receipt. Such a U.S. Holder generally will recognize ordinary income or loss on the subsequent sale or other taxable disposition of such foreign currency, including an exchange for U.S. dollars.
Dividends paid on our common shares generally will not be eligible for the “dividends received deduction.” The availability of the dividends received deduction is subject to complex limitations that are beyond the scope of this discussion, and a U.S. Holder that is a corporation should consult its own financial advisor, legal counsel or accountant regarding the dividends received deduction.
A U.S. Holder will recognize gain or loss on the sale or other taxable disposition of our common shares in an amount equal to the difference, if any, between (a) the amount of cash plus the fair market value of any property received and (b) such U.S. Holder’s tax basis in our common shares sold or otherwise disposed. Any such gain or loss generally will be capital gain or loss, which will be long-term capital gain or loss if the common shares are held for more than one year. Gain or loss recognized by a U.S. Holder on the sale or other taxable disposition of our common shares generally will be treated as “U.S. source” for purposes of the foreign tax credit rules. For a more detailed discussion, see “Foreign Tax Credit” below.
Preferential tax rates apply to long-term capital gains of a U.S. Holder that is an individual, estate or trust. There currently are no preferential tax rates for long-term capital gains of a U.S. Holder that is a corporation. Deductions for capital losses and net capital losses are subject to complex limitations. For a U.S. Holder that is an individual, estate or trust, capital losses may be used to offset capital gains and up to U.S.$3,000 of ordinary income. An unused capital loss of a U.S. Holder that is an individual, estate or trust generally may be carried forward to subsequent taxable years, until such net capital loss is exhausted. For a U.S. Holder that is a corporation, capital losses may be used to offset capital gains, and an unused capital loss generally may be carried back three years and carried forward five years from the year in which such net capital loss is recognized.
A U.S. Holder who pays Canadian income tax, directly or through withholding, with respect to dividends paid on our common shares generally will be entitled, at the election of such U.S. Holder, to receive either a deduction or a credit for such Canadian income tax paid. Generally, a credit will reduce a U.S. Holder’s U.S. federal income tax liability on a dollar-for-dollar basis, whereas a deduction will reduce a U.S. Holder’s income subject to U.S. federal income tax. This election is made on a year-by-year basis and applies to all foreign taxes paid, whether directly or through withholding, by a U.S. Holder during a year.
Complex limitations apply to the foreign tax credit, including the general limitation that the credit cannot exceed the proportionate share of a U.S. Holder’s U.S. federal income tax liability that such U.S. Holder’s “foreign source” taxable income bears to such U.S. Holder’s worldwide taxable income. In applying this limitation, a U.S. Holder’s various items of income and deduction must be classified, under complex rules, as either “foreign source” or “U.S. source.” In addition, this limitation is calculated separately with respect to specific categories of income, including “passive income,” “high withholding tax interest,” “financial services income,” “shipping income,” and certain other categories of income. Dividends paid by us generally will constitute “foreign source” income and generally will be classified as “passive income” or, in the case of certain U.S. Holders, “financial services income.” In addition, a U.S. Holder that is a corporation and that owns 10% or more of our voting stock may, subject to complex limitations, be entitled to an “indirect” foreign tax credit under Section 902 of the Code with respect to dividends paid by us. The foreign tax credit rules are complex, and each U.S. Holder should consult its own financial advisor, legal counsel or accountant regarding the foreign tax credit rules.
Payments made within the U.S. of dividends on, and proceeds arising from certain sales or other taxable dispositions of, common shares generally will be subject to information reporting and backup withholding tax, at the rate of 28%, if a U.S. Holder (a) fails to furnish such U.S. Holder’s correct U.S. taxpayer identification number, generally on Form W-9, (b) furnishes an incorrect U.S. taxpayer identification number, (c) is notified by the IRS that
such U.S. Holder has previously failed to properly report items subject to backup withholding tax or (d) fails to certify, under penalty of perjury, that such U.S. Holder has furnished its correct U.S. taxpayer identification number and that the IRS has not notified such U.S. Holder that it is subject to backup withholding tax. However, U.S. Holders that are corporations generally are excluded from these information reporting and backup withholding tax rules. Any amounts withheld under the U.S. backup withholding tax rules will be allowed as a credit against a U.S. Holder’s U.S. federal income tax liability, if any, or will be refunded, if such U.S. Holder furnishes required information to the IRS. Each U.S. Holder should consult its own financial advisor, legal counsel or accountant regarding the information reporting and backup withholding tax rules.
Additional Rules that May Apply to U.S. Holders
If we are deemed to be a “foreign personal holding company,” a “foreign investment company,” a “controlled foreign corporation” or a “passive foreign investment company” (each as defined below), the preceding sections of this summary may not describe the U.S. federal income tax consequences to U.S. Holders of the acquisition, ownership and disposition of our common shares.
Foreign Personal Holding Company
We generally will be a “foreign personal holding company” under Section 552 of the Code, referred to below as an “FPHC,” if: (a) at any time during a taxable year, more than 50% of the total voting power or the total value of our outstanding shares is owned, directly or indirectly, by five or fewer individuals who are citizens or residents of the U.S. and (b) 60%, or 50% in certain cases, or more of our gross income for such taxable year is FPHC income. “FPHC income” includes, for example, dividends, interest, certain rents and royalties, certain gains from the sale of stock and securities and certain gains from commodities transactions.
If we are deemed to be a FPHC, a U.S. Holder generally will be required to include in gross income of such U.S. Holder’s allocable portion of our “undistributed foreign personal holding company income,” as defined in Section 556 of the Code. We do not believe that we have previously been, or currently are, a FPHC. The FPHC rules are repealed for tax years of foreign corporations beginning after December 31, 2004, and for tax years of U.S. Holders with or within which such tax years of foreign corporations end.
Foreign Investment Company
We generally will not be deemed a “foreign investment company” under Section 1246 of the Code, referred to below as an “FIC” if: (a) 50% or more of the total voting power or the total value of our outstanding shares is owned, directly or indirectly, by citizens or residents of the U.S., domestic partnerships, domestic corporations, domestic estates, or domestic trusts (each as defined in Section 7701(a)(30) of the Code) and (b) we are (i) registered under the U.S. Investment Company Act of 1940, as amended, as a “management company” or a “unit investment trust” or (ii) engaged primarily in the business of investing, reinvesting or trading in securities, commodities or any interest in securities or commodities.
If we are determined to be a FIC, all or part of any gain recognized by a U.S. Holder on the sale or other taxable disposition of common shares will be treated as ordinary income, rather than as capital gain. We do not believe that we have previously been, or currently are, a FIC. The FIC rules are repealed for tax years of foreign corporations beginning after December 31, 2004, and for tax years of U.S. Holders with or within which such tax years of foreign corporations end.
Controlled Foreign Corporation
We generally will be a “controlled foreign corporation” under Section 957 of the Code, referred to below as a “CFC,” if more than 50% of the total voting power or the total value of our outstanding shares is owned, directly or indirectly, by citizens or residents of the U.S., domestic partnerships, domestic corporations, domestic estates or domestic trusts, (each as defined in Section 7701(a)(30) of the Code), each of which own, directly or indirectly, 10% or more of the total voting power of our outstanding shares, referred to below as a “10% Shareholder”.
If we are deemed to be a CFC, a 10% Shareholder generally will be subject to current U.S. federal income tax with respect to (a) such 10% Shareholder’s pro rata share of our “subpart F income” (as defined in Section 952
45
of the Code) and (b) such 10% Shareholder’s pro rata share of our earnings invested in “United States property” (as defined in Section 956 of the Code). In addition, under Section 1248 of the Code, any gain recognized on the sale or other taxable disposition of common shares by a U.S. Holder that was a 10% Shareholder at any time during the five-year period ending with such sale or other taxable disposition generally will be treated as a dividend to the extent of our “earnings and profits” that are attributable to such common shares. If we are deemed to be both a CFC and a “passive foreign investment company,” as defined below, we generally will be treated as a CFC, and not as a “passive foreign investment company,”with respect to any 10% Shareholder.
We do not believe that we have previously been, or currently are, a CFC. However, there can be no assurance that we will not be a CFC for the current or any future taxable year.
Passive Foreign Investment Company
We generally will be a “passive foreign investment company” under Section 1297 of the Code, referred to below as a “PFIC,” if, for a taxable year (a) 75% or more of our gross income for such taxable year is passive income or (b) 50% or more of the assets held by us either produce passive income or are held for the production of passive income, based on the fair market value of such assets. “Passive income” includes, for example, dividends, interest, certain rents and royalties, certain gains from the sale of stock and securities, and certain gains from commodities transactions.
For purposes of the PFIC income test and assets test described above, if we own, directly or indirectly, 25% or more of the total value of the outstanding shares of another foreign corporation, we will be treated as if we (a) held a proportionate share of the assets of such other foreign corporation and (b) received directly a proportionate share of the income of such other foreign corporation. In addition, for purposes of the PFIC income test and asset test described above, “passive income” does not include any interest, dividends, rents or royalties that are received or accrued by us from a “related person,” as defined in Section 954(d)(3) of the Code, to the extent such items are properly allocable to the income of such related person that is not passive income.
