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| LMLP > SEC Filings for LMLP > Form 10-Q on 9-Feb-2009 | All Recent SEC Filings |
9-Feb-2009
Quarterly Report
Unless the context otherwise requires, references in this report on Form 10-Q to the "Corporation", "LML", "we", "us" or "our" refer to LML Payment Systems Inc. and its direct and indirect subsidiaries. LML Payment Systems Inc.'s direct subsidiaries include Beanstream Internet Commerce Inc., LML Corp., Legacy Promotions Inc. 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 audited consolidated financial statements and related notes thereto contained in our Annual Report on Form 10-K for the fiscal year ended March 31, 2008, filed with the Securities and Exchange Commission on June 19, 2008 (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 operating three separate lines of business: transaction payment processing, intellectual property licensing and check processing/software licensing. Our transaction payment processing services consist predominantly of Internet-based services; while our check processing services involve predominantly traditional and electronic check processing and recovery services that do not utilize the Internet. We believe that electronic transaction processing services, including Internet-based payment services, will continue to be used in greater frequency than traditional payment methods, such as checks and cash, and we are therefore focusing on these services. With the completion of our 2007 acquisition of Beanstream (which had a strong Internet-based product and service offering), we expect that our transaction payment processing services will be our principal line of business for the foreseeable future, while our other lines of business (including the electronic check processing services that we have historically relied on for a significant source of revenue) will become less important to our overall service offerings and less significant to the financial performance of our corporation.
TPP Segment
Our Transaction Payment Processing Operations ("TPP") involve financial payment processing, authentication and risk management services. We provide a service that acts as a bank-neutral interface between businesses and consumers processing financial or authentication transactions. Our transaction payment processing services are accessible via the Internet and are offered in an application service provider ("ASP") model. We focus on product development, project management and third tier technical support of our products and services and rely primarily on strategic business partners to sell and market our products and services. In some instances, our transaction payment processing services and payment products are integrated into third party products in target vertical markets. Our revenues are derived from one-time set-up fees, monthly gateway fees, and transaction fees paid to us by merchants. Transaction fees are recognized in the period in which the transaction occurs. Gateway fees are monthly subscription fees charged to our merchant customers for the use of our payment gateway. Gateway fees are recognized in the period in which the service is provided. Set-up fees represent one-time charges for initiating our processing services. Although these fees are generally paid at the commencement of the agreement, they are recognized ratably over the estimated average life of the merchant relationship, which is determined through a series of analyses of active and deactivated merchants. We currently service a merchant base of over 6,000 customers primarily in Canada.
IPL Segment
Our Intellectual Property Licensing Operations ("IPL") involve licensing our intellectual property estate, which includes five U.S. patents describing electronic check processing methods. When we provide clients licenses to our intellectual property estate, we typically earn revenue or other income from ongoing royalty fees and, in some cases, release fees for potential past infringement. In some instances we also earn revenue from license agreements that provide for the payment of contractually determined paid-up license fees to us in consideration for the grant of a non-exclusive, retroactive and future license to our intellectual property estate and in other instances, where license agreements include multiple element arrangements, we may defer this revenue and recognize the revenue ratably over the license term.
CP/SL Segment
Our Check Processing/Software Licensing Operations ("CP/SL") involve primary and secondary check collection including electronic check re-presentment (RCK) and software licensing. Our check processing services, which are provided in the United States, include return check management services such as traditional and electronic recovery services to retail clients. When we provide return check management services, we typically receive revenue when we are successful at recovering the principal amount of the original transaction on behalf of the client. In some instances we also earn a percentage of the principal amount and in other instances our secondary recovery services provide for us to earn additional fees when legal action is required.
In connection with our continuing focus on electronic transaction processing services, including Internet-based services, and our gradual de-emphasis of CP/SL services, during the fourth quarter of our prior fiscal year 2008, we ceased providing certain CP/SL services, including electronic check verification.
We also provide mainframe payment processing software modules and rights to use our intellectual property to retailers and other payment processors. When we provide mainframe based payment software modules we typically earn revenue by way of a fixed software license fee. In some instances we also earn revenue by way of royalties that are typically based upon a fixed sale price or on a usage or transaction basis. We provide our check processing services from our office location in Wichita, Kansas.
Within these segments, performance is measured based on revenue, factoring in costs and expenses including amortization and depreciation as well as earnings from operations before income taxes from each segment. There are no transactions between segments. We do not generally allocate corporate or centralized marketing and general and administrative expenses to our business unit segments because these activities are managed separately from the business units. Asset information by operating segment is not reported to or reviewed by our Chief Executive Officer, and therefore we have not disclosed asset information for each operating segment.
