AirIQ Inc.
TSX : IQ

AirIQ Inc.

November 10, 2006 07:00 ET

AirIQ Announces Third Quarter Results

Operating expense reductions fuel continued improvement in EBITDA results

TORONTO, ONTARIO--(CCNMatthews - Nov. 10, 2006) - AirIQ Inc. (TSX:IQ), a leader in global wireless security, today announced its results for the third quarter and nine months ended September 30, 2006.



Third Quarter Highlights

- EBITDA improvement of 19% quarter over quarter; 60.5% quarterly year over
year;
- Operating expense reduction of $278,728 quarter over quarter; $1,058,983
quarterly year over year;
- Expense to revenue ratio improvement to 42.5% from 51.3% in the third
quarter of 2005;
- Slight revenue increase of $173,102 comparing the first nine months of
2006 to the same period in 2005;
- Launched into the Field Service Market with a new GSM solution;
- Placed 15th on Deloitte's Technology Fast 50 (Canada) and placed 90th
on the Deloitte Fast 500 (North America).


"The telematics industry is gaining momentum" said Donald E. Simmonds, President and Chief Executive Officer of AirIQ. "Although AirIQ has experienced growth of almost 10,000% over the past five years, 2006 has been a year of pruning and streamlining to best prepare for the opportunities that lie ahead."

"Our focus on reducing operating expenses remained as one of our key priorities in the quarter and has had a positive impact on our EBITDA results," elaborated Mark Kohler, Chief Financial Officer of AirIQ.

Overview

The accompanying unaudited interim condensed consolidated statements of loss and deficit are presented for the three months and nine months ended September 30, 2006 and September 30, 2005, comparatively, and include the operating results of AirIQ Inc. and its subsidiaries. The accompanying unaudited interim condensed consolidated balance sheets do not include any adjustments to the amounts and classification of assets and liabilities that may be necessary should the Company be unable to continue as a going concern. The Company's unaudited interim consolidated financial statements as at and for the period ended September 30, 2006, including notes thereto and the accompanying Management's Discussion and Analysis will be filed with the Canadian securities regulatory authorities by November 14, 2006; and will be available on the Company's website (www.airiq.com) and on the System for Electronic Document Analysis and Retrieval ("SEDAR") website (www.sedar.com).

Unless otherwise noted herein, all references to dollar amounts are in Canadian dollars.

Revenues

Revenues for the three months ended September 30, 2006, decreased 3.5% to $9,911,177 from $10,273,609 for the comparative three months ended September 30, 2005. The revenues decreased $306,510 as compared with the previous three months ended June 30, 2006.

The decrease in year over year quarterly revenues was the result of the strengthening Canadian dollar in comparison to the US dollar and the related impact on monthly service revenues. The impact of the strengthening Canadian dollar in comparison to the US dollar had a notional effect of reducing the Company's third quarter revenues by approximately $390,000 year over year.

Revenue increased to $30,267,055 from $30,093,953 for the nine months ended September 30, 2006 and 2005, respectively.

Gross Profit

Gross profit for the three months ended September 30, 2006 was $3,860,732, representing a decrease of 11.8% compared to gross profit of $4,375,475 for the three months ended September 30, 2005. Gross profit decreased by $195,041 from the gross profit for the previous three months ended June 30, 2006.

As a percentage of revenues, gross profit for the three months ended September 30, 2006, was 39.0% compared to 42.6% for the three months ended September 30, 2005 and 39.7% for the three months ended June 30, 2006.

The negative effect on revenue of the weakening of the US dollar relative to the Canadian dollar was partially offset by a decreased US dollar cost of sales. However, overall negative impact on gross profit from the year over year fluctuation in US dollar exchange rates is estimated to be approximately $120,000.

Gross profit decreased 4.7% to $12,086,066 from $12,682,132 for the nine months ended September 30, 2006 and 2005, respectively.

Expenses

Expenses totaled $4,216,015 for the three months ended September 30, 2006, compared to $5,274,998 for the three months ended September 30, 2005.

Included in expenses for the three months ended September 30, 2006 is approximately $105,000 of unusual legal expenses related primarily to the Company's efforts to defend and file a cross-complaint related to the previously disclosed claim of a former component supplier.

Expenses as a percentage of revenues were further reduced in the three months ended September 30, 2006 to 42.5% compared with 51.3% for the three months ended September 30, 2005.

