ITEM 1A. RISK FACTORS
Summary
Risk Factors
Our
business is subject to numerous risks and uncertainties, many of which are beyond our control, including those highlighted in the section
titled “Risk Factors” immediately following this summary. These risks include, among others, the following:
● We may not be able to manage our future growth;
● We are dependent on our current management;
● Cyber security attacks and website problems;
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 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.
We
were recently unprofitable, we have recently generated net losses, and we may incur losses in the future.
Revenues
generated from our consolidated operations for the years ended December 31, 2022 and 2021 were $11,448,265 and $9,889,433, respectively.
We
incurred a net loss of $3,909,868 for Fiscal 2022, compared to a net loss of $5,315,883 for the Fiscal 2021. We may incur other losses
in the foreseeable future due to the significant costs associated with our business operations, including costs associated with maintaining
industry regulatory and licensure compliance. We also incur significant compliance costs associated with maintaining SEC regulatory and
financial reporting requirements; as well as costs to maintain minimum listing requirements of Nasdaq. 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.
We
need additional capital which may not be available on commercially acceptable terms, if at all, which creates substantial doubt about
our ability to continue as a going concern.
Our
historical financial statements have been prepared under the assumption that we will continue as a going concern. As of December 31,
2022, the Company had an accumulated deficit of $19.7 million. We have limited financial resources, as of December 31, 2022, we had working
capital of negative $0.053 million and a cash balance of $1.1 million. We will need to raise additional capital or secure debt funding
to support on-going operations. The sources of this capital are expected to be the sale of equity and debt, which may not be available
on favorable terms, if at all, and may, if sold, cause significant dilution to existing stockholders. If we are unable to access additional
capital moving forward, it may hurt our ability to grow and to generate future revenues, our financial position, and liquidity. These
matters, when considered in the aggregate, raise substantial doubt about the Company’s ability to continue as a going concern for
a reasonable period of time, which is defined as within one year after the date that our condensed financial statements are issued. The
financial statements incorporated by reference herein do not contain any adjustments to reflect the possible future effects on the classification
of assets or the amounts and classification of liabilities that might result from the outcome of this uncertainty. The doubt regarding
our potential ability to continue as a going concern may adversely affect our ability to obtain new financing on reasonable terms or
at all. Additionally, if we are unable to continue as a going concern, our stockholders may lose some or all of their investment in the
Company.
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). Our access to additional capital
may be negatively affected by future recessions, downturns in the economy or the markets as a whole, or inflation.
If
we do not obtain additional financing, our business, prospects, financial condition and results of operations will be adversely affected.
On
October 4, 2022 the Company entered into a securities purchase agreement (the “Purchase Agreement”) with a certain
institutional investor (the “Purchaser”). The Purchase Agreement provided for the sale and issuance by the Company
of an aggregate of: (i) 920,000 shares (the “Shares”) of the Company’s common stock, $0.00001 par value (the
“Common Stock”), (ii) pre-funded warrants (the “Pre-Funded Warrants”) to purchase up to 601,740
shares of Common Stock and (iii) warrants (the “Private Placement Warrants” and, together with the Shares and the
Pre-Funded Warrants, the “Securities”) to purchase up to 2,663,045 shares of Common Stock. The offering price per
Share was $1.15 and the offering price per Pre-Funded Warrant was $1.14999. The Private Placement Warrants were sold in a concurrent
private placement (the “Private Placement”), exempt from registration pursuant to Section 4(a)(2) and/or Rule 506
of the Securities Act of 1933, as amended (the “Securities Act”).
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. Furthermore, the recent
developments on the financial industry may impair our ability to obtain bank financings. 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). Our access to additional capital may be negatively
affected by future recessions, downturns in the economy or the markets as a whole, or inflation.
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.
If
we do not maintain a current and effective prospectus relating to the common stock issuable upon exercise of the Private Placement Warrants,
holders may exercise such Private Placement Warrants on a “cashless basis.”
If
we do not maintain a current and effective prospectus relating to the shares of common stock issuable upon exercise of the Private Placement
Warrants at the time that holders wish to exercise such warrants, they will be able to exercise them on a “cashless basis”.
