SECURITIES AND EXCHANGE COMMISSION
Washington, D.C., 20549
FORM 6-K
Report of Foreign Issuer
Submission For the month of May 2006.
QI Systems Inc. (SEC File No: 0-30948)
(Translation of registrant's name into English)
Unit 101, 3820 Jacombs Road, Richmond, British Columbia, CANADA, V6V 1Y6
(Address of principal executive office)
[Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F. Form 20-FX Form 40-F ____]
[Indicate by check mark whether the registrant by furnishing the information contained in this Form is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934. Yes ____ No _X___]
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
QI Systems Inc.
(Registrant)
Date:May 24, 2006
By:*Steven R. Garman(Signature)*
Steven R. Garman
President & CEO
QI System Inc.
*Print name and title under the signature of the signing officer
QI SYSTEMS INC.
CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED MARCH 31, 2006
NOT AUDITED OR REVIEWED BY EXTERNAL AUDITORS
QI SYSTEMS INC.
Consolidated Balance Sheets
As at March 31, 2006 and June 30, 2005
Expressed in US Dollars
Unaudited
March 31, 2006 | June 30, 2005 | ||
($) | ($) | ||
ASSETS | |||
Current | |||
Cash | 101,293 | 59,950 | |
Receivables | 285,363 | 40,784 | |
Share subscriptions receivable | 10,088 | 6,635 | |
Prepaid expenses | 66,833 | 410,545 | |
Inventory | 193,966 | 192,237 | |
657,544 | 710,151 | ||
Property, plant and equipment | 33,221 | 9,106 | |
690,766 | 719,257 | ||
LIABILITIES | |||
Current | |||
Payables and accruals | 352,944 | 808,094 | |
Shareholder loans | 1,284 | 21,392 | |
Deposits received | 258 | 16,578 | |
354,486 | 846,064 | ||
SHAREHOLDERS’ DEFICIENCY | |||
Share capital | 13,217,275 | 11,225,477 | |
Share capital subscribed | 100,000 | 692,333 | |
Value allocated to stock options | 310,488 | 260,318 | |
Deficit | (13,337,888) | (12,218,019) | |
Cumulative translation adjustment | 46,405 | (86,916) | |
336,280 | (126,807) | ||
690,766 | 719,257 | ||
On behalf of the Board of Directors: | |||
“Steven R. Garman” | “Matthew Yugovich” | ||
Steven R. Garman, Director | Matthew Yugovich, Director |
The accompanying notes are an integral part of these consolidated financial statements.
QI SYSTEMS INC.
Consolidated Statements of Operations and Deficit
For the three and nine months ended March 31, 2006 and March 31, 2005
Expressed in US Dollars
Unaudited
Three months ended | Nine months ended | ||||
March 31, 2006 | March 31, 2005 | March 31, 2006 | March 31, 2005 | ||
$ | $ | $ | $ | ||
Revenues | 256,487 | 96,208 | 379,453 | 367,729 | |
Cost of goods sold | 85,518 | 45,790 | 138,982 | 176,631 | |
170,969 | 50,418 | 240,471 | 191,098 | ||
Expenses | |||||
Administration | 162,146 | 93,493 | 531,353 | 276,649 | |
Amortization | 1,683 | 1,296 | 4,028 | 3,793 | |
Development costs | 45,025 | 57,485 | 125,460 | 201,350 | |
Financing costs and interest | 594 | 586 | 2,005 | 1,968 | |
Investor relations | 138,699 | - | 406,766 | - | |
Sales and marketing | 28,984 | 56,565 | 97,662 | 167,992 | |
Stock-based compensation | 468 | 24,434 | 49,731 | 24,434 | |
Professional fees | 104,457 | (592) | 181,871 | 26,026 | |
482,056 | 233,267 | 1,398,876 | 702,212 | ||
Operating loss | (311,087) | (182,849) | (1,158,405) | (511,114) | |
Interest income | 3,952 | 675 | 3,952 | 1,850 | |
Gain on settlement of debt | (8,094) | 277 | 34,584 | 22,444 | |
Net loss | (315,229) | (181,897) | (1,119,869) | (486,820) | |
Deficit, beginning of period | (13,022,659) | (11,540,763) | (12,218,019) | (11,235,840) | |
Deficit, end of period | (13,337,888) | (11,722,660) | (13,337,888) | (11,722,660) | |
Loss per share – basic and diluted | (0.01) | (0.01) | (0.03) | (0.02) | |
The accompanying notes are an integral part of these consolidated financial statements.