Expenses totaled $13,433,712 for the nine months ended September 30, 2006; a $2,338,589 reduction compared to $15,772,301 for the nine months ended September 30, 2005.

Net Interest

Net interest expense for the three months and nine months ended September 30, 2006, was $322,737 and $1,084,073, respectively, compared to $192,399 and $1,049,785 for the three months and nine months ended September 30, 2005, respectively.

Included in the net interest expense for the three months ended September 30, 2006 is the amount of $46,066 related to the accreted fair market value of warrants issued in connection with the term loan and secured debenture financings during the second quarter of 2006.

Amortization

Amortization for the three months and nine months ended September 30, 2006 was $543,187 and $2,067,891, respectively, compared with $762,159 and $2,472,433, for the three months and nine months ended September 30, 2005 respectively.

Commencing August 1, 2006, there was a reduction of approximately $68,000 in monthly amortization expenses related to the end of the two year amortization periods for "purchased technology" and "tradenames", which were purchased as part of the Company's acquisition of the assets of Aircept in 2004.

Net Loss

Net loss for the three months ended September 30, 2006 was $1,221,207, or $0.01 per share, compared with $1,943,081 or $0.02 per share, for the three months ended September 30, 2005. The improvement relates primarily to the implementation of the Company's integration strategy and the Company's initiatives to reduce operating expenses during 2006.

Liquidity and Capital Resources

As at September 30, 2006, the Company had cash and cash equivalents of $1,739,564 and negative working capital of $901,476. Working capital has been calculated by netting current assets and current liabilities, and excluding deferred revenue and obligations for service contracts that are non-cash items.

On July 4, 2006, the Company reduced the outstanding balance on its operating loan by repaying $1,100,000 of the outstanding loan amount, required as a result of the consolidated accounts receivable margin test calculations under the loan. The maximum principal amount available under the revolving operating loan remains at $5,000,000, subject to the consolidated accounts receivable margin test.

In accordance with Canadian GAAP, and as required in section 3070, Deferred Charges, of the Canadian Institute of Chartered Accountants ("CICA") handbook, all deferred service contract costs have been classified as non-current in the accompanying unaudited interim condensed consolidated financial statements regardless of their associated amortization period. Deferred service contract costs, as at September 30, 2006, in the amount of $8,545,092 (September 30, 2005 - $7,533,431) are to be amortized on a straight-line basis over the next twelve months. The related deferred revenue and obligations for service contracts, as at September 30, 2006, to be realized over the same twelve month period amounts to $9,904,517 ($9,242,168 and $662,349, respectively) compared with $10,607,735 ($9,775,291 and $832,444, respectively) as at September 30, 2005.



AirIQ Inc.
Consolidated Balance Sheets
(Unaudited)

As at September 30, 2006 December 31, 2005
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Assets
Current
Cash and cash equivalents $ 1,739,564 $ 1,383,827
Accounts receivable 7,057,067 5,641,893
Inventory 1,188,130 4,824,907
Prepaid expenses 432,475 468,949
---------------------------------------------------------------------------
Total current assets 10,417,236 12,319,576
Property, plant and equipment,
net 3,103,512 4,534,196
Intangible assets, net 5,582,340 7,176,667
Goodwill 16,620,354 16,620,353
Deferred financing, net 353,093 -
Deferred service contract costs,
net 9,681,862 9,677,759
---------------------------------------------------------------------------
$ 45,758,397 $ 50,328,551
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---------------------------------------------------------------------------

Liabilities and Shareholders'
Equity
Current
Accounts payable and accrued
liabilities $ 7,073,643 $ 7,970,721
Revolving operating loan (note 6) 3,900,000 -
Accrual for earn-out payment - 4,942,750
Income taxes payable 118,736 118,736
Non-revolving credit facility
(note 4) - 6,985,968
Deferred revenue (note 3) 9,242,168 10,042,872
Obligations for service
contracts (note 3) 662,349 882,235
Obligations under capital lease 226,333 213,921
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Total current liabilities 21,223,229 31,157,203
Term loan and secured debenture
(notes 5 and 7) 5,395,893 -
Obligations under capital lease 171,382 237,773
National Research Council loan 10,013 117,637
Deferred revenue 1,569,162 1,909,605
Obligations for service
contracts 159,843 581,142
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Total liabilities 28,529,522 34,003,360
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Shareholders' equity
Share capital 88,204,432 83,591,703
Other paid-in capital 4,447,754 3,610,254
Contributed surplus 1,498,469 1,190,969
Deficit (76,921,780) (72,067,735)
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Total shareholders' equity 17,228,875 16,325,191
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$ 45,758,397 $ 50,328,551
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The accompanying notes are an integral part of these unaudited interim
condensed consolidated financial statements.


