UNITED
STATES





SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10-Q





x
            QUARTERLY
      REPORT PURSUANT TO SECTION 13 or 15(d) OFTHE
      SECURITIES EXCHANGE ACT OF 1934for
      the quarterly period ended September 30, 2010ORo
            TRANSITION
      REPORT UNDER SECTION 13 or 15(d) OF THE SECURITIES
  EXCHANGEACT
      OF 1934 for the Transition Period from toCommission
      file number: 001-16781





CAREPAYMENT
      TECHNOLOGIES, INC.(Exact
      Name of Registrant as Specified in its
Charter)





Oregon
            
            91-1758621(State
      or Other Jurisdiction of
            
            (I.R.S.
      Employer Identification No.)Incorporation
      or Organization)





5300
      Meadows Rd, Suite 400, Lake Oswego, Oregon
            
            97035(Address
      of Principal Executive
            
            (Zip
      Code)Offices)





(Registrant’s
Telephone Number, Including Area Code): 503-419-3505





Former
Name:  microHelix, Inc.





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 o No x





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files).


Yes o No x





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-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 o
            
            Accelerated
      filer oNon-accelerated
      filer  o
            
            Smaller
      reporting company x





Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).


Yes o  No x





Shares of
Common Stock outstanding as of November 13, 2010 were:





Class
      A
                  
                  
                  1,390,616Class
      B
                  
                  
                  6,510,092Total
                  
                  
                  7,900,708





On March
31, 2010, the Company’s shareholders authorized the Company to effect a 1-for-10
reverse stock split of its Common Stock and subsequent conversion of each share
of Common Stock into one share of Class A Common Stock.  The consolidated
financial statements, notes, and other references to share and per share data
contained in this Report have been retroactively restated to reflect such
reverse stock split and conversion for all periods presented.










CAREPAYMENT
TECHNOLOGIES, INC


Quarterly
Report on Form 10-Q


Quarter
Ended September 30, 2010





TABLE
OF CONTENTS





PagePART
      I.   Financial Information
                2ITEM
      1.   Condensed Consolidated Financial Statements
      (Unaudited)Condensed
      consolidated balance sheets as of September 30, 2010 and December 31,
      2009
                2Condensed
      consolidated statements of operations for the three and nine months ended
      September 30, 2010 and 2009
                3Condensed
      consolidated statements of cash flows for the nine months ended September
      30, 2010 and 2009
                4Notes
      to condensed consolidated financial statements
                5ITEM
      2.   Management’s Discussion And Analysis Of Financial Condition
      And Results Of Operations
                19ITEM
      4.   Controls And Procedures
                25PART
      II.    Other Information
                27ITEM
      1.   Legal Proceedings
                27ITEM
      2.   Unregistered Sales Of Equity Securities And Use Of
      Proceeds
                27ITEM
      6.   Exhibits
                27SIGNATURE
                27


1





PART
I — FINANCIAL INFORMATION





ITEM
1. FINANCIAL STATEMENTS — UNAUDITED





CAREPAYMENT
TECHNOLOGIES, INC.


CONDENSED
CONSOLIDATED BALANCE SHEETS


(UNAUDITED)


September
30, 2010 and December 31, 2009





2010
                            
                            
                            2009AssetsCurrent
      Assets:Cash
      and cash equivalents
                            
                            $
                            1,481,938
                            
                            
                            $
                            69,097Related
      party receivable
                            
                            
                            42,177
                            
                            
                            
                            —Loans
      receivable, net
                            
                            
                            78,699
                            
                            
                            
                            —Prepaid
      expenses
                            
                            
                            58,060
                            
                            
                            
                            —Total
      current assets
                            
                            
                            1,660,874
                            
                            
                            
                            69,097Property
      and equipment, net
                            
                            
                            385,817
                            
                            
                            
                            500,000Loans
      receivable, net
                            
                            
                            3,746
                            
                            
                            
                            —Intangible
      assets, net
                            
                            
                            9,330,525
                            
                            
                            
                            9,550,000Goodwill
                            
                            
                            13,335
                            
                            
                            
                            —Total
      assets
                            
                            $
                            11,394,297
                            
                            
                            $
                            10,119,097Liabilities
      and Shareholders' Equity (Deficit)Current
      Liabilities:Accounts
      payable
                            
                            $
                            1,291,445
                            
                            
                            $
                            797,751Accrued
      interest
                            
                            
                            411,560
                            
                            
                            
                            324,082Accrued
      liabilities
                            
                            
                            214,081
                            
                            
                            
                            —Deferred
      revenue
                            
                            
                            12,350
                            
                            
                            
                            —Current
      maturities of notes payable
                            
                            
                            —
                            
                            
                            
                            294,190Total
      current liabilities
                            
                            
                            1,929,436
                            
                            
                            
                            1,416,023Notes
      payable, net of current potion
                            
                            
                            588,275
                            
                            
                            
                            988,275Mandatorily
      redeemable preferred stock, Series D, no par value: 1,200,000 shares
      authorized, 1,200,000 and 1,000,000 shares issued and outstanding at
      September 30, 2010 and December 31, 2009, respectively, liquidation
      preference of $12,000,000 at September 30, 2010
                            
                            
                            954,674
                            
                            
                            
                            8,805,140Other
      liabilities
                            
                            
                            136
                            
                            
                            
                            —Total
      liabilities
                            
                            
                            3,472,521
                            
                            
                            
                            11,209,438Shareholders'
      Equity (Deficit):CarePayment
      Technologies, Inc. shareholders’ equity (deficit):Preferred
      stock, Series E, no par value:  250,000 shares authorized,
      97,500 shares issued and outstanding at September 30, 2010 and no shares
      issued or outstanding at December 31, 2009
                            
                            
                            136,500
                            
                            
                            
                            —Common
      stock, no par value: Class A, 65,000,000 shares authorized, 1,390,616 and
      1,383,286 issued and outstanding at September 30, 2010 and December 31,
      2009, respectively; Class B, 10,000,000 shares authorized, 6,510,092
      shares issued and outstanding at September 30, 2010 and no shares issued
      or outstanding at December 31, 2009
                            
                            
                            18,087,951
                            
                            
                            
                            18,022,591Additional
      paid-in-capital
                            
                            
                            21,852,979
                            
                            
                            
                            11,755,211Accumulated
      deficit
                            
                            
                            (32,156,916
                            )
                            
                            
                            (30,868,143
                            )Total
      CarePayment Technologies, Inc. shareholders' equity
    (deficit)
                            
                            
                            7,920,514
                            
                            
                            
                            (1,090,341
                            )Noncontrolling
      interest
                            
                            
                            1,262
                            
                            
                            
                            —Total
      shareholders’ equity (deficit)
                            
                            
                            7,921,776
                            
                            
                            
                            (1,090,341
                            )Total
      liabilities and shareholders’ equity (deficit)
                            
                            $
                            11,394,297
                            
                            
                            $
                            10,119,097




The
accompanying notes are an integral part of these condensed consolidated
financial statements.


2


CAREPAYMENT
TECHNOLOGIES, INC.


CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS


(UNAUDITED)





Three Months Ended
                              September 30
                            
                            
                            Nine Months Ended
                              September 302010
                            
                            
                            2009
                            
                            
                            2010
                            
                            
                            2009Service
      fees revenue
                            
                            $
                            1,606,695
                            
                            
                            $
                            —
                            
                            
                            $
                            4,445,940
                            
                            
                            $
                            —Interest
      on consumer loans
                            
                            
                            5,426
                            
                            
                            
                            —
                            
                            
                            
                            5,426
                            
                            
                            
                            —Total  revenue
                            
                            
                            1,612,121
                            
                            
                            
                            —
                            
                            
                            
                            4,451,366
                            
                            
                            
                            —Cost
      of revenue
                            
                            
                            1,337,510
                            
                            
                            
                            —
                            
                            
                            
                            3,579,152
                            
                            
                            
                            —Gross
      margin
                            
                            
                            274,611
                            
                            
                            
                            —
                            
                            
                            
                            872,214
                            
                            
                            
                            —Operating
      expenses:Sales,
      general and administrative
                            
                            
                            1,132,807
                            
                            
                            
                            64,224
                            
                            
                            
                            3,074,658
                            
                            
                            
                            304,252Loss
      from operations
                            
                            
                            (858,196
                            )
                            
                            
                            (64,224
                            )
                            
                            
                            (2,202,444
                            )
                            
                            
                            (304,252
                            )Other
      income (expense):Other
      income
                            
                            
                            17,697
                            
                            
                            
                            —
                            
                            
                            
                            37,115
                            
                            
                            
                            —Loss
      reimbursement
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            1,241,912
                            
                            
                            
                            —Interest
      expense:Interest
      expense
                            
                            
                            (5,577
                            )
                            
                            
                            (61,394
                            )
                            
                            
                            (143,090
                            )
                            
                            
                            (172,674
                            )Accretion
      of preferred stock discount
                            
                            
                            (72,744
                            )
                            
                            
                            —
                            
                            
                            
                            (220,521
                            )
                            
                            
                            —Accretion
      of note payable discount
                            
                            
                            —
                            
                            
                            
                            (51,762
                            )
                            
                            
                            —
                            
                            
                            
                            (136,465
                            )Other
      income (expense), net
                            
                            
                            (60,624
                            )
                            
                            
                            (113,156
                            )
                            
                            
                            915,416
                            
                            
                            
                            (309,139
                            )Net
      loss before income tax
                            
                            
                            (918,820
                            )
                            
                            
                            (177,380
                            )
                            
                            
                            (1,287,028
                            )
                            
                            
                            (613,391
                            )Income
      tax expense
                            
                            
                            150
                            
                            
                            
                            —
                            
                            
                            
                            483
                            
                            
                            
                            —Net
      loss
                            
                            
                            (918,970
                            )
                            
                            
                            (177,380
                            )
                            
                            
                            (1,287,511
                            )
                            
                            
                            (613,391
                            )Less:
      Net income (loss) attributable to noncontrolling interest
                            
                            
                            (4,114
                            )
                            
                            
                            —
                            
                            
                            
                            1,262
                            
                            
                            
                            —Net
      loss attributable to CarePayment Technologies, Inc.
                            
