TX Holdings, Inc. - Quarter Report: 2019 March (Form 10-Q)

 UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C. 20549

FORM 10-Q

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 registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. YES ☒ NO ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). YES ☒ NO ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer, “accelerated filer”, “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.        

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ☐ NO ☒

Securities registered pursuant to Section 12(b) of the Act:

On May 13, 2019, there were 48,053,084 shares of the registrant’s common stock outstanding.

TX HOLDINGS, INC.

FORM 10-Q

FOR QUARTERLY PERIOD ENDED March 31, 2019

TABLE OF CONTENTS

Forward-Looking Statements

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.

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.

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

Results of Operations – For the three months ended March 31, 2019, versus the three months ended March 31, 2018

Revenues from Operations

Revenues for the second quarter of fiscal 2019 were $1,120,997 as compared to $1,098,590 for the same period in fiscal 2018, an increase of $22,407 or 2.0%. 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.

Cost of Goods Sold

During the quarter ended March 31, 2019, our cost of goods sold was $931,340 as compared to cost of goods sold of $886,544 for the quarter ended March 31, 2018, an increase of $44,796 or 5.1% due to an increase in sales during the current period. As a percentage of sales, cost of goods sold increased from 80.7% in 2018 to 83.1% 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 March 31, 2019, decreased as a percentage of revenue to 16.9% from 19.3% for the same period of the prior fiscal year. The decrease in gross profit resulted from an unfavorable mix of higher cost rail related products with lower margins sold during the current second quarter.

Operating Expenses

Operating expenses for the three months ended March 31, 2019 were $108,009 as compared to $132,495 for the three months ended March 31, 2018, a decrease of $24,486 or 18.5%.

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 March 31, 2019, was $36,717 compared to $25,075 for the same period in 2018, an increase of $11,642 or 46.4%. The higher salary expense is the direct result of an additional warehouse staff added to the payroll in the current period.

Professional fees decreased $15,400 or 100.0% during the three months ended March 31, 2019 as compared to the same period in 2018. 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 March 31, 2019, was $1,792, which compares to the same period the prior year.

During the three months ended March 31, 2019, other operating expenses of $69,500 decreased by $30,708 or 30.6% from $100,208 for the same period in 2018. The lower other operating expenses resulted primarily from lower sales commission expense and a reversal of payroll taxes over-accrual, partially offset by higher repair and maintenance expense.

Income from operations

Income from operations for the quarter ended March 31, 2019, was $81,648 compared to income from operations of $79,551 during the same period in 2018. The increase in income from operations when compared to the same period the prior year is the direct result of lower operating expenses partially offset by lower sales margins of rail products in the current period.

Other income and (expense)

Other income and expense for the three months ended March 31, 2019 was a net expense of $37,326 as compared to a net expense of $32,008 for the quarter ended March 31,2018 or, an increase of $5,318. The increase in net expense is the result of higher interest expense incurred on our bank loan during the current quarter.

Net income

For the quarter ended March 31, 2019, we had net income of $44,322 compared to net income of $47,543 for the quarter ended March 31, 2018. The $3,221 decrease in net income in the current period was the result of lower sales margins of rail products during the current quarter partially offset by lower operating expense compared to the same quarter the prior year.

Net income per common share

The net income of $44,322 for the quarter ended March 31, 2019, as well as the net income of $47,543 for the quarter ended March 31, 2018, when divided by the number of common shares outstanding of 48,053,084 basic shares in both years resulted in a net income per share of less than $0.01 in both periods.

RESULTS OF OPERATIONS

Results of Operations – For the six months ended March 31, 2019, versus the three months ended March 31, 2018

Revenues from Operations

Revenues for the six months of fiscal 2019 were $2,129,740 as compared to $2,098,066 for the same period in fiscal 2018, an increase of $31,674 or 1.5%. 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.

Cost of Goods Sold

During the six months period ended March 31, 2019, our cost of goods sold was $1,760,036 as compared to cost of goods sold of $1,745,998 for the same period ended March 31, 2018, an increase of $14,038 or 0.8% due to an increase in sales during the current period. As a percentage of sales, cost of goods sold decreased from 83.2% in 2018 to 82.6% during the current period due to higher sales of a product mix with relatively lower unit cost during the current six months period.

Gross Profit

Gross profit for the period ended March 31, 2019, increased as a percentage of revenue to 17.4% from 16.8% 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 six months period.

Operating Expenses

Operating expenses for the six months ended March 31, 2019 were $243,574 as compared to $278,606 for the six months ended March 31, 2018, a decrease of $35,032 or 12.6%.

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

Salary expense for the six months ended March 31, 2019, was $74,393 compared to $56,758 for the same period in 2018, an increase of $17,635 or 31.1%. The higher salary expense is the direct result of an additional warehouse staff added to the payroll in the current period.

Professional fees decreased $16,714 or 98.9% during the six months ended March 31, 2019 as compared to the same period in 2018. The decrease can be attributed to lower legal expenses related to SEC compliance and other compliance related matters.

Depreciation expense during the six months ended March 31, 2019, was $3,584, which compares to the same period the prior year.

