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, 2006
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)
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Yukon
Territory
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980-20-9289
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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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|
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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 or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
one):
Large
Accelerated Filed [ ] Accelerated
Filer [ X ] Non-Accelerated
Filer [ ]
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
2,
2007, was 20,207,094.
LML
PAYMENT SYSTEMS INC.
FORM
10-Q
FOR
THE QUARTERLY PERIOD ENDED DECEMBER 31, 2006
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Page
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Number
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PART
I.
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FINANCIAL
INFORMATION
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1
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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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Item
2.
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8
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Item
3.
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15
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Item
4.
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15
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PART
II.
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OTHER
INFORMATION
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16
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Item
1.
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16
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Item
1A.
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16
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Item
6.
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16
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17
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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
|
LML
PAYMENT SYSTEMS INC.
(In
U.S. Dollars, except as noted below)
(Unaudited)
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December
31,
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March
31,
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||||||
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2006
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2006
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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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$
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10,359,948
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$
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3,691,632
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|||
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Restricted
cash
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250,000
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250,000
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|||||
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Accounts
receivable, less allowances of $46,886 and $46,145, respectively
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430,317
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436,475
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|||||
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Prepaid
expenses
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271,342
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374,887
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|||||
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Total
Current Assets
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11,311,607
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4,752,994
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|||||
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||||||
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Capital
Assets, net
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179,495
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201,036
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|||||
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Patents,
net
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977,125
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1,093,392
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|||||
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Other
Assets
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130,102
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30,102
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|||||
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TOTAL
ASSETS
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12,598,329
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6,077,524
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|||||
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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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545,221
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1,104,034
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|||||
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Accrued
liabilities
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184,794
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165,083
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|||||
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Accrued
compensation
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202,813
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173,444
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|||||
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Current
portion of long-term debt
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1,802
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22,458
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|||||
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Current
portion of deferred revenue
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1,526,551
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260,121
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|||||
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Total
Current Liabilities
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2,461,181
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1,725,140
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|||||
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Long-term
debt
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4,654
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-
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|||||
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Deferred
revenue
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6,176,248
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10,985
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|||||
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Total
Liabilities
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8,642,083
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1,736,125
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|||||
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Commitments
and contingencies
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|||||||
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SHAREHOLDERS'
EQUITY
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|||||||
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Capital
Stock
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|||||||
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Class
A, preferred stock, $1.00 CDN par value, 150,000,000 shares authorized,
issuable in series, none issued or outstanding
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-
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-
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|||||
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Class
B, preferred stock, $1.00 CDN par value, 150,000,000 shares authorized,
issuable in series, none issued or outstanding
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-
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-
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|||||
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Common
shares, no par value, 100,000,000 shares authorized, 20,207,094
and
20,194,094 shares issued and outstanding, respectively
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32,774,368
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32,710,018
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|||||
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Contributed
Surplus
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3,254,000
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2,544,312
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|||||
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Deficit
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(32,072,122
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)
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(30,912,931
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)
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|||
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Total
Shareholders' Equity
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3,956,246
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4,341,399
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|||||
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TOTAL
LIABILITIES AND SHAREHOLDERS' EQUITY
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12,598,329
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6,077,524
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|||||
See
accompanying notes to the 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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2006
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2005
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2006
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2005
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||||||||||
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REVENUE
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$
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1,516,415
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$
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1,205,604
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$
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4,962,636
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$
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3,923,644
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|||||
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COSTS
AND EXPENSES
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|||||||||||||
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Costs
of operations
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1,236,984
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1,175,308
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3,721,526
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3,425,433
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|||||||||
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Sales,
general and administrative expenses (includes stock-based compensation
expense of $262,183 for three months ended December 31, 2006 (three
months
ended December 31, 2005 - $140,342) and $688,042 for nine months
ended
December 31, 2006 (nine months ended December 31, 2005 -
$801,836))
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726,072
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1,054,013
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2,335,630
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3,960,187
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|||||||||
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Amortization
and depreciation
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72,251
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91,970
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231,382
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528,048
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|||||||||
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LOSS
BEFORE OTHER (EXPENSES) INCOME AND INCOME TAXES
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(518,892
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)
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(1,115,687
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)
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(1,325,902
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)
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(3,990,024
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)
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|||||
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Other
(expenses) income, net
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(524,995
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)
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(1,209
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)
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(143,911
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)
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(229,793
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)
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|||||
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Interest
income, net
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124,027
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25,046
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344,868
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99,032
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|||||||||
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LOSS
BEFORE INCOME TAXES
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(919,860
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)
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(1,091,850
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)
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(1,124,945
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)
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(4,120,785
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)
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|||||
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Income
taxes
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4,200
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7,840
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34,246
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21,663
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|||||||||
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NET
LOSS
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(924,060
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)
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(1,099,690
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)
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(1,159,191
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)
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(4,142,448
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)
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|||||
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DEFICIT,
beginning of period
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(31,148,062
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)
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(29,308,596
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)
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(30,912,931
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)
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(26,265,838
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)
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|||||
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DEFICIT,
end of period
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(32,072,122
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)
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(30,408,286
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)
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(32,072,122
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)
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(30,408,286
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)
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|||||
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LOSS
PER SHARE, basic and diluted
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(0.05
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)
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(0.06
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)
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(0.06
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)
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(0.21
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)
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|||||
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WEIGHTED
AVERAGE SHARES OUTSTANDING
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|||||||||||||
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Basic
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20,207,094
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20,176,453
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20,206,189
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20,156,209
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|||||||||
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Diluted
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20,207,094
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20,176,453
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20,206,189
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20,156,209
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|||||||||
See
accompanying notes to the consolidated financial
statements.
LML
PAYMENT SYSTEMS INC.