If we are a PFIC, the U.S. federal income tax consequences to a U.S. Holder of the acquisition, ownership and disposition of our common shares will depend on whether such U.S. Holder makes an election to treat us as a “qualified electing fund” or “QEF” under Section 1295 of the Code, referred to below as a “QEF Election” or a mark-to-market election under Section 1296 of the Code, referred to below as a “Mark-to-Market Election.” A U.S. Holder that does not make either a QEF Election or a Mark-to-Market Election will be referred to in this summary as a “Non-Electing U.S. Holder.”
Under Section 1291 of the Code, any gain recognized on the sale or other taxable disposition of our common shares, and any “excess distribution,” as defined in Section 1291(b) of the Code paid on our common shares, must be ratably allocated to each day in a Non-Electing U.S. Holder’s holding period for our common shares. The amount of any such gain or excess distribution allocated to prior years of such Non-Electing U.S. Holder’s holding period for our common shares generally will be subject to U.S. federal income tax at the highest tax applicable to ordinary income in each such prior year. A Non-Electing U.S. Holder will be required to pay interest on the resulting tax liability for each such prior year, calculated as if such tax liability had been due in each such prior year.
A U.S. Holder that makes a QEF Election generally will not be subject to the rules of Section 1291 of the Code discussed above. However, a U.S. Holder that makes a QEF Election generally will be subject to U.S. federal income tax on such U.S. Holder’s pro rata share of (a) our “net capital gain,” which will be taxed as long-term capital gain to such U.S. Holder, and (b) and our “ordinary earnings,” which will be taxed as ordinary income to such U.S. Holder. A U.S. Holder that makes a QEF Election will be subject to U.S. federal income tax on such amounts for each taxable year in which we are a PFIC, regardless of whether we actually distribute such amounts to such U.S. Holder.
A U.S. Holder that makes a Mark-to-Market Election generally will not be subject to the rules of Section 1291 of the Code discussed above. A U.S. Holder may make a Mark-to-Market Election only if the common shares are “marketable stock,” as defined in Section 1296(e) of the Code. A U.S. Holder that makes a Mark-to-Market Election will include in gross income, for each taxable year in which we are a PFIC, an amount equal to the excess, if any, of (a) the fair market value of our common shares as of the close of such taxable year
46
over (b) such U.S. Holder’s tax basis in such common shares. A U.S. Holder that makes a Mark-to-Market Election will, subject to certain limitations, be allowed a deduction in an amount equal to the excess, if any, of (a) such U.S. Holder’s adjusted tax basis in our common shares over (b) the fair market value of such common shares as of the close of such taxable year.
We do not believe that we were a PFIC for the taxable year ended June 30, 2005. There can be no assurance, however, that the IRS will not challenge our determination concerning our PFIC status or that we will not be a PFIC for the current or any future taxable year.
The PFIC rules are complex, and each U.S. Holder should consult its own financial advisor, legal counsel, or accountant regarding the PFIC rules and how the PFIC rules may affect the U.S. federal income tax consequences of the acquisition, ownership and disposition of our common shares.
10.FDividends and paying agents
Not applicable.
10.GStatement by experts
Not applicable.
10.HDocuments on display
Copies of material contracts herein described may be examined at our head office located at Unit 101, 3820 Jacombs Road, Richmond, British Columbia, V6V 1Y6 during normal business hours. The documents referred to in this report can also be read the Securities and Exchange Commission public reference facilities at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549.
WE ARE REQUIRED TO FILE REPORTS AND OTHER INFORMATION WITH THE SEC UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. REPORTS AND OTHER INFORMATION WE FILED WITH THE SEC MAY BE INSPECTED AND COPIED AT THE SEC’S PUBLIC REFERENCE FACILITIES DESCRIBED ABOVE. AS A FOREIGN PRIVATE ISSUER, WE ARE EXEMPT FROM THE RULES UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED PRESCRIBING THE FURNISHING AND CONTENT OF PROXY STATEMENTS AND OUR OFFICERS, DIRECTORS AND PRINCIPAL SHAREHOLDERS ARE EXEMPT FROM THE REPORTING AND SHORT-SWING PROFIT RECOVERY PROVISIONS CONTAINED IN SECTION 16 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED, AS A FOREIGN PRIVATE ISSUER, WE ARE NOT REQUIRED TO PUBLISH FINANCIAL STATEMENTS AS FREQUENTLY OR AS PROMPTLY AS UNITED STATES COMPANIES.
10.ISubsidiary information
Not applicable.
Item 11 Quantitative and Qualitative Disclosures About Market Risk
We do not believe we have any material exposure to interest or commodity risks. We do not own any derivative instruments, do not engage in any hedging transactions and do not have any outstanding long-term debt.
Item 12 Description of Securities Other Than Equity Securities
12.ADebt securities.
Not applicable.
47
12.BWarrants and rights
Not applicable.
12.COther securities
Not applicable.
12.DAmerican depositary shares
Not applicable.
PART II
Item 13 Defaults, dividends arrearages and delinquencies.
Not applicable.
Item 14 Material modifications to the rights of security holders and use of proceeds
Not applicable.
Item 15 Controls and Procedures
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, referred to below as the “Exchange Act”). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective in timely alerting them to the material information relating to us (or our consolidated subsidiaries) required to be included in the reports we file or submit under the Exchange Act.
During the period covered by this annual report, there has been no change in our internal control over financial reporting (as defined in Rule 13a-15(f)under the Exchange Act) that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Item 16
16.A Audit Committee Financial Expert
All of the members of the Audit Committee are financially literate and the Board has determined that Mr Steve Garman meets the requirements of an “audit committee financial expert” as defined by the SEC. Mr. Garman is not an “independent director” as defined in Rule 10A-3 of the Securities Exchange Act of 1934, as amended, or Section 121B of the American Stock Exchange Company Guide related to audit committee requirements for listed companies Mr. Garman received his Bachelor of Science Degree in Business Management and Administration from Indiana University’s Kelley School of Business in 1969. Mr. Garman has over 35 years of business experience in the international corporate environment and a diversified management background including senior executive positions in varied industries such as health care services, high tech medical devices, computer products, OEM manufacturing, and sports and recreation. He has held multi-million dollar P & L responsibility with Olympus America, Inc.
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16.B Code of Ethics
We developed, and our board subsequently adopted, a Code of Ethics to reflect SEC rules and other proposed regulations. The Code of Ethics governs the actions of and is applicable to all of our directors and officers and our subsidiary and its affiliates. The Code of Ethics deals with the following issues:
| | • | compliance with all the laws and regulations identified in the Code of Ethics; |
| | • | corporate opportunities and conflicts of interest; |
| | • | the quality of the public disclosures; |
| | • | the protection and appropriate use of our properties; |
| | • | the protection of confidential information and property; |
| | • | compliance with insider trading and corrupt practices legislation; |
A copy of our Code of Ethics is filed as an exhibit to the 20-F for the year ended June 30, 2004, filed with the Securities & Exchange Commission on December 17, 2005. All interested investors may acquire a copy of our Code of Ethics free of charge by sending electronic mail to the attention of investor relations on our website athttp://www.qisystems.ca.
There have been no waivers to the Code of Ethics in the fiscal year ended June 30, 2005.
16.C Principal Accountant Fees and Services
Amisano Hanson, Chartered Accountants, was our external auditor for the financial year ending June 30, 2005 and 2004 after being appointed on July 7, 2004. Wolrige Mahon, Chartered Accountants, was our external auditor for the fiscal year ended June 30, 2003.
The following table charts the external auditors’ fees for each of the financial years ending June 30, 2005 and June 30, 2004 by category:
|
| | Years ended June 30 | Total (1) |
|
| | 2005 | 2004 |
|
| Audit Fees: | Cdn$29,755 | Cdn$20,000 | Cdn$49,755 |
|
| Audit Related Fees (2) | Nil | Nil | Nil |
|
| Tax Fees (3) | Cdn$795 | Nil | Cdn$795 |
|
| All Other Fees (4) | Nil | Nil | Nil |
|
| Total | Cdn$30,550 | Cdn$20,000 | $50,550 |
|
| (1) | Aggregate fees billed by the external auditor in each of the last two financial years. |
| (2) | Fees billed for assurances and related services that are reasonably related to the performance of the audit or review of our financial statements and are not reported under “Audit Fees”. |
| (3) | Aggregate fees billed for professional services rendered for tax compliance, tax advice, and tax planning. |
| (4) | Aggregate fees for products and services provided other than the services reported under the three previous rows. |
Pre-Approval Policies and Procedures
The Audit Committee is responsible for reviewing all financial statements prior to approval by the board, all other disclosures containing financial information and all management reports which accompany any financial statements. The Audit Committee is also responsible for all internal and external audit plans, any recommendation affecting our internal controls, the results of internal and external audit plans, any recommendation affecting our internal controls, the results of internal and external audits and any changes in accounting practices or policies. The Audit Committee reviews any accruals, provisions, estimates or related party transactions that have a significant impact on our financial statements and any litigation, claim or other contingency that could have a material effect upon our financial statements. In addition, the Audit Committee is responsible for assessing management’s
49
programs and policies relating to the adequacy and effectiveness of internal controls over our accounting and financial systems. The Audit Committee reviews and discusses with the Chief Executive Officer and Chief Financial Officer, the procedures undertaken in connection with their certifications for annual and quarterly filings in accordance with the requirements of applicable securities regulatory authorities. The Audit Committee is also responsible for considering the appointment and remuneration of external auditors. The Audit Committee reports directly to the board of directors.
