symbol “TXHG.”
The following table provides the high and
low bid prices of our common stock for each quarterly period during the two most recent fiscal years as regularly quoted by the
OTC Markets Group, Inc.’s OTCQB. The quotations set forth below reflect inter-dealer prices, without retail mark-up, markdown
or commission and may not represent actual transactions.
Quarter Ended | |
High | | |
Low | |
| |
$ | | |
$ | |
September 30, 2015 | |
| 0.04 | | |
| 0.02 | |
June, 30, 2015 | |
| 0.05 | | |
| 0.03 | |
March, 31, 2015 | |
| 0.06 | | |
| 0.02 | |
December 31, 2014 | |
| 0.08 | | |
| 0.04 | |
| |
| | | |
| | |
September 30, 2014 | |
| 0.10 | | |
| 0.07 | |
June, 30, 2014 | |
| 0.10 | | |
| 0.06 | |
March, 31, 2014 | |
| 0.14 | | |
| 0.06 | |
December 31, 2013 | |
| 0.12 | | |
| 0.08 | |
As of September 30, 2015, there were approximately
785 holders of record of our shares of common stock.
Dividends
We have never declared or paid a cash dividend
on our common stock and do not anticipate paying cash dividends on our common stock in the foreseeable future. Payment of future
cash dividends, if any, will be at the discretion of our board of directors and will depend on our financial condition, results
of operations, contractual restrictions, capital requirements, business prospects and other factors that our board of directors
considers relevant.
Equity Compensation Plan Information
The following table details the number of securities
to be issued and the exercise prices of the options and warrants as of September 30, 2015.
Plan Category | |
Number
of securities to
be issued upon exercise
of outstanding warrants
and rights
(1) | | |
Weighted-average exercise
price of outstanding options,
warrants and
rights | | |
Number
of securities remaining
available for future
issuance under equity
compensation plans
(excluding
securities reflected
in column (a) | |
| |
| | |
| | |
| |
| |
(a) | | |
(b) | | |
(c) | |
| |
| | |
| | |
| |
Equity compensation plans approved by security holders | |
| 0 | | |
| 0 | | |
| 0 | |
| |
| | | |
| | | |
| | |
Equity compensation plans not approved by security holders | |
| 700,000 | | |
$ | 0.0945 | | |
| 0 | |
Total | |
| 700,000 | | |
$ | 0.0945 | | |
| 0 | |
| (1) | On May 16, 2012, the Board of
Directors authorized the grant of an aggregate of 400,000 common stock purchase warrants
to a sales agent over a period of four years. The agent is expected to receive 50,000
warrants every six months for an aggregate of 400,000 warrants. The warrants are exercisable
at a price of $0.10 per share, become exercisable upon issuance, and expire two years
after the date of issuance. The initial tranche of 50,000 warrants were issuable effective
July 1, 2012. As of September 30, 2015, 200,000 warrants are exercisable and 150,000
warrants have expired. In addition, the Company granted to Mr. Shrewsbury options to
purchase an aggregate of 500,000 shares of the Company’s common stock pursuant
to the terms of a Non-Qualified Stock Option Agreement, issued February 25, 2014. The
options are exercisable commencing April 1, 2014, and for a period of three years thereafter.
The options are exercisable at a price of $0.0924 per share subject to certain anti-dilution
adjustments in the event of stock dividends, subdivisions, capital reorganizations, a
consolidation or merger, or sale of all or substantially all of our assets. |
Unregistered Sales of Equity Securities
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. The warrants are issuable over a four
year period in equal tranches of 50,000. The first tranche was issued on July 1, 2012, followed by additional tranches every six
months thereafter with the last tranche to be issued on January 1, 2016. As of September 30, 2015, 200,000 warrants issuable to
the sales agent are exercisable and 150,000 warrants have expired. 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 sale of all or substantially all of our assets, become exercisable upon the date of issuance and expire two years
after the date of such issuance. The warrants 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.
Purchases of Equity Securities
We did not purchase any of our equity securities
during the year ended September 30, 2015.
| ITEM 6. | SELECTED FINANCIAL DATA |
Disclosure in response to this item is not required
of a smaller reporting company.
ITEM 7. 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, financial statements and financial notes, and the 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.
The following discussion and analysis of our
financial condition and results of operations is based upon our financial statements which have been prepared in accordance with
accounting principles generally accepted in the United States. The preparation of these financial statements requires us
to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure
of contingent assets and liabilities. On an on-going basis, we evaluate our critical accounting policies and estimates, including
those related to revenue recognition, intangible assets, and contingencies. We base our estimates on historical experience, where
available, and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form
the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates under different assumptions and conditions.
The discussion and analysis of our financial
condition below contains forward-looking statements which involve certain risks and uncertainties. All statements other than statements
of historical information may be deemed to be forward-looking. Factors that could cause actual results to differ materially from
those reflected in forward-looking statements include, but are not limited to, those discussed under “Item 1A Risk Factors”
and elsewhere in this report or in our SEC filings. 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 our financial statements for the years ended September 30, 2015, and 2014, contains an explanatory paragraph
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.
Overview
We supply and distribute rail products including
tee rail, switches, ties and related products, and drill bits, augurs, related tools and mining supplies to U.S. coal mining companies
and operators and distributors. Our coal mining customers are primarily located in Ohio, Pennsylvania, Kentucky and West Virginia.
We purchase mining supplies from several manufacturers
and rail products from several suppliers of such products. The products are shipped to our warehouse in Ashland, Kentucky, and
then distributed to our customers. Our products are transported primarily by road to our customers. Shipping costs are born by
our customers.
We distribute and sell our products through two
independent sales agents who are compensated on a commission basis.
U.S. coal production has decreased in recent
years due in part to the retirement of U.S. coal-fired electricity generators, increased environmental regulation and related
compliance costs on the part of coal mining companies, the increased use of natural gas generators and the availability of relatively
inexpensive natural gas, a modest demand growth for electricity, and reduced demand for coal abroad, including from China. The
U.S. coal industry produced approximately 984 million short tons of coal in 2013 (as compared to1.016 billion in 2012) from coal
mining operations. The average price of coal per short ton in 2013 was $37.24 as compared to $39.95 in 2012. (See, U.S. Energy
Information Administration, Annual Coal Report 2013, http://www.eia.gov/coal/annual/pdf/acr.pdf.)
In the U.S., coal is produced from mines located
in approximately 25 states. The principal coal producing states are Wyoming, West Virginia, Kentucky, Illinois and Texas. Coal
is used to generate approximately 39% of the electricity in the U.S., but is also used for coke production and for certain industrial
applications, such as cement making.
As of 2013, there were approximately 1,061 active
coal producing mines in the U.S. (as compared to 1,207 in 2012), and approximately 700 coal producers, of which the top 4 coal
producers accounted for approximately 54.5% of the total U.S. coal production. (See, U.S. Energy Information Administration,
Annual Coal Report 2013, http://www.eia.gov/coal/annual/pdf/acr.pdf.)
Our revenues for the year ended September 30,
2015, were $3,105,733 as compared to $4,285,620 for 2014.
During the year ended September 30, 2015, we
had a net loss of $372,509 as compared to net income of $341,300 for 2014. The net income for the year ended September 30, 2014,
included a payment in connection with a legal settlement of $374,025 and a gain on extinguishment of accounts payable of $93,167.
The year ended September 30, 2015, is the first fiscal year in which we have reported a net loss after two prior profitable years.
The current year loss is a direct result of lower sales due to an operational decline in the U.S. coal mining industry.
Net cash used in operating activities was $253,626
during the year ended September 30, 2015 and $291,920 in 2014. Operating cash funded by the Company’s credit line and a
stockholder’s advance during the current year which amounted to $163,949 and $127,300 respectively.
Mr. William Shrewsbury, our Chairman and CEO, has provided financing
in the form of loans and advances which were restructured in February, 2014. Currently, such loans are in the form of a consolidated
promissory note in the amount of $2,000,000 and, as of September 30, 2015, advances due to Mr. Shrewsbury in the amount of $124,637.
On August 26, 2014, we increased our bank line of credit from $250,000 to $750,000. The credit line was secured by a lien on our
inventory and accounts receivable and was guaranteed by Mr. Shrewsbury. As of September 30, 2015, we had drawn $712,449 under
the bank line of credit. On December 3, 2015, we obtained a new term loan from the bank in the amount of $711,376. We utilized
the proceeds of the new loan to repay the line of credit. The new loan is for a term of five years and matures on December 3,
2020. During the term of the loan we have 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. Interest under the new loan is variable and is based upon the Wall Street Journal
Prime rate, currently 3.25% per annum. In the event of a default, interest under the loan may be increased by 2%. The new loan
is secured by a priority security interest in our inventory and accounts receivable and guaranteed by our CEO. Also, our indebtedness
to Mr. Shrewsbury is subordinated to the new bank loan.
Our success is dependent upon our ability
to increase sales of our rail products and mining supplies, of which there can be no assurance.
We were incorporated in the State of Georgia
in May, 2000. We ceased to be a “development stage company” for financial reporting purposes on March 31, 2012.
Results of Operations
Year Ended September 30, 2015 Compared
With Year Ended September 30, 2014
Revenues from Operations
Revenue for the year ended September 30, 2015
and September 30, 2014 were $3,105,733 and $4,285,620, respectively, a decrease of $1,179,887 or approximately 27.5%. The decrease
in revenue during 2015 is due to the overall operational decline in the coal mining industry.
Cost of Goods Sold
During the
year ended September 30, 2015, the Company’s cost of goods sold was $2,469,697 as compared to cost of goods sold of $3,149,924
for the year ended September 30, 2014, a decrease of $680,227 or 21.6%. The decrease in cost of goods is solely related to the
decrease in sales. Cost of Goods Sold as a percentage of sales increased from 73.5% in 2014 to 79.5% in 2015, as a result of increased
sales of higher cost products.
Operating Expenses
The Company incurred operating expenses of $898,342 for the fiscal
year ended September 30, 2015, as compared to $1,173,079 during 2014, a decrease of $274,737 or approximately 23.4%. As a percentage
of revenue, operating expenses increased from 27.4% to 28.9% in 2015. The increase is attributed to the impact of fixed operating
expenses while generating lower revenue during 2015.
The following table details the components of
operating expense, as well as the dollar and percentage changes for the year end periods.
| |
Twelve Months Ended | |
| |
9/30/2015 | | |
9/30/2014 | | |
$ Change | | |
%Change | |
Operating Expense | |
| | | |
| | | |
| | | |
| | |
Commission Expense | |
| 236,119 | | |
| 458,086 | | |
| (221,967 | ) | |
| (48.5 | ) |
Professional fees | |
| 86,837 | | |
| 179,996 | | |
| (93,159 | ) | |
| (51.8 | ) |
Stock-based compensation | |
| 347 | | |
| 16,702 | | |
| (16,355 | ) | |
| (97.9 | ) |
Bad debt expense | |
| 13,643 | | |
| 18,350 | | |
| (4,707 | ) | |
| (25.7 | ) |
Depreciation expense | |
| 10,104 | | |
| 9,679 | | |
| 425 | | |
| 4.4 | |
Other operating expense | |
| 551,292 | | |
| 490,266 | | |
| 61,026 | | |
| 12.4 | |
Total | |
| 898,342 | | |
| 1,173,079 | | |
| (274,737 | ) | |
| (23.4 | ) |
Commission expense for the year ended September
30, 2015 was $236,119 compared to $458,086 for the same period in 2014, a decrease of $221,967 or 48.5%. The lower commission,
during the year ended September 30, 2015, is a direct result of the decreased sales resulting from operational decline in the
domestic coal mining industry. As a percentage of revenue, commission expense decreased from 10.7% in 2014 to 7.6% in 2015. The
decrease is attributed to lower negotiated commission rates paid to sales agents during 2015.
Professional fees decreased $93,159 or 51.8%
for the year ended September 30, 2015, as compared to the prior year. The lower expenses were the result of lower legal expenses
of $100,088. During 2014, the Company incurred additional litigation expenses in connection with its lawsuit against Dexter &
Dexter and Mr. Cederstrom (our prior CFO) which was settled in May 2014.
Stock based compensation for 2015 was $347
as compared to $16,702 in 2014. The current year expense is the direct result of the cost associated with stock options issued
to our sales agent. The higher stock based compensation in 2014 resulted from stock options issued to our CEO in connection with
a debt restructuring and warrants issued to our sales agent.
Bad debt expense decreased $4,707 or 25.7%
for the twelve months ended September 30, 2015, as compared to the prior year. Bad debt reserve recorded for two small customers
in 2014 which accounted for the expense decrease.
Depreciation expenses increased $425 in 2015
as compared to 2014. The higher depreciation resulted from depreciation associated with the cost of a recently refurbished delivery
truck/trailer.
For the year ended September 30, 2015, other
operating expenses were $551,292, an increase of $61,026 or 12.4% from the $490,266 incurred during 2014. The higher operating
expenses resulted from higher insurance ($15,910), higher board compensation ($6,750), higher delivery truck maintenance expenses
($18,150), higher contract labor ($9,630) and higher registration fees related to our listing on the OTC Markets OTCQB ($7,500).
Income/(loss) from Operations
For the year ended September 30, 2015, we had
a loss from operations of $262,306 as compared to a loss of $37,383 in 2014. The higher loss of $224,923 resulted from lower gross
profit during the current year as a result of lower sales and higher cost of goods sold due to increased sales of products with
a lower profit margin.
Other Income and (Expense)
Other expense was $110,203 for the year
ended September 30, 2015 as compared to other income of $378,683 for the year ended September 30, 2014, a decrease of
$488,886. The decrease resulted from a gain from the settlement of certain litigation of $374,025 and, an increase of $93,167
gain on extinguishment of debt recorded in 2014. As of September 30, 2014, the Company realized a gain on disposal of fixed
assets of $10,807 representing an increase of $8,776 over the prior year gain; the increased gain resulted from the sale of
assets associated with our previous oil and gas business.
Net Income or Loss
Gross profit for 2015 was $636,036
a decrease of $499,660 or 44.0% when compared to 2014. The lower gross profit is the result of lower revenue during 2015
as a result of lower overall sales due to production declines in the coal industry and sales of products with lower profit margins.
During 2015
the Company had a net loss of $372,509 compared to net income of $341,300 for 2014, representing a net income decrease of $713,809.
The decrease resulted from higher loss from operations of $224, 923 in 2015, due to lower sales and lower profit margins, a gain
from a legal settlement of $374,025 and a gain on extinguishment of debt of $93,167 both recorded in 2014.
Net Earnings/Loss Per Share
Net earnings
per share (basic and diluted) as a result of the net loss in 2015, was reduced to a negative $0.01 in 2015 as compare to a positive
$0.01 in 2014..
Net Operating Loss Carry Forward for
Tax Purposes
As of September 30, 2015, the Company had tax net operating loss
carry forwards totaling approximately $7,250,000, which expire in 2018 through 2035. Approximately $1,200,000 of such net operating
losses were incurred prior to December 12, 2002 at which date MA&N acquired 51% of the Company and are consequently subject
to certain limitation described in Section 382 of the Internal Revenue Code. The Company estimates that, due to the limitations
and expiration dates, only $424,000 of the net operating losses incurred prior to December 12, 2002 will be available to offset
future taxable income.
There can be no assurance that these deferred
tax assets will ever be used. A deferred tax asset can be used only if there is future taxable income, of which there can be no
assurance.
Liquidity and Capital Resources
The following table presents a summary of
our net cash provided (used in) operating, investing and financing activities:
| |
Twelve Months Ended | |
| |
9/30/2015 | | |
9/30/2014 | |
Liquidity and capital resources | |
| | | |
| | |
Net cash used in operating activities | |
$ | (253,626 | ) | |
$ | (291,920 | ) |
Net cash used in investing activities | |
| (2,843 | ) | |
| (21, 924) | |
Net cash provided by financing activities | |
| 245,249 | | |
| 211,600 | |
Net decrease in cash equivalents | |
$ | (11,220 | ) | |
$ | (102,244 | ) |
At September 30, 2015, the Company had cash
and cash equivalents of $61,564 compared to cash and cash equivalents of $72,784 at September 30, 2014, a decrease of $11,220.
The decrease in cash is the direct result of the net cash used in operating activities of $253,626. The decrease in cash was partially
offset by line of credit borrowing of $163,949 and stockholder/officer net advances of $81,300.
Cash Flows Used by Operating
Activities
Cash used in operating activities during 2015
was $253,626 as compared to $291,920 during 2014.
During 2014, the Company received $374,025 (included
in other income) from the favorable settlement of a legal matter and had net income of $341,300.
During the year ended September 30, 2015, the
Company incurred a net loss of $372,509.
A decrease in inventory (current and non-current)
of $239,498 and an increase in accrued liabilities of $72,525 during 2015 were offset by a $107,980 decrease in accounts payable
and a $48,338 increase in sales commission advances. The decrease in inventory is associated with inventory reduction levels to
meet lower sales demand.
Accounts receivable increased by $96,069 compared
to an increase of $95,037 during 2014. The increase ($1,032) in 2015 is the result of higher sales occurring at the end of the
fourth fiscal quarter.
Accrued liabilities as of September 30, 2015,
increased by $72,525 due to accrued interest on a loan due to Mr. Shrewsbury.
Accounts payable decreased $107,980 in 2015 compared
to a $362,376 increase in the prior year. The decrease is the result of lower purchases of inventory as compared to the prior
year due to lower anticipated sales.
During 2014, a $93,167 legal service debt write-off
recorded on December 31, 2013, accounted for the reported gain on extinguishment of debt. The gain from the reversal of the debt
was recorded on a disputed debt the Company deems no longer payable.
Cash Flows Used in Investing Activities
Cash used in investing activities was directed
to the purchase and refurbishing of a truck/trailer during 2015 ($4,149) and 2014 ($46,015). The new truck/trailer and equipment
was required for the shipping and warehousing of finished goods products.
Sale of obsolete equipment during the year ended
2014 generated cash of $18,000.
On May 30, 2012, the Company sold 100% of the
interest in an Oil and Gas lease for $80,000. The Company received a down payment of $40,000 and a note for the balance of $40,000.
The note is secured by future lease production. During the years ended September 30, 2015 and 2014, the Company received note
payments of $1,306 and $6,091, respectively.
Cash Flows Provided by Financing Activities
During 2015, cash provided by financing activities
was $245,249 as compared to $211,600 during 2014. During such periods, the Company drew down $163,949 and $300,000, respectively
under the Company’s bank line of credit. Also during such periods, the Company received advances from our CEO of $127,300
and $34,450, respectively, and repaid stockholder advances of $46,000 and $122,850, respectively.
The Company had two primary sources of financing
during 2015 and 2014. A bank line of credit and a loan and advances from a stockholder/officer.
In November 2012, we obtained a $250,000 line of credit from a
bank. On August 26, 2014, the bank increased the Company’s existing bank line of credit from $250,000 to $750,000 and extended
the term of the loan. The loan which was refinanced in December 2015 was secured by a priority security interest in the Company’s
inventory and accounts receivable and matured on November 7, 2015. Interest on the loan was payable monthly and was calculated
on the basis of a variable index. As of September 30, 2015, the Company had borrowed $712,449 under the loan. The rate of interest
under the loan was 3.25% per annum. Principal, interest and collection costs under the loan were guaranteed by Mr. Shrewsbury.
On December 3, 2015, we obtained a new term loan from the bank in the amount of $711,376. We utilized the proceeds of the new
loan to repay the line of credit. The new loan is for a term of five years and matures on December 3, 2020. During the term of
the loan we have 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. Interest under the new loan is variable and is based upon the Wall Street Journal Prime rate, currently 3.25% per annum.
In the event of a default, interest under the loan may be increased by 2%. The new loan is secured by a priority security interest
in our inventory and accounts receivable and guaranteed by our CEO.
On February 25, 2014, the Company and Mr. Shrewsbury
entered into an agreement to consolidate an aggregate of $2,000,000 of the 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 amounts. The Consolidated Note bears interest at 5% per annum or
prime rate if higher than 5% per annum, principal and interest are repayable ten years from February 25, 2014, and it is subject
to customary events of default. Payment of the Consolidated Note is to be secured or otherwise payable by the Company out of the
death benefit proceeds of key man insurance of $2 million that has been purchased by the Company on the life of Mr. Shrewsbury.
During 2015, the Company received $127,300 in
cash advances from Mr. Shrewsbury and repaid $46,000, bringing the total outstanding advance balance to $124,637. Cash advances
from Mr. Shrewsbury are repayable upon demand and do not bear interest.
Property and Equipment, net, was $66,575 as of
September 30, 2015 compared to $72,530 as of September 30, 2014. Delivery equipment depreciation recorded in the current year
accounts for the reduction in Property and Equipment.
As of September 30, 2015, the Company had accrued
and unpaid an amount of $451,743 due to Jose Fuentes, CFO, as payment for past services.
Financial Condition and Going Concern Uncertainties
Except for the six consecutive quarters ended
June 30, 2014, since inception, the Company has not generated sufficient cash to fund its operations and has incurred operating
losses. Currently, the Company relies substantially upon financing provided by Mr. Shrewsbury, the Company’s Chief Executive
Officer, and secured bank indebtedness in connection with the development and expansion of its business. In view of these matters,
realization of certain assets in the accompanying balance sheet is dependent upon continued operations, which in turn, is dependent
on our ability to meet our financial requirements, upon the continued provision of financing from Mr. Shrewsbury and under the
Company’s bank line of credit, and the success of our future operations.
Our independent registered public accounting
firm’s report on the financial statements included in our Annual Report on Form 10-K for the year ended September 30, 2015,
contained an explanatory paragraph 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 to become our stockholder.
As of September 30, 2015, the Company had cash
and cash equivalents of $61,564 as compared to $72,784 as of September 30, 2014. The decrease in cash resulted from
the Company’s net loss during the current fiscal year.
The Company’s accounts receivable were
$585,043 as of September 30, 2015, as compared to $502,617 as of September 30, 2014, an increase of $82,426 or 16.4%. The increase
resulted from a timing difference due to relatively increased sales during the second half of September 2015 resulting in a higher
receivable balance at month end in comparison to the prior year.
Inventory (current and non-current) was $2,523,037
as of September 30, 2015 as compared to $2,762,535 as of September 30, 2014, a decrease of $239,498 or 8.7%. The inventory
reduction is the direct result of lower sales due to the recent slow-down in the U.S. coal mining industry.
During 2015, our stockholders’ deficit
increased from $14,380,202 to $14,752,711, an increase of $372,509 or 2.6%. The net loss for the year ended September 30,
2015 accounts for the increase in stockholders’ deficit.
During the year ended September 30, 2015, the
Company’s net loss was $372,509 compared to a net income of $341,300 for 2014 representing a decrease of $713,809. The
decrease can be directly attributed to lower sales of $1,179,887 during the current period and a favorable legal settlement ($374,025)
recorded in the prior year. The lower sales are the result of operational downturn in the coal mining industry.
Currently, in addition to funds utilized to purchase
inventory, the Company is spending approximately $80,000 per month on operations. Management believes that the Company’s
cash flows from its operations, the loans and advances provided by Mr. Shrewsbury, and the loan provided by the bank to be
sufficient to fund the Company operations for the next 12 months. However, the Company will require additional financing to meet
any large capital requirements or to meet its current obligations if its business does not generate sufficient operational cash
flow.
The Company continues to rely substantially upon
financings provided by Mr. Shrewsbury and the bank to fund its operations, discussed below.
Bank Loan
Under the terms of a business loan agreement,
originally entered into on November 7, 2012, and as amended through August 26, 2014, the Company obtained a secured revolving
line of credit in the amount of $750,000 from Town Square Bank. Interest on the loan 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 line of credit. The loan is for a term of five years and matures on December 3, 2020.
During the term of the loan, we have 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 between the bank and the Company: |
| · | we
default 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 we made to the bank under the loan document 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 of ours 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 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 3.25% 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.
Advances and Loans from Our Chief Executive
Officer
In connection with the expansion of the Company’s
business, Mr. Shrewsbury, the Company’s Chairman and CEO, provided financing to the Company in the form of demand notes
and advances. On February 25, 2014, the Company entered into a Note Exchange Agreement (“Exchange Agreement”) with
Mr. Shrewsbury pursuant to which certain outstanding indebtedness due to Mr. Shrewsbury was consolidated and restructured. Under
the terms of the agreement, the Company and Mr. Shrewsbury consolidated the following indebtedness: the principal due under the
Revolving Promissory Demand Note issued to Mr. Shrewsbury on April 30, 2012 (“Revolving Note”), in the amount of $1,062,000
and accrued but unpaid interest due thereunder as of January 31, 2014, in the amount of $168,905; the principal due under the
10% Promissory Note issued to Mr. Shrewsbury effective February 27, 2009 (the “10% Note”), in the amount of $289,997
and accrued but unpaid interest due thereunder as of January 31, 2014, in the amount of $93,252; and $385,846 of the non-interest
bearing advances previously made by Mr. Shrewsbury and outstanding as of January 31, 2014. The Company issued in exchange and
in replacement for such indebtedness a Consolidated Secured Promissory Note (the “Consolidated Note) in the principal amount
of $2,000,000. Upon issuance of the Consolidated Note, the Revolving Note and 10% Note were cancelled. Mr. Shrewsbury agreed to
waive any prior defaults under the terms of such cancelled notes and to release the Company from any claims related thereto.
The principal and interest under the Consolidated
Note is due and payable ten years from the date of issuance and is to be secured by the proceeds of key man insurance purchased
by the Company on the life of Mr. Shrewsbury. The Consolidated Note bears interest at the rate of 5% per annum except that, if
the prime rate reported by the Wall Street Journal (“WSJ Prime Rate”) exceeds 5%, then the Consolidated Note will
bear interest at the WSJ Prime Rate.
An event of default will occur under the Consolidated
Note upon:
| · | the
Company’s failure to pay when due any principal or interest under the Consolidated
Note; |
| · | the
violation by the Company of any covenant or agreement contained in the Consolidated Note,
the Exchange Agreement or related transaction documents; |
| · | an
assignment for the benefit of creditors by the Company; |
| · | the
application for the appointment of a receiver or liquidator for the Company or for property
of the Company; |
| · | the
filing of a petition in bankruptcy by or against the Company; |
| · | the
issuance of an attachment or the entry of a judgment against the Company in excess of
$250,000; |
| · | a
default by the Company with respect to any other indebtedness or with respect to any
installment debt whether or not owing to Mr. Shrewsbury; |
| · | the
sale of all or substantially all of the Company’s assets or a transfer of more
than 51% of the Company’s equity interests to a person not currently a holder of
equity interests of the Company; |
| · | the
termination of existence or the dissolution of the Company; |
| · | the
death of Mr. Shrewsbury; or the failure to pay when due any premium under the key man
policy required to be purchased on the life of Mr. Shrewsbury under the Exchange Agreement. |
In addition, in consideration of Mr. Shrewsbury
agreeing to consolidate and restructure the indebtedness, the Company granted to Mr. Shrewsbury options to purchase an aggregate
of 500,000 shares of the Company’s common stock pursuant to the terms of a Non-Qualified Stock Option Agreement, issued
February 25, 2014. The options are exercisable commencing April 1, 2014, and for a period of three years thereafter. The options
are exercisable at a price of $0.0924 per share subject to certain anti-dilution adjustments in the event of stock dividends,
subdivisions, capital reorganizations, a consolidation or merger, or sale of all or substantially all of our assets.
As of September 30, 2015, Mr. Shrewsbury had
advanced an aggregate of $124,637 to the Company. The advances do not bear interest and are repayable upon demand. At September
30, 2015, the Company also has a payable of $12,000 to Mr. Shrewsbury for warehouse storage rental.
The Consolidated Note and advances are subordinate
to the Company’s bank indebtedness.
RECENTLY ISSUED ACCOUNTING STANDARDS
During the year ended September 30, 2015 and through December 30,
2015. There were several new accounting pronouncements issued by the Financial Accounting Standards Board (FASB). Each of these
pronouncements, as applicable, has been or will be adopted by the Company. Management does not believe the adoption of any of
these accounting pronouncements has had or will have a material impact on the Company’s financial statements.
| ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK |
Disclosure in response to this item is not required
of a smaller reporting company.
| ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA |
The Company’s consolidated balance sheets as of September 30, 2015
and 2014 and the related consolidated statements of operations, consolidated changes in stockholders’ deficit and consolidated
cash flows for the years then ended have been audited by Turner, Stone and Company, LLP. Turner, Stone and Company, LLP is an
independent registered public accounting firm. These financial statements have been prepared in accordance with accounting principles
generally accepted in the United States of America and pursuant to Regulation S-K as promulgated by the Securities and Exchange
Commission and are included herein pursuant to Part II, Item 8 of this Form 10-K. The financial statements have been prepared
assuming the Company will continue as a going concern.
TX HOLDINGS, INC. |
|
CONSOLIDATED FINANCIAL STATEMENTS
- TABLE OF CONTENTS |
For the
Years Ended September 30, 2015 and 2014 |
Report of Independent Registered Public
Accounting Firm
Board of Directors and Stockholders
TX Holdings, Inc.
We have audited the accompanying balance sheets
of TX Holdings, Inc. (the “Company”) as of September 30, 2015 and 2014 and the related statements of operations, changes
in stockholders’ deficit and cash flows for the years then ended. These financial statements are the responsibility of the
Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the
standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the
audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred
to above present fairly, in all material respects, the financial position of TX Holdings, Inc. as of September 30, 2015 and 2014,
and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally
accepted in the United States of America.
The accompanying financial statements have been
prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company
has incurred significant losses from operations since inception and has a stockholders’ deficit, both of which raise substantial
doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described
in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ Turner, Stone & Company, L.L.P.
Dallas, Texas
December 29, 2015
TX
HOLDINGS, INC. |
CONSOLIDATED BALANCE SHEETS |
September
30, 2015 and 2014 |
| |
September 30, | | |
September 30, | |
| |
2015 | | |
2014 | |
ASSETS | |
| | | |
| | |
Current assets: | |
| | | |
| | |
Cash and cash equivalents | |
$ | 61,564 | | |
$ | 72,784 | |
Accounts receivable, net of allowance for doubtful
accounts of $13,643 and $32,343, respectively | |
| 585,043 | | |
| 502,617 | |
Inventory | |
| 2,223,037 | | |
| 2,762,535 | |
Commission advances | |
| 48,338 | | |
| – | |
Note receivable-current | |
| 10,000 | | |
| 10,000 | |
Other current assets | |
| 27,674 | | |
| 45,327 | |
Total current assets | |
| 2,955,656 | | |
| 3,393,263 | |
| |
| | | |
| | |
Inventory, non-current (Note 1) | |
| 300,000 | | |
| – | |
Property and equipment, net (Note 2) | |
| 66,575 | | |
| 72,530 | |
Note receivable, less current portion | |
| 19,983 | | |
| 21,289 | |
Other | |
| 500 | | |
| – | |
| |
| | | |
| | |
Total Assets | |
$ | 3,342,714 | | |
$ | 3,487,082 | |
| |
| | | |
| | |
LIABILITIES AND STOCKHOLDERS’
DEFICIT | |
| | | |
| | |
| |
| | | |
| | |
Current liabilities: | |
| | | |
| | |
Accrued liabilities | |
$ | 696,624 | | |
$ | 606,099 | |
Accounts payable | |
| 946,576 | | |
| 1,054,556 | |
Advances from officer (Note 7) | |
| 124,637 | | |
| 43,337 | |
Bank-line of credit (Note 9
and 11) | |
| 712,449 | | |
| 548,500 | |
Total current liabilities | |
| 2,480,286 | | |
| 2,252,492 | |
| |
| | | |
| | |
Note payable to offier (Note
7) | |
| 2,000,000 | | |
| 2,000,000 | |
Total Liabilities | |
| 4,480,286 | | |
| 4,252,492 | |
| |
| | | |
| | |
Commitments and contingencies (Notes 6 and 7) | |
| | | |
| | |
| |
| | | |
| | |
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 September 30, 2015 and 2014 | |
| 9,293,810 | | |
| 9,293,810 | |
Additional paid-in capital | |
| 4,321,329 | | |
| 4,320,982 | |
Accumulated deficit | |
| (14,752,711 | ) | |
| (14,380,202 | ) |
Total stockholders’ deficit | |
| (1,137,572 | ) | |
| (765,410 | ) |
| |
| | | |
| | |
Total Liabilities and Stockholders’
Deficit | |
$ | 3,342,714 | | |
$ | 3,487,082 | |
The accompanying notes are an integral part
of the consolidated financial statements.
TX HOLDINGS,
INC. |
CONSOLIDATED STATEMENTS OF OPERATIONS |
For
the Years Ended September 30, 2015 and 2014 |
| |
September 30, | | |
September 30, | |
| |
2015 | | |
2014 | |
| |
| | |
| |
Revenue | |
$ | 3,105,733 | | |
$ | 4,285,620 | |
| |
| | | |
| | |
Cost of goods sold | |
| 2,469,697 | | |
| 3,149,924 | |
| |
| | | |
| | |
Gross profit | |
| 636,036 | | |
| 1,135,696 | |
| |
| | | |
| | |
Operating expenses, except items shown separately below | |
| 551,292 | | |
| 490,266 | |
Commission expense | |
| 236,119 | | |
| 458,086 | |
Professional fees | |
| 86,837 | | |
| 179,996 | |
Stock-based compensation | |
| 347 | | |
| 16,702 | |
Bad debt expense | |
| 13,643 | | |
| 18,350 | |
Depreciation expense | |
| 10,104 | | |
| 9,679 | |
Total operating expenses | |
| 898,342 | | |
| 1,173,079 | |
| |
| | | |
| | |
Loss from operations | |
| (262,306 | ) | |
| (37,383 | ) |
| |
| | | |
| | |
Other income and (expense): | |
| | | |
| | |
Legal settlement (Note 6) | |
| – | | |
| 374,025 | |
Gain on disposal of fixed assets | |
| – | | |
| 10,807 | |
Gain on extinguishment of accounts payable | |
| – | | |
| 93,167 | |
Other income | |
| 15,505 | | |
| – | |
Interest expense | |
| (125,708 | ) | |
| (99,316 | ) |
| |
| | | |
| | |
Total other income and (expense),
net | |
| (110,203 | ) | |
| 378,683 | |
| |
| | | |
| | |
Income (loss) before provision for income taxes | |
| (372,509 | ) | |
| 341,300 | |
| |
| | | |
| | |
Provision for income taxes | |
| – | | |
| 122,000 | |
Utilization of net operating loss
carry forward | |
| – | | |
| (122,000 | ) |
| |
| | | |
| | |
Net income (loss) | |
$ | (372,509 | ) | |
$ | 341,300 | |
| |
| | | |
| | |
Net earnings (loss) per common share | |
| | | |
| | |
Basic | |
$ | (0.01 | ) | |
$ | 0.01 | |
| |
| | | |
| | |
Weighted average of common shares outstanding- | |
| | | |
| | |
Basic | |
| 48,053,084 | | |
| 48,053,084 | |
The accompanying notes are an integral part
of the consolidated financial statements.
TX
HOLDINGS, INC. |
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’
DEFICIT |
For
the Years Ended September 30, 2015 and 2014 |
| |
| | |
| | |
| | |
| | |
Additional | | |
| | |
| |
| |
Preferred Stock | | |
Common Stock | | |
Paid in | | |
Accumulated | | |
| |
| |
Shares | | |
Amount | | |
Shares | | |
Amount | | |
Capital | | |
Deficit | | |
Total | |
Balance at September
30, 2013 | |
| – | | |
$ | – | | |
| 48,053,084 | | |
| 9,293,810 | | |
| 4,304,280 | | |
| (14,721,502 | ) | |
| (1,123,412 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Warrants issued to an officer | |
| – | | |
| – | | |
| – | | |
| – | | |
| 14,971 | | |
| – | | |
| 14,971 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Warrants issued to a sales agent | |
| – | | |
| – | | |
| – | | |
| – | | |
| 1,731 | | |
| – | | |
| 1,731 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Net income | |
| – | | |
| – | | |
| – | | |
| – | | |
| – | | |
| 341,300 | | |
| 341,300 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Balance at September 30, 2014 | |
| – | | |
$ | – | | |
| 48,053,084 | | |
$ | 9,293,810 | | |
$ | 4,320,982 | | |
$ | (14,380,202 | ) | |
$ | (765,410 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Warrants issued to a sales agent | |
| – | | |
| – | | |
| | | |
| | | |
| 347 | | |
| | | |
| 347 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Net loss | |
| – | | |
| – | | |
| | | |
| | | |
| | | |
| (372,509 | ) | |
| (372,509 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Balance at
September 30, 2015 | |
| – | | |
$ | – | | |
| 48,053,084 | | |
$ | 9,293,810 | | |
$ | 4,321,329 | | |
$ | (14,752,711 | ) | |
$ | (1,137,572 | ) |
The accompanying notes are an integral part
of the consolidated financial statements.
TX
HOLDINGS, INC. |
CONSOLIDATED STATEMENTS OF CASH FLOWS |
For
the Years Ended September 30, 2015 and 2014 |
| |
September 30, | | |
September 30, | |
| |
2015 | | |
2014 | |
Cash flows used in operating activities: | |
| | | |
| | |
Net income (loss) | |
$ | (372,509 | ) | |
$ | 341,300 | |
Adjustments to reconcile net income (loss) to net cash used in operating activities: | |
| | | |
| | |
Depreciation expense | |
| 10,104 | | |
| 9,679 | |
Bad debt expense | |
| 13,643 | | |
| 18,350 | |
Gain on extinguishment of accounts payable | |
| – | | |
| (93,167 | ) |
Stock-based compensation | |
| 347 | | |
| 16,702 | |
Gain on disposal of fixed assets | |
| – | | |
| (10,807 | ) |
Other assets | |
| (500 | ) | |
| 200 | |
Changes in operating assets and liabilities: | |
| | | |
| | |
Accounts receivable | |
| (96,069 | ) | |
| (95,037 | ) |
Inventory | |
| 539,498 | | |
| (912,548 | ) |
Commission advances | |
| (48,338 | ) | |
| 3,546 | |
Other current assets | |
| 17,653 | | |
| (22,052 | ) |
Inventory, non-current | |
| (300,000 | ) | |
| | |
Accrued liabilities | |
| 72,525 | | |
| 71,538 | |
Accounts payable | |
| (107,980 | ) | |
| 362,376 | |
Stockholder/officers advances for operations | |
| 18,000 | | |
| 18,000 | |
Net cash used in operating activities | |
| (253,626 | ) | |
| (291,920 | ) |
| |
| | | |
| | |
Cash flows used in investing activities: | |
| | | |
| | |
Proceeds received from disposal of fixed assets | |
| – | | |
| 18,000 | |
Notes receivable | |
| 1,306 | | |
| 6,091 | |
Purchase of equipment | |
| (4,149 | ) | |
| (46,015 | ) |
Net cash used in investing activities | |
| (2,843 | ) | |
| (21,924 | ) |
| |
| | | |
| | |
Cash flows provided by financing activities: | |
| | | |
| | |
Proceeds from bank line of credit | |
| 163,949 | | |
| 300,000 | |
Proceeds from stockholder/officer advances | |
| 127,300 | | |
| 34,450 | |
Repayment of stockholder/officer advances | |
| (46,000 | ) | |
| (122,850 | ) |
Net cash provided by financing activities | |
| 245,249 | | |
| 211,600 | |
| |
| | | |
| | |
Decrease in cash and cash equivalents | |
| (11,220 | ) | |
| (102,244 | ) |
Cash and cash equivalents at end of year beginning of year | |
| 72,784 | | |
| 175,028 | |
| |
| | | |
| | |
Cash and cash equivalents at end of year | |
$ | 61,564 | | |
$ | 72,784 | |
Supplemental Cash Flow Disclosure | |
| | | |
| | |
| |
| | | |
| | |
Interest Paid | |
$ | 23,575 | | |
$ | 10,798 | |
The accompanying notes are an integral part
of the consolidated financial statements.
TX HOLDINGS,
INC. |
|
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS |
|
NOTE 1- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ACTIVITIES
BUSINESS
TX Holdings, Inc., a Georgia corporation (the
“Company” ), is in the business of supplying, distributing and selling drill bits, related tools, and other mining supplies
and rail products to United States’ coal mining companies and operators for use in their extraction and transportation processes.
The products are supplied to the Company by certain manufacturers and suppliers and warehoused and distributed from the Company’s
principal business location in Ashland, Kentucky.
The Company was incorporated in the State of
Georgia on May 15, 2000.
Rail and Mining Supplies Distribution Business
Commencing in December 2011, the Company expanded
and began focusing its business on the distribution of rail material and mining supplies consumed by the United States’
coal mining industry in its production and transportation processes. This includes rail and its various components and mining
supplies, such as steel and tungsten carbide miner bits and augurs and related tools and material.
In connection with the Company’s business
expansion, Mr. Shrewsbury, our Chairman and CEO, has provided us with financing in the form of loans and advances and has guaranteed
our bank line of credit.
On February 25, 2014, the Company and Mr.
Shrewsbury entered into an agreement to consolidate certain indebtedness due to Mr. Shrewsbury in the aggregate amount of $2,000,000,
including the principal due under a Revolving Demand Note (“Revolving Note”) in the principal amount of $1,062,000
and accrued but unpaid interest due thereunder as of January 31, 2014 in the amount of $168,905, the principal due under a 10%
Promissory Note (“10% Note”) in the amount of $289,997 and accrued but unpaid interest due thereunder as of January
31, 2014 in the amount of $93,252; and $385,846 of non-interest bearing advances previously made by Mr. Shrewsbury and outstanding
as of January 31, 2014. The Company issued in exchange and in replacement therefor a Consolidated Secured Promissory Note (the
“Consolidated Note”) in the principal amount of $2,000,000. Upon issuance of the Consolidated Note, the Revolving
Note and 10% Note were cancelled and Mr. Shrewsbury agreed to waive any prior defaults under the terms of such notes and to release
the Company from any claims related thereto. In addition, in consideration of Mr. Shrewsbury agreeing to consolidate and restructure
the foregoing indebtedness, the Company granted to Mr. Shrewsbury options to purchase an aggregate of 500,000 shares of the Company’s
common stock pursuant to the terms of a Non-Qualified Stock Option Agreement, issued February 25, 2014. The options are exercisable
for a period of three years commencing April 1, 2014. 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, merger, or
sale of all or substantially all of the assets.
The Consolidated Note bears interest at the rate
of 5% per annum or prime rate if higher than 5% per annum, is repayable in full ten years from the date of issuance and is subject
to certain events of default. Payment of the Consolidated Note is to be secured or otherwise payable by the Company out of the
death benefit proceeds of key man insurance of $2 million that has been purchased by the Company on the life of Mr. Shrewsbury.
The terms and conditions of the foregoing debt consolidation and restructuring were submitted to and unanimously approved by the
disinterested members of the Board of Directors of the Company who are also “qualified directors” within the definition
set forth in Section 14-2-862 of the Georgia Corporation Code. Mr. Shrewsbury has also advanced the Company an additional $124,637
which is not interest bearing. The notes and advances due to Mr. Shrewsbury are subordinate to the Company’s bank indebtedness.
FINANCIAL CONDITION AND GOING CONCERN CONSIDERATIONS
Although the Company has been profitable during
fiscal 2014 and 2013, the Company has not generated sufficient cash during the current fiscal year to fund its operations and
relies substantially upon financing provided by Mr. Shrewsbury, the Company’s Chief Executive Officer, and a secure bank
line of credit that is guaranteed by Mr. Shrewsbury.
