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EXHIBIT 10.1
 
NOTE EXCHANGE AGREEMENT
 
THIS NOTE EXCHANGE AGREEMENT (this “Agreement”), is made and entered into
effective as of February 25, 2014, by and between TX Holdings, Inc., a Georgia
corporation (“Company”), and William L. Shrewsbury (“Note Holder”).
 
WITNESSETH:
 
WHEREAS, Company and Note Holder, the Chairman and Chief Executive Officer of
Company, are executing and delivering this Agreement in reliance upon an
exemption from the registration requirements under the Securities Act of 1933,
as amended (the “Securities Act”), afforded by the provisions of Section 4(a)(2
under the Securities Act and/or Rule 506 of Regulation D promulgated under the
Securities Act; and
 
WHEREAS, the parties desire that, upon the terms and subject to the conditions
contained herein, Company shall issue to Note Holder, as provided herein, and
Note Holder shall acquire from Company a Consolidated Secured Promissory Note of
Company in the principal amount of $2,000,000 (the “Exchange Note”) in the form
attached as Exhibit A hereto in replacement of, and to effect the consolidation
of, the following indebtedness due from Company to Note Holder: (i) the
principal due under the Revolving Promissory Demand Note issued by Company to
Note Holder on April 30, 2012 (the “Revolving Note”), in the amount of
$1,062,000 and accrued but unpaid interest thereunder as of January 31, 2014, in
the amount of $168,904.51, (ii) the principal due under the 10% Promissory Note
issued by Company to Note Holder effective February 27, 2009 (the “10% Note”),
in the amount of $289,997 and accrued but unpaid interest thereunder as of
January 31, 2014, in the amount of $93,252.33, and (iii) $385,845.88 of the
non-interest bearing advances previously made by Note Holder to  Company and
outstanding as of January 31, 2014 (the “Exchange”).
 
NOW, THEREFORE, in consideration of the mutual covenants and other agreements
contained in this Agreement and other good and valuable consideration, receipt
of which is hereby acknowledged by the parties, Company and Note Holder hereby
agree as follows:
 
1.           Closing.  The “Closing” of the Exchange and issuance of the
Exchange Note shall occur contemporaneously with the execution of this Agreement
or such later date as the parties shall mutually agree in writing (the date of
such Closing, the “Closing Date”).  At Closing and as a condition thereto and
the issuance of the Exchange Note, Note Holder shall deliver to Company the
original Revolving Note and 10% Note whereupon such notes shall be cancelled and
of no further force and effect.  As soon as practicable following the Closing
Date, Company shall use its best efforts to purchase, obtain and secure (subject
to Note Holder being able to meet applicable insurance underwriting
requirements) one or more key man life insurance policies in the aggregate
amount of $2,000,000 (or such lesser amount as the parties shall mutually agree)
on the life of Note Holder (“Key Man Policy”) to cover repayment by Company of
amounts due under the Exchange Note in the event of Note Holder’s
death.  Further, following the Closing Date and immediately following Company’s
purchase of the Key Man Policy, Company and Note Holder shall promptly enter
into a security agreement or other appropriate agreement (“Security Agreement”)
pursuant to which the death benefit proceeds to be received by Company under
such Key Man Policy upon the death of Note Holder shall be subject to a first
priority security interest of Note Holder and his estate or otherwise
exclusively designated or set aside for the purpose of repaying the Exchange
Note.
 
2.           Note Holder Representations, Warranties and Agreements.  Note
Holder hereby represents, warrants and agrees with the Company that:
 
 (a)           Authorization and Power.      Note Holder has the requisite power
and authority to enter into and perform this Agreement and to acquire the
Exchange Note.   This Agreement, the Exchange Note, and the Security Agreement
(the Exchange Note and the Security Agreement, the “Transaction Documents”) have
been or will be duly authorized and executed and when delivered by Note Holder
will constitute valid and binding obligations of Note Holder, enforceable
against Note Holder in accordance with the terms thereof.
 

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 (b)           No Conflicts.      The execution, delivery and performance of
this Agreement and the Transaction Documents and the consummation by Note Holder
of the transactions contemplated hereby and thereby or relating hereto do not
and will not (i) conflict with nor constitute a default (or an event which with
notice or lapse of time or both would become a default) under any agreement to
which Note Holder is a party, or (ii) result in a violation of any law, rule, or
regulation, or any order, judgment or decree of any court or governmental agency
applicable to Note Holder or his properties (except for such conflicts, defaults
and violations as would not, individually or in the aggregate, have a material
adverse effect on Note Holder).  Note Holder is not required to obtain any
consent, authorization or order of, or make any filing or registration with, any
court or governmental agency in order for him to execute, deliver or perform any
of his obligations under this Agreement or the Transaction Documents nor to
acquire the Exchange Note in accordance with the terms hereof and thereof,
provided that for purposes of the representation made in this sentence, Note
Holder is assuming and relying upon the accuracy of the relevant representations
and agreements of Company herein.
 
