Attached files
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EX-31.1 - EXHIBIT 31_1 - LML PAYMENT SYSTEMS INC | exh31_1.htm |
EX-32.1 - EXHIBIT 32_1 - LML PAYMENT SYSTEMS INC | exh32_1.htm |
EX-31.2 - EXHIBIT 31_2 - LML PAYMENT SYSTEMS INC | exh31_2.htm |
EX-10.1 - EXHIBIT 10_1 - LML PAYMENT SYSTEMS INC | exh10_1.htm |
UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
Form
10-Q
[X] QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For
the Quarterly Period Ended December 31, 2009
OR
[ ] TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For
the Transition Period from ________ to ________
Commission
File Number: 000-13959
LML
PAYMENT SYSTEMS INC.
(Exact
name of registrant as specified in its charter)
Yukon
Territory
|
###-##-####
|
|
(State
or other jurisdiction of
|
(I.R.S.
Employer Identification No.)
|
|
incorporation
or organization)
|
1680-1140
West Pender Street
Vancouver,
British Columbia
Canada V6E
4G1
(Address
of principal executive offices) (Zip Code)
Registrant's
Telephone Number, Including Area Code: (604) 689-4440
Indicate
by check mark whether the registrant: (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90
days.
Yes [X] No [ ]
Indicate
by check mark whether the registrant 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 (§ 232.405) of this
chapter) 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
registrant)
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See definition of “large accelerated filer,” “accelerated
filer” and “smaller reporting company” in Rule 12b-2 of the Exchange
Act. (Check one):
Large
Accelerated Filed
[ ] Accelerated
Filer
[ ] Non-Accelerated
Filer [ ]
Smaller Reporting
Company [X]
(Do not check if a smaller reporting company)
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange
Act).
Yes []No [X]
The
number of shares of the registrant's Common Stock outstanding as of February 3,
2010, was 27,116,408.
LML PAYMENT SYSTEMS INC.
FORM
10-Q
FOR
THE QUARTERLY PERIOD ENDED DECEMBER 31, 2009
INDEX
Page
Number
|
||
PART
I.
|
||
Item
1.
|
||
Item
2.
|
||
Item
3.
|
||
Item
4.
|
||
PART
II.
|
||
Item
1.
|
||
Item
1A.
|
||
Item
6.
|
||
In this
Quarterly Report on Form 10-Q, unless otherwise indicated, all dollar amounts
are expressed in United States Dollars.
PART I.
|
ITEM
1.
|
CONSOLIDATED
FINANCIAL STATEMENTS
|
LML
PAYMENT SYSTEMS INC.
CONSOLIDATED BALANCE SHEETS
(In
U.S. Dollars, except as noted below)
(Unaudited)
December
31, 2009
|
March
31, 2009
|
|||||||
ASSETS
|
||||||||
Current
Assets
|
||||||||
Cash
and cash equivalents
|
$ | 3,979,487 | $ | 6,138,530 | ||||
Funds
held in trust
|
718,093 | - | ||||||
Funds
held for merchants (Note 8)
|
4,266,636 | 10,746,731 | ||||||
Restricted
cash
|
175,000 | 175,000 | ||||||
Accounts
receivable, less allowances of $30,474 and $31,785,
respectively
|
756,967 | 801,087 | ||||||
Corporate
taxes receivable
|
582,863 | - | ||||||
Prepaid
expenses
|
301,257 | 295,702 | ||||||
Current
portion of future income tax assets
|
1,852,894 | 838,575 | ||||||
Total
current assets
|
12,633,197 | 18,995,625 | ||||||
Property
and equipment, net
|
235,978 | 227,324 | ||||||
Patents,
net
|
497,160 | 622,730 | ||||||
Restricted
cash
|
250,048 | 125,030 | ||||||
Future
income tax assets
|
3,370,685 | 4,429,578 | ||||||
Other
assets
|
20,362 | 19,020 | ||||||
Goodwill
|
17,874,202 | 17,874,202 | ||||||
Other
intangible assets, net
|
4,834,125 | 5,205,487 | ||||||
TOTAL
ASSETS
|
$ | 39,715,757 | $ | 47,498,996 | ||||
LIABILITIES
|
||||||||
Current
Liabilities
|
||||||||
Accounts
payable
|
$ | 748,215 | $ | 756,845 | ||||
Accrued
liabilities
|
765,071 | 814,094 | ||||||
Corporate
taxes payable
|
- | 283,794 | ||||||
Funds
due to merchants (Note 8)
|
4,266,636 | 10,746,731 | ||||||
Obligations
under capital lease
|
30,043 | 170,243 | ||||||
Promissory
notes
|
- | 2,100,920 | ||||||
Current
portion of deferred revenue
|
1,312,366 | 1,361,046 | ||||||
Total
current liabilities
|
7,122,331 | 16,233,673 | ||||||
Deferred
revenue
|
2,466,031 | 3,330,630 | ||||||
TOTAL
LIABILITIES
|
9,588,362 | 19,564,303 | ||||||
Commitments
and Contingencies (Note 11)
|
||||||||
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 and
27,116,408 issued and outstanding, respectively
|
50,039,568 | 50,039,568 | ||||||
Contributed
surplus
|
7,663,735 | 6,732,059 | ||||||
Deficit
|
(27,680,447 | ) | (28,751,456 | ) | ||||
Accumulated
other comprehensive income (loss)
|
104,539 | (85,478 | ) | |||||
Total
shareholders' equity
|
30,127,395 | 27,934,693 | ||||||
TOTAL
LIABILITIES AND SHAREHOLDERS' EQUITY
|
$ | 39,715,757 | $ | 47,498,996 |
See
accompanying notes to the unaudited consolidated financial
statements.
LML
PAYMENT SYSTEMS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND DEFICIT
(In
U.S. Dollars, except share data)
(Unaudited)
Three
Months Ended
December
31
|
Nine
months Ended
December
31
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
REVENUE
|
$ | 4, 742,568 | $ | 3,037,241 | $ | 11,229,773 | $ | 9,301,687 | ||||||||
COST
OF REVENUE (includes stock-based compensation (“s.b.c.”) expense of
$37,464 for three months ended December 31, 2009 (three months ended
December 31, 2008 - $37,464) and $111,579 for nine months ended December
31, 2009 (nine months ended December 31, 2008 - $113,066))
|
2,329,810 | 1,560,708 | 5,670,576 | 4,580,407 | ||||||||||||
GROSS
PROFIT (excludes amortization and depreciation expense)
|
2,412,758 | 1,476,533 | 5,559,197 | 4,721,280 | ||||||||||||
OPERATING
EXPENSES
|
||||||||||||||||
General
and administrative (includes s.b.c. expense of $243,028 for three months
ended December 31, 2009 (three months ended December 31, 2008 - $274,297)
and $781,386 for nine months ended December 31, 2009 (nine months ended
December 31, 2008- $871,255))
|
1,059,165 | 962,623 | 3,083,629 | 3,209,063 | ||||||||||||
Sales
and marketing (includes s.b.c. expense of $765 for three months ended
December 31, 2009 (three months ended December 31, 2008 - $765) and $2,277
for nine months ended December 31, 2009 (nine months ended December 31,
2008 - $2,285))
|
103,481 | 77,149 | 296,084 | 237,715 | ||||||||||||
Product
development and enhancement (includes s.b.c. expense of $12,233 for three
months ended December 31, 2009 (three months ended December 31, 2008 -
$12,233) and $36,434 for nine months ended December 31, 2009 (nine months
ended December 31, 2008 - $36,567))
|
122,759 | 58,279 | 342,585 | 197,589 | ||||||||||||
Amortization
and depreciation
|
200,346 | 197,102 | 596,930 | 589,654 | ||||||||||||
(Gain)
on sale of assets
|
- | - | (3,830 | ) | (864 | ) | ||||||||||
INCOME
BEFORE OTHER INCOME (EXPENSES) AND INCOME TAXES
|
927,007 | 181,380 | 1,243,799 | 488,123 | ||||||||||||
|
||||||||||||||||
Foreign exchange
gain
|
10,928 | 281,682 | 135,296 | 380,650 | ||||||||||||
Other income
(expenses)
|
- | 10,833 | (50,641 | ) | 29,808 | |||||||||||
Interest income
|
4,285 | 58,750 | 20,549 | 202,719 | ||||||||||||
Interest
expense
|
(846 | ) | (45,269 | ) | (47,676 | ) | (204,154 | ) | ||||||||
INCOME BEFORE
INCOME TAXES
|
941,374 | 487,376 | 1,301,327 | 897,146 | ||||||||||||
Income
tax expense (recovery) (Note 10)
|
||||||||||||||||
Current
|
(324,275 | ) | 206,074 | (323,647 | ) | 597,018 | ||||||||||
Future
|
650,119 | - | 553,965 | - | ||||||||||||
325,844 | 206,074 | 230,318 | 597,018 | |||||||||||||
NET
INCOME
|
615,530 | 281,302 | 1,071,009 | 300,128 | ||||||||||||
DEFICIT,
beginning of period
|
(28,295,977 | ) | (34,187,796 | ) | (28,751,456 | ) | (34,206,622 | ) | ||||||||
DEFICIT,
end of period
|
$ | (27,680,447 | ) | $ | (33,906,494 | ) | $ | (27,680,447 | ) | $ | (33,906,494 | ) | ||||
EARNINGS PER
SHARE, basic and diluted
|
$ | 0.02 | $ | 0.01 | $ | 0.04 | $ | 0.01 | ||||||||
WEIGHTED
AVERAGE SHARES OUTSTANDING
|
||||||||||||||||
Basic
|
27,116,408 | 27,116,408 | 27,116,408 | 26,741,795 | ||||||||||||
Diluted
|
27,252,792 | 27,116,408 | 27,150,430 | 26,741,795 |
See
accompanying notes to the unaudited consolidated financial
statements.
LML
PAYMENT SYSTEMS INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE
INCOME
(In
U.S. Dollars)
(Unaudited)
Three
Months Ended
December
31
|
Nine
months Ended
December
31
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
Net
income
|
$ | 615,530 | $ | 281,302 | $ | 1,071,009 | $ | 300,128 | ||||||||
Unrealized
foreign exchange gain on translation of self- sustaining
operations
|
23,174 | 782 | 190,017 | 14,332 | ||||||||||||
Comprehensive
income
|
$ | 638,704 | $ | 282,084 | $ | 1,261,026 | $ | 314,460 | ||||||||
See
accompanying notes to the unaudited consolidated financial
statements.
