10QSB/A 1 form10-qsba.htm QI SYSTEMS INC. 10-QSB/A 09-30-2006 QI Systems Inc. 10-QSB/A 09-30-2006
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-QSB/A
 
(Mark One)
S
QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2006

or

£
TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _________ to __________

Commission File Number 000-30948
 
 
QI SYSTEMS INC.
(Exact name of registrant as specified in its charter)

 
Delaware
 
20-5126146
 
 
(State or other jurisdiction of incorporate of organization)
 
(IRS Employer Identification Number)
 

609 Cheek Sparger Road, Suite 300, Colleyville, TX 76034
(Address of principal executive offices) (Zip Code)

(817) 485-8111
(Registrant’s telephone number, including area code)

Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes   S   No   £

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes   £   No   S

State the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 
Class
 
Shares outstanding as of November 14, 2006
 
 
Common Stock, par value $0.001 per share
 
44,834,629
 

Transitional Small Business Disclosure Format (check one);

Yes   £   No   S
 
1
 

FORM 10-QSB/A

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2006
 
TABLE OF CONTENTS
 
 
EXPLANATORY STATEMENT

This Form 10-QSB/A, which amends and restates the Company’s Form 10-QSB for the quarterly period ended September 30, 2006, initially filed with the Securities and Exchange Commission (the “SEC”) on November 15, 2006 (the “Original Filing”), is being filed to reflect the restatement of the financial statements for the three month period ending September 30, 2006 and for the related disclosures for the same period.

The Company determined that subsequent to the Original Filing, a Form 10-QSB/A would be required to reclassify the interest expense associated with the beneficial conversion feature of its convertible debt securities. When the Company issues convertible debt securities with a non-detachable conversion feature that provides for a rate of conversion that is below market value on the commitment date, it is known as a beneficial conversion feature (“BCF”). Pursuant to Emerging Issues Task Force (“EITF”) Issue No. 98-5 “Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios” and EITF Issue No. 00-27 “Application of Issue No. 98-5 to Certain Convertible Instruments”, the conversion feature of the security that has characteristics of an equity instrument is measured at its intrinsic value at the commitment date and is recorded as additional paid in capital. A portion of the proceeds of the security issued is allocated to the conversion feature equal to its intrinsic value to a maximum of the proceeds received. The resulting discount of the debt instrument is amortized into income as interest expense over the conversion feature’s vesting period.

In the Original Filing the beneficial conversion feature was classified as long-term debt on the balance sheet in the financial statements. The amended financial statements properly classify the beneficial conversion feature as additional paid in capital in the shareholders equity section of the balance sheet. The financial statements in the Original Filing also classified the beneficial conversion expense as a separate line item in the income statement. The amended financial statements correctly classify the beneficial conversion expense as part of interest on long term debt.

This Form 10-QSB/A sets forth Part I Item 2 of the Original Filing in its entirety for the convenience of the reader except for where this 10-QSB/A solely amends and restates certain information. This Form 10-QSB/A also updates all CEO and CFO certifications.

Except for the foregoing amended information, this Form 10-QSB/A continues to describe conditions as of the date of the Original Filing, and the disclosures contained herein have not been updated to reflect events, results or developments that occurred after the Original Filing, or to modify or update those disclosures affected by subsequent events. Among other things, forward looking statements made in the Original Filing have not been revised to reflect events, results or developments that occurred or facts that became known to the Company after the date of the Original Filing (other than the restatement), and such forward looking statements should be read in their historical context.

 
QI SYSTEMS INC.
 
A Delaware Company
 
INTERIM CONSOLIDATED FINANCIAL STATEMENTS
 
September 30, 2006
 
(Expressed in US dollars)
 
(Unaudited)


Interim Consolidated Balance Sheets
September 30, 2006 and June 30, 2006
(Expressed in US Dollars)
(Unaudited)
 
 
 
 
  
September 30,
2006
$
  
June 30,
2006
$
  
Assets
  
 
  
 
  
Current
  
 
  
 
  
Cash and cash equivalents
    
172,326
    
73,559
  
Receivables
    
75,660
    
31,963
  
Prepaid expenses
   
121,256
    
227,566
  
Inventory
    
164,593
    
149,902
  
     
533,835
    
482,990
  
Deposit
    
1,000
    
1,000
  
Equipment
    
30,725
    
32,680
  
 
    
