TX Holdings, Inc. - Quarter Report: 2018 December (Form 10-Q)

FORWARD-LOOKING STATEMENTS

This report contains “forward looking statements,” that is statements regarding future, not past, events. Forward-looking statements often address our expected future business and financial performance and financial condition, and often contain words such as "expect," "anticipate," "intend," "plan," "believe," "seek," "see," "will," "would," "estimate," "forecast" or "target." All statements that are not statements of historical fact are “forward looking statements.”

For us, particular uncertainties that could cause our actual results to be materially different than those expressed in our forward-looking statements include:

These and other uncertainties may cause our actual results to be materially different from those expressed in our forward-looking statements. You should not unduly rely on these forward-looking statements which speak only as of the date of this report. We do not ordinarily make projections of our future operating results and do not undertake to publicly revise any forward-looking statement to reflect circumstances or events after the date of this report, or to reflect the occurrence of unanticipated events.

Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, expressly state that the safe harbor for forwarding looking statements does not apply to companies that issue “penny stocks.” Because we may from time to time be considered an issuer of penny stock, the safe harbor for forward looking statements under such statutory provisions may not be applicable to us at certain times.

We obtained certain statistical data, market data and other industry data and forecasts used in this Form 10-Q from publicly available information. While we believe that such data is reliable, we have not independently verified the data, and we do not make any representation as to the accuracy of the information.

The accompanying notes are an integral part of the financial statements.

The accompanying notes are an integral part of the financial statements.

The accompanying notes are an integral part of the financial statements.

TX HOLDINGS, INC.

STATEMENTS OF CASH FLOWS

For the Three Months Ended December 31, 2018 and 2017

The accompanying notes are an integral part of the financial statements.

TX HOLDINGS, INC.

NOTES TO UNAUDITED FINANCIAL STATEMENTS

ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Introduction

You should read the following summary together with the more detailed information and consolidated financial statements and notes thereto and schedules appearing elsewhere in this report. When we refer to the “Company” “TX Holdings,” “we,” “our” or “us,” we mean TX Holdings, Inc., and its subsidiary.

The discussion and analysis contained in this Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is based upon our consolidated financial statements which have been prepared in accordance with GAAP. The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our critical accounting policies and estimates, including those related to revenue recognition and contingencies. We base our estimates on historical experience, where available, and on various other assumptions we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions and conditions.

Except for historical information, the statements and other information contained in this MD&A are forward-looking. Our actual results could differ materially from the results discussed in the forward-looking statements, which include certain risks and uncertainties.

Our independent registered public accounting firm’s report on the consolidated financial statements included in our Annual Report Form 10-K for the year ended September 30, 2018, contained an explanatory paragraph in which they expressed an opinion that there is substantial doubt about our ability to continue as a going concern.

Accordingly, careful consideration of such opinion should be given in determining whether to continue or become our stockholder.

Please refer to and carefully consider the factors described in the Risk Factors section in our Form 10-K for the year ended September 30, 2018, and in this report.

Business and Operational Overview

We are in the business of supplying, distributing and selling drill bits, related tools, and other mining supplies, rail and rail material directly and through other suppliers to United States’ coal mining companies for use in their production and transportation processes. Our coal mining customers are primarily located in Ohio, Pennsylvania, Kentucky and West Virginia. Our principal executive offices and warehousing facility is located in Ashland, Kentucky.

Recent Developments in U.S. Coal Industry

Although, the Company has experienced an increase in sales starting in the second fiscal quarter of 2017 as compared to the two prior years, when the U.S. Coal industry was phasing declining U.S. coal production and bankruptcies and restructurings among certain U.S. coal companies, the demand for, and production of, coal continue to be adversely affected by several factors, including increased environmental regulation in the U.S., declining coal consumption in the electric power sector, increased competition from natural gas, and a strong U.S. dollar.

