UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-QSB
|X| QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2006
------------------------
|_| TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ________to ________
Commission File No. 0-32335
TX HOLDINGS, INC.
(Exact name of small business issuer as specified in its charter)
GEORGIA 58-2558702
------- ----------
(State or other jurisdiction of (I.R.S. Employer Identification. No.)
incorporation or organization)
1701 North Judge Ely Blvd. #6420
Abilene, Texas 79601
-------------------------------------
(Address of principal)
(682) 286-3116
-------------------------------------
Issuer's telephone number
Formerly, R Wireless, Inc.
--------------------------------------------------------
(Former name, former address and former fiscal year if
changed from last report.)
Check whether the issuer: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the issuer was required to file such reports) and (2) has
been subject to such filing requirements for the past 90 days. YES |X| NO |_|
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act) YES |_| NO |X|
As of March 31, 2006, the registrant had a total of 19,399,934 shares of Common
Stock outstanding.
As of March 20, 2007, there were 27,002,558 shares of common stock outstanding.
Transitional Small Business Disclosure Format (check one): YES |_| NO |X|
TX HOLDINGS, INC.
FORM 10-QSB
FOR THE QUARTER ENDED MARCH 31, 2006
TABLE OF CONTENTS
PART 1-FINANCIAL INFORMATION
Item 1 Condensed Financial Statements
Unaudited Balance Sheet as of March 31, 2006 and
September 30, 2005 3
Unaudited Statements of Operations for the Three Months and
six ended March 31, 2006 and 2005 ,and for the period from
inception of the development stage, October 1, 2004 to
March 31, 2006 4
Unaudited Statement of Changes in Stockholders' Deficit for
the six Months ended March 31, 2006 5
Unaudited Statements of Cash Flows for the six Months Ended
March 31, 2006 and 2005, and for the period from inception
of the development stage, October 1, 2004 to March 31, 2006 6
Notes to Financial Statements (Unaudited) 7
Item 2 Management's Discussion and Analysis of Financial Condition 18
and Results of Operations
Item 3 Controls and Procedures 19
PART II-OTHER INFORMATION
Item 1 Legal Proceedings 20
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds 21
Item 3 Defaults upon Senior Securities 21
Item 4 Submission of Matters to a Vote to Security Holders 21
Item 5 Other Information 21
Item 6 Exhibits 21
SIGNATURES 21
2
TX HOLDINGS, INC,
A CORPORATION IN THE DEVELOPMENT STAGE
UNAUDITED CONSOLIDATED BALANCE SHEET
MARCH 31, 2006 AND SEPTEMBER 30, 2005
------------------------------------------------------------------------------------------------------------
3/31/2006 9/30/2005
-------------- --------------
ASSETS
Current assets:
Cash and cash equivalents $ 2,793 $ -
Prepaid expenses 10,000
-------------- --------------
Total current assets 2,793 10,000
Deposits for oil and gas property acquisition 3,000
Property and Equipment, net 932 1,080
-------------- --------------
Total Assets $ 6,725 $ 11,080
============== ==============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable and accrued liabilities $ 220,277 $ 220,277
Advances from stockholder/officer 257,073 214,697
-------------- --------------
Total current liabilities $ 477,350 434,974
Commitments and contingencies
Stockholders' deficit:
Preferred stock: no par value, 1,000,000 shares
authorized. No share outstanding at March 31, 2006 - -
Common stock: no par value, 50,000,000 shares
authorized, 18,999,934 and 16,705,593 shares
issued and outstanding at March 31, 2006
and September 30, 2005 , respectively 2,271,248 1,618,305
Additional paid in capital-Authorized warrants 427,178 211,098
Accumulated deficit (1,803,507) (1,803,507)
Losses accumulated in the development stage (1,365,544) (449,790)
-------------- --------------
Total stockholders' deficit (470,625) (423,894)
-------------- --------------
Total liabilities and stockholders' deficit $ 6,725 $ 11,080
============== ==============
The accompanying notes are an integral part of the unaudited consolidated condensed financial statements
3
TX HOLDINGS, INC.
A CORPORATION IN THE DEVELOPMENT STAGE
UNAUDITED STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED MARCH 31, 2006 AND 2005 AND FOR THE PERIOD FROM
INCEPTION OF THE DEVELOPMENT STAGE, OCTOBER 1, 2004, TO MARCH 21, 2006
------------------------------------------------------------------------------------------------------------------------
INCEPTION OF
DEVELOPMENT
THREE MONTHS ENDED SIX MONTHS ENDED STAGE TO
-------------------------- -------------------------- MARCH 31,
3/31/2006 3/31/2005 3/31/2006 3/31/2005 2006
------------ ------------ ------------ ------------ ----------------
Revenue $ - $ - $ - $ - $ -
------------ ------------ ------------ ------------ ----------------
Operating expenses, except for items shown
separately below 17,605 3,638 17,607 25,111 84,857
Stock-based compensation 386,080 866,080 866,080
Professional fees 20,548 2,689 20,548 4,182 181,254
Lease expense - - - - 5,000
Depreciation expense 300 120 300 240 780
Advertising expense 2,075 525 2,075 1,120 4,459
------------ ------------ ------------ ------------ ----------------
Total Operating Expense 426,608 6,972 906,610 30,653 1,142,430
Loss from operations (426,608) (6,972) (906,610) (30,653) (1,142,430)
------------ ------------ ------------ ------------ ----------------
Other Income and (expense):
Dividend income - - - - -
Forbearance agreement costs - - - - (211,098)
Interest Expense (4,572) (947) (9,144) (1,915) (12,016)
------------ ------------ ------------ ------------ ----------------
Total other income and (expenses), net (4,752) (947) (9,144) (1,915) (223,114)
------------ ------------ ------------ ------------ ----------------
Loss from continuing operations (431,180) (7,919) (915,754) (32,568) (1,365,544)
Discontinued operations:
Gain (loss) from disposal of
discontinued business segment - - - 108,892 -
------------ ------------ ------------ ------------ ----------------
Gain (loss) from discontinued operations - - - 108,892 -
------------ ------------ ------------ ------------ ----------------
Net gain (loss) (431,180) (7,919) (915,754) 76,324 (1,365,544)
============ ============ ============ ============ ================
Net loss per common share
continuing operations (0.02) 0.00 (0.05) 0.00
discontinued operations 0.00 0.00 0.00 0.01
------------ ------------ ------------ ------------
Total (0.02) 0.00 (0.05) 0.00
============ ============ ============ ============
Weighted average number of common shares
outstanding-basic and diluted 19,079,934 15,793,651 18,115,670 15,793,651
============ ============ ============ ============
The accompanying notes are an integral part of the unaudited consolidated condensed financial statements
4
TX HOLDINGS INC.
