ITEM 1A. RISK FACTORS
You
should be aware that there are substantial risks for an investment in our common stock. You should carefully consider these risk
factors before you decide to invest in our common stock.
If
any of the following risks were to occur, such as our business, financial condition, results of operations or other prospects,
any of these could materially affect our likelihood of success. If that happens, the market price of our common stock, if any,
could decline, and prospective investors would lose all or part of their investment in our common stock.
Risks
Related to Our Business Operations
Our
business, financial condition and results of operations are subject to various risks and uncertainties, including those described
below. This section discusses factors that, individually or in the aggregate, could cause our actual results to differ materially
from expected and historical results. Our business, financial condition or results of operations could be materially adversely
affected by any of these risks. It is not possible to predict or identify all such factors. Consequently, the following description
of Risk Factors is not a complete discussion of all potential risks or uncertainties applicable to our business.
Table of Contents
We
have been, and may in the future be, adversely affected by the global COVID-19 pandemic, the duration and economic, governmental
and social impact of which is difficult to predict, which may significantly harm our business, prospects, financial condition
and operating results.
During
2020 and continuing into 2021, there has been a widespread worldwide impact from the COVID-19 pandemic, and we have been, and may in
the future be, adversely affected as a result. Numerous government regulations and public advisories, as well as shifting social behaviors,
have temporarily limited or closed non-essential transportation, government functions, business activities, and person-to-person interactions,
and the duration of such trends is difficult to predict. The outbreak of the COVID-19 coronavirus, the global response to such coronavirus,
including travel restrictions and quarantines that governments are instituting, has adversely affected our operations, may continue to
have an adverse effect on our operations, and/or may have a significant negative impact on our results of operations, the production
of pharmaceuticals and our ability to timely obtain pharmaceuticals for resale. Currently, we are experiencing reductions to, and interruptions
in, the delivery of supply chain pharmaceuticals that are having a negative impact on our wholesalers and certain technology outsourcing
in India and the Philippines. Notwithstanding the above disruptions, our results of operations have not, to date, been materially adversely
affected by the pandemic. However, if we continue to experience production difficulties, quality control problems or further shortages
in supply of pharmaceuticals in the future, this could harm our business and results of operations, any of which could have a material
adverse effect on our operations and the value of our securities. In addition, employee sicknesses and remote working environments, and
the potential negative effect thereof on productivity and internal controls, related to the coronavirus and the federal, state and local
responses to such virus, could materially impact our consolidated results for the year for 2021 and beyond. The COVID-19 outbreak could
also restrict our access to capital such as credit facilities and lead to material nonrecurring charges, write-downs, impairments and
expenses. The Company is actively and continually monitoring the pandemic’s effect on our businesses and endeavoring to
adapt quickly in real time to meet the rapidly-changing demands of our Customers and Suppliers.
To
mitigate the spread of COVID-19, we implemented travel restrictions and remote working arrangements for most of our employees
in order to minimize physical contact, and we implemented additional sanitation and personal protection measures. The
Company’s employees started working remotely around March 17, 2020, and as a result, productivity did not drop, if productivity
drops it could impact revenues and profitability. The Company’s corporate office is closed through June 30, 2021, at the
earliest, unless the current situation improves. These measures might not fully mitigate COVID-19 risks to our workforce
and we could experience unusual levels of absenteeism that might impair operations and delay delivery of products. The COVID-19
pandemic affects product manufacturing, supply and transport availability and cost. The pandemic reduces demand for some products
due to delays or cancellations of elective medical procedures, consumer self-isolation and business closures, among other reasons.
The COVID-19 pandemic also influences shortages of some products, with product allocation resulting in delivery delays for customers.
Additionally, as a result of the recent coronavirus outbreak, various states have adopted
price gouging laws. Our failure to comply with such laws and regulations could subject us to claims, penalties, fines or lawsuits.
We
have been impacted and may be further impacted by COVID-19 as follows:
COVID-19
may cause further disruptions to our business, including, but not limited to:
● negatively impacting collections of accounts receivable;
Table of Contents
● negatively impacting our ability to forecast our business’s financial outlook;
● harming our business, results of operations and financial condition.
The
ongoing impacts of the pandemic may cause a general economic slowdown or recession in one or more markets, disruptions and volatility
in global capital markets and other broad and adverse effects on the economy, business conditions, commercial activity and the
healthcare industry. The pandemic might impact our business operations, financial position and results of operation in unpredictable
ways that depend on highly-uncertain future developments, such as determining the effectiveness of current or future government
actions to address the public health or economic impacts of the pandemic. Any of these risks might have a materially adverse impact
on our business operations and our financial position or results of operations.
We
were recently unprofitable, we have recently generated net losses, and we may incur losses in the future.
In
2017, we became profitable for the first time; in prior years, we were unprofitable and generated a net accumulated deficit of
$8,120,113. Our current business model has been in constant and improved development since 2010 with results that culminated in
net income for the years ended December 31, 2017 and 2018 of $288,983 and $9,038, respectively.
Revenues
generated from our consolidated operations for the years ended December 31, 2020 and 2019 were $17,122,520 and $7,436,264, respectively.
