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EX-31.2 - EXHIBIT 31_2 - LML PAYMENT SYSTEMS INCexh31_2.htm
EX-32.1 - EXHIBIT 32_1 - LML PAYMENT SYSTEMS INCexh32_1.htm
EX-31.1 - EXHIBIT 31_1 - LML PAYMENT SYSTEMS INCexh31_1.htm
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549


Form 10-Q


[X]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended June 30, 2012

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: 000-13959

Logo

LML PAYMENT SYSTEMS INC.
(Exact name of registrant as specified in its charter)

Yukon Territory
 
###-##-####
(State or other jurisdiction of
 
(I.R.S. Employer Identification No.)
incorporation or organization)
   

1680-1140 West Pender Street
Vancouver, British Columbia
Canada  V6E 4G1
(Address of principal executive offices) (Zip Code)

Registrant's Telephone Number, Including Area Code: (604) 689-4440

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes [X]  No [   ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405) of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [  ]   No [X] (not applicable to registrant)

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Check one):

Large Accelerated Filed
[  ]
Accelerated Filer
[  ]
Non-Accelerated Filer
[   ]
 
Smaller Reporting Company
[X]
       
(Do not check if a smaller reporting company)
 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).Yes []No [X]

The number of shares of the registrant's Common Stock outstanding as of August 3, 2012 was 28,246,684.



 
 

 

LML PAYMENT SYSTEMS INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2012

INDEX


   
Page Number
     
PART I.
 FINANCIAL INFORMATION
 
     
Item 1.
Consolidated Financial Statements (unaudited)
1
 
Consolidated Statements of Financial Position (unaudited) at June 30, 2012 and March 31, 2012
 
 
Consolidated Statements of Earnings and Comprehensive Income (unaudited) for the Three Months Ended June 30, 2012 and 2011
2
 
Consolidated Statements of Shareholders' Equity (unaudited) for the Three Months Ended June 30, 2012 and 2011
3
 
Consolidated Statements of Cash Flows (unaudited) for the Three Months Ended June 30, 2012 and 2011
4
 
Notes to Consolidated Financial Statements (unaudited)
5
     
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
17
     
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
23
     
Item 4.
Controls and Procedures
24
     
PART II.
 OTHER INFORMATION
25
     
Item 1.
Legal Proceedings
25
     
Item 1A.
Risk Factors
 
   
25
Item 6.
Exhibits
 
   
25
 
SIGNATURE PAGE
 


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.
 
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(In U.S. Dollars, except as noted below)
(unaudited)

   
June 30,
   
March 31,
 
   
2012
   
2012
 
ASSETS
       
(Restated – Note 2)
 
             
Current Assets
           
Cash and cash equivalents
  $ 27,560,561     $ 26,783,754  
Funds held for merchants
    12,954,151       9,485,182  
Short-term investments
    3,237,169       3,290,393  
Restricted cash (Note 5(b))
    175,000       175,000  
Accounts receivable, less allowance of $26,867 (March 31, 2012 - $27,397)
    1,428,230       1,272,580  
Inventory
    38,205       -  
Corporate taxes receivable
    275,606       373,939  
Prepaid expenses
    271,585       331,361  
Total current assets
    45,940,507       41,712,209  
                 
Property and equipment, net
    123,305       121,496  
Patents
    75,775       120,457  
Restricted cash (Note 5(b))
    254,896       258,095  
Deferred tax assets
    855,673       809,951  
Goodwill
    17,874,202       17,874,202  
Other intangible assets
    3,596,250       3,720,037  
Other assets
    20,624       20,796  
                 
Total assets
  $ 68,741,232     $ 64,637,243  
                 
LIABILITIES
     
                 
Current Liabilities
               
Accounts payable
  $ 674,894     $ 720,666  
Accrued liabilities
    1,412,982       1,445,490  
Corporate taxes payable
    835,439       386,607  
Funds due to merchants
    12,954,151       9,485,182  
Current portion of obligations under finance lease
    2,460       2,460  
Current portion of deferred revenue
    1,092,814       1,342,828  
Total current liabilities
    16,972,740       13,383,233  
                 
Obligations under finance lease
    4,125       4,920  
                 
Total liabilities
    16,976,865       13,388,153  
                 
EQUITY
     
   
Capital Stock
               
Class A, preferred stock, $1.00 CDN par value, 150,000,000 shares authorized, issuable in series, none issued or outstanding
    -       -  
Class B, preferred stock, $1.00 CDN par value, 150,000,000 shares authorized, issuable in series, none issued or outstanding
    -       -  
Common shares, no par value, 100,000,000 shares authorized, 28,246,684 issued and outstanding (March 31, 2012 - 28,246,684)
    53,918,912       53,918,912  
                 
Contributed surplus
    10,200,701       10,001,594  
Warrants
    113,662       113,662  
Deficit
    (12,610,231 )     (13,057,560 )
Accumulated other comprehensive income
    141,323       272,482  
Total equity
    51,764,367       51,249,090  
                 
Total liabilities and equity
  $ 68,741,232     $ 64,637,243  
 
 
 
Approved by the Board and authorized for issuance on August 9, 2012

/s/ Patrick  H. Gaines
 
/s/ Greg A. MacRae
Board of Directors
 
Board of Directors
 
 
 
See accompanying notes to the unaudited consolidated financial statements.

 
~1~

 

LML PAYMENT SYSTEMS INC.

CONSOLIDATED STATEMENTS OF EARNINGS AND COMPREHENSIVE INCOME
(In U.S. Dollars, except share data)
(unaudited)


   
Three Months Ended
 
   
June 30
 
   
2012
   
2011
 
         
(Restated - Note 2)
 
             
REVENUE
  $ 5,613,032     $ 5,969,265  
COST OF REVENUE
    3,250,972       3,321,826  
GROSS PROFIT
    2,362,060       2,647,439  
                 
OPERATING EXPENSES
               
General and administrative
    966,187       931,004  
Sales and marketing
    251,224       307,510  
Product development and enhancement
    309,974       273,695  
INCOME BEFORE OTHER INCOME AND INCOME TAXES
    834,675       1,135,230  
                 
Foreign exchange (loss) gain
    (4,206 )     31,650  
Interest income
    26,757       17,177  
 INCOME BEFORE INCOME TAXES
    857,226       1,184,057  
                 
 Income tax expense (recovery)
               
Current
    455,619       206,197  
Deferred
    (45,722 )     290,514  
      409,897       496,711  
                 
NET INCOME
    447,329       687,346  
                 
OTHER COMPREHENSIVE INCOME
               
Unrealized foreign exchange (loss) gain on translation of foreign operations
    (131,159 )     14,363  
                 
TOTAL COMPREHENSIVE INCOME
  $ 316,170     $ 701,709  
                 
EARNINGS PER SHARE, basic and diluted
  $ 0.02     $ 0.02  
                 
WEIGHTED AVERAGE SHARES OUTSTANDING
               
Basic
    28,246,684       28,149,725  
Diluted
    28,626,607       28,987,253  






















See accompanying notes to the unaudited consolidated financial statements.