565,560
    
516,670
  
Liabilities
          
Current
          
Payables and accruals - Note 4
    
288,752
    
350,954
  
Shareholder loans
    
153,075
    
2,575
  
Deposits received
   
68,777
    
20,059
  
Unearned revenue
    
10,792
    
10,734
  
 
    
521,396
    
384,322
  
Long term shareholder loans - Note 5
    
150,958
    
-
  
 
    
672,354
    
384,322
  
 
          
Stockholders’ Equity (Deficiency)
          
Capital stock - Note 6
          
Authorized: 100,000,000 common stock, $0.001 par value
          
Issued: 42,095,756 common stock (June 20, 2006: 42,095,756)
    
42,096
    
42,096
  
Additional paid in capital
    
14,757,329
    
14,613,929
  
Share capital subscribed - Note 6
    
130,500
    
-
  
Obligation to issue shares - Note 6
    
56,700
    
-
  
Deficit
    
(15,088,687
)
  
(14,508,086
)
Cumulative translation adjustment
    
(4,732
)
  
(15,591
)
 
    
(106,794
)
  
132,348
  
 
    
565,560
    
516,670
  

The accompanying notes are an integral part of these financial statements.
Interim Consolidated Statements of Operations
for the three months ended September 30, 2006 and 2005
(Expressed in US Dollars)
(Unaudited)
 
 
 
 
  
2006
$
  
2005
$
  
 
  
 
  
 
  
Revenue
    
73,045
    
50,199
  
 
          
Cost of goods sold
    
33,834
    
19,145
  
 
    
39,211
    
31,054
  
 
          
Expenses
          
Administration
    
186,087
    
174,452
  
Amortization
    
1,953
    
1,173
  
Development costs
    
32,778
    
48,499
  
Financing costs and interest
    
42,938
    
920
  
Interest on long-term debt
    
150,035
    
-
  
Investor relations
    
141,020
    
142,181
  
Sales and marketing
    
43,184
    
37,498
  
Professional fees
    
21,864
    
15,293
  
Stock-based compensation
    
-
    
24,427
  
 
    
619,859
    
444,443
  
Operating loss
    
(580,648
)
  
(413,389
)
Interest income
    
47
    
-
  
Net loss
    
(580,601
)
  
(413,389
)
 
          
Other comprehensive income:
          
Foreign currency translation adjustment
    
10,859
    
24,069
  
Comprehensive loss
    
(569,742
)
  
(389,320
)
 
          
Net Loss per share - basic and diluted
  
$
(0.01
)
$
(0.01
)
 
          
Weighted average number of shares outstanding
    
42,095,756
    
30,672,897
  

The accompanying notes are an integral part of these financial statements.


Interim Consolidated Statements of Cash Flows
for the three months ended September 30, 2006 and 2005
(Expressed in US Dollars)
(Unaudited)
 
 
 
 
  
2006
$
  
2005
$
  
 
  
 
  
 
  
Cash Flows related to Operating Activities
  
 
  
 
  
Net loss for the year
    
(580,601
)
  
(413,389
)
Adjustments to reconcile net loss used in operations
          
Stock-based compensation
   
-
    
24,427
  
Investor relations expense
    
119,822
    
111,167
  
Finance fee
    
42,219
    
-
  
Amortization
    
1,953
    
1,173
  
Interest on long-term debt
    
149,081
    
-
  
Inventory write-down
    
1,796
    
-
  
Changes in non-cash working capital items
          
Receivables
    
(43,697
)
  
7,986
  
Prepaid expenses
    
(13,032
)
  
105,039
  
Inventory
    
(16,487
)
  
633
  
Payables and accruals
    
(62,202
)
  
(180,643
)
Deposits received
    
47,586
    
(11,964
)
 
    
(353,562
)
  
(355,571
)
 
          
Cash Flows related to Investing Activity
          
Investment in capital assets
    
-
    
(9,254
)
 
          
Cash Flows related to Financing Activities
          
Proceeds from (repayment of) shareholder loans
    
300,744
    
(20,109
)
Proceeds from share issuances, net of issue costs
    
-
    
992,175
  
Proceeds from exercise of stock options and warrants
    
7,500
    
48,667
  
Proceeds from share capital subscribed
    
130,500
    
-
  
 
    
438,744
    
1,020,733
  
…/cont’d
The accompanying notes are an integral part of these financial statements.