QI SYSTEMS INC.
Consolidated Statements of Cash Flow
For the three and nine months ended March 31, 2006 and March 31, 2005
Expressed in US Dollars
Unaudited
For the three months ended | For the nine months ended | ||||
March 31, 2006 | March 31, 2005 | March 31, 2006 | March 31, 2005 | ||
($) | ($) | ($) | ($) | ||
Cash flows related to operating activities | |||||
Net loss for the period | (315,229) | (181,897) | (1,119,869) | (486,820) | |
Adjustments to reconcile net loss used in operations | |||||
Stock-based compensation | 468 | 24,434 | 49,731 | 24,434 | |
Employment incentive paid with shares | - | - | 37,500 | - | |
Investor relations | 108,750 | - | 331,083 | - | |
Gain on settlement of debt | 8,094 | (277) | (34,584) | (22,444) | |
Amortization | 1,683 | 1,296 | 4,028 | 3,793 | |
(196,234) | (156,444) | (732,111) | (481,037) | ||
Changes in non-cash working capital items | |||||
Receivables | (204,587) | 21,847 | (244,580) | 4,575 | |
Share subscriptions receivable | 12,736 | - | (3,453) | - | |
Prepaid expenses | (189,866) | 3,936 | 12,629 | (1,371) | |
Inventory | (2,093) | 23,008 | (1,729) | (4,583) | |
Payables and accruals | 9,606 | 136,517 | (420,566) | 159,673 | |
Deposits received | (26,141) | (2,116) | (16,320) | (12,631) | |
(596,579) | 26,748 | (1,406,130) | (335,374) | ||
Cash flows related to investing activities | (10,463) | - | (28,144) | - | |
Cash flows related to financing activities | |||||
Proceeds from (repayment of) shareholder loans | - | 6,762 | (20,109) | 13,591 | |
Proceeds from issuance of capital, net of issue costs | 16,029 | - | 1,008,203 | 275,000 | |
Proceeds from exercise of stock option warrants | 47,536 | - | 254,202 | 17,200 | |
Proceeds from share capital subscribed | 100,000 | - | 100,000 | 87,300 | |
163,565 | 6,762 | 1,342,296 | 393,091 | ||
Effect of foreign currency translation on cash | 193,985 | 2,283 | 133,321 | (9,948) | |
Net increase (decrease) in cash | (249,492) | 35,793 | 41,343 | 47,769 | |
Cash and cash equivalents (cash deficiency), beginning of period | 350,785 | 24,134 | 59,950 | 12,158 | |
Cash and cash equivalents, end of period | 101,293 | 59,927 | 101,293 | 59,927 | |
The accompanying notes are an integral part of these consolidated financial statements.
QI SYSTEMS INC.
Notes to the Consolidated Financial Statements
March 31, 2006
Expressed in US Dollars
Unaudited
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles for interim financial information and do not include all information and footnote disclosures required for an annual set of financial statements.
In the opinion of management, all adjustments necessary for fair presentation of the Company’s financial position, results of operations and cash flows as at March 31, 2006 and for other periods presented, have been included.
Interim results are not necessarily indicative of the results to be expected for the fiscal year as a whole.
These unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s audited financial statements for the fiscal year ended June 30, 2005.
2. SIGNIFICANT ACCOUNTING POLICIES
These interim financial statements follow the same accounting policies used in the most recent annual financial statements.
3. COMPARATIVE FIGURES
Certain comparative figures have been reclassified to conform with the basis of presentation adopted in the current period.
QI Systems Inc.
