NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
For the Three months Ended August 31, 2022
Note 1 – Organization and Description of
Business
PreAxia Health Care Payment Systems Inc. (the “Company”
or “PreAxia”) was incorporated on April 3, 2000 in the State of Nevada. On May 31, 2005, the Company acquired all of the outstanding
stock of Tiempo de Mexico Ltd. (“Tiempo”) in exchange for 5,000,000 shares of the common stock of the Company with a par value
of $0.001. The Company had no operations prior to the date of the aforementioned acquisition.
The business objective of the Company is the development,
distribution, marketing and sale of health care payment processing services and products. The Company has realized only nominal revenues
from its planned operations.
The operations of the Company are expected to be primarily
undertaken by its wholly-owned subsidiary, PreAxia Health Care Payment Ltd. (“PreAxia Payment”), incorporated pursuant to
the laws of the Province of Alberta on November 26, 2015.
PreAxia Payment is in the process of developing an
online access system creating a health spending account that will facilitate card payment and processing services to third-party administrators,
insurance companies and others.
Note 2 – Summary of Significant Accounting
Policies
Basis of presentation
The unaudited condensed consolidated financial statements
of the Company for the three months ended August 31, 2022 and 2021 have been prepared in accordance with accounting principles generally
accepted in the United States of America for interim financial information and pursuant to the requirements for reporting on Form 10-Q
and Regulation S-K. Accordingly, they do not include all the information and footnotes required by accounting principles generally accepted
in the United States of America for complete financial statements. However, such information reflects all adjustments (consisting solely
of normal recurring adjustments), which are, in the opinion of management, necessary for the fair presentation of the financial position
and the results of operations. Results shown for interim periods are not necessarily indicative of the results to be obtained for a full
fiscal year. The balance sheet information as of May 31, 2022 was derived from the audited financial statements included in the Company's
financial statements as of and for the fiscal year ended May 31, 2022 included in the Company’s Annual Report on Form 10-K filed
with the Securities and Exchange Commission (the “SEC”) on September 29, 2022. These financial statements should be read in
conjunction with that report.
Principles of Consolidation
The consolidated financial statements include
the accounts of the Company and its wholly-owned subsidiaries (i) PreAxia Health Care Payment Systems Inc., incorporated pursuant to the
laws of the Province of Alberta on January 28, 2008 (ii) PreAxia Canada Inc., incorporated pursuant to the laws of the Province of Alberta
on January 28, 2008 and (iii) PreAxia Health Care Payment Ltd., incorporated pursuant to the laws of the Province of Alberta on November
26, 2015 (collectively, the “Subsidiaries”). All inter-company accounts and transactions have been eliminated in consolidation.
Going Concern
The accompanying unaudited condensed
consolidated financial statements have been prepared assuming the Company will continue as a going concern, which contemplates the
realization of assets and satisfaction of liabilities in the normal course of business. During the three months ended August 31,
2022, the Company incurred a net loss of $37,347
and used cash in operating activities of $13,289,
and on August 31, 2022, had a stockholders’ deficit of $2,177,811.
These factors, among others, raise substantial doubt about the Company’s ability to continue as a going concern within one
year of the date that the consolidated financial statements are issued. The Company’s unaudited condensed consolidated
financial statements do not include any adjustments that might result from the outcome of this uncertainty should we be unable to
continue as a going concern.
The Company’s ability to continue as a going
concern is dependent upon its ability to develop additional sources of capital and to ultimately achieve profitable operations. Currently,
the Company does not have significant cash or other material assets, nor does it have operations or a source of revenue sufficient to
cover its operating costs and allow it to continue as a going concern. The Company’s officers or principal shareholders have committed
to making advances or loans to pay for certain legal, accounting, and administrative costs.
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 COVID-19 global pandemic may have on its access to the financing
markets. Even if the Company is able to obtain additional financing, it may contain undue restrictions on our operations, in the case
of debt financing or cause substantial dilution for our stockholders, in the case of equity financing.
Cash and Cash Equivalents
The Company considers all highly liquid debt
instruments with an original maturity of three months or less to be cash equivalents.
Use of Estimates
The preparation of the Company’s
unaudited condensed consolidated 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 consolidated financial
statements and accompanying notes. Although these estimates are based on management’s knowledge of current events and actions
that our company may undertake in the future, actual results could differ from those estimates.
