PREAXIA HEALTH CARE PAYMENT SYSTEMS INC. - Quarter Report: 2015 February (Form 10-Q)
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 February 28, 2015
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)
Nevada | 20-4395271 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
PO Box 34072, 55-1610-37th Street S.W., Calgary, Alberta T3C 3W2
(Address of principal executive offices) (Zip Code)
(403) 850-4120
(Registrant’s telephone number, including area code)
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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).
Yes [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large Accelerated filer [ ] Accelerated filer [ ]
Non-accelerated filer [ ] Smaller reporting Company [X]
(Do not check if a smaller reporting company)
1 |
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
[X ]
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.
17,652,082 common shares outstanding as of April 17, 2015
2 |
PREAXIA HEALTH CARE PAYMENT SYSTEMS INC.
TABLE OF CONTENTS
PART I – FINANCIAL INFORMATION | |
ITEM 1. FINANCIAL STATEMENTS | 4 |
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | 6 |
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK | 11 |
Item 4. Controls and Procedures | 11 |
PART II – OTHER INFORMATION | |
ITEM 1. LEGAL PROCEEDINGS | 15 |
ITEM 1A. RISK FACTORS | 12 |
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS | 12 |
ITEM 3. DEFAULTS UPON SENIOR SECURITIES | 14 |
ITEM 4. MINE SAFETY DISCLOSURES | 14 |
ITEM 5. OTHER INFORMATION | 14 |
ITEM 6. EXHIBITS | 14 |
SIGNATURES | 15 |
3 |
PART I – FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with 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 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 nine month period ended February 28, 2015 are not necessarily indicative of the results that may be expected for the fiscal year ending May 31, 2015. 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, 2014.
Page | |
Unaudited Consolidated Financial Statements | |
Consolidated Balance Sheets as of February 28, 2015 (Unaudited) and May 31, 2014 (Audited) |
F-1 |
Unaudited Consolidated Statements of Operations and Comprehensive Loss for the three months ended February 28, 2015 and 2014 | F-2 |
Unaudited Consolidated Statements of Stockholders’ Deficit as of February 28, 2015 | F-3 |
Unaudited Consolidated Statements of Cash Flows for the nine months ended February 28, 2015 and 2014 | F-4 |
Notes to Unaudited Consolidated Financial Statements | F-5 |
4 |
PREAXIA HEALTH CARE PAYMENT SYSTEMS INC.
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
February 28, 2015
(Stated in US Dollars)
5 |
CONSOLIDATED BALANCE SHEET
February 28, 2015 and May 31, 2014
(Stated in US Dollars)
(Unaudited) February 28, 2015 |
(Audited) May 31, 2014 | ||
ASSETS | |||
Current Assets | |||
Cash | $ 2,980 | $ 8,532 | |
Total Current Assets | 2,980 | 8,532 | |
Other Assets | |||
Intangible Software Costs | 102,151 | 102,151 | |
Amortization Software Costs | (25,538) | ||
Total Other Assets | 76,613 | 102,151 | |
Total Assets | $ 79,593 | $ 110,683 | |
LIABILITIES | |||
Current Liabilities | |||
Bank Overdraft | $ - | $ - | |
Accounts Payable and Accrued Liabilities | 177,916 | 183,717 | |
Accounts Payable – Related Party (Note 4) | 1,057,337 | 961,441 | |
Loan Payable | 418,758 | 446,519 | |
Accrued Interest – Loans Payable | 13,402 | 12,496 | |
Total Current Liabilities | 1,667,413 | 1,604,173 | |
STOCKHOLDERS’ DEFICIT | |||
Capital Stock, $0.001 par value | |||
75,000,000 | common shares authorized | ||
17,652,082 and 17,652,082 common shares issued and outstanding at February 28, 2015 and May 31, 2014, respectively |
17,652 |
17,652 | |
Additional Paid-in Capital | 1,705,628 | 1,705,628 | |
Accumulated other Comprehensive Loss | 44,284 | 14,138 | |
Deficit Accumulated | (3,355,384) | (3,230,908) | |
Total Stockholders’ Deficit | (1,587,820) | (1,493,490) | |
Total Liabilities and Stockholders’ Deficit | $ 79,593 | $ 110,683 | |
SEE ACCOMPANYING NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
F-1 |
PREAXIA HEALTH CARE PAYMENT SYSTEMS INC.
