QuStream Corporation
TSX VENTURE : QVC

QuStream Corporation

August 14, 2007 16:46 ET

QuStream Corporation Announces Second Quarter Fiscal 2007 Results

TORONTO, ONTARIO--(Marketwire - Aug. 14, 2007) - QuStream Corporation ("QuStream")(TSX VENTURE:QVC) announces its second quarter fiscal 2007 results.

Revenues for the second quarter of fiscal 2007 were $6.4 million compared to $5.3 million in the same period in fiscal 2006, an increase of 21%. Revenues were $11.3 million for the six months ended June 30, 2007, up 28% from the $8.8 million during the same period last year.

Backlog (note 1) at the end of the second quarter of fiscal 2007 was US$3.6 million, compared to US$4.0 million at the end of the second quarter of 2006.

Gross margin for the second quarter of fiscal 2007 was 55% compared to 57% in the same period last year. Gross margin for the six months ended June 30, 2007 was 56% compared to 54% for the same period last year.

Net loss for the second quarter of fiscal 2007 was $0.03 million or $(0.00) per share compared with a net loss of $0.2 million or $(0.01) per share for the same period last year. Net loss for the six months ended June 30, 2007 was $(0.3) million or $(0.01) per share compared to $(1.2) million or $(0.06) per share for the same period last year.

The strength in our bookings performance continued into the second quarter with total bookings of US$5.8 million, the second highest in the Company's history.

"I am very pleased with the level of bookings that were generated this quarter. Business from the US Government segment was particularly strong, being up significantly over the same period last year." said Frederick L. Godard, Chairman, President and Chief Executive Officer of QuStream. We enjoyed a very successful National Association of Broadcasters show in April, 2007, where we introduced our new Integrity™ 600 series signal processing platform.

I am excited about the opportunities ahead of us and look forward to a rewarding year."

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 2006 revenue growth rate of at least 25%, 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
Condensed Consolidated Balance Sheets
(In thousands of Canadian dollars)
Unaudited

June 30 December 31
2007 2006

Assets

Current
Cash and cash equivalents $ 3,443 $ 6,965
Short term investments 434 434
Accounts receivable 6,375 5,599
Inventories 8,032 6,012
Future income taxes 648 709
Prepaid expenses & other current assets 461 440
-------------------------------------------------------------------------
19,393 20,159

Property, plant and equipment, net 2,803 2,166
Goodwill 411 450
Intangible assets, net 3,326 4,099
Future income taxes 179 291

-------------------------------------------------------------------------
$ 26,112 $ 27,165
-------------------------------------------------------------------------
-------------------------------------------------------------------------

Liabilities and Shareholders' Equity

Current
Accounts payable and accrued liabilities $ 5,617 $ 4,003
Deferred revenue 87 55
Warranty reserve 257 451
Income taxes payable 399 496
Future income taxes 244 245
Current portion of obligations under capital lease - 33
Current portion of notes payable 108 3,227
-------------------------------------------------------------------------
6,712 8,510

Notes payable, net of current portion 2,000 -
Future income taxes 539 529
-------------------------------------------------------------------------
9,251 9,039
-------------------------------------------------------------------------

Shareholders' equity:
Share capital 17,257 17,040
Retained earnings 363 685
Contributed surplus 804 756
Accumulated other comprehensive income (1,563) (355)
-------------------------------------------------------------------------
16,861 18,126

-------------------------------------------------------------------------
$ 26,112 $ 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

Accum-
ulated
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

Stock-based
compensation 30 30

Foreign
currency
translation
adjustment (296) (296)

Net loss (297) (297)
-----------------------------------------------------------------

Balance -
March 31,
2007 23,576,956 17,185 786 (651) 388 17,708

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 55 55

Foreign
currency
translation
adjustment (912) (912)

Net loss (25) (25)
---------------------------------------------------------------

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


Accum-
ulated
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

Stock-based
compensation 32 32

Foreign
currency
translation
adjustment 1 1

Net loss (1,035) (1,035)
-----------------------------------------------------------------