 
~2~

 

LML PAYMENT SYSTEMS INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(In U.S. Dollars)
(unaudited)


                           
Accumulated
             
                           
Other
             
   
Common
         
Contributed
         
Comprehensive
             
   
Shares
   
Amount
   
Surplus
   
Warrants
   
Income (Loss)
   
Deficit
   
Total
 
Balance as at April 1, 2011
    28,127,184     $ 53,557,276     $ 8,819,006     $ 113,662     $ 394,554     $ (19,563,201 )   $ 43,321,297  
                                                         
Net income (Restated – Note 2)
    -       -       -       -       -       687,346       687,346  
Change in cumulative translation adjustment
    -       -       -       -       14,363       -       14,363  
Exercise of stock options
    106,250       205,375       -       -       -       -       205,375  
Reallocation of contributed surplus on exercise of options
    -       121,008       (121,008 )     -       -       -       -  
Share-based payments
    -       -       136,437       -       -       -       136,437  
Balance as at June 30, 2011 (Restated – Note 2)
    28,233,434     $ 53,883,659     $ 8,834,435     $ 113,662     $ 408,917     $ (18,875,855 )   $ 44,364,818  
                                                         
Balance as at April 1, 2012
    28,246,684     $ 53,918,912     $ 10,001,594     $ 113,662     $ 272,482     $ (13,057,560 )   $ 51,249,090  
                                                         
Net income
    -       -       -       -               447,329       447,329  
Change in cumulative translation adjustment
    -       -       -       -       (131,159 )     -       (131,159 )
Share-based payments
    -       -       199,107       -       -       -       199,107  
Balance as at June 30, 2012
    28,246,684     $ 53,918,912     $ 10,200,701     $ 113,662     $ 141,323     $ (12,610,231 )   $ 51,764,367  
































See accompanying notes to the unaudited consolidated financial statements.

 
~3~

 


LML PAYMENT SYSTEMS INC.
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In U.S. Dollars)
(unaudited)


   
Three Months Ended
 
   
June 30
 
   
2012
   
2011
 
         
(Restated - Note 2)
 
Operating Activities:
           
Net income
  $ 447,329     $ 687,346  
Adjustments to reconcile net income to net cash provided by (used in) operating activities
               
Amortization of property and equipment
    22,200       34,240  
Amortization of intangible assets
    168,469       165,645  
Share-based payments
    199,107       136,437  
Deferred income taxes
    (45,722 )     290,514  
Foreign exchange loss (gain)
    53,981       (3,703 )
                 
Changes in non-cash operating working capital
               
Accounts receivable
    (180,243 )     (874,550 )
Corporate taxes receivable
    97,098       (59,169 )
Inventory
    (38,505 )      
Prepaid expenses
    56,716       21,507  
Accounts payable and accrued liabilities
    (52,376 )     (138,024 )
Corporate taxes payable
    460,078       (4,338,755 )
Deferred revenue
    (241,025 )     (309,206 )
Net cash provided by (used in) operating activities
    947,107       (4,387,718 )
                 
Investing Activities:
               
Acquisition of property and equipment
    (26,531 )     (21,242 )
Net cash used in investing activities
    (26,531 )     (21,242 )
                 
Financing Activities:
               
Proceeds from exercise of stock options
    -       205,375  
Net cash provided by financing activities
    -       205,375  
                 
Effects of foreign exchange rate changes on cash and cash equivalents
    (143,769 )     12,387  
                 
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
    776,807       (4,191,198 )
                 
Cash and cash equivalents, beginning of period
    26,783,754       26,917,491  
                 
Cash and cash equivalents, end of period
  $ 27,560,561     $ 22,726,293  
                 
Supplemental disclosure of cash flow information
               
Interest paid
  $ -     $ -  
Taxes paid
  $ -     $ 4,599,921  













See accompanying notes to the unaudited consolidated financial statements.

 
~4~

 

LML PAYMENT SYSTEMS INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 
 
 
1.
Nature of Operations

LML Payment Systems Inc. (a Yukon Territory corporation) and its subsidiaries (the "Corporation"), see Note 3, is a financial payment processor providing electronic payment, risk management, and authentication services primarily to businesses and organizations who use the Internet to receive or send payments.  Its corporate office address is 1140 West Pender Street, Suite 1680, Vancouver, British Columbia, Canada.  The Corporation links merchants selling products or services to customers wanting to buy them and financial institutions who allow the transfer of payments to occur.  The Corporation has partnership arrangements and certified connections to financial institutions, payment processors and other payment service providers in order to enable its customers to safely and reliably conduct e-Commerce.  The Corporation provides its electronic payment, authentication and risk management services to over 14,000 businesses and organizations in Canada and the United States of America (“U.S.”).  The Corporation also provides check processing solutions including primary and secondary check collection including electronic check re-presentment (RCK) to retailers in the U.S.

The Corporation also provides licenses to its intellectual property. The Corporation’s intellectual property estate, owned by subsidiary LML Patent Corp., includes U.S. Patent No. 6,354,491, No. 6,283,366, No. 6,164,528, No. 5,484,988, and No. RE40,220, all of which describe electronic check processing methods.

The Corporation is incorporated under the Yukon Business Corporations Act and qualifies as a foreign private issuer in the U.S. for purposes of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).  While not required to do so, the Corporation continues to voluntarily report utilizing domestic forms, including annual reports on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K, with the Securities and Exchange Commission (“SEC”) instead of filing the reporting forms available to foreign private issuers.


 
2.
Restatement of Comparative Figures

The Corporation has restated its comparative figures for the fiscal year ended March 31, 2012 and the related three month interim periods.