 
Continued
QI SYSTEMS INC.
Interim Consolidated Statements of Cash Flows
for the three months ended September 30, 2006 and 2005
(Expressed in US Dollars)
(Unaudited)
 
 
 
 
  
2006
$
  
2005
$
  
 
  
 
  
 
  
 
  
 
  
 
  
Effect of foreign currency translation on cash
    
13,585
    
(2,896
)
Net increase in cash
    
98,767
    
653,012
  
Cash, beginning
    
73,559
    
59,950
  
Cash and cash equivalents, ending
    
172,326
    
712,962
  
 
          
Cash and cash equivalents is comprised of:
          
Cash
    
63,181
    
462,962
  
Term deposit
    
109,145
    
250,000
  
 
    
172,326
    
712,962
  

Non-cash transaction - Note 10

The accompanying notes are an integral part of these financial statements.

 
Interim Consolidated Statements of Stockholders' Equity
for the year ended June 30, 2006 and for the three months ended September 30, 2006 
(Expressed in US Dollars)
(Unaudited)
 
 
 
   
 Common Shares
                                
   
Number
  
 Par Value*
  
 Additional
Paid-in
Capital*
  
 Share
Capital
Subscribed
  
 Obligation
To issue
Shares
  
 Accumulated
Deficit
  
 Cumulative
Translation
Adjustment
  
 Stockholders’
Equity
(Deficiency)
  
Balance, June 30, 2005
    
24,230,053
  
$
24,230
  
$
11,962,199
  
$
692,333
  
$
-
  
$
(12,718,653
)
$
(86,916
)
$
(126,807
)
Issued pursuant to private placements
                                 
for cash
   
12,620,500
    
12,620
    
1,609,430
    
(270,300
)
  
-
    
-
    
-
    
1,351,750
  
for settlement of debts
    
241,667
    
242
    
36,008
    
-
    
-
    
-
    
-
    
36,250
  
Issued pursuant to a debt settlement agreement
    
100,000
    
100
    
30,900
    
-
    
-
    
-
    
-
    
31,000
  
Issued for services
    
4,292,500
    
4,293
    
758,520
    
(444,063
)
  
-
    
-
    
-
    
318,750
  
Share issue costs
   
150,000
    
150
    
(95,854
)
  
22,030
    
-
    
-
    
-
    
(73,674
)
Stock-based compensation
   
-
    
-
    
58,047
    
-
    
-
    
-
    
-
    
58,047
  
Exercise of options for cash
   
32,250
    
32
    
4,806
    
-
    
-
    
-
    
-
    
4,838
  
Exercise of warrants
                                 
for cash
   
966,665
    
967
    
192,366
    
-
    
-
    
-
    
-
    
193,333
  
for settlement of debts
    
212,121
    
212
    
56,757
    
-
    
-
    
-
    
-
    
56,969
  
Escrow shares cancelled
    
(750,000
)
  
(750
)
  
750
    
-
    
-
    
-
    
-
    
-
  
Foreign currency translation adjustment
   
-
    
-
    
-
    
-
    
-
    
-
    
71,325
    
71,325
  
Net loss
   
-
    
-
    
-
    
-
    
-
    
(1,789,433
)
  
-
    
(1,789,433
)
 
                                  
Balance, June 30, 2006
   
42,095,756
    
42,096
    
14,613,929
    
-
    
-
    
(14,508,086
)
  
(15,591
)
$
132,348
  
Share capital subscribed
   
-
    
-
    
-
    
130,500
        
-
    
-
    
130,500
  
Exercise of stock options for cash
    
-
    
-
    
-
    
-
    
7,500
    
-
    
-
    
7,500
  
Fair value of stock option exercised
    
-
    
-
    
(6,600
)
  
