================================================================================
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 December 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition Period from ________ to ________
Commission File Number: 0-13959
LML PAYMENT SYSTEMS INC.
(Exact name of registrant as specified in its charter)
Yukon Territory, Canada 980-20-9289
(State or other jurisdiction 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 [ ]
The number of shares of the registrant's Common Stock outstanding as of
January 31, 2001 was 18,696,870.
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LML PAYMENT SYSTEMS INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2000
INDEX
Page
Number
------
PART I. FINANCIAL INFORMATION............................................................................ 1
Item 1. Financial Statements............................................................................. 1
Consolidated Balance Sheets at March 31, 2000 and December 31, 2000 1
(unaudited)......................................................................................
Consolidated Statements of Operations and Deficit (unaudited) for the Three 2
and Nine Months Ended December 31, 1999 and 2000.................................................
Consolidated Statements of Cash Flows (unaudited) for the Nine Months Ended 3
December 31, 1999 and 2000.......................................................................
Notes to Consolidated Financial Statements....................................................... 4
Item 2. Management's Discussion and Analysis of Financial Condition and Results of 10
Operations.......................................................................................
Item 3. Quantitative and Qualitative Disclosures About Market Risk....................................... 14
PART II. OTHER INFORMATION................................................................................ 15
Item 1. Legal Proceedings................................................................................ 15
Item 2. Changes in Securities and Use of Proceeds........................................................ 15
Item 6. Exhibits and Reports on Form 8-K................................................................. 15
SIGNATURE PAGE................................................................................... 16
In this Quarterly Report on Form 10-Q, unless otherwise indicated, all dollar
amounts are expressed in United States Dollars.
PART I.
FINANCIAL INFORMATION
Item 1. Financial Statements
LML PAYMENT SYSTEMS INC.
CONSOLIDATED BALANCE SHEETS
(In U.S. Dollars)
December 31, March 31
2000 2000
$ $
(Unaudited)
-------------------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash and short term deposits 9,921,408 11,528,850
Accounts receivable 774,905 369,464
Prepaid expenses 411,397 459,999
------------------- -----------------
11,107,710 12,358,313
------------------- -----------------
REAL PROPERTY 1,536,336 1,378,467
CAPITAL ASSETS 7,229,779 2,157,326
PATENTS 1,739,556 602,491
GOODWILL (Note 2) 7,464,832 7,009,387
OTHER ASSETS 439,365 231,597
-------------------------------------------------------------------------------------------------------
29,517,578 23,737,581
=======================================================================================================
LIABILITIES
CURRENT LIABILITIES
Accounts payable and accrued liabilities 1,890,689 1,370,411
Dividend payable (Note 3(c)) 453,787 -
Current portion of long-term debt 320,753 1,151,751
------------------- -----------------
2,665,229 2,522,162
LONG TERM DEBT 313,697 69,613
------------------- -----------------
2,978,926 2,591,775
------------------- -----------------
COMMITMENTS AND CONTINGENCIES (Note 6)
SHAREHOLDERS' EQUITY
SHARE CAPITAL (Note 3) 29,728,236 44,047,550
DEFICIT (3,189,584) (22,901,744)
------------------- -----------------
26,538,652 21,145,806
-------------------------------------------------------------------------------------------------------
29,517,578 23,737,581
=======================================================================================================
See accompanying notes to the consolidated financial statements.
-1-
LML PAYMENT SYSTEMS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND DEFICIT
(In U.S. Dollars, except share data)
(Unaudited)
Three Months Ended Nine Months Ended
December 31 December 31
2000 1999 2000 1999
$ $ $ $
------------------------------------------------------------------------------------------------------------------------
REVENUE 2,636,977 338,217 7,245,205 486,634
OPERATING EXPENSES 2,025,411 512,130 5,666,045 806,623
SALES, GENERAL & ADMINISTRATIVE EXPENSES 1,003,030 257,953 2,592,967 628,156
OTHER ITEMS
Other expenses 122,661 18,889 128,783 (35,945)
Office relocation 3,149 - 93,653 -
Interest income (166,410) - (556,663) -
LOSS BEFORE INTEREST, TAX, DEPRECIATION ------------ ------------ ------------ ------------
AND AMORTIZATION (350,864) (450,755) (679,580) (912,200)
------------ ------------ ------------ ------------
Amortization and depreciation 777,007 178,050 1,922,101 429,385
Interest expense 14,792 59,508 97,964 155,726
------------ ------------ ------------ ------------
791,799 237,558 2,020,065 585,111
State income tax 36,152 - 36,152 -
------------ ------------ ------------ ------------
NET LOSS (1,178,815) (688,313) (2,735,797) (1,497,311)
============ ============ ============ ============
DEFICIT, beginning of period (22,901,744) (20,554,245) (22,901,744) (20,554,245)
DEFICIT ADJUSTMENT (Note 3(a)) 22,901,744 - 22,901,744 -
------------ ------------ ------------ ------------
AS ADJUSTED - (20,554,245) - (20,554,245)
------------ ------------ ------------ ------------
DIVIDENDS, PREFERRED (See Note 3(c)) (453,787) - (453,787) -
------------ ------------ ------------ ------------
DEFICIT, end of period (1,632,602) (21,242,558) (3,189,584) (22,051,556)
============ ============ ============ ============
NET LOSS AVAILABLE TO COMMON SHAREHOLDERS (1,632,602) (688,313) (3,189,584) (1,497,311)
LOSS PER SHARE
Basic (0.10) (0.06) (0.20) (0.13)
============ ============ ============ ============
Diluted (0.10) (0.06) (0.20) (0.13)
============ ============ ============ ============
AVERAGE SHARES OUTSTANDING
Basic 16,681,551 11,506,275 15,741,846 11,334,888
Diluted 16,681,551 11,506,275 15,741,846 11,334,888
See accompanying notes to the consolidated financial statements.
