LML PAYMENT SYSTEMS INC - FORM 10-Q - November 13, 2012

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EX-31.1 - EXHIBIT 31_1 - LML PAYMENT SYSTEMS INCexh31_1.htm
EX-32.1 - EXHIBIT 32_1 - LML PAYMENT SYSTEMS INCexh32_1.htm
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EX-3.1 - EXHIBIT 3_1 ARTICLES - LML PAYMENT SYSTEMS INCexh3_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 September 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)

British Columbia
  
###-##-####
(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 November 5, 2012 was 28,246,684.




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

INDEX
 
 
 
   
Page Number
     
 
     
1
 
1
 
2
 
3
 
4
 
5
     
21
     
32
     
32
     
33
     
33
     
34
     
34
     
 
36
 
 


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)
 
   
September 30,
    
March 31,
  
   
2012
    
2012
  
ASSETS
        
(Restated – Note 2)
  
Current Assets
            
Cash and cash equivalents
   $ 27,402,745     $ 26,783,754  
Funds held for merchants
     12,391,538       9,485,182  
Short-term investments
     2,586,393       3,290,393  
Restricted cash (Note 5(b))
     175,000       175,000  
Accounts receivable, less allowance of $190,513 (March 31, 2012 - $27,397)
     1,530,081       1,272,580  
Other receivable
     852,889       -  
Inventory
     38,049       -  
Corporate taxes receivable
     358,724       373,939  
Prepaid expenses
     244,473       331,361  
Total current assets
     45,579,892       41,712,209  
                 
Property and equipment, net
     197,521       121,496  
Patents
     31,093       120,457  
Restricted cash (Note 5(b))
     260,395       258,095  
Deferred tax assets (Note 7)
     982,821       809,951  
Goodwill
     17,874,202       17,874,202  
Other intangible assets
     3,472,462       3,720,037  
Other assets
     20,919       20,796  
Total assets
   $ 68,419,305     $ 64,637,243  
                 
LIABILITIES
                
Current Liabilities
                
Accounts payable
   $ 809,973     $ 720,666  
Accrued liabilities
     1,860,478       1,445,490  
Corporate taxes payable
     -       386,607  
Funds due to merchants
     12,391,538       9,485,182  
Current portion of obligations under finance lease
     2,460       2,460  
Current portion of deferred revenue
     811,048       1,342,828  
Total current liabilities
     15,875,497       13,383,233  
                 
Obligations under finance lease
     3,510       4,920  
Total liabilities
     15,879,007       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
     10,396,434       10,001,594  
Warrants
     113,662       113,662  
Deficit
     (12,261,392 )     (13,057,560 )
Accumulated other comprehensive income
     372,682       272,482  
Total equity
     52,540,298       51,249,090  
                 
Total liabilities and equity
   $ 68,419,305     $ 64,637,243  

 
Approved by the Board and authorized for issuance on November 8, 2012

/s/ Patrick  H. Gaines
  
/s/ Greg A. MacRae
Board of Directors
  
Board of Directors

See accompanying notes to the unaudited consolidated financial statements.
 

 

LML PAYMENT SYSTEMS INC.

CONSOLIDATED STATEMENTS OF EARNINGS AND COMPREHENSIVE INCOME
(In U.S. Dollars, except share data)
(unaudited)
 
   
Three Months Ended
    
Six Months Ended
  
   
September 30
    
September 30
  
   
2012
    
2011
    
2012
    
2011
  
         
(Restated – Note 2)
          
(Restated – Note 2)
  
                         
REVENUE
   $ 5,759,228     $ 12,921,122     $ 11,372,260     $ 18,890,387  
COST OF REVENUE
    3,280,872       5,610,876       6,531,844       8,932,702  
GROSS PROFIT
    2,478,356       7,310,246       4,840,416       9,957,685  
                                 
OPERATING EXPENSES
                                
General and administrative
    1,330,308       981,091       2,296,495       1,912,095  
Sales and marketing
    273,928       214,727       525,152       522,237  
Product development and enhancement
    307,769       248,516       617,743       522,211  
INCOME BEFORE OTHER INCOME (LOSS) AND INCOME TAXES
     566,351       5,865,912       1,401,026       7,001,142  
                                 
OTHER INCOME (LOSS)
                                
Foreign exchange loss
     (68,794 )     (34,394 )     (73,000 )     (2,744 )
Interest income
     43,744       11,708       70,501       28,885  
      (25,050 )     (22,686 )     (2,499 )     26,141  
                                 
