UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
|X| QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 2010
---------------------------
|_| 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)
12080 Virginia Blvd.
Ashland, KY 41102
--------------------------------
(Principal Address of Issuer)
(606) 928-1131
--------------------------------
Issuer's telephone number
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the 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 large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company.
Smaller reporting company |X|
Indicate by check mark whether the Registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act) YES |_| NO |X|
Transitional Small Business Disclosure Format (check one): YES |_| NO |X|
As of July 29, 2010 there were 53, 041,897 shares of common stock outstanding.
TX Holdings, Inc.
Form 10-Q
For the Quarter Ended June 30, 2010
Table of Contents
PART 1-FINANCIAL INFORMATION
Item 1 Condensed Financial Statements
Unaudited Balance Sheet as of June 30, 2010 and Audited
Balance Sheet as of September 30, 2009 3
Unaudited Statements of Operations for the Three Months and
Nine Months Ended June 30, 2010 and 2009, and for the Period
From Inception of the Development Stage, October 1, 2004, to
June 30, 2010 4
Unaudited Statement of Changes in Stockholders? Deficit for
the Nine Months Ended June 30, 2010 and Audited Statements
of Changes in Stockholders? Deficit for the Period From
Inception of the Development Stage, October 1, 2004 to
September 30, 2009 5
Unaudited Statements of Cash Flows for the Nine Months Ended
June 30, 2010 and 2009, and for the Period From Inception of
the Development Stage, October 1, 2004, to June 30, 2010 11
Notes to Unaudited Financial Statements 12
Item 2 Management?s Discussion and Analysis of Financial Condition
and Results of Operations 25
Item 4 Controls and Procedures 27
PART II-OTHER INFORMATION
Item 1 Legal Proceedings 29
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds 29
Item 3 Defaults upon Senior Securities 29
Item 4 Submission of Matters to a Vote to Security Holders 29
Item 5 Other Information 29
Item 6 Exhibits 30
SIGNATURES 31
2
TX Holdings, Inc.
A CORPORATION IN THE DEVELOPMENT STAGE
Balance Sheets
June 30, 2010 and September 30, 2009
---------------------------------------------------------------------------------------------------
Unaudited Audited
June 30, September 30,
2010 2009
---------------- ---------------
ASSETS
Current assets:
Cash and cash equivalents $ 1,204 $ 6,588
Accounts Receivable-(Net of Allowance for Doubtful Accounts) _ _
---------------- ---------------
Total current assets 1,204 6,588
Proved oil and gas properties undeveloped-successful efforts, net 779,998 771,752
Performance Bond 50,000 50,000
Prepaid Expenses 2,000 _
---------------- ---------------
Total Assets $ 833,202 $ 828,340
================ ===============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Notes payable to a stockholder $ 289,997 $ 289,997
Accounts payable and accrued liabilities 914,296 755,285
Accounts payable-related party 158,308 158,308
Advances from stockholder/officer 42,347 49,247
Convertible debt to stockholder/officer 1,199,886 1,199,886
---------------- ---------------
Total Current Liabilities 2,604,834 2,452,723
Asset Retirement Obligation 86,455 86,455
---------------- ---------------
Total Liabilities 2,691,289 2,539,178
Stockholders' deficit
Preferred stock: no par value, 1,000,000 shares authorized
no shares outstanding as of June 30, 2010 and September _ _
30,2009
Common stock:no par value, 250,000,000 shares
authorized, 53,041,897 and 47,636,897 shares
issued and outstanding at June 30, 2010
and September 30, 2009, respectively 10,558,437 10,216,052
Additional paid-in capital 1,379,409 1,379,409
Accumulated deficit (1,803,507) (1,803,507)
Losses accumulated in the development stage (11,992,426) (11,502,792)
---------------- ---------------
Total stockholders' deficit (1,858,087) (1,710,838)
---------------- ---------------
Total liabilities and stockholders' deficit $ 833,202 $ 828,340
================ ===============
The accompanying notes are an integral part of the financial statements.
3
UNAUDITED STATEMENTS OF OPERATIONS
For the Three and Nine Months Ended June 30, 2010 and 2009 and for the Period From
Inception of the Development Stage, October 1, 2004 to June 30, 2010
--------------------------------------------------------------------------------------------------------------------
Inception of
THREE MONTHS ENDED Nine Months Ended Development
--------------------------- ---------------------------- Stage to
June 30, June 30, June 30, June 30, June 30,
2010 2009 2010 2009 2010
------------ ------------- ------------ ------------- ---------------
Oil Sales $ 7,509 $ 6,455 $ 14,507 $ 6,904 $ 30,719
------------ ------------- ------------ ------------- ---------------
Operating expenses, except items shown
separately below 62,517 42,929 165,325 116,326 2,307,026
Stock-based compensation _ _ 239,885 224,000 7,452,389
Professional fees 520 1,000 520 87,783 1,172,310
Impairment Expense 315,866
Lease expense _ _ _ 17,392
Depreciation expense 1,081 _ 2,470 _ 5,616
Advertising expense _ _ _ 83,265
------------ ------------- ------------ ------------- ---------------
Total Operating Expenses 64,118 43,929 408,200 428,109 11,353,864
Loss from operations (56,609) (37,474) (393,693) (421,205) (11,323,145)
------------ ------------- ------------ ------------- ---------------
Other income and (expense):
Legal settlement _ _ _ 204,000
Other income _ _ 125 4 838
Loss on Write-off of leases and _ _ _
equipment (11,202)
Forbearance agreement costs _ _ _ (211,098)
Interest expense (31,761) (32,602) (96,065) (94,919) (651,819)
------------ ------------- ------------ ------------- ---------------
Total other income and (expenses), net (31,761) (32,602) (95,940) (94,915) (669,281)
------------ ------------- ------------ ------------- ---------------
Net loss $ (88,370) $ (70,076) $ (489,633) $ (516,120) $ (11,992,426)
============ ============= ============ ============= ===============
Net loss per common share
basic and diluted $ - _ $ (0.01) $ (0.01)
============ ============= ============ =============
Weighted average number of common shares
outstanding-basic and diluted 52,986,952 47,286,897 50,264,760 45,562,290
============ ============= ============ =============
The accompanying notes are an integral part of the financial statements.
4
TX HOLDINGS, INC.
A CORPORATION IN THE DEVELOPMENT STAGE
STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIT
For the Period from Development Stage , October 1, 2004 to June 30, 2010
----------------------------------------------------------------------------------------------------------------------------
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, 2004 $ 15,793,651 $1,532,111 - $(1,912,397) $ $ (380,286)
Inception of the development
stage on October 1, 2004 - - -
Common stock issued for
professional services 450,000 40,000 - 40,000
Common stock issued for
prepaid services 100,000 10,000 - 10,000
Common stock issued to
settle accounts payable 361,942 36,194 - 36,194
Warrants issued under
forbearence agreement - - 211,098 211,098
Net income (loss) - - - 108,890 (449,790) (340,900)
------ -------- --------------------- ----------- ------------ ------------ -------------
Balance at September 30, 2005 $ 16,705,593 1,618,305 211,098 $(1,803,507) $ (449,790) $ (423,894)
------ -------- ---------- ---------- ----------- ------------ ------------ -------------
The accompanying notes are an integral part of the financial statements
5
TX HOLDINGS, INC.
