QuStream Corporation
TSX VENTURE : QVC

QuStream Corporation

November 12, 2007 16:16 ET

QuStream Corporation Announces Third Quarter Fiscal 2007 Results

TORONTO, ONTARIO--(Marketwire - Nov. 12, 2007) - QuStream Corporation ("QuStream") (TSX VENTURE:QVC) announces its third quarter fiscal 2007 results.

All figures are in Canadian currency except for where otherwise noted.

Revenues for the third quarter of fiscal 2007 were a record $7.8 million compared to $6.4 million in the same period in fiscal 2006, an increase of 22%. Revenues for the nine months ended September 30, 2007 were $19.1 million, up 26% from the $15.2 million during the same period last year.

Excluding the exchange rate effect, revenues for the third quarter of fiscal 2007 were USD $7.5 million, up 32% from the USD $5.7 million in the same period last year. Revenues for the nine months ended September 30, 2007 were USD $17.6 million, up 30% from the USD $13.5 million in the same period last year.

Gross margin for the third quarter of fiscal 2007 was 55% compared to 56% in the same period last year. Gross margin for the nine months ended September 30, 2007 was 56% compared to 55% for the same period last year.

Net earnings for the third quarter of fiscal 2007 were $0.4 million or $0.02 per share compared with net earnings of $0.3 million or $0.02 per share for the same period last year. Net earnings for the nine months ended September 30, 2007 were $0.1 million or $0.01 per share compared to a net loss of $(0.9) million or $(0.04) per share for the same period last year.

In the third quarter total bookings (note 1) were US$7.7 million, the second highest in the Company's history.

Backlog at the end of the third quarter of fiscal 2007 was US$3.8 million.

"I am very pleased with the continued strength in the Commercial segment as revenue from this market increased 48% in the third quarter of 2007 compared to the same period last year. I am also pleased with the level of bookings that were generated this quarter, particularly the continued strength from the US Government segment," said Frederick L. Godard, Chairman, President and Chief Executive Officer of QuStream. "We continue to make significant investments in Research & Development and in Selling & Marketing as we execute on our growth plans."

Note 1:

The Company uses terms such as bookings, shipments and backlog. These terms are not defined by generally accepted accounting principles (GAAP). Our usage of these terms may vary from the usage adopted by other companies. We believe that the combination of bookings (purchase orders received by the company), shipments (orders shipped by the company and invoiced) and closing backlog (opening backlog, plus bookings less shipments) provides a useful indictor for determining how our products are being received by the market and the economic health of the market as it relates to demand for our products. Closing backlog is not a guarantee of future revenues and provides no information about the timing on which future revenue may be recorded. We report our bookings, shipments and backlog in US dollars to reflect the underlying currency of the majority of such contracts and, therefore, reduce the volatility that would result from converting the measure to Canadian dollars.

Forward-Looking Statements

The statements made in this press release that are not historical facts contain forward-looking information that involves risk and uncertainties. All statements, other than statements of historical facts, which address QuStream's expectations, should be considered forward-looking statements. Such statements are based on management's exercise of business judgment as well as assumptions made by and information currently available to management. When used in this document, the words "may", "will", "anticipate", "believe", "estimate", "expect", "intend" and words of similar import, are intended to identify any forward-looking statements. You should not place undue reliance on these forward-looking statements. These statements reflect our current view of future events and are subject to certain risks and uncertainties as contained in the Company's filings with Canadian securities regulatory authorities, which in relation to this press release include, but are not limited to, our expected fiscal 2007 organic revenue growth, our expected future design wins, and our expected market share across various customers and product segments. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, our actual results could differ materially from those anticipated in these forward-looking statements. We undertake no obligation, and do not intend, to update, revise or otherwise publicly release any revisions to these forward-looking statements to reflect events or circumstances after the date hereof, or to reflect the occurrence of any unanticipated events. Although we believe that our expectations are based on reasonable assumptions, we can give no assurance that our expectations will materialize.

QUSTREAM CORPORATION

NOTICE TO READER

The accompanying unaudited interim consolidated financial statements of QuStream Corporation for the three and nine months ended September 30, 2007 have been prepared by management and approved by the Audit Committee and the Board of Directors of QuStream. These statements have not been reviewed by QuStream's external auditors.



