================================================================================
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Quarterly Period Ended June 30, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition Period from ________ to ________
Commission File Number: 0-13959
LML PAYMENT SYSTEMS INC.
(Exact name of registrant as specified in its charter)
Yukon Territory, Canada 980-20-9289
(State or other jurisdiction (I.R.S. Employer
of incorporation or Identification No.)
organization)
1680-1140 West Pender Street
Vancouver, British Columbia
Canada V6E 4G1
(Address of principal executive offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (604) 689-4440
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
The number of shares of the registrant's Common Stock outstanding as of July
31, 2001, was 19,404,063.
================================================================================
LML PAYMENT SYSTEMS INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2001
INDEX
Page
Number
-----------
PART I. FINANCIAL INFORMATION................................................ 1
Item 1. Financial Statements................................................. 1
Consolidated Balance Sheets at March 31, 2001 and June 30, 1
2001 (unaudited).....................................................
Consolidated Statements of Operations (unaudited) for the 2
Three Months Ended June 30, 2000 and 2001............................
Consolidated Statements of Cash Flows (unaudited) for the 3
Three Months Ended June 30, 2000 and 2001............................
Notes to Consolidated Financial Statements........................... 4
Item 2. Management's Discussion and Analysis of Financial Condition 10
and Results of Operations............................................
Item 3. Quantitative and Qualitative Disclosures About Market Risk........... 14
PART II. OTHER INFORMATION.................................................... 15
Item 1. Legal Proceedings.................................................... 15
Item 2. Changes in Securities and Use of Proceeds............................ 15
Item 6. Exhibits and Reports on Form 8-K..................................... 15
SIGNATURE PAGE....................................................... 17
In this Quarterly Report on Form 10-Q, unless otherwise indicated, all dollar
amounts are expressed in United States Dollars.
PART I.
FINANCIAL INFORMATION
Item 1. Financial Statements
LML PAYMENT SYSTEMS INC.
CONSOLIDATED BALANCE SHEETS
(In U.S. Dollars)
June 30, March 31
2001 2001
$ $
(Unaudited)
--------------------------------------------------------------------------------------------------------
ASSETS
Current Assets
Cash and cash equivalents 6,266,845 8,357,354
Restricted cash 250,000 250,000
Accounts receivable, less allowances of $157,531 and
$155,737, respectively 678,540 549,133
Prepaid expenses 451,700 502,121
-------------------- -----------------
Total Current Assets 7,647,085 9,658,608
-------------------- -----------------
Real Property, net 1,589,259 1,617,491
Capital Assets, net 6,222,013 6,596,535
Patents, net 1,678,798 1,710,581
Goodwill, net 7,052,716 7,259,665
Other Assets 449,910 467,631
--------------------------------------------------------------------------------------------------------
TOTAL ASSETS 24,639,781 27,310,511
========================================================================================================
LIABILITIES
Current Liabilities
Accounts payable 1,512,817 1,876,186
Accrued liabilities 140,220 530,166
Accrued compensation 131,554 292,900
Current portion of capital lease obligations 252,638 276,535
-------------------- -----------------
Total Current Liabilities 2,037,229 2,975,787
Capital lease obligations 213,187 273,970
-------------------- -----------------
Total Liabilities 2,250,416 3,249,757
-------------------- -----------------
Commitments and Contingencies
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, 19,404,063 and 18,697,929 issued and
outstanding, respectively 29,759,236 29,728,236
Deficit (7,369,871) (5,667,482)
-------------------- -----------------
Total Shareholders' Equity 22,389,365 24,060,754
--------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 24,639,781 27,310,511
========================================================================================================
See accompanying notes to the consolidated financial statements.
-1-
LML PAYMENT SYSTEMS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In U.S. Dollars, except share data)
(Unaudited)
Three Months Ended
June 30
2001 2000
$ $
---------------------------------------------------------------------------------------------------------------------------------
REVENUE 2,434,715 2,145,545
COSTS AND EXPENSES
Cost of operations 2,373,925 1,742,349
Sales, general and administrative 1,013,063 673,308
Amortization and depreciation 787,188 425,246
Other expenses (income) 18,666 (14,977)
-------------------- -------------------
LOSS FROM OPERATIONS (1,758,127) (680,381)
-------------------- -------------------
Interest income, net 56,401 120,883
-------------------- -------------------
NET LOSS BEFORE INCOME TAXES (1,701,726) (559,498)
State income taxes 662 -
-------------------- -------------------
NET LOSS (1,702,388) (559,498)
==================== ===================
LOSS PER SHARE
Basic (0.09) (0.04)
==================== ===================
Diluted (0.09) (0.04)
==================== ===================
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic 18,737,318 15,122,234
Diluted 18,737,318 15,122,234
See accompanying notes to the consolidated financial statements.