A CORPORATION IN THE DEVELOPMENT STAGE
STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIT
For the Period from Development Stage , October 1, 2004 to June 30, 2010
-----------------------------------------------------------------------------------------------------------------------------------
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 - - 4,649,300 2,318,295 - - - 2,318,295
Common stock issued for cash - - 4,633,324 1,164,997 - - - 1,164,997
Common stock issued upon
exercise of warrants - - 294,341 2,943 - - - 2,943
Common stock surrendered - - (500,000) - - - -
Warrants issued for services - - - - 376,605 - - 376,605
Preferrd stock issued to the
Company's chief executive
officer/stockholder 1,000 1,018,000 - - - - - 1,018,000
Net income (loss) - - - - - - (5,015,719) (5,015,719)
--------------------- ----------------------- ------------ ------------ ------------- ------------
Balance at September 30, 2006 1,000 $ 1,018,000 25,782,558 $ 5,104,541$ 587,703 $(1,803,507) $(5,465,509) $ (558,772)
--------- ----------- ------------ ---------- ------------ ------------ ------------- ------------
The accompanying notes are an integral part of the financial statements
6
TX HOLDINGS, INC.
A CORPORATION IN THE DEVELOPMENT STAGE
STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIT
For the period from development Stage, October 1, 2004 to June 30, 2010
----------------------------------------------------------------------------------------------------------------------------------
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, 2006 1,000 $1,018,000 25,782,558 $ 5,104,541 $ 587,703 $ (1,803,507) $(5,465,509) $ (558,772)
Common stock issued for
professional services - - 3,475,555 2,501,222 - - 2,501,222
Contribution by stockholder - - - - 53,325 - 53,325
Warrants issued for service - - - - 159,381 - 159,381
Common stock issued upon
exercise of warrants - - 355,821 75,461 - - 75,461
Common stock issued in settle-
ment of notes payable and
and interest - - 833,333 546,666 - - 546,666
Common stock issued in settle-
of accounts payable - - 1,437,088 215,114 - - 215,114
Net loss - - - - - - (4,085,033) (4,085,033)
------------ ---------- ----------- ----------- ---------- ------------- ------------ -----------
Balance at September 30, 2007 1,000 $1,018,000 31,884,355 $ 8,443,004 $ 800,409 $ (1,803,507) (9,550,542) (1,092,636)
============ ========== =========== =========== ========== ============= ============ ===========
The accompanying notes are an integral part of the financial statements
7
TX HOLDINGS, INC.
A CORPORATION IN THE DEVELOPMENT STAGE
STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIT
For the period from development Stage, October 1, 2004 to June 30, 2010
---------------------------------------------------------------------------------------------------------------------------------
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, 2007 1,000 $ 1,018,000 31,884,355 $ 8,443,004 $ 800,409 $(1,803,507) $ (9,550,542) $(1,092,636)
Common stock issued in
exchange of preferred stock -1,000 -1,018,000 10,715,789 1,018,000 - - - -
Common stock issued for
professional services - - 450,680 128,440 - - - 128,440
Common stock issued for
cash - - 780,000 73,000 - - - 73,000
Common stock issued in
settlement of legal claim - - 175,000 31,500 - - - 31,500
Contribution by stockholder - - - - 10,643 10,643
Common stock returned
to treasury - - -300,000 - - - - -
Accrued salary contributed by
officer/stockholder - - - - 125,000 - - 125,000
Accounting for employee
stock warrants - - - - 190,000 - - 190,000
Accounting for options issued
to a consultant - - - - 19,000 - - 19,000
Net loss - - - - - - (676,123) (676,123)
--------- ------------ ----------- ----------- ----------- ----------- ------------ -----------
Balance at September 30, 2008 - $ - 43,705,824 $9,693,944 $1,145,052 $(1,803,507) $(10,226,665) $(1,191,176)
========= ============ =========== ========== ========== =========== ============ ============
The accompanying notes are an integral part of the financial statements
8
TX HOLDINGS INC.
A CORPORATION IN THE DEVELOPMENT STAGE
STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIT
For the Period from Inception of the Development Stage, October 1, 2004, to June 30, 2010
------------------------------------------------------------------------------------------------------------------------------------
Losses
Additional Accumulated
Preferred Stock Common Stock Paid in in the
------------------- ---------------------- ----------- Accumulated Development
Shares Amount Shares Amount Capital Deficit Stage Total
------------------- ---------------------- ----------- ------------- -------------- --------------
Balance at
September 30, 2008 _ _ 43,705,824 $9,693,944 $ 1,145,052 $ (1,803,507) $ (10,226,665) $ (1,191,176)
Common stock issued
in Payment for
Shareholders'advances _ _ 2,581,073 258,108 _ _ _ 258,108
Common stock issued
for professional
services _ _ 2,450,000 244,000 _ _ _ 244,000
Common stock sold
to private investors _ _ 200,000 20,000 _ _ _ 20,000
Common stock returned
to treasury _ _ (1,300,000) _ _ _ _ _
Shareholders' advances
previously reported as
Additional Paid in Capital _ _ _ _ (10,643) _ _ (10,643)
Imputed salary contributed
by officer/stockholder _ _ _ _ 125,000 _ _ 125,000
Accounting for employee
stock warrant _ _ _ _ 120,000 _ _ 120,000
Net Loss _ _ _ _ _ _ (1,276,127) (1,276,127)
Balance at
------------------- ----------------------- ----------- ------------- -------------- --------------
September 30, 2009 _ _ 47,636,897 $10,216,052 $ 1,379,409 $ (1,803,507) $ (11,502,792) $ (1,710,838)
=================== ======================= =========== ============= ============== ==============
The accompanying notes are an integral part of these financial statements.
9
TX HOLDINGS INC.
A CORPORATION IN THE DEVELOPMENT STAGE
UNAUDITED STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIT
For the Period from Inception of the Development Stage, October 1, 2004, to June 30, 2010
------------------------------------------------------------------------------------------------------------------------------------
Losses
Additional Accumulated
Preferred Stock Common Stock Paid in in the
------------------ ------------------------ ------------- Accumulated Development
Shares Amount Shares Amount Capital Deficit Stage Total
------------------ ------------------------ ------------- --------------- ----------------- --------------
Balance at
September 30, 2009 _ _ 47,636,897 $ 10,216,052 $ 1,379,409 $ (1,803,507) $ (11,502,792) $ (1,710,838)
Common stock issued
for professional
services _ _ 3,355,000 239,885 _ _ _ 239,885
Common stock sold
to private _ _ _ _ _
investors 2,050,000 102,500 102,500
Net Loss _ _ _ _ _ _ (489,633) (489,633)
Balance at
------------------ ------------------------ ------------- --------------- ----------------- --------------
June 30, 2010 _ _ 53,041,897 $ 10,558,437 $ 1,379,409 $ (1,803,507) $ (11,992,426) $ (1,858,087)
================== ======================== ============= =============== ================= ==============
The accompanying notes are an integral part of the financial statements.
10
TX HOLDINGS, INC.
