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 September 30, 2006
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)
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Yukon
Territory
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980-20-9289
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(State
or other jurisdiction of
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(I.R.S.
Employer Identification No.)
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|
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incorporation
or organization)
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1680-1140
West Pender Street
Vancouver,
British Columbia
Canada
V6E 4G1
(Address
of principal executive offices) (Zip Code)
Registrant's
Telephone Number, Including Area Code: (604)
689-4440
Indicate
by check mark whether the registrant (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements
for
the past 90 days. Yes [X] No [ ]
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
one):
Large
Accelerated Filed [ ] Accelerated
Filer [ X ] Non-Accelerated
Filer [ ]
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes
[ ] No
[X]
The
number of shares of the registrant's Common Stock outstanding as of November
3,
2006, was 20,207,094.
LML
PAYMENT SYSTEMS INC.
FORM
10-Q
FOR
THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2006
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Page
Number
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PART
I.
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FINANCIAL
INFORMATION
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1
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Item
1.
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1
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Consolidated
Balance Sheets (unaudited) at
September 30, 2006 and March 31, 2006
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1
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Consolidated
Statements of Operations and Deficit
(unaudited) for the Three and Six Months Ended September 30,
2006 and
2005
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2
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Consolidated
Statements of Cash Flows (unaudited) for
the Three and Six Months Ended September 30, 2006 and 2005
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3
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4
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Item
2.
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8
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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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OTHER
INFORMATION
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16
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Item
1.
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16
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Item
1A.
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16
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Item
4.
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16
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Item
6.
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17
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18
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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. Consolidated
Financial Statements
LML
PAYMENT SYSTEMS INC.
(In
U.S. Dollars, except as noted below)
(Unaudited)
|
September
30,
2006
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March
31,
2006
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||||||
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ASSETS
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|||||||
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Current
Assets
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|||||||
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Cash
and cash equivalents
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$
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11,066,437
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$
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3,691,632
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|||
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Restricted
cash
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250,000
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250,000
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|||||
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Accounts
receivable, less allowances of $46,886 and $46,145, respectively
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498,416
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436,475
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|||||
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Prepaid
expenses
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342,779
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374,887
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|||||
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Total
Current Assets
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12,157,632
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4,752,994
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|||||
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Capital
Assets, net
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156,438
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201,036
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|||||
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Patents,
net
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1,013,355
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1,093,392
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|||||
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Other
Assets
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263,590
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30,102
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|||||
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TOTAL
ASSETS
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13,591,015
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6,077,524
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|||||
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LIABILITIES
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|||||||
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Current
Liabilities
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|||||||
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Accounts
payable
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618,757
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1,104,034
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|||||
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Accrued
liabilities
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164,991
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165,083
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|||||
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Accrued
compensation
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185,660
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173,444
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|||||
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Current
portion of long-term debt
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2,460
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22,458
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|||||
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Current
portion of deferred revenue
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1,503,717
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260,121
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|||||
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Total
Current Liabilities
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2,475,585
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1,725,140
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|||||
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Long-term
debt
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4,654
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-
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|||||
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Deferred
revenue
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6,492,653
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10,985
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|||||
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Total
Liabilities
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8,972,892
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1,736,125
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|||||
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Commitments
and contingencies
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|||||||
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SHAREHOLDERS'
EQUITY
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|||||||
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Capital
Stock
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|||||||
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Class
A, preferred stock, $1.00 CDN par value, 150,000,000 shares
authorized,
issuable in series, none issued or outstanding
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-
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-
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|||||
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Class
B, preferred stock, $1.00 CDN par value, 150,000,000 shares
authorized,
issuable in series, none issued or outstanding
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-
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-
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|||||
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Common
shares, no par value, 100,000,000 shares authorized, 20,207,094
and
20,194,094 shares issued and outstanding, respectively
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32,774,368
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32,710,018
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|||||
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Contributed
surplus
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2,991,817
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2,544,312
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|||||
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Deficit
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(31,148,062
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)
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(30,912,931
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)
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|||
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Total
Shareholders' Equity
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4,618,123
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4,341,399
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|||||
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TOTAL
LIABILITIES AND SHAREHOLDERS' EQUITY
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13,591,015
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6,077,524
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|||||
See
accompanying notes to the consolidated financial
statements.
LML
PAYMENT SYSTEMS INC.
(In
U.S. Dollars, except share data)
(Unaudited)
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Three
Months Ended September 30
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Six
Months Ended September 30
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||||||||||||
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2006
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2005
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2006
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2005
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||||||||||
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REVENUE
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$
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1,650,673
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$
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1,158,488
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$
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3,446,221
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$
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2,718,040
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|||||
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COSTS
AND EXPENSES
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|||||||||||||
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Cost
of operations
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1,219,476
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1,114,829
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2,484,542
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2,250,125
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|||||||||
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Sales,
general and administrative expenses (includes stock-based
compensation
expense of $301,664 for three months ended September 30,
2006 (three
months ended September 30, 2005 - $504,625) and $425,859
for six months
ended September 30, 2006 (six months ended September 30,
2005 -
$661,494))
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880,581
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1,695,576
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1,609,558
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2,906,174
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|||||||||
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Amortization
and depreciation
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79,319
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110,413
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159,131
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436,078
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|||||||||
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LOSS
BEFORE OTHER (EXPENSES) INCOME AND INCOME TAXES
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(528,703
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)
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(1,762,330
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)
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(807,010
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)
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(2,874,337
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)
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|||||
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Other
(expenses) income, net
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(3,235
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)
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(228,990
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)
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381,084
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(228,584
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)
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||||||
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Interest
income, net
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117,085
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36,521
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220,841
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73,986
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|||||||||
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LOSS
BEFORE INCOME TAXES
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(414,853
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)
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(1,954,799
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)
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(205,085
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)
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(3,028,935
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)
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Income
taxes
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4,200
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9,623
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30,046
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13,823
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|||||||||
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NET
LOSS
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(419,053
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)
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(1,964,422
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)
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(235,131
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)
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(3,042,758
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)
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|||||
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DEFICIT,
beginning of period
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(30,729,009
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)
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(27,344,174
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)
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(30,912,931
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)
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(26,265,838
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)
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|||||
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DEFICIT,
end of period
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(31,148,062
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)
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(29,308,596
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)
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(31,148,062
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)
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(29,308,596
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)
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|||||
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LOSS
PER SHARE, basic and diluted
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(0.02
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)
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(0.10
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)
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(0.01
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)
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(0.15
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)
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|||||
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WEIGHTED
AVERAGE SHARES OUTSTANDING
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|||||||||||||
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Basic
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20,207,094
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20,146,464
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20,205,733
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20,146,031
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|||||||||
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Diluted
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20,207,094
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20,146,464
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20,205,733
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20,146,031
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|||||||||
See
accompanying notes to the consolidated financial
statements.
