UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2009
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Commission file number 0-53270
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/ \ / \ | PREPAID CARD HOLDINGS, INC.
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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 St. #200 Newport Beach Ca 92660
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 949 250 9556 ext 123
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Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on which Registered
None N/A
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock ($0.001 par value)
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(Title of Class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. [ ] Yes [x] No
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. [ ] Yes [x] No
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. [x] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (Sec. 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference
in Part III of this Form 10-K or any amendment to this Form 10-K. [ ]
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
definition of "accelerated filer, large accelerated filer and smaller reporting
company" as defined 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 Act). [ ] Yes [x] No
The aggregate market value of the common equity held by non-affiliates of the
registrant as of June 30, 2009 was $3,070,156.
The number of shares of the registrant's common stock outstanding as of April
14, 2010 was 391,653,890 shares.
PREPAID CARD HOLDINGS, INC.
TABLE OF CONTENTS
PART I
Item 1. Business...........................................................4
Item 1A. Risk Factors......................................................14
Item 1B. Unresolved Staff Comments.........................................14
Item 2. Properties........................................................14
Item 3. Legal Proceedings.................................................14
Item 4. [Removed and Reserved]............................................15
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities.................16
Item 6. Selected Financial Data...........................................18
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.............................................18
Item 7A. Quantitative and Qualitative Disclosures About Market Risk........21
Item 8. Financial Statements and Supplementary Data.......................21
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure..............................................37
Item 9A. Controls and Procedures...........................................37
Item 9B. Other Information.................................................38
PART III
Item 10. Directors and Executive Officers of the Registrant................39
Item 11. Executive Compensation............................................41
Item 12. Security Ownership of Certain Beneficial Owners and Management....45
Item 13. Certain Relationships and Related Transactions....................46
Item 14. Principal Accounting Fees and Services............................47
PART IV
Item 15. Exhibits and Financial Statement Schedules........................48
Signatures....................................................................48
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PART I
ITEM 1. BUSINESS
A. BUSINESS DEVELOPMENT
Prepaid Card Holdings, Inc., a Nevada Corporation (the "Company"), through its
wholly-owned operating subsidiaries Berman Marketing Group, Inc., a California
Corporation ("BMG") and Merchant Processing International, Inc. dba Bank Freedom
("Bank Freedom") offering card association branded payment cards directly to
consumers through its issuing bank, does not participate in other typical
commercial banking services such as making loans, accepting deposits, etc., is
in the business of marketing and management of general use prepaid cards.
The Company was originally incorporated on October 8, 1986 as Nately National
Corporation, and on April 7, 1987 changed its name to National HealthCare
Alliance, Inc. to better reflect the business of the Company at the time. On
June 22, 2005, the Ninth Judicial District Court of the State of Nevada entered
an order granting custodianship of the Company to Robert K. McBride, due to the
finding that the Company had been abandoned by its prior management. Mr. McBride
was elected sole director and appointed officer of the Company.
On October 11, 2007, the Company acquired BMG as its operating business. The
Company then changed its name to Berman Holdings, Inc. on November 2, 2007 to
better reflect its operating business, and changed its trading symbol from NHAL
to BRMN. The Company changed its name to Prepaid Card Holdings, Inc. on May 2,
2008 to better reflect its operating business and changed its trading symbol
from BRMN to PPDC. BMG was formed on February 2, 2007 by the Company's
president, Bruce Berman. On March 8, 2008, the Company acquired Merchant
Processing International, Inc. dba Bank Freedom ("Bank Freedom") from the
Company's president, Bruce Berman, as its second operating business. Our
operations are currently divided between BMG and Bank Freedom. BMG manages
marketing operations, while Bank Freedom manages our prepaid card products,
including the processing, banking, printing, customer service, and
infrastructure necessary for the management and delivery of prepaid cards. Bank
Freedom also manages our merchant processing services portfolio, discussed in
more detail below. The Company has not been in bankruptcy, receivership, or any
similar proceeding, and, to the best knowledge of management, is not in default
on the terms of any note, loan, lease, or other indebtedness or financing
arrangement requiring the issuer to make any material payments.
The Company began operations in February 2008 as it began the process of
accepting orders and shipping the Bank Freedom Prepaid MasterCard, which was
first shipped to its customers approximately March 1, 2008. Prior to that, the
Company was in the development stage and focused on establishing relationships
with key operational partners.
B. FINANCIAL INFORMATION ABOUT SEGMENTS
As defined by generally accepted accounting principles ("GAAP"), we do not have
any segments separate and apart from our business as a whole. Accordingly,
there are no measures of revenue from external customers, profit and loss, or
total assets aside from what is reported in the Financial Statements attached to
this Form 10.
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C. BUSINESS OF THE COMPANY
EXECUTIVE SUMMARY
Prepaid Card Holdings, Inc., through its wholly owned subsidiary Bank Freedom,
is an established brand in the Prepaid Debit Card Industry. The industry, which
is still in its infancy, was created to offer a banking solution to the
estimated 60,000,000 adult Americans who do not have either a bank account or
credit card and are known as the "Underbanked" or "Underserved" demographic.
The underbanked are everyday people who use financial services not provided by
traditional banks. These include payday loans, check cashing, and money orders.
The unfulfilled need of this demographic is the lack of a credit and/or debit
card. The underbanked, for various reasons, do not have or cannot get a
checking account and/or credit card. Without a branded VISA or MasterCard, the
underbanked are restricted from making everyday purchases that require plastic.
It is estimated that only 5%-10% of the market for prepaid debit cards has been
penetrated to date. According to the Associated Press on March 2, 2010,
industry analysts stated that $291 Billion was loaded onto prepaid cards in 2009
and the prepaid market is estimated to grow 22% per year each year for the next
3 years and estimated that $526 Billion will be loaded onto prepaid cards in
2012. According to MasterCard, 2009 was the first year in MasterCard's history
as a company that more money was spent on debit cards than credit cards
OUR PREPAID DEBIT CARD PROGRAMS
Under license from MasterCard International, Inc. and Visa U.S.A. Inc., Bank
Freedom markets and manages several prepaid card programs, including: the Bank
Freedom Prepaid MasterCard and the Bank Freedom Prepaid Visa Card, for
consumers; the Bank Freedom MasterCard Prepaid Expense Card for businesses to
manage, control, and track employee spending; and the Bank Freedom Payroll
MasterCard for businesses to eliminate issuing paper paychecks and pay employee
wages with a payroll card. Bank Freedom is also the program manager for the
AFSCME Advantage Prepaid MasterCard program. AFSCME is a 1.6 million member
Union (American Federation of State, County and Municipal Employees). Bank
Freedom has received all the necessary approvals and intends to launch the Card
Now Prepaid MasterCard for consumers in July of 2010.
Bank Freedom's prepaid debit cards work like a virtual bank account plus a
MasterCard or Visa debit card to make purchases. Customers can load money and
fund their Bank Freedom card accounts in multiple ways. They can direct deposit
their paycheck or government issued benefits checks, deposit cash to their card
accounts at one of over 50,000 cash load retailers nationwide (estimated to
expand to 100,000 retailers in 2011), or transfer money from one Bank Freedom
card account to another Bank Freedom card account. Once our customers deposit
funds to their card account they can use their prepaid debit card anywhere
MasterCard or Visa debit is accepted to make purchases and at over 1,000,000
ATMs worldwide for cash access. Customers can log on to our cardholder website
to check their account balance, transfer funds, and use our bill payment system
to pay bills electronically or send paper checks to anyone.
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[GRAPHIC OMITTED BUT INCLUDED IN PDF VERSION]
Our transaction processing platform works in real-time and will not permit
customers to pay a bill, send a check, make purchases, or withdraw funds at an
ATM unless the funds are available in their card account. Customers cannot
overdraft their card account which is one of their biggest challenges. The
average American pays $300 a year in overdraft fees with a traditional bank
account.
Types ofPrepaid Cards
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Our card products include several types of prepaid card:
General Purpose Reloadable (GPR) Cards - Intended for the underbanked
consumer, our target demographic is one that will set up direct deposit of their
pay check and use their prepaid MasterCard or Visa Card for day to day purchases
and as a bill payment solution. Within this model, they act and behave much
like a normal banked individual. We also have customers that only deposit cash
on to their cards, as well as customers who use both direct deposit and add
cash.
Private Label co-branded Card Programs - The prepaid card industry is
growing at a significant rate. It is one of the few industries that is actually
expanding while other industries are shrinking. With Bank Freedom's internet
presence, we are getting business leads from companies who desire to monetize
their customer/membership base by issuing private label co-branded prepaid
cards. We believe these co-branded opportunities offer growth potential for Bank
Freedom.
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Business Travel and Expense Cards -Business cards earn a higher interchange rate
than consumer cards which translates to additional income for Bank Freedom per
dollar spent by the cardholder.
Payroll Cards - Introduced to employees by their employers, the Bank
Freedom Payroll MasterCard is identical to our GPR product with slightly lower
fees. Ordered and shipped in bulk, the program offers businesses of all sizes a
paperless solution for payroll, which reduces overall costs while bringing a
banking solution to their underbanked employees. Our payroll product does not
require complex integration or programming, and works seamlessly with most
payroll systems that support direct deposit.
Our Prepaid Cards
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Bank Freedom Prepaid MasterCard and Visa Cards: Our Bank Freedom Prepaid
MasterCard cards were first shipped in March, 2008 and our Bank Freedom Visa
Cards were first shipped in October 2008. . Since we launched our card programs
a total of approximately $126,000,000 has been loaded onto Bank Freedom cards by
our cardholders through direct deposit and via our reloading partner, Green Dot.
In 2008, $32,000,000 was loaded on to Bank Freedom Prepaid Cards by our
customers, and in 2009, $72,500,000 was loaded.
Bank Freedom Prepaid MasterCard targeted at the Hispanic community: On June 1,
2008 we launched a Spanish language version website for our Bank Freedom Prepaid
MasterCard Card program. Spanish speaking customers can go to
www.bancolibertadtarjeta.com and order a Bank Freedom Prepaid MasterCard from a
website entirely in Spanish. Bank Freedom has always had bilingual customer
service agents and a bilingual website for its customers to access their prepaid
card accounts; however, to help new Spanish speaking customers to better
understand the benefits of the product they are ordering, we released this
all-Spanish enrollment website.
Card Association Support Agreement
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On July 2, 2009, the Company entered into a support agreement with a major Card
Association to offer their prepaid cards to the Company's customers in a
preferred manner in exchange for various support considerations. On August 27,
2009, the Company received $200,000 from the association of which part was a
bonus and part was marketing support.
AFSCME Advantage Prepaid MasterCard
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Bank Freedom, through a third party marketing agreement, is the program manager
for the AFSCME Advantage Prepaid MasterCard. AFSCME (American Federation of
State, County and Municipal Employees) with its 1.6 million members is estimated
to be the second largest union in America. The AFSCME card program is up and
running and AFSCME members have begun slowly ordering our prepaid cards. The
company intends to use part of the funds from this offering to directly market
its prepaid cards to members of AFSCME.