                            $
                            (914,856
                            )
                            
                            $
                            (177,380
                            )
                            
                            
                            (1,288,773
                            )
                            
                            
                            (613,391
                            )Net
      loss per share:Basic
      and diluted
                            
                            $
                            (0.12
                            )
                            
                            $
                            (0.90
                            )
                            
                            $
                            (0.23
                            )
                            
                            $
                            (3.11
                            )Weighted
      average number of shares outstanding:Basic
      and diluted
                            
                            
                            7,900,708
                            
                            
                            
                            197,409
                            
                            
                            
                            5,704,951
                            
                            
                            
                            197,380





The
accompanying notes are an integral part of these condensed consolidated
financial statements.


3





CAREPAYMENT
TECHNOLOGIES, INC.


CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS


(UNAUDITED)





Nine
      Months Ended
                                  September
      302010
                                
                                
                                2009Cash
      Flows Provided by (Used In) Operating Activities:Net
      loss
                                
                                $
                                (1,287,511
                                )
                                
                                $
                                (613,391
                                )Adjustments
      to reconcile net loss to cash provided by (used in) operating
      activities:Depreciation
      and amortization
                                
                                
                                417,408
                                
                                
                                
                                —Accretion
      of preferred stock discount
                                
                                
                                220,521
                                
                                
                                
                                —Stock-based
      compensation
                                
                                
                                26,781
                                
                                
                                
                                —Warrants
      issued for services
                                
                                
                                —
                                
                                
                                
                                1,001Amortization
      of debt discount
                                
                                
                                —
                                
                                
                                
                                136,465Change
      in assets and liabilities:Increase
      in assets:Related
      party receivables
                                
                                
                                (42,177
                                )
                                
                                
                                —Prepaid
      expenses
                                
                                
                                (55,828
                                )
                                
                                
                                (4,166
                                )Increase
      (decrease) in liabilities:Accounts
      payable
                                
                                
                                493,694
                                
                                
                                
                                —Accrued
      interest
                                
                                
                                87,478
                                
                                
                                
                                —Deferred
      revenue
                                
                                
                                (5,270
                                )
                                
                                
                                —Accrued
      liabilities
                                
                                
                                99,408
                                
                                
                                
                                282,629Net
      cash used in operating activities
                                
                                
                                (45,496
                                )
                                
                                
                                (197,462
                                )Cash
      Flows Provided By (Used In) Investing Activities:Purchase
      property and equipment
                                
                                
                                (7,200
                                )
                                
                                
                                —Investment
      in loans receivable
                                
                                
                                (28,272
                                )
                                
                                
                                —Proceeds
      from payments received on loans receivable
                                
                                
                                21,797
                                
                                
                                
                                —Cash
      acquired in purchase of Vitality Financial, Inc.
                                
                                
                                100,842
                                
                                
                                
                                —Net
      cash provided by investing activities
                                
                                
                                87,167
                                
                                
                                
                                —Cash
      Flows Provided By (Used In) Financing Activities:Payments
      on notes payable
                                
                                
                                (694,190
                                )
                                
                                
                                —Proceeds
      from collection of related party note receivable
                                
                                
                                2,000,000
                                
                                
                                
                                —Proceeds
      from revolving credit line
                                
                                
                                31,000
                                
                                
                                
                                —Payment
      on revolving credit line
                                
                                
                                (31,000
                                )
                                
                                
                                —Proceeds
      from exercise of warrants
                                
                                
                                65,360
                                
                                
                                
                                —Proceeds
      from issue of notes payable to shareholders
                                
                                
                                —
                                
                                
                                
                                100,000Net
      cash provided by financing activities
                                
                                
                                1,371,170
                                
                                
                                
                                100,000Change
      in cash
                                
                                
                                1,412,841
                                
                                
                                
                                (97,462
                                )Cash,
      beginning of period
                                
                                
                                69,097
                                
                                
                                
                                98,433Cash,
      end of period
                                
                                $
                                1,481,938
                                
                                
                                $
                                971Supplemental
      Disclosure of Cash Flow InformationCash
      paid for interest
                                
                                $
                                55,612
                                
                                
                                $
                                —Cash
      paid for income taxes
                                
                                $
                                483
                                
                                
                                $
                                —Supplemental
      Disclosure of Non-cash Investing Activities:Fair
      value of preferred stock issued to acquire Vitality Financial,
      Inc.
                                
                                $
                                136,500
                                
                                
                                $
                                —Supplemental
      Disclosure of Non-cash Financing Activities:Fair
      value of preferred stock sold in exchange for a note
      receivable
                                
                                $
                                825,499
                                
                                
                                $
                                —Beneficial
      conversion feature issued with preferred stock sold in exchange for a note
      receivable
                                
                                
                                245,145Fair
      value of warrants issued with preferred stock sold in exchange for a note
      receivable
                                
                                
                                929,356
                                
                                
                                
                                —Beneficial
      conversion feature recorded for amendment to preferred stock certificate
      of designation
                                
                                
                                8,896,486Warrants
      issued to lenders recorded as debt discount
                                
                                $
                                —
                                
                                
                                $
                                94,114Refinance
      of accrued liability to note payable
                                
                                $
                                —
                                
                                
                                $
                                244,989




The accompanying notes are an
integral part of these condensed consolidated financial
statements.


4


CAREPAYMENT
TECHNOLOGIES, INC.





NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)





1. 
Business




Overview




CarePayment
Technologies, Inc. (“we,” “us,” “our,” “CarePayment,” or the “Company”) was
incorporated as an Oregon corporation in 1991.  From inception until
September 28, 2007, we manufactured custom cable assemblies and mechanical
assemblies for the medical and commercial original equipment manufacturer (OEM)
markets.  We were experiencing considerable competition by late 2006 as our
customers aggressively outsourced competing products from offshore
suppliers.  In the first quarter of 2007, a customer that accounted for
over 30% of our revenues experienced a recall of one of its major products by
the U.S. Food and Drug Administration.  As a result the customer cancelled
its orders with us, leaving us with large amounts of inventory on hand and
significantly reduced revenue.





On May
31, 2007 we informed our three secured creditors, BFI Business Finance, VenCore
Solution, LLC and MH Financial Associates, LLC ("MH Financial"), that we were
unable to continue business operations due to continuing operating losses and a
lack of working capital.  At that time we voluntarily surrendered our
assets to these secured creditors, following which we and our wholly owned
subsidiary, Moore Electronics, Inc. ("Moore"), operated for the benefit of the
secured creditors until September 2007, when we ceased manufacturing operations
and became a shell company.  MH Financial was, at that time, and currently
is, an affiliate of ours due to its ownership of shares of our capital
stock.





Following
September 2007 and continuing until December 31, 2009, we had no
operations.  Our Board of Directors, however, determined to maintain us as
a shell company to seek opportunities to acquire a business or assets sufficient
to operate a business.  To help facilitate our search for suitable business
acquisition opportunities, among other goals, on June 27, 2008 we entered into
an advisory services agreement with Aequitas Capital Management, Inc.
(“Aequitas”) to provide us with strategy development, strategic planning,
marketing, corporate development and other advisory services.  In exchange
for the services to be provided by Aequitas under that agreement, we issued to
Aequitas warrants to purchase 106,667 shares of our Class A Common Stock at an
exercise price of $0.01 per share.





Effective
at the end of December 2009, we acquired certain assets and rights that enabled
us to begin building a business that services accounts receivable for other
parties.  The assets and rights we acquired had been previously developed
by Aequitas and its affiliate, CarePayment, LLC, under the CarePayment® brand
for servicing accounts receivable generated by hospitals in connection with
providing health care services to their patients.  The assets and rights we
acquired included the exclusive right to administer, service and collect patient
accounts receivables generated by hospitals and purchased by CarePayment, LLC or
its affiliates, and a proprietary software product that is used to manage the
servicing.  Typically CarePayment, LLC or one of its affiliates purchase
patient accounts receivable from hospitals and then we administer, service and
collect them on behalf of CarePayment, LLC for a fee.  Although we intend
to grow our business to include servicing of accounts receivable on behalf of
other parties, currently CarePayment, LLC is our only customer.





To
facilitate building the business, on December 30, 2009 we, Aequitas and
CarePayment, LLC formed an Oregon limited liability company, CP Technologies LLC
("CP Technologies").  We contributed shares of our newly authorized Series
D Convertible Preferred Stock ("Series D Preferred") and warrants to purchase
shares of our Class B Common Stock to CP Technologies.  Aequitas and
CarePayment, LLC contributed to CP Technologies the CarePayment® assets and
rights described in the foregoing paragraph.  CP Technologies then
distributed the shares of Series D Preferred to Aequitas and CarePayment, LLC,
and the warrants to purchase shares of Class B Common to CarePayment, LLC, to
redeem all but half of one membership unit (a "Unit") held by each of
them.  Following these transactions, we own 99% of CP Technologies, and
Aequitas and CarePayment, LLC each own 0.5% of CP Technologies as of December
31, 2009.




5





The
Receivables Servicing Business




On
January 1, 2010 and as a result of the transactions described above, CP
Technologies began building a business to service hospital patient receivables
for an affiliate of the Company, CarePayment, LLC.





Generally,
a majority of a hospital's accounts receivable are paid by medical insurance,
Medicare and Medicaid.  The balance of accounts receivable due directly
from the patient is not always a priority for many hospitals, due primarily to
the effort and expense required to collect those balances from individuals.CarePayment, LLC, acting
alone or through its affiliates, purchases patient receivables from
hospitals.  CP Technologies administers, services and collects the
receivables; CarePayment, LLC maintains ownership of the
receivables.





A patient
whose health care receivable is acquired by CarePayment, LLC becomes a
CarePayment® finance card customer and is issued a CarePayment® card, which has
an initial outstanding balance equal to the receivable purchased by CarePayment,
LLC.  Balances due on the CarePayment® card are generally payable over 25
months with no interest.  From the customer's point of view, the
CarePayment® card functions much like a credit card even though  CP
Technologies advances no credit to the customer.  In addition to servicing
the receivables, CP Technologies also analyzes potential receivable acquisitions
for CarePayment, LLC and recommends a course of action when it determines that
collection efforts for existing receivables are no longer
effective.





