Yukon
Territory
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980-20-9289
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(State
or other jurisdiction of
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(I.R.S.
Employer Identification No.)
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incorporation
or organization)
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Page
Number
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PART
I.
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FINANCIAL
INFORMATION
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1
|
Item
1.
|
1
|
|
Consolidated
Balance Sheets (unaudited) at
September 30, 2006 and March 31, 2006
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1
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|
Consolidated
Statements of Operations and Deficit
(unaudited) for the Three and Six Months Ended September 30,
2006 and
2005
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2
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Consolidated
Statements of Cash Flows (unaudited) for
the Three and Six Months Ended September 30, 2006 and 2005
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3
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4
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||
Item
2.
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8
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Item
3.
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15
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Item
4.
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15
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PART
II.
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OTHER
INFORMATION
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16
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Item
1.
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16
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Item
1A.
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16
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Item
4.
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16
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Item
6.
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17
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18
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||
September
30,
2006
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March
31,
2006
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||||||
ASSETS
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|||||||
Current
Assets
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|||||||
Cash
and cash equivalents
|
$
|
11,066,437
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$
|
3,691,632
|
|||
Restricted
cash
|
250,000
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250,000
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|||||
Accounts
receivable, less allowances of $46,886 and $46,145, respectively
|
498,416
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436,475
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|||||
Prepaid
expenses
|
342,779
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374,887
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|||||
Total
Current Assets
|
12,157,632
|
4,752,994
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|||||
Capital
Assets, net
|
156,438
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201,036
|
|||||
Patents,
net
|
1,013,355
|
1,093,392
|
|||||
Other
Assets
|
263,590
|
30,102
|
|||||
TOTAL
ASSETS
|
13,591,015
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6,077,524
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|||||
LIABILITIES
|
|||||||
Current
Liabilities
|
|||||||
Accounts
payable
|
618,757
|
1,104,034
|
|||||
Accrued
liabilities
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164,991
|
165,083
|
|||||
Accrued
compensation
|
185,660
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173,444
|
|||||
Current
portion of long-term debt
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2,460
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22,458
|
|||||
Current
portion of deferred revenue
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1,503,717
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260,121
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|||||
Total
Current Liabilities
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2,475,585
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1,725,140
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|||||
Long-term
debt
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4,654
|
-
|
|||||
Deferred
revenue
|
6,492,653
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10,985
|
|||||
Total
Liabilities
|
8,972,892
|
1,736,125
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|||||
Commitments
and contingencies
|
|||||||
SHAREHOLDERS'
EQUITY
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|||||||
Capital
Stock
|
|||||||
Class
A, preferred stock, $1.00 CDN par value, 150,000,000 shares
authorized,
issuable in series, none issued or outstanding
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-
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-
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|||||
Class
B, preferred stock, $1.00 CDN par value, 150,000,000 shares
authorized,
issuable in series, none issued or outstanding
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-
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-
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|||||
Common
shares, no par value, 100,000,000 shares authorized, 20,207,094
and
20,194,094 shares issued and outstanding, respectively
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32,774,368
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32,710,018
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|||||
Contributed
surplus
|
2,991,817
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2,544,312
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|||||
Deficit
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(31,148,062
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)
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(30,912,931
|
)
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|||
Total
Shareholders' Equity
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4,618,123
