CarePayment Technologies, Inc. - 10-Q filing on 2012-08-13

Business Activity	6 Months Ended
Jun. 30, 2012
Business Activity	1. Business Activity *Overview* CarePayment Technologies, Inc. ("we," "us," "our," "CarePayment" or the "Company”) was incorporated as an Oregon corporation in 1991. Unless otherwise indicated, all references to the Company in this Quarterly Report on Form 10-Q (this "Report") include our 99% owned subsidiary, CP Technologies LLC ("CP Technologies"), which was organized as an Oregon limited liability company in 2009. The remaining 1% of CP Technologies is owned by Aequitas Capital Management, Inc. ("Aequitas") and CarePayment, LLC, each of which are affiliates of ours. Effective at the end of December 2009, we acquired certain assets and rights that enabled us to begin building a business that originates and services healthcare accounts receivable for other parties, including the development of innovative patient plans for more effective recovery of healthcare receivables. 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 healthcare providers in connection with providing healthcare services to their patients. The assets and rights we acquired included the exclusive right to originate, administer, service and collect patient accounts receivable and to market our services under the CarePayment® brand generated by healthcare providers 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 purchases patient accounts receivables from hospitals and then we originate, administer, service and collect them on behalf of CarePayment, LLC, or one of its affiliates, for a fee. Although we intend to grow our business to include servicing accounts receivable on behalf of other parties, CarePayment, LLC is currently our only customer. To facilitate building the business, on December 30, 2009 we, Aequitas and CarePayment, LLC formed CP Technologies. We contributed shares of our newly authorized Series D Convertible Preferred Stock ("Series D Preferred Stock") 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 Stock to Aequitas and CarePayment, LLC, and the warrants to purchase shares of our Class B Common Stock to CarePayment, LLC, to redeem all but half of one membership 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. *The Healthcare Receivables Servicing Industry and Our Business* On January 1, 2010, and as a result of the transactions described above, CP Technologies began building a business to service healthcare patient receivables for an affiliate of the Company, CarePayment, LLC. Generally, the majority of an account receivable that a healthcare provider (for example, a hospital) generates in connection with providing healthcare services is paid by private medical insurance, Medicare or Medicaid. The balance of an account receivable that is not paid by those sources is due directly from the patient. Often, healthcare providers do not prioritize collecting that balance as a result of the effort and expense required to collect directly from a patient. Our affiliate, CarePayment, LLC, offers healthcare providers a receivables servicing alternative. CarePayment, LLC, either alone or through an affiliate, purchases from healthcare providers the balance of their accounts receivable that are due directly from patients. A patient whose healthcare receivable is acquired by CarePayment, LLC is offered the opportunity to participate in the CarePayment® program, which includes a line of credit for payment of future healthcare expenses. If the patient accepts the terms of the program, the patient becomes a CarePayment® customer. The patient's CarePayment® account has an initial outstanding balance equal to the receivable amount purchased by CarePayment, LLC or one of its affiliates from the healthcare provider. Balances due on the CarePayment® account are generally payable over 25 months or more with no interest (0% APR). On December 31, 2009, CP Technologies entered into a Servicing Agreement (the "Servicing Agreement") with CarePayment, LLC under which CP Technologies has the exclusive right to originate, collect, administer and service all accounts receivable purchased or controlled by CarePayment, LLC or its affiliates. CarePayment, LLC also appointed CP Technologies as a non-exclusive originator of receivables purchased or controlled by CarePayment, LLC, including the right to deal with healthcare providers on behalf of CarePayment, LLC with respect to originating, collecting, administering and servicing receivables purchased or controlled by CarePayment, LLC or its affiliates. While CP Technologies services the receivables, CarePayment, LLC or its affiliates retain ownership of the receivables. In addition to servicing receivables on behalf of CarePayment, LLC, CP Technologies recommends a course of action when it determines that collection efforts for existing receivables are no longer effective and it may also analyze potential receivables acquisitions for CarePayment, LLC. In exchange for its services, CarePayment, LLC pays CP Technologies certain fees, including (i) an origination fee at the time CarePayment, LLC purchases and delivers receivables to CP Technologies for servicing based upon the balance of the receivables to be serviced, (ii) a monthly servicing fee based upon the principal amount of purchased receivables that CP Technologies is servicing, and (iii) a quarterly servicing fee based upon a percentage of CarePayment, LLC's quarterly net income from operating activities, as adjusted for certain items. On July 30, 2010, the Company entered into an Agreement and Plan of Merger with Vitality Financial, Inc. (“Vitality”) pursuant to which Vitality became a wholly owned subsidiary of the Company. Under the terms of the Merger Agreement, the stockholders of Vitality received, collectively, 97,500 shares of Series E Convertible Preferred Stock of the Company in consideration for all the outstanding stock of Vitality. Vitality provides payment and receivables management to a limited number of medical providers and patients. *Liquidity* Substantially all of the Company’s revenue and cash receipts are generated from the Servicing Agreement with CarePayment, LLC. Origination and servicing revenues are generated based upon the volume of receivables that CarePayment, LLC or its affiliates purchase and service. During 2010 and 2011, the Company added headcount, trained staff and hired a software development firm to develop additional systems to manage the servicing operation in preparation for projected receivables volume increases. On March 31, 2011, Aequitas Holdings, LLC (“Holdings”) purchased an additional 1.5 million shares of the Company’s Class B Common Stock for $1.00 per share. Holdings, an affiliate of Aequitas, now owns 7,910,092 shares of Class B Common Stock, which equates to approximately 92% of the voting shares of the Company as of the date of this Report. On September 29, 2011, the Company entered into a $3 million Business Loan Agreement and Promissory Note (“Business Loan”) with Aequitas Commercial Finance, LLC (“ACF”), an affiliate of Aequitas. On December 29, 2011, the Business Loan was amended to increase the aggregate principal amount that the Company may borrow under the Business Loan from $3,000,000 to $4,500,000. On March 5, 2012, the Business Loan was further amended to increase the aggregate principal amount the Company may borrow from $4,500,000 to $8,000,000, and to increase the interest rate on the outstanding principal balance owing under the Business Loan from 11% to 12.5% per annum. On April 12, 2012, the Company and ACF further amended the Business Loan to convert, effective April 30, 2012, $2,000,000 of the aggregate principal amount owing under the Business Loan into shares of the Company's Class A Common Stock at a price of $1.00 per share, to decrease the aggregate principal amount the Company may borrow under the Business Loan from $8,000,000 to $6,000,000 and to extend the maturity date of the Business Loan from December 31, 2012 to December 31, 2013. Should the Business Loan be insufficient to meet the Company’s liquidity needs over the next year or until such time as the Company has positive cash flow, Holdings has advised the Company that it is prepared to provide additional liquidity, either in the form of an additional equity infusion or an additional line of credit. At June 30, 2012, the Company had taken net advances on the Business Loan of $3,731,000.