Balance -
March 31,
2006 19,276,956 8,367 194 (431) (784) 7,346

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

Stock-based
compensation 32 32

Foreign
currency
translation
adjustment (342) (342)

Net loss (192) (192)
-----------------------------------------------------------------

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

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 months Three months Six months Six months
ended ended ended ended
June 30, June 30, June 30, June 30,
2007 2006 2007 2006

Revenues $ 6,417 $ 5,263 $ 11,331 $ 8,821
Cost of goods sold 2,869 2,274 5,019 4,058
--------------------------------------------------------------------------
Gross profit 3,548 2,989 6,312 4,763
--------------------------------------------------------------------------

Operating expenses:
Research and development 1,081 1,006 2,098 2,109
Selling and marketing 1,627 1,280 2,870 2,453
General and administrative 652 644 1,280 1,439

Amortization of intangibles 206 272 428 552
--------------------------------------------------------------------------
Total operating expenses 3,566 3,202 6,676 6,553
--------------------------------------------------------------------------
Loss from operations
before the following (18) (213) (364) (1,790)
--------------------------------------------------------------------------
Other income (expense):
Interest income 33 54 76 74
Interest expense -
notes payable (52) (95) (105) (202)
Interest expense -
capital lease - (5) (1) (6)
Foreign exchange gain (loss) (4) (9) 21 (9)
--------------------------------------------------------------------------
(23) (55) (9) (143)
--------------------------------------------------------------------------
Loss from operations
before income taxes (41) (268) (373) (1,933)

Recovery of income taxes (16) (76) (51) (706)
--------------------------------------------------------------------------

Net loss $ (25) $ (192) $ (322) $ (1,227)
--------------------------------------------------------------------------
--------------------------------------------------------------------------

Earnings (loss) per
share:
Basic $ (0.00) $ (0.01) $ (0.01) $ (0.06)
Diluted $ (0.00) $ (0.01) $ (0.01) $ (0.06)
Weighted average
number of shares
outstanding (000s):
Basic 23,581 21,723 23,559 20,507
Diluted 23,581 21,723 23,559 20,507



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

Net loss $ (25) $ (192) $ (322) $ (1,227)

Other comprehensive
income (loss):

Unrealized income
(loss) on translation
of self sustaining
Operations (912) (341) (1,208) 1
--------------------------------------------------------------------------

Total comprehensive loss (937) $ (533) $ (1,530) $ (1,226)
--------------------------------------------------------------------------
--------------------------------------------------------------------------

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 months Three months Six months Six months
ended ended ended ended
June 30, June 30, June 30, June 30,
2007 2006 2007 2006

Cash flows provided by
(used in):

Operating activities:
Net loss for the
period $ (25) $ (192) $ (322) $ (1,227)
Add (Deduct) items
not affecting cash:
Depreciation and
amortization of
property
plant and equipment 178 141 348 293
Amortization of
licences - 6 6 12
Amortization of
intangible assets 206 272 422 552
Stock-based
compensation 55 32 85 64
Future income taxes (66) (203) (40) (258)
Loss on disposal of
capital assets - - 3 -
Net change in
non-cash working
capital balances
related to operations (623) (1,285) (1,858) (1,264)
-------------------------------------------------------------------------
Cash flows provided
by (used in) operating
activities (275) (1,229) (1,356) (1,828)
-------------------------------------------------------------------------

Investing activities:
Purchase of property,
plant and equipment (480) (27) (1,091) (212)
Proceeds on disposal
of property, plant and
equipment - - 2 -
Adjustment to Fortel
acquisition price - 54 - 54
-------------------------------------------------------------------------
Cash flows provided
by (used in) investing
activities (480) 27 (1,089) (158)
-------------------------------------------------------------------------

Financing activities:
Capital lease payments (33) (24) (58) (28)
Repayment of notes payable (37) (51) (3,182) (103)
Issuance of common
shares, net of
issuance costs - 9,131 - 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 - 36 -
-------------------------------------------------------------------------
Cash flows provided
by (used in) financing
activities (34) 9,056 (1,059) 9,000
-------------------------------------------------------------------------

