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 September 30, 2009
-------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 for the transition period from to
Commission File Number:0-53270
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PREPAID CARD HOLDINGS, INC.
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(Exact name of registrant as specified in its charter)
Nevada 76-0222016
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(State or other jurisdiction of (I. R. S. Employer Identification No.)
incorporation or organization)
20251 S.W. Acacia Street #200, Newport Beach, CA 92660
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(Address of principal executive offices) (Zip Code)
(949) 250-9556 ext 112
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Issuer's telephone number
18500 Von Karman, Suite 530, Irvine, CA 92612
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(Former name, former address and former fiscal year, if changed since last
report)
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 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)
Indicate by check mark whether the registrant is a shell company (as defined in
rule 12b-2 of the Exchange Act). Yes [ ] No [x]
The number of shares of the registrant's common stock outstanding as of
September 30, 2009 was 403,903,890 shares.
PPDC3Q0901
PREPAID CARD HOLDINGS, INC.
---------------------------
INDEX TO QUARTERLY REPORT ON FORM 10-Q
PART I. FINANCIAL INFORMATION PAGE NO.
- ------------------------------ --------
Item 1. Condensed Consolidated Interim Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets at September 30, 2009 (unaudited)......F-3
Condensed Consolidated Statements of Operations for the nine months ended
September 30, 2009 (Unaudited)...............................................F-4
Condensed Consolidated Statements of Changes in Stockholders' Equity for
the nine months ended September 30, 2009 (Unaudited).........................F-6
Condensed Consolidated Statement of Cash Flows for the nine months ended
September 30, 2009 (Unaudited)...............................................F-7
Notes to Condensed Consolidated Interim Financial Statements (unaudited).....F-8
Item 2. Management's Discussion and Analysis..............................16
Item 3. Quantitative and Qualitative Disclosures About Market Risk........19
Item 4. Controls and Procedures...........................................20
PART II. OTHER INFORMATION
- ---------------------------
Item 1. Legal Proceedings.................................................20
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.......21
Item 3. Defaults Upon Senior Securities...................................21
Item 4. Submission of Matters to a Vote of Security Holders...............21
Item 5. Other Information.................................................21
Item 6. Exhibits..........................................................21
Signatures....................................................................22
Page 2
PPDC3Q0902
PART I. FINANCIAL INFORMATION
------------------------------
ITEM 1. CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
PREPAID CARD HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2009
SEPTEMBER 30, DECEMBER 31,
2009 2008
--------------- --------------
ASSETS (UNAUDITED)
Current Assets
Cash and cash equivalents $ 78,528 $ 83,011
Receivables 198,839 79,472
Prepaid expenses 39,071 33,100
--------------- --------------
Total Current Assets 316,438 195,583
Property and Equipment, net 4,796 4,420
Other Assets
Deposits 10,000 10,000
--------------- --------------
Total Assets $ 331,234 $ 210,003
=============== ==============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities
Accounts payable and accrued expenses $ 316,288 $ 272,099
Deferred liability 88,549 -
Interest payable - related party 12,933 2,768
Note payable - related party 307,944 197,269
Note payable 86,784 58,551
--------------- --------------
Total Current Liabilities 812,499 530,687
Long Term Liabilities
Note payable - related party 341,779 466,960
Note payable 83,981 124,338
--------------- --------------
Total Long Term Liabilities 425,760 591,298
--------------- --------------
Total Liabilities 1,238,258 1,121,985
Commitments and Contingencies - -
Stockholders' Deficit
Common stock - authorized 1,000,000,000
shares, $0.001 per share, 403,903,890 shares
issued and outstanding 403,904 403,904
Additional paid in capital 2,057,597 2,057,597
Accumulated deficit (3,368,525) (3,373,483)
--------------- --------------
Total Stockholders' Deficit (907,024) (911,982)
--------------- --------------
Total Liabilities and Stockholders' Deficit $ 331,234 $ 210,003
=============== ==============
The accompanying notes are an integral part of the unaudited consolidated
financial statements.