-2-
LML PAYMENT SYSTEMS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In U.S. Dollars)
(Unaudited)
Three Months Ended
June 30
2001 2000
$ $
-----------------------------------------------------------------------------------------------------------
Operating Activities:
Net Loss (1,702,388) (559,498)
Adjustments to reconcile net loss to net cash (used
in) provided by operating activities
Amortization and depreciation 787,188 425,246
Other 970 -
Changes in operating assets and liabilities
Accounts receivable (131,202) (96,787)
Prepaid expenses 50,421 3,721
Accounts payable and accrued liabilities (914,661) 384,193
Other assets (136) 2,055
-------------------- --------------------
Net cash (used in) provided by operating activities (1,909,808) 158,930
-------------------- --------------------
Investing Activities:
Real property improvements - (170,053)
Capital asset expenditures (124,488) (104,268)
Patents (2,532) (15,019)
-------------------- --------------------
Net cash used in investing activities (127,020) (289,340)
-------------------- --------------------
Financing Activities:
Payments on long term debt, net - (1,121,280)
Payments on capital leases (84,681) (7,333)
Proceeds from exercise of stock options 31,000 4,123,750
-------------------- --------------------
Net cash (used in) provided by financing activities (53,681) 2,995,137
-------------------- --------------------
(DECREASE) INCREASE IN CASH (2,090,509) 2,864,727
Cash and cash equivalents, beginning of period 8,357,354 11,528,850
-------------------- --------------------
Cash and cash equivalents, end of period 6,266,845 14,393,577
==================== ====================
See accompanying notes to the consolidated financial statements.
-3-
LML PAYMENT SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The consolidated balance sheet as of June 30, 2001, the consolidated
statements of operations for the three months ended June 30, 2000 and 2001,
and the consolidated statements of cash flows for the three months ended June
30, 2000 and 2001, of LML Payment Systems Inc. and its subsidiaries
(collectively, the "Corporation") are unaudited. The Corporation's
consolidated balance sheet as of March 31, 2001, was derived from audited
financial statements. In the opinion of management, all adjustments necessary
for a fair presentation of such financial statements are included. Other than
those discussed in the notes below, such adjustments consist only of normal
recurring items. Interim results are not necessarily indicative of results
for a full year. The Corporation's consolidated financial statements and
notes are presented in accordance with generally accepted accounting
principles in Canada for interim financial information and in accordance with
the instructions for Form 10-Q and Article 10 of Regulation S-X, and do not
contain certain information included in the Corporation's consolidated
audited annual financial statements and notes. The consolidated financial
statements and notes appearing in this report should be read in conjunction
with the Corporation's consolidated audited financial statements and related
notes thereto, together with management's discussion and analysis of
financial condition and results of operations, contained in the Corporation's
Annual Report on Form 10-K for the fiscal year ended March 31, 2001, as filed
with the Securities and Exchange Commission on June 29, 2001 (file no. 0-
13959). Certain of the prior period financial statement amounts have been
reclassified to conform to the current period presentation.
2. GOODWILL
All of the Corporation's goodwill is associated with the entire company
("enterprise level") rather than any specific identifiable asset or product
line. Each quarter the Corporation evaluates whether an impairment of this
enterprise goodwill may exist by comparing the book value of the
Corporation's common stock to the product of (i) the number of shares of
common stock issued and outstanding at the end of the quarter and (ii) the
market price of the common stock at the end of the quarter. If the product of
shares and market price exceeds the book value, impairment does not exist. If
the product of shares and market prices is less than book value, the
Corporation evaluates whether the condition is other than temporary, based
primarily on fluctuations in the Corporation's stock price, and considering
all other relevant evidence. If the product of shares and market price is
continuously less than the book value for a period of six months the
Corporation considers all other relevant factors to determine whether the
current market condition would be deemed to be other than temporary. If the
Corporation determines that the condition is other than temporary, additional
amortization would be recorded for the impairment equal to the excess book
value at the end of the quarter. See also Note 4 - "Recent Accounting
Pronouncements."
June 30, March 31,
Goodwill has been recorded as follows: 2001 2001
$ $
--------------------------------------------------------- -----------------
Total Accumulated
Goodwill Amortization Net Net
------------------------------------------------------------------------------------------------------ -----------------
CFDC Holdings Corp. * 4,334,368 686,275 3,648,093 3,756,453
National Recovery Systems, Ltd. of America* 2,891,793 433,769 2,458,024 2,530,319
Phoenix EPS, Inc. (a) * 539,805 53,980 485,825 499,320
Check Technologies, Inc. (b) * 511,846 51,072 460,774 473,573
--------------- ------------------ ---------------- -----------------
8,277,812 1,225,096 7,052,716 7,259,665
=============== ================== ================ =================
-4-
* Effective April 1, 2001, these subsidiary companies were merged into LML
Payment Systems Corp. (formerly known as ChequeMARK Inc.).
a) On July 9, 2000, the Corporation purchased all of the issued and
outstanding shares of Phoenix EPS, Inc. ("Phoenix") in exchange for 220,857
shares of the Corporation's common stock with a fair market value of $4.5
million. Phoenix, located in Scottsdale, Arizona, engineered and marketed
electronic payment system software solutions to the retail industry.
Phoenix also provided selective routing, including real-time monitoring of
check, debit, credit and EBT transactions for authorization and settlement
through its transaction processing product REPS. In connection with the
acquisition, the Corporation incurred transaction costs consisting
primarily of professional fees of $126,205 and a finder's fee of 7,730
shares of the Corporation's common stock with a fair market value of
$157,500, resulting in a total purchase price of $4,783,705. The
acquisition was accounted for as a purchase business combination;
accordingly, the results of operations of Phoenix have been included with
the Corporation's results of operations since July 9, 2000.
