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 June 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): 503-419-3564





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 August 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 June 30, 2010





TABLE
OF CONTENTS





PagePART
      I.   Financial Information
            2ITEM
      1.   Condensed Consolidated Financial Statements
      (Unaudited)Condensed
      consolidated balance sheets as of June 30, 2010 and December 31,
      2009
            2Condensed
      consolidated statements of operations for the three and six months ended
      June 30, 2010 and 2009
            3Condensed
      consolidated statements of cash flows for the six months ended June 30,
      2010 and 2009
            4Notes
      to condensed consolidated financial statements
            5ITEM
      2.   Management’s Discussion And Analysis Of Financial
      Condition And Results Of Operations
            17ITEM
      4.   Controls And Procedures
            22PART
      II.   Other Information
            23ITEM
      2.   Unregistered Sales Of Equity Securities And Use Of
      Proceeds
            23ITEM
      6.   Exhibits
            23SIGNATURE
            24




1


PART
I — FINANCIAL INFORMATION





ITEM 1. FINANCIAL STATEMENTS —
UNAUDITED








CAREPAYMENT
TECHNOLOGIES, INC.


CONDENSED
CONSOLIDATED BALANCE SHEETS


(UNAUDITED)


June
30, 2010 and December 31, 2009





2010
            
            
            2009AssetsCurrent
      Assets:Cash
      and cash equivalents
            
            $
            530,178
            
            
            $
            69,097Related
      party receivable
            
            
            265,622
            
            
            
            --Related
      party interest receivable
            
            
            19,418
            
            
            
            --Prepaid
      expenses
            
            
            87,083
            
            
            
            --Total
      current assets
            
            
            902,301
            
            
            
            69,097Related
      party note receivable
            
            
            1,750,000
            
            
            
            --Property
      and equipment, net
            
            
            423,867
            
            
            
            500,000Servicing
      rights, net
            
            
            9,359,000
            
            
            
            9,550,000Total
      assets
            
            $
            12,435,168
            
            
            $
            10,119,097Liabilities
      and Shareholders' Equity (Deficit)Current
      Liabilities:Accounts
      payable
            
            $
            1,453,657
            
            
            $
            797,751Accrued
      interest
            
            
            405,883
            
            
            
            324,082Accrued
      liabilities
            
            
            108,928
            
            
            
            --Current
      maturities of notes payable
            
            
            --
            
            
            
            294,190Total
      current liabilities
            
            
            1,968,468
            
            
            
            1,416,023Notes
      payable, net of current potion
            
            
            884,875
            
            
            
            988,275Mandatorily
      redeemable preferred stock, no par value, 1,200,000 shares authorized,
      1,200,000 and 1,000,000 shares issued and outstanding at June 30, 2010 and
      December 31, 2009, respectively, liquidation preference of $12,000,000 at
      June 30, 2010
            
            
            881,931
            
            
            
            8,805,140Total
      liabilities
            
            
            3,735,274
            
            
            
            11,209,438Shareholders'
      Equity (Deficit):CarePayment
      Technologies, Inc. shareholders’ equity (deficit):Common
      stock, no par value: Class A 65,000,000 shares authorized, 1,390,616 and
      1,383,286 issued and outstanding at June 30, 2010 and December 31, 2009,
      respectively; Class B 10,000,000 shares authorized, 6,510,092 shares
      issued and outstanding at June 30, 2010 and no shares issued or
      outstanding at December 31, 2009
            
            
            18,087,951
            
            
            
            18,022,591Additional
      paid-in capital
            
            
            21,848,627
            
            
            
            11,755,211Accumulated
      deficit
            
            
            (31,242,060
            )
            
            
            (30,868,143
            )Total
      CarePayment Technologies, Inc. shareholders' equity
    (deficit)
            
            
            8,694,518
            
            
            
            (1,090,341
            )Noncontrolling
      interest
            
            
            5,376
            
            
            
            --Total
      shareholders’ equity (deficit)
            
            
            8,699,894
            
            
            
            (1,090,341
            )Total
      liabilities and shareholders’ equity (deficit)
            
            $
            12,435,168
            
            
            $
            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
              June
      30
            
            
            Six
      Months Ended
              June
      302010
            
            
            2009
            
            
            2010
            
            
            2009Service
      fees revenue
            
            $
            1,534,528
            
            
            $
            --
            
            
            $
            2,839,245
            
            
            $
            --Cost
      of revenue
            
            
            1,118,160
            
            
            
