UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
Form
10-Q
[X]QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For
the Quarterly Period Ended December 31, 2008
OR
[]TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For
the Transition Period from ________ to ________
Commission
File Number: 0-13959
LML
PAYMENT SYSTEMS INC.
(Exact
name of registrant as specified in its charter)
|
Yukon
Territory
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###-##-####
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|
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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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1680-1140
West Pender Street
Vancouver,
British Columbia
Canada V6E
4G1
(Address
of principal executive offices) (Zip Code)
Registrant's
Telephone Number, Including Area Code: (604) 689-4440
Indicate
by check mark whether the registrant: (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes [X] No [ ]
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See definition of “large accelerated filer,” “accelerated
filer” and “smaller reporting company” in Rule 12b-2 of the Exchange
Act. (Check one):
Large
Accelerated Filed
[ ] Accelerated
Filer
[ ] Non-Accelerated
Filer [ ] Smaller
Reporting Company [X]
(Do not
check if a smaller reporting company)
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).Yes []No [X]
The
number of shares of the registrant's Common Stock outstanding as of February 3,
2009, was 27,116,408.
FORM
10-Q
FOR
THE QUARTERLY PERIOD ENDED DECEMBER 31, 2008
INDEX
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Page
Number
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PART
I.
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FINANCIAL
INFORMATION
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Item
1.
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1
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1
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2
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3
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4
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5
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Item
2.
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16
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Item
3.
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25
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Item
4.
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25
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PART
II.
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26
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Item
1.
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26
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Item
1A.
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26
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Item
6.
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27
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28
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In this
Quarterly Report on Form 10-Q, unless otherwise indicated, all dollar amounts
are expressed in United States Dollars.
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PART I.
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FINANCIAL
INFORMATION
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LML
PAYMENT SYSTEMS INC.
CONSOLIDATED
BALANCE SHEETS
(In
U.S. Dollars, except as noted below)
(Unaudited)
|
December
31, 2008
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March
31, 2008
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|||||||
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ASSETS
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||||||||
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Current
Assets
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||||||||
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Cash
and cash equivalents
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$ | 6,034,854 | $ | 9,749,768 | ||||
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Funds
held for merchants (Note 6)
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2,536,110 | 5,833,617 | ||||||
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Restricted
cash
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125,000 | 250,000 | ||||||
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Accounts
receivable, less allowances of $32,168 and $32,168,
respectively
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554,919 | 719,301 | ||||||
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Prepaid
expenses
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299,163 | 273,751 | ||||||
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Total
current assets
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9,550,046 | 16,826,437 | ||||||
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Property
and equipment, net
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241,713 | 246,828 | ||||||
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Patents,
net
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664,586 | 788,473 | ||||||
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Restricted
cash
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129,488 | 153,619 | ||||||
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Other
assets
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21,954 | 23,247 | ||||||
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Goodwill
(Note 7)
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17,874,202 | 15,903,077 | ||||||
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Intangible
assets, net
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5,329,275 | 5,700,637 | ||||||
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TOTAL
ASSETS
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$ | 33,811,264 | $ | 39,642,318 | ||||
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LIABILITIES
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||||||||
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Current
Liabilities
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||||||||
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Accounts
payable
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$ | 622,319 | $ | 1,745,679 | ||||
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Accrued
liabilities
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798,088 | 648,661 | ||||||
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Corporate
taxes payable
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21,180 | 573,240 | ||||||
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Funds
due to merchants (Note 6)
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2,536,110 | 5,833,617 | ||||||
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Current
portion of obligations under capital lease
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201,357 | 203,366 | ||||||
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Current
portion of promissory notes
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2,134,647 | 2,731,923 | ||||||
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Current
portion of deferred revenue
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1,287,897 | 1,448,921 | ||||||
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Total
current liabilities
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7,601,598 | 13,185,407 | ||||||
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Obligations
under capital lease
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17,379 | 177,573 | ||||||
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Promissory
notes
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- | 2,435,460 | ||||||
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Deferred
revenue
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3,649,567 | 4,606,379 | ||||||
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TOTAL
LIABILITIES
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11,268,544 | 20,404,819 | ||||||
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Commitments
and Contingencies (Note 9)
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||||||||
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SHAREHOLDERS'
EQUITY
|
||||||||
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Capital
Stock
|
||||||||
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Class
A, preferred stock, CAD $1.00 par value, 150,000,000 shares authorized,
issuable in series, none issued or outstanding
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- | - | ||||||
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Class
B, preferred stock, CAD $1.00 par value, 150,000,000 shares authorized,
issuable in series, none issued or outstanding
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- | - | ||||||
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Common
shares, no par value, 100,000,000 shares authorized, 27,116,408 and
26,341,832 issued and outstanding, respectively
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50,039,568 | 48,071,980 | ||||||
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Accumulated
other comprehensive loss
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(4,714 | ) | (19,046 | ) | ||||
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Contributed
surplus
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6,414,360 | 5,391,187 | ||||||
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Deficit
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(33,906,494 | ) | (34,206,622 | ) | ||||
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Total
shareholders' equity
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22,542,720 | 19,237,499 | ||||||
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TOTAL
LIABILITIES AND SHAREHOLDERS' EQUITY
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$ | 33,811,264 | $ | 39,642,318 | ||||
See
accompanying notes to the unaudited consolidated financial
statements.
LML
PAYMENT SYSTEMS INC.
(In
U.S. Dollars, except share data)
(Unaudited)
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Three
Months Ended
December
31
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Nine
Months Ended
December
31
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|||||||||||||||
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2008
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2007
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2008
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2007
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|||||||||||||
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REVENUE
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$ | 3,037,241 | $ | 3,397,810 | $ | 9,301,687 | $ | 8,036,074 | ||||||||
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COST
OF REVENUE (includes stock-based compensation (“s.b.c.”) expense of
$37,464 for three months ended December 31, 2008 (three months ended
December 31, 2007 - $11,158) and $113,066 for nine months ended December
31, 2008 (nine months ended December 31, 2007 - $30,654))
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1,560,421 | 1,517,211 | 4,578,445 | 3,327,587 | ||||||||||||
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GROSS
PROFIT (excludes amortization and depreciation expense)
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1,476,820 | 1,880,599 | 4,723,242 | 4,708,487 | ||||||||||||
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OPERATING
EXPENSES
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||||||||||||||||
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General
and administrative (includes s.b.c. expense of $274,296 for three months
ended December 31, 2008 (three months ended December 31, 2007 - $217,507)
and $871,254 for nine months ended December 31, 2008 (nine months ended
December 31, 2007- $451,526))
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962,910 | 1,419,302 | 3,211,025 | 3,736,187 | ||||||||||||
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Sales
and marketing (includes s.b.c. expense of $765 for three months ended
December 31, 2008 (three months ended December 31, 2007 - $1,463) and
$2,286 for nine months ended December 31, 2008 (nine months ended December
31, 2007 - $1,463))
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77,149 | 44,847 | 237,715 | 161,539 | ||||||||||||
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Product
development and enhancement (includes s.b.c. expense of $12,233 for three
months ended December 31, 2008 (three months ended December 31, 2007 -
$11,701) and $36,567 for nine months ended December 31, 2008 (nine months
ended December 31, 2007 - $11,701))
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58,279 | 61,459 | 197,589 | 114,093 | ||||||||||||
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Amortization
and depreciation
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197,102 | 382,617 | 589,654 | 643,870 | ||||||||||||
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INCOME
BEFORE OTHER INCOME (EXPENSES) AND INCOME TAXES
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181,380 | (27,626 | ) | 487,259 | 52,798 | |||||||||||
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Foreign exchange gain
(loss)
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281,682 | 562 | 380,650 | (426,535 | ) | |||||||||||
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Other income
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10,833 | 9,084 | 29,808 | 28,626 | ||||||||||||
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Gain on sale of
assets
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- | - | 864 | 1,700 | ||||||||||||
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Interest income
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58,750 | 110,691 | 202,719 | 347,794 | ||||||||||||
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Interest
expense
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(45,269 | ) | (116,788 | ) | (204,154 | ) | (246,955 | ) | ||||||||
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INCOME (LOSS)
BEFORE INCOME TAXES
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487,376 | (24,077 | ) | 897,146 | (242,572 | ) | ||||||||||
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Income taxes
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206,074 | 203,972 | 597,018 | 414,865 | ||||||||||||
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NET
INCOME (LOSS)
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281,302 | (228,049 | ) | 300,128 | (657,437 | ) | ||||||||||
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DEFICIT,
beginning of period
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(34,187,796 | ) | (32,415,182 | ) | (34,206,622 | ) | (31,985,794 | ) | ||||||||
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DEFICIT,
end of period
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$ | (33,906,494 | ) | $ | (32,643,231 | ) | $ | (33,906,494 | ) | $ | (32,643,231 | ) | ||||
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EARNINGS
(LOSS) PER SHARE, basic and diluted
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$ | 0.01 | $ | (0.01 | ) | $ | 0.01 | $ | (0.03 | ) | ||||||
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WEIGHTED
AVERAGE SHARES OUTSTANDING
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||||||||||||||||
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Basic
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27,116,408 | 22,341,280 | 26,741,795 | 21,814,759 | ||||||||||||
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Diluted
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27,116,408 | 22,341,280 | 26,741,795 | 21,814,759 | ||||||||||||
See
accompanying notes to the unaudited consolidated financial
statements.
LML
PAYMENT SYSTEMS INC.
(In
U.S. Dollars)
(Unaudited)
|
Three
Months Ended
December
31
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Nine
Months Ended
December
31
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|||||||||||||||
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2008
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2007
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2008
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2007
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|||||||||||||
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Net
income (loss)
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$ | 281,302 | $ | (228,049 | ) | $ | 300,128 | $ | (657,437 | ) | ||||||
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Unrealized
foreign exchange gain (loss) on translation of self- sustaining
operations
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782 | (2,555 | ) | 14,332 | 26,232 | |||||||||||
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Comprehensive
income (loss)
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$ | 282,084 | $ | (230,604 | ) | $ | 314,460 | $ | (631,205 | ) | ||||||
See
accompanying notes to the unaudited consolidated financial
statements.
LML
PAYMENT SYSTEMS INC.
