ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This quarterly report contains forward-looking statements
relating to future events or our future financial performance. In some cases, you can identify forward-looking
statements by terminology such as “may”, “should”, “intends”, “expects”,
“plans”, “anticipates”, “believes”, “estimates”, “predicts”,
“potential”, or “continue” or the negative of these terms or other comparable
terminology. These statements are only predictions and involve known and unknown risks, uncertainties and other
factors which may cause our or our industry's actual results, levels of activity or performance to be materially different
from any future results, levels of activity or performance expressed or implied by these forward-looking statements.
Such factors include, among others, the following: international,
national and local general economic and market conditions; demographic changes; the ability of PreAxia to sustain, manage or forecast
its growth; the ability of PreAxia to successfully make and integrate acquisitions; raw material costs and availability;
new product development and introduction; existing government regulations and changes in, or failure to comply with government
regulations; adverse publicity; competition; the loss of significant customers or suppliers; fluctuations and difficulty in forecasting
operating results; changes in business strategy or development plans; business disruptions; the ability to attract and retain qualified
personnel; the ability to protect technology; and other factors referenced in this and previous filings.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of activity or performance. Except as required
by applicable law, including the securities laws of the United States, we do not intend to update any of the forward-looking statements
to conform these statements to actual results.
Given these uncertainties, readers of this Form 10-Q and investors
are cautioned not to place undue reliance on such forward-looking statements. PreAxia disclaims any obligation to update
any such factors or to publicly announce the result of any revisions to any of the forward-looking statements contained herein
to reflect future events or developments, except as required by applicable law, including the securities laws of the United States.
All dollar amounts stated herein are in US dollars unless otherwise
indicated.
The management’s discussion and analysis of our financial
condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance
with accounting principles generally accepted in the United States of America (“GAAP”). The following discussion
of our financial condition and results of operations should be read in conjunction with our audited consolidated financial statements
for the year ended May 31, 2013, together with notes thereto. As used in this quarterly report, the terms “we”,
“us”, “our”, “PreAxia” and the “Company” means PreAxia Health Care Payment
Systems Inc. and its wholly-owned subsidiary, PreAxia Canada Inc. (“PreAxia Canada”) formerly PreAxia Health Care Payment
System Inc. and, before that, H Pay Card Ltd., unless the context clearly requires otherwise.
General Overview
PreAxia and PreAxia Canada are both development stage companies.
PreAxia Canada is a company which offers a comprehensive suite of solutions and services directed at the emerging health payment
market, specifically the opportunities tied to the growth of Health Spending Accounts (“HSAs”) and generally as a payment
service between health care providers and consumers. Put differently, PreAxia offers a health care payment model that incorporates
certain attributes of both PayPal and virtual banking. There is a shift in healthcare traditional payment models to consumer-directed
healthcare that is creating significant opportunities for financial services and insurance industries to deliver new dynamic products
to this emerging market.
The Canadian economy has undergone unprecedented growth over
the past two decades. During this same period, the Internet has dramatically changed our way of communicating and conducting business.
This has had dramatic effects on key industries such as retail, banking and travel. Consumers have shown a preference for relying
on the Internet to handle many aspects of their personal and professional lives. This, in turn, has forced businesses to adapt.
While the Health Care Industry has also grown during this time, the consumer has seen neither cost nor efficiency savings comparable
to what has occurred in other industries.
PreAxia Health Care Payment Systems is a market
disrupting technology that takes advantage of important trends in our society. Government budgets are strained. With health
care requiring a large and growing portion of these budgets, it seems inevitable that efforts to reduce government
expenditures are likely to target these health care expenditures. Reductions in government funding of health care services
mean that individuals will have to take more individual responsibility for covering at least some of these costs. The growing
responsibility for directly funding one’s own future health care expenditures combined with a desire to manage all
sorts of financial dealings through the Internet presents the opportunity that PreAxia has now begun to exploit.
PreAxia has found a better way to service an existing and growing
need. Utilizing the Internet to automate and eliminate paperwork, the company was developed to reflect the growing demand for Health
Spending Accounts (HSAs) as tax free vehicle for managing and controlling health care expenditures.
