ITEM 1A. RISK FACTORS

An investment in our common stock involves a high degree of risk.  You should carefully consider the risks described below and other information contained in this filing before deciding to invest in our common stock.  The risks described below are not the only ones facing our company. Additional risks not presently known to us or which we currently consider immaterial may also adversely affect our company.  If any of the following risks 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 of your investment.

 

Risks Related to Our Operations

We have a limited operating history and our success is subject to substantial risks inherent in the establishment of a new business.  We cannot assure we will be profitable in the future.

Although we commenced operations in 1997, we have sold or discontinued our oil and gas operations and original management has been replaced as previous operations were not profitable. We have been in the business of distributing and selling mining supplies and rail products since December 2011 and were a development stage company until March 31, 2012.  We have encountered unforeseen costs, expenses, problems, difficulties and delays frequently associated with new ventures, and these costs, expenses, problems, difficulties and delays may continue. There is no assurance that our wholesale and retail mining supplies and rail products distribution business will be successful. We anticipate that our operating expenses will increase if and as our business expands, and we will need to generate revenues sufficient to meet all of our expenses to continue to achieve profitability.

Although we reported net income for the year ended September 30, 2013, we have a history of net losses and cannot assure we will be profitable in the future.  Any failure on our part to achieve profitability may cause us to reduce or eventually cease operations.

 

We had net income of $326,977 for the twelve months ended September 30, 2013 and a net loss of $499,501 for 2012.  At September 30, 2013 and 2012, we had accumulated deficits of $14,721,502 and $15,048,479, respectively. Based on current expectations, we may need to obtain additional financing to expand our wholesale and retail mining supply business.   We may also require additional financing to fund ongoing operations if our current sales and revenue growth are insufficient to meet our operating costs.  In the past we have been able to raise financing from our chief executive officer through demand notes and advances.  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 overall business results of operations and financial condition.

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 demand notes and advances due to our CEO if he makes a demand under such notes and with regard to such advances.

 

As of September 30, 2013, we have incurred debt due to Mr. Shrewsbury in the form of notes and advances in the aggregate amount of $1,851,580, of which $1,351,997 is covered by two notes that are repayable upon demand and advances of $499,583. We have outstanding accounts payable of $692,180 and other accrued liabilities of $889,885. Also, we owe $248,500 under a bank line of credit which is secured by our inventory and which becomes due on November 7, 2014, and guaranteed by our CEO.  Accordingly although, Mr. Shrewsbury has committed to the Company not to demand payment of the notes before their respective due dates, we are subject to the risks associated with substantial indebtedness, including insufficient funds to repay the outstanding principal under the demand notes and advances due to Mr. Shrewsbury in the event he makes a demand for payment; it may be more expensive and difficult to obtain additional financing; and we are more vulnerable to economic downturns.

There are substantial doubts about our ability to continue as a going concern and, if we are unable to continue our business, our shares may have little or no value.

Our independent registered public accounting firm’s report on our financial statements included in our annual report on Form 10-K for the year ended September 30, 2013, as well as our independent registered public accounting firm’s report on our financial statements for the years ended September 30, 2012 and 2011, contain an explanatory paragraph wherein they expressed an opinion that there is substantial doubt about our ability to continue as a going concern.   Our financial statements do not include any adjustments to reflect the possible future effects on recoverability and classification of assets or the amounts and classification of liabilities that might occur if we are unable to continue in business as a going concern. Accordingly, careful consideration of such opinions should be given in determining whether to continue or become our stockholder.

 

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We depend on a small number of customers for a substantial portion of our revenues.

 

During the year ended September 30, 2013, one customer accounted for approximately 33% of our revenues, one customer accounted for approximately 17% of our revenues, and one customer accounted for approximately 15% of our revenues.  We expect sales to such customers to continue to constitute a significant portion of our revenues in the near term.  The loss of any one or more of such customers could have a material adverse effect our business, financial condition and results of operations.

 

Exchange rate fluctuations could cause a decline in our financial condition and results of operations.

 

We import most of our mining supplies products from overseas.  Future fluctuations in exchange rate on foreign currencies could adversely affect our results in the event we make purchases and import our products.  From time to time, as and when we determine it is appropriate and advisable to do so, we will seek to mitigate the effect of exchange rate fluctuations through the use of derivative financial instruments. We cannot assure you, however, that we will continue this practice or be successful in these efforts.