During the six months ended March 31, 2019, other operating expenses of $165,411 decreased by $35,933 or 17.8% from $201,344 for the same period in 2018. The lower other operating expenses resulted primarily from lower sales commission expense and a reversal of over-accrued payroll taxes, partially offset by higher repair and maintenance expense and higher insurance expense.

Income from operations

Income from operations for the two quarters ended March 31, 2019, was $126,130 compared to income from operations of $73,462 during the same period in 2018. The increase in income from operations when compared to the same period the prior year is the direct result of higher sales and sales margins of rail products and lower operating expenses, in the current period.

Other income and (expense)

Other income and expense for the six months ended March 31, 2019 was a net expense of $72,633 as compared to a net expense of $57,440 for the six months ended on March 31,2018 or a loss increase of $15,193. A $6,476 gain on sale of scrap during the 2018 period and higher interest on our bank loan during the current period account for the higher net expense in the current period.

Net income

For the two quarters ended March 31, 2019, we had net income of $53,497 compared to net income of $16,022 for the same period ended March 31, 2018. The $37,475 increase in the current period net income resulted from higher sales and sales margins of rail products and lower operating expenses during the current period.

Net income per common share

The net income of $53,497 for the six months period ended March 31, 2019, as well as the net income of $16,022 for the six months ended March 31, 2018, when divided by the number of common shares outstanding of 48,053,084 basic shares in both years resulted in a net income 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 March 31, 2019, we had cash and cash equivalents of $151,694 as compared to $36,609 at September 30, 2018 an increase of $115,085 or 314.4%.

Cash Flows Provided/(Used) in Operating Activities

Net cash provided by operating activities for the six months ended March 31, 2019, was $85,998 compared to net cash used by operating activities of $15,801 in the same six-months in 2018.

During the six months ended March 31, 2019, we had net income of $53,497 as compared to net income of $16,022 for the same period in the prior year.

In the current six months period, as well as prior year for the same period, the Company had non-cash expenses for depreciation of $3,584.

Cash provided by operating activities during the six months ended March 31, 2019 from an increase in accounts receivable of $200,715 and a reduction in accrued liabilities of $87,456 were more than offset by cash provided by operating activities from a reduction in inventory of $68,088, an increase in accounts payable of $172.945, and an increase in other liabilities of $74,955.

Cash Flows Provided/(Used in) Investing Activities

There was no cash flow used in investing activities for the period ended March 31, 2019 or 2018.

Cash Flows Used in Financing Activities

During the six months ended March 31, 2019 and, 2018, cash provided by financing activities was $29,087 compared to cash used in financing activities of $19,138 during the same period in 2018. During the current six months period, the Company made payment on its term loan of $27,413 and received advances from our CEO of 56,500.

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 March 31, 2019, the loan balance was $521,637. 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 six months ended March 31, 2019, we received advances of $56,500 from Mr. Shrewsbury, bringing the total outstanding advance balance to $148,987. Cash advances from Mr. Shrewsbury are repayable upon demand and do not bear interest.

As of March 31, 2019 the Company had an accrued liability in the amount of $329,179 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 March 31, 2019, the Company’s accumulated deficit was $15,557,639. 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 March 31, 2019, we had cash and cash equivalents of $151,694 as compared to $36,609 as of September 30, 2018.

Our accounts receivable was $460,409 as of March 31, 2019, as compared to $259,694 as of September 30, 2018, an increase of $200,715 or 77.3%. The higher March 31. 2019 receivable balance is the direct result of higher sales demand in the current period.

Inventory was $1,730,452 as of March 31, 2019, as compared to $1,798,540 as of September 30, 2018, a decrease of $68,088 or 3.8%.

Accrued expenses were reduced from $416,636 as of September 30, 2018 to $329,180 as of the six months ended March 31, 2019, a reduction of $87,456. A reduction in accrued payroll and payroll taxes account for the lower accrued liabilities balance as of March 31, 2019.

Accounts payable for the six months ended March 31, 2019, were $702,798 as compared to $529,853 as of September 30, 2018, an increase of $172,945 or 32.6%.

During the six months ended March 31, 2019, our accumulated deficit decreased from $15,611,136 to $15,557,639, a decrease of $53,497 due to the reported net income during the six months ended March 31, 2019.

During the six months ended March 31, 2019, the Company’s net income was $53,497 compared to a net income of $16,022 for the comparable period in 2018. The net income increase is due to increased sales and sales margins of our rail and mining related products and lower operating expenses in the current period..

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 March 31, 2019, the loan balance was $521,637.

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 March 31, 2019, accrued interest on the note was $509,589.

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 March 31, 2019, Mr. Shrewsbury had advanced an aggregate of $148, 987 to the Company. The advances do not bear interest and are repayable upon demand. As of March 31, 2019, the Company also has a payable of $96,000 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 March 31, 2019, and September 30, 2018.

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.

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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 March 31, 2019, 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 $148,987. We have outstanding accounts payable of $702,798 and other accrued liabilities of $838,769, including $329,179 due to our CFO, Jose Fuentes, for services. Also, the Company owes $521,637 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 $96,000 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 $53,497 for the six months ended March 31, 2019 and net income of $16,022 for the same period in 2018. At March 31. 2019 and September 30, 2018, we had accumulated deficits of $15,557,639 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.

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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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