Conversions

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

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

For the Quarterly Period Ended June 30, 2003

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

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 [ ]

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act.). Yes [X] No [ ]

The number of shares of the registrant's Common Stock outstanding as of July 31, 2003, was 19,593,061.

1

LML PAYMENT SYSTEMS INC.

FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2003

INDEX

 

Page
Number

PART I.

FINANCIAL INFORMATION

1

 

 

 

Item 1.

Consolidated Financial Statements

1

 

 

 

 

Consolidated Balance Sheets at March 31, 2003 and June 30, 2003 (unaudited)

1

 

 

 

 

Consolidated Statements of Operations and Deficit (unaudited) for the

2

 

Three Months Ended June 30, 2002 and 2003

 

 

 

 

 

Consolidated Statements of Cash Flows (unaudited) for the

3

 

Three Months Ended June 30, 2002 and 2003

 

 

 

 

 

Notes to Consolidated Financial Statements (unaudited)

4

 

 

 

Item 2.

Management's Discussion and Analysis of Financial Condition

8

 

and Results of Operations

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

11

 

 

 

Item 4.

Controls and Procedures

11

 

 

 

PART II.

OTHER INFORMATION

12

 

 

 

Item 1.

Legal Proceedings

12

 

 

 

Item 6.

Exhibits and Reports on Form 8-K

12

 

 

 

 

SIGNATURE PAGE

13

 

 

 

2

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 BALANCE SHEETS

(In U.S. Dollars)

 

June 30,
2003
$
(Unaudited)

 

March 31,
2003
$

ASSETS

Current Assets

 

 

 

Cash and cash equivalents

5,027,084

 

3,483,690

Restricted cash

300,000

 

300,000

Accounts receivable, less allowances of $103,253 and $60,815, respectively

479,112

 

583,969

Prepaid expenses

450,782

 

540,303

Total Current Assets

6,256,978

 

4,907,962

Real Property Held for Sale, net

-

 

1,580,020

Capital Assets, net

2,795,729

 

3,291,517

Patents, net

1,425,522

 

1,454,270

Other Assets

274,012

 

319,514

TOTAL ASSETS

10,752,241

 

11,553,283

 

 

 

 

LIABILITIES

Current Liabilities

 

 

 

Accounts payable

386,423

 

504,869

Accrued liabilities

142,046

 

216,513

Accrued compensation

205,813

 

257,667

Current portion of capital lease obligations

48,648

 

90,016

Current portion of deferred revenue

227,462

 

277,350

Total Current Liabilities

1,010,392

 

1,346,415

 

 

 

 

Deferred revenue

236,918

 

243,927

Total Liabilities

1,247,310

 

1,590,342

SHAREHOLDERS' 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, 19,593,061 and 19,593,061 shares issued and
outstanding, respectively




-


-


30,350,561




-


-


30,350,561

Deficit

(20,845,630)

(20,387,620)

Total Shareholders' Equity

9,504,931

 

9,962,941

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY

10,752,241

 

11,553,283

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
June 30

 

 

2003
$

 

2002
$

REVENUE

 

1,896,663

 

1,878,887

 

 

 

 

 

COSTS AND EXPENSES

 

 

 

 

Cost of operations

 

1,757,877

 

1,580,713

Sales, general and administrative

 

612,828

 

715,088

Amortization and depreciation

 

572,448

 

614,633

Other expenses (income)

 

16,347

 

(6,189)

 

 

 

 

 

LOSS FROM CONTINUING OPERATIONS BEFORE INTEREST INCOME AND INCOME TAXES

 

(1,062,837)

 

(1,025,358)

 

 

 

 

 

Interest income, net

 

9,601

 

11,855

 

 

 

 

 

LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES

 

(1,053,236)

 

(1,013,503)

 

 

 

 

 

State income taxes

 

4,200

 

-

LOSS FROM CONTINUING OPERATIONS

(1,057,436)

(1,013,503)

 

 

 

 

 

Discontinued operations (Note 3)

 

599,426

 

(17,072)

 

 

 

 

 

NET LOSS

 

(458,010)

 

(1,030,575)

 

 

 

 

 

DEFICIT, beginning of period

 

(20,387,620)

 

(10,905,949)

 

 

 

 

 

DEFICIT, end of period

 

(20,845,630)

 

(11,936,524)

 

 

 

 

 

LOSS PER SHARE

 

 

 

 

Basic loss per share

 

 

Loss from continuing operations

 

(0.05)

 

(0.05)

Net loss

 

(0.02)

 

(0.05)

Diluted loss per share

Loss from continuing operations

 

 

(0.05)

 

 

(0.05)

Net loss

 

(0.02)

 

(0.05)

 

 

 

 

 

WEIGHTED AVERAGE SHARES OUTSTANDING

 

 

 

 

Basic

 

19,593,061

 

19,450,869

Diluted

 

19,593,061

 

19,450,869

See accompanying notes to the consolidated financial statements.