LML
PAYMENT SYSTEMS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In
U.S. Dollars)
(Unaudited)
Three
Months Ended
December
31
|
Nine
months Ended
December
31
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
Operating
Activities:
|
||||||||||||||||
Net
income
|
$ | 615,530 | $ | 281,302 | $ | 1,071,009 | $ | 300,128 | ||||||||
Adjustments
to reconcile net income to net cash provided by (used in) operating
activities
|
||||||||||||||||
Provision for losses on
accounts receivable
|
- | - | 5,705 | - | ||||||||||||
Amortization and
depreciation
|
200,346 | 197,102 | 596,930 | 589,654 | ||||||||||||
Gain on sale
of assets
|
- | - | (3,830 | ) | (864 | ) | ||||||||||
Stock-based
compensation
|
293,490 | 324,759 | 931,676 | 1,023,173 | ||||||||||||
Future income
taxes
|
650,119 | - | 553,965 | - | ||||||||||||
Foreign exchange (gain)
loss
|
(52,253 | ) | (302,231 | ) | (331,716 | ) | (298,891 | ) | ||||||||
Changes
in non-cash operating working capital
|
||||||||||||||||
Funds
held in trust
|
(718,093 | ) | - | (718,093 | ) | - | ||||||||||
Restricted
cash
|
(100,000 | ) | - | (100,000 | ) | 125,000 | ||||||||||
Accounts
receivable
|
(145,436 | ) | 1,217 | 71,714 | 136,826 | |||||||||||
Corporate
taxes receivable
|
(432,147 | ) | - | (582,863 | ) | - | ||||||||||
Prepaid
expenses
|
152,228 | (21,094 | ) | 3,202 | (31,127 | ) | ||||||||||
Accounts
payable and accrued liabilities
|
(4,503 | ) | 31,649 | (70,949 | ) | (801,937 | ) | |||||||||
Corporate
taxes payable
|
(6,991 | ) | 55,872 | (327,673 | ) | (517,121 | ) | |||||||||
Deferred
revenue
|
(377,545 | ) | (348,875 | ) | (923,947 | ) | (1,108,374 | ) | ||||||||
Net
cash provided by (used in) operating activities
|
74,745 | 219,701 | 175,130 | (583,533 | ) | |||||||||||
Investing
Activities:
|
||||||||||||||||
Acquisition
of property and equipment
|
(75,497 | ) | (16,744 | ) | (90,017 | ) | (106,147 | ) | ||||||||
Proceeds
from disposal of property and equipment
|
- | - | 3,830 | 5,500 | ||||||||||||
Development
of patents
|
- | - | - | (1,652 | ) | |||||||||||
Net
cash used in investing activities
|
(75,497 | ) | (16,744 | ) | (86,187 | ) | (102,299 | ) | ||||||||
Financing
Activities:
|
||||||||||||||||
Payments
on capital leases
|
(39,552 | ) | (48,939 | ) | (140,882 | ) | (142,335 | ) | ||||||||
Payment
on promissory notes
|
- | - | (2,321,460 | ) | (2,843,974 | ) | ||||||||||
Share
capital financing costs
|
- | - | - | (3,537 | ) | |||||||||||
Net
cash used in financing activities
|
(39,552 | ) | (48,939 | ) | (2,462,342 | ) | (2,989,846 | ) | ||||||||
Effects
of foreign exchange rate changes on cash and cash
equivalents
|
16,457 | (54,565 | ) | 214,356 | (39,236 | ) | ||||||||||
(DECREASE)
INCREASE IN CASH AND CASH EQUIVALENTS
|
(23,847 | ) | 99,453 | (2,159,043 | ) | (3,714,914 | ) | |||||||||
Cash
and cash equivalents, beginning of period
|
4,003,334 | 5,935,401 | 6,138,530 | 9,749,768 | ||||||||||||
Cash
and cash equivalents, end of period
|
$ | 3,979,487 | $ | 6,034,854 | $ | 3,979,487 | $ | 6,034,854 | ||||||||
Supplemental
disclosure of cash flow information
|
||||||||||||||||
Interest
paid
|
$ | 846 | $ | 4,581 | $ | 47,939 | $ | 411,171 | ||||||||
Taxes
paid
|
- | $ | 201,476 | $ | 435,138 | $ | 1,173,893 | |||||||||
Non-cash
investing and financing transactions not included in cash
flows:
|
||||||||||||||||
Issuance
of common shares pursuant to earn-out provision
|
- | - | - | $ | 1,971,125 |
See
accompanying notes to the unaudited consolidated financial
statements.
LML
PAYMENT SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1.
|
Basis
of Presentation
|
The
consolidated balance sheet as of December 31, 2009, the consolidated statements
of operations and deficit for the three and nine months ended December 31, 2009
and 2008, the consolidated statements of cash flows for the three and nine
months ended December 31, 2009 and 2008 and the consolidated statements of
comprehensive income for the three and nine months ended December 31, 2009 and
2008, of LML Payment Systems Inc. and its subsidiaries (collectively, the
“Corporation”) are unaudited. In the opinion of management, all adjustments
necessary for a fair presentation of such financial statements are included
herein. Other than those discussed in the notes below, such adjustments consist
only of normal recurring items. Interim results are not necessarily indicative
of results for a full year. The Corporation's consolidated balance sheet as of
March 31, 2009, was derived from audited financial statements. The Corporation's
consolidated financial statements and notes are presented in accordance with
generally accepted accounting principles in Canada for interim financial
information and in accordance with the instructions for Form 10-Q and Article 10
of Regulation S-X, and do not contain certain information included in the
Corporation's annual audited consolidated financial statements and notes. Unless
otherwise noted, the accounting policies of the Corporation are unchanged from
the Corporation’s annual audited consolidated financial statements contained in
the Corporation's Annual Report on Form 10-K for the fiscal year ended March 31,
2009. The consolidated financial statements and notes appearing in this report
should be read in conjunction with the Corporation's annual audited consolidated
financial statements and related notes thereto, together with management's
discussion and analysis of financial condition and results of operations,
contained in the Corporation's Annual Report on Form 10-K for the fiscal year
ended March 31, 2009, as filed with the Securities and Exchange Commission on
June 23, 2009 (file no. 000-13959).
These
consolidated financial statements include the accounts of the Corporation and
its wholly owned subsidiaries as set out below. All significant
inter-company balances and transactions have been eliminated on
consolidation.
CANADA
Legacy
Promotions Inc.
Beanstream
Internet Commerce Inc. (“Beanstream”)
0858669
B.C. Ltd.
UNITED
STATES
LHTW
Properties Inc.
LML
Corp.
LML
Patent Corp.
LML
Payment Systems Corp.
Beanstream
Internet Commerce Corp.
2.
|
Significant
Accounting Policies
|
All
significant accounting policies remain unchanged from the Corporation’s audited
consolidated financial statements contained in the Corporation’s Annual Report
on Form 10-K for the fiscal year ended March 31, 2009, as filed with the
Securities and Exchange Commission on June 23, 2009 (file no. 000-13959), except
as noted below:
Revenue
Recognition
In
addition to recognizing revenue in accordance with the Canadian Institute of
Chartered Accountants (“CICA”) Handbook Section 3400, “Revenue” and with the
corresponding U.S. Guidance SAB 104, “Revenue Recognition”, the Corporation has
adopted the provisions of CICA’s Emerging Issues Committee Abstract of Issues
Discussed, “Multiple Deliverable Revenue Arrangements” (“EIC 175”), issued on
December 24, 2009, regarding revenue arrangements with multiple deliverables
that are outside the scope of the software revenue recognition
guidance.
Within
the Intellectual Property Licensing (“IPL”) segment, when a subsidiary of the
Corporation enters into licensing and settlement agreements with its licensees
comprising multiple elements, the significant factors, inputs, assumptions and
methods used in determining the total arrangement consideration include
reviewing royalty rates from existing licenses, depth of usage, including
transaction volumes, by the existing licensees of the IPL segment’s intellectual
property and estimation of the expected usage by licensees of the IPL segment’s
intellectual property. Total arrangement consideration is allocated
to each of the following deliverables using the relative selling price
method:
2.
|
Significant
Accounting Policies (continued)
|
·
|
Licenses
– licenses are issued for the use of existing
patents;
|
·
|
Release
from litigation – the subsidiary of the Corporation releases the licensees
from any claims or causes of action for patent infringement as of the
effective date of the underlying
agreement;
|
·
|
Covenant-not-to-sue
provision – the subsidiary of the Corporation agrees to a
covenant-not-to-sue provision for infringement of any patents for a
specified period commencing on the effective date of the underlying
agreement.
|
As the
license and release elements are fully delivered as of the effective date of the
underlying agreement, revenue related to these elements is recognized at that
time, assuming (i) there is persuasive evidence of an arrangement, (ii) the fee
is fixed or determinable and (iii) there are no concerns over collectability of
the arrangement proceeds. As the covenant-not-to-sue typically
includes as-yet unidentified patents which may be acquired during the specified
term (a when-and-if available deliverable), proceeds allocated to this element
are recognized ratably over the specified period, assuming all other revenue
recognition criteria have been met.
3.
|
Change
in Accounting Policy
|
EIC 175
does not differ materially from the application required under the FASB issued
authoritative guidance on revenue arrangements that include certain
software-related elements. Under the new FASB guidance, for arrangements that
include software elements, tangible products with software components that are
essential to the functionality of the tangible product will no longer be within
the scope of the software revenue recognition guidance, and such
software-enabled products will now be subject to other relevant revenue
recognition guidance. Additionally, EIC 175 also does not differ materially from
the application under the FASB issued authoritative guidance on
multiple-deliverable revenue arrangements. Under the new FASB guidance, when
vendor specific objective evidence or third party evidence for deliverables in
an arrangement cannot be determined, a best estimate of the selling price is
required to separate deliverables and allocate arrangement consideration using
the relative selling price method. The new guidance includes new disclosure
requirements on how the application of the relative selling price method affects
the timing and amount of revenue recognition.
During
the quarter ended December 31, 2009, the Corporation early adopted the
provisions of EIC 175 and retrospectively applied the guidance as at April 1,
2009. The effect of the retrospective adoption had no impact on amounts
previously reported during the prior interim periods in the current fiscal
year.
4.
|
Recent
accounting pronouncements
|
Business
Combinations
In
December 2008, 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 generally
accepted accounting principles (“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 among 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.
4.
|
Recent
accounting pronouncements
(continued)
|
Consolidated
Financial Statements and Non-Controlling Interests
In
January 2009, the CICA issued CICA Handbook Section 1601, “Consolidated
Financial Statements” and Section 1602, “Non-controlling interest”. Together
these sections replace the former Section 1600, “Consolidated Financial
Statements”. Section 1601 establishes standards for the
preparation of consolidated financial statements. Section 1602
establishes standards for accounting for a non-controlling interest in a
subsidiary in consolidated financial statements subsequent to a business
combination and is equivalent to the corresponding provisions of International
Financial Reporting Standard IAS 27, “Consolidated and Separate Financial
Statements”.