-
    
6,600
    
-
    
-
    
-
  
Pursuant to loan agreements
    
-
    
-
    
-
    
-
    
42,600
    
-
    
-
    
42,600
  
Beneficial conversion feature
                
150,000
                            
150,000
  
Foreign currency translation adjustment
   
-
    
-
    
-
    
-
    
-
    
-
    
10,859
    
10,859
  
Net loss
   
-
    
-
    
-
    
-
    
-
    
(580,601
)
  
-
    
(580,601
)
 
                                  
Balance, September 30, 2006
   
42,095,756
  
$
42,096
  
$
14,757,329
  
$
130,500
  
$
56,700
  
$
(15,088,687
)
$
(4,732
)
$
(106,794
)
*The par value of common shares has been retroactively restated to reflect a change from no par value to a par value of $0.001 effective July 1, 2006.
The accompanying notes are an integral part of these financial statements.

 
Notes to the Interim Consolidated Financial Statements
for the three months ended September 30, 2006
(Expressed in US Dollars)
(Unaudited)
 
 
 
Note 1
Interim Reporting
 

QI Systems Inc. (“QI” or “the Company”) was incorporated in 1978 under the British Columbia Company Act. Effective July 1, 2006, the Company changed its jurisdiction of incorporation to the State of Delaware, USA. The Company manufactures designs and sells readers that allow the use of cash-card payment systems for self-serve applications such as vending, gaming, laundromat machines, transit fare collection systems and newspaper vending machines.

The accompanying unaudited interim consolidated financial statements have been prepared by QI Systems Inc. (the "Company") pursuant to the rules and regulations of the United States Securities and Exchange Commission. Certain information and disclosures normally included in annual consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, all adjustments and disclosures necessary for a fair presentation of these consolidated financial statements have been included. Such adjustments consist of normal recurring adjustments. These interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements of the Company for the fiscal year ended June 30, 2006.

The results of operations for the three months ended September 30, 2006 are not indicative of the results that may be expected for the full year.
 
 
Note 2
Continuance of Operations
 

These financial statements have been prepared in accordance with generally accepted accounting principles applicable to a going concern, which assumes that the Company will be able to meet its obligations and continue its operations for its next fiscal year. Realization values may be substantially different from carrying values as shown and these financial statements do not give effect to adjustments that would be necessary to the carrying values and classification of assets and liabilities should the Company be unable to continue as a going concern. At September 30, 2006, the Company had not yet achieved profitable operations, has accumulated losses of $15,088,687 since its inception, has working capital of $12,439 and expects to incur further losses in the development of its business, all of which casts substantial doubt about the Company’s ability to continue as a going concern. The Company’s ability to continue as a going concern is dependent upon its ability to generate future profitable operations and/or to obtain the necessary financing to meet its obligations and repay its liabilities arising from normal business operations when they come due. Management has no formal plan in place to address this concern but considers that the Company will be able to obtain additional funds by equity financing and/or related party advances, however there is no assurance of additional funding being available.  

 
QI SYSTEMS INC.
Notes to the Interim Consolidated Financial Statements
for the three months ended September 30, 2006
(Expressed in US Dollars)
(Unaudited)
 
 
 
Note 2
Continuance of Operations (continued)
 

The preparation of financial statements in accordance with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
 

Note 3
Additional Significant Accounting Policy
 
 
Beneficial Conversion Feature
 
When the Company issues convertible debt securities with a non-detachable conversion feature that provides for a rate of conversion that is below market value on the commitment date, it is known as a beneficial conversion feature (“BCF”). Pursuant to Emerging Issues Task Force (“EITF”) Issue No. 98-5 “Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios” and EITF Issue No. 00-27 “Application of Issue No. 98-5 to Certain Convertible Instruments”, the conversion feature of the security that has characteristics of an equity instrument is measured at its intrinsic value at the commitment date and is recorded as additional paid in capital. A portion of the proceeds of the security issued is allocated to the conversion feature equal to its intrinsic value to a maximum of the proceeds received. The resulting discount of the debt instrument is amortized into income as interest expense over the conversion feature’s vesting period.
 

Note 4
Related Party Transactions
 
 
In August 2006, a director of the Company exercised 50,000 share purchase options at $0.15 per share for options outstanding at June 30, 2006 for total proceeds of $7,500. The shares were issued in October 2006.
 
Included in accounts payable is $48,888 (June 30, 2006: $66,765) due to a director and officer of the Company and a company with a common director for administrative fees charged in prior years.