In
exchange for its services,  CP Technologies receives origination fees
at the time CarePayment, LLC purchases and delivers receivables to CP
Technologies for servicing, a monthly servicing fee based on the total principal
amount of receivables being serviced, and a quarterly fee based upon a
percentage of CarePayment, LLC's quarterly net income.  CP Technologies’
servicing agreement with CarePayment, LLC includes additional compensation
during the first six months of 2010 to cover the Company’s start up costs as it
began building a receivables servicing business.  This compensation was
equal to the Company's actual monthly losses for the first quarter of 2010 and
an amount equal to 50% of actual monthly losses for the second quarter of
2010.  The Company received $1,241,912 of such compensation from
CarePayment, LLC in the nine months ended September 30, 2010.





CP
Technologies contracts with various vendors to service the CarePayment® finance
card product, send customer statements, accept payments, and transmit all
transaction history back to CP Technologies.  Since CP Technologies is
responsible for the CarePayment® finance card's compliance with various laws and
regulations relating to consumer credit, these vendors are selected for their
specific expertise in such areas.





On July
30, 2010, the Company entered into an Agreement and Plan of Merger with Vitality
Financial, Inc. (“Vitality”) pursuant to which Vitality became a wholly owned
subsidiary of the Company.  Under the terms of the Merger Agreement, the
stockholders of Vitality received, collectively, 97,500 shares of Series E
Convertible Preferred Stock of the Company in consideration for all the
outstanding stock of Vitality.





Vitality
purchases consumer health care receivables from hospitals for patients’
uninsured portion of their hospital bill on a non-recourse basis.  Vitality
has developed a proprietary healthcare credit scoring process to evaluate
healthcare non-recourse loans prior to purchase.  Upon credit approval,
customer’s are offered a line of credit.  When the customer accepts the
terms of the agreement, the Company purchases the customers hospital receivable
balance at a discount.  Interest rates charged to the consumer on these
loans are generally less than traditional credit card rates.  Payment terms
are generally up to 24 months.




2. 
Summary of Significant Accounting Policies




Basis
of presentation:




The
unaudited condensed consolidated financial statements have been prepared by
management of CarePayment and in the opinion of management include all material
adjustments (consisting of normal recurring accruals) which are necessary to
present fairly the Company’s financial position and operating results for the
periods indicated.  The financial position and operating results include
Vitality’s results of operations beginning July 30, 2010; comparable periods for
2009 do not include Vitality’s results of operations.  The results of
operations for the nine months ended September 30, 2010 are not necessarily
indicative of the results to be expected for the entire year ending December 31,
2010.


6





Certain
information and note disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted from the interim financial statements presented in this
Quarterly Report on Form 10-Q pursuant to the rules and regulations of the
SEC.  These unaudited condensed consolidated financial statements should be
read in conjunction with the Consolidated Financial Statements and notes thereto
included in the Company’s Form 10-K for the year ended December 31, 2009, filed
on March 31, 2010.




Estimates
and assumptions:




The
preparation of consolidated 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 disclosure of contingent assets and liabilities at
the date of the consolidated financial statements and the reported amounts of
revenues and expenses during the reporting period.  Actual results could
differ from those estimates.




Principles
of consolidation:




The
consolidated financial statements include the accounts of CarePayment, its
wholly owned subsidiaries, Moore and Vitality, and its 99% owned subsidiary, CP
Technologies LLC. All intercompany transactions have been
eliminated.




Concentration
of credit risk:




Loansreceivable— The loans
receivable are with consumers who may be affected by the current economic
environment.  The Company believes it has adequately provided for potential
credit losses.





Revenue from one source— The
Company currently generates substantially all its revenue through one servicing
agreement with a related party.





Cash and investments —
The Company maintains its cash in bank accounts; at times, the balances in these
accounts may exceed federally insured limits.  The Company has not
experienced any losses in such accounts.




Cash
and cash equivalents:




Cash and
cash equivalents are stated at cost, which approximates fair value, and include
investments with maturities of three months or less at the date of
acquisition.  Cash and cash equivalents consist of bank
deposits.




Loans
receivable and provision for credit losses:




The
Company purchases consumer healthcare receivables at a discount from hospitals,
which are recorded as loans receivable.  The discounted price ranges from
12% to 60% of face value depending on the credit worthiness of the
consumer.  The terms of the receivable agreements at September 30, 2010
range from 15 to 19 months.  There were no loans receivable at December 31,
2009.





Loans
receivable are stated at unpaid principal balances, less a provision for credit
losses.  Discounts are recorded as deferred revenue; deferred revenue is
recognized as revenue over the estimated life of each loan receivable using the
interest method.





The
provision for loan losses is maintained at a level which, in management’s
judgment, is adequate to absorb credit losses inherent in the Company’s
outstanding loans.  The amount of the provision is based on management’s
evaluation of the collectability of the loans, trends in historical loss
experience, specific impaired receivables, economic conditions and other
inherent risks.




Property
and equipment:




Property
and equipment is comprised of servicing software and computer equipment which is
stated at original estimated fair value and software stated at cost, net of
accumulated amortization and depreciation.  Amortization and depreciation
is computed using the straight-line method over the estimated useful lives of
the assets. The estimated useful life of the software and the software licenses
is three years and the estimated useful life of used computer equipment is two
years.  The Company evaluates long-lived assets for impairment annually or
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable.  Amortization and depreciation expense was
$42,650 and $125,983 for the three and nine months ended September 30,
2010.


7




Intangible
assets:




Servicing
rights:




Servicing
rights represent the fair value of the identifiable intangible asset
associated with the acquisition of certain business assets on December 31,
2009.  Effective January 1, 2010, the cost associated with this asset is
being amortized on a straight line basis over an estimated useful life of 25
years, which is based on the term of the servicing agreement that expires in
2034.




Other
intangible assets:




Intangible
assets acquired as part of the Vitality acquisition include loan processing
software, a proprietary credit scoring algorithm and customers lists which are
being amortized over the estimated useful lives of 1.5 to 5 years. 
Additionally the lender’s licenses acquired are considered to have an indefinite
life and are not subject to amortization. See Note 3.




Amortization
expense was $100,425 and $291,425 for the three and nine months ended September
30, 2010, respectively.




Goodwill




Goodwill
is recorded at historical cost and is tested for impairment annually or more
frequently if events or changes in circumstances indicate that goodwill might be
impaired.  We did not recognize impairment losses on goodwill for the three
and nine months ended September 30, 2010.




Revenue
recognition:




Receivable
servicing:




The
Company recognizes revenue in conjunction with a servicing agreement with
CarePayment, LLC.  The Company receives a servicing fee equal to 5%
annually of total funded receivables being serviced and an origination fee equal
to 6% of the original balance of newly generated funded receivables.  The
servicing agreement also provides that the Company receives 25% of CarePayment,
LLC’s quarterly net income, adjusted for certain items.  The Company
recognizes revenue related to this agreement, which is evidence of an
arrangement, at the time the services are rendered; the servicing fee is
recognized as revenue monthly at 1/12 of the annual percent of the funded
receivables being serviced for the month; the origination fee is recognized as
revenue at the time CarePayment, LLC funds its purchased receivables and the
Company assumes the responsibility for servicing these receivables; the 25% of
CarePayment, LLC’s net income is recognized as revenue in the quarter that
CarePayment, LLC records the net income.  The collectability of the revenue
recognized from these related party transactions is considered reasonably
assured.




Installation
services:




The
Company provides software implementation services to client hospitals on behalf
of CarePayment, LLC.  Implementation fees received from CarePayment, LLC
are recognized as revenue when CarePayment, LLC accepts the implementation,
which is at the time the hospital can successfully transmit data to CarePayment,
LLC.




Loans
receivable:




The
Company purchases consumer healthcare receivables at a discount from
hospitals.  The discount is recorded as deferred revenue on the balance
sheet and is recognized as revenue over the estimated life of each receivable
using the interest method.  Interest income is not recognized on specific
impaired receivables unless the likelihood of further loss is remote. 
Interest income on these receivables is recognized only to the extent of
interest payments received.




Cost
of revenue:




Cost of
revenue is comprised primarily of compensation and benefit costs for servicing
employees, costs associated with outsourcing billing, collections and payment
processing services, amortization of servicing rights and servicing software and
underwriting costs related to loans.


8




Income
taxes:




The
Company accounts for income taxes under an asset and liability approach that
requires the recognition of deferred tax assets and liabilities that are
determined based on the differences between the financial statement bases and
tax bases of assets and liabilities using enacted tax rates.  A valuation
allowance is recorded to reduce a deferred tax asset to that portion of the
deferred tax asset that is expected to more likely than not be
realized.





The
Company reports a liability, if any, for unrecognized tax benefits resulting
from uncertain income tax positions taken or expected to be taken in an income
tax return.  Estimated interest and penalties, if any, are recorded as a
component of interest expense and other expense, respectively.  No
liability has been recorded for uncertain tax positions, or related interest or
penalties as of September 30, 2010 and December 31, 2009.  Tax years that
remain subject to examination by federal and state authorities are the years
ended 2006 through 2009.




Stock-based
compensation:




Stock-based
compensation cost is estimated at the grant date based on the award’s fair value
and is recognized as expense over the requisite service period using the
straight-line attribution method.  Stock-based compensation for stock
options granted is estimated using the Black-Scholes option pricing
model.




Warrants
to purchase the Company’s stock:




The fair
value of warrants to purchase the Company’s stock issued for services or in
exchange for assets is estimated at the issue date using the Black-Scholes
model.




Earnings
(loss) per common share:




Basic
earnings (loss) per common share (“EPS”) is calculated by dividing net income
(loss) attributable to the Company by the weighted average number of shares of
common outstanding during the period.  Fully diluted EPS assumes the
conversion of all potentially dilutive securities and is calculated by dividing
net income by the sum of the weighted average number of shares of common
outstanding plus potentially dilutive securities determined using the treasury
stock method.  Dilutive loss per share does not consider the impact of
potentially dilutive securities in periods in which there is a loss because the
inclusion of the potentially dilutive securities would have an anti-dilutive
effect.




Comprehensive
income (loss):




The
Company has no components of Other Comprehensive Income (Loss) and, accordingly,
no statement of Comprehensive Income (Loss) is included in the accompanying
Condensed Consolidated Financial Statements.




Operating
segments and reporting Units:




The
Company operates as a single business segment and reporting unit.