2

LML PAYMENT SYSTEMS INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In U.S. Dollars)

(Unaudited)

 

Three Months Ended
June 30

 

2003
$

 

2002
$

Operating Activities:

 

 

 

Loss from continuing operations

(1,057,436)

 

(1,013,503)

Adjustments to reconcile loss from continuing operations to net cash (used in) provided by operating activities

 

 

 

Provision for losses on accounts receivable

42,439

 

-

Amortization and depreciation

572,448

 

614,633

Changes in operating assets and liabilities

 

 

 

Accounts receivable

60,351

 

(262,109)

Prepaid expenses

82,424

 

184,420

Accounts payable and accrued liabilities

(228,264)

 

(354,733)

Other assets

(733)

 

6,855

Deferred revenue

(56,897)

 

225,716

Net cash used in operating activities of continuing operations

(585,668)

 

(598,721)

 

 

 

 

Investing Activities:

 

 

 

Capital asset expenditures

(7,126)

 

(36,834)

Patents

(7,306)

 

(3,288)

Net cash used in investing activities of continuing operations

(14,432)

 

(40,122)

 

 

 

 

Financing Activities:

 

 

 

Payments on capital leases

(41,368)

(103,581)

Proceeds from exercise of stock options

-

17,325

Net cash used in financing activities of continuing operations

(41,368)

 

(86,256)

Net cash used in continuing operations

(641,468)

 

(725,099)

Net cash (used in) provided by discontinued operations (Note 3)

2,184,862

 

(30,973)

INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

1,543,394

 

(756,072)

Cash and cash equivalents, beginning of period

3,483,690

 

4,582,304

Cash and cash equivalents, end of period

5,027,084

3,826,232

See accompanying notes to the consolidated financial statements.

3

LML PAYMENT SYSTEMS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

1. Basis of Presentation

The consolidated balance sheet as of June 30, 2003, the consolidated statements of operations and deficit for the three months ended June 30, 2002 and 2003, and the consolidated statements of cash flows for the three months ended June 30, 2002 and 2003, of LML Payment Systems Inc. and its subsidiaries (collectively, the "Corporation") are unaudited. The Corporation's consolidated balance sheet as of March 31, 2003, was derived from audited financial statements. In the opinion of management, all adjustments necessary for a fair presentation of such financial statements are included herein. 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 Corporation'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 Corporation'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 Corporation'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 Corporation's Annual Report on Form 10-K for the fiscal year ended March 31, 2003, as filed with the Securities and Exchange Commission on June 27, 2003 (file no. 0-13959). Certain of the prior period financial statement amounts have been reclassified to conform to the current period presentation.

2. Stock-based compensation

CICA Handbook section 3870 Stock-based Compensation and Other Stock-based Payments ("CICA 3870"), encourages, but does not require, corporations to record compensation cost for stock-based employee compensation plans based on the fair value of options granted. We have elected to continue to account for stock-based compensation using the intrinsic value method prescribed in CICA 3870 and its related interpretations, and to provide disclosures of the pro forma effects of adoption had we recorded compensation expense under the fair value method. During the three months ended June 30, 2003, there were no stock options granted. The pro forma compensation expense recorded during the three months ended June 30, 2003 represents the amortization of previously issued stock options. These previously issued options are amortized to pro forma compensation expense as the options vest.

 

 

Three Months

Ended June 30

 

Three Months

Ended June 30


 

2003

$

 

2002

$

Compensation cost

Net loss

763,854

878,758

As reported

 

(458,010)

(1,030,575)

Pro forma

 

(1,221,864)

(1,909,333)

Net loss per share

 

 

 

As reported

 

(0.02)

(0.05)

Pro forma

 

(0.06)

(0.10)

Fair value of options granted are estimated at the date of grant using the Black-Scholes option pricing model with the following assumptions for the three months ended June 30, 2003 and 2002:

Risk free interest rate of 4% for the three months ended June 30, 2003 and 2002;

Expected volatility of 104% for three months ended June 30,2003 and 2002;

Expected life of the options of 4 years for the three months ended June 30, 2003 and 2002;

4

No dividend yields.

