UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549


Form 10-Q


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

For the Quarterly Period Ended December 31, 2009

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)

Yukon Territory
  
###-##-####
(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 February 3, 2010, was 27,116,408.



 

LML PAYMENT SYSTEMS INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2009

INDEX
 

 
   
Page Number
     
PART I.
  
     
Item 1.
 
 
 
 
 
     
Item 2.
     
Item 3.
     
Item 4.
     
PART II.
  
     
Item 1.
     
Item 1A.
     
Item 6.
     
 
     

 

In this Quarterly Report on Form 10-Q, unless otherwise indicated, all dollar amounts are expressed in United States Dollars.


 

PART I.
ITEM 1.
CONSOLIDATED FINANCIAL STATEMENTS

LML PAYMENT SYSTEMS INC.

CONSOLIDATED BALANCE SHEETS
(In U.S. Dollars, except as noted below)
(Unaudited)
   
December 31, 2009
    
March 31, 2009
  
ASSETS
  
Current Assets
            
Cash and cash equivalents
   $ 3,979,487     $ 6,138,530  
Funds held in trust
     718,093       -  
Funds held for merchants (Note 8)
     4,266,636       10,746,731  
Restricted cash
     175,000       175,000  
Accounts receivable, less allowances of $30,474 and $31,785, respectively
     756,967       801,087  
Corporate taxes receivable
     582,863       -  
Prepaid expenses
     301,257       295,702  
Current portion of future income tax assets
     1,852,894       838,575  
Total current assets
     12,633,197       18,995,625  
                 
Property and equipment, net
     235,978       227,324  
Patents, net
     497,160       622,730  
Restricted cash
     250,048       125,030  
Future income tax assets
     3,370,685       4,429,578  
Other assets
     20,362       19,020  
Goodwill
     17,874,202       17,874,202  
Other intangible assets, net
     4,834,125       5,205,487  
                 
TOTAL ASSETS
   $ 39,715,757     $ 47,498,996  
                 
LIABILITIES
                
Current Liabilities
                
Accounts payable
   $ 748,215     $ 756,845  
Accrued liabilities
     765,071       814,094  
Corporate taxes payable
     -       283,794  
Funds due to merchants (Note 8)
     4,266,636       10,746,731  
Obligations under capital lease
     30,043       170,243  
Promissory notes
     -       2,100,920  
Current portion of deferred revenue
     1,312,366       1,361,046  
Total current liabilities
     7,122,331       16,233,673  
                 
Deferred revenue
     2,466,031       3,330,630  
                 
TOTAL LIABILITIES
     9,588,362       19,564,303  
Commitments and Contingencies (Note 11)
                
                 
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, 27,116,408 and 27,116,408 issued and outstanding, respectively
     50,039,568       50,039,568  
                 
Contributed surplus
     7,663,735       6,732,059  
Deficit
     (27,680,447 )     (28,751,456 )
Accumulated other comprehensive income (loss)
     104,539       (85,478 )
Total shareholders' equity
     30,127,395       27,934,693  
                 
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
   $ 39,715,757     $ 47,498,996  

See accompanying notes to the unaudited 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
December 31
    
Nine months Ended
December 31
  
                         
   
2009
    
2008
    
2009
    
2008
  
                         
REVENUE
   $ 4, 742,568     $ 3,037,241     $ 11,229,773     $ 9,301,687  
COST OF REVENUE (includes stock-based compensation (“s.b.c.”) expense of $37,464 for three months ended December 31, 2009 (three months ended December 31, 2008 - $37,464) and $111,579 for nine months ended December 31, 2009 (nine months ended December 31, 2008 - $113,066))
     2,329,810       1,560,708       5,670,576       4,580,407  
GROSS PROFIT (excludes amortization and depreciation expense)
     2,412,758       1,476,533       5,559,197       4,721,280  
                                 
