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| LMLP > SEC Filings for LMLP > Form 10-Q on 13-Aug-2009 | All Recent SEC Filings |
13-Aug-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., LML Payment Systems Corp. and Beanstream Internet Commerce Corp. Unless otherwise specified herein, all references herein to dollars or "$" are to U.S. Dollars.
The following discussion and analysis should be read in conjunction with the consolidated audited financial statements and related notes thereto contained in our Annual Report on Form 10-K for the fiscal year ended March 31, 2009, filed with the Securities and Exchange Commission on June 23, 2009 (file no. 000-13959). We believe that all necessary adjustments (consisting only of normal recurring adjustments) have been included in the amounts stated below to present fairly the following quarterly information. Quarterly operating results have varied significantly in the past and can be expected to vary in the future. Results of operations for any particular quarter are not necessarily indicative of results of operations for a full year.
Forward Looking Information
All statements other than statements of historical fact contained herein are forward-looking statements. Forward-looking statements generally are accompanied by words such as "anticipate," "believe," "estimate," "intend," "project," "potential" or "expect" or similar statements. The forward-looking statements were prepared on the basis of certain assumptions which relate, among other things, to the demand for and cost of marketing our services, the volume and total value of transactions processed by merchants utilizing our services, the technological adaptation of electronic check conversion end-users, the renewal of material contracts in our business, our ability to anticipate and respond to technological changes, particularly with respect to financial payments and e-commerce, in a highly competitive industry characterized by rapid technological change and rapid rates of product obsolescence, our ability to develop and market new product enhancements and new products and services that respond to technological change or evolving industry standards, no unanticipated developments relating to previously disclosed lawsuits against us, and the cost of protecting our intellectual property. Even if the assumptions on which the forward-looking statements are based prove accurate and appropriate, the actual results of our operations in the future may vary widely due to technological change, increased competition, new government regulation or intervention in the industry, general economic conditions, other risks described in our filings with the Securities and Exchange Commission. Accordingly, the actual results of our operations in the future may vary widely from the forward-looking statements included herein. All forward-looking statements included herein are expressly qualified in their entirety by the cautionary statements in this paragraph.
Overview
LML Payment Systems Inc. is a financial payment processor operating three separate lines of business: transaction payment processing, intellectual property licensing and check processing/software licensing. Our transaction payment processing services consist predominantly of Internet-based services; while our check processing services involve predominantly traditional and electronic check processing and recovery services that do not utilize the Internet. With the completion of our 2007 acquisition of Beanstream (which had a strong Internet-based product and service offering), we expect that our transaction payment processing services will be our principal line of business for the foreseeable future, while our other lines of business (including the electronic check processing services that we have historically relied on for a significant source of revenue) will become less important to our overall service offerings and less significant to the financial performance of our company.
TPP Segment
Our TPP operations involve financial payment processing, authentication and risk management services. We provide a service that acts as a bank neutral interface between businesses and consumers processing financial or authentication transactions. Our transaction payment processing services are accessible via the Internet and are offered in an application service provider (ASP) model. We focus on product development, project management and third tier technical support of our products and services and rely primarily on strategic business partners to sell and market our products and services. In some instances, our transaction payment processing services and payment products are integrated into third party products in target vertical markets. Our revenues are derived from one-time set-up fees, monthly gateway fees, and transaction fees paid to us by merchants. Transaction fees are recognized in the period in which the transaction occurs. Gateway fees are monthly subscription fees charged to our merchant customers for the use of our payment gateway. Gateway fees are recognized in the period in which the service is provided. Set-up fees represent one-time charges for initiating our processing services. Although these fees are generally paid at the commencement of the agreement, they are recognized ratably over the estimated average life of the merchant relationship, which is determined through a series of analyses of active and deactivated merchants. We currently service a merchant base of over 8,000 customers primarily in Canada.
IPL Segment
Our IPL operations 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 CP/SL operations involve primary and secondary check collection including electronic check re-presentment (RCK) and software licensing. Our check processing service involve check return management such as traditional and electronic recovery services to retail clients. When we provide return check management services, we typically receive revenue when we are successful at recovering the principal amount of the original transaction on behalf of the client. In some instances we also earn a percentage of the principal amount and in other instances our secondary recovery services provide for us to earn additional fees when legal action is required. Our check processing services are provided in the United States and are operated from our Wichita, Kansas location.
We also provide mainframe payment processing software modules and rights to use our intellectual property to retailers and other payment processors. When we provide mainframe based payment software modules we typically earn revenue by way of a fixed software license fee. In some instances we also earn revenue by way of royalties that are typically based upon a fixed sale price or on a usage or transaction basis.
Within these segments, performance is measured based on revenue, factoring in interest income and expenses and amortization and depreciation as well as earnings from operations before income taxes from each segment. There are no transactions between segments. We do not generally allocate corporate or centralized marketing and general and administrative expenses to our business unit segments because these activities are managed separately from the business units. Asset information by operating segment is not reported to or reviewed by our senior management decision makers on an interim basis, and therefore we have not disclosed asset information for each operating segment.