The U.S. Energy Information Administration (EIA) forecasted in its Short-Term Energy Outlook (STEO) released October 10, 2018, that U. S. coal production will decline by 2% to 756MMst in 2018, despite a 12% (11MMst) increase in coal export. The production decrease is largely attributable to a forecast decline of 4% (26MMst) in domestic coal consumption in 2018. EIA expects coal production to decline by 2% (13MMst) in 2019 because it forecasts that coal exports and coal consumption will decrease by 7% and 5%, respectively.

EIA expects the share of U.S. total utility-scale electricity generation from natural gas to rise from 32% in 2017 to 35% in both 2018 and 2019 and, the forecast for electricity generation share from coal averages 28% in 2018 and 27% in 2019, down from 30% in 2017.

Electricity generators that use fossil fuels continue to be the most common sources of electricity generation in most states. In all but 15 states, coal, natural gas, or petroleum liquids were the most-used electricity generation fuel in 2017. Since 2007, the number of states where coal was the most prevalent electricity generation fuel has fallen as natural gas, nuclear or hydroelectricity have gained market share. In 2017 coal provided the largest generation share in 18 states, down from 28 states in 2007 and natural gas had the largest share in 16 states up from 11 in 2007.

Coal production for the first six months of 2018 was 368 MMst, 16 MMst (4%) lower than in the same period in 2017. Coal production is expected to decrease by 2% in 2018 and by 2% in 2019.

Coal exports for the first six months of 2018 totaled 58 MMst, compared to 44MMst in 2017 or 62% higher than the prior year. EIA expects growth in coal exports for all 2018 forecast at 108 MMst, representing a 12% increase over 2017.

Continued distress in the U.S. coal mining industry will materially affect the demand for our products.

Our Business

We purchase mining supplies such as drill bits, augurs and related products from domestic as well as overseas manufacturers and rail material such as tee rail, switches, ties and other rail products from several suppliers of such products and distribute and sell such products to U.S. coal mining companies and other suppliers. Our products are either shipped to our warehouse in Ashland, Kentucky, for distribution to our customers or shipped directly to our customers, including products we import once they have been received by us at a port and cleared customs. Our products are transported primarily by ground transportation to our customers. Shipping costs are born by our customers.

We distribute and sell our products through an independent sales agent who is compensated on a commission basis.

We were incorporated in the State of Georgia in 2000.

Results of Operations

Revenues for the first fiscal quarter of 2019 were $1,008,744 as compared to $999,476 for the same period in 2018, an increase of approximately .93%.

Gross profit during the first fiscal quarter of 2019 was $180,048 compared to $140,022 during the same period in 2018. Gross profit in the current quarter increased by 28.6% when compared to the same period in fiscal 2018.

As a percentage of revenue, gross profit increased to 17.8% during the first quarter of fiscal 2019 from 14.0% during the first quarter of fiscal 2018.

During the first fiscal quarter of 2019, we had net income of $9,176 as compared to a net loss of $31,521 for the same period in fiscal 2018.

Liquidity and Capital Resources

At December 31, 2018, cash and cash equivalents were $65,141 compared to $36,609 at September 30, 2018.

Net cash used in operating activities was $6,767 during the three months ended December 31, 2018. Net cash used in operating activities during the same three-month period in 2017 was $26,510.

There was no cash flow from investing activities for either of the three-month period ended December 31, 2018, or 2017.

During the three months ended December 31, 2018, net cash provided by financing activities was $35,299 due to cash infusion of $54,000 from our CEO, William Shrewsbury partially offset by our loan partial repayment of $18,701.

Mr. William Shrewsbury, our Chairman and CEO, is providing financing to us in the form of a Consolidated Secured Promissory Note of $2,000,000 (“Consolidated Note”) and periodic advances. The principal and interest under the Consolidated Note is due February 24, 2024.The principal bears interest at the rate of 5% per annum or prime rate if higher than 5% per annum and is subject to certain events of default. The Consolidated Note is to be secured or otherwise payable by us out of the death benefit proceeds of key man insurance of $2 million that has been purchased by us on the life of Mr. Shrewsbury. As of December 31, 2018, Mr. Shrewsbury had also provided non-interest-bearing advances to us of $146,487.