3. Discontinued operations

On June 18, 2003 the Corporation, through its subsidiary LHTW Properties Inc. sold its real property located in Wildwood, Florida. The decision to discontinue operations of this business segment, previously reported under the Residential Real Estate Operations segment, resulted from an opportunity to sell the property and consequently remove a business segment no longer consistent with the business strategy. The Corporation received gross proceeds of $2.4 million, less selling costs of $185,113, for net proceeds of $2,214,887. The Corporation has recorded a gain on the sale of $625,042 during the three months ended June 30, 2003. There are no expected tax consequences to the Corporation as there are previously existing non-capital losses which the Corporation can apply this gain against. The results of these discontinued operations have been reclassified in the statements of operations and deficit and cash flows for the three months ended June 30, 2003 and 2002. The results of operations of the Residential Real Estate Operations segment are as follows:

 

Consolidated Statements of Operations

Three Months ended

June 30

 

 

 

2003

$

 

2002

$

Revenue

 

 

35,462

 

39,230

Net loss from discontinued operations

 

 

(25,616)

 

(17,072)

Net gain from sale of property (a)

 

 

625,042

 

-

 

 

 

 

 

 

Discontinued operations

 

 

599,426

 

(17,072)

(a) Assets included as part of the disposal group:

 

Real Property - Held for sale

 

 

 

Land held for resale

584,672

Common area land

803,554

Common area building

227,125

Total cost

1,615,351

Less: accumulated depreciation

36,846

Net book value

1,578,505

Capital assets

Computer equipment

 

2,056

Furniture and fixtures

37,407

Total cost

39,463

Less: accumulated depreciation

28,123

Net book value

11,340

 

 

Total net book value

1,589,845

Net proceeds from sale of property

2,214,887

Net gain from sale of property

625,042

 

Consolidated balance sheets

 

 

June 30,
2003
$

 

March 31,
2003
$

Cash

 

 

 

4,634

 

12,443

Accounts receivable - net

 

 

25,474

 

27,542

Prepaid expenses

 

 

1,506

 

8,603

 

 

 

 

 

 

Total current assets of discontinued operations

 

 

31,614

 

48,588

5

 

Real property - held for sale

 

 

 

 

-

 

1,580,020

Capital assets

 

 

-

 

12,753

 

 

 

 

 

 

Total assets of discontinued operations

 

 

31,614

 

1,641,361

 

Current liabilities

 

 

 

85,353

 

101,856

 

 

 

 

 

 

Total liabilities of discontinued operations

 

 

85,353

 

101,856

 

Consolidated statements of cash flows

Three Months ended

June 30

 

 

 

2003

$

 

2002

$

Cash flows (used in) provided by discontinued operations

 

 

Operating activities

 

 

(30,025)

 

(30,973)

Investing activities

 

 

2,214,887

 

-

 

 

 

 

 

 

Net cash provided by (used in) discontinued operations

 

 

2,184,862

 

(30,973)

4. Industry and Geographic Segments

Financial Payment Processing Operations

U.S.

Three Months ended

June 30

 

 

2003

$

 

2002

$

 

Revenue (excluding intercompany sales)

 

1,895,663

 

1,877,887

 

Revenue major customers

 

682,862

 

1,120,155

 

Segment operating loss

 

(748,473)

 

(770,151)

 

Total assets

 

7,734,502

 

14,008,569

 

6

Corporate

Canada

Three months ended

June 30

 

 

 

2003

$

 

2002

$

 

Revenue (excluding intercompany sales)

 

 

1,000

 

1,000

 

Segment operating loss

 

 

(308,963)

 

(243,352)

 

Total assets

 

 

2,986,125

 

4,011,112

 

The Financial Payment Processing Operations involve electronic check authorization, electronic check conversion (ECC) and primary and secondary check collection including electronic check re-presentment (RCK). Corporate is the corporate administration of the Corporation's headquarters. There were no inter-segment sales.

5. 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:

  1. Under U.S. GAAP, the Corporation could not effect the reduction in deficit of $22,901,744 (performed in fiscal 2001 and disclosed in the Corporation's Form 10-K for the fiscal year ended March 31, 2001) by reducing the stated capital of the shares of the Corporation's common stock.