OPERATING EXPENSES
                                
General and administrative (includes s.b.c. expense of $243,028 for three months ended December 31, 2009 (three months ended December 31, 2008 - $274,297) and $781,386 for nine months ended December 31, 2009 (nine months ended December 31, 2008- $871,255))
     1,059,165       962,623       3,083,629       3,209,063  
Sales and marketing (includes s.b.c. expense of $765 for three months ended December 31, 2009 (three months ended December 31, 2008 - $765) and $2,277 for nine months ended December 31, 2009 (nine months ended December 31, 2008 - $2,285))
     103,481       77,149       296,084       237,715  
Product development and enhancement (includes s.b.c. expense of $12,233 for three months ended December 31, 2009 (three months ended December 31, 2008 - $12,233) and $36,434 for nine months ended December 31, 2009 (nine months ended December 31, 2008 - $36,567))
     122,759       58,279       342,585       197,589  
Amortization and depreciation
     200,346       197,102       596,930       589,654  
(Gain) on sale of assets
     -       -       (3,830 )     (864 )
                                 
INCOME BEFORE OTHER INCOME (EXPENSES) AND INCOME TAXES
     927,007       181,380       1,243,799       488,123  
 
                                
Foreign exchange gain
     10,928       281,682       135,296       380,650  
Other income (expenses)
     -       10,833       (50,641 )     29,808  
Interest income
     4,285       58,750       20,549       202,719  
Interest expense
     (846 )     (45,269 )     (47,676 )     (204,154 )
                                 
INCOME   BEFORE INCOME TAXES
     941,374       487,376       1,301,327       897,146  
Income tax expense (recovery) (Note 10)
                                
Current
     (324,275 )     206,074       (323,647 )     597,018  
Future
     650,119       -       553,965       -  
      325,844       206,074       230,318       597,018  
                                 
NET INCOME
     615,530       281,302       1,071,009       300,128  
                                 
DEFICIT, beginning of period
     (28,295,977 )     (34,187,796 )     (28,751,456 )     (34,206,622 )
                                 
DEFICIT, end of period
   $ (27,680,447 )   $ (33,906,494 )   $ (27,680,447 )   $ (33,906,494 )
                                 
EARNINGS  PER SHARE, basic and diluted
   $ 0.02     $ 0.01     $ 0.04     $ 0.01  
                                 
WEIGHTED AVERAGE SHARES OUTSTANDING
                                
Basic
     27,116,408       27,116,408       27,116,408       26,741,795  
Diluted
     27,252,792       27,116,408       27,150,430       26,741,795  


See accompanying notes to the unaudited consolidated financial statements.

-2-


LML PAYMENT SYSTEMS INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In U.S. Dollars)
(Unaudited)


   
Three Months Ended
December 31
    
Nine months Ended
December 31
  
                         
   
2009
    
2008
    
2009
    
2008
  
                         
Net income
   $ 615,530     $ 281,302     $ 1,071,009     $ 300,128  
Unrealized foreign exchange gain on translation of self- sustaining operations
     23,174       782       190,017       14,332  
Comprehensive income
   $ 638,704     $ 282,084     $ 1,261,026     $ 314,460  
                                 













































See accompanying notes to the unaudited consolidated financial statements.

-3-

LML PAYMENT SYSTEMS INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(In U.S. Dollars)
(Unaudited)

   
Three Months Ended
December 31
    
Nine months Ended
December 31
  
                         
   
2009
    
2008
    
2009
    
2008
  
                         
Operating Activities:
                        
Net income
   $ 615,530     $ 281,302     $ 1,071,009     $ 300,128  
Adjustments to reconcile net income to net cash provided by (used in) operating activities
                                
Provision for losses on accounts receivable
     -       -       5,705       -  
Amortization and depreciation
     200,346       197,102       596,930       589,654  
Gain on sale of  assets
     -       -       (3,830 )     (864 )
Stock-based compensation
     293,490       324,759       931,676       1,023,173  
Future income taxes
     650,119       -       553,965       -  
Foreign exchange (gain) loss
     (52,253 )     (302,231 )     (331,716 )     (298,891 )
                                 