We are implementing a growth strategy which, if successful, will place significant demands on us and subject us to numerous risks.

Growing businesses often have difficulty managing their growth. If our growth strategy is successful, significant demands will be placed on our management, accounting, financial, information and other systems and on our business. We will have to expand our management and recruit and employ experienced executives and key employees capable of providing the necessary support. In addition, to manage our anticipated growth we will need to continue to improve our financial, accounting, information and other systems in order to effectively manage our growth and, in doing so, could incur substantial additional expenses that could harm our financial results. We cannot assure you that our management will be able to manage our growth effectively or successfully, or that our financial, accounting, information or other systems will be able to successfully accommodate our external and internal growth. Our failure to meet these challenges could materially impair our business.

We may undertake acquisitions which pose risks to our business.

As part of our growth strategy, we have and may in the future acquire or enter into joint venture arrangements with, or form strategic alliances with complementary businesses. Any such acquisition, investment, strategic alliance or related effort will be accompanied by the risks commonly encountered in such transactions.  These risks may include:

 

●	Difficulty of identifying appropriate acquisition candidates;

●	Paying more than the acquired company is worth;

●	Difficulty in assimilating the operations of the new business;

●	Costs associated with the development and integration of the operations of the new entity;

●	Existing business may be disrupted;

●	Entering markets in which we have little or no experience;

●	Accounting for acquisitions could require us to amortize substantial intangible assets (goodwill), adversely affecting our results of operations;

●	Inability to retain the management and key personnel of the acquired business;

●	Inability to maintain uniform standards, controls, policies and procedures; or

●	Customer attrition with respect to customers acquired through the acquisition.

 

We cannot assure you that we would successfully overcome these risks or any other problems associated with any acquisition, investment, strategic alliances, or related efforts.  Also, if we use our common stock in connection with an acquisition, your percentage ownership in us will be reduced and you may experience additional dilution.

 

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Our business may be impacted by political events, war, terrorism, public health issues, natural disasters and other circumstances that are not within our control.

 

War, terrorism, geopolitical uncertainties, public health issues, and other business interruptions have caused and could cause damage or disruption to international commerce and the global economy, and thus could have a material adverse effect on us, our suppliers, and manufacturing vendors. Our business operations are subject to interruption by natural disasters, fire, power shortages, nuclear power plant accidents, terrorist attacks, and other hostile acts, labor disputes, public health issues, and other events beyond our control. Such events could decrease demand for our products, make it difficult or impossible for us to make and deliver products to our customers, or to receive products from our manufacturers and suppliers, and create delays and inefficiencies in our supply chain. Should major public health issues, including pandemics, arise, we could be adversely affected by more stringent employee travel restrictions, additional limitations in freight services, governmental actions limiting the movement of products between regions, delays in production ramps of new products, and disruptions in the operations of our manufacturing vendors and suppliers. In the event of a natural disaster, we could incur significant losses, require substantial recovery time and experience significant expenditures in order to resume operations.

 

We have accrued but unpaid lease payments due under our office and warehouse lease and may be deemed to be in default under our lease agreement.

 

As of September 30, 2013, we had accrued but unpaid lease payments due to our CEO and his wife in the amount of $42,000 under our principal office and warehouse lease.  Accordingly, we may be deemed to be in default under the terms of our lease agreement.  We have not received a notice of default or termination under our lease agreement as of the date of the filing of this report.

Risks Related to Our Company

Investor confidence in the price of our stock may be adversely affected if we are unable to comply with Section 404 of the Sarbanes-Oxley Act of 2002.

As an SEC registrant, we are subject to the rules adopted by the SEC pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, which require us to include in our annual report on Form 10-K our management’s report on, and assessment of the effectiveness of, our internal control over financial reporting (“management’s report”). If we fail to achieve and maintain the adequacy of our internal control over financial reporting, there is a risk that we will not comply with all of the requirements imposed by Section 404.  Moreover, effective internal control over financial reporting, particularly that relating to revenue recognition, is necessary for us to produce reliable financial reports and is important in helping to prevent financial fraud.  Any of these possible outcomes could result in an adverse reaction in the financial marketplace due to a loss in investor confidence in the reliability of our financial statements, which ultimately could harm our business and could negatively impact the market price of our common stock.  Investor confidence and the price of our common stock may be adversely affected if we are unable to comply with Section 404 of the Sarbanes-Oxley Act of 2002.