The decision to restate these comparative figures was made by the Corporation’s Audit Committee upon management’s recommendation following the identification of an error related to the recognition of revenue that occurred during the fiscal year ended March 31, 2012.  The error resulted in a non-material misstatement to the Corporation's fiscal 2012 year-end consolidated financial statements which the Corporation has determined will need to be adjusted and presented to the comparative amounts in its interim and annual consolidated financial statements for the fiscal year ended March 31, 2013. The general nature and scope of the related error and adjustments are summarized as follows:

Error in revenue recognition — The Corporation identified an error relating to the recognition of revenue that occurred during the fiscal year ended March 31, 2012 resulting in a non-material misstatement to the fiscal 2012 year-end consolidated financial statements.  An analysis of the Corporation’s billing report during the three months ended June 30, 2012 resulted in the identification of three customers whereby the accounting of the revenue pertaining to these three customers was erroneous.  The three customers receive their monthly invoices independent of the Corporation’s automated electronic monthly invoicing systems. The Corporation erroneously recorded to its accounting system revenue from both the electronic invoicing system and the invoices independently sent to these three customers resulting in a duplication of the revenue amounts from these three customers.

As a result of this error, revenue for the fiscal year ended March 31, 2012 was overstated by $300,101 and current income tax expense by $78,027.  Net income was also overstated by $222,074 from previously reported net income of $6,727,715 to restated net income of $6,505,641.  Basic and diluted earnings per share were overstated by $0.01 per share, from $0.24 and $0.23 respectively to $0.23 and $0.22 respectively.  Accounts receivable as at March 31, 2012 was overstated $329,905 while corporate taxes payable and current portion of deferred revenue was overstated $78,437 and $28,268, respectively, with a net understatement of the Corporation’s deficit balance at March 31, 2012 of $222,074.  For the three months ended June 30, 2011, revenue was overstated by $7,059 and current income tax expense by $1,835, with a net understatement of the Corporation’s deficit balance at June 30, 2011 of $5,224.


 
~5~

 


LML PAYMENT SYSTEMS INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 
 
 
 
2.
Restatement of Comparative Figures (continued)

The following tables present the adjustments due to the restatements of the Corporation’s previously issued audited consolidated statement of financial position as of March 31, 2012, unaudited consolidated statements of earnings and comprehensive income for the three month period ended June 30, 2011, and unaudited consolidated statements of cash flows for the three month period ended June 30, 2011:

CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
AS AT MARCH 31, 2012
(In U.S. Dollars, except as noted below)

   
Previously Reported
   
Adjustments
   
As restated
 
ASSETS
             
(unaudited)
 
Current Assets
                 
Cash and cash equivalents
  $ 26,783,754           $ 26,783,754  
Funds held for merchants
    9,485,182             9,485,182  
Short-term investments
    3,290,393             3,290,393  
Restricted cash
    175,000             175,000  
Accounts receivable, less allowance of $27,397
    1,602,485     $ (329,905 )     1,272,580  
Corporate taxes receivable
    373,939               373,939  
Prepaid expenses
    331,361               331,361  
Total current assets
    42,042,114       (329,905 )     41,712,209  
                         
Property and equipment, net
    121,496               121,496  
Patents
    120,457               120,457  
Restricted cash
    258,095               258,095  
Deferred tax assets
    809,951               809,951  
Goodwill
    17,874,202               17,874,202  
Other intangible assets
    3,720,037               3,720,037  
Other assets
    20,796               20,796  
                         
Total assets
  $ 64,967,148     $ (329,905 )   $ 64,637,243  
                         
LIABILITIES
             
                         
Current Liabilities
                       
Accounts payable
  $ 720,666             $ 720,666  
Accrued liabilities
    1,445,490               1,445,490  
Corporate taxes payable
    465,044     $ (78,437 )     386,607  
Funds due to merchants
    9,485,182               9,485,182  
Current portion of obligations under finance lease
    2,460               2,460  
Current portion of deferred revenue
    1,371,096       (28,268 )     1,342,828  
Total current liabilities
    13,489,938       (106,705 )     13,383,233  
                         
Obligations under finance lease
    4,920               4,920  
                         
Total liabilities
    13,494,858       (106,705 )     13,388,153  
                         
EQUITY
             
           
Capital Stock
                       
Class A, preferred stock, $1.00 CDN par value, 150,000,000 shares authorized, issuable in series, none issued or outstanding
    -               -  
Class B, preferred stock, $1.00 CDN par value, 150,000,000 shares authorized, issuable in series, none issued or outstanding
    -               -  
Common shares, no par value, 100,000,000 shares authorized, 28,246,684  issued and outstanding
    53,918,912               53,918,912  
                         
Contributed surplus
    10,001,594               10,001,594  
Warrants
    113,662               113,662  
Deficit
    (12,835,486 )     (222,074 )     (13,057,560 )
Accumulated other comprehensive income
    273,608       (1,126 )     272,482  
Total equity
    51,472,290       (223,200 )     51,249,090  
Total liabilities and equity
  $ 64,967,148     $ (329,905 )   $ 64,637,243  

 
~6~

 

LML PAYMENT SYSTEMS INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 

 
 
2.
Restatement of Comparative Figures (continued)


CONSOLIDATED STATEMENTS OF EARNINGS AND COMPREHENSIVE INCOME
FOR THE THREE MONTHS ENDED JUNE 30, 2011
(In U.S. Dollars, except share data)
(unaudited)


   
Previously Reported
   
Adjustments
   
As restated
 
                   
                   
REVENUE
  $ 5,976,324     $ (7,059 )   $ 5,969,265  
COST OF REVENUE
    3,321,826               3,321,826  
GROSS PROFIT
    2,654,498       (7,059 )     2,647,439  
                         
OPERATING EXPENSES
                       
General and administrative
    931,004               931,004  
Sales and marketing
    307,510               307,510  
Product development and enhancement
    273,695               273,695  
INCOME BEFORE OTHER INCOME AND INCOME TAXES
    1,142,289       (7,059 )     1,135,230  
                         
Foreign exchange gain
    31,650               31,650  
Interest income
    17,177               17,177  
 INCOME BEFORE INCOME TAXES
    1,191,116       (7,059 )     1,184,057  
                         
 Income tax expense (recovery)
                       
Current
    208,032       (1,835 )     206,197  
Deferred
    290,514               290,514  
      498,546       (1,835 )     496,711  
                         
NET INCOME
    692,570       (5,224 )     687,346  
                         
OTHER COMPREHENSIVE INCOME
                       
Unrealized foreign exchange gain on translation of foreign operations
    14,363               14,363  
                         
TOTAL COMPREHENSIVE INCOME
  $ 706,933     $ (5,224 )   $ 701,709  
                         
EARNINGS PER SHARE, basic and diluted
  $ 0.02     $ (0.00 )   $ 0.02  
                         
WEIGHTED AVERAGE SHARES OUTSTANDING
                       
Basic
    28,149,725               28,149,725  
Diluted
    28,987,253               28,987,253  