Any services provided by our independent auditors that are not specifically included within the scope of the audit must be pre-approved by the audit committee prior to any engagement. The audit committee is permitted to approve certain fees for audit-related services, tax services and other services pursuant to ade minimusexception before the completion of the engagement. In the fiscal year ended June 30, 2005, none of the fees paid to Amisano Hanson, Chartered Accountants, were approved pursuant to thede minimus exception.
16.D Exemptions from the Listing Standards for Audit Committees.
Not Applicable.
16.E Purchases of Equity Securities by the Issuer and Affiliated Purchasers.
None.
PART III
Item 17 Financial Statements
Reference is made to pages F-1 through F-18.
The Report and Consolidated Financial Statements for the years ended June 30, 2005 and June 30, 2004 are reported by Amisano Hanson, Chartered Accountants and the 2003 Report and Consolidated Financial Statements for the year ended June 30, 2003 are reported on by Wolrige Mahon, Chartered Accountants, collectively referred to below as the Annual Statements. These Annual Statements were prepared in accordance with generally accepted accounting principles in Canada, which differ from general accepted accounting principles in the United States. See Note 14 to the Consolidated Financial Statements June 30, 2005.
The following financial Statements and related Notes are included in this Item:
| Description | Page
Number |
| | |
| | Report of Independent Registered Public Accounting Firm | F-2 |
| | |
| Comments from Auditor for U.S. Readers of Canada-U.S. Reporting Differences | F-2 |
| | |
| Consolidated Balance Sheets as at June 30, 2005 and 2004 | F-3 |
| | |
| Consolidated Statements of Operations and Deficit for the Years | F-4 |
| Ended June 30, 2005, 2004 and 2003 | |
| | |
| Consolidated Statements of Cash Flows for the Years Ended | F-5 |
| June 30, 2005, 2004 and 2003 | |
| | |
| Consolidated Statement of Stockholder’s Deficiency for the Period | F-6 |
| July 1, 2002 to June 30, 2005 | |
| | |
| Notes to the Consolidated Financial Statements June 30, 2005 | F-7 |
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Item 18 Financial Statements
We have elected to provide financial statements pursuant to Item 17.
Item 19 Exhibits
| | Exhibit
Number
| | Description |
| | *1.1 | | Memorandum and Articles of Incorporation of the Company dated July 4, 1978 |
| *1.2 | | Certificate for Jewel Resources Inc. changing name to Wkay Resources Inc. dated December 22, 1987 |
| *1.3 | | Certificate for Wkay Resources Inc. changing name to Magnatron International Corp. dated October 18, 1990 |
| *1.4 | | Certificate for Magnatron International Corp. changing name to Q I Technologies Corp. dated March 17, 1994 |
| *1.5 | | Form 21 Special Resolutions filed December 22, 1987 with the British Columbia Registrar of Companies altering our authorized capital by consolidating every 2.5 common shares before consolidation into one consolidated common share; changing the name of the Company |
| *1.6 | | Form 21 Special Resolutions filed October 18, 1990 with the British Columbia Registrar of Companies to cancel and replace the Articles of the Company. |
| *1.7 | | Form 21 Special Resolutions filed March 17, 1994 with the British Columbia Registrar of Companies altering our authorized capital by consolidating every 5 common shares before consolidation into one consolidated common share; changing the name of the Company |
| *1.8 | | Directors’ Resolutions filed May 7, 1996 with the British Columbia Registrar of Companies, amending our share capital. |
| *1.9 | | Form 19 Special Resolutions filed November 1, 1999 with the British Columbia Registrar of Companies altering our authorized capital by subdividing each one common share into two common shares and increasing the authorized capital of the Company to |
| *4.1 | | Technology Acquisition Agreement dated March 14, 1995 between Robert Angus, Richard Murray and James D. Roberts and QI Technologies Corp. |
| *4.2 | | Escrow Agreement dated March 14, 1995 among Montreal Trust Company of Canada, QI Technologies Corp., Richard H. Murray, Robert Angus, James D. Roberts, Doug Brazier and J. Michael Page.Pooling Agreement dated April 15, 1995 among James D. Roberts, |
| *4.4 | | Allotted Shares Agreement dated August 16, 1995 among QI Technologies Corp. and Robert Angus, Richard Murray and James D. Roberts. |
| *4.5 | | Settlement Agreement dated March 31, 1999 among James D. Roberts, Robert M. Angus, Richard H. Murray, Brenda N. Angus, QI Technologies Corp., Equus Technologies Inc., Douglas C. Brazier, and J. Michael Page. |
| *4.6 | | Voluntary Pooling Agreement dated March 31, 1999 between Pacific Corporate Trust Company, QI Technologies corp. and James D. Roberts, Richard H. Murray, Robert M. Angus and Brenda N. Angus. |
| *4.7 | | Consulting Agreement dated July 1, 1995 between QI Technologies Corp. and James D. Roberts. |
| *4.8 | | Amendment to Consulting Agreement dated January 1, 1997 between QI Technologies Corp. and James D. Roberts. |
| *4.9 | | Management Services Agreement dated July 1, 1996 between QI Technologies Corp. and Douglas C. Brazier. |
| *4.10 | | Amendment to Management Services Agreement dated January 1, 1997 between QI Technologies Corp. and Douglas C. Brazier. |
| *4.11 | | QI Technologies Corp. Stock Option Plan. |
| *4.12 | | Form of Stock Option Agreement |
| *4.13 | | Employment Agreement dated April 20, 2000 between QI Technologies Corp. and Craig Jones. |
| *4.14 | | GPT License Agreement dated March 23, 1998. |
| **4.15 | | Purchase order dated October 31, 2000 related to slimline design purchase of 250 cash card reader systems |
| **4.16 | | Confidentiality agreement dated February 7, 1997 between QI Technologies Corp. and GPT Phone Systems |
| **4.17 | | Non-disclosure agreement dated June 8, 1999 between QI Technologies Corp. and Diebold, Incorporated |
| **4.18 | | Mutual confidentiality agreement dated February 7, 1997 between QI Technologies and Maytag appliances |
| *****4.26 | | |
51
| **4.19 | | Mutual non disclosure agreement dated September 9, 1997 between QI Technologies and Mondex USA Services Limited Liability Company |
| **4.20 | | Visa Master confidentiality agreement dated November 10, 1998 |
| ***4.21 | | Termination Agreement dated April 28, 2000 between QI Technologies Corp. and Richard H. Murray. |
| ***4.22 | | Employment Agreement dated May 1, 2002 between QI Technologies Corp. and Mesbah Taherzadeh. |
| ***4.23 | | Private Placement Subscription Agreement dated September 10, 2002 between QI Systems Inc. and Billy Gene Parker Jr. |
| *****4.24 | | Memorandum of Understanding dated May 26, 2005 between Richard H. Murray, QI Systems Inc. and Matthew Yugovich |
| *****4.25 | | Advertising and Promotional Service Agreement dated March 25, 2005 between QI Systems Inc. and Hobson, Lorenze, Bowersock and Associates |
| *****4.26 | | Employment Agreement between QI Systems Inc. and QI Systems International, Inc. and Steven R. Garman dated December 21, 2005 |
| *****8.1 | | List of subsidiaries |
| 12.1 | | Certification of Principal Executive Officer required by Rule 13a-14(a) |
| 12.2 | | Certification of Principal Financial Officer required by Rule 13a-14(a) |
| 13.1 | | Section 906 of the Sarbanes-Oxley Act of 2002 Certification of Principal Executive Officer |
| 13.2 | | Section 906 of the Sarbanes-Oxley Act of 2002 Certification of Principal Financial Officer |
| ****16 B | | Code of Ethics |
| * | | Previously filed on Form 20-F filed on September 29, 2000 (SEC File No. 000-30948). |
| | | | |
| ** | | Previously filed on Form 20-F/A Amendment No. 1 filed on or about January 15, 2002. |
| | | | |
| *** | | Previously filed on Form 20-F filed on January 31, 2002 |
| | | | |
| **** | | Previously filed on Form 20-F filed on December 17, 2004 |
| ***** | | Previously filed on Form S-F filed on December 22, 2005 |
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Signatures
The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.
Date: December 30, 2005
Executed at Colleyville, Texas,
USA
| | QI SYSTEMS INC.
