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
,
consolidated
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., and its subsidiaries.
Th
e discussion and analysis contained in this Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is based upon our consolidated financial statements which have been prepared in accordance with generally accepted accounting principles in the United States (GAAP).
The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. . On an on-going basis, we evaluate our critical accounting policies and estimates, including those related to revenue recognition, intangible assets, and contingencies. We base our estimates on historical experience, where available, and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions and conditions.
Except for historical information, the statements and other information contained in this
MD&A are forward-looking. Our actual results could differ materially from the results discussed in the forward-looking statements, which include certain risks and uncertainties.
Our independent registered public accounting firm
’s report on our financial statements for the years ended September 30, 2017 and September 30, 2016, 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.
Please refer to and carefully consider the factors described in
the Risk Factors section in this report.
Business and Operational
Overview
We are
in the business of supplying, distributing and selling drill bits, related tools, and other mining supplies, rail and rail material directly and through other suppliers to United States’ coal mining companies for use in their production and transportation processes. Our coal mining customers are primarily located in Ohio, Pennsylvania, Kentucky and West Virginia. Our principal executive offices and warehousing facility is located in Ashland, Kentucky. 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 one independent sales agent who are compensated on a commission basis.
Recent Developments in U.S.
Coal Industry
Due to declining U.S. coal production and bankruptcies and restructurings among
certain U.S. coal companies, we experienced a reduction in demand for our mining and rail products during fiscal 2015 and 2016 and the first quarter of fiscal 2017. The demand for, and production of, coal had been adversely affected by several factors, including increased environmental regulation in the U.S., declining coal consumption in the electric power sector, increased competition from natural gas, and a strong U.S. dollar.
The U.S. Energy Information Administration (EIA) reported in its
Short-Term Energy Outlook
(STEO) released October 11, 2017, that it expects the share of U.S. total utility-scale electricity generation from natural gas to fall from 34% in 2016 to about 31% in 2017 as a result of higher natural gas prices and increased electricity generation from renewables and coal. In 2018, natural gas’s generation share is expected to rise to 32%. Coal's forecast generation share rose from 30% last year to 31% in 2017 and is expected to stay at that level in 2018.
Coal production for the first n
ine months of 2017 was 591 MMst, 62 MMst (12%) higher than in the same period in 2016. Coal production is expected to increase by 8% in 2017 and by less than 1% in 2018.
As discussed below, we believe we are beginning to see the impact of such increased production in increased sales of our mining and rail products, particularly in the
three most recent fiscal quarters.
Low natural gas prices, warmer-than-normal temperatures during the 2015-16 winter that reduced electricity demand, the retirements of some coal-fired generators, and lower international coal demand had contributed to declining U.S. coal production.
As a result, several major U.S. coal producers sought protection under bankruptcy laws or engaged in restructurings of their businesses and operations, and certain plants closed or were
, or are
, being sold or operations curtailed.
Continued distress in the U.S. coal mining industry will materially affect the dem
and for our products.
Our Business
We purchase mining supplies
such as drill bits, augurs and related products from domestic as well as overseas manufacturers and rail material such as tee rail, switches, ties and other rail products from several suppliers of such products and distribute and sell such products to U.S. coal mining companies and other suppliers
. Our products are either shipped to our warehouse in Ashland, Kentucky, for distribution to our customers or shipped directly to our customers, including products we import once they have been received by us at a port and cleared customs. Our products are transported primarily by ground transportation to our customers. Shipping costs are born by our customers.
We distribute and sell our products
through an independent sales agent who is compensated on a commission basis.
We were incorporated in the State of Georgia in 2000
.
Results of Operations
Our revenues
for the year ended September 30, 2017, were $3,006,599 as compared to $2,128,278 for 2016
.
Gross profit in the year increased by 163% when compared to 2016
We
had a net loss of $124,506 in fiscal 2017 compared to a net loss of $678,719 in 2016. The year ended September 30, 2017, is the third fiscal year in which we have reported a net loss after two previously profitable years. The current year loss is a direct result of lower sales during the first fiscal quarter of 2017 due to an operational decline in the U.S. coal mining industry. Also, we wrote off an aggregate of $144,726 in inventory in connection with the discontinuance of our Bag Rack operations which was offset by the reversal of an inventory reserve we recorded in the prior year.
Liquidity and Capital Resources
At September 30,
2017, we had cash and cash equivalents of $40,345 compared to cash and cash equivalents of $3,062 at September 30, 2016
an increase of $37,283.
Net cash
provided in operating activities was $258,040 during the year ended September 30, 2017, comparing favorably to net cash used in operating activities of $82,165 in 2016.
There was no cash flow
from investing activities for either 2017 or 2016.
C
ash used in financing activities during the current year was $220,757 as compared to cash provided in financing activities of $23,663 in 2016. The current year cash used in financing activities resulted from stockholder’s net advances repayment of $164,650 and a repayment of our term loan of $56,107. During 2016, cash provided by stockholder’s net advances was $74,000 and cash repayment of our term loan was $50,337.
Mr. William Shrewsbury, our Chairman and CEO,
has provided financing in the form of a consolidated promissory note in the amount of $2,000,000 (“Consolidated Note”) on which we have accrued interest of $359,726
, and the principal and interest under the Consolidated Note is due February 24, 2024 The principal bears interest at the rate of 5% per annum or prime rate if higher than 5% per annum, and is subject to certain events of default. The Consolidated Note is secured
or otherwise payable by us out of the death benefit proceeds of key man insurance of $2 million that has been purchased by us on the life of Mr. Shrewsbury. As of September 30, 2017, Mr. Shrewsbury had also provided non-interest
-bearing advances to us of $33,987
.
In November
, 2012, we obtained a bank line of credit of $250,000 which was subsequently increased to $750,000. The line of credit was secured by a lien on our inventory and accounts receivable and guaranteed by Mr. Shrewsbury.