-2-
LML PAYMENT SYSTEMS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In U.S. Dollars)
(Unaudited)
Nine Months Ended December 31
2000 1999
$ $
-----------------------------------------------------------------------------------------------------------
CASH USED FOR
OPERATING ACTIVITIES:
Net Loss (2,735,797) (1,497,311)
Add items not affecting cash
Amortization and depreciation 1,922,101 429,385
Interest on long term debt - 10,057
Changes in assets and liabilities
Accounts receivable (375,072) (421,730)
Prepaid expenses 169,502 (183,597)
Deposits and maintenance charges (105,796) -
Accounts payable and accrued liabilities 235,299 1,576,874
Note receivable 224,376 -
------------------ ------------------
Net cash used for operating activities (665,387) (86,322)
------------------ ------------------
INVESTING ACTIVITIES
Purchase of Phoenix, net of cash acquired (126,205) -
Purchase of Check Technologies, net of cash acquired (466,755) -
Purchase of CFDC Holdings Corp., net of cash acquired - (2,791,166)
Additional ChequeMARK consideration (2,499,320) -
Real property improvements (187,326) (7,877)
Capital asset expenditures (365,025) (751,553)
Patents (22,046) (20,210)
Other assets (197,526) (191,327)
------------------ ------------------
Net cash used for investing activities (3,864,203) (3,762,133)
------------------ ------------------
FINANCING ACTIVITIES
Payments on long term debt, net (1,201,117) (138,604)
Proceeds from long term borrowing - 260,000
Payments on capital leases (18,485) (19,881)
Proceeds from exercise of stock options 4,141,750 2,868,600
Proceeds from private placement - 5,000,000
Share capital financing costs - 76,987
------------------ ------------------
Net cash provided by financing activities 2,922,148 8,047,102
------------------ ------------------
INCREASE (DECREASE) IN CASH (1,607,442) 4,198,647
Cash and cash equivalents, beginning of period 11,528,850 41,928
------------------ ------------------
Cash and cash equivalents, end of period 9,921,408 4,240,575
================== ==================
See accompanying notes to the consolidated financial statements.
-3-
LML PAYMENT SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The consolidated balance sheet as of December 31, 2000, the consolidated
statements of operations for the three months and the nine months ended
December 31, 1999 and 2000, and the consolidated statements of cash flows
for the nine months ended December 31, 1999 and 2000 of LML Payment Systems
Inc. and its subsidiaries (collectively, the "Company") are unaudited. The
Company's consolidated balance sheet as of March 31, 2000 was derived from
audited financial statements. In the opinion of management, all adjustments
necessary for a fair presentation of such financial statements are
included. Other than those discussed in the notes below, such adjustments
consist only of normal recurring items. Interim results are not necessarily
indicative of results for a full year. The Company's consolidated financial
statements and notes are presented in accordance with generally accepted
accounting principles in Canada for interim financial information and in
accordance with the instructions for Form 10-Q and Article 10 of Regulation
S-X, and do not contain certain information included in the Company's
consolidated audited annual financial statements and notes. The
consolidated financial statements and notes appearing in this report should
be read in conjunction with the Company's consolidated audited financial
statements and related notes thereto, together with management's discussion
and analysis of financial condition and results of operations, contained in
the Company's Annual Report on Form 20-F for the fiscal year ended March
31, 2000, as filed with the Securities and Exchange Commission on September
29, 2000 (file no. 0-13959). Certain of the prior period financial
statements amounts have been reclassified to conform to the current period
presentation.
2. GOODWILL
Goodwill has been recorded as follows:
December 31, March 31,
2000 2000
$ $
------------------------------------------------ ---------
Total Accumulated
Goodwill Amortization Net Net
------------------------------------------------ ---------
CFDC Holdings Corp. 4,334,368 469,556 3,864,812 4,189,889
National Recovery Systems, Ltd. of America 2,891,793 289,179 2,602,614 2,819,498
Phoenix, EPS (a) 539,805 26,990 512,815 -
Check Technologies (b) 510,096 25,505 484,591 -
--------- ------------ --------- ---------
8,276,062 811,230 7,464,832 7,009,387
========= ============ ========= =========
a) On July 9, 2000, the Company purchased all of the issued and
outstanding shares of Phoenix EPS, Inc. ("Phoenix") in exchange for
220,857 shares of the Company's common stock with a fair market value
of $4.5 million. Phoenix, located in Scottsdale, Arizona, engineers
and markets electronic payment system software solutions to the retail
industry. In connection with the acquisition, the Company incurred
transaction costs consisting primarily of professional fees of
$126,205 and a finder's fee of 7,730 shares of the Company's common
stock with a fair market value of $157,500, resulting in a total
purchase price of $4,783,705. The acquisition was accounted for as a
purchase business combination; accordingly, the results of operations
of Phoenix have been included with the Company's results of operations
since July 9, 2000.
The total purchase price paid for Phoenix acquisition was allocated
based on the estimated fair values of the assets acquired as follows:
$
--------------
Software 4,243,900
Goodwill 539,805
--------------
4,783,705
==============
The purchase price allocation is preliminary and subject to final
valuation. A total of approximately $4.2 million of the purchase
consideration was allocated to software, which is to be depreciated
over 5 years. Goodwill is to be amortized over 10 years.
-4-
b) On July 22, 2000, the Company purchased all of the issued and
outstanding shares of Check Technologies, Inc. ("Check Technologies")
in exchange for 22,987 shares of the Company's common stock with a
fair market value of $250,000 and $250,000 cash. The Company also
agreed to pay to a certain Check Technologies shareholder, and
employee, $150,010 pursuant to a non-compete agreement with additional
consideration of $50,000 due in the first year upon satisfaction of
certain conditions and an additional, unconditional $50,000 for each
of the second and third years. The non-compete agreement has a maximum
term of three (3) years. Check Technologies, located in Dallas, Texas,
is a check verification and recovery business. In connection with the
acquisition, the Company incurred transaction costs consisting
primarily of professional fees of $43,088 and a finder's fee of
$24,270, resulting in a total purchase price of $717,368. The
acquisition was accounted for as a purchase business combination;
accordingly, the results of operations of Check Technologies have been
included with the Company's results of operations since July 22, 2000.
