form10q071231.htm
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, 2007
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
|
|
###-##-####
|
(State
or other jurisdiction of
|
|
(I.R.S.
Employer Identification No.)
|
incorporation
or organization)
|
|
|
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 Filer [ ]
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 1,
2008, was 22,341,832.
LML
PAYMENT SYSTEMS INC.
FORM
10-Q
FOR
THE QUARTERLY PERIOD ENDED DECEMBER 31, 2007
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Page
Number
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PART
I.
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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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13
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Item
3.
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21
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Item
4.
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21
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PART
II.
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22
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Item
1.
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22
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Item
1A.
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22
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Item
6.
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29
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30
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In
this Quarterly Report on Form 10-Q, unless otherwise indicated, all dollar
amounts are expressed in United States Dollars.
LML
PAYMENT SYSTEMS INC.
(In
U.S. Dollars, except as noted below)
(Unaudited)
|
|
December
31, 2007
|
|
|
March
31, 2007
|
|
|
|
|
|
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|
ASSETS
|
|
|
|
|
|
|
Current
Assets
|
|
|
|
|
|
|
Cash
and cash equivalents (Note 4)
|
|
$ |
2,458,386 |
|
|
$ |
10,163,008 |
|
Funds
held for merchants (Note 4)
|
|
|
8,376,377 |
|
|
|
- |
|
Restricted
cash
|
|
|
250,000 |
|
|
|
250,000 |
|
Accounts
receivable, less allowances of $23,388 and $23,388,
respectively
|
|
|
623,436 |
|
|
|
330,055 |
|
Prepaid
expenses
|
|
|
358,657 |
|
|
|
405,213 |
|
Total
Current Assets
|
|
|
12,066,856 |
|
|
|
11,148,276 |
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net
|
|
|
1,281,054 |
|
|
|
1,362,003 |
|
Patents,
net
|
|
|
829,411 |
|
|
|
943,985 |
|
Restricted
cash
|
|
|
159,088 |
|
|
|
- |
|
Other
assets
|
|
|
23,620 |
|
|
|
224,263 |
|
Goodwill
(Note 5)
|
|
|
15,903,077 |
|
|
|
- |
|
Intangible
assets, net (Note 5)
|
|
|
5,824,425 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
TOTAL
ASSETS
|
|
$ |
36,087,531 |
|
|
$ |
13,678,527 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
Current
Liabilities
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$ |
691,745 |
|
|
$ |
659,111 |
|
Accrued
compensation
|
|
|
182,382 |
|
|
|
165,703 |
|
Other
accrued liabilities
|
|
|
590,493 |
|
|
|
143,974 |
|
Corporate
taxes payable
|
|
|
464,871 |
|
|
|
- |
|
Funds
due to merchants (Note 4)
|
|
|
8,376,377 |
|
|
|
- |
|
Current
portion of obligations under capital lease
|
|
|
378,850 |
|
|
|
360,179 |
|
Current
portion of promissory notes (Note 8)
|
|
|
2,723,760 |
|
|
|
- |
|
Current
portion of deferred revenue
|
|
|
1,427,644 |
|
|
|
1,531,260 |
|
Total
Current Liabilities
|
|
|
14,836,122 |
|
|
|
2,860,227 |
|
|
|
|
|
|
|
|
|
|
Obligations
under capital lease
|
|
|
440,123 |
|
|
|
726,806 |
|
Promissory
notes (Note 8)
|
|
|
2,522,000 |
|
|
|
- |
|
Deferred
revenue
|
|
|
4,925,317 |
|
|
|
5,859,628 |
|
|
|
|
|
|
|
|
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TOTAL
LIABILITIES
|
|
$ |
22,723,562 |
|
|
$ |
9,446,661 |
|
|
|
|
|
|
|
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SHAREHOLDERS'
EQUITY
|
|
|
|
|
|
|
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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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|
Class
B, preferred stock, $1.00 CDN par value, 150,000,000 shares authorized,
issuable in series, none issued or outstanding
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
Common
shares, no par value, 100,000,000 shares authorized, 22,341,832 and
20,207,094 shares issued and outstanding, respectively
|
|
|
42,031,147 |
|
|
|
32,774,368 |
|
|
|
|
|
|
|
|
|
|
Accumulated
other comprehensive income
|
|
|
26,232 |
|
|
|
- |
|
Contributed
surplus
|
|
|
3,949,821 |
|
|
|
3,443,292 |
|
Deficit
|
|
|
(32,643,231 |
) |
|
|
(31,985,794 |
) |
Total
Shareholders' Equity
|
|
|
13,363,969 |
|
|
|
4,231,866 |
|
|
|
|
|
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|
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|
TOTAL
LIABILITIES AND SHAREHOLDERS' EQUITY
|
|
$ |
36,087,531 |
|
|
$ |
13,678,527 |
|
See
accompanying notes to the unaudited consolidated financial
statements.
Commitments
and contingencies (Note 7)
LML
PAYMENT SYSTEMS INC.
(In
U.S. Dollars, except share data)
(Unaudited)
|
|
Three
Months Ended December
31
|
|
|
Nine
Months Ended December
31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
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REVENUE
|
|
$ |
3,397,810 |
|
|
$ |
1,516,415 |
|
|
$ |
8,036,074 |
|
|
$ |
4,962,636 |
|
|
|
|
|
|
|
|
|
|
|
|
|
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COSTS
AND EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of
operations
|
|
|
1,973,395 |
|
|
|
1,236,984 |
|
|
|
4,795,816 |
|
|
|
3,721,526 |
|
Sales, general and
administrative expenses (includes stock-based compensation expense of
$241,829 for three months ended December 31, 2007 (three months ended
December 31, 2006 - $262,183) and $495,344 for nine months ended December
31, 2007 (nine months ended December 31, 2006 - $688,042))
|
|
|
1,069,424 |
|
|
|
726,072 |
|
|
|
2,543,590 |
|
|
|
2,335,630 |
|
Amortization and
depreciation
|
|
|
382,617 |
|
|
|
72,251 |
|
|
|
643,870 |
|
|
|
231,382 |
|
(LOSS)
INCOME BEFORE OTHER INCOME (EXPENSES) AND INCOME
TAXES
|
|
|
(27,626 |
) |
|
|
(518,892 |
) |
|
|
52,798 |
|
|
|
(1,325,902 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange gain
(loss)
|
|
|
562 |
|
|
|
1,707 |
|
|
|
(426,535 |
) |
|
|
(2,923 |
) |
Other income (expenses),
net
|
|
|
9,084 |
|
|
|
(526.702 |
) |
|
|
30,326 |
|
|
|
(140,988 |
) |
Interest income
|
|
|
110,691 |
|
|
|
124,065 |
|
|
|
347,794 |
|
|
|
345,448 |
|
Interest
expense
|
|
|
(116,788 |
) |
|
|
(38 |
) |
|
|
(246,955 |
) |
|
|
(580 |
) |
(LOSS)
INCOME BEFORE INCOME TAXES
|
|
|
(24,077 |
) |
|
|
(919,860 |
) |
|
|
(242,572 |
) |
|
|
(1,124,945 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes -
current
|
|
|
203,972 |
|
|
|
4,200 |
|
|
|
414,865 |
|
|
|
34,246 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
LOSS
|
|
|
(228,049 |
) |
|
|
(924,060 |
) |
|
|
(657,437 |
) |
|
|
(1,159,191 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DEFICIT,
beginning of period
|
|
|
(32,415,182 |
) |
|
|
(31,148,062 |
) |
|
|
(31,985,794 |
) |
|
|
(30,912,931 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DEFICIT,
end of period
|
|
|
(32,643,231 |
) |
|
|
(32,072,122 |
) |
|
|
(32,643,231 |
) |
|
|
(32,072,122 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LOSS
PER SHARE, basic and diluted
|
|
|
(0.01 |
) |
|
|
(0.05 |
) |
|
|
(0.03 |
) |
|
|
(0.06 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WEIGHTED
AVERAGE SHARES OUTSTANDING
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
22,341,280 |
|
|
|
20,207,094 |
|
|
|
21,814,759 |
|
|
|
20,206,189 |
|
Diluted
|
|
|
22,341,280 |
|
|
|
20,207,094 |
|
|
|
21,814,759 |
|
|
|
20,206,189 |
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
Operating
Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss
|
|
$ |
(228,049 |
) |
|
$ |
(924,060 |
) |
|
$ |
(657,437 |
) |
|
$ |
(1,159,191 |
) |
Adjustments
to reconcile net loss to net cash provided by (used in) operating
activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for losses on
accounts receivable
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
24,464 |
|
Amortization and
depreciation
|
|
|
382,616 |
|
|
|
72,251 |
|
|
|
643,870 |
|
|
|
231,382 |
|
Stock-based
compensation
|
|
|
241,829 |
|
|
|
262,183 |
|
|
|
495,344 |
|
|
|
688,042 |
|
Stock-based compensation –
future income taxes
|
|
|
- |
|
|
|
- |
|
|
|
11,185 |
|
|
|
21,646 |
|
Unrealized foreign exchange
loss
|
|
|
17,242 |
|
|
|
- |
|
|
|
355,118 |
|
|
|
- |
|
Other
|
|
|
- |
|
|
|
(3,000 |
) |
|
|
(1,700 |
) |
|
|
(3,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes
in operating assets and liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
175,271 |
|
|
|
68,099 |
|
|
|
(15,645 |
) |
|
|
(18,306 |
) |
Prepaid
expenses
|
|
|
14,862 |
|
|
|
71,437 |
|
|
|
131,494 |
|
|
|
103,545 |
|
Other assets
|
|
|
(263 |
) |
|
|
540,787 |
|
|
|
(8,753 |
) |
|
|
540,787 |
|
Accounts payable and accrued
liabilities
|
|
|
(264,932 |
) |
|
|
(36,580 |
) |
|
|
(625,169 |
) |
|
|
(509,733 |
) |
Corporate taxes
payable
|
|
|
327,881 |
|
|
|
- |
|
|
|
454,799 |
|
|
|
- |
|
Deferred
revenue
|
|
|
(414,804 |
) |
|
|
(293,571 |
) |
|
|
(1,044,079 |
) |
|
|
7,431,693 |
|
Net
cash provided by (used in) operating activities
|
|
|
251,653 |
|
|
|
(242,454 |
) |
|
|
(260,973 |
) |
|
|
7,351,329 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing
Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other assets
|
|
|
- |
|
|
|
(407,299 |
) |
|
|
- |
|
|
|
(640,787 |
) |
Acquisition of Beanstream, net
of cash acquired (Note 8)
|
|
|
(3,403,680 |
) |
|
|
- |
|
|
|
(7,375,068 |
) |
|
|
- |
|
Acquisition of property and
equipment
|
|
|
(6,723 |
) |
|
|
(54,183 |
) |
|
|
(113,646 |
) |
|
|
(79,647 |
) |
Proceeds from disposal of
equipment
|
|
|
- |
|
|
|
3,000 |
|
|
|
1,700 |
|
|
|
3,000 |
|
Development of
patents
|
|
|
(2,066 |
) |
|
|
(4,895 |
) |
|
|
(10,004 |
) |
|
|
(6,147 |
) |
Net
cash (used in) investing activities
|
|
|
(3,412,469 |
) |
|
|
(463,377 |
) |
|
|
(7,497,018 |
) |
|
|
(723,581 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing
Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments on capital
leases
|
|
|
(91,509 |
) |
|
|
(658 |
) |
|
|
(268,583 |
) |
|
|
(21,009 |
) |
Payments on long-term
borrowing
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(2,773 |
) |
Proceeds from exercise of stock
options
|
|
|
- |
|
|
|
- |
|
|
|
77,438 |
|
|
|
64,350 |
|
Net
cash (used in) provided by financing activities
|
|
|
(91,509 |
) |
|
|
(658 |
) |
|
|
(191,145 |
) |
|
|
40,568 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effects
of foreign exchange rate changes on cash and cash
equivalents
|
|
|
(59,272 |
) |
|
|
- |
|
|
|
244,514 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(DECREASE)
INCREASE IN CASH AND CASH EQUIVALENTS
|
|
|
(3,311,597 |
) |
|
|
(706,489 |
) |
|
|
(7,704,622 |
) |
|
|
6,668,316 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents, beginning of period
|
|
|
5,769,983 |
|
|
|
11,066,437 |
|
|
|
10,163,008 |
|
|
|
3,691,632 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents, end of period
|
|
|
2,458,386 |
|
|
|
10,359,948 |
|
|
|
2,458,386 |
|
|
|
10,359,948 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of cash flow information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid
|
|
|
116,788 |
|
|
|
38 |
|
|
|
246,955 |
|
|
|
580 |
|
Taxes paid
|
|
|
203,972 |
|
|
|
4,200 |
|
|
|
403,680 |
|
|
|
12,600 |
|
See
accompanying notes to the unaudited consolidated financial
statements.