F-3
PPDC3Q0903
PREPAID CARD HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
QUARTER ENDED SEPTEMBER 30, 2009
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
2009 2008 2009 2008
--------------- --------------- --------------- ---------------
REVENUES
Card operations $ 532,130 $ 259,808 $ 1,329,905 $ 387,531
Processing services 115,312 144,294 391,489 285,437
--------------- --------------- --------------- ---------------
Total revenues 647,441 404,102 1,721,393 672,968
COST OF SALES 325,708 157,626 661,433 335,189
--------------- --------------- --------------- ---------------
GROSS PROFIT 321,733 246,476 1,059,960 337,779
OPERATING EXPENSES
Sales and marketing 10,761 144,798 122,795 1,148,681
Professional fees 24,250 238,234 178,690 785,878
Depreciation 243 343 729 1,029
General and administrative 319,179 293,221 722,757 998,748
Related party - rent expense - 17,151 - 71,661
Derivative expense - 98,438 - 98,438
--------------- --------------- --------------- ---------------
Total operating expenses 354,432 792,185 1,024,970 3,104,435
--------------- --------------- --------------- ---------------
INCOME (LOSS) FROM OPERATIONS (32,699) (545,709) 34,990 (2,766,656)
NON-OPERATING INCOME (EXPENSES)
Interest income 96 - 96 -
Interest expense (5,136) (1,489) (13,618) (11,491)
Interest expense - related party (4,542) (9,198) (15,701) (20,444)
Other (17) 133 34 1,549
--------------- --------------- --------------- ---------------
Total non- operating expenses (9,600) (10,554) (29,189) (30,386)
--------------- --------------- --------------- ---------------
Income (Loss) Before Income Taxes (42,299) (556,263) 5,801 (2,797,042)
F-4
PPDC3Q0904
Provision for income taxes - - (843) (865)
--------------- --------------- --------------- ---------------
Net Income (Loss) (42,299) (556,263) 4,958 (2,797,907)
=============== =============== =============== ===============
Income (Loss) per common share
- basic and diluted (0.0003) (0.0013) 0.0000 (0.0058)
=============== =============== =============== ===============
Weighted average shares outstanding
during the period - basic and diluted 403,903,890 436,992,764 403,903,890 483,212,842
=============== =============== =============== ===============
F-5
PPDC3Q0905
PREPAID CARD HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
QUARTER ENDED SEPTEMBER 30, 2009
COMMON STOCK PREFERRED STOCK ADDITIONAL RETAINED
SHARES AMOUNT SHARES AMOUNT PAID IN CAPITAL EARNINGS (DEFICIT) TOTAL
----------- -------- --------- ------- ---------------- ------------------- ----------
Balance - January 1, 2009 403,903,890 $403,904 - $ - $ 2,057,597 $ (3,373,483) $(911,982)
Net income - - - - - 4,958 4,958
----------- -------- --------- ------- ---------------- ------------------- ----------
Balance - September 30, 2009 403,903,890 $403,904 - $ - $ 2,057,597 $ (3,368,525) $(907,024)
=========== ======== ========= ======= ================ =================== ==========
The accompanying notes are an integral part of the unaudited consolidated
financial statements
F-6
PPDC3Q0906
PREPAID CARD HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
QUARTER ENDED SEPTEMBER 30, 2009
FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 2009 SEPTEMBER 30, 2008
-------------------- --------------------
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income (Loss) $ 4,958 $ (2,797,907)
Depreciation 729 1,029
Common stock issued - 337,231
(Increase) decrease in current assets
Accounts receivable (119,367) (46,438)
Due from affiliates - (125)
Prepaid expenses and deposits (5,971) (35,314)
Increase (Decrease) in current liabilities
Accounts payable and accrued expenses 54,355 680,953
Deferred liability 88,549 -
-------------------- --------------------
Net Cash Provided By (Used In) Operating Activities 23,252 (1,860,571)
CASH FLOWS FROM INVESTING ACTIVITIES
Business combination and fixed assets (1,105) (734,067)
-------------------- --------------------
Net Cash Used in Investing Activities (1,105) (734,067)
CASH FLOWS FROM FINANCING ACTIVITIES
Cash proceeds from issuance of note payable - 1,103,125
Cash payments on notes payable (26,630) (410,068)
Cash proceeds from issuance of common stock - 1,425,000
Cash proceeds from collections of subscriptions receivable - 114,163
-------------------- --------------------
Net Cash Used In Financing Activities (26,630) 2,232,220
-------------------- --------------------
NET INCREASE (DECREASE) IN CASH (4,483) (362,418)
CASH AND CASH EQUIVALENTS - BEGINNING BALANCE 83,011 577,331
-------------------- --------------------
CASH AND CASH EQUIVALENTS - ENDING BALANCE $ 78,528 $ 214,913
==================== ====================
SUPPLEMENTAL DISCLOSURES:
Interest Paid $ 13,521 $ 31,395
Income Taxes Paid $ 800 $ -
The accompanying notes are an integral part of the unaudited consolidated
financial statements.
F-7
PPDC3Q0907
PREPAID CARD HOLDINGS, INC.
NOTES TO THE FINANCIAL STATEMENTS
SEPTEMBER 30, 2009
NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Organization and Line of Business
- -------------------------------------
Prepaid Card Holdings, Inc. formerly Berman Holdings, Inc. (the "Company"), was
incorporated under the name Nately National Corporation in the state of Nevada
on October 8, 1986 and then changed its name to National Health Care Alliance,
Inc. The Company was dormant until October 11, 2007 when it acquired Berman
Marketing Group, a wholly-owned subsidiary as its operating business. In October
2007, the name of the Company was changed from National Health Care Alliance,
Inc. to Berman Holdings, Inc. In March 2008, the Company acquired Merchant
Processing International, Inc. from a related party, and it became a
wholly-owned subsidiary of the Company. In May 2008, the Company changed its
name to Prepaid Card Holdings, Inc. The Company currently trades under the
symbol PPDC.PK on Pink OTC Markets Inc. which provides the leading inter-dealer
electronic quotation and trading system in the over-the-counter (OTC) securities
market.
