QuestAir Reports Third Quarter 2008 Results



    BURNABY, BC, Aug. 6 /CNW/ - QuestAir Technologies Inc. ("QuestAir" or
"the Company"; AIM: QAR; TSX: QAR) reported today its unaudited financial and
operational results for the third quarter of fiscal 2008, ended June 30, 2008.
All amounts are in Canadian dollars unless otherwise noted.

    
    Third Quarter Highlights
    ------------------------

    -   Revenue for the nine months ended June 30, 2008 was $6,567,935, an
        increase of $435,624, or 7% from $6,132,311 for the same period last
        year. For the quarter ended June 30, 2008, revenue was $2,701,562, a
        decrease of $914,526, or 25% compared to the same period in fiscal
        2007.

    -   QuestAir ended the third quarter with a sales order backlog of
        $14,502,466, a decrease of $1,519,908, or 9% from $16,022,374 at
        March 31, 2008 when backlog was at its highest level since the
        Company's inception.

    -   Cash used by operations and capital requirements for the nine months
        ended June 30, 2008 was $5,505,013, a decrease of 27% or $2,072,802
        compared to the same period in fiscal 2007. For the quarter ended
        June 30, 2008, cash used by operations and capital requirements
        decreased significantly to $512,087 compared to $2,263,565 in the
        same period in fiscal 2007. The 77% reduction in cash usage compared
        to the prior period was a result of significant cash inflows from the
        new engineering services contract with ExxonMobil Research and
        Engineering ("EMRE") that was entered into in March 2008, as well as
        lower operating costs following the restructuring that took place in
        the second quarter of fiscal 2008.

    -   Net loss for the nine months ended June 30, 2008 decreased 36% to
        $6,030,126 ($1.08 per share) from $9,428,387 ($1.80 per share) for
        the same period in 2007. For the quarter ended June 30, 2008, net
        loss was $1,582,247 ($0.25 per share), decreased by $976,957, or 38%
        compared to the same period in fiscal 2007.

    -   QuestAir sold a total of six H-3200 pressure swing adsorption ("PSA")
        units to three customers during the quarter. This included an H-3200
        PSA that was sold to Hydro-Chem for a new hydrogen plant in Mexico,
        which will supply hydrogen to a new steel plant being constructed by
        POSCO.

    -   Phase 3 Renewables LLC purchased an M-3200 PSA to be integrated into
        a biogas upgrading plant at a dairy farm in California. The
        biomethane from this plant will be used to fuel heavy-duty milk
        trucks once it becomes operational, which is expected to be in the
        fall of 2008. This will be the first commercial scale plant in North
        America to produce renewable biomethane vehicle fuel from
        agricultural waste.

    -   During the quarter, QuestAir raised gross proceeds of $9,000,000 from
        an equity offering of subscription receipts, which were converted
        into common shares and share purchase warrants.

    -   Also during the quarter, the Company completed a share consolidation
        on a ten old shares for one new share basis.

    -   Subsequent to quarter end the British Columbia Government announced
        funding for several clean energy projects. QuestAir expects to supply
        full scope biogas upgrading systems into two of these projects,
        upgrading methane from a sewage treatment plant in one project and
        from agricultural waste in the other. Assuming these projects proceed
        as planned, and contractual negotiations are completed as
        anticipated, these projects will become sales bookings for QuestAir
        in fiscal 2009.
    

    Jonathan Wilkinson, President and CEO of QuestAir, said: "The initiatives
that we undertook in the second quarter to improve our cash management are
already contributing significantly to our bottom line. Our net loss for the
third quarter and for the nine months ended June 30, 2008 was down
considerably compared to the same periods a year ago. Importantly, our cash
used by operations and capital requirements in the third quarter of fiscal
2008 was just over $500,000, compared to over $2.2 million in the same period
a year before. While cash used by operations and capital requirements can be
expected to fluctuate from quarter to quarter, we expect that the cost
reduction measures that were implemented in the second quarter will continue
to benefit us in future periods."
    "Also during the quarter, we completed an equity offering of subscription
receipts, raising gross proceeds of $9 million. These funds strengthen our
balance sheet, and will support a number of growth initiatives in the
biomethane, industrial hydrogen and refinery hydrogen markets. We are very
pleased to have completed this offering under such challenging market
conditions."
    "Going forward, we will continue to focus on core opportunities in our
key markets in order to build value for shareholders. We will make targeted
investments to expand our product offering, grow the commercial adoption of
QuestAir's products and open up important markets such as biomethane
purification. This must be balanced with the need for ongoing prudent
financial management."