LML
PAYMENT SYSTEMS INC.
(In
U.S. Dollars)
(Unaudited)
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Three
Months Ended September 30
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Six
Months Ended September 30
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||||||||||||
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2006
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2005
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2006
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2005
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||||||||||
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Operating
Activities:
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|||||||||||||
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Net
Loss
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$
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(419,053
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)
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$
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(1,964,422
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)
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$
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(235,131
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)
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$
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(3,042,758
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)
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Adjustments
to reconcile net loss to net cash (used in) provided by
operating
activities
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|||||||||||||
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Provision
for losses on accounts receivable
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-
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14,989
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24,464
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14,989
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|||||||||
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Amortization
and depreciation
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79,319
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110,413
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159,131
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436,078
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|||||||||
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Stock-based
compensation
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301,664
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504,625
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425,859
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661,494
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|||||||||
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Stock-based
compensation - future income taxes
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-
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5,423
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21,646
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5,423
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|||||||||
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Changes
in operating assets and liabilities
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|||||||||||||
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Accounts
receivable
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(144,287
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)
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119,837
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(86,405
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)
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22,569
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|||||||
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Prepaid
expenses
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15,191
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31,246
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32,108
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192,370
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|||||||||
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Other
assets
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-
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10,952
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-
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10,952
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|||||||||
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Accounts
payable and accrued liabilities
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(21,147
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)
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323,776
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(473,153
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)
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585,707
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|||||||
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Deferred
revenue
|
(290,617
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)
|
40,279
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7,725,264
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(996
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)
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|||||||
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Net
cash (used in) provided by operating activities
|
(478,930
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)
|
(802,882
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)
|
7,593,783
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(1,114,172
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)
|
||||||
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Investing
Activities:
|
|||||||||||||
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Other
assets
|
(133,488
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)
|
-
|
(233,488
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)
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-
|
|||||||
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Capital
asset expenditures
|
(18,417
|
)
|
(56,142
|
)
|
(25,464
|
)
|
(73,827
|
)
|
|||||
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Patents
|
(487
|
)
|
-
|
(1,252
|
)
|
(211
|
)
|
||||||
|
Net
cash (used in) investing activities
|
(152,392
|
)
|
(56,142
|
)
|
(260,204
|
)
|
(74,038
|
)
|
|||||
|
Financing
Activities:
|
|||||||||||||
|
Payments
on capital leases
|
(11,114
|
)
|
(9,670
|
)
|
(20,351
|
)
|
(19,035
|
)
|
|||||
|
Payments
on long-term borrowing
|
-
|
(2,533
|
)
|
(2,773
|
)
|
(5,095
|
)
|
||||||
|
Proceeds
from exercise of stock options
|
-
|
42,325
|
64,350
|
42,325
|
|||||||||
|
Net
cash (used in) provided by financing activities
|
(11,114
|
)
|
30,122
|
41,226
|
18,195
|
||||||||
|
(DECREASE)
INCREASE IN CASH AND CASH EQUIVALENTS
|
(642,436
|
)
|
(828,902
|
)
|
7,374,805
|
(1,170,015
|
)
|
||||||
|
Cash
and cash equivalents, beginning of period
|
11,708,873
|
5,720,708
|
3,691,632
|
6,061,821
|
|||||||||
|
Cash
and cash equivalents, end of period
|
11,066,437
|
4,891,806
|
11,066,437
|
4,891,806
|
|||||||||
See
accompanying notes to the consolidated financial
statements
LML
PAYMENT SYSTEMS INC.
(unaudited)
|
1.
|
Basis
of Presentation
|
The
consolidated balance sheet as at September 30, 2006, the consolidated statements
of operations and deficit for the three and six months ended September
30, 2006
and 2005, and the consolidated statements of cash flows for the three and
six
months ended September 30, 2006 and 2005, of LML Payment Systems Inc. and
its
subsidiaries (collectively, the “Corporation”) are unaudited. The Corporation's
consolidated balance sheet as at March 31, 2006, was derived from audited
financial statements. In the opinion of management, all adjustments necessary
for a fair presentation of such financial statements are included herein.
Other
than those discussed in the notes below, such adjustments consist only
of normal
recurring items. Interim results are not necessarily indicative of results
for a
full year. The Corporation's consolidated financial statements and notes
are
presented in accordance with generally accepted accounting principles in
Canada
for interim financial information and in accordance with the instructions
for
Form 10-Q and Article 10 of Regulation S-X, and do not contain certain
information included in the Corporation's annual audited
consolidated financial statements and notes. Unless otherwise noted, the
accounting policies of the Corporation are unchanged from the Corporation’s
annual audited consolidated financial statements contained in the Corporation’s
Annual Report on Form 10-K for the fiscal year ended March 31, 2006. The
consolidated financial statements and notes appearing in this report should
be
read in conjunction with the Corporation's audited consolidated financial
statements and related notes thereto, together with management's discussion
and
analysis of financial condition and results of operations, contained in
the
Corporation's Annual Report on Form 10-K for the fiscal year ended March
31,
2006, as filed with the Securities and Exchange Commission on June 15,
2006
(file no. 0-13959).
|
2.
|
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 (March 31, 2006
-
$250,000) against charge back losses.
|
b)
|
Concentration
of credit risk
|
During
the three months ended September 30, 2006, revenue from the Corporation’s three
largest customers amounted to approximately 62% of total revenue (three
months
ended September 30, 2005 - 33%). The amount of revenue from these customers
amounted to approximately $1,028,360 (three months ended September 30,
2005 -
$385,550). During the six months ended September 30, 2006, revenue from
the
Corporation’s two largest customers amounted to approximately 49% of total
revenue (six months ended September 30, 2005 - 23%). The amount of revenue
from
these customers amounted to approximately $1,698,463 (six months ended
September
30, 2005 - $632,137). The Corporation is economically dependent on revenue
from
these customers.