The Company is in the prepaid general use debit, ATM, POS and signature based
card market. The Company's primary target audience is the non-banked and
underserved individuals in the country.
Basis of Presentation/Going Concern
- --------------------------------------
The accompanying consolidated financial statements have been prepared in
conformity with accounting principles generally accepted in the
country-regionplaceUnited States of America, which contemplate continuation of
the Company as a going concern. The Company has incurred consistent losses and
has a negative stockholders' equity. These conditions raise substantial doubt as
to the Company's ability to continue as a going concern. These consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty. These consolidated financial statements do not
include any adjustments relating to the recoverability and classification of
recorded asset amounts, or amounts and classification of liabilities that might
be necessary should the Company be unable to continue as a going concern. The
accompanying consolidated financial statements have been prepared on the accrual
basis of accounting in accordance with accounting principles generally accepted
in the United States.
Principles of Consolidation
- -----------------------------
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries Berman Marketing Group, Inc and Merchant
Processing International, Inc. All material inter-company balances and
transactions have been eliminated on consolidation. The acquisition of Merchant
Processing International, Inc. has been accounted for as a transfer of assets
under common control, and accordingly is accounted for in all periods presented.
F-8
PPDC3Q0908
Stock Based Compensation
- --------------------------
SFAS No. 123, "Accounting for Stock-Based Compensation," establishes and
encourages the use of the fair value based method of accounting for stock-based
compensation arrangements under which compensation cost is determined using the
fair value of stock-based compensation determined as of the date of grant and is
recognized over the periods in which the related services are rendered. For
stock based compensation, the Company recognizes an expense in accordance with
SFAS No. 123 and values the equity securities based on the fair value of the
security on the date of grant. For stock-based awards the value is based on the
market value for the stock on the date of grant. Stock option awards are valued
using the Black-Scholes option-pricing model.
The Company did not realize any professional services during the nine months
ended September 30, 2009 and therefore, did not record any stock based
compensation expense.
Use of Estimates
- ------------------
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue and expenses during
the reporting periods. Actual results could differ from these estimates.
Fair Value of Financial Instruments
- ---------------------------------------
For certain of the Company's financial instruments, including cash and cash
equivalents, other current assets, accounts payable, accrued interest and due to
related party, the carrying amounts approximate fair value due to their short
maturities.
Cash and Cash Equivalents
- ----------------------------
For purposes of the statements of cash flows, the Company defines cash
equivalents as all highly liquid debt instruments purchased with a maturity of
three months or less, plus all certificates of deposit.
Accounts Receivable
- --------------------
Accounts receivable consist of processing fees and charges from banks on the
amounts transacted for the previous month. The Company maintains reserves for
potential credit losses on accounts receivable. Management reviews the
composition of accounts receivable and analyzes historical bad debts, customer
concentrations, customer credit worthiness, current economic trends and changes
in customer payment patterns to evaluate the adequacy of these reserves.
Reserves are recorded primarily on a specific identification basis.
F-9
PPDC3Q0909
Allowance for doubtful debts amounted to $0 as of September 30, 2009 and
December 31, 2008, respectively.
Property and Equipment
- ------------------------
Property and equipment are carried at cost less accumulated depreciation.
Depreciation is provided using the straight-line method over the estimated
useful life of the assets from three to five years. Expenditures for maintenance
and repairs are charged to expense as incurred.
Concentration of Credit Risk
- -------------------------------
Financial instruments, which potentially subject the Company to concentrations
of credit risk, consist of cash and cash equivalents and accounts receivables.
The Company places its cash with high quality financial institutions and at
times may exceed the FDIC $250,000 insurance limit. The Company extends credit
based on an evaluation of the customer's financial condition, generally without
collateral. Exposure to losses on receivables is principally dependent on each
customer's financial condition. The Company monitors its exposure for credit
losses and maintains allowances for anticipated losses, as required.
Impairment of Long-Lived Assets
- ----------------------------------
SFAS No. 144 requires that long-lived assets to be disposed of by sale,
including those of discontinued operations, be measured at the lower of carrying
amount or fair value less cost to sell, whether reported in continuing
operations or in discontinued operations. SFAS No. 144 broadens the reporting
of discontinued operations to include all components of an entity with
operations that can be distinguished from the rest of the entity and that will
be eliminated from the ongoing operations of the entity in a disposal
transaction. SFAS No. 144 also establishes a "primary-asset" approach to
determine the cash flow estimation period for a group of assets and liabilities
that represents the unit of accounting for a long-lived asset to be held and
used.
Revenue Recognition
- --------------------
The Company recognizes revenues both from merchant processing services and
activity charges for card usage. These fees are based on individual transactions
and recorded at the time of occurrence.
For the merchant processing services, the Company receives revenues in the form
of commissions paid resulting from a percentage of credit card volume for the
retailers engaged. This revenue is recognized on a monthly basis under the
accrual basis of accounting.