The total purchase price paid for the Check Technologies acquisition
was allocated based on the estimated fair values of the assets
acquired as follows:
$
-------------
Net assets acquired 57,262
Identifiable intangible assets 150,010
Goodwill 510,096
-------------
717,368
=============
c) The following summary, prepared on an unaudited pro forma basis,
reflects the condensed consolidated results of operations for the nine
months ended December 31, 1999 and 2000 assuming Phoenix, Check
Technologies, CFDC Holdings Corp. (acquired November 30, 1999) and
National Recovery Systems, Ltd. of America (acquired January 1, 2000)
had been acquired as of April 1, 1999:
PRO FORMA (UNAUDITED)
Nine months ended December 31
1999 2000
$ $
Revenue 8,059,344 7,957,131
Net Loss (2,056,700) (2,440,138)
=========== ===========
Net loss available to common
shareholders (2,056,700) (2,893,925)
=========== ===========
Basic net loss per share (0.18) (0.18)
=========== ===========
The pro forma results are not necessarily indicative of what would
have occurred if the acquisitions had been in effect for the periods
presented and are not intended to be a projection of future results.
d) The purchase price for each of CFDC Holdings Corp., Phoenix and Check
Technologies was paid either entirely or partially with shares of the
Company's common stock. As part of each transaction, the Company
agreed to certain price protection covenants for the benefit of the
former stockholders of the acquired companies. In the event the value
of the shares of the Company's common stock exchanged for the shares
of the acquired company's stock decreases below the deemed issue price
per share of the Company's common stock, and the former shareholders
of the acquired company sell such shares of the Company's common stock
at a lower price after the expiration of any applicable hold period
and within a specified period of time thereafter, such shareholders
would have a right to receive additional shares of the Company's
common stock. On November 30, 2000 the price protection covenants for
the benefit of the former stockholders of CFDC Holdings Corp. came
into effect. As a result, the Company issued, subsequent to the nine
months ended December 31, 2000, an additional 138,997 shares of the
Company's common stock to certain former owners of CFDC Holdings Corp.
under the price protection covenants.
-5-
3. Share Capital
a) At the Company's Annual General Meeting held September 18, 2000, the
Company's shareholders approved a reduction in the stated capital of
the shares of the Company's common stock by $22,901,744 and to effect
such reduction by reducing the amount of the Company's deficit by the
same amount.
b) Authorized Capital as of December 31, 2000 -
100,000,000 Common shares without par value
150,000,000 Class A Preference shares with a par value of $1.00 CDN,
issuable in series
150,000,000 Class B Preference shares with a par value of $1.00 CDN
Issued and Outstanding at December 31, 2000 - 18,557,873 common shares
c) In December 1995, the Company, LHTW Properties, Inc., a wholly owned
subsidiary of the Company ("LHTW"), and Destiny Petroleum, Inc., a
company controlled by an affiliate ("Destiny") entered into a debt
conversion agreement (the "Conversion Agreement"). On November 30,
2000, the Company, pursuant to the Conversion Agreement (as amended),
issued 3,533,132 shares of the Company's common stock to Destiny in
exchange for the surrender of 883,283 LHTW Class A Preference Shares.
Prior to the exchange, dividends and interest on the LHTW Class A
Preference Shares had accrued in an amount totaling $453,787. In
January 2001, the Company paid this amount to Destiny in full
satisfaction of any and all remaining monetary obligations related to
the LHTW Class A Preference Shares.
4. Supplemental Non-Cash Activities
On November 30, 2000, the Company exchanged 3,533,132 shares of the
Company's common stock for the surrender of 883,283 LHTW Class A Preference
Shares. (See Note 3(c) to the consolidated financial statements). During
the nine months ended December 31, 2000, the Company acquired hardware,
software and maintenance services totaling $632,687, which were financed
under certain capital lease and maintenance financing agreements. Also,
during the nine months ended December 31, 2000, the Company issued shares
related to certain acquisitions totaling $4,907,500 (See Note 2 to the
consolidated financial statements), and shares of the Company's common
stock with a value of $466,820 were returned to the Company for
cancellation. During the nine months ended December 31, 2000, the Company
paid $97,964 in interest payments.
5. Industry and Geographic Segments
Administrative Operations
Canada
Three months ended December 31 Nine months ended December 31
--------------------------------- ---------------------------------
2000 1999 2000 1999
$ $ $ $
-------------- -------------- -------------- --------------
Revenue outside the Company - - - -
============== ============== ============== ==============
Segment operating loss (434,071) (282,745) (699,739) (473,183)
============== ============== ============== ==============
Total assets 9,373,654 3,740,281 9,373,654 3,740,281
============== ============== ============== ==============
Residential Real Estate Operations
U.S.
Three months ended December 31 Nine months ended December 31
--------------------------------- ---------------------------------
2000 1999 2000 1999
$ $ $ $
-------------- -------------- -------------- --------------
Revenue outside the Company 43,307 41,260 133,885 125,194
============== ============== ============== ==============
Segment operating loss (15,340) (52,519) (153,751) (113,524)
============== ============== ============== ==============
Total assets 1,552,635 1,481,101 1,552,635 1,481,101
============== ============== ============== ==============
-6-
Financial Payment Processing Operations
U.S.
Three months ended December 31 Nine months ended December 31
-------------- -------------- -------------- --------------
2000 1999 2000 1999
$ $ $ $
-------------- -------------- -------------- --------------
Revenue outside the Company 2,593,670 296,957 7,111,320 361,440
============== ============== ============== ==============
Revenue major customers 1,032,061 - 3,503,266 -
============== ============== ============== ==============
Segment operating loss (729,404) (353,049) (1,882,307) (910,604)
============== ============== ============== ==============
Total assets 18,591,289 8,084,029 18,591,289 8,084,029
============== ============== ============== ==============
The Company employed a large amount of financial and managerial resources
relating to its Financial Payment Processing Operations. The Financial
Payment Processing Operations involve point-of-sale check authorization and
check recovery services. In previous years, the Company operated primarily
in two industries, the Administrative Operations and Residential Real
Estate Operations. Administrative Operations involved the point-of-sale
merchant discount business in Canada and is currently the corporate
administration of the Company's headquarters. Residential Real Estate
Operations involve the development and sale of residential real estate lots
and homes in the United States. There were no inter-segment sales.
