PINX:BMPI Quarterly Report 10-Q Filing - 3/31/2012

Effective Date 3/31/2012

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q


(Mark One) 

[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 

For the quarterly period ended: March 31, 2012

  

 


[   ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 

For the transition period from N/A to N/A 

  

  

 

Commission file number: 000-27145 


BILLMYPARENTS, INC.

(Name of small business issuer in its charter)


Colorado

 

 

33-0756798 

(State or jurisdiction of incorporation or organization)

 

 

(I.R.S. Employer Identification No.)


6440 Lusk Blvd., Suite 200

 

 

 

San Diego California

 

 

92121

(Address and of principal executive offices)

 

 

(Zip Code)



(858) 677-0080

(Issuer’s telephone number, including area code)



 

Indicate by check mark whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  x    No  o

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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨  

Indicate by check mark whether registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o

Accelerated filer o

Non-accelerated filer o (Do not check if a smaller reporting company)

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 


At May 10, 2012, there were 98,269,842 shares outstanding of the issuers common stock, the only class of common equity.

 

Transitional Small Business Disclosure Format (Check one):  Yes  o   No  x









TABLE OF CONTENTS


PART I: Financial Information

 

 

Item 1 –

Financial Statements

Condensed Consolidated Balance Sheets as of March 31, 2012 (unaudited) and September 30, 2011

Condensed Consolidated Statements of Operations (unaudited) for the three and six months ended March 31, 2012 and 2011

Condensed Consolidated Statements of Cash Flows (unaudited) for the six months ended March 31, 2012 and 2011

Notes to Condensed Consolidated Financial Statements (unaudited)

Item 2 –

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Item 3 –

Quantitative and Qualitative Disclosures about Market Risk

Item 4 –

Controls and Procedures

 

 

PART II: Other Information

 

Item 1 –

Legal Proceedings

Item 1A –

Risk Factors

Item 2 –

Unregistered Sales of Equity Securities and Use of Proceeds

Item 3 –

Defaults upon Senior Securities

Item 4 –

Removed and Reserved

Item 5 –

Other Information

Item 6 –

Exhibits

 


Signatures


Exhibits




FORWARD LOOKING STATEMENTS

 

In addition to historical information, this Quarterly Report on Form 10-Q may contain statements relating to future results of BillMyParents, Inc. (including certain projections and business trends) that are “forward-looking statements.” Our actual results may differ materially from those projected as a result of certain risks and uncertainties. These risks and uncertainties include, but are not limited to, without limitation, statements that express or involve discussions with respect to predictions, expectations, beliefs, plans, projections, objectives, assumptions or future events or performance (often, but not always, using words or phrases such as “expects” or “does not expect”, “is expected”, “anticipates” or “does not anticipate”, “plans”, “estimates” or “intends”, or stating that certain actions, events or results “may”, “could”, “would”, “might” or “will” be taken, occur or be achieved) are not statements of historical fact and may be “forward-looking statements.” Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results or achievements of the Company to be materially different from any future results or achievements of the Company expressed or implied by such forward-looking statements. Such factors include, among others, those set forth herein and those detailed from time to time in our other Securities and Exchange Commission (“SEC”) filings including those contained in our most recent Form 10-K. These forward-looking statements are made only as of the date hereof, and we undertake no obligation to update or revise the forward-looking statements, whether as a result of new information, future events or otherwise, except as otherwise required by law. The Company cautions readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. The Company disclaims any obligation subsequently to revise any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events. Also, there can be no assurance that the Company will be able to raise sufficient capital to continue as a going concern.









BILLMYPARENTS, INC.

Condensed Consolidated Balance Sheets

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2012 (unaudited)

 

 

September 30, 2011

 

 

 

 

 

 

 

 

Assets

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

$

683,643

 

$

1,386,402

 

Amounts on deposit with card processor

 

117,946

 

 

90,359

 

Amounts on deposit with or due from merchant processors

 

197,690

 

 

41,793

 

Prepaid insurance

 

19,542

 

 

53,042

 

Prepaid officer compensation

 

170,447

 

 

-

 

 

 

 

 

 

 

 

 

 

Total current assets

 

1,189,268

 

 

1,571,596

 

 

 

 

 

 

 

 

Other assets

 

5,052

 

 

5,052

 

 

 

 

 

 

 

 

 

 

 

$

1,194,320

 

$

1,576,648

 

 

 

 

 

 

 

 

Liabilities and Stockholders' Equity (Deficiency)

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Accounts payable and accrued liabilities

$

493,156

 

$

1,456,366

 

Accrued and deferred personnel compensation

 

65,078

 

 

81,932

 

Derivative liabilities

 

629,289

 

 

1,289,520

 

 

 

 

 

 

 

 

 

 

Total current liabilities

 

1,187,523

 

 

2,827,818

 

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ equity (deficiency):

 

 

 

 

 

 

Series A convertible preferred stock; $0.001 par value; 10,000,000

 

 

 

 

 

 

 

shares authorized; 3,325 shares issued and outstanding

 

3

 

 

4

 

Series B convertible preferred stock; $0.001 par value; 12,000

 

 

 

 

 

 

 

shares authorized; 714 shares issued and outstanding

 

1

 

 

-

 

Common stock; $0.001 par value; 300,000,000 shares authorized; 98,119,842

 

 

 

 

 

 

 

shares issued and outstanding (85,322,566 - September 30, 2011)

 

98,120

 

 

85,323

 

Additional paid-in capital

 

40,813,020

 

 

32,155,789

 

Accumulated deficit

 

(40,904,347)

 

 

(33,492,286)

 

 

 

 

 

 

 

 

 

 

Total stockholders' equity (deficiency)

 

6,797

 

 

(1,251,170)

 

 

 

 

 

 

 

 

 

 

 

$

1,194,320

 

$

1,576,648

 

See accompanying notes.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



1





BILLMYPARENTS, INC.

Unaudited Condensed Consolidated Statements of Operations

For the three and six months ended March 31, 2012 and 2011

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended March 31,

 

For the six months ended March 31,

 

 

 

 

2012

 

2011

 

2012

 

2011

 

 

 

 

 

 

 

 

 

 

 

Revenues

$

          282,339

$

              6,096

$

         517,515

$

             6,754

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Selling and marketing

 

          303,884

 

          630,730

 

      1,796,362

 

         945,514

 

Personnel related

 

       2,249,495

 

          797,568

 

      4,204,623

 

      1,591,865

 

Processing

 

          577,940

 

          286,737

 

      1,489,067

 

         461,225

 

General and administrative

 

          386,933

 

          883,083

 

         620,948

 

         997,662

 

 

 

 

 

 

 

 

 

 

 

 

 

Total operating expenses

 

       3,518,252

 

       2,598,118

 

      8,111,000

 

      3,996,266

 

 

 

 

 

 

 

 

 

 

 

Loss from operations

 

     (3,235,913)

 

      (2,592,022)

 

    (7,593,485)

 

    (3,989,512)

 

 

 

 

 

 

 

 

 

 

 

Nonoperating income (expense):

 

 

 

 

 

 

 

 

 

Interest expense

 

                    -   

 

                    -   

 

                  -   

 

       (133,379)

 

Interest income

 

              1,161

 

              3,714

 

             2,611

 

             4,676

 

Change in fair value of derivative liabilities

 

            73,146

 

          113,634

 

         178,813

 

         269,601

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

            74,307

 

          117,348

 

         181,424

 

         140,898

 

 

 

 

 

 

 

 

 

 

 

Net loss and comprehensive net loss

$

     (3,161,606)

$

      (2,474,674)

$

    (7,412,061)

$

    (3,848,614)

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted net loss per share

$

              (0.03)

$

               (0.04)

$

             (0.08)

$

             (0.06)

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted weighted average number of common

 

 

 

 

 

 

 

 

 

shares outstanding used in computing basic and

 

 

 

 

 

 

 

 

 

diluted net loss per share

 

     97,578,724

 

     68,842,595

 

    96,075,442

 

    63,620,265

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 





2





BILLMYPARENTS, INC.

Unaudited Condensed Consolidated Statements of Cash Flows

For the six months ended March 31, 2012 and 2011

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2012

 

 

2011

 

 

 

 

 

 

 

 

 

Cash flows from operating activities:

  

 

 

  

 

 

Net loss

$

        (7,412,061)

 

$

        (3,848,614)

 

Adjustments to reconcile net loss to cash flows from operating activities:

 

 

 

 

 

 

 

Depreciation expense

 

                       -   

 

 

                 7,155

 

 

Stock based compensation

 

          3,084,489

 

 

             900,494

 

 

Issuance of common stock for services

 

             289,198

 

 

             865,600

 

 

Amortization and accretion of interest expense

 

                       -   

 

 

             127,811

 

 

Change in fair value of derivative liabilities

 

           (178,813)

 

 

           (269,601)

 

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Amounts on deposit with card processor

 

             (27,587)

 

 

             (63,830)

 

 

 

Prepaid insurance

 

               33,500

 

 

             (39,230)

 

 

 

Amounts on deposit with or due from merchant processors

 

           (155,897)

 

 

                 8,971

 

 

 

Prepaid officer compensation

 

           (170,447)

 

 

                       -   

 

 

 

Other assets

 

                       -   

 

 

               33,059

 

 

 

Accounts payable and accrued liabilities

 

           (963,210)

 

 

             136,376

 

 

 

Accrued and deferred personnel compensation

 

             (16,854)

 

 

                      42

 

 

 

 

  

 

 

  

 

 

 

Cash flows from operating activities

  

        (5,517,682)

 

  

        (2,141,767)

 

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

Proceeds from issuance of common stock and warrants

 

          4,814,923

 

 

          4,904,242

 

Repayments of note payable

 

                       -   

 

 

           (352,720)

 

 

 

 

  

 

 

  

 

 

 

Cash flows from financing activities

  

          4,814,923

 

  

          4,551,522

 

 

 

 

  

 

 

  

 

Change in cash and cash equivalents

  

           (702,759)

 

  

          2,409,755

 

 

 

 

  

 

 

  

 

Cash and cash equivalents, beginning of period

  

          1,386,402

 

  

             730,361

 

 

 

 

 

 

 

 

 

Cash and cash equivalents, end of period

$

             683,643

 

$

          3,140,116

 

 

 

 

 

 

 

 

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

Cash paid for:

 

 

 

 

 

 

 

Interest

$

                       -   

 

$

                 5,568

 

 

 

 

  

 

 

  

 

Noncash investing and financing transactions:

 

 

 

 

 

 

Conversion of convertible note payable

$

                       -   

 

$

             863,017

 

 

 

 

 

 

 

 

 

 

See accompanying notes.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



3


BillMyParents, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements



1.

Basis of Presentation

BillMyParents, Inc. (hereinafter referred to as “we” or “the/our Company”) is a Colorado corporation.  Through our subsidiary incorporated in the state of California, BillMyParents, Inc. (“BillMyParents-CA”), we issue and service prepaid cards marketed to young people and their parents.  We are a publicly traded company trading on the OTC Bulletin Board under the symbol “BMPI.”  The accompanying unaudited consolidated financial statements include the accounts of our Company and BillMyParents-CA as of and through March 31, 2012.  All intercompany amounts have been eliminated in consolidation.     

