NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
Three Months Ended August 31, 2020
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 not yet realized any
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.
COVID-19
The recent outbreak of the coronavirus COVID-19
has spread across the globe and is impacting worldwide economic activity. Conditions surrounding the coronavirus continue to rapidly
evolve and government authorities have implemented emergency measures to mitigate the spread of the virus. The outbreak and the
related mitigation measures have had and will continue to have a material adverse impact on global economic conditions as well
as on the Company's business activities. The extent to which COVID-19 may impact the Company's business activities will depend
on future developments, such as the ultimate geographic spread of the disease, the duration of the outbreak, travel restrictions,
business disruptions, and the effectiveness of actions taken in the Canada, United States and other countries to contain and treat
the disease. These events are highly uncertain and, as such, the Company cannot determine their financial impact at this time.
No adjustments have been made to the amounts reported in these condensed consolidated financial statements as a result of this
matter.
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, 2020 and 2019 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, 2020 was derived from
the audited financial statements included in the Company's financial statements as of and for the fiscal year ended May 31, 2020
included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (the “SEC”)
on September 14, 2020. 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 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, 2020, the Company incurred a net loss
of $34,855 and used cash in operating activities of $11,182, and at August 31, 2020, had a stockholders’ deficit of $1,831,483.
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 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 coronavirus 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 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=1.3040 Canadian Dollars (August
31, 2020), 1.00 USD Dollar=0.7476 GBP, and 1.00 US Dollar = 1.3772 Canadian Dollars (May 31, 2020), 1.00 USD Dollar=0.8101 GBP;
ii) income
and expenses are translated at average exchange rates for three months ended August 31, 2020 of 1.00 US Dollar = 1.3428 Canadian
Dollars and 1.00 US Dollar = 1.3219 Canadian Dollars (August 31, 2019);
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, 2020 and 2019 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.
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Fair value estimates discussed herein are based
upon certain market assumptions and pertinent information available to management as of August 31, 2020 and 2019. 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 as of
August 31, 2020 and 2019, 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
During the three months ended August
31, 2020 and 2019, we incurred $1,351 and $3,573, 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.
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 adopted 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. The Company had no material adjustments to its liabilities for unrecognized
income tax benefits according to the provisions of Section 740-10-25.
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 Parties
As of August 31, 2020 and May 31, 2020, accounts
payable and accrued liabilities – related party due to Tom Zapatinas totaled $339,121 and $309,121, respectively. During
the three months ended August 31, 2020 and 2019, 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.
Advances – Related Party
As of August 31, 2020 and May 31, 2020, advances
payable due to Tom Zapatinas totaled $21,747 and $9,810, respectively. During the three months ended August 31, 2020 and 2019,
Tom Zapatinas, the Chief Executive Officer and a Director of the Company, advanced the Company $12,535 and $1,220, respectively,
in cash and was repaid $598 and $4,523, respectively, in cash.
Loans Payable – Shareholders
As of August 31, 2020 and May 31, 2020, loans
payable - shareholders are $136,465 and $136,465, respectively. Loans payable – shareholders are unsecured, non-interest
bearing and due on demand or due within one year after the issuance date. During the three months ended August 31, 2020 and 2019,
the Company was advanced $0 and $0, respectively, in cash and was repaid $0 and $0, respectively, in cash.
Convertible Note Payable – Related
Party
As of August 31, 2020 and May 31, 2020, 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, 2020 and May 31, 2020.
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.