In November 2012, we obtained a bank line of credit of $250,000 which was subsequently increased to $750,000. On December 3, 2015, we entered into a new loan agreement with a bank under which we obtained a term loan in the amount of $711,376. The loan is secured by a lien on our inventory and accounts receivable and guaranteed by Mr. Shrewsbury. We utilized proceeds of the new loan to repay our line of credit. The loan is for a term of five years and matures on December 3, 2020. As of December 31,2018, the loan balance was $530,349.

RESULTS OF OPERATIONS

Results of Operations – For the three months ended December 31, 2018, versus the three months ended December 31, 2017

Revenues from Operations

Revenues for the first quarter of fiscal 2019 were $1,008,744 as compared to $999,476 for the same period in fiscal 2018, an increase of $9,268 or .93%. The increase in revenues is attributable to higher sales of our rail products during the current period due to increased or renewed operations at previously downsized or shut-down coal mines as the coal industry experiences increased demand, a more favorable regulatory environment, and due to relatively higher natural gas prices.

Cost of Goods Sold

During the quarter ended December 31, 2018, our cost of goods sold was $828,696 as compared to cost of goods sold of $859,454 for the quarter ended December 31, 2017, a decrease of $30,758 or 3.6% due to an increase in sales during the current period. As a percentage of sales, cost of goods sold decreased from 86.0% in 2017 to 82.2% during the current period due to higher sales of a product mix with relatively lower unit cost during the current quarter.

Gross Profit

Gross profit for the period ended December 31, 2018, increased as a percentage of revenue to 17.8% from 14.0% for the same period of the prior fiscal year. The increase in gross profit resulted from a favorable mix of lower cost rail related products with higher margins sold during the current first quarter.

Operating Expenses

Operating expenses for the three months ended December 31, 2018 were $135,566 as compared to $146,112 for the three months ended December 31, 2017, a decrease of $10,546 or 7.2%. As a percentage of revenues, operating expenses decreased from 14.6% in 2017 to 13.4% in 2018. The decrease is attributable to lower commission and professional fees during the first fiscal quarter of 2019.

The table below details the components of operating expenses, as well as the dollar and percentage changes for the comparative three-month periods.

Salary expense for the three months ended December 31, 2018, was $37,676 compared to $31,683 for the same period in 2017, an increase of $5,993 or 18.9%. The higher salary expense is the direct result of an additional warehouse staff added to the payroll in the current period.

Professional fees decreased $11,500 or 100.0% during the three months ended December 31, 2018 as compared to the same period in 2017. The decrease can be attributed to lower legal expenses related to SEC compliance and other compliance related matters.

Depreciation expense during the three months ended December 31, 2018, was $1,792, which compares to the same period the prior year.

During the three months ended December 31, 2018, other operating expenses of $96,098 decreased by $5,039 or 5.0% from $91,218 for the same period in 2017. The lower other operating expenses resulted primarily from lower commission expense of $6,387 and, lower operating supplies of $4,236 partially offset by higher delivery truck maintenance of $5,184.

Income/(loss) from operations

Income from operations for the quarter ended December 31, 2018, was $44,482 compared to loss from operations of $6,090 during the same period in 2017.The increase in income from operations when compare to the same period the prior year is the direct result of higher sales margins of rail products and a reduction in the current period operating expenses.

Other income and (expense)

Other income and expense for the three months ended December 31, 2018, reflected a net expense of $35,306 as compared to net expense of $25,431 for the quarter ended December 31, 2017 or a net loss increase of $9,875. Profit generated from the sales of scrap during the period ended December 31, 2017 account for $6,476 of the loss increase with the remaining variance resulting from higher interest expense during the current quarter.

Net income (loss)

For the quarter ended December 31, 2018, we had net income of $9,176 compared to a net loss of $31,521 for the quarter ended December 31, 2017. The increase in net income in the current period was the result of higher sales margins of rail products during the current quarter and a decrease in operating expense of $10,546 as compared to the same quarter the prior year.