General Market Conditions
We are currently assessing the possible impacts on our operations and financial condition of various scenarios, including the potential for a prolonged global recession. In particular, we continue to evaluate how a prolonged global recession might impact future revenues generated by our operating segments. We anticipate we will be continuing to evaluate how a prolonged global recession and the related distresses in the credit and capital markets will impact existing business customers of ours, many of whom are small businesses and how a prolonged global recession may impact consumer spending and other business transactions. Also unknown is the potential effect a prolonged recession may have on our competitors, channel partners and end customers. In general, for the three and nine months ended December 31, 2008, we do not believe any of our operating segments experienced significant negative effects attributable to the current financial crisis and distress in the credit and capital markets.
Given the foregoing uncertainties, we continue to re-assess our stated strategies and investment plans. All statements made herein of the previously stated plans or the "current" plan or expectation of such should be considered in light of the potential effects discussed in the preceding paragraph. While the magnitude of any change in plans, including investment plans, cannot be predicted at this time, it is likely that some adjustments will be necessary due to the global recession and the lack of liquidity in financial markets.
We operate in a highly competitive business environment that has many risks. Critical risk factors that affect, or may affect us and the financial payment processing industry include changes in the level of spending by and transactions being processed for our customers and the ongoing credit worthiness and financial solvency of our customers. We believe that a prolonged global recession could affect consumer confidence and spending patterns which we believe could have a negative impact on the business of our customers and ultimately have a material adverse effect on our results of operations and financial condition. A full discussion of each of these risk factors (in addition to several other risk factors) is disclosed in Item 1A in our Annual Report on Form 10-K for the year ended March 31, 2008, as filed with the Securities and Exchange Commission on June 19, 2008 (file no. 0-13959).
Results of Operations
Three months ended December 31, 2008 compared to three months ended December 31, 2007
Revenue
Total revenue for the three months ended December 31, 2008 was approximately $3,037,000, a decrease of approximately $361,000 or approximately 10.6% from total revenue of approximately $3,398,000 for the three months ended December 31, 2007. This decrease is primarily attributable to a decrease in revenue from the CP/SL segment of approximately $341,000. During the fourth quarter of our fiscal year 2008, we ceased providing certain CP/SL segment services, including check verification, and, consequently, expected a corresponding decrease in CP/SL segment revenue.
During the three months ended December 30, 2008 revenue from and associated with our two largest customers amounted to approximately 30.4% of total revenue as compared to approximately 35.1% of total revenue for the three months ended December 31, 2007. 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.
TPP Segment
Revenue pertaining to our TPP segment consists of one-time set-up fees, monthly gateway fees, and transaction fees. TPP segment revenue for the three months ended December 31, 2008 was approximately $1,949,000, a decrease of approximately $35,000 or approximately 1.8% from TPP segment revenue of approximately $1,984,000 for the three months ended December 31, 2007. The decrease in TPP segment revenue was primarily attributable to a weakening Canadian dollar in relation to the US dollar which decreased approximately 23% from the prior fiscal third quarter. Since a significant amount of our TPP segment revenue originates in Canadian dollars, the conversion of this revenue to US dollars was at a reduced exchange rate when compared to the prior fiscal third quarter conversion. TPP segment revenue originating in Canadian dollars was approximately $1,287,000CAD for the three months ended December 31, 2008 compared to $1,046,000CAD for the three months ended December 31, 2007, an increase of approximately $241,000CAD or approximately 23%. Transaction fees for the three months ended December 31, 2008 were approximately $1,588,000 compared to approximately $1,641,000 for the three months ended December 31, 2007, a decrease of approximately $53,000 or approximately 3.2%; the amortized portion of one-time set-up fees recognized was approximately $35,000 for the three months ended December 31, 2008 compared to approximately $31,000 for the three months ended December 31, 2007, an increase of approximately $4,000 or approximately 12.9%; and monthly gateway fees for the three months ended December 31, 2008 were approximately $243,000 compared to approximately $237,000 for the three months ended December 31, 2007, an increase of approximately $6,000 or approximately 2.5%.
IPL Segment
Revenue from licensing our patented intellectual property increased by approximately $16,000 or approximately 3.9% from approximately $415,000 for the three months ended December 31, 2007 to approximately $431,000 for the three months ended December 31, 2008. The increase was primarily attributable to an increase in our running royalties provided by our existing licensees. The licensing revenue of approximately $431,000 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 $125,000 related to aggregate licenses providing running royalties and other paid-up license fees.
CP/SL Segment
CP/SL segment revenue for the three months ended December 31, 2008 was approximately $657,000, a decrease of approximately 34.2% from CP/SL segment revenue of approximately $998,000 for the three months ended December 31, 2007. The decrease in CP/SL segment revenue was primarily attributable to a reduction in revenue from electronic check verification and primary and secondary check collections business.