During the three months ended September 30, 2006, the Company entered into three separate loan agreements with two shareholders of the Company (Note 5). 
 

Note 5
Shareholder Loans
 

The following borrowing transactions occurred during the three months ended September 30, 2006:
 
By a loan agreement dated August 4, 2006, the Company was loaned $50,000 by a shareholder of the Company. This loan is unsecured and non-interest bearing. The agreement provides that if the loan is not repaid within 60 days, interest will accrue at a monthly rate of 2% of the principal unpaid balance. As a funding fee for the loan, the Company agreed to issue the shareholder 30,000 shares of the Company's common stock. The shares were issued in October 2006.

 
QI SYSTEMS INC.
Notes to the Interim Consolidated Financial Statements
for the three months ended September 30, 2006
(Expressed in US Dollars)
(Unaudited)
 
 

Note 5
Shareholder Loans (continued)
 
 
By an agreement dated August 31, 2006, the Company was loaned $100,000 by the above noted shareholder. This loan is secured and non-interest bearing. The loan is secured by the Company’s inventory, equipment, trademarks, trade names, contract rights and leasehold interests. The agreement provides that if the loan is not repaid within 90 days, interest will accrue at a monthly rate of 2.5% of the principal unpaid balance. As a funding fee for the loan, the Company agreed to issue the shareholder 250,000 shares of the Company's common stock. The shares were issued in October 2006.

By an agreement dated September 5, 2006, the Company was loaned $150,000 by a shareholder of the Company. The subordinated loan has a term of five years; bears interest at 10% per annum and is convertible into common stock of the Company at $0.07 per share. In addition, for each share of common stock issued upon conversion, a warrant to purchase additional shares of common stock of the Company will be issued at an exercise price of $0.20 per share for two years from the date the loan is converted. An amount of $150,000 was recognized during the three months ended September 30, 2006 as the fair value of the beneficial conversion feature of this loan. This amount has been include in interest on long-term debt.

At September 30, 2006, accrued interest of $958 has been recorded.
 

Note 6
Share Capital
 
 
Commitments:

Share capital subscribed:

As at September 30, 2006, proceeds of $130,500 representing 1,864,283 shares at $0.07 per share had been received by the Company as subscription for a private placement to be completed during the three months ended December 31, 2006 (Note 9).

Obligation to issue shares:

Pursuant to two loan agreements entered into during the three months ended September 30, 2006 with a shareholder of the Company, 30,000 shares valued at $0.17 per share and 250,000 shares valued at $0.15 per share are owed as a funding fee. The shares were issued in October 2006.

A director of the Company exercised 50,000 share purchase options at $0.15 per share for total proceeds of $7,500. The shares were issued in October 2006.

 
QI SYSTEMS INC.
Notes to the Interim Consolidated Financial Statements
for the three months ended September 30, 2006
(Expressed in US Dollars)
(Unaudited)
 
 
 
Note 6
Shareholder Loans (continued)
 

Commitments: (continued)

Warrants:

Share purchase warrants outstanding to acquire an equal number of common shares as of June 30, 2006 are as follows:


Number of
Warrants
  
Exercise
Price
  
Expiry
Date
  
 
6,820,500
  
$
0.25
    
October 30, 2006 (1
)
 
1,363,636
  
$
0.30
    
November 17, 2006
  
 
4,641,667
  
$
0.30
    
September 01, 2007
  
 
1,400,000
  
$
0.40
    
June 20, 2008
  
 
14,225,803
          

(1) Subsequent to September 30, 2006, these warrants expired.

