QSound Labs, Inc.
NASDAQ : QSND

QSound Labs, Inc.

August 09, 2006 16:00 ET

QSound Labs Reports Second Quarter Results for 2006

CALGARY, ALBERTA--(CCNMatthews - Aug. 9, 2006) - QSound Labs, Inc. (NASDAQ:QSND), a leading developer of audio and voice software solutions, today reported financial results for the second quarter of FY2006. For the three months ended June 30, 2006, the consolidated revenues were $430,000 as compared to $401,000 for the same quarter in FY2005. The net loss for the second quarter was $(350,000) or $(0.04) per share as compared to $(481,000) or $(0.06) per share in FY2005.

Consolidated revenues for the six months ended June 30, 2006 were $1,104,000 compared to $878,000 for the same period in FY2005. Net loss for the six month period was $(754,000) or $(0.08) per share as compared to $(856,000) or $(0.10) per share in FY2005.

The Company had working capital of $2,933,673 and positive cash flow from operations during the quarter of $157,248.

The Company completed a $1 million convertible debt financing earlier this year. It has been determined that the conversion feature of this financial instrument is an embedded derivative under SFAS 133. As such, it is recorded as a liability and the carrying value adjusted to estimated fair value at each reporting date. Changes in the carrying value are recognized in the Company's Statement of Operations. For the six months ended June 20, 2006, these non-cash amounts totaled $204,916 or $(0.02) per share. For the comparative period in FY2005, there was no such charge.

"The second quarter provided a number of indictors that the Company is gaining traction with its marketing efforts to the mobile device industry," stated David Gallagher, President and CEO of QSound Labs. "The first phones embedded with microQ's QFX for music shipped during the quarter - Pantech's PT L-1900, i-mobile's TV901 and Samsung's Z-560."

"This was complemented by the continued market penetration of microQ's ring tone player which added design wins during the quarter with MITAC's A700 and A701, Philips 9@9t and UTStarcom's UT-109. As reported at the last quarter end, revenue growth is dependant upon the alignment of the microQ technology with major mobile device platform providers and semiconductor companies. In this area, the Company also has made good progress by adding HiSilicon and Flextronics to its existing platform licensees, ATI, Broadcom & Qualcomm. Most of these platform providers expect their customers to start shipping microQ enabled devices this year."

About QSound Labs, Inc.

Since its inception in 1988, QSound Labs, Inc. has established itself as one of the world's leading audio technology companies. The company has developed proprietary audio solutions that include virtual surround sound, positional audio and stereo enhancement for the mobile devices, consumer electronics, PC/multimedia, and Internet markets. QSound Labs' cutting-edge audio technologies create rich 3D audio environments allowing consumers to enjoy stereo surround sound from two, four and up to 7.1 speaker systems. The company's customer and partner roster includes Broadcom, Qualcomm, Vodafone, ZTE, BenQ, MITAC, Thompson, Toshiba, Philips, Sanyo and RealNetworks among others. To hear 3D audio demos and learn more about QSound, visit our web site at http://www.qsound.com.

This release contains forward-looking statements within the meaning of the Private Securities Litigation Act of 1995 concerning, among other things, expectation in 2006 of increased shipments of microQ enabled devices. Investors are cautioned that such forward-looking statements involve risk and uncertainties, which could cause actual results, performance or achievements of QSound, or industry results to differ materially from those reflected in the forward-looking statements. Such risks and uncertainties include, but are not limited to, risks associated with loss of relationships with companies that do business with QSound, successful product development, introduction and acceptance, QSound's ability to carry out its business strategy and marketing plans, dependence on intellectual property, rapid technological change, competition, general economic and business conditions, continued growth of multimedia usage in the mobile devices market and other risks detailed from time to time in QSound's periodic reports filed with the Securities and Exchange Commission. Forward-looking statements are based on the current expectations, projections and opinions of QSound's management, and QSound undertakes no obligation to publicly release the results of any revisions to such forward-looking statements which may be made, for example to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.



Consolidated Balance sheets
As at June 30, 2006 and December 31, 2005
(Expressed in United States dollars under United States GAAP)

June 30, December 31,
2006 2005
(unaudited)
ASSETS
Current assets
Cash and cash equivalents $ 2,464,122 $ 1,222,729
Accounts receivable 526,508 401,524
Note receivable 6,000 82,648
Inventory 49,892 40,438
Deposits and prepaid expenses 126,820 76,146
------------------------------------------------------------------------
3,173,342 1,823,485

Note receivable 53,165 -
Property and equipment 512,255 670,635
Deferred development costs 253,285 271,879
Intangible assets 150,013 155,445
------------------------------------------------------------------------
$ 4,142,060 $ 2,921,444
------------------------------------------------------------------------
------------------------------------------------------------------------

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued liabilities $ 201,265 $ 285,786
Deferred revenue 38,404 45,011
------------------------------------------------------------------------
239,669 330,797

Convertible debt (net of unamortized debt
discount of $1,000,000) - -
Fair value of convertible debt conversion
feature 769,308 -
------------------------------------------------------------------------
1,008,977 330,797
------------------------------------------------------------------------