LML
PAYMENT SYSTEMS INC.
(unaudited)
The
consolidated balance sheet as of December 31, 2007, the consolidated statements
of operations and deficit for the three and nine months ended December 31, 2007
and 2006, and the consolidated statements of cash flows for the three and nine
months ended December 31, 2007 and 2006, 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, 2007, 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 consolidated audited 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, 2007. 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, 2007, as filed
with the Securities and Exchange Commission on June 14, 2007 (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, 2007 and the
consolidated statements of operations and deficit and the consolidated
statements of cash flows for the three and nine months ended December 31, 2007
include the accounts of Beanstream since its acquisition by the Corporation on
June 30, 2007.
2.
|
Change
in Accounting Policies
|
Effective
April 1, 2007, the Corporation adopted the new recommendation of the Canadian
Institute of Chartered Accountants (CICA) under CICA Handbook Section 1530,
“Comprehensive Income”, Section 3251, “Equity”, Section 3855, “Financial
Instruments – Recognition and Measurement” and Section 3861 “Financial
Instruments – Disclosure and Presentation”. These new Handbook sections, which
apply to fiscal years beginning on or after November 1, 2006, provide
requirements for the recognition and measurement of financial instruments.
Section 1530 establishes standards for reporting and presenting comprehensive
income which is defined as the change in equity from transactions and other
events from non-owner sources. Other comprehensive income refers to items
recognized in comprehensive income but are excluded from net income calculated
in accordance with Canadian Generally Accepted Accounting
Principles.
Under
Section 3855, all financial instruments are classified into one of five
categories: held-for trading, held-to-maturity investments, loans and
receivables, available-for-sale financial assets or other financial liabilities.
All financial instruments are measured in the balance sheet at fair value except
for loans and receivables, held-to-maturity investments and other financial
liabilities which are measured at amortized cost. Subsequent measurement and
changes in fair value will depend on their initial classification, as follows:
held-for-trading financial assets are measured at fair value and changes in fair
value are recognized in net income. Available-for-sale financial instruments are
measured at fair value with changes in fair value recorded in other
comprehensive income until the instrument is derecognized or impaired. The
adoption of these new standards had no impact on the Corporation’s accounts and
deficit position as at April 1, 2007.
2.
|
Change
in Accounting Policies (cont'd)
|
As a
result of the adoption of these new standards, the Corporation has classified
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 certain accrued liabilities, corporate taxes payable, funds
due to merchants and former shareholders, obligations under capital lease and
promissory notes are classified as other liabilities, all of which are measured
at amortized cost.
Carrying
value and fair value of financial assets and liabilities as at December 31, 2007
are summarized as follows:
|
|
|
Carrying
Value
|
|
|
Fair
Value
|
|
|
|
|
|
|
|
|
|
|
Held-for-trading
|
|
$ |
11,243,851 |
|
|
$ |
11,243,851 |
|
|
Loans
and receivables
|
|
|
623,436 |
|
|
|
623,436 |
|
|
Held-to-maturity
|
|
|
- |
|
|
|
- |
|
|
Available-for-sale
|
|
|
- |
|
|
|
- |
|
|
Other
liabilities
|
|
|
16,370,601 |
|
|
|
16,370,601 |
|
|
|
|
|
|
|
|
|
|
|
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 No. 52 (“SFAS No. 52”) “Foreign
Currency Translation”) using the exchange rate prevailing at the balance
sheet date. 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 newly-acquired 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 year are used to translate Beanstream’s
revenues and expenses. The cumulative translation adjustment is
reported as a component of accumulated other comprehensive income.
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, 2007 -
$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. The funds of $159,088 held by First
Data Loan Company bear interest at the rate of prime minus 3% and have no
specific terms of re-payment.
|
b)
|
Concentration
of credit risk
|
During
the three months ended December 31, 2007, revenue from the Corporation’s two
largest customers amounted to approximately 34% of total revenue (December 31,
2006 - 34%). Revenue from these customers amounted to approximately
$1,191,119 (December 31, 2006 - $512,628). During the nine months
ended December 31, 2007, revenue from the Corporation’s three largest customers
amounted to approximately 47% of total revenue (December 31, 2006 -
51%). Revenue from these customers amounted to approximately
$3,764,968 (December 31, 2006 - $2,516,647). The Corporation is
economically dependent on revenue from these customers.
Subsequent
to the three and nine months ended December 31, 2007, the Corporation entered
into various contractual arrangements to purchase $750,000 Canadian at a
pre-determined foreign exchange rate with an execution date between June 16 to
June 27, 2008.
4.
|
Cash
and cash equivalents and funds held for /due
merchants
|
Cash
and cash equivalents
At
December 31, 2007, the Corporation held $2,458,386 (March 31, 2007: $10,163,008)
in cash and cash equivalents. Included in this balance is $1.1
million in cash and cash equivalents used as continuing collateral security with
the Corporation’s primary financial institution. As this continuing
collateral security relates to Beanstream’s operations, there was no such amount
before the acquisition of Beanstream.
Funds
held for/due to merchants
At
December 31, 2007, Beanstream was holding funds due to merchants in the amount
of $8,376,377. The funds held for/due to merchants are
comprised of 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.
|
5.
|
Goodwill
and Acquired Intangible Assets
|
During
the three months ended December 31, 2007, the Corporation’s management concluded
its review of the independent valuation report and has recorded goodwill of
$15,903,077 and intangible assets of $6,072,000 in connection with the
acquisition of Beanstream. Acquired 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 not
amortized.
The
components of acquired intangible asses are as follows:
|
|
|
December
31, 2007
|
|
|
March
31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Accumulated
Amortization
|
|
|
Net
|
|
|
Gross
|
|
|
Accumulated
Amortization
|
|
|
Net
|
|
|
Amortizable
intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Partner
relationships
|
|
$ |
928,000 |
|
|
$ |
46,400 |
|
|
$ |
881,600 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
Merchant contracts
|
|
|
2,963,500 |
|
|
|
148,175 |
|
|
|
2,815,325 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
Existing
technology
|
|
|
530,000 |
|
|
|
53,000 |
|
|
|
477,000 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
Unamortized
intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade names
|
|
|
1,650,500 |
|
|
|
- |
|
|
|
1,650,500 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
$ |
6,072,000 |
|
|
$ |
247,575 |
|
|
$ |
5,824,425 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
Amortization
expense for intangible assets totaled $247,575 for the three and nine months
ended December 31, 2007 (December 31, 2006 - $0)
6.
|
Stock-based
compensation
|
The
Corporation accounts for all stock options issued during the period based on
their fair value as required by the CICA Section 3870 which corresponds to the
Financial Accounting Standard Board’s (“FASB”) Statement of Financial Accounting
Standards No. 123(R) (“SFAS 123(R)”), “Share-Based Payment” (see Note 10), which
also corresponds to CICA Section 3870. 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.
6.
|
Stock-based
compensation (cont'd)
|
During
the three month period 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 month period ended September
30, 2007; no stock options were granted during the three month period ended June
30, 2007). The weighted average grant date fair value for the stock
options granted during the three month period ended December 31, 2007 is $1.82
per stock option ($1.47 per stock option for stock options granted during the
three month period ended September 30, 2007). The total fair value of
stock-based compensation is amortized over the vesting period resulting in
stock-based compensation expense of $241,829 for the three months ended December
31, 2007 and $495,344 for the nine months ended December 31, 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.
During
the three month period ended December 31, 2006, the Corporation granted 585,000
stock options under the Corporation’s 1998 Stock Incentive Plan (125,000 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 month period
ended September 30, 2006; no stock options were granted during the three month
period ended June 30, 2006). The weighted average grant date fair
value for the stock options granted during the three month period ended December
31, 2006 is $1.46 per stock option ($1.82 per stock option for stock options
granted during the three month period ended September 30, 2006). 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. 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 3.84% and 4.42%;
Expected
volatility of 60.2% and 60.8%;
Expected
life of the stock options of 4 years; and
No
dividend yields.
7.
|
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, 2007 except
as noted below:
|
During
the prior fiscal year ended March 31, 2006, a former employee of a subsidiary of
the Corporation filed a complaint against the Corporation’s subsidiary, LML
Payment Systems Corp. 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 alleged 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 the Corporation’s
subsidiary, LML Payment Systems Corp., and wrongfully terminated the former
employee without requisite notice and for acts that do not constitute cause
under the aforementioned employment agreement.
During
the nine months ended December 31, 2007, the subsidiary of the Corporation
settled the complaint. Pursuant to the terms of the settlement, the subsidiary
of the Corporation agreed to pay the former employee the sum of $22,500 and the
former employee’s legal counsel the sum of $22,500. The amounts had been
included in accrued liabilities at March 31, 2007 and were paid in the period
ended December 31, 2007.