For the Bank Freedom prepaid cards operations, we derive revenues through fees
charged to the cardholders. Those sources may include:
- - Interchange
- - Bill pay fees
- - Domestic and International ATM transaction fees
F-10
PPDC3Q0910
- - Debit purchase and PIN decline fees
- - Monthly maintenance fees
These fees are charged on the card and recognized as revenue immediately.
Income Taxes
- -------------
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes." Deferred taxes are provided on the liability
method whereby deferred tax assets are recognized for deductible temporary
differences, and deferred tax liabilities are recognized for taxable temporary
differences. Temporary differences are the differences between the reported
amounts of assets and liabilities and their tax bases. Deferred tax assets are
reduced by a valuation allowance when, in the opinion of management, it is more
likely than not that some portion or all of the deferred tax assets will be
realized. Deferred tax assets and liabilities are adjusted for the effects of
changes in tax laws and rates on the date of enactment.
Earnings (Loss) Per Share
- ----------------------------
The Company reports earnings (loss) per share in accordance with SFAS No. 128,
"Earnings per Share." Basic earnings (loss) per share is computed by dividing
income (loss) available to common shareholders by the weighted average number of
common shares available. Diluted earnings (loss) per share is computed similar
to basic earnings (loss) per share except that the denominator is increased to
include the number of additional common shares that would have been outstanding
if the potential common shares had been issued and if the additional common
shares were dilutive. Diluted earnings (loss) per share has not been presented
since the effect of the assumed conversion of options and warrants to purchase
common shares would have an anti-dilutive effect.
Recently Issued Accounting Pronouncements
- --------------------------------------------
In October 2009, the FASB issued ASU 2009-13, "Multiple-Deliverable Revenue
Arrangements", now codified under FASB ASC Topic 605, "Revenue Recognition",
("ASU 2009-13"). ASU 2009-13 requires entities to allocate revenue in an
arrangement using estimated selling prices of the delivered goods and services
based on a selling price hierarchy. The amendments eliminate the residual method
of revenue allocation and require revenue to be allocated using the relative
selling price method. ASU 2009-13 should be applied on a prospective basis for
revenue arrangements entered into or materially modified in fiscal years
beginning on or after June 15, 2010, with early adoption permitted. Management
is currently evaluating the potential impact of ASU2009-13 on our financial
statements.
In October, 2009, the FASB issued ASU 2009-15, "Accounting for Own-Share Lending
Arrangements in Contemplation of Convertible Debt Issuance or Other Financing",
now codified under FASB ASC Topic 470 "Debt", ("ASU 2009-15"), and provides
guidance for accounting and reporting for own-share lending arrangements issued
in contemplation of a convertible debt issuance. At the date of issuance, a
share-lending arrangement entered into on an entity's own shares should be
measured at fair value in accordance with Topic 820 and recognized as an
F-11
PPDC3Q0911
issuance cost, with an offset to additional paid-in capital. Loaned shares are
excluded from basic and diluted earnings per share unless default of the
share-lending arrangement occurs. The amendments also require several
disclosures including a description and the terms of the arrangement and the
reason for entering into the arrangement. The effective dates of the amendments
are dependent upon the date the share-lending arrangement was entered into and
include retrospective application for arrangements outstanding as of the
beginning of fiscal years beginning on or after December 15, 2009. Management is
currently evaluating the potential impact of ASU 2009-15 on our financial
statements.
In December, 2009, under FASB ASC Topic 860, "Transfers and Servicing." New
authoritative accounting guidance under ASC Topic 860, "Transfers and
Servicing," amends prior accounting guidance to enhance reporting about
transfers of financial assets, including securitizations, and where companies
have continuing exposure to the risks related to transferred financial assets.
The new authoritative accounting guidance eliminates the concept of a
"qualifying special-purpose entity" and changes the requirements for
derecognizing financial assets. The new authoritative accounting guidance also
requires additional disclosures about all continuing involvements with
transferred financial assets including information about gains and losses
resulting from transfers during the period. The new authoritative accounting
guidance under ASC Topic 860 will be effective January 1, 2010 and is not
expected to have a significant impact on the Company's financial statements.
Reclassifications
- -----------------
Certain comparative amounts have been reclassified to conform to the current
period's presentation.
NOTE 2 - RELATED PARTY TRANSACTIONS
The Company issued 22,500,000 shares of common stock for the acquisition of
Merchant Processing International, Inc., an entity which was owned by the
majority stockholder of the Company.
The Company executed a promissory note with its President for a principal sum of
$750,000 bearing interest at 5% per annum, due over 48 months starting July 1,
2008. On January 1, 2009, the interest rate was adjusted to 3.25% per annum.
The principal amount outstanding on the promissory note was $664,229 at
September 30, 2009. Accrued interest payable on the promissory note amounted to
$12,933 at September 30, 2009.
Starting February 1, 2009, the Company's President reduced his salary by
approximately 70%.
The Company was obligated under a sub-lease arrangement with Berman Investment
Group, a related party, for hardware and software usage for $1,800 per month.