The new
standards result in measuring business acquisitions at the fair value of the
acquired business and a prospectively applied shift from a parent corporation
conceptual view of consolidation theory (which results in the parent corporation
recording book values attributable to non-controlling interests) to an entity
conceptual view (which results in the parent corporation recording fair values
attributable to non-controlling interests).
These
sections apply to interim and annual consolidated financial statements relating
to fiscal years beginning on or after January 1, 2011 and are to be applied
prospectively. Earlier adoption is permitted as of the beginning of a fiscal
year. An entity adopting these Sections for a fiscal year beginning before
January 1, 2011 also adopts Section 1582, “Business Combinations”.
The
Corporation does not intend to early apply these sections. The impact
on the Corporation’s consolidated financial statements from the application of
these sections will depend upon the nature of any future business acquisitions
made by the Corporation after adoption.
Financial
Instruments – Recognition and Measurement
On May
29, 2009, CICA’s Accounting Standards Board (“AcSB”) issued an Exposure Draft
that proposes to amend CICA Handbook Section 3855, “Financial Instruments —
Recognition and Measurement”, to converge with international
standards. The proposed amendment will have the following
impact:
·
|
The
amendment clarifies that if an entity reclassifies a financial asset out
of the held-for-trading category, it must assess whether the financial
asset contains an embedded derivative that is required to be separated
from the host contract. This assessment is made on the basis of
circumstances that existed on the later date of specified dates provided
in the amendment.
|
·
|
If
an embedded derivative cannot be measured reliably, the entity is
prohibited from reclassifying the asset from
held-for-trading.
|
·
|
When
a financial asset or a group of similar financial assets (other than the
loans and receivables category) has been written down as a result of an
impairment loss, interest income is recognized thereafter using the rate
of interest used in the measurement of the impairment
loss.
|
·
|
An
embedded call, put, surrender or prepayment option is closely related to
the host debt instrument when its exercise price reimburses the lender for
an amount up to the approximate present value of the lost interest.
Calculation guidance to determine the lost interest is provided in the
amendment.
|
The
amendment is applicable for years ending on or after October 31, 2009 and will
be applied prospectively. The adoption of this amendment did not have
an impact on the Corporation’s consolidated financial statements.
5.
|
Foreign
currency translation
|
Except as
described below, the Corporation’s functional 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”) (and the Financial Accounting
Standards Board (“FASB”) issued authoritative guidance regarding foreign
currency translation) using the exchange rate prevailing at the balance sheet
date and non-monetary assets and liabilities are translated at exchange rates
prevailing at the historical transaction 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 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
the FASB issued authoritative guidance regarding foreign currency
translation. 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.
6.
|
Economic
dependence
|
During
the three months ended December 31, 2009, revenue from the Corporation’s two
largest customers amounted to approximately 22.7% of the Corporation’s total
revenue for the first customer (2008 – NIL%) and 12.1% for the second customer
(2008 – 19.3%). Revenue from these customers amounted to approximately
$1,077,113 for the first customer (2008 - $NIL) and $574,690 for the second
customer (2008 - $585,500). The Corporation is economically dependent
on revenue from the second customer as the revenue from the first customer is
non-recurring.
During
the nine months ended December 31, 2009, revenue from the Corporation’s largest
customer amounted to approximately 15.5% of total revenue (2008 – 18.5%).
Revenue from this customer amounted to approximately $1,736,013 (2008 -
$1,717,463). The Corporation is economically dependent on revenue
from this customer.
7.
|
Financial
instruments
|
|
(a)
|
The
Corporation classifies its cash and cash equivalents, funds held in trust,
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 December 31, 2009
and March 31, 2009 are summarized as follows:
December
31, 2009
|
March
31, 2009
|
|||||||||||||||
Carrying
Value
|
Fair
Value
|
Carrying
Value
|
Fair
Value
|
|||||||||||||
Held-for-Trading
|
$ | 9,389,264 | $ | 9,389,264 | $ | 17,185,291 | $ | 17,185,291 | ||||||||
Loans
and receivables
|
756,967 | 756,967 | 801,087 | 801,087 | ||||||||||||
Held-to-maturity
|
- | - | - | - | ||||||||||||
Available-for-sale
|
- | - | - | - | ||||||||||||
Other
liabilities
|
5,779,922 | 5,779,922 | 14,418,590 | 14,418,590 |
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.
7.
|
Financial
Instruments (continued)
|
|
(b)
|
Funds
held in trust
|
|
During
the three and nine month period ended December 31, 2009, $718,093 in cash
was held in trust for a subsidiary of the Corporation by the Corporation’s
legal firm. This cash was received pursuant to a Settlement and
License Agreement entered into by a subsidiary of the Corporation with one
of the defendants in the patent infringement lawsuit originally filed on
November 19, 2008 in the U.S. District Court for the Eastern District of
Texas against nineteen defendants in the United States alleging that
the defendants infringe U.S. Patent No.
RE40220. Subsequent to the three and nine months ended
December 31, 2009, the cash was released from trust to the subsidiary of
the Corporation.
|
|
(c)
|
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, 2009 - $175,000)
against chargeback losses. Non-current restricted cash represents
funds held by a third party processor as security for the Corporation’s merchant
accounts.
|
(d)
|
Market
Risk
|
Currency
Risk
The
Corporation’s functional currency is the U.S. dollar except for the
Corporation’s Beanstream subsidiary whose functional currency is the Canadian
dollar. The Corporation is exposed to foreign exchange risk from
fluctuations in exchange rates between the U.S. dollar and the Canadian
dollar. Significant losses may occur due to significant balances of
cash and cash equivalents and short-term investments held in Canadian dollars
that may be affected negatively by an increase in the value of the U.S. dollar
as compared to the Canadian dollar. The Corporation has not hedged its exposure
to foreign currency fluctuations.
As at
December 31, 2009 and March 31, 2009, the Corporation is exposed to currency
risk through its cash and restricted cash, accounts receivable, accounts
payable, accrued liabilities and promissory notes denominated in Canadian
dollars as follows:
December
31, 2009
|
March
31, 2009
|
|||||||
Cash
and restricted cash
|
$ | 38,121 | $ | 1,172,539 | ||||
Accounts
receivable
|
- | 50,476 | ||||||
Accounts
payable
|
89,799 | 132,570 | ||||||
Accrued
liabilities
|
282,518 | 333,360 | ||||||
Promissory
notes
|
- | 2,100,920 |
Based on
the above foreign currency exposure as at December 31, 2009 and March 31, 2009
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 $33,420 and $134,384 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 are short-term in nature 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.
7.
|
Financial
Instruments (continued)
|
|
(e)
|
Credit
Risk
|
Credit
risk is the risk of a financial loss if a customer or counter party to a
financial instrument fails to meet its contractual obligations. Any credit risk
exposure on cash balances is considered negligible as the Corporation places
funds or deposits only with major established banks in the countries in which it
has payment processing services. The credit risk arises primarily from the
Corporation’s trade receivables from customers.
On a
regular basis, the Corporation reviews the collectability of its trade accounts
receivable and establishes an allowance for doubtful accounts based on its best
estimates of any potentially uncollectible accounts. As at December 31, 2009,
the balance of the Corporation’s allowance for doubtful accounts was $30,474
(March 31, 2009 - $31,785). The Corporation has good credit history
with its customers and the amounts due from them generally are received as
expected.
Pursuant
to their respective terms, accounts receivable are aged as follows at December
31, 2009:
0-30
days
|
$ | 668,478 | ||
31-60
days
|
81,755 | |||
61-90
days
|
5,973 | |||
Over
90 days due
|
31,235 | |||
$ | 787,441 |
|
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 December 31,
2009, three customers accounted for 22%, 20% and 14% of the Corporation’s
accounts receivable balance (March 31, 2009 – 16%, 26% and 3%).
|
(f)
|
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.
8.
|
Cash
and cash equivalents and funds held for /due to
merchants
|
Cash
and cash equivalents
At
December 31, 2009, the Corporation held $3,979,487 (March 31, 2009: $6,138,530)
in cash and cash equivalents. Included in this balance was $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 (March 31, 2009 - $1 million).
8.
|
Cash
and cash equivalents and funds held for /due to merchants
(continued)
|
Funds
held for/due to merchants
At
December 31, 2009, the Corporation held funds due to merchants in the amount of
$4,266,636 (March 31, 2009 - $10,746,731.) The funds held for/due to merchants
were 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 nine 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.
|
9.
|
Stock-based
compensation
|
The
Corporation accounts for all stock options issued based on their fair value as
required by the CICA Section 3870 which does not differ materially from the
application required under the FASB issued authoritative guidance regarding
share-based payment.
During
the three months ended December 31, 2009, the Corporation granted 125,000 stock
options under the Corporation’s 2009 Stock Incentive Plan. The weighted average
grant date fair value for these stock options is $0.44 per stock option. The
fair value of these stock options was estimated at the date of grant using a
Black-Scholes option-pricing model with the following assumptions:
Risk-free
interest rate of 2.32%;
Expected
volatility of 78.09%;
Expected
life of the stock options of 4 years; and
No
dividend yields.
During
the three months ended September 30, 2009, the Corporation granted 75,000 stock
options under the Corporation’s 2009 Stock Incentive Plan and 300,000 stock
options under the 1996 Stock Option Plan (no stock options were granted during
the three month period ended June 30, 2009). The weighted average grant date
fair value for these stock options is $0.38 per stock option. The fair value of
these stock options was estimated at the date of grant using a Black-Scholes
option-pricing model with the following assumptions:
Risk-free
interest rate of 2.30%;
Expected
volatility of 77.93%;
Expected
life of the stock options of 4 years; and
No
dividend yields.
During
the nine months ended December 31, 2008, the Corporation did not grant any stock
options under the Corporation’s 1996 Stock Option plan, its 1998 Stock Incentive
Plan or its 2009 Stock Incentive Plan.
10.
|
Income
Taxes
|
During
the three and nine months ended December 31, 2009, the Corporation implemented
certain tax planning strategies relating to its subsidiary, Beanstream. These
strategies are expected to permit the recovery of income taxes previously paid
on behalf of Beanstream. During the three months ended December 31, 2009, the
Corporation recorded $324,275 in current income tax recovery. 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. During the three months ended December 31,
2009, we revised the value of the future tax assets pertaining to the Canadian
non-capital loss carry-forwards as a result of newly available data and
information. The Corporation decreased its future tax asset value resulting in a
future income tax expense of $650,119 after application of the change in
accounting estimate pertaining to the value of the Canadian non-capital loss
carry-forwards available for future use. The change in accounting estimate has
been applied prospectively from October 1, 2009.