The growing interest in HSAs has fuelled the need for fund
management and adjudication services, hence the creation and growth of Third Party Administrators (TPAs). The HSA/TPA clients are
referred by Brokerage Firms and Independent Brokers, who receive a referral commission. The HSA industry is primarily focused on
small to medium-size businesses which can, since 2003, offer HSAs as part of their employee benefits package. The incentive for
a traditional insurer such as Manulife to service the small to medium-size employer (under 50 lives) with anything other than their
traditional, premium-driven health insurance products is on the whole too small to warrant significant (i.e. costly) marketing
efforts or the introduction of competing HSA-type products.
Using health plan innovations, including the HSA, these new
alternative providers of employee health benefits have successfully gained an estimated 10% share of the $26-$30 Billion Canadian
health benefits annual market.
Description of Health Spending Account (“HSA”)
An HSA is a uniquely designed bank account established exclusively
and specifically for the purpose of health care spending. An employer deposits funds into a special account for the employee. These
funds can be used to pay for eligible medical and related health care expenses for the employee and their dependents. HSAs provide
employers and employees with greater control in both the amount of funds invested and how these funds are used.
Services and infrastructure provided by PreAxia enable organizations
and individuals to eliminate all paper involved in the management of these accounts and benefit through savings in time and money.
The PreAxia platform for processing and managing accounts,
including cardholder and customer account management, reconciliation and financial settlement, and customer reporting is fully
operational.
Over time, the company will evaluate
opportunities for forms of virtual banking and PayPal-type services. One opportunity seen as particularly relevant to the health
care market is to offer instant issuing services that enable corporations to issue and fund Pre-Paid Interac or credit card services
to beneficiaries in real time. If implemented, the beneficiary will most likely select a personal identification number (“PIN”)
using a PIN and card activation terminal, thus gaining instant access to funds that can be reloaded. This consideration would
require development of software systems for the issuing of health payment cards and financial transaction processing services
that would be fully managed by a data center.
Distribution Methods and Marketing Strategy
PreAxia operates on a Cloud Computing Platform that makes it
accessible to anyone with a personal computer and Internet access. The preliminary market for PreAxia’s HSA Management Solution
is small and medium sized companies that are not currently well served by the current group benefits model. The financial benefits
of the PreAxia business model, however, are also relevant to larger employers and we believe that these larger employers will migrate
to the PreAxia product over time.
PreAxia’s s marketing strategy is to promote its existing
platform to the groups that most need access to it. Namely, independent brokers, financial advisors and small to medium sized businesses.
Brokers should see PreAxia as a superior method of promoting and supporting HSAs that allow them to earn above average commission
rates on invested funds. Financial advisors should see PreAxia in a similar way as brokers except that there is the additional
benefit of tax reduction. Small to medium sized businesses, which are expected to drive the growth in business, should see PreAxia
as offering financial savings to the company and to employees by offering personal health care benefits through an HSA, along with
the same conveniences they have come to expect from other services they currently utilize over the Internet. It is expected that
the group benefits market will subsequently follow as they too realize the advantages of PreAxia over their current HSA offerings.
PreAxia has begun and will continue to seek opportunities with lead customers and alliance partners to establish reference-able,
high-profile implementations and market-leading, early-adopter firms for further developing innovative products and services. The
company intends to design solutions targeted towards corporate financial management, financial risk, audit management and cash
management while targeting product/service management as a support to financial management.
We anticipate that the prime target for services will be small
to medium sized organizations that are not adequately served by the current insurance and group benefits offerings. These organizations
should realize significant benefits in both cost and time savings by utilization of PreAxia technology while providing their employees
with an increased level of benefits.
PreAxia intends to achieve service volume and the associated
economies of scale through marketing directly to select target customers that provide the necessary transaction volumes, through
market specific channel partners and through an education based public relations strategy geared to the small to mid-sized employers
including the brokers and financial advisors utilized by these businesses. The channel strategy is supported in the solution design,
as multiple channel partners will require branding and our company’s fee charging/collection capabilities.
