| LML PAYMENT SYSTEMS INC ITEM 1A Risk Factors Introduction In addition to the normal risks of business, we are subject to significant risks and uncertainties, including those listed below and others described elsewhere in this Annual Report on Form 10-K Any of the risks described herein could result in a significant adverse effect on our results of operations and financial condition and could cause our actual results of operations to differ materially from the results contemplated by the forward-looking statements contained in this report |
| Acquisitions As part of our growth strategy, we have made business acquisitions in recent years and we expect to be an active business acquirer in the future |
| We anticipate that we will seek to acquire complementary businesses products and services in the future |
| The acquisition and integration of businesses involves a number of risks, including: - The operations, technology and personnel of an acquired business may be difficult to integrate; - An acquired business may not achieve anticipated revenues, earnings or cash flow; - The allocation of management resources to complete a business acquisition may disrupt our day-to-day business |
| There can be no assurance that we will be able to fully integrate all aspects of an acquired business successfully or fully realize the potential benefits of any business combination |
| The business in which we compete is highly competitive and there is no assurance that our current products and services will stay competitive or that we will be able to introduce new products and services to compete successfully |
| The financial payment processing market in which we operate is highly competitive and is characterized by rapid technological change, evolving industry standards, merchant requirements, pricing competition, rapid rates of product obsolescence, and rapid rates of new product introduction |
| Our market share is relatively small as compared to most of our competitors and many of our competitors have greater technical, financial and marketing resources than us and, as a result, may be able to respond more quickly to changes in technology, industry standards and merchant requirements or may be able to devote greater resources to product development and marketing than us |
| There can be no assurance that our curren t products and services will not become obsolete or that we will have the financial, technical and marketing resources and support facilities to compete successfully in the future |
| We believe that part of our success will depend on our ability to successfully market existing products, to acquire transaction volume, and to develop and introduce new products and services in addition to or as enhancements of existing products and services |
| However, there can be no assurance that we will be able to increase our transaction volume, develop and introduce new products and services in addition to, or as enhancements of, existing products and services or compete successfully in the future |
| If we lose customers, our business operations may be materially adversely affected, which could cause us to cease our business or curtail our business to a point where we are no longer able to generate sufficient revenue to fund operations |
| There is no assurance that our current products and services will stay competitive with those of our competitors or that we will be able to introduce new products and services to compete successfully in the future |
| -7- _________________________________________________________________ ______________________________________________________________________ We may be unable to protect our intellectual property rights or others may claim that we are infringing on their intellectual property |
| Third parties have asserted patent infringement claims against our check authorization products in the past and others may assert these types of claims against these products, or any of our other products, in the future |
| Patent infringement claims can require us to modify our products, services and technologies or obtain a license to permit our continued use of those rights |
| We may not be able to do either of these things in a timely manner or upon reasonable terms and conditions |
| In addition, future litigation relating to infringement claims could result in substantial costs to us and a diversion of management resources |
| Adverse determinations in any litigation or proceeding could also subject us to significant liabilities and could prevent us from selling some of our products, services or technologies |
| Despite our efforts to protect our intellectual property rights , third parties may infringe or misappropriate our intellectual property rights, or otherwise independently develop substantially equivalent products and services |
| The loss of intellectual property protection or the inability to secure or enforce intellectual property protection could harm our business and ability to compete |
| We may be required to expend significant resources to protect our trade secrets and monitor and police our intellectual property rights and these efforts may not be uniformly successful |
| Our business is highly dependent on the efficient and uninterrupted operation of our computer network systems and data center, and any disruption or material breach of security of our systems could harm our business |
| Our ability to provide reliable service largely depends on the efficient and uninterrupted operation of our computer network systems and data center |
| Any significant interruptions or security or privacy breaches in our facilities, computer networks and databases could harm our business and reputation, result in a loss of customers or cause inquiries and fines or penalties from regulatory or governmental authorities |
| Our systems and operations could be exposed to damage or interruption from fire, natural disaster, power loss, telecommunications failure, unauthorized entry or physical break-ins, computer viruses and hackers |
| The measures we have enacted, such as the implementation of security access and disaster recovery plans, may not be successful and we may experience problems other than system failures |
| We may also experience software defects, development delays and installation difficulties, which would harm our business and reputation and expo se us to potential liability and increased operating expenses |
| We may not be able to attract, retain or integrate key personnel, which may prevent us from successfully operating our business |
| We may not be able to retain our key personnel or attract other qualified personnel in the future |
| Our success will depend upon the continued service of key management personnel |
| The loss of services of any of the key members of our management team or our failure to attract and retain other key personnel could disrupt operations and have a negative effect on employee productivity and morale and have a material adverse impact upon our financial results |
| Failure to maintain effective internal controls in accordance with Section 404 of the Sarbanes-Oxley Act could have a material adverse e ffect on our business and stock price |
