Yukon
Territory
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###-##-####
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(State
or other jurisdiction of
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(I.R.S.
Employer Identification No.)
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incorporation
or organization)
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Page
Number
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PART
I.
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FINANCIAL
INFORMATION
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1
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Item
1.
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Consolidated
Financial Statements (unaudited)
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1
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Consolidated
Balance Sheets (unaudited) at June 30, 2008 and March 31,
2008
|
1
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Consolidated
Statements of Operations and Deficit (unaudited) for the Three Months
Ended June 30, 2008 and 2007
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2
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Consolidated
Statements of Cash Flows (unaudited) for the Three Months Ended June 30,
2008 and 2007
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3
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Notes
to Consolidated Financial Statements (unaudited)
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4
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Item
2.
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Management's
Discussion and Analysis of Financial Condition and Results of
Operations
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10
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Item
3.
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Quantitative
and Qualitative Disclosures About Market Risk
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15
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Item
4.
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Controls
and Procedures
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15
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PART
II.
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OTHER
INFORMATION
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16
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Item
1.
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Legal
Proceedings
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16
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Item
1A.
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Risk
Factors
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16
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Item 2 | Unregistered Sales of Equity Securities And Use of Proceeds |
16
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Item
6.
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Exhibits
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16
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SIGNATURE
PAGE
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17
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PART I.
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FINANCIAL
INFORMATION
|
ITEM
1.
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CONSOLIDATED
FINANCIAL STATEMENTS
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June
30, 2008
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March
31, 2008
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|||||||
ASSETS
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||||||||
Current
Assets
|
||||||||
Cash
and cash equivalents
|
$ | 6,617,672 | $ | 9,749,768 | ||||
Funds
held for merchants (Note 4)
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10,623,528 | 5,833,617 | ||||||
Restricted
cash
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125,000 | 250,000 | ||||||
Accounts
receivable, less allowances of $32,168 and $32,168,
respectively
|
585,444 | 719,301 | ||||||
Prepaid
expenses
|
249,494 | 273,751 | ||||||
Total
current assets
|
18,201,138 | 16,826,437 | ||||||
Property
and equipment, net
|
268,082 | 246,828 | ||||||
Patents, net
|
748,249 | 788,473 | ||||||
Restricted
cash
|
154,653 | 153,619 | ||||||
Other
assets
|
23,302 | 23,247 | ||||||
Goodwill
(Note 5)
|
17,873,642 | 15,903,077 | ||||||
Intangible
assets, net
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5,576,850 | 5,700,637 | ||||||