The sub-lease agreement expired in November 2008. No expenses were incurred for
the sub-lease during the nine month period ended September 30, 2009.
F-12
PPDC3Q0912
The Company also sub-leased its rental space from Berman Investment Group until
December 31, 2008, an entity owned by a related party, for approximately $3,500
per month. The Company recorded rent expense from related party amounting to $0
and $71,661 for the nine months ended September 30, 2009 and 2008, respectively.
NOTE 3 - BUSINESS COMBINATION
The Company has accounted for the acquisition of Merchant Processing
International, Inc. as a business combination under common management and common
control for the amount paid for Merchant Processing International, Inc. in
excess of its book value. The Company issued 22,500,000 shares of common stock,
valued at par of $0.001, due to the related party interest, amounting to
$22,500, and incurred a note payable for $750,000, for a total consideration of
acquisition valued at $772,500. This amount exceeded the book value of the
assets acquired by $732,348 which was charged against additional paid in
capital.
NOTE 4 - PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
September 30, December 31,
2009 2008
--------------- --------------
(Unaudited)
Furniture and fixtures $ 6,808 $ 8,648
Computer equipment 4,787 3,682
11,594 12,330
Accumulated depreciation (6,797) (7,910)
--------------- --------------
Property and equipment, net $ 4,798 $ 4,420
=============== ==============
Depreciation expense for the nine months ended September 30, 2009 and 2008 was
$729 and $1,029, respectively.
NOTE 5 - NOTES PAYABLE
Note Payable - Related Party
- --------------------------------
The Company is indebted to its President, a principal shareholder, for the
purchase of the subsidiary. The principal balance of the promissory note bearing
interest at 3.25% per annum, due at September 30, 2009 amounted to $649,723, and
is payable over 41 monthly payments of $16,764 each. Accrued interest payable to
the President amounted to $12,933 at September 30, 2009. The Company recorded
interest expense related to the promissory note of $15,701 and $20,444 in the
accompanying consolidated statements of operations for the nine months period
ending September 30, 2009 and 2008, respectively. Effective January 1, 2009,
the interest rate was reduced from 5% to 3.25%.
F-13
PPDC3Q0913
Notes Payable - Others
- -------------------------
The Company is indebted to a third party vendor for the purchase of marketing
services. The principal balance, bearing annual interest at 4%, outstanding at
September 30, 2009 amounted to $144,110 payable in monthly payments of $5,400
over 28 months.
The Company is indebted to a third party vendor for the purchase of marketing
services. The principal balance, bearing annual interest at 4%, outstanding at
September 30, 2009 amounted to $26,655 payable in monthly payments of $4,493
over 6 months.
The Company recorded an interest expense of $13,618 and $11,491 in the
accompanying statements of operations for the nine months ended September 30,
2009 and 2008, respectively.
NOTE 6 - COMMON STOCK TRANSACTIONS
There were no stock transactions during the nine months ended September 30,
2009.
NOTE 7 - COMMITMENT AND CONTINGENCIES
On July 2, 2009, the Company entered into a five (5) year marketing support
agreement with a major Card Association ("Association") to offer their prepaid
cards to the Company's customers in a preferred manner with no less than 70% of
the company's cards issued bearing the Association's brand. In consideration for
offering the prepaid cards in a preferred manner, the Association provided a
non-returnable bonus and agreed to provide support up to a certain amount for
certain expenses during the term of the agreement and subject to certain
performance criteria. In addition, the Association agreed to provide financial
incentives to the Company based on achieving future processing volumes. To the
extent that the entire value of marketing support is not used during the term of
the agreement, any unused marketing support will be forfeited and the Company
shall refund to the Association such unused amount of marketing support. On
August 27, 2009, the Company received $200,000 of which part was a bonus and
recorded it as revenues in the accompanying financial statements for the three
months ended September 30, 2009. During the three months ended September 30,
2009, the Company incurred expenses of $61,451 in support expense that was
offset against the remaining amount received from the Association. The Company
recorded in the accompanying financial statements at September 30, 2009 a
deferred liability for the remaining unused support fund received from the
Association.
In November 2009, the Company received an invoice from its Processor for
$92,945.40 for service charges covering the period from January 1, 2008 to
September 30, 2009. On February 11, 2010, the Processor sent a revised invoice
for services for $121,828 with no details of the time period covered. The
Company is disputing these charges. The Company has not recorded the additional
expense of $28,882.60 for services in the accompanying financial statements for
the period ended September 30, 2009. On February 17, 2010, the Company and the
Processor agreed to mediate their dispute regarding those charges as well as
other charges where the Company asserts it has been over billed by its
processor. The mediation is scheduled for March 9, 2010. If the Company and the
Processor cannot agree in the mediation, the parties will arbitrate the issue.
F-14
PPDC3Q0914
NOTE 8 -SUBSEQUENT EVENTS
On October 30, 2009, the Company's wholly-owned subsidiary, Merchant Processing
International, Inc. entered into a Purchase Agreement with a third party to
assign its rights, title, benefit, privileges and interest in receiving
compensation for merchant services provided to Payment Resource International,
LLC. The purchase price for the assignment of the portfolio to third party was
agreed to be $274,835.03. The Company completed the purchase transaction and
received net proceeds of $184,557 in cash on October 30, 2009 after making
payments of $90,278 owed to third parties.