On December 3, 2015, we entered into a new loan agreement with a bank under which we obtained a term loan in the amount of $711,376. We utilized proceeds of the new loan to repay our line of credit. The new loan is for a term of five years and matures on December 3, 2020. Interest under the new loan is variable and is based upon the Wall Street Journal Prime rate, currently 4.25
% per annum.
O
ur indebtedness to Mr. Shrewsbury is subordinated to the new bank loan. During the current year, we repaid $56,107 leaving an outstanding balance of $606,005 under the new 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.
Results of Operations
Year Ended September 30,
20
1
7
Compared w
ith Year Ended September 30,
20
1
6
Revenues from Operations
Revenue
s for 2017 and 2016 were $3,006,599 and $2,128,278, respectively, an increase for 2017 of $878,321 or approximately 41.3%. The increase in revenue in 2017 resulted from higher sales as U.S. coal mine operators began ramping-up operations and opening new, or re-opening previously closed, mines to meet the higher demand for coal during the last three fiscal quarters of 2017.
Cost of Goods Sold
During 201
7, cost of goods sold was $2,273,214 as compared to cost of goods sold of $1,849,289 for 2016, an increase of $423,925 or 22.9%. The increase in cost of goods is solely related to the increase in sales over the prior year. Cost of goods sold as a percentage of sales decreased from 86.9% in 2016 to 75.69% in 2017 as a result of the inventory reserve recorded in 2016.
Gross Profit
Gross profit for 201
7 was $733,385, an increase of $454,395 or 162.9% when compared to 2016. The higher gross profit is the result of higher revenue during 2017 from higher sales due to increase in production in the coal industry and a $275,000 reserve for inventory obsolescence recorded in 2016.
Operating Expense
s
The Company incurred operating expenses of
$742,941 in 2017, as compared to $837,209 during 2016, a decrease of $94,268 or approximately 11.3%. As a percentage of revenue, operating expenses decreased from 39.3% in 2016 to 24.7% in 2017. The decrease is attributed to the impact of our fixed operating expenses while generating higher revenue during 2017.
The
following table details the components of operating expenses, as well as the dollar and percentage changes for the year end periods.
|
|
Twelve Months Ended
|
|
|
|
9/30/201
7
|
|
|
9/30/201
6
|
|
|
$ Change
|
|
|
%Change
|
|
Operating Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commission expense
|
|
$
|
149,884
|
|
|
$
|
101,627
|
|
|
$
|
48,257
|
|
|
|
47.5
|
|
Professional fees
|
|
|
16,739
|
|
|
|
62,788
|
|
|
|
(46,049
|
)
|
|
|
(73.3
|
)
|
Bad debt expense
|
|
|
6,936
|
|
|
|
169,958
|
|
|
|
(163,022
|
)
|
|
|
(95.9
|
)
|
Depreciation expense
|
|
|
9,799
|
|
|
|
9,796
|
|
|
|
3
|
|
|
|
0.0
|
|
Other operating expense
|
|
|
559,583
|
|
|
|
493,040
|
|
|
|
66,543
|
|
|
|
13.5
|
|
Total
|
|
$
|
742,941
|
|
|
$
|
837,209
|
|
|
$
|
(94,268
|
)
|
|
|
(11.3
|
)
|
Commission expense for the year ended September 30, 201
7 was $149,884 compared to $101,627 for the same period in 2016, an increase of $48,257 or 47.5%. The higher commission, during the year ended September 30, 2017, is a direct result of the increased sales resulting from operational increase in the domestic coal mining industry. As a percentage of revenue, commission expense increased from 4.8% in 2016 to 5.0% in 2017.
P
rofessional fees decreased $46,049 or 73.3% for the year ended September 30, 2017, as compared to the prior year. The lower expenses were the result of lower legal expenses of $32,416 and lower advertising expense of $13,633. During 2016, the Company incurred additional advertising expenses in connection with the acquisition of The Bag Rack business.
Bad debt expense
decreased $163,022 or 95.9% for the twelve months ended September 30, 2017, as compared to the prior year. Bad debt reserve recorded for three customers and an advance to a supplier write-off in 2016 accounted for the expense decrease.
Depreciation expenses
increased $3 in 2017 as compared to 2016.
For the
year ended September 30, 2017, other operating expenses were $559,583, an increase of $66,543 or 13.5% from the $493.040 incurred during 2016. The higher operating expenses resulted from the write-off of the Bag Rack inventory ($144,726) partially offset by lower compensation ($60,658) and lower Board fees ($24,000). The Bag rack inventory write-off results from management decision to exit the business as product sales did not materialize.
Loss
from O
perations
For
2017, we had a loss from operations of $9,556 as compared to a loss of $558,220 in 2016. The decrease of $548,664 resulted from a reserve for inventory obsolescence of $275,000 and an increase in bad debt reserve of $156,315 recorded in 2016 and, higher profit from higher sales in 2017.
Other Income and (
E
xpense)
Other
expense was $114,190 in 2017 as compared to $120,499 in 2016, a decrease of $5,549. The decrease resulted from lower interest expense associated with the term loan of $3,179 and higher scrap sales of $2,370 than in 2016.
Net Loss
.
During
2017 the Company had a net loss of $124,506 compared to a net loss of $678,719 for 2016, representing a net loss decrease of $554,213. The decrease resulted from an inventory reserve of $275,000 and a bad reserve of $156,315 recorded in 2016. Higher sales resulting in higher profits during the current year account for the remaining loss reduction.
Net Loss Per
Common
Share
N
et earnings per share (basic and diluted) as a result of the net loss remains a negative $0.00 in 2017, compared to a negative $0.01in the prior year.