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3.
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Stock-based
compensation
|
Effective
April 1, 2003, the Corporation prospectively early adopted the Canadian
Institute of Chartered Accountants (“CICA”) Section 3870 which corresponds to
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”), which requires fair value accounting for all stock options issued during
the year. Subsequent to SFAS 148, the Corporation has adopted Statement
of
Financial Accounting Standards No. 123(R) (“SFAS 123(R)”), “Share-Based Payment”
(see Note 5), which also corresponds to CICA Section 3870. Prior to the
adoption
of the new 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. No pro forma disclosure is presented as all stock
options granted prior to the adoption have been fully pro-forma expensed.
During
the three months ended September 30, 2006, the Corporation granted 125,000
stock
options under the Corporation’s 1996 Stock Option Plan and 50,000 stock options
under the 1998 Stock Incentive Plan. The weighted average fair value for
these
stock options is $1.82. The total fair value of stock-based compensation
is
amortized over the vesting period resulting in stock-based compensation
expense
of $301,664 for the three months ended September 30, 2006 and $425,859
for the
six months ended September 30, 2006. The fair value for the 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 4.42%;
Expected
volatility of 60.8%;
Expected
life of the stock options of 4 years; and
No
dividend yields.
During
the three months ended September 30, 2005, the Corporation granted 175,000
stock
options under the Corporation’s 1996 Stock Option Plan and 75,000 stock options
under the 1998 Stock Incentive Plan. The weighted average fair value for
these
stock options is $2.35. The total fair value of stock-based compensation
is
amortized over the vesting period resulting in stock-based compensation
expense
of $504,625 for the three months ended September 30, 2005 and $661,494
for the
six months ended September 30, 2005. During the six months ended September
30,
2005, 50,000 stock options were terminated upon the departure of an employee.
The fair value for the 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.
|
4.
|
Commitments
and Contingencies
|
All
commitments and contingencies remain unchanged from the Corporation’s audited
consolidated financial statements contained in the Corporation’s Annual Report
on Form 10-K for the fiscal year ended March 31, 2006 except as noted
below:
During
the six months ended September 30, 2006, a subsidiary of the Corporation settled
its suit, originally filed on June 14, 2004 in the U.S. District Court for
the
District of Delaware, against four companies who provide equipment, systems
and
services that convert paper checks presented at the point-of-sale into
electronic transactions and entered into a separate settlement and license
agreement with each of them. The provisions of each of the three settlement
and
license agreements included providing a license to the patents owned by the
subsidiary of the Corporation in exchange for consideration in the form of
a
release fee for a release from any and all causes of action related to the
subsidiary of the Corporation’s licensed patents as well as consideration in the
form of either a lump sum payment or a running royalty fee covering a term
through to the expiration of the licensed patents owned by the subsidiary of
the
Corporation. The consideration received by the subsidiary of the Corporation
for
these three settlement and license agreements was $16,000,000.
The
three
settlement and license agreements contained a number of elements that have
been
recorded in these consolidated financial statements as follows:
| · |
Under
the terms of two of the agreements, in exchange for a release fee
consideration, the subsidiary of the Corporation has agreed to release
these licensees from any and all causes of action related to its
patents
which may have arisen prior to the effective date of the licenses.
Due to
the specific nature of the releases, these release fees have been
recorded
as other income in the six months ended September 30, 2006.
|
| · |
The
subsidiary of the Corporation has entered into a standstill agreement
with
one of the licensees, whereby both have promised to refrain from
filing
certain types of litigation against each other until April 1, 2009.
The
consideration received related to the standstill agreement has been
deferred and will be recognized as other income ratably over the
standstill period.
|
| · |
Under
the terms of one agreement, the subsidiary of the Corporation agreed
to
provide licensing rights for use of existing patents. As these rights
have
been delivered, payment has been received and the subsidiary of the
Corporation has no future obligations under the agreement, this revenue
has been recognized in the six months ended September 30,
2006.
|
| · |
Under
the terms of one agreement, a portion of the consideration received
is
comprised of license fees for past and future use of the subject
patents
and for use of any future patents to be developed, acquired or obtained
by
the Corporation. The components of this portion of the agreement
are
considered multiple element arrangements that do not qualify for
separate
units of accounting, therefore, these license fees have been deferred
and
will be recognized ratably over the remaining term of the license
agreement, which expires on January 16,
2013.
|
| · |
One
agreement also included running royalties for certain future transactions
completed by the licensee. These running royalties will be recorded
by the
subsidiary of the Corporation as revenue in the period in which they
are
earned.
|
| · |
The
Corporation has a special fee arrangement with its legal firm, Kirkland
and Ellis LLP, that resulted in a $7,100,000 fee for the legal firm’s
services in connection with the foregoing settlement and licensing
agreements. The special fee was paid in the period and has been offset
against the $16,000,000
consideration.
|
In
conjunction with one of the agreements above, during the six months ended
September 30, 2006, the Corporation and the Corporation’s subsidiary, LML
Payment Systems Corp., settled the complaint for patent infringement originally
filed on June 22, 2005 by Telecheck International Inc. in the United States
District Court for the Eastern District of Texas, Marshall Division. The
provisions of the settlement agreement included providing the Corporation and
the Corporation’s subsidiary, LML Payment Systems Corp., with a license to
certain patents owned by Telecheck International Inc. and certain other future
patents owned by First Data Corp. and Telecheck related to the Corporation’s
current products or services.
|
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 2001 reduction
in deficit
of $22,901,744 by reducing the stated capital of the shares of
the
Corporation's common stock.
|
|
b)
|
On
April 1, 2006, the Corporation adopted SFAS 123(R) which requires
the
expensing of all options issued, modified or settled based on the
grant
date fair value over the period during which an employee is required
to
provide service (vesting period).