As a result, the number of shares of common stock that holders will receive upon exercise of the Private Placement Warrants will be fewer
than it would have been had such holders exercised their Private Placement Warrants for cash. Under the terms of the Purchase Agreement,
we have agreed to file a registration statement to register the shares of common stock issuable upon the exercise of the Private Placement
Warrants (the “Private Placement Warrant Shares”), as soon as practicable (and in any event within 60 calendar days of the
date of the Purchase Agreement), and use commercially reasonable efforts to cause such registration statement to become effective within
181 days following the closing date of the offering of the Securities and to keep such registration statement effective at all times
until the investor holds no Private Placement Warrants or Private Placement Warrant Shares issuable upon exercise thereof. However, we
cannot assure you that we will be able to do so. If the Private Placement Warrants are exercised on a “cashless” basis, we
will not receive any consideration from such exercises.
Provisions
of the Private Placement Warrants could discourage an acquisition of us by a third party.
Certain
provisions of the Private Placement Warrants could make it more difficult or expensive for a third party to acquire us. The Private Placement
Warrants prohibit us from engaging in certain transactions constituting “fundamental transactions” unless, among other things,
the surviving entity assumes our obligations under the Private Placement Warrants. Further, the Private Placement Warrants provide that,
in the event of certain transactions constituting “fundamental transactions,” with some exception, holders of such warrants
will have the right, at their option, to require us to repurchase such warrants at a price described in such warrants. These and other
provisions of the Private Placement Warrants could prevent or deter a third party from acquiring us even where the acquisition could
be beneficial to you.
The
Private Placement Warrants have certain anti-dilutive rights.
The
Private Placement Warrants include full ratchet anti-dilutive rights in the event any shares of common stock or other equity or equity
equivalent securities payable in common stock are granted, issued or sold (or the Company enters into any agreement to grant, issue or
sell), or in accordance with the terms of the warrant agreement evidencing the Private Placement Warrants, are deemed to have granted,
issued or sold, in each case, at a price less than the exercise price, which automatically decreases the exercise price of the Warrants
upon the occurrence of such event, as described in greater detail in the warrant agreement, subject to a minimum exercise price of $0.232
per share. Such anti-dilution rights, if triggered, could result in a significant decrease in the exercise price of the Private Placement
Warrants, which could result in significant dilution to existing shareholders.
The
Private Placement Warrants are accounted for as liabilities and the changes in value of such Private Placement Warrants may have a material
effect on our financial results.
Private
Placement Warrants, with certain terms as included in the Purchase Agreement should be accounted for as liability instruments. As a result,
the Company recorded warrant liability on the balance sheet as of December 31, 2022. Under the liability accounting treatment, the Company
is required to measure the fair value of these instruments at the end of each reporting period and recognize changes in the fair value
from the prior period in the Company’s operating results for the current period. As a result of the recurring fair value measurement,
our financial statements and results of operations may fluctuate quarterly based on factors which are outside our control. In the event
the Private Placement Warrants are required to be accounted for under liability accounting treatment, we will recognize noncash gains
or losses due to the quarterly fair valuation of these warrants which could be material. The impact of changes in fair value on our earnings
may have an adverse effect on the market price of our common stock and/or our stockholders’ equity, which may make it harder for
us to, or prevent us from, meeting the continued listing standards of The Nasdaq Capital Market.
The
issuance and sale of common stock upon exercise of the Private Placement Warrants may cause substantial dilution to existing stockholders
and may also depress the market price of our common stock.
The
Private Placement Warrants will be exercisable for up to 2,633,045 shares of common stock, provided that the Private Placement Warrants
contain a provision limiting each holder’s ability to exercise the warrants if such exercise would cause the holder’s (or
any affiliate of any such holder) holdings in the Company to exceed 4.99% of the Company’s issued and outstanding shares of common
stock (which may be increased or decreased with 61 days prior written notice from the holder, to up to 9.99% of the Company’s issued
and outstanding shares of common stock). The ownership limitation does not prevent such holder from exercising some of the warrants,
selling those shares, and then exercising the rest of the warrants, while still staying below the 4.99% limit. In this way, the holder
of the warrants could sell more than this limit while never actually holding more shares than this limit allows. If the holder of the
warrants chooses to do this, it will cause substantial dilution to the then holders of our common stock.
If
exercises of the warrants and sales of such shares issuable upon exercise thereof take place, the price of our common stock may decline.
In addition, the common stock issuable upon exercise of the warrants may represent overhang that may also adversely affect the market
price of our common stock. Overhang occurs when there is a greater supply of a company’s stock in the market than there is demand
for that stock. When this happens the price of the company’s stock will decrease, and any additional shares which shareholders
attempt to sell in the market will only further decrease the share price. If the share volume of our common stock cannot absorb shares
sold by the warrant holders, then the value of our common stock will likely decrease.