FIS: Fidelity National Information Systems
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FIS is our new core transaction processor and a leader in prepaid card
transaction processing, having processed over $28 billion in loaded funds in
2008. By leveraging the FIS platform we are able to deliver greater reliability
and provide market-leading features and functionality to our cardholders. FIS
delivers banking and payments technologies to more than 14,000 financial
institutions and businesses in over 100 countries worldwide. FIS maintains
processing and technology relationships with 40 of the top 50 global
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banks, including nine of the top 10. FIS has an $8 Billion market cap as
reported by the New York Stock Exchange, where it is listed under the symbol
"FIS".
Cash Reloading Agreement
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In December, 2007, Bank Freedom entered into an exclusive agreement with Green
Dot to provide cash loading services for card programs managed by Bank Freedom.
In May, 2008, Green Dot offered Bank Freedom branding on its point of purchase
displays nationally. Green Dot has point of purchase displays in Walgreens,
K-Mart and CVS/Pharmacy locations throughout the US.
BUSINESS MODEL AND STRATEGY
When we drafted our business plan in 2007 to enter the prepaid card space our
assessment was that most competitors were using a check cashing mentality of
"let's overcharge the underbanked because they don't have any alternative". We
made a decision from the beginning to establish a pricing model that was based
on where we believed the market was heading.
Our Bank Freedom business model is to acquire customers who adopt our products
as their primary transaction account (PTA). Whether for business or consumer,
when a customer assimilates our card accounts into their day to day management
of funds, Bank Freedom gains higher retention, additional transaction volume
which generates additional fee revenue.
Our business strategy includes marketing campaigns to acquire customers, and
then an education process to adopt the prepaid card into their daily financial
management. This will require continuous marketing and touch points both prior
to and after customer acquisition.
Bank Freedom Prepaid CardRevenue
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We derive revenues through multiple sources. Those sources may include:
1. Transaction Fees - As customers use their cards, we may collect fees that
include
a. Domestic and International ATM transaction fees
b. Debit purchase and PIN decline fees
c. Monthly maintenance fees (waived with direct deposit)
d. Bill payment and check writing
e. Money Conversion Fees - For transactions that involve an international
source, up to 3% of total dollar volume in transaction fees.
2. Interchange - Bank Freedom receives interchange revenue on Signature
transactions. The interchange Bank Freedom receives is paid by the merchant, not
by our cardholder. The interchange fee Bank Freedom receives on signature
transactions is usually in excess of 1% of the amount the customer spends at any
merchant.
3. Private Label Application Fees - for private label opportunities, Bank
Freedom intends to collect an application fee for the set up and development of
custom prepaid card programs.
4. Card Purchase Fees - Our Business Travel and Expense programs charge a
one-time application fee to businesses as well as annual fees paid upon ordering
the card. Our Payroll program charges an application fee and card issuance fee
to the employer.
Page 8
Bank Freedom Prepaid CardPricing
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We believe there is a threshold the unbanked consumer will pay for the benefits
of a prepaid card. So far, this threshold has yet to be determined. Major
players in the market have successfully entered the market, but with estimates
of only 5% to 10% market penetration. Pricing is critical to a long-standing
relationship with our targeted demographic. We believe there are several key
strategic concepts that will move our card offering beyond the current thinking.
In particular:
Do not gouge the customer: There is a perception that prepaid cards offer
issuers an opportunity to gouge the customers. We believe this is a problematic
strategy as more and more issuers find their way into the market.
Offer Free Services: Everyone likes getting something free, including our
targeted demographic.
We will determine the optimal type and amount of pricing in order to maximize
our penetration of the market.
MARKETING
Using our management's unique and diverse experience in the direct response
marketing and credit card processing fields, we have developed and offer the
Bank Freedom Prepaid MasterCard and the Bank Freedom Prepaid VISA card. These
cards target the 60 million customers who have difficulty securing credit cards
and or bank accounts.
During the company's first year in the prepaid card market, our goal was to
acquire new prepaid card customers. This was accomplished through:
- - Direct marketing and establishing a client base; and
- - Maintaining a broad range of prepaid card services and offerings;
In order to create awareness of our prepaid cards, the company did the
following:
- - Launched a comprehensive direct marketing campaign;
- - Created competitive pricing models;
- - Implemented our business plan quickly by leveraging existing technology
infrastructure previously developed for marketing to the underbanked, leveraging
our CEO's experience in marketing and customer service of the underbanked, and
our management team's experience in Internet marketing and technologies; and
- - Developed a nationally recognized brand.
Our Value Proposition
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Through established direct marketing methods known to our executive staff, we
offered the following value points to our potential customers:
- - Provide access to electronic financial networks for all people: 10% to
13% of U.S. households, primarily low-to-moderate-income, minorities, and recent
immigrants, do not have bank accounts. This represents 60 million people who do
not have access to the purchasing online, travel reservation system, and the
convenience of debit and ATM networks.
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- - Safer than Cash: If the card is lost or stolen, the consumer does not
lose the cash. This is important with younger customers and the elderly.
- - Bill Pay: Through online bill pay, consumers can pay bills at
significantly reduced cost than money orders or retail payment outlets.
- - Payroll and Benefits Check Direct Deposit: Consumers can have their
payroll check and/or government issued benefits checks directly deposited to
their card at no cost. This eliminates the typical 3% rate check cashing
services offer to the unbanked and the underserved.
- - Access to cash via the worldwide ATM Network: Access to cash without the
hassle of check cashing services 24/7.
- - Consumer Recourse: Cash has no recourse. When a consumer wants to return
the product when cash is involved they are at the mercy of the retailer for a
refund. Leveraging the VISA/MasterCard associations, the consumer has
alternative recourse for refunds.
- - Easy Approval: No credit check, no employment necessary; customers only
need valid ID for approval. This is ideal for people with credit and banking
problems.
- - Send Money to Anyone: Using our remittance services, customers can send
money to any person in the U.S.
Marketing Tools
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We have directly marketed our prepaid cards using the following means:
- - Direct Radio and television to web (sending customers to the internet to
order)
- - Email campaigns to managed opt-in lists of individuals known to have
credit issues and or in need of a credit card.
- - Affiliate networks including banner and contextual ads.
- - Search Engine Optimization (SEO).
- - Social Media Optimization (SMO).
- - Pay-per-click (PPC) and Search Engine Marketing (SEM) campaigns
- - Direct mail
Competitive Advantages
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Several companies have a meaningful presence in the prepaid card industry.
Their presence extends to the Internet and an occasional TV or radio ad with
little air time. Some of our competitors market their cards through retail
store fronts. Our competitors include: All Access (Net Spend), Green Dot,
RushCard, Western Union, AccountNow, Ready Debit and Vision.
There are many other small, general spending prepaid card programs that do not
represent significant market share or recognition. They focus on the internet
as their main strategy of application and enrollment. We believe this creates a
competitive advantage for the Company and allows us to truly leverage our
marketing skills to exploit a more dynamic marketing strategy, including in the
areas of direct response and other media markets.
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Marketing Technology and Infrastructure
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Our technology foundation is capable of handling more than 50,000 orders per day
through scalable platforms using Microsoft's SQL Server, multi-redundant
databases, web servers, routers, and switches. This primary hardware is housed
in a full rack within a locked private cage located at the Cox Communication
Business Collocation facility in Ranch Santa Margarita, CA. We have back up
redundancy hardware for testing failover, and disaster recovery purposes located
at Millennium Systems in Irvine, CA and a virtual private server for redundant
web site hosting through Verio, an NTT Communications Company. All technology is
highly customizable allowing unlimited number of web sites access to common
databases while tracking unlimited marketing campaigns allowing us to
concentrate on the most profitable marketing channels. We will pay approximately
$1,478 a month for the hosting of this hardware and software. We will also pay
for any software or hardware modifications we request.
We own approximately 1,000 prepaid keyword related website URLs that can be
hosted all at the same time with this system. Through minute by minute detailed
reporting, we can tailor marketing messages and focus on key geographic and
demographics using internet, print, radio, and television
OPERATIONS
Operational Partnerships
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Operationally, there are five key partnership components we must have to issue
prepaid cards. They are:
1. Issuing bank
2. Card Association (MasterCard and/or Visa)
3. Processor
4. Card Fulfillment
5. Cash Load Network
Issuing Bank: An issuing bank is a bank that offers card association branded
payment cards directly to consumers and businesses. Merchant Processing
International, Inc. DBA Bank Freedom ("Bank Freedom"), signed an agreement on
November 19, 2007 with Meta Payment Systems, to issue our branded prepaid cards.
Meta Payment Systems is the largest issuing bank for program manager sponsored
prepaid card products within the US. We began issuing prepaid cards through
MetaBank in February 2008.
Card Associations: A card association is a network of issuing banks and
acquiring banks that process payment cards of a specific brand, including Visa,
MasterCard, American Express, etc. Bank Freedom has been approved by MasterCard
and currently issues the Bank Freedom Prepaid MasterCard . Bank Freedom has also
been approved by Visa and currently issues the Bank Freedom Prepaid Visa Card.
Processor: A processor is a company that connects to the various networks
(Visa, MasterCard, Discover, STAR, Cirrus, etc.) and handles the core
transactions. They also provide services for customer care (to the end user),
an interactive voice response ("IVR") telephone-based customer service system,
and web based services for balance inquiries, dispute resolution, replacement
cards, and other support issues. From 2008 through April, 2010, Bank Freedom
processed its transactions through I2C, Inc. processing services. Bank Freedom
is currently in the process of switching its core processor services from I2C,
Inc. to FIS with the intentions of opening all new prepaid cards through FIS
going forward. FIS is a leader in prepaid card transaction processing, having
processed over $28 billion in loaded funds in 2008. By leveraging the FIS
platform we are able to deliver greater reliability and provide market-leading
features
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and functionality to our cardholders. FIS delivers banking and payments
technologies to more than 14,000 financial institutions and businesses in over
100 countries worldwide. FIS maintains processing and technology relationships
with 40 of the top 50 global banks, including nine of the top 10. FIS has an $8
Billion market cap as reported by the New York Stock Exchange, where it is
listed under the symbol "FIS".
Card Fulfillment: Card Fulfillment entails card plastic creation, programming,
personalization/embossing, and shipping the prepaid cards and collateral to new
cardholders. Bank Freedom signed an agreement with EFT Source for card printing,
personalization, and fulfillment services on December 14, 2007. EFT Source
provides printing, inventory, and delivery of Bank Freedom's prepaid cards
processed through I2C, Inc. Bank Freedom intends to utilize FIS-owned card
fulfillment services for prepaid cards processed through FIS. Bank Freedom
intends to maintain its relationship with EFT Source.
