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PREAXIA HEALTH CARE PAYMENT SYSTEMS INC. - 10-K - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION(Edgar Glimpses Via Acquire Media NewsEdge) General Overview Our company undertakes all of its operations through PreAxia Canada, our wholly-owned subsidiary. PreAxia Canada 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 HSAs. 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 growth conduct, studies suggest that HSA's in the US will grow to over $75 billion in assets and 25 million consumers by 2015. 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. Plan of Operation Over the next twelve months, we plan to: (a) Raise additional capital to execute our business plans, and; (b) To penetrate the health payment processing market in Canada, and worldwide, by continuing to develop innovative health payment processing products and services, and; (c) Build up a network of strategic alliances with several types of health insurance companies, governments and other alliances in various vertical markets, and; (d) Fill the positions of senior management sales, administrative and engineering positions. 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 developing and marketing of health care processing products and services. We do not expect to generate any revenues during the year. Therefore, we will be required to raise a total of $2,850,000 to complete our business plan and pay our existing outstanding debts of approximately $1,300,000. Our working capital requirements for both our company and PreAxia Canada for the next twelve months are estimated at $1,550,000 distributed as follows: 17 Estimated Expenses General and Administrative $300,000 Research and Development $450,000 Marketing and Education $450,000 Professional Services $350,000 Total $1,550,000 Our estimated expenses over the next twelve months are broken down as follows: 1. General and Administrative We anticipate spending approximately $300,000 on general and administration costs in the next twelve months, which will include office rent, office supplies, transfer agents, filing fees, bank service charges, salary for our administrator, interest expense and travel, which includes airfare, meals, car rentals and accommodations. 2. Research and Development We anticipate that we may spend approximately $450,000 in the next twelve months in the maintenance of our development and additional acquisition of software for our processing services and products. 3. Marketing and Education We anticipate spending approximately $450,000 on the costs of staff and personnel marketing and promoting our company, our products and services, and educating the public to attract new accounts, including staff and personnel. 4. 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, consulting fees, accounting, auditing and legal fees. 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. Liquidity and Capital Resources As of May 31, 2014, we had a cash balance of $8,532 compared to $13,251, as at May 31, 2013. PreAxia Canada will be required to raise capital to fund our operations. We had a working capital deficit of $1,595,641 as of May 31, 2014 compared with a working capital deficit of $1,429,313 as of May 31, 2013. Our company currently has little cash on hand. 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. Our company's cash and cash equivalents will not be sufficient to meet our 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 with PreAxia Canada. We project that we will require an estimated additional $3,145,641over the next twelve month period to fund our operating cash shortfall calculated as $1,595,641 to cover our working capital deficit plus $1,550,000 for our projected cash request for the year ended May 31, 2014. 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 our company may determine. 18 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 financial condition as at May 31, 2014 and May 31, 2013 and the changes between those periods for the respective items are summarized as follows: Working Capital May 31, 2014 May 31, 2013 Current Assets $ 8,532 $ 13,251 Current Liabilities $ 1,604,173 $ 1,442,564 Working Capital (deficit) $ (1,595,641 ) $ (1,429,313) The increase in our working deficit of $166,328 was primarily due to increase in in accounts payables and loans payable. 19 Cash Flows Year Ended Year Ended May 31, 2014 May 31, 2013 Net cash used in Operating Activities $ (31,176 ) $ (5,028 ) Net cash provided by Investing Activities $ - $ (102,151) Net cash provided by Financing Activities $ 11,079 $ 111,657 Effect of exchange rate on cash $ 15,378 $ 305 Change in Cash and Cash Equivalents During the $ (4,719) $ 4,783 Period Cash Used in Operating Activities During the year ended May 31, 2014, we used net cash in operating activities in the amount of $31,176 due to increase in accounts payable. Cash Provided by Investing Activities During the year ended May 31, 2014, cash was not used in investing activities. Cash from Financing Activities During the year ended May 31, 2014, we generated $11,079 in cash from financing activities. We received $25,000 and paid back $13,921. 