TX HOLDINGS,
INC. |
|
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS |
|
NOTE 1- SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES AND ACTIVITIES-Continued
FINANCIAL
CONDITION AND GOING CONCERN CONSIDERATIONS-Continued
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 availability of financing from Mr. Shrewsbury and under the Company’s bank line of credit,
and the success of our future operations.
Our independent registered public accounting firm’s report
on the financial statements included in our Annual Report on Form 10-K for the years ended September 30, 2015, and 2014 contains
an explanatory paragraph wherein they state that the Company has incurred significant losses from operations since inception and
has a stockholders’ deficit, both of which raise substantial doubt about the Company’s ability to continue as a going
concern.
Accordingly, you should give careful consideration to our auditor’s
opinion and these matters in determining whether to become or continue to be our stockholder.
The accompanying financial statements have been prepared on a going
concern basis, which contemplates continuing operations and realization of assets and liquidation of liabilities in the ordinary
course of business. The Company’s ability to continue as a going concern is dependent upon its ability to implement successfully
its business plan and to become financially viable. The financial statements do not include adjustments relating to the recoverability
of recorded assets nor the implications of associated bankruptcy costs should the Company be unable to continue as a going concern.
The financial statements have been prepared by the Company pursuant
to the rules and regulations of the Securities and Exchange Commission (“SEC”) and U. S. generally accepted accounting
principles.
USE OF ESTIMATES AND ASSUMPTIONS
The preparation of financial statements in
conformity with accounting principles generally accepted in the United States of America requires management to make estimates
and assumptions and calculated estimates that affect (a) certain reported amounts of assets and liabilities, (b) disclosure of
contingent assets and liabilities at the date of the financial statements, and (c) the reported amounts of revenues and expenses
during the reporting periods. Significant items subject to such estimates and assumptions include recoverability of long-lived
and deferred tax assets, and measurement of stock based compensation. The Company bases its estimates on historical experience
and various other common assumptions that management believes to be reasonable under the circumstances. Changes in estimates are
recorded in the period in which they become known. Actual results could differ from those estimates.
CASH AND CASH FLOWS
For purposes of the statements of cash flows, cash includes demand
deposits, time deposits, certificates of deposit and short-term liquid investments in government securities with original maturities
of three months or less when purchased. The Company maintains deposits in two financial institutions. The Federal Deposit Insurance
Corporation provides coverage up to $250,000 per depositor, per bank. At September 30, 2015, none of the Company’s cash
was in excess of federally insured limits. The Company has not experienced any losses in such accounts and does not believe it
is exposed to any significant credit risks from these deposits.
ACCOUNTS RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS
The Company’s practice is to record an allowance for doubtful
accounts for estimated losses resulting from the inability of customers to make required payments. The estimate is based on management’s
assessment of the collectability of customer accounts and includes consideration for credit worthiness and financial condition
of those customers. The Company reviews historical experience with its customers, the general economic environment and the aging
of receivables to determine the adequacy of the allowance. The Company records an allowance to reduce receivables to the amount
that can be reasonably expected to be collectible. The allowance for doubtful accounts was $13,643 and $32,343 for the years ended
September 30, 2015 and 2014, respectively.
TX HOLDINGS,
INC. |
|
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS |
|
NOTE 1- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ACTIVITIES-Continued
ACCOUNTS RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS-Continued
During fiscal year 2015, the Company wrote-off two uncollectable
customers’ accounts in the amount of $32,343 and added $13,643 for one customer doubtful account.
INVENTORY
The Company’s inventory consists of
mine and rail inventory. Inventory is stated at the lower of cost (first-in, first-out) or market. During the current year,
the Company has reclassified rail inventory in the amount of $300,000 from current to non-current, as it anticipated the
inventory will not be sold in the subsequent year.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less depreciation. Major
renewals and betterments are capitalized, while maintenance and repairs that do not materially improve or extend the useful lives
of the assets are charged to expense as incurred. A depreciable life of three (3) years and five (5) years are assigned to delivery
trucks and equipment, respectively. Assets are depreciated over their estimated useful lives using the straight-line method. The
Company records impairment losses on long-lived assets used in operations when events and circumstances indicate that the assets
might be impaired and the undiscounted cash flows estimated to be generated by those assets are less than the carrying amounts
of those assets (Note 2).
REVENUE RECOGNITION
The Company recognizes revenue from direct sales
of our products to our customers, including shipping fees, when title passes to the customer, which usually occurs upon shipment
or delivery, depending upon the terms of the sales order, when persuasive evidence of an arrangement exists; when sales amounts
are fixed or determinable; and when collectability is reasonably assured. The Company expenses shipping and handling costs as
incurred which are included in cost of sales on the consolidated statements of operations.
STOCK BASED COMPENSATION
The Company accounts for share-based expense and activity in accordance
with Financial Accounting Standard Board (FASB) ASC Topic 718 which establishes accounting for equity instruments exchanged for
services. Under this provision share-based compensation costs are measured at the grant date, based on the calculated fair value
of the award, and are recognized as an expense over employee’s requisite service period, generally the vesting period of
the equity grant.
The Company estimates the fair value of stock options using the
Black-Scholes valuation model. Key input assumptions used to estimate the fair value of stock options include the exercise price
of the award, expected option term, expected volatility of the stock over the option’s expected term, risk-free interest
rate over the option’s expected term and the expected annual dividend yield. The Company believes that the valuation technique
and approach utilized to develop the underlying assumptions are appropriate in calculating the fair value of the stock options
granted (Note 5).
POTENTIALLY DILUTIVE OPTIONS AND WARRANTS
At September 30, 2015, the Company has
outstanding 200,000 warrants and 500,000 options which were not included in the twelve months ended September 30, 2015
calculation of diluted net loss per share since their inclusion will be antidilutive. The 500,000 options had been issued to
an officer and the 200,000 warrants are issued to a sales agent. At September 30, 2014, the Company had outstanding 200,000
warrants and 500,000 options which were not included in the twelve months ended September 30, 2014. The incremental number of
additional shares which would have had dilutive effect under the treasury stock method was -0- due to the exercise price and
average market price of our common stock being equal for the period.
TX HOLDINGS,
INC. |
|
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS |
|
NOTE 1- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ACTIVITIES-Continued
INCOME TAXES
Income taxes are estimated for the tax effects of transactions
reported in the financial statements and consist of deferred taxes related primarily to differences between the financial reporting
basis and income tax basis of assets and liabilities. Deferred tax assets and liabilities represent future tax consequences of
those differences, which will either be taxable or deductible when the assets and liabilities are recovered or settled.
Deferred taxes may also be recognized for operating losses that
are available to offset future taxable income. Deferred taxes are adjusted for changes in tax laws and tax rates when those changes
are enacted.
In assessing the deferred tax assets, management considers whether
it is more likely than not that some portion or all of the deferred tax assets will be realized. The ultimate realization of deferred
tax assets is dependent upon the generation of future taxable income during periods in which temporary differences become deductible.
Management considers the reversal of any deferred tax liabilities, projected future taxable income and tax planning strategies
in making this assessment. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected
to be realized.
FINANCIAL INSTRUMENTS
The Company includes fair value information in
the notes to the financial statements when the fair value of its financial instruments is different from the book value. When
the book value approximates fair value, no additional disclosure is made, which is the case for financial instruments outstanding
as of September 30, 2015 and 2014. The book value of those financial instruments that are classified as current assets or liabilities
approximates fair value because of the short maturity of these instruments. For non-current financial instruments, the Company
uses quoted market prices or, to the extent that there are no quoted market prices, market prices for similar instruments.
FAIR VALUE MEASUREMENT
ASC Topic 820, Fair Value Measurement, defines
fair value, establishes a framework for measuring fair value in accordance with U. S. generally accepted accounting principles,
and requires certain disclosures about fair value measurements. In general, fair values of financial instruments are based upon
quoted market prices, where available. If such quoted market prices are not available, fair value is based upon internally developed
models that primarily use, as inputs, observable market-based parameters. Valuation adjustments may be made to ensure that financial
instruments are recorded at fair value. These adjustments may include amounts to reflect counterparty credit quality and the customer’s
creditworthiness, among other things, as well as unobservable parameters. Any such valuation adjustments are applied consistently
over time.
BASIC NET INCOME (LOSS) PER COMMON SHARE
Net income or loss per share is computed based on current accounting
guidance requiring companies to report both basic net income or loss per common share, which is computed using the weighted average
number of common shares outstanding during the period, and diluted net income per common share, which is computed using the weighted
average number of common shares outstanding and the weighted average dilutive potential common shares outstanding using the treasury
stock method.
TX HOLDINGS,
INC. |
|
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS |
|
NOTE
1- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ACTIVITIES-Continued
BASIC NET INCOME (LOSS) PER COMMON SHARE-Continued
The following table summarizes securities
unissued at each of the periods presented which were not included in the calculation of diluted net earnings per share in 2015
and 2014.
| |
2015 | | |
2014 | |
| |
| | |
| |
Options and warrants issued as compensation | |
| 700,000 | | |
| 700,000 | |
| |
| | | |
| | |
Total | |
| 700,000 | | |
| 700,000 | |
RECENTLY ISSUED ACCOUNTING STANDARDS
During the year ended September 30, 2015 and through December 29,
2015, there were several new accounting pronouncements issued by the Financial Standards Board (FASB). Each of these pronouncements,
as applicable, has been or will be adopted by the Company. Management does not believe the adoption of any of these accounting
pronouncements has had or will have a material impact on the Company’s financial statements.
NOTE 2 - PROPERTY AND EQUIPMENT
We lease approximately 4,800 square feet of office
and warehouse space and certain land located at 12080 Virginia Blvd, Ashland, Kentucky, from Mr. Shrewsbury, our CEO, and Mrs.
Shrewsbury pursuant to the terms of a lease we entered into with them on November 19, 2012, for a monthly lease payment of $2,000.
The 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 24 month period upon the same terms and conditions. As of September 30, 2015, the
Company had accrued but unpaid lease payments due to Mr. and Mrs. Shrewsbury in the amount of $12,000; accordingly, the Company
may be deemed to be in default under the terms of the lease agreement with Mr. and Mrs. Shrewsbury. However, the Company has not
received a notice of default or termination under the lease agreement as of the date of the filing of this report. The Company
believes that such office, warehouse and land space will be sufficient for its current needs.
Property and equipment consists of the following at September 30,
2015 and 2014:
| |
2015 | | |
2014 | |
| |
| | |
| |
Property and equipment | |
$ | 107,308 | | |
$ | 103,159 | |
| |
| | | |
| | |
Less accumulated depreciation | |
| (40,733 | ) | |
| (30,629 | ) |
| |
| | | |
| | |
| |
$ | 66,575 | | |
$ | 72,530 | |
Depreciation expense of $10,104 and $9,679 were recognized during
the years ended September 30, 2015 and 2014, respectively.
TX HOLDINGS,
INC. |
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
|
NOTE 3 – ACQUISITION
In November 2014, and with a view to diversifying
our business, we acquired The Bag Rack, LLC. The acquired company has developed a new product, “The Bag Rack,” a device
that enables bags with handles to be stored efficiently in a car preventing the bags from tipping over and causing spillage. We
are in the preliminary stages of developing the new product. We expect to market and sell the new product online, through broadcast
shopping networks, and other distribution outlets, and through certain national retailers and discount stores. During fiscal 2015,
we did not generate any revenue from the sale of the product and there can be no assurance we will be able to generate any revenue
from this new product.
NOTE 4 - INCOME TAXES
The tax effects of temporary differences that
give rise to deferred taxes are as follows at September 30, 2015 and 2014:
| |
2015 | | |
2014 | |
| |
| | |
| |
Deferred tax assets: | |
| | | |
| | |
Net operating losses | |
$ | 2,204,000 | | |
$ | 2,048,000 | |
Accrued expenses | |
| 167,000 | | |
| 251,000 | |
Valuation allowance | |
| (2,371,000 | ) | |
| (2,299,000 | ) |
| |
| | | |
| | |
Total deferred tax assets | |
| - | | |
| - | |
| |
| | | |
| | |
Deferred tax liabilities: | |
| | | |
| | |
Basis of property and equipment | |
| - | | |
| - | |
| |
| | | |
| | |
Net deferred tax asset | |
$ | - | | |
$ | - | |
Net operating losses after December 12, 2002 through September
30, 2015 were approximately $7,250,000. The Company has total net operating losses available to the Company to offset future taxable
income of approximately $6,500,000. Following is a reconciliation of the tax benefit at the federal statutory rate to the amount
reported in the statement of operations:
| |
2014 | | |
2013 | |
| |
Amount | | |
Percent | | |
Amount | | |
Percent | |
Income tax expense at federal statutory rate | |
$ | (127.000 | ) | |
| 34 | % | |
$ | 116,000 | | |
| 34 | % |
| |
| | | |
| | | |
| | | |
| | |
Change in estimate | |
| 55,000 | | |
| 15 | % | |
| (24,000 | ) | |
| (7 | ) |
| |
| | | |
| | | |
| | | |
| | |
Non-deductible expenses | |
| - | | |
| - | | |
| 30,000 | | |
| 9 | |
| |
| | | |
| | | |
| | | |
| | |
Decrease in valuation allowance | |
| 72,000 | | |
| 19 | % | |
| (122,000 | ) | |
| (36 | ) |
| |
| | | |
| | | |
| | | |
| | |
Provision for income taxes, net | |
$ | - | | |
| - | % | |
$ | - | | |
| -
| % |
TX HOLDINGS,
INC. |
|
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS |
|
NOTE 4 - INCOME TAXES-Continued
The Company’s valuation allowance attributable to its deferred
tax assets increased (decreased) by $72,000 and $(122,000) during the years ended September 30, 2015 and 2014.
The Company has tax net operating loss
carry forwards totaling approximately $7,250,000, expiring in 2018 through 2035. Approximately $1,200,000 of net operating
losses was incurred prior to December 12, 2002 at which date MA&N acquired 51% of the Company and are consequently
subject to certain limitation described in section 382 of the Internal Revenue Code. The Company estimates that, due to the
limitations and expiration dates, only $424,000 of the net operating losses incurred prior to December 12, 2002 will be
available to offset future taxable income.
NOTE 5 - STOCKHOLDERS’ DEFICIT
PREFERRED STOCK
The Company has authorized 1,000,000 shares
of no par value preferred stock. As of September 30, 2015 and 2014, there are no preferred shares issued and outstanding.
COMMON STOCK
Of the 250,000,000 shares of no par value common stock authorized
by the Company, 48,053,084 shares were issued and outstanding as of September 30, 2015 and 2014.
STOCK WARRANTS AND OPTIONS
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, over a period of four years. The agent
is entitled to receive 50,000 warrants every six months for an aggregate of 400,000 warrants. The warrants are exercisable at
a price of $0.10 per share, become exercisable upon issuance, and expire two years after the date of issuance, the first 50,000
warrants tranche were issuable effective July 1, 2012 and, additional 50,000 tranches were issuable every six months thereafter.
As of September 30, 2015 there are 200,000 warrants exercisable and 150,000 warrants have expired. The warrants were not included
in the calculation of diluted net earnings per share in 2015 and 2014 since their inclusion would 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 of authorized by the Board of Directors,
February 21, 2014. The options expire on March 31, 2017. The options were not included in the calculation of diluted earnings
per share for the year ended September 30, 2014 since their inclusion would be anti-dilutive.
The fair value of the equity based awards issued
during the years ended September 30, 2015 and 2014 was estimated using the Black-Scholes option pricing model. Expected volatility
was based on the Company’s historical volatility for its common stock and adjusted to reflect the thinly traded nature of
the market for its securities. The risk-free rate was determined using the U. S. Treasury yield in effect at the issuance date
based on the term of the equity award. The expected life was based on the contractual term of the award. The Company has never
declared or paid cash dividends and has no plans to do so in the foreseeable future.
TX HOLDINGS,
INC. |
|
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS |
|
NOTE 5 - STOCKHOLDERS’ DEFICIT-Continued
STOCK
WARRANTS AND OPTIONS-Continued
The following assumptions were utilized for
awards issued during the years ended September 30, 2015 and 2014.
|
September
30, |
|
September
30, |
|
2015 |
|
2014 |
|
|
|
|
Expected life (in years) |
2 to 3 |
|
2 to 3 |
Expected volatility |
75% |
|
75% |
Risk-free interest rate |
0.39% to 2% |
|
0.39% to 2% |
Expected dividend rate |
0 |
|
0 |
Following is a summary of outstanding stock warrants and options
at September 30, 2015 and 2014 and activity during the years then ended:
| |
Number of | | |
Exercise | | |
Weighted | |
| |
Shares | | |
Price | | |
Average Price | |
Warrants/Options at September 30, 2013 | |
| 1,450,000 | | |
$ | 0.05-0.10 | | |
$ | 0.052 | |
New Issue | |
| 600,000 | | |
| 0.092-0.10 | | |
| 0.095 | |
Forfeited | |
| (1,350,000 | ) | |
| 0.05-0.10 | | |
| 0.052 | |
Warrants/Options at September 30, 2014 | |
| 700,000 | | |
$ | 0.092-0.10 | | |
$ | 0.095 | |
New Issue | |
| 100,000 | | |
| 0.10 | | |
| 0.10 | |
Forfeited | |
| (100,000 | ) | |
| 0.10 | | |
| 0.10 | |
Warrants/Options at September 30, 2015 | |
| 700,000 | | |
$ | 0.092-0.10 | | |
$ | 0.095 | |
A summary of outstanding warrants and options
at September 30, 2015, follows:
| |
Number | | |
| | |
Remaining | |
| |
of | | |
Exercise | | |
Life | |
Expiration Date | |
Shares | | |
Price | | |
(Years) | |
January 1, 2016 | |
| 50,000 | | |
$ | 0.10 | | |
| 0.25 | |
July 1, 2016 | |
| 50,000 | | |
$ | 0.10 | | |
| 0.75 | |
January 1, 2017 | |
| 50,000 | | |
$ | 0.10 | | |
| 1.25 | |
March 31, 2017 | |
| 500,000 | | |
$ | 0.0926 | | |
| 1.5 | |
July 1, 2017 | |
| 50,000 | | |
$ | 0.10 | | |
| 1.75 | |
TX HOLDINGS,
INC. |
|
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS |
|
NOTE 6 – LEGAL PROCEEDINGS
Except as discussed below, other than ordinary
routine litigation incidental to the business, the Company is not a party to any material pending legal proceeding.
On January
17, 2012, the Company filed a lawsuit in the United States District Court for the District of Utah against Michael Cederstrom
(“Cederstrom”), the Company’s former chief financial officer and corporate counsel, Dexter and Dexter Attorneys
at Law (“Dexter”), the law firm that employed Mr. Cederstrom, and certain other parties. Claims against the other
parties have been resolved through settlement. The Company had asserted claims against Cederstrom that included a claim of fraud
in the inducement, breach of fiduciary duty, professional negligence, and negligent misrepresentation by omission or commission.
The Company’s claims against Dexter were based substantially upon the same theories and on a theory that Dexter was vicariously
liable for the acts of Cederstrom and that Dexter had failed to adequately supervise Cederstrom. The claims against Dexter and
Cederstrom were based upon allegations that, among other things, in connection with the exchange in December 2007 by Mr. Mark
Neuhaus (“Neuhaus”), the Company’s former Chief Executive Officer, of 10,715,789 shares of common stock for
shares of 1,000 preferred stock, Cederstrom failed to disclose to the Company that the preferred shares issued to Neuhaus as compensation
for work allegedly performed in 2004 and 2005 were issued without the proper consent of the previous board of directors of the
Company and that Neuhaus had not performed services for which the shares of preferred stock were issued. Additionally, the Company
claimed Cederstrom executed, on behalf of the Company, a $1,199,885.55 convertible promissory note in favor of Neuhaus that was
not authorized. The Company also claimed conflict of interest, breach of fiduciary duties, breach of contract and seeked an accounting
for the fees paid to Dexter and certain shares issued to Cederstrom by the Company.
On May 14, 2014 the Company entered into a
settlement agreement and release, dated effective May 20, 2014, with Dexter & Dexter and Mr. Cederstrom that settles all claims
among the parties arising from the litigation. Pursuant to the terms of the settlement agreement Dexter & Dexter’s insurer
paid the Company $374,025 in settlement of all claims among the parties. Also, effective upon receipt of the settlement payment,
each party agreed to release each other party and affiliates from all claim arising out of the litigation or otherwise. None of
the parties made any admission of liability in entering into the settlement agreement. Subsequently, the parties filed a joint
motion to dismiss the case with prejudice and the motion was granted by the courts on June 16, 2014.
NOTE 7– RELATED PARTY TRANSACTIONS
ADVANCES FROM STOCKHOLDER AND OFFICER
As of September 30, 2015 and 2014, Mr. Shrewsbury
had advanced an aggregate of $124,637 and $43,337, respectively, to the Company. The advances do not bear interest and are repayable
upon demand. The advances are subordinate to the Company’s bank indebtedness.
PARK’S LEASE
In November 2006, the Company entered into a Purchase and Sale
Agreement with Masada Oil & Gas, Inc. (“Masada”). Mr. Bobby S. Feller is the owner of Masada and a member of the
Company’s board. The Parks lease purchased from Masada covered 320 acres in which the company previously owned a 75% working
interest and Masada owned the remaining 25%.On January 28, 2011, TX Holdings, Inc. entered into an agreement with Masada Oil &
Gas Inc. to acquire the remaining 25% working interest in the Park’s lease. As part of the agreement, the Company also acquired
a storage building and approximately two acres of land. In return, the Company agreed to relinquish an 8.5% working interest which
it had in a different lease, pay the sum of $10,400 and, assume the current 25% lease owners’ liability in the amount of
$17,000. On May 30, 2012, the Company sold 100% of the interest on the Parks lease for $80,000. The Company received a down payment
of $40,000 and a note for the balance of $40,000. The note is secured by Park’s lease future production. On March 25, 2014,
the storage building was sold for $18,000. The note receivable balance as of September 30, 2015 and 2014 were $29.983 and 31,289,
respectively.
TX HOLDINGS,
INC. |
|
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS |
|
NOTE
7– RELATED PARTY TRANSACTIONS-Continued
NOTES PAYABLE TO A STOCKHOLDER AND OFFICER
On February 25,
2014, the Company and Mr. Shrewsbury entered into an agreement to consolidate certain indebtedness due to Mr. Shrewsbury in the
aggregate amount of $2,000,000, including the principal due under a Revolving Demand Note (“Revolving Note”) in the
principal amount of $1,062,000 and accrued but unpaid interest due thereunder as of January 31, 2014 in the amount of $168,905,
the principal due under a 10% Promissory Note (“10% Note”) in the amount of $289,997 and accrued but unpaid interest
due thereunder as of January 31, 2014 in the amount of $93,252; and $385,846 of non-interest bearing advances previously made
by Mr. Shrewsbury and outstanding as of January 31, 2014. The Company issued a Consolidated Secured Promissory Note (the “Consolidated
Note”) in the principal amount of $2,000,000 to reflect the consolidated indebtedness. Upon issuance of the Consolidated
Note, the Revolving Note and 10% Note were cancelled and Mr. Shrewsbury agreed to waive any prior defaults under the terms of
such notes and to release the Company from any claims related thereto. The Consolidated Note
bears interest at the rate of 5% per annum or prime rate if higher than 5% per annum, is repayable in full ten years from the
date of issuance and is subject to certain events of default. Payment of the Consolidated Note has been secured by the Company
by the death benefit proceeds of a $2 million key man term life insurance policy purchased by the Company on the life of Mr. Shrewsbury
and that has been assigned to Mr. Shrewsbury. The terms and conditions of the foregoing debt consolidation and restructuring were
submitted to and unanimously approved by the disinterested members of the Board of Directors of the Company.
For the year ended September 30, 2015 and
2014, interest expense of $125,708 and $99,316, respectively, in the accompanying statements of operations, relates to the Consolidated
Note and the revolving credit arrangement. Interest on the Consolidated Note payable for the amount of $159,452 and $59,452 has
been accrued as of September 30, 2015 and 2014, respectively..
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 some 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 2, 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.
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 years ended September 30, 2015 and 2014, such trucking company was paid $62,975 and $65,280, respectively,
for such trucking services, which were included in our cost of sales amount.
COMMISSIONS PAID TO COMPANY CONTROLLED BY
OFFICER/STOCKHOLDER
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 years ended September 30, 2015 and 2014 the amounts of such commission were $31,423
and $11,745, respectively.
ACCRUED OFFICER’S SALARY
As of September 30, 2015 and 2014, the Company
had accrued and unpaid an amount of $451,743 due to Jose Fuentes, CFO as payment for past services.
TX HOLDINGS,
INC. |
|
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS |
|
NOTE 7 – RELATED PARTY TRANSACTIONS-Continued
ADVANCES FROM STOCKHOLDER AND OFFICER
Included in the financial statements as of
September 30, 2015 and 2014 are advances from stockholder and officer of $124,637 and $43,337, respectively. On February 25, 2014
Mr. Shrewsbury agreed to consolidate accrued loan interest due to him in the amount of $385,846 into the principal amount of the
Consolidated Note.
| |
September | | |
September | |
| |
2015 | | |
2014 | |
| |
| | |
| |
Beginning Balance | |
$ | 43,337 | | |
$ | 499,583 | |
Proceeds from Stockholer/Officer advances | |
| 127,300 | | |
| 34,450 | |
Warehouse rental from officer/stockholder | |
| – | | |
| 18,000 | |
Repayment of stockholder advances | |
| (46,000 | ) | |
| (122,850 | ) |
Transfer to consolidated note | |
| – | | |
| (385,846 | ) |
Ending Balance | |
$ | 124,637 | | |
$ | 43,337 | |
NOTE 8 - NON CASH INVESTING AND FINANCING ACTIVITIES
Following is an analysis of non-cash investing and financing activities
during the years ended September 30, 2015 and 2014:
| |
2015 | | |
2014 | |
| |
| | |
| |
Accrued interest exchanged
for note payable to stockholder | |
$ | - | | |
| 262,157 | |
| |
| | | |
| | |
Advances from stockholder exchanged
for note payable to stockholder | |
$ | - | | |
| 385,846 | |
NOTE 9 – BANK LINE OF CREDIT
On November 7, 2012, the Company obtained a line of credit for
the approximate amount of $250,000 from a bank. The line of credit was secured by a priority security interest in the Company’s
inventory, and matured on November 7, 2013 and was subsequently extended to November 7, 2014. Interest on the line of credit was
payable monthly and was calculated on the basis of an independent variable indexed rate which is currently 3.25% per annum. The
line of credit was guaranteed as to principal and interest, and all collection costs and legal fees by Mr. Shrewsbury. All notes
and other indebtedness due to Mr. Shrewsbury by the Company were subordinated to the bank line of credit including with regard
to the Company’s inventory and assets. On August 26, 2014 the line of credit amount was increased to $750,000 and would
mature on November 7, 2015. The new line of credit had substantially the same terms as the original line of credit, was secured
by the Company’s inventory and accounts receivable and guaranteed as to principal and interest, and all collection costs
and legal fees, by Mr. Shrewsbury. The line of credit balance as of September 30, 2015 and 2014 was $712,449 and $548,500, respectively.
TX HOLDINGS,
INC. |
|
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS |
|
NOTE 10 – CONCENTRATION OF RISKS
Significant Customers
At September 30, 2015 and 2014, the Company had the following customer
concentration:
| |
| | |
| | |
Percentage of | |
| |
| | |
| | |
Accounts Receivable | |
| |
Percentage of Sales (1) | | |
trade, net | |
| |
September 30, | | |
September 30, | | |
September 30, | | |
September 30, | |
| |
2015 | | |
2014 | | |
2015 | | |
2014 | |
| |
| | |
| | |
| | |
| |
Customer A | |
| 23 | | |
| 21 | | |
| 21 | | |
| 18 | |
| |
| | | |
| | | |
| | | |
| | |
Customer B | |
| 16 | | |
| 14 | | |
| 7 | | |
| 8 | |
| |
| | | |
| | | |
| | | |
| | |
Customer C | |
| 10 | | |
| * | | |
| 24 | | |
| * | |
| |
| | | |
| | | |
| | | |
| | |
Customer D | |
| 10 | | |
| * | | |
| 5 | | |
| * | |
| |
| | | |
| | | |
| | | |
| | |
Customer E | |
| 9 | | |
| * | | |
| 21 | | |
| * | |
*=Less than 5%
(1) Represents customers with annual sales
of $200,000 or higher as of September 30, 2015.
NOTE 11 – SUBSEQUENT EVENTS
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.
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.
TX HOLDINGS,
INC. |
|
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS |
|
NOTE 10 – SUBSEQUENT EVENTS-Continued
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; |
| · | 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 3.25% 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 9. CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
There have been no changes in or disagreements
with accountants on accounting and financial disclosure.
| ITEM 9A. | 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
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 Section
13(a) or 15(d) of 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.
Management’s Report on Internal Control
Over Financial Reporting
Management is responsible for establishing and
maintaining adequate internal control over financial reporting (as defined in Rules13a-15(f) under the Securities Exchange
Act of 1934, as amended).
The Company’s internal control over financial
reporting is a process designed by, and under the supervision of, its principal executive and principal financial officers, or
persons performing similar functions, and effected by the Company’s board of directors, management and other personnel,
to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles in the United States of America. The Company’s
internal controls over financial reporting include those policies and procedures that (i) pertain to the maintenance of records
that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with
U.S. generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance
with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect
on the financial statements.
Because of its inherent limitations, internal
control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness
to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
Under the supervision of and with the participation
of the Chief Executive Officer and the Chief Financial Officer, the Company’s management conducted an assessment of the
effectiveness of the Company’s internal control over financial reporting based on the framework in the 1992 Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on this assessment,
the Company’s management has concluded that, as of September 30, 2015, the Company’s internal control over financial
reporting was effective.
This annual report does not include an attestation
report of the Company’s registered independent public accounting firm regarding internal control over financial reporting.
Management’s report was not subject to attestation by the Company’s registered independent public accounting firm
pursuant to rules of the Securities and Exchange Commission that permit the Company to provide only management’s report
in this Annual Report on Form 10-K.
Changes in Internal Control Over Financial
Reporting
There were no changes in the Company’s
internal control over financial reporting during the period covered by the Report that have materially affected, or are reasonably
likely to materially affect, the Company’s internal control over financial reporting.
| ITEM 9B. | OTHER INFORMATION |
None.
PART III
| ITEM 10. | DIRECTORS, EXECUTIVE OFFICERS AND
CORPORATE GOVERNANCE |
The following table sets forth our current executive
officers and directors:
Name |
Age |
Title |
William L. Shrewsbury |
71 |
Chairman of the Board, Chief
Executive Officer, and Director |
Jose Fuentes |
68 |
Chief Financial Officer |
Martin Lipper |
81 |
Director |
Bobby S. Fellers |
65 |
Director |
Biographical information with respect to our
current executive officers and directors is set forth below. There are no family relationships between any executive officer or
director and any other executive officer or director.
William “Buck” Shrewsbury,
Chairman and CEO. Mr. Shrewsbury has been a director and our Chairman and CEO since December 24, 2007. Since 1988, Mr.
Shrewsbury has been the President and owner of Lee’s Services and Storage, LLC, a trucking agency and has been the President
and owner of Buck’s Truck Inc., a trucking company. Prior to 1988, Mr. Shrewsbury served as the IT manager with a
large steel mill for 19 years. Mr. Shrewsbury attended the University of Kentucky 1962 -1965 with a major in Civil Engineering.
Martin Lipper, Director. Mr. Lipper
became a director on December 24, 2007. Since 2010, Mr. Lipper has been a Managing Director of Greenstone Holdings Group LLC.
From November 2006 to March 2009, Mr. Lipper served as Senior Vice President and Research Director of Baron Group U.S.A. Mr. Lipper
also serves as a director of Polydex Pharmaceutical, Inc., a publicly traded chemical manufacturing company for the drug industry.
Mr. Lipper began his career on Wall Street as a securities analyst. He joined the Bank of New York and was the senior bank insurance
and finance analyst. Subsequently, he became co-director of research at Eastman Dillon Union Securities and later Purcell Graham.
In 1973, Mr. Lipper became V.P. and treasurer of APF Electronics. Mr. Lipper is a Korean War Veteran who graduated
from N.Y.U. in 1958 with a Bachelor of Science degree in Finance and Economics.
Bobby S. Fellers, Director. Mr.
Fellers has been a director since March 28, 2006. Currently, Mr. Fellers is the principal of the Masada Family of Companies which
includes Masada Oil and Gas Company, Ltd. Mr. Fellers has over 30 years’ experience in the oil and gas industry in both
field and offshore operations.
Jose Fuentes, Chief Financial Officer.
Mr. Fuentes has been Chief Financial Officer since May 12, 2008. Commencing in 2006 and through 2007, Mr. Fuentes was
our VP of Finance. Mr. Fuentes has over thirty-five years of financial related experience in the energy sector. The majority of
his early career, after leaving public accounting, was spent at Atlantic Richfield Co., where he held several progressively responsible
financial roles including his most recent position as Vice President of Finance, Planning and Control for Arco Indonesia. From
there, Mr. Fuentes served as Vice President of Finance and CFO at PJM Interconnection, LLC. Mr. Fuentes received a Bachelor of
Science degree in accounting from Saint John’s University in New York and is a Certified Public Accountant.
All directors were appointed by the board of
directors as a result of vacancies on the board. They hold office until the next annual meeting of shareholders and until their
successors have been duly elected and qualified or until their earlier resignation, removal or death. Directors are elected at
the annual meetings to serve for one-year terms. Any non-employee director of the Company is reimbursed for expenses incurred
for attendance at meetings of the board and any committee of the board of directors although no such committee has been established.
Each officer is appointed by the board of directors
and holds his office at the pleasure and discretion of the board of directors or until his earlier resignation, removal or death.
There are no material proceedings to which any
director, officer or affiliate of the Company, any owner of record or beneficially of more than five percent of any class of voting
securities of the Company, or any associate of any such director, officer, affiliate of the Company or security holder is a party
adverse to the Company or has a material interest adverse to the Company..
Audit, Nominating, Compensation and
Other Board Committees
The board of directors of the Company has not
established an audit, nominating, compensation or other board committee although it may do so in the future. Also, the Company
has not appointed an “audit committee financial expert” although it may do so in the future. During 2015, the board
appointed a special committee to review and consider a related party transaction.
The Board of Directors
The board oversees our business affairs and monitors
the performance of management. During the year ended September 30, 2015, the board held one board meeting. Messrs Shrewsbury,
Lipper and Fellows attended such meeting. In addition, a special committee of our board held one meeting. All of the members of
such committee attended such meeting.
Independence of Directors
Our shares of common stock are quoted on the
OTC Markets Group, Inc.’s OTCQB. As such we are not subject to certain corporate governance requirements applicable to companies
listed on a national securities exchange. For purposes of determining the “independence” of our directors, we have
adopted the definition in the NYSE MKT Company Guide. We have determined that we have two directors that are “independent”
within the meaning set forth in the NYSE MKT’s Company Guide. Mr. Shrewsbury is our CEO and Chairman. For a company of our
size and management resources, we believe that the CEO is in the best position to focus the independent directors’ attention
on the issues of greatest importance to the Company and its stockholders and we believe that splitting the roles of CEO and Chairman
may have the consequence of making our management and governance processes less effective than they are today through duplication
of the lines of accountability and responsibility for matters. Periodically, our board of directors intends to review such policy.
Risk Assessment and Management
Our senior management is responsible for overseeing,
assessing and managing our exposure to risk on a day-to-day basis, including the creation of appropriate management programs and
policies. We do not maintain a separate committee of our board responsible for managing and overseeing our exposure to risk. Our
board is responsible for overseeing management in the execution of this responsibility and for assessing our approach to risk
management. Our board exercises this responsibility at its periodic board meetings. Our board’s role in risk management
is consistent with our leadership structure, with our CEO having responsibility for assessing and managing our risk exposure and
the board providing oversight in connection with those efforts.
Section 16(a) Beneficial Ownership Compliance
and Reporting
Section 16(a) of the Exchange Act requires
our executive officers and directors, and persons who own more than ten percent of our common stock, to file reports of ownership
and changes in ownership of our common stock with the SEC. Officers, directors, and greater-than-ten-percent stockholders are
required by SEC regulations to furnish us with copies of all Section 16(a) reports they file.
Based solely upon our review of Forms 3, 4 and
5 submitted to us pursuant to Rule 16a-3 under the Exchange Act, we believe that except as set forth below, all such forms required
to be filed were timely filed by our executive officers, directors, and security holders required to file the forms during the
fiscal year ended September 30, 2015.
On June 18, 2015, Mr. Shrewsbury filed a Form
4 that was not filed timely to report an aggregate of four transactions not previously reported. On October 10, 2015, Mr. Shrewsbury
filed a Form 4 that was not filed timely to report an aggregate of six transactions not previously reported. All of such reported
transactions in our shares would have been eligible for deferred reporting by Mr. Shrewsbury on Form 5 in accordance with Section
16(a) and the rules promulgated thereunder. Mr. Bobby Fellers has not filed an initial report on Form 3 and has not filed a Form
4 or Form 5 to report one transaction
Code of Ethics
The Company has adopted a Code of Ethics that
applies to our principal executive officer, principal financial officer, principal accounting officer or controller, or persons
performing similar functions. A copy of the Code of Ethics has been filed as an exhibit to the Company’s Annual Report on
Form 10-K.
| ITEM 11. | EXECUTIVE COMPENSATION |
The following table provides information concerning
the compensation of our Chief Executive Officer, Chief Financial Officer and one former “named executive officer”
for our last two completed fiscal years:
Name
and Principal
Position | |
Year | |
Salary ($) (1) | | |
Bonus ($) | | |
Stock Awards ($) | | |
Option Awards ($) (2) | | |
Non-Equity Incentive Plan Compensation ($) | | |
Non-Qualified
Deferred Compensation
Earnings | | |
All Other
Compensation ($) (3) | | |
Total ($) | |
William L. Shrewsbury | |
2014 | |
$ | 60,000 | | |
| — | | |
| — | | |
$ | 14,971 | | |
| - | | |
| — | | |
$ | 24,000 | | |
$ | 98,971 | |
CEO and Chairman | |
2015 | |
$ | 60,000 | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
$ | 24,000 | | |
$ | 84,000 | |
| |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Jose Fuentes | |
2014 | |
| 104,000 | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| 104,000 | |
Chief Financial Officer | |
2015 | |
| 104,000 | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| 104,000 | |
| (1) | Represents salaries paid during
the years ended September 30, 2015, and 2014. In May 2013, Mr. Shrewsbury commenced receiving
a monthly salary of $5,000. Mr. Fuentes receives an annual salary of $104,000. |
| (2) | 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. |
| (3) | Represent lease payments payable
pursuant to a lease agreement between the Company and Mr. Shrewsbury and Mrs. Shrewsbury.
Management believes that the current rental is below market value for similar warehouse
and land space. |
The Company does not have an employment agreement
with either Mr. Shrewsbury or Mr. Fuentes. The salaries of our officers are recommended by the CEO to the board of directors and
subject to their review and approval and are determined on the basis of current market and other conditions and the cash resources
available to us. We do not provide any employee benefit programs to our employees other than a periodic grant of options and warrants.
The grant of options or warrants to our officers and directors and the terms of such warrants are recommended by the CEO to the
board of directors and subject to their review and approval.
Outstanding Equity Awards at Fiscal Year-End
The following table sets forth information
for each named executive officer regarding the number of shares subject to exercisable and unexercisable common stock purchase
options as of September 30, 2015.
Name | |
Option Awards | |
| |
Number of securities underlying unexercised options | | |
Equity Incentive Plan Awards: Number of Securities
Underlying Unexercised | | |
| | |
| |
| |
Exercisable | | |
Unexercisable | | |
Unearned Options | | |
Option Exercise Price | | |
|
Option Expiration Date | |
William L. Shrewsbury | |
| 500,000 | (1) | |
| — | | |
| — | | |
$ | 0.0924 | | |
| March 31, 2017 | |
| (1) | The options were granted on February
25, 2014, and became exercisable on April 1, 2014. |
Director Compensation
The following table sets forth the compensation
paid to our directors during the years ended December 31, 2015, and 2014.
DIRECTOR COMPENSATION | |
| |
| | |
Fees Earned | | |
| | |
| | |
| |
| |
| | |
or | | |
Options | | |
All Other | | |
| |
| |
| | |
Paid in Cash | | |
Awards | | |
Compensation | | |
Total | |
Name and Position | |
Year | | |
$ | | |
$ | | |
$ | | |
$ | |
| |
| | |
| | |
| | |
| | |
| |
Bobby S. Fellers | |
| 2014 | | |
| 0 | | |
| 0 | | |
| 0 | | |
| 0 | |
| |
| 2015 | | |
| 0 | | |
| 0 | | |
| 0 | | |
| 0 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Martin Lipper | |
| 2014 | | |
| 23,500 | | |
| 0 | | |
| 0 | | |
| 23,500 | |
| |
| 2015 | | |
| 30,250 | | |
| 0 | | |
| 0 | | |
| 30,250 | |
During fiscal 2015, we paid aggregate compensation
of $30,250 to Mr. Lipper ($23,500 for 2014), for attending quarterly meetings at the Company’s principal offices related
to its business and operations, and, on behalf of the board of directors, for oversight of the appointment, compensation, and
work of the Company’s independent registered public accountant.
ITEM 12. SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The following table shows, as of December 30,
2015, beneficial ownership of our common stock by: (i) each person we know who is the beneficial owner of more than 5% of our
common stock, (ii) each of our directors and our named executive officers, and (iii) all of our directors and named executive
officers as a group. As of December 30, 2015, 48,053,084 shares of our common stock were issued and outstanding.
Name of Beneficial
Owner(1) | |
Number
of Shares Beneficially
Owned (1) | | |
Percentage
of Common Stock Beneficially Owned | |
| |
| | |
| |
William
L. Shrewsbury Chairman,
CEO and director | |
| 11,037,651 | (2) | |
| 22.73 | % |
| |
| | | |
| | |
Jose
Fuentes Chief
Financial Officer | |
| 500,000 | | |
| 1.04 | % |
| |
| | | |
| | |
Martin
Lipper Director | |
| 561,666 | (3) | |
| 1.17 | % |
| |
| | | |
| | |
Bobby
S. Fellers Director | |
| 0 | | |
| * | |
| |
| | | |
| | |
All executive officers and directors as a group (4 persons) | |
| 12,099,317 | (2)(3) | |
| 24.92 | % |
(1) |
Beneficial ownership is determined
in accordance with Rule 13d-3 under the Securities Exchange Act of 1934, as amended, and is generally determined by “voting
power” and/or “investment power” with respect to securities. Unless otherwise noted, all shares
of our common stock listed above are owned of record by each individual named as beneficial owner and such individual has
sole voting and dispositive power with respect to the shares owned by each of them. Such person or entity’s
percentage of ownership is determined by assuming that any options, warrants or convertible securities held by such person
or entity that are exercisable or convertible within 60 days from the date hereof have been exercised or converted as the
case may be. All addresses, except as noted, are c/o TX Holdings, Inc., 12080 Virginia Boulevard, Ashland, Kentucky
41102. |
|
|
(2) |
Includes 500,000 shares issuable upon exercise
of options that expire on March 31, 2017. The options are exercisable at a price of $0.0924 per share. |
|
|
(3) |
Includes 175,000 shares owned beneficially
and of record by Mr. Lipper’s spouse. |
| ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, DIRECTOR
INDEPENDENCE |
Except as set forth below, we have not been a
party to any transaction in which the amount involved in the transaction exceeded or will exceed the lesser of $120,000 or one
percent of the average of our total assets as at the year-end for the last two completed fiscal years and in which any of our
directors, executive officers or beneficial holders of more than 5% of our capital stock, or any immediate family member of, or
person sharing the household with, any of these individuals, had or will have a direct or indirect material interest.