 
~7~

 

LML PAYMENT SYSTEMS INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 

 
 
2.
Restatement of Comparative Figures (continued)


CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED JUNE 30, 2011
(In U.S. Dollars)
(unaudited)


   
Previously Reported
   
Adjustments
   
As restated
 
                   
Operating Activities:
                 
Net income
  $ 692,570     $ (5,224 )   $ 687,346  
Adjustments to reconcile net income to net cash used in operating activities
                       
Amortization of property and equipment
    34,240               34,240  
Amortization of intangible assets
    165,645               165,645  
Share-based payments
    136,437               136,437  
Deferred income taxes
    290,514               290,514  
Foreign exchange gain
    (3,703 )             (3,703 )
                         
Changes in non-cash operating working capital
                       
Accounts receivable
    (884,868 )     10,318       (874,550 )
Corporate taxes receivable
    (59,169 )             (59,169 )
Prepaid expenses
    21,507               21,507  
Accounts payable and accrued liabilities
    (138,024 )             (138,024 )
Corporate taxes payable
    (4,336,920 )     (1,835 )     (4,338,755 )
Deferred revenue
    (305,947 )     (3,259 )     (309,206 )
Net cash used in operating activities
    (4,387,718 )     -       (4,387,718 )
                         
Investing Activities:
                       
Acquisition of property and equipment
    (21,242 )             (21,242 )
Net cash used in investing activities
    (21,242 )     -       (21,242 )
                         
Financing Activities:
                       
Principal payments on finance leases
    -               -  
Proceeds from exercise of stock options
    205,375               205,375  
Net cash provided by financing activities
    205,375       -       205,375  
                         
Effects of foreign exchange rate changes on cash and cash equivalents
    12,387       -       12,387  
                         
DECREASE IN CASH AND CASH EQUIVALENTS
    (4,191,198 )     -       (4,191,198 )
                         
Cash and cash equivalents, beginning of period
    26,917,491       -       26,917,491  
                         
Cash and cash equivalents, end of period
  $ 22,726,293       -     $ 22,726,293  
                         
Supplemental disclosure of cash flow information
                       
Interest paid
  $ -             $ -  
Taxes paid
  $ 4,599,921             $ 4,599,921  



 
~8~

 

LML PAYMENT SYSTEMS INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)


 
3.
Basis of Presentation

These unaudited interim consolidated financial statements, including comparatives, have been prepared in accordance with International Accounting Standard (“IAS”) 34 “Interim Financial Reporting”.  The accounting policies used in preparing these interim consolidated financial statements are consistent with the accounting policies used in the preparation of the Corporation’s annual consolidated financial statements for the year ended March 31, 2012.

These interim consolidated financial statements do not include all disclosures required by International Financial Reporting Standards (“IFRS”) for annual consolidated financial statements and, accordingly, should be read in conjunction with the Corporation’s audited consolidated financial statements for the year ended March 31, 2012 presented under IFRS.  The results for the three months ended June 30, 2012 may not be indicative of the results that may be expected for the full fiscal year or any other period.

The interim consolidated financial statements are presented in United States Dollars, except when otherwise indicated.

These consolidated financial statements include the accounts of the Corporation and its wholly owned subsidiaries as set out below. All significant inter-company balances and transactions have been eliminated on consolidation.

CANADA
 
UNITED STATES
Legacy Promotions Inc.
 
LML Corp.
Beanstream Internet Commerce Inc. (“Beanstream”)
 
LML Patent Corp.
   
LML Payment Systems Corp.
   
Beanstream Internet Commerce Corp.
 

 
4.
Significant Accounting Policies
 
 
(a)
Inventory
 
The Corporation’s inventory is comprised of credit card magnetic stripe readers used to communicate with mobile devices.  Inventory is recorded at the lower of cost and net realizable value.  The cost of inventory is comprised of purchase costs and costs incurred in bringing the inventories to their present location and condition.  Net realizable value is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated selling costs.

 
(b)
New standards and interpretations not yet adopted

Standards issued but not yet effective up to the date of issuance of the Corporation’s consolidated financial statements are listed below.  This listing is of standards and interpretations issued which the Corporation reasonably expects to be applicable at a future date.  The Corporation intends to adopt those standards when they become effective.  The Corporation has yet to assess the full impact of these standards on the interim consolidated financial statements.

IFRS 9 - Financial Instrument:  Classification and Measurement

IFRS 9 was issued in November 2009.  This standard is the first step in the process to replace IAS 39 Financial Instruments: Recognition and Measurements.  IFRS 9 introduces new requirements for classifying and measuring assets and liabilities, which may affect the Corporation’s accounting for its financial instruments.  The standard is not applicable until annual periods beginning on or after January 1, 2015 but is available for early adoption, however, the Corporation does not currently intend to early adopt this standard.

 
~9~

 


LML PAYMENT SYSTEMS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

4.
Significant Accounting Policies (continued)


IFRS 10 - Consolidated Financial Statements

The Corporation will be required to adopt IFRS 10 Consolidated Financial Statements (“IFRS 10”) effective for annual periods beginning on or after January 1, 2013, with earlier application permitted. IFRS 10 replaces the consolidation requirements in IAS 27 Consolidated and Separate Financial Statements (“IAS 27”) and interpretation SIC-12 Consolidation—Special Purpose Entities (“SIC-12”). IFRS 10 provides a revised definition of control and related application guidance so that a single control model can be applied to all entities. IFRS 10 also enhances disclosures about consolidated and unconsolidated entities to be published in a separate comprehensive disclosure standard related to involvement in other entities. The Corporation has not early adopted this standard.

IFRS 12 - Disclosure of Interests in Other Entities

IFRS 12 provides the required disclosures for interests in subsidiaries and joint arrangements.  These disclosures will require information that will assist users of financial statements to evaluate the nature, risks and financial effects associated with an entity’s interests in subsidiaries and joint arrangements.  This standard is not applicable until annual periods beginning on or after January 1, 2013.

IFRS 13 – Fair Value Measurement

IFRS 13 is a comprehensive standard for fair value measurement and disclosure requirements for use across all IFRS standards.  The new standard clarifies that fair value is the price that would be received to sell an asset, or paid to transfer a liability in an orderly transaction between market participants, at the measurement date.  It also establishes disclosures about fair value measurement.  Under existing IFRS, guidance on measuring and disclosing fair value is dispersed among the specific standards requiring fair value measurement and in many cases does not reflect a clear measurement basis or consistent disclosures.  This standard is not applicable until annual periods beginning on or after January 1, 2013.