(In
U.S. Dollars)
(Unaudited)
|
Three
Months Ended
December
31
|
Nine
Months Ended
December
31
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|||||||||||||||
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2008
|
2007
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2008
|
2007
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|||||||||||||
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Operating
Activities:
|
||||||||||||||||
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Net
income (loss)
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$ | 281,302 | $ | (228,049 | ) | $ | 300,128 | $ | (657,437 | ) | ||||||
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Adjustments
to reconcile net income (loss) to net cash provided by (used in) operating
activities
|
||||||||||||||||
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Amortization and
depreciation
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197,102 | 382,617 | 589,654 | 643,870 | ||||||||||||
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Gain on sale
of assets
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- | - | (864 | ) | (1,700 | ) | ||||||||||
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Stock-based
compensation
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324,759 | 241,829 | 1,023,173 | 495,344 | ||||||||||||
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Stock-based compensation –
future income taxes
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- | - | - | 11,185 | ||||||||||||
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Unrealized foreign exchange
(gain) loss
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(302,231 | ) | 17,242 | (298,891 | ) | 355,118 | ||||||||||
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Changes
in non-cash operating working capital
|
||||||||||||||||
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Restricted
cash
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- | - | 125,000 | - | ||||||||||||
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Accounts
receivable
|
1,217 | 175,270 | 136,826 | (15,645 | ) | |||||||||||
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Prepaid
expenses
|
(21,094 | ) | 14,862 | (31,127 | ) | 131,494 | ||||||||||
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Other
assets
|
- | (263 | ) | - | (8,753 | ) | ||||||||||
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Accounts
payable and accrued liabilities
|
31,649 | (264,932 | ) | (801,937 | ) | (625,169 | ) | |||||||||
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Corporate
taxes payable
|
55,872 | 327,881 | (517,121 | ) | 454,799 | |||||||||||
|
Deferred
revenue
|
(348,875 | ) | (414,804 | ) | (1,108,374 | ) | (1,044,079 | ) | ||||||||
|
Net
cash provided by (used in) operating activities
|
219,701 | 251,653 | (583,533 | ) | (260,973 | ) | ||||||||||
|
Investing
Activities:
|
||||||||||||||||
|
Acquisition
of Beanstream, net of cash acquired
|
- | (3,403,680 | ) | - | (7,375,068 | ) | ||||||||||
|
Acquisition
of property and equipment
|
(16,744 | ) | (6,723 | ) | (106,147 | ) | (113,646 | ) | ||||||||
|
Proceeds
from disposal of equipment
|
- | - | 5,500 | 1,700 | ||||||||||||
|
Development
of patents
|
- | (2,066 | ) | (1,652 | ) | (10,004 | ) | |||||||||
|
Net
cash used in investing activities
|
(16,744 | ) | (3,412,469 | ) | (102,299 | ) | (7,497,018 | ) | ||||||||
|
Financing
Activities:
|
||||||||||||||||
|
Payments
on capital leases
|
(48,939 | ) | (91,509 | ) | (142,335 | ) | (268,583 | ) | ||||||||
|
Payment
on promissory notes
|
- | - | (2,843,974 | ) | - | |||||||||||
|
Share
capital financing costs
|
- | - | (3,537 | ) | - | |||||||||||
|
Proceeds
from exercise of stock options
|
- | - | - | 77,438 | ||||||||||||
|
Net
cash used in financing activities
|
(48,939 | ) | (91,509 | ) | (2,989,846 | ) | (191,145 | ) | ||||||||
|
Effects
of foreign exchange rate changes on cash and cash
equivalents
|
(54,565 | ) | (59,272 | ) | (39,236 | ) | 244,514 | |||||||||
|
INCREASE (DECREASE)
IN CASH AND CASH EQUIVALENTS
|
99,453 | (3,311,597 | ) | (3,714,914 | ) | (7,704,622 | ) | |||||||||
|
Cash
and cash equivalents, beginning of period
|
5,935,401 | 5,769,983 | 9,749,768 | 10,163,008 | ||||||||||||
|
Cash
and cash equivalents, end of period
|
$ | 6,034,854 | $ | 2,458,386 | $ | 6,034,854 | $ | 2,458,386 | ||||||||
|
Supplemental
disclosure of cash flow information
|
||||||||||||||||
|
Interest
paid
|
$ | 4,581 | $ | 4,292 | $ | 411,171 | $ | 43,041 | ||||||||
|
Taxes
paid
|
$ | 201,476 | $ | 14,063 | $ | 1,173,893 | $ | 42,449 | ||||||||
|
Non-cash
investing and financing transactions not included in cash
flows:
|
||||||||||||||||
|
Issuance
of common shares pursuant to earn-out provision
|
$ | - | $ | - | $ | 1,971,125 | $ | - | ||||||||
See
accompanying notes to the unaudited consolidated financial
statements.
LML
PAYMENT SYSTEMS INC.
(unaudited)
1. Basis
of Presentation
The
consolidated balance sheet as of December 31, 2008, the consolidated statements
of operations and deficit and comprehensive income for the three and nine months
ended December 31, 2008 and 2007 and the consolidated statements of cash flows
for the three and nine months ended December 31, 2008 and 2007, of LML Payment
Systems Inc. and its subsidiaries (collectively, the “Corporation”) are
unaudited. In the opinion of management, all adjustments necessary for a fair
presentation of such financial statements are included herein. Other than those
discussed in the notes below, such adjustments consist only of normal recurring
items. Interim results are not necessarily indicative of results for a full
year. The Corporation's consolidated balance sheet as of March 31, 2008, was
derived from audited financial statements. The Corporation's consolidated
financial statements and notes are presented in accordance with generally
accepted accounting principles in Canada for interim financial information and
in accordance with the instructions for Form 10-Q and Article 10 of Regulation
S-X, and do not contain certain information included in the Corporation's
audited consolidated annual financial statements and notes. Unless otherwise
noted, the accounting policies of the Corporation are unchanged from the
Corporation’s annual audited consolidated financial statements contained in the
Corporation's Annual Report on Form 10-K for the fiscal year ended March 31,
2008. The consolidated financial statements and notes appearing in this report
should be read in conjunction with the Corporation's audited consolidated
financial statements and related notes thereto, together with management's
discussion and analysis of financial condition and results of operations,
contained in the Corporation's Annual Report on Form 10-K for the fiscal year
ended March 31, 2008, as filed with the Securities and Exchange Commission on
June 19, 2008 (file no. 0-13959).
These
consolidated financial statements include the accounts of the Corporation and
its wholly owned subsidiaries as set out below. All significant
inter-company balances and transactions have been eliminated on
consolidation.
CANADA
Legacy
Promotions Inc.
Beanstream
Internet Commerce Inc. (“Beanstream”) *
UNITED
STATES
LHTW
Properties Inc.
LML
Corp.
LML
Patent Corp.
LML
Payment Systems Corp.
*
Effective June 30, 2007, the Corporation completed the acquisition of
Beanstream. The consolidated balance sheet as of December 31, 2008 and the
consolidated statements of operations and deficit, comprehensive income and cash
flow for the three and nine months ended December 31, 2008 and 2007 include the
accounts of Beanstream since its acquisition by the Corporation on June 30,
2007.
Comparative
amounts
Comparative
amounts have been reclassified to conform to the basis of presentation adopted
in the current period. Specifically, the Corporation has chosen to
present the costs of revenue and operating expenses separately with effect April
1, 2008.
|
2.
|
Adoption
of New Accounting Policies
|
Goodwill
and Intangible Assets
In
January 2008, the Canadian Institute of Chartered Accountants (“CICA”) issued
Section 3064, “Goodwill and Intangible Assets”, which will replace Section 3062,
“Goodwill and Other Intangible Assets”. The standard provides
guidance on the recognition of intangible assets in accordance with the
definition of an asset and the criteria for asset recognition as well as
clarifying the application of the concept of matching revenues and expenses,
whether these assets are separately acquired or internally developed. Section
1000 – Financial Statement Concepts was also amended to provide consistency with
this new standard. As of April 1, 2008, the Corporation has early
adopted this standard as is allowed under the transitional provision. Adoption
of these new standards has had no significant impact on the Corporation’s
consolidated financial statements.
|
2.
|
Adoption
of New Accounting Policies
(continued)
|
Financial
instruments – disclosure and presentation
Commencing
April 1, 2008 the Corporation has adopted CICA Handbook Section 3862, Financial
Instruments - Disclosure and 3863, Financial Instruments – Presentation. The
adoption of these sections have resulted in incremental
disclosures, with an emphasis on risks associated with both
recognized and unrecognized financial instruments to which an entity is exposed
during the period and at the balance sheet date, and how an entity manages those
risks.
Inventories
Commencing
April 1, 2008 the Corporation has adopted CICA Handbook Section 3031,
Inventories. The new recommendations provide more guidance on the measurement
and disclosure requirements for inventories; specifically, the new
recommendations allow the reversals of previous write-downs to net realizable
value where there is a subsequent increase in the value of
inventories. Due to the limited nature of the Corporation’s
inventories, adoption of this new section has resulted in no significant changes
to the financial statements.
Capital
Management
Commencing
April 1, 2008, the Corporation adopted CICA Handbook Section 1535, Capital
Disclosures. The Corporation’s objectives when managing capital are
to safeguard its ability to support its normal operating requirements on an
ongoing basis, so that it can continue to provide returns for shareholders and
benefits for other stakeholders, and to provide an adequate return to
shareholders by pricing products and services commensurately with the level of
risk.
The
capital structure of the Corporation consists of obligations under a capital
lease, promissory notes, and equity comprising issued capital, contributed
surplus and deficit. The Corporation manages its capital structure and makes
adjustments to it in light of economic conditions. The Corporation, upon
approval from its Board of Directors, will balance its overall capital structure
through new share issues or by undertaking other activities as deemed
appropriate under the specific circumstances.
The
Corporation is not subject to any externally imposed capital requirements.
The Corporation’s overall strategy with respect to capital risk management
remains unchanged from the year ended March 31, 2008.
|
3.
|
Recent
accounting pronouncements
|
International
Financial Reporting Standards
The
Accounting Standards Board of the CICA announced that Canadian Generally
Accepted Accounting Principles (“CDN GAAP”) for publicly accountable enterprises
will be replaced with International Financial Reporting Standards (“IFRS”) for
fiscal years beginning on or after January 1, 2011. Early conversion to IFRS for
fiscal years beginning on or after January 1, 2009 may also be
permitted.
The
Corporation plans to begin reporting under IFRS at the commencement of its 2012
fiscal year, including interim periods.
Implementing
IFRS will have an impact on accounting, financial reporting and supporting IT
systems and processes. It may also have an impact on taxes, contractual
commitments involving CDN GAAP based clauses, long-term employee compensation
plans and performance metrics. Accordingly, when the Corporation develops its
IFRS implementation plan, it will have to include measures to provide extensive
training to key finance personnel, to review contracts and agreements and to
increase the level of awareness and knowledge amongst management, the Board of
Directors and Audit Committee. Additional resources may be engaged to ensure the
timely conversion to IFRS.
Recent
accounting pronouncements affecting the Corporation’s financial reporting are
summarized below.
|
a)
|
In
January 2009, the CICA issued CICA HB Section 1582, “Business
Combinations”. This Section, which replaces the former Section 1581,
“Business Combinations”, establishes standards for the accounting for a
business combination. It provides the Canadian equivalent to IFRS 3,
"Business Combinations".
|
The
Section applies prospectively to business combinations for which the acquisition
date is on or after the beginning of the first annual reporting period beginning
on or after January 1, 2011. Earlier application is permitted. If an entity
applies this Section before January 1, 2011, it shall disclose that fact and
apply Section 1601, “Consolidated Financial Statements”, and Section 1602,
“Non-controlling interests”, at the same time.
|
3.
|
Recent
accounting pronouncements
(continued)
|
The
Corporation does not intend to early apply this section. The impact
on the Corporation’s financial statements from the application of this section
will depend upon the nature of any future business acquisitions made by the
Corporation after application.
|
b)
|
In
January 2009, the CICA issued CICA HB Section 1601, “Consolidated
Financial Statements”. This section, which, together with new Section
1602, replaces the former Section 1600, “Consolidated Financial
Statements”, establishes standards for the preparation of consolidated
financial statements.
|
The
Section applies to interim and annual consolidated financial statements relating
to fiscal years beginning on or after January 1, 2011. Earlier adoption is
permitted as of the beginning of a fiscal year. An entity adopting this Section
for a fiscal year beginning before January 1, 2011 also adopts, Section
1582,”Business Combinations”, and Section 1602, “Non-controlling
interests”.
The
Corporation does not intend to early apply this section. The impact
on the Corporation’s financial statements from the application of this section
will depend upon the nature of any future business acquisitions made by the
Corporation after application.
|
c)
|
In
January 2009, the CICA issued CICA HB Section 1602, “Non-controlling
interests”. This new Section establishes standards for accounting for a
non-controlling interest in a subsidiary in consolidated financial
statements subsequent to a business combination. It is equivalent to the
corresponding provisions of International Accounting Standard 27,
“Consolidated and Separate Financial
Statements”.
|
This
Section applies to interim and annual consolidated financial statements relating
to fiscal years beginning on or after January 1, 2011. Earlier adoption is
permitted as of the beginning of a fiscal year. An entity adopting this Section
for a fiscal year beginning before January 1, 2011 also adopts Section
1582,”Business Combinations”, and Section 1601, “Consolidated Financial
Statements”.