A CORPORATION IN THE DEVELOPMENT STAGE
UNAUDITED STATEMENTS OF CASH FLOWS
For the Nine Months Ended June 30, 2010 and 2009 and for the Period From
Inception of the Development Stage, October 1, 2004, to June 30, 2010
-----------------------------------------------------------------------------------------------------------------------
Inception of
Nine Months Ended Development
---------------------------------- Stage to
June 30, 2010 June 30, 2009 June 30, 2010
---------------- ---------------- -------------------
Cash flows used by operating activities:
Net loss $ (489,633) $ (516,120) $ (11,992,425)
Adjustments to reconcile net loss to net cash used
in operating activities:
Warrants issued for forbearance agreement _ _ 211,098
Loss on disposal of equipment _ _ 11,202
Impairment of unproved oil and gas properties 384,088
Depreciation expense 2,470 _ 5,616
Bad Debt Expense _ 1,729 1,729
Common and preferred stock issued for services 239,885 224,000 6,060,224
Warrants issued to employees and a consultant _ _ 329,000
Warrants issued for services _ _ 376,605
Common stock issued to settle accounts payable _ _ 251,308
Common stock issued in payment of interest expense _ _ 196,666
Common stock issued by an officer/stockholder to
satisfy expenses of the Company and increase
stockholder advances _ _ 616,750
Common stock issued in settlement of legal claim _ _ 31,500
Accrued salary contributed by stockholder/former
officer _ _ 250,000
Changes in operating assets and liabilities:
Accrued stock-based compensation reversal
resulting from legal claim settlement _ _ (231,000)
Prepaid expenses and other assets (2,000) _ (51,750)
Accounts receivable _ (448) (1,729)
Accounts payable and accrued liabilities 159,009 213,261 1,819,491
---------------- ---------------- -------------------
Net cash used by operating activities (90,269) (77,578) (1,731,627)
---------------- ---------------- -------------------
Cash flows used in investing activities:
Deposits paid for oil and gas property acquisitions _ _ (378,000)
Property and equipment additions (10,715) (58,057) (425,328)
---------------- ---------------- -------------------
Net cash used in investing activities (10,715) (58,057) (803,328)
---------------- ---------------- -------------------
Cash flows provided by financing activities:
Proceeds from stockholder/officer contribution _ _ 10,643
Repayment of note payable to a bank _ _ (20,598)
Proceeds from note payable to stockholder _ _ 520,000
Proceeds from sale of common stock 102,500 10,000 1,360,497
Proceeds from exercise of warrants _ _ 78,404
Proceeds from stockholder/officer advances _ 128,814 594,113
Payment of stockholder advances (6,900) _ (6,900)
---------------- ---------------- -------------------
Net cash provided by financing activities 95,600 138,814 2,536,159
---------------- ---------------- -------------------
Increase (Decrease) in cash and cash equivalents (5,384) 3,179 1,204
Cash and cash equivalents at beginning of period 6,588 3,558 _
---------------- ---------------- -------------------
Cash and cash equivalents at end of period $ 1,204 $ 6,737 $ 1,204
================ ================ ===================
Non-cash investing and financing activities:
Common stock issued in payment of Shareholders' advances $ - $ 258,108 $ 258,108
================ ================ ===================
Shareholders' advances converted to notes payable from
stockholder $ - $ 119,997 $ 119,997
================ ================ ===================
The accompanying notes are an integral part of the financial statements.
11
TX HOLDINGS, INC.
A CORPORATION IN THE DEVELOPMENT STAGE
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 1- BACKGROUND AND CRITICAL ACCOUNTING POLICIES
INTERIM FINANCIAL STATEMENTS
The accompanying interim unaudited financial statements included herein have
been prepared by the Company pursuant to the rules and regulations of the
Securities and Exchange Commission. The 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 accounting
principles generally accepted in the United States of America ("US GAAP"), have
been condensed or omitted pursuant to such rules and regulations.
These financial statements should be read in conjunction with the audited
financial statements and the notes thereto included in the Company's 2009 Annual
Report. The results of operations for interim periods are not necessarily
indicative of the results for any subsequent quarter or the entire year ending
September 30, 2010.
CAUTIONARY NOTE TO U.S. INVESTORS
THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION PERMITS OIL AND GAS
COMPANIES, IN THEIR FILINGS WITH THE SEC, TO DISCLOSE ONLY PROVED RESERVES THAT
A COMPANY HAS DEMONSTRATED BY ACTUAL PRODUCTION OR CONCLUSIVE FORMATION TESTS TO
BE ECONOMICALLY AND LEGALLY PRODUCIBLE UNDER EXISTING ECONOMIC AND OPERATING
CONDITIONS. WE USE CERTAIN TERMS HEREIN, SUCH AS "PROBABLE", "POSSIBLE",
"RECOVERABLE",AND "RISKED," AMONG OTHERS, THAT THE SEC'S GUIDELINES STRICTLY
PROHIBIT US FROM INCLUDING IN FILINGS WITH THE SEC. READERS ARE URGED TO
CAREFULLY REVIEW AND CONSIDER THE VARIOUS DISCLOSURES MADE BY US WHICH ATTEMPT
TO ADVISE INTERESTED PARTIES OF THE ADDITIONAL FACTORS WHICH MAY AFFECT OUR
BUSINESS
OVERVIEW OF BUSINESS
TX Holdings, Inc. ("TX Holdings" or the "Company"), formerly named R Wireless,
Inc. ("RWLS") and HOM Corporation ("HOM"), is a Georgia corporation incorporated
on May 4, 2000. In December 2004 the Company began to structure itself into an
oil and gas exploration and production company. The Company acquired oil and gas
leases and began development of a plan for oil and gas producing operations in
April 2006.
The Company is engaged in the exploration, development, and acquisition of crude
oil and natural gas in the counties of Callahan and Eastland, Texas. The Company
is also pursuing acquisitions in Ohio, Pennsylvania, West Virginia and Wyoming.
In November 2006, the Company entered into a Purchase and Sale Agreement with
Masada Oil & Gas, Inc. ("Masada"). Masada has previously served as the operator
on two leases in which TX Holdings currently holds interest in the counties of
Callahan and Eastland, Texas. TX Holding's leases and the related working
interests are as follows:
a. Contract Area # 1, 8.5% Working Interest;
b. Park's Lease, 75% Working Interest;
The Contract Area #1 leases include a total of 247 acres and a total of 36
wells. D-Bar Leasing is the operator of record for all 36. The lease has
eighteen wells capable of production although production of the wells is minimal
(from 3 to 5 bbls per day). The Company believes it may be able to achieve
higher production rates through the development of an effective water flood
program. The water flood program involves the injection of water into the field
through injection wells to force the oil to the production wells and thereby
increase the production rate.
12
TX HOLDINGS, INC.
A CORPORATION IN THE DEVELOPMENT STAGE
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 1- BACKGROUND AND CRITICAL ACCOUNTING POLICIES- CONT'D
OVERVIEW OF BUSINESS-CONT'D
The Parks lease covers 320 acres in which the company owns a 75% working
interest and Masada owns the remaining 25%. The land owners of this lease have a
12.5% royalty interest in the production. TX Holdings Inc is the lease operator
of the lease and there are currently 22 wells with minimal production rates (2
to 3 bbls per day).
The Company owned a 100% working interest and was the operator of the 843 acre
Williams Lease. Due to an on-going dispute with the land owner of the lease
which prevented the Company from operating or reporting any production on this
lease. On September 30, 2009, the Company elected to cease operation of the
Williams lease resulting in impairment of the lease. The Company recorded an
impairment loss of $68,222 for the year ended September 30, 2009 related to this
lease.
The Company plans to continue using a combination of debt and equity financing
to acquire additional fields and to develop those fields. 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 operations.