————————
Registrant
“Steven R. Garman”
—————————
By: Steven R. Garman, President |
| |
INDEX TO FINANCIAL STATEMENTS
(Expressed in US Dollars) |
| |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Shareholders
QI Systems Inc. We have audited the consolidated balance sheets of QI Systems Inc. as at June 30, 2005 and 2004 and the consolidated statements of operations and deficit, cash flows and stockholders’ deficiency for the years then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards and the standards of the Public Company Accounting Oversight Board (United States of America). Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the Company as at June 30, 2005 and 2004 and the results of its operations and its cash flows for the years then ended in accordance with Canadian generally accepted accounting principles. The consolidated financial statements for the year ended June 30, 2003 were audited by other auditors who expressed an opinion without reservation on those statements in their report dated October 6, 2003. |
| |
| Vancouver, Canada | “AMISANO HANSON” |
October 7, 2005, except as to Notes 7 and 12,
which are as of October 27, 2005 | Chartered Accountants |
| |
| COMMENTS BY AUDITOR FOR US READERS ON CANADA-US REPORTING DIFFERENCES |
| |
In the United States, reporting standards for auditors require the addition of an explanatory paragraph (following the opinion paragraph) when the financial statements are affected by conditions and events that cast substantial doubt on the Company’s ability to continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company designs and sells readers for use in cash payment systems and has a working capital deficiency, incurred substantial losses from operations and has not achieved positive cash flow, which raises substantial doubt about the Company’s ability to continue as a going concern. The accompanying consolidated financial statements do not include any adjustment that might result from the outcome of this uncertainty. Our report to the shareholders dated September 10, 2004 is expressed in accordance with Canadian reporting standards which do not permit a reference to such events and conditions in the auditor’s report when these are adequately disclosed in the consolidated financial statements. |
| |
| Vancouver, Canada | “AMISANO HANSON” |
October 7, 2005, except as to Notes 7 and 12,
which are as of October 27, 2005 | Chartered Accountants |
| | | |
| 750 WEST PENDER STREET, SUITE 604 | TELEPHONE: | 604-689-0188 |
| VANCOUVER CANADA | FACSIMILE: | 604-689-9773 |
| V6C 2T7 | E-MAIL: | amishan@telus.net |
QI SYSTEMS INC. CONSOLIDATED BALANCE SHEETS As at June 30, 2005 and 2004
(Expressed in US Dollars) |
| |
| |
|---|
| 2005
$ | | 2004
$ | |
|---|
| |
| Assets | | | | | | |
| Current | | | | | | |
| Cash | | 59,950 | | | 12,158 | |
| Receivables | | 40,784 | | | 30,878 | |
| Share subscriptions receivable – Note 7 | | 6,635 | | | 87,300 | |
| Prepaid expenses – Note 7 | | 410,545 | | | 1,550 | |
| Inventory – Note 4 | | 192,237 | | | 218,589 | |
| |
| | | 710,151 | | | 350,475 | |
| Equipment – Note 5 | | 9,106 | | | 12,481 | |
| |
| | | 719,257 | | | 362,956 | |
| |
| Liabilities | | | | | | |
| Current | | | | | | |
| Payables and accruals – Notes 6, 7, 11 and 12 | | 808,094 | | | 515,168 | |
| Shareholder loans – Note 6 | | 21,392 | | | 17,125 | |
| Deposits received | | 16,578 | | | 16,279 | |
| |
| | | 846,064 | | | 548,572 | |
| |
| | | | | | | |
| Shareholders’ Deficiency | | 11,225,477 | | | 10,820,977 | |
| | | | | | | |
| Share capital – Notes 7 and 12 | | | | | | |
| Share capital subscribed – Notes 7 and 12 | | 692,333 | | | 87,300 | |
| Contributed surplus – Note 7 | | 260,318 | | | 203,169 | |
| Deficit | | (12,218,019 | ) | | (11,235,840 | ) |
| Cumulative translation adjustment | | (86,916 | ) | | (61,222 | ) |
| |
| | | (126,807 | ) | | (185,616 | ) |
| |
| | | 719,257 | | | 362,956 | |
| |
| | |
| | Nature and Continuance of Operations – Note 1
Commitments and Contingencies – Notes 7, 11 and 12
Subsequent Events – Notes 7, 11 and 12 |
| | |
| | Approved by the Directors: | | |
| | | | |
| | “Steve Garman” | | “Matthew Yugovich” |
| | | | |
| | ________________________________, Director | | ________________________________, Director |
QI SYSTEMS INC. CONSOLIDATED STATEMENTS OF OPERATIONS AND DEFICIT For the Years Ended June 30, 2005, 2004 and 2003
(Expressed in US Dollars) |
| |
| |
|---|
| 2005
$ | | 2004
$ | | 2003
$ | |
|---|
| |
| | | | | | | | | | |
| Revenue | | 390,111 | | | 383,722 | | | 325,422 | |
| | | | | | | | | | |
| Cost of goods sold | | 216,652 | | | 75,320 | | | 84,742 | |
| |
| | | 173,459 | | | 308,402 | | | 240,680 | |
| |
| | | | | | | | | | |
| Expenses | | | | | | | | | |
| Administration – Note 6 | | 406,154 | | | 419,060 | | | 305,404 | |
| Amortization | | 3,375 | | | 4,697 | | | 5,974 | |
| Bad debt (recovery) | | (131 | ) | | 13,887 | | | 5,000 | |
| Corporate finance | | — | | | 116,166 | | | — | |
| Development costs – Note 6 | | 269,997 | | | 284,190 | | | 341,154 | |
| Financing costs and interest – Notes 6 and 7 | | 112,468 | | | 5,554 | | | 38,757 | |
| Investor relations – Notes 6 and 7 | | 42,313 | | | 240,606 | | | 4,414 | |
| Marketing | | 221,683 | | | 207,782 | | | 171,911 | |
| Professional fees | | 65,102 | | | 59,500 | | | 78,415 | |
| Stock-based compensation – Note 7 | | 57,149 | | | 203,169 | | | — | |
| |
| | | 1,178,110 | | | 1,554,611 | | | 951,029 | |
| |
| Operating loss | | (1,004,651 | ) | | (1,246,209 | ) | | (710,349 | ) |
| Interest income | | — | | | — | | | 174 | |
| Gain on settlement of debt | | 22,472 | | | 62,314 | | | — | |
| |
| Net loss | | (982,179 | ) | | (1,183,895 | ) | | (710,175 | ) |
| | | | | | | | | | |
| Deficit, beginning of year | | (11,235,840 | ) | | (10,051,945 | ) | | (9,341,770 | ) |
| |
| Deficit, end of year | | (12,218,019 | ) | | (11,235,840 | ) | | (10,051,945 | ) |
| |
| Loss per share – basic and diluted – Note 10 | | (0.04 | ) | | (0.06 | ) | | (0.04 | ) |
| |
QI SYSTEMS INC. CONSOLIDATED STATEMENT OF CASH FLOWS For the Years Ended June 30, 2005, 2004 and 2003
(Expressed in US Dollars) |
| |
| |
|---|
| 2005
$ | | 2004
$ | | 2003
$ | |
|---|
| |
| Cash Flows related to Operating Activities | | | | | | | | | |
| Net loss for the year | | (982,179 | ) | | (1,183,895 | ) | | (710,175 | ) |
| Adjustments to reconcile net loss used in Operations | | | | | | | | | |
| Stock-based compensation | | 57,149 | | | 203,169 | | | — | |
| Investor relations expense | | 42,313 | | | — | | | — | |
| Finance fee | | 45,313 | | | — | | | — | |
| Gain on settlement of debt | | (22,472 | ) | | (62,314 | ) | | — | |
| Amortization | | 3,375 | | | 4,697 | | | 5,974 | |
| |
| Changes in non-cash working capital items | | (856,501 | ) | | (1,038,343 | ) | | (704,201 | ) |
| Receivables | | (9,906 | ) | | 5,327 | | | 1,555 | |
| Prepaid expenses | | (6,675 | ) | | 7,778 | | | (2,981 | ) |
| Inventory | | 26,352 | | | (30,255 | ) | | (45,164 | ) |
| Payables and accruals | | 191,540 | | | 115,866 | | | 252,307 | |
| Deposits received | | 299 | | | 16,279 | | | (25,000 | ) |
| |
| | | (654,891 | ) | | (923,348 | ) | | (523,484 | ) |
| |
| | | | | | | | | | |
| Cash Flows related to Investing Activity | | | | | | | | | |
| Investment in capital assets | | — | | | — | | | (1,310 | ) |
| |
| | | | | | | | | | |
| Cash Flows related to Financing Activities | | | | | | | | | |
| Proceeds from (repayment of) shareholder loans | | 4,267 | | | (90,559 | ) | | 119,500 | |
| Proceeds from share issuances, net of issue costs | | 397,865 | | | 970,450 | | | 335,979 | |
| Proceeds from share capital subscribed | | 248,270 | | | — | | | — | |
| |
| | | 650,402 | | | 879,891 | | | 455,479 | |
| |
| Effect of foreign currency translation on cash | | 52,281 | | | 64,465 | | | (23,496 | ) |
| |
| Net increase (decrease) in cash | | 47,792 | | | 21,008 | | | (92,811 | ) |
| Cash (cash deficiency), beginning | | 12,158 | | | (8,850 | ) | | 83,961 | |
| |
| Cash (cash deficiency), ending | | 59,950 | | | 12,158 | | | (8,850 | ) |
| |
| Supplementary cash flow information: | | | | | | | | | |
| Interest received | | — | | | — | | | 174 | |
| Interest paid | | (909 | ) | | (1,849 | ) | | (6,831 | ) |
| Income taxes paid | | — | | | — | | | — | |
| |
Non-cash Transactions – Note 15 |
QI SYSTEMS INC. CONSOLIDATED STATEMENT OF STOCKHOLDERS’ DEFICIENCY For the Period July 1, 2002 to June 30, 2005
(Expressed in US Dollars) |
| |
| | Common Shares | | Share
Capital
Subscribed | | Contributed
Surplus | | Accumulated
Deficit | | Cumulative
Translation
Adjustment | | Stockholders’
Equity
(Deficiency) | |
|---|
| Number | | Amount |
|---|
| |
| |
| |
| |
| |
| |
| |
| |
| | | | | | | | | | | | | | | | | | | | | |
| Balance, June 30, 2002 | 12,280,168 | | $ | 7,967,877 | | $ | — | | $ | — | | $ | (9,341,770 | ) | $ | (34,211 | ) | $ | (1,408,104 | ) |