|
|
The
Corporation adopted SFAS 123(R) using the modified prospective
approach,
which requires application of the standard to all awards granted,
modified, repurchased or cancelled on or after April 1, 2006, and
to all
awards for which the requisite service has not been rendered as
at such
date. Since April 1, 2003, the Corporation has been following the
fair
value based approach prescribed by SFAS 123, as amended by SFAS
148, for
stock option awards granted, modified or settled on or after such
date. As
such, the application of SFAS 123(R) on April 1, 2006 to all awards
granted prior to its adoption did not have 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 CDN GAAP.
|
|
Previously
under U.S. GAAP, the Corporation accounted for its 1996 Stock Option
Plan
and 1998 Stock Incentive Plan under the principles of Accounting
Principles Board Opinion No. 25 “Accounting for Stock Issued to Employees
and Related Interpretations” (“APB 25”). No compensation expense was
recognized under APB 25 because the exercise price of the Corporation’s
stock options equals the market price of the underlying stock on
the date
of the grant.
|
|
c)
|
Other
Comprehensive Income
|
|
U.S.
GAAP requires that a statement of comprehensive income be displayed
with
the same prominence as other financial statements and that the aggregate
amount of comprehensive income excluding the deficit be disclosed
separately in shareholders’ equity. Comprehensive income, which
incorporates the net income (loss), includes all changes in shareholders’
equity during a period except those resulting from investments by
and
distributions to owners. Net income (loss) for the Corporation is
the same
as comprehensive income. There is currently no requirement to disclose
comprehensive income under CDN
GAAP.
|
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 5.a).
Recent
U.S. GAAP Accounting Pronouncements
In
June
2006, FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income
Taxes” (FIN 48), effective for fiscal years beginning after December 15, 2006.
This interpretation clarifies the accounting for uncertainty in income taxes
recognized in an enterprise’s financial statements in accordance with Statement
of Financial Accounting Standards (SFAS) No. 109, “Accounting for Income Taxes,”
including the recognition threshold and measurement attributes for the financial
statement recognition and measurement of a tax position taken or expected to
be
taken in a tax return. The Corporation plans to adopt FIN 48 on April 1, 2007,
as required. The adoption of FIN 48 is not expected to have an impact on the
Corporation’s consolidated financial statements.
In
June
2006, FASB ratified the consensus reached by the Emerging Issues Task Force
in
Issue No. 06-3, “How Taxes Collected from Customers and Remitted to Governmental
Authorities Should be Presented in the Income Statement (That is, Gross Versus
Net Presentation).” Issue No. 06-3 requires disclosure of an entity’s accounting
policy regarding the presentation of taxes assessed by a governmental authority
that are directly imposed on a revenue-producing transaction between a seller
and a customer, including sales, use, value added and some excise taxes. The
adoption of Issue No. 06-3, which is effective for interim and annual reporting
periods beginning after December 15, 2006, is not expected to have an impact
on
the Corporation’s consolidated financial statements.
In
September 2006, the SEC staff issued Staff Accounting Bulletin No. 108,
“Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements” (SAB 108). SAB 108 was
issued to provide consistency between how registrants quantify financial
statement misstatements. Historically, there have been two widely-used methods
for quantifying the effects of financial statement misstatements. These
methods are referred to as the “roll-over” and “iron curtain” method. The
roll-over method quantifies the amount by which the current year income
statement is misstated. Exclusive reliance on an income statement approach
can result in the accumulation of errors on the balance sheet that may not
have
been material to any individual income statement, but which may misstate one
or
more balance sheet accounts. The iron curtain method quantifies the error
as the cumulative amount by which the current year balance sheet is
misstated. Exclusive reliance on a balance sheet approach can result
in disregarding the effects of errors in the current year income statement
that
results from the correction of an error existing in previously issued financial
statements. The Corporation currently uses the roll-over method for
quantifying identified financial statement misstatements. SAB 108 established
an
approach that requires quantification of financial statement misstatements
based
on the effects of the misstatement on each of the company’s financial statements
and the related financial statement disclosures. This approach is commonly
referred to as the “dual approach” because it requires quantification of errors
under both the roll-over and iron curtain methods. SAB 108 allows
registrants to initially apply the dual approach either by (1) retroactively
adjusting prior financial statements as if the dual approach had always been
used or by (2) recording the cumulative effect of initially applying the dual
approach as adjustments to the carrying values of assets and liabilities as
of
April
1, 2006
with an offsetting adjustment recorded to the opening balance of retained
earnings. Use of this “cumulative effect” transition method
requires detailed disclosure of the nature and amount of each individual error
being corrected through the cumulative adjustment and how and when it arose.
The
Corporation will initially apply SAB 108 using the retroactive method in
connection with the preparation of its annual financial statements for the
year
ending March 31, 2007. When the Corporation initially applies the
provisions of SAB 108, it does not expect this adoption to result in any
adjustment to the Corporation’s consolidated financial statements.
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
our Annual Report on Form 10-K for the fiscal year ended March 31, 2006, filed
with the Securities and Exchange Commission on June 15, 2006 (file no. 0-13959).
We believe that all necessary adjustments (consisting only of normal recurring
adjustments) have been included in the amounts stated below to present fairly
the following quarterly information. Quarterly operating results have varied
significantly in the past and can be expected to vary in the future. Results
of
operations for any particular quarter are not necessarily indicative of results
of operations for a full year.
Forward
Looking Information
All
statements other than statements of historical fact contained herein are
forward-looking statements. Forward-looking statements generally are accompanied
by words such as “anticipate,” “believe,” “estimate,” “intend,” “project,”
“potential” or “expect” or similar statements. The forward-looking statements
were prepared on the basis of certain assumptions which relate, among other
things, to the demand for and cost of marketing our services, the volume and
total value of transactions processed by merchants utilizing our services,
the
technological adaptation of electronic check conversion end-users, the renewal
of material contracts in our business, our ability to anticipate and respond to
technological changes, particularly with respect to financial payments and
e-commerce, in a highly competitive industry characterized by rapid
technological change and rapid rates of product obsolescence, our ability to
develop and market new product enhancements and new products and services that
respond to technological change or evolving industry standards, no unanticipated
developments relating to previously disclosed lawsuits against us, and the
cost
of protecting our intellectual property. Even if the assumptions on which the
forward-looking statements are based prove accurate and appropriate, the actual
results of our operations in the future may vary widely due to technological
change, increased competition, new government regulation or intervention in
the
industry, general economic conditions, other risks described in our filings
with
the Securities and Exchange Commission. Accordingly, the actual results of
our
operations in the future may vary widely from the forward-looking statements
included herein. All forward-looking statements included herein are expressly
qualified in their entirety by the cautionary statements in this
paragraph.