HISTORY AND CORPORATE STRUCTURE
TX Holdings formerly acted as a holding company whose operations were conducted
through two wholly-owned operating subsidiaries, Direct Lending Inc. and Homes
By Owners, Inc. The Company ceased its former operations in September 2004. In
December 2004, as a result of the Company's research, the Company announced that
it would pursue acquisition of producing oil and gas properties operations in
the oil and gas industry. In connection with this decision, the Company effected
its name change to "TX Holdings, Inc." on September 1, 2005. October 1, 2004 was
the beginning day for the first quarter of the determination to pursue
operations in the oil and gas industry. The CUSIP number changed to 873 11R 101
as of September 6, 2005, and the trading symbol changed to TXHG as of September
19, 2005.
In April 2006 TX Holdings acquired a 75% working interest in the Parks Lease
located in Callahan County, Texas. In February 2006 TX Holdings entered into a
Memorandum of Understanding with Masada Oil and Gas Inc. and subsequently
acquired an 8% working interest in an oil and gas lease known as Contract Area
#1 located in Texas.
On March 28, 2006, TX Holdings appointed to its Board of Directors, Bobby
Fellers, who has worked in the oil and gas business for more than thirty years.
Mr. Fellers has assisted TX Holdings in the acquisition of the above referenced
leases and owns a ninety two percent working interest position in the Contract
Area #1 lease and a twenty-five percent working interest in the Parks Lease. In
addition Mr. Fellers is the sole owner of Masada Oil & Gas Inc a Texas
corporation, which is the current operator of record of certain wells in
Contract Area #1 in which TX Holdings has an 8% working interest.
On or about May 7, 2007, the Company entered into a Strategic Alliance Agreement
with Hewitt Energy Group, LLC ("Hewitt"), a company owned by Douglas C. Hewitt,
a Director of TX Holdings, Inc. at the time of the transaction. The Strategic
Alliance Agreement provided that TX Holdings, Inc. would acquire a 50% working
interest in eight projects in Kansas and Oklahoma. The purchase and development
of all of the prospects were estimated at approximately $15,000,000 in cash and
stock to be paid over a 6 month period. Mr. Hewitt resigned as a director on
July, 27, 2007 The Company and Mr. Hewitt mutually agreed to terminate the
Strategic Alliance
13
TX HOLDINGS, INC.
A CORPORATION IN THE DEVELOPMENT STAGE
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 1- BACKGROUND AND CRITICAL ACCOUNTING POLICIES- CONT'D
HISTORY AND CORPORATE STRUCTURE-CONT'D
Agreement and to negotiate the participation in individual projects. During
2007, the Company's former Chief Executive Officer claimed that he transferred
stock on behalf of the Company with a market value of $352, 560 to Hewitt to
acquire an interest in the Perth field in Kansas. There is currently a dispute
as to the extent of the Company's performance under the leases and agreement
with Hewitt Energy.
From July through September 2006 the Company raised $1,240,000 in a Private
Placement offering. The funds raised were used to purchase interests in three
oil and gas fields located in Texas as described above. Development of the
fields began on November 1, 2006, by way of cleaning up the fields and preparing
the wells located in the fields for testing required by the State of Texas. The
testing of wells located in the Williams Field was completed as of April 30,
2008. In November 2007, the Company began work on the Parks Lease.
The Company has experienced substantial costs for engineering and other
professional services during 2005 through 2010 in making the attempt to
transition to an oil and gas exploration and production company from its current
development stage status.
GOING CONCERN CONSIDERATIONS
Since it ceased its former business operations, the Company has devoted its
efforts to research, product development, and securing financing and has not
earned significant revenue from its planned principal operations. Accordingly,
the financial statements are presented in accordance with FASB Accounting
Standards Codification ("ASC") Topic 915 Development Stage Entities (formerly)
Statement of Financial Accounting Standards (SFAS) No.7, Accounting and
Reporting by Development-Stage Enterprises.
The Company, with its prior subsidiaries, has suffered recurring losses while
devoting substantially all of its efforts to raising capital and identifying and
pursuing advantageous businesses opportunities. Management currently believes
that its best opportunities lie in the oil and gas industry. The Company's total
liabilities exceed its total assets and the Company's liquidity has depended
excessively on raising new capital.
These factors raise substantial doubt about the Company's ability to continue as
a going concern. 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 raise sufficient capital and to implement a successful business plan to
generate profits sufficient 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.
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 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, measurement of stock based compensation, and the asset
retirement obligation on oil and gas properties. 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.
14
TX HOLDINGS, INC.
A CORPORATION IN THE DEVELOPMENT STAGE
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
ACCOUNTS RECEIVABLE AND PROVISION FOR BAD DEBTS
The Company maintains 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
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 $1,729 and $1,729 as of
June 30, 2010 and September 30, 2009, respectively
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, costs of carrying and retaining unproved
properties, and exploratory dry hole drilling costs, are all 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 geological, geophysical, 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 in which 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.
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 are 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. The Company 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.
15
TX HOLDINGS, INC.
A CORPORATION IN THE DEVELOPMENT STAGE
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 1- BACKGROUND AND CRITICAL ACCOUNTING POLICIES, CONT'D
PROPERTY AND EQUIPMENT-CONT'D
Other property and equipment are stated at their historical 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.
ASSET RETIREMENT OBLIGATION
The Company follows ASC Topic 410, "Accounting for Asset Retirement
Obligations", which requires that the fair value of a liability for an asset
retirement obligation be recognized in the period in which it is incurred if a
reasonable estimate of fair value can be made. The associated asset retirement
costs will be capitalized as part of the carrying amount of the long-lived
asset. The carrying value of a property associated with the capitalization of an
asset retirement cost is included in unproved oil and gas property in the
accompanying balance sheets. The Company's asset retirement obligation consists
of costs related to the plugging of wells and removal of facilities and
equipment on its oil and gas properties.
REVENUE RECOGNITION
Currently the Company has limited revenue from oil and gas operations. Once the
Company begins to receive higher 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.
POTENTIALLY DILUTIVE OPTIONS AND WARRANTS
At June 30, 2010 the Company has outstanding 1,000,000 warrants which were not
included in the calculation of diluted net loss per share since their inclusion
would be anti-dilutive. These warrants have an exercise price of $0.28 per
share and expire in September 2011.
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
16
TX HOLDINGS, INC.
A CORPORATION IN THE DEVELOPMENT STAGE
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 1- BACKGROUND AND CRITICAL ACCOUNTING POLICIES, CONT'D
INCOME TAXES-CONT'D
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 June 30, 2010 and September 30, 2009. The Company assumes the book value of
those financial instruments that are classified as current 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.
RECLASSIFICATIONS
Certain reclassifications have been made to the prior years' financial
statements to conform to the current year presentation. These reclassifications
had no effect on reported net loss or accumulated deficit.
ROUNDING
Throughout our financial statements and footnotes, amounts have been rounded to
the nearest dollar. Consequently, the addition and subtraction totals of some
columns and category presentations may have differences of a dollar due to this
rounding.
BASIC NET LOSS PER COMMON SHARE
Net loss per share is computed based on current accounting guidance 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.
RECENTLY ISSUED ACCOUNTING STANDARDS
On December 31, 2008, the SEC published the final rules and interpretations
updating its oil and gas reporting requirements. Many of the revisions are
updates to definitions in the existing oil and gas rules to make them consistent
with the petroleum recourse management system, which is a widely accepted
standard for the management of petroleum resources that was developed by several
industry organizations. Key revisions include changes to the pricing used to
estimate reserves utilizing a 12-month average price rather than a single day
spot price which eliminates the ability to utilize subsequent prices to the end
of a reporting period when the full cost ceiling was exceeded and subsequent
pricing exceeds pricing at the end of a reporting period, the ability to include
nontraditional resources in reserves, the use of new technology for determining
reserves, and permitting disclosure of probable and possible reserves. The SEC
will require companies to comply with the amended disclosure
17
TX HOLDINGS, INC.