(In
U.S. Dollars)
(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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2006
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2005
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2006
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2005
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||||||||||
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Operating
Activities:
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|||||||||||||
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Net
Loss
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$
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(924,060
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)
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$
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(1,099,690
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)
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$
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(1,159,191
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)
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$
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(4,142,448
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)
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Adjustments
to reconcile net loss to net cash (used in) provided by operating
activities
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|||||||||||||
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Provision
for losses on accounts receivable
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-
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-
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24,464
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14,989
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|||||||||
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Amortization
and depreciation
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72,251
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91,970
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231,382
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528,048
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|||||||||
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Gain
on sale of capital assets
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(3,000
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)
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-
|
(3,000
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)
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-
|
|||||||
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Stock-based
compensation
|
262,183
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140,342
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688,042
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801,836
|
|||||||||
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Stock-based
compensation - future income taxes
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-
|
3,640
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21,646
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9,063
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|||||||||
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Changes
in operating assets and liabilities
|
|||||||||||||
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Accounts
receivable
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68,099
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32,042
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(18,306
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)
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54,611
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||||||||
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Prepaid
expenses
|
71,437
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90,397
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103,545
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282,767
|
|||||||||
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Other
assets
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540,787
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-
|
540,787
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10,952
|
|||||||||
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Accounts
payable and accrued liabilities
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(36,580
|
)
|
149,928
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(509,733
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)
|
735,635
|
|||||||
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Deferred
revenue
|
(293,571
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)
|
19,020
|
7,431,693
|
18,024
|
||||||||
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Net
cash (used in) provided by operating activities
|
(242,454
|
)
|
(572,351
|
)
|
7,351,329
|
(1,686,523
|
)
|
||||||
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Investing
Activities:
|
|||||||||||||
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Other
assets
|
(407,299
|
)
|
-
|
(640,787
|
)
|
-
|
|||||||
|
Proceeds
from sale of capital assets
|
3,000
|
-
|
3,000
|
-
|
|||||||||
|
Capital
asset expenditures
|
(54,183
|
)
|
(65,495
|
)
|
(79,647
|
)
|
(139,322
|
)
|
|||||
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Patents
|
(4,895
|
)
|
(8,549
|
)
|
(6,147
|
)
|
(8,760
|
)
|
|||||
|
Net
cash provided by (used in) investing activities
|
(463,377
|
)
|
(74,044
|
)
|
(723,581
|
)
|
(148,082
|
)
|
|||||
|
Financing
Activities:
|
|||||||||||||
|
Payments
on capital leases
|
(658
|
)
|
(9,816
|
)
|
(21,009
|
)
|
(28,851
|
)
|
|||||
|
Payments
on long-term borrowing
|
-
|
(2,661
|
)
|
(2,773
|
)
|
(7,756
|
)
|
||||||
|
Proceeds
from exercise of stock options
|
-
|
151,000
|
64,350
|
193,325
|
|||||||||
|
Net
cash (used in) provided by financing activities
|
(658
|
)
|
138,523
|
40,568
|
156,718
|
||||||||
|
(DECREASE)
INCREASE IN CASH AND CASH EQUIVALENTS
|
(706,489
|
)
|
(507,872
|
)
|
6,668,316
|
(1,677,887
|
)
|
||||||
|
Cash
and cash equivalents, beginning of period
|
11,066,437
|
4,891,806
|
3,691,632
|
6,061,821
|
|||||||||
|
Cash
and cash equivalents, end of period
|
10,359,948
|
4,383,934
|
10,359,948
|
4,383,934
|
|||||||||
See
accompanying notes to the consolidated financial
statements
LML
PAYMENT SYSTEMS INC.
(unaudited)
|
1.
|
Basis
of Presentation
|
The
consolidated balance sheet as at December 31, 2006, the consolidated statements
of operations and deficit for the three and nine months ended December 31,
2006
and 2005, and the consolidated statements of cash flows for the three and nine
months ended December 31, 2006 and 2005, of LML Payment Systems Inc. and its
subsidiaries (collectively, the “Corporation”) are unaudited. The Corporation's
consolidated balance sheet as at March 31, 2006, was derived from audited
financial statements. 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 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 annual consolidated 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, 2006. The consolidated financial statements
and notes appearing in this report should be read in conjunction with the
Corporation's consolidated audited 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, 2006, as filed with
the
Securities and Exchange Commission on June 15, 2006 (file no.
0-13959).
|
2.
|
Financial
instruments
|
|
a)
|
Restricted
cash
|
Under
the
terms of the processing agreement with one of the Corporation’s processing
banks, the Corporation has pledged a deposit of $250,000 (March 31, 2006 -
$250,000) against charge back losses.
|
b)
|
Concentration
of credit risk
|
During
the three months ended December 31, 2006, revenue from the Corporation’s two
largest customers amounted to approximately 54% of total revenue (three months
ended December 31, 2005 - 27%). The amount of revenue from these customers
amounted to approximately $818,184 (three months ended December 31, 2005 -
$325,154). During the nine months ended December 31, 2006, revenue from the
Corporation’s two largest customers amounted to approximately 51% of total
revenue (nine months ended December 31, 2005 - 24%). The amount of revenue
from
these customers amounted to approximately $2,516,647 (nine months ended December
31, 2005 - $957,291). The Corporation is economically dependent on revenue
from
these customers.
|
3.
|
Stock-based
compensation
|
Effective
April 1, 2003, the Corporation prospectively early adopted the Canadian
Institute of Chartered Accountants (“CICA”) Section 3870 which corresponds to
the Financial Accounting Standard Board’s (“FASB”) Statement of Financial
Accounting Standards No. 123, (“SFAS 123”), as amended by SFAS No. 148,
“Accounting for Stock-Based Compensation - Transition and Disclosure” (“SFAS
148”), which requires fair value accounting for all stock options issued during
the year. Subsequent to SFAS 148, the Corporation has adopted Statement of
Financial Accounting Standards No. 123(R) (“SFAS 123(R)”), “Share-Based Payment”
(see Note 6), which also corresponds to CICA Section 3870. Prior to the adoption
of the new 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. No pro forma disclosure is presented as all stock
options granted prior to the adoption have been fully pro-forma
expensed.
During
the three months ended December 31, 2006, the Corporation granted 585,000 stock
options under the Corporation’s 1998 Stock Incentive Plan. The weighted average
fair value for these stock options is $1.46. The fair value for the stock option
grants was estimated at the date of grant using a Black-Scholes option-pricing
model with the following assumptions:
Risk-free
interest rate of 3.84%;
Expected
volatility of 60.2%;
Expected
life of the stock options of 4 years; and
No
dividend yields.