            --
            
            
            
            2,241,642
            
            
            
            --Gross
      margin
            
            
            416,368
            
            
            
            --
            
            
            
            597,603
            
            
            
            --Operating
      Expenses:Sales,
      general and administrative
            
            
            1,051,627
            
            
            
            108,127
            
            
            
            1,941,851
            
            
            
            240,028Loss
      from operations
            
            
            (635,259
            )
            
            
            (108,127
            )
            
            
            (1,344,248
            )
            
            
            (240,028
            )Other
      income (expense):Interest
      income
            
            
            19,418
            
            
            
            --
            
            
            
            19,418
            
            
            
            --Loss
      reimbursement
            
            
            368,541
            
            
            
            --
            
            
            
            1,241,912
            
            
            
            --Interest
      expense:Interest
      expense
            
            
            (64,809
            )
            
            
            (66,450
            )
            
            
            (137,512
            )
            
            
            (111,280
            )Accretion
      of preferred stock discount
            
            
            (56,432
            )
            
            
            --
            
            
            
            (147,778
            )
            
            
            --Accretion
      of note payable discount
            
            
            --
            
            
            
            (51,763
            )
            
            
            --
            
            
            
            (84,703
            )Other
      income (expense), net
            
            
            266,718
            
            
            
            (118,213
            )
            
            
            976,040
            
            
            
            (195,983
            )Net
      loss before income tax
            
            
            (368,541
            )
            
            
            (226,340
            )
            
            
            (368,208
            )
            
            
            (436,011
            )Income
      tax expense
            
            
            --
            
            
            
            --
            
            
            
            333
            
            
            
            --Net
      loss
            
            
            (368,541
            )
            
            
            (226,340
            )
            
            
            (368,541
            )
            
            
            (436,011
            )Less:
      Net income attributable to noncontrolling interest
            
            
            (2,951
            )
            
            
            --
            
            
            
            (5,376
            )
            
            
            --Net
      loss attributable to CarePayment Technologies, Inc.
            
            $
            (371,492
            )
            
            $
            (226,340
            )
            
            
            (373,917
            )
            
            
            (436,011
            )Net
      loss per share:
              Basic
      and diluted
            
            $
            (0.05
            )
            
            $
            (1.15
            )
            
            
            (0.08
            )
            
            
            (2.21
            )Weighted
      average number of shares outstanding:
              Basic
      and diluted
            
            
            7,757,629
            
            
            
            197,409
            
            
            
            4,588,876
            
            
            
            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)





Six
      Months Ended
              June
      302010
            
            
            2009Cash
      Flows Provided by (Used In) Operating Activities:Net
      loss
            
            $
            (368,541
            )
            
            $
            (436,011
            )Adjustments
      to reconcile net loss to cash provided by (used in) operating
      activities:Amortization
      of intangibles
            
            
            274,333
            
            
            
            --Accretion
      of preferred stock discount
            
            
            147,778
            
            
            
            --Stock-based
      compensation
            
            
            22,429
            
            
            
            --Warrants
      issued for services
            
            
            --
            
            
            
            1,001Amortization
      of debt discount
            
            
            --
            
            
            
            84,703Change
      in assets and liabilities:Increase
      in assets:Related
      party receivables
            
            
            (285,040
            )
            
            
            --Prepaid
      expenses
            
            
            (87,083
            )
            
            
            (10,417
            )Increase
      in liabilities:Accounts
      payable
            
            
            655,906
            
            
            
            --Accrued
      interest
            
            
            81,801
            
            
            
            --Accrued
      liabilities
            
            
            108,928
            
            
            
            174,732Net
      cash provided by (used in) operating activities
            
            
            550,511
            
            
            
            (185,992
            )Cash
      Flows Provided By (Used In) Investing Activities:Purchase
      property and equipment
            
            
            (7,200
            )
            
            
            --Net
      cash used in investing activities
            
            
            (7,200
            )
            
            
            --Cash
      Flows Provided By (Used In) Financing Activities:Payments
      on notes payable
            
            
            (397,590
            )
            
            
            --Proceeds
      from collection of related party note receivable
            
            
            250,000Proceeds
      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 (used in) financing activities
            
            
            (82,230
            )
            
            
            100,000Change
      in cash
            
            
            461,081
            
            
            
            (85,992
            )Cash,
      beginning of period
            
            
            69,097
            
            
            
            98,433Cash,
      end of period
            
            $
            530,178
            
            
            $
            12,441Supplemental
      Disclosure of Cash Flow InformationCash
      paid for interest
            
            $
            55,712
            
            
            $
            --Cash
      paid for income taxes
            
            $
            333
            
            
            $
            --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
            
            $
            --
            
            
            $
            199,988




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 receivables 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 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.