8.
|
Acquisition
of Beanstream
|
On April
30, 2007, the Corporation entered into an arrangement agreement to acquire all
of the outstanding capital stock of Beanstream, a leading provider of
authentication and Internet payment processing solutions. The
transaction closed on June 30, 2007. The purchase price originally
agreed to in the arrangement agreement was approximately CDN$19.5 million
(U.S.$18.3 million) consisting of CDN$7.6 million in cash (U.S.$7.1 million),
CDN$5.0 million (U.S.$4.7 million) in two-year promissory notes and CDN$6.9
million (U.S.$6.5 million) in the Corporation’s common stock paid at
closing. Former Beanstream shareholders could also receive up to an
additional CDN$2.0 million (U.S.$1.9 million) in the Corporation’s common stock
if certain revenue milestones are reached by June 30, 2008.
8.
|
Acquisition
of Beanstream
(cont'd)
|
In
accordance with CICA Section 1581, “Business Combinations” (“CICA 1581”) which
corresponds to FASB 141, “Business Combinations” (“FASB 141”), the Corporation
has applied the purchase method and has consolidated the results of operations
of Beanstream commencing July 1, 2007.
Pursuant
to the arrangement agreement, the Beanstream shareholders had an option to
elect to accept shares of the Corporation in lieu of a portion of the cash
consideration. The amount of the share-for-cash election was not
known until June 27, 2007, therefore, the measurement date for the consideration
paid by the Corporation was determined to be June 27, 2007 rather than April 30,
2007. Consequently, the measurement date is June 27, 2007 and the
total purchase price paid has been calculated as follows:
|
|
|
Number
of Shares
|
|
U.S.
$
|
|
|
|
|
|
|
|
Cash
|
|
-
|
|
7,153,759
|
|
Promissory
Notes
1
|
|
-
|
|
4,693,073
|
|
Common
Shares 2
|
|
1,962,928
|
|
8,538,737
|
|
Finders
Fee Common Shares
|
|
144,933
|
|
640,604
|
|
Transaction
Costs
|
|
-
|
|
1,102,578
|
|
|
|
|
|
|
|
Purchase
Price
|
|
|
|
22,128,751
|
|
1
|
The
promissory notes are secured by Beanstream’s assets, bear interest at 8%
per annum and are payable in two equal installments on June 30, 2008 and
June 30, 2009. The Corporation has the ability to prepay the
promissory notes without penalty at its
discretion.
|
|
2
|
The
value of shares issued to complete the transaction was determined using
the weighted average share price of approximately $4.35 per share for the
Corporation’s stock for the period of five days prior to and following the
measurement date of the
acquisition.
|
The
purchase price was allocated as follows:
|
Cash
|
$ |
3,989,336 |
|
|
Funds
held for merchants
|
|
2,812,117 |
|
|
Accounts
receivable, net
|
|
258,223 |
|
|
Prepaid
expenses
|
|
79,124 |
|
|
Restricted
cash
|
|
158,520 |
|
|
Accounts
payable and accrued liabilities
|
|
(1,052,378 |
) |
|
Funds
due to merchants
|
|
(2,812,117 |
) |
|
Amounts
due to former shareholders of Beanstream 3
|
|
(3,350,552 |
) |
|
Book
value of deferred revenue (recorded as goodwill)
|
|
(82,273 |
) |
|
|
|
|
|
|
Net
working capital acquired 3
|
|
- |
|
|
|
|
|
|
|
Property
and equipment
|
|
71,401 |
|
|
|
|
|
|
|
Net
identifiable assets
|
|
71,401 |
|
|
Goodwill
|
|
15,985,350 |
|
|
Intangible
assets
|
|
6,072,000 |
|
|
|
|
|
|
|
|
$ |
22,128,751 |
|
|
3
|
The
arrangement agreement included a provision whereby the Corporation
acquired Beanstream with a $NIL working capital (as defined in the
arrangement agreement) balance. Accordingly, the working
capital acquired from Beanstream on June 30, 2007 included an accrual in
the amount of $3,350,552 recognizing the excess working capital balance of
Beanstream due to the former shareholders of
Beanstream.
|
8.
|
Acquisition
of Beanstream (cont’d)
|
On the
statement of cash flows, the acquisition of Beanstream, net of cash acquired, is
shown as a net cash outflow of $7,375,068 calculated as follows:
|
Cash
consideration paid
|
$ |
(7,153,759 |
) |
|
Beanstream
cash acquired
|
|
6,801,453 |
|
|
Funds
held for merchants (Note 4)
|
|
(2,812,117 |
) |
|
Amounts
due to former shareholders of Beanstream
|
|
(3,317,312 |
) |
|
Transaction
costs incurred 1
|
|
(893,333 |
) |
|
Acquisition
of Beanstream, net of cash acquired
|
$ |
(7,375,068 |
) |
|
1
|
In
addition to the $893,333 transaction costs paid, the Corporation incurred
transaction costs of $209,245 that were incurred and paid prior to March
31, 2007.
|
Pro forma
Information (Unaudited)
The
following pro forma consolidated financial summary is presented as if the
acquisition of Beanstream was completed as of April 1, 2007 and April 1, 2006,
respectively. The pro forma combined results have been prepared for
informational purposes only and do not purport to be indicative of the results
which could have actually been attained had the business combination been
consummated on the dates indicated or of the results which may be expected to
occur in the future.
|
|
Three
Months EndedDecember
31
|
|
|
Nine
Months EndedDecember
31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
REVENUE
|
|
$ |
3,397,810 |
|
|
$ |
2,790,407 |
|
|
$ |
9,670,842 |
|
|
$ |
8,334,878 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COSTS
AND EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of
operations
|
|
|
1,973,395 |
|
|
|
1,843,522 |
|
|
|
5,446,351 |
|
|
|
5,234,667 |
|
Sales, general and
administrative expenses
|
|
|
1,069,424 |
|
|
|
1,108,367 |
|
|
|
2,941,843 |
|
|
|
3,101,363 |
|
Amortization and
depreciation
|
|
|
258,830 |
|
|
|
201,254 |
|
|
|
777,132 |
|
|
|
618,388 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME
(LOSS) BEFORE OTHER INCOME (EXPENSES) AND INCOME TAXES
|
|
|
96,161 |
|
|
|
(362,736 |
) |
|
|
505,516 |
|
|
|
(619,540 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange
loss
|
|
|
562 |
|
|
|
(16,436 |
) |
|
|
(426,534 |
) |
|
|
(21,066 |
) |
Other income (expenses),
net
|
|
|
9,084 |
|
|
|
(527,181 |
) |
|
|
30,325 |
|
|
|
(141,466 |
) |
Interest income
|
|
|
110,691 |
|
|
|
68,621 |
|
|
|
313,983 |
|
|
|
181,240 |
|
Interest
expense
|
|
|
(116,788 |
) |
|
|
(88,356 |
) |
|
|
(338,021 |
) |
|
|
(266,642 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME
(LOSS) BEFORE INCOME TAXES
|
|
|
99,710 |
|
|
|
(926,088 |
) |
|
|
85,269 |
|
|
|
(867,474 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes
|
|
|
203,972 |
|
|
|
60,273 |
|
|
|
585,227 |
|
|
|
299,319 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
LOSS
|
|
$ |
(104,262 |
) |
|
$ |
(986,361 |
) |
|
$ |
(499,958 |
) |
|
$ |
(1,166,793 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LOSS
PER SHARE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
(0.00 |
) |
|
$ |
(0.04 |
) |
|
$ |
(0.02 |
) |
|
$ |
(0.05 |
) |
Diluted
|
|
$ |
(0.00 |
) |
|
$ |
(0.04 |
) |
|
$ |
(0.02 |
) |
|
$ |
(0.05 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WEIGHTED
AVERAGE SHARES OUTSTANDING
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
22,341,280 |
|
|
|
22,315,582 |
|
|
|
22,333,538 |
|
|
|
22,314,677 |
|
Diluted
|
|
|
22,341,280 |
|
|
|
22,315,582 |
|
|
|
22,333,538 |
|
|
|
22,314,677 |
|
9.
|
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:
|
Transaction
Payment Processing Operations ("TPP") 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 Operations ("IPL") involve licensing the Corporation’s
intellectual property estate, which includes four U.S. patents describing
electronic check processing
methods.
|
|
Check
Processing/Software Licensing Operations ("CP/SL") involve electronic
check authorization, electronic check conversion (ECC), primary and
secondary check collection including electronic check re-presentment (RCK)
and software licensing.
|
Within
these segments, performance is measured based on revenue, factoring in interest
income and expenses and amortization and depreciation as well as earnings from
operations 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.
9.
|
Industry
and Geographic Segments (cont'd)
|
Financial
information for each reportable segment for the three and nine months ended
December 31, 2007 and 2006 was as follows:
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 (Note 3)
|
|
|
588,807 |
|
|
|
305,556 |
|
|
|
602,312 |
|
|
|
- |
|
|
|
|
|
|
1,496,675 |
|
Cost
of operations
|
|
|
1,009,553 |
|
|
|
507 |
|
|
|
963,335 |
|
|
|
- |
|
|
|
|
|
|
1,973,395 |
|
Interest
income
|
|
|
98,515 |
|
|
|
52 |
|
|
|
12,105 |
|
|
|
19 |
|
|
|
|
1 |
|
|
110,691 |
|
Interest
expenses
|
|
|
- |
|
|
|
- |
|
|
|
14,852 |
|
|
|
101,936 |
|
|
|
|
2 |
|
|
116,788 |
|
Amortization and
depreciation
|
|
|
5,658 |
|
|
|
41,858 |
|
|
|
84,972 |
|
|
|
250,129 |
|
|
|
|
3 |
|
|
382,617 |
|
Earnings
(losses) from operations before income taxes
|
|
|
805,888 |
|
|
|
375,767 |
|
|
|
(104,927 |
) |
|
|
(1,100,805 |
) |
|
|
|
4 |
|
|
(24,077 |
) |
Three
Months Ended
|
|
TPP
|
|
|
IPL
|
|
|
CP/SL
|
|
|
Reconciling
|
|
|
|
|
|
Consolidated
|
|
December
31, 2006
|
|
Canada
|
|
|
U.S.
|
|
|
U.S.