Management Discussion and Analysis
For the Quarter and Nine months Ended March 31, 2006
All figures expressed in US Dollars except where noted
May 19, 2006
Note to Readers - Financial results for the three and nine months ended March 31, 2006 have not been reviewed by the Company’s Auditors.
The Company’s financial statements have been prepared in accordance with Canadian Generally Accepted Accounting Principles and the same accounting principles used for the June 30, 2005 consolidated financial statements have been used for preparing the March 31, 2006 quarter results. The Company’s reporting currency is the US Dollar. Other currencies are referenced.
The Company operates as a designer, developer and marketer of hardware and software for smart cards and contactless payment cards. The Company is a leading supplier of smart card systems for various vertical markets including vending machines, parking meters, photocopiers, laundry machines and water operators. QI’s products have been installed in Canada, the United States of America, Venezuela, the United Kingdom and Norway.
In the quarter ended March 31, 2006 the Company achieved sales of $256,487 which is an increase of $183,720 or 252% compared to sales in the preceding quarter. The increase in sales was due primarily to a large order being completed and shipped to the Company’s largest client who operates in the parking industry. Sales to clients operating in the newspaper vending industry were the next largest segment of customers.
Cost of sales during the period was $85,518, which represents 33% of sales, a margin improvement from total cost of sales of $45,790 (48% of sales) in the comparative quarter. Gross Margins were $170,969 or 67% of sales (comparative quarter: 52% of sales).
The Company’s expenses in the quarter are categorized as Administration, Amortization, Corporate Finance, Development Costs, Financing Costs and Interest, Investor Relations, Sales and Marketing and Professional Fees.
During the third quarter of fiscal 2006, Administration expenses were $162,146, down from $194,755 in the preceding quarter and up from $93,493 in the comparative period. The major Administration expenses are salaries and benefits paid to employees performing administrative duties of $108,485 and $19,601 of rent expense.
Development costs in the quarter ended March 31, 2006 were $45,025 (comparative period: $57,485) of which the most significant expense is for salaries and benefits paid to employees involved in the development of the Company’s products of $42,893 in the quarter. The reduction in cost results from a R&D reorganization that resulted in certain positions being eliminated. In the same period, as a cost savings initiative, the Company did not incur the same level of development consulting fees. The Company anticipates that development costs may increase in Q4 of fiscal 2006 or in early fiscal 2007 to accommodate the Company’s projected increased commercial activity and its concentrated efforts in developing its contactless payment technology.
During the quarter the Company incurred investor relations expense of $138,699, substantially most of which refers to the amortization over one year of the cost attributed to shares committed for issuance to an investor relations provider. Other costs are for consulting services provided to the Company with regards to investor relations. In the comparative quarter, the Company did not incur any investor relations or corporate finance expenses.
Sales and marketing expense in the quarter ended March 31, 2006 was $28,984 (comparative period: $56,565) which consists fundamentally of salaries, benefits and consulting fees. The reduction in sales expenses results from the departure in early fiscal 2006 of the Company’s former VP of Sales and Marketing. In April 2006, the Company hired a new Vice President of Business Development who assumes these responsibilities. These activities were previously absorbed by the Company’s CEO and CFO/COO, who are charged to General and Administrative expenses.
Professional fees of $104,457 during the quarter ended March 31, 2006 were incurred for legal fees incurred in connection with regulatory and compliance work, particularly in relation to the Company’s anticipated change of domicile into the United States of America. This represents an increase of $105,049 from the comparative period which essentially had no Professional Fees.
QI recorded an operating loss of $311,087 in the quarter ended March 31, 2006, compared to an operating loss of $182,849 in the comparative period due to the increase in expenses outlined above. In the quarter ended March 31, 2006, QI posted a net loss of $315,229, or $0.01 per share, compared to a net loss of $181,897 or $0.01 in the comparative period.
As anticipated, the Company incurred investing activities of $10,463 for purchase of various computer equipment and to purchase furniture and fixtures for the new headquarters in Colleyville, Texas. QI did not have any investing activities in the comparative quarter. QI will face the need to incur further capital expenditures in fiscal 2006 and early fiscal 2007 to purchase equipment to supports the development of its contactless payment devices and to properly outfit new employees.
