UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 --------------- FORM 10-QSB --------------- (Mark One) |X| QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2003 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: 000-30090 --------------- IMAGIS TECHNOLOGIES INC. (Exact name of small business issuer in its charter) --------------- British Columbia, Canada Not Applicable (State or other jurisdiction of (IRS Employer Identification No.) incorporation or organization) 1630 - 1075 West Georgia Street Vancouver, British Columbia (Address of principal executive offices) (604) 684-2449 (Issuer's telephone number) --------------- As of May 15, 2003, 20,671,705 common shares of the Company were issued and outstanding. Transitional Small Business Disclosure Format (Check one): Yes |_| No |X| 1 IMAGIS TECHNOLOGIES INC. FORM 10-QSB For the Quarterly Period Ended March, 2003 INDEX PART I Financial Information Item 1. Financial Statements 4 Item 2. Management's Discussion and Analysis or Plan of Operations 18 Item 3. Controls and Procedures 22 PART II Other Information Item 1. Legal Proceedings 23 Item 2. Changes in Securities 23 Item 3. Defaults Upon Senior Securities 23 Item 4. Submission of Matters to a Vote of Security Holders 23 Item 5. Other Information 23 Item 6. Exhibits and Reports on Form 8-K 24 2 NOTE REGARDING FORWARD-LOOKING STATEMENTS Except for statements of historical fact, certain information contained herein constitutes "forward-looking statements," including without limitation statements containing the words "believes," "anticipates," "intends," "expects," and words of similar import, as well as all projections of future results. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results or achievements of the Issuer to be materially different from any future results or achievements of the Issuer expressed or implied by such forward-looking statements. Such factors include, but are not limited to the following: the Issuer's limited operating history; the Issuer's need for additional financing; the Issuer's history of losses; the Issuer's dependence on a small number of customers; risks involving new product development; competition, management of growth and integration; risks of technological change; the Issuer's dependence on key personnel; risks involving lengthy sales cycles; marketing relationships and third-party suppliers; the Issuer's ability to protect its intellectual property rights; risks associated with exchange rate fluctuations; risks of software defects; risks associated with product liability; the directors' and officers' involvement in other projects; the Issuer's strategic alliances with Sanyo Semiconductor Company and Intacta Technologies Inc. ("Intacta") to form Zixsys Inc.; the Issuer's agreements with OSI Systems Inc. ("OSI"); the volatility of the Issuer's share price; risks associated with certain shareholders' exercising control over certain matters; and the other risks and uncertainties described in Exhibit 99.1 of this Form 10-QSB. Although the Issuer believes that expectations reflected in these forward-looking statements are reasonable, the Issuer cannot guarantee future results, levels of activity, performance, achievements or other future events. Moreover, neither the Issuer nor anyone else assumes responsibility for the accuracy and completeness of these forward-looking statements. The Issuer is under no duty to update any of these forward-looking statements after the date of this report. You should not place undue reliance on these forward-looking statements. 3 PART 1 - FINANCIAL INFORMATION Item 1. Financial Statements The Company's financial statements for the three month period ended March 31, 2003 are included in response to Item 1 and have been compiled by management. The financial statements should be read in conjunction with Management's Discussion and Analysis or Plan of Operations (Part 1, Item 2) and other financial information included elsewhere in this Form 10-QSB. IMAGIS TECHNOLOGIES INC. BALANCE SHEETS AS AT MARCH 31, 2003 AND DECEMBER 31, 2002 (expressed in Canadian dollars) March 31, 2003 December 31, (Unaudited) 2002 --------------- ----------------- ASSETS Current assets Cash and cash equivalents $ 59,840 $ 547,831 Accounts receivable 320,095 437,770 Prepaid expenses and deposit 38,933 75,537 --------------- ----------------- 418,868 1,061,138 Equipment 297,569 328,402 Other assets 470,351 306,231 --------------- ----------------- $ 1,186,788 $ 1,695,771 --------------- ----------------- LIABILITIES AND SHAREHOLDERS' DEFICIENCY Current liabilities Credit facility (note 3) $ 186,115 $ - Accounts payable and accrued liabilities 1,392,217 648,901 Deferred revenue 279,218 339,485 Capital lease obligations 21,448 19,123 --------------- ----------------- 1,878,998 1,007,509 --------------- ----------------- Long-term liabilities Capital lease obligations 38,181 41,720 --------------- ----------------- 38,181 41,720 --------------- ----------------- Shareholders' deficiency Share capital (note 4) 17,626,656 17,361,118 Advance on private placement (note 4) 146,780 - Contributed surplus 423,303 427,453 Deficit (18,927,130) (17,142,029) --------------- ----------------- (730,391) 646,542 --------------- ----------------- $ 1,186,788 $ 1,695,771 --------------- ----------------- See accompanying notes to financial statements. 4 IMAGIS TECHNOLOGIES INC. STATEMENTS OF OPERATIONS AND DEFICIT FOR THE THREE MONTHS ENDED MARCH 31, 2003 AND 2002 (expressed in Canadian dollars) (Unaudited - Prepared by Management) Three months ended March 31, 2003 2002 ---- ---- Revenues: Software sales $ 135,983 $ 985,954 Support and services 134,019 59,830 Other 7,506 24,500 --------------- -------------- 277,508 1,070,284 --------------- -------------- Expenses: Administration 951,651 997,178 Amortization 66,413 31,876 Bad debt expense 42,074 - Cost of materials 3,014 10,289 Interest 6,330 3,592 Sales and marketing 573,996 557,748 Technology development 278,543 369,706 Technical services 140,588 239,397 --------------- -------------- 2,062,609 2,209,786 --------------- -------------- Loss for the period (1,785,101) (1,139,502) Deficit, beginning of year (17,142,029) (10,190,636) --------------- -------------- Deficit, end of period $ (18,927,130) $ (11,330,138) =============== ============== Loss per share - basic and diluted $ (0.09) $ (0.07) =============== ============== Weighted average number of 20,483,622 16,708,795 shares outstanding --------------- -------------- See accompanying notes to financial statements. 5 IMAGIS TECHNOLOGIES INC. STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 2003 AND 2002 (expressed in Canadian dollars) (Unaudited - Prepared by Management) Three months ended March 31, 2003 2002 ---- ---- Cash provided by (used in): Operations: Loss for the period $ (1,785,101) $ (1,139,502) Items not involving cash: Amortization 66,413 31,876 Stock-based compensation (4,150) 223,781 Accrued interest 1,115 - Changes in non-cash operating working capital: Accounts receivable 117,675 (706,479) Prepaids 36,604 (2,324) Accounts payable and accrued liabilities 743,315 100,214 Deferred revenue (60,267) 17,492 -------------- --------------- (884,396) (1,474,942) -------------- --------------- Investments: Purchase of equipment (5,921) (62,894) Short-term investments - 908,836 Deferred acquisition costs (190,338) - -------------- --------------- (196,259) 845,942 -------------- --------------- Financing: Issuance of common shares for cash 265,538 523,748 Advance on private placement 146,780 - Capital lease obligations (4,654) - Loan from related party 185,000 - -------------- --------------- 592,664 523,748 -------------- --------------- Decrease in cash (487,991) (105,252) Cash and cash equivalents, beginning of period 547,831 200,659 -------------- --------------- Cash and cash equivalents, end of period $ 59,840 $ 95,407 ============== =============== 6 IMAGIS TECHNOLOGIES INC. STATEMENTS OF CASH FLOWS (continued) FOR THE THREE MONTHS ENDED MARCH 31, 2003 AND 2002 (expressed in Canadian dollars) (Unaudited - Prepared by Management) Supplementary information and disclosures: Interest paid $ 5,215 $ 3,592 Issuance of common shares on conversion of special warrants - 1,195,750 Equipment acquired under capital lease 3,440 - See accompanying notes to financial statements. 