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 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 condensed 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, 2020, 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
subsidiaries, unless the context clearly requires otherwise.
General Overview
Corporate Overview
PreAxia Health Care Payment Systems
Inc. (the “Company” or “PreAxia”) was incorporated on April 3, 2000 in the State of Nevada.
The Company primarily undertakes its
operations through its wholly-owned subsidiary, PreAxia Health Care Payment Limited (“PreAxia Payment”). PreAxia Payment
was incorporated pursuant to the laws of the Province of Alberta on November 26, 2015.
General Overview
PreAxia Payment is a company which intends
to deliver 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 (“HSA”). There is a rapid 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.
Spawned by the need to address escalating
health care costs, changes in the regulatory environment and the growing consumer desire for greater participation in the management
of their health benefits, the boundaries between health care and the financial services industries are becoming increasingly blurred.
With the trend towards self-directed health payment solutions and the growing demand for faster, easier and more convenient benefit
services, the insurance and benefits industries are banking on HSA medical payments being their next big growth conduit. Studies
estimate that HSAs in the US will reach $88.2 billion in assets in 2021, an increase of 14% of estimated assets over the prior
period. The Canadian market for health benefits is estimated at more than $30 Billion of which HSAs are estimated to have gain
a 10% share. This coupled with the continued growth of the Canadian group insurance industry illustrates the emerging opportunity
for innovative health payment services. We intend to initially launch our products in Canada. We believe that Canadian businesses
are embracing a new healthcare financing vehicle to provide greater value to employees, increase profitability and get more return
from their investment. We intend to provide them with services to capture this market opportunity.
Description of Health Spending Account
(“HSA”)
An HSA is a uniquely designed 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.
Matching of consumers in need of health
care products or services with providers is another area PreAxia intends to evaluate. Consumers managing their health care dollars
through an online system will find convenience in seeking out health care professionals and services through the same system.
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 marketing strategy is
to promote its existing platform direct to consumers and businesses, and to the groups that most need access to it; 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 may require custom pricing and compensation.
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:
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Independent brokers that sell, or desire to sell, Health Spending Accounts
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Financial advisors who manage funds and advise on tax saving strategies for individuals and corporations
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Accountants and bookkeepers who regularly advise businesses on financial and operational matters
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Benefits managers/adjudicators, including insurance, health or outsourced government benefits processors that manage benefits disbursement
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Issuer banks, including partner banks that enable the issuance of Health Cards and/or sell insurance products
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Application providers, including software manufacturers selling into the target vertical markets
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Professional services, including consulting, development and implementation companies serving the target vertical markets
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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 2021 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 Health Spending Accounts in the
marketplace. Our approach is to provide a high value added and robust capability within specific target markets, rather than the
“one size fits all” and mass volume approach of the larger companies in the Canadian and international market. This
is consistent with the PreAxia platform which has been designed for expansion in the United States and internationally. The following
are some of the leading providers of products and services that are or may be potential competitors in PreAxia’s target markets:
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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.
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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.
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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.
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League, which operates in Canada and the US, offers a range of health benefit services including
Health Spending Accounts.
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Most major insurance companies offer some version of HSAs to their customers.
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Many brokers have created HSA products for their clients.
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Many accounting and financial services firms have created their own HSA products to offer to
their clients.
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US and International Markets
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HealthEquity, a publicly listed company offering HSAs in the USA, manages over $1.7 billion in
deposits. It is one of the largest dedicated health account custodians in the USA and serves more than 1.4 million accounts owned
by individuals at more than 24,000 companies across the country.
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HSA Bank, a division of Webster Bank, offers Health Spending Accounts and related offerings to
the consumer-directed healthcare industry.
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Fidelity Investments offers a Health Spending Account to businesses as a means of controlling
costs while providing employee health benefits.
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Intellectual Property and Patent Protection
At present, PreAxia does not have any pending
or registered patents or any trademarks.
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 markets in Canada, the United States 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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As of November 30, 2020, PreAxia’s cash
balance was $0 compared to $46 as of May 31, 2020. Our Company will be required to raise capital to fund our operations. PreAxia
had a working capital deficit of $1,878,882 as of November 30, 2020 compared with a working capital deficit of $1,796,628 as of
May 31, 2020.