Overview
LML
Payment Systems Inc. is a financial payment processor. We provide check risk
services such as electronic check authorization, electronic check processing
services such as electronic check conversion and return check management such
as
traditional and electronic recovery services to retail clients. We also provide
mainframe payment processing software modules and rights to use our patented
intellectual property to retailers and other payment processors.
When
we
provide 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 some other instances our secondary recovery services
provide for us to earn additional fees when legal action is
required.
When
we
provide check authorization and electronic check conversion services we
typically earn revenue based upon the number of transactions we process through
our data center.
When
we
provide mainframe based payment software modules to clients who are of
sufficient size and possess the technical capability to process financial
transactions in-house, or through their own data center, we typically earn
revenue by way of a fixed software license fee. In some instances we also earn
revenue by way of royalties that are typically based upon a fixed sale price
or
on a usage or transaction basis.
When
we
provide clients licenses to our intellectual property estate (which includes
four U.S. patents describing electronic check processing methods), we typically
earn revenue or other income from release fees for potential past infringement
and ongoing royalty fees. 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.
We
provide our financial payment processing services from our office locations
in
Scottsdale, Arizona, Wichita, Kansas and Dallas, Texas.
Results
of Operations
Three
Months Ended September 30, 2006 results compared to Three Months Ended September
30, 2005
Revenue
Total
revenue for the three months ended September 30, 2006 was approximately $1.7
million, an increase of approximately 41.2% from total revenue of approximately
$1.2 million for the three months ended September 30, 2005. This increase is
primarily attributable to an increase in revenue from licensing our patented
intellectual property.
Revenue
from electronic check verification was approximately $203,000 for the three
months ended September 30, 2006, approximately a 29.8% decrease from revenue
from electronic check verification of approximately $289,000 for the three
months ended September 30, 2005. This decrease is primarily attributable to
a
reduction in per transaction pricing of our enhanced electronic check
verification services provided to certain existing customers who entered into
contract renewals during our previous quarter of our current fiscal
year.
Revenue
from our primary check collections business decreased approximately 15.7% from
approximately $235,000 for the three months ended September 30, 2005 to
approximately $198,000 for the three months ended September 30, 2006. The
reduction in revenue from our primary check collections business was primarily
attributable to an overall reduction in new returned check volume of
approximately 33.5% 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, we developed and began to implement 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 coincides with the expiration of our
property leases regarding our Dallas facilities. We anticipate completing this
combination by December 31, 2006. 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 37.6%
from
approximately $442,000 for the three months ended September 30, 2005 to
approximately $608,000 for the three months ended September 30, 2006. 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 royalties received from CheckFree Corporation pertaining to their marketing
of the PEP+ reACH™ product was approximately $140,000 for the three months ended
September 30, 2006, versus approximately $61,000 for the three months ended
September 30, 2005. We believe future royalties are dependent upon the continued
successful marketing by CheckFree Corporation of the PEP+ reACH™
product.
Revenue
from licensing our patented intellectual property increased by approximately
$360,000, from approximately $33,000 for the three months ended September 30,
2005 to approximately $393,000 for the three months ended September 30, 2006.
The licensing revenue of approximately $393,000 consists of: (i) approximately
$306,000, net of legal fees, representing the recognized current period portion
of deferred revenue from one granted license; and (ii) approximately $87,000
related to aggregate licenses providing running royalties.
During
the three months ended September 30, 2006, revenue from and associated with
our
three largest customers amounted to approximately 62.3% of total revenue as
compared to approximately 33.3% of total revenue for the three months ended
September 30, 2005.
The
increase in revenue from and associated with our largest customers is primarily
attributable to the revenue attributable to one of our settlement and license
agreements we entered into in April 2006. We are economically dependent on
these
customers and the temporary or permanent loss of these customers might have
a
material adverse effect on our results of operations and financial
condition.
Costs
of operations
Costs
of
operations increased from approximately $1.1 million for the three months ended
September 30, 2005, to approximately $1.2 million for the three months ended
September 30, 2006, an increase of approximately 9.1%. The increase was
primarily attributable to an increase in costs of approximately $60,000
associated with increases in our secondary check collections business and
partially attributable to an increase in our personnel costs. Costs of
operations consist of transaction processing costs, personnel costs, equipment
related costs and telecommunication costs.
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 $881,000 from approximately $1.7 million for the three months
ended September 30, 2006 and 2005, respectively, a decrease of approximately
$819,000 or approximately 48.2%. The decrease in sales, general and
administrative expense is primarily attributable to a decrease in legal fees
of
approximately $555,000, attributable to the patent infringement suit we filed
during the fiscal year ended March 31, 2005 and settled in the first quarter
of
our fiscal year ending March 31, 2007, from approximately $567,000 for the
three
months ended September 30, 2005 to approximately $12,000 for the three months
ended September 30, 2006 and partially attributable to a decrease in stock-based
compensation expense of approximately $203,000 from approximately $505,000
for
the three months ended September 30, 2005 to approximately $302,000 for the
three months ended September 30, 2006.
Amortization
and depreciation
Amortization
and depreciation decreased to approximately $79,000 from approximately $110,000
for the three months ended September 30, 2006 and 2005, respectively. The
decrease was primarily attributable to certain capital assets, acquired through
previous years’ acquisitions, which had become fully depreciated.
Other
(expenses) income, net
During
the three months ended September 30, 2006, we had other expenses of
approximately $3,000 compared to approximately $229,000 for the three months
ended September 30, 2005. The decrease in other expenses is primarily
attributable to costs of approximately $227,000 incurred during the three months
ended September 30, 2005 attributable to an Arbitrator’s decision to award a
former consultant of ours damages, interest and certain arbitration
costs.