INCOME BEFORE INCOME TAXES
     541,301       5,843,226       1,398,527       7,027,283  
                                 
 Income tax expense (recovery) (Note 7)
                                
Current
     319,610       2,222,008       775,229       2,428,205  
Deferred
     (127,148 )     207,485       (172,870 )     497,999  
      192,462       2,429,493       602,359       2,926,204  
                                 
NET INCOME
     348,839       3,413,733       796,168       4,101,079  
                                 
OTHER COMPREHENSIVE INCOME (LOSS)
                                
Unrealized foreign exchange gain (loss) on translation of foreign operations
     231,359       (398,154 )     100,200       (383,791 )
                                 
TOTAL COMPREHENSIVE INCOME
   $ 580,198     $ 3,015,579     $ 896,368     $ 3,717,288  
                                 
EARNINGS PER SHARE, basic
   $ 0.01     $ 0.12     $ 0.03     $ 0.15  
EARNINGS PER SHARE, diluted
   $ 0.01     $ 0.12     $ 0.03     $ 0.14  
                                 
WEIGHTED AVERAGE SHARES OUTSTANDING
                                
Basic
    28,246,684       28,233,434       28,246,684       28,191,808  
Diluted
    29,107,280       28,898,811       28,858,501       28,932,332  
 
See accompanying notes to the unaudited consolidated financial statements.


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)
     -       -       -       -       -       4,101,079       4,101,079  
Change in cumulative translation adjustment
     -       -       -       -       (383,791 )     -       (383,791 )
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
     -       -       289,094       -       -       -       289,094  
Balance as at September 30, 2011 (Restated – Note 2)
     28,233,434     $ 53,883,659     $ 8,987,092     $ 113,662     $ 10,763     $ (15,462,122 )   $ 47,533,054  
                                                         
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
     -       -       -       -       -       796,168       796,168  
Change in cumulative translation adjustment
     -       -       -       -       100,200       -       100,200  
Share-based payments
     -       -       394,840       -       -       -       394,840  
Balance as at September 30, 2012
     28,246,684     $ 53,918,912     $ 10,396,434     $ 113,662     $ 372,682     $ (12,261,392 )   $ 52,540,298  




 

See accompanying notes to the unaudited consolidated financial statements.



LML PAYMENT SYSTEMS INC.
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In U.S. Dollars)
(unaudited)
 
 
 
   
Three Months Ended
    
Six Months Ended
  
   
September 30
    
September 30
  
   
2012
    
2011
    
2012
    
2011
  
         
(Restated - Note 2)
          
(Restated - Note 2)
  
Operating Activities:
                        
Net income
   $ 348,839     $ 3,413,733     $ 796,168     $ 4,101,079  
Adjustments to reconcile net income to net cash (used in) provided by operating activities
                                
Amortization of property and equipment
     23,375       25,038       45,575       59,278  
Amortization of intangible assets
     168,469       165,645       336,938       331,290  
Share-based payments
     195,733       152,657       394,840       289,094  
Deferred income taxes
     (127,148 )     207,485       (172,870 )     497,999  
Foreign exchange (gain) loss
     (124,223 )     195,701       (70,242 )     191,998  
                                 
Changes in non-cash operating working capital
                                
Accounts receivable
     (54,346 )     838,251       (234,589 )     (36,299 )
Other receivable
     (852,889 )     -       (852,889 )     -  
Inventory
     1,188       -       (37,317 )     -  
Corporate taxes receivable
     (90,723 )     (106,308 )     6,375       (165,477 )
Prepaid expenses
     31,314       10,818       88,030       32,325  
Accounts payable and accrued liabilities
     547,298       (309,966 )     494,922       (447,990 )
Corporate taxes payable
     (836,236 )     1,631,891       (376,158 )     (2,706,864 )
Deferred revenue
     (298,362 )     (339,475 )     (539,387 )     (648,681 )
Net cash (used in) provided by operating activities
     (1,067,711 )     5,885,470       (120,604 )     1,497,752  
                                 
Investing Activities:
                                
Acquisition of short term investments
     -       (3,294,525 )     -       (3,294,525 )
Maturity of short term investments
     766,125       -       766,125       -  
Acquisition of property and equipment
     (93,238 )     (21,655 )     (119,769 )     (42,897 )
Net cash provided by (used in) investing activities
     672,887       (3,316,180 )     646,356       (3,337,422 )
                                 
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
     237,008       (375,299 )     93,239       (362,912 )
                                 
(DECREASE)  INCREASE IN CASH AND CASH EQUIVALENTS
     (157,816 )     2,193,991       618,991       (1,997,207 )
                                 
Cash and cash equivalents, beginning of period
     27,560,561       22,726,293       26,783,754       26,917,491  
                                 
Cash and cash equivalents, end of period
   $ 27,402,745     $ 24,920,284     $ 27,402,745     $ 24,920,284  
                                 
Supplemental disclosure of cash flow information
                               
Taxes paid
   $ 1,260,548     $ 697,000     $ 1,260,548     $ 5,296,921  
 
 


 
 
See accompanying notes to the unaudited consolidated financial statements.