The Company's Executive Vice President of Business Development, Robert
Christiansen was terminated by the Company on August 6, 2009. On September 10,
2009, the Company filed a lawsuit against Mr. Christiansen and on December 22,
2009, the Company settled the lawsuit. As part of the settlement, the Company
received back 21,250,000 shares of its common stock held by Mr. Christiansen.
Mr. Christiansen also held an option to purchase up to 63,750,000 options at
$0.0001 per share from the Company's CEO, Bruce Berman. Mr. Christiansen also
released all rights to any of those unexercised options, and in exchange, the
Company paid $15,000 to Mr. Christiansen. Each party extended mutual releases.
On January 15, 2010, the Company cancelled 21,250,000 shares of common stock
received pursuant to the settlement of its lawsuit. In addition, Bruce Berman
the Company's Chief executive Officer granted from his personal stock holdings
63,750,000 options to four key members of the Company's management team.
On January 10, 2010, the Board of Directors approved the price reduction of
15,000,000 stock options issued to Rick Galasieski, Senior Vice President of the
Company ("Executive") for $0.001 per share if the Executive exercised the
purchase of options immediately. The Board reached a unanimous decision to
accept the option exercise effective January 5, 2010. The Company received
$15,000 in cash from the Executive from the exercise of 15,000,000 options.
On February 5, 2010, the Company assigned its rights to receive compensation and
other benefits based upon the processing activity of certain merchants, herein
referred to as "Merchant Portfolio", from Spectrum Business Solutions, Inc. to
a non-affiliated third party for $100,000. The Company has received $50,000
towards such assignment and agreed to execute a promissory note guaranteed by
the two shareholders of the third party, to receive the remaining $50,000 no
later than May 3, 2010. As part of this assignment, the Company also agreed to
recommend to all its agents to submit all future merchant processing accounts to
this third party. With the assignment of this portfolio, the Company is not
exiting the merchant credit card processing business but changing from an agent
based merchant processor to a 100% in house account based merchant processor.
The advertising the Company does on Bank Freedom Prepaid Debit Cards has created
an unanticipated lead flow of potential merchant business.
F-15
PPDC3Q0915
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD LOOKING STATEMENTS: STATEMENTS ABOUT OUR FUTURE EXPECTATIONS ARE
"FORWARD-LOOKING STATEMENTS" AND ARE NOT GUARANTEES OF FUTURE PERFORMANCE. WHEN
USED HEREIN, THE WORDS "MAY," "WILL," "SHOULD," "ANTICIPATE," "BELIEVE,"
"APPEAR," "INTEND," "PLAN," "EXPECT," "ESTIMATE," "APPROXIMATE," AND SIMILAR
EXPRESSIONS ARE INTENDED TO IDENTIFY SUCH FORWARD-LOOKING STATEMENTS. THESE
STATEMENTS INVOLVE RISKS AND UNCERTAINTIES INHERENT IN OUR BUSINESS, INCLUDING
THOSE SET FORTH UNDER THE CAPTION "RISK FACTORS," IN THIS DISCLOSURE STATEMENT,
AND ARE SUBJECT TO CHANGE AT ANY TIME. OUR ACTUAL RESULTS COULD DIFFER
MATERIALLY FROM THESE FORWARD-LOOKING STATEMENTS. WE UNDERTAKE NO OBLIGATION TO
UPDATE PUBLICLY ANY FORWARD-LOOKING STATEMENT.
This Management's Discussion and Analysis and Plan of Operation should be read
in conjunction with the financial statements included in this Report (the
"Financial Statements).
The financial statements have been prepared in accordance with generally
accepted accounting policies in the United States ("GAAP"). Except as otherwise
disclosed, all dollar figures included therein and in the following management
discussion and analysis ("MD&A") are quoted in United States dollars.
LIQUIDITY AND CAPITAL RESOURCES
Our liquidity requirements arise principally from our working capital needs,
including the cost of goods and marketing costs. Although in the future we
intend to fund our liquidity requirements through a combination of cash on hand
and revenues from operations, for the nine months ended September 30, 2009, the
Company had realized only $4,958 in Net Income despite $1,721,393 in revenues.
Accordingly, our ability to initiate our plan of operations and continue as a
going concern is currently dependent on our ability to build our customer base
on organic internet traffic, revenue sharing opportunities, co branding,
marketing partnerships and cost saving measures. Due to our stock being thinly
traded and the current state of our balance sheet, including a lack of hard
assets against which to borrow, we believe that it will be very difficult to
obtain any form of debt financing with or without equity conversion terms. With
the economic turmoil in the financial markets today we are concerned about the
ability to raise any capital at all at terms that would be in the shareholders'
best interest.