TOTAL
ASSETS
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$ | 42,845,916 | $ | 39,642,318 | ||||
LIABILITIES
|
||||||||
Current
Liabilities
|
||||||||
Accounts
payable
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$ | 924,456 | $ | 1,745,679 | ||||
Accrued
liabilities
|
681,453 | 648,661 | ||||||
Corporate
taxes payable
|
633,992 | 573,240 | ||||||
Funds
due to merchants (Note 4)
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10,623,528 | 5,833,617 | ||||||
Current
portion of obligations under capital lease
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194,952 | 203,366 | ||||||
Current
portion of promissory notes
|
2,451,701 | 2,731,923 | ||||||
Obligation
to issue consideration (Note 5)
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1,970,565 | - | ||||||
Current
portion of deferred revenue
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1,382,725 | 1,448,921 | ||||||
Total
current liabilities
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18,863,372 | 13,185,407 | ||||||
Obligations
under capital lease
|
119,698 | 177,573 | ||||||
Promissory
notes
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- | 2,435,460 | ||||||
Deferred
revenue
|
4,287,442 | 4,606,379 | ||||||
TOTAL
LIABILITIES
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23,270,512 | 20,404,819 | ||||||
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
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- | - | ||||||
Class
B, preferred stock, $1.00 CDN par value, 150,000,000 shares authorized,
issuable in series, none issued or outstanding
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- | - | ||||||
Common
shares, no par value, 100,000,000 shares authorized, 26,341,832 and
26,341,832 issued and outstanding, respectively
|
48,068,443 | 48,071,980 | ||||||
Accumulated
other comprehensive income (loss)
|
10,928 | (19,046 | ) | |||||
Contributed
surplus
|
5,749,174 | 5,391,187 | ||||||
Deficit
|
(34,253,141 | ) | (34,206,622 | ) | ||||
Total
shareholders' equity
|
19,575,404 | 19,237,499 | ||||||
TOTAL
LIABILITIES AND SHAREHOLDERS' EQUITY
|
$ | 42,845,916 | $ | 39,642,318 |
Three
Months Ended
|
||||||||
June
30
|
||||||||
2008
|
2007
|
|||||||
REVENUE
|
$ | 3,177,472 | $ | 1,455,716 | ||||
COST
OF REVENUE (includes stock-based compensation expense of $37,813 (June 30,
2007 - $9,695 ))
|
1,513,278 | 498,227 | ||||||
GROSS
PROFIT (excludes amortization and depreciation expense)
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1,664,194 | 957,489 | ||||||
OPERATING
EXPENSES
|
||||||||
General
and administrative (includes stock-based compensation expense of $307,317
(June 30, 2007 - $129,740 ))
|
1,064,764 | 1,099,870 | ||||||
Sales
and marketing (includes stock-based compensation expense of $756 (June 30,
2007 - $- ))
|
82,482 | 64,575 | ||||||
Product
development and enhancement (includes stock-based compensation expense of
$12,100 (June 30, 2007 - $- ))
|
72,091 | - | ||||||
Amortization
and depreciation
|
194,357 | 126,516 | ||||||
INCOME
(LOSS) BEFORE OTHER INCOME AND INCOME TAXES
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250,500 | (333,472 | ) | |||||
Foreign exchange
loss
|
64,836 | 16,224 | ||||||
Other income
|
(8,321 | ) | (8,709 | ) | ||||
Gain on sale of
assets
|
(864 | ) | (1,700 | ) | ||||
Interest income
|
(62,436 | ) | (113,310 | ) | ||||
Interest
expense
|
105,380 | 17,988 | ||||||
INCOME (LOSS)
BEFORE INCOME TAXES
|
151,905 | (243,965 | ) | |||||
Income taxes
|
198,424 | 4,200 | ||||||
NET
LOSS
|
(46,519 | ) | (248,165 | ) | ||||
DEFICIT,
beginning of period
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(34,206,622 | ) | (31,985,794 | ) | ||||
DEFICIT,
end of period
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$ | (34,253,141 | ) | $ | (32,233,959 | ) | ||
LOSS
PER SHARE, basic and diluted
|
$ | (0.00 | ) | $ | (0.01 | ) | ||
WEIGHTED
AVERAGE SHARES OUTSTANDING
|
||||||||
Basic
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26,341,832 | 20,230,257 | ||||||
Diluted
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26,341,832 | 20,230,257 |
Three
Months Ended
|
||||||||
June
30
|
||||||||
2008
|
2007
|
|||||||
Operating
Activities:
|
||||||||
Net
loss
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$ | (46,519 | ) | $ | (248,165 | ) | ||
Adjustments
to reconcile net loss to net cash provided by operating
activities
|
||||||||
Amortization and
depreciation
|
194,357 | 126,516 | ||||||
Stock-based
compensation
|