7 IMAGIS TECHNOLOGIES INC. NOTES TO FINANCIAL STATEMENTS (expressed in Canadian dollars) (Unaudited - Prepared by Management) 1. Operations: Imagis Technologies Inc. (the "Company") was incorporated under the Company Act (British Columbia) on March 23, 1998. The Company operates in a single segment, being the development and sale of software applications and advanced biometric facial recognition software solutions. These financial statements have been prepared on a going concern basis which includes the assumption that the Company will be able to realize its assets and settle its liabilities in the normal course of business. For the three months ended March 31, 2003, the Company has incurred a loss from operations of $1,785,101 and a deficiency in operating cash flow of $884,396. In addition, the Company has incurred significant operating losses and net utilization of cash in operations in all prior periods. Accordingly, the Company will require continued financial support from its shareholders and creditors until it is able to generate sufficient cash flow from operations on a sustained basis. Failure to obtain ongoing support of its shareholders and creditors may make the going concern basis of accounting inappropriate, in which case the Company's assets and liabilities would need to be recognized at their liquidation values. These financial statements do not include any adjustment due to this going concern uncertainty. 2. Significant accounting policies: The Company prepares its financial statements in accordance with generally accepted accounting principles in Canada and, except as set out in Note 7, also comply, in all material respects, with accounting principles generally accepted in the United States. The financial statements reflect the following significant accounting policies: (a) Cash equivalents: The Company considers all highly liquid investments with a term to maturity of three months or less when purchased to be cash equivalents. Investments having a term in excess of three months but less than one year are classified as short-term investments. (b) Equipment: Equipment is recorded at cost and is amortized over its estimated useful life on a straight-line basis at the following annual rates: Asset Rate ----- ---- Computer hardware 30% Furniture and fixtures 20% Software 100% (c) Other Assets: Other assets is comprised of patents and a license. The assets are recorded at cost and are amortized over their estimated useful life on a straight-line basis at the following annual rates: Asset Rate ----- ---- Patents 33.3% License 33.3% Included in other assets is $210,387 which represents costs incurred by the Company through March 31, 2003 (December 31, 2002 - $20,048) relating to a proposed acquisition. 8 IMAGIS TECHNOLOGIES INC. NOTES TO FINANCIAL STATEMENTS (expressed in Canadian dollars) (Unaudited - Prepared by Management) 2. Significant accounting policies, continued: (d) Revenue recognition: (i) Software sales revenue: The Company recognizes revenue consistent with Statement of Position 97-2, "Software Revenue Recognition". In accordance with this Statement, revenue is recognized, except as noted below, when all of the following criteria are met; persuasive evidence of a contractual arrangement exists, title has passed, delivery and customer acceptance has occurred, the sales price is fixed or determinable and collection is reasonably assured. Funds received in advance of meeting the revenue recognition criteria are recorded as deferred revenue. When a software product requires significant production, modification or customization, the Company generally accounts for the arrangement using the percentage-of-completion method of contract accounting. Progress to completion is measured by the proportion that activities completed are to the activities required under each arrangement. When the current estimate on a contract indicates a loss, a provision for the entire loss on the contract is made. When software is sold under contractual arrangements that includes post contract customer support ("PCS"), the elements are accounted for separately if vendor specific objective evidence ("VSOE") of fair value exists for all undelivered elements. VSOE is identified by reference to renewal arrangements for similar levels of support covering comparable periods. If such evidence does not exist, revenue on the completed arrangement is deferred until the earlier of (a) VSOE being established or (b) all of the undelivered elements are delivered or performed, with the following exceptions: if the only undelivered element is PCS, the entire fee is recognized ratably over the PCS period, and if the only undelivered element is service, the entire fee is recognized as the services are performed. The Company provides for estimated returns and warranty costs, which to date have been nominal, on recognition of revenue. (ii) Support and services revenue: Up front payments for Contract support and services revenue is deferred and is amortized to revenue over the period that the support and services are provided. (e) Use of estimates: The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported or disclosed in the financial statements. Actual amounts may differ from these estimates. (f) Foreign currency: Monetary assets and liabilities denominated in foreign currencies are translated into Canadian dollars at exchange rates in effect at the balance sheet date. Revenues and expenses are translated using rates in effect at the time of the transactions. Foreign exchange gains and losses are included in income. 9 IMAGIS TECHNOLOGIES INC. NOTES TO FINANCIAL STATEMENTS (expressed in Canadian dollars) (Unaudited - Prepared by Management) 2. Significant accounting policies, continued: (g) Income taxes: The Company uses the asset and liability method of accounting for income taxes. Under the asset and liability method, future tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Future tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on future tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the date of substantive enactment. To the extent that it is not considered to be more likely than not that a deferred tax asset will be realized, a valuation allowance is provided. (h) Stock-based compensation: Effective January 1, 2002, the Company adopted the new recommendations of the Canadian Institute of Chartered Accountants with respect to the accounting for stock-based compensation and other stock-based payments. The new recommendations require direct awards of stock, stock appreciation rights or awards that call for the settlement in cash or other assets awarded to employees and the cost of the service received as consideration to be measured and recognized based on the fair value of the equity instruments issued. Compensation expense is recorded over the period of related employee service, usually the vesting period of the equity instrument