A CORPORATION IN THE DEVELOPMENT STAGE
UNAUDITED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDER'S DEFICIT
FOR THE SIX MONTHS ENDED MARCH 31, 2006
------------------------------------------------------------------------------------------------------------------------------
LOSSES
ACCUMULATED
PREFERRED STOCK COMMON STOCK ADDITIONAL IN THE
-------------------- -------------------------- PAID IN ACCUMULATED DEVELOPMENT
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT STAGE TOTAL
-------- ---------- ------------ ------------ ----------- ------------- ------------- -----------
BALANCE AT
SEPTEMBER 30,
2005 - - 16,705,593 1,618,305 211,098 (1,803,507) (449,790) (423,894)
Common stock
issued for
professional
services - - 2,600,000 650,000 - - - 650,000
Common stock
issued upon
exercise of
warrants - - 294,341 2,943 - - - 2,943
Net Loss - - - - - - (915,754) (915,754)
-------- ---------- ------------ ------------ ----------- ------------- ------------- -----------
BALANCE AT
DECEMBER
MARCH 31, 2006 - - 19,599,934 2,271,248 427,178 (1,803,507) (1,365,544) (470,625)
======== ========== ============ ============ =========== ============= ============= ===========
The accompanying notes are an integral part of the unaudited consolidated financial statements
5
TX HOLDINGS, INC
A CORPORATION IN THE DEVELOPMENT STAGE
UNAUDITED CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED MARCH 31, 2006 AND 2005 AND FOR THE PERIOD FROM
INCEPTION OF THE DEVELOPMENT STAGE, OCTOBER 1, 2004, TO MARCH 31, 2006
-----------------------------------------------------------------------------------------------------------------------------------
INCEPTION OF
DEVELOPMENT
SIX MONTHS ENDED STAGE TO
-------------------------------- MARCH 31,
3/31/2006 3/31/2005 2006
-------------- -------------- -------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Gain (Loss) $ (3,100,467) $ 12,860 $ (3,441,367)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Gain (Loss) $ (915,754) $ 76,324 $ (1,256,654)
Adjustments to reconcile net loss to net cash used
in operating activities:
Loss (gain) from discontinued operations - (108,892) (108,890)
Warrants issued for forbearance agreement - - 211,098
Depreciation expense 300 240 780
Common stock issued for services 650,000 - 700,000
Common stock issued to settle accounts payable - - 36,194
Warrants issued for services 216,080 - 216,080
Preferred stock issued for services - - -
Changes in operating assets and liabilities:
Prepaid expenses and other assets 10,000 250 250
Accounts payable and accrued liabilities - 21,956 20,705
-------------- -------------- -------------------
Net cash used by continuing operations (39,374) (10,122) (180,437)
Net cash used by discontinued operations - - -
-------------- -------------- -------------------
Net cash used by operating activities (39,374) (10,122) (180,437)
CASH FLOWS FROM INVESTING ACTIVITIES:
Property and equipment additions (3,152) - (3,152)
-------------- -------------- -------------------
Net cash provided by investing activities (3,152) - (3,152)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of note payable to a bank - (20,598) (20,598)
Proceeds from sale of common stock 2,943 - 2,943
Proceeds from stockholder/officer advances 42,376 36,843 204,037
-------------- -------------- -------------------
Net cash provided by financing activities 45,319 16,245 186,382
Increase (Decrease) in cash and cash equivalents 2,793 6,123 2,793
Cash and cash equivalents at beginning of year - - -
-------------- -------------- -------------------
Cash and cash equivalent at March 31, 2006, and 2005 $ 2,793 $ 6,123 $ 2,793
============== ============== ===================
Supplemental Disclosure of cash flow information:
Cash paid for interest expense $ 9,144 $ 3,589
Cash paid for income taxes - -
The accompanying notes are an integral part of the unaudited consolidated condensed financial statements
6
TX HOLDINGS, INC.
A CORPORATION IN THE DEVELOPMENT STAGE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 1- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ACTIVITIES
HISTORICAL BUSINESS ACTIVITIES
TX Holdings, Inc. (formerly R Wireless, Inc. and HOM Corporation) (the
"Company"), incorporated May 4, 2000 in the State of Georgia, is transitioning
from a holding company to an oil and gas exploration and production company.
This transition began during 2005 and is discussed below in "CURRENT BUSINESS
ACTIVITIES". Prior to May 26, 2005 the Company operated as a holding company for
its formerly two wholly owned subsidiaries, Homes By Owners, Inc. ("Homes") and
Direct Lending, Inc. ("Direct"). The Company received approval from the
Secretary of State of Georgia for a certificate of merger between Homes and
Freedom Homes, Inc. ("Freedom"). The Company remains the owner of 32.3% of the
common shares of Homes. The remaining common shares of Homes are owned as
follows: 63.1% by Jim Evans, owner of Freedom, and 4.6% by Robert S. Wilson,
operating officer of Homes. In 2005 the company sold a 67.7% interest in Freedom
Home Inc and wrote off its remaining 32.3% investment in Freedom because
management is unable to demonstrate that its equity interest has any future
value. Accordingly, at September 30, 2005 the Company recognized a gain from
discontinued operations of $108,890.
Clarification of Freedom Homes was incorporated in the State of Georgia in
December 1999 and operates in the real estate market as an advertiser of real
estate listed as "for sale by owner" ("FSBO"). Homes has published a periodic
magazine which contains FSBO and other advertising, and Homes offers an Internet
web page that serves as an advertising venue for FSBO residential and commercial
real estate in the Central Savannah River Area.
CURRENT BUSINESS ACTIVITIES
Management seeks to acquire producing oil and gas properties in and around
Texas, Louisiana and Oklahoma that will define the operational holdings of The
Company. Management has defined a number of criteria for acquisition which
include:
o Wells should be currently Producing;
o Production should be broadly distributed across lease;
o Lease should show a 24 month payback (or better);
o Wells should show upside potential (proved undeveloped reserves of
approximately 20%).