The total purchase price paid for the Phoenix acquisition was allocated
based on the estimated fair values of the assets acquired as determined by
the cost and residual method valuation approaches as follows:
$
----------------
Software 4,243,900
Goodwill 539,805
----------------
4,783,705
================
The Corporation has completed its purchase price allocation, and no
adjustments were made to the allocation as of March 31, 2001.
A total of approximately $4.2 million of the purchase consideration was
allocated to software, which is being depreciated over 5 years. Goodwill is
being amortized over ten years.
b) On July 22, 2000, the Corporation purchased all of the issued and
outstanding shares of Check Technologies, Inc. ("Check Technologies"), a
Dallas-based check verification and recovery business, in exchange for
22,987 shares of the Corporation's common stock with a fair market value of
$250,000 and $250,000 cash. The Corporation also agreed to pay to certain
former Check Technologies shareholders and a former employee a total of
$150,010 pursuant to separate non-compete agreements having a maximum term
of three (3) years. The former employee and one of the former shareholders
of Check Technologies were each paid additional consideration of $25,000 in
the first year upon satisfaction of certain conditions. The Corporation is
obligated to pay additional consideration of $25,000 to each of these
persons in each of the second and third years of the terms of their
respective agreements. The non-compete agreement payments are recorded as
other assets, and the carrying value net of accumulated amortization at
March 31, 2001, was $160,722. In connection with the acquisition, the
Corporation incurred transaction costs consisting primarily of professional
fees of $43,088 and a finder's fee of $26,020, resulting in a total
purchase price of $769,118. The acquisition was accounted for as a purchase
business combination; accordingly, the results of operations of Check
Technologies have been included with the Corporation's results of
operations since July 22, 2000.
The total purchase price paid for the Check Technologies acquisition was
allocated based on the estimated fair values of the assets acquired as
follows:
$
---------------
Net assets acquired 57,262
Identifiable intangible assets 200,010
Goodwill 511,846
---------------
769,118
===============
-5-
The Corporation has completed its purchase price allocation, and no
adjustments were made to the allocation as of March 31, 2001.
c) The following summary, prepared on an unaudited pro forma basis, reflects
the condensed consolidated results of operations for the three months ended
June 30, 2000 and 2001, assuming Phoenix and Check Technologies had been
acquired as of April 1, 2000:
PRO FORMA
(UNAUDITED)
Three months
ended June 30
2000 2001
$ $
------------------- ----------------
Revenue 2,792,475 2,434,715
Net Loss (570,569) (1,702,388)
=================== ================
Basic net loss per share (0.04) (0.09)
=================== ================
The pro forma results are not necessarily indicative of what would have
occurred if the acquisitions had been in effect for the periods presented
and are not intended to be a projection of future results. During the three
months ended June 30, 2001 the Corporation had additional costs related to
the development of the Corporation's data center. During the three months
ended June 30, 2000, Phoenix recorded software license and software
development revenue associated with the REPS system. The Corporation has
discontinued providing licensing of the REPS system and therefore recorded
no revenue from this service.
d) The purchase price for each of Phoenix and Check Technologies was paid
either entirely or partially with shares of the Corporation's common stock.
As part of each transaction, the Corporation agreed to certain price
protection covenants for the benefit of the former shareholders of the
acquired companies. In the event the value of the shares of the
Corporation's common stock exchanged for the shares of the acquired
company's stock decreases below the deemed issue price per share of the
Corporation's common stock, and the former shareholders of the acquired
company sell such shares of the Corporation's common stock at a lower price
after the expiration of any applicable hold period and within a specified
period of time thereafter, such shareholders would have a right to receive
additional shares of the Corporation's common stock. On June 27, 2001, the
Corporation issued 679,134 shares of common stock to the former
shareholders of Phoenix under the price protection covenants. The issuance
of these shares did not result in additional purchase consideration, but
only an increase in the Corporation's common shares outstanding.
3. COMMON STOCK OPTIONS
Stock option activity during the first quarter ended June 30, 2001, and for
the fiscal years ended March 31, 2001, 2000, and 1999 was as follows:
Number of Exercise Price Weighted-Average
Shares $ Exercise Price $
---------------------------------------------------------------
Balance, March 31, 1998 930,000 1.00-1.30 1.20
Granted 400,000 3.50 3.50
Canceled - - -
Exercised (590,000) 1.00-3.50 1.62
---------------------------------------------------------------
-6-
Balance, March 31, 1999 740,000 1.00-3.50 2.11
---------------------------------------------------------------
Granted 1,315,000 3.00-10.00 5.04
Canceled (85,000) 3.00-3.50 3.35
Exercised (880,000) 1.00-10.00 2.87
---------------------------------------------------------------
Balance, March 31, 2000 1,090,000 1.00-10.00 4.90
---------------------------------------------------------------
Granted 645,000 3.50-20.375 13.12
Canceled (78,000) 3.00-6.25 4.67
Exercised (283,500) 3.00-16.00 14.61
---------------------------------------------------------------
Balance, March 31, 2001 1,373,500 1.00-20.375 6.77
---------------------------------------------------------------
Granted - - -
Canceled (26,000) 3.00-10.00 9.46
Exercised (27,000) 1.00-3.00 1.15
---------------------------------------------------------------
Balance, June 30, 2001 1,320,500 1.00-20.375 6.83
---------------------------------------------------------------
Exercisable at March 31, 1999 572,500
Exercisable at March 31, 2000 248,000
Exercisable at March 31, 2001 686,750