357,986 | 139,435 | ||||||
Unrealized foreign exchange
loss
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105,165 | - | ||||||
Other
|
(864 | ) | (1,700 | ) | ||||
Changes
in non-cash operating working capital
|
||||||||
Restricted
cash
|
125,000 | - | ||||||
Accounts
receivable
|
82,560 | (47,828 | ) | |||||
Prepaid
expenses
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24,515 | 56,160 | ||||||
Accounts
payable and accrued liabilities
|
(738,927 | ) | (101,984 | ) | ||||
Corporate
taxes payable
|
57,439 | - | ||||||
Deferred
revenue
|
(385,562 | ) | (365,756 | ) | ||||
Net
cash used in operating activities
|
(224,850 | ) | (443,322 | ) | ||||
Investing
Activities:
|
||||||||
Acquisition
of Beanstream, net of cash acquired
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- | (513,146 | ) | |||||
Acquisition
of property and equipment
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(53,346 | ) | (84,385 | ) | ||||
Proceeds
from disposal of equipment
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5,500 | 1,700 | ||||||
Development
of patents
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(1,606 | ) | (4,542 | ) | ||||
Net
cash used in investing activities
|
(49,452 | ) | (600,373 | ) | ||||
Financing
Activities:
|
||||||||
Payments
on capital leases
|
(44,272 | ) | (87,763 | ) | ||||
Payment
on promissory notes
|
(2,843,974 | ) | - | |||||
Share
capital financing costs
|
(3,537 | ) | - | |||||
Net
cash used in financing activities
|
(2,891,783 | ) | (87,763 | ) | ||||
Effects
of foreign exchange rate changes on cash and cash
equivalents
|
33,989 | - | ||||||
DECREASE
IN CASH AND CASH EQUIVALENTS
|
(3,132,096 | ) | (1,131,458 | ) | ||||
Cash
and cash equivalents, beginning of period
|
9,749,768 | 10,163,008 | ||||||
Cash
and cash equivalents, end of period
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$ | 6,617,672 | $ | 9,031,550 | ||||
Supplemental
disclosure of cash flow information
|
||||||||
Interest
paid
|
$ | 105,380 | $ | 17,988 | ||||
Taxes
paid
|
$ | 145,264 | $ | 28,386 |
2.
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Change
in Accounting Policies
|
3.
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Financial
instruments
|
a)
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The
Corporation classifies its cash and cash equivalents, funds held for
merchants and restricted cash as held-for-trading. Accounts receivable are
classified as loans and receivables. Accounts payable and certain accrued
liabilities, corporate taxes payable, funds due to merchants, obligations
under capital lease, promissory notes and obligation to issue shares are
classified as other liabilities, all of which are measured at amortized
costs.
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Carrying
Value
|
Fair
Value
|
||||
Held-for-Trading
|
17,520,853
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17,520,853
|
|||
Loans
and receivables
|
585,444
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585,444
|
|||
Held-to-maturity
|
-
|
-
|
|||
Available-for-sale
|
-
|
-
|
|||
Other
liabilities
|
17,600,345
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17,600,345
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b)
|
Restricted
cash
|
c)
|
Concentration
of credit risk
|
·
|
funds
held in reserves calculated by applying contractually determined
percentages of the gross transaction volume for a hold-back period of up
to six months;
|
·
|
funds
from transaction payment processing which may be held for up to
approximately fifteen days, the actual number of days depends on the
contractual terms with each merchant;
and
|
·
|
funds
from payroll/pre-authorized debit services provided on behalf of
merchants, which may be held for up to approximately two
days.
|
5.
|
Goodwill
and Intangible Assets
|
|
On
June 30, 2008, additional contingent consideration became payable under
the Beanstream arrangement agreement. Under the agreement, due
to Beanstream meeting certain performance related criteria, additional
consideration from the Corporation became issuable equal in value to
CAD$2,000,000. This additional consideration results in a
prospective increase in the purchase price, thus resulting in an increase
in goodwill upon consolidation.
|
Original
goodwill recognized on acquisition
|
$15,903,077
|
||
Additional
Contingent Consideration (CAD $2,000,000)
|
1,970,565
|
||
Goodwill
related to Beanstream Acquisition on June 30, 2008
|
$17,873,642
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6.