11.
|
Commitments
and Contingencies
|
|
All
commitments and contingencies remain unchanged from the Corporation’s
annual audited consolidated financial statements contained in the
Corporation's Annual Report on Form 10-K for the fiscal year ended March
31, 2009, as filed with the Securities and Exchange Commission on June 23,
2009 (file no. 000-13959), except as noted
below:
|
During
the three months ended December 31, 2009, a subsidiary of the Corporation
entered into a Settlement and License Agreement (the “License Agreement”) with
one of the defendants (the “Released Defendant”) in the patent infringement
lawsuit originally filed on November 19, 2008 in the U.S. District Court for the
Eastern District of Texas against nineteen defendants in the United States
alleging that the
defendants infringe U.S. Patent No. RE40220. The subsidiary of
the Corporation sought damages, injunctive and
other relief for the alleged infringement of this patent. The License
Agreement was effective December 29, 2009 and provided the Released Defendant
with a fully paid-up license to the subsidiary of the Corporation’s patents for
electronic check conversion transactions including “ARC”, “WEB”, “POP”, “TEL”
and “BOC”. In connection with the License Agreement, the Released Defendant paid
the subsidiary of the Corporation compensation in the amount of $1,150,000 for
releases, licenses, covenants and all other rights granted under the License
Agreement. Pursuant to a retention agreement with its legal
firm, the subsidiary of the Corporation paid $288,175 in legal fees for the
firm’s services in connection with the License Agreement.
The
License Agreement contained a number of elements that have been recorded in
these consolidated financial statements under the guidance of EIC-175, which
does not differ materially from the application required under the FASB issued
authoritative guidance on revenue arrangements with multiple
deliverables. Total arrangement consideration has been allocated to
each of the following deliverables using the relative selling price
method:
·
|
Licenses
– the subsidiary of the Corporation has issued a licence for the use of
existing patents. This revenue has been recognized in the
period.
|
·
|
Release
from litigation – the subsidiary of the Corporation has agreed to release
the Released Defendant from any claims or causes of action for patent
infringement as of the effective date. This revenue has been
recognized in the period.
|
·
|
Covenant-not-to-sue
provision – the subsidiary of the Corporation has agreed to a
covenant-not-to-sue provision for infringement of any patents for a
specified period commencing on the effective date of the License
Agreement. This revenue has been deferred and will be recognized ratably
over the specified period.
|
12.
|
Industry
and geographic segments
|
Based
upon the way financial information is provided to the Corporation’s Chief
Executive Officer for use in evaluating allocation of resources and assessing
performance of the business, the Corporation reports its operations in three
distinct operating segments, described as follows:
Transaction
Payment Processing (“TPP”) operations involve financial payment processing,
authentication and risk management services provided by
Beanstream. The services are accessible via the Internet and are
offered in an application service provider (ASP) model.
Intellectual
Property Licensing (“IPL”) operations involve licensing the subsidiary of the
Corporation’s intellectual property estate, which includes five U.S. patents
describing electronic check processing methods.
Check
Processing/Software Licensing (“CP/SL”) operations involve primary and secondary
check collection including electronic check re-presentment (RCK) and software
licensing.
Within
these segments, performance is measured based on revenue, factoring in interest
income and expenses and amortization and depreciation as well as income before
income taxes from each segment. There are no transactions between segments. The
Corporation does not generally allocate corporate or centralized marketing and
general and administrative expenses to its business unit segments because these
activities are managed separately from the business units. Asset
information by operating segment is not reported to or reviewed by the
Corporation’s decision makers on an interim basis and therefore, the Corporation
has not disclosed asset information for each operating segment.
Financial
information for each reportable segment for the three and nine months ended
December 31, 2009 and 2008 was as follows:
12.
|
Industry
and geographic segments (continued)
|
Three
Months Ended
|
TPP
|
IPL
|
CP/SL
|
Reconciling
|
Consolidated
|
||||||||||||||||
December
31, 2009
|
Canada
|
U.S.
|
U.S.
|
Items
|
Total
|
||||||||||||||||
Total
revenue
|
$ | 2,674,557 | $ | 1,534,333 | $ | 533,678 | $ | - | $ | 4,742,568 | |||||||||||
Revenue:
major customers
|
574,690 | 1,382,669 | 278,368 | - | 2,235,727 | ||||||||||||||||
Cost
of revenue
|
1,488,974 | 446,637 | 356,735 | 37,464 | 1 | 2,329,810 | |||||||||||||||
General
and administrative
|
258,457 | (30,315 | ) | 136,969 | 694,054 | 2 | 1,059,165 | ||||||||||||||
Sales
and marketing
|
97,323 | - | 5,393 | 765 | 1 | 103,481 | |||||||||||||||
Product
development and enhancement
|
110,526 | - | - | 12,233 | 1 | 122,759 | |||||||||||||||
Amortization and
depreciation
|
15,628 | 41,857 | 13,657 | 129,204 | 3 | 200,346 | |||||||||||||||
Income
(losses) before income taxes
|
$ | 659,262 | $ | 1,076,596 | $ | 19,881 | $ | (814,365 | ) | 4 | $ | 941,374 |
Three
Months Ended
|
TPP
|
IPL
|
CP/SL
|
Reconciling
|
Consolidated
|
||||||||||||||||
December
31, 2008
|
Canada
|
U.S.
|
U.S.
|
Items
|
Total
|
||||||||||||||||
Total
revenue
|
$ | 1,948,747 | $ | 431,354 | $ | 657,140 | $ | - | $ | 3,037,241 | |||||||||||
Revenue:
major customers
|
585,500 | 305,556 | 337,490 | - | 1,228,546 | ||||||||||||||||
Cost
of revenue
|
1,090,901 | 287 | 432,056 | 37,464 | 1 | 1,560,708 | |||||||||||||||
General
and administrative
|
145,262 | 1,921 | 111,825 | 703,615 | 2 | 962,623 | |||||||||||||||
Sales
and marketing
|
70,928 | - | 5,456 | 765 | 1 | 77,149 | |||||||||||||||
Product
development and enhancement
|
46,046 | - | - | 12,233 | 1 | 58,279 | |||||||||||||||
Amortization
and depreciation
|
10,729 | 42,057 | 15,481 | 128,835 | 3 | 197,102 | |||||||||||||||
Income
(losses) before income taxes
|
$ | 698,119 | $ | 398,738 | $ | 82,409 | $ | (691,890 | ) | 4 | $ | 487,376 |
Nine
months Ended
|
TPP
|
IPL
|
CP/SL
|
Reconciling
|
Consolidated
|
||||||||||||||||
December
31, 2009
|
Canada
|
U.S.
|
U.S.
|
Items
|
Total
|
||||||||||||||||
Total
revenue
|
$ | 7,060,499 | $ | 2,428,351 | $ | 1,740,923 | $ | - | $ | 11,229,773 | |||||||||||
Revenue:
major customers
|
1,736,013 | 1,993,781 | 959,475 | - | 4,689,269 | ||||||||||||||||
Cost
of revenue
|
4,032,550 | 447,477 | 1,078,970 | 111,579 | 1 | 5,670,576 | |||||||||||||||
General
and administrative
|
629,149 | 9,579 | 361,600 | 2,083,301 | 2 | 3,083,629 | |||||||||||||||
Sales
and marketing
|
277,855 | - | 15,952 | 2,277 | 1 | 296,084 | |||||||||||||||
Product
development and enhancement
|
306,151 | - | - | 36,434 | 1 | 342,585 | |||||||||||||||
Amortization and
depreciation
|
42,761 | 125,820 | 40,658 | 387,691 | 3 | 596,930 | |||||||||||||||
(Gain)
on sale of assets
|
- | - | (1,656 | ) | (2,174 | ) | 5 | (3,830 | ) | ||||||||||||
Income
(losses) before income taxes
|
$ | 1,570,111 | $ | 1,846,769 | $ | 245,261 | $ | (2,360,814 | ) | 4 | $ | 1,301,327 |
Nine
months Ended
|
TPP
|
IPL
|
CP/SL
|
Reconciling
|
Consolidated
|
||||||||||||||||
December
31, 2008
|
Canada
|
U.S.
|
U.S.
|
Items
|
Total
|
||||||||||||||||
Total
revenue
|
$ | 5,873,518 | $ | 1,271,948 | $ | 2,156,221 | $ | - | $ | 9,301,687 | |||||||||||
Revenue:
major customers
|
1,717,463 | 916,668 | 1,054,354 | - | 3,688,485 | ||||||||||||||||
Cost
of revenue
|
3,223,944 | 1,962 | 1,241,435 | 113,066 | 1 | 4,580,407 | |||||||||||||||
General
and administrative
|
457,461 | 12,416 | 467,197 | 2,271,989 | 2 | 3,209,063 | |||||||||||||||
Sales
and marketing
|
216,394 | - | 19,036 | 2,285 | 1 | 237,715 | |||||||||||||||
Product
development and enhancement
|
161,022 | - | - | 36,567 | 1 | 197,589 | |||||||||||||||
Amortization
and depreciation
|
31,617 | 126,143 | 48,378 | 383,516 | 3 | 589,654 | |||||||||||||||
(Gain)
on sale of assets
|
- | - | (864 | ) | - | 5 | (864 | ) | |||||||||||||
Income
(losses) before income taxes
|
$ | 1,937,396 | $ | 1,165,728 | $ | 361,073 | $ | (2,567,051 | ) | 4 | $ | 897,146 |
|
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
earnings (losses) included in the unallocated corporate or centralized
marketing, general and administrative
expenses.
|
|
5
|
Represents
(gain) on sale of assets included in the unallocated corporate or
centralized marketing general and administrative
expenses.
|
13.
|
Reconciliation
of United States to Canadian Generally Accepted Accounting
Principles
|
These
consolidated financial statements are prepared using Canadian GAAP, which does
not differ materially from generally accepted accounting principles in the
United States (“U.S. GAAP”) with respect to the accounting policies and
disclosures in these financial statements except as set out below:
|
(a)
|
Under
U.S. GAAP, the Corporation could not effect the reduction in deficit of
$22,901,744 by reducing the stated capital of the shares of the
Corporation’s common stock.
|
|
(b)
|
Income
Taxes
|
|
In
June 2006, the FASB issued authoritative guidance regarding accounting for
uncertainty in income taxes. This guidance 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. The guidance also includes guidance on
derecognition, classification, interest and penalties, accounting in
interim periods, disclosures, and transition. The guidance is effective
for fiscal years beginning after December 15,
2006.
|
|
The
Corporation adopted the provisions of the guidance on April 1, 2007. No
cumulative effect adjustment to the April 1, 2007 balance of the
Corporation’s deficit was required upon the implementation. As of the date
of adoption there were no unrecognized tax benefits. Under current
conditions and expectations, management does not foresee any significant
changes in unrecognized tax benefits that would have a material impact on
the Corporation’s consolidated financial
statements.
|
|
(c)
|
Changes
in U.S. GAAP
|
Recent
accounting pronouncements affecting the Corporation’s financial reporting under
U.S. GAAP are summarized below:
(i)
|
On
July 1, 2009, the FASB established the new source of authoritative
accounting principles, the FASB Accounting Standards Codification™ (the
Codification). This new source of authoritative accounting principles
recognized by the FASB is to be applied by nongovernmental entities in the
preparation of financial statements in conformity with U.S. GAAP.