We
incurred a net loss of $2,536,051 for the year ended December 31, 2020, compared to a net loss of $284,428 for the year
ended December 31, 2019. We may incur other losses in the foreseeable future due to the significant costs associated with our
business development, including costs associated with maintaining compliance under SEC reporting standards. We cannot assure you
that our operations will annually generate sufficient revenues to fund our continuing operations or to fully implement our business
plan, and thereafter sustain profitability in any future period.
The
likelihood of our success must be considered in light of the problems, expenses, difficulties, complications and delays frequently
encountered in connection with the start and growth of a business, the implementation and execution of our business plan, and
the regulatory environment affecting the distribution of pharmaceuticals in which we operate.
If
we do not obtain additional financing, our business, prospects, financial condition and results of operations will be adversely
affected.
Management
anticipates that we will require additional working capital in the future to pursue continued development of products, services,
and marketing operations. We cannot accurately predict the timing and amount of such capital requirements. Additional financing
may not be available to us when needed or, if available, it may not be obtained on commercially reasonable terms. If we are not
able to obtain the necessary additional financing on a timely or commercially reasonable basis, we will be forced to delay or
scale down some or all of our development activities (or perhaps even cease the operation of our business).
We
have no commitments for any additional financing, and such commitments may not be obtained on favorable terms, if at all. Any
additional equity financing will be dilutive to our stockholders, and debt financing, if available, may involve restrictive covenants
with respect to dividends, raising future capital, and other financial and operational matters. If we are unable to obtain additional
financing as needed, we may be required to reduce the scope of our operations or our anticipated expansion, which could have a
material adverse effect on us.
Our
business is subject to rigorous regulatory and licensing requirements.
As
described in greater detail in “Item 1. Business”, above, our business is highly regulated in the United States, at
both the federal and state level, and in foreign countries. If we fail to comply with regulatory requirements, or if allegations
are made that we fail to comply, our results of operations and financial condition could be adversely affected.
Table of Contents
To
lawfully operate our businesses, we are required to obtain and hold permits, product registrations, licenses and other regulatory
approvals from, and to comply with operating and security standards of, numerous governmental bodies. For example, as a wholesale
distributor of controlled substances, we must hold valid DEA registrations and state-level licenses, meet various security and
operating standards, and comply with the Controlled Substances Act (CSA). Failure to maintain or renew necessary permits, product
registrations, licenses or approvals, or to comply with required standards, could have an adverse effect on our results of operations
and financial condition. We are also required to comply with various state pricing gouging laws. Products that we source and distribute
must also comply with regulatory requirements.
Noncompliance
or concerns over noncompliance may result in suspension of our ability to distribute or import products, product bans, recalls
or seizures, or criminal or civil sanctions, which, in turn, could result in product liability claims and lawsuits, including
class actions.
Many
of our competitors are better established and have resources significantly greater than we have, which may make it difficult to
fend off competition.
We
expect to compete with the three largest ADR distributors (McKesson, Cardinal Health and AmerisourceBergen), in addition to other
pharmaceutical distributors, buying groups, software products, and various start-up drug companies. Many of these operations have
substantially greater financial and manufacturer-backed resources, longer operating histories, greater name recognition and more
established relationships in the industry than us. In addition, a number of these competitors may combine or form strategic partnerships.
As a result, our competitors may establish a more favorable footing in the pharmaceutical industry with respect to pricing or
other factors. Our failure to compete successfully with any of these companies would have a material adverse effect on our business
and the trading price of our common stock.
The
three distributors listed above have a strong control over our industry, as they have contracts with approximately 24,000 independent,
retail pharmacies that limit the participants’ ability to purchase pharmaceuticals outside of those primary distributors.
Additional restrictive elements exist within the pharmaceutical channels of distribution. For example, a number of the inventory
management systems, either developed by the distributors or third-party vendors, have been developed to require compliance to
these restrictive purchasing agreements. Management anticipates that other existing and prospective competitors will adopt technologies
or business plans similar to ours or seek other means to develop operations competitive with ours, particularly if our development
of large-scale production progresses as scheduled.
We
will need to expand our member base or our profit margins to attain profitability.
Currently,
we are paid an administrative fee of up to 6 percent of the buying price on the generic pharmaceuticals sold to pharmacies and
up to 1 percent on brand pharmaceuticals that pass through our pharmaceutical exchanges. Our management is aware that the competitiveness
of the group of suppliers that participate in our system and price products on our exchange is a key factor in determining how
many purchasing pharmacies and wholesalers will purchase products through our platforms. However, price is not the only factor
that influences where retail pharmacies will obtain their product. Quality fulfillment services are also important, and retail
pharmacies have historically received quality fulfillment services from the three major ADR distributors. In order to be more
competitive, we must improve our customer service and wholesaler fulfillment efforts, because the independent, retail pharmacy
has for years considered this element of the fulfillment process as important as price. Other factors influencing the pharmacies
purchasing behavior in the future will be changes brought upon by the ACA, which regulates some aspects of pharmaceutical spending
and pricing. Management believes that we should benefit substantially from our pricing and product knowledge that is offered by
our platform.