Exercisable at June 30, 2001 750,000
Options available for grant at March 31, 2000 1,460,000
Options available for grant at March 31, 2001 3,393,000
Options available for grant at June 30, 2001 3,393,000
Other information regarding options outstanding and options exercisable as of
March 31, 2001, and June 30, 2001, is as follows:
Options Outstanding Options Exercisable
--------------------------------------------------- ----------------------------------
Range of Exercise Number of Weighted- Weighted-Average Number of Weighted-
Prices $ Shares Average Remaining Shares Average
Exercise Contractual Life Exercise
Price $ (Years) Price $
-------------------------------------------------------------------------------- ----------------------------------
0.00 - 2.99 100,000 1.00 1.8 50,000 1.00
3.00 - 6.99 545,500 3.47 3.3 385,250 3.55
7.00 - 10.00 598,000 7.78 4.1 224,000 7.66
10.01 - 20.38 130,000 20.38 4.3 27,500 20.38
------------- -------------
Total March 31, 2001 1,373,500 6.77 3.6 686,750 5.38
------------- -------------
Options Outstanding Options Exercisable
--------------------------------------------------- ----------------------------------
Range of Exercise Number of Weighted- Weighted-Average Number of Weighted-
Prices $ Shares Average Remaining Shares Average
Exercise Contractual Life Exercise
Price $ (Years) Price $
-------------------------------------------------------------------------------- ----------------------------------
0.00 - 2.99 75,000 1.00 1.5 25,000 1.00
3.00 - 6.99 541,500 3.48 3.1 457,000 3.56
7.00 - 10.00 574,000 7.69 3.9 240,500 7.55
10.01 - 20.38 130,000 20.38 4.0 27,500 20.38
------------- -------------
Total June 30, 2001 1,320,500 6.83 3.4 750,000 5.37
------------- -------------
All director, officer and employee options are granted under the Corporation's
1996 Stock Option Plan ("1996 Plan") or the 1998 Stock Incentive Plan ("1998
Plan"). The exercise price of options granted under the 1996 Plan and the
1998 Plan is 100% of the fair market value on the date the option is granted.
Options to directors, officers and employees are normally vested over a three-
year period. Options are exercisable for a period of five years from the date
of grant.
-7-
The following pro forma information presents net loss and loss per share for
2001, 2000, and 1999 had the fair value method of SFAS No. 123 been used to
measure compensation cost for stock compensation plans. For purposes of these
pro forma disclosures, the estimated fair value of the options is amortized to
expense over the options' vesting periods. These amounts have not been
reflected in our Consolidated Statements of Operations.
The weighted average fair value of options granted in 2001, 2000 and 1999 was
$11.12, $4.90 and $3.66 per option. Fair values of options are estimated at
the date of grant using the Black-Scholes option pricing model with the
following assumptions for 2001, 2000, and 1999: Risk free interest rate of
6.0%; dividend rate 0%, weighted average volatility factors of 145.22%,
175.75% and 184.59%; an expected life of the options of 5 years; and no
dividend yields.
2001 2000 1999
$ $ $
------------------ ----------------- -------------------
Net loss available to common shareholders:
As reported (5,667,482) (2,347,499) (2,315,153)
Pro forma (9,891,766) (3,842,044) (2,688,620)
Basic and diluted loss per common share:
As reported (0.34) (0.19) (0.22)
Pro forma (0.59) (0.32) (0.26)
Share Capital
In March 2000, the Corporation completed a private placement with three
subscribers (the "Subscribers"). The private placement consisted of 1,000,000
units purchased at a price of $12.00 per unit. Each unit consisted of one
common share and one share purchase warrant to purchase one common share at
$16.00 until March 31, 2002 (the "Unit"). The Corporation paid a 10% finder's
fee in cash to a finder. The finder subscribed for 100,000 Units and a special
warrant (the "Finder's Unit") at $12.00 per Finders Unit. The special warrant
provides the finder with the right to acquire common shares in the Corporation
without the payment of any additional consideration. The number of common
shares to be acquired by the finder under the special warrant is determined by
dividing 10% of the aggregate exercise price received by the Corporation in
respect of warrants exercised by the Subscribers by a deemed price of $16.00
per share. The fair value of the warrants are $6.89 per share, based on the
Black-Scholes fair value pricing model with the following assumptions: risk
free interest rate 6.0%; dividend rate 0%; and volatility 121.0%. The total
fair value of approximately $8.3 million is included in common shares.
The shares issued, if any, from the finder's special warrant will be recorded
as a reduction in the net proceeds received from the exercise of the warrants
in the period of exercise with a corresponding increase to common shares to
reflect the issuance. This issuance of these shares will not have a net dollar
value impact to the Corporation's total equity, but only an increase in the
Corporation's shares outstanding.
4. Recent Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board issued the accounting
rules governing business combinations, goodwill and intangible assets. These
rules are, Statement of Financial Accounting Standards No. 141, Business
Combinations, and No. 142, Goodwill and Other Intangible Assets. With the
adoption of Statement 142, goodwill is no longer subject to amortization over
its estimated useful life. Rather, goodwill will be subject to at least an
annual assessment for impairment by applying a fair-value-based test at the
reporting units level. Impairment loss would be recognized to the extent the
carrying
-8-
amount of goodwill exceeds the implied fair value. Under the new rules, an
acquired intangible asset should be separately recognized if the benefit of
the intangible asset is obtained through contractual or other legal rights, or
if the intangible asset can be sold, transferred, licensed, rented, or
exchanged, regardless of the acquirer's intent to do so. Determining the
useful lives of intangible assets will require considerable judgment and fact-
based analysis. The Corporation will adopt the provisions of this standard in
fiscal 2003, beginning April 1, 2002. Upon its adoption, we will conform our
accounting policy to the requirements in this standard.
