UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
Form
10-K
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[X]
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ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For
the Fiscal Year Ended March 31, 2009
OR
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[ ]
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For the
Transition Period from ________ to ________
Commission
File Number: 0-13959
LML
PAYMENT SYSTEMS INC.
(Exact
name of registrant as specified in its charter)
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Yukon
Territory
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###-##-####
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(State
or other jurisdiction of incorporation or organization)
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(I.R.S.
Employer Identification No.)
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1680-1140
West Pender Street
Vancouver,
British Columbia Canada
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V6E
4G1
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(Address
of principal executive offices)
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(Zip
Code)
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Registrant’s
Telephone Number, Including Area Code: (604) 689-4440
Securities
registered pursuant to Section 12(b) of the Act:
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Title of Each Class
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Name of Each Exchange on Which
Registered
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None
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None
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Securities
registered pursuant to Section 12(g) of the Act:
Common
Stock, without par value
(Title of
each class)
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.Yes [ ] No
[X]
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.Yes
[ ] No [X]
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 has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files).Yes [ ] No [X] (not applicable
to the registrant)
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See definition of “large accelerated filer,” “accelerated
filer” and “smaller reporting company” in Rule 12b-2 of the Exchange
Act. (Check one):
Large
Accelerated Filed
[ ] Accelerated
Filer
[ ] Non-Accelerated
Filer [ ] Smaller
Reporting Company [X]
(Do not check if a smaller reporting company)
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes
[ ] No [X]
As of
September 30, 2008, the last business day of the registrant's most recently
completed second fiscal quarter, the aggregate market value of the Common Stock
of the Registrant held by non-affiliates based upon the closing sale price of
the Common Stock on such date as reported on the NASDAQ Capital Market, was
approximately $21.8 million.
As of May
29, 2009, the Registrant had 27,116,408 shares of Common Stock
outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions
of the registrant’s proxy statement for its 2009 Annual and Special Meeting of
Shareholders, which will be filed with the Commission within 120 days after the
end of the Registrant’s fiscal year ended March 31, 2009, are incorporated by
reference into Part III of this Annual Report on Form 10-K.
LML
PAYMENT SYSTEMS INC.
2009
FORM 10-K ANNUAL REPORT
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Page
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PART
I
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Item
1.
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1
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Item
1A.
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5
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Item
1B.
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14
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Item
2.
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14
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Item
3.
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15
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Item
4.
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15
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PART
II
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Item
5.
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16
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Item
6.
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19
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Item
7.
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21
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Item
7A.
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34
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Item
8.
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34
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Item
9.
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34
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Item
9A.
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35
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Item
9B.
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38
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PART
III
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Item
10.
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38
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Item
11.
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38
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Item
12.
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38
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Item
13.
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38
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Item
14.
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38
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PART
IV
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Item
15.
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39
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42
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PART
I
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ITEM
1.
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Unless
the context otherwise requires, references in this report on Form 10-K to the
“Company”, “LML,” “we,” “us” or “our” refer to LML Payment Systems
Inc. and its direct and indirect subsidiaries. LML Payment Systems Inc.’s
subsidiaries are Beanstream Internet Commerce, Inc,. LML Corp., Legacy
Promotions Inc., and LHTW Properties, Inc. LML Corp.’s subsidiaries
are LML Patent Corp., LML Payment Systems Corp. and Beanstream Internet Commerce
Corp. Unless otherwise specified herein, all references herein
to “$” are to United States (“U.S.”) Dollars. From time to time the
Company has made and may continue to make written or oral “forward-looking
statements” including those contained in this Annual Report on Form 10-K. These
forward-looking statements represent the Company’s present expectations or
beliefs concerning future events. The Company cautions that such
statements are qualified by important factors that could cause actual results to
differ materially from those in the forward-looking statements including those
factors identified below in Item 1A – “Risk Factors”.
Overview
We are a
leading provider of electronic payment, and risk management and authentication
services primarily to businesses and organizations who use the Internet to
receive or send payments.
We link
merchants selling products or services to customers wanting to buy them and
financial institutions who allow the transfer of payments to
occur. We have partnership arrangements and certified connections to
financial institutions, payment processors and other payment service providers
in order to enable our customers to safely and reliably conduct
e-Commerce. We provide our electronic payment, authentication and
risk management services to over 8,000 businesses and organizations in Canada
and the United States.
Our
payment services allow our customers to accept or process a wide array of
payments including credit cards, debit cards, electronic fund transfers and
Automated Clearing House (“ACH”) transactions. We process Mastercard,
VISA, American Express, Diners, JCB, and Discover cards on behalf of the
majority of Canadian and American merchant account acquirers. We also
offer leading risk management solutions to both online and brick and mortar
customers who wish to use the Internet as a cost effective means of
communicating with their own bank or credit reporting agency.
On June
30, 2007, we acquired Beanstream Internet Commerce Inc., a leading provider of
Internet-based electronic payment, risk management and authentication services
to businesses and organizations in Canada and the United States. We
believe the acquisition was complementary to our existing payment processing
business. The transaction was a cash, stock and debt transaction
valued at approximately $24,100,000 including the value of earn-out shares
issued since the closing date of the acquisition.
We
operate three separate lines of business: transaction payment processing,
intellectual property licensing and check processing/software licensing. Our
transaction payment processing services consist predominantly of Internet-based
services, while our check processing services involve predominantly traditional
and electronic check processing and recovery services that do not utilize the
Internet. With the completion of our 2007 acquisition of Beanstream
(which had a strong Internet-based product and service offering), we expect that
our transaction payment processing services will be our principal line of
business for the foreseeable future, while our other lines of business
(including the electronic check processing services that we have historically
relied on for a significant source of revenue) will become less important to our
overall service offerings and less significant to the financial performance of
our company. See “Item 7 – Management’s Discussion and Analysis of Financial
Condition and Results of Operations -- Overview.”
Our
headquarters are located at 1680 – 1140 West Pender Street, Vancouver, British
Columbia, Canada and we have office locations in Victoria, British Columbia,
Canada and Wichita, Kansas and Marshall, Texas in the United
States.
e-Commerce
Market
The
United States Department of Commerce reported that online retail sales in the
United States grew by 4.6% to $133.1 billion in 2008 compared to 2007, despite a
0.6% decline in total retail sales.
According
to the Forrester Research report: “US Online Retail Forecast, 2008 to 2013,”
e-commerce spending in the United States is projected to rise 11% to $156.1
billion in 2009 compared to 2008 despite the economic downturn being experienced
globally. Over the five-year forecast period of the report, online
retail sales in the United States are projected to grow at a compound annual
growth rate of 10% to reach $229 billion in 2013.
We
believe that the electronic payments and e-Commerce markets will continue to
grow as more and more businesses decide to sell products or make payments
electronically and over the Internet.
Products
and Services
Our
transaction payment customers range in size from small, sole proprietorships to
large corporations. However, most of our transaction payment
processing business comes from services we provide to small to medium size
firms. We support this market in three separate ways: first by
providing services that can be integrated to a customer’s website or financial
platform through software plug-ins and application programming interfaces
(API’s); second, by providing hosted services where we can provide a turn-key
e-Commerce website for a merchant; and third, by having our transaction payment
services integrated directly into third party software solutions. In
each instance, our products and services are designed to provide this market
segment with bundled payment, risk management, authentication, shopping cart
products and reporting forms that allow our customers to sell goods and services
and secure payment in an efficient and secure manner.
Our
customers include both online merchants and brick and mortar merchants,
including government and financial institutions. We provide electronic payment
and risk management solutions for brick and mortar retailers and mail-order and
telephone-order call-centers (“MOTO”) that allow these businesses to streamline
payment processing. Our payment services can be integrated into a
customer’s accounting or financial system, thereby reducing administrative costs
and removing some of the complexity of a paper-based environment.
We
provide solutions for e-merchants where we integrate our services to the website
of the e-merchant and their shopping cart or application software provider,
which allows e-merchants to accept credit card and debit card payments,
electronic funds transfers (EFT) and ACH payments. Our payment
solutions have been integrated into many shopping cart and application service
providers who integrate our payment services into their own products in order to
provide their customers secure access to financial payment
networks. Our payment products support both Canadian and U.S. dollar
settlement and our products are available in both French and
English.
Our
hosted solutions offered to customers include a connection between the
merchant’s website and our host system that provides the merchant with a
shopping cart with secure payment processing for credit cards and debit cards,
electronic funds transfers (EFT) and ACH payments, a secure order management
interface, multiple shipping options and sophisticated reporting and
reconciliation tools. All required forms and images are hosted on our
servers and are secured using secured socket layer (SSL)
encryption. We operate equipment in two separate data centers to
provide greater reliability to our merchants and customers.
In
addition, we provide a robust selection of authentication tools for merchants to
reduce the risk inherent in card-not-present credit card
transactions. Our merchants are entitled to the fraud protection
services offered by the card associations such as Mastercard’s Securecode and
Verified by Visa in addition to our own risk-management tools and
applications. We also provide additional easy to use authentication
services that provide our merchants with information that ranges from the
validation of credit card orders to the fraud screening of applications by
consumers. Our authentication services allow certification of
addresses and telephone numbers and can identify addresses that have been known
to be used as mail drops, and high risk postal codes. Our highest
level of authentication involves the consumer providing answers to
“out-of-wallet” questions as part of the transaction
process. Finally, we supply merchants with a variety of risk
management tools that, when combined with our cardholder authentication
services, provide leading class functionality in the battle against payments
fraud.
Technology
and Data Centers
We
operate a transaction processing platform that is designed for reliability,
scalability and security. We operate two separate data centers, one
in Victoria, B.C. and one in Saanich, B.C. These secure data centers
contain the technology necessary to provide our services to merchants over the
Internet and to our financial institutions and payment processing
partners. Our data centers contain our enterprise servers, network
firewalls, routers and other technology we use to provide services to our
merchants and partners. Our processing software is certified to
process financial transactions with a majority of Canadian and US merchant
acquirers, which allows us to act as a single point of integration and point of
contact for our customers and the customers of our channel partners and the
financial payments network.
Our
systems are monitored 24 hours per day, 7 days per week, 365 days per
year. We are also certified as a level 1 service provider under the
Payment Card Industry (PCI) Data Security Standard (DSS) which is a
comprehensive set of requirements for enhancing payment account data security
that was developed by the PCI Security Standards Council including American
Express, Discover Financial Services, JCB International, Mastercard Worldwide
and VISA Inc., to help facilitate the broad adoption of consistent data security
measures.
Sales
and Marketing
Our
products and services are primarily sold indirectly through both channel and
technology partners, directly through our website and directly by an internal
sales staff of five people.
We obtain
new business as a result of our relationships with channel partners and our own
internal marketing efforts. These channel partners can be payment
processors, financial institutions, independent sales organizations or software
application vendors who, in many cases, may provide a value-added service to our
merchants. We typically pay either a referral fee or commission or
residual fee for each merchant referred to us by our channel
partners. We rely on the success of our channel partners for new
sales. We currently have more than 400 channel partners.
Customer
Service
We staff
our own bilingual (French and English) customer support center and provide
direct inbound access to highly qualified and trained customer service
representatives who are fully capable of handling technical and non-technical
inquiries. Our customer service desk is staffed by 7 people.
Emergency support is available 24 hours a day, 7 days a week.
We view
our customer service capabilities as a key competitive advantage in our market.
Over 95% of our incoming calls are answered within 30 seconds by a live operator
who in most cases can address a question immediately.
Competition
The
market for our products and services is highly competitive and is characterized
by rapidly changing technology, changing industry standards, merchant
requirements, pricing competition and rapid rates of product obsolescence. Our
competitors include other payment gateways and merchant acquirers, payment
processors, technology service providers, Internet commerce providers and
financial institutions. In Canada, our primary competition is Moneris
and Elavon. In the U.S. market we compete against other third party processors
and gateways such as Cybersource, Authorize.net, and
Verisign/Paypal.
We
believe we compete on certain factors including:
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Customer
service
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Features
and functionality
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Strategic
partnerships and channel partners
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Ease
of product integration for
customers
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Broad
range of certified connections to financial institutions and payment
processors
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We
believe that we compete favorably with respect to these factors however, we
believe that part of our success will be our ability to successfully market
existing services. We operate in a market that is rapidly changing
and we may not be able to successfully compete against current or future
competitors. Many of our competitors have greater technical,
financial and marketing resources than us and, as a result, may be able to
respond more quickly to changes in technology, industry standards and merchant
requirements or may be able to devote greater resources to product development
and marketing than us. There can be no assurance that our current
services will not become obsolete or that we will have the financial, technical
and marketing resources and support facilities to compete successfully in the
future. Our failure to compete favorably could materially and
adversely affect our business, results of operations and financial
condition.
Regulatory
Matters
Various
aspects of our business are either subject to or may be affected by current and
future governmental and other regulations in many different
jurisdictions. The rules, regulations, policies and procedures
affecting our business are constantly subject to change.
Certain
of our services in Canada may be subject to federal legislation called the Proceeds of Crime and Terrorist
Financing Act.
Certain
check collection and electronic check re-presentment services that we provide
are governed by the Federal Fair Debt Collection Practices Act and the Federal
Fair Credit Reporting Act and other similar state laws. Electronic
check re-presentment transactions are subject to applicable National Automated
Clearing House Association (“NACHA”) Operating Rules, and applicable Uniform
Commercial Code statutes. Our electronic check re-presentment
transactions currently utilize the facilities of the Automated Clearing House
Network and therefore are governed by and subject to NACHA Operating Rules and
Regulation E. We use commercially reasonable efforts to oversee
compliance with the requirements of these acts and regulations.
Intellectual
Property
Our
Intellectual Property Licensing Operations ("IPL") involve licensing our
intellectual property estate, which includes five U.S. patents describing
electronic check processing methods. When we provide clients licenses
to our intellectual property estate, we typically earn revenue or other income
from ongoing royalty fees and, in some cases, release fees for potential past
infringement. In some instances we also earn revenue from license agreements
that provide for the payment of contractually determined paid-up license fees to
us in consideration for the grant of a non-exclusive, retroactive and future
license to our intellectual property estate and in other instances, where
license agreements include multiple element arrangements, we may defer this
revenue and recognize the revenue ratably over the license term.
Currently,
our intellectual property estate includes U.S. patent nos. 5,484,988, 6,164,528,
6,283,366, 6,354,491, RE40,220, all of which describe methods and systems for
processing checks electronically.
We rely
upon a combination of patent, trademark, copyright and trade secret law to
establish and protect our trademarks, software and inventions. Our
success will depend, in part, on our ability to protect and enforce intellectual
property protection for the technology contained in our patents and
trademarks. Certain unique aspects of our intellectual property are
protected by patents, including U.S. patent nos. 5,484,988, 6,164,528,
6,283,366, 6,354,491 and RE40,220, all of which relate to electronic check
processing methods and systems. Moreover, our patent estate
addresses, among other issues, the electronic submission of transactions through
a centralized database and authorization system for approval electronically,
electronic debiting of consumer bank accounts and electronic crediting of
designated merchant accounts in real-time or off-line modes using the facilities
of the ACH Network or any competing network.
We intend
to continue to file additional patent applications to expand our intellectual
property estate, seeking coverage of our developments in our business
areas. We rely on a combination of trademark, copyright and trade
secret laws and contractual provisions to establish and protect proprietary
rights in our software. There can be no assurance that these
protections will be adequate to deter misappropriation of our technologies or
independent third-party development of similar technologies. The cost
of prosecuting a claim of infringement against others, or defending a patent
infringement claim, may be substantial and there can be no assurance that we
will have the resources necessary to successfully prosecute or defend a patent
infringement claim.
Although we do not believe that our technology infringes the patent
rights of others, there can be no assurance that infringement claims will not be
made in the future or that the validity or enforceability of any patent issued
to us will be sustained if judicially tested.
Check
Processing/Software Licensing
Our Check
Processing/Software Licensing Operations ("CP/SL") involve primary and secondary
check collection including electronic check re-presentment (RCK) and software
licensing. Our check processing services involve return check
management such as traditional and electronic recovery services to retail
clients. When we provide return check management services, we
typically receive revenue when we are successful at recovering the principal
amount of the original transaction on behalf of the client. In some
instances we also earn a percentage of the principal amount and in other
instances our secondary recovery services provide for us to earn additional fees
when legal action is required. Our check processing services are
provided in the United States and are operated from our Wichita, Kansas
location.
Corporate
History
We were
originally incorporated under the laws of the Province of British Columbia,
Canada, as a “specially limited company” on January 24, 1974. In October 1997,
after receipt of shareholder approval, our directors elected to change our
governing corporate jurisdiction to the Yukon Territory, which change became
effective in November 1997. Under the Yukon Business Corporations
Act, we are a corporation that enjoys limited liability for its shareholders, is
governed by its Board of Directors and generally has the powers and capacity
attributable to a corporation.
Employees
There
exists competition for personnel in the financial payment processing
industry. We believe that our future success will depend in part on
our continued ability to hire and retain qualified personnel. There
can be no assurance that we will be successful in attracting and retaining a
sufficient number of qualified employees to conduct our business in the
future. As of May 29, 2009, we had 55 full-time employees including
five employees in sales and marketing and 10 employees in administration and
finance. We also employ consultants to perform services for us from
time to time.
Business
Concentration
During
the fiscal year ended March 31, 2009, revenue from and associated with our two
largest customers amounted to approximately 30% of total revenue. In
fiscal 2009, Dillon’s and Disney Interactive were our largest customers with
each of them accounting for more than 10% of our total revenue. We
are economically dependent on revenue from these customers. See
“Part II, Item 7 – Management’s Discussion and Analysis of Financial Condition
and Results of Operations” and Note 4 to our Consolidated Financial Statements
included in this report.
Available
Information
We
maintain investor relations pages on our Internet website at http://www.lmlpayment.com. On
these pages, we make available our annual, quarterly and other current reports
filed or furnished with the SEC as soon as practicable. These reports
may be reviewed or downloaded free of charge. Alternatively, if you
would like a paper copy of any such SEC report (without exhibits) or document,
write to the Corporate Secretary, LML Payment Systems Inc., Suite 1680, 1140
West Pender Street, Vancouver, BC V6E 4G1, and a
copy of such requested document will be provided to you, free of
charge.
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ITEM
1A.
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Introduction
In
addition to the normal risks of business, we are subject to significant risks
and uncertainties, including those listed below and others described elsewhere
in this Annual Report on Form 10-K. Any of the risks described herein
could result in a significant adverse effect on our results of operations and
financial condition and could cause our actual results of operations to differ
materially from the results contemplated by the forward-looking statements
contained in this report.
An
economic downturn may have a material adverse effect on our results of
operations, financial position or liquidity.
As the
recent global financial crisis has broadened and intensified, other sectors of
the economy have been adversely impacted which has led to a severe global
recession. Specifically, general economic conditions in the U.S. and other areas
of the world weakened in the second half of 2008, with a dramatic acceleration
in the fourth quarter. Our operating segments rely in part on the
number and size of consumer transactions. Retail sales are expected
to remain relatively flat or decrease during 2009 compared to 2008. As a service
provider that is dependent upon consumer and corporate spending, we continue to
face the risk of a downturn in revenues as customers process fewer purchases and
payments as a result of job losses, foreclosures, bankruptcies, reduced access
to credit and sharply falling home prices. Any resulting decreases in customer
traffic or average value per transaction will negatively impact our financial
performance.
Additionally,
many of the effects and consequences of the global financial crisis and a
broader global economic downturn are currently unknown; any one or all of them
could potentially have a material adverse effect on our future revenue and
profits and on our liquidity and capital resources, including the ability to
raise additional capital if needed, or otherwise negatively impact our business
and financial results.
If
our goodwill, indefinite-life intangible assets or other long-term assets
become impaired, we will be required to record additional impairment charges,
which may be significant.
A
significant portion of our long-term assets continues to consist of goodwill and
other definite and indefinite-life intangible assets recorded as a result
of our acquisition of Beanstream. We do not amortize goodwill and
indefinite-life intangible assets, but rather review them for impairment on
an annual basis or more frequently whenever events or changes in circumstances
indicate that their carrying value may not be recoverable. We
consider whether circumstances or conditions exist which suggest that the
carrying value of our goodwill and other long-lived assets might be impaired. If
such circumstances or conditions exist, further steps are required in order to
determine whether the carrying value of each of the individual assets
exceeds its fair market value. If analysis indicates that an individual asset’s
carrying value does exceed its fair market value, the next step is to record a
loss equal to the excess of the individual asset’s carrying value over its fair
value. The steps required by Canadian and U.S. generally accepted accounting
principles entail significant amounts of judgment and subjectivity. We
complete our analysis of the carrying value of our goodwill and other intangible
assets during the fourth quarter of each fiscal year, or more frequently
whenever events or changes in circumstances indicate that their carrying value
may not be recoverable. Events and changes in circumstances that may
indicate that there is impairment and which may indicate that interim
impairment testing is necessary include, but are not limited to, strategic
decisions to exit a business or dispose of an asset made in response to changes
in economic, political and competitive conditions, the impact of
the economic environment on our customer base and on broad market
conditions that drive valuation considerations by market participants, our
internal expectations with regard to future revenue growth and the assumptions
we make when performing our impairment reviews, a significant decrease in the
market price of our assets, a significant adverse change in the extent or manner
in which our assets are used, a significant adverse change in legal factors or
the business climate that could affect our assets, an accumulation of costs
significantly in excess of the amount originally expected for the acquisition of
an asset, and significant changes in the cash flows associated with an
asset. We analyze these assets at the individual asset, reporting unit and
corporate levels. As a result of such circumstances, we may be required to
record a significant charge to earnings in our financial statements during the
period in which any impairment of our goodwill, indefinite-life intangible
assets or other long-term assets is determined. Any such impairment
charges could have a material adverse effect on our business, financial
condition and operating results.
As a result of the continued
deterioration of economic conditions during the second half of fiscal 2009, we
evaluated the impact of
these conditions and other developments on our long-lived assets, including intangible
assets and goodwill, to assess whether impairment indicators were present that
would require interim impairment testing. During the latter half of the
third quarter of fiscal
2009, our total market capitalization began to decline below our consolidated
shareholders’ equity balance. When our total
market capitalization remains below our consolidated shareholders’ equity balance for a sustained period
of time, this may be an indicator of
potential impairment of goodwill and other intangible assets. Because this
condition continued throughout the balance of the fourth quarter of fiscal 2009,
we determined that the carrying amount of our goodwill and other intangible assets might not be recoverable
and performed additional impairment testing as of March 31, 2009.
These test results included an independent third party valuation of our TPP
segment reporting unit. In addition, the carrying value of the
definite and indefinite-life intangible assets was compared
with the expected future net undiscounted cash flows and fair value as calculated by the
expected future net
discounted cash flows, respectively, from these assets and we determined the
carrying value of the
assets did not exceed their fair value.
We
have a general history of losses and may not operate profitably in the
future.
We have
incurred losses for four of the last five fiscal years. As of March 31,
2009, our accumulated deficit was approximately $28,751,456. We believe that our
planned growth and profitability will depend in large part on our ability to
expand our client base. Accordingly, we intend to invest in marketing,
development of our client base and development of our marketing technology and
operating infrastructure. If we are not successful in expanding our client base,
it will have a material adverse effect on our financial condition and our
ability to continue to operate our business.
Excessive
chargeback losses could significantly affect our results of operations and
liquidity.
Our
agreements with our sponsoring financial institutions and certain payment
processors require us to assume and bear 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 could have a material adverse effect on our results of operations and
liquidity.
Because
a small number of customers have historically accounted for a substantial
portion of our revenue, our financial results would be materially adversely
affected if we are unable to retain customers.
We have
had in the past and may have in the future, a small number of customers that
have accounted for a significant portion of our revenue. During the
fiscal year ended March 31, 2009, revenue from and associated with our two
largest customers amounted to approximately 30% of total revenue. Our
revenue could materially decline because of a delay in signing agreements with a
single customer or the failure to retain an existing customer.
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 merchant or customer 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 and
liquidity.
Despite
systems designed to manage 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 any chargeback or
processing 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
reliance on financial institutions, providers of financial payment networks and
payment technology vendors could adversely affect our ability to provide our
services to our clients on a timely and cost-efficient basis.
We rely
to a substantial extent on third parties to provide access to networks and
technology including software, data, systems and services. In some
circumstances, we rely on a single supplier or limited group of
suppliers. For example, we require the services of financial
institutions and third-party payment processors for access to payment
networks. If any of these processors cease to allow us to access
their processing platforms and/or networks, our ability to process credit card,
debit card, EFT and ACH payments would be severely impacted and this would, in
turn, have a materially adverse impact on our results of operations and
liquidity.
If
we are unable to protect our intellectual property rights or if others claim
that we are infringing on their intellectual property, we could lose any
competitive advantage we may have with respect to our intellectual
property or we may be required to incur significant costs with
respect to the infringement of the intellectual property rights of
others.
We may be
unable to successfully assert patent infringement claims against others and
could incur significant costs with respect to asserting such
claims. Defending patent infringement claims brought against us could
cause us to incur significant costs. The failure to successfully
prosecute our patent infringement claims or defend patent infringement claims
brought against us could have a material adverse effect upon our business and
our financial results.
We are
currently asserting and have in the past asserted patent infringement claims
against others. The cost of prosecuting a patent infringement claim
against others carries a high degree of uncertainly and is
expensive. While we believe our patents to be valid, we face the risk
that our patents could ultimately be determined to be invalid or otherwise not
infringed by a court, jury or the United States Patent and Trademark
Office. Furthermore, all patents have an expiration date and our
patent nos. 5,484,988, 6,164,528, 6,283,366, 6,354,491 and RE40,220, regarding
electronic check processing, expire on January 16, 2013. Failure to
prevail in a patent infringement claim against others would have a material
adverse impact on our business and our financial results and our stock
price.