Interest
income, net
Interest
income increased to approximately $117,000 from approximately $37,000 for the
three months ended September 30, 2006 and 2005, respectively.
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.
Net
Loss
Net
loss
decreased approximately $1.6 million from a net loss of approximately $2.0
million for the three months ended September 30, 2005 to a net loss of
approximately $419,000 for the three months ended September 30, 2006. The
decrease was primarily attributable to a decrease in legal fees attributable
to
the patent infringement suit we filed during the fiscal year ended March 31,
2005, of approximately $555,000 and partially attributable to a decrease in
stock-based compensation expense of approximately $203,000, an increase in
revenue of approximately $360,000 attributable to licensing our patented
intellectual property and a decrease of approximately $226,000 in other
expenses.
Basic
and
diluted loss per share were both approximately ($0.02) for the three months
ended September 30, 2006, as compared to approximately ($0.10) for the three
months ended September 30, 2005.
Six
Months Ended September 30, 2006 results compared to Six Months Ended September
30, 2005
Revenue
Total
revenue for the six months ended September 30, 2006 was approximately $3.4
million, an increase of approximately 25.9% from total revenue of approximately
$2.7 million for the six months ended September 30, 2005. This increase is
primarily attributable to an increase in revenue from licensing our patented
intellectual property.
Revenue
from electronic check verification was approximately $428,000 for the six months
ended September 30, 2006, approximately a 24.8% decrease from revenue from
electronic check verification of approximately $569,000 for the six months
ended
September 30, 2005. This decrease is primarily attributable to a reduction
in
per transaction pricing of our enhanced electronic check verification services
provided to certain existing customers who entered into contract renewals during
the first three months of our six months ended September 30, 2006.
Revenue
from our primary check collections business decreased approximately 24.4% from
approximately $533,000 for the six months ended September 30, 2005 to
approximately $403,000 for the six months ended September 30, 2006. The
reduction in revenue from our primary check collections business was primarily
attributable to an overall reduction in new returned check volume of
approximately 32% 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, we developed and began to implement 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 coincides with the expiration of our
property leases regarding our Dallas facilities. We anticipate completing this
combination by December 31, 2006. 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 30.3%
from
approximately $998,000 for the six months ended September 30, 2005 to
approximately $1.3 million for the six months ended September 30, 2006. 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 the six
months ended September 30, 2006, compared to approximately $112,000 for the
six
months ended September 30, 2005.
Revenue
from royalties received from CheckFree Corporation pertaining to their marketing
of the PEP+ reACH™ product was approximately $205,000 for the six months ended
September 30, 2006, versus approximately $222,000 for the six months ended
September 30, 2005. We believe future royalties are dependent upon the continued
successful marketing by CheckFree Corporation of the PEP+ reACH™
product.
Revenue
from licensing our patented intellectual property increased by approximately
$853,000, from approximately $65,000 for the six months ended September 30,
2005
to approximately $918,000 for the six months ended September 30, 2006. The
licensing revenue of approximately $918,000 consists of: (i) approximately
$143,000, net of legal fees, pertaining to one granted license; (ii)
approximately $612,000, net of legal fees, representing the recognized current
period portion of deferred revenue from a second granted license; and (iii)
approximately $163,000 related to aggregate licenses providing running
royalties.
During
the six months ended September 30, 2006, revenue from and associated with our
two largest customers amounted to approximately 49.3% of total revenue as
compared to approximately 23.3% of total revenue for the six months ended
September 30, 2005.
The
increase in revenue from and associated with our largest customers is primarily
attributable to the revenue attributable to one of our settlement and license
agreements we entered into in April 2006. We are economically dependent on
these
customers and the temporary or permanent loss of these customers might have
a
material adverse effect on our results of operations and financial
condition.
Costs
of operations
Costs
of
operations increased from approximately $2.3 million for the six months ended
September 30, 2005, to approximately $2.5 million for the six months ended
September 30, 2006, an increase of approximately 8.7%. The increase was
primarily attributable to an increase in costs of approximately $140,000
associated with increases in our secondary check collections business and
partially attributable to an increase in our personnel costs. Costs of
operations consist of transaction processing costs, personnel costs, equipment
related costs and telecommunication costs.
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 $1.6 million from approximately $2.9 million for the six months
ended September 30, 2006 and 2005, respectively, a decrease of approximately
$1.3 million or approximately 44.8%. The decrease in sales, general and
administrative expense is primarily attributable to a decrease in legal fees
of
approximately $932,000, attributable to the patent infringement suit we filed
during the fiscal year ended March 31, 2005 and settled in the first quarter
of
our fiscal year ending March 31, 2007, from approximately $983,000 for the
six
months ended September 30, 2005 to approximately $51,000 for the six months
ended September 30, 2006 and partially attributable to a decrease in stock-based
compensation expense of approximately $235,000 from approximately $661,000
for
the six months ended September 30, 2005 to approximately $426,000 for the six
months ended September 30, 2006.
Amortization
and depreciation
Amortization
and depreciation decreased to approximately $159,000 from approximately $436,000
for the six months ended September 30, 2006 and 2005, respectively. The decrease
was primarily attributable to certain capital assets, acquired through previous
years’ acquisitions, which had become fully depreciated.
Other
(expenses) income, net
During
the six months ended September 30, 2006 we had other income of approximately
$381,000 compared to other expenses of approximately $229,000 for the six months
ended September 30, 2005. The other income of approximately $381,000 in the
current period consists of approximately $377,000, net of legal fees,
attributable to specific release provisions contained in two of the license
agreements entered into in April, 2006 as well as approximately $22,000, net
of
legal fees, attributable to the recognized current period portion of deferred
other income from a certain standstill agreement contained in one of these
licenses. The other expense of approximately $229,000 in the prior fiscal year
period is primarily attributable to costs of approximately $227,000 attributable
to an Arbitrator’s decision to award a former consultant of ours damages,
interest and certain arbitration costs.
Interest
income, net
Interest
expense decreased to approximately $1,000 from approximately $2,000 for the
six
months ended September 30, 2006 and 2005, respectively. Interest income
increased to approximately $221,000 from approximately $76,000 for the six
months ended September 30, 2006 and 2005, respectively.