    Outlook
    -------

    Commenting on the outlook for the remainder of fiscal 2008, Wilkinson
said:
    "On March 3, 2008 we revised our financial guidance for fiscal 2008,
stating that recognized revenue for the full fiscal year is expected to be in
the range of $11 to $12 million, and that cash used in operations and capital
expenditures is expected to be in the range of $6.5 to $7.5 million. Based on
current estimates, we expect that recognized revenue will be within the
guidance range, and that cash used in operations and capital expenditures for
the full fiscal year will be towards the high end of the range ($7.5 million).
Variables that can affect the amount of revenue recognized include timing of
cash receipts on equipment sales and costs incurred on engineering service
contracts (which affects the percentage of completion calculations).
Similarly, our cash used in operations and capital expenditures estimates may
be impacted by variables such as timing of cash receipts and disbursements,
and the level and timing of receipt of new sales orders."
    "Our priorities for the remainder of fiscal 2008 include growing our
sales of biomethane and hydrogen purification equipment, marketing full scope
biogas solutions, and continuing to carefully control our operating costs."
    "Sales orders of gas purification equipment for the first nine months of
fiscal 2008 and for the third quarter in particular have been below our
expectations, in part due to delays in certain projects that were expected to
begin earlier. During the final quarter of the fiscal year, we will be working
to secure additional orders of gas purification equipment, including in the
biogas upgrading market where we continue to see significant market potential
for our products."
    "Although we expect to meet our financial guidance for the year, the
lower than expected level of sales orders will make it difficult for us to
meet our goal of growing our industrial hydrogen business in fiscal 2008. Our
objective to increase the number of hydrogen system sales is unlikely to be
met, as we have not secured as many orders of larger PSAs as we anticipated at
the beginning of the year."
    "With respect to the H-6200 hydrogen purifier, in March of this year
QuestAir successfully completed field testing of a prototype H-6200 at an
ExxonMobil refinery in France. The unit demonstrated its ability to
effectively recover hydrogen from refinery gas streams and return purified
hydrogen for plant applications. The operating performance and robustness of
the prototype plant under various conditions bode well for future sales of the
H-6200 hydrogen purifier. We are presently working with our partner, Exxon
Mobil Research and Engineering, to market the H-6200 to both ExxonMobil and
third party refineries. Commercial prospects for this product remain positive.
However, the fact that the prototype test ended only in March coupled with a
lengthy sales cycle in the refinery environment means that we now expect the
first commercial order for an H-6200 to be received in fiscal 2009."
    "Management remains optimistic regarding future prospects for our
business. Growth drivers in the biogas market remain strong. We expect to see
growth in product sales into this market, and to undertake initial full scope
biogas projects in fiscal 2009. Additionally, the H-6200 hydrogen purifier has
now moved well beyond the testing phase and we expect to see commercial sales
of the H-6200 commence in fiscal 2009. Finally, we expect that measures we
undertook earlier in fiscal 2008 to reduce our operating costs will continue
to benefit the company in future fiscal years."

    Q3 2008 Financial Results
    -------------------------

    Operating Results

    The following table provides a breakdown of revenues from the sale of gas
purification systems and engineering service contracts for the reported
periods:

    
    -------------------------------------------------------------------------
    (Unaudited)                 Three months ended         Nine months ended
                                      June 30,                  June 30,
                                 2008         2007         2008         2007
    -------------------------------------------------------------------------
    Gas purification
     systems                1,300,189    3,333,135    4,011,139    5,613,689
    Engineering service
     contracts              1,401,373      282,953    2,556,796      518,622
    -------------------------------------------------------------------------
    Total revenue           2,701,562    3,616,088    6,567,935    6,132,311
    -------------------------------------------------------------------------
    

