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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|
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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 August 31,
2013, PreAxia’s cash balance was $11,624 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 $1,499,122 as of August 31, 2013 compared with a working capital deficit of $1,429,312 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 $2,950,000 over the next twelve month period to fund our operating cash
shortfall and to complete our business plan. Our company plans to raise the capital required to satisfy our
immediate short-term needs and additional capital required to meet our estimated funding requirements for the next twelve
months primarily through the private placement of our equity securities or by way of loans or such other means as PreAxia may
determine.
There are no assurances
that we will be able to obtain funds required for our continued operations. There can be no assurance that additional
financing will be available to us when needed or, if available, that it can be obtained on commercially reasonable terms. If
we are not able to obtain the additional financing on a timely basis, we will not be able to meet our other obligations as they
become due and we will be forced to scale down or perhaps even cease the operation of our business.
There is substantial doubt about our
ability to continue as a going concern as the continuation of our business is dependent upon obtaining further long-term financing,
successful and sufficient market acceptance of our products and achieving a profitable level of operations. The issuance
of additional equity securities by us could result in a significant dilution in the equity interests of our current stockholders. Obtaining
commercial loans, assuming those loans would be available, will increase our liabilities and future cash commitments.
Our working capital (deficit) as at
August 31, 2013 compared to May 31, 2013 is summarized as follows:
Working Capital
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August 31, 2013
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May 31,2013
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Current Assets
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$
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11,624
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$
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13,251
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Current Liabilities
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1,510,746
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1,442,563
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Working Capital (deficit)
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$
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(1,499,122
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)
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$
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(1,429,312
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)
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The increase in our working capital
deficit of $69,809 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
August 31, 2013 and August 31, 2012
Our operating results for the three
month period ended August 31, 2013 compared to the three month period ended August 31, 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 August 31, 2012
was $,74,695 compared to $66,474 for the three month period ended August 31, 2012. The increase in loss of $8,221 for the three
month period ending August 31, 2013 is due to an increase in expenses of $21,378 for research and development, a decrease of $21,016
for wages and benefits, a decrease of $3,024 for rent, an increase in the amount of $18,706 for professional fees and a decrease
in the amount of $5,337 in office and administration fees.
Research and Development
Research and Development expenses increased
by $18,706 in the three month period ended August 31, 2013 compared to the three month period ended August 31, 2012, due to the
completion of major project components.
Wages and Benefits
Wages and benefits decreased by $21,016
during the three month period ended August 31, 2013 compared to August 31, 2012, as a result of the temporary layoff of a general
manager.
Office and Administration
Office and administration expenses decreased
by $5,337 for the period ended August 31, 2012 compared to August 31, 2011, due to a decrease in expenses.
Professional Fees
Professional fees decreased by $18,706
during the three months ended August 31, 2013 compared to August 31, 2012, due to an increase in accounting and legal fees.
Rent
Rent decreased by $3,024 during the
three months ended August 31, 2013 compared to August 31, 2012 due to the closure of the Calgary main office.
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
Software Development Costs
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.