Profitability
may be further increased as a result of lower cost of goods, should the Company build stronger relationships with manufacturers
and other larger buying groups that serve wholesalers and distributors. On a larger scale, those margins are expected to drop
depending upon the breadth of products provided in the market and the sale turn rates required. We are currently undertaking a
significant effort to increase our membership base through attendance at annual conferences and other strategies. Trxade has an
expanded e-mail marketing strategy based on our competitive price advantages and price trend analysis tools.
Table of Contents
There
are inherent risks associated with our operations within the Pharmaceutical Distribution Market.
There
are inherent risks involved with doing business within the pharmaceutical distribution market, including:
● Improperly manufactured products may prove dangerous to the end consumer.
● Counterfeit products or products with fake pedigree papers.
● Unlicensed or unlawful participants in the distribution channel.
● Risk with default and the assumption of credit loss.
● Regulatory risks.
Although
all of our end-user agreements require our customers to indemnify us and for any and all liabilities resulting from our participation
in the pharmaceutical distribution industry, we cannot assure you that the parties required to provide such indemnification will
have the financial resources to do so. Additionally, although we have evaluated appropriate state statutes and federal laws pertaining
to pharmaceutical distribution in an effort to diminish our risks, the Board of Pharmacy for each state is responsible for interpreting
their state laws, and their interpretations may not comport with our analysis. It is also possible that any third-party logistics
arrangements may disrupt service, create a loss of income, or other unforeseen disruptions should the service provider experience
any legal, financial or other difficulties of their own.
We
do not have a traditional credit facility with a financial institution, which may adversely impact our operations.
We
do not have a traditional credit facility with a financial institution, such as a working line of credit. The absence of such
a facility could adversely impact our operations, as it may constrain our ability to have available the working capital for equipment
purchases or other operational requirements. If adequate funds are not otherwise available, we may be required to delay, scale
back or eliminate portions of our business development efforts. Without credit facilities, we could be forced to cease operations
and investors in our securities could lose their entire investment.
We
are dependent upon our current management, who may have conflicts of interest.
We
are dependent upon the efforts of our current management. All of our officers and directors have duties and affiliations with
other companies. Even though these companies are not competitors or involved in pharmaceutical distribution, involvement of our
officers and directors in other businesses may still present a conflict of interest regarding decisions they make for Trxade or
with respect to the amount of time available for Trxade. The loss of any of our officers or directors and, in particular, Mr.
Prashant Patel, our President or Mr. Suren Ajjarapu, our Chief Executive Officer and Chairman of the Company, could have a materially
adverse effect upon our business and future prospects.
The
Company purchased, on behalf of and for the benefit of Mr. Suren Ajjarapu, a personal disability insurance policy providing for
a $1,500,000 lump sum benefit, payable to Mr. Ajjarapu, in the event of Mr. Ajjarapu’s disability. The premiums on
such policy will be paid by the Company for so long as Mr. Ajjarapu is employed by the Company.
The
Company also obtained a $4,000,000 key-man life insurance policy on the life of Mr. Suren Ajjarapu, and a $1,500,000 lump sum
disability insurance policy on Mr. Ajjarapu, providing for the Company as beneficiary of such policies.
Table of Contents
While
our management team has considerable information technology and entrepreneurial experience, none of our management was involved
in pharmaceutical distribution prior to joining the Company and, as such, did not have any technical experience in pharmaceutical
distribution prior to joining us. In the event of the loss of Mr. Ajjarapu’s services, we will seek to hire and retain a
qualified professional. In the event of the loss of his services in connection with his death, upon obtaining funding from the
key-man life insurance, management intends to hire qualified and experienced personnel. We may be unable to find a suitable or
qualified replacement for Mr. Ajjarapu and as such our operations and/or prospects may suffer.
We
rely on third party contracts.
We
depend on others to provide products and services to us. We do not manufacture pharmaceuticals and we do not sell pharmaceuticals
to the end consumer. We do not control these wholesalers, suppliers and purchasers and, although our arrangements with them will
be terminable or of limited length, a change may be difficult to implement. At this time, we have a working relationship with
over 50 wholesalers and the nation’s largest buying group. Although we believe that those entities are satisfied with their
business relationship with Trxade, if our buying group and two or three of the wholesalers decided no longer to do business with
us, that supplier void would materially and adversely affect our competitiveness in the marketplace.
Rapid
technological change in our industry presents us with significant risks and challenges.
Our
industry is characterized by rapid technological change, changing consumer requirements, short product lifecycles and evolving
industry standards. Our success will depend on our ability to develop or to acquire and market new services. There is no guarantee
that we will possess the resources, either financial or personnel, for the research, design and development of new applications
or services, or that we will be able to utilize these resources successfully and avoid technological or market obsolescence. Further,
there can be no assurance that technological advances by one or more of our competitors or future competitors will not result
in our present or future applications and services becoming uncompetitive or obsolete.
We
are currently facing and may in the future face difficulties in sourcing products and inventory due to a variety of causes.