| Issued for cash: | | | | | | | | | | | | | | | | | | | | |
| Private placements | 2,131,333 | | | 707,794 | | | — | | | — | | | — | | | — | | | 707,794 | |
| Issued in settlement for debt: | | | | | | | | | | | | | | | | — | | | | |
| Shareholder loan | 1,000,000 | | | 326,415 | | | — | | | — | | | — | | | — | | | 326,415 | |
| Trade accounts payable | 770,000 | | | 253,600 | | | — | | | — | | | — | | | — | | | 253,600 | |
Warrants transferred to share
capital
| — | | | 164,000 | | | — | | | — | | | — | | | — | | | 164,000 | |
Foreign currency translation
adjustment | — | | | — | | | — | | | — | | | — | | | (23,496 | ) | | (23,496 | ) |
| Net loss | — | | | — | | | — | | | — | | | (710,175 | ) | | — | | | (710,175 | ) |
| |
| | | | | | | | | | | | | | | | | | | | | |
| Balance, June 30, 2003 | 16,363,501 | | | 9,419,686 | | | — | | | — | | | (10,051,945 | ) | | (57,707 | ) | | (689,966 | ) |
Issued for cash pursuant to
private placements | 4,866,120 | | | 979,950 | | | — | | | — | | | — | | | — | | | 979,950 | |
| Subscriptions received | — | | | — | | | 87,300 | | | — | | | — | | | — | | | 87,300 | |
| Exercise of warrants for cash | 20,000 | | | 8,000 | | | — | | | — | | | — | | | — | | | 8,000 | |
| Issued in settlement for debt | 1,176,977 | | | 413,341 | | | — | | | — | | | — | | | — | | | 413,341 | |
| Stock-based compensation | — | | | — | | | — | | | 203,169 | | | — | | | — | | | 203,169 | |
Foreign currency translation
adjustment | — | | | — | | | — | | | — | | | — | | | (3,515 | ) | | (3,515 | ) |
| Net loss | — | | | — | | | — | | | — | | | (1,183,895 | ) | | — | | | (1,183,895 | ) |
| |
| | | | | | | | | | | | | | | | | | | | | |
| Balance, June 30, 2004 | 22,426,598 | | | 10,820,977 | | | 87,300 | | | 203,169 | | | (11,235,840 | ) | | (61,222 | ) | | (185,616 | ) |
Issued for cash pursuant to
private placements | 1,760,455 | | | 387,300 | | | (87,300 | ) | | — | | | — | | | — | | | 300,000 | |
| Subscriptions received | — | | | — | | | 714,363 | | | — | | | — | | | — | | | 714,363 | |
| Share issue costs | — | | | — | | | (22,030 | ) | | — | | | — | | | — | | | (22,030 | ) |
| Exercise of warrants for cash | 43,000 | | | 17,200 | | | — | | | — | | | — | | | — | | | 17,200 | |
| Stock-based compensation | — | | | — | | | — | | | 57,149 | | | — | | | — | | | 57,149 | |
Foreign currency translation
adjustment
| — | | | — | | | — | | | — | | | — | | | (25,694 | ) | | (25,694 | ) |
| Net loss | — | | | — | | | — | | | — | | | (982,179 | ) | | — | | | (982,179 | ) |
| |
| | |
| Balance, June 30, 2005 | 24,230,053 | | $ | 11,225,477 | | $ | 692,333 | | $ | 260,318 | | $ | (12,218,019 | ) | $ | (86,916 | ) | $ | (126,807 | ) |
| |
QI SYSTEMS INC. Notes to the Consolidated Financial Statements June 30, 2005
(Expressed in US Dollars) |
| Note 1 | Nature and Continuance of Operations |
| | |
| | QI Systems Inc. (“QI” or “the Company”) was incorporated in 1978 under the British Columbia Company Act. The Company manufactures, designs and sells readers that allow the use of cash payment systems for self-serve applications such as vending, gaming, laundromat machines, transit fare collection systems and newspaper vending machines. |
| |
| | These consolidated financial statements have been prepared using Canadian generally accepted accounting principles applicable to a going concern. The use of such principles may not be appropriate because as at June 30, 2005, there was substantial doubt that the Company would be able to continue as a going concern. |
| |
| | The Company has accumulated a deficit of $12,218,019 since inception, has yet to achieve profitable operations and has a working capital deficiency of $135,913 at June 30, 2005. The Company requires additional capital and revenue sources. The outcome of these matters cannot be predicted with any certainty at this time. The Company has historically satisfied its capital needs by issuing equity securities. These financial statements do not give effect to any adjustments and classification of assets and liabilities that would be necessary should the Company be unable to continue as a going concern and therefore be required to realize its assets and discharge its liabilities and commitments at amounts different from those reported in the financial statements. |
| | |
| Note 2 | Significant Accounting Policies |
| | |
| | These consolidated financial statements have been prepared in accordance with generally accepted accounting principles in Canada and are stated in United States dollars and, except as described in Note 14, conform in all material respects with accounting principles generally accepted in the United States of America. Because a precise determination of many assets and liabilities is dependent upon future events, the preparation of financial statements for a period necessarily involves the use of estimates which have been made using careful judgement. Actual results may differ from these estimates. |
| |
| | The consolidated financial statements have, in management’s opinion, been properly prepared within reasonable limits of materiality and within the framework of the significant accounting policies summarized below: |
| |
| | Principles of Consolidation |
| |
| | These consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, QI Systems International Inc., incorporated under the laws of the State of Texas, and Magnatron Inc. (inactive), incorporated under the laws of the State of Nevada. All inter-company transactions have been eliminated. |
| |
| | Amortization of Equipment |
| |
| | Equipment is carried at cost less accumulated amortization. Amortization is calculated using the following annual rates and method: |
| |
| Furniture and fixtures | | - 20% declining balance |
| Computer equipment | | - 30% declining balance |
| | | |
| | In the year of acquisition amortization is provided for at one-half the annual rate. |
| |
| | Inventories and Cost of Goods Sold |
| |
| | The Company records inventories at the lower of cost, calculated on a weighted average basis, and estimated net realizable value. |
| |
| | Cost of goods sold comprises materials, direct labour and direct overhead expenditures incurred in the production process. |
| |
| | Revenue Recognition |
| |
| | Revenues are derived primarily from equipment sales and non-recurring engineering fees. Revenue is recognized upon delivery of equipment and completion of non-recurring engineering work and collection is reasonably assured. Service, installation and contract revenue is recognized upon completion and acceptance and collection is reasonably assured. |
| |
| | Development Costs |
| |
| | Development costs include on-going research and development of the modular payment systems. Development costs are expensed as incurred unless they meet the criteria for deferral under the Canadian generally accepted accounting principles. |
| |
| | Foreign Currency Translation |
| |
| | The Company’s functional currency is Canadian dollars (“CDN dollars”). Monetary items denominated in a foreign currency other than CDN dollars are translated into CDN dollars at exchange rates prevailing at the balance sheet date and non-monetary items are translated at exchange rates prevailing when the assets were acquired or obligations incurred. Foreign currency denominated revenue and expense items are translated at exchange rates prevailing at the transaction date. Gains or losses arising from the translations are included in operations. |
| |
| | The Company’s reporting currency is United States dollars (“US dollars”) and CDN dollar amounts are translated using the current rate method. Assets and liabilities are translated at exchange rates prevailing at the balance sheet date and revenue expense items at actual or average exchange rates for the year. Translation adjustments arising from changes in exchange rates are accounted for as a separate component of shareholders’ equity as the cumulative translation adjustment. |
| | |
| | Income Taxes |
| | |
| | The Company records income taxes in accordance with the Canadian Institute of Chartered Accountants’ recommendations for accounting for income taxes. Under these recommendations current income taxes recognize the estimated income taxes payable for the current period. Future income tax assets and liabilities are recognized for temporary differences between the tax basis and the accounting basis of assets and liabilities, as well as for the benefits of losses available to be carried forward to future years for tax purposes that are more likely-than-not to be realized. |
| |
| | Stock-based Compensation Plans |
| |
| | The Company has a stock-based compensation plan, which is described in Note 7. Effective for the year ending June 30, 2004, the Company adopted, on a prospective basis, the fair value method of accounting for stock options granted to employees, consultants and directors. Compensation expense is recognized over the options’ vesting period. |