CONSOLIDATED STATEMENT OF OPERATIONS AND COMPREHENSIVE LOSS (UNAUDITED)
(Stated in U.S. Dollars)
Three months ended | Nine months ended | |||
February 28, | February 28, | |||
2015 | 2014 | 2015 | 2014 | |
Expenses | ||||
Consulting fees | $ 30,000 | $ 30,000 | $ 90,000 | $ 90,000 |
Professional fees | - | - | - | 19,706 |
Office and administration | 2,159 | 4,778 | 8,080 | 11,923 |
Research and development | - | - | - | 22,641 |
Amortization Software | 8,512 | - | 25,538 | - |
Wages and benefits | - | - | - | - |
Rent | - | - | - | - |
Total Operating Loss | 40,671 | 34,778 | 123,618 | 144,270 |
Operating loss | (40,671) | (34,778) | (123,618) | (144,270) |
Other Income (Expenses) | ||||
Other income | - | - | 48 | 1 |
Interest income | - | - | - | - |
Interest expense | 654 | (987) | (906) | (2,278) |
Total Other Income (Expenses) | 654 | (987) | (858) | (2,277) |
Net loss | $ (40,017) | $ (35,765) | $ (124,476) | $ (146,547) |
Other comprehensive income: | ||||
Foreign Currency transaction | - | 1,764 | - | 7,549 |
Foreign currency translation | 23,959 | 299 | 30,146 | 166 |
Comprehensive loss for period | $ (16,058) | $ (33,702) | $ (94,330) | $ (138,832) |
Basic and diluted loss per share | (.00) | (.00) | (0.01) | (0.01) |
Weighted average number of shares outstanding |
17,652,082 |
16,652,082 |
17,652,082 | 16,652,082 |
SEE ACCOMPANYING NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
F-2 |
PREAXIA HEALTH CARE PAYMENT SYSTEMS INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ DEFICIT
(Stated in U.S. Dollars)
Accumulated | |||||||
Additional | Stock | Other | |||||
Common Stock | Paid-in | Subscription | Comprehensive | Retained | |||
Shares | Amount | Capital | Receivable | Income | Earnings | Total | |
Balance, May 31, 2012 | 17,652,082 | 17,652 | 1,620,797 | (170) | (1,545) | (2,823,497) | (1,186,765) |
Common shares issued for cash | 170,002 | 170 | 84,831 | 85,001 | |||
Stock Subscription Receivable | (170,002) | (170) | 170 | - | - | - | |
Foreign Currency Translation Adjustment | - | - | - | 305 | 305 | ||
Net Loss for Period | - | - | - | - | - | (225,705) | (225,705) |
Balance, May 31, 2013 | 17,652,082 | $ 17,652 | $ 1,705,628 | - | $ (1,240) | $(3,049,203) | $(1,327,164) |
Net Loss for period | (181,704) | (181,704) | |||||
Foreign Currency Translation Adjustment | 15,378 | 15,378 | |||||
Balance, May 31, 2014 | 17,652,082 | $17,652 | $1,705,628 | 14,138 | (3,230,908) | (1,493,490) | |
Net Loss for period | (124,476) | (124,476) | |||||
Foreign Currency Translation Adjustment | 30,146 | 30,146 | |||||
Balance, February 28, 2015 (UNAUDITED) | 17,652,082 | $17,652 | $1,705,628 | 44,284 | (3,355,384) | (1,587,820) |
SEE ACCOMPANYING NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
F-3 |
PREAXIA HEALTH CARE PAYMENT SYSTEMS INC.