    Revenue from engineering services contracts increased significantly in
each of the three months and nine months ended June 30, 2008 compared to the
same periods in fiscal 2007. This reflects the higher level of engineering
service contracts in backlog, and a corresponding higher level of activity to
complete these contracts, compared to the prior periods. This trend is
expected to continue for several quarters as a result of the $6.3 million
engineering services contract with EMRE that was entered into in March 2008,
which will elevate the revenue recognized from engineering service contracts
until it is completed in December 2009. Revenue from gas purification systems
decreased by $2,032,946 for the quarter and $1,602,550 for the nine months
ended June 30, 2008 compared to the same periods in fiscal 2007, relating to
fluctuations in the timing of revenue recognition of commercial products which
is based on timing of customer acceptance.
    Fluctuations in recognized revenue and the receipt of new sales orders
are to be expected in the industrial markets that the Company currently
serves. In addition, the timing of receipt of new engineering service
contracts can vary from year to year. Accordingly, management believes that
recognized revenue and changes in sales order backlog should be monitored
together to determine the strength of its commercial operations.
    Sales order backlog is defined as future revenue from signed contracts
that have not yet been recognized as revenue. The following table provides an
analysis of the changes in sales order backlog for the three and the nine
months ended June 30, 2008.

    
    -------------------------------------------------------------------------
    (Unaudited)                     For the three months ended June 30, 2008
                                               Gas  Engineering
                                      Purification      Service
                                           Systems    Contracts        Total
    -------------------------------------------------------------------------
    Opening Balance                      8,390,638    7,631,736   16,022,374
      Bookings                           1,304,748            -    1,304,748
      Revenue                           (1,300,189)  (1,401,373)  (2,701,562)
      Adjustments(1)                       (67,218)     (55,876)    (123,094)
    -------------------------------------------------------------------------
    Ending Balance                       8,327,979    6,174,487   14,502,466
    -------------------------------------------------------------------------


    -------------------------------------------------------------------------
    (Unaudited)                      For the nine months ended June 30, 2008
                                               Gas  Engineering
                                      Purification      Service
                                           Systems    Contracts        Total
    -------------------------------------------------------------------------
    Opening Balance                      8,954,635    2,099,130   11,053,765
      Bookings                           2,899,806    6,457,200    9,357,006
      Revenue                           (4,011,139)  (2,556,796)  (6,567,935)
      Adjustments(1)                       484,677      174,953      659,630
    -------------------------------------------------------------------------
    Ending Balance                       8,327,979    6,174,487   14,502,466
    -------------------------------------------------------------------------

    -----------------------------------
    (1) Includes adjustments for fluctuations in foreign currency exchange
        rates.
    

    The total sales order backlog decreased by $1,519,908 or 9% during the
third quarter of fiscal 2008, as the dollar value of revenue recognized
exceeded new bookings in the quarter. Included in bookings for the quarter was
an order for an H-3200 for use in a new hydrogen plant to be constructed by
Hydro-Chem, and an order for an M-3200 for use in the "Biomethane for Vehicle
Fuel" project located at the Hilarides Dairy in California. Management expects
that approximately 30% to 35% of the sales order backlog as of June 30, 2008
will be recognized as revenue by September 30, 2008, with the balance being
recognized in future fiscal years.
    The following table provides a calculation of gross profit for the
reported periods:

    
    -------------------------------------------------------------------------
    (Unaudited)                 Three months ended         Nine months ended
                                      June 30,                  June 30,
                                 2008         2007         2008         2007
    -------------------------------------------------------------------------
    Revenue                 2,701,562    3,616,088    6,567,935    6,132,311
    Cost of goods sold      1,631,305    2,393,370    4,207,794    5,997,915
    -------------------------------------------------------------------------
    Gross Profit            1,070,257    1,222,718    2,360,141      134,396
    Gross Margin (%)            39.6%        33.8%        35.9%         2.2%
    -------------------------------------------------------------------------
    

    Gross profit decreased by $152,461 or 12% during the third quarter of
fiscal 2008 compared to $1,222,718 for the same period in fiscal 2007,
reflecting the decrease in recognized revenue in the current quarter compared
to the third quarter of fiscal 2007. However, the percentage gross margin
increased during the quarter, largely due to the increase in revenue from
engineering service contracts compared to the prior period. There was a
significant increase in gross profit for the nine months ended June 30, 2008
of $2,225,745 compared to the same period in fiscal 2007. Low gross profit for
the prior period was the result of losses related to the prototype H-6200
hydrogen purifier ("prototype plant") that was sold to an ExxonMobil refinery.
Revenue from the prototype plant was fully recognized at the end of the first
quarter of fiscal 2008, allowing the gross margin to return to more normal
levels. In any given quarter, gross margins fluctuate depending on the mix of
revenues from engineering service contracts, which tend to produce higher
margins, and commercial equipment.
    The gross Research and Development ("R&D") expenditures, offsetting
government funding and the resulting net R&D expenditures for the relevant
periods, were as follows:

    
    -------------------------------------------------------------------------
    (Unaudited)                 Three months ended         Nine months ended
                                      June 30,                  June 30,
                                 2008         2007         2008         2007
    -------------------------------------------------------------------------
    Gross R&D Expenditure     411,245    1,424,228    2,300,809    4,159,865
    Less: Government Funding        -            -            -     (384,565)
    -------------------------------------------------------------------------
    Net R&D Expenditure       411,245    1,424,228    2,300,809    3,775,300
    -------------------------------------------------------------------------
    

    The 71% reduction in net R&D expenditures for the quarter and 39%
reduction in the nine months ended June 30, 2008 compared to the same periods
in fiscal 2007 were due to a reduction in the level of R&D activities in the
current year, reflecting the Company's shift towards commercial activities.
R&D expenses during the quarter were further reduced compared to the prior
period as human resources that formerly completed development activities were
redeployed towards completing work on engineering service contracts with EMRE.
    This is the first fiscal year that "Operations" appears as a caption on
QuestAir's financial statements, and is the result of the restructuring
undertaken in the prior fiscal year to increase resources dedicated to
commercial activities and to reduce R&D expenditures. Consistent with the
Company's accounting policy, comparative amounts have been reclassified where
necessary to conform to the presentation adopted in the current fiscal year.
Included in operations are expenses related to supply chain management,
shipping and receiving, quality management and non-development related
engineering activities. Operations expenses were $291,334 for the third
quarter of fiscal 2008, an increase of 45% from $201,139 for the same period
in fiscal 2007. For the nine months ended June 30, 2008, operations expenses
were $1,159,141, increased by 58% compared to $733,553 for the same period in
fiscal 2007. The increase in operating expenses is primarily due to the
addition of human resources to the department.
    Other operating expenses include general and administrative ("G&A"),
sales and marketing, and amortization expenses. Total other operating expenses
decreased $641,719 or 31% in the quarter and $483,612 or 9% for the nine
months ended June 30, 2008 compared to the same periods in fiscal 2007. G&A
expenses were lower in the current quarter due to a restructuring charge of
approximately $560,800 being incurred in the third quarter of fiscal 2007.
Sales and marketing expenses declined in both the quarter and nine months
ended June 30, 2008 compared to the prior period primarily due to lower
variable costs associated with a reduction in gas purification equipment sales
orders. Amortization expenses in the quarter and nine months ended June 30,
2008 fell due to less investment in new capital equipment compared to the
prior periods.
    Other expense was $545,140 for the third quarter of fiscal 2008 compared
to $110,051 in the same period in fiscal 2007. For the nine months ended
June 30, 2008, other expense was $207,662 compared to other income of $152,337
for the same period in fiscal 2007. During the quarter the Company recorded a
one-time, unconditional royalty expense of $495,037 related to the amendment
of its agreement with Technology Partnerships Canada ("TPC"). This was in
addition to the regular royalty expense QuestAir incurs in respect of its
agreements with TPC. As well, higher foreign exchange and derivative gains
were offset by lower interest income in the current periods compared to the
same periods in fiscal 2007.
    Net loss for the quarter ended June 30, 2008 was $1,582,247 ($0.25 per
share) compared to $2,559,204 ($0.49 per share) for the same period in fiscal
2007. Net loss for the nine months ended June 30, 2008 was $6,030,126 ($1.08
per share) compared to $9,428,387 ($1.80 per share) for the same period in
fiscal 2007. The decrease in the net loss for the quarter was a result of
decreased R&D and G&A expenses discussed previously. The decrease for the nine
months ended June 30, 2008 was primarily a result of increased gross profits
and reduced R&D expenses compared to the same periods in fiscal 2007.
    Capital expenditures net of government funding and proceeds on sale ("Net
CAPEX"), for the third quarter of fiscal 2008 was $45,449 compared to $36,842
for the same period in fiscal 2007. Net CAPEX for the nine months ended
June 30, 2008 was $286,030 compared to $397,324 for the same period in fiscal
2007. It is expected that capital expenditures will fluctuate from quarter to
quarter depending on the requirements of specific product development programs
and administrative needs.