Net Operating Loss Carry F
orward for Tax Purposes
As of September 30, 201
7, the Company had tax net operating loss carry forwards totaling approximately $8,110,000, which expire in 2018 through 2036. 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
|
|
Liquidity and capital resources
|
|
9/30/2017
|
|
|
9/30/2016
|
|
Net cash provided /(used) in operating activities
|
|
$
|
258,040
|
|
|
$
|
(82,165
|
)
|
Net cash provided/(used) in investing activities
|
|
_
|
|
|
_
|
|
Net cash provided/(used) in financing activities
|
|
|
(220,757
|
)
|
|
|
23,663
|
|
Net increase/(decrease) in cash equivalents
|
|
$
|
37,283
|
|
|
$
|
(58,502
|
)
|
At September 30,
2017, the Company had cash and cash equivalents of $40,345 compared to cash and cash equivalents of $3,062 at September 30, 2016 an increase of $37,283. The increase in cash is the direct result of the net cash provided in operating activities of $258,040 partially offset by a net repayment of officer advances of $164,650 and a $56,107 repayment of our term loan.
Cash
Flows
U
sed
in
Operating Activities
Cash
provided in operating activities during 2017 was $258,040 as compared to cash used in operating activities of $82,165 during 2016.
During the year ended September 30, 201
7, the Company incurred a net loss of $124,506.
A decrease in
inventory (current and non-current) of $415,668, decrease in commission advances of $46,070 and an increase in accrued liabilities of $46,891 during 2017 were offset by an increase in accounts receivable of $116,094 and a reversal of of the allowance for doubtful accounts of $113,643. The decrease in inventory is associated with management’s decision to reduce inventory levels of the mine related products and the Bag Rack Inventory write-off of $144,726.
Accounts receivable
increased by $116,094 compared to a decrease of $179,683 during 2016. The receivable increase is the result of a 29.2% increase in sales over the prior year.
Accrued liabilities as of September
30, 2017, increased by $46,891, accrued interest on a loan due to Mr. Shrewsbury account for the current year increase.
Accounts payable decreased $
29,686 in 2017 compared to a $321,489 increase in the prior year. The decrease is the result of lower purchases of inventory and higher payments of vendors’ outstanding payables.
Cash Flows Used in Investing Activities
There w
ere no investing activities during 2017 or 2016.
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 current year, the Company wrote-off the balance of $29,983 which was deemed uncollectible.
Cash Flows Provided
/(used) in
Financing Activities
During 201
7, cash used in financing activities was $220,757 as compared to cash provided in financing activities of $23,663 during 2016. During 2017, the Company repaid $56,107 on the outstanding term loan and repaid stockholder/officer’s net advances of $164,650. In 2016 the Company repaid $50,337 on the term loan and received net advances from our CEO of $74,000.
The Company primary sources of financing during 201
7 was the cash generated from its operations, as compared to 2016 where the primary source was the advances received from our CEO.
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 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 4.25% 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. As of September 30, 2017 the term loan balance is $606,005.
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 and issued in replacement a Secured Consolidated Note (“Consolidated Note”) for such amount. The Consolidated Note bears interest at 5% per annum or prime rate if higher than 5% per annum, principal and interest are repayable ten years from February 25, 2014, 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 201
7, the Company received $111,150 in cash advances from Mr. Shrewsbury and repaid $275,800, bringing the total outstanding advance balance to $33,987. Cash advances from Mr. Shrewsbury are repayable upon demand and do not bear interest.
Property and Equipment, net, was $
46,980 as of September 30, 2017 compared to $56,779 as of September 30, 2016. Delivery equipment depreciation recorded in the current year accounts for the reduction in Property and Equipment.
As of September 30, 201
7, the Company had accrued and unpaid an amount of $416,179 due to Jose Fuentes, CFO, as payment for past services.
Financial Condition and Going Concern Uncertainties
Since inception, e
xcept for the six consecutive quarters ended June 30, 2014, we have not generated sufficient cash to fund its operations and has incurred operating losses. During the current year, the Company generated sufficient cash to cover its operating cash needs and repay $164,650 of our CEO advances. Currently, in addition to our operating cash flow, the Company will continue to rely substantially upon financing provided by Mr. Shrewsbury, our CEO, and secured bank indebtedness to fund its operations. In view of these matters, realization of certain assets in the accompanying balance sheet is dependent upon continued operations, which in turn, is dependent on our ability to meet our financial requirements, upon the continued provision of financing by Mr. Shrewsbury and under the Company’s term loan, 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, 2017, 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 to become our stockholder.
As of
September 30, 2017, the Company had cash and cash equivalents of $40,345 as compared to $3,062 as of September 30, 2016. The $37,283 increase in cash resulted from the Company’s cash generated from operations partially offset by repayment of the bank term loan of $56,107 and a $164,650 net repayment of officer’s advances.
The Comp
any’s accounts receivable were $458,203 as of September 30, 2017, as compared to $235,402 as of September 30, 2016, an increase of $222,801 or 94.7%. The increase resulted from a 41% increase in sales in the current year and a $100,000 bad debt reserve recorded in 2016.
Inventory
(current and non-current) was $1,690,350 as of September 30, 2017 as compared to $1,806.018 as of September 30, 2016, a decrease of $115,660 or 6.4%. The inventory reduction is the direct result of a $144,726 inventory write-off of the Bag Rack inventory. The Bag Rack’s inventory write-off was offset against a $275,000 inventory reserve for obsolescence recorded in the prior year.
During 201
7, our stockholders’ deficit increased from $15,431,430, in the prior year to $15,555,936, an increase of $124,506 or 0.8%. The net loss for the year ended September 30, 2017 accounts for the increase in stockholders’ deficit.
During the year ended September 30, 201
7, the Company’s net loss was $124,506 compared to a net loss of $678,719 for 2016 representing a loss decrease of $554,213. The decrease can be directly attributed to higher sales of $878,321 during the current period resulting from operational upturn in the coal mining industry, an inventory reserve of $275,000 for inventory obsolescence and, an increase in bad debt reserve of $100,000 recorded in the prior year.
