UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
Form
10-K
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[X]
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ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For
the Fiscal Year Ended March 31, 2008
OR
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[ ]
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For the
Transition Period from ________ to ________
Commission
File Number: 0-13959
LML
PAYMENT SYSTEMS INC.
(Exact
name of registrant as specified in its charter)
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Yukon
Territory
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###-##-####
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(State
or other jurisdiction of incorporation or organization)
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(I.R.S.
Employer Identification No.)
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1680-1140
West Pender Street
Vancouver,
British Columbia Canada
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V6E
4G1
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(Address
of principal executive offices)
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(Zip
Code)
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Registrant’s
Telephone Number, Including Area Code: (604) 689-4440
Securities
registered pursuant to Section 12(b) of the Act:
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Title of Each Class
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Name of Each Exchange on Which
Registered
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None
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None
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Securities
registered pursuant to Section 12(g) of the Act:
Common
Stock, without par value
(Title of
each class)
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes
[ ] No [X]
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes
[ ] No [X]
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes [X] No
[ ]
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See definition of “large accelerated filer,” “accelerated
filer” and “smaller reporting company” in Rule 12b-2 of the Exchange
Act. (Check one):
Large
Accelerated Filed
[ ] Accelerated
Filer
[ ] Non-Accelerated
Filer [ ] Smaller
Reporting Company [X]
(Do not check if a smaller
reporting company)
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act.). Yes
[ ] No [X]
As of
September 30, 2007, the last business day of the registrant's most recently
completed second fiscal quarter, the aggregate market value of the Common Stock
of the Registrant held by non-affiliates based upon the closing sale price of
the Common Stock on such date as reported on the NASDAQ Capital Market, was
approximately $61.8 million.
As of May
31, 2008, the Registrant had 26,341,832 shares of Common Stock
outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions
of the registrant’s proxy statement for its 2008 Annual and Special Meeting of
Shareholders, which will be filed with the Commission within 120 days after the
end of the Registrant’s fiscal year ended March 31, 2008, are incorporated by
reference into Part III of this Annual Report on Form 10-K.
2008
FORM 10-K ANNUAL REPORT
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TABLE
OF CONTENTS
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Page
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PART
I
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Item
1.
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1
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Item
1A.
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6
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Item
1B.
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14
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Item
2.
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15
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Item
3.
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15
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Item
4.
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15
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PART
II
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Item
5.
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16
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Item
6.
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20
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Item
7.
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21
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Item
7A.
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34
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Item
8.
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34
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Item
9.
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34
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Item
9A.
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35
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Item
9B.
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38
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PART
III
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Item
10.
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39
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Item
11.
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39
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Item
12.
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39
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Item
13.
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39
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Item
14.
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39
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PART
IV
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Item
15.
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40
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42
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PART
I
Unless
the context otherwise requires, references in this report on Form 10-K to the
“Company”, “LML,” “we,” “us” or “our” refer to LML Payment Systems
Inc. and its direct and indirect subsidiaries. LML Payment Systems Inc.’s
subsidiaries are Beanstream Internet Commerce, Inc,. LML Corp., Legacy
Promotions Inc., and LHTW Properties, Inc. LML Corp.’s subsidiaries are
LML Patent Corp., and LML Payment Systems Corp. Unless
otherwise specified herein, all references herein to “$” are to United States
(“U.S.”) Dollars. From time to time the Company has made and may
continue to make written or oral “forward-looking statements” including those
contained in this Annual Report on Form 10-K. These forward-looking statements
represent the Company’s present expectations or beliefs concerning future
events. The Company cautions that such statements are qualified by
important factors that could cause actual results to differ materially from
those in the forward-looking statements including those factors identified below
in Item 1A – “Risk Factors”.
Overview
We are a
leading provider of electronic payment, risk management and authentication
services primarily to businesses and organizations who use the Internet to
receive or send payments.
We link
merchants selling products or services to customers wanting to buy them and
financial institutions who allow the transfer of payments to
occur. We have partnership arrangements and certified connections to
financial institutions, payment processors and other payment service providers
in order to enable our customers to safely and reliably conduct
e-Commerce. We provide our electronic payment, authentication and
risk management services to over 6,000 businesses and organizations in Canada
and the United States.
Our
payment services allow our customers to accept or process a wide array of
payments including credit cards, debit cards, electronic fund transfers and
Automated Clearing House ("ACH") transactions. We process
Mastercard, VISA, American Express, Diners, JCB, and Discover cards on behalf of
the majority of Canadian and American merchant account acquirers. We
also offer leading risk management solutions to both online and brick and mortar
customers who wish to use the Internet as a cost effective means of
communicating with their own bank or credit reporting agency.
On June
30, 2007, we acquired Beanstream Internet Commerce Inc., a leading provider of
Internet-based electronic payment, risk management and authentication services
to businesses and organizations in Canada and the United States. We
believe the acquisition was complementary to our existing payment processing
business. The transaction was a cash, stock and debt transaction
valued at $22 million.
We
operate three separate lines of business: transaction payment processing,
intellectual property licensing and check processing/software licensing. Our
transaction payment processing services consist predominantly of Internet-based
services, while our check processing services involve predominantly traditional
and electronic check processing and recovery services that do not utilize the
Internet. With the completion of our 2007 acquisition of Beanstream
(which had a strong Internet-based product and service offering), we expect that
our transaction payment processing services will be our principal line of
business for the foreseeable future, while our other lines of business
(including the electronic check processing services that we have historically
relied on for a significant source of revenue) will become less important to our
overall service offerings and less significant to the financial performance of
our company. See “Item 7 – Management’s Discussion and Analysis of Financial
Condition and Results of Operations -- Overview.”
Our
headquarters are located at 1680 – 1140 West Pender Street, Vancouver, British
Columbia, Canada and we have office locations in Victoria, British Columbia,
Canada and Wichita, Kansas, United States.
e-Commerce
Market
In 2007,
Statistics Canada reported that online sales increased at a double-digit pace
for the sixth consecutive year. Total Internet sales were estimated
at $62.7 billion, up 26% from 2006.
Forrester
Research estimated that the e-Commerce market in the United States was $174.5
billion for 2007 and that online shopping ranked number two, ahead of catalog,
telephone and television and secondary to in-store sales. The United
States Census Bureau claimed that online sales by retailers experienced growth
of 19% in 2007 from 2006.
We
believe that the electronic payments and e-Commerce markets will continue to
grow as more and more businesses decide to sell products or make payments
electronically and over the Internet.
Products
and Services
Our
transaction payment customers range in size from small, sole proprietorships to
large corporations. However, most of our transaction payment
processing business comes from services we provide to small to medium size
firms. We support this market in three separate ways: first by
providing services that can be integrated to a customer’s website or financial
platform through software plug-ins and application programming interfaces
(API’s); secondly, by providing hosted services where we can provide a turn-key
e-Commerce website for a merchant; and thirdly, by having our transaction
payment services integrated directly into third party software
solutions. In each instance, our products and services are designed
to provide this market segment with bundled payment, risk management,
authentication, shopping cart products and reporting forms that allow our
customers to sell goods and services and secure payment in an efficient and
secure manner.
Our
customers include both online merchants and brick and mortar merchants,
including government and financial institutions.
We
provide electronic payment and risk management solutions for brick and mortar
retailers and mail-order and telephone-order call-centers (“MOTO”) that allow
these businesses to streamline payment processing. Our payment
services can be integrated into a customer’s accounting or financial system,
reducing administrative costs and removing some of the complexity of a
paper-based environment.
We
provide solutions for e-merchants where we integrate our services to the website
of the e-merchant and their shopping cart or application software provider,
which allows e-merchants to accept credit card and debit card payments,
electronic funds transfers (EFT) and ACH payments. Our payment
solutions have been integrated into many shopping cart and application service
providers who integrate our payment services into their own products in order to
provide their customers secure access to financial payment
networks. Our payment products support both Canadian and U.S. dollar
settlement and our products are available in both French and
English.
Our
hosted solutions offered to customers include a connection between the
merchant’s website and our host system that provides the merchant with a
shopping cart with secure payment processing for credit cards and debit cards,
electronic funds transfers (EFT) and ACH payments, a secure order management
interface, multiple shipping options and sophisticated reporting and
reconciliation tools. All required forms and images are hosted on our
servers and are secured using secured socket layer (SSL)
encryption. We operate equipment in two separate
data centers to provide greater reliability to our merchants and
customers.
We also
provide a robust selection of authentication tools for merchants to reduce the
risk inherent in card-not-present credit card transactions. Our
merchants are entitled to the fraud protection services offered by the card
associations such as Mastercard’s Securecode and Verified by Visa in addition to
our own risk-management tools and applications.
We also
provide additional easy to use authentication services that provide our
merchants with information that ranges from the validation of credit card orders
to the fraud screening of applications by consumers. Our
authentication services allow certification of addresses and telephone numbers
and can identify addresses that have been known to be used as mail drops, and
high risk postal codes. Our highest level of authentication involves
the consumer providing answers to “out-of-wallet” questions as part of the
transaction process.
We also
supply merchants with a variety of risk management tools that, when combined
with our cardholder authentication services, provide leading class functionality
in the battle against payments fraud.
Technology
and Data Centers
We
operate a transaction processing platform that is designed for reliability,
scalability and security. We operate two separate data centers, one
in Victoria, B.C. and one in Saanich, B.C. These secure data centers
contain the technology necessary to provide our services to merchants over the
Internet and to our financial institutions and payment processing
partners. Our data centers contain our enterprise servers, network
firewalls, routers and other technology we use to provide services to our
merchants and partners. Our processing software is certified to
process financial transactions with a majority of Canadian and US merchant
acquirers, which allows us to act as a single point of integration and point of
contact for our customers and the customers of our channel partners and the
financial payments network.
Our
systems are monitored 24 hours per day, 7 days per week, 365 days per
year. We are also certified as a level 1 service provider under the
Payment Card Industry (PCI) Data Security Standard (DSS) which is a
comprehensive set of requirements for enhancing payment account data security
that was developed by the PCI Security Standards Council including American
Express, Discover Financial Services, JCB International, Mastercard Worldwide
and VISA Inc., to help facilitate the broad adoption of consistent data security
measures.
Sales
and Marketing
Our
products and services are primarily sold indirectly through both channel and
technology partners, directly through our website and directly by an internal
sales staff of two people.
We obtain
new business as a result of our relationships with channel partners and our own
internal marketing efforts. These channel partners can be payment
processors, financial institutions, independent sales organizations or software
application vendors who, in many cases, may provide a value-added service to our
merchants. We typically pay either a referral fee or commission or
residual fee for each merchant referred to us by our channel
partners. We rely on the success of our channel partners for new
sales. We currently have more than 150 channel partners.
Customer
Service
We staff
our own bilingual (French and English) customer support center and provide
direct inbound access to highly qualified and trained customer service
representatives who are fully capable of handling technical and non-technical
inquiries. Our customer service desk is staffed by 7 people.
Emergency support is available 24 hours a day, 7 days a week.
We view
our customer service capabilities as a key competitive advantage in our market.
Over 95% of our incoming calls are answered within 30 seconds by a live operator
who in most cases can address a question immediately.
Competition
The
market for our products and services is highly competitive and is characterized
by rapidly changing technology, evolving industry standards, merchant
requirements, pricing competition and rapid rates of product obsolescence. Our
competitors include other payment gateways and merchant acquirers, payment
processors, technology service providers, Internet commerce providers and
financial institutions. In Canada, our primary competition is Moneris
and Elavon. In the US market we compete against other third party processors and
gateways such as Cybersource, Authorize.net, and
Verisign/Paypal.
We
believe we compete on certain factors including:
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Customer
service
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Features
and functionality
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Strategic
partnerships and channel partners
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Ease
of product integration for
customers
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Broad
range of certified connections to financial institutions and payment
processors
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We
believe that we compete favorably with respect to these factors however, we
believe that part of our success will be our ability to successfully market
existing services. We operate in a market that is rapidly evolving
and we may not be able to successfully compete against current or future
competitors. Many of our competitors have greater technical,
financial and marketing resources than us and, as a result, may be able to
respond more quickly to changes in technology, industry standards and merchant
requirements or may be able to devote greater resources to product development
and marketing than us. There can be no assurance that our current
services will not become obsolete or that we will have the financial, technical
and marketing resources and support facilities to compete successfully in the
future. Our failure to compete favorably could materially and
adversely affect our business, results of operations and financial
condition.
Regulatory
Matters
Various
aspects of our business are either subject to or may be affected by current and
future governmental and other regulations in many different
jurisdictions. The rules, regulations, policies and procedures
affecting our business are constantly subject to change.
Certain
of our services in Canada may be subject to federal legislation called the Proceeds of Crime and Terrorist
Financing Act.
Certain
check collection and electronic check re-presentment services that we provide
are governed by the Federal Fair Debt Collection Practices Act and the Federal
Fair Credit Reporting Act and other similar state laws. Electronic
check re-presentment transactions are subject to applicable National Automated
Clearing House Association ("NACHA") Operating Rules, and applicable Uniform
Commercial Code statutes. Our electronic check re-presentment
transactions currently utilize the facilities of the Automated Clearing House
Network and therefore are governed by and subject to the NACHA Operating Rules
and Regulation E. We use commercially reasonable efforts to oversee
compliance with the requirements of these acts and regulations.
Intellectual
Property
Our
Intellectual Property Licensing Operations ("IPL") involve licensing our
intellectual property estate, which includes five U.S. patents describing
electronic check processing methods. When we provide clients licenses
to our intellectual property estate, we typically earn revenue or other income
from ongoing royalty fees and, in some cases, release fees for potential past
infringement. In some instances we also earn revenue from license agreements
that provide for the payment of contractually determined paid-up license fees to
us in consideration for the grant of a non-exclusive, retroactive and future
license to our intellectual property estate and in other instances, where
license agreements include multiple element arrangements, we may defer this
revenue and recognize the revenue ratably over the license term.
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Currently,
our intellectual property estate includes U.S. patent nos. 5,484,988,
6,164,528, 6,283,366, 6,354,491, RE40,220, all of which describe methods
and systems for processing checks
electronically.
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We rely
upon a combination of patent, trademark, copyright and trade secret law to
establish and protect our trademarks, software and inventions. Our
success will depend, in part, on our ability to protect and enforce intellectual
property protection for the technology contained in our patents and
trademarks. Certain unique aspects of our intellectual property are
protected by patents, including U.S. patent nos. 5,484,988, 6,164,528,
6,283,366, 6,354,491 and RE40,220, all of which relate to electronic check
processing methods and systems. Moreover, our patent estate
addresses, among other issues, the electronic submission of transactions through
a centralized database and authorization system for approval electronically,
electronic debiting of consumer bank accounts and electronic crediting of
designated merchant accounts in real-time or off-line modes using the facilities
of the ACH Network or any competing network.
We intend
to continue to file additional patent applications to expand our intellectual
property estate, seeking coverage of our developments in our business
areas. We rely on a combination of trademark, copyright and trade
secret laws and contractual provisions to establish and protect proprietary
rights in our software. There can be no assurance that
these protections will be adequate to deter misappropriation of our technologies
or independent third-party development of similar technologies. The
cost of prosecuting a claim of infringement against others, or defending a
patent infringement claim, may be substantial and there can be no assurance that
we will have the resources necessary to successfully prosecute or defend a
patent infringement claim.
Although we do not believe that our technology infringes the patent
rights of others, there can be no assurance that infringement claims will not be
made in the future or that the validity or enforceability of any patent issued
to us will be sustained if judicially tested.
Check
Processing/Software Licensing
Our Check
Processing/Software Licensing Operations ("CP/SL") involve primary and secondary
check collection including electronic check re-presentment (RCK) and software
licensing. Our check processing services involve return check
management such as traditional and electronic recovery services to retail
clients. When we provide return check management services, we
typically receive revenue when we are successful at recovering the principal
amount of the original transaction on behalf of the client. In some
instances we also earn a percentage of the principal amount and in other
instances our secondary recovery services provide for us to earn additional fees
when legal action is required. Our check processing services are
provided in the United States and are operated from our Wichita, Kansas
location.
Corporate
History
We were
originally incorporated under the laws of the Province of British Columbia,
Canada, as a “specially limited company” on January 24, 1974. In October 1997,
after receipt of shareholder approval, our directors elected to change our
governing corporate jurisdiction to the Yukon Territory, which change became
effective in November 1997. Under the Yukon Business Corporations
Act, we are a corporation that enjoys limited liability for its shareholders, is
governed by its Board of Directors and generally has the powers and capacity
attributable to a corporation.
Employees
There
exists competition for personnel in the financial payment processing
industry. We believe that our future success will depend in part on
our continued ability to hire and retain qualified personnel. There
can be no assurance that we will be successful in attracting and retaining a
sufficient number of qualified employees to conduct our business in the
future. As of May 31, 2008, we had 56 full-time employees including
two employees in sales and marketing and 13 employees in administration and
finance. We also employ consultants to perform services for us from
time to time.
Business
Concentration
During
the fiscal year ended March 31, 2008, revenue from and associated with our three
largest customers amounted to approximately 47% of total revenue. In
fiscal 2008, Dillon’s, Disney Interactive and First Data were our largest
customers with each of them accounting for more than 10% of our total
revenue. We may be economically dependent on revenue from these
customers. See “Part II, Item 7 – Management’s Discussion and
Analysis of Financial Condition and Results of Operations.”
Available
Information
We
maintain investor relations pages on our Internet website at http://www.lmlpayment.com. On
these pages, we make available our annual, quarterly and other current reports
filed or furnished with the SEC as soon as practicable. These reports
may be reviewed or downloaded free of charge. Alternatively, if you
would like a paper copy of any such SEC report (without exhibits) or document,
write to the Corporate Secretary, LML Payment Systems Inc., Suite 1680, 1140
West Pender Street, Vancouver, BC V6E 4G1, and a
copy of such requested document will be provided to you, free of
charge.
Introduction
In
addition to the normal risks of business, we are subject to significant risks
and uncertainties, including those listed below and others described elsewhere
in this Annual Report on Form 10-K. Any of the risks described herein
could result in a significant adverse effect on our results of operations and
financial condition and could cause our actual results of operations to differ
materially from the results contemplated by the forward-looking statements
contained in this report.
We
have a general history of losses and may not operate profitably in the
future.
We have
incurred losses for the last five fiscal years. Our net losses and negative cash
flow may continue for the foreseeable future. As of March 31, 2008, our
accumulated deficit was approximately $34,112,000. We believe that our planned
growth and profitability will depend in large part on our ability to expand our
client base. Accordingly, we intend to invest in marketing, development of our
client base and development of our marketing technology and operating
infrastructure. If we are not successful in expanding our client base, it will
have a material adverse effect on our financial condition and our ability to
continue to operate our business.
Excessive
chargeback losses could significantly affect our results of operations and
liquidity.
Our
agreements with our sponsoring financial institutions and certain payment
processors require us to assume and bear the risk of “chargeback”
losses. Under the rules of Visa and MasterCard, when a merchant
processor acquires card transactions, it has certain contingent liabilities for
the transactions processed. This contingent liability arises in the
event of a billing dispute between the merchant and a cardholder that is
ultimately resolved in the cardholder’s favor. In such a case, the
disputed transaction is charged back to the merchant and the disputed amount is
credited or otherwise refunded to the cardholder. If we are unable to
collect this amount from the merchant’s account, or if the merchant refuses or
is unable to reimburse us for the chargeback due to merchant fraud, insolvency
or other reasons, we will bear the loss for the amount of the refund paid to the
cardholders. In addition, if we are unable to recover these
chargeback amounts from merchants, having to pay the aggregate of any such
amounts could have a material adverse effect on our results of operations and
liquidity.
Because
a small number of customers have historically accounted for a substantial
portion of our revenue, our financial results would be materially adversely
affected if we are unable to retain customers.
We have
had in the past and may have in the future, a small number of customers that
have accounted for a significant portion of our revenue. During the
fiscal year ended March 31, 2008, revenue from and associated with our three
largest customers amounted to approximately 47% of total revenue. Our
revenue could materially decline because of a delay in signing agreements with a
single customer or the failure to retain an existing customer.
Merchant
fraud with respect to Internet-based bankcard and EFT transactions could cause
us to incur significant losses.
We
significantly rely on the processing revenue derived from bankcard and EFT
transactions. If any merchant or customer were to submit or process
unauthorized or fraudulent bankcard or EFT transactions, depending on the dollar
amount, we could incur significant losses which could have a material adverse
effect on our business and results of operations and
liquidity.
Despite
systems designed to manage such risk, we cannot guarantee that our systems will
prevent fraudulent transactions from being submitted and processed or that the
funds set aside to address such activity will be adequate to cover all potential
situations that might occur. We do not have insurance to protect us
from these losses. There is no assurance that any chargeback or
processing reserve will be adequate to offset against any unauthorized or
fraudulent processing losses that we may incur. Accordingly, should
we experience such fraudulent activity and such losses, our results of
operations could be immediately and materially adversely affected.
Our
reliance on financial institutions, providers of financial payment networks and
payment technology vendors could adversely affect our ability to provide our
services to our clients on a timely and cost-efficient basis.
We rely
to a substantial extent on third parties to provide access to networks and
technology including software, data, systems and services. In some
circumstances, we rely on a single supplier or limited group of
suppliers. For example, we require the services of financial
institutions and third-party payment processors for access to payment
networks. If any of these processors cease to allow us to access
their processing platforms and/or networks, our ability to process credit card,
debit card, EFT and ACH payments would be severely impacted and this would, in
turn, have a materially adverse impact on our results of operations and
liquidity.
If
we are unable to protect our intellectual property rights or if others claim
that we are infringing on their intellectual property, we could lose any
competitive advantage we may have with respect to our intellectual
property or we may be required to incur significant costs with
respect to the infringement of the intellectual property rights of
others.
We may be
unable to successfully assert patent infringement claims against others and
could incur significant costs with respect to asserting such
claims. Defending patent infringement claims brought against us could
cause us to incur significant costs. The failure to successfully
prosecute our patent infringement claims or defend patent infringement
claims brought against us could have a material adverse effect upon our
business and our financial results.
We have
in the past asserted patent infringement claims against others. The
cost of prosecuting a patent infringement claim against others carries a high
degree of uncertainly and is expensive. While we believe our patents
to be valid, if we were to enter future litigation against others regarding the
infringement of our patents we face the risk that our patents could ultimately
be determined to be invalid or otherwise not infringed by a court, jury or the
United States Patent and Trademark Office. Furthermore, all patents
have an expiration date and our patent nos. 5,484,988, 6,164,528, 6,283,366,
6,354,491 and RE40,220, regarding electronic check processing, expire on January
16, 2013. Failure to prevail in a patent infringement claim against
others would have a material adverse impact on our business and our financial
results and our stock price.
We
could be subject to liability as a result of security breaches, service
interruptions by cyber terrorists or fraudulent or illegal use of our
services.
Because
some of our activities involve the storage and transmission of confidential
personal or proprietary information, such as credit card numbers and bank
account numbers, and because we are a link in the chain of e-Commerce, we are
vulnerable to internal and external security breaches, service interruptions and
third-party and employee fraud schemes that could damage our reputation and
expose us to a risk of loss or litigation and monetary damages. Our payment
services may be susceptible to credit card and other payment fraud schemes,
including unauthorized use of credit cards, debit cards or bank account
information, identity theft or merchant fraud. We expect that technically
sophisticated criminals will continue to attempt to circumvent our anti-fraud
systems. If such fraud schemes are successful or otherwise cause merchants,
customers or partners to lose confidence in our services in particular, or in
Internet systems generally, our business would be materially adversely
affected.
Our
business may also be susceptible to potentially illegal or improper uses. These
uses may include illegal online gambling, fraudulent sales of goods or services,
illicit sales of prescription medications or controlled substances, software and
other intellectual property piracy, money laundering, bank fraud, child
pornography trafficking, prohibited sales of alcoholic beverages and tobacco
products and online securities fraud. Despite measures we have taken to detect
and lessen the risk of this kind of conduct, we cannot ensure that these
measures will succeed.
We
believe we are compliant with the Payment Card Industry’s (PCI) Security
Standard which incorporates Visa’s Cardholder Information Security Program
(CISP) and MasterCard’s Site Data Protection (SDP) standard. However, there
is no guarantee that we will maintain such compliance or that compliance will
prevent illegal or improper use of our payment system.
Our
security measures may not prevent security breaches, service interruptions and
fraud schemes and the failure to do so may disrupt our business, damage our
reputation and expose us to risk of loss or litigation and possible monetary
damages that would materially adversely effect our business, results of
operation and financial condition.
Changes
to credit card association, debit networks and ACH rules or practices could
adversely impact our business.
We do not
belong to nor can we directly access the bank card associations. As a result, we
must rely on banks and their processing providers to process our credit, debit,
EFT and ACH transactions. However, we must comply with the operating rules of
the credit card associations and other payment networks such as debit networks
and ACH networks. The associations’ member banks and network owners set these
rules and the associations and network owners interpret them. Some of
those member banks and network owners compete with us in certain
situations. Visa, MasterCard, American Express, Discover, Interac or
the Automated Clearing House could adopt new operating rules or interpretations
of existing rules which we might find difficult or even impossible to comply
with, resulting in our inability to give customers the option of using credit
cards, debit cards, EFT and ACH facilities to fund their payments. If we were
unable to provide a gateway for these payment services, our business would be
materially and adversely affected.