In order to comply with public reporting requirements, we must continue to strengthen our financial systems and controls, and failure to do so could adversely affect our ability to provide timely and accurate financial statements.

 

Refinement of our internal controls and procedures will be required as we manage future growth successfully and operate effectively as a public company. Such refinement of our internal controls, as well as compliance with the Sarbanes-Oxley Act of 2002 and related requirements, will be costly and will place a significant burden on management.  We cannot assure you that measures already taken, or any future measures, will enable us to provide accurate and timely financial reports, particularly if we are unable to hire additional personnel in our accounting and financial department, or if we lose personnel in this area. Any failure to improve our internal controls or other problems with our financial systems or internal controls could result in delays or inaccuracies in reporting financial information, or non-compliance with SEC reporting and other regulatory requirements, any of which could adversely affect our business and stock price.

 

Current shareholdings may be diluted if we make future equity issuances or if outstanding warrants are exercised for shares of our common stock.

“Dilution” refers to the reduction in the voting effect and proportionate ownership interest of a given number of shares of common stock as the total number of shares increases.  Our issuance of additional stock, convertible preferred stock and convertible debt may result in dilution to the interests of shareholders and may also result in the reduction of your stock price.  The sale of a substantial number of shares into the market, or even the perception that sales could occur, could depress the price of the common stock.  Also, the exercise of warrants and options may result in additional dilution.

As of September 30, 2013, we had 1,450,000 common stock purchase warrants outstanding.  The holders of outstanding warrants (and options and other convertible securities, if any are subsequently issued) have the opportunity to profit from a rise in the market price of our common stock, if any, without assuming the risk of ownership, with a resulting dilution in the interests of other shareholders.  We may find it more difficult to raise additional equity capital if it should be needed for our business while the options, warrants and convertible securities are outstanding.  At any time at which the holders of the warrants or convertible securities might be expected to exercise or convert them, we would probably be able to obtain additional capital on terms more favorable than those provided by those securities.

 

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Certain provisions of our charter and bylaws may discourage mergers and other transactions.

 

Certain provisions of our certificate of incorporation and bylaws may make it more difficult for someone to acquire control of us.  These provisions may make it more difficult for stockholders to take certain corporate actions and could delay or prevent someone from acquiring our business.  These provisions could limit the price that certain investors might be willing to pay for shares of our common stock.  The ability to issue “blank check” preferred stock are traditional anti-takeover measures.  These provisions may be beneficial to our management and the board of directors in a hostile tender offer, and may have an adverse impact on stockholders who may want to participate in such tender offer, or who may want to replace some or all of the members of the board of directors.

Our board of directors may issue additional shares of preferred stock without stockholder approval.

 

Our certificate of incorporation authorizes the issuance of up to 1,000,000 shares of preferred stock.  Accordingly, our board of directors may, without shareholder approval, issue one or more new series of preferred stock with rights which could adversely affect the voting power or other rights of the holders of outstanding shares of common stock.  In addition, the issuance of shares of preferred stock may have the effect of rendering more difficult or discouraging, an acquisition or change of control of TX Holdings.  Although we do not have any current plans to issue any shares of preferred stock, we may do so in the future.

We depend on key personnel and independent sales agents.

Our success depends on the contributions of our key management personnel, including Mr. William “Buck” Shrewsbury, Chairman and Chief Executive Officer, and Mr. Jose Fuentes, our Chief Financial Officer.  If we lose the services of any of such personnel we could be delayed in or precluded from achieving our business objectives.  We do not have key man life insurance on any of our officers.

In addition, the loss of either of our independent sales agents could temporarily jeopardize our positive relations with our customers.  Our agreements with such sales agents are terminable upon 30 days’ notice.  Any loss of our sales agents would jeopardize the stability of our infrastructure and our ability to provide the service levels our customers expect.  The loss of any of our key officers or sales agents could impair our ability to successfully execute our business strategy, because we substantially rely on their experience and management skills.

Our ability to attract and retain additional skilled personnel may impact our ability to develop our technology and attract customers in growing our business.