Currently,
in addition to funds utilized to purchase inventory, the Company is spending approximately $60,000 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 Squ
are Bank. Interest on the loan was payable monthly in arrears. Interest under the loan was variable and 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 loan or perform its obligation under the loan 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 4.25% 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, our Chairman and CEO, provided financing to us in the form of demand notes and advances. On February 25, 2014, we entered into a Note Exchange Agreement (“Exchange Agreement”) with Mr. Shrewsbury pursuant to which an aggregate of $2,000,000 in indebtedness due to Mr. Shrewsbury was consolidated and restructured and issued in exchange for such indebtedness a Consolidated Secured Promissory Note (the “Consolidated Note) in the principal amount of $2,000,000.
The principal and interest under the Consolidated Note is due and payable ten years from the date of issuance and is to be secured by the proceeds of key man 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.
As of September 30, 2017, accrued interest on the note was $359,726
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 the indebtedness, the Company granted to Mr. Shrewsbury options to purchase an aggregate of 500,000 shares of the Company
’s common stock issued February 25, 2014. The options became exercisable on April 1, 2014, and expired on March 31, 2017. The options were 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, 201
7, Mr. Shrewsbury had advanced an aggregate of $33,987 to the Company. The advances do not bear interest and are repayable upon demand. At September 30, 2017, the Company also has a payable of $60,000 to Mr. Shrewsbury for warehouse storage rental.
The
Consolidated Note and advances are subordinate to the Company’s bank indebtedness.
RECENTLY ISSUED ACCOUNTING STANDARDS
In May 2014, the FASB issued ASU NO.2014-09,
Revenue from Contracts with Customers
(Topic 606). This standard provides a single set of guidelines for revenue recognition to be used across all industries and requires additional disclosures. It is effective for annual and interim reporting periods beginning after December 15, 2017. This standard permits early adoption, but not before December 15, 2016, and permits the use of either a retrospective or cumulative effect transition method. We are currently evaluating the potential impact of this standard on our financial position and results of operations, as well as our selected transition method. Based on our preliminary assessment, we believe the new standard will not have a material impact on our financial position and results of operations, as we do not expect to change the manner or timing of recognizing revenue on a majority of our revenue transactions. We recognize revenue on sales to customers and distributors upon satisfaction of our performance obligations when the goods are shipped. For consignment sales, we recognize revenue when the goods are pulled from consignment inventory.
In February 2016, the FASB issued ASU No. 2016-02,
Leases
(Topic 842). The standard require all leases that have a term of over 12 months to be recognized on the balance sheet with the liability for lease payments and the corresponding right-of-use asset initially measured at the present value of amounts expected to be paid over the term. Recognition of the costs of these leases on the income statement will be dependent upon their classification as either an operating or a financing lease. Costs of an operating lease will continue to be recognized as a single operating expense on a straight-line basis over the lease term. Costs for a financing lease will be disaggregated and recognized as both an operating expense (for the amortization of the right-of-use asset) and interest expense (for interest on the lease liability). This standard will be effective for our interim and annual periods beginning January 1, 2019, and must be applied on a modified retrospective basis to leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. Early adoption permitted. We are currently evaluating the timing of adoption and the potential impact of this standard on our financial position, but we do not expect it to have a material impact on our results of operations.
ITEM 8
.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's
consolidated balance sheets as of September 30, 2017 and 2016 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, 20
1
7
and 20
1
6
|
|
|
|
|
|
Page(s)
|
|
|
Report
of Independent Registered Public Accounting Firm
|
2
7
|
|
|
Audited Financial Statements:
|
|
|
|
|
Consolidated
Balance Sheets at September 30, 2017 and 2016
|
28
|
|
|
|
|
Consolidated
Statements of Operations for the years ended September 30, 2017 and 2016
|
29
|
|
|
|
Consolidated
Statements of Changes In Stockholders' Deficit for the years ended
September 30, 201
7 and 2016
|
30
|
|
|
|
Consolidated
Statements of Cash Flows for the years ended September 30, 2017 and 2016
|
3
1
|
|
|
|
|
Notes to
Consolidated Financial Statements
|
32
|
Report of Independent Registered Public Accounting Firm
Board of Directors and Stockholders
TX Holdings, Inc.
Ashland, Kentucky
We have audited the accompanying consolidated balance sheets of TX Holdings, Inc. (the “Company”) at September 30, 2017 and 2016 and the related consolidated statements of operations, changes in stockholders
’ deficit and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated 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 consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of TX Holdings, Inc. as of September 30, 2017 and 2016, and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has not generated sufficient cash to fund its operations and continues to rely substantially upon financing provided by a stockholder, 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 consolidated financial statements do not include any adjustments that may result from the outcome of these uncertainties.
/s/ Turner, Stone & Company, L.L.P.
Dallas, Texas
December 15, 2017
PART 1-FINANCIAL INFORMATION
|
Item 1-Financial Statements
|
TX HOLDINGS, INC.