The
Corporation does not intend to early apply this section. The impact
on the Corporations’ financial statements from the application of this section
will depend upon the nature of any future business acquisitions made by the
Corporation after application.
|
4.
|
Foreign
currency translation
|
The
Corporation’s functional (except as described below) and reporting currency is
the United States dollar. Monetary assets and liabilities denominated
in foreign currencies are translated in accordance with CICA Handbook Section
1651, "Foreign Currency Translation" (which is consistent with Statement of
Financial Accounting Standards (“SFAS”) No. 52 (“SFAS No. 52”) Foreign Currency
Translation) using the exchange rate prevailing at the balance sheet
date. Average rates for the period are used to translate the
Corporation’s revenue and expenses. Gains and losses arising on
settlement of foreign currency denominated transactions or balances are included
in the determination of income.
The
functional currency of the Corporation’s self-sustaining Beanstream subsidiary
is the Canadian dollar. Beanstream’s financial statements are
translated to United States dollars under the current rate method in accordance
with CICA 1651 and SFAS No. 52. Beanstream’s assets and liabilities
are translated into U.S. dollars at rates of exchange in effect at the balance
sheet date. Average rates for the period are used to translate
Beanstream’s revenues and expenses. The cumulative translation
adjustment is reported as a component of accumulated other comprehensive
income.
|
5.
|
Financial
instruments
|
|
a)
|
The
Corporation classifies its cash and cash equivalents, funds held for
merchants and restricted cash as held-for-trading. Accounts receivable are
classified as loans and receivables. Accounts payable and accrued
liabilities, funds due to merchants, and promissory notes are classified
as other financial liabilities, all of which are measured at amortized
costs.
|
Carrying
value and fair value of financial assets and liabilities as at December 31, 2008
are summarized as follows:
|
Carrying
Value
|
Fair
Value
|
||||||||
|
Held-for-Trading
|
$ | 8,825,452 | $ | 8,825,452 | |||||
|
Loans
and receivables
|
554,919 | 554,919 | |||||||
|
Held-to-maturity
|
- | - | |||||||
|
Available-for-sale
|
- | - | |||||||
|
Other
financial liabilities
|
6,091,164 | 6,091,164 | |||||||
Management
reviewed all significant financial instruments held by the Corporation and
determined that no material differences between fair value and carrying value
existed as at the reporting date.
|
b)
|
Restricted
cash
|
Under the
terms of the processing agreement with one of the Corporation’s processing
banks, the Corporation pledged a deposit of $125,000 (March 31, 2008 - $250,000)
against charge back losses. Non-current restricted cash represents
funds held by First Data Loan Company as security for the Corporation’s merchant
accounts.
|
c)
|
Market
Risk
|
Currency
Risk
The
Corporation’s functional currency is the U.S. dollar. The Corporation
is exposed to foreign exchange risk from fluctuations in exchange rates between
the U.S. dollar and the Canadian dollar. Significant losses may occur
due to significant balances of cash and cash equivalents and short-term
investments held in Canadian dollars that may be affected negatively by an
increase in the value of the U.S. dollar as compared to the Canadian dollar. The
Corporation has not hedged its exposure to foreign currency
fluctuations.
As at
December 31, 2008 and March 31, 2008, the Corporation is exposed to currency
risk through its cash and restricted cash, accounts receivable, accounts
payable, accrued liabilities, corporate taxes payable and promissory notes
denominated in Canadian dollars:
|
December
31, 2008
|
March
31, 2008
|
||||||||
|
Cash
and restricted cash
|
$ | 337,632 | $ | 145,968 | |||||
|
Accounts
receivable
|
297,597 | 156,871 | |||||||
|
Accounts
payable
|
199,863 | 380,326 | |||||||
|
Accrued
liabilities
|
506,015 | 517,338 | |||||||
|
Corporate
taxes payable
|
21,180 | 573,240 | |||||||
|
Promissory
notes
|
2,134,647 | 5,167,383 | |||||||
Based on
the above foreign currency exposure as at December 31, 2008 and March 31, 2008
and assuming all other variables remain constant, a 10% depreciation or
appreciation of the Canadian dollar against the U.S. dollar would result in an
increase/decrease of $222,643 and $218,692 respectively, in the Corporation’s
foreign currency gain.
|
5.
|
Financial
instruments (continued)
|
Interest
Rate Risk
Interest
rate risk is the risk that the fair value or future cash flows of a financial
instrument will fluctuate because of changes in market interest rates. The
Corporation’s exposure to interest rate risk is limited as its cash and payment
processing accounts are short-term in nature and its promissory notes bear a
fixed exchange rate.
Other
Price Risk
Other
price risk is the risk that the future value or cash flows of a financial
instrument will fluctuate because of changes in market prices. Exposure to price
risk is low as the Corporation’s cash management policy is to invest excess cash
in high grade/low risk investments over short periods of time.
|
|
d)
|
Credit
Risk
|
Credit
risk is the risk of a financial loss if a customer or counter party to a
financial instrument fails to meet its contractual obligations. Any credit risk
exposure on cash balances is considered negligible as the Corporation places
funds or deposits only with major established banks in the countries in which it
has payment processing services. The credit risk arises primarily from the
Corporation’s trade receivables from customers.
On a
regular basis, the Corporation reviews the collectability of its trade accounts
receivable and establishes an allowance for doubtful accounts based on its best
estimates of any potentially uncollectible accounts. As at December 31, 2008,
the balance of the Corporation’s allowance for doubtful accounts was $32,168
(March 31, 2008 - $32,168). The Corporation has good credit history with its
customers and the amounts due from them are received as expected.
Pursuant
to their respective terms, accounts receivable are aged as follows at December
31, 2008:
|
0-30
days
|
$ | 176,534 | |||
|
31-60
days
|
80,432 | ||||
|
61-90
days
|
78,220 | ||||
|
Over
90 days due *
|
219,733 | ||||
| $ | 554,919 |
|
|
*
Included in this balance are $118,648 in sales tax receivables of which
$54,556 relates to amounts outstanding from the 2007 Texas sales tax audit
and $64,092 relate to amounts owed on Canadian goods and services tax
receivables. The Corporation believes all of these amounts are
collectible.
|
Concentration
of credit risk
During
the three months ended December 31, 2008, revenue from the Corporation’s two
largest customers amounted to approximately 30.4% of total revenue (2007–35.1%)
consisting of approximately 19.3% of total revenue for the Corporation’s largest
customer (2007 – 17.3%) and 11.1% for the Corporation’s second largest customer
(2007 – 17.7%). Revenue from the Corporation’s two largest customers
amounted to approximately $922,990 (2007 – $1,191,119) consisting of
approximately $585,500 (2007 – $588,807) for the Corporation’s largest customer
and $337,490 for the Corporation’s second largest customer (2007 –
$602,312). The Corporation is economically dependent on revenue from
these customers.
During
the nine months ended December 31, 2008, revenue from the Corporation’s two
largest customers amounted to approximately 29.8% of total revenue (2007 –
35.4%) consisting of approximately 18.5% of total revenue for the Corporation’s
largest customer (2007 – 13.8%;) and 11.3% for the Corporation’s second largest
customer (2007 – 21.6%). Revenue from the Corporation’s two largest customers
amounted to approximately $2,771,817 (2007 – $2,848,300) consisting of
approximately $1,717,463 (2007 – $1,109,372) for the Corporation’s largest
customer and $1,054,354 for the Corporation’s second largest customer (2007 –
$1,738,928). The Corporation is economically dependent on revenue
from these customers.
|
|
e)
|
Liquidity
Risk
|
Liquidity
risk is the risk that the Corporation will not be able to meet its financial
obligations as they are due. The Corporation continuously monitors actual and
forecasted cash flows to ensure, as far as possible, there is sufficient working
capital to satisfy its operating requirements.
6. Cash
and cash equivalents and funds held for /due to merchants
Cash
and cash equivalents
At
December 31, 2008, the Corporation held $6,034,854 (March
31, 2008 – $9,749,768) in cash and cash equivalents. Included in this
balance was $756,000 in cash and cash equivalents used as continuing collateral
security with the Corporation’s primary financial institution (March 31, 2008 –
$1.1 million).
Funds
held for/due to merchants
At
December 31, 2008, Beanstream held funds due to merchants in the amount of
$2,536,110
(March 31, 2008 – $5,833,617). The funds held for/due to merchants comprised the
following:
|
·
|
funds
held in reserves calculated by applying contractually determined
percentages of the gross transaction volume for a hold-back period of up
to six months;
|
|
·
|
funds
from transaction payment processing which may be held for up to
approximately fifteen days, the actual number of days depends on the
contractual terms with each merchant;
and
|
|
·
|
funds
from payroll/pre-authorized debit services provided on behalf of
merchants, which may be held for up to approximately two
days.
|
|
7.
|
Goodwill
and Intangible Assets
|
|
|
On
June 30, 2008, additional contingent consideration became payable under
the Beanstream arrangement agreement. Pursuant to the agreement
and due to Beanstream meeting certain performance related criteria,
additional consideration from the Corporation became issuable equal in
value to CAD$2,000,000. The payment of this additional
consideration resulted in an increase in the purchase price, and goodwill
recorded.
|
|
Original
goodwill recognized on acquisition
|
$ | 15,903,077 | |||
|
Additional
contingent consideration (CAD $2,000,000)
|
1,971,125 | ||||
|
Goodwill
related to Beanstream acquisition on December 31, 2008
|
$ | 17,874,202 |
The
Corporation had the right to pay the additional consideration in cash or through
the issuance of shares of its common stock with such shares to be issued at a
price equal to the volume weighted average of the closing price of one share of
the Corporation’s common stock as reported on the NASDAQ Stock Exchange during
the ten trading days immediately before the Earn-out record
date. During the nine months ended December 31, 2008, the Corporation
elected to pay such additional consideration through the issuance of 774,576
shares of its common stock to the former Beanstream shareholders.
The
Corporation performs an impairment assessment annually on March 31 or more
frequently if events or circumstances indicate that the asset might be
impaired.
To test
for impairment in the Corporation’s goodwill, management compares the fair value
of the reporting unit with its carrying amount. If the carrying amount of the
reporting unit exceeds its fair value, determined based on expected discounted
cash flows, the reporting unit’s goodwill may not be recoverable. An impairment
charge is recorded if the carrying amount of allocated goodwill exceeds its
implied fair value.
To test
for impairment of indefinite life intangibles, management compares the fair
value of the indefinite life intangible asset with its carrying
amount. When the carrying amount exceeds its fair value, an
impairment charge is recorded for such excess.
In the
case of definite life intangible assets, these items are regularly reviewed for
impairment whenever events or changes in circumstances indicate that their
carrying values may not be recoverable. Impairment is assessed by comparing the
carrying amount of an asset with its expected future net undiscounted cash flows
from use plus its residual value. If such an asset is considered impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the asset exceeds its fair value, generally determined on a discounted
cash flow basis.
|
7.
|
Goodwill
and Intangible Assets
(continued)
|
As of
December 31, 2008, the price per share of the Corporation’s common stock
declined by 75% from the closing price per share on March 31,
2008. As a result, the Corporation is currently assessing whether or
not any of its long-lived assets, including intangible assets and goodwill, have
suffered impairment. Part of the Corporation’s assessment involves, among other
things, analysis of its recent trend of revenue growth and improved
profitability, and the belief that there were no other events or circumstances
during the three and nine months ended December 31, 2008 that would indicate
potential impairment of long-lived assets, including intangible assets and
goodwill. The Corporation intends to perform and complete this
assessment during the fourth quarter of the Corporation’s 2009 fiscal year.