Cash Load Network: The cash load network is a company that allows your customers
to load cash on to their card accounts. Green Dot is our current cash load
network partner. Customers can use the Green Dot MoneyPak for loading cash onto
their prepaid card accounts. The Green Dot MoneyPak is available in over
50,000 retail locations including Wal-Mart, Walgreens, CVS/Pharmacy, Rite Aid,
Radio Shack, Kroger, Ralphs, Food4Less and Fred Meyer, consumers can purchase a
MoneyPak at any Green Dot retailer location. We are also approved by MoneyGram
to allow our customers to load money to their prepaid card accounts at any of
the 40,000 MoneyGram locations throughout the US. We have an exclusive agreement
with Green Dot that expires in December 2010. We do not intend to renew that
exclusive agreement although we hope to negotiate the continued usage of Green
Dot on a non exclusive basis however there can be no assurance that we will
reach such an agreement with Green Dot. We are in the implementation stages
with MoneyGram and plan to load cash to customer card accounts through MoneyGram
in December 2010. We are also in the negotiating process with Western Union and
intend to load cash to customer card accounts through Western Union in December
2010.
In-House Operations
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Our operations consist of the following major groups. They are:
Sales and Marketing: To acquire customers, we have engaged in aggressive
marketing campaigns to drive prospects to our websites to order their prepaid
card.
Activation: Critical to our success is the activation and initial loading of
the card. We use a separate customer service marketing effort that uses email
to contact low activity card accounts to increase card activations and loads.
Secondary Marketing: We engage in a persistent touch process that reminds the
customers to use their card (reload, ATM, pay bills, etc). This revenue
generating group (part of internet marketing) is critical to ongoing
profitability and card usage.
Customer Service: We provide 24/7 customer service to our cardholders in both
English and Spanish. We handle all inbound customer services calls between the
hours of 8:00 AM and 5:00 PM, Monday to Friday with our internal staff of
customer service representatives.
MERCHANT PROCESSING SERVICES
In addition to our primary business of our Bank Freedom prepaid cards, since
2005 we have realized revenue by selling merchant processing services for retail
companies nationally, receiving revenues in the form of commissions paid as a
percentage of credit card volume for the retailers engaged.
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From 2005 to September 2007, Bank Freedom focused exclusively on selling
merchant services that enable US businesses to accept credit and debit cards.
As a result, Bank Freedom built a portfolio of merchant accounts that generate
commissions on each credit card transaction processed by the business.
In October of 2007, Bank Freedom changed its focus and dedicated its resources
to developing prepaid card solutions. .
On October 30, 2009, Bank Freedom 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.
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 exiting
agent based merchant processing however the Company is maintaining its merchant
processing relationships to be a valued added service for its prepaid business
clients.
OTHER MATTERS
Employees
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Not including our executive officers, Prepaid Card Holdings, Inc. and its
subsidiaries currently have 6 employees, all of which are full time. We believe
our relationship with our employees is good.
Independent Contractors
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The company has several independent contractors that work on a revenue sharing
basis.
Research and Development
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During the last two full fiscal years, we have not engaged in any research and
development activities. In the event that we undertake research and development
activities in the future, the costs of those efforts will not be bourn directly
by our consumers.
Intellectual Property
- ----------------------
We have applied for trademarks for "Bank Freedom", "Bank Freedom Card", and "A
card for everyone", Card Now, CardNow, Bank Free, Bank Free Card.
On February 24, 2009 "Bank Freedom" trademark was issued registration number
3581447. On September 30, 2008 "A Card For Everyone" trademark was issued
registration number 3507604. On August 4, 2009 "CardNow" trademark was issued
registration number 3664391. On August 4, 2009 "Card Now" trademark was issued
registration number 3664390 "Bank Freedom Card" "Bank Free" and "Bank Free Card"
are still pending.
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Regulation
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Open loop prepaid cards are subject to several forms of regulation. The most
notable of these regulations include the Electronics Funds Transfer Act; the
Anti-money Laundering and Bank Secrecy Act; the customer identification program
of the Patriot Act; customer security and privacy provisions of the Gramm Leach
Bylie act; and the funds availability requirement of Regulation CC. Due to a
recent change, the Company is not subject to the requirements of Regulation E.
As open loop prepaid cards are essentially bank accounts, we anticipate that our
business will continue to be heavily regulated. Although we have experience in
this area, and we have taken the necessary steps to comply with regulations,
compliance can represent a costly expense and there is no assurance that the
steps we have taken and will take will be sufficient to prevent adverse
regulatory action. If we are unable to successfully comply with all relevant
regulation, it could materially affect our business.
We currently produce no product and conduct no activity that is subject to
environmental laws. All manufacturing is undertaken by a third party.
Nevertheless, it is possible that our activities could fall within the ambit of
environmental regulation in the future. If so, compliance with environmental
laws could become a significant cost, and could materially affect our business.
ITEM 1A. RISK FACTORS
Not required by smaller reporting companies.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
The Company currently operates in a 1,378 square foot space in an office located
in Newport Beach, CA.. The office is in good condition.
Bank Freedom, the Company's wholly owned operating subsidiary, is renting this
space under a lease from L&J properties which expires in December, 2010. The
Company intends to renew its lease before the expiration and knows of no reason
the landlord would not allow the renewal on approximately the same terms it has
now. Monthly rent is due on the first of each month in the amount of $2,756.
ITEM 3. LEGAL PROCEEDINGS
PROCESSOR
We believe our processor, I2C, Inc., overcharged us a significant amount. They
sent a bill which we are disputing for lack of documentation. Our contract
calls for arbitration and we are going forward with it. We tried to mediate but
could not reach an agreement. We are in the process of switching processors to
FIS an $8 billion NYSE company in May and anticipate no service interruption
over the dispute.
Page 14
ROBERT MCBRIDE AND BRUCE BARTON
On August 3, 2009, the Company reached an agreement in principal to settle
lawsuits brought by Robert McBride and Bruce Barton against the Company. Under
the terms of the settlement, the Company agreed to pay Mr. McBride a total of
$60,000 to purchase 6,000,000 shares of the Company's common stock from him.
Additionally, a convertible note issued to Mr. McBride in the amount of up to
$50,000, which is convertible into 400,000 shares of non reversible stock, was
agreed to be reduced to 300,000 shares of non reversible stock. If after two
years of the agreement date the Company does not complete a reverse split of its
common stock and pays all required settlement payments to Mr. McBride, the
convertible note and underlying 300,000 shares of non reversible stock will be
canceled. Mr. McBride and Mr. Barton released all claims against the Company and
all of its officers and directors, Bruce Berman, Merchant Processing
International Inc. DBA Bank Freedom, Berman Marketing Group Inc. and Berman
Investment Group.
The Company received 6,000,000 shares of its common stock from Mr. McBride and
on November 12, 2009 cancelled these shares. Pursuant to the terms of the
settlement agreement, the Company has paid Mr. McBride $30,000 as of December
31, 2009 and an additional payment of $5,000 on January 15, 2010.
ROBERT CHRISTIANSEN
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.
VENDOR DISPUTE
During the year ended December 31, 2008, the Company had a dispute with one of
its vendors over the amount of about $360,000. On January 13, 2009, the Company
agreed to a settlement of this dispute. We have agreed to execute a note in the
amount of $182,900 at 4% simple annual interest payable monthly over three
years, whereby we will pay $5399.64 a month
Other than the foregoing, the Company is not a party to any material legal
proceedings and, to the Company's knowledge, no such proceedings are threatened
or contemplated by any party.
ITEM 4. [REMOVED AND RESERVED]
Page 15
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
MARKET INFORMATION
Our common stock is quoted in United States markets on the Pink Sheets,
maintained by Pink Sheets LLC, a privately owned company headquartered in New
York City, under the symbol "PPDC." There is no assurance that the common stock
will continue to be traded on the Pink Sheets or that any liquidity exists for
our shareholders.
MARKET PRICE
The following table shows the high and low per share price quotations of the
Company's common stock as reported by the Pink Sheets for the periods presented.
These quotations reflect inter-dealer prices, without retail mark-up, mark-down
or commissions, and may not necessarily represent actual transactions. The Pink
Sheets market is extremely limited and the prices quoted by brokers are not a
reliable indication of the value of the common stock. The periods presented
represent fiscal quarters, with the fourth quarter of each year ending on
December 31.
HIGH LOW
Fiscal 2010
First Quarter .015 .0019
Fiscal 2009
First Quarter .035 .01
Second Quarter .13 .01
Third Quarter .09 .04
Fourth Quarter .021 .001
Fiscal 2008
First Quarter 0.17 0.06
Second Quarter 0.13 0.07
Third Quarter 0.16 0.04
Fourth Quarter 0.13 0.03
As of April 14, 2010, the Company had 1,000,000,000 shares of common stock
authorized with 391,653,890 issued and outstanding and 27,166,209 freely
tradable shares in the public float. These shares were held by approximately
270 shareholders of record and the Company estimates by more than 300 beneficial
shareholders.
PENNY STOCK REGULATIONS
Our common stock is quoted in United States markets on the PinkSheets,
maintained by PinkSheets LLC, a privately owned company headquartered in New
York City, under the symbol "PPDC." On April 7, 2010, the last reported sale
price of our common stock was $0. 0125 per share. As such, the Company's common
stock may be subject to provisions of Section 15(g) and Rule 15g-9 of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), commonly
referred to as the "penny stock rule."
Page 16
Section 15(g) sets forth certain requirements for transactions in penny stocks,
and Rule 15g-9(d) incorporates the definition of "penny stock" that is found in
Rule 3a51-1 of the Exchange Act. The SEC generally defines "penny stock" to be
any equity security that has a market price less than $5.00 per share, subject
to certain exceptions. As long as the Company's common stock is deemed to be a
penny stock, trading in the shares will be subject to additional sales practice
requirements on broker-dealers who sell penny stocks to persons other than
established customers and accredited investors.
DIVIDENDS
The Company has not issued any dividends on the common stock to date, and does
not intend to issue any dividends on the common stock in the near future. We
currently intend to use all profits to further the growth and development of the
Company.
RECENT SALES OF UNREGISTERED SECURITIES
In Fiscal 2009 and the interim period through the date of this report, we issued
or cancelled the following unregistered shares of securities:
On April 2, 2010, the Company executed a Revolving Promissory Note with an
officer and director to borrow a principal sum of $50,000 for a one year term.
The interest rate payable for such loan was agreed to be the interest rate
charged to the officer and director on the revolving credit line by the third
party. In the event the Company does not pay the amount due on or before the
maturity date, the Company agreed to pay liquidated damages of 1.5% simple
monthly interest on any amounts outstanding, due on each one month anniversary
of the maturity date. The Company also agreed to grant 5,000,000 stock options
at an exercise price of $0.01 per share as consideration for making this
revolving line available to the Company. The Company has not borrowed any funds
against the April 2, 2010. This issuance was completed in accordance with
Section 4(2) of the Securities Act in an offering without any public offering or
distribution. These shares are restricted securities and include an appropriate
restrictive legend.