Net income (loss) per common share

The net income of $9,176 for the quarter ended December 31, 2018, as well as the net loss of $31,521 for the quarter ended December 31, 2017, when divided by the number of common shares outstanding of 48,053,084 basic shares in both years resulted in a net income and loss per share of less than $0.01 in both periods.

LIQUIDITY AND CAPITAL RESOURCES

The following table presents a summary of our net cash provided (used) by operating, investing and financing activities:

At December 31, 2018, we had cash and cash equivalents of $65,141 as compared to $36,609 at September 30, 2018 an increase of $28,532 or 77.9%.

Cash Flows Provided/(Used) in Operating Activities

Net cash used in operating activities for the three-months ended December 31, 2018, was $6,767 compared to cash used in operating activities of $26,510 in 2017, a decrease of $19,743 or 74.5%.

During the three months ended December 31, 2018, we had net income of $9,176 as compared to a net loss of $31,521 for the same period in the prior year.

In the current three-month period, as well as prior year for the same period, the Company had non-cash expenses for depreciation of $1,792.

An increase in accounts receivable of $22,214 and an inventory increase of $24,153 in the current period was partially offset by an increase in other current liabilities of $28,731. As of December 31, 2018, other current assets increased by $850, accounts payable increased by $5,122 and officer’s advances for operations increased by $6,000.

Cash Flows Provided/(Used in) Investing Activities

There was no cash flow used in investing activities for the period ended December 31, 2018 or 2017.

Cash Flows Used in Financing Activities

During the three months ended December 31, 2018, cash provided by financing activities was $35,299 compared to cash used in financing activities of $4,288 during the same period in 2017. During the current three-month period, the Company made payment on its term loan of $18,701 and received advances from our CEO of $54,000.

On December 3, 2015, we entered into a new fixed term loan agreement with a bank of $711,376 the proceeds of which were used to repay our previous line of credit. The loan is for a term of five years and matures on December 3, 2020. As of December 31, 2018, the loan balance was $530,349. The current rate of interest under the loan is 5.50% per annum. Principal, interest and collection costs under the loan are guaranteed by Mr. Shrewsbury.

On February 25, 2014, we issued to Mr. Shrewsbury a Consolidated Secured Promissory Note (“Consolidated Note”) to consolidate an aggregate of $2,000,000 in outstanding debt and unpaid interest due to Mr. Shrewsbury. The Consolidated Note bears interest at 5% per annum or prime rate if higher than 5% per annum and principal and interest are repayable ten years from February 25, 2014. The Consolidated Note is subject to customary events of default. Payment of the Consolidated Note is to be secured or otherwise payable by us out of the death benefit proceeds of key man insurance of $2 million that has been purchased by us on the life of Mr. Shrewsbury.

During the three months ended December 31, 2018, we received advances of $54,000 from Mr. Shrewsbury, bringing the total outstanding advance balance to $146,487. Cash advances from Mr. Shrewsbury are repayable upon demand and do not bear interest.

As of December 31, 2018 the Company had an accrued liability in the amount of $344,179 due to Jose Fuentes, CFO, for past services.

Financial Condition and Going Concern Uncertainties

Since inception, the Company, with a few exceptions has not generated sufficient cash to fund its operations and has incurred operating losses. As of December 31, 2018, the Company’s accumulated deficit was $15,601,960. Currently, in addition to funds from operations, the Company relies substantially upon financing provided by Mr. Shrewsbury, the Company’s Chief Executive Officer, and a secured bank loan that is guaranteed by Mr. Shrewsbury to finance its business operations. In view of these matters, realization of certain assets in the accompanying balance sheet is dependent upon continued operations which are dependent upon our ability to meet our financial requirements, upon the continued provision of financing from Mr. Shrewsbury and under the Company’s bank loan, and the success of our operations.

Our independent registered public accounting firm’s report on the financial statements included in our Annual Report on Form 10-K for the year ended September 30, 2018, contained an explanatory paragraph in which our auditors expressed an opinion that there is a substantial doubt about our ability to continue as a going concern.

Accordingly, careful consideration of such opinion should be given in determining whether to continue or to become our stockholder.