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 September 30, 2006 the total number of options approved for issue is 4,000,000, 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 September 30, 2006 and June 30, 2006 and changes during the period ending on that dates, is presented below:


   
September 30, 2006
  
June 30, 2006
  
   
 Number of
options
  
 Weighted
Average
Exercise Price
  
 Number of
options
  
 Weighted
Average
Exercise Price
  
Outstanding, beginning  of period
    
1,050,000
    
0.28
    
1,780,500
    
0.43
  
Exercised
    
(50,000
)
  
0.15
   
(32,250
)
  
0.15
  
Expired
    
-
   
-
   
(167,000
)
  
1.79
  
Forfeited
    
-
   
-
   
(531,250
)
  
0.38
  
Outstanding and  exercisable, end of  period
    
1,000,000
    
0.28
    
1,050,000
    
0.28
  

 
QI SYSTEMS INC.
Notes to the Interim Consolidated Financial Statements
for the three months ended September 30, 2006
(Expressed in US Dollars)
(Unaudited)
 
 
 
Note 6
Share Capital (continued)
 
 
Commitments: (continued)

Stock Options: (continued)

Options Outstanding
  
 Options
Exercisable
  
Exercise Price
  
 Number
Outstanding at
September 30,
2006
  
 Weighted
Average
Remaining
Contractual
Life
(Years)
  
 Number
Exercisable at
September 30,
2006
  
                  
 
0.15
    
616,000
    
3.25
    
616,000
  
 
0.50
    
384,000
    
1.25
    
384,000
  
     
1,000,000
    
2.49
    
1,000,000
  

The options expire December 31, 2007 as to 384,000 options at $0.50 per share and December 31, 2009 as to 616,000 options at $0.15 per share.
 

Note 7
Segmented Information
 

The Company operates in one business segment: the development, manufacture and installation of unattended smartcard applications.

For the three months ended September 30, 2006, revenues by country are as follows:

 
  
2006
$
  
 
  
 
  
 
  
 
  
Canada
    
24,615
  
United States
    
47,972
  
Other
    
458
  
 
    
73,045
  



QI SYSTEMS INC.
Notes to the Interim Consolidated Financial Statements
for the three months ended September 30, 2006
(Expressed in US Dollars)
(Unaudited)

 

Note 7
Segmented Information (continued)
 

As at September 30, 2006, the net book value of capital assets located in Canada and the United States are $6,642 and $24,083, respectively.

During the three months ended September 30, 2006, four customers accounted for 70% of revenues.
 

Note 8
Commitments and Contingencies
 
 
Obligations under the operating leases on office premises are:
 
 
$
  
 
  
 
  
2007
    
62,620
  
2008
    
25,618
  
2009
    
16,412
  
 
    
104,650
  

The Company signed an employment agreement dated December 19, 2005 with the president of the Company whereby the president will receive a salary of $17,500 per month plus $1,000 per month in benefits. In addition, the president is entitled to receive bonuses not to exceed 200% of his salary based on the achievement of certain financial targets. The term of the contract is indefinite.

The Company signed an employment agreement dated March 1, 2006 with an officer of the Company whereby the officer will receive a salary of $13,000 per month plus benefits. In addition, the officer is entitled to receive bonuses not to exceed 150% of his salary based on the achievement of certain financial targets. The term of the contract is indefinite.

A notice of claim has been filed in the Provincial Court of British Columbia against the Company whereby the claimant is claiming $25,000 in damages plus costs from misrepresentation. Management of the Company feels the claim is without merit and is unlikely to succeed.
 

Note 9
Subsequent Events - Note 6
 

On October 3, 2006 the Company completed a private placement of 2,408,873 units at $0.07 per unit for total proceeds of $168,621. Each unit is comprised of one common share and one share purchase warrant. Each warrant entitles the holder to purchase one common share at $0.20 per share until October 3, 2008.

 
QI SYSTEMS INC.
Notes to the Interim Consolidated Financial Statements
for the three months ended September 30, 2006
(Expressed in US Dollars)
(Unaudited)
 
 

Note 10
Non-cash Transactions
 

Investing and financing activities that do not have an impact on current cash flows are excluded from the statements of cash flows.

During the three months ended September 30, 2006, the Company issued 280,000 common shares valued at $42,600 as a funding fee pursuant to two shareholder loan agreements. This transaction has been excluded from the statement of cash flows.