On March 3, 2010, the Company received in cash $50,000 from a third party and
executed a Convertible Promissory Note to pay the principal sum of $50,000 for a
one year term. The term of maturity of the Convertible Promissory Note is one
year and interest rate is 12% simple interest per annum. In the event the
Company does not pay the amount due on or before the maturity date, the Company
agreed to pay liquidated damages of 1.5% simple monthly interest on any amounts
outstanding, due on each one month anniversary of the maturity date. The Company
also agreed to grant 5,000,000 stock options at an exercise price of $0.01 per
share as consideration for making this loan available to the Company. This
issuance was completed in accordance with Section 4(2) of the Securities Act in
an offering without any public offering or distribution. These shares are
restricted securities and include an appropriate restrictive legend.
On January 15, 2010, the Company cancelled 21,250,000 shares of common stock
returned by a former executive officer of the Company pursuant to the terms of a
settlement agreement executed on December 22, 2009.
On January 10, 2010, the Company issued 15,000,000 shares of common stock on the
exercise of options granted to Rick Galasieski, an officer and director of the
Company, at an exercise price of $0.001 per share, for a total of $15,000. The
Company agreed to reduce the exercise price from $0.075 in consideration for Mr.
Galasieski agreeing to exercise the options immediately. This issuance was
completed in accordance with Section 4(2) of the Securities Act in an offering
without any public offering or distribution. These shares are restricted
securities and include an appropriate restrictive legend.
Page 17
On August 3, 2009, the Company reached an agreement in principal to settle
lawsuits brought by Robert McBride and Bruce Barton against the Company. Under
the terms of the settlement, the Company received 6,000,000 shares of its common
stock from Mr. McBride and on November 12, 2009 cancelled these shares.
Additionally, a convertible note issued to Mr. McBride in the amount of up to
$50,000, which is convertible into 400,000 shares of non reversible stock, was
agreed to be reduced to 300,000 shares of non reversible stock.
On April 27, 2009, the Company issued warrants to two employees to purchase
250,000 shares of common stock each at an exercise price of $0.025. The
warrants vest on January 1, 2010, and expire on January 1, 2015 or upon
termination of their employment. This issuance was completed in accordance with
Section 4(2) of the Securities Act in an offering without any public offering or
distribution. These shares are restricted securities and include an appropriate
restrictive legend.
PURCHASES OF EQUITY SECURITIES
None.
ITEM 6. SELECTED FINANCIAL DATA
Not required by smaller reporting companies.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
Forward Looking Statements: Statements about our future expectations are
"forward-looking statements" within the meaning of applicable Federal Securities
Laws, 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.
FINANCIAL STATEMENTS
This Management's Discussion and Analysis of Financial Condition and Results of
Operations should be read in conjunction with the following financial statements
included in this report, and their accompanying notes (the "Financial
Statements"):
Financial Statements for theYear Ended December 31, 2009 (Unaudited)
- ----------------------------------------------------------------------------
- - Consolidated Balance Sheet at December 31, 2009.
- - Consolidated Statement of Operations for the Year ended December 31, 2009.
- - Consolidated Statement of Cash Flows for the Year ended December 31, 2009.
- - Consolidated Statement of Stockholders Equity at December 31, 2009.
Page 18
NOTE REGARDING UNAUDITED FINANCIAL STATEMENTS. As of the date of this report,
the Company has not engaged an auditor to audit its 2009 financial statements.
The Financial Statements contained herein are accordingly unaudited and subject
to change once the Company engages an auditor and conducts a complete audit. To
the best knowledge of management, the information and data provided herein do
not contain any material misstatement or omissions of fact.
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 plan of
operation 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 year ended December 31, 2009, the Company
had a net income of $160,103, but as of the year end we had $1,110,365 in total
liabilities and an accumulated deficit of $3,213,379. We do not believe this
level of income is sufficient to sustain our operations without additional
capital.
Accordingly, our ability to initiate our plan of operations and continue as a
going concern is currently dependent on our ability to increase profits and
raise external capital. We have raised $350,000 on the issuance of three
convertible notes in 2008, and an additional $90,000 on the issuance of two
convertible notes in 2010. We believe that it will be very difficult to obtain
any form of debt financing without equity conversion terms due to our current
lack of revenues from operations and the current state of our balance sheet,
including a lack of hard assets against which to borrow. Accordingly, we are
focusing on obtaining equity financing. However, with the economic turmoil in
the finical markets today we are concerned about the ability to raise any
capital at all
From November, 2007, through September, 2008, the Company raised approximately
$2,164,237 in three private offerings, before costs. In January 2010 we raised
$15,000 on the exercise of options held by one of our directors. We may be
required to seek additional funding subsequent to this private offering.
RESULTS OF OPERATIONS - 2009 VS. 2008
Revenues
During the year ended December 31, 2008, merchant processing services realized
revenues of $697,263 and the Bank Freedom prepaid card realized revenues of
$1,681,454 for a total of $2,378,717. This represents an increase of 133% or
$1,359,821 from $1,018,896 for the same period last year. The increase is the
result of the growth of both our prepaid card services and our merchant
processing portfolio. We expect our prepaid card services to continue to grow
as we continue our marketing campaign to attract more cardholders.
Cost of Sales
During the year ended December 31, 2009, we incurred $668,066 in costs directly
attributed to our sales. This represents an increase of 57%% or $242,720 over
$425,346 realized in the same period last year. The increase is primarily due
to the growth of our prepaid card services. In 2009, Cost of Sales included
bank and MasterCard Association fees, merchant processing fees, and fulfillment
costs.
Page 19
Expenses
During the year ended December 31, 2009, we incurred $1,498,341 in expenses from
operations. This represents a 53% or $1,707,396 decrease from $3,248,555
realized in the same period last year. Expenses consisted of the following:
INCREASE % INCREASE
EXPENSES: 2009 2008 (DECREASE) (DECREASE)
- ---------------------------- ---------- ---------- ------------- -----------
Sales and marketing $ 106,342 $1,361,243 ($1,254,901) (92%)
Professional Fees 211,590 422,520 ($210,930) (50%)
Depreciation 2,349 1,272 $ 1,077 85%
General and Administrative 1,178,060 1,338,541 ($160,481) (12%)
Related Party - Rent Expense - 82,161 ($82,161.00) (100%)
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. The 92% decrease
from 2008 is attributable to the aggressive marketing campaign we conducted in
2008 as we rolled out our prepaid cards. Sales and marketing will continue to
fluctuate greatly due to the varying amount of time and money we commit to
marketing from time to time.
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. The 50% decrease in professional fees
is primarily due to the costs of our private offering and registration statement
in 2008. We anticipate this expense remaining at or around its 2009 levels for
the foreseeable future.
Depreciation - Consists of depreciation of property and equipment. We attribute
the increase in depreciation to the acquisition of additional depreciable
property and equipment in 2009.
General and Administrative - Consists of insurance, office supplies and expense,
payroll expenses, investor referral fees and other miscellaneous expenses. We
believe the 12% decrease represents the mild fluctuation we expect to occur each
year based on the varying needs of the Company.
Related Party- Rent Expense - Consists of office space rental. In 2009 we no
longer leased office space from a related party, and do not anticipate incurring
this expense in the future.
OFF-BALANCE SHEET ARRANGEMENTS
None
SIGNIFICANT EMPLOYEE CHANGES
On January 29, 2009, Rick Galasieski was elected as a director of the Company
and appointed as Vice President and Corporate Secretary of the Company. On July
15, 2009, Mr. Galasieski was promoted to Senior Vice President.
On August 6, 2009, the Company terminated Executive Vice President Robert
Christiansen . On September 19, 2009, John Weber, Jr. resigned as a consultant
to the Company and as head of the Company's Accounting Advisory Board. Mr.
Weber was previously the Company's Vice President of Finance, the principal
financial officer of the Company.
Page 20
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
None.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Description Page
- ------------------------------------------------------------ ----
Consolidated Balance Sheets F-22
Consolidated Statements of Operations F-23
Consolidated Statements of Changes in Shareholders' Interest F-24
Consolidated Statements of Cash Flows F-25
Notes to Consolidated Financial Statements F-26
Page 21
PREPAID CARD HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
DECEMBER 31, 2009
DECEMBER 31, DECEMBER 31,
2009 2008
-------------- --------------
ASSETS
Current Assets
Cash and cash equivalents $ 100,283 $ 83,011
Receivables, net 200,990 79,472
Prepaid expenses and other current assets 41,630 33,100
-------------- --------------
Total Current Assets 342,903 195,583
Property and Equipment, net 5,583 4,420
Other Assets
Deposits 10,000 10,000
-------------- --------------
Total Assets $ 358,486 $ 210,003
============== ==============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities
Accounts payable and accrued expenses $ 268,632 $ 272,099
Deferred liability 52,825 -
Common stock to be issued 15,000 -
Interest payable - related party 13,624 2,768
Note payable - related party 340,585 197,269
Note payable 74,128 58,551
Total Current Liabilities 764,794 530,687
Long Term Liabilities
Note payable - related party 277,003 466,960
Note payable 68,568 124,338
-------------- --------------
Total Long Term Liabilities 345,571 591,298
-------------- --------------
Total Liabilities 1,110,365 1,121,985
Commitments and Contingencies - -
Stockholders' Deficit
Common stock - authorized
1,000,000,000 shares,
$0.001 per share, 397,903,890 shares
and 403,903,890 shares issued and
outstanding 397,904 403,904
Additional paid in capital 2,063,597 2,057,597
Accumulated deficit (3,213,379) (3,373,483)
-------------- --------------
Total Stockholders' Deficit (751,879) (911,982)
-------------- --------------
Total Liabilities and Stockholders' Deficit $ 358,486 $ 210,003
============== ==============
The accompanying notes are an integral part of these unaudited consolidated
financial statements
F-22
PREPAID CARD HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
DECEMBER 31, 2009
FOR THE YEAR ENDED DECEMBER 31,
2009 2008
------------------ -----------------
REVENUES
Card operations $ 1,681,454 $ 614,793
Processing services 697,263 404,103
------------------ -----------------
Total revenues 2,378,717 1,018,896
COST OF SALES 668,066 425,346
------------------ -----------------
GROSS PROFIT 1,710,651 593,550
OPERATING EXPENSES
Sales and marketing 106,342 1,361,243
Professional fees 211,590 422,520
Depreciation 2,349 1,272
General and administrative 1,178,060 1,338,541
Related party - rent expense - 82,161
------------------ -----------------
Total operating expenses 1,498,341 3,205,737
------------------ -----------------
INCOME (LOSS) FROM OPERATIONS 212,310 (2,612,187)
NON-OPERATING INCOME (EXPENSES)
Interest income 207 -
Interest expense (29,390) (8,424)
Interest expense - related party (19,871) (31,994)
Other 34 1,952
------------------ -----------------
Total non- operating expenses (49,019) (38,466)
------------------ -----------------
Income (Loss) Before Income Taxes 163,291 (2,650,653)
Provision for income taxes 3,188 2,400
Net Income (Loss) $ 160,103 $ (2,653,053)
================== =================
Income (Loss) per common share
- basic and diluted $ 0.0004 $ (0.0070)
================== =================
Weighted average shares outstanding
during the period - basic and diluted 402,548,391 377,763,729
================== =================
The accompanying notes are an integral part of these unaudited consolidated
financial statements.