As of December 31, 2018, we had cash and cash equivalents of $65,141 as compared to $36,609 as of September 30, 2018.

Our accounts receivable was $281,908 as of December 31, 2018, as compared to $259,694 as of September 30, 2018, an increase of $22,214 or 8.65%. The higher December 31, 2018 receivable balance is the direct result of higher sales demand in the current period.

Inventory was $1,822,693 as of December 31, 2018, as compared to $1,798,540 as of September 30, 2018, an increase of $24,513 or 1.4%.

Accrued expenses were reduced from $416,636 as of September 30, 2018 to $379,359 as of the three-month ended December 31, 2018, a reduction of $37,277. A reduction in accrued payroll and payroll taxes account for the lower accrued liabilities balance as of December 31,2018.

Accounts payable for the three months ended December 31, 2018, were $534,975 as compared to $529,853 as of September 30, 2018, an increase of $5,122 or 1.0%.

During the three months ended December 31, 2018, our accumulated deficit decreased from $15,611,136 to $15,601,960, a decrease of $9,176 due to the reported net income during the three months ended December 31, 2018.

During the three months ended December 31, 2018, the Company’s net income was $9,176 compared to a net loss of $31,521 for the comparable period in 2017. The loss reduction is due to increased sales margins of our rail and mining related products.

Currently, in addition to product purchases for resale, we are spending approximately $50,000 per month on operations. Management believes that the Company’s available cash, cash flows from operations, loans and advances provided by Mr. Shrewsbury, and the loan provided by the bank to be sufficient to fund the Company’s operations during the next 12 months.

We continue to rely substantially upon financings provided by Mr. Shrewsbury and a bank loan to fund our operations. The terms of such financings are discussed below.

Bank Loan

On December 3, 2015, we obtained a term loan from Town Square Bank of $711,376. We used proceeds of the new loan to repay our former line of credit. The loan is for a term of five years and matures on December 3, 2020. As of December 31, 2018, the loan balance was $530,349.

During the term of the loan, we agreed to make equal monthly repayments of principal and interest of $6,967 commencing January 3, 2016, and to make a final payment on December 3, 2020, of the outstanding balance of the interest and principal, estimated to be approximately $391,896. Early repayment of the loan will not affect the monthly repayment amount, unless otherwise agreed to by the bank.

An event of default under the loan will occur upon the occurrence of any of the following events:

The loan agreements contain affirmative covenants, including an obligation to: notify the bank of a material adverse change in our financial condition and of any threatened litigation or claim or other proceeding which could materially affect our financial condition; maintain certain liability insurance in amounts acceptable to the bank; maintain qualified executive and management personnel; comply with applicable environmental laws and perform environmental studies required by the bank; and certify annually to the bank compliance with the representations and warranties in the bank loan documents. The loan agreements contain other customary covenants, terms and conditions.

In addition, the loan agreements contain negative covenants, including that we will not, without the bank’s consent:

Interest under the loan is variable and is based upon the Wall Street Journal Prime rate, currently 5.50% per annum. In the event of a default, interest under the loan may be increased by 2%. The loan is secured by a priority security interest in the Company’s inventory and accounts receivable and has been guaranteed by our CEO.

Advances and Loans from Mr. Shrewsbury

Since 2006, Mr. Shrewsbury, our Chairman and CEO, has provided financing to us in the form of demand notes and advances.

Mr. Shrewsbury, our Chairman and CEO, has provided financing to us in the form of demand notes and advances. On February 25, 2014, we entered into a Note Exchange Agreement (“Exchange Agreement”) with Mr. Shrewsbury under which an aggregate of $2,000,000 of our indebtedness (including amounts of accrued interest) to Mr. Shrewsbury was consolidated and restructured and we issued in exchange for the indebtedness a Consolidated Secured Promissory Note (the “Consolidated Note) in the principal amount of $2,000,000.