    Liquidity and Capital Resources
    -------------------------------

    At June 30, 2008 cash and short-term investments were $10,782,929,
compared to $3,697,331 at March 31, 2008. Not included in cash and short term
investments at June 30, 2008 was $414,717 of restricted cash to secure letters
of credit with customers compared to $256,717 at March 31, 2008.
    Cash used by operations and capital requirements for the third quarter of
fiscal 2008 was $512,087, compared to $2,263,565 for the same period in fiscal
2007. The loss from operations was lower in the current quarter, and
significant changes in non-cash working capital contributed to the decrease in
cash used in operations compared to the same period in fiscal 2007. In the
current period, inventory increased in order to fulfill customer orders in
backlog. This increase in use of cash was offset by an increase in accounts
payable and accrued liabilities, a decrease in accounts receivable, and an
increase in deferred revenue reflecting progress payments invoiced and
received from customers for orders in backlog. For the nine months ended June
30, 2008, cash used by operations was $5,218,983 compared to $7,180,491 for
the same period in fiscal 2007. Reduced losses and higher proceeds from
deferred revenue in the current period were partially offset by higher
inventory levels compared to the prior period.
    The Company has available a US$1 million accounts receivable line of
credit and a US$1 million term loan from Comerica Bank. This agreement is
amended and restated each year as part of the annual renewal of these
facilities, most recently in June 2008. As at June 30, 2008, the Company had
drawn $640,933 against the prior term loans net of repayments. These credit
facilities are secured by the assets of the Company with certain exceptions.
QuestAir is in compliance with all of its bank covenants.
    On May 13, 2008, QuestAir completed an offering of subscription receipts
for gross proceeds of $9 million, which were automatically converted into
common shares and share purchase warrants following receipt of shareholder
approval of the offering on June 16, 2008. On June 27, 2008, the Company
completed a common share consolidation on a 10 for 1 basis, reducing the
number of common shares outstanding from 112,683,647 to 11,268,318.
Accordingly, all share data for the period ended June 30, 2008 are reported on
a consolidated basis, and the basic and diluted earnings per share data have
been adjusted retroactively for all comparative periods to reflect the common
share consolidation.
    At July 31, 2008, authorized share capital consists of an unlimited
number of common shares, of which 11,268,318 common shares were issued and
outstanding, and an unlimited number of preferred shares authorized, none of
which are issued. In addition, there were 383,247 stock options and
6,180,000 warrants outstanding as of July 31, 2008.
    Further information on the Company's financial results for the quarter
can be found at www.sedar.com.


    
    Balance Sheets
    --------------

    -------------------------------------------------------------------------
    Unaudited (expressed in Canadian dollars)           As at          As at
                                                      June 30,  September 30,
                                                         2008           2007

    ASSETS
    Current assets:
    Cash and cash equivalents                     $10,720,881     $5,726,245
    Restricted cash                                   414,717        340,802
    Short-term investments                             62,048      3,060,447
    Accounts receivable                             1,491,517      1,412,983
    Inventories                                     6,978,688      4,376,717
    Prepaid expenses                                  222,681        256,378
                                                -----------------------------
                                                   19,890,532     15,173,572

    Property, plant and equipment                   1,455,378      1,703,872
    Other long-term assets                            182,080        175,080
                                                -----------------------------
                                                  $21,527,990    $17,052,524
                                                -----------------------------
                                                -----------------------------
    LIABILITIES AND SHAREHOLDERS' EQUITY
    Current liabilities:
    Accounts payable and accrued liabilities       $2,978,418     $2,791,139
    Deferred revenue                                7,137,568      4,546,584
    Current portion of bank debt                      486,214        564,306
    Current portion of obligation under
     capital lease                                     99,473         97,822
    Derivatives                                             -         75,874
                                                -----------------------------
                                                   10,701,673      8,075,725
    Long term liabilities:
    Bank debt                                         154,719        356,030
    Obligation under capital lease                          -         97,822
                                                -----------------------------
                                                   10,856,392      8,529,577
                                                -----------------------------
    Shareholders' equity:
    Share capital
    Authorized
      Unlimited common shares, voting,
       no par value
      Unlimited preferred shares, issuable
       in series, no par value
    Common shares                                 115,363,615    109,383,859
    Contributed surplus                             8,825,846      6,626,825
    Deficit                                      (113,517,863)  (107,487,737)
                                                -----------------------------
                                                   10,671,598      8,522,947
                                                -----------------------------
                                                  $21,527,990    $17,052,524
                                                -----------------------------
                                                -----------------------------