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 receivables are paid by medical insurances,
Medicare and Medicaid.  The balance of accounts receivables 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 six-month period ended June 30,
2010.





CP
Technologies contracts with various vendors to issue 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.








6




2.  Summary
of Significant Accounting Policies




Basis
of presentation:




The
unaudited condensed consolidated financial statements have been prepared by the
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 results of operations for the six months ended June 30,
2010 are not necessarily indicative of the results to be expected for the entire
year ending December 31, 2010.





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 subsidiary, Moore, and its 99%
owned subsidiary, CP Technologies LLC (“CP Technologies”). All intercompany
transactions have been eliminated.




Concentration
of credit risk:




Receivables— The
Company’s  receivables are all with one related party.  The
Company does not anticipate any collection issues.





Revenue from one source— The
Company currently generates 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.




Property
and equipment:




Property
and equipment is comprised of servicing software which is stated at original
estimated fair value, net of accumulated amortization and software
licenses.  Amortization 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 3 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 expense was $41,667 and $83,333 for the
three and six months ended June 30, 2010.




Servicing
rights:




Servicing
rights represent the fair value of the identifiable intangible asset associated
with the acquisition of certain business assets.  Effective January 1,
2010, the cost associated with this asset will be 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.  The Company evaluates
servicing rights for impairment annually or whenever events or changes in
circumstances indicate that the carrying amount of the asset may not be
recoverable by analyzing the undiscounted and discounted future cash flows under
the servicing agreement with CarePayment, LLC.  Amortization expense
was $95,500 and $191,000 for the three and six months ended June 30, 2010,
respectively.




7


Revenue
recognition:




Beginning
January 1, 2010, the Company will  recognize revenue in
conjunction with a servicing agreement with CarePayment, LLC.  The
Company will receive 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 will receive 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.




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, and amortization of servicing rights and servicing
software.




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 June 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.




8


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.





3.  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 is due April 15, 2011
(See Notes 5 and 6).  Founders Fund paid $250,000 on the note in May
2010.  The Company recorded interest income for the three and six
months ended June 30, 2010 of $19,418 for this note. The
related party note receivable is recorded as a long-term asset as the underlying
transaction related to the mandatorily
redeemable preferred stock is
recorded as a long-term liability.





4.  Notes
Payable





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





2010
            
            
            2009MH
      Financial Associates, LLC
            
            $
            874,343
            
            
            $
            977,743Aequitas
      Capital Management, Inc.
            
            
            --
            
            
            
            294,190Other
            
            
            10,532
            
            
            
            10,532Total
      notes payable
            
            
            884,875
            
            
            
            1,282,465Current
      maturities
            
            
            --
            
            
            
            (294,190
            )Notes
      payable, less current maturities
            
            $
            884,875
            
            
            $
            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 27, 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 amounts outstanding under the Note will be
decreased from 20% to 8% per annum after the Company makes principal payments
totaling $400,000.  As of March 31, 2010, the Company has made
principal payments of $103,500; the interest rate on the loan will decrease
after the Company makes additional principal payments of
$296,500.  The Note continues to be secured by substantially all of
the assets of the Company.





9


On
December 31, 2008, the Company entered into a multiple advance promissory
note payable to Aequitas.  The note is a multiple advance note, with a
maximum advance amount of $360,000.  The note was amended and was
modified to reflect modified payment and maturity date information such that
effective December 31, 2009, there will be no additional advances made
under the note.  The maturity date was further extended on March 31,
2010 to be September 30, 2010.  Under these modified terms all amounts
outstanding under this note are due and payable on the earliest of the
following:  (a) September 30, 2010; (b) the closing of
a loan or other financing provided to the Company by a senior lender or other
source in an amount sufficient to pay off this note; (c) the closing of a
private investment in public equity financing and/or any other financing event
with gross proceeds to the Company in excess of $1,000,000 (each of (a) through
(c) is individually the "Maturity Date");
provided, however, that after the occurrence of an Event of Default, the
outstanding principal and all accrued interest will be payable on
demand.  Unless otherwise agreed or required by applicable law,
payments will be applied first to expenses for which the Company is liable under
the note (including unpaid collection costs and late charges), next to accrued
and unpaid interest, and the balance to principal.  In addition, the
outstanding principal balance and all accrued and unpaid interest will be due
and payable in the event of (x) a sale of all or substantially all of the assets
of the Company, or (y) the transfer of ownership or beneficial interest, by
merger or otherwise, of 50% or more of the stock of the Company.  The
Company paid all principal and interest balances to Aequitas in June
2010.