AirIQ Inc.
Consolidated Statements of Loss and Deficit
(Unaudited)

Three months ended
September 30, 2006 September 30, 2005
---------------------------------------------------------------------------

Revenues $ 9,911,177 $ 10,273,609
Direct cost of sales 6,050,445 5,898,134
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Gross profit 3,860,732 4,375,475
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Expenses
Sales and marketing 1,116,471 1,332,238
Engineering and research 792,607 1,262,140
General and administration 2,187,151 2,281,896
Stock-based compensation 105,000 200,000
Loss on foreign exchange 14,786 198,724
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4,216,015 5,274,998
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Loss before the following (355,283) (899,523)
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Other expenses
Net interest expense 322,737 192,399
Other charges - 89,000
Amortization 543,187 762,159
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865,924 1,043,558
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Loss before income taxes (1,221,207) (1,943,081)

Provision for income taxes
Current - -
Future - -
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- -
---------------------------------------------------------------------------

Net loss for the period (1,221,207) (1,943,081)

Deficit, beginning of period (75,700,573) (64,398,001)
---------------------------------------------------------------------------

Deficit, end of period $ (76,921,780) $ (66,341,082)
---------------------------------------------------------------------------
---------------------------------------------------------------------------

Loss per share - basic and
diluted $ (0.01) $ (0.02)
---------------------------------------------------------------------------
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Weighted average number of
common shares used in computing
loss per share, basic and diluted 154,913,501 121,007,438
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---------------------------------------------------------------------------


Nine months ended
September 30, 2006 September 30, 2005
---------------------------------------------------------------------------

Revenues $ 30,267,055 $ 30,093,953
Direct cost of sales 18,180,989 17,411,821
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Gross profit 12,086,066 12,682,132
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Expenses
Sales and marketing 3,670,099 4,388,572
Engineering and research 2,615,828 3,797,573
General and administration 6,560,279 6,870,979
Stock-based compensation 307,500 495,000
Loss on foreign exchange 280,006 220,177
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13,433,712 15,772,301
---------------------------------------------------------------------------

Loss before the following (1,347,646) (3,090,169)
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Other expenses
Net interest expense 1,084,073 1,049,785
Other charges 354,435 337,759
Amortization 2,067,891 2,472,433
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3,506,399 3,859,977
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Loss before income taxes (4,854,045) (6,950,146)

Provision for income taxes
Current - 136,000
Future - 335,000
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- 471,000
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Net loss for the period (4,854,045) (7,421,146)
Deficit, beginning of period (72,067,735) (58,919,936)
---------------------------------------------------------------------------

Deficit, end of period $ (76,921,780) $ (66,341,082)
---------------------------------------------------------------------------
---------------------------------------------------------------------------

Loss per share - basic and
diluted $ (0.03) $ (0.06)
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---------------------------------------------------------------------------

Weighted average number of
common shares used in computing
loss per share, basic and
diluted 142,369,505 118,519,462
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AirIQ Inc.
Consolidated Statements of Cash Flows
(Unaudited)