It is our company’s intention that brokers and financial
advisors will aggressively promote their PreAxia supported HSA offerings due to the quality of product, higher margins and because
of the non-competitive relationship with PreAxia.
PreAxia has identified the following “channels”
through which it will target prime end market customers:
Independent brokers that sell, or desire to sell,
Health Spending Accounts
Financial advisors who manage funds and advise on
tax saving strategies for individuals and corporations
MGAs that provide services and education to the broker
community
Accountants and bookkeepers who regularly advise
businesses on financial and operational matters
Benefits managers/adjudicators, including insurance,
health or outsourced government benefits processors that manage benefits disbursement
Issuer banks, including partner banks that enable
the issuance of Health Cards and/or sell insurance products
Application providers, including software manufacturers
selling into the target vertical markets
Professional services, including consulting, development
and implementation companies serving the target vertical markets
PreAxia intends to establish several key customer reference
accounts, channel marketing partners and technology alliances. These corporate relationships are relevant to advancing our company’s
goals in 2013 and beyond for achieving a prime position in the Canadian marketplace and establishing a solid service foundation.
Competitive Business Conditions and our Company’s
Competitive Position in the Industry and Methods of Competition
PreAxia intends to offer a combination of products and services
in its solution. However, there are other providers of components or versions of the service offerings in the marketplace. PreAxia
is taking a unique approach by focusing exclusively on Health Spending Accounts and making it available on a Cloud Computing platform
that provides both the sellers and users of this product with a superior offering. Also uniquely, PreAxia offers a differentiating
USP to brokers by operating in a non-competitive position thereby acting as a partner to the brokers that ultimately sell HSAs.
As awareness of PreAxia’s product grows in the marketplace, the company will seek out opportunities to expand its market
share by integrating with the group benefits industry. The company also intends to expand its offering to markets in the USA and
elsewhere. The following are some of the providers of products and services that are or may be potential competitors in PreAxia’s
target markets:
Benecaid has become a leading provider of Health
Spending Accounts in Canada by offering an easy to understand product through brokers and also directly through the company.
Olympia Benefits has become a leading provider of
Health Spending Accounts in Canada by offering a “Cost Plus” version of HSAs that has become popular in the marketplace.
QuickCard is a provider of Health Spending Accounts
and group insurance products. They are partially differentiated from competitors by virtue of a “credit type card”
that is used to pay for qualified health products and services.
Most major insurance companies offer some version
of HSAs to their customers.
Many brokers have created HSA products for their
clients.
Many accounting and financial services firms have
created their own HSA products to offer to their clients.
Intangible Properties
When negotiating its arrangements with clients, PreAxia intends
to ensure that all rights to and ownership of its intellectual property remains with the company. We anticipate that source codes
or other proprietary knowledge will be protected through agreements entered into between PreAxia and its employees and contractors,
and additional high standards of confidentiality and protection of data are set by clients and regulatory authorities within the
industry.
Intellectual Property and Patent Protection
At present, PreAxia has two trademarks pending. One is for
the company name (PreAxia) and another is for the company logo design.
Plan
of Operation
Over the next twelve months, we plan to:
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(a)
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Raise additional capital to execute our business plans;
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(b)
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Penetrate the health care processing market in Canada, and worldwide, by continuing to develop innovative health care processing products and services;
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(c)
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Build up a network of strategic alliances with several types of health insurance companies, governments and other alliances in various vertical markets; and
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(d)
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Fill the positions of senior management sales, administrative and engineering positions.
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Cash Requirements
After a further review of business opportunities with industry consultants,
for the next twelve months and given that we meet our forecasted expenses, we plan to spend a total of approximately $1,550,000
in implementing our business plan of development and marketing of health care processing products and services. We do
not expect to generate any revenues this year, therefore we will be required to raise a total of $2,950,000 to complete our business
plan and pay our outstanding debts of approximately $1,400,000. Our working capital requirements for PreAxia Canada
for the next twelve months are estimated at $1,550,000 distributed, as follows:
Estimated Expenses
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General and Administrative
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$
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300,000
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Research and Development
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450,000
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Marketing and Education
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450,000
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Professional Services
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350,000
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Total
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$
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1,550,000
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Our estimated expenses over the next twelve months are broken down
as follows:
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1.