We have prepared the accompanying unaudited condensed consolidated financial statements in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with rules and regulations of the United States Securities and Exchange Commission (“SEC”).  Accordingly, they do not include all of the information and disclosures required by generally accepted accounting principles for complete financial statements.  In the opinion of our management, all adjustments (consisting of normal recurring accruals) considered necessary for fair presentation have been included.  Operating results for the three and six months ended March 31, 2012 are not necessarily indicative of the results that may be expected for the entire year.  For further information, see our consolidated financial statements and related disclosures thereto for the year ended September 30, 2011 in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on December 21, 2011.  


Our condensed consolidated financial statements have been prepared assuming that we will continue as a going concern.   However, our auditors raised concerns about our ability to continue as going concern in their opinion on our financial statements at and for the year ended September 30, 2011.  Additionally, we have incurred net losses and through March 31, 2012 have yet to establish profitable operations. These factors among others create a substantial doubt about our ability to continue as a going concern.  In response to our Company’s cash needs, through the date of this report we raised additional cash through the sale of common stock and warrants as described in our footnotes that follow.  All additional amounts raised will be used for our future investing and operating cash flow needs.  


We also currently plan to attempt to raise additional required capital through the sale of unregistered shares of our Company’s preferred or common stock (accompanied by warrants to purchase our common.  All additional amounts raised will be used for our future investing and operating cash flow needs.  However there can be no assurance that we will be successful in consummating such financing.    This description of our recent financing and future plans for financing does not constitute an offer to sell or the solicitation of an offer to buy our securities, nor shall such securities be offered or sold in the United States absent registration or an applicable exemption from the registration requirements and certificates evidencing such shares contain a legend stating the same.


Certain reclassifications have been made to the balances at September 30, 2011 (as reported in the aforementioned Annual Report) and for the three and six months ended March 31, 2011 to conform to the current year’s presentation.  


2.

Summary of Significant Accounting Policies


Our condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America.


Use of Estimates


The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires our 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.


Revenue Recognition


We recognize revenue at the time we provide services contracted for by customers in accordance with the cardholder agreement, our fees for the transaction is fixed (specified in the cardholder agreement) and collection from the customer is reasonably assured (provided no significant obligations remain).  Generally all cash we receive from cardholder transactions is remitted to us by our merchant processors within one day of when we satisfied the criteria for revenue recognition, and thus we do not carry significant balances of either accounts receivable or deferred revenues.  We do not anticipate collecting sales taxes in the future in connection with our products or services.  We believe that our revenue recognition policies are appropriate and in accordance with generally accepted accounting principles and all applicable standards governing our Company’s financial accounting.



4


BillMyParents, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements




Cash and cash equivalents


We consider all investments with an original maturity of three months or less to be cash equivalents.  Cash equivalents primarily represent funds invested in money market funds, bank certificates of deposit and U.S. government debt securities whose cost equals fair market value.


Cash and cash equivalents are maintained at financial institutions and, at times, balances may exceed federally insured limits. We have never experienced any losses related to these balances. All of our non-interest bearing cash balances were fully insured at March 31, 2012 due to a temporary federal program in effect through December 31, 2012. Under the program, there is no limit to the amount of insurance for eligible accounts. Beginning January 1, 2013, insurance coverage will revert to $250,000 per depositor at each financial institution, and our non-interest bearing cash balances may again exceed federally insured limits.


Property and Equipment


Property and equipment are recorded at cost and depreciated using the straight-line method over the estimated useful lives of the related assets (generally three to five years).  Costs incurred for maintenance and repairs are expensed as incurred and expenditures for major replacements and improvements are capitalized and depreciated over their estimated remaining useful lives.  


Valuation of Long-Lived Assets


We record impairment losses on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets’ carrying amount.  If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amounts of the assets exceed the estimated fair value of the assets.  


Income Tax Expense Estimates and Policies

  

As part of the income tax provision process of preparing our financial statements, we are required to estimate our Company’s provision for income taxes.  This process involves estimating our current tax liabilities together with assessing temporary differences resulting from differing treatments of items for tax and accounting purposes.  These differences result in deferred tax assets and liabilities. Management then assesses the likelihood that our deferred tax assets will be recovered from future taxable income and to the extent believed that recovery is not likely, a valuation allowance is established.  Further, to the extent a valuation allowance is established and changes occur to this allowance in a financial accounting period, such changes are recognized in our tax provision in our consolidated statement of operations.  We use our judgment in making estimates to determine our provision for income taxes, deferred tax assets and liabilities and any valuation allowance is recorded against our net deferred tax assets.


There are various factors that may cause these tax assumptions to change in the near term, requiring us to write down deferred tax assets or establish tax reserves.  We recognize the benefit of an uncertain tax position taken or expected to be taken on our income tax returns if it is “more likely than not” that such tax position will be sustained based on its technical merits.


Stock Based Compensation


We account for stock based compensation arrangements through the measurement and recognition of compensation expense for all stock based payment awards to employees and directors based on estimated fair values.  We use the Black-Scholes option valuation model to estimate the fair value of our stock options and warrants at the date of grant.  The Black-Scholes option valuation model requires the input of subjective assumptions to calculate the value of options and warrants.  We use historical company data among other information to estimate the expected price volatility and the expected forfeiture rate.  


Derivatives


We account for certain of our outstanding warrants as derivative liabilities.  These derivative liabilities were determined to be ineligible for equity classification due to provisions of the respective instruments that may result in an adjustment to their conversion or exercise prices.  At March 31, 2012 and September 30, 2011, their fair values were $629,289 and $1,289,520, respectively.  During the six months ended March 31, 2012, we reclassified derivative liabilities totaling $481,418 to additional paid-in capital due to the expiration of the anti-dilution provisions of one of the former derivative liability warrants.  We also recognized gains from the changes in fair



5


BillMyParents, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements



value of derivative liabilities during the three and six months ended March 31, 2012 totaling $73,146 and $178,813, respectively ($113,634 and $269,601 for the three and six months ended March 31, 2011, respectively) due to a decrease in the value of the related derivative securities.  Subsequent changes to the fair value of the derivative liabilities will continue to require adjustments to their carrying value that will be recorded as other income (in the event that their value decreases) or as other expense (in the event that their value increases).  In general (all other factors being equal), we will record income when the market value of our common stock decreases and will record expense when the value of our common stock increases.  


Fair value of assets and liabilities


Fair value is defined as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value for applicable assets and liabilities, we consider the principal or most advantageous market in which we would transact and considers assumptions market participants would use when pricing the asset or liability, such as inherent risk, transfer restriction, and risk of nonperformance.  This guidance also establishes a fair value hierarchy to prioritize inputs used in measuring fair value as follows:


·

Level 1:  Observable inputs such as quoted prices in active markets;  


·

Level 2:  Inputs, other than quoted prices in active markets, that are observable either directly or indirectly; and


·

Level 3:  Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.


Our financial instruments are cash and cash equivalents, accounts payable and derivative liabilities. The recorded values of cash and cash equivalents and accounts payable approximate their fair values based on their short-term nature.  The fair value of derivative liabilities is estimated using option pricing models that are based on the individual characteristics of our warrants, preferred and common stock, the derivative liability on the valuation date as well as assumptions for volatility, remaining expected life, risk-free interest rate and, in some cases, credit spread.  The derivative liabilities are the only Level 3 valuations.  


Net Loss per Share


We calculate basic earnings per share (“EPS”) by dividing our net loss by the weighted average number of common shares outstanding for the period, without considering common stock equivalents.  Diluted EPS is computed by dividing net income or net loss by the weighted average number of common shares outstanding for the period and the weighted average number of dilutive common stock equivalents, such as options and warrants.  Options and warrants are only included in the calculation of diluted EPS when their effect is dilutive.  Potentially dilutive options and warrants totaling 1,513,144 and 3,741,411 shares for the three months ended March 31, 2012 were excluded from the weighted average number of shares outstanding used to compute basic and diluted earnings per share, respectively, due to their anti-dilutive effect (2,345,222 and 3,672,497 for the three months ended March 31, 2011).


Advertising


We expense advertising costs as incurred.  We have no existing arrangements under which we provide or receive advertising services from others for any consideration other than cash.  Advertising expenses totaled $106,029 and $1,244,405 for the three and six months ended March 31, 2012, respectively ($460,399 and $647,899 during the three and six months ended March 31, 2011, respectively).  


Litigation


From time to time, we may become involved in disputes, litigation and other legal actions.  We estimate the range of liability related to any pending litigation where the amount and range of loss can be estimated.  We record our best estimate of a loss when the loss is considered probable.  Where a liability is probable and there is a range of estimated loss with no best estimate in the range, we record a charge equal to at least the minimum estimated liability for a loss contingency when both of the following conditions are met: (i) information available prior to issuance of the financial statements indicates that it is probable that an asset had been impaired or a liability had been incurred at the date of the financial statements and (ii) the range of loss can be reasonably estimated.  As of the date of this quarterly report, we are currently not involved in disputes, litigation and other legal actions.  




6


BillMyParents, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements



Recently Issued Accounting Pronouncements


In June 2011, the Financial Accounting Standards Board, or the FASB, issued Accounting Standards Update (“ASU”), 2011-05, Comprehensive Income: Presentation of Comprehensive Income, which requires an entity to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. It eliminates the option to present components of other comprehensive income as part of the statement of changes in stockholders' equity. The ASU does not change the items which must be reported in other comprehensive income, how such items are measured or when they must be reclassified to net income. This ASU is effective for interim and annual periods beginning after December 15, 2011. Our adoption of this ASU did not have a material impact on our consolidated financial statements.


In May 2011, the FASB issued ASU 2011-04, Fair Value Measurement: Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs, which converges common fair value measurement and disclosure requirements in accordance with GAAP and International Financial Reporting Standards (“IFRS”). This ASU is effective for interim and annual periods beginning after December 15, 2011. Our adoption of this ASU did not have a material impact on our consolidated financial statements.


3.

Issuances of common stock and warrants


During the three and six months ended March 31, 2012, we issued 80,000 and 140,000 shares of our common stock, respectively, to a contractor in exchange for programming services performed (62,222 and 110,222 during the three and six months ended March 31, 2011, respectively).  In connection with these issuances of shares, we recognized expenses of $32,000 and $56,000 during the three and six months ended March 31, 2012, respectively ($28,000 and $52,000 for the three and six months ended March 31, 2011, respectively).


During the three months ended March 31, 2012, we entered into subscription agreements with 20 accredited investors pursuant to which we issued 714 shares of our Series B preferred stock and warrants to purchase up to an additional 446,250 shares of our common stock with an exercise price of $0.60 per share and a term of five years after the date of their issuance, in exchange for gross proceeds totaling $714,000.  The Series B preferred shares are subject to registration rights granted at the time of their sale.  The Series B preferred stock is convertible (under prescribed conditions) by our Company or the holders into a total of 1,785,000 shares of our Company’s common stock.  