The principal and interest under the Consolidated Note is due and payable ten years from the date of issuance and is to be secured by the proceeds of key man life insurance purchased by us on the life of Mr. Shrewsbury. The Consolidated Note bears interest at the rate of 5% per annum except that, if the prime rate reported by the Wall Street Journal (“WSJ Prime Rate”) exceeds 5%, then the Consolidated Note will bear interest at the WSJ Prime Rate. As of December 31, 2018, accrued interest on the note was $484,932.

An event of default will occur under the Consolidated Note upon:

In addition, in consideration of Mr. Shrewsbury agreeing to consolidate and restructure the indebtedness, the Company granted to Mr. Shrewsbury options to purchase an aggregate of 500,000 shares of our common stock pursuant to the terms of a Non-Qualified Stock Option Agreement, issued February 25, 2014. The options were exercisable commencing April 1, 2014, and for a period of three years thereafter. The options were exercisable at a price of $0.0924 per share subject to anti-dilution adjustments in the event of stock dividends, subdivisions, capital reorganizations, a consolidation or merger, or sale of all or substantially all of our assets. The options expired on March 31, 2017.

As of December 31, 2018, Mr. Shrewsbury had advanced an aggregate of $146,487 to the Company. The advances do not bear interest and are repayable upon demand. As of December 31, 2018, the Company also has a payable of $90,000 to Mr. Shrewsbury for warehouse storage rental.

The Consolidated Note and advances are subordinate to the Company’s bank indebtedness.

Off-Balance Sheet Arrangements

We do not maintain any off-balance sheet arrangements, transactions, obligations or other relationships with unconsolidated entities that would be expected to have a material current or future effect upon our financial condition or results of operations as of December 31, 2018 and September 30, 2018.

ITEM 3.            QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are a “smaller reporting company” as defined by Rule 12b-2 under the Exchange Act and, as such, we are not required to provide the information required under this Item.

ITEM 4.            CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

As of the end of the period covered by this Report, the Chief Executive Officer and Chief Financial Officer of the Company (the “Certifying Officers”) conducted evaluations of the Company’s disclosure controls and procedures. As defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), the term “disclosure controls and procedures” means controls and other procedures of an issuer that are designed to ensure the information required to be disclosed by the issuer in the reports that it files or submits under Section 13(a) or 15(d) of the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s (“SEC”) rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under Section 13(a) or 15(d) of the Exchange Act is accumulated and communicated to the issuer’s management, including the Certifying Officers, to allow timely decisions regarding required disclosure.

Based on this evaluation, the Certifying Officers determined that, as of the end of the period covered by this Report, the Company’s disclosure controls and procedures were effective to ensure that the information required to be disclosed by the Company in the reports that it files or submits under Section 13(a) or 15(d) of the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms and to ensure that information required to be disclosed by the Company in the Reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including the Company’s principal executive and principal financial officers, or persons performing similar functions, as appropriate, to allow timely decisions regarding disclosure.

Changes in Internal Controls

There were no changes in the Company’s internal controls over financial reporting during the period covered by this Report that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.

PART II - OTHER INFORMATION

ITEM 1.              LEGAL PROCEEDINGS

The Company is not a party to any material pending legal proceeding.

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ITEM 1A.           RISK FACTORS

An investment in our common stock involves a high degree of risk. You should carefully consider the risks described below (which supplement and reflect changes to certain of the risk factors we disclosed in our 2017 Annual Report on Form 10-K) and other information contained in this Report in deciding whether to invest in our common stock.   Additional risks not presently known to us or which we currently consider immaterial may also adversely affect us. If any of the following risks (or the risk factors we disclosed in our 2017 Form 10-K) actually occur, our business, financial condition and operating results could be materially adversely affected. In such case, the trading price of our common stock could decline, and you could lose a part or all your investment.

Risks Related to Our Operations

We are dependent on financing provided or guaranteed by our CEO to fund our business and ongoing operations. We have incurred substantial debt which could affect our ability to obtain additional financing and may increase our vulnerability to business downturns. We may be unable to repay our bank loan when it becomes due.