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

1.
Nature of Operations

LML Payment Systems Inc. (a British Columbia company) and its subsidiaries (the "Company"), 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 15,000 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 Business Corporations Act (British Columbia) 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 and six 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 and six month periods ended September 30, 2011, revenue was overstated by $85,355 and $92,414, respectively and current income tax expense by $22,193 and $24,028, respectively.   There was a net understatement of the Corporation’s deficit balance at September 30, 2011 of $68,386.




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 and six month periods ended September 30, 2011, and unaudited consolidated statements of cash flows for the three and six month periods ended September 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  
 
 

 

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 SEPTEMBER 30, 2011
(In U.S. Dollars, except share data)
(unaudited)
 
   
Previously Reported
    
Adjustments
    
As restated
  
                   
                   
REVENUE
   $ 13,006,477     $ (85,355 )   $ 12,921,122  
COST OF REVENUE
    5,610,876               5,610,876  
GROSS PROFIT
    7,395,601       (85,355 )     7,310,246  
                         
OPERATING EXPENSES
                        
General and administrative
    981,091               981,091  
Sales and marketing
    214,727               214,727  
Product development and enhancement
     248,516               248,516  
INCOME BEFORE OTHER INCOME (LOSS) AND INCOME TAXES
     5,951,267       (85,355 )     5,865,912  
                         
OTHER INCOME (LOSS)
                        
Foreign exchange loss
     (34,394 )             (34,394 )
Interest income
     11,708               11,708  
      (22,686 )     -       (22,686 )
                         
INCOME BEFORE INCOME TAXES
     5,928,581       (85,355 )     5,843,226  
                         
 Income tax expense (recovery)
                        
Current
     2,244,201       (22,193 )     2,222,008  
Deferred
     207,485               207,485  
      2,451,686       (22,193 )     2,429,493  
                         
NET INCOME
     3,476,895       (63,162 )     3,413,733  
                         
OTHER COMPREHENSIVE LOSS
                        
Unrealized foreign exchange loss on translation of foreign operations
     (398,154 )             (398,154 )
                         
TOTAL COMPREHENSIVE INCOME
   $ 3,078,741     $ (63,162 )   $ 3,015,579  
                         
EARNINGS PER SHARE, basic and diluted
   $ 0.12     $ (0.00 )   $ 0.12  
                         
WEIGHTED AVERAGE SHARES OUTSTANDING
                        
Basic
    28,233,434               28,233,434  
Diluted
    28,898,811               28,898,811  
 
 

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 SIX MONTHS ENDED SEPTEMBER 30, 2011
(In U.S. Dollars, except share data)
(unaudited)
 
   
Previously Reported
    
Adjustments
    
As restated
  
                   
REVENUE
   $ 18,982,801     $ (92,414 )   $ 18,890,387  
COST OF REVENUE
    8,932,702               8,932,702  
GROSS PROFIT
    10,050,099       (92,414 )     9,957,685  
                         
OPERATING EXPENSES
                        
General and administrative
    1,912,095               1,912,095  
Sales and marketing
    522,237               522,237  
Product development and enhancement
     522,211               522,211  
INCOME BEFORE OTHER INCOME (LOSS) AND INCOME TAXES
     7,093,556       (92,414 )     7,001,142  
                         
OTHER INCOME (LOSS)
                        
Foreign exchange loss
     (2,744 )             (2,744 )
Interest income
     28,885               28,885  
      26,141       -        26,141  
                         
 INCOME BEFORE INCOME TAXES
     7,119,697       (92,414 )     7,027,283  
                         
 Income tax expense (recovery)
                        
Current
     2,452,233       (24,028 )     2,428,205  
Deferred
     497,999               497,999  
      2,950,232       (24,028 )     2,926,204  
                         
