PAXH PreAxia Health Care Payment Systems Inc (PK)

ITEM 1A. RISK FACTORS

Risks Related to our Company

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.

PreAxia has a limited operational history. Our company has never paid dividends and has no present intention to pay dividends. Our company is in the early commercialization stage of its business and therefore 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. PreAxia will be committing, and for the foreseeable future will continue to commit, significant financial resources to marketing, product development and research. PreAxia’s 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 company’s business, PreAxia’s 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 PreAxia will be successful in doing what is necessary to address these risks.

We will need substantial additional financing in the future to continue operations.

Our ability to continue our present operations will be dependent upon our ability to obtain significant external funding. Additional sources of funding have not been established. We are exploring various financing alternatives. There can be no assurance that we will be successful in securing such financing at acceptable terms, if at all. If adequate funds are not available from the foregoing sources, or if we determine it is to otherwise be in our best interests, we may consider additional strategic financing options, including sales of assets.

We will require key personnel.

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

We have additional financing requirements.

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

We may not be successful in the protection of 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 PreAxia or that any such assertions or prosecutions will not materially adversely affect our company’s business, financial condition or results of operations. Irrespective of the validity or the successful assertion of such claims, our company could incur significant costs and diversion of resources with respect to the defense thereof which could have a material adverse effect on our company’s business, financial condition or results of operations. Our company’s performance and ability to compete are dependent to a significant degree on its proprietary technology. There can be no assurance that the steps taken by our company will prevent misappropriation of its technology or that agreements entered into for that purpose will be enforceable. The laws of other countries may afford our company little or no effective protection of its intellectual property. Our company 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 our company on commercially reasonable terms. The loss of, or inability of our company 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 PreAxia’s business, results of operations and financial condition.

Our disclosure controls and procedures and internal control over financial reporting are 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 May 31, 2017 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, 2017 and concluded 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 these material weaknesses 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 Related to our Business

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 financial services technology is competitive. There are other providers of components or versions of 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 the market. 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 PreAxia 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 PreAxia’s products and may have a material adverse effect on PreAxia’s business, financial condition and results of operations.

We may face implementation delays.

Most of PreAxia’s customers will be in a testing or preliminary stage of utilizing PreAxia’s products and may encounter delays or other problems in the introduction of PreAxia’s 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 PreAxia’s businesses 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 PreAxia’s products.

We may get limited customer feedback respecting products.

PreAxia’s revenue will depend on the number of customers who use PreAxia’s products. Accordingly, the satisfactory design of PreAxia’s product is critical to PreAxia’s business, and any significant product design limitations or deficiencies could harm PreAxia’s business and market acceptance. This limited feedback may not have resulted in an adequate assessment of customer requirements. Therefore, the currently specified features and functionality of PreAxia’s product may not satisfy current or future customer demands. Furthermore, even if PreAxia identifies the feature set required by customers in PreAxia’s market, it may not be able to design and implement products incorporating features in a timely and efficient manner, if at all.

We may face a slowdown in developing markets.

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

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

The financial services technology industry is susceptible to technological advances and the introduction of new products utilizing new technologies. Further, the financial services technology industry is 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 its ability to secure technological superiority in its product and maintain such superiority in the face of new products. No assurances can be given that the product of PreAxia 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 the product of PreAxia less competitive, less marketable, or even obsolete over time. The future success of PreAxia will be influenced by its 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 its existing product will prove profitable, or that products or improvements resulting therefrom, if any, will be successfully produced and marketed.

The financial services technology industry is 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 PreAxia’s technology obsolete or have a negative impact on sales margins PreAxia’s product may command. PreAxia’s performance will depend, in part, on its ability to enhance its 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 PreAxia will be successful in using new technologies effectively or adapting its product to customer requirements or emerging industry standards.

We require strategic alliances.

PreAxia’s 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 PreAxias’s products, and/or lawsuits, and would be detrimental, perhaps materially, to PreAxia’s 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 PreAxia considers minor may be considered serious by its customers. If PreAxia’s internal quality assurance testing or customer testing reveals performance issues and/or desirable feature enhancements, PreAxia could postpone the development and release of updates or enhancements to its current product or the release of new products. PreAxia 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 PreAxia’s business and prospects. In addition, product defects may expose PreAxia to liability claims, for which PreAxia may not have sufficient liability insurance. A successful lawsuit against PreAxia could harm its business and financial condition.

We may not be able to effectively manage our growth.

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

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 PreAxia’s financial resources will continue to be directed to the development of its products and to marketing activities. The success of PreAxia will ultimately depend on its ability to generate revenues from its 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.

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 are required, subject to certain exceptions, to disclose that interest and generally abstain from voting on any resolution to approve the contract. In addition, the 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.

PreAxia does not have key man insurance.

PreAxia does not currently have key man insurance in place in respect of any of its 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 Annual Report on Form 10-K, 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:

• The need to implement or remediate controls, procedures and policies appropriate for a public company in an acquired company that, prior to the acquisition, lacked these controls, procedures and policies;
• Cultural challenges associated with integrating employees from an acquired company or business into our organization;
• Retaining key employees from the businesses we acquire, and
• The need to integrate an acquired company’s accounting, management information, human resource and other administrative systems to permit effective management.

Future acquisitions and investments could involve the issuance of our equity securities, potentially diluting 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.

Risks Related to our Common Stock

There is currently no trading market for our common stock.

There is currently no trading market for our common stock. Our common stock is not quoted on any exchange or inter-dealer quotation system. There is no trading market for our common stock on any stock exchange or through any quotation system (including, without limitation, the NASDAQ Stock Market), however our common stock is quoted and traded on the OTC Markets Pink Sheets.

A decline in the price of our common stock could affect our ability to raise further working capital, it may adversely impact our ability to continue operations and we may go out of business.

A prolonged decline in the price of our common stock could result in a reduction in the liquidity of our common stock and a reduction in our ability to raise capital. Because we may attempt to acquire a significant portion of the funds we need in order to conduct our planned operations through the sale of equity securities, a decline in the price of our common stock could be detrimental to our liquidity and our operations because the decline may cause investors to not choose to invest in our stock. If we are unable to raise the funds we require for all our planned operations, we may be forced to reallocate funds from other planned uses and may suffer a significant negative effect on our business plan and operations, including our ability to develop new products and continue our current operations. As a result, our business may suffer, and not be successful and we may go out of business. We also might not be able to meet our financial obligations if we cannot raise enough funds through the sale of our common stock and we may be forced to go out of business.

Because we do not intend to pay any cash dividends on our shares of common stock in the near future, our shareholders will not be able to receive a return on their shares unless they sell them.

We intend to retain any future earnings to finance the development and expansion of our business. We do not anticipate paying any cash dividends on our common stock in the near future. The declaration, payment and amount of any future dividends will be made at the discretion of the board of directors, and will depend upon, among other things, the results of operations, cash flows and financial condition, operating and capital requirements, and other factors as the board of directors considers relevant. There is no assurance that future dividends will be paid, and if dividends are paid, there is no assurance with respect to the amount of any such dividend. Unless we pay dividends, our shareholders will not be able to receive a return on their shares unless they sell them.

Our stock is a penny stock. Trading of our stock may be restricted by the SEC’s penny stock regulations which may limit a shareholder’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 SEC 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.

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 Securities and Exchange Commission, the Financial Industry Regulatory Authority (“FINRA”) has adopted rules that 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 your ability to buy and sell our stock.