| | The Company recognizes an expense for the fair value of options granted. Upon exercise of stock options, consideration paid by the option holder, together with the amount previously recognized in contributed surplus, is recorded as an increase to share capital. The Company uses the Black-Scholes option pricing model to value stock options granted. The Black-Scholes model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. The model requires management to make estimates, which are subjective and may not be representative of actual results. Changes in assumptions can materially affect estimates of fair values. |
| |
| | Warrants |
| |
| | Consideration received on the exercise of warrants or purchase of stock is credited to share capital. |
| |
| | Detachable warrants are allocated a portion of the proceeds from debt or share issues based on fair values and included in additional paid-in capital warrants until the warrants are exercised or expired. |
| | |
| Note 3 | Financial Instruments |
| | |
| | The fair value of the Company’s cash, receivables, payables and accruals, shareholder loans and deposits approximates their carrying amount due to the relatively short periods to maturity of the instruments. |
| |
| | The Company provides credit to its clients in the normal course of operations. It carries out, on a continuing basis, credit checks on its clients and maintains provisions for contingent losses. For other debts, the Company estimates, on a continuing basis, the probable losses and provides a provision for losses based on the estimated realizable value. |
| |
| | The Company is exposed to fluctuations in foreign currencies through accounts receivable and accounts payable to be settled in Canadian dollars. The Company monitors this exposure, but had no hedge positions at June 30, 2005 or 2004. |
| | |
| Note 4 | Inventory |
| | |
| | | 2005
$ | | 2006
$ | |
|---|
| | |
| |
| |
| | Raw materials | | 125,516 | | | 163,748 | |
| | Finished goods | | 66,721 | | | 54,841 | |
| |
| |
| | | | 192,237 | | | 218,589 | |
| |
| |
| | | Cost
$ | | 2005
Accumulated
Amortization
$ | | Net
$ | | Cost
$ | | 2004
Accumulated
Amortization
$ | | Net
$ | |
|---|
| | | | | | | | | | | | | | | | | | | | |
| | Furniture and fixtures | | 22,268 | | | 19,315 | | | 2,953 | | | 22,268 | | | 18,578 | | | 3,690 | |
| | Computer equipment | | 74,049 | | | 67,896 | | | 6,153 | | | 74,049 | | | 65,258 | | | 8,791 | |
| | | | 96,317 | | | 87,211 | | | 9,106 | | | 96,317 | | | 83,836 | | | 12,481 | |
| |
| |
| | |
| Note 6 | Related Party Transactions and Balances – Notes 7 and 12 |
| | |
| | During the years ended June 30, 2005, 2004 and 2003, the Company incurred fees charged by directors and officers of the Company and their related companies. These transactions are in the normal course of operations and are measured at the exchange amount which was the amount established and agreed to by the related parties and are as follows: |
| |
| | | Years ended June 30, | |
|---|
| | | 2005
$ | | 2004
$ | | 2003
$ | |
|---|
| | |
| |
| |
| |
| | Administration | | 253,142 | | | 155,867 | | | 205,834 | |
| | Development costs | | 56,610 | | | 58,276 | | | — | |
| | Financing costs and interests | | 45,313 | | | — | | | — | |
| | | | |
| | |
| |
| |
| |
| | | | 355,065 | | | 214,143 | | | 205,834 | |
| |
| |
| | |
| | As at June 30, 2005, included in payables and accruals was $372,514 (2004: $246,336) due to directors and officers of the Company and former directors and officers of the Company relating to the above expenses. Included in shareholders loans is $2,494 due to a director of the Company. These loans are unsecured, non-interest bearing and have no repayment terms. |
| |
| | During the year ended June 30, 2005, the Company issued 170,454 common shares at $0.22 per share for proceeds of $37,500 pursuant to a private placement to directors of the Company. |
| | |
| Note 7 | Share Capital and Contributed Surplus – Note 12 |
| | |
| | Authorized: |
| |
| | 200,000,000 common shares with no par value |
| |
| | Shares Issued: |
| |
| | During the year ended June 30, 2005 the Company: |
| |
| • | Issued 396,819 common shares for proceeds of $87,300 pursuant to a private placement completed on April 1, 2004. The shares had been accounted for as share capital subscribed at June 30, 2004. |
| | |
| • | Completed a private placement for proceeds of $300,000. The placement consisted of 1,363,636 units at $0.22 per unit; each unit is comprised of one common share and one share purchase warrant. Each warrant entitles the holder to purchase one common share at $0.30 per share prior to November 17, 2006. |
| | |
| | During the year ended June 30, 2004 the Company: |
| |
| • | Completed a private placement for proceeds of $250,000. The placement consisted of 1,666,665 units at $0.15 per unit; each unit comprised of one common share and one share purchase warrant. Each warrant entitles the holder to purchase one common share at $0.20 per share prior to October 27, 2005. |
| | |
| • | Issued 1,176,977 common shares to settle debt of $413,341 at an average price of $0.35 per share. |
| | |
| • | Completed a private placement for proceeds of $217,250. The placement consisted of 869,000 units at $0.25 per unit; each unit is comprised of one common share and one share purchase warrant. Each warrant entitles the holder to purchase one common share at $0.35 prior to |
| • | Completed a private placement for proceeds of $512,700. The placement consisted of 2,727,273 units at $0.22 per unit; each unit is comprised of one common share and one share purchase warrant. Each warrant entitles the holder to purchase one common share at $0.30 per share prior to April 1, 2006. |
| | | |
| | Commitments: |
| |
| | Share capital subscribed: |
| |
| | As at June 30, 2005, proceeds of $120,300 representing 1,203,000 shares at $0.10 per share had been received by the Company as subscription for a private placement to be completed subsequent to June 30, 2005 (Note 12). The Company paid $12,030 in share issuance costs related to these subscriptions. |
| |
| | As at June 30, 2005, proceeds of $150,000 representing 1,000,000 shares at $0.15 per share had been received by the Company as subscription for a private placement to be completed subsequent to June 30, 2005 (Note 12). The Company paid $10,000 in share issuance costs related to this private placement. |
| |
| | As at June 30, 2005, the Company had a share subscriptions receivable of $6,635 with respect to 30,160 common shares issued to a director of the Company at $0.22 per share pursuant to a private placement. This subscription was paid subsequent to June 30, 2005. |
| |
| | As at June 30, 2004, the Company had a share subscriptions receivable of $87,300 with respect to 396,818 common shares issued at $0.22 per share pursuant to a private placement. This subscription was paid during the year ended June 30, 2005. |
| |
| | On May 25, 2005, the Company entered into an Investors Relations agreement with an arms-length party which requires the Company to irrevocably issue 3,000,000 common shares of the Company, valued at $435,000, to the investor relations firm (“IR”) as follows: |
| |
| • | 1,500,000 shares within 5 days of the agreement date; |
| | |
| • | 750,000 shares within 185 days of the agreement date and, |
| | |
| • | 750,000 shares within 275 days of the agreement date. |
| | |
| | One half of the shares issued at each date are to contain an escrow trading restriction until May 26, 2006. |
| |
| | Pursuant to this agreement, a shareholder and an officer of the Company loaned the Company 750,000 free trading shares which were delivered to IR prior to June 30, 2005 on behalf of the Company for the following consideration: |
| |
| • | Debt of $36,250 (included in accounts payable and accruals at June 30, 2005) for 250,000 common shares delivered to IR by a shareholder of the Company. This debt was settled by a private placement completed subsequent to June 30, 2005 (Note 12); and |
| | |
| • | 500,000 common shares to be issued for 500,000 common shares delivered to IR by an officer of the Company. In addition, the Company agreed to issue a further 312,500 common shares, valued at $45,313, to this officer as a financing fee. |
| | The Company has recorded the commitment of 3,000,000 common shares ($435,000) as a prepaid investor relations expense to be expensed over the term of the agreement, to May 26, 2006. In this regard, at June 30, 2005, the Company had expensed $42,313 as investor relation fees. |
| |
| | Subsequent to June 30, 2005, the Company issued the remaining 750,000 shares to IR and the 812,500 shares to the officer of the Company and also placed 1,500,000 shares in escrow, all pursuant to the above noted agreement. |