 (c)           Information Regarding Company.  Note Holder has been furnished
with or has had access at the EDGAR Website of the Securities and Exchange
Commission (“SEC”) to Company’s Form 10-K for the fiscal year ended September
30, 2013, and to Company's other filings made with the SEC which are available
at the Edgar Website.  In addition, Note Holder may have received in writing
from Company such other information concerning its operations, financial
condition and other matters as Note Holder has requested in writing and
considered all factors Note Holder deems material in deciding on the
advisability of investing in the Exchange Note.
 
 (d)           Information Regarding Note Holder.  Note Holder is an “accredited
investor,” as such term is defined in Regulation D promulgated under the
Securities Act, is experienced in investments and business matters, has made
investments of a speculative nature and has purchased securities of United
States publicly-owned companies in private placements in the past and has such
knowledge and experience in financial, tax and other business matters as to
enable Note Holder to utilize the information made available by Company to
evaluate the merits and risks of and to make an informed investment decision
with respect to the proposed Exchange, which represents a speculative
investment.  Note Holder has the authority and is duly and legally qualified to
purchase and own the Exchange Note.  Note Holder is able to bear the risk of
such investment for an indefinite period and to afford a complete loss
thereof.  Note Holder agrees to provide Company with such information reasonably
required from time to time for Company to comply with Company’s regulatory
filing requirements.
 
 (e)           Purchase of Exchange Note.  On the Closing Date, Note Holder will
acquire the Exchange Note as principal for his own account for investment only
and not with a view toward, or for resale in connection with, the public sale or
any distribution thereof.
 
 (f)           Compliance with Securities Act.  Note Holder understands and
agrees that the Exchange Note has not been registered under the Securities Act
or any applicable state securities laws, by reason of its issuance by Company in
a transaction that does not require registration under the Securities Act (based
in part on the accuracy of the representations and warranties of Note Holder
contained herein), and that the Exchange Note must be held indefinitely by Note
Holder unless a subsequent disposition is registered under the Securities Act or
any applicable state securities laws or is exempt from such registration.  
 

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                                 (g)           Exchange Note Legend.  The
Exchange Note shall bear the following or similar legend:
 
“THIS CONSOLIDATED SECURED PROMISSORY NOTE HAS NOT BEEN THE SUBJECT OF
REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR UNDER THE
SECURITIES LAWS OF ANY STATE AND HAS BEEN ISSUED IN RELIANCE UPON EXEMPTIONS
FROM THE REGISTRATION REQUIREMENTS OF SAID ACT AND SUCH LAWS.  THIS CONSOLIDATED
SECURED PROMISSORY NOTE MAY NOT BE SOLD, TRANSFERRED, PLEDGED, HYPOTHECATED OR
OTHERWISE DISPOSED OF IN THE ABSENCE OF (I) AN EFFECTIVE REGISTRATION STATEMENT
UNDER THE ACT OR (II) AN OPINION OF COUNSEL SATISFACTORY TO THE ISSUER THAT SUCH
TRANSFER OR DISPOSITION DOES NOT VIOLATE THE ACT, THE RULES AND REGULATIONS
THEREUNDER, OR APPLICABLE STATE SECURITIES LAWS.”
 
 (h)           No Governmental Review.  Note Holder understands that no United
States federal or state agency or any other governmental or state agency has
passed on or made recommendations or endorsement of the Exchange or the
suitability of Note Holder’s investment in the Exchange Note, nor have such
authorities passed upon or endorsed the merits of the offering of the Exchange
Note.
 
 (i)            Waiver of Prior Defaults; Release of Claims. Effective through
the date hereof, Note Holder hereby waives any and all prior events of default
under the terms of the Revolving Note and 10% Note and releases Company from any
and all claims related thereto or thereunder.
 
 (j)           Accuracy of Representations.  Note Holder represents that the
foregoing representations and warranties are true and correct as of the date
hereof and, unless Note Holder otherwise notifies Company prior to the Closing
Date, shall be true and correct as of the Closing Date.
 
3.         Company Representations, Warranties and Agreements.  Company
represents and warrants to and agrees with Note Holder that:
 
 (a)           Due Incorporation.   Company is a corporation duly incorporated,
validly existing and in good standing under the laws of the jurisdiction of its
incorporation and has the requisite corporate power to own its properties and to
carry on its business as presently conducted.  Company is duly qualified as a
foreign corporation to do business and is in good standing in each jurisdiction
where the nature of the business conducted or property owned by it makes such
qualification necessary, other than those jurisdictions in which the failure to
so qualify would not have a material adverse effect.
 