During the three months ended December 31, 2011, we entered into subscription agreements with 56 accredited investors pursuant to which we issued 11,771,250 shares of our common stock and warrants to purchase up to an additional 1,692,815 shares of our common stock with an exercise price of $0.60 per share and a term of five years after the date of their issuance and warrants to purchase up to an additional 5,000,000 shares of our common stock with an exercise price of $0.50 per share with a term of five years after their date of issuance, in exchange for gross proceeds totaling $4,708,500 ($4,173,643 net of cash commissions and related expenses totaling $534,857).  We also issued five-year warrants to purchase up to a total of up to 1,177,125 shares of our common stock with an exercise price of $0.60 per share to Maxim Group LLC (“Maxim”) who assisted us in connection with the transactions.  


During the six months ended March 31, 2011, we entered into subscription agreements with 46 accredited investors pursuant to which we issued 13,905,875 shares of our common stock and warrants to purchase an additional 4,804,406 shares of our common stock with an exercise price of $0.60 per share for periods of two to five years after the date of their issuance and warrants to purchase an additional 5,625,000 shares of our common stock with an exercise price of $0.40 per share for five years after their date of issuance, in exchange for gross proceeds totaling $5,562,350 ($4,904,242 net of cash commissions and related expenses totaling $658,108).  We also issued warrants to purchase a total of 2,477,810 and 550,000 shares of our common stock with exercise prices of $0.60 per share to Maxim and Equity Source Partners, LLC (“ESP”) who assisted us in connection with the transaction.  A principal of ESP (Cary Sucoff) became a member of our Company’s Board of Directors in May 2011.  Included in the above amounts were shares of our common stock and warrants to purchase common stock purchased directly or indirectly by the Vice Chairman of our Board of Directors (having joined our Board as a director in March 2011) Mr. Isaac Blech, of 7,500,000 and 5,625,000, respectively (Mr. Blech’s totals do not reflect shares or warrants to purchase shares received in connection with convertible debt described elsewhere herein).  


On November 24, 2010, we received notice from Mr. Blech, the holder of a convertible note payable issued in August 2010 with an outstanding principal balance of $1 million of his election to convert the note into 2,500,000 shares of the Company’s common stock at a price of $0.40 per share.  At conversion as provided in the Convertible Note Purchase Agreement with Mr. Blech, he was issued a



7


BillMyParents, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements



warrant to purchase up to an additional 1,250,000 shares of our Company’s restricted common stock at an exercise price of $0.40 per share (he previously received a warrant to purchase up to 625,000 shares of common stock at $0.40 per share at the inception of the note).  In addition, our Company agreed to issue Mr. Blech a warrant to purchase up to 62,500 additional shares of common stock at an exercise price of $0.40 per share to reflect the interest due to him under the terms of the Note from inception until its scheduled maturity on February 13, 2011.  We paid additional fees to Maxim in connection with the conversion that included cash of $50,000 and five-year warrants to purchase up to 250,000 shares of our Company’s common stock at $0.60 per share.  We also issued a five year warrant to purchase up to 350,000 shares of our common stock for $0.60 per share to ESP.


This description of our issuances of common stock and warrants does not constitute an offer to sell or the solicitation of an offer to buy our securities, nor shall such securities be offered or sold in the United States absent registration or an applicable exemption from the registration requirements and certificates evidencing such shares contain a legend stating the same.  


4.

Convertible Preferred Stock

At March 31, 2012 and September 30, 2011, we had 3,325 and 4,325 shares, respectively, of Series A Cumulative Convertible Preferred Stock (the “Series A Stock”) outstanding.  The Series A Stock was originally issued to investors for $100 per share.  The following summarizes the terms of the Series A preferred stock outstanding:

Face Value:  Each share of Series A Stock has a face and par value of $100 and $.001 per share, respectively.

Voluntary Conversion:  Each share of Series A Stock is convertible at the election of the holders at any time into approximately 303 shares of our common stock, subject to increase under the anti-dilution provisions under the Certificate of Designation and the Subscription Agreement upon the occurrence of events as defined therein.  

Dividends:  Except in the event of default under the terms of the Subscription Agreement, the Series A Stock pays no dividends.  In the event of an uncured default by the Company, the Series A Stock pays dividends of 12% per annum during the period our Company is in default as described under the Certificate of Designation.  

Redemption:  The Series A Stock is not required to be redeemed by our Company.

Liquidation Rights:  Upon the occurrence of a liquidation event (as defined in the Certificate of Designation), the holders of Series A Stock will be repaid their full face value and cumulative accrued dividends prior to the receipt of any other class of preferred or common stock.

Forced Conversion:  We have the right to force conversion of each share of Series A Stock into approximately 303 shares of common stock at any time provided our common stock has maintained a closing price of $1.00 per share for three consecutive trading days prior to conversion.  

Voting Rights: Generally, our Series A Stock has no voting rights.

Covenants: The Subscription Agreement imposes certain covenants on us, including restrictions against incurring additional indebtedness, issuing any additional equity except certain permitted issuances, creating any liens on our property, amending our certificate of incorporation or bylaws in a manner which may adversely affect the Series A Stock holders, redeeming or paying dividends on shares of our outstanding common stock, and entering into certain related party transactions.


At March 31, 2012, the Series A preferred stock is convertible into 1,007,577 shares of our common stock at an effective price of $0.33 per share. 

At March 31, 2012, we had 714 shares of Series B convertible preferred stock outstanding (none at September 30, 2011).  The Series B convertible preferred stock (“Series B Stock”) was issued to investors for $1,000 per share.  The following summarizes the terms of the Series B Stock outstanding:

Face Value:  Each share of Series B Stock has a face and par value of $1,000 and $.001 per share, respectively.



8


BillMyParents, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements



Voluntary Conversion:  Each share of Series B Stock is convertible at the election of the holders at any time into 2,500 shares of our common stock.  

Dividends:  None.  

Redemption:  The Series B Stock is not required to be redeemed by our Company.

Liquidation Rights:  Upon the occurrence of a liquidation event and after any payments to the holders of Series A Stock, the holders of Series B Stock will be repaid their full face value prior to the receipt of any other class of preferred or common stock.

Forced Conversion:  Each share of Series B Stock shall automatically convert into common stock at the earlier of: 1) the effective date of registration of common shares into which Series B Stock is convertible; or 2) six months from the date of the final closing as defined in the related subscription agreement.   

Voting Rights: Equal to the largest number of full shares of common stock into which the shares can be converted.


5.

Agreements for services


Investor related services


In February 2012, we entered into a separate investor relations services agreement under which we agreed to pay $5,000 per month and issued 333,000 shares (and will issue 667,000 additional shares of common stock in the future) for services to be performed on our Company’s behalf through November 2012.  In connection with the shares issued, we recognized a noncash charge totaling $133,200 for the three months ended March 31, 2012 and will recognize additional future noncash expenses currently estimated to total $266,800.  


On August 5, 2011, we entered into an investor relations services agreement with SPN Investments, Inc. (“SPN”) that will result in SPN receiving 1,000,000 shares of our common stock through August 4, 2012, such amounts vested and to be vested as follows: 1) 500,000 shares at execution of the agreement; 2) 41,674 shares on the one month’s anniversary of the agreement’s execution; and 3) 41,666 shares on the second through twelfth months’ anniversary of the agreement’s execution.  Through March 31, 2012, SPN has earned 791,670 shares of common stock under this agreement and we have recognized noncash charges to general and administrative expense for the three and six months ended March 31, 2012, respectively, totaling $50,000 and $100,000 ($316,668 over the entire life of the contract) in connection with these shares.  


On December 29, 2010, we entered into an investor relations services agreement with Kay Holdings, Inc. (“Kay” - Kay and SPN have a common principal officer) for the provision of investor relations services through (as modified) March 31, 2011 in exchange for 1,500,000 shares of our common stock.  Also in December 2010, we issued 500,000 shares of our common stock to Kay in connection with investment funding received in November 2010.  We recognized expenses during the six months ending March 31, 2011 totaling $200,000.  


Beginning on April 28, 2010, we entered into a series of agreements with Maxim (the last of which was signed in January 2012) to act as a non-exclusive placement agent for the sales of equity securities of our Company.  Under the terms of the agreements to date with Maxim, they received a cash payment equaling 10% of the proceeds raised from investors introduced to the Company by Maxim and warrants to purchase up to between ten and twenty percent of the shares of our common stock placed by Maxim at terms similar to those sold to the investors introduced by Maxim.


On August 24, 2009, we entered into a non-exclusive agreement with ESP to assist our Company in connection with fund raising activities.  Under the agreement (as subsequently revised), we issued ESP 50,000 shares of our Company’s restricted common stock and paid them or their designees: 1) up to 8% (as amended) of the cash raised by ESP or its associates on our Company’s behalf; and 2) a five year warrant to purchase up to one share of common stock for each 25 shares sold at the exercise price of $0.60 per share.  From inception of the agreement through September 30, 2011, ESP and its designees earned cash totaling $164,400, 50,000 shares of our common stock and warrants to purchase up to 1,343,000 shares (also included in totals previously described above) of our common stock under the agreement (no amounts were earned or paid since September 30, 2011 and no future sums are expected to paid under this agreement).  



9


BillMyParents, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements




On May 8, 2009, we entered into an agreement with Patrick Kolenik to provide strategic advisory services to our Company through May 2011.  Mr. Kolenik was named to our Company’s Board of Directors in August 2011.  Through September 30, 2011, Mr. Kolenik was issued a total of 402,000 shares of common stock and five-year warrants to purchase up to 402,000 and 100,000 common shares with exercise prices of $1.00 and $0.60 per share, respectively.  Noncash charges to operations during the three and six months ended March 31, 2011 in connection with our issuance of common shares and warrants to Mr. Kolenik totaled $84,540 and $106,800, respectively.


6.

Notes Payable

On March 31, 2009, we issued a 12% Senior Note payable for $750,000 originally due December 31, 2009, and 400,000 shares of our Company’s restricted common stock.  The Note was neither convertible nor secured and carried certain operating and other covenants as well as prescribing certain events of default.  Our Company subsequently extended the maturity date of the Note three times and tendered 225,000 additional shares of its common stock to the holder.  In November 2010, we tendered $358,288 to the holder in order to pay in full the remaining principal and accrued interest due and retired the Note.  We recognized interest expense (including the amortization of prepaid interest from the cost related to the prior issuance of shares of our common stock) in connection with the Note totaling $27,790 for the three months ended December 31, 2010.  


As noted above, we entered into a convertible note agreement with Mr. Blech in August 2010 that was converted into 2,500,000 shares of our common stock (with the issuance of warrants to purchase 1,312,500 additional shares of our common stock) in November 2010.  Interest recognized during the three months ended December 31, 2010 in connection with the convertible note totaled $105,589 and included contractually required interest through February 13, 2011 and the accretion of the discount on the note (related to warrants issued at the time of the note’s inception).  

7.

