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 December 31, 2009
___________________________
[ ] 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 February 12, 2009 there were 51,236,897 shares of common stock
outstanding.
TX HOLDINGS, INC.
FORM 10-Q
FOR THE QUARTER ENDED DECEMBER 31, 2009
TABLE OF CONTENTS
PART 1-FINANCIAL INFORMATION
Item 1 Condensed Financial Statements
Unaudited Balance Sheets as of December 31, 2009 and Audited Balance Sheet as of September 30, 2009 3
Unaudited Statements of Operations for the Three Months Ended December 31, 2009 and 2008,
and for the Period From Inception of the Development Stage, October 1, 2004, to December 31 2009 4
Unaudited Statement of Changes in Stockholders' Deficit for the Three Months Ended December 31, 2009
and Audited Statement 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 Three Months Ended December 31, 2009 and 2008, and
for the Period From Inception of the Development Stage, October 1, 2004, to December 31, 2009 11
Notes to Unaudited Financial Statements 12
Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations 26
Item 4(T) Controls and Procedures 27
PART II-OTHER INFORMATION
Item 1 Legal Proceedings 28
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds 28
Item 3 Defaults upon Senior Securities 28
Item 4 Submission of Matters to a Vote to Security Holders 28
Item 5 Other Information 28
Item 6 Exhibits 29
SIGNATURES 30
2
TX Holdings, Inc.
A CORPORATION IN THE DEVELOPMENT STAGE
Balance Sheets
December 31, 2009 and September 30, 2009
--------------------------------------------------------------------------------
Unaudited Audited
December 31, September 30,
2009 2009
------------- -------------
ASSETS
Current assets:
Cash and cash equivalents $ 10,045 $ 6,588
Accounts Receivable-(Net of Allowance for Doubtful _ _
Accounts)
------------- -------------
Total current assets 10,045 6,588
Unproved oil and gas properties-successful efforts,
net 771,752 771,752
Other 52,000 50,000
------------- -------------
Total Assets $ 833,797 $ 828,340
============= =============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Notes payable to a stockholder $ 289,997 $ 289,997
Accounts payable and accrued liabilities 793,651 755,285
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 2,484,189 2,452,723
Asset Retirement Obligation 86,455 86,455
------------- -------------
Total Liabilities 2,570,644 2,539,178
Commitments and contingencies
Stockholders' deficit
Preferred stock: no par value, 1,000,000 shares
authorized no shares outstanding as of
December 31,2009 and September 30,2009 _ _
Common stock:no par value, 250,000,000 shares
authorized, 51,236,897 and 47,636,897 shares
issued and outstanding at December 31, 2009
and September 30, 2009, respectively 10,448,552 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 (11,761,301) (11,502,792)
------------- -------------
Total stockholders' deficit (1,736,847) (1,710,838)
------------- -------------
Total liabilities and stockholders' deficit $ 833,797 $ 828,340
============= =============
The accompanying notes are an integral part of the financial statements.
3
TX HOLDINGS, INC.
A CORPORATION IN THE DEVELOPMENT STAGE
UNAUDITED STATEMENTS OF OPERATIONS
For the Three Months Ended December 31, 2009, and 2008 and for the Period From
Inception of the Development Stage, October 1, 2004 to December 31, 2009
--------------------------------------------------------------------------------
Inception of
THREE MONTHS ENDED Development
------------------------- Stage to
December 31, December 31, December 31,
2009 2008 2009
------------ ------------ -------------
Revenue $ 6,406 $ 449 $ 22,618
------------ ------------ -------------
Operating expenses, except items shown
separately below $ 55,126 $ 85,985 $ 2,196,827
Stock-based compensation 177,500 - 7,390,004
Professional fees 84,000 1,171,790
Impairment Expense 315,866
Lease expense - - 17,392
Depreciation expense - - 3,146
Advertising expense - - 83,265
------------ ------------ -------------
Total Operating Expenses 232,626 169,985 11,178,290
Loss from operations (226,220) (169,536) (11,155,672)
------------ ------------ -------------
Other income and (expense):
Legal settlement - - 204,000
Other income - - 714
Loss on Write-off of leases and - - (11,202)
equipment
Forbearance agreement costs - - (211,098)
Interest expense (32,289) (29,861) (588,043)
------------ ------------ -------------
Total other income and (expenses),
net (32,289) (29,861) (605,629)
------------ ------------ -------------
Net loss $ (258,509) $ (199,397) $(11,761,301)
============ ============ =============
Net loss per common share
basic and diluted $ 0.01 $ -
============ ============
Weighted average number of common shares
outstanding-basic and diluted 46,272,587 43,894,954
============ ============
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 Inception of the Development Stage, October 1, 2004, to December 31, 2009
------------------------------------------------------------------------------------------------------------------------------------
Losses
Preferred Accumulated
Stock Common Stock Additional in the
------------- ---------------------- Paid-In Accumulated Develop-