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 bank
account numbers, and because we are a link in the chain of e-Commerce, we are
vulnerable to internal and external security breaches, service interruptions and
third-party and employee fraud schemes that could damage our reputation and
expose us to a risk of loss or litigation and monetary damages. Our payment
services may be susceptible to credit card and other payment fraud schemes,
including unauthorized use of credit cards, debit cards or bank account
information, 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 are successful or otherwise cause merchants,
customers or partners to lose confidence in our services in particular, or in
Internet systems generally, our business would be materially adversely
affected.
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.
We
believe we are 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.
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 that would materially adversely effect our business, results of
operation and financial condition.
Changes
to credit card association, debit networks and ACH rules or practices could
adversely impact our business.
We do not
belong to nor can we directly access the bank card associations. As a result, we
must rely on banks and their processing providers to process our credit, debit,
EFT and ACH transactions. However, we must comply with the operating rules of
the credit card associations and other payment networks such as debit networks
and ACH networks. The associations’ member banks and network owners set these
rules and the associations and network owners interpret them. Some of
those member banks and network owners compete with us in certain
situations. Visa, MasterCard, American Express, Discover, Interac or
the Automated Clearing House 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, debit cards, EFT and ACH facilities to fund their payments. If we were
unable to provide a gateway for these payment services, our business would be
materially and 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
ours, are subject to numerous state, federal, provincial and international
regulations, including those related to banking, credit cards, electronic
transactions and communication, escrow, fair credit reporting, privacy of
personal information and financial records, internet gambling and others. State,
federal and provincial money transmitter regulations and federal and
international 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,
the Personal Information Protection and Electronic Documents Act in Canada, as
well as provincial and 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 of personal information and credit and
financial transactions have been evolving rapidly at the state, federal,
provincial 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. We
have in the past collected personal data about consumers for use in our check
authorization products, which has given rise to litigation involving our
corporation (see “Item 3 – Legal Proceedings”).
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
Canadian Securities Administrators in Canada and the Securities and Exchange
Commission and the National Association of Securities Dealers, Inc. in the
United States, 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
business is highly dependent on the efficient and uninterrupted operation of our
computer network systems and data centers, and any disruption or material breach
of security of our systems could materially harm our business.
Our
ability to provide reliable service largely depends on the efficient and
uninterrupted operation of our computer network systems and data centers. Any
significant interruptions or security or privacy breaches in our facilities,
computer networks, firewalls and databases could harm our business and
reputation, result in a loss of customers or cause inquiries and fines or
penalties from regulatory or governmental authorities. Our systems and
operations could be exposed to damage or interruption from fire, natural
disaster, power loss, telecommunications failure, unauthorized entry or physical
break-ins, computer viruses and hackers. The measures we have enacted, such as
the implementation of security access and disaster recovery plans, may not be
successful and we may experience problems other than system failures. We may
also experience software defects, development delays and installation
difficulties, which would harm our business and reputation and expose us to
potential liability and increased operating expenses.
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 thousands of lines of computer code. Complex
software systems such as ours are susceptible to errors. We believe our software
design, development and testing processes are adequate to detect errors in our
software prior to its release. Because of the complexity of our systems and the
large volume of transactions we process on a daily basis, it is possible that we
may not detect software errors until after they have affected a significant
number of transactions. Software errors can have the effect of causing
merchants, customers or partners who utilize our products and services to fail
to comply with their intended business policies, or to fail to comply with
legal, credit card, debit 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.
Our
future revenues may be uncertain because of reliance on third parties for
marketing and distribution.
We
distribute our service offerings primarily through third party sales
distribution partners and our 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.
We
may require additional capital, which may not be available on commercially
reasonable terms, or at all. Capital raised through the sale or issuance of
equity securities may result in dilution to our shareholders. Failure to obtain
such additional capital could have a materially adverse impact on our business
development.
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
shareholders 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.
Our
ability to expand through acquisitions involves risks and may not be
successful.
As part
of our growth strategy, we have made business acquisitions in recent years and
we expect to be an active business acquirer in the future. We
anticipate that we will seek to acquire complementary businesses, products and
services in the future. The acquisition and integration of businesses
involves a number of risks and challenges, including:
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·
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Maintaining
the acquired business’ customer
relationships;
|
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·
|
Demonstrating
to the customers of the acquired business that the acquisition has not
resulted in changes that would adversely impact the ability of the
acquired business to address the needs of its
customers;
|
|
·
|
The
operations, technology and personnel of an acquired business may be
difficult to integrate;
|
|
·
|
An
acquired business may not achieve anticipated revenues, earnings or cash
flow;
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·
|
The
allocation of management resources to complete a business acquisition may
divert management resources from our business and disrupt our day-to-day
operations.
|
There can
be no assurance that we will be able to fully integrate all aspects of an
acquired business successfully or fully realize the potential benefits of any
business combination and our failure to successfully integrate acquired
businesses may have a material adverse effect on our financial results and stock
price.
Currency
exchange rate fluctuations could adversely affect our financial results, which
may have an adverse impact on our business, results of operations and financial
condition as well as the value of our foreign assets.
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 our 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 which are denominated in Canadian
dollars), we must generate the equivalent 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). 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 a material adverse impact on
our profitability and results of operations.
Failure
to maintain effective internal controls in accordance with Section 404 of
the Sarbanes-Oxley Act could have a material adverse effect on our business and
stock price.
We have
been and may continue to be required to certify and report on our compliance
with the requirements of Section 404 of the Sarbanes-Oxley Act, which
requires annual management assessments of the effectiveness of our internal
control over financial reporting and a report by our independent registered
chartered accounting firm addressing the effectiveness of our internal control
over financial reporting. If we fail to maintain the adequacy of our internal
controls, as such standards are modified, supplemented or amended from time to
time, we may not be able to ensure that we can conclude on an ongoing basis that
we have effective internal controls over financial reporting in accordance with
Section 404. In order to achieve effective internal controls we may need to
enhance our accounting systems or processes which could increase our cost of
doing business. Any failure to achieve and maintain an effective internal
control environment could have a material adverse effect on our business,
financial results and stock price.
We
have historically experienced fluctuations in our operating results and expect
these fluctuations to continue in future periods, which may result in volatility
in our stock price.
Our
operating results may fluctuate in the future based upon a number of factors,
many of which are not within our control. 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 calendar year.
Our
operating results may also fluctuate in the future due to a variety of other
factors, including the timing and extent of restructuring, and impairment and
other charges that may occur in a given fiscal year, the final disposition of
any patent litigation and new changes in accounting rules, such as the
requirement to record stock-based compensation expense for employee stock option
grants made at fair market value. As a result of these factors, we believe that
our fiscal year results are not predictable with any significant degree of
certainty, and year-to-year comparisons of our results of operations are not
necessarily meaningful. You should not rely on our fiscal year results of
operations to predict our future performance.
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.
We
may be required to offset future deferred tax assets with a valuation
allowance.
During
the quarter ended March 31, 2009, we conducted an analysis of our ability
to realize our future income tax assets. As a result of this analysis, we
reduced the valuation allowance from prior years relating to our future tax assets resulting in an income tax benefit of
approximately $5,268,000 for 2009, whereas we did not record an income tax
benefit for 2008. However, if we fail to achieve future taxable
income assumed in the calculation of our future tax assets or if we fail to
implement feasible and prudent tax planning strategies, we may be required to
offset future tax assets with a valuation allowance, resulting in an additional
tax expense. The change in the valuation could have a material adverse impact on
our profitability and results of operations. If we do not achieve sufficient
Canadian and U.S. taxable income in future years to utilize all or some of our
net operating loss carryforwards, they will expire.
We
face competition from a broad and increasing range of vendors that could reduce
or eliminate demand for our products and services.
The
market for products and services offered to participants in online transactions
is highly competitive and is characterized by rapid technological change,
evolving industry standards, merchant requirements, pricing competition, rapid
rates of product obsolescence, and rapid rates of new product introduction. This
market is fragmented and a number of companies offer one or more products or
services competitive with ours. We face competition from several providers of
online payment processing services, including CyberSource Corporation,
Plug & Pay Technologies, Inc., Verisign/PayPal, Inc., Google, Inc. and
LinkPoint International, Inc., a subsidiary of First Data Corporation as well as
financial services companies, credit card and payment processing
companies. 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.
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 lose customers, our business
operations may be materially
adversely affected, which could cause us to
cease our business or curtail our business to a point
where we are no longer able to generate sufficient revenue
to fund operations.
The demand for many of our products
and services could be negatively affected by reduced growth of
e-Commerce,
delays in the
development of the Internet infrastructure, a general
economic slowdown or any other event causing a material slowing of consumer
spending.
A
significant portion of our revenue is derived from transaction processing fees.
Any changes in economic factors that adversely affect consumer spending and
related consumer debt, or a reduction in check writing or credit and debit card
usage, could reduce the volume of transactions that we process, and have a
materially adverse effect on our business, financial condition and results of
operations. 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.
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.
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 transaction payment
processing segment operations. If we are not able to successfully expand our
penetration into the 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.
The
industries in which we do business or intend to do business have been changing
rapidly as a result of increasing competition, technological advances, changing
consumer payment habits, 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:
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identify
and anticipate emerging technological and market trends affecting the
markets in which we do business;
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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;
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develop
or acquire new products and services that meet emerging client needs, such
as products and services for the online
market;
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modify
our products and services in response to changing business practices and
technical requirements of our clients, as well as to new regulatory
requirements;
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integrate
our current and future products with third-party products;
and
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create
and maintain interfaces to changing client and third party
systems.
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We must
achieve these goals in a timely and cost-effective manner and successfully
market our new and enhanced products and services to clients.
There is no assurance that our current
products and services will stay competitive with those of our
competitors or that we will be
able to introduce new products and services
to compete successfully in the future. 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
may not be able to attract, retain or integrate key personnel, including
executive officers, which may prevent us from successfully operating our
business.
We may
not be able to retain our key personnel or attract other qualified personnel in
the future. Our success will depend upon the continued service of key management
personnel as well as the skills, experience and efforts of our executive
officers. The loss of services of any of the key members of our management team
or our failure to attract and retain other key personnel could disrupt
operations and have a negative effect on employee productivity and morale and
have a material adverse impact upon our financial results. 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.
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.
Consolidation
in the industries we serve may adversely affect our ability to sell our products
and services.
Mergers,
acquisitions and personnel changes at financial institutions, payment processors
and payment technology providers including brick and mortar and e-Commerce
retailers may adversely affect our business, financial condition and results of
operations. The payments industry continues to consolidate and this
consolidation could cause us to lose:
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current
and potential customers; and
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market
share if an entity resulting from a combination of our customers
determines that it is more efficient to develop in-house products and
services similar to ours or to use our competitors’ products and
services.
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Estimates
of future financial results are inherently unreliable.
From time
to time, the Corporation and its representatives may make public predictions or
forecasts regarding the Corporation’s future results, including estimates
regarding future revenues, expense levels, tax rates, acquisition expenses,
capital expenditures, earnings or earnings from operations. Any forecast
regarding our future performance reflects various assumptions and judgments by
management regarding the likelihood that certain possible future events will in
fact occur. These assumptions and judgments are subject to significant
uncertainties and shifting market dynamics, and, as a matter of course, many of
them will prove to be incorrect. Further, events that may seem unlikely or
relatively certain at the time a given prediction is made may in fact occur or
fail to occur. Many of the factors that can influence the outcome of any
prediction or projection are beyond our control. As a result, there can be no
assurance that our performance will be consistent with any management forecasts
or that the variation from such forecasts will not be material and adverse.
Investors are cautioned that any prediction, projection or other forward looking
statement made by us should be considered current only as of the date made.
Investors are encouraged to utilize the entire available mix of historical and
forward-looking information made available by us, and other information relating
to our Corporation and our products and services, when evaluating our
prospective results of operations.
We may not be able to successfully
manage operational changes.
Over the
last several years, our operations have experienced rapid significant 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.
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ITEM
1B.
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Unresolved Staff
Comments
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None.
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ITEM
2.
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As of May
29, 2009, we leased office space containing approximately 14,000 square feet of
floor space for our operations. Our principal facilities
include:
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Location
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Approximate
Square
Feet
|
Lease
Expiration
Date
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Description
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|||
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|
||||||
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Wichita,
Kansas
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5,785
|
November,
2013
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CP/SL
Segment Operations
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|||
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Vancouver,
British Columbia
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3,400
|
September,
2013
|
Administration
|
|||
|
Victoria,
British Columbia
|
4,411
|
September,
2009
|
Data
Center/TPP Segment Operations
|
|||
|
Marshall, Texas
|
400
|
October,
2009
|
IPL
Segment
Operations
|
We
consider our current facilities to be adequate for our current needs and believe
that suitable additional space will be available, as needed, to accommodate
further physical expansion of our operations.
|
ITEM
3.
|
Legal Proceedings
|
On March
6, 2007, we received notification that we had been named in a class-action
lawsuit filed in the United States District Court, Eastern District, Marshall
Division, Texas, alleging that numerous defendants, including a subsidiary of
the Corporation, violated the Driver’s Privacy Protection Act regulating the use
of personal information such as driver’s license numbers and home addresses
contained in motor vehicle records held by motor vehicle departments, by not
having a permissible use in obtaining the State of Texas’ entire database of
names, addresses and other personal information. On September 8, 2008, the
complaint was dismissed with prejudice and on October 8, 2008 the plaintiffs
appealed this decision. We believe that these allegations are without
merit and do not expect them to have a material adverse effect on our results of
operations, financial position or liquidity.
On November 19, 2008, we filed a patent
infringement lawsuit in the U.S. district court for the Eastern District of
Texas against multiple financial institutions operating in the United States
(the “LML Suit”). In the suit, we allege that the defendants infringe
U.S. Patent No. RE40,220 and we are seeking damages and injunctive and other
relief for the alleged infringement of this patent.
On April 9, 2009, CitiBank, N.A., an
affiliate of one of the defendants in the LML Suit, filed a complaint for patent
infringement in the U.S. District Court for the Northern District of Illinois,
Eastern Division against our subsidiary LML Payment Systems Corp., in
an action styled Citibank, N.A. as plaintiff vs. LML Payment Systems
Corp. In the suit, Citibank, N.A. alleges that our subsidiary
infringes U.S. Patent No. 7,020,639 and is seeking damages and injunctive and
other relief. We believe these allegations are without merit and
intend to vigorously defend against them. At this time, the
likelihood of success of this suit is indeterminate and any amount likely to be
payable is unknown at this time.
On April 23, 2009, JP Morgan Chase
Bank, N.A., an affiliate of one of the defendants in the LML Suit,
filed a complaint for patent infringement in the U.S. District Court for the
District of Delaware against our subsidiaries LML Payment Systems Corp. and
Beanstream Internet Commerce Inc., in an action styled JP Morgan Chase Bank N.A.
as plaintiff vs. LML Payment Systems Corp. and Beanstream Internet Commerce
Inc. In the suit, JP Morgan Chase Bank N.A. alleges that our
subsidiaries infringe U.S. Patent Nos. 5,917,965 and 6,341,724 and is seeking
damages and injunctive and other relief. On May 13, 2009, the
plaintiff in this suit filed an amended complaint alleging our subsidiaries
additionally infringe U.S. Patent Nos. 5,940,844 and
6,098,052. We believe these allegations are without merit and
intend to vigorously defend against them. At this time, the
likelihood of success of this suit is indeterminate and any amount likely to be
payable is unknown at this time.
On June
4, 2009, which was subsequent to our fiscal year ended March 31, 2009, we
filed an additional patent infringement lawsuit in the U.S. district
court for the Eastern District of Texas against six financial institutions
operating in the United States. In the suit, we allege that the
defendants infringe U.S. Patent No. RE40,220 and we are seeking damages and
injunctive and other relief for the alleged infringement of this
patent.
Other
than as described herein, we are not currently involved in any material legal
proceedings. However, we are party from time to time to additional ordinary
litigation incidental to our business, none of which is expected to have a
material adverse effect on the results of our operations, financial position or
liquidity.
|
ITEM
4.
|
Submission of Matters to a Vote of Security
Holders
|
None.
PART
II
|
ITEM
5.
|
Market For Registrant's Common Equity, Related
Stockholder Security Matters and Issuer Purchases of Equity
Securities
|
Our
common stock is traded on The NASDAQ Stock Market’s Capital Market, which is the
principal market for our common stock, and trades under the symbol
"LMLP". Our common stock is neither listed nor traded on any
foreign trading market. The following table sets forth the range of high and low
prices for our common stock during the fiscal periods indicated. The prices set
forth below represent quotations between dealers and do not include retail
markups, markdowns or commissions and may not represent actual
transactions.
|
Fiscal
Year
Ended
March 31:
|
High
|
Low
|
|||
|
2009
|
1Q
|
$3.11
|
$2.35
|
||
|
2Q
|
2.95
|
0.65
|
|||
|
3Q
|
1.37
|
0.44
|
|||
|
4Q
|
.87
|
0.30
|
|||
|
2008
|
1Q
|
$4.48
|
$2.99
|
||
|
2Q
|
5.00
|
3.10
|
|||
|
3Q
|
4.09
|
2.74
|
|||
|
4Q
|
3.82
|
1.91
|
|||
The
prices set forth above are not necessarily indicative of liquidity of the
trading market for our common stock. Trading in our common stock is limited and
sporadic.
Our
common stock price is volatile.
The
market price of our common stock has been volatile in the past and may change
rapidly in the future. The following factors, among others, may cause
significant volatility in our stock price:
|
·
|
Actual
or anticipated fluctuations in our operating
results;
|
|
·
|
Financial
or business announcements by us, our competitors or our
customers;
|
|
·
|
Announcements
of the introduction of new or enhanced products and services by us or our
competitors;
|
|
·
|
Announcements
of mergers, joint development efforts or corporate partnerships in the
electronic commerce market;
|
|
·
|
Market
conditions in the banking, telecommunications, technology and emerging
growth sectors;
|
|
·
|
Rumors
relating to our competitors or us;
and
|
|
·
|
General
market or economic conditions.
|
In
addition, the U.S. stock markets have, in recent years, experienced significant
price and volume fluctuations, which have particularly affected the trading
price of equity securities of many technology companies.
Holders
of Common Stock
As of May
29, 2009, there were approximately 397 record holders of our common stock, with
approximately 27,116,408 shares outstanding. The number of holders of record is
based on the actual number of holders registered on the books of our transfer
agent and does not reflect holders of shares in "street name" or persons,
partnerships, associations, corporations or other entities identified in
security position listings maintained by depository trust
companies.
Dividend
Policy
We have
not paid any dividends on our common stock in the past and have no current plan
to pay dividends in the future. We intend to devote all funds to the operation
of our businesses.
Canadian
Federal Tax Considerations
General
There are
no foreign or currency controls in Canada, and there are no exchange
restrictions on borrowing from abroad, on the repatriation of capital, or the
ability to remit dividends, profits, interests, royalties, or other payments to
non-resident holders of our common stock. However, any such remittance to a
resident of the U.S. is subject to a reduced withholding tax pursuant to various
Articles of the Canada-U.S. Income Tax Convention, 1980 (the “Treaty”) between
Canada and the U.S.
Dividends
Generally,
dividends that are paid or credited by Canadian corporations to non-resident
shareholders are subject to a nonresident tax of 25%. However, the
Treaty provides that dividends paid by a Canadian corporation to a corporation
resident of the U.S. with no permanent establishment in Canada, which owns at
least 10% of our voting stock paying the dividend, are subject to the Canadian
non-resident withholding tax of 5%. In all other cases, when a
dividend is paid by a Canadian corporation to the beneficial owner resident in
the U.S., the Canadian non-resident withholding tax is 15% of the amount of the
dividend.
The
reduced withholding tax rates do not apply if the beneficial owner of the shares
carries on business through a permanent establishment in Canada and the stock
holding in respect of which the dividends are paid is effectively connected with
such permanent establishment. In such a case, the dividends are
taxable in Canada as general business profits at rates that may exceed the 5% or
15% rates applicable to dividends that are not effectively connected with a
Canadian permanent establishment.
The
Treaty permits Canada to apply its domestic law rules for differentiating
dividends from interest and other disbursements. Stock dividends are
subject to the normal Canadian non-resident withholding tax rules on the amount
of the dividend. The amount of a stock dividend is equal to the
increase in our paid-up capital by virtue of the dividend.
Interest
Effective
January 1, 2008, changes have been made to the Canadian Income Tax Act that
eliminate withholding taxes on interest paid (excluding Participating debt
interest) to arm’s lengths residents of the U.S. by a Canadian
corporation.
Historically,
interest paid or credited to a non-resident is subject to a 25% Canadian
withholding tax. If, at a time when interest has accrued but is not yet payable,
the holder of the debt transfers it to a Canadian resident or, in certain
circumstances, a non-resident who carries on business in Canada, part of the
proceeds of the disposition may be considered to be interest for Canadian income
tax purposes. Previously, under the Treaty, the rate of withholding tax on
interest paid to a U.S. resident is 10%.
For
Treaty purposes, interest includes interest as defined by domestic Canadian
income tax rules in the jurisdiction in which interest arises. The
withholding tax applies to the gross amount of the interest
payment.
Non-residents are subject to Canadian income tax on dispositions of “taxable
Canadian property.” Taxable Canadian property includes shares of a publicly
traded Canadian corporation if, at any time during the preceding five years, the
non-resident and persons with whom the non-resident did not deal at arm’s length
owned at least 25% of the issued and outstanding shares of any class of
stock.
The
applicable tax rate on capital gains realized by a non-resident is 30% for
corporations and 21.85% for individuals. Under the Treaty, capital
gains realized by a U.S. resident on the disposition of shares of a Canadian
corporation are exempt from Canadian income tax, unless (i) the value of the
shares is derived principally from Canadian real property, or (ii) the shares
are effectively connected with a permanent Canadian establishment of such
non-resident, the capital gains are attributable to such permanent
establishment, and the gains are realized not later than twelve months after the
termination of such permanent establishment.
Securities
Authorized for Issuance Under Equity Compensation Plans
The
following table provides information as of March 31, 2009 about our common stock
that may be issued upon the exercise of options, warrants and rights under all
of our existing equity compensation plans, including the 1996 Stock Option Plan
and the 1998 Stock Incentive Plan:
|
(A)
|
(B)
|
(C)
|
|
|
PLAN
CATEGORY
|
Number
of securities to be issued upon exercise of outstanding options, warrants
and rights
|
Weighted-average
exercise price of outstanding options, warrants and rights
|
Number
of securities remaining available for future issuance under equity
compensation plans (excluding securities reflected in column
(A))
|
|
Equity
compensation plans approved by security holders(1)
|
4,005,000
|
$3.74
|
1,027,000(2)
|
|
Equity
compensation plans not approved by security holders(3)
|
400,000
|
$3.40
|
N/A
|
|
|
______________________________
|
|
(1)
|
These
plans consist of: (i) the 1996 Stock Option Plan, and (ii) the 1998 Stock
Incentive Plan
|
|
(2)
|
Represents
the 1,027,000 shares that remain available for grant under the 1996
Stock Option Plan. The 10-year term of the 1998 Stock Incentive Plan
has expired and, accordingly, no additional options or other equity awards
may be granted under that plan (however, outstanding awards under the 1998
Stock Incentive Plan are not affected by the expiration of the term and
will continue to be governed by the provisions of the plan). The
Corporation intends to adopt a new equity incentive plan, which will be
submitted for shareholder approval at the Company's 2009 annual and
special meeting of shareholders, that the Company currently expects will
provide for the issuance of up to 6,000,000 shares of the Company's common
stock.
|
|
(3)
|
These
securities consist of warrants issued to Ladenburg Thalmann & Co.,
Inc. who acted as placement agent and financial advisor to LML in
connection with the private placement transaction with Millennium Partners
LLP completed on March 31, 2008. The warrants are exercisable
for 400,000 shares of LML’s common stock for a period of five years from
March 26, 2008 at a price of $3.40 per
share.
|
Stock
Performance Graph
The graph
set forth below compares the cumulative total shareholder return on our common
stock between March 31, 2004 and March 31, 2009 with the cumulative return of
(i) the NASDAQ Stock Market Index (US) and (ii) the NASDAQ Computer and Data
Processing Index (US and Foreign), over the same period. This graph assumes the
investment of $100 on March 31, 2004 in our common stock, the NASDAQ Stock
Market Index (US) and the NASDAQ Computer and Data Processing Index (US and
Foreign), and assumes the reinvestment of dividends, if any.
The
comparisons shown in the graph below are based upon historical data. We caution
that the share price performance shown in the graph below is not indicative of,
nor intended to forecast, the potential future performance of the LML Shares.
Information used in the graph was obtained from Research Data Group, Inc., a
source believed to be reliable but we are not responsible for any errors or
omissions in such information.
Notwithstanding
anything to the contrary set forth in any of our previous or future filings
under the Securities Act of 1933 or the Securities Exchange Act of 1934 that
might incorporate this Annual Report on Form 10-K or future filings made by us
under those statutes, the stock price performance graph is not considered
"soliciting material," is not deemed "filed" with the SEC and is not deemed to
be incorporated by reference into any of those prior filings or into any future
filings made by us under those statues.
[
|
ITEM
6.
|
Selected Financial
Data
|
The
selected financial data set forth below should be read together with
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations” and our financial statements and related notes. We have
derived the statement of operations data for the fiscal years ended March 31,
2007, 2008 and 2009 and the balance sheet data as at March 31, 2008 and 2009
from the audited financial statements included elsewhere in this
report. The statement of operations data for the fiscal years ended
March 31, 2005 and 2006 and the balance sheet data as at March 31, 2005, 2006
and 2007 were derived from audited financial statements that are not included in
this report. Historical results are not necessarily indicative of
results to be expected for future periods.