Under U.S. GAAP there are no adjustments that resulted in changes to the Consolidated Statements of Operations and Deficit, Consolidated Statements of Cash Flows or the Consolidated Balance Sheets of the Corporation.

7

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Unless the context otherwise requires, references in this report on Form 10-Q to the "Corporation", "LML", "we", "us" or "our" refer to LML Payment Systems Inc. and its direct and indirect subsidiaries. LML Payment Systems Inc.'s direct subsidiaries include LML Corp., Legacy Promotions Inc. and LHTW Properties Inc. LML Corp.'s subsidiaries are LML Patent Corp., and LML Payment Systems Corp. Unless otherwise specified herein, all references herein to dollars or "$" are to U.S. Dollars.

The following discussion and analysis should be read in conjunction with the consolidated audited financial statements and related notes thereto contained in our Annual Report on Form 10-K for the fiscal year ended March 31, 2003, filed with the Securities and Exchange Commission on June 27, 2003 (file no. 0-13959). We believe that all necessary adjustments (consisting only of normal recurring adjustments) have been included in the amounts stated below to present fairly the following quarterly information. Quarterly operating results have varied significantly in the past and can be expected to vary in the future. Results of operations for any particular quarter are not necessarily indicative of results of operations for a full year.

Forward Looking Information

All statements other than statements of historical fact contained herein are forward-looking statements. Forward-looking statements generally are accompanied by words such as "anticipate," "believe," "estimate," "intend," "project," "potential" or "expect" or similar statements. The forward-looking statements were prepared on the basis of certain assumptions which relate, among other things, to the demand for and cost of marketing our services, the volume and total value of transactions processed by merchants utilizing our services, the technological adaptation of electronic check conversion end-users, the renewal of material contracts in our business, our ability to anticipate and respond to technological changes, particularly with respect to financial payments and e-commerce, in a highly competitive industry characterized by rapid technological change and rapid rates of product obsolescence, our ability to develop and market new product enhancements and new products and services that respond to technological change or evolving industry standards, no unanticipated developments relating to previously disclosed lawsuits against us, and the cost of protecting our intellectual property. Even if the assumptions on which the forward-looking statements are based prove accurate and appropriate, the actual results of our operations in the future may vary widely due to technological change, increased competition, new government regulation or intervention in the industry, general economic conditions, other risks described in our filings with the Securities and Exchange Commission. Accordingly, the actual results of our operations in the future may vary widely from the forward-looking statements included herein. All forward-looking statements included herein are expressly qualified in their entirety by the cautionary statements in this paragraph.

Overview

LML Payment Systems Inc. is a financial payment processor that primarily provides consumer financial payment processing solutions to retailers and other clients in the United States. Our financial payment processing solutions include traditional check recovery, electronic check re-presentment, electronic check authorization and electronic check conversion. We also provide electronic fund transfer switching services to certain segments of the retail industry. We focus on providing our services to supermarkets, grocery stores, multi-lane retailers, convenience stores and other national, regional and local retailers in the United States.

Our strategic objective is to acquire electronic payment volume across all our financial payment processing services and strengthen our position as a financial payment processor. We also have as an objective the goal of developing revenue streams from the licensing of our intellectual property, specifically, the licensing of the intellectual property associated with our five patents regarding electronic check processing.

Other Operations

In a separate business segment, we owned and managed a 332-acre manufactured home retirement property known as Wildwood Estates, in Wildwood, Florida. Operations included the sale of manufactured homes and lots. In exchange for monthly maintenance fees, we provided the resident community with certain amenities and services commonly associated with similar developments. In June 2003, we sold the Wildwood Estates property for total gross proceeds of approximately $2.4 million cash. (See "Results of Operations - Discontinued Operations" located in "Management Discussion and Analysis of Financial Condition and Results of Operations" ("MD&A") and Note 3 to the Consolidated Financial Statements in Part I, Item 1).