| |
| | Warrants |
| |
| | Share purchase warrants outstanding to acquire an equal number of common shares as of June 30, 2005 are as follows: |
| |
| | Number of
Warrants | | | Exercise
Price | | Expiry
Date | | |
|---|
|
| | |
| |
| | |
| | 1,666,665 | | | $ 0.20 | | October 27, 2005 | | |
| | 869,000 | | | $ 0.35 | | November 17, 2005 | | |
| | 2,727,273 | | | $ 0.30 | | April 1, 2006 | | |
| | 1,363,636 | | | $ 0.30 | | November 17, 2006 | | |
| |
| | | | | | | |
| | 6,626,574 | | | | | | | |
| |
| | | | | | | |
| | |
| | Subsequent to June 30, 2005, 633,333 warrants expired unexercised. |
| |
| | Escrow Shares |
| |
| | Issued share capital includes 750,000 shares held in escrow subject to release at the direction of the British Columbia Securities Commission. |
| |
| | Stock Options |
| |
| | The Company issues stock options as approved by the board of directors to employees, consultants and directors. Options are issued at the average trading price of the 10 days preceding the grant date as a minimum and may be granted for periods of up to five years. The vesting schedule for each grant is determined by the board of directors. As at June 30, 2005 the total number of options approved for issue is 2,175,000, of which no more than 1,085,000 options may be granted to insiders. |
| | A summary of the status of the Company’s stock option plan as of June 30, 2005 and 2004, and changes during the years ending on those dates, is presented below: |
| |
| | | 2005 | | 2004 | |
|---|
| | |
| |
|---|
| | | Number
Of
Options | | Weighted Average
Exercise Price | | Number
Of
Options | | Weighted Average
Exercise Price | |
|---|
| | | | US$ | | CDN$ | | | US$ | | CDN$ | |
|---|
| | | |
| | |
| | |
| | |
| | |
| | |
| |
| | | | | | | | | | | | | | | | | | | | |
| | Outstanding,
beginning of
Year | | 1,298,000 | | | 0.83 | | | 1.11 | | | 1,507,500 | | | 0.81 | | | 1.25 | |
| | Granted | | 879,500 | | | 0.15 | | | 0.18 | | | — | | | — | | | — | |
| | Exercised | | — | | | — | | | — | | | — | | | — | | | — | |
| | Forfeited | | (397,000 | ) | | 1.25 | | | 1.54 | | | (209,500 | ) | | 1.18 | | | 1.59 | |
| |
| |
| | |
| | Outstanding,
end of year | | 1,780,500 | | | 0.43 | | | 0.53 | | | 1,298,000 | | | 0.83 | | | 1.11 | |
| |
| |
| |
| Options Outstanding | | Options
Exercisable | |
|---|
| |
| |
| |
|---|
| | Number
Outstanding
at June 30,
2005 | | Weighted
Average
Remaining
Contractual
Life
(Years) | | Number
Exercisable
at June 30,
2005 | |
|---|
| | Exercise Price | | | |
|---|
| |
| | | |
|---|
| | | | US$ | CDN$ | | | | |
|---|
| |
| |
| | | | 0.15 | | 0.18 | | | 879,500 | | | 4.51 | | | 439,750 | |
| | | | 0.50 | | 0.61 | | | 300,000 | | | 2.82 | | | 300,000 | |
| | | | 0.50 | | 0.61 | | | 434,000 | | | 2.50 | | | 434,000 | |
| | | | 1.63 | | 2.00 | | | 167,000 | | | 0.48 | | | 167,000 | |
| |
| | | |
| |
| | | | | | 1,780,500 | | 3.36 | | 1,340,750 | |
| |
| | | |
| |
| | |
| | The options expire at various dates between December 22, 2005 and December 31, 2009 and are exercisable at amounts ranging from $0.15 to $1.63. |
| |
| | During the years ended June 30, 2005 and 2004 the Company expensed the stock option benefit of $57,149 and $203,169 respectively, which were estimated using the Black Scholes Option Pricing Model over the vesting term, with the following assumptions: |
| |
| | | 2005 | | 2004 | |
|---|
| | | |
| | |
| |
| | Risk free rate | | 3.8 | % | | 4.06% - 4.20 | % |
| | Dividend yield | | 0 | % | | 0 | % |
| | Expected volatility | | 115 | % | | 69% - 703 | % |
| | Weighted average expected stock option life | | 5 years | | | 2 – 5 years | |
| | |
| Note 8 | Segmented Information |
| | |
| | The Company operates in one business segment: the development, manufacture and installation of unattended smartcard applications. |
| |
| | Revenues by country are as follows: |
| |
| | | 2005
$ | | 2004
$ | | 2003
$ | |
|---|
| | | |
| | |
| | |
| |
| | Canada | | 273,194 | | | 267,970 | | | 175,505 | |
| | United States | | 116,917 | | | 115,752 | | | 149,317 | |
| | United Kingdom | | — | | | — | | | 600 | |
| |
| |
| | | | 390,111 | | | 383,722 | | | 325,422 | |
| |
| |
| | |
| | All capital assets are located in Canada. |
| |
| | During the year ended June 30, 2005, one customer accounted for 60% of revenues. |
| |
| | During the year ended June 30, 2004, one customer accounted for 63% of revenues. |
| |
| | During the year ended June 30, 2003, three customers accounted for 48%, 24% and 11% of revenues respectively. |
| | |
| Note 9 | Income Taxes |
| | |
| | The Company has accumulated non-capital losses in Canada totalling $7,018,574 and non-capital losses in the United States totalling $154,281 for income tax purposes, which may be deducted in the calculation of taxable income in future years. The losses expire as follows: |
| |
| | | Canada
$ | | United States
$ | |
|---|
| | |
| |
|---|
| | 2006 | | 1,025,284 | | | — | |
| | 2007 | | 991,993 | | | — | |
| | 2008 | | 1,248,591 | | | — | |
| | 2009 | | 1,159,337 | | | — | |
| | 2010 | | 842,684 | | | — | |
| | 2011 | | 984,063 | | | — | |
| | 2012 | | 766,622 | | | — | |
| | 2025 | | — | | | 154,281 | |
| |
| |
| | | | 7,018,574 | | | 154,281 | |
| |
| |
| | |
| | In addition, the Company has incurred scientific research and experimental development expenditures (SR&ED) of approximately $2,232,625 for income tax purposes which may be carried forward indefinitely and deducted in the calculation of taxable income in future years. |
| |
| | The Company has also accumulated non-refundable investment tax credits of $513,622 which may be applied against taxes payable in future years, and which expire at various dates commencing 2006. |
| |
| | These amounts are subject to review and revision by tax authorities and the potential tax benefit which may result from future application of the losses, SR&ED expenditures, non-refundable investment tax credits, and capital cost allowance is not reflected in these financial statements. The Company’s future tax assets and liabilities at enacted corporation tax rates are as follows: |
| | | | |
|---|
| | | 2005 | | 2004 | |
|---|
| | |
| |
| |
|---|
| | Canadian federal and provincial tax rates | | 35.62 | % | | 35.62 | % |
| | Unites States rate | | 15.00 | % | | — | |
| | Income tax recovery based on statutory rates: | | | | | | |
| | Losses carried forward | $ | 2,523,158 | | $ | 2,427,441 | |
| | Scientific research and experimental development
expenditures | | 796,922 | | | 766,666 | |
| | Investment tax credit | | 513,622 | | | 467,850 | |
| | Valuation allowance for future income tax assets | | (3,833,702 | ) | | (3,661,957 | ) |
| |
| |
| | | $ | — | | $ | — | |
| |
| |
| | | |
| | |
| | Management considers it more-likely-than-not that the amounts will not be utilized and, accordingly, a full valuation allowance has been applied. |
| | |
| Note 10 | Loss per share |
| | |
| | Loss per share is calculated using the weighted average number of common shares outstanding during the year of 23,674,454 shares (2004: 19,445,139 shares; 2003: 16,046,378 shares). Fully diluted per share amounts are not presented as the effect of outstanding options and warrants is anti-dilutive. |
| | |
| Note 11 | Commitments and Contingencies – Note 12 |
| | |
| | Obligations under the operating lease on the office premises are: |
| | |
| | | $ | |
|---|
| | |
| |
| | 2006 | 57,684 | |
| | 2007 | 52,877 | |
| |
| |
| | | 110,561 | |
| |
| |
| |
| | The Company is party to a settlement agreement, dated March 31, 1999, between various shareholders and directors of the Company. As a condition of this settlement, and in exchange for certain rights relating to the intangible assets of the Company, the Company has agreed to indemnify certain shareholders against potential tax liabilities and related incidental costs that may result on the transfer of escrow shares as determined in the settlement agreement. The amount of the potential liability is not determinable, and accordingly, no provision has been made in these financial statements. To date, no claims have been made. |
| |
| | During the year ended June 30, 2003, a former director and officer of the Company filed a complaint under the Employment Standards Act for fees of $130,445 plus interest. In September 2004, the Company settled this claim for $100,000 payable as to $8,333 per month beginning September 15, 2004. The former director and officer of the Company has been granted security for the claim against accounts receivable and the Company accrued an adequate provision included in the payables and accruals for the settlement. Subsequent to June 30, 2005 the claim was paid in full and all claims against the Company’s assets were discharged. |
| |