Impairment losses, if any, are reflected in the consolidated statements of
operations.
Intangible
assets related to the acquisition of Beanstream include partner relationships,
merchant contracts, existing technology and trade names. The partner
relationships and merchant contracts are amortized over ten
years. The existing technology is amortized over five
years. Trade names are considered indefinite life intangible assets
and as such are not amortized.
|
8.
|
Stock-based
compensation
|
The
Corporation accounts for all stock options issued based on their fair value as
required by the CICA Section 3870 which corresponds to the Financial Accounting
Standard Board’s (“FASB”) SFAS No. 123(R), “Share-Based
Payment”. Prior to the adoption of this accounting standard, the
Corporation did not record the fair value of stock options issued, rather, it
provided pro-forma disclosure of the effect of applying the fair value based
method to stock options issued to directors, officers and
employees.
During
the nine months ended December 31, 2008, the Corporation did not grant any stock
options under the Corporation’s 1996 Stock Option plan or its 1998 Stock
Incentive Plan. The total stock-based compensation expense for the three months
ended December 31, 2008 is $324,759 (2007 – $241,829) and for the nine months
ended December 31, 2008 is $1,023,173 (2007 – $495,344).
During
the three months ended December 31, 2007, the Corporation granted 950,000 stock
options under the Corporation’s 1996 Stock Option Plan and 130,000 stock options
under the 1998 Stock Incentive Plan (25,000 stock options were granted under the
Corporation’s 1996 Stock Option Plan and 50,000 stock options under the 1998
Stock Incentive Plan during the three months ended September 30, 2007; no stock
options were granted during the three months ended June 30, 2007). The weighted
average grant date fair value for the stock options granted during the three
months ended December 31, 2007 is $1.82 per stock option ($1.47 per stock option
for stock options granted during the three months ended September 30, 2007). The
fair value of these stock options was estimated at the date of grant using a
Black-Scholes option-pricing model with the following assumptions:
Risk-free
interest rate of 4.1% and 4.5%;
Expected
volatility of 55.3% and 54.3%;
Expected
life of the stock options of 4 years; and
No
dividend yields.
|
9.
|
Commitments
and Contingencies
|
All
commitments and contingencies remain unchanged from the Corporation’s audited
consolidated financial statements contained in the Corporation's Annual Report
on Form 10-K for the fiscal year ended March 31, 2008 except as noted
below:
During
the fiscal year ended March 31, 2007 a subsidiary of the Corporation received
notification that it had been named in a class-action lawsuit filed in the
United States District Court, Eastern District, Marshall Division, Texas,
alleging that numerous defendants, including the subsidiary of the Corporation,
violated the Driver’s Privacy Protection Act regulating the use of personal
information such as driver’s license numbers and home addresses contained in
motor vehicle records held by motor vehicle departments, by not having a
permissible use in obtaining the State of Texas’ entire database of names,
addresses and other personal information. During the nine
months ended December 31, 2008, the complaint was dismissed with prejudice.
During the three months ended December 31, 2008, the plaintiffs appealed this
decision. The subsidiary of the Corporation believes that these
allegations are without merit and does not expect them to have a material
adverse effect on its results of operations, financial position or
liquidity.
|
9.
|
Commitments
and Contingencies (continued)
|
During
the three months ended December 31, 2008, a subsidiary of the Corporation filed
a patent infringement lawsuit in the U.S. district court for the Eastern
District of Texas against multiple financial institutions operating in the
United States. In the suit, the subsidiary of the Corporation alleges
that the defendants infringe U.S. Patent No. RE40,220. The subsidiary of the
Corporation is seeking damages, injunctive and other relief for the alleged
infringement of these patents.
|
10.
|
Industry
and geographic segments
|
Based
upon the way financial information is provided to the Corporation’s Chief
Executive Officer for use in evaluating allocation of resources and assessing
performance of the business, the Corporation reports its operations in three
distinct operating segments, described as follows:
Transactions
Payment Processing (“TPP”) operations involve financial payment processing,
authentication and risk management services provided by
Beanstream. The services are accessible via the Internet and are
offered in an application service provider (“ASP”) model.
Intellectual
Property Licensing (“IPL”) operations involve licensing the Corporation’s
intellectual property estate, which includes five U.S. patents describing
electronic check processing methods.
Check
Processing/Software Licensing (“CP/SL”) operations involve primary and secondary
check collection including electronic check re-presentment (“RCK”) and software
licensing.
Within
these segments, performance is measured based on revenue, cost of revenue,
general and administrative, sales and marketing, product development and
enhancement, and amortization and depreciation as well as income before income
taxes from each segment. There are no transactions between segments. The
Corporation does not generally allocate corporate or centralized marketing and
general and administrative expenses to its business unit segments because these
activities are managed separately from the business units. Asset information by
operating segment is not reported to or reviewed by the Corporation’s Chief
Executive Officer, and therefore the Corporation has not disclosed asset
information for each operating segment.
Financial
information for each reportable segment for the three and nine months ended
December 31, 2008 and 2007 was as follows:
|
10.
|
Industry
and geographic segments (continued)
|
|
Three
Months Ended
|
TPP
|
IPL
|
CP/SL
|
Reconciling
|
Consolidated
|
||||||||||||||||
|
December
31, 2008
|
Canada
|
U.S.
|
U.S.
|
Items
|
Total
|
||||||||||||||||
|
Total
Revenue
|
$ | 1,948,747 | $ | 431,354 | $ | 657,140 | $ | - | $ | 3,037,241 | |||||||||||
|
Revenue:
major customers
|
585,500 | 305,556 | 337,490 | - | 1,228,546 | ||||||||||||||||
|
Cost
of revenue
|
1,090,901 | - | 432,056 | 37,464 | 1 | 1,560,421 | |||||||||||||||
|
General
and administrative
|
145,262 | 2,208 | 111,825 | 703,615 | 2 | 962,910 | |||||||||||||||
|
Sales
and marketing
|
70,928 | - | 5,456 | 765 | 1 | 77,149 | |||||||||||||||
|
Product
development and enhancement
|
46,046 | - | - | 12,233 | 1 | 58,279 | |||||||||||||||
|
Amortization
and depreciation
|
10,729 | 42,057 | 15,481 | 128,835 | 3 | 197,102 | |||||||||||||||
|
Income
(losses) before income taxes
|
698,119 | 398,738 | 82,409 | (691,890 | ) | 4 | 487,376 | ||||||||||||||
|
Three
Months Ended
|
TPP
|
IPL
|
CP/SL
|
Reconciling
|
Consolidated
|
||||||||||||||||
|
December
31, 2007
|
Canada
|
U.S.
|
U.S.
|
Items
|
Total
|
||||||||||||||||
|
Total
Revenue
|
$ | 1,984,025 | $ | 415,314 | $ | 998,471 | $ | - | $ | 3,397,810 | |||||||||||
|
Revenue:
major customers
|
588,807 | 305,556 | 602,312 | - | 1,496,675 | ||||||||||||||||
|
Cost
of revenue
|
1,079,666 | - | 426,387 | 11,158 | 1 | 1,517,211 | |||||||||||||||
|
General
and administrative
|
134,229 | 8,573 | 582,690 | 693,810 | 2 | 1,419,302 | |||||||||||||||
|
Sales
and marketing
|
36,915 | - | 6,469 | 1,463 | 1 | 44,847 | |||||||||||||||
|
Product
development and enhancement
|
49,758 | - | - | 11,701 | 1 | 61,459 | |||||||||||||||
|
Amortization and
depreciation
|
5,657 | 41,858 | 84,972 | 250,130 | 3 | 382,617 | |||||||||||||||
|
Income
(losses) before income taxes
|
805,888 | 375,765 | (104,925 | ) | (1,100,805 | ) | 4 | (24,077 | ) | ||||||||||||
|
Nine
Months Ended
|
TPP
|
IPL
|
CP/SL
|
Reconciling
|
Consolidated
|
||||||||||||||||
|
December
31, 2008
|
Canada
|
U.S.
|
U.S.
|
Items
|
Total
|
||||||||||||||||
|
Total
Revenue
|
$ | 5,873,518 | $ | 1,271,948 | $ | 2,156,221 | $ | - | $ | 9,301,687 | |||||||||||
|
Revenue:
major customers
|
1,717,463 | 916,668 | 1,054,354 | - | 3,688,485 | ||||||||||||||||
|
Cost
of revenue
|
3,223,944 | - | 1,241,436 | 113,065 | 1 | 4,578,445 | |||||||||||||||
|
General
and administrative
|
457,461 | 14,378 | 467,197 | 2,271,989 | 2 | 3,211,025 | |||||||||||||||
|
Sales
and marketing
|
216,393 | - | 19,036 | 2,286 | 1 | 237,715 | |||||||||||||||
|
Product
development and enhancement
|
161,023 | - | - | 36,566 | 1 | 197,589 | |||||||||||||||
|
Amortization
and depreciation
|
31,617 | 126,143 | 48,378 | 383,516 | 3 | 589,654 | |||||||||||||||
|
Income
(losses) before income taxes
|
1,937,396 | 1,165,728 | 361,073 | (2,567,051 | ) | 4 | 897,146 | ||||||||||||||
|
Nine
Months Ended
|
TPP
|
IPL
|
CP/SL
|
Reconciling
|
Consolidated
|
|||||||||||||||||
|
December
31, 2007
|
Canada
|
U.S.
|
U.S.
|
Items
|
Total
|
|||||||||||||||||
|
Total
Revenue
|
$ | 3,693,900 | $ | 1,259,669 | $ | 3,082,505 | $ | - | $ | 8,036,074 | ||||||||||||
|
Revenue:
major customers
|
1,109,371 | 916,668 | 1,738,928 | - | 3,764,967 | |||||||||||||||||
|
Cost
of revenue
|
1,937,585 | - | 1,359,347 | 30,655 | 1 | 3,327,587 | ||||||||||||||||
|
General
and administrative
|
231,183 | 12,728 | 1,742,034 | 1,750,242 | 2 | 3,736,187 | ||||||||||||||||
|
Sales
and marketing
|
87,591 | - | 72,485 | 1,463 | 1 | 161,539 | ||||||||||||||||
|
Product
development and enhancement
|
102,392 | - | - | 11,701 | 1 | 114,093 | ||||||||||||||||
|
Amortization and
depreciation
|
10,975 | 125,183 | 253,473 | 254,239 | 3 | 643,870 | ||||||||||||||||
|
Income
(losses) before income taxes
|
1,478,916 | 1,239,418 | (345,128 | ) | (2,615,778 | ) | 4 | (242,572 | ) | |||||||||||||
|
1
|
Represents
stock-based compensation expense.
|
|
2
|
Represents
stock-based compensation expense and other unallocated corporate or
centralized marketing, general and administrative
expenses.
|
|
3
|
Represents
amortization and depreciation included in the unallocated corporate or
centralized marketing, general and administrative
expenses.
|
|
4
|
Represents
income (losses) included in the unallocated corporate or centralized
marketing, general and administrative
expenses.
|
|
11.
|
Reconciliation
of United States to Canadian Generally Accepted Accounting
Principles
|
These
consolidated financial statements are prepared using CDN GAAP which does not
differ materially from United States generally accepted accounting principles
(“U.S. GAAP”) with respect to the accounting policies and disclosures in these
consolidated financial statements except as set out below:
|
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)
|
Income
Taxes
|
In June
2006, the FASB issued FASB Interpretation No. 48 “Accounting for Uncertainty in
Income Taxes - an interpretation of FASB Statement 109” (“FIN 48”). This
interpretation clarifies the recognition threshold and measurement of a tax
position taken or expected to be taken on a tax return, and requires expanded
disclosure with respect to the uncertainty in income taxes. FIN 48 also provides
guidance on de-recognition, classification, interest and penalties, accounting
in interim periods, disclosures, and transition. FIN 48 is effective for fiscal
years beginning after December 15, 2006.