Three months ended
September 30, 2006 September 30, 2005
---------------------------------------------------------------------------
Operating activities
Net loss for the year $ (1,221,207) $ (1,943,081)
Add items not involving cash
Future tax expense - -
Stock-based compensation 105,000 200,000
Interest accreted on term loan 46,064 -
Amortization of property, plant
and equipment 442,658 616,463
Amortization of deferred service
contract costs 3,973,643 3,584,639
Amortization of intangible assets 405,194 590,822
Amortization of deferred financing
costs 19,057 -
Changes in non-cash working capital
balances related to operations
Accounts receivable 99,746 787,472
Future tax asset - -
Inventory 615,782 (727,336)
Prepaid expenses (10,654) (116,209)
Accounts payable and accrued
liabilities 461,375 (338,319)
Accrual for earn-out payment - -
Income taxes payable 37,500 (6,782)
Deferred revenue (1,185,326) (690,027)
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3,788,832 1,957,642
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Investing activities
Purchase of property, plant and
equipment (7,291) (462,612)
Deferred financing - -
Deferred service contract costs (3,684,586) (2,545,865)
---------------------------------------------------------------------------
(3,691,877) (3,008,477)
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Financing activities
Repayment of obligations under
capital lease (64,577) (93,253)
Repayment of National Research
Council loan (26,666) (26,416)
Proceeds from revolving operating
loan - -
Repayment of revolving operating
loan (1,100,000) -
Repayment of non-revolving credit
facility - -
Repayments of term loan and
secured debenture - -
Proceeds from term loan and
secured debenture - 1,000,000
Repayment of obligations for
service contracts (39,982) (250,677)
Issuance of common shares and
equity instruments - -
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(1,231,225) 629,654
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Net decrease in cash and cash
equivalents (1,134,270) (421,181)

Cash and cash equivalents,
beginning of period 2,873,834 3,865,361
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Cash and cash equivalents, end of
period $ 1,739,564 $ 3,444,180
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Supplementary disclosure
Cash interest $ 170,732 $ 118,753
Non-cash investing and financing
activities
Property, plant and equipment
purchased under capital leases 61,585 20,917
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Nine months ended
September 30, 2006 September 30, 2005
---------------------------------------------------------------------------
Operating activities
Net loss for the year $ (4,854,045) $ (7,421,146)
Add items not involving cash
Future tax expense - 450,000
Stock-based compensation 307,500 495,000
Interest accreted on term loan 233,393 358,526
Amortization of property, plant
and equipment 1,603,491 1,928,758
Amortization of deferred service
contract costs 11,450,877 10,547,288
Amortization of intangible
assets 1,594,328 1,772,456
Amortization of deferred
financing costs 19,061 102,778
Changes in non-cash working
capital balances related
Accounts receivable (1,415,174) 103,731
Future tax asset - (115,000)
Inventory 3,636,777 (1,436,575)
Prepaid expenses 36,473 (486,499)
Accounts payable and accrued
liabilities (911,737) 361,480
Accrual for earn-out payment (4,942,750) -
Income taxes payable - 131,749
Deferred revenue (1,141,147) 908,251
---------------------------------------------------------------------------
5,617,047 7,700,797
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Investing activities
Purchase of property, plant and
equipment (49,420) (745,589)
Deferred financing (372,154) -
Deferred service contract costs (11,440,322) (10,088,424)
---------------------------------------------------------------------------
(11,861,896) (10,834,013)
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Financing activities
Repayment of obligations under
capital lease (177,366) (174,765)
Repayment of National Research
Council loan (107,624) (70,072)
Proceeds from revolving
operating loan 5,000,000 -
Repayment of revolving operating
loan (1,100,000) -
Repayment of non-revolving
credit facility (6,985,968) -
Repayments of term loan and
secured debenture (1,000,000) (5,319,484)
Proceeds from term loan and
secured debenture 7,000,000 5,110,968
Repayment of obligations for
service contracts (641,185) (845,582)
Issuance of common shares and
equity instruments 4,612,729 2,974,242
---------------------------------------------------------------------------
6,600,586 1,675,307
---------------------------------------------------------------------------

Net decrease in cash and cash
equivalents 355,737 (1,457,909)

Cash and cash equivalents,
beginning of period 1,383,827 4,902,089
---------------------------------------------------------------------------
Cash and cash equivalents, end of
period $ 1,739,564 $ 3,444,180
---------------------------------------------------------------------------

Supplementary disclosure
Cash interest $ 523,313 $ 458,588
Non-cash investing and financing
activities Property, plant and
equipment purchased under
capital leases 123,387 451,399
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Notes to Consolidated Financial Statements

(Unaudited)

1. Basis of Presentation and Going Concern Uncertainty

The accompanying unaudited interim condensed consolidated financial statements include the accounts of AirIQ Inc. ("AirIQ" or the "Company") and its subsidiaries, AirIQ U.S. Holdings, Inc. ("AirIQ Holdings"), AirIQ U.S., Inc. ("AirIQ US"), AirIQ Marine, Inc. ("AirIQ Marine"), Oceantrac Incorporated ("Oceantrac") and AirIQ, LLC ("AirIQ LLC"), and are presented for the three months and nine months ended September 30, 2006 and 2005, comparatively. All intercompany balances and transactions have been eliminated on consolidation.