|
CONSOLIDATED BALANCE SHEETS
|
September 30, 2017 and 2016
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
40,345
|
|
|
$
|
3,062
|
|
Accounts receivable, net of allowance for doubtful
accounts of $ 0 at September 30, 2017 and $113,643 at September 30, 2016
|
|
|
458,203
|
|
|
|
235,402
|
|
Inventory
|
|
|
1,690,350
|
|
|
|
1,806,018
|
|
Commission advances
|
|
|
22,648
|
|
|
|
68,718
|
|
Note receivable-current
|
|
|
–
|
|
|
|
10,000
|
|
Other current assets
|
|
|
2,886
|
|
|
|
136
|
|
Total current assets
|
|
|
2,214,432
|
|
|
|
2,123,336
|
|
|
|
|
|
|
|
|
|
|
Inventory, non-current
|
|
|
–
|
|
|
|
300,000
|
|
Property and equipment, net
|
|
|
46,980
|
|
|
|
56,779
|
|
Note receivable, less current portion
|
|
|
–
|
|
|
|
19,983
|
|
Other
|
|
|
500
|
|
|
|
500
|
|
Total Assets
|
|
$
|
2,261,912
|
|
|
$
|
2,500,598
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' DEFICIT
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accrued liabilities
|
|
$
|
548,218
|
|
|
$
|
571,327
|
|
Accounts payable
|
|
|
654,773
|
|
|
|
625,087
|
|
Accrued interest
|
|
|
359,726
|
|
|
|
259,726
|
|
Advances from officer
|
|
|
33,987
|
|
|
|
198,637
|
|
Bank-Term Loan
|
|
|
606,005
|
|
|
|
662,112
|
|
Total current liabilities
|
|
|
2,202,709
|
|
|
|
2,316,889
|
|
|
|
|
|
|
|
|
|
|
Note payable to officer
|
|
|
2,000,000
|
|
|
|
2,000,000
|
|
Total Liabilities
|
|
|
4,202,709
|
|
|
|
4,316,889
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders' deficit:
|
|
|
|
|
|
|
|
|
Preferred stock: no par value, 1,000,000 shares authorized
no shares outstanding
|
|
|
–
|
|
|
|
–
|
|
Common stock: no par value, 250,000,000 shares
authorized, 48,053,084 shares issued and outstanding
at September 30, 2017 and September 30, 2016
|
|
|
9,293,810
|
|
|
|
9,293,810
|
|
Additional paid-in capital
|
|
|
4,321,329
|
|
|
|
4,321,329
|
|
Accumulated deficit
|
|
|
(15,555,936
|
)
|
|
|
(15,431,430
|
)
|
Total stockholders' deficit
|
|
|
(1,940,797
|
)
|
|
|
(1,816,291
|
)
|
Total Liabilities and Stockholders' Deficit
|
|
$
|
2,261,912
|
|
|
$
|
2,500,598
|
|
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, 2017 and 2016
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
3,006,599
|
|
|
$
|
2,128,278
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold
|
|
|
(2,273,214
|
)
|
|
|
(1,849,289
|
)
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
733,385
|
|
|
|
278,989
|
|
|
|
|
|
|
|
|
|
|
Operating expenses, except items shown
separately below
|
|
|
559,583
|
|
|
|
493,040
|
|
Commission expense
|
|
|
149,884
|
|
|
|
101,627
|
|
Professional fees
|
|
|
16,739
|
|
|
|
62,788
|
|
Bad Debt Expense
|
|
|
6,936
|
|
|
|
169,958
|
|
Depreciation expense
|
|
|
9,799
|
|
|
|
9,796
|
|
Total operating expenses
|
|
|
742,941
|
|
|
|
837,209
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(9,556
|
)
|
|
|
(558,220
|
)
|
|
|
|
|
|
|
|
|
|
Other income and (expense):
|
|
|
|
|
|
|
|
|
Other income
|
|
|
11,038
|
|
|
|
8,668
|
|
Interest expense
|
|
|
(125,988
|
)
|
|
|
(129,167
|
)
|
|
|
|
|
|
|
|
|
|
Total other income and (expense), net
|
|
|
(114,950
|
)
|
|
|
(120,499
|
)
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(124,506
|
)
|
|
$
|
(678,719
|
)
|
|
|
|
|
|
|
|
|
|
Net loss per common share
|
|
|
|
|
|
|
|
|
Basic and Diluted
|
|
$
|
0.00
|
|
|
$
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
Weighted average of common shares
outstanding-
|
|
|
|
|
|
|
|
|
Basic and Diluted
|
|
|
48,053,084
|
|
|
|
48,053,084
|
|
The accompanying notes are an integral part of the consolidated financial statements.
|
TX HOLDINGS, INC.
|
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIT
|
For the Years Ended September 30, 2017 and 2016
|
|
|
Unaudited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
|
|
|
|
|
Preferred Stock
|
|
|
Common Stock
|
|
|
Paid in
|
|
|
Accumulated
|
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
September 30,2015
|
|
|
–
|
|
|
$
|
–
|
|
|
|
48,053,084
|
|
|
$
|
9,293,810
|
|
|
$
|
4,321,329
|
|
|
$
|
(14,752,711
|
)
|
|
$
|
(1,137,572
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(678,719
|
)
|
|
|
(678,719
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
September 30, 2016
|
|
|
–
|
|
|
$
|
–
|
|
|
|
48,053,084
|
|
|
$
|
9,293,810
|
|
|
$
|
4,321,329
|
|
|
$
|
(15,431,430
|
)
|
|
$
|
(1,816,291
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
(124,506
|
)
|
|
|
(124,506
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
September 30, 2017
|
|
|
–
|
|
|
$
|
–
|
|
|
|
48,053,084
|
|
|
$
|
9,293,810
|
|
|
$
|
4,321,329
|
|
|
$
|
(15,555,936
|
)
|
|
$
|
(1,940,797
|
)
|
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, 2017 and 2016
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
Cash flows provided/(used) in operating activities:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(124,506
|
)
|
|
$
|
(678,719
|
)
|
Adjustments to reconcile loss to net cash used
in operating activities:
|
|
|
|
|
|
|
|
|
Depreciation expense
|
|
|
9,799
|
|
|
|
9,796
|
|
Bad debt expense
|
|
|
6,936
|
|
|
|
169,958
|
|
Write-off of note receivable
|
|
|
29,983
|
|
|
|
26,000
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
|
(229,737
|
)
|
|
|
179,683
|
|
Inventory
|
|
|
415,668
|
|
|
|
417,019
|
|
Commission advances
|
|
|
46,070
|
|
|
|
(20,380
|
)
|
Other current assets
|
|
|
(2,750
|
)
|
|
|
1,538
|
|
Accrued liabilities
|
|
|
46,891
|
|
|
|
110,429
|
|
Accounts payable
|
|
|
29,686
|
|
|
|
(321,489
|
)
|
Stockholder/officers advances for operations
|
|
|
30,000
|
|
|
|
24,000
|
|
Net cash provided/(used) in operating activities
|
|
|
258,040
|
|
|
|
(82,165
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows provided/(used) in investing activities:
|
|
|
|
|
|
|
|
|
Net cash provided/(used) in investing activities
|
|
|
–
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
Cash flows provided/(used) in financing activities:
|
|
|
|
|
|
|
|
|
Repayment of bank term loan
|
|
|
(56,107
|
)
|
|
|
(50,337
|
)
|
Proceeds from stockholder/officer advances
|
|
|
111,150
|
|
|
|
187,200
|
|
Repayment of stockholder/officer advances
|
|
|
(275,800
|
)
|
|
|
(113,200
|
)
|
Net cash provided/(used) in financing activities
