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, 2022, 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 suggest that HSAs in
the US reached $112.4 billion in assets in 2022 and 33.4 million consumers in 2021, an increase of 11% of 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 the 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 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 directly 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 |
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 2023 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:
| · | 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.
|
| · | League,
which operates in Canada and the US, offers a range of health benefit services including Health Spending Accounts. |
| · | 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. |
US and International Markets
| · | HealthEquity, a publicly listed company offering HSAs in the USA, manages over $15 billion in deposits.
It is one of the largest dedicated health account custodians in the USA and serves more than 12 million accounts owned by individuals
at more than 24,000 companies across the country. |
| · | HSA Bank, a division of Webster Bank, offers Health Spending Accounts and related offerings to the consumer-directed
healthcare industry. |
| · | Fidelity Investments offers a Health Spending Account to businesses as a means of controlling costs
while providing employee health benefits. |
Intellectual Property and Patent Protection
At present, PreAxia does not have any pending or registered
patents or any trademarks.
Research and Development
For the nine months ended February 28, 2023 and 2022,
we incurred $5,215 and $14,653, respectively,
in research and development expenses.
Employees
PreAxia has one full-time consultant, our President,
Mr. Tom Zapatinas, effective September 1, 2011. We anticipate that we will hire additional key staff throughout 2023 in areas of administration/accounting,
business development, operations, sales/marketing and research/development.
Plan of Operation
Over the next twelve months, we plan to:
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(a) |
Raise additional capital to execute our business plans; |
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(b) |
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) |
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) |
Fill the positions of senior management sales, administrative and engineering positions. |
Liquidity and Capital Resources
As of February 28, 2023, PreAxia’s cash balance
was $32 compared to $259 as of May 31, 2022. Our Company will be required to raise capital to fund our operations. PreAxia
had a working capital deficit of $2,259,391 as of February 28, 2023 compared with a working capital deficit of $2,140,464 as of May 31,
2022.
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 $2,800,000 over the next twelve-month period to fund our working capital deficit of approximately
$2,100,000 plus an additional $700,000 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
the 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 February 28, 2023
and May 31, 2022 is summarized as follows:
Working Capital
| | |
February 28,
2023 | |
May
31,
2022 |
| | |
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|
| Current Assets | |
$ | 32 | | |
$ | 259 | |
| Current Liabilities | |
| (2,259,423 | ) | |
| (2,140,723 | ) |
| Working Capital (Deficit) | |
$ | (2,259,391 | ) | |
$ | (2,140,464 | ) |
The increase in our working capital deficit of $118,927
was primarily due to increases in accrued liabilities – related party of $90,000 and Advances – related party of $26,736.
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
February 28, 2023 and 2022
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
February 28, 2023.
For the three months ended February 28, 2023 and
2022
Our operating results for the three months ended February
28, 2023 compared to the three months ended February 28, 2022 are described below:
Revenue
During the three months ended February 28, 2023 and
2022, the Company had revenue of $0 and $70, respectively. The Company earns a 10% commission on amounts reimbursed for eligible expenses.
Expenses
Our total expenses for the three months ended February
28, 2023 was $36,488 compared to $46,866 for the three months ended February 28, 2022. The decrease in total expenses of $10,378 for the
three months ending February 28, 2023 is due to an increase in consulting fees of $442, decrease in professional fees of $99, a decrease
of $593 in office and administration fees, and a decrease in research and development of $10,128.
Consulting Fees
During each of the three months ended February 28,
2023 and 2022, Tom Zapatinas, the Chief Executive Officer and Director of the Company, earned $30,000 for consulting services provided
to the Company, which is included in accounts payable and accrued liabilities – related party.
Research and Development
Research and development expenses during the three
months ended February 28, 2023 decreased by $10,128 to $371, as compared to $10,499 during the three months ended February 28, 2022.
Wages and Benefits
There were no wages and benefits during the three
months ended February 28, 2023 and 2022.
Office and Administration
Office and administration expenses decreased by $593 for
the three months ended February 28, 2023 due to a decrease in office supply expense and filing fees.
