The accompanying notes are an integral part
of the consolidated financial statements.
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 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 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 $198,637
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 and the prior year 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 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, 2016, and 2015 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, 2016, 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 $113,643 for the years ended September
30, 2016 and $13,643 for 2015.
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 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 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 and recorded a $275,000 reserve for inventory obsolescence.
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, 2016, the Company has outstanding
150,000 warrants and 500,000 options which were not included in the twelve months ended September 30, 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 the 150,000
warrants are issued to a sales agent. At September 30, 2015, the Company had outstanding 200,000 warrants and 500,000 options which
were not included in the twelve months ended September 30, 2015. 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, 2016 and 2015. 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 2016
and 2015.
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Options and warrants issued as compensation
|
|
|
650,000
|
|
|
|
700,000
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
650,000
|
|
|
|
700,000
|
|
RECENTLY ISSUED ACCOUNTING STANDARDS
During the year ended September 30, 2016 and through December
9, 2016, 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. 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, 2016, the Company had accrued but unpaid lease payments due to Mr.
and Mrs. Shrewsbury in the amount of $24,000; 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, 2016 and 2015:
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Delivery truck/trailer
|
|
$
|
69,164
|
|
|
$
|
69,164
|
|
Other warehouse equipment
|
|
|
38,144
|
|
|
|
38,144
|
|
|
|
|
|
|
|
|
|
|
Less accumulated depreciation
|
|
|
(50,529
|
)
|
|
|
(40,733
|
)
|
|
|
$
|
56,779
|
|
|
$
|
66,575
|
|
Depreciation expense of $9,796 and $10,104 were recognized during
the years ended September 30, 2016 and 2015, 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 2016,
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, 2016 and 2015:
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Net operating losses
|
|
$
|
2,339,000
|
|
|
$
|
2,204,000
|
|
Accrued expenses
|
|
|
170,000
|
|
|
|
167,000
|
|
Valuation allowance
|
|
|
(2,509,000
|
)
|
|
|
(2,371,000
|
)
|
|
|
|
|
|
|
|
|
|
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, 2016 were approximately $7,643,000. The Company has total net operating losses available to the Company to offset future taxable
income of approximately $6,876,000. Following is a reconciliation of the tax benefit at the federal statutory rate to the amount
reported in the statement of operations:
|
|
2016
|
|
|
2015
|
|
|
|
Amount
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
Income tax expense at federal statutory rate
|
|
$
|
(134.000
|
)
|
|
|
(34
|
)%
|
|
$
|
(127,000
|
)
|
|
|
(34
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in estimate
|
|
|
-
|
|
|
|
-
|
|
|
|
55,000
|
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-deductible expenses
|
|
|
(3,000
|
)
|
|
|
(2
|
)%
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase in valuation
allowance
|
|
|
137,000
|
|
|
|
36
|
%
|
|
|
72,000
|
|
|
|
19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 $137,000 and $72,000 during the years ended September 30, 2016 and 2015.
The Company has tax net operating loss
carry forwards totaling approximately $7,250,000, 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
PREFERRED STOCK
The Company is authorized to issue up to
1,000,000 shares of preferred stock, no par value. As of September 30, 2016 and 2015, there are 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, 2016 and 2015.
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 of issuable, 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, 2016 there are 150,000 warrants exercisable and 250,000 warrants have expired. The warrants were not included
in the calculation of diluted net earnings per share in 2016 and 2015 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, 2016 and 2015 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 and 2015.
|
September 30,
|
|
September 30,
|
|
2016
|
|
2015
|
|
|
|
|
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, 2016 and 2015 and activity during the years then ended:
|
|
Number of
|
|
|
Exercise
|
|
|
Weighted
|
|
|
|
Shares
|
|
|
Price
|
|
|
Average Price
|
|
Warrants/Options at September 30, 2014
|
|
|
700,000
|
|
|
$
|
0.092-0.10
|
|
|
$
|
0.095
|
|
New Issue
|
|
|
100,000
|
|
|
|
0.10
|
|
|
|
0.100
|
|
Forfeited
|
|
|
(100,000
|
)
|
|
|
0.1
|
|
|
|
0.100
|
|
Warrants/Options at September 30, 2015
|
|
|
700,000
|
|
|
$
|
0.092-0.10
|
|
|
$
|
0.095
|
|
New Issue
|
|
|
50,000
|
|
|
|
0.10
|
|
|
|
0.10
|
|
Forfeited
|
|
|
(100,000
|
)
|
|
|
0.10
|
|
|
|
0.10
|
|
Warrants/Options at September 30, 2016
|
|
|
650,000
|
|
|
$
|
0.092-0.10
|
|
|
$
|
0.094
|
|
A summary of outstanding warrants and options
at September 30, 2016, follows:
|
|
Number
|
|
|
|
|
|
Remaining
|
|
|
|
of
|
|
|
Exercise
|
|
|
Life
|
|
Expiration Date
|
|
Shares
|
|
|
Price
|
|
|
(Years)
|
|
January 1, 2017
|
|
|
50,000
|
|
|
$
|
0.10
|
|
|
|
0.25
|
|
March 31, 2017
|
|
|
500,000
|
|
|
$
|
0.0926
|
|
|
|
0.5
|
|
July 1, 2017
|
|
|
50,000
|
|
|
$
|
0.10
|
|
|
|
0.75
|
|
January 1, 2018
|
|
|
50,000
|
|
|
$
|
0.10
|
|
|
|
1.25
|
|
TX HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 – LEGAL PROCEEDINGS
Other than ordinary routine litigation incidental
to the business, the Company is not a party to any material pending legal proceeding.