Table of
Selected Financial Data1
Year
Ended March 31
(Presented
under Canadian and U.S. GAAP)
(Amounts
in thousands, except per share data)
|
2009
|
2008
|
2007
|
2006
|
2005
|
||||||||||||||||
|
Statement
of operations data:
|
||||||||||||||||||||
|
Revenue
|
$ | 12,379 | $ | 11,328 | $ | 6,554 | $ | 5,458 | $ | 6,658 | ||||||||||
|
Net
income (loss)2
|
5,455 | (2,221 | ) | (1,073 | ) | (4,647 | ) | (4,150 | ) | |||||||||||
|
Net income (loss) per share –
basic
|
.20 | (.10 | ) | (.05 | ) | (.23 | ) | (.21 | ) | |||||||||||
|
Net income (loss) per share –
diluted
|
.20 | (.10 | ) | (.05 | ) | (.23 | ) | (.21 | ) | |||||||||||
|
Weighted
average number of common shares outstanding – basic
|
26,834 | 21,869 | 20,206 | 20,164 | 20,012 | |||||||||||||||
|
Weighted
average number of common shares outstanding – diluted
|
26,834 | 21,869 | 20,206 | 20,164 | 20,012 | |||||||||||||||
|
Balance
sheet data:
|
||||||||||||||||||||
|
Current
assets
|
$ | 18,996 | $ | 16,826 | $ | 11,148 | $ | 4,753 | $ | 7,318 | ||||||||||
|
Total
assets
|
47,499 | 39,642 | 13,679 | 6,078 | 9,070 | |||||||||||||||
|
Current
liabilities
|
16,234 | 13,185 | 2,860 | 1,725 | 1,204 | |||||||||||||||
|
Long-term
debt, less current portion
|
- | 2,613 | 727 | - | 23 | |||||||||||||||
|
|
______________________________
|
|
1
|
The
financial information set forth in this table for the fiscal years ended
March 31, 2005, 2006, 2007, 2008 and 2009 includes our accounts on a
consolidated basis.
|
|
2
|
Net income (loss) for the
fiscal years ended March 31, 2009, 2008, 2007, 2006 and 2005 include
stock-based compensation expenses of approximately $1,341,000, $1,287,000,
$877,000, $904,000 and $1,485,000, respectively, resulting from
fair value accounting for all stock options issued during the
year.
|
|
ITEM
7.
|
Management’s Discussion and Analysis of Financial Condition
And Results of Operations
|
The
following discussion and analysis should be read in conjunction with the
Consolidated Financial Statements and Notes thereto included in this Form 10-K.
See Item 8. “Financial Statements.” This information is not necessarily
indicative of future operating results. The Consolidated Financial Statements
and Notes thereto have been prepared in accordance with Canadian
GAAP.
Forward
Looking Information
All
statements other than statements of historical fact contained in this Annual
Report on Form 10-K 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
changes, increased competition, new government regulation or intervention in the
industry, general economic conditions and other risks described elsewhere in
this Annual Report on Form 10-K. See Part I, Item 1A – “Risk
Factors”. Accordingly, the actual results of our operations in the
future may vary widely from the forward-looking statements included
herein. All forward-looking statements included herein are expressly
qualified in their entirety by the cautionary statements in this
paragraph.
Overview
LML
Payment Systems Inc. is a financial payment processor operating three separate
lines of business: transaction payment processing, intellectual
property licensing and check processing/software licensing. Our transaction
payment processing services consist predominantly of Internet-based services,
while our check processing services involve predominantly traditional and
electronic check processing and recovery services that do not utilize the
Internet. With the completion of our 2007 acquisition of Beanstream
(which had a strong Internet-based product and service offering), we expect that
our transaction payment processing services will be our principal line of
business for the foreseeable future, while our other lines of business
(including the electronic check processing services that we have historically
relied on for a significant source of revenue) will become less important to our
overall service offerings and less significant to the financial performance of
our company.
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
8,000 customers primarily in Canada.
IPL
Segment
Our
Intellectual Property Licensing Operations ("IPL") involve licensing our
intellectual property estate, which includes five U.S. patents describing
electronic check processing methods. When we provide clients licenses
to our intellectual property estate, we typically earn revenue or other income
from ongoing royalty fees and, in some cases, release fees for potential past
infringement. In some instances we also earn revenue from license agreements
that provide for the payment of contractually determined paid-up license fees to
us in consideration for the grant of a non-exclusive, retroactive and future
license to our intellectual property estate and in other instances, where
license agreements include multiple element arrangements, we may defer this
revenue and recognize the revenue ratably over the license term.
CP/SL
Segment
Our Check
Processing/Software Licensing Operations ("CP/SL") involve primary and secondary
check collection including electronic check re-presentment (RCK) and software
licensing. Our check processing services involve return check
management such as traditional and electronic recovery services to retail
clients. When we provide return check management services, we
typically receive revenue when we are successful at recovering the principal
amount of the original transaction on behalf of the client. In some
instances we also earn a percentage of the principal amount and in other
instances our secondary recovery services provide for us to earn additional fees
when legal action is required. Our check processing services are
provided in the United States and are operated from our Wichita, Kansas
location.
We also
provide mainframe payment processing software modules and rights to use our
intellectual property to retailers and other payment processors. When
we provide mainframe based payment software modules we typically earn revenue by
way of a fixed software license fee. In some instances we also earn
revenue by way of royalties that are typically based upon a fixed sale price or
on a usage or transaction basis. We provide our check processing services from
our office location in Wichita, Kansas.
Within
these segments, performance is measured based on revenue, factoring in 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.
General
Market Conditions
We are
currently assessing the possible impacts on our operations and financial
condition of various scenarios, including the potential for a prolonged global
recession. In particular, we continue to evaluate how a prolonged global
recession might impact future revenues generated by our operating segments. We
anticipate we will be continuing to evaluate how a prolonged global recession
and the related distresses in the credit and capital markets will impact
existing business customers of ours, many of whom are small businesses, and how
a prolonged global recession may impact consumer spending and other business
transactions. Also unknown is the potential effect a prolonged recession may
have on our competitors, channel partners and end customers. In
general, for the fiscal year ended March 31, 2009, we do not believe any of
our operating segments experienced significant negative effects attributable to
the current financial crisis and distress in the credit and capital
markets.
Given the
foregoing uncertainties, we continue to re-assess our stated strategies and
investment plans. All statements made herein of the previously stated plans or
the “current” plan or expectation of such should be considered in light of the
potential effects discussed in the preceding paragraph. While the magnitude of
any change in plans, including investment plans, cannot be predicted at this
time, it is likely that some adjustments will be necessary due to the global
recession and the lack of liquidity in financial markets.
We operate in a highly competitive
business environment that has many risks. Critical risk factors that affect, or
may affect us and the financial payment processing industry include changes in
the level of spending by and transactions being processed for our customers and
the ongoing credit worthiness and financial solvency of our
customers. We believe that a prolonged global recession could affect
consumer confidence and spending patterns which we believe could have a negative
impact on the business of our customers and ultimately have a material adverse
effect on our results of operations and financial condition. A full discussion
of each of these risk factors (in addition to several other risk factors) is
disclosed in Item 1A.
Results of
Operations
Fiscal
year 2009 compared to Fiscal year 2008
Revenue
Total
revenue for fiscal year 2009 was approximately $12,379,000, an increase of
approximately 9.3% from total revenue of approximately $11,328,000 for fiscal
year 2008. This increase is primarily attributable to the increase in
our TPP segment revenue of approximately $2,212,000 from approximately
$5,637,000 for fiscal year 2008 to approximately $7,849,000 for fiscal year
2009. This increase was primarily attributable to our inclusion of twelve months
worth of TPP segment revenue for fiscal year 2009 as compared to the inclusion
of nine months worth of TPP segment revenue for fiscal year 2008 resulting from
our acquisition of Beanstream on June 30, 2007. Our TPP segment now makes up
approximately 63% of our total revenue.
TPP
Segment
Revenue
pertaining to our TPP segment consists of one-time set-up fees, monthly gateway
fees, and transaction fees. Transaction fees for fiscal year 2009 were
approximately $6,380,000 compared to transaction fees of approximately
$4,608,000 for fiscal year 2008, an increase of approximately $1,772,000; the
amortized portion of one-time set-up fees recognized was approximately $142,000
for fiscal year 2009 compared to one-time set-up fees of approximately $98,000
for fiscal year 2008, an increase of approximately $44,000; and monthly gateway
fees for fiscal year 2009 were approximately $982,000 compared to monthly
gateway fees for fiscal year 2008 of approximately $699,000, an increase of
approximately $283,000. These increases were primarily attributable to our
inclusion of twelve months worth of TPP segment revenue for fiscal year 2009 as
compared to the inclusion of nine months worth of TPP segment revenue for fiscal
year 2008 resulting from our acquisition of Beanstream on June 30,
2007.
IPL
Segment
Revenue
from licensing our patented intellectual property increased by approximately
$34,000 from approximately $1,670,000 for fiscal year 2008 to approximately
$1,704,000 for fiscal year 2009. The licensing revenue of
approximately $1,704,000 consists of: (i) approximately $1,224,000, net of legal
fees, pertaining to one granted license; and (ii) approximately $480,000 related
to aggregate licenses providing running royalties.
CP/SL
Segment
CP/SL segment revenue for fiscal year
2009 was approximately $2,826,000, a decrease of approximately 29.7% from CP/SL
segment revenue of approximately $4,021,000 for fiscal year 2008. During the
fourth quarter of our fiscal year 2008, and as part of our repositioning effort
in this segment, we ceased providing certain CP/SL segment services, including
check verification, and, consequently, expected a corresponding decrease in
CP/SL segment revenue.
Revenue
from electronic check verification was $nil for fiscal year 2009, as compared to
approximately $327,000 for fiscal year 2008. This decrease is primarily
attributable to our no longer providing electronic check verification services
during fiscal year 2009. During the fourth quarter of our fiscal year 2008, we
ceased providing certain CP/SL segment services, including electronic check
verification.
Revenue
from our primary check collections business decreased approximately 20.6% from
approximately $622,000 for fiscal year 2008 to approximately $494,000 for fiscal
year 2009. Revenue from our secondary check collections business decreased
approximately 9% from approximately $2,311,000 for fiscal year 2008 to
approximately $2,103,000 for fiscal year 2009. The decrease in primary and
secondary check collections business is primarily attributable to our cessation
of providing certain CP/SL segment services, including check verification during
the fourth quarter of our fiscal year 2008. Historically, certain customers may
have received bundled payment processing services from us including electronic
check verification and returned check management services. Consequently, the
cessation of electronic check verification services to these specific customers
could also cause a reduction in primary and secondary check collections
business.
Revenue
from royalties received from CheckFree Corporation pertaining to their marketing
of the PEP+ reACH™ product was approximately $43,000 for fiscal year 2009,
versus approximately $370,000 for fiscal year 2008. Future royalties
are dependent upon the continued successful marketing by CheckFree of the PEP+
reACH™ product. CheckFree is not contractually required to market the PEP+
reACH™ product and no assurances can be made that CheckFree will actively market
the PEP+ reACH™ product in the future.
Cost
of revenue
Cost of
revenue consists primarily of costs incurred by the TPP and CP/SL operating
segments. These costs are incurred in the delivery of e-commerce
transaction services, customer service support and check collection services and
include processing and interchange fees paid, other third-party fees, personnel
costs and associated benefits and stock-based compensation.
Cost of
revenue increased from approximately $4,808,000 for fiscal year 2008 to
approximately $6,056,000 for fiscal year 2009, an increase of approximately
$1,248,000 or approximately 26%. This increase was primarily attributable to our
inclusion of twelve months worth of TPP segment cost of revenue totaling
approximately $4,278,000 for fiscal year 2009 as compared to the inclusion of
nine months worth of TPP segment cost of revenue totaling approximately
$3,002,000 for fiscal year 2008 resulting from our acquisition of Beanstream on
June 30, 2007. CP/SL segment cost of revenue was approximately $1,628,000 for
fiscal year 2009 as compared to approximately $1,764,000 for fiscal year 2008, a
decrease in CP/SL segment cost of revenue of approximately $136,000 or
approximately 7.7%.
In fiscal year 2009, cost of revenue was approximately $1,513,000 in the first
quarter, approximately $1,505,000 in the second quarter, approximately
$1,560,000 in the third quarter and approximately $1,478,000 in the fourth
quarter.
General
and administrative expenses
General
and administrative expenses consist primarily of personnel costs including
associated stock-based compensation and employment benefits, office facilities,
travel, public relations and professional service fees, which include legal
fees, audit fees, SEC compliance costs and costs related to compliance with the
Sarbanes-Oxley Act of 2002. General and administrative expenses also include the
costs of corporate and support functions including our executive leadership and
administration groups, finance, information technology, legal, human resources
and corporate communication costs.
General
and administrative expenses decreased to approximately $4,343,000 from
approximately $5,660,000 for fiscal years 2009 and 2008, respectively, a
decrease of approximately $1,317,000 or approximately 23.3%. Included in general
and administrative expenses for fiscal year 2009 are TPP segment expenses of
approximately $643,000 as compared to approximately $337,000 for fiscal year
2008. The increase in TPP segment general and administrative expenses was
primarily attributable to our inclusion of twelve months worth of TPP segment
expenses for fiscal year 2009 as compared to the inclusion of nine months worth
of TPP segment expenses for fiscal year 2008 resulting from our acquisition of
Beanstream on June 30, 2007. CP/SL segment expenses decreased to approximately
$639,000 from approximately $2,146,000 for fiscal year 2009 and 2008
respectively, a decrease of approximately $1,507,000 or approximately 70.2%.
This expected decrease in CP/SL segment general and administrative expenses is
primarily attributable to our repositioning of this segment, and in particular
the consolidation of our four data centers into two which was completed during
the fourth quarter of our fiscal year 2008. As the data center consolidations
took place during our prior fiscal year’s fourth quarter, we do not anticipate
these significant decreases in CP/SL segment general and administrative expenses
to extend past our fourth quarter of our current fiscal year 2009. Also included
in general and administrative expenses are stock-based compensation expenses of
approximately $1,140,000 for fiscal year 2009 compared to approximately
$1,218,000 for fiscal year 2008, a decrease of approximately $78,000 or
approximately 6.4%.
Sales
and Marketing
Sales and
marketing expenses consist primarily of costs related to sales and marketing
activities. These expenses include salaries, sales commissions, sales operations
and other personnel-related expenses, travel and related expenses, trade shows,
costs of lead generation, consulting fees and costs of marketing programs, such
as internet, print and direct mail advertising costs.
Sales and
marketing expense increased to approximately $323,000 from approximately
$228,000 for fiscal year 2009 and 2008, respectively, an increase of
approximately $95,000 or approximately 41.7%. The increase is primarily
attributable to an increase in our TPP segment sales and marketing expenses of
approximately $149,000 primarily associated with increased personnel costs, and
partially attributable to our inclusion of twelve months worth of TPP segment
sales and marketing expenses for fiscal year 2009 as compared to the inclusion
of nine months worth of TPP segment expenses for fiscal year 2008 resulting from
our acquisition of Beanstream on June 30, 2007.
Product
Development and Enhancement
Product
development and enhancement expenses consist primarily of compensation and
related costs of employees engaged in the research, design and development of
new services and in the improvement and enhancement of the existing product and
service lines.
Product
development and enhancement expenses were approximately $272,000 for fiscal year
2009 as compared to approximately $178,000 for fiscal year 2008. The increase is
primarily attributable to an increase in our TPP segment product development and
enhancement expenses of approximately $94,000 primarily associated with our
inclusion of twelve months worth of TPP segment product development and
enhancement expenses for fiscal year 2009 as compared to the inclusion of nine
months worth of TPP segment expenses for fiscal year 2008 resulting from our
acquisition of Beanstream on June 30, 2007.
Amortization
and depreciation
Amortization
of intangibles was approximately $661,000 for fiscal year 2009, as compared to
approximately $537,000 for fiscal year 2008. The increase in amortization of
intangibles of approximately $124,000 was primarily attributable to twelve
months worth of amortization of acquired intangible assets for fiscal year 2009
versus nine months worth for fiscal 2008 resulting from our acquisition of
Beanstream on June 30, 2007. Depreciation expense for capital assets decreased
to approximately $124,000 for fiscal year 2009 from approximately $368,000 for
fiscal year 2008.
Foreign
exchange gain (loss)
Foreign
exchange gain increased to approximately $444,000 for fiscal year 2009 from a
foreign exchange loss of approximately $230,000 for fiscal year 2008. The
increase in foreign exchange gain was primarily attributable to an unrealized
foreign exchange gain of approximately $371,000 relating to the conversion of
the Canadian dollar denominated two-year promissory notes into U.S. dollars at
March 31, 2009 closing exchange rates. The U.S. dollar strengthened by
approximately 23.5% from the prior fiscal year end date, March 31, 2008 to the
current fiscal year end date March 31, 2009.
Other
(expenses) income, net
During
the fiscal year 2009, we had net other income of approximately $11,000 compared
to net other expenses of approximately $247,000 for the fiscal year
2008. Net other income for fiscal year 2009 consist primarily of
approximately $43,000, net of legal fees, attributable to the recognized current
period portion of deferred other income from a certain standstill agreement
contained in one of the licenses we entered into in April, 2006 offset by
approximately $35,000 in costs relating to the early termination of one of our
operating leases. Net other expenses for fiscal year 2008 consist primarily of
approximately $247,000 in costs relating to the consolidation of our four data
centers into two which was completed during our fourth quarter of fiscal
2008.
Gain/(loss)
on disposal/abandonment of property and equipment
Gain on
disposal/abandonment of property and equipment for fiscal year 2009 was
approximately $1,000 compared to a loss on disposal/abandonment of property and
equipment for fiscal year 2008 of approximately $726,000. The loss on
disposal/abandonment of property and equipment for fiscal 2008 consist primarily
of costs relating to the consolidation of our four data centers into two and the
consequential consolidation of two distinct processing platforms into a single
processing platform. We disposed and abandoned the two IBM Mainframes that were
running the processing platform that was consolidated during the fourth quarter
of our fiscal year 2008.
Interest
income
Interest
income for fiscal year 2009 decreased to approximately $226,000 from
approximately $406,000 for fiscal year 2008. The decrease in interest
income was primarily attributable to a decrease in interest bearing cash
investments.
Interest
expense
Interest
expense decreased to approximately $248,000 in fiscal year 2009 compared to
approximately $359,000 in fiscal year 2008. The decrease in interest expense was
primarily attributable to a decrease of approximately $68,000 from approximately
$297,000 in interest accrued on the two-year promissory notes issued in the
Beanstream acquisition for fiscal year 2008 to approximately $229,000 for fiscal
year 2009.
Income
Taxes
Income
taxes decreased to a recovery position of approximately $4,421,000 from an
expense position of approximately $614,000 for fiscal year 2009 and 2008,
respectively. The recovery of income taxes was attributable to an approximate
$6,547,000 reversal in the valuation allowance related to our future income tax
assets which was recorded in the fourth quarter of the 2009 fiscal year, offset
by amounts accrued for our estimated 2009 income tax liabilities.
In
evaluating our ability to realize our future income tax assets we consider all
available positive and negative evidence including our past operating results
and our forecast of future taxable income. In determining future taxable income,
we make assumptions to forecast future taxable income, the reversal of temporary
differences, and the implementation of any feasible and prudent tax planning
strategies. These assumptions require significant judgment regarding the
forecasts of future taxable income, and are consistent with the forecasts used
to manage our business. Valuation allowances are established when necessary to
reduce future income tax assets to the amounts expected to be realized on a more
likely than not basis. During 2009, we recorded an income tax benefit of
approximately $5,268,000. This benefit included approximately a $6,547,000
reduction of our remaining valuation allowance related to our future income tax
assets as we have determined that these assets will more likely than not be
realized. If we fail to achieve future taxable income assumed in the
calculation of our future tax assets or if we fail to implement feasible and
prudent tax planning strategies, we may be required to offset future tax assets
with a valuation allowance, resulting in an additional tax expense.
As of
March 31, 2009, we had U.S. net operating loss carry-forwards of
approximately $9,515,000 and Canadian non-capital loss carry-forwards of
approximately $8,792,000. Of the U.S. net operating loss amounts, approximately
$3,372,000 represents tax deductions from stock-based compensation which will be
recorded as an adjustment to additional paid-in capital when they reduce taxes
payable. If we are not able to use these loss carry-forwards, the U.S. and
Canadian loss carry-forwards will expire in 2010 through 2029.
Net Income
(Loss)
Net
income was approximately $5,455,000 for fiscal year 2009 compared to a net loss
of approximately $2,221,000 for fiscal year 2008, an increase in net income of
approximately $7,676,000. The increase in net income is primarily
attributable to an approximately $6,547,000 reversal in the valuation allowance
related to our future income tax assets which was recorded in the fourth quarter
of the 2009 fiscal year. Net income per both basic and diluted share
was approximately $0.20 for fiscal year 2009, as compared to a net loss per
basic and diluted share of approximately ($0.10) for fiscal year 2008, an
increase in net income per basic and diluted share of approximately
$0.30.
Results
of Operations
Fiscal
year 2008 compared to Fiscal year 2007
Revenue
Total
revenue for fiscal year 2008 was approximately $11,328,000, an increase of
approximately 72.8% from total revenue of approximately $6,554,000 for fiscal
year 2007. 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.
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 fiscal results for the
first time during the fiscal year ended March 31, 2008 as a result of the
acquisition of Beanstream on June 30, 2007. Transaction fees for fiscal year
2008 were approximately $4,608,000; the amortized portion of one-time set-up
fees recognized was approximately $98,000 for fiscal year 2008; and monthly
gateway fees for fiscal year 2008 were approximately $699,000.
IPL
Segment
Revenue
from licensing our patented intellectual property decreased by approximately
$49,000 from approximately $1,719,000 for fiscal year 2007 to approximately
$1,670,000 for fiscal year 2008. The licensing revenue of
approximately $1,670,000 consists of: (i) approximately $1,224,000, net of legal
fees, pertaining to one granted license; and (ii) approximately $446,000 related
to aggregate licenses providing running royalties.
CP/SL
Segment
Revenue
from electronic check verification was approximately $327,000 for fiscal year
2008, approximately a 55.2% decrease from revenue from electronic check
verification of approximately $730,000 for fiscal year 2007. 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 20.2% from
approximately $779,000 for fiscal year 2007 to approximately $622,000 for fiscal
year 2008. Revenue from our secondary check collections business decreased
approximately 8.8% from approximately $2,534,000 for fiscal year 2007 to
approximately $2,311,000 for fiscal year 2008. 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 $370,000 for fiscal year 2008,
versus approximately $363,000 for fiscal year 2007. We believe future
royalties are dependent upon the continued successful marketing by CheckFree
Corporation of the PEP+ reACH™ product.
During
our fiscal year 2008, we ceased providing certain CP/SL segment services,
including electronic check verification. As a result, during the fourth quarter
of our fiscal year 2008, we consolidated our four data centers into
two.
Cost
of revenue
Cost of
revenue increased from approximately $4,534,000 for fiscal year 2007 to
approximately $4,808,000 for fiscal year 2008, an increase of approximately
$274,000 or approximately 6%. This increase was primarily attributable to our
inclusion of nine months worth of TPP segment cost of revenue totaling
approximately $3,002,000 for fiscal year 2008 resulting from our acquisition of
Beanstream on June 30, 2007. CP/SL segment cost of revenue was approximately
$1,764,000 for fiscal year 2008 as compared to approximately $4,534,000 for
fiscal year 2007, a decrease in CP/SL segment cost of revenue of approximately
$2,770,000 or approximately 61.1%.
In fiscal year 2008, cost of revenue was approximately $498,000 in the first
quarter, approximately $1,312,000 in the second quarter, approximately
$1,517,000 in the third quarter and approximately $1,481,000 in the fourth
quarter.
General
and administrative expenses
General
and administrative expenses increased to approximately $5,660,000 from
approximately $2,835,000 for fiscal years 2008 and 2007, respectively, an
increase of approximately $2,825,000 or approximately 99.6%. Included in general
and administrative expenses for fiscal year 2008 are nine months worth of TPP
segment expenses of approximately $337,000 resulting from our acquisition of
Beanstream on June 30, 2007. CP/SL segment expenses increased to approximately
$2,146,000 from approximately $425,000 for fiscal year 2008 and 2007
respectively, an increase of approximately $1,721,000. Also included in general
and administrative expenses are stock-based compensation expenses of
approximately $1,218,000 for fiscal year 2008 compared to approximately $877,000
for fiscal year 2007, an increase of approximately $341,000 or approximately
38.9%.
Sales
and Marketing
Sales and
marketing expense decreased to approximately $228,000 from approximately
$355,000 for fiscal year 2008 and 2007, respectively, a decrease of
approximately $127,000 or approximately 35.8%. The decrease is primarily
attributable to a decrease in our CP/SL segment sales and marketing expenses of
approximately $275,000 from approximately $355,000 for fiscal year 2007 to
$80,000 for fiscal year 2008 offset by nine months worth of TPP segment sales
and marketing expenses of approximately $145,000 resulting from our acquisition
of Beanstream on June 30, 2007.
Product
Development and Enhancement
Product
development and enhancement expenses were approximately $178,000 for fiscal year
2008 as compared to approximately $nil for fiscal year 2007. The increase is
primarily attributable to the inclusion of nine months worth of TPP segment
product development and enhancement expenses of approximately $154,000 resulting
from our acquisition of Beanstream on June 30, 2007.