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
(Stated in U.S. Dollars)
Nine months ended | ||
February 28, | ||
2015 | 2014 | |
Cash Flows from Operating Activities | ||
Net loss | $ (124,476) | $ (138,999) |
Adjustments to reconcile net loss to net cash used in operating activities: | ||
Amortization of Software | 25,538 | - |
Changes in operating assets and liabilities: | ||
Decrease (increase) in trade receivables | - | - |
Decrease (increase) in rent deposit | - | - |
Increase (decrease) in accounts payable – related party | 95,896 | 141,651 |
Increase (decrease) in accounts payable and accrued liabilities |
(3,475) |
(5,913) |
Increase (decrease) in accrued interest | 906 | 2,279 |
Cash Flows used in operating activities | (5,611) | (982) |
Cash Flow from Investing Activities | ||
Cash to Acquire Software | - | - |
Cash received from Note Receivable | - | - |
Cash Acquired from business combination | - | - |
Cash flows used in investing activities | - | - |
Cash Flows from Financing Activities | ||
Overdraft in bank | - | - |
Proceeds from loan payable – related party | - | - |
Repayment of loan payable | (30,087) | - |
Proceeds from loan payable – Convertible Debenture | - | - |
Proceeds from sale of common stock | - | - |
Cash flows provided by financing activities | (30,087) | - |
Effect of exchange rate changes on cash | 30,146 | (885) |
Increase (decrease) in cash during the period | (5,552) | (1,867) |
Cash, beginning of period | 8,532 | 13,251 |
Cash, end of period | $ 2,980 | $ 11,384 |
Supplemental Disclosure: | ||
Non-Cash Investing and Financing Transactions: | ||
Common stock issued for acquisition of subsidiary | $ - | $ - |
Common stock issued for debt | $ - | $ - |
SEE ACCOMPANYING NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
F-4 |
PREAXIA HEALTH CARE PAYMENT SYSTEMS INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
February 28, 2015 and May 31, 2014
Note 1 – Organization and Description of Business
PreAxia Health Care Payment Systems Inc. (the “Company”) was incorporated in the State of Nevada on January 28, 2008. The Company is devoting substantially all of its present efforts to establish a new business and none of its planned principal operations have commenced. The primary operations of the Company will eventually be undertaken by PreAxia Canada. PreAxia Canada is in the process of developing an online access system creating a health savings account that allows card payments and processing services to third-party administrators, insurance companies and others. PreAxia Canada Inc. was incorporated pursuant to the laws of the Province of Alberta on January 28, 2008. PreAxia Canada Inc. is a wholly owned subsidiary of the Company.
Note 2 – Summary of Significant Accounting Policies
Basis of presentation
The Company’s financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”).
Reclassification
Certain prior period amounts in the condensed financial statements have been reclassified to conform to current period presentation.
Unaudited Interim Financial Information
The accompanying unaudited consolidated financial statements of PreAxia Health Care Payment Systems Inc. (the “Company”) have been prepared in accordance with Securities and Exchange Commission requirements for interim financial statements. Therefore, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. The consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements for the year ended May 31, 2014.
The interim consolidated financial information is unaudited. In the opinion of management, all adjustments necessary to present fairly the financial position as of February 28, 2015, and the results of operations, and cash flows presented herein have been included in the consolidated financial statements. All such adjustments are of a normal and recurring nature. Interim results are not necessarily indicative of results of operations for the full year.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and PreAxia Canada. All inter-company accounts and transactions have been eliminated in consolidation.
Going Concern
These consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States applicable to a going concern, which assumes that the Company will be able to meet its obligations and continue its operations for its next fiscal year. Realization values may be substantially different from carrying values as shown and these consolidated financial statements do not give effect to adjustments that would be necessary to the carrying values and classification of assets and liabilities should the Company be unable to continue as a going concern. As of February 28, 2015, the Company had not yet achieved profitable operations, has accumulated losses of $3,355,384 has negative working capital of $1,664,433 and expects to incur further losses in the development of its business, all of which raises substantial doubt about the Company’s ability to continue as a going concern. The Company’s ability to continue as a going concern is dependent upon its ability to generate future profitable operations and/or to obtain the necessary financing to meet its obligations and repay its liabilities arising from normal business operations when they come due.
F-5 |
Management has no formal plan in place to address this concern but believes the Company will be able to obtain additional funds by equity financing and/or related party advances; however there is no assurance of additional funding being available.
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 financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates include the estimated useful lives of property and equipment. 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 PreAxia Canada 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 exchange gains and losses are included in the Statement of Operations and Comprehensive Loss.