In the period, the Company received $47,536 from the exercise of stock purchase warrants and options (seeLiquidity) and $130,000 from the proceeds of a private placement started at the end of the third quarter.
At March 31, 2006 the Company’s cash position was $101,293, with working capital of $303,057.
Revenues during the nine months ended March 31, 2006 were $379,453 compared to sales of $367,729 in the nine months ended December 31, 2004 (“the nine month comparative period”). Sales were essentially flat, due to similar volumes year over year from a major client in the parking industry.
Cost of sales during the period went down to $138,982, or 37% of sales, compared to $176,631, or 48% of sales, in the nine month comparative period.
During the nine months ended March 31, 2006 Administration expenses were $531,353 compared to $276,649 for the comparative period. This increase results primarily from the hiring of a full time CFO/COO in fiscal 2006 and from increased selling activity performed by the Executive staff since it has not replaced the VP of Sales and Marketing who resigned in the first quarter.
Development costs in the nine months ended March 31, 2006 were $125,460 compared to $201,350 following a reorganization that eliminated certain development positions.
During the nine-month period ended March 31, 2006 the Company incurred investor relations costs of $406,766 from the amortization of the cost of shares issued to an IR provider late in fiscal 2005, and from additional consulting fees in the field of investor relations. In the comparative nine month period, the Company did not incur any investor relations, fundamentally because of limited capital raising activities.
Sales and marketing expense in the nine months ended March 31, 2006 was $97,662 compared to $167,992 in the comparative nine month period, a difference of $70,330 that is explained by the elimination of the salary paid to the former VP of Sales and Marketing, whose responsibilities have been absorbed by senior administrative officers, as shown by the increase in Administrative Expenses.
Professional fees of $181,871 include legal fees incurred in the nine months ended March 31, 2006 in connection with regulatory and compliance work, most of which is related to the impending change of domicile of the Company to the United States of America. In the comparative nine month period, professional fees of $26,026 were incurred for legal fees.
QI recorded an operating loss of $1,158,405 in the nine months ended March 31, 2006, compared to an operating loss of $511,114 in the comparative nine month period. The Company recorded a Gain on Settlement of Debt of $34,584 mostly in connection with settlement of an outstanding major creditor. In the comparative nine month period the Company posted a gain on settlement of debt of $22,444. In the nine months ended March 31, 2006, QI posted a net loss of $1,119,869, or $0.03 per share, compared to a net loss of $486,820 or $0.02 per share in the comparative nine month period.
Qtr ended | Qtr ended | Qtr ended | Qtr ended | |
March 31, 2006 | Dec. 31, 2005 | Sept. 30, 2005 | June 30, 2005 | |
Total revenues | $256,457 | $72,767 | $50,199 | $22,382 |
(Net loss) | (315,229) | (391,252) | (413,388) | (495,358) |
(Loss) per share, basic and diluted | (0.01) | (0.01) | (0.01) | (0.02) |
Qtr ended | Qtr ended | Qtr ended | Qtr ended | |
March 31, 2005 | Dec. 31, 2004 | Sept. 30, 2004 | June 30, 2004 | |
Total revenues | $96,208 | $120,152 | $151,369 | $146,744 |
(Net loss) | (181,897) | (192,308) | (112,616) | (441,490) |
(Loss) per share, basic and diluted | (0.01) | (0.01) | (0.01) | (0.03) |
QI has incurred operating losses in the reporting period and in past periods. Its ability to continue operating as a going concern is contingent on the Company being able to rely on equity or debt financing to cover operating deficits until such time as its operations become cash neutral or cash positive.
At March 31, 2006 the Company’s cash position was $101,293, with working capital of $303,057.
During the quarter ended March 31, 2006:
?The Company received $43,636 from the exercise of 145,454 stock warrants at an exercise price of $0.30.
?The Company received $3,900 from the exercise of 26,000 stock options at an exercise price of $0.15.