We
and our clients must comply with complex and changing laws and
regulations.
Government
regulation influences our activities and the activities of our current and
prospective clients, as well as our clients’ expectations and needs in relation
to our products and services. Businesses that handle consumers’ funds, such as
our’s, are subject to numerous state, federal, provincial and international
regulations, including those related to banking, credit cards, electronic
transactions and communication, escrow, fair credit reporting, privacy of
personal information and financial records, internet gambling and others. State,
federal and provincial money transmitter regulations and federal and
international anti-money laundering and money services business regulations can
also apply under some circumstances. The application of many of these laws with
regard to electronic commerce is unclear. In addition, it is possible that a
number of laws and regulations may be applicable or may be adopted in the future
with respect to conducting business over the Internet concerning matters such as
taxes, pricing, content and distribution. If applied to us, any of the foregoing
rules and regulations could require us to change the way we do business in a way
that increases costs or makes our business more complex. In addition, violation
of some statutes may result in severe penalties or restrictions on our ability
to engage in e-Commerce, which could have a material adverse effect on our
business.
Privacy
legislation, including the Gramm-Leach-Bliley Act and regulations thereunder,
the Personal Information Protection and Electronic Documents Act in Canada, as
well as provincial and state laws may also affect the nature and extent of the
products or services that we can provide to clients as well as our ability to
collect, monitor and disseminate information subject to privacy
protection.
Consumer
protection laws in the areas of privacy of personal information and credit and
financial transactions have been evolving rapidly at the state, federal,
provincial and international levels. As the electronic transmission,
processing and storage of financial information regarding consumers continues to
grow and develop, it is likely that more stringent consumer protection laws may
impose additional burdens on companies involved in such transactions including,
without limitation, notification of unauthorized disclosure of personal
information of individuals. Uncertainty and new laws and regulations,
as well as the application of existing laws, could limit our ability to operate
in our markets, expose us to compliance costs, fines, penalties and substantial
liability, and result in costly and time-consuming litigation. We
have in the past collected personal data about consumers for use in our check
authorization products, which has given rise to litigation involving our
corporation (see “Item 3 – Legal Proceedings”).
Furthermore,
the growth and development of the market for e-Commerce may prompt more
stringent consumer protection laws that may impose additional regulatory burdens
on companies that provide services to online businesses. The adoption of
additional laws or regulations, or taxation requirements may affect the ability
to offer, or cost effectiveness of offering, goods or services online, which
could, in turn, decrease the demand for our products and services and increase
our cost of doing business.
The
Canadian Securities Administrators in Canada and the Securities and Exchange
Commission and the National Association of Securities Dealers, Inc. in the
United States, have also enacted regulations affecting our corporate
governance, securities disclosure and compliance practices. We expect these
regulations to increase our compliance costs and require additional time and
attention. If we fail to comply with any of these regulations, we could be
subject to legal actions by regulatory authorities or private
parties.
Our
business is highly dependent on the efficient and uninterrupted operation of our
computer network systems and data centers, and any disruption or material breach
of security of our systems could materially harm our business.
Our
ability to provide reliable service largely depends on the efficient and
uninterrupted operation of our computer network systems and data centers. Any
significant interruptions or security or privacy breaches in our facilities,
computer networks, firewalls and databases could harm our business and
reputation, result in a loss of customers or cause inquiries and fines or
penalties from regulatory or governmental authorities. Our systems and
operations could be exposed to damage or interruption from fire, natural
disaster, power loss, telecommunications failure, unauthorized entry or physical
break-ins, computer viruses and hackers. The measures we have enacted, such as
the implementation of security access and disaster recovery plans, may not be
successful and we may experience problems other than system failures. We may
also experience software defects, development delays and installation
difficulties, which would harm our business and reputation and expose us to
potential liability and increased operating expenses.
Our business may be harmed by errors
in our software.
The
software that we develop and use in providing our transaction payment processing
is extremely complex and contains thousands of lines of computer code. Complex
software systems such as ours are susceptible to errors. We believe our software
design, development and testing processes are adequate to detect errors in our
software prior to its release. Because of the complexity of our systems and the
large volume of transactions we process on a daily basis, it is possible that we
may not detect software errors until after they have affected a significant
number of transactions. Software errors can have the effect of causing
merchants, customers or partners who utilize our products and services to fail
to comply with their intended business policies, or to fail to comply with
legal, credit card, debit card and banking requirements, such as those under the
Fair Credit Reporting Act, Gramm-Leach-Bliley Act, NACHA rules, MasterCard’s
Site Data Protection (SDP) Standard, Visa’s Cardholder Information Security
Program (CISP) and Payment Card Industry’s (PCI) Data Security
Standard.
Our future revenues may be uncertain
because of reliance on third parties for marketing and
distribution.
We
distribute our service offerings primarily through third party sales
distribution partners and our revenues are derived predominantly through these
relationships.
We intend
to continue to market and distribute our current and future products and
services through existing and other relationships both in and outside of Canada.
There are no minimum purchase obligations applicable to any existing distributor
or other sales and marketing partners and we do not expect to have any
guarantees of continuing orders. Failure by our existing and future distributors
or other sales and marketing partners to generate significant revenues, our
failure to establish additional distribution or sales and marketing alliances,
changes in the industry that render third party distribution networks obsolete,
termination of relationships with significant distributors or marketing partners
would have a material adverse effect on our business, operating results and
financial condition. In addition, we may be required to pay higher commission
rates in order to maintain loyalty among our third-party distribution partners,
which may have a material adverse impact on our
profitability.
We
may require additional capital, which may not be available on commercially
reasonable terms, or at all. Capital raised through the sale or issuance of
equity securities may result in dilution to our shareholders. Failure to obtain
such additional capital could have a materially adverse impact on our business
development.
Our
future business activities, the development or acquisition of new or enhanced
products and services, the acquisition of additional computer and network
equipment, the costs of compliance with government regulations and future
expansions including acquisitions will require us to make significant capital
expenditures. If our available cash resources prove to be insufficient, because
of unanticipated expenses, previous acquisitions, revenue shortfalls or
otherwise, we may need to seek additional financing or curtail our expansion
activities. If we obtain equity financing for any reason, our existing
shareholders may experience dilution in their investments. If we obtain debt
financing, our business could become subject to restrictions that affect our
operations or increase the level of risk in our business. It is also possible
that, if we need additional financing, we will not be able to obtain it on
acceptable terms, or at all.
Our
ability to expand through acquisitions involves risks and may not be
successful.
As part
of our growth strategy, we have made business acquisitions in recent years and
we expect to be an active business acquirer in the future. We
anticipate that we will seek to acquire complementary businesses, products and
services in the future. The acquisition and integration of businesses
involves a number of risks and challenges, including:
|
·
|
Maintaining
the acquired business’ customer
relationships;
|
|
·
|
Demonstrating
to the customers of the acquired business that the acquisition has not
resulted in changes that would adversely impact the ability of the
acquired business to address the needs of its
customers;
|
|
·
|
The
operations, technology and personnel of an acquired business may be
difficult to integrate;
|
|
·
|
An
acquired business may not achieve anticipated revenues, earnings or cash
flow;
|
|
·
|
The
allocation of management resources to complete a business acquisition may
divert management resources from our business and disrupt our day-to-day
operations.
|
There can
be no assurance that we will be able to fully integrate all aspects of an
acquired business successfully or fully realize the potential benefits of any
business combination and our failure to successfully integrate acquired
businesses may have a material adverse effect on our financial results and stock
price.
Currency
exchange rate fluctuations could adversely affect our financial results, which
may have an adverse impact on our business, results of operations and financial
condition as well as the value of our foreign assets.
Fluctuations
in foreign currency exchange rates may have an adverse impact on our business,
results of operations and financial condition, as well as the value of our
foreign assets, which, in turn, may adversely affect reported earnings or losses
and the comparability of period-to-period results of operations, with the
exception of our newly acquired subsidiary Beanstream. The U.S.
dollar is the functional currency of our operations since substantially all of
our operations are conducted in U.S. currency. As a result, when we
are paying any obligation that is denominated in a foreign currency (including,
for example, the Beanstream promissory notes which are denominated in Canadian
dollars), we must generate the equivalent amount of cash in U.S dollars that,
when exchanged at the then-prevailing applicable foreign currency exchange rate,
will equal the amount of the obligation to be paid (which means that we may pay
more U.S. dollars than initially anticipated if the foreign currency strengthens
against the U.S. dollar between the time we incur the obligation and the time we
are required to pay the obligation). Given recent and unexpected
fluctuations in the U.S./Canadian currency exchange rate, the amount owing on
the Beanstream promissory notes has increased as of March 31, 2008 from
approximately U.S. $4,975,000 to approximately U.S.
$5,167,000. Changes in the U.S./Canadian currency exchange rate could
have a significant adverse impact on our current liquidity and capital resources
and could also have a material adverse impact on our profitability
and results of operations.
Failure
to maintain effective internal controls in accordance with Section 404 of
the Sarbanes-Oxley Act could have a material adverse effect on our business and
stock price.
We are
required to certify and report on our compliance with the requirements of
Section 404 of the Sarbanes-Oxley Act, which requires annual management
assessments of the effectiveness of our internal control over financial
reporting and a report by our independent registered chartered accounting firm
addressing these assessments. If we fail to maintain the adequacy of our
internal controls, as such standards are modified, supplemented or amended from
time to time, we may not be able to ensure that we can conclude on an ongoing
basis that we have effective internal controls over financial reporting in
accordance with Section 404. In order to achieve effective internal
controls we may need to enhance our accounting systems or processes which could
increase our cost of doing business. Any failure to achieve and maintain an
effective internal control environment could have a material adverse effect on
our business, financial results and stock price.
We
have historically experienced fluctuations in our operating results and expect
these fluctuations to continue in future periods, which may result in volatility
in our stock price.
Our
operating results may fluctuate in the future based upon a number of factors,
many of which are not within our control. Our revenue model is based largely on
recurring revenues, billed monthly, predominately derived from growth in
customers and the numbers of transactions processed within a monthly billing
period. The number of transactions processed is affected by many factors,
several of which are beyond our control, including general consumer trends and
holiday shopping in the fourth quarter of the year.
Our
operating results may also fluctuate in the future due to a variety of other
factors, including the timing and extent of restructuring, and impairment
and other charges that may occur in a given fiscal year, the final disposition
of any patent litigation and new changes in accounting rules, such as the
requirement to record stock-based compensation expense for employee stock option
grants made at fair market value. As a result of these factors, we believe that
our fiscal year results are not predictable with any significant degree of
certainty, and year-to-year comparisons of our results of operations are not
necessarily meaningful. You should not rely on our fiscal year results of
operations to predict our future performance.
If our
operating results fall below the expectations of investors or public market
analysts, the price of our common stock could fall dramatically. Our common
stock price could also fall dramatically if investors or public market analysts
reduce their estimates of our future quarterly operating results, whether as a
result of information we disclose, or based on industry, market or economic
trends, or other factors.
We
face competition from a broad and increasing range of vendors which could reduce
or eliminate demand for our products and services.
The
market for products and services offered to participants in online transactions
is highly competitive and is characterized by rapid technological change,
evolving industry standards, merchant requirements, pricing competition, rapid
rates of product obsolescence, and rapid rates of new product introduction. This
market is fragmented and a number of companies offer one or more products or
services competitive with ours. We face competition from several providers of
online payment processing services, including CyberSource Corporation,
Plug & Pay Technologies, Inc., Verisign/PayPal, Inc., Google, Inc. and
LinkPoint International, Inc., a subsidiary of First Data Corporation as well as
financial services companies, credit card and payment processing
companies. We anticipate continued growth and the formation of new
alliances in the market in which we compete, which will result in the entrance
of new or the creation of bigger competitors in the future.
Because
competitors can penetrate one or more of our markets, we anticipate additional
competition from other established and new companies. In addition,
competition may intensify as competitors establish cooperative relationships
among themselves or alliances with others.
Many of
our current and potential competitors have significantly greater financial,
marketing, technical and other competitive resources than we do. As a
result, these competitors may be able to adapt more quickly to new or emerging
technologies and changes in client requirements, or may be able to devote
greater resources to the promotion and sale of their products and
services. In addition, in order to meet client requirements, we must
often work cooperatively with companies that are, in other circumstances,
competitors. The need for us to work cooperatively with such
companies may limit our ability to compete aggressively with those companies in
other circumstances.
If we lose customers, our business
operations may be materially
adversely affected, which could cause us to
cease our business or curtail our business to a point
where we are no longer able to generate sufficient revenue
to fund operations.
The demand for many of our products
and services could be negatively affected by reduced growth of e-Commerce,
delays in the development of the Internet infrastructure, a general economic slowdown or any
other event causing a material slowing of consumer spending.
A
significant portion of our revenue is derived from transaction processing fees.
Any changes in economic factors that adversely affect consumer spending and
related consumer debt, or a reduction in check writing or credit and debit card
usage, could reduce the volume of transactions that we process, and have a
materially adverse effect on our business, financial condition and results of
operations. We depend on the growing use and acceptance of the Internet by
merchants and customers in Canada and the United States as a means to grow our
business. We cannot be certain that acceptance and use of the Internet will
continue to grow or that a sufficiently broad base of merchants and consumers
will adopt, and continue to use, the Internet as a medium of
commerce.
It is
also possible that continued growth in the number of Internet users and the use
of the Internet generally, may overwhelm the existing Internet infrastructure.
Delays in the development or adoption of new standards and protocols required to
handle increased levels of Internet activity could also have a detrimental
effect on the Internet and correspondingly on our business. These factors would
adversely affect usage of the Internet, and lower demand for our products and
services.
If
we do not continue to enhance our existing products and services and develop or
acquire new ones, we will not be able to compete effectively.
As part
of our business strategy, we are seeking to further penetrate into the
transaction payment processing market and to expand our business into new
markets or markets that are complementary to our existing transaction payment
processing segment operations. If we are not able to successfully expand our
penetration into the existing transaction payment processing market or into
new or complementary markets, our financial results and future prospects may be
harmed. Our ability to increase market penetration and enter new or
complementary markets depends on a number of factors, including growth in our
existing and targeted markets, our ability to provide products and services to
address the needs of those markets and competition in those
markets.
The
industries in which we do business or intend to do business have been changing
rapidly as a result of increasing competition, technological advances, changing
consumer payment habits, regulatory changes and evolving industry practices and
standards, and we expect these changes will continue. Current and
potential clients have also experienced significant changes as the result of
competition and economic conditions. In addition, the business practices and
technical requirements of our clients are subject to changes that may require
modifications to our products and services. In order to remain competitive and
successfully address the evolving needs of our clients, we must commit a
significant portion of our resources to:
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·
|
identify
and anticipate emerging technological and market trends affecting the
markets in which we do business;
|
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·
|
enhance
our current products and services in order to increase their
functionality, features and cost-effectiveness to clients that are seeking
to control costs and to meet regulatory
requirements;
|
|
·
|
develop
or acquire new products and services that meet emerging client needs, such
as products and services for the online
market;
|
|
·
|
modify
our products and services in response to changing business practices and
technical requirements of our clients, as well as to new regulatory
requirements;
|
|
·
|
integrate
our current and future products with third-party products;
and
|
|
·
|
create
and maintain interfaces to changing client and third party
systems.
|
We must
achieve these goals in a timely and cost-effective manner and successfully
market our new and enhanced products and services to clients.
There is no assurance that our current
products and services will stay competitive with those of our
competitors or that we will be
able to introduce new products and services
to compete successfully in the future. If we are unable to
expand or appropriately enhance or modify our products and services quickly and
efficiently, our business and operating results will be adversely
affected.
We
may not be able to attract, retain or integrate key personnel, including
executive officers, which may prevent us from successfully operating our
business.
We may
not be able to retain our key personnel or attract other qualified personnel in
the future. Our success will depend upon the continued service of key management
personnel as well as the skills, experience and efforts of our executive
officers. The loss of services of any of the key members of our management team
or our failure to attract and retain other key personnel could disrupt
operations and have a negative effect on employee productivity and morale and
have a material adverse impact upon our financial results. The loss of any
of our executive officers could impair our ability to successfully manage our
current business or implement our planned business objectives and our future
operations may be adversely affected.
Our
business depends on the services of skilled software engineers who can develop,
maintain and enhance our products, consultants who can undertake complex client
projects and sales and marketing personnel. In general, only highly qualified,
highly educated personnel have the training and skills necessary to perform
these tasks successfully. In order to maintain the competitiveness of our
products and services and to meet client requirements, we need to attract,
motivate and retain a significant number of software engineers, consultants and
sales and marketing personnel. Qualified personnel such as these are in short
supply and we face significant competition for these employees, from not only
our competitors but also clients and other enterprises. Other employers may
offer software engineers, consultants and sales and marketing personnel
significantly greater compensation and benefits or more attractive career paths
than we are able to offer. Any failure on our part to hire, train and retain a
sufficient number of qualified personnel would seriously damage our
business.
Consolidation
in the industries we serve may adversely affect our ability to sell our products
and services.
Mergers,
acquisitions and personnel changes at financial institutions, payment processors
and payment technology providers including brick and mortar and e-Commerce
retailers may adversely affect our business, financial condition and results of
operations. The payments industry continues to consolidate and this
consolidation could cause us to lose:
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·
|
current
and potential customers; and
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·
|
market
share if an entity resulting from a combination of our customers
determines that it is more efficient to develop in-house products and
services similar to ours or to use our competitors’ products and
services.
|
Estimates
of future financial results are inherently unreliable.
From time
to time, the Corporation and its representatives may make public predictions or
forecasts regarding the Corporation’s future results, including estimates
regarding future revenues, expense levels, tax rates, acquisition expenses,
capital expenditures, earnings or earnings from operations. Any forecast
regarding our future performance reflects various assumptions and judgments by
management regarding the likelihood that certain possible future events will in
fact occur. These assumptions and judgments are subject to significant
uncertainties and shifting market dynamics, and, as a matter of course, many of
them will prove to be incorrect. Further, events that may seem unlikely or
relatively certain at the time a given prediction is made may in fact occur or
fail to occur. Many of the factors that can influence the outcome of any
prediction or projection are beyond our control. As a result, there can be no
assurance that our performance will be consistent with any management forecasts
or that the variation from such forecasts will not be material and adverse.
Investors are cautioned that any prediction, projection or other forward looking
statement made by us should be considered current only as of the date made.
Investors are encouraged to utilize the entire available mix of historical and
forward-looking information made available by us, and other information relating
to our Corporation and our products and services, when evaluating our
prospective results of operations.
We May Not Be Able to Successfully
Manage Operational Changes.
Over the
last several years, our operations have experienced rapid significant growth in
some areas and significant restructurings and cutbacks in others. These changes
have created significant demands on our executive, operational, development and
financial personnel and other resources. If we achieve future growth in our
business, or if we are forced to make additional restructurings, we may further
strain our management, financial and other resources. Our future operating
results will depend on the ability of our officers and key employees to manage
changing business conditions and to continue to improve our operational and
financial controls and reporting systems. We cannot ensure that we will be able
to successfully manage the future changes in our business.
None.
Office Space. As of May 31,
2008, we leased office space containing approximately 18,000 square feet of
floor space for our operations. Our principal facilities
include:
|
Location
|
Approximate
Square Feet
|
Lease
Expiration Date
|
Description
|
|||
|
Wichita,
Kansas
|
10,000
|
December,
2008
|
Primary/Secondary
Collection operations
|
|||
|
Phoenix,
Arizona
|
150
|
June,
2009
|
Former
Data Center Operations
|
|||
|
Vancouver,
British Columbia
|
3,400
|
September,
2013
|
Administration
|
|||
|
Victoria,
British Columbia
|
4,411
|
September,
2009
|
Data
Center/Transaction Payment Processing
Operations
|
During
the fiscal year ended March 31, 2008, we consolidated our four data centers
located in Scottsdale and Phoenix, Arizona and Victoria and Saanich, British
Columbia into two data centers located in Victoria and Saanich, British
Columbia. Our lease obligations pertaining to the facilities located
in Phoenix, Arizona will continue until June 2009.
We
consider our current facilities to be adequate for our current needs and believe
that suitable additional space will be available, as needed, to accommodate
further physical expansion of our operations .
On March
6, 2007 we received notification that we were named in a class-action lawsuit
filed in the United States District Court, Eastern District, Marshall Division,
Texas, alleging that numerous defendants violated the Driver’s Privacy
Protection Act of Texas regulating the use of personal information such as
driver’s license numbers and home addresses contained in motor vehicle records
held by motor vehicle departments, by not having a permissible use in obtaining
the State of Texas’ entire database of names, addresses and other personal
information. In the case, which was originally filed by the
plaintiffs on January 12, 2007, the plaintiffs are seeking, among other things,
$2,500 for each instance in which the defendants obtained, disclosed or used
personal information, and are claiming that because the Texas database includes
the information of approximately 20 million persons, that the mere act of
improperly obtaining that database constitutes 20 million violations of the
statute by each defendant. The plaintiffs allege, among other things,
that a provider of check verification services (such as LML) should not be
allowed to obtain and use Texas’ entire driver’s license database for the
purpose of enabling merchants to check driver’s licenses or other forms of
identification at the point of sale, and that instead providers of check
verification services should only be allowed to obtain the driver’s license
numbers of individuals at the time that such individual presents his or her
driver’s license to a merchant (in other words, plaintiffs allege that when a
customer gets to the cashier and presents a driver’s license to the merchant for
the purpose of enabling the merchant to verify such person’s identity when such
person is using a credit card or check to purchase goods or services, that this
is the first time at which it would be appropriate for a provider of check
verification services to obtain such driver’s license number from the state of
Texas). Given the impossibility of first obtaining driver’s license
information from the state of Texas at the point of sale in a time-efficient
manner, we believe that a finding by the court in favor of the plaintiffs would
effectively prohibit merchants from being able to check driver’s licenses or
other forms of identification at the point of sale, which we believe would cause
an unprecedented disruption in the way goods and services are bought and sold in
the U.S.
We
believe that the plaintiffs’ allegations are without merit and we intend to
vigorously defend them. We believe that we legally contracted with
the State of Texas to obtain the database and that we did so for a proper
purpose. On April 10, 2007, we filed a Motion for Judgment on the
Pleadings and to Dismiss for Lack of Subject-Matter Jurisdiction. Our
motion requests dismissal of the action and asserts that the Driver's Privacy
Protection Act does not provide a cause of action for plaintiffs' improper
obtainment claims and that plaintiffs lack standing because they failed to
allege that their personal information was improperly obtained or
used. This motion has not yet been ruled on by the
court. While we can give no assurance as to the ultimate outcome of
this lawsuit, we do not expect this lawsuit to have a material adverse effect on
our results of operations, financial position or liquidity.
Other
than as described herein, we are not currently involved in any material legal
proceedings. However, we are party from time to time to additional ordinary
litigation incidental to our business, none of which is expected to have a
material adverse effect on the results of our operations, financial position or
liquidity.
None.
PART
II
ITEM 5. Market For Registrant's Common Equity, Related
Stockholder Security Matters and Issuer Purchases of Equity
Securities
Our
common stock is traded on The NASDAQ Stock Market’s Capital Market, which is the
principal market for our common stock, and trades under the symbol
"LMLP". Our common stock is neither listed nor traded on any
foreign trading market. The following table sets forth the range of high and low
prices for our common stock during the fiscal periods indicated. The prices set
forth below represent quotations between dealers and do not include retail
markups, markdowns or commissions and may not represent actual
transactions.
|
Fiscal
Year Ended March 31:
|
High
|
Low
|
||||||||||
|
2008
|
1 | Q | $ | 4.48 | $ | 2.99 | ||||||
| 2 | Q | 5.00 | 3.10 | |||||||||
|
|
3 | Q | 4.09 | 2.74 | ||||||||
| 4 | Q | 3.82 | 1.91 | |||||||||
|
2007
|
1 | Q | $ | 12.21 | $ | 3.76 | ||||||
| 2 | Q | 5.33 | 2.89 | |||||||||
| 3 | Q | 4.12 | 2.57 | |||||||||
| 4 | Q | 3.93 | 3.00 | |||||||||
The
prices set forth above are not necessarily indicative of liquidity of the
trading market for our common stock. Trading in our common stock is limited and
sporadic.
Our
common stock price is volatile.
The
market price of our common stock has been volatile in the past and may change
rapidly in the future. The following factors, among others, may cause
significant volatility in our stock price:
|
·
|
Actual
or anticipated fluctuations in our operating
results;
|
|
·
|
Financial
or business announcements by us, our competitors or our
customers;
|
|
·
|
Announcements
of the introduction of new or enhanced products and services by us or our
competitors;
|
|
·
|
Announcements
of mergers, joint development efforts or corporate partnerships in the
electronic commerce market;
|
|
·
|
Market
conditions in the banking, telecommunications, technology and emerging
growth sectors;
|
|
·
|
Rumors
relating to our competitors or us;
and
|
|
·
|
General
market or economic conditions.
|
In
addition, the U.S. stock markets have experienced significant price and volume
fluctuations, which have particularly affected the trading price of equity
securities of many technology companies.