IAS 1 Financial Statement Presentation

The Corporation will be required to adopt the amendments to IAS 1 Financial Statement Presentation (“IAS 1”) effective for annual periods beginning on or after July 1, 2012. These amendments improve the presentation of components of other comprehensive income (“OCI”). The amendments to this standard do not change the nature of the items that are currently recognized in OCI, but requires presentational changes.


5.
Financial Instruments

 
(a)
The Corporation classifies its cash and cash equivalents, funds held for merchants, short-term investments, restricted cash and accounts receivable as loans and receivables measured at amortized cost using the effective interest rate method. Accounts payable, certain accrued liabilities and funds due to merchants are classified as other financial liabilities measured at amortized cost using the effective interest rate method.

The carrying value of the Corporation’s financial assets and liabilities is considered to be a reasonable approximation of fair value due to their immediate or short term maturity or their ability for liquidation at comparable amounts.

 
~10~

 


LML PAYMENT SYSTEMS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

5.
Financial Instruments (Continued)



Carrying value and fair value of financial assets and liabilities as at June 30, 3012 and March 31, 2012 are summarized as follows:

         
March 31, 2012
 
    June 30, 2012    
(As restated – Note 2)
 
   
Carrying Value
   
Fair Value
   
Carrying Value
   
Fair Value
 
                         
Loans and receivables
  $ 45,610,007     $ 45,610,007     $ 41,265,004     $ 41,265,004  
Other financial liabilities
  $ 15,042,027     $ 15,042,027     $ 11,651,338     $ 11,651,338  


 
(b)
Restricted cash

Under the terms of the processing agreement with one of the Corporation’s processing banks, the Corporation pledged a deposit of $175,000 (March 31, 2012 - $175,000) against charge back losses.  Non-current restricted cash represents funds held by a third party processor as security for the Corporation’s merchant accounts.

 
(c)
Market Risk

Currency Risk

The Corporation’s functional currency is the U.S. dollar except for the Corporation’s Canadian Beanstream subsidiary whose functional currency is the Canadian dollar.  Movements in the foreign currency exchange rate between the Canadian and U.S. dollar will give rise to gains and losses to the Corporation due to the existence of cash balances and other monetary assets and liabilities denominated in a currency other than the functional currency of each entity within the consolidated group. Significant losses may occur due to significant balances of cash and cash equivalents and short-term investments held in Canadian dollars (U.S. dollars for Beanstream) that may be affected negatively by an increase in the value of the U.S. dollar as compared to the Canadian dollar (Canadian dollar as compared to the U.S. dollar for Beanstream). The Corporation has not hedged its exposure to foreign currency fluctuations.

As at June 30, 2012 and March 31, 2012, the Corporation is exposed to currency risk through its cash and cash equivalents, restricted cash, funds held for merchants, accounts receivable, accounts payable, accrued liabilities, and funds due to merchants denominated in Canadian dollars (U.S. dollars for Beanstream).

Based on the foreign currency exposure as at June 30, 2012 and March 31, 2012 and assuming all other variables remain constant, a 10% depreciation or appreciation of the Canadian dollar against the U.S. dollar would result in an increase/decrease of $186,531 and $88,613, respectively, in the Corporation’s foreign currency loss/gain.

As at June 30, 2012 and March 31, 2012 the Corporation’s Canadian Beanstream subsidiary was exposed to currency risk on the translation of its financial instruments to U.S. dollars.  Beanstream’s financial instruments are translated into U.S. dollars at rates of exchange in effect at the balance sheet date.   Gains and losses arising on the translation of Beanstream’s financial instruments are reported as a cumulative translation adjustment which is a component of accumulated other comprehensive income. Based on the foreign currency exposure as at June 30, 2012 and March 31, 2012 and assuming all other variables remain constant, a 10% depreciation or appreciation of the Canadian dollar against the U.S. dollar would result in an increase/decrease of $367,382 and $212,574, respectively, in the Corporation’s other comprehensive income.

 
~11~

 

LML PAYMENT SYSTEMS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)


5.
Financial Instruments (continued)


Interest Rate Risk

Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates. The Corporation’s exposure to interest rate risk is limited as its cash and payment processing accounts earn minimal interest.

Other Price Risk

Other price risk is the risk that the future value or cash flows of a financial instrument will fluctuate because of changes in market prices. Exposure to price risk is low as the Corporation’s cash management policy is to invest excess cash in high grade/low risk investments over short periods of time.

 
(d)
Credit Risk

Credit risk is the risk of a financial loss if a customer or counter party to a financial instrument fails to meet its contractual obligations. Any credit risk exposure on cash balances is considered negligible as the Corporation places funds or deposits only with major established banks in the countries in which it has payment processing services. The credit risk arises primarily from the Corporation’s trade receivables from customers.

On a regular basis, the Corporation reviews the collectability of its trade accounts receivable and establishes an allowance for doubtful accounts based on its best estimates of any potentially uncollectible accounts. As at June 30, 2012, the balance of the Corporation’s allowance for doubtful accounts was $26,867 (March 31, 2012 - $27,397).  The Corporation has good credit history with its customers and the amounts due from them are usually received as expected.

Pursuant to their respective terms, gross accounts receivable are aged as follows at June 30, 2012:

0-30 days
  $ 1,262,155  
31-60 days
    -  
61-90 days
    11,551  
Over 90 days due
    181,391  
    $ 1,455,097  

 
Concentration of credit risk

Financial instruments that potentially subject the Corporation and its subsidiaries to concentrations of credit risk consist principally of cash and cash equivalents, short-term investments and accounts receivable.

Cash and cash equivalents and short-term investments are invested in major financial institutions in the U.S. and Canada. Such deposits may be in excess of insured limits and are not insured in other jurisdictions. Management believes that the financial institutions that hold the Corporation’s investments are financially sound and, accordingly, relatively minimal credit risk exists with respect to these investments.

The accounts receivable of the Corporation and its subsidiaries are derived from sales to customers located primarily in the U.S. and Canada. The Corporation performs ongoing credit evaluations of its customers. The Corporation generally does not require collateral.

An allowance for doubtful accounts is determined with respect to those amounts that the Corporation has determined to be doubtful of collection.  At June 30, 2012, three customers accounted for 19%, 10% and 10% of the Corporation’s accounts receivable balance (March 31, 2012 – 21%, 11%, and 5%).