Business Activity

6 Months Ended

Jun. 30, 2012

1. Business Activity

Overview

CarePayment Technologies, Inc. ("we," "us," "our," "CarePayment" or the "Company”) was incorporated as an Oregon corporation in 1991. Unless otherwise indicated, all references to the Company in this Quarterly Report on Form 10-Q (this "Report") include our 99% owned subsidiary, CP Technologies LLC ("CP Technologies"), which was organized as an Oregon limited liability company in 2009. The remaining 1% of CP Technologies is owned by Aequitas Capital Management, Inc. ("Aequitas") and CarePayment, LLC, each of which are affiliates of ours.

Effective at the end of December 2009, we acquired certain assets and rights that enabled us to begin building a business that originates and services healthcare accounts receivable for other parties, including the development of innovative patient plans for more effective recovery of healthcare receivables. 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 healthcare providers in connection with providing healthcare services to their patients. The assets and rights we acquired included the exclusive right to originate, administer, service and collect patient accounts receivable and to market our services under the CarePayment® brand generated by healthcare providers 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 purchases patient accounts receivables from hospitals and then we originate, administer, service and collect them on behalf of CarePayment, LLC, or one of its affiliates, for a fee. Although we intend to grow our business to include servicing accounts receivable on behalf of other parties, CarePayment, LLC is currently our only customer.

To facilitate building the business, on December 30, 2009 we, Aequitas and CarePayment, LLC formed CP Technologies. We contributed shares of our newly authorized Series D Convertible Preferred Stock ("Series D Preferred Stock") 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 Stock to Aequitas and CarePayment, LLC, and the warrants to purchase shares of our Class B Common Stock to CarePayment, LLC, to redeem all but half of one membership 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.