Holders
of Common Stock
As of May
31, 2008, there were approximately 389 record holders of our common stock, with
approximately 26,341,832 shares outstanding. The number of holders of record is
based on the actual number of holders registered on the books of our transfer
agent and does not reflect holders of shares in "street name" or persons,
partnerships, associations, corporations or other entities identified in
security position listings maintained by depository trust
companies.
Dividend
Policy
We have
not paid any dividends on our common stock in the past and have no current plan
to pay dividends in the future. We intend to devote all funds to the operation
of our businesses.
Canadian
Federal Tax Considerations
General
There are
no foreign or currency controls in Canada, and there are no exchange
restrictions on borrowing from abroad, on the repatriation of capital, or the
ability to remit dividends, profits, interests, royalties, or other payments to
non-resident holders of our common stock. However, any such remittance to a
resident of the U.S. is subject to a reduced withholding tax pursuant to various
Articles of the Canada-U.S. Income Tax Convention, 1980 (the “Treaty”) between
Canada and the U.S.
Dividends
Generally,
dividends that are paid or credited by Canadian corporations to non-resident
shareholders are subject to a nonresident tax of 25%. However, the
Treaty provides that dividends paid by a Canadian corporation to a corporation
resident of the U.S. with no permanent establishment in Canada, which owns at
least 10% of our voting stock paying the dividend, are subject to the Canadian
non-resident withholding tax of 5%. In all other cases, when a
dividend is paid by a Canadian corporation to the beneficial owner resident in
the U.S., the Canadian non-resident withholding tax is 15% of the amount of the
dividend.
The
reduced withholding tax rates do not apply if the beneficial owner of the shares
carries on business through a permanent establishment in Canada and the stock
holding in respect of which the dividends are paid is effectively connected with
such permanent establishment. In such a case, the dividends are
taxable in Canada as general business profits at rates that may exceed the 5% or
15% rates applicable to dividends that are not effectively connected with a
Canadian permanent establishment.
The
Treaty permits Canada to apply its domestic law rules for differentiating
dividends from interest and other disbursements. Stock dividends are
subject to the normal Canadian non-resident withholding tax rules on the amount
of the dividend. The amount of a stock dividend is equal to the
increase in our paid-up capital by virtue of the dividend.
Interest
As of
January 1, 2008 and effective March 1, 2008, changes have been made to the
Canadian Income Tax Act that eliminate withholding taxes on interest paid
(excluding Participating debt interest) to arm’s lengths residents of the US by
a Canadian corporation.
Historically,
interest paid or credited to a non-resident is subject to a 25% Canadian
withholding tax. If, at a time when interest has accrued but is not yet payable,
the holder of the debt transfers it to a Canadian resident or, in certain
circumstances, a non-resident who carries on business in Canada, part of the
proceeds of the disposition may be considered to be interest for Canadian income
tax purposes. Previously, under the Treaty, the rate of withholding tax on
interest paid to a U.S. resident is 10%.
For
Treaty purposes, interest means interest as defined by domestic Canadian income
tax rules. The withholding tax applies to the gross amount of the
interest payment.
Capital
Gains
Non-residents
are subject to Canadian income tax on dispositions of “taxable Canadian
property.” Taxable Canadian property includes shares of a publicly traded
Canadian corporation if, at any time during the preceding five years, the
non-resident and persons with whom the non-resident did not deal at arm’s length
owned at least 25% of the issued and outstanding shares of any class of
stock.
The
applicable tax rate on capital gains realized by a non-resident is 18.06% for
corporations and 21.46% for individuals. Under the Treaty, capital
gains realized by a U.S. resident on the disposition of shares of a Canadian
corporation are exempt from Canadian income tax, unless (i) the value of the
shares is derived principally from Canadian real property, or (ii) the shares
are effectively connected with a permanent Canadian establishment of such
non-resident, the capital gains are attributable to such permanent
establishment, and the gains are realized not later than twelve months after the
termination of such permanent establishment.
Securities
Authorized for Issuance Under Equity Compensation Plans
The
following table provides information as of March 31, 2008 about our common stock
that may be issued upon the exercise of options, warrants and rights under all
of our existing equity compensation plans, including the 1996 Stock Option Plan
and the 1998 Stock Incentive Plan:
|
(A)
|
(B)
|
(C)
|
|
|
PLAN
CATEGORY
|
Number
of securities to be issued upon exercise of outstanding options, warrants
and rights
|
Weighted-average
exercise price of outstanding options, warrants and rights
|
Number
of securities remaining available for future issuance under equity
compensation plans (excluding securities reflected in column
(A))
|
|
Equity
compensation plans approved by security holders1
|
4,207,500
|
$3.73
|
5,649,717
|
|
Equity
compensation plans not approved by security holders2
|
400,000
|
$3.40
|
N/A
|
Stock
Performance Graph
The graph
set forth below compares the cumulative total shareholder return on our common
stock between March 31, 2003 and March 31, 2008 with the cumulative return of
(i) the NASDAQ Stock Market Index (US) and (ii) the NASDAQ Computer and Data
Processing Index (US and Foreign), over the same period. This graph assumes the
investment of $100 on March 31, 2003 in our common stock, the NASDAQ Stock
Market Index (US) and the NASDAQ Computer and Data Processing Index (US and
Foreign), and assumes the reinvestment of dividends, if any.
The
comparisons shown in the graph below are based upon historical data. We caution
that the share price performance shown in the graph below is not indicative of,
nor intended to forecast, the potential future performance of the LML Shares.
Information used in the graph was obtained from Research Data Group, Inc., a
source believed to be reliable but we are not responsible for any errors or
omissions in such information.
|
|
______________________________
|
|
1
|
These
plans consist of: (i) the 1996 Stock Option Plan, and (ii) the 1998 Stock
Incentive Plan
|
|
2
|
These
securities consist of warrants issued to Ladenburg Thalmann & Co.,
Inc. who acted as placement agent and financial advisor to LML in
connection with the private placement transaction with Millennium Partners
LLP completed on March 31, 2008. The warrants are exercisable
for 400,000 shares of LML's common stock for a period of five years
from March 26, 2008 at a price of $3.40 per
share.
|
Notwithstanding
anything to the contrary set forth in any of our previous or future filings
under the Securities Act of 1933 or the Securities Exchange Act of 1934 that
might incorporate this Annual Report on Form 10-K or future filings made by us
under those statutes, the stock price performance graph is not considered
"soliciting material," is not deemed "filed" with the SEC and is not deemed to
be incorporated by reference into any of those prior filings or into any future
filings made by us under those statues.
|
Total
Returns Index for:
|
3/03
|
3/04
|
3/05
|
3/06
|
3/07
|
3/08
|
|
|
LML
Payment Systems Inc.
|
100.00
|
113.22
|
92.95
|
162.48
|
59.49
|
55.77
|
|
|
NASDAQ
Composite
|
100.00
|
151.01
|
152.38
|
181.06
|
189.63
|
177.49
|
|
|
NASDAQ
Computer and Data Processing
|
100.00
|
124.00
|
134.00
|
156.97
|
171.51
|
164.93
|
ITEM 6. Selected Financial Data
The
selected financial data set forth below should be read together with
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations” and our financial statements and related notes. We have
derived the statement of operations data for the fiscal years ended March 31,
2006, 2007 and 2008 and the balance sheet data as at March 31, 2007 and 2008
from the audited financial statements included elsewhere in this
report. The statement of operations data for the fiscal years ended
March 31, 2004 and 2005 and the balance sheet data as at March 31, 2004, 2005
and 2006 were derived from audited financial statements that are not included in
this report. Historical results are not necessarily indicative of
results to be expected for future periods.
Table of
Selected Financial Data1
Year
Ended March 31
(Presented
under Canadian and U.S. GAAP)
(Amounts
in thousands, except per share data)
|
2008
|
2007
|
2006
|
2005
|
2004
|
||||||||||||||||
|
Statement
of operations data:
|
||||||||||||||||||||
|
Revenue
|
$ | 11,328 | $ | 6,554 | $ | 5,458 | $ | 6,658 | $ | 8,740 | ||||||||||
|
Loss
from continuing operations2
|
(2,221 | ) | (1,073 | ) | (4,647 | ) | (4,150 | ) | (2,316 | ) | ||||||||||
|
Discontinued
operations3
|
- | - | - | - | 588 | |||||||||||||||
|
Net
loss2
|
(2,221 | ) | (1,073 | ) | (4,647 | ) | (4,150 | ) | (1,728 | ) | ||||||||||
|
Loss from continuing operations
per share – basic
|
(.10 | ) | (.05 | ) | (.23 | ) | (.21 | ) | (.12 | ) | ||||||||||
|
Loss from continuing operations
per share – diluted
|
(.10 | ) | (.05 | ) | (.23 | ) | (.21 | ) | (.12 | ) | ||||||||||
|
Net loss per share –
basic
|
(.10 | ) | (.05 | ) | (.23 | ) | (.21 | ) | (.09 | ) | ||||||||||
|
Net loss per share –
diluted
|
(.10 | ) | (.05 | ) | (.23 | ) | (.21 | ) | (.09 | ) | ||||||||||
|
Weighted
average number of common shares outstanding – basic
|
21,869 | 20,206 | 20,164 | 20,012 | 19,606 | |||||||||||||||
|
Weighted
average number of common shares outstanding – diluted
|
21,869 | 20,206 | 20,164 | 20,012 | 19,606 | |||||||||||||||
|
Balance
sheet data:
|
||||||||||||||||||||
|
Current
assets
|
$ | 16,826 | $ | 11,148 | $ | 4,753 | $ | 7,318 | $ | 6,713 | ||||||||||
|
Total
assets
|
39,642 | 13,679 | 6,078 | 9,070 | 9,759 | |||||||||||||||
|
Current
liabilities
|
13,185 | 2,860 | 1,725 | 1,204 | 1,076 | |||||||||||||||
|
Long-term
debt, less current portion
|
2,613 | 727 | - | 23 | 56 | |||||||||||||||
|
1
|
The
financial information set forth in this table for the fiscal years ended
March 31, 2004, 2005, 2006, 2007 and 2008 includes our accounts on a
consolidated basis.
|
|
2
|
Loss
from continuing operations and net loss for the fiscal years ended March
31, 2008, 2007 and 2006 include stock-based compensation expenses of
approximately $1,287,000, $ 877,000 and $ 904,000, respectively, resulting
from our adoption of new accounting standards in fiscal 2004 requiring
fair value accounting for all stock options issued during the
year.
|
|
3
|
During
the fiscal year ended March 31, 2004 we sold the Wildwood Estates property
for gross proceeds of approximately $2.4 million. The decision
to discontinue operations of this business segment resulted from an
opportunity to sell the property and consequently remove a business
segment no longer consistent with our business strategy. The
results of these discontinued operations have been reclassified in the
statements of operations and deficit and cash flows for the fiscal year
ended March 31, 2004.
|
|
ITEM
7.
|
Management's
Discussion And Analysis of Financial Condition And Results of
Operations
|
The
following discussion and analysis should be read in conjunction with the
Consolidated Financial Statements and Notes thereto included in this Form 10-K.
See Item 8. “Financial Statements.” This information is not necessarily
indicative of future operating results. The Consolidated Financial Statements
and Notes thereto have been prepared in accordance with Canadian
GAAP.
Forward
Looking Information
All
statements other than statements of historical fact contained in this Annual
Report on Form 10-K are forward-looking statements. Forward-looking
statements generally are accompanied by words such as “anticipate,” “believe,”
“estimate,” “intend,” “project,” “potential” or “expect” or similar
statements. The forward-looking statements were prepared on the basis
of certain assumptions which relate, among other things, to the demand for and
cost of marketing our services, the volume and total value of transactions
processed by merchants utilizing our services, the technological adaptation of
electronic check conversion end-users, the renewal of material contracts in our
business, our ability to anticipate and respond to technological changes,
particularly with respect to financial payments and e-commerce, in a highly
competitive industry characterized by rapid technological change and rapid rates
of product obsolescence, our ability to develop and market new product
enhancements and new products and services that respond to technological change
or evolving industry standards, no unanticipated developments relating to
previously disclosed lawsuits against us, and the cost of protecting our
intellectual property. Even if the assumptions on which the
forward-looking statements are based prove accurate and appropriate, the actual
results of our operations in the future may vary widely due to technological
changes, increased competition, new government regulation or intervention in the
industry, general economic conditions and other risks described elsewhere in
this Annual Report on Form 10-K. See Part I, Item 1A – “Risk
Factors”. Accordingly, the actual results of our operations in the
future may vary widely from the forward-looking statements included
herein. All forward-looking statements included herein are expressly
qualified in their entirety by the cautionary statements in this
paragraph.
Overview
LML
Payment Systems Inc. is a financial payment processor operating three separate
lines of business: transaction payment processing, intellectual
property licensing and check processing/software licensing. Our transaction
payment processing services consist predominantly of Internet-based services,
while our check processing services involve predominantly traditional and
electronic check processing and recovery services that do not utilize the
Internet. With the completion of our 2007 acquisition of Beanstream
(which had a strong Internet-based product and service offering), we expect that
our transaction payment processing services will be our principal line of
business for the foreseeable future, while our other lines of business
(including the electronic check processing services that we have historically
relied on for a significant source of revenue) will become less important to our
overall service offerings and less significant to the financial performance of
our company.
TPP
Segment
Our
Transaction Payment Processing Operations (“TPP”) involve financial payment
processing, authentication and risk management services. We provide a service
that acts as a bank neutral interface between businesses and consumers
processing financial or authentication transactions. Our transaction payment
processing services are accessible via the Internet and are offered in an
application service provider (ASP) model. We focus on product development,
project management and third tier technical support of our products and services
and rely primarily on strategic business partners to sell and market our
products and services. In some instances, our transaction payment processing
services and payment products are integrated into third party products in target
vertical markets. Our revenues are derived from one-time set-up fees, monthly
gateway fees, and transaction fees paid to us by merchants. Transaction fees are
recognized in the period in which the transaction occurs. Gateway fees are
monthly subscription fees charged to our merchant customers for the use of our
payment gateway. Gateway fees are recognized in the period in which the service
is provided. Set-up fees represent one-time charges for initiating our
processing services. Although these fees are generally paid at the commencement
of the agreement, they are recognized ratably over the estimated average life of
the merchant relationship, which is determined through a series of analyses of
active and deactivated merchants. We currently service a merchant base of over
6,000 customers primarily in Canada.
IPL
Segment
Our
Intellectual Property Licensing Operations ("IPL") involve licensing our
intellectual property estate, which includes five U.S. patents describing
electronic check processing methods. When we provide clients licenses
to our intellectual property estate, we typically earn revenue or other income
from ongoing royalty fees and, in some cases, release fees for potential past
infringement. In some instances we also earn revenue from license agreements
that provide for the payment of contractually determined paid-up license fees to
us in consideration for the grant of a non-exclusive, retroactive and future
license to our intellectual property estate and in other instances, where
license agreements include multiple element arrangements, we may defer this
revenue and recognize the revenue ratably over the license term.
CP/SL
Segment
Our Check
Processing/Software Licensing Operations ("CP/SL") involve primary and secondary
check collection including electronic check re-presentment (RCK) and software
licensing. Our check processing services, which are provided in the
United States, include services such as return check management such as
traditional and electronic recovery services to retail clients. When
we provide return check management services, we typically receive revenue when
we are successful at recovering the principal amount of the original transaction
on behalf of the client. In some instances we also earn a percentage
of the principal amount and in other instances our secondary recovery services
provide for us to earn additional fees when legal action is
required.
We also
provide mainframe payment processing software modules and rights to use our
intellectual property to retailers and other payment processors. When
we provide mainframe based payment software modules we typically earn revenue by
way of a fixed software license fee. In some instances we also earn
revenue by way of royalties that are typically based upon a fixed sale price or
on a usage or transaction basis. We provide our check processing services from
our office location in Wichita, Kansas.
Management
believes that certain trends in the use of electronic payments may be due to
changes in the financial behavior of consumers and businesses, particularly when
it comes to payment method of choice. We believe that electronic
payment methods are being used in greater frequency in transactions where
traditionally, checks and cash may have been the preferred method of payment
used in the past. While we anticipate the use of electronic payments
to increase, we also expect the number of checks written generally to
decrease. Based upon this assessment and during the fiscal year 2008,
we undertook an evaluation regarding the provision of certain check processing
and software licensing services. In performing this evaluation,
management considered the profitability of each service, the current growth
prospects for each service, and whether each service could be consolidated on to
our most efficient processing platform. We determined that certain
CP/SL services were profitable and could be consolidated onto an efficient
processing platform, and we also determined that certain CP/SL services were not
profitable nor had a high prospect for growth and could be
terminated. During the third quarter of fiscal 2008, we notified
affected customers of our decision and during the fourth quarter of fiscal 2008
we consolidated our four data centers, located in Scottsdale and
Phoenix, Arizona and Victoria and Saanich, British Columbia, which were running
two distinct processing platforms, into the two data centers with a single
processing platform located in Victoria and Saanich, British
Columbia. We believe the impact of these operational adjustments
should result in reduction of CP/SL segment revenue of approximately $640,000
per year and a reduction in CP/SL costs of operations of
approximately $1.6 million per year, for a net savings of approximately $960,000
per year.
Within
these segments, performance is measured based on revenue, factoring in interest
income and expenses and amortization and depreciation as well as earnings from
operations before income taxes from each segment. There are no transactions
between segments. We do not generally allocate corporate or centralized
marketing and general and administrative expenses to our business unit segments
because these activities are managed separately from the business units. Asset
information by operating segment is not reported to or reviewed by our Chief
Executive Officer, and therefore we have not disclosed asset information for
each operating segment.
Acquisition
of Beanstream Internet Commerce Inc.
On April
30, 2007, we entered into an arrangement agreement to acquire all of the
outstanding capital stock of Beanstream, a leading provider of authentication
and Internet payment processing solutions that is based in Victoria, British
Columbia. The transaction closed on June 30, 2007. The
purchase price originally agreed to in the arrangement agreement was
approximately CDN$19.5 million (U.S.$18.3 million) consisting of CDN$7.6 million
in cash (U.S.$7.1 million), CDN$5.0 million (U.S.$4.7 million) in two-year
promissory notes and CDN$6.9 million (U.S.$6.5 million) in our common stock paid
at closing. Former Beanstream shareholders could also receive up to
an additional CDN$2.0 million (U.S.$1.9 million) in our common stock if certain
revenue milestones are reached by June 30, 2008. Pursuant
to the arrangement agreement, the Beanstream shareholders had an option to elect
to accept our shares in lieu of a portion of the cash
consideration. The amount of the share-for-cash election was not
known until June 27, 2007, therefore, the measurement date for the consideration
that we paid was determined to be June 27, 2007 rather than April 30,
2007. Consequently, the measurement date is June 27, 2007 and the
total purchase price paid was U.S. $22,128,751. The increase in
purchase price from the U.S.$18.3 million above to the $22.1 million recorded
was a result of changes in the Canadian/U.S. currency exchange rate and
increases in the trading price of our common stock between April 30, 2007 and
June 27, 2007, and also due to a finders fee and other transaction costs related
to the acquisition.
Since the
acquisition date of June 30, 2007, we have included the accounts of Beanstream
in our consolidated balance sheet for the fiscal year ended March 31, 2008 and
our consolidated statements of operations and deficit and consolidated
statements of cash flows for the fiscal year ended March 31, 2008.
Results of
Operations
Fiscal
year 2008 compared to Fiscal year 2007
Revenue
Total
revenue for fiscal year 2008 was approximately $11,328,000, an increase of
approximately 72.8% from total revenue of approximately $6,554,000 for fiscal
year 2007. This increase is primarily attributable to an increase in
revenue associated with the inclusion of revenue from our TPP segment for the
first time commencing on July 1, 2007.
TPP
Segment
Revenue
pertaining to our TPP segment consists of one-time set-up fees, monthly gateway
fees, and transaction fees and has been included in our fiscal results for the
first time during the fiscal year ended March 31, 2008 as a result of the
acquisition of Beanstream on June 30, 2007. Transaction fees for fiscal year
2008 were approximately $4,608,000; the amortized portion of one-time set-up
fees recognized was approximately $98,000 for fiscal year 2008; and monthly
gateway fees for fiscal year 2008 were approximately $699,000.
IPL
Segment
Revenue
from licensing our patented intellectual property decreased by approximately
$49,000 from approximately $1,719,000 for fiscal year 2007 to approximately
$1,670,000 for fiscal year 2008. The licensing revenue of
approximately $1,670,000 consists of: (i) approximately $1,224,000, net of legal
fees, pertaining to one granted license; and (ii) approximately $446,000 related
to aggregate licenses providing running royalties.
CP/SL
Segment
Revenue
from electronic check verification was approximately $327,000 for fiscal year
2008, approximately a 55.2% decrease from revenue from electronic check
verification of approximately $730,000 for fiscal year 2007. This decrease is
primarily attributable to the non-renewal of certain direct contracts with
independent stores represented by Grocers Supply Company Inc. which previously
accounted for approximately 28% of our revenue from electronic check
verification.
Revenue
from our primary check collections business decreased approximately 20.2% from
approximately $779,000 for fiscal year 2007 to approximately $622,000 for fiscal
year 2008. Revenue from our secondary check collections business decreased
approximately 8.8% from approximately $2,534,000 for fiscal year 2007 to
approximately $2,311,000 for fiscal year 2008. The decrease in revenue from our
secondary check collections business was primarily attributable to a decrease in
collections of the principal amount and related fees of returned checks assigned
for secondary recovery.
Revenue
from royalties received from CheckFree Corporation pertaining to their marketing
of the PEP+ reACH™ product was approximately $370,000 for fiscal year 2008,
versus approximately $363,000 for fiscal year 2007. We believe future
royalties are dependent upon the continued successful marketing by CheckFree
Corporation of the PEP+ reACH™ product.
During
our fiscal year 2008, we ceased providing certain CP/SL segment services,
including electronic check verification. As a result, during the fourth quarter
of our fiscal year 2008, we consolidated our four data centers into two. We
believe the impact of these operational adjustments will be a reduction of our
CP/SL revenue of approximately $640,000 per year. See “Item 7 – Overview - CP/SL
Segment”.
Costs
of operations
Costs of
operations were approximately $7,685,000 for fiscal year 2008 as compared to
approximately $4,838,000 for fiscal year 2007. Costs of operations
includes stock-based compensation expense of approximately $424,000 and
approximately $81,000 for the fiscal years 2008 and 2007,
respectively. For fiscal year 2008, costs of operations as a
percentage of revenue decreased to approximately 67.8% compared to approximately
73.8% for fiscal year 2007. In fiscal year 2008, costs of operations were
approximately $1,067,000 in the first quarter, approximately $2,069,000 in the
second quarter, approximately $2,366,000 in the third quarter and approximately
$2,183,000 in the fourth quarter.
TPP
Segment
Costs of
operations of our TPP segment consist of bank transaction fees, credit card
processing fees, commissions, dataport/telecom costs, personnel costs and
telecommunication costs. Costs of operations for fiscal year 2008
were approximately $3,469,000.
Costs of
TPP revenue and gross profit for fiscal year 2008 were as follows:
|
$
|
%
of Revenue
|
|||
|
Cost
of TPP revenue
|
2,740,000
|
48.7
|
||
|
Gross
profit
|
2,897,000
|
51.3
|
CP/SL
Segment
Costs of
operations relating to our CP/SL segment consist of transaction processing
costs, personnel costs, equipment related costs and telecommunication costs.
CP/SL costs were approximately $3,789,000 compared to approximately $4,756,000
for fiscal years 2008 and 2007, respectively, a decrease in CP/SL costs of
operation of approximately 20.3%. This decrease is primarily attributable to the
cost savings associated with our combination of operations of our primary check
collections business, previously located in Dallas, Texas, with our secondary
check collections business located in Wichita, Kansas, which took place during
fiscal year 2007.
In
addition, during fiscal year 2008, we ceased providing certain CP/SL segment
services. As a result, during the fourth quarter of our fiscal year
2008, we consolidated our four data centers into two. We believe the
impact of these operational adjustments will be a reduction in CP/SL costs of
operations of approximately $1,600,000 per year. See “Item 7 - Overview - CP/SL
Segment”.
Sales,
general and administrative expenses
Sales,
general and administrative expenses consist primarily of stock-based
compensation expense, personnel costs, office facilities, travel, promotional
events such as trade shows, seminars and technical conferences, public relations
and professional service fees, which include legal fees, audit fees, SEC
compliance costs and costs related to compliance with the Sarbanes-Oxley Act of
2002. Sales, general and administrative expenses increased to approximately
$3,189,000 from approximately $2,886,000 for fiscal years 2008 and 2007,
respectively, an increase of approximately $303,000 or approximately 10.5%. The
increase in sales, general and administrative expense is primarily attributable
to the inclusion of our TPP segment’s sales, general and administrative expenses
of approximately $168,000 for the first time during our fiscal year 2008. The
increase in sales, general and administrative expenses is also partially
attributable to an increase of approximately $67,000 in stock-based compensation
expense from approximately $796,000 for fiscal year 2007 to approximately
$863,000 for fiscal year 2008.