The
Corporation adopted the provisions of FIN 48 on April 1, 2007. No cumulative
effect adjustment to the April 1, 2007 balance of the Corporation’s deficit was
required upon the implementation of FIN 48. As of the date of adoption there
were no unrecognized tax benefits. Under current conditions and expectations,
management does not foresee any significant changes in unrecognized tax benefits
that would have a material impact on the Corporation’s consolidated financial
statements.
|
c)
|
Changes
in U.S. GAAP
|
Recent
accounting pronouncements affecting the Corporation’s financial reporting under
U.S. GAAP are summarized below.
|
(i)
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In September 2006,
the FASB issued SFAS No. 157, “Fair Value Measurements”, which
defines fair value, establishes a framework for measuring fair value in
generally accepted accounting principles, and expands disclosures about
fair value measurements. SFAS 157 is effective for fiscal years
beginning after November 15, 2007 except as amended by FASB Staff Position
(“FSP”) SFAS 157-2 which is effective for fiscal years beginning after
November 15, 2008. FSP SFAS 157-2 allows partial deferral of the effective
date of SFAS 157 relating to fair value measurements for non-financial
assets and liabilities that are not measured at fair value on a recurring
basis. SFAS
No. 157 does not require any new fair value measurements, but
provides guidance on how to measure fair value by providing a fair value
hierarchy used to classify the source of the information. As of
April 1, 2008, the Corporation adopted SFAS 157, except as it
applies to the non-financial assets and non-financial liabilities subject
to FSP SFAS 157-2. The Corporation will adopt the remaining portion of
SFAS 157 in the first quarter of fiscal 2010 and does not expect the
adoption to have a material impact on the consolidated financial
statements and the accompanying
notes.
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(ii)
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As
at April 1, 2008, the Corporation adopted SFAS No. 159, “The Fair
Value Option for Financial Assets and Financial Liabilities”. SFAS
No. 159 provides companies with an option to report selected
financial assets and liabilities at fair value. The objective of SFAS
No. 159 is to reduce both complexity in accounting for financial
instruments and the volatility in earnings caused by measuring related
assets and liabilities differently. U.S. GAAP has required different
measurement attributes for different assets and liabilities that can
create artificial volatility in earnings. FASB has indicated it believes
that SFAS No. 159 helps to mitigate this type of accounting- induced
volatility by enabling companies to report related assets and liabilities
at fair value, which would likely reduce the need for companies to comply
with detailed rules for hedge accounting. SFAS No. 159 also
establishes presentation and disclosure requirements designed to
facilitate comparisons between companies that choose different measurement
attributes for similar types of assets and liabilities. For example, SFAS
No. 159 requires companies to provide additional information that
will help investors and other users of financial statements to more easily
understand the effect of the company’s choice to use fair value on its
earnings. It also requires entities to display the fair value of those
assets and liabilities for which the company has chosen to use fair value
on the face of the balance sheet. SFAS No. 159 does not eliminate
disclosure requirements included in other accounting standards, including
requirements for disclosures about fair value measurements included in
SFAS No. 157, , and SFAS No. 107, “Disclosures about Fair Value
of Financial Instruments”. The Corporation did
not elect to use the fair value measurement options of this
standard. Adoption of this standard has not had a
significant impact on the Corporation’s consolidated financial
statements.
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11.
|
Reconciliation
of United States to Canadian Generally Accepted Accounting Principles
(continued)
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(iii)
|
In
December 2007, the FASB issued SFAS No. 141(R) “Business
Combinations”. SFAS No. 141(R) replaces SFAS No. 141 “Business
Combinations”. SFAS No. 141(R) is broader in scope than SFAS No.
141 which applied only to business combinations in which control was
obtained by transferring consideration. SFAS No. 141(R) applies to all
transactions and other events in which one entity obtains control over one
or more other businesses. SFAS No. 141(R) is effective for fiscal years
beginning after December 15, 2008 and the Corporation will adopt the
standard in the first quarter of fiscal 2010 and its effects on future
periods will depend on the nature and significance of any business
combinations subject to this
statement.
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(iv)
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In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interest
in Consolidated Financial Statements”, an amendment of
ARB No. 51. The new statement changes the accounting for, and
the financial statement presentation of, noncontrolling equity interests
in a consolidated subsidiary.
|
SFAS No.
160 replaces the existing minority-interest provisions of Accounting Research
Bulletin 51, Consolidated Financial Statements, by defining a new
term—noncontrolling interests—to replace what were previously called minority interests. The new
standard establishes noncontrolling interests as a component of the equity of a
consolidated entity.
The
underlying principle of the new standard is that both the controlling interest
and the noncontrolling interests are part of the equity of a single economic
entity: the consolidated reporting entity. Classifying noncontrolling interests
as a component of consolidated equity is a change from the current practice of
treating minority interests as a mezzanine item between liabilities and equity
or as a liability. The change affects both the accounting and financial
reporting for noncontrolling interests in a consolidated
subsidiary.
SFAS No.
160 is effective for fiscal years and interim periods within those fiscal years
beginning on or after December 15, 2008. Early adoption is prohibited. The
impact of adopting SFAS No. 160 will be dependent on the future business
combinations that the Corporation may pursue after its effective
date.
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(v)
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In
March 2008, the FASB issued SFAS No. 161 "Disclosures about Derivative
Instruments and Hedging Activities - an amendment of FASB Statement No.
133". This standard requires enhanced disclosures regarding derivatives
and hedging activities, including: (a) the manner in which an entity uses
derivative instruments; (b) the manner in which derivative instruments and
related hedged items are accounted for under SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities;" and (c) the effect of
derivative instruments and related hedged items on an entity's financial
position, financial performance, and cash flows. SFAS No. 161 is effective
for financial statements issued for fiscal years and interim periods
beginning after November 15, 2008. The Corporation is in the process of
evaluating the impact, if any, that the adoption of SFAS No. 161 will have
on its consolidated financial
statements.
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ITEM
2. MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Unless
the context otherwise requires, references in this report on Form 10-Q to the
“Corporation”, “LML”, “we”, “us” or “our” refer to LML Payment Systems Inc. and
its direct and indirect subsidiaries. LML Payment Systems Inc.'s
direct subsidiaries include Beanstream Internet Commerce Inc., LML Corp., Legacy
Promotions Inc. and LHTW Properties Inc. LML Corp.'s subsidiaries are LML Patent
Corp. and LML Payment Systems Corp. Unless otherwise specified herein, all
references herein to dollars or “$” are to U.S. Dollars.
The
following discussion and analysis should be read in conjunction with the audited
consolidated financial statements and related notes thereto contained in our
Annual Report on Form 10-K for the fiscal year ended March 31, 2008, filed with
the Securities and Exchange Commission on June 19, 2008 (file no.
0-13959). We believe that all necessary adjustments (consisting only
of normal recurring adjustments) have been included in the amounts stated below
to present fairly the following quarterly information. Quarterly
operating results have varied significantly in the past and can be expected to
vary in the future. Results of operations for any particular quarter
are not necessarily indicative of results of operations for a full
year.
Forward
Looking Information
All
statements other than statements of historical fact contained herein are
forward-looking statements. Forward-looking statements generally are
accompanied by words such as “anticipate,” “believe,” “estimate,” “intend,”
“project,” “potential” or “expect” or similar statements. The
forward-looking statements were prepared on the basis of certain assumptions
which relate, among other things, to the demand for and cost of marketing our
services, the volume and total value of transactions processed by merchants
utilizing our services, the technological adaptation of electronic check
conversion end-users, the renewal of material contracts in our business, our
ability to anticipate and respond to technological changes, particularly with
respect to financial payments and e-commerce, in a highly competitive industry
characterized by rapid technological change and rapid rates of product
obsolescence, our ability to develop and market new product enhancements and new
products and services that respond to technological change or evolving industry
standards, no unanticipated developments relating to previously disclosed
lawsuits against us, and the cost of protecting our intellectual
property. Even if the assumptions on which the forward-looking
statements are based prove accurate and appropriate, the actual results of our
operations in the future may vary widely due to technological change, increased
competition, new government regulation or intervention in the industry, general
economic conditions, other risks described in our filings with the Securities
and Exchange Commission. Accordingly, the actual results of our
operations in the future may vary widely from the forward-looking statements
included herein. All forward-looking statements included herein are
expressly qualified in their entirety by the cautionary statements in this
paragraph.
Overview
LML
Payment Systems Inc. is a financial payment processor operating three separate
lines of business: transaction payment processing, intellectual
property licensing and check processing/software licensing. Our transaction
payment processing services consist predominantly of Internet-based services;
while our check processing services involve predominantly traditional and
electronic check processing and recovery services that do not utilize the
Internet. We believe that electronic transaction processing services,
including Internet-based payment services, will continue to be used in greater
frequency than traditional payment methods, such as checks and cash, and we are
therefore focusing on these services. With the completion of our 2007
acquisition of Beanstream (which had a strong Internet-based product and service
offering), we expect that our transaction payment processing services will be
our principal line of business for the foreseeable future, while our other lines
of business (including the electronic check processing services that we have
historically relied on for a significant source of revenue) will become less
important to our overall service offerings and less significant to
the financial performance of our corporation.
TPP
Segment
Our
Transaction Payment Processing Operations (“TPP”) involve financial payment
processing, authentication and risk management services. We provide a service
that acts as a bank-neutral interface between businesses and consumers
processing financial or authentication transactions. Our transaction payment
processing services are accessible via the Internet and are offered in an
application service provider (“ASP”) model. We focus on product development,
project management and third tier technical support of our products and services
and rely primarily on strategic business partners to sell and market our
products and services. In some instances, our transaction payment processing
services and payment products are integrated into third party products in target
vertical markets. Our revenues are derived from one-time set-up fees, monthly
gateway fees, and transaction fees paid to us by merchants. Transaction fees are
recognized in the period in which the transaction occurs. Gateway fees are
monthly subscription fees charged to our merchant customers for the use of our
payment gateway. Gateway fees are recognized in the period in which the service
is provided. Set-up fees represent one-time charges for initiating our
processing services. Although these fees are generally paid at the commencement
of the agreement, they are recognized ratably over the estimated average life of
the merchant relationship, which is determined through a series of analyses of
active and deactivated merchants. We currently service a merchant base of over
6,000 customers primarily in Canada.
IPL
Segment
Our
Intellectual Property Licensing Operations ("IPL") involve licensing our
intellectual property estate, which includes five U.S. patents describing
electronic check processing methods. When we provide clients licenses
to our intellectual property estate, we typically earn revenue or other income
from ongoing royalty fees and, in some cases, release fees for potential past
infringement. In some instances we also earn revenue from license agreements
that provide for the payment of contractually determined paid-up license fees to
us in consideration for the grant of a non-exclusive, retroactive and future
license to our intellectual property estate and in other instances, where
license agreements include multiple element arrangements, we may defer this
revenue and recognize the revenue ratably over the license term.