Foreign Currency Translation
The functional currency of the Company is the
United States dollar. The functional currency of the Subsidiaries is the Canadian dollar. Assets and liabilities in the accompanying consolidated
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 transaction
exchange gains and losses are included in the statement of operations and comprehensive loss.
The Company's reporting currency is the U.S.
dollar. All transactions initiated in Canadian Dollars are translated into U.S. dollars in accordance with Accounting Standards Codification
("ASC") 830-30, "Translation of Financial Statements," as follows:
i) assets
and liabilities are translated at the closing rate at the date of the balance sheet of 1.00 US Dollar =1.3101 Canadian Dollars (August
31, 2022), 1.00 USD Dollar=0.8600 GBP, and 1.00 US Dollar=1.2632 Canadian Dollars (May 31, 2022), 1.00 USD Dollar=0.7925 GBP;
ii) income
and expenses are translated at average exchange rates for the three months ended August 31, 2022 of 1.00 US Dollar = 1.2893 Canadian Dollars
and 1.00 US Dollar = 1.2452 Canadian Dollars (August 31, 2021);
iii) all
resulting exchange differences are recognized as other comprehensive income, a separate component of equity. The exchange differences
during the three months ended August 31, 2022 and 2021 were insignificant and no amounts have been recorded.
Fair Value of Financial Instruments
The Company defines fair value as the exchange
price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market
for the asset or liability in an orderly transaction between market participants on the measurement date. Management uses a fair value
hierarchy that distinguishes between (1) market participant assumptions developed based on market data obtained from independent
sources (observable inputs) and (2) an entity’s own assumptions about market participant assumptions developed based on the
best information available in the circumstances (unobservable inputs). The fair value hierarchy consists of three broad levels, which
gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest
priority to unobservable inputs (Level 3). The three levels of the fair value hierarchy are described below:
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Level 1 - Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities. |
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Level 2 - Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly, including quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; inputs other than quoted prices that are observable for the asset or liability (e.g., interest rates); and inputs that are derived principally from or corroborated by observable market data by correlation or other means. |
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Level 3 - Inputs that are both significant to the fair value measurement and unobservable. |
Fair value estimates discussed herein are based upon
certain market assumptions and pertinent information available to management as of August 31, 2022 and May 31, 2022. The carrying amounts
of current assets and current liabilities approximate their fair value because of the relatively short period of time between the origination
of these instruments and their expected realization.
Net Income (Loss) Per Share
Net income (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. The Company has 10,587,600 shares
of potential common stock equivalents for convertible note payable – related party outstanding during the periods ended August 31,
2022 and 2021, which have been excluded from the loss per share computation as their effect would have been anti-dilutive due to net losses.
Research and Development Costs
The Company expenses research and development
costs as incurred in accordance with FASB ASC 730 “Research and Development.” During the three months ended August 31, 2022
and 2021, we incurred $3,271 and $2,081, respectively, in research and development expenses.
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 will capitalize 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 are capitalized under
the same criteria as our marketed software.
Impairment of Long-lived Assets
Long-lived assets such as property, equipment
and identifiable intangibles are reviewed for impairment whenever facts and circumstances indicate that the carrying value may not be
recoverable. When required, impairment losses on assets to be held and used are recognized based on the fair value of the asset. The
fair value is determined based on estimates of future cash flows, market value of similar assets, if available, or independent appraisals,
if required. If the carrying amount of the long-lived asset is not recoverable from its undiscounted cash flows, an impairment
loss is recognized for the difference between the carrying amount and fair value of the asset. When fair values are not available,
the Company estimates fair value using the expected future cash flows discounted at a rate commensurate with the risk associated with
the recovery of the assets. We did not recognize any impairment losses for any periods presented.
Commitments and Contingencies
The Company follows subtopic 450-20 of the FASB Accounting
Standards Codification to report accounting for contingencies. Liabilities for loss contingencies arising from claims, assessments,
litigation, fines and penalties and other sources are recorded when it is probable that a liability has been incurred and the amount of
the assessment can be reasonably estimated.
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.
During the three months ended August 31, 2022 and
2021, the Company had revenue of $0 and $41, respectively. The Company earns a 10% commission on amounts reimbursed for eligible expenses.
