UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 for the quarterly period ended September 30, 2008
-------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 for the transition period from to
Commission File Number: 0-53270
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PREPAID CARD HOLDINGS, INC.
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(Exact name of registrant as specified in its charter)
Nevada 76-0222016
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(State or other jurisdiction of incorporation or organization) (I. R.
S. Employer Identification No.)
18500 Von Karman, Suite 530 Irvine, CA 92612
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(Address of principal executive offices) (Zip Code)
877-237-6260 x 110
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Issuer's telephone number
N/A
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(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [x] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of "large accelerated filer," "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ ] Accelerated filer [ ]
Non-accelerated filer [ ] Smaller reporting company [x]
(Do not check if a smaller
reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in
rule 12b-2 of the Exchange Act). Yes [ ] No [x]
The number of shares of the registrant's common stock outstanding as of
September 30, 2008 was 396,966,390 shares
PREPAID CARD HOLDINGS, INC.
---------------------------
INDEX TO QUARTERLY REPORT ON FORM 10-Q
PART I. FINANCIAL INFORMATION PAGE NO.
------------------------------ --------
Item 1. Condensed Consolidated Interim Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets at September 30, 2008
(unaudited).............................................................F-3
Condensed Consolidated Statements of Operations for the three
months ended September 30, 2008, and the nine months ended
September 30, 2008 (Unaudited)..........................................F-4
Condensed Consolidated Statements of Changes in Stockholders'
Equity for the three months ended September 30, 2008, and the nine
months ended September 30, 2008 (Unaudited).............................F-5
Condensed Consolidated Statement of Cash Flows for the three
months ended September 30, 2008, and the nine months ended
September 30, 2008 (Unaudited)..........................................F-6
Notes to Condensed Consolidated Interim Financial Statements
(unaudited).............................................................F-7
Item 2. Management's Discussion and Analysis..............................14
Item 3. Quantitative and Qualitative Disclosures About Market Risk........17
Item 4. Controls and Procedures...........................................17
PART II. OTHER INFORMATION
---------------------------
Item 1. Legal Proceedings.................................................18
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.......18
Item 3. Defaults Upon Senior Securities...................................18
Item 4. Submission of Matters to a Vote of Security Holders...............18
Item 5. Other Information.................................................18
Item 6. Exhibits..........................................................18
Signatures....................................................................19
Page 2
PART I. FINANCIAL INFORMATION
------------------------------
ITEM 1. CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
PREPAID CARD HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2008
ASSETS (UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
Current Assets: 2008 2007
--------------- --------------
Cash and Cash Equivalents $ 214,913 $ 577,331
Accounts Receivable 46,438 -
Due from Affiliate 125 -
Prepaid Expenses 25,314 -
--------------- --------------
Total Current Assets $ 286,790 $ 577,331
Fixed Assets - net 4,663 3,973
Other Assets:
Goodwill = -
Deposits 10,000 -
--------------- --------------
Total Other Assets 10,000 -
--------------- --------------
Total Assets $ 301,453 $ 581,304
=============== ==============
Liabilities and Stockholders' Equity:
Current Liabilities:
Accounts Payable and Accrued Expenses $ 578,969 $ 3,454
Accounts Payable - related party 7,000 -
Notes Payable - related party 176,622
Accrued Derivative Liability 98,438
--------------- --------------
Total Current Liabilities 861,029 3,454
Long Term Liabilities - related party 516,435 -
--------------- --------------
Total liabilities 1,377,464 3,454
--------------- --------------
Stockholders Equity:
Common Stock, authorized 1,000,000,000
shares, 403,466,390 and