These criteria were developed in an effort to mitigate risk for TX Holdings,
Inc. and its investors.
Management raised $1,240,000 in a Private Placement offering during the months
of July through September 2006 to finance these acquisitions. The funds raised
in 2006 were used to purchase an interest in three oil and gas fields located in
Texas. Development of the fields began on November 1, 2006. The Company
experienced substantial costs for engineering and other professional services
during 2005 and 2006 in making the transition to an oil and gas exploration and
production company. The Company plans to continue to use a combination of debt,
and equity finance. Currently, management cannot provide any assurance regarding
the successful development of acquired oil and gas fields, the completion of
additional acquisitions or the continued ability to raise funds, however it is
using its best efforts to complete field work on the fields acquired, acquire
additional fields and finance the operations.
7
TX HOLDINGS, INC.
A CORPORATION IN THE DEVELOPMENT STAGE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ACTIVITIES, CONTINUED
GOING CONCERN CONSIDERATIONS
The Company, with its prior subsidiaries, has suffered recurring losses while
devoting substantially all of its efforts to raising capital, identifying and
pursuing businesses opportunities and management currently believes its best
opportunities are in the oil and gas business. The Company's total liabilities
exceed its total assets and the Company's liquidity is substantially dependent
on raising capital.
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,
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 to implement a successful business plan
and to generate profits sufficient to become financially viable. The
consolidated financial statements do not include adjustments relating to the
recoverability of recorded assets or liabilities that might be necessary should
the Company be unable to continue as a going concern.
USE OF ESTIMATES
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 that affect certain reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities at the date of the
financial statements, and 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,
valuation of acquired in-process research and development, measurement of
stock-based compensation, and the fair value of the Company's common stock. The
Company bases its estimates on historical experience and various other
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.
PROPERTY AND EQUIPMENT
The Company uses the successful efforts method of accounting for oil and gas
producing activities. Under this method, acquisition costs for proved and
unproved properties are capitalized when incurred. Exploration costs, including
geological and geophysical costs, the costs of carrying and retaining unproved
properties and exploratory dry hole drilling costs, are expensed. Development
costs, including the costs to drill and equip development wells and successful
exploratory drilling costs to locate proved reserves are capitalized.
Exploratory drilling costs are capitalized when incurred pending the
determination of whether a well has found proved reserves. A determination of
whether a well has found proved reserves is made shortly after drilling is
completed. The determination is based on a process that relies on
interpretations of available geologic, geophysic, and engineering data. If a
well is determined to be successful, the capitalized drilling costs will be
reclassified as part of the cost of the well. If a well is determined to be
unsuccessful, the capitalized drilling costs will be charged to expense in the
period the determination is made. If an exploratory well requires a major
capital expenditure before production can begin, the cost of drilling the
exploratory well will continue to be carried as an asset pending determination
of whether proved reserves have been found only as long as: i) the well has
found a sufficient quantity of reserves to justify its completion as a producing
well if the required capital expenditure is made and ii) drilling of the
additional exploratory wells is under way or firmly planned for the near future.
If drilling in the area is not under way or firmly planned, or if the well has
not found a commercially producible quantity of reserves, the exploratory well
is assumed to be impaired, and its costs are charged to expense.
8
TX HOLDINGS, INC.
A CORPORATION IN THE DEVELOPMENT STAGE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ACTIVITIES, CONTINUED
PROPERTY AND EQUIPMENT, CONTINUED
In the absence of a determination as to whether the reserves that have been
found can be classified as proved, the costs of drilling such an exploratory
well is not carried as an asset for more than one year following completion of
drilling. If, after that year has passed, a determination that proved reserves
exist cannot be made, the well is assumed to be impaired, and its costs are
charged to expense. Its costs can, however, continue to be capitalized if
sufficient quantities of reserves are discovered in the well to justify its
completion as a producing well and sufficient progress is made in assessing the
reserves and the well's economic and operating feasibility.
The impairment of unamortized capital costs is measured at a lease level and is
reduced to fair value if it is determined that the sum of expected future net
cash flows is less than the net book value. ERHC determines if impairment has
occurred through either adverse changes or as a result of the annual review of
all fields.
Development costs of proved oil and gas properties, including estimated
dismantlement, restoration and abandonment costs and acquisition costs, are
depreciated and depleted on a field basis by the units-of-production method
using proved developed and proved reserves, respectively. The costs of unproved
oil and gas properties are generally combined and impaired over a period that is
based on the average holding period for such properties and the Company's
experience of successful drilling.
Other property and equipment are stated at cost. 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. Costs
relating to the initial design and implementation of the Internet web page have
been capitalized while the costs of web page maintenance are expensed as
incurred. 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.
REVENUE RECOGNITION
Currently the Company has no revenue from oil and gas operations. When the
Company begins to receive revenue from oil and gas operations it will be
recognized upon the delivery of the oil or gas to the purchaser of the oil or
gas.
INCOME TAXES
Income taxes are estimated for the tax effects of transactions reported in the
financial statements and consist of taxes currently due plus 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 realizability of 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.
9
TX HOLDINGS, INC.
A CORPORATION IN THE DEVELOPMENT STAGE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ACTIVITIES, CONTINUED
RECLASSIFICATIONS
Certain reclassifications have been made to the prior years' consolidated
financial statements to conform to the current year presentation. These
reclassifications had no effect on reported net loss or accumulated deficit.
BASIC NET LOSS PER COMMON SHARE
Net loss per share is computed based on the guidance of SFAS No. 128, EARNINGS
PER SHARE (SFAS 128), requiring companies to report both basic net loss per
common share, which is computed using the weighted average number of common
shares outstanding during the period, and diluted net loss 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. However, for all periods presented, diluted net loss per
share is the same as basic net loss per share as the inclusion of weighted
average shares of common stock issuable upon the exercise of stock options and
warrants and conversion of convertible preferred stock would be anti-dilutive.
The following table summarizes securities outstanding at each of the periods
presented which were not included in the calculation of diluted net loss per
share since their inclusion would be anti-dilutive.