Shares Amount Shares Amount Capital Deficit ment 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 Inception of the Development Stage, October 1, 2004, to December 31, 2009
------------------------------------------------------------------------------------------------------------------------------------
Losses
Accumulated
Preferred Stock Common Stock Additional in the
----------------- ----------------------- Paid-In Accumulated Develop-
Shares Amount Shares Amount Capital Deficit ment 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 2,944 - - - 2,944
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 Inception of the Development Stage, October 1, 2004, to December 31, 2009
------------------------------------------------------------------------------------------------------------------------------------
Losses
Accumulated
Preferred Stock Common Stock Additional Accumulated in the
----------------- ---------------------- Paid-In Develop-
Shares Amount Shares Amount Capital Deficit ment 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 June 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 Inception of the Development Stage, October 1, 2004, to December 31, 2009
------------------------------------------------------------------------------------------------------------------------------------
Losses
Accumulated
Preferred Stock Common Stock Additional in the
--------------------- ----------------------- Paid-In Accumulated Develop-
Shares Amount Shares Amount Capital Deficit ment 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 December 31, 2009
-------------------------------------------------------------------------------------------------------------------------
Losses
Accumulated
Additional in the
Preferred Stock Common Stock Paid in Development
---------------- ------------------------ ----------- Accumulated Stage
Shares Amount Shares Amount Capital Deficit 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 December 31, 2009
------------------------------------------------------------------------------------------------------------------------
Losses
Accumulated
Additional in the
Preferred Stock Common Stock Paid in 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 _ _ 2,500,000 177,500 _ _ _ 177,500
Common stock sold
to private _ _ _ _ _
investors 1,100,000 55,000 55,000
Net Loss _ _ _ _ _ _ (258,509) (258,509)
Balance at
-------- ------- ---------- ----------- ---------- ------------- -------------- --------------------
December 31,2009 _ _ 51,236,897 $10,448,552 $1,379,409 $ (1,803,507) $ (11,761,301) $ (1,736,847)
======== ======= ========== =========== ========== ============= ============== ====================
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 Three Months Ended December 31, 2009 and 2008 and for the Period From
Inception of the Development Stage, October 1, 2004, to December 31, 2009
--------------------------------------------------------------------------------------------
Inception of
Development
THREE MONTHS ENDED Stage to
--------------------------
12/31/2009 12/31/2008 12/31/2009
------------ ------------ ---------------------
Cash flows used by operating activities:
Net loss $ (258,509) $ (199,397) $ (11,761,301)
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 _ _ 3,146
Bad Debt Expense _ _ 1,729
Common and preferred stock issued for
services 177,500 24,000 5,997,839
Accounting for 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 38,366 113,198 1,698,848
------------ ------------ ---------------------
Net cash used by operating activities (44,643) (62,647) (1,686,001)
------------ ------------ ---------------------
Cash flows used in investing activities:
Deposits paid for oil and gas property _ _
acquisitions (378,000)
Property and equipment additions _ (58,057) (414,613)
------------ ------------ ---------------------
Net cash used in investing activities _ (58,057) (792,613)
------------ ------------ ---------------------
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 55,000 _ 1,312,997
Proceeds from exercise of warrants _ _ 78,404
Proceeds from stockholder/officer
advances (6,900) 117,804 587,213
------------ ------------ ---------------------
Net cash provided by financing activities 48,100 117,804 2,488,659
------------ ------------ ---------------------
Increase (Decrease) in cash and cash
equivalents 3,457 (2,900) 10,045
Cash and cash equivalents at beginning of _
period 6,588 3,558
------------ ------------ ---------------------
Cash and cash equivalent at December 31,
2009 and 2008 $ 10,045 $ 658 $ 10,045
============ ============ =====================
Supplemental Information
Cash paid for interest expense $ _ $ -
============ ============
Cash paid for income taxes $ _ $ -
============ ============
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 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 8.5% 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
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
Strategic Alliance 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 2009 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
December 31, 2009 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.
