QSound Labs, Inc.
NASDAQ : QSND

QSound Labs, Inc.

August 13, 2008 16:00 ET

QSound Labs Reports Second Quarter Results for 2008

CALGARY, ALBERTA--(Marketwire - Aug. 13, 2008) - QSound Labs, Inc. (NASDAQ:QSND), a leading developer of audio and voice software products, today reported its second quarter financial results for 2008. Revenues for the three months ended June 30, 2008 were $608,000 as compared to $737,000 for the same period in FY2007. The net loss for the quarter, computed in accordance with US generally accepted accounting principles, was $(292,000) or $(0.03) per share as compared to a net loss of $(142,000) or $(0.02) per share for the same period in FY2007.

Consolidated revenues for the six months ended June 30, 2008 were $980,000 compared to $1,273,000 for the same period in FY2007. Net loss for the six months was $(864,000) or $(0.09) per share as compared to $(523,000) or $(0.06) per share in FY2007.

Subsequent to the quarter-end, the Company closed a private placement for $1,925,000, of which $1,750,000 had been received before the quarter-end and is included in cash and cash equivalents at June 30, 2008.

The Company used some of these funds to reach an agreement with MachineWorks Northwest, a premier developer of mobile platform games, to acquire its acclaimed Ripp3D graphics engine for $3.1 million. The engine currently earns the majority of its royalty revenues from the mobile game, Guitar Hero Mobile which is available on the Verizon network. Later this year, it will be used on several new titles under development for the iPhone platform. As part of this agreement, QSound also has acquired an option to purchase the MachineWorks Northwest mobile gaming business, exercisable until January 31, 2009.

In April, the Company submitted a plan to The Nasdaq Stock Market outlining how it intends to specifically achieve and sustain compliance with the Nasdaq Capital Market listing requirements following receipt of a Nasdaq Staff deficiency letter, as previously reported. With the transactions as noted above, the Company now believes it has regained compliance for continued listing on the Nasdaq Capital Market. The Nasdaq Hearings Panel will review the recent transactions entered into by the Company and will make a determination regarding continued listing. The Panel has sole discretion in this matter and there can be no guarantee that the Company will succeed in its application for continued listing.

The Company reported a working capital surplus of $2,634,000 as at June 30, 2008 of which cash comprised $2,023,000.

"The Company continues to focus on the mobile device market," stated David Gallagher, President and CEO of QSound Labs. "Our recent license agreement with Modiotek for mQFX represents the next stage in establishing microQ as the audio engine of choice for mobile devices. Mobile phone manufacturers are now requiring music enhancement features on more of their product lines which has increased the opportunities for mQFX. This should complement our existing revenue stream which to date, has been derived primarily from the mQSynth component of microQ. The partnerships announced earlier in the year with Symbian and CSR will complement the mQFX marketing activities."

"The window of opportunity for the third component of microQ, mQ3D, our 3D audio engine for gaming, is beginning to open. The recent launch of the App Store by Apple in conjunction with the iPhone/iPod Touch has provided evidence to the industry that mobile gaming is now a business. This coupled with the Company's plans to showcase mQ3D with its newly acquired 3D graphics engine, Ripp3D, on upcoming titles for the iPhone, should set the standard for 3D gaming on mobile devices," added Gallagher.

About microQ

microQ is a compact, modular and highly efficient software digital audio engine enabling polyphonic ringtones (mQSynth), 3D game sound (mQ3D Positional) and enhanced music playback with multiple effects (mQFX) for mobile devices. This world-leading mobile audio technology represents the culmination of over 20 years of PC host and DSP audio software development by QSound Labs, Inc.

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 numerous innovative, proprietary audio solutions based on extensive research into human auditory perception. These technologies include virtual surround sound, 3D positional audio, stereo enhancement and MIDI Synthesis for the mobile devices, consumer electronics, PC/multimedia, and Internet markets. QSound Labs' cutting-edge audio technologies create rich, immersive 3D audio environments allowing consumers to enjoy stereo surround sound from headphones or from two, four and up to 7.1 speaker systems. The Company's customer and partner roster includes Aricent, ARM, Broadcom, CSR, LG, MiTAC, Panasonic, Pantech, Qualcomm, Samsung, Sony Vaio, STMicroelectronics, Telechips and Toshiba among others. QSound Labs supports its semiconductor, software and OEM partners globally with offices in Canada, China, Japan, Korea and USA. To hear 3D audio demos and learn more about QSound, visit our web site at www.qsound.com.