awarded. The new recommendations permit the measurement of compensation expense for stock option grants to employees and directors that are not direct awards of stock, stock appreciation rights or otherwise call for settlement in cash or other assets by an alternative method and to provide pro forma disclosure of the financial results using the fair value method. The Company has elected to adopt an alternative method and continue with its policy of not recognizing compensation expense for stock options granted to employees. The Company recognizes compensation expense for non-employees based on the estimated fair value of the equity instruments issued and recognizes stock based compensation under Canadian GAAP. Had compensation expense for employees been determined based on the fair value method, the Company's net loss and net loss per share for the three month period ended March 31, 2003 and 2002, would have been adjusted to the pro forma amounts indicated below: Three months ended March 31, 2003 2002 ------------------------------------ Net loss - as reported $(1,785,101) $(1,139,502) Net loss - pro forma (2,056,476) (1,206,292) Net loss per share - as reported $(0.09) $(0.07) Net loss per share - pro form (0.10) (0.07) ------------------------------------ The pro forma amounts exclude the effect of stock options granted prior to January 1, 2002. The fair value of each stock option grant was estimated on the date of grant using the Black-Scholes option pricing model using the following average inputs: volatility - 120%, risk free interest rate - 5%, option term - 5 years, and dividend yield - nil. The weighted average fair value of employee stock options granted since January 1, 2002 was $2.05 per share purchase option. 10 IMAGIS TECHNOLOGIES INC. NOTES TO FINANCIAL STATEMENTS (expressed in Canadian dollars) (Unaudited - Prepared by Management) 2. Significant accounting policies, continued: (i) Loss per share: Loss per share is calculated using the weighted average number of shares outstanding during the reporting period. This average includes common shares issued in a reporting period from their date of issuance. Diluted per share amounts are calculated by the treasury stock method whereby the assumed proceeds of dilutive exercisable instruments are applied to repurchase common shares at the average market price for the period. The resulting net issuance is included in the weighted average number for purposes of the diluted per share calculation. As all outstanding shares and warrants are anti-dilutive, there is no difference between basic and diluted loss per share. (j) Unaudited interim financial information: The information reported herein as at March 31, 2003 and for the three month periods ended March 31, 2003 and 2002 is unaudited. However, such financial information reflects all adjustments (consisting solely of normal recurring adjustments) necessary for a fair presentation of the results for the periods presented. The unaudited interim financial statements are prepared using accounting policies consistent with and should be read in conjunction with the Company's financial statements at at and for the period ended December 31, 2002 which are included in the Company's 2002 Annual Report on Form 10-KSB. Certain comparative figures have been reclassified to conform with the presentation adopted in the current reporting period. Results for the interim period ended March 31, 2003 are not necessarily indicative of what the results will be for the complete 2003 fiscal year. 3. Credit facility: During the quarter ended March 31, 2003, the company received $185,000 through the issuance of a note payable to a former director of the Company. This note allows the Company to borrow up to $200,000 and bears interest at the prime rate plus 2% and is due on the earlier of May 31, 2003 or upon receipt of funds pursuant to an equity financing. The note is secured by the receivables of the Company. Through March 31, 2003 this note has accrued interest in the amount of $1,115. The terms of this loan arrangement were modified subsequent to the end of the quarter (see Note 6 - Subsequent Events). 4. Share capital: (a) Authorized: 100,000,000 common shares without par value 11 IMAGIS TECHNOLOGIES INC. NOTES TO FINANCIAL STATEMENTS (expressed in Canadian dollars) (Unaudited - Prepared by Management) 4. Share capital, continued: (b) Issued: Number of shares Amount ---------------- ------------------- ---------------- ------------------- Balance, December 31, 2001 16,419,131 10,142,041 ---------------- ------------------- Issued during year: On private placement 1,166,667 2,660,001 Options exercised 375,110 423,193 Warrants exercised 894,776 1,571,090 Issued on conversion of special warrants 1,427,682 3,098,070 Issued as bonus for consulting agreement 37,500 78,750 Issued as bonus in consideration of loan 10,000 19,000 Issued as bonus to a director and officer 20,000 25,000 Share issuance costs -- (656,027) ---------------- ------------------- Balance, December 31, 2002 20,350,866 $ 17,361,118 ---------------- ------------------- Issued during the period: Options exercised 112,505 98,870 Warrants exercised 133,334 166,668 ---------------- ------------------- Balance, March 31, 2003 20,596,705 $ 17,626,656 ---------------- ------------------- (c) Escrowed shares: As at December 31, 2001, 266,669 common shares were being held in escrow. These common shares were released from escrow on February 23, 2002. (d) Special warrants: On November 9, 2001, 1,427,682 Special Warrants were sold at a price of $2.17 per Special Warrant (gross proceeds less offering costs equaled $2,822,861), each of which entitled the holder, upon exercise and without payment of further consideration, to acquire one common share of the Company and one-half of one common share purchase warrant (the "Warrants") of the Company. These Special Warrants were not issued as compensation for services rendered. Each whole Warrant will entitle the holder to purchase one common share of the Company at a price of $2.55. During 2002, all special warrants were converted into common shares. Also during 2002, the Company reduced the exercise price on some of the share purchase warrants as follows: (i) 288,018 share purchase warrants from $2.55 to $1.63; (ii) 220,200 share purchase warrants from $2.55 to $1.81; The securities issued pursuant to the brokered private placement and all underlying securities were subject to resale restrictions that expired on March 9, 2002. 12 IMAGIS TECHNOLOGIES INC. NOTES TO FINANCIAL STATEMENTS (expressed in Canadian dollars) (Unaudited - Prepared by Management) 4. Share capital, continued: (e) Advance on private placement: During the quarter ended March 31, 2003, the Company received US$100,000 (CDN$146,780) from a director of the Company. The Company intends to issue stock in consideration of the amounts advanced to the director as part of the Company's next equity financing. (f) Warrants: At December 31, 2002 and March 31, 2003, the following warrants were outstanding: ------------------------------------------------------------------------------------------------------------- December 31, March 31, Exercise 2002 Granted Exercised Expired 2003 price Expiry date ------------------------------------------------------------------------------------------------------------- 133,334 -- (133,334) -- -- $1.25 February 23, 2003 220,200 -- -- (220,200) -- $1.81 March 9, 2003 15,633 -- -- (15,633) -- $1.81 March 9, 2003 50,000 -- -- -- 50,000 $2.20 January 18, 2004 291,667 -- -- -- 291,667 $2.28 July 8, 2004 105,000 -- -- -- 105,000 $2.84 July 24, 2004 ------------------------------------------------------------------------------------------------------------- 815,834 -- (133,334) (235,833) 446,667 ============================================================================================================= The Company has agreed, subject to regulatory approval, that the exercise price of the warrants for the purchase of 291,667 shares, issued in conjunction with a private placement will be reduced from US$1.50 (Cdn$2.28) to the same price per share as that afforded the investors under the Company's next equity offering. 