Shareholders' equity
Share capital 47,242,967 46,181,113
Warrants 1,720,489 1,502,331
Contributed surplus 1,459,178 1,442,408
Deficit (47,289,551) (46,535,205)
------------------------------------------------------------------------
3,133,083 2,590,647

------------------------------------------------------------------------
$ 4,142,060 $ 2,921,444
------------------------------------------------------------------------
------------------------------------------------------------------------


Consolidated Statements of Operations and Deficit
For the periods ended June 30, 2006 and 2005
(Expressed in United States dollars under United States GAAP)

For the three For the three For the six For the six
months ended months ended months ended months ended
June 30, 2006 June 30, 2005 June 30, 2006 June 30, 2005
(unaudited) (unaudited) (unaudited) (unaudited)

REVENUE
Royalties and
license fees $ 364,054 $ 253,856 $ 956,771 $ 591,504
Product sales 66,114 147,188 147,167 286,284
------------------------------------------------------------------------
430,168 401,044 1,103,938 877,788
Cost of product
sales (3,251) 20,884 4,823 67,690
------------------------------------------------------------------------
433,419 380,160 1,099,115 810,098
EXPENSES
Marketing 226,420 267,325 427,985 498,299
Operations 33,933 54,416 69,810 97,646
Product
engineering 217,198 257,349 432,830 484,374
Administration 221,536 194,101 444,506 386,702
Foreign
exchange loss
(gain) 220 (4,540) 8,907 (2,569)
Amortization 98,634 104,529 261,922 206,213
------------------------------------------------------------------------
797,941 873,180 1,645,960 1,670,665

------------------------------------------------------------------------
Loss before
other items (364,522) (493,020) (546,845) (860,567)

OTHER ITEMS
Interest income 24,614 17,566 32,276 29,019
Interest on
convertible
debt (19,322) - (19,747) -
Change in fair
value of
convertible
debt conversion
feature 19,717 - 19,717 -
Excess fair
value of
convertible
debt at
transaction
date - - (224,633) -
Other (1,637) (38) (1,637) (3,206)
------------------------------------------------------------------------
23,372 17,528 (194,024) 25,813

------------------------------------------------------------------------
Loss before
taxes (341,150) (475,492) (740,869) (834,754)

Foreign
withholding tax (9,142) (5,668) (13,477) (21,553)
------------------------------------------------------------------------
Net loss for
period (350,292) (481,160) (754,346) (856,307)

Deficit,
beginning of
period (46,939,259) (44,076,715) (46,535,205) (43,701,568)
------------------------------------------------------------------------

Deficit, end of
period $(47,289,551) $(44,557,875) $(47,289,551) $(44,557,875)
------------------------------------------------------------------------
------------------------------------------------------------------------

Loss per common
share (basic
and diluted) $ (0.04) $ (0.06) $ (0.08) $ (0.10)
------------------------------------------------------------------------
------------------------------------------------------------------------


Consolidated Statements of Cash Flows
For the periods ended June 30, 2006 and 2005
(Expressed in United States dollars under United States GAAP)

For the three For the three For the six For the six
months ended months ended months ended months ended
June 30, 2006 June 30, 2005 June 30, 2006 June 30, 2005
(unaudited) (unaudited) (unaudited) (unaudited)
Cash provided by
(used in)

OPERATIONS
Loss for the
period $ (350,292) $ (481,160) $ (754,346) $ (856,307)
Items not
requiring cash:
Amortization 98,634 104,529 261,922 206,213
Stock based
compensation 51,231 47,691 123,212 69,728
Change in fair
value of
convertible
debt
conversion
feature (19,717) - (19,717) -
Excess fair
value
of convertible
debt at
transaction
date - - 224,633 -
Changes in
working capital
balances 377,392 (278,400) (276,240) (528,303)
------------------------------------------------------------------------
157,248 (607,340) (440,536) (1,108,669)
FINANCING
Issuance of
common shares,
net 91,547 21,190 737,962 39,049
Proceeds from
convertible
debt - - 1,000,000 -
------------------------------------------------------------------------
91,547 21,190 1,737,963 39,049

INVESTMENTS
Note receivable 25,061 - 23,483 -
Purchase of
property and
equipment (14,588) (49,587) (24,011) (132,241)
Purchase of
deferred
development
costs (16,420) - (39,500) -
Purchase of
intangible
assets (2,381) (6,963) (16,006) (21,853)
------------------------------------------------------------------------
(8,328) (56,550) (56,034) (154,094)

------------------------------------------------------------------------
Increase
(decrease) in
cash and cash
equivalents 240,467 (642,700) 1,241,393 (1,223,714)
Cash and cash
equivalents,
beginning of
period 2,223,655 2,746,529 1,222,729 3,327,543
------------------------------------------------------------------------

Cash and cash
equivalents, end
of period $ 2,464,122 $ 2,103,829 $ 2,464,122 $ 2,103,829
------------------------------------------------------------------------
------------------------------------------------------------------------




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