Professional Fees
Professional fees during the three months ended February
28, 2023 decreased by $99 to $2,996, as compared to $3,095 during the three months ended February 28, 2022.
Interest Expense
Interest expense is $0 for the three months ended
February 28, 2023 and 2022 because accounts payable and accrued liabilities – related party, convertible note payable – related
party and loans payable – shareholders are non-interest bearing.
Results of Operations – Nine months ended
February 28, 2023 and 2022
The following summary of our results of operations
should be read in conjunction with our unaudited condensed consolidated financial statements for the nine months ended February 28, 2023.
For the nine months ended February 28, 2023 and
2022
Our operating results for the nine months ended February
28, 2023 compared to the nine months ended February 28, 2022 are described below:
Revenue
During the nine months ended February 28, 2023 and
2022, the Company had revenue of $0 and $341, respectively. The Company earns a 10% commission on amounts reimbursed for eligible expenses.
Expenses
Our total expenses for the nine months ended February
28, 2023 was $118,927 compared to $132,324 for the nine months ended February 28, 2022. The decrease in total expenses of $13,397 for
the nine months ending February 28, 2023 is due to a decrease in consulting fees of $343, decrease in professional fees of $1,942, a decrease
of $,1,674 in office and administration fees, and a decrease in research and development of $9,438.
Consulting Fees
During each of the nine months ended February 28,
2023 and 2022, Tom Zapatinas, the Chief Executive Officer and Director of the Company, earned $90,000 for consulting services provided
to the Company, which is included in accounts payable and accrued liabilities – related party.
Research and Development
Research and development expenses during the nine
months ended February 28, 2023 decreased by $9,438 to $5,215, as compared to $14,653 during the nine months ended February 28, 2022.
Wages and Benefits
There were no wages and benefits during the nine months
ended February 28, 2023 and 2022.
Office and Administration
Office and administration expenses decreased by $1,674 for
the nine months ended February 28, 2023 due to a decrease in office supply expense and filing fees.
Professional Fees
Professional fees during the nine months ended February
28, 2023 decreased by $1,942 to $12,536, as compared to $14,478 during the nine months ended February 28, 2022.
Interest Expense
Interest expense is $0 for the nine months ended February
28, 2023 and 2022 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 unaudited consolidated financial statements for a full and complete disclosure of our accounting policies.
Revenue Recognition
In accordance with ASC 606, “Revenue from Contracts
with Customers,” revenue is recognized when a customer obtains control of promised goods or services. The amount of revenue recognized
reflects the consideration to which we expect to be entitled to receive in exchange for these goods or services. ASC 606 requires us to
apply the following steps: (1) identify the contract with the customer; (2) identify the performance obligations in the contract; (3)
determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize
revenue when, or as, we satisfy the performance obligation.
Gross Versus Net Revenue
ASC 606 provides guidance on proper recognition of
principal versus agent considerations which is used to determine gross versus net revenue recognition. Under ASC 606, the core objective
of the guidance on gross versus net revenue recognition is to help determine whether an entity is a principal or an agent in a transaction.
In general, the primary difference between these two is the performance obligation being satisfied. The principal has a performance obligation
to provide the desired goods or services to the end customer, whereas the agent arranges for the principal to provide the desired goods
or services. Additionally, a fundamental characteristic of a principal in a transaction is control. A principal substantively controls
the goods and services before they are transferred to the customer as well as controlling the price of the good or service being provided.
An agent normally receives a commission or fee for these activities. In addition to control, the level at which an entity controls the
price of the good or service being transferred determines principal versus agent status. The more discretion over setting price a company
has in providing the good or service, the more likely they are considered a principal rather than an agent. Under the guidance when another
party is involved in providing a good or service to a customer, an entity is a principal if the entity obtains control of the asset or
right to a service performed by the other party.
The Company provides administrative services for Health
Spending Accounts sponsored by employers (the “customer”). The Company does not take possession of goods or control the services
provided as the employees of the customer are free to determine their health care provider. As such, the Company records revenue net of
reimbursements to employees. The Company’s services to the customer consist of reviewing medical costs for eligibility and reimbursing
employees for eligible costs.
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.