13 IMAGIS TECHNOLOGIES INC. NOTES TO FINANCIAL STATEMENTS (expressed in Canadian dollars) (Unaudited - Prepared by Management) 4. Share capital, continued: (g) Options: At December 31, 2002 and March 31, 2003, the following options were outstanding: ------------------------------------------------------------------------------------------------------------- December 31, March 31, Exercise 2002 Granted Exercised Expired 2003 price Expiry date ------------------------------------------------------------------------------------------------------------- 155,000 -- (80,000) -- 75,000 $0.30 July 6, 2003 50,000 -- -- -- 50,000 $1.00 February 25, 2004 45,000 -- -- -- 45,000 $1.00 March 25, 2004 60,000 -- -- -- 60,000 $1.00 July 19, 2004 196,999 -- (11,000) (20,000) 165,999 $1.00 January 19, 2005 546,666 -- -- -- 546,666 $1.00 August 30, 2006 15,000 -- -- -- 15,000 $2.35 September 2, 2005 15,000 -- -- -- 15,000 $2.35 November 2, 2005 160,000 -- -- -- 160,000 $2.20 December 19, 2006 15,000 -- -- -- 15,000 $2.06 December 5, 2005 27,000 -- -- -- 27,000 $1.99 December 20, 2005 8,400 -- -- -- 8,400 $1.50 December 20, 2005 245,833 -- -- (3,333) 242,500 $1.50 May 14, 2006 305,000 -- -- (35,000) 270,000 $2.35 March 4, 2007 56,990 -- (21,505) -- 35,485 $2.97 February 8, 2004 10,000 -- -- -- 10,000 $2.24 January 31, 2007 170,000 -- -- (40,000) 130,000 $2.35 May 15, 2007 155,000 -- -- -- 155,000 $2.35 June 30, 2007 385,000 -- -- -- 385,000 $2.35 July 31, 2007 300,000 -- -- -- 300,000 $2.35 August 31, 2007 85,000 -- -- -- 85,000 $2.35 October 31, 2007 ------------------------------------------------------------------------------------------------------------- 3,006,888 -- (112,505) (98,333) 2,796,050 ============================================================================================================= 14 IMAGIS TECHNOLOGIES INC. NOTES TO FINANCIAL STATEMENTS (expressed in Canadian dollars) (Unaudited - Prepared by Management) 5. Related party transactions not disclosed elsewhere are as follows: (a) included in administration expense is $nil (2002 - $91,963) for payments made to a company with a director in common for services rendered to the Company. (b) During the quarter ended March 31, 2003 the Company borrowed from a previous director of the Company an amount of $185,000. This loan is secured by the accounts receivable of the Company. Also included is interest payable of $1,115 (2002 - nil) which is payable pursuant to this loan (see also Note 6 - Subsequent events). 6. Subsequent events: (a) Subsequent to March 31, 2003, 75,000 options were exercised for proceeds to the Company of $22,500. (b) Subsequent to March 31, 2003, the terms of the note payable issued to a previous director of the Company were modified to increase the total borrowings available from $200,000 to $500,000. The interest rate remains at the prime rate plus 2%. In addition the note is now secured by a General Security Agreement over the assets of Imagis, and a Source Code Escrow Agreement that requires Imagis to deposit into escrow its source codes together with a license to commercialize the source codes on a non-exclusive, world-wide, royalty-free basis for a period of five years, to be released only in the event that Imagis ceases operations or enters bankruptcy proceedings. (c) Subsequent to March 31, 2003, the Company has undergone an organizational restructuring and refocusing of its sales, marketing, and development efforts and as a result has temporarily laid off non-core employees from its global operations. The Company has also closed its Victoria, B.C office and consolidated its operations into its Vancouver, B.C. head office, and implemented significant general administrative expense reduction measures, in order to substantially reduce the Company's monthly operating expenses. (d) Pursuant to a Letter of Intent dated December 6, 2002 and an Arrangement Agreement dated February 14, 2003 the Company has agreed to acquire 100% of the issued and outstanding shares of Briyante Software Corp. ("Briyante"), a software development Company. Under the terms of this agreement the Company will issue 0.2857 of a common share for each 1 common share of Briyante. The arrangement agreement was approved by the shareholders of Briyante at an annual and special general meeting held on March 17, 2003 and by an order of the Supreme Court of British Columbia on March 20, 2003. Subsequent to March 31, 2003, the Company agreed to the postponement, pending amendments to the terms, of the acquisition of Briyante Software Corp. The agreement to amend the terms was brought about by the Company determining that it does not currently have sufficient working capital for the combined entity, as a result of a poor financial environment over the past six months. The revised terms of the acquisition are currently under negotiation. Any amendments will be subject to entering into a definitive amendment agreement, regulatory approval and any required shareholder approval. The Company is committed to completing its acquisition of Briyante and, in the interim, the Company and Briyante will continue to market each other's products and services. (e) Pursuant to a term sheet dated February 20, 2003, the Company entered into a private placement agreement to obtain financing of up to USD$4.0 million, with an initial sale of up to USD$1.5 million in the form of a special warrant and up to USD$2.5 million in the form of a series of sales of common shares under an effective registration agreement filed with the Securities and Exchange Commission. This agreement was subject to final documentation, approval of the board of directors of the Company, and regulatory approval. Subsequent to March 31, 2003, the Company was unable to reach agreement with the placee on the final terms of the private placement and the private placement was cancelled. 15 IMAGIS TECHNOLOGIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (expressed in Canadian dollars) 7. United States generally accepted accounting principles: These financial statements have been prepared in accordance with generally accepted accounting principles in Canada ("Canadian GAAP") which differ in certain respects with accounting principles generally accepted in the United States ("U.S. GAAP"). Material issues that could give rise to measurement differences to these consolidated financial statements are as follows: (a) Stock-based compensation: The Company has granted stock options to certain employees, directors, advisors, and consultants. These options are granted for services provided to the Company. For options issued subsequent to December 31, 2001, the Company amortizes the expense of all options issued to non-employees based on the Black-Scholes model under Canadian GAAP. For U.S. GAAP purposes, an enterprise recognizes or, at its option, discloses the impact of the fair value of stock options and other forms of stock-based compensation in the determination of income. The Company has elected under U.S. GAAP to continue to measure compensation cost for stock options granted to employees by the