| We are required to certify and report on our compliance with the requirements of Section 404 of the Sarbanes-Oxley Act, which requires annual management assessments of the effectiveness of our internal control over financial reporting and a report by our independent registered chartered accounting firm addressing these assessments |
| If we fail to maintain the adequacy of our internal controls, as such standards are modified, supplemented or amended from time to time, we may not be able to ensure that we can conclude on an ongoing basis that we have effective internal controls over financial reporting in accordance with Section 404 |
| In order to achieve effective internal controls we may need to enhance our accounting systems or processes which could increase our cost of doing business |
| -8- _________________________________________________________________ ______________________________________________________________________ Estimates of future financial results are inherently unreliable |
| From time to time, the Company and its representatives may make public predictions or forecasts regarding the Company’s future results, including estimates regarding future revenues, expense levels, tax rates, acquisition expenses, capital expenditures, earnings or earnings from operations |
| Any forecast regarding our future performance reflects various assumptions and judgments by management regarding the likelihood that certain possible future events will in fact occur |
| These assumptions and judgments are subject to significant uncertainties and shifting market dynamics, and, as a matter of course, many of them will prove to be incorrect |
| Further, events that may seem unlikely or relatively certain at the time a given prediction is made may in fact occur or fail to occur |
| Man y of the factors that can influence the outcome of any prediction or projections are beyond our control |
| As a result, there can be no assurance that our performance will be consistent with any management forecasts or that the variation from such forecasts will not be material and adverse |
| Investors are cautioned that any prediction, projection or other forward looking statement made by us should be considered current only as of the date made |
| Investors are encouraged to utilize the entire available mix of historical and forward-looking information made available by us, and other information relating to our Company and our products and services, when evaluating our prospective results of operations |
| Legislation or regulation could impair our ability to collect and use data, increase our operating costs or otherwise harm our business |
| Existing and new laws and regulations relating to consumer privacy protection could harm our ability to collect and use consumer data, increase our operating costs or otherwise harm our business |
| We collect personal data about consumers for use in our check authorization products |
| Due to increasing public concern over consumer privacy rights, Congress and state legislatures have adopted and are considering adopting laws and regulations restricting the purchase, sale and sharing of personal information about consumers |
| We are unable to predict whether more restrictive legislation or regulations will be adopted in the future |
| A material increase in the scope of these types of restrictions could impair the efficacy of our check authorization products |
| We have a general history of losses and may not operate profitably in the future |
| We have incurred losses for the last five fiscal years |
| Our net losses and negative cash flow may continue for the foreseeable future |
| As of March 31, 2006, our accumulated deficit was approximately dlra30cmam912cmam931 |
| We believe that our planned growth and profitability will depend in large part on our ability to expand our client base |
| Accordingly, we intend to invest in marketing, development of our client base and development of our marketing technology and operating infrastructure |
| If we are not successful in expanding our client base, it will have a material adverse effect on our financial condition and our ability to continue to operate our business |
| Demand for many of our products and services is sensitive to the level of consumer transactions generated by our customers, and accordingly, our revenues could be impacted negatively by a general economic slowdown or any other event causing a material slowing of consumer spending |
| A significant portion of our revenue is derived from transaction processing fees |
| Any changes in economic factors that adversely affect consumer spending and related consumer debt, or a reduction in check writing or credit and debit card usage, could reduce the volume of transactions that we process, and have an adverse effect on our business, financial condition and results of operations |
| -9- _________________________________________________________________ ______________________________________________________________________ We have a long sales cycle for a significant number of our products and if we fail to close sales after expending significant time and resources to do so, our business, financial condition, and results of operations may be adversely affected |
| The implementation of some of our products often involves significant capital commitments by our customers |
| Potential customers generally require us to expend substantial time, effort and money educating them as to the value of our products and services |
| We incur substantial costs in order to obtain each new customer |
| We may expend significant funds and management resources during the sales cycle and ultimately fail to close the sale |
| Our sales cycle may be extended due to our customers’ budgetary constraints or for other reasons |
| If we are unsuccessful in closing sales after expending significant funds and management resources or we experience delays, it could have a material adverse effect on our business, financial condition, and results of operations |
| Failure to maintain existing contracts/customers Because a small number of customers have historically accounted for a substantial portion of our revenue, our revenue could be materially adversely a ffected if we are unable to retain customers |
| We have had in the past and may have in the future, a small number of customers that have accounted for a significant portion of our revenue |
| Our revenue could materially decline because of a delay in signing agreements with a single customer or the failure to retain an existing customer |
| Consolidation in the industries we serve may adversely affect our ability to sell our products and services |
| Mergers, acquisitions and personnel changes at retailers and electronic funds transfer networks may adversely affect our business, financial condition and results of operations |
| The grocery store and supermarket industry continue s to consolidate, causing the number of grocery stores and supermarkets to decline |
| This consolidation could cause us to lose: - current and potential customers; and - market share if an entity resulting from a combination of our customers determines that it is more efficient to develop in-house products and services similar to ours or to use our competitors’ products and services |