NET INCOME
     4,169,465       (68,386 )     4,101,079  
                         
OTHER COMPREHENSIVE (LOSS) INCOME
                        
Unrealized foreign exchange loss on translation of foreign operations
     (383,791 )             (383,791 )
                         
TOTAL COMPREHENSIVE INCOME
   $ 3,785,674     $ (68,386 )   $ 3,717,288  
                         
EARNINGS PER SHARE, basic
   $ 0.15     $ (0.00 )   $ 0.15  
EARNINGS PER SHARE, diluted
   $ 0.14     $ (0.00 )   $ 0.14  
                         
WEIGHTED AVERAGE SHARES OUTSTANDING
                        
Basic
    28,191,808               28,191,808  
Diluted
    28,932,332               28,932,332  

 

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 SEPTEMBER 30, 2011
(In U.S. Dollars)
(unaudited)
 
   
Previously Reported
    
Adjustments
    
As restated
  
Operating Activities:
                  
Net income
   $ 3,476,895     $ (63,162 )   $ 3,413,733  
Adjustments to reconcile net income to net cash provided by operating activities
                        
Amortization of property and equipment
     25,038               25,038  
Amortization of intangible assets
     165,645               165,645  
Share-based payments
     152,657               152,657  
Deferred income taxes
     207,485               207,485  
Foreign exchange loss
     195,701               195,701  
                         
Changes in non-cash operating working capital
                        
Accounts receivable
     746,074       92,177       838,251  
Corporate taxes receivable
     (106,308 )             (106,308 )
Prepaid expenses
     10,818               10,818  
Accounts payable and accrued liabilities
     (309,966 )             (309,966 )
Corporate taxes payable
     1,654,084       (22,193 )     1,631,891  
Deferred revenue
     (332,653 )     (6,822 )     (339,475 )
Net cash provided by operating activities
     5,885,470       -       5,885,470  
                         
Investing Activities:
                        
Acquisition of short term investments
     (3,294,525 )             (3,294,525 )
Acquisition of property and equipment
     (21,655 )             (21,655 )
Net cash used in investing activities
     (3,316,180 )     -       (3,316,180 )
                         
Effects of foreign exchange rate changes on cash and cash equivalents
     (375,299 )     -       (375,299 )
                         
INCREASE IN CASH AND CASH EQUIVALENTS
     2,193,991       -       2,193,991  
                         
Cash and cash equivalents, beginning of period
     22,726,293       -       22,726,293  
                         
Cash and cash equivalents, end of period
   $ 24,920,284       -     $ 24,920,284  
                         
Supplemental disclosure of cash flow information
                       
Taxes paid
   $ 697,000             $ 697,000  

 


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

2.
Restatement of Comparative Figures (continued)
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 2011
(In U.S. Dollars)
(unaudited)
 
   
Previously Reported
    
Adjustments
    
As restated
  
                   
Operating Activities:
                  
Net income
   $ 4,169,465     $ (68,386 )   $ 4,101,079  
Adjustments to reconcile net income to net cash provided by operating activities
                        
Amortization of property and equipment
     59,278               59,278  
Amortization of intangible assets
     331,290               331,290  
Share-based payments
     289,094               289,094  
Deferred income taxes
     497,999               497,999  
Foreign exchange loss
     191,998               191,998  
                         
Changes in non-cash operating working capital
                        
Accounts receivable
     (138,794 )     102,495       (36,299 )
Corporate taxes receivable
     (165,477 )             (165,477 )
Prepaid expenses
     32,325               32,325  
Accounts payable and accrued liabilities
     (447,990 )             (447,990 )
Corporate taxes payable
     (2,682,836 )     (24,028 )     (2,706,864 )
Deferred revenue
     (638,600 )     (10,081 )     (648,681 )
Net cash provided by operating activities
     1,497,752       -       1,497,752  
                         
Investing Activities:
                        
Acquisition of short term investments
     (3,294,525 )             (3,294,525 )
Acquisition of property and equipment
     (42,897 )             (42,897 )
Net cash used in investing activities
     (3,337,422 )     -       (3,337,422 )
                         
Financing Activities:
                        
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
     (362,912 )     -       (362,912 )
                         
DECREASE IN CASH AND CASH EQUIVALENTS
     (1,997,207 )     -       (1,997,207 )
                         
Cash and cash equivalents, beginning of period
     26,917,491       -       26,917,491  
                         
Cash and cash equivalents, end of period
   $ 24,920,284       -     $ 24,920,284  
                         
Supplemental disclosure of cash flow information
                       
Taxes paid
   $ 5,296,921             $ 5,296,921  

 
 
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 unaudited 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 month and six month periods ended September 30, 2012 may not be indicative of the results that may be expected for the full fiscal year or any other period.