intrinsic value method. Options granted to non-employees prior to January 1, 2002, are required to be measured and recognized at their fair value as the services are provided and the options are earned. In addition, during the year ended December 31, 2001 and 2002, the Company repriced certain options and consequently, under U.S. GAAP, such options are accounted for as variable options and net increases in the underlying common shares market price since the repricing date are recognized as compensation cost until the options are exercised, expire or forfeited. (b) Beneficial conversion option: During the year ended December 31, 2000, the Company issued convertible debentures with detachable warrants attached. For Canadian GAAP purposes, the issuance is considered to be of a compound debt and equity instrument and the proceeds were allocated between the two elements based on their relative fair values. For U.S. GAAP purposes, this allocation results in a beneficial conversion option as the fair value of the shares issuable on conversion of the debt is in excess of the value at which such shares would be issuable based on the reduced carrying value of the debt element. This beneficial conversion option was amortized over the period to the first conversion date. (c) Warrant issuance for services: During the year ended December 31, 2000, the Company issued 200,000 warrants having an exercise price of $3.50 each for services rendered. In accordance with the Company's accounting policies, for Canadian GAAP purposes no value has been assigned to these warrant issuances. For U.S. GAAP purposes, the fair value of these warrants would be determined based on an option pricing model and recognized as the services are provided. 16 IMAGIS TECHNOLOGIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (expressed in Canadian dollars) 7. United States generally accepted accounting principles, continued: (d) Loss per share: In accordance with U.S. GAAP, common shares issuable on exercise of the Special Warrants are included in the calculation of the weighted average number of shares outstanding for purposes of the loss per share calculations. The effect of these accounting differences on deficit, net loss, loss per share and future income taxes under United States accounting principles are as follows: Ended March 31, 2003 2002 Deficit, Canadian GAAP $ (18,927,130) $ (11,330,138) Cumulative stock based compensation (a) (1,315,767) (1,538,636) Beneficial conversion options (b) (208,200) (208,200) Warrants issued for services (c) (722,000) (722,000) -------------------- --------------------- Deficit, U.S. GAAP $ (21,173,097) $ (13,798,974) -------------------- --------------------- Three months ended March 31, 2003 2002 Loss for the period, Canadian GAAP $ (1,785,101) $ (1,139,502) Stock-based compensation (20,743) (484,024) -------------------- --------------------- Loss for the period, U.S. GAAP (1,805,844) (1,623,526) -------------------- --------------------- Loss per share, U.S. GAAP - basic and diluted$ $ (0.09) $ (0.09) -------------------- --------------------- 17 Item 2. Management's Discussion and Analysis or Plan of Operations About Imagis Imagis Technologies Inc. is a developer and marketer of software applications and advanced biometric facial recognition software solutions both as products and as a Software Development Kit. These applications provide a range of security solutions in various industry sectors including airports, law enforcement, customs, immigration and other government agencies, and gaming. The Company currently has over one hundred and forty installations of its software products. Overview Revenue for software and services has historically accounted for a substantial portion of the Company's revenue. Typically, the Company enters into a fixed price contract with a customer for the licensing of selected software products and the provision of specific services. The Company generally recognizes total revenue for software and services associated with a contract using percentage of completion method based on the total costs incurred over the total estimated costs to complete the contract. The Company's revenue is dependent, in large part, on significant contracts from a limited number of customers. As a result, any substantial delay in the Company's completion of a contract, the inability of the Company to obtain new contracts or the cancellation of an existing contract by a customer could have a material adverse effect on the Company's results of operations. The loss of certain contracts could have a material adverse effect on the Company's business, financial condition, operating results and cash flows. As a result of these and other factors, the Company's results of operations have fluctuated in the past and may continue to fluctuate from period-to-period. Recent world events and concerns regarding security have increased awareness of and interest in products that have law enforcement or other security applications. There can be no assurance, however, that such trends will continue or will result in increased sales of the Company's products and services. Critical Accounting Polices On December 12, 2001, the Securities and Exchange Commission issued a cautionary advice regarding the disclosure of critical accounting policies. Critical accounting policies are those that management believes are both most important to the portrayal of the Company's financial conditions and results, and that require difficult, subjective, or complex judgements, often as a result of the need to make estimates about the effects of matters that involve uncertainty. We believe the "critical" accounting policies we use in preparation of our financial statements are as follows: Revenue recognition (i) Software sales revenue: The Company recognizes revenue consistent with Statement of Position 97-2, "Software Revenue Recognition". In accordance with this Statement, revenue is recognized, except as noted below, when all of the following criteria are met: persuasive evidence of a contractual arrangement exists, title has passed, delivery and customer acceptance has occurred, the sales price is fixed or determinable and collection is reasonably assured. Funds received in advance of meeting the revenue recognition criteria are recorded as deferred revenue. When a software product requires significant production, modification or customization, the Company generally accounts for the arrangement using the percentage-of-completion method of contract accounting. Progress to completion is measured by the proportion that activities completed are to the activities required under each arrangement. When the current estimate on a contract indicates a loss, a provision for the entire loss on the contract is made. 18 When software is sold under contractual arrangements that includes post contract customer support ("PCS"), the elements are accounted for separately if vendor specific objective evidence ("VSOE") of fair value exists for all undelivered elements. VSOE is identified by reference to renewal arrangements for similar levels of support covering comparable periods. If such evidence does not exist, revenue on the completed arrangement is deferred until the earlier of (a) VSOE being established or (b) all of the undelivered elements are delivered or performed, with the following exceptions: if the only undelivered element is PCS, the entire fee is recognized ratably over the PCS period, and if the only undelivered element is service, the entire fee is recognized as the services are performed. The Company provides for estimated returns and warranty costs, which to