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



    Statements of Operations, Comprehensive Loss and Deficit
    --------------------------------------------------------

    -------------------------------------------------------------------------
    Unaudited       For the three months ended     For the nine months ended
     (expressed         June 30,       June 30,       June 30,       June 30,
     in Canadian           2008           2007           2008           2007
     dollars)

    Revenues      $   2,701,562  $   3,616,088  $   6,567,935  $   6,132,311
    Cost of goods
     sold             1,631,305      2,393,370      4,207,794      5,997,915
                  ----------------------------- -----------------------------
    Gross profit      1,070,257      1,222,718      2,360,141        134,396
                  ----------------------------- -----------------------------
    Operating
     expenses
    Research and
     development -
     net                411,245      1,424,228      2,300,809      3,775,300
    General and
     administration     768,556      1,233,181      2,843,944      2,896,095
    Operations          291,334        201,139      1,159,141        733,553
    Sales and
     marketing          454,978        630,677      1,344,188      1,668,713
    Amortization        181,251        209,646        534,523        641,459
                  ----------------------------- -----------------------------
                      2,107,364      3,671,871      8,182,605      9,715,120
                  ----------------------------- -----------------------------
    Loss before
     undernoted      (1,037,107)    (2,449,153)    (5,822,464)    (9,580,724)
                  ----------------------------- -----------------------------
    Other income
     (expense)
    Interest income      41,856        118,833        142,608        414,965
    Royalty expense    (511,823)       (39,475)      (615,608)      (102,186)
    Other               (75,173)      (189,409)       265,338       (160,442)
                  ----------------------------- -----------------------------
                       (545,140)      (110,051)      (207,662)       152,337
                  ----------------------------- -----------------------------
    Loss and
     comprehensive
     loss for
     the period      (1,582,247)    (2,559,204)    (6,030,126)    (9,428,387)
    Deficit -
     Beginning
     of period     (111,935,616)  (101,939,508)  (107,487,737)   (95,070,325)
                  ----------------------------- -----------------------------
    Deficit -
     End of
     period       $(113,517,863) $(104,498,712) $(113,517,863) $(104,498,712)
                  ----------------------------- -----------------------------
                  ----------------------------- -----------------------------
    Basic and
     diluted loss
     per share           $(0.25)        $(0.49)        $(1.08)        $(1.80)
    Weighted average
     number of
     common shares
     outstanding      6,257,376      5,251,939      5,592,752      5,245,143
    -------------------------------------------------------------------------



    Statements of Cash Flows
    ------------------------

    -------------------------------------------------------------------------
    Unaudited       For the three months ended     For the nine months ended
     (expressed         June 30,       June 30,       June 30,       June 30,
     in Canadian           2008           2007           2008           2007
     dollars)

    Cash flows from
     operating
     activities
    Loss for the
     period         $(1,582,247)   $(2,559,204)   $(6,030,126)   $(9,428,387)
      Items not
       involving cash
      Amortization      181,251        209,646        534,523        641,459
      Gain on sale of
       property, plant
       and equipment          -         (2,213)             -         (2,564)
      Unrealized
       foreign
       exchange
       (gain) loss on
       derivatives          249         56,059        (76,249)        65,899
      Non-cash
       compensation
       expense           79,684        104,986        259,752        350,434
      Foreign
       currency
       (gain) loss            -        (18,605)         6,234        (18,605)
                  ----------------------------- -----------------------------
                     (1,321,063)    (2,209,331)    (5,305,866)    (8,391,764)
                  ----------------------------- -----------------------------
    Changes in
     non-cash
     operating
     working capital
      Accounts
       receivable       236,877         49,554        (78,160)       243,500
      Inventories      (654,525)       797,027     (2,601,971)       424,332
      Prepaid expenses   (9,950)       127,697         26,697         30,806
      Accounts payable
       and accrued
       liabilities      388,176         57,588        149,332       (627,111)
      Deferred
       revenue          893,847     (1,049,258)     2,590,985      1,139,746
                  ----------------------------- -----------------------------
                        854,425        (17,392)        86,883      1,211,273
                  ----------------------------- -----------------------------
                       (466,638)    (2,226,723)    (5,218,983)    (7,180,491)
                  ----------------------------- -----------------------------
    Cash flows from
     investing
     activities
    Decrease in short-
     term investments         -      4,939,554      3,060,447      7,339,554
    Increase in short-
     term investments         -              -        (62,048)             -
    Purchase of
     property, plant
     and equipment      (45,449)       (48,539)      (286,030)      (414,806)
    Government grants
     and funding
     related to
     property, plant
     and equipment            -              -              -          5,435
    Proceeds on sale
     of property,
     plant and
     equipment                -         11,697              -         12,047
    (Increase)
     decrease in
     restricted cash   (158,000)       678,639        (73,915)       571,045
                  ----------------------------- -----------------------------
                       (203,449)     5,581,351      2,638,454      7,513,275
                  ----------------------------- -----------------------------
    Cash flows from
     financing
     activities
    Proceeds from
     financing        9,000,000              -      9,000,000              -
    Share issuance
     cost              (996,296)             -     (1,043,172)             -
    Issuance of
     common shares
     on exercise of
     stock options            -          9,097            143         67,885
    Repayment of
     capital lease     (102,405)      (127,930)      (102,405)      (127,930)
    Increase in
     bank debt                -        214,254        153,629        462,759
    Repayment of
     bank debt         (145,614)      (112,749)      (433,030)      (292,495)
                  ----------------------------- -----------------------------
                      7,755,685        (17,328)     7,575,165        110,219
                  ----------------------------- -----------------------------
    Increase in
     cash and cash
     equivalents      7,085,598      3,337,300      4,994,636        443,003
    Cash and cash
     equivalents -
     Beginning
     of period        3,635,283      8,124,503      5,726,245     11,018,800
                  ----------------------------- -----------------------------
    Cash and cash
     equivalents -
     End of period  $10,720,881    $11,461,803    $10,720,881    $11,461,803
                  ----------------------------- -----------------------------
                  ----------------------------- -----------------------------