8

Results of Operations

Revenue

Our revenue consists primarily of fees from our primary and secondary check collection, electronic check authorization, electronic check conversion and transaction switching business. Revenue is recognized in accordance with SEC Staff Accounting Bulletin ("SAB") 101, "Revenue Recognition." Revenue from our electronic check authorization, electronic check conversion and transaction switching business is recognized at the time the transactions are processed by the merchant, provided the fee is fixed and determinable and collectability is reasonably assured. Fees associated with our primary and secondary check collection business are contingent on successful recovery; accordingly, revenue is recognized as cash is received. In accordance with Statement of Position ("SOP") 97-2 "Software Revenue Recognition," we recognize software license revenue when all of the following criteria are met: execution of a written agreement; delivery of software; the license fee is fixed and determinable; collectibility of the proceeds is probable; and vendor-specific objective evidence exists to allocate the total fee to elements of multiple-element arrangements, including post contract customer support. Vendor specific objective evidence is based on the price charged when an element is sold separately, or if not yet sold separately, the price established by authorized management or a substantitive renewal rate for post-contract customer support. If we do not have sufficient evidence of the fair value of undelivered elements, revenue is recognized ratably over the support period when the undelivered element is post-contract customer support. Any cash consideration received prior to meeting revenue recognition criteria is recorded as deferred revenue. Revenue regarding Wildwood Estates was recognized when sales of property lots and mobile homes were completed. Maintenance fees from the management of the property and from the maintenance of the common areas were recognized straight line over the service period.

Total revenue was approximately $1.9 million for the three months ended June 30, 2003 as compared to approximately $1.9 million for the three months ended June 30, 2002. Revenue from our primary check collection business was approximately $850,000 for the three months ended June 30, 2003 as compared to approximately $976,000 for the three months ended June 30, 2002, a decrease of approximately 12.9%. This decrease was mainly attributable to us no longer providing electronic check recovery services to JC Penney, formerly one of our largest customers and responsible for approximately 18.3% of total revenue for the three months ended June 30, 2002. We are continuing to provide other primary collection services to JC Penney which resulted in revenue of approximately 7.8% of total revenue for the three months ended June 30, 2003. Revenue from our secondary check collection business was approximately $532,000 for the three months ended June 30, 2003 as compared to approximately $495,000 for the three months ended June 30, 2002, an increase of approximately 7.5%. Revenue from electronic check verification increased approximately 34.6% from approximately $247,000 for the three months ended June 30, 2002 to approximately $333,000 for the three months ended June 30, 2003. The increase is mainly attributable to the rollout of check processing services, including electronic check verification, to 49 multi-lane grocery stores with 268 locations in the Houston, Texas area during the third quarter of fiscal year 2003. Revenue from the licensing of certain modules of our software increased approximately $45,000 for the three months ended June 30, 2003. The increases in electronic check verification revenue and software licensing revenue is consistent with our strategic objective of acquiring electronic payment volume across all our financial payment processing services and strengthening our position as a financial payment processor.

During the three months ended June 30, 2003, revenue from and associated with our two largest customers amounted to approximately 36% of total revenue. We may be economically dependent on revenue from these customers.

On March 31, 2003, Fleming Retail Group ("Fleming"), one of our customers we previously provided transaction switching services to, filed for Chapter 11 reorganization in the United States Bankruptcy Court. During the three months ended June 30, 2003, Fleming notified us of its intention to commence closing and selling their remaining grocery retail store locations and by the conclusion of the three months ended June 30, 2003, Fleming had finalized the closing and selling of these remaining grocery retail store locations. Consequently, the transaction switching services previously provided by us to Fleming is no longer required and, therefore, the resulting impact on future revenue is a reduction of approximately $90,000 per quarter or approximately 4% of our total revenue.

Costs of operations

Costs of operations increased from approximately $1.6 million for the three months ended June 30, 2002, to approximately $1.8 million for the three months ended June 30, 2003, an increase of approximately 12.5%. Cost of operations consist of transaction processing costs, personnel costs, equipment related costs and telecommunication costs. The increase was partially attributable to an increase in traditional collection services versus a decrease in electronic check recovery services resulting from the removal of the electronic check recovery services previously provided to JC Penney. Services such as electronic check recovery, provide us with a greater gross margin due to

9

utilization of more cost efficient electronic check recovery methods as compared to more labor-intensive traditional check recovery methods. The increase was also attributable to a provision for losses on accounts receivable from Fleming Retail Group of approximately $42,000 resulting from their recent bankruptcy. We continue to seek ways to reduce costs of operations.

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 decreased to approximately $613,000 from approximately $715,000 for the three months ended June 30, 2003 and 2002, respectively, a decrease of approximately 14.3%. The decrease in sales, general and administrative expense is primarily attributable to lower costs associated with the reduction of personnel costs and general corporate expenses.