A CORPORATION IN THE DEVELOPMENT STAGE
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 1- BACKGROUND AND CRITICAL ACCOUNTING POLICIES, CONT'D
RECENTLY ISSUED ACCOUNTING STANDARDS, CONT'D
requirements for registration statements filed after January 1, 2010, and for
annual reports on Form 10-K for fiscal years ending on or after December 15,
2009. Early adoption is not permitted. The Company is currently assessing the
impact that the adoption will have on the Company's disclosures, operating
results, financial position and cash flows.
In June 2009, the FASB issued Statement of Financial Accounting Standards
("SFAS") No. 168, "The FASB Accounting Standards Codification TM and the
Hierarchy of Generally Accepted Accounting Principles - a replacement of FASB
Statement No. 162" ("SFAS 168"). The FASB Accounting Standards Codification TM,
("Codification" or "ASC") became the source of authoritative GAAP recognized by
the FASB to be applied by nongovernmental entities. Rules and interpretive
releases of the SEC under authority of federal securities laws are also sources
of authoritative GAAP for SEC registrants. On the effective date of SFAS 168,
the Codification superseded all then-existing non-SEC accounting and reporting
standards. All other non-grandfathered non-SEC accounting literature not
included in the Codification became non-authoritative.
Following SFAS 168, the FASB will no longer issue new standards in the form of
Statements, FASB Staff Positions, or Emerging Issues Task Force Abstracts;
instead, it will issue Accounting Standards Updates (ASUs). The FASB will not
consider ASUs as authoritative in their own right; rather, these updates will
serve only to update the Codification, provide background information about the
guidance, and provide the bases for conclusions on the change(s) in the
Codification. SFAS No. 168 is incorporated in ASC Topic 105, Generally Accepted
Accounting Principles. The Company adopted SFAS No. 168 for the fiscal
year-ended September 30, 2009, and the Company will provide reference to both
the Codification topic reference and the previously authoritative references
related to Codification topics and subtopics, as appropriate.
In May 2009, the FASB issued ASC Topic 855, Subsequent Events (formerly SFAS No.
165, Subsequent Events) which establishes general standards for the evaluation,
recognition and disclosure of events and transactions that occur after the
balance sheet date. Although there is new terminology, the standard is based on
the same principles as those that currently exist in the auditing standards. The
standard, which includes a new required disclosure of the date through which
management has evaluated subsequent events, is effective for interim and annual
periods ending after June 15, 2009. The adoption of ASC 855 did not have a
material effect on the Company's financial statements.
In September 2006, the FASB issued ASC Topic 820 Fair Value Measurments and
Disclosures (formerly SFAS No. 157, Fair Value Measurements) which defines fair
value, establishes a framework for measuring fair value in generally accepted
accounting principles, and expands disclosures about fair value measurements.
ASC Topic 820 does not require any new fair value measurements, but provides
guidance on how to measure fair value by providing a fair value hierarchy used
to classify the source of the information. This statement was effective for and
adopted by the Company beginning the first quarter of fiscal 2008. Its adoption
had no significant impact on our financial statements.
In June 2006, the FASB issued accounting guidance for uncertainty in income
taxes which is included in ASC Topic 740 Income Taxes (formerly Interpretation
No. 48, "Accounting for Uncertainty in Income Taxes-An Interpretation of FASB
Statement No. 109" ("FIN No. 48"). FIN No. 48 clarifies the accounting for
uncertainty in income taxes recognized in an enterprise's financial statements
in accordance with Statement No. 109. ASC Topic 740 clarifies the accounting for
uncertainty in income taxes recognized in an enterprise's financial statements
ASC Topic 740 prescribes a recognition threshold and measurement attribute for
the financial statement recognition and measurement classification, accounting
for interest and penalties and accounting in interim periods and disclosure.
18
TX HOLDINGS, INC.
A CORPORATION IN THE DEVELOPMENT STAGE
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 1- BACKGROUND AND CRITICAL ACCOUNTING POLICIES, CONT'D
RECENTLY ISSUED ACCOUNTING STANDARDS, CONT'D
The provisions of the accounting guidance are effective for fiscal years
beginning after December 15, 2006. This statement was effective for and
adopted by the Company beginning the first quarter of fiscal 2008. Its adoption
had no significant impact on the Company's financial condition or results of
operations.
Effective October 1, 2008, the Company adopted certain aspects of ASC Topic 825.
Financial Instruments (formerly SFAS 159, "The Fair Value Option for Financial
Assets & Financial Liabilities - including an amendment of SFAS No. 115.").The
accounting guidance created a fair value option under which an entity may
irrevocably elect fair value as the initial and subsequent measurement attribute
for certain financial assets and liabilities on a contract by contract basis,
with changes in fair values recognized in earnings as these changes occur. The
adoption of ASC Topic 825 has no significant impact on the Company's financial
condition or results of operations.
In December 2007, the FASB issued ASC Topic 805, Business Combinations (
formerly SFAS 141R, "Business Combinations,") ASC Topic 805 changes how a
reporting enterprise will account for the acquisition of a business. ASC 805
will apply prospectively to business combinations with an acquisition date on or
after November 1, 2009 The adoption of ASC Topic 805 is not expected to have a
material impact on the Company's financial condition or results of operations,
however future acquisitions would be accounted for under the guidance.
During the nine months ended June 30, 2010, there were several new accounting
pronouncements issued by the FASB the most recent of which was Accounting
Standards Update 2010-19, Foreign Currency Issues: Multiple Foreign Currency
Exchange Rates. 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.
SUBSEQUENT EVENTS
In preparing the financial statements, the Company has reviewed, as determined
necessary by the Company's management, events that have occurred after June 30,
2010, up until the issuance of the financial statements, which occurred on July
29, 2010.
NOTE 2 - PROPERTY AND EQUIPMENT
Property and equipment consists of the following at June 30, 2010 and September 30, 2009:
June 30, September 30,
2010 2009
------------- --------------
Oil and gas properties ? successful efforts
method - unproved $ 782,468 $ 771,752
Less accumulated depreciation, depletion amortization (2,470) _
------------- --------------
$ 779,998 $ 771,752
============= ==============
At June 30, 2010 and September 30, 2009, the Company had proved oil and gas
undeveloped properties and, accordingly, with the exception of some equipment,
there was no amortization of oil and gas properties recorded during the periods
then ended. The Company's unproven oil and gas properties were reviewed for
impairment on a field-by-field basis
19
TX HOLDINGS, INC.
A CORPORATION IN THE DEVELOPMENT STAGE
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 2 - PROPERTY AND EQUIPMENT-CONT'D
as of June 30, 2010 and September 30, 2009. As a result of the review, the
Company recognized an impairment loss of $0 and $(384,088) for the period ended
June 30, 2010 and September 30, 2009, respectively.
Substantially all the Company's reserves can only be produced economically
through application of improved recovery techniques and are excluded from the
proved classification until successful testing by a pilot project, or the
operation of an installed program in the reservoir, provide support for the
engineering analysis on which the project or program is based.