The
total
fair value of stock-based compensation is amortized over the vesting period
resulting in stock-based compensation expense of $262,183 for the three months
ended December 31, 2006 and $688,042 for the nine months ended December 31,
2006.
During
the three months ended December 31, 2005, the Corporation did not grant any
stock options under the Corporation’s 1996 Stock Option Plan or its 1998 Stock
Incentive Plan. Stock-based compensation expense from vesting stock options
resulted in an expense of $140,342 for the three months ended December 31,
2005
and $801,836 for the nine months ended December 31, 2005. During the nine months
ended December 31, 2005, 50,000 stock options were terminated upon the departure
of an employee.
4. 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, 2006 except as noted
below:
During
the nine months ended December 31, 2006, a subsidiary of the Corporation settled
its suit, originally filed on June 14, 2004 in the U.S. District Court for
the
District of Delaware, against four companies who provide equipment, systems
and
services that convert paper checks presented at the point-of-sale into
electronic transactions and entered into a separate settlement and license
agreement with each of them. The provisions of each of the three settlement
and
license agreements included providing a license to the patents owned by the
subsidiary of the Corporation in exchange for consideration in the form of
a
release fee for a release from any and all causes of action related to the
subsidiary of the Corporation’s licensed patents as well as consideration in the
form of either a lump sum payment or a running royalty fee covering a term
through to the expiration of the licensed patents owned by the subsidiary of
the
Corporation. The consideration received by the subsidiary of the Corporation
for
these three settlement and license agreements was $16,000,000.
The
three
settlement and license agreements contained a number of elements that have
been
recorded in these consolidated financial statements as follows:
| · |
Under
the terms of two of the agreements, in exchange for a release fee
consideration, the subsidiary of the Corporation has agreed to release
these licensees from any and all causes of action related to its
patents
which may have arisen prior to the effective date of the licenses.
Due to
the specific nature of the releases, these release fees have been
recorded
as other income in the nine months ended December 31,
2006.
|
| · |
The
subsidiary of the Corporation has entered into a standstill agreement
with
one of the licensees, whereby both have promised to refrain from
filing
certain types of litigation against each other until April 1, 2009.
The
consideration received related to the standstill agreement has been
deferred and will be recognized as other income ratably over the
standstill period.
|
| · |
Under
the terms of one agreement, the subsidiary of the Corporation agreed
to
provide licensing rights for use of existing patents. As these rights
have
been delivered, payment has been received and the subsidiary of the
Corporation has no future obligations under the agreement, this revenue
has been recognized in the nine months ended December 31,
2006.
|
| · |
Under
the terms of one agreement, a portion of the consideration received
is
comprised of license fees for past and future use of the subject
patents
and for use of any future patents to be developed, acquired or obtained
by
the Corporation. The components of this portion of the agreement
are
considered multiple element arrangements that do not qualify for
separate
units of accounting, therefore, these license fees have been deferred
and
will be recognized ratably over the remaining term of the license
agreement, which expires on January 16,
2013.
|
| · |
One
agreement also included running royalties for certain future transactions
completed by the licensee. These running royalties will be recorded
by the
subsidiary of the Corporation as revenue in the period in which they
are
earned.
|
| · |
The
Corporation has a special fee arrangement with its legal firm, Kirkland
and Ellis LLP, that resulted in a $7,100,000 fee for the legal firm’s
services in connection with the foregoing settlement and licensing
agreements. The special fee was paid in April 2006 and has been offset
against the $16,000,000
consideration.
|
In
conjunction with one of the agreements above, during the nine months ended
December 31, 2006, the Corporation and the Corporation’s subsidiary, LML Payment
Systems Corp., settled the complaint for patent infringement originally filed
on
June 22, 2005 by Telecheck International Inc. in the United States District
Court for the Eastern District of Texas, Marshall Division. The provisions
of
the settlement agreement included providing the Corporation and the
Corporation’s subsidiary, LML Payment Systems Corp., with a license to certain
patents owned by Telecheck International Inc. and certain other future patents
owned by First Data Corp. and Telecheck related to the Corporation’s current
products or services.
5. Subsequent
Event
Subsequent
to the nine months ended December 31, 2006, the Corporation entered into a
lease
agreement with IBM Credit LLC to finance two IBM Mainframe hardware purchases
totaling approximately $935,000. Lease payments are monthly in arrears under
the
lease term of thirty-six (36) months.
6. Reconciliation
of United States to Canadian Generally Accepted Accounting
Principles
These
financial statements are prepared using Canadian generally accepted accounting
principles (“CDN GAAP”) which do not differ materially from United States
generally accepted accounting principles (“U.S. GAAP”) with respect to the
accounting policies and disclosures in these financial statements except as
set
out below:
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a)
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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.
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b)
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On
April 1, 2006, the Corporation adopted SFAS 123(R) which requires
the
expensing of all options issued, modified or settled based on the
grant
date fair value over the period during which an employee is required
to
provide service (vesting period).
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The
Corporation adopted SFAS 123(R) using the modified prospective approach,
which requires application of the standard to all awards granted,
modified, repurchased or cancelled on or after April 1, 2006, and
to all
awards for which the requisite service has not been rendered as at
such
date. Since April 1, 2003, the Corporation has been following the
fair
value based approach prescribed by SFAS 123, as amended by SFAS 148,
for
stock option awards granted, modified or settled on or after such
date. As
such, the application of SFAS 123(R) on April 1, 2006 to all awards
granted prior to its adoption did not have an impact on the financial
statements. In accordance with the modified prospective approach,
prior
period financial statements have not been restated to reflect the
impact
of SFAS 123(R). The prospective adoption of this new U.S. GAAP policy
creates no differences with the Corporation’s stock compensation expense
reported under CDN GAAP.
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Previously
under U.S. GAAP, the Corporation accounted for its 1996 Stock Option
Plan
and 1998 Stock Incentive Plan under the principles of Accounting
Principles Board Opinion No. 25 “Accounting for Stock Issued to Employees
and Related Interpretations” (“APB 25”). No compensation expense was
recognized under APB 25 because the exercise price of the Corporation’s
stock options equals the market price of the underlying stock on
the date
of the grant.
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c)
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Other
Comprehensive Income
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U.S.