|
Stock-based
compensation
|
8.
|
Industry
and geographic segments
|
Three
Months Ended
|
TPP
|
IPL
|
CP/SL
|
Reconciling
|
Consolidated
|
||||||
June
30, 2008
|
Canada
|
U.S.
|
U.S.
|
Items
|
Total
|
||||||
Total
Revenue
|
$
|
1,954,496
|
$
|
406,442
|
$
|
816,534
|
$
|
-
|
$
|
3,177,472
|
|
Revenue:
major customers
|
562,814
|
305,556
|
362,822
|
-
|
1,231,192
|
||||||
Cost
of revenue
|
1,076,648
|
-
|
398,817
|
37,813
|
1
|
1,513,278
|
|||||
General
and administrative
|
144,669
|
5,604
|
175,815
|
738,676
|
2
|
1,064,764
|
|||||
Sales
and marketing
|
75,071
|
-
|
6,655
|
756
|
1
|
82,482
|
|||||
Product
development and enhancement
|
59,991
|
-
|
-
|
12,100
|
1
|
72,091
|
|||||
Amortization
and depreciation
|
8,536
|
42,031
|
16,775
|
127,015
|
3
|
194,357
|
|||||
Earnings
(losses) from operations before income taxes
|
586,147
|
369,933
|
213,737
|
(1,017,912)
|
4
|
151,905
|
Three
Months Ended
|
TPP
|
IPL
|
CP/SL
|
Reconciling
|
Consolidated
|
||||||
June
30, 2007
|
Canada
|
U.S.
|
U.S.
|
Items
|
Total
|
||||||
Total
Revenue
|
$
|
-
|
$
|
412,908
|
$
|
1,042,808
|
$
|
-
|
$
|
1,455,716
|
|
Revenue:
major customers
|
-
|
305,556
|
588,100
|
-
|
893,656
|
||||||
Cost
of revenue
|
-
|
-
|
488,532
|
9,695
|
1
|
498,227
|
|||||
General
and administrative
|
-
|
1,832
|
604,135
|
493,903
|
2
|
1,099,870
|
|||||
Sales
and marketing
|
64,575
|
-
|
64,575
|
||||||||
Product
development and enhancement
|
-
|
-
|
-
|
-
|
|||||||
Amortization and
depreciation
|
-
|
41,594
|
83,120
|
1,802
|
3
|
126,516
|
|||||
Earnings
(losses) from operations before income taxes
|
-
|
464,545
|
(197,581)
|
(510,929)
|
4
|
(243,965)
|
1
|
Represents
stock-based compensation expense.
|
2
|
Represents
stock-based compensation expense and other unallocated corporate or
centralized marketing, general and administrative
expenses.
|
3
|
Represents
amortization and depreciation included in the unallocated corporate or
centralized marketing, general and administrative
expenses.
|
4
|
Represents earnings (losses)
included in the unallocated corporate or centralized marketing, general
and administrative expenses.
|
a)
|
Under
U.S. GAAP, the Corporation could not effect the 2001 reduction in deficit
of $22,901,744 by reducing the stated capital of the shares of the
Corporation's common stock.
|
c)
|
Changes
in US GAAP
|
(i)
|
As
at April 1, 2008, the Corporation adopted SFAS No. 157, Fair Value
Measurements, which defines fair value, establishes a framework for
measuring fair value in generally accepted accounting principles, and
expands disclosures about fair value measurements. SFAS No. 157 does
not require any new fair value measurements, but provides guidance on how
to measure fair value by providing a fair value hierarchy used to classify
the source of the information. Adoption of this standard has
had no significant impact on the Corporation’s financial
statements.