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
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 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 December 31, 2009 the Company has outstanding 2,050,000 warrants which were
not included in the calculation of diluted net loss per share since their
inclusion would be anti-dilutive. These warrants have exercise prices ranging
from $0.28 to $0.50 per share and expire at various dates through 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.
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
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.
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 December 31, 2009 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.
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 requirements
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
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.
SUBSEQUENT EVENTS
In preparing the financial statements, the Company has reviewed, as determined
necessary by the Company's management, events that have occurred after December
31, 2009, up until the issuance of the financial statements, which occurred on
February 11, 2010.
NOTE 2 - PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31, 2009 and,
September 30, 2009:
December 31, September 30,
2009 2009
------------ -------------
Oil and gas properties - successful efforts
method - unproved $ 771,752 $ 771,752
Less accumulated depreciation, depletion
amortization _ _
------------ -------------
$ 771,752 $ 771,752
============ =============
At December 31, 2009 and, September 30, 2009, the Company had no proven oil and
gas properties and, accordingly, there was no amortization of oil and gas
properties recorded during the years then ended. The Company's unproven oil and
gas properties were reviewed for impairment on a field-by-field basis as of
December 31, 2009 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 December
31, 2009 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.
19
TX HOLDINGS, INC.
A CORPORATION IN THE DEVELOPMENT STAGE
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 2 - PROPERTY AND EQUIPMENT-CONT'D
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 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.
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 December
31, 2009 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 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
20
TX HOLDINGS, INC.
A CORPORATION IN THE DEVELOPMENT STAGE
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 4 - ASSET RETIREMENT OBLIGATION-CON'TD
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 December 31, 2009 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 December 31, 2009:
Deferred tax assets:
Net operating losses $ 1,478,986
Accrued expenses 256,797
Valuation allowance (1,735,783)
------------
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
$4,200,000, 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 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 December 31, 2009 were
approximately $3,000,000. The total net operating losses available to the
Company to offset future taxable income is approximately $3,424,000. Following
is a reconciliation of the tax benefit at the federal statutory rate to the
amount reported in the statement of operations for the three months ended
December 31, 2009 and 2008:
21
TX HOLDINGS, INC.
A CORPORATION IN THE DEVELOPMENT STAGE
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 5- INCOME TAXES-CONT'D
Three Months Ended
December 31,
-------------------
2009 2008
--------- ---------
Benefit for income tax at federal
statutory rate $ 88,000 $ 68,000
Change in valuation allowance (28,000) (60,000)
Non-deductible stock-based
Compensation (60,000) (8,000)
--------- ---------
$ - $ -
========= =========
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.
COMMON STOCK
During the period September 30, 2008 through December 31, 2009, the Company
issued Common stock to raise capital, compensate employees and professionals,
and to settle liabilities as follows:
On February 20, 2008, the Company sold 660,000 shares to private investors for
cash proceeds of $43,000.
On February 20, 2008, the Company issued 150,000 shares to Frank Shafer for
marketing services. The services were valued at $42,000.
22
TX HOLDINGS, INC.
A CORPORATION IN THE DEVELOPMENT STAGE
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 6 - STOCKHOLDERS' EQUITY-CONT'D
COMMON STOCK-CONT'D
On February 20, 2008, the Company issued 17,500 shares of restricted common
shares to Barker Design, Inc for Web design services valued at $4,900.
On February 20, 2008, the Company issued 33,180 shares of restricted common
shares to Paul Owens for office relocation services valued at $9,290.
On March 10, 2008, the Company issued 200,000 shares of restricted common stock
to James Stock for investor relation services valued at $64,000.
On March 10, 2008, The Baron Group returned 300,000 shares to the Company upon
discontinuation of their consulting services.
On July 15, 2008, the Company sold 120,000 shares to Richard Novack, a private
investor, for the sum of $30,000.
On September 4, 2008, the Company issued 50,000 shares to Andrew Patzert, at a
value of $8,250, for consulting services.
On or about September 12, 2008, an agreement was reached with The Investor
Relation Group Inc ("TIRG") settling pending litigation. As part of the
settlement, TIRG received 75,000 shares of restricted common stock from the
Company and 75,000 shares of unrestricted common stock on behalf of the Company
by a third party shareholder. The Company also issued 100,000 shares of
restricted common stock to the shareholder who acted as the third party
facilitator of the settlement.
On October 6, 2008, the Company issued a total of 200,000 shares for services.
The shares were issued to several contract personnel and were valued at $24,000
based on the quoted market price of the Company's common stock on the date of
issuance.