MARCH 31, 2006 SEPT. 30, 2005
---------------- ----------------
Options issued to former owner - 294,341
Warrants Issued for forbearance of payable 1,434,088 1,434,088
Warrants issued as compensation 800,000 -
-
---------------- ----------------
Total 2,234,088 1,728,429
================ ================
RECENTLY ISSUED ACCOUNTING STANDARDS
In December 2004, the FASB issued FAS No. 123R, "Share-Based Payment." The
statement replaces FAS No. 123, "Accounting for Stock-Based Compensation" and
supersedes APB Opinion No. 25, "Accounting for Stock Issued to Employees." This
statement focuses primarily on accounting for transactions in which an entity
obtains employee services in share-based payment transactions. The adoption of
the statement will result in the expensing of the fair value of stock options
granted to employees in the basic financial statements. The statement is
effective for the years commencing after January 1, 2006 and management is
currently assessing its impact.
The statement applies to new equity awards and to equity awards modified,
repurchased, or cancelled after the effective date. Additionally, compensation
cost for the portion of awards for which the requisite service has not been
rendered that are outstanding as of the effective date shall be recognized as
the requisite service is rendered on or after the effective date. The
compensation cost for that portion of awards is based on the grant-date fair
value of those awards as calculated from the pro forma disclosures under
Statement No. 123. Changes to the grant-date fair value of equity awards granted
before the effective date of this statement are precluded. The compensation cost
for those earlier awards shall be attributed to periods beginning on or after
the effective date of this statement using the attribution method that was used
under Statement No. 123, except that the method of recognizing forfeitures only
as they occur shall not be continued.
10
TX HOLDINGS, INC.
A CORPORATION IN THE DEVELOPMENT STAGE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ACTIVITIES, CONTINUED
RECENTLY ISSUED ACCOUNTING STANDARDS, CONTINUED
Any unearned or deferred compensation (contra-equity accounts) related to those
earlier awards shall be eliminated against the appropriate equity accounts.
Additionally, common stock purchased pursuant to stock options granted under our
employee stock purchase plan is expensed based upon the fair market value of the
stock option.
The statement also allows for a modified version of retrospective application to
periods before the effective date. Modified retrospective application may be
applied either (a) to all prior years for which Statement No. 123 was effective
or (b) only to prior interim periods in the year of initial adoption. An entity
that chooses to apply the modified retrospective method to all prior years for
which Statement No. 123 was effective shall adjust financial statements for
prior periods to give effect to the fair-value-based method of accounting for
awards granted, modified, or settled in cash in fiscal years beginning after
December 15, 1994, on a basis consistent with the pro forma disclosures required
for those periods by Statement No. 123. Accordingly, compensation cost and the
related tax effects will be recognized in those financial statements as though
they had been accounted for under Statement No. 123. Changes to amounts as
originally measured on a pro forma basis are precluded.
In December 2004, the FASB issued FAS No. 153, "Exchange of Nonmonetary Assets",
which is an amendment to APB Opinion No. 29. The guidance in APB Opinion No. 29,
"Accounting for Nonmonetary Transactions," is based on the principle that
exchanges of nonmonetary assets should be measured based on the fair value of
the assets exchanged. The guidance in that opinion, however, included certain
exceptions to that principle. This statement amends APB Opinion No. 29 to
eliminate the exception for nonmonetary exchanges of similar productive assets
and replaces it with a general exception for exchanges of nonmonetary assets
that do not have commercial substance. A nonmonetary exchange has commercial
substance if the future cash flows of the entity are expected to change
significantly as a result of the exchange. The adoption of FAS No. 153 is not
expected to have a material impact on our financial position or results of
operations.
In July 2006, the FASB issued FASB Interpretation No. 48, ACCOUNTING FOR
UNCERTAINTY IN INCOME TAXES--AN INTERPRETATION OF FAS 109. This interpretation
clarifies the accounting for uncertainty in income taxes recognized in a
company's financial statements in accordance with FASB Statement No. 109,
ACCOUNTING FOR INCOME TAXES. This interpretation prescribes a recognition
threshold and measurement attribute for the financial statement recognition and
measurement of a tax position taken in a tax return. It also provides guidance
on derecognition, classification, interest and penalties, accounting in interim
periods, disclosure and transition. Interpretation No. 48 is effective for
fiscal years beginning after December 15, 2006. Earlier application is
encouraged if the company has not yet issued financial statements, including
interim financial statements, in the period Interpretation No. 48 is adopted.
The Company is currently evaluating the impact the adoption of this
interpretation will have on its consolidated results of operations and financial
position.
Other accounting standards that have been issued or proposed by the Financial
Accounting Standards Board that do not require adoption until a future date are
not expected to have a material impact on the consolidated financial statements
upon adoption.
11
TX HOLDINGS, INC.
A CORPORATION IN THE DEVELOPMENT STAGE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 2 - DEPOSITS FOR OIL AND GAS PROPERTY ACQUISITION
On November 1 2007, the Company entered into a purchase and sale agreement (the
"Agreement") for a 60% interest in certain oil and gas properties located in
Eastland County, Texas. Under the Agreement, the Company is obligated to pay a
total of $7,200,000 for equipment, mineral leases, drilling and reworks, and
various other categories of costs if all provisions of the agreement are met. At
September 30, 2006, the Company had made payments totaling $253,000 to the
seller and those payments are presented as deposits for oil and gas property
acquisition in the accompanying balance sheet.
NOTE 3 - RESTATEMENT
The Company previously filed its March 31, 2005 financial statements without
review and those financial statements included errors in the application of
accounting principles generally accepted in the United States. Following is an
analysis errors and the effect on the financial statements: for the six months
ended March 31, 2005:
SIX MONTHS ENDED MARCH 31, 2005
-------------------------------------------------------------
AS ORIGINALLY
FILED RESTATEMENT AS RESTATED
------------------- ------------------- -------------------
Total operating expenses $ 30,653 $ -- $ 30,653
Loss from Operations (30,653) -- (30,653)
Total other income (and expenses), net (1,915) -- (1,915)
------------------- ------------------- -------------------
Loss from continuing operations (32,568) -- (32,568)
Discontinued Operations
Gain (loss) from disposal of
discontinued business segment -- 108,892 108,892
------------------- ------------------- -------------------
Gain from discontinued operations -- 108,892 108,892
------------------- ------------------- -------------------
Net income (Loss) $ (32,568) $ 899,731 $ (76,324)
=================== =================== ===================
Net Gain (loss) per common share - basic
and diluted
=================== =================== ===================
Continuing operations $ (0.00) $ (0.00)
Discontinued operations $ 0.00 $ 0.01
------------------- -------------------
Total $ (0.00) $ 0.01
=================== =================== -------------------
(A) To properly recognize the gain upon sale of a majority interest in Homes.