Amortization and depreciation

Amortization and depreciation decreased to approximately $572,000 from approximately $615,000 for the three months ended June 30, 2003 and 2002, respectively. The decrease was primarily attributable to certain capital assets, acquired through previous years' acquisitions, which had become fully depreciated.

Other expenses (income)

For the three months ended June 30, 2003 we had other expenses of approximately $16,000 compared to other income of approximately $6,000 for the three months ended June 30, 2002. The other expenses were attributed to foreign exchange losses from current liabilities due in Canadian currency. Other income for the three months ended June 30, 2002 was attributed to a foreign exchange gain from cash and cash equivalents held in Canadian currency.

Interest

Interest expense decreased to approximately $5,000 from approximately $8,000 for the three months ended June 30, 2003 and 2002, respectively. This decrease was due to the decrease in long-term debt. Interest income decreased to approximately $14,000 from approximately $20,000 for the three months ended June 30, 2003 and 2002, respectively. This decrease in interest earned was primarily attributed to a decrease in funds placed in term deposits or short-term commercial paper, as well as the decrease in interest rates from an average of approximately 1.7% to approximately 1% for the three months ended June 30, 2003 and 2002, respectively.

Loss from continuing operations

Loss from continuing operations increased to approximately $1.1 million from approximately $1 million for the three months ended June 30, 2003 and 2002, respectively. The increase was primarily attributable to an increase in cost of operations resulting from an increase in traditional check collection services as well as an increase in our provision for losses on accounts receivable.

Basic and diluted loss per share from continuing operations were both approximately ($0.05) for the three months ended June 30, 2003, as compared to approximately ($0.05) for the three months ended June 30, 2002.

Results of Operations - discontinued operations

During the three months ended June 30, 2003, we sold our Wildwood Estates property, previously reported in a separate business segment, for total gross proceeds of approximately $2.4 million cash. We recorded net profit of approximately $599,000, which was primarily attributed to a net gain of approximately $625,000 from the sale of real property and capital assets offset by a net loss of approximately $26,000 from discontinued operations. The decision to discontinue operations of this business segment resulted from an opportunity to sell the property and consequently remove a business segment which was no longer consistent with our business strategy.

Liquidity and Capital Resources

Our liquidity and financial position consisted of approximately $5.2 million in working capital as of June 30, 2003, compared to approximately $3.6 million in working capital as of March 31, 2003. The increase in working capital was attributable to cash flows provided by discontinued operations of approximately $2.2 million offset by cash used in operating activities of continuing operations of approximately $585,000. Cash used in operating activities of continuing

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operations related to normal operating activities and a decrease in accounts payable and accrued liabilities of approximately $228,000, a decrease of prepaid expenses of approximately $82,000 and a decrease in accounts receivable of approximately $60,000. Cash flows used in continuing operations were approximately $586,000 as compared to approximately $599,000 for the three months ended June 30, 2003 and 2002, respectively. Cash used in investing activities of continuing operations was approximately $14,000 as compared to approximately $40,000 for the three months ended June 30, 2003 and 2002, respectively. The decrease during the three months ended June 30, 2003 was due mainly to a reduction in capital asset expenditures. Cash used in financing activities of continuing operations was approximately $41,000 for the three months ended June 30, 2003, as compared to approximately $86,000 for the three months ended June 30, 2002. The decrease in cash used in financing activities is primarily due to the decrease in payments on capital leases.

We believe that existing cash and cash equivalent balances, and potential cash flows from operations should satisfy our working capital and capital expenditure requirements in the foreseeable future. However, any material acquisitions of complementary businesses, products or technologies, other arrangements, unexpected losses, or a further economic slowdown in the retail industry could require us to obtain additional equity or debt financing. There can be no assurance that such financing would be available on acceptable terms, if at all.

Critical Accounting Policies

There have been no changes to our critical accounting policies since March 31, 2003. For a description of our critical accounting policies, see our Annual Report on Form 10-K for the year ended March 31, 2003 filed with the Securities and Exchange Commission.

Contingencies

In addition to the legal matters previously reported in our Annual Report filed on Form 10-K for the year ended March 31, 2003, as filed with the Securities and Exchange Commission on June 27, 2003 (file no. 0-13959), we are party from time to time to ordinary litigation incidental to our business, none of which is expected to have a material adverse effect on our results of operations, financial position or liquidity.