 
~12~

 


LML PAYMENT SYSTEMS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

5.
Financial Instruments (continued)

 
 
(e)
Liquidity Risk

Liquidity risk is the risk that the Corporation will not be able to meet its financial obligations as they become due. The Corporation continuously monitors actual and forecasted cash flows to ensure, as far as possible, there is sufficient working capital to satisfy its operating requirements.


   
June 30, 2012
   
Total
   
Less than 1 year
   
1-3 years
   
4-5 years
   
After 5 years
Contractual Obligations, at June 30, 2012
                           
Accounts payable and accrued liabilities
  $ 2,087,876     $ 2,087,876     $ -     $ -     $ -
Funds due to merchants
    12,954,151       12,954,151       -       -       -
Capital lease obligations
    6,585       2,460       4,125       -       -
Total
  $ 15,048,612     $ 15,044,487     $ 4,125     $ -     $ -

   
March 31, 2012
   
Total
   
Less than 1 year
   
1-3 years
   
4-5 years
   
After 5 years
Contractual Obligations, at March 31, 2012
                           
Accounts payable and accrued liabilities
  $ 2,166,156     $ 2,166,156     $ -     $ -     $ -
Funds due to merchants
    9,485,182       9,485,182       -       -       -
Capital lease obligations
    7,380       2,460       4,920       -       -
Total
  $ 11,658,718     $ 11,653,798     $ 4,920     $ -     $ -


6.
Related Party Transactions

Compensation of key management personnel for the three month periods ended June 30, 2012 and 2011 are as follows:

   
Three month period ended
   
June 30, 2012
   
June 30, 2011
           
Short-term employee benefits
  $ 194,027     $ 157,105
Share-based payments
    113,696       70,695
Total
  $ 307,723     $ 227,800

The amounts disclosed in the table are the amounts recognized as an expense during the reporting period related to key management personnel.







 
~13~

 

LML PAYMENT SYSTEMS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)


 
7.
Income Taxes

At June 30, 2012, the Corporation had Canadian non-capital loss carry-forwards for income tax purposes of approximately $482,180 expiring in 2033.  Due to Canadian and U.S. tax "change of ownership" rules, the loss carry-forwards are restricted in their use.

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Corporation’s deferred tax assets as of June 30, 2012 and March 31, 2012 are as follows:

   
June 30, 2012
   
March 31, 2012
Deferred tax assets:
         
Excess of tax value over the net book value for capital assets
  $ 573,434     $ 612,680
Canadian non-capital loss carry-forwards
    120,545       39,922
Other
    161,694       157,349
Total deferred tax assets
  $ 855,673     $ 809,951

The reconciliation of income tax attributable to operations computed at the statutory tax rates to income tax expense (recovery), using an approximate 25% statutory tax rate at June 30, 2012 and an approximate 26% statutory tax rate at June 30, 2011, is as follows:

   
June 30, 2012
   
June 30, 2011
 
         
(As restated – Note 2)
 
             
Income taxes at statutory rates
  $ 244,792     $ 299,826  
Share-based payments and other permanent differences
    74,838       83,321  
Effect of U.S. tax rates
    74,884       118,014  
Effect of foreign exchange translation of foreign currency denominated deferred income tax assets
    -       2,369  
Effect of change in tax rates and other
    15,383       (6,819 )
    $ 409,897     $ 496,711  

During the Corporation’s assessment of the realizability of its deferred tax assets, the Corporation considered all available positive and negative evidence including its past operating results, the existence of cumulative losses and its forecast of future taxable income. In determining future taxable income, the Corporation is responsible for assumptions utilized including the amount of pre-tax operating income, the reversal of temporary differences and the implementation of feasible and prudent tax planning strategies. These assumptions require significant judgment about the forecasts of future taxable income and are consistent with the plans and estimates it uses to manage the underlying businesses.

8.
Commitments and Contingencies

 
Reexamination Proceedings

On May 11, 2010, four of the defendants (the “Third Party Requesters”) in the patent litigation commenced by a subsidiary of the Corporation in 2008 (which has since been resolved and is now closed) submitted a request for an inter-partes reexamination to the United States Patent and Trademark Office (“USPTO”) regarding the Corporation’s U.S. Patent No. RE40,220 (the “40,220 Patent”).  Prior to the Corporation’s fiscal year ended March 31, 2012, the USPTO rejected 16 of the 100 claims described by the 40,220 Patent.  The rejected claims continue to be subject to re-examination; however, they will remain valid and enforceable until the 40,220 Patent expires on January 16, 2013 unless they are cancelled prior to that date.  During the three months ended June 30, 2012, there were no material developments relating to the inter-partes proceeding.


 
~14~

 

 
LML PAYMENT SYSTEMS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 
 
 

8.
Commitments and Contingencies (continued)


In response (in part) to the inter-partes reexamination proceeding, on June 17, 2011, the subsidiary of the Corporation filed a separate ex-parte reexamination request with the USPTO with respect to other claims described in the 40,220 Patent.  As part of this request, the subsidiary of the Corporation requested amendments to certain claims and also requested the addition of new claims and the cancellation of certain claims described in the 40,220 Patent.  On September 13, 2011, the USPTO issued an order granting an ex-partes reexamination with respect to the 40,220 Patent.  On January 4, 2012, the USPTO issued a non-final office action in the ex-parte reexamination proceeding pursuant to which: (i) certain claims described by the 40,220 Patent were subject to reexamination; (ii) certain other claims were cancelled (as the subsidiary of the Corporation requested); (iii) certain other claims were rejected, and (iv) new claims were added.  Following the February 1, 2012 response of the subsidiary of the  Corporation and an examiner interview, the USPTO issued a Notice of Intent to Issue a Reexam Certificate on March 20, 2012. On May 2, 2012 the USPTO issued an Ex-Parte Reexamination Certificate in the ex-parte reexamination proceeding.  On the Certificate, certain amended and added claims were confirmed and other claims were cancelled, as the subsidiary of the Corporation had requested in its originally filed ex-parte reexamination request.  As a result of the issuance of the Ex-Parte Reexamination Certificate, the ex-parte reexamination proceeding is closed.   The Third Party Requesters did not have the right to participate in the ex-parte reexamination proceeding.


9.
Industry and Geographic Segments

Based upon the way financial information is provided to the Corporation’s Chief Executive Officer for use in evaluating allocation of resources and assessing performance of the business, the Corporation reports its operations in three distinct operating segments, described as follows:

 
Transaction Payment Processing (“TPP”) operations involve financial payment processing, authentication and risk management services provided by Beanstream.  The services are accessible via the Internet and are offered in an application service provider (ASP) model.