The adjustment eliminates the negative investment as a result of the sale.
12
TX HOLDINGS, INC.
A CORPORATION IN THE DEVELOPMENT STAGE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 4 - PROPERTY AND EQUIPMENT
Property and equipment consists of the following at March 31, 2006 and September
30, 2005
LIFE
YEARS 2006 2005
------------- ---------------- ----------------
Deposits for oil and gas property
acquisition $ 3,000 $ -
Furniture and office equipment 3-5 years 2,552 2,400
---------------- ----------------
Total 5,552 2,400
Less accumulated depreciation,
depletion and
amortization (1,620) (1,320)
---------------- ----------------
3,932 1,080
================ ================
Depreciation expense of $300 and $480 was recognized during the six months ended
March 31, 2006 and the year ended September 30 2005, respectively. At September
30, 2006, the Company has no proven oil and gas properties and, accordingly,
there is no amortization of oil and gas properties during the six months ended
March 31, 2006.
NOTE 5 - DISCONTINUED OPERATIONS
In 2005 the company sold a 67.7% interest in Freedom Home Inc and wrote off its
remaining 32.3% investment in Freedom because management is unable to
demonstrate that its equity interest has any future value. Accordingly, at
September 30, 2005 the Company recognized a gain from discontinued operations of
$108,890.
NOTE 6 - INCOME TAXES
The tax effects of temporary differences that give rise to deferred taxes are as
follows at September 30, 2006 and 2005:
2006 2005
---------------- ----------------
DEFERRED TAX ASSETS:
Net operating losses $ 591,580 $ 413,573
Accrued wages - 17,149
Valuation allowance (591,480) (430,722)
---------------- ----------------
Total deferred tax assets 100 -
DEFERRED TAX LIABILITIES:
Basis of property and equipment 100 -
---------------- ----------------
Net deferred tax asset $ - $ -
================ ================
The Company has tax net operating loss carryforwards totaling approximately
$1,740,000, expiring in 2018 through 2026. 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.
13
TX HOLDINGS, INC.
A CORPORATION IN THE DEVELOPMENT STAGE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 6 - INCOME TAXES, CONTINUED
Net operating losses after December 12, 2002 through September 30, 2005 were
approximately $1,316,000. The total net operating losses available to the
Company to offset future taxable income is approximately $1,740,000. Following
is a reconciliation of the tax benefit at the federal statutory rate to the
amount reported in the statement of operations:
2006 2005
---------------------------- ----------------------------
AMOUNT PERCENT AMOUNT PERCENT
-------------- ----------- -------------- -----------
Benefit for income tax at federal
statutory rate $ 1,705,344 34 % $ 115,906 34 %
Change in valuation allowance (160,758) (3) (67,555) (20)
Non-taxable gain from discontinued
operations - - 37,022 11
Non-deductible stock-based
compensation (1,544,586) (31) (85,373) (25)
-------------- ----------- -------------- -----------
$ - - % $ - - %
============== =========== ============== ===========
There were no income taxes due or receivable from operations for the years ended
September 30, 2006 and 2005, and the Company's reported benefit for income taxes
differs from the amount computed by applying statutory tax rates to loss before
income taxes due to changes in the valuation allowance for financial reporting
purposes.
NOTE 7 - STOCKHOLDERS' EQUITY
PREFERRED STOCK
In May 2006 an employment agreement was entered into with Mr. Neuhaus the
president, CEO and chairman of the Board. The agreement provides that Mr.
Neuhaus shall be compensated at the rate of $25,000 per month plus bonus based
on oil and gas production. In addition the employment agreement provides to Mr.
Neuhaus 1,000 shares of preferred stock with no rights of conversion to common
stock. The preferred stock documents provide Mr. Neuhaus with voting rights
equivalent to 50% of the common shares of issued by company. During the fiscal
year 2006 Mr. Neuhaus waived his salary; however, the preferred stock he was
issued was valued at $1,018,000 due to the fact that the shares give Mr. Neuhaus
complete control over every decision made by the Company.
COMMON STOCK
During the years ended September 30, 2006 and 2005, the Company issued Common
stock to raise capital, compensate employees and professionals, and to settle
liabilities. Following is a description of stock issuances in 2006 and 2005:
On May 11, 2005 Company issued 100,000 shares of common stock of the Company to
Frank Shafer. The shares were issued as payment of $12,000 in fees for past and
future advisory services provided to the Company in relation to financial
aspects of the Company's plans for expansion, acquisitions, and business
opportunities. On April 18, 2006, June 9, 2006 and July 31, 2006, Frank Shafer
received additional shares of 100,000, 20,000 and 300,000, respectively, for his
services. The shares issued to Frank Shaffer during the years ended September
30, 2006 and 2005 were valued at $338,400 and $12,000, respectively.
14
TX HOLDINGS, INC.
A CORPORATION IN THE DEVELOPMENT STAGE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 7 - STOCKHOLDERS' EQUITY, CONTINUED
COMMON STOCK, CONTINUED
On July 1, 2005, the Company authorized the issuance of 350,000 shares of TX
Holdings common stock to Ned Baramov for services, valued at $28,000, in
relation to the preparation of SEC filings. Mr. Baramov's role included
assisting the Company in record keeping, accounting and data management.
On August 5, 2005, 461,942 shares of TX Holdings common stock were issued to
David R. Baker, 361,942 representing settlement of $36,194 of legal fees and
expenses of Haskell Slaughter Young & Rediker, LLC that were due to Mr. Baker
(the issuance being 3,000 shares less than required, which additional shares
will be issued in due course) and 100,000 shares representing an accountable
retainer valued at $10,000 for future services and expenses of Haskell Slaughter
Young & Rediker, LLC in assisting the Company (through Mr. Baker) in bringing
all required SEC filings up to date. Mr. Baker is an accredited investor. Such
services exceeding $10,000 in value have been performed.
On October 19, 2005, the Company issued 2,000,000 shares of its common stock to
Darren Bloom as his compensation in the role of, CFO, Secretary - Treasurer. The
Company has filed suit against Mr. Bloom for the return of the shares for breach
of contract. The shares were issued pursuant to a three year employment contract
which Mr. Bloom only served for 9 months.