Recently
adopted accounting standards:




In
February 2010, the Financial Accounting Standards Board (“FASB”) issued amended
guidance on subsequent events. Under this amended guidance, SEC filers are no
longer required to disclose the date through which subsequent events have been
evaluated in originally issued and revised financial statements. This guidance
was effective immediately and the Company adopted these new
requirements.




Recently
issued accounting standards:




In
January 2010, the FASB issued guidance to amend the disclosure requirements
related to recurring and nonrecurring fair value measurements. The guidance
requires disclosure of transfers of assets and liabilities between Level 1 and
Level 2 of the fair value measurement hierarchy, including the reasons and the
timing of the transfers and information on purchases, sales, issuance, and
settlements on a gross basis in the reconciliation of the assets and liabilities
measured under Level 3 of the fair value measurement hierarchy. This guidance is
effective for the Company beginning January 1, 2011. The Company does not expect
the adoption of this guidance will have an impact on its consolidated financial
position or results of operations.


9




3. 
Acquisition of Vitality Financial, Inc.




On July
30, 2010, the Company entered into an Agreement and Plan of Merger with Vitality
pursuant to which Vitality became a wholly owned subsidiary of the
Company.  Under the terms of the Merger Agreement, the stockholders of
Vitality received, collectively, 97,500 shares of Series E Convertible Preferred
Stock of the Company in consideration for all the outstanding stock of Vitality.
See Note 7.





Vitality
purchases consumer health care receivables from hospitals for patients’
uninsured portion of their hospital bill on a non-recourse basis.  Vitality
has developed a proprietary credit scoring process to evaluate healthcare
non-recourse loans prior to purchase.  As a result of the acquisition, the
Company expects to use Vitality’s assembled workforce expertise, proprietary
healthcare credit scoring system, and customer contacts to expand into the
non-recourse financing market.





The
goodwill of $13,335 arising from the acquisition consists primarily of the
assembled workforce with non-recourse healthcare loan experience.





None of
the goodwill recognized is expected to be deductible for income tax
purposes.





The
following table summarized the consideration paid for Vitality and the amounts
of assets acquired and liabilities assumed recognized at the acquisition
date:





ConsiderationSeries
      E Preferred Stock, 97,500 shares. See Note 7. (a)
                  
                  $
                  136,500Fair
      value of total consideration transferred
                  
                  $
                  136,500Recognized
      amount of identifiable assets acquired and liabilities
    assumedCash
                  
                  $
                  100,842Loans
      receivable (b)
                  
                  
                  67,516Prepaid
      expense
                  
                  
                  2,232Equipment
                  
                  
                  4,600Identifiable
      intangible assets (c)
                  
                  
                  71,950Financial
      liabilities
                  
                  
                  (123,975
                  )Total
      identifiable net assets
                  
                  
                  123,165Goodwill
                  
                  
                  13,335$
                  136,500




(a)
            The
      fair value of the 97,500 shares of Series E Preferred Stock issued as
      consideration for all of Vitality’s outstanding stock was determined on
      the basis of the closing market price of the Company’s Class A Common
      Stock on the most recent date with a market trade prior to the acquisition
      date, as the Series E Preferred Stock is convertible at the option of the
      holder into Class A Common Stock eighteen months after issuance and is
      mandatorily convertible into Class A Common Stock thirty six months after
      issuance, in each case at a defined conversion rate.  The conversion
      rate on the acquisition date was ten shares of Class A Common Stock for
      each share of Series E Preferred Stock. See Note
  7.


(b)
            The
      gross loan balances due under the contracts are $70,716, of which $3,200
      is expected to be uncollectible.


(c)
            Identifiable
      intangible assets include a software program to manage the loans
      receivable ($7,250), proprietary credit scoring algorithm for evaluating
      non-recourse loans ($20,000), customer lists ($34,700) and lenders license
      ($10,000).





The
amounts of Vitality’s revenue and losses included in the Company’s consolidated
statement of operations for the three and nine months ended September 30, and
the revenue and losses of the combined entity had the acquisition date been
January 1, 2010, or January 1, 2009, are:


Revenue
                  
                  
                  LossesActual
      from July 30, 2010 through September 30, 2010
                  
                  $
                  5,426
                  
                  
                  $
                  (37,577
                  )Supplemental
      pro forma from January 1, 2010 through September 30, 2010
                  
                  $
                  4,464,717
                  
                  
                  $
                  (1,604,823
                  )Supplemental
      pro forma from January 1, 2009 through September 30, 2009
                  
                  $
                  1,533
                  
                  
                  $
                  (935,430
                  )




10





4. 
Related Party Note Receivable





On April
15, 2010, the Company sold 200,000 shares of Series D Convertible Preferred
Stock (“Series D Preferred”) to Aequitas CarePayment Founders Fund, LLC
(“Founders Fund”) for a purchase price of $10.00 per share.  The Company
received a promissory note from Founders Fund for $2,000,000 which bears
interest at 5% per annum and was due April 15, 2011. See Notes 6 and 7.  As
of September 30, 2010, Founders Fund had paid the total principal and interest
balances due.  The Company recorded interest income for the three and nine
months ended September 30, 2010 of $13,675 and $33,093, respectively for this
Note.





5. 
Notes Payable





A summary
of the Company's notes payable as of September 30, 2010 and December 31, 2009 is
as follows:





2010
                      
                      
                      2009MH
      Financial Associates, LLC
                      
                      $
                      577,743
                      
                      
                      $
                      977,743Aequitas
      Capital Management, Inc.
                      
                      
                      —
                      
                      
                      
                      294,190Other
                      
                      
                      10,532
                      
                      
                      
                      10,532Total
      notes payable
                      
                      
                      588,275
                      
                      
                      
                      1,282,465Current
      maturities
                      
                      
                      —
                      
                      
                      
                      (294,190
                      )Notes
      payable, less current maturities
                      
                      $
                      588,275
                      
                      
                      $
                      988,275





On
June 27, 2008, the Company refinanced a promissory note payable to MH
Financial Associates by issuing a note payable (the “Note”) in the amount of
$977,743.  The loan amount included $477,743 that was owed to MH Financial
as of June 27, 2008 and an additional loan of up to $500,000.  The
Company was advanced $200,000 on June 27, 2008, $100,000 on
December 31, 2008, $100,000 on February 27, 2009, and $100,000 on
November 6, 2009.  Effective as of the date of this refinance,
interest accrued on the outstanding principal balance of the loan at a rate of
20% per annum.  The original due date of the Note was December 27,
2008 and, as a condition of the December 31, 2008 advance, the due date was
extended to December 31, 2009.  On December 31, 2009, the Company was
granted a note extension to December 31, 2011, at which time all unpaid
interest and principal are due.  In addition, the interest rate on the
principal amount outstanding under the Note decreases from 20% to 8% per annum
after the Company makes principal payments totaling $400,000.  As of
September 2010, the Company had made a total of $400,000 in principal payments;
and as such the interest rate on the outstanding balance of the Note has
decreased to 8% per annum.  The Note continues to be secured by
substantially all of the assets of the Company.




6. 
Mandatorily Redeemable Convertible Preferred Stock





On
December  30, 2009, the Company issued 1,000,000 shares of Series D
Preferred in connection with the transactions described in Note 1.  On
April 15, 2010, the Company sold 200,000 shares of Series D Preferred to
Founders Fund for a purchase price of $10.00 per share pursuant to a note
receivable in the original principal amount of $2,000,000 and, for no
additional consideration, the Company issued a warrant to Founders Fund to
purchase up to 1,200,000 shares of the Company's Class A Common Stock at an
exercise price of $0.001 per share. See Notes 4 and 7.





Holders
of the Series D Preferred receive a preferred dividend of $0.50 per share per
annum, when, as and if declared by our Board of Directors, and a liquidation
preference of $10 per share, plus cumulative unpaid dividends.  The Company
may redeem all of the Series D Preferred at any time upon 30 days prior written
notice, and is required to redeem all of the Series D Preferred in January 2013
at a purchase price equal to the liquidation preference in effect on January 1,
2013.  If the Company is unable to redeem the Series D Preferred with cash
or other immediately available funds for any reason, the holders of Series D
Preferred will have the right to exchange all shares of Series D Preferred for
an aggregate 99% ownership interest in CP Technologies.


11





The fair
value of the Series D Preferred was determined using a dividend discount model
assuming a 9% discount rate and that the cumulative dividends of $0.50 per share
will be accrued and received at the mandatory redemption date (Level 3 inputs in
the fair value hierarchy). The resulting fair value of the 1,000,000 shares of
Series D Preferred issued on December 30, 2009 was $8,805,140.  As of
April 1, 2010, the Company amended the Certificate of Designation for
Series D Preferred such that the Series D Preferred is convertible into Class A
Common Stock. See Note 7.  The intrinsic value of the beneficial conversion
feature resulting from this amendment is $23,052,396; since the intrinsic value
of the beneficial conversion feature is greater than the fair value determined
at issuance plus the accretion as of April 1, 2010, the amount of the discount
assigned to the beneficial conversion was the fair value of the Series D
Preferred on April 1, 2010 of $8,896,486.





The
$2,000,000 of proceeds from the April 15, 2010 sale of the Series D Preferred
was allocated to the debt and warrants based on the relative fair values of each
instrument at the time of issuance; the intrinsic value of the beneficial
conversion feature at issuance was $245,145.  The proceeds from the sale of
the Series D Preferred were allocated as follows:  $929,356 to fair
value of warrants, $825,499 to the liability for mandatorily redeemable
preferred stock; and $245,145 to the beneficial conversion feature.





The
difference between the fair value of the Series D Preferred and the redemption
value of $12,000,000 will be accreted to interest expense over the period to
redemption in January 2013 using the level yield method.  The carrying
value at September 30, 2010 is $954,674.




7. 
Shareholders’ Equity




Preferred
Stock:




As of
April 1, 2010, the Company's Certificate of Designation for Series D
Preferred was amended by adding a provision allowing for the conversion of the
Series D Preferred at any time after one year after its issuance.  Each
share of Series D Preferred Stock is convertible into such number of fully paid
and nonassessable shares of Class A Common Stock of the Company as is determined
by dividing the amount of $10.00 per share (as adjusted for stock splits, stock
dividends, reclassification and the like) by the Conversion Price (defined in
the following sentence) applicable to such share in effect on the date the
certificate is surrendered for conversion.  The Conversion Price per share
of Series D Preferred is 80% of the volume weighted average price of the Class A
Common Stock; provided, however, that in no event will the Conversion Price be
less than $1.00 per share.