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4,341,399
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|||||
TOTAL
LIABILITIES AND SHAREHOLDERS' EQUITY
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13,591,015
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6,077,524
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Three
Months Ended September 30
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Six
Months Ended September 30
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||||||||||||
2006
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2005
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2006
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2005
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||||||||||
REVENUE
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$
|
1,650,673
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$
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1,158,488
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$
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3,446,221
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$
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2,718,040
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|||||
COSTS
AND EXPENSES
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|||||||||||||
Cost
of operations
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1,219,476
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1,114,829
|
2,484,542
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2,250,125
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|||||||||
Sales,
general and administrative expenses (includes stock-based
compensation
expense of $301,664 for three months ended September 30,
2006 (three
months ended September 30, 2005 - $504,625) and $425,859
for six months
ended September 30, 2006 (six months ended September 30,
2005 -
$661,494))
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880,581
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1,695,576
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1,609,558
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2,906,174
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|||||||||
Amortization
and depreciation
|
79,319
|
110,413
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159,131
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436,078
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|||||||||
LOSS
BEFORE OTHER (EXPENSES) INCOME AND INCOME TAXES
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(528,703
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)
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(1,762,330
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)
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(807,010
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)
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(2,874,337
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)
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|||||
Other
(expenses) income, net
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(3,235
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)
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(228,990
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)
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381,084
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(228,584
|
)
|
||||||
Interest
income, net
|
117,085
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36,521
|
220,841
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73,986
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|||||||||
LOSS
BEFORE INCOME TAXES
|
(414,853
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)
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(1,954,799
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)
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(205,085
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)
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(3,028,935
|
)
|
|||||
Income
taxes
|
4,200
|
9,623
|
30,046
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13,823
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|||||||||
NET
LOSS
|
(419,053
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)
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(1,964,422
|
)
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(235,131
|
)
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(3,042,758
|
)
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|||||
DEFICIT,
beginning of period
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(30,729,009
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)
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(27,344,174
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)
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(30,912,931
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)
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(26,265,838
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)
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|||||
DEFICIT,
end of period
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(31,148,062
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)
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(29,308,596
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)
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(31,148,062
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)
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(29,308,596
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)
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|||||
LOSS
PER SHARE, basic and diluted
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(0.02
|
)
|
(0.10
|
)
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(0.01
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)
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(0.15
|
)
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|||||
WEIGHTED
AVERAGE SHARES OUTSTANDING
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|||||||||||||
Basic
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20,207,094
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20,146,464
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20,205,733
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20,146,031