 

We believe that our ability to attract, train, motivate and retain additional highly skilled managerial and sales personnel is essential to our future success. Competition for such personnel with appropriate qualifications and skills is intense. Locating candidates with the appropriate qualifications, particularly in the desired geographic location, can be costly and difficult. We may not be able to hire the necessary personnel to implement our business strategy, or we may need to provide higher compensation to such personnel than we currently anticipate. If we fail to attract and retain sufficient numbers of qualified employees or sales agents, our ability to provide the necessary products and services may be limited and, as a result, we may be unable to attract customers and grow our business.

There is a limited market for our shares.

Our shares of common stock are quoted on the OTC Markets Group, Inc.’s OTCQB marketplace. As a result, relatively small trades in our stock could have disproportionate effect on our stock prices.  No assurance can be made that an active market will develop for our common stock or, if it develops, that it will continue.  A limited trading volume may limit the ability of our shareholders to resell their shares at times and in such amounts as they may desire.

We have never declared or paid cash dividends on our common stock.

We have never declared or paid a cash dividend on our common stock and do not anticipate paying cash dividends on our common stock in the foreseeable future. Payment of future cash dividends, if any, will be at the discretion of our board of directors and will depend on our financial condition, results of operations, contractual restrictions, capital requirements, business prospects and other factors that our board of directors considers relevant. Accordingly, investors will only see a return on their investment if the value of our securities appreciates.

 

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Our directors and named executive officers own a substantial percentage of our common stock.

 

As of October 25, 2013, our directors and executive officers beneficially owned approximately 23.04% of our shares of common stock including shares issuable upon exercise of warrants.  Our directors and executive officers are entitled to cast an aggregate of approximately 10,225,317 votes on matters submitted to our stockholders for a vote or approximately 21.28% of the total number of votes entitled to be cast at a meeting of our stockholders.  These stockholders, if they acted together, could exert substantial control over matters requiring approval by our stockholders.  These matters would include the election of directors and the approval of mergers or other business combination transactions.  This concentration of ownership may discourage or prevent someone from acquiring our business.

Our common stock is subject to the SEC’s penny stock regulations.

Our common stock is subject to the SEC’s “penny stock” rules.  These regulations define a “penny stock” to be any equity security that has a market price (as defined) of less than $5.00 per share, subject to certain exceptions.  For any transaction involving a penny stock, unless exempt, these rules require the delivery, prior to the transaction, of a disclosure schedule prepared by the SEC relating to the penny stock market.  The broker-dealer also must disclose the commissions payable to the broker-dealer and the registered underwriter, current quotations for the securities, information on the limited market in penny stocks and, if the broker-dealer is the sole market-maker, the broker-dealer must disclose this fact and the broker-dealers’ presumed control over the market.  In addition, the broker-dealer must obtain a written statement from the customer that such disclosure information was provided and must retain such acknowledgment for at least three years.  Further, monthly statements must be sent disclosing current price information for the penny stock held in the account.  The penny stock rules also require that broker-dealers engaging in a transaction in a penny stock make a special suitability determination for the purchaser and receive the purchaser’s written consent to the transaction prior to the purchase.  The foregoing rules may materially and adversely affect the liquidity for the market of our common stock.  Such rules may also affect the ability of broker-dealers to sell our common stock, the ability of holders of such securities to obtain accurate price quotations and may therefore impede the ability of holders of our common stock to sell such securities in the secondary market.

FINRA sales practice requirements may also limit a shareholder’s ability to buy and sell our stock.

In addition to the penny stock rules promulgated by the SEC, FINRA rules require that in recommending an investment to a customer, a broker-dealer must have reasonable grounds for believing that the investment is suitable for that customer. Prior to recommending speculative low priced securities to their non-institutional customers, broker-dealers must make reasonable efforts to obtain information about the customer’s financial status, tax status, investment objectives and other information. Under interpretations of these rules, FINRA believes that there is a high probability that speculative low priced securities will not be suitable for at least some customers. FINRA requirements make it more difficult for broker-dealers to recommend that their customers buy our common stock, which may limit the ability to buy and sell our stock and have an adverse effect on the market value for our shares.

As an issuer of “penny stock,” the protection provided by federal securities laws related to forward looking statements does not apply to us.