GAAP requires that a statement of comprehensive income be displayed
with
the same prominence as other financial statements and that the aggregate
amount of comprehensive income excluding the deficit be disclosed
separately in shareholders’ equity. Comprehensive income, which
incorporates the net income (loss), includes all changes in shareholders’
equity during a period except those resulting from investments by
and
distributions to owners. Net income (loss) for the Corporation is
the same
as comprehensive income. There is currently no requirement to disclose
comprehensive income under CDN
GAAP.
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Under
U.S. GAAP there are no adjustments that resulted in changes to the Consolidated
Statements of Operations and Deficit, Consolidated
Statements of Cash Flows or the Consolidated Balance Sheets of the Corporation,
except that under U.S. GAAP the stated capital of the Corporation’s shares would
be $22,901,744 higher, as would the Corporation’s deficit due to the reporting
difference disclosed under note 6.a).
Recent
U.S. GAAP Accounting Pronouncements
In
June
2006, FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income
Taxes” (FIN 48), effective for fiscal years beginning after December 15, 2006.
This interpretation clarifies the accounting for uncertainty in income taxes
recognized in an enterprise’s financial statements in accordance with Statement
of Financial Accounting Standards (SFAS) No. 109, “Accounting for Income Taxes,”
including the recognition threshold and measurement attributes for the financial
statement recognition and measurement of a tax position taken or expected to
be
taken in a tax return. The Corporation plans to adopt FIN 48 on April 1, 2007,
as required. The Corporation is currently evaluating the impact, if any, the
adoption of FIN 48 will have on its consolidated financial
statements.
In
June
2006, FASB ratified the consensus reached by the Emerging Issues Task Force
in
Issue No. 06-3, “How Taxes Collected from Customers and Remitted to Governmental
Authorities Should be Presented in the Income Statement (That is, Gross Versus
Net Presentation).” Issue No. 06-3 requires disclosure of an entity’s accounting
policy regarding the presentation of taxes assessed by a governmental authority
that are directly imposed on a revenue-producing transaction between a seller
and a customer, including sales, use, value added and some excise taxes. The
adoption of Issue No. 06-3, which is effective for interim and annual reporting
periods beginning after December 15, 2006, did not have an impact on the
Corporation’s consolidated financial statements.
In
September 2006, the SEC staff issued Staff Accounting Bulletin No. 108,
“Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements” (SAB 108). SAB 108 was
issued to provide consistency between how registrants quantify financial
statement misstatements. Historically, there have been two widely-used methods
for quantifying the effects of financial statement misstatements. These
methods are referred to as the “roll-over” and “iron curtain” method. The
roll-over method quantifies the amount by which the current year income
statement is misstated. Exclusive reliance on an income statement approach
can result in the accumulation of errors on the balance sheet that may not
have
been material to any individual income statement, but which may misstate one
or
more balance sheet accounts. The iron curtain method quantifies the error
as the cumulative amount by which the current year balance sheet is
misstated. Exclusive reliance on a balance sheet approach can result
in disregarding the effects of errors in the current year income statement
that
results from the correction of an error existing in previously issued financial
statements. The Corporation currently uses the roll-over method for
quantifying identified financial statement misstatements. SAB 108 established
an
approach that requires quantification of financial statement misstatements
based
on the effects of the misstatement on each of the company’s financial statements
and the related financial statement disclosures. This approach is commonly
referred to as the “dual approach” because it requires quantification of errors
under both the roll-over and iron curtain methods. SAB 108 allows
registrants to initially apply the dual approach either by (1) retroactively
adjusting prior financial statements as if the dual approach had always been
used or by (2) recording the cumulative effect of initially applying the dual
approach as adjustments to the carrying values of assets and liabilities as
of
April
1, 2006
with an offsetting adjustment recorded to the opening balance of retained
earnings. Use of this “cumulative effect” transition method
requires detailed disclosure of the nature and amount of each individual error
being corrected through the cumulative adjustment and how and when it arose.
The
Corporation will initially apply SAB 108 using the retroactive method in
connection with the preparation of its annual financial statements for the
year
ending March 31, 2007. The adoption of SAB 108 will not result in any
adjustment to the Corporation’s consolidated financial statements.
In
September 2006, 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 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. SFAS No.
157 is effective for fiscal years beginning after December 15, 2007. The
Corporation plans to adopt SFAS No. 157 beginning in the first quarter of fiscal
2009. The Corporation is currently assessing the potential impact that adoption
of SFAS No. 157 will have on its consolidated financial
statements.
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ITEM
2.
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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 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
consolidated audited financial statements and related notes thereto contained
in
our Annual Report on Form 10-K for the fiscal year ended March 31, 2006, filed
with the Securities and Exchange Commission on June 15, 2006 (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. We provide check risk
services such as electronic check authorization, electronic check processing
services such as electronic check conversion and return check management such
as
traditional and electronic recovery services to retail clients. We also provide
mainframe payment processing software modules and rights to use our patented
intellectual property to retailers and other payment processors.
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 some other instances our secondary recovery services
provide for us to earn additional fees when legal action is
required.
When
we
provide check authorization and electronic check conversion services we
typically earn revenue based upon the number of transactions we process through
our data center.
When
we
provide mainframe based payment software modules to clients who are of
sufficient size and possess the technical capability to process financial
transactions in-house, or through their own data center, 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.
When
we
provide clients licenses to our intellectual property estate (which includes
four U.S. patents describing electronic check processing methods), we typically
earn revenue or other income from release fees for potential past infringement
and ongoing royalty fees. 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.
We
provide our financial payment processing services from our office locations
in
Scottsdale, Arizona and Wichita, Kansas.
Results
of Operations
Three
Months Ended December 31, 2006 results compared to Three Months Ended December
31, 2005
Revenue
Total
revenue for the three months ended December 31, 2006 was approximately $1.5
million, an increase of approximately 25% from total revenue of approximately
$1.2 million for the three months ended December 31, 2005. This increase is
primarily attributable to an increase in revenue from licensing our patented
intellectual property.
Revenue
from electronic check verification was approximately $159,000 for the three
months ended December 31, 2006, approximately a 43.6% decrease from revenue
from
electronic check verification of approximately $282,000 for the three months
ended December 31, 2005. This decrease is primarily attributable to certain
existing customers negotiating a reduction in the per transaction pricing of
our
enhanced electronic check verification services when they entered into contract
renewals with us during the first quarter of our current fiscal
year.