Changes in non-cash operating working capital
                                
Funds held in trust
     (718,093 )     -       (718,093 )     -  
Restricted cash
     (100,000 )     -       (100,000 )     125,000  
Accounts receivable
     (145,436 )     1,217       71,714       136,826  
Corporate taxes receivable
     (432,147 )     -       (582,863 )     -  
Prepaid expenses
     152,228       (21,094 )     3,202       (31,127 )
Accounts payable and accrued liabilities
     (4,503 )     31,649       (70,949 )     (801,937 )
Corporate taxes payable
     (6,991 )     55,872       (327,673 )     (517,121 )
Deferred revenue
     (377,545 )     (348,875 )     (923,947 )     (1,108,374 )
Net cash provided by (used in) operating activities
     74,745       219,701       175,130       (583,533 )
                                 
Investing Activities:
                                
Acquisition of property and equipment
     (75,497 )     (16,744 )     (90,017 )     (106,147 )
Proceeds from disposal of property and equipment
     -       -       3,830       5,500  
Development of patents
     -       -       -       (1,652 )
Net cash used in investing activities
     (75,497 )     (16,744 )     (86,187 )     (102,299 )
                                 
Financing Activities:
                                
Payments on capital leases
     (39,552 )     (48,939 )     (140,882 )     (142,335 )
Payment on promissory notes
     -       -       (2,321,460 )     (2,843,974 )
Share capital financing costs
     -       -       -       (3,537 )
Net cash used in financing activities
     (39,552 )     (48,939 )     (2,462,342 )     (2,989,846 )
                                 
Effects of foreign exchange rate changes on cash and cash equivalents
     16,457       (54,565 )     214,356       (39,236 )
                                 
 (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
     (23,847 )     99,453       (2,159,043 )     (3,714,914 )
                                 
Cash and cash equivalents, beginning of period
     4,003,334       5,935,401       6,138,530       9,749,768  
                                 
Cash and cash equivalents, end of period
   $ 3,979,487     $ 6,034,854     $ 3,979,487     $ 6,034,854  
                                 
Supplemental disclosure of cash flow information
                                
Interest paid
   $ 846     $ 4,581     $ 47,939     $ 411,171  
Taxes paid
     -     $ 201,476     $ 435,138     $ 1,173,893  
                                 
Non-cash investing and financing transactions not included in cash flows:
                                
                                 
Issuance of common shares pursuant to earn-out provision
     -       -       -     $ 1,971,125  



See accompanying notes to the unaudited consolidated financial statements.

-4-

LML PAYMENT SYSTEMS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1.
Basis of Presentation

The consolidated balance sheet as of December 31, 2009, the consolidated statements of operations and deficit for the three and nine months ended December 31, 2009 and 2008, the consolidated statements of cash flows for the three and nine months ended December 31, 2009 and 2008 and the consolidated statements of comprehensive income for the three and nine months ended December 31, 2009 and 2008, of LML Payment Systems Inc. and its subsidiaries (collectively, the “Corporation”) are unaudited. 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 balance sheet as of March 31, 2009, was derived from audited financial statements. 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 annual audited consolidated financial statements and notes. Unless otherwise noted, the accounting policies of the Corporation are unchanged from the Corporation’s annual audited consolidated financial statements contained in the Corporation's Annual Report on Form 10-K for the fiscal year ended March 31, 2009. The consolidated financial statements and notes appearing in this report should be read in conjunction with the Corporation's annual audited consolidated 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, 2009, as filed with the Securities and Exchange Commission on June 23, 2009 (file no. 000-13959).

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
Legacy Promotions Inc.
Beanstream Internet Commerce Inc. (“Beanstream”)
0858669 B.C. Ltd.

UNITED STATES
LHTW Properties Inc.
LML Corp.
LML Patent Corp.
LML Payment Systems Corp.
Beanstream Internet Commerce Corp.
 
2.
Significant Accounting Policies
 
All significant accounting policies remain unchanged from the Corporation’s audited consolidated financial statements contained in the Corporation’s Annual Report on Form 10-K for the fiscal year ended March 31, 2009, as filed with the Securities and Exchange Commission on June 23, 2009 (file no. 000-13959), except as noted below:

Revenue Recognition

In addition to recognizing revenue in accordance with the Canadian Institute of Chartered Accountants (“CICA”) Handbook Section 3400, “Revenue” and with the corresponding U.S. Guidance SAB 104, “Revenue Recognition”, the Corporation has adopted the provisions of CICA’s Emerging Issues Committee Abstract of Issues Discussed, “Multiple Deliverable Revenue Arrangements” (“EIC 175”), issued on December 24, 2009, regarding revenue arrangements with multiple deliverables that are outside the scope of the software revenue recognition guidance.