On February 22, 2006, the company issued 200,000 shares of common stock to The
Research Works for consulting services, valued at $70,000.
On March 1, 2006 the Company entered into a contract with Global Investment
Holdings, LLC ("Global"). Global acts as a consultant and provides advice in the
areas of paper-based stock and internet-based stock information publishers who
are in compliance with the federal securities laws, etc. For their services,
Global will receive 400,000 restricted shares of common stock each month for a
period of six months commencing March 1, 2006. The Company used the services of
Global for seven months in 2006 and issued Global a total of 1,600,000 shares in
2006 with a value of $1,300,000. An additional 1,220,000 shares were issued to
Global subsequent to September 30, 2006, with a value of $830,000. The liability
for the services performed for which shares were not issued in 2006 is presented
as accrued stock-based compensation in the accompanying balance sheet.
On March 14, 2006, the company issued 400,000 shares of common stock to Security
Pacific Holdings LLC for consulting services, valued at $100,000.
During May 2006 the Company entered into a Private Placement Agreement with
Brill Securities, Inc. to act as a financial advisor for the private placement
of shares of common stock of TX Holdings. Pursuant to the Private Placement
Memorandum $1,240,000 of units were placed. The units contained an aggregate of
4,133,324 shares of the Company's common stock and 4,133,324 common stock
purchase warrants. Each common stock purchase warrant is exercisable for a
period of two years at an exercise price of $.50 per share. In connection with
the offering, the Company paid a placement fee of $70,500 in cash. In addition,
the placing agent was issued warrants to purchase 235,000 shares of common stock
on the same terms and conditions as the investors. The net proceeds of the
offering will be used by the Company to purchase necessary equipment to upgrade,
replace, repair equipment on site at the fields we lease; to search, negotiate
and acquire additional oil and gas leases; and general corporate purposes.
On June 9, 2006, the company issued 17,900 shares of common stock to Michael
Pisani for consulting services in assisting with investor relations efforts,
valued at $18,079.
15
TX HOLDINGS, INC.
A CORPORATION IN THE DEVELOPMENT STAGE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 7 - STOCKHOLDERS' EQUITY, CONTINUED
COMMON STOCK, CONTINUED
On June 9, 2006, the Company issued 11,400 shares of common stock to Barker
Design Inc. for website design services valued at $11,514.
STOCK OPTIONS AND WARRANTS
On December 12, 2002, the award of 5-year options to purchase 294,341 shares of
TX Holdings Common Stock at $0.01 per share to Robert Wilson, then Chairman and
Chief Executive Officer of the Company was authorized in lieu of $54,000 in
compensation earned during calendar year 2001, and cash advances and accrued
interest of $19,585 for a total of $73,585. The options were exercised in
December 2005.
On July 21, 2005, a warrant to purchase 1,434,088 shares of TX Holdings stock
("Warrant") was issued to Baker, Johnston & Wilson LLC (now Baker & Johnston LLC
("B & J")) at an exercise price of $.15 a share. The Warrant provided that it
expires June 30, 2010, was callable by the Company on or after February 1, 2006
if the per share market value of TX Holdings common stock has been at least 2
1/2 times the exercise price for 20 consecutive trading days. The Warrant was
issued pursuant to a Forbearance Agreement between B & J and TX Holdings whereby
B & J agreed not to seek collection of $215,113.20 owed to it by TX Holdings for
legal services and expenses until January 21, 2007. The Warrant, if exercised,
provides for a total exercise price of $215,113.30 ($.15 x 1,434,088), exactly
equaling the indebtedness of the Company to B & J and the warrant may be
exercised by application of indebtedness to the exercise price. B & J is an
accredited investor. The sale was exempt pursuant to Section 4(2) of the
Securities Act of 1933. On January 12, 2006 but effective November 1, 2005, (i)
the Warrant was amended to expire December 31, 2010, (ii) to be callable only on
or after August 1, 2006, and (iii) to be exercisable only on or after July 1,
2006 and the Forbearance Agreement was amended to provide for forbearance until
July 21, 2007. On or about May 1, 2006 this Warrant was assigned to David R.
Baker as to 717,041 Warrants and to J. Brooke Johnston, Jr. as to 717,041
Warrants.
On March 28, 2006, a warrant to purchase 200,000 shares of common stock of TX
Holdings, Inc. at an exercise price of $0.30 was issued to Michael A Cederstrom.
The warrant expires on March 31, 2010 and is callable by
the Company on or after March 27, 2007 if the market value of TX Holding Stock
is has been at least 2 1/2 times the exercise price for 20 consecutive trading
days.
On March 28, 2006, a warrant to purchase 300,000 shares of TX Holdings, Inc.
common stock at an exercise price of $0.30 was issued to Douglas C. Hewitt. The
warrant expires on March 27, 2010 and is callable by the Company on or after
March 31, 2007, if the market value of TX Holding Stock has been at least 2 1/2
times the exercise price for 20 consecutive trading days.
On March 28, 2006, a warrant to purchase 300,000 shares of common stock of TX
Holdings, Inc. at an exercise price of $0.30 was issued to Bobby Fellers. The
warrant expires on March 31, 2010 and is callable by the Company on or after
March 31, 2007 if the market value of TX Holding Stock is has been at least 2
1/2 times the exercise price for 20 consecutive trading days.
In September 1, 2006, the Company entered into a consulting agreement with W.A.
("Bill") Alexander to provide technical support and advice in setting up the oil
and gas operations. Mr. Alexander was granted warrants to purchase 250,000
shares of TX Holdings Common Stock at an exercise price of $0.30 per share. The
warrants will expire on March 27, 2010.
Following is a summary of outstanding stock warrants at September 30, 2006 and
2005 and activity during the years then ended:
16
TX HOLDINGS, INC.