The
increase in interest income was primarily attributable to an increase in
interest bearing cash investments resulting from the net consideration we
received during the six months ended September 30, 2006 from the three
settlement and license agreements we entered into in April 2006.
Net
Loss
Net
loss
decreased approximately $2.8 million from a net loss of approximately $3.0
million for the six months ended September 30, 2005 to a net loss of
approximately $235,000 for the six months ended September 30, 2006. The decrease
was primarily attributable to an increase in revenue of approximately $853,000
attributable to licensing our patented intellectual property and a decrease
in
legal fees attributable to the patent infringement suit we filed during the
fiscal year ended March 31, 2005, of approximately $932,000 and partially
attributable to a decrease in stock-based compensation expense of approximately
$235,000, an increase in other income of approximately $381,000, and a decrease
of approximately $229,000 in other expenses.
Basic
and
diluted loss per share were both approximately ($0.01) for the six months ended
September 30, 2006, as compared to approximately ($0.15) for the six months
ended September 30, 2005.
Liquidity
and Capital Resources
Our
liquidity and financial position consisted of approximately $9.7 million in
working capital as of September 30, 2006, compared to approximately $3.0 million
in working capital as of March 31, 2006. The increase in working capital was
primarily attributable to cash flows provided by operating activities of
approximately $7.6 million. Cash provided by operating activities increased
approximately $8.7 million from cash used in operating activities of
approximately $1.1 million for the six months ended September 30, 2005 to cash
provided by operating activities of approximately $7.6 million for the six
months ended September 30, 2006. The increase in cash provided by operating
activities was primarily attributable to consideration we received of
approximately $16.0 million less special fee arrangements we paid Kirkland
&
Ellis of approximately $7.1 million resulting from the three settlement and
license agreements we entered into during the six months ended September 30,
2006. Cash used in investing activities was approximately $260,000 for the
six
months ended September 30, 2006 as compared to approximately $74,000 for the
six
months ended September 30, 2005, an increase in cash used in investing
activities of approximately $186,000. The increase in cash used in investing
activities was primarily attributable to an amount we paid pursuant to the
engagement of a corporate financial advisor. Cash provided by financing
activities was approximately $41,000 for the six months ended September 30,
2006
as compared to approximately $18,000 for the six months ended September 30,
2005, an increase in cash provided by financing activities of approximately
$23,000. The increase in cash provided by financing activities was primarily
due
to the increase in proceeds from the exercise of options of our common stock
of
approximately $22,000 from approximately $42,000 during the six months ended
September 30, 2005 to approximately $64,000 during the six months ended
September 30, 2006.
Due
to
the net consideration of $8.9 million we received from the three settlement
and
license agreements we entered into during the six months ended September 30,
2006, we anticipate positive cash flows from our operating activities in fiscal
2007. Consequently, we believe that this consideration combined with our
existing cash and cash equivalent balances should satisfy our working capital
and capital expenditure requirements in fiscal 2007.
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, 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.
Recent
Accounting Pronouncements
In
June
2006, the Financial Accounting Standards Board (FASB) issued Interpretation
No.
48, “Accounting for Uncertainty in Income Taxes” (FIN 48), effective for fiscal
years beginning after December 15, 2006. This interpretation clarifies the
accounting for uncertainty in income taxes recognized in an enterprise’s
financial statements in accordance with Statement of Financial Accounting
Standards (SFAS) No. 109, “Accounting for Income Taxes,” including the
recognition threshold and measurement attributes for the financial statement
recognition and measurement of a tax position taken or expected to be taken
in a
tax return. We plan to adopt FIN 48 on April 1, 2007, as required. The adoption
of FIN 48 is not expected to have an impact on our consolidated financial
statements.
In
June
2006, the FASB ratified the consensus reached by the Emerging Issues Task Force
in Issue No. 06-3, “How Taxes Collected from Customers and Remitted to
Governmental Authorities Should be Presented in the Income Statement (That
is,
Gross Versus Net Presentation).” Issue No. 06-3 requires disclosure of an
entity’s accounting policy regarding the presentation of taxes assessed by a
governmental authority that are directly imposed on a revenue-producing
transaction between a seller and a customer, including sales, use, value added
and some excise taxes. The adoption of Issue No. 06-3, which is effective for
interim and annual reporting periods beginning after December 15, 2006, is
not
expected to have an impact on our consolidated financial
statements.
In
September 2006, the SEC staff issued Staff Accounting Bulletin No. 108,
“Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements” (SAB 108). SAB 108 was
issued to provide consistency between how registrants quantify financial
statement misstatements. Historically, there have been two widely-used methods
for quantifying the effects of financial statement misstatements. These
methods are referred to as the “roll-over” and “iron curtain” method. The
roll-over method quantifies the amount by which the current year income
statement is misstated. Exclusive reliance on an income statement approach
can result in the accumulation of errors on the balance sheet that may not
have
been material to any individual income statement, but which may misstate one
or
more balance sheet accounts. The iron curtain method quantifies the error
as the cumulative amount by which the current year balance sheet is
misstated. Exclusive reliance on a balance sheet approach can result
in disregarding the effects of errors in the current year income statement
that
results from the correction of an error existing in previously issued financial
statements. We currently use the roll-over method for quantifying
identified financial statement misstatements. SAB 108 established an approach
that requires quantification of financial statement misstatements based on
the
effects of the misstatement on each of the company’s financial statements and
the related financial statement disclosures. This approach is commonly
referred to as the “dual approach” because it requires quantification of errors
under both the roll-over and iron curtain methods. SAB 108 allows
registrants to initially apply the dual approach either by (1) retroactively
adjusting prior financial statements as if the dual approach had always been
used or by (2) recording the cumulative effect of initially applying the dual
approach as adjustments to the carrying values of assets and liabilities as
of
April
1, 2006
with an offsetting adjustment recorded to the opening balance of retained
earnings. Use of this “cumulative effect” transition method
requires detailed disclosure of the nature and amount of each individual error
being corrected through the cumulative adjustment and how and when it arose.
