PAXH PreAxia Health Care Payment Systems Inc (PK)

ITEM 1A. RISK FACTORS

You should carefully consider the risks described below before making an investment decision. The risks and uncertainties described below are not the only ones we face. Any of the following risks could harm our business, financial condition or results of operations. In such case, the trading price of our common stock could decline, and you may lose all or part of your investment.

Risks Associated with our Financial Condition

Our independent auditors have expressed substantial doubt about our ability to continue as a going concern.

We incurred a net loss of $3,815,573 for the period from April 3, 2000 (date of inception) to November 30, 2016. We are yet to attain profitable operations. In their report on our financial statements for the fiscal year ended May 31, 2016, our independent auditors included an explanatory paragraph regarding the substantial doubt about our ability to continue as a going concern.

Our ability to continue as a going concern is dependent upon our ability to generate future profitable operations and/or to obtain the necessary financing to meet our obligations and repay our liabilities arising from normal business operations when they come due. We have not generated significant revenues since our inception on January 28, 2008. We will, in all likelihood, continue to incur operating expenses without significant revenues for the foreseeable future. We cannot assure that we will be able to generate enough interest in our health payment market products. If we cannot attract a significant customer base, we will not be able to generate any significant revenues or income. In addition, if we are unable to establish and generate significant revenues, or obtain adequate future financing, our business will fail and you may lose some or all of your investment in our common stock.

We have additional financing requirements.

In order to accelerate PreAxia's growth objectives, we will need to raise additional funds from lenders and equity markets in the future. There can be no assurance that we will be able to raise additional capital on commercially reasonable terms to finance our growth objectives. The ability of PreAxia to arrange such financing in the future will depend in part upon the prevailing capital market conditions as well as the business performance of PreAxia. There can be no assurance that we will be successful in our efforts to arrange additional financing on terms satisfactory to us. If additional financing is raised by the issuance of shares of common stock of PreAxia, control of PreAxia may change and stockholders may suffer additional dilution of their ownership interest in PreAxia.

We have negative cash flow and absence of profits.

PreAxia has not earned any profits to date and there is no assurance that it will earn any profits in the future, or that profitability, if achieved, will be sustained. A significant portion of our financial resources will continue to be directed to the development of our products and to marketing activities. Our success will ultimately depend on our ability to generate revenues from our product sales, such that the business development and marketing activities may be financed by revenues from operations instead of external financing.

There is no assurance that future revenues will be sufficient to generate the required funds to continue such business development and marketing activities.

Risks Associated with our Business

We have a limited operating history.

We are in the early stages of development and face risks associated with a new company in a growth industry. We may not successfully address these risks and uncertainties or successfully implement our operating strategies. If we fail to do so, it could materially harm our business to the point of having to cease operations and could impair the value of our common stock to the point investors may lose their entire investment. Even if we accomplish these objectives, we may not generate positive cash flows or the profits we anticipate in the future.

We have a limited operational history. We are in the early commercialization stage of our business and therefore we will be subject to the risks associated with early stage companies, including uncertainty of revenues, markets and profitability and the need to raise additional funding. We will be committing, and for the foreseeable future will continue to commit, significant financial resources to marketing, product development and research. Our business and prospects must be considered in light of the risks, expenses and difficulties frequently encountered by companies in the early stage of development. Such risks include the evolving and unpredictable nature of our business, our ability to anticipate and adapt to a developing market, acceptance by consumers of our products and the ability to identify, attract and retain qualified personnel. There can be no assurance that we will be successful in doing what is necessary to address these risks.

We will require key personnel.

The financial services technology industry, and HSA marketplace, involves a high degree of risk , which even a combination of experience, knowledge and careful evaluation may not be able to overcome. Our success is dependent on the services of our senior management. The loss of one or more of our key employees could have a material adverse effect on our operations and business prospects. In addition, our future success will depend in large part on our ability to attract and retain additional highly skilled technical, management, sales and marketing personnel. There can be no assurance that we will be successful in attracting and retaining such personnel and the failure to do so could have a material adverse effect on our business, operating results and financial condition.

We may not be successful in the protection of our intellectual property.