Fair value of financial instruments
The Company follows paragraph 825-10-50-10 of the FASB Accounting Standards Codification for disclosures about fair value of its financial instruments and paragraph 820-10-35-37 of the FASB Accounting Standards Codification (“Paragraph 820-10-35-37”) to measure the fair value of its financial instruments. Paragraph 820-10-35-37 establishes a framework for measuring fair value in accounting principles generally accepted in the United States of America (U.S. GAAP), and expands disclosures about fair value measurements. To increase consistency and comparability in fair value measurements and related disclosures, Paragraph 820-10-35-37 establishes a fair value hierarchy which prioritizes the inputs to valuation techniques used to measure fair value into three (3) broad levels. The fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The three (3) levels of fair value hierarchy defined by Paragraph 820-10-35-37 are described below:
Level 1 | Quoted market prices available in active markets for identical assets or liabilities as of the reporting date. | |
Level 2 | Pricing inputs other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the reporting date. |
Level 3 | Pricing inputs that are generally observable inputs and not corroborated by market data. |
F-6 |
The carrying amount of the Company’s financial assets and liabilities, such as cash, prepaid expenses and accrued expenses approximate their fair value because of the short maturity of those instruments. The Company’s notes payable approximate the fair value of such instruments based upon management’s best estimate of interest rates that would be available to the Company for similar financial arrangements at February 28, 2015.
The Company does not have any assets or liabilities measured at fair value on a recurring or a non-recurring basis.
Gain (Loss) Per Share
Gain (loss) per share of common stock is computed by dividing the net loss by the weighted average number of common shares outstanding during the period.
Research and Development 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.
The Company has capitalized certain costs in the development of our proprietary software (computer software to be sold, leased or licensed) for the period after technological feasibility was determined and prior to our marketing and initial sales.
Website development costs have been capitalized, under the same criteria as our marketed software.
Capitalized software costs are stated at cost. The estimated useful life of costs capitalized is evaluated for each specific project. The software is being amortized over three years.
Impairment of long-lived assets
The Company follows paragraph 360-10-05-4 of the FASB Accounting Standards Codification for its long-lived assets. The Company’s long-lived assets, which includes computer equipment is reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable.
The Company assesses the recoverability of its long-lived assets by comparing the projected undiscounted net cash flows associated with the related long-lived asset or group of long-lived assets over their remaining estimated useful lives against their respective carrying amounts. Impairment, if any, is based on the excess of the carrying amount over the fair value of those assets. Fair value is generally determined using the asset’s expected future discounted cash flows or market value, if readily determinable. If long-lived assets are determined to be recoverable, but the newly determined remaining estimated useful lives are shorter than originally estimated, the net book values of the long-lived assets are depreciated over the newly determined remaining estimated useful lives.
F-7 |
The Company determined that there were no impairments of long-lived assets as of February 28, 2015.
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
The Company follows paragraph 605-10-S99-1 of the FASB Accounting Standards Codification for revenue recognition. The Company will recognize revenue when it is realized or realizable and earned. The Company considers revenue realized or realizable and earned when all of the following criteria are met: (i) persuasive evidence of an arrangement exists, (ii) the product has been shipped or the services have been rendered to the customer, (iii) the sales price is fixed or determinable, and (iv) collectability is reasonably assured.
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 uncertainty income taxes. 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.
Cash flows reporting
The Company adopted paragraph 230-10-45-24 of the FASB Accounting Standards Codification for cash flows reporting, classifies cash receipts and payments according to whether they stem from operating, investing, or financing activities and provides definitions of each category, and uses the indirect or reconciliation method (“Indirect method”) as defined by paragraph 230-10-45-25 of the FASB Accounting Standards Codification to report net cash flow from operating activities by adjusting net income to reconcile it to net cash flow from operating activities by removing the effects of (a) all deferrals of past operating cash receipts and payments and all accruals of expected future operating cash receipts and payments and (b) all items that are included in net income that do not affect operating cash receipts and payments. The Company reports the reporting currency equivalent of foreign currency cash flows, using the current exchange rate at the time of the cash flows and the effect of exchange rate changes on cash held in foreign currencies is reported as a separate item in the reconciliation of beginning and ending balances of cash and cash equivalents and separately provides information about investing and financing activities not resulting in cash receipts or payments in the period pursuant to paragraph 830-230-45-1 of the FASB Accounting Standards Codification.
F-8 |
Subsequent events
The Company follows the guidance in Section 855-10-50 of the FASB Accounting Standards Codification for the disclosure of subsequent events. The Company will evaluate subsequent events through the date when the financial statements were issued. Pursuant to ASU 2010-09 of the FASB Accounting Standards Codification, the Company as an SEC filer considers its financial statements issued when they are widely distributed to users, such as through filing them on EDGAR.