 

Although federal securities laws provide a safe harbor for forward-looking statements made by a public company that files reports under the federal securities laws, this safe harbor is not available to issuers of “penny stock.” As a result, we may not have the benefit of this safe harbor protection in the event of any legal action based upon a claim that the material provided by us contained a material misstatement of fact or was misleading in any material respect because of our failure to include any statements necessary to make the statements not misleading. Such an action could hurt our financial condition.

Our stock price is volatile.

The stock market from time to time experiences significant price and volume fluctuations that are unrelated to the operating performance of particular companies.  These broad market fluctuations may cause the market price of our common stock to drop.  In addition, the market price of our common stock is highly volatile.  Factors that may cause the market price of our common stock to drop include:

 

●	Fluctuations in our results of operations;

●	Any acquisitions that we make or joint venture arrangements we enter into with third parties;

●	Changes in stock market analyst recommendations regarding our common stock;

●	Failure of our results of operations to meet the expectations of stock market analysts and investors;

●	Increases in the number of outstanding shares of our common stock resulting from sales of new shares, or the exercise of warrants, stock options or convertible securities;

●	Reluctance of any market maker to make a market in our common stock;

 

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●	Changes in investors’ perception of the United States coal mining industry and related supply businesses; and

●	General stock market conditions.

Risks Related to Our Industries

We may face competition from manufacturers and other distributors of mining supplies and rail products.

The market for our mining supplies is highly fragmented and we face competition from other companies offering products they manufacture or distribute that are competitive with our products.   We also face potential competition from other companies that manufacture and sell rail products.  Business in general is highly competitive, and we compete with both large manufacturers and smaller companies that manufacturer and/or distribute drill bits and related products to the coal industry, in some instances in accordance with customer requirements and specifications. Some of our competitors have more capital, longer operating and market histories, greater manufacturing capability, and greater resources than we have, and may offer a broader range of products and at lower prices than we offer.

Liability claims may occur if our products are defective.

Any failure by our engineered metalwork products and tools could expose us to claims for negligence, breach of contract, personal injury, wrongful death, and products liability. Unsuccessful claims could be costly to defend and divert management time and resources. In addition, we cannot make assurances that we will have appropriate insurance available to us in the future at commercially reasonable rates.  Currently, we maintain general liability insurance in the amount of $1,000,000.     Such coverage may not be adequate to cover any claim that may be made against us. Claims brought against us that are not covered by insurance or that result in recoveries in excess of our insurance coverage could have a material adverse effect on our business, financial condition and results of operations.

Our future operating results may be affected by fluctuations in the prices and availability of raw materials.

The raw materials used in the manufacture of our products include ore for our steel products and carbide for our drilling bit products . Our manufacturing vendors are supplied with a significant portion of their raw materials from sources outside the U.S. The raw materials industry as a whole is highly cyclical and at times pricing and supply can be volatile due to a number of factors beyond our control, including natural disasters, general economic and political conditions, labor costs, competition, import duties, tariffs and currency exchange rate fluctuations. This volatility can significantly affect our suppliers’ raw material costs. In an environment of increasing raw material prices, competitive conditions can affect how much of the price increases in raw materials that we can recover in the form of higher sales prices for our products. To the extent our manufacturer vendors pass on the cost of such increases and we are unable to pass on any raw material price increases to our customers, our profitability would be adversely affected. Furthermore, restrictions on the supply of tungsten and other raw materials could adversely affect our operating results.  If the prices for such raw materials increase or our manufacturing vendors are unable to secure adequate supplies of raw materials on favorable terms, our profitability could be impaired.

We could be adversely affected by changes in regulations affecting the mining or utilities industries.

Our principal customers are mining companies. Many of these customers supply coal or other fuels as a source for the production of utilities in the U.S. and other industrialized regions. The operations of these mining companies are geographically diverse and are subject to or affected by a wide array of regulations in the jurisdictions where they operate, such as applicable environmental laws and regulations governing the operations of utilities. As a result of changes in regulations and laws relating to such industries, our customers’ operations could be disrupted or curtailed by governmental authorities. The high cost of compliance with mining, drilling and environmental regulations may also induce customers to discontinue or limit their operations, and may discourage companies from developing new opportunities. As a result of these factors, demand for our mining- and drilling-related products could be substantially affected by regulations adversely impacting the mining and drilling industries or altering the consumption patterns of utilities.