|
|
|
(220,757
|
)
|
|
|
23,663
|
|
|
|
|
|
|
|
|
|
|
Increase/(decrease) in cash and cash equivalents
|
|
|
37,283
|
|
|
|
(58,502
|
)
|
Cash and cash equivalents at beginning of period
|
|
|
3,062
|
|
|
|
61,564
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
40,345
|
|
|
$
|
3,062
|
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosure of Cash Flow Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the year for interest
|
|
$
|
25,988
|
|
|
$
|
129,167
|
|
|
|
|
|
|
|
|
|
|
Suppemental Schedule of Non-Cash investing and Financing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repayment of line of credit through issuance of bank term loan
|
|
$
|
–
|
|
|
$
|
711,376
|
|
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
. Our products are either shipped to our warehouse in Ashland, Kentucky, for distribution to our customers or shipped directly to our customers, including products we import once they have been received by us at a port and cleared customs. Our products are transported primarily by ground transportation to our customers. Shipping costs are born by our customers.
The Company was
incorporated in the State of Georgia on May 15, 2000
.
Rail and Mining Supplies Distribution Business
Commencing i
n 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 term loan.
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 were exercisable for a period of three years commencing April 1, 2014. The options were 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 options expired on March 31, 2017.
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 $33,987 at September 30, 2017, 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
was profitable during fiscal 2014 and 2013, the Company has not generated sufficient cash during succeeding years to fund its operations and relies substantially upon financing provided by Mr. Shrewsbury, the Company’s Chief Executive Officer, and a term loan that is guaranteed by Mr. Shrewsbury.
TX HOLDINGS
, INC.
|
|
NOTES TO
CONSOLIDATED
FINANCIAL STATEMENTS
|
|
NOTE 1- SUMMARY OF SIGNIFICANT ACCO
UNTING POLICIES AND ACTIVITIES-C
ontinued
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, 2017, and 2016 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. The Company will continue its on-going efforts to increase our customer base and seek lower cost suppliers to generate future operating profits.
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
e
xperience 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, 2017, 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
is $
0
at September 30, 2017 and $113,643 for 2016
.
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
The Company wrote-off two uncollectable customer
’s accounts in the amount of $1,115 and also wrote-off a note receivable in the amount of $29,983 during the current year. The note receivable had been issued in connection with the sale of an oil lease previously owned by the Company. During fiscal year 2016, the Company wrote-off two uncollectable customers’ accounts in the amount of $43,957 and increased the allowance for doubtful accounts by $100,000.
INVENTORY
The Company
’s inventory consists of mine and rail inventory. Inventory is stated at the lower of cost (first-in, first-out) or net realizable value
. During the prior year, the Company had 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 and recorded a $275,000 reserve for inventory obsolescence
.
PROPERTY AND EQUIPMENT
Property and e
quipment 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 F
inancial 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 t
he 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).
TX HOLDINGS, INC.
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
NOTE 1- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ACTIVITIES-Continued
POTENTIALLY DILUTIVE OPTIONS AND WARRANTS-Continued
At September 30, 201
7, the Company has outstanding 50,000 warrants which were not included in the twelve months ended September 30, 2017 calculation of diluted net loss per share since their inclusion will be antidilutive. Similarly, at September 30, 2016, the Company had 150,000 warrants and 500,000 options which were also not included in the 2016 calculation of diluted net loss per share since their inclusion will be antidilutive. The 500,000 options had been issued to an officer and expired in the current year, the 150,000 warrants were issued to a sales agent of which 50,000 warrants remain exercisable as of September 30, 2017.
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 Comp
any 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, 2017 and 2016. 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 2017 and 2016
.
|
|
20
1
7
|
|
|
20
1
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options and w
arrants issued as compensation
|
|
|
50,000
|
|
|
|
650,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
50,000
|
|
|
|
650,000
|
|
RECENTLY ISSUED ACCOUNTING STANDARDS
In May 2014, the FASB issued ASU NO.2014-09,
Revenue from Contracts with Customers
(Topic 606). This standard provides a single set of guidelines for revenue recognition to be used across all industries and requires additional disclosures. It is effective for annual and interim reporting periods beginning after December 15, 2017. This standard permits early adoption, but not before December 15, 2016, and permits the use of either a retrospective or cumulative effect transition method. We are currently evaluating the potential impact of this standard on our financial position and results of operations, as well as our selected transition method. Based on our preliminary assessment, we believe the new standard will not have a material impact on our financial position and results of operations, as we do not expect to change the manner or timing of recognizing revenue on a majority of our revenue transactions. We recognize revenue on sales to customers and distributors upon satisfaction of our performance obligations when the goods are shipped. For consignment sales, we recognize revenue when the goods are pulled from consignment inventory.