Results of Operations
Three months ended June 30, 2009 compared to three months ended June 30, 2008
Revenue
Total revenue for the three months ended June 30, 2009 was approximately $3,236,000, an increase of approximately $59,000 or approximately 1.9% from total revenue of approximately $3,177,000 for the three months ended June 30, 2008.
During the three months ended June 30, 2009 revenue from and associated with our two largest customers amounted to approximately 29.5% of total revenue as compared to approximately 29.1% of total revenue for the three months ended June 30, 2008. 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 June 30, 2009 was approximately $2,169,000, an increase of approximately $215,000 or approximately 11.0% from TPP segment revenue of approximately $1,954,000 for the three months ended June 30, 2008. TPP segment revenue originating in Canadian dollars was approximately $2,528,000CAD for the three months ended June 30, 2009 compared to $1,973,000CAD for the three months ended June 30, 2008, an increase of approximately $555,000CAD or approximately 28.1%. Due to a weakening Canadian dollar in relation to the U.S. dollar, which decreased approximately 13% from the prior fiscal first quarter, the increase in revenue originating from Canada in the amount of approximately $555,000 or approximately 28.1% was offset by a weakening Canadian dollar for the three months ended June 30, 2009 as compared to the three months ended June 30, 2008. Transaction fees for the three months ended June 30, 2009 were approximately $1,781,000 compared to approximately $1,610,000 for the three months ended June 30, 2008, an increase of approximately $171,000 or approximately 10.6%; the amortized portion of one-time set-up fees recognized was approximately $43,000 for the three months ended June 30, 2009 compared to approximately $35,000 for the three months ended June 30, 2008, an increase of approximately $8,000 or approximately 22.9%; and monthly gateway fees for the three months ended June 30, 2009 were approximately $266,000 compared to approximately $244,000 for the three months ended June 30, 2008, an increase of approximately $22,000 or approximately 9.0%.
IPL Segment
Revenue from licensing our patented intellectual property increased by approximately $37,000 or approximately 9.1% from approximately $406,000 for the three months ended June 30, 2008 to approximately $443,000 for the three months ended June 30, 2009. The increase was primarily attributable to an increase in our running royalties provided by our existing licensees. The licensing revenue of approximately $443,000 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 $137,000 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 June 30, 2009 was approximately $624,000, a decrease of approximately 23.6% from CP/SL segment revenue of approximately $817,000 for the three months ended June 30, 2008. The decrease in CP/SL segment revenue was primarily attributable to a reduction in revenue from our secondary check collections business and software licensing royalties.
Revenue from our primary check collections business decreased approximately 7.7% from approximately $130,000 for the three months ended June 30, 2008 to approximately $120,000 for the three months ended June 30, 2009. Revenue from our secondary check collections business decreased approximately 13.0% from approximately $547,000 for the three months ended June 30, 2008 to approximately $476,000 for the three months ended June 30, 2009. The decrease in secondary check collections business is primarily attributable to reduction 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 $nil for the three months ended June 30, 2009, versus approximately $70,000 for the three months ended June 30, 2008. During the three months ended June 30, 2009, 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.
Costs of revenue increased from approximately $1,513,000 for the three months ended June 30, 2008, to approximately $1,624,000 for the three months ended June 30, 2009, an increase of approximately $111,000 or approximately 7.3%. TPP segment cost of revenue was approximately $1,222,000 for the three months ended June 30, 2009 as compared to approximately $1,077,000 for the three months ended June 30, 2008, an increase in TPP segment costs of approximately $145,000 or approximately 13.5%. This increase was primarily attributable to an increase in customer service representation staff levels in the TPP segment. CP/SL segment cost of revenue was approximately $366,000 for the three months ended June 30, 2009 as compared to approximately $399,000 for the three months ended June 30, 2008, a decrease in CP/SL segment costs of approximately $33,000 or approximately 8.3%.
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 $949,000 from approximately $1,065,000 for the three months ended June 30, 2009 and 2008, respectively, a decrease of approximately $116,000 or approximately 10.9%. TPP segment expenses increased to approximately $174,000 from approximately $145,000 for the three months ended June 30, 2009 and 2008 respectively, an increase of approximately $29,000 or approximately 20.0%. CP/SL segment expenses decreased to approximately $113,000 from approximately $176,000 for the three months ended June 30, 2009 and 2008 respectively, a decrease of approximately $63,000 or approximately 35.8%. The decrease in CP/SL segment general and administrative expenses is primarily attributable to staff reductions and cost savings relating to the relocation of our Wichita, Kansas office during the third quarter of our prior fiscal year.
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 increased to approximately $99,000 from approximately $82,000 for the three months ended June 30, 2009 and 2008, respectively, an increase of $17,000 or 20.7%. The increase is primarily attributable to an increase in TPP segment sales and marketing expenses of approximately $18,000 or approximately 24% from approximately $75,000 for the three months ended June 30, 2008 to approximately $93,000 for the three months ended June 30, 2009. The increase in TPP segment sales and marketing expenses is primarily attributable to an increase in wages and commissions.