| | Various other claims by suppliers and professionals for unpaid balances are pending against the Company and, in management’s opinion, these claims are unfounded and no provision has been made in the financial statements. These claims total approximately $12,450. |
| | |
| Note 12 | Subsequent Events – Notes 7 and 11 |
| | |
| | Subsequent to June 30, 2005: |
| | The Company completed a private placement of 6,820,500 units at $0.10 per unit for gross proceeds of $682,050. Each unit is comprised of one common share and one share purchase warrant. Each warrant entitles the holder to purchase one common share at $0.25 per share. The warrants expire on August 31, 2006. In connection with this placement the Company paid $68,205 in cash and issued 150,000 common shares as commissions. At June 30, 2005, the Company had received $120,300 as subscriptions for this placement. |
| |
| | The Company completed a private placement of 4,641,667 units at $0.15 per share for gross proceeds of $660,000 and a debt settlement of $36,250 to a director of the Company included in payables and accruals at June 30, 2005. Each unit is comprised of one common share and one share purchase warrant. Each warrant entitles the holder to purchase one common share at $0.30 per share. The warrants expire on August 31, 2007. In connection with the private placement the Company incurred share issuance costs of $10,000, which was included in payables and accruals at June 30, 2005. At June 30, 2005, the company had received $150,000 as subscriptions for this placement. |
| |
| | The Company issued 1,033,332 common shares pursuant to the exercise of share purchase warrants at $0.20 per share for total proceeds of $206,666. The remaining 633,333 share purchase warrants exercisable at $0.20 per share expired unexercised. |
| |
| | The Company entered into a premise lease agreement until December 2008 which requires monthly lease payments of $2,032 for a total commitment of $73,152. |
| |
| | The Company entered into a consulting agreement for $5,000 per month to June 30, 2006 for a total commitment of $60,000. |
| | |
| Note 13 | Comparative Figures |
| | |
| | Certain comparative figures for the years ended June 30, 2004 and 2003 have been reclassified to conform to the financial statement presentation adopted for the year ended June 30, 2005. |
| |
| Note 14 | Differences Between Generally Accepted Accounting Principles in Canada and the United States |
| | |
| | These consolidated financial statements have been prepared in accordance with generally accepted accounting principles in Canada (Canadian GAAP) which differ in certain measurement respects with accounting principles generally accepted in the United States (US GAAP). |
| |
| | Had the Company followed US GAAP, the consolidated statement of shareholder’s equity (deficiency) under US GAAP would have been reported as follows: |
| |
| | | 2005
$ | | 2004
$ | |
|---|
| | |
| |
| |
|---|
| | Share Capital | | | | | | |
| | Common shares | | 11,225,477 | | | 10,820,977 | |
| | Additional capital – stock options | | 1,410,984 | | | 805,469 | |
| | Deferred compensation expenses | | — | | | (56,667 | ) |
| |
| |
| | | | 12,636,461 | | | 11,569,779 | |
| |
| |
| | Accumulated other comprehensive loss | | (86,916 | ) | | (61,222 | ) |
| |
| |
| | Accumulated Deficit | | | | | | |
| | Balance, beginning of year | | (11,682,087 | ) | | (10,499,235 | ) |
| | Loss for the year | | (982,179 | ) | | (1,183,895 | ) |
| |
| |
| | | | (12,664,266 | ) | | (11,683,130 | ) |
| |
| |
| | | | (114,721 | ) | | (174,573 | ) |
| |
| |
| | | |
| | |
| | Had the Company followed US GAAP, the consolidated statements of operations would be the same as under Canadian GAAP after giving effect to the change in stock-based compensation discussed below. |
| | Had the Company followed US GAAP, it would have reported consolidated statements of comprehensive loss within the financial statements as follows: |
| |
| | | 2005
$ | | 2004
$ | | 2003
$ | |
|---|
| | |
| |
| |
| |
|---|
| | Loss for the year under Canadian and
US GAAP | | (982,179 | ) | | (1,183,895 | ) | | (710,175 | ) |
| | Foreign currency translation adjustment | | (25,694 | ) | | (3,515 | ) | | (23,496 | ) |
| |
| |
| | Comprehensive loss under US GAAP | | (1,007,873 | ) | | (1,187,410 | ) | | (733,671 | ) |
| |
| |
| | Loss per common share – basic and diluted | | | | | | | | | |
| | Canadian GAAP | | (0.04 | ) | | (0.06 | ) | | (0.04 | ) |
| | US GAAP | | (0.04 | ) | | (0.06 | ) | | (0.05 | ) |
| |
| |
| | | | |
| | |
| | Had the Company followed US GAAP, it would have reported consolidated statements of cash flows within the financial statements as follows: |
| |
| | | | | |
|---|
| | | 2005
$ | | 2004
$ | | 2003
$ | |
|---|
| | |
| |
| |
| |
|---|
| | Cash flows from operating activities | | | | | | | | | |
| | Net loss for the year under US GAAP | | (982,179 | ) | | (1,183,895 | ) | | (710,175 | ) |
| | Items not affecting cash | | | | | | | | | |
| | Stock-based compensation | | 57,149 | | | 203,169 | | | — | |
| | Investor relations expense | | 42,313 | | | — | | | — | |
| | Finance fee | | 45,313 | | | — | | | — | |
| | Gain on settlement of debt | | (22,472 | ) | | (62,314 | ) | | — | |
| | Amortization | | 3,375 | | | 4,697 | | | 5,974 | |
| | Changes in non-cash working capital | | | | | | | | | |
| | Receivables | | (9,906 | ) | | 5,327 | | | 1,555 | |
| | Prepaid expenses | | (6,675 | ) | | 7,778 | | | (2,981 | ) |
| | Inventory | | 26,352 | | | (30,255 | ) | | (45164 | ) |
| | Payable and accruals | | 191,540 | | | 115,866 | | | 252,307 | |
| | Deposits received | | 299 | | | 16,279 | | | (25,000 | ) |
| |
| |
| | Operating activities under US GAAP | | (654,891 | ) | | (923,348 | ) | | (523,484 | ) |
| |
| |
| | |
| | Stock-based Compensation |
| |
| | Under Canadian GAAP, effective for fiscal years beginning on or after January 1, 2002, all public companies were required to adopt recommendations of the Canadian Institute of Chartered Accountants regarding accounting for Canadian stock-based compensation. Under these requirements, all stock-based payments to non-employees and direct awards of stock to employees need to be accounted for using a fair value based method of accounting. However, the new standard allowed the Company to continue its existing policy of not recording compensation cost on the grant of stock options to employees with the addition of pro forma information. The Company elected to apply the pro forma disclosure provisions of the new standard to awards granted to employees on or after July 1, 2002 for both US and Canadian GAAP. For the year ended June 30, 2004, however, the Company elected to follow the fair value method of accounting for stock options granted to employees for both US and Canadian GAAP. This will result in a charge to income in respect of the fair value of such options. |
| |
| | For fiscal years prior to June 30, 2003 under US GAAP, the Company used the intrinsic value method as described in APB 25, “Accounting for Stock Issued to Employees”, to recognize compensation cost on options granted to directors and employees. Under this method, the difference between the market price of the stock on the date of the grant and the exercise price of the stock options is expensed as compensation cost over the period from the date of the grant to the date the option is first exercisable. For options issued to consultants, the Company adopted the fair value method of accounting for |
| | stock-based compensation. This requires the options to be valued on the date of grant using the Black-Scholes option pricing method as prescribed by FAS 123. Under Canadian GAAP, prior to June 30, 2002 the Company did not record this stock-based compensation. |
| |
| | Comprehensive Income |
| |
| | US GAAP requires disclosure of comprehensive income which, for the Company, is net income (loss) under US GAAP plus the change in unrealized foreign exchange gains (losses) shown as cumulative translation adjustments under US GAAP. |
| |
| | The concept of comprehensive income is not required to be disclosed under Canadian GAAP. |
| |
| New Accounting Standards |
| | |
| | Management does not believe that any recently issued, but not yet effective, accounting standards if currently adopted could have a material effect on the accompanying financial statements. |
| | |
| Note 15 | Non-cash Transactions |
| | |
| | Investing and financing activities that do not have an impact on current cash flows are excluded from the statement of cash flows. |
| |
| | During the year ended June 30, 2005, the share capital subscribed includes $444,063 as consideration for investor relations services. |
| |
| | During the year ended June 30, 2004, the Company issued common shares of the Company as settlement of accounts payable totalling $413,341. |
| |
| | These transactions have been excluded from the statement of cash flows. |