476,873,587 issued and
outstanding @.001 per share 403,466 476,874
Subscription Receivable - (114,163)
Additional Paid in Capital 2,038,860 935,569
Retained Deficit (3,518,337) (720,430)
--------------- --------------
Total Stockholders' Equity (Deficit) (1,076,011) 577,850
--------------- --------------
Total Liabilities and Stockholders
Equity (Deficit) $ 301,453 $ 581,304
=============== ==============
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
PREPAID CARD HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
QUARTER ENDED SEPTEMBER 30, 2008
FOR THE THREE MONTHS ENDED OR THE NINE MONTHS ENDED
-------------------------- --------------------------
SEPTEMBER SEPTEMBER SEPTEMBER SEPTEMBER
30, 2008 30, 2007 30, 2008 30, 2007
------------- ----------- ------------- -----------
Revenues
Card Operations $ 259,808 $ - $ 387,531 $ -
Processing Services 144,294 256,868 285,437 693,229
------------- ----------- ------------- -----------
Total Revenues 404,102 256,868 672,968 693,229
Cost of Revenues 157,626 76,329 335,189 238,863
------------- ----------- ------------- -----------
Gross Profit 246,476 180,539 337,779 454,366
Expenses:
Sales 144,798 - 1,148,681 -
Professional Fees 238,234 11,138 785,878 29,709
General and
Administrative 304,251 137,228 1,032,577 309,097
Related Party
Expense-Rent 17,151 24,968 71,661 54,928
Derivative Expense 98,438 98,438
------------- -------------
Total 802,872 173,334 3,137,235 393,734
Profit (Loss) from
operations (556,396) 7,205 (2,799,456) 60,632
Other income 133 131 1,549 292
Net Profit (Loss) $ (556,263) $ 7,336 $ (2,797,907) $ 60,924
============= =========== ============= ===========
Profit (Loss) per share $ (.0013) $ .0003 $ (.0058) $ .0024
============= =========== ============= ===========
Weighted Average
Shares Outstanding 436,992,764 25,529,837 483,212,842 25,529,837
============= =========== ============= ===========
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
PREPAID CARD HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
QUARTER ENDED SEPTEMBER 30, 2008
Subscr- Addi-
Common Stock Preferred Stock iption Subscr- tional Retained
------------------------- ------------------ Recei- iption Paid in Earnings
Shares Amount Shares Amount vable Payable Capital (Deficit) Tottal
------------- ---------- ------- --------- ---------- -------- ----------- ------------ ------------
Balance January
1, 2008 476,873,589 $ 476,874 $ $(114,163) $ - $ 935,569 $ (720,430) $ 577,850
Shares for
Combination 22,500,000 22,500 (732,348) (709,848)
------------- ---------- ------- --------- ---------- -------- ----------- ------------ ------------
Subscription
Cash Received 114,163 114,163
Shares for Cash 29,000,000 29,000 1,396,000 1,425,000
Shares returned
to Treasury (127,500,000) (127,500) 127,500 -
Shares Issued for
Services 3,092,803 3,092 311,639 314,731
Shares Cancelled (500,000) (500) 500 -
Net (Loss) for the
nine months
ended September
30, 2008 - - - - - - - (2,797,907) (2,797,907)
------------- ---------- ------- --------- ---------- -------- ----------- ------------ ------------
Balance September
30, 2008 403,466,390 $ 403,466 - $ - $ - $ - $2,038,860 $(3,518,337) $(1,076,011)
============= ========== ======= ========= ========== ======== =========== ============ ============
The accompanying notes are an integral part of these financial statements.
F-5
PREPAID CARD HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
QUARTER ENDED SEPTEMBER 30, 2008
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
Cash Flows from Operating Activities: 2008 2007
------------ ---------
Net (Loss) for the period: $(2,797,907) $ 60,924
Depreciation 1,029 1,084
Common Stock issued 337,231 -
Changes in Assets and Liabilities
Accounts Receivable (46,438)
Due from Affiliate (125) -
Prepaid Expenses and Deposits (35,314) (20,285)
Accounts Payable and Accrued Expenses 680,953 6,518
------------ ---------
Net Cash flows used for Operating Activities (1,860,571) 48,241
Cash Flows Used for Investing Activities -
Business Combination and Fixed Assets (734,067)
Cash Flows from Financing Activities
Issuance of note 1,103,125 -
Repayments on notes (410,068)
Proceeds from the Issuance of Common Stock 1,425,000 -
Collection of subscription Receivable 114,163 -
------------ ---------
Net Cash Flows from Financing Activities 2,232,220 -
------------ ---------
Net Increase (Decrease) in cash (362,418) 48,241
Cash-beginning 577,331 822
------------ ---------
Cash-end $ 214,913 $ 49,063
============ =========
Supplemental disclosures:
Interest Paid $ 31,935 $ -
Income Taxes paid $ - $ -
F-6
PREPAID CARD HOLDINGS, INC.