In February 2016, the FASB issued ASU No. 2016-02,
Leases
(Topic 842). The standard require all leases that have a term of over 12 months to be recognized on the balance sheet with the liability for lease payments and the corresponding right-of-use asset initially measured at the present value of amounts expected to be paid over the term. Recognition of the costs of these leases on the income statement will be dependent upon their classification as either an operating or a financing lease. Costs of an operating lease will continue to be recognized as a single operating expense on a straight-line basis over the lease term. Costs for a financing lease will be disaggregated and recognized as both an operating expense (for the amortization of the right-of-use asset) and interest expense (for interest on the lease liability). This standard will be effective for our interim and annual periods beginning January 1, 2019, and must be applied on a modified retrospective basis to leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. Early adoption permitted. We are currently evaluating the timing of adoption and the potential impact of this standard on our financial position, but we do not expect it to have a material impact on our results of operations.
NOTE 2 - PROPERTY AND EQUIPMENT
Property and equipment consists of the following at September 30, 201
7 and 2016:
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
Delivery truck/trailer
|
|
$
|
69,164
|
|
|
$
|
69,164
|
|
Other warehouse equipment
|
|
|
38,144
|
|
|
|
38,144
|
|
Less- accumulated depreciation
|
|
|
(60,328
|
)
|
|
|
(50,529
|
)
|
|
|
$
|
46,980
|
|
|
$
|
56,779
|
|
Depreciation expense of $9,799 and $9,796 were recognized during the years ended September 30, 2017 and 2016, 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 ha
d 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. Having experienced no sales to-date and no prospective of sales in the near future, the Company, in the current year, has written-off Bag Rack’s full inventory in the amount of $144,726
NOTE
4
- INCOME TAXES
The tax effects
of temporary differences that give rise to deferred taxes are as
follows at September 30, 2017 and 2016:
|
|
20
1
7
|
|
|
20
1
6
|
|
|
|
|
|
|
|
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Net operating losses
|
|
$
|
2,497,000
|
|
|
$
|
2,339,000
|
|
Accrued
expenses
|
|
|
155,000
|
|
|
|
170,000
|
|
Valuation allowance
|
|
|
(2,652,000
|
)
|
|
|
(2,509,000
|
)
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Basis of property and equipment
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset
|
|
$
|
-
|
|
|
$
|
-
|
|
N
et operating losses after December 12, 2002 through September 30, 2017 were approximately $8,110,000. The Company has total net operating losses available to the Company to offset future taxable income of approximately $7,334,000. Following is a reconciliation of the tax benefit at the federal statutory rate to the amount reported in the statement of operations:
|
|
20
1
7
|
|
|
20
1
6
|
|
|
|
Amount
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
Income tax expense at
federal statutory rate
|
|
$
|
(57.000
|
)
|
|
|
(34
|
%)
|
|
$
|
(134,000
|
)
|
|
|
(34
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in estimate
|
|
|
(101,000
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-deductible expenses
|
|
|
15,000
|
|
|
|
-
|
|
|
|
(3,000
|
)
|
|
|
(2
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase in valuation
allowance
|
|
|
143,000
|
|
|
|
34
|
%
|
|
|
72,000
|
|
|
|
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 by $42,000 and $137,000 during the years ended September 30, 2017 and 2016
.
The Company
has tax net operating loss carry forwards totaling approximately $8,110,000, expiring in 2018 through 2036. 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
P
REFERRED STOCK
The
Company is authorized to issue up to 1,000,000 shares of preferred stock, no par value. As of September 30, 2017 and 2016, there were no preferred shares issued and outstanding.
COMMON STOCK
Of the 250,000,000 shares of
common stock, no par value, authorized for issuance by the Company, 48,053,084 shares were issued and outstanding as of September 30, 2017 and 2016.
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
issuance are exercisable at a price of $0.10 per share, become exercisable upon issuance, and expire two years after the date issuable, the first tranche of 50,000 warrants were issuable effective July 1, 2012, and additional tranches of 50,000 were issuable every six months thereafter. As of September 30, 2017 there were 50,000 warrants issuable and exercisable and 350,000 warrants had expired. The warrants were not included in the calculation of diluted net earnings per share in 2017 and 2016 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 expired on March 31, 2017. The options were not included in the calculation of diluted earnings per share for the year ended September 30, 2017 or 2016 since their inclusion would be anti-dilutive.
The fair value of the equity based awards issued during the year ended September 30, 201
6 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, 2016. There were no stock options or warrants awarded during fiscal year 2017.
|
|
September 30,
|
|
|
September 30,
|
|
|
|
201
7
|
|
|
201
6
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected life (in years)
|
|
|
–
|
|
|
|
2
|
to
|
3
|
|
Expected volatility
|
|
|
–
|
|
|
|
|
75%
|
|
|
Risk-free interest rate
|
|
|
–
|
|
|
|
0.39%
|
to
|
2%
|
|
Expected dividend rat
e
|
|
|
–
|
|
|
|
|
0
|
|
|
Following is a summary of outstanding stock warrants
and options at September 30, 2017 and 2016 and activity during the years then ended:
|
|
Number
of
|
|
|
Exercise
|
|
|
Weighted
|
|
|
|
Shares
|
|
|
Price
|
|
|
Average Price
|
|
Warrants/Options at September 30, 201
5
|
|
|
700,000
|
|
|
$
|
0.092-0.10
|
|
|
$
|
0.095
|
|
New Issue
|
|
|
50,000
|
|
|
|
0.10
|
|
|
|
0.100
|
|
Forfeited
|
|
|
(100,000
|
)
|
|
|
0.1
|
|
|
|
0.100
|
|
Warrants/Options at September 30, 201
6
|
|
|
650,000
|
|
|
$
|
0.092-0.10
|
|
|
$
|
0.095
|
|
New Issue
|
|
|
0
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
(600,000
|
)
|
|
|
0.092-0.10
|
|
|
|
0.093
|
|
Warrants/Options at September 30, 201
7
|
|
|
50,000
|
|
|
$
|
0.10
|
|
|
$
|
0.100
|
|
A summary of outstanding warrants
and options at September 30, 2017, follows:
|
|
Number
|
|
|
|
|
|
|
Remaining
|
|
|
|
of
|
|
|
Exercise
|
|
|
Life
|
|
Expiration Date
|
|
Shares
|
|
|
Price
|
|
|
(Years)
|
|
January 1, 2018
|
|
|
50,000
|
|
|
$
|
0.10
|
|
|
|
0.25
|
|
TX HOLDINGS, INC.
|
|
NOTES TO
CONSOLIDATED
FINANCIAL STATEMENTS
|
|
NOTE
6
–
LEGAL PROCEEDINGS
T
he Company is not a party to any material pending legal proceeding.