A CORPORATION IN THE DEVELOPMENT STAGE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 7 - STOCKHOLDERS' EQUITY, CONTINUED
STOCK OPTIONS AND WARRANTS, CONTINUED
NUMBER OF EXERCISE WEIGHTED
SHARES PRICE AVERAGE PRICE
-------------- --------------- ---------------
Warrants at September 30, 2004 294,341 $ 0.01 $ 0.01
Warrants at September 30, 2004 294,341 $ 0.01 $ 0.01
Issued 1,434,082 0.15 0.15
---------------
Warrants at September 30, 2005 1,728,423 0.01 - 0.15 0.13
Issued 5,418,324 0.30 - 0.50 0.46
Exercised (294,341) 0.01 0.01
---------------
Warrants at September 30, 2006 6,852,406 $ 0.15 - 0.50 $ 0.40
===============
A summary of outstanding warrants at September 30, 2006, follows:
CONTRACTUAL
NUMBER OF EXERCISE REMAINING LIFE
Expiration Date SHARES PRICE (YEARS)
--------------------------------------- -------------- --------------- ---------------
March 2007 800,000 $ 0.30 0.5
October 2008 4,368,324 0.50 2.0
March 2010 250,000 0.30 3.5
December 2010 1,434,082 0.15 4.3
---------------
Warrants at September 30, 2006 6,852,406
===============
NOTE 8 - SUBSEQUENT EVENTS
In May, 2006 an employment agreement was entered into with Mr. Neuhaus the
president, CEO and chairman of the Board. The agreement provides that Mr.
Neuhaus shall be compensated at the rate of $25,000 per month plus bonus based
on oil and gas production. In addition the employment agreement provides to Mr.
Neuhaus 1,000 shares of preferred stock with no rights of conversion to common
stock. The preferred stock documents provide Mr. Neuhaus with voting rights
equivalent to 50% of the common shares of issued by company. During the fiscal
year 2006 Mr. Neuhaus waived his monthly salary.
On March 28, 2006 the Company entered into a Contract with Michael A. Cederstrom
for services as the part time interim Chief Financial Officer. Mr. Cederstrom
was granted warrants to purchase 200,000 shares of TX Holdings Company Stock at
an exercise price of $0.30 per share. The warrants will expire on March 27,
2010. In addition, Mr. Cederstrom performs legal services for the Company
through his law firm, Dexter and Dexter. The company pays to Dexter and Dexter
the sum of $15,000 per month for legal representation.
On March 28, 2006 the Company entered into a consulting agreement with Douglas
C. Hewitt to provide technical support and advice in setting up the oil and gas
operations. Mr. Hewitt was granted warrants to purchase 300,000 shares of TX
Holdings Common Stock at an exercise price of $0.30 per share. The warrants will
expire on March 27, 2010.
On March 28, 2006 the Company entered into an agreement with Bobby Fellers to
provide technical support and advice in setting up the oil and gas operations.
Mr. Fellers was granted warrants to purchase 300,000 shares of TX Holdings
Common Stock at an exercise price of $0.30 per share. The warrants will expire
on March 27, 2010.
17
TX HOLDINGS, INC.
A CORPORATION IN THE DEVELOPMENT STAGE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 8 - SUBSEQUENT EVENTS
On July 1, 2006 the Company entered into a consulting agreement with W.A.
("Bill") Alexander to provide technical support and advice in setting up the oil
and gas operations. Mr. Alexander was granted warrants to purchase 250,000
shares of TX Holdings Common Stock at an exercise price of $0.30 per share. The
warrants will expire on March 27, 2010.
On December 12, 2005, the Company issued 2,000,000 shares of the Company's
Common Stock for the compensation of Darren Bloom, CFO, Secretary/Treasurer and
member of the Board of Directors. The shares were issued pursuant to a three
year employment contract which Mr. Bloom only served for 9 months. TX Holdings
has filed suit against Mr. Bloom for the return of the shares for breach of
contract.
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
INTRODUCTION
The following discussion is intended to facilitate an understanding of our
business and results of operations and includes forward-looking statements that
reflect our plans, estimates and beliefs. It should be read in conjunction with
our audited consolidated financial statements and the accompanying notes to the
consolidated financial statements included herein. Our actual results could
differ materially from those discussed in these forward-looking statements.
The Company has never earned a profit, and has incurred an accumulated deficit
of $2,609,837 as of March 31, 2006. The acquisition of a controlling interest in
the Company by MA&N has given the Company access to additional funds directly
from MA&N, and the business plan developed by MA&N has enabled the Company to
raise additional funds from third parties. As of September 30, 2006 the Company
was able to raise $1,240,000 in equity. The Company has used these funds to
purchase or place deposits on three oil and gas fields to begin its operations
as an oil and gas exploration and production company. The Company believes it
will begin oil production in 2007. Revenues derived from the planned production
and sale of oil will be based on the evaluation and development of fields. If
our development plan is successful, it is estimated it will take approximately
one year to reach full production levels. During this initial ramp up period,
the Company believes it will need to raise additional funds to fully develop its
fields, purchase equipment and meet general administrative expenses. The Company
may seek both debt and equity financing. The Company believes that it will have
in excess of 100 wells in operation, each with estimated potential to produce 2
to 12 barrels ("bbls") per day once proper techniques are utilized. The Company
believes it could be profitable at approximately 200 bbls of oil produced per
day. The Company's success is dependent on if and how quickly it can reach these
levels of production. The Company plans to use all revenues for general
corporate purposes as well as, future expansion of its current oil producing
properties and the acquisition of other oil and gas properties. There is no
certainty that the Company can achieve profitable levels of production or that
it will be able to raise additional capital through any means.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2006 COMPARED TO THREE MONTHS ENDED MARCH 31, 2005
REVENUES FROM OPERATIONS - Revenues for the three months ended March 31, 2006
and 2005 were zero. On December 5, 2004 the Company began to structure itself
into an oil and gas production and exploration company. The Company acquired oil
and gas leases and began development of oil and gas. The Company anticipates
having revenue in early 2007.
18
RESULTS OF OPERATIONS, CONTINUED
EXPENSES FROM CONTINUING OPERATIONS - The Company incurred operating expenses of
$426,608 for the three months ended March 31, 2006 an increase of $419,636 or
6,018% compared to $6,972 for the three months ended March 31, 2005. The
increase in operating expenses occurred as the Company ramped-up in the initial
phases of entering a new industry (oil and gas) and hiring the necessary
professionals to assist in the selection process and development of potential
oil and gas producing properties. During the three months ended March 31, 2006
stock-based compensation and professional fees accounted for $406,628 or 97% of
the total expenses.
The stock-based compensation for March 31, 2006 include Investment Banker's fees
of $120, 000 related to start-up financing initiatives.