 
Intellectual Property Licensing (“IPL”) operations involve licensing an intellectual property estate, which includes five U.S. patents describing electronic check processing methods.

 
Check Processing (“CP”) operations involve primary and secondary check collection including electronic check re-presentment (“RCK”).

 
Within these segments, performance is measured based on revenue, factoring in interest income and expenses and amortization and depreciation as well as income before income taxes from each segment. There are no transactions between segments. The Corporation does not generally allocate corporate or centralized marketing and general and administrative expenses to its business unit segments because these activities are managed separately from the business units.

 
~15~

 

LML PAYMENT SYSTEMS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)


9.
Industry and Geographic Segments (continued)


Financial information for each reportable segment for the three months ended June 30, 2012 and 2011 is as follows:

Three Months Ended
 
TPP
   
IPL
   
CP
   
Reconciling
   
Consolidated
 
June 30, 2012
 
Canada
   
U.S.
   
U.S.
   
Items
   
Total
 
                               
Total revenue
  $ 4,620,767     $ 424,119     $ 568,146     $ -     $ 5,613,032  
Revenue: major customers
    -       305,556       377,158       -       682,714  
Cost of revenue
    2,883,208       535       327,546       29,013  1     3,240,302  5
General and administrative
    213,347       8,011       99,539       595,075  2     915,972  5
Sales and marketing
    146,206       -       4,433       -  1     150,639  5
Product development and enhancement
    261,329       -       -       19,446  1     280,775  5
Amortization and depreciation
    14,993       44,682       6,858       124,136  3     190,669  5
Income (losses) before income taxes
    1,200,577       373,634       130,383       (847,368)  4     857,226  

Three Months Ended
 
TPP
   
IPL
   
CP
   
Reconciling
   
Consolidated
 
June 30, 2011 (As Restated – Note 2)
 
Canada
   
U.S.
   
U.S.
   
Items
   
Total
 
                               
Total revenue
  $ 3,678,793     $ 1,681,548     $ 608,924     $ -     $ 5,969,265  
Revenue: major customers
    528,359       1,250,000       374,178       -       2,152,537  
Cost of revenue
    2,219,626       683,248       392,741       10,916  1     3,306,531  5
General and administrative
    228,946       11,279       99,734       538,626  2     878,585  5
Sales and marketing
    197,619       -       4,354       3,639  1     205,612  5
Product development and enhancement
    234,689       -       -       8,733  1     243,422  5
Amortization and depreciation
    20,961       41,855       10,007       127,062  3     199,885  5
Income (losses) before income taxes
    802,797       948,601       103,308       (670,649)  4     1,184,057  

 
 
1
Represents share-based payments included in the unallocated corporate or centralized marketing, general and administrative expenses.
2
Represents share-based payments and other unallocated corporate or centralized marketing, general and administrative expenses.
3
Represents amortization and depreciation included in the unallocated corporate or centralized marketing, general and administrative expenses.
4
Represents income (losses) included in the unallocated corporate or centralized marketing, general and administrative expenses.
5
Amortization of property and equipment has not been allocated to other cost categories as presented in the consolidated statements of earnings and comprehensive income.



 
~16~

 


ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Unless the context otherwise requires, references in this report on Form 10-Q to the “Corporation”, “LML”, “we”, “us” or “our” refer to LML Payment Systems Inc. and its direct and indirect subsidiaries.  LML Payment Systems Inc.'s direct subsidiaries include Beanstream Internet Commerce Inc., LML Corp. and Legacy Promotions 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.

We are incorporated under the Yukon Business Corporations Act and qualify as a foreign private issuer in the U.S. for purposes of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).  While not required to do so, we continue to voluntarily report utilizing domestic forms, including annual reports on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K, with the Securities and Exchange Commission (“SEC”) instead of filing the reporting forms available to foreign private issuers.

The following discussion and analysis should be read in conjunction with the unaudited interim consolidated financial statements and related notes thereto for the three months ended June 30, 2012 included therein, which have been prepared in accordance with IFRS as issued by the IASB.  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 renewal of material contracts in our business, our ability to anticipate and respond to technological changes, particularly with respect to financial payments and eCommerce, 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 and 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

We are a financial payment processor operating three separate lines of business:  transaction payment processing, intellectual property licensing and check processing. 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.  While we have historically generated significant amounts of non-recurring revenue associated with our intellectual property licensing initiatives (see “—Resolution of Patent Infringement Litigation” below), our transaction payment processing services are (and are expected to be for the foreseeable future) our principal line of business, while our other lines of business (including our electronic check processing services and intellectual property licensing initiatives) are less significant to the financial performance of our company.
 
 
 
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Resolution of Patent Infringement Litigation

On November 19, 2008, we filed a patent infringement lawsuit in the U.S. district court for the Eastern District of Texas against multiple financial institutions operating in the United States (the “2008 Patent Litigation”).  On June 4, 2009, we filed another patent infringement lawsuit in the U.S. district court for the Eastern District of Texas against six financial institutions operating in the United States (the “2009 Patent Litigation”).  In both patent infringement lawsuits, we alleged that the defendants were infringing our 40,220 Patent.  During our fiscal year ended March 31, 2012, we settled with (and/or dismissed our claims against) the last of the defendants in both the 2008 Patent Litigation and the 2009 Patent Litigation.  As a result, both lawsuits were closed during our 2012 fiscal year and we are not currently prosecuting any patent infringement claims against any parties.

Our primary source of revenue from our IPL segment operations for our fiscal years ended 2011 and 2012 was from revenue generated from the licensing and settlement agreements that we entered into in connection with our 2008 Patent Litigation and, to a lesser extent, our 2009 Patent Litigation.  Since both of those lawsuits have been closed and since the 40,220 Patent expires in January 2013, we expect a decline for the foreseeable future (starting with our 2013 fiscal year) in the number of new licensing agreements that we will enter into and, accordingly, we expect that the revenue generated in upcoming years from the licensing of our intellectual property estate will be substantially reduced from recent historical levels.  While the revenue derived in future periods from the licensing of our intellectual property estate may fluctuate significantly from time to time, we generally expect that going forward the revenue from our IPL segment operations will continue to be less significant to the overall financial performance of our company.


TPP Segment

Our TPP segment 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 and 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 14,000 customers primarily in Canada.