NOTES TO THE FINANCIAL STATEMENTS
SEPTEMBER 30, 2008
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 National Health Care Alliance, Inc.
The Company was dormant until October 11, 2007 when the Company acquired Berman
Marketing Group, a wholly owned subsidiary as its operating business. In October
2007 the name was changed from National Health Care Alliance, Inc. to Berman
Holdings, Inc. In March of 2008 the Company acquired Merchant Processing
International, from a related party, and it became a wholly owned subsidiary. In
May of 2008 the Company changed its name to Prepaid Card Holdings, Inc. The
company trades under the symbol PPDC on the pink sheets.
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 United States of
America, which contemplate continuation of the Company as a going concern. The
Company has incurred losses and has yet to begin total operations. 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. All material inter-company balances and transactions
have been eliminated on consolidation. The acquisition of Merchant Processing
International has been accounted for as a transfer of assets under common
control, and accordingly is accounted for in all periods presented.
For 2007 the financial includes the activity of Merchant Processing
International which was the only operating company during that period.
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
F-7
accordance with SFAS No. 123 and values the equity securities based on the fair
value of the security on the date of grant. For stock-based awards the value is
based on the market value for the stock on the date of grant. Stock option
awards are valued using the Black-Scholes option-pricing model.
During the period 3,092,803 shares were issued for services totaling $314,731.
These shares were issued from April 4, 2008 to September 22 , 2008 at market
prices between .06 and .14 cents per share to four individuals for consulting
services.
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.
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 $100,000 insurance limit. The Company extends credit
based on an evaluation of the customer's financial condition, generally without
collateral. Exposure to losses on receivables is principally dependent on each
customer's financial condition. The Company monitors its exposure for credit
losses and maintains allowances for anticipated losses, as required.
Impairment of Long-Lived Assets
-------------------------------
SFAS No. 144 requires that long-lived assets to be disposed of by sale,
including those of discontinued operations, be measured at the lower of carrying
amount or fair value less cost to sell, whether reported in continuing
operations or in discontinued operations. SFAS No. 144 broadens the reporting
of discontinued operations to include all components of an entity with
operations that can be distinguished from the rest of the entity and that will
be eliminated from the ongoing operations of the entity in a disposal
transaction. SFAS No. 144 also establishes a "primary-asset" approach to
determine the cash flow estimation period for a group of assets and liabilities
that represents the unit of accounting for a long-lived asset to be held and
used.
F-8
Revenue Recognition
--------------------
The company recognizes revenue both from merchant processing costs and activity
charges for card usage. These fees are transactionally based and recorded at the
time of occurrence.
For the merchant processing services, the company receives revenues in the form
of commissions paid resulting from a percentage of credit card volume for the
retailers engaged. This revenue is recognized on a monthly basis under the
accrual basis of accounting.
For the Bank Freedom prepaid cards operations, we derive revenues through fees
charged to the cardholders. Those sources may include:
- Interchange
- Bill pay fees
- Domestic and International ATM transaction fees
- Debit purchase and PIN decline fees
- Monthly maintenance fees
These fees are debited on the card and recognized as revenue immediately.
Income Taxes
-------------
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes." Deferred taxes are provided on the liability
method whereby deferred tax assets are recognized for deductible temporary
differences, and deferred tax liabilities are recognized for taxable temporary
differences. Temporary differences are the differences between the reported
amounts of assets and liabilities and their tax bases. Deferred tax assets are
reduced by a valuation allowance when, in the opinion of management, it is more
likely than not that some portion or all of the deferred tax assets will be
realized. Deferred tax assets and liabilities are adjusted for the effects of
changes in tax laws and rates on the date of enactment.
Earnings (Loss) Per Share
----------------------------
The Company reports earnings (loss) per share in accordance with SFAS No. 128,
"Earnings per Share." Basic earnings (loss) per share is computed by dividing
income (loss) available to common shareholders by the weighted average number of
common shares available. Diluted earnings (loss) per share is computed similar
to basic earnings (loss) per share except that the denominator is increased to
include the number of additional common shares that would have been outstanding
if the potential common shares had been issued and if the additional common
shares were dilutive. Diluted earnings (loss) per share has not been presented
since the effect of the assumed conversion of options and warrants to purchase
common shares would have an anti-dilutive effect.