 
Item 2. Management’s Discussion and Analysis or Plan or Operation

Forward Looking Statements

We are including the following cautionary statement in this Form 10-QSB/A for any forward-looking statements made by, or on behalf of, us. Certain statements contained herein and other materials we file with the Securities and Exchange Commission are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Act of 1934, as amended and, accordingly, involve risks and uncertainties which could cause actual results or outcomes to differ materially from those expressed in the forward-looking statements. Forward-looking statements include statements concerning plans, objectives, goals, strategies, expectations, future events or performance and underlying assumptions and other statements which are other than statements of historical facts. Forward looking statements are accompanied by words such as “may”, “will”, “could”, “should”, “anticipate”, “believe”, “budgeted”, “expect”, “intend”, “plan”, “project”, “potential”, “estimate”, or “future” or variations thereof or similar statements. Our expectations, beliefs and projections are expressed in good faith and are believed by us to have a reasonable basis, including without limitation, management's examination of historical operating trends, data contained in our records and other data available from third parties, but we cannot assure you that management's expectations, beliefs or projections will result or be achieved or accomplished.

Our Business

We operate as a designer, developer and marketer of hardware and software for smart cards. We are a leading supplier of smart card systems for various vertical markets including vending machines, parking meters, gaming, photocopiers, laundry machines and water operators. Our products have been installed in Canada, the United States of America, Venezuela, the United Kingdom and Norway.

Results of Operations

Three Months Ended September 30, 2006 and 2005

Revenues during the three months ended September 30, 2006 were $73,045, primarily derived from the sale of smart cards and ancillary products to our client base, fundamentally within the parking and newspaper vending industries. Sales of our products in the first quarter of fiscal 2007 increased 173% from sales achieved in the preceding quarter. This represents $46,331 in additional sales. Sales continue to be concentrated in a few clients. Sales in the first quarter of fiscal 2007 increased by $22,846, or 46%, from sales in the comparative fiscal 2006 period. The increase in sales is the result of demand changes from our most significant clients in the parking and newspaper vending industries. We have received a significant sales order from our major parking client, which is expected to be delivered in the next quarter.

We incurred a net loss of $580,601 in the quarter ended September 30, 2006 and have incurred losses in past periods. Losses were funded by the receipt of share capital and the exercise of stock purchase options. We expect to be able to fund working capital requirements in future periods with cash flow from operations and the issuance of equity.

Cost of sales during the period was $33,834, which represents 46% of sales, a slight decrease from total cost of sales of $19,145, or 38% of sales, in the comparative quarter. Gross margins were $39,211 or 54% of sales (comparative quarter: 62% of sales).

Our expenses in the quarter are categorized as administration, amortization, development costs, financing costs and interest, investor relations, sales and marketing and professional fees.

 
During the first quarter of fiscal 2007, administration expenses were $186,087 (comparative period: $174,452), which include the following three major expenses: salaries and benefits paid to employees performing administrative duties, foreign exchange expense (most of which is unrealized and refers to adjustments of monetary items at quarter end) and rent expense.

Development costs in the quarter ended September 30, 2006 were $32,778 (comparative period: $48,499), of which the most significant expense was for salaries and benefits paid to employees involved in the development of our products. We anticipate that development costs will increase in fiscal 2007 to accommodate our projected increased commercial activity.

Financing costs of $43,892 during the three months ended September 30, 2006 included $42,600 relating to the fair value of shares issued to a shareholder as funding fees for two loans made to us.

In the first quarter 2007, an amount of $149,081 was recognized as a beneficial conversion expense relating to a loan agreement with one of our shareholders. This amount has been included in interest on long-term debt.

During the quarter ended September 30, 2006, we incurred investor relations expenses of $141,020, (comparative period $142,181), most of which refers to the amortization of the cost attributed to shares committed for issuance to investor relations providers. Other costs are for consulting fees provided to us relating to investor relations services.

Sales and marketing expense in the quarter ended September 30, 2006 $43,184 (comparative period: $37,498), which consists fundamentally of salaries and benefits.

Professional fees of $21,864 during the quarter were for audit and legal fees incurred in connection with regulatory and compliance work. It is expected that future quarters’ professional fees will be lower than those in the current quarter due to the completion of our change in domicile at the end of fiscal 2006.

We recorded an operating loss of $580,648 in the quarter ended September 30, 2006, compared to an operating loss of $413,389 in the three months ended September 30, 2005. In the quarter ended September 30, 2006, we posted a net loss of $580,601, or $0.01 per share, compared to a net loss of $413,389 or $0.01 per share in the comparative period.