F-23
PREPAID CARD HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT (UNAUDITED)
DECEMBER 31, 2009
SUBSCR- ADDITIONAL RETAINED
COMMON STOCK PREFERRED STOCK IPTIONS PAID IN EARNINGS
SHARES AMOUNT SHARES AMOUNT RECEIVABLE CAPITAL (DEFICIT) TOTAL
------------- ---------- ------- --------- ------------ ----------- ------------ ------------
Balance - December 31, 2007 476,873,589 $ 476,874 - $ - $ (114,163) $ 935,569 $ (720,430) $ 577,850
Shares issued for
combination 2,500,000 22,500 - - - (732,348) - (709,848)
Subscriptions received - - - - 114,163 - - 114,163
Shares issued for cash 29,187,500 29,188 - - - 1,400,049 - 1,429,237
Shares returned to treasury (127,500,000) (127,500) - - - 127,500 - -
Shares issued for services 3,342,801 3,343 - - - 326,327 - 329,670
Shares cancelled (500,000) (500) - - - 500 - -
Net loss - - - - - - (2,653,053) (2,653,053)
------------- ---------- ------- --------- ------------ ----------- ------------ ------------
Balance - December 31, 2008 403,903,890 403,904 - - - 2,057,597 (3,373,483) (911,982)
Shares cancelled per
settlement (6,000,000) (6,000) - - - 6,000 - -
Net Income - - - - - - 160,103 160,103
------------- ---------- ------- --------- ------------ ----------- ------------ ------------
Balance - December 31, 2009 397,903,890 $ 397,904 - $ - $ - $2,063,597 $(3,213,380) $ (751,879)
============= ========== ======= ========= ============ =========== ============ ============
<FN>
The accompanying notes are an integral part of these unaudited consolidated financial statements.
F-24
PREPAID CARD HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
DECEMBER 31, 2009
FOR THE YEAR ENDED DECEMBER 31,
2009 2008
-------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income (Loss) $ 160,103 $ (2,653,053)
Depreciation 2,349 1,272
Bad debts 190,832 -
Common stock issued for services - 352,169
(Increase) decrease in current assets
Accounts receivable (312,351) (79,472)
Prepaid expenses and other current assets (8,530) (43,100)
Increase (Decrease) in current liabilities
Accounts payable and accrued expenses (3,467) 268,645
Interest payable - related party 10,856 -
Deferred liability 52,825 -
-------------- -------------
Net Cash Provided By (Used In)
Operating Activities 92,618 (2,153,539)
CASH FLOWS FROM INVESTING ACTIVITIES
Business combination and fixed assets - (734,067)
Purchase of property and equipment (3,512) -
-------------- -------------
Net Cash Used in Investing Activities (3,512) (734,067)
CASH FLOWS FROM FINANCING ACTIVITIES
Cash proceeds from issuance of note
payable - 1,288,782
Cash payments on notes payable (40,193) (353,125)
Cash payments on notes payable
- related party (46,641) (85,771)
Cash proceeds from issuance of
common stock 15,000 1,429,237
Cash proceeds from collections of
subscriptions receivable - 114,163
-------------- -------------
Net Cash Provided by (Used In)
Financing Activities (71,834) 2,393,286
-------------- -------------
NET INCREASE (DECREASE) IN CASH 17,272 (494,320)
CASH AND CASH EQUIVALENTS
- BEGINNING BALANCE 83,011 577,331
-------------- -------------
CASH AND CASH EQUIVALENTS
- ENDING BALANCE $ 100,283 $ 83,011
============== =============
SUPPLEMENTAL DISCLOSURES:
Interest Paid $ 14,798 $ 35,002
Income Taxes Paid $ 843 $ -
<
The accompanying notes are an integral part of these unaudited consolidated
financial statements.
F-25
PREPAID CARD HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
DECEMBER 31, 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-regionPlaceTypeUnited 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.
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
F-26
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 year ended December 31, 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.
Allowance for doubtful debts amounted to $112,494 and $0 as of December 31, 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.
F-27
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 earns 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, the Company earns revenues
through fees charged to the cardholders. Those sources may include:
- - Interchange
- - Bill pay fees
- - Domestic and International ATM transaction fees
- - 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
F-28
not been presented separately 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 August 2009, the FASB issued Accounting Standards Update ("ASU") 2009-05,
which amends ASC Topic 820, Measuring Liabilities at Fair Value, which provides
additional guidance on the measurement of liabilities at fair value. These
amended standards clarify that in circumstances in which a quoted price in an
active market for the identical liability is not available, we are required to
use the quoted price of the identical liability when traded as an asset, quoted
prices for similar liabilities, or quoted prices for similar liabilities when
traded as assets. If these quoted prices are not available, we are required to
use another valuation technique, such as an income approach or a market
approach. These amended standards became effective for us beginning in the
fourth quarter of fiscal year 2009 and are not expected to have a significant
impact on our consolidated financial statements.
In September 2009, the Financial Accounting Standards Board ("FASB") issued
guidance related to revenue recognition for multiple element deliverables which
eliminates the requirement that all undelivered elements must have objective and
reliable evidence of fair value before a company can recognize the portion of
the consideration that is attributable to items that already have been
delivered. Under the new guidance, the relative selling price method is required
to be used in allocating consideration between deliverables and the residual
value method will no longer be permitted. This guidance is effective
prospectively for revenue arrangements entered into or materially modified in
2011 although early adoption is permitted. A company may elect, but will not be
required, to adopt the amendments retrospectively for all prior periods. The
Company is currently evaluating this guidance and has not yet determined the
impact, if any, that it will have on the consolidated financial statements.
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 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
F-29
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 $617,588 at December
31, 2009 and accrued interest payable on the promissory note amounted to $13,624
at December 31, 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 for the sub-lease
were incurred during the year ended December 31, 2009.
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 $14,000 for the year ended December 31, 2009 and 2008, respectively.
NOTE 3 - BUSINESS COMBINATION
In March 2008, the Company 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
to a related party, at par value of $0.001 per share valued at $22,500, and
executed a promissory note for $750,000, for a total consideration of
acquisition valued at $772,500. The consideration paid exceeded the book value
of the assets acquired by $732,348, which was charged against additional paid in
capital.
NOTE 4 - ACCOUNTS RECEIVABLE
The Company has accounts receivable from banks on the amounts transacted for the
previous month consisting of processing fees and charges. Accounts receivable
consist of:
F-30
DECEMBER 31,
2009 2008
-------------- -------
Trade $ 112,494 $ -
Meta Bank 180,735 78,773
Commissions 1,327 700
Card Association Incentives 9,547 -
Other 9,381 -
-------------- -------
313,484 79,473
Less: Allowance for doubtful accounts (112,494) -
-------------- -------
$ 200,990 $79,473
============== =======
NOTE 5 - PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
DECEMBER 31,
2009 2008
-------------- --------
Furniture and fixtures $ 8,648 $ 8,648
Computer equipment 7,193 3,682
-------------- --------
15,841 12,330
Less: Accumulated depreciation (9,799) (7,910)
-------------- --------
Property and equipment, net $ 6,042 $ 4,420
-------------- --------
Depreciation expense for the twelve months periods ended December 31, 2009 and
2008 was $2,349 and $1,272, respectively.
NOTE 6 - ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following:
DECEMBER 31,
2009 2008
------------- --------
Accrued Interest $ 24,903 $ 2,768
Website 3,066 -
Office Expense 8,415 60,948
Insurance 5,085 1,029
Legal 43,173 1,127
Accrued Salaries 10,000 -
Marketing and Processing Costs 154,430 194,997
Other 19,560 11,230
------------- --------
Total $ 268,632 $272,099
============= ========
F-31
NOTE 7 - NOTES PAYABLE
Note Payable - Related Party
- --------------------------------
The Company is indebted to its President, a principal shareholder, for the
purchase of the subsidiary. The Company executed a promissory note of $750,000,
payable over 48 months bearing interest at 3.25% per annum, with final payment
due on June 1, 2012. The Company is obligated to make a monthly payment on
$16,764. Effective January 1, 2009, the interest rate was reduced from 5% to
3.25%. The principal balance outstanding at December 31, 2009 amounted to
$617,588. Accrued interest payable to the President on the promissory note
amounted to $13,624 at December 31, 2009. The Company recorded interest expense
related to the promissory note of $19,871 and $31,994 in the accompanying
consolidated statements of operations for the twelve months period ending
December 31, 2009 and 2008, respectively.
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
December 31, 2009 amounted to $129,299 payable in monthly payments of $5,400
over 25 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
December 31, 2009 amounted to $13,397 payable in monthly payments of $4,493 over
3 months.
The Company recorded an interest expense of $29,390 and $8,424 in the
accompanying statements of operations for the twelve months ended December 31,
2009 and 2008, respectively.
NOTE 8 - COMMON STOCK TRANSACTIONS
On August 3, 2009, the Company reached an agreement in principal to settle
lawsuits brought by Robert McBride and Bruce Barton against the Company. Under
the terms of the settlement, the Company agreed to pay Mr. McBride a total of
$60,000 to purchase 6,000,000 shares of the Company's common stock from him.
Additionally, a convertible note issued to Mr. McBride in the amount of up to
$50,000, which is convertible into 400,000 shares of non reversible stock, was
agreed to be reduced to 300,000 shares of non reversible stock. If after two
years of the agreement date the Company does not complete a reverse split of its
common stock and pays all required settlement payments to Mr. McBride, the
convertible note and underlying 300,000 shares of non reversible stock will be
canceled. Mr. McBride and Mr. Barton released all claims against the Company and
all of its officers and directors, Bruce Berman, Merchant Processing
International Inc. DBA Bank Freedom, Berman Marketing Group Inc. and Berman
Investment Group.
The Company received 6,000,000 shares of its common stock from Mr. McBride and
on November 12, 2009 cancelled these shares. Pursuant to the terms of the
settlement agreement, the Company has paid Mr. McBride $30,000 as of December
31, 2009 and an additional payment of $5,000 on January 15, 2010.
NOTE 9 - BASIC AND DILUTED NET INCOME (LOSS) PER SHARE
Net income (loss) per share is calculated in accordance with the Statement of
financial accounting standards No. 128 (SFAS No. 128), "Earnings per share."