Stockholders’ equity

Stock options

On August 4, 2011, our Board of Directors approved the adoption of the BillMyParents, Inc. 2011 Equity Incentive Plan (the “2011 Plan”).  The 2011 Plan provides for granting of stock-based awards including: incentive stock options, non-statutory stock options, stock bonuses and rights to acquire restricted stock.  The total number of shares of common stock that may be issued pursuant to stock awards under the Plan (as approved by the Board of Directors but subject to future shareholder approval) shall not exceed in the aggregate 25,000,000 shares of the common stock of our Company.  We also have a stockholder-approved Plan (the IdeaEdge, Inc. 2007 Equity Incentive Plan - the “2007 Plan”, previously approved by our shareholders).  The 2007 Plan has similar provisions and purposes as the 2011 Plan.  The total number of shares of common stock that may be issued pursuant to stock awards under the 2007 Plan (as amended) shall not exceed in the aggregate 4,000,000 shares of the common stock of our Company.  

Through March 31, 2012, we have outstanding and vested a total of 21,865,000 and 8,657,360, respectively, of incentive and nonqualified stock options granted under the Plans, all of which we have estimated will eventually vest.  All of the options have terms of five years with expiration dates ranging from October 2012 to November 2016.  During the six months ended March 31, 2012, we issued options to purchase up to 100,000 shares of our Company’s common stock.  


Warrants


Our Company issued warrants to purchase up to 12,450,000 and 15,050,000 shares of our common stock during the three and six months ended March 31, 2012, respectively, including five-year warrants to purchase up to 2,500,000 shares (exercise price of $0.51 per share) to Mr. Blech.  During the three and six months ended March 31, 2011, we issued warrants to purchase up to 8,892,000 and 9,184,000 shares, respectively, of our common stock to advisors (including 184,000 to Mr. Kolenik).  Through March 31, 2012, we have issued warrants to purchase up to a total of 38,674,853 shares of common stock to advisors, consultants and in connection with the purchase of intellectual property.  Warrants to purchase 50,000 shares were previously exercised, warrants to purchase up to 1,939,976 shares of common stock have expired and warrants to purchase up to 3,845,000 shares of common stock have been cancelled.  Warrants to purchase up to 32,839,877 shares of common stock remain outstanding at March 31, 2012, 14,597,635 of which have vested.  The warrants have remaining terms ranging from 10 to 34 months as of March 31, 2012 and exercise prices ranging from $0.40 to $1.00 per share.  




10


BillMyParents, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements



Through March 31, 2012, we have also issued warrants to purchase up to 47,554,281 shares of our common stock to investors (and as compensation to third parties in connection with investments) related to the sale of our common stock, 43,403,062 of which remain outstanding net of exercises, cancellations and expirations (all of which are fully vested).  


The numbers and exercise prices of all options and warrants outstanding at March 31, 2012 are as follows:  


Outstanding

Weighted Average Exercise Price

Vested

Expiration Fiscal Period

1,110,313

0.59

1,110,313

3rd Qtr, 2012

1,207,244

0.60

1,207,244

4th Qtr, 2012

337,000

0.65

337,000

1st Qtr, 2013

500,000

0.55

500,000

2nd Qtr, 2013

295,000

0.62

295,000

3rd Qtr, 2013

2,471,213

0.43

2,471,213

1st Qtr, 2014

516,667

0.57

516,667

2nd Qtr, 2014

910,000

0.64

890,000

3rd Qtr, 2014

1,150,000

0.50

1,150,000

4th Qtr, 2014

1,376,600

0.51

1,376,600

1st Qtr, 2015

1,171,500

0.52

1,171,500

2nd Qtr, 2015

159,000

0.67

159,000

3rd Qtr, 2015

1,158,777

0.45

1,158,777

4th Qtr, 2015

10,461,560

0.54

10,461,560

1st Qtr, 2016

11,042,000

0.48

9,306,566

2nd Qtr, 2016

14,415,500

0.43

14,415,500

3rd Qtr, 2016

26,459,375

0.45

10,964,928

4th Qtr, 2016

10,469,940

0.53

8,158,828

1st Qtr, 2017

12,896,250

0.42

1,007,361

2nd Qtr, 2017

98,107,939

 

66,658,057

 


Stock-based compensation


During the three and six months ended March 31, 2012, we recognized stock-based compensation expense totaling $1,638,919 and $3,084,489, respectively, ($536,859 and $900,494 for the three and six months ended March 31, 2011) in connection with the issuance of stock options and warrants issued to employees, directors, advisors and consultants (not including shares of stock issued directly for services).  For purposes of accounting for stock-based compensation, the fair value of each warrant award is estimated on the date of grant (or performance of the contracted services as appropriate) using the Black-Scholes-Merton option pricing formula. The following weighted average assumptions were utilized for the calculations of newly issued options and warrants during the three months ended March 31, 2012: expected life (in years) – 3.35 years; weighted average volatility – 190.34%; forfeiture rate – 0%; risk-free interest rate – 0.99%; and expected dividend rate – 0%.  At March 31, 2012, the weighted average exercise price of vested options and warrants outstanding (issued in connection with stock-based compensation) is $0.42 per share while the corresponding weighted average remaining contractual period was approximately 43.9 months.  As of March 31, 2012, $12,593,398 of total unrecognized compensation expense related to unvested stock-based compensation is expected to be recognized through January 2015.


8.

Disagreement with a supplier

We currently receive services from a transaction processor (the “Processor”) through a non-exclusive agreement with a term through October 2012.  In connection with the services provided, the Processor asserted that our Company is liable for previously unbilled services totaling $328,054.  We contend that the charges in question were explicitly waived by an executive officer of the Processor in a face to face meeting between members of our respective management teams.  At present, the managements of our respective companies are attempting to negotiate a settlement of this dispute to the mutual satisfaction of both parties.  We believe a settlement if reached could cover the collaboration on future joint opportunities in the prepaid card space and our Company’s agreement to support such efforts with future marketing expenditures.  Should we fail to reach an agreement with the Processor, we intend to vigorously assert our position and we currently estimate that we would prevail in the arbitration called for in the processing agreement between the



11


BillMyParents, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements



two companies.  We therefore have not recognized any charges to our results of operations or financial position through March 31, 2012 in connection with this matter.  Should it result that in the future we are judged liable for either a portion or all of the charges or should we enter into a monetary settlement with the Processor, such charge would be recognized at the time that it is both estimated to be probable and measurable.  

9.

Income taxes

We currently estimate our Company’s book net operating loss carryforwards (“NOL”) and deferred tax asset balance total approximately $26,600,000 and $10,700,000, respectively, as of March 31, 2012.  We have recorded a valuation allowance against our entire deferred tax asset balance due to our lack of a history of earnings, the limitations on the use of our NOL as a result of the BillMyParents-CA acquisition and the future expiration of the NOL.  These factors give rise to substantial uncertainty as to whether our net deferred tax assets will be realized.  As a result of these factors, our utilization of the NOL will likely be severely limited and a substantial portion of the NOL will likely expire unused.  



12


BillMyParents, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements



Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations


The following discussion and analysis is intended as a review of significant factors affecting our financial condition and results of operations for the periods indicated.  The discussion should be read in conjunction with our consolidated financial statements and the notes presented herein.  In addition to historical information, the following Management's Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements that involve risks and uncertainties. Our actual results could differ significantly from those anticipated in these forward-looking statements as a result of certain factors discussed in this Quarterly Report and our other periodic reports filed with the Securities and Exchange Commission.

Overview and Financial Condition

Discussions with respect to our Company’s operations included herein refer to our operating subsidiary, BillMyParents-CA.  Our Company purchased BillMyParents-CA on October 16, 2007.  We have no other operations than those of BillMyParents-CA.  

Results of Operations

Revenues

Our Company had total revenues of $282,339 and $517,515, respectively, for the three and six months ended March 31, 2012 ($6,096 and $6,754 for the corresponding periods in fiscal year 2011).  Revenues consist of fees charged to our customer prepaid cardholders for monthly maintenance fees, ATM fees, load fees and other insignificant revenues.  We do not charge our cardholders for new card initiation fees at present.  We charge maintenance fees on our issued cards (“ICs”) to cardholders on a monthly basis pursuant to the terms and conditions in our cardholder agreements. We charge ATM fees to cardholders when they withdraw money or conduct other transactions at certain ATMs in accordance with the terms and conditions in our cardholder agreements.  Other revenues (currently insignificant) consist primarily of fees associated with optional products or services, which we may offer to consumers during the card activation process.  


Our aggregate new card fee revenues vary based upon the number of ICs activated and the activities associated therewith.  Our aggregate monthly maintenance fee revenues vary primarily based upon the number of active cards in our portfolio and the average fee assessed per account.  Our average monthly maintenance fee per active account depends upon the extent to which fees are waived based on promotional considerations.  Our aggregate ATM fee revenues vary based upon the number of cardholder ATM transactions and the average fee per ATM transaction.  


Our prepaid card product offerings are marketed primarily to parents, enabling them to link and communicate with younger cardholders (generally their children or other young people in their care) in order to guide responsible spending.  Our products have been designed with significant features that we hope consumers will find compelling.  Going forward we plan to market our products (both online and in traditional retail settings) to the public as a convenient and safe youth payment system.  For the early portion of fiscal 2011, our revenues included insignificant amounts from a former (and now discontinued) product offering that was only available as a payment method on several youth gaming sites.  


While we are optimistic about the prospects for prepaid card products, since this continues to be a relatively new product offering, there can be no assurance about whether or when they will turn out to be a successful or if they will generate sufficient revenues to fund our operations over future periods.  

Operating Expenses

In order to better represent our financial results and to make them comparable to leading companies in the prepaid card industry, we have reclassified our operating expenses into four major categories: 1) selling and marketing; 2) personnel related; 3) processing; and 4) general and administrative expenses.  We do not allocate common expenses to any of these expense categories.  Amounts from the three and six months ended March 31, 2011 were reclassified to conform to the current year’s presentation format.  




13


BillMyParents, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements



Selling and marketing expenses


Selling and marketing expenses for the three and six months ended March 31, 2012 totaled $303,884 and $1,796,362, respectively ($630,730 and $945,514, for the corresponding periods in fiscal 2011).  Included in these expenses for the three and six months ended March 31, 2012 were marketing consulting expenses totaling $113,052 and $332,434, respectively ($98,414 and $177,863 for the corresponding periods in fiscal 2011), an increase of $14,638 and 154,571, respectively or 14.9% and 86.9% over the previous year’s total.  We incurred significant expenses in our prior fiscal quarter in this area due to our attempts at engaging experienced brand managers in order to best present our product to our intended primary target market - parents of young people.  Related to this marketing focus, we incurred expenses related to marketing programs and public relations totaling $78,664 and $184,682 during the three and six months ended March 31, 2012, respectively, compared to $51,469 and $97,433, respectively in fiscal 2011 (increases of $27,195 and $87,249, respectively over the prior fiscal year to date’s outlay).  Expenses incurred in these areas continued to be the result of our Company’s brand awareness efforts and decreased in our latest fiscal quarter compared to our first one.  We expect such expenses to continue to either decrease in absolute terms and/or in relative terms (in comparison to forecast revenues and total operating expenses) going 2012.  