"Frederick L. Godard" "Angelo Tullo"

Frederick L. Godard Angelo Tullo
Chairman, President and Vice-President and
Chief Executive Officer Chief Financial Officer



QuStream Corporation
Condensed Consolidated Balance Sheets
(In thousands of Canadian dollars)
Unaudited
September 30 December 31
2007 2006

Assets

Current
Cash and cash equivalents $ 2,931 $ 6,965
Short term investments 452 434
Accounts receivable 5,360 5,599
Inventories 11,353 6,012
Future income taxes 605 709
Prepaid expenses & other current assets 391 440
--------------------------------------------------------------------------
21,092 20,159

Property, plant and equipment, net 2,573 2,166
Goodwill 384 450
Intangible assets, net 2,857 4,099
Future income taxes 132 291

--------------------------------------------------------------------------
$ 27,038 $ 27,165
--------------------------------------------------------------------------
--------------------------------------------------------------------------

Liabilities and Shareholders' Equity

Current
Accounts payable and accrued liabilities 7,565 $ 4,454
Deferred revenue 6 55
Income taxes payable 530 496
Future income taxes 228 245
Current portion of obligations under capital
lease - 33
Current portion of notes payable 2,045 3,227
--------------------------------------------------------------------------
10,374 8,510

Future income taxes 380 529
--------------------------------------------------------------------------
10,754 9,039
--------------------------------------------------------------------------

Shareholders' equity:
Share capital 17,257 17,040
Retained earnings 811 685
Contributed surplus 859 756
Accumulated other comprehensive income (2,643) (355)
--------------------------------------------------------------------------
16,284 18,126

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$ 27,038 $ 27,165
--------------------------------------------------------------------------
--------------------------------------------------------------------------

The accompanying notes form an integral part of these condensed
consolidated financial statements.



QuStream Corporation
Condensed Consolidated Statements of Shareholders' Equity
(In thousands of Canadian dollars) Unaudited

Accumu-
lated
Other Total
Contri- Compre- Share-
Common Share buted hensive Retained holders'
Shares Capital Surplus Income Earnings Equity

Balance -
December 31,
2006 23,476,956 $ 17,040 $ 756 ($355) $ 685 $ 18,126

Issue of
common
shares in
connection
with
exercise
warrants 100,000 145 145

Issue of
common
shares upon
exercise from
stock options 40,500 36 36

Incremental
value on the
modification
of warrants
exercised 23 (23) -

Stock-based
compensation
on exercised
options 13 (13) -

Stock-based
compensation 85 85

Foreign
currency
translation
adjustment (1,208) (1,208)

Net loss (322) (322)
------------------------------------------------------------

Balance - June
30, 2007 23,617,456 $ 17,257 $ 804 ($1,563) $ 363 $ 16,861
------------------------------------------------------------
------------------------------------------------------------

Stock-based
compensation 55 55

Foreign
currency
translation
adjustment (1,080) (1,080)

Net earnings 448 448
------------------------------------------------------------

Balance -
September 30,
2007 23,617,456 $ 17,257 $ 859 ($2,643) $ 811 $ 16,284
------------------------------------------------------------
------------------------------------------------------------


Accumu-
lated
Other Total
Contri- Compre- Share-
Common Share buted hensive Retained holders'
Shares Capital Surplus Income Earnings Equity

Balance -
December 31,
2005
19,276,956 $ 8,367 $ 162 ($432) $ 251 $ 8,348

Issue of common
shares and
warrants for
cash 4,200,000 8,676 456 9,132

Stock-based
compensation 64 64

Foreign currency
translation
adjustment (341) (341)

Net loss (1,227) (1,227)
------------------------------------------------------------

Balance - June
30, 2006 23,476,956 $ 17,043 $ 682 ($773) ($976) $15,976
------------------------------------------------------------
------------------------------------------------------------

Stock-based
compensation 41 41

Foreign currency
translation
adjustment (12) (12)

Net earnings 349 349
------------------------------------------------------------

Balance -
September 30,
2006 23,476,956 $ 17,043 $ 723 ($785) ($627) $16,354
------------------------------------------------------------
------------------------------------------------------------

The accompanying notes form an integral part of these condensed
consolidated financial statements.