date have been nominal, on recognition of revenue. (ii) Support and services revenue: Contract support and services revenue is deferred and is amortized to revenue ratably over the period that the support and services are provided. Use of estimates ---------------- The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported or disclosed in the financial statements. Actual amounts may differ from these estimates. Stock-based compensation ------------------------ Effective January 1, 2002, the Company adopted the new recommendations of the Canadian Institute of Chartered Accountants with respect to the accounting for stock-based compensation and other stock-based payments. The new recommendations require equity instruments awarded to employees and the cost of the service received as consideration to be measured and recognized based on the fair value of the equity instruments issued. Compensation expense is recorded over the period of related employee service, usually the vesting period of the equity instrument awarded. Alternatively, the new recommendations permit the measurement of compensation expense for stock option grants to employees and directors that are not direct awards of stock, stock appreciation rights or otherwise call for settlement in cash or other assets by an alternative method and to provide pro forma disclosure of the financial results using the fair value method. The Company has elected to follow an alternative method and continue with the former accounting policy of recognizing no compensation expense when stock options are granted to employees because the Company grants stock options with an exercise price based on the market price at the date of the grant. The Company recognizes compensation expense for consultants based on the fair value of the equity instruments issued. Results of operations for the three months ended March 31, 2003 compared to March 31, 2002: Revenues Imagis' total revenues decreased 74% to $277,508 for the quarter ended March 31, 2003 over the comparable prior year level of $1,070,284, and decreased 4% over the fourth quarter 2002 level of $289,774. The lower revenues were attributable to lower software sales revenues. Revenues from the Company's software products declined 86% to $135,983 this year as compared to $985,954 for 2002. The quarter ending March 31, 2002 included $620,000 in revenue from the Serco installation during that period and $300,000 from the Company's Alameda installation. There were no comparable large contracts during the same period this year, these orders were received during 2001 and the revenue was recorded as the installations were completed. The new orders received during 2003 were $70,389 higher than in 2002, a 118% increase. Support and services revenues for 2003 were $134,019 and were 124% higher than in 2002 of $59,830. The support revenues are increasing as the sales revenues increased during 2002 and the deferred revenue of $279,218 recorded as at March 31, 2003 consists solely of ongoing support contracts, this represents a 264% increase over the 2002 deferred revenue balance of $76,676. Other revenues were $7,506 for 2003, whereas comparable revenues of $24,500 were earned in the prior year. These revenues were primarily earned through interest revenue and fluctuate with the Company's cash balances. 19 Operating Costs Operating expenses totaled $2,062,609 for 2003, which is 7% lower than the 2002 operating expenses of $2,209,786. The 2003 expenses include a one-time charge of USD$250,000 (CDN$366,950) incurred as a management fee owing to OSI Systems Inc. ("OSI") in consideration of renegotiating the terms of the agreements with OSI. Excluding this charge, the operating expenses for 2003 were $1,695,659, which represents a 23% reduction in expenses over the prior year. The lower costs over the prior period resulted from significant decreases in the areas of administration and technology development and technical services. Management of the Company has implemented significant cost reduction strategies during the final quarter of 2002 and throughout 2003 and the current operating expense rate is equivalent to approximately $3,000,000 per annum, providing an expected expense level of approximately $4,400,000 for fiscal 2003. Management intends to continue to reduce costs wherever possible without impinging upon the Company's ability to make sales, continue product development, and service customers. Administration Administrative costs for 2003 were $951,651, which is 5% lower than for 2002 of $997,178. These costs include the one-time management fee of USD$250,000 (CDN$366,950) described above. Excluding this charge, the administrative costs were $584,701, which represents a 41% reduction from the prior year. Administrative costs include staff salaries and related benefits and travel, stock based compensation, consulting and professional fees, facility and support costs, shareholder, regulatory and investor relations costs. Generally all categories were lower due to the effects of cost reducing strategies, in particular including a significant reduction in travel costs and the use of outside consultants. Stock based compensation for the period was nil during 2003 as opposed to an expense of $223,781 during 2002. The Company's administrative costs have declined since the second quarter of 2002, primarily due to no longer using financial advisory services and contract support staff. Bad debt expense The bad debt expense in 2003 of $42,074 consists of a single customer that defaulted on payment for a software license. There was no comparable expense during the same period in 2002. Interest and Amortization Interest expense incurred this year primarily related to financing of equipment amounted to $6,330, up 76% from the prior year of $3,592. This is due to the acquisition of equipment during 2002. Amortization in 2003 amounted to $66,413 as compared to $31,876 for 2001. The increase in amortization expense reflects purchases of equipment and the amortization expense associated with the acquisition of the Intacta license and patents. Sales and marketing Sales and marketing expenses for 2003 were $573,996, and were comparable to those in 2002 of $557,748. Imagis significantly increased its sales and marketing efforts during 2002 in order to increase market awareness of the Company and its products and capitalize on expected increased sales opportunities. The Company has decreased its sales team subsequent to March 31, 2003 as part of its strategy of utilizing a more targeted marketing and sales strategy but no further decreases are currently contemplated. The Company expects that sales and marketing expenses will continue at approximately the same or reduced levels in future periods. Technology development The technology development expenses for 2003 were $278,542, which is 25% lower than the 2002 comparable costs of $369,706. Expenses were further reduced subsequent to March 31, 2003 through a reduction in staff and overhead costs. Technology development expenses are expected to remain at this approximate level until such time as market demand for new products necessitates adding resources. This will only occur when specific sales opportunities are identified. Technical services Costs for the technical services group were $140,588 this year, which is 41% lower than the comparable 2002 costs of $239,397. The technical services group generally assists the Company's strategic partners in their installation of Imagis' products and also provides clients with any technical support they may require under annual support 20 contracts, and includes primarily costs