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 $3,746,319 for the period from January
28, 2008 (date of inception) to August 31, 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 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 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:
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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;
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cultural challenges associated with integrating employees from an
acquired company or business into our organization;
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retaining key employees from the businesses we acquire, and
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the need to integrate an acquired company’s accounting, management
information, human resource and other administrative systems to permit effective management.
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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 August 31, 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 October 17, 2016, there were 18,436,320 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.