The accompanying unaudited interim consolidated condensed financial statements have been prepared in accordance with Canadian generally accepted accounting principles ("Canadian GAAP") on a going concern basis, which presumes that the Company will be able to realize its assets and discharge its liabilities in the normal course of business for the foreseeable future.

The Company has incurred significant losses of $1,221,207 and $4,854,045 for the three months and nine months ended September 30, 2006, and has an accumulated deficit of $76,921,780 as at September 30, 2006.

During the nine months ended September 30, 2006, the Company has improved its working capital position by approximately $7.0 million mainly due to an equity financing (see note 8) and the restructuring of its debt (see notes 4-7). While these activities were planned to enable the Company to improve its ability to generate cash from its operations, the Company's continuation as a "going concern" is uncertain and is dependent upon its ability to achieve profitable operations and upon its ability to obtain additional financing or equity in the future. The outcome of these matters cannot be predicted at this time.

The accompanying unaudited interim condensed consolidated financial statements do not include any adjustments to the amounts and classification of assets and liabilities that may be necessary should the Company be unable to continue as a going concern.

AirIQ develops and operates a telematics system using specialized software, digitized mapping, wireless communications, the Internet and the Global Positioning System ("GPS"). Telematics is the name given to information and control messages sent via wireless to and from vehicles and vessels. The accompanying unaudited interim condensed consolidated financial statements include the accounts of AirIQ and its subsidiaries.

2. Summary of Significant Accounting Policies

The accompanying unaudited interim condensed consolidated financial statements do not contain all disclosures required by Canadian GAAP for annual financial statements and, accordingly, should be read in conjunction with the audited annual consolidated financial statements of the Company for the years ended December 31, 2005 and 2004.

The accompanying unaudited interim condensed consolidated financial statements are prepared in accordance with Canadian GAAP using the same accounting policies disclosed in the Company's most recently prepared audited annual consolidated financial statements for the years ended December 31, 2005 and 2004.

3. Deferred Service Contract Costs

In accordance with Canadian GAAP, and as required in section 3070, Deferred Charges, of the Canadian Institute of Chartered Accountants ("CICA") handbook, all deferred service contract costs have been classified as non-current in the accompanying unaudited interim condensed consolidated financial statements regardless of their associated amortization period. Deferred service contract costs, as at September 30, 2006, in the amount of $8,545,092 (September 30, 2005 - $7,533,431) are to be amortized on a straight-line basis over the next twelve months. The related deferred revenue and obligations for service contracts, as at September 30, 2006, to be realized over the same twelve month period amounts to $9,904,517 ($9,242,168 and $662,349, respectively) compared with $10,607,735 ($9,775,291 and $832,444, respectively) as at September 30, 2005.

4. Non-revolving Credit Facility (Renamed from "Bank Financing")

On June 20, 2006, the Company's non-revolving credit facility, originally entered into on April 25, 2005 with a Canadian chartered bank, was repaid in full with funds received from the revolving operating loan (note 6). The funds drawn on the non-revolving facility did bear interest at varying margins based on the bank's Canadian prime rate or US base rate, and were secured by a general security agreement and first priority mortgage over all of the assets of the Company.

Total interest charges related to the non-revolving credit facility for the three months and nine months ended September 30, 2006 were $nil and $325,713, respectively. The effective interest rate for the nine months ended September 30, 2006 was 12%.

5. Term Loan

On April 5, 2006, the Company obtained a five-year $4,000,000 term loan from Lenbrook Corp., an existing shareholder of AirIQ, and Quadrature Investments Inc., a company controlled by Robert Simmonds, a director and existing shareholder of AirIQ (together, the "Lenders"). The term loan bears interest at a fixed rate of 12% per annum payable quarterly; interest only is payable for the first two years, and quarterly blended payments of principal plus interest will be payable for the subsequent twelve quarters.

In connection with the term loan financing and for no additional consideration, the Company issued a total of 5,000,000 share purchase warrants with an exercise price of $0.24 per share to the Lenders. The warrants are exercisable over a term of three years.