Bank Loan Guarantee by Our CEO
Under the terms of a business loan agreement,
originally entered into 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
is variable and was based upon Wall Street Journal Prime Rate. An event of default under the loan would have occurred if or upon
the occurrence of any of the following events:
| · | the
Company failed to make any payment when due under the loan; |
| · | the
Company failed to comply with any term obligation, covenant or condition in the loan
document or any other agreement between the bank and the Company; |
| · | the
Company defaulted under any loan or similar agreement, purchase or sales agreement or
any other agreement with any creditor that materially affected the Company’s property
or its ability to repay the loan or perform its obligations under the loan documents. |
| · | a
statement, representation or warranty made by the Company in the loan documents is or
becomes materially false or misleading; |
| · | the
dissolution, termination or insolvency or occurrence of a bankruptcy event with respect
to the Company; |
| · | the
commencement of foreclosure with regard to any property securing the loan; |
| · | any
of the preceding events occurs with respect to a loan guarantor; |
| · | a
25% or more change in the ownership of the stock of the Company; |
| · | a
material adverse change in the financial condition of the Company ; or |
| · | the
bank in good faith believes itself insecure. |
The line of credit 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. The loan was guaranteed as to principal, interest and all
collection costs and legal fees by Mr. Shrewsbury. All notes and other indebtedness due to Mr. Shrewsbury by us were subordinated
to the bank loan including with regard to our inventory and assets. The loan agreement contained other customary covenants and
provisions, and contained certain events of default.
On December 3, 2015, we entered into a new
loan agreement with Town Square 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.
During the term of the loan, we have 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 between the bank and the Company: |
| · | we
default 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 we made to the bank under the loan document 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 of ours 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 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 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 3.25% 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.
Advances and Loans from Our CEO
On February 25, 2014, the Company entered
into a Note Exchange Agreement (“Exchange Agreement”) with Mr. Shrewsbury pursuant to which certain outstanding indebtedness
due to Mr. Shrewsbury was consolidated and restructured. Under the terms of the agreement, the Company and Mr. Shrewsbury consolidated
the following indebtedness: the principal due under the Revolving Promissory Demand Note issued to Mr. Shrewsbury on April 30,
2012 (“Revolving Note”), in the amount of $1,062,000 and accrued but unpaid interest due thereunder as of January
31, 2014, in the amount of $168,905; the principal due under the 10% Promissory Note issued to Mr. Shrewsbury effective February
27, 2009 (the “10% Note”), in the amount of $289,997 and accrued but unpaid interest due thereunder as of January
31, 2014, in the amount of $93,252; and $385,846 of the non-interest bearing advances previously made by Mr. Shrewsbury and outstanding
as of January 31, 2014. The Company issued in exchange and in replacement for such indebtedness a Consolidated Secured Promissory
Note (the “Consolidated Note) in the principal amount of $2,000,000. Upon issuance of the Consolidated Note, the Revolving
Note and 10% Note were cancelled. Mr. Shrewsbury agreed to waive any prior defaults under the terms of such cancelled notes and
to release the Company from any claims related thereto.
Principal and interest under the Consolidated
Note is due and payable ten years from the date of issuance and is to be secured by the proceeds of key man insurance purchased
by the Company on the life of Mr. Shrewsbury. The Consolidated Note bears interest at the rate of 5% per annum except that, if
the prime rate reported by the Wall Street Journal (“WSJ Prime Rate”) exceeds 5%, then the Consolidated Note will
bear interest at the WSJ Prime Rate.
An event of default will occur under the Consolidated
Note upon:
| · | the
Company’s failure to pay when due any principal or interest under the Consolidated
Note; |
| · | the
violation by the Company of any covenant or agreement contained in the Consolidated Note,
the Exchange Agreement or related transaction documents; |
| · | an
assignment for the benefit of creditors by the Company; |
| · | the
application for the appointment of a receiver or liquidator for the Company or for property
of the Company; |
| · | the
filing of a petition in bankruptcy by or against the Company; |
| · | the
issuance of an attachment or the entry of a judgment against the Company in excess of
$250,000; |
| · | a
default by the Company with respect to any other indebtedness or with respect to any
installment debt whether or not owing to Mr. Shrewsbury; |
| · | the
sale of all or substantially all of the Company’s assets or a transfer of more
than 51% of the Company’s equity interests to a person not currently a holder of
equity interests of the Company; |
| · | the
termination of existence or the dissolution of the Company; |
| · | the
death of Mr. Shrewsbury; or the failure to pay when due any premium under the key man
policy required to be purchased on the life of Mr. Shrewsbury under the Exchange Agreement. |
In addition, in consideration of Mr. Shrewsbury
agreeing to consolidate and restructure the indebtedness, the Company granted to Mr. Shrewsbury options to purchase an aggregate
of 500,000 shares of the Company’s common stock pursuant to the terms of a Non-Qualified Stock Option Agreement, issued
February 25, 2014. The options are exercisable commencing April 1, 2014, and for a period of three years thereafter. The options
are exercisable at a price of $0.0924 per share subject to certain anti-dilution adjustments in the event of stock dividends,
subdivisions, capital reorganizations, a consolidation or merger, or sale of all or substantially all of our assets.
As of September 30, 2015, Mr. Shrewsbury had
advanced an aggregate of $124,637 to the Company. The advances do not bear interest and are repayable upon demand. At September
30, 2015, the Company also has a payable of $12,000 to Mr. Shrewsbury for warehouse storage rental.
Mr Shrewsbury has agreed that the Consolidated
Note and advances and other claims due from the company to Mr. Shrewsbury are subordinate to the Company’s bank indebtedness.
Lease Agreement
On November 2012, the Company entered into a
lease agreement with Mr. Shrewsbury and Mrs. Shrewsbury, Mr. Shrewsbury’s wife, pursuant to which they agreed to lease to
the Company certain office space and certain warehouse space and land to store the Company’s inventory. The lease commenced
on October 1, 2012 had a two year term and the option to extend the lease on the same terms for up to an additional 24 months
upon written notice at least 30 days prior to the end of the lease. On September 1, 2014, the parties agreed to extend the
lease for an additional two years to August 31, 2016. The lease rental is $2,000 per month payable on the first of each month.
As of September 30, 2015, the Company had accrued and unpaid lease payments due to Mr. and Mrs. Shrewsbury in the amount of $12,000.
Accordingly, our lease with Mr. and Mrs. Shrewsbury may be deemed to be in default. As of the date of this report, we have not
received a notice of termination of the lease.
Freight Charges
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 years ended September 30, 2015 and 2014, such trucking company was paid $62,975 and $65,280, respectively,
for such trucking services. Management believes that the freight charges of such trucking company are at or below market rates
for such services.
Commission Charges
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 years ended September 30, 2015 and 2014 the amounts of such commission were $31,423
and $11,745, respectively.
| ITEM 14. | PRINCIPAL ACCOUNTING FEES AND SERVICES |
Audit Fees
The following table sets forth the aggregate
fees billed to the Company by its independent registered public accounting firm, Turner, Stone & Company, L.L.P., for each
of the last two fiscal years.
ACCOUNTING FEES AND SERVICES | |
2015 | | |
2014 | |
| |
| | |
| |
Audit fees | |
$ | 46,186 | | |
$ | 47,049 | |
Audit-related fees | |
| - | | |
| - | |
Tax fees | |
| - | | |
| - | |
All other fees | |
| - | | |
| - | |
| |
| | | |
| | |
Total | |
$ | 46,186 | | |
$ | 47,049 | |
Audit Fees
“Audit fees” represent
the aggregate fees billed for professional services for the audit of our annual financial statements, reviews of our financial
statements included in our quarterly reports services that are normally provided in connection with statutory and regulatory filings
or engagements.
Audit Related Fees
“Audit-related fees” represent the aggregate fees billed for assurance and related services that are reasonably related to the performance of the
audit or review of our financial statements and are not reported under Audit Fees.
Tax Fees
Tax fees represent the aggregate fees billed
for professional services rendered by our principal accountants for tax compliance, tax advice, and tax planning.
All other Fees
All other fees represent the aggregate fees billed
for products and services reported in the other categories. There were no such fees in either fiscal 2015 or fiscal 2014.
All above audit services and audit-related services
were pre-approved by the Board of Directors, which concluded that the provision of such services by Turner Stone was compatible
with the maintenance of the firm’s independence in the conduct of its audits.
| ITEM 15. | EXHIBITS AND FINANCIAL STATEMENT
SCHEDULES |
The following are filed as part of this report
commencing on page 25:
Report of Independent Registered Public Accounting
Firm
Consolidated Balance Sheets as at September 30,
2015 and 2014
Consolidated Statements of Operations for the
years ended September 30, 2015 and 2014
Consolidated Statements of Changes in Stockholders’
Deficit for the years ended September 30, 2015 and 2014
Consolidated Statements of Cash Flows for the
years ended September 30, 2015 and 2014
The following exhibits are filed or
“furnished” herewith.
|
|
|
|
|
Incorporated
by
Reference From |
Exhibit
No. |
|
Description |
Exhibit |
|
Form |
|
Filing
Date |
|
Filed/
“Furnished”
Herewith |
3.1 |
|
Articles of Incorporation. |
|
|
10-K |
|
12/3/13 |
|
|
|
|
|
|
|
|
|
|
|
|
3.2 |
|
Articles of Amendment to Articles of Incorporation, dated January
17, 2003. |
|
|
|
|
|
|
X |
|
|
|
|
|
|
|
|
|
|
3.3 |
|
Articles of Amendment to Articles of Incorporation, dated July
25, 2005. |
|
|
10-Q |
|
05/03/2013 |
|
|
|
|
|
|
|
|
|
|
|
|
3.4 |
|
Articles of Amendment to Articles of Incorporation, dated December
24, 2007. |
|
|
10-Q |
|
05/03/2013 |
|
|
|
|
|
|
|
|
|
|
|
|
3.5 |
|
By-Laws. |
|
|
10-KSB |
|
01/14/2003 |
|
|
|
|
|
|
|
|
|
|
|
|
4.1 |
|
Form of Common Stock Certificate. |
|
|
10-K |
|
12/3/13 |
|
|
|
|
|
|
|
|
|
|
|
|
10.1 |
|
Lease Agreement, dated November 19, 2012, by and among registrant
and William Shrewsbury and Peggy Shrewsbury. |
|
|
10-Q |
|
05/03/2013 |
|
|
|
|
|
|
|
|
|
|
|
|
10.2 |
|
Business Loan Agreement and Exhibits, dated August 26, 2014, by
and between registrant and Home Federal Savings and Loan Association. |
|
|
10-K |
|
12/3/13 |
|
|
|
|
|
|
|
|
|
|
|
|
10.3 |
|
Warehouse Lease Extension, dated September 1, 2014, by and among
the Company and William L. Shrewsbury and Peggy Shrewsbury. |
|
|
10-K |
|
11/18/14 |
|
|
|
|
|
|
|
|
|
|
|
|
10.4 |
|
Consolidated Secured Promissory Note, dated February 25, 2014,
issued to William L. Shrewsbury. |
|
|
8-K |
|
2/28/14 |
|
|
|
|
|
|
|
|
|
|
|
|
10.5 |
|
Non-Qualified Stock Option Agreement, dated February 25, 2014,
issued to William L. Shrewsbury. |
|
|
8-K |
|
2/28/14 |
|
|
|
|
|
|
|
|
|
|
|
|
10.6 |
|
Business Loan Agreement and Exhibits, dated December 3, 2015, by
and between registrant and Town Square Bank |
|
|
|
|
|
|
X |
|
|
|
|
|
|
|
|
|
|
14.1 |
|
Code of Ethics for Chief Executive Officer and Senior Financial
Officer. |
|
|
|
|
|
|
X |
|
|
|
|
|
|
|
|
|
|
21 |
|
List of Subsidiaries. |
|
|
|
|
|
|
X |
|
|
|
|
|
|
|
|
|
|
24.1 |
|
Power of Attorney - included on signature page. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31.1 |
|
Certification 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 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 Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 (CEO) |
|
|
|
|
|
|
X |
|
|
|
|
|
|
|
|
|
|
32.2 |
|
Certification Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 (CFO) |
|
|
|
|
|
|
X |
|
|
|
|
|
|
|
|
|
|
101.INS |
|
XBRL Instance Document ** |
|
|
|
|
|
|
X |
|
|
|
|
|
|
|
|
|
|
101.SCH |
|
XBRL Taxonomy Extension Schema Document ** |
|
|
|
|
|
|
X |
|
|
|
|
|
|
|
|
|
|
101.CAL |
|
XBRL Taxonomy Extension Calculation Linkbase Document ** |
|
|
|
|
|
|
X |
|
|
|
|
|
|
|
|
|
|
101.DEF |
|
XBRL Taxonomy Extension Definition Linkbase Document ** |
|
|
|
|
|
|
X |
|
|
|
|
|
|
|
|
|
|
101.LAB |
|
XBRL Taxonomy Extension Label Linkbase Document ** |
|
|
|
|
|
|
X |
|
|
|
|
|
|
|
|
|
|
101.PRE |
|
XBRL Taxonomy Extension Presentation Linkbase Document ** |
|
|
|
|
|
|
X |
** |
Users of this data are advised pursuant to Rule 406T
of Regulation S-X that this interactive data file is deemed not filed or part of a registration statement or prospectus for
the purpose of section 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18
of the Securities and Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections. |
SIGNATURES
Pursuant to the requirements of Section 13 or
15(d) 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 |
|
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE
PRESENTS, that each person whose signature appears below constitutes and appoints William L. Shrewsbury and Jose Fuentes,
and each of them, as his or her true and lawful attorneys-in-fact and agents, with full power of substitution and re-substitution,
for him or her and in his or her name, place and stead, in any and all capacities, to sign any and all amendments to this Annual
Report on Form 10-K for the year ended September 30, 2015, and to file the same, with all exhibits thereto, and other documents
in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each
of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection
therewith, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming that
all said attorneys-in-fact and agents, or any of them or their or his or her substitute or substitutes, may lawfully do or cause
to be done by virtue hereof.
Pursuant to the requirements
of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant
and in the capacities and on the dates indicated.
Signature |
|
Title |
|
Date |
|
|
|
|
|
/s/ William L. Shrewsbury |
|
Chairman of the Board, Chief Executive Officer
and Director |
|
December 29, 2015 |
William L. Shrewsbury |
|
(Principal Executive Officer) |
|
|
|
|
|
|
|
/s/ Jose Fuentes |
|
Chief Financial Officer |
|
December 29, 2015 |
Jose Fuentes |
|
(Principal Financial and Accounting Officer) |
|
|
|
|
|
|
|
/s/ Martin Lipper |
|
Director |
|
December 29, 2015 |
Martin Lipper |
|
|
|
|
|
|
Director |
|
December 29, 2015 |
|
|
|
|
|
Bobby Fellers |
|
|
|
|
Exhibit
3.2
ARTICLES
OF AMENDENT
| 1. | The
name of the corporation is HOM Corporation. |
| 2. | The
Board of Directors has adopted the following amendment to the Articles of Incorporation: |
The name
of the corporation shall be changed to R Wireless, Inc.
| 3. | The
amendment was adopted by the Board of Directors on January 15, 2003. |
| 4. | The
amendment was adopted by the Board of Directors without shareholder approval and
shareholder approval was not required. |
| 5. | The
corporation shall cause a notice of change of corporate name to be published in the
Columbia News-Times, the official organ of Columbia County, Georgia, pursuant to the provisions of O.C.G.A. Section 14-2-1006.1. |
Executed
on behalf of HOM Corporation by David R. Baker, attorney for HOM Corporation, on January 17, 2003.
|
HOM Corporation |
|
|
|
By: |
/s/ David R. Baker |
|
|
David R. Baker |
|
|
Attorney for HOM Corporation |
Exhibit 10.6
BUSINESS
LOAN AGREEMENT (ASSET BASED)
Principal
$711,376.42 |
Loan
Date
12-03-2015 |
Maturity
12-03-2020 |
Loan
No
#0185000009 |
Call
/ Coll |
Account |
Officer
* ** |
Initials |
References
in the boxes above are for Lender’s use only and do not limit
the applicability of this document to any particular loan or item.
Any item above containing
“***” has been omitted due to text length limitations. |
Borrower: |
TX
Holdings Incorporated |
Lender: |
Town
Square Bank |
|
P. O. Box
1425 |
|
1500 Carter
Avenue |
|
Ashland,
KY 41105-1425 |
|
P.O. Box
509 |
|
|
|
Ashland,
KY 41105-0509 |
|
|
|
(606) 324-7196 |
|
|
|
|
THIS BUSINESS LOAN AGREEMENT (ASSET BASED)
dated December 3, 2015, is made and executed between TX Holdings Incorporated (“Borrower”) and Town Square Bank (“Lender”)
on the following terms and conditions. Borrower has received prior commercial loans from Lender or has applied to Lender for a
commercial loan or loans or other financial accommodations, including those which may be described on any exhibit or schedule
attached to this Agreement. Borrower understands and agrees that: (A) in granting, renewing, or extending any Loan, Lender is
relying upon Borrower’s representations, warranties, and agreements as set forth in this Agreement; (B) the granting, renewing,
or extending of any Loan by Lender at all times shall be subject to Lender’s sole judgment and discretion; and (C) all such
Loans shall be and remain subject to the terms and conditions of this Agreement.
TERM. This
Agreement shall be effective as of December 3, 2015, and shall continue in full force and effect until such time as all of Borrower’s
Loans in favor of Lender have been paid in full, including principal, interest, costs, expenses, attorneys’ fees, and other fees
and charges, or until December 3, 2020.
PRIMARY CREDIT
FACILITY. Lender agrees to make Advances to Borrower from the date of this Agreement to the Expiration Date, provided
the aggregate amount of such Advances does not exceed the Borrowing Base. This facility is not a revolving line of credit, and
thus, Borrower may not reborrow any amounts it pays or prepays under the credit facility.
Conditions
Precedent to Each Advance. Lender’s obligation to make any Advance to or for the account of Borrower under this Agreement
is subject to the following conditions precedent, with all documents, instruments, opinions, reports, and other items required
under this Agreement to be in form and substance satisfactory to Lender:
(1) Lender shall have received evidence that this Agreement
and all Related Documents have been duly authorized, executed, and delivered by Borrower to Lender.
(2) Lender shall have received such opinions of counsel,
supplemental opinions, and documents as Lender may request.
(3) The security interests in the Collateral shall have
been duly authorized, created, and perfected with first lien priority and shall be in full force and effect.
(4) All guaranties required by Lender for the credit
facility(ies) shall have been executed by each Guarantor, delivered to Lender, and be in full force and effect.
(5) Lender, at its option and for its sole benefit,
shall have conducted an audit of Borrower’s Accounts, Inventory, books, records, and operations, and Lender shall be satisfied
as to their condition.
(6) Borrower shall have paid to Lender all fees, costs,
and expenses specified in this Agreement and the Related Documents as are then due and payable.
(7) There shall not exist at the time of any Advance
a condition which would constitute an Event of Default under this Agreement, and Borrower shall have delivered to Lender the compliance
certificate called for in the paragraph below titled “Compliance Certificate.”
Making
Loan Advances. Advances under this credit facility, as well as directions for payment from Borrower’s accounts, may
be requested orally or in writing by authorized persons. Lender may, but need not, require that all oral requests be confirmed
in writing. Each Advance shall be conclusively deemed to have been made at the request of and for the benefit of Borrower (1) when
credited to any deposit account of Borrower maintained with Lender or (2) when advanced in accordance with the instructions of
an authorized person. Lender, at its option, may set a cutoff time, after which all requests for Advances will be treated as having
been requested on the next succeeding Business Day.
Mandatory
Loan Repayments. If at any time the aggregate principal amount of the outstanding Advances shall exceed the applicable
Borrowing Base, Borrower, immediately upon written or oral notice from Lender, shall pay to Lender an amount equal to the difference
between the outstanding principal balance of the Advances and the Borrowing Base. On the Expiration Date, Borrower shall pay to
Lender in full the aggregate unpaid principal amount of all Advances then outstanding and all accrued unpaid interest, together
with all other applicable fees, costs and charges, if any, not yet paid.
Loan
Account. Lender shall maintain on its books a record of account in which Lender shall make entries for each Advance
and such other debits and credits as shall be appropriate in connection with the credit facility. Lender shall provide Borrower
with periodic statements of Borrower’s account, which statements shall be considered to be correct and conclusively binding on
Borrower unless Borrower notifies Lender to the contrary within thirty (30) days after Borrower’s receipt of any such statement
which Borrower deems to be incorrect.
COLLATERAL.
To secure payment of the Primary Credit Facility and performance of all other Loans, obligations and duties owed by
Borrower to Lender, Borrower (and others, if required) shall grant to Lender Security Interests in such property and assets as
Lender may require. Lender’s Security Interests in the Collateral shall be continuing liens and shall include the proceeds and
products of the Collateral, including without limitation the proceeds of any insurance. With respect to the Collateral, Borrower
agrees and represents and warrants to Lender:
Perfection
of Security Interests. Borrower agrees to execute all documents perfecting Lender’s Security Interest and to take whatever
actions are requested by Lender to perfect and continue Lender’s Security Interests in the Collateral. Upon request of Lender,
Borrower will deliver to Lender any and all of the documents evidencing or constituting the Collateral, and Borrower will note
Lender’s interest upon any and all chattel paper and instruments if not delivered to Lender for possession by Lender. Contemporaneous
with the execution of this Agreement, Borrower will execute one or more UCC financing statements and any similar statements as
may be required by applicable law, and Lender will file such financing statements and all such similar statements in the appropriate
location or locations. Borrower hereby appoints Lender as its irrevocable attorney-in-fact for the purpose of executing any documents
necessary to perfect or to continue any Security Interest. Lender may at any time, and without further authorization from Borrower,
file a carbon, photograph, facsimile, or other reproduction of any financing statement for use as a financing statement. Borrower
will reimburse Lender for all expenses for the perfection, termination, and the continuation of the perfection of Lender’s security
interest in the Collateral. Borrower promptly will notify Lender before any change in Borrower’s name including any change to the
assumed business names of Borrower. Borrower also promptly
will notify Lender before any change in Borrower’s Social Security Number or Employer Identification Number. Borrower further agrees
to notify Lender in writing prior to any change in address or location of Borrower’s principal governance office or should Borrower
merge or consolidate with any other entity.
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Collateral
Records. Borrower does now, and at all times hereafter shall, keep correct and accurate records
of the Collateral, all of which records shall be available to Lender or Lender’s representative upon demand for inspection and
copying at any reasonable time. With respect to the Accounts, Borrower agrees to keep and maintain such records as Lender may require,
including without limitation information concerning Eligible Accounts and Account balances and agings. Records related to Accounts
(Receivables) are or will be located at 12080 Virginia Blvd Ashland KY 41102. With respect to the Inventory, Borrower agrees to
keep and maintain such records as Lender may require, including without limitation information concerning Eligible Inventory and
records itemizing and describing the kind, type, quality, and quantity of Inventory, Borrower’s Inventory costs and selling
prices, and the daily withdrawals and additions to Inventory. Records related to Inventory are or will be located at 12080 VIRGINIA
BLVD ASHLAND KY 41102. The above is an accurate and complete list of all locations at which Borrower keeps or maintains business
records concerning Borrower’s collateral.
Collateral
Schedules. Concurrently with the execution and delivery of this Agreement, Borrower shall
execute and deliver to Lender schedules of Accounts and Inventory and schedules of Eligible Accounts and Eligible Inventory in
form and substance satisfactory to the Lender. Thereafter supplemental schedules shall be delivered according to the following
schedule: With respect to Eligible Accounts, schedules shall be delivered quarterly . With respect to Eligible Inventory, schedules
shall be delivered QUARTERLY.
Representations
and Warranties Concerning Accounts. With respect to the Accounts, Borrower represents and
warrants to Lender: (1) Each Account represented by Borrower to be an Eligible Account for purposes of this Agreement conforms
to the requirements of the definition of an Eligible Account; (2) All Account information listed on schedules delivered to Lender
will be true and correct, subject to immaterial variance; and (3) Lender, its assigns, or agents shall have the right at any time
and at Borrower’s expense to inspect, examine, and audit Borrower’s records and to confirm with Account Debtors the accuracy of
such Accounts.
Representations
and Warranties Concerning Inventory. With respect to the Inventory, Borrower represents
and warrants to Lender: (1) All Inventory represented by Borrower to be Eligible Inventory for purposes of this Agreement
conforms to the requirements of the definition of Eligible Inventory; (2) All Inventory values listed on schedules delivered
to Lender will be true and correct, subject to immaterial variance; (3) The
value of the Inventory will be determined on a consistent accounting basis; (4) Except as agreed to the contrary by Lender in
writing, all Eligible Inventory is now and at all times hereafter will be in Borrower’s physical possession and shall
not be held by others on consignment, sale on approval, or sale or return; (5) Except as reflected in the Inventory schedules
delivered to Lender, all Eligible Inventory is now and at all times hereafter will be of good and merchantable quality, free
from defects; (6) Eligible Inventory is not now and will not at any time hereafter be stored with a bailee, warehouseman, or
similar party without Lender’s prior written consent, and, in such event, Borrower will concurrently at the time of
bailment cause any such bailee, warehouseman, or similar party to issue and deliver to
Lender, in form acceptable to Lender, warehouse receipts in Lender name evidencing the storage of Inventory; and (7) Lender,
its assigns, or agents shall have the right at any time and at Borrower’s expense to inspect and examine the Inventory
and to check and test the same as to quality, quantity, value, and condition.
CONDITIONS
PRECEDENT TO EACH ADVANCE. Lender’s obligation to make the initial Advance
and each subsequent Advance under this Agreement shall be subject to the fulfillment to Lender’s satisfaction of all
of the conditions set forth in this Agreement and in the Related Documents.
Loan
Documents. Borrower shall provide to Lender the following documents for the Loan:
(1) the Note; (2) Security Agreements granting to Lender security interests in the Collateral; (3) financing statements
and all other documents perfecting Lender’s Security Interests; (4) evidence of insurance as required below; (5)
guaranties; (6) together with all such Related Documents as Lender may require for the Loan; all in form and substance
satisfactory to Lender and Lender’s counsel.
Borrower’s
Authorization. Borrower shall have provided in form and substance satisfactory to Lender
properly certified resolutions, duly authorizing the execution and delivery of this Agreement, the Note and the Related Documents.
In addition, Borrower shall have provided such other resolutions, authorizations, documents and instruments as Lender or its counsel,
may require.
Fees
and Expenses Under This Agreement. Borrower shall have paid to Lender all fees, costs, and
expenses specified in this Agreement and the Related Documents as are then due and payable.
Representations
and Warranties. The representations and warranties set forth in this Agreement, in the Related
Documents, and in any document or certificate delivered to Lender under this Agreement are true and correct.
No
Event of Default. There shall not exist at the time of any Advance a condition which would
constitute an Event of Default under this Agreement or under any Related Document.
REPRESENTATIONS
AND WARRANTIES. Borrower represents and warrants to Lender, as of the date of this Agreement,
as of the date of each disbursement of loan proceeds, as of the date of any renewal, extension or modification of any Loan, and
at all times any Indebtedness exists:
Organization.
Borrower is a corporation for profit which is, and at all times shall be, duly organized, validly existing, and in good standing
under and by virtue of the laws of the State of Georgia. Borrower is duly authorized to transact business in all other states in
which Borrower is doing business, having obtained all necessary filings, governmental licenses and approvals for each state in
which Borrower is doing business. Specifically, Borrower is, and at all times shall be, duly qualified as a foreign corporation
in all states in which the failure to so qualify would have a material adverse effect on its business or financial condition. Borrower
has the full power and authority to own its properties and to transact the business in which it is presently engaged or presently
proposes to engage. Borrower maintains an office at 12070 Virginia, Ashland, KY 41102. Unless Borrower has designated otherwise
in writing, the principal office is the office at which Borrower keeps its books and records including its records concerning the
Collateral. Borrower will notify Lender prior to any change in the location of Borrower’s state of organization or any change in
Borrower’s name. Borrower shall do all things necessary to preserve and to keep in full force and effect its existence, rights
and privileges, and shall comply with all regulations, rules, ordinances, statutes, orders and decrees of any governmental or quasi-governmental
authority or court applicable to Borrower and Borrower’s business activities.
Assumed
Business Names. Borrower has filed or recorded all documents or filings required by law relating
to all assumed business names used by Borrower. Excluding the name of Borrower, the following is a complete list of all assumed
business names under which Borrower does business: None.
Authorization.
Borrower’s execution, delivery, and performance of this Agreement and all the Related Documents have been duly authorized by all
necessary action by Borrower and do not conflict with, result in a violation of, or constitute a default under (1) any provision
of (a) Borrower’s articles of incorporation or organization, or bylaws, or (b) any agreement or other instrument binding upon Borrower
or (2) any law, governmental regulation, court decree, or order applicable to Borrower or to Borrower’s properties.
Financial
Information. Each of Borrower’s financial statements supplied to Lender truly and completely
disclosed Borrower’s financial condition as of the date of the statement, and there has been no material adverse change in
Borrower’s financial condition subsequent to the date of the most recent financial statement supplied to Lender. Borrower has no
material contingent obligations except as disclosed in such financial statements.
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Legal
Effect. This Agreement constitutes, and any instrument or agreement Borrower is required
to give under this Agreement when delivered will constitute legal, valid, and binding obligations of Borrower enforceable against
Borrower in accordance with their respective terms.
Properties.
Except as contemplated by this Agreement or as previously disclosed in Borrower’s financial statements or in writing to Lender
and as accepted by Lender, and except for property tax liens for taxes not presently due and payable, Borrower owns and has good
title to all of Borrower’s properties free and clear of all Security Interests, and has not executed any security documents or
financing statements relating to such properties. All of Borrower’s properties are titled in Borrower’s legal name, and Borrower
has not used or filed a financing statement under any other name for at least the last five (5) years.
Hazardous
Substances. Except as disclosed to and acknowledged by Lender in writing, Borrower represents
and warrants that: (1) During the period of Borrower’s ownership of the Collateral, there has been no use, generation, manufacture,
storage, treatment, disposal, release or threatened release of any Hazardous Substance by any person on, under, about or from any
of the Collateral. (2) Borrower has no knowledge of, or reason to believe that there has been (a) any breach or violation of any
Environmental Laws; (b) any use, generation, manufacture, storage, treatment, disposal, release or threatened release of any Hazardous
Substance on, under, about or from the Collateral by any prior owners or occupants of any of the Collateral; or (c) any actual
or threatened litigation or claims of any kind by any person relating to such matters. (3) Neither Borrower nor any tenant, contractor,
agent or other authorized user of any of the Collateral shall use, generate, manufacture, store, treat, dispose of or release any
Hazardous Substance on, under, about or from any of the Collateral; and any such activity shall be conducted in compliance with
all applicable federal, state, and local laws, regulations, and ordinances, including without limitation all Environmental Laws.
Borrower authorizes Lender and its agents to enter upon the Collateral to make such inspections and tests as Lender may deem appropriate
to determine compliance of the Collateral with this section of the Agreement. Any inspections or tests made by Lender shall be
at Borrower’s expense and for Lender’s purposes only and shall not be construed to create any responsibility or liability on the
part of Lender to Borrower or to any other person. The representations and warranties contained herein are based on Borrower’s
due diligence in investigating the Collateral for hazardous waste and Hazardous Substances. Borrower hereby (1) releases and waives
any future claims against Lender for indemnity or contribution in the event Borrower becomes liable for cleanup or other costs
under any such laws, and (2) agrees to indemnify, defend, and hold harmless Lender against any and all claims, losses, liabilities,
damages, penalties, and expenses which Lender may directly or indirectly sustain or suffer resulting from a breach of this section
of the Agreement or as a consequence of any use, generation, manufacture, storage, disposal, release or threatened release of a
hazardous waste or substance on the Collateral. The provisions of this section of the Agreement, including the obligation to indemnify
and defend, shall survive the payment of the Indebtedness and the termination, expiration or satisfaction of this Agreement and
shall not be affected by Lender’s acquisition of any interest in any of the Collateral, whether by foreclosure or otherwise.
Litigation
and Claims. No litigation, claim, investigation, administrative proceeding or similar action
(including those for unpaid taxes) against Borrower is pending or threatened, and no other event has occurred which may materially
adversely affect Borrower’s financial condition or properties, other than litigation, claims, or other events, if any, that have
been disclosed to and acknowledged by Lender in writing.
Taxes.
To the best of Borrower’s knowledge, all of Borrower’s tax returns and reports that are or
were required to be filed, have been filed, and all taxes, assessments and other governmental charges have been paid in full, except
those presently being or to be contested by Borrower in good faith in the ordinary course of business and for which adequate reserves
have been provided.
Lien
Priority. Unless otherwise previously disclosed to Lender in writing, Borrower has not entered
into or granted any Security Agreements, or permitted the filing or attachment of any Security Interests on or affecting any of
the Collateral directly or indirectly securing repayment of Borrower’s Loan and Note, that would be prior or that may in any way
be superior to Lender’s Security Interests and rights in and to such Collateral.
Binding
Effect. This Agreement, the Note, all Security Agreements (if any), and all Related Documents
are binding upon the signers thereof, as well as upon their successors, representatives and assigns, and are legally enforceable
in accordance with their respective terms.
AFFIRMATIVE
COVENANTS. Borrower covenants and agrees with Lender that, so long as this Agreement remains
in effect, Borrower will:
Notices
of Claims and Litigation. Promptly inform Lender in writing of (1) all material adverse changes
in Borrower’s financial condition, and (2) all existing and all threatened litigation, claims, investigations, administrative proceedings
or similar actions affecting Borrower or any Guarantor which could materially affect the financial condition of Borrower or the
financial condition of any Guarantor.
Financial
Records. Maintain its books and records in accordance with GAAP, applied on a
consistent basis, and permit Lender to examine and audit Borrower’s books and records at all reasonable
times.
Financial
Statements. Furnish Lender with the following:
Annual
Statements. As soon as available after the end of each fiscal year,
Borrower’s balance sheet and income statement for the year ended, prepared by Borrower in form
satisfactory to Lender.
Interim
Statements. As soon as available after the end of each fiscal quarter, Borrower’s
balance sheet and profit and loss statement for the period ended, prepared by Borrower in form satisfactory to Lender.
Tax
Returns. As soon as available after the applicable filing date for the tax reporting period
ended, Borrower’s Federal and other governmental tax returns, prepared by a tax professional satisfactory to Lender.
All
financial reports required to be provided under this Agreement shall be prepared in accordance with GAAP, applied on a consistent
basis, and certified by Borrower as being true and correct.
Additional
Information. Furnish such additional information and statements, as Lender may request from
time to time.
Insurance.
Maintain fire and other risk insurance, public liability insurance, and such other insurance
as Lender may require with respect to Borrower’s properties and operations, in form, amounts, coverages and with insurance
companies acceptable to Lender. Borrower, upon request of Lender, will deliver to Lender from time to time the policies or certificates
of insurance in form satisfactory to Lender, including stipulations that coverages will not be cancelled or diminished without
at least thirty (30) days prior written notice to Lender. Each insurance policy also shall include an endorsement providing that
coverage in favor of Lender will not be impaired in any way by any act, omission or default of Borrower or any other person. In
connection with all policies covering assets in which Lender holds or is offered a security interest for the Loans, Borrower will
provide Lender with such lender’s loss payable or other endorsements as Lender may require.
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Insurance
Reports. Furnish to Lender, upon request of Lender, reports on each existing insurance policy
showing such information as Lender may reasonably request, including without limitation the following: (1) the name of the insurer;
(2) the risks insured; (3) the amount of the policy; (4) the properties insured; (5) the then current property values on the basis
of which insurance has been obtained, and the manner of determining those values; and (6) the expiration date of the policy. In
addition, upon request of Lender (however not more often than annually), Borrower will have an independent appraiser satisfactory
to Lender determine, as applicable, the actual cash value or replacement cost of any Collateral. The cost of such appraisal shall
be paid by Borrower.
Guaranties.
Prior to disbursement of any Loan proceeds, furnish executed guaranties of the Loans in favor
of Lender, executed by the guarantor named below, on Lender’s forms, and in the amount and under the conditions set forth in those
guaranties.
Name
of Guarantor |
Amount |
William
L. Shrewsbury |
100.000%
of $711,376.42 |
Other
Agreements. Comply with all terms and conditions of all other agreements, whether now or
hereafter existing, between Borrower and any other party and notify Lender immediately in writing of any default in connection
with any other such agreements.
Loan
Proceeds. Use all Loan proceeds solely for Borrower’s business operations, unless specifically
consented to the contrary by Lender in writing.
Taxes,
Charges and Liens. Pay and discharge when due all of its indebtedness and obligations, including
without limitation all assessments, taxes, governmental charges, levies and liens, of every kind and nature, imposed upon Borrower
or its properties, income, or profits, prior to the date on which penalties would attach, and all lawful claims that, if unpaid,
might become a lien or charge upon any of Borrower’s properties, income, or profits. Provided however, Borrower will not be required
to pay and discharge any such assessment, tax, charge, levy, lien or claim so long as (1) the legality of the same shall be contested
in good faith by appropriate proceedings, and (2) Borrower shall have established on Borrower’s books adequate reserves with respect
to such contested assessment, tax, charge, levy, lien, or claim in accordance with GAAP.
Performance.
Perform and comply, in a timely manner, with all terms, conditions, and provisions set forth in this Agreement, in the Related
Documents, and in all other instruments and agreements between Borrower and Lender. Borrower shall notify Lender immediately in
writing of any default in connection with any agreement.
Operations.
Maintain executive and management personnel with substantially the same qualifications and experience as the present executive
and management personnel; provide written notice to Lender of any change in executive and management personnel; conduct its business
affairs in a reasonable and prudent manner.
Environmental
Studies. Promptly conduct and complete, at Borrower’s expense, all such investigations, studies,
samplings and testings as may be requested by Lender or any governmental authority relative to any substance, or any waste or by-product
of any substance defined as toxic or a hazardous substance under applicable federal, state, or local law, rule, regulation, order
or directive, at or affecting any property or any facility owned, leased or used by Borrower.
Compliance
with Governmental Requirements. Comply with all laws, ordinances, and regulations, now or
hereafter in effect, of all governmental authorities applicable to the conduct of Borrower’s properties, businesses and operations,
and to the use or occupancy of the Collateral, including without limitation, the Americans With Disabilities Act. Borrower may
contest in good faith any such law, ordinance, or regulation and withhold compliance during any proceeding, including appropriate
appeals, so long as Borrower has notified Lender in writing prior to doing so and so long as, in Lender’s sole opinion, Lender’s
interests in the Collateral are not jeopardized. Lender may require Borrower to post adequate security or a surety bond, reasonably
satisfactory to Lender, to protect Lender’s interest.
Inspection.
Permit employees or agents of Lender at any reasonable time to inspect any and all Collateral for the Loan or Loans and Borrower’s
other properties and to examine or audit Borrower’s books, accounts, and records and to make copies and memoranda of Borrower’s
books, accounts, and records. If Borrower now or at any time hereafter maintains any records (including without limitation computer
generated records and computer software programs for the generation of such records) in the possession of a third party, Borrower,
upon request of Lender, shall notify such party to permit Lender free access to such records at all reasonable times and to provide
Lender with copies of any records it may request, all at Borrower’s expense.
Compliance
Certificates. Unless waived in writing by Lender, provide Lender at least annually, with
a certificate executed by Borrower’s chief financial officer, or other officer or person acceptable to Lender, certifying that
the representations and warranties set forth in this Agreement are true and correct as of the date of the certificate and further
certifying that, as of the date of the certificate, no Event of Default exists under this Agreement.
Environmental
Compliance and Reports. Borrower shall comply in all respects with any and all Environmental
Laws; not cause or permit to exist, as a result of an intentional or unintentional action or omission on Borrower’s part or on
the part of any third party, on property owned and/or occupied by Borrower, any environmental activity where damage may result
to the environment, unless such environmental activity is pursuant to and in compliance with the conditions of a permit issued
by the appropriate federal, state or local governmental authorities; shall furnish to Lender promptly and in any event within thirty
(30) days after receipt thereof a copy of any notice, summons, lien, citation, directive, letter or other communication from any
governmental agency or instrumentality concerning any intentional or unintentional action or omission on Borrower’s part in connection
with any environmental activity whether or not there is damage to the environment and/or other natural resources.
Additional
Assurances. Make, execute and deliver to Lender such promissory notes, mortgages, deeds of
trust, security agreements, assignments, financing statements, instruments, documents and other agreements as Lender or its attorneys
may reasonably request to evidence and secure the Loans and to perfect all Security Interests.
LENDER’S
EXPENDITURES. If any action or proceeding is commenced that would materially affect Lender’s
interest in the Collateral or if Borrower fails to comply with any provision of this Agreement or any Related Documents, including
but not limited to Borrower’s failure to discharge or pay when due any amounts Borrower is required to discharge or pay under this
Agreement or any Related Documents, Lender on Borrower’s behalf may (but shall not be obligated to) take any action that Lender
deems appropriate, including but not limited to discharging or paying all taxes, liens, security interests, encumbrances and other
claims, at any time levied or placed on any Collateral and paying all costs for insuring, maintaining and preserving any Collateral.
All such expenditures incurred or paid by Lender for such purposes will then bear interest at the rate charged under the Note from
the date incurred or paid by Lender to the date of repayment by Borrower. All such expenses will become a part of the Indebtedness
and, at Lender’s option, will (A) be payable on demand; (B) be added to the balance of the Note and be apportioned among and be
payable with any installment payments to become due during either (1) the term of any applicable insurance policy; or (2) the remaining
term of the Note; or (C) be treated as a balloon payment which will be due and payable at the Note’s maturity.
NEGATIVE
COVENANTS. Borrower covenants and agrees with Lender that while this Agreement is in effect,
Borrower shall not, without the prior written consent of Lender:
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Indebtedness
and Liens. (1) Except for trade debt incurred in the normal course of business and indebtedness
to Lender contemplated by this Agreement, create, incur or assume indebtedness for borrowed money, including capital leases, (2)
sell, transfer, mortgage, assign, pledge, lease, grant a security interest in, or encumber any of Borrower’s assets (except as
allowed as Permitted Liens), or (3) sell with recourse any of Borrower’s accounts, except to Lender.