Accounting Standards Updates will not be authoritative in their own right
as they will serve to update the Codification. This adoption did not
impact the Corporation’s consolidated financial
statements.
|
(ii)
|
In
September 2006, the FASB issued authoritative guidance which defines fair
value, establishes a framework for measuring fair value in generally
accepted accounting principles, and expands disclosures about fair value
measurements. The Corporation has fully adopted this guidance
in the first quarter of fiscal 2010. Adoption of this guidance
had no impact on the consolidated financial statements and the
accompanying notes.
|
(iii)
|
In
December 2007, the FASB issued authoritative guidance regarding business
combinations. This guidance is broader in scope than previous guidance
that applied only to business combinations in which control was obtained
by transferring consideration. The new guidance applies to all
transactions and other events in which one entity obtains control over one
or more other businesses. The new guidance is effective for fiscal years
beginning after December 15, 2008. The Corporation has adopted
the guidance as at April 1, 2009. Adoption of this guidance did
not have an impact on the consolidated financial statements and the
accompanying notes. The impact of this guidance will not be
known until such time as the Corporation enters into a business
combination, if ever.
|
(iv)
|
In
December 2007, the FASB issued authoritative guidance regarding
non-controlling interest in consolidated financial statements. The new
guidance changes the accounting for, and the financial statement
presentation of, non-controlling equity interests in a consolidated
subsidiary. The new guidance establishes non-controlling interests
as a component of the equity of a consolidated
entity.
|
13.
|
Reconciliation
of United States to Canadian Generally Accepted Accounting Principles
(continued)
|
The
underlying principle of the new guidance 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 previous FASB issued
authoritative guidance of treating minority interests as a mezzanine item
between liabilities and equity or as a liability. The new guidance also changes
the presentation of net income to include and identify net income attributable
to the non-controlling interest. The change affects both the
accounting and financial reporting for non-controlling interests in a
consolidated subsidiary.
This
guidance is effective for fiscal years and interim periods within those fiscal
years beginning on or after December 15, 2008. The Corporation has
adopted the guidance as at April 1, 2009. Adoption of this guidance
has had no impact on the consolidated financial statements and the accompanying
notes.
(v)
|
In
March 2008, the FASB changed its authoritative guidance regarding
disclosures about derivative instruments and hedging
activities. The changes in guidance require 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
and (c) the effect of derivative instruments and related hedged items on
an entity's financial position, financial performance, and cash flows.
This guidance is effective for financial statements issued for fiscal
years and interim periods beginning after November 15, 2008. The
Corporation has adopted the guidance as at April 1,
2009. Adoption of this guidance has had no impact on the
consolidated financial statements and the accompanying
notes.
|
(vi)
|
In
April 2008, the FASB issued authoritative guidance regarding the
determination of the useful life of intangible assets. This
guidance 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. The
guidance also requires expanded disclosure related to the determination of
intangible asset useful lives. This guidance is effective for fiscal
years beginning after December 15, 2008. The Corporation has adopted
the guidance as at April 1, 2009. Adoption of this guidance has
not had a material impact on the consolidated financial statements and the
accompanying notes.
|
(vii)
|
In
April 2009, the FASB issued authoritative guidance regarding
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. This guidance 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. This guidance is effective for interim periods and fiscal
years ending after June 15, 2009. The Corporation has adopted the
guidance as at June 30, 2009. Adoption of this guidance has not
had a material impact on the consolidated financial statements and the
accompanying notes.
|
(viii)
|
In
April 2009, the FASB issued authoritative guidance regarding interim
disclosures about fair value of financial instruments. This
guidance functions to require, on an interim basis, disclosures about the
fair value of financial instruments for public entities. This guidance is
effective for interim and annual periods ending after June 15, 2009, with
early adoption permitted for periods ending after March 15, 2009. The
Corporation has adopted the guidance as at June 30,
2009. Adoption of this guidance has had no material impact on
the consolidated financial statements and the accompanying
notes.
|
13.
|
Reconciliation
of United States to Canadian Generally Accepted Accounting Principles
(continued)
|
(ix)
|
In
May 2009, the FASB issued authoritative guidance regarding subsequent
events. The new statement provides additional guidance on what events that
occur subsequent to the balance sheet date will be recognized and/or
disclosed. It also provides guidance on the date through which
subsequent events have to be evaluated. This statement shall be effective
for interim and annual financial periods ending after June 15, 2009, and
shall be applied prospectively. The Corporation has adopted the
guidance as at June 30, 2009. Adoption of this guidance has not
had a material impact on the consolidated financial statements and the
accompanying notes. The Corporation evaluated its December 31,
2009 financial statements for subsequent events through February
12, 2010, the date the financial statements were
issued. The Corporation is not aware of any subsequent events
that would require recognition or disclosure in the financial
statements.
|
(x)
|
In
October 2009, the FASB issued authoritative guidance on certain revenue
arrangements that include software elements that is effective for fiscal
years beginning on or after June 15, 2010, with earlier adoption
permitted. Under the new guidance, tangible products that contain software
components and non-software components that function together to deliver
the tangible product’s essential functionality and undelivered elements
that relate to software that is essential to the functionality of the
tangible product are not within the scope of the software revenue
recognition guidance. The Corporation has early adopted this
guidance in the quarter ended December 31, 2009 and retrospectively
applied the guidance as at April 1, 2009. The effect of early adoption did
not have an impact on amounts previously reported during the prior interim
periods in the 2010 fiscal year.
|
(xi)
|
In
October 2009, the FASB issued authoritative guidance on
multiple-deliverable revenue arrangements that is effective for fiscal
years on or after June 15, 2010, with earlier adoption permitted. Under
the new guidance, when vendor specific objective evidence or third party
evidence for deliverables in an arrangement cannot be determined, a best
estimate of the selling price is required to separate deliverables and
allocate arrangement consideration using the relative selling price
method. The new guidance includes new disclosure requirements including,
but not limited to, significant judgments made in applying the guidance
and how changes in the judgments or in the application of the guidance may
significantly affect either the timing or amount of revenue recognition.
The Corporation has early adopted this guidance in the quarter ended
December 31, 2009 and retrospectively applied the guidance as at April 1,
2009. The effect of early adoption did not have an impact on amounts
previously reported during the prior interim periods in the 2010 fiscal
year.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
Unless
the context otherwise requires, references in this report on Form 10-Q to the
“Corporation”, “LML”, “we”, “us” or “our” refer to LML Payment Systems Inc. and
its direct and indirect subsidiaries. LML Payment Systems Inc.'s
direct subsidiaries include Beanstream Internet Commerce Inc., LML Corp., Legacy
Promotions Inc., 0858669 B.C. Ltd. 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 dollars or “$” are to U.S. Dollars.
The
following discussion and analysis should be read in conjunction with the audited
consolidated financial statements and related notes thereto contained in our
Annual Report on Form 10-K for the fiscal year ended March 31, 2009, filed with
the Securities and Exchange Commission on June 23, 2009 (file no.
000-13959). We believe that all necessary adjustments (consisting
only of normal recurring adjustments) have been included in the amounts stated
below to present fairly the following quarterly
information. Quarterly operating results have varied significantly in
the past and can be expected to vary in the future. Results of
operations for any particular quarter are not necessarily indicative of results
of operations for a full year.
Forward
Looking Information
All
statements other than statements of historical fact contained herein are
forward-looking statements. Forward-looking statements generally are
accompanied by words such as “anticipate,” “believe,” “estimate,” “intend,”
“project,” “potential” or “expect” or similar statements. The
forward-looking statements were prepared on the basis of certain assumptions
which relate, among other things, to the demand for and cost of marketing our
services, the volume and total value of transactions processed by merchants
utilizing our services, the technological adaptation of electronic check
conversion end-users, the renewal of material contracts in our business, our
ability to anticipate and respond to technological changes, particularly with
respect to financial payments and e-commerce, in a highly competitive industry
characterized by rapid technological change and rapid rates of product
obsolescence, our ability to develop and market new product enhancements and new
products and services that respond to technological change or evolving industry
standards, no unanticipated developments relating to previously disclosed
lawsuits against us, and the cost of protecting our intellectual
property. Even if the assumptions on which the forward-looking
statements are based prove accurate and appropriate, the actual results of our
operations in the future may vary widely due to technological change, increased
competition, new government regulation or intervention in the industry, general
economic conditions, other risks described in our filings with the Securities
and Exchange Commission. Accordingly, the actual results of our
operations in the future may vary widely from the forward-looking statements
included herein. All forward-looking statements included herein are
expressly qualified in their entirety by the cautionary statements in this
paragraph.
Overview
LML
Payment Systems Inc. is a financial payment processor operating three separate
lines of business: transaction payment processing, intellectual
property licensing and check processing/software licensing. Our transaction
payment processing services consist predominantly of Internet-based services;
while our check processing services involve predominantly traditional and
electronic check processing and recovery services that do not utilize the
Internet. We believe that electronic transaction processing services,
including Internet-based payment services, will continue to be used in greater
frequency than traditional payment methods, such as checks and cash, and we are
therefore focusing on these services. Accordingly, we expect that our
transaction payment processing services will be our principal line of business
for the foreseeable future, while our other lines of business (including the
electronic check processing services that we have historically relied on for a
significant source of revenue) will become less important to our overall service
offerings and less significant to the financial performance of our
corporation.
TPP
Segment
Our
Transaction Payment Processing Operations (“TPP”) involve financial payment
processing, authentication and risk management services. We provide a service
that acts as a bank neutral interface between businesses and consumers
processing financial or authentication transactions. Our transaction payment
processing services are accessible via the Internet and are offered in an
application service provider (ASP) model. We focus on product development,
project management and third tier technical support of our products and services
and rely primarily on strategic business partners to sell and market our
products and services. In some instances, our transaction payment processing
services and payment products are integrated into third party products in target
vertical markets. Our revenues are derived from one-time set-up fees, monthly
gateway fees, and transaction fees paid to us by merchants. Transaction fees are
recognized in the period in which the transaction occurs. Gateway fees are
monthly subscription fees charged to our merchant customers for the use of our
payment gateway. Gateway fees are recognized in the period in which the service
is provided. Set-up fees represent one-time charges for initiating our
processing services. Although these fees are generally paid at the commencement
of the agreement, they are recognized ratably over the estimated average life of
the merchant relationship, which is determined through a series of analyses of
active and deactivated merchants. We currently service a merchant base of over
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 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 portions of this
revenue and recognize the revenue ratably over the license term.