On November 1, 2006, 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 was 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.
The Company has made payments totaling $378,000 to the seller, which reduced the
working interest to 8.5%. These payments are included in unproved oil and gas
properties - successful efforts on the accompanying balance sheet as of June 30,
2010 and September 30, 2009. Included in unproved oil and gas properties is
$352,560 of 2007 additions that were acquired in exchange for shares of the
Company's common stock that the Company's former Chief Executive Officer
who is a major stockholder of the Company advised he transferred on behalf of
the Company. This amount is included in Convertible Debt to
Stockholder/Officer. The Company has established a $4,000 Fixed Asset
capitalization threshold.
NOTE 3 - NOTES PAYABLE TO A STOCKHOLDER AND CONVERTIBLE DEBT TO OFFICER/
STOCKHOLDER
On February 14, 2007 the Company obtained a $250,000 bridge loan from Rob
Hutchings, convertible to common stock at $0.525 per share, the closing price of
the Company's common stock at that date. The beneficial conversion feature
associated with the debt was valued at $35,000. The note bore interest of 10%
per year with the principal due in 60 days. The terms of the loan required that
the Company issue 500,000 shares of restricted common stock as security for the
loan. On June 29, 2007, Mr. Hutchings elected to convert his note for shares
provided as collateral. The sum of $250,000 was applied toward the principal
repayment; the beneficial conversion value of $35,000 was charged to interest
expense.
The balance in note payable to a stockholder of $289,997 is the principal due on
advances from William Shrewsbury. The note bears interest at 10% per year and
due on demand. On June 15, 2007, the Company issued William Shrewsbury 333,333
shares of common stock at a market price of $0.77 per share for a total
consideration of $256,666. The proceeds were used for a $100,000 reduction of a
$270,000 loan owed to Mr. Shrewsbury and the remaining $156,666 was treated as
interest expense. During February 2009, the Company converted the $119,997
advance from shareholder to a note payable, related party.
Mark Neuhaus, the former Chairman of the Board of Directors and former Chief
Executive Officer of the Company caused the Company in September 2007 to
issue to him a convertible promissory note in the amount of $1,199,886
bearing interest at 8% per annum and due and payable within two years for
payments in cash and common stock made on behalf of the Company through
that date. The conversion price is $0.28 per common share (the market price
of the Company's common stock on the date of the note) which will
automatically convert on the two-year anniversary of the note if not paid
in full by the Company. The conversion price is subject to adjustments for
anti-dilution. The Company disputed that the note was not supported by
consideration or that it was properly authorized under Georgia law and on
November 11, 2008 the Company entered into a settlement agreement with Mr.
Neuhaus and his wife which included provisions cancelling the indebtedness
represented by the note contingent on the closing of a third party transaction
within 90 days of November 11, 2008. The Company was not
20
TX HOLDINGS, INC.
A CORPORATION IN THE DEVELOPMENT STAGE
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 3 - NOTES PAYABLE TO A STOCKHOLDER AND CONVERTIBLE DEBT TO OFFICER/
STOCKHOLDER-CON'TD
successful in finalizing the transaction with the third party within the
stipulated period resulting in the cancellation of the settlement agreement
between the Company and Mark Neuhaus and his wife.
NOTE 4 - ASSET RETIREMENT OBLIGATION
In the period in which an asset retirement obligation is incurred or becomes
reasonably estimable, the Company recognizes the fair value of the liability if
there is a legal obligation to dismantle the asset and reclaim or remediate
the property at the end of its useful life. The Company estimates the timing of
the asset retirement based on an economic life determined by reference to
similar properties and/or reserve reports. The liability amounts are based on
future retirement cost estimates and incorporate many assumptions such as
expected economic recoveries of oil and gas, time to abandonment, future
inflation rates and the adjusted risk-free rate of interest. When the liability
is initially recorded, the Company capitalizes the cost by increasing the
related property balances. This initial cost is depreciated or depleted over the
useful life of the asset.
The Company has identified potential retirement obligations related to the Parks
Lease and Contract Area #1 Lease. These retirement obligations are determined
based on estimated costs to comply with abandonment regulations established by
the Texas Railroad Commission and the State of Texas. Management has estimated
the cost in today's dollars, to comply with these regulations. These estimates
have been projected out to the anticipated retirement date 10 years in the
future. The anticipated future cost of remediation efforts is $186,650. The
anticipated future cost of remediation efforts were discounted back at an
assumed interest rate of 10 percent, to arrive at a net present value of the
obligation. The asset retirement obligation is $86,455 at June 30, 2010 and
September 30, 2009. The Company has not recorded accretion on the asset
retirement obligation due to minimal revenues.
NOTE 5 - INCOME TAXES
Following is an analysis of deferred taxes at June 30, 2010:
Deferred tax assets:
Net operating losses $ 1,535,000
Accrued expenses 256,000
Valuation allowance (1,791,000)
----------------
Total deferred tax assets _
Deferred tax liabilities:
Basis of property and equipment _
----------------
Net deferred tax asset $ _
================
The Company has tax net operating loss carryforwards totaling approximately
$4,550,000, expiring in 2018 through 2029. Approximately $1,200,000 of net
operating losses were incurred prior to December 12, 2002 at which date MA&N
acquired 51% of the Company and are consequently subject to certain limitation
described in section 382 of
21
TX HOLDINGS, INC.
A CORPORATION IN THE DEVELOPMENT STAGE
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 5- INCOME TAXES-CONT'D
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.
Net operating losses after December 12, 2002 through June 30, 2010 were
approximately $3,350,000. The total net operating losses available to the
Company to offset future taxable income is approximately $3,674,000. Following
is a reconciliation of the tax benefit at the federal statutory rate to the
amount reported in the statement of operations for the nine months ended June
30, 2010 and 2009:
Nine Months Ended June 30,
-----------------------------
2010 2009
----------- ------------
Benefit for income tax at federal
statutory rate $ 166,000 $ 175,481
Change in valuation allowance (82,000) (99,321)
Non-deductible stock-based
Compensation (84,000) (76,160)
----------- ------------
$ - $ -
=========== ============
NOTE 6 - STOCKHOLDERS' EQUITY
PREFERRED STOCK
Mark Neuhaus, former President, CEO and Chairman of the Board, has represented
that in May 2006 the Company entered into an employment agreement with him. Mr.
Neuhaus claims that the agreement provided that he was to be compensated at the
rate of $25,000 per month plus bonus based on oil and gas production. In
addition he claims that the employment agreement granted to Mr. Neuhaus 1,000
shares of preferred stock. The preferred stock which Mr. Neuhaus caused to be
issued to himself had the following rights and privileges:
1. Super voting rights: The preferred stock has the right to vote on any
item of business submitted to the common shareholders for a vote the
equivalent number of votes representing 50% of the outstanding common
shares then issued by the Company.
2. No other rights: The preferred shares have no other rights, including
but not limited to no conversion rights; no dividend rights; and no
liquidation priority rights.
During the fiscal year 2006, Mr. Neuhaus waived his salary. However, Mr.
Neuhaus obtained a letter from Baron Capital Group, Inc. stating that value of
the preferred stock value was no greater than $1,018,000. On December 24, 2007,
and in connection with Mr. Neuhaus' resignation, the 1,000 preferred shares were
exchanged for 10,715,789 common shares, which exchange assumed that the
preferred stock had a value of $1,018,000. Current management of the Company
has not seen documentation establishing that an employment agreement existed
between Mr. Neuhaus and the Company; that any such agreement was authorized in
accordance with Georgia law or that the preferred stock was duly authorized or
validly issued in accordance with law.