The unaudited 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.

 
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, accounts receivable and other 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.

 
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 September 30, 3012 and March 31, 2012 are summarized as follows:

   
September 30, 2012
    
March 31, 2012
  
         
(As restated – Note 2)
  
   
Carrying Value
    
Fair Value
    
Carrying Value
    
Fair Value
  
                         
Loans and receivables
   $ 45,199,041     $ 45,199,041     $ 41,265,004     $ 41,265,004  
Other financial liabilities
   $ 15,061,989     $ 15,061,989     $ 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 September 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 September 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 $258,221 and $88,613, respectively, in the Corporation’s foreign currency loss/gain.

As at September 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 September 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 $32,121 and $212,574, respectively, in the Corporation’s other comprehensive income.


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 September 30, 2012, the balance of the Corporation’s allowance for doubtful accounts was $190,513 (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 September 30, 2012:

0-30 days
   $ 1,233,239  
31-60 days
     8,194  
61-90 days
     155,936  
Over 90 days due
     323,225  
    $ 1,720,594  

 
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 September 30, 2012, three customers accounted for 23%, 8% and 6% of the Corporation’s accounts receivable balance (March 31, 2012 – 21%, 11%, and 7%).

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

5.
Financial Instruments (continued)

The other receivable balance as at September 30, 2012 is comprised of certain costs, including certain investment banking, travel, legal and accounting fees and other miscellaneous transaction expenses, relating to the pending arrangement (see Note 10) between the Corporation and Digital River, Inc. ("Digital River") pursuant to which Digital River will, indirectly through LML Acquisition Corp., acquire all of the issued and outstanding common shares of the Corporation (the “Arrangement”). Pursuant to the terms of the Arrangement Agreement, all costs and expenses associated with the Arrangement will be the obligation of Digital River following the closing of the Arrangement. However, if the Arrangement does not close, the Corporation will be liable for these costs and will be required to expense the amounts accordingly.

 
(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.

   
September 30, 2012
  
   
Total
    
Less than 1 year
    
1-3 years
    
4-5 years
    
After 5 years
  
Contractual Obligations, at September 30, 2012
                              
Accounts payable and accrued liabilities
   $ 2,670,451     $ 2,670,451     $ -     $ -     $ -  
Funds due to merchants
     12,391,538       12,391,538       -       -       -  
Capital lease obligations
     5,970       2,460       3,510       -       -  
Total
   $ 15,067,959     $ 15,064,449     $ 3,510     $ -     $ -  

   
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 and six month periods ended September 30, 2012 and 2011 are as follows:

   
Three month period ended
    
Six month period ended
  
   
September 30, 2012
    
September 30, 2011
    
September 30, 2012
    
September 30, 2011
  
                         
Short-term employee benefits
   $ 494,656     $ 377,752     $ 688,683     $ 534,857  
Share-based payments
     114,946       71,471       228,642       142,166  
Total
   $ 609,602     $ 449,223     $ 917,325     $ 677,023  
 
The amounts disclosed in the table are the amounts recognized as an expense during the reporting period related to key management personnel.

 
LML PAYMENT SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 
7.
Income Taxes

At September 30, 2012, the Corporation had Canadian non-capital loss carry-forwards for income tax purposes of approximately $1,053,983 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 September 30, 2012 and March 31, 2012 are as follows:

   
September 30, 2012
    
March 31, 2012
  
Deferred tax assets:
            
Excess of tax value over the net book value for capital assets
   $ 555,892     $ 612,680  
Canadian non-capital loss carry-forwards
     263,496       39,922  
Other
     163,433       157,349  
Total deferred tax assets
   $ 982,821     $ 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 September 30, 2012 and an approximate 26% statutory tax rate at September 30, 2011, is as follows:

   
Three Months Ended
    
Six Months Ended
  
   
September 30, 2012
    
September 30, 2011
    
September 30, 2012
    
September 30, 2011
  
         
(As restated – Note 2)
          
(As restated – Note 2)
  
Income taxes at statutory rates
   $ 123,424     $ 1,522,069     $ 368,216     $ 1,821,895  
Share-based payments and other permanent differences
     67,219       159,600       142,057       242,921  
Effect of U.S. tax rates
     65,357       718,779       140,241       836,793  
Effect of foreign exchange translation of foreign currency denominated deferred income tax assets
     -       28,230