CP/SL
Segment
Our CP/SL
operations involve primary and secondary check collection including electronic
check re-presentment (RCK) and software licensing. Our check
processing services involve check return 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.
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 senior
management decision makers on an interim basis, and therefore we have not
disclosed asset information for each operating segment.
Results
of Operations
Three
months ended December 31, 2009 compared to three months ended December 31,
2008
Revenue
Total
revenue for the three months ended December 31, 2009 was approximately
$4,743,000, an increase of approximately $1,706,000 or approximately 56.2% from
total revenue of approximately $3,037,000 for the three months ended December
31, 2008. This increase is primarily attributable to an increase in
IPL revenues for the period of approximately $1,103,000 and partially
attributable to an increase in TPP revenues of approximately
$726,000.
During
the three months ended December 31, 2009 revenue from and associated with our
two largest customers amounted to approximately 34.8% of total revenue as
compared to approximately 19.3% of total revenue for the three months ended
December 31, 2008. The
increase in the percentage of revenue from and associated with our two largest
customers to total revenue is primarily attributable to an increase in our IPL
revenue associated with one customer, representing 22.7% of total revenue,
during the three months ended December 31, 2009. We are economically dependent
on revenue from one of these customers representing 12.1% of total revenue (2008
– 19.3%) as revenue from the other customer is non-recurring. The
temporary or permanent loss of this customer might have a material adverse
effect on our results of operations and financial condition.
TPP
Segment
Revenue
pertaining to our TPP segment consists of one-time set-up fees, monthly gateway
fees, transaction fees and software customization fees. TPP segment
revenue for the three months ended December 31, 2009 was approximately
$2,675,000, an increase of approximately $726,000 or approximately 37.3% from
TPP segment revenue of approximately $1,949,000 for the three months ended
December 31, 2008. The increase in TPP segment revenue was primarily
attributable to software customization fee revenue of approximately $214,000
recognized during the current period.
Transaction
fees for the three months ended December 31, 2009 were approximately $2,042,000
compared to approximately $1,588,000 for the three months ended December 31,
2008, an increase of approximately $454,000 or approximately
28.5%. The increase in transaction fees was primarily attributable to
a strengthening Canadian dollar in relation to the U.S. dollar which increased
approximately 12% from the prior fiscal third quarter. Since a significant
amount of our TPP segment revenue originates in Canadian dollars, the conversion
of this revenue to U.S. dollars was at an increased exchange rate when compared
to the prior fiscal third quarter conversion. Transaction fees originating in
Canadian dollars were approximately $2,159,000CAD for the three months ended
December 31, 2009 compared to $1,926,000CAD for the three months ended December
31, 2008, an increase of approximately $233,000 or approximately 12.1%. The
amortized portion of one-time set-up fees recognized was approximately $46,000
for the three months ended December 31, 2009 compared to approximately $35,000
for the three months ended December 31, 2008, an increase of approximately
$11,000 or approximately 31.4%. Monthly gateway fees for the
three months ended December 31, 2009 were approximately $318,000 compared to
approximately $243,000 for the three months ended December 31, 2008, an increase
of approximately $75,000 or approximately 30.9%.
IPL
Segment
Revenue
from licensing our patented intellectual property increased by approximately
$1,103,000 or approximately 256%, from approximately $431,000 for the three
months ended December 31, 2008 to approximately $1,534,000 for the three months
ended December 31, 2009. The increase in revenue from licensing our patented
intellectual property was primarily attributable to the net licensing revenue
recognized of approximately $1,077,000 from the License Agreement entered into
during the three months ended December 31, 2009 and partially attributable to an
increase of approximately $26,000 in licensing revenue related to aggregate
licenses providing running royalties and other paid up license
fees.
CP/SL
Segment
CP/SL
segment revenue for the three months ended December 31, 2009 was approximately
$534,000, a decrease of approximately $123,000 or approximately 18.7% from CP/SL
segment revenue of approximately $657,000 for the three months ended December
31, 2008. The decrease in CP/SL segment revenue was primarily attributable to a
reduction in revenue from our primary and secondary check collections
business.
Revenue
from our primary check collections business decreased approximately 26.5% from
approximately $117,000 for the three months ended December 31, 2008 to
approximately $86,000 for the three months ended December 31, 2009. Revenue from
our secondary check collections business decreased approximately 17.5% from
approximately $509,000 for the three months ended December 31, 2008 to
approximately $420,000 for the three months ended December 31, 2009. The
decrease in primary and secondary check collections business is primarily
attributable to a reduction of approximately 20.5% in returned checks for
primary collections business and partially attributable to a reduction in
collections of the principal amount and related fees of returned checks assigned
for secondary recovery. We believe as consumers continue to use
checks less as a method of payment in favor of other methods of payment,
particularly electronic forms of payments including debit and credit cards, the
value of returned checks available for our primary and secondary check
collections business may continue to decrease. We anticipate
developing plans to increase the volume of returned checks in addition to
developing plans to decrease expenses associated with this segment.
Cost
of Revenue
Cost of
revenue consists primarily of costs incurred by the TPP and CP/SL operating
segments and partially of costs incurred by the IPL operating
segment. 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. IPL segment costs of
revenue are primarily legal retention fees and disbursement costs incurred in
generating licensing revenue.
Cost of
revenue increased from approximately $1,561,000 for the three months ended
December 31, 2008, to approximately $2,330,000 for the three months ended
December 31, 2009, an increase of approximately $769,000 or approximately 49.3%.
The increase was primarily attributable to an increase in our TPP segment cost
of revenue of approximately $398,000 or approximately 36.5% from approximately
$1,091,000 for the three months ended December 31, 2008 to approximately
$1,489,000 for the three months ended December 31, 2009 and an increase in IPL
segment cost of revenue of approximately $447,000 from approximately $NIL for
the three months ended December 31, 2008 to approximately $447,000 for the three
months ended December 31, 2009. The increase in TPP segment cost of revenue was
primarily attributable to a strengthening Canadian dollar in relation to the
U.S. dollar which increased approximately 12% from the prior fiscal third
quarter. Since a significant amount of our TPP segment cost of revenue
originates in Canadian dollars, the conversion of these costs to U.S. dollars
was at an increased exchange rate when compared to the prior fiscal third
quarter conversion. TPP segment costs of revenue originating in Canadian dollars
was approximately $1,574,000CAD for the three months ended December 31, 2009
compared to $1,323,000CAD for the three months ended December 31, 2008, an
increase of approximately $251,000 or approximately 19%. The increase in IPL
segment cost of revenue was primarily attributable to the costs incurred in
entering into the License Agreement during the three months ended December 31,
2009.
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 increased to approximately $1,059,000 from
approximately $963,000 for the three months ended December 31, 2009 and 2008,
respectively, an increase of approximately $96,000 or approximately 10%.
Included in general and administrative expenses are TPP segment expenses of
approximately $258,000 for the three months ended December 31, 2009, an increase
of approximately $113,000 compared to general and administrative expenses of
approximately $145,000 for the three months ended December 31, 2008. The
increase in TPP segment general and administrative expenses is primarily
attributable to the foreign exchange effect of a strengthening Canadian
dollar in relation to the U.S. dollar which increased approximately 12% from the
prior fiscal third quarter. CP/SL segment expenses increased
to approximately $137,000 from approximately $112,000 for the three months ended
December 31, 2009 and 2008, respectively, an increase of approximately $25,000
or approximately 22.3%.
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 expenses increased to approximately $103,000 from approximately
$77,000 for the three months ended December 31, 2009 and 2008, respectively, an
increase of approximately 33.8%. The increase is primarily attributable to an
increase of approximately $26,000 in TPP segment sales and marketing expenses
from approximately $71,000 for the three months ended December 31, 2008 to
approximately $97,000 for the three months ended December 31,
2009. The increase in TPP segment sales and marketing expenses is
primarily attributable to the foreign exchange effect of a strengthening Canadian
dollar in relation to the U.S. dollar which increased approximately 12% from the
prior fiscal third quarter and partially attributable to an increase in wages
and commissions of approximately $15,000 CAD.
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 improving and enhancing of the existing product and
service lines.
Product development and
enhancement expenses were approximately $123,000 for the three months
ended December 31, 2009 as compared to $58,000 for the three months ended
December 31, 2008. This increase is primarily attributable to an increase in TPP
segment product development and enhancement expenses of approximately $65,000 or
approximately 141.3% from approximately $46,000 for the three months ended
December 31, 2008 to approximately $111,000 for the three months ended December
31, 2009. The increase in TPP product development and enhancement
expenses is primarily attributable to an increase in staffing levels for the
three months ended December 31, 2009 as compared to the three months ended
December 31, 2008.
Amortization
and Depreciation
Amortization
and depreciation increased to approximately $200,000 from approximately $197,000
for the three months ended December 31, 2009 and 2008, respectively, an increase
of approximately $3,000 or approximately 1.5%.
Interest
income
Interest
income decreased to approximately $4,000 from approximately $59,000 for the
three months ended December 31, 2009 and 2008, respectively. The decrease in
interest income was primarily attributable to a decrease in interest bearing
cash investments and a decrease in interest rates earned on cash
investments.
Interest
expense
Interest
expense decreased to approximately $1,000 from approximately $45,000 for the
three months ended December 31, 2009 and 2008, respectively. The
decrease is primarily attributable to the payment of the final installment of
approximately $2,321,000 on the promissory notes relating to the acquisition of
Beanstream which was made in the first quarter of fiscal 2010.
Income
tax expense (recovery)
Income
tax expense (recovery) consists of a recovery of current income taxes of
approximately $324,000 for the three months ended December 31, 2009 compared to
an income tax expense of approximately $206,000 for the three months ended
December 31, 2008, a decrease of current income tax expense of approximately
$530,000. The decrease is primarily attributable to the expected recovery
of taxes for the current fiscal quarter resulting from the implementation of
certain tax planning strategies during the three months ended September 30,
2009. These strategies are intended to permit the recovery of income
taxes previously paid on behalf of our subsidiary, Beanstream. Future income tax
expense was approximately $650,000 for the three months ended
December 31, 2009 compared to $NIL for the three months ended December, 31,
2008, an increase in future income tax expense of approximately $650,000. The
increase in future income tax expense was primarily attributable to a decrease
in the future tax asset value as at December 31, 2009.
Net
income
Net
income increased by approximately $335,000 from net income of approximately
$281,000 for the three months ended December 31, 2008 to approximately $616,000
for the three months ended December 31, 2009.