Due
to the continued effects of the COVID-19 pandemic, the governmental responses to contain the spread of such virus, we have to
date experienced issues with the availability of certain products, resulting in product allocation and delivery delays, which
has not to date, had a material adverse effect on our results of operations. We might also experience difficulties and delays
in sourcing products and inventory due to a variety of causes in the future, such as: difficulties in complying with the legal
requirements for export or import of pharmaceuticals or components; suppliers’ failures to satisfy production demand; manufacturing
or supply problems such as inadequate resources; real or perceived quality issues; and advanced deposits which are at risk of
return if product is not delivered. Difficulties in product manufacturing or access to raw materials could result in supplier
production shutdowns, product shortages and other supply disruptions. Any of these risks might have a materially adverse impact
on our business operations and our financial position or results of operations.
We
have in the past, and may in the future, not be able to sell our inventory, at or above the price we acquired such inventory for,
and have in the past, and may in the future, be forced to write-down inventory in the future.
Due
to the supply and demand nature of our pharmaceutical business
and the personal protective equipment (PPE) business, especially in connection with the rapidly changing regulations, recommendations
and guidance surrounding COVID-19, the inventory of products we have acquired, or may acquire in the future, has been/may be,
acquired at a cost higher than the price at which we may be able to resell such products. As a result, in the past we have, and
in the future we may not be able to, make a profit on such sales and have in the past and may in the future, have to write-down
a significant portion of our inventory. During the years ended December 31, 2020 and 2019, write-down to market value was $1,220,269
and $0, respectively.
Table of Contents
We
may not receive products or receive refunds for deposited amounts and may experience losses in connection with such deposits.
We
might not receive products or the return of funds on deposits that have been provided. We have two deposits outstanding as of
the date of this report in an aggregate amount of approximately $1,081,250. In the event we do not receive products for the deposited
amounts or the return of our deposits (through litigation or otherwise), this will cause us financial harm and result in us taking
a significant charge on our financial statements and taking a loss in the amount of such deposit amount. Additionally, in the
future we may provide additional deposits for products which may be material, which deposits may not be refunded timely, if at
all, and which products may not be delivered, or may be defective or unusable. Any significant losses of deposited funds could
have a material adverse effect on our financial condition, results of operations and the value of our securities.
In July 2020, the Company’s
wholly-owned subsidiary, Integra, entered into an agreement with Studebaker Defense Group, LLC (“Studebaker”) wherein Integra
would pay Studebaker a down payment of $500,000 and Studebaker would deliver 180,000 boxes of nitrile gloves by August 14, 2020. Integra
wired the $500,000 to Studebaker, but to date, Studebaker has not delivered the gloves or provided a refund of the deposit. In December
2020, we filed a complaint against Studebaker Defense Group, LLC in Florida state court, Case No. 20-CA-010118 in the Circuit Court for
the Thirteenth Judicial Circuit in Hillsborough County for, among other things, breach of contract. Studebaker did not answer the complaint,
nor did counsel for Studebaker file an appearance. Accordingly, in February 2021 the Company filed a default judgment; however, on
March 22, 2021, counsel for Studebaker filed an appearance and the Company anticipates that Studebaker will file a motion to vacate
the judgment. A hearing on our motion for a default judgement has been set for April 27, 2021. The Company anticipates that irrespective
of the outcome of such hearing on April 27, 2021, the Company will prevail on the merits; and believes Studebaker has the
ability to satisfy a judgment.
In
August 2020, Company’s subsidiary, Integra, entered into an agreement with Sandwave Group Dsn Bhd, wherein Integra
would pay Sandwave a down payment of $581,250 and Sandwave’s supplier, Crecom Burj Group SDN BHD (“Crecom”),
would deliver 150,000 boxes of nitrile gloves within 45 days. Integra wired the $581,250 to Sandwave, which in turn wired the
purchase price to Crecom, which Crecom accepted; however, to date, Crecom has not delivered the nitrile gloves. Integra
demanded return of its $581,250 and Crecom has acknowledged that Integra is entitled to a refund, but to date Crecom has
failed to return Integra’s money. In February 2021, Integra filed a complaint against Crecom in Malaysia: Case No.
WA-22NCC-55-02/2021 in the High Court of Malaysia at Kuala Lumpur in the Federal Territory, Malaysia for the Malaysian
equivalent of breach of contract. Crecom filed an appearance on March 1, 2021; and Crecom had 14 days to file an answer,
which they did not do; however, Crecom has filed a request for extension which we are contesting. There is a hearing scheduled
on April 20, 2021 to hear the matter and, in the meantime, we are preparing our Application for Summary Judgement. If a judgment is entered against Crecom, the process of executing the judgment, and ultimately
collecting, can take three to six months. The Company believes that it will prevail in the lawsuit filed; and
believes Crecom has the ability to satisfy a judgment, and the steps to enforce a judgment in Malaysia, if any,
may be cumbersome, time consuming or costly.
Risks
Relating to Our Information Systems; Technology and Intellectual Property
We
may be subject to claims that we violated intellectual property rights of others, which are extremely costly to defend and could
require us to pay significant damages and limit our ability to operate.