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 financial statements. The accounting pronouncements and updates issued subsequent to the date of these financial statements that were considered significant by management were evaluated for the potential effect on these consolidated financial statements. Management does not believe any of the subsequent updates will have a material effect on these consolidated financial statements as presented and does not anticipate the need for any future restatement of these consolidated financial statements because of the retro-active application of any accounting pronouncements issued subsequent to February 28, 2015 through the date these financial statements were issued.
Note 4 – Related Party Transactions
Accounts Payable to Related Parties
During the nine months ended February 28, 2015, the Company’s President/Chief Executive Officer, Tom Zapatinas, invoiced $90,000 for management services rendered to the Company. As at February 28, 2015, Accounts payable – related party includes a total of $1,057,337 due and payable to Mr. Zapatinas. There are no terms of repayment for this payable.
As of February 28, 2015 and May 31, 2014, the Company had loans payable to shareholders totalling $418,758 and 446,519. The terms of repayment are 30 days after demand is made by the loanholder.
Note 5 – Stockholders’ Deficit
Common Stock
No shares were issued during the period.
Note 6 – Contingencies
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.
Note 7 - Subsequent events
Mr Jim Kenney has resigned from the Board of Directors effective February 2nd, 2015 citing his work schedule would no longer allow him to give the position the necessary time to contribute to the company. Management has evaluated subsequent events pursuant to the requirements of ASC Topic 855 and has determined that no other material subsequent events exist.
F-9 |
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 dollar 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 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, 2014, 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 subsidiary, PreAxia Canada Inc. (“PreAxia Canada”) formerly PreAxia Health Care Payment System Inc. and, before that, H Pay Card Ltd., unless the context clearly requires otherwise.
General Overview
PreAxia and PreAxia Canada are companies which offer comprehensive suite of solutions and services directed at the emerging health payment market, specifically the opportunities tied to the growth of Health Spending Accounts (“HSAs”) and generally as a payment service between health care providers and consumers. Put differently, PreAxia offers a health care payment model that incorporates certain attributes of both PayPal and virtual banking. There is a 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.
6 |
Description of Health Spending Account (“HSA”)
An HSA is a uniquely designed bank 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.
Intellectual Property and Patent Protection
At present, PreAxia has two trademarks pending. One is for the company name (PreAxia) and another is for the company logo design.
Plan of Operation
Over the next twelve months, we plan to:
(a) | Raise additional capital to execute our business plans; | |
(b) | Penetrate the health care processing market in Canada, and worldwide, by continuing to develop innovative health care processing products and services; | |
(c) | Build up a network of strategic alliances with several types of health insurance companies, governments and other alliances in various vertical markets; and | |
(d) | Fill the positions of senior management sales, administrative and engineering positions. |
Cash Requirements
After a further review of business opportunities with industry consultants, for the next twelve months and given that we meet our forecasted expenses, we plan to spend a total of approximately $1,550,000 in implementing our business plan of development and marketing of health care processing products and services. We do not expect to generate any revenues this year, therefore we will be required to raise a total of $3,217,000 to complete our business plan and pay our outstanding debts of approximately $1,667,000. Our working capital requirements for PreAxia Canada for the next twelve months are estimated at $1,550,000 distributed, as follows:
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Estimated Expenses | |||||
General and Administrative | $ | 300,000 | |||
Research and Development | 450,000 | ||||
Marketing and Education | 450,000 | ||||
Professional Services | 350,000 | ||||
Total | $ | 1,550,000 |
Our estimated expenses over the next twelve months are broken down as follows:
1. | General and Administrative. We anticipate spending approximately $300,000 on general and administration costs in the next twelve months, which will include staff fees, office rent, office supplies, transfer agents, filing fees, bank service charges, salaries for our administration, interest expense and travel, which includes airfare, meals, car rentals and accommodations. | |
2. | Research and Development. We anticipate that we may spend approximately $450,000 in the next twelve months in the development and acquisition of software for our processing services and products. | |
3. | Marketing and Education. We anticipate spending approximately $450,000 as the costs of staff and personnel, marketing and promoting our Company, our products and services, and educating the public to attract new accounts. | |
4. | Professional Services. We anticipate that we may spend up to $350,000 in the next twelve months for professional services, which includes, stock-based compensation, accounting, auditing, legal fees and investor relations. | |
Liquidity and Capital Resources
As of February 28, 2015, PreAxia’s cash balance was $2,980 compared to $8,532 as at May 31, 2014. Our Company will be required to raise capital to fund our operations. PreAxia’s cash on hand is currently its only source of liquidity. PreAxia had a working capital deficit of $1,664,433 as of February 28, 2015 compared with a working capital deficit of $1,595,641 as of May 31, 2014.