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.
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 companies 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.
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
offer limited credit to the pharmacies which limits the amount of the orders that they place and may result in us losing business and
a reduction in our revenues.
We
currently offer a limited amount of credit to our members. Such limited credit reduces the risk that such members do not pay for products;
however, it also limits the amount of revenue we generate per member. We believe that if we were to increase the amount of credit we
provide to members we would generate more revenues, but bear more risk of non-payment. We are currently exploring increasing the amount
of credit we provide to members, which may in turn result in an increase in receivables and write-offs.
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 holds, 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 holds 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.
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.
We
depend on suppliers to make their drugs and other medical products available to us for resale and are subject to risks associated with
the availability of these drugs and other medical products.
We
do not directly manufacture any of the products we sell and instead we rely on third parties to manufacture and/or procure such drugs
and other medical products for us to resell. Supply chain constraints have, and may in the future have, a negative impact on the availability
of drugs and medical products that we sell. Our supplier relationships could be interrupted, become less favorable to us or be terminated
and the supply of these drugs or products could be interrupted or become insufficient. Supply interruptions or other disruptions in manufacturing
processes could be caused by events beyond our control, including natural disasters, supplier facility shut-downs, defective raw materials,
the impact of epidemics or pandemics, such as COVID-19, and actions by U.S. or international governments, including export restrictions
or tariffs. A sustained supply reduction or interruption, and an inability to develop alternative and additional sources for such supply,
could result in lost sales, increased cost, damage to our reputation, and may have an adverse effect on our business.
We
may have difficulties in sourcing or selling products due to a variety of causes.
We
might experience difficulties and delays in sourcing and selling products due to a variety of causes, such as: difficulties in complying
with the legal requirements for export or import of pharmaceuticals or supplies; suppliers’ failure to satisfy production demand;
manufacturing or supply problems such as inadequate resources; and real or perceived quality issues. Difficulties in product manufacturing
or access to raw materials could result in supplier production shutdowns, product shortages and other supply disruptions. The COVID-19
pandemic has adversely affected the availability of some products, resulting in product allocation and delivery delays. Any of these
risks might have a materially adverse impact on our business operations and our financial position or results of operations.
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 and certain of our other assets which may have a material
adverse effect on our balance sheet.
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, 2022 and 2021, write-down
to market value was $0 and $376,348 respectively. A significant write-down of assets may have a material adverse effect on our
balance sheet and results of operations.
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. In the event we do not receive the return of our
deposits (through litigation or otherwise), this will cause us financial harm and as a result the Company has taken a significant charge
on our financial statements by 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. On December 31, 2020, we filed a complaint against Studebaker 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. On January 29, 2021, Integra Pharma Solutions filed a motion for clerk’s default against
Studebaker. On February 2, 2021, the clerk of court issued a default judgment against Studebaker. On March 4, 2021, Integra Pharma
Solutions filed a motion for final default judgment against Studebaker. On March 22, 2021, counsel for Studebaker filed a notice of
appearance in the case. On March 24, Studebaker filed a response in opposition to the motion for final judgment, and on March 25,
2021, Studebaker filed a motion to dismiss the case. On May 14, 2021, the Court denied Integra’s motion for final default
judgment, granted Studebaker’s motion to set aside the clerk’s default, and denied Studebaker’s motion to dismiss.
An amended answer and affirmative defenses were filed by Studebaker on October 14, 2021. Integra’s motion to strike the
affirmative defenses, or in the alternative, motion for more definite statement is scheduled for hearing on April 27, 2022. We have
also scheduled the deposition of Studebaker’s corporate representative on April 12, 2022, and moved to compel better answers
to outstanding discovery. The litigation remains pending and is in the discovery phase. Integra remains confident it can
successfully prosecute its claims against Studebaker on the merit. On June 30, 2021, the $500,000 was recorded as Loss on Inventory
Investment.
In
August 2020, Integra, entered into an agreement with Sandwave Group Dsn Bhd (“Sandwave”), 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. In April
2021, an Application for Summary Judgment was filed with the court, and on May 25, 2021, the Court extracted the sealed application,
and a copy thereof was served on Crecom’s attorneys and Crecom, 14 days later, filed an Affidavit in Reply with the court alleging
that there are issues to be tried and that this case must go to a full trial. On June 28, 2021, the court directed both parties to file
their written submissions/arguments in relation to the application for summary judgment on or before July 12, 2021, and scheduled a hearing
thereon for August 26, 2021. At the final hearing on October 18, 2021, the ruling for the summary judgment was denied and a trial date
is pending. The Company believes that it will prevail in the lawsuit filed; but the steps to enforce a judgment in Malaysia, if any,
may be cumbersome, time-consuming or costly. The Company cannot determine the timing of the judgment, nor the amount ultimately collected.