Companies
on the Internet and technology industries, and other patent and trademark holders seeking to profit from royalties in connection
with grants of licenses, own large numbers of patents, copyrights, trademarks and trade secrets and frequently enter into litigation
based on allegations of infringement or other violations of intellectual property rights. There may be intellectual property rights
held by others, including issued or pending patents and trademarks, that cover significant aspects of our technologies, content,
branding or business methods. Any intellectual property claims against us, regardless of merit, could be time-consuming and expensive
to settle or litigate and could divert our management’s attention and other resources. These claims also could subject us
to significant liability for damages and could result in our having to stop using technology, content, branding or business methods
found to be in violation of another party’s rights. We might be required or may opt to seek a license for rights to intellectual
property held by others, which may not be available on commercially reasonable terms, or at all. If we cannot license or develop
technology, content, branding or business methods for any allegedly infringing aspect of our business, we may be unable to compete
effectively. Even if a license is available, we could be required to pay significant royalties, which could increase our operating
expenses. We may also be required to develop alternative non-infringing technology, content, branding or business methods, which
could require significant effort and expense and be inferior. Any of these results could harm our operating results.
Table of Contents
Our
business and operations depend on the proper functioning of information systems, critical facilities and distribution networks.
We
rely on our and third-party service providers’ information systems for a wide variety of critical operations, including
to obtain, rapidly process, analyze and manage data to:
● receive, process and ship orders on a timely basis;
● manage accurate billing and collections for thousands of customers;
● process payments to suppliers; and
● generate financial information.
Our
business also depends on the proper functioning of our critical facilities and our distribution networks. Our results of operations
could be adversely affected if our or a service provider’s information systems, critical facilities or distribution networks
are disrupted (including disruption of access), are damaged or fail, whether due to physical disruptions, such as fire, natural
disaster, pandemic or power outage, or due to cyber-security incidents, ransomware or other actions of third parties, including
labor strikes, political unrest and terrorist attacks. Manufacturing disruptions also can occur due to regulatory action, production
quality deviations, safety issues or raw material shortages or defects, or because a key product or component is manufactured
at a single manufacturing facility with limited alternate facilities.
We
rely on network and information systems and other technologies and a disruption, cyber-attack, failure or destruction of such
networks, systems, or technologies may disrupt our business or result in liability.
Network
and information systems and other technologies, including those related to our computer, data back-up and processing systems,
network management, customer service operations and programming delivery, are critical to our business activities. Network and
information systems-related events, such as computer hackings, cyber-attacks, computer viruses, worms or other destructive or
disruptive software, process breakdowns, denial of service attacks, malicious social engineering or other malicious activities,
or any combination of the foregoing, or power outages, natural disasters, terrorist attacks or other similar events, could result
in a degradation or disruption of our services or damage to our properties, equipment and data. These events also could result
in large expenditures to repair or replace the damaged properties, networks or information systems or to protect them from similar
events in the future.
The
risk of these systems-related events and security breaches occurring has intensified, in part because we maintain certain information
necessary to conduct our businesses in digital form stored on cloud servers. While we develop and maintain systems seeking to
prevent systems-related events and security breaches from occurring, the development and maintenance of these systems is costly
and requires ongoing monitoring and updating as technologies change and efforts to overcome security measures become more sophisticated.
Despite these efforts, there can be no assurance that these events and security breaches will not occur in the future. Moreover,
we may provide certain confidential, proprietary and personal information to third parties in connection with our businesses,
and while we obtain assurances that these third parties will protect this information, there is a risk that this information could
be compromised.
Table of Contents
If
any of our systems are damaged, fail to function properly or otherwise become unavailable, we may incur substantial costs to repair
or replace them, and may experience loss or corruption of critical data and interruptions or delays in our ability to perform
critical functions, which could adversely affect our business and results of operations. In addition, we are currently making,
and expect to continue to make, substantial investments in our information technology systems and infrastructure, some of which
are significant. Upgrades involve replacing existing systems with successor systems, making changes to existing systems, or cost-effectively
acquiring new systems with new functionality. Implementing new systems carries significant potential risks, including failure
to operate as designed, potential loss or corruption of data or information, cost overruns, implementation delays, disruption
of operations, and the potential inability to meet business and reporting requirements. While we are aware of inherent risks associated
with replacing these systems and believe we are taking reasonable action to mitigate known risks, these technology initiatives
may not be deployed as planned or may not be timely implemented without disruption to our operations.
There
may be losses or unauthorized access to or releases of confidential information, including personally identifiable information,
that could subject the Company to significant reputational, financial, legal and operational consequences.
The
Company’s business requires it to use, transmit and store confidential information including, among other things, personally
identifiable information (“PII”) with respect to the Company’s customers and employees. The Company devotes
significant resources to network and data security, including through the use of encryption and other security measures intended
to protect its systems and data. But these measures cannot provide absolute security, and losses or unauthorized access to or
releases of confidential information occur and could materially adversely affect the Company’s reputation, financial condition
and operating results. The Company’s business also requires it to share confidential information with third parties. Although
the Company takes steps to secure confidential information that is provided to third parties, such measures are not always effective
and losses or unauthorized access to or releases of confidential information occur and could materially adversely affect the Company’s
reputation, financial condition and operating results.
