TX Holdings, Inc. - Quarter Report: 2018 June (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.

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, 2017, 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, 2017, 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

Due to declining U.S. coal production and bankruptcies and restructurings among certain U.S. coal companies, we experienced a reduction in demand for our mining and rail products during fiscal 2015 and 2016 and the first quarter of fiscal 2017. The demand for, and production of, coal has been 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. Commencing in the second fiscal quarter of 2017, demand for our products increased due to U.S. coal production, as discussed below, following a period of production decline.

The U.S. Energy Information Administration (EIA) has reported in its Short-Term Energy Outlook (STEO) released June 2018 U.S. coal production was 774 million short tons (MMst) in 2017, 46 MMst (6%) higher than in 2016

The EIA Short-Term Energy Outlook (STEO) released June 2018 states that the EIA expects the share of U.S. total utility-scale electricity generation from natural gas fired power plants to rise from 32% in 2017 to 34% in both 2018 and 2019. The forecast electricity generation share from coal in both 2018 and 2019 averages 28%, down from 30% in 2017. The nuclear share of generation was 20% in 2017 and is forecast to average 20% in 2018 and 19% in 2019. The generation share of hydropower was 7% in 2017 and is forecast to be about the same in 2018 and 2019.

The EIA forecasts coal production to decline by almost 2.3% to 756 million short tons (MMst) in 2018 and then decrease by 2.4% to 738 MMst in 2019. The EIA report released in June 2018, indicates the production decrease is largely attributable to a forecast decline of 5% in domestic coal consumption in 2018, with most of the decline is expected to be in the electric power sector. A forecast decline of 4% in coal exports also contributes to lower expected coal production in 2018. The EIA estimates that coal production will decline by 2% in 2019.

U.S. coal exports were 97 MMst in 2017, a 61% increase from the previous year, but they are expected to decrease in both 2018 and 2019. Exports of metallurgical coal, which are used in the steelmaking process, remain at 55 MMst in 2018 and decline to 54 MMst in 2019. Steam coal exports, which were an estimated 42 MMst in 2017, are expected to decline to 26 MMst and 23 MMst in 2018 and 2019, respectively.

The EIA estimates the delivered coal price averaged $2.28 per million British thermal units (MMBtu) in 2017, which was 5 cent/MMBtu lower than the 2016 price. Coal prices are estimated at $2.21/MMBtu in 2018 and increase to $2.34 in 2019.

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 third fiscal quarter of 2018 were $1,002,866 as compared to $852,926 for the same period in 2017, an increase of approximately 17.6%.

Gross profit during the third fiscal quarter of 2018 was $170,186 compared to $195,800 during the same period in 2017. Gross profit in the current quarter decreased by 13.1% when compared to the same period in fiscal 2017.

As a percentage of revenue, gross profit decreased to 17.0% during the third quarter of fiscal 2018 from 23.0% during the third quarter of fiscal 2017.

During the third fiscal quarter of 2018, we had net income of $564 as compared to a net income of $6,402 for the same period in fiscal 2017.

Liquidity and Capital Resources

At June 30, 2018, cash and cash equivalents were $41,834 compared to $40,345 at September 30, 2017.

Net cash provided by operating activities was $55,771 during the nine months ended June 30, 2018. Net cash provided by operating activities during the same nine-month period in 2017 was $147,419.

There was no cash flow from investing activities for either of the nine-month period ended June 30, 2018, or 2017.

During the nine months ended June 30, 2018, net cash used in financing activities was $54,282 due to a repayment of $42,782 on our bank term loan and net advance repayment to our CEO, William Shrewsbury in the amount of $11,500.

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 June 30, 2018, Mr. Shrewsbury had also provided non-interest-bearing advances to us of $22,487.

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 June 30, 2018, the loan balance was $563,223.

RESULTS OF OPERATIONS

Results of Operations – For the three months ended June 30, 2018, versus the three months ended June 30, 2017

Revenues from Operations

Revenues for the third quarter of fiscal 2018 were $1,002,866 as compared to $852,926 for the same period in fiscal 2017, an increase of $149,940 or 17.6%. 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 June 30, 2018, our cost of goods sold was $832,680 as compared to cost of goods sold of $657,126 for the quarter ended June 30, 2017, an increase of $175,554 or 26.7% due to an increase in sales during the current period. As a percentage of sales, cost of goods sold increased from 77.0% in 2017 to 83.0% during the current period due to higher sales of a product mix with relatively higher unit cost during the current quarter.

Gross Profit

Gross profit for the period ended June 30, 2018, decreased as a percentage of revenue to 17.0% from 23.0% for the same period of the prior fiscal year. The decrease in gross profit resulted from a favorable mix of lower cost rail related products with higher margins sold during the prior year’s third quarter.

Operating Expenses

Operating expenses for the three months ended June 30, 2018 were $140,356 as compared to $155,830 for the three months ended June 30, 2017, a decrease of $15,474 or 9.9%. As a percentage of revenues, operating expenses decreased from 18.3% in 2017 to 14.0% in 2018. The decrease is attributable to the impact of certain operating expenses remaining fixed and, also our higher revenue during the third fiscal quarter of 2018.