22
TX HOLDINGS, INC.
A CORPORATION IN THE DEVELOPMENT STAGE
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 6 - STOCKHOLDERS' EQUITY-CONT'D
COMMON STOCK
During the period September 30, 2009 through June 30, 2010, the Company issued
Common stock to raise capital, compensate employees and professionals, and to
settle liabilities as follows:
On October 6, 2009, the Company sold 300,000 shares to private investors for
cash proceeds of $15,000.
On December 1, 2009, the Company sold 200,000 shares to a private investor for
cash proceeds of $10,000.
On December 8, 2009, the Company sold 500,000 shares to a private investor for
cash proceeds of $25,000.
On December 8, 2009, the Company issued 2,500,000 shares of restricted common
stock for services, The services were valued at $177,500 based on the quoted
market price of the Company's common stock on the date of issuance.
On December 10, 2009 the Company sold 100,000 shares to a private investor for
cash proceeds of $5,000.
On February 16, 2010 the Company sold 350,000 shares to private investors for
cash proceeds of $17,500.
On February 16, 2010, the Company issued 580,000 shares of restricted common
stock for services. The services were valued at $41, 760 based on the quoted
market price of the Company's stock on the date of issuance.
On March 1, 2010 the Company issued 275,000 shares of restricted common stock
for services. The services were valued at $20,625 based on the quoted market
price of the Company's stock on the date of issuance.
On March 18, 2010, the Company sold 400,000 shares to a private investor for
cash proceeds of $20,000.
On April 26, 2010, the Company sold 200,000 shares to a private investor for
cash proceeds of $10,000.
POTENTIALLY DILUTIVE OPTIONS AND WARRANTS
At June 30, 2010, the Company has outstanding 1,000,000 warrants which were not
included in the calculation of diluted net loss per share since their inclusion
would be anti-dilutive.
Following is a summary of outstanding stock warrants at June 30, 2010
Number of Exercise Weighted
Shares Price Avg. Price
------------- ------------ -------------
Warrants at September 30,2009 2,050,000 $0.28-0.50 $0.39
Issued _ _ _
Expired 1,050,000 $0.50 $0.50
------------- ------------ -------------
Warrants at June 30, 2010 1,000,000 $0.28 $0.28
============= ============ =============
23
TX HOLDINGS, INC.
A CORPORATION IN THE DEVELOPMENT STAGE
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
A summary of outstanding warrants at June 30, 2010, follows:
Contractual
Remaining
Number of Exercise Life
Expiration Date Shares Price (Years)
------------------------------ ---------- ----------- -----------
September, 2011 1,000,000 0.28 1.25
----------
1,000,000
==========
NOTE 7 - RELATED PARTY TRANSACTIONS
Beginning with the quarter ended March 31, 2008 to the present, the Company
recognized crude oil sales from a lease for which the operator is company owned
by a stockholder/director of the Company. These sales account for 100% of our
oil and gas revenue for the nine months ended June 30, 2010.
As of June 30, 2010, the Company has an outstanding note payable to Mr.
Shrewsbury, the Company's Chairman and CEO, for the amount of $289,997, the note
bears a 10% interest and is payable on demand.
Included in the financial statements at June 30, 2010 are advances from
stockholder/officer of $42,347. Interest has been accrued on these advances at
rates ranging from 8% to 10%,. In the quarter ended June 30, 2010 interest
expense of $31,162, in the accompanying statement of operations, relates to
those advances and the promissory note.
In June 2007, the Company entered into a strategic alliance agreement with
Hewitt Energy Group, LLC ("Hewitt Energy") to identify reserves and prospects,
and to establish production from the projects mutually owned or contemplated to
be jointly owned by the entities in states of Texas, Kansas and Oklahoma.
Hewitt Energy is controlled by a former member of the Company's board of
directors. During 2007, the Company's former Chief Executive Officer, who is a
major stockholder, claimed that he transferred stock on behalf of the Company
with a market value of $352,560 to Hewitt Energy Group, LLC to acquire an
interest in the Perth field in Kansas. There is currently a dispute as to the
extent of the Company's performance under the leases and agreement with Hewitt
Energy.
On November 11, 2008, the Company entered into a settlement agreement with Mark
Neuhaus and Nicole Neuhaus. The agreement was subject to the Company finalizing
a transaction with a third party involving certain oil and gas properties within
90 days of November 11, 2008 ("Third Party Closing"). If the third party
transaction closes, the agreement provides for mutual general releases between
the Company, Mark Neuhaus and Nicole Neuhaus. In connection with the agreement,
seven million shares of the common stock of the Company previously issued to
Mark Neuhaus were delivered to the Company to be held pending the Third Party
Closing. If the Third Party Closing occurs within the 90 day period, (1) four
million five hundred thousand of the deposited shares will be cancelled and
returned to authorized but unissued shares of the Company,(2) two million five
hundred thousand of the deposited shares will be delivered to Nicole Neuhaus and
(3) certain alleged claims of Mark Neuhaus against the Company for compensation
and reimbursement for advances in the aggregate amount of $178,862 and a
purported indebtedness of the Company to Mark Neuhaus in the amount of
$1,320,071,including interest accrued through December 31, 2008 and represented
by a convertible note dated as of September 28, 2007 will be cancelled. If the
24
TX HOLDINGS, INC.
A CORPORATION IN THE DEVELOPMENT STAGE
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 7 - RELATED PARTY TRANSACTIONS-CON'TD
Third Party Closing does not occur within 90 days of November 11, 2008, the
settlement agreement will be void and of no force and effect and the deposited
shares will be returned. On February 6, 2009, an amendment to the settlement
agreement was signed by all parties. The amendment extends the period of time
provided in paragraph 10 of the settlement agreement by an additional 30 days so
that the agreement would remain in full force and effect until March 11, 2009.
The Company was not successful in finalizing the transaction with the third
party within the stipulated period resulting in the cancellation of the
settlement agreement between the Company and Mark Neuhaus and Nicole Neuhaus.
NOTE 8 - FAIR VALUE MEASUREMENTS
The Company adopted Accounting Standard Codification (ASC) Topic 820 "Fair Value
Measurements" on October 1, 2008. ASC Topic 820, among other things, defines
fair value, establishes a consistent framework for measuring fair value and
expands disclosure for each major asset and liability category measured at fair
value on either a recurring or nonrecurring basis. ASC Topic 820 clarifies that
fair value is an exit price, representing the amount that would be received to
sell an asset or paid to transfer a liability in an orderly transaction between
market participants. As such, fair value is a market-based measurement that
should be determined based on assumptions that market participants would use in
pricing an asset or liability. As a basis for considering such assumptions, ASC
Topic 820 establishes a three-tier fair value hierarchy, which prioritizes the
inputs used in measuring fair value as follows:
Level 1. Observable inputs such as quoted prices in active markets for
identical assets or liabilities;
Level 2. Inputs, other than quoted prices included within Level 1,
that are observable either directly or indirectly; and
Level 3. Unobservable inputs in which there is little or no market
data, which require the reporting entity to develop
its own assumptions.
Asset Fair Value as of June 30, 2010 and 2009
---------------------------------------------
Level 1 Level 2 Level 3
----------- -------------- -------------
Performance Bond $ - $ 50,000 $ -
Management has determined that it will not, at this time, adopt fair value
accounting for nonfinancial assets or liabilities currently recorded in the
financial statements which includes fixed assets and prepaid expenses.