As of December 31, 2018, we have incurred debt due to Mr. Shrewsbury in the form of $2 million Consolidated Note and non-interest bearing advances in the amount of $146,487. We have outstanding accounts payable of $534,975 and other accrued liabilities of $864,291, including $344,179 due to our CFO, Jose Fuentes, for services. Also, the Company owes $530,349 under a bank term loan which is secured by the Company’s inventory and accounts receivable and which becomes due on December 3, 2020. We are subject to the risks associated with substantial indebtedness, including insufficient funds to repay the amounts due to Mr. Fuentes and Mr. Shrewsbury in the event they make a demand for payment; it may be more expensive and difficult to obtain additional financing; and we are more vulnerable to economic downturns. The Company also has a $90,000 payable for warehouse lease rental due to Mr. and Mrs. Shrewsbury.

We have a history of net losses and, due to the impact of increased federal regulation of the U.S. coal mining industry, a decrease in the number of coal powered electricity generation plants, a relatively weak U.S. dollar, and other factors affecting the coal mining industry in the U.S., we cannot assure that we will be profitable in the future. Any failure on the part of the Company, due to industry conditions, which will prevent us from achieving profitability may cause us to reduce or eventually cease operations.

We had net income of $9,176 for the three-months ended December 31, 2018 and a net loss of $31,521 for the same period in 2017. At December 31, 2018 and September 30, 2018, we had accumulated deficits of $15,601,960 and $15,611,136, respectively. We may need to obtain additional financing or incur additional debt to expand our wholesale and retail mining supplies business. We may also require additional financing to fund ongoing operations if our revenue is insufficient to meet our operating costs. In the past, we have been able to raise financing from our CEO through notes and advances and a bank loan guaranteed by our CEO. Our inability to obtain necessary capital or financing to fund these needs will adversely affect our ability to fund operations and continue as a going concern. Additional financing may not be available when needed or may not be available on terms acceptable to us. If adequate funds are not available, we may be required to delay, scale back or eliminate one or more of our business strategies, which may affect our results of operations and financial condition.

The effect of comprehensive U.S. tax reform legislation on us, whether adverse or favorable, is uncertain.

 

On December 22, 2017, President Trump signed into law H.R. 1, "An Act to provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018" (informally titled the "Tax Cuts and Jobs Act"). Among a number of significant changes to the U.S. federal income tax rules, the Tax Cuts and Jobs Act (the "Act") reduces the marginal U.S. corporate income tax rate from 35% to 21%, limits the deduction for net interest expense, limits the deduction for net operating losses and eliminates net operating loss carrybacks, modifies or repeals many business deductions and credits, shifts the United States toward a more territorial tax system, and imposes new taxes to combat erosion of the U.S. federal income tax base. The Company’s net deferred tax assets and liabilities will be revalued at the newly enacted U.S. corporate rate, and the impact will be recognized in tax expense in the year of enactment.  The Company continues to examine the impact this tax reform legislation may have on its business.  However, the effect of the Act on the Company and the Company’s customers, whether adverse or favorable, is uncertain, and may not become evident for some period of time.

We could be adversely affected by information systems interruptions, cybersecurity attacks or other disruptions which could have a material adverse effect on our business and result of operations.

 

We depend upon information technology infrastructure, including network, hardware and software systems to conduct our business.  Despite our implementation of network and other cybersecurity measures, our information technology system and networks could be disrupted or experience a security breach from computer viruses, break-ins and similar disruptions from unauthorized tampering with our computer systems.  Our security measures may not be adequate to protect against highly targeted sophisticated cyber-attacks, or other improper disclosures of confidential and/or sensitive information.  Additionally, we may have access to confidential or other sensitive information of our customers, which, despite our efforts to protect, may be vulnerable to security breaches, theft, or other improper disclosure, any of which could have a material adverse effect on our competitive position, results of operations, cash flows or financial condition.

ITEM 2.            UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None

ITEM 3.            DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4.            MINE SAFETY DISCLOSURES

None.

ITEM 5.            OTHER INFORMATION

None.

ITEM 6.            EXHIBITS

The following exhibits are filed or “furnished” herewith:

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

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