?The Company received $130,000 for a private placement offering at $0.20 per unit. Each unit contains one share of common stock and a warrant to purchase one share at $0.40 within two years.
?The Company extended the exercise period for 61 days, until June 1, 2006, for 2,581,817 warrants with an exercise price of $0.30 originally scheduled to expire on April 1, 2006.
As disclosed inResults of Operations, QI posted a net loss in the quarter of $315,229. Losses in subsequent periods will be reduced or eliminated if the Company is able to secure sales streams that are still not fully in place at the date of this report. Even if it achieves decreasing quarterly losses in subsequent periods, the Company may face the need to raise additional funding in the capital markets or through short or long-term debt in the near future, until it can achieve positive cash flows from operations.
The company has no long term debt and is not subject to debt covenants. It does not anticipate it will incur any default or arrears on payment of leases.
The Company is not currently committed to further capital expenditures for the purchase of property, plant and equipment.
At March 31, 2006, the Company had outstanding 15,407,620 share purchase warrants (with exercise prices ranging from $0.25 to $0.30) and 1,050,000 share purchase options (with exercise prices ranging from $0.15 to $0.50).
There were no changes to the Company’s critical accounting estimates or accounting policies during the quarter ended March 31, 2006.
As of May 17, 2006 the Company has 39,715,756 common shares outstanding.
Additional information is available on SEDAR atwww.sedar.com.
This Management Discussion and Analysis may contain forward-looking statements that involve risks and uncertainties. When used in this document, the words “believe,” “anticipates,” “expects” and similar expressions are intended to identify such forward-looking statements. The Company’s actual results may differ significantly from the results discussed in the forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. The Company undertakes no obligation to publicly release the results of any revisions to these forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.
Form 52-109F2Certification of Interim Filings
May 23, 2006
I, Robert I. McLean Jr., Chief Financial Officer of QI Systems Inc., certify that:
1.I have reviewed the interim filings (as this term is defined in Multilateral Instrument 52-109Certification of Disclosure in Issuers’ Annual and Interim Filings) ofQI Systems Inc.(the issuer) for the period ending March 31, 2006.
2.Based on my knowledge, the interim filings do not contain any untrue statement of a material fact or omit to state a material fact required to be stated or that is necessary to make a statement not misleading in light of the circumstances under which it was made, with respect to the period covered by the interim filings;
3.Based on my knowledge, the interim financial statements together with the other financial information included in the interim filings fairly present in all material respects the financial condition, results of operations and cash flows of the issuer, as of the date and for the periods presented in the interim filings;
4.The issuer’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures for the issuer, and we have:
(a)designed such disclosure controls and procedures, or caused them to be designed under our supervision, to provide reasonable assurance that material information relating to the issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which the interim filings are being prepared.
May 23, 2006
“Robert I. McLean Jr.
”__________________________
Robert I. McLean Jr.
Chief Financial Officer
Form 52-109F2Certification of Interim Filings
May 23, 2006
I, Steve Garman, Chief Executive Officer of QI Systems Inc., certify that:
1.I have reviewed the interim filings (as this term is defined in Multilateral Instrument 52-109Certification of Disclosure in Issuers’ Annual and Interim Filings) ofQI Systems Inc.(the issuer) for the period ending March 31, 2006.
2.Based on my knowledge, the interim filings do not contain any untrue statement of a material fact or omit to state a material fact required to be stated or that is necessary to make a statement not misleading in light of the circumstances under which it was made, with respect to the period covered by the interim filings;
3.Based on my knowledge, the interim financial statements together with the other financial information included in the interim filings fairly present in all material respects the financial condition, results of operations and cash flows of the issuer, as of the date and for the periods presented in the interim filings;
4.The issuer’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures for the issuer, and we have:
(a)designed such disclosure controls and procedures, or caused them to be designed under our supervision, to provide reasonable assurance that material information relating to the issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which the interim filings are being prepared.
May 23, 2006
“Steve Garman
”__________________________
Steve Garman
Chief Executive Officer
