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 PreAxia Canada are both development stage companies. 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 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.
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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 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.
Description of Health Spending Account (“HSA”)
A HSA can operate like a bank account; plan members start each plan year with a certain number of dollar credits in their HSA; throughout the year, those credits may be used to pay for certain medical, vision and dental expenses. The credits 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.
Services and infrastructure provided by PreAxia will enable insurance companies, governments and corporations to replace cash and cheque payments. Our company 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:
Distribution Methods and Marketing Strategy
PreAxia’s overall strategy is to finalize development of and market its health care payment cards and system. Our company will target enterprise-sized, public and private sector customers at the provincial and national levels. We will 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. Our company intends to design solutions targeted towards corporate financial management, financial risk, audit management and cash management and target product/service management as a support to financial management.
We anticipate that prime targets will be organizations that make a significant number of payments to individuals by way of cheques or serve individuals with limited or no access to bank accounts. We anticipate that PreAxia’s products will replace the usage of cheques for people who prefer electronic delivery of funds through a multi-functional Interac or major credit card and generate cost savings benefits and increased efficiencies for its clients.
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, and through market specific channel partners. 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:
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 2012 and 2013, 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 Health Card value proposition 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. The following are some of the leading providers of products and services that are or may be potential competitors in PreAxia’s target markets:
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Canadian Market:
International Market:
Intangible Properties
When negotiating its arrangements with clients, PreAxia intends to ensure that all rights to and ownership of its intellectual property remains with our 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 does not have any pending or registered patents or trademarks.
Research and Development
For the year ended May 31, 2012, we expended $240,596 on research and development compared to $649,324 during year ended May 31, 2011.
Employees
PreAxia has no employees. It has one full-time consultant, our Chief Executive Officer, Mr. Tom Zapatinas. We entered into an employment agreement effective July 1, 2009 with Mr. Geneau for the position of chief marketing and privacy officer. Effective June 30, 2011, this employee resigned. Effective September 1, 2011, an employment agreement was signed with Mr. Perry Shoom for the position of general manager; this position was terminated at the end of October 2012. We anticipate that we will need to hire additional key staff in areas of administration, accounting, business development, operations, sales and marketing, and research and development.
ITEM 1A. RISK FACTORS
Risks Related to our Company
We have a limited operating history.
We are in the early stages of development and face risks associated with a new company in a growth industry. We may not successfully address these risks and uncertainties or successfully implement our operating strategies. If we fail to do so, it could materially harm our business to the point of having to cease operations and could impair the value of our common stock to the point investors may lose their entire investment. Even if we accomplish these objectives, we may not generate positive cash flows or the profits we anticipate in the future.
PreAxia has a limited operational history. Our company has never paid dividends and has no present intention to pay dividends. Our company is in the early commercialization stage of its business and therefore will be subject to the risks associated with early stage companies, including uncertainty of revenues, markets and profitability, and the need to raise additional funding. PreAxia will be committing, and for the foreseeable future will continue to commit, significant financial resources to marketing, product development and research. PreAxia’s business and prospects must be considered in light of the risks, expenses and difficulties frequently encountered by companies in the early stage of development. Such risks include the evolving and unpredictable nature of our company’s business,
PreAxia’s ability to anticipate and adapt to a developing market, acceptance by consumers of our products and the ability to identify, attract and retain qualified personnel. There can be no assurance that PreAxia will be successful in doing what is necessary to address these risks.
We will need substantial additional financing in the future to continue operations.
Our ability to continue our present operations will be dependent upon our ability to obtain significant external funding. Additional sources of funding have not been established. We are exploring various financing alternatives. There can be no assurance that we will be successful in securing such financing at acceptable terms, if at all. If adequate funds are not available from the foregoing sources, or if we determine it is to otherwise be in our best interests, we may consider additional strategic financing options, including sales of assets.
We will require key personnel.
The financial services technology industry involves a high degree of risk, which even a combination of experience, knowledge and careful evaluation may not be able to overcome. The success of PreAxia is dependent on the services of its senior management. The experience of these individuals will be a factor contributing to our company’s continued success and growth. The loss of one or more of its key employees could have a material adverse effect on our operations and business prospects. In addition, PreAxia’s future success will depend in large part on its ability to attract and retain additional highly skilled technical, management, sales and marketing personnel. There can be no assurance that our company will be successful in attracting and retaining such personnel and the failure to do so could have a material adverse effect on our company’s business, operating results and financial condition.
We have additional financing requirements.