Recently Issued Accounting Pronouncements
--------------------------------------------
In December 2007, the FASB issued SFAS No. 141(R), Business Combinations (FAS
141(R)). This Statement provides greater consistency in the accounting and
financial reporting of business combinations. It requires the acquiring entity
in a business combination to recognize all assets acquired and liabilities
assumed in the transaction, establishes the acquisition-date fair value as the
measurement objective for all assets acquired and liabilities assumed, and
requires the
F-9
acquirer to disclose the nature and financial effect of the business
combination. FAS 141(R) is effective for fiscal years beginning after December
15, 2008. We will adopt FAS 141(R) no later than the first quarter of fiscal
2009 and are currently assessing the impact the adoption will have on our
financial position and results of operations.
In December 2007, the FASB issued SFAS No. 160. Noncontrolling Interests in
Consolidated Financial Statements (FAS 160). This Statement amends Accounting
Research Bulletin No. 51, Consolidated Financial Statements, to establish
accounting and reporting standards for the noncontrolling interest in a
subsidiary and for the deconsolidation of a subsidiary. FAS 160 is effective for
fiscal years beginning after December 15, 2008. We will adopt FAS 160 no later
than the first quarter of fiscal 2009 and are currently assessing the impact the
adoption will have on our financial position and results of operations.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities, which permits entities to choose to
measure at fair value eligible financial instruments and certain other items
that are not currently required to be measured at fair value. The standard
requires that unrealized gains and losses on items for which the fair value
option has been elected be reported in earnings at each subsequent reporting
date. SFAS No. 159 is effective for fiscal years beginning after November 15,
2007. We adopted SFAS No. 159 in the first quarter of fiscal 2008. The adoption
of SFAS No. 159 had no effect on our financial position and results of
operations.
In September 2006, the FASB issued SFAS No. 158, Employers' Accounting for
Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB
Statements No. 87, 88, 106, and 132(R). SFAS No. 158 requires company plan
sponsors to display the net over- or under-funded position of a defined benefit
postretirement plan as an asset or liability, with any unrecognized prior
service costs, transition obligations or actuarial gains/losses reported as a
component of other comprehensive income in shareholders' equity. SFAS No. 158
is effective for fiscal years ending after December 15, 2006. We adopted the
recognition provisions of SFAS No. 158 as of the end of fiscal 2007. The
adoption of SFAS No. 158 did not have an effect on the Company's financial
position or results of operations.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. SFAS
No. 157 establishes a framework for measuring fair value in generally accepted
accounting principles, clarifies the definition of fair value and expands
disclosures about fair value measurements. SFAS No. 157 does not require any new
fair value measurements. However, the application of SFAS No. 157 may change
current practice for some entities. SFAS No. 157 is effective for financial
statements issued for fiscal years beginning after November 15, 2007, and
interim periods within those fiscal years. We adopted SFAS No. 157 in the first
quarter of fiscal 2008. There was no impact with the adoption of SFAS No. 157 on
our financial position and results of operations.
F-10
In July 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty
in Income Taxes - an interpretation of FASB Statement No. 109 (FIN 48). This
interpretation clarifies the application of SFAS No. 109, Accounting for Income
Taxes, by defining a criterion that an individual tax position must meet for any
part of the benefit of that position to be recognized in an enterprise's
financial statements and also provides guidance on measurement, derecognition,
classification, interest and penalties, accounting in interim periods,
disclosure and transition. FIN 48 is effective for fiscal years beginning after
December 15, 2006, but earlier adoption is permitted. We adopted FIN 48
effective first quarter of fiscal 2007. There was no impact on our financial
position and results of operations upon the adoption of FIN 48.
NOTE 2 - RELATED PARTY TRANSACTIONS
The Company issued 22,500,000 shares of stock, for the acquisition of Merchant
Processing International, an entity who was owned by the majority stockholder of
the Company.
The company is owed money from an affiliate of $125 for expenses paid on behalf
of the affiliate. The affiliate is controlled and owned by the Company's
President.
The company owes on a note a related party, its President $693,057 with interest
at 5% due over 48 months starting July 1, 2008.