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 development stage. We project that we will require an estimated additional $3,217,000 over the next twelve month period to fund our operating cash shortfall and to complete our business plan. Our company plans to raise the capital required to satisfy our immediate short-term needs and additional capital required to meet our estimated funding requirements for the next twelve months primarily through the private placement of our equity securities or by way of loans or such other means as 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 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.
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Our working capital (deficit) as at February 28, 2015 compared to May 31, 2014 is summarized as follows:
Working Capital
February 28, 2015 | May 31, 2014 | |||||||
Current Assets | $ | 2,980 | $ | 8,532 | ||||
Current Liabilities | 1,667,413 | 1,604,173 | ||||||
Working Capital (deficit) | $ | (1,664,433 | ) | $ | (1,595,641 | ) |
The increase in our working capital deficit of $68,792 was primarily due to an increase in our accounts payable related party.
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
The following summary of our results of operations should be read in conjunction with our audited financial statements for the year ended May 31, 2014.
For the three month period ended February 28, 2015 and February 28, 2014
Our operating results for the three month period ended February 28, 2015 compared to the three month period ended February 28, 2014 are described below:
Revenue
We have not earned any revenues since our inception and we do not anticipate earning revenues until such time as we have completed the development of our Health Card software and obtained new customers.
Expenses
Our operating loss for the three month period ended February 28, 2015 was $40,671 compared to $34,778 for the three month period ended February 28, 2014. The increase in loss of $5,893 for the three month period ending February 28, 2015 is due to a decrease in the amount of $2,619 in office and administration fees and an increase in amortization of software of 8,512.
Research and Development
There were no Research and Development expenses during the three month period ended February 28, 2015 or February 28, 2014.
Wages and Benefits
There were no wages and benefits during the three month period ended February 28, 2015 or February 28, 2014.
Office and Administration
Office and administration expenses decreased by $2,619 for the period ended February 28, 2015 compared to February 28, 2014, due to a decrease in expenses.
Professional Fees
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There were no Professional fees during the three month period ended February 28, 2015 or February 28, 2015.
Rent
There were no rent expenses during the three months ended February 28, 2015 or February 28, 2014 due to the closure of the Calgary main office.
Amortization of Software
Amortization of software commenced in August 2014 and totaled $8,512 for the three months ended February 28, 2015.
For the nine month period ended February 28, 2015 and February 28, 2014
Our operating results for the nine month period ended February 28, 2015 compared to the nine month period ended February 28, 2014 are described below:
Revenue
We have not earned any revenues since our inception and we do not anticipate earning revenues until such time as we have completed the development of our Health Card software and obtained new customers.
Expenses
Our operating loss for the nine month period ended February 28, 2015 was $123,618 compared to $144,270 for the nine month period ended February 28, 2014. The decrease in loss of $20,652 for the nine month period ending February 28, 2015 is due to a decrease in expenses of $22,641 for research and development, a decrease in the amount of $19,706 for professional fees, a decrease in the amount of $3,843 in office and administration fees and an increase in amortization of software of 25,538.
Research and Development
Research and Development expenses decreased by $22,641 in the nine month period ended February 28, 2015 compared to the nine month period ended February 28, 2014, as many of the major project components were completed.
Wages and Benefits
There were no wages and benefits during the nine month period ended February 28, 2015 or February 28, 2014.
Office and Administration
Office and administration expenses decreased by $3,843 for the period ended February 28, 2015 compared to February 28, 2014, due to a decrease in expenses.
Professional Fees
Professional fees decreased by $19,706 during the nine months ended February 28, 2015 compared to February 28, 2014, as there was no requirement for accounting and legal fees.
Rent
There were no rent expenses during the nine months ended February 28, 2015 or February 28, 2014 due to the closure of the Calgary main office.
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Amortization of Software
Amortization of software commenced in August 2014 and totaled $25,538 for the nine months ended February 28, 2015.