CP/SL
Segment
Our Check
Processing/Software Licensing Operations ("CP/SL") involve primary and secondary
check collection including electronic check re-presentment (RCK) and software
licensing. Our check processing services, which are provided in the
United States, include return check management services such as traditional and
electronic recovery services to retail clients. When we provide
return check management services, we typically receive revenue when we are
successful at recovering the principal amount of the original transaction on
behalf of the client. In some instances we also earn a percentage of
the principal amount and in other instances our secondary recovery services
provide for us to earn additional fees when legal action is
required.
In
connection with our continuing focus on electronic transaction processing
services, including Internet-based services, and our gradual de-emphasis of
CP/SL services, during the fourth quarter of our prior fiscal year 2008, we
ceased providing certain CP/SL services, including electronic check
verification.
We also
provide mainframe payment processing software modules and rights to use our
intellectual property to retailers and other payment processors. When
we provide mainframe based payment software modules we typically earn revenue by
way of a fixed software license fee. In some instances we also earn
revenue by way of royalties that are typically based upon a fixed sale price or
on a usage or transaction basis. We provide our check processing services from
our office location in Wichita, Kansas.
Within
these segments, performance is measured based on revenue, factoring in costs and
expenses including amortization and depreciation as well as earnings from
operations before income taxes from each segment. There are no transactions
between segments. We do not generally allocate corporate or centralized
marketing and general and administrative expenses to our business unit segments
because these activities are managed separately from the business units. Asset
information by operating segment is not reported to or reviewed by our Chief
Executive Officer, and therefore we have not disclosed asset information for
each operating segment.
General
Market Conditions
We are
currently assessing the possible impacts on our operations and financial
condition of various scenarios, including the potential for a prolonged global
recession. In particular, we continue to evaluate how a prolonged global
recession might impact future revenues generated by our operating segments. We
anticipate we will be continuing to evaluate how a prolonged global recession
and the related distresses in the credit and capital markets will impact
existing business customers of ours, many of whom are small businesses and how a
prolonged global recession may impact consumer spending and other business
transactions. Also unknown is the potential effect a prolonged recession may
have on our competitors, channel partners and end customers. In general, for the
three and nine months ended December 31, 2008, we do not believe any of our
operating segments experienced significant negative effects attributable to the
current financial crisis and distress in the credit and capital
markets.
Given the
foregoing uncertainties, we continue to re-assess our stated strategies and
investment plans. All statements made herein of the previously stated plans or
the “current” plan or expectation of such should be considered in light of the
potential effects discussed in the preceding paragraph. While the magnitude of
any change in plans, including investment plans, cannot be predicted at this
time, it is likely that some adjustments will be necessary due to the global
recession and the lack of liquidity in financial markets.
We
operate in a highly competitive business environment that has many risks.
Critical risk factors that affect, or may affect us and the financial payment
processing industry include changes in the level of spending by and transactions
being processed for our customers and the ongoing credit worthiness and
financial solvency of our customers. We believe that a prolonged
global recession could affect consumer confidence and spending patterns which we
believe could have a negative impact on the business of our customers and
ultimately have a material adverse effect on our results of operations and
financial condition. A full discussion of each of these risk factors (in
addition to several other risk factors) is disclosed in Item 1A in our
Annual Report on Form 10-K for the year ended March 31, 2008, as filed with
the Securities and Exchange Commission on June 19, 2008 (file no.
0-13959).
Results
of Operations
Three
months ended December 31, 2008 compared to three months ended December 31,
2007
Revenue
Total
revenue for the three months ended December 31, 2008 was approximately
$3,037,000, a decrease of approximately $361,000 or approximately 10.6% from
total revenue of approximately $3,398,000 for the three months ended December
31, 2007. This decrease is primarily attributable to a decrease in
revenue from the CP/SL segment of approximately $341,000. During the fourth
quarter of our fiscal year 2008, we ceased providing certain CP/SL segment
services, including check verification, and, consequently, expected a
corresponding decrease in CP/SL segment revenue.
During
the three months ended December 30, 2008 revenue from and associated with our
two largest customers amounted to approximately 30.4% of total revenue as
compared to approximately 35.1% of total revenue for the three months ended
December 31, 2007. We
are economically dependent on these customers and the temporary or permanent
loss of these customers might have a material adverse effect on our results of
operations and financial condition.
TPP
Segment
Revenue
pertaining to our TPP segment consists of one-time set-up fees, monthly gateway
fees, and transaction fees. TPP segment revenue for the three months
ended December 31, 2008 was approximately $1,949,000, a decrease of
approximately $35,000 or approximately 1.8% from TPP segment revenue of
approximately $1,984,000 for the three months ended December 31, 2007. The
decrease in TPP segment revenue was primarily attributable to a weakening
Canadian dollar in relation to the US dollar which decreased approximately 23%
from the prior fiscal third quarter. Since a significant amount of our TPP
segment revenue originates in Canadian dollars, the conversion of this revenue
to US dollars was at a reduced exchange rate when compared to the prior fiscal
third quarter conversion. TPP segment revenue originating in Canadian dollars
was approximately $1,287,000CAD for the three months ended December 31, 2008
compared to $1,046,000CAD for the three months ended December 31, 2007, an
increase of approximately $241,000CAD or approximately
23%. Transaction fees for the three months ended December 31, 2008
were approximately $1,588,000 compared to approximately $1,641,000 for the three
months ended December 31, 2007, a decrease of approximately $53,000 or
approximately 3.2%; the amortized portion of one-time set-up fees recognized was
approximately $35,000 for the three months ended December 31, 2008 compared to
approximately $31,000 for the three months ended December 31, 2007, an increase
of approximately $4,000 or approximately 12.9%; and monthly gateway fees for the
three months ended December 31, 2008 were approximately $243,000 compared to
approximately $237,000 for the three months ended December 31, 2007, an increase
of approximately $6,000 or approximately 2.5%.
IPL
Segment
Revenue
from licensing our patented intellectual property increased by approximately
$16,000 or approximately 3.9% from approximately $415,000 for the three months
ended December 31, 2007 to approximately $431,000 for the three months ended
December 31, 2008. The increase was primarily attributable to an increase in our
running royalties provided by our existing licensees. The licensing revenue of
approximately $431,000 consists of: (i) approximately $306,000, net of legal
fees, representing the recognized current period portion of deferred revenue
from one granted license; and (ii) approximately $125,000 related to aggregate
licenses providing running royalties and other paid-up license
fees.
CP/SL
Segment
CP/SL
segment revenue for the three months ended December 31, 2008 was approximately
$657,000, a decrease of approximately 34.2% from CP/SL segment revenue of
approximately $998,000 for the three months ended December 31, 2007. The
decrease in CP/SL segment revenue was primarily attributable to a reduction in
revenue from electronic check verification and primary and secondary check
collections business.
Revenue
from electronic check verification was $nil for the three months ended December
31, 2008 as compared to approximately $87,000 for the three months ended
December 31, 2007. This is primarily attributable to our no longer providing
electronic check verification services during the three months ended December
31, 2008. During the fourth quarter of our fiscal year 2008, we ceased providing
certain CP/SL segment services, including electronic check
verification.
Revenue
from our primary check collections business decreased approximately 24% from
approximately $154,000 for the three months ended December 31, 2007 to
approximately $117,000 for the three months ended December 31, 2008. Revenue
from our secondary check collections business decreased approximately 12.2% from
approximately $580,000 for the three months ended December 31, 2007 to
approximately $509,000 for the three months ended December 31, 2008. The
decrease in primary and secondary check collections business is primarily
attributable to our cessation of providing certain CP/SL segment services,
including check verification during the fourth quarter of our fiscal year 2008.
Historically, certain customers may have received bundled payment processing
services from us including electronic check verification and returned check
management services. Consequently, the cessation of electronic check
verification services to these specific customers could also cause a reduction
in primary and secondary check collections business.
Revenue
from royalties received from CheckFree Corporation (“CheckFree”) pertaining to
their marketing of the PEP+ reACH™ product was approximately $nil for the three
months ended December 31, 2008, versus approximately $72,000 for the three
months ended December 31, 2007. During the three months ended
December 31, 2008, CheckFree received no commissionable revenue pertaining to
their marketing of the PEP+ reACH™ product. Consequently we received no
royalties and future royalties are dependent on CheckFree successfully marketing
and earning revenue from the PEP+ reACH™ product. CheckFree is not
contractually required to market the PEP+ reACH™ product and no assurances can
be made that CheckFree will actively market the PEP+ reACH™ product in the
future.
Cost
of Revenue
Cost of
revenue consists primarily of costs incurred by the TPP and CP/SL operating
segments. These costs are incurred in the delivery of e-commerce
transaction services, customer service support and check collection services and
include processing and interchange fees paid, other third-party fees, personnel
costs and associated benefits and stock-based compensation.
Cost of
revenue increased from approximately $1,517,000 for the three months ended
December 31, 2007, to approximately $1,560,000 for the three months ended
December 31, 2008, an increase of approximately $43,000 or approximately 2.8%.
The increase was primarily attributable to an increase in our TPP segment cost
of revenue of approximately $11,000 or approximately 1.0% from approximately
$1,080,000 for the three months ended December 31, 2007 to approximately
$1,091,000 for the three months ended December 31, 2008 and an increase in stock
based compensation allocated to cost of revenue of approximately $26,000, from
approximately $11,000 for the three months ended December 31, 2007 to
approximately $37,000 for the three months ended December 31, 2008.
General
and administrative expenses
General and administrative
expenses consist primarily of personnel costs including associated stock-based
compensation and employment benefits, office facilities, travel, public
relations and professional service fees, which include legal fees, audit fees,
SEC compliance costs and costs related to compliance with the Sarbanes-Oxley Act
of 2002. General and administrative expenses also include the costs of corporate
and support functions including our executive leadership and administration
groups, finance, information technology, legal, human resources and corporate
communication costs.
General
and administrative expenses decreased to approximately $963,000 from
approximately $1,419,000 for the three months ended December 31, 2008 and 2007,
respectively, a decrease of approximately $456,000 or approximately 32.1%.
Included in general and administrative expenses are TPP segment expenses of
approximately $145,000 for the three months ended December 31, 2008 an increase
of approximately $11,000 compared to general and administrative expenses of
approximately $134,000 for the three months ended December 31, 2007. CP/SL
segment expenses decreased to approximately $112,000 from approximately $583,000
for the three months ended December 31, 2008 and 2007 respectively, a
decrease of approximately $471,000 or approximately 80.8%. The decrease in CP/SL
segment general and administrative expenses is primarily attributable to the
consolidation of our four data centers into two which was completed during the
fourth quarter of our fiscal year 2008. Also included in general and
administrative expenses are stock-based compensation expenses of approximately
$274,000 for the three months ended December 31, 2008 compared to stock-based
compensation expenses of approximately $218,000 for the three months ended
December 31, 2007, an increase of approximately $56,000 or approximately
25.7%.
Sales
and Marketing
Sales and
marketing expenses consist primarily of costs related to sales and marketing
activities. These expenses include salaries, sales commissions, sales operations
and other personnel-related expenses, travel and related expenses, trade shows,
costs of lead generation, consulting fees and costs of marketing programs, such
as internet, print and direct mail advertising costs.
Sales and
marketing expense increased to approximately $77,000 from approximately $45,000
for the three months ended December 31, 2008 and 2007, respectively, an increase
of approximately 71.1%. The increase is primarily attributable to increased
personnel costs resulting in an increase of approximately $34,000 in TPP segment
sales and marketing costs from approximately $37,000 for the three months ended
December 31, 2007 to approximately $71,000 for the three months ended December
31, 2008.
Product
Development and Enhancement
Product
development and enhancement expenses consist primarily of compensation and
related costs of employees engaged in the research, design and development of
new services and in the improvement and enhancement of the existing product and
service lines.