Amortization
and depreciation
Amortization
on intangibles increased to approximately $537,000 for fiscal year 2008 from
approximately $164,000 for fiscal year 2007. The increase was
primarily attributable to amortization on acquired intangible assets resulting
from our acquisition of Beanstream on June 30, 2007. Depreciation expenses
relating to our system software and other software increased to approximately
$94,000 for fiscal year 2008 from approximately $40,000 for fiscal year
2007. Depreciation expense for capital assets increased
to approximately $274,000 for fiscal year 2008 from approximately $132,000 for
fiscal year 2007.
Foreign
exchange loss
Foreign
exchange loss increased to approximately $230,000 from approximately $3,000 for
fiscal year 2008 and 2007, respectively. The increase in foreign exchange loss
was primarily attributable to an unrealized foreign exchange loss of
approximately $178,000 relating to the conversion of the Canadian dollar
denominated two-year promissory notes into U.S. dollars at March 31, 2008
closing exchange rates. The U.S. dollar weakened by approximately 3.9% from the
date we issued the two-year promissory notes to the March 31, 2008
date.
Other
(expenses) income, net
During
the fiscal year 2008 we had net other expenses of approximately $247,000
compared to net other income of approximately $617,000 for the fiscal year
2007. Net other expenses for fiscal year 2008 consist primarily of
approximately $247,000 in costs relating to the consolidation of our four data
centers into two which was completed during our fourth quarter of fiscal 2008.
Net other income for fiscal year 2007 consists primarily of (i) approximately
$377,000, net of legal fees, attributable to specific release provisions
contained in two of the license agreements we entered into in April 2006, (ii)
approximately $43,000, net of legal fees, attributable to the recognized current
period portion of deferred other income from a certain standstill agreement
contained in one of these licenses, and (iii) approximately $208,000 related to
a State sales tax refund resulting from the conclusion of a State sales tax
audit performed during our fiscal year 2007.
Gain/(loss)
on disposal/abandonment of capital assets
Loss on
disposal/abandonment of capital assets for fiscal year 2008 was approximately
$726,000 compared to a gain on disposal/abandonment of capitals assets for
fiscal year 2007 of approximately $7,000. The loss on disposal/abandonment of
capital assets for fiscal 2008 consist primarily of costs relating to the
consolidation of our four data centers into two and the consequential
consolidation of two distinct processing platforms into a single processing
platform. We disposed and abandoned the two IBM Mainframes which were running
the processing platform that was consolidated during the fourth quarter of our
fiscal year 2008.
Interest
income
Interest
income for fiscal year 2008 decreased to approximately $406,000 from
approximately $475,000 for fiscal year 2007. The decrease in interest
income was primarily attributable to a decrease in interest bearing cash
investments.
Interest
expense
Interest
expense increased to approximately $359,000 in fiscal year 2008 compared to
approximately $13,000 in fiscal year 2007. The increase in interest expense was
primarily attributable to approximately $297,000 in interest accrued on the
two-year promissory notes for fiscal year 2008.
Income
Taxes
Income
taxes increased to approximately $614,000 from approximately $38,000 for fiscal
year 2008 and 2007, respectively. The increase in income taxes was primarily
attributable to a provision for income taxes in the amount of approximately
$586,000 recorded for our TPP segment. We expect our TPP segment to have taxable
income for the current fiscal year and, therefore, have recorded a provision for
income taxes. We are presently exploring our options as they pertain
to the utilization of our Canadian tax losses against the future taxable income
of our TPP segment.
We
regularly evaluate the realizability of our future tax assets given the nature
of our operations and given the tax jurisdictions in which we operate. At this
time, we consider it more likely than not that the future tax assets will not be
realized through future taxable income. Accordingly, a valuation allowance of
100% has been provided against these future tax assets at March 31, 2008 and
2007.
Net Loss
Net loss
was approximately $2,221,000 for fiscal year 2008 and approximately $1,073,000
for fiscal year 2007. Net loss per both basic and diluted shares was
approximately ($0.10) for fiscal year 2008, as compared to approximately ($0.05)
for fiscal year 2007.
Results
of Operations
Fiscal
year 2007 compared to Fiscal year 2006
Revenue
Total
revenue for fiscal year 2007 was approximately $6,554,000, an increase of
approximately 20.1% from total revenue of approximately $5,458,000 for fiscal
year 2006. This increase is primarily attributable to an increase in
revenue from licensing our patented intellectual property.
IPL
Segment
Revenue
from licensing our patented intellectual property increased by approximately
$1,572,000 from approximately $147,000 for fiscal year 2006 to approximately
$1,719,000 for fiscal year 2007. The licensing revenue of
approximately $1,719,000 consists of: (i) approximately $143,000, net of legal
fees, pertaining to one granted license; (ii) approximately $1,224,000, net of
legal fees, representing the recognized current period portion of deferred
revenue from a second granted license; and (iii) approximately $352,000 related
to aggregate licenses providing running royalties.
CP/SL
Segment
Revenue
from electronic check verification was approximately $730,000 for fiscal year
2007, approximately a 32.9% decrease from revenue from electronic check
verification of approximately $1,088,000 for fiscal year 2006. This decrease is
primarily attributable to certain existing customers negotiating a reduction in
the per transaction pricing of our enhanced electronic check verification
services when they entered into contract renewals with us during the first
quarter of our fiscal year 2007.
Revenue
from our primary check collections business decreased approximately 23.9% from
approximately $1,024,000 for fiscal year 2006 to approximately $779,000 for
fiscal year 2007. The reduction in revenue from our primary check collections
business was primarily attributable to an overall reduction of approximately 28%
in new returned check volume provided to us for primary collection services. We
believe this reduction may be attributable to better check verification services
we are providing to some of our customers and fewer paper checks being processed
by some of our customers. In light of trending decreases in revenue from our
primary check collections business, during the fiscal year 2007, we implemented
a plan to combine the operations of our primary check collections business
located in Dallas, Texas with our secondary check collections business located
in Wichita, Kansas. This combination of operations coincided with the
expiration of our property leases for our Dallas facilities. The
total one-time cost associated with this combination of operations was
approximately $68,000. We believe this combination will produce new
operating efficiencies, including a significant reduction in our future primary
check collection costs of operations without significantly impacting our
existing revenue from our primary check collections business.
Revenue
from our secondary check collections business increased approximately 15.5% from
approximately $2,193,000 for fiscal year 2006 to approximately $2,534,000 for
fiscal year 2007. The increase in revenue from our secondary check collections
business was primarily attributable to an increase in collections of the
principal amount and related fees of returned checks assigned for secondary
recovery.
Revenue
from our licensing of certain payment software modules was nil for fiscal year
2007 compared to approximately $162,000 for fiscal year 2006.
Revenue
from royalties received from CheckFree Corporation pertaining to their marketing
of the PEP+ reACH™ product was approximately $363,000 for fiscal year 2007,
versus approximately $413,000 for fiscal year 2006. We believe future
royalties are dependent upon the continued successful marketing by CheckFree
Corporation of the PEP+ reACH™ product.
Costs
of operations
Costs of
operations were approximately $4,838,000 for fiscal year 2007 as compared to
approximately $4,601,000 for fiscal year 2006. Costs of operations
includes stock-based compensation expense of approximately $81,000 for fiscal
year 2007 and nil for fiscal year 2006. For fiscal year 2007, costs
of operations as a percentage of revenue decreased to approximately 73.8%
compared to approximately 83.6% for fiscal year 2006. In fiscal year 2007, costs
of operations were approximately $1,265,000 in the first quarter, approximately
$1,219,000 in the second quarter, approximately $1,277,000 in the third quarter
and approximately $1,077,000 in the fourth quarter.
CP/SL
Segment
Costs of
operations relating to our CP/SL segment consist of transaction processing
costs, personnel costs, equipment related costs and telecommunication costs.
CP/SL costs were approximately $4,756,000 for fiscal year 2007 as compared to
approximately $4,597,000 for fiscal year 2006.
Sales,
general and administrative expenses
Sales,
general and administrative expenses consist primarily of stock-based
compensation expense, personnel costs, commissions, office facilities, travel,
promotional events such as trade shows, seminars and technical conferences,
public relations and professional service fees, which include legal fees, audit
fees, SEC compliance costs and costs related to compliance with the
Sarbanes-Oxley Act of 2002. Sales, general and administrative expenses decreased
to approximately $2,886,000 from approximately $4,753,000 for the fiscal year
2007 and 2006, respectively, a decrease of approximately $1,867,000 or
approximately 39.3%. The decrease in sales, general and administrative expense
is primarily attributable to a decrease in legal fees of approximately
$1,428,000 from approximately $1,480,000 for fiscal year 2006 to approximately
$52,000 for fiscal year 2007. This decrease is attributable to the
settlement of the patent infringement suit we filed in fiscal 2005 and settled
in the first quarter of fiscal 2007.
Amortization
and depreciation
Amortization
on intangibles increased to approximately $164,000 for fiscal year 2007 from
approximately $157,000 for fiscal year 2006. Depreciation expenses
relating to our system software and other software decreased to approximately
$40,000 for fiscal year 2007 from approximately $247,000 for fiscal year
2006. Depreciation expense for capital assets decreased
to approximately $132,000 for fiscal year 2007 from approximately $213,000 for
fiscal year 2006. The decreases in depreciation expenses were
primarily attributable to certain capital assets becoming fully depreciated
during fiscal year 2007.
Other
(expenses) income, net
During
the fiscal year 2007 we had net other income of approximately $621,000 compared
to net other expenses of approximately $5,700 for the fiscal year
2006. Net other income for fiscal year 2007 consists primarily of (i)
approximately $377,000, net of legal fees, attributable to specific release
provisions contained in two of the license agreements we entered into in April
2006, (ii) approximately $43,000, net of legal fees, attributable to the
recognized current period portion of deferred other income from a certain
standstill agreement contained in one of these licenses, and (iii) approximately
$208,000 related to a State sales tax refund resulting from the conclusion of a
State sales tax audit performed during our fiscal year 2007.
Interest
income
Interest
income for fiscal year 2007 increased to approximately $475,000 from
approximately $142,000 for fiscal year 2006. The increase in interest
income was primarily attributable to an increase in interest bearing cash
investments resulting from the net consideration we received from the three
settlement and license agreements we entered into in April 2006.
Interest
expense
Interest
expense increased to approximately $13,000 in fiscal year 2007 compared to
approximately $10,000 in fiscal year 2006.
Settlement
expenses
Settlement
expenses for fiscal year 2007 decreased to approximately $45,000 from
approximately $236,000 for fiscal year 2006. Settlement expenses for
fiscal year 2007 consist of the settlement of the complaint filed by a former
employee against us. Settlement expenses for fiscal year 2006 consist of costs
of approximately $227,000 attributable to an arbitrator’s decision to award a
former consultant of ours damages, interest and certain arbitration
costs.
Due
diligence expenses
Due
diligence expenses for fiscal year 2007 were approximately $568,000 compared to
nil for fiscal year 2006. As part of our continuing efforts to
maximize shareholder value and solidify our financial and operational
foundation, we explored several potential acquisitions and merger opportunities
during the fiscal year 2007. The due diligence process involved in
these activities resulted in us incurring certain related costs, namely
professional services fees which primarily included legal fees, as well as other
travel, meetings and related expenditures. We did not enter
into any definitive agreements related to these costs; therefore, during the
fiscal year 2007, we expensed approximately $568,000 of costs attributable to
these efforts.
Income
Taxes
We
regularly evaluate the realizability of our future tax assets given the nature
of our operations and given the tax jurisdictions in which we operate. At this
time, we consider it more likely than not that the future tax assets will not be
realized through future taxable income. Accordingly, a valuation allowance of
100% has been provided against these future tax assets at March 31, 2007 and
2006.
Net
Loss
Net loss
was approximately $1,073,000 for fiscal year 2007 and approximately $4,647,000
for fiscal year 2006. Net loss per both basic and diluted shares was
approximately ($0.05) for fiscal year 2007, as compared to approximately ($0.23)
for fiscal year 2006.
Liquidity
and Capital Resources
Our
liquidity and financial position consisted of approximately $3,641,000 in
working capital as of March 31, 2008 compared to approximately $8,288,000 in
working capital as of March 31, 2007. The decrease in working capital was
primarily attributable to our acquisition of Beanstream which was completed on
June 30, 2007. The purchase price included cash consideration of approximately
$7,154,000 and two-year promissory notes which were approximately $4,693,000 on
the closing date and were approximately $5,167,000 at March 31, 2008, the
increase partially attributable to foreign currency exchange rate fluctuations.
Our decrease in our March 31, 2008 working capital balance of approximately
$4,647,000 was primarily attributable to the cash consideration paid of
approximately $7,154,000 and the current portion of the two-year promissory
notes totaling approximately $2,732,000 offset by net cash consideration
received from a private placement of common shares of approximately $6,690,000.
Cash provided by operating activities decreased approximately $6,919,000 from
approximately $7,459,000 for fiscal year 2007 to approximately $540,000 for
fiscal year 2008. The decrease in cash provided by operating activities was
primarily attributable to consideration we received of approximately $16,000,000
(less special fee arrangements we paid Kirkland & Ellis of approximately
$7,100,000) resulting from the three settlement and license agreements we
entered into during the fiscal year 2007. Cash used in investing activities was
approximately $7,334,000 for fiscal year 2008 as compared to approximately
$969,000 for fiscal year 2007, an increase in cash used in investing activities
of approximately $6,365,000. The increase in cash used in investing activities
was primarily attributed to the acquisition of Beanstream, net of cash acquired
of approximately $7,287,000. Cash provided by financing activities was
approximately $6,193,000 for fiscal year 2008 as compared to cash used in
financing activities of approximately $18,000 for fiscal year 2007. The increase
in cash provided by financing activities was primarily due to the net proceeds
of approximately $6,690,000 resulting from a private placement of our common
shares during fiscal year 2008.
We
anticipate positive cash flows from our operating activities in fiscal
2009.
In light
of our strategic objective of acquiring electronic payment volume across all our
financial payment processing services and strengthening our position as a
financial payment processor (as demonstrated by our acquisition of Beanstream),
our long-term plans may include the potential to strategically acquire
complementary businesses, products or technologies and may also include
instituting actions against other entities who we believe are infringing our
intellectual property. We believe that existing cash and cash
equivalent balances and potential cash flows from operations should satisfy our
long-term cash requirements, however, we may elect to raise additional funds for
these purposes, either through equity or debt financing, as
appropriate. There can be no assurance that such financing would be
available on acceptable terms, if at all.
Contingencies
On March
6, 2007 we received notification that we were named in a class-action lawsuit
filed in the United States District Court, Eastern District, Marshall Division,
Texas, alleging that numerous defendants violated the Driver’s Privacy
Protection Act of Texas regulating the use of personal information such as
driver’s license numbers and home addresses contained in motor vehicle records
held by motor vehicle departments, by not having a permissible use in obtaining
the State of Texas’ entire database of names, addresses and other
personal information. See “Item 3 – Legal
Proceedings”. We believe that these allegations are without merit and
we intend to vigorously defend them. While we can give no assurance
as to the ultimate outcome of this lawsuit, we do not expect this lawsuit to
have a material adverse effect on our results of operations, financial position
or liquidity.
Contractual
Obligations
In our
prior fiscal year ended March 31, 2007, we entered into a three year lease
agreement with IBM Credit LLC to finance two IBM Mainframe hardware purchases
totaling $1,139,000. During the fourth quarter of our fiscal year 2008, we
consolidated our four data centers. Consequently, two components of the IBM
Mainframes were sold and we remain contractually obligated with respect to the
balance of $400,000 as at March 31, 2008 which will be satisfied with monthly
payments over the remaining twenty-two (22) months of the lease agreement. Also
in our prior fiscal year 2007, we entered into a three year financing
arrangement with Xerox Canada Ltd. to finance an equipment
purchase.
The
following table summarizes our significant contractual obligations and
commitments as of March 31, 2008:
|
|
Payments
due by:
|
|||||||||||||||||||
|
(in
thousands)
|
||||||||||||||||||||
|
Less
than
|
1
to 3
|
4
to 5
|
More
than
|
|||||||||||||||||
|
Total
|
1
year
|
years
|
years
|
5
years
|
||||||||||||||||
|
Long-Term
Debt Obligations
|
$ | 5,167 | $ | 2,732 | $ | 2,435 | $ | - | $ | - | ||||||||||
|
Capital
Lease Obligations
|
404 | 221 | 183 | - | - | |||||||||||||||
|
Operating
Lease Obligations
|
377 | 307 | 70 | - | - | |||||||||||||||
|
Purchase
Obligations
|
243 | 186 | 57 | - | - | |||||||||||||||
|
Total
|
$ | 6,191 | $ | 3,446 | $ | 2,745 | $ | - | - | |||||||||||
Critical
Accounting Policies and Estimates
Our
financial statements have been prepared in accordance with accounting principles
generally accepted in Canada and form the basis for the following discussion and
analysis of critical accounting policies and estimates. We make
estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses and related disclosure of contingent assets
and liabilities during the course of preparing these financial
statements. On a regular basis, we evaluate our estimates and
assumptions including those related to the recognition of revenues, valuation of
other long-lived assets and stock-based compensation.
We base
our estimates on historical experience and on various other assumptions that we
believe to be reasonable. These estimates form the basis of our
judgments about the carrying value of assets and liabilities that are not
readily apparent from other sources. Our actual results may differ
from those estimates.
The
following critical accounting policies reflect the more significant estimates
and assumptions we have used in the preparation of our financial
statements.
Revenue
Recognition
TPP
Segment
Our
revenues are derived from one-time set-up fees, monthly gateway fees, and
transaction fees paid to us by merchants. Transaction fees are recognized in the
period in which the transaction occurs. Gateway fees are monthly subscription
fees charged to our merchant customers for the use of our payment gateway.
Gateway fees are recognized in the period in which the service is provided.
Set-up fees represent one-time charges for initiating our processing services.
Although these fees are generally paid at the commencement of the agreement,
they are recognized ratably over the estimated average life of the merchant
relationship, which is determined through a series of analyses of active and
deactivated merchants.
IPL
Segment
License
fees regarding the licensing of the technology embodied within our five U.S.
patents regarding electronic check processing are recognized in accordance with
Securities and Exchange Commission (“SEC”) Staff Accounting Bulletin (“SAB”) 101
“Revenue Recognition” (“SAB 101”) and further guidance provided by the Canadian
Institute of Chartered Accountants (“CICA”) Emerging Issues Committee (“EIC”)
abstract-142 (“EIC 142”) and Emerging Issues Task Force (“EITF”) issue 00-21;
“Revenue Arrangements with Multiple Deliverables” (“EITF 00-21”). In
some instances, our licensees have paid an up-front fee to obtain a license, and
in such cases the up-front fee is treated as deferred revenue and is recognized
over the life of the agreement. In other cases, our licensees have
paid a fee for a release regarding potential past infringements of our five U.S.
patents and, in such cases, the fee is recognized as revenue when the release is
granted and the amount is reasonably determinable. Running royalties
earned from electronic check transactions processed by the licensee are
recognized on a monthly basis based on the volume of transactions
processed.
CP/SL
Segment
Transaction
processing and service fees are recognized in the period these services are
performed. These services consist of processing our clients’
electronic check authorization and conversion transactions. These
fees are charged on a per transactions basis and depend upon the contractual
agreement with the client.
Check
recovery fees are recognized in the period when cash is received for the
services performed. These services typically consist of recovering
the face amount of the original transaction and a service or collection
fee. We are typically paid the service fee only when we are
successful in the recovery of the face amount of the original transaction on
behalf of our client.
In cases
where our clients are of sufficient size and possess the technical capability to
process transactions on their own, we license certain elements of our modules of
our electronic payment processing software. We are typically paid
either a fixed license fee that is recognized in accordance with Statement of
Position (“SOP”) 97-2, “Software Revenue Recognition” or in some cases a fee per
transaction processed by the client whereupon revenue is recognized at the time
the transactions are processed, provided the fee is fixed and determinable and
collectability is reasonably assured.
Valuation
of Other Long-Lived Assets
We
regularly evaluate whether events and circumstances have occurred that indicate
the carrying amounts of our other long-lived assets, primarily our patents and
our transaction processing software, equipment and other intangible assets, may
warrant revision or may not be recoverable. When there are
indications that such assets should be evaluated for possible impairment, we
perform an impairment test in accordance with CICA Section 3063 and SFAS No.
144: “Accounting for the Impairment or Disposal of Long-Lived
Assets”. The impairment test involves calculating an estimate of
undiscounted cash flows to be earned from future operations and recording an
impairment charge, if any, in the statement of operations based on the
difference between the asset’s book value and its fair value. In the
opinion of management, our long-lived assets are appropriately valued as of
March 31, 2008 and 2007.
Stock-Based
Compensation
We issue
stock options to our employees and directors under the terms of our 1996 Stock
Option Plan and our 1998 Stock Incentive Plan. Canadian GAAP
previously provided two alternative methods of accounting for stock options
under the terms and conditions we typically issue such options. Alternative one
was to estimate the fair value of the stock option on the date of grant and
recognize that value as an expense to operations over the stock option’s vesting
period (“Alternative One”). Alternative two was to estimate the fair
value of the stock option on the date of grant but only reflect the impact in a
pro-forma disclosure setting forth compensation expense as if the fair value
method was used in the Corporation’s financial statements and forego adjusting
the consolidated statements of operations (“Alternative
Two”). During the fiscal year 2004, CICA released revised
transitional provisions for voluntary adoption of Alternative
One. These provisions permit a prospective application of the
Alternative One recognition provisions to accounting for stock options not
previously accounted for at fair value, provided we elect to apply the
Alternative One method to those stock options granted starting for
our fiscal year 2004. We adopted these transitional
provisions during our fiscal year 2004 and, therefore, stock options granted
during the fiscal years 2004, 2005, 2006, 2007 and 2008 have been recognized
under Alternative One and presented as stock-based compensation expense in our
consolidated statements of operations. Stock options granted in
previous fiscal years have continued to be accounted for under the Alternative
Two method with stock-based compensation expense reflected in a pro-forma
disclosure. Stock options granted in future fiscal years will be
accounted for under the Alternative One method with stock-based compensation
recognized as an expense to operations over the stock options’ vesting
period.
We
determine the assumptions used in computing the fair value of the stock options
by estimating the expected useful lives, giving consideration to the vesting
periods, contractual lives, actual employee forfeitures and the relationship
between the exercise price and the historical market value of our common stock,
among other factors. The risk-free interest rate is the federal
government zero-coupon bond rate for the relevant expected life. The
fair value of the stock options are estimated on the date of grant using the
Black-Scholes option-pricing model.
Future
Income Taxes and Valuation Allowance
Future
income taxes reflect the net tax effects of temporary differences between the
carrying amount of our assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes. We assess the
likelihood that our future tax assets will be recovered from our future taxable
income, and to the extent we believe that recovery is not likely, we establish a
valuation allowance. We consider historical taxable income, estimates
of future taxable income and ongoing prudent and feasible tax planning
strategies in assessing the amount of the valuation allowance. Based
on various factors, including our cumulative losses for the past years and
estimates of future profitability, we recorded a valuation allowance for the
full amount of our net future tax assets. We will continue to monitor
our estimate of future profitability and the likelihood of realizing our net
future tax assets based on evolving business conditions.
Foreign
Currency Translation
Our
functional (except as described below) and reporting currency is the United
States dollar. Monetary assets and liabilities denominated in foreign
currencies are translated in accordance with CICA Handbook Section 1651 “Foreign Currency Translation”
(which is consistent with Statement of Financial Accounting Standards No. 52
(“SFAS No. 52”) “Foreign
Currency Translation”) using the exchange rate prevailing at the balance
sheet date. Gains and losses arising on settlement of foreign
currency denominated transactions or balances are included in the determination
of income.
The
functional currency of our newly-acquired Beanstream subsidiary is the Canadian
dollar. Beanstream’s financial statements are translated to United
States dollars under the current rate method in accordance with CICA 1651 and
SFAS No. 52. Beanstream’s assets and liabilities are translated into
U.S. dollars at rates of exchange in effect at the balance sheet
date. Average rates for the year are used to translate Beanstream’s
revenues and expenses. The cumulative translation adjustment is
reported as a component of accumulated other comprehensive income.
Off-Balance
Sheet Arrangements
We do not
currently have any off-balance sheet arrangements as such term is defined in
Item 303(a) (4) of Regulation S-K.