 (b)           Authority; Enforceability.  This Agreement, the Transaction
Documents and any and all other agreements delivered or required to be delivered
together with or pursuant to this Agreement or in connection herewith (including
but not limited to the Security Agreement) have been (or, with regard to the
Security Agreement to be entered into by the parties, will be) duly authorized,
executed and delivered by the Company and are (or will be) valid and binding
agreements of Company enforceable in accordance with their terms, subject to
bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and
similar laws of general applicability relating to or affecting creditors' rights
generally and to general principles of equity.  Company has full corporate power
and authority necessary to enter into and deliver this Agreement and the
Transaction Documents and to perform its obligations thereunder.
 
 (c)           Consents.  No consent, approval, authorization or order of any
court, governmental agency or body or arbitrator having jurisdiction over
Company, or any of its affiliates, or Company's shareholders is required for the
execution by Company of this Agreement or the Transaction Documents and
compliance and performance by Company of its obligations under this Agreement
and under the Transaction Documents, including, without limitation, the issuance
of the Exchange Note except as may be required under Company’s Business Loan
Agreement, dated November 7, 2012, with Home Federal Savings and Loan
Association (“Home Federal Loan”).   No consent, approval, order or
authorization of, or registration, qualification, designation, declaration or
filing with, any governmental authority in the world, including without
limitation, the United States, or elsewhere is required by Company in connection
with the consummation of the transactions contemplated by this Agreement and the
Transaction Documents. Any such qualifications and filings will, in the case of
qualifications, be effective on the Closing Date and will, in the case of
filings, be made within the time prescribed by law.
 

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 (d)           The Securities.  The Exchange Note upon issuance:
 
(i)           is, or will be, free and clear of any security interests, liens,
claims or other encumbrances, subject only to restrictions upon transfer under
the Securities Act and any applicable state securities laws; and
 
(ii)           has been, or will be, duly and validly authorized and on the date
of issuance of the Exchange Note.
 
 (e)          Accuracy of Representations and Warranties.  Company represents
that the foregoing representations and warranties are true and correct as of the
date hereof in all material respects, and, unless Company otherwise notifies
Note Holder prior to the Closing Date, shall be true and correct in all material
respects as of the Closing Date; provided, that, if any such representation or
warranty is made as of a different date, in which case such representation or
warranty shall be true as of such date.
 
 (f)           Survival.  The foregoing representations and warranties shall
survive the Closing Date.
 
4.         Covenants and Agreements of the Company.  Company covenants and
agrees with Note Holder as follows:
 
 (a)           Negative Covenants.  So long as the Exchange Note is outstanding,
without the consent of Note Holder, Company and its officers and directors will
not, directly or indirectly:
 
(i)          amend its Articles of Incorporation, bylaws or its charter
documents so as to materially and adversely affect any rights of Note Holder;
 
(ii)         repay, repurchase or offer to repay, repurchase or otherwise
acquire or make any dividend or distribution in respect of any of its shares of
common stock, no par value per share, or other equity securities other than to
the extent permitted or required under this Agreement and the Transaction
Documents;
 
(iii)        prepay or redeem any financing related debt or past due obligations
or securities, or past due obligations (except (A) with respect to vendor
obligations, or any such obligations which in management’s good faith,
reasonable judgment must be repaid to avoid disruption of Company’s business and
(B) with respect to amounts due pursuant to the Home Federal Loan);
 
(iv)        liquidate, merge, consolidate, or sell all or substantially all its
assets with or to any other entity, except for a migratory merger with a
wholly-owned subsidiary the result of which does not change the relative
ownership or rights of the Note Holder under the Exchange Note; and
 
 (b)           Key Man Policy.      Following purchase of the Key Man Policy and
at all times thereafter, Company shall promptly pay all premiums due to the
insurance company issuer(s) of such policy.  In the event Company determines it
is unable to pay such premiums at any time, Company shall immediately notify
Note Holder whereupon Note Holder shall have the right (but not the obligation)
to pay such premiums on behalf of Company and seek and obtain reimbursement
thereof from Company.
 

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5.           Miscellaneous.
 