Continuity
of Operations. (1) Engage in any business activities substantially different than those
in which Borrower is presently engaged, (2) cease
operations, liquidate, merge, transfer, acquire or consolidate with any other entity, change its name, dissolve or transfer
or sell Collateral out of the ordinary course of business, or (3) pay any dividends on Borrower’s stock (other than
dividends payable in its stock), provided, however that notwithstanding the foregoing, but only so long as no Event of
Default has occurred and is continuing or would result from the payment of dividends, if Borrower is a “Subchapter S
Corporation” (as defined in the Internal Revenue Code of 1986, as amended), Borrower may pay cash dividends on its
stock to its shareholders from time to time in amounts necessary to enable the shareholders to pay income taxes and make
estimated income tax payments to satisfy their liabilities under federal and state law which arise solely from their status
as Shareholders of a Subchapter S Corporation because of their ownership of shares of Borrower’s stock, or purchase or
retire any of Borrower’s outstanding shares or alter or amend Borrower’s capital structure.
Loans,
Acquisitions and Guaranties. (1) Loan, invest in or advance money or assets to any other
person, enterprise or entity, (2) purchase, create or acquire any interest in any other enterprise or entity, or (3) incur any
obligation as surety or guarantor other than in the ordinary course of business.
Agreements.
Enter into any agreement containing any provisions which would be violated or breached by the performance of Borrower’s obligations
under this Agreement or in connection herewith.
CESSATION
OF ADVANCES. If Lender has made any commitment to make any Loan to Borrower, whether under
this Agreement or under any other agreement, Lender shall have no obligation to make Loan Advances or to disburse Loan proceeds
if: (A) Borrower or any Guarantor is in default under the terms of this Agreement or any of the Related Documents or any other
agreement that Borrower or any Guarantor has with Lender; (B) Borrower or any Guarantor dies, becomes incompetent or becomes insolvent,
files a petition in bankruptcy or similar proceedings, or is adjudged a bankrupt; (C) there occurs a material adverse change
in Borrower’s financial condition, in the financial condition of any Guarantor, or in the value of any Collateral securing any
Loan; or (D) any Guarantor seeks, claims or otherwise attempts to limit, modify or revoke such Guarantor’s guaranty of the Loan
or any other loan with Lender; or (E) Lender in good faith deems itself insecure, even though no Event of Default shall have
occurred.
RIGHT
OF SETOFF. To the extent permitted by applicable law, Lender reserves a right of setoff in
all Borrower’s accounts with Lender (whether checking, savings, or some other account). This includes all accounts Borrower holds
jointly with someone else and all accounts Borrower may open in the future. However, this does not include any IRA or Keogh accounts,
or any trust accounts for which setoff would be prohibited by law. Borrower authorizes Lender, to the extent permitted by applicable
law, to charge or setoff all sums owing on the Indebtedness against any and all such accounts, and, at Lender’s option, to administratively
freeze all such accounts to allow Lender to protect Lender’s charge and setoff rights provided in this paragraph.
DEFAULT.
Each of the following shall constitute an Event of Default under this Agreement:
Payment
Default. Borrower fails to make any payment when due under the Loan.
Other
Defaults. Borrower fails to comply with or to perform any other term, obligation,
covenant or condition contained in this Agreement or in any of the Related Documents or to comply with or to perform any
term, obligation, covenant or condition contained in any other agreement between Lender and Borrower.
Default
in Favor of Third Parties. Borrower or any Grantor defaults under any loan, extension of
credit, security agreement, purchase or sales agreement, or any other agreement, in favor of any other creditor or person that
may materially affect any of Borrower’s or any Grantor’s property or Borrower’s or any Grantor’s ability to repay the Loans
or perform their respective obligations under this Agreement or any of the Related Documents.
False
Statements. Any warranty, representation or statement made or furnished to Lender by Borrower
or on Borrower’s behalf under this Agreement or the Related Documents is false or misleading in any material respect, either now
or at the time made or furnished or becomes false or misleading at any time thereafter.
Insolvency.
The dissolution or termination of Borrower’s existence as a going business, the insolvency of Borrower, the appointment of a receiver
for any part of Borrower’s 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 Borrower.
Defective
Collateralization. This Agreement or any of the Related Documents ceases to be in full force
and effect (including failure of any collateral document to create a valid and perfected security interest or lien) at any time
and for any reason.
Creditor
or Forfeiture Proceedings. Commencement of foreclosure or forfeiture proceedings, whether
by judicial proceeding, self-help, repossession or any other method, by any creditor of Borrower or by any governmental agency
against any collateral securing the Loan. This includes a garnishment of any of Borrower’s accounts, including deposit accounts,
with Lender. However, this Event of Default shall not apply if there is a good faith dispute by Borrower as to the validity or
reasonableness of the claim which is the basis of the creditor or forfeiture proceeding and if Borrower gives Lender written notice
of the creditor or forfeiture proceeding and deposits with Lender monies or a surety bond for the creditor or forfeiture proceeding,
in an amount determined by Lender, in its sole discretion, as being an adequate reserve or bond for the dispute.
Events
Affecting Guarantor. Any of the preceding events occurs with respect to any Guarantor of
any of the Indebtedness or any Guarantor dies or becomes incompetent, or revokes or disputes the validity of, or liability under,
any Guaranty of the Indebtedness.
Change
in Ownership. Any change in ownership of twenty-five percent (25%) or more of the common
stock of Borrower.
Adverse
Change. A material adverse change occurs in Borrower’s financial condition, or Lender believes
the prospect of payment or performance of the Loan is impaired.
Insecurity.
Lender in good faith believes itself insecure.
Right
to Cure. If any default, other than a default on Indebtedness, is curable and if Borrower
or Grantor, as the case may be, has not been given a notice of a similar default within the preceding twelve (12) months, it may
be cured if Borrower or Grantor, as the case may be, after Lender sends written notice to Borrower or Grantor, as the case may
be, demanding cure of such default: (1) cure the default within fifteen (15) days; or (2) if the cure requires more than fifteen
(15) days, immediately initiate steps which Lender deems in Lender’s sole discretion to be sufficient to cure the default and thereafter
continue and complete all reasonable and necessary steps sufficient to produce compliance as soon as reasonably practical.
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BUSINESS
LOAN AGREEMENT (ASSET BASED) |
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Loan No: #0185000009 |
(Continued) |
Page 6 |
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EFFECT
OF AN EVENT OF DEFAULT. If any Event of Default shall occur, except where otherwise provided
in this Agreement or the Related Documents,
all commitments and obligations of Lender under this Agreement or the Related Documents or any other agreement immediately will
terminate (including any obligation to make further Loan Advances or disbursements), and, at Lender’s option, all Indebtedness
immediately will become due and payable, all without notice of any kind to Borrower, except that in the case of an Event of Default
of the type described in the “Insolvency” subsection above, such acceleration shall be automatic and not optional. In
addition, Lender shall have all the rights and remedies provided in the Related Documents or available at law, in equity, or otherwise.
Except as may be prohibited by applicable law, all of Lender’s rights and remedies shall be cumulative and may be exercised singularly
or concurrently. Election by Lender to pursue any remedy shall not exclude pursuit of any other remedy, and an election to make
expenditures or to take action to perform an obligation of Borrower or of any Grantor shall not affect Lender’s right to
declare a default and to exercise its rights and remedies.
MISCELLANEOUS
PROVISIONS. The following miscellaneous provisions are a part of this Agreement:
Amendments.
This Agreement, together with any Related Documents, constitutes the entire understanding and agreement of the parties as to
the matters set forth in this Agreement. No alteration of or amendment to this Agreement shall be effective unless given in
writing and signed by the party or parties sought to be charged or bound by the alteration or amendment.
Attorneys’
Fees; Expenses. Borrower agrees to pay upon demand all of Lender’s costs and expenses, including
Lender’s reasonable attorneys’ fees and Lender’s legal expenses, incurred in connection with the enforcement of this Agreement.
Lender may hire or pay someone else to help enforce this Agreement, and Borrower shall pay the costs and expenses of such enforcement.
Costs and expenses include Lender’s reasonable attorneys’ fees and legal expenses whether or not there is a lawsuit, including
reasonable attorneys’ fees and legal expenses for bankruptcy proceedings (including efforts to modify or vacate any automatic stay
or injunction), appeals, and any anticipated post-judgment collection services. Borrower also shall pay all court costs and such
additional fees as may be directed by the court.
Caption
Headings. Caption headings in this Agreement are for convenience purposes only and are not
to be used to interpret or define the provisions of this Agreement.
Consent
to Loan Participation. Borrower agrees and consents to Lender’s sale or transfer, whether
now or later, of one or more participation interests in the Loan to one or more purchasers, whether related or unrelated to Lender.
Lender may provide, without any limitation whatsoever, to any one or more purchasers, or potential purchasers, any information
or knowledge Lender may have about Borrower or about any other matter relating to the Loan, and Borrower hereby waives any rights
to privacy Borrower may have with respect to such matters. Borrower additionally waives any and all notices of sale of participation
interests, as well as all notices of any repurchase of such participation interests. Borrower also agrees that the purchasers of
any such participation interests will be considered as the absolute owners of such interests in the Loan and will have all the
rights granted under the participation agreement or agreements governing the sale of such participation interests. Borrower further
waives all rights of offset or counterclaim that it may have now or later against Lender or against any purchaser of such a participation
interest and unconditionally agrees that either Lender or such purchaser may enforce Borrower’s obligation under the Loan irrespective
of the failure or insolvency of any holder of any interest in the Loan. Borrower further agrees that the purchaser of any such
participation interests may enforce its interests irrespective of any personal claims or defenses that Borrower may have against
Lender.
Governing
Law. This Agreement will be governed by federal law applicable to Lender and, to the extent not preempted by federal law, the laws
of the Commonwealth of Kentucky without regard to its conflicts of law provisions. This Agreement has been accepted by Lender in
the Commonwealth of Kentucky.
Choice
of Venue. If there is a lawsuit, Borrower agrees upon Lender’s request to submit to the jurisdiction
of the courts of BOYD County, Commonwealth of Kentucky.
No
Waiver by Lender. Lender shall not be deemed to have waived any rights under this Agreement
unless such waiver is given in writing and signed by Lender. No delay or omission on the part of Lender in exercising any right
shall operate as a waiver of such right or any other right. A waiver by Lender of a provision of this Agreement shall not prejudice
or constitute a waiver of Lender’s right otherwise to demand strict compliance with that provision or any other provision of this
Agreement. No prior waiver by Lender, nor any course of dealing between Lender and Borrower, or between Lender and any Grantor,
shall constitute a waiver of any of Lender’s rights or of any of Borrower’s or any Grantor’s obligations as to any future transactions.
Whenever the consent of Lender is required under this Agreement, the granting of such consent by Lender in any instance shall not
constitute continuing consent to subsequent instances where such consent is required and in all cases such consent may be granted
or withheld in the sole discretion of Lender.
Notices.
Any notice required to be given under this Agreement shall be given in writing, and shall be effective when actually delivered,
when actually received by telefacsimile (unless otherwise required by law), when deposited with a nationally recognized overnight
courier, or, if mailed, when deposited in the United States mail, as first class, certified or registered mail postage prepaid,
directed to the addresses shown near the beginning of this Agreement. Any party may change its address for notices under this Agreement
by giving formal written notice to the other parties, specifying that the purpose of the notice is to change the party’s address.
For notice purposes, Borrower agrees to keep Lender informed at all times of Borrower’s current address. Unless otherwise provided
or required by law, if there is more than one Borrower, any notice given by Lender to any Borrower is deemed to be notice given
to all Borrowers.
Severability.
If a court of competent jurisdiction finds any provision of this Agreement to be illegal,
invalid, or unenforceable as to any circumstance, that finding shall not make the offending provision illegal, invalid, or unenforceable
as to any other circumstance. If feasible, the offending provision shall be considered modified so that it becomes legal, valid
and enforceable. If the offending provision cannot be so modified, it shall be considered deleted from this Agreement. Unless otherwise
required by law, the illegality, invalidity, or unenforceability of any provision of this Agreement shall not affect the legality,
validity or enforceability of any other provision of this Agreement.
Subsidiaries
and Affiliates of Borrower. To the extent the context of any provisions of this Agreement
makes it appropriate, including without limitation any representation, warranty or covenant, the word “Borrower” as used
in this Agreement shall include all of Borrower’s subsidiaries and affiliates. Notwithstanding the foregoing however, under no
circumstances shall this Agreement be construed to require Lender to make any Loan or other financial accommodation to any of Borrower’s
subsidiaries or affiliates.
Successors
and Assigns. All covenants and agreements by or on behalf of Borrower contained in this Agreement
or any Related Documents shall bind Borrower’s successors and assigns and shall inure to the benefit of Lender and its successors
and assigns. Borrower shall not, however, have the right to assign Borrower’s rights under this Agreement or any interest therein,
without the prior written consent of Lender.
Survival
of Representations and Warranties. Borrower understands and agrees that in making the Loan,
Lender is relying on all representations, warranties, and covenants made by Borrower in this Agreement or in any certificate or
other instrument delivered by Borrower to Lender under this Agreement or the Related Documents. Borrower further agrees that regardless
of any investigation made by Lender, all such representations, warranties and covenants will survive the making of the Loan and
delivery to Lender of the Related Documents, shall be continuing in nature, and shall remain in full force and effect until such
time as Borrower’s Indebtedness shall be paid in full, or until this Agreement shall be terminated in the manner provided above,
whichever is the last to occur.
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BUSINESS
LOAN AGREEMENT (ASSET BASED) |
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Loan
No: #0185000009 |
(Continued) |
Page
7 |
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Time
is of the Essence. Time is of the essence in the performance of this Agreement.
Waive
Jury. All parties to this Agreement hereby waive the right to any jury trial in any action, proceeding, or counterclaim brought
by any party against any other party.
DEFINITIONS.
The following capitalized words and terms shall have the following meanings when used in this Agreement. Unless specifically
stated to the contrary, all references to dollar amounts shall mean amounts in lawful money of the United States of America. Words
and terms used in the singular shall include the plural, and the plural shall include the singular, as the context may require.
Words and terms not otherwise defined in this Agreement shall have the meanings attributed to such terms in the Uniform Commercial
Code. Accounting words and terms not otherwise defined in this Agreement shall have the meanings assigned to them in accordance
with generally accepted accounting principles as in effect on the date of this Agreement:
Account.
The word “Account” means a trade account, account receivable, other receivable, or other right to payment
for goods sold or services rendered owing to Borrower (or to a third party grantor acceptable to Lender).
Account
Debtor. The words “Account Debtor” mean the person or entity obligated upon an Account.
Advance.
The word “Advance” means a disbursement of Loan funds made, or to be made, to Borrower or on Borrower’s behalf
under the terms and conditions of this Agreement.
Agreement.
The word “Agreement” means this Business Loan Agreement (Asset Based), as this Business Loan Agreement (Asset
Based) may be amended or modified from time to time, together with all exhibits and schedules attached to this Business Loan Agreement
(Asset Based) from time to time.
Borrower.
The word “Borrower” means TX Holdings Incorporated and includes all co-signers and co-makers signing the Note
and all their successors and assigns.
Borrowing
Base. The words “Borrowing Base” mean, as determined by Lender from time to time, the lesser of (1) $_________________
or (2) the sum of (a) 80.000% of the aggregate amount of Eligible
Accounts (not to exceed in corresponding Loan amount based on Eligible Accounts $711,376.42),
plus (b) 50.000% of the aggregate amount of Eligible Inventory
(not to exceed in corresponding Loan amount based on Eligible Inventory $711,376.42).
Business
Day. The words “Business Day” mean a day on which commercial banks are open in the Commonwealth of Kentucky.
Collateral.
The word “Collateral” means all property and assets granted as collateral security for a Loan, whether real
or personal property, whether granted directly or indirectly, whether granted now or in the future, and whether granted in the
form of a security interest, mortgage, collateral mortgage, deed of trust, assignment, pledge, crop pledge, chattel mortgage, collateral
chattel mortgage, chattel trust, factor’s lien, equipment trust, conditional sale, trust receipt, lien, charge, lien or title retention
contract, lease or consignment intended as a security device, or any other security or lien interest whatsoever, whether created
by law, contract, or otherwise. The word Collateral also includes without limitation all collateral described in the Collateral
section of this Agreement.
Eligible
Accounts. The words “Eligible Accounts” mean at any time, all of Borrower’s Accounts which contain selling
terms and conditions acceptable to Lender. The net amount of any Eligible Account against which Borrower may borrow shall exclude
all returns, discounts, credits, and offsets of any nature. Unless otherwise agreed to by Lender in writing, Eligible Accounts
do not include:
(1) Accounts with respect to which the Account Debtor
is employee or agent of Borrower.
(2) Accounts with respect to which the Account Debtor
is a subsidiary of, or affiliated with Borrower or its shareholders, officers, or directors.
(3) Accounts with respect to which goods are placed
on consignment, guaranteed sale, or other terms by reason of which the payment by the Account Debtor may be conditional.
(4) Accounts with respect to which Borrower is or may
become liable to the Account Debtor for goods sold or services rendered by the Account Debtor to Borrower.
(5) Accounts which are subject to dispute, counterclaim,
or setoff.
(6) Accounts with respect to which the goods have not
been shipped or delivered, or the services have not been rendered, to the Account Debtor.
(7) Accounts with respect to which Lender, in its sole
discretion, deems the creditworthiness or financial condition of the Account Debtor to be unsatisfactory.
(8) Accounts of any Account Debtor who has filed or
has had filed against it a petition in bankruptcy or an application for relief under any provision of any state or federal bankruptcy,
insolvency, or debtor-in-relief acts; or who has had appointed a trustee, custodian, or receiver for the assets of such Account
Debtor; or who has made an assignment for the benefit of creditors or has become insolvent or fails generally to pay its debts
(including its payrolls) as such debts become due.
(9) Accounts which have not been paid in full within
90 days or older from the invoice date.
Eligible
Inventory. The words “Eligible Inventory” mean, at any time, all of Borrower’s Inventory as defined below,
except:
(1) Inventory which is not owned by Borrower free and
clear of all security interests, liens, encumbrances, and claims of third parties.
(2) Inventory which Lender, in its sole discretion,
deems to be obsolete, unsalable, damaged, defective, or unfit for further processing.
Environmental
Laws. The words “Environmental Laws” mean any and all state, federal and local statutes, regulations and ordinances
relating to the protection of human health or the environment, including without limitation the Comprehensive Environmental Response,
Compensation, and Liability Act of 1980, as amended, 42 U.S.C. Section 9601, et seq. (“CERCLA”), the Superfund Amendments
and Reauthorization Act of 1986, Pub. L. No. 99-499 (“SARA”), the Hazardous Materials Transportation Act, 49 U.S.C. Section
1801, et seq., the Resource Conservation and Recovery Act, 42 U.S.C. Section 6901, et seq., or other applicable state or federal
laws, rules, or regulations adopted pursuant thereto.
Event
of Default. The words “Event of Default” mean any of the events of default set forth in this Agreement in
the default section of this Agreement.
Expiration
Date. The words “Expiration Date” mean the date of termination of Lender’s commitment to lend under this Agreement.
GAAP.
The word “GAAP” means generally accepted accounting principles.
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BUSINESS
LOAN AGREEMENT (ASSET BASED) |
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Loan No: #0185000009 |
(Continued) |
Page 8 |
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Grantor.
The word “Grantor” means each and all of the persons or entities granting a Security
Interest in any Collateral for the Loan, including without limitation all Borrowers granting such a Security Interest.
Guarantor.
The word “Guarantor” means any guarantor, surety, or accommodation party of any
or all of the Loan.
Guaranty.
The word “Guaranty” means the guaranty from Guarantor to Lender, including without
limitation a guaranty of all or part of the Note.
Hazardous
Substances. The words “Hazardous Substances” mean materials that, because of their
quantity, concentration or physical, chemical or infectious characteristics, may cause or pose a present or potential hazard to
human health or the environment when improperly used, treated, stored, disposed of, generated, manufactured, transported or otherwise
handled. The words “Hazardous Substances” are used in their very broadest sense and include without limitation any and
all hazardous or toxic substances, materials or waste as defined by or listed under the Environmental Laws. The term “Hazardous
Substances” also includes, without limitation, petroleum and petroleum by-products or any fraction thereof and asbestos.
Indebtedness.
The word “Indebtedness” means the indebtedness evidenced by the Note or Related
Documents, including all principal and interest together with all other indebtedness and costs and expenses for which Borrower
is responsible under this Agreement or under any of the Related Documents.
Inventory.
The word “Inventory” means all of Borrower’s raw materials, work in process, finished
goods, merchandise, parts and supplies, of every kind and description, and goods held for sale or lease or furnished under contracts
of service in which Borrower now has or hereafter acquires any right, whether held by Borrower or others, and all documents of
title, warehouse receipts, bills of lading, and all other documents of every type covering all or any part of the foregoing. Inventory
includes inventory temporarily out of Borrower’s custody or possession and all returns on Accounts.
Lender.
The word “Lender” means Town Square Bank, its successors and assigns.
Loan.
The word “Loan” means any and all loans and financial accommodations from Lender
to Borrower whether now or hereafter existing, and however evidenced, including without limitation those loans and financial accommodations
described herein or described on any exhibit or schedule attached to this Agreement from time to time.
Note.
The word “Note” means the Note dated December 3, 2015 and executed by TX Holdings
Incorporated in the principal amount of $711,376.42, together with all renewals of, extensions of, modifications of, refinancings
of, consolidations of, and substitutions for the note or credit agreement.
Permitted
Liens. The words “Permitted Liens” mean (1) liens and security interests
securing Indebtedness owed by Borrower to Lender; (2) liens
for taxes, assessments, or similar charges either not yet due or being contested in good faith; (3) liens of materialmen,
mechanics, warehousemen, or carriers, or other like liens arising in the ordinary course of business and securing obligations
which are not yet delinquent; (4) purchase money liens or purchase money security interests upon or in any property acquired
or held by Borrower in the ordinary course of business to secure indebtedness outstanding on the date of this Agreement or
permitted to be incurred under the paragraph of this Agreement titled “Indebtedness and Liens”; (5) liens and
security interests which, as of the date of this Agreement, have been disclosed to and approved by the Lender in writing; and
(6) those liens and security interests which in the aggregate constitute an immaterial and insignificant monetary amount with
respect to the net value of Borrower’s assets.
Primary
Credit Facility. The words “Primary Credit Facility” mean the credit facility described
in the Primary Credit Facility section of this Agreement.
Related
Documents. The words “Related Documents” mean all promissory notes, credit agreements,
loan agreements, environmental agreements, guaranties, security agreements, mortgages, deeds of trust, security deeds, collateral
mortgages, and all other instruments, agreements and documents, whether now or hereafter existing, executed in connection with
the Loan.
Security
Agreement. The words “Security Agreement” mean and include without limitation any
agreements, promises, covenants, arrangements, understandings or other agreements, whether created by law, contract, or otherwise,
evidencing, governing, representing, or creating a Security Interest.
Security
Interest. The words “Security Interest” mean, without limitation, any and all types
of collateral security, present and future, whether in the form of a lien, charge, encumbrance, mortgage, deed of trust, security
deed, assignment, pledge, crop pledge, chattel mortgage, collateral chattel mortgage, chattel trust, factor’s lien, equipment trust,
conditional sale, trust receipt, lien or title retention contract, lease or consignment intended as a security device, or any other
security or lien interest whatsoever whether created by law, contract, or otherwise.
BORROWER
ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS BUSINESS LOAN AGREEMENT (ASSET BASED) AND BORROWER AGREES TO ITS TERMS. THIS
BUSINESS LOAN AGREEMENT (ASSET BASED) IS DATED DECEMBER 3, 2015.
BORROWER:
TX
HOLDINGS INCORPORATED |
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By: |
/s/
William L. Shrewsbury |
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William
L. Shrewsbury, Chairman of TX Holdings Incorporated |
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BUSINESS
LOAN AGREEMENT (ASSET BASED) |
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Loan No: #0185000009 |
(Continued) |
Page 9 |
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LENDER: |
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TOWN
SQUARE BANK |
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By: |
/s/ Josh Daniel |
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Josh
Daniel, Loan Officer |
|
LaserPro,
Ver. 15.4.20.033 Copr. D + H USA Corporation 1997, 2015. All Rights Reserved. - KY c:CFILPLC40.FC TR-9236 PR-199 |
PROMISSORY
NOTE
Principal
$711,376.42 |
Loan
Date
12-03-2015 |
Maturity
12-03-2020 |
Loan
No
#0185000009 |
Call
/ Coll |
Account |
Officer
* *
* |
Initials |
References
in the boxes above are for Lender’s use only and do not limit the applicability of this document to any particular
loan or item.
Any
item above containing “***” has been omitted due to text length limitations. |
Borrower:
|
TX
Holdings Incorporated |
Lender: |
Town
Square Bank |
|
P.
O. Box 1425 |
|
1500
Carter Avenue |
|
Ashland,
KY 41105-1425 |
|
P.O.
Box 509 |
|
|
|
Ashland,
KY 41105-0509 |
|
|
|
(606)
324-7196 |
|
|
|
|
Principal
Amount: $711,376.42 |
Date
of Note: December 3, 2015 |
PROMISE
TO PAY. TX Holdings Incorporated (“Borrower”) promises to pay to Town Square Bank (“Lender”), or order,
in lawful money of the United States of America, the principal amount of Seven Hundred Eleven Thousand Three Hundred Seventy-six
& 42/100 Dollars ($711,376.42), together with interest on the unpaid principal balance from December 3, 2015, until paid in
full.
PAYMENT.
Subject to any payment changes resulting from changes in the Index, Borrower will pay this loan in 59 regular payments of $6,967.37
each and one irregular last payment estimated at $391,896.72. Borrower’s first payment is due January 3, 2016, and all subsequent
payments are due on the same day of each month after that. Borrower’s final payment will be due on December 3, 2020, and
will be for all principal and all accrued interest not yet paid. Payments include principal and interest. Unless otherwise agreed
or required by applicable law, payments will be applied first to any accrued unpaid interest; then to principal; then to any late
charges; and then to any unpaid collection costs. Borrower will pay Lender at Lender’s address shown above or at such other
place as Lender may designate in writing.
VARIABLE
INTEREST RATE. The interest rate on this Note is subject to change from time to time based on changes in an independent index
which is the Wall Street Journal Prime Rate, as published in the Money Rates Column of the Wall Street Journal (the “Index”).
The Index is not necessarily the lowest rate charged by Lender on its loans. If the Index becomes unavailable during the
term of this loan, Lender may designate a substitute index after notifying Borrower. Lender will tell Borrower the current Index
rate upon Borrower’s request. The interest rate change will not occur more often than each day. Borrower understands that
Lender may make loans based on other rates as well. The Index currently is 3.250% per annum. Interest on the unpaid principal
balance of this Note will be calculated as described in the “INTEREST CALCULATION METHOD” paragraph using a rate equal
to the Index, adjusted if necessary for any minimum and maximum rate limitations described below, resulting in an initial rate
of 3.250% per annum based on a year of 360 days. NOTICE: Under no circumstances will the interest rate on this Note be less than
3.250% per annum or more than the maximum rate allowed by applicable law. Whenever increases occur in the interest rate, Lender,
at its option, may do one or more of the following: (A) increase Borrower’s payments to ensure Borrower’s loan will
pay off by its original final maturity date, (B) increase Borrower’s payments to cover accruing interest, (C) increase the
number of Borrower’s payments, and (D) continue Borrower’s payments at the same amount and increase Borrower’s
final payment.
INTEREST
CALCULATION METHOD. Interest on this Note is computed on a 365/360 basis; that is, by applying the ratio of the interest rate
over a year of 360 days, multiplied by the outstanding principal balance, multiplied by the actual number of days the principal
balance is outstanding. All interest payable under this Note is computed using this method.
PREPAYMENT;
MINIMUM INTEREST CHARGE. Borrower agrees that all loan fees and other prepaid finance charges are earned fully as of the date
of the loan and will not be subject to refund upon early payment (whether voluntary or as a result of default), except as otherwise
required by law. In any event, even upon full prepayment of this Note, Borrower understands that Lender is entitled to a minimum
interest charge of $10.00. Other than Borrower’s obligation to pay any minimum interest charge, Borrower may pay without
penalty all or a portion of the amount owed earlier than it is due. Early payments will not, unless agreed to by Lender in writing,
relieve Borrower of Borrower’s obligation to continue to make payments under the payment schedule. Rather, early payments
will reduce the principal balance due and may result in Borrower’s making fewer payments. Borrower agrees not to send Lender
payments marked “paid in full”, “without recourse”, or similar language. If Borrower sends such a payment,
Lender may accept it without losing any of Lender’s rights under this Note, and Borrower will remain obligated to pay any
further amount owed to Lender. All written communications concerning disputed amounts, including any check or other payment
instrument that indicates that the payment constitutes “payment in full” of the amount owed or that is tendered with
other conditions or limitations or as full satisfaction of a disputed amount must be mailed or delivered to: Town Square Bank,
1500 Carter Avenue, P.O. Box 509, Ashland, KY 41105-0509.
LATE CHARGE.
If a payment is 10 days or more late, Borrower will be charged 5.000% of the regularly scheduled payment or $50.00, whichever
is greater.
INTEREST
AFTER DEFAULT. Upon default, at Lender’s option, and if permitted by applicable law, Lender may add any unpaid accrued
interest to principal and such sum will bear interest therefrom until paid at the rate provided in this Note (including any increased
rate). Upon default, the interest rate on this Note shall be increased by adding an additional 2.000 percentage point margin (“Default
Rate Margin”). The Default Rate Margin shall also apply to each succeeding interest rate change that would have applied
had there been no default. However, in no event will the interest rate exceed the maximum interest rate limitations under applicable
law.
DEFAULT.
Each of the following shall constitute an event of default (“Event of Default”) under this Note:
Payment
Default. Borrower fails to make any payment when due under this Note.
Other Defaults.
Borrower fails to comply with or to perform any other term, obligation, covenant or condition contained in this Note or in
any of the related documents or to comply with or to perform any term, obligation, covenant or condition contained in any other
agreement between Lender and Borrower.
Default
in Favor of Third Parties. Borrower or any Grantor defaults under any loan, extension of credit, security agreement, purchase
or sales agreement, or any other agreement, in favor of any other creditor or person that may materially affect any of Borrower’s
property or Borrower’s ability to repay this Note or perform Borrower’s obligations under this Note or any of the
related documents.
False Statements.
Any warranty, representation or statement made or furnished to Lender by Borrower or on Borrower’s behalf under this
Note or the related documents is false or misleading in any material respect, either now or at the time made or furnished or becomes
false or misleading at any time thereafter.
Insolvency.
The dissolution or termination of Borrower’s existence as a going business, the insolvency of Borrower, the appointment
of a receiver for any part of Borrower’s 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 Borrower.
Creditor
or Forfeiture Proceedings. Commencement of foreclosure or forfeiture proceedings, whether by judicial proceeding,
self-help, repossession or any other method, by any creditor of Borrower or by any governmental agency against any collateral
securing the loan. This includes a garnishment of any of Borrower’s accounts, including deposit accounts, with
Lender. However, this Event of Default shall not apply if there is a good faith dispute by Borrower as to the validity or
reasonableness of the claim which is the basis of the creditor or forfeiture proceeding and if Borrower gives Lender written
notice of the creditor or forfeiture proceeding and deposits with Lender monies or a surety bond for the creditor or
forfeiture proceeding, in an amount determined by Lender, in its sole discretion, as being an adequate reserve or bond for
the dispute.
Events Affecting
Guarantor. Any of the preceding events occurs with respect to any Guarantor of any of the indebtedness or any Guarantor dies
or becomes incompetent, or revokes or disputes the validity of, or liability under, any guaranty of the indebtedness evidenced
by this Note.
Change In
Ownership. Any change in ownership of twenty-five percent (25%) or more of the common stock of Borrower.
Adverse
Change. A material adverse change occurs in Borrower’s financial condition, or Lender believes the prospect of payment
or performance of this Note is impaired.
Insecurity.
Lender in good faith believes itself insecure.
Cure Provisions.
If any default, other than a default in payment, is curable and if Borrower has not been given a notice of a breach of the
same provision of this Note within the preceding twelve (12) months, it may be cured if Borrower, after Lender sends written notice
to Borrower demanding cure of such default: (1) cures the default within fifteen (15) days; or (2) if the cure requires more than
fifteen (15) days, immediately initiates steps which Lender deems in Lender’s sole discretion to be sufficient to cure the
default and thereafter continues and completes all reasonable and necessary steps sufficient to produce compliance as soon as
reasonably practical.
LENDER’S
RIGHTS. Upon default, Lender may declare the entire unpaid principal balance under this Note and all accrued unpaid interest
immediately due, and then Borrower will pay that amount.
PROMISSORY
NOTE |
Loan
No: #0185000009 |
(Continued) |
Page
2 |
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ATTORNEYS’
FEES; EXPENSES. Lender may hire or pay someone else to help collect this Note if Borrower does not pay. Borrower will pay
Lender that amount. This includes, subject to any limits under applicable law, Lender’s reasonable attorneys’ fees
and Lender’s legal expenses whether or not there is a lawsuit, including reasonable attorneys’ fees and legal expenses
for bankruptcy proceedings (including efforts to modify or vacate any automatic stay or injunction), and appeals. If not prohibited
by applicable law, Borrower also will pay any court costs, in addition to all other sums provided by law.
JURY WAIVER.
Lender and Borrower hereby waive the right to any jury trial in any action, proceeding, or counterclaim brought by either Lender
or Borrower against the other.
GOVERNING
LAW. This Note will be governed by federal law applicable to Lender and, to the extent not preempted by federal law, the laws
of the Commonwealth of Kentucky without regard to its conflicts of law provisions. This Note has been accepted by Lender in the
Commonwealth of Kentucky.
CHOICE OF
VENUE. If there is a lawsuit, Borrower agrees upon Lender’s request to submit to the jurisdiction of the courts of BOYD
County, Commonwealth of Kentucky.
DISHONORED
ITEM FEE. Borrower will pay a fee to Lender of $25.00 if Borrower makes a payment on Borrower’s loan and the check or
preauthorized charge with which Borrower pays is later dishonored.
RIGHT OF
SETOFF. To the extent permitted by applicable law, Lender reserves a right of setoff in all Borrower’s accounts with
Lender (whether checking, savings, or some other account). This includes all accounts Borrower holds jointly with someone else
and all accounts Borrower may open in the future. However, this does not include any IRA or Keogh accounts, or any trust accounts
for which setoff would be prohibited by law. Borrower authorizes Lender, to the extent permitted by applicable law, to charge
or setoff all sums owing on the indebtedness against any and all such accounts, and, at Lender’s option, to administratively
freeze all such accounts to allow Lender to protect Lender’s charge and setoff rights provided in this paragraph.
COLLATERAL.
Borrower acknowledges this Note is secured by UCC FILING WITH THE KY SOS DATED 11/7/2012 FILE#2012-2609277-28 AND A UCC FILIING
WITH GA SOS.
FINANCIAL
INFORMATION. Borrower covenants and agrees to provide Lender, upon request, any financial statement or information deemed
necessary. Borrower further covenants and agrees that any financial statements or information provided to lender will be accurate,
correct and complete. .
PARTICIPATION
CLAUSE. Borrower hereby authorizes Bank to share all information, including, without limitation, all credit and financial
information, and all loan applications and information provided in connection therewith, pertaining or relating to Borrower, with
Bank’s parent company, with any subsidiary or affiliate of Bank or of Bank’s parent company, with any actual or proposed
participant in or assignee of all or any part of Bank’s interest in or rights under this note, or with any other person
or entity reasonably deemed incidental by Bank to the administration of the indebtedness evidenced hereby. Borrower expressly
waives, releases and relinquishes any and all claims, demands and/or causes of action against Bank, Bank’s parent company,
their subsidiaries and affiliates, and all participants, successors and/or assigns arising from or pertaining in any such disclosure
of information.
SUCCESSOR
INTERESTS. The terms of this Note shall be binding upon Borrower, and upon Borrower’s heirs, personal representatives,
successors and assigns, and shall inure to the benefit of Lender and its successors and assigns.
NOTIFY US
OF INACCURATE INFORMATION WE REPORT TO CONSUMER REPORTING AGENCIES. Borrower may notify Lender if Lender reports any inaccurate
information about Borrower’s account(s) to a consumer reporting agency. Borrower’s written notice describing the specific
inaccuracy(ies) should be sent to Lender at the following address: Town Square Bank, 1500 Carter Avenue, P.O. Box 509, Ashland,
KY 41105-0509.
GENERAL
PROVISIONS. If any part of this Note cannot be enforced, this fact will not affect the rest of the Note. Lender may delay
or forgo enforcing any of its rights or remedies under this Note without losing them. Borrower and any other person who signs,
guarantees or endorses this Note, to the extent allowed by law, waive presentment, demand for payment, and notice of dishonor.
Upon any change in the terms of this Note, and unless otherwise expressly stated in writing, no party who signs this Note, whether
as maker, guarantor, accommodation maker or endorser, shall be released from liability. All such parties agree that Lender may
renew or extend (repeatedly and for any length of time) this loan or release any party or guarantor or collateral; or impair,
fail to realize upon or perfect Lender’s security interest in the collateral; and take any other action deemed necessary
by Lender without the consent of or notice to anyone. All such parties also agree that Lender may modify this loan without the
consent of or notice to anyone other than the party with whom the modification is made. The obligations under this Note are joint
and several.
PRIOR TO
SIGNING THIS NOTE, BORROWER READ AND UNDERSTOOD ALL THE PROVISIONS OF THIS NOTE, INCLUDING THE VARIABLE INTEREST RATE PROVISIONS.
BORROWER AGREES TO THE TERMS OF THE NOTE.
BORROWER
ACKNOWLEDGES RECEIPT OF A COMPLETED COPY OF THIS PROMISSORY NOTE.
BORROWER:
TX
HOLDINGS INCORPORATED |
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By: |
/s/
William L. Shrewsbury |
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William
L. Shrewsbury, Chairman of TX Holdings Incorporated |
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LaserPro,
Ver. 15.4.20.033 Copr. D + H USA Corporation 1997, 2015. All Rights Reserved. - KY c:CFILPLD20.FC TR-9236 PR-199 |
COMMERCIAL
SECURITY AGREEMENT
Principal
$711,376.42 |
Loan
Date
12-03-2015 |
Maturity
12-03-2020 |
Loan
No
#0185000009 |
Call
/ Coll |
Account |
Officer
*** |
Initials |
References in the boxes above are for Lender’s
use only and do not limit the applicability of this document to any particular loan or item.
Any item above containing “***”
has been omitted due to text length limitations. |
Grantor: |
TX Holdings Incorporated |
Lender: |
Town Square Bank |
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P. O. Box 1425 |
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1500 Carter Avenue |
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Ashland, KY 41105-1425 |
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P.O. Box 509 |
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Ashland, KY 41105-0509 |
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(606) 324-7196 |
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THIS COMMERCIAL SECURITY AGREEMENT dated
December 3, 2015, is made and executed between TX Holdings Incorporated (“Grantor”) and Town Square Bank (“Lender”).
GRANT OF SECURITY INTEREST. For valuable
consideration, Grantor grants to Lender a security interest in the Collateral to secure the Indebtedness and agrees that Lender
shall have the rights stated in this Agreement with respect to the Collateral, in addition to all other rights which Lender may
have by law.
COLLATERAL DESCRIPTION. The word
“Collateral” as used in this Agreement means the following described property, whether now owned or hereafter acquired,
whether now existing or hereafter arising, and wherever located, in which Grantor is giving to Lender a security interest for the
payment of the Indebtedness and performance of all other obligations under the Note and this Agreement:
All Inventory and Accounts
In addition, the word “Collateral”
also includes all the following, whether now owned or hereafter acquired, whether now existing or hereafter arising, and wherever
located:
(A) All accessions,
attachments, accessories, tools, parts, supplies, replacements of and additions to any of the collateral described herein, whether
added now or later.
(B) All products
and produce of any of the property described in this Collateral section.
(C) All accounts,
general intangibles, instruments, rents, monies, payments, and all other rights, arising out of a sale, lease, consignment or other
disposition of any of the property described in this Collateral section.
(D) All proceeds
(including insurance proceeds) from the sale, destruction, loss, or other disposition of any of the property described in this
Collateral section, and sums due from a third party who has damaged or destroyed the Collateral or from that party’s insurer, whether
due to judgment, settlement or other process.
(E) All records
and data relating to any of the property described in this Collateral section, whether in the form of a writing, photograph, microfilm,
microfiche, or electronic media, together with all of Grantor’s right, title, and interest in and to all computer software required
to utilize, create, maintain, and process any such records or data on electronic media.
RIGHT OF SETOFF. To the extent permitted
by applicable law, Lender reserves a right of setoff in all Grantor’s accounts with Lender (whether checking, savings, or some
other account). This includes all accounts Grantor holds jointly with someone else and all accounts Grantor may open in the future.
However, this does not include any IRA or Keogh accounts, or any trust accounts for which setoff would be prohibited by law. Grantor
authorizes Lender, to the extent permitted by applicable law, to charge or setoff all sums owing on the Indebtedness against any
and all such accounts, and, at Lender’s option, to administratively freeze all such accounts to allow Lender to protect Lender’s
charge and setoff rights provided in this paragraph.
GRANTOR’S REPRESENTATIONS AND WARRANTIES
WITH RESPECT TO THE COLLATERAL. With respect to the Collateral, Grantor represents and promises to Lender that:
Perfection of Security Interest. Grantor
agrees to take whatever actions are requested by Lender to perfect and continue Lender’s security interest in the Collateral. Upon
request of Lender, Grantor will deliver to Lender any and all of the documents evidencing or constituting the Collateral, and Grantor
will note Lender’s interest upon any and all chattel paper and instruments if not delivered to Lender for possession by Lender.
Notices to Lender. Grantor will
promptly notify Lender in writing at Lender’s address shown above (or such other addresses as Lender may designate from time to
time) prior to any (1) change in Grantor’s name; (2) change in Grantor’s assumed business name(s); (3) change in the management
of the Corporation Grantor; (4) change in the authorized signer(s); (5) change in Grantor’s principal office address; (6) change
in Grantor’s state of organization; (7) conversion of Grantor to a new or different type of business entity; or (8) change in any
other aspect of Grantor that directly or indirectly relates to any agreements between Grantor and Lender. No change in Grantor’s
name or state of organization will take effect until after Lender has received notice.
No Violation. The execution and
delivery of this Agreement will not violate any law or agreement governing Grantor or to which Grantor is a party, and its certificate
or articles of incorporation and bylaws do not prohibit any term or condition of this Agreement.
Enforceability of Collateral. To
the extent the Collateral consists of accounts, chattel paper, or general intangibles, as defined by the Uniform Commercial Code,
the Collateral is enforceable in accordance with its terms, is genuine, and fully complies with all applicable laws and regulations
concerning form, content and manner of preparation and execution, and all persons appearing to be obligated on the Collateral have
authority and capacity to contract and are in fact obligated as they appear to be on the Collateral. At the time any account becomes
subject to a security interest in favor of Lender, the account shall be a good and valid account representing an undisputed, bona
fide indebtedness incurred by the account debtor, for merchandise held subject to delivery instructions or previously shipped or
delivered pursuant to a contract of sale, or for services previously performed by Grantor with or for the account debtor. So long
as this Agreement remains in effect, Grantor shall not, without Lender’s prior written consent, compromise, settle, adjust, or
extend payment under or with regard to any such Accounts. There shall be no setoffs or counterclaims against any of the Collateral,
and no agreement shall have been made under which any deductions or discounts may be claimed concerning the Collateral except those
disclosed to Lender in writing.