The fair value of the warrants, being $650,000, was charged to other paid-in capital and is accreted to interest expense over the term of the loan.

In connection with the term loan financing, the Company also incurred costs of $85,349 that were charged to deferred financing and are being amortized over the term of the loan.

On June 20, 2006, the Company repaid a total of $1,000,000 to the Lenders with proceeds received from the secured debenture described in note 7.

During the three months and nine months ended September 30, 2006, total interest charges of $94,132 and $397,318, respectively, was included in net interest expense related to the term loan. Included in the interest charges for the three months and nine months ended September 30, 2006 was non-cash accreted notional interest of $25,453 and $210,579, respectively, related to the fair value of the warrants, of which $156,811 related to the early repayment of $1,000,000 of the term loan.

6. Revolving Operating Loan

On June 20, 2006, the Company obtained a $5,000,000 two year revolving operating loan from an unrelated private capital fund (the "Senior Lender"), replacing the non-revolving credit facility described in note 4. The operating loan is secured by a general security agreement and first priority mortgage over all of the assets of the Company, and is subject to the Company maintaining certain financial covenants that include revenue and earnings (losses) before other expenses and income taxes and marginable consolidated accounts receivable balances. The funds drawn on the operating loan bear interest at the Canadian prime rate or US base rates of interest plus 3%.

On July 4, 2006, the Company reduced the outstanding balance on its operating loan by $1,100,000, required as a result of the consolidated accounts receivable margin test calculations under the loan. The maximum principal amount available under the revolving operating loan remains at $5,000,000, subject to the consolidated accounts receivable margin test. The consolidated accounts receivable margin test was waived by the Senior Lender for the month ended September 30, 2006.

Total interest charges related to the operating loan for the three months and nine months ended September 30, 2006 were $85,556 and $97,885, respectively, translating to an effective interest rate of 9% per annum.

7. Secured Debenture

On June 20, 2006 the Company issued a $3,000,000 secured debenture to the Senior Lender that holds the revolving operating loan described in note 6. The debenture bears interest at the fixed rate of 12% per annum and will mature on June 20, 2008. The term is subject to extension if requested by AirIQ and if certain financial targets are met. Under the terms of the debenture, interest only is payable monthly and principal prepayments are allowed at the option of AirIQ after June 20, 2007.

In connection with the secured debenture financing and for no additional cost, the Company issued 3,750,000 special warrants to the holder of the debenture which are exercisable, for no additional consideration, into common share purchase warrants with an exercise price of $0.24 per share. The underlying warrants expire on June 20, 2009.

The fair value of the warrants, being $187,500, was charged to other paid-in capital and is accreted to interest expense over the term of the debenture.

In connection with this debenture and the revolving operating loan (note 6), the Company incurred costs, in aggregate of $286,801, that was charged to deferred financing and are being amortized over the two year term of the debt instruments.

Subsequent to quarter end, the Senior Lender and the Company amended the secured debenture agreement which included the delivery of revised financial benchmarks to the Senior Lender that more appropriately measure compliance going forward.

As part of the amended agreement, the Company will use its best efforts to obtain regulatory approval to issue 3,750,000 common share purchase warrants in replacement of the common share purchase warrants originally issued on June 20, 2006, from $0.240 per share to $0.185 per share.

During the three months and nine months ended September 30, 2006, total interest charges of $90,740 and $102,805 was included in net interest expense related to this debenture. Included in the interest charges for the three months and nine months ended September 30, 2006 was non-cash accreted notional interest of $20,612 and $22,815, respectively, related to the fair value of the warrants.

8. Share Capital

(a) Share capital consists of the following:

Authorized:

Unlimited common shares without par value

Issued:

As at September 30, 2006, 154,913,501 (June 30, 2006 -- 154,913,501 and December 31, 2005 --128,364,916) common shares were issued and outstanding in the capital of the Company.

On April 5, 2006, 26,545,455 special warrants were issued by the Company pursuant to a bought deal private placement financing at a price of $0.20 per special warrant for gross proceeds of $5,309,091 ($4,611,946 net of $697,145 of transaction costs). Each special warrant was qualified for distribution pursuant to a short form prospectus dated May 5, 2006, and was automatically exercised for no additional consideration into one common share of AirIQ on May 10, 2006.

(b) Warrants:

As at September 30, 2006, the Company had 16,744,737 (December 31, 2005 -- 9,461,197) warrants outstanding.