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General and Administrative
.
We anticipate spending approximately $300,000 on general and administration costs in the next twelve months, which will include staff fees, office rent, office supplies, transfer agents, filing fees, bank service charges, salaries for our administration, interest expense and travel, which includes airfare, meals, car rentals and accommodations.
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2.
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Research and Development
. We anticipate that we may spend approximately $450,000 in the next twelve months in the development and acquisition of software for our processing services and products.
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3.
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Marketing and Education
.
We anticipate spending approximately $450,000 as the costs of staff and personnel, marketing and promoting our Company, our products and services, and educating the public to attract new accounts.
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4.
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Professional Services
. We anticipate that we may spend up to $350,000 in the next twelve months for professional services, which includes, stock-based compensation, accounting, auditing, legal fees and investor relations.
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Liquidity and Capital Resources
As of November 30, 2013, PreAxia’s cash
balance was $10,734 compared to $13,251 as at May 31, 2013. Our Company will be required to raise capital to fund our
operations. PreAxia’s cash on hand is currently its only source of liquidity. PreAxia had a working
capital deficit of $1,532,380 as of November 30, 2012 compared with a working capital deficit of $1,429,313 as of May 31, 2013.
Our ability to meet our financial liabilities
and commitments is primarily dependent upon the continued issuance of equity to new stockholders, and our ability to achieve and
maintain profitable operations. PreAxia's cash and cash equivalents will not be sufficient to meet its working capital
requirements for the next twelve month period. We will not initially have any cash flow from operating activities
as we are in the development stage. We project that we will require an estimated additional $2,950,000 over the
next twelve month period to fund our operating cash shortfall and to complete our business plan. Our company plans to
raise the capital required to satisfy our immediate short-term needs and additional capital required to meet our estimated funding
requirements for the next twelve months primarily through the private placement of our equity securities or by way of loans or
such other means as PreAxia may determine.
There are no assurances that we will be able
to obtain funds required for our continued operations. There can be no assurance that additional financing will be available
to us when needed or, if available, that it can be obtained on commercially reasonable terms. If we are not able to
obtain the additional financing on a timely basis, we will not be able to meet our other obligations as they become due and we
will be forced to scale down or perhaps even cease the operation of our business.
There is substantial doubt about our ability to continue as a going
concern as the continuation of our business is dependent upon obtaining further long-term financing, successful and sufficient
market acceptance of our products and achieving a profitable level of operations. The issuance of additional equity
securities by us could result in a significant dilution in the equity interests of our current stockholders. Obtaining
commercial loans, assuming those loans would be available, will increase our liabilities and future cash commitments.
Our working capital (deficit) as at November 30, 2013 compared to
May 31, 2013 is summarized as follows:
Working Capital
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November 30,
2013
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May 31,
2013
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Current Assets
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$
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10,734
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$
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13,251
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Current Liabilities
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1,543,114
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1,442,564
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Working Capital (deficit)
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$
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(1,532,380
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)
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$
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(1,429,313
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)
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The increase in our working capital deficit of $103,067 was primarily
due to an increase in our accounts payable related party.
Off-balance Sheet Arrangements
We have no off-balance sheet arrangements that have or are reasonably
likely to have a current or future effect on our financial condition, changes in financial condition revenues or expenses, results
of operations, liquidity, capital expenditures or capital resources that is material to stockholders.
Results of Operations
The following summary of our results of operations should be read
in conjunction with our audited financial statements for the year ended May 31, 2013.
For the three month period ended November 30, 2013 and November
30, 2012
Our operating results for the three month period ended November
30, 2013 compared to the three month period ended November 30, 2012 are described below:
Revenue
We have not earned any revenues since our inception and we do not
anticipate earning revenues until such time as we have completed the development of our Health Card software and obtained new customers.