Effect of exchange
rate changes on cash (18) (18) (18) (24)
--------------------------------------------------------------------------

Increase (Decrease) in
cash & cash equivalents (807) 7,836 (3,522) 6,990

Cash & cash
equivalents, beginning
of period 4,250 1,664 6,965 2,510

--------------------------------------------------------------------------
Cash & cash
equivalents, end of
period $ 3,443 $ 9,500 $ 3,443 $ 9,500
--------------------------------------------------------------------------
--------------------------------------------------------------------------

--------------------------------------------------------------------------
--------------------------------------------------------------------------
Supplementary cash
flow information:
Taxes paid $ - $ - $ - $ -
Property, plant and
equipment acquired
by capital lease - 94 - 94
Interest paid 52 80 112 160
--------------------------------------------------------------------------
--------------------------------------------------------------------------
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)

June 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:



June 30, December 31,
2007 2006

Trade receivables 6,272 5,482
Other receivables 113 128
Provision for doubtful accounts (10) (11)
-------------------------------------------------------
6,375 5,599
-------------------------------------------------------
-------------------------------------------------------


3. Inventories

Details of inventories are as follows:



June 30, December 31,
2007 2006

Raw materials 2,670 2,200
Work in process 4,246 2,665
Finished goods 1,116 1,147
-------------------------------------
8,032 6,012
-------------------------------------
-------------------------------------


4. Property, plant and equipment

Details of property, plant and equipment are as follows:



June 30, December 31,
2007 2006

Machinery and equipment 2,850 1,984
Furniture and fixtures 807 609
Building 365 365
Leasehold improvements 157 57
Equipment under capital lease 142 155
Accumulated depreciation / amortization (1,518) (1,004)
---------------------------------------------------------------
2,803 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.

Fully diluted loss per share is the same as basic loss per share as the effect of all potential common shares is anti-dilutive. Potential common shares include the stock options disclosed in note 7 and the common share purchase warrants disclosed above.

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

Options exercisable, June 30, 2007 548,330 1.21
-------------------------------------------------------
-------------------------------------------------------


During the second quarter, the Company recognized compensation expense of $55,000 for stock-based compensation, $85,000 year-to-date. The corresponding amounts for fiscal 2006 were $32,000 and $64,000 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 months Three months Six months Six months
ended ended ended ended
June 30, June 30, June 30, June 30,
2007 2006 2007 2006
------------------------------------------------------------------------

Risk-free interest rate 4.25% 4.0% 4.25% 4.0%
Dividend yield 0.0% 0.0% 0.0% 0.0%
Expected life 5 years 5 years 5 years 5 years
Expected volatility 52.0% 50.0% 52.0% 50.0%
Weighted average
grant date fair
value of options
granted at market price $ 0.70 $ 0.89 $ 0.70 $ 0.89
------------------------------------------------------------------------


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 June 30, 2007, the Company had committed to purchasing approximately $6,763,000 (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 Six months ended
June 30 June 30
2007 2006 2007 2006
-------------------------------------------

United States 5,766 4,087 10,166 6,839
International 646 738 1,147 1,544
Canada 5 438 18 438

-------------------------------------------
Total 6,417 5,263 11,331 8,821
-------------------------------------------
-------------------------------------------


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



As at June 30, 2007
Canada USA Total
----------------------

Property, plant and equipment 478 2,325 2,803
Other identifiable assets 3,844 15,728 19,572
Goodwill - 411 411
Intangible assets - 3,326 3,326

----------------------
Total 4,322 21,790 26,112
----------------------
----------------------


As at June 30, 2006
Canada USA Total
-----------------------

Property, plant and equipment 382 1,223 1,605
Other identifiable assets 9,663 10,327 19,990
Goodwill - 534 534
Intangible assets - 4,285 4,285

-----------------------
Total 10,045 16,369 26,414
-----------------------
-----------------------


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

Contact Information