Revenue from electronic check verification was $nil for the three months ended December 31, 2008 as compared to approximately $87,000 for the three months ended December 31, 2007. This is primarily attributable to our no longer providing electronic check verification services during the three months ended December 31, 2008. During the fourth quarter of our fiscal year 2008, we ceased providing certain CP/SL segment services, including electronic check verification.
Revenue from our primary check collections business decreased approximately 24% from approximately $154,000 for the three months ended December 31, 2007 to approximately $117,000 for the three months ended December 31, 2008. Revenue from our secondary check collections business decreased approximately 12.2% from approximately $580,000 for the three months ended December 31, 2007 to approximately $509,000 for the three months ended December 31, 2008. The decrease in primary and secondary check collections business is primarily attributable to our cessation of providing certain CP/SL segment services, including check verification during the fourth quarter of our fiscal year 2008. Historically, certain customers may have received bundled payment processing services from us including electronic check verification and returned check management services. Consequently, the cessation of electronic check verification services to these specific customers could also cause a reduction in primary and secondary check collections business.
Revenue from royalties received from CheckFree Corporation ("CheckFree") pertaining to their marketing of the PEP+ reACH™ product was approximately $nil for the three months ended December 31, 2008, versus approximately $72,000 for the three months ended December 31, 2007. During the three months ended December 31, 2008, CheckFree received no commissionable revenue pertaining to their marketing of the PEP+ reACH™ product. Consequently we received no royalties and future royalties are dependent on CheckFree successfully marketing and earning revenue from the PEP+ reACH™ product. CheckFree is not contractually required to market the PEP+ reACH™ product and no assurances can be made that CheckFree will actively market the PEP+ reACH™ product in the future.
Cost of Revenue
Cost of revenue consists primarily of costs incurred by the TPP and CP/SL operating segments. These costs are incurred in the delivery of e-commerce transaction services, customer service support and check collection services and include processing and interchange fees paid, other third-party fees, personnel costs and associated benefits and stock-based compensation.
Cost of revenue increased from approximately $1,517,000 for the three months ended December 31, 2007, to approximately $1,560,000 for the three months ended December 31, 2008, an increase of approximately $43,000 or approximately 2.8%. The increase was primarily attributable to an increase in our TPP segment cost of revenue of approximately $11,000 or approximately 1.0% from approximately $1,080,000 for the three months ended December 31, 2007 to approximately $1,091,000 for the three months ended December 31, 2008 and an increase in stock based compensation allocated to cost of revenue of approximately $26,000, from approximately $11,000 for the three months ended December 31, 2007 to approximately $37,000 for the three months ended December 31, 2008.
General and administrative expenses
General and administrative expenses consist primarily of personnel costs including associated stock-based compensation and employment benefits, office facilities, travel, public relations and professional service fees, which include legal fees, audit fees, SEC compliance costs and costs related to compliance with the Sarbanes-Oxley Act of 2002. General and administrative expenses also include the costs of corporate and support functions including our executive leadership and administration groups, finance, information technology, legal, human resources and corporate communication costs.
General and administrative expenses decreased to approximately $963,000 from approximately $1,419,000 for the three months ended December 31, 2008 and 2007, respectively, a decrease of approximately $456,000 or approximately 32.1%. Included in general and administrative expenses are TPP segment expenses of approximately $145,000 for the three months ended December 31, 2008 an increase of approximately $11,000 compared to general and administrative expenses of approximately $134,000 for the three months ended December 31, 2007. CP/SL segment expenses decreased to approximately $112,000 from approximately $583,000 for the three months ended December 31, 2008 and 2007 respectively, a decrease of approximately $471,000 or approximately 80.8%. The decrease in CP/SL segment general and administrative expenses is primarily attributable to the consolidation of our four data centers into two which was completed during the fourth quarter of our fiscal year 2008. Also included in general and administrative expenses are stock-based compensation expenses of approximately $274,000 for the three months ended December 31, 2008 compared to stock-based compensation expenses of approximately $218,000 for the three months ended December 31, 2007, an increase of approximately $56,000 or approximately 25.7%.
Sales and Marketing
Sales and marketing expenses consist primarily of costs related to sales and marketing activities. These expenses include salaries, sales commissions, sales operations and other personnel-related expenses, travel and related expenses, trade shows, costs of lead generation, consulting fees and costs of marketing programs, such as internet, print and direct mail advertising costs.