On
July 29, 2010, the Company amended its Amended and Restated Articles of
Incorporation, as amended, by filing a Second Amended and Restated Certificate
of Designation designating 250,000 shares of its Preferred Stock as Series E
Convertible Preferred Stock (“Series E Preferred”).  Each share of Series E
Preferred Stock is convertible into such number of fully paid and nonassessable
shares of Class A Common Stock of the Company as is determined by dividing the
amount of $10.00 per share (as adjusted for stock splits, stock dividends,
reclassification and the like) by the Conversion Price (defined in the following
sentence) applicable to such share in effect on the date the certificate is
surrendered for conversion.  The Conversion Price per share of Series E
Preferred is 80% of the volume weighted average price of the Class A Common
Stock; provided, however, that in no event will the Conversion Price be less
than $1.00 per share. Series E Preferred may be converted to Class A Common
stock 18 months after issuance and is mandatorily convertible to Class A Common
Stock 36 months after issuance.  A total of 97,500 shares were issued in
connection with the acquisition of Vitality on July 30, 2010. See Note
3.




Stock
Warrants:




As of
September 30, 2010, the Company had 1,204,417 warrants outstanding for Class A
Common Stock which are exercisable as follows:





Warrants
                              
                              Exercise
      Price
                                Per
      Share
                              
                              Expiration
      Date3,189
                              
                              $
                              37.50
                              
                              April
      2015487
                              
                              $
                              72.00
                              
                              June
      2016667
                              
                              $
                              75.00
                              
                              July
      201174
                              
                              $
                              4,077.00
                              
                              March
      20121,200,000
                              
                              $
                              0.001
                              
                              April
      15,
2015




12





On April
15, 2010, the Company sold 200,000 shares of Series D Preferred to Founders Fund
for a purchase price of $10.00 per share. See Note 4.  In connection with
the sale of the Series D Preferred, on April 15, 2010, and for no additional
consideration, the Company issued a warrant to Founders Fund to purchase up to
1,200,000 shares of the Company's Class A Common Stock at an exercise price of
$0.001 per share.  The warrant expires on April 15, 2015.





The fair
value of the warrant was calculated using the Black-Scholes model using the
following assumptions:





Expected
      life (in years)
                      
                      
                      5Expected
      volatility
                      
                      
                      40.42
                      %Risk-free
      interest rate
                      
                      
                      2.57
                      %Expected
      dividend
                      
                      
                      —




The fair
value of the warrant was determined by allocating the $2,000,000 of proceeds
from the sale of the mandatorily redeemable Series D Preferred to the debt and
warrants based on the relative fair values of each instrument at the time of
issuance.  The resulting fair value of the warrant issued on April 15, 2010
to purchase 1,200,000 shares of Class A Common Stock was $929,356.





Warrants
for 7,330 shares of Class A Common Stock were exercised on March 11, 2010,
resulting in $259 proceeds to the Company.





Warrants
for 6,510,092 shares of Class B Common Stock were exercised on April 2, 2010,
resulting in $65,101 proceeds to the Company.




Common
Stock:




At the
annual meeting of the shareholders held on March 31, 2010, the Company's
shareholders voted to amend the Company's Articles of Incorporation to effect a
reverse stock split (“Reverse Stock Split”) of the Company's common stock.
Pursuant to the Reverse Stock Split, each ten shares of common stock outstanding
immediately prior to the Reverse Stock Split were combined and reclassified as
one share of fully paid and nonassessable common stock.





At the
same annual meeting of the shareholders on March 31, 2010, the Company's
shareholders also voted to amend the Company's Articles of Incorporation to
create two classes of common stock: Class A Common Stock and Class B Common
Stock.  The Articles authorize 75 million shares of common stock, of which
65 million shares are designated as Class A Common Stock and 10 million shares
are designated as Class B Common Stock.  Holders of Class A Common Stock
are entitled to one vote per share, and holders of Class B Common Stock are
entitled to ten votes per share, on any matter submitted to the
shareholders.  Effective immediately after the Reverse Stock Split, each
share of common stock outstanding was automatically converted into one share of
Class A Common Stock.





The
condensed consolidated financial statements and notes thereto have been
retroactively restated to reflect the Reverse Stock Split and such conversion
for all periods presented.





8. 
Loss Reimbursement





The
Company’s servicing agreement with CarePayment, LLC provides for CarePayment,
LLC to pay additional compensation equal to the Company’s actual monthly losses
for the first quarter of 2010 and an amount equal to 50% of actual monthly
losses for the second quarter of 2010.  This additional compensation is
intended to reimburse the Company for transition costs that are not specifically
identifiable.  For the six months ended June 30, 2010, the period of the
agreement, the Company recorded a loss reimbursement of $1,241,912 as other
income.




13




9. 
Earnings (Loss) per Common Share





The
shares used in the computation of the Company’s basic and diluted loss per
common share are reconciled as follows:





Three
      Months Ended
                                  September
      30
                                
                                
                                Nine
      Months Ended
                                  September
      302010
                                
                                
                                2009
                                
                                
                                2010
                                
                                
                                2009Weighted
      average basic common shares outstanding
                                
                                
                                7,900,708
                                
                                
                                
                                197,409
                                
                                
                                
                                5,704,951
                                
                                
                                
                                197,380Dilutive
      effect of convertible preferred stock (a) (b)
                                
                                
                                —
                                
                                
                                
                                —
                                
                                
                                
                                —
                                
                                
                                
                                —Dilutive
      effect of warrants (a) (b)
                                
                                
                                —
                                
                                
                                
                                —
                                
                                
                                
                                —
                                
                                
                                
                                —Dilutive
      effect of employee stock options (a) (b)
                                
                                
                                —
                                
                                
                                
                                —
                                
                                
                                
                                —
                                
                                
                                
                                —Weighted
      average diluted common shares outstanding (a) (b)
                                
                                
                                7,900,708
                                
                                
                                
                                197,409
                                
                                
                                
                                5,704,951
                                
                                
                                
                                197,380







(a)
              Common
      stock equivalents outstanding for the three and nine months ended
      September 30, 2010 excluded in the computation of diluted EPS because
      their effect would be anti-dilutive as a result of applying the treasury
      stock method are:  warrants to purchase 1,204,417 shares of
      Class A Common Stock, 1,200,000 shares of Series D Preferred Stock
      convertible to purchase shares of Class A Common Stock and 97,500 shares
      of Series E Preferred Stock based on the conversion calculation described
      in Note 7, and stock options to purchase 897,950 shares of Class A Common
      Stock.


(b)
            Common
      stock equivalents outstanding for the three and nine months ended
      September 30, 2009 excluded in the computation of diluted EPS because
      their effect would be anti-dilutive as a result of applying the treasury
      stock method are:  warrants to purchase 1,072,414 shares of
      Class A Common Stock and Series C Preferred Stock convertible to purchase
      18,605 shares of Class A Common
Stock.




10. 
Employee Benefit Plans




Stock
Incentive Plan




In
February 2010, the Company adopted the 2010 Stock Option Plan (the "Plan")
pursuant to which the Company may grant restricted stock and stock options for
the benefit of selected employees and directors.  The Plan was amended in
September 2010 to increase authorized grants to a total of 1,000,000 shares of
Class A Common Stock.  Grants are issued at prices equal to the estimated
fair market value of the stock as defined in the plan on the date of the grant,
vest over various terms (generally three years), and expire ten years from the
date of the grant.  The Plan allows vesting based upon performance
criteria; all current grants outstanding are time-based vesting
instruments.  Certain option and share awards provide for accelerated
vesting if there is a change in control of the Company (as defined in the
Plan).  The fair value of share based options granted is calculated using
the Black-Scholes option pricing model.  A total of 102,050 shares of Class
A Common Stock are reserved for issuance under the Plan at September 30,
2010.





The
Company accounts for stock-based compensation by estimating the fair value of
options granted using a Black-Scholes option valuation model.  The Company
recognizes the expense for grants of stock options on a straight-line basis in
the statements of operations as operating expense based on their fair value over
the requisite service period.





For stock
options issued in February 2010, the following assumptions were
used:





Expected
      life (in years)
                  
                  
                  5.5Expected
      volatility
                  
                  
                  40.90
                  %Risk-free
      interest rate
                  
                  
                  2.58
                  %Expected
      dividend
                  
                  
                  —Weighted
      average fair value per share
                  
                  $
                  0.061




14





For stock
options issued in July 2010, the following assumptions were used:





Expected
      life (in years)
                  
                  
                  6.0Expected
      volatility
                  
                  
                  39.65
                  %Risk-free
      interest rate
                  
                  
                  1.95
                  %Expected
      dividend
                  
                  
                  —Weighted
      average fair value per share
                  
                  $
                  0.057





Expected
volatilities are based on historic volatilities from traded shares of a selected
publicly traded peer group. Historic volatility has been calculated using the
previous two years’ daily share closing price of the index companies. The
Company has no historical data to estimate forfeitures. The expected term of
options granted is the safe harbor period approved by the SEC using the vesting
period and the contract life as factors. The risk-free rate for periods matching
the contractual life of the option is based on the U.S. Treasury yield curve in
effect at the time of grant.





A summary
of option activity under the Plan during the nine months ended September 30,
2010 is presented below:


Number of
                  Shares
                
                
                Weighted
                  Average
                  Exercise
                  Price
                
                
                Weighted
                  Average
                  Remaining
                  Contractual
                  Life (years)
                
                
                Aggregate
                  Intrinsic
                  ValueOptions
      outstanding at December31,
    2009
                
                
                —Granted
                
                
                897,950
                
                
                $
                0.19Cancelled
                
                
                —Exercised
                
                
                —Options
      outstanding at September 30, 2010
                
                
                897,950
                
                
                $
                0.19
                
                
                
                9.4
                
                
                $
                —Options
      exercisable at September 30, 2010
                
                
                262,343
                
                
                $
                0.20
                
                
                
                9.4
                
                
                $
                —





The
Company recorded compensation expense for the estimated fair value of options
issued of $4,352 and $26,781 for the three and nine months ended September 30,
2010, respectively.  As of September 30, 2010, the Company had $27,549
of unrecognized compensation cost related to unvested share-based compensation
arrangements granted under the Plan. The unamortized cost is expected to be
recognized over a weighted-average period of 1.7 years.