Income Taxes
The Company follows Section 740-10-30 of the FASB
Accounting Standards Codification, which requires recognition of deferred tax assets and liabilities for the expected future tax consequences
of events that have been included in the financial statements or tax returns. Under this method, deferred tax assets and liabilities
are based on the differences between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect
for the fiscal year in which the differences are expected to reverse. Deferred tax assets are reduced by a valuation allowance to
the extent management concludes it is more likely than not that the assets will not be realized. Deferred tax assets and liabilities
are measured using enacted tax rates expected to apply to taxable income in the fiscal years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the Statements
of Income and Comprehensive Income in the period that includes the enactment date.
The Company follows section 740-10-25 of the FASB
Accounting Standards Codification (“Section 740-10-25”) with regards to uncertain income tax positions. Section 740-10-25
addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial
statements. Under Section 740-10-25, the Company may recognize the tax benefit from an uncertain tax position only if it is more likely
than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position.
The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that
has a greater than fifty percent (50%) likelihood of being realized upon ultimate settlement. Section 740-10-25 also provides guidance
on de-recognition, classification, interest and penalties on income taxes, accounting in interim periods and requires increased disclosures.
Note 3 – Recent Accounting Pronouncements
The Company reviews new accounting standards as issued
or updated. No new standards or updates had any material effect on these consolidated financial statements. The accounting pronouncements
issued subsequent to the date of these consolidated 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.
Note 4 – Related Party Transactions
Accounts Payable and Accrued Liabilities - Related
Party
As of August 31, 2022 and May 31, 2022, accounts payable
and accrued liabilities – related party due to Tom Zapatinas totaled $150,000 and $120,000, respectively. During the three months
ended August 31, 2022 and 2021, Tom Zapatinas, the Chief Executive Officer and Director of the Company, earned $30,000 and $30,000, respectively,
for consulting services provided to the Company. On May 31, 2022, accounts payable and accrued liabilities – related party of $429,121
was settled by issuing promissory note – related party below.
Advances – Related Party
As of August 31, 2022 and May 31, 2022, advances payable
due to Tom Zapatinas totaled $45,810 and $32,580, respectively. During the three months ended August 31, 2022 and 2021, Tom Zapatinas,
the Chief Executive Officer and a Director of the Company, advanced the Company $13,292 and $9,035, respectively, in cash and was repaid
$62 and $210, respectively, in cash. On May 31, 2022, advances – related party of $37,696 was settled by issuing promissory note
– related party below.
Loans Payable – Shareholders
As of August 31, 2022 and May 31, 2022, loans payable
- shareholders are $168,075 and $168,075, respectively. Loans payable – shareholders are unsecured, non-interest bearing and due
on demand. During the three months ended August 31, 2022 and 2021, the Company was advanced $0 and $0, respectively, in cash, and was
repaid $0 and $0, respectively, in cash.
Promissory Note – Related Party
As of August 31, 2022 and May 31, 2022, promissory
note - related party of $466,817 and $466,817, respectively, is due to Tom Zapatinas, the Chief Executive Officer and a Director of the
Company. The Note is non-interest bearing, unsecured and payable on demand. The note payable – related party was issued on May 31,
2022, to settle accounts payable and accrued liabilities – related party of $429,121 and advance – related party of $37,696.
Convertible Note Payable – Related Party
As of August 31, 2022 and May 31, 2022, convertible
note payable - related party of $1,058,760 is due to Tom Zapatinas, the Chief Executive Officer and a Director of the Company. The Note
is non-interest bearing, unsecured, payable on demand and convertible in whole or in part into shares of common stock of the Company at
a conversion price of $0.10 per share, which equates to 10,587,600 shares.
Note 5 – Stockholders’ Deficit
Common Stock
Common Stock, par value of $0.001 per share; 75,000,000
shares authorized: 19,767,698 shares issued and outstanding at August 31, 2022 and May 31, 2022. Holders of Common Stock have one vote
per share of Common Stock held.
Note 6 – Contingencies and Commitments
From time to time the Company may be a party to litigation
matters involving claims against the Company. Management believes that there are no current matters that would have a material effect
on the Company’s financial position or results of operations.
The Company does not have long-term commitments for
equipment purchases or leases. The Company does not lease office space as the CEO operates the business from his personal residence.
Note 7 – Subsequent Events
The Company has evaluated all subsequent events through
the date these financial statements were issued and no subsequent events occurred that required disclosure.