|
|
|
Items
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Revenue
|
|
$ |
- |
|
|
$ |
398,140 |
|
|
$ |
1,118,275 |
|
|
$ |
- |
|
|
|
|
|
$ |
1,516,415 |
|
Revenue:
major customers (Note 3)
|
|
|
- |
|
|
|
305,556 |
|
|
|
512,628 |
|
|
|
- |
|
|
|
|
|
|
818,184 |
|
Cost
of operations
|
|
|
- |
|
|
|
89 |
|
|
|
1,236,895 |
|
|
|
- |
|
|
|
|
|
|
1,236,984 |
|
Interest
income
|
|
|
- |
|
|
|
100,497 |
|
|
|
19,890 |
|
|
|
3,678 |
|
|
|
|
1 |
|
|
124,065 |
|
Interest
expenses
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
38 |
|
|
|
|
2 |
|
|
38 |
|
Amortization and
depreciation
|
|
|
- |
|
|
|
41,325 |
|
|
|
29,838 |
|
|
|
1,088 |
|
|
|
|
3 |
|
|
72,251 |
|
Earnings
(losses) from operations before income taxes
|
|
|
- |
|
|
|
461,154 |
|
|
|
(236,489 |
) |
|
|
(1,144,525 |
) |
|
|
|
4 |
|
|
(919,860 |
) |
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 (Note 3)
|
|
|
1,109,372 |
|
|
|
916,668 |
|
|
|
1,738,928 |
|
|
|
- |
|
|
|
|
|
|
3,764,968 |
|
Cost
of operations
|
|
|
1,800,514 |
|
|
|
1,401 |
|
|
|
2,993,901 |
|
|
|
- |
|
|
|
|
|
|
4,795,816 |
|
Interest
income
|
|
|
197,757 |
|
|
|
85,163 |
|
|
|
52,127 |
|
|
|
12,747 |
|
|
|
|
1 |
|
|
347,794 |
|
Interest
expenses
|
|
|
- |
|
|
|
- |
|
|
|
49,144 |
|
|
|
197,811 |
|
|
|
|
2 |
|
|
246,955 |
|
Amortization and
depreciation
|
|
|
10,975 |
|
|
|
125,183 |
|
|
|
253,473 |
|
|
|
254,239 |
|
|
|
|
3 |
|
|
643,870 |
|
Earnings
(losses) from operations before income taxes
|
|
|
1,478,916 |
|
|
|
1,239,418 |
|
|
|
(340,226 |
) |
|
|
(2,620,680 |
) |
|
|
|
4 |
|
|
(242,572 |
) |
Nine
Months Ended
|
|
TPP
|
|
|
IPL
|
|
|
CP/SL
|
|
|
Reconciling
|
|
|
|
|
|
Consolidated
|
|
December
31, 2006
|
|
Canada
|
|
|
U.S.
|
|
|
U.S.
|
|
|
Items
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Revenue
|
|
$ |
- |
|
|
$ |
1,315,676 |
|
|
$ |
3,646,960 |
|
|
$ |
- |
|
|
|
|
|
$ |
4,962,636 |
|
Revenue:
major customers (Note 3)
|
|
|
- |
|
|
|
916,668 |
|
|
|
1,599,979 |
|
|
|
- |
|
|
|
|
|
|
2,516,647 |
|
Cost
of operations
|
|
|
- |
|
|
|
620 |
|
|
|
3,720,906 |
|
|
|
- |
|
|
|
|
|
|
3,721,526 |
|
Interest
income
|
|
|
- |
|
|
|
260,534 |
|
|
|
57,433 |
|
|
|
27,481 |
|
|
|
|
1 |
|
|
345,448 |
|
Interest
expenses
|
|
|
- |
|
|
|
- |
|
|
|
505 |
|
|
|
75 |
|
|
|
|
2 |
|
|
580 |
|
Amortization and
depreciation
|
|
|
- |
|
|
|
123,017 |
|
|
|
106,209 |
|
|
|
2,156 |
|
|
|
|
3 |
|
|
231,382 |
|
Earnings
(losses) from operations before income taxes
|
|
|
- |
|
|
|
1,802,237 |
|
|
|
(587,282 |
) |
|
|
(2,339,900 |
) |
|
|
|
4 |
|
|
(1,124,945 |
) |
|
1
|
Represents
interest income included in the unallocated corporate or centralized
marketing, general and administrative
expenses.
|
|
2
|
Represents
interest expense included in the 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
earnings (losses) included in the unallocated corporate or centralized
marketing, general and administrative
expenses.
|
10.
|
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 accounting
principles generally accepted in the United States of America (“U.S. GAAP”) with
respect to the accounting policies and disclosures in these 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)
|
On
April 1, 2006, the Corporation adopted SFAS 123(R) which requires the
expensing of all options issued, modified or settled based on the grant
date fair value over the period during which an employee is required to
provide service (vesting period).
The
Corporation adopted SFAS 123(R) using the modified prospective approach,
which requires application of the standard to all awards granted,
modified, repurchased or cancelled on or after April 1, 2006, and to all
awards for which the requisite service has not been rendered as at such
date. Since April 1, 2003, the Corporation has been following
the fair value based approach prescribed by SFAS 123, as amended by SFAS
148, for stock option awards granted, modified or settled on or after such
date. As such, the application of SFAS 123(R) on April 1, 2006
to all awards granted prior to its adoption did not have any impact on the
financial statements. In accordance with the modified
prospective approach, prior period financial statements have not been
restated to reflect the impact of SFAS 123(R). The prospective adoption of
this new U.S. GAAP policy creates no differences with the Corporation’s
stock compensation expense reported under CDN GAAP.
Previously
under U.S. GAAP, the Corporation accounted for its 1996 Stock Option Plan
and 1998 Stock Incentive Plan under the principles of Accounting
Principles Board Opinion No. 25 “Accounting for Stock Issued to Employees
and Related Interpretations” (“APB 25”). No compensation
expense was recognized under APB 25 because the exercise price of the
Corporation’s stock options equals the market price of the underlying
stock on the date of the
grant.
|
|
c)
|
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 derecognition,
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 financial
statements.
|
The
components of comprehensive loss include the Corporation’s net loss and the
change in the cumulative translation adjustment related to the foreign currency
translation of its subsidiary Beanstream.
|
|
|
Three
months ended December 31
|
|
|
Nine
months ended December 31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$ |
(228,049 |
) |
|
$ |
(924,060 |
) |
|
$ |
(657,437 |
) |
|
$ |
(1,159,191 |
) |
|
Change
in cumulative translation adjustment
|
|
|
(2,555 |
) |
|
|
- |
|
|
|
26,232 |
|
|
|
- |
|
|
Total
comprehensive loss
|
|
$ |
(230,604 |
) |
|
$ |
(924,060 |
) |
|
$ |
(631,205 |
) |
|
$ |
(1,159,191 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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., Beanstream
Internet Commerce 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, 2007, filed
with the Securities and Exchange Commission on June 14, 2007 (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. Due to the
acquisition of Beanstream, we now operate three separate lines of
business: transaction payment processing, intellectual property
licensing and check processing/software licensing.
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
5,600 customers primarily in Canada.
IPL
Segment
Our
Intellectual Property Licensing Operations ("IPL") involve licensing our
intellectual property estate, which includes four 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 electronic check
authorization, electronic check conversion (ECC), 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 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. 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 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.
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 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. We provide our check
processing and software licensing services from our office locations in
Scottsdale, Arizona, and Wichita, Kansas.
Management
believes that certain trends in the use of electronic payments may be due to
changes in the financial behavior of consumers and businesses, particularly when
it comes to payment method of choice. We believe that electronic
payment methods are being used in greater frequency in transactions where
traditionally, checks and cash may have been the preferred method of payment
used in the past. While we anticipate the use of electronic payments
to increase, we also expect the number of checks written generally to
decrease. Based upon this assessment and during the three months
ended December 31, 2007, we undertook an evaluation regarding the provision of
certain CP/SL services. In performing this evaluation, management
considered the profitability of each service, the current growth prospects for
each service, and whether each service could be consolidated on to our most
efficient processing platform. We determined that certain CP/SL
services were profitable and could be consolidated onto an efficient processing
platform, and we also determined that certain CP/SL services were not profitable
nor had a high prospect for growth and could be terminated. During
the quarter ended December 31, 2007, we notified affected customers of our
decision. Subsequently, we moved ahead with plans to consolidate our
four data centers, currently located in Scottsdale and Phoenix, Arizona and
Victoria and Saanich, British Columbia, which are running two distinct
processing platforms, into two data centers with a single processing platform
located in Victoria and Saanich, British Columbia. We believe the
impact of these operational adjustments should result in reduction of CP/SL
segment revenue of approximately $160,000 per quarter and a reduction in CP/SL
costs of operations of approximately $400,000 per quarter, for a net savings of
approximately $240,000 per quarter. We anticipate this process to be
materially complete by the end of our current fiscal year.
Within
these segments, performance is measured based on revenue, factoring in interest
income and expenses and 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.
Acquisition
of Beanstream Internet Commerce Inc.
On April
30, 2007, we entered into an arrangement agreement to acquire all of the
outstanding capital stock of Beanstream , a leading provider of authentication
and Internet payment processing solutions that is based in Victoria, British
Columbia. The transaction closed on June 30, 2007. The
purchase price originally agreed to in the arrangement agreement was
approximately CDN$19.5 million (U.S.$18.3 million) consisting of CDN$7.6 million
in cash (U.S.$7.1 million), CDN$5.0 million (U.S.$4.7 million) in two-year
promissory notes and CDN$6.9 million (U.S.$6.5 million) in our common stock paid
at
closing. Former Beanstream shareholders could also receive up to an
additional CDN$2.0 million (U.S.$1.9 million) in our common stock if certain
revenue milestones are reached by June 30, 2008. Pursuant
to the arrangement agreement, the Beanstream shareholders had an option to elect
to accept our shares in lieu of a portion of the cash
consideration. The amount of the share-for-cash election was not
known until June 27, 2007, therefore, the measurement date for the consideration
that we paid was determined to be June 27, 2007 rather than April 30,
2007. Consequently, the measurement date is June 27, 2007 and the
total purchase price paid was U.S. $22,128,751. The increase in
purchase price from the U.S.$18.3 million above to the $22.1 million recorded
was a result of changes in the Canadian/U.S. currency exchange rate and
increases in the trading price of our common stock between April 30, 2007 and
June 27, 2007, and also due to a finders fee and other transaction costs related
to the acquisition.
We have
included the accounts of Beanstream since we acquired them on June 30, 2007 in
our consolidated balance sheet as of December 31, 2007 and our consolidated
statements of operations and deficit and consolidated statements of cash flows
for the three and nine month periods ended December 31,
2007.
Results
of Operations
Three
Months Ended December 31, 2007 results compared to Three Months Ended December
31, 2006
Revenue
Total
revenue for the three months ended December 31, 2007 was approximately
$3,398,000, an increase of approximately 124.1% from total revenue of
approximately $1,516,000 for the three months ended December 31,
2006. This increase is primarily attributable to an increase in
revenue associated with the inclusion of revenue from our TPP segment for the
first time commencing on July 1, 2007.
During
the three months ended December 31, 2007 and December 31, 2006 revenue from and
associated with our two largest customers amounted to approximately 34%. 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 and has been included in our third quarter results
for the first time during the three months ended December 31, 2007 as a result
of the acquisition of Beanstream on June 30, 2007. Transaction fees for the
three months ended December 31, 2007 were approximately $1,641,000; the
amortized portion of one-time set-up fees recognized was approximately $31,000
for the three months ended December 31, 2007; and monthly gateway fees for the
three months ended December 31, 2007 were approximately $237,000.
IPL
Segment
Revenue
from licensing our patented intellectual property increased by approximately
$17,000, from approximately $398,000 for the three months ended December 31,
2006 to approximately $415,000 for the three months ended December 31,
2007. The licensing revenue of approximately $415,000 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 $109,000 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, 2007 was approximately
$998,000, a decrease of approximately 10.7% from CP/SL segment revenue of
approximately $1,118,000 for the three months ended December 31,
2006.