NOTE 7– RELATED PARTY TRANSACTIONS
ADVANCES FROM STOCKHOLDER AND OFFICER
As of September 30, 2016 and 2015, Mr.
Shrewsbury had advanced an aggregate of $198,637 and $124,637, 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 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 as of September 30, 2016
and 2015 was $29,983 for both years.
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, 2016 and
2015, interest expense of $129,167and $125,708, 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 $259,726 and $159,452 has been
accrued as of September 30, 2016 and 2015, respectively.
TX HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 – RELATED PARTY TRANSACTIONS-Continued
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 1, 2014, the lease was extended for an additional two years and on September
1, 2016 the parties again 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, 2016 and 2015, such trucking company was paid $51,078 and $62,975, 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, 2016 and 2015 the amounts of such commission were $8,669
and $31,423, respectively, which are included in our commission expense amount.
ACCRUED OFFICER’S SALARY
As of September 30, 2016 and 2015, the Company
had accrued and unpaid an amount of $460,410 due to Jose Fuentes, CFO as payment for past services, which are included in our accrued
liabilities amount.
ADVANCES FROM STOCKHOLDER AND OFFICER
Included in the financial statements as
of September 30, 2016 and 2015 are advances from stockholder and officer of $198,637 and $124,637, respectively.
|
|
September
|
|
|
September
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Beginning Balance
|
|
$
|
124,637
|
|
|
$
|
43,337
|
|
Proceeds from Stockholer/Officer advances
|
|
|
187,200
|
|
|
|
127,300
|
|
Repayment of stockholder advances
|
|
|
(113,200
|
)
|
|
|
(46,000
|
)
|
Ending Balance
|
|
$
|
198,637
|
|
|
$
|
124,637
|
|
TX 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, 2016 and 2015:
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
Repayment of line of credit through issuance of bank term loan
|
|
$
|
711,376
|
|
|
|
–
|
|
NOTE 9 – BANK LOAN
In November 2012, the Company obtained a $250,000
line of credit from a bank. On August 26, 2014, the bank increased the Company’s existing bank line of credit from $250,000
to $750,000 and extended the term of the line of credit. The line of credit was secured by a priority security interest in the
Company’s inventory and accounts receivable and matured on November 7, 2015. On December 3, 2015, the Company entered into
a new loan agreement with the Bank under which it obtained a term loan in the amount of $711,376. The Company utilized proceeds
of the new loan to repay its line of credit. The loan is for a term of five years and matures on December 3, 2020. As of September
30, 2016, the loan balance is $662,112.
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 3.50% per annum. In the event of a default, interest under the loan may
be increased by 2%. The line of credit is secured by a priority security interest in the Company’s inventory and accounts
receivable and has been guaranteed by our CEO. Also, all claims due from the Company to Mr. Shrewsbury are subordinate to the bank’s
indebtedness, including under the Consolidated Note and any advances due to Mr. Shrewsbury.
TX HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 – CONCENTRATION OF RISKS-
Continued
Significant Customers- Continued
At September 30, 2016 and 2015, 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,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer A
|
|
|
23
|
|
|
|
9
|
|
|
|
22
|
|
|
|
21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer B
|
|
|
13
|
|
|
|
*
|
|
|
|
*
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer C
|
|
|
13
|
|
|
|
*
|
|
|
|
29
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer D
|
|
|
11
|
|
|
|
5
|
|
|
|
20
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer E
|
|
|
9
|
|
|
|
10
|
|
|
|
*
|
|
|
|
24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer F
|
|
|
7
|
|
|
|
23
|
|
|
|
17
|
|
|
|
21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer G
|
|
|
*
|
|
|
|
10
|
|
|
|
6
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer H
|
|
|
*
|
|
|
|
16
|
|
|
|
*
|
|
|
|
7
|
|
*
Represent less than 5%
NOTE 11 – SUBSEQUENT EVENTS
NONE