Summary
Quarterly Financial Data (Unaudited)
The
following summarizes our unaudited quarterly financial results for the fiscal
years ended March 31, 2008 and March 31, 2007 (in thousands, except share
data):
|
Year
Ended March 31, 2008
|
||||||||||||||||
|
First
|
Second
|
Third
|
Fourth
|
|||||||||||||
|
Quarter
|
Quarter
|
Quarter
|
Quarter
|
|||||||||||||
|
Net
revenue
|
$ | 1,456 | $ | 3,183 | $ | 3,398 | $ | 3,291 | ||||||||
|
Net
loss
|
(248 | ) | (181 | ) | (228 | ) | (1,564 | ) | ||||||||
|
Basic
net loss per common share
|
(0.01 | ) | (0.01 | ) | (0.01 | ) | (0.07 | ) | ||||||||
|
Diluted
net income loss per common share
|
(0.01 | ) | (0.01 | ) | (0.01 | ) | (0.07 | ) | ||||||||
|
Year
Ended March 31, 2007
|
||||||||||||||||
|
First
|
Second
|
Third
|
Fourth
|
|||||||||||||
|
Quarter
|
Quarter
|
Quarter
|
Quarter
|
|||||||||||||
|
Net
revenue
|
$ | 1,796 | $ | 1,651 | $ | 1,516 | $ | 1,592 | ||||||||
|
Net
income (loss)
|
184 | (419 | ) | (924 | ) | 86 | ||||||||||
|
Basic
net income (loss) per common share
|
.01 | (.02 | ) | (.05 | ) | .01 | ||||||||||
|
Diluted
net income (loss) per common share
|
.01 | (.02 | ) | (.05 | ) | .01 | ||||||||||
|
Quantitative
and Qualitative Disclosures About Market
Risk
|
We are
exposed to market risk from changes in marketable securities (which consist of
money market and commercial paper). At March 31, 2008, our marketable securities
were recorded at a fair value of approximately $1,401,000, with an overall
weighted average return of 4.14% and an overall weighted average life of less
than three months. Our marketable securities have exposure to price risk, which
is estimated as the potential loss in fair value due to a hypothetical change of
50 basis points (9% of our overall average return on marketable securities) in
quoted market prices. This hypothetical change would have an immaterial effect
on the recorded value of the marketable securities.
We are
not exposed to material future earnings or cash flow fluctuations from changes
in interest rates on long-term debt since 100% of our long-term debt is at a
fixed rate as of March 31, 2008. The fair value of our debt
approximates its carrying value. To date, we have not entered into any
derivative financial instruments to manage interest rate risk and are currently
not evaluating the future use of any such financial instruments.
Foreign
Exchange Risk
The U.S.
dollar is the functional currency of our operations since substantially all of
our operations are conducted in U.S. currency. As a result, when we
are paying any obligation that is denominated in a foreign currency (including,
for example, the Beanstream promissory notes), we must generate the amount of
cash in U.S. dollars that, when exchanged at the then-prevailing applicable
foreign currency exchange rate, will equal the amount of the obligation to be
paid (which means that we may pay more U.S. dollars than initially anticipated
if the foreign currency strengthens against the U.S. dollar between the time we
incur the obligation and the time we are required to pay the
obligation). Given recent and unexpected fluctuations in the
U.S./Canadian currency exchange rate, the amount owing on the Beanstream
promissory notes has increased as of March 31, 2008 from approximately U.S.
$4,975,000 to approximately U.S. $5,167,000. In addition, we have
operations in Canada, which are denominated in local
currency. Accordingly, we are exposed to the risk of future currency
exchange rate fluctuations, which are accounted for as an adjustment to
shareholders’ equity until realized. Therefore, changes from
reporting period to reporting period in the exchange rates between the Canadian
currency and the U.S. dollar might have a material adverse effect on our results
of operations and financial condition.
During
the fourth quarter of fiscal 2008, we entered into various contractual
arrangements with the right to purchase $1,000,000 Canadian using U.S. dollars
at a pre-determined foreign exchange rates. The rights must be executed between
the periods of June 16 to June 27, 2008.
|
Financial
Statements and Supplementary Data
|
Information
called for by this item is set forth in our Consolidated Financial Statements
contained in this report. Our Consolidated Financial Statements begin in Item 7
- "Management's Discussion and Analysis of Financial Condition and Results of
Operations - Summary Quarterly Financial Data (Unaudited)" and at page
F-1.
|
Changes
in and Disagreements With Accountants on Accounting and Financial
Disclosures
|
Not
applicable
|
Controls
and Procedures
|
Our
management, with the participation of our Chief Executive Officer and Chief
Accounting Officer, evaluated the effectiveness of our disclosure controls and
procedures as of the end of the period covered by this Annual Report on
Form 10-K. The term “disclosure controls and procedures,” as defined in
Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act
of 1934, as amended (the “Exchange Act”), means controls and other procedures of
a company that are designed to ensure that information required to be disclosed
by the company in the reports that it files or submits under the Exchange Act is
recorded, processed, summarized and reported, within the time periods specified
in the SEC’s rules and forms. Disclosure controls and procedures include,
without limitation, controls and procedures designed to ensure that information
required to be disclosed by a company in the reports that it files or submits
under the Exchange Act is accumulated and communicated to the company’s
management, including its principal executive and principal financial officers,
as appropriate to allow timely decisions regarding required disclosure. There
are inherent limitations to the effectiveness of any system of disclosure
controls and procedures, including the possibility of human error and the
circumvention or overriding of the controls and
procedures. Accordingly, even effective disclosure controls and
procedures can only provide reasonable assurance of achieving their control
objectives. Based on their evaluation, the Chief Executive Officer
and Chief Accounting Officer have concluded that our disclosure controls and
procedures were effective as of the end of the period covered by this annual
report.
MANAGEMENT'S
ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting, as such term is defined in the Exchange Act
Rules 13a-15(f) and 15d-15(f). Those rules define internal control
over financial reporting as a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with Generally Accepted
Accounting Principles ("GAAP"). It includes policies and procedures
that:
|
·
|
Pertain
to the maintenance of records that in reasonable detail accurately and
fairly reflect the transactions and dispositions of our
assets;
|
|
·
|
Provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with GAAP, and that our
receipts and expenditures are being made only in accordance with
authorizations of management and directors;
and
|
|
·
|
Provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of our assets that could have
a material effect on the financial
statements.
|
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
Management
assessed the effectiveness of the Company’s internal control over financial
reporting as of March 31, 2008, based on the criteria set forth in the Internal
Control-Integrated
Framework by the Committee of Sponsoring Organizations of the Treadway
Commission (“COSO”). Based on this assessment and those criteria, management
believes that the Company maintained effective internal control over financial
reporting as of March 31, 2008.
The
Company acquired Beanstream Internet Commerce Inc. (“Beanstream”) on June 30,
2007. Management excluded Beanstream’s internal control over financial reporting
from its assessment of the effectiveness of internal control over financial
reporting as of March 31, 2008.
Management’s
assessment of the effectiveness of our internal control over financial reporting
as of March 31, 2008 has been audited by Grant Thornton, LLP, an Independent
Registered Chartered Accounting Firm, as stated in their report, which is
included elsewhere herein.
Based on
the evaluation conducted by management, including the Chief Executive Officer
and the Chief Accounting Officer, there were no changes in our internal controls
during the fourth quarter ended March 31, 2008 that have materially affected, or
are reasonably likely to materially affect, our internal control over financial
reporting.
REPORT
OF INDEPENDENT REGISTERED CHARTERED ACCOUNTING FIRM
To The
Board of Directors and Shareholders of LML Payment Systems Inc.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk that a material
weakness exists, testing and evaluating the design and operating effectiveness
of internal control based on the assessed risk, and performing such other
procedures as we considered necessary in the circumstances. We
believe that our audit provides a reasonable basis for our
opinions.
In
conducting management’s evaluation of the effectiveness of its internal control
over financial reporting, management has excluded, due to its size and
complexity, Beanstream Internet Commerce Inc, which was recently acquired on
June 30, 2007. Beanstream constituted 50% of the Corporation’s total revenues
for the year ended March 31, 2008. Our audit of internal control over financial
reporting of the Corporation did not include an evaluation of the internal
control over financial reporting of Beanstream Internet Commerce
Inc.
A company's internal control over
financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted
accounting principles. A company's internal control over financial
reporting includes those policies and procedures that (1) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect
the transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and
directors of the company; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition
of the company's assets that could have a material effect on the financial
statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate. In our
opinion, the Corporation maintained, in all material respects effective internal
control over financial reporting as of March 31, 2008 based on criteria
established in Internal
Control – Integrated Framework issued by COSO.
We have
also audited, in accordance with Canadian generally accepted auditing standards
and the standards of the Public Company Accounting Oversight Board (United
States), the consolidated balance sheets of LML Payment Systems Inc. and
subsidiaries as of March 31, 2008 and 2007 and the consolidated statements of
operations, shareholders’ equity and cash flows for each of the three years in
the period ended March 31, 2008 and our report dated June 19, 2008
expresses an unqualified opinion on those financial statements.
|
Vancouver,
Canada
|
/s/
GRANT THORNTON LLP
|
|
June
19, 2008
|
Chartered
Accountants
|
ITEM 9B. Other Information
Not
applicable.
PART
III
|
Directors, Executive
Officers and Corporate Governance
|
Information
on our directors, executive officers, and audit committee, compliance with
Section 16(a) of the Exchange Act and our code of ethics applicable to our Chief
Executive Officer and Chief Accounting Officer will be contained in our Proxy
Statement for our 2008 Annual and Special Meeting of Shareholders, to be filed
with the SEC within 120 days after the end of our fiscal 2008, and is
incorporated herein by reference.
We have
adopted a Code of Ethics applicable to our principal executive officer,
principal financial officer, controller and others performing similar
functions. Our Code of Ethics also applies to all of our other
employees and to our directors. Our Code of Ethics is available on
our website located at www.lmlpayment.com
under the heading “Investor Relations; Corporate Governance”. We
intend to satisfy any disclosure requirements pursuant to Item 5.05 of Form 8-K
regarding any amendment to, or a waiver from, certain provisions of our Code of
Ethics by posting such information on our website (unless we are otherwise
required to file a Form 8-K under the rules and regulations of The NASDAQ Stock
Market).
There
were no material changes to the procedures by which our stockholders may
recommend nominees to our Board of Directors implemented during fiscal
2008.
|
Executive
Compensation
|
Information
on compensation of our directors and executive officers will be contained in our
Proxy Statement for our 2008 Annual and Special Meeting of Shareholders, to be
filed with the SEC within 120 days after the end of our fiscal 2008, and is
incorporated herein by reference.
|
ITEM 12.
|
Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Security Matters
|
Information
on the securities ownership of certain beneficial owners and our management will
be contained in our Proxy Statement for our 2008 Annual and Special Meeting of
Shareholders, to be filed with the SEC within 120 days after the end of our
fiscal 2008, and is incorporated herein by reference.
Information
required by Item 201(d) of Regulation S-K is set forth under Item 5. “Market for
Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities”.
|
Certain
Relationships, Related Transactions and Director
Independence
|
Information
on certain relationships and related transactions will be contained in our Proxy
Statement for our 2008 Annual and Special Meeting of Shareholders, to be filed
with the SEC within 120 days after the end of our fiscal 2008, and is
incorporated herein by reference.
|
Principal Accountant Fees and
Services
|
Information
regarding principal accountant fees and services will be contained in our Proxy
Statement for our 2008 Annual and Special Meeting of Shareholders, to be filed
with the SEC within 120 days after the end of our fiscal 2008, and is
incorporated herein by reference.
|
Exhibits
and Financial Statement Schedules
|
|
(a)
|
The
following documents are filed as part of this
report:
|
|
|
(1)
|
Consolidated
Financial Statements
|
|
Page
|
Description
|
|
|
F-1
|
||
|
F-2
|
||
|
F-3
|
||
|
F-4
|
||
|
F-5
|
||
|
F-6
|
All other
schedules are omitted because they are not applicable or the required
information is shown in the Consolidated Financial Statements or Notes
thereto.
(b) Exhibits:
|
Exhibit
Number
|
Description
of Document
|
|
|
2.1
|
Arrangement
Agreement dated as of April 30, 2007, between LML Payment Systems Inc. and
Beanstream Internet Commerce Inc. and the schedules thereto (incorporated
by reference to Exhibit 2.1 to the Form 8-K dated April 30, 2007 of LML
(file No. 0-13959)).
|
|
|
2.2
|
Amending
Agreement between LML Payment Systems Inc. and Beanstream Internet
Commerce Inc. dated as of May 24, 2007 (incorporated by reference to
Exhibit 99.2 to the Form 8-K dated June 4, 2007 of LML (file No.
0-13959)).
|
|
|
3.1
|
Restated
Articles of Incorporation (incorporated by reference to Exhibit 3.1 to the
Annual Report on Form 10-K for the period ended March 31, 2006 of LML
(File No. 0-13959)).
|
|
|
3.2
|
Bylaws
of LML, as amended (incorporated by reference to Exhibit 3.2 to the
Quarterly Report on Form 10-Q for the period ended September 30, 2007 of
LML (File No. 0-13959)).
|
|
|
10.1
|
Securities
Purchase Agreement dated as of March 26, 2008, between LML Payment Systems
Inc. and Millennium Partners, L.P. (incorporated by reference to Exhibit
10.1 to the Form 8-K dated March 26, 2008 of LML (file
0-13959)).
|
|
|
10.2
|
Registration
Rights Agreement dated as of March 26, 2008, between LML Payment Systems
Inc. and Millennium Partners, L.P. (incorporated by reference to Exhibit
10.2 to the Form 8-K dated March 26, 2008 of LML (file
0-13959)).
|
|
|
10.3
|
Warrant
dated as of March 26, 2008, between LML Payment Systems Inc. and Ladenburg
Thalmann & Co., Inc. (incorporated by reference to Exhibit 10.3 to the
Form 8-K dated March 26, 2008 of LML (file 0-13959)).
|
|
|
10.4
|
Employment
agreement between LML Payment Systems Inc. and Patrick H. Gaines dated
March 31, 2008 (incorporated by reference to Exhibit 10.1 to the Form 8-K
dated March 31, 2008 of LML (file 0-13959)).
|
|
|
10.5
|
Employment
agreement between LML Payment Systems Inc. and Richard R. Schulz dated
March 31, 2008 (incorporated by reference to Exhibit 10.2 to the Form 8-K
dated March 31, 2008 of LML (file 0-13959)).
|
|
|
10.6
|
Employment
agreement between LML Payment Systems Inc. and Carolyn
L. Gaines dated March 31, 2008 (incorporated by reference to
Exhibit 10.1 to the Form 8-K dated March 31, 2008 of LML (file
0-13959)).
|
|
|
21*
|
||
|
23.1*
|
||
|
31.1*
|
||
|
31.2*
|
||
|
32
*
|
_______
* filed
herewith
- 41
-
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
|
LML
PAYMENT SYSTEMS INC.
|
|
|
/s/ Patrick H.
Gaines
|
|
|
Patrick
H. Gaines
|
|
|
Chairman
of the Board, Chief Executive Officer and President
|
|
|
Date:
June 19, 2008
|
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Registrant and in the
capacities indicated and on the dates indicated below.
|
Title
|
Date
|
|||
|
/s/ Patrick H.
Gaines
|
Chairman
of the Board, Chief Executive Officer, President and
Director
|
June
19, 2008
|
||
|
Patrick
H. Gaines
|
(Principal
Executive Officer)
|
|||
|
/s/ Richard R.
Schulz
|
Controller
and Chief Accounting Officer
|
June
19, 2008
|
||
|
Richard
R. Schulz
|
(Principal
Financial and Accounting Officer)
|
|||
|
/s/ L. William
Seidman
|
Director
|
June
19, 2008
|
||
|
L.
William Seidman
|
||||
|
/s/ Jacqueline
Pace
|
Director
|
June
19, 2008
|
||
|
Jacqueline
Pace
|
||||
|
/s/ Greg A.
MacRae
|
Director
|
June
19, 2008
|
||
|
Greg
A. MacRae
|
To the
Shareholders
LML
Payment Systems Inc.
We have
audited the accompanying consolidated balance sheets of LML Payment Systems Inc.
and subsidiaries (together, the “Corporation”) as of March 31, 2008 and 2007 and
the related consolidated statements of operations, shareholders’ equity and cash
flows for each of the three years in the period ended March 31,
2008. These consolidated financial statements are the responsibility
of the Corporation’s management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audits.
We
conducted our audits in accordance with Canadian generally accepted auditing
standards and the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of LML Payment Systems Inc. and
subsidiaries as of March 31, 2008 and 2007 and the results of their operations
and their cash flows for each of the three years in the period ended March 31,
2008 in accordance with Canadian generally accepted accounting
principles.
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the effectiveness of LML Payment Systems Inc.
and subsidiaries’ internal control over financial reporting as of March 31,
2008, based on criteria established in Internal Control – Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO) and our report dated June 19, 2008 expressed an
unqualified opinion on management’s assessment of the effectiveness of the
Corporation’s internal control over financial reporting and an unqualified
opinion on the effectiveness of the Corporation’s internal control over
financial reporting.
Canadian
generally accepted accounting principles vary in certain significant respects
from accounting principles generally accepted in the United States of
America. Information relating to the nature and effect of such
differences is presented in Note 16 to the consolidated financial
statements.
|
Vancouver,
Canada
|
/s/
GRANT THORNTON LLP
|
|
June
19, 2008
|
Chartered
Accountants
|
LML
PAYMENT SYSTEMS INC.
(In
U.S. Dollars)
|
Years
Ended March 31,
|
||||||||
|
2008
|
2007
|
|||||||
|
ASSETS
|
||||||||
|
CURRENT
ASSETS
|
||||||||
|
Cash
and cash equivalents (Note 6)
|
$ | 9,749,768 | $ | 10,163,008 | ||||
|
Funds
held for merchants (Note 6)
|
5,833,617 | - | ||||||
|
Restricted
cash (Note 5(a))
|
250,000 | 250,000 | ||||||
|
Accounts
receivable, less allowance of $32,168 (2007: $23,388)
|
719,301 | 330,055 | ||||||
|
Prepaid
expenses
|
273,751 | 405,213 | ||||||
|
Total
current assets
|
16,826,437 | 11,148,276 | ||||||
|
PROPERTY
AND EQUIPMENT, net (Notes 7 and 10)
|
246,828 | 1,362,003 | ||||||
|
PATENTS
(Note 8)
|
788,473 | 943,985 | ||||||
|
RESTRICTED
CASH (Note 5(a))
|
153,619 | - | ||||||
|
OTHER
ASSETS
|
23,247 | 224,263 | ||||||
|
GOODWILL
|
15,903,077 | - | ||||||
|
INTANGIBLE
ASSETS (Note 9)
|
5,700,637 | - | ||||||
|
Total
assets
|
39,642,318 | 13,678,527 | ||||||
|
LIABILITIES
|
||||||||
|
CURRENT
LIABILITIES
|
||||||||
|
Accounts
payable
|
1,745,679 | 659,111 | ||||||
|
Accrued
liabilities
|
648,661 | 309,677 | ||||||
|
Corporate
taxes payable
|
573,240 | - | ||||||
|
Funds
due to merchants (Note 6)
|
5,833,617 | - | ||||||
|
Current
portion of obligations under capital lease (Note 10)
|
203,366 | 360,179 | ||||||
|
Current
portion of promissory notes (Note 4)
|
2,731,923 | - | ||||||
|
Current
portion of deferred revenue
|
1,448,921 | 1,531,260 | ||||||
|
Total
current liabilities
|
13,185,407 | 2,860,227 | ||||||
|
OBLIGATIONS
UNDER CAPITAL LEASE (Note 10)
|
177,573 | 726,806 | ||||||
|
PROMISSORY
NOTES (Note 4)
|
2,435,460 | - | ||||||
|
DEFERRED
REVENUE
|
4,606,379 | 5,859,628 | ||||||
|
Total
liabilities
|
20,404,819 | 9,446,661 | ||||||
|
COMMITMENTS
AND CONTINGENCIES (Note
14)
|
||||||||
|
SHAREHOLDERS’
EQUITY
|
||||||||
|
CAPITAL
STOCK
|
||||||||
|
Class
A, preferred stock, $1.00 CDN par value, 150,000,000 shares authorized,
issuable in series, none issued or outstanding
|
- | - | ||||||
|
Class
B, preferred stock, $1.00 CDN par value, 150,000,000 shares authorized,
issuable in series, none issued or outstanding
|
- | - | ||||||
|
Common
shares, no par value, 100,000,000 shares authorized, 26,341,832 issued and
outstanding (2007:20,207,094)
|
48,071,980 | 32,774,368 | ||||||
|
ACCUMULATED
OTHER COMPREHENSIVE LOSS
|
(19,046 | ) | - | |||||
|
CONTRIBUTED
SURPLUS (Note 11(b))
|
5,391,187 | 3,443,292 | ||||||
|
DEFICIT
|
(34,206,622 | ) | (31,985,794 | ) | ||||
|
Total
shareholders’ equity
|
19,237,499 | 4,231,866 | ||||||
|
Total
liabilities and shareholders’ equity
|
39,642,318 | 13,678,527 | ||||||
See
accompanying notes to the consolidated financial statements.
LML
PAYMENT SYSTEMS INC.
(In
U.S. Dollars, except share data)
|
Years
ended March 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
REVENUE
|
$ | 11,327,878 | $ | 6,554,191 | $ | 5,458,029 | ||||||
|
COSTS
AND EXPENSES
|
||||||||||||
|
Cost
of operations (includes stock-based compensation expense of $424,155
(2007-$81,321; 2006-$0))
|
7,684,769 | 4,838,374 | 4,600,766 | |||||||||
|
Sales,
general and administrative expenses (includes stock-based compensation
expense of $863,055 (2007-$796,012; 2006-$903,778))
|
3,188,510 | 2,885,811 | 4,752,718 | |||||||||
|
Amortization
and depreciation
|
905,488 | 335,555 | 616,592 | |||||||||
|
LOSS
BEFORE OTHER INCOME (EXPENSES) AND INCOME TAXES
|
(450,889 | ) | (1,505,549 | ) | (4,512,047 | ) | ||||||
|
Foreign
exchange gain (loss)
|
(229,661 | ) | (2,545 | ) | (5,675 | ) | ||||||
|
Other
income (expenses), net (Note 10)
|
(246,918 | ) | 616,571 | - | ||||||||
|
(Loss)
gain on disposal/abandonment of capital assets (Note 10)
|
(726,325 | ) | 7,000 | - | ||||||||
|
Interest
income
|
406,063 | 475,368 | 142,311 | |||||||||
|
Interest
expense
|
(358,756 | ) | (12,700 | ) | (10,041 | ) | ||||||
|
Settlement
expenses
|
- | (45,000 | ) | (235,778 | ) | |||||||
|
Due
diligence expenses
|
- | (567,562 | ) | - | ||||||||
|
LOSS
BEFORE INCOME TAXES
|
(1,606,486 | ) | (1,034,417 | ) | (4,621,230 | ) | ||||||
|
Income
taxes (Note 13)
|
614,342 | 38,446 | 25,863 | |||||||||
|
NET
LOSS
|
(2,220,828 | ) | (1,072,863 | ) | (4,647,093 | ) | ||||||
|
NET
LOSS PER SHARE, basic and diluted
|
(0.10 | ) | (0.05 | ) | (0.23 | ) | ||||||
|
WEIGHTED
AVERAGE SHARES OUTSTANDING, basic and diluted (Note 11(a))
|
21,869,404 | 20,206,412 | 20,164,279 | |||||||||
See
accompanying notes to the consolidated financial statements.
LML
PAYMENT SYSTEMS INC.
(In
U.S. Dollars)
|
Accumulated
|
||||||||||||||||||||||||
|
other
|
||||||||||||||||||||||||
|
Common
|
Contributed
|
Comprehensive
|
||||||||||||||||||||||
|
Shares
|
Amount
|
Surplus
|
Income
(Loss)
|
Deficit
|
Total
|
|||||||||||||||||||
|
Balance
as at March 31, 2005
|
20,145,594 | $ | 32,476,693 | $ | 1,631,471 | $ | - | $ | (26,265,838 | ) | $ | 7,842,326 | ||||||||||||
|
Exercise
of stock options
|
48,500 | 233,325 | - | - | - | 233,325 | ||||||||||||||||||
|
Stock-based
compensation (Note 11(c))
|
- | - | 903,778 | - | - | 903,778 | ||||||||||||||||||
|
Stock-based
compensation – future income taxes
|
- | - | 9,063 | - | - | 9,063 | ||||||||||||||||||
|
Net
loss
|
- | - | - | - | (4,647,093 | ) | (4,647,093 | ) | ||||||||||||||||
|
Other
comprehensive income (loss)
|
- | - | - | - | - | - | ||||||||||||||||||
|
Balance
as at March 31, 2006
|
20,194,094 | 32,710,018 | 2,544,312 | - | (30,912,931 | ) | 4,341,399 | |||||||||||||||||
|
Exercise
of stock options
|
13,000 | 64,350 | - | - | - | 64,350 | ||||||||||||||||||
|
Stock-based
compensation (Note 11(c))
|
- | - | 877,334 | - | - | 877,334 | ||||||||||||||||||
|
Stock-based
compensation – future income taxes
|
- | - | 21,646 | - | - | 21,646 | ||||||||||||||||||
|
Net
loss
|
- | - | - | - | (1,072,863 | ) | (1,072,863 | ) | ||||||||||||||||
|
Other
comprehensive income (loss)
|
- | - | - | - | - | - | ||||||||||||||||||
|
Balance
as at March 31, 2007
|
20,207,094 | 32,774,368 | 3,443,292 | - | (31,985,794 | ) | 4,231,866 | |||||||||||||||||
|
Net
loss
|
- | - | - | - | (2,220,828 | ) | (2,220,828 | ) | ||||||||||||||||
|
Change
in cumulative translation adjustment
|
- | - | - | (19,046 | ) | - | (19,046 | ) | ||||||||||||||||
|
Comprehensive
loss
|
(2,239,874 | ) | ||||||||||||||||||||||
|
Exercise
of stock options
|
26,250 | 77,437 | - | - | - | 77,437 | ||||||||||||||||||
|
Acquisition
(see Note 4)
|
1,963,555 | 8,538,737 | - | - | - | 8,538,737 | ||||||||||||||||||
|
Finders
fee on Acquisition
|
144,933 | 640,604 | - | - | - | 640,604 | ||||||||||||||||||
|
Private
Placement (Note 11(d))
|
4,000,000 | 7,200,000 | - | - | - | 7,200,000 | ||||||||||||||||||
|
Financial advisor
fee
|
- | - | 649,500 | - | - | 649,500 | ||||||||||||||||||
|
Share issuance
cost
|
- | (1,159,166 | ) | - | - | - | (1,159,166 | ) | ||||||||||||||||
|
Stock-based
compensation (Note 11(c))
|
- | - | 1,287,210 | - | - | 1,287,210 | ||||||||||||||||||
|
Stock-based
compensation – future income taxes
|
- | - | 11,185 | - | - | 11,185 | ||||||||||||||||||
|
Balance
as at March 31, 2008
|
26,341,832 | 48,071,980 | 5,391,187 | (19,046 | ) | (34,206,622 | ) | 19,237,499 | ||||||||||||||||
See
accompanying notes to the consolidated financial statements
LML
PAYMENT SYSTEMS INC.