Location of the Collateral. Except
in the ordinary course of Grantor’s business, Grantor agrees to keep the Collateral (or to the extent the Collateral consists of
intangible property such as accounts or general intangibles, the records concerning the Collateral) at Grantor’s address shown
above or at such other locations as are acceptable to Lender. Upon Lender’s request, Grantor will deliver to Lender in form
satisfactory to Lender a schedule of real properties and Collateral locations relating to Grantor’s operations, including
without limitation the following: (1) all real property Grantor owns or is purchasing; (2) all real property Grantor is renting
or leasing; (3) all storage facilities Grantor owns, rents, leases, or uses; and (4) all other properties where Collateral is or
may be located.
COMMERCIAL
SECURITY AGREEMENT |
Loan No: #0185000009 |
(Continued) |
Page 2 |
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Removal of the Collateral. Except
in the ordinary course of Grantor’s business, including the sales of inventory, Grantor shall not remove the Collateral from its
existing location without Lender’s prior written consent. To the extent that the Collateral consists of vehicles, or other titled
property, Grantor shall not take or permit any action which would require application for certificates of title for the vehicles
outside the Commonwealth of Kentucky, without Lender’s prior written consent. Grantor shall, whenever requested, advise Lender
of the exact location of the Collateral.
Transactions Involving Collateral.
Except for inventory sold or accounts collected in the ordinary course of Grantor’s business, or as otherwise provided for
in this Agreement, Grantor shall not sell, offer to sell, or otherwise transfer or dispose of the Collateral. While Grantor is
not in default under this Agreement, Grantor may sell inventory, but only in the ordinary course of its business and only to buyers
who qualify as a buyer in the ordinary course of business. A sale in the ordinary course of Grantor’s business does not include
a transfer in partial or total satisfaction of a debt or any bulk sale. Grantor shall not pledge, mortgage, encumber or otherwise
permit the Collateral to be subject to any lien, security interest, encumbrance, or charge, other than the security interest provided
for in this Agreement, without the prior written consent of Lender. This includes security interests even if junior in right to
the security interests granted under this Agreement. Unless waived by Lender, all proceeds from any disposition of the Collateral
(for whatever reason) shall be held in trust for Lender and shall not be commingled with any other funds; provided however, this
requirement shall not constitute consent by Lender to any sale or other disposition. Upon receipt, Grantor shall immediately deliver
any such proceeds to Lender.
Title. Grantor represents and warrants
to Lender that Grantor holds good and marketable title to the Collateral, free and clear of all liens and encumbrances except for
the lien of this Agreement. No financing statement covering any of the Collateral is on file in any public office other than those
which reflect the security interest created by this Agreement or to which Lender has specifically consented. Grantor shall defend
Lender’s rights in the Collateral against the claims and demands of all other persons.
Repairs and Maintenance. Grantor
agrees to keep and maintain, and to cause others to keep and maintain, the Collateral in good order, repair and condition at all
times while this Agreement remains in effect. Grantor further agrees to pay when due all claims for work done on, or services rendered
or material furnished in connection with the Collateral so that no lien or encumbrance may ever attach to or be filed against the
Collateral.
Inspection of Collateral. Lender
and Lender’s designated representatives and agents shall have the right at all reasonable times to examine and inspect the Collateral
wherever located.
Taxes, Assessments and Liens.
Grantor will pay when due all taxes, assessments and liens upon the Collateral, its use or operation, upon this Agreement,
upon any promissory note or notes evidencing the Indebtedness, or upon any of the other Related Documents. Grantor may withhold
any such payment or may elect to contest any lien if Grantor is in good faith conducting an appropriate proceeding to contest
the obligation to pay and so long as Lender’s interest in the Collateral is not jeopardized in Lender’s sole opinion.
If the Collateral is subjected to a lien which is not discharged within fifteen (15) days, Grantor shall deposit with Lender cash,
a sufficient corporate surety bond or other security satisfactory to Lender in an amount adequate to provide for the discharge
of the lien plus any interest, costs, reasonable attorneys’ fees or other charges that could accrue as a result of foreclosure
or sale of the Collateral. In any contest Grantor shall defend itself and Lender and shall satisfy any final adverse judgment
before enforcement against the Collateral. Grantor shall name Lender as an additional obligee under any surety bond furnished
in the contest proceedings. Grantor further agrees to furnish Lender with evidence that such taxes, assessments, and governmental
and other charges have been paid in full and in a timely manner. Grantor may withhold any such payment or may elect to contest
any lien if Grantor is in good faith conducting an appropriate proceeding to contest the obligation to pay and so long as Lender’s
interest in the Collateral is not jeopardized.
Compliance with Governmental Requirements.
Grantor shall comply promptly with all laws, ordinances, rules and regulations of all governmental authorities, now or hereafter
in effect, applicable to the ownership, production, disposition, or use of the Collateral, including all laws or regulations relating
to the undue erosion of highly-erodible land or relating to the conversion of wetlands for the production of an agricultural product
or commodity. Grantor may contest in good faith any such law, ordinance or regulation and withhold compliance during any proceeding,
including appropriate appeals, so long as Lender’s interest in the Collateral, in Lender’s opinion, is not jeopardized.
Hazardous Substances. Grantor represents
and warrants that the Collateral never has been, and never will be so long as this Agreement remains a lien on the Collateral,
used in violation of any Environmental Laws or for the generation, manufacture, storage, transportation, treatment, disposal, release
or threatened release of any Hazardous Substance. The representations and warranties contained herein are based on Grantor’s due
diligence in investigating the Collateral for Hazardous Substances. Grantor hereby (1) releases and waives any future claims against
Lender for indemnity or contribution in the event Grantor becomes liable for cleanup or other costs under any Environmental Laws,
and (2) agrees to indemnify, defend, and hold harmless Lender against any and all claims and losses resulting from a breach of
this provision of this Agreement. This obligation to indemnify and defend shall survive the payment of the Indebtedness and the
satisfaction of this Agreement.
Maintenance of Casualty Insurance.
Grantor shall procure and maintain all risks insurance, including without limitation fire, theft and liability coverage together
with such other insurance as Lender may require with respect to the Collateral, in form, amounts, coverages and basis reasonably
acceptable to Lender and issued by a company or companies reasonably acceptable to Lender. Grantor, upon request of Lender, will
deliver to Lender from time to time the policies or certificates of insurance in form satisfactory to Lender, including stipulations
that coverages will not be cancelled or diminished without at least thirty (30) days’ prior written notice to Lender and not including
any disclaimer of the insurer’s liability for failure to give such a notice. Each insurance policy also shall include an endorsement
providing that coverage in favor of Lender will not be impaired in any way by any act, omission or default of Grantor or any other
person. In connection with all policies covering assets in which Lender holds or is offered a security interest, Grantor will provide
Lender with such loss payable or other endorsements as Lender may require. If Grantor at any time fails to obtain or maintain any
insurance as required under this Agreement, Lender may (but shall not be obligated to) obtain such insurance as Lender deems appropriate,
including if Lender so chooses “single interest insurance,” which will cover only Lender’s interest in the Collateral.
Application of Insurance Proceeds.
Grantor shall promptly notify Lender of any loss or damage to the Collateral, whether or not such casualty or loss is covered by
insurance. Lender may make proof of loss if Grantor fails to do so within fifteen (15) days of the casualty. All proceeds of any
insurance on the Collateral, including accrued proceeds thereon, shall be held by Lender as part of the Collateral. If Lender consents
to repair or replacement of the damaged or destroyed Collateral, Lender shall, upon satisfactory proof of expenditure, pay or reimburse
Grantor from the proceeds for the reasonable cost of repair or restoration. If Lender does not consent to repair or replacement
of the Collateral, Lender shall retain a sufficient amount of the proceeds to pay all of the Indebtedness, and shall pay the balance
to Grantor. Any proceeds which have not been disbursed within six (6) months after their receipt and which Grantor has not committed
to the repair or restoration of the Collateral shall be used to prepay the Indebtedness.
COMMERCIAL
SECURITY AGREEMENT |
Loan No: #0185000009 |
(Continued) |
Page 3 |
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Insurance Reserves. Lender may require
Grantor to maintain with Lender reserves for payment of insurance premiums, which reserves shall be created by monthly payments
from Grantor of a sum estimated by Lender to be sufficient to produce, at least fifteen (15) days before the premium due date,
amounts at least equal to the insurance premiums to be paid. If fifteen (15) days before payment is due, the reserve funds are
insufficient, Grantor shall upon demand pay any deficiency to Lender. The reserve funds shall be held by Lender as a general deposit
and shall constitute a non-interest-bearing account which Lender may satisfy by payment of the insurance premiums required to be
paid by Grantor as they become due. Lender does not hold the reserve funds in trust for Grantor, and Lender is not the agent of
Grantor for payment of the insurance premiums required to be paid by Grantor. The responsibility for the payment of premiums shall
remain Grantor’s sole responsibility.
Insurance Reports. Grantor, upon
request of Lender, shall furnish to Lender reports on each existing policy of insurance showing such information as Lender may
reasonably request including the following: (1) the name of the insurer; (2) the risks insured; (3) the amount of the policy; (4)
the property insured; (5) the then current value on the basis of which insurance has been obtained and the manner of determining
that value; and (6) the expiration date of the policy. In addition, Grantor shall upon request by Lender (however not more often
than annually) have an independent appraiser satisfactory to Lender determine, as applicable, the cash value or replacement cost
of the Collateral.
Financing Statements. Grantor authorizes
Lender to file a UCC financing statement, or alternatively, a copy of this Agreement to perfect Lender’s security interest. At
Lender’s request, Grantor additionally agrees to sign all other documents that are necessary to perfect, protect, and continue
Lender’s security interest in the Property. Grantor will pay all filing fees, title transfer fees, and other fees and costs involved
unless prohibited by law or unless Lender is required by law to pay such fees and costs. Grantor irrevocably appoints Lender to
execute documents necessary to transfer title if there is a default. Lender may file a copy of this Agreement as a financing statement.
GRANTOR’S RIGHT TO POSSESSION
AND TO COLLECT ACCOUNTS. Until default and except as otherwise provided below with respect to accounts, Grantor may have possession
of the tangible personal property and beneficial use of all the Collateral and may use it in any lawful manner not inconsistent
with this Agreement or the Related Documents, provided that Grantor’s right to possession and beneficial use shall not apply
to any Collateral where possession of the Collateral by Lender is required by law to perfect Lender’s security interest in such
Collateral. Until otherwise notified by Lender, Grantor may collect any of the Collateral consisting of accounts. At any time and
even though no Event of Default exists, Lender may exercise its rights to collect the accounts and to notify account debtors to
make payments directly to Lender for application to the Indebtedness. If Lender at any time has possession of any Collateral, whether
before or after an Event of Default, Lender shall be deemed to have exercised reasonable care in the custody and preservation of
the Collateral if Lender takes such action for that purpose as Grantor shall request or as Lender, in Lender’s sole discretion,
shall deem appropriate under the circumstances, but failure to honor any request by Grantor shall not of itself be deemed to be
a failure to exercise reasonable care. Lender shall not be required to take any steps necessary to preserve any rights in the Collateral
against prior parties, nor to protect, preserve or maintain any security interest given to secure the Indebtedness.
LENDER’S EXPENDITURES. If any action
or proceeding is commenced that would materially affect Lender’s interest in the Collateral or if Grantor fails to comply with
any provision of this Agreement or any Related Documents, including but not limited to Grantor’s failure to discharge or pay when
due any amounts Grantor is required to discharge or pay under this Agreement or any Related Documents, Lender on Grantor’s behalf
may (but shall not be obligated to) take any action that Lender deems appropriate, including but not limited to discharging or
paying all taxes, liens, security interests, encumbrances and other claims, at any time levied or placed on the Collateral and
paying all costs for insuring, maintaining and preserving the Collateral. All such expenditures incurred or paid by Lender for
such purposes will then bear interest at the rate charged under the Note from the date incurred or paid by Lender to the date of
repayment by Grantor. All such expenses will become a part of the Indebtedness and, at Lender’s option, will (A) be payable on
demand; (B) be added to the balance of the Note and be apportioned among and be payable with any installment payments to become
due during either (1) the term of any applicable insurance policy; or (2) the remaining term of the Note; or (C) be treated as
a balloon payment which will be due and payable at the Note’s maturity. The Agreement also will secure payment of these amounts.
Such right shall be in addition to all other rights and remedies to which Lender may be entitled upon Default.
DEFAULT. Each of the following shall
constitute an Event of Default under this Agreement:
Payment Default. Grantor fails to
make any payment when due under the Indebtedness.
Other Defaults. Grantor fails to
comply with or to perform any other term, obligation, covenant or condition contained in this Agreement or in any of the Related
Documents or to comply with or to perform any term, obligation, covenant or condition contained in any other agreement between
Lender and Grantor.
Default in Favor of Third Parties.
Any guarantor or Grantor defaults under any loan, extension of credit, security agreement, purchase or sales agreement, or any
other agreement, in favor of any other creditor or person that may materially affect any of any guarantor’s or Grantor’s
property or ability to perform their respective obligations under this Agreement or any of the Related Documents.
False Statements. Any warranty,
representation or statement made or furnished to Lender by Grantor or on Grantor’s behalf under this Agreement or the Related Documents
is false or misleading in any material respect, either now or at the time made or furnished or becomes false or misleading at any
time thereafter.
Defective Collateralization. This
Agreement or any of the Related Documents ceases to be in full force and effect (including failure of any collateral document to
create a valid and perfected security interest or lien) at any time and for any reason.
Insolvency. The dissolution or termination
of Grantor’s existence as a going business, the insolvency of Grantor, the appointment of a receiver for any part of Grantor’s
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 Grantor.
Creditor or Forfeiture Proceedings.
Commencement of foreclosure or forfeiture proceedings, whether by judicial proceeding, self-help, repossession or any other method,
by any creditor of Grantor or by any governmental agency against any collateral securing the Indebtedness. This includes a garnishment
of any of Grantor’s accounts, including deposit accounts, with Lender. However, this Event of Default shall not apply if there
is a good faith dispute by Grantor as to the validity or reasonableness of the claim which is the basis of the creditor or forfeiture
proceeding and if Grantor gives Lender written notice of the creditor or forfeiture proceeding and deposits with Lender monies
or a surety bond for the creditor or forfeiture proceeding, in an amount determined by Lender, in its sole discretion, as being
an adequate reserve or bond for the dispute.
Events Affecting Guarantor. Any
of the preceding events occurs with respect to any Guarantor of any of the Indebtedness or Guarantor dies or becomes incompetent
or revokes or disputes the validity of, or liability under, any Guaranty of the Indebtedness.
Adverse Change. A material adverse
change occurs in Grantor’s financial condition, or Lender believes the prospect of payment or performance of the Indebtedness is
impaired.
Insecurity. Lender in good faith
believes itself insecure.
COMMERCIAL
SECURITY AGREEMENT |
Loan No: #0185000009 |
(Continued) |
Page 4 |
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Cure Provisions. If any default,
other than a default in payment, is curable and if Grantor has not been given a notice of a breach of the same provision of this
Agreement within the preceding twelve (12) months, it may be cured if Grantor, after Lender sends written notice to Grantor demanding
cure of such default: (1) cures the default within fifteen (15) days; or (2) if the cure requires more than fifteen (15) days,
immediately initiates steps which Lender deems in Lender’s sole discretion to be sufficient to cure the default and thereafter
continues and completes all reasonable and necessary steps sufficient to produce compliance as soon as reasonably practical.
RIGHTS AND REMEDIES ON DEFAULT. If
an Event of Default occurs under this Agreement, at any time thereafter, Lender shall have all the rights of a secured party under
the Kentucky Uniform Commercial Code. In addition and without limitation, Lender may exercise any one or more of the following
rights and remedies:
Accelerate Indebtedness. Lender
may declare the entire Indebtedness, including any prepayment penalty which Grantor would be required to pay, immediately due and
payable, without notice of any kind to Grantor.
Assemble Collateral. Lender may
require Grantor to deliver to Lender all or any portion of the Collateral and any and all certificates of title and other documents
relating to the Collateral. Lender may require Grantor to assemble the Collateral and make it available to Lender at a place to
be designated by Lender. Lender also shall have full power to enter upon the property of Grantor to take possession of and remove
the Collateral. If the Collateral contains other goods not covered by this Agreement at the time of repossession, Grantor agrees
Lender may take such other goods, provided that Lender makes reasonable efforts to return them to Grantor after repossession.
Sell the Collateral. Lender shall
have full power to sell, lease, transfer, or otherwise deal with the Collateral or proceeds thereof in Lender’s own name or that
of Grantor. Lender may sell the Collateral at public auction or private sale. Unless the Collateral threatens to decline speedily
in value or is of a type customarily sold on a recognized market, Lender will give Grantor, and other persons as required by law,
reasonable notice of the time and place of any public sale, or the time after which any private sale or any other disposition of
the Collateral is to be made. However, no notice need be provided to any person who, after Event of Default occurs, enters into
and authenticates an agreement waiving that person’s right to notification of sale. The requirements of reasonable notice shall
be met if such notice is given at least ten (10) days before the time of the sale or disposition. All expenses relating to the
disposition of the Collateral, including without limitation the expenses of retaking, holding, insuring, preparing for sale and
selling the Collateral, shall become a part of the Indebtedness secured by this Agreement and shall be payable on demand, with
interest at the Note rate from date of expenditure until repaid.
Appoint Receiver. Lender shall have
the right to have a receiver appointed to take possession of all or any part of the Collateral, with the power to protect and preserve
the Collateral, to operate the Collateral preceding foreclosure or sale, and to collect the rents from the Collateral and apply
the proceeds, over and above the cost of the receivership, against the Indebtedness. The receiver may serve without bond if permitted
by law. Lender’s right to the appointment of a receiver shall exist whether or not the apparent value of the Collateral exceeds
the Indebtedness by a substantial amount. Employment by Lender shall not disqualify a person from serving as a receiver.
Collect Revenues, Apply Accounts. Lender,
either itself or through a receiver, may collect the payments, rents, income, and revenues from the Collateral. Lender may at any
time in Lender’s discretion transfer any Collateral into Lender’s own name or that of Lender’s nominee and receive the payments,
rents, income, and revenues therefrom and hold the same as security for the Indebtedness or apply it to payment of the Indebtedness
in such order of preference as Lender may determine. Insofar as the Collateral consists of accounts, general intangibles, insurance
policies, instruments, chattel paper, choses in action, or similar property, Lender may demand, collect, receipt for, settle, compromise,
adjust, sue for, foreclose, or realize on the Collateral as Lender may determine, whether or not Indebtedness or Collateral is
then due. For these purposes, Lender may, on behalf of and in the name of Grantor, receive, open and dispose of mail addressed
to Grantor; change any address to which mail and payments are to be sent; and endorse notes, checks, drafts, money orders, documents
of title, instruments and items pertaining to payment, shipment, or storage of any Collateral. To facilitate collection, Lender
may notify account debtors and obligors on any Collateral to make payments directly to Lender.
Obtain Deficiency. If Lender chooses
to sell any or all of the Collateral, Lender may obtain a judgment against Grantor for any deficiency remaining on the Indebtedness
due to Lender after application of all amounts received from the exercise of the rights provided in this Agreement. Grantor shall
be liable for a deficiency even if the transaction described in this subsection is a sale of accounts or chattel paper.
Other Rights and Remedies. Lender
shall have all the rights and remedies of a secured creditor under the provisions of the Uniform Commercial Code, as may be amended
from time to time. In addition, Lender shall have and may exercise any or all other rights and remedies it may have available at
law, in equity, or otherwise.
Election of Remedies. Except as
may be prohibited by applicable law, all of Lender’s rights and remedies, whether evidenced by this Agreement, the Related Documents,
or by any other writing, shall be cumulative and may be exercised singularly or concurrently. Election by Lender to pursue any
remedy shall not exclude pursuit of any other remedy, and an election to make expenditures or to take action to perform an obligation
of Grantor under this Agreement, after Grantor’s failure to perform, shall not affect Lender’s right to declare a default and exercise
its remedies.
MISCELLANEOUS PROVISIONS. The following
miscellaneous provisions are a part of this Agreement:
Amendments. This Agreement, together
with any Related Documents, constitutes the entire understanding and agreement of the parties as to the matters set forth in this
Agreement. No alteration of or amendment to this Agreement shall be effective unless given in writing and signed by the party or
parties sought to be charged or bound by the alteration or amendment.
Attorneys’ Fees; Expenses. Grantor
agrees to pay upon demand all of Lender’s costs and expenses, including Lender’s reasonable attorneys’ fees and Lender’s
legal expenses, incurred in connection with the enforcement of this Agreement. Lender may hire or pay someone else to help enforce
this Agreement, and Grantor shall pay the costs and expenses of such enforcement. Costs and expenses include Lender’s reasonable
attorneys’ fees and legal expenses whether or not there is a lawsuit, including reasonable attorneys’ fees and legal expenses for
bankruptcy proceedings (including efforts to modify or vacate any automatic stay or injunction), appeals, and any anticipated post-judgment
collection services. Grantor also shall pay all court costs and such additional fees as may be directed by the court.
Caption Headings. Caption headings
in this Agreement are for convenience purposes only and are not to be used to interpret or define the provisions of this Agreement.
Governing Law. This Agreement will be governed
by federal law applicable to Lender and, to the extent not preempted by federal law, the laws of the Commonwealth of Kentucky
without regard to its conflicts of law provisions. This Agreement has been accepted by Lender in the Commonwealth of Kentucky.
Choice of Venue. If there is a lawsuit,
Grantor agrees upon Lender’s request to submit to the jurisdiction of the courts of BOYD County, Commonwealth of Kentucky.
COMMERCIAL
SECURITY AGREEMENT |
Loan No: #0185000009 |
(Continued) |
Page 5 |
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No Waiver by Lender. Lender shall
not be deemed to have waived any rights under this Agreement unless such waiver is given in writing and signed by Lender. No delay
or omission on the part of Lender in exercising any right shall operate as a waiver of such right or any other right. A waiver
by Lender of a provision of this Agreement shall not prejudice or constitute a waiver of Lender’s right otherwise to demand strict
compliance with that provision or any other provision of this Agreement. No prior waiver by Lender, nor any course of dealing between
Lender and Grantor, shall constitute a waiver of any of Lender’s rights or of any of Grantor’s obligations as to any
future transactions. Whenever the consent of Lender is required under this Agreement, the granting of such consent by Lender in
any instance shall not constitute continuing consent to subsequent instances where such consent is required and in all cases such
consent may be granted or withheld in the sole discretion of Lender.
Notices. Any notice required to
be given under this Agreement shall be given in writing, and shall be effective when actually delivered, when actually received
by telefacsimile (unless otherwise required by law), when deposited with a nationally recognized overnight courier, or, if mailed,
when deposited in the United States mail, as first class, certified or registered mail postage prepaid, directed to the addresses
shown near the beginning of this Agreement. Any party may change its address for notices under this Agreement by giving formal
written notice to the other parties, specifying that the purpose of the notice is to change the party’s address. For notice purposes,
Grantor agrees to keep Lender informed at all times of Grantor’s current address. Unless otherwise provided or required by law,
if there is more than one Grantor, any notice given by Lender to any Grantor is deemed to be notice given to all Grantors.
Power of Attorney. Grantor hereby
appoints Lender as Grantor’s irrevocable attorney-in-fact for the purpose of executing any documents necessary to perfect, amend,
or to continue the security interest granted in this Agreement or to demand termination of filings of other secured parties. Lender
may at any time, and without further authorization from Grantor, file a carbon, photographic or other reproduction of any financing
statement or of this Agreement for use as a financing statement. Grantor will reimburse Lender for all expenses for the perfection
and the continuation of the perfection of Lender’s security interest in the Collateral.
Severability. If a court of competent
jurisdiction finds any provision of this Agreement to be illegal, invalid, or unenforceable as to any circumstance, that finding
shall not make the offending provision illegal, invalid, or unenforceable as to any other circumstance. If feasible, the offending
provision shall be considered modified so that it becomes legal, valid and enforceable. If the offending provision cannot be so
modified, it shall be considered deleted from this Agreement. Unless otherwise required by law, the illegality, invalidity, or
unenforceability of any provision of this Agreement shall not affect the legality, validity or enforceability of any other provision
of this Agreement.
Successors and Assigns. Subject
to any limitations stated in this Agreement on transfer of Grantor’s interest, this Agreement shall be binding upon and inure to
the benefit of the parties, their successors and assigns. If ownership of the Collateral becomes vested in a person other than
Grantor, Lender, without notice to Grantor, may deal with Grantor’s successors with reference to this Agreement and the Indebtedness
by way of forbearance or extension without releasing Grantor from the obligations of this Agreement or liability under the Indebtedness.
Survival of Representations and Warranties.
All representations, warranties, and agreements made by Grantor in this Agreement shall survive the execution and delivery of this
Agreement, shall be continuing in nature, and shall remain in full force and effect until such time as Grantor’s Indebtedness shall
be paid in full.
Time is of the Essence. Time is
of the essence in the performance of this Agreement.
DEFINITIONS. The following capitalized
words and terms shall have the following meanings when used in this Agreement. Unless specifically stated to the contrary, all
references to dollar amounts shall mean amounts in lawful money of the United States of America. Words and terms used in the singular
shall include the plural, and the plural shall include the singular, as the context may require. Words and terms not otherwise
defined in this Agreement shall have the meanings attributed to such terms in the Uniform Commercial Code:
Agreement. The word “Agreement”
means this Commercial Security Agreement, as this Commercial Security Agreement may be amended or modified from time to time, together
with all exhibits and schedules attached to this Commercial Security Agreement from time to time.
Borrower. The word “Borrower”
means TX Holdings Incorporated and includes all co-signers and co-makers signing the Note and all their successors and assigns.
Collateral. The word “Collateral”
means all of Grantor’s right, title and interest in and to all the Collateral as described in the Collateral Description section
of this Agreement.
Default. The word “Default”
means the Default set forth in this Agreement in the section titled “Default”.
Environmental Laws. The words “Environmental
Laws” mean any and all state, federal and local statutes, regulations and ordinances relating to the protection of human
health or the environment, including without limitation the Comprehensive Environmental Response, Compensation, and Liability Act
of 1980, as amended, 42 U.S.C. Section 9601, et seq. (“CERCLA”), the Superfund Amendments and Reauthorization Act of
1986, Pub. L. No. 99-499 (“SARA”), the Hazardous Materials Transportation Act, 49 U.S.C. Section 1801, et seq., the
Resource Conservation and Recovery Act, 42 U.S.C. Section 6901, et seq., or other applicable state or federal laws, rules, or regulations
adopted pursuant thereto.
Event of Default. The words “Event
of Default” mean any of the events of default set forth in this Agreement in the default section of this Agreement.
Grantor. The word “Grantor”
means TX Holdings Incorporated.
Guarantor. The word “Guarantor”
means any guarantor, surety, or accommodation party of any or all of the Indebtedness.
Guaranty. The word “Guaranty”
means the guaranty from Guarantor to Lender, including without limitation a guaranty of all or part of the Note.
Hazardous Substances. The words
“Hazardous Substances” mean materials that, because of their quantity, concentration or physical, chemical or infectious
characteristics, may cause or pose a present or potential hazard to human health or the environment when improperly used, treated,
stored, disposed of, generated, manufactured, transported or otherwise handled. The words “Hazardous Substances” are
used in their very broadest sense and include without limitation any and all hazardous or toxic substances, materials or waste
as defined by or listed under the Environmental Laws. The term “Hazardous Substances” also includes, without limitation,
petroleum and petroleum by-products or any fraction thereof and asbestos.
Indebtedness. The word “Indebtedness”
means the indebtedness evidenced by the Note or Related Documents, including all principal and interest together with all other
indebtedness and costs and expenses for which Grantor is responsible under this Agreement or under any of the Related Documents.
Lender. The word “Lender”
means Town Square Bank, its successors and assigns.
Note. The word “Note”
means the Note dated December 3, 2015 and executed by TX Holdings Incorporated in the principal amount of $711,376.42, together
with all renewals of, extensions of, modifications of, refinancings of, consolidations of, and substitutions for the note or credit
agreement.
COMMERCIAL
SECURITY AGREEMENT |
Loan No: #0185000009 |
(Continued) |
Page 6 |
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Property. The word “Property”
means all of Grantor’s right, title and interest in and to all the Property as described in the “Collateral Description”
section of this Agreement.
Related Documents. The words “Related
Documents” mean all promissory notes, credit agreements, loan agreements, environmental agreements, guaranties, security
agreements, mortgages, deeds of trust, security deeds, collateral mortgages, and all other instruments, agreements and documents,
whether now or hereafter existing, executed in connection with the Indebtedness.
GRANTOR HAS READ AND UNDERSTOOD ALL THE PROVISIONS OF THIS
COMMERCIAL SECURITY AGREEMENT AND AGREES TO ITS TERMS. THIS AGREEMENT IS DATED DECEMBER 3, 2015.
GRANTOR:
TX HOLDINGS INCORPORATED |
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By: |
/s/ William L. Shrewsbury |
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William
L. Shrewsbury, Chairman of TX Holdings
Incorporated |
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LENDER: |
TOWN SQUARE BANK |
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X |
/s/ Josh Daniel |
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Josh Daniel, Loan Officer |
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LaserPro,
Ver. 15.4.20.033 Copr. D + H USA Corporation 1997, 2015. All Rights Reserved. - KY c:CFILPLE40.FC TR-9236 PR-199 |
COMMERCIAL
SECURITY AGREEMENT
Principal |
Loan Date |
Maturity |
Loan No |
Call / Coll |
Account |
Officer |
Initials |
$711,376.42 |
12-03-2015 |
12-03-2020 |
#0185000009 |
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*** |
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References in the boxes above are for Lender’s use only and do not limit the applicability of this document to any particular loan or item. Any item above containing “***” has been omitted due to text length limitations. |
Grantor: |
TX Holdings Incorporated |
Lender: |
Town Square Bank |
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P.
O. Box 1425 |
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1500 Carter Avenue |
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Ashland, KY 41105-1425 |
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P.O. Box 509 |
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Ashland, KY 41105-0509 |
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(606) 324-7196 |
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THIS COMMERCIAL SECURITY AGREEMENT dated December 3, 2015,
is made and executed between TX Holdings Incorporated (“Grantor”) and Town Square Bank (“Lender”).
GRANT OF SECURITY INTEREST. For valuable consideration,
Grantor grants to Lender a security interest in the Collateral to secure the Indebtedness and agrees that Lender shall have the
rights stated in this Agreement with respect to the Collateral, in addition to all other rights which Lender may have by law.
COLLATERAL DESCRIPTION. The word
“Collateral” as used in this Agreement means the following described property, whether now owned or hereafter acquired,
whether now existing or hereafter arising, and wherever located, in which Grantor is giving to Lender a security interest for the
payment of the Indebtedness and performance of all other obligations under the Note and this Agreement:
All Inventory and Accounts
In addition, the word “Collateral”
also includes all the following, whether now owned or hereafter acquired, whether now existing or hereafter arising, and wherever
located:
(A) All accessions,
attachments, accessories, tools, parts, supplies, replacements of and additions to any of the collateral described herein, whether
added now or later.
(B) All products
and produce of any of the property described in this Collateral section.
(C) All accounts,
general intangibles, instruments, rents, monies, payments, and all other rights, arising out of a sale, lease, consignment or other
disposition of any of the property described in this Collateral section.
(D) All proceeds
(including insurance proceeds) from the sale, destruction, loss, or other disposition of any of the property described in this
Collateral section, and sums due from a third party who has damaged or destroyed the Collateral or from that party’s insurer, whether
due to judgment, settlement or other process.
(E) All records
and data relating to any of the property described in this Collateral section, whether in the form of a writing, photograph, microfilm,
microfiche, or electronic media, together with all of Grantor’s right, title, and interest in and to all computer software required
to utilize, create, maintain, and process any such records or data on electronic media.
CROSS-COLLATERALIZATION. In addition
to the Note, this Agreement secures all obligations, debts and liabilities, plus interest thereon, of Grantor to Lender, or any
one or more of them, as well as all claims by Lender against Grantor or any one or more of them, whether now existing or hereafter
arising, whether related or unrelated to the purpose of the Note, whether voluntary or otherwise, whether due or not due, direct
or indirect, determined or undetermined, absolute or contingent, liquidated or unliquidated, whether Grantor may be liable individually
or jointly with others, whether obligated as guarantor, surety, accommodation party or otherwise, and whether recovery upon such
amounts may be or hereafter may become barred by any statute of limitations, and whether the obligation to repay such amounts may
be or hereafter may become otherwise unenforceable.
RIGHT OF SETOFF. To the extent permitted
by applicable law, Lender reserves a right of setoff in all Grantor’s accounts with Lender (whether checking, savings, or some
other account). This includes all accounts Grantor holds jointly with someone else and all accounts Grantor may open in the future.
However, this does not include any IRA or Keogh accounts, or any trust accounts for which setoff would be prohibited by law. Grantor
authorizes Lender, to the extent permitted by applicable law, to charge or setoff all sums owing on the Indebtedness against any
and all such accounts, and, at Lender’s option, to administratively freeze all such accounts to allow Lender to protect Lender’s
charge and setoff rights provided in this paragraph.
GRANTOR’S REPRESENTATIONS AND WARRANTIES
WITH RESPECT TO THE COLLATERAL. With respect to the Collateral, Grantor represents and promises to Lender that:
Perfection of Security Interest. Grantor
agrees to take whatever actions are requested by Lender to perfect and continue Lender’s security interest in the Collateral.
Upon request of Lender, Grantor will deliver to Lender any and all of the documents evidencing or constituting the Collateral,
and Grantor will note Lender’s interest upon any and all chattel paper and instruments if not delivered to Lender for possession
by Lender. This is a continuing Security Agreement and will continue in effect even though all or any part of the Indebtedness
is paid in full and even though for a period of time Grantor may not be indebted to Lender.
Notices to Lender. Grantor will
promptly notify Lender in writing at Lender’s address shown above (or such other addresses as Lender may designate from time to
time) prior to any (1) change in Grantor’s name; (2) change in Grantor’s assumed business name(s); (3) change in the management
of the Corporation Grantor; (4) change in the authorized signer(s); (5) change in Grantor’s principal office address; (6)
change in Grantor’s state of organization; (7) conversion of Grantor to a new or different type of business entity; or (8) change
in any other aspect of Grantor that directly or indirectly relates to any agreements between Grantor and Lender. No change in Grantor’s
name or state of organization will take effect until after Lender has received notice.
No Violation. The execution and
delivery of this Agreement will not violate any law or agreement governing Grantor or to which Grantor is a party, and its certificate
or articles of incorporation and bylaws do not prohibit any term or condition of this Agreement.
Enforceability of Collateral. To
the extent the Collateral consists of accounts, chattel paper, or general intangibles, as defined by the Uniform Commercial Code,
the Collateral is enforceable in accordance with its terms, is genuine, and fully complies with all applicable laws and regulations
concerning form, content and manner of preparation and execution, and all persons appearing to be obligated on the Collateral have
authority and capacity to contract and are in fact obligated as they appear to be on the Collateral. At the time any account becomes
subject to a security interest in favor of Lender, the account shall be a good and valid account representing an undisputed, bona
fide indebtedness incurred by the account debtor, for merchandise held subject to delivery instructions or previously shipped or
delivered pursuant to a contract of sale, or for services previously performed by Grantor with or for the account debtor. So long
as this Agreement remains in effect, Grantor shall not, without Lender’s prior written consent, compromise, settle, adjust,
or extend payment under or with regard to any such Accounts. There shall be no setoffs or counterclaims against any of the Collateral,
and no agreement shall have been made under which any deductions or discounts may be claimed concerning the Collateral except those
disclosed to Lender in writing.
COMMERCIAL
SECURITY AGREEMENT |
Loan No: #0185000009 |
(Continued) |
Page 2 |
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Location of the Collateral. Except
in the ordinary course of Grantor’s business, Grantor agrees to keep the Collateral (or to the extent the Collateral consists of
intangible property such as accounts or general intangibles, the records concerning the Collateral) at Grantor’s address shown
above or at such other locations as are acceptable to Lender. Upon Lender’s request, Grantor will deliver to Lender in form satisfactory
to Lender a schedule of real properties and Collateral locations relating to Grantor’s operations, including without limitation
the following: (1) all real property Grantor owns or is purchasing; (2) all real property Grantor is renting or leasing; (3) all
storage facilities Grantor owns, rents, leases, or uses; and (4) all other properties where Collateral is or may be located.
Removal of the Collateral. Except
in the ordinary course of Grantor’s business, including the sales of inventory, Grantor shall not remove the Collateral from its
existing location without Lender’s prior written consent. To the extent that the Collateral consists of vehicles, or other titled
property, Grantor shall not take or permit any action which would require application for certificates of title for the vehicles
outside the State of Georgia, without Lender’s prior written consent. Grantor shall, whenever requested, advise Lender of the exact
location of the Collateral.
Transactions Involving Collateral.
Except for inventory sold or accounts collected in the ordinary course of Grantor’s business, or as otherwise provided for in this
Agreement, Grantor shall not sell, offer to sell, or otherwise transfer or dispose of the Collateral. While Grantor is not in default
under this Agreement, Grantor may sell inventory, but only in the ordinary course of its business and only to buyers who qualify
as a buyer in the ordinary course of business. A sale in the ordinary course of Grantor’s business does not include a transfer
in partial or total satisfaction of a debt or any bulk sale. Grantor shall not pledge, mortgage, encumber or otherwise permit the
Collateral to be subject to any lien, security interest, encumbrance, or charge, other than the security interest provided for
in this Agreement, without the prior written consent of Lender. This includes security interests even if junior in right to the
security interests granted under this Agreement. Unless waived by Lender, all proceeds from any disposition of the Collateral (for
whatever reason) shall be held in trust for Lender and shall not be commingled with any other funds; provided however, this requirement
shall not constitute consent by Lender to any sale or other disposition. Upon receipt, Grantor shall immediately deliver any such
proceeds to Lender.
Title. Grantor represents and warrants
to Lender that Grantor holds good and marketable title to the Collateral, free and clear of all liens and encumbrances except for
the lien of this Agreement. No financing statement covering any of the Collateral is on file in any public office other than those
which reflect the security interest created by this Agreement or to which Lender has specifically consented. Grantor shall defend
Lender’s rights in the Collateral against the claims and demands of all other persons.
Repairs and Maintenance. Grantor
agrees to keep and maintain, and to cause others to keep and maintain, the Collateral in good order, repair and condition at all
times while this Agreement remains in effect. Grantor further agrees to pay when due all claims for work done on, or services rendered
or material furnished in connection with the Collateral so that no lien or encumbrance may ever attach to or be filed against the
Collateral.
Inspection of Collateral. Lender
and Lender’s designated representatives and agents shall have the right at all reasonable times to examine and inspect the Collateral
wherever located.
Taxes, Assessments and Liens. Grantor
will pay when due all taxes, assessments and liens upon the Collateral, its use or operation, upon this Agreement, upon any promissory
note or notes evidencing the Indebtedness, or upon any of the other Related Documents. Grantor may withhold any such payment or
may elect to contest any lien if Grantor is in good faith conducting an appropriate proceeding to contest the obligation to pay
and so long as Lender’s interest in the Collateral is not jeopardized in Lender’s sole opinion. If the Collateral is subjected
to a lien which is not discharged within fifteen (15) days, Grantor shall deposit with Lender cash, a sufficient corporate surety
bond or other security satisfactory to Lender in an amount adequate to provide for the discharge of the lien plus any interest,
costs, attorneys’ fees or other charges that could accrue as a result of foreclosure or sale of the Collateral. In any contest
Grantor shall defend itself and Lender and shall satisfy any final adverse judgment before enforcement against the Collateral.
Grantor shall name Lender as an additional obligee under any surety bond furnished in the contest proceedings. Grantor further
agrees to furnish Lender with evidence that such taxes, assessments, and governmental and other charges have been paid in full
and in a timely manner. Grantor may withhold any such payment or may elect to contest any lien if Grantor is in good faith conducting
an appropriate proceeding to contest the obligation to pay and so long as Lender’s interest in the Collateral is not jeopardized.
Compliance with Governmental Requirements.
Grantor shall comply promptly with all laws, ordinances, rules and regulations of all governmental authorities, now or hereafter
in effect, applicable to the ownership, production, disposition, or use of the Collateral, including all laws or regulations relating
to the undue erosion of highly-erodible land or relating to the conversion of wetlands for the production of an agricultural product
or commodity. Grantor may contest in good faith any such law, ordinance or regulation and withhold compliance during any proceeding,
including appropriate appeals, so long as Lender’s interest in the Collateral, in Lender’s opinion, is not jeopardized.
Hazardous Substances. Grantor represents
and warrants that the Collateral never has been, and never will be so long as this Agreement remains a lien on the Collateral,
used in violation of any Environmental Laws or for the generation, manufacture, storage, transportation, treatment, disposal, release
or threatened release of any Hazardous Substance. The representations and warranties contained herein are based on Grantor’s due
diligence in investigating the Collateral for Hazardous Substances. Grantor hereby (1) releases and waives any future claims against
Lender for indemnity or contribution in the event Grantor becomes liable for cleanup or other costs under any Environmental Laws,
and (2) agrees to indemnify, defend, and hold harmless Lender against any and all claims and losses resulting from a breach of
this provision of this Agreement. This obligation to indemnify and defend shall survive the payment of the Indebtedness and the
satisfaction of this Agreement.
Maintenance of Casualty Insurance.
Grantor shall procure and maintain all risks insurance, including without limitation fire, theft and liability coverage together
with such other insurance as Lender may require with respect to the Collateral, in form, amounts, coverages and basis reasonably
acceptable to Lender and issued by a company or companies reasonably acceptable to Lender. Grantor, upon request of Lender, will
deliver to Lender from time to time the policies or certificates of insurance in form satisfactory to Lender, including stipulations
that coverages will not be cancelled or diminished without at least thirty (30) days’ prior written notice to Lender and not including
any disclaimer of the insurer’s liability for failure to give such a notice. Each insurance policy also shall include an endorsement
providing that coverage in favor of Lender will not be impaired in any way by any act, omission or default of Grantor or any other
person. In connection with all policies covering assets in which Lender holds or is offered a security interest, Grantor will provide
Lender with such loss payable or other endorsements as Lender may require. If Grantor at any time fails to obtain or maintain any
insurance as required under this Agreement, Lender may (but shall not be obligated to) obtain such insurance as Lender deems appropriate,
including if Lender so chooses “single interest insurance,” which will cover only Lender’s interest in the Collateral.
Application of Insurance Proceeds.
Grantor shall promptly notify Lender of any loss or damage to the Collateral, whether or not such casualty or loss is covered by
insurance. Lender may make proof of loss if Grantor fails to do so within fifteen (15) days of the casualty.
COMMERCIAL
SECURITY AGREEMENT |
Loan No: #0185000009 |
(Continued) |
Page 3 |
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All proceeds of any insurance on the Collateral,
including accrued proceeds thereon, shall be held by Lender as part of the Collateral. If Lender consents to repair or replacement
of the damaged or destroyed Collateral, Lender shall, upon satisfactory proof of expenditure, pay or reimburse Grantor from the
proceeds for the reasonable cost of repair or restoration. If Lender does not consent to repair or replacement of the Collateral,
Lender shall retain a sufficient amount of the proceeds to pay all of the Indebtedness, and shall pay the balance to Grantor. Any
proceeds which have not been disbursed within six (6) months after their receipt and which Grantor has not committed to the repair
or restoration of the Collateral shall be used to prepay the Indebtedness.