Expenses
Our operating loss for the three month period ended November
30, 2013 was $34,798 compared to $57,714 for the three month period ended November 30, 2012. The decrease in loss of $23,854 for
the three month period ending November 30, 2013 is due to an increase in expenses of $1,263 for research and development, a decrease
of $18,244 for wages and benefits, a decrease of $1,368 for rent, and a decrease in the amount of $5,055 in office and administration
fees.
Research and Development
Research and Development expenses increased by $1,263 in the three
month period ended November 30, 2013 compared to the three month period ended November 30, 2011, due to the minor
project refinements.
Wages and Benefits
Wages and benefits decreased by $18,244 during the three month period
ended November 30, 2013 compared to November 30, 2012, as a result of the temporary layoff of a general manager.
Office and Administration
Office and administration expenses decreased by $5,055 for the period
ended November 30, 2013 compared to November 30, 2012, as a result of the closure of the Calgary office and use of remote employment
sites.
Rent
Rent decreased by $1,368 during the three months ended November
30, 2013 compared to November 30, 2012 as a result of the closure of the Calgary office and use of remote employment sites.
For the six month period ended November 30, 2013 and November
30, 2012
Our operating results for the six month period ended November 30,
2013 compared to the six month period ended November 30, 2012 are described below:
Revenue
We have not earned any revenues since our inception and we do not
anticipate earning revenues until such time as we have completed the development of our Health Card software and obtained new customers.
Expenses
Our operating loss for the six month period ended November 30,
2013 was $109,493 compared to $124,188 for the six month period ended November 30, 2012. The decrease in loss of $14,474 for the
six month period ending November 30, 2013 is due to an increase in expenses of $22,641 for research and development, a decrease
of $39,260 for wages and benefits, a decrease of $4,392 for rent, an increase of $19,706 for professional fees, and a decrease
in the amount of $10,392 in office and administration fees.
Research and Development
Research and Development expenses decreased by $22,641 in the six
month period ended November 30, 2013 compared to the six month period ended November 30, 2012, due to the completion of major project
components.
Wages and Benefits
Wages and benefits decreased by $39,260 during the six month period
ended November 30, 2013 compared to November 30, 2012, as a result of the temporary layoff of a general manager.
Office and Administration
Office and administration expenses decreased by $10,392 for the
period ended November 30, 2013 compared to November 30, 2012, as a result of the closure of the Calgary office and use of remote
employment sites.
Rent
Rent decreased by $4,392 during the three months ended November
30, 2013 compared to November 30, 2012 as a result of the closure of the Calgary office and use of remote employment sites.
Professional Fees
Professional fees increased by $19,706 during the period ended November
30, 2013 compared to November 30, 2012 as a result of the increased requirement for accounting and legal services.
Critical Accounting Policies
We have identified certain accounting policies, described below,
that are the most important to the portrayal of our current financial condition and results of operations.
Revenue recognition
PreAxia recognizes revenue in accordance with the provision of the
Securities and Exchange Commission which establishes guidance in applying generally accepted accounting principles to revenue recognition
in financial statements. This provision requires that four basic criteria must be met before revenue can be recognized:
(1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services rendered; (3) the price to the buyer is
fixed and determinable; and (4) collectability is reasonably assured.
Research and development
The Company accounts for software development costs in accordance
with several accounting pronouncements, including FASB ASC 730, Research and Development, FASB ASC 350-40, Internal-Use Software,
FASB 985-20, Costs of Computer Software to be Sold, Leased, or Marketed and FASB ASC 350-50, Website Development Costs
.
Costs incurred during the period of planning and design, prior to
the period determining technological feasibility, for all software developed for use internal and external, has been charged to
operations in the period incurred as research and development costs. Additionally, costs incurred after determination of
readiness for market have been expensed as research and development.
The Company has capitalized certain costs in the development of
our proprietary software (computer software to be sold, leased or licensed) for the period after technological feasibility was
determined and prior to our marketing and initial sales.
Website development costs have been capitalized, under the same
criteria as our marketed software.
Capitalized software costs are stated at cost. The estimated
useful life of costs capitalized is evaluated for each specific project. Currently the software is not being amortized until significant
marketing efforts begin.