Revenue
from electronic check verification was approximately $87,000 for the three
months ended December 31, 2007, a decrease of approximately 45.3% from revenue
from electronic check verification of approximately $159,000 for the three
months ended December 31, 2006. This decrease is primarily attributable to the
non-renewal of certain direct contracts with independent stores represented by
Grocers Supply Company Inc. which previously accounted for approximately 28% of
our revenue from electronic check verification.
Revenue
from our primary check collections business decreased approximately 13% from
approximately $177,000 for the three months ended December 31, 2006 to
approximately $154,000 for the three months ended December 31, 2007. Revenue
from our secondary check collections business decreased approximately 3.8% from
approximately $603,000 for the three months ended December 31, 2006 to
approximately $580,000 for the three months ended December 31,
2007.
Revenue
from royalties received from CheckFree Corporation pertaining to their marketing
of the PEP+ reACH™ product was approximately $72,000 for the three months ended
December 31, 2007, versus approximately $80,000 for the three months ended
December 31, 2006. We believe future royalties are dependent upon the
continued successful marketing by CheckFree Corporation of the PEP+ reACH™
product.
During
the three months ended December 31, 2007, we concluded our evaluation with
respect to our current operating activities and decided to cease providing
certain CP/SL segment services. As a result, subsequent to the three
months ended December 31, 2007, we commenced the consolidation of our four data
centers into two. We believe the impact of these operational
adjustments will be a reduction of our CP/SL revenue of approximately $160,000
per quarter. See “Item 2 - Overview - CP/SL Segment”.
Costs
of operations
Costs of
operations increased from approximately $1,237,000 for the three months ended
December 31, 2006, to approximately $1,973,000 for the three months ended
December 31, 2007, an increase of approximately 59.5%. The increase was
primarily attributable to the inclusion of our TPP segment costs for the first
time during the three months ended December 31, 2007.
TPP
Segment
Costs of
operations of our TPP segment consist of bank transaction fees, credit card
processing fees, commissions and dataport/telecom costs. Costs of operations for
the three months ended December 31, 2007 were approximately
$1,010,000.
Costs of
TPP revenue and gross profit for the three months ended December 31, 2007 were
as follows:
|
|
|
$
|
|
%
of Revenue
|
|
|
|
|
|
|
|
Cost
of TPP revenue
|
|
1,010,000
|
|
50.9
|
|
Gross
profit
|
|
974,000
|
|
49.1
|
CP/SL
Segment
Costs of
operations relating to our CP/SL segment consist of transaction processing
costs, personnel costs, equipment related costs and telecommunication costs.
CP/SL costs were approximately $963,000 compared to approximately $1,237,000 for
the three months ended December 31, 2007 and 2006, respectively, a decrease in
CP/SL costs of operation of approximately 22.2%. This decrease is primarily
attributable to the cost savings associated with our combination of operations
of our primary check collections business, previously located in Dallas, Texas,
with our secondary check collections business located in Wichita, Kansas, which
took place during the three months ended December 31, 2006.
In
addition, during the three months ended December 31, 2007, we concluded our
evaluation with respect to our current operating activities and decided to cease
providing certain CP/SL segment services. As a result, subsequent to
the three months ended December 31, 2007, we commenced the consolidation of our
four data centers into two. We believe the impact of these
operational adjustments will be a reduction in CP/SL costs of operations of
approximately $400,000 per quarter. See “Item 2 - Overview - CP/SL
Segment”.
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 increased
to approximately $1,069,000 from approximately $726,000 for the three months
ended December 31, 2007 and 2006, respectively, an increase of approximately
$343,000 or approximately 47.2%. The increase in sales, general and
administrative expense was primarily
attributable to the inclusion of our TPP segment’s sales, general and
administrative expenses of approximately $291,000 for the first time during the
three months ended December 31, 2007.
Amortization
and depreciation
Amortization
and depreciation increased to approximately $383,000 from approximately $72,000
for the three months ended December 31, 2007 and 2006, respectively. The
increase was primarily attributable to amortization on acquired intangible
assets resulting from our acquisition of Beanstream on June 30,
2007.
Other
income (expenses), net
During
the three months ended December 31, 2007, we had other income of approximately
$9,000 compared to other expenses of approximately $527,000 for the three months
ended December 31, 2006. The other income of approximately $9,000 in
the current period consists primarily of the recognized current period portion
of deferred other income from a certain standstill agreement contained in one of
the license agreements entered into in April 2006. The other expenses of
approximately $527,000 for the three months ended December 31, 2006 were
primarily attributable to expenses of approximately $540,000 in connection with
our due diligence efforts exploring several potential acquisition and merger
opportunities during this period in our prior fiscal year.
Interest
income
Interest
income decreased to approximately $111,000 from approximately $124,000 for the
three months ended December 31, 2007 and 2006, respectively. The
decrease in interest income was primarily attributable to a decrease in interest
bearing cash investments.
Interest
expense
Interest
expense increased to approximately $117,000 from nil for the three months ended
December 31, 2007 and 2006, respectively. The increase in interest
expense was primarily attributable to approximately $102,000 in interest accrued
on the two-year promissory notes for the three months ended December 31,
2007.
Income
taxes
Income
taxes increased to approximately $204,000 from approximately $4,000 for the
three months ended December 31, 2007 and 2006, respectively. The increase in
income taxes was primarily attributable to a provision for income taxes in the
amount of approximately $200,000 recorded for our TPP segment. We
expect our TPP segment to have taxable income for the current fiscal year and,
therefore, have recorded a provision for income taxes. We are
presently exploring our options as they pertain to the utilization of our
Canadian tax losses against the future taxable income of our TPP
segment.
Net
Loss
Net loss
decreased approximately $696,000 from a net loss of approximately $924,000 for
the three months ended December 31, 2006 to a net loss of approximately $228,000
for the three months ended December 31, 2007. The decrease was
primarily attributable to the inclusion of our TPP segment’s net income of
approximately $606,000 for the first time during the three months ended December
31, 2007.
Basic and
diluted loss per share were both ($0.01) for the three months ended December 31,
2007, as compared to approximately ($0.05) for the three months ended December
31, 2006.
Nine
Months Ended December 31, 2007 results compared to Nine Months Ended December
31, 2006
Revenue
Total
revenue for the nine months ended December 31, 2007 was approximately
$8,036,000, an increase of approximately 61.9% from total revenue of
approximately $4,963,000 for the nine months ended December 31,
2006. This increase is primarily attributable to an increase in
revenue associated with the inclusion of revenue from our TPP segment for the
first time commencing on July 1, 2007.
During
the nine months ended December 31, 2007 revenue from and associated with our
three largest customers amounted to approximately 47% of total revenue as
compared to approximately 51% of total revenue for the nine months ended December
31, 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.
TPP
Segment
Revenue
pertaining to our TPP segment consists of one-time set-up fees, monthly gateway
fees, and transaction fees and have been included in our second and third
quarter results for the first time during the nine months ended December 31,
2007 as a result of the acquisition of Beanstream on June 30,
2007. Transaction fees for the nine months ended December 31, 2007
were approximately $3,030,000; recognized one-time set-up fees were
approximately $60,000 for the nine months ended December 31, 2007; and monthly
gateway fees for the nine months ended December 31, 2007 were approximately
$461,000.
IPL
Segment
Revenue
from licensing our patented intellectual property decreased by approximately
$56,000, from approximately $1,316,000 for the nine months ended December 31,
2006 to approximately $1,260,000 for the nine months ended December 31,
2007. The licensing revenue of approximately $1,260,000 consists of:
(i) approximately $917,000, net of legal fees, representing the recognized
current period portion of deferred revenue from one granted license; and (ii)
approximately $343,000 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, 2007 was approximately
$3,083,000, a decrease of approximately 15.5% from CP/SL segment revenue of
approximately $3,647,000 for the nine months ended December 31,
2006.
Revenue
from electronic check verification was approximately $277,000 for the nine
months ended December 31, 2007, a decrease of approximately 52.8%
from revenue from electronic check verification of approximately $587,000 for
the nine months ended December 31, 2006. This decrease is primarily attributable
to the non-renewal of certain direct contracts with independent stores
represented by Grocers Supply Company Inc. which previously accounted for
approximately 28% of our revenue from electronic check
verification.
Revenue
from our primary check collections business decreased approximately 20.3% from
approximately $580,000 for the nine months ended December 31, 2006 to
approximately $462,000 for the nine months ended December 31, 2007. Revenue from
our secondary check collections business decreased approximately 6.9% from
approximately $1,865,000 for the nine months ended December 31, 2006 to
approximately $1,737,000 for the nine months ended December 31, 2007. The
decrease in revenue from our secondary check collections business was primarily
attributable to a decrease 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 $297,000 for the nine months ended
December 31, 2007, versus approximately $285,000 for the nine months ended
December 31, 2006. We believe future royalties are dependent upon the
continued successful marketing by CheckFree Corporation of the PEP+ reACH™
product.
During
our fiscal quarter ended December 31, 2007, we concluded our evaluation with
respect to our current operating activities and decided to cease providing
certain CP/SL segment services. As a result, subsequent to the nine
months ended December 31, 2007, we commenced the consolidation of our four data
centers into two. We believe the impact of these operational
adjustments will be a reduction of our CP/SL revenue of approximately $160,000
per quarter. See “Item 2 - Overview - CP/SL Segment”.
Costs
of operations
Costs of
operations increased from approximately $3,722,000 for the nine months ended
December 31, 2006, to approximately $4,796,000 for the nine months ended
December 31, 2007, an increase of approximately 28.9%. The increase was
primarily attributable to the inclusion of our TPP segment’s costs for the first
time during our nine months ended December 31, 2007.
TPP
Segment
Costs of
operations of our TPP segment consist of bank transaction fees, credit card
processing fees, commissions and dataport/telecom costs. Costs of operations for
the nine months ended December 31, 2007 were approximately
$1,801,000.
CP/SL
Segment
Costs of
operations relating to our CP/SL segment consist of transaction processing
costs, personnel costs, equipment related costs and telecommunication costs.
CP/SL costs were approximately $2,994,000 compared to approximately $3,721,000
for the nine months ended December 31, 2007 and 2006, respectively, a decrease
in CP/SL costs of operation of approximately 19.5%. This decrease is primarily
attributable to the cost savings associated with our combination of operations
of our primary check collections business, previously located in Dallas, Texas,
with our secondary check collections business located in Wichita, Kansas, which
took place during the nine months ended December 31, 2006.
In
addition, during our fiscal quarter ended December 31, 2007, we concluded our
evaluation with respect to our current operating activities and decided to cease
providing certain CP/SL segment services. As a result, subsequent to
the nine months ended December 31, 2007, we commenced the consolidation of our
four data centers into two resulting in a reduction in CP/SL costs of operations
of approximately $400,000 per quarter. See “Item 2 - Overview -
CP/SL Segment”.