SFAS No. 128 superseded Accounting Principles Board Opinion No.15 (APB 15). Net
income (loss) per share for all periods presented has been restated to reflect
the adoption of SFAS No. 128. Basic net income (loss) per share is based upon
the
F-32
weighted average number of common shares outstanding. Diluted net income (loss)
per share is based on the assumption that all dilutive convertible shares and
stock options were converted or exercised. Dilution is computed by applying the
treasury stock method. Under this method, options and warrants are assumed to be
exercised at the beginning of the period (or at the time of issuance, if later),
and as if funds obtained thereby were used to purchase common stock at the
average market price during the period.
Weighted average number of shares used to compute basic and diluted income
(loss) per share is the same since the effect of dilutive securities is
anti-dilutive.
NOTE 10 - INCOME TAXES
Income tax for the years ended December 31, 2009 and 2008 is summarized as
follows:
DECEMBER 31,
2009 2008
------ --------
Current:
Federal $ - $ -
State 3,188 2,400
Deferred taxes - -
------ --------
$3,188 $ 2,400
====== ========
The following is a reconciliation of the provision for income taxes at the U.S.
federal income tax rate to the income taxes reflected in the Consolidated
Statements of Operations:
DECEMBER 31,
2009 2008
------ --------
Tax expense (credit) at statutory rate - federal (34%) (34%)
State tax expense net of federal tax (6%) (6%)
Valuation allowance 40% 40%
------ --------
Tax expense at actual rate - -
====== ========
The tax effects of temporary differences that gave rise to significant portions
of deferred tax assets and liabilities at December 31, 2009 and 2008 are as
follows:
DECEMBER 31,
2009 2008
------------ ------------
Deferred tax assets:
Net operating loss carry forward $ 1,286,657 $ 1,350,698
------------ ------------
Total gross deferred tax assets 1,286,657 1,350,698
Less: Valuation allowance (1,286,657) (1,350,698)
------------ ------------
Net deferred tax assets - -
============ ============
F-33
At December 31, 2009, the Company had net operating loss carry forwards of
$3,216,642 for U.S. federal income tax purposes available to offset future
taxable income expiring on various dates through 2022. The Company has recorded
a 100% valuation allowance on the deferred tax assets due to the uncertainty of
its realization.
NOTE 11 - 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 sign-on bonus of $50,000 and agreed to provide marketing support
of up to $150,000 for the Company's actual out-of-pocket 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 $50,000 was a sign-on bonus and recorded it
as revenues in the accompanying financial statements for the year ended December
31, 2009. During the year ended December 31, 2009, the Company incurred expenses
of $97,175 in marketing support expense that was offset against the $150,000
received from the Association. The Company recorded in the accompanying
financial statements at December 31, 2009 a deferred liability for the remaining
$53,825 unused marketing support fund received from the Association. In
addition, based on its processing volume the Company earned $18,101 of financial
incentives from the Association during the year ended December 31, 2009 which
the Company will receive on the 1st anniversary of the execution of the
agreement. Each subsequent year's marketing incentives will be paid to the
Company on the respective anniversary date. The Company has recorded $18,101 as
accounts receivable from the Association as of December 31, 2009.
In November 2009, the Company received an invoice from its Processor for $92,945
for service charges covering the period from January 1, 2008 to September 30,
2009. Subsequently, the Processor sent a revised invoice for services for in an
amount not less than $107,984 with no details of the time period covered. The
Company is disputing these charges. The Company has not recorded the additional
expense of $15,039 for services in the accompanying financial statements for the
period ended December 31, 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, however, such mediation was without success. On March 16, 2010, the
Processor filed a complaint against the Company for their demand of not less
than $107,000. The Company plans to arbitrate the dispute to defend itself.
NOTE 12 - GOING CONCERN
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles, which contemplate continuation of the
Company as a going concern. This basis of accounting contemplates the recovery
of the Company's assets and the satisfaction of its liabilities in the normal
course of business. The Company has an accumulated deficit of $3,213,379 and
working capital deficiency of $421,890 as of December 31, 2009 and recorded net
earnings of $160,103 for the year ended December 31, 2009. In view of the
matters described above, recoverability of a major portion of the recorded asset
amounts shown in the accompanying balance sheet is dependent upon continued
operations of the Company, which in turn is dependent upon the Company's ability
to raise additional capital, obtain financing and to succeed in its future
operations. The financial statements do not include
F-34
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.
Management has taken the following steps to revise its operating and financial
requirements, which it believes are sufficient to provide the Company with the
ability to continue as a going concern. Management devoted considerable effort
during the year ended December 31, 2009 towards (i) expanding the Company's Card
operations business, (ii) further streamlining and reducing costs, (iii)
evaluating its distribution and marketing methods, and (iv) obtaining additional
equity financing.
NOTE 13 -SUBSEQUENT EVENTS
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.
On March 3, 2010, the Company received in cash $50,000 from a third party and
executed a Convertible Promissory Note to pay the principal sum of $50,000 for a
one year term. The term of maturity of the Convertible Promissory Note is one
year and interest rate is 12% simple interest per annum. In the event the
Company does not pay the amount due on or before the maturity date, the Company
agreed to pay liquidated damages of 1.5% simple monthly interest on any amounts
outstanding, due on each one month anniversary of the maturity date. The Company
also agreed to grant 5,000,000 stock options at an exercise price of $0.01 per
share as consideration for making this loan available to the Company.
On April 2, 2010, the Company executed a Revolving Promissory Note with an
officer and director to borrow a principal sum of $50,000 for a one year term.
The interest rate payable for such loan was agreed to be the interest rate
charged to the officer and director on the revolving credit line by the third
party. In the
F-35
event the Company does not pay the amount due on or before the maturity date,
the Company agreed to pay liquidated damages of 1.5% simple monthly interest on
any amounts outstanding, due on each one month anniversary of the maturity date.
The Company also agreed to grant 5,000,000 stock options at an exercise price of
$0.01 per share as consideration for making this revolving line available to the
Company. The Company has not borrowed any funds against the April 2, 2010.
F-36
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
In January 2010 we learned that Mr. Corso, the accountant who had been
conducting the audit in the name of Gruber & Company, did not hold a current
accounting license; we were later informed by Gruber & Company that Mr. Corso
was incarcerated on unknown charges and was never an employee of Gruber &
Company. Gruber & Company has stated that they have no association with Mr.
Corso, therefore, the December 31, 2008 audited financials should not be relied
on and need to be re-audited. We currently have not engaged an auditor to audit
our Fiscal 2008 and 2009 financial statements.
Accordingly, on January 26, 2010 the Company entered into a consulting agreement
with a licensed CPA from the State of California to assist the Company in
preparing its financial statements going forward, as well as in reconciling the
company's previous financial statements for accuracy and completeness.
As of the date hereof, the Company has not engaged a new certified public
auditing firm. Engaging a certified public auditing firm and conducting audits
on fiscal 2008 and 2009 is a priority for the Company.
ITEM 9A. CONTROLS AND PROCEDURES
(a) 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 December 31, 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 December 31, 2009.
(b) Management's Report on Internal Control over Financial Reporting
-----------------------------------------------------------------------
Our management is responsible for establishing and maintaining adequate internal
control over financial reporting as defined in Rules 13a-15(f) and 15d-a5(f)
under the Exchange Act. Our internal control over financial reporting is
designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in
accordance with U.S. GAAP. Our internal control over financial reporting
includes those policies and procedures that: (i) pertain to the maintenance of
records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of our assets; (ii) provide reasonable assurance
that transactions are recorded as necessary to permit preparation of financial
statements in accordance with GAAP, and that our receipts and expenditures are
being made only in accordance with authorizations of our management and
directors; and (iii) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use of disposition of our assets that
could have a material effect on the financial statements.
Page 37
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
Under the supervision of our Chief Executive Officer, our management assessed
the effectiveness of our internal control over financial reporting as of
December 31, 2009. In making this assessment, management used the criteria set
forth in Internal Control-Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission. Based on this assessment,
our management has concluded that our internal control over financial reporting
was ineffective as of December 31, 2009 and there are material weaknesses in our
internal control over financial reporting. A material weakness is a deficiency,
or a combination of control deficiencies, in internal control over financial
reporting such that there is a reasonable possibility that a material
misstatement of our annual or interim financial statements will not be prevented
or detected on a timely basis.
The material weaknesses relate to the limited number of persons responsible for
the recording and reporting of financial information, the lack of separation of
financial reporting duties, and the limited size of our management team in
general. We are in the process evaluating methods of improving our internal
control over financial reporting, including the possible addition of financial
reporting staff and the increased separation of financial reporting
responsibility, and intend to implement such steps as are necessary and possible
to correct these material weaknesses.
This annual report does not include an attestation report of our registered
public accounting firm regarding internal control over financial reporting.
Management's report was not subject to attestation by our registered public
accounting firm pursuant to temporary rules of the SEC that permit us to provide
only management's report in this Annual Report on Form 10-K. Under current
regulations, our registered public accounting firm will not be required to opine
on internal controls until fiscal 2010.
(c) Change in Internal Controls
------------------------------
There were no changes in our internal control over financial reporting during
the quarter ended December 31, 2009, that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
ITEM 9B. OTHER INFORMATION
None.
Page 38
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTOR AND EXECUTIVE OFFICER SUMMARY
The following table sets forth the names, ages, and principal offices and
positions of our current directors, executive officers, and persons we consider
to be significant employees. The Board of Directors elects our executive
officers annually. Our directors serve one-year terms or until their successors
are elected, qualified and accept their positions. The executive officers serve
terms of one year or until their death, resignation or removal by the Board of
Directors. There are no family relationships or understandings between any of
the directors and executive officers. In addition, there was no arrangement or
understanding between any executive officer and any other person pursuant to
which any person was selected as an executive officer.
NAME OF DIRECTOR OR OFFICER AGE POSITION
Bruce Berman 52 Chief Executive Officer,
Chairman of the Board of Directors,
and Principal Financial Officer
Rick Galasieski 35 Vice President, Corporate Secretary
and Director
EXECUTIVE OFFICER AND DIRECTOR BIOS
BRUCE BERMAN: Chief Executive Officer, Chairman of the Board of Directors, and
Principal Financial Officer
In 2001, Mr. Berman founded Berman Investment Group LLC ("BIG"). From 2003 to
2007 at BIG, Mr. Berman led the development and marketing of over $20,000,000 in
financial empowerment books and CDs, including his book, "I Got Here. You Can
Too!"(R), a book on how to start, fund, and run companies that has approximately
500,000 copies in circulation, and 15 financial empowerment CD's with
approximately 3,000,000 copies in circulation targeted at a similar demographic
as Bank Freedom consisting of Credit and Debt Repair, Internet Marketing, Real
Estate, Sales, Negotiating, using eBay, Being Your Own Boss, and Residual
Income. He wrote, produced, performed, and aired ten TV commercials, twenty
radio commercials and was responsible for the purchasing and airing over 100,000
spots specifically targeted at a similar demographic.