Revenue
from our primary check collections business decreased approximately 14.5% from
approximately $207,000 for the three months ended December 31, 2005 to
approximately $177,000 for the three months ended December 31, 2006. The
reduction in revenue from our primary check collections business was primarily
attributable to an overall reduction of approximately 27% in new returned check
volume provided to us for primary collection services. We believe this reduction
may be attributable to better check verification services we are providing
to
some of our customers and fewer paper checks being processed by some of our
customers. In light of trending decreases in revenue from our primary check
collections business, during the three months ended December 31, 2006, we
implemented a plan to combine the operations of our primary check collections
business located in Dallas, Texas with our secondary check collections business
located in Wichita, Kansas. This combination of operations coincided with the
expiration of our property leases for our Dallas facilities. The total costs
associated with this combination of operations were approximately $68,000.
We
believe this combination will produce new operating efficiencies, including
a
significant reduction in our future primary check collection costs of operations
without significantly impacting our existing revenue from our primary check
collections business.
Revenue
from our secondary check collections business increased approximately 26.6%
from
approximately $477,000 for the three months ended December 31, 2005 to
approximately $603,000 for the three months ended December 31, 2006. The
increase in revenue from our secondary check collections business was primarily
attributable to an increase in collections of the principal amount and related
fees of returned checks assigned for secondary recovery.
Revenue
from royalties received from CheckFree Corporation pertaining to their marketing
of the PEP+ reACH™ product was approximately $80,000 for the three months ended
December 31, 2006, versus approximately $105,000 for the three months ended
December 31, 2005. We believe future royalties are dependent upon the continued
successful marketing by CheckFree Corporation of the PEP+ reACH™
product.
Revenue
from licensing our patented intellectual property increased by approximately
$369,000, from approximately $30,000 for the three months ended December 31,
2005 to approximately $398,000 for the three months ended December 31, 2006.
The
licensing revenue of approximately $398,000 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 $92,000
related to aggregate licenses providing running royalties.
Recently
released statistics from the National Automated Clearing House Association
(“NACHA”) show that the transaction volume for point-of-purchase (“POP”) check
conversion during the fourth quarter of 2006 was over 86 million, an increase
of
approximately 89% over the transaction volume for the same period in 2005.
We
believe that this growing trend may have an impact on our patented intellectual
property licensing activities.
During
the three months ended December 31, 2006, revenue from and associated with
our
two largest customers amounted to approximately 54% of total revenue as compared
to approximately 27% of total revenue for the three months ended December 31,
2005.
The
increase in revenue from and associated with our largest customers is primarily
attributable to the revenue from one of our settlement and license agreements
we
entered into in April 2006. 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.
Costs
of operations
Costs
of
operations were approximately $1.2 million for the three months ended December
31, 2006 as compared to approximately $1.2 million for the three months ended
December 31, 2005. Costs of operations consist of transaction processing costs,
personnel costs, equipment related costs and telecommunication costs. Subsequent
to the three months ended December 31, 2006, we entered into a lease agreement
with IBM Credit LLC to finance two IBM Mainframe hardware purchases totaling
approximately $935,000. The purpose of these purchases is to update our existing
IBM Mainframe hardware and acquire redundant IBM Mainframe hardware as part
of
our creation of a second data center.
Sales,
general and administrative expenses
Sales,
general and administrative expenses consist primarily of stock-based
compensation expense, personnel costs, commissions, office facilities, travel,
promotional events such as trade shows, seminars and technical conferences,
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. Sales, general and administrative expenses decreased
to approximately $726,000 from approximately $1.1 million for the three months
ended December 31, 2006 and 2005, respectively, a decrease of approximately
$374,000 or approximately 34%. The decrease in sales, general and administrative
expenses is primarily attributable to a decrease in legal fees from
approximately $407,000 for the three months ended December 31, 2005 to nil
for
the three months ended December 31, 2006. The legal fees for the three months
ended December 31, 2005 were attributable to the patent infringement suit we
filed during the fiscal year ended March 31, 2005 and settled in the first
quarter of our fiscal year ending March 31, 2007. This decrease was partially
offset by an increase in stock-based compensation expense of approximately
$122,000 from approximately $140,000 for the three months ended December 31,
2005 to approximately $262,000 for the three months ended December 31, 2006.
Amortization
and depreciation
Amortization
and depreciation decreased to approximately $72,000 from approximately $92,000
for the three months ended December 31, 2006 and 2005, respectively. The
decrease was primarily attributable to certain capital assets, acquired through
previous years’ acquisitions, which had become fully depreciated.
Other
(expenses) income, net
During the
three
months ended December 31, 2006, we had other expenses of approximately $541,000
compared to approximately $1,200 for the three months ended December 31, 2005.
As part of our continuing efforts to maximize shareholder value and solidify
our
financial and operational foundation, we explored several potential acquisitions
and merger opportunities during the three months ended December 31, 2006. The
due diligence process involved in these activities resulted in us incurring
certain related costs, namely professional services fees which primarily
included legal fees, as well as other travel, meetings and related expenditures.
We did not enter into any definitive agreements related to these costs;
therefore, during the three months ended December 31, 2006, we expensed
approximately $540,000 of costs attributable to these efforts which is recorded
as other expenses. During the three months ended December 31, 2006, we had
other
income of approximately $16,000 compared to nil for the three months ended
December 31, 2005. The increase in other income is primarily attributable to
other income of approximately $11,000, net of legal fees, attributable to the
recognized current period portion of deferred other income from a certain
standstill agreement entered into with one of our licensees during the first
quarter of our current fiscal year.
Interest
income, net
Interest
income increased to approximately $124,000 from approximately $25,000 for the
three months ended December 31, 2006 and 2005, respectively.
The
increase in interest income was primarily attributable to an increase in
interest bearing cash investments resulting from the net consideration we
received from the three settlement and license agreements we entered into in
April 2006.
