UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

☑[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended August 31, 20212022

or

☐[  ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from __________ to ______________

Commission File Number:  000-52365

PREAXIA HEALTH CARE PAYMENT SYSTEMS INC.

 (Exact name of registrant as specified in its charter)

PO Box 34075 Westbrook PO 1610-37th, 1610-37^th Street S.W., Calgary AB , AlbertaT3C 3W2

(Address of principal executive offices) (Zip Code)

(403) (403) 850-4120

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, $0.001 par value
(Title of class)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ [X]  No ☐   [  ]

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes ☑ [X] No ☐ [ ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐[   ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.)  Yes ☐  [  ]  No ☑ [X]

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY

PROCEEDINGS DURING THE PRECEDING FIVE YEARS:

Indicate by check mark whether the registrant filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes ☐[  ]  No ☑ [  ]

APPLICABLE ONLY TO CORPORATE ISSUERS

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

As of October 15, 202117, 2022 the registrant had 19,767,698 outstanding shares of Common Stock.

PREAXIA HEALTH CARE PAYMENT SYSTEMS INC.

TABLE OF CONTENTS

PART I – FINANCIAL INFORMATION

ITEM 1.   FINANCIAL STATEMENTS

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and with the instructions for Form 10-Q and Article 210 8-03 of Regulation S-X.  Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements.  In the opinion of management, all adjustments considered necessary for a fair presentation have been included.  All such adjustments are of a normal recurring nature.  Operating results for the three monththree-month period ended August 31, 20212022 are not necessarily indicative of the results that may be expected for the fiscal year ending May 31, 2022.2023.  For further information refer to the consolidated financial statements and footnotes thereto included in Preaxia’s Annual Report on Form 10-K for the year ended May 31, 2021.2022. 

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, 2021,2022, 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 $88.2$112.4 billion in assets in 20212022 and 30.033.4 million consumers in 2019,2021, an increase of 20%11% of assets over the prior period. The Canadian market for health benefits is estimated at more than $30 Billionbillion 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.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:

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:

·        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 three months ended MayAugust 31, 2022 and 2021, we incurred $3,271and 2020, we incurred $2,081 and $1,351$2,081, 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 20212022 and 20222023 in areas of administration/accounting, business development, operations, sales/marketing and research/development.

Plan of Operation

Over the next twelve months, we plan to:

Liquidity and Capital Resources

As of August 31, 2021,2022, PreAxia’s cash balance was $0$200 compared to $40$259 as of May 31, 2021.2022.  Our Company will be required to raise capital to fund our operations.  .  PreAxia had a working capital deficit of $2,001,353$2,177,811 as of August 31, 20212022 compared with a working capital deficit of $1,959,821$2,140,464 as of May 31, 2021.2022.  

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 $1,000,000$2,800,000 over the next twelve-month period to fund our working capital deficit of approximately $400,000$2,100,000 plus an additional $600,000$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 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 August 31, 2022 and May 31, 2021 and 20202022 is summarized as follows:

Working Capital

Working Capital

The increase in our working capital deficit of $41,532$37,347 was primarily due to an increaseincreases in our accounts payable - related party and an increase in accountsAccounts payable and accrued liabilities.liabilities – related party of $30,000 and Advances – related party of $13,230.

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 August 31, 20212022 and 20202021

The following summary of our results of operations should be read in conjunction with our unaudited condensed consolidated financial statements for the three ended August 31, 2022.

For the three months ended August 31, 2021.

For the three months period ended August 31,2022 and 2021 and 2020

Our operating results for the three months ended August 31, 20212022 compared to the three months ended August 31, 20202021 are described below:

Revenue

During the three months ended August 31, 20212022 and 2020,2021, the Company had revenue of $41$0 and $0,$41, respectively. The Company earns a 10% commission on amounts reimbursed for eligible expenses.

Expenses

Our total expenses for the three months ended August 31, 20212022 was $41,573$37,347 compared to $34,855$41,573 for the three monthsyear ended August 31, 2020.2021. The increasedecrease in total expenses of $6,718$4,226 for the three months ending August 31, 20212022 is due to an increase in professional fees of $7,876, an increase in research and development of $730$1,190, a decrease in professional fees of $5,376 and which is partially offset by a decrease of $1,888$40 in office and administration fees.

Consulting Fees

During each of the three months ended August 31, 20212022 and 2020,2021, 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 August 31, 20212022 increased by $730.$1,190 to $3,271, as compared to $2,081 during the three months ended August 31, 2021.

Wages and Benefits

There were no wages and benefits during the three months ended August 31, 2021 or August 31,2022 and 2021.

Office and Administration

Office and administration expenses decreased by $1,888$40 for the periodthree months ended August 31, 20212022 due to ana decrease in office supply expense.expense and filing fees.

Professional Fees

Professional fees during the three months ended August 31, 2021 increased2022 decreased by $5,376 to $2,500, as compared to $7,876 during the three months ended August 31, 2021, due to the substantial completiona significant portion of the 2022 annual financial statement audit in the first quarter of fiscal 2021. In the previous fiscal year the annual financial statement audit wasbeing completed in the second quarter. As such, fees for accounting and audit were expensed in an earlier quarter in fiscal 2021.September 2022.

Interest Expense

Interest expense is $0 for the three months ended August 31, 20212022 and 20202021 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 controls 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 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.

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.

ITEM 4. CONTROLS AND PROCEDURES.

Evaluation of Disclosure Controls and Procedures

Management, evaluated the effectiveness of our disclosure controls and procedures, as defined under Exchange Act Rule 13a-15(e). Based upon this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of August 31, 2021,2022, the disclosure controls and procedures, based on the Framework of Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) 2013, were not effective.

Disclosure controls and procedures are the controls and other procedures that are designed to ensure that information required to be disclosed in our Company’s Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Securities Exchange Commission’s rules and forms.

Changes in Internal Control over Financial Reporting

There have been no changes in our internal controls over financial reporting that occurred during the quarter ended August 31, 20212022 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

PART II – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

We know of no material pending legal proceedings to which our company or subsidiary is a party or of which any of our property is the subject. In addition, we do not know of any such proceedings contemplated by any governmental authorities.

We know of no material proceedings in which any director, officer or affiliate of our company, or any registered or beneficial stockholder of our company, or any associate of any such director, officer, affiliate, or stockholder is a party adverse to our company or subsidiary or has a material interest adverse to our company or subsidiary.

ITEM 1A. RISK FACTORS

Not applicable to smaller reporting companies.

ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5.  OTHER INFORMATION

None.

ITEM 6.   EXHIBITS

* Filed herewith.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

PREAXIA HEALTH CARE PAYMENT SYSTEMS INC.

By:  /s/Tom Zapatinas                                                                           

Name: Tom Zapatinas

Title:   President, Chief Executive Officer and Chief Financial Officer

(Principal Executive Officer and Principal Financial Officer)

Date: October 15, 202117, 2022