(In
U.S. Dollars)
|
Years
ended March 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
OPERATING
ACTIVITIES:
|
||||||||||||
|
Net
loss
|
$ | (2,220,828 | ) | $ | (1,072,863 | ) | $ | (4,647,093 | ) | |||
|
Adjustments
to reconcile net loss to net cash provided by (used in) operating
activities
|
||||||||||||
|
Provisions
for losses on accounts receivable
|
10,942 | 37,347 | 14,989 | |||||||||
|
Amortization
and depreciation
|
905,488 | 335,555 | 616,592 | |||||||||
|
(Gain)
loss on disposal/abandonment of capital assets
|
726,325 | - | - | |||||||||
|
Stock-based
compensation
|
1,287,210 | 877,334 | 903,778 | |||||||||
|
Stock-based
compensation – future income taxes
|
11,185 | 21,646 | 9,063 | |||||||||
|
Unrealized
foreign exchange loss
|
177,847 | - | - | |||||||||
|
Due
diligence expenses
|
- | 567,562 | - | |||||||||
|
Other
|
- | (7,252 | ) | - | ||||||||
|
Changes
in non-cash operating working capital
|
||||||||||||
|
Accounts
receivable
|
(130,694 | ) | 69,073 | 57,161 | ||||||||
|
Prepaid
expenses
|
214,414 | (30,326 | ) | 122,526 | ||||||||
|
Other
assets
|
(8,360 | ) | 14,447 | 10,953 | ||||||||
|
Accounts
payable and accrued liabilities
|
323,496 | (473,773 | ) | 530,263 | ||||||||
|
Corporate
taxes payable
|
582,538 | - | - | |||||||||
|
Deferred
revenue
|
(1,339,390 | ) | 7,119,782 | 27,439 | ||||||||
|
Net
cash provided by (used in) operating activities
|
540,173 | 7,458,532 | (2,354,329 | ) | ||||||||
|
INVESTING
ACTIVITIES:
|
||||||||||||
|
Other
assets
|
- | (776,170 | ) | - | ||||||||
|
Acquisition
of Beanstream, net of cash acquired (Note 4)
|
(7,286,834 | ) | - | - | ||||||||
|
Proceeds
from disposal of capital assets (Note 10)
|
107,900 | 7,252 | - | |||||||||
|
Acquisition
of property and equipment
|
(144,241 | ) | (185,886 | ) | (152,096 | ) | ||||||
|
Development
of patents
|
(10,804 | ) | (14,341 | ) | (47,755 | ) | ||||||
|
Net
cash (used in) provided by investing activities
|
(7,333,979 | ) | (969,145 | ) | (199,851 | ) | ||||||
|
FINANCING
ACTIVITIES:
|
||||||||||||
|
Payments
on capital leases
|
(575,234 | ) | (79,588 | ) | (38,874 | ) | ||||||
|
Payments
on long-term borrowing
|
- | (2,773 | ) | (10,460 | ) | |||||||
|
Proceeds
from exercise of stock options
|
77,438 | 64,350 | 233,325 | |||||||||
|
Proceeds
from private placement of common shares
|
7,200,000 | - | - | |||||||||
|
Share
capital financing costs
|
(509,666 | ) | - | - | ||||||||
|
Net
cash (used in) provided by financing activities
|
6,192,538 | (18,011 | ) | 183,991 | ||||||||
|
Effects
of foreign exchange rate changes on cash and cash
equivalents
|
188,028 | - | - | |||||||||
|
(DECREASE)
INCREASE IN CASH AND CASH EQUIVALENTS
|
(413,240 | ) | 6,471,376 | (2,370,189 | ) | |||||||
|
Cash
and cash equivalents, beginning of year
|
10,163,008 | 3,691,632 | 6,061,821 | |||||||||
|
Cash
and cash equivalents, end of year
|
9,749,768 | 10,163,008 | 3,691,632 | |||||||||
|
Cash
and cash equivalents consist of:
|
||||||||||||
|
Cash
|
8,348,906 | 9,041,704 | 1,176,900 | |||||||||
|
Money
market fund
|
107,233 | 1,121,304 | - | |||||||||
|
Commercial
paper
|
1,293,629 | - | 2,514,732 | |||||||||
| 9,749,768 | 10,163,008 | 3,691,632 | ||||||||||
|
Supplemental
disclosure of cash flow information:
|
||||||||||||
|
Interest
paid
|
358,756 | 12,700 | 10,041 | |||||||||
|
Taxes
paid
|
603,157 | 16,800 | 16,800 | |||||||||
|
Non-cash
investing and financing transactions not included in cash
flows:
|
||||||||||||
|
Property
and equipment acquired through capital leases
|
- | 1,146,473 | - | |||||||||
See
accompanying notes to the consolidated financial statements.
LML
PAYMENT SYSTEMS INC.
(unless
otherwise indicated, all dollar amounts are U.S. dollars)
|
|
1.
|
NATURE
OF OPERATIONS
|
LML
Payment Systems Inc. (a Yukon Territory corporation) and its subsidiaries (the
"Corporation"), see Note 2(a), is a financial payment processor providing
electronic payment and risk management and authentication services
primarily to businesses and organizations who use the Internet to receive or
send payments. The Corporation links merchants selling products or
services to customers wanting to buy them and financial institutions who allow
the transfer of payments to occur. The Corporation has partnership
arrangements and certified connections to financial institutions, payment
processors and other payment service providers in order to enable its customers
to safely and reliably conduct e-commerce. The Corporation provides
its electronic payment, authentication and risk management services to over
6,000 businesses and organizations in Canada and the Untied
States. The Corporation also provides check processing solutions
including primary and secondary check collection including electronic check
re-presentment (RCK) to retailers in the United States of America
(U.S.).
The
Corporation also provides licenses to its intellectual property. The
Corporation’s intellectual property estate, owned by subsidiary LML Patent
Corp., includes U.S. Patent No. 6,354,491, No. 6,283,366, No. 6,164,528, No.
5,484,988, and No. RE40,220 which describe electronic check processing
methods.
|
|
2.
|
SIGNIFICANT
ACCOUNTING POLICIES
|
|
|
(a)
|
Basis
of Presentation
|
These
consolidated financial statements have been prepared in accordance with Canadian
generally accepted accounting principles (“Canadian GAAP”). Except as disclosed
in Note 16, these principles do not differ materially from generally accepted
accounting principles in the U.S. (“U.S. GAAP”).
These
consolidated financial statements include the accounts of the Corporation and
its wholly owned subsidiaries as set out below. All significant inter-company
balances and transactions have been eliminated on consolidation.
CANADA
Legacy
Promotions Inc.
Beanstream
Internet Commerce Inc. (“Beanstream”) *
UNITED
STATES
LHTW
Properties Inc.
LML
Corp.
LML
Patent Corp.
LML
Payment Systems Corp.
*
Effective June 30, 2007, the Corporation completed the acquisition of
Beanstream. The consolidated balance sheet as of March 31, 2008 and the
consolidated statements of operations and deficit and the consolidated
statements of cash flows for the year ended March 31, 2008 include the accounts
of Beanstream since its acquisition by the Corporation on June 30,
2007.
|
|
(b)
|
Use
of Estimates and Measurement
Uncertainty
|
The
preparation of financial statements in conformity with Canadian GAAP requires
management to make estimates and assumptions that affect the reported amount of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Significant areas requiring the use of
management estimates relate to, among others, the allowance for doubtful
accounts, determination of impairment of assets, determination of stock-based
compensation expense, useful lives for depreciation and amortization and future
income taxes. Actual results could differ from those
estimates.
LML
PAYMENT SYSTEMS INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(unless
otherwise indicated, all dollar amounts are U.S. dollars)
|
|
2.
|
SIGNIFICANT
ACCOUNTING POLICIES (continued)
|
|
|
(c)
|
Cash
and Cash Equivalents
|
Cash and
cash equivalents include cash on hand and all highly liquid debt instruments
purchased with a maturity of three months or less at the date of
purchase.
|
|
(d)
|
Accounts
Receivable
|
Accounts
receivable are stated net of allowances for uncollectible
accounts. Management develops the estimate of the allowance based on
the Corporation’s experience with specific customers, its understanding of their
current economic circumstances and its own judgment as to the likelihood of
their ultimate payment. Management also considers the Corporation’s
collection experience with the balance of its receivables portfolio and makes
estimates regarding collectibility based on trends in aging.
|
|
(e)
|
Property
and Equipment
|
Property
and equipment are recorded at cost less accumulated depreciation. A
straight-line method is used to depreciate assets over their estimated useful
lives as follows:
|
Computer
equipment
|
3 –
5 years
|
|
Computer
software
|
3 –
5 years
|
|
Furniture
and fixtures
|
3
years
|
|
Leasehold
improvements
|
Lesser
of the life of the lease or the useful life of the leasehold
improvement
|
|
Office
equipment
|
5
years
|
|
System
and software
|
5
years
|
|
Vehicles
|
4
years
|
|
Website
& trademarks
|
5
years
|
|
|
(f)
|
Patents
|
Patent
costs are amortized using the straight-line method over the estimated useful
life of 15 years.
|
|
(g)
|
Long-lived
Assets
|
Long-lived
assets are reviewed for impairment when events indicate their carrying amount
may not be recoverable from undiscounted cash flows estimated to be earned from
future operations. An impairment charge, if any, is recorded in the statement of
operations based on the difference between the asset’s book value and its fair
value.
|
|
(h)
|
Goodwill
|
|
|
Goodwill
relates to the acquisition of Beanstream and represents the excess of the
purchase price over the fair values of the identifiable assets acquired
and liabilities assumed. Goodwill is subject to a review for
impairment on an annual basis or when events indicate the carrying amount
may not be recoverable from undiscounted cash flows estimated to be earned
from future operations. An impairment charge, if any, is
recorded in the statement of operations based on the difference between
the asset’s book value and its fair
value.
|
|
|
(i)
|
Intangible
Assets
|
Acquired
intangible assets related to the acquisition of Beanstream include partner
relationships, merchant contracts, existing technology and trade
names. The partner relationships and merchant contracts are amortized
over ten years. The existing technology is amortized over five
years. Trade names are not amortized.
LML
PAYMENT SYSTEMS INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(unless
otherwise indicated, all dollar amounts are U.S.
dollars)
|
|
2.
|
SIGNIFICANT
ACCOUNTING POLICIES (continued)
|
|
|
(j)
|
Revenue
Recognition
|
The
Corporation’s revenue is derived from three separate lines of
business: (i) transaction payment processing; (ii) intellectual
property licensing and (iii) check processing and software
licensing. Revenue is recognized in accordance with Canadian
Institute of Chartered Accountants (“CICA”) Handbook Section 3400, “Revenue”
(“CICA 3400”) and with the corresponding U.S. guidance, Securities and Exchange
Commission (“SEC”) Staff Accounting Bulletin ("SAB") 104, "Revenue
Recognition".
Revenue
from the Corporation’s transaction payment processing (“TPP”) segment is derived
from one-time set-up fees, monthly gateway fees, and transaction fees paid to
the TPP segment by merchants. Transaction fees are recognized in the
period in which the transaction occurs. Gateway fees are monthly
subscription fees charged to the TPP segment merchant customers for the use of
its payment gateway. Gateway fees are recognized in the period in
which the service is provided. Set-up fees represent one-time charges
for initiating the TPP segment’s processing services. Although these
fees are generally paid at the commencement of the agreement, they are
recognized ratably over the estimated average life of the merchant relationship,
which is determined through a series of analyses of active and deactivated
merchants.
Revenue
from the Corporation’s intellectual property licensing (“IPL”) segment pertains
to licenses provided on its intellectual property estate. The IPL
segment typically earns revenue or other income from ongoing royalty fees and,
in some cases, release fees for potential past infringement. In some
instances, it also earns revenue from license agreements that provide for the
payment of contractually determined paid-up license fees to the IPL segment in
consideration for the grant of a non-exclusive, retroactive and future license
to the IPL segment’s intellectual property estate and in other instances, where
license agreements include multiple element arrangements, the IPL segment may
defer this revenue and recognize the revenue ratably over the license
term.
Revenue
from the Corporation’s check processing and software licensing (“CP/SL”) segment
consists primarily of transaction charges from primary and secondary check
collection business, including electronic check re-presentment.
Revenue
from the CP/SL segment’s electronic check authorization and electronic check
conversion business is recognized at the time the transactions are processed by
the merchant, provided the fee is fixed and determinable and collectability is
reasonably assured. Fees associated with the CP/SL segment’s primary and
secondary check collection business, including electronic check re-presentment,
are contingent on successful recovery; accordingly, revenue is recognized as
cash is received.
In
accordance with the American Institute of Certified Public Accountants (“AICPA”)
Statement of Position (“SOP”) 97-2, as amended by SOP 98-9, “Software Revenue
Recognition,” the CP/SL segment recognizes software license revenue when all of
the following criteria are met: execution of a written agreement;
delivery has occurred; the fee is fixed and determinable; collectability of the
proceeds is probable; and vendor-specific objective evidence exists to allocate
the total fee to elements of multiple-element arrangements, including post
contract customer support. Vendor-specific objective evidence is
based on the price charged when an element is sold separately. If the
CP/SL segment does not have sufficient evidence of the fair value of undelivered
elements, revenue is recognized ratably over the support period when the only
undelivered element is post-contract customer support. Any cash consideration
received prior to meeting revenue recognition criteria is recorded as deferred
revenue.
|
|
(k)
|
Income
Taxes
|
The
liability method is used in accounting for income taxes. Under this
method, income tax assets and liabilities are determined based on differences
between the financial reporting and tax bases of assets and liabilities and
measured using the substantively enacted tax rates and laws that will be in
effect when the differences are expected to reverse. Valuation
allowances are provided against net deferred tax assets when it is more likely
than not those assets may not be realized.
LML
PAYMENT SYSTEMS INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(unless
otherwise indicated, all dollar amounts are U.S. dollars)
|
|
2.
|
SIGNIFICANT
ACCOUNTING POLICIES (continued)
|
|
|
(l)
|
Loss
Per Common Share
|
Basic
loss per common share is calculated based on net loss divided by the
weighted-average number of common shares outstanding during the period. Diluted
loss per share includes the dilutive effect of stock options granted using the
treasury stock method.
|
|
(m)
|
Stock-based
Compensation Plans
|
The
Corporation has two stock-based compensation plans, described more fully in Note
11. Effective April 1, 2003, the Corporation adopted the fair value accounting
provisions of CICA Handbook Section 3870 “Stock-based compensation and other
stock-based payments” (“CICA 3870”) which corresponds to the fair value
recognition provisions under the Financial Accounting Standard Board’s (“FASB”)
Statement of Financial Accounting Standards No. 123, (“SFAS 123”), as amended by
SFAS No. 148, “Accounting for Stock-Based Compensation - Transition and
Disclosure” (“SFAS 148”) for all stock-based compensation granted after April
1. Subsequent to SFAS 148, the Corporation has adopted Statement of
Financial Accounting Standards No. 123(R) (“SFAS 123(R)”), “Share-Based Payment”
(see Note 11), which also corresponds to CICA Section 3870. Under this method,
the fair value of the stock options at the date of grant is recognized and is
amortized to the Consolidated Statement of Operations over the shorter of the
remaining employee service period or the vesting period with the offsetting
credit to contributed surplus. Upon the exercise of these options,
any amounts originally credited to contributed surplus are or will be credited
to capital stock.
Any
consideration paid by directors, officers and employees on the exercise of stock
options or purchase of stock is credited to share capital.
|
|
(n)
|
Foreign
currency translation
|
The
Corporation’s functional (except as described below) and reporting currency is
the United States dollar. Monetary assets and liabilities denominated
in foreign currencies are translated in accordance with CICA Handbook Section
1651 “Foreign Currency
Translation” (which is consistent with Statement of Financial Accounting
Standards No. 52 (“SFAS No. 52”) “Foreign Currency
Translation”) using the exchange rate prevailing at the balance sheet
date. Gains and losses arising on settlement of foreign currency
denominated transactions or balances are included in the determination of
income.
The
functional currency of the Corporation’s newly-acquired Beanstream subsidiary is
the Canadian dollar. Beanstream’s financial statements are translated
to United States dollars under the current rate method in accordance with CICA
1651 and SFAS No. 52. Beanstream’s assets and liabilities are
translated into U.S. dollars at rates of exchange in effect at the balance sheet
date. Average rates for the year are used to translate Beanstream’s
revenues and expenses. The cumulative translation adjustment is
reported as a component of accumulated other comprehensive income.
|
|
(o)
|
Financial
Instruments
|
All
financial instruments are classified into one of five categories: held-for
trading, held-to-maturity investments, loans and receivables, available-for-sale
financial assets or other financial liabilities. All financial instruments are
measured in the balance sheet at fair value except for loans and receivables,
held-to-maturity investments and other financial liabilities which are measured
at amortized cost. Subsequent measurement and changes in fair value will depend
on their initial classification, as follows: held-for-trading financial assets
are measured at fair value and changes in fair value are recognized in net
income. Available-for-sale financial instruments are measured at fair value with
changes in fair value recorded in other comprehensive income until the
instrument is derecognized or impaired.
LML
PAYMENT SYSTEMS INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(unless
otherwise indicated, all dollar amounts are U.S. dollars)
|
|
2.
|
SIGNIFICANT
ACCOUNTING POLICIES (continued)
|
The
Corporation’s financial instruments consist of cash and cash equivalents,
restricted cash, short term investments, accounts receivable, accounts payable,
and obligations under capital lease and promissory notes. From time to time the
Corporation purchases short-term investments including commercial paper. The
principal objective of the Corporation’s investment activities is to provide
maximum levels of interest income while maintaining acceptable levels of
interest rate and liquidity risk and facilitating the funding needs of the
Corporation.
The
Corporation has classified its cash and cash equivalents, funds held for
merchants and restricted cash as held-for-trading. Accounts receivable are
classified as loans and receivables. Accounts payable and certain accrued
liabilities, corporate taxes payable, funds due to merchants and former
shareholders, obligations under capital lease and promissory notes are
classified as other liabilities, all of which are measured at amortized
cost.
|
|
3.
|
CHANGE
IN ACCOUNTING POLICIES
|
Effective
April 1, 2007, the Corporation adopted the new recommendation of the Canadian
Institute of Chartered Accountants (CICA) under CICA Handbook Section 1530,
“Comprehensive Income”, Section 3251, “Equity”, Section 3855, “Financial
Instruments – Recognition and Measurement” and Section 3861 “Financial
Instruments – Disclosure and Presentation”. These new Handbook sections, which
apply to fiscal years beginning on or after November 1, 2006, provide
requirements for the recognition and measurement of financial instruments.
Section 1530 establishes standards for reporting and presenting comprehensive
income which is defined as the change in equity from transactions and other
events from non-owner sources. Other comprehensive income refers to items
recognized in comprehensive income but are excluded from net income calculated
in accordance with Canadian Generally Accepted Accounting
Principles.
Under
Section 3855, all financial instruments are classified into one of five
categories: held-for trading, held-to-maturity investments, loans and
receivables, available-for-sale financial assets or other financial liabilities.
All financial instruments are measured in the balance sheet at fair value except
for loans and receivables, held-to-maturity investments and other financial
liabilities which are measured at amortized cost. Subsequent measurement and
changes in fair value will depend on their initial classification, as follows:
held-for-trading financial assets are measured at fair value and changes in fair
value are recognized in net income. Available-for-sale financial instruments are
measured at fair value with changes in fair value recorded in other
comprehensive income until the instrument is derecognized or impaired. The
adoption of these new standards had no impact on the Corporation’s accounts and
deficit position as at April 1, 2007.
As a
result of the adoption of these new standards, the Corporation has classified
its cash and cash equivalents, funds held for merchants and restricted cash as
held-for-trading. Accounts receivable are classified as loans and receivables.
Accounts payable and certain accrued liabilities, corporate taxes payable, funds
due to merchants and former shareholders, obligations under capital lease and
promissory notes are classified as other liabilities, all of which are measured
at amortized cost.
Carrying
value and fair value of financial assets and liabilities as at March 31, 2008
are summarized as follows:
|
Carrying
Value
|
Fair
Value
|
|||||||
|
Held-for-trading
|
$ | 15,987,004 | $ | 15,987,004 | ||||
|
Loans
and receivables
|
719,301 | 719,301 | ||||||
|
Held-to-maturity
|
- | - | ||||||
|
Available-for-sale
|
- | - | ||||||
|
Other
liabilities
|
14,349,519 | 14,349,519 | ||||||
LML
PAYMENT SYSTEMS INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(unless
otherwise indicated, all dollar amounts are U.S. dollars)
|
|
3.
|
CHANGE
IN ACCOUNTING POLICIES (continued)
|
|
|
Accounting
changes
|
Commencing
with the Corporation’s 2008 fiscal year, the new recommendations of the CICA for
accounting changes (CICA Handbook Section 1506) apply to the Corporation. Most
significantly, the new recommendations stipulate that voluntary changes in
accounting policy are made only if they result in the financial statements
providing reliable and more relevant information and that new disclosures are
required in respect of changes in accounting policies, changes in accounting
estimates and correction of errors. The Corporation is not currently materially
affected by the new recommendations.
|
|
4.
|
ACQUISITION
OF BEANSTREAM
|
On April
30, 2007, the Corporation entered into an arrangement agreement to acquire all
of the outstanding capital stock of Beanstream, a leading provider of
authentication and Internet payment processing solutions. The
transaction closed on June 30, 2007. The purchase price originally
agreed to in the arrangement agreement was approximately CDN$19.5 million
(U.S.$18.3 million) consisting of CDN$7.6 million in cash (U.S.$7.1 million),
CDN$5.0 million (U.S.$4.7 million) in two-year promissory notes and CDN$6.9
million (U.S.$6.5 million) in the Corporation’s common stock paid at
closing. Former Beanstream shareholders could also receive up to an
additional CDN$2.0 million (U.S.$1.9 million) in the Corporation’s common stock
if certain revenue milestones are reached by June 30, 2008.
In
accordance with CICA Section 1581, “Business Combinations” (“CICA 1581”) which
corresponds to FASB 141, “Business Combinations” (“FASB 141”), the Corporation
has applied the purchase method and has consolidated the results of operations
of Beanstream commencing July 1, 2007.
Pursuant
to the arrangement agreement, the Beanstream shareholders had an option to
elect to accept shares of the Corporation in lieu of a portion of the cash
consideration. The amount of the share-for-cash election was not
known until June 27, 2007, therefore, the measurement date for the consideration
paid by the Corporation was determined to be June 27, 2007 rather than April 30,
2007. Consequently, the measurement date is June 27, 2007 and the
total purchase price paid has been calculated as follows:
|
Number
of Shares
|
U.S.
($)
|
|||
|
Cash
|
-
|
7,153,759
|
||
|
Promissory
Notes
1
|
-
|
4,693,073
|
||
|
Common
Shares 2
|
1,963,555
|
8,538,737
|
||
|
Finders
Fee Common Shares
|
144,933
|
640,604
|
||
|
Transaction
Costs
|
-
|
1,102,578
|
||
|
Purchase
Price
|
22,128,751
|
|
|
1
|
The
promissory notes are secured by Beanstream’s assets, bear interest at 8%
per annum and are payable in two equal installments on June 30, 2008 and
June 30, 2009. The Corporation has the ability to prepay the
promissory notes without penalty at its discretion. The balance
of $5,167,383 at March 31, 2008 includes $296,462 in accrued interest and
$177,847 in an unrealized foreign exchange
loss.
|
|
|
2
|
The
value of shares issued to complete the transaction was determined using
the weighted average share price of approximately $4.35 per share for the
Corporation’s stock for the period of five days prior to and following the
measurement date of the
acquisition.
|
The
increase in purchase price from the U.S.$18.3 million above to the U.S. $22.1
million recorded was a result of changes in the Canadian/U.S. currency exchange
rate and increases in the trading price of the Corporation’s common stock
between April 30, 2007 and June 27, 2007, and also due to a finders fee and
other transaction costs related to the acquisition.