Sales and marketing expense increased to approximately $77,000 from approximately $45,000 for the three months ended December 31, 2008 and 2007, respectively, an increase of approximately 71.1%. The increase is primarily attributable to increased personnel costs resulting in an increase of approximately $34,000 in TPP segment sales and marketing costs from approximately $37,000 for the three months ended December 31, 2007 to approximately $71,000 for the three months ended December 31, 2008.
Product Development and Enhancement
Product development and enhancement expenses consist primarily of compensation and related costs of employees engaged in the research, design and development of new services and in the improvement and enhancement of the existing product and service lines.
Product development and enhancement expenses were approximately $58,000 for the three months ended December 31, 2008 as compared to approximately $61,000 for the three months ended December 31, 2007. The decrease is primarily attributable to a decrease in TPP segment product development and enhancement expenses of approximately $4,000 from approximately $50,000 for the three months ended December 31, 2007 to approximately $46,000 for the three months ended December 31, 2008.
Amortization and Depreciation
Amortization and depreciation decreased to approximately $197,000 from approximately $383,000 for the three months ended December 31, 2008 and 2007, respectively, a decrease of approximately $186,000 or approximately 48.6%. The decrease is primarily attributable to the amortization of intangible assets associated with the Beanstream acquisition of approximately $248,000 for the three months ended December 31, 2007 compared to approximately $124,000 for the three months ended December 31, 2008.
Interest income
Interest income decreased to approximately $59,000 from approximately $111,000 for the three months ended December 31, 2008 and 2007, respectively. The decrease in interest income was primarily attributable to a decrease in the amount of cash invested.
Interest expense
Interest expense decreased to approximately $45,000 from approximately $117,000 for the three months ended December 31, 2008 and 2007, respectively. The decrease is primarily attributable to the reduction of the amount owing on the promissory notes relating to the acquisition of Beanstream. We made the first installment payment on the notes of approximately $2,844,000 during the first quarter of fiscal 2009.
Net income
Net income increased approximately $509,000 from a net loss of approximately $228,000 for the three months ended December 31, 2007 to a net income of approximately $281,000 for the three months ended December 31, 2008.
Basic and diluted earnings per share were both approximately $0.01 for the three months ended December 31, 2008, as compared to basic and diluted loss per share of approximately $0.01 for the three months ended December 31, 2007.
Results of Operations
Nine months ended December 31, 2008 compared to nine months ended December 31, 2007
Revenue
Total revenue for the nine months ended December 31, 2008 was approximately $9,302,000, an increase of approximately $1,266,000 or approximately 15.8% from total revenue of approximately $8,036,000 for the nine months ended December 31, 2007. This increase is primarily attributable to the increase in our TPP segment revenue of approximately $2,180,000 from approximately $3,694,000 for the nine months ended December 31, 2007 to approximately $5,874,000 for the nine months ended December 31, 2008. This increase was primarily attributable to our inclusion of nine months worth of TPP segment revenue for the nine months ended December 31, 2008 as compared to the inclusion of six months worth of TPP segment revenue for the nine months ended December 31, 2007 resulting from our acquisition of Beanstream on June 30, 2007. Our TPP segment now makes up approximately 63% of our total revenue.
During the nine months ended December 31, 2008 revenue from and associated with our two largest customers amounted to approximately 29.8% of total revenue as compared to approximately 35.4% of total revenue for the nine months ended December 31, 2007. 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.
TPP Segment
Revenue pertaining to our TPP segment consists of one-time set-up fees, monthly gateway fees, and transaction fees. TPP segment revenue for the nine months ended December 31, 2008 was approximately $5,874,000 as compared to TPP segment revenue of approximately $3,694,000 for the nine months ended December 31, 2007, an increase of approximately $2,180,000. Transaction fees for the nine months ended December 31, 2008 were approximately $4,765,000 compared to transaction fees of approximately $3,030,000 for the nine months ended December 31, 2007, an increase of approximately $1,735,000; the amortized portion of one-time set-up fees recognized was approximately $106,000 for the nine months ended December 31, 2008 compared to one-time set-up fees for the nine months ended December 31, 2007 of approximately $60,000, an increase of approximately $46,000; and monthly gateway fees for the nine months ended December 31, 2008 were approximately $741,000 compared to monthly gateway fees for the nine months ended December 31, 2007 of approximately $461,000, an increase of approximately $280,000. These increases were primarily attributable to our inclusion of nine months worth of TPP segment revenue for the nine months ended December 31, 2008 as compared to the inclusion of six months worth of TPP segment revenue for the nine months ended December 31, 2007 resulting from our acquisition of Beanstream on June 30, 2007.
IPL Segment
Revenue from licensing our patented intellectual property increased by approximately $12,000 or approximately 1% from approximately $1,260,000 for the . . .
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