There can be no assurance that infringement or invalidity claims (or claims for indemnification resulting from infringement claims) will not be asserted or prosecuted against us or that any such assertions or prosecutions will not materially adversely affect our business, financial condition or results of operations. Irrespective of the validity or the successful assertion of such claims, we could incur significant costs and diversion of resources with respect to the defense thereof which could have a material adverse effect on our business, financial condition or results of operations. Our performance and ability to compete are dependent to a significant degree on our proprietary technology. There can be no assurance that the steps taken by us will prevent misappropriation of our technology or that agreements entered into for that purpose will be enforceable. The laws of other countries may afford us little or no effective protection of our intellectual property. We may in the future also rely on technology licenses from third parties. There can be no assurance that these third party licenses will be, or will continue to be, available to us on commercially reasonable terms. The loss of, or inability of PreAxia to maintain, any of these technology licenses could result in delays in completing its product enhancements and new developments until equivalent technology could be identified, licensed, or developed and integrated. Any such delays would materially adversely affect our business, results of operations and financial condition.

We face competition and may not be able to compete successfully.

PreAxia may not be able to compete successfully against current and future competitors, and the competitive pressures PreAxia faces could harm its business and prospects. Broadly speaking, the market for HSAs and for financial services technology is competitive. There are other providers of components or versions of both HSAs and the Health Card value proposition in the marketplace. Additionally, the level of competition is likely to increase as current competitors improve their product offerings and as new participants enter these markets. Many of PreAxia’s current and potential competitors have longer operating histories, larger customer bases, greater name and brand recognition and significantly greater financial, sales, marketing, technical and other resources than PreAxia.

Additionally, these competitors have research and development capabilities that may allow them to develop new or improved products that may compete with products our company markets and distributes. New technologies and the expansion of existing technologies may also increase competitive pressures on PreAxia. Increased competition may result in reduced operating margins as well as loss of market share. This could result in decreased usage of our products and may have a material adverse effect on our business, financial condition and results of operations.

We may face implementation delays.

Most of our customers will be in a testing or preliminary stage of utilizing our products and may encounter delays or other problems in the introduction of our products. A decision not to do so, or a delay in implementation, could result in a delay or loss of related revenue or could otherwise harm our business and prospects. PreAxia will not be able to predict when a customer that is in a testing or a preliminary use phase will adopt a broader use of our products.

We may get limited customer feedback respecting products.

Our revenue will depend on the number of customers who use our products. Accordingly, the satisfactory design of our product is critical to our business, and any significant product design limitations or deficiencies could harm our business and market acceptance. The feedback we obtain from our customers is critical to our ability to fix any limitations or deficiencies in our product. If we do not obtain adequate feedback from our customers, we may not be able to adequately assess our customers’ requirements. The currently specified features and functionality of our product may not satisfy current or future customer demands. Furthermore, even if we identify the feature set required by our customers and potential customers, we may not be able to design and implement products incorporating features in a timely and efficient manner, if at all.

We may face a slow down in developing markets.

The market for our products is relatively new and continues to evolve. If the market for our product fails to develop and grow, or if our product does not gain market acceptance, our business and prospects will be harmed.

Our ability to keep current with technological changes can impact our ongoing business.

The HSA and financial services technology industries are susceptible to technological advances and the introduction of new products utilizing new technologies. Further, the HSA and financial services technology industries are also subject to customer preferences and to competitive pressures which can, among other things, necessitate revisions in pricing strategies, price reductions and reduced profit margins. The success of PreAxia will depend on our ability to secure technological superiority in our products and maintain such superiority in the face of new products from competitors. No assurances can be given that our products will be commercially viable or that further modification or additional products will not be required in order to meet demands or to make changes necessitated by developments made by competitors which might render our products less competitive, less marketable, or even obsolete over time. The future success of PreAxia will be influenced by our ability to continue to develop new competitive products. There can be no assurance that research and development activities with respect to the development of new products and the improvement of our existing products will prove profitable, or that products or improvements resulting therefrom, if any, will be successfully produced and marketed.

The HSA and financial services technology industries are characterized by technological change, changes in user and customer requirements, new product introductions, new technologies, and the emergence of new industry standards and practices that could render our technology obsolete or have a negative impact on sales margins our product may command. PreAxia's performance will depend, in part, on our ability to enhance our existing product, develop new proprietary technology that addresses the sophisticated and varied needs of its prospective customers, and respond to technological advances and emerging industry standards and practices on a timely and cost-effective basis. The development of technology entails significant technical and business risks. There can be no assurance that we will be successful in using new technologies effectively or adapting our product to customer requirements or emerging industry standards.

We require strategic alliances.

Our growth and marketing strategies are based, in part, on seeking out and forming strategic alliances and working relationships, as well as the performance of such strategic alliances and working relationships. General criteria to be used to assess potential alliances include the following: industry expertise, reputation and market position, complementary technologies or products, and nature and adequacy of resources.

We may have problems with our resolution of product deficiencies.