Within the Intellectual Property Licensing (“IPL”) segment, when a subsidiary of the Corporation enters into licensing and settlement agreements with its licensees comprising multiple elements, the significant factors, inputs, assumptions and methods used in determining the total arrangement consideration include reviewing royalty rates from existing licenses, depth of usage, including transaction volumes, by the existing licensees of the IPL segment’s intellectual property and estimation of the expected usage by licensees of the IPL segment’s intellectual property.  Total arrangement consideration is allocated to each of the following deliverables using the relative selling price method:


-5-
 
 
2.
Significant Accounting Policies (continued)
 
·  
Licenses – licenses are issued for the use of existing patents;
·  
Release from litigation – the subsidiary of the Corporation releases the licensees from any claims or causes of action for patent infringement as of the effective date of the underlying agreement;
·  
Covenant-not-to-sue provision – the subsidiary of the Corporation agrees to a covenant-not-to-sue provision for infringement of any patents for a specified period commencing on the effective date of the underlying agreement.
 
As the license and release elements are fully delivered as of the effective date of the underlying agreement, revenue related to these elements is recognized at that time, assuming (i) there is persuasive evidence of an arrangement, (ii) the fee is fixed or determinable and (iii) there are no concerns over collectability of the arrangement proceeds.  As the covenant-not-to-sue typically includes as-yet unidentified patents which may be acquired during the specified term (a when-and-if available deliverable), proceeds allocated to this element are recognized ratably over the specified period, assuming all other revenue recognition criteria have been met.


3.
Change in Accounting Policy

EIC 175 does not differ materially from the application required under the FASB issued authoritative guidance on revenue arrangements that include certain software-related elements. Under the new FASB guidance, for arrangements that include software elements, tangible products with software components that are essential to the functionality of the tangible product will no longer be within the scope of the software revenue recognition guidance, and such software-enabled products will now be subject to other relevant revenue recognition guidance. Additionally, EIC 175 also does not differ materially from the application under the FASB issued authoritative guidance on multiple-deliverable revenue arrangements. Under the new FASB guidance, when vendor specific objective evidence or third party evidence for deliverables in an arrangement cannot be determined, a best estimate of the selling price is required to separate deliverables and allocate arrangement consideration using the relative selling price method. The new guidance includes new disclosure requirements on how the application of the relative selling price method affects the timing and amount of revenue recognition.

During the quarter ended December 31, 2009, the Corporation early adopted the provisions of EIC 175 and retrospectively applied the guidance as at April 1, 2009. The effect of the retrospective adoption had no impact on amounts previously reported during the prior interim periods in the current fiscal year.


4.
Recent accounting pronouncements

Business Combinations

In December 2008, CICA issued Section 1582 – “Business Combinations”, which will replace Section 1581 – “Business Combinations”.  This section establishes revised standards for the accounting for a business combination which are aligned with International Financial Reporting Standards (“IFRS”) on business combinations.  The Section applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after January 1, 2011.  The Corporation has not yet determined what the impact of adopting this standard will have on the consolidated financial statements.

International Financial Reporting Standards

The Accounting Standards Board of the CICA announced that Canadian generally accepted accounting principles (“Canadian GAAP”) for publicly accountable enterprises will be replaced with IFRS, as published by the International Accounting Standards Board, for fiscal years beginning on or after January 1, 2011.  Early conversion to IFRS for fiscal years beginning on or after January 1, 2009 may also be permitted.

Implementing IFRS will have an impact on accounting, financial reporting and supporting IT systems and processes.  It may also have an impact on taxes, contractual commitments involving clauses based on generally accepted accounting principles, long-term employee compensation plans and performance metrics.  Accordingly, when the Corporation develops its IFRS implementation plan, it will have to include measures to provide extensive training to key finance personnel, to review contracts and agreements and to increase the level of awareness and knowledge among management, the Board of Directors and Audit Committee.  Additional resources may be engaged to ensure the timely conversion to IFRS.  The financial impact of the transition to IFRS cannot be reasonably estimated at this time.