LML
PAYMENT SYSTEMS INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(unless
otherwise indicated, all dollar amounts are U.S. dollars)
|
|
4.
|
ACQUISITION
OF BEANSTREAM (continued)
|
The
purchase price was allocated as follows:
|
Cash
|
$ | 3,989,336 | ||
|
Funds
held for merchants
|
2,812,117 | |||
|
Accounts
receivable, net
|
258,223 | |||
|
Prepaid
expenses
|
79,124 | |||
|
Restricted
cash
|
158,520 | |||
|
Accounts
payable and accrued liabilities
|
(1,052,378 | ) | ||
|
Funds
due to merchants
|
(2,812,117 | ) | ||
|
Amounts
due to former shareholders of Beanstream 1
|
(3,350,552 | ) | ||
|
Book
value of deferred revenue (recorded as goodwill)
|
(82,273 | ) | ||
|
Net
working capital acquired 1
|
- | |||
|
Property
and equipment
|
71,401 | |||
|
Net
identifiable assets
|
71,401 | |||
|
Goodwill
|
15,985,350 | |||
|
Intangible
assets
|
6,072,000 | |||
| $ | 22,128,751 |
|
|
1
|
The
arrangement agreement included a provision whereby the Corporation
acquired Beanstream with a $NIL working capital (as defined in the
arrangement agreement) balance. Accordingly, the working
capital acquired from Beanstream on June 30, 2007 included an accrual in
the amount of $3,350,552 recognizing the excess working capital balance of
Beanstream due to the former shareholders of
Beanstream.
|
On the
statement of cash flows, the acquisition of Beanstream, net of cash acquired, is
shown as a net cash outflow of $7,286,834 calculated as follows:
|
Cash
consideration paid
|
$ | (7,153,759 | ) | |
|
Beanstream
cash acquired
|
6,801,453 | |||
|
Funds
held for merchants (Note 6)
|
(2,812,117 | ) | ||
|
Amounts
due to former shareholders of Beanstream
|
(3,229,078 | ) | ||
|
Transaction
costs incurred 1
|
(893,333 | ) | ||
|
Acquisition
of Beanstream, net of cash acquired
|
$ | (7,286,834 | ) |
|
|
1
|
In
addition to the $893,333 transaction costs paid, the Corporation incurred
transaction costs of $209,245 that were incurred and paid prior to March
31, 2007.
|
LML
PAYMENT SYSTEMS INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(unless
otherwise indicated, all dollar amounts are U.S. dollars)
|
4.
|
ACQUISITION
OF BEANSTREAM (continued)
|
Pro forma
Information (Unaudited)
The
following pro forma consolidated financial summary is presented as if the
acquisition of Beanstream was completed as of April 1, 2007, April 1, 2006 and
April 1, 2005, respectively. The pro forma combined results have been
prepared for informational purposes only and do not purport to be indicative of
the results which could have actually been attained had the business combination
been consummated on the dates indicated or of the results which may be expected
to occur in the future.
|
Years
Ended March 31
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
REVENUE
|
$ | 12,962,645 | $ | 11,435,181 | $ | 8,277,670 | ||||||
|
COSTS
AND EXPENSES
|
||||||||||||
|
Cost
of operations
|
8,703,748 | 8,033,447 | 6,408,320 | |||||||||
|
Sales,
general and administrative expenses
|
3,218,319 | 2,982,623 | 4,903,996 | |||||||||
|
Amortization
and depreciation
|
1,038,750 | 851,563 | 1,132,600 | |||||||||
|
INCOME
(LOSS) BEFORE OTHER INCOME (EXPENSES)
AND INCOME
TAXES
|
1,828 | (432,452 | ) | (4,167,246 | ) | |||||||
|
Foreign
exchange gain (loss)
|
(229,661 | ) | (11,644 | ) | 37,898 | |||||||
|
Other
income (expenses), net
|
(246,918 | ) | 616,092 | - | ||||||||
|
Gain
(loss) on disposal/abandonment of capital assets
|
(726,325 | ) | 7,000 | - | ||||||||
|
Interest
income
|
372,252 | 270,506 | - | |||||||||
|
Interest
expense
|
(449,822 | ) | (364,115 | ) | (345,252 | ) | ||||||
|
Settlement
expenses
|
- | (45,000 | ) | (235,778 | ) | |||||||
|
Due
diligence expenses
|
- | (567,562 | ) | - | ||||||||
|
INCOME
(LOSS) BEFORE INCOME TAXES
|
(1,278,646 | ) | (527,175 | ) | (4,710,378 | ) | ||||||
|
Income
taxes
|
784,704 | 443,689 | 122,640 | |||||||||
|
NET
LOSS
|
$ | (2,063,350 | ) | $ | (970,864 | ) | $ | (4,833,018 | ) | |||
|
LOSS
PER SHARE
|
||||||||||||
|
Basic
|
$ | (0.09 | ) | $ | (0.04 | ) | $ | (0.22 | ) | |||
|
Diluted
|
$ | (0.09 | ) | $ | (0.04 | ) | $ | (0.22 | ) | |||
|
WEIGHTED
AVERAGE SHARES OUTSTANDING
|
||||||||||||
|
Basic
|
22,388,183 | 22,314,900 | 22,272,767 | |||||||||
|
Diluted
|
22,388,183 | 22,314,900 | 22,272,767 | |||||||||
|
|
5.
|
FINANCIAL
INSTRUMENTS
|
|
|
(a)
|
Restricted
cash
|
Under the
terms of the processing agreement with one of the Corporation’s processing
banks, the Corporation has pledged a deposit of $250,000 (2007 - $250,000)
against charge back losses. Non-current restricted cash represents
funds held by First Data Loan Company as security for the Corporation’s merchant
accounts.
LML
PAYMENT SYSTEMS INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(unless
otherwise indicated, all dollar amounts are U.S. dollars)
|
|
5.
|
FINANCIAL
INSTRUMENTS (Continued)
|
|
(b)
|
Concentration
of credit risk
|
During
the fiscal year ended March 31, 2008, revenue from the Corporation’s three
largest customers amounted to approximately 21% of total revenue for one
customer (2007 - 34%; 2006 - 29%), 11% for the second customer (2007 - 19%; 2006
- 0%) and 15% for the third customer (2007 - 0%; 2006 - 0%). Revenue
from these customers amounted to approximately $2,356,049 for one customer (2007
- $2,265,963; 2006 - $1,553,567), $1,222,224 for the second customer (2007 -
$1,222,224; 2006 - $0) and $1,715,753 for the third customer (2007 - $0; 2006 -
$0). The Corporation is economically dependent on revenue from these
customers.
During
the fiscal year ended March 31, 2008, the Corporation entered into various
contractual arrangements to purchase $1,000,000 Canadian at a pre-determined
foreign exchange rate with an execution date between June 16 to June 27,
2008. The change that would result from marking this financial
instrument to market is insignificant.
|
6.
|
CASH
AND CASH EQUIVALENTS AND FUNDS HELD FOR/DUE
MERCHANTS
|
Cash
and cash equivalents
At March
31, 2008, the Corporation held $9,749,768 (March 31, 2007: $10,163,008) in cash
and cash equivalents. Included in this balance is $1.1 million in
cash and cash equivalents used as continuing collateral security with the
Corporation’s primary financial institution. As this continuing
collateral security relates to Beanstream’s operations, there was no such amount
before the acquisition of Beanstream.
Funds
held for/due to merchants
At March
31, 2008, Beanstream was holding funds due to merchants in the amount of
$5,833,617. The funds held for/due to merchants are
comprised of the following:
|
·
|
funds
held in reserves calculated by applying contractually determined
percentages of the gross transaction volume for a hold-back
period of up to six
months;
|
|
·
|
funds
from transaction payment processing which may be held for up to
approximately fifteen days, the actual number of days depends
on the contractual terms with each merchant;
and
|
|
·
|
funds
from payroll/pre-authorized debit services provided on behalf of
merchants, which may be held for up to approximately two
days.
|
LML
PAYMENT SYSTEMS INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(unless
otherwise indicated, all dollar amounts are U.S. dollars)
|
|
7.
|
PROPERTY
AND EQUIPMENT
|
|
2008
|
||||||||||||
|
Accumulated
|
||||||||||||
|
Amortization
and
|
||||||||||||
|
Cost
|
Depreciation
|
Net
Book Value
|
||||||||||
|
Computer
equipment
|
$ | 1,480,343 | $ | 1,410,472 | $ | 69,871 | ||||||
|
Computer
software
|
1,207,429 | 1,126,394 | 81,035 | |||||||||
|
Furniture
and fixtures
|
293,768 | 289,576 | 4,192 | |||||||||
|
Leasehold improvements
|
260,662 | 257,291 | 3,371 | |||||||||
|
Office
equipment
|
702,824 | 620,342 | 82,482 | |||||||||
|
Vehicles
|
75,277 | 70,396 | 4,881 | |||||||||
|
Website
& trademarks
|
38,186 | 37,190 | 996 | |||||||||
|
System
& software
|
6,775,841 | 6,775,841 | - | |||||||||
|
Total
cost
|
10,834,330 | 10,587,502 | 246,828 | |||||||||
|
2007
|
||||||||||||
|
Accumulated
|
||||||||||||
|
Amortization
and
|
||||||||||||
|
Cost
|
Depreciation
|
Net
Book Value
|
||||||||||
|
Computer
equipment
|
$ | 2,528,848 | $ | 1,307,677 | $ | 1,221,171 | ||||||
|
Computer
software
|
1,060,510 | 1,022,816 | 37,694 | |||||||||
|
Furniture
and fixtures
|
289,209 | 288,721 | 488 | |||||||||
|
Leasehold
improvements
|
257,872 | 255,372 | 2,500 | |||||||||
|
Office
equipment
|
661,553 | 587,391 | 74,162 | |||||||||
|
Vehicles
|
75,277 | 67,468 | 7,809 | |||||||||
|
Website
& trademarks
|
38,186 | 35,425 | 2,761 | |||||||||
|
System
& software
|
6,800,841 | 6,785,423 | 15,418 | |||||||||
|
Total
cost
|
11,712,296 | 10,350,293 | 1,362,003 | |||||||||
Depreciation
expense on property and equipment totaled $237,209 in 2008, $171,807 in 2007 and
$460,041 in 2006. Property and equipment include $ 7,367 of an asset that is
financed under a capital lease for the year ended March 31, 2008 and $1,146,473
of assets that are financed under various capital leases for the year ended
March 31, 2007. Accumulated amortization on these assets totals $2,333 and
$449,316 for the years ended March 31, 2008 and 2007,
respectively. Amortization of assets under capital lease is included
in depreciation expense.
|
|
8.
|
PATENTS
|
|
2008
|
2007
|
|||||||
|
Cost
|
$ | 2,045,715 | $ | 2,034,911 | ||||
|
Less:
accumulated amortization
|
1,257,242 | 1,090,926 | ||||||
|
Net
book value
|
788,473 | 943,985 | ||||||
Amortization
expense totaled $166,316 in 2008, $163,748 in 2007 and $156,551 in
2006.
LML
PAYMENT SYSTEMS INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(unless
otherwise indicated, all dollar amounts are U.S. dollars)
|
|
8.
|
PATENTS
(continued)
|
Estimated
aggregate amortization expense for each of the five succeeding fiscal years is
as follows:
|
Years
ending March 31
|
||||
|
2009
|
$ | 165,950 | ||
|
2010
|
165,950 | |||
|
2011
|
165,950 | |||
|
2012
|
165,950 | |||
|
2013
|
124,673 | |||
|
|
9.
|
INTANGIBLE
ASSETS
|
During
the fiscal year ended March 31, 2008, the Corporation recorded intangible assets
of $6,072,000 in connection with the acquisition of Beanstream (see Note
4).
Acquired
intangible assets related to the acquisition of Beanstream include partner
relationships, merchant contracts, existing technology and trade
names. The partner relationships and merchant contracts are amortized
over ten years. The existing technology is amortized over five
years. Trade names are not amortized.
The
components of acquired intangible asses are as follows:
|
March
31, 2008
|
March
31, 2007
|
|||||||||||||||||||||||
|
Accumulated
|
Accumulated
|
|||||||||||||||||||||||
|
Gross
|
Amortization
|
Net
|
Gross
|
Amortization
|
Net
|
|||||||||||||||||||
|
Amortizable
intangible assets:
|
||||||||||||||||||||||||
|
Partner
relationships
|
$ | 928,000 | $ | 69,600 | $ | 858,400 | $ | - | $ | - | $ | - | ||||||||||||
|
Merchant contracts
|
2,963,500 | 222,263 | 2,741,237 | - | - | - | ||||||||||||||||||
|
Existing
technology
|
530,000 | 79,500 | 450,500 | - | - | - | ||||||||||||||||||
|
Unamortized
intangible assets:
|
||||||||||||||||||||||||
|
Trade names
|
1,650,500 | - | 1,650,500 | - | - | - | ||||||||||||||||||
| $ | 6,072,000 | $ | 371,363 | $ | 5,700,637 | $ | - | $ | - | $ | - | |||||||||||||
Amortization
expense for intangible assets totaled $371,363 for the fiscal year ended March
31, 2008 (2007 - $0).
|
10.
|
OBLIGATIONS
UNDER CAPITAL LEASE
|
In
August, 2006, the Corporation entered into a lease agreement with Xerox Canada
Ltd. to finance an equipment purchase of $7,367. Lease payments are due
quarterly under the lease term of thirty-six (36) months. Title to the equipment
will transfer to the Corporation at the expiration of the lease. Accordingly
these amounts have been recorded as a capital lease.
LML
PAYMENT SYSTEMS INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(unless
otherwise indicated, all dollar amounts are U.S. dollars)
|
10.
|
OBLIGATIONS
UNDER CAPITAL LEASE (continued)
|
In
February, 2007, the Corporation entered into a lease agreement with IBM Credit
LLC to finance two IBM Mainframe hardware purchases totaling $1,139,106. Lease
payments are due on the last day of each month under the lease term of
thirty-six (36) months. Title to the equipment will transfer to the Corporation
at the expiration of the lease. Accordingly these amounts have been recorded as
a capital lease. During the fourth quarter of our fiscal year ended March 31,
2008, the Corporation consolidated its four data centers, which were running two
distinct processing platforms, into two data centers with a single processing
platform. Consequently, the Corporation disposed and abandoned the two IBM
Mainframes for a net loss of approximately $726,000 and incurred other costs
relating to the consolidation of the data centers of approximately $247,000. The
Corporation sold two components of the IBM Mainframe and remains obligated on
the balance of $377,171 as at March 31, 2008 which will be satisfied with
monthly payments over the remaining twenty-two (22) months of the lease
agreement.
|
2008
|
2007
|
|||||||
|
Future
minimum payments due
|
||||||||
|
2008
|
$ | - | $ | 423,934 | ||||
|
2009
|
220,887 | 423,934 | ||||||
|
2010
|
182,239 | 351,852 | ||||||
|
Less
amount representing interest (7%-8%)
|
(22,187 | ) | (112,735 | ) | ||||
|
Net
principal balance
|
380,939 | 1,086,985 | ||||||
|
Less
current portion
|
(203,366 | ) | (360,179 | ) | ||||
| 177,573 | 726,806 | |||||||
The lease
is collateralized by the equipment under capital lease.
|
|
11.
|
SHARE
CAPITAL
|
|
|
(a)
|
Weighted
average common shares outstanding
|
As a result of the net losses
incurred for 2008, 2007 and 2006, the effect of dilutive securities would have
been anti-dilutive to the diluted loss per common share computations and were
thus excluded. Dilutive securities that would have otherwise been included in
the determination of the weighted-average number of common shares outstanding
for the purposes of computing diluted earnings per common share included
2,162,500 for 2008, 660,000 for 2007 and 1,174,500 for 2006, issuable under
stock options.
LML
PAYMENT SYSTEMS INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(unless
otherwise indicated, all dollar amounts are U.S. dollars)
|
|
11.
|
SHARE
CAPITAL (continued)
|
|
|
(b)
|
Contributed
Surplus
|
|
Year
ended March 31
|
||||||||||||
|
Contributed
Surplus
|
2008
|
2007
|
2006
|
|||||||||
|
Opening
contributed surplus
|
$ | 3,443,292 | $ | 2,544,312 | $ | 1,631,471 | ||||||
|
Financial
advisor fee (see Note 11(d))
|
649,000 | - | - | |||||||||
|
Stock-based
compensation
|
1,287,210 | 877,334 | 903,778 | |||||||||
|
Stock-based
compensation – future income taxes
|
11,185 | 21,646 | 9,063 | |||||||||
|
Closing
contributed surplus
|
5,391,187 | 3,443,292 | 2,544,312 | |||||||||
The
Corporation accounts for all stock options issued during the period based on
their fair value as required by the CICA Section 3870 which corresponds to the
Financial Accounting Standard Board’s (“FASB”) Statement of Financial Accounting
Standards No. 123(R) (“SFAS 123(R)”), “Share-Based Payment” (see Note 16), which
also corresponds to CICA Section 3870. Prior to the adoption of this
accounting standard, the Corporation did not record the fair value of stock
options issued, rather, it provided pro-forma disclosure of the effect of
applying the fair value based method to stock options issued to directors,
officers and employees.
The
2,775,000 stock options granted in the fiscal year ended March 31, 2008 (see
Note 11(c)), have a weighted average fair value of a range from a low of $1.43
to a high of $1.82.
The total
fair value stock compensation is amortized over the vesting period resulting in
a stock compensation expense of $1,287,210 for the fiscal year ended March 31,
2008 (2007 - $877,334; 2006 - $903,778). The fair value for the 2008
stock option grants was estimated at the date of grant using a Black-Scholes
option pricing model with the following assumptions:
Risk-free
interest rate of 3.8% to 4.5%;
Expected
volatility of 54.3% to 57.5%;
Expected
life of the stock option of 4 years; and
No
dividend yields.
The
760,000 stock options granted in the fiscal year ended March 31, 2007, have a
weighted average fair value of a range from a low of $1.46 to a high of
$1.82.
The total
fair value stock compensation is amortized over the vesting period resulting in
a stock compensation expense of $877,334 for the fiscal year ended March 31,
2007 (2006 - $903,778). The fair value for the 2007 stock option
grants was estimated at the date of grant using a Black-Scholes option pricing
model with the following assumptions:
Risk-free
interest rate of 3.84% to 4.42%;
Expected
volatility of 60.2% to 65.5%;
Expected
life of the stock options of 4 years; and
No
dividend yields.
The
250,000 stock options granted in the fiscal year ended March 31, 2006, have a
weighted average fair value of $2.35.
LML
PAYMENT SYSTEMS INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(unless
otherwise indicated, all dollar amounts are U.S. dollars)
|
|
11.
|
SHARE
CAPITAL (continued)
|
The total
fair value stock compensation is amortized over the vesting period resulting in
a stock compensation expense of $903,778 for the fiscal year ended March 31,
2006. The fair value for the 2006 stock option grants was estimated
at the date of grant using a Black-Scholes option pricing model with the
following assumptions:
Risk-free
interest rate of 3.12%;
Expected
volatility of 65.5%;
Expected
life of the stock options of 4 years; and
No
dividend yields.
|
|
(c)
|
Stock
Options
|
The
Corporation maintains two stock option plans; the 1996 Stock Option Plan (the
“1996 Plan”) and the 1998 Stock Incentive Plan (the “1998 Plan”). A
total of 6 million shares may be granted under each of the 1996 Plan and the
1998 Plan. All director, officer and employee stock options are
granted under either the Corporation’s 1996 Plan or the 1998
Plan. The exercise price of stock options granted under the 1996 Plan
and the 1998 Plan is 100% of the fair market value on the date the stock option
is granted. Stock options granted to independent directors vest one year from
the date of grant and are exercisable for a period of five years in accordance
with the compensation plan adopted for the Corporation’s independent directors
during the fiscal year ended March 31, 2005. Stock options granted to
executive officers have varying vesting schedules which range from immediate
vesting of all of the stock options granted to vesting over a five-year period
and are exercisable for periods ranging from five to ten years. Stock
options granted to employees are normally vested over a three-year period and
are exercisable for a period of five years from the date of
grant. Generally, stock options granted to employees are forfeited 30
days after leaving the employment of the Corporation.
At March
31, 2008 there are stock options outstanding and exercisable to issue 4,207,500
common shares of the Corporation (2007 - 2,255,500). The price of these stock
options range from $2.95 to $6.25 and their expiry dates range from August 20,
2008 to March 31, 2018. At March 31, 2008, 5,649,717 common shares were reserved
for issuance pursuant to the 1996 Plan and 1998 Plan. This amount
reflects the limit of shares collectively to be granted pursuant to the 1996
Plan and 1998 Plan less (i) the number of shares which have been granted and are
still outstanding (ii) the number of shares which have been granted and
exercised and (iii) the number of shares that have been granted and have expired
without being exercised.
The
following table summarizes information about the stock options
outstanding:
|
Options
outstanding
|
Options
exercisable
|
|||||||||||||||||||||||||
|
Weighted
|
Weighted
|
|||||||||||||||||||||||||
|
Weighted
|
average
|
Weighted
|
average
|
|||||||||||||||||||||||
|
average
|
contract
life
|
average
|
contract
life
|
|||||||||||||||||||||||
|
Total
# of
|
exercise
|
remaining
|
Total
# of
|
exercise
|
remaining
|
|||||||||||||||||||||
|
Range
($)
|
Shares
|
price
|
(years)
|
Shares
|
price
|
(years)
|
||||||||||||||||||||
| 2.95 | 467,500 | $ | 2.95 | 3.52 | 280,000 | $ | 2.95 | 3.52 | ||||||||||||||||||
| 3.00-3.90 | 2,950,000 | 3.37 | 7.46 | 650,000 | 3.30 | 7.43 | ||||||||||||||||||||
| 4.52-4.74 | 255,000 | 4.55 | 2.16 | 255,000 | 4.55 | 2.16 | ||||||||||||||||||||
| 5.08-5.61 | 155,000 | 5.35 | 1.33 | 155,000 | 5.35 | 1.33 | ||||||||||||||||||||
| 6.25 | 380,000 | 6.25 | 1.00 | 380,000 | 6.25 | 1.00 | ||||||||||||||||||||
| 4,207,500 | 3.73 | 5.89 | 1,720,000 | 4.26 | 4.04 | |||||||||||||||||||||
LML
PAYMENT SYSTEMS INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(unless
otherwise indicated, all dollar amounts are U.S. dollars)
|
|
11.
|
SHARE
CAPITAL (continued)
|
Stock
option activity for the three preceding years is as follows:
|
2008
|
2007
|
2006
|
||||||||||||||||||||||
|
Weighted
|
Weighted
|
Weighted
|
||||||||||||||||||||||
|
average
|
average
|
average
|
||||||||||||||||||||||
|
Total
# of
|
exercise
|
Total
# of
|
exercise
|
Total
# of
|
exercise
|
|||||||||||||||||||
|
Shares
|
price
|
Shares
|
price
|
Shares
|
price
|
|||||||||||||||||||
|
Stock
options outstanding, beginning of year
|
2,225,500 | $ | 4.59 | 1,629,500 | $ | 5.32 | 1,903,000 | $ | 6.65 | |||||||||||||||
|
Granted
|
2,775,000 | 3.35 | 760,000 | 3.10 | 250,000 | 4.52 | ||||||||||||||||||
|
Forfeited
|
(766,750 | ) | 4.91 | (151,000 | ) | 4.89 | (475,000 | ) | 10.30 | |||||||||||||||
|
Exercised
|
(26,250 | ) | 2.95 | (13,000 | ) | 4.95 | (48,500 | ) | 4.81 | |||||||||||||||
|
Stock
options outstanding, end of year
|
4,207,500 | 3.73 | 2,225,500 | 4.59 | 1,629,500 | 5.32 | ||||||||||||||||||
|
|
(d)
|
Private
Placement
|
In March,
2008, the Corporation completed a private placement of common stock. The private
placement consisted of 4,000,000 common shares at a purchase price of $1.80 per
common share, which realized the Corporation $7,200,000. The Corporation paid a
financial advisor a 6.5% fee in cash as well as warrants to acquire 400,000
shares of the Corporation’s common stock. The warrants are exercisable at $3.40
per share and are exercisable for a period of five years from March 26,
2008.
The fair
value of the warrants is $1.62 per share, based on the Black-Scholes fair value
pricing model with the following assumptions:
Risk-free
interest rate of 3.825%;
Expected
volatility of 57.5%;
Expected
life of the warrants of 4 years; and
No
dividend yields.