Difficulties in product design, performance and reliability could result in lost revenue, delays in customer acceptance of PreAxia’s products, and/or lawsuits, and would be detrimental, perhaps materially, to our market reputation. Serious defects are frequently found during the period immediately following the introduction of new products or enhancements to existing products. Undetected errors or performance problems may be discovered in the future. Moreover, known errors which we consider minor may be considered serious by our customers. If our internal quality assurance testing or customer testing reveals performance issues and/or desirable feature enhancements, we may postpone the development and release of updates or enhancements to our current product or the release of new products. We may not be able to successfully complete the development of planned or future products in a timely manner, or to adequately address product defects, which could harm our business and prospects. In addition, product defects may expose us to liability claims, for which we may not have sufficient liability insurance. A successful suit against us could harm our business and financial condition.

We may not be able to effectively manage our growth.

We may be subject to growth-related risks, including capacity constraints and pressure on our internal systems and controls. Our ability to manage our growth effectively will require us to continue to implement and improve our operational and financial systems and to expand, train and manage our employee base. The inability of PreAxia to deal with this growth could have a material adverse impact on our business, operations and prospects. We may experience growth in the number of our employees and the scope of our operating and financial systems, resulting in increased responsibilities for our personnel, the hiring of additional personnel and, in general, higher levels of operating expenses. In order to manage our current operations and any future growth effectively, we will also need to continue to implement and improve our operational, financial and management information systems and to hire, train, motivate, manage and retain our employees. There can be no assurance that we will be able to manage such growth effectively, that our management, personnel or systems will be adequate to support our operations or that we will be able to achieve the increased levels of revenue proportional with the increased levels of operating expenses associated with this growth.

Our directors and officers may face conflicts of interest.

Certain directors and officers of PreAxia may become associated with other reporting issuers or other corporations which may give rise to conflicts of interest. Directors who have a material interest or any person who is a party to a material contract or a proposed material contract with PreAxia is required, subject to certain exceptions, to disclose that interest and generally abstain from voting on any resolution to approve the contract. In addition, our directors are required to act honestly, and in good faith, with a view to the best interests of PreAxia, as the case may be. Certain of the directors may have, other employment, other business, or time restrictions placed on them and accordingly, these directors will only be able to devote part of their time to the affairs of PreAxia.

Certain directors and officers may have other employment, other business, or time restrictions placed on them and accordingly, these directors will only be able to devote part of their time to the affairs of PreAxia.

We do not have key personnel insurance.

We do not currently have key personnel insurance in place in respect of any of our senior officers or personnel.

Acquisitions, investments and other strategic transactions could result in operating difficulties, dilution to our investors and other negative consequences.

It is our current intention to engage in and evaluate a wide array of potential strategic transactions, including acquisitions of companies, businesses, intellectual properties, and other assets. As of the date of filing of this quarterly report, we have not yet identified any such strategic transactions. Any of these strategic transactions could be material to our financial condition and results of operations. In our search for opportunities to engage in strategic transactions, we may not be successful in identifying suitable opportunities. We may not be able to consummate potential acquisitions or investments, or an acquisition or investment may not enhance our business or may decrease rather than increase our earnings. In addition, the process of integrating an acquired company or business, or successfully exploiting acquired intellectual property or other assets, could divert a significant amount of our management’s time and focus and may create unforeseen operating difficulties and expenditures.

Additional risks we may face include:

Future acquisitions and investments could involve the issuance of our equity securities, potentially diluting the ownership interest in our company of our existing stockholders, the incurrence of debt, contingent liabilities or amortization expenses, write-offs of goodwill, intangibles, or acquired in-process technology, or other increased expenses, any of which could harm our financial condition. Our stockholders may not have the opportunity to review, vote on or evaluate future acquisitions or investments.

Fluctuations in quarterly operating results lead to unpredictability of revenue and earnings.

The timing of the release of health care payments processing products and services can cause material quarterly revenue and earnings fluctuations. A significant portion of revenue in any quarter may be derived from sales of products and services introduced in that quarter or established in the immediately preceding quarter. If we are unable to begin to generate sales of products and services during the scheduled quarter, our revenue and earnings will be negatively affected in that period. Quarterly operating results also may be materially impacted by factors, including the level of market acceptance, or demand for health payment processing products and services and the level of development and/or promotion expenses for health payment processing products and services. Consequently, if net revenue in a period is below expectations, our operating results and financial position in that period are likely to be negatively affected, as has occurred in the past.

Our disclosure controls and procedures and internal control over financial reporting were not effective, which may cause our financial reporting to be unreliable and lead to misinformation being disseminated to the public.