|
(ii)
|
As
at April 1, 2008, the Corporation adopted FASB Statement No. 159,
“The Fair Value Option for Financial Assets and Financial Liabilities”
(SFAS No. 159). SFAS No. 159 provides companies with an option
to report selected financial assets and liabilities at fair value. The
objective of SFAS No. 159 is to reduce both complexity in accounting
for financial instruments and the volatility in earnings caused by
measuring related assets and liabilities differently. Generally accepted
accounting principles have required different measurement attributes for
different assets and liabilities that can create artificial volatility in
earnings. FASB has indicated it believes that SFAS No. 159 helps to
mitigate this type of accounting- induced volatility by enabling companies
to report related assets and liabilities at fair value, which would likely
reduce the need for companies to comply with detailed rules for hedge
accounting. SFAS No. 159 also establishes presentation and disclosure
requirements designed to facilitate comparisons between companies that
choose different measurement attributes for similar types of assets and
liabilities. For example, SFAS No. 159 requires companies to provide
additional information that will help investors and other users of
financial statements to more easily understand the effect of the company’s
choice to use fair value on its earnings. It also requires entities to
display the fair value of those assets and liabilities for which the
company has chosen to use fair value on the face of the balance sheet.
SFAS No. 159 does not eliminate disclosure requirements included in
other accounting standards, including requirements for disclosures about
fair value measurements included in FASB Statement No. 157, “Fair
Value Measurements” (SFAS No. 157), and FASB Statement No. 107,
“Disclosures about Fair Value of Financial Instruments” (SFAS
No. 107). Adoption of this standard has not had a significant impact
on the Corporation’s financial
statements.
|
(iii)
|
Business combinations and
non-controlling interests - As at April 1, 2008, the Corporation
has adopted SFAS No. 141(R), Business Combinations
and Financial Accounting Standards Board Statement of Financial Accounting
notes to consolidated financial statements. The impact of
adopting SFAS No. 141(R) will be dependent on the future business
combinations that the Corporation may pursue in the
future. There has been no impact upon adoption of this standard
on the Corporation’s financial
statements.
|
(iv)
|
SFAS
No. 160, Accounting
and Reporting of Noncontrolling Interest in Consolidated Financial
Statements, an amendment of ARB No. 51,
respectively - The issuance of these standards is the
culmination of the first major collaborative convergence undertaking of
the Financial Accounting Standards Board and the International Accounting
Standards Board. Whether the Corporation would be materially affected by
the new standards would depend upon the specific facts of the business
combinations, if any, occurring on or after April 1, 2009. Generally, the
new standards will result in measuring business acquisitions at the fair
value of the acquired entities and a prospectively applied shift from a
parent company conceptual view of consolidation (which results in the
parent company recording the book values attributable to non-controlling
interests) to an entity conceptual view (which results in the parent
company recording the fair values attributable to non-controlling
interests). Early adoption of these standards is prohibited. The impact of
adopting SFAS No. 160 will be dependent on the future business
combinations that the Corporation may pursue after its effective
date.
|
ITEM
2.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
Exhibit
Number
|
Description
of Document
|
|
3.1
|
Restated
Articles of Incorporation (incorporated by reference to Exhibit 3.1 to the
Annual Report on Form 10-K for the period ended March 31, 2006 of LML
(File No. 0-13959)).
|
|
3.2
|
Bylaws
of LML, as amended (incorporated by reference to Exhibit 3.2 to the
Quarterly Report on Form 10-Q for the period ended September 30, 2007 of
LML (File No. 0-13959)).
|
|
31.1*
|
Rule
13a-14(a) Certification of Principal Executive Officer.
|
|
31.2*
|
Rule
13a-14(a) Certification of Principal Financial Officer.
|
|
32*
|
Section
1350 Certification of Principal Executive Officer and Principal Financial
Officer.
|
LML
PAYMENT SYSTEMS INC.
|
|
/s/
Richard R. Schulz
|
|
Richard
R. Schulz
|
|
Controller
and Chief Accounting Officer
|
|
(Duly
Authorized Officer and Chief Accounting Officer)
|
|
August
11 , 2008
|