QuStream Corporation
Condensed Consolidated Statements of Earnings
(In thousands of Canadian dollars, except share and per share amounts)
Unaudited

Three Three Nine Nine
months months months months
ended ended ended ended
September September September September
30, 2007 30, 2006 30, 2007 30, 2006

Revenues $ 7,766 $ 6,394 $ 19,097 $ 15,215
Cost of goods sold 3,476 2,840 8,495 6,898
---------------------------------------------------------------------------
Gross profit 4,290 3,554 10,602 8,317
---------------------------------------------------------------------------

Operating expenses:
Research and development 1,086 882 3,184 2,991
Selling and marketing 1,459 1,168 4,329 3,621
General and administrative 740 649 2,020 2,088
Amortization of
intangibles 254 170 682 722
---------------------------------------------------------------------------
Total operating expenses 3,539 2,869 10,215 9,422
---------------------------------------------------------------------------
Earnings (loss) from
operations before the
following 751 685 387 (1,105)
---------------------------------------------------------------------------
Other income (expense):
Interest income 43 69 119 143
Interest expense - notes
payable (51) (98) (156) (300)
Interest expense - capital
lease - (5) (1) (11)
Foreign exchange gain
(loss) (62) (47) (41) (56)
---------------------------------------------------------------------------
(70) (81) (79) (224)
---------------------------------------------------------------------------
Earnings (loss) from
operations before income
taxes 681 604 308 (1,329)
Provision (recovery) of
income taxes 233 255 182 (451)
---------------------------------------------------------------------------

Net earnings (loss) $ 448 $ 349 $ 126 $ (878)
---------------------------------------------------------------------------
---------------------------------------------------------------------------

Earnings (loss) per share:
Basic $ 0.02 $ 0.02 $ 0.01 $ (0.04)
Diluted $ 0.02 $ 0.02 $ 0.01 $ (0.04)

Weighted average number of
shares outstanding (000s):
Basic 23,617 23,477 23,587 21,508
Diluted 23,815 23,960 23,874 21,508



QuStream Corporation
Condensed Consolidated
Statements of Comprehensive Income
(In thousands of Canadian dollars)
Unaudited

Net earnings (loss) $ 448 $ 349 $ 126 $ (878)

Other comprehensive income
(loss):
Unrealized income (loss) on
translation of self
sustaining Operations (1,080) (341) (2,288) (353)
---------------------------------------------------------------------------

Total comprehensive income
(loss) $ (632) $ 8 $ (2,162) $ (1,231)
---------------------------------------------------------------------------
---------------------------------------------------------------------------

The accompanying notes form an integral part of these condensed
consolidated financial statements.



QuStream Corporation
Condensed Consolidated Statements of Cash Flows
(In thousands of Canadian dollars)
Unaudited


Three Three Nine Nine
months months months months
ended ended ended ended
September September September September
30, 2007 30, 2006 30, 2007 30, 2006

Cash flows provided by
(used in):

Operating activities:
Net earnings (loss) for
the period $ 448 $ 349 $ 126 $ (878)
Add (Deduct) items not
affecting cash:
Depreciation and
amortization of
property plant and
equipment 197 137 545 430
Amortization of licences 10 6 16 18
Amortization of intangible
assets 250 170 672 722
Stock-based compensation 55 41 140 105
Future income taxes (85) (186) (125) (444)
Gain on disposal of
capital assets - - 3 -
Net change in non-cash
working capital balances
related to operations (1,229) (2,017) (3,112) (3,281)
---------------------------------------------------------------------------
Cash flows provided by
(used in) operating
activities (354) (1,500) (1,735) (3,328)
---------------------------------------------------------------------------

Investing activities:
Purchase of property,
plant and equipment (129) (211) (1,220) (423)
Proceeds on disposal of
property, plant and
equipment - - 2 -
Adjustment to Fortel
acquisition price - - - 54
---------------------------------------------------------------------------
Cash flows provided by
(used in) investing
activities (129) (211) (1,218) (369)
---------------------------------------------------------------------------

Financing activities:
Capital lease payments - (29) (33) (57)
Repayment of notes payable - (51) (3,182) (154)
Issuance of common shares,
net of issuance costs - - - 9,131
Issuance of notes payable - - 2,000 -
Issuance of common shares
upon exercise of warrants
for cash - - 145 -
Issusance of common shares
upon exercise of options
for cash - - 36 -
---------------------------------------------------------------------------
Cash flows provided by
(used in) financing
activities - (80) (1,034) 8,920
---------------------------------------------------------------------------

Effect of exchange rate
changes on cash (30) (1) (48) (25)
---------------------------------------------------------------------------

Increase (Decrease) in cash
& cash equivalents (512) (1,792) (4,034) 5,198

Cash & cash equivalents,
beginning of period 3,443 9,500 6,965 2,510

---------------------------------------------------------------------------
Cash & cash equivalents,
end of period $ 2,931 $ 7,708 $ 2,931 $ 7,708
---------------------------------------------------------------------------
---------------------------------------------------------------------------

---------------------------------------------------------------------------
---------------------------------------------------------------------------

Supplementary cash flow
information:
Taxes paid $ 12 $ - $ 12 $ -
Property, plant and
equipment acquired by
capital lease - - - 94
Interest paid 51 79 156 239
---------------------------------------------------------------------------
---------------------------------------------------------------------------

The accompanying notes form an integral part of these condensed
consolidated financial statements.