Amortization
and depreciation
Amortization
on intangibles increased to approximately $537,000 for fiscal year 2008 from
approximately $164,000 for fiscal year 2007. The increase was
primarily attributable to amortization on acquired intangible assets resulting
from our acquisition of Beanstream on June 30, 2007. Depreciation expenses
relating to our system software and other software increased to approximately
$94,000 for fiscal year 2008 from approximately $40,000 for fiscal year
2007. Depreciation expense for other capital assets
increased to approximately $274,000 for fiscal year 2008 from approximately
$132,000 for fiscal year 2007.
Foreign
exchange loss
Foreign
exchange loss increased to approximately $230,000 from approximately $3,000 for
fiscal year 2008 and 2007, respectively. The increase in foreign exchange loss
was primarily attributable to an unrealized foreign exchange loss of
approximately $178,000 relating to the conversion of the Canadian dollar
denominated two-year promissory notes into U.S. dollars at March 31, 2008
closing exchange rates. The U.S. dollar weakened by approximately 3.9% from the
date we issued the two-year promissory notes to the March 31, 2008
date.
Other
(expenses) income, net
During
the fiscal year 2008, we had net other expenses of approximately $247,000
compared to net other income of approximately $617,000 for the fiscal year
2007. Net other expenses for fiscal year 2008 consist primarily of
approximately $247,000 in costs relating to the consolidation of our four data
centers into two which was completed during our fourth quarter of fiscal 2008.
Net other income for fiscal year 2007 consists primarily of (i) approximately
$377,000, net of legal fees, attributable to specific release provisions
contained in two of the license agreements we entered into in April 2006, (ii)
approximately $43,000, 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, and (iii) approximately $208,000 related to
a State sales tax refund resulting from the conclusion of a State sales tax
audit performed during our fiscal year 2007.
Gain/(loss)
on disposal/abandonment of property and equipment
Loss on
disposal/abandonment of property and equipment for fiscal year 2008 was
approximately $726,000 compared to a gain on disposal/abandonment of property
and equipment for fiscal year 2007 of approximately $7,000. The loss on
disposal/abandonment of property and equipment for fiscal 2008 consist primarily
of costs relating to the consolidation of our four data centers into two and the
consequential consolidation of two distinct processing platforms into a single
processing platform. We disposed and abandoned the two IBM Mainframes which were
running the processing platform that was consolidated during the fourth quarter
of our fiscal year 2008.
Interest
income
Interest
income for fiscal year 2008 decreased to approximately $406,000 from
approximately $475,000 for fiscal year 2007. The decrease in interest
income was primarily attributable to a decrease in interest bearing cash
investments.
Interest
expense
Interest
expense increased to approximately $359,000 in fiscal year 2008 compared to
approximately $13,000 in fiscal year 2007. The increase in interest expense was
primarily attributable to approximately $297,000 in interest accrued on the
two-year promissory notes issued in the Beanstream acquisition for fiscal year
2008.
Income
Taxes
Income
taxes increased to approximately $614,000 from approximately $38,000 for fiscal
year 2008 and 2007, respectively. The increase in income taxes was primarily
attributable to a provision for income taxes in the amount of approximately
$586,000 recorded for our TPP segment.
We
regularly evaluate the realizability of our future tax assets given the nature
of our operations and given the tax jurisdictions in which we operate. As at
March 31, 2008, we considered it more likely than not that the future tax assets
would not be realized through future taxable income. Accordingly, a valuation
allowance of 100% had been provided against these future tax assets at March 31,
2008 and 2007.
Net Loss
Net loss
was approximately $2,221,000 for fiscal year 2008 and approximately $1,073,000
for fiscal year 2007. Net loss per both basic and diluted shares was
approximately ($0.10) for fiscal year 2008, as compared to approximately ($0.05)
for fiscal year 2007.
Liquidity
and Capital Resources
Our
liquidity and financial position consisted of approximately $2,762,000 in
working capital as of March 31, 2009 compared to approximately $3,641,000 in
working capital as of March 31, 2008. The decrease in working capital was
primarily attributable to the first installment payment of approximately
$2,844,000 (CAD $2,900,000) on the promissory notes relating to the acquisition
of Beanstream. Cash used in operating activities increased approximately
$843,000 from cash provided by operating activities of approximately $540,000
for fiscal year 2008 to cash used in operating activities of approximately
$303,000 for fiscal year 2009. The increase in cash used in operating activities
was primarily attributable to decreases in accounts payable and corporate taxes
payable balances as at March 31, 2009. Cash used in investing activities was
approximately $119,000 for fiscal year 2009 as compared to approximately
$7,334,000 for fiscal 2008, a decrease in cash used in investing activities of
approximately $7,215,000. Cash used in investing activities during fiscal 2008
included approximately $7,287,000 attributable to the acquisition of
Beanstream. Cash used in financing activities was approximately
$3,038,000 for fiscal year 2009 as compared to cash provided by financing
activities of approximately $6,193,000 for fiscal year 2008 an increase in cash
used in financing activities of approximately $9,231,000. The increase in cash
used in financing activities was primarily due to the first installment payment
of approximately $2,844,000 (CAD$2,900,000) on the promissory notes relating to
the acquisition of Beanstream. The increase in cash used in financing activities
was also attributable to the net proceeds of approximately $6,690,000 resulting
from a private placement of our common shares during our prior fiscal year
2008.
We
anticipate positive cash flows from our operating activities in fiscal
2010.
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.
Contingencies
On March
6, 2007, we received notification that we had been named in a class-action
lawsuit filed in the United States District Court, Eastern District, Marshall
Division, Texas, alleging that numerous defendants, including a subsidiary of
the Corporation, violated the Driver’s Privacy Protection Act regulating the use
of personal information such as driver’s license numbers and home addresses
contained in motor vehicle records held by motor vehicle departments, by not
having a permissible use in obtaining the State of Texas’ entire database of
names, addresses and other personal information. On September 8, 2008, the
complaint was dismissed with prejudice and on October 8, 2008 the plaintiffs
appealed this decision. We believe that these allegations are without
merit and do not expect them to have a material adverse effect on our results of
operations, financial position or liquidity.
On
November 19, 2008, we filed a patent infringement lawsuit in the U.S. district
court for the Eastern District of Texas against multiple financial institutions
operating in the United States (the “LML Suit”). In the suit, we
allege that the defendants infringe U.S. Patent No. RE40,220 and we are seeking
damages and injunctive and other relief for the alleged infringement of this
patent.
On April
9, 2009, CitiBank, N.A., an affiliate of one of the defendants in the LML Suit,
filed a complaint for patent infringement in the U.S. District Court for the
Northern District of Illinois, Eastern Division against our subsidiary LML
Payment Systems Corp., in an action styled Citibank, N.A. as
plaintiff vs. LML Payment Systems Corp. In the suit, Citibank, N.A.
alleges that our subsidiary infringes U.S. Patent No. 7,020,639 and is seeking
damages and injunctive and other relief. We believe these allegations
are without merit and intend to vigorously defend against them. At
this time, the likelihood of success of this suit is indeterminate and any
amount likely to be payable is unknown at this time.
On April
23, 2009, JP Morgan Chase Bank, N.A., an affiliate of one of the
defendants in the LML Suit, filed a complaint for patent infringement in the
U.S. District Court for the District of Delaware against our subsidiaries LML
Payment Systems Corp. and Beanstream Internet Commerce Inc., in an action styled
JP Morgan Chase Bank N.A. as plaintiff vs. LML Payment Systems Corp. and
Beanstream Internet Commerce Inc. In the suit, JP Morgan Chase Bank
N.A. alleges that our subsidiaries infringe U.S. Patent Nos. 5,917,965 and
6,341,724 and is seeking damages and injunctive and other relief. On
May 13, 2009, the plaintiff in this suit filed an amended complaint alleging our
subsidiaries additionally infringe U.S. Patent Nos. 5,940,844 and
6,098,052. We believe these allegations are without merit and
intend to vigorously defend against them. At this time, the
likelihood of success of this suit is indeterminate and any amount likely to be
payable is unknown at this time.
On June
4, 2009, we filed an additional patent infringement lawsuit in the U.S. district
court for the Eastern District of Texas against six financial institutions
operating in the United States. In the suit, we allege that the
defendants infringe U.S. Patent No. RE40,220 and we are seeking damages and
injunctive and other relief for the alleged infringement of this
patent.
Contractual
Obligations
In our
fiscal year ended March 31, 2007, we entered into a three year lease agreement
with IBM Credit LLC to finance two IBM Mainframe hardware purchases totaling
$1,139,000. During the fourth quarter of our prior fiscal year 2008, we
consolidated our four data centers. Consequently, two components of the IBM
Mainframes were sold and we remain contractually obligated with respect to the
balance of $174,000 as at March 31, 2009, which will be satisfied with monthly
payments over the remaining ten (10) months of the lease agreement. Also in our
fiscal year 2007, we entered into a three year financing arrangement with Xerox
Canada Ltd. to finance an equipment purchase.
The
following table summarizes our significant contractual obligations and
commitments as of March 31, 2009:
|
Payments
due by:
|
||||||||||||||||||||
|
(in
thousands)
|
||||||||||||||||||||
|
Total
|
Less
than 1 year
|
1
to 3 years
|
4
to 5 years
|
More
than 5 years
|
||||||||||||||||
|
Long-Term
Debt Obligations
|
$ | 2,101 | $ | 2,101 | $ | - | $ | - | $ | - | ||||||||||
|
Capital
Lease Obligations
|
175 | 175 | - | - | - | |||||||||||||||
|
Operating
Lease Obligations
|
792 | 180 | 331 | 281 | - | |||||||||||||||
|
Purchase
Obligations
|
217 | 197 | 20 | - | - | |||||||||||||||
|
Total
|
$ | 3,285 | $ | 2,653 | $ | 351 | $ | 281 | $ | - | ||||||||||
Critical
Accounting Policies and Estimates
Our
financial statements have been prepared in accordance with accounting principles
generally accepted in Canada and form the basis for the following discussion and
analysis of critical accounting policies and estimates. We make
estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses and related disclosure of contingent assets
and liabilities during the course of preparing these financial
statements. On a regular basis, we evaluate our estimates and
assumptions including those related to the recognition of revenues, valuation of
other long-lived assets and stock-based compensation.
We base
our estimates on historical experience and on various other assumptions that we
believe to be reasonable. These estimates form the basis of our
judgments about the carrying value of assets and liabilities that are not
readily apparent from other sources. Our actual results may differ
from those estimates.
The
following critical accounting policies reflect the more significant estimates
and assumptions we have used in the preparation of our financial
statements.
Revenue
Recognition
TPP
Segment
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.
IPL
Segment
License
fees regarding the licensing of the technology embodied within our five U.S.
patents regarding electronic check processing are recognized in accordance with
Securities and Exchange Commission (“SEC”) Staff Accounting Bulletin (“SAB”) 104
“Revenue Recognition” (“SAB 104”) and further guidance provided by the Canadian
Institute of Chartered Accountants (“CICA”) Emerging Issues Committee (“EIC”)
abstract-142 (“EIC 142”) and Emerging Issues Task Force (“EITF”) issue 00-21;
“Revenue Arrangements with Multiple Deliverables” (“EITF 00-21”). In
some instances, our licensees have paid an up-front fee to obtain a license, and
in such cases the up-front fee is treated as deferred revenue and is recognized
over the life of the agreement. In other cases, our licensees have
paid a fee for a release regarding potential past infringements of our five U.S.
patents and, in such cases, the fee is recognized as revenue when the release is
granted and the amount is reasonably determinable. Running royalties
earned from electronic check transactions processed by the licensee are
recognized on a monthly basis based on the volume of transactions
processed.
CP/SL
Segment
Check
recovery fees are recognized in the period when cash is received for the
services performed. These services typically consist of recovering
the face amount of the original transaction and a service or collection
fee. We are typically paid the service fee only when we are
successful in the recovery of the face amount of the original transaction on
behalf of our client.
In cases
where our clients are of sufficient size and possess the technical capability to
process transactions on their own, we license certain elements of our modules of
our electronic payment processing software. We are typically paid
either a fixed license fee that is recognized in accordance with Statement of
Position (“SOP”) 97-2, “Software Revenue Recognition” or in some cases a fee per
transaction processed by the client whereupon revenue is recognized at the time
the transactions are processed, provided the fee is fixed and determinable and
collectability is reasonably assured.
Goodwill,
Purchased Intangible Assets and Other Long-Lived Assets — Impairment
Assessments
We make
judgments about the recoverability of purchased intangible assets and other
long-lived assets whenever events or changes in circumstances indicate that an
other-than-temporary impairment in the remaining value of the assets recorded on
our balance sheet may exist. We test the impairment of goodwill and
indefinite-life intangibles annually in our fourth fiscal quarter or more
frequently if indicators of impairment arise. The timing of the formal annual
test may result in charges to our statement of operations in our fourth fiscal
quarter that could not have been reasonably foreseen in prior periods. In order
to estimate the fair value of long-lived assets, we typically make various
assumptions about the future prospects for the business that the asset relates
to, consider market factors specific to that business and estimate future cash
flows to be generated by that business. Based on these assumptions and
estimates, we determine whether we need to record an impairment charge to reduce
the value of the asset stated on our balance sheet to reflect its estimated fair
value. Assumptions and estimates about future values and remaining useful lives
are complex and often subjective. They can be affected by a variety of factors,
including external factors such as industry and economic trends, and internal
factors such as changes in our business strategy and our internal forecasts.
Although we believe the assumptions and estimates we have made in the past have
been reasonable and appropriate, different assumptions and estimates could
materially impact our reported financial results. More conservative estimates of
the anticipated future benefits from these businesses could result in impairment
charges, which would decrease net income and result in lower asset values on our
balance sheet. Conversely, less conservative estimates could result in smaller
or no impairment charges, higher net income and higher asset values. At March
31, 2009, we had approximately $17,874,000 in goodwill and approximately
$5,205,000 in net purchased intangible assets on our balance sheet.
Stock-Based
Compensation
We issue
stock options to our employees and directors under the terms of our 1996 Stock
Option Plan and our 1998 Stock Incentive Plan. Canadian GAAP
previously provided two alternative methods of accounting for stock options
under the terms and conditions we typically issue such options. Alternative one
was to estimate the fair value of the stock option on the date of grant and
recognize that value as an expense to operations over the stock option’s vesting
period (“Alternative One”). Alternative two was to estimate the fair
value of the stock option on the date of grant but only reflect the impact in a
pro-forma disclosure setting forth compensation expense as if the fair value
method was used in the Corporation’s financial statements and forego adjusting
the consolidated statements of operations (“Alternative
Two”). During the fiscal year 2004, CICA released revised
transitional provisions for voluntary adoption of Alternative
One. These provisions permit a prospective application of the
Alternative One recognition provisions to accounting for stock options not
previously accounted for at fair value, provided we elect to apply the
Alternative One method to those stock options granted starting for
our fiscal year 2004. We adopted these transitional
provisions during our fiscal year 2004 and, therefore, stock options granted
during the fiscal years 2004 through 2009 have been recognized under Alternative
One and presented as stock-based compensation expense in our consolidated
statements of operations. Stock options granted in previous fiscal
years have continued to be accounted for under the Alternative Two method with
stock-based compensation expense reflected in a pro-forma
disclosure. Stock options granted in future fiscal years will be
accounted for under the Alternative One method with stock-based compensation
recognized as an expense to operations over the stock options’ vesting
period.
We
determine the assumptions used in computing the fair value of the stock options
by estimating the expected useful lives, giving consideration to the vesting
periods, contractual lives, actual employee forfeitures and the relationship
between the exercise price and the historical market value of our common stock,
among other factors. The risk-free interest rate is the federal
government zero-coupon bond rate for the relevant expected life. The
fair value of the stock options are estimated on the date of grant using the
Black-Scholes option-pricing model.
Future
Income Taxes and Valuation Allowance
Future
income taxes reflect the net tax effects of temporary differences between the
carrying amount of our assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes. We assess the
likelihood that our future tax assets will be recovered from our future taxable
income, and to the extent we believe that recovery is not likely, we establish a
valuation allowance. We consider historical taxable income, estimates
of future taxable income and ongoing feasible and prudent tax planning
strategies in assessing the amount of the valuation allowance. Based
on various factors, including our taxable income for the past year and estimates
of future profitability, we recorded a partial valuation allowance against our
net future tax assets. If we fail to achieve future taxable income
assumed in the calculation of our future tax assets or if we fail to implement
feasible and prudent tax planning strategies, we may be required to offset
future tax assets with a valuation allowance, resulting in an additional tax
expense. The change in the valuation could have a material adverse impact on our
profitability and results of operations. If we do not achieve sufficient
Canadian and U.S. taxable income in future years to utilize all or some of our
net operating loss carryforwards, they will expire.
Foreign
Currency Translation
Our
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 our 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.
New
Accounting Guidance
Note 17
in the accompanying consolidated financial statements in this report contains a
discussion of new accounting pronouncements and the potential impact to our
consolidated results of operations and financial position.
Off-Balance
Sheet Arrangements
We do not
currently have any off-balance sheet arrangements as such term is defined in
Item 303(a) (4) of Regulation S-K.
Summary
Quarterly Financial Data (Unaudited)
The
following summarizes our unaudited quarterly financial results for the fiscal
years ended March 31, 2009 and March 31, 2008 (in thousands, except share
data):
|
Year
Ended March 31, 2009
|
||||||||||||||||
|
First
Quarter
|
Second
Quarter
|
Third
Quarter
|
Fourth
Quarter
|
|||||||||||||
|
Net
revenue
|
$ | 3,177 | $ | 3,087 | $ | 3,037 | $ | 3,078 | ||||||||
|
Net
income (loss)
|
(47 | ) | 65 | 281 | 5,156 | |||||||||||
|
Basic
net income (loss) per common share
|
(0.00 | ) | 0.00 | 0.01 | 0.19 | |||||||||||
|
Diluted
net income (loss) per common share
|
(0.00 | ) | 0.00 | 0.01 | 0.19 | |||||||||||
|
Year
Ended March 31, 2008
|
||||||||||||||||
|
First
Quarter
|
Second
Quarter
|
Third
Quarter
|
Fourth
Quarter
|
|||||||||||||
|
Net
revenue
|
$ | 1,456 | $ | 3,183 | $ | 3,398 | $ | 3,291 | ||||||||
|
Net
loss
|
(248 | ) | (181 | ) | (228 | ) | (1,564 | ) | ||||||||
|
Basic
net loss per common share
|
(0.01 | ) | (0.01 | ) | (0.01 | ) | (0.07 | ) | ||||||||
|
Diluted
net loss per common share
|
(0.01 | (0.01 | ) | (0.01 | ) | (0.07 | ) | |||||||||
|
ITEM
7A.
|
Quantitative and Qualitative Disclosures About Market
Risk
|
We are
exposed to market risk from changes in marketable securities (which consist of
money market and commercial paper). At March 31, 2009, our marketable securities
were recorded at a fair value of approximately $5,580,000, with an overall
weighted average return of .87% and an overall weighted average life of less
than three months. Any exposure to price risk would have an immaterial effect on
the recorded value of the marketable securities.
We are
not exposed to material future earnings or cash flow fluctuations from changes
in interest rates on long-term debt since 100% of our long-term debt is at a
fixed rate as of March 31, 2009. The fair value of our debt
approximates its carrying value. To date, we have not entered into any
derivative financial instruments to manage interest rate risk and are currently
not evaluating the future use of any such financial instruments.
Foreign
Exchange Risk
The U.S.
dollar is the functional currency of our operations since primarily 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). 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.
|
ITEM
8.
|
Financial Statements and Supplementary
Data
|
Information
called for by this item is set forth in our Consolidated Financial Statements
contained in this report. Our Consolidated Financial Statements begin in Item 7
– “Management’s Discussion and Analysis of Financial Condition and Results of
Operations” and at page F-1.
|
ITEM
9.
|
Changes in and Disagreements With Accountants on
Accounting and Financial
Disclosures
|
Not
applicable
|
ITEM
9A.
|
Controls and
Procedures
|
Our
management, with the participation of our Chief Executive Officer and Chief
Accounting Officer, evaluated the effectiveness of our disclosure controls and
procedures as of the end of the period covered by this Annual Report on
Form 10-K. The term “disclosure controls and procedures,” as defined in
Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act
of 1934, as amended (the “Exchange Act”), means controls and other procedures of
a company that are designed to ensure that information required to be disclosed
by the company in the reports that it files or submits under the Exchange Act is
recorded, processed, summarized and reported, within the time periods specified
in the SEC’s rules and forms. Disclosure controls and procedures include,
without limitation, controls and procedures designed to ensure that information
required to be disclosed by a company in the reports that it files or submits
under the Exchange Act is accumulated and communicated to the company’s
management, including its principal executive and principal financial officers,
as appropriate to allow timely decisions regarding required disclosure. There
are inherent limitations to the effectiveness of any system of disclosure
controls and procedures, including the possibility of human error and the
circumvention or overriding of the controls and
procedures. Accordingly, even effective disclosure controls and
procedures can only provide reasonable assurance of achieving their control
objectives. Based on their evaluation, the Chief Executive Officer
and Chief Accounting Officer have concluded that our disclosure controls and
procedures were effective as of the end of the period covered by this annual
report.
MANAGEMENT'S
ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting, as such term is defined in the Exchange Act
Rules 13a-15(f) and 15d-15(f). Those rules define internal control
over financial reporting as a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with Generally Accepted
Accounting Principles ("GAAP"). It includes policies and procedures
that:
|
·
|
Pertain
to the maintenance of records that in reasonable detail accurately and
fairly reflect the transactions and dispositions of our
assets;
|
|
·
|
Provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with GAAP, and that our
receipts and expenditures are being made only in accordance with
authorizations of management and directors;
and
|
|
·
|
Provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of our assets that could have
a material effect on the financial
statements.
|
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
Management
assessed the effectiveness of the Company’s internal control over financial
reporting as of March 31, 2009, based on the criteria set forth in the Internal Control-Integrated
Framework by the Committee of Sponsoring Organizations of the Treadway
Commission (“COSO”). Based on this assessment and those criteria, management
believes that the Company maintained effective internal control over financial
reporting as of March 31, 2009.
Grant
Thornton, LLP, an Independent Registered Chartered Accounting Firm, has audited
the effectiveness of our internal control over financial reporting as of March
31, 2009 , as stated in their report, which is included elsewhere
herein.
Based on
the evaluation conducted by management, including the Chief Executive Officer
and the Chief Accounting Officer, there were no further changes in our internal
controls during the fourth quarter ended March 31, 2009 that have
materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting, apart from the implementation of the
following:
|
·
|
We
removed certain administration rights to our production system from
certain executive level personnel within the IT
department.
|
REPORT
OF INDEPENDENT REGISTERED CHARTERED ACCOUNTING FIRM
To The
Board of Directors and Shareholders of LML Payment Systems Inc.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk that a material
weakness exists, testing and evaluating the design and operating effectiveness
of internal control based on the assessed risk, and performing such other
procedures as we considered necessary in the circumstances. We
believe that our audit provides a reasonable basis for our opinion.
A
company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal
control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of the assets of the company;
(2) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial
statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
In our
opinion, LML Payment Systems Inc. and subsidiaries maintained, in all material
respects effective internal control over financial reporting as of March 31,
2009 based on criteria established in Internal Control – Integrated
Framework issued by COSO.
We have
also audited, in accordance with Canadian generally accepted auditing standards
and the standards of the Public Company Accounting Oversight Board (United
States), the consolidated balance sheets of LML Payment Systems Inc. and
subsidiaries as of March 31, 2009 and 2008 and the consolidated statements of
operations, comprehensive income (loss), shareholders’ equity and cash flows for
each of the three years in the period ended March 31, 2009 and our report dated
June 22, 2009 expresses an unqualified opinion on those financial
statements.
|
Vancouver,
Canada
|
/s/
GRANT THORNTON LLP
|
|
June
22, 2009
|
Chartered
Accountants
|
|
ITEM
9B.
|
Other
Information
|
Not
applicable.
PART
III
|
ITEM
10.
|
Directors, Executive Officers and Corporate
Governance
|
Information
on our directors, executive officers, and audit committee, compliance with
Section 16(a) of the Exchange Act and our code of ethics applicable to our Chief
Executive Officer and Chief Accounting Officer will be contained in our Proxy
Statement for our 2009 Annual and Special Meeting of Shareholders, to be filed
with the SEC within 120 days after the end of our fiscal 2009, and is
incorporated herein by reference.
We have
adopted a Code of Ethics applicable to our principal executive officer,
principal financial officer, controller and others performing similar
functions. Our Code of Ethics also applies to all of our other
employees and to our directors. Our Code of Ethics is available on
our website located at www.lmlpayment.com
under the heading “Investor Relations; Corporate Governance”. We
intend to satisfy any disclosure requirements pursuant to Item 5.05 of Form 8-K
regarding any amendment to, or a waiver from, certain provisions of our Code of
Ethics by posting such information on our website (unless we are otherwise
required to file a Form 8-K under the rules and regulations of The NASDAQ Stock
Market).
There
were no material changes to the procedures by which our stockholders may
recommend nominees to our Board of Directors implemented during fiscal
2009.
|
ITEM
11.
|
Information
on compensation of our directors and executive officers will be contained in our
Proxy Statement for our 2009 Annual and Special Meeting of Shareholders, to be
filed with the SEC within 120 days after the end of our fiscal 2009, and is
incorporated herein by reference.
|
ITEM
12.
|
Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder Security
Matters
|
Information
on the securities ownership of certain beneficial owners and our management will
be contained in our Proxy Statement for our 2009 Annual and Special Meeting of
Shareholders, to be filed with the SEC within 120 days after the end of our
fiscal 2009, and is incorporated herein by reference.