Product Development and Enhancement
Product development and enhancement expenses consist primarily of compensation and related costs of employees engaged in the research, design and development of new services and in the improving and enhancing of the existing product and service lines.
Product development and enhancement expenses were approximately $99,000 for the three months ended June 30, 2009 as compared to approximately $72,000 for the three months ended June 30, 2008. The increase is primarily attributable to an increase in TPP segment product development and enhancement expenses of approximately $27,000 or approximately 45% from approximately $60,000 for the three months ended June 30, 2008 to approximately $87,000 for the three months ended June 30, 2009. The increase in TPP product development and enhancement expenses is primarily attributable to an increase in staffing levels for the three months ended June 30, 2009 as compared to the three months ended June 30, 2008.
Amortization and Depreciation
Amortization and depreciation increased to approximately $198,000 from approximately $194,000 for the three months ended June 30, 2009 and 2008, respectively, an increase of approximately $4,000 or approximately 2.1%.
Interest income
Interest income decreased to approximately $11,000 from approximately $62,000 for the three months ended June 30, 2009 and 2008, respectively. The decrease in interest income was primarily attributable to a decrease in interest bearing cash investments and a decrease in interest rates earned on cash investments.
Interest expense
Interest expense decreased to approximately $45,000 from approximately $105,000 for the three months ended June 30, 2009 and 2008, 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 and the second and final installment payment on the notes of approximately $2,321,000 during the three months ended June 30, 2009.
Net income (loss)
Net income increased approximately $137,000 from a net loss of approximately $47,000 for the three months ended June 30, 2008 to net income of approximately $90,000 for the three months ended June 30, 2009.
Basic and diluted earnings per share were both approximately $0.00 for the three months ended June 30, 2009, as compared to basic and diluted loss per share of approximately $(0.00) for the three months ended June 30, 2008.
Liquidity and Capital Resources
Our liquidity and financial position consisted of approximately $2,931,000 in working capital as of June 30, 2009 compared to approximately $2,762,000 in working capital as of March 31, 2009. The increase in working capital was primarily attributable to cash provided by operating activities. Cash provided by operating activities was approximately $113,000 for the three months ended June 30, 2009, as compared to cash used in operating activities of approximately $225,000 for the three months ended June 30, 2008. The increase in cash provided by operating activities was primarily attributable to a decrease in cash used in discharging accounts payable and accrued liabilities of approximately $137,000 for the three months ended June 30, 2009 as compared to a decrease in cash used in discharging accounts payable and accrued liabilities of approximately $739,000 for the three months ended June 30, 2008. Cash used in investing activities was approximately $10,000 for the three months ended June 30, 2009 as compared to approximately $49,000 for the three months ended June 30, 2008, a decrease in cash used in investing activities of approximately $39,000. The decrease in cash used in investing activities was primarily attributable to a reduction in acquisition of property and equipment of approximately $40,000 for the three months ended June 30, 2009 as compared to the three months ended June 30, 2008. Cash used in financing activities was approximately $2,372,000 for the three months ended June 30, 2009 as compared to approximately $2,892,000 for the three months ended June 30, 2008, a decrease in cash used in financing activities of approximately $520,000. The decrease in cash used in financing activities was primarily due to the difference in the payments on the promissory notes relating to the acquisition of Beanstream. During the three months ended June 30, 2009, we made the second and final payment of approximately $2,321,000 on the promissory notes as compared to the first payment of approximately $2,844,000 on the promissory notes made during the three months ended June 30, 2008, a difference in payments of approximately $523,000.
We anticipate positive cash flows from our operating activities in fiscal 2010.
In light of our strategic objective of acquiring electronic payment volume across all our financial payment processing services and strengthening our position as a financial payment processor (as demonstrated by our acquisition of Beanstream), our long-term plans may include the potential to strategically acquire complementary businesses, products or technologies and may also include instituting actions against other entities who we believe are infringing our intellectual property. We believe that existing cash and cash equivalent balances and potential cash flows from operations should satisfy our long-term cash requirements, however, we may have to raise additional funds for these purposes, either through equity or debt financing, as appropriate. There can be no assurance that such financing would be available on acceptable terms, if at all.
Critical Accounting Policies
There have been no changes to our critical accounting policies since March 31, 2009. For a description of our critical accounting policies, see our Annual Report on Form 10-K for the year ended March 31, 2009 filed with the Securities and Exchange Commission on June 23, 2009 (file no. 000-13959).
Contingencies
In addition to legal matters as previously reported in our Annual Report filed on Form 10-K for the year ended March 31, 2009, as filed with the Securities and Exchange Commission on June 23, 2009 (file no. 000-13959), we are party from time to time to ordinary litigation incidental to our business, none of which is expected to have a material adverse effect on our results of operations, financial position or liquidity.
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