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.
Revenue recognition
PreAxia recognizes revenue in accordance with the provision of the Securities and Exchange Commission which establishes guidance in applying generally accepted accounting principles to revenue recognition in financial statements. This provision requires that four basic criteria must be met before revenue can be recognized: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services rendered; (3) the price to the buyer is fixed and determinable; and (4) collectability is reasonably assured.
Research and development
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 has capitalized certain costs in the development of our proprietary software (computer software to be sold, leased or licensed) for the period after technological feasibility was determined and prior to our marketing and initial sales.
Website development costs have been capitalized, under the same criteria as our marketed software.
Capitalized software costs are stated at cost. The estimated useful life of costs capitalized is evaluated for each specific project. The software is being amortized over three years.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
As required by Rules 13a-15 or 15d-15 under the Securities Exchange Act of 1934, we have carried out an evaluation of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this quarterly report, being February 28, 2015. This evaluation was carried out under the supervision and with the participation of our management, including our principal executive officer and principal financial officer.
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Our management does not expect that our disclosure controls or our internal control over financial reporting will prevent all error and fraud. A control system, no matter how well conceived and operated, can provide only reasonable, but not absolute, assurance that the objectives of a control system are met. Further, any control system reflects limitations on resources, and the benefits of a control system must be considered relative to its costs. These limitations also include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of a control. The design of a control system is also based upon certain assumptions about potential future conditions; over time, currently implemented controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Due to the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and may not be detected.
Based upon their evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were not effective as at the end of the period covered by this quarterly report.
Our company determined that our disclosure controls and procedures were not effective as of November 30, 2014 due to the following two material weaknesses in our internal control over financial reporting that we indentified in our annual report on Form 10-K for the fiscal year ended May 31, 2014: (i) we do not have accounting staff with sufficient technical accounting knowledge relating to accounting for U.S. income taxes and complex US GAAP matters; and (ii) we failed to file our corporate tax returns for 2008, 2009, 2010, 2011, 2012 or 2013. As we disclosed in our annual report on Form 10-K for the fiscal year ended May 31, 2014, we intend to take appropriate and reasonable steps to make the necessary improvements to remediate these material weaknesses. In particular, we intend to hire staff with U.S. GAAP expertise if we can obtain additional financing and hire professionals to prepare and complete the filing of our corporate tax returns.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal controls over financial reporting that occurred during the fiscal quarter ended February 28, 2015 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.
Risks Associated with Our Common Stock
Our common stock is traded on the "Over-the-Counter Bulletin Board," which may make it more difficult for investors to resell their shares due to suitability requirements.
Our common stock is currently quoted for trading on Over the Counter Bulletin Board (“OTCBB”) under the symbol PAXH.OB where we expect it to remain in the foreseeable future. Broker-dealers often decline to trade in OTCBB stocks given the market for such securities is often limited, the stocks are more volatile, and the risk to investors is greater. These factors may reduce the potential market for our common stock by reducing the number of potential investors. This may make it more difficult for investors in our common stock to sell shares to third parties or to otherwise dispose of their shares. This could cause our stock price to decline.
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Because we can issue additional shares of our common stock or preferred stock, purchasers of our common stock may experience dilution in their ownership of our company in the future.
We are authorized to issue up to 75,000,000 shares of common stock. As of April 17, 2015, there were 17,652,082 shares of our common stock issued and outstanding. Our board of directors has the authority to cause our company to issue additional shares of common stock without the consent of any of our stockholders. Consequently, our stockholders may experience dilution in their ownership of our company in the future.
We do not intend to pay any dividends on our common stock in the foreseeable future.
We do not currently anticipate declaring and paying dividends to our stockholders in the foreseeable future. It is our current intention to apply net earnings, if any, in the foreseeable future to increasing our working capital. We currently have no material revenues and a history of losses, so there can be no assurance that we will ever have sufficient earnings to declare and pay dividends to the holders of shares of our common stock, and in any event, a decision to declare and pay dividends is at the sole discretion of our board of directors, which currently do not intend to pay any dividends on shares of our common stock for the foreseeable future.
Our stock is a penny stock. Trading of our stock may be restricted by the Securities and Exchange Commission’s penny stock regulations which may limit a stockholder’s ability to buy and sell our stock.