From November, 2007, through September, 2008, the Company raised approximately
$2,164,237 in three private offerings, before costs. We are currently seeking
additional sources of funding.
RESULTS OF OPERATIONS
Nine Months Ended September 30, 2009
- -----------------------------------------
Revenues
During the six months ended September 30, 2009, merchant processing services
realized revenues of $391,489 and the Bank Freedom prepaid card operations
realized revenues of $1,329,905 for a total of $1,721,393. This represents an
increase of 156% or $1,048,425 from
Page 16
PPDC3Q0916
$672,968 for the same period in the prior year. The increase is primarily the
result of prepaid card operations beginning in the second quarter of 2008.
Merchant processing revenues are generated in the form of commissions paid as a
percentage of credit card volume for the retailers engaged, while the prepaid
card business model earns revenues through interchange and service fees after
issuance of the cards.
Cost of Sales
During the nine months ended September 30, 2009, we incurred $661,433 in costs
directly attributed to our sales. This represents a total increase of 97% or
$326,244 over $335,189 realized in the same period in the prior year. The
increase is primarily the result of prepaid card operations beginning in the
second quarter of 2008. Cost of Sales includes bank and Mastercard Association
fees, merchant processing fees, and fulfillment costs.
Expenses
During the nine months ended September 30, 2009, we incurred $1,024,970 in
operating expenses. This represents a decrease of 67% or $2,079,465 from
$3,104,435 realized in the same period last year. Operating expenses consisted
of the following:
SEPTEMBER 30, SEPTEMBER 30,
2009 2008
------------- -------------
OPERATING EXPENSES
Sales and marketing 122,795 1,148,681
Professional fees 178,690 785,878
Depreciation 729 1,029
General and administrative 722,757 998,748
Related party - rent expense - 71,661
Derivative expense - 98,438
------------- -------------
Total operating expenses 1,024,970 3,104,435
------------- -------------
Sales and Marketing - Consist of internet marketing to potential cardholders
using various affiliate marketing channels and pay-per-click campaigns. This
category also includes direct mail, radio commercial production, radio air time,
and printing expense necessary to attract new cardholders. This represents a
decrease of 89% or $1,025,886 from $1,148,681 realized in the same period last
year. As a development stage company in the first quarter of 2008, and a
company entering production in the second quarter of 2008, the company dedicated
significant resources to its marketing effort.
Professional Fees - Consist of accounting, legal and other professional fees
including the cost of the fair market value for the stock provided to investor
representatives for investor referrals. This represents a decrease of 77% or
$607,188 from $785,878 realized in the same period last year, as the company
required more professional services during development stage and initial
production this period last year.
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PPDC3Q0917
Depreciation - Consists of the depreciation of furniture, fixtures, and computer
equipment. This represents a 29% or $300 decrease from $1,029 realized in the
same period in 2008.
General and Administrative - Consists of insurance, office supplies and expense,
payroll expenses, investor referral fees and other miscellaneous expenses. This
represents a 28% or $275,991 decrease from $998,748 realized in the same period
in 2008. The reduction in 2009 is the result of the company significantly
leaning out its operations.
Related Party Expense - Rent - Consists of office space rental. This represents
a total decrease of $71,661 from $71,661 to $0 realized from the same period in
2008. In 2009, the company no longer rents its office space from a related
party.
Derivative Expense - Consists of stock warrants which are valued using the
Black-Scholes option-pricing model. This cost was not incurred during this
period in 2009.
Three Months Ended September 30, 2009
- ------------------------------------------
Revenues
During the three months ended September 30, 2009, merchant processing services
realized revenues of $115,312 and the Bank Freedom prepaid card realized
revenues of $532,130 for a total of $647,441. This represents an increase of
60% or $243,339 from $404,102 for the same period last year. The increase is
primarily the result of number of cardholders for prepaid card operations. For
this period in 2008, the prepaid card operations had had only a few months of
operations. Merchant processing revenues are generated in the form of
commissions paid as a percentage of credit card volume for the retailers
engaged, while the prepaid card business model earns revenues through
interchange and service fees after issuance of the cards.
Cost of Sales
During the three months ended September 30, 2009, we incurred $325,708 in costs
directly attributed to our sales. This represents a total increase of 107% or
$168,082 over $157,626 realized in the same period last year. The increase is
due to the operations of the prepaid card business had had only a few months of
operations during this period in 2008. Cost of Sales includes, bank and
Mastercard Association fees, merchant processing fees, and fulfillment costs.
Operating Expenses
During the three months ended September 30, 2009, we incurred $354,432 in
operating expenses. This represents a decrease of 55% or $437,753 from $792,185
realized in the same period last year. Expenses consisted of the following:
Page 18
PPDC3Q0918
SEPTEMBER 30, SEPTEMBER 30,
2009 2008
------------- -------------
OPERATING EXPENSES
Sales and marketing 10,761 144,798
Professional fees 24,250 238,234
Depreciation 243 343
General and administrative 319,179 293,221
Related party - rent expense - 17,151
Derivative expense - 98,438
------------- -------------
Total operating expenses 354,432 792,185
------------- -------------
Sales and Marketing - Consist of internet marketing to potential cardholders
using various affiliate marketing channels and pay-per-click campaigns. This
category also includes direct mail, radio commercial production, radio air time,
and printing expense necessary to attract new cardholders. This represents a
decrease of 93% or $134,037 from $144,798 realized in the same period last year.