In order to accelerate PreAxia’s growth objectives, it will need to raise additional funds from lenders and equity markets in the future. There can be no assurance that our company will be able to raise additional capital on commercially reasonable terms to finance its growth objectives. The ability of our company to arrange such financing in the future will depend in part upon the prevailing capital market conditions as well as the business performance of our company. There can be no assurance that PreAxia will be successful in its efforts to arrange additional financing on terms satisfactory to our company. If additional financing is raised by the issuance of shares of common stock of our company, control of our company may change and stockholders may suffer additional dilution.
We may not be successful in the protection of intellectual property.
There can be no assurance that infringement or invalidity claims (or claims for indemnification resulting from infringement claims) will not be asserted or prosecuted against PreAxia or that any such assertions or prosecutions will not materially adversely affect our company’s business, financial condition or results of operations. Irrespective of the validity or the successful assertion of such claims, our company could incur significant costs and diversion of resources with respect to the defense thereof which could have a material adverse effect on our company’s business, financial condition or results of operations. Our company’s performance and ability to compete are dependent to a significant degree on its proprietary technology. There can be no assurance that the steps taken by our company will prevent misappropriation of its technology or that agreements entered into for that purpose will be enforceable. The laws of other countries may afford our company little or no effective protection of its intellectual property. Our company may in the future also rely on technology licenses from third parties. There can be no assurance that these third party licenses will be, or will continue to be, available to our company on commercially reasonable terms. The loss of, or inability of our company to maintain, any of these technology licenses could result in delays in completing its product enhancements and new developments until equivalent technology could be identified, licensed, or developed and integrated. Any such delays would materially adversely affect PreAxia’s business, results of operations and financial condition.
Our disclosure controls and procedures and internal control over financial reporting were not effective, which may cause our financial reporting to be unreliable and lead to misinformation being disseminated to the public.
Our management evaluated our disclosure controls and procedures as of May 31, 2012 and concluded that as of that date, our disclosure controls and procedures were not effective. In addition, our management evaluated our internal control over financial reporting as of May 31, 2012 and concluded that that there were material weaknesses in our
internal control over financial reporting as of that date and that our internal control over financial reporting was not effective as of that date. A material weakness is a control deficiency, or combination of control deficiencies, such that there is a reasonable possibility that a material misstatement of the financial statements will not be prevented or detected on a timely basis.
We have not yet remediated this material weakness and we believe that our disclosure controls and procedures and internal control over financial reporting continue to be ineffective. Until these issues are corrected, our ability to report financial results or other information required to be disclosed on a timely and accurate basis may be adversely affected and our financial reporting may continue to be unreliable, which could result in additional misinformation being disseminated to the public. Investors relying upon this misinformation may make an uninformed investment decision.
Risks Related to our Business
We face competition and may not be able to compete successfully.
PreAxia may not be able to compete successfully against current and future competitors, and the competitive pressures PreAxia faces could harm its business and prospects. Broadly speaking, the market for financial services technology is competitive. There are other providers of components or versions of the Health Card value proposition in the marketplace. Additionally, the level of competition is likely to increase as current competitors improve their product offerings and as new participants enter the market. Many of PreAxia’s current and potential competitors have longer operating histories, larger customer bases, greater name and brand recognition and significantly greater financial, sales, marketing, technical and other resources than PreAxia.
Additionally, these competitors have research and development capabilities that may allow them to develop new or improved products that may compete with products PreAxia markets and distributes. New technologies and the expansion of existing technologies may also increase competitive pressures on PreAxia. Increased competition may result in reduced operating margins as well as loss of market share. This could result in decreased usage of PreAxia’s products and may have a material adverse effect on PreAxia’s business, financial condition and results of operations.
We may face implementation delays.
Most of PreAxia’s customers will be in a testing or preliminary stage of utilizing PreAxia’s products and may encounter delays or other problems in the introduction of PreAxia’s products. A decision not to do so, or a delay in implementation, could result in a delay or loss of related revenue or could otherwise harm PreAxia’s businesses and prospects. PreAxia will not be able to predict when a customer that is in a testing or a preliminary use phase will adopt a broader use of PreAxia’s products.
We may get limited customer feedback respecting products.
PreAxia’s revenue will depend on the number of customers who use PreAxia’s products. Accordingly, the satisfactory design of PreAxia’s product is critical to PreAxia’s business, and any significant product design limitations or deficiencies could harm PreAxia’s business and market acceptance. This limited feedback may not have resulted in an adequate assessment of customer requirements. Therefore, the currently specified features and functionality of PreAxia’s product may not satisfy current or future customer demands. Furthermore, even if PreAxia identifies the feature set required by customers in PreAxia’s market, it may not be able to design and implement products incorporating features in a timely and efficient manner, if at all.