Our stock is a penny stock. The Securities and Exchange Commission has adopted Rule 15g-9 which generally defines “penny stock” to be any equity security that has a market price (as defined) less than $5.00 per share or an exercise price of less than $5.00 per share, subject to certain exceptions. Our securities are covered by the penny stock rules, which impose additional sales practice requirements on broker-dealers who sell to persons other than established customers and “accredited investors”. The term “accredited investor” refers generally to institutions with assets in excess of $5,000,000 or individuals with a net worth in excess of $1,000,000 or annual income exceeding $200,000 or $300,000 jointly with their spouse. The penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document in a form prepared by the Securities and Exchange Commission which provides information about penny stocks and the nature and level of risks in the penny stock market. The broker-dealer also must provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson in the transaction and monthly account statements showing the market value of each penny stock held in the customer’s account. The bid and offer quotations, and the broker-dealer and salesperson compensation information, must be given to the customer orally or in writing prior to effecting the transaction and must be given to the customer in writing before or with the customer’s confirmation. In addition, the penny stock rules require that prior to a transaction in a penny stock not otherwise exempt from these rules; the broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser’s written agreement to the transaction. These disclosure requirements may have the effect of reducing the level of trading activity in the secondary market for the stock that is subject to these penny stock rules. Consequently, these penny stock rules may affect the ability of broker-dealers to trade our securities. We believe that the penny stock rules discourage investor interest in and limit the marketability of our common stock.
The Financial Industry Regulatory Authority sales practice requirements may also limit a stockholder’s ability to buy and sell our stock.
In addition to the “penny stock” rules described above, the Financial Industry Regulatory Authority (“FINRA”) has adopted rules that require that when recommending an investment to a customer, a broker-dealer must have reasonable grounds for believing that the investment is suitable for that customer. Prior to recommending speculative low priced securities to their non-institutional customers, broker-dealers must make reasonable efforts to obtain information about the customer’s financial status, tax status, investment objectives and other information. Under interpretations of these rules, FINRA believes that there is a high probability that speculative low priced securities will not be suitable for at least some customers. The FINRA requirements make it more difficult for broker-dealers to recommend that their customers buy our common stock, which may limit your ability to buy and sell our common stock and have an adverse effect on the market for shares of our common stock.
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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
No new shares were issued in the nine months ended February 28, 2015.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS
Exhibit Number | Description |
3.1 | Articles of Incorporation (Incorporated by reference to the Exhibits filed with the Form SB-2 filed with the SEC on March 16, 2006) |
3.2 | Certificate of Amendment to Articles of Incorporation (Incorporated by reference to the Exhibits filed with Schedule 14C on November 14, 2008) |
3.3 | Bylaws (Incorporated by reference to the Exhibits filed with the Form SB-2 filed with the SEC on March 16, 2006) |
3.4 | Amended Bylaws (Incorporated by reference to the Exhibits filed with the Form SB-2 filed with the SEC on March 16, 2006) |
10.3 | Acquisition Agreement dated April 22, 2008 (Incorporated by reference to the Exhibits filed with the Form 8-K on May 19, 2008) |
10.4 | Promissory note dated June 1, 2011 issued to Macleod Projects Inc. (Incorporated by reference to the Exhibits filed with the annual report on Form 10-K for the year ended May 31, 2011 filed with the SEC on October 21, 2011) |
10.5 | Promissory note dated August 5, 2011 issued to Macleod Projects Inc. (Incorporated by reference to the Exhibits filed with the annual report on Form 10-K for the year ended May 31, 2011 filed with the SEC on October 21, 2011) |
31.1* | Section 302 Certification of Principal Executive Officer |
32.1* | Certification Pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
101.INS* | XBRL INSTANCE DOCUMENT |
101.SCH* | XBRL TAXONOMY EXTENSION SCHEMA |
101.CAL* | XBRL TAXONOMY EXTENSION CALCULATION LINKBASE |
101.DEF* | XBRL TAXONOMY EXTENSION DEFINITION LINKBASE |
101.LAB* | XBRL TAXONOMY EXTENSION LABEL LINKBASE |
101.PRE* | XBRL TAXONOMY EXTENSION PRESENTATION LINKBASE |
* Filed herewith.
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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 Officers and Chief Financial Officers
(Principal Executive Officer)
Date: April 20, 2015
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