-6-


4.
Recent accounting pronouncements (continued)

Consolidated Financial Statements and Non-Controlling Interests

In January 2009, the CICA issued CICA Handbook Section 1601, “Consolidated Financial Statements” and Section 1602, “Non-controlling interest”. Together these sections replace the former Section 1600, “Consolidated Financial Statements”.   Section 1601 establishes standards for the preparation of consolidated financial statements.  Section 1602 establishes standards for accounting for a non-controlling interest in a subsidiary in consolidated financial statements subsequent to a business combination and is equivalent to the corresponding provisions of International Financial Reporting Standard IAS 27, “Consolidated and Separate Financial Statements”.

The new standards result in measuring business acquisitions at the fair value of the acquired business and a prospectively applied shift from a parent corporation conceptual view of consolidation theory (which results in the parent corporation recording book values attributable to non-controlling interests) to an entity conceptual view (which results in the parent corporation recording fair values attributable to non-controlling interests).

These sections apply to interim and annual consolidated financial statements relating to fiscal years beginning on or after January 1, 2011 and are to be applied prospectively. Earlier adoption is permitted as of the beginning of a fiscal year. An entity adopting these Sections for a fiscal year beginning before January 1, 2011 also adopts Section 1582, “Business Combinations”.

The Corporation does not intend to early apply these sections.  The impact on the Corporation’s consolidated financial statements from the application of these sections will depend upon the nature of any future business acquisitions made by the Corporation after adoption.

Financial Instruments – Recognition and Measurement

On May 29, 2009, CICA’s Accounting Standards Board (“AcSB”) issued an Exposure Draft that proposes to amend CICA Handbook Section 3855, “Financial Instruments — Recognition and Measurement”, to converge with international standards.  The proposed amendment will have the following impact:

·  
The amendment clarifies that if an entity reclassifies a financial asset out of the held-for-trading category, it must assess whether the financial asset contains an embedded derivative that is required to be separated from the host contract. This assessment is made on the basis of circumstances that existed on the later date of specified dates provided in the amendment.

·  
If an embedded derivative cannot be measured reliably, the entity is prohibited from reclassifying the asset from held-for-trading.

·  
When a financial asset or a group of similar financial assets (other than the loans and receivables category) has been written down as a result of an impairment loss, interest income is recognized thereafter using the rate of interest used in the measurement of the impairment loss.

·  
An embedded call, put, surrender or prepayment option is closely related to the host debt instrument when its exercise price reimburses the lender for an amount up to the approximate present value of the lost interest. Calculation guidance to determine the lost interest is provided in the amendment.

The amendment is applicable for years ending on or after October 31, 2009 and will be applied prospectively.  The adoption of this amendment did not have an impact on the Corporation’s consolidated financial statements.


-7-

5.
Foreign currency translation

Except as described below, the Corporation’s functional and reporting currency is the United States dollar.  Monetary assets and liabilities denominated in foreign currencies are translated in accordance with CICA Handbook Section 1651 “Foreign Currency Translation” (“Section 1651”) (and the Financial Accounting Standards Board (“FASB”) issued authoritative guidance regarding foreign currency translation) using the exchange rate prevailing at the balance sheet date and non-monetary assets and liabilities are translated at exchange rates prevailing at the historical transaction date.  Average rates for the period are used to translate the Corporation’s revenue and expenses. Gains and losses arising on settlement of foreign currency denominated transactions or balances are included in the determination of income.

The functional currency of the Corporation’s Beanstream subsidiary is the Canadian dollar.  Beanstream’s financial statements are translated to United States dollars under the current rate method in accordance with Section 1651 and the FASB issued authoritative guidance regarding foreign currency translation.  Beanstream’s assets and liabilities are translated into U.S. dollars at rates of exchange in effect at the balance sheet date.  Average rates for the period are used to translate Beanstream’s revenues and expenses.  Gains and losses arising on the translation of Beanstream’s financial statements are reported as a cumulative translation adjustment which is a component of accumulated other comprehensive income.