We did not engage in any investing activities in the current quarter or in the comparative quarter of fiscal 2006. We will face the need to incur capital expenditures in fiscal 2007 to upgrade certain hardware used by our employees to perform their development duties.

At September 30, 2006, our cash position was $172,326, with working capital of $12,439


Summary of Quarterly Results
 
   
Qtr ended
Sept. 30, 2006
  
Qtr ended
June 30, 2006
  
Qtr ended
March 31, 2006
  
Qtr ended
Dec. 31, 2005
  
Total revenues
  
$
73,045
  
$
26,715
  
$
256,487
  
$
72,767
  
(Net loss)
    
(580,601
)
  
(669,563
)
  
(315,229
)
  
(391,252
)
(Loss) per share, basic and diluted
    
(0.01
)
  
(0.02
)
  
(0.01
)
  
(0.01
)

   
Qtr ended
Sept. 30, 2005
  
Qtr ended
June 30, 2005
  
Qtr ended
March 31, 2005
  
Qtr ended
Dec. 31, 2004
  
Total revenues
  
$
50,199
  
$
22,382
  
$
96,208
  
$
120,152
  
(Net loss)
    
(413,389
)
  
(549,745
)
  
(181,897
)
  
(192,308
)
(Loss) per share, basic and diluted
    
(0.01
)
  
(0.02
)
  
(0.01
)
  
(0.01
)
 
Liquidity and Capital Resources

We have incurred operating losses in the reporting period and in past periods. Our ability to continue operating as a going concern is contingent on our ability to rely on equity or debt financing to cover operating deficits until such time as our operations become cash neutral or cash positive.

By a loan agreement dated August 4, 2006, we were loaned $50,000 by one of our shareholders, Dan Berry. This loan is unsecured and non-interest bearing. The agreement provides that if the loan is not repaid within 60 days, interest will accrue at a monthly rate of 2% of the principal unpaid balance. As a funding fee for the loan, we issued Mr. Berry 30,000 shares of our common stock.

By a loan agreement dated August 31, 2006, we were loaned $100,000 by the same shareholder mentioned above. This loan is secured by our inventory, equipment, trademarks, trade names, contract rights and leasehold interests and is non-interest bearing. The agreement provides that if the loan is not repaid within 90 days, interest will accrue at a monthly rate of 2.5% of the principal unpaid balance. As a funding fee for the loan, we issued the shareholder 250,000 shares of our common stock.

By a Convertible Subordinated Capital Note dated September 5, 2006, we were loaned $150,000 by shareholders, Scott and Kymberly Sabins. The subordinated loan has a term of five years, bears interest at 10% per annum and is convertible into shares of our common stock at a price of $0.07 per share. In addition, for each share of common stock issued, a warrant to purchase additional shares of our common stock will be issued at an exercise price of $0.20 per share for two years from the date the loan is converted. An amount of $149,081 was recognized during the three months ended September 30, 2006 as the fair value of the beneficial conversion feature of this loan.

In August 2006, one of our directors exercised 50,000 share purchase options at $0.15 per share for options outstanding at June 30, 2006 for total proceeds of $7,500.

On October 3, 2006, we completed a private placement of 2,408,873 units at $0.07 per unit for total proceeds of $168,621. Each unit is comprised of one common share and one share purchase warrant. Each warrant entitles the holder to purchase one common share at $0.20 per share until October 3, 2008.

As disclosed in Results of Operations, we posted a net loss in the quarter ended September 30, 2006 of $580,601. Losses in subsequent periods will be reduced or eliminated if we are able to secure sales streams that are still not fully in place at the date of this report. Even if we achieve decreasing quarterly losses in subsequent periods, we still may face the need to raise additional funding in the capital markets or through further short or long-term debt in the near future, until we can achieve positive cash flows from operations.

We are not currently committed to further capital expenditures for the purchase of property, plant and equipment.
 

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 
QI SYSTEMS INC.
 
(Registrant)
 
 
 
Date: February 28, 2007
By:
 /s/ Steven R. Garman
 
Steven R. Garman
 
President and Chief Executive Officer
 
 
 
Date: February 28, 2007
By:
 /s/ Robert I. McLean Jr.
 
Robert I. McLean Jr.
 
Chief Financial Officer (Chief Accounting Officer)
 
and Chief Operating Officer

 
20