The company entered production in the second quarter of 2008, and continued to
dedicate significant resources to its marketing effort in the third quarter of
2008.
Professional Fees - Consist of accounting, legal and other professional fees
including the cost of the fair market value for the stock provided to investor
representatives for investor referrals. This represents a decrease of 90% or
$213,984 from $238,234 realized in the same period last year, as the company
required more professional services as it moved from development stage to
production during this period last year.
Depreciation - Consists of the depreciation of furniture, fixtures, and computer
equipment. This represents a 29% or $100 decrease from $343 realized in the
same period in 2008.
General and Administrative - Consists of insurance, office supplies and expense,
payroll expenses, investor referral fees and other miscellaneous expenses. This
represents a 9% or $25,958 increase from $293,221 realized in the same period in
2008. We do not view this as a significant change from the prior period.
Related Party Expense - Rent - Consists of office space rental. This represents
a total decrease of $17,151 from $17,151 to $0 realized from the same period in
2008. In 2009, the company no longer rents its office space from a related
party.
Derivative Expense - Consists of stock warrants which are valued using the
Black-Scholes option-pricing model. This cost was not incurred during this
period in 2009.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
None.
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PPDC3Q0919
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures
Our management, including our Chief Executive and Principal Financial Officer,
evaluated the effectiveness of the design and operation of our disclosure
controls and procedures (as defined in Securities Exchange Act Rules 13a-15(e)
and 15d-15(e)) as of September 30, 2009. Our disclosure controls and procedures
are designed to ensure that information required to be disclosed by the issuer
in the reports that it files or submits under the Act (15 U.S.C. 78a et seq.) is
recorded, processed, summarized, and reported, within the time periods specified
in the Commission's rules and forms. Disclosure controls and procedures include,
without limitation, controls and procedures designed to ensure that information
required to be disclosed by an issuer in the reports that it files or submits
under the Act is accumulated and communicated to the issuer's management,
including its principal executive and principal financial officers, or persons
performing similar functions, as appropriate to allow timely decisions regarding
required disclosure. Based on this evaluation, our Chief Executive and Principal
Financial Officer concluded that our disclosure controls and procedures were not
effective as of September 30, 2009.
This quarterly report does not include a report of management's assessment
regarding internal control over financial reporting or an attestation report of
the company's registered public accounting firm due to a transition period
established by rules of the Securities and Exchange Commission for newly public
companies.
Change in Internal Controls
There were no changes in our internal control over financial reporting during
the quarter ended September 30, 2009 that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company's Executive Vice President of Business Development, Robert
Christiansen was terminated by the Company on August 6, 2009. On September 10,
2009, the Company filed a lawsuit against Mr. Christiansen and on December 22,
2009, the Company settled the lawsuit. As part of the settlement, the Company
received back 21,250,000 shares of its common stock held by Mr. Christiansen.
Mr. Christiansen also held an option to purchase up to 63,750,000 options at
$0.0001 per share from the Company's CEO, Bruce Berman. Mr. Christiansen also
released all rights to any of those unexercised options, and in exchange, the
Company paid $15,000 to Mr. Christiansen. Each party extended mutual releases.
On January 15, 2010, the Company cancelled 21,250,000 shares of common stock
received pursuant to the settlement of its lawsuit. In addition, Bruce Berman
the Company's Chief executive Officer granted from his personal stock holdings
63,750,000 options to four key members of the Company's management team.
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PPDC3Q0920
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. CHANGES IN REGISTRANT'S CERTIFYING ACCOUNTANT
None.
ITEM 6. EXHIBITS
10.1 Prepaid Card Agreement between the Company and MasterCard International,
Incorporated dated July 2, 2009. Portions of this Exhibit have been omitted
pursuant to an application for confidential treatment; the omitted
information has been filed separately with the SEC.
10.2 Purchase Agreement between Merchant Processing International, Inc. and
Solveras, Inc. dated October 30, 2009.
10.3 Residual Purchase Agreement between Merchant Processing International, inc.
and Valico Inc. dated February 5, 2010.
31.1 Certification by the Principal Executive and Financial Officer of Prepaid
Card Holdings, Inc. pursuant to Section 302 of the Sarbanes-Oxley Act of
2002 (Rule 13a-14(a) or Rule 15d-14(a)).
32.1 Certification by the Principal Executive and Financial Officer of Prepaid
Card Holdings, Inc. pursuant to Section 906 of the Sarbanes-Oxley Act of
2002 (18 U.S.C. 1350).
Page 21
PPDC3Q0921
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.
Dated: March 4, 2010 PREPAID CARD HOLDINGS, INC.
------------- (the registrant)
By: \s\ Bruce Berman
----------------
Bruce Berman
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