Management believes this standard will have a significant non-cash impact on
the Corporation's financial statements, as it will not allow for amortization
of goodwill, which approximates $827,794 annually. At this time the
Corporation has not determined how goodwill will be allocated to specific
reporting units as of April 1, 2002, as the Corporation is in the process of
evaluating its reporting units. Accordingly, the Corporation has not made a
determination about whether or not an impairment charge will be necessary upon
adoption of the new standard.
5. Reconciliation of United States to Canadian Generally Accepted Accounting
Principles
These financial statements are prepared using Canadian generally accepted
accounting principles ("CDN GAAP") which do not differ materially from United
States generally accepted accounting principles ("U.S. GAAP") with respect to
the accounting policies and disclosures in these financial statements except
as set out below:
a) Under U.S. GAAP, the Corporation could not effect the reduction in deficit
of $22,901,744 (performed in fiscal 2001 and disclosed in the
Corporation's Form 10-K for the fiscal year ended March 31, 2001) by
reducing the stated capital of the shares of the Corporation's common
stock.
b) Under U.S. GAAP, the Corporation follows Financial Accounting Standards
No. 123 "Accounting for Stock Based Compensation" for options issued to a
non-employee. The Corporation's policy is to record the compensation when
the options vest. During the three months ended June 30, 2000, options to
purchase 13,333 shares of the Corporation's common stock issued to a non-
employee vested.
Adjustments under U.S. GAAP result in changes to the Consolidated
Statement of Operations of the Corporation as follows:
Three months ended June 30,
2001 2000
$ $
---------------------------------------------- ------------------------ ------------------
Net loss - CDN GAAP (1,702,388) (559,498)
U.S. GAAP adjustments:
Non-employee stock based compensation (b) - (50,944)
------------------------ ------------------
Net loss - U.S. GAAP (1,702,388) (610,442)
======================== ==================
Loss per share - U.S. GAAP
Basic (0.09) (0.04)
======================== ==================
Diluted (0.09) (0.04)
======================== ==================
Under U.S. GAAP there are no adjustments that resulted in changes to the
Consolidated Statement of Cash Flows or the Consolidated Balance Sheet of the
Corporation.
-9-
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Unless the context otherwise requires, references in this report on Form 10-Q
to the "Corporation", "LML", "we", "us" or "our" refer to LML Payment Systems
Inc. and its direct and indirect subsidiaries. LML Payment Systems Inc.'s
direct subsidiaries include LML Corp., Legacy Promotions Inc. and LHTW
Properties Inc. LML Corp.'s subsidiaries are LML Patent Corp., and LML Payment
Systems Corp. Unless otherwise specified herein, all references herein to
dollars or "$" are to U.S. Dollars.
The following discussion and analysis should be read in conjunction with the
consolidated audited financial statements and related notes thereto contained in
the Corporation's Annual Report on Form 10-K for the fiscal year ended March 31,
2001, filed with the Securities and Exchange Commission on June 29, 2001 (file
no. 0-13959). The Corporation believes that all necessary adjustments
(consisting only of normal recurring adjustments) have been included in the
amounts stated below to present fairly the following quarterly information.
Quarterly operating results have varied significantly in the past and can be
expected to vary in the future. Results of operations for any particular
quarter are not necessarily indicative of results of operations for a full year.
Forward Looking Information
All statements other than statements of historical fact contained herein are
forward-looking statements. Forward-looking statements generally are
accompanied by words such as "anticipate," "believe," "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 the Corporation's services, the volume and total value
of transactions processed by merchants utilizing the Corporation's services, the
technological adaptation of check verification end-users, the issuance of
additional patents necessary to protect the business enterprise, the renewal of
material contracts in the Corporation's business, the Corporation's 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, the Corporation's 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 the Corporation, and the cost of
protecting the Corporation's intellectual property. Even if the assumptions on
which the forward-looking statements are based prove accurate and appropriate,
the actual results of the Corporation's operations in the future may vary widely
due to technological change, increased competition, additional government
regulation or intervention in the industry, general economic conditions, other
risks described in the Corporation's filings with the Securities and Exchange
Commission and other factors not yet known or anticipated. Accordingly, the
actual results of the Corporation's 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
The Corporation is a financial payment processor that provides check
processing solutions for national, regional and local retail merchants in the
United States. The Corporation's processing services include check verification
and collection services along with electronic processing services, including
Electronic Check Re-presentment or "RCK" (whereby returned checks are re-
presented for payment electronically) and Electronic Check Conversion or "ECC"
(whereby paper checks are converted into electronic transactions at the point of
sale). The Corporation focuses on providing these services to supermarkets,
grocery stores, multi-lane retailers, convenience stores and other national,
regional and local retailers in the United States. The Corporation also provides
selective routing, including real-time monitoring of debit, credit and
Electronic Benefit Transaction or "EBT" card transactions for authorization and
settlement.