Product development and
enhancement expenses were approximately $58,000 for the three months
ended December 31, 2008 as compared to approximately $61,000 for the three
months ended December 31, 2007. The decrease is primarily attributable to a
decrease in TPP segment product development and enhancement expenses of
approximately $4,000 from approximately $50,000 for the three months ended
December 31, 2007 to approximately $46,000 for the three months ended December
31, 2008.
Amortization
and Depreciation
Amortization
and depreciation decreased to approximately $197,000 from approximately $383,000
for the three months ended December 31, 2008 and 2007, respectively, a decrease
of approximately $186,000 or approximately 48.6%. The decrease is primarily
attributable to the amortization of intangible assets associated with the
Beanstream acquisition of approximately $248,000 for the three months ended
December 31, 2007 compared to approximately $124,000 for the three months ended
December 31, 2008.
Interest
income
Interest
income decreased to approximately $59,000 from approximately $111,000 for the
three months ended December 31, 2008 and 2007, respectively. The decrease in
interest income was primarily attributable to a decrease in the amount of cash
invested.
Interest
expense
Interest
expense decreased to approximately $45,000 from approximately $117,000 for the
three months ended December 31, 2008 and 2007, respectively. The decrease is
primarily attributable to the reduction of the amount owing on the promissory
notes relating to the acquisition of Beanstream. We made the first installment
payment on the notes of approximately $2,844,000 during the first quarter of
fiscal 2009.
Net
income
Net
income increased approximately $509,000 from a net loss of approximately
$228,000 for the three months ended December 31, 2007 to a net income of
approximately $281,000 for the three months ended December 31,
2008.
Basic and
diluted earnings per share were both approximately $0.01 for the three months
ended December 31, 2008, as compared to basic and diluted loss per share of
approximately $0.01 for the three months ended December 31,
2007.
Results
of Operations
Nine
months ended December 31, 2008 compared to nine months ended December 31,
2007
Revenue
Total
revenue for the nine months ended December 31, 2008 was approximately
$9,302,000, an increase of approximately $1,266,000 or approximately 15.8% from
total revenue of approximately $8,036,000 for the nine months ended December 31,
2007. This increase is primarily attributable to the increase in our
TPP segment revenue of approximately $2,180,000 from approximately $3,694,000
for the nine months ended December 31, 2007 to approximately $5,874,000 for the
nine months ended December 31, 2008. This increase was primarily attributable to
our inclusion of nine months worth of TPP segment revenue for the nine months
ended December 31, 2008 as compared to the inclusion of six months worth of TPP
segment revenue for the nine months ended December 31, 2007 resulting from our
acquisition of Beanstream on June 30, 2007. Our TPP segment now makes up
approximately 63% of our total revenue.
During
the nine months ended December 31, 2008 revenue from and associated with our two
largest customers amounted to approximately 29.8% of total revenue as compared
to approximately 35.4% of total revenue for the nine months ended December 31,
2007. We
are economically dependent on these customers and the temporary or permanent
loss of these customers might have a material adverse effect on our results of
operations and financial condition.
TPP
Segment
Revenue
pertaining to our TPP segment consists of one-time set-up fees, monthly gateway
fees, and transaction fees. TPP segment revenue for the nine months ended
December 31, 2008 was approximately $5,874,000 as compared to TPP segment
revenue of approximately $3,694,000 for the nine months ended December 31, 2007,
an increase of approximately $2,180,000. Transaction fees for the nine months
ended December 31, 2008 were approximately $4,765,000 compared to transaction
fees of approximately $3,030,000 for the nine months ended December 31, 2007, an
increase of approximately $1,735,000; the amortized portion of one-time set-up
fees recognized was approximately $106,000 for the nine months ended December
31, 2008 compared to one-time set-up fees for the nine months ended December 31,
2007 of approximately $60,000, an increase of approximately $46,000; and monthly
gateway fees for the nine months ended December 31, 2008 were approximately
$741,000 compared to monthly gateway fees for the nine months ended December 31,
2007 of approximately $461,000, an increase of approximately $280,000. These
increases were primarily attributable to our inclusion of nine months worth of
TPP segment revenue for the nine months ended December 31, 2008 as compared to
the inclusion of six months worth of TPP segment revenue for the nine months
ended December 31, 2007 resulting from our acquisition of Beanstream on June 30,
2007.
IPL
Segment
Revenue
from licensing our patented intellectual property increased by approximately
$12,000 or approximately 1% from approximately $1,260,000 for the nine months
ended December 31, 2007 to approximately $1,272,000 for the nine months ended
December 31, 2008. The increase was primarily attributable to
an increase in our running royalties provided by our existing licensees. The
licensing revenue of approximately $1,272,000 consists of: (i) approximately
$918,000, net of legal fees, representing the recognized current period portion
of deferred revenue from one granted license; and (ii) approximately $354,000
related to aggregate licenses providing running royalties and other paid-up
license fees.
CP/SL
Segment
CP/SL
segment revenue for the nine months ended December 31, 2008 was approximately
$2,156,000, a decrease of approximately $927,000 or approximately 30.1% from
CP/SL segment revenue of approximately $3,083,000 for the nine months ended
December 31, 2007. During the fourth quarter of our fiscal year 2008, and as
part of our repositioning effort in this segment, we ceased providing certain
CP/SL segment services, including check verification, and, consequently,
expected a corresponding decrease in CP/SL segment revenue.
Revenue
from electronic check verification was $nil for the nine months ended December
31, 2008 as compared to approximately $277,000 for the nine months ended
December 31, 2007. This decrease is primarily attributable to our no longer
providing electronic check verification services during the nine months ended
December 31, 2008. During the fourth quarter of our fiscal year 2008, we ceased
providing certain CP/SL segment services, including electronic check
verification.
Revenue
from our primary check collections business decreased approximately $94,000 or
approximately 20.3% from approximately $462,000 for the nine months ended
December 31, 2007 to approximately $368,000 for the nine months ended December
31, 2008. Revenue from our secondary check collections business decreased
approximately $151,000 or approximately 8.7% from approximately $1,737,000 for
the nine months ended December 31, 2007 to approximately $1,586,000 for the nine
months ended December 31, 2008. The decrease in primary and secondary check
collections business is primarily attributable to our cessation of providing
certain CP/SL segment services, including check verification during the fourth
quarter of our fiscal year 2008. Historically, certain customers may have
received bundled payment processing services from us including electronic check
verification and returned check management services. Consequently, the cessation
of electronic check verification services to these specific customers could also
cause a reduction in primary and secondary check collections
business.
Revenue
from royalties received from CheckFree pertaining to their marketing of the PEP+
reACH™ product was approximately $43,000 for the nine months ended December 31,
2008, versus approximately $297,000 for the nine months ended December 31,
2007. Future royalties are dependent upon the continued successful
marketing by CheckFree of the PEP+ reACH™ product. CheckFree is not
contractually required to market the PEP+ reACH™ product and no assurances can
be made that CheckFree will actively market the PEP+ reACH™ product in the
future.
Cost
of Revenue
Cost of
revenue consists primarily of costs incurred by the TPP and CP/SL operating
segments. These costs are incurred in the delivery of e-commerce
transaction services, customer service support and check collection services and
include processing and interchange fees paid, other third-party fees, personnel
costs and associated benefits and stock-based compensation.
Cost of
revenue increased from approximately $3,328,000 for the nine months ended
December 31, 2007, to approximately $4,578,000 for the nine months ended
December 31, 2008, an increase of approximately $1,250,000. This increase was
primarily attributable to our inclusion of nine months worth of TPP segment cost
of revenue totaling approximately $3,224,000 for the nine months ended December
31, 2008 as compared to the inclusion of six months worth of TPP segment cost of
revenue totaling approximately $1,938,000 for the nine months ended December 31,
2007 resulting from our acquisition of Beanstream on June 30, 2007. CP/SL
segment cost of revenue was approximately $1,241,000 for the nine months ended
December 31, 2008 as compared to approximately $1,359,000 for the nine months
ended December 31, 2007, a decrease in CP/SL segment cost of revenue of
approximately $118,000 or approximately 8.7%.
General
and administrative expenses
General and administrative
expenses consist primarily of personnel costs including associated stock-based
compensation and employment benefits, office facilities, travel, public
relations and professional service fees, which include legal fees, audit fees,
SEC compliance costs and costs related to compliance with the Sarbanes-Oxley Act
of 2002. General and administrative expenses also include the costs of corporate
and support functions including our executive leadership and administration
groups, finance, information technology, legal, human resources and corporate
communication costs.
General
and administrative expenses decreased to approximately $3,211,000 from
approximately $3,736,000 for the nine months ended December 31, 2008 and 2007,
respectively, a decrease of approximately $525,000 or approximately 14.1%.
Included in general and administrative expenses for the nine months ended
December 31, 2008 are TPP segment expenses of approximately $457,000 as compared
to approximately $231,000 for the nine months ended December 31, 2007. The
increase in TPP segment general and administrative expenses was primarily
attributable to our inclusion of nine months worth of TPP segment expenses for
the nine months ended December 31, 2008 as compared to the inclusion of six
months worth of TPP segment expenses for the nine months ended December 31, 2007
resulting from our acquisition of Beanstream on June 30, 2007. CP/SL segment
expenses decreased to approximately $467,000 from approximately $1,742,000 for
the nine months ended December 31, 2008 and 2007 respectively, a decrease of
approximately $1,275,000 or approximately 73.2%. This expected decrease in CP/SL
segment general and administrative expenses is primarily attributable to our
repositioning of this segment, and in particular the consolidation of our four
data centers into two which was completed during the fourth quarter of our
fiscal year 2008. As the data center consolidations took place during our prior
fiscal year’s fourth quarter, we do not anticipate these significant decreases
in CP/SL segment general and administrative expenses to extend past our fourth
quarter of our current fiscal year. Also included in general and administrative
expenses are stock-based compensation expenses of approximately $871,000 for the
nine months ended December 31, 2008 compared to approximately $452,000 for the
nine months ended December 31, 2007, an increase of approximately $419,000 or
approximately 92.7%.
Sales
and Marketing
Sales and
marketing expenses consist primarily of costs related to sales and marketing
activities. These expenses include salaries, sales commissions, sales operations
and other personnel-related expenses, travel and related expenses, trade shows,
costs of lead generation, consulting fees and costs of marketing programs, such
as internet, print and direct mail advertising costs.
Sales and
marketing expense increased to approximately $238,000 from approximately
$162,000 for the nine months ended December 31, 2008 and 2007, respectively, an
increase of approximately $76,000 or approximately 46.9%. The increase is
primarily attributable to an increase in our TPP segment sales and marketing
expenses of approximately $128,000 primarily associated with increased personnel
costs, and partially attributable to our inclusion of nine months worth of TPP
segment sales and marketing expenses for the nine months ended December 31, 2008
as compared to the inclusion of six months worth of TPP segment expenses for the
nine months ended December 31, 2007 resulting from our acquisition of Beanstream
on June 30, 2007.
Product
Development and Enhancement
Product
development and enhancement expenses consist primarily of compensation and
related costs of employees engaged in the research, design and development of
new services and in the improvement and enhancement of the existing product and
service lines.
Product development and
enhancement expenses were approximately $198,000 for the nine months
ended December 31, 2008 as compared to approximately $114,000 for the nine
months ended December 31, 2007. The increase is primarily attributable to an
increase in our TPP segment product development and enhancement expenses of
approximately $84,000 primarily associated with our inclusion of nine months
worth of TPP segment product development and enhancement expenses for the nine
months ended December 31, 2008 as compared to the inclusion of six months worth
of TPP segment expenses for the nine months ended December 31, 2007 resulting
from our acquisition of Beanstream on June 30, 2007.