Net
Loss
Net
loss
decreased approximately $180,000 from a net loss of approximately $1.1 million
for the three months ended December 31, 2005 to a net loss of approximately
$924,000 for the three months ended December 31, 2006. The decrease was
primarily attributable to a decrease of approximately $407,000 in legal fees
attributable to the patent infringement suit we filed during the fiscal year
ended March 31, 2005. This decrease was partially offset by an increase in
stock-based compensation expense of approximately $122,000, an increase in
revenue of approximately $369,000 attributable to licensing our patented
intellectual property and an increase of approximately $540,000 in other
expenses.
Basic
and
diluted loss per share were both approximately ($0.05) for the three months
ended December 31, 2006, as compared to approximately ($0.06) for the three
months ended December 31, 2005.
Nine
Months Ended December 31, 2006 results compared to Nine Months Ended December
31, 2005
Revenue
Total
revenue for the nine months ended December 31, 2006 was approximately $5.0
million, an increase of approximately 28.2% from total revenue of approximately
$3.9 million for the nine months ended December 31, 2005. This increase is
primarily attributable to an increase in revenue from licensing our patented
intellectual property.
Revenue
from electronic check verification was approximately $587,000 for the nine
months ended December 31, 2006, approximately a 30.9% decrease from revenue
from
electronic check verification of approximately $850,000 for the nine months
ended December 31, 2005. This decrease is primarily attributable to certain
existing customers negotiating a reduction in the per transaction pricing of
our
enhanced electronic check verification services when they entered into contract
renewals with us during the nine months ended December 31, 2006.
Revenue
from our primary check collections business decreased approximately 21.6% from
approximately $740,000 for the nine months ended December 31, 2005 to
approximately $580,000 for the nine months ended December 31, 2006. The
reduction in revenue from our primary check collections business was primarily
attributable to an overall reduction of approximately 30.6% in new returned
check volume provided to us for primary collection services. We believe this
reduction may be attributable to better check verification services we are
providing to some of our customers and fewer paper checks being processed by
some of our customers. In light of trending decreases in revenue from our
primary check collections business, we implemented a plan which combined the
operations of our primary check collections business located in Dallas, Texas,
with our secondary check collections business located in Wichita, Kansas. This
combination of operations coincided with the expiration of our property leases
for our Dallas facilities. The total costs associated with this combination
of
operations were approximately $68,000. We believe this combination will produce
new operating efficiencies, including a significant reduction in our future
primary check collection costs of operations without significantly impacting
our
existing revenue from our primary check collections business.
Revenue
from our secondary check collections business increased approximately 26.7%
from
approximately $1.5 million for the nine months ended December 31, 2005 to
approximately $1.9 million for the nine months ended December 31, 2006. The
increase in revenue from our secondary check collections business was primarily
attributable to an increase in collections of the principal amount and related
fees of returned checks assigned for secondary recovery.
Revenue
from our licensing of certain payment software modules was nil for the nine
months ended December 31, 2006, compared to approximately $112,000 for the
nine
months ended December 31, 2005.
Revenue
from royalties received from CheckFree Corporation pertaining to their marketing
of the PEP+ reACH™ product was approximately $285,000 for the nine months ended
December 31, 2006, versus approximately $327,000 for the nine months ended
December 31, 2005. We believe future royalties are dependent upon the continued
successful marketing by CheckFree Corporation of the PEP+ reACH™
product.
Revenue
from licensing our patented intellectual property increased by approximately
$1.2 million, from approximately $95,000 for the nine months ended December
31,
2005 to approximately $1.3 million for the nine months ended December 31, 2006.
The licensing revenue of approximately $1.3 million consists of: (i)
approximately $143,000, net of legal fees, pertaining to one granted license;
(ii) approximately $917,000, net of legal fees, representing the recognized
current period portion of deferred revenue from a second granted license; and
(iii) approximately $255,000 related to aggregate licenses providing running
royalties.
During
the nine months ended December 31 2006, revenue from and associated with our
two
largest customers amounted to approximately 50.7% of total revenue as compared
to approximately 24.4% of total revenue for the nine months ended December
31
2005.
The
increase in revenue from and associated with our largest customers is primarily
attributable to the revenue from one of our settlement and license agreements
we
entered into in April 2006. 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.
Costs
of operations
Costs
of
operations increased from approximately $3.4 million for the nine months ended
December 31, 2005, to approximately $3.7 million for the nine months ended
December 31, 2006, an increase of approximately 8.8%. The increase was primarily
attributable to an increase in costs of approximately $230,000 associated with
increases in our secondary check collections business and partially attributable
to an increase in our personnel costs. Costs of operations consist of
transaction processing costs, personnel costs, equipment related costs and
telecommunication costs. Subsequent to the nine months ended December 31, 2006,
we entered into a lease agreement with IBM Credit LLC to finance two IBM
Mainframe hardware purchases totaling approximately $935,000. The purpose of
these purchases is to update our existing IBM Mainframe hardware and acquire
redundant IBM Mainframe hardware as part of our creation of a second data center
Sales,
general and administrative expenses
Sales,
general and administrative expenses consist primarily of stock-based
compensation expense, personnel costs, commissions, office facilities, travel,
promotional events such as trade shows, seminars and technical conferences,
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. Sales, general and administrative expenses decreased
to approximately $2.3 million from approximately $4.0 million for the nine
months ended December 31, 2006 and 2005, respectively, a decrease of
approximately $1.7 million or approximately 42.5%. The decrease in sales,
general and administrative expense is primarily attributable to a decrease
in
legal fees of approximately $1.3 million, attributable to the patent
infringement suit we filed during the fiscal year ended March 31, 2005 and
settled in the first quarter of our fiscal year ending March 31, 2007, from
approximately $1.4 million for the nine months ended December 31, 2005 to
approximately $52,000 for the nine months ended December 31, 2006. This decrease
is also partially attributable to a decrease in stock-based compensation expense
of approximately $114,000 from approximately $802,000 for the nine months ended
December 31, 2005 to approximately $688,000 for the nine months ended December
31, 2006.
Amortization
and depreciation
Amortization
and depreciation decreased to approximately $231,000 from approximately $528,000
for the nine months ended December 31, 2006 and 2005, respectively. The decrease
was primarily attributable to certain capital assets, acquired through previous
years’ acquisitions, which had become fully depreciated.
