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false --09-30 Q3 2017 2017-06-30 10-Q 0001133798 48053084 Yes Smaller Reporting Company TX Holdings, Inc. No No txhg P2Y 32703 68718 0.05
Going Concern Considerations
 
The unaudited consolidated financial statements included in this report have been prepared assuming that the Company will continue as a going concern and, accordingly, do
not
include any adjustments that might result from the outcome of this uncertainty. Our independent registered public accounting firm’s report on the consolidated financial statements included in the Company’s annual report on Form
10
-K for the year ended
September 30, 2016,
contains an explanatory paragraph wherein it expressed an opinion that there is substantial doubt about our ability to continue as a going concern.
 
Since the commencement of its mining and rail products distribution business, the Company has relied substantially upon financing provided by Mr. Shrewsbury, the Company’s CEO and, from
November 2012
to
December 2015,
a secured bank line of credit in connection with the development and expansion of its business.
On
December 3, 2015,
the Company entered into a new loan agreement with Town Square Bank under which it obtained a term loan in the amount of
$711,376.
The Company utilized proceeds of the new loan to repay its line of credit. The loan is for a term of
five
years and matures on
December 3, 2020
.
 
These factors raise substantial doubt about the Company's ability to continue as a going concern. The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates continuing operations and realization of assets and liquidation of liabilities in the ordinary course of business. The Company's ability to continue as a going concern is dependent upon its ability to raise sufficient capital and to implement a successful business plan to generate profits sufficient to become financially viable. The consolidated financial statements do
not
include adjustments relating to the recoverability of recorded assets or the implications of associated bankruptcy costs if the Company is unable to continue as a going concern.
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NOTE
2
ACQUISITIONS
 
On
November 21, 2014
,
the Company acquired
100%
ownership of The Bag Rack, LLC, a Kentucky limited liability company, from the Company’s CEO (who prior to the acquisition, owned
50%
of the membership interest in the acquired company) and the remaining membership interests from an unrelated
third
party. The acquired company had been recently established and was in the process of initiating the development and distribution of “The Bag Rack”, a unique patent pending device which enables bags with handles to be stored in the trunk of a car neatly and preventing content spillage. The transaction was completed with the Company paying a purchase price of
$500.
 
The Bag Rack, LLC acquired all rights to the product shortly prior to its acquisition by the Company. Since its formation and at the date of acquisition, the acquired company held
no
assets or liabilities other than rights to the product which were valued at
$500
as they pertained to a new unproven product. In addition, the Company agreed to pay
20%
of the net profit for each product sold to a customer by The Bag Rack LLC to the former pending patent holder and
20%
of the net income, after payment to the former pending patent holder, to each of the
two
former members of The Bag Rack, LLC. The payments to the former pending patent holder and prior members of The Bag Rack, LLC will be in perpetuity.
NOTE
1
- BACKGROUND AND SIGNIFICANT ACCOUNTING POLICIES
 
INTERIM FINANCIAL STATEMENTS
 
Basis of Presentation
 
The accompanying interim unaudited consolidated financial statements and footnotes of TX Holdings, Inc., and its subsidiaries (the “Company”),
have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) and applicable rules and regulations of the Securities and Exchange Commission regarding interim financial reporting. The consolidated financial statements reflect all adjustments that are, in the opinion of management, necessary to fairly present such information. All such adjustments are of a normal recurring nature. Although the Company believes that the disclosures are adequate to make the information presented
not
misleading, certain information and footnote disclosures, including a description of significant accounting policies normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations.
 
The balance sheet as of
September 30, 2016,
included herein was derived from audited consolidated financial statements as of that date, but does
not
include all disclosures including notes required by GAAP.
 
These interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form
10
-K for the year ended
September 30, 2016.
The accompanying unaudited consolidated financial statements reflect all normal recurring adjustments necessary to present fairly the financial position, results of operations, and cash flows for the interim periods, but are
not
necessarily indicative of the results for any subsequent quarter or the entire year ending
September 30, 2017.
 