Information
required by Item 201(d) of Regulation S-K is set forth under Item 5. “Market for
Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities”.
|
ITEM
13.
|
Certain Relationships and Related Transactions and
Director Independence
|
Information
on certain relationships, related transactions and director independence will be
contained in our Proxy Statement for our 2009 Annual and Special Meeting of
Shareholders, to be filed with the SEC within 120 days after the end of our
fiscal 2009, and is incorporated herein by reference.
|
ITEM 14.
|
Principal Accountant Fees and
Services
|
Information
regarding principal accountant fees and services will be contained in our Proxy
Statement for our 2009 Annual and Special Meeting of Shareholders, to be filed
with the SEC within 120 days after the end of our fiscal 2009, and is
incorporated herein by reference.
PART
IV
|
ITEM
15.
|
Exhibits and Financial Statement
Schedules
|
|
(a)
|
The
following documents are filed as part of this
report:
|
|
|
(1)
|
Consolidated
Financial Statements
|
|
Page
|
Description
|
|
|
F-1
|
Grant
Thornton LLP, Report of Independent Registered Chartered Accounting
Firm
|
|
|
F-2
|
Consolidated
Balance Sheets at March 31, 2009 and 2008
|
|
|
F-3
|
Consolidated
Statements of Operations for each of the three years ended March 31, 2009,
2008 and 2007
|
|
| F-4 | Consolidated Statements of Comprehensive Income (Loss) for each of the three years ended March 31, 2009, 2008 and 2007 | |
|
F-5
|
Consolidated
Statements of Shareholders' Equity for each of the three years ended March
31, 2009, 2008 and 2007
|
|
|
F-6
|
Consolidated
Statements of Cash Flows for each of the three years ended March 31, 2009,
2008 and 2007
|
|
|
F-7
|
Notes
to Consolidated Financial
Statements
|
All other
schedules are omitted because they are not applicable or the required
information is shown in the Consolidated Financial Statements or Notes
thereto.
|
(b)
|
Exhibits:
|
|
Exhibit
Number
|
Description
of Document
|
|
|
2.1
|
Arrangement
Agreement dated as of April 30, 2007, between LML Payment Systems Inc. and
Beanstream Internet Commerce Inc. and the schedules thereto (incorporated
by reference to Exhibit 2.1 to the Form 8-K dated April 30, 2007 of LML
(file No. 0-13959)).
|
|
|
2.2
|
Amending
Agreement between LML Payment Systems Inc. and Beanstream Internet
Commerce Inc. dated as of May 24, 2007 (incorporated by reference to
Exhibit 99.2 to the Form 8-K dated June 4, 2007 of LML (file No.
0-13959)).
|
|
|
3.1
|
Restated
Articles of Incorporation (incorporated by reference to Exhibit 3.1 to the
Annual Report on Form 10-K for the period ended March 31, 2006 of LML
(File No. 0-13959)).
|
|
|
3.2
|
Bylaws
of LML, as amended (incorporated by reference to Exhibit 3.2 to the
Quarterly Report on Form 10-Q for the period ended September 30, 2007 of
LML (File No. 0-13959)).
|
|
|
10.1
|
Securities
Purchase Agreement dated as of March 26, 2008, between LML Payment Systems
Inc. and Millennium Partners, L.P. (incorporated by reference to Exhibit
10.1 to the Form 8-K dated March 26, 2008 of LML (file
0-13959)).
|
|
|
10.2
|
Registration
Rights Agreement dated as of March 26, 2008, between LML Payment Systems
Inc. and Millennium Partners, L.P. (incorporated by reference to Exhibit
10.2 to the Form 8-K dated March 26, 2008 of LML (file
0-13959)).
|
|
|
10.3
|
Warrant
dated as of March 26, 2008, between LML Payment Systems Inc. and Ladenburg
Thalmann & Co., Inc. (incorporated by reference to Exhibit 10.3 to the
Form 8-K dated March 26, 2008 of LML (file 0-13959)).
|
|
|
10.4†
|
Employment
agreement between LML Payment Systems Inc. and Patrick H. Gaines dated
March 31, 2008 (incorporated by reference to Exhibit 10.1 to the Form 8-K
dated March 31, 2008 of LML (file 0-13959)).
|
|
|
10.5†
|
Employment
agreement between LML Payment Systems Inc. and Richard R. Schulz dated
March 31, 2008 (incorporated by reference to Exhibit 10.2 to the Form 8-K
dated March 31, 2008 of LML (file 0-13959)).
|
|
|
10.6†
|
Employment
agreement between LML Payment Systems Inc. and Carolyn
L. Gaines dated March 31, 2008 (incorporated by reference to
Exhibit 10.3 to the Form 8-K dated March 31, 2008 of LML (file
0-13959)).
|
|
|
10.7†
|
Employment
agreement between LML Payment Systems Inc. and Craig Thomson dated
February 5, 2009 (incorporated by reference to Exhibit 10.1 to the Form
8-K dated February 5, 2009 of LML (file 0-13959)).
|
|
|
10.8†
|
Employment
agreement between LML Payment Systems Inc. and Chris Koide dated February
5, 2009 (incorporated by reference to Exhibit 10.2 to the Form 8-K dated
February 5, 2009 of LML (file 0-13959)).
|
|
|
10.9†
|
Amending
agreement to the employment agreement between LML Payment Systems Inc. and
Patrick H. Gaines dated February 5, 2009 (incorporated by reference to
Exhibit 10.3 to the Form 8-K dated February 5, 2009 of LML (file
0-13959)).
|
|
|
10.10†
|
Amending
agreement to the employment agreement between LML Payment Systems Inc. and
Richard R. Schulz dated February 5, 2009 (incorporated by reference to
Exhibit 10.4 to the Form 8-K dated February 5, 2009 of LML (file
0-13959)).
|
|
|
10.11†
|
1996
Stock Option Plan and amendments to 1996 Stock Option Plan dated August
31, 1998, September 30, 1999 and September 18, 2000 (incorporated by
reference to Appendix A to the Schedule 14A of LML dated August 8, 2007
(file
0-13959)).
|
|
(b)
|
Exhibits
(continued)
|
|
10.12†
|
1998
Stock Incentive Plan and amendment to 1998 Stock Incentive Plan dated
September 18, 2000 (incorporated by reference to Appendix B to the
Schedule 14A of LML dated August 8, 2007 (file
0-13959)).
|
|
|
21*
|
Subsidiaries
of LML
|
|
|
23.1*
|
Consent
of Grant Thornton LLP
|
|
|
31.1*
|
Rule
13a-14(a) Certification of Principal Executive Officer.
|
|
|
31.2*
|
Rule
13a-14(a) Certification of Principal Financial Officer.
|
|
|
32*
|
Section
1350 Certification of Principal Executive Officer and Principal Financial
Officer.
|
_______
* filed
herewith
†
Management contract or compensatory plan or arrangement
LML PAYMENT SYSTEMS INC.
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
|
LML
PAYMENT SYSTEMS INC.
|
|
| /s/ Patrick H. Gaines | |
|
Patrick
H. Gaines
|
|
|
Chairman
of the Board and Chief Executive Officer
|
|
|
Date:
June 23, 2009
|
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Registrant and in the
capacities indicated and on the dates indicated below.
|
Title
|
Date
|
|||
| /s/ Patrick H. Gaines |
Chairman
of the Board, Chief Executive Officer and Director
|
June 23,
2009
|
||
|
Patrick
H. Gaines
|
(Principal
Executive Officer)
|
|||
| /s/ Craig S. Thomson |
President
|
June
23, 2009
|
||
|
Craig
S. Thomson
|
||||
| /s/ Richard R. Schulz |
Controller
and Chief Accounting Officer
|
June
23, 2009
|
||
|
Richard
R. Schulz
|
(Principal
Financial and Accounting Officer)
|
|||
| /s/ David C. Cooke |
Director
|
June
23, 2009
|
||
|
David
C. Cooke
|
||||
| /s/ Jacqueline Pace |
Director
|
June
23, 2009
|
||
|
Jacqueline
Pace
|
||||
| /s/ Greg A. MacRae |
Director
|
June
23, 2009
|
||
|
Greg
A. MacRae
|
REPORT
OF INDEPENDENT REGISTERED CHARTERED ACCOUNTING FIRM
To the
Shareholders
LML
Payment Systems Inc.
We have
audited the accompanying consolidated balance sheets of LML Payment Systems Inc.
and subsidiaries (together, the “Corporation”) as of March 31, 2009 and 2008 and
the related consolidated statements of operations, comprehensive income (loss),
shareholders’ equity and cash flows for each of the three years in the period
ended March 31, 2009. These consolidated financial statements are the
responsibility of the Corporation’s management. Our responsibility is to express
an opinion on these consolidated financial statements based on our
audits.
We
conducted our audits in accordance with Canadian generally accepted auditing
standards and the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of LML Payment Systems Inc. and
subsidiaries as of March 31, 2009 and 2008 and the results of their operations
and their cash flows for each of the three years in the period ended March 31,
2009 in accordance with Canadian generally accepted accounting
principles.
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), LML Payment Systems Inc. and subsidiaries’
internal control over financial reporting as of March 31, 2009, based on
criteria established in Internal Control – Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO) and our report dated June 22, 2009 expressed an
unqualified opinion on the effectiveness of internal control over financial
reporting.
Canadian
generally accepted accounting principles vary in certain significant respects
from accounting principles generally accepted in the United States of
America. Information relating to the nature and effect of such
differences is presented in Note 17 to the consolidated financial
statements.
|
Vancouver,
Canada
|
/s/
GRANT THORNTON LLP
|
|
June 22,
2009
|
Chartered
Accountants
|
LML
PAYMENT SYSTEMS INC.
CONSOLIDATED
BALANCE SHEETS
(In
U.S. Dollars)
|
Years
Ended March 31,
|
||||||||
|
2009
|
2008
|
|||||||
|
ASSETS
|
||||||||
|
CURRENT
ASSETS
|
||||||||
|
Cash
and cash equivalents (Note 6)
|
$ | 6,138,530 | $ | 9,749,768 | ||||
|
Funds
held for merchants (Note 6)
|
10,746,731 | 5,833,617 | ||||||
|
Restricted
cash (Note 5(b))
|
175,000 | 250,000 | ||||||
|
Accounts
receivable, less allowance of $31,785 (2008: $32,168)
|
801,087 | 719,301 | ||||||
|
Prepaid
expenses
|
295,702 | 273,751 | ||||||
|
Current portion
of future income tax assets (Note 13)
|
838,575 | - | ||||||
|
Total
current assets
|
18,995,625 | 16,826,437 | ||||||
|
PROPERTY
AND EQUIPMENT, net (Notes 7 and 10)
|
227,324 | 246,828 | ||||||
|
PATENTS
(Note 8)
|
622,730 | 788,473 | ||||||
|
RESTRICTED
CASH (Note 5(b))
|
125,030 | 153,619 | ||||||
|
FUTURE
INCOME TAX ASSETS (NOTE 13)
|
4,429,578 | - | ||||||
|
OTHER
ASSETS
|
19,020 | 23,247 | ||||||
|
GOODWILL
(Note 9)
|
17,874,202 | 15,903,077 | ||||||
|
INTANGIBLE
ASSETS (Note 9)
|
5,205,487 | 5,700,637 | ||||||
|
Total
assets
|
$ | 47,498,996 | $ | 39,642,318 | ||||
|
LIABILITIES
|
||||||||
|
CURRENT
LIABILITIES
|
||||||||
|
Accounts
payable
|
$ | 756,845 | $ | 1,745,679 | ||||
|
Accrued
liabilities
|
814,094 | 648,661 | ||||||
|
Corporate
taxes payable
|
283,794 | 573,240 | ||||||
|
Funds
due to merchants (Note 6)
|
10,746,731 | 5,833,617 | ||||||
|
Current
portion of obligations under capital lease (Note 10)
|
170,243 | 203,366 | ||||||
|
Current
portion of promissory notes (Note 3)
|
2,100,920 | 2,731,923 | ||||||
|
Current
portion of deferred revenue
|
1,361,046 | 1,448,921 | ||||||
|
Total
current liabilities
|
16,233,673 | 13,185,407 | ||||||
|
OBLIGATIONS
UNDER CAPITAL LEASE (Note 10)
|
- | 177,573 | ||||||
|
PROMISSORY
NOTES (Note 3)
|
- | 2,435,460 | ||||||
|
DEFERRED
REVENUE
|
3,330,630 | 4,606,379 | ||||||
|
Total
liabilities
|
19,564,303 | 20,404,819 | ||||||
|
COMMITMENTS
AND CONTINGENCIES (Note
14)
|
||||||||
|
SHAREHOLDERS’
EQUITY
|
||||||||
|
CAPITAL
STOCK
|
||||||||
|
Class
A, preferred stock, $1.00 CDN par value, 150,000,000 shares authorized,
issuable in series, none issued or outstanding
|
- | - | ||||||
|
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, 27,116,408 issued and
outstanding (2008: 26,341,832)
|
50,039,568 | 48,071,980 | ||||||
|
CONTRIBUTED
SURPLUS (Note 11(b))
|
6,732,059 | 5,391,187 | ||||||
|
DEFICIT
|
(28,751,456 | ) | (34,206,622 | ) | ||||
|
ACCUMULATED
OTHER COMPREHENSIVE LOSS
|
(85,478 | ) | (19,046 | ) | ||||
|
Total
shareholders’ equity
|
27,934,693 | 19,237,499 | ||||||
|
Total
liabilities and shareholders’ equity
|
$ | 47,498,996 | $ | 39,642,318 | ||||
See
accompanying notes to the consolidated financial statements.
LML
PAYMENT SYSTEMS INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS
(In
U.S. Dollars, except share data)
|
Years
ended March 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
REVENUE
|
$ | 12,378,848 | $ | 11,327,878 | $ | 6,554,191 | ||||||
|
COSTS OF REVENUE
(includes
stock-based compensation expense of $149,716 (2008 - $42,449; 2007 -
$0))
|
6,055,570 | 4,807,946 | 4,533,788 | |||||||||
|
GROSS
PROFIT (excludes amortization and depreciation expense)
|
6,323,278 | 6,519,932 | 2,020,403 | |||||||||
|
OPERATING
EXPENSES
|
||||||||||||
|
General
and administrative (includes stock-based compensation expense of
$1,139,589 (2008 - $1,217,984; 2007 - $877,334))
|
4,343,406 | 5,659,694 | 2,834,952 | |||||||||
|
Sales
and marketing (includes stock-based compensation expense of $3,033 (2008 -
$2,975; 2007 - $0))
|
323,103 | 227,935 | 355,445 | |||||||||
|
Product
development and enhancement (includes stock-based compensation expense of
$48,534 (2008 - $23,802; 2007 - $0))
|
272,499 | 177,704 | - | |||||||||
|
Amortization
and depreciation
|
785,334 | 905,488 | 335,555 | |||||||||
|
INCOME
(LOSS) BEFORE OTHER INCOME (EXPENSES) AND INCOME TAXES
|
598,936 | (450,889 | ) | (1,505,549 | ) | |||||||
|
Foreign
exchange gain (loss)
|
444,050 | (229,661 | ) | (2,545 | ) | |||||||
|
Other
income (expense), net
|
10,898 | (246,918 | ) | 616,571 | ||||||||
|
Gain
(Loss) on disposal/abandonment of property and equipment
|
864 | (726,325 | ) | 7,000 | ||||||||
|
Interest
income
|
226,472 | 406,063 | 475,368 | |||||||||
|
Interest
expense
|
(247,536 | ) | (358,756 | ) | (12,700 | ) | ||||||
|
Settlement
expenses
|
- | - | (45,000 | ) | ||||||||
|
Due
diligence expenses
|
- | - | (567,562 | ) | ||||||||
|
INCOME
(LOSS) BEFORE INCOME TAXES
|
1,033,684 | (1,606,486 | ) | (1,034,417 | ) | |||||||
|
Income
tax expense (recovery) (Note 13)
|
||||||||||||
|
Current
|
846,671 | 614,342 | 38,446 | |||||||||
|
Future
|
(5,268,153 | ) | - | - | ||||||||
| (4,421,482 | ) | 614,342 | 38,446 | |||||||||
|
NET
INCOME (LOSS)
|
$ | 5,455,166 | $ | (2,220,828 | ) | $ | (1,072,863 | ) | ||||
|
EARNINGS
(LOSS) PER SHARE, basic and diluted
|
$ | 0.20 | $ | (0.10 | ) | $ | (0.05 | ) | ||||
|
WEIGHTED
AVERAGE NUMBER OF SHARES OUTSTANDING, (Note 11(a))
|
||||||||||||
|
Basic
|
26,834,165 | 21,869,404 | 20,206,412 | |||||||||
|
Diluted
|
26,834,165 | 21,869,404 | 20,206,412 | |||||||||
See
accompanying notes to the consolidated financial statements.
LML
PAYMENT SYSTEMS INC.
CONSOLIDATED
STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In
U.S. Dollars)
|
Years
ended March 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Net
income (loss)
|
$ | 5,455,166 | $ | (2,220,828 | ) | $ | (1,072,863 | ) | ||||
|
Unrealized
foreign exchange loss on translation of self-sustaining
operations
|
(66,432 | ) | (19,046 | ) | - | |||||||
|
Comprehensive
income (loss)
|
$ | 5,388,734 | $ | (2,239,874 | ) | $ | (1,072,863 | ) | ||||
See
accompanying notes to the consolidated financial statements.
LML
PAYMENT SYSTEMS INC.
CONSOLIDATED
STATEMENTS OF SHAREHOLDERS’ EQUITY
(In
U.S. Dollars)
|
Accumulated
|
||||||||||||||||||||||||
|
other
|
||||||||||||||||||||||||
|
Common
|
Contributed
|
Comprehensive
|
||||||||||||||||||||||
|
Shares
|
Amount
|
Surplus
|
Income
(Loss)
|
Deficit
|
Total
|
|||||||||||||||||||
|
Balance
as at March 31, 2006
|
20,194,094 | $ | 32,710,018 | $ | 2,544,312 | $ | - | $ | (30,912,931 | ) | $ | 4,341,399 | ||||||||||||
|
Exercise
of stock options
|
13,000 | 64,350 | - | - | - | 64,350 | ||||||||||||||||||
|
Stock-based
compensation (Note 11(c))
|
- | - | 877,334 | - | - | 877,334 | ||||||||||||||||||
|
Stock-based
compensation – future income taxes
|
- | - | 21,646 | - | - | 21,646 | ||||||||||||||||||
|
Net
loss
|
- | - | - | - | (1,072,863 | ) | (1,072,863 | ) | ||||||||||||||||
|
Balance
as at March 31, 2007
|
20,207,094 | 32,774,368 | 3,443,292 | - | (31,985,794 | ) | 4,231,866 | |||||||||||||||||
|
Net
loss
|
- | - | - | - | (2,220,828 | ) | (2,220,828 | ) | ||||||||||||||||
|
Change
in cumulative translation adjustment
|
- | - | - | (19,046 | ) | - | (19,046 | ) | ||||||||||||||||
|
Exercise
of stock options
|
26,250 | 77,437 | - | - | - | 77,437 | ||||||||||||||||||
|
Acquisition
(Note 3)
|
1,963,555 | 8,538,737 | - | - | - | 8,538,737 | ||||||||||||||||||
|
Finders
fee on Acquisition (Note 3)
|
144,933 | 640,604 | - | - | - | 640,604 | ||||||||||||||||||
|
Private
Placement (Note 11(e))
|
4,000,000 | 7,200,000 | - | - | - | 7,200,000 | ||||||||||||||||||
|
Financial advisor
fee
|
- | - | 649,500 | - | - | 649,500 | ||||||||||||||||||
|
Share issuance
cost
|
- | (1,159,166 | ) | - | - | - | (1,159,166 | ) | ||||||||||||||||
|
Stock-based
compensation (Note 11(c))
|
- | - | 1,287,210 | - | - | 1,287,210 | ||||||||||||||||||
|
Stock-based
compensation – future income taxes
|
- | - | 11,185 | - | - | 11,185 | ||||||||||||||||||
|
Balance
as at March 31, 2008
|
26,341,832 | 48,071,980 | 5,391,187 | (19,046 | ) | (34,206,622 | ) | 19,237,499 | ||||||||||||||||
|
Net
income
|
- | - | - | - | 5,455,166 | 5,455,166 | ||||||||||||||||||
|
Change
in cumulative translation adjustment
|
- | - | - | (66,432 | ) | - | (66,432 | ) | ||||||||||||||||
|
Acquisition
(Note 9)
|
774,576 | 1,971,125 | - | - | - | 1,971,125 | ||||||||||||||||||
|
Share
issuance cost
|
- | (3,537 | ) | - | - | - | (3,537 | ) | ||||||||||||||||
|
Stock-based
compensation (Note 11(c))
|
- | - | 1,340,872 | - | - | 1,340,872 | ||||||||||||||||||
|
Balance
as at March 31, 2009
|
27,116,408 | $ | 50,039,568 | $ | 6,732,059 | $ | (85,478 | ) | $ | (28,751,456 | ) | $ | 27,934,693 | |||||||||||
See
accompanying notes to the consolidated financial statements
LML
PAYMENT SYSTEMS INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(In
U.S. Dollars)
|
Years
ended March 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
OPERATING
ACTIVITIES:
|
||||||||||||
|
Net
income (loss)
|
$ | 5,455,166 | $ | (2,220,828 | ) | $ | (1,072,863 | ) | ||||
|
Adjustments
to reconcile net income (loss) to net cash (used in) provided by operating
activities
|
||||||||||||
|
Provisions
for losses on accounts receivable
|
17,461 | 10,942 | 37,347 | |||||||||
|
Amortization
and depreciation
|
785,334 | 905,488 | 335,555 | |||||||||
|
(Gain)
loss on disposal/abandonment of property and equipment
|
(864 | ) | 726,325 | (7,000 | ) | |||||||
|
Stock-based
compensation
|
1,340,872 | 1,287,210 | 877,334 | |||||||||
|
Stock-based
compensation – future income taxes
|
- | 11,185 | 21,646 | |||||||||
|
Future
income taxes
|
(5,268,153 | ) | - | - | ||||||||
|
Unrealized
foreign exchange (gain) loss
|
(370,692 | ) | 177,847 | - | ||||||||
|
Due
diligence expenses
|
- | - | 567,562 | |||||||||
|
Other
|
- | - | (252 | ) | ||||||||
|
Changes
in non-cash operating working capital
|
||||||||||||
|
Restricted
cash
|
75,000 | - | - | |||||||||
|
Accounts
receivable
|
(214,903 | ) | (130,694 | ) | 69,073 | |||||||
|
Prepaid
expenses
|
(28,405 | ) | 214,414 | (30,326 | ) | |||||||
|
Other
assets
|
- | (8,360 | ) | 14,447 | ||||||||
|
Accounts
payable and accrued liabilities
|
(536,940 | ) | 323,496 | (473,773 | ) | |||||||
|
Corporate
taxes payable
|
(204,471 | ) | 582,538 | - | ||||||||
|
Deferred
revenue
|
(1,352,311 | ) | (1,339,390 | ) | 7,119,782 | |||||||
|
Net
cash (used in) provided by operating activities
|
(302,906 | ) | 540,173 | 7,458,532 | ||||||||
|
INVESTING
ACTIVITIES:
|
||||||||||||
|
Other
assets
|
2,785 | - | (776,170 | ) | ||||||||
|
Acquisition
of Beanstream, net of cash acquired (Note 3)
|
- | (7,286,834 | ) | - | ||||||||
|
Proceeds
from disposal of property and equipment
|
5,500 | 107,900 | 7,252 | |||||||||
|
Acquisition
of property and equipment
|
(126,076 | ) | (144,241 | ) | (185,886 | ) | ||||||
|
Development
of patents
|
(1,652 | ) | (10,804 | ) | (14,341 | ) | ||||||
|
Net
cash used in investing activities
|
(119,443 | ) | (7,333,979 | ) | (969,145 | ) | ||||||
|
FINANCING
ACTIVITIES:
|
||||||||||||
|
Payments
on capital leases
|
(190,746 | ) | (575,234 | ) | (79,588 | ) | ||||||
|
Payment
of promissory note
|
(2,843,974 | ) | - | - | ||||||||
|
Payments
on long-term borrowing
|
- | - | (2,773 | ) | ||||||||
|
Proceeds
from exercise of stock options
|
- | 77,438 | 64,350 | |||||||||
|
Proceeds
from private placement of common shares
|
- | 7,200,000 | - | |||||||||
|
Share
capital financing costs
|
(3,537 | ) | (509,666 | ) | - | |||||||
|
Net
cash (used in) provided by financing activities
|
(3,038,257 | ) | 6,192,538 | (18,011 | ) | |||||||
|
Effects
of foreign exchange rate changes on cash and cash
equivalents
|
(150,632 | ) | 188,028 | - | ||||||||
|
(DECREASE)
INCREASE IN CASH AND CASH EQUIVALENTS
|
(3,611,238 | ) | (413,240 | ) | 6,471,376 | |||||||
|
Cash
and cash equivalents, beginning of year
|
9,749,768 | 10,163,008 | 3,691,632 | |||||||||
|
Cash
and cash equivalents, end of year
|
$ | 6,138,530 | $ | 9,749,768 | $ | 10,163,008 | ||||||
|
Cash
and cash equivalents consist of:
|
||||||||||||
|
Cash
|
$ | 558,571 | $ | 8,348,906 | $ | 9,041,704 | ||||||
|
Money
market fund
|
109,524 | 107,233 | 1,121,304 | |||||||||
|
Commercial
paper
|
5,470,435 | 1,293,629 | - | |||||||||
| $ | 6,138,530 | $ | 9,749,768 | $ | 10,163,008 | |||||||
|
Supplemental
disclosure of cash flow information:
|
||||||||||||
|
Interest
paid
|
$ | 414,603 | $ | 61,640 | $ | 12,700 | ||||||
|
Taxes
paid
|
$ | 1,240,310 | $ | 44,120 | $ | 7,042 | ||||||
|
Non-cash
investing and financing transactions not included in cash
flows:
|
||||||||||||
|
Property
and equipment acquired through capital leases
|
$ | - | $ | - | $ | 1,146,473 | ||||||
See
accompanying notes to the consolidated financial statements.