For
example, the Company may experience a security breach impacting the Company’s information technology systems that compromises
the confidentiality, integrity or availability of confidential information. Such an incident could, among other things, impair
the Company’s ability to attract and retain customers for its products and services, impact the Company’s stock price,
materially damage supplier relationships, and expose the Company to litigation or government investigations, which could result
in penalties, fines or judgments against the Company.
The
Company has implemented systems and processes intended to secure its information technology systems and prevent unauthorized access
to or loss of sensitive data. As with all companies, these security measures may not be sufficient for all eventualities and may
be vulnerable to hacking, employee error, malfeasance, system error, faulty password management or other irregularities. In addition
to the risks relating to general confidential information described above, the Company is also subject to specific obligations
relating to health data and payment card data. Health data is subject to additional privacy, security and breach notification
requirements, and the Company can be subject to audit by governmental authorities regarding the Company’s compliance with
these obligations. If the Company fails to adequately comply with these rules and requirements, or if health data is handled in
a manner not permitted by law or under the Company’s agreements with healthcare institutions, the Company could be subject
to litigation or government investigations, may be liable for associated investigatory expenses, and could also incur significant
fees or fines.
Under
payment card rules and obligations, if cardholder information is potentially compromised, the Company could be liable for associated
investigatory expenses and could also incur significant fees or fines if the Company fails to follow payment card industry data
security standards. The Company could also experience a significant increase in payment card transaction costs or lose the ability
to process payment cards if it fails to follow payment card industry data security standards, which would materially adversely
affect the Company’s reputation, financial condition and operating results.
System
errors or failures of our platform or services to conform to specifications could cause unforeseen liabilities or injury, harm
our reputation and have a material adverse impact on our results of operations.
The
software and technology services that we operate are complex. As with complex systems offered by others, our software and technology
services may contain errors, especially when first introduced. Failure of a customer’s system to perform in accordance with
our documentation could constitute a breach of warranty and could require us to incur additional expense in order to make the
system comply with the documentation. If such failure is not remedied in a timely manner, it could constitute a material breach
under a contract, allowing the client to cancel the contract, obtain refunds of amounts previously paid, or assert claims for
significant damages.
Table of Contents
Risks
Associated with Bonum Health Telemedicine Services
The
telehealth market is immature and volatile.
The
telehealth market is relatively new and unproven, and it is uncertain whether it will achieve and sustain high levels of demand,
consumer acceptance and market adoption. Our success will depend to a substantial extent on the willingness of our clients’
members or patients to use, and to increase the frequency and extent of their utilization of, our services, as well as on our
ability to demonstrate the value of telehealth to employers, health plans, government agencies and other purchasers of healthcare
for beneficiaries. Negative publicity concerning our services or the telehealth market as a whole could limit market acceptance
of our services. If our clients, or their members or patients, do not perceive the benefits of our services, or if our services
are not competitive, then our market may not develop at all, or it may develop more slowly than we expect. Similarly, individual
and healthcare industry concerns or negative publicity regarding patient confidentiality and privacy in the context of telehealth
could limit market acceptance of our healthcare services. If any of these events occurs, it could have a material adverse effect
on our business, financial condition or results of operations.
With
respect to our planned “Bonum Health Hub” telehealth services, the market for such services is new and unproven,
and it is uncertain whether it will achieve consumer acceptance and market adoption. The success of our “Bonum Health
Hub” will depend to a substantial extent on the willingness of patients to use new technologies such as our planned
“Bonum Health Hubs”. Negative publicity concerning our “Bonum Health Hubs” or the telehealth
market as a whole, could limit market acceptance of the “Bonum Health Hubs”. Similarly, individual and healthcare
industry concerns or negative publicity regarding patient confidentiality and privacy in the context of telehealth could limit
market acceptance of our “Bonum Health Hubs”. If any of these events occurs, it could have a material adverse
effect on our business, financial condition or results of operations.
Our
telehealth business could be adversely affected by legal challenges to our business model or by actions restricting our ability
to provide services in certain jurisdictions.
Our
ability to conduct telehealth services in a particular U.S. state is dependent upon the applicable laws governing remote healthcare
and the practice of medicine and healthcare delivery in general in such location which are subject to changing political, regulatory
and other influences. With respect to telehealth services, which we plan to offer through our “Bonum Health Hubs”,
such services and our ability to offer such services are subject to rules established or interpreted by state medical boards and
whether such boards consider such “Bonum Health Hubs” services to be the practice of medicine. The definition
of practicing medicine is subject to change and open to evolving interpretations by medical boards and state attorneys’
generals, among others. Accordingly, we must monitor our compliance with laws in the jurisdictions in which we operate, on an
ongoing basis, and we cannot provide assurance that our activities and arrangements, if challenged, will be found to be in compliance
with the law. Additionally, it is possible that the laws and rules governing the practice of medicine, including remote healthcare,
in one or more jurisdictions may change in a manner which negatively effects our ability to operate. If a successful legal challenge
or an adverse change in the relevant laws were to occur, and we were unable to adapt our business model accordingly, our operations
in the affected jurisdictions would be disrupted, which could have a material adverse effect on our business, financial condition
and results of operations.
In
our telehealth business, we will be dependent on our relationships with affiliated professions and our business would be adversely
affected if those relationships were disrupted.