This release contains forward-looking statements within the meaning of the Private Securities Litigation Act of 1995 concerning, among other things, use of Ripp3D on mobile games including titles for the iPhone platform, increased use of mQFX and mQ3D in mobile devices resulting in increased revenue streams, plans for use of mQ3D in iPhone games, and expected achievement of compliance for continued listing on the Nasdaq Capital Market. 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 continued and new revenues from use of Ripp3D in mobile game titles, acceptance of mQFX and mQ3D by major mobile device platform manufacturers, achievement of plans to use mQ3D on iPhone games, ability to sustain Nasdaq listing requirements, successful distribution of QSound-enabled products by licensees, loss of relationships with companies that do business with QSound, 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, 2008 and December 31, 2007
(unaudited)
(Expressed in United States dollars under United States GAAP)

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June 30, December 31,
2008 2007
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ASSETS
Current assets
Cash and cash equivalents $ 2,022,744 $ 1,232,255
Accounts receivable (net) 794,066 506,648
Note receivable 25,037 27,400
Inventory 5,131 12,217
Deposits and prepaid expenses 183,544 188,568
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3,030,522 1,967,088

Property and equipment 233,489 258,414
Deferred development costs 165,799 194,915
Intangible assets 61,539 70,260
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$ 3,491,349 $ 2,490,677
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued liabilities $ 253,728 $ 262,718
Deferred revenue 142,780 22,820
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396,508 285,538

Liability for pension benefit 4,119 5,079
Convertible notes 156,358 118,220

Shareholders' equity
Share capital 47,689,769 47,675,739
Subscription receipts 1,750,000 -
Warrants 1,027,114 1,027,114
Contributed surplus 2,922,374 2,959,339
Deficit (50,343,527) (49,479,722)
Accumulated other comprehensive loss (111,366) (100,630)
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2,934,364 2,081,840

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$ 3,491,349 $ 2,490,677
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Consolidated
Statements of Operations, Comprehensive Loss and Deficit
(unaudited)
(Expressed in United States dollars under United States GAAP)

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Three months ended Six months ended
June 30, June 30, June 30, June 30,
2008 2007 2008 2007
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REVENUE
Royalties,
licenses and
engineering fees $ 608,466 $ 736,659 $ 979,544 $1,272,868
Product sales 53,377 59,371 105,707 129,522
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661,843 796,030 1,085,251 1,402,390
Cost of product
sales 17,340 29,455 34,365 56,170
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644,503 766,575 1,050,886 1,346,220

EXPENSES:
Marketing 221,895 335,071 509,931 733,828
Operations 69,677 33,679 134,785 66,905
Product
engineering 259,185 167,411 496,443 347,999
Administration 307,720 301,560 616,123 582,265
Foreign exchange
loss (654) (630) 1,292 191
Amortization 42,228 50,759 83,787 100,516
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900,051 887,850 1,842,361 1,831,704
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Loss before
other items (255,548) (121,275) (791,475) (485,484)

OTHER ITEMS:
Interest income 3,506 20,556 10,462 43,644
Interest on
convertible notes (13,004) (20,569) (31,079) (40,911)
Accretion expense (19,068) (8,306) (38,137) (16,521)
Gain on sale of
capital assets - 586 - 586
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(28,566) (7,733) (58,754) (13,202)
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Loss before taxes (284,114) (129,008) (850,229) (498,686)
Foreign withholding tax (7,587) (13,269) (13,576) (24,536)
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Net loss and
comprehensive loss
for the period (291,701) (142,277) (863,805) (523,222)

Deficit, beginning
of period (50,051,826) (48,597,825) (49,479,722) (48,216,880)
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Deficit, end of
period $(50,343,527) $(48,740,102) $(50,343,527) $(48,740,102)
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Loss per common
share (basic and
diluted) $ (0.03) $ (0.02) $ (0.09) $ (0.06)
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Consolidated
Statements of Cash Flows
(unaudited)
(Expressed in United States dollars under United States GAAP)

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Three months ended Six months ended
June 30, June 30, June 30, June 30,
2008 2007 2008 2007
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Cash provided by
(used in):

OPERATIONS
Loss for the period $ (291,701) $ (142,277) $ (863,805) $ (523,222)

Items not
requiring
(providing) cash:
Amortization 42,228 50,759 83,787 100,516
Stock based
compensation (49,947) 68,287 (22,935) 169,496
Accretion expense 19,068 8,306 38,137 16,521
Employee future
benefits 5,833 - (11,695) -
Gain on sale of
capital assets - (586) - (586)
Other (290) (349) (637) (1,367)
Changes in non-cash
working capital
balances (392,894) 5,156 (164,338) (366,270)
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(667,703) (10,704) (941,486) (604,912)

FINANCING
Issuance of
common shares (net) - 24,555 - 96,855
Subscription receipts 1,750,000 - 1,750,000 -
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1,750,000 24,555 1,750,000 96,855
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INVESTMENTS
Note receivable - - 3,000 36,000
Purchase of
property and
equipment (5,044) (2,837) (13,829) (9,367)
Purchase of
intangible assets (3,248) (3,135) (7,196) (3,135)
Proceeds on sale
of capital assets - 586 - 586
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(8,292) (5,386) (18,025) 24,084
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(Decrease)
increase in cash
and cash equivalents 1,074,005 8,465 790,489 (483,973)

Cash and cash
equivalents,
beginning of period 948,739 1,824,038 1,232,255 2,316,476
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Cash and cash
equivalents, end
of period 2,022,744 1,832,503 2,022,744 1,832,503
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