Mr. Berman was nominated by Sprint(R) for the Ernst & Young "Entrepreneur of the
Year Award" for a technology development company he founded in 1999 and took
public in 2000.
During 1990 to 2000 Mr. Berman was a business consultant. Mr. Berman advised
companies on formation, capital raising, investor relations, mergers and
acquisitions, marketing growth and becoming public. Although he never held a
securities license, Mr. Berman was the beneficial owner of an NASD licensed
broker-dealer he started in 1999. Other Companies founded and headed by Mr.
Berman include TAEI, a pioneer in wind energy development in the US from 1983 to
1988, With TAEI, he purchased several companies within the industry including a
NASD licensed broker dealer, a licensed construction company and a manufacturing
facility which in a few short years employed over 100 staff. Two years
Page 39
after the federal and state tax credits financing wind energy expired in 1985,
TAEI ended up in chapter 11 bankruptcy in 1987. For approximately a year Mr.
Berman was the court-appointed trustee and negotiated the resolution of tens of
millions of dollars worth of contracts. Eventually the company went chapter 7.
From 1980 to 1983, Mr. Berman co founded Cal American Leasing, an equipment
leasing company.
RICK GALASIESKI: Senior Vice President, Corporate Secretary and Director
Rick Galasieski serves as Vice President and director of the Company. He
previously served as Vice President of Internet Marketing for Berman Marketing
Group, Inc. In 2002 Mr. Galasieski founded Epic Results, Inc., an interactive
internet marketing firm specializing in driving keyword targeted traffic to web
properties, which he ran until joining the Company in 2007. In 2000 he
co-founded EdgeFocus, Inc., which was acquired by Wireless Logic Group, a
leading supplier of Wi-Fi services to multi-dwelling units across the
Southwestern United States. From 2000 to 2002, he served as their Vice
President of Operations and Strategic Development.
In 1998 Mr. Galasieski co-founded Broadband Digital Group, Inc. From 1998 to
2000, he was instrumental in growing this company from its inception to over 200
employees, which was acquired by Winfire, Inc., and grew to the number six
broadband company in the United States at the time. The company had over 50,000
active DSL subscribers and over 500,000 desktop software clients when the
subscriber base was sold off to the regional bell operating companies. Mr.
Galasieski received his BS in Marketing from Arizona State University.
LEGAL AND DISCIPLINARY HISTORY
No officer, director or control person of the Company has been the subject of:
1. A conviction in a criminal proceeding or named as a defendant in a
pending criminal proceeding (excluding traffic violations and other minor
offenses);
2. The entry of an order, judgment, or decree, not subsequently reversed,
suspended or vacated, by a court of competent jurisdiction that permanently or
temporarily enjoined, barred, suspended or otherwise limited such person's
involvement in any type of business, securities, commodities, or banking
activities;
3. A finding or judgment by a court of competent jurisdiction (in a civil
action), the Securities and Exchange Commission, the Commodity Futures Trading
Commission, or a state securities regulator of a violation of federal or state
securities or commodities law, which finding or judgment has not been reversed,
suspended, or vacated; or
4. The entry of an order by a self-regulatory organization that permanently
or temporarily barred, suspended or otherwise limited such person's involvement
in any type of business or securities activities.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 (the "Exchange Act")
requires our directors and officers, and persons who own more than ten percent
of the Common Stock to file reports of ownership and changes in ownership with
the Securities and Exchange Commission ("SEC"). SEC regulations require
reporting persons to furnish us with copies of all Section 16(a) forms they
file.
Page 40
Based solely on our review of the copies of the Forms 3, 4 and 5 and amendments
thereto furnished to us by the persons required to make such filings during
fiscal 2009 and our own records, we believe that Mr. Berman failed to timely
file form a form 4 to report disposition of certain of his shares as a gift in
April, 2009. No other such person failed to file timely a Form 3, 4 or 5 in
Fiscal 2009.
CORPORATE GOVERNANCE.
We have not adopted a code of ethics do date. We are in the process of
evaluating the standards of conduct necessary for the deterrence of malfeasance
and the promotion of ethical conduct and accountability, and will determine
whether a code of ethics is necessary based on our evaluation.
The Company does not have a standing Nominating Committee. There have been no
changes to the procedures whereby security holders may recommend nominees to the
registrant's board of directors.
The Company is not a "listed issuer" as defined by Rule 10A-3, and does not have
a standing Audit Committee. We do not have a financial expert serving on our
board of directors.
ITEM 11. EXECUTIVE COMPENSATION
Objectives and Philosophy ofour Executive Compensation Program
- --------------------------------------------------------------------
We do not have a standing compensation committee. Our board of directors as a
whole makes the decisions as to employee benefit programs and officer and
employee compensation. The primary objectives of our executive compensation
programs are to:
- - attract, retain and motivate skilled and knowledgeable individuals;
- - ensure that compensation is aligned with our corporate strategies and
business objectives;
- - promote the achievement of key strategic and financial performance
measures by linking short-term and long-term cash and equity incentives to the
achievement of measurable corporate and individual performance goals; and
- - align executives' incentives with the creation of stockholder value.
To achieve these objectives, our board of directors evaluates our executive
compensation program with the objective of setting compensation at levels they
believe will allow us to attract and retain qualified executives. In addition,
a portion of each executive's overall compensation is tied to key strategic,
financial and operational goals set by our board of directors. We also
generally provide a portion of our executive compensation in the form of options
that vest over time, which we believe helps us retain our executives and align
their interests with those of our stockholders by allowing the executives to
participate in our longer term success as reflected in asset growth and stock
price appreciation.
Named Executive Officers
- --------------------------
The following table identifies our principal executive officer, our principal
financial officer and our most highly paid executive officers, who, for purposes
of this Compensation Disclosure and Analysis only, are referred to herein as the
"named executive officers."
Name Corporate Office
- --------------- ---------------------------------------------
Bruce Berman Chief Executive Officer
and Principal Financial Officer
Rick Galasieski Senior Vice President and Corporate Secretary
Page 41
Components of our Executive Compensation Program
- ------------------------------------------------
At this time, the primary elements of our executive compensation program are
base salaries and option grant incentive awards, although the board of directors
has the authority to award cash bonuses, benefits and other forms of
compensation as it sees fit.
We do not have any formal or informal policy or target for allocating
compensation between short-term and long-term compensation, between cash and
non-cash compensation or among the different forms of non-cash compensation.
Instead, we have determined subjectively on a case-by-case basis the appropriate
level and mix of the various compensation components. Similarly, we do not rely
extensively on benchmarking against our competitors in making compensation
related decisions, although we may consider industry compensation trends as one
of many factors in our case-by-case determination of proper compensation.
Base salaries
- --------------
Base salaries are used to recognize the experience, skills, knowledge and
responsibilities required of our named executive officers. Base salary, and
other components of compensation, may be evaluated by our board of directors for
adjustment based on an assessment of the individual's performance and
compensation trends in our industry.
Equity Awards
- -------------
Our stock option award program is the primary vehicle for offering long-term
incentives to our executives. Our equity awards to executives have typically
been made in the form of warrants. We believe that equity grants in the form of
warrants provide our executives with a direct link to our long-term performance,
create an ownership culture, and align the interests of our executives and our
stockholders. During Fiscal 2009 the Company issued a total of 350,000 warrants
to four of its non-executive employees.
Cash bonuses
- -------------
Our board of directors has the discretion to award cash bonuses based on our
financial performance and individual objectives. The corporate financial
performance measures (revenues and profits) will be given the greatest weight in
this bonus analysis. We have not yet granted any cash bonuses to any named
executive officer nor have we yet developed any specific individual objectives
while we wait to attain revenue and profitability levels sufficient to undertake
any such bonuses.
Benefits and other compensation
- ----------------------------------
Our named executive officers are permitted to participate in such health care,
disability insurance, bonus and other employee benefits plans as may be in
effect with the Company from time to time to the extent the executive is
eligible under the terms of those plans. As of the date of this Registration
Statement, with exception to health care, we have not implemented any such
employee benefit plans. Mr. Berman's health care costs are paid by the company.
CURRENT EXECUTIVE COMPENSATION
As discussed above, we have agreed to pay the Named Executive Officers an annual
salary. Base salary may be increased from time to time with the approval of the
board of directors. The following table summarizes the current agreed annual
salary of each of the named executive officers.
Page 42
Name Annual Salary
--------------- --------------
Bruce Berman $ 150,000
Rick Galasieski $ 100,000
Bruce Berman, Chief Executive Officer - Mr. Berman was paid $1 for the 15 month
period of October 2007 until December 31 2008. The Company had previously agreed
to pay Mr. Berman an annual salary of $297,500, $24,970 monthly, beginning on
January 1, 2009. Mr. Berman agreed to lower his salary and received a total of
$72,292 in 2009 in salary. Effective April 1 2010 Mr. Berman is to be paid
$150,000 annually. Mr. Berman has agreed to accrue $5,000 a month of his salary
until the company cash flow improves.
Rick Galasieski, Senior Vice President - Mr. Galasieski effective April 1 2010
is to be paid $100,000 annually. Mr. Galasieski has agreed to accrue $833.33 a
month of his salary until the company cash flow improves.
GRANTS OF PLAN-BASED AWARDS TABLE FOR FISCAL YEAR 2009
The Company currently does not participate in any equity award plan. During
fiscal 2009, we did not grant any equity awards under any equity award plan.
OPTION EXERCISES FOR FISCAL 2009
During fiscal 2009, none of the named executive officers exercised options.
NONQUALIFIED DEFERRED COMPENSATION
We currently offer no defined contribution or other plan that provides for the
deferral of compensation on a basis that is not tax-qualified to any of our
employees, including the named executive officers.
COMPENSATION OF DIRECTORS
We intend to use a combination of cash and equity-based compensation to attract
and retain candidates to serve on our board of directors. We do not compensate
directors who are also our employees for their service on our board of
directors. Therefore, Mr. Berman and Mr. Galasieski did not receive any
compensation for service on our board of directors, and we have not provided any
compensation to any member of our Board of Directors to date
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
We do not currently have a standing Compensation Committee. Our entire board of
directors participated in deliberations concerning executive officer
compensation. None of our officers serve on the board of directors of any other
entity whose executive officer serves on our board of directors.
COMPENSATION COMMITTEE REPORT
The board of directors has reviewed and discussed the Compensation Discussion
and Analysis required by Item 402(b) of Regulation S-K with management and,
based on such review and discussions, the board of directors has recommended
that this Compensation Discussion and Analysis be included in this Registration
Statement on Form 10
Page 43
SUMMARY COMPENSATION TABLE
The following table sets forth the total compensation paid to, or accrued by, the named executive officers during the
fiscal years ended December 31, 2009 and 2008. No restricted stock awards, long-term incentive plan payout or other
types of compensation, other than the compensation identified in the chart below and its accompanying notes, were paid
to these executive officers during that fiscal year.