The Corporation's ECC services utilize the Corporation's proprietary
system, including software, hardware and modes of interaction, known as the
"ChequeMARK System." An objective of the Corporation
-10-
is to increase transaction volume through internal growth and acquisitions,
including the acquisition of business relationships through which the
Corporation can integrate its ChequeMARK technology as a preferred service
provider. During the past two fiscal years, the Corporation has begun to
implement this objective through a number of acquisitions. These acquisitions
give the Corporation a suite of retail point-of-sale check handling services and
an infrastructure to further expand its offerings to include other forms of
electronic payment systems in the future such as expansion into the e-commerce
market.
The acquisitions that have been completed by the Corporation over the past two
years have made the Corporation's results of operations not comparable period
over period due to the increase in amortization as well as the acquisitions of
Phoenix and Check Technologies, which were completed in fiscal year 2001, and
were not included in the Corporation's results of operations until July 2000.
Effective April 1, 2001, CFDC Holdings Corp., CF Data Corp., Check
Technologies, Check Center, National Process Servers, Inc. and Phoenix EPS
merged operations and management into LML Payment Systems Corp. (formerly known
as ChequeMARK Inc.), a Delaware corporation and a wholly-owned subsidiary of LML
Corp. LML Payment Systems Corp. maintains operations in Dallas, Texas; Wichita,
Kansas; Tulsa, Oklahoma; and Phoenix, Arizona. The merger is designed to
achieve certain economies related to costs and the elimination of redundant
systems and services. It is also designed to take advantage of the growing
recognition of the Corporation's brand name. The consolidation should allow a
coordinated approach to the marketing of payment services under the
Corporation's trademarks.
Other Operations. LHTW Properties Inc. owns and operates Wildwood Estates, a
332-acre residential community located in Wildwood, Florida. Operations have
included sale of manufactured homes and lots. In exchange for monthly
maintenance fees, LHTW Properties provides the resident community with certain
amenities and services commonly associated with similar developments. The
results of operations for LHTW Properties were not significant for the three
month period ended June 30, 2001, or June 30, 2000.
Results of Operations
Revenues
The Corporation's revenues consist primarily of fees from the Corporation's
check verification and electronic processing business and check recovery
business. Revenues are recognized in accordance with SEC Staff Accounting
Bulletin ("SAB") 101, "Revenue Recognition." Revenue from the Corporation's
check verification and electronic processing 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
Corporation's check recovery business are contingent on successful recovery;
accordingly, revenue is recognized as cash is received. Software license revenue
is recognized upon shipment, provided fees are fixed and determinable and
collection is probable, in accordance with Statement of Position ("SOP") 97-2,
"Software Revenue Recognition." Software maintenance revenues are recognized
over the term of the maintenance agreement. Any cash consideration received
prior to meeting revenue recognition criteria is recorded as deferred revenue.
Revenue regarding Wildwood Estates is recognized when sales of property lots and
mobile homes are completed. Maintenance fees from the management of the property
and from the maintenance of the common areas are recognized straight line over
the service period.
Total revenues increased to approximately $2.4 million for the three months
ended June 30, 2001 from approximately $2.1 million for the three months ended
June 30, 2000. This increase was mainly attributable to the increased
transaction processing fees, software maintenance revenue and consulting fees.
During the three months ended June 30, 2001, revenue from and associated with
the Corporation's three largest customers amounted to approximately 53% of the
Corporation's total sales volume. The Corporation may be economically dependent
on sales volume to these customers.
-11-
During the year ended March 31, 2001, one of the Corporation's three largest
customers notified the Corporation that it intends to move its check
verification processing in house. Verification transactions started being
transferred in February 2001 and are expected to be completed by the end of the
Corporation's second quarter of fiscal 2002. This customer is also planning on
moving its primary check collections in house. The Corporation expects to
continue to provide secondary check collection services to this customer. During
the three months ended June 30, 2001, this customer's sales amounted to 17% of
the Corporation's total sales volume, and there was no significant reduction in
the revenue received by the Corporation from this customer during this period.
Costs of operations
Costs of operations increased from approximately $1.7 million for the three
months ended June 30, 2000, to approximately $2.4 million for the three months
ended June 30, 2001, an increase of approximately 41%. Financial payment
processing costs of operations increased approximately 35% from approximately
$1.7 million for the three months ended June 30, 2000, to approximately $2.3
million for the three months ended June 30, 2001. The increase was principally
attributable to incremental fixed costs associated with the development of the
Corporation's data center. Costs of operations consist of transaction processing
costs, personnel costs, equipment related costs and telecommunication costs. For
the three months ended June 30, 2001, costs of operations as a percentage of
sales increased to approximately 97% compared to approximately 81% for the three
months ended June 30, 2000. This increase was due to the operating activities
from the Corporation's data center. Costs of operations related to Wildwood
Estates increased approximately 34% from approximately $47,755 for the three
months ended June 30, 2000, to approximately $63,809 for the three months ended
June 30, 2001.
Sales, general and administrative expenses
Sales, general and administrative expenses consist primarily of personnel
costs, commissions, office facilities, travel, promotional events such as trade
shows, seminars and technical conferences and public relations. Sales, general
and administrative expenses were approximately $1 million and approximately
$673,308 for the three months ended June 30, 2001 and 2000, respectively. The
increase in sales, general and administrative expenses is primarily attributable
to costs associated with increased marketing and sales activities including the
establishment of a sales force, increased participation at industry trade shows,
and other general corporate expenses.