QuStream Corporation

Notes to the Condensed Consolidated Financial Statements

(Tabular amounts in thousands of Canadian dollars, except per share amounts - Unaudited)

September 30, 2007

1. Significant accounting policies

Basis of Presentation

These condensed consolidated financial statements have been prepared in accordance with The Canadian Institute of Chartered Accountants ("CICA") standards for interim financial statements. Except as noted below, these condensed consolidated financial statements follow the same accounting policies and methods of their application as the most recent annual financial statements, however, they do not include all of the disclosure requirements for annual financial statements. For a full description of accounting policies, refer to QuStream Corporation's ("QuStream" or the "Company") 2006 Consolidated Annual Financial Statements. These condensed consolidated financial statements should be read in conjunction with the Company's 2006 Consolidated Annual Financial Statements.

Changes in accounting policies

Effective January 1, 2007, the Company adopted the CICA Handbook Section 1530, Comprehensive Income, Section 3855, Financial Instruments-Recognition and Measurement and Section 3861, Financial Instruments - Disclosure and Presentation. The changes have been applied retrospectively.

The adoption of the new CICA standards required the Company to reclassify all financial assets and liabilities into categories that have differently defined accounting treatment as follows:

(a) Financial assets held for trading

Short-term investments are classified as "financial assets available for sale" and are measured at fair value.

(b) Loans and receivables

Accounts receivable are classified as "loans and receivable" and are measured at amortized cost.

(c) Other financial liabilities

Accounts payable, accrued liabilities and notes payable are classified as "other financial liabilities" and are measured at amortized cost.

The new CICA standards also introduced a new measurement of results called comprehensive income, which is composed of the Company's net earnings and other comprehensive income. The other comprehensive income (loss) solely consists of the foreign currency translation gains and losses on the net investment in self-sustaining operations. The presentation resulted in the reclassification of amounts previously recorded in "Cumulative translation account" to "Accumulated other comprehensive income".

2. Accounts receivable

Details of accounts receivable balances are as follows:



September 30, December 31,
2007 2006

Trade receivables 5,376 5,482
Other receivables - 128
Provision for doubtful accounts (16) (11)
----------------------------------------------------------------------
5,360 5,599
----------------------------------------------------------------------
----------------------------------------------------------------------

3. Inventories

Details of inventories are as follows:

September 30, December 31,
2007 2006


Raw materials 2,490 2,200
Work in process 6,104 2,665
Finished goods 2,759 1,147
-----------------------------------------------------------------------
11,353 6,012
-----------------------------------------------------------------------
-----------------------------------------------------------------------

4. Property, plant and equipment

Details of property, plant and equipment are as follows:

September 30, December 31,
2007 2006


Machinery and equipment 2,764 1,984
Furniture and fixtures 782 609
Building 365 365
Leasehold improvements 160 57
Equipment under capital lease 133 155
Accumulated depreciation / amortization (1,631) (1,004)
-----------------------------------------------------------------------
2,573 2,166
-----------------------------------------------------------------------
-----------------------------------------------------------------------


5. Notes payable

On February 9, 2007 the company discharged its $3 million of notes payable that came due. Also on that date, 100,000 common share purchase warrants that were originally issued with the notes payable were exercised for net proceeds to the Company of $145,000. The remaining 217,500 common share purchase warrants expired unexercised.

On February 9, 2007, the company issued $2 million of notes payable that mature on August 9, 2008. The notes payable bear interest at a rate of 10% per annum, and a General Security Agreement over all assets of the Company has been provided as collateral by the Company. The notes are open and may be repaid at any time prior to maturity without any penalty.

6. Share capital

On February 9, 2007 note payable holders exercised warrants to purchase 100,000 common shares for net proceeds to the Company of $145,000; there were no issuance costs. The remaining 217,500 common share purchase warrants expired unexercised.

Weighted average number of shares outstanding for the three months and nine months ended September 30, 2007 are approximately 23,815,000 and 23,874,000 respectively. Fully diluted per share information for the three months and nine months ended September, 2007 does not reflect approximately 1,051,000 and 574,000 stock options respectively as they are considered anti-dilutive.