ITEM 3. Quantitative and Qualitative Disclosures About Market Risk

From March 31, 2003, until June 30, 2003, there were no material changes from the information concerning market risk contained in our Annual Report on Form 10-K for the year ended March 31, 2003, as filed with the Securities and Exchange Commission on June 27, 2003 (file no. 0-13959).

ITEM 4. Controls and Procedures

The Corporation's disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives, and the conclusions of the principal executive and principal financial officers are that the controls and procedures are effective at the reasonable assurance level.

PART II.

OTHER INFORMATION

Item 1. Legal Proceedings

There are no material changes with respect to the information concerning legal proceedings contained in our Annual Report on Form 10-K for the year ended March 31, 2003, as filed with the Securities and Exchange Commission on June 27, 2003 (file no. 0-13959). In addition to the legal matters as described herein and as previously reported in our most recent report on Form 10-K, we are party from time to time to ordinary litigation incidental to our business, none of which is expected to have a material adverse effect on our results of operations, financial position or liquidity.

Item 6. Exhibits and Reports on Form 8-K

  1. Exhibits:
  2. Exhibit Number Description of Document

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    3.1 Restated Articles of Incorporation (incorporated by reference to Exhibit 3.1 to the Quarterly Report on Form 10-Q for the period ended September 30, 2000, of LML Payment Systems Inc. (File No. 0-13959)).

    3.2 Bylaws (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 Payment Systems Inc. (File No. 0-13959)).

    3.3 Amendment to Bylaws of LML Payment Systems Inc. (incorporated by reference to Exhibit 3.3 to the Quarterly Report on Form 10-Q for the period ended September 30, 2001, of LML Payment Systems Inc. (File No. 0-13959)).

    31.1 Rule 13a-14(a) Certification of Chief Executive Officer (filed herewith).

    31.2 Rule 13a-14(a) Certification of Principal Financial Officer (filed herewith).

    32.1 Section 1350 Certification of Chief Executive Officer (furnished herewith).

    32.2 Section 1350 Certification of Controller and Chief Accounting Officer (furnished herewith).

  3. Reports on Form 8-K

We filed the following Current Reports on Form 8-K with the Securities and Exchange Commission during the quarter ended June 30, 2003:

i) A current report on Form 8-K, dated May 7, 2003, was filed on May 7, 2003 (Item 7)

ii) A current report on Form 8-K, dated May 13, 2003, was filed on May 29, 2003 (Item 5)

iii) A current report on Form 8-K, dated June 4, 2003, was filed on June 19, 2003 (Item 5)

iv) A current report on Form 8-K, dated June 27, 2003, was filed on June 30, 2003 (Item 5)

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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/ Richard R. Schulz

Chief Accounting Officer (Duly Authorized Officer and Chief Accounting Officer)

Date: August 14, 2003

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Exhibit 31.1

RULE 13A-14(A) CERTIFICATION OF CHIEF EXECUTIVE OFFICER

I, Patrick H. Gaines, certify that:

1.  I have reviewed this Quarterly Report on Form 10-Q of LML Payment Systems Inc.;

2.  Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.  Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.  The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)  Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)  Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)  Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5.  The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function):

(a)  All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information, and

(b)  Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

/s/ Patrick H. Gaines

Patrick H. Gaines

President and CEO

August 14, 2003

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Exhibit 31.2

RULE 13A-14(A) CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER

I, Richard R. Schulz, certify that:

1.  I have reviewed this Quarterly Report on Form 10-Q of LML Payment Systems Inc.;

2.  Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.  Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.  The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)  Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)  Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)  Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5.  The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function):

(a)  All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information, and

(b)  Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

/s/ Richard R. Schulz

Richard R. Schulz

Controller and Chief Accounting Officer

August 14, 2003

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CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002.

In connection with the Quarterly Report of LML Payment Systems Inc. (the "Corporation") on Form 10-Q for the period ended June 30, 2003 as filed with the Securities and Exchange commission on the date hereof (the "Report"), I, Patrick H. Gaines, Chief Executive Officer of the Corporation, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Corporation.

/s/ Patrick H. Gaines

Patrick H. Gaines

Chief Executive Officer

August 14, 2003

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Exhibit 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002.

In connection with the Quarterly Report of LML Payment Systems Inc. (the "Corporation") on Form 10-Q for the period ended June 30, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Richard R. Schulz, Controller and Chief Accounting Officer of the Corporation, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Corporation.

/s/ Richard R. Schulz

Richard R. Schulz

Controller and Chief Accounting Officer

August 14, 2003

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