Other
(expenses) income, net
During
the nine months ended December 31, 2006 we had other expenses of approximately
$556,000 compared to other expenses of approximately $230,000 for the nine
months ended December 31, 2005. As part of our continuing efforts to maximize
shareholder value and solidify our financial and operational foundation, we
explored several potential acquisitions and merger opportunities during the
nine
months ended December 31, 2006.
The
due
diligence process involved in these activities resulted in us incurring certain
related costs, namely professional services fees which primarily included
legal
fees, as well as other travel, meetings and related expenditures. We did
not
enter into any definitive agreements related to these costs; therefore, during
the nine months ended December 31, 2006, we expensed approximately $540,000
of
costs attributable to these efforts which is recorded as other expenses.
The
other expense of approximately $230,000 in the prior fiscal year period is
primarily attributable to costs of approximately $227,000 attributable to
an
arbitrator’s decision to award a former consultant of ours damages, interest and
certain arbitration costs. During the nine months ended December 31, 2006
we had
other income of approximately $412,000 compared to nil for the nine months
ended
December 31, 2005. The other income of approximately $412,000 in the current
period consists of approximately $377,000, net of legal fees, attributable
to
specific release provisions contained in two of the license agreements we
entered into in April 2006 as well as approximately $32,000, net of legal
fees,
attributable to the recognized current period portion of deferred other income
from a certain standstill agreement contained in one of these
licenses.
Interest
income, net
Interest
expense decreased to approximately $1,000 from approximately $8,000 for the
nine
months ended December 31, 2006 and 2005, respectively. Interest income increased
to approximately $345,000 from approximately $107,000 for the nine months ended
December 31, 2006 and 2005, respectively.
The
increase in interest income was primarily attributable to an increase in
interest bearing cash investments resulting from the net consideration we
received during the nine months ended December 31, 2006 from the three
settlement and license agreements we entered into in April 2006.
Net
Loss
Net
loss
decreased approximately $2.9 million from a net loss of approximately $4.1
million for the nine months ended December 31, 2005 to a net loss of
approximately $1.2 million for the nine months ended December 31, 2006. The
decrease was primarily attributable to an increase in revenue of approximately
$1.2 million attributable to licensing our patented intellectual property and
a
decrease of approximately $1.3 million in legal fees attributable to the patent
infringement suit we filed during the fiscal year ended March 31, 2005. The
decrease was also partially attributable to a decrease in stock-based
compensation expense of approximately $114,000 and an increase in other income
of approximately $412,000, offset by an increase in other expenses of
approximately $326,000.
Basic
and
diluted loss per share were both approximately ($0.06) for the nine months
ended
December 31, 2006, as compared to approximately ($0.21) for the nine months
ended December 31, 2005.
Subsequent
Business Developments
Subsequent
to the three and nine months ended December 31, 2006, we received notification
from Grocers Supply Company Inc. that our Master Support Agreement for check
authorization support, due to expire on April 30, 2007, would not be renewed.
Although we also maintain direct contracts with the independent stores
represented by Grocers Supply Company Inc., we believe that some of these
contracts held directly with the independent stores may not be renewed. At
this
time we cannot quantify the effect on our electronic check verification revenue,
however, approximately 76% of our revenue from electronic check verification
is
attributable to these independent stores and, therefore, the non-renewal of
certain direct contracts could have a material adverse effect on our financial
results.
Liquidity
and Capital Resources
Our
liquidity and financial position consisted of approximately $8.9 million in
working capital as of December 31, 2006, compared to approximately $3.0 million
in working capital as of March 31, 2006. The increase in working capital was
primarily attributable to cash flows provided by operating activities of
approximately $7.4 million. Cash provided by operating activities increased
approximately $9.1 million from cash used in operating activities of
approximately $1.7 million for the nine months ended December 31, 2005 to cash
provided by operating activities of approximately $7.4 million for the nine
months ended December 31, 2006. The increase in cash provided by operating
activities was primarily attributable to consideration we received of
approximately $16.0 million (less special fee arrangements we paid Kirkland
& Ellis of approximately $7.1 million) resulting from the three settlement
and license agreements we entered into during the nine months ended December
31,
2006. Cash used in investing activities was approximately $724,000 for the
nine
months ended December 31, 2006 as compared to approximately $148,000 for the
nine months ended December 31, 2005, an increase in cash used in investing
activities of approximately $576,000. The increase in cash used in investing
activities was primarily attributable to expenditures related to our due
diligence efforts from our consideration of potential acquisitions and merger
opportunities, including professional services fees, which included legal fees,
travel, meetings and other related expenditures and partially attributable
to an
amount we paid pursuant to the engagement of a corporate financial advisor.
Cash
provided by financing activities was approximately $41,000 for the nine months
ended December 31, 2006 as compared to approximately $157,000 for the nine
months ended December 31, 2005, a decrease in cash provided by financing
activities of approximately $116,000. The decrease in cash provided by financing
activities was primarily due to the decrease in proceeds from the exercise
of
options of our common stock of approximately $129,000 from approximately
$193,000 during the nine months ended December 31, 2005 to approximately $64,000
during the nine months ended December 31, 2006.
Due
to
the net consideration of $8.9 million we received from the three settlement
and
license agreements we entered into during the nine months ended December 31,
2006, we anticipate positive cash flows from our operating activities in fiscal
2007. Consequently, we believe that this consideration combined with our
existing cash and cash equivalent balances should satisfy our working capital
and capital expenditure requirements in fiscal 2007.
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, our long-term plans may include the potential
to
strategically acquire complementary businesses, products or technologies. We
considered a number of potential acquisition and merger opportunities during
the
three and nine months ended December 31, 2006, and we currently expect to
continue considering and evaluating opportunities as they arise as part of
implementing our strategic objectives (although no assurances can be made that
we will enter into definitive agreements for or consummate any such
acquisitions). Implementing our strategic objectives 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 elect 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.
Recent
Accounting Pronouncements
In
June
2006, the Financial Accounting Standards Board (FASB) issued Interpretation
No.
48, “Accounting for Uncertainty in Income Taxes” (FIN 48), effective for fiscal
years beginning after December 15, 2006. This interpretation clarifies the
accounting for uncertainty in income taxes recognized in an enterprise’s
financial statements in accordance with Statement of Financial Accounting
Standards (SFAS) No. 109, “Accounting for Income Taxes,” including the
recognition threshold and measurement attributes for the financial statement
recognition and measurement of a tax position taken or expected to be taken
in a
tax return. We plan to adopt FIN 48 on April 1, 2007, as required. We are
currently evaluating the impact, if any, the adoption of FIN 48 will have on
our
consolidated financial statements.