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


    About QuestAir Technologies Inc.

    QuestAir Technologies, Inc. is a developer and supplier of proprietary
gas purification systems for several large international markets, including
existing markets such as oil refining, biogas production and natural gas
processing, and emerging markets such as fuel cell power plants and fuel cell
vehicle refueling stations. QuestAir is based in Burnaby, British Columbia and
its shares trade on the AIM Market of the London Stock Exchange Plc. and on
the Toronto Stock Exchange under the symbol "QAR".

    Forward-looking statements

    This press release contains forward-looking statements. Forward-looking
statements generally can be identified by the use of forward-looking
terminology such as "may", "will", "expect", "intend", "anticipate", "plan",
"foresee", "believe" or "continue" or the negatives of these terms or
variations of them or similar terminology. These forward-looking statements
include references to the future success of its business, technology, and
market opportunities. By their nature, forward-looking statements require
QuestAir to make assumptions and are subject to important known and unknown
risks and uncertainties, which may cause QuestAir's actual results in future
periods to differ materially from forecasted results. While QuestAir considers
its assumptions to be reasonable and appropriate based on current information
available, there is a risk that they may not be accurate. These
forward-looking statements are neither promises nor guarantees, but involve
known and unknown risks and uncertainties that may cause the Company's actual
results, level of activity, performance or achievements to be materially
different from any future results, levels of activity, performance or
achievements expressed in or implied by these forward-looking statements.
These risks include risks related to general economic conditions, risks
associated with revenue growth, operating results, industry factors and
QuestAir's general business environment, risks associated with doing business
with partners, risks involved with the development new products and
technology, financing risks, such as risks relating to liquidity and access to
capital markets, and risks relating to competition, among other factors.
Readers are cautioned that the foregoing list of factors that may affect
future growth, results and performance is not exhaustive and undue reliance
should not be placed on such forward-looking statements which speak only to
the date they were made. Except as required by law, QuestAir disclaims any
obligation to publicly update or revise any such statements to reflect any
change in the Company's expectations or in events, conditions, or
circumstances on which any such statements may be based, or that may affect
the likelihood that actual results will differ from those set forth in the
forward-looking statements.

    %SEDAR: 00021328E




For further information:

For further information: QuestAir Technologies Inc.: Sherry Tryssenaar,
Chief Financial Officer, Phone: (604) 453-6902, Email:
tryssenaar@questairinc.com, Web: www.questairinc.com; Canaccord Adams: Robert
Finlay, Phone: +44 (0) 20 7050 6500; UK media contact: Charles Ryland, Ben
Willey, Buchanan Communications, Phone: +44 (0) 20 7466 5000; Canadian media
contact: Stephen Burega, Karyo Communications, Phone: (604) 623-3007

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