There
is a risk that state authorities in some jurisdictions may find that contractual relationships with physicians providing telehealth
violate laws prohibiting the corporate practice of medicine. State corporate practice of medicine doctrines also often impose
penalties on physicians themselves for aiding the corporate practice of medicine, which could discourage physicians from participating
in our network of providers. A material changes in our relationship with our healthcare providers, whether resulting from a dispute
among the entities, a change in government regulation, or the loss of these affiliations, could impair our ability to provide
services through our planned “Bonum Health Hub”, and could have a material adverse effect on our business,
financial condition and results of operations.
Table of Contents
Our
“Bonum Health Hub” telehealth business will depend on our ability to maintain and expand a network of qualified providers.
The
success of our “Bonum Health Hubs” is dependent upon our ability to maintain a network of qualified telehealth
providers. If we are unable to recruit and retain board-certified physicians and other healthcare professionals, it would have
a material adverse effect on our “Bonum Health Hubs” business and ability to grow such operations. We may not
be willing to pay the costs demanded by such services providers and/or changes in Medicare and/or Medicaid reimbursement levels
and other pressures on healthcare providers and consolidation activity among hospitals, physician groups and healthcare providers
may make such providers harder or more expensive to find and contract with. The result of the above may be that our “Bonum
Health Hubs” are unsuccessful, which may result in a material adverse effect to our operations.
Rapid
technological change in the telehealth industry presents us with significant risks and challenges.
The
telehealth market is characterized by rapid technological change, changing consumer requirements, short product lifecycles and
evolving industry standards. Our success will depend on our ability to enhance our offerings with next-generation technologies
and to develop or to acquire and market new services. There is no guarantee that we will possess the resources, either financial
or personnel, for the research, design and development of new applications or services, or that we will be able to utilize these
resources successfully and avoid technological or market obsolescence. Further, there can be no assurance that technological advances
by one or more of our competitors or future competitors will not result in our present or future software-based products and services
becoming uncompetitive or obsolete.
The
telehealth industry is competitive, and if we are not able to compete effectively, our business, financial condition and results
of operations will be harmed.
While
the telehealth market is in an early stage of development, it is competitive and we expect it to attract increased competition,
which could make it difficult for us to succeed. We currently face competition in the telehealth industry from a range of companies,
including specialized software and solution providers that offer similar solutions, often at substantially lower prices, and that
are continuing to develop additional products and becoming more sophisticated and effective. These competitors include Doctor
On Demand, MDLive and Teladoc. In addition, large, well-financed health systems have in some cases developed their own telehealth
tools and may provide these solutions to their customers at discounted prices. The surge in interest in telehealth, and in particular
the relaxation of HIPAA privacy and security requirements, has also attracted new competition from providers who utilize consumer-grade
video conferencing platforms such as Zoom and Twilio. Competition from large software companies or other specialized solution
providers, communication tools and other parties could result in continued pricing pressures, which is likely to lead to price
declines in certain product segments, which could negatively impact our future market, sales, profitability and market share (if
any). If we are unable to successfully compete in the telehealth market, our business, financial condition and results of operations
could be materially adversely affected.
The
emergence of new technologies may render our telehealth solution obsolete or require us to expend significant resources in order
to remain competitive.
The
U.S. healthcare industry is massive, with a number of large market participants with conflicting agendas, and it is subject to
significant government regulation and is currently undergoing significant change. Changes in the telehealth industry, for example,
such as the emergence of new technologies as more competitors enter our market, could result in our telehealth solution being
less desirable or relevant. If healthcare benefits trends shift or entirely new technologies are developed that replace existing
solutions, our existing or future products could be rendered obsolete and our business could be adversely affected. In addition,
we may experience difficulties with industry standards, design or marketing that could delay or prevent our development, introduction
or implementation of new applications and enhancements.
Table of Contents
If
we fail to develop widespread brand awareness cost-effectively, our business may suffer.
We
believe that developing and maintaining widespread awareness of our brand in a cost-effective manner is critical to achieving
widespread adoption of our products and attracting new clients. Our brand promotion activities may not generate client awareness
or increase revenue, and even if they do, any increase in revenue may not offset the expenses we incur in building our brand.
If we fail to successfully promote and maintain our brand, or incur substantial expenses in doing so, we may fail to attract or
retain clients necessary to realize a sufficient return on our brand-building efforts or to achieve the widespread brand awareness
that is critical for broad client adoption of our solution.
Risks
Associated with Our Planned MedCheks Health Passport Platform
The
health passport market may not achieve and sustain high levels of demand, consumer acceptance and market adoption.
The
health passport market is relatively new and unproven, and it is uncertain whether it will achieve and sustain high levels of
demand, consumer acceptance and market adoption. Our success in this new market will depend to a substantial extent on the willingness
of our customers to use, and to increase the frequency and extent of their utilization of, our services, as well as on our ability
to demonstrate the value of health passports to employers, health plans, government agencies and other purchasers. Negative publicity
concerning our services or the health passport market as a whole could limit market acceptance of our services. If our s, or their
members or patients, do not perceive the benefits of our services, or if our services are not competitive, then our market may
not develop at all, or it may develop more slowly than we expect. Similarly, individual and healthcare industry concerns or negative
publicity regarding patient confidentiality and privacy in the context of health passport could limit market acceptance of our
services. Our health passport may not be adopted by customers due to among other things, their belief that smartphones lack appropriate
security or their failure to understand blockchain. If customers fail to adopt our health passport, or health passports fail to
become adopted in the marketplace, it could have a material adverse effect on our business, financial condition or results of
operations. Separately, governments may come out with their own health passports or similar technology which makes our health
passport obsolete.
