PAXH PreAxia Health Care Payment Systems Inc (PK)

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 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, 2017, 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

Corporate Overview

Preaxia was incorporated in the State of Nevada on April 3, 2000. On December 11, 2008, the Nevada Secretary of State effected a name change, which had been previously approved by the majority of the stockholders on October 28, 2008.

Our company undertakes all of its operations through its wholly-owned subsidiary, PreAxia Health Care Payment Systems Inc. (“PreAxia Canada”- formerly H Pay Card Inc). PreAxia Canada, prior to being acquired by PreAxia, was a private corporation incorporated pursuant to the laws of the Province of Alberta on January 28, 2008.

General Overview

PreAxia and its wholly owned subsidiary, 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.

Today, however, the economy is in a slow growth phase (at best) and more likely one of worldwide contraction. No less an authority than the head of Toronto-Dominion Bank has warned that Canada has “hardly begun to appreciate the implications” of the long-term economic disruption. In a speech to the Annual Ivey Business Leader Award Dinner (2011), Mr. Clark suggested that all western economies are facing one of the biggest challenges in a generation due to a series of economic and demographic forces that include a slow-growth economy. He goes on to explain that “… in too many countries, promises have been made that cannot be kept. Promises around health care, pensions and support systems, which seemed affordable at the time.”

PreAxia now offers what we believe to be the proper medicine for this economy.

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 a tax-free vehicle for managing and controlling health care expenditures.

The growing interest in HSAs has fueled 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.

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 will grow to over $75 billion in assets and 25 million consumers by 2017. 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 control costs, 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 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. The funds in the HSA can be used to top up existing group coverage by covering residual amounts on prescription drugs, eyeglasses and hearing aids or to pay for medical, vision and dental expenses that otherwise may not be covered under the group benefit plan. Traditional health plan users pay premiums into a plan but do not see a return on money unless there is an issue with their health. In addition, most plans are established so that monies deposited into a plan by an employee are non-transferable upon the employee’s change of employment. 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 will enable insurance companies, governments and corporations to replace cash and cheque payments and to eliminate all paper involved in the management of these accounts and benefit through savings in time and money. Our company’s plans are to provide instant issuing services that enable corporations to issue and fund Pre-Paid Interac or credit card services to beneficiaries in real time. The beneficiary will select a personal identification number (“PIN”) using a PIN and card activation terminal, thus gaining instant access to funds that can be reloaded.

PreAxia is in the process of developing a platform for processing and managing accounts and payment cards, including cardholder and customer account management, reconciliation and financial settlement, and customer reporting.

PreAxia is in the process of developing software systems for the issuing of health payment cards and financial transaction processing services that will be fully managed by a data center. Products and services are anticipated to include:

• Payment card issuance on behalf of issuing bank partners for customer-branded credit cards and Interac payment cards. The cards are anticipated to be issued with Canadian and United States access through Interac (Canada) and STAR (United States) ATM, as well as inter-bank networks.
• Payment processing and funds allocation on payment accounts through financial electronic data interchange, wire transfers, and the automatic clearing house (“ACH”), with a PreAxia connection to a financial institution payment gateway and the United States ACH network through a United States financial institution.
• Enabling cardholders to select a personal PIN using a PreAxia PIN selection and card activation terminal. These functions enable the end user to be issued a PreAxia generated payment card at a customer’s office which is ready for immediate use.
• Authorizing transactions based upon the business requirements of PreAxia customers.
• Monitoring for unusual transaction activities, fraud and compliance violations.
• Providing management reports to customers and payment beneficiaries.
• Customer support center for reporting lost or stolen cards and for answering cardholder inquiries.

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 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 to sell through multi-tiered, value-added resellers. For example, the Health Card solution may be provided by a subcontract to a leading vendor that rebrands and adds value to the solution. The leading vendor in turn may form part of a larger professional services systems integration engagement with the customer. One example of this approach is that a major bank may lead on selling our company’s solution to medical insurance companies and the health care industry under our product brand.

PreAxia has identified the following “channels” through which it will target prime end market customers:

• Benefits managers/adjudicators, including insurance, health or outsources government benefits processors that manage benefits disbursement
• Issuer banks, including partner banks that enable the issuance of Health Cards
• Application providers, including software manufacturers selling into the target vertical markets
• 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
• Accountants and bookkeepers who regularly advise businesses on financial and operational matters
• MGAs that provide services and education to the broker community
• 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 key to advance our company’s goals in 2017 for achieving a prime position in the Canadian public sector 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. Our company is taking a different approach by providing 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. In addition,,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. PreAxia also 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:

Canadian Market:

• Pay Linx Financial Corporation is presently inactive, but was a company offering prepaid debit card payment solutions that integrated into the Interac and MasterCard financial networks in North America. Pay Linx Financial Corporation was presently 27.0% owned by Royal Bank of Canada and provided services to Royal Bank of Canada for Canadian governments through QuickLinxTM, replacing cheque and voucher payments.
• DirectCash Income Fund offers prepaid debit and credit cards and processes cash card transactions. In addition, DirectCash Income Fund provides ATM and debit terminal transaction processing, sales and maintenance.
• CardOne Plus Ltd. offers prepaid debit card products designed to support merchant specific programs, including card graphics and merchant account management. These products are certified for acceptance on multiple card scheme and ATM networks.
• HyperWALLET Systems Inc. offers a product offering “flexible debit card payment solutions” through Alterna Savings, HSBC and the Credit Union Central of British Columbia, Canada. It also offers pre- authorized debit, credit card, EFT and bill payment services.
• NextWave Wireless Inc. is a joint venture between Money Mart and DataWave Systems Inc., established to provide card issuance solutions including prepaid debit and credit cards. ”Nextwave Titanium” prepaid cards issued by Money Mart support loading from Money Mart transactions, such as cheque cashing, bill payment and ATM cash withdrawal.
• DataWave Systems Inc. provides prepaid card products for scheme cards as well as prepaid phone cards and prepaid wireless airtime. It offers “instant activation” through retail point of sale (“POS”) terminals. DataWave Systems Inc. is owned by InComm, a global provider of prepaid services. DataWave Systems Inc. also powers the Peoples Trust Company’s card service initiative, “HorizonPlus”, which is the contracted provider of “Titanium” card services.
• 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.