6. Commitments and Contingencies
a) Effective August 22, 2000, the Company, Mr. Robert R. Hills ("Mr.
Hills") and Mark Technologies Corporation ("MARK" (f/k/a ChequeMARK
Technologies Corporation)) reached a settlement with respect to the
Company's legal action commenced March 10, 1999 and other claims
against Mr. Hills and MARK. Pursuant to the terms of the settlement,
the Company paid additional consideration of $2.5 million for the
software and U.S. Patent 5,484,988 (the "Patent") acquired from Mr.
Hills and MARK and received for cancellation 466,820 shares of the
Company's common stock with a value of $466,820. Additionally,
$350,000 was withheld for the purpose of defending or pursuing other
legal claims regarding ownership, license or infringement of certain
intellectual property of the Company including the Patent, against
persons other than Mr. Hills who may claim rights directly or
indirectly from Mr. Hills, including the claims asserted by Global
Transaction Systems, LLC ("Global"). (See Note 6(b) to the
consolidated financial statements). If there is no such ongoing
litigation as of August 21, 2005, the portion of the $350,000 not used
by the Company for litigation expenses will be delivered to Mr. Hills.
As of the nine months ended December 31, 2000, the Company had
incurred and deducted $147,927 for litigation expenses, leaving a
balance of $202,073.
b) On July 20, 2000, Global, a Nevada limited liability company, filed a
complaint against the Company in the United States District Court,
Southern District of Florida, for patent and copyright infringement of
the Patent. Global served an amended complaint on the Company on
September 7, 2000, seeking a declaratory judgment. The Company filed a
motion to dismiss the Global action for lack of subject matter
jurisdiction under 28 U.S.C. 1338(a). On January 11, 2001, the amended
complaint was dismissed by the court without prejudice.
c) The Company continues to defend a claim in the United States District
Court for the Southern District of Florida, Ocala Division regarding
the release of approximately 254,000 shares of the Company's common
stock being held under the terms of the voluntary pooling agreement
established in connection with the acquisition of certain residential
real estate property known as Wildwood Estates. The plaintiffs are
alleging that the Company is improperly preventing the release of
those shares. The outcome of this action is unknown at this time.
d) On December 14, 2000, the Company received a complaint filed by Todd
H. Moore ("Moore") against the Company in the 150th District Court,
Bexar County, Texas. Moore is seeking an order directing the Company
to deliver an option to purchase 250,000 shares of the Company's
common stock at $1.50 per share, or, alternatively, damages of $10
million, and certain other relief. Moore alleges that the Company
retained him in 1998 to assist in raising media exposure of the
Company and that as compensation for such services Moore was to
receive the stock option. In December 1999, Moore filed a similar suit
against the Company in the United States District Court, Western
District of Washington, alleging substantially the same facts as those
set forth above. The original suit was dismissed with prejudice on
June 5, 2000. The Company contends that as a result of the dismissal
with prejudice in the prior case, Moore is precluded from bringing
substantially the same suit in a Texas court. Moore has filed a motion
with the court in Washington to attempt to have the dismissal in the
prior suit changed to a dismissal without prejudice. The Company
believes this suit is without merit and intends to defend this action
vigorously.
-7-
7. Related Party Transactions
During the three months ended December 31, 2000, the Company entered into
the following transactions with related parties:
a) A subsidiary of the Company leases office facilities from a company
controlled by a director of the subsidiary. The lease term expires
March 2002. Total lease expenses paid to this related party for the
three months ended December 31, 2000 were $11,250.
b) In December 1995, the Company, LHTW and Destiny entered into the
Conversion Agreement. On November 30, 2000, the Company, pursuant to
the Conversion Agreement (as amended), issued 3,533,132 shares of the
Company's common stock to Destiny in exchange for the surrender of
883,283 LHTW Class A Preference Shares. Prior to the exchange,
dividends and interest on the LHTW Class A Preference Shares had
accrued in an amount totaling $453,787. In January 2001, the Company
paid this amount to Destiny in full satisfaction of any and all
remaining monetary obligations related to the LHTW Class A Preference
Shares.
8. Subsequent events
a) Subsequent to the nine months ended December 31, 2000, the Company
filed with the United States District Court for the Southern District
of Florida a motion for sanctions against counsel for Global pursuant
to Rule 11 of the Federal Rules of Civil Procedure. Rule 11 requires
that any pleading, motion or other paper filed with a court must be
well grounded in fact and warranted by existing law. Any violation of
that rule allows the court to impose "appropriate" sanctions,
including reasonable attorney's fees. The Company has requested
sanctions in the form of its attorney's fees and costs incurred in
defending the action. The Court for lack of subject matter
jurisdiction had dismissed Global's amended complaint against the
Company earlier this month. The law governing the jurisdiction in
which Global filed its suit states that initiation of a federal suit
that very clearly does not give rise to federal subject matter
jurisdiction is sanctionable under Rule 11. The Company continues to
protect its intellectual property, including property owned by its
subsidiaries.
b) Subsequent to the nine months ended December 31, 2000, the Company and
its indirect wholly owned subsidiary, ChequeMARK Patent Inc. ("CPI")
filed suit in the United States District Court for the District
of Nevada against Global on grounds of violations of the unfair
competition provisions under the Lanham Act, violation of common law
unfair competition and wrongful interference with prospective economic
advantage. The suit also seeks a declaratory judgment that declares
CPI the sole owner of all right, title and interest in United States
Patent Nos. 5,484,988 and 6,164,528 for a check writing point-of-sale
system ("the Patents"); and that further declares any actions taken in
derogation of such rights to be null and void, and therefore
rescinded. The suit additionally seeks injunctive relief against
Global, restraining and enjoining it and its agents from representing
or implying that they have any ownership interest in the Patents or
that they have the right or ability to provide electronic transaction
processing services through use of the technology described in the
Patents.