Risks
Associated with Our Governing Documents and Delaware Law
Our
certificate of incorporation provides for indemnification of officers and directors at our expense and limits their liability,
which may result in a major cost to us and hurt the interests of our stockholders because corporate resources may be expended
for the benefit of officers or directors.
Our
Certificate of Incorporation provides for indemnification as follows: “To the fullest extent permitted by applicable law,
the Corporation is authorized to provide indemnification of, and advancement of expenses to, such agents of the Corporation (and
any other persons to which Delaware law permits the Corporation to provide indemnification) through Bylaw provisions, agreements
with such agents or other persons, vote of stockholders or disinterested directors or otherwise, in excess of the indemnification
and advancement otherwise permitted by Section 145 of the Delaware General Corporation Law, subject only to limits created by
applicable Delaware law (statutory or non-statutory), with respect to actions for breach of duty to the Corporation, its stockholders
and others.”
We
have been advised that, in the opinion of the SEC, indemnification for liabilities arising under federal securities laws is against
public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification
for liabilities arising under federal securities laws, other than the payment by us of expenses incurred or paid by a director,
officer or controlling person in the successful defense of any action, suit or proceeding, is asserted by a director, officer
or controlling person in connection with our activities, we will (unless in the opinion of our counsel, the matter has been settled
by controlling precedent) submit to a court of appropriate jurisdiction, the question whether indemnification by us is against
public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. The legal process
relating to this matter if it were to occur is likely to be very costly and may result in us receiving negative publicity, either
of which factors is likely to materially reduce the market and price for our shares.
Table of Contents
Our
certificate of incorporation contains a specific provision that limits the liability of our directors for monetary damages to
the Company and the Company’s stockholders and requires us, under certain circumstances, to indemnify officers, directors
and employees.
The
limitation of monetary liability against our directors, officers and employees under Delaware law and the existence of indemnification
rights to them may result in substantial expenditures by us and may discourage lawsuits against our directors, officers and employees.
Our
certificate of incorporation contains a specific provision that limits the liability of our directors for monetary damages to
the Company and the Company’s stockholders. We also have contractual indemnification obligations under our employment and
engagement agreements with our executive officers and directors. The foregoing indemnification obligations could result in us
incurring substantial expenditures to cover the cost of settlement or damage awards against our directors and officers, which
the Company may be unable to recoup. These provisions and resultant costs may also discourage us from bringing a lawsuit against
our directors and officers for breaches of their fiduciary duties and may similarly discourage the filing of derivative litigation
by our stockholders against our directors and officers, even though such actions, if successful, might otherwise benefit us and
our stockholders.
Our
directors have the right to authorize the issuance of shares of preferred stock and additional shares of our common stock.
Our
directors, within the limitations and restrictions contained in our certificate of incorporation and without further action by
our stockholders, have the authority to issue shares of preferred stock from time to time in one or more series and to fix the
number of shares and the relative rights, conversion rights, voting rights, and terms of redemption, liquidation preferences and
any other preferences, special rights and qualifications of any such series. Any issuance of shares of preferred stock could adversely
affect the rights of holders of our common stock. Should we issue additional shares of our common stock at a later time, each
investor’s ownership interest in our stock would be proportionally reduced.
Anti-takeover
provisions may impede the acquisition of Trxade.
Certain
provisions of the Delaware General Corporation Law (DGCL) have anti-takeover effects and may inhibit a non-negotiated merger or
other business combination. These provisions are intended to encourage any person interested in acquiring Trxade to negotiate
with, and to obtain the approval of, our directors, in connection with such a transaction. As a result, certain of these provisions
may discourage a future acquisition of Trxade, including an acquisition in which the stockholders might otherwise receive a premium
for their shares. In addition, we can also authorize “blank check” preferred stock, which could be issued by
our Board of Directors without stockholder approval and may contain voting, liquidation, dividend and other rights superior to
our common stock.
Compliance,
Reporting and Listing Risks
We
incur significant costs to ensure compliance with U.S. and NASDAQ Capital Market reporting and corporate governance requirements.
We
incur significant costs associated with our public company reporting requirements and with applicable U.S. and NASDAQ Capital
Market corporate governance requirements, including requirements under the Sarbanes-Oxley Act of 2002 and other rules implemented
by the SEC and The NASDAQ Capital Market. The rules of The NASDAQ Capital Market include requiring us to maintain independent
directors, comply with other corporate governance requirements and pay annual listing and stock issuance fees. All of such SEC
and NASDAQ obligations require a commitment of additional resources including, but not limited, to additional expenses, and may
result in the diversion of our senior management’s time and attention from our day-to-day operations. We expect all of these