NOTE
7
– RELATED PARTY TRANSACTIONS
ADVANCES FROM STOCKHOLDE
R
AND
OFFICER
As of
September 30, 2017 and 2016, Mr. Shrewsbury had advanced an aggregate of $33,987 and $198,637, 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
, a former director, 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 in the Parks lease for $80,000. The Company received a down payment of $40,000 and a note for the balance of $40,000. The note is secured by Park’s lease future production. On March 25, 2014, the storage building was sold for $18,000. The note receivable balance of $29,983 was written-off as of September 30, 2017, as the amount was deemed uncollectible.
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, 201
7 and 2016, interest expense of $125,988 and $129,167, respectively, in the accompanying statements of operations, relates to the Consolidated Note and the term loan arrangement. Interest on the Consolidated Note payable for the amount of $359,726 and $259,726 has been accrued as of September 30, 2017 and 2016, respectively.
TX HOLDINGS, INC.
|
|
NOTES TO
CONSOLIDATED
FINANCIAL STATEMENTS
|
|
NOTE
7
– RELATED PARTY TRANSACTIONS-Continued
LEASE AGREEMENT WITH STOCKHOLDER AND OFFICER
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. The lease was subsequently extended for an additional two years and on September 1, 2016, the parties agreed to extend the lease for an additional 24 month period upon the same terms and conditions. As of September 30, 2017, the Company had accrued but unpaid lease payments due to Mr. and Mrs. Shrewsbury in the amount of $60,000; 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.
FREIGHT
PAID TO COMPANY CONTROLLED BY OFFICER/S
TOCKHOLDER
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, 2017 and 2016, such trucking company was paid $57,773 and $51,078, respectively, for such trucking services, which were included in our cost of sales amount.
COMMISSIONS PAID TO COMPANY CONTROLLED BY OFFICER/S
TOCKHOLDER
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, 2017 and 2016 the amounts of such commission were $9,640 and $8,669, respectively, which are included in our commission expense amount.
ACCRUED OFFICER
’S SALARY
As of September 30, 201
7 and 2016, the Company had accrued and unpaid amounts of $416,179 and $460,410, respectively, due to Jose Fuentes, CFO as payment for past services, which are included in our accrued liabilities amount.
ADVANCES FROM STOCKHOLDE
R
AND
OFFICER
Included
in the financial statements as of September 30, 2017 and 2016 are advances from stockholder and officer of $33,987 and $198,637, respectively.
|
|
September
|
|
|
September
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
Beginning Balance
|
|
$
|
198,637
|
|
|
$
|
124,637
|
|
Proceeds from Stockhol
der/Officer advances
|
|
|
111,150
|
|
|
|
187,200
|
|
Repayment of stockholder
/officer advances
|
|
|
(275,800
|
)
|
|
|
(113,200
|
)
|
Ending Balance
|
|
$
|
33,987
|
|
|
$
|
198,637
|
|
T
X HOLDINGS, INC.
|
|
NOTES TO
CONSOLIDATED
FINANCIAL STATEMENTS
|
|
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, 2017 and 2016:
|
|
201
7
|
|
|
201
6
|
|
|
|
|
|
|
|
|
|
|
Rep
ayment of line of credit through issuance of
bank term loan
|
|
$
|
–
|
|
|
|
711,376
|
|
NOTE
9
–
BANK L
OAN
In November 2012, the Company obtained a $250,000 line of credit from a bank. On August 26, 2014, the bank increased the Company
’s existing bank line of credit from $250,000 to $750,000 and extended the term of the line of credit. The line of credit was secured by a priority security interest in the Company’s inventory and accounts receivable and matured on November 7, 2015.
On December 3, 2015, the Company entered into a new loan agreement with the Bank under which it obtained a term loan in the amount of $711,376. The Company utilized proceeds of the new loan to repay its line of credit. The loan is for a term of five years and matures on December 3, 2020. As of September 30, 2017, the loan balance was $606,005.
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
|
|
●
|
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.
|
TX HOLDINGS, INC.
|
|
NOTES TO
CONSOLIDATED
FINANCIAL STATEMENTS
|
|
NOTE
9
–
BANK LOAN-
Continued
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
4.25% 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.
TX HOLDINGS, INC.
|
|
NOTES TO
CONSOLIDATED
FINANCIAL STATEMENTS
|
|
NOTE 10
– CONCENTRATION OF RISKS
Significant Customers
At September 30, 201
7 and 2016, 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,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer A
|
|
|
30
|
|
|
|
9
|
|
|
|
52
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer B
|
|
|
11
|
|
|
|
23
|
|
|
|
*
|
|
|
|
22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer C
|
|
|
7
|
|
|
|
7
|
|
|
|
*
|
|
|
|
17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer
D
|
|
|
6
|
|
|
|
13
|
|
|
|
10
|
|
|
|
29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer E
|
|
|
*
|
|
|
|
*
|
|
|
|
17
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer F
|
|
|
*
|
|
|
|
11
|
|
|
|
*
|
|
|
|
20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer G
|
|
|
*
|
|
|
|
13
|
|
|
|
*
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer H
|
|
|
*
|
|
|
|
*
|
|
|
|
*
|
|
|
|
6
|
|
*
Represent less than 5%