The Company is obligated under a sub-lease arrangement with Berman Investment
Group, a related party for hardware and software expiring in November 2008.
Monthly terms approximate $1,800 a month. There were no expenses incurred during
the period.
The Company also sub-leases its rental space from Berman Investment Group, an
entity owned by a related party now for approximately $3,500 per month. During
the period ended September 30, 2008 and 2007 $71,661 and $54,928 was incurred
respectively and shown as related party expenses in the profit and loss
statement. The company currently owes $7,000 on rent payments.
The Company has also engaged Berman Investment Group (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.
NOTE 3 - BUSINESS COMBINATION
The Company has accounted for the acquisition of Merchant Processing, Inc. as a
business combination under common control on the amount paid for Merchant
Processing International in excess of its book value. The Company issued
22,500,000 shares of stock, valued at par, due to the related party interest, of
$22,500 and incurred a note payable for $750,000, the total of which was
$772,500. This amount exceeded the book value by $732,348 which was charged
against additional paid in capital.
F-11
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.
NOTE 5 - FIXED ASSETS
Furniture and Fixtures $ 8,648
Computers 3,682
--------
Total 12,330
Accumulated Depreciation (7,667)
Net Fixed Assets $ 4,663
NOTE 6 - NOTE PAYABLE
Related Party
--------------
The Company is indebted to its main shareholder for the purchase of the
subsidiary for $693,057 payable over 44 months with interest at 5%. There was
no accrued interest at September 30, 2008. The interest expense is also
included in the general and administrative expenses in the statement of
operations.
NOTE 7 - COMMON STOCK TRANSACTIONS
During the first quarter 2008 the Company issued 33,000,000 shares of stock,
22,500,000 shares for the purchase of the subsidiary and the balance of
10,500,000 shares for $500,000 cash. Also during the quarter subscription
receivables of $114,163 were collected.
During the second quarter of 2008 the company issued 10,992,803 shares and
cancelled 500,000 shares. Of the shares issued 9,000,000 were issued for cash of
$450,000, and 1,992,803 for services totaling $188,732
During the third quarter of 2008 the company issued 10,600,000 shares and
returned to Treasury 127,500,000 shares. Of the shares issued 9,500,000 were
issued for cash of $475,000, and 1,100,000 for services totaling $126,000
NOTE 8 - INCOME TAXES
Income taxes are accounted for in accordance with SFAS 109, Accounting for
Income Taxes, using the asset and liability method. Deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases and tax credit carryforwards.
Deferred tax assets and liabilities are measured using enacted tax rates
expected
F-12
to apply to taxable income in the year in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period,that
includes the enactment date.
The Company has a net loss carryforward equal to approximately $700,000. The
deferred tax asset related to this carryforward has been reserved in full based
upon the weight of available evidence, that it is more likely than not that the
deferred tax assets will not be realized.
NOTE 9 - SUBSEQUENT EVENTS
In October, 2008, shareholders holding A warrants from the initial Private
Placement Memorandum were offered the opportunity to exercise their warrants at
$0.025 (as opposed to the warrant price of $0.05). 187,500 of a possible
9,468,750 were exercised, for at total of $4,688.
In October, 2008, the Company issued to John Weber, former Vice President of
Finance, 250,000 shares of stock for services rendered.
F-13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD LOOKING STATEMENTS: STATEMENTS ABOUT OUR FUTURE EXPECTATIONS ARE
"FORWARD-LOOKING STATEMENTS" AND ARE NOT GUARANTEES OF FUTURE PERFORMANCE. WHEN
USED HEREIN, THE WORDS "MAY," "WILL," "SHOULD," "ANTICIPATE," "BELIEVE,"
"APPEAR," "INTEND," "PLAN," "EXPECT," "ESTIMATE," "APPROXIMATE," AND SIMILAR
EXPRESSIONS ARE INTENDED TO IDENTIFY SUCH FORWARD-LOOKING STATEMENTS. THESE
STATEMENTS INVOLVE RISKS AND UNCERTAINTIES INHERENT IN OUR BUSINESS, INCLUDING
THOSE SET FORTH UNDER THE CAPTION "RISK FACTORS," IN THIS DISCLOSURE STATEMENT,
AND ARE SUBJECT TO CHANGE AT ANY TIME. OUR ACTUAL RESULTS COULD DIFFER
MATERIALLY FROM THESE FORWARD-LOOKING STATEMENTS. WE UNDERTAKE NO OBLIGATION TO
UPDATE PUBLICLY ANY FORWARD-LOOKING STATEMENT.