On April 5, 2006, 5,000,000 share purchase warrants with an exercise price of $0.24 were issued in connection with the term loan described in note 5.

On June 20, 2006, 3,750,000 share purchase warrants with an exercise price of $0.24 were issued in connection with the secured debenture described in note 7.

On April 14, 2006, 1,466,460 compensation warrants previously issued by the Company on October 14, 2004, expired pursuant to their terms, unexercised.

(c) Stock options:

The Company currently has one stock option plan that has been approved by the shareholders: the June 4, 2002, Employee Stock Option Plan, as amended on April 26, 2005 (the "Plan"), which replaces and supercedes the original stock option plan dated June 14, 2000. On September 28, 2001, the Company merged ("Merger") with a wholly owned subsidiary of eDispatch.com Wireless Data Inc. ("eDispatch"). On January 1, 2003, the Company amalgamated with eDispatch and continued under its current name, AirIQ Inc. Shareholders separately approved the exchange of AirIQ options for options of eDispatch, pursuant to the Merger.

(i) Stock options under the Plan

As at September 30, 2006, the Company has 13,296,568 (December 31, 2005 - 13,299,698) common shares reserved for future options granted under the Plan. The Company may grant options to directors, officers, employees and consultants. The Company's Board of Directors has the discretion to set the price, term, vesting schedules and other terms and conditions for options granted under the Plan, subject to the terms of the Plan and the requirements of any stock exchanges on which the Company's shares are listed.

Effective January 1, 2003, the Company elected to adopt on a prospective basis the fair value method of accounting for stock-based compensation with respect to stock options issued after December 31, 2002. Under the fair value method, compensation expense for stock-based compensation is measured at the grant date using an option pricing model and recognized in earnings on a straight-line basis over the expected service life. No compensation expense for stock options issued before January 1, 2003, has been recorded.

On May 19, 2006, the Company granted 1,166,863 options under the Plan at an exercise price of $0.20 per share and a term of ten years. The estimated fair value of the stock-based compensation for this grant is approximately $133,920 or approximately $0.11 per option.

The fair value of the stock-based compensation issued during the three months and nine months ended September 30, 2006 is approximately $nil and $140,271, respectively (September 30, 2005 - $6,000 and $1,006,000 respectively), or approximately an average of $nil and $0.12, respectively (September 30, 2005 - $0.29 and $0.34, respectively) per option.

The stock-based compensation expense estimated for the three months and nine months ended September 30, 2006 is $105,000 and $307,500, respectively (September 30, 2005 - $200,000 and $495,000), and was estimated at the date of the grants using the Black Scholes option pricing model with the assumptions listed in the table below.



2006 2005
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Risk free interest rate 4.1% 41.7%
Expected volatility 76% 95%
Expected time until exercise 6 years 6 years
Expected dividend yield 0% 0%


There were 7,734,666 options outstanding under the Plan as at September 30, 2006 (December 31, 2005 --8,673,100).

(ii) Stock options issued pursuant to the Merger

Pursuant to the Merger, 3,242,598 options were issued outside of the Plan in exchange for outstanding AirIQ options. These options are separate and distinct from options issued under the Plan. As of September 30, 2006 there were 1,762,284 options outstanding outside of the Plan (December 31, 2005 --1,814,839).

9. Related Party Transactions

The Company has identified Lenbrook Corp. and Quadrature Investments Inc. as related parties. The related parties were considered to have significant influence over the Company as defined under section 3840 of the CICA Handbook. During the three months and nine months ended September 30, 2006, the Company accrued interest, collectively, on the term loans in the amount of $90,921 and $208,981, respectively, to the related parties. As at September 30, 2006, $3,031,377 is payable to the related parties. Balances payable to related parties are included in term loan and accounts payable and accrued liabilities, and are due on normal trade terms or as described under the terms of the term loan agreement as described in note 5.

10. Commitments and Contingencies

Total future minimum payments under leases for premises are approximately $1,210,100 that includes both Canadian and US dollar commitments expressed in Canadian dollars.

The following is a schedule of approximate future annual minimum payments expressed in Canadian dollars:



2006 $ 129,400
2007 316,300
2008 323,900
2009 331,700
2010 and thereafter 108,800
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$ 1,210,100
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The Company has outstanding irrevocable standby letters of credit in the amount of $70,000 as security for certain supply agreements.