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|||||||||
Diluted
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20,207,094
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20,146,464
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20,205,733
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20,146,031
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Three
Months Ended September 30
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Six
Months Ended September 30
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||||||||||||
2006
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2005
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2006
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2005
|
||||||||||
Operating
Activities:
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|||||||||||||
Net
Loss
|
$
|
(419,053
|
)
|
$
|
(1,964,422
|
)
|
$
|
(235,131
|
)
|
$
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(3,042,758
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)
|
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Adjustments
to reconcile net loss to net cash (used in) provided by
operating
activities
|
|||||||||||||
Provision
for losses on accounts receivable
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-
|
14,989
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24,464
|
14,989
|
|||||||||
Amortization
and depreciation
|
79,319
|
110,413
|
159,131
|
436,078
|
|||||||||
Stock-based
compensation
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301,664
|
504,625
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425,859
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661,494
|
|||||||||
Stock-based
compensation - future income taxes
|
-
|
5,423
|
21,646
|
5,423
|
|||||||||
Changes
in operating assets and liabilities
|
|||||||||||||
Accounts
receivable
|
(144,287
|
)
|
119,837
|
(86,405
|
)
|
22,569
|
|||||||
Prepaid
expenses
|
15,191
|
31,246
|
32,108
|
192,370
|
|||||||||
Other
assets
|
-
|
10,952
|
-
|
10,952
|
|||||||||
Accounts
payable and accrued liabilities
|
(21,147
|
)
|
323,776
|
(473,153
|
)
|
585,707
|
|||||||
Deferred
revenue
|
(290,617
|
)
|
40,279
|
7,725,264
|
(996
|
)
|
|||||||
Net
cash (used in) provided by operating activities
|
(478,930
|
)
|
(802,882
|
)
|
7,593,783
|
(1,114,172
|
)
|
||||||
Investing
Activities:
|
|||||||||||||
Other
assets
|
(133,488
|
)
|
-
|
(233,488
|
)
|
-
|
|||||||
Capital
asset expenditures
|
(18,417
|
)
|
(56,142
|
)
|
(25,464
|
)
|
(73,827
|
)
|
|||||
Patents
|
(487
|
)
|
-
|
(1,252
|
)
|
(211
|
)
|
||||||
Net
cash (used in) investing activities
|
(152,392
|
)
|
(56,142
|
)
|
(260,204
|
)
|
(74,038
|
)
|
|||||
Financing
Activities:
|
|||||||||||||
Payments
on capital leases
|
(11,114
|
)
|
(9,670
|
)
|
(20,351
|
)
|
(19,035
|
)
|
|||||
Payments
on long-term borrowing
|
-
|
(2,533
|
)
|
(2,773
|
)
|
(5,095
|
)
|
||||||
Proceeds
from exercise of stock options
|
-
|
42,325
|
64,350
|
42,325
|
|||||||||
Net
cash (used in) provided by financing activities
|
(11,114
|
)
|
30,122
|
41,226
|
18,195
|
||||||||
(DECREASE)
INCREASE IN CASH AND CASH EQUIVALENTS
|
(642,436
|
)
|
(828,902
|
)
|
7,374,805
|
(1,170,015
|
)
|
||||||
Cash
and cash equivalents, beginning of period
|
11,708,873
|
5,720,708
|
3,691,632
|
6,061,821
|
|||||||||
Cash
and cash equivalents, end of period
|
11,066,437
|
4,891,806
|
11,066,437
|
4,891,806
|
1.
|
Basis
of Presentation
|
2.
|
Financial
instruments
|
a)
|
Restricted
cash
|
b)
|
Concentration
of credit risk
|
3.
|
Stock-based
compensation
|
4.
|
Commitments
and Contingencies
|
· |
Under
the terms of two of the agreements, in exchange for a release fee
consideration, the subsidiary of the Corporation has agreed to release
these licensees from any and all causes of action related to its
patents
which may have arisen prior to the effective date of the licenses.
Due to
the specific nature of the releases, these release fees have been
recorded
as other income in the six months ended September 30, 2006.
|
· |
The
subsidiary of the Corporation has entered into a standstill agreement
with
one of the licensees, whereby both have promised to refrain from
filing
certain types of litigation against each other until April 1, 2009.
The
consideration received related to the standstill agreement has been
deferred and will be recognized as other income ratably over the
standstill period.
|
· |
Under
the terms of one agreement, the subsidiary of the Corporation agreed
to
provide licensing rights for use of existing patents. As these rights
have
been delivered, payment has been received and the subsidiary of the
Corporation has no future obligations under the agreement, this revenue
has been recognized in the six months ended September 30,
2006.
|
· |
Under
the terms of one agreement, a portion of the consideration received
is
comprised of license fees for past and future use of the subject
patents
and for use of any future patents to be developed, acquired or obtained
by
the Corporation. The components of this portion of the agreement
are
considered multiple element arrangements that do not qualify for
separate
units of accounting, therefore, these license fees have been deferred
and
will be recognized ratably over the remaining term of the license
agreement, which expires on January 16,
2013.
|
· |
One
agreement also included running royalties for certain future transactions
completed by the licensee. These running royalties will be recorded
by the
subsidiary of the Corporation as revenue in the period in which they
are
earned.
|
· |
The
Corporation has a special fee arrangement with its legal firm, Kirkland
and Ellis LLP, that resulted in a $7,100,000 fee for the legal firm’s
services in connection with the foregoing settlement and licensing
agreements. The special fee was paid in the period and has been offset
against the $16,000,000
consideration.
|
5.
|
Reconciliation
of United States to Canadian Generally Accepted Accounting
Principles
|
a)
|
Under
U.S. GAAP, the Corporation could not effect the 2001 reduction
in deficit
of $22,901,744 by reducing the stated capital of the shares of
the
Corporation's common stock.
|
b)
|
On
April 1, 2006, the Corporation adopted SFAS 123(R) which requires
the
expensing of all options issued, modified or settled based on the
grant
date fair value over the period during which an employee is required
to
provide service (vesting period).