We also incurred direct marketing expenses of $106,029 and $1,244,405 for the three and six months ended March 31, 2012 compared to $460,399 and $647,899 for the corresponding periods in fiscal 2011 (a decrease of $354,370 or 77.0% between our second fiscal quarter in 2011 to 2012 and an increase of $596,506 or 92.1% from fiscal 2011 to fiscal 2012).  Direct marketing expenditures represent primarily Internet based advertising intended to sign up new prepaid cardholder accounts.  We expect that direct marketing expenses will increase on an absolute basis later in fiscal 2012 as we hope to increase the number of cardholder accounts.  We intend however to drive these costs lower on a per new-account-acquired basis in fiscal 2012.  


Personnel related expenses


Personnel related expenses totaled $2,249,495 and $4,204,623 for the three and six months ended March 31, 2012, respectively ($797,568 and $1,591,865 for the three and six months ended March 31, 2011, respectively).  This amounted to an increase of $1,451,927 and $2,612,758, respectively, from fiscal 2011 to fiscal 2012 (182.0% and 164.1%, respectively).  More significant components of these expenses for the three and six months ended March 31, 2012 and 2011 were as follows.


Personnel Related Expenses Detail

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fiscal 2012

 

Fiscal 2011

 

Absolute Change

 

Percentage Change

 

Quarter 2

Year to Date

 

Quarter 2

Year to Date

 

Quarter 2

Year to Date

 

Quarter 2

Year to Date

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and wages

$      376,626

$      870,306

 

$     209,196

$    584,105

 

$     167,430

$        286,201

 

80.0 %

49.0 %

Share based compensation

1,728,558

3,084,491

 

536,859

900,494

 

1,191,699

2,183,997

 

222.0 %

242.5 %

Consulting and outside services

68,911

103,111

 

4,400

19,719

 

64,511

83,392

 

1466.2 %

422.9 %

 

 

 

 

 

 

 

 

 

 

 

 

Other

75,400

146,715

 

47,113

87,547

 

28,287

59,168

 

60.0 %

67.6 %

 

 

 

 

 

 

 

 

 

 

 

 

 

$   2,249,495

$   4,204,623

 

$     797,568

$ 1,591,865

 

$  1,451,927

$     2,612,758

 

182.0 %

164.1 %

 

 

 

 

 

 

 

 

 

 

 

 


Overall increases in personnel related expenses reflected the addition of employees and consultants in the latter part of fiscal 2011 to match higher activities surrounding our operations.  Most notable was the inclusion for portions of fiscal 2012 of two highly compensated executives.  


Processing expenses


Processing expenses totaled $577,940 and $1,489,067 for the three and six months ended March 31, 2012, respectively ($286,737 and $461,225 for the three and six months, respectively, ended March 31, 2011).  This resulted in an increase of $291,203 and $1,027,842 and percentage increases of 101.6% and 222.9% for corresponding periods from fiscal 2011 to 2012.  The following is a detail of the significant components of processing expenses for the respective periods.




14


BillMyParents, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements






Processing Expenses Detail

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fiscal 2012

 

Fiscal 2011

 

Absolute Change

 

Percentage Change

 

Quarter 2

Year to Date

 

Quarter 2

Year to Date

 

Quarter 2

Year to Date

 

Quarter 2

Year to Date

 

 

 

 

 

 

 

 

 

 

 

 

Card processing

$      102,213

$    192,533

 

$         28,000

$        57,000

 

$        74,213

$      135,533

 

265.0 %

237.8 %

Fraud losses

11,285

43,475

 

-

422

 

11,285

43,053

 

 

10202.1 %

Account initiation

3,897

106,481

 

2,500

2,500

 

1,397

103,981

 

55.9 %

4159.2 %

Card creation

11,481

148,203

 

5,723

5,992

 

5,758

142,211

 

100.6 %

2373.3 %

Account holder communications

13,551

31,207

 

-

-

 

13,551

31,207

 

 

 

Merchant credit card fees

91,605

178,498

 

3,642

4,832

 

87,963

173,666

 

2415.2 %

3594.1 %

Contracted software development

264,344

528,458

 

219,096

342,897

 

45,248

185,561

 

20.7 %

54.1 %

Customer service

70,938

180,356

 

5,875

11,363

 

65,063

168,993

 

1107.5 %

1487.2 %

 

 

 

 

 

 

 

 

 

 

 

 

Other

8,626

79,856

 

21,901

36,219

 

(13,275)

43,637

 

(60.6)%

120.5 %

 

 

 

 

 

 

 

 

 

 

 

 

 

$      577,940

$ 1,489,067

 

$       286,737

$      461,225

 

$      291,203

$   1,027,842

 

101.6 %

222.9 %

 

 

 

 

 

 

 

 

 

 

 

 


Substantial increases in processing expenses were the result of scaling our account holder base from an insignificant total during the previous fiscal year to the levels we reached through March 31, 2012.  We would expect that processing expenses will continue to increase on an absolute basis based on our forecast growth in the number of our cardholders; however our plan is to attempt to aggressively reduce such costs on a per account basis over time.  Contracted software development expenses increased over the prior fiscal year due to expenses incurred in connection with the integration of our card processor.  Expenses such as card creation and account initiation decreased in our latest fiscal quarter over the previous fiscal quarter in line with a planned slowdown of account acquisition efforts by our Company during the recently completed fiscal quarter.  


General and administrative expenses


General and administrative expenses totaled $386,933 and $620,948 for the three and six months ended March 31, 2012, respectively ($883,082 and $997,662 for the three and six months, respectively, ended March 31, 2011).  This resulted in decreases of $496,149 and $376,714, respectively and corresponding percentage decreases of 56.2% and 37.8% for corresponding periods from fiscal 2011 to 2012.  The following is a detail of the significant components of processing expenses for the respective periods.  


General and Administrative Expenses Detail

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fiscal 2012

 

Fiscal 2011

 

Absolute Change

 

Percentage Change

 

Quarter 2

Year to Date

 

Quarter 2

Year to Date

 

Quarter 2

Year to Date

 

Quarter 2

Year to Date

 

 

 

 

 

 

 

 

 

 

 

 

Accounting

$        10,250

$      54,993

 

$   22,361

$      56,361

 

$    (12,111)

$   (1,368)

 

(54.2)%

(2.4)%

Insurance

16,836

33,832

 

12,999

26,163

 

3,837

7,669

 

29.5 %

29.3 %

Investor relations

26,419

54,590

 

8,557

20,764

 

17,862

33,826

 

208.7 %

162.9 %

Investor relations consulting

183,198

233,196

 

796,800

813,600

 

(613,602)

(580,404)

 

(77.0)%

(71.3)%

Legal fees - general counsel

68,270

94,839

 

5,749

10,731

 

62,521

84,108

 

1087.5 %

783.8 %

Rent

8,325

16,650

 

7,764

15,492

 

561

1,158

 

7.2 %

7.5 %

Travel and lodging

25,803

43,336

 

3,603

6,426

 

22,200

36,910

 

616.2 %

574.4 %

Seminars

18,420

21,842

 

-

-

 

18,420

21,842

 

 

 

Telecommunications

13,191

24,903

 

4,536

8,117

 

8,655

16,786

 

190.8 %

206.8 %

 

 

 

 

 

 

 

 

 

 

 

 

Other

16,221

42,767

 

20,713

40,008

 

(4,492)

2,759

 

(21.7)%

6.9 %

 

 

 

 

 

 

 

 

 

 

 

 

 

$      386,933

$    620,948

 

$ 883,082

$    997,662

 

$  (496,149)

$(376,714)

 

(56.2)%

(37.8)%

 

 

 

 

 

 

 

 

 

 

 

 



Investor relations consulting results from the issuance of stock to investor relations consultants for services performed on our Company’s behalf and is a noncash expense.  We had significant issuances of stock issued to Kay in the prior fiscal year that were



15


BillMyParents, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements



reduced in the corresponding periods during fiscal 2012.  We expect that overall general and administrative expenses will increase in fiscal 2012 but will be a smaller percentage of revenues and overall expenses in the upcoming year.  


Total operating expenses


Total operating expenses for the three and six months ended March 31, 2012 were $3,518,252 and $8,111,000, respectively ($2,598,118 and $3,996,266 for the three and six months ended March 31, 2011).  The increase in operating expenses of $830,496 and $4,025,100, respectively (32.0% and 100.8%, respectively in percentage terms over the previous comparable period’s level was noted previously throughout above.  Included in the total operating expenses were noncash expenses (primarily for stock based compensation) totaling $3,284,048 and $1,773,249 for the six months ended March 31, 2012 and 2011, respectively.  

Nonoperating Income and Expense

For the three and six months ended March 31, 2012 interest income totaled $1,161 and $2,611, respectively ($3,714 and $4,676, respectively for fiscal 2011), while we incurred no interest expense in fiscal 2012 compared to $133,379 for the six months ended March 31, 2011.  Interest expense for fiscal 2011 included cash interest paid on amounts outstanding from October 1, 2010 through November 2010 of $5,568 and noncash interest expense resulting from the amortization and accretion of discounts on the same liabilities totaling $127,811.  


We recognized a gain from the change in the fair value of derivative liabilities of $73,146 and $178,813 for the three and six months ended March 31, 2012 compared to $113,634 and 269,601 for the comparable periods in fiscal 2011.  These derivative liabilities are the full value of warrants issued with unexpired anti-dilution privileges.


Net Loss and Net Loss per Share

For the three and six months ended March 31, 2012, our net losses totaled $3,071,967 and $7,322,422, respectively ($2,474,674 and $3,848,614 for the three and six months ended March 31, 2011, respectively).  Our basic and diluted net loss per share was $0.03 and $0.08 for the three and six months ended March 31, 2012, respectively ($0.04 and $0.06, respectively in fiscal 2011).  Common stock equivalents and outstanding options and warrants were not included in the calculations due to their anti-dilutive effects.  


Liquidity and Capital Resources


We have primarily financed our operations to date through the sale of unregistered equity (accompanied by warrants to purchase shares of our common stock) and in prior years with the issuance of notes payable.  At March 31, 2012, our total assets were $1,194,320, while we had working capital of $1,745.  Total liabilities were $1,187,523 (all of which were current) and our stockholders’ equity totaled $6,797.  Also included in current liabilities were amounts arising in connection with derivative liabilities (consisting of warrants issued with anti-dilution provisions) totaling $629,289.  These liabilities represent the entire calculated fair value of the warrants (including the value of the anti-dilution feature in isolation) and they do not represent a future claim on our Company’s cash flows as they are never required to be settled in cash by our Company.  Any future settlement of these securities could result either: 1) upon their expiration unexercised; or 2) upon their exercise and receipt of cash by our Company of the cash proceeds of their exercise (assuming the exercise is not effected on a cashless basis allowed by the outstanding warrants accounted for as derivatives).  