401(k)
Savings Plan




Employees
of the Company are eligible to participate in a 401(k) Savings Plan.  The
Company matches 100% of the first 3% of eligible compensation and 50% of the
next 2% of eligible compensation that employees contribute to the plan; the
Company’s matching contributions vest immediately.  The Company recorded
expense of $13,225 and $37,552 for the three and nine months ended September 30,
2010, respectively and no expense for 2009.





11. 
Commitments and Contingencies





Operating
Leases:




The
Company and its subsidiaries lease office space and personal property used in
their operations from Aequitas, an affiliate.  At September 30, 2010, the
Company's aggregate future minimum payments for operating leases with the
affiliate having initial or non-cancelable lease terms greater than one year are
payable as follows:





Year
                    
                    Required
      Minimum Payment2010
                    
                    $
                    56,0002011
                    
                    $
                    229,0002012
                    
                    $
                    233,0002013
                    
                    $
                    238,0002014
                    
                    $
                    202,000




15




For the
nine months ended September 30, 2010 and 2009, the Company incurred rent expense
of $168,176 and $45,000, respectively.




Off-Balance
Sheet Arrangements:




The
Company does not have any off-balance sheet arrangements.




Litigation:




From time
to time the Company may become involved in ordinary, routine or regulatory legal
proceedings incidental to the Company’s business.  In July 2010, a former
employee of Vitality filed a complaint in Orange County, California, alleging
breach of contract, breach of fiduciary duty, fraud, and negligent
misrepresentation against Vitality and its officers.  The plaintiff seeks
damages relating to unexercised stock option grants and other matters related to
the sale of Vitality to the Company. See Note 3.  The Company believes the
claim is without merit and does not believe that the claim will have a material
impact on the Company’s financial position or results of
operations.





12. 
Fair Value Measures





Fair
Value:




Fair
value is defined as the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market participants at
the measurement date.  It establishes a fair value hierarchy that
distinguishes between (1) market participant assumptions developed based on
market data obtained from independent sources (observable inputs) and (2) an
entity's own assumptions about market participant assumptions developed based on
the best information available in the circumstances (unobservable inputs). The
fair value hierarchy consists of three broad levels, which gives the highest
priority to unadjusted quoted prices in active markets for identical assets or
liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3).
The three levels of the fair value hierarchy are described below:




Level
      1 – Unadjusted quoted prices in active markets that are accessible at the
      measurement date for identical assets or
  liabilities.


Level
      2 – Observable inputs other than Level 1 prices such as quoted prices for
      similar assets or liabilities; quoted prices in markets that are not
      active; or other inputs that are observable or can be corroborated by
      observable market data for substantially the full term of the assets or
      liabilities.


Level
      3 – Valuations derived from valuation techniques in which one or more
      significant inputs or significant value drivers are
      unobservable.




Fair
Value of Financial Instruments:




The
carrying value of the Company's cash and cash equivalents, related party
receivable, accounts payable and other accrued liabilities approximate their
fair values due to the relatively short maturities of those
instruments.





The fair
value of the loans receivable at September 30, 2010 is $76,400 based on a
discounted cash flow model.





The fair
value of the Company’s mandatorily redeemable convertible Series D Preferred
issued on December 30, 2009 and April 15, 2010 was determined using a dividend
discount model and additionally for the April 15, 2010 sale of the Series D
Preferred, the proceeds from the sale were allocated to the debt and attached
warrant based on the relative fair values of each instrument at the time of
issuance; the intrinsic value of the beneficial conversion feature was computed
and recorded as a discount to the Series D Preferred and Additional Paid-In
Capital.  The assumptions used in the fair value calculation at December
31, 2009 would be the same at September 30, 2010.  The difference between
the fair value at issue date and the redemption value is being accreted
into expense over the period to redemption in January 2013 using the level yield
method.  The fair value of the Series D Preferred at September 30, 2010 is
$11,280,000 based on a discounted cash flow model.




The fair
value of the notes payable was calculated using our estimated borrowing rate for
similar types of borrowing arrangements for the periods ended September 30, 2010
and December 31, 2009.  The Company’s estimated borrowing rate has not
changed; therefore, the carrying amounts reflected in the unaudited condensed
consolidated balance sheets for notes payable approximate fair
value.




16




13. 
Related-Party Transactions





Effective
January 1, 2010, Aequitas began providing CP Technologies certain
management support services such as accounting, financial, human resources and
information technology services, under the terms of theAdministrative
Services Agreement dated December 31, 2009.  The total fee for the
services is approximately $65,100 per month.  The fees will increase by 3%
on January 1 of each year, beginning January 1, 2011.  Both
parties may change the services (including terminating a particular service)
upon 180 days prior written notice to the other party, and the Administrative
Services Agreement is terminable by either party on 180 days notice.  The
Company paid fees under the Administrative Services Agreement to Aequitas of
$195,300 and $585,900 for the three and nine months ended September 30, 2010,
respectively, which are included in sales, general and administrative
expense.





Under the
terms of the Sublease dated December 31, 2009 between CP Technologies and
Aequitas, CP Technologies leases certain office space and personal property from
Aequitas pursuant to the Sublease.  The rent for the real property is
$12,424 per month, and will increase by 3% each year beginning January 1,
2011.  The rent for the personal property is $6,262 per month, and CP
Technologies also pays all personal property taxes related to the personal
property it uses under the Sublease.  The Company paid fees under the
Sublease to Aequitas of $56,059 and $168,176 for the three and nine months ended
September 30, 2010, respectively, which are included in sales, general and
administrative expense.





Effective
on December 31, 2009, the Company and Aequitas entered into an amended and
restated Advisory Agreement (“Advisory Agreement”).  Under the terms of the
Advisory Agreement, Aequitas provides services to the Company relating to
strategy development, strategic planning, marketing, corporate development and
such other advisory services as the Company reasonably requests from time to
time.  The Company pays Aequitas a monthly fee of $15,000 for such
services.  In addition, Aequitas will receive a success fee in the event of
certain transactions entered into by the Company.  The Company paid fees
under the Advisory Agreement to Aequitas of $95,000 and $185,000 for the three
and nine months ended September 30, 2010, respectively, which are included in
sales, general and administrative expense and includes a $50,000 success fee
related to the acquisition of Vitality. See Note 3.





Effective
December 31, 2009, a Royalty Agreement was entered into between CP
Technologies and Aequitas, whereby CP Technologies pays Aequitas a royalty based
on new products (the "Products") developed by CP Technologies or its affiliates
or co-developed by CP Technologies or its affiliates and Aequitas or its
affiliates and that are based on or use the Software.  The royalty is equal
to (i) 1.0% of the net revenue received by CP Technologies or its affiliates and
generated by the Products that utilize funding provided by Aequitas or its
affiliates, and (ii) 7.0% of the face amount, or such other percentage as the
parties may agree, of receivables serviced by CP Technologies or its affiliates
that do not utilize such funding.  No fees were paid under the Royalty
Agreement to Aequitas for the three and nine months ended September 30,
2010.





Beginning
January 1, 2010, the Company recognized revenue in conjunction with a
servicing agreement with CarePayment, LLC.  CarePayment, LLC pays the
Company a servicing fee based on the total funded receivables being serviced, an
origination fee on newly generated funded receivables, and a “back-end fee”
based on  CarePayment, LLC’s quarterly net income, adjusted for
certain items.  The Company received fee revenue under this agreement of
$1,576,695 and $4,415,940 for the three and nine months ended September 30,
2010, respectively.  Additionally the Company recorded implementation
revenue of $30,000 for implementation services provided to CarePayment, LLC for
the three and nine months ended September 30, 2010.





CarePayment,
LLC also paid the Company additional compensation equal to the Company’s actual
monthly losses for the first quarter of 2010, and an amount equal to 50% of
actual monthly losses for the second quarter of 2010.  The Company received
$0 and $1,241,912 under this agreement for the three and nine months ended
September 30, 2010, respectively. See Note 8.





The
Company issued a note payable to MH Financial, as described in Notes 1 and
5.  The Company recorded interest expense on the note payable to MH
Financial of $5,577 and $49,727 for the three months ended September 30, 2010
and 2009, respectively, and $128,849 and $145,326 for the nine months ended
September 30, 2010 and 2009, respectively.  The Company repaid a note
payable to Aequitas in June 2010 and recorded interest expense on the note of $0
and $11,669 for the three months ended September 30, 2010 and 2009,
respectively, and $14,045 and $27,257 for the nine months ended September 30,
2010 and 2009, respectively.  The Company paid $196 of interest expense to
Aequitas Commercial Finance, LLC, an affiliate of Aequitas, for the nine months
ended September 30, 2010.


17





As of
September 30, 2010, the Company had a receivable of $42,177 due from
CarePayment, LLC for servicing fees.  The Company had accrued interest
payable to MH Financial of $411,560 and $282,711 as of September 30, 2010 and
December 31, 2009, respectively.  Additionally, the Company had accrued
interest payable to Aequitas of $41,371 as of December 31, 2009.




18




ITEM
2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS





The
following discussion provides information that management believes is relevant
to an assessment and understanding of the Company's operations and financial
condition.  This discussion should be read in conjunction with the
unaudited condensed consolidated financial statements and accompanying
notes.




Forward-Looking
Statements




This
Quarterly Report on Form 10-Q contains forward-looking statements.  Such
statements reflect management's current view and estimates of future economic
and market circumstances, industry conditions, company performance and financial
results. Words such as "expects," "anticipates," "intends," "plans," "believes,"
"seeks," "estimates" and variations of such words and similar expressions are
intended to identify such forward-looking statements.  These statements are
subject to risks and uncertainties that could cause our future results to differ
materially from the results discussed herein.  Factors that might cause
such a difference include, but are not limited to, those discussed elsewhere in
this Quarterly Report on Form 10-Q.  We do not intend, and undertake no
obligation, to update any such forward-looking statements to reflect events or
circumstances that occur after the date of this filing.