In
June
2006, the FASB ratified the consensus reached by the Emerging Issues Task Force
in Issue No. 06-3, “How Taxes Collected from Customers and Remitted to
Governmental Authorities Should be Presented in the Income Statement (That
is,
Gross Versus Net Presentation).” Issue No. 06-3 requires disclosure of an
entity’s accounting policy regarding the presentation of taxes assessed by a
governmental authority that are directly imposed on a revenue-producing
transaction between a seller and a customer, including sales, use, value added
and some excise taxes. The adoption of Issue No. 06-3, which is effective for
interim and annual reporting periods beginning after December 15, 2006, did
not
have an impact on our consolidated financial statements for the three month
period ended December 31, 2006.
In
September 2006, the SEC staff issued Staff Accounting Bulletin No. 108,
“Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements” (SAB 108). SAB 108 was
issued to provide consistency between how registrants quantify financial
statement misstatements. Historically, there have been two widely-used methods
for quantifying the effects of financial statement misstatements. These
methods are referred to as the “roll-over” and “iron curtain” method. The
roll-over method quantifies the amount by which the current year income
statement is misstated. Exclusive reliance on an income statement approach
can result in the accumulation of errors on the balance sheet that may not
have
been material to any individual income statement, but which may misstate one
or
more balance sheet accounts. The iron curtain method quantifies the error
as the cumulative amount by which the current year balance sheet is
misstated. Exclusive reliance on a balance sheet approach can result
in disregarding the effects of errors in the current year income statement
that
results from the correction of an error existing in previously issued financial
statements. We currently use the roll-over method for quantifying
identified financial statement misstatements. SAB 108 established an approach
that requires quantification of financial statement misstatements based on
the
effects of the misstatement on each of the company’s financial statements and
the related financial statement disclosures. This approach is commonly
referred to as the “dual approach”
because it requires quantification of errors under both the roll-over and iron
curtain methods. SAB 108 allows registrants to initially apply the dual
approach either by (1) retroactively adjusting prior financial statements as
if
the dual approach had always been used or by (2) recording the cumulative effect
of initially applying the dual approach as adjustments to the carrying values
of
assets and liabilities as of April 1, 2006 with an offsetting adjustment
recorded to the opening balance of retained earnings. Use of
this “cumulative effect” transition method requires detailed disclosure of the
nature and amount of each individual error being corrected through the
cumulative adjustment and how and when it arose. We will initially apply SAB
108
using the retroactive method in connection with the preparation of our annual
financial statements for the year ending March 31, 2007. The adoption of
SAB 108 will not result in any adjustment to our consolidated financial
statements.
In
September 2006, 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 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. SFAS No.
157 is effective for fiscal years beginning after December 15, 2007. We plan
to
adopt SFAS No. 157 beginning in the first quarter of fiscal 2009. We are
currently assessing the potential impact that adoption of SFAS No. 157 will
have on our consolidated financial statements.
Critical
Accounting Policies and Estimates
There
have been no changes to our critical accounting policies and estimates since
March 31, 2006. For a description of our critical accounting policies and
estimates, see our Annual Report on Form 10-K for the year ended March 31,
2006
filed with the Securities and Exchange Commission on June 15, 2006 (file no.
0-13959).
Off-Balance
Sheet Arrangements
We
do not
currently have any off-balance sheet arrangements as such term is defined in
Item 303(a)(4) of Regulation S-K.
Contingencies
In
March
2006, a former employee of a subsidiary of the Corporation filed a complaint
against us for breach of contract and wrongful termination in the Superior
Court
of the State of Arizona in and for the County of Maricopa. In the suit, the
former employee alleges that the subsidiary of the Corporation wrongfully
reduced the former employee’s salary without requisite notice under the
employment agreement between the former employee and us and wrongfully
terminated the former employee without requisite notice and for acts that do
not
constitute cause under the aforementioned employment agreement. We believe
these
allegations are without merit and we intend to vigorously defend against them.
The likelihood of success of this suit is indeterminate and any amounts to
be
payable cannot be reasonably estimated. As such, no amounts have been recorded
in the consolidated financial statements pertaining to this suit for the nine
months ended December 31, 2006.
In
addition to the legal matters as described herein and previously reported in
our
Annual Report filed on Form 10-K for the year ended March 31, 2006, as filed
with the Securities and Exchange Commission on June 15, 2006 (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
April 1, 2006 until December 31, 2006, 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, 2006, as filed with the Securities and Exchange
Commission on June 15, 2006 (file no. 0-13959).
|
ITEM
4.
|
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
that 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, 2006 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, 2006 that have materially
affected, or are reasonably likely to materially affect, such internal control
over financial reporting.
|
PART
II.
|
OTHER
INFORMATION
|
|
Legal
Proceedings
|
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, 2006, as filed
with
the Securities and Exchange Commission on June 15, 2006 (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
|
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, 2006, as filed with the Securities
and
Exchange Commission on June 15, 2006 (file no. 0-13959)
|
ITEM
6.
|
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 fiscal year ended March 31, 2006,
of
LML Payment Systems Inc. (File No.
0-13959)).
|
|
3.2
|
Bylaws
of LML, as amended (incorporated by reference to Exhibit 3.2 to the
Annual
Report on Form 10-K for the fiscal year ended March 31, 2006, of
LML
Payment Systems Inc. (File No.
0-13959)).
|
|
21
|
Subsidiaries
of LML (incorporated by reference to Exhibit 21 to the Annual Report
on
Form 10-K for the fiscal year ended March 31, 2006, of LML Payment
Systems
Inc. (File No. 0-13959)).
|
|
31.1*
|
Rule
13a-14(a) Certification of Chief Executive
Officer.
|
|
31.2*
|
Rule
13a-14(a) Certification of Principal Financial
Officer.
|
|
32.1*
|
Section
1350 Certification of Chief Executive Officer and Controller and
Chief
Accounting Officer.
|
|
*
|
filed
herewith
|
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
8, 2007
|
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17
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