NET INCOME/LOSS - For the quarter ended March 31, 2006 the Company had a net
loss of $431,180 representing a negative variance of $423,261 when compared to a
net loss of $7,919 for the quarter ended March 31, 2005. The negative variance
is the result of higher stock-based compensation and professional fees, $403,939
and higher travel related expenses, $10,248.
SIX MONTHS ENDED MARCH 31, 2006 COMPARED TO SIX MONTHS ENDED MARCH 31, 2005
REVENUES FROM OPERATIONS - Revenues for the six months ended March 31, 2006 and
2005 were zero. On December 5, 2004 the Company began to structure itself into
an oil and gas production and exploration company. The Company has acquired
three oil and gas leases in the counties of Eastland and Callahan, Texas and
began development of oil and gas. The Company anticipates having revenue in
early 2007
EXPENSES FROM CONTINUING OPERATIONS - The Company incurred operating expenses of
$906,610 for the six months ended March 31, 2006 an increase of $875,957 or
2,858% compared to $30,653 for the six months ended March 31, 2005. The increase
in operating expenses occurred as the Company ramped-up in the initial phases of
entering a new industry (oil and gas) and hiring the necessary professionals to
assist in the selection process of potential oil and gas producing properties.
During the six months ended March 31, 2005 stock-based compensation and
professional fees accounted for $886,628 of expense, an increase of $882,446
compared to $4,182 for the six months ended March 31, 2005.
The professional fees for the six months ended March 31, 2006 include officers'
compensation provided to Darren Bloom of $480,000 by the issuance of common
stock to Mr. Bloom (See Part II Item 1, Legal Proceeding).
NET INCOME/LOSS - For the six months ended March 31, 2006 the Company had a net
loss of $915,754 representing a negative variance of $992,078 when compared to a
net gain of $76,324 for the six months ended March 31, 2005. In addition to
higher stock based compensation and professional fees of $882,446 a major reason
for the negative variance was a gain of $108,892 from discontinued operations
recorded in the quarter ended March 31, 2005.
ITEM 3 CONTROLS AND PROCEDURES
EFFECTIVENESS OF DISCLOSURE AND PROCEDURES
The management of the Company is responsible for establishing and maintaining
adequate internal control over financial reporting as defined in Rules 13a-15(f)
and 15d-15(f) under the Securities Exchange Act of 1934. The Company's internal
control over financial reporting is designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted
accounting principles in the United States of America. The Company's internal
control over financial reporting includes those policies and procedures that:
(i) pertain to the maintenance of records that, in reasonable detail, accurately
and fairly reflect the transactions and dispositions of the assets of the
Company; (ii) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with
generally accepted accounting principles, and that receipts and expenditures of
the Company are being made only in accordance with authorizations of management
and directors of the Company; and (iii) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use or disposition
of the Company's assets that could have a material effect on the financial
statements.
19
ITEM 3 CONTROLS AND PROCEDURES, CONTINUED
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedure may deteriorate. Management assessed the
effectiveness of the Company's internal control over financial reporting as of
September 30, 2005. In making this assessment, management used the criteria set
forth by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO) in Internal Control-Integrated Framework.
Based on our assessment and those criteria, management has concluded that the
Company did not maintain effective internal control over financial reporting as
of September 30, 2006 as a result of material weaknesses in internal controls
surrounding the accounting for common stock and preferred stock issuances that
resulted in significant adjustments to the financial statements and weakness in
financial statement disclosures.
A material weakness is a control deficiency, or combination of control
deficiencies, that results in more than a remote likelihood that a material
misstatement of the annual or interim financial statements will not be prevented
or detected.
PART II - OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS
Management is currently aware of one pending, past or present litigation
involving the Company which management does not believe could have a material
adverse effect on the Company. Management does not know of any outstanding
bankruptcy or receivership issues and is not aware of any securities law
violations other than the failure to file timely Form 10-KSB for 2005 and 2006,
and timely Forms 10-QSB for the quarterly periods in 2005 and 2006. The Company
has recently filed Form 10-KSB for fiscal year end 2005. The Forms 10-QSB for
the quarterly periods in 2005 have been incorporated in the Form 10-KSB 2005
filing as provided in an agreement between the Company and the SEC.
TX Holdings has filed an action in Dade County, Florida in District Circuit #11,
case number 06-14396CA04 entitled TX Holdings, Inc vs. Darren Bloom. The Company
has brought an action against Mr. Bloom for breach of contract, damages and for
the cancellation of common stock issued to Mr. Bloom pursuant to a three year
employment contract. Mr. Bloom resigned from the Company on March 17, 2006 after
serving only 9 months. Mr. Bloom currently owns 2,000,000 shares of TX Holdings
common stock. Management believes that this matter can be resolved and will have
no material effect on the Company operations. (The cancellation of shares, if
granted would have a positive effect on Earnings Per Share).
Except as disclosed above, the Company has no material legal proceedings in
which any director, officer or affiliate of the Company, any owner of record or
beneficially of more than 5% of any class of voting securities of the Company,
or security holder is a party adverse to the Company or has a material interest
adverse to the Company.
20
ITEM 2 UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3 DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE TO SECURITY HOLDERS
None.
ITEM 5 OTHER INFORMATION
[Enter other information if any here]
ITEM 6 EXHIBITS
Exhibit Section 302 Certification of Chief Executive Officer
31.1
Exhibit Section 302 Certification of Chief Financial Officer
31.2
Exhibit Section 906 Certification of Chief Executive Officer
32.1
Exhibit Section 906 Certification of Chief Financial Officer
32.2
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
TX HOLDINGS, INC.
By: /s/ Mark Neuhaus
Mark Neuhaus
Chief Executive Officer
Dated: March 26, 2007
In accordance with the Securities Exchange Act of 1934, this report has
been signed below by the following persons on behalf of the Registrant and in
the capacities and on the dates indicated.
/s/ Mark Neuhaus Chairman of the Board of Directors, and
March 26, 2007 Chief Executive Officer
----------------
Mark Neuhaus
/s/ Michael A. Cederstrom Chief Financial Officer
March 26, 2007
-------------------------
Michael A. Cederstrom
/s/ Douglas C. Hewitt Director
March 26, 2007
---------------------
Douglas C. Hewitt
/s/ Bobby S. Fellers Director
March 26, 2007
--------------------
Bobby S. Fellers
21