IPL Segment

Our IPL segment operations involve licensing our intellectual property estate, which includes five U.S. patents describing electronic check processing methods.    Licenses to our intellectual property estate are generally provided to licensees based on usage of the technology embodied in the patent(s) being licensed.  Some licensees pay ‘running royalties,’ which is a pay-as-you-go model, and other licensees pay a ‘one-time,’ fully paid-up royalty amount, also based on usage.  Licensees’ usage pertaining to these one-time, fully paid-up licenses is contractually determined and in some cases, in order to determine usage and to facilitate the negotiation of a license agreement, the commencement of litigation and the discovery process inherent therein (to determine usage), is employed.   These one-time, fully paid-up licenses are also non-exclusive, similar to the non-exclusive nature of many software licensing arrangements treated as product sales,  and the consideration is fixed and non-refundable with no trailing royalties or other variable consideration.  Since our 40,220 Patent (which is the primary patent that has generated IPL revenue for us in recent years) is set to expire in January 2013, we expect a decline for the foreseeable future (starting with our 2013 fiscal year) in the number of new licensing agreements that we will enter into.  Accordingly, we expect that the revenue generated in upcoming years from the licensing of our intellectual property estate will be substantially reduced from recent historical levels and expect that our IPL segment operations will continue to be less significant to the overall financial performance of our company.


 
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CP Segment

Our CP segment operations involve primary and secondary check collection including electronic check re-presentment (RCK).  Our check processing services involve return check management such as traditional and electronic recovery services to retail clients wherein 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.

Within these segments, performance is measured based on revenue, factoring in interest income and expenses, amortization and depreciation, and 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.

Results of Operations

We qualify as a foreign private issuer in the U.S. for purposes of the Exchange Act.  As such, we file our consolidated financial statements with the Securities and Exchange Commission (“SEC”) under IFRS without a reconciliation to generally accepted accounting principles in the U.S. (“U.S. GAAP”).  It is possible that certain of our accounting policies under IFRS could be different from U.S. GAAP.

Three months ended June 30, 2012 compared to three months ended June 30, 2011

   
Three months ended June 30,
   
Variance
 
   
2012
   
2011
          %  
                           
Revenue
  $ 5,613,000     $ 5,969,000       (356,000 )     (6.0 )
Costs of revenue
    3,251,000       3,322,000       (71,000 )     (2.1 )
Gross profit
    2,362,000       2,647,000       (285,000 )     (10.8 )
                                 
Operating expenses
                               
General and administrative
    966,000       931,000       35,000       3.8  
Sales and marketing
    251,000       307,000       (56,000 )     (18.2 )
Product development and enhancement
    310,000       274,000       36,000       13.1  
Income before other income (expenses) and income taxes
    835,000       1,135,000       (300,000 )     (26.4 )
                                 
Foreign exchange (loss) gain
    (4,000 )     32,000       (36,000 )     (112.5 )
Interest income
    27,000       17,000       10,000       58.8  
Income before income taxes
    858,000       1,184,000       (326,000 )     (27.5 )
                                 
Income tax expense
                               
Current
    456,000       206,000       250,000       121.4  
Deferred
    (46,000 )     291,000       (337,000 )     (115.8 )
      410,000       497,000       (87,000 )     (17.5 )
                                 
Net income
  $ 448,000     $ 687,000       (239,000 )     (34.8 )


 
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Revenue

The following table compares the revenue generated by all three of our business segments during the three months ended June 30, 2012 and 2011:

   
Three months ended June 30,
   
Variance
 
   
2012
   
2011
    $         %  
Revenue
                         
TPP Segment:
                         
Transaction fees
  $ 3,791,000     $ 2,925,000       866,000       29.6  
One-time set-up fees recognized
    65,000       55,000       10,000       18.2  
Monthly fees including gateway
    630,000       489,000       141,000       28.8  
Software customization fees
    18,000       134,000       (116,000 )     (86.6 )
 Other
    117,000       76,000       41,000       53.9  
      4,621,000       3,679,000       942,000       25.6  
                                 
IPL Segment:
                               
Non-recurring licensing
    -       1,250,000       (1,250,000 )     -  
Ongoing/Recognized deferred
    424,000       431,000       (7,000 )     (1.6 )
      424,000       1,681,000       (1,257,000 )     (74.8 )
                                 
CP Segment:
                               
Secondary check collections
    489,000       529,000       (40,000 )     (7.6 )
Primary check collections
    76,000       76,000       -       -  
Other
    3,000       4,000       (1,000 )     (25.0 )
      568,000       609,000       (41,000 )     (6.7 )
                                 
Total revenue
  $ 5,613,000     $ 5,969,000       (356,000 )     (6.0 )

The decrease is total revenue for the three months ended June 30, 2012 is primarily attributable to the decrease in our non-recurring IPL segment revenue of approximately $1,250,000 offset by an increase in our TPP segment revenue of approximately $942,000.

TPP Segment

Revenue pertaining to our TPP segment consists of transaction fees, one-time set-up fees, monthly fees including gateway fees and software customization fees.  Total revenue from our TPP segment increased by approximately $942,000, or approximately 25.6%. Transaction fees for the three months ended June 30, 2012 increased by approximately $866,000 or approximately 29.6%; the amortized portion of one-time setup fees recognized increased approximately $10,000 or approximately 18.2%; monthly fees including gateway fees for the three months ended June 30, 2012 increased approximately $141,000 or approximately 28.8% while software customization fees decreased approximately $116,000 or approximately 86.6%. The increase in transaction fees, one-time set-up fees and monthly fees including gateway fees was primarily attributable to a 26.8% increase in our merchant base as at June 30, 2012 as compared to June 30, 2011.

IPL Segment

Revenue from licensing our patented intellectual property decreased by approximately $1,257,000 or approximately 74.8% primarily due to the recognition of approximately $1,250,000 in non-recurring revenue from a license agreement entered into during the three months ended June 30, 2011.

CP Segment

CP segment revenue for the three months ended June 30, 2012 decreased by approximately $41,000 or approximately 6.7% primarily due to a decrease in collections of the principal amount and related fees of returned checks assigned for primary and secondary recovery.


 
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Cost of Revenue

The following table compares the cost of revenue incurred by all three of our business segments during the three months ended June 30, 2012 and 2011:

   
Three months ended June 30,
   
Variance
 
   
2012
   
2011
          %  
                           
Cost of revenue
                         
TPP Segment
  $ 2,883,000     $ 2,220,000       663,000       29.8  
IPL Segment
    -       683,000       (683,000 )     -  
CP Segment
    328,000       393,000       (65,000 )     (16.5 )
Share-based payments
    29,000       11,000       18,000       163.6  
Depreciation of property and equipment
    11,000       15,000       (4,000 )     (26.7 )
Total
  $ 3,251,000     $ 3,322,000       (71,000 )