Conformity with GAAP requires the use of estimates and judgments that affect the reported amounts in the financial statements and accompanying notes. These estimates form the basis for judgments we make about the carrying values of our assets and liabilities, which are
not
readily apparent from other sources. We base our estimates and judgments on historical information and on various other assumptions that we believe are reasonable under the circumstances. GAAP requires us to make estimates and judgments in several areas, including, but
not
limited to, those related to revenue recognition, collectability of accounts receivable, contingent liabilities, fair value of share-based awards, fair value of financial instruments, fair value of acquired intangible assets and goodwill, useful lives of intangible assets and property and equipment, and income taxes. These estimates are based on management’s knowledge about current events and expectations about actions we
may
undertake in the future. Actual results could differ materially from those estimates.
 
Overview of Business
 
The Company is in the business of supplying, distributing and selling drill bits, related tools, and other mining supplies, rail, rail ties, and rail material directly and through other suppliers to United States’ coal mining companies for use in their production and transportation processes. The products are supplied to the Company by various manufacturers and suppliers. The products are warehoused and distributed from the Company’s principal business location in Ashland, Kentucky or shipped directly to its customers
.
 
In addition, on
November 21, 2014,
and with a view to diversifying its business, the Company acquired all of the membership interest in The Bag Rack, LLC. The acquired company has developed a new product, “The Bag Rack.”
The Bag Rack is a unique device that enables bags with handles to be stored in the trunk of a car preventing the bags from tipping over and causing spillage. The Company has
not
generated any revenue from the sale of the new product but continues to explore opportunities for the marketing and distribution of the product. See Note
2.
 
The Company was incorporated in the State of Georgia on
May 15, 2000
.
 
Revenue Recognition
 
The Company recognizes revenue from direct sales of our products to our customers, including shipping fees. Title passes to the customer (usually upon shipment or delivery, depending upon the terms of the sales order) when persuasive evidence of an arrangement exists; when sales amounts are fixed or determinable; and when collectability is reasonably assured. The Company expenses shipping and handling costs as incurred which are included in cost of goods sold on the consolidated statements of operations. See Note
6.
 
Going Concern Considerations
 
The unaudited consolidated financial statements included in this report have been prepared assuming that the Company will continue as a going concern and, accordingly, do
not
include any adjustments that might result from the outcome of this uncertainty. Our independent registered public accounting firm’s report on the consolidated financial statements included in the Company’s annual report on Form
10
-K for the year ended
September 30, 2016,
contains an explanatory paragraph wherein it expressed an opinion that there is substantial doubt about our ability to continue as a going concern.
 
Since the commencement of its mining and rail products distribution business, the Company has relied substantially upon financing provided by Mr. Shrewsbury, the Company’s CEO and, from
November 2012
to
December 2015,
a secured bank line of credit in connection with the development and expansion of its business.
On
December 3, 2015,
the Company entered into a new loan agreement with Town Square Bank under which it obtained a term loan in the amount of
$711,376.
The Company utilized proceeds of the new loan to repay its line of credit. The loan is for a term of
five
years and matures on
December 3, 2020
.
 
These factors raise substantial doubt about the Company's ability to continue as a going concern. The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates continuing operations and realization of assets and liquidation of liabilities in the ordinary course of business. The Company's ability to continue as a going concern is dependent upon its ability to raise sufficient capital and to implement a successful business plan to generate profits sufficient to become financially viable. The consolidated financial statements do
not
include adjustments relating to the recoverability of recorded assets or the implications of associated bankruptcy costs if the Company is unable to continue as a going concern.
 
Principles of Consolidation
 
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary. All significant inter-company transactions and balances have been eliminated in consolidation.
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Principles of Consolidation
 
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary. All significant inter-company transactions and balances have been eliminated in consolidation.
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NOTE
5
BANK LOAN
 
In
November 2012,
the Company obtained a
$250,000
line of credit from a bank and, on
August 26, 2014,
increased the line of credit to
$750,000
and extended the term of the line of credit. The line of credit was secured by a priority security interest in the Company’s inventory and accounts receivable and matured on
November 7, 2015.
On
December 3, 2015,
the Company entered into a new fixed term loan agreement with the bank of
$711,376
the proceeds of which were used to repay its line of credit. The loan is for a term of
five
years and matures on
December 3, 2020.
As of
June 30, 2017,
the loan balance was
$614,870.
 