On January 9, 2009, the Company issued a total of 1,250,000 shares for services.
The shares were issued to several contract personnel and were valued at $125,000
based on the quoted market price of the Company's common stock on the date of
issuance.
On February 5, 2009, Darren Bloom returned 1,300,000 shares to the Company in
settlement of a legal dispute over compensation.
On February 27, 2009, the Company issued 2,581,073 shares to two shareholders in
payment for outstanding cash advances to the Company. The shares were valued at
$258,108 based on the quoted market price of the Company's common stock on the
date of issuance.
On February 27, 2009, the Company issued a total of 750,000 shares for services.
The shares were issued to several contract personnel and were valued at $75,000
based on the quoted market price of the Company's common stock on the date of
issuance.
On February 27, 2009, the Company sold 100,000 shares to private investors for
cash proceeds of $10,000.
23
TX HOLDINGS, INC.
A CORPORATION IN THE DEVELOPMENT STAGE
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 6- STOCKHOLDERS' EQUITY-CONT'D
COMMON STOCK-CONT'D
On August 12, 2009, the Company issued 250,000 shares of restricted common stock
for services. The services were valued at $20,000 based on the quoted market
price of the Company's common stock on the date of issuance.
On August 12, 2009 the Company sold 100,000 shares to a private investor for
cash proceeds of $10,000.
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.
POTENTIALLY DILUTIVE OPTIONS AND WARRANTS
At December 31, 2009, the Company has outstanding 2,050,000 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 December 31, 2009
Number of Exercise Weighted
Shares Price Avg. Price
---------- ----------- ----------
Warrants at September 30,2009 2,050,000 $0.28-0.50 $0.29
Issued _ _ _
Exercised _ _ _
---------- ----------- ----------
Warrants at December 31,2009 2,050,000 $0.28-0.50 $0.29
========== =========== ==========
A summary of outstanding warrants at December 31, 2009, follows:
Contractual
Remaining
Number of Exercise Life
Expiration Date Shares Price (Years)
------------------------------ ---------- ----------- -----------
March, 2010 1,050,000 0.30 0.25
September, 2011 1,000,000 0.28 1.75
----------
2,050,000
==========
24
TX HOLDINGS, INC.
A CORPORATION IN THE DEVELOPMENT STAGE
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
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 three months ended December 31, 2009. The Management
believes that the agreements were entered at arms length and upon terms that
would be common for the industry and location of the fields.
As of December 31, 2009, 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 December 31, 2009 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 December 31, 2009 interest
expense of $31,504, 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
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.
25
TX HOLDINGS, INC.
A CORPORATION IN THE DEVELOPMENT STAGE
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
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.
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.
The Company has never earned a profit, and has incurred an accumulated deficit
of $13,564,808 as of December 31, 2009. 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
26
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 DECEMBER 31, 2009 COMPARED TO THREE MONTHS ENDED DECEMBER 31,
2008
REVENUES FROM OPERATIONS
Revenues for the three months ended December 31, 2009 and 2008 were $6,406 and
$449 respectively. 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 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 December 31, 2009 were
$232,626. The current quarter operating expenses represent a negative variance
of $62,641 when compared to operating expenses of $169,985 for the quarter ended
December 31, 2008. Higher stock based compensation in the current quarter
account for a negative variance of $177,500 when compared to the same quarter
the prior year. The stock based compensation arose from Company stock issued for
Investor relation services. The negative variance was partially offset by lower
legal fees ($84,000), lower contract labor ($17,300) and, lower travel expense
($5,632).
NET INCOME/LOSS
For the quarter ended December 31, 2009, the Company had a net loss of $258,509
representing a negative variance of $59,112 when compared to a net loss of
$199,397 for the quarter ended December 31, 2008. The negative variance as noted
above in "Expenses from Continuing Operations" resulted from higher stock issued
compensation partially offset by lower legal fees and lower travel expenses.
ITEM 4(T) 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
27
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.
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
December 31, 2009, 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: February 12, 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
February 12, 2010
/s/ Richard (Rick) Novack President and Director
-------------------------
Richard (Rick) Novack
February 12, 2010
/s/ Jose Fuentes Chief Financial Officer
-------------------------
Jose Fuentes
February 12, 2010
/s/ Bobby S. Fellers Director
-------------------------
Bobby S. Fellers
February 12 2010
/s/ Martin Lipper Director
-------------------------
Martin Lipper
February 12, 2010
31