for salaries, facilities and travel. The reduction is primarily due to a reduction in staff costs and travel, these costs were higher in 2002 due to expenses associated with completing the Alameda installation. Costs for future quarters will be dependent on the sales levels achieved by the Company. Net Loss for the Period Overall, the Company incurred a net loss for the first quarter of 2003 of $1,785,101or $0.09 per share, which is 57% higher than the net loss incurred during the first quarter of 2002 of $1,139,502 or $0.07 per share. Excluding the one-time charge of USD$250,000 (CDN$366,950) the loss was $1,418,151 or $0.07 per share. The primary cause of the increased loss was the lack of large contracts in progress during 2003, which resulted in a significant reduction in revenues. Liquidity and Capital Resources The Company's cash on hand at the beginning of the period aggregated $547,831. During the period, the Company received additional funds of $265,538 from the exercise of both stock options and warrants. In total, 112,505 options and 133,334 warrants were exercised which resulted in aggregate proceeds to the Company of $98,870 and $166,668, respectively. The Company also received USD$100,000 (CDN$146,780) as at March 31, 2003, as an advance on a future private placement and a loan from a related party of $185,000. The Company used these funds primarily to finance its operating loss for the period. The impact on cash of the loss of $1,785,101, after adjustment for non-cash items and changes to other working capital accounts in the period, resulted in a negative cash flow from operations of $884,396. The Company also used funds to purchase capital equipment amounting to $5,921, repay capital leases of $4,654, and deferred acquisition costs of $190,338 related to its proposed acquisition of Briyante Software Corp. In summary, the Company's cash position declined by $487,991 from $547,831 at the beginning of the period to $59,840 at March 31, 2003. During the quarter ended March 31, 2003, the company received $185,000 through the issuance of a note payable to a former director of the Company. This note allows the Company to borrow up to $200,000 and bears interest at the prime rate plus 2% and is due on the earlier of May 31, 2003 or upon receipt of funds pursuant to an equity financing. The note is secured by the receivables of the Company. Through March 31, 2003 this note has accrued interest in the amount of $1,115. Subsequent to March 31, 2003, the terms of the note payable were modified to increase the total borrowings available from $200,000 to $500,000. The interest rate remains at the prime rate plus 2%. In addition, the note is now secured by a General Security Agreement over the assets of Imagis, and a Source Code Escrow Agreement that requires Imagis to deposit into escrow its source codes together with a license to commercialize the source codes on a non-exclusive, world-wide, royalty-free basis for a period of five years, to be released only in the event that Imagis ceases operations or enters bankruptcy proceedings. Pursuant to a Letter of Intent dated December 6, 2002 and an Arrangement Agreement dated February 14, 2003 the Company has agreed to acquire 100% of the issued and outstanding shares of Briyante Software Corp. ("Briyante"), a software development Company. Under the terms of this agreement the Company will issue 0.2857 of a common share for each 1 common share of Briyante. The arrangement agreement was approved by the shareholders of Briyante at an annual and special general meeting held on March 17, 2003 and by an order of the Supreme Court of British Columbia on March 20, 2003. Subsequent to March 31, 2003, the Company agreed to the postponement, pending amendments to the terms, of the acquisition of Briyante Software Corp. The agreement to amend the terms was brought about by the Company determining that it does not currently have sufficient working capital for the combined entity, as a result of a poor financial environment over the past six months. The revised terms of the acquisition are currently under negotiation. Any amendments will be subject to entering into a definitive amendment agreement, regulatory approval and any required shareholder approval. The Company is committed to completing its acquisition of Briyante and, in the interim, the Company and Briyante will continue to market each other's products and services. Subsequent to March 31, 2003, the Company has undergone an organizational restructuring and refocusing of its sales, marketing, and development efforts and as a result has temporarily laid off non-core employees from its global operations. The Company has also closed its Victoria, B.C office and consolidated its operations into its Vancouver, B.C. head office, and implemented significant general administrative expense reduction measures, in order to substantially reduce the Company's monthly operating expenses. 21 The Company does not have sufficient cash flow from operations to fund its operations beyond June 2003 and will be required to seek additional financing. In recognition of this situation, the Company is currently actively seeking financing. Pursuant to a term sheet dated February 20, 2003, the Company entered into a private placement agreement to obtain financing of up to USD$4.0 million, with an initial sale of up to USD$1.5 million in the form of a special warrant and up to USD$2.5 million in the form of a series of sales of common shares under an effective registration agreement filed with the Securities and Exchange Commission. This agreement was subject to final documentation, approval of the board of directors of the Company, and regulatory approval. Subsequent to March 31, 2003, the Company was unable to reach agreement with the placee on the final terms of the private placement and the private placement was cancelled. There is no assurance that the Company will be able to secure any financing or that any financing secured will be obtained on terms favorable to the Company. Failure to obtain adequate financing could result in a substantial curtailment of Imagis' operations. Item 3. Controls and Procedures (a) Evaluation of Disclosure Controls and Procedures Under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, the Company evaluated the effectiveness of the design and operation of its disclosure controls and procedures (as defined in Rule 139-14(c) under the Securities Exchange Act of 1934, as amended) as of a date (the "Evaluation Date") within 90 days prior to the filing date of this report. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the Evaluation Date, the Company's disclosure controls and procedures were effective in timely alerting them to the material information relating to the Company (or its consolidated subsidiaries) required to included in the Company's periodic SEC filings. (b) Changes in Internal Controls There were no significant changes made to the Company's internal controls or, to its knowledge, in other factors that could significantly affect these controls subsequent to the date of their evaluation, including any corrective actions taken with regard to significant deficiencies and material weaknesses. 