This Management's Discussion and Analysis and Plan of Operation should be read
in conjunction with the financial statements included in this Report (the
"Financial Statements)
The financial statements have been prepared in accordance with generally
accepted accounting policies in the United States ("GAAP"). Except as otherwise
disclosed, all dollar figures included therein and in the following management
discussion and analysis ("MD&A") are quoted in United States dollars.
LIQUIDITY AND CAPITAL RESOURCES
Our liquidity requirements arise principally from our working capital needs,
including the cost of goods and marketing costs. Although in the future we
intend to fund our liquidity requirements through a combination of cash on hand
and revenues from operations, for the nine months ended September 30, 2008, the
Company had incurred $3,472,424 in expenses (of which $338,260 were non-cash
expenses) and had realized only $672,968 in revenues.
Accordingly, our ability to initiate our plan of operations and continue as a
going concern is currently dependent on our ability to raise external capital.
We have raised $350,000 on the issuance of three convertible notes. 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.
From November, 2007, through Septmeber, 2008, the Company raised approximately
$2,160,000 in three private offerings, before costs. In addition, we may be
required to seek additional funding.
We hope to raise sufficient capital to finance marketing programs to gain market
share. We believe the cost of marketing general purpose prepaid debit cards
will increase as more competitors enter the market. These new competitive
forces will increase media costs on television and radio.
Page 14
RESULTS OF OPERATIONS
Nine Months Ended September 30, 2008
-----------------------------------------
Revenues
During the nine months ended September 30, 2008, merchant processing services
realized revenues of $285,437 and the Bank Freedom prepaid card realized
revenues of $387,531 for a total of $672,968. This represents a decrease of 3%
or $20,261 from $693,229 for the same period last year. The decrease is the
result of merchant processing revenues not continuing with its consulting line
of business, offset by no revenues generated in 2007 by prepaid card operations.
In 2008, merchant processing revenues are generated in the form of commissions
paid as a percentage of credit card volume for the retailers engaged, while the
prepaid card business model earns revenues through interchange and service fees
after issuance of the cards.
Cost of Sales
During the nine months ended September 30, 2008, we incurred $335,189 in costs
directly attributed to our sales. This represents an increase of 40% or $96,326
over $238,863 realized in the same period last year. The increase is primarily
due to the operations of the prepaid card business, partially offset by the
decrease in merchant processing consulting costs. In 2008, Cost of Sales
includes, bank and Mastercard Association fees, merchant processing fees, and
fulfillment costs.
Expenses
During the nine months ended September 30, 2008, we incurred $3,137,235 in
expenses. This represents a 697% or $2,743,501 increase over $393,734 realized
in the same period last year. Expenses consisted of the following:
EXPENSES:
Sales $1,148,681
Professional Fees 785,878
Selling General and Administrative Costs 1,032,577
Related Party Expense - Rent 71,661
Derivative Expense 98,438
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Sales - 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. In 2007, no sales expenses were
recorded.
Professional Fees - Consist of accounting, legal and other professional fees
including the cost of the fair market value for the stock provided to investor
representatives for investor referrals. This represents a 2,545% or $756,169
increase over $29,709 realized in the same period last year, as most of these
expenses did not exist in 2007.
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Selling General and Administrative Costs - Consists of insurance, office
supplies and expense, payroll expenses, investor referral fees and other
miscellaneous expenses. The 234% or $723,480 increase over $309,097 realized in
the same period in 2007 is the result of the new prepaid card operations.
Related Party Expense - Rent - Consists of office space rental. This represents
an increase of 30% or $16,733 over $54,928 realized from the same period in
2007, resulting from prorate share of office space occupied by the prepaid card
operations.
Derivative Expense - Consists of stock warrants which are valued using the
Black-Scholes option-pricing model. This cost was not existent in 2007.