Impairment analysis will be made of all assets using fair value measurements.
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.
25
The Company has never earned a profit, and has incurred an accumulated deficit
of $13,795,933 as of June 30, 2010. As of September 30, 2006, the Company had
raised $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. 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 production levels to sufficiently capitalize the
Company on an ongoing basis. 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 currently has in excess of
forty nine wells located on the two fields located in Texas. Each of the wells
will need to be reworked to establish production at a cost of approximately
$7,000 to $10,000 per well. Initial production from each well is estimated to be
between two to five barrels per day. Once initial production has been
established the Company intends to begin a water flood program that injects
water into the oil producing zone through injector wells. The water then forces
the oil towards the producing well and, if successful, may increase production
of each well up to an estimated four to seven barrels per day per well. If the
Company is able to produce its wells upon the re-completion the Company revenues
will exceed current operating expenses if 40 barrels of oil is produced and the
price of oil remains above $55.00 per barrel. 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 JUNE 30, 2010 COMPARED TO THREE MONTHS ENDED JUNE 30, 2009
REVENUES FROM OPERATIONS
Revenues for the three months ended June 30, 2010 and 2009 were $7,509 and
$6,455 respectively. On December 5, 2004, the Company began to structure itself
into an oil and gas production and exploration company. The Company has acquired
two oil and gas leases in the counties of Eastland and Callahan, Texas and has
begun development of oil and gas. The Company received its first revenues from
oil and gas operations in March 2008. The Company believes that it will place
additional wells into operation during the current fiscal year. Since it ceased
its former business operations, the Company has devoted its efforts to research
prospective leases and business combinations and secure financing.
EXPENSES FROM CONTINUING OPERATIONS
The Company operating expenses for the three months ended June 30, 2010 were
$64,118. The current quarter operating expenses represent a negative variance of
$20,189 when compared to operating expenses of $43,929 for the quarter ended
June 30, 2009. Well work-over expenses in the current quarter in the amount of
$17,825 account for a negative variance of $16,812 when compared to the same
quarter the prior year. Higher travel and depreciation expenses in the current
quarter account for the remaining negative variance of $3,377.
NET INCOME/LOSS
For the quarter June 30, 2010, the Company had a net loss of $88,370
representing a negative variance of $18,294 when compared to a net loss of
$70,076 for the quarter ended June 30, 2009. The negative variance in the
current quarter as noted above in "Expenses from Continuing Operations" resulted
from higher well work-over, travel and depreciation expenses.
26
NINE MONTHS ENDED JUNE 30, 2010 COMPARED TO NINE MONTHS ENDED JUNE 30, 2009
REVENUES FROM OPERATIONS
Revenues for the nine months ended June 30, 2010 and 2009 were $14,507 and
$6,904 respectively. On December 5, 2004, the Company began to structure itself
into an oil and gas production and exploration company. The Company has acquired
two oil and gas leases in the counties of Eastland and Callahan, Texas and has
begun development of oil and gas. The Company received its first revenues from
oil and gas operations in March 2008. The Company believes that it will place
additional wells into operation during the current fiscal year. Since it ceased
its former business operations, the Company has devoted its efforts to research
prospective leases and business combinations and secure financing.
EXPENSES FROM CONTINUING OPERATIONS
The Company operating expenses for the nine months ended June 30, 2010 were
$408,200. The current period operating expenses represent a positive variance of
$19,909 when compared to operating expenses of $428,109 for the nine months
ended June 30, 2009. Higher stock based compensation in the current period,
resulting from higher outside consultants and investor relations expenses,
account for a negative variance of $15,885 when compared to the same period the
prior year. Higher well work-over during the current period account for an
additional negative variance of $28,835. The higher stock based compensation and
well work-over expenses were more than offset by lower legal fees of $87,783
during the current period.
NET INCOME/LOSS
For the nine months ended June 30, 2010, the Company had a net loss of $489,633
representing a favorable variance of $26,487 when compared to a net loss of
$516,120 for the nine months ended June 30, 2009. The favorable variance was
primarily the result of higher revenue of $7,603 and lower operating expenses
amounting to $19,909 during the nine months ended June 30, 2010, as compared
with the same period the prior year. Higher interest expense in the current
period account for a negative variance of $1,146.
ITEM 4 CONTROLS AND PROCEDURES
Management is responsible for establishing and maintaining adequate internal
control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of
the Exchange Act) of the Company. Internal control over financial reporting is a
process designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with accounting principles generally accepted 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 accounting principles generally accepted in the
United States of America, and that receipts and expenditures of the Company are
being made only in accordance with authorizations of management and directors of
the Company; and (iii) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use or disposition of the
Company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
27
Management, under the supervision of the Company's Chief Executive Officer and
Chief Financial Officer, conducted an evaluation of the effectiveness of
internal control over financial reporting based on the framework in Internal
Control-Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission. Based on that evaluation, management concluded that
the Company's internal control over financial reporting were not effective as of
June 30, 2010, under the criteria set forth in the Internal Control-Integrated
Framework. The determination was made partially due to the small size of the
company and a lack of segregation of duties. The Company continues to implement
control processes to mitigate the control weaknesses that are present in a small
Company with very few employees.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
There was no change in our internal control over financial reporting (as defined
in Rule 13a-15(f) under the Exchange Act) identified in connection with
management's evaluation during our last fiscal quarter that has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting.
28
PART II - OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS
Management is currently aware of no pending, past or present litigation
involving the Company which management believes could have a material adverse
effect on the Company.
TX Holdings had filled an action in Dade County, Florida in District Circuit
#11, case number 06-14396CA04 entitled TX Holdings, Inc vs. Darren Bloom. The
Company 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 owned 2,000,000 shares of TX Holdings
common stock. In 2009, The Company reached an agreement with Mr. Bloom whereby
he retained 700,000 shares and returned 1,300,000 shares to the Company.
On November 17, 2009 the Company filed a legal claim in the Miami Circuit Court
against several defendants for alleged services and reimbursed expenses paid by
the Company. The claim stipulates that the defendants did not perform any
services on TX Holdings behalf which would have entitled them to receive
compensation or reimbursement of expenses. Management believes that this matter
can be resolved and will have no material effect on the Company's operations.
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.
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 None.
29
ITEM 6 EXHIBITS
Exhibit 31.1 Section 302 Certification of Chief Executive Officer
Exhibit 31.2 Section 302 Certification of Chief Financial Officer
Exhibit 32.1 Section 906 Certification of Chief Executive Officer
Exhibit 32.2 Section 906 Certification of Chief Financial Officer
30
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/ William "Buck" Shrewsbury
William "Buck" Shrewsbury
Chief Executive Officer
Dated: July 29, 2010
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/ William "Buck" Shrewsbury Chairman of the Board of Directors and
------------------------- Chief Executive Officer
William ?Buck? Shrewsbury
July 29, 2010
/s/ Richard (Rick) Novack President and Director
-------------------------
Richard (Rick) Novack
July 29, 2010
/s/ Jose Fuentes Chief Financial Officer
-------------------------
Jose Fuentes
July 29, 2010
/s/ Bobby S. Fellers Director
-------------------------
Bobby S. Fellers
July 29, 2010
/s/ Martin Lipper Director
-------------------------
Martin Lipper
July 29, 2010
31