Overview





CarePayment
Technologies, Inc. (“we,” “us,” “our,” “CarePayment,” or the “Company”) was
incorporated as an Oregon corporation in 1991.  From inception until
September 28, 2007, we manufactured custom cable assemblies and mechanical
assemblies for the medical and commercial original equipment manufacturer (OEM)
markets.  We were experiencing considerable competition by late 2006 as our
customers aggressively outsourced competing products from offshore
suppliers.  In the first quarter of 2007, a customer that accounted for
over 30% of our revenues experienced a recall of one of its major products by
the U.S. Food and Drug Administration.  As a result the customer cancelled
its orders with us, leaving us with large amounts of inventory on hand and
significantly reduced revenue.





On May
31, 2007 we informed our three secured creditors, BFI Business Finance, VenCore
Solution, LLC and MH Financial Associates, LLC ("MH Financial"), that we were
unable to continue business operations due to continuing operating losses and a
lack of working capital.  At that time we voluntarily surrendered our
assets to these secured creditors, following which we and our wholly owned
subsidiary, Moore Electronics, Inc. ("Moore"), operated for the benefit of the
secured creditors until September 2007, when we ceased manufacturing operations
and became a shell company.  MH Financial was, at that time, and currently
is, an affiliate of ours due to its ownership of shares of our capital
stock.





Following
September 2007 and continuing until December 31, 2009, we had no
operations.  Our Board of Directors, however, determined to maintain us as
a shell company to seek opportunities to acquire a business or assets sufficient
to operate a business.  To help facilitate our search for suitable business
acquisition opportunities, among other goals, on June 27, 2008 we entered into
an advisory services agreement with Aequitas Capital Management, Inc.
(“Aequitas”) to provide us with strategy development, strategic planning,
marketing, corporate development and other advisory services.  In exchange
for the services to be provided by Aequitas under that agreement, we issued to
Aequitas warrants to purchase 106,667 shares of our Class A Common Stock at an
exercise price of $0.01 per share.





Effective
at the end of December 2009, we acquired certain assets and rights that enabled
us to begin building a business that services accounts receivable for other
parties.  The assets and rights we acquired had been previously developed
by Aequitas and its affiliate, CarePayment, LLC, under the CarePayment® brand
for servicing accounts receivable generated by hospitals in connection with
providing health care services to their patients.  The assets and rights we
acquired included the exclusive right to administer, service and collect patient
accounts receivable generated by hospitals and purchased by CarePayment, LLC or
its affiliates, and a proprietary software product that is used to manage the
servicing.  Typically  CarePayment, LLC or one of its affiliates
purchase patient accounts receivable from hospitals and then we administer,
service and collect them on behalf of CarePayment, LLC for a fee.  Although
we intend to grow our business to include servicing of accounts receivable on
behalf of other parties, currently CarePayment, LLC is our only
customer.


19





To
facilitate building the business, on December 30, 2009 we, Aequitas and
CarePayment, LLC formed an Oregon limited liability company called CP
Technologies LLC ("CP Technologies").  We contributed shares of our newly
authorized Series D Convertible Preferred Stock ("Series D Preferred") and
warrants to purchase shares of our Class B Common Stock to CP
Technologies.  Aequitas and CarePayment, LLC contributed to CP Technologies
the CarePayment® assets and rights described in the foregoing paragraph. 
CP Technologies then distributed the shares of Series D Preferred to Aequitas
and CarePayment, LLC, and the warrants to purchase shares of Class B Common to
CarePayment, LLC, to redeem all but half of one membership unit (a "Unit") held
by each of them.  Following these transactions, we own 99% of CP
Technologies, and Aequitas and CarePayment, LLC each own 0.5% of CP Technologies
as of December 31, 2009.





Following
the transactions described above, our current corporate structure and
relationships with certain affiliates are depicted in the following
diagram:










•
              Aequitas
      controls approximately 47% of the issued and outstanding shares of the
      Company’s Class A Common Stock.
 
 •
              Aequitas
      Holdings owns substantially all of the issued and outstanding shares of
      the Company’s Class B Common Stock, which represent approximately 95% of
      the voting power of the Company.
 
 •
              Aequitas
      CarePayment Founders Fund, LLC (“Founders Fund”) owns all of the issued
      and outstanding shares of the Company’s Series D Convertible Preferred
      Stock.  Founders Fund is managed by a subsidiary of
      Aequitas.


20





The
Receivables Servicing Business





On
January 1, 2010 and as a result of the transactions described above, CP
Technologies began building a business to service hospital patient receivables
for an affiliate of the Company, CarePayment, LLC.





Generally,
a majority of a hospital's accounts receivable are paid by medical insurance,
Medicare and Medicaid.  The balance of accounts receivable due directly
from the patient is not always a priority for many hospitals, due primarily to
the effort and expense required to collect those balances from individuals.CarePayment, LLC, acting
alone or through its affiliates, purchases patient receivables from
hospitals.  CP Technologies administers, services and collects the
receivables; CarePayment, LLC maintains ownership of the
receivables.





A patient
whose health care receivable is acquired by CarePayment, LLC becomes a
CarePayment® finance card customer and is issued a CarePayment® card, which has
an initial outstanding balance equal to the receivable purchased by CarePayment,
LLC.  Balances due on the CarePayment® card are generally payable over 25
months with no interest.  From the customer's point of view, the
CarePayment® card functions much like a credit card even though CP Technologies
advances no credit to the customer.  In addition to servicing the
receivables, CP Technologies also analyzes potential receivable acquisitions for
CarePayment, LLC and recommends a course of action when it determines that
collection efforts for existing receivables are no longer
effective.





In
exchange for its services, CP Technologies receives origination fees at the time
CarePayment, LLC purchases and delivers receivables to CP Technologies for
servicing, a monthly servicing fee based on the total principal amount of
receivables being serviced, and a quarterly fee based upon a percentage of
CarePayment, LLC's quarterly net income.  CP Technology's servicing
agreement with CarePayment, LLC included additional compensation during the
first nine months of 2010 to cover the Company’s start up costs as it began
building a receivables servicing business.  This compensation was equal to
the Company's actual monthly losses for the first quarter of 2010 and an amount
equal to 50% of actual monthly losses for the second quarter of 2010. The
Company received $1,241,912 of such compensation from CarePayment, LLC in the
nine months ended September 30, 2010.





CP
Technologies contracts with various vendors to service the CarePayment® finance
card product, send customer statements, accept payments, and transmit all
transaction history back to CP Technologies.  Since CP Technologies is
responsible for the CarePayment® finance card's compliance with various laws and
regulations relating to consumer credit, these vendors are selected for their
specific expertise in such areas.





On July
30, 2010, the Company entered into an Agreement and Plan of Merger with Vitality
Financial, Inc. (“Vitality”) pursuant to which Vitality became a wholly owned
subsidiary of the Company.  Under the terms of the Merger Agreement, the
stockholders of Vitality received, collectively, 97,500 shares of Series E
Convertible Preferred Stock of the Company in consideration for all the
outstanding stock of Vitality.





Vitality
purchases consumer health care receivables from hospitals for the patients’
uninsured portion of their hospital bill on a non-recourse basis.  Vitality
has developed a proprietary healthcare credit score process to evaluate
non-recourse loans prior to purchase.  Upon credit approval, customers are
offered a pre-approved line of credit.  When the customer accepts the terms
of the agreement, the Company purchases the customer’s hospital receivable
balance at a discount.  Interest rates charged the consumer on these loans
are generally less than traditional credit card rates.





Other





Currently,
shares of our Class A Common Stock trade on the Pink Sheets under the symbol
CPYT.PK.




As of
August 2010, no class of our securities is registered under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and we are not subject to
the information requirements of the Exchange Act.  On April 30, 2010, we
filed a Form 10 with the Securities and Exchange Commission (the "SEC") to
register our Class A Common Stock under Section 12(g) of the Exchange Act. 
We voluntarily withdrew the Form 10 on June 6, 2010 while we respond to comments
to the Form 10 that we received from the staff of the SEC.  We intend to
re-file the Form 10, but cannot predict when we will do so or, once re-filed,
when the registration will be declared effective.  Until the Form 10 is
declared effective, we intend to continue filing reports and information under
the Exchange Act voluntarily.
 21







Critical
Accounting Policies and Estimates




The
discussion and analysis of the Company’s financial condition and results of
operations is based upon the Company's consolidated financial statements which
have been prepared in accordance with accounting principles generally accepted
in the United States. The preparation of these financial statements requires the
Company to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses, and related disclosure of contingent
assets and liabilities. The Company based the estimates on historical experience
and on various other assumptions that are believed to be reasonable under the
circumstances, the results of which formed the basis for making judgments about
the carrying value of assets and liabilities that are not readily apparent from
other sources.





The
Company believes the critical accounting policy and related judgments and
estimates identified in Note 2 to the Condensed Consolidated Financial
Statements (Unaudited) contained in this Report affect the preparation of the
Company's consolidated financial statements.


22




RESULTS
OF OPERATIONS




The
following discussion should be read in the context of the above overview and the
notes to the Condensed Consolidated Financial Statements (Unaudited) contained
in this Report.




THREE
MONTHS ENDED SEPTEMBER 30, 2010 AND 2009




Revenues:




The
Company had no revenue in 2009 as discussed in the above overview.  As of
January 1, 2010, the Company began recognizing revenue in conjunction with
a servicing agreement with its affiliate, CarePayment, LLC.  CarePayment,
LLC pays the Company a servicing fee equal to 5%  annually of total
funded receivables being serviced, an origination fee equal to 6% of the
original balance of newly generated funded receivables, and a “back-end fee”
based on 25% of CarePayment, LLC’s quarterly net income, adjusted for certain
items.  The Company recorded fee revenues in conjunction with the servicing
contract of $1,576,695 for the three months ended September 30, 2010, which were
comprised of $487,490 of servicing fees, $1,089,205 of origination fees and no
“back-end fees.”  Additionally the Company recorded implementation
revenue of $30,000 for implementation services provided to CarePayment, LLC and
$5,426 of interest revenue on loans receivable acquired in the acquisition of
Vitality for the three months ended September 30, 2010.