The Company, in the course of its normal operations, is subject to claims, lawsuits and contingencies. Accruals are made in instances where it is probable that liabilities may be incurred and where such liabilities can be reasonably estimated. Although it is possible that liabilities may be incurred in instances for which no accruals have been made, the Company has no reason to believe that the ultimate outcome of these matters would have a significant impact on its consolidated financial position.

11. Other Charges

Total charges of $354,435 have been recorded for the nine months ended September 30, 2006. This non-recurring charge relates, primarily, to payroll obligations attributed to staff reductions during the first and second quarters.

12. Segmented Information

The Company has one reportable segment, mobile asset management services. The Company's capital assets and goodwill are located in Canada and the United States. Capital assets located in Canada have a net book value of $2,329,658. The remainder of the Company's capital assets and all of its goodwill are located in the United States.

The majority of the Company's revenues are generated in the United States.

Conference Call and Webcast

AirIQ will hold a conference call today, Friday, November 10, 2006, at 10 a.m. ET. To access the call, please dial 416-695-9753 or 1-800-766-6630. A replay of the conference call will be available as of noon the same day until midnight November 17, 2006. To access the replay, dial 416-695-5275 or 1-888-509-0081 followed by the pass code 634080. The call will also be webcast live on the Company's web site at www.airiq.com.

The Company's quarterly report, including complete financial statements and Management's Discussion and Analysis will be available at www.airiq.com and at www.sedar.com by November 14, 2006.

Non-GAAP Disclosure

"EBITDA" is defined by the Company as net income before interest expense, income taxes, other charges, depreciation and amortization. The Company has included information concerning EBITDA because it believes that it may be used by certain investors as one measure of the Company's financial performance. EBITDA is not a measure of financial performance under Canadian GAAP and is not necessarily comparable to similarly titled measures used by other companies. EBITDA should not be construed as an alternative to net income or to cash flows from operating activities (as determined in accordance with Canadian GAAP) or as a measure of liquidity.

In addition, the Company has included information concerning adjustments to gross profit, expenses and working capital because it believes that it may be used by certain investors as further measures of the Company's financial performance, and such adjustments to expenses or assets and liabilities are highlighted due to their nature or to their magnitude.

The accompanying unaudited interim consolidated statements of loss and deficit are presented for the three months and nine months ended September 30, 2006 and 2005, comparatively, and include the operating results of AirIQ Inc. and its subsidiaries.

Forward-looking Statements

This news release contains forward-looking information based on management's best estimates and the current operating environment. These forward-looking statements are related to, but not limited to, AirIQ's operations, anticipated financial performance, business prospects and strategies. Forward-looking information typically contains words such as "anticipate", "believe", "expect", "plan" or similar words suggesting future outcomes. Such forward-looking statements are as of the date which such statement is made and are subject to a number of known and unknown risks, uncertainties and other factors which could cause actual results or events to differ materially from future results expressed, anticipated or implied by such forward-looking statements. Such factors include, but are not limited to, changes in market and competition, technological and competitive developments and potential downturns in economic conditions generally. Therefore, actual outcomes and results may differ materially from those expressed in such forward-looking statements. Other than as may be required by law, AirIQ disclaims any intention or obligation to update or revise any such forward-looking statements, whether as a result of new information, future events or otherwise.

About AirIQ

AirIQ trades on the Toronto Stock Exchange under the symbol IQ. A leader in Global Wireless Security, AirIQ is headquartered in Pickering, near Toronto, Canada, with offices in Lake Forest and San Diego, California, U.S.A. The Company operates as a wireless Internet applications service provider specializing in location-based services. AirIQ's services are offered to four primary markets: Commercial Fleets; Consumer; Vehicle Finance; and, Marine Fleets. AirIQ gives vehicle and vessel owners the abilities to manage and protect their mobile assets. AirIQ's services include: vehicle locating, boundary notification, automated inventory, maintenance reminders, security alerts, vehicle disabling, unauthorized movement alerts and many more features. For additional information on AirIQ or its products and services, please visit the Company's website at www.airiq.com.

Contact Information

  • AirIQ Finance:
    Mark Kohler
    Chief Financial Officer
    (905) 831-6444, Ext. 4250
    Email: mkohler@airiq.com