9. Reconciliation of United States to Canadian Generally Accepted Accounting
Principles
These financial statements are prepared using Canadian generally accepted
accounting principles ("CDN GAAP") which do not differ materially from
United States generally accepted accounting principles ("U.S. GAAP") with
respect to the accounting policies and disclosures in these financial
statements except as set out below:
a) Under U.S. GAAP, merchant contract costs, which have been deferred in
the accounts, would be recorded as operating expenses.
b) Under U.S. GAAP, the Company follows Financial Accounting Standards
No. 123 "Accounting for Stock Based Compensation" for options issued
to consultants. The Company's policy is to record the compensation
when the options vest. During the three months ended December 31,
2000, options to purchase 26,668 shares of the Company's common stock
issued to a consultant vested.
c) Under U.S. GAAP, preferred shares of a subsidiary that were held by a
third party are not included in equity and were presented as a
minority interest.
-8-
Adjustments under U.S. GAAP result in changes to the Consolidated Statement of
Operations of the Company as follows:
Three months ended Nine months ended
December 31 December 31
-------------------------- ----------------------------
2000 1999 2000 1999
$ $ $ $
------------ ----------- ------------ ------------
Net loss - CDN GAAP (1,178,815) (688,313) (2,735,797) (1,497,311)
U.S. GAAP adjustments:
Add: amortization merchant contract costs (a) - 31,775 - 94,589
Merchant contract costs expensed (a) - - - (8,893)
Consultants stock based compensation (b) (101,895) - (305,669) -
------------ ----------- ------------ ------------
Net loss - U.S. GAAP (1,280,710) (656,538) (3,041,466) (1,411,615)
============ =========== ============ ============
Loss per share - U.S. GAAP
Basic (0.10) (0.06) (0.22) (0.12)
============ =========== ============ ============
Diluted (0.10) (0.06) (0.22) (0.12)
============ =========== ============ ============
Adjustments under U.S. GAAP result in changes to the Consolidated Balance Sheet
of the Company as follows:
December 31, 2000 March 31, 2000
----------------------------------------- ------------------------------------------------
CDN. U.S. CDN. U.S.
GAAP $ ADJ. GAAP $ GAAP $ ADJ. GAAP $
----------------------------------------- ------------------------------------------------
Current Assets 11,107,710 - 11,107,710 12,358,313 - 12,358,313
Real Property 1,536,336 - 1,536,336 1,378,467 - 1,378,467
Capital Assets 7,229,779 - 7,229,779 2,157,326 - 2,157,326
Patent 1,739,556 - 1,739,556 602,491 - 602,491
Goodwill 7,464,832 - 7,464,832 7,009,387 - 7,009,387
Other Assets 439,365 - 439,365 231,597 - 231,597
----------------------------------------- ------------------------------------------------
29,517,578 - 29,517,578 23,737,581 - 23,737,581
========================================= ================================================
Current Liabilities 2,665,229 - 2,665,229 2,522,162 - 2,522,162
Long Term Debt 313,697 - 313,697 69,613 - 69,613
----------------------------------------- ------------------------------------------------
TOTAL LIABILITIES 2,978,926 - 2,978,926 2,591,775 - 2,591,775
----------------------------------------- ------------------------------------------------
LHTW CLASS A
PREFERENCE
SHARES (c) - - - - 883,283 883,283
----------------------------------------- ------------------------------------------------
----------------------------------------- ------------------------------------------------
SHAREHOLDERS' EQUITY 26,538,652 - 26,538,652 21,145,806 (883,283) 20,262,523
(a), (b), (c)
----------------------------------------- ------------------------------------------------
29,517,578 - 29,517,578 23,737,581 - 23,737,581
========================================= ================================================
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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 "Company", "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 ChequeMARK Holdings Inc. ("ChequeMARK"),
Legacy Promotions Inc. and LHTW Properties Inc. ("LHTW"). LHTW's direct
subsidiary is Quail Roost Sales Corp. ChequeMARK's direct subsidiaries include
ChequeMARK Patent Inc., ChequeMARK Inc., Phoenix EPS, Inc. ("Phoenix") and CFDC
Holdings Corp. ("CFDC"). CFDC's direct subsidiaries include National Recovery
Systems, Ltd. of America d/b/a Check Center ("Check Center") and CF Data Corp.
("CF Data"). Check Center's direct subsidiary is National Process Servers. CF
Data's direct subsidiary is Check Technologies Inc. ("Check Technologies").
Unless otherwise specified herein, all references herein to dollars or "$" are
to U.S. Dollars.
The following discussion and analysis should be read in conjunction with
the consolidated audited financial statements and related notes thereto
contained in the Company's Annual Report on Form 20-F for the fiscal year ended
March 31, 2000, filed with the Securities and Exchange Commission on September
29, 2000 (file no. 0-13959). The Company believes that all necessary adjustments
(consisting only of normal recurring adjustments) have been included in the
amounts stated below to present fairly the following quarterly information.
Quarterly operating results have varied significantly in the past and can be
expected to vary in the future. Results of operations for any particular quarter
are not necessarily indicative of results of operations for a full year.
Forward Looking Information
All statements other than statements of historical fact contained herein
are forward-looking statements. Forward-looking statements generally are
accompanied by words such as "anticipate," "believe," "project," "potential" or
"expect" or similar statements. The forward-looking statements were prepared on
the basis of certain assumptions which relate, among other things, to the demand
for and cost of marketing the Company's services, the volume and total value of
transactions processed by merchants utilizing the Company's services, the
technological adaptation of check verification end-users, the issuance of
additional patents necessary to protect the business enterprise, the renewal of
material contracts in the Company's business, the Company's ability to
anticipate and respond to technological changes, particularly with respect to
financial payments and e-commerce, in a highly competitive industry
characterized by rapid technological change and rapid rates of product
obsolescence, the Company's ability to develop and market new product
enhancements and new products and services that respond to technological change
or evolving industry standards, no unanticipated developments relating to
previously disclosed lawsuits against the Company, and the cost of protecting
the Company's intellectual property. Even if the assumptions on which the
forward-looking statements are based prove accurate and appropriate, the actual
results of the Company's operations in the future may vary widely due to
technological change, increased competition, additional government regulation or
intervention in the industry, general economic conditions, other risks described
in the Company's filings with the Securities and Exchange Commission and other
factors not yet known or anticipated. Accordingly, the actual results of the
Company's operations in the future may vary widely from the forward-looking
statements included herein. All forward-looking statements included herein are
expressly qualified in their entirety by the cautionary statements in this
paragraph.