Insurance Reserves. Lender may require
Grantor to maintain with Lender reserves for payment of insurance premiums, which reserves shall be created by monthly payments
from Grantor of a sum estimated by Lender to be sufficient to produce, at least fifteen (15) days before the premium due date,
amounts at least equal to the insurance premiums to be paid. If fifteen (15) days before payment is due, the reserve funds are
insufficient, Grantor shall upon demand pay any deficiency to Lender. The reserve funds shall be held by Lender as a general deposit
and shall constitute a non-interest-bearing account which Lender may satisfy by payment of the insurance premiums required to be
paid by Grantor as they become due. Lender does not hold the reserve funds in trust for Grantor, and Lender is not the agent of
Grantor for payment of the insurance premiums required to be paid by Grantor. The responsibility for the payment of premiums shall
remain Grantor’s sole responsibility.
Insurance Reports. Grantor, upon
request of Lender, shall furnish to Lender reports on each existing policy of insurance showing such information as Lender may
reasonably request including the following: (1) the name of the insurer; (2) the risks insured; (3) the amount of the policy; (4)
the property insured; (5) the then current value on the basis of which insurance has been obtained and the manner of determining
that value; and (6) the expiration date of the policy. In addition, Grantor shall upon request by Lender (however not more often
than annually) have an independent appraiser satisfactory to Lender determine, as applicable, the cash value or replacement cost
of the Collateral.
Financing Statements. Grantor authorizes
Lender to file a UCC financing statement, or alternatively, a copy of this Agreement to perfect Lender’s security interest. At
Lender’s request, Grantor additionally agrees to sign all other documents that are necessary to perfect, protect, and continue
Lender’s security interest in the Property. Grantor will pay all filing fees, title transfer fees, and other fees and costs involved
unless prohibited by law or unless Lender is required by law to pay such fees and costs. Grantor irrevocably appoints Lender to
execute documents necessary to transfer title if there is a default. Lender may file a copy of this Agreement as a financing statement.
GRANTOR’S RIGHT TO POSSESSION
AND TO COLLECT ACCOUNTS. Until default and except as otherwise provided below with respect to accounts, Grantor may have possession
of the tangible personal property and beneficial use of all the Collateral and may use it in any lawful manner not inconsistent
with this Agreement or the Related Documents, provided that Grantor’s right to possession and beneficial use shall not apply
to any Collateral where possession of the Collateral by Lender is required by law to perfect Lender’s security interest in such
Collateral. Until otherwise notified by Lender, Grantor may collect any of the Collateral consisting of accounts. At any time and
even though no Event of Default exists Lender may exercise its rights to collect the accounts and to notify account debtors to
make payments directly to Lender for application to the Indebtedness. If Lender at any time has possession of any Collateral, whether
before or after an Event of Default, Lender shall be deemed to have exercised reasonable care in the custody and preservation of
the Collateral if Lender takes such action for that purpose as Grantor shall request or as Lender, in Lender’s sole discretion,
shall deem appropriate under the circumstances, but failure to honor any request by Grantor shall not of itself be deemed to be
a failure to exercise reasonable care. Lender shall not be required to take any steps necessary to preserve any rights in the Collateral
against prior parties, nor to protect, preserve or maintain any security interest given to secure the Indebtedness.
LENDER’S EXPENDITURES. If any action
or proceeding is commenced that would materially affect Lender’s interest in the Collateral or if Grantor fails to comply with
any provision of this Agreement or any Related Documents, including but not limited to Grantor’s failure to discharge or
pay when due any amounts Grantor is required to discharge or pay under this Agreement or any Related Documents, Lender on Grantor’s
behalf may (but shall not be obligated to) take any action that Lender deems appropriate, including but not limited to discharging
or paying all taxes, liens, security interests, encumbrances and other claims, at any time levied or placed on the Collateral and
paying all costs for insuring, maintaining and preserving the Collateral. All such expenditures incurred or paid by Lender for
such purposes will then bear interest at the rate charged under the Note from the date incurred or paid by Lender to the date of
repayment by Grantor. All such expenses will become a part of the Indebtedness and, at Lender’s option, will (A) be payable on
demand; (B) be added to the balance of the Note and be apportioned among and be payable with any installment payments to become
due during either (1) the term of any applicable insurance policy; or (2) the remaining term of the Note; or (C) be treated as
a balloon payment which will be due and payable at the Note’s maturity. The Agreement also will secure payment of these amounts.
Such right shall be in addition to all other rights and remedies to which Lender may be entitled upon Default.
DEFAULT. Each of the following shall
constitute an Event of Default under this Agreement:
Payment Default. Grantor fails to
make any payment when due under the Indebtedness.
Other Defaults. Grantor fails to
comply with or to perform any other term, obligation, covenant or condition contained in this Agreement or in any of the Related
Documents or to comply with or to perform any term, obligation, covenant or condition contained in any other agreement between
Lender and Grantor.
Default in Favor of Third Parties.
Any guarantor or Grantor defaults under any loan, extension of credit, security agreement, purchase or sales agreement, or any
other agreement, in favor of any other creditor or person that may materially affect any of any guarantor’s or Grantor’s
property or ability to perform their respective obligations under this Agreement or any of the Related Documents.
False Statements. Any warranty,
representation or statement made or furnished to Lender by Grantor or on Grantor’s behalf under this Agreement or the Related Documents
is false or misleading in any material respect, either now or at the time made or furnished or becomes false or misleading at any
time thereafter.
Defective Collateralization. This
Agreement or any of the Related Documents ceases to be in full force and effect (including failure of any collateral document to
create a valid and perfected security interest or lien) at any time and for any reason.
Insolvency. The dissolution or termination
of Grantor’s existence as a going business, the insolvency of Grantor, the appointment of a receiver for any part of Grantor’s
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 Grantor.
Creditor or Forfeiture Proceedings.
Commencement of foreclosure or forfeiture proceedings, whether by judicial proceeding, self-help, repossession or any other method,
by any creditor of Grantor or by any governmental agency against any collateral securing the Indebtedness. This includes a garnishment
of any of Grantor’s accounts, including deposit accounts, with Lender. However, this Event of Default shall not apply if there
is a good faith dispute by Grantor as to the validity or reasonableness of the claim which is the basis of the creditor or forfeiture
proceeding and if Grantor gives Lender written notice of the creditor or forfeiture proceeding and deposits with Lender monies
or a surety bond for the creditor or forfeiture proceeding, in an amount determined by Lender, in its sole discretion, as being
an adequate reserve or bond for the dispute.
COMMERCIAL
SECURITY AGREEMENT |
Loan No: #0185000009 |
(Continued) |
Page 4 |
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Events Affecting Guarantor. Any
of the preceding events occurs with respect to any Guarantor of any of the Indebtedness or Guarantor dies or becomes incompetent
or revokes or disputes the validity of, or liability under, any Guaranty of the Indebtedness.
Adverse Change. A material adverse
change occurs in Grantor’s financial condition, or Lender believes the prospect of payment or performance of the Indebtedness is
impaired.
Insecurity. Lender in good faith
believes itself insecure.
Cure Provisions. If any default,
other than a default in payment, is curable and if Grantor has not been given a notice of a breach of the same provision of this
Agreement within the preceding twelve (12) months, it may be cured if Grantor, after Lender sends written notice to Grantor demanding
cure of such default: (1) cures the default within fifteen (15) days; or (2) if the cure requires more than fifteen (15) days,
immediately initiates steps which Lender deems in Lender’s sole discretion to be sufficient to cure the default and thereafter
continues and completes all reasonable and necessary steps sufficient to produce compliance as soon as reasonably practical.
RIGHTS AND REMEDIES ON DEFAULT.
If an Event of Default occurs under this Agreement, at any time thereafter, Lender shall have all the rights of a secured party
under the Georgia Uniform Commercial Code. In addition and without limitation, Lender may exercise any one or more of the following
rights and remedies:
Accelerate Indebtedness. Lender
may declare the entire Indebtedness, including any prepayment penalty which Grantor would be required to pay, immediately due and
payable, without notice of any kind to Grantor.
Assemble Collateral. Lender may
require Grantor to deliver to Lender all or any portion of the Collateral and any and all certificates of title and other documents
relating to the Collateral. Lender may require Grantor to assemble the Collateral and make it available to Lender at a place to
be designated by Lender. Lender also shall have full power to enter upon the property of Grantor to take possession of and remove
the Collateral. If the Collateral contains other goods not covered by this Agreement at the time of repossession, Grantor agrees
Lender may take such other goods, provided that Lender makes reasonable efforts to return them to Grantor after repossession.
Sell the Collateral. Lender shall
have full power to sell, lease, transfer, or otherwise deal with the Collateral or proceeds thereof in Lender’s own name
or that of Grantor. Lender may sell the Collateral at public auction or private sale. Unless the Collateral threatens to decline
speedily in value or is of a type customarily sold on a recognized market, Lender will give Grantor, and other persons as required
by law, reasonable notice of the time and place of any public sale, or the time after which any private sale or any other disposition
of the Collateral is to be made. However, no notice need be provided to any person who, after Event of Default occurs, enters into
and authenticates an agreement waiving that person’s right to notification of sale. The requirements of reasonable notice shall
be met if such notice is given at least ten (10) days before the time of the sale or disposition. All expenses relating to the
disposition of the Collateral, including without limitation the expenses of retaking, holding, insuring, preparing for sale and
selling the Collateral, shall become a part of the Indebtedness secured by this Agreement and shall be payable on demand, with
interest at the Note rate from date of expenditure until repaid.
Appoint Receiver. Lender shall have
the right to have a receiver appointed to take possession of all or any part of the Collateral, with the power to protect and preserve
the Collateral, to operate the Collateral preceding foreclosure or sale, and to collect the rents from the Collateral and apply
the proceeds, over and above the cost of the receivership, against the Indebtedness. The receiver may serve without bond if permitted
by law. Lender’s right to the appointment of a receiver shall exist whether or not the apparent value of the Collateral exceeds
the Indebtedness by a substantial amount. Employment by Lender shall not disqualify a person from serving as a receiver.
Collect Revenues, Apply Accounts.
Lender, either itself or through a receiver, may collect the payments, rents, income, and revenues from the Collateral. Lender
may at any time in Lender’s discretion transfer any Collateral into Lender’s own name or that of Lender’s nominee and receive the
payments, rents, income, and revenues therefrom and hold the same as security for the Indebtedness or apply it to payment of the
Indebtedness in such order of preference as Lender may determine. Insofar as the Collateral consists of accounts, general intangibles,
insurance policies, instruments, chattel paper, choses in action, or similar property, Lender may demand, collect, receipt for,
settle, compromise, adjust, sue for, foreclose, or realize on the Collateral as Lender may determine, whether or not Indebtedness
or Collateral is then due. For these purposes, Lender may, on behalf of and in the name of Grantor, receive, open and dispose of
mail addressed to Grantor; change any address to which mail and payments are to be sent; and endorse notes, checks, drafts, money
orders, documents of title, instruments and items pertaining to payment, shipment, or storage of any Collateral. To facilitate
collection, Lender may notify account debtors and obligors on any Collateral to make payments directly to Lender.
Obtain Deficiency. If Lender chooses
to sell any or all of the Collateral, Lender may obtain a judgment against Grantor for any deficiency remaining on the Indebtedness
due to Lender after application of all amounts received from the exercise of the rights provided in this Agreement. Grantor shall
be liable for a deficiency even if the transaction described in this subsection is a sale of accounts or chattel paper.
Other Rights and Remedies. Lender
shall have all the rights and remedies of a secured creditor under the provisions of the Uniform Commercial Code, as may be amended
from time to time. In addition, Lender shall have and may exercise any or all other rights and remedies it may have available at
law, in equity, or otherwise.
Election of Remedies. Except as
may be prohibited by applicable law, all of Lender’s rights and remedies, whether evidenced by this Agreement, the Related Documents,
or by any other writing, shall be cumulative and may be exercised singularly or concurrently. Election by Lender to pursue any
remedy shall not exclude pursuit of any other remedy, and an election to make expenditures or to take action to perform an obligation
of Grantor under this Agreement, after Grantor’s failure to perform, shall not affect Lender’s right to declare a default
and exercise its remedies.
MISCELLANEOUS PROVISIONS. The following
miscellaneous provisions are a part of this Agreement:
Amendments. This Agreement, together
with any Related Documents, constitutes the entire understanding and agreement of the parties as to the matters set forth in this
Agreement. No alteration of or amendment to this Agreement shall be effective unless given in writing and signed by the party or
parties sought to be charged or bound by the alteration or amendment.
Attorneys’ Fees; Expenses. Grantor
agrees to pay upon demand all of Lender’s costs and expenses, including Lender’s attorneys’ fees and Lender’s legal expenses,
incurred in connection with the enforcement of this Agreement. Lender may hire or pay someone else to help enforce this Agreement,
and Grantor shall pay the costs and expenses of such enforcement. Subject to any limits under applicable law, costs and expenses
include fifteen percent (15%) of the principal plus accrued interest collected as Lender’s attorneys’ fees and Lender’s legal expenses
whether or not there is a lawsuit, including legal expenses for bankruptcy proceedings (including efforts to modify or vacate any
automatic stay or injunction), appeals, and any anticipated post-judgment collection services. Grantor also shall pay all court
costs and such additional fees as may be directed by the court.
Caption Headings. Caption headings
in this Agreement are for convenience purposes only and are not to be used to interpret or define the provisions of this Agreement.
COMMERCIAL
SECURITY AGREEMENT |
Loan No: #0185000009 |
(Continued) |
Page 5 |
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Governing Law. With respect
to procedural matters related to the perfection and enforcement of Lender’s rights against the Collateral, this Agreement
will be governed by federal law applicable to Lender and to the extent not preempted by federal law, the laws of the State of
Georgia. In all other respects, this Agreement will be governed by federal law applicable to Lender and, to the extent not preempted
by federal law, the laws of the Commonwealth of Kentucky without regard to its conflicts of law provisions. However, if there
ever is a question about whether any provision of this Agreement is valid or enforceable, the provision that is questioned will
be governed by whichever state or federal law would find the provision to be valid and enforceable. The loan transaction that
is evidenced by the Note and this Agreement has been applied for, considered, approved and made, and all necessary loan documents
have been accepted by Lender in the Commonwealth of Kentucky.
Choice of Venue. If there is a lawsuit,
Grantor agrees upon Lender’s request to submit to the jurisdiction of the courts of BOYD County, Commonwealth of Kentucky.
No Waiver by Lender. Lender shall
not be deemed to have waived any rights under this Agreement unless such waiver is given in writing and signed by Lender. No delay
or omission on the part of Lender in exercising any right shall operate as a waiver of such right or any other right. A waiver
by Lender of a provision of this Agreement shall not prejudice or constitute a waiver of Lender’s right otherwise to demand strict
compliance with that provision or any other provision of this Agreement. No prior waiver by Lender, nor any course of dealing between
Lender and Grantor, shall constitute a waiver of any of Lender’s rights or of any of Grantor’s obligations as to any future transactions.
Whenever the consent of Lender is required under this Agreement, the granting of such consent by Lender in any instance shall not
constitute continuing consent to subsequent instances where such consent is required and in all cases such consent may be granted
or withheld in the sole discretion of Lender.
Notices. Any notice required to
be given under this Agreement shall be given in writing, and shall be effective when actually delivered, when actually received
by telefacsimile (unless otherwise required by law), when deposited with a nationally recognized overnight courier, or, if mailed,
when deposited in the United States mail, as first class, certified or registered mail postage prepaid, directed to the addresses
shown near the beginning of this Agreement. Any party may change its address for notices under this Agreement by giving formal
written notice to the other parties, specifying that the purpose of the notice is to change the party’s address. For notice purposes,
Grantor agrees to keep Lender informed at all times of Grantor’s current address. Unless otherwise provided or required by law,
if there is more than one Grantor, any notice given by Lender to any Grantor is deemed to be notice given to all Grantors.
Power of Attorney. Grantor hereby
appoints Lender as Grantor’s irrevocable attorney-in-fact for the purpose of executing any documents necessary to perfect, amend,
or to continue the security interest granted in this Agreement or to demand termination of filings of other secured parties. Lender
may at any time, and without further authorization from Grantor, file a carbon, photographic or other reproduction of any financing
statement or of this Agreement for use as a financing statement. Grantor will reimburse Lender for all expenses for the perfection
and the continuation of the perfection of Lender’s security interest in the Collateral.
Severability. If a court of competent
jurisdiction finds any provision of this Agreement to be illegal, invalid, or unenforceable as to any circumstance, that finding
shall not make the offending provision illegal, invalid, or unenforceable as to any other circumstance. If feasible, the offending
provision shall be considered modified so that it becomes legal, valid and enforceable. If the offending provision cannot be so
modified, it shall be considered deleted from this Agreement. Unless otherwise required by law, the illegality, invalidity, or
unenforceability of any provision of this Agreement shall not affect the legality, validity or enforceability of any other provision
of this Agreement.
Successors and Assigns. Subject
to any limitations stated in this Agreement on transfer of Grantor’s interest, this Agreement shall be binding upon and inure to
the benefit of the parties, their successors and assigns. If ownership of the Collateral becomes vested in a person other than
Grantor, Lender, without notice to Grantor, may deal with Grantor’s successors with reference to this Agreement and the Indebtedness
by way of forbearance or extension without releasing Grantor from the obligations of this Agreement or liability under the Indebtedness.
Survival of Representations and Warranties.
All representations, warranties, and agreements made by Grantor in this Agreement shall survive the execution and delivery of this
Agreement, shall be continuing in nature, and shall remain in full force and effect until such time as Grantor’s Indebtedness shall
be paid in full.
Time is of the Essence. Time is
of the essence in the performance of this Agreement.
DEFINITIONS. The following capitalized
words and terms shall have the following meanings when used in this Agreement. Unless specifically stated to the contrary, all
references to dollar amounts shall mean amounts in lawful money of the United States of America. Words and terms used in the singular
shall include the plural, and the plural shall include the singular, as the context may require. Words and terms not otherwise
defined in this Agreement shall have the meanings attributed to such terms in the Uniform Commercial Code:
Agreement. The word “Agreement”
means this Commercial Security Agreement, as this Commercial Security Agreement may be amended or modified from time to time, together
with all exhibits and schedules attached to this Commercial Security Agreement from time to time.
Borrower. The word “Borrower”
means TX Holdings Incorporated and includes all co-signers and co-makers signing the Note and all their successors and assigns.
Collateral. The word “Collateral”
means all of Grantor’s right, title and interest in and to all the Collateral as described in the Collateral Description section
of this Agreement.
Default. The word “Default”
means the Default set forth in this Agreement in the section titled “Default”.
Environmental Laws. The words “Environmental
Laws” mean any and all state, federal and local statutes, regulations and ordinances relating to the protection of human
health or the environment, including without limitation the Comprehensive Environmental Response, Compensation, and Liability Act
of 1980, as amended, 42 U.S.C. Section 9601, et seq. (“CERCLA”), the Superfund Amendments and Reauthorization Act of
1986, Pub. L. No. 99-499 (“SARA”), the Hazardous Materials Transportation Act, 49 U.S.C. Section 1801, et seq., the
Resource Conservation and Recovery Act, 42 U.S.C. Section 6901, et seq., or other applicable state or federal laws, rules, or regulations
adopted pursuant thereto.
Event of Default. The words “Event
of Default” mean any of the events of default set forth in this Agreement in the default section of this Agreement.
Grantor. The word “Grantor”
means TX Holdings Incorporated.
Guarantor. The word “Guarantor”
means any guarantor, surety, or accommodation party of any or all of the Indebtedness.
Guaranty. The word “Guaranty”
means the guaranty from Guarantor to Lender, including without limitation a guaranty of all or part of the Note.
Hazardous Substances. The words
“Hazardous Substances” mean materials that, because of their quantity, concentration or physical, chemical or infectious
characteristics, may cause or pose a present or potential hazard to human health or the environment when improperly used, treated,
stored, disposed of, generated, manufactured, transported or otherwise handled. The words “Hazardous Substances” are
used in their very broadest sense and include without limitation any and all hazardous or toxic substances, materials or waste
as defined by or listed under the Environmental Laws. The term “Hazardous Substances” also includes, without limitation,
petroleum and petroleum by-products or any fraction thereof and asbestos.
COMMERCIAL
SECURITY AGREEMENT |
Loan No: #0185000009 |
(Continued) |
Page 6 |
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Indebtedness. The word “Indebtedness”
means the indebtedness evidenced by the Note or Related Documents, including all principal and interest together with all other
indebtedness and costs and expenses for which Grantor is responsible under this Agreement or under any of the Related Documents.
Specifically, without limitation, Indebtedness includes all amounts that may be indirectly secured by the Cross-Collateralization
provision of this Agreement.
Lender. The word “Lender”
means Town Square Bank, its successors and assigns.
Note. The word “Note”
means the Note dated December 3, 2015 and executed by TX Holdings Incorporated in the principal amount of $711,376.42, together
with all renewals of, extensions of, modifications of, refinancings of, consolidations of, and substitutions for the note or credit
agreement.
Property. The word “Property”
means all of Grantor’s right, title and interest in and to all the Property as described in the “Collateral Description”
section of this Agreement.
Related Documents. The words “Related
Documents” mean all promissory notes, credit agreements, loan agreements, environmental agreements, guaranties, security
agreements, mortgages, deeds of trust, security deeds, collateral mortgages, and all other instruments, agreements and documents,
whether now or hereafter existing, executed in connection with the Indebtedness.
GRANTOR HAS READ AND UNDERSTOOD ALL
THE PROVISIONS OF THIS COMMERCIAL SECURITY AGREEMENT AND AGREES TO ITS TERMS. THIS AGREEMENT IS DATED DECEMBER 3, 2015.
THIS AGREEMENT IS GIVEN UNDER SEAL AND
IT IS INTENDED THAT THIS AGREEMENT IS AND SHALL CONSTITUTE AND HAVE THE EFFECT OF A SEALED INSTRUMENT ACCORDING TO LAW.
GRANTOR:
TX HOLDINGS INCORPORATED |
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By: |
/s/ William L. Shrewsbury |
(Seal) |
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William L. Shrewsbury, Chairman of TX Holdings |
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Incorporated |
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LENDER: |
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TOWN SQUARE BANK |
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X |
/s/ Josh Daniel |
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Josh Daniel, Loan Officer |
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LaserPro,
Ver. 15.4.20.033 Copr. D + H USA Corporation 1997, 2015. All Rights Reserved. - GA/KY c:CFILPLE40.FC TR-9236 PR-199 |
COMMERCIAL
GUARANTY
Principal |
Loan Date |
Maturity |
Loan No |
Call
/ Coll |
Account |
Officer
*** |
Initials |
References in the boxes above are for Lender’s use only and do not limit the applicability of this document to any particular loan or item any item above containing “***” has been omitted due to text length limitations. |
Borrower: |
TX
Holdings Incorporated |
Lender: |
Town
Square Bank |
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P.
O. Box 1425 |
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1500
Carter Avenue |
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Ashland,
KY 41105-1425 |
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P.O.
Box 509 |
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Ashland,
KY 41105-0509 |
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(606)
324-7196 |
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Guarantor: |
William
L. Shrewsbury |
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9413
Collier Road |
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Ashland,
KY 41101 |
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GUARANTEE
OF PAYMENT AND PERFORMANCE. For good and valuable consideration, Guarantor absolutely and unconditionally guarantees full
and punctual payment and satisfaction of Guarantor’s Share of the Indebtedness of Borrower to Lender, and the performance
and discharge of all Borrower’s obligations under the Note and the Related Documents. This is a guaranty of payment and
performance and not of collection, so Lender can enforce this Guaranty against Guarantor even when Lender has not exhausted Lender’s
remedies against anyone else obligated to pay the Indebtedness or against any collateral securing the Indebtedness, this Guaranty
or any other guaranty of the Indebtedness. Guarantor will make any payments to Lender or its order, on demand, in legal tender
of the United States of America, in same-day funds, without set-off or deduction or counterclaim, and will otherwise perform Borrower’s
obligations under the Note and Related Documents.
INDEBTEDNESS.
The word “Indebtedness” as used in this Guaranty means all of the principal amount outstanding from time to time
and at any one or more times, accrued unpaid interest thereon and all collection costs and legal expenses related thereto permitted
by law, reasonable attorneys’ fees, arising from any and all debts, liabilities and obligations that Borrower individually
or collectively or interchangeably with others, owes or will owe Lender under the Note and Related Documents and any renewals,
extensions, modifications, refinancings, consolidations and substitutions of the Note and Related Documents.
If
Lender presently holds one or more guaranties, or hereafter receives additional guaranties from Guarantor, Lender’s rights
under all guaranties shall be cumulative. This Guaranty shall not (unless specifically provided below to the contrary) affect
or invalidate any such other guaranties. Guarantor’s liability will be Guarantor’s aggregate liability under the terms
of this Guaranty and any such other unterminated guaranties.
GUARANTOR’S
SHARE OF THE INDEBTEDNESS. The words “Guarantor’s Share of the Indebtedness” as used in this Guaranty mean
Guarantor’s maximum aggregate liability that is 100.000% of all the principal amount, interest thereon to the extent not
prohibited by law, and all collection costs, expenses and reasonable attorneys’ fees whether or not there is a lawsuit,
and if there is a lawsuit, any fees and costs for trial and appeals.
Lender
shall determine Guarantor’s Share of the Indebtedness when Lender makes demand on Guarantor. After a determination, Guarantor’s
Share of the Indebtedness will only be reduced by sums actually paid by Guarantor under this Guaranty, but will not be reduced
by sums from any other source including, but not limited to, sums realized from any collateral securing the Indebtedness or this
Guaranty, or payments by anyone other than Guarantor, or reductions by operation of law, judicial order or equitable principles.
Lender has the sole and absolute discretion to determine how sums shall be applied among guaranties of the Indebtedness.
The
above limitation on liability is not a restriction on the amount of the Note of Borrower to Lender either in the aggregate or
at any one time.
DURATION
OF GUARANTY. This Guaranty will take effect when received by Lender without the necessity of any acceptance by Lender, or
any notice to Guarantor or to Borrower, and will continue in full force until all the Indebtedness shall have been fully and finally
paid and satisfied and all of Guarantor’s other obligations under this Guaranty shall have been performed in full. Release
of any other guarantor or termination of any other guaranty of the Indebtedness shall not affect the liability of Guarantor under
this Guaranty. A revocation Lender receives from any one or more Guarantors shall not affect the liability of any remaining Guarantors
under this Guaranty.
GUARANTOR’S
AUTHORIZATION TO LENDER. Guarantor authorizes Lender, without notice or demand
and without lessening Guarantor’s liability under this Guaranty, from time to time: (A)
to make one or more additional secured or unsecured loans to Borrower, to
lease equipment or other goods to Borrower, or otherwise to extend additional credit to
Borrower; (B) to alter, compromise, renew, extend, accelerate, or otherwise change one or more times the time for payment or other
terms of the Indebtedness or any part of the Indebtedness, including increases and decreases of the rate of interest on the Indebtedness;
extensions may be repeated and may be for longer than the original loan term; (C) to take and hold security for the payment of
this Guaranty or the Indebtedness, and exchange, enforce, waive, subordinate, fail or decide not to perfect, and release any such
security, with or without the substitution of new collateral; (D) to release, substitute, agree not to sue, or deal with any one
or more of Borrower’s sureties, endorsers, or other guarantors on any terms or in any manner Lender may choose; (E) to determine
how, when and what application of payments and credits shall be made on the Indebtedness; (F) to apply such security and direct
the order or manner of sale thereof, including without limitation, any nonjudicial sale permitted by the terms of the controlling
security agreement or deed of trust, as Lender in its discretion may determine; (G) to sell, transfer, assign or grant participations
in all or any part of the Indebtedness; and (H) to assign or transfer this Guaranty in whole or in part.
GUARANTOR’S
REPRESENTATIONS AND WARRANTIES. Guarantor represents and warrants to Lender that (A) no representations or agreements of any
kind have been made to Guarantor which would limit or qualify in any way the terms of this Guaranty; (B) this Guaranty is executed
at Borrower’s request and not at the request of Lender; (C) Guarantor has full power, right and authority to enter into
this Guaranty; (D) the provisions of this Guaranty do not conflict with or result in a default under any agreement or other instrument
binding upon Guarantor and do not result in a violation of any law, regulation, court decree or order applicable to Guarantor;
(E) Guarantor has not and will not, without the prior written consent of Lender, sell, lease, assign, encumber, hypothecate, transfer,
or otherwise dispose of all or substantially all of Guarantor’s assets, or any interest therein; (F) upon Lender’s
request, Guarantor will provide to Lender financial and credit information in form acceptable to Lender, and all such financial
information which currently has been, and all future financial information which will be provided to Lender is and will be true
and correct in all material respects and fairly present Guarantor’s financial condition as of the dates the financial information
is provided; (G) no material adverse change has occurred in Guarantor’s financial condition since the date of the most recent
financial statements provided to Lender and no event has occurred which may materially adversely affect Guarantor’s financial
condition; (H) no litigation, claim, investigation, administrative proceeding or similar action (including those for unpaid taxes)
against Guarantor is pending or threatened; (I) Lender has made no representation to Guarantor as to the creditworthiness of Borrower;
and (J) Guarantor has established adequate means of obtaining from Borrower on a continuing basis information regarding Borrower’s
financial condition. Guarantor agrees to keep adequately informed from such means of any facts, events, or circumstances which
might in any way affect Guarantor’s risks under this Guaranty, and Guarantor further agrees that, absent a request for information,
Lender shall have no obligation to disclose to Guarantor any information or documents acquired by Lender in the course of its
relationship with Borrower.
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COMMERCIAL GUARANTY |
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Loan No: #0185000009 |
(Continued) |
Page 2 |
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GUARANTOR’S
FINANCIAL STATEMENTS. Guarantor agrees to furnish Lender with the following:
Annual
Statements. As soon as available after the end of each fiscal year, Guarantor’s balance sheet and income statement for
the year ended, prepared by Guarantor in form satisfactory to Lender.
Tax
Returns. As soon as available after the applicable filing date for the tax reporting period ended, Guarantor’s Federal
and other governmental tax returns, prepared by a tax professional satisfactory to Lender.
All
financial reports required to be provided under this Guaranty shall be prepared in accordance with GAAP, applied on a consistent
basis, and certified by Guarantor as being true and correct.
GUARANTOR’S
WAIVERS. Except as prohibited by applicable law, Guarantor waives any right to require Lender (A) to continue lending money
or to extend other credit to Borrower; (B) to make any presentment, protest, demand, or notice of any kind, including notice of
any nonpayment of the Indebtedness or of any nonpayment related to any collateral, or notice of any action or nonaction on the
part of Borrower, Lender, any surety, endorser, or other guarantor in connection with the Indebtedness or in connection with the
creation of new or additional loans or obligations; (C) to resort for payment or to proceed directly or at once against any person,
including Borrower or any other guarantor; (D) to proceed directly against or exhaust any collateral held by Lender from Borrower,
any other guarantor, or any other person; (E) to give notice of the terms, time, and place of any public or private sale of personal
property security held by Lender from Borrower or to comply with any other applicable provisions of the Uniform Commercial Code;
(F) to pursue any other remedy within Lender’s power; or (G) to commit any act or omission of any kind, or at any time,
with respect to any matter whatsoever.
Guarantor
also waives any and all rights or defenses based on suretyship or impairment of collateral including, but not limited to, any
rights or defenses arising by reason of (A) any “one action” or “anti-deficiency” law or any other law
which may prevent Lender from bringing any action, including a claim for deficiency, against Guarantor, before or after Lender’s
commencement or completion of any foreclosure action, either judicially or by exercise of a power of sale; (B) any election of
remedies by Lender which destroys or otherwise adversely affects Guarantor’s subrogation rights or Guarantor’s rights
to proceed against Borrower for reimbursement, including without limitation, any loss of rights Guarantor may suffer by reason
of any law limiting, qualifying, or discharging the Indebtedness; (C) any disability or other defense of Borrower, of any other
guarantor, or of any other person, or by reason of the cessation of Borrower’s liability from any cause whatsoever, other
than payment in full in legal tender, of the Indebtedness; (D) any right to claim discharge of the Indebtedness on the basis of
unjustified impairment of any collateral for the Indebtedness; (E) any statute of limitations, if at any time any action or suit
brought by Lender against Guarantor is commenced, there is outstanding Indebtedness which is not barred by any applicable statute
of limitations; or (F) any defenses given to guarantors at law or in equity other than actual payment and performance of the Indebtedness.
If payment is made by Borrower, whether voluntarily or otherwise, or by any third party, on the Indebtedness and thereafter Lender
is forced to remit the amount of that payment to Borrower’s trustee in bankruptcy or to any similar person under any federal
or state bankruptcy law or law for the relief of debtors, the Indebtedness shall be considered unpaid for the purpose of the enforcement
of this Guaranty.
Guarantor
further waives and agrees not to assert or claim at any time any deductions to the amount guaranteed under this Guaranty for any
claim of setoff, counterclaim, counter demand, recoupment or similar right, whether such claim, demand or right may be asserted
by the Borrower, the Guarantor, or both.
GUARANTOR’S
UNDERSTANDING WITH RESPECT TO WAIVERS. Guarantor warrants and agrees that each of the waivers set forth above is made with
Guarantor’s full knowledge of its significance and consequences and that, under the circumstances, the waivers are reasonable
and not contrary to public policy or law. If any such waiver is determined to be contrary to any applicable law or public policy,
such waiver shall be effective only to the extent permitted by law or public policy.
RIGHT
OF SETOFF. To the extent permitted by applicable law, Lender reserves a right of setoff in all Guarantor’s accounts
with Lender (whether checking, savings, or some other account). This includes all accounts Guarantor holds jointly with someone
else and all accounts Guarantor may open in the future. However, this does not include any IRA or Keogh accounts, or any trust
accounts for which setoff would be prohibited by law. Guarantor authorizes Lender, to the extent permitted by applicable law,
to hold these funds if there is a default, and Lender may apply the funds in these accounts to pay what Guarantor owes under the
terms of this Guaranty.
SUBORDINATION
OF BORROWER’S DEBTS TO GUARANTOR. Guarantor agrees that the Indebtedness, whether now existing or hereafter created,
shall be superior to any claim that Guarantor may now have or hereafter acquire against Borrower, whether or not Borrower becomes
insolvent. Guarantor hereby expressly subordinates any claim Guarantor may have against Borrower, upon any account whatsoever,
to any claim that Lender may now or hereafter have against Borrower. In the event of insolvency and consequent liquidation of
the assets of Borrower, through bankruptcy, by an assignment for the benefit of creditors, by voluntary liquidation, or otherwise,
the assets of Borrower applicable to the payment of the claims of both Lender and Guarantor shall be paid to Lender and shall
be first applied by Lender to the Indebtedness. Guarantor does hereby assign to Lender all claims which it may have or acquire
against Borrower or against any assignee or trustee in bankruptcy of Borrower; provided however, that such assignment shall be
effective only for the purpose of assuring to Lender full payment in legal tender of the Indebtedness. If Lender so requests,
any notes or credit agreements now or hereafter evidencing any debts or obligations of Borrower to Guarantor shall be marked with
a legend that the same are subject to this Guaranty and shall be delivered to Lender. Guarantor agrees, and Lender is hereby authorized,
in the name of Guarantor, from time to time to file financing statements and continuation statements and to execute documents
and to take such other actions as Lender deems necessary or appropriate to perfect, preserve and enforce its rights under this
Guaranty.
MISCELLANEOUS
PROVISIONS. The following miscellaneous provisions are a part of this Guaranty:
Amendments.
This Guaranty, together with any Related Documents, constitutes the entire understanding and agreement of the parties as to
the matters set forth in this Guaranty. No alteration of or amendment to this Guaranty shall be effective unless given in writing
and signed by the party or parties sought to be charged or bound by the alteration or amendment.
Attorneys’
Fees; Expenses. Guarantor agrees to pay upon demand all of Lender’s costs and expenses, including Lender’s reasonable
attorneys’ fees and Lender’s legal expenses, incurred in connection with the enforcement of this Guaranty. Lender
may hire or pay someone else to help enforce this Guaranty, and Guarantor shall pay the costs and expenses of such enforcement.
Costs and expenses include Lender’s reasonable attorneys’ fees and legal expenses whether or not there is a lawsuit,
including reasonable attorneys’ fees and legal expenses for bankruptcy proceedings (including efforts to modify or vacate
any automatic stay or injunction), appeals, and any anticipated post-judgment collection services. Guarantor also shall pay all
court costs and such additional fees as may be directed by the court.
Caption
Headings. Caption headings in this Guaranty are for convenience purposes only and are not to be used to interpret or define
the provisions of this Guaranty.
Governing
Law. This Guaranty will be governed by federal law applicable to Lender and, to the extent not preempted by federal law, the laws
of the Commonwealth of Kentucky without regard to its conflicts of law provisions.
Choice
of Venue. If there is a lawsuit, Guarantor agrees upon Lender’s request to submit to the jurisdiction of the courts
of BOYD County, Commonwealth of Kentucky.
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COMMERCIAL GUARANTY |
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Loan No: #0185000009 |
(Continued) |
Page 3 |
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Integration.
Guarantor further agrees that Guarantor has read and fully understands the terms of this Guaranty; Guarantor has had the opportunity
to be advised by Guarantor’s attorney with respect to this Guaranty; the Guaranty fully reflects Guarantor’s intentions
and parol evidence is not required to interpret the terms of this Guaranty. Guarantor hereby indemnifies and holds Lender harmless
from all losses, claims, damages, and costs (including Lender’s attorneys’ fees) suffered or incurred by Lender as
a result of any breach by Guarantor of the warranties, representations and agreements of this paragraph.
Interpretation.
In all cases where there is more than one Borrower or Guarantor, then all words used in this Guaranty in the singular shall
be deemed to have been used in the plural where the context and construction so require; and where there is more than one Borrower
named in this Guaranty or when this Guaranty is executed by more than one Guarantor, the words “Borrower” and “Guarantor”
respectively shall mean all and any one or more of them. The words “Guarantor,” “Borrower,” and “Lender”
include the heirs, successors, assigns, and transferees of each of them. If a court finds that any provision of this Guaranty
is not valid or should not be enforced, that fact by itself will not mean that the rest of this Guaranty will not be valid or
enforced. Therefore, a court will enforce the rest of the provisions of this Guaranty even if a provision of this Guaranty may
be found to be invalid or unenforceable. If any one or more of Borrower or Guarantor are corporations, partnerships, limited liability
companies, or similar entities, it is not necessary for Lender to inquire into the powers of Borrower or Guarantor or of the officers,
directors, partners, managers, or other agents acting or purporting to act on their behalf, and any indebtedness made or created
in reliance upon the professed exercise of such powers shall be guaranteed under this Guaranty.
Notices.
Any notice required to be given under this Guaranty shall be given in writing, and shall be effective when actually delivered,
when actually received by telefacsimile (unless otherwise required by law), when deposited with a nationally recognized overnight
courier, or, if mailed, when deposited in the United States mail, as first class, certified or registered mail postage prepaid,
directed to the addresses shown near the beginning of this Guaranty. Any party may change its address for notices under this Guaranty
by giving formal written notice to the other parties, specifying that the purpose of the notice is to change the party’s
address. For notice purposes, Guarantor agrees to keep Lender informed at all times of Guarantor’s current address. Unless
otherwise provided or required by law, if there is more than one Guarantor, any notice given by Lender to any Guarantor is deemed
to be notice given to all Guarantors.
No
Waiver by Lender. Lender shall not be deemed to have waived any rights under this Guaranty unless such waiver is given in
writing and signed by Lender. No delay or omission on the part of Lender in exercising any right shall operate as a waiver of
such right or any other right. A waiver by Lender of a provision of this Guaranty shall not prejudice or constitute a waiver of
Lender’s right otherwise to demand strict compliance with that provision or any other provision of this Guaranty. No prior
waiver by Lender, nor any course of dealing between Lender and Guarantor, shall constitute a waiver of any of Lender’s rights
or of any of Guarantor’s obligations as to any future transactions. Whenever the consent of Lender is required under this
Guaranty, the granting of such consent by Lender in any instance shall not constitute continuing consent to subsequent instances
where such consent is required and in all cases such consent may be granted or withheld in the sole discretion of Lender.
Successors
and Assigns. Subject to any limitations stated in this Guaranty on transfer of Guarantor’s interest, this Guaranty shall
be binding upon and inure to the benefit of the parties, their successors and assigns.
DEFINITIONS.
The following capitalized words and terms shall have the following meanings when used in this Guaranty. Unless specifically
stated to the contrary, all references to dollar amounts shall mean amounts in lawful money of the United States of America. Words
and terms used in the singular shall include the plural, and the plural shall include the singular, as the context may require.
Words and terms not otherwise defined in this Guaranty shall have the meanings attributed to such terms in the Uniform Commercial
Code:
Borrower.
The word “Borrower” means TX Holdings Incorporated and includes all co-signers and co-makers signing the Note
and all their successors and assigns.
GAAP.
The word “GAAP” means generally accepted accounting principles.
Guarantor.
The word “Guarantor” means everyone signing this Guaranty, including without limitation William L. Shrewsbury,
and in each case, any signer’s successors and assigns.
Guarantor’s
Share of the Indebtedness. The words “Guarantor’s Share of the Indebtedness” mean Guarantor’s indebtedness
to Lender as more particularly described in this Guaranty.
Guaranty.
The word “Guaranty” means this guaranty from Guarantor to Lender.
Indebtedness.
The word “Indebtedness” means Borrower’s indebtedness to Lender as more particularly described in this Guaranty.
Lender.
The word “Lender” means Town Square Bank, its successors and assigns.
Note.
The word “Note” means the promissory note dated December 3, 2015, in the original principal amount of $711,376.42
from Borrower to Lender, together with all renewals of, extensions of, modifications of, refinancings of, consolidations of,
and substitutions for the promissory note or agreement.
Related
Documents. The words “Related Documents” mean all promissory notes, credit agreements, loan agreements, environmental
agreements, guaranties, security agreements, mortgages, deeds of trust, security deeds, collateral mortgages, and all other instruments,
agreements and documents, whether now or hereafter existing, executed in connection with the Indebtedness.
EACH
UNDERSIGNED GUARANTOR ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS GUARANTY AND AGREES TO ITS TERMS. IN ADDITION, EACH
GUARANTOR UNDERSTANDS THAT THIS GUARANTY IS EFFECTIVE UPON GUARANTOR’S EXECUTION AND DELIVERY OF THIS GUARANTY TO LENDER
AND THAT THE GUARANTY WILL CONTINUE UNTIL TERMINATED IN THE MANNER SET FORTH IN THE SECTION TITLED “DURATION OF GUARANTY”.