Basic and
diluted earnings per share were both approximately $0.02 for the three months
ended December 31, 2009, as compared to approximately $0.01 for the three months
ended December 31, 2008.
Results
of Operations
Nine
months ended December 31, 2009 compared to nine months ended December 31,
2008
Revenue
Total
revenue for the nine months ended December 31, 2009 was approximately
$11,230,000, an increase of approximately $1,928,000 or approximately 20.7% from
total revenue of approximately $9,302,000 for the nine months ended December 31,
2008. This increase is primarily attributable to the increase in our
TPP segment revenue of approximately $1,186,000 or approximately 20.2%, from
approximately $5,874,000 for the nine months ended December 31, 2008 to
approximately $7,060,000 for the nine months ended December 31, 2009 and an
increase in our IPL segment revenue of approximately $1,156,000 or approximately
90.9% from approximately $1,272,000 to approximately $2,428,000.
During
the nine months ended December 31, 2009 revenue from and associated with our
largest customer amounted to approximately 15.5% of total revenue as compared to
approximately 18.5% of total revenue for the nine months ended December 31,
2008. The
decrease in the percentage of revenue from and associated with our largest
customer to total revenue is primarily attributable to our total revenue
increasing approximately 20.7% from total revenue of the prior fiscal nine month
period resulting from an increase in our TPP and IPL segment
revenue. We are economically dependent on revenue from this customer
and the temporary or permanent loss of this customer might have a material
adverse effect on our results of operations and financial
condition.
TPP
Segment
Revenue
pertaining to our TPP segment consists of one-time set-up fees, monthly gateway
fees, transaction fees and software customization fees. TPP segment revenue for
the nine months ended December 31, 2009 was approximately $7,060,000 as compared
to TPP segment revenue of approximately $5,874,000 for the nine months ended
December 31, 2008, an increase of approximately $1,186,000 or approximately
20.2%.
Transaction
fees for the nine months ended December 31, 2009 were approximately $5,638,000
compared to transaction fees of approximately $4,765,000 for the nine months
ended December 31, 2008, an increase of approximately $873,000 or approximately
18.3%. The amortized portion of one-time set-up fees recognized was
approximately $121,000 for the nine months ended December 31, 2009 compared to
one-time set-up fees for the nine months ended December 31, 2008 of
approximately $106,000, an increase of approximately $15,000 or approximately
14.2%. Monthly gateway fees for the nine months ended
December 31, 2009 were approximately $874,000 compared to monthly gateway fees
for the nine months ended December 31, 2008 of approximately $741,000, an
increase of approximately $133,000 or approximately 17.9%. The increase in
transaction fees, one-time set-up fees and monthly gateway fees was primarily
attributable to a 13.7% increase in new customer contracts during the nine
months ended December 31, 2009 as compared to the nine months ended December 31,
2008.
IPL
Segment
Revenue
from licensing our patented intellectual property increased by approximately
$1,156,000 or approximately 90.9%, from approximately $1,272,000 for the nine
months ended December 31, 2008 to approximately $2,428,000 for the nine months
ended December 31, 2009. The increase in revenue from licensing our
patented intellectual property was primarily attributable to the revenue
recognized of approximately $1,077,000 from the License Agreement entered into
during the nine months ended December 31, 2009 and partially attributable to an
increase of approximately $79,000 in licensing revenue related to aggregate
licenses providing running royalties and other paid up license
fees.
CP/SL
Segment
CP/SL
segment revenue for the nine months ended December 31, 2009 was approximately
$1,741,000, a decrease of approximately $415,000 or approximately 19.2% from
CP/SL segment revenue of approximately $2,156,000 for the nine months ended
December 31, 2008.
Revenue
from our primary check collections business decreased approximately $67,000 or
approximately 18.2% from approximately $368,000 for the nine months ended
December 31, 2008 to approximately $301,000 for the nine months ended December
31, 2009. Revenue from our secondary check collections business decreased
approximately $230,000 or approximately 14.5% from approximately $1,586,000 for
the nine months ended December 31, 2008 to approximately $1,356,000 for the nine
months ended December 31, 2009. The decrease in primary and secondary check
collections business is primarily attributable to a reduction in returned checks
for primary collections business and a reduction in collections of the principal
amount and related fees of returned checks assigned for secondary
recovery.
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. IPL segment
costs of revenue are primarily legal retention fees and disbursement costs
incurred in generating licensing revenue.
Cost of
revenue increased from approximately $4,580,000 for the nine months ended
December 31, 2008, to approximately $5,671,000 for the nine months ended
December 31, 2009, an increase of approximately $1,091,000 or approximately
23.8%. This increase was primarily attributable to an increase in TPP segment
cost of revenue of approximately $809,000 or approximately 25.1%, from
approximately $3,224,000 for the nine months ended December 31, 2008 to
approximately $4,033,000 for the nine months ended December 31,
2009. The increase in TPP segment cost of revenue was primarily
attributable to an increase in our transaction costs which include interchange,
assessments and other transaction fees and partially attributable to an increase
in staffing within our customer service support team. CP/SL segment
cost of revenue was approximately $1,079,000 for the nine months ended December
31, 2009 as compared to approximately $1,241,000 for the nine months ended
December 31, 2008, a decrease in CP/SL segment cost of revenue of approximately
$162,000 or approximately 13.1%. IPL segment cost of revenue was
approximately $447,000 for the nine months ended December 31, 2009, as compared
to approximately $2,000 for the nine months ended December 31, 2008, an increase
in IPL segment cost of revenue of approximately $445,000. The
increase in IPL segment cost of revenue was primarily attributable to the costs
incurred in entering into the License Agreement during the nine months ended
December 31, 2009.
General
and administrative expenses
General and administrative
expenses consist primarily of personnel costs including associated stock-based
compensation and employment benefits, office facilities, travel, public
relations and professional service fees, which include legal fees, audit fees,
SEC compliance costs and costs related to compliance with the Sarbanes-Oxley Act
of 2002. General and administrative expenses also include the costs of corporate
and support functions including our executive leadership and administration
groups, finance, information technology, legal, human resources and corporate
communication costs.
General
and administrative expenses decreased to approximately $3,084,000 from
approximately $3,209,000 for the nine months ended December 31, 2009 and 2008,
respectively, a decrease of approximately $125,000 or approximately 3.9%.
Included in general and administrative expenses for the nine months ended
December 31, 2009 are TPP segment expenses of approximately $629,000 as compared
to approximately $457,000 for the nine months ended December 31,
2008. The increase in TPP segment general and administrative expenses
was primarily attributable to an increase in accounting and legal fees, bank
charges and interest expense of approximately $127,000
collectively. CP/SL segment expenses decreased to approximately
$362,000 from approximately $467,000 for the nine months ended December 31, 2009
and 2008, respectively, a decrease of approximately $105,000 or approximately
22.5%. The decrease in CP/SL segment general and administrative expenses is
primarily attributable to staff reductions and cost savings relating to the
relocation of our Wichita, Kansas office during the third quarter of our prior
fiscal year. Also included in general and administrative expenses are
stock-based compensation expenses of approximately $781,000 for the
nine months ended December 31, 2009 compared to approximately $871,000 for the
nine months ended December 31, 2008, a decrease of approximately $90,000 or
approximately 10.3%.
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 expenses increased to approximately $296,000 from approximately
$238,000 for the nine months ended December 31, 2009 and 2008, respectively, an
increase of approximately $58,000 or approximately 24.4%. The increase is
primarily attributable to an increase in our TPP segment sales and marketing
expenses of approximately $62,000 from approximately $216,000 for the nine
months ended December 31, 2008 to approximately $278,000 for the nine months
ended December 31, 2009. The increase in TPP segment sales and
marketing expenses is primarily attributable to an increase in wages and
commissions of approximately $54,000.
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 improving and enhancing of the existing product and
service lines.
Product development and
enhancement expenses were approximately $343,000 for the nine months
ended December 31, 2009 as compared to approximately $198,000 for the nine
months ended December 31, 2008. The increase is primarily attributable to an
increase in our TPP segment product development and enhancement expenses of
approximately $145,000, or approximately 90%, from approximately $161,000 for
the nine months ended December 31, 2008 to approximately $306,000 for the nine
months ended December 31, 2009. The increase in TPP product
development and enhancement expenses is primarily attributable to an increase in
staffing levels for the nine months ended December 31, 2009 as compared to the
nine months ended December 31, 2008.
Amortization
and Depreciation
Amortization
and depreciation increased to approximately $597,000 from approximately $590,000
for the nine months ended December 31, 2009 and 2008, respectively, an increase
of approximately $7,000 or approximately 1.2%.
Interest
income
Interest
income decreased to approximately $21,000 from approximately $203,000 for the
nine months ended December 31, 2009 and 2008, respectively. The decrease in
interest income was primarily attributable to a decrease in interest bearing
cash investments and a decrease in interest rates earned on cash
investments.
Interest
expense
Interest
expense decreased to approximately $48,000 from approximately $204,000 for the
nine months ended December 31, 2009 and 2008, respectively. The decrease is
primarily attributable to the payment of the final installment of approximately
$2,321,000 on the promissory notes relating to the acquisition of Beanstream
which was made in the first quarter of fiscal 2010.
Income
tax expense (recovery)
Income
tax expense (recovery) consists of a recovery of current income taxes of
approximately $324,000 for the nine months ended December 31, 2009 compared to
an income tax expense of approximately $597,000 for the nine months ended
December 31, 2008, a decrease of current income tax expense of approximately
$921,000. The decrease is primarily attributable to the expected recovery
of taxes for the current fiscal period resulting from the implementation of
certain tax planning strategies during the nine months ended December 31, 2009.
These strategies are intended to permit the recovery of income taxes previously
paid on behalf of our subsidiary, Beanstream. Future income tax expense was
approximately $554,000 for the nine months ended December 31, 2009
compared to $NIL for the nine months ended December 31, 2008, an increase in
future income tax expense of approximately $554,000. The increase in future
income tax expense was primarily attributable to a decrease in the future tax
asset value as at December 31, 2009.
Net
income
Net
income increased approximately $771,000 from net income of approximately
$300,000 for the nine months ended December 31, 2008 to approximately $1,071,000
for the nine months ended December 31, 2009.
Basic and
diluted earnings per share were both approximately $0.04 for the nine months
ended December 31, 2009, as compared to basic and diluted earnings per share of
approximately $0.01 for the nine months ended December 31, 2008.
Liquidity
and Capital Resources
Our
liquidity and financial position consisted of approximately $5,511,000 in
working capital as of December 31, 2009 compared to approximately $2,762,000 in
working capital as of March 31, 2009, an increase of approximately $2,749,000.