Overview
The Company is a financial payment processor specializing in providing end-
to-end check processing solutions for national, regional and local retail
merchants in the United States. The Company's processing services include check
verification and collection services along with electronic processing services,
including Electronic Check Re-presentment or "RCK" (whereby returned checks are
re-presented for payment electronically) and Electronic Check Conversion or
"ECC" (whereby paper checks are converted into electronic transactions right at
the point of sale). The Company focuses on providing these services to
supermarkets, grocery stores, multi-lane retailers, convenience stores and other
retailers.
Acquisitions. On July 9, 2000, the Company acquired Phoenix which engineers
and markets host-based software products that provide centralized gateway
services for electronic payment authorized traffic between store registers and
authorized networks. Phoenix's flagship product REPS (Retail Electronic Payment
System) provides real-time transaction monitoring, authorization and selective
routing of debit card, credit card, EBT cards (food stamps) and check
verification transactions. The REPS architecture is scalable to support a wide
range of electronic payment transaction volume, and will be used to assist in
building the Company's infrastructure such that the Company will be able to
offer integrated payment processing solutions on a single and well-proven
platform and product offerings can be made side by side with credit cards, debit
cards, EBT cards and other electronic payment methods.
Pursuant to a Share Purchase Agreement between the Company, Phoenix and the
Phoenix shareholders dated as of July 9, 2000, the Company agreed to purchase
all of the issued and outstanding shares of Phoenix from the Phoenix
shareholders
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for a purchase price of $4,500,000 paid by the issuance to the Phoenix
shareholders of an aggregate of 220,857 shares of the Company's common stock. As
part of this acquisition, the Company agreed to certain price protection
covenants for the benefit of the Phoenix shareholders. In the event the value of
the shares of the Company's common stock exchanged for shares of Phoenix's stock
decreases below the deemed issue price per share of the Company's common stock,
and the Phoenix shareholders sold such shares of the Company's common stock at a
lower price after the expiration of any applicable hold period and within a
specified period of time thereafter, such Phoenix shareholders would have a
right to receive additional shares of the Company's common stock. The Company
also agreed to pay a 3.5% finder's fee in connection with this acquisition
through the issuance of an additional 7,730 shares of the Company's common
stock. (See Note 2(a) to the consolidated financial statements).
On July 22, 2000, the Company acquired Check Technologies, which is located
in Dallas, Texas. Check Technologies is a check verification and recovery
company with a primary client base located in Texas and Louisiana. Check
Technologies' regional clients include Dominos Pizza, Centennial Liquor, Whole
Foods Market, Drug Emporium and Paragon Cable. The Company is proceeding with
the planned integration of Check Technologies' operations into its processing
facilities in Dallas, Texas and expects this to be completed shortly.
Pursuant to a Share Purchase Agreement between the Company and the Check
Technologies shareholders dated as of July 22, 2000, the Company agreed to
purchase all of the issued and outstanding shares of Check Technologies from the
Check Technologies shareholders for a purchase price of $500,000 paid by
$250,000 in cash and the issuance to the Check Technologies shareholders of an
aggregate of 22,987 shares of the Company's common stock. In connection with
the purchase of Check Technologies and in exchange for certain cash
consideration, one of the Check Technologies shareholders and an employee of
Check Technologies entered into separate non-compete agreements with the
Company. As part of this acquisition, the Company agreed to certain price
protection covenants for the benefit of the Check Technologies shareholders.
In the event the value of the shares of the Company's common stock exchanged for
shares of Check Technologies' stock decreases below the deemed issue price per
share of the Company's common stock, and the Check Technologies shareholders
sold such shares of the Company's common stock at a lower price after the
expiration of any applicable hold period and within a specified period of time
thereafter, such Check Technologies shareholders would have a right to receive
additional shares of the Company's common stock. The Company also agreed to pay
a 3.5% finder's fee in cash in connection with this acquisition. (See Note 2(b)
to the consolidated financial statements).
Facilities. During the nine months ended December 31, 2000, the Company has
been moving forward with the implementation of plans to establish a primary
processing center in Scottsdale, Arizona, which will complement the existing
processing facilities in Dallas, Texas. The Company made significant investments
in connection with these plans including entering into a five (5) year office
lease in Scottsdale, Arizona for approximately 5,000 square feet of office space
to house this new processing center. The Company also entered into certain
capital lease agreements with a total value of more than $600,000 in August
2000, to obtain additional hardware, software and maintenance services in
connection with the facilities in Scottsdale, Arizona. In addition, the Company
completed the relocation of its Jacksonville, Florida offices to Dallas, Texas
during the nine months ended December 31, 2000.
Other Operations. The Company has continued implementing steps necessary to
resume sales and marketing activities at its residential real estate property
known as Wildwood Estates. In order to conduct mobile home sales at Wildwood
Estates, the Company has taken steps to obtain a `Mobile Home Dealer's License'
and has also begun investigating the acquisition of model home inventory which
would be made available for viewing by potential home purchasers. The Company
also initiated magazine advertising to promote the sale of homes at Wildwood
Estates. Further, the Company has retained a real estate agent to sell homes and
real estate lots at Wildwood Estates. These steps, in addition to the recent
connection of the City of Wildwood, Florida's water and wastewater facilities to
the property, should enhance opportunities for the potential development of new
and existing home sites. The Company will continue to list the property for sale
while evaluating its options for further development of the undeveloped portion
of the property or possible disposition of the property if a transaction can be
consummated on acceptable terms.