From October 1, 2011 through November 21, 2011, we entered into subscription agreements with accredited investors pursuant to which we issued a total of 11,771,250 shares of our Common Stock, and five year warrants to purchase up to an additional 6,224,065 shares of our Common Stock at exercise prices ranging from $0.50 to $0.60 per share, in exchange for gross proceeds totaling $4,708,500.  This financing transaction resulted in net proceeds to us of $4,173,643, after deducting fees and expenses.    


From January 1, 2012 through May 8, 2012, we entered into subscription agreements with accredited investors pursuant to which we issued a total of 894 shares of our Series B Preferred Stock (convertible into 2,235,000 shares of our Common Stock), and five year warrants to purchase up to an additional 558,750 shares of our Common Stock at exercise prices of $0.60 per share, in exchange for gross proceeds totaling $894,000.  


We plan to raise additional funding through the sale of unregistered common stock and warrants although there can be no assurance that we will be successful in raising such funds.  This description of our recent financing and our future plans does not



16


BillMyParents, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements



constitute an offer to sell or the solicitation of an offer to buy our securities, nor shall such securities be offered or sold in the United States absent registration or an applicable exemption from the registration requirements and certificates evidencing such shares contain a legend stating the same.  


Our cash and cash equivalents balance at March 31, 2012 totaled $683,643.  During the six months ended March 31, 2012, positive cash flows resulted from the sale of unregistered common stock and warrants to purchase common stock described above, offset by negative cash flows from operating activities totaling $5,517,682.  


Plan of Operations

We do not currently expect to purchase any significant property or equipment, or to have substantial changes in the number of our employees for the next twelve months.  We expect however to continue to incur costs in improving, maintaining and marketing our prepaid card products during fiscal 2012.  We expect that our greatest cost to be incurred during fiscal 2012 will be in the area of customer account acquisition.  


Going Concern


As noted above (and by our independent registered public accounting firm in its report on our consolidated financial statements as of and for the year ended September 30, 2011), there exists substantial doubt about our ability to continue as a going concern through our fiscal year ended September 30, 2012.  Our financial statements do not contain any adjustments related to the outcome of this uncertainty.  

Critical Accounting Policies


Management’s discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements which are prepared in accordance with accounting principles that are generally accepted in the United States.  The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities, related disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period.  We continually evaluate our estimates and judgments and we base our estimates and judgments on historical experience and other factors that we believe to be reasonable under the circumstances.  Materially different results can occur as circumstances change and additional information becomes known. There were no changes in our critical accounting policies during fiscal 2012.  

Item 3—Quantitative and Qualitative Disclosures about Market Risk


Intentionally omitted pursuant to Item 305(e) of Regulation S-K.


Item 4 – Controls and Procedures


Disclosure Controls and Procedures

 

We maintain disclosure controls and procedures and internal controls that are designed to provide reasonable assurance that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures and internal controls, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable, and not absolute, assurance of achieving the desired control objectives. In reaching a reasonable level of assurance, management necessarily was required to apply its judgment in evaluating the cost benefit relationship of possible controls and procedures and internal controls.  Our disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives.  

As required by the Securities and Exchange Commission Rule 13a-15(e) and Rule 15d-15(e), we carried out an evaluation, under the supervision of and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by



17


BillMyParents, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements



this report. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level.

Changes in Internal Controls over Financial Reporting

 

There have not been any changes in our internal controls over financial reporting during the fiscal quarter ended March 31, 2012 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

 

Part II: Other Information

Item 1 – Legal Proceedings

From time to time and in the course of business, we may become involved in various legal proceedings seeking monetary damages and other relief.  The amount of the ultimate liability, if any, from such claims cannot be determined. However, in the opinion of our management, there are no legal claims currently pending or threatened against us that would be likely to have a material adverse effect on our financial position, results of operations or cash flows.


Item 1A – Risk Factors

Investment in our common stock involves a high degree of risk. You should carefully consider the risks described below together with all of the other information included in this herein before making an investment decision.  If any of the following risks actually occur, our business, financial condition or results of operations could suffer. In that case, the market price of our common stock could decline, and you may lose all or part of your investment.

 

Risks Related to Our Business


 We have a very limited operating history overall and have only recently embarked on our current corporate focus of providing online payment solutions. We completed our acquisition of BillMyParents-CA on October 16, 2007. BillMyParents-CA was formed in April 2007 to pursue opportunities in the gift card industry. We have since refocused our efforts on providing prepaid cards for young people and their parents. We do not currently have significant operating revenues and have a very limited operating history. We do not have any historical financial data upon which to base planned future operations. Because we have a limited operating history, our historical financial information is not a reliable indicator of future performance. Therefore, it is difficult to evaluate the business and prospects of our Company. Furthermore, our revised business focus centered on BMP has been ongoing only since 2009. We have limited experience as to whether BMP will be popular with consumers. Failure to correctly evaluate our Company’s prospects could result in an investor’s loss of a significant portion or all of his investment in our Company.


Our failure to obtain additional adequate financing would materially and adversely affect our business. We do not currently have sufficient revenues and gross margin to cover our operating expenses and have never been profitable. We cannot be certain that we will ever generate sufficient revenues and gross margin to achieve profitability in the future.  Our failure to significantly increase revenues or to raise additional adequate and necessary financing would seriously harm our business and operating results.  We have incurred significant costs in building, launching and marketing our BMP Offering.  If we fail to achieve sufficient revenues and gross margin with our BMP Offering, or our revenues grow more slowly than anticipated, or if our operating or capital expenses increase more than is expected or cannot be reduced in the event of lower revenues, our business will be materially and adversely affected and an investor could suffer the loss of a significant portion or all of his investment in the Company.


We face competition from other online payment systems.  We will face competition from other companies with similar product offerings.  Many of these companies have longer operating histories, greater name recognition and substantially greater financial, technical and marketing resources than us.  Many of these companies also have more extensive customer bases, broader customer relationships and broader industry alliances than us, including relationships with many of our potential customers. Increased competition from any of these sources could result in our failure to achieve and maintain an adequate level of customers and market share to support the cost of our operations.


We have limited resources to develop our product offerings.  We face a challenging capital market at the same time that our Company has required funding for the development and marketing of our product offerings.  This has caused and will likely continue to cause us to restrict funding of the development of our products and to favor the development of one product offering over the other



18


BillMyParents, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements



based on their relative estimated potentials for commercial success as evaluated by our management.  Our current focus is on our BMP Offering.  The failure of our BMP Offering to be commercially successful would substantially harm our business and results of operations.  Furthermore, in the future we may determine that it is in the best interest of our Company to severely curtail, license, jointly develop with a third party or sell one of our product offerings, which may be on terms which limit the revenue potential of the product offering to our Company.


We rely on third-party suppliers and distributors that are specific to our business and distribution channels such as processors, programmers, social networks and security advisors.  We will be dependent on other companies to provide necessary products and services in connection with key elements of our business.  Any interruption in our ability to obtain these services, or comparable quality replacements would severely harm our business and results of operations.  Our current business model includes our plan to incorporate our BMP Offering within existing social networks.  We will be dependent on these social networks to allow our product offerings to run within their proprietary Internet websites.  Permission for our applications to run on social networks is revocable at any time at the discretion of the social networks. Should any of these adverse contingencies result, they could substantially harm our business and results of operations and an investor could suffer the loss of a significant portion or all of his investment in our Company.


We rely on third-party credit card merchant processors to allow our customers to load balances on their BMP cards and these third parties could view our pre-paid BMP card and limited financial resources as overly risky. Most of our customers load balances on their BMP cards with a credit card. We are dependent on third party credit card merchant processors to allow our customers to load these balances on their BMP cards. Many credit card merchant processors view the prepaid card industry which we operate in as high risk from a fraud and financial standpoint. While we take steps to reduce fraud in our business, our limited financial resources can be viewed as too risky by credit card merchant processors and cause them not to want to do business with us, or discontinue doing business with us. Since most of our customers load balances on their BMP cards with a credit card, any interruption in our ability to obtain these services or comparable quality replacements, would severely harm our business and results of operations. Should we lose the services of a credit card merchant processor and not be able to replace them, our business and results of operations would be substantially impaired, and an investor could suffer the loss of a significant portion or all of his investment in our Company.


We operate in a highly regulated environment and failure by us or the bank that issues our cards to comply with applicable laws and regulations could have an adverse effect on our business, financial position and results of operations. We operate in a highly regulated environment, and failure by us or the bank that issues our cards to comply with the laws and regulations to which we are subject could negatively impact our business. We are subject to a wide range of federal and state laws and regulations. In particular, our products and services are subject to an increasingly strict set of legal and regulatory requirements intended to protect consumers and to help detect and prevent money laundering, terrorist financing and other illicit activities. Many of these laws and regulations are evolving, unclear and inconsistent across various jurisdictions, and ensuring compliance with them is difficult and costly. Failure by us or our bank to comply with the laws and regulations to which we are or may become subject could result in fines, penalties or limitations on our ability to conduct our business, or federal or state actions, any of which could significantly harm our reputation with consumers and other network participants, banks that issue our cards and regulators and could materially and adversely affect our business, operating results and financial condition.


Changes in credit card association or other network rules or standards set by the payment networks or changes in card association and network fees or products or interchange rates could adversely affect our business, financial position and results of operations. We and the banks that issue our cards are subject to association rules that could subject us to a variety of fines or penalties that may be levied by the card associations or networks for acts or omissions by us or businesses that work with us, including credit card merchant processors. The termination of the card association registrations held by us or any of the banks that issue our cards or any changes in card association or other network rules or standards, including interpretation and implementation of existing rules or standards, that increase the cost of doing business or limit our ability to provide our products and services could have an adverse effect on our business, operating results and financial condition. In addition, from time to time, card associations could increase the organization and/or processing fees that they charge, which could increase our operating expenses, reduce our profit margin and adversely affect our business, operating results and financial condition. Furthermore, a substantial portion of our operating revenues is derived from interchange fees, and we expect interchange revenues to someday potentially represent a significant percentage of our total operating revenues. The amount of interchange revenues that we earn is highly dependent on the interchange rates that the payment networks set and adjust from time to time. The enactment of the Wall Street Reform and Consumer Protection Act, or the Dodd-Frank Act, required the Federal Reserve Board to implement regulations that have substantially limited interchange fees for many issuers. While we believe the interchange rates that may be earned by us are exempt from such limitations, in light of this legislation and recent attention generally on interchange rates in the United States, there can be no assurance that the interpretation or enforcement of interchange legislation or regulation will not impact our interchange revenues substantially. If interchange rates



19


BillMyParents, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements



decline, whether due to actions by the payment networks, the banks that issue our cards or existing or future legislation, regulation or the interpretation or enforcement thereof, we would likely need to change our fee structure to compensate for lost interchange revenues. To the extent we increase the pricing of our products and services, we might find it more difficult to acquire consumers and to maintain or grow card usage and customer retention, and we could suffer reputational damage and become subject to greater regulatory scrutiny. We also might have to discontinue certain products or services. As a result, our operating revenues, operating results, prospects for future growth and overall business could be materially and adversely affected.