Three Months Ended September 30, 2008
------------------------------------------
Revenues
During the three months ended September 30, 2008, merchant processing services
realized revenues of $144,294 and the Bank Freedom prepaid card realized
revenues of $259,808 for a total of $404,102. This represents an increase of
57% or $147,234 over $256,868 realized in the same period last year. The
increase is the result of no revenues generated in 2007 by prepaid card
operations, offset by merchant processing revenues not continuing with its
consulting line of business. In 2008, merchant processing revenues are
generated in the form of commissions paid as a percentage of credit card volume
for the retailers engaged, while the prepaid card business model earns revenues
through interchange and service fees after issuance of the cards.
Cost of Sales
During the three months ended September 30, 2008, we incurred $157,626 in costs
directly attributed to our sales. This represents an increase of 107% or
$81,297 over $76,329 realized in the same period last year. The increase is
primarily due to the operations of the prepaid card business, partially offset
by the decrease in merchant processing consulting costs. In 2008, Cost of Sales
includes, bank and Mastercard Association fees, merchant processing fees, and
fulfillment costs.
Expenses
During the three months ended September 30, 2008, we incurred $802,872 in
expenses. This represents a 363% or $629,538 increase over $173,334 recognized
in the same period last year. Expenses consisted of the following:
EXPENSES:
Sales $144,798
Professional Fees 238,234
Selling General and Administrative Costs 304,251
Related Party Expense - Rent 17,151
Derivative Expense 98,438
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Sales - 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. In 2007, no sales expenses were
recorded.
Professional Fees - Consist of accounting, legal and other professional fees
including the cost of the fair market value for the stock provided to investor
representatives for investor referrals. This represents a 2,039% or $227,096
increase over $11,138 realized in the same period last year, as most of these
expenses did not exist in 2007.
Selling General and Administrative Costs - Consists of insurance, office
supplies and expense, payroll expenses, investor referral fees and other
miscellaneous expenses. The 121% or $167,023 increase over $137,228 in the same
period last year is the result of the new prepaid card operations.
Related Party Expense - Rent - Consists of office space rental. This represents
a decrease of 31% or $7,817 from $24,968 realized in the same period last year,
resulting from monthly reduced rent obligations and offset by prorate share of
office space occupied by the prepaid card operations.
Derivative Expense - Consists of stock warrants which are valued using the
Black-Scholes option-pricing model. This cost was not existent in 2007.
OFF-BALANCE SHEET ARRANGEMENTS
The company has no off-balance sheet arrangements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
None.
ITEM 4. CONTROLS AND PROCEDURES
This quarterly report does not include a report of management's assessment
regarding internal control over financial reporting or an attestation report of
the company's registered public accounting firm due to a transition period
established by rules of the Securities and Exchange Commission for newly public
companies.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The company has one material dispute with one of its vendors regarding the
validity of approximately $360,000 of services the company was billed for. The
company is currently negotiating with the vendor to resolve the issue.
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 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
On October 23, 2008, the Company issued warrants to a consultant to purchase up
to 5,000,000 shares at an exercise price of $0.05. The warrants vest 1,000,000
upon the Company's acceptance to the OTCBB, and 500,000 for each timely filing
of the periodic reports due for the periods from September 30, 2008 to June 30,
2010. The warrants terminate immediately upon termination of employment for
cause, and 6 months after termination of employment for any other reason. 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.
Other than the foregoing, there have been no issuances of equity securities
during the period covered by this report or during the subsequent period up to
the date of the filing of this report.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. CHANGES IN REGISTRANT'S CERTIFYING ACCOUNTANT
None.
ITEM 6. EXHIBITS
31.1 Certification by the Principal Executive and Financial Officer of Prepaid
Card Holdings, Inc. pursuant to Section 302 of the Sarbanes-Oxley Act of
2002 (Rule 13a-14(a) or Rule 15d-14(a)).
32.1 Certification by the Principal Executive and Financial Officer of Prepaid
Card Holdings, Inc. pursuant to Section 906 of the Sarbanes-Oxley Act of
2002 (18 U.S.C. 1350) (furnished herewith).
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SIGNATURES
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Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Dated: November 11, 2008 PREPAID CARD HOLDINGS, INC.
(the registrant)
By: \s\ Bruce Berman
----------------
Bruce Berman
Chief Executive Officer
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