Results of Operations
Revenues
The Company's revenues consist of check collection, check verification and
electronic processing revenues. Revenue is recognized as the collection fee is
collected, and verification and processing services are performed, provided that
collectibility is reasonably assured.
Total revenues increased to approximately $2.6 million for the three months
ended December 31, 2000 from approximately $338,000 for the three months ended
December 31, 1999. For the first nine months ended December 31, 2000,
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total revenue increased to approximately $7.2 million from approximately
$487,000 in the nine months ended December 31, 1999. The revenue increases are
principally attributable to the acquisition of CF Data in November 1999, Check
Center in January 2000, and Phoenix and Check Technologies in July 2000 (the
"Acquisitions").
Operating expenses
Operating expenses were approximately $2.0 million and approximately
$512,000 for the three months ended December 31, 2000 and 1999, respectively.
Operating expenses were approximately $5.7 million and approximately $806,000
for the nine months ended December 31, 2000 and 1999, respectively. The
increases in operating expenses are principally attributable to the
Acquisitions. Operating expenses consist of personnel costs, equipment related
costs and telecommunication costs.
Sales, general and administrative expenses
Sales, general and administrative expenses consist primarily of personnel
costs, commissions, office facilities, travel, promotional events such as trade
shows, seminars and technical conferences and public relations. Sales, general
and administrative expenses were approximately $1 million and approximately
$258,000 in the three months ended December 31, 2000 and 1999, respectively.
Sales, general and administrative expenses were approximately $2.6 million and
approximately $628,000 for the nine months ended December 31, 2000 and 1999,
respectively. The increases in sales, general and administrative expenses are
principally attributable to the Acquisitions. The increases in sales, general
and administrative expenses are also due to professional fees associated with
various legal matters.
Other items
Other items increased to approximately $40,000 in other income from an
expense of approximately $19,000 for the three months ended December 31, 2000
and 1999, respectively. Other items increased to approximately $334,000 in other
income from approximately $36,000 in other income for the nine months ended
December 31, 2000 and 1999, respectively. The increases in other expenses were
primarily attributed to expenses for potential acquisitions that the Company has
determined will not be completed, and expenses associated with the relocation of
the Jacksonville office to Dallas, Texas. The increases in other income are due
to the increase in interest earned for funds placed in term deposits or short-
term commercial paper.
Amortization and depreciation
Amortization and depreciation expenses increased to approximately $777,000
from approximately $178,000 for the three months ended December 31, 2000 and
1999, respectively, and increased to approximately $1.9 million from
approximately $429,000 for the nine months ended December 31, 2000 and 1999,
respectively. The increases are principally associated with amortization of
goodwill from the Acquisitions, depreciation of capital assets acquired in the
Acquisitions and depreciation of the ChequeMARK system software and the
Patents.
Net loss
Net loss increased to approximately $1.2 million from approximately
$688,000 for the three months ended December 31, 2000 and 1999, respectively;
and increased to approximately $2.7 million from approximately $1.5 million for
the nine months ended December 31, 2000 and 1999, respectively. The increase in
the Company's net loss is due primarily to amortization of intangibles and
increased costs associated with the Acquisitions.
EBITDA
Loss before interest, tax, depreciation and amortization, or "EBITDA,"
decreased to approximately $351,000 from approximately $451,000 for the three
months ended December 31, 2000 and 1999, respectively; and decreased to
approximately $680,000 from approximately $912,000 for the nine months ended
December 31, 2000 and 1999, respectively. The decrease is the result of an
increase in revenue and operating expenses associated with the Acquisitions and
an increase in interest income.
Liquidity and Capital Resources
The Company's liquidity and financial position consisted of approximately
$8.4 million in working capital as of December 31, 2000 compared to
approximately $9.8 million in working capital as of March 31, 2000. The decrease
in working capital was primarily related to a decrease in cash associated with
legal costs associated with the Company's Patents, the Phoenix and Check
Technologies acquisitions, an increase in accounts receivable to approximately
$775,000 as
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of December 31, 2000 from approximately $369,000 at March 31, 2000, an increase
in accounts payable to approximately $1.9 million as of December 31, 2000 from
approximately $1.4 million at March 31, 2000, and the dividend payable of
approximately $454,000 required under the Conversion Agreement (as amended) with
Destiny which was offset by a decrease in the current portion of debt due to the
Company's payment of the mortgage note payable on the Wildwood Estates property.
Cash flows used in operations were approximately $665,000 and approximately
$86,000 for the nine months ended December 31, 2000 and 1999, respectively. The
increase in cash used in operating activities is due to the increase in the
Company's net loss.
Cash used in investing activities was approximately $3.9 million for the
nine months ended December 31, 2000 as compared to approximately $3.8 million
for the nine months ended December 31, 1999. Expenditures during the nine months
ended December 31, 2000 consisted mainly of capital asset expenditures, legal
costs associated with the Company's Patents and the acquisition of Phoenix and
Check Technologies. Cash provided by financing activities was approximately $2.9
million for the nine months ended December 31, 2000 as compared to approximately
$8 million for the nine months ended December 31, 1999. The decrease in cash
provided by financing activities is primarily due to the private placement of
the Company's common stock that was completed in November 1999.
Management believes that existing cash and cash equivalent balances, and
potential cash flows from operations will satisfy the Company's working capital
and capital expenditure requirements for the next 12 months. However, any
material acquisitions of complementary businesses, products or technologies or
other arrangements could require the Company to obtain additional equity or debt
financing. There can be no assurance that such financing would be available on
acceptable terms, if at all.
Recently Issued Accounting Standards
In June 1998, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 133 ("SFAS No. 133"), "Accounting for
Derivative Instruments and Hedging Activities." Among other provisions, SFAS No.