22 PART II - OTHER INFORMATION Item 1. Legal Proceedings As of the date of this report, the Company is not a party to any legal proceedings, the adverse outcome of which, in management's opinion, individually or in the aggregate, would have a material effect on the Company's results of operations or financial position. Item 2. Changes in Securities (a) None (b) None (c) The Company issued 91,000 common shares upon the exercise of stock options by three (3) persons in private transactions outside the United States for gross proceeds to the Company of $35,000. The options were exercised on the following dates for the following amounts: January 24, 2003 - 5,000 options for gross proceeds to the Company of $5,000; January 27, 2003 - 6,000 options for gross proceeds to the Company of $6,000; February 10, 2003 - 50,000 options for gross proceeds to the Company of $15,000; and March 12, 2003 - 30,000 options for gross proceeds to the Company of $9,000. The common shares were issued in reliance upon an exclusion from registration available under Regulation S ("Regulation S") promulgated under the Securities Act of 1933, as amended (the "Securities Act"). On January 23, 2003, the Company issued 21,505 of its common shares upon the exercise of stock options to a consultant to the Company for gross proceeds of $63,870. The options were issued in reliance upon Rule 506 of Regulation D under the Securities Act of 1933. The consultant represented to the Company that he is an "accredited investor", as such term is defined under Rule 501 of Regulation D promulgated under the Securities Act at the time the option was granted and at the time of exercise of such option. The Company issued 133,334 of its common shares on February 10, 2003 upon the exercise of warrants by one (1) non-U.S. persons in private transactions outside the United States for gross proceeds to the Company of $166,668. The common shares were issued in reliance upon an exclusion from registration available under Regulation S promulgated under the Securities Act. (d) None Item 3. Defaults Upon Senior Securities None Item 4. Submission of Matters to a Vote of Security Holders No matters were submitted to a vote of security holders during the quarter ended March 31, 2003. Item 5. Other Information None 23 Item 6. Exhibits and Reports on Form 8-K (a) Exhibits The following exhibits are filed (or incorporated by reference herein) as part of this Form 10-QSB: Exhibit Number Description ------ ----------- 3.1(1) Articles of Incorporation 4.1(1) Shareholder Agreement dated February 23, 1999 among the Original Shareholders and the Former Imagis Shareholders 4.2(5) Registration rights agreement dated July 8, 2002 between Imagis and OSI 10.1(1)* Employment Agreement dated February 23, 1999 between the Issuer and Iain Drummond 10.2(2)* Imagis Technologies Inc. 2000 Stock Option Plan 10.3(3) Form of Unit Subscription Agreement 10.4(4) Software Assets Sale and Assignment Agreement dated October 31, 2001 between Imagis and API Technologies, LLC. 10.5(5) Subscription Agreement dated July 8, 2002 between Imagis and OSI 10.6(5) Letter of Intent dated July 8, 2002 between Imagis and OSI 10.7(5) Product Development and Marketing Agreement dated July 8, 2002 between Imagis and OSI 10.8(5) Software Developer Services Agreement dated July 8, 2002 between Imagis and OSI 10.9(6) Purchase Agreement dated August 30, 2002 between Imagis and Intacta for certain data encoding technologies 10.10(6) Agreement to amend the terms of Item 10.9 dated October 8, 2002 10.11(6) Agreement to amend the terms of Item 10.9 and 10.10 dated October 9, 2002 10.12(6) Agreement between Imagis and Intacta for the purchase of Intacta patents dated November 1, 2002 10.13(6) Consulting Agreement between Imagis and Altaf Nazerali dated October 1, 2002 10.14(6) Agreement between Imagis and Briyante for the development of a query application dated July 30, 2002 10.15 Revolving Line of Credit dated February 21, 2003 between Imagis and Altaf Nazerali 10.16 Amended and Restated Loan Agreement: Revolving Line of Credit dated April 15, 2003 between Imagis and Altaf Nazerali 10.17 General Security Agreement dated April 15, 2003 between Imagis and Altaf Nazerali 10.18 Grid Promissory Note dated February 21, 2003 between Imagis and Altaf Nazerali 10.19 Grid Promissory Note Amended and Restated dated April 15, 2003 between Imagis and Altaf Nazerali 10.20 Source Code License Agreement dated April 15, 2003 between Imagis and Altaf Nazerali 10.21 Source Code Escrow Agreement dated April 15, 2003 between Imagis and Altaf Nazerali 99.1 Risk Factors 99.2 Form 51-901F as required by the British Columbia Securities Commission * Indicates a management contract or compensatory plan or arrangement (1) Previously filed as part of Imagis' Registration Statement on Form 10-SB (File No. 000-30090). (2) Previously filed as part of Imagis' Annual Report on Form 10-KSB for the year ended December 31, 2000. (3) Previously filed as part of Imagis' Quarterly Report on Form 10-QSB for the period ended June 30, 2001. (4) Previously filed as part of Imagis' Quarterly Report on Form 10-QSB for the period ended March 31, 2002. (5) Previously filed as part of Imagis' Current Report on Form 8-K filed on December 19, 2002. (6) Previously filed as part of Imagis' Annual Report on Form 10-KSB for the year ended December 31, 2002. (b) Reports on Form 8-K On March 5, 2003, the Company furnished on a Form 8-K under Item 9 the following documents attached as exhibits thereto: the Notice of Annual General and Special Meeting of Shareholders, and the Information Circular relating to the proposed plan of arrangement involving Briyante and the Company. Such exhibits furnished pursuant to Item 9 on Form 8-K shall not be deemed filed under the Securities Exchange Act of 1934, as amended. 24 SIGNATURES In accordance with the requirements of the Exchange Act, the registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. IMAGIS TECHNOLOGIES INC. Date: May 15, 2003 /s/ Wayne Smith ------------------------------- Wayne Smith Chief Financial Officer (Principal Financial and Accounting Officer and Duly Authorized Officer) CERTIFICATION I, Wayne Smith, certify that: 1. I have reviewed this quarterly report on Form 10-QSB of Imagis Technologies Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: (a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; (b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and (c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): (a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: May 15, 2003 /s/ Wayne Smith ---------------- Wayne Smith Chief Financial Officer (Principal Financial and Accounting Officer) CERTIFICATION I, Iain Drummond, certify that: 1. I have reviewed this quarterly report on Form 10-QSB of Imagis Technologies Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: (a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; (b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and (c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): (a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: May 15, 2003 /s/ Iain Drummond ----------------- Iain Drummond Chief Executive Officer (Principal Executive Officer) CERTIFICATION PURSUANT TO 18 U.S.C. ss. 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Imagis Technologies Inc. (the "Company") on Form 10-QSB for the period ended March 31, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report), I, Wayne Smith, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Wayne Smith --------------- Wayne Smith Chief Financial Officer (Principal Financial and Accounting Officer) May 15, 2003 CERTIFICATION PURSUANT TO 18 U.S.C. ss. 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Imagis Technologies Inc. (the "Company") on Form 10-QSB for the period ended March 31, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report), I, Iain Drummond, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Iain Drummond ----------------- Iain Drummond Chief Executive Officer (Principal Executive Officer) May 15, 2003