Amortization and depreciation
Amortization of intangibles increased to approximately $576,122 from
approximately $259,952 for the three months ended June 30, 2001 and 2000,
respectively. Depreciation expenses for capital assets increased to
approximately $211,066 from approximately $165,295 for the three months ended
June 30, 2001 and 2000, respectively. These increases are principally associated
with amortization of goodwill from all of the Corporation's acquisitions and
amortization of U.S. Patent No. 5,484,988, depreciation of the ChequeMARK system
software and the software acquired in the acquisition of Phoenix, and
depreciation of capital assets acquired in all of the Corporation's
acquisitions.
Other expenses and income
Other expenses increased to approximately $18,666 from other income of
approximately $14,978 for the three months ended June 30, 2001 and 2000,
respectively. The increase in other expenses was primarily attributed to costs
associated with the merger of the Corporation's subsidiaries, which was
completed on April 1, 2001.
Interest
Interest expense decreased to approximately $12,144 from approximately $82,048
for the three months ended June 30, 2001 and 2000, respectively. This decrease
was due to the payment of long-term debt
-12-
during the three months ended June 30, 2000. Interest income decreased to
approximately $68,545 from approximately $202,930 for the three months ended
June 30, 2001 and 2000, respectively. This decrease in interest earned was
primarily attributed to a decrease in funds placed in term deposits or short-
term commercial paper, as well as the decrease in interest rates from an average
of 6.3% to 4.2% for the three months ended June 30, 2001 and 2000, respectively.
EBITDA/1/
Earnings before income taxes, interest expense, depreciation and amortization,
or "EBITDA," increased to a loss of approximately $902,394 from a loss of
approximately $52,204 for the three months ended June 30, 2001 and 2000,
respectively. The increase is primarily due to increased costs associated with
the development of the Corporation's data center, increased costs associated
with the development of marketing and sales activity, and other general
corporate expenses.
Net loss
Net loss increased to approximately $1.7 million from approximately $559,498
for the three months ended June 30, 2001 and 2000, respectively. The increase in
the Corporation's net loss is due primarily to increased costs associated with
the development of the Corporation's data center, increased costs associated
with the development of marketing and sales activity, the increased amortization
of intangibles, depreciation of capital assets, and other general corporate
expenses.
Loss per both basic and diluted shares was ($0.09) for the three months ended
June 30, 2001, as compared to ($0.04) for the three months ended June 30, 2000.
Liquidity and Capital Resources
The Corporation's liquidity and financial position consisted of approximately
$5.6 million in working capital as of June 30, 2001, compared to approximately
$6.7 million in working capital as of March 31, 2001. The decrease in working
capital was related to normal operating activities and the development of the
Corporation's data center, a decrease in accounts payable and accrued
liabilities of approximately $915,000, and an increase in accounts receivable of
approximately $131,000. Cash flows used in operations were approximately $1.9
million for the three months ended June 30, 2001, and cash flows provided by
operations was approximately $158,930 for the three months ended June 30, 2000.
Cash used in investing activities was approximately $127,020 as compared to
approximately $289,340 for the three months ended June 30, 2001 and 2000,
respectively. Cash used by financing activities was approximately $53,681 for
the three months ended June 30, 2001, as compared to cash provided by financing
activities of approximately $3 million for the three months ended June 30, 2000.
The decrease in cash provided by financing activities is primarily due to the
exercise of options of the Corporation's common stock that were completed in the
three months ended June 30, 2000.
Management believes that existing cash and cash equivalent balances, and
potential cash flows from operations will satisfy the Corporation's working
capital and capital expenditure requirements for the next 12 months. However,
any material acquisitions of complementary businesses, products or technologies
or
---------------
/1/ EBITDA is earnings before income taxes, interest expense and depreciation
and amortization. The Corporation believes that, in addition to cash flows from
operations and net income, EBITDA is a useful financial performance measure for
assessing operating performance as it provides an additional basis to evaluate
the ability of the Corporation to incur and service debt and to fund capital
expenditures. To evaluate EBITDA, the components of EBITDA such as revenue and
operating expenses and the variability of such components over time should also
be considered. EBITDA should not be construed, however, as an alternative to
operating income (as determined in accordance with accounting principles
generally accepted in Canada or the United States of America ("GAAP")) as an
indicator of the Corporation's operating performance or to cash flows from
operating activities (as determined in accordance with GAAP) as a measure of
liquidity. The Corporation's method of calculating EBITDA may differ from
methods used by other companies, and as a result, EBITDA measures disclosed
herein may not be comparable to other similarly titled measures used by other
companies.
-13-
other arrangements could require the Corporation to obtain additional equity or
debt financing. There can be no assurance that such financing would be available
on acceptable terms, if at all.
Recently Issued Accounting Standards
In July 2001, the Financial Accounting Standards Board issued the accounting
rules governing business combinations, goodwill and intangible assets. These
rules are Statement of Financial Accounting Standards No. 141, Business
Combinations, and No. 142, Goodwill and Other Intangible Assets. With the
adoption of Statement 142, goodwill is no longer subject to amortization over
its estimated useful life. Rather, goodwill will be subject to at least an
annual assessment for impairment by applying a fair-value-based test at the
reporting units level. Impairment loss would be recognized to the extent the
carrying amount of goodwill exceeds the implied fair value. Under the new rules,
an acquired intangible asset should be separately recognized if the benefit of
the intangible asset is obtained through contractual or other legal rights, or
if the intangible asset can be sold, transferred, licensed, rented, or
exchanged, regardless of the acquirer's intent to do so. Determining the useful
lives of intangible assets will require considerable judgment and fact-based
analysis. The Corporation will adopt the provisions of this standard in fiscal
2003, beginning April 1, 2002. Upon its adoption, we will conform our accounting
policy to the requirements in this standard.