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

Commission expense for the three months ended June 30, 2018, was $44,418 compared to $51,903 for the same period in 2017, a decrease of $7,485 or 14.4%. The lower commission expense is a direct result of the 8.5% decrease in sales margins during the current period.

Professional fees increased $478 or 10.0% during the three months ended June 30, 2018 as compared to the same period in 2017. The increase can be attributed to higher legal expenses related to SEC compliance and other compliance related matters.

A bad debt recovery of $10,000, due to subsequent collection, during the third quarter of 2017 account for the $10,000 variance when compared to the current three-month period. There was no bad debt expense incurred in the same period in the current quarter.

Depreciation expense during the three months ended June 30, 2018, was $1,792, $657 lower than the same period the prior year. The lower depreciation is the result of shipping related equipment becoming fully depreciated.

During the three months ended June 30, 2018, other operating expenses of $88,879 decreased by $17,810 or 16.7% from $106,689 for the same period in 2017. The lower other operating expenses resulted primarily from lower travel related expenses of $12,475, lower board related fees of $7,500 partially offset by higher tax related expense of $2,453.

Income/(loss) from operations

Income from operations for the quarter ended June 30, 2018 was $29,830 compared to income from operations of $39,970 during the same period in 2017.When compared to the income for the same period in the prior year, the income reduction in the current period is the direct result of lower sales margins of rail products partially offset by a $15,474 reduction in the current period operating expenses.

Other income and (expense)

Other income and expense for the three months ended June 30, 2018, reflected a net expense of $29,266 as compared to net expense of $33,568 for the quarter ended June 30, 2017. The lower net expense of $4,302 in the current period compared to the same period the prior year, result from other income generated by the sale of scrap during the current quarter.

Net income (loss)

For the quarter ended June 30, 2018, we had net income of $564 compared to net income of $6,402 for the quarter ended June 30, 2017. The decrease in the current period was due to lower sales margins of rail products during the current quarter as compared to the same quarter the prior year. The negative income variance was partially offset by a $15,474 reduction in operating expenses.

Net income (loss) per common share

The net income of $564 for the quarter ended June 30, 2018, as well as the net income of $6,402 for the quarter ended June 30, 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.

Results of operations – For the nine months ended June 30, 2018 versus the nine months ended June 30, 2017

Revenues from Operations

Revenue for the nine months ended June 30, 2018 was $3,100,840 as compared to $2,273,245 for the same period in 2017, an increase of $827,595 or 36.4%. The increase in revenues is attributable to higher sales of our rail and mine related 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 and a more favorable regulatory environment.

Cost of Goods Sold

During the nine months ended June 30, 2018, our cost of goods sold was $2,578,678 as compared to cost of goods sold of $1,858,902 for the nine months ended June 30, 2017, an increase of $719,776 or 38.7% due to higher sales during the current period. As a percentage of sales, cost of goods sold increased from 81.8% in 2017 to 83.2% during the current period, an increase of approximately 1.4% resulting from sales of products with higher unit cost and higher sales of a product mix with relatively higher unit cost during the current period.

Gross Profit

Gross profit for the period ended June 30, 2018, decreased as a percentage of revenue to 16.8% from 18.2% for the same period of the prior year, or approximately 1.4%. The decrease in gross profit resulted from sales of certain products with higher unit cost and lower sales prices to address a more competitive environment.

Operating Expenses

Operating expenses for the nine months ended June 30, 2018 were $418,963 as compared to $427,445 for the nine months ended June 30, 2017, a decrease of $8,482 or 2.0%.

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

.

Commission expense for the nine months ended June 30, 2018, was $130,596 compared to $108,259 for the same period in 2017, an increase of $22,337 or 20.6%. The higher commission expense is a direct result of a 36.4% increase in sales during the current period as compared to the same period the prior year.

Professional fees increased $9,758 or 78.6% during the nine months ended June 30, 2018, as compared to the same period in 2017. The increase in expense can be attributed to higher legal expenses related to SEC compliance and other compliance related matters.

Bad debt expense/(recovery) for the nine- month period ended June 30, 2018 was $20 as compared to $(9,095) for the same period in 2017, an increase of $9,115 or 100.2%. The total variance is attributed to a $10,000 bad debt recovery in June 2017, resulting from the collection of a customer receivable previously reserved as uncollectable.

Depreciation expense of $5,376 for the nine months ended June 30, 2018, was lower by $1,971 than for the same nine-month period the prior year. The lower depreciation is the result of shipping related equipment becoming fully depreciated.

During the nine months ended June 30, 2018, other operating expenses of $260,804 decreased by $47,721 or 15.5% from $308,525 for the same period in 2017. The lower other operating expenses resulted primarily from lower payroll and payroll taxes of $46,659 during the current nine-month period.

Income/(loss) from operations

Income from operations for the nine months ended June 30, 2018 was $103,199 compared to loss from operations of $13,102 during the same period in 2017. When compared to the loss for the same period in the prior year, the income in the current period is the direct result of higher sales and, lower operating expenses.