 (a)           Notices.  All notices, demands, requests, consents, approvals,
and other communications required or permitted hereunder shall be in writing
and, unless otherwise specified herein, shall be (i) personally served, (ii)
deposited in the mail, registered or certified, return receipt requested,
postage prepaid, (iii) delivered by reputable air courier service with charges
prepaid, or (iv) transmitted by hand delivery, telegram, or facsimile, addressed
as set forth below or to such other address as such party shall have specified
most recently by written notice.  Any notice or other communication required or
permitted to be given hereunder shall be deemed effective (a) upon hand delivery
or delivery by facsimile, with accurate confirmation generated by the
transmitting facsimile machine, at the address or number designated below (if
delivered on a business day during normal business hours where such notice is to
be received), or the first business day following such delivery (if delivered
other than on a business day during normal business hours where such notice is
to be received) or (b) on the second business day following the date of mailing
by express courier service, fully prepaid, addressed to such address, or upon
actual receipt of such mailing, whichever shall first occur. The addresses for
such communications shall be: (i) if to the Company, to: TX Holdings, Inc.,
12080 Virginia Blvd., Ashland, Kentucky  41102, Attention:  Chief Executive
Officer, facsimile number: (606) 929-5727, and (ii) if to the Note Holder, to:
William L. Shrewsbury, _________________________, _________.
 
 (b)           Entire Agreement; Assignment.  This Agreement and the Transaction
Documents and other documents delivered in connection herewith represent the
entire agreement between the parties hereto with respect to the subject matter
hereof and may be amended only by a writing executed by both parties.  Neither
Company nor Note Holder has relied on any representations not contained or
referred to in this Agreement, the Transaction Documents and the documents
delivered herewith.  No right or obligation of the Company shall be assigned
without prior notice to and the written consent of Note Holder.
 
 (c)           Counterparts/Execution.  This Agreement may be executed in any
number of counterparts and by the different signatories hereto on separate
counterparts, each of which, when so executed, shall be deemed an original, but
all such counterparts shall constitute but one and the same instrument.  This
Agreement and the Transaction Documents may be executed by facsimile signature
and delivered by electronic transmission.
 
 (d)           Law Governing this Agreement.  This Agreement shall be governed
by and construed in accordance with the laws of the State of Kentucky without
regard to principles of conflicts of laws of such state.  References in this
Agreement and the Transaction Documents to laws, rules, regulations and forms
shall also include successors to and functionally equivalent replacements of
such laws, rules, regulations and forms.   The parties to this Agreement and the
Transaction Documents hereby irrevocably waive any objection to jurisdiction and
venue of any action instituted hereunder and shall not assert any defense based
on lack of jurisdiction or venue or based upon forum non conveniens.  The
parties executing this Agreement and Transaction Documents referred to herein or
delivered in connection herewith on behalf of Company agree to submit to the in
personam jurisdiction of such courts and hereby irrevocably waive trial by
jury.  The prevailing party shall be entitled to recover from the other party
its reasonable attorney's fees and costs.  In the event that any provision of
this Agreement or any other agreement delivered in connection herewith is
invalid or unenforceable under any applicable statute or rule of law, then such
provision shall be deemed inoperative to the extent that it may conflict
therewith and shall be deemed modified to conform with such statute or rule of
law.  Any such provision which may prove invalid or unenforceable under any law
shall not affect the validity or enforceability of any other provision of any
agreement.  Each party hereby irrevocably waives personal service of process and
consents to process being served in any suit, action or proceeding in connection
with this Agreement or any other Transaction Document by mailing a copy thereof
via registered or certified mail or overnight delivery (with evidence of
delivery) to such party at the address in effect for notices to it under this
Agreement and agrees that such service shall constitute good and sufficient
service of process and notice thereof.  Nothing contained herein shall be deemed
to limit in any way any right to serve process in any other manner permitted by
law.
 

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 (e)           Captions: Certain Definitions.  The captions of the various
sections and paragraphs of this Agreement have been inserted only for the
purposes of convenience; such captions are not a part of this Agreement and
shall not be deemed in any manner to modify, explain, enlarge or restrict any of
the provisions of this Agreement.
 
 (h)           Severability.  In the event that any term or provision of this
Agreement shall be finally determined to be superseded, invalid, illegal or
otherwise unenforceable pursuant to applicable law by an authority having
jurisdiction and venue, that determination shall not impair or otherwise affect
the validity, legality or enforceability: (i) by or before that authority of the
remaining terms and provisions of this Agreement, which shall be enforced as if
the unenforceable term or provision were deleted, or (ii) by or before any other
authority of any of the terms and provisions of this Agreement.
 
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IN WITNESS WHEREOF, the parties have executed this Agreement effective as of the
date first set forth above.

       
TX HOLDINGS, INC.
         
 
By:
/s/ Jose Fuentes                
Its:
Chief Financial Officer
   

 

         
WILLIAM L. SHREWSBURY
           
Signed:
/s/ William L. Shrewsbury    

 

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