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 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;
 
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 obligations under the note or related documents;
 
a warranty, representation or statement made to the bank under the loan document is or becomes materially false or misleading;
 
the dissolution or termination of the Company’s existence, or its insolvency, the appointment of a receiver for any part of its property, any assignment for the benefit of creditors, any type of creditor workout, or the commencement of any proceeding under any bankruptcy or insolvency laws by or against the Company;
 
the commencement of foreclosure or forfeiture proceedings by any creditor or any governmental agency against any collateral securing the loan;
 
any of the preceding events occurs with respect to any loan guarantor;
 
a
25%
or more change in the ownership of the Company’s common stock;
 
a material adverse change in the Company’s financial condition, or the bank believes the prospect of payment or performance of the loan is impaired; or
 
the bank in good faith believes itself insecure.
 
The loan agreements contain certain affirmative covenants, including an obligation to: notify the bank of a material adverse change in the Company’s financial condition and of any threatened litigation or claim or other proceeding which could materially affect the Company’s financial condition; maintain certain liability insurance in amounts acceptable to the bank; maintain qualified executive and management personnel; comply with applicable environmental laws and perform environmental studies required by the bank; and certify annually to the bank compliance with the representations and warranties in the bank loan documents. The loan agreements contain certain other customary covenants and conditions.
 
In addition, the loan agreements contain certain negative covenants, including that the Company will
not,
without the bank’s consent:
 
 
incur any indebtedness other than to the bank or for trade debt incurred in the ordinary course;
 
sell, transfer, mortgage, assign, pledge, lease, grant a security interest in, or encumber any of its assets, except for permitted liens;
 
sell its accounts receivable, except to the bank;
 
engage in business activities substantially different from the Company’s current activities;
 
cease operations, liquidate, merge, transfer, acquire or consolidate with another entity, change the Company’s name, dissolve, or sell the inventory or accounts receivable secured under the loan;
 
pay any dividend other than in stock;
 
lend money, invest or advance money or assets to another person or entity;
 
purchase, create or acquire an interest in any other entity;
 
incur any obligation as a surety or guarantor other than in the ordinary course; or
 
enter into any agreement containing any provision which would be violated or breached by the performance of the Company’s obligations under the loan agreements.
 
Interest under the loan is variable and is based upon the Wall Street Journal Prime rate, currently
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 obligations due from the Company to Mr. Shrewsbury are subordinate to the bank’s indebtedness, including under the Consolidated Note and any advances due to Mr. Shrewsbury.
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NOTE
6
NEW ACCOUNTING PRONOUNCEMENT
 
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 requires 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 is 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.
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NOTE
4
– RELATED PARTY TRANSACTIONS
 
Advances from Stockholder and Officer
 
As of
June 30, 2017,
and
September 30, 2016,
Mr. Shrewsbury had outstanding advances owed from the Company of
$99,087
and
$198,637,
respectively. The advances bear
no
interest and are due on demand.
 