On
January 15, 2010, CarePayment entered into agreements pursuant to which it
could borrow up to a maximum of $500,000 from Aequitas Commercial Finance, LLC
(“ACF”), an affiliate of Aequitas.  The Company was advanced $31,000
on January 14, 2010, which was repaid on February 12,
2010.  These agreements expired on March 31, 2010.




5.  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 3 and 6).





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.





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 6).  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
proceed from the sale of the Series D Preferred was 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.





10


The
difference between the fair values 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 June 30, 2010 is $881,931.




6.  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 with
respect to the Series D Preferred) 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. (See Note 13).




Stock
Warrants:




As of
June 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
            
            
            December
      31, 2014





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 3).  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 determinded 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.





11


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.




7.  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 three and six months ended June
30, 2010, the Company recorded a loss reimbursement of $368,541 and $1,241,912,
respectively, as other income.




8.  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
              June
      30
            
            
            Six
      Months Ended
              June
      302010
            
            
            2009
            
            
            2010
            
            
            2009Weighted
      average basic common shares outstanding
            
            
            7,757,629
            
            
            
            197,409
            
            
            
            4,588,876
            
            
            
            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)
            
            
            7,757,629
            
            
            
            197,409
            
            
            
            4,588,876
            
            
            
            197,380


________________


(a)
            Common
      stock equivalents outstanding for the three and six months ended
      June 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 bassed on the
      conversion calculation in Note 6, and stock options to purchase 787,030
      shares of Class A Common Stock.




(b)
            Common
      stock equivalents outstanding for the three and six months ended
      June 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.





12




9.  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 authorized grants of
878,339 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 91,309 shares of Class
A Common Stock remained reserved for issuance under the Plan at June 30,
2010.





The
Company accounts for share-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 statement of operations as operating expense based on their fair
value over the requisite service period.





For stock
options issued in March 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





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 six months ended June 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
            
            
            787,030
            
            
            $
            0.20Cancelled
            
            
            --Exercised
            
            
            --Options
      outstanding at June30,
    2010
            
            
            787,030
            
            
            $
            0.20
            
            
            
            9.6
            
            
            $
            --Options
      exercisable at June30,
    2010
            
            
            262,343
            
            
            $
            0.20
            
            
            
            9.6
            
            
            $
            --





The
Company recorded compensation expense for the estimated fair value of options
issued of $4,000 and $22,429 for the three and six months ended June 30, 2010,
respectively.  As of June 30, 2010, the Company had $25,580 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 1.6 years.




13


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 $13,276 and $24,327 for
the three and six months ended June 30, 2010.




10.  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 June 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
            
            
            $112,0002011
            
            
            $229,0002012
            
            
            $233,0002013
            
            
            $238,0002014
            
            
            $202,000




For the
six months ended June 30, 2010 and 2009, the Company incurred rent expense of
$112,117 and $30,000, 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.  The Company is not
engaged in any legal proceedings nor is the Company aware of any pending or
threatened legal proceedings that, singly or in the aggregate, could have a
material adverse effect on the Company.




11.  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.





14




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 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 June 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 June
30, 2010 is $11,038,000 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 June 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.




12.  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.  Either party 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 $390,600 for the three and six months
ended June 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 $112,117 for the three and six months ended
June 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 $45,000 and
$90,000 for the three and six months ended June 3, 2010, respectively,
which are included in sales, general and administrative expense.





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 Aequitasfor the
three and six months ended June 30, 2010.





15


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 $1,534,528 and $2,839,245 for the three and six months ended June 30,
2010, respectively.





CarePayment,
LLC also pays 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 $368,541 and $1,241,902 under this agreement for the three and six
months ended June 30, 2010, respectively (See Note 7).