The Healthcare Receivables Servicing Industry and Our Business

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

Generally, the majority of an account receivable that a healthcare provider (for example, a hospital) generates in connection with providing healthcare services is paid by private medical insurance, Medicare or Medicaid. The balance of an account receivable that is not paid by those sources is due directly from the patient. Often, healthcare providers do not prioritize collecting that balance as a result of the effort and expense required to collect directly from a patient.

Our affiliate, CarePayment, LLC, offers healthcare providers a receivables servicing alternative. CarePayment, LLC, either alone or through an affiliate, purchases from healthcare providers the balance of their accounts receivable that are due directly from patients. A patient whose healthcare receivable is acquired by CarePayment, LLC is offered the opportunity to participate in the CarePayment® program, which includes a line of credit for payment of future healthcare expenses. If the patient accepts the terms of the program, the patient becomes a CarePayment® customer. The patient's CarePayment® account has an initial outstanding balance equal to the receivable amount purchased by CarePayment, LLC or one of its affiliates from the healthcare provider. Balances due on the CarePayment® account are generally payable over 25 months or more with no interest (0% APR).

On December 31, 2009, CP Technologies entered into a Servicing Agreement (the "Servicing Agreement") with CarePayment, LLC under which CP Technologies has the exclusive right to originate, collect, administer and service all accounts receivable purchased or controlled by CarePayment, LLC or its affiliates. CarePayment, LLC also appointed CP Technologies as a non-exclusive originator of receivables purchased or controlled by CarePayment, LLC, including the right to deal with healthcare providers on behalf of CarePayment, LLC with respect to originating, collecting, administering and servicing receivables purchased or controlled by CarePayment, LLC or its affiliates. While CP Technologies services the receivables, CarePayment, LLC or its affiliates retain ownership of the receivables. In addition to servicing receivables on behalf of CarePayment, LLC, CP Technologies recommends a course of action when it determines that collection efforts for existing receivables are no longer effective and it may also analyze potential receivables acquisitions for CarePayment, LLC.

In exchange for its services, CarePayment, LLC pays CP Technologies certain fees, including (i) an origination fee at the time CarePayment, LLC purchases and delivers receivables to CP Technologies for servicing based upon the balance of the receivables to be serviced, (ii) a monthly servicing fee based upon the principal amount of purchased receivables that CP Technologies is servicing, and (iii) a quarterly servicing fee based upon a percentage of CarePayment, LLC's quarterly net income from operating activities, as adjusted for certain items.

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

Liquidity

Substantially all of the Company’s revenue and cash receipts are generated from the Servicing Agreement with CarePayment, LLC. Origination and servicing revenues are generated based upon the volume of receivables that CarePayment, LLC or its affiliates purchase and service.

During 2010 and 2011, the Company added headcount, trained staff and hired a software development firm to develop additional systems to manage the servicing operation in preparation for projected receivables volume increases.

On March 31, 2011, Aequitas Holdings, LLC (“Holdings”) purchased an additional 1.5 million shares of the Company’s Class B Common Stock for $1.00 per share. Holdings, an affiliate of Aequitas, now owns 7,910,092 shares of Class B Common Stock, which equates to approximately 92% of the voting shares of the Company as of the date of this Report.

On September 29, 2011, the Company entered into a $3 million Business Loan Agreement and Promissory Note (“Business Loan”) with Aequitas Commercial Finance, LLC (“ACF”), an affiliate of Aequitas. On December 29, 2011, the Business Loan was amended to increase the aggregate principal amount that the Company may borrow under the Business Loan from $3,000,000 to $4,500,000. On March 5, 2012, the Business Loan was further amended to increase the aggregate principal amount the Company may borrow from $4,500,000 to $8,000,000, and to increase the interest rate on the outstanding principal balance owing under the Business Loan from 11% to 12.5% per annum. On April 12, 2012, the Company and ACF further amended the Business Loan to convert, effective April 30, 2012, $2,000,000 of the aggregate principal amount owing under the Business Loan into shares of the Company's Class A Common Stock at a price of $1.00 per share, to decrease the aggregate principal amount the Company may borrow under the Business Loan from $8,000,000 to $6,000,000 and to extend the maturity date of the Business Loan from December 31, 2012 to December 31, 2013.

Should the Business Loan be insufficient to meet the Company’s liquidity needs over the next year or until such time as the Company has positive cash flow, Holdings has advised the Company that it is prepared to provide additional liquidity, either in the form of an additional equity infusion or an additional line of credit. At June 30, 2012, the Company had taken net advances on the Business Loan of $3,731,000.