LML
PAYMENT SYSTEMS INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(unless
otherwise indicated, all dollar amounts are U.S. dollars)
|
|
1.
|
NATURE
OF OPERATIONS
|
LML
Payment Systems Inc. (a Yukon Territory corporation) and its subsidiaries (the
"Corporation"), see Note 2(a), is a financial payment processor providing
electronic payment and risk management and authentication services
primarily to businesses and organizations who use the Internet to receive or
send payments. The Corporation links merchants selling products or
services to customers wanting to buy them and financial institutions who allow
the transfer of payments to occur. The Corporation has partnership
arrangements and certified connections to financial institutions, payment
processors and other payment service providers in order to enable its customers
to safely and reliably conduct e-Commerce. The Corporation provides
its electronic payment, authentication and risk management services to over
8,000 businesses and organizations in Canada and the United States of America
(“U.S.”). The Corporation also provides check processing solutions
including primary and secondary check collection including electronic check
re-presentment (RCK) to retailers in the U.S.
The
Corporation also provides licenses to its intellectual property. The
Corporation’s intellectual property estate, owned by subsidiary LML Patent
Corp., includes U.S. Patent No. 6,354,491, No. 6,283,366, No. 6,164,528, No.
5,484,988, and No. RE40,220, all of which describe electronic check processing
methods.
|
|
2.
|
SIGNIFICANT
ACCOUNTING POLICIES
|
|
|
(a)
|
Basis
of Presentation
|
These
consolidated financial statements have been prepared in accordance with Canadian
generally accepted accounting principles (“Canadian GAAP”). Except as disclosed
in Note 17, these principles do not differ materially from generally accepted
accounting principles in the U.S. (“U.S. GAAP”).
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.
Beanstream
Internet Commerce Corp.
*
Effective June 30, 2007, the Corporation completed the acquisition of
Beanstream. The consolidated balance sheets as of March 31, 2009 and 2008, and
the consolidated statements of operations, consolidated statements of
comprehensive income (loss), consolidated statements of shareholders’ equity and
the consolidated statements of cash flows for the years ended March 31, 2009 and
2008 include the accounts of Beanstream since its acquisition by the Corporation
on June 30, 2007.
|
|
(b)
|
Use
of Estimates and Measurement
Uncertainty
|
The
preparation of financial statements in conformity with Canadian GAAP requires
management to make estimates and assumptions that affect the reported amount of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Significant areas requiring the use of
management estimates relate to, among others, the allowance for doubtful
accounts, determination of impairment of assets, determination of stock-based
compensation expense, allocation of the purchase price of business acquisitions,
useful lives for depreciation and amortization and future income
taxes. Actual results could differ from those estimates.
LML
PAYMENT SYSTEMS INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(unless
otherwise indicated, all dollar amounts are U.S. dollars)
|
|
2.
|
SIGNIFICANT
ACCOUNTING POLICIES (continued)
|
|
|
(c)
|
Cash
and Cash Equivalents
|
Cash and
cash equivalents include cash on hand and all highly liquid debt instruments
purchased with a maturity of three months or less at the date of
purchase.
|
|
(d)
|
Accounts
Receivable
|
Accounts
receivable are stated net of allowances for uncollectible
accounts. Management develops the estimate of the allowance based on
the Corporation’s experience with specific customers, its understanding of their
current economic circumstances and its own judgment as to the likelihood of
their ultimate payment. Management also considers the Corporation’s
collection experience with the balance of its receivables portfolio and makes
estimates regarding collectibility based on trends in aging.
|
|
(e)
|
Property
and Equipment
|
Property
and equipment are recorded at cost less accumulated depreciation. The
straight-line method is used to depreciate assets over their estimated useful
lives as follows:
|
Computer
equipment
|
3 –
5 years
|
|
Computer
software
|
3 –
5 years
|
|
Furniture
and fixtures
|
3
years
|
|
Leasehold
improvements
|
Lesser
of the life of the lease or the useful life of the leasehold
improvement
|
|
Office
equipment
|
5
years
|
|
Website
& trademarks
|
5
years
|
|
|
(f)
|
Leases
|
|
|
Leases
are classified as either capital or operating leases. A lease
that transfers substantially all of the benefits and risks incidental to
the ownership of property is classified as a capital lease. All
other leases are accounted for as operating leases wherein rental payments
are expensed as incurred. At the inception of a capital lease,
an asset and an obligation are recorded at an amount equal to the lesser
of the present value of the future minimum lease payments and the
property’s fair value at the beginning of such
lease. Amortization of the equipment under capital lease is on
the same basis as similar property and
equipment.
|
|
|
(g)
|
Research
and Development Costs
|
|
|
The
Corporation incurs costs to research and develop its proprietary software
products to be sold, licensed or otherwise marketed. Research
costs are expensed as incurred. Development costs are expensed
as incurred unless a project meets the criteria under Canadian GAAP for
deferral and amortization. In this case the development costs
are deferred and amortized over the estimated useful life of the software
product developed. Amortization of deferred development costs
commences when development of the software is complete and the product is
available for sale to customers.
|
|
|
(h)
|
Patents
|
Patent
costs are amortized using the straight-line method over the estimated useful
life of 15 years.
|
|
LML
PAYMENT SYSTEMS INC.
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(unless
otherwise indicated, all dollar amounts are U.S. dollars)
|
|
2.
|
SIGNIFICANT
ACCOUNTING POLICIES (continued)
|
|
|
(i)
|
Impairment
of Long-lived Assets
|
Long-lived
assets subject to amortization are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. Recoverability of assets to be held and used is
measured by a comparison of the carrying amount of an asset to estimated
undiscounted future cash flows expected to be generated by the
asset. If the carrying amount of an asset exceeds its estimated
future cash flows, an impairment charge is recognized by the amount by which the
carrying amount of the asset exceeds the fair value of the asset.
|
|
(j)
|
Goodwill
|
|
|
Goodwill
relates to the acquisition of Beanstream and represents the excess of
purchase price over the fair values of the identifiable assets acquired
and liabilities assumed. Goodwill is not amortized and is
tested at least annually for impairment or more frequently if an event or
circumstance occurs that more likely than not reduces the fair value of a
reporting unit below its carrying amount. Any resulting
write-down, representing the difference between fair value and the
carrying amount, is recorded in the period in which the impairment
occurs.
|
|
|
(k)
|
Intangible
Assets
|
Definite-life
intangible assets are regularly reviewed for impairment whenever events or
changes in circumstances indicate that their carrying values may not be
recoverable. Impairment is assessed by comparing the carrying amount of an asset
with its expected future net undiscounted cash flows from use plus its residual
value. If such an asset is considered impaired, the impairment to be recognized
is measured by the amount by which the carrying amount of the asset exceeds its
fair value, generally determined on a discounted cash flow basis.
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 on a
straight-line basis. The existing technology is amortized over five
years on a straight-line basis. Trade names are considered
indefinite-life intangible assets and as such are not amortized.
|
|
(l)
|
Revenue
Recognition
|
The
Corporation’s revenue is derived from three separate lines of
business: (i) transaction payment processing; (ii) intellectual
property licensing and (iii) check processing and software
licensing. Revenue is recognized in accordance with Canadian
Institute of Chartered Accountants (“CICA”) Handbook Section 3400, “Revenue”
(“CICA 3400”) and with the corresponding U.S. guidance, Securities and Exchange
Commission (“SEC”) Staff Accounting Bulletin ("SAB") 104, "Revenue
Recognition".
Revenue
from the Corporation’s transaction payment processing (“TPP”) segment is derived
from one-time set-up fees, monthly gateway fees, and transaction fees paid to
the TPP segment by merchants. Transaction fees are recognized in the
period in which the transaction occurs. Gateway fees are monthly
subscription fees charged to the TPP segment merchant customers for the use of
its payment gateway. Gateway fees are recognized in the period in
which the service is provided. Set-up fees represent one-time charges
for initiating the TPP segment’s 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.
Revenue
from the Corporation’s intellectual property licensing (“IPL”) segment pertains
to licenses provided on its intellectual property estate. The IPL
segment typically earns revenue or other income from ongoing royalty fees and,
in some cases, release fees for potential past infringement. In some
instances, it also earns revenue from license agreements that provide for the
payment of contractually determined paid-up license fees to the IPL segment in
consideration for the grant of a non-exclusive, retroactive and future license
to the IPL segment’s intellectual property estate and in other instances, where
license agreements include multiple element arrangements, the IPL segment may
defer this revenue and recognize the revenue ratably over the license
term.
|
|
LML
PAYMENT SYSTEMS INC.
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(unless
otherwise indicated, all dollar amounts are U.S. dollars)
|
|
2.
|
SIGNIFICANT
ACCOUNTING POLICIES (continued)
|
Revenue
from the Corporation’s check processing and software licensing (“CP/SL”) segment
consists primarily of transaction charges from primary and secondary check
collection business, including electronic check re-presentment. Fees associated
with the CP/SL segment’s primary and secondary check collection business,
including electronic check re-presentment, are contingent on successful
recovery; accordingly, revenue is recognized as cash is received.
In
accordance with the American Institute of Certified Public Accountants (“AICPA”)
Statement of Position (“SOP”) 97-2, as amended by SOP 98-9, “Software Revenue
Recognition,” the CP/SL segment recognizes software license revenue when all of
the following criteria are met: execution of a written agreement;
delivery has occurred; the fee is fixed and determinable; collectability of the
proceeds is probable; and vendor-specific objective evidence exists to allocate
the total fee to elements of multiple-element arrangements, including post
contract customer support. Vendor-specific objective evidence is
based on the price charged when an element is sold separately. If the
CP/SL segment does not have sufficient evidence of the fair value of undelivered
elements, revenue is recognized ratably over the support period when the only
undelivered element is post-contract customer support. Any cash consideration
received prior to meeting revenue recognition criteria is recorded as deferred
revenue.
|
|
(m)
|
Income
Taxes
|
The
liability method is used in accounting for income taxes. Under this
method, income tax assets and liabilities are determined based on differences
between the financial reporting and tax bases of assets and liabilities and
measured using the substantively enacted tax rates and laws that will be in
effect when the differences are expected to reverse. Valuation
allowances are provided against net deferred tax assets when it is more likely
than not those assets may not be realized.
|
|
(n)
|
Earnings
(Loss) Per Common Share
|
Basic
earnings (loss) per common share is calculated based on net income (loss)
divided by the weighted-average number of common shares outstanding during the
period. Diluted earnings (loss) per share includes the dilutive effect of stock
options granted using the treasury stock method.
|
|
(o)
|
Stock-based
Compensation Plans
|
The
Corporation has two stock-based compensation plans, described more fully in Note
11. The Corporation applies the fair value recognition provisions of CICA
Handbook Section 3870 “Stock-based compensation and other stock-based payments”
(“Section 3870”) which corresponds to the fair value recognition provisions
under the Financial Accounting Standard Board’s (“FASB”) Statement of Financial
Accounting Standards (“SFAS”) No. 123 (revised 2004) “Share-Based Payment”
(“SFAS 123(R)”),. Under these standards, share-based payment transactions with
employees are required to be measured based on the grant-date fair value of the
equity instrument issued and recognized as compensation expense over the
requisite service period. The Corporation recognizes stock-based
compensation costs over the requisite service period during which an employee is
required to provide service in exchange for the award, which generally is the
vesting period with the offsetting credit to contributed
surplus. Upon the exercise of these options, any amounts originally
credited to contributed surplus are or will be credited to capital
stock.
Any
consideration paid on the exercise of stock options or purchase of stock is
credited to share capital.
|
|
LML
PAYMENT SYSTEMS INC.
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(unless
otherwise indicated, all dollar amounts are U.S. dollars)
|
|
2.
|
SIGNIFICANT
ACCOUNTING POLICIES (continued)
|
|
|
(p)
|
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” (“Section 1651”) (which is consistent with
Statement of Financial Accounting Standards (“SFAS”) No. 52 (“SFAS No. 52”)
“Foreign Currency Translation”) using the exchange rate prevailing at the
balance sheet date. Average rates for the period are used to
translate the Corporation’s revenue and expenses. Gains and losses
arising on settlement of foreign currency denominated transactions or balances
are included in the determination of income.
The
functional currency of the Corporation’s self-sustaining Beanstream subsidiary
is the Canadian dollar. Beanstream’s financial statements are
translated to United States dollars under the current rate method in accordance
with Section 1651 and SFAS No. 52. Beanstream’s assets and
liabilities are translated into U.S. dollars at rates of exchange in effect at
the balance sheet date. Average rates for the period are used to
translate Beanstream’s revenues and expenses. Gains and losses
arising on the translation of Beanstream’s financial statements are reported as
a cumulative translation adjustment which is a component of accumulated other
comprehensive income.
|
|
(q)
|
Financial
Instruments
|
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.
|
|
CHANGE
IN ACCOUNTING POLICIES
|
Capital
Disclosures and Financial Instruments – Disclosures and
Presentation
At April
1, 2008, the Corporation adopted three new presentation and disclosure standards
that were issued by the Canadian Institute of Chartered Accountants: Handbook
Section 1535, “Capital Disclosures” (“Section 1535”), Handbook Section 3862,
“Financial Instruments – Disclosures” (“Section 3862”) and Handbook Section
3863, “Financial Instruments – Presentation” (“Section 3863”).
Section
1535 requires the disclosure of both qualitative and quantitative information
that enables users of financial statements to evaluate (i) an entity’s
objectives, policies and processes for managing capital; (ii) quantitative data
about what the entity regards as capital; (iii) whether the entity has complied
with any capital requirements; and (iv) if it has not complied, the consequences
of such non-compliance. The Corporation has provided the required
disclosures under Section 1535 in Note 15 to these consolidated financial
statements
Sections
3862 and 3863 replace CICA Handbook Section 3861, “Financial Instruments –
Disclosure and Presentation”, revising and enhancing its disclosure requirements
and carrying forward unchanged its presentation requirements for financial
instruments. Sections 3862 and 3863 place increased emphasis on
disclosures about the nature and extent of risks arising from financial
instruments and how the entity manages those risks. The Corporation
has provided the required disclosures under Section 3862 in Note 5 to these
consolidated financial statements. The adoption of Sections 3862 and
3863 did not result in a material impact on the Corporation’s consolidated
financial statements.
|
|
LML
PAYMENT SYSTEMS INC.
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(unless
otherwise indicated, all dollar amounts are U.S. dollars)
|
2.
|
SIGNIFICANT
ACCOUNTING
POLICIES (continued)
|
Inventories
Section
3031, “Inventories” (“Section 3031”), which replaces Section 3030, establishes
standards for the measurement and disclosure of inventories. The new
standard provides more extensive guidance on the determination of cost,
including allocation of overhead and requires impairment testing. The
adoption of Section 3031 did not result in a material impact on the
Corporation’s consolidated financial statements.
RECENT
ACCOUNTING PRONOUNCEMENTS
Goodwill
and Intangible Assets
In
January 2008, the CICA issued Section 3064, “Goodwill and Intangible Assets”,
which will replace Section 3062, “Goodwill and Other Intangible
Assets”. The standard provides guidance on the recognition of
intangible assets in accordance with the definition of an asset and the criteria
for asset recognition as well as clarifying the application of the concept of
matching revenue and expenses, whether these assets are separately acquired or
internally developed. Section 1000 – “Financial Statement Concepts”,
was also amended to provide consistency with this new standard. At
April 1, 2008, the Corporation early-adopted this standard as is allowed under
the transitional provision. Adoption of this standard has had no
significant impact on the Corporation’s consolidated financial
statements.
Business
Combinations
In
December 2008, the CICA issued Section 1582 – “Business Combinations”, which
will replace Section 1581 – “Business Combinations”. This section
establishes revised standards for the accounting for a business combination
which are aligned with International Financial Reporting Standards (“IFRS”) on
business combinations. The Section applies prospectively to business
combinations for which the acquisition date is on or after the beginning of the
first annual reporting period beginning on or after January 1,
2011. The Corporation has not yet determined what the impact of
adopting this standard will have on the consolidated financial
statements.
International
Financial Reporting Standards
The
Accounting Standards Board of the CICA announced that Canadian GAAP for publicly
accountable enterprises will be replaced with IFRS, as published by the
International Accounting Standards Board, for fiscal years beginning on or after
January 1, 2011. Early conversion to IFRS for fiscal years beginning
on or after January 1, 2009 may also be permitted.
Implementing
IFRS will have an impact on accounting, financial reporting and supporting IT
systems and processes. It may also have an impact on taxes,
contractual commitments involving clauses based on generally accepted accounting
principles, long-term employee compensation plans and performance
metrics. Accordingly, when the Corporation develops its IFRS
implementation plan, it will have to include measures to provide extensive
training to key finance personnel, to review contracts and agreements and to
increase the level of awareness and knowledge amongst management, the Board of
Directors and Audit Committee. Additional resources may be engaged to
ensure the timely conversion to IFRS. The financial impact of the
transition to IFRS cannot be reasonably estimated at this time.
|
|
Consolidated
Financial Statements
|
In
January 2009, the CICA issued CICA Handbook Section 1601, “Consolidated
Financial Statements”. This section, which, together with new Section 1602,
“Non-controlling Interests”, replaces the former Section 1600, “Consolidated
Financial Statements”, and establishes standards for the preparation of
consolidated financial statements.
|
|
LML
PAYMENT SYSTEMS INC.
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(unless
otherwise indicated, all dollar amounts are U.S. dollars)
|
2.
|
SIGNIFICANT
ACCOUNTING
POLICIES (continued)
|
This
Section applies to interim and annual consolidated financial statements relating
to fiscal years beginning on or after January 1, 2011. Earlier adoption is
permitted as of the beginning of a fiscal year. An entity adopting this Section
for a fiscal year beginning before January 1, 2011 also adopts, Section
1582,”Business Combinations”, and Section 1602, “Non-controlling
interests”.
The
Corporation does not intend to early apply this section. The impact
on the Corporation’s consolidated financial statements from the application of
this section will depend upon the nature of any future business acquisitions
made by the Corporation after application.
Non-Controlling
Interests
In
January 2009, the CICA issued CICA Handbook Section 1602, “Non-controlling
interests”. This new Section establishes standards for accounting for a
non-controlling interest in a subsidiary in consolidated financial statements
subsequent to a business combination. It is equivalent to the corresponding
provisions of International Financial Reporting Standard IAS 27, “Consolidated
and Separate Financial Statements”.
This
Section applies to interim and annual consolidated financial statements relating
to fiscal years beginning on or after January 1, 2011. Earlier adoption is
permitted as of the beginning of a fiscal year. An entity adopting this Section
for a fiscal year beginning before January 1, 2011 also adopts Section
1582,”Business Combinations”, and Section 1601, “Consolidated Financial
Statements”.
The
Corporation does not intend to early apply this section. The impact
on the Corporation’s consolidated financial statements from the application of
this section will depend upon the nature of any future business acquisitions
made by the Corporation after application.
|
|
3.
|
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. On June 30, 2008, former Beanstream shareholders also
received an additional CDN$2.0 million (U.S.$1.97 million) in the Corporation’s
common stock upon the Corporation’s achievement of certain revenue milestones by
June 30, 2008 (see Note 9).
In
accordance with CICA Section 1581, “Business Combinations” (“CICA 1581”) which
corresponds to SFAS 141, “Business Combinations” (“SFAS 141”), the Corporation
has applied the purchase method and has consolidated the results of operations
of Beanstream commencing July 1, 2007.
Pursuant
to the arrangement agreement, the Beanstream shareholders had an option to elect
to accept shares of the Corporation in lieu of a portion of the cash
consideration. The amount of the share-for-cash election was not
known until June 27, 2007, therefore, the measurement date for the consideration
paid by the Corporation was determined to be June 27, 2007 rather than April 30,
2007. Consequently, the measurement date is June 27, 2007 and the
total purchase price paid has been calculated as follows:
LML
PAYMENT SYSTEMS INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(unless
otherwise indicated, all dollar amounts are U.S. dollars)
|
|
3.
|
ACQUISITION
OF BEANSTREAM (continued)
|
|
Number
of Shares
|
U.S.
($)
|
|||
|
Cash
|
-
|
7,153,759
|
||
|
Promissory
Notes
1
|
-
|
4,693,073
|
||
|
Common
Shares 2
|
1,963,555
|
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. The balance
of $2,100,920 at March 31, 2009 (March 31, 2008 - $5,167,383) includes
$118,920 in accrued interest (March 31, 2008 - $296,462) and $370,692 in
an unrealized foreign exchange gain (March 31, 2008 –
($177,847)).
|
|
|
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
increase in purchase price from the U.S.$18.3 million above to the U.S.$22.1
million recorded was a result of changes in the Canadian/U.S. currency exchange
rate and increases in the trading price of the Corporation’s 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.
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 1
|
(3,350,552 | ) | ||
|
Book
value of deferred revenue (recorded as goodwill2)
|
(82,273 | ) | ||
|
Net
working capital acquired 1
|
- | |||
|
Property
and equipment
|
71,401 | |||
|
Net
identifiable assets
|
71,401 | |||
|
Goodwill
2
|
15,985,350 | |||
|
Intangible
assets
|
6,072,000 | |||
| $ | 22,128,751 |
|
|
______________________________
|
|
|
1
|
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.
|
|
|
2
|
The
goodwill is not deductible for tax
purposes.
|
LML
PAYMENT SYSTEMS INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(unless
otherwise indicated, all dollar amounts are U.S. dollars)
|
|
3.
|
ACQUISITION
OF BEANSTREAM (continued)
|
On the
statement of cash flows, the acquisition of Beanstream, net of cash acquired, is
shown as a net cash outflow of $7,286,834 calculated as follows:
|
Cash
consideration paid
|
$ | (7,153,759 | ) | |
|
Beanstream
cash acquired
|
6,801,453 | |||
|
Funds
held for merchants (Note 6)
|
(2,812,117 | ) | ||
|
Amounts
due to former shareholders of Beanstream
|
(3,229,078 | ) | ||
|
Transaction
costs incurred 1
|
(893,333 | ) | ||
|
Acquisition
of Beanstream, net of cash acquired
|
$ | (7,286,834 | ) |
|
|
______________________________
|
|
|
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, 2008 and April 1, 2007,
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.
|
Years
Ended March 31
|
||||||||
|
2008
|
2007
|
|||||||
|
REVENUE
|
$ | 12,962,645 | $ | 11,435,181 | ||||
|
COSTS
OF REVENUE
|
5,649,699 | 7,028,748 | ||||||
|
GROSS
PROFIT
|
7,312,946 | 4,406,433 | ||||||
|
OPERATING
EXPENSES
|
||||||||
|
General
and administrative
|
5,777,830 | 3,207,383 | ||||||
|
Sales
and marketing
|
271,545 | 563,664 | ||||||
|
Product
development and enhancement
|
222,993 | 216,275 | ||||||
|
Amortization
and depreciation
|
1,038,750 | 851,563 | ||||||
|
INCOME
(LOSS) BEFORE OTHER INCOME (EXPENSES) AND INCOME TAXES
|
1,828 | (432,452 | ) | |||||
|
Foreign
exchange loss
|
(229,661 | ) | (11.644 | ) | ||||
|
Other
(expense) income, net
|
(246,918 | ) | 616,092 | |||||
|
(Loss)
gain on disposal/abandonment of property and equipment
|
(726,325 | ) | 7,000 | |||||
|
Interest
income
|
372,252 | 270,506 | ||||||
|
Interest
expense
|
(449,822 | ) | (364,115 | ) | ||||
|
Settlement
expenses
|
- | (45,000 | ) | |||||
|
Due
diligence expenses
|
- | (567,562 | ) | |||||
|
LOSS
BEFORE INCOME TAXES
|
(1,278,646 | ) | (527,175 | ) | ||||
|
Income
taxes
|
784,704 | 443,689 | ||||||
|
NET
LOSS
|
$ | (2,063,350 | ) | $ | (970,864 | ) | ||
|
LOSS
PER SHARE, basic and diluted
|
$ | (0.09 | ) | $ | (0.04 | ) | ||
|
WEIGHTED
AVERAGE NUMBER OF SHARES OUTSTANDING
|
||||||||
|
Basic
|
22,388,183 | 22,314,900 | ||||||
|
Diluted
|
22,388,183 | 22,314,900 | ||||||
LML
PAYMENT SYSTEMS INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(unless
otherwise indicated, all dollar amounts are U.S. dollars)
|
4.
|
ECONOMIC
DEPENDENCE
|
During the fiscal year ended March 31,
2009, revenue from the Corporation’s two largest customers amounted to
approximately 30.2% of total revenue (2008 – 35.9%; 2007 – 34.6%) consisting of
approximately 18.9% of total revenue for the Corporation’s largest customer
(2008 – 15.1%; 2007 - nil%) and 11.3% for the Corporation’s second largest
customer (2008 – 20.8%; 2007 – 34.6%). Revenue from the Corporation’s two
largest customers amounted to approximately $3,740,398 (2008 – $4,071,801; 2007
- $2,265,963) consisting of approximately $2,337,761 (2008 – $1,715,753; 2007 -
$nil) for the Corporation’s largest customer and $1,402,637 for the
Corporation’s second largest customer (2008 – $2,356,048; 2007 -
$2,265,963). The Corporation is economically dependent on revenue
from these customers.
|
|
5.
|
FINANCIAL
INSTRUMENTS
|
|
|
(a)
|
The
Corporation classifies its cash and cash equivalents, funds held for
merchants and restricted cash as held-for-trading. Accounts receivable are
classified as loans and receivables. Accounts payable and certain accrued
liabilities, funds due to merchants, and promissory notes are classified
as other liabilities, all of which are measured at amortized cost (using
the effective interest rate
method).
|
Carrying
value and fair value of financial assets and liabilities as at March 31, 2009
and 2008 are summarized as follows:
|
March
31, 2009
|
March
31, 2008
|
|||||||||||||||
|
Carrying
Value
|
Fair
Value
|
Carrying
Value
|
Fair
Value
|
|||||||||||||
|
Held-for-Trading
|
$ | 17,185,291 | $ | 17,185,291 | $ | 15,987,004 | $ | 15,987,004 | ||||||||
|
Loans
and receivables
|
801,087 | 801,087 | 719,301 | 719,301 | ||||||||||||
|
Held-to-maturity
|
- | - | - | - | ||||||||||||
|
Available-for-sale
|
- | - | - | - | ||||||||||||
|
Other
liabilities
|
14,418,590 | 14,418,590 | 13,395,340 | 13,395,340 | ||||||||||||
Management
reviewed all significant financial instruments held by the Corporation and
determined that no material differences between fair value and carrying value
existed as at the reporting date.
|
|
(b)
|
Restricted
cash
|
Under the
terms of the processing agreement with one of the Corporation’s processing
banks, the Corporation pledged a deposit of $175,000 (March 31, 2008 - $250,000)
against charge back losses. Non-current restricted cash represents
funds held by First Data Loan Company as security for the Corporation’s merchant
accounts.
|
|
(c)
|
Market
Risk
|
Currency
Risk
The
Corporation’s functional currency is the U.S. dollar. The Corporation
is exposed to foreign exchange risk from fluctuations in exchange rates between
the U.S. dollar and the Canadian dollar. Significant losses may occur
due to significant balances of cash and cash equivalents and short-term
investments held in Canadian dollars that may be affected negatively by an
increase in the value of the U.S. dollar as compared to the Canadian dollar. The
Corporation has not hedged its exposure to foreign currency
fluctuations.