  International Market:

• Orbiscom Inc. is in an alliance with MasterCard to offer “custom use cards” that can be issued by MasterCard banks and provides for restricted authorizations (by merchant, merchant type or geography) as well as instant issuance.
• Comdata Corporation offers “controlled spending solutions”, with enhanced authorization and “real time” transfer of funds to payees, including government program payments.
• Affiliated Computer Services Inc. (ACS) is penetrating the U.S. government benefits card issuance marketplace through MasterCard prepaid cards that support “no fee” ATM cash withdrawals through participating ATM networks. ACS provides these services for a range of governmental benefits programs.
• Metavante Corporation is owned by Marshall & Ilsley Corporation and provides a wide range of payments products and services.
• Blackhawk Network is owned by Safeway and is a provider of the “gift card mall”, which can be used at participating merchants only. These cards are Visa, MasterCard or American Express branded and are activated at the POS.
• InComm is expanding its prepaid card services network “Fastcard” through an arrangement with Green Dot Corporation, which is a leading network of reloadable debit cards and processes for the MasterCard “repower” POS-based load network for prepaid cards.

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:

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 $2,843,915 to complete our business plan and pay our outstanding debts of approximately $1,293,915.   Our working capital requirements for PreAxia Canada for the next twelve months are estimated at $1,550,000 distributed, as follows:

Our estimated expenses over the next twelve months are broken down as follows:

Liquidity and Capital Resources

As of November 30, 2017, PreAxia’s cash balance was $2,596 compared to $8,779 as at May 31, 2017.  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 $1,291,319 as of November 30, 2017 compared with a working capital deficit of $1,198,480 as of May 31, 2017.  

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 additional $1,550,000 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, 2017 compared to May 31, 2017 is summarized as follows:

The increase in our working capital deficit of $92,839 was primarily due to an increase in our accounts payable related party and an increase in loans payable from shareholders.

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 three months ended November 30, 2017 and 2016.

For the three month period ended November 30, 2017 and November 30, 2016

Our operating results for the three month period ended November 30, 2017 compared to the three month period ended November 30, 2016 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

The operating loss for the three month period ended, November 30, 2017 was $42,725 compared to $68,463 for the three month period ended November 30, 2016. The decrease in loss of $25,738 for the three month period ending November 30, 2017 is due to a decrease in expenses of $6,000 in professional fees, a decrease in research and development of $7,315, a decrease of $3,207 in office and administration fees, a decrease in consulting fees of $704 and a decrease in amortization of software of $8,512.

Consulting Fees

Consulting Fees during the three-month period ended November 30, 2017 decreased by $704 over the three-month period ended November 30, 2016, related to the completion of marketing strategies.

Research and Development

Research and Development expenses during the three month period ended November 30, 2017 decreased by $7,315 over the three month period ended November 30, 2016, as web updates were completed and development of the platform was completed.

Wages and Benefits

There were no wages and benefits during the three month period ended November 30, 2017 or November 30, 2016.

Office and Administration

Office and administration expenses decreased by $3,207 for the period ended November 30, 2017 compared to November 30, 2016, due to a decrease in travel expenses.

Professional Fees

Professional fees during the three months ended November 30, 2017 decreased by $6,000 compared to November 30, 2016.

Amortization of Software

Amortization of software expenses of $nil as the software was fully amortized at the end of May 31, 2017 Amortization expenses for the period November 30, 2016 were $8,512 and this resulted in a decrease in expenses of a similar amount in the three month period ended November 30, 2017.

For the six-month period ended November 30, 2017 and November 30, 2016

Our operating results for the six month period ended November 30, 2017 compared to the six month period ended November 30, 2016 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, 2017 was $92,839 compared to $118,339 for the six month period ended November 30, 2016. The decrease in loss of $25,500 for the six month period ending November 30, 2017 is due to an increase in expenses of $2,534 in consulting fees, a decrease in research and development costs of $7,395, a decrease in professional fees of $2,507, a decrease in office and administration fees of $1,107 and a decrease in amortization of software of $17,025.

Research and Development

Research and Development expenses during the six month period ended November 30, 2017 decreased by $7,395 over the six month period ended November 30, 2016, as updates and license fees for major project components were completed.

Wages and Benefits

There were no wages and benefits during the six month period ended November 30, 2017 or November 30, 2016.

Office and Administration

Office and administration expenses decreased by $1,107 for the period ended November 30, 2017 compared to November 30, 2016, due to an increase in travel expenses.

Professional Fees

Professional fees during the six months ended November 30, 2017 decreased by $2,507 compared to November 30, 2016.

Rent

There were no rent expenses during the six months ended November 30, 2017 or November 30, 2016 due to the closure of the Calgary main office.

Amortization of Software

Amortization of software expenses of $17,025 were incurred for the six months ended November 30, 2016 and there was no amortization of software expenses for the six months ended November 30, 2017 as amortization of the. Software was completed by May 31, 2017.

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. The software is being amortized over three years starting June 2014 and has been fully amortized as of May 31, 2017 November 30, 2017.