We
will initially apply SAB 108 using the retroactive method in connection with
the
preparation of our annual financial statements for the year ending March 31,
2007. When we initially apply the provisions of SAB 108, we do not expect
this adoption to result in any adjustment to our consolidated financial
statements.
Critical
Accounting Policies and Estimates
There
have been no changes to our critical accounting policies and estimates since
March 31, 2006. For a description of our critical accounting policies and
estimates, see our Annual Report on Form 10-K for the year ended March 31,
2006
filed with the Securities and Exchange Commission on June 15, 2006 (file no.
0-13959).
Contingencies
In
March
2006, a former employee of a subsidiary of the Corporation filed a complaint
against us 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 alleges 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 us and wrongfully
terminated the former employee without requisite notice and for acts that do
not
constitute cause under the aforementioned employment agreement. We believe
these
allegations are without merit and we intend to vigorously defend against them.
The likelihood of success of this suit is indeterminate and any amounts to
be
payable cannot be reasonably estimated. As such, no amounts have been recorded
in the consolidated financial statements pertaining to this suit for the six
months ended September 30, 2006.
In
addition to the legal matters as described herein and previously reported in
our
Annual Report filed on Form 10-K for the year ended March 31, 2006, as filed
with the Securities and Exchange Commission on June 15, 2006 (file no. 0-13959),
we are party from time to time to ordinary litigation incidental to our
business, none of which is expected to have a material adverse effect on our
results of operations, financial position or liquidity.
From
April 1, 2006 until September 30, 2006, there were no material changes from
the
information concerning market risk contained in our Annual Report on Form 10-K
for the year ended March 31, 2006, as filed with the Securities and Exchange
Commission on June 15, 2006 (file no. 0-13959).
An
evaluation of the effectiveness of our disclosure controls and procedures,
as
defined in Exchange Act Rule 13a-15(e), was carried out by management with
the
participation of the Chief Executive Officer and Chief Accounting Officer as
of
the end of the period covered by this Quarterly Report on Form 10-Q. Based
on
that evaluation, our Chief Executive Officer and Chief Accounting Officer have
concluded that such controls and procedures were effective as of the end of
the
period covered by this Quarterly Report on Form 10-Q. As required by Exchange
Act Rule 13a-15(d), management, with the participation of the Chief Executive
Officer and Chief Accounting Officer, also conducted an evaluation of our
internal control over financial reporting to determine whether changes occurred
during the quarter ended September 30, 2006 that have materially affected,
or
are reasonably likely to materially affect, our internal control over financial
reporting. There were no changes in our internal control over financial
reporting during the quarter ended September 30, 2006 that have materially
affected, or are reasonably likely to materially affect, such internal control
over financial reporting.
PART
II. OTHER
INFORMATION
In
addition to the legal matters as described herein and as previously reported
in
our Annual Report on Form 10-K for the year ended March 31, 2006, as filed
with
the Securities and Exchange Commission on June 15, 2006 (file no. 0-13959),
we
are party from time to time to ordinary litigation incidental to our business,
none of which is expected to have a material adverse effect on our results
of
operations, financial position or liquidity.
There
are
no material changes to the risk factors as reported in our annual report on
Form
10-K for the fiscal year ended March 31, 2006, as filed with the Securities
and
Exchange Commission on June 15, 2006 (file no. 0-13959)
The
Corporation’s Annual General Meeting of Shareholders was held August 30, 2006
(the “Meeting”). There were 20,207,094 common shares of the Corporation entitled
to vote at the Meeting, of which a total of 17,587,796 (87.03%) were represented
at the Meeting either in person or by proxy.
The
following summarizes the results of the voting regarding the proposals which
were adopted at the Meeting:
|
1.
|
Proposal
to elect Patrick H. Gaines, Gregory A. MacRae, L. William Seidman
and
Jacqueline Pace for terms expiring at the Annual General Meeting
of
Shareholders in 2007, as described in the Corporation’s Information
Circular and Proxy Statement for the
Meeting.
|
|
DIRECTORS
|
VOTES
FOR
|
VOTES
WITHHELD
|
|
Patrick
H. Gaines
|
17,129,557
|
458,239
|
|
Greg
A. MacRae
|
17,145,260
|
442,536
|
|
L.
William Seidman
|
17,144,727
|
443,069
|
|
Jacqueline
Pace
|
17,143,952
|
443,844
|
|
2.
|
Proposal
to ratify the appointment of Grant Thornton LLP as the Corporation’s
independent auditor until the Annual General Meeting of Shareholders
in
2007.
|
|
VOTES
FOR
|
VOTES
AGAINST
|
ABSTENTIONS
|
|
17,337,425
|
98,689
|
151,682
|
Exhibits:
The
following exhibits are attached hereto or are incorporated herein by reference
as indicated in the table below:
Exhibit
|
Number
|
Description
of Document
|
|
3.1
|
Restated
Articles of Incorporation (incorporated by reference to Exhibit 3.1
to the
Annual Report on Form 10-K for the fiscal year ended March 31, 2006,
of
LML Payment Systems Inc. (File No.
0-13959)).
|
|
3.2
|
Bylaws
of LML, as amended (incorporated by reference to Exhibit 3.2 to the
Annual
Report on Form 10-K for the fiscal year ended March 31, 2006, of
LML
Payment Systems Inc. (File No.
0-13959)).
|
|
21
|
Subsidiaries
of LML (incorporated by reference to Exhibit 21 to the Annual Report
on
Form 10-K for the fiscal year ended March 31, 2006, of LML Payment
Systems
Inc. (File No. 0-13959)).
|
|
31.1*
|
Rule
13a-14(a) Certification of Chief Executive
Officer.
|
|
31.2*
|
Rule
13a-14(a) Certification of Principal Financial
Officer.
|
|
32.1*
|
Section
1350 Certification of Chief Executive Officer and Controller and
Chief
Accounting Officer.
|
|
*
|
filed
herewith
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant
has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
|
LML
PAYMENT SYSTEMS INC.
|
|
|
/s/
Richard R. Schulz
|
|
|
Richard
R. Schulz
|
|
|
Controller
and Chief Accounting Officer
|
|
|
(Duly
Authorized Officer and Chief Accounting Officer)
|
|
|
November
8, 2006
|