NAMED ANNUAL ANNUAL OTHER COMPENSATION LONG TERM
EXECUTIVE COMPENSATION COMPENSATION ANNUAL RESTRICTED COMPENSATION LTIP
OFFICER YEAR SALARY ($) BONUS ($) COMPENSATION STOCK OPTIONS PAYOUTS ALL OTHER
- -------------------- ---- ------------- ------------- ------------ ------------ ------------ ------- ---------
Bruce Berman 2009 72,292 0 0 0 0 0 0
2008 1 0 0 0 0 0 0
Rick Galasieski 2009 80,250 0 0 0 0 0 0
2008 64,500 0 23,4852 0 0 0 0
Robert Christiansen1 2009 71,935 0 0 0 0 0 0
2008 120,000 0 0 0 0 0 0
<FN>
1. Mr. Christiansen was terminated for cause on August 6, 2009.
2. For part of 2008 Mr. Galasieski was a consultant to the Company, and was paid this amount for consulting services.
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR END TABLE
The following table sets forth information regarding the outstanding warrants held by our named
officers as of December 31, 2009.
NUMBER OF NUMBER OF
SECURITIES SECURITIES EQUITY INCENTIVE
UNDERLYING UNDERLYING PLAN AWARDS: OPTION
UNEXERCISED UNEXERCISED NUMBER OF SECURITIES EXERCISE OPTION
OPTIONS OPTIONS UNDERLYING UNEXERCISED PRICE EXPIRATION
NAME (#) EXERCISABLE (#) UNEXERCISABLE UNEARNED OPTIONS ($) DATE
Bruce Berman - - - - -
- ---------------- --------------- ----------------- ---------------------- --------- ----------
Rick Galasieski1 15,000,0002 - - 0.001 N/A
<FN>
1. On April 2, 2010, the Company issued Mr. Galasieski 5,000,000 options at an exercise price of
$0.01, which vested immediately.
2. These options were amended and exercised in the first quarter of 2010.
Page 44
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table shows the beneficial ownership of our common stock as of
April 14, 2010. The table shows the amount of shares owned by:
(1) each person known to us who owns beneficially more than five percent of
the outstanding shares of any class of the Company's stock, based on the number
of shares outstanding as of April 14, 2010;
(2) each of the Company's Directors and Executive Officers; and
(3) all of its Directors and Executive Officers as a group.
AMOUNT OF PERCENT OF
SHARES SHARES
IDENTITY OF BENEFICIALLY BENEFICIALLY
PERSON OR GROUP OWNED OWNED(1,2) CLASS
- -------------------- ------------ ------------- ------
Bruce Berman
CEO and Chairman
292,325,000(3) 74.6% Common
------------ ------------- ------
Rick Galasieski
VP and Director
15,000,000 3.8% Common
------------ ------------- ------
Stuart E. Feick
PO Box 911
Palm Beach, FL 33480
19,825,0004 5.06% Common
------------ ------------- ------
All Directors and
Officers as a Group 307,325,000 78.4% Common
- -------------------- ------------ ------------- ------
(1) The percentage of shares owned is based on 391,653,890 shares being
outstanding as of April 14, 2010. Where the beneficially owned shares of any
individual or group in the following table includes any options, warrants, or
other rights to purchase shares in the Company's stock, the percentage of shares
owned includes such shares as if the right to purchase had been duly exercised.
(2) BENEFICIAL OWNERSHIP OF SECURITIES: Pursuant to Rule 13d-3 under the
Securities Exchange Act of 1934, involving the determination of beneficial
owners of securities, a beneficial owner of securities is person who directly or
indirectly, through any contract, arrangement, understanding, relationship or
otherwise has, or shares, voting power and/or investment power with respect to
the securities, and any person who has the right to acquire beneficial ownership
of the security within sixty days through means including the exercise of any
option, warrant or conversion of a security.
(3) Mr. Berman has issued options to purchase up to 63,750,000 of his shares to
certain employees of the Company, including 42,500,000 to Mr. Galasieski. None
of the options are exercisable in the next 6 months.
(4) Held in the name of Stuart E. Feick, Stuart E. Feick IRA, Gulfstream Asset
Management Corp, Gulfstream Capital Management LTD, Anita de Vienne Tremain, and
Anita de Vienne Tremain IRA.
ITEM 13. CERTAIN RELATIONSHIPS, RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
BERMAN INVESTMENT GROUP LLC
Bruce Berman, the Company's Chief Executive officer, owns Berman Investment
Group LLC ("BIG"). BIG allowed on a non-exclusive basis Berman Marketing Group,
Inc. ("BMG"), a wholly owned subsidiary of the Company, to use its hardware,
software, Data Base, Business Support Facilities and Equipment In exchange for
paying the hosting cost of equipment which is approximately $1,800 per month.
This agreement expired in November 2008. The agreement also required the
Company to
Page 45
reimburse BIG for costs incurred, however BIG did not incur any costs resulting
from the lease agreement.
The Company has also engaged BIG as a consultant. The Company is also required
to reimburse BIG for costs incurred, however BIG has not incurred any costs
resulting from the consulting agreement and is currently not seeking
reimbursement.
BANK FREEDOM
Prior to March 8, 2008, Bruce Berman, the Company's Chief Executive Officer,
owned Merchant Processing International, Inc. dba Bank Freedom ("Bank Freedom").
Bank Freedom was a registered Independent Sales Organization ("ISO") with
Columbus Bank and Trust and was authorized by Visa and MasterCard as a merchant
account provider that specializes in all areas of bankcard processing. Bank
Freedom discontinued being an ISO of Columbus Bank and Trust in March 2010. Bank
Freedom is currently an ISO with Spectrum Merchant Services for the purposes of
providing merchant processing services to small businesses. Bank Freedom has
been approved by a sponsoring bank as well as MasterCard and Visa to issue
prepaid debit cards.
Bank Freedom had an exclusive agreement with BMG to pay BMG 80% of the gross
revenue it receives for all debit card issued. Because of the acquisition of
Bank Freedom, this agreement is canceled.
Effective January 25, 2008, the Company entered into an Acquisition and Stock
Purchase Agreement to purchase all 600 shares of Bank Freedom, representing 100%
of the issued and outstanding common stock, from Mr. Berman. In consideration
for the controlling stake in Bank Freedom, the Company issued Mr. Berman
22,500,000 shares of common stock, and executed a note in the amount of
$750,000, payable in monthly installments over two years with a simple interest
rate of 7.25%. This agreement was approved by a majority of disinterested
shareholders of the Company. Following the transaction, the Company filed a dba
to do business as "Bank Freedom." The Company has recently filed in California
to change the name of Merchant Processing International, Inc., dba Bank Freedom
to Bank Freedom, Inc.
On July 3, 2008, the Company restructured the note owed to Mr. Berman. The term
of the note was increased from two years to four years, the interest rate was
changed from a fixed 7.25% to prime, not to exceed 7.25%, and reduced fixed
payments from $31,250 of principal plus interest to $17,272, which includes both
principal and interest. The prime rate is currently 5%. A majority of the
directors not including Mr. Berman has determined this restructuring to be in
the best interest of the Company and its shareholders. In January of 2009 the
interest rate on the note was dropped to 3.25% which creates a payment of
$16,764.69.
The principal amount outstanding on the promissory note was $582,261.36 as of
March 31,2010 and is approximately 10 months past due. Effective April 1, 2010,
the Company renegotiated the note for a 4 year term at 3.25% with a payment of
$12,952.40 a month. Mr. Berman also agreed to discount the note 30% if paid off
in 2010.
LEASED PROPERTY
The Company previously operated at 18500 Von Karman Suite 530, Irvine, CA
92612. BMG, the Company's wholly owned operating subsidiary, rented this space
on a sublease from BIG under a lease from The Irvine Company. The lease expired
December, 2008, and we now operate out of an office located in Newport Beach,
CA.
Page 46
DIRECTOR INDEPENDENCE
The Company is not listed on any national exchange, or quoted on any
inter-dealer quotation service, that imposes independence requirements on any
committee of the Company's directors, such as an audit, nominating or
compensation committee. The Company does not have any independent directors on
its Board. The company's Board of Directors consists of Bruce Berman and Rick
Galasieski, neither of whom are independent.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The following is a summary of the fees paid to the Company's independent public
accounting firm, for the fiscal years ended December 31, 2008 and 2009.
2009* 2008*
------ ------
Audit fees $ - $ -
Audit-related fees - -
Tax fees - -
All other fees - -
------ ------
TOTAL $ - $ -
*In January 2010 we learned that Mr. Corso, the accountant who had been
conducting the audit in the name of Gruber & Company, was incarcerated on
unknown charges and did not hold a current accounting license; we were later
informed by Gruber & Company that Mr. Corso was never an employee of Gruber &
Company. Gruber & Company has stated that they have no association with Mr.
Corso, therefore, the December 31, 2008 audited financials should not be relied
on and need to be re-audited. We currently have not engaged an auditor to audit
our Fiscal 2008 and 2009 financial statements.
Accordingly, no monies have been paid to a certified independent public
accounting firm. For Fiscal 2008, the Company paid to Mr. Corso $15,000 for
auditing services.
AUDIT COMMITTEE PRE-APPROVAL OF SERVICES OF PRINCIPAL ACCOUNTANTS
The Company does not have a standing audit committee. The Board as a whole has
the authority and responsibility to select, evaluate, determine the compensation
of, and, where appropriate, replace the independent auditor. After determining
that providing the non-audit services is compatible with maintaining the
auditor's independence, the board pre-approves all audits and permitted
non-audit services to be performed by the independent auditor, except for de
minimus amounts. If it is not practical for the board to meet to approve fees
for permitted non-audit services, the board has authorized its chairman,
currently Mr. Berman, to approve them and to review such pre-approvals with the
Board at its next meeting.
Page 47
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
FINANCIAL STATEMENTS AND SCHEDULES.
The following consolidated financial statements of Prepaid Card Holdings, Inc.
and Subsidiaries are included herein by reference to the pages listed in "Item
8. Financial Statements and Supplementary Data":
Consolidated Balance Sheets as of December 31, 2008 and 2009
Consolidated Statements of Operations for the years ended December 31, 2008, and
2009
Consolidated Statements of Changes in Shareholders' Interest for the years ended
December 31, 2008 and 2009
Consolidated Statements of Cash Flows for the years ended December 31, 2008 and
2009
Notes to Consolidated Financial Statements
EXHIBITS
The following Exhibits are included herein:
31.1 Certification of the Principal Executive and Principal Financial
Officer 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 Principal Financial
Officer of Prepaid Card Holdings, Inc. pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350).
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
PREPAID CARD HOLDINGS, INC.
(the registrant)
By \s\ Bruce Berman
----------------
Bruce Berman
Chairman, Chief Executive Officer, and
Principal Financial Officer
Date: April 15, 201
Page 48