As at
March 31, 2009 and March 31, 2008, the Corporation is exposed to currency risk
through its cash and restricted cash, accounts receivable, accounts payable,
accrued liabilities, corporate taxes payable and promissory notes denominated in
Canadian dollars:
LML
PAYMENT SYSTEMS INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(unless
otherwise indicated, all dollar amounts are U.S. dollars)
|
5.
|
FINANCIAL
INSTRUMENTS (continued)
|
|
March
31, 2009
|
March
31, 2008
|
|||||||
|
Cash
and restricted cash
|
$ | 326,655 | $ | 145,968 | ||||
|
Accounts
receivable
|
226,396 | 156,871 | ||||||
|
Accounts
payable
|
269,068 | 380,326 | ||||||
|
Accrued
liabilities
|
683,579 | 517,338 | ||||||
|
Corporate
taxes payable
|
283,794 | 573,240 | ||||||
|
Promissory
notes
|
2,100,920 | 5,167,383 | ||||||
|
|
Based
on the above foreign currency exposure as at March 31, 2009 and March 31,
2008 and assuming all other variables remain constant, a 10% depreciation
or appreciation of the Canadian dollar against the U.S. dollar would
result in an increase/decrease of $278,430 and $633,545 respectively, in
the Corporation’s foreign currency
loss/gain.
|
|
|
Interest
Rate Risk
|
|
|
Interest
rate risk is the risk that the fair value or future cash flows of a
financial instrument will fluctuate because of changes in market interest
rates. The Corporation’s exposure to interest rate risk is limited as its
cash and payment processing accounts earn minimal interest and its
promissory notes bear a fixed interest
rate.
|
|
|
Other
Price Risk
|
|
|
Other
price risk is the risk that the future value or cash flows of a financial
instrument will fluctuate because of changes in market prices. Exposure to
price risk is low as the Corporation’s cash management policy is to invest
excess cash in high grade/low risk investments over short periods of
time.
|
|
|
(d)
|
Credit
Risk
|
Credit
risk is the risk of a financial loss if a customer or counter party to a
financial instrument fails to meet its contractual obligations. Any credit risk
exposure on cash balances is considered negligible as the Corporation places
funds or deposits only with major established banks in the countries in which it
has payment processing services. The credit risk arises primarily from the
Corporation’s trade receivables from customers.
On a
regular basis, the Corporation reviews the collectability of its trade accounts
receivable and establishes an allowance for doubtful accounts based on its best
estimates of any potentially uncollectible accounts. As at March 31, 2009, the
balance of the Corporation’s allowance for doubtful accounts was $31,785 (March
31, 2008 - $32,168). The Corporation has good credit history with its
customers and the amounts due from them are received as expected.
Pursuant
to their respective terms, accounts receivable are aged as follows at March 31,
2009:
|
0-30
days
|
$ | 560,107 | ||
|
31-60
days
|
126,593 | |||
|
61-90
days
|
4,391 | |||
|
Over
90 days due *
|
141,781 | |||
| $ | 832,872 |
|
______________________________
|
|
|
*
|
Included
in this balance is $105,856 in sales tax receivables of which $55,380
relates to amounts outstanding from a 2007 Texas sales tax audit and
$50,476 relates to amounts owed on Canadian goods and services tax
receivables. The Corporation believes all of these amounts are
collectible.
|
LML
PAYMENT SYSTEMS INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(unless
otherwise indicated, all dollar amounts are U.S. dollars)
|
5.
|
FINANCIAL
INSTRUMENTS (continued)
|
|
|
Concentration
of credit risk
|
Financial
instruments that potentially subject the Corporation and its subsidiaries to
concentrations of credit risk consist principally of cash and cash equivalents
and accounts receivable.
|
|
Cash
and cash equivalents are invested in major financial institutions in the
U.S. and Canada. Such deposits may be in excess of insured limits and are
not insured in other jurisdictions. Management believes that the financial
institutions that hold the Corporation’s investments are financially sound
and, accordingly, relatively minimal credit risk exists with respect to
these investments.
|
|
|
The
accounts receivable of the Corporation and its subsidiaries are derived
from sales to customers located primarily in the U.S. and Canada. The
Corporation performs ongoing credit evaluations of its customers. The
Corporation generally does not require
collateral.
|
|
|
An
allowance for doubtful accounts is determined with respect to those
amounts that the Corporation has determined to be doubtful of collection.
At March 31, 2009, three customers accounted for 27%, 17% and 12% of
the Corporation’s accounts receivable balance (March 31, 2008 – 24%, 13%
and 14%).
|
|
|
(e)
|
Liquidity
Risk
|
Liquidity
risk is the risk that the Corporation will not be able to meet its financial
obligations as they are due. The Corporation continuously monitors actual and
forecasted cash flows to ensure, as far as possible, there is sufficient working
capital to satisfy its operating requirements.
|
Total
|
Less
than 1 year
|
2-3
years
|
4-5
years
|
After
5 years
|
||||||||||||||||
|
Contractual
Obligations
|
||||||||||||||||||||
|
Current portion of promissory
note
|
$ | 2,100,920 | $ | 2,100,920 | $ | - | $ | - | $ | - | ||||||||||
|
Accounts payable and accrued
liabilities
|
1,570,939 | 1,570,939 | - | - | - | |||||||||||||||
|
Capital lease
obligations
|
174,927 | 174,927 | - | - | - | |||||||||||||||
|
Operating lease
obligations
|
791,016 | 179,999 | 330,343 | 280,674 | ||||||||||||||||
|
Purchase
obligations
|
216,687 | 196,728 | 19,959 | - | - | |||||||||||||||
|
Total
|
$ | 4,854,489 | $ | 4,223,513 | $ | 350,302 | $ | 280,674 | $ | - | ||||||||||
LML
PAYMENT SYSTEMS INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
(unless
otherwise indicated, all dollar amounts are U.S.
dollars)
|
|
6.
|
CASH
AND CASH EQUIVALENTS AND FUNDS HELD FOR/DUE
MERCHANTS
|
Cash
and cash equivalents
At March
31, 2009, the Corporation held $6,138,530 (March 31, 2008: $9,749,768) in cash
and cash equivalents. Included in this balance is $1 million in cash
and cash equivalents used as continuing collateral security with the
Corporation’s primary financial institution which is available for use to the
Corporation.
Funds
held for/due to merchants
At March
31, 2009, Beanstream was holding funds due to merchants in the amount of
$10,746,731 (2008 – $5,833,617). 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.
|
|
|
7.
|
PROPERTY
AND EQUIPMENT
|
|
2009
|
||||||||||||
|
Cost
|
Accumulated
Amortization and Depreciation
|
Net
Book Value
|
||||||||||
|
Computer
equipment
|
$ | 1,502,769 | $ | 1,431,452 | $ | 71,317 | ||||||
|
Computer
software
|
1,237,098 | 1,158,332 | 78,766 | |||||||||
|
Furniture
and fixtures
|
293,768 | 290,660 | 3,108 | |||||||||
|
Leasehold improvements
|
260,143 | 258,667 | 1,476 | |||||||||
|
Office
equipment
|
715,886 | 643,730 | 72,156 | |||||||||
|
Website
& trademarks
|
38,186 | 37,685 | 501 | |||||||||
|
Total
cost
|
$ | 4,047,850 | $ | 3,820,526 | $ | 227,324 | ||||||
|
2008
|
||||||||||||
|
Cost
|
Accumulated
Amortization and Depreciation
|
Net
Book Value
|
||||||||||
|
Computer
equipment
|
$ | 1,480,343 | $ | 1,410,472 | $ | 69,871 | ||||||
|
Computer
software
|
1,207,429 | 1,126,394 | 81,035 | |||||||||
|
Furniture
and fixtures
|
293,768 | 289,576 | 4,192 | |||||||||
|
Leasehold
improvements
|
260,662 | 257,291 | 3,371 | |||||||||
|
Office
equipment
|
702,824 | 620,342 | 82,482 | |||||||||
|
Vehicles
|
75,277 | 70,396 | 4,881 | |||||||||
|
Website
& trademarks
|
38,186 | 37,190 | 996 | |||||||||
|
Total
cost
|
$ | 4,058,489 | $ | 3,811,661 | $ | 246,828 | ||||||
LML
PAYMENT SYSTEMS INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(unless
otherwise indicated, all dollar amounts are U.S. dollars)
|
|
7.
|
PROPERTY
AND EQUIPMENT (continued)
|
Depreciation
expense on property and equipment totaled $124,441 in 2009, $367,809 in 2008 and
$171,807 in 2007. Property and equipment include $7,367 of an asset that is
financed under a capital lease for the years ended March 31, 2009 and 2008 and
$1,146,473 of assets that are financed under various capital leases for the year
ended March 31, 2007. Accumulated amortization on these assets totals $3,806,
$2,333 and $449,316 for the years ended March 31, 2009, 2008 and 2007,
respectively. Amortization of assets under capital lease is included
in depreciation expense and totaled $1,473 in 2009, $245,115 in 2008 and $59,619
in 2007.
|
|
8.
|
PATENTS
|
|
2009
|
2008
|
|||||||
|
Cost
|
$ | 2,045,715 | $ | 2,045,715 | ||||
|
Less:
accumulated amortization
|
1,422,985 | 1,257,242 | ||||||
|
Net
book value
|
$ | 622,730 | $ | 788,473 | ||||
Amortization
expense totaled $165,743 in 2009, $166,316 in 2008 and $163,748 in
2007.
Estimated
aggregate amortization expense for each of the five succeeding fiscal years is
as follows:
|
Years
ending March 31
|
||||
|
2010
|
$ | 165,950 | ||
|
2011
|
$ | 165,950 | ||
|
2012
|
$ | 165,950 | ||
|
2013
|
$ | 124,880 | ||
|
2014
|
$ | - | ||
|
|
9.
|
GOODWILL
AND INTANGIBLE ASSETS
|
On June
30, 2008, additional contingent consideration became payable under the
Beanstream arrangement agreement. Pursuant to the agreement and due
to Beanstream meeting certain performance related criteria, additional
consideration from the Corporation of CDN$2,000,000 became
payable. The payment of this additional consideration resulted in an
increase in the purchase price and goodwill recorded.
|
Original
goodwill recognized on acquisition
|
$ | 15,903,077 | ||
|
Additional
contingent consideration (CDN $2,000,000)
|
1,971,125 | |||
|
Goodwill
related to Beanstream acquisition on March 31, 2009
|
$ | 17,874,202 |
The
Corporation had the right to pay the additional consideration in cash or through
the issuance of shares of its common stock with such shares to be issued at a
price equal to the volume weighted average of the closing price of one share of
the Corporation’s common stock as reported on the NASDAQ Stock Exchange during
the ten trading days immediately before the earn-out record date (June 30,
2008). The Corporation elected to pay such additional consideration
through the issuance of 774,576 shares of its common stock to the former
Beanstream shareholders.
During
the fiscal year ended March 31, 2008, the Corporation recorded intangible assets
of $6,072,000 in connection with the acquisition of Beanstream (see Note
3).
LML
PAYMENT SYSTEMS INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(unless
otherwise indicated, all dollar amounts are U.S. dollars)
|
|
9.
|
GOODWILL
AND INTANGIBLE ASSETS (continued)
|
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 on a straight-line basis. The existing technology is
amortized over five years on a straight-line basis. Trade names are
not amortized.
The
components of acquired intangible assets are as follows:
|
2009
|
2008
|
|||||||||||||||||||||||
|
Gross
|
Accumulated
Amortization
|
Net
|
Gross
|
Accumulated
Amortization
|
Net
|
|||||||||||||||||||
|
Amortizable
intangible assets:
|
||||||||||||||||||||||||
|
Partner
relationships
|
$ | 928,000 | $ | 162,400 | $ | 765,600 | $ | 928,000 | $ | 69,600 | $ | 858,400 | ||||||||||||
|
Merchant contracts
|
2,963,500 | 518,613 | 2,444,887 | 2,963,500 | 222,263 | 2,741,237 | ||||||||||||||||||
|
Existing
technology
|
530,000 | 185,500 | 344,500 | 530,000 | 79,500 | 450,500 | ||||||||||||||||||
|
Unamortized
intangible assets:
|
||||||||||||||||||||||||
|
Trade names
|
1,650,500 | - | 1,650,500 | 1,650,500 | - | 1,650,500 | ||||||||||||||||||
| $ | 6,072,000 | $ | 866,513 | $ | 5,205,487 | $ | 6,072,000 | $ | 371,363 | $ | 5,700,637 | |||||||||||||
Amortization
expense for intangible assets totaled $495,150 for the fiscal year ended March
31, 2009 (2008 - $371,363; 2007 - $nil).
As a
result of the continued deterioration of economic conditions during the second
half of fiscal 2009, the Corporation evaluated the impact of these conditions
and other developments on its long-lived assets, including intangible assets and
goodwill, to assess whether impairment indicators were present that would
require interim impairment testing. During the latter half of the third quarter
of fiscal 2009, the Corporation’s total market capitalization began to decline
below its consolidated shareholders’ equity balance. When the
Corporation’s total market capitalization remains below its consolidated
shareholders’ equity balance for a sustained period of time, this may be an
indicator of potential impairment of goodwill and other intangible assets.
Because this condition continued throughout the balance of the fourth quarter of
fiscal 2009, the Corporation determined that the carrying amount of its goodwill
and other intangible assets might not be recoverable and performed additional
impairment testing as of March 31, 2009. These test results included
an independent third party valuation of its TPP segment reporting unit. In
addition, the carrying value of the definite and indefinite-life intangible
assets was compared with the expected future net undiscounted cash flows and
fair value as calculated by the expected future net discounted cash flows,
respectively, from these assets and the Corporation determined the carrying
value of the assets did not exceed their fair value.
|
10.
|
OBLIGATIONS
UNDER CAPITAL LEASE
|
In
February, 2007, the Corporation entered into a lease agreement with IBM Credit
LLC to finance two IBM Mainframe hardware purchases totaling $1,139,106. Lease
payments are due on the last day of each month under the lease term of
thirty-six (36) months. Title to the equipment will transfer to the Corporation
at the expiration of the lease. Accordingly these amounts have been recorded as
a capital lease. During the fourth quarter of our fiscal year ended March 31,
2008, the Corporation consolidated its four data centers, which were running two
distinct processing platforms, into two data centers with a single processing
platform. Consequently, the Corporation disposed and abandoned the two IBM
Mainframes for a net loss of approximately $726,000 and incurred other costs
relating to the consolidation of the data centers of approximately $247,000. The
Corporation sold two components of the IBM Mainframe and remains obligated on
the balance of approximately $174,000 as at March 31, 2009, which will be
satisfied with monthly payments over the remaining ten (10) months of the lease
agreement.
LML
PAYMENT SYSTEMS INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(unless
otherwise indicated, all dollar amounts are U.S. dollars)
|
10.
|
OBLIGATIONS
UNDER CAPITAL LEASE (continued)
|
|
Future
minimum payments due
|
2009
|
2008
|
||||||
|
2009
|
$ | - | $ | 220,887 | ||||
|
2010
|
174,927 | 182,239 | ||||||
|
Less
amount representing interest (7%-8%)
|
(4,684 | ) | (22,187 | ) | ||||
|
Net
principal balance
|
170,243 | 380,939 | ||||||
|
Less
current portion
|
(170,243 | ) | (203,366 | ) | ||||
| $ | - | $ | 177,573 | |||||
The lease
is collateralized by the equipment under capital lease.
|
11.
|
SHARE
CAPITAL
|
|
|
(a)
|
Weighted
average common shares outstanding
|
For the
fiscal year ended March 31, 2009, the Corporation’s stock options and warrants
have been excluded from the calculation of diluted earnings per share and
diluted weighted average common shares outstanding. This is because
the average trading price of the Corporation’s publically traded shares was
below the stock option and warrants exercise price.
As a
result of the net losses incurred for 2008 and 2007, the effect of dilutive
securities would have been anti-dilutive to the diluted loss per common share
computations and were thus excluded. Dilutive securities that would have
otherwise been included in the determination of the weighted-average number of
common shares outstanding for the purposes of computing diluted earnings per
common share included 2,162,500 for 2008 and 660,000 for 2007 issuable under
stock options.
|
|
(b)
|
Contributed
Surplus
|
|
Years
ended March 31
|
||||||||||||
|
Contributed
Surplus
|
2009
|
2008
|
2007
|
|||||||||
|
Opening
contributed surplus
|
$ | 5,391,187 | $ | 3,443,292 | $ | 2,544,312 | ||||||
|
Financial
advisor fee (see Note 11(e))
|
- | 649,500 | - | |||||||||
|
Stock-based
compensation
|
1,340,872 | 1,287,210 | 877,334 | |||||||||
|
Stock-based
compensation – future income taxes
|
- | 11,185 | 21,646 | |||||||||
|
Closing
contributed surplus
|
$ | 6,732,059 | $ | 5,391,187 | $ | 3,443,292 | ||||||
LML
PAYMENT SYSTEMS INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(unless
otherwise indicated, all dollar amounts are U.S. dollars)
|
11.
|
SHARE
CAPITAL (continued)
|
|
|
(c)
|
Stock
Options
|
The
Corporation maintains two stock option plans; the 1996 Stock Option Plan (the
“1996 Plan”) and the 1998 Stock Incentive Plan (the “1998 Plan”). A
total of 6 million shares may be granted under each of the 1996 Plan and the
1998 Plan. All director, officer and employee stock options are
granted under either the 1996 Plan or the 1998 Plan. The
exercise price of stock options granted under the 1996 Plan and the 1998 Plan is
100% of the fair market value on the date the stock option is granted. Stock
options granted to independent directors vest one year from the date of grant
and are exercisable for a period of five years in accordance with the
compensation plan adopted for the Corporation’s independent directors during the
fiscal year ended March 31, 2005. Stock options granted to executive
officers have varying vesting schedules, which range from immediate vesting of
all of the stock options granted to vesting over a five-year period, and are
exercisable for periods ranging from five to ten years. Stock options
granted to employees normally vest over a three-year period and are exercisable
for a period of five years from the date of grant. Generally, stock
options granted to employees are forfeited 30 days after leaving the employment
of the Corporation.
There
were no stock options issued during the fiscal year ended March 31,
2009.
The total
fair value of stock-based compensation is amortized over the vesting of
previously issued stock options and resulted in a stock-based compensation
expense of $1,340,872 for the fiscal year ended March 31, 2009 (2008 -
$1,287,210; 2007 - $877,334).
The
2,775,000 stock options granted in the fiscal year ended March 31,
2008 have a weighted average fair value of a range from a low of
$1.43 to a high of $1.82.
The fair
value for the 2008 stock option grants was estimated at the date of grant using
a Black-Scholes option pricing model with the following
assumptions:
|
·
|
Risk-free
interest rate of 3.8% to 4.5%;
|
|
·
|
Expected
volatility of 54.3% to 57.5%;
|
|
·
|
Expected
life of the stock option of 4 years;
and
|
|
·
|
No
dividend yields.
|
The
760,000 stock options granted in the fiscal year ended March 31, 2007, have a
weighted average fair value of a range from a low of $1.46 to a high of
$1.82.
The fair
value for the 2007 stock option grants was estimated at the date of grant using
a Black-Scholes option pricing model with the following
assumptions:
|
·
|
Risk-free
interest rate of 3.84% to 4.42%;
|
|
·
|
Expected
volatility of 60.2% to 65.5%;
|
|
·
|
Expected
life of the stock options of 4 years;
and
|
|
·
|
No
dividend yields.
|
LML
PAYMENT SYSTEMS INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(unless
otherwise indicated, all dollar amounts are U.S. dollars)
|
11.
|
SHARE
CAPITAL (continued)
|
At March
31, 2009, 1,027,000 common shares were reserved for issuance pursuant to the
1996 Plan. This amount reflects the limit of shares collectively to
be granted pursuant to the 1996 Plan less (i) the number of shares that have
been granted and are still outstanding; (ii) the number of shares that have been
granted and exercised and (iii) the number of shares that have been granted and
have expired without being exercised. The 10-year term of the
1998 Stock Incentive Plan has expired and, accordingly, no additional options or
other equity awards may be granted under that plan (however, outstanding awards
under the 1998 Stock Incentive Plan are not affected by the expiration of the
term and will continue to be governed by the provisions of the
plan).
The
following table summarizes information about the stock options
outstanding:
|
Options
outstanding
|
Options
exercisable
|
|||||||
|
Range
($)
|
Total
# of Shares
|
Weighted
average exercise price
|
Weighted
average contract life remaining (years)
|
Total
# of Shares
|
Weighted
average exercise price
|
Weighted
average contract life remaining (years)
|
||
|
2.95
|
340,000
|
$2.95
|
2.52
|
280,000
|
$2.95
|
2.52
|
||
|
3.00-3.90
|
2,905,000
|
3.36
|
6.51
|
1,423,800
|
3.35
|
6.30
|
||
|
4.52
|
225,000
|
4.52
|
1.40
|
225,000
|
4.52
|
1.40
|
||
|
5.08-5.61
|
155,000
|
5.35
|
0.33
|
155,000
|
5.35
|
0.33
|
||
|
6.25
|
380,000
|
6.25
|
0.00
|
380,000
|
6.25
|
0.00
|
||
|
4,005,000
|
3.74
|
5.02
|
2,463,800
|
3.98
|
4.08
|
|||
Stock
option activity for the three preceding years is as follows:
|
2009
|
2008
|
2007
|
||||||
|
Total
# of Shares
|
Weighted
average exercise price
|
Total
# of Shares
|
Weighted
average exercise price
|
Total
# of Shares
|
Weighted
average exercise price
|
|||
|
Stock
options outstanding, beginning of year
|
4,207,500
|
$3.73
|
2,225,500
|
$4.59
|
1,629,500
|
$5.32
|
||
|
Granted
|
-
|
-
|
2,775,000
|
3.35
|
760,000
|
3.10
|
||
|
Forfeited
|
(202,500)
|
3.53
|
(766,750)
|
4.91
|
(151,000)
|
4.89
|
||
|
Exercised
|
-
|
-
|
(26,250)
|
2.95
|
(13,000)
|
4.95
|
||
|
Stock
options outstanding, end of year
|
4,005,000
|
3.74
|
4,207,500
|
3.73
|
2,225,500
|
4.59
|
||
|
|
(d)
|
Beanstream
Acquisition additional contingent
consideration
|
During
the fiscal year ended March 31, 2009, the Corporation issued shares of its
common stock pursuant to an earn-out provision in the Beanstream arrangement
agreement. The issuance consisted of 774,576 of its common stock to the former
Beanstream shareholders (see Note 9).
LML
PAYMENT SYSTEMS INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(unless
otherwise indicated, all dollar amounts are U.S. dollars)
|
11.
|
SHARE
CAPITAL (continued)
|
|
|
(e)
|
Private
Placement
|
In March,
2008, the Corporation completed a private placement of common stock. The private
placement consisted of 4,000,000 common shares at a purchase price of $1.80 per
common share, which realized the Corporation $7,200,000. The Corporation paid a
financial advisor a 6.5% fee in cash as well as warrants to acquire 400,000
shares of the Corporation’s common stock. The warrants are exercisable at $3.40
per share and are exercisable for a period of five years from March 26,
2008.