On June 30, 2021, the $581,250 was recorded as Loss on Inventory Investment.
On
May 20, 2022, effective as of May 18, 2022, the Company’s wholly owned subsidiary Community Specialty Pharmacy, LLC (“CSP”)
entered into an agreement to acquire COVID-19 testing kits (the “CSP Test Kits”) from a third party vendor for an
aggregate of $1,200,000, of which $875,000 was paid on May 23, 2022. The Company received the CSP Test Kits in July of 2022. On August
18, 2022, the Company was informed by the vendor that the vendor had received a letter from the U.S. Food and Drug Administration (“FDA”)
that the CSP Test Kits were misbranded under Section 502(o) of the Federal Food. Drug, and Cosmetic Act (“FDC Act”)
(21 USC 352(o)) and adulterated under Section 501(f) of the FDC Act (21 USC 351(f)). Furthermore, the vendor informed the Company that
the letter from the FDA also stated that because of the FDA’s prohibition on the distribution of adulterated and/or misbranded
devices applies to all parties along the distribution chain, the FDA was advising the vendor against furthering the distribution of the
CSP Test Kits in interstate commerce. At this time the Company has informed the vendor that it expects the vendor to provide a full return
of the $875,000 paid on May 23, 2022, along with any additional damages that the Company may incur. As of December 31, 2022, $875,250
was recorded as a loss on inventory investment in the statement of operations for Fiscal 2022.
Our
quarterly results have in the past, and may in the future, fluctuate significantly due to certain non-recurring sales of products.
Our
quarterly revenues have in the past and may in the future fluctuate significantly due to certain non-recurring sales of personal protective
equipment (PPE) and other products and associated costs of revenues therewith, which may be compounded in our year over year financial
results. As such, we believe that quarter-to-quarter comparisons of our revenues, operating results and cash flows may not be meaningful
and should not be relied upon as an indication of future performance.
Our
investments in new businesses and new products, services, and technologies is inherently risky, and could disrupt our ongoing businesses.
We
have invested and expect to continue to invest in new businesses, products, services, and technologies. Such endeavors may involve significant
risks and uncertainties, including insufficient revenues from such investments to offset any new liabilities assumed and expenses associated
with these new investments, inadequate return of capital on our investments, distraction of management from current operations, and unidentified
issues not discovered in our due diligence of such strategies and offerings that could cause us to fail to realize the anticipated benefits
of such investments and incur unanticipated liabilities. Because these new ventures are inherently risky, no assurance can be given that
such strategies and offerings will be successful and will not adversely affect our reputation, financial condition, and operating results.
To date we have taken losses and/or write-downs on several businesses, products, services, and technologies. For example.
The
use of resources for new businesses and new products, services, and technologies, to the extent such new businesses and new products,
services, and technologies do not generate revenues or profits may take management’s focus and time away from more profitable endeavors,
may require the Company to take significant write-downs or write-offs, may take funding away from the Company’s other operations
or growth opportunities, which may ultimately be more profitable, and may have a material adverse effect on the Company’s cash
flows, liquidity and revenues, any or all of which may cause the value of the Company’s securities to decline in value or become
worthless.
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
primarily conducting their business on the internet, in the technology sector, 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.
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 are 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.
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.
In
the past, we had an incident with an email account being compromised and an attempt was made to get us to wire outgoing money. We
did not fall victim to the attempt, conducted a thorough investigation, performed cleanup procedures, and instituted additional security
measures to mitigate the risk of this incident from occurring in the future. Risk mitigation includes the board of directors inquiring
with the information technology department on the status of cyber risks management, on a quarterly basis.
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 expenses 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.
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.
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, 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 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 change 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 and could have a material adverse
effect on our business, financial condition and results of operations.
Our
telehealth business will depend on our ability to maintain and expand a network of qualified providers.
The
success of our delivery through the Bonum Health app and/or Bonum Health Hubs (the “Bonum Health Business”)
telehealth services 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” Business and our ability to grow its 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 Business telehealth services 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, Teladoc
and others. In addition, large, well-financed health systems have in some cases developed their own telehealth tools and 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, Microsoft Teams, Google Meet 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.