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 increased
to approximately $2,544,000 from approximately $2,336,000 for the nine months
ended December 31, 2007 and 2006, respectively, an increase of approximately
$208,000 or approximately 8.9%. The increase in sales, general and
administrative expense was primarily attributable to the inclusion of our TPP
segment’s sales, general and administrative expenses of approximately $558,000
for the first time during the nine months ended December 31,
2007. This increase in sales, general and administrative expenses was
partially offset by a decrease of approximately $193,000 in stock-based
compensation expense from approximately $688,000 for the nine months ended
December 31, 2006 to approximately $495,000 for the nine months ended December
31, 2007.
Amortization
and depreciation
Amortization
and depreciation increased to approximately $644,000 from approximately $231,000
for the nine months ended December 31, 2007 and 2006, respectively. The increase
was primarily attributable to amortization on acquired intangible assets
resulting from our acquisition of Beanstream on June 30, 2007.
Foreign
exchange loss
Foreign
exchange loss increased to approximately $427,000 from approximately $3,000 for
the nine months ended December 31, 2007 and 2006, respectively. The increase in
foreign exchange loss was primarily attributable to an unrealized foreign
exchange loss of approximately $355,000 relating to the conversion of the
Canadian dollar denominated two-year promissory notes into U.S. dollars at
December 31, 2007 closing exchange rates. The U.S. dollar weakened by
approximately 7.4% from the date we issued the two-year promissory notes to the
December 31, 2007 date.
Other
(expenses) income, net
During
the nine months ended December 31, 2007 we had other income, net of
approximately $30,000 compared to other expenses, net of approximately $141,000
for the nine months ended December 31, 2006. The other income of
approximately $30,000 in the current period consists primarily of the recognized
current period portion of deferred other income from a certain standstill
agreement contained in one of the license agreements entered into in April
2006. The other expenses, net of approximately $141,000 in the prior
fiscal period consisted of approximately $540,000 in expenses attributable to
due diligence efforts relating to the exploration of several potential
acquisition and merger opportunities offset with other income of approximately
$377,000, net of legal fees, attributable to specific release provisions
contained in two of the license agreements entered into in April, 2006 as well
as approximately $22,000, 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
Interest
income increased to approximately $348,000 from approximately $345,000 for the
nine months ended December 31, 2007 and 2006, respectively.
Interest
expense
Interest
expense increased to approximately $247,000 from approximately $1,000 for the
nine months ended December 31, 2007 and 2006, respectively. The
increase in interest expense was primarily attributable to approximately
$198,000 in interest accrued on the two-year promissory notes for the nine
months ended December 31, 2007.
Income
taxes
Income
taxes increased to approximately $415,000 from approximately $34,000 for the
nine months ended December 31, 2007 and 2006, respectively. The increase in
income taxes was primarily attributable to a provision for income taxes in the
amount of approximately $391,000 recorded for our TPP segment. We expect our TPP
segment to have taxable income for the current fiscal year and, therefore, have
recorded a provision for income taxes. We are presently exploring our
options as they pertain to the utilization of our Canadian tax losses against
the future taxable income of our TPP segment.
Net
Loss
Net loss
decreased approximately $502,000 from a net loss of approximately $1,159,000 for
the nine months ended December 31, 2006 to a net loss of approximately $657,000
for the nine months ended December 31, 2007. The decrease was
primarily attributable to the inclusion of our TPP segment’s net income of
approximately $1,088,000 for the first time during the nine months ended
December 31, 2007.
Basic and
diluted loss per share were both approximately ($0.03) for the nine months ended
December 31, 2007, as compared to approximately ($0.06) for the nine months
ended December 31, 2006.
Liquidity
and Capital Resources
Our
liquidity and financial position consisted of approximately $2,769,000 in
negative working capital as of December 31, 2007 compared to approximately
$8,288,000 in working capital as of March 31, 2007. The decrease of
approximately $11,057,000 was primarily attributable to our acquisition of
Beanstream, completed on June 30, 2007. The purchase price included cash
consideration of approximately $7,154,000 and two-year promissory notes which
were approximately $4,693,000 on the closing date and were approximately
$5,246,000 at December 31, 2007, the increase primarily attributable to foreign
currency exchange rate fluctuations. Our decrease in our December 31, 2007
working capital balance was primarily attributable to the cash consideration
paid of approximately $7,154,000 and the current portion of the two-year
promissory notes totaling approximately $2,724,000. Cash used in operating
activities was approximately $261,000 for the nine months ended December 31,
2007, as compared to cash provided by operating activities of approximately
$7,351,000 for the nine months ended December 31, 2006. Cash used in operating
activities increased primarily due to the consideration we received during the
prior fiscal nine months ended December 31, 2006 of approximately $16,000,000,
less fees we paid Kirkland & Ellis of approximately $7,100,000 under a
special fee arrangement we have with them, resulting from the three settlement
and license agreements we entered into. Cash used in investing
activities was approximately $7,497,000 for the nine months ended December 31,
2007 as compared to approximately $724,000 for the nine months ended December
31, 2006, an increase in cash used in investing activities of approximately
$6,773,000. The increase in cash used in investing activities was primarily
attributable to the acquisition of Beanstream, net of cash acquired of
approximately $7,375,000. Cash used in financing activities was approximately
$191,000 for the nine months ended December 31, 2007 as compared to cash
provided by financing activities of approximately $41,000 for the nine months
ended December 31, 2006, an increase in cash used in financing activities of
approximately $232,000. The increase in cash used in financing activities was
primarily due to an increase in payments on capital leases of approximately
$248,000 from approximately $21,000 for the nine months ended December 31, 2006
to approximately $269,000 for the nine months ended December 31,
2007.
We
anticipate positive cash flows from our operating activities in fiscal
2008.
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 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.
Critical
Accounting Policies
There
have been no changes to our critical accounting policies since March 31, 2007.
For a description of our critical accounting policies, see our Annual Report on
Form 10-K for the year ended March 31, 2007 filed with the Securities and
Exchange Commission on June 14, 2007 (file no. 0-13959).
Contingencies
In
addition to the legal matters as described herein and as previously reported in
our Annual Report filed on Form 10-K for the year ended March 31, 2007, as filed
with the Securities and Exchange Commission on June 14, 2007 (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.
From
March 31, 2007 until December 31, 2007, 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, 2007, as filed with the Securities and Exchange
Commission on June 14, 2007 (file no. 0-13959), except as follows:
Foreign
Exchange Risk
The U.S.
dollar is the functional currency of our operations since substantially all of
our operations are conducted in U.S. currency. As a result, when we
are paying any obligation that is denominated in a foreign currency (including,
for example, the Beanstream promissory notes), we must generate the amount of
cash in U.S dollars that, when exchanged at the then-prevailing applicable
foreign currency exchange rate, will equal the amount of the obligation to be
paid (which means that we may pay more U.S. dollars than initially anticipated
if the foreign currency strengthens against the U.S. dollar between the time we
incur the obligation and the time we are required to pay the
obligation). Given recent and unexpected fluctuations in the
U.S./Canadian currency exchange rate, the amount owing on the Beanstream
promissory notes has increased as of December 31, 2007 from approximately U.S.
$4,881,000 to approximately U.S. $5,246,000. In addition, we have
operations in Canada, which are denominated in local
currency. Accordingly, we are exposed to the risk of future currency
exchange rate fluctuations, which are accounted for as an adjustment to
shareholders’ equity until realized. Therefore, changes from
reporting period to reporting period in the exchange rates between the Canadian
currency and the U.S. dollar might have a material adverse effect on our results
of operations and financial condition.
Subsequent
to the quarter ended December 31, 2007, we entered into various contractual
arrangements with the right to purchase $750,000 Canadian using U.S. dollars at
pre-determined foreign exchange rates. The rights must be executed between the
periods of June 16 to June 27, 2008.
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.
On June
30, 2007, the Corporation acquired Beanstream. 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 are in the
process of implementing our internal controls over financial reporting for the
acquired business and thus have not yet completed an assessment of their
effectiveness. As of and for the period ending December 31, 2007,
Beanstream represented 29% of our total assets, 42% of our total liabilities and
58% of our net operating revenue in our consolidated financial
statements.
Based on
their evaluation (and excluding Beanstream from management’s assessment), 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, 2007 that have materially affected, or are reasonably
likely to materially affect, our internal control over financial
reporting. There were no further changes in our internal control over
financial reporting during the quarter ended December 31, 2007 that have
materially affected, or are reasonably likely to materially affect, such
internal control over financial reporting, apart from the implementation, which
took place in the previous quarter ended September 30, 2007, of the
following:
·
|
certain
additional computer system log reviews at head office over reports
generated by the Beanstream
systems;
|
·
|
segregation
of duties in certain Beanstream accounting processes;
and
|
·
|
implementation
of head office disbursement authorization policies over disbursements
initiated at Beanstream.
|
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, 2007, as filed with
the Securities and Exchange Commission on June 14, 2007 (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.
The
following risk factors contain changes from the risk factors set forth in our
annual report on Form 10-K for the fiscal year ended March 31, 2007, as filed
with the Securities and Exchange Commission on June 14, 2007 (file no. 0-13959)
and should be reviewed together with risk factors set forth in such annual
report. The changes may be deemed material.
Currency
Exchange Rate Fluctuations Could Adversely Affect our Financial
Results
Fluctuations
in foreign currency exchange rates may have an adverse impact on our business,
results of operations and financial condition, as well as the value of our
foreign assets, which, in turn, may adversely affect reported earnings or losses
and the comparability of period-to-period results of operations, with the
exception of the newly acquired subsidiary Beanstream. The U.S. dollar is the
functional currency of our operations since substantially all of our operations
are conducted in U.S. currency. As a result, when we are paying any
obligation that is denominated in a foreign currency (including, for example,
the Beanstream promissory notes), we must generate the amount of cash in U.S
dollars that, when exchanged at the then-prevailing applicable foreign currency
exchange rate, will equal the amount of the obligation to be paid (which means
that we may pay more U.S. dollars than initially anticipated if the foreign
currency strengthens against the U.S. dollar between the time we incur the
obligation and the time we are required to pay the obligation). Given
recent and unexpected fluctuations in the U.S./Canadian currency exchange rate,
the amount owing on the Beanstream promissory notes has increased as of December
31, 2007 from approximately U.S. $4,881,000 to approximately U.S.
$5,246,000. We can not predict the impact, if any, that further
fluctuations in the U.S./Canadian currency exchange rate between now and the
date the first promissory note payment is due might have on our ability to pay
the cash portion of the first promissory note. In addition, further
significant changes in the U.S./Canadian currency exchange rate could have a
significant adverse impact on our current liquidity and capital resources and
could also have an adverse impact on our profitability and results of operations
for our fiscal year ending March 31, 2008.
Excessive
chargeback losses could significantly affect our results of operations and
liquidity.