Cost
of Revenues:




Cost of
revenue is comprised primarily of compensation and benefit costs for servicing
employees, costs associated with outsourcing billing, collection and payment
processing servicing, and the amortization of the servicing rights and servicing
software.  For the three months ended September 30, 2010, the total cost of
revenues of $1,337,510 was comprised of compensation expense of $318,445,
outsourced processing and collections services of $844,837, amortization expense
of $139,220 and other expense of $35,008.  Outsourced services from four
primary vendors include hosting and maintenance of cardholder accounts including
all customer transaction processing, collection and mailing services, card
processing and customer service administration.




Operating
Expenses:




Operating
expenses for the three months ended September 30, 2010 were $1,132,807 as
compared to $64,224 for the same period in 2009.  The sales, general and
administrative expenses for the three months ended September 30, 2010 related to
the servicing operations which began on January 1, 2010, while the expense for
the same period in 2009 related to managing a shell company and preparing
filings of reports with the SEC.





Operating
expenses for the three months ended September 30, 2010 were comprised of the
following:  sales and marketing expense of approximately $344,000;
legal, consulting and other professional fees of approximately $140,000;
executive compensation of approximately $143,000; related party agreements with
Aequitas for office and equipment lease expense of $56,000, accounting services
of $195,000 and advisory services of $95,000; travel and entertainment of
$123,000, and general office expense of approximately $37,000.




Interest
Expense:




Interest
expense of $78,321 for the three months ended September 30, 2010 included
$72,744 of the accreted discount on the Series D Preferred; see Note 6 to the
Condensed Consolidated Financial Statements (Unaudited) contained in this
Report.  Interest expense of $113,156 for the three months ended September
30, 2009 included $51,762 of debt discount expense.




Net
Loss:




Net loss
for the three months ended September 30, 2010 was $918,970.


23




NINE
MONTHS ENDED SEPTEMBER 30, 2010 AND 2009




Revenues:




The
Company had no revenue in 2009 as discussed in the above overview.  As of
January 1, 2010, the Company began recognizing revenue in conjunction with a
servicing agreement with its affiliate, CarePayment, LLC.  CarePayment, LLC
pays the Company a servicing fee equal to 5%  annually of total funded
receivables being serviced, an origination fee equal to 6% of the original
balance of newly generated funded receivables, and a “back-end fee” based on 25%
of CarePayment, LLC’s quarterly net income, adjusted for certain items. 
The Company recorded fee revenues in conjunction with the servicing contract of
$4,415,940 for the nine months ended September 30, 2010, which were comprised of
$1,329,836 of servicing fees, $3,086,104 of origination fees and no “back end
fees.”  Additionally the Company recorded implementation revenue of
$30,000 for implementation services provided to CarePayment, LLC and $5,426 of
interest revenue from loans receivable acquired in the acquisition of Vitality
for the nine months ended September 30, 2010.




Cost
of Revenues:




Cost of
revenue is comprised primarily of compensation and benefit costs for servicing
employees, costs associated with outsourcing billing, collection and payment
processing servicing, and the amortization of the servicing rights and servicing
software.  For the nine months ended September 30, 2010, the total cost of
revenues of $3,579,152 was comprised of compensation expense of $914,704,
outsourced processing and collections services of $2,155,314, amortization
expense of $413,553, and $95,581 of other expense.  Outsourced services
from four primary vendors include hosting and maintenance of cardholder accounts
including all customer transaction processing, collection and mailing services,
card processing and customer service administration.




Operating
Expenses:




Operating
expenses for the nine months ended September 30, 2010 were $3,074,658 as
compared to $304,252 for the same period in 2009.  The sales, general and
administrative expenses for the nine months ended September 30, 2010 related to
the servicing operations which began on January 1, 2010, while the expense for
the same period in 2009 related to managing a shell company and preparing
filings of reports with the SEC.





Operating
expenses for the nine months ended September 30, 2010 were comprised of the
following:  sales and marketing expense of approximately $902,000;
legal, consulting and other professional fees of approximately $455,000;
executive compensation of approximately $390,000; related party agreements with
Aequitas for office and equipment lease expense of $168,000, accounting services
of $586,000 and advisory services of $185,000; travel and entertainment of
$294,000 and general office expense of approximately $95,000.




Other
Income (Expense):




Loss
reimbursement –The Company’s servicing agreement with CarePayment, LLC
provides for CarePayment, LLC to pay additional compensation equal to the
Company’s actual monthly losses for the first quarter of 2010 and an amount
equal to 50% of actual monthly losses for the second quarter of 2010.  This
additional compensation is intended to reimburse the Company for transition
costs that are not specifically identifiable.  For the nine months ended
September 30, 2010, the Company recorded a loss reimbursement of $1,241,912 as
other income.





Interest expense
–Interest expense of $363,611 for the nine months ended September 30,
2010 included $220,521 of the accreted discount on the Series D Preferred; see
Note 6 to the Condensed Consolidated Financial Statements (Unaudited) contained
in this Report.  Interest expense of $309,139 for the nine months ended
September 30, 2009 included $136,465 of debt discount expense.




Net
Loss:




Net loss
for the nine months ended September 30, 2010 was $1,287,511.  This loss is
net of the $1,241,912 additional compensation received from CarePayment, LLC,
whereby CarePayment, LLC reimbursed the Company for an amount equal to the
Company’s actual monthly losses for the first quarter of 2010 and an amount
equal to 50% of actual monthly losses for the second quarter of 2010 in
accordance with the servicing agreement.




24




LIQUIDITY
AND CAPITAL RESOURCES





Asof September 30, 2010, the
Company had $1,481,938 of cash and cash equivalents.  Cash used in
operating activities during the nine-month period ended September 30, 2010 was
$45,496 compared to $197,462 used in the same period a year ago. Cash used in
operating activities during the first nine months of 2010 included a net loss of
$1,287,511 offset by non-cash activity of $664,710, which included depreciation
and amortization of $417,408, accretion of the discount on the Series D
Preferred Stock of $220,521, and stock-based compensation expense of $26,781,
and further offset by a net change in operating assets and liabilities of
$577,305.  The primary components of the change in operating assets and
liabilities were an increase in accounts payable and accrued liabilities of
$593,102 and accrued interest of $87,478 that provided cash for operating
activities, which was offset by an increase in prepaid expense of $55,828 and
accounts receivable of $42,177 due from CarePayment, LLC for fees due to the
Company.





For the
nine months ended September 30, 2010, the Company provided $87,167 in cash from
investing activities compared to $0 for the same period in 2009.  The
acquisition of Vitality provided $100,842 of cash, which was offset by loans
receivable activity and the purchase of $7,200 of property and equipment. 
The total consideration for the acquisition of Vitality was Series E Preferred
Stock; Vitality had $100,842 in cash at the acquisition date.





For the
nine months ended September 30, 2010, the Company provided $1,371,170 in cash
from financing activities as compared to $100,000 of cash provided by financing
activities during the first nine months of 2009.  During the nine-month
period ending September 30, 2010, the Company received a payment of $2,000,000
from Founders Fund for the purchase of Series D Preferred Stock and $65,360 of
proceeds from the exercise of warrants.  These proceeds were offset by the
use of $694,190 to repay notes payable.





On March
31, 2010, the Company’s shareholders authorized the Company to effect a 1-for-10
reverse stock split of its common stock and subsequent conversion of each share
of common stock into one share of Class A Common Stock.  The consolidated
financial statements, notes, and other references to share and per share data
contained in this Report have been retroactively restated to reflect such
reverse stock split and conversion for all periods presented.




Off-Balance
Sheet Arrangements




The
Company does not have any off-balance sheet arrangements.




ITEM
3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK




Not
applicable





ITEM
4.  CONTROLS AND PROCEDURES





Attached
as exhibits to this Quarterly Report on Form 10-Q are certifications (the
"Certifications") of the Company's principal executive officer and principal
financial officer, which are required pursuant to Rule 13a-14 of the Exchange
Act.  This Item 4 includes information concerning the controls and controls
evaluation referenced in the Certifications.  This Item 4 should be read in
conjunction with the Certifications for a more complete understanding of the
matters presented.





The
Company’s Chief Executive Officer and Chief Financial Officer evaluated the
effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15
under the Exchange Act as of September 30, 2010.  Based on that evaluation,
our Chief Executive Officer and Chief Financial Officer concluded that the
Company’s disclosure controls and procedures are not designed at a reasonable
assurance level nor are they effective to give reasonable assurance that the
information the Company must disclose in reports filed with the Securities and
Exchange Commission are properly recorded, processed, summarized, and reported
as required, and that such information is not accumulated and communicated to
our management, including the Company’s Chief Executive Officer and Chief
Financial Officer, to allow timely decisions regarding required
disclosure.


25





The
Company restarted operations on January 1, 2010 and has not had sufficient time
or financial resources to design and implement adequate disclosure controls and
procedures.  The Company is in the process of doing so, and anticipates
that it will complete these activities during 2010.





There
were no changes to the Company’s internal controls during the three months ended
September 30, 2010.


26





PART
II.  OTHER INFORMATION





ITEM
1.  LEGAL PROCEEDINGS





From time
to time the Company may become involved in ordinary, routine or regulatory legal
proceedings incidental to the Company’s business.  On July 7, 2010, a
former employee of Vitality filed a complaint in the Superior Court of
California for Orange County, alleging breach of contract, breach of fiduciary
duty, fraud, and negligent misrepresentation against Vitality and its
officers.  The plaintiff seeks damages relating to unexercised stock option
grants and other matters related to the sale of Vitality to the Company. 
The Company believes the claim is without merit and does not believe that the
claim will have a material impact on the Company’s financial position or results
of operations.  As of the date of this Report, the Company is not engaged
in any other legal proceedings nor is the Company aware of any other pending or
threatened legal proceedings that, singly or in the aggregate, could have a
material adverse effect on the Company.





ITEM
2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS





None.





ITEM
6.  EXHIBITS





(a)Exhibits:





31.1(1)
            
            Certification
      of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as
      adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
      200231.2(1)
            
            Certification
      of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as
      adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
      200232.1(1)
            
            Certification
      of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as
      adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
      200232.2(1)
            
            Certification
      of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as
      adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002





(1)
            Filed
      herewith.





SIGNATURE





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.





CAREPAYMENT
      TECHNOLOGIES, INC.Dated:  November
      15, 2010
            
            (Registrant)/s/
      PATRICIA J. BROWNPatricia
      J. BrownChief
      Financial Officer




27