Amortization
and Depreciation
Amortization
and depreciation decreased to approximately $590,000 from approximately $644,000
for the nine months ended December 31, 2008 and 2007, respectively, a decrease
of approximately 8.4%. The decrease is primarily attributable to the decrease in
amortization in the CP/SL segment of approximately $205,000 from approximately
$253,000 for the nine months ended December 31, 2007 to approximately $48,000
for the nine months ended December 31, 2008 due to the disposition of assets
associated with the closure of the Scottsdale, Arizona office.
Interest
income
Interest
income decreased to approximately $203,000 from approximately $348,000 for the
nine months ended December 31, 2008 and 2007, respectively. The decrease in
interest income was primarily attributable to a decrease in the amount of cash
invested.
Interest
expense
Interest expense decreased
to approximately $204,000 from approximately $247,000 for the nine months ended
December 31, 2008 and 2007, respectively. The decrease is primarily
attributable to the reduction of the amount owing on the promissory notes
relating to the acquisition of Beanstream. We made the first installment payment
on the notes of approximately $2,844,000 during the first quarter of fiscal
2009.
Net
income
Net
income increased approximately $957,000 from a net loss of approximately
$657,000 for the nine months ended December 31, 2007 to a net income of
approximately $300,000 for the nine months ended December 31, 2008.
Basic and
diluted earnings per share were both approximately $0.01 for the nine months
ended December 31, 2008, as compared to basic and diluted loss per share of
approximately $0.03 for the nine months ended December 31, 2007.
Liquidity
and Capital Resources
Our
liquidity and financial position consisted of approximately $1,948,000 in
working capital as of December 31, 2008 compared to approximately $3,641,000 in
working capital as of March 31, 2008. The decrease in working capital was
primarily attributable to the first installment payment of approximately
$2,844,000 (CAD $2,900,000) on the promissory notes relating to the acquisition
of Beanstream. Cash used in operating activities was approximately $584,000 for
the nine months ended December 31, 2008, as compared to approximately $261,000
for the nine months ended December 31, 2007, an increase in cash used in
operating activities of approximately $323,000. The increase in cash used in
operating activities was primarily attributable to decreases in accounts payable
and corporate taxes payable balances as at December 31, 2008. Cash used in
investing activities was approximately $102,000 for the nine months ended
December 31, 2008 as compared to approximately $7,497,000 for the nine months
ended December 31, 2007, a decrease in cash used in investing activities of
approximately $7,395,000. Cash used in investing activities during the nine
months ended December 31, 2007 included approximately $7,375,000 attributable to
the acquisition of Beanstream. Cash used in financing activities was
approximately $2,990,000 for the nine months ended December 31, 2008 as compared
to approximately $191,000 for the nine months ended December 31, 2007, an
increase in cash used in financing activities of approximately $2,799,000. The
increase in cash used in financing activities was primarily due to the first
installment payment of approximately $2,844,000 (CAD$2,900,000) on the
promissory notes relating to the acquisition of Beanstream.
During
the nine months ended December 31, 2008, approximately $1,407,000 in cash was
used to discharge accounts payable, accrued liabilities and corporate taxes
payable. We don’t anticipate this same level of cash outflow or
liabilities over the remaining three months of our fiscal 2009 and, as such, we
anticipate positive cash flows from our operating activities in fiscal
2009.
In light
of our strategic objective of acquiring electronic payment volume across all our
financial payment processing services and strengthening our position as a
financial payment processor (as demonstrated by our acquisition of Beanstream),
our long-term plans may include the potential to strategically acquire
complementary businesses, products or technologies and may also include
instituting actions against other entities who we believe are infringing our
intellectual property. We believe that existing cash and cash
equivalent balances and potential cash flows from operations should satisfy our
long-term cash requirements, however, we may have to raise additional funds for
these purposes, either through equity or debt financing, as
appropriate. There can be no assurance that such financing would be
available on acceptable terms, if at all.
Critical
Accounting Policies
There
have been no changes to our critical accounting policies since March 31, 2008.
For a description of our critical accounting policies, see our Annual Report on
Form 10-K for the year ended March 31, 2008 filed with the Securities and
Exchange Commission on June 19, 2008 (file no. 0-13959).
Contingencies
On March
6, 2007 we received notification that we had been named in a class-action
lawsuit filed in the United States District Court, Eastern District, Marshall
Division, Texas, alleging that numerous defendants, including a subsidiary of
the Corporation, violated the Driver’s Privacy Protection Act regulating the use
of personal information such as driver’s license numbers and home addresses
contained in motor vehicle records held by motor vehicle departments, by not
having a permissible use in obtaining the State of Texas’ entire database of
names, addresses and other personal information. On September 8, 2008, the
complaint was dismissed with prejudice and on October 8, 2008 the plaintiffs
appealed this decision. We believe that these allegations are without
merit and do not expect them to have a material adverse effect on our results of
operations, financial position or liquidity.
On
November 19, 2008, we filed a patent infringement lawsuit in the U.S. district
court for the Eastern District of Texas against multiple financial institutions
operating in the United States. In the suit, we allege that the
defendants infringe U.S. Patent No. RE40,220 and we are seeking damages and
injunctive and other relief for the alleged infringement of these
patents.
In
addition to legal matters as previously reported in our Annual Report filed on
Form 10-K for the year ended March 31, 2008, as filed with the Securities and
Exchange Commission on June 19, 2008 (file no. 0-13959), we are party from time
to time to ordinary litigation incidental to our business, none of which is
expected to have a material adverse effect on our results of operations,
financial position or liquidity.
ITEM
3. QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
From
March 31, 2008 until December 31, 2008, there were no material changes from the
information concerning market risk contained in our Annual Report on Form 10-K
for the year ended March 31, 2008, as filed with the Securities and Exchange
Commission on June 19, 2008 (file no. 0-13959).
ITEM
4. CONTROLS
AND PROCEDURES
An
evaluation of the effectiveness of our disclosure controls and procedures, as
defined in Exchange Act Rule 13a-15(e), was carried out by management with the
participation of the Chief Executive Officer and Chief Accounting Officer as of
the end of the period covered by this Quarterly Report on Form
10-Q. Based on their evaluation, our Chief Executive Officer and
Chief Accounting Officer have concluded that such controls and procedures were
effective as of the end of the period covered by this Quarterly Report on Form
10-Q. As required by Exchange Act Rule 13a-15(d), management, with
the participation of the Chief Executive Officer and Chief Accounting Officer,
also conducted an evaluation of our internal control over financial reporting to
determine whether changes occurred during the quarter ended December 31, 2008
that have materially affected, or are reasonably likely to materially affect,
our internal control over financial reporting. There were no changes
in our internal control over financial reporting during the quarter ended
December 31, 2008 that have materially affected, or are reasonably likely to
materially affect, such internal control over financial
reporting. The Corporation acquired Beanstream on June 30,
2007. Commencing July 1, 2007, the results of operations and cash
flows of Beanstream have been included in the consolidated financial statements
of the Corporation. We have implemented our internal controls over
financial reporting for the acquired business and are in the process of testing
and assessing the effectiveness of the controls. As of and for the
period ended December 31, 2008, Beanstream represented 17.6% of our total
assets, 28.3% of our total liabilities and 63.1% of our net operating revenue in
our consolidated financial statements.
PART
II. OTHER
INFORMATION
ITEM
1. LEGAL
PROCEEDINGS
As
previously reported in our Annual Report on Form 10-K for the year ended March
31, 2008, as filed with the Securities and Exchange Commission on June 19, 2008
(file no. 0-13959), on March 6, 2007 we received notification that we had been
named in a class-action lawsuit filed in the United States District Court,
Eastern District, Marshall Division, Texas, alleging that numerous defendants,
including a subsidiary of the Corporation, violated the Driver’s Privacy
Protection Act regulating the use of personal information such as driver’s
license numbers and home addresses contained in motor vehicle records held by
motor vehicle departments, by not having a permissible use in obtaining the
State of Texas’ entire database of names, addresses and other personal
information. On September 8, 2008, the complaint was dismissed with
prejudice and on October 8, 2008 the plaintiffs appealed this decision. We
believe that these allegations are without merit and do not expect them to have
a material adverse effect on our results of operations, financial position or
liquidity.
On
November 19, 2008, we filed a patent infringement lawsuit in the U.S. district
court for the Eastern District of Texas against multiple financial institutions
operating in the United States. In the suit, we allege that the
defendants infringe U.S. Patent No. RE40,220 and we are seeking damages and
injunctive and other relief for the alleged infringement of these
patents.
In
addition to the legal matters as described herein and as previously reported in
our Annual Report on Form 10-K for the year ended March 31, 2008, as filed with
the Securities and Exchange Commission on June 19, 2008 (file no. 0-13959), we
are party from time to time to ordinary litigation incidental to our business,
none of which is expected to have a material adverse effect on our results of
operations, financial position or liquidity.
ITEM
1A.
RISK FACTORS
Except as
set forth below, there are no material changes to the risk factors as reported
in our annual report on Form 10-K for the fiscal year ended March 31, 2008, as
filed with the Securities and Exchange Commission on June 19, 2008 (file no.
0-13959).
An
economic downturn may have a material adverse effect on our results of
operations, financial position or liquidity.
As the
recent global financial crisis has broadened and intensified, other sectors of
the economy have been adversely impacted and a severe global recession now
appears likely. As a service provider that is dependent upon consumer and
corporate spending, we may face a downturn in revenues as customers process
fewer purchases and payments as a result of job losses, foreclosures,
bankruptcies, reduced access to credit and sharply falling home prices. Any
resulting decreases in customer traffic or average value per transaction will
negatively impact our financial performance.
Additionally,
many of the effects and consequences of the global financial crisis and a
broader global economic downturn are currently unknown; any one or all of them
could potentially have a material adverse effect on our liquidity and capital
resources, including the ability to raise additional capital if needed, or
otherwise negatively impact our business and financial results.
An
economic downturn may result in an impairment of our goodwill and other
intangible assets
As of
December 31, 2008, the price per share of our common stock declined by 75% from
the closing price per share on March 31, 2008. As a result, we are
currently assessing whether or not any of our long-lived assets, including
intangible assets and goodwill, have suffered impairment. Part of our
assessment involves, among other things, our analysis of our recent trend of
revenue growth and improved profitability, and our belief there were no other
events or circumstances during the three and nine months ended December 31, 2008
that would indicate potential impairment of long-lived assets, including
intangible assets and goodwill. We intend to perform and
complete this assessment during the fourth quarter of our 2009 fiscal year.
Impairment losses, if any, are reflected in the consolidated statements of
operations.
Exhibits:
The
following exhibits are attached hereto or are incorporated herein by reference
as indicated in the table below:
|
Exhibit
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 period ended March 31, 2006 of LML
(File No. 0-13959)).
|
|
|
3.2
|
Bylaws
of LML, as amended (incorporated by reference to Exhibit 3.2 to the
Quarterly Report on Form 10-Q for the period ended September 30, 2007 of
LML (File No. 0-13959)).
|
|
|
31.1*
|
Rule
13a-14(a) Certification of Principal Executive Officer.
|
|
|
31.2*
|
Rule
13a-14(a) Certification of Principal Financial Officer.
|
|
|
32*
|
Section
1350 Certification of Principal Executive Officer and Principal Financial
Officer.
|
*filed
herewith
Pursuant to the requirements of the
Securities Exchange Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned thereunto duly
authorized.
|
LML
PAYMENT SYSTEMS INC.
|
|
|
/s/
Richard R. Schulz
|
|
|
Richard
R. Schulz
|
|
|
Controller
and Chief Accounting Officer
|
|
|
(Duly
Authorized Officer and Chief Accounting Officer)
|
|
|
February
9, 2009
|
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