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 startup stage. We project that we will require an estimated $3,150,000 over the next twelve-month
period to fund our working capital deficit of approximately $1,700,000 plus an additional $1,450,000 to complete our business plan. The
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 Company hopes to
be able to attract suitable investors for our business plan, which will not require us to use our cash. There can be no assurance
that the Company will be successful in this situation. The Company is unable to predict the effect, if any, that the coronavirus
COVID-19 global pandemic may have on its access to the financing markets. 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 of November
30, 2020 and May 31, 2020 is summarized as follows:
Working Capital
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November 30,
2020
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May 31,
2020
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Current Assets
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$
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0
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$
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46
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Current Liabilities
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(1,878,882
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)
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(1,796,674
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)
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Working Capital (deficit)
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$
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(1,878,882
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)
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$
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(1,796,628
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The increase in our working capital
deficit of $82,254 was primarily due to an increase in our accounts payable - related party and advances - related party and
an increase in accounts payable and accrued liabilities.
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 – Three months
ended November 30, 2020 and 2019
The following summary of our results of operations
should be read in conjunction with our unaudited condensed consolidated financial statements for the three months ended November
30, 2020.
For the three months period ended November
30, 2020 and 2019
Our operating results for the three months
ended November 30, 2020 compared to the three months ended November 30, 2019 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 months ended
November 30, 2020 was $47,399 compared to $37,995 for the three months ended November 30, 2019. The increase in loss of $9,404
for the year ending November 30, 2020 is due to an increase in professional fees of $9,033, a decrease in research and development
of $240 and an increase of $611 in office and administration fees.
Consulting Fees
During the three months ended November 30,
2020 and 2019, Tom Zapatinas, the Chief Executive Officer and Director of the Company, earned $30,000
for consulting services provided to the Company.
Research and Development
Research and development expenses during the
three months ended November 30, 2020 decreased by $240 as web updates and platform development were being completed in the current
year.
Wages and Benefits
There were no wages and benefits during the
three months ended November 30, 2020 or November 30, 2019.
Office and Administration
Office and administration
expenses increased by $611 for the period ended November
30, 2020 due to an increase in office and administration expenses.
Professional Fees
Professional fees during the three months ended
November 30, 2020 increased by $9,033 due to the completion of the annual financial statement audit in the second quarter of fiscal
2021. In the previous year the annual financial statement audit was completed in the first quarter. As such, fees for accounting
and audit fees were invoiced in a later quarter in fiscal 2021.
Interest Expense
Interest expense is $0 for the three months
ended November 30, 2020 and 2019 because accounts payable and accrued liabilities – related party, convertible note payable
– related party and loans payable – shareholders are non-interest bearing.
Results of Operations – Six months
ended November 30, 2020 and 2019
The following summary of our results of operations
should be read in conjunction with our unaudited condensed consolidated financial statements for the six months ended November
30, 2020.
For the six months period ended November
30, 2020 and 2019
Our operating results for the six months ended
November 30, 2020 compared to the six months ended November 30, 2019 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 months ended
November 30, 2020 was $82,254 compared to $87,140 for the six months ended November 30, 2019. The decrease in loss of $4,886 for
the year ending November 30, 2020 is due to a decrease in professional fees of $665, a decrease in research and development of
$2,462 and a decrease of $1,759 in office and administration fees.
Consulting Fees
During the six months ended November 30, 2020
and 2019, Tom Zapatinas, the Chief Executive Officer and Director of the Company, earned $60,000 for
consulting services provided to the Company.
Research and Development
Research and development expenses during the
six months ended November 30, 2020 decreased by $2,462 as web updates and platform development were being completed in the current
year.
Wages and Benefits
There were no wages and benefits during the
six months ended November 30, 2020 or November 30, 2019.
Office and Administration
Office and administration
expenses decreased by $1,759 for the period ended
November 30, 2020 due to a decrease in travel and office and administration expenses.
Professional Fees
Professional fees during the six months ended
November 30, 2020 decreased by $665 due a decrease in fees paid for accounting services.
Interest Expense
Interest expense is $0 for the six months ended
November 30, 2020 and 2019 because accounts payable and accrued liabilities – related party, convertible note payable –
related party and loans payable – shareholders are non-interest bearing.
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. Please
refer to Note 2 of the accompanying consolidated financial statements for a full and complete disclosure of our accounting policies.
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.