The total
fair value of approximately $649,500 is included in contributed
surplus.
|
12.
|
EMPLOYEE
BENEFIT PLAN
|
The
Corporation has a defined contribution 401 (k) plan (the "Plan") for eligible
employees. The Plan requires that the Corporation match 50% of eligible
employees’ contributions, up to 6% of their compensation. The Corporation
recorded matching contribution expenses for the years ended March 31, 2008, 2007
and 2006 of $22,327, $24,018 and $17,779 respectively.
|
13.
|
INCOME
TAXES
|
At March
31, 2008, the Corporation has Canadian non-capital loss carry-forwards for
income tax purposes of approximately $12,042,000 and U.S. federal net operating
loss carry-forwards of $11,752,000. Due to Canadian and U.S. tax "change of
ownership" rules, the loss carry-forwards are restricted in their
use. These losses expire as follows:
LML
PAYMENT SYSTEMS INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(unless
otherwise indicated, all dollar amounts are U.S. dollars)
|
13.
|
INCOME
TAXES (continued)
|
Canadian
non-capital loss carry-forwards:
|
2009
|
$ | 935,000 | ||
|
2010
|
1,264,000 | |||
|
2014
|
1,287,000 | |||
|
2013
- 2027
|
8,556,000 | |||
| 12,042,000 |
|
2012
|
$ | 51,000 | ||
|
2013
|
50,000 | |||
|
2014
|
82,000 | |||
|
2015
|
346,000 | |||
|
2016-2031
|
11,223,000 | |||
| 11,752,000 |
Future
income taxes reflect the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and
the amounts used for income tax purposes. Significant components of the
Corporation’s future tax assets as of March 31, 2008 and 2007 are as
follows:
|
2008
|
2007
|
|||||||
|
Future
tax assets:
|
||||||||
|
Excess
of tax value over the net book value for capital assets
|
$ | 259,000 | $ | 317,000 | ||||
|
Stock-based
compensation
|
1,180,357 | 1,275,000 | ||||||
|
Canadian
non-capital loss carry-forwards
|
3,251,000 | 3,719,000 | ||||||
|
U.S.
federal net operating loss carry-forwards
|
4,113,000 | 4,472,000 | ||||||
|
Total
future tax assets
|
8,803,357 | 9,783,000 | ||||||
|
Valuation
allowance for future tax assets
|
(8,803,357 | ) | (9,783,000 | ) | ||||
|
Net
future tax assets
|
- | - | ||||||
The
potential income tax benefits related to these future tax assets have not been
recognized in the accounts as their realization did not meet the requirements of
"more likely than not" under the liability method of tax allocation due to the
Corporation’s history of losses. Accordingly, no future tax assets have been
recognized in the financial statements as at March 31, 2008.
The
reconciliation of income tax attributable to operations computed at the
statutory tax rates to income tax expense (recovery), using a 31% statutory tax
rate at March 31, 2008, a 34.12% statutory tax rate at March 31, 2007 and a
34.12% statutory tax rate at March 31, 2006 is as follows:
|
2008
|
2007
|
2006
|
||||||||||
|
Income
taxes at statutory rates
|
$ | (498,000 | ) | $ | (366,000 | ) | $ | (1,586,000 | ) | |||
|
State
income taxes
|
16,800 | 16,800 | 16,800 | |||||||||
|
Stock-based
compensation – future income taxes
|
11,185 | 21,646 | 9,063 | |||||||||
|
Stock-based
compensation and other permanent differences
|
544,000 | 307,000 | 311,000 | |||||||||
|
Effect
of U.S. tax rates
|
10,000 | 16,000 | (21,000 | ) | ||||||||
| Expiration of loss carry-forwards | 268,000 | - | - | |||||||||
| Change in substantially enacted tax rates | 1,154,000 | - | - | |||||||||
| Utilization of U.S. federal net operating losses | 88,000 | - | - | |||||||||
|
(Decrease)
Increase in valuation allowance
|
(979,643 | ) | 43,000 | 1,296,000 | ||||||||
| 614,342 | 38,446 | 25,863 | ||||||||||
LML
PAYMENT SYSTEMS INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(unless
otherwise indicated, all dollar amounts are U.S. dollars)
|
14.
|
COMMITMENTS
AND CONTINGENCIES
|
|
|
(a)
|
During
the fiscal year ended March 31, 2006, a former employee of a subsidiary of
the Corporation filed a complaint against the Corporation’s subsidiary,
LML Payment Systems Corp. for breach of contract and wrongful termination
in the Superior Court of the State of Arizona in and for the County of
Maricopa. In the suit, the former employee alleged that the subsidiary of
the Corporation wrongfully reduced the former employee’s salary without
requisite notice under the employment agreement between the former
employee and the Corporation’s subsidiary, LML Payment Systems Corp. and
wrongfully terminated the former employee without requisite notice and for
acts that do not constitute cause under the aforementioned employment
agreement.
|
During
the fiscal year ended March 31, 2008, the subsidiary of the Corporation settled
the complaint. Pursuant to the terms of the settlement, the subsidiary of the
Corporation agreed to pay the former employee the sum of $22,500 and the former
employee’s legal counsel the sum of $22,500. The amounts were included in
accrued liabilities at March 31, 2007 and were paid during the fiscal year ended
March 31, 2008.
|
|
(b)
|
During
the fiscal year ended March 31, 2007 a subsidiary of the Corporation
received notification that it had been named in a class-action lawsuit
filed in the United States District Court, Eastern District, Marshall
Division, Texas, alleging that numerous defendants, including the
subsidiary of the Corporation, violated the Driver’s Privacy Protection
Act regulating the use of personal information such as driver’s license
numbers and home addresses contained in motor vehicle records held by
motor vehicle departments, by not having a permissible use in obtaining
the State of Texas’ entire database of names, addresses and other personal
information. The subsidiary of the Corporation
believes that these allegations are without merit and does not expect them
to have a material adverse effect on its results of operations, financial
position or liquidity.
|
|
|
(c)
|
During
the fiscal year ended March 31, 2008, the Corporation entered into a
Registration Rights Agreement in connection with a private placement
transaction (see Note 11(d)). Pursuant to the
Registration Rights Agreement, the Corporation agreed to prepare and file
with the SEC a Registration Statement on Form S-1 covering the resale of
the shares sold to the purchaser by the earlier of (i) the 15th calendar
day following the date the Corporation files its annual report on Form
10-K on Edgar for the fiscal year ended March 31, 2008, and (ii) one
hundred (100) calendar days after March 26, 2008, being the closing date
of the private placement transaction (the “Filing
Deadline”). If the Corporation fails to file the Registration
Statement by the Filing Deadline or if the Registration Statement fails to
be declared effective by the SEC within a certain time period after filing
(each, an “Event”), then the Corporation has agreed to pay the purchaser
liquidated damages in cash on each such Event date and on each monthly
anniversary of each such Event date until the applicable Event is cured,
in an amount equal to 1.0% of the purchase price of the purchaser’s common
stock then held by the purchaser. The maximum aggregate
liquidated damages payable to the purchaser under the Registration Rights
Agreement is six percent (6%) of the purchase price, being
$432,000.
|
|
|
(d)
|
The
Corporation is a party to additional ordinary litigation incidental to its
business, none of which is expected to have a material adverse effect on
results of operations, financial position or liquidity of the
Corporation.
|
|
|
(e)
|
Operating
lease obligations
|
Future
minimum lease payments for obligations under operating leases, including
premises, are as follows:
|
2009
|
$ | 493,692 | ||
|
2010
|
118,629 | |||
|
2011
|
8,019 | |||
|
2012
|
- | |||
|
2013
|
- | |||
| 620,340 |
The
Corporation’s rent expense totaled $443,420 in 2008, $415,609 in 2007 and
$360,599 in 2006.
LML
PAYMENT SYSTEMS INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(unless
otherwise indicated, all dollar amounts are U.S. dollars)
|
15.
|
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:
TPP
operations involve financial payment processing, authentication and risk
management services provided by Beanstream. The services are
accessible via the Internet and are offered in an application service provider
(ASP) model.
IPL
operations involve licensing the Corporation’s intellectual property estate,
which includes five U.S. patents describing electronic check processing
methods.
CP/SL
operations involve electronic check authorization, electronic check
conversion (ECC), primary and secondary check collection including electronic
check re-presentment (RCK) and software licensing.
Within
these segments, performance is measured based on revenue, factoring in interest
income and expenses and amortization and depreciation as well as earnings from
operations before income taxes from each segment. There are no transactions
between segments. The Corporation does not generally allocate corporate or
centralized marketing and general and administrative expenses to its business
unit segments because these activities are managed separately from the business
units. Asset information by operating segment is not reported to or reviewed by
the Corporation’s Chief Executive Officer, and therefore the Corporation has not
disclosed asset information for each operating segment.
LML
PAYMENT SYSTEMS INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(unless
otherwise indicated, all dollar amounts are U.S. dollars)
|
15.
|
INDUSTRY
AND GEOGRAPHIC SEGMENTS (continued)
|
Financial
information for each reportable segment for the fiscal years ended March 31,
2008, 2007and 2006 was as follows:
|
Fiscal
Year Ended
|
TPP
|
IPL
|
CP/SL
|
Reconciling
|
Consolidated
|
||||||||||||||||||
|
March
31, 2008
|
Canada
|
U.S.
|
U.S.
|
Items
|
Total
|
||||||||||||||||||
|
Total
Revenue
|
$ | 5,636,564 | $ | 1,670,247 | $ | 4,021,067 | $ | - | $ | 11,327,878 | |||||||||||||
|
Revenue:
major customers (Note 5)
|
1,715,753 | 1,222,224 | 2,356,049 | - | 5,294,026 | ||||||||||||||||||
|
Cost
of operations
|
3,469,415 | 2,110 | 3,789,089 | 424,155 | 1 | 7,684,769 | |||||||||||||||||
|
Interest
income
|
247,616 | 85,260 | 60,436 | 12,751 | 2 | 406,063 | |||||||||||||||||
|
Interest
expenses
|
- | - | 61,334 | 297,422 | 3 | 358,756 | |||||||||||||||||
|
Amortization and
depreciation
|
19,161 | 167,122 | 338,053 | 381,152 | 4 | 905,488 | |||||||||||||||||
|
Earnings
(losses) from operations before income taxes
|
2,203,211 | 1,613,249 | (1,348,273 | ) | (4,074,673 | ) | 5 | (1,606,486 | ) | ||||||||||||||
|
Fiscal
Year Ended
|
TPP
|
IPL
|
CP/SL
|
Reconciling
|
Consolidated
|
||||||||||||||||||
|
March
31, 2007
|
Canada
|
U.S.
|
U.S.
|
Items
|
Total
|
||||||||||||||||||
|
Total
Revenue
|
$ | - | $ | 1,718,781 | $ | 4,835,410 | $ | - | $ | 6,554,191 | |||||||||||||
|
Revenue:
major customers (Note 5)
|
- | 1,222,224 | 2,265,963 | - | 3,488,187 | ||||||||||||||||||
|
Cost
of operations
|
- | 1,031 | 4,756,022 | 81,321 |
1
|
4,838,374 | |||||||||||||||||
|
Interest
income
|
- | 368,472 | 94,036 | 12,860 |
2
|
475,368 | |||||||||||||||||
|
Interest
expenses
|
- | - | 12,537 | 163 |
3
|
12,700 | |||||||||||||||||
|
Amortization and
depreciation
|
- | 164,552 | 167,238 | 3,765 |
4
|
335,555 | |||||||||||||||||
|
Earnings
(losses) from operations before income taxes
|
- | 2,280,902 | (420,281 | ) | (2,895,038 | ) |
5
|
(1,034,417 | ) | ||||||||||||||
|
Fiscal
Year Ended
|
TPP
|
IPL
|
CP/SL
|
Reconciling
|
Consolidated
|
||||||||||||||||||
|
March
31, 2006
|
Canada
|
U.S.
|
U.S.
|
Items
|
Total
|
||||||||||||||||||
|
Total
Revenue
|
$ | - | $ | 146,916 | $ | 5,311,113 | $ | - | $ | 5,458,029 | |||||||||||||
|
Revenue:
major customers (Note 5)
|
- | - | 1,553,567 | - | 1,553,567 | ||||||||||||||||||
|
Cost
of operations
|
- | 4,159 | 4,596,607 | - | 4,600,766 | ||||||||||||||||||
|
Interest
income
|
- | - | 55,734 | 86,577 |
2
|
142,311 | |||||||||||||||||
|
Interest
expenses
|
- | - | 3,499 | 6,542 |
3
|
10,041 | |||||||||||||||||
|
Amortization and
depreciation
|
- | 157,356 | 411,104 | 48,132 |
4
|
616,592 | |||||||||||||||||
|
Earnings
(losses) from operations before income taxes
|
- | (1,494,566 | ) | (293,692 | ) | (2,832,972 | ) |
5
|
(4,621,230 | ) | |||||||||||||
|
1
|
Represents
stock-based compensation expense included in the unallocated corporate or
centralized marketing, general and administrative
expenses.
|
|
2
|
Represents
interest income included in the unallocated corporate or centralized
marketing, general and administrative
expenses.
|
|
3
|
Represents
interest expense included in the unallocated corporate or centralized
marketing, general and administrative
expenses.
|
|
4
|
Represents
amortization and depreciation included in the unallocated corporate or
centralized marketing, general and administrative
expenses.
|
|
5
|
Represents
earnings (losses) included in the unallocated corporate or centralized
marketing, general and administrative
expenses.
|
LML
PAYMENT SYSTEMS INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(unless
otherwise indicated, all dollar amounts are U.S. dollars)
|
|
16.
|
RECONCILIATION
OF CANADIAN TO UNITED STATES GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES
|
These
financial statements are prepared using Canadian GAAP, which does not differ
materially from U.S. GAAP with respect to the accounting policies and
disclosures in these financial statements except as set out below:
|
|
(a)
|
Under
U.S. GAAP, the Corporation could not effect the reduction in deficit of
$22,901,744 by reducing the stated capital of the shares of the
Corporation’s common stock.
|
|
|
(b)
|
On
April 1, 2006, the Corporation adopted SFAS 123(R) which requires the
expensing of all options issued, modified or settled based on the grant
date fair value over the period during which an employee is required to
provide service (vesting period).
|
The
Corporation adopted SFAS 123(R) using the modified prospective approach, which
requires application of the standard to all awards granted, modified,
repurchased or cancelled on or after April 1, 2006, and to all awards for which
the requisite service has not been rendered as at such date. Since
April 1, 2003, the Corporation has been following the fair value based approach
prescribed by SFAS 123, as amended by SFAS 148, for stock option awards granted,
modified or settled on or after such date. As such, the application
of SFAS 123(R) on April 1, 2006 to all awards granted prior to its adoption did
not have an impact on the financial statements. In accordance with
the modified prospective approach, prior period financial statements have not
been restated to reflect the impact of SFAS 123(R). The prospective adoption of
this new U.S. GAAP policy creates no differences with the Corporation’s stock
compensation expense reported under Canadian GAAP.
Previously
under U.S. GAAP, the Corporation accounted for its 1996 Stock Option Plan and
1998 Stock Incentive Plan under the principles of Accounting Principles Board
Opinion No. 25 “Accounting for Stock Issued to Employees and Related
Interpretations” (“APB 25”). No compensation expense was recognized
under APB 25 because the exercise price of the Corporation’s stock options
equals the market price of the underlying stock on the date of the
grant.
|
|
(c)
|
Income
Taxes
|
|
|
In
June, 2006, the FASB issued FASB Interpretation No. 48 “Accounting for
Uncertainty in Income Taxes — an interpretation of FASB Statement 109”
(“FIN 48”). This interpretation clarifies the recognition threshold and
measurement of a tax position taken or expected to be taken on a tax
return, and requires expanded disclosure with respect to the uncertainty
in income taxes. FIN 48 also provides guidance on derecognition,
classification, interest and penalties, accounting in interim periods,
disclosures, and transition. FIN 48 is effective for fiscal years
beginning after December 15, 2006.
|
|
|
The
Corporation adopted the provisions of FIN 48 on April 1, 2007. No
cumulative effect adjustment to the April 1, 2007 balance of the
Corporation’s deficit was required upon the implementation of FIN 48. As
of the date of adoption there were no unrecognized tax benefits. Under
current conditions and expectations, management does not foresee any
significant changes in unrecognized tax benefits that would have a
material impact on the Corporation’s financial
statements.
|
Under
U.S. GAAP there are no adjustments that resulted in changes to the Consolidated
Statements of Operations and Deficit, Consolidated Statements of Cash Flows or
the Consolidated Balance Sheets of the Corporation, except that under U.S. GAAP
the stated capital of the Corporation’s shares would be $22,901,744 higher, as
would the Corporation’s deficit due to the reporting difference disclosed under
Note 16(a).
LML
PAYMENT SYSTEMS INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(unless
otherwise indicated, all dollar amounts are U.S. dollars)
|
|
17.
|
RECENT
ACCOUNTING PRONOUNCEMENTS
|
Canadian
GAAP
Recent
accounting pronouncements affecting the Corporation’s financial reporting under
Canadian GAAP are summarized below:
|
|
(i)
|
Convergence
with International Financial Reporting
Standards
|
In 2006,
Canada’s Accounting Standards Board ratified a strategic plan that will result
in Canadian GAAP, as used by public companies, being converged with
International Financial Reporting Standards (“IFRS”) over a transitional period
currently expected to be approximately five years. Canadian GAAP will be
converged with IFRS through a combination of two methods: as current
joint-convergence projects of the United States’ Financial Accounting Standards
Board and the International Accounting Standards Board are agreed upon, they
will be adopted by Canada’s Accounting Standards Board and may be introduced in
Canada before the complete changeover to IFRS; and standards not subject to a
joint-convergence project will be exposed in an omnibus manner. As this
convergence initiative is very much in its infancy as of the date of these
consolidated financial statements, it would be premature to currently assess the
impact of the initiative, if any, on the Corporation. In May 2007,
the CICA published an updated version of its “Implementation Plan for
Incorporating IFRS into Canadian GAAP”. This plan includes an outline
of the key disclosure that the CICA will need to make as it implements the
Strategic Plan for publicly accountable enterprises that will converge Canadian
GAAP with IFRS. The changeover date from Canadian GAAP to IFRS is for
annual and interim financial statements relating to fiscal years beginning on or
after April 1, 2011.
|
|
(ii)
|
Financial
instruments – disclosure and
presentation
|
Commencing
with the Corporation’s 2009 Q1 period, the new recommendations of the CICA for
financial instrument disclosures and presentation (CICA Handbook Section 3862
and 3863) will apply to the Corporation. The new recommendations will result in
incremental disclosures, relative to those currently, with an emphasis on risks
associated with both recognized and unrecognized financial instruments to which
an entity is exposed during the period and at the balance sheet date, and how an
entity manages those risks. The Corporation is assessing how it will be affected
by these new recommendations.
|
(iii)
|
Inventories
|
Commencing
with the Corporation’s 2009 fiscal year, the new, IFRS-converged recommendations
of the CICA for accounting for inventories (CICA Handbook Section 3031)
will apply to the Corporation. The new recommendations provide more guidance on
the measurement and disclosure requirements for inventories; significantly, the
new recommendations allow the reversals of previous write-downs to net
realizable value where there is a subsequent increase in the value of
inventories. The Corporation does not expect to be materially affected by the
new recommendations.
|
|
(iv)
|
Handbook
Section 1400, General Standards of Financial Presentation, was amended to
include the requirements for assessing and disclosing an entity’s ability
to continue as a going concern. The amendment is based upon International
Accounting Standard IAS1, Presentation of Financial Statements. This
section is applicable to interim and annual financial reporting statements
relating to fiscal years beginning on or after January 1, 2008 with
earlier adoption encouraged. The Corporation will adopt this section in
fiscal 2009 but this will not have an impact on the financial statement
disclosures as the Corporation is currently complying with this
requirement.
|
LML
PAYMENT SYSTEMS INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(unless
otherwise indicated, all dollar amounts are U.S. dollars)
|
|
17.
|
RECENT
ACCOUNTING PRONOUNCEMENTS
(continued)
|
|
|
(v)
|
Handbook
Section 1535, Capital Disclosures, requires disclosures about capital and
is harmonized with recently amended International Accounting Standard
IAS1. The standard is applicable to all entities, regardless of whether or
not they have financial instruments. Entities are required to
disclose information about their objectives, policies and processes for
managing capital as well as their compliance with any externally imposed
capital requirements, where they may exist. This section is
applicable to interim and annual financial statements relating to fiscal
years beginning on or after October 1, 2007 with earlier adoption
encouraged. The Corporation will adopt this section in fiscal
2009. The Corporation is currently investigating the impact that this
section will have on the Corporation’s disclosures. The impact is
currently not known.
|
|
|
(vi)
|
Handbook
Section 3064, Goodwill and Intangible Assets, replaces Handbook Sections
3062, Goodwill and Other Intangible Assets and 3450, Research and
Development costs. This section establishes standards for the
recognition, measurement, presentation, and disclosure of goodwill and
intangible assets. Certain items are specifically excluded from the scope
of the Section including the initial recognition, measurement and
disclosure of goodwill and intangible assets acquired in a business
combination, the establishment of a new cost basis for intangible assets
as part of a comprehensive revaluation, intangible assets held by an
entity for sale in the ordinary course of business, non-current intangible
assets classified as held for sale or included in a disposal group that is
classified as held for sale, etc. This section is applied to interim
and annual financial statements relating to fiscal years beginning on or
after October 1, 2008. Earlier adoption is encouraged. The Corporation
will adopt this Section in fiscal 2009. The Corporation is currently
investigating the impact that this section will have on the Corporation’s
financial position and results of operations. The impact is currently not
known.
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U.S. GAAP.
Recent
accounting pronouncements affecting the Corporation’s financial reporting under
U.S. GAAP are summarized below.
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(i)
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In
September 2006, FASB issued SFAS No. 157, Fair Value Measurements,
which defines fair value, establishes a framework for measuring fair value
in generally accepted accounting principles, and expands disclosures about
fair value measurements. SFAS No. 157 does not require any new fair
value measurements, but provides guidance on how to measure fair value by
providing a fair value hierarchy used to classify the source of the
information. SFAS No. 157 is effective for fiscal years beginning after
December 15, 2007. The Corporation plans to adopt SFAS No. 157 beginning
in the first quarter of fiscal 2009. The Corporation is currently
assessing the potential impact that adoption of SFAS No. 157 will
have on its consolidated financial
statements.
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LML
PAYMENT SYSTEMS INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(unless
otherwise indicated, all dollar amounts are U.S. dollars)
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17.
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RECENT
ACCOUNTING PRONOUNCEMENTS
(Continued)
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(ii)
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In
February 2007, the FASB issued FASB Statement No. 159, “The Fair
Value Option for Financial Assets and Financial Liabilities” (SFAS
No. 159). SFAS No. 159 provides companies with an option to
report selected financial assets and liabilities at fair value. The
objective of SFAS No. 159 is to reduce both complexity in accounting
for financial instruments and the volatility in earnings caused by
measuring related assets and liabilities differently. Generally accepted
accounting principles have required different measurement attributes for
different assets and liabilities that can create artificial volatility in
earnings. FASB has indicated it believes that SFAS No. 159 helps to
mitigate this type of accounting- induced volatility by enabling companies
to report related assets and liabilities at fair value, which would likely
reduce the need for companies to comply with detailed rules for hedge
accounting. SFAS No. 159 also establishes presentation and disclosure
requirements designed to facilitate comparisons between companies that
choose different measurement attributes for similar types of assets and
liabilities. For example, SFAS No. 159 requires companies to provide
additional information that will help investors and other users of
financial statements to more easily understand the effect of the company’s
choice to use fair value on its earnings. It also requires entities to
display the fair value of those assets and liabilities for which the
company has chosen to use fair value on the face of the balance sheet.
SFAS No. 159 does not eliminate disclosure requirements included in
other accounting standards, including requirements for disclosures about
fair value measurements included in FASB Statement No. 157, “Fair
Value Measurements” (SFAS No. 157), and FASB Statement No. 107,
“Disclosures about Fair Value of Financial Instruments” (SFAS
No. 107). SFAS No. 159 is effective as of the beginning of a
company’s first fiscal year beginning after November 15, 2007. Early
adoption is permitted as of the beginning of the previous fiscal year
provided that the company makes that choice in the first 120 days of that
fiscal year and also elects to apply the provisions of SFAS No. 157.
The Corporation has not yet completed its evaluation of the
Interpretation, but does not currently believe that adoption will have a
material impact on its results of operations, financial position or cash
flows.
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(iii)
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Business combinations and
non-controlling interests - Under U.S. GAAP, effective for its
2009 fiscal year, the Corporation will be required to comply with new
standards in respect of business combinations and accounting for
non-controlling interests, as prescribed by SFAS No. 141(R), Business Combinations
and Financial Accounting Standards Board Statement of Financial Accounting
notes to consolidated financial statements. The impact of
adopting SFAS No. 141(R) will be dependent on the future business
combinations that the Corporation may pursue after its effective
date.
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(iv)
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SFAS
No. 160, Accounting
and Reporting of Noncontrolling Interest in Consolidated Financial
Statements, an amendment of ARB No. 51,
respectively - The issuance of these standards is the
culmination of the first major collaborative convergence undertaking of
the Financial Accounting Standards Board and the International Accounting
Standards Board. Whether the Corporation would be materially affected by
the new standards would depend upon the specific facts of the business
combinations, if any, occurring on or after April 1, 2009. Generally, the
new standards will result in measuring business acquisitions at the fair
value of the acquired entities and a prospectively applied shift from a
parent company conceptual view of consolidation (which results in the
parent company recording the book values attributable to non-controlling
interests) to an entity conceptual view (which results in the parent
company recording the fair values attributable to non-controlling
interests). Early adoption of these standards is prohibited. The impact of
adopting SFAS No. 160 will be dependent on the future business
combinations that the Corporation may pursue after its effective
date.
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F-28