Other income and (expense)

Other income for the current nine-month period increased by $10,692 due to scrap sales sold. Interest expense for the nine months ended June 30, 2018, reflected a $97,396 expense as compared to $95,212 expense for the nine months ended June 30, 2017, an increase of $2,184 due to higher interest expense under our bank term loan resulting from an increase in the rate of interest under such loan.

Net income/(loss)

For the nine months ended June 30, 2018, we had net income of $16,495 compared to a net loss of $108,314 for the nine months ended June 30, 2017, a difference of $124,809. The net income increase during the current period was a result of higher sales.

Net earnings/(loss) per common share

The net income of $16,495 for the nine months ended June 30, 2018, as well as the net loss of $108,314 for the nine months ended June 30, 2017, when divided by the number of common shares outstanding of 48,053,084 basic shares in both periods resulted in a net income per share and a loss per share of less than $0.01, respectively.

LIQUIDITY AND CAPITAL RESOURCES

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

At June 30, 2018, we had cash and cash equivalents of $41,834 as compared to $40,345 at September 30, 2017, an increase of $1,489 or 3.7%.

Cash Flows Provided/(Used) in Operating Activities

Net cash provided in operating activities for the nine-months ended June 30, 2018, was $55,771 compared to cash provided of $147,419 in 2017, a decrease of $91,648 or 62.2%.

During the nine months ended June 30, 2018, we had net income of $16,495 as compared to a net loss of $108,314 for the same period in the prior year.

In the current nine-month period, the Company had non-cash expenses for depreciation of $5,376 and $20 bad debt expense.

A decrease in accounts receivable in the current period of $80,360 was offset by a decrease in accounts payable of $89,834 As of June 30, 2018, commission advances decreased by $22,648, inventory increased by $33 and, other current assets decreased by $1,428 due to a decrease in employee’s advances.

Cash Flows Provided/(Used) in Investing Activities

There was no cash flow used in investing activities for the period ended June 30, 2018 or 2017.

Cash Flows Used in Financing Activities

During the nine months ended June 30, 2018, cash used in financing activities was $54,282 compared to cash used in financing activities of $146,792 during the same period in 2017. During the current nine-month period, the Company made payment on its term loan of $42,782 and repaid net advances from our CEO of $11,500.

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 June 30, 2018, the loan balance was $563,223. The current rate of interest under the loan is 5% 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 nine months ended June 30, 2018, we received advances of $186,000 from Mr. Shrewsbury and repaid $197,500 in cash advances to Mr. Shrewsbury, bringing the total outstanding advance balance to $22,487. Cash advances from Mr. Shrewsbury are repayable upon demand and do not bear interest.

As of June 30, 2018, the Company had an accrued liability in the amount of $376,179 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 June 30, 2018, the Company’s accumulated deficit was $15,539,441. 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 consolidated financial statements included in our Annual Report on Form 10-K for the year ended September 30, 2017, 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 June 30, 2018, we had cash and cash equivalents of $41,834 as compared to $40,345 as of September 30, 2017.

Our accounts receivable was $377,863 as of June 30, 2018, as compared to $458,203 as of September 30, 2017, a decrease of $80,340 or 17.5%. The lower June 30, 2018 receivable balance is the direct result of a significant number of customers submitting payments at the end of the current quarter.

Inventory was $1,690,383 as of June 30, 2018, as compared to $1,690,350 as of September 30, 2017, an increase of $33.

Accrued liabilities were reduced from $548,218 as of September 30, 2017 to $492,274 as of the nine-month ended June 30, 2018, a reduction of $55,944. A reduction in accrued payroll and payroll taxes account for the lower accrued liabilities balance as of June 30, 2018.

Accounts payable for the nine months ended June 30, 2018, were $564,939 as compared to $654,773 as of September 30, 2017, a decrease of $89,834 or 13.7%. The decrease in accounts payable is due to large payments to a major supplier on invoices due at the end of the current quarter.

During the nine months ended June 30, 2018, our accumulated deficit decreased from $15,555,936 to $15,539,441, a decrease of $16,495 due to the reported net income during the nine months ended June 30, 2018.

During the nine months ended June 30, 2018, the Company’s net income was $16,495 compared to a net loss of $108,314 for the comparable period in 2017. The loss reduction is due to increased sales 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 June 30, 2018, the loan balance was $563,223.

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 5.00% 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 June 30, 2018, accrued interest on the note was $434,521.

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 June 30, 2018, Mr. Shrewsbury had advanced an aggregate of $22,487 to the Company. The advances do not bear interest and are repayable upon demand. As of June 30, 2018, the Company also has a payable of $78,000 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 June 30, 2018 and September 30, 2017.

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.

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

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

.

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 June 30, 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 $22,487. We have outstanding accounts payable of $564,939 and other accrued liabilities of $926,795, including $376,179 due to our CFO, Jose Fuentes, for services. Also, the Company owes $563,223 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 $78,000 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 $16,495 for the nine-months ended June 30, 2018 and a net loss of $108,314 for the same period in 2017. At June 30, 2018 and September 30, 2017, we had accumulated deficits of $15,539,441 and $15,555,936, 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.

None

None.

None.

None.

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.

27