The increase in working capital was primarily attributable to an increase in the
current portion of future income taxes of approximately $1,014,000 resulting
from the implementation of tax planning strategies during the nine months ended
December 31, 2009. These strategies are
intended to permit the recovery of income taxes previously paid on behalf of our
subsidiary, Beanstream. Cash provided by operating activities was
approximately $175,000 for the nine months ended December 31, 2009, as compared
to cash used in operating activities of approximately $584,000 for the nine
months ended December 31, 2008, an increase in cash generated by operating
activities of approximately $759,000. The increase in cash provided by operating
activities was primarily attributable to a decrease in cash used in discharging
accounts payable and accrued liabilities of approximately $71,000 for the nine
months ended December 31, 2009 as compared to cash used in discharging accounts
payable and accrued liabilities of approximately $802,000 for the nine months
ended December 31, 2008. Cash used in
investing activities was approximately $86,000 for the nine months ended
December 31, 2009 as compared to approximately $102,000 for the nine months
ended December 31, 2008, a decrease in cash used in investing activities of
approximately $16,000. The decrease in cash used in investing activities was
primarily attributable to a decrease in acquisition of property and equipment of
approximately $16,000 for the nine months ended December 31, 2009 as compared to
the nine months ended December 31, 2008. Cash used in financing
activities was approximately $2,462,000 for the nine months ended December 31,
2009 as compared to approximately $2,990,000 for the nine months ended December
31, 2008, a decrease in cash used in financing activities of approximately
$528,000. The decrease in cash used in financing activities was primarily due to
the difference in the payments on the promissory notes relating to the
acquisition of Beanstream. During the nine months ended December 31,
2009 we made the second and final payment of approximately $2,321,000 on the
promissory notes as compared to the first payment of approximately $2,844,000 on
the promissory notes made during the nine months ended December 31, 2008, a
difference in payments of approximately $523,000.
Management
tracks projected cash collections and projected cash outflows to monitor
short-term liquidity requirements and to make decisions about future resource
allocations and take actions to adjust our expenses with the goal of remaining
cash flow positive from operations on an annual basis. We believe
that, as of December 31, 2009, the Corporation’s cash resources will be
sufficient to meet our operating requirements for the next twelve
months.
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. While we believe that existing cash and cash
equivalent balances and potential cash flows from operations should satisfy our
long-term cash requirements, we may nonetheless have to raise additional funds
for these purposes, either through equity or debt financing, as
appropriate. There can be no assurance that such financing would be
available on acceptable terms, if at all.
Recently
Adopted Accounting Guidance
In
December 2009, CICA’s EIC issued an Abstract of Issues Discussed, “Multiple
Deliverable Revenue Arrangements”, which does not differ materially from the
FASB authoritative guidance on revenue recognition issued in October
2009. We have early adopted this guidance during the quarter ended
December 31, 2009 and retrospectively applied the guidance as at April 1, 2009.
Under the FASB's new guidance on arrangements that contain software components
and non-software components that function together to deliver the tangible
product’s essential functionality and undelivered elements that relate to
software that is essential to the functionality of the tangible product are not
within the scope of the software revenue recognition guidance. Additionally, the
FASB issued authoritative guidance on multiple-deliverable revenue arrangements.
Under the new guidance, when vendor specific objective evidence or third party
evidence for deliverables in an arrangement cannot be determined, a best
estimate of the selling price is required to separate deliverables and allocate
arrangement consideration using the relative selling price method. The new
guidance includes new disclosure requirements, including, but not limited to
significant judgments made in applying the guidance and how changes in judgments
or in the application of the guidance may significantly affect either the timing
or amount of revenue recognition. We have also early adopted both of the FASB's
new guidance during the quarter ended December 31, 2009 and retrospectively
applied the guidance as at April 1, 2009. The effect of early adoption of
this guidance did not impact any amounts previously reported during the prior
interim periods in the 2010 fiscal year.
Critical
Accounting Policies
There
have been no changes to our critical accounting policies since March 31, 2009.
For a description of our critical accounting policies, see our Annual Report on
Form 10-K for the year ended March 31, 2009 filed with the Securities and
Exchange Commission on June 23, 2009 (file no. 000-13959).
Contingencies
LML
Patent Corp., our indirect wholly-owned subsidiary, entered into a Settlement
and License Agreement (the “License Agreement”) with one of the defendants (the
“Released Defendant”) in the patent infringement lawsuit originally filed by LML
Patent Corp. in the U.S. District Court for the Eastern District of Texas
against nineteen defendants in the United States alleging that the defendants
infringe U.S. Patent No. RE40220. LML Patent Corp. sought
damages, injunctive and other relief for the alleged infringement of this
patent. The License Agreement was effective December 29, 2009 and
provided the Released Defendant with a fully paid-up license to LML Patent
Corp’s patents for electronic check conversion transactions including “ARC”,
“WEB”, “POP”, “TEL” and “BOC”. In connection with the License
Agreement, the Released Defendant paid LML Patent Corp. compensation in the
amount of $1,150,000 for releases, licenses, covenants and all other rights
granted under the License Agreement. Pursuant to the License
Agreement, the lawsuit against the Released Defendant was dismissed with
prejudice on January 5, 2010.
In
addition to legal matters described herein and as previously reported in our
Annual Report filed on Form 10-K for the year ended March 31, 2009, as filed
with the Securities and Exchange Commission on June 23, 2009 (file no.
000-13959), we are party from time to time to ordinary litigation incidental to
our business, none of which is expected to have a material adverse effect on our
results of operations, financial position or liquidity.
ITEM
3.
|
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
|
From
March 31, 2009 until December 31, 2009, there were no material changes from the
information concerning market risk contained in our Annual Report on Form 10-K
for the year ended March 31, 2009, as filed with the Securities and Exchange
Commission on June 23, 2009 (file no. 000-13959).
ITEM
4.
|
CONTROLS AND
PROCEDURES
|
Evaluation of Disclosure Controls
and Procedures. As required by Rule 13a-15(b) under the
Securities and Exchange Act of 1934 (Exchange Act), our management, including
our Chief Executive Officer (‘CEO”) and Chief Accounting Officer (“CAO”),
carried out an evaluation of the effectiveness of the design and operation of
our “disclosure controls and procedures” as of the end of the period covered by
this report. As defined in Rules 13a-15(e) and 15d-15(e) under the
Exchange Act, disclosure controls and procedures are controls and other
procedures of our Corporation that are designed to ensure that information
required to be disclosed by our Corporation in the reports we file or submit
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 our Corporation
in the reports we file or submit under the Exchange Act is accumulated and
communicated to our Corporation’s management, including our CEO and CAO, as
appropriate, to allow timely decisions regarding required
disclosure.
Based on
this evaluation our CEO and CAO concluded that, as of the end of the period
covered by this report, our disclosure controls and procedures were effective to
provide reasonable assurance that information required to be disclosed by our
Corporation in the reports we file or submit under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the
rules and forms of the SEC and to provide reasonable assurance that such
information is accumulated and communicated to our Corporation’s management,
including our CEO and CAO, as appropriate, to allow timely decisions regarding
required disclosure. It should be noted that any system of controls,
however well designed and operated, is based in part upon certain assumptions
and can provide only reasonable, and not absolute, assurance that the objectives
of the system are met.
Changes in Internal Control over
Financial Reporting. As required by Rule 13a-15(d) under the
Exchange Act, our management, including our CEO and CAO, also conducted an
evaluation of our internal control over financial reporting to determine whether
any change occurred during our most recent fiscal quarter that has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting. Based on our evaluation, during our most
recent fiscal quarter there were no changes in our internal control over
financial reporting that have materially affected, or are reasonably likely to
materially affect, our internal control over financial
reporting.
PART
II.
|
ITEM
1.
|
LEGAL PROCEEDINGS
|
LML
Patent Corp., our indirect wholly-owned subsidiary, entered into a Settlement
and License Agreement (the “License Agreement”) with RBS Citizens Bank N.A. (the
“Released Defendant”), one of the defendants in the patent infringement lawsuit
originally filed by LML Patent Corp. in the U.S. District Court for the Eastern
District of Texas against nineteen defendants in the United States alleging that
the defendants infringe U.S. Patent No. RE40220. LML Patent
Corp. sought damages, injunctive and other relief for the alleged infringement
of this patent. The License Agreement was effective December 29, 2009
and provided the Released Defendant with a fully paid-up license to LML Patent
Corp.’s patents for electronic check conversion transactions including “ARC”,
“WEB”, “POP”, “TEL” and “BOC”. In connection with the License
Agreement, the Released Defendant paid LML Patent Corp. compensation in the
amount of $1,150,000 for releases, licenses, covenants and all other rights
granted under the License Agreement. Pursuant to the License
Agreement, the lawsuit against the Released Defendant was dismissed with
prejudice on January 5, 2010.
In
addition to the legal matters described herein and as previously reported in our
Annual Report on Form 10-K for the year ended March 31, 2009, as filed with the
Securities and Exchange Commission on June 23, 2009 (file no. 000-13959), we are
party from time to time to ordinary litigation incidental to our business, none
of which is expected to have a material adverse effect on our results of
operations, financial position or liquidity.
ITEM
1A.
|
There are
no material changes to the risk factors as reported in our annual report on Form
10-K for the fiscal year ended March 31, 2009, as filed with the Securities and
Exchange Commission on June 23, 2009 (file no. 000-13959).
ITEM
6.
|
EXHIBITS
|
Exhibits:
The
following exhibits are attached hereto or are incorporated herein by reference
as indicated in the table below:
Exhibit
Number
|
Description
of Document
|
|
3.1
|
Restated
Articles of Incorporation (incorporated by reference to Exhibit 3.1 to the
Annual Report on Form 10-K for the period ended March 31, 2006 of LML
(File No. 000-13959)).
|
|
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. 000-13959)).
|
|
10.1*†
|
Settlement
and License Agreement between LML Patent Corp. and RBS Citizens Bank N.A.
dated December 29, 2009.
|
|
31.1*
|
Rule
13a-14(a) Certification of Principal Executive Officer.
|
|
31.2*
|
Rule
13a-14(a) Certification of Principal Financial Officer.
|
|
32.1*
|
Section
1350 Certification of Principal Executive Officer and Principal Financial
Officer.
|
* filed
herewith
† Portions
of this exhibit have been omitted pursuant to a request for confidential
treatment.
LML
PAYMENT SYSTEMS INC.
Pursuant to the requirements of the
Securities Exchange Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned thereunto duly
authorized.
LML
PAYMENT SYSTEMS INC.
|
|
/s/
Richard R. Schulz
|
|
Richard
R. Schulz
|
|
Controller
and Chief Accounting Officer
|
|
(Duly
Authorized Officer and Chief Accounting Officer)
|
|
February
12, 2010
|