7. Stock-based compensation

The Company has established a stock option plan (the "Option Plan") to encourage ownership in the Company's shares by directors, officers and employees of the Company and its subsidiaries.

The maximum number of shares which may be issued under the Option Plan is equal to 10% of the outstanding shares of the Company. The outstanding options granted to a participant on their grant date will vest ratably every three months over five years. Unexercised options will expire 5 years from the date of grant.



Activity under the Company's Option Plan is summarized as follows:
Weighted
average
exercise
Number price
# $
Outstanding, December 31, 2006 1,756,400 1.37

Granted - -
Exercised - -
Forfeited (184,200) 1.50
Expired - -
---------------------------------------------------------------------------
Outstanding, March 31, 2007 1,572,200 1.36

Granted 469,000 1.40
Exercised (40,500) 0.90
Forfeited (21,900) 1.77
Expired - -
---------------------------------------------------------------------------
Outstanding, June 30, 2007 1,978,800 1.37

Granted - -
Exercised - -
Forfeited (233,225) 1.57
Expired - -
---------------------------------------------------------------------------
Outstanding, September 30, 2007 1,745,575 1.35
---------------------------------------------------------------------------
---------------------------------------------------------------------------

Options exercisable, September 30, 2007 637,120 1.24
---------------------------------------------------------------------------
---------------------------------------------------------------------------


During the third quarter, the Company recognized compensation expense of $55,000 for stock-based compensation, $140,000 year-to-date. The corresponding amounts for fiscal 2006 were $41,000 and $106,000 respectively. A corresponding amount has been credited to contributed surplus.

The compensation expense was determined on the grant date by applying the Black-Scholes option pricing model, based on the following weighted average assumptions:



Three Three Nine Nine
months months months months
ended ended ended ended
September September September September
30, 2007 30, 2006 30, 2007 30, 2006
---------------------------------------------------------------------------

Risk-free interest rate 4.50% 3.1% 4.25% 3.7%
Dividend yield 0.0% 0.0% 0.0% 0.0%
Expected life 5 years 5 years 5 years 5 years
Expected volatility 79.0% 50.0% 52.0% 37.0%
Weighted average grant date
fair value of options granted
at market price N/A N/A $ 0.70 $ 0.62
---------------------------------------------------------------------------


8. Commitments and contingencies

In the normal course of operations, the Company enters into purchase commitments for inventory with third party contract manufacturers. As at September 30, 2007, the Company had committed to purchasing approximately $4,740,000 (December 31, 2006 - $1,826,000) of inventory from various suppliers.

9. Segmented information

Operating segments

The Company operates in one business segment, that being the design, development, and distribution of routing, switching, interface conversion and distribution products to the global professional video/audio markets. Since the products have the same manufacturing process and distribution based, the Company has determined that it does not have separately reportable operating segments.

Geographic segments

The Company's external revenues by geographic region is based on the region in which the customer is located. Property, plant and equipment, other identifiable assets and intangible assets data is based on the geographic areas in which the Company operates.

The Company's revenue was generated from the following regions:




Three months ended Nine months ended
September 30 September 30
2007 2006 2007 2006
------------------ -----------------
------------------ -----------------

United States 6,710 5,526 16,876 12,365
International 1,028 780 2,175 2,324
Canada 28 88 46 526

------------------ -----------------
Total 7,766 6,394 19,097 15,215
------------------ -----------------
------------------ -----------------

The company's assets were located in the following regions:

As at September 30, 2007

Canada USA Total
----------------------

Property, plant and equipment 463 2,110 2,573
Other identifiable assets 3,039 18,185 21,224
Goodwill - 384 384
Intangible assets - 2,857 2,857
----------------------
Total 3,502 23,536 27,038
----------------------
----------------------

As at September 30, 2006

Canada USA Total
----------------------

Property, plant and equipment 380 1,299 1,679
Other identifiable assets 9,448 9,717 19,165
Goodwill - 559 559
Intangible assets - 4,024 4,024
----------------------
Total 9,828 15,599 25,427
----------------------
----------------------


The TSX Venture Exchange Inc. has not reviewed and does not accept responsibility for the adequacy or accuracy of this release.

Contact Information

  • QuStream Investor Contact:
    Frederick L. Godard
    Chairman, President and CEO
    (416) 385-2323 x 200
    Email: godard@qustream.com