Changes in laws and regulations to which we are subject, or to which we may become subject, may increase our costs of operation, decrease our operating revenues and disrupt our business. Changes in laws and regulations or the interpretation or enforcement thereof may occur that could increase our compliance and other costs of doing business, require significant systems redevelopment, or render our products or services less profitable or obsolete, any of which could have an adverse effect on our results of operations. We could face more stringent anti-money laundering rules and regulations, as well as more stringent regulations, compliance with which could be expensive and time consuming. Changes in laws and regulations governing the way our products are sold or in the way those laws and regulations are interpreted or enforced could adversely affect our ability to distribute our products and the cost of providing those products and services. If onerous regulatory requirements were imposed on the sale of our products and services, the requirements could lead to a loss of retail distributors, which in turn could materially and adversely impact our operations. State and federal legislators and regulatory authorities have become increasingly focused on the banking and consumer financial services industries and continue to propose and adopt new legislation that could result in significant adverse changes in the regulatory landscape for financial institutions (including card issuing banks) and other financial services companies (including us). Changes in the way we or the banks that issue our cards are could expose us and the banks that issue our cards to increased regulatory oversight, more burdensome regulation of our business, and increased litigation risk, each of which could increase our costs and decrease our operating margins. Additionally, changes to the limitations placed on fees, the interchange rates that can be charged or the disclosures that must be provided with respect to our products and services could increase our costs and decrease our operating revenues.


Our business could suffer if there is a decline in the use of prepaid cards as a payment mechanism or there are adverse developments with respect to the prepaid financial services industry in general. As the prepaid financial services industry evolves, consumers may find prepaid financial services to be less attractive than traditional or other financial services. Consumers might not use prepaid financial services for any number of reasons, including the general perception of our industry. For example, negative publicity surrounding other prepaid financial service providers could impact our business and prospects for growth to the extent it adversely impacts the perception of prepaid financial services among consumers. If consumers do not continue or increase their usage of prepaid cards, our operating revenues may remain at current levels or decline. Predictions by industry analysts and others concerning the growth of prepaid financial services as an electronic payment mechanism may overstate the growth of an industry, segment or category, and you should not rely upon them. The projected growth may not occur or may occur more slowly than estimated. If consumer acceptance of prepaid financial services does not continue to develop or develops more slowly than expected or if there is a shift in the mix of payment forms, such as cash, credit cards, traditional prepaid cards and prepaid cards, away from our products and services, it could have a material adverse effect on our financial position and results of operations.


Fraudulent and other illegal activity involving our products and services could lead to reputational damage to us and reduce the use and acceptance of our cards and reload network. Criminals are using increasingly sophisticated methods to engage in illegal activities involving prepaid/credit/debit cards or cardholder information, such as counterfeiting, fraudulent payment or refund schemes and identity theft. We rely upon third parties for some transaction processing services, which subjects us and our cardholders to risks related to the vulnerabilities of those third parties. A single significant incident of fraud or increases in the overall level of fraud involving our cards, could result in financial or reputational damage to us, which could reduce the use and acceptance of our cards, cause other channel members to cease doing business with us or lead to greater regulation that would increase our compliance costs.


A data security breach could expose us to liability and protracted and costly litigation, and could adversely affect our reputation and operating revenues. We, the bank that issues our cards, network acceptance members and/or third-party processors receive, transmit and store confidential customer and other information in connection with the sale and use of our prepaid cards. Encryption software and the other technologies used to provide security for storage, processing and transmission of confidential customer and other information may not be effective to protect against data security breaches by third parties. The risk of unauthorized circumvention of such security measures has been heightened by advances in computer capabilities and the increasing sophistication of hackers. Improper access to our or these third parties’ systems or databases could result in the theft, publication, deletion or modification of confidential customer and other information. A data security breach of the systems on which sensitive cardholder data and account information are stored could lead to fraudulent activity involving our products and services, reputational damage and



20


BillMyParents, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements



claims or regulatory actions against us. If we are sued in connection with any data security breach, we could be involved in protracted and costly litigation. If unsuccessful in defending that litigation, we might be forced to pay damages and/or change our business practices or pricing structure, any of which could have a material adverse effect on our operating revenues and profitability. We would also likely have to pay (or indemnify the banks that issue our cards for) fines, penalties and/or other assessments imposed as a result of any data security breach. Further, a significant data security breach could lead to additional regulation, which could impose new and costly compliance obligations. In addition, a data security breach at the bank that issues our cards, network acceptance members or third-party processors could result in significant reputational harm to us and cause the use and acceptance of our cards to decline, either of which could have a significant adverse impact on our operating revenues and future growth prospects.


Our ability to protect our intellectual property and proprietary technology surrounding our BMP Offering is uncertain. Our future success may depend significantly on our ability to protect our proprietary rights to the intellectual property upon which our products and services will be based.  Our pending U.S. patent application, which includes claims to material aspects of our products and services that are not currently protected by issued patents, may not be issued as patents in a form that will be advantageous to us. Any patents we obtain in the future may be challenged by re-examination or otherwise invalidated or eventually be found unenforceable. Both the patent application process and the process of managing patent disputes can be time consuming and expensive. Competitors may attempt to challenge or invalidate our patents, or may be able to design alternative techniques or devices that avoid infringement of our patents, or develop products with functionalities that are comparable to ours. In the event a competitor infringes upon our patent or other intellectual property rights, litigation to enforce our intellectual property rights or to defend our patents against challenge, even if successful, could be expensive and time consuming and could require significant time and attention from our management. We may not have sufficient resources to enforce our intellectual property rights or to defend our patents against challenges from others.


We are dependent upon consumer tastes with respect to preferred methods of online payment for the success of our products and services. Our product offerings’ acceptance by consumers and their consequent generation of revenues will depend upon a variety of unpredictable factors, including:

·

Public taste, which is always subject to change;

·

The quantity and popularity of other payment systems available to the public;

·

The continued appeal and reputations of our celebrity spokespersons; and

·

The fact that the distribution and sales methods chosen for the products and services we market may be ineffective.


For any of these reasons, our programs may be commercially unsuccessful.  If we are unable to market products which are commercially successful, we may not be able to recoup our expenses and/or generate sufficient revenues. In the event that we are unable to generate sufficient revenues, we may not be able to continue operating as a viable business and an investor could suffer the loss of a significant portion or all of his investment in our Company.


Our Company is economically sensitive to general economic conditions, including continued weakening of the economy; therefore a reduction in consumer purchases of discretionary items could consequently materially impact our Company’s future revenues from BMP for the worse. Consumer purchases are subject to cyclical variations, recessions in the general economy and the future economic outlook. Our results may be dependent on a number of factors impacting consumer spending, including general economic and business conditions; consumer confidence; wages and employment levels; the housing market; consumer debt levels; availability of consumer credit; credit and interest rates; fuel and energy costs; energy shortages; taxes; general political conditions, both domestic and abroad; and the level of customer traffic on social networking websites. Consumer purchases of discretionary items may decline during recessionary periods and at other times when disposable income is lower. A downturn or an uncertain outlook in the economy may materially adversely affect our business and the success of our BMP Offering.


Financial Risks


Our financial statements have been prepared assuming that the Company will continue as a going concern. The factors described herein raise substantial doubt about our ability to continue as a going concern. Our financial statements do not include any adjustments that might result from this uncertainty. The report of our independent registered public accounting firm included an explanatory paragraph expressing substantial doubt about our ability to continue as a going concern in their audit report for the fiscal years ended September 30, 2011 and 2010.   If we cannot generate the required revenues and gross margin to achieve profitability or obtain additional capital on acceptable terms, we will need to substantially revise our business plan or cease operations and an investor could suffer the loss of a significant portion or all of his investment in our Company.  




21


BillMyParents, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements



Current macro-economic conditions could adversely affect the financial viability of our Company. Continuing recessionary conditions in the global economy threaten to cause further tightening of the credit and equity markets and more stringent lending and investing standards. The persistence of these conditions could have a material adverse effect on our access to further needed capital. In addition, further deterioration in the economy could adversely affect our corporate results, which could adversely affect our financial condition and operations.


We do not expect to pay dividends for the foreseeable future, and we may never pay dividends and, consequently, the only opportunity for investors to achieve a return on their investment is if a trading market develops and investors are able to sell their shares for a profit or if our business is sold at a price that enables investors to recognize a profit. We currently intend to retain any future earnings to support the development and expansion of our business and do not anticipate paying cash dividends for the foreseeable future. Our payment of any future dividends will be at the discretion of our Board of Directors after taking into account various factors, including but not limited to our financial condition, operating results, cash needs, growth plans and the terms of any credit agreements that we may be a party to at the time. In addition, our ability to pay dividends on our common stock may be limited by state law. Accordingly, we cannot assure investors any return on their investment, other than in connection with a sale of their shares or a sale of our business. At the present time there is a limited trading market for our shares. Therefore, holders of our securities may be unable to sell them. We cannot assure investors that an active trading market will develop or that any third party will offer to purchase our business on acceptable terms and at a price that would enable our investors to recognize a profit.


  Accounting rules will continue to cause an unfavorable change to the accounting for our financial position. We are required to account for certain of our issued warrants as derivative liabilities. This accounting is occasioned by the anti-dilution provisions of the securities which would reduce their future exercise or conversion price in the event our Company in the future either issues equity shares for a price that is lower than the exercise price of those instruments or issues new warrants or convertible instruments that have a lower exercise or conversion price (such an actual reduction in connection with certain of our warrants outstanding and their strike prices have previously occurred). In the future, certain of our warrants outstanding will be marked to market at each future reporting period until such time (perhaps far into the future) that they are converted, cancelled, expire or are exercised for shares of our common stock. Additionally, since not all of our outstanding securities have these anti-dilution provisions, holders of such securities lacking anti-dilution provisions could be disadvantaged vis-à-vis securities outstanding with such features, in the event of a future issuance by our Company of securities for consideration that trigger the anti-dilution provisions. An investor could suffer the loss of a portion or the whole value of their securities in the event of a significant adjustment occasioned by such a future issuance of our Company’s securities.


Our net operating loss carry-forward is limited.  We have recorded a valuation allowance amounting to our entire net deferred tax asset balance due to our lack of a history of earnings, possible statutory limitations on the use of tax loss carry-forwards generated in the past and the future expiration of our NOL.  This gives rise to uncertainty as to whether the net deferred tax asset is realizable.  Internal Revenue Code Section 382, and similar California rules, place a limitation on the amount of taxable income that can be offset by carry-forwards after a change in control (generally greater than a 50% change in ownership).  As a result of these provisions, it is likely that given our acquisition of BillMyParents-CA, future utilization of the NOL will be severely limited.  Our inability to use our Company’s historical NOL, or the full amount of the NOL, would limit our ability to offset any future tax liabilities with its NOL.