6.
Economic dependence

During the three months ended December 31, 2009, revenue from the Corporation’s two largest customers amounted to approximately 22.7% of the Corporation’s total revenue for the first customer (2008 – NIL%) and 12.1% for the second customer (2008 – 19.3%). Revenue from these customers amounted to approximately $1,077,113 for the first customer (2008 - $NIL) and $574,690 for the second customer (2008 - $585,500).  The Corporation is economically dependent on revenue from the second customer as the revenue from the first customer is non-recurring.

During the nine months ended December 31, 2009, revenue from the Corporation’s largest customer amounted to approximately 15.5% of total revenue (2008 – 18.5%). Revenue from this customer amounted to approximately $1,736,013 (2008 - $1,717,463).  The Corporation is economically dependent on revenue from this customer.
 
7.
Financial instruments
 
 
(a)
The Corporation classifies its cash and cash equivalents, funds held in trust, 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, funds due to merchants, and promissory notes are classified as other liabilities, all of which are measured at amortized cost (using the effective interest rate method).

Carrying value and fair value of financial assets and liabilities as at December 31, 2009 and March 31, 2009 are summarized as follows:


   
December 31, 2009
    
March 31, 2009
  
   
Carrying Value
    
Fair Value
    
Carrying Value
    
Fair Value
  
                         
Held-for-Trading
   $ 9,389,264     $ 9,389,264     $ 17,185,291     $ 17,185,291  
Loans and receivables
     756,967       756,967       801,087       801,087  
Held-to-maturity
     -       -       -       -  
Available-for-sale
     -       -       -       -  
Other liabilities
     5,779,922       5,779,922       14,418,590       14,418,590  


Management reviewed all significant financial instruments held by the Corporation and determined that no material differences between fair value and carrying value existed as at the reporting date.

-8-

7.
Financial Instruments (continued)

 
(b)
Funds held in trust

 
During the three and nine month period ended December 31, 2009, $718,093 in cash was held in trust for a subsidiary of the Corporation by the Corporation’s legal firm.  This cash was received pursuant to a Settlement and License Agreement entered into by a subsidiary of the Corporation with one of the defendants in the patent infringement lawsuit originally filed on November 19, 2008 in the U.S. District Court for the Eastern District of Texas against nineteen defendants in the United States alleging that the defendants infringe U.S. Patent No. RE40220.   Subsequent to the three and nine months ended December 31, 2009, the cash was released from trust to the subsidiary of the Corporation.

 
(c)
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, 2009 - $175,000) against chargeback losses.  Non-current restricted cash represents funds held by a third party processor as security for the Corporation’s merchant accounts.

 
(d)
Market Risk

Currency Risk

The Corporation’s functional currency is the U.S. dollar except for the Corporation’s Beanstream subsidiary whose functional currency is the Canadian dollar.  The Corporation is exposed to foreign exchange risk from fluctuations in exchange rates between the U.S. dollar and the Canadian dollar.  Significant losses may occur due to significant balances of cash and cash equivalents and short-term investments held in Canadian dollars that may be affected negatively by an increase in the value of the U.S. dollar as compared to the Canadian dollar. The Corporation has not hedged its exposure to foreign currency fluctuations.

As at December 31, 2009 and March 31, 2009, the Corporation is exposed to currency risk through its cash and restricted cash, accounts receivable, accounts payable, accrued liabilities and promissory notes denominated in Canadian dollars as follows:
 
   
December 31, 2009
    
March 31, 2009
  
             
Cash and restricted cash
   $ 38,121     $ 1,172,539  
Accounts receivable
     -       50,476  
Accounts payable
     89,799       132,570  
Accrued liabilities
     282,518       333,360  
Promissory notes
     -       2,100,920  
 
Based on the above foreign currency exposure as at December 31, 2009 and March 31, 2009 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 $33,420 and $134,384 respectively, in the Corporation’s foreign currency loss/gain.

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 are short-term in nature and its pr