Our management evaluated our disclosure controls and procedures as of November 30, 2016 and concluded that as of that date, our disclosure controls and procedures were not effective. In addition, our management evaluated our internal control over financial reporting as of May 31, 2016 and concluded that that there were material weaknesses in our internal control over financial reporting as of that date and that our internal control over financial reporting was not effective as of that date. A material weakness is a control deficiency, or combination of control deficiencies, such that there is a reasonable possibility that a material misstatement of the financial statements will not be prevented or detected on a timely basis.

We have not yet remediated this material weakness and we believe that our disclosure controls and procedures and internal control over financial reporting continue to be ineffective. Until these issues are corrected, our ability to report financial results or other information required to be disclosed on a timely and accurate basis may be adversely affected and our financial reporting may continue to be unreliable, which could result in additional misinformation being disseminated to the public. Investors relying upon this misinformation may make an uninformed investment decision.

Risks Associated with Our Common Stock

Our common stock is traded on the "Over-the-Counter Bulletin Board," which may make it more difficult for investors to resell their shares due to suitability requirements.

Our common stock is currently quoted for trading on Over the Counter Bulletin Board (“OTCBB”) under the symbol PAXH.OB where we expect it to remain in the foreseeable future. Broker-dealers often decline to trade in OTCBB stocks given the market for such securities is often limited, the stocks are more volatile, and the risk to investors is greater. These factors may reduce the potential market for our common stock by reducing the number of potential investors. This may make it more difficult for investors in our common stock to sell shares to third parties or to otherwise dispose of their shares. This could cause our stock price to decline.

Because we can issue additional shares of our common stock or preferred stock, purchasers of our common stock may experience dilution in their ownership of our company in the future.

We are authorized to issue up to 75,000,000 shares of common stock. As of January 10, 2017, there were 18,426,332 shares of our common stock issued and outstanding. Our board of directors has the authority to cause our company to issue additional shares of common stock without the consent of any of our stockholders. Consequently, our stockholders may experience dilution in their ownership of our company in the future.

We do not intend to pay any dividends on our common stock in the foreseeable future.

We do not currently anticipate declaring and paying dividends to our stockholders in the foreseeable future. It is our current intention to apply net earnings, if any, in the foreseeable future to increasing our working capital. We currently have no material revenues and a history of losses, so there can be no assurance that we will ever have sufficient earnings to declare and pay dividends to the holders of shares of our common stock, and in any event, a decision to declare and pay dividends is at the sole discretion of our board of directors, which currently do not intend to pay any dividends on shares of our common stock for the foreseeable future.

Our stock is a penny stock. Trading of our stock may be restricted by the Securities and Exchange Commission’s penny stock regulations which may limit a stockholder’s ability to buy and sell our stock.

Our stock is a penny stock. The Securities and Exchange Commission has adopted Rule 15g-9 which generally defines “penny stock” to be any equity security that has a market price (as defined) less than $5.00 per share or an exercise price of less than $5.00 per share, subject to certain exceptions. Our securities are covered by the penny stock rules, which impose additional sales practice requirements on broker-dealers who sell to persons other than established customers and “accredited investors”. The term “accredited investor” refers generally to institutions with assets in excess of $5,000,000 or individuals with a net worth in excess of $1,000,000 or annual income exceeding $200,000 or $300,000 jointly with their spouse. The penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document in a form prepared by the Securities and Exchange Commission which provides information about penny stocks and the nature and level of risks in the penny stock market. The broker-dealer also must provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson in the transaction and monthly account statements showing the market value of each penny stock held in the customer’s account. The bid and offer quotations, and the broker-dealer and salesperson compensation information, must be given to the customer orally or in writing prior to effecting the transaction and must be given to the customer in writing before or with the customer’s confirmation. In addition, the penny stock rules require that prior to a transaction in a penny stock not otherwise exempt from these rules; the broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser’s written agreement to the transaction. These disclosure requirements may have the effect of reducing the level of trading activity in the secondary market for the stock that is subject to these penny stock rules. Consequently, these penny stock rules may affect the ability of broker-dealers to trade our securities. We believe that the penny stock rules discourage investor interest in and limit the marketability of our common stock.

The Financial Industry Regulatory Authority sales practice requirements may also limit a stockholder’s ability to buy and sell our stock.

In addition to the “penny stock” rules described above, the Financial Industry Regulatory Authority (“FINRA”) has adopted rules that require that when 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. The FINRA requirements make it more difficult for broker-dealers to recommend that their customers buy our common stock, which may limit your ability to buy and sell our common stock and have an adverse effect on the market for shares of our common stock.