Management believes this standard will have a material non-cash impact on the
Corporation's financial statements, as it will not allow for amortization of
goodwill, which approximates $827,794 annually. At this time the Corporation has
not determined how goodwill will be allocated to specific reporting units as of
April 1, 2002, as the Corporation is in the process of evaluating its reporting
units. Accordingly, the Corporation has not made a determination about whether
or not an impairment charge will be necessary upon adoption of the new standard.
Contingencies
In addition to the legal matters previously reported in the Corporation's
Annual Report filed on Form 10-K for the year ended March 31, 2001, as filed
with the Securities and Exchange Commission on June 29, 2001 (file no. 0-13959),
the Corporation is party from time to time to ordinary litigation incidental to
its business, none of which is expected to have a material adverse effect on the
results of operations, financial position or liquidity of the Corporation.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
From March 31, 2001, until June 30, 2001, there were no material changes from
the information concerning market risk contained in the Corporation's Annual
Report on Form 10-K for the year ended March 31, 2001, as filed with the
Securities and Exchange Commission on June 29, 2001 (file no. 0-13959).
-14-
PART II.
OTHER INFORMATION
Item 1. Legal Proceedings
There have been no material changes with respect to the information concerning
legal proceedings contained in the Corporation's Annual Report on Form 10-K for
the year ended March 31, 2001, as filed with the Securities and Exchange
Commission on June 29, 2001, (file no. 0-13959). In addition to the legal
matters previously reported in the Corporation's most recent report on Form 10-
K, the Corporation is party from time to time to ordinary litigation incidental
to its business, none of which is expected to have a material adverse effect on
the results of operations, financial position or liquidity of the Corporation.
Item 2. Changes in Securities and Use of Proceeds
On June 27, 2001, the Corporation issued 679,134 restricted shares of its
common stock, with no par value, to the former shareholders of Phoenix in
consideration of the modification and satisfaction in full of certain price
protection covenants included in the July 9, 2000, purchase agreement. (See Note
2(d) to the consolidated financial statements). The Corporation believes that
the issuance of such securities was exempt from registration in reliance on
Section 4(2) of the Securities Act of 1933 as a transaction not involving a
public offering. This issuance was made without general solicitation or
advertising. The Phoenix shareholders represented that they were acquiring the
shares without a view to distribute and that they were afforded the opportunity
to review all publicly filed documents and to ask questions, and receive answers
from, officers of the Corporation.
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits:
Exhibit
Number Description of Document
3.1 Restated Articles of Incorporation (incorporated by reference to Exhibit
3.1 to the Quarterly Report on Form 10-Q for the period ended September
30, 2000, of LML Payment Systems Inc. (File No. 0-13959)).
3.2 Bylaws (incorporated by reference to Exhibit 1.2 to the Annual Report on
Form 20-F for the fiscal year ended March 31, 1998, of LML Payment
Systems Inc. (File No. 0-13959)).
10.1* Amending Agreement, dated June 26, 2001, amending the Share Purchase
Agreement, dated July 9, 2000, between and among LML Payment Systems
Inc., Phoenix EPS, Inc. (as predecessor to LML Payment Systems Corp.),
Robert E. Peyton, Joseph M. Bandiera and Peter D. Stenhjem.
10.2* Agreement and Plan of Merger, dated March 28, 2001, by and among
ChequeMARK Inc., Phoenix EPS, Inc., CFDC Holdings Corp., CF Data Corp.,
National Recovery Systems, Ltd. of America and National Process Servers,
Inc.
____________
* filed herewith
-15-
b) Reports on Form 8-K
Current Report on Form 8-K dated December 4, 2000, and filed April 6, 2001,
under Items 5 and 7, to report press releases regarding the following
announcements: (1) filing of a legal action against the Corporation by Todd
H. Moore; (2) approval of patent application for Patent No. 6,164,528; (3)
dismissal of a complaint filed against the Corporation by Global Transaction
Systems, LLC ("Global"); (4) correcting a misstatement in a prior press
release; (5) filing of a motion for sanctions by the Corporation against
Global; (6) filing of a legal action by the Corporation against Global (7)
financial results for the three and nine months ended December 31, 2000; (8)
amendment by the U.S. District Court, Western District of Washington of its
judgment against Todd H. Moore from a dismissal with prejudice to a
dismissal without prejudice; (9) settlement of a lawsuit filed against the
Corporation by the former owners of the Wildwood Estates property; (10)
receipt of a notice of allowance for patent application serial no.
09/562,303; and (11) the Corporation's consolidation of six subsidiary
companies into a single operating company.
-16-
LML PAYMENT SYSTEMS INC.
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LML PAYMENT SYSTEMS INC.
By: /s/ Wendy J. Ogilvie
-----------------------------------
Wendy J. Ogilvie
Controller (Duly Authorized Officer
and Chief Accounting Officer)
Date: August 14, 2001
-17-