The
Company has notes payable to Aequitas and its affiliates, MH Financial and ACF,
as described in Notes 1 and 4.  The Company recorded interest expense
on the note payable to MH Financial of $61,461 and $57,454 for the three months
ended June 30, 2010 and 2009, respectively, and $123,272 and $95,599 for the six
months ended June 30, 2010 and 2009, respectively.  The Company also
recorded interest expense on the note payable to Aequitas of $3,349 and $8,996
for the three months ended June 30, 2010 and 2009, respectively, and $14,045 and
$15,588 for the six months ended June 30, 2010 and 2009,
respectively.  The Company paid $196 of interest expense to ACF for
the six months ended June 30, 2010.





As of
June 30, 2010, the Company had a receivable of $265,622 due from CarePayment,
LLC for servicing fees.  The Company had accrued interest payable to
MH Financial of $405,883 and $282,711 as of June 30, 2010 and December 31, 2009,
respectively.  Additionally, the Company had accrued interest payable
to Aequitas of $41,371 as of December 31, 2009.





As of
June 30, 2010, the Company had a note receivable from Founders Fund of
$1,750,000 and interest receivable of $19,418 (see Note 3).  The
Company had accounts payable amounts of $5,756 payable to CarePayment, LLC and
$112,699 payable to Aequitas related to the administrative services and advisory
services agreements.




13.  Subsequent
Events





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 with the Oregon Secretary of State designating 250,000 shares of
its Preferred Stock as Series E Convertible Preferred Stock.





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.  CP Technologies entered into
employment agreements with two former executives of Vitality; the Company
granted 55,460 options to purchase Class A Common Stock to each of the two new
employees.  Vitality, based in San Francisco, California, purchases
non-recourse hospital receivables at a discount.


16





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 within the
meaning of the Private Securities Litigation Reform Act of 1995, as amended.
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 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 receivables 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.




17


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 96% of
      the voting power of the Company.
 
 •
              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.
  18


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 receivables are paid by medical insurances,
Medicare and Medicaid.  The balance of accounts receivables 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 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 six-month period ended June 30, 2010.





CP
Technologies contracts with various vendors to issue 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.


Other
  Currently,
shares of our Class A Common Stock trade on the Pink Sheets under the symbol
CPYT.PK.
 
 On June
11, 2007 we filed a Form 15 with the Securities and Exchange Commission (“SEC”)
terminating our registration of our shares under the Securities Exchange Act of
1934, as amended (the “Exchange Act”) and suspended our duty to file reports
under Sections 13 and 15(d) of the Exchange Act.  On March 25, 2009,
we voluntarily filed our annual and quarterly reports for 2007 and quarterly
reports for 2008 with the SEC.  We are not currently subject to the
information requirements of the Exchange Act.  However, we voluntarily
file annual, quarterly and current reports, proxy statements and other
information with the SEC.
 
 On April
30, 2010, the Company filed a Form 10 with the SEC.  The Company
voluntarily withdrew the Form 10 on June 16, 2010 while it responds to comments
to the Form 10 that the Company received from the staff of the
SEC.  The Company intends to re-file the Form 10, but cannot predict
when it will do so or, once re-filed, when the registration will be declared
effective.  Until the Form 10 is declared effective, the Company
intends to continue voluntarily filing reports and information under the
Exchange Act.


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.




19


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 JUNE 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 of $1,534,528 in the three months ended June 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 June 30, 2010, the total cost of
revenues of $1,118,160 was comprised of compensation expense of $292,475,
outsourced processing and collections services of $630,947, amortization expense
of $137,166 and other expense of $57,572.  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 June 30, 2010 were $1,051,627 as compared to
$108,127 for the same period in 2009.  The sales, general and
administrative expenses for the three months ended June 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 voluntary
filings of reports with the SEC.





Operating
expenses for the three months ended June 30, 2010 were comprised of the
following:  sales and marketing expense of approximately $218,000;
legal, consulting and other professional fees of approximately $256,000;
executive compensation of approximately $141,000; related party agreements with
Aequitas for office and equipment lease expense of $56,000, accounting services
of $195,000 and advisory services of $45,000; travel and entertainment of
$101,000, and general office expense of approximately $40,000.




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 reimbursement the
Company for transition costs that are not specifically
identifiable.  For the three months ended June 30, 2010, the Company
recorded a loss reimbursement of $368,541 as other income.




Interest expense
–Interest expense of $121,241 for the three months ended June 30, 2010
includes $56,432 of the accreted discount on the Series D Preferred; see Note 5
to the Condensed Consolidated Financial Statements (Unaudited) contained in this
Report.  Interest expense of $118,213 for the three months ended June
30, 2009 includes $51,763 of debt discount expense.