|
The
Corporation adopted SFAS 123(R) using the modified prospective
approach,
which requires application of the standard to all awards granted,
modified, repurchased or cancelled on or after April 1, 2006, and
to all
awards for which the requisite service has not been rendered as
at such
date. Since April 1, 2003, the Corporation has been following the
fair
value based approach prescribed by SFAS 123, as amended by SFAS
148, for
stock option awards granted, modified or settled on or after such
date. As
such, the application of SFAS 123(R) on April 1, 2006 to all awards
granted prior to its adoption did not have an impact on the financial
statements. In accordance with the modified prospective approach,
prior
period financial statements have not been restated to reflect the
impact
of SFAS 123(R). The prospective adoption of this new U.S. GAAP
policy
creates no differences with the Corporation’s stock compensation expense
reported under CDN GAAP.
|
Previously
under U.S. GAAP, the Corporation accounted for its 1996 Stock Option
Plan
and 1998 Stock Incentive Plan under the principles of Accounting
Principles Board Opinion No. 25 “Accounting for Stock Issued to Employees
and Related Interpretations” (“APB 25”). No compensation expense was
recognized under APB 25 because the exercise price of the Corporation’s
stock options equals the market price of the underlying stock on
the date
of the grant.
|
c)
|
Other
Comprehensive Income
|
U.S.
GAAP requires that a statement of comprehensive income be displayed
with
the same prominence as other financial statements and that the aggregate
amount of comprehensive income excluding the deficit be disclosed
separately in shareholders’ equity. Comprehensive income, which
incorporates the net income (loss), includes all changes in shareholders’
equity during a period except those resulting from investments by
and
distributions to owners. Net income (loss) for the Corporation is
the same
as comprehensive income. There is currently no requirement to disclose
comprehensive income under CDN
GAAP.
|
1.
|
Proposal
to elect Patrick H. Gaines, Gregory A. MacRae, L. William Seidman
and
Jacqueline Pace for terms expiring at the Annual General Meeting
of
Shareholders in 2007, as described in the Corporation’s Information
Circular and Proxy Statement for the
Meeting.
|
DIRECTORS
|
VOTES
FOR
|
VOTES
WITHHELD
|
Patrick
H. Gaines
|
17,129,557
|
458,239
|
Greg
A. MacRae
|
17,145,260
|
442,536
|
L.
William Seidman
|
17,144,727
|
443,069
|
Jacqueline
Pace
|
17,143,952
|
443,844
|
2.
|
Proposal
to ratify the appointment of Grant Thornton LLP as the Corporation’s
independent auditor until the Annual General Meeting of Shareholders
in
2007.
|
VOTES
FOR
|
VOTES
AGAINST
|
ABSTENTIONS
|
17,337,425
|
98,689
|
151,682
|
Number
|
Description
of Document
|
3.1
|
Restated
Articles of Incorporation (incorporated by reference to Exhibit 3.1
to the
Annual Report on Form 10-K for the fiscal year ended March 31, 2006,
of
LML Payment Systems Inc. (File No.
0-13959)).
|
3.2
|
Bylaws
of LML, as amended (incorporated by reference to Exhibit 3.2 to the
Annual
Report on Form 10-K for the fiscal year ended March 31, 2006, of
LML
Payment Systems Inc. (File No.
0-13959)).
|
21
|
Subsidiaries
of LML (incorporated by reference to Exhibit 21 to the Annual Report
on
Form 10-K for the fiscal year ended March 31, 2006, of LML Payment
Systems
Inc. (File No. 0-13959)).
|
31.1*
|
Rule
13a-14(a) Certification of Chief Executive
Officer.
|
31.2*
|
Rule
13a-14(a) Certification of Principal Financial
Officer.
|
32.1*
|
Section
1350 Certification of Chief Executive Officer and Controller and
Chief
Accounting Officer.
|
*
|
filed
herewith
|
LML
PAYMENT SYSTEMS INC.
|
|
/s/
Richard R. Schulz
|
|
Richard
R. Schulz
|
|
Controller
and Chief Accounting Officer
|
|
(Duly
Authorized Officer and Chief Accounting Officer)
|
|
November
8, 2006
|