133 requires that entities recognize all derivatives as either assets or
liabilities in the balance sheet and measure those financial instruments at fair
value. Accounting for changes in fair value is dependent on the use of the
derivatives and whether such use qualifies as hedging activity. The new
standard, as amended, becomes effective for the Company in fiscal 2001, and
management believes that it will have no impact on the Company's financial
position and results of operations.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 ("SAB No. 101"), "Revenue Recognition in Financial
Statements." SAB No. 101 provides guidance on applying generally accepted
accounting principles to revenue recognition issues in financial statements. The
Company will adopt SAB No. 101 in the fourth quarter of fiscal 2001. The Company
does not believe that SAB No. 101 will have a significant effect on its
consolidated financial position or results of operations based on current
interpretations. The Company will continue to evaluate the impact of SAB No. 101
with regard to subsequent interpretations.
Contingencies
Effective August 22, 2000, the Company, Mr. Hills and MARK reached a
settlement with respect to the Company's legal action commenced March 10, 1999
and other claims against Mr. Hills and MARK. Pursuant to the terms of the
settlement, the Company paid additional consideration of $2.5 million for the
software and Patent acquired from Mr. Hills and MARK and received for
cancellation 466,820 shares of the Company's common stock with a value of
$466,820. Additionally, $350,000 was withheld for the purpose of defending or
pursuing other legal claims regarding ownership, license or infringement of
certain intellectual property of the Company, including the Patent, against
persons other than Mr. Hills who may claim rights directly or indirectly from
Mr. Hills, including the claims asserted by Global, discussed below. If there is
no such ongoing litigation as of August 21, 2005, the portion of the $350,000
not used by the Company for litigation expenses will be delivered to Mr. Hills.
As of the nine months ended December 31, 2000, the Company had incurred and
deducted $147,927 for litigation expenses, leaving a balance of $202,073. (See
Note 6(a) to the consolidated financial statements).
On July 20, 2000, Global, a Nevada limited liability company, filed a
complaint against the Company in the United States District Court, Southern
District of Florida, for patent and copyright infringement of the Patent.
Global served an amended complaint on the Company on September 7, 2000, seeking
a declaratory judgment. The Company filed a motion to dismiss the Global action
for lack of subject matter jurisdiction under 28 U.S.C. 1338(a). On January 11,
2001, the amended complaint was dismissed by the court without prejudice. (See
Note 6(b) to the consolidated financial statements).
The Company continues to defend a claim in the United States District Court
for the Southern District of Florida, Ocala Division regarding the release of
approximately 254,000 shares of the Company's common stock being held under the
terms of the voluntary pooling agreement established in connection with the
acquisition of Wildwood Estates. The plaintiffs are
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alleging that the Company is improperly preventing the release of those shares.
The outcome of this action is unknown at this time. (See Note 6(c) to the
consolidated financial statements).
On December 14, 2000, the Company received a complaint filed by Moore
against the Company in the 150th District Court, Bexar County, Texas. Moore is
seeking an order directing the Company to deliver an option to purchase 250,000
shares of the Company's common stock at $1.50 per share, or, alternatively,
damages of $10 million, and certain other relief. Moore alleges that the
Corporation retained him in 1998 to assist in raising media exposure of the
Company and that as compensation for such services Moore was to receive the
stock option. In December 1999, Moore filed a similar suit against the Company
in the United States District Court, Western District of Washington, alleging
substantially the same facts as those set forth above. The original suit was
dismissed with prejudice on June 5, 2000. The Company contends that as a result
of the dismissal with prejudice in the prior case, Moore is precluded from
bringing substantially the same suit in a Texas court. Moore has filed a motion
with the court in Washington to attempt to have the dismissal in the prior suit
changed to a dismissal without prejudice. The Company believes this suit is
without merit and intends to defend this action vigorously. (See Note 6(d) to
the consolidated financial statements).
The Company is also party from time to time to ordinary litigation
incidental to its business. No currently pending litigation is expected to have
a material adverse effect on the Company's business, financial condition,
results of operations and cash flows. (See Note 8 to the consolidated financial
statements).
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
From March 31, 2000, until December 31, 2000, there were no material
changes from the information concerning market risk contained in the Company's
Annual Report on Form 20-F for the year ended March 31, 2000, as filed with the
Securities and Exchange Commission on September 29, 2000 (file no. 0-13959).
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PART II.
OTHER INFORMATION
Item 1. Legal Proceedings
Information pertaining to this item is incorporated herein from Part I.
Financial Information (Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations - Contingencies).
See the Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 2000 as filed with the Securities and Exchange Commission on
November 14, 2000 (file no. 0-13959) for information previously reported on such
legal proceedings.
Item 2. Changes in Securities and Use of Proceeds
On November 30, 2000, the Company issued 3,533,132 shares of the Company's
common stock to Destiny at a deemed issue price of $0.25 per share in exchange
for 883,283 LHTW Class A Preference Shares. (See Notes 3(c) and 7(b) to the
consolidated financial statements). These shares of the Company's common stock
were issued pursuant to an exemption by reason of Section 4(2) of the Securities
Act of 1933. This sale was made without general solicitation or advertising.
Destiny represented that it was acquiring the shares without a view to
distribute and that it was afforded an opportunity to review all publicly filed
documents and to ask questions, and receive answers from, officers of the
Company.
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
Exhibit
No. Description
--- -----------
3.1 - Restated Articles of Incorporation of LML (incorporated by reference to Exhibit 3.1 to the Quarterly Report on Form
10-Q for the period ended September 30, 2000 (File No. 0-13959)).
3.2 - Bylaws of LML (incorporated by reference to Exhibit 1.2 to the Annual Report on Form 20-F for the fiscal year ended
March 31, 1998 of LML (File No. 0-13959)).
__________
b) Reports on Form 8-K
Current Report on Form 8-K dated November 15, 2000 and filed November
29, 2000, containing press releases regarding the announcement of the
Company's financial results for the three and six months ended September
30, 2000 and changes to the Company's board of directors.
Current Report on Form 8-K dated December 4, 2000 and filed December 11,
2000 regarding the Company's change of independent accountants.
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LML PAYMENT SYSTEMS INC.
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LML PAYMENT SYSTEMS INC.
By: /s/ Wendy J. Ogilvie
-------------------------------
Wendy J. Ogilvie
Controller (Duly Authorized Officer
and Chief Accounting Officer)
Date: February 14, 2001
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