Net
Loss:




Net loss
for the three months ended June 30, 2010 was $368,541.  This loss is
net of the $368,541 additional compensation received from CarePayment, LLC,
whereby CarePayment, LLC reimbursed the Company for 50% of its losses for the
second quarter of 2010 in accordance with the servicing agreement.





20




SIX
MONTHS ENDED JUNE 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 from CarePayment, LLC of $2,839,245 in the six months ended June 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 June 30, 2010, the total cost of
revenues of $2,241,642 was comprised of compensation expense of $596,259,
outsourced processing and collections services of $1,310,477, amortization
expense of $274,333, and $60,573 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 six months ended June 30, 2010 were $1,941,851 as compared to
$240,028 for the same period in 2009.  The sales, general and
administrative expenses for the six months ended June 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 voluntary
filings of reports with the SEC.





Operating
expenses for the six months ended June 30, 2010 were comprised of the
following:  sales and marketing expense of approximately $438,000;
legal, consulting and other professional fees of approximately $434,000;
executive compensation of approximately $247,000; related party agreements with
Aequitas for office and equipment lease expense of $112,000, accounting services
of $391,000 and advisory services of $90,000; travel and entertainment of
$172,000 and general office expense of approximately $58,000.




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 reimbursement the
Company for transition costs that are not specifically
identifiable.  For the six months ended June 30, 2010, the Company
recorded a loss reimbursement of $1,241,912 as other income.





Interest expense
–Interest expense of $285,290 for the six months ended June 30, 2010
includes $147,778 of the accreted discount on the Series D Preferred; see Note 5
to the Condensed Consolidated Financial Statements (Unaudited) contained in this
Report.  Interest expense of $195,983 for the six months ended June
30, 2009 includes $84,703 of debt discount expense.




Net
Income:




Net loss
for the six months ended June 30, 2010 was $368,541.  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.





21




LIQUIDITY
AND CAPITAL RESOURCES





Asof June 30, 2010, the
Company had $530,178 of cash and cash equivalents.  Cash provided by
operating activities during the six-month period ended June 30, 2010 was
$550,511 compared to cash used in operating activities of $185,992 in the same
period a year ago. Cash provided from operating activities during the first six
months of 2010 included a net loss of $368,541 offset by non-cash activity of
$444,540, which included amortization of $274,333, accretion of the discount on
the Series D Preferred Stock of $147,778, and stock-based compensation expense
of $22,429, and further offset by a net change in operating assets and
liabilities of $474,512.  The primary components of the change in
operating assets and liabilities was an increase in accounts payable of $655,906
and accrued interest of $81,801that provided cash for operating activities,
which was offset by an increase in accounts receivable of $285,040 from
CarePayment, LLC for fees due to the Company.





For the
six months ended June 30, 2010, the Company used $82,230 for financing
activities as compared to $100,000 of cash provided by financing activities
during the first six months of 2009.  During the six-month period
ending June 30, 2010, the Company received a payment of $250,000 on the
$2,000,000 note receivable due from Founders Fund and $65,360 proceeds from the
exercise of warrants.  These proceeds were offset by the use of
$397,590 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 June 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.





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
June 30, 2010.





22


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.  As of the
date of this Report, the Company is not engaged in any legal proceedings nor is
the Company aware of any 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





On April
2, 2010, warrants were exercised by Aequitas Holdings, LLC, an affiliate of the
Company, for the purchase of 6,510,092 of Class B Common Stock, resulting in net
proceeds for the Company of $65,101.  The shares of Class B Common
Stock were issued in reliance on the exemption from registration afforded by
Section 4(2) of the Securities Act of 1933, as amended, including Regulation D
thereunder.





ITEM
6.  EXHIBITS





(a) Exhibits:




3.1(1)
            
            Second
      Amended and Restated Certificate of Designation to Second Amended and
      Restated Articles of Incorporation of CarePayment Technologies, Inc.
      relating to Series D Convertible Preferred Stock and Series E Convertible
      Preferred Stock31.1(2)
            
            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(2)
            
            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(2)
            
            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(2)
            
            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)
            Incorporated
      by reference to the Company's Form 8-K filed on August 4,
      2010.(2)
            Filed
      herewith.





23





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./s/ James T.
      Quist
            
            
            
            August
      23, 2010James
      T. Quist
            
            Chief
      Executive Officer





24