Our
agreements with our sponsoring banks require us to assume and compensate the
banks for bearing the risk of “chargeback” losses. Under the rules of Visa and
MasterCard, when a merchant processor acquires card transactions, it has certain
contingent liabilities for the transactions processed. This
contingent liability arises in the event of a billing dispute between the
merchant and a cardholder that is ultimately resolved in the cardholder’s
favor. In such a case, the disputed transaction is charged back to
the merchant and the disputed amount is credited or otherwise refunded to the
cardholder. If we are unable to collect this amount from the
merchant’s account, or if the merchant refuses or is unable to reimburse us for
the chargeback due to merchant fraud, insolvency or other reasons, we will bear
the loss for the amount of the refund paid to the cardholders. In
addition, if we are unable to recover these chargeback amounts from merchants,
having to pay the aggregate of any such amounts would significantly affect our
results of operations and liquidity.
Merchant
fraud with respect to Internet-based bankcard and EFT transactions could cause
us to incur significant losses.
We
significantly rely on the processing revenue derived from bankcard and EFT
transactions. If any merchants were to submit or process unauthorized
or fraudulent bankcard or EFT transactions, depending on the dollar amount, we
could incur significant losses which could have a material adverse effect on our
business and results of operations.
Despite a
history of managing such risk, we cannot guarantee that our systems will prevent
fraudulent transactions from being submitted and processed or that the funds set
aside to address such activity will be adequate to cover all potential
situations that might occur. We do not have insurance to protect us
from these losses. There is no assurance that our chargeback reserve
will be adequate to offset against any unauthorized or fraudulent processing
losses that we may incur. Accordingly, should we experience such
fraudulent activity and such losses, our results of operations could be
immediately and materially adversely affected.
Our Future
Revenues May Be Uncertain Because of Reliance on Third Parties for Marketing and
Distribution.
Our TPP
segment distributes its service offerings primarily through outside sales
distribution partners and its revenues are derived predominantly through these
relationships.
We intend
to continue to market and distribute our current and future products and
services through existing and other relationships both in and outside of Canada.
There are no minimum purchase obligations applicable to any existing distributor
or other sales and marketing partners and we do not expect to have any
guarantees of continuing orders. Failure by our existing and future distributors
or other sales and marketing partners to generate significant revenues, our
failure to establish additional distribution or sales and marketing alliances,
changes in the industry that render third party distribution networks obsolete,
termination of relationships with significant distributors or marketing partners
would have a material adverse effect on our business, operating results and
financial condition. In addition, we may be required to pay higher commission
rates in order to maintain loyalty among our third-party distribution partners,
which may have a material adverse impact on our
profitability.
Distributors
and other sales and marketing partners may become our competitors with respect
to the products they distribute either by developing a competitive product
themselves or by distributing a competitive offering.
Our
Reliance on Suppliers and Vendors Could Adversely Affect Our Ability to Provide
Our Services and Products to Our Clients on a Timely and Cost-Efficient
Basis.
We rely
to a substantial extent on third parties to provide some of our software, data,
systems and services. In some circumstances, we rely on a single supplier or
limited group of suppliers. For example, our TPP segment requires the services
of third-party payment processors. If any of these processors cease to allow us
to access their processing platforms, our ability to process credit card
payments would be severely impacted.
Our
reliance on outside vendors and service providers also subjects us to other
risks, including a potential inability to obtain an adequate supply of required
components and reduced control over quality, pricing and timing of delivery of
components.
In
addition, our business is materially dependent on services provided by various
telecommunications providers. A significant interruption in telecommunications
services including, without limitation, a power loss, could seriously harm our
business.
From time
to time, we must also rely upon third parties to develop and introduce
components and products to enable us, in turn, to develop new products and
product enhancements on a timely and cost-effective basis. We may not be able to
obtain access, in a timely manner, to third-party products and development
services necessary to enable us to develop and introduce new and enhanced
products. We may not be able to obtain third-party products and development
services on commercially reasonable terms and we may not be able to replace
third-party products in the event such products become unavailable, obsolete or
incompatible with future versions of our products.
The Demand for
Our Transaction Payment Processing Products and Services Could Be Negatively
Affected by Reduced Growth of e-Commerce or Delays in the Development of the
Internet Infrastructure.
We depend
on the growing use and acceptance of the Internet by merchants and customers in
Canada and the United States as a means to grow our business. We cannot be
certain that acceptance and use of the Internet will continue to grow or that a
sufficiently broad base of merchants and consumers will adopt, and continue to
use, the Internet as a medium of commerce.
It is
also possible that continued growth in the number of Internet users and the use
of the Internet generally, may overwhelm the existing Internet infrastructure.
Delays in the development or adoption of new standards and protocols required to
handle increased levels of Internet activity could also have a detrimental
effect on the Internet and correspondingly on our business. These factors would
adversely affect usage of the Internet, and lower demand for our products and
services.
We
Could Be Subject to Liability as a Result of Security Breaches, Service
Interruptions by Cyber Terrorists or Fraudulent or Illegal Use of Our
Services.
Because
some of our activities involve the storage and transmission of confidential
personal or proprietary information, such as credit card numbers and social
security numbers, and because we are a link in the chain of e-commerce, security
breaches, service interruptions and fraud schemes could damage our reputation
and expose us to a risk of loss or litigation and monetary damages. Cyber
terrorists have periodically interrupted, and may continue to interrupt, our
payment gateway services in attempts to extort payments from us or disrupt
commerce. Our payment gateway services may be susceptible to credit card and
other payment fraud schemes, including unauthorized use of credit cards or bank
accounts, identity theft or merchant fraud. We expect that technically
sophisticated criminals will continue to attempt to circumvent our anti-fraud
systems. If such fraud schemes become widespread or otherwise cause merchants to
lose confidence in our services in particular, or in Internet systems generally,
our business could suffer.
In
addition, the storage and transmission of confidential personal data, coupled
with the large volume of payments that we handle for our clients, makes us
vulnerable to third-party or employee fraud or other internal security breaches.
Further, we may be required to expend significant capital and other resources to
protect against security breaches and fraud to address any problems they may
cause.
Our
business may also be susceptible to potentially illegal or improper uses. These
uses may include illegal online gambling, fraudulent sales of goods or services,
illicit sales of prescription medications or controlled substances, software and
other intellectual property piracy, money laundering, bank fraud, child
pornography trafficking, prohibited sales of alcoholic beverages and tobacco
products and online securities fraud. Despite measures we have taken to detect
and lessen the risk of this kind of conduct, we cannot ensure that these
measures will succeed. In addition, regulations under the USA Patriot Act may
require us to revise the procedures we use to comply with the various anti-money
laundering and financial services laws. Our business could suffer if clients use
our system for illegal or improper purposes or if the costs of complying with
regulatory requirements increase significantly.
We
believe our TPP segment is compliant with the Payment Card Industry’s (PCI)
Security Standard which incorporates Visa’s Cardholder Information Security
Program (CISP) and MasterCard’s Site Data Protection (SDP) standard.
However, there is no guarantee that we will maintain such compliance or that
compliance will prevent illegal or improper use of our payment
system.
We have
expended, and may be required to continue to expend, significant capital
resources to protect against security breaches, service interruptions and fraud
schemes. Our security measures may not prevent security breaches, service
interruptions and fraud schemes and the failure to do so may disrupt our
business, damage our reputation and expose us to risk of loss or litigation and
possible monetary damages.
Changes
to Credit Card Association and ACH Rules or Practices Could Adversely Impact Our
Business.
Our TPP
segment’s credit card payment gateway does not directly access the credit card
associations. As a result, we must rely on banks and their credit card
processing providers to process our transactions. Nevertheless, as a payment
gateway we must comply with the operating rules of the credit card associations.
The associations’ member banks set these rules and the associations interpret
them. Some of those member banks compete with the business of our TPP segment.
Visa, MasterCard, American Express or Discover could adopt new operating rules
or interpretations of existing rules which we might find difficult or even
impossible to comply with, resulting in our inability to give customers the
option of using credit cards to fund their payments. If we were unable to
provide a gateway for credit card transactions, our TPP segment would be
materially and adversely affected.
In
December 2004, the Payment Card Industry (PCI) Data Security Standard was
created by major credit card companies to safeguard customer information. Visa,
MasterCard, American Express, and other credit card associations mandate that
merchants and service providers meet certain minimum standards of security when
they store, process and transmit cardholder data. Our TPP segment must comply
with this standard in order to continue as an Internet payment gateway. Changes
to this standard may require us to invest significant resources in engineering
and hardware in order to comply.
The
Success of Our Business Strategy Is Dependent on Our Ability to Further
Penetrate into the Transaction Payment Processing Market and to Expand into New
or Complementary Markets.
As part
of our business strategy, we are seeking to further penetrate into the
transaction payment processing market and to expand our business into new
markets or markets that are complementary to our existing TPP segment
operations. If we are not able to successfully expand our penetration into our
existing transaction payment processing market or into new or complementary
markets, our financial results and future prospects may be harmed. Our ability
to increase market penetration and enter new or complementary markets depends on
a number of factors, including:
·
|
growth
in our existing and targeted
markets;
|
·
|
our
ability to provide products and services to address the needs of those
markets; and
|
·
|
competition
in those markets.
|
We
Face Competition from a Broad and Increasing Range of Vendors.
The
market for products and services offered to participants in online transactions
is highly competitive and subject to rapid change. This market is fragmented,
and a number of companies offer one or more products or services competitive
with ours. We anticipate continued growth and the formation of new alliances in
the market in which we compete, which will result in the entrance of new or the
creation of bigger competitors in the future. For example, in October 2005,
VeriSign, Inc. announced that PayPal, Inc., a wholly-owned subsidiary of eBay,
Inc., agreed to acquire VeriSign’s payment gateway business and to form a
strategic alliance with VeriSign, Inc. for online commerce and security. In
addition, in June 2006 Google, Inc. announced Google Checkout, a new payment
service that may compete with us. We face potential competition from several
providers of online payment processing services, including CyberSource
Corporation, Plug & Pay Technologies, Inc., PayPal, Inc., Google, Inc.
and LinkPoint International, Inc., a subsidiary of First Data
Corporation. In addition, other companies, including financial
services, credit card and payment processing companies compete with us or may
enter the market and provide competing services.
Because
competitors can penetrate one or more of our markets, we anticipate additional
competition from other established and new companies. In addition, competition
may intensify as competitors establish cooperative relationships among
themselves or alliances with others.
Many of
our current and potential competitors have significantly greater financial,
marketing, technical and other competitive resources than we do. As a result,
these competitors may be able to adapt more quickly to new or emerging
technologies and changes in client requirements, or may be able to devote
greater resources to the promotion and sale of their products and services. In
addition, in order to meet client requirements, we must often work cooperatively
with companies that are, in other circumstances, competitors. The need for us to
work cooperatively with such companies may limit our ability to compete
aggressively with those companies in other circumstances.
If
We Do Not Continue to Enhance Our Existing Products and Services, and Develop or
Acquire New Ones, We Will Not Be Able to Compete Effectively.
The
industries in which we do business or intend to do business have been changing
rapidly as a result of increasing competition, technological advances,
regulatory changes and evolving industry practices and standards, and we expect
these changes will continue. Current and potential clients have also experienced
significant changes as the result of competition and economic conditions. In
addition, the business practices and technical requirements of our clients are
subject to changes that may require modifications to our products and services.