Notes Payable to a Stockholder and Officer
 
On
February 25, 2014,
the Company and Mr. Shrewsbury consolidated an aggregate of
$2,000,000
of indebtedness due to Mr. Shrewsbury, including principal due under a Revolving Demand Note (“Revolving Note”) in the amount of
$1,062,000
and accrued but unpaid interest as of
January 31, 2014
of
$168,905;
principal due under a
10%
Promissory Note (
“10%
Note”) in the amount of
$289,997
and accrued but unpaid interest as of
January 31, 2014
of
$93,252;
and
$385,846
of non-interest bearing advances outstanding as of
January 31, 2014.
The Company issued in exchange a Consolidated Secured Promissory Note (“Consolidated Note”) in the principal amount of
$2,000,000.
The Revolving Note and
10%
Note were cancelled and Mr. Shrewsbury agreed to waive any prior defaults under the terms of such notes and to release the Company from any claims related thereto. The Consolidated Note bears interest at the rate of
5%
per annum or prime rate if higher than
5%
per annum, is repayable in full
ten
years from the date of issuance, and is subject to certain events of default. Payment of the Consolidated Note is to be secured or otherwise payable by the Company out of the death benefit proceeds of key man life insurance of
$2
million that has been purchased by the Company on the life of Mr. Shrewsbury. The terms of the debt consolidation and restructuring were unanimously approved by disinterested members of the Board of Directors of the Company.
 
Lease Agreement with Stockholder and Officer
 
In
November 2012,
the Company entered into a lease agreement with William Shrewsbury and Peggy Shrewsbury to lease to the Company real estate and warehouse space to store the Company’s inventory. The initial lease had a
two
-year term starting
October 1, 2012
and ending
August 31, 2014.
On
September 1, 2014
the lease was extended for an additional
two
years and on
September 1, 2016,
further extended for an additional
two
years. The lease rental is
$2,000
per month payable the
first
of each month. As of
June 30, 2017,
since the beginning of the lease, the Company has made lease payments in the amount of
$84,000
and has an outstanding payable to Mr. Shrewsbury of
$54,000.
 
Freight Charges Paid to Company Controlled by Officer and Stockholder
 
The Company utilizes the services of a trucking company owned and controlled by Mr. Shrewsbury, our Chief Executive Officer, to transport certain of the Company’s products to its customers. During the
three
months and
nine
months ended
June 30, 2017
and
2016,
such trucking company was paid
$17,143
and
$10,591
and
$37,887
and
$39,002,
respectively, for these trucking services.
 
Commissions Paid to Company Controlled by Officer and 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 of the Company owns and controls a company that is an agent of such transportation company. Such controlled company places orders for such transportation services on behalf of the Company and is paid a commission for such transportation services. During the
three
months and
nine
months ended
June 30, 2017
and
2016,
the Company paid commissions of
$3,390
and
$1,534
and
$7,456
and
$7,507,
respectively.
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Revenue Recognition
 
The Company recognizes revenue from direct sales of our products to our customers, including shipping fees. Title passes to the customer (usually upon shipment or delivery, depending upon the terms of the sales order) when persuasive evidence of an arrangement exists; when sales amounts are fixed or determinable; and when collectability is reasonably assured. The Company expenses shipping and handling costs as incurred which are included in cost of goods sold on the consolidated statements of operations. See Note
6.
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NOTE
3
– STOCKHOLDERS’
DEFICIT
 
Potentially Dilutive Options and Warrants
 
On
May 16, 2012,
the Board of Directors authorized the issuance of an aggregate of
400,000
common stock purchase warrants to a sales agent, Mr. Tom Chafin. Over a period of
four
years, Mr. Chafin was expected to receive
50,000
warrants every
six
months, for an aggregate of
400,000
warrants. The warrants are exercisable at a price of
$0.10
per share, become immediately exercisable, and expire
two
years after the date of issuance. The initial tranche of
50,000
warrants were issuable effective
July 1, 2012.
As of
June 30, 2017,
an aggregate of
100,000
warrants were issuable to Mr. Chafin, and
300,000
of the previously issuable warrants have expired under the terms of the agreement. The warrants were
not
included in the calculation of diluted earnings per share since their inclusion will be anti-dilutive.
 
On
February 25, 2014,
the Company issued
500,000
common stock purchase options to Mr. Shrewsbury. Commencing
April 1, 2014,
the options became exercisable at a price of
$.0924
per share, the fair market value of the Company’s shares of Common Stock on the date authorized by the Board of Directors,
February 21, 2014.
The options expired on
March 31, 2017.
The options were
not
included in the calculation of diluted earnings per share since their inclusion would be anti-dilutive.
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