Corporate and Other Risks


We may be subject to fines, sanctions, and/or penalties of an indeterminable nature as a result of potential violations of federal securities laws. The Company may have potentially committed a violation of Section 5 of the Securities Act in connection with a sale of 151,515 shares of common stock in April 2010 included on its registration statement on Form S-1 (File no. 333-153552) which may have not been updated pursuant Section 10(a)(3) of the Securities Act at the time of such sale. Under Section 5, no security may be offered, sold or delivered after sale in interstate commerce unless a registration statement is in effect as to the security, or an exemption from registration is available. Furthermore, Section 5(b) of the Securities Act requires that a prospectus meeting the requirements of Section 10(a) be delivered before or at the same time with a confirmation of sale of a security. While a registration statement was filed and declared effective by the SEC in July 2009, it could be determined that in order for such sale to comply with the Securities Act the registration statement was required to have been updated under Section 10(a)(3) of the Securities Act via a post-effective amendment at the time of the sale of the securities.  Such a determination may make the Company susceptible to potential lawsuits and/or regulatory actions.  Additionally, under state and federal law, such a determination may require that the Company offer a right of rescission to the shareholders who sold securities under the registration statement at such time as the registration statement was required to be updated, and any such right of rescission may also require the payment of statutory interest.  The potential costs, risks and liabilities associated with such potential lawsuits, rights of rescission and/or regulatory actions cannot be accurately assessed



22


BillMyParents, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements



at this time, but in the event such lawsuits, rescission offerings and/or regulatory actions are instituted, the Company believes that such actions will not have a material financial effect on the Company.  Also, the Company’s inability to resolve any potential violation of Section 5 of the Securities Act to the satisfaction of the SEC could result in a delay or prohibition in obtaining the effectiveness of any future registration statements, which could hinder or impair the ability to obtain future financing.


Limitations on director and officer liability and indemnification of our Company’s officers and directors by us may discourage stockholders from bringing suit against an officer or director. Our Company’s articles of incorporation and bylaws provide, with certain exceptions as permitted by governing state law, that a director or officer shall not be personally liable to us or our stockholders for breach of fiduciary duty as a director, except for acts or omissions which involve intentional misconduct, fraud or knowing violation of law, or unlawful payments of dividends. These provisions may discourage stockholders from bringing suit against a director for breach of fiduciary duty and may reduce the likelihood of derivative litigation brought by stockholders on our behalf against a director.


We are responsible for the indemnification of our officers and directors. Should our officers and/or directors require us to contribute to their defense, we may be required to spend significant amounts of our capital. Our articles of incorporation and bylaws also provide for the indemnification of our directors, officers, employees, and agents, under certain circumstances, against attorney's fees and other expenses incurred by them in any litigation to which they become a party arising from their association with or activities on behalf of our Company. This indemnification policy could result in substantial expenditures, which we may be unable to recoup. If these expenditures are significant, or involve issues which result in significant liability for our key personnel, we may be unable to continue operating as a going concern.


Our employees, executive officers, directors and insider stockholders beneficially own or control a substantial portion of our outstanding common stock, which may limit your ability and the ability of our other stockholders, whether acting alone or together, to propose or direct the management or overall direction of our Company. Additionally, this concentration of ownership could discourage or prevent a potential takeover of our Company that might otherwise result in an investor receiving a premium over the market price for his shares. Approximately 52% of our outstanding shares of common stock is beneficially owned and controlled by a group of insiders, including our employees, directors and executive officers. Accordingly, our employees, directors, executive officers and insider shareholders may have the power to control the election of our directors and the approval of actions for which the approval of our stockholders is required. If you acquire shares of our common stock, you may have no effective voice in the management of our Company.  Such concentrated control of our Company may adversely affect the price of our common stock. Our principal stockholders may be able to control matters requiring approval by our stockholders, including the election of directors, mergers or other business combinations. Such concentrated control may also make it difficult for our stockholders to receive a premium for their shares of our common stock in the event we merge with a third party or enter into different transactions which require stockholder approval. These provisions could also limit the price that investors might be willing to pay in the future for shares of our common stock.


We are dependent for our success on a few key employees. Our inability to retain those employees would impede our business plan and growth strategies, which would have a negative impact on our business and the value of your investment. Our success depends on the skills, experience and performance of key members of our Company.  Each of those individuals may voluntarily terminate his employment with the Company at any time. Were we to lose one or more of these key employees, we would be forced to expend significant time and money in the pursuit of a replacement, which would result in both a delay in the implementation of our business plan and the diversion of limited working capital. We do not maintain a key man insurance policy on any of our key employees.


Should we be successful in transitioning to a Company generating significant revenues, we may not be able to manage our growth effectively, which could adversely affect our operations and financial performance. The ability to manage and operate our business as we execute our growth strategy will require effective planning. Significant rapid growth could strain our internal resources, leading to a lower quality of customer service, reporting problems and delays in meeting important deadlines resulting in loss of market share and other problems that could adversely affect our financial performance. Our efforts to grow could place a significant strain on our personnel, management systems, infrastructure and other resources. If we do not manage our growth effectively, our operations could be adversely affected, resulting in slower growth and a failure to achieve or sustain profitability.


Capital Market Risks


Our common stock is thinly traded, so you may be unable to sell at or near ask prices or at all if you need to sell your shares to raise money or otherwise desire to liquidate your shares. There is limited market activity in our stock and we are too small to attract the interest of many brokerage firms and analysts. We cannot give you any assurance that a broader or more active public



23


BillMyParents, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements



trading market for our common stock will develop or be sustained. While we are trading on OTC Markets, the trading volume we will develop may be limited by the fact that many major institutional investment funds, including mutual funds, as well as individual investors follow a policy of not investing in Bulletin Board stocks and certain major brokerage firms restrict their brokers from recommending Bulletin Board stocks because they are considered speculative, volatile, thinly traded and the market price of the common stock may not accurately reflect the underlying value of our Company.  The market price of our common stock could be subject to wide fluctuations in response to quarterly variations in our revenues and operating expenses, announcements of new products or services by us, significant sales of our common stock, including “short” sales, the operating and stock price performance of other companies that investors may deem comparable to us, and news reports relating to trends in our markets or general economic conditions.


The application of the “penny stock” rules to our common stock could limit the trading and liquidity of the common stock, adversely affect the market price of our common stock and increase your transaction costs to sell those shares.  As long as the trading price of our common stock is below $5 per share, the open-market trading of our common stock will be subject to the “penny stock” rules, unless we otherwise qualify for an exemption from the “penny stock” definition. The “penny stock” rules impose additional sales practice requirements on certain broker-dealers who sell securities to persons other than established customers and accredited investors (generally those with assets in excess of $1,000,000 or annual income exceeding $200,000 or $300,000 together with their spouse). These regulations, if they apply, require the delivery, prior to any transaction involving a penny stock, of a disclosure schedule explaining the penny stock market and the associated risks. Under these regulations, certain brokers who recommend such securities to persons other than established customers or certain accredited investors must make a special written suitability determination regarding such a purchaser and receive such purchaser’s written agreement to a transaction prior to sale. These regulations may have the effect of limiting the trading activity of our common stock, reducing the liquidity of an investment in our common stock and increasing the transaction costs for sales and purchases of our common stock as compared to other securities. The stock market in general and the market prices for penny stock companies in particular, have experienced volatility that often has been unrelated to the operating performance of such companies. These broad market and industry fluctuations may adversely affect the price of our stock, regardless of our operating performance.  Stockholders should be aware that, according to SEC Release No. 34-29093, the market for penny stocks has suffered in recent years from patterns of fraud and abuse. Such patterns include 1) control of the market for the security by one or a few broker-dealers that are often related to the promoter or issuer; 2) manipulation of prices through prearranged matching of purchases and sales and false and misleading press releases; 3) boiler room practices involving high-pressure sales tactics and unrealistic price projections by inexperienced sales persons; 4) excessive and undisclosed bid-ask differential and markups by selling broker-dealers; and 5) the wholesale dumping of the same securities by promoters and broker-dealers after prices have been manipulated to a desired level, along with the resulting inevitable collapse of those prices and with consequent investor losses. The occurrence of these patterns or practices could increase the volatility of our share price.


We may not be able to attract the attention of major brokerage firms, which could have a material adverse impact on the market value of our common stock. Security analysts of major brokerage firms may not provide coverage of our common stock since there is no incentive to brokerage firms to recommend the purchase of our common stock. The absence of such coverage limits the likelihood that an active market will develop for our common stock. It will also likely make it more difficult to attract new investors at times when we require additional capital.


We may be unable to list our common stock on NASDAQ or on any securities exchange. Although we may apply to list our common stock on NASDAQ or the NYSE Amex in the future, we cannot assure you that we will be able to meet the initial listing standards, including the minimum per share price and minimum capitalization requirements, or that we will be able to maintain a listing of our common stock on either of those or any other trading venue. Until such time as we qualify for listing on NASDAQ, the NYSE Amex or another trading venue, our common stock will continue to trade on OTC Markets or another over-the-counter quotation system, or on the ‘‘pink sheets,’’ where an investor may find it more difficult to dispose of shares or obtain accurate quotations as to the market value of our common stock. In addition, rules promulgated by the SEC impose various practice requirements on broker-dealers who sell securities that fail to meet certain criteria set forth in those rules to persons other than established customers and accredited investors.  Consequently, these rules may deter broker-dealers from recommending or selling our common stock, which may further affect the liquidity of our common stock. It would also make it more difficult for us to raise additional capital.


Future sales of our equity securities could put downward selling pressure on our securities, and adversely affect the stock price.  There is a risk that this downward pressure may make it impossible for an investor to sell his or her securities at any reasonable price, if at all. Future sales of substantial amounts of our equity securities in the public market, or the perception that such sales could occur, could put downward selling pressure on our securities, and adversely affect the market price of our common stock.




24


BillMyParents, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements




Item 2 –Unregistered Sales of Equity Securities and Use of Proceeds

None not previously disclosed.  


Item 3 – Defaults upon Senior Securities

Not applicable.

Item 4 – Removed and Reserved

Not applicable.

Item 5 – Other Information

None.

Item 6 – Exhibits

See Exhibit Index immediately following signatures.


SIGNATURES

 

In accordance with the requirements of the Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

BillMyParents, Inc., a Colorado corporation


By: /s/ MICHAEL MCCOY

       Michael McCoy, Chief Executive Officer


May 10, 2012


By: /s/ JONATHAN SHULTZ

       Jonathan Shultz, Chief Financial Officer


May 10, 2012


Exhibit Index

Exhibit No.

Description

31.1*

Certification pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, by Chief Executive Officer

31.2*

Certification pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, by Chief Financial Officer

32.1*

Certification pursuant to 18 U.S.C. §1350 by Chief Executive Officer

32.2*

Certification pursuant to 18 U.S.C. §1350 by Chief Financial Officer

*

Filed as an exhibit to this report




25


PINX:BMPI Quarterly Report 10-Q Filling

PINX:BMPI Stock - Get Quarterly Report SEC Filing of PINX:BMPI stocks, including company profile, shares outstanding, strategy, business segments, operations, officers, consolidated financial statements, financial notes and ownership information.

PINX:BMPI Quarterly Report 10-Q Filing - 3/31/2012
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