In order to remain competitive and successfully address the evolving needs of
our clients, we must commit a significant portion of our resources
to:
·
|
identify
and anticipate emerging technological and market trends affecting the
markets in which we do business;
|
·
|
enhance
our current products and services in order to increase their
functionality, features and cost-effectiveness to clients that are seeking
to control costs and to meet regulatory
requirements;
|
·
|
develop
or acquire new products and services that meet emerging client needs, such
as products and services for the online
market;
|
·
|
modify
our products and services in response to changing business practices and
technical requirements of our clients, as well as to new regulatory
requirements;
|
·
|
integrate
our current and future products with third-party products;
and
|
·
|
create
and maintain interfaces to changing client and third party
systems.
|
We must
achieve these goals in a timely and cost-effective manner and successfully
market our new and enhanced products and services to clients. If we
are unable to expand or appropriately enhance or modify our products and
services quickly and efficiently, our business and operating results will be
adversely affected.
We
and Our Clients Must Comply with Complex and Changing Laws and
Regulations.
Government
regulation influences our activities and the activities of our current and
prospective clients, as well as our clients’ expectations and needs in relation
to our products and services. Businesses that handle consumers’ funds, such as
our TPP segment, are subject to numerous state and federal regulations,
including those related to banking, credit cards, electronic transactions and
communication, escrow, fair credit reporting, privacy of financial records,
internet gambling and others. State money transmitter regulations and federal
anti-money laundering and money services business regulations can also apply
under some circumstances. The application of many of these laws with regard to
electronic commerce is unclear. In addition, it is possible that a number of
laws and regulations may be applicable or may be adopted in the future with
respect to conducting business over the Internet concerning matters such as
taxes, pricing, content and distribution. If applied to us, any of the foregoing
rules and regulations could require us to change the way we do business in a way
that increases costs or makes our business more complex. In addition, violation
of some statutes may result in severe penalties or restrictions on our ability
to engage in e-commerce, which could have a material adverse effect on our
business.
Privacy
legislation, including the Gramm-Leach-Bliley Act and regulations thereunder, as
well as state laws may also affect the nature and extent of the products or
services that we can provide to clients as well as our ability to collect,
monitor and disseminate information subject to privacy
protection.
Consumer
protection laws in the areas of privacy, credit and financial transactions have
been evolving rapidly at the state, federal and international levels. As the
electronic transmission, processing and storage of financial information
regarding consumers continues to grow and develop, it is likely that more
stringent consumer protection laws may impose additional burdens on companies
involved in such transactions including, without limitation, notification of
unauthorized disclosure of personal information of individuals. Uncertainty and
new laws and regulations, as well as the application of existing laws, could
limit our ability to operate in our markets, expose us to compliance costs,
fines, penalties and substantial liability, and result in costly and
time-consuming litigation.
Furthermore,
the growth and development of the market for e-commerce may prompt more
stringent consumer protection laws that may impose additional regulatory burdens
on companies that provide services to online businesses. The adoption of
additional laws or regulations, or taxation requirements may affect the ability
to offer, or cost effectiveness of offering, goods or services online, which
could, in turn, decrease the demand for our products and services and increase
our cost of doing business.
The
Securities and Exchange Commission and the National Association of Securities
Dealers, Inc. have also enacted regulations affecting our corporate governance,
securities disclosure and compliance practices. We expect these regulations to
increase our compliance costs and require additional time and attention. If we
fail to comply with any of these regulations, we could be subject to legal
actions by regulatory authorities or private parties.
Our
Quarterly Operating Results May Fluctuate.
Our
operating results may fluctuate in the future based upon a number of factors,
many of which are not within our control. We base our operating expenses on
anticipated revenue growth and many of our operating expenses are relatively
fixed in the short-term. Our revenue model is based largely on recurring
revenues, billed monthly, predominately derived from growth in customers and the
numbers of transactions processed within a monthly billing period. The number of
transactions processed is affected by many factors, several of which are beyond
our control, including general consumer trends and holiday shopping in the
fourth quarter of the year.
If our
operating results fall below the expectations of investors or public market
analysts, the price of our common stock could fall dramatically. Our common
stock price could also fall dramatically if investors or public market analysts
reduce their estimates of our future quarterly operating results, whether as a
result of information we disclose, or based on industry, market or economic
trends, or other factors.
Our
operating results may also fluctuate in the future due to a variety of other
factors, including:
·
|
how
well we execute on our strategy and operating
plans;
|
·
|
changes
in the number of transactions we process for our customers, including as a
result of seasonality, success of each customer’s business, general
economic conditions or regulatory requirements restricting our
customers;
|
·
|
changes
in our pricing policies or those of our
competitors;
|
·
|
relative
rates of acquisition of new customers and the loss of existing
customers;
|
·
|
delays
in the introduction of new or enhanced services, software and related
products by us or our competitors or market acceptance of these products
and services;
|
·
|
the
impact of external factors or events, such as war, cyber terrorism or
other acts of terrorism
|
Our
quarterly results may also vary due to the timing and extent of restructuring,
and impairment and other charges that may occur in a given
quarter.
Our
quarterly results may be affected by new changes in accounting rules, such as
the requirement to record share-based compensation expense for employee stock
option grants made at fair market value.
As a
result of these factors, we believe that our quarterly results are not
predictable with any significant degree of certainty, and quarter-to-quarter
comparisons of our results of operations are not necessarily meaningful. You
should not rely on our quarterly results of operations to predict our future
performance.
Our
Business May Be Harmed by Errors in Our Software.
The
software that we develop and use in providing our transaction payment processing
is extremely complex and contains hundreds of thousands of lines of computer
code. Large, complex software systems such as ours are susceptible to errors.
The difficulty of preventing and detecting errors in our software is compounded
by the fact that we maintain multiple versions of our systems to meet the
differing requirements of our major clients, and must implement frequent
modifications to these systems in response to these clients’ evolving business
policies and technical requirements. Our software design, development and
testing processes are not always adequate to detect errors in our software prior
to its release. As a result, we have from time to time discovered, and may
likely in the future discover, errors in software that we have put into use.
Because of the complexity of our systems and the large volume of transactions we
process on a daily basis, we sometimes have not detected software errors until
after they have affected a significant number of transactions. Software errors
can have the effect of causing clients that utilize our products and services to
fail to comply with their intended business policies, or to fail to comply with
legal, credit card, and banking requirements, such as those under the Fair
Credit Reporting Act, Gramm-Leach-Bliley Act, NACHA rules, MasterCard’s Site
Data Protection (SDP) Standard, Visa’s Cardholder Information Security
Program (CISP) and Payment Card Industry’s (PCI) Data Security
Standard.
Such
errors can harm our business in several ways, including the
following:
·
|
we
may suffer a loss of revenue if, due to software errors, we are
temporarily unable to provide products or services to our merchant
customers;
|
·
|
we
may not be paid for the products or services provided to a client that
contain errors, or we may be liable for losses or damages sustained by a
customer as a result of such
errors;
|
·
|
we
may incur additional unexpected expenses to correct errors in our
software, or to fund product development projects that we may undertake to
minimize the occurrences of such errors in the
future;
|
·
|
we
may damage our relationships with clients or suffer a loss of reputation
within our industry;
|
·
|
we
may become subject to litigation or regulatory
scrutiny; and
|
·
|
our
customers may terminate or fail to renew their agreements with us or
reduce the products and services they purchase from
us.
|
Our
errors and omissions insurance may not adequately compensate us for losses that
may occur due to software errors. It is also possible that such insurance might
cease to be available to us on commercially reasonable terms or at
all.
Our
Initiatives to Improve Our Software Design and Development Processes May Not Be
Successful.
The
development of our products has, in some cases, extended over a period of more
than ten years. This incremental development process has resulted in systems
which are extremely complex. Systems of the size and complexity of ours are
inherently difficult to modify and maintain. We have implemented and are also
evaluating changes in our product development, testing and control processes to
improve the accuracy and timeliness of modifications that we make to our
software, including the frequent modifications that we must make in response to
changes in the business policies and technical requirements of our clients. We
believe that our initiatives to implement new product architecture and to
improve our product development, testing and control processes will be important
to our future competitive position and success. If we are not successful in
carrying out these initiatives on a timely basis or in a manner that is
acceptable to our clients, our business and future prospects could be
harmed.
Changes
in Management Could Affect Our Ability to Operate Our
Business.
Our
future success will depend to a significant degree on the skills, experience and
efforts of our executive officers. The loss of any of our executive officers
could impair our ability to successfully manage our current business or
implement our planned business objectives and our future operations may be
adversely affected.
We Face
Significant Competition for a Limited Supply of Qualified Software Engineers,
Consultants and Sales and Marketing Personnel.
Our
business depends on the services of skilled software engineers who can develop,
maintain and enhance our products, consultants who can undertake complex client
projects and sales and marketing personnel. In general, only highly qualified,
highly educated personnel have the training and skills necessary to perform
these tasks successfully. In order to maintain the competitiveness of our
products and services and to meet client requirements, we need to attract,
motivate and retain a significant number of software engineers, consultants and
sales and marketing personnel. Qualified personnel such as these are in short
supply and we face significant competition for these employees, from not only
our competitors but also clients and other enterprises. Other employers may
offer software engineers, consultants and sales and marketing personnel
significantly greater compensation and benefits or more attractive career paths
than we are able to offer. Any failure on our part to hire, train and retain a
sufficient number of qualified personnel would seriously damage our
business.
Our Business
Could Require Additional Financing.
Our
future business activities, the development or acquisition of new or enhanced
products and services, the acquisition of additional computer and network
equipment, the costs of compliance with government regulations and future
expansions including acquisitions will require us to make significant capital
expenditures. If our available cash resources prove to be insufficient, because
of unanticipated expenses, previous acquisitions, revenue shortfalls or
otherwise, we may need to seek additional financing or curtail our expansion
activities. If we obtain equity financing for any reason, our existing
stockholders may experience dilution in their investments. If we obtain debt
financing, our business could become subject to restrictions that affect our
operations or increase the level of risk in our business. It is also possible
that, if we need additional financing, we will not be able to obtain it on
acceptable terms, or at all.
We May Not Be
Able to Successfully Manage Operational Changes.
Over the
last several years, our operations have experienced rapid growth in some areas
and significant restructurings and cutbacks in others. These changes have
created significant demands on our executive, operational, development and
financial personnel and other resources. If we achieve future growth in our
business, or if we are forced to make additional restructurings, we may further
strain our management, financial and other resources. Our future operating
results will depend on the ability of our officers and key employees to manage
changing business conditions and to continue to improve our operational and
financial controls and reporting systems. We cannot ensure that we will be able
to successfully manage the future changes in our business.
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 refernce 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.
|
|
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32.1*
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Section
1350 Certification of Principal Executive Officer and Principal Financial
Officer.
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* 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.
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LML
PAYMENT SYSTEMS INC.
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/s/
Richard R. Schulz
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Richard
R. Schulz
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Controller
and Chief Accounting Officer
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(Duly
Authorized Officer and Chief Accounting Officer)
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February
8, 2008
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