NO FORMAL ACCEPTANCE BY LENDER IS NECESSARY TO MAKE THIS GUARANTY EFFECTIVE. THIS GUARANTY IS DATED DECEMBER 3, 2015.
|
GUARANTOR: |
|
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X |
/s/
William L. Shrewsbury |
|
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William
L. Shrewsbury |
|
|
COMMERCIAL GUARANTY |
|
Loan No: #0185000009 |
(Continued) |
Page 4 |
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INDIVIDUAL
ACKNOWLEDGMENT
COMMONWEALTH
OF KENTUCKY |
) |
|
) SS |
COUNTY
OF |
BOYD |
) |
The foregoing instrument was acknowledged before me this 3 day
of December, 2015 by William L. Shrewsbury.
|
/s/
Josh Daniel |
|
(Signature of Person Taking Acknowledgement) |
|
|
|
Notary |
|
(Title or Rank) |
|
|
|
517655 |
8/19/18 |
|
(Serial
Number, if any) |
(My commission expires) |
LaserPro,
Ver. 15.4.20.033 Copr. D + H USA Corporation 1997, 2015. All Rights Reserved. - KY c:CFILPLE20.FC
TR-9236 PR-199 |
Exhibit 14.1
TX HOLDINGS,
INC.
AMENDED AND
RESTATED
CODE OF ETHICS
FOR CHIEF EXECUTIVE
OFFICER AND
SENIOR FINANCIAL
OFFICERS
The Board of Directors
of TX Holdings, Inc. (the “Company”), has adopted the following Amended and Restated Code of Ethics (the “Code”)
to apply to the Company’s Chief Executive Officer, Chief Financial Officer, principal accounting officer or controller, and
persons performing similar functions (collectively, “Senior Financial Officers”).
This Code is intended to
focus Senior Financial Officers on areas of ethical risk, provide guidance to help them recognize and deal with ethical issues,
provide a mechanism to report unethical conduct, foster a culture of honesty and accountability, deter wrongdoing and promote fair
and accurate disclosure and financial reporting, deal with conflicts of interest, and compliance with law.
The Senior Financial Officers
each owe a duty to the Company to adhere to a high standard of ethical conduct.
This Code is intended to
serve as a source of guiding principles. Senior Financial Officers are encouraged to raise questions about particular circumstances
that may involve one or more provisions of this Code to the attention of the Audit Committee (or in the absence thereof, to the
independent directors on the Company’s Board of Directors), who may consult with legal counsel.
| 1. | The Senior Financial Officers are responsible for full, fair, accurate, timely and understandable
disclosure in the periodic reports and other filings made by the Company with the Securities and Exchange Commission (“SEC”).
The Senior Financial Officers are required to familiarize themselves with disclosure requirements applicable to the Company as
well as the business and financial operations of the Company. In the performance of their duties, the Senior Financial Officers
are prohibited from knowingly misrepresenting facts. |
| 2. | It is the Company’s policy to comply with all applicable laws, rules and regulations relating
to its business and operations. It is the responsibility of the Senior Financial Officers to adhere to the standards and restrictions
imposed by such laws, rules and regulations. |
| 3. | The Senior Financial Officers shall encourage open communication and full disclosure of financial
information by providing well understood processes under which management is kept informed of financial information of importance,
including any departures from sound policy, practice or accounting norms. However, such officers should refrain from disclosing
confidential information acquired in the course of their work except where authorized, unless legally obligated to do so. They
should also refrain from using confidential information acquired in the course of their work for unethical or illegal advantage,
either personally or through others. |
| 4. | The Senior Financial Officers, among other things, have a supervisory role over the preparation
of financial disclosure to be included in the Company’s periodic reports to be filed with the SEC. |
| 5. | It is the responsibility of the Senior Financial Officers to bring to the attention of the Board
of Directors (“Board”) and the Audit Committee (or in the absence thereof, to the independent directors on the Board)
any material information of which he or she may become aware that affects the disclosures made by the Company in its filings with
the SEC or otherwise assist the Board and Audit Committee (or in the absence thereof, the independent members of the Board) in
fulfilling their responsibilities. |
| 6. | The Senior Financial Officers shall promptly bring to the attention of the Board and the Audit
Committee (or in the absence thereof, the independent directors on the Board) any information he or she may have concerning (a)
a significant deficiency in the design or operation of internal controls which could adversely affect the Company’s ability
to record, process, summarize and report financial data or (b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the Company’s financial reporting, disclosures or internal controls. |
| 7. | The Senior Financial Officers shall promptly bring to the attention of the CEO or Audit Committee
(or in the absence thereof, the independent directors on the Board) any information he or she may have concerning any violation
of these procedures, including any actual or apparent conflict of interest between personal and professional relationships, involving
any management or other employee who has a significant role in the Company’s financial reporting, disclosures or internal
controls. |
| 8. | The Senior Financial Officers shall promptly bring to the attention of the CEO or Audit Committee
(or in the absence thereof, to the independent directors on the Board) any information he or she may have concerning evidence of
a violation of the securities or other laws, rules or regulations applicable to the Company and the operations of its business,
by the Company or any agent thereof, or of violation of these procedures. |
| 9. | The Board shall determine, or designate an appropriate person to determine, appropriate actions
to be taken in the event of violations of these procedures by the Senior Financial Officers. Such actions shall be reasonably designed
to deter wrongdoing and to promote accountability for adherence to these procedures, and shall include written notices to the individual
involved that the Board has determined there has been a violation, censure of the Board, demotion or re-assignment of the individual,
suspension with or without pay or benefits (as determined by the Board) and termination of the individual’s employment. In
determining what action is appropriate in a particular case, the Board or such designee shall take into account all relevant information,
including the nature and severity of the violation, whether the violation was a single occurrence or repeated occurrences, whether
the violation appears to have been intentional or inadvertent, whether the individual in question had been advised prior to the
violation as to the proper course of action or whether or not the individual in question had committed other violations in the
past. |
Approved by the Board of Directors,
February 21, 2014.
EXHIBIT 21
TX HOLDINGS, INC.
LIST OF SUBSIDIARIES
SEPTEMBER 30, 2015
| 1. | The Bag Rack, LLC, a Kentucky limited liability company. |
EXHIBIT 31.1
CERTIFICATIONS
I, William “Buck” Shrewsbury, certify
that:
1. I have reviewed this annual report on Form
10-K of TX Holdings, Inc.;
2. Based on my knowledge, this report does
not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in
light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements,
and other financial information included in this report, fairly present in all material respects the financial condition, results
of operations and cash flows of the small business issuer as of, and for, the periods presented in this report;
4. TX Holdings, Inc other certifying officer
and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e)
and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the
registrant and have:
a) Designed
such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to TX Holdings Inc., including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the period in which this report is being prepared;
b) Designed
such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated
the effectiveness of TX Holdings Inc’s disclosure controls and procedures and presented in this report our conclusions about
the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation;
and
d) Disclosed
in this report any change in TX Holdings Inc’s internal control over financial reporting that occurred during TX Holdings
Inc’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect TX Holdings Inc’s
internal control over financial reporting; and
5. TX Holdings Inc’s other certifying
officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Company’s
independent registered public accounting firm and TX Holdings Inc’s Board of Directors (or persons performing the equivalent
functions):
a) All significant
deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably
likely to adversely affect TX Holdings Inc’s ability to record, process, summarize and report financial information; and
b) Any fraud,
whether or not material, that involves management or other employees who have a significant role in TX Holdings Inc’s internal
control over financial reporting.
December 29, 2015
|
/s/ William L. Shrewsbury |
|
|
William L. Shrewsbury |
|
|
Chief Executive Officer |
|
EXHIBIT 31.2
CERTIFICATIONS
I, Jose Fuentes, certify that:
1. I have reviewed this annual report on Form
10-K of TX Holdings, Inc.;
2. Based on my knowledge, this report does
not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in
light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements,
and other financial information included in this report, fairly present in all material respects the financial condition, results
of operations and cash flows of the small business issuer as of, and for, the periods presented in this report;
4. TX Holdings Inc’s other certifying
officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules
13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))
for the small business issuer and have:
a) Designed
such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to TX Holdings Inc’s, including its consolidated subsidiaries, is made known
to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed
such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated
the effectiveness of TX Holdings Inc’s disclosure controls and procedures and presented in this report our conclusions about
the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation;
and
d) Disclosed
in this report any change in TX Holdings Inc’s internal control over financial reporting that occurred during the small business
issuer’s most recent fiscal quarter (the small business issuer’s fourth fiscal quarter in the case of an annual report)
that has materially affected, or is reasonably likely to materially affect, the small business issuer’s internal control
over financial reporting; and
5. TX Holdings Inc’s other certifying
officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Company’s
independent registered public accounting firm and TX Holdings Inc’s Board of Directors (or persons performing the equivalent
functions):
a) All significant
deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably
likely to adversely affect TX Holdings Inc’s ability to record, process, summarize and report financial information; and
b) Any fraud,
whether or not material, that involves management or other employees who have a significant role in TX Holdings Inc’s internal
control over financial reporting.
December 29, 2015
|
/s/ Jose Fuentes |
|
|
Jose Fuentes |
|
|
Chief Financial Officer |
|
EXHIBIT 32.1
CERTIFICATIONS PURSUANT TO SECTION 906 OF
THE SARBANES-OXLEY ACT OF 2002 (18 U.S.C. SECTION 1350)
In connection with the Annual Report of TX
Holdings, Inc., a Georgia corporation (the "Company"), on Form 10-K for the year ended September 30, 2015, as filed with
the Securities and Exchange Commission (the "Report"), I, William L. Shrewsbury, Chief Executive Officer of the Company,
do hereby certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. § 1350), that to my knowledge:
| (1) | The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange
Act of 1934; and |
| (2) | The information contained in the Report fairly presents, in all material respects, the financial
condition and results of operations of the Company. |
/s/ William L. Shrewsbury |
|
William L.Shrewsbury |
|
Chief Executive Officer |
|
December 29, 2015 |
|
[A signed original of this written statement
required by Section 906 has been provided to TX Holdings, Inc. and will be retained by TX Holdings, Inc. and furnished to the Securities
and Exchange Commission or its staff upon request.]
EXHIBIT 32.2
CERTIFICATIONS PURSUANT TO SECTION 906 OF
THE SARBANES-OXLEY ACT OF 2002 (18 U.S.C. SECTION 1350)
In connection with the Annual Report of TX
Holdings, Inc., a Georgia corporation (the "Company"), on Form 10-K for the year ended September 30, 2015, as filed with
the Securities and Exchange Commission (the "Report"), I, Jose Fuentes, Chief Financial Officer, of the Company, do hereby
certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. § 1350), that to my knowledge:
| (1) | The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange
Act of 1934; and |
| (2) | The information contained in the Report fairly presents, in all material respects, the financial
condition and results of operations of the Company. |
/s/ Jose Fuentes |
|
Jose Fuentes |
|
Chief Financial Officer |
|
December 29, 2015 |
|
[A signed original of this written statement
required by Section 906 has been provided to TX Holdings, Inc. and will be retained by TX Holdings, Inc. and furnished to the Securities
and Exchange Commission or its staff upon request.
v3.3.1.900
Document and Entity Information - USD ($)
|
12 Months Ended |
|
|
Sep. 30, 2015 |
Dec. 29, 2015 |
Jun. 30, 2015 |
Document and Entity Information [Abstract] |
|
|
|
Entity Registrant Name |
TX Holdings, Inc.
|
|
|
Entity Central Index Key |
0001133798
|
|
|
Trading Symbol |
txhg
|
|
|
Entity Current Reporting Status |
Yes
|
|
|
Entity Voluntary Filers |
No
|
|
|
Current Fiscal Year End Date |
--09-30
|
|
|
Entity Filer Category |
Smaller Reporting Company
|
|
|
Entity Well-Known Seasoned Issuer |
No
|
|
|
Entity Common Stock, Shares Outstanding |
|
48,053,084
|
|
Entity Public Float |
|
|
$ 1,385,281
|
Document Type |
10-K
|
|
|
Document Period End Date |
Sep. 30, 2015
|
|
|
Amendment Flag |
false
|
|
|
Document Fiscal Year Focus |
2015
|
|
|
Document Fiscal Period Focus |
FY
|
|
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v3.3.1.900
CONSOLIDATED BALANCE SHEETS - USD ($)
|
Sep. 30, 2015 |
Sep. 30, 2014 |
Current assets: |
|
|
Cash and cash equivalents |
$ 61,564
|
$ 72,784
|
Accounts receivable, net of allowance for doubtful accounts of $13,643 and $32,343, respectively |
585,043
|
502,617
|
Inventory |
2,223,037
|
2,762,535
|
Commission advances |
48,338
|
|
Note receivable-current |
10,000
|
10,000
|
Other current assets |
27,674
|
45,327
|
Total current assets |
2,955,656
|
3,393,263
|
Inventory, non-current (Note 1) |
300,000
|
|
Property and equipment, net (Note 2) |
66,575
|
72,530
|
Note receivable, less current portion |
19,983
|
21,289
|
Other |
500
|
|
Total Assets |
3,342,714
|
3,487,082
|
Current liabilities: |
|
|
Accrued liabilities |
696,624
|
606,099
|
Accounts payable |
946,576
|
1,054,556
|
Advances from officer (Note 7) |
124,637
|
43,337
|
Bank-line of credit (Note 9 and 11) |
712,449
|
548,500
|
Total current liabilities |
2,480,286
|
2,252,492
|
Note payable to officer (Note 7) |
2,000,000
|
2,000,000
|
Total Liabilities |
$ 4,480,286
|
$ 4,252,492
|
Commitments and contingencies (Notes 6 and 7) |
|
|
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 September 30, 2015 and 2014 |
$ 9,293,810
|
$ 9,293,810
|
Additional paid-in capital |
4,321,329
|
4,320,982
|
Accumulated deficit |
(14,752,711)
|
(14,380,202)
|
Total stockholders' deficit |
(1,137,572)
|
(765,410)
|
Total Liabilities and Stockholders' Deficit |
$ 3,342,714
|
$ 3,487,082
|
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v3.3.1.900
CONSOLIDATED BALANCE SHEETS (Parentheticals) - USD ($)
|
Sep. 30, 2015 |
Sep. 30, 2014 |
Statement Of Financial Position [Abstract] |
|
|
Allowance for doubtful accounts (in dollars) |
$ 13,643
|
$ 32,343
|
Preferred stock, no par value (in dollars per share) |
$ 0
|
$ 0
|
Preferred stock, shares authorized |
1,000,000
|
1,000,000
|
Preferred stock, shares outstanding |
0
|
0
|
Common stock, no par value (in dollars per share) |
$ 0
|
$ 0
|
Common stock, shares authorized |
250,000,000
|
250,000,000
|
Common stock, shares issued |
48,053,084
|
48,053,084
|
Common stock, shares outstanding |
48,053,084
|
48,053,084
|
X |
- DefinitionA valuation allowance for trade and other receivables due to an Entity within one year (or the normal operating cycle, whichever is longer) that are expected to be uncollectible.
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v3.3.1.900
CONSOLIDATED STATEMENTS OF OPERATIONS - USD ($)
|
12 Months Ended |
Sep. 30, 2015 |
Sep. 30, 2014 |
Income Statement [Abstract] |
|
|
Revenue |
$ 3,105,733
|
$ 4,285,620
|
Cost of goods sold |
2,469,697
|
3,149,924
|
Gross profit |
636,036
|
1,135,696
|
Operating expenses, except items shown separately below |
551,292
|
490,266
|
Commission expense |
236,119
|
458,086
|
Professional fees |
86,837
|
179,996
|
Stock-based compensation |
347
|
16,702
|
Bad debt expense |
13,643
|
18,350
|
Depreciation expense |
10,104
|
9,679
|
Total operating expenses |
898,342
|
1,173,079
|
Loss from operations |
(262,306)
|
(37,383)
|
Other income and (expense): |
|
|
Legal settlement (Note 6) |
|
374,025
|
Gain on disposal of fixed assets |
|
10,807
|
Gain on extinguishment of accounts payable |
|
93,167
|
Other income |
15,505
|
|
Interest expense |
(125,708)
|
(99,316)
|
Total other income and (expense), net |
(110,203)
|
378,683
|
Income (loss) before provision for income taxes |
(372,509)
|
341,300
|
Provision for income taxes |
|
122,000
|
Utilization of net operating loss carry forward |
|
(122,000)
|
Net income (loss) |
$ (372,509)
|
$ 341,300
|
Net earnings (loss) per common share |
|
|
Basic (in dollars per share) |
$ (0.01)
|
$ 0.01
|
Weighted average of common shares outstanding- |
|
|
Basic (in shares) |
48,053,084
|
48,053,084
|
X |
- DefinitionGenerally recurring costs associated with normal operations except for the portion of these expenses which can be clearly related to production and included in cost of sales or services. Excludes professional fees, commission, impairment and depreciation expense and share-based compensation.
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v3.3.1.900
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT - USD ($)
|
Preferred Stock |
Common Stock |
Additional Paid in Capital |
Accumulated Deficit |
Total |
Balance at Sep. 30, 2013 |
|
$ 9,293,810
|
$ 4,304,280
|
$ (14,721,502)
|
$ (1,123,412)
|
Balance (in shares) at Sep. 30, 2013 |
|
48,053,084
|
|
|
|
Increase (Decrease) in Stockholders' Equity [Roll Forward] |
|
|
|
|
|
Warrants issued to an officer |
|
|
14,971
|
|
14,971
|
Warrants issued to a sales agent |
|
|
1,731
|
|
1,731
|
Net income (loss) |
|
|
|
341,300
|
341,300
|
Balance at Sep. 30, 2014 |
|
$ 9,293,810
|
4,320,982
|
(14,380,202)
|
(765,410)
|
Balance (in shares) at Sep. 30, 2014 |
|
48,053,084
|
|
|
|
Increase (Decrease) in Stockholders' Equity [Roll Forward] |
|
|
|
|
|
Warrants issued to a sales agent |
|
|
347
|
|
347
|
Net income (loss) |
|
|
|
(372,509)
|
(372,509)
|
Balance at Sep. 30, 2015 |
|
$ 9,293,810
|
$ 4,321,329
|
$ (14,752,711)
|
$ (1,137,572)
|
Balance (in shares) at Sep. 30, 2015 |
|
48,053,084
|
|
|
|
X |
- DefinitionAmount of increase in additional paid in capital (APIC) resulting from the issuance of warrants to sales agent.
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v3.3.1.900
CONSOLIDATED STATEMENTS OF CASH FLOWS - USD ($)
|
12 Months Ended |
Sep. 30, 2015 |
Sep. 30, 2014 |
Cash flows used in operating activities: |
|
|
Net income (loss) |
$ (372,509)
|
$ 341,300
|
Adjustments to reconcile net income (loss) to net cash used in operating activities: |
|
|
Depreciation expense |
10,104
|
9,679
|
Bad debt expense |
13,643
|
18,350
|
Gain on extinguishment of accounts payable |
|
(93,167)
|
Stock-based compensation |
347
|
16,702
|
Gain on disposal of fixed assets |
|
(10,807)
|
Other assets |
(500)
|
200
|
Changes in operating assets and liabilities: |
|
|
Accounts receivable |
(96,069)
|
(95,037)
|
Inventory |
539,498
|
(912,548)
|
Commission advances |
(48,338)
|
3,546
|
Other current assets |
17,653
|
(22,052)
|
Inventory, non-current |
(300,000)
|
|
Accrued liabilities |
72,525
|
71,538
|
Accounts payable |
(107,980)
|
362,376
|
Stockholder/officers advances for operations |
18,000
|
18,000
|
Net cash used in operating activities |
(253,626)
|
(291,920)
|
Cash flows used in investing activities: |
|
|
Proceeds received from disposal of fixed assets |
|
18,000
|
Notes receivable |
1,306
|
6,091
|
Purchase of equipment |
(4,149)
|
(46,015)
|
Net cash used in investing activities |
(2,843)
|
(21,924)
|
Cash flows provided by financing activities: |
|
|
Proceeds from bank line of credit |
163,949
|
300,000
|
Proceeds from stockholder/officer advances |
127,300
|
34,450
|
Repayment of stockholder/officer advances |
(46,000)
|
(122,850)
|
Net cash provided by financing activities |
245,249
|
211,600
|
Decrease in cash and cash equivalents |
(11,220)
|
(102,244)
|
Cash and cash equivalents at end of year beginning of year |
72,784
|
175,028
|
Cash and cash equivalents at end of year |
61,564
|
72,784
|
Supplemental Cash Flow Disclosure |
|
|
Interest Paid |
$ 23,575
|
$ 10,798
|
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v3.3.1.900
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ACTIVITIES
|
12 Months Ended |
Sep. 30, 2015 |
Accounting Policies [Abstract] |
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ACTIVITIES |
NOTE 1- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ACTIVITIES
BUSINESS
TX Holdings, Inc., a Georgia corporation (the “Company” ), is in the business of supplying, distributing and selling drill bits, related tools, and other mining supplies and rail products to United States’ coal mining companies and operators for use in their extraction and transportation processes. The products are supplied to the Company by certain manufacturers and suppliers and warehoused and distributed from the Company’s principal business location in Ashland, Kentucky.
The Company was incorporated in the State of Georgia on May 15, 2000.
Rail and Mining Supplies Distribution Business
Commencing in December 2011, the Company expanded and began focusing its business on the distribution of rail material and mining supplies consumed by the United States’ coal mining industry in its production and transportation processes. This includes rail and its various components and mining supplies, such as steel and tungsten carbide miner bits and augurs and related tools and material.
In connection with the Company’s business expansion, Mr. Shrewsbury, our Chairman and CEO, has provided us with financing in the form of loans and advances and has guaranteed our bank line of credit.
On February 25, 2014, the Company and Mr. Shrewsbury entered into an agreement to consolidate certain indebtedness due to Mr. Shrewsbury in the aggregate amount of $2,000,000, including the principal due under a Revolving Demand Note (“Revolving Note”) in the principal amount of $1,062,000 and accrued but unpaid interest due thereunder as of January 31, 2014 in the amount of $168,905, the principal due under a 10% Promissory Note (“10% Note”) in the amount of $289,997 and accrued but unpaid interest due thereunder as of January 31, 2014 in the amount of $93,252; and $385,846 of non-interest bearing advances previously made by Mr. Shrewsbury and outstanding as of January 31, 2014. The Company issued in exchange and in replacement
therefor a Consolidated Secured Promissory Note (the “Consolidated Note”) in the principal amount of $2,000,000. Upon issuance of the Consolidated Note, the Revolving Note and 10% Note were cancelled and Mr. Shrewsbury agreed to waive any prior defaults under the terms of such notes and to release the Company from any claims related thereto. In addition, in consideration of Mr. Shrewsbury agreeing to consolidate and restructure the foregoing indebtedness, the Company granted to Mr. Shrewsbury options to purchase an aggregate of 500,000 shares of the Company’s common stock pursuant to the terms of a Non-Qualified Stock Option Agreement, issued February 25, 2014. The options are exercisable for a period of three years commencing April 1, 2014. 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, merger, or sale of all or substantially all of the assets.
The Consolidated Note bears interest at the rate of 5% per annum or prime rate if higher than 5% per annum, is repayable in full ten years from the date of issuance and is subject to certain events of default. Payment of the Consolidated Note is to be secured or otherwise payable by the Company out of the death benefit proceeds of key man insurance of $2 million that has been purchased by the Company on the life of Mr. Shrewsbury. The terms and conditions of the foregoing debt consolidation and restructuring were submitted to and unanimously approved by the disinterested members of the Board of Directors of the Company who are also “qualified directors” within the definition set forth in Section 14-2-862 of the Georgia Corporation Code. Mr. Shrewsbury has also advanced the Company an additional $124,637 which is not interest bearing. The notes and advances due to Mr. Shrewsbury are subordinate to the Company’s bank indebtedness.
FINANCIAL CONDITION AND GOING CONCERN CONSIDERATIONS
Although the Company has been profitable during fiscal 2014 and 2013, the Company has not generated sufficient cash during the current fiscal year to fund its operations and relies substantially upon financing provided by Mr. Shrewsbury, the Company’s Chief Executive Officer, and a secure bank line of credit that is guaranteed by Mr. Shrewsbury.
FINANCIAL CONDITION AND GOING CONCERN CONSIDERATIONS-Continued
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 availability of financing from Mr. Shrewsbury and under the Company’s bank line of credit, and the success of our future operations.
Our independent registered public accounting firm’s report on the financial
statements included in our Annual Report on Form 10-K for the years ended September 30, 2015, and 2014 contains an explanatory paragraph wherein they state that the Company has incurred significant losses from operations since inception and has a stockholders’ deficit, both of which raise substantial doubt about the Company’s ability to continue as a going concern.
Accordingly, you should give careful consideration to our auditor’s opinion and these matters in determining whether to become or continue to be our stockholder.
The accompanying financial statements have been prepared on a going concern basis, which contemplates continuing operations and realization of assets and liquidation of liabilities in the ordinary course of business. The Company’s ability to continue as a going concern is dependent upon its ability to implement successfully its business plan and to become financially viable. The financial statements do not include adjustments relating to the recoverability of recorded assets nor the implications of associated bankruptcy costs should the Company be unable to continue as a going concern.
The financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and U. S. generally accepted accounting principles.
USE OF ESTIMATES AND ASSUMPTIONS
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions and calculated estimates that affect (a) certain reported amounts of assets and liabilities, (b) disclosure of contingent assets and liabilities at the date of the financial statements, and (c) the reported amounts of revenues and expenses during the reporting periods. Significant items subject to such estimates and assumptions include recoverability of long-lived and deferred tax assets, and measurement of stock based compensation. The Company bases its estimates on historical experience and various other common assumptions that management believes to be reasonable under the circumstances. Changes in estimates are recorded in the period in which they become known. Actual results could differ from those estimates.
CASH AND CASH FLOWS
For purposes of the statements of cash flows, cash includes demand deposits, time deposits, certificates of deposit and short-term liquid investments in
government securities with original maturities of three months or less when purchased. The Company maintains deposits in two financial institutions. The Federal Deposit Insurance Corporation provides coverage up to $250,000 per depositor, per bank. At September 30, 2015, none of the Company’s cash was in excess of federally insured limits. The Company has not experienced any losses in such accounts and does not believe it is exposed to any significant credit risks from these deposits.
ACCOUNTS RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS
The Company’s practice is to record an allowance for doubtful accounts for estimated losses resulting from the inability of customers to make required payments. The estimate is based on management’s assessment of the collectability of customer accounts and includes consideration for credit worthiness and financial condition of those customers. The Company reviews historical experience with its customers, the general economic environment and the aging of receivables to determine the adequacy of the allowance. The Company records an allowance to reduce receivables to the amount that can be reasonably expected to be collectible. The allowance for doubtful accounts was $13,643 and $32,343 for the years ended September 30, 2015 and 2014, respectively.
ACCOUNTS RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS-Continued
During fiscal year 2015, the Company wrote-off two uncollectable customers’ accounts in the amount of $32,343 and added $13,643 for one customer doubtful account.
INVENTORY
The Company’s inventory consists of mine and rail inventory. Inventory is stated at the lower of cost (first-in, first-out) or market. During the current year, the Company has reclassified rail inventory in the amount of $300,000 from current to non-current, as it anticipated the inventory will not be sold in the subsequent year.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less depreciation. Major renewals and betterments are capitalized, while maintenance and repairs that do not materially improve or extend the useful lives of the assets are charged to expense as incurred. A depreciable life of three (3) years and five (5) years are assigned to delivery trucks and equipment, respectively. Assets are depreciated over their estimated useful lives using the straight-line method. The Company records impairment losses on long-lived assets used in operations when events and circumstances indicate that the assets might be impaired and the undiscounted cash flows estimated to be generated by those assets are less than the carrying amounts of those assets (Note 2).
REVENUE RECOGNITION
The Company recognizes revenue from direct sales of our products to our customers, including shipping fees, when title passes to the customer, which usually occurs upon shipment or delivery, depending upon the terms of the sales order, when persuasive evidence of an arrangement exists; when sales amounts are fixed or determinable; and when collectability is reasonably assured. The Company expenses shipping and handling costs as incurred which are included in cost of sales on the consolidated statements of operations.
STOCK BASED COMPENSATION
The Company accounts for share-based expense and activity in accordance with Financial Accounting Standard Board (FASB) ASC Topic 718 which establishes accounting for equity instruments exchanged for services. Under this provision share-based compensation costs are measured at the grant date, based on the calculated fair value of the award, and are recognized as an expense over employee’s requisite service period, generally the vesting period of the equity grant.
The Company estimates the fair value of stock options using the Black-Scholes valuation model. Key input assumptions used to estimate the fair value of stock options include the exercise price of the award, expected option term, expected volatility of the stock over the option’s expected term, risk-free interest rate over the option’s expected term and the expected annual dividend yield. The Company believes that the valuation technique and approach utilized to develop the underlying assumptions are appropriate in calculating the fair value of the stock options granted (Note 5).
POTENTIALLY DILUTIVE OPTIONS AND WARRANTS
At September 30, 2015, the Company has outstanding 200,000 warrants and 500,000
options which were not included in the twelve months ended September 30, 2015 calculation of diluted net loss per share since their inclusion will be antidilutive. The 500,000 options had been issued to an officer and the 200,000 warrants are issued to a sales agent. At September 30, 2014, the Company had outstanding 200,000 warrants and 500,000 options which were not included in the twelve months ended September 30, 2014. The incremental number of additional shares which would have had dilutive effect under the treasury stock method was -0- due to the exercise price and average market price of our common stock being equal for the period.
INCOME TAXES
Income taxes are estimated for the tax effects of transactions reported in the financial statements and consist of deferred taxes related primarily to differences between the financial reporting basis and income tax basis of assets and liabilities. Deferred tax assets and liabilities represent future tax consequences of those differences, which will either be taxable or deductible when the assets and liabilities are recovered or settled.
Deferred taxes may also be recognized for operating losses that are available to offset future taxable income. Deferred taxes are adjusted for changes in tax laws and tax rates when those changes are enacted.
In assessing the deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during periods in which temporary differences become deductible. Management considers the reversal of any deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.
FINANCIAL INSTRUMENTS
The Company includes fair value information in the notes to the financial statements when the fair value of its financial instruments is different from the book value. When the book value approximates fair value, no additional disclosure is made, which is the case for financial instruments outstanding as of September 30, 2015 and 2014. The book value of those financial instruments that are classified as current assets or liabilities approximates fair value because of the short maturity of these instruments. For non-current financial instruments, the Company uses quoted market prices or, to the extent that there are no quoted market prices, market prices for similar instruments.
FAIR VALUE MEASUREMENT
ASC Topic 820, Fair Value Measurement, defines fair value, establishes a framework for measuring fair value in accordance with U. S. generally accepted accounting principles, and requires certain disclosures about fair value measurements. In general, fair values of financial instruments are based upon quoted market prices, where available. If such quoted market prices are not available, fair value is based upon internally developed models that primarily use, as inputs, observable market-based parameters. Valuation adjustments may be made to ensure that financial instruments are recorded at fair value. These adjustments may include amounts to reflect counterparty credit quality and the customer’s creditworthiness, among other things, as well as unobservable parameters. Any such valuation adjustments are applied consistently over time.
BASIC NET INCOME (LOSS) PER COMMON SHARE
Net income or loss per share is computed based on current accounting guidance requiring companies to report both basic net income or loss per common share, which is computed using the weighted average number of common shares outstanding during the period, and diluted net income per common share, which is computed using the weighted average number of common shares outstanding and the weighted average dilutive potential common shares outstanding using the treasury stock method.
The following table summarizes securities unissued at each of the periods presented which were not included in the calculation of diluted net earnings per share in 2015 and 2014.
|
|
2015 |
|
|
2014 |
|
|
|
|
|
|
|
|
Options and warrants issued as compensation |
|
|
700,000 |
|
|
|
700,000 |
|
|
|
|
|
|
|
|
|
|
Total |
|
|
700,000 |
|
|
|
700,000 |
|
RECENTLY ISSUED ACCOUNTING STANDARDS
During the year ended September 30, 2015 and through December 29, 2015, there were several new accounting pronouncements issued by the Financial Standards Board (FASB). Each of these pronouncements, as applicable, has been or will be adopted by the Company. Management does not believe the adoption of any of these accounting pronouncements has had or will have a material impact on the Company’s financial statements.
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- DefinitionThe entire disclosure for all significant accounting policies of the reporting entity.
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v3.3.1.900
PROPERTY AND EQUIPMENT
|
12 Months Ended |
Sep. 30, 2015 |
Property, Plant and Equipment [Abstract] |
|
PROPERTY AND EQUIPMENT |
NOTE 2 - PROPERTY AND EQUIPMENT
We lease approximately 4,800 square feet of office and warehouse space and certain land located at 12080 Virginia Blvd, Ashland, Kentucky, from Mr. Shrewsbury, our CEO, and Mrs. Shrewsbury pursuant to the terms of a lease we entered into with them on November 19, 2012, for a monthly lease payment of $2,000. The 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 24 month period upon the same terms and conditions. As of September 30, 2015, the Company had accrued but unpaid lease payments due to Mr. and Mrs. Shrewsbury in the amount of $12,000; accordingly, the Company may be deemed to be in default under the terms of the lease agreement with Mr. and Mrs. Shrewsbury. However, the Company has not received a notice of default or termination under the lease agreement as of the date of the filing of this report. The Company believes that such office, warehouse and land space will be sufficient for its current needs.
Property and equipment consists of the following at September 30, 2015 and 2014:
|
|
2015 |
|
|
2014 |
|
|
|
|
|
|
|
|
Property and equipment |
|
$ |
107,308 |
|
|
$ |
103,159 |
|
|
|
|
|
|
|
|
|
|
Less accumulated depreciation |
|
|
(40,733 |
) |
|
|
(30,629 |
) |
|
|
|
|
|
|
|
|
|
|
|
$ |
66,575 |
|
|
$ |
72,530 |
|
Depreciation expense of $10,104 and $9,679 were recognized during the years ended September 30, 2015 and 2014, respectively.
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v3.3.1.900
ACQUISITION
|
12 Months Ended |
Sep. 30, 2015 |
Business Combinations [Abstract] |
|
ACQUISITION |
NOTE 3 – ACQUISITION
In November 2014, and with a view to diversifying our business, we acquired The Bag Rack, LLC. The acquired company has developed a new product, “The Bag Rack,” a device that enables bags with handles to be stored efficiently in a car preventing the bags from tipping over and causing spillage. We are in the preliminary stages of developing the new product. We expect to market and sell the new product online, through broadcast shopping networks, and other distribution outlets, and through certain national retailers and discount stores. During fiscal 2015, we did not generate any revenue from the sale of the product and there can be no assurance we will be able to generate any revenue from this new product.
|
X |
- DefinitionThe entire disclosure for a business combination (or series of individually immaterial business combinations) completed during the period, including background, timing, and recognized assets and liabilities. The disclosure may include leverage buyout transactions (as applicable).
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v3.3.1.900
INCOME TAXES
|
12 Months Ended |
Sep. 30, 2015 |
Income Tax Disclosure [Abstract] |
|
INCOME TAXES |
NOTE 4 - INCOME TAXES
The tax effects of temporary differences that give rise to deferred taxes are as follows at September 30, 2015 and 2014:
|
|
2015 |
|
|
2014 |
|
|
|
|
|
|
|
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
Net operating losses |
|
$ |
2,204,000 |
|
|
$ |
2,048,000 |
|
Accrued expenses |
|
|
167,000 |
|
|
|
251,000 |
|
Valuation allowance |
|
|
(2,371,000 |
) |
|
|
(2,299,000 |
) |
|
|
|
|
|
|
|
|
|
Total deferred tax assets |
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
Basis of property and equipment |
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset |
|
$ |
- |
|
|
$ |
- |
|
Net operating losses after December 12, 2002 through September 30, 2015 were approximately $7,250,000. The Company has total net operating losses available to the Company to offset future taxable income of approximately $6,500,000. Following is a reconciliation of the tax benefit at the federal statutory rate to the amount reported in the statement of operations:
|
|
2014 |
|
|
2013 |
|
|
|
Amount |
|
|
Percent |
|
|
Amount |
|
|
Percent |
|
Income tax expense at federal statutory rate |
|
$ |
(127.000 |
) |
|
|
34 |
% |
|
$ |
116,000 |
|
|
|
34 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in estimate |
|
|
55,000 |
|
|
|
15 |
% |
|
|
(24,000 |
) |
|
|
(7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-deductible expenses |
|
|
- |
|
|
|
- |
|
|
|
30,000 |
|
|
|
9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Decrease in valuation allowance |
|
|
72,000 |
|
|
|
19 |
% |
|
|
(122,000 |
) |
|
|
(36 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes, net |
|
$ |
- |
|
|
|
- |
% |
|
$ |
- |
|
|
|
- |
% |
The Company’s valuation allowance attributable to its deferred tax assets increased (decreased) by $72,000 and $(122,000) during the years ended September 30, 2015 and 2014.
The Company has tax net operating loss carry forwards totaling approximately $7,250,000, expiring in
2018 through 2035. Approximately $1,200,000 of net operating losses was incurred prior to December 12, 2002 at which date MA&N acquired 51% of the Company and are consequently subject to certain limitation described in section 382 of the Internal Revenue Code. The Company estimates that, due to the limitations and expiration dates, only $424,000 of the net operating losses incurred prior to December 12, 2002 will be available to offset future taxable income.
|
X |
- DefinitionThe entire disclosure for income taxes. Disclosures may include net deferred tax liability or asset recognized in an enterprise's statement of financial position, net change during the year in the total valuation allowance, approximate tax effect of each type of temporary difference and carryforward that gives rise to a significant portion of deferred tax liabilities and deferred tax assets, utilization of a tax carryback, and tax uncertainties information.
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v3.3.1.900
STOCKHOLDERS' DEFICIT
|
12 Months Ended |
Sep. 30, 2015 |
Stockholders' Equity Note [Abstract] |
|
STOCKHOLDERS' DEFICIT |
NOTE 5 - STOCKHOLDERS’ DEFICIT
PREFERRED STOCK
The Company has authorized 1,000,000 shares of no par value preferred stock. As of September 30, 2015 and 2014, there are no preferred shares issued and outstanding.
COMMON STOCK
Of the 250,000,000 shares of no par value common stock authorized by the Company, 48,053,084 shares were issued and outstanding as of September 30, 2015 and 2014.
STOCK WARRANTS AND OPTIONS
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, over a period of four years. The agent is entitled to receive 50,000 warrants every six months for an aggregate of 400,000 warrants. The warrants are exercisable at a price of $0.10 per share, become exercisable upon issuance, and expire two years after the date of issuance, the first 50,000 warrants tranche were issuable effective July 1, 2012 and, additional 50,000 tranches were issuable every six months thereafter. As of September 30, 2015 there are 200,000 warrants exercisable and 150,000 warrants have expired. The warrants were not included in the calculation of diluted net earnings per share in 2015 and 2014 since their inclusion would 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 of authorized by the Board of Directors, February 21, 2014. The options expire on March 31, 2017. The options were not included in the calculation of diluted earnings per share for the year ended September 30, 2014 since their inclusion would be anti-dilutive.
The fair value of the equity based awards issued during the years ended September 30, 2015 and 2014 was estimated using the Black-Scholes option pricing model. Expected volatility was based on the Company’s historical volatility for its common stock and adjusted to reflect the thinly traded nature of the market for its securities. The risk-free rate was determined using the U. S. Treasury yield in effect at the issuance date based on the term of the equity award. The expected life was based on the contractual term of the award. The Company has never declared or paid cash dividends and has no plans to do so in the foreseeable future.
The following assumptions were utilized for awards issued during the years ended September 30, 2015 and 2014.
|
September 30, |
|
September 30, |
|
2015 |
|
2014 |
|
|
|
|
Expected life (in years) |
2 to 3 |
|
2 to 3 |
Expected volatility |
75% |
|
75% |
Risk-free interest rate |
0.39% to 2% |
|
0.39% to 2% |
Expected dividend rate |
0 |
|
0 |
Following is a summary of outstanding stock warrants and options at September 30, 2015 and
2014 and activity during the years then ended:
|
|
Number of |
|
|
Exercise |
|
|
Weighted |
|
|
|
Shares |
|
|
Price |
|
|
Average Price |
|
Warrants/Options at September 30, 2013 |
|
|
1,450,000 |
|
|
$ |
0.05-0.10 |
|
|
$ |
0.052 |
|
New Issue |
|
|
600,000 |
|
|
|
0.092-0.10 |
|
|
|
0.095 |
|
Forfeited |
|
|
(1,350,000 |
) |
|
|
0.05-0.10 |
|
|
|
0.052 |
|
Warrants/Options at September 30, 2014 |
|
|
700,000 |
|
|
$ |
0.092-0.10 |
|
|
$ |
0.095 |
|
New Issue |
|
|
100,000 |
|
|
|
0.10 |
|
|
|
0.10 |
|
Forfeited |
|
|
(100,000 |
) |
|
|
0.10 |
|
|
|
0.10 |
|
Warrants/Options at September 30, 2015 |
|
|
700,000 |
|
|
$ |
0.092-0.10 |
|
|
$ |
0.095 |
|
A summary of outstanding warrants and options at September 30, 2015, follows:
|
|
Number |
|
|
|
|
|
Remaining |
|
|
|
of |
|
|
Exercise |
|
|
Life |
|
Expiration Date |
|
Shares |
|
|
Price |
|
|
(Years) |
|
January 1, 2016 |
|
|
50,000 |
|
|
$ |
0.10 |
|
|
|
0.25 |
|
July 1, 2016 |
|
|
50,000 |
|
|
$ |
0.10 |
|
|
|
0.75 |
|
January 1, 2017 |
|
|
50,000 |
|
|
$ |
0.10 |
|
|
|
1.25 |
|
March 31, 2017 |
|
|
500,000 |
|
|
$ |
0.0926 |
|
|
|
1.5 |
|
July 1, 2017 |
|
|
50,000 |
|
|
$ |
0.10 |
|
|
|
1.75 |
|
|
X |
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- DefinitionThe entire disclosure for shareholders' equity comprised of portions attributable to the parent entity and noncontrolling interest, including other comprehensive income. Includes, but is not limited to, balances of common stock, preferred stock, additional paid-in capital, other capital and retained earnings, accumulated balance for each classification of other comprehensive income and amount of comprehensive income.
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v3.3.1.900
LEGAL PROCEEDINGS
|
12 Months Ended |
Sep. 30, 2015 |
Loss Contingency, Information about Litigation Matters [Abstract] |
|
LEGAL PROCEEDINGS |
NOTE 6 – LEGAL PROCEEDINGS
Except as discussed below, other than ordinary routine litigation incidental to the business, the Company is not a party to any material pending legal proceeding.
On January 17, 2012, the Company filed a lawsuit in the United States District Court for the District of Utah against Michael Cederstrom (“Cederstrom”), the Company’s former chief financial officer and corporate counsel, Dexter and Dexter Attorneys at Law (“Dexter”), the law firm that employed Mr. Cederstrom, and certain other parties. Claims against the other parties have been resolved through settlement. The Company had asserted claims against Cederstrom that included a claim of fraud in the inducement, breach of fiduciary duty, professional negligence, and negligent misrepresentation by omission or commission. The Company’s claims against Dexter were based substantially upon the same theories and on a theory that Dexter was vicariously liable for the acts of Cederstrom and that Dexter had failed to adequately supervise Cederstrom. The claims against Dexter and Cederstrom were based upon allegations that, among other things, in connection with the exchange in December 2007 by Mr. Mark Neuhaus (“Neuhaus”), the Company’s former Chief Executive Officer, of 10,715,789 shares of common stock for shares of 1,000 preferred stock, Cederstrom failed to disclose to the Company that the preferred shares issued to Neuhaus as compensation for work allegedly performed in 2004 and 2005 were issued without the proper consent of the previous board of directors of the Company and that Neuhaus had not performed services for which the shares of preferred stock were issued. Additionally, the Company claimed Cederstrom executed, on behalf of the Company, a $1,199,885.55 convertible promissory note in favor of Neuhaus that was not authorized. The Company also claimed conflict of interest, breach of fiduciary duties, breach of contract and seeked an accounting for the fees paid to Dexter and certain shares issued to Cederstrom by the Company.