The fair
value of the private placement warrants was calculated as $1.62 per share, based
on the Black-Scholes fair value pricing model with the following
assumptions:
|
·
|
Risk-free
interest rate of 3.825%;
|
|
·
|
Expected
volatility of 57.5%;
|
|
·
|
Expected
life of the warrants of 4 years;
and
|
|
·
|
No
dividend yields.
|
The total
fair value of approximately $649,500 is included in contributed
surplus.
|
12.
|
EMPLOYEE
BENEFIT PLAN
|
The
Corporation has a defined contribution 401(k) plan (the "Plan") for eligible
employees. The Plan requires that the Corporation match 50% of eligible
employees’ contributions, up to 6% of their compensation. The Corporation
recorded matching contribution expenses for the years ended March 31, 2009, 2008
and 2007 of $2,769, $22,327, and $24,018 respectively.
|
13.
|
INCOME
TAXES
|
At March
31, 2009, the Corporation has Canadian non-capital loss carry-forwards for
income tax purposes of approximately $8,792,000 and U.S. federal net operating
loss carry-forwards of $9,515,000. Due to Canadian and U.S. tax "change of
ownership" rules, the loss carry-forwards are restricted in their
use. These losses expire as follows:
|
Canadian
non-capital loss-carry-forwards:
|
U.S.
federal net operating loss carry-forwards:
|
||||||||
|
2010
|
$ | 1,409,000 |
2010
|
$ | 346,000 | ||||
|
2014
|
1,231,000 |
2011
|
258,000 | ||||||
|
2025
to 2029
|
6,152,000 |
2017
to 2029
|
8,911,000 | ||||||
| $ | 8,792,000 | $ | 9,515,000 | ||||||
LML
PAYMENT SYSTEMS INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(unless
otherwise indicated, all dollar amounts are U.S. dollars)
|
13.
|
INCOME
TAXES (continued)
|
Future
income taxes reflect the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and
the amounts used for income tax purposes. Significant components of the
Corporation’s future tax assets as of March 31, 2009 and 2008 are as
follows:
|
2009
|
2008
|
|||||||
|
Future
tax assets:
|
||||||||
|
Excess
of tax value over the net book value for capital assets
|
$ | 639,669 | $ | 259,000 | ||||
|
Stock-based
compensation
|
1,180,357 | 1,180,357 | ||||||
|
Canadian
non-capital loss carry-forwards
|
2,374,035 | 3,251,000 | ||||||
|
U.S.
federal net operating loss carry-forwards
|
3,330,372 | 4,113,000 | ||||||
|
Total
future tax assets
|
7,524,433 | 8,803,357 | ||||||
|
Valuation
allowance for future tax assets
|
(2,256,280 | ) | (8,803,357 | ) | ||||
|
Net
future tax assets
|
$ | 5,268,153 | $ | - | ||||
A portion
of potential income tax benefits related to future tax assets have
not been recognized in the accounts as their realization did not meet the
requirements of "more likely than not" under the liability method of tax
allocation due to the Corporation’s history of losses.
The
reconciliation of income tax attributable to operations computed at the
statutory tax rates to income tax expense (recovery), using a 30.63% statutory
tax rate at March 31, 2009, a 31% statutory tax rate at March 31, 2008 and a
34.12% statutory tax rate at March 31, 2007 is as follows:
|
2009
|
2008
|
2007
|
||||||||||
|
Income
taxes at statutory rates
|
$ | 316,566 | $ | (498,000 | ) | $ | (366,000 | ) | ||||
|
State
income taxes
|
16,800 | 16,800 | 16,800 | |||||||||
|
Stock-based
compensation – future income taxes
|
- | 11,185 | 21,646 | |||||||||
|
Stock-based
compensation and other permanent differences
|
489,341 | 544,000 | 307,000 | |||||||||
|
Effect
of U.S. tax rates
|
71,986 | 10,000 | 16,000 | |||||||||
|
Expiration
of loss carry-forwards
|
361,900 | 268,000 | - | |||||||||
|
Effect
of change in tax rates and other
|
(74,762 | ) | 1,154,000 | - | ||||||||
|
Utilization
of U.S. federal net operating losses
|
590,587 | 88,000 | - | |||||||||
|
(Decrease)
Increase in valuation allowance
|
(6,193,900 | ) | (979,643 | ) | 43,000 | |||||||
| $ | (4,421,482 | ) | $ | 614,342 | $ | 38,446 | ||||||
During
the Corporation’s 2009 assessment of the realizability of its future tax assets,
the Corporation considered historical taxable income, estimates of future
profitability and its ongoing feasible and prudent tax planning
strategies. Based upon this assessment, the Corporation decreased the
valuation allowance for the fiscal year ended March 31, 2009 as the realization
of future tax assets of $5,268,153 meet the requirements of “more likely than
not” under the liability method of tax allocation.
|
14.
|
COMMITMENTS
AND CONTINGENCIES
|
|
|
(a)
|
During the fiscal year ended
March 31, 2007 a subsidiary of the Corporation received notification that
it had been named in a class-action lawsuit filed in the United States
District Court, Eastern District, Marshall Division, Texas, alleging that
numerous defendants, including the subsidiary of the Corporation, violated
the Driver’s Privacy Protection Act regulating the use of personal
information such as driver’s license numbers and home addresses contained
in motor vehicle records held by motor vehicle departments, by not having
a permissible use in obtaining the State of Texas’ entire database of
names, addresses and other personal information. During
the fiscal year ended March 31, 2009, the complaint was dismissed with
prejudice. Also during the fiscal year ended March 31, 2009, the
plaintiffs appealed this decision. The subsidiary of the
Corporation believes that these allegations are without merit and does not
expect them to have a material adverse effect on its results of
operations, financial position or liquidity.
|
LML
PAYMENT SYSTEMS INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(unless
otherwise indicated, all dollar amounts are U.S. dollars)
|
14.
|
COMMITMENTS
AND CONTINGENCIES (continued)
|
|
|
(b)
|
During
the fiscal year ended March 31, 2009, a subsidiary of the Corporation
filed a patent infringement lawsuit in the U.S. district court for the
Eastern District of Texas against multiple financial institutions
operating in the United States. In the suit, the subsidiary
of the Corporation alleges that the defendants infringe U.S. Patent No.
RE40,220. The subsidiary of the Corporation is seeking damages, injunctive
and other relief for the alleged infringement of these
patents.
|
Subsequent
to the fiscal year ended March 31, 2009, CitiBank, N.A., an affiliate of one of
the defendants in the LML Suit, filed a complaint for patent infringement in the
U.S. District Court for the Northern District of Illinois, Eastern Division
against a subsidiary of the Corporation, in an action styled Citibank, N.A. as
plaintiff vs. LML Payment Systems Corp. In the suit, Citibank, N.A.
alleges that the subsidiary of the Corporation infringes U.S. Patent No.
7,020,639 and is seeking damages and injunctive and other relief. The
subsidiary of the Corporation believes these allegations are without merit and
intends to vigorously defend against them. At this time, the
likelihood of success of this suit is indeterminable and any amount likely to be
payable is unknown at this time.
Also
subsequent to the fiscal year ended March 31, 2009, JP Morgan Chase Bank, N.A.,
an affiliate of one of the defendants in the LML Suit, filed a complaint for
patent infringement in the U.S. District Court for the District of Delaware
against two subsidiaries of the Corporation in an action styled JP Morgan Chase
Bank N.A. as plaintiff vs. LML Payment Systems Corp. and Beanstream Internet
Commerce Inc. In the suit, JP Morgan Chase Bank N.A. alleges that the
subsidiaries of the Corporation infringe U.S. Patent Nos. 5,917,965 and
6,341,724 and is seeking damages and injunctive and other relief. On
May 13, 2009, the plaintiff in this suit filed an amended complaint alleging the
same two subsidiaries of the Corporation additionally infringe U.S. Patent Nos.
5,940,844 and 6,098,052. The subsidiaries of the Corporation
believe these allegations are without merit and intend to vigorously defend
against them. At this time, the likelihood of success of this suit is
indeterminable and any amount likely to be payable is unknown at this
time.
Also
subsequent to the fiscal year ended March 31, 2009, a subsidiary of the
Corporation filed another patent infringement lawsuit in the U.S. district court
for the Eastern District of Texas against six financial institutions operating
in the United States. In the suit, the subsidiary of the Corporation
alleges that the defendants infringe U.S. Patent No. RE40,220 and is seeking
damages and injunctive and other relief for the alleged infringement of this
patent.
|
|
(c)
|
The Corporation is a
party to additional ordinary litigation incidental to its business,
none of which is expected to have a material adverse effect on results of
operations, financial position or liquidity of the
Corporation.
|
|
|
(d)
|
Operating
lease obligations
|
Future
minimum lease payments for obligations under operating leases, including
premises for the next five years and thereafter, are as follows:
|
2010
|
$ | 179,999 | ||
|
2011
|
161,836 | |||
|
2012
|
168,507 | |||
|
2013
|
176,221 | |||
|
2014
|
104,453 | |||
|
2015
and thereafter
|
- | |||
| $ | 791,016 |
The
Corporation’s rent expense totaled $307,521 in 2009, $443,420 in 2008 and
$415,609 in 2007.
LML
PAYMENT SYSTEMS INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(unless
otherwise indicated, all dollar amounts are U.S. dollars)
|
14.
|
COMMITMENTS
AND CONTINGENCIES (continued)
|
|
|
(e)
|
Purchase
obligations
|
|
|
Future
minimum payments for purchase obligations for the next five years and
thereafter, are as follows:
|
|
2010
|
$ | 196,728 | ||
|
2011
|
19,959 | |||
|
2012
|
- | |||
|
2013
|
- | |||
|
2014
|
- | |||
|
2015
and thereafter
|
- | |||
| $ | 216,687 |
|
15.
|
CAPITAL
MANAGEMENT DISCLOSURES
|
The
Corporation’s objectives when managing capital are to safeguard its ability to
support its normal operating requirements on an ongoing basis, so that it can
continue to provide returns for shareholders and benefits for other
stakeholders, and to provide an adequate return to shareholders by pricing
products and services commensurately with the level of risk.
The
capital structure of the Corporation consists of obligations under a capital
lease, promissory notes, and shareholders’ equity. The Corporation manages its
capital structure and makes adjustments to it in light of economic conditions.
The Corporation, upon approval from its Board of Directors, will balance its
overall capital structure through new share issues or by undertaking other
activities as deemed appropriate under the specific circumstances.
The
Corporation is not subject to any externally imposed capital requirements.
The Corporation’s overall strategy with respect to capital risk management
remains unchanged from the year ended March 31, 2008.
|
16.
|
INDUSTRY
AND GEOGRAPHIC SEGMENTS
|
Based
upon the way financial information is provided to the Corporation’s decision
makers 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:
TPP
operations involve financial payment processing, authentication and risk
management services provided by Beanstream. The services are
accessible via the Internet and are offered in an application service provider
(ASP) model.
IPL
operations involve licensing the Corporation’s intellectual property estate,
which includes five U.S. patents describing electronic check processing
methods.
CP/SL
operations involve primary and secondary check collection including electronic
check re-presentment (RCK) and software licensing.
Within
these segments, performance is measured based on revenue, 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.
Financial
information for each reportable segment for the fiscal years ended March 31,
2009, 2008 and 2007 was as follows:
LML
PAYMENT SYSTEMS INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(unless
otherwise indicated, all dollar amounts are U.S. dollars)
|
16.
|
INDUSTRY
AND GEOGRAPHIC SEGMENTS (continued)
|
|
Fiscal
Year Ended
|
TPP
|
IPL
|
CP/SL
|
Reconciling
|
Consolidated
|
|||||||||||||||
|
March
31, 2009
|
Canada
|
U.S.
|
U.S.
|
Items
|
Total
|
|||||||||||||||
|
Total
Revenue
|
$ | 7,848,819 | $ | 1,703,977 | $ | 2,826,052 | $ | - | $ | 12,378,848 | ||||||||||
|
Revenue:
major customers (Note 4)
|
2,337,761 | 1,222,224 | 1,402,637 | - | 4,962,622 | |||||||||||||||
|
Cost
of revenue
|
4,278,214 | - | 1,627,640 | 149,716 | 1 | 6,055,570 | ||||||||||||||
|
General
and administrative
|
643,471 | 20,971 | 639,078 | 3,039,886 | 2 | 4,343,406 | ||||||||||||||
|
Sales
and marketing
|
293,961 | - | 26,109 | 3,033 | 1 | 323,103 | ||||||||||||||
|
Product
development and enhancement
|
223,965 | - | - | 48,534 | 1 | 272,499 | ||||||||||||||
|
Amortization and
depreciation
|
42,791 | 168,199 | 61,668 | 512,676 | 3 | 785,334 | ||||||||||||||
|
Income
(losses) before income taxes
|
2,708,590 | 1,560,206 | 414,202 | (3,649,314 | )4 | 1,033,684 | ||||||||||||||
|
Property
and equipment
|
95,454 | 249 | 88,200 | 43,421 | 227,324 | |||||||||||||||
|
Goodwill
|
17,874,202 | - | - | - | 17,874,202 | |||||||||||||||
|
Fiscal
Year Ended
|
TPP
|
IPL
|
CP/SL
|
Reconciling
|
Consolidated
|
|||||||||||||||
|
March
31, 2008
|
Canada
|
U.S.
|
U.S.
|
Items
|
Total
|
|||||||||||||||
|
Total
Revenue
|
$ | 5,636,564 | $ | 1,670,247 | $ | 4,021,067 | $ | - | $ | 11,327,878 | ||||||||||
|
Revenue:
major customers (Note 4)
|
1,715,753 | 1,222,224 | 2,356,049 | - | 5,294,026 | |||||||||||||||
|
Cost
of revenue
|
3,001,840 | - | 1,763,657 | 42,449 | 1 | 4,807,946 | ||||||||||||||
|
General
and administrative
|
336,615 | 18,468 | 2,146,428 | 3,158,183 | 2 | 5,659,694 | ||||||||||||||
|
Sales
and marketing
|
144,772 | - | 80,188 | 2,975 | 1 | 227,935 | ||||||||||||||
|
Product
development and enhancement
|
153,902 | - | - | 23,802 | 1 | 177,704 | ||||||||||||||
|
Amortization and
depreciation
|
19,161 | 167,122 | 338,053 | 381,152 | 3 | 905,488 | ||||||||||||||
|
Income
(losses) before income taxes
|
2,203,221 | 1,613,249 | (1,348,273 | ) | (4,074,683 | )4 | (1,606,486 | ) | ||||||||||||
|
Property
and equipment
|
76,843 | 1,054 | 139,558 | 29,373 | 246,828 | |||||||||||||||
|
Goodwill
|
15,903,077 | - | - | - | 15,903,077 | |||||||||||||||
|
Fiscal
Year Ended
|
TPP
|
IPL
|
CP/SL
|
Reconciling
|
Consolidated
|
|||||||||||||||
|
March
31, 2007
|
Canada
|
U.S.
|
U.S.
|
Items
|
Total
|
|||||||||||||||
|
Total
Revenue
|
$ | - | $ | 1,718,781 | $ | 4,835,410 | $ | - | $ | 6,554,191 | ||||||||||
|
Revenue:
major customers (Note 4)
|
- | 1,222,224 | 2,265,963 | - | 3,488,187 | |||||||||||||||
|
Cost
of revenue
|
- | - | 4,533,788 | - | 4,533,788 | |||||||||||||||
|
General
and administrative
|
- | 62,131 | 425,304 | 2,347,517 | 2 | 2,834,952 | ||||||||||||||
|
Sales
and marketing
|
- | - | 355,445 | - | 355,445 | |||||||||||||||
|
Amortization and
depreciation
|
- | 164,552 | 167,238 | 3,765 | 3 | 335,555 | ||||||||||||||
|
Income
(losses) before income taxes
|
2,280,902 | (420,281 | ) | (2,895,038 | )4 | (1,034,417 | ) | |||||||||||||
|
Property
and equipment
|
- | 1,859 | 1,337,735 | 22,409 | 1,362,003 | |||||||||||||||
______________________________
|
1
|
Represents
stock-based compensation expense.
|
|
2
|
Represents
stock-based compensation expense and other unallocated corporate or
centralized marketing, general and administrative
expenses
|
|
3
|
Represents
amortization and depreciation included in the unallocated corporate or
centralized marketing, general and administrative
expenses.
|
|
4
|
Represents
income (losses) included in the unallocated corporate or centralized
marketing, general and administrative
expenses.
|
LML
PAYMENT SYSTEMS INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(unless
otherwise indicated, all dollar amounts are U.S. dollars)
|
17.
|
RECONCILIATION
OF CANADIAN TO UNITED STATES GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES
|
These
consolidated financial statements are prepared using Canadian GAAP, which does
not differ materially from 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 affect the reduction in deficit of
$22,901,744 by reducing the stated capital of the shares of the
Corporation’s common stock.
|
|
|
(b)
|
On
April 1, 2006, the Corporation adopted SFAS 123(R) which requires the
expensing of all options issued, modified or settled based on the grant
date fair value over the period during which an employee is required to
provide service (vesting period).
|
The
Corporation adopted SFAS 123(R) using the modified prospective approach, which
requires application of the standard to all awards granted, modified,
repurchased or cancelled on or after April 1, 2006, and to all awards for which
the requisite service has not been rendered as at such date. Since
April 1, 2003, the Corporation has been following the fair value based approach
prescribed by SFAS 123, as amended by SFAS 148, for stock option awards granted,
modified or settled on or after such date. As such, the application
of SFAS 123(R) on April 1, 2006 to all awards granted prior to its adoption did
not have an impact on the financial statements. In accordance with
the modified prospective approach, prior period financial statements have not
been restated to reflect the impact of SFAS 123(R). The prospective adoption of
this new U.S. GAAP policy creates no differences with the Corporation’s stock
compensation expense reported under Canadian 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 consolidated financial
statements.
|
|
|
(d)
|
Changes
in U.S. GAAP
|
Recent
accounting pronouncements affecting the Corporation’s financial reporting under
U.S. GAAP are summarized below:
LML
PAYMENT SYSTEMS INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(unless
otherwise indicated, all dollar amounts are U.S. dollars)
|
|
17.
|
RECONCILIATION
OF CANADIAN TO UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(continued)
|
|
(i)
|
In
September 2006, the FASB issued SFAS No. 157, “Fair Value
Measurements”, which defines fair value, establishes a framework for
measuring fair value in generally accepted accounting principles, and
expands disclosures about fair value measurements. SFAS 157 is effective
for fiscal years beginning after November 15, 2007 except as amended by
FASB Staff Position (“FSP”) SFAS 157-2 which is effective for fiscal years
beginning after November 15, 2008. FSP SFAS 157-2 allows partial deferral
of the effective date of SFAS 157 relating to fair value measurements for
non-financial assets and liabilities that are not measured at fair value
on a recurring basis. SFAS No. 157 does not require any new fair
value measurements, but provides guidance on how to measure fair value by
providing a fair value hierarchy used to classify the source of the
information. As of April 1, 2008, the Corporation adopted SFAS
157, except as it applies to the non-financial assets and non-financial
liabilities subject to FSP SFAS 157-2. The Corporation will adopt the
remaining portion of SFAS 157 in the first quarter of fiscal 2010 and does
not expect the adoption to have a material impact on the consolidated
financial statements and the accompanying
notes.
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(ii)
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As
at April 1, 2008, the Corporation adopted SFAS No. 159, “The Fair
Value Option for Financial Assets and Financial Liabilities”. SFAS
No. 159 provides companies with an option to report selected
financial assets and liabilities at fair value. The objective of SFAS
No. 159 is to reduce both complexity in accounting for financial
instruments and the volatility in earnings caused by measuring related
assets and liabilities differently. U.S. GAAP has required different
measurement attributes for different assets and liabilities that can
create artificial volatility in earnings. FASB has indicated it believes
that SFAS No. 159 helps to mitigate this type of accounting- induced
volatility by enabling companies to report related assets and liabilities
at fair value, which would likely reduce the need for companies to comply
with detailed rules for hedge accounting. SFAS No. 159 also
establishes presentation and disclosure requirements designed to
facilitate comparisons between companies that choose different measurement
attributes for similar types of assets and liabilities. For example, SFAS
No. 159 requires companies to provide additional information that
will help investors and other users of financial statements to more easily
understand the effect of the company’s choice to use fair value on its
earnings. It also requires entities to display the fair value of those
assets and liabilities for which the company has chosen to use fair value
on the face of the balance sheet. SFAS No. 159 does not eliminate
disclosure requirements included in other accounting standards, including
requirements for disclosures about fair value measurements included in
SFAS No. 157, and SFAS No. 107, “Disclosures about Fair Value of
Financial Instruments”. The Corporation did not elect to use the fair
value measurement options of this standard. Adoption of this
standard has not had a significant impact on the Corporation’s
consolidated financial statements.
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(iii)
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In
December 2007, the FASB issued SFAS No. 141(R) “Business Combinations”.
SFAS No. 141(R) replaces SFAS No. 141 “Business Combinations”. SFAS No.
141(R) is broader in scope than SFAS No. 141 which applied only to
business combinations in which control was obtained by transferring
consideration. SFAS No. 141(R) applies to all transactions and other
events in which one entity obtains control over one or more other
businesses. SFAS No. 141(R) is effective for fiscal years beginning after
December 15, 2008 and the Corporation will adopt the standard in the first
quarter of fiscal 2010 and its effects on future periods will depend on
the nature and significance of any business combinations subject to this
statement.
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(iv)
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In
December 2007, the FASB issued SFAS No. 160, “Non-controlling
Interest in Consolidated Financial Statements”, an amendment of
ARB No. 51. The new statement changes the accounting for, and
the financial statement presentation of, non-controlling equity interests
in a consolidated subsidiary.
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SFAS No.
160 replaces the existing minority-interest provisions of Accounting Research
Bulletin 51, Consolidated Financial Statements, by defining a new
term—non-controlling interests—to replace what were previously called minority interests. The new
standard establishes non-controlling interests as a component of the equity of a
consolidated entity.
LML
PAYMENT SYSTEMS INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(unless
otherwise indicated, all dollar amounts are U.S. dollars)
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17.
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RECONCILIATION
OF CANADIAN TO UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(continued)
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The
underlying principle of the new standard is that both the controlling interest
and the non-controlling interests are part of the equity of a single economic
entity: the consolidated reporting entity. Classifying non-controlling interests
as a component of consolidated equity is a change from the current practice of
treating minority interests as a mezzanine item between liabilities and equity
or as a liability. The change affects both the accounting and financial
reporting for non-controlling interests in a consolidated
subsidiary.
SFAS No.
160 is effective for fiscal years and interim periods within those fiscal years
beginning on or after December 15, 2008. Early adoption is prohibited. The
impact of adopting SFAS No. 160 will be dependent on the future business
combinations that the Corporation may pursue after its effective
date.
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(v)
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In
March 2008, the FASB issued SFAS No. 161 "Disclosures about Derivative
Instruments and Hedging Activities - an amendment of FASB Statement No.
133". This standard requires enhanced disclosures regarding derivatives
and hedging activities, including: (a) the manner in which an entity uses
derivative instruments; (b) the manner in which derivative instruments and
related hedged items are accounted for under SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities;" and (c) the effect of
derivative instruments and related hedged items on an entity's financial
position, financial performance, and cash flows. SFAS No. 161 is effective
for financial statements issued for fiscal years and interim periods
beginning after November 15, 2008. The Corporation is in the process of
evaluating the impact, if any, that the adoption of SFAS No. 161 will have
on its consolidated financial
statements.
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(vi)
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In
April 2008, the FASB issued FASB Staff Position (FSP) 142-3,
“Determination of the Useful Life of Intangible Assets” (“FSP
142-3”). FSP 142-3 removes the requirement to consider whether an
intangible asset can be renewed without substantial cost of material
modifications to the existing terms and conditions and, instead, requires
an entity to consider its own historical experience in renewing similar
arrangements. FSP 142-3 also requires expanded disclosure related to the
determination of intangible asset useful lives. FSP 142-3 is
effective for fiscal years beginning after December 15, 2008. The
Corporation does not expect the adoption of FSP 142-3 to have a material
impact on its consolidated financial
statements.
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(vii)
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In
April 2009, the FASB issued FASB Staff Position FSP 157-4,
“Determining Fair Value When the Volume and Level of Activity for the
Asset or Liability Have Significantly Decreased and Identifying
Transactions That Are Not Orderly” (“FSP 157-4”). This FSP
emphasizes that even if there has been a significant decrease in the
volume and level of activity for the asset or liability and regardless of
the valuation technique(s) used, the objective of a fair value
measurement remains the same, and provides additional guidance on when
market level data should not be relied upon or should be adjusted in
determining fair value. FSP FAS 157-4 is effective for interim
periods and fiscal years ending after June 15, 2009. The Corporation
does not expect the adoption of this pronouncement to have a material
effect on its consolidated financial
statements.
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(viii)
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In
April 2009, the FASB issued FASB Staff Position (FSP) FAS 107-1 and APB
28-1, “Interim Disclosures about Fair Value of Financial Instruments,”
(“FSP 107-1 and APB 28-1”) to require, on an interim basis, disclosures
about the fair value of financial instruments for public entities. FSP FAS
107-1 and APB 28-1 is effective for interim and annual periods ending
after June 15, 2009, with early adoption permitted for periods ending
after March 15, 2009. An entity may early adopt this FSP only if it
concurrently adopts both FSP FAS 157-4, “Determining Fair Value When the
Volume and Level of Activity for the Asset or Liability Have Significantly
Decreased and Identifying Transactions That Are Not Orderly,” and FSP FAS
115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary
Impairments.” The Corporation intends to adopt FSP FAS 107-1 and APB 28-1
effective June 30, 2009.
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LML
PAYMENT SYSTEMS INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(unless
otherwise indicated, all dollar amounts are U.S. dollars)
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17.
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RECONCILIATION
OF CANADIAN TO UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(continued)
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Under
U.S. GAAP there are no adjustments that resulted in changes to the Consolidated
Statements of Operations, Consolidated Statements of Comprehensive Income
(Loss), Consolidated Statements of Shareholders’ Equity, Consolidated Statements
of Cash Flows or the Consolidated Balance Sheets of the Corporation, except that
under U.S. GAAP the stated capital of the Corporation’s shares would be
$22,901,744 higher, as would the Corporation’s deficit due to the reporting
difference disclosed under Note 17(a).