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, 2014, which are included herein. Our operating results for the year ended May 31, 2014 and May 31, 2013 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 expenses for the 12 months ended May 31, 2014 and May 31, 2013 were as follows: 20 Year Ended Year Ended May 31, 2014 May 31, 2013 % Consulting Fees $ 125,500 $ 139,185 (10 )% Professional Fees 28,706 16,251 76.6 % Office and Administration 15,419 27,025 (50.3 )% Research and Development 39,665 - Wages and Benefits - 39,260 Rent - 4,392 $ 209,291 $ 226,113 Operating expenses for the 12 months ended May 31, 2014 were $209,291 which is a decrease of $16,822 compared to the year ended May 31, 2013. The decrease was due to an increase in professional fees of $12,455, decrease in office and administration of $12,293, increase in research and development of $39,665, decrease in wages and benefits of $39,260 and a decrease in rent of $4,392. Professional Fees Professional fees increased by $12,455 in the year ended May 31, 2014 compared to the year ended May 31, 2013, due to an increase in accounting fees, legal fees, and audit fees. Office and Administration Our office and administration expenses decreased by $12,293 in the year ended May 31, 2014 compared to the year ended May 31, 2013, due to a decrease in travel expenses in general and administration expenses. Research and development Research and Development expenses increased by $39,665 for the year ended May 31, 2014 compared to the year ended May 31, 2013, as a result of a software license requirements and other required program updates. Wages and benefits Wages and benefits decreased by $39,260 for the year ended May 31, 2014 compared to the year ended May 31, 2013 due to an employee resigning. Rent Rent expense decreased by $4,392 for the year ended May 31, 2014 compared to the rent for the year ended May 31, 2013, as a result of the Calgary office closing. We have historically incurred losses and have incurred a loss of $3,230,908 from inception to May 31, 2014. Because of these historical losses, we will require additional working capital to develop our business operations. 21 We intend to raise additional working capital through private placements, public offerings, bank financing and/or advances from related parties or shareholder loans. The continuation of our business is dependent upon obtaining further financing and achieving a break even or 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 or future stockholders. Obtaining commercial loans, assuming those loans would be available, will increase our liabilities and future cash commitments. There are no assurances that we will be able to either (i) achieve a level of revenues adequate to generate sufficient cash flow from operations; or (ii) obtain additional financing through either private placements, public offerings and/or bank financing necessary to support our working capital requirements. To the extent that funds generated from operations and any private placements, public offerings and/or bank financing are insufficient, we will have to raise additional working capital. No assurance can be given that additional financing will be available, or if available, will be on terms acceptable to us. If adequate working capital is not available, we may cease operations. These conditions raise substantial doubt about our ability to continue as a going concern. The financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might be necessary should we be unable to continue as a going concern. Summary of Significant Accounting Policies The preparation of financial statements in conformity with United States generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying disclosures of our company. Although these estimates are based on management's knowledge of current events and actions that our company may undertake in the future, actual results may differ from such estimates. Use of Estimates in the preparation of the financial statements The preparation of our company's financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in these financial statements and accompanying notes. Actual results could differ from those estimates. Cash and Cash Equivalents Our company considers all highly liquid debt instruments with an original maturity of three months or less to be cash equivalents. Foreign Currency Translation The functional currency of our company is the United States dollar. The functional currency of PreAxia Canada is the Canadian dollar. Assets and liabilities in the accompanying financial statements are translated into United States dollars at the exchange rate in effect at the balance sheet date and capital accounts are translated at historical rates. Income statement accounts are translated at the average rates of exchange prevailing during the period. Translation adjustments arising from the use of differing exchange rates from period to period are included in the accumulated other comprehensive income (loss) account in stockholders' deficit. Transactions undertaken in currencies other than the functional currency of the entity are translated using the exchange rate in effect as of the transaction date. Any exchange gains and losses are included in the Statement of Operations and Comprehensive Loss. 22 Gain (Loss) Per Share Gain (loss) per share of common stock is computed by dividing the net loss by the weighted average number of common shares outstanding during the period. Fully diluted earnings per share are not presented because they are anti-dilutive. Research and 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. Intangible software costs will only be amortized against revenues generated by the software over a three year period. It is anticipated that these costs will begin to be amortized beginning in 2015. Recent Accounting Pronouncements The Company reviews new accounting standards as issued or updated. No new standards or updates had any material effect on these financial statements. The accounting pronouncements issued subsequent to the date of these financial statements that were considered significant by management were evaluated for the potential effect on these consolidated financial statements. Management does not believe any of the subsequent pronouncements will have a material effect on these consolidated financial statements as presented and does not anticipate the need for any future restatement of these consolidated financial statements because of the retro-active application of any accounting pronouncements issued subsequent to December 31, 2012 through the date these financial statements were issued. 23 |