On May 14, 2014 the Company entered into a settlement agreement and release, dated effective May 20, 2014, with Dexter & Dexter and Mr. Cederstrom that settles all claims among the parties arising from the litigation. Pursuant to the terms of the settlement agreement Dexter & Dexter’s insurer paid the Company $374,025 in settlement of all claims among the parties. Also, effective upon receipt of the settlement payment, each party agreed to release each other party and affiliates from all claim arising out of the litigation or otherwise. None of the parties made any admission of liability in entering into the settlement agreement. Subsequently, the parties filed a joint motion to dismiss the case with prejudice and the motion was granted by the courts on June 16, 2014.
|
X |
- DefinitionThe entire disclosure for legal proceedings, legal contingencies, litigation, regulatory and environmental matters and other contingencies.
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v3.3.1.900
RELATED PARTY TRANSACTIONS
|
12 Months Ended |
Sep. 30, 2015 |
Related Party Transactions [Abstract] |
|
RELATED PARTY TRANSACTIONS |
NOTE 7– RELATED PARTY TRANSACTIONS
ADVANCES FROM STOCKHOLDER AND OFFICER
As of September 30, 2015 and 2014, Mr. Shrewsbury had advanced an aggregate of $124,637 and $43,337, respectively, to the Company. The advances do not bear interest and are repayable upon demand. The advances are subordinate to the Company’s bank indebtedness.
PARK’S LEASE
In November 2006, the Company entered into a Purchase and Sale Agreement with Masada Oil & Gas, Inc. (“Masada”). Mr. Bobby S. Feller is the owner of Masada and a member of the Company’s board. The Parks lease purchased from Masada covered 320 acres in which the company previously owned a 75% working interest and Masada owned the remaining 25%.On January 28, 2011, TX Holdings, Inc. entered into an agreement with Masada Oil & Gas Inc. to acquire the remaining 25% working interest in the Park’s lease. As part of the agreement, the Company also acquired a storage building and approximately two acres of land. In return, the Company agreed to relinquish an 8.5% working interest which it had in a different lease, pay the sum of $10,400 and, assume the current 25% lease owners’ liability in the amount of $17,000. On May 30, 2012, the Company sold 100% of the interest on the Parks lease for $80,000. The Company received a down payment of $40,000 and a note for the balance of $40,000. The note is secured by Park’s lease future production. On March 25, 2014, the storage building was sold for $18,000. The note receivable balance as of September 30, 2015 and 2014 were $29.983 and 31,289, respectively.
NOTES PAYABLE TO A STOCKHOLDER AND OFFICER
On February 25, 2014, the Company and Mr. Shrewsbury entered into an agreement to consolidate certain indebtedness due to Mr. Shrewsbury in the aggregate amount of $2,000,000, including the principal due under a Revolving Demand Note (“Revolving Note”) in the principal amount of $1,062,000 and accrued but unpaid interest due thereunder as of January 31, 2014 in the amount of $168,905, the principal due under a 10% Promissory Note (“10% Note”) in the amount of $289,997 and accrued but unpaid interest due thereunder as of January 31, 2014 in the amount of $93,252; and $385,846 of non-interest bearing advances previously made by Mr. Shrewsbury and outstanding as of January 31, 2014. The Company issued a Consolidated Secured Promissory Note (the “Consolidated Note”) in the principal amount of $2,000,000 to reflect the consolidated indebtedness. Upon issuance of the Consolidated Note, the Revolving Note and 10% Note were cancelled and Mr. Shrewsbury agreed to waive any
prior defaults under the terms of such notes and to release the Company from any claims related thereto. The Consolidated Note bears interest at the rate of 5% per annum or prime rate if higher than 5% per annum, is repayable in full ten years from the date of issuance and is subject to certain events of default. Payment of the Consolidated Note has been secured by the Company by the death benefit proceeds of a $2 million key man term life insurance policy purchased by the Company on the life of Mr. Shrewsbury and that has been assigned to Mr. Shrewsbury. The terms and conditions of the foregoing debt consolidation and restructuring were submitted to and unanimously approved by the disinterested members of the Board of Directors of the Company.
For the year ended September 30, 2015 and 2014, interest expense of $125,708 and $99,316, respectively, in the accompanying statements of operations, relates to the Consolidated Note and the revolving credit arrangement. Interest on the Consolidated Note payable for the amount of $159,452 and $59,452 has been accrued as of September 30, 2015 and 2014, respectively..
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 some 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 2, 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.
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 years ended September 30, 2015 and 2014, such trucking company was paid $62,975 and $65,280, respectively, for such trucking services, which were included in our cost of sales amount.
COMMISSIONS PAID TO COMPANY CONTROLLED BY OFFICER/STOCKHOLDER
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 years ended September 30, 2015 and 2014 the amounts of such commission were $31,423 and $11,745, respectively.
ACCRUED OFFICER’S SALARY
As of September 30, 2015 and 2014, the Company had accrued and unpaid an amount of $451,743 due to Jose Fuentes, CFO as payment for past services.
ADVANCES FROM STOCKHOLDER AND OFFICER
Included in the financial statements as of September 30, 2015 and 2014 are advances from stockholder and officer of $124,637 and $43,337, respectively. On February 25, 2014 Mr. Shrewsbury agreed to consolidate accrued loan interest due to him in the amount of $385,846 into the principal amount of the Consolidated Note.
|
|
September |
|
|
September |
|
|
|
2015 |
|
|
2014 |
|
|
|
|
|
|
|
|
Beginning Balance |
|
$ |
43,337 |
|
|
$ |
499,583 |
|
Proceeds from Stockholer/Officer advances |
|
|
127,300 |
|
|
|
34,450 |
|
Warehouse rental from officer/stockholder |
|
|
– |
|
|
|
18,000 |
|
Repayment of stockholder advances |
|
|
(46,000 |
) |
|
|
(122,850 |
) |
Transfer to consolidated note |
|
|
– |
|
|
|
(385,846 |
) |
Ending Balance |
|
$ |
124,637 |
|
|
$ |
43,337 |
|
|
X |
- DefinitionThe entire disclosure for related party transactions. Examples of related party transactions include transactions between (a) a parent company and its subsidiary; (b) subsidiaries of a common parent; (c) and entity and its principal owners; and (d) affiliates.
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v3.3.1.900
BANK LINE OF CREDIT
|
12 Months Ended |
Sep. 30, 2015 |
Line of Credit Facility [Abstract] |
|
BANK LINE OF CREDIT |
NOTE 9 – BANK LINE OF CREDIT
On November 7, 2012, the Company obtained a line of credit for the approximate amount of $250,000 from a bank. The line of credit was secured by a priority security interest in the Company’s inventory, and matured on November 7, 2013 and was subsequently extended to November 7, 2014. Interest on the line of credit was payable monthly and was calculated on the basis of an independent variable indexed rate which is currently 3.25% per annum. The line of credit was guaranteed as to principal and interest, and all collection costs and legal fees by Mr. Shrewsbury. All notes and other indebtedness due to Mr. Shrewsbury by the Company were subordinated to the bank line of credit including with regard to the Company’s inventory and assets. On August 26, 2014 the line of credit amount was increased to $750,000 and would mature on November 7, 2015. The new line of credit had substantially the same terms as the original line of credit, was secured by the Company’s inventory and accounts receivable and guaranteed as to principal and interest, and all collection costs and legal fees, by Mr. Shrewsbury. The line of credit balance as of September 30, 2015 and 2014 was $712,449 and $548,500, respectively.
|
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- DefinitionThe entire disclosure for information about short-term and long-term debt arrangements, which includes amounts of borrowings under each line of credit, note payable, commercial paper issue, bonds indenture, debenture issue, own-share lending arrangements and any other contractual agreement to repay funds, and about the underlying arrangements, rationale for a classification as long-term, including repayment terms, interest rates, collateral provided, restrictions on use of assets and activities, whether or not in compliance with debt covenants, and other matters important to users of the financial statements, such as the effects of refinancing and noncompliance with debt covenants.
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v3.3.1.900
CONCENTRATION OF RISKS
|
12 Months Ended |
Sep. 30, 2015 |
Commitments and Contingencies Disclosure [Abstract] |
|
CONCENTRATION OF RISKS |
NOTE 10 – CONCENTRATION OF RISKS
Significant Customers
At September 30, 2015 and 2014, the Company had the following customer concentration:
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Percentage of |
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Accounts Receivable |
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Percentage of Sales (1) |
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trade, net |
|
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|
September 30, |
|
|
September 30, |
|
|
September 30, |
|
|
September 30, |
|
|
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2015 |
|
|
2014 |
|
|
2015 |
|
|
2014 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer A |
|
|
23 |
|
|
|
21 |
|
|
|
21 |
|
|
|
18 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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Customer B |
|
|
16 |
|
|
|
14 |
|
|
|
7 |
|
|
|
8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Customer C |
|
|
10 |
|
|
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* |
|
|
|
24 |
|
|
|
* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Customer D |
|
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10 |
|
|
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* |
|
|
|
5 |
|
|
|
* |
|
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|
|
|
|
|
|
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Customer E |
|
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9 |
|
|
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* |
|
|
|
21 |
|
|
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* |
|
*=Less than 5%
(1) Represents customers with annual sales of $200,000 or higher as of September 30, 2015.
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- DefinitionThe entire disclosure for commitments and contingencies.
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v3.3.1.900
SUBSEQUENT EVENTS
|
12 Months Ended |
Sep. 30, 2015 |
Subsequent Events [Abstract] |
|
SUBSEQUENT EVENTS |
NOTE 11 – SUBSEQUENT EVENTS
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.
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; |
|
· |
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 3.25% 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.
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v3.3.1.900
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ACTIVITIES (Policies)
|
12 Months Ended |
Sep. 30, 2015 |
Accounting Policies [Abstract] |
|
FINANCIAL CONDITION AND GOING CONCERN CONSIDERATIONS |
FINANCIAL CONDITION AND GOING CONCERN CONSIDERATIONS
Although the Company has been profitable during fiscal 2014 and 2013, the Company has not generated sufficient cash during the current fiscal year to fund its operations and relies substantially upon financing provided by Mr. Shrewsbury, the Company’s Chief Executive Officer, and a secure bank line of credit that is guaranteed by Mr. Shrewsbury.
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 availability of financing from Mr. Shrewsbury and under the Company’s bank line of credit, and the success of our future operations.
Our independent registered public accounting firm’s report on the financial statements included in our Annual Report on Form 10-K for the years ended September 30, 2015, and 2014 contains an explanatory paragraph wherein they state that the Company has incurred significant losses from operations since inception and has a stockholders’ deficit, both of which raise substantial doubt about the Company’s ability to continue as a going concern.
Accordingly, you should give careful consideration to our auditor’s opinion and these matters in determining whether to become or continue to be our stockholder.
The accompanying financial statements have been prepared on a going concern basis, which contemplates continuing operations and realization of assets and liquidation of liabilities in the ordinary course of business. The Company’s ability to continue as a going concern is dependent upon its ability to implement successfully its business plan and to become financially viable. The financial statements do not include adjustments relating to the recoverability of recorded assets nor the implications of associated bankruptcy costs should the Company be unable to continue as a going concern.
The financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and U. S. generally accepted accounting principles.
|
USE OF ESTIMATES AND ASSUMPTIONS |
USE OF ESTIMATES AND ASSUMPTIONS
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions and calculated estimates that affect (a) certain reported amounts of assets and liabilities, (b) disclosure of contingent assets and liabilities at the date of the financial statements, and (c) the reported amounts of revenues and expenses during the reporting periods. Significant items subject to such estimates and assumptions include recoverability of long-lived and deferred tax assets, and measurement of stock based compensation. The Company bases its estimates on historical experience and various other common assumptions that management believes to be reasonable under the circumstances. Changes in estimates are recorded in the period in which they become known. Actual results could differ from those estimates.
|
CASH AND CASH FLOWS |
CASH AND CASH FLOWS
For purposes of the statements of cash flows, cash includes demand deposits, time deposits, certificates of deposit and short-term liquid investments in government securities with original maturities of three months or less when purchased. The Company maintains deposits in two financial institutions. The Federal Deposit Insurance Corporation provides coverage up to $250,000 per depositor, per bank. At September 30, 2015, none of the Company’s cash was in excess of federally insured limits. The Company has not experienced any losses in such accounts and does not believe it is exposed to any significant credit risks from these deposits.
|
ACCOUNTS RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS |
ACCOUNTS RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS
The Company’s practice is to record an allowance for doubtful accounts for estimated losses resulting from the inability of customers to make required payments. The estimate is based on management’s assessment of the collectability of customer accounts and includes consideration for credit worthiness and financial condition of those customers. The Company reviews historical experience with its customers, the general economic environment and the aging of receivables to determine the adequacy of the allowance. The Company records an allowance to reduce receivables to the amount that can be reasonably expected to be collectible. The allowance for doubtful accounts was $13,643 and $32,343 for the years ended September 30, 2015 and 2014, respectively.
During fiscal year 2015, the Company wrote-off two uncollectable customers’ accounts in the amount of $32,343 and added $13,643 for one customer doubtful account.
|
INVENTORY |
INVENTORY
The Company’s inventory consists of mine and rail inventory. Inventory is stated at the lower of cost (first-in, first-out) or market. During the current year, the Company has reclassified rail inventory in the amount of $300,000 from current to non-current, as it anticipated the inventory will not be sold in the subsequent year.
|
PROPERTY AND EQUIPMENT |
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less depreciation. Major renewals and betterments are capitalized, while maintenance and repairs that do not materially improve or extend the useful lives of the assets are charged to expense as incurred. A depreciable life of three (3) years and five (5) years are assigned to delivery trucks and equipment, respectively. Assets are depreciated over their estimated useful lives using the straight-line method. The Company records impairment losses on long-lived assets used in operations when events and circumstances indicate that the assets might be impaired and the undiscounted cash flows estimated to be generated by those assets are less than the carrying amounts of those assets (Note 2).
|
REVENUE RECOGNITION |
REVENUE RECOGNITION
The Company recognizes revenue from direct sales of our products to our customers, including shipping fees, when title passes to the customer, which usually occurs upon shipment or delivery, depending upon the terms of the sales order, when persuasive evidence of an arrangement exists; when sales amounts are fixed or determinable; and when collectability is reasonably assured. The Company expenses shipping and handling costs as incurred which are included in cost of sales on the consolidated statements of operations.
|
STOCK BASED COMPENSATION |
STOCK BASED COMPENSATION
The Company accounts for share-based expense and activity in accordance with Financial Accounting Standard Board (FASB) ASC Topic 718 which establishes accounting for equity instruments exchanged for services. Under this provision share-based compensation costs are measured at the grant date, based on the calculated fair value of the award, and are recognized as an expense over employee’s requisite service period, generally the vesting period of the equity grant.
The Company estimates the fair value of stock options using the Black-Scholes valuation model. Key input assumptions used to estimate the fair value of stock options include the exercise price of the award, expected option term, expected volatility of the stock over the option’s expected term, risk-free interest rate over the option’s expected term and the expected annual dividend yield. The Company believes that the valuation technique and approach utilized to develop the underlying assumptions are appropriate in calculating the fair value of the stock options granted (Note 5).
|
POTENTIALLY DILUTIVE OPTIONS AND WARRANTS |
POTENTIALLY DILUTIVE OPTIONS AND WARRANTS
At September 30, 2015, the Company has outstanding 200,000 warrants and 500,000 options which were not included in the twelve months ended September 30, 2015 calculation of diluted net loss per share since their inclusion will be antidilutive. The 500,000 options had been issued to an officer and the 200,000 warrants are issued to a sales agent. At September 30, 2014, the Company had outstanding 200,000 warrants and 500,000 options which were not included in the twelve months ended September 30, 2014. The incremental number of additional shares which would have had dilutive effect under the treasury stock method was -0- due to the exercise price and average market price of our common stock being equal for the period.
|
INCOME TAXES |
INCOME TAXES
Income taxes are estimated for the tax effects of transactions reported in the financial statements and consist of deferred taxes related primarily to differences between the financial reporting basis and income tax basis of assets and liabilities. Deferred tax assets and liabilities represent future tax consequences of those differences, which will either be taxable or deductible when the assets and liabilities are recovered or settled.
Deferred taxes may also be recognized for operating losses that are available to offset future taxable income. Deferred taxes are adjusted for changes in tax laws and tax rates when those changes are enacted.
In assessing the deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during periods in which temporary differences become deductible. Management considers the reversal of any deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.
|
FINANCIAL INSTRUMENTS |
FINANCIAL INSTRUMENTS
The Company includes fair value information in the notes to the financial statements when the fair value of its financial instruments is different from the book value. When the book value approximates fair value, no additional disclosure is made, which is the case for financial instruments outstanding as of September 30, 2015 and 2014. The book value of those financial instruments that are classified as current assets or liabilities approximates fair value because of the short maturity of these instruments. For non-current financial instruments, the Company uses quoted market prices or, to the extent that there are no quoted market prices, market prices for similar instruments.
|
FAIR VALUE MEASUREMENT |
FAIR VALUE MEASUREMENT
ASC Topic 820, Fair Value Measurement, defines fair value, establishes a framework for measuring fair value in accordance with U. S. generally accepted accounting principles, and requires certain disclosures about fair value measurements. In general, fair values of financial instruments are based upon quoted market prices, where available. If such quoted market prices are not available, fair value is based upon internally developed models that primarily use, as inputs, observable market-based parameters. Valuation adjustments may be made to ensure that financial instruments are recorded at fair value. These adjustments may include amounts to reflect counterparty credit quality and the customer’s creditworthiness, among other things, as well as unobservable parameters. Any such valuation adjustments are applied consistently over time.
|
BASIC NET INCOME (LOSS) PER COMMON SHARE |
BASIC NET INCOME (LOSS) PER COMMON SHARE
Net income or loss per share is computed based on current accounting guidance requiring companies to report both basic net income or loss per common share, which is computed using the weighted average number of common shares outstanding during the period, and diluted net income per common share, which is computed using the weighted average number of common shares outstanding and the weighted average dilutive potential common shares outstanding using the treasury stock method.
The following table summarizes securities unissued at each of the periods presented which were not included in the calculation of diluted net earnings per share in 2015 and 2014.
|
|
2015 |
|
|
2014 |
|
|
|
|
|
|
|
|
Options and warrants issued as compensation |
|
|
700,000 |
|
|
|
700,000 |
|
|
|
|
|
|
|
|
|
|
Total |
|
|
700,000 |
|
|
|
700,000 |
|
|
RECENTLY ISSUED ACCOUNTING STANDARDS |
RECENTLY ISSUED ACCOUNTING STANDARDS
During the year ended September 30, 2015 and through December 29, 2015, there were several new accounting pronouncements issued by the Financial Standards Board (FASB). Each of these pronouncements, as applicable, has been or will be adopted by the Company. Management does not believe the adoption of any of these accounting pronouncements has had or will have a material impact on the Company’s financial statements.
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- DefinitionTabular disclosure of securities (including those issuable pursuant to contingent stock agreements) that could potentially dilute basic earnings per share (EPS) in the future that were included in the computation of diluted EPS.
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v3.3.1.900
INCOME TAXES (Tables)
|
12 Months Ended |
Sep. 30, 2015 |
Income Tax Disclosure [Abstract] |
|
Schedule of deferred tax assets and liabilities |
|
|
2015 |
|
|
2014 |
|
|
|
|
|
|
|
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
Net operating losses |
|
$ |
2,204,000 |
|
|
$ |
2,048,000 |
|
Accrued expenses |
|
|
167,000 |
|
|
|
251,000 |
|
Valuation allowance |
|
|
(2,371,000 |
) |
|
|
(2,299,000 |
) |
|
|
|
|
|
|
|
|
|
Total deferred tax assets |
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
Basis of property and equipment |
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset |
|
$ |
- |
|
|
$ |
- |
|
|
Schedule of reconciliation of tax benefit at federal statutory rate |
|
|
2014 |
|
|
2013 |
|
|
|
Amount |
|
|
Percent |
|
|
Amount |
|
|
Percent |
|
Income tax expense at federal statutory rate |
|
$ |
(127.000 |
) |
|
|
34 |
% |
|
$ |
116,000 |
|
|
|
34 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in estimate |
|
|
55,000 |
|
|
|
15 |
% |
|
|
(24,000 |
) |
|
|
(7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-deductible expenses |
|
|
- |
|
|
|
- |
|
|
|
30,000 |
|
|
|
9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Decrease in valuation allowance |
|
|
72,000 |
|
|
|
19 |
% |
|
|
(122,000 |
) |
|
|
(36 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes, net |
|
$ |
- |
|
|
|
- |
% |
|
$ |
- |
|
|
|
- |
% |
|
X |
- DefinitionTabular disclosure of the components of net deferred tax asset or liability recognized in an entity's statement of financial position, including the following: the total of all deferred tax liabilities, the total of all deferred tax assets, the total valuation allowance recognized for deferred tax assets.
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v3.3.1.900
STOCKHOLDERS' EQUITY (Tables)
|
12 Months Ended |
Sep. 30, 2015 |
Stockholders' Equity Note [Abstract] |
|
Schedule of stock options award assumptions |
|
September 30, |
|
September 30, |
|
2015 |
|
2014 |
|
|
|
|
Expected life (in years) |
2 to 3 |
|
2 to 3 |
Expected volatility |
75% |
|
75% |
Risk-free interest rate |
0.39% to 2% |
|
0.39% to 2% |
Expected dividend rate |
0 |
|
0 |
|
Schedule of outstanding stock warrants |
|
|
Number of |
|
|
Exercise |
|
|
Weighted |
|
|
|
Shares |
|
|
Price |
|
|
Average Price |
|
Warrants/Options at September 30, 2013 |
|
|
1,450,000 |
|
|
$ |
0.05-0.10 |
|
|
$ |
0.052 |
|
New Issue |
|
|
600,000 |
|
|
|
0.092-0.10 |
|
|
|
0.095 |
|
Forfeited |
|
|
(1,350,000 |
) |
|
|
0.05-0.10 |
|
|
|
0.052 |
|
Warrants/Options at September 30, 2014 |
|
|
700,000 |
|
|
$ |
0.092-0.10 |
|
|
$ |
0.095 |
|
New Issue |
|
|
100,000 |
|
|
|
0.10 |
|
|
|
0.10 |
|
Forfeited |
|
|
(100,000 |
) |
|
|
0.10 |
|
|
|
0.10 |
|
Warrants/Options at September 30, 2015 |
|
|
700,000 |
|
|
$ |
0.092-0.10 |
|
|
$ |
0.095 |
|
|
Schedule of outstanding warrants |
|
|
Number |
|
|
|
|
|
Remaining |
|
|
|
of |
|
|
Exercise |
|
|
Life |
|
Expiration Date |
|
Shares |
|
|
Price |
|
|
(Years) |
|
January 1, 2016 |
|
|
50,000 |
|
|
$ |
0.10 |
|
|
|
0.25 |
|
July 1, 2016 |
|
|
50,000 |
|
|
$ |
0.10 |
|
|
|
0.75 |
|
January 1, 2017 |
|
|
50,000 |
|
|
$ |
0.10 |
|
|
|
1.25 |
|
March 31, 2017 |
|
|
500,000 |
|
|
$ |
0.0926 |
|
|
|
1.5 |
|
July 1, 2017 |
|
|
50,000 |
|
|
$ |
0.10 |
|
|
|
1.75 |
|
|
X |
- DefinitionTabular disclosure of outstanding warrants.
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v3.3.1.900
RELATED PARTY TRANSACTIONS (Tables)
|
12 Months Ended |
Sep. 30, 2015 |
Related Party Transactions [Abstract] |
|
Schedule of advances from stockholder/officer included in the financial statements |
|
|
September |
|
|
September |
|
|
|
2015 |
|
|
2014 |
|
|
|
|
|
|
|
|
Beginning Balance |
|
$ |
43,337 |
|
|
$ |
499,583 |
|
Proceeds from Stockholer/Officer advances |
|
|
127,300 |
|
|
|
34,450 |
|
Warehouse rental from officer/stockholder |
|
|
– |
|
|
|
18,000 |
|
Repayment of stockholder advances |
|
|
(46,000 |
) |
|
|
(122,850 |
) |
Transfer to consolidated note |
|
|
– |
|
|
|
(385,846 |
) |
Ending Balance |
|
$ |
124,637 |
|
|
$ |
43,337 |
|
|
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CONCENTRATION OF RISKS (Tables)
|
12 Months Ended |
Sep. 30, 2015 |
Commitments and Contingencies Disclosure [Abstract] |
|
Schedule of customer concentration |
|
|
|
|
|
|
|
|
Percentage of |
|
|
|
|
|
|
|
|
|
Accounts Receivable |
|
|
|
Percentage of Sales (1) |
|
|
trade, net |
|
|
|
September 30, |
|
|
September 30, |
|
|
September 30, |
|
|
September 30, |
|
|
|
2015 |
|
|
2014 |
|
|
2015 |
|
|
2014 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer A |
|
|
23 |
|
|
|
21 |
|
|
|
21 |
|
|
|
18 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer B |
|
|
16 |
|
|
|
14 |
|
|
|
7 |
|
|
|
8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer C |
|
|
10 |
|
|
|
* |
|
|
|
24 |
|
|
|
* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer D |
|
|
10 |
|
|
|
* |
|
|
|
5 |
|
|
|
* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer E |
|
|
9 |
|
|
|
* |
|
|
|
21 |
|
|
|
* |
|
*=Less than 5%
(1) Represents customers with annual sales of $200,000 or higher as of September 30, 2015.
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v3.3.1.900
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ACTIVITIES (Detail Textuals) - USD ($)
|
1 Months Ended |
|
|
|
|
Feb. 25, 2014 |
Jan. 31, 2014 |
Sep. 30, 2015 |
Sep. 30, 2014 |
Mar. 25, 2014 |
Sep. 30, 2013 |
Related Party Transaction [Line Items] |
|
|
|
|
|
|
Advances from officer (Note 7) |
|
|
$ 124,637
|
$ 43,337
|
|
$ 499,583
|
Mr.William Shrewsbury |
|
|
|
|
|
|
Related Party Transaction [Line Items] |
|
|
|
|
|
|
Advances from officer (Note 7) |
|
|
$ 124,637
|
$ 43,337
|
|
|
Proceeds from keyman insurance policy |
$ 2,000,000
|
|
|
|
|
|
Mr.William Shrewsbury | Employee Stock Option |
|
|
|
|
|
|
Related Party Transaction [Line Items] |
|
|
|
|
|
|
Shares granted under option purchase agreement with related party |
500,000
|
|
|
|
|
|
Expiry period of warrants |
3 years
|
|
|
|
|
|
Exercise price of options granted |
$ 0.0924
|
|
|
|
|
|
Mr.William Shrewsbury | Revolving promissory note payable |
|
|
|
|
|
|
Related Party Transaction [Line Items] |
|
|
|
|
|
|
Face value of note issued |
|
$ 1,062,000
|
|
|
|
|
Unpaid interest due |
|
168,905
|
|
|
|
|
Outstanding amount non interest bearing promissory notes |
|
385,846
|
|
|
|
|
Amount of secured promissory notes |
|
2,000,000
|
|
|
|
|
Mr.William Shrewsbury | Consolidated notes payable |
|
|
|
|
|
|
Related Party Transaction [Line Items] |
|
|
|
|
|
|
Face value of note issued |
$ 2,000,000
|
|
|
|
$ 2,000,000
|
|
Debt instrument prime interest rate |
5.00%
|
|
|
|
|
|
Mr.William Shrewsbury | 10% Promissory Note |
|
|
|
|
|
|
Related Party Transaction [Line Items] |
|
|
|
|
|
|
Face value of note issued |
|
$ 289,997
|
|
|
|
|
Interest rate of note payable |
|
10.00%
|
|
|
|
|
Unpaid interest due |
|
$ 93,252
|
|
|
|
|
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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ACTIVITIES (Detail Textuals 3) - shares
|
12 Months Ended |
Sep. 30, 2015 |
Sep. 30, 2014 |
Dilutive Securities [Line Items] |
|
|
Number of warrants/option outstanding |
700,000
|
700,000
|
incremental number of additional shares |
0
|
|
Warrant |
|
|
Dilutive Securities [Line Items] |
|
|
Number of warrants/option outstanding |
200,000
|
200,000
|
Warrant | Sales agent |
|
|
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|
|
Number of warrants issued |
200,000
|
|
Stock options |
|
|
Dilutive Securities [Line Items] |
|
|
Number of warrants/option outstanding |
500,000
|
500,000
|
Stock options | Officers and directors |
|
|
Dilutive Securities [Line Items] |
|
|
Number of option issued |
500,000
|
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v3.3.1.900
PROPERTY AND EQUIPMENT - Summary of Property and equipment (Details) - USD ($)
|
Sep. 30, 2015 |
Sep. 30, 2014 |
Property, Plant and Equipment [Abstract] |
|
|
Property and equipment |
$ 107,308
|
$ 103,159
|
Less accumulated depreciation |
(40,733)
|
(30,629)
|
Property and equipment, net |
$ 66,575
|
$ 72,530
|
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- DefinitionAmount of accumulated depreciation, depletion and amortization for physical assets used in the normal conduct of business to produce goods and services.
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PROPERTY AND EQUIPMENT (Detail Textuals)
|
|
1 Months Ended |
12 Months Ended |
Sep. 01, 2014 |
Nov. 19, 2012
USD ($)
ft²
|
Sep. 30, 2015
USD ($)
|
Sep. 30, 2014
USD ($)
|
Property, Plant and Equipment [Abstract] |
|
|
|
|
Depreciation expense |
|
|
$ 10,104
|
$ 9,679
|
Property, Plant and Equipment [Line Items] |
|
|
|
|
Accrued but unpaid lease payments |
|
|
451,743
|
$ 451,743
|
Mr. and Mrs. Shrewsbury |
|
|
|
|
Property, Plant and Equipment [Line Items] |
|
|
|
|
Area of lease | ft² |
|
4,800
|
|
|
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|
$ 2,000
|
|
|
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|
2 years
|
|
|
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24 months
|
|
|
|
Accrued but unpaid lease payments |
|
|
$ 12,000
|
|
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INCOME TAXES - Summary of Deferred tax assets and liabilities (Details) - USD ($)
|
Sep. 30, 2015 |
Sep. 30, 2014 |
Deferred tax assets: |
|
|
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$ 2,204,000
|
$ 2,048,000
|
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167,000
|
251,000
|
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|
$ (2,299,000)
|
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|
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INCOME TAXES - Reconciliation of tax benefit at federal statutory (Details 1) - USD ($)
|
12 Months Ended |
Sep. 30, 2015 |
Sep. 30, 2014 |
Amount |
|
|
Income tax expense at federal statutory rate |
$ (127,000)
|
$ 116,000
|
Change in estimate |
$ 55,000
|
(24,000)
|
Non-deductible expenses |
|
30,000
|
Decrease in valuation allowance |
$ 72,000
|
$ (122,000)
|
Provision for income taxes, net |
|
|
Percent |
|
|
Income tax expense at federal statutory rate (in percent) |
34.00%
|
34.00%
|
Change in estimate (in percent) |
15.00%
|
(7.00%)
|
Non-deductible expenses (in percent) |
|
9.00%
|
Decrease in valuation allowance (in percent) |
19.00%
|
(36.00%)
|
Provision for income taxes, net (in percent) |
|
|
v3.3.1.900
INCOME TAXES (Detail Textuals) - USD ($)
|
12 Months Ended |
154 Months Ended |
|
Sep. 30, 2015 |
Sep. 30, 2014 |
Sep. 30, 2015 |
Dec. 11, 2002 |
Income Tax Disclosure [Abstract] |
|
|
|
|
Net operating losses |
|
|
$ 7,250,000
|
|
Net operating losses available to offset future taxable income |
$ 6,500,000
|
|
$ 6,500,000
|
$ 424,000
|
Decrease in amount of valuation allowance attributable to deferred tax assets |
$ 72,000
|
$ (122,000)
|
|
|
X |
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v3.3.1.900
STOCKHOLDERS' DEFICIT - Summary of outstanding stock warrants (Details 1) - Warrant
|
12 Months Ended |
Sep. 30, 2015
$ / Warrant
shares
|
Sep. 30, 2014
$ / Warrant
shares
|
Number of Shares |
|
|
Warrants/Options | shares |
700,000
|
1,450,000
|
New Issue | shares |
100,000
|
600,000
|
Forfeited | shares |
(100,000)
|
(1,350,000)
|
Warrants/Options | shares |
700,000
|
700,000
|
Exercise Price |
|
|
New issue |
0.10
|
|
Forfeited |
0.10
|
|
Weighted Average Price |
|
|
Warrants |
0.095
|
0.052
|
New issue |
0.10
|
0.095
|
Forfeited |
0.10
|
0.052
|
Warrants |
0.095
|
0.095
|
Minimum |
|
|
Exercise Price |
|
|
Warrants/Options |
0.092
|
0.05
|
New issue |
|
0.092
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Forfeited |
|
0.05
|
Warrants/Options |
0.092
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0.092
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0.10
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0.10
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v3.3.1.900
STOCKHOLDERS' DEFICIT - Summary of outstanding warrants (Details 2) - Warrant
|
12 Months Ended |
Sep. 30, 2015
$ / shares
shares
|
Expiration Date January 1, 2016 |
|
Class of Warrant or Right [Line Items] |
|
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50,000
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$ 0.10
|
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3 months
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50,000
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$ 0.10
|
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9 months
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|
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50,000
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$ 0.10
|
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1 year 3 months
|
Expiration Date March 31, 2017 |
|
Class of Warrant or Right [Line Items] |
|
Number of shares | shares |
500,000
|
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$ 0.0926
|
Remaining life (Years) |
1 year 6 months
|
Expiration Date July 1, 2017 |
|
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50,000
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v3.3.1.900
STOCKHOLDERS' DEFICIT (Detail Textuals) - $ / shares
|
1 Months Ended |
|
|
Feb. 25, 2014 |
Sep. 30, 2015 |
Sep. 30, 2014 |
Class of Stock [Line Items] |
|
|
|
Preferred stock, shares authorized |
|
1,000,000
|
1,000,000
|
Preferred stock, no par value (in dollars per share) |
|
$ 0
|
$ 0
|
Preferred stock, shares issued |
|
0
|
0
|
Preferred stock, shares outstanding |
|
0
|
0
|
Common stock, no par value (in dollars per share) |
|
$ 0
|
$ 0
|
Common stock, shares authorized |
|
250,000,000
|
250,000,000
|
Common stock, shares issued |
|
48,053,084
|
48,053,084
|
Common stock, shares outstanding |
|
48,053,084
|
48,053,084
|
Mr.William Shrewsbury | Stock options |
|
|
|
Class of Stock [Line Items] |
|
|
|
Exercise price |
$ 0.0924
|
|
|
Number of option issued |
500,000
|
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v3.3.1.900
RELATED PARTY TRANSACTIONS - Summary of advances from stockholder/officer (Details) - USD ($)
|
12 Months Ended |
Sep. 30, 2015 |
Sep. 30, 2014 |
Advances From Related Party [Roll Forward] |
|
|
Beginning Balance |
$ 43,337
|
$ 499,583
|
Proceeds from Stockholder/Officer advances |
127,300
|
34,450
|
Warehouse rental from officer/stockholder |
|
18,000
|
Repayment of stockholder advances |
(46,000)
|
(122,850)
|
Transfer to consolidated note |
|
(385,846)
|
Ending Balance |
$ 124,637
|
$ 43,337
|
X |
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v3.3.1.900
RELATED PARTY TRANSACTIONS (Detail Textuals)
|
1 Months Ended |
|
|
|
May. 30, 2012
USD ($)
|
Jan. 28, 2011
USD ($)
a
|
Nov. 30, 2006
a
|
Sep. 30, 2015
USD ($)
|
Sep. 30, 2014
USD ($)
|
Mar. 25, 2014
USD ($)
|
Related Party Transaction [Line Items] |
|
|
|
|
|
|
Amount of note receivable balance |
|
|
|
$ 29.983
|
$ 31,289
|
|
Purchase and sale agreement related to Park's lease | Masada Oil and Gas Inc |
|
|
|
|
|
|
Related Party Transaction [Line Items] |
|
|
|
|
|
|
Percentage of working interest owned |
|
|
75.00%
|
|
|
|
Area of lease covered | a |
|
|
320
|
|
|
|
Percentage of remaining working interest |
|
|
25.00%
|
|
|
|
Percentage of lease owners liability in park's lease |
100.00%
|
|
|
|
|
|
Value of interest sold on park lease |
$ 80,000
|
|
|
|
|
|
Down payment received |
40,000
|
|
|
|
|
|
Amount of note receivable balance |
$ 40,000
|
|
|
|
|
|
Asset sold under lease |
|
|
|
|
|
$ 18,000
|
Contract Area - 1 lease | Masada Oil and Gas Inc |
|
|
|
|
|
|
Related Party Transaction [Line Items] |
|
|
|
|
|
|
Area of land acquired in park's lease | a |
|
2
|
|
|
|
|
Percentage of relinquished working interest |
|
8.50%
|
|
|
|
|
Lease paid |
|
$ 10,400
|
|
|
|
|
Amount of lease owners liability |
|
$ 17,000
|
|
|
|
|
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- DefinitionThis element represents amount of lease owners liability.
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v3.3.1.900
RELATED PARTY TRANSACTIONS (Detail Textuals 1) - USD ($)
|
1 Months Ended |
12 Months Ended |
|
|
Feb. 25, 2014 |
Jan. 31, 2014 |
Sep. 30, 2015 |
Sep. 30, 2014 |
Mar. 25, 2014 |
Sep. 30, 2013 |
Related Party Transaction [Line Items] |
|
|
|
|
|
|
Advances from officer (Note 7) |
|
|
$ 124,637
|
$ 43,337
|
|
$ 499,583
|
Interest expense |
|
|
125,708
|
99,316
|
|
|
Note payable interest expense |
|
|
159,452
|
59,452
|
|
|
Mr.William Shrewsbury |
|
|
|
|
|
|
Related Party Transaction [Line Items] |
|
|
|
|
|
|
Advances from officer (Note 7) |
|
|
$ 124,637
|
$ 43,337
|
|
|
Proceeds from keyman insurance policy |
$ 2,000,000
|
|
|
|
|
|
Revolving promissory note payable | Mr.William Shrewsbury |
|
|
|
|
|
|
Related Party Transaction [Line Items] |
|
|
|
|
|
|
Convertible promissory note issued |
|
$ 1,062,000
|
|
|
|
|
Unpaid interest due |
|
168,905
|
|
|
|
|
Outstanding amount non interest bearing promissory notes |
|
385,846
|
|
|
|
|
Consolidated notes payable | Mr.William Shrewsbury |
|
|
|
|
|
|
Related Party Transaction [Line Items] |
|
|
|
|
|
|
Convertible promissory note issued |
$ 2,000,000
|
|
|
|
$ 2,000,000
|
|
Debt instrument prime interest rate |
5.00%
|
|
|
|
|
|
10% Promissory Note | Mr.William Shrewsbury |
|
|
|
|
|
|
Related Party Transaction [Line Items] |
|
|
|
|
|
|
Convertible promissory note issued |
|
$ 289,997
|
|
|
|
|
Interest rate of note payable |
|
10.00%
|
|
|
|
|
Unpaid interest due |
|
$ 93,252
|
|
|
|
|
X |
- DefinitionRepresent prime interest rate on note.
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v3.3.1.900
RELATED PARTY TRANSACTIONS (Detail Textuals 2) - USD ($)
|
|
12 Months Ended |
23 Months Ended |
|
Sep. 02, 2014 |
Sep. 30, 2015 |
Sep. 30, 2014 |
Aug. 31, 2014 |
Sep. 30, 2013 |
Related Party Transaction [Line Items] |
|
|
|
|
|
Freight expenses paid |
|
$ 62,975
|
$ 65,280
|
|
|
Commission paid for transportation services |
|
31,423
|
11,745
|
|
|
Accrued but unpaid lease payments |
|
451,743
|
451,743
|
|
|
Advances from stockholders/officers |
|
$ 124,637
|
43,337
|
|
$ 499,583
|
Transfer to consolidated note |
|
|
$ (385,846)
|
|
|
Lease agreement | William Shrewsbury and Peggy Shrewsbury |
|
|
|
|
|
Related Party Transaction [Line Items] |
|
|
|
|
|
Term of lease agreement |
|
|
|
2 years
|
|
Additional extension in term of lease contract |
2 years
|
|
|
|
|
Lease rental payment on first of each month |
$ 2,000
|
|
|
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v3.3.1.900
CONCENTRATION OF RISKS - Summary of customer concentration (Details) - Customer Concentration Risk
|
12 Months Ended |
Sep. 30, 2015 |
Sep. 30, 2014 |
Percentage of Sales | Customer A |
|
|
|
|
Concentration Risk [Line Items] |
|
|
|
|
Customer concentration, percentage |
[1] |
23.00%
|
21.00%
|
|
Percentage of Sales | Customer B |
|
|
|
|
Concentration Risk [Line Items] |
|
|
|
|
Customer concentration, percentage |
[1] |
16.00%
|
14.00%
|
|
Percentage of Sales | Customer C |
|
|
|
|
Concentration Risk [Line Items] |
|
|
|
|
Customer concentration, percentage |
[1] |
10.00%
|
|
[2] |
Percentage of Sales | Customer D |
|
|
|
|
Concentration Risk [Line Items] |
|
|
|
|
Customer concentration, percentage |
[1] |
10.00%
|
|
[2] |
Percentage of Sales | Customer E |
|
|
|
|
Concentration Risk [Line Items] |
|
|
|
|
Customer concentration, percentage |
[1] |
9.00%
|
|
[2] |
Percentage of Accounts Receivable, trade | Customer A |
|
|
|
|
Concentration Risk [Line Items] |
|
|
|
|
Customer concentration, percentage |
[1] |
21.00%
|
18.00%
|
|
Percentage of Accounts Receivable, trade | Customer B |
|
|
|
|
Concentration Risk [Line Items] |
|
|
|
|
Customer concentration, percentage |
[1] |
7.00%
|
8.00%
|
|
Percentage of Accounts Receivable, trade | Customer C |
|
|
|
|
Concentration Risk [Line Items] |
|
|
|
|
Customer concentration, percentage |
[1] |
24.00%
|
|
[2] |
Percentage of Accounts Receivable, trade | Customer D |
|
|
|
|
Concentration Risk [Line Items] |
|
|
|
|
Customer concentration, percentage |
[1] |
5.00%
|
|
[2] |
Percentage of Accounts Receivable, trade | Customer E |
|
|
|
|
Concentration Risk [Line Items] |
|
|
|
|
Customer concentration, percentage |
[1] |
21.00%
|
|
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|
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