QuestAir Technologies Announces Strong First Quarter 2009 Results



    
    Rising revenue, profitability and growing margins provide strong start
    to fiscal year
    

    BURNABY, BC, Feb. 9 /CNW/ - QuestAir Technologies Inc. ("QuestAir" or
"the Company"; TSX: QAR), a developer and supplier of proprietary gas
purification systems for several large international markets, reports strong
financial and operational results for the first quarter of fiscal 2009, ended
December 31, 2008 ("fiscal 2009"). All amounts are in Canadian dollars unless
otherwise noted.
    QuestAir will hold a conference call and webcast to discuss its results
at 10:00 am EST on February 10, 2009. Participants can access the call by
dialing 1-800-732-6179 (North America), 00-800-2288-3501 (United Kingdom) or
416-644-3422 (other regions) and entering code 21297523 followed by the number
sign when prompted, or listen to the webcast by entering
http://www.newswire.ca/en/webcast/viewEvent.cgi?eventID=2547160 into their
browser.

    
    First Quarter Highlights
    ------------------------

    -   Profitability: This quarter was the first profitable quarter in the
        Company's history. Net income was $692,951 ($0.06 per share) for the
        quarter, compared to a loss of $2,390,476 ($0.45 per share) in the
        same period in fiscal 2008. Higher revenue and margins, lower
        operating costs and foreign exchange gains all contributed to this
        significant improvement in earnings.

    -   Rising revenue: Revenue was $3,511,719 for the quarter, an increase
        of $1,943,794, or 124%, compared to the same period in fiscal 2008.
        Revenues from both gas purification systems and engineering service
        contracts increased substantially compared to the same period in
        fiscal 2008.

    -   Significant order backlog: Sales order backlog at December 31, 2008
        was $10,044,448, a decrease of $823,440, or 8%, from September 30,
        2008.

    -   Disciplined cash management: Cash used by operations and capital
        requirements was $153,062 for the quarter, a decrease of $2,673,790,
        or 95%, compared to the same period in fiscal 2008. Management's
        efforts to reduce cash usage since March 2008 continue to deliver
        strong results.

    -   Targeted sales results: QuestAir continued to build on its success in
        new markets, making further inroads with key orders:

           -  In October, QuestAir received a $700,000 order from Venoco
              Inc., one of the largest independent oil and natural gas
              companies in California, to provide an M-3100 pressure swing
              adsorption ("PSA") system for use on an off-shore platform.
              QuestAir's PSA will remove carbon dioxide from sub-quality
              "associated gas" in order to meet the strict quality
              specifications for natural gas sold in California. This is the
              Company's first sale of an M-3100 system for use on an off-
              shore platform, where QuestAir's compact, skid-mounted gas
              purification systems offer significant benefits.

           -  In December, the Company announced the sale of two M-3200 PSA
              systems that will be used to create renewable compressed
              natural gas ("CNG") from biogas. The two projects, one in Korea
              and the other in Austria, build on the success QuestAir has
              enjoyed with biogas-to-CNG projects in California and Europe.
              Creating renewable vehicle fuel to replace gasoline and diesel
              is the highest value-added use of biogas, and another promising
              market for QuestAir's products.

    -   Streamlined trading: In December, QuestAir announced that it would
        delist from the AIM Market in the United Kingdom to reduce
        administrative costs. The delisting became effective in January 2009.
        The Company's shares continue to be listed on the Toronto Stock
        Exchange under the symbol "QAR".
    

    "Our strategic focus on growing our business in the biogas upgrading
market and maintaining prudent cash management policies have led to a
successful first quarter ended December 31, 2008, with rising revenues, our
first ever quarterly profit and enhanced margins," said Andrew Hall, President
and CEO of QuestAir. "We are very pleased with QuestAir's performance, and the
strong financial results in the first quarter of fiscal 2009 will favourably
impact our financial results for the full fiscal year."
    QuestAir's recently announced emphasis on biogas upgrading recognizes the
significant growth potential of this market as gas utilities, consumers and
businesses increase their demand for domestic renewable energy and governments
provide financial incentives and policy support for biogas upgrading projects.
    "Biogas orders received in the first quarter, including the two
CNG-from-biogas projects in Austria and Korea, build on our success in this
market and reinforce our commitment to growing our presence in biogas
upgrading," said Hall. "QuestAir's PSA systems have a number of competitive
advantages - compact size, reliable operation, and low installation and
operating costs - that are helping us to win business and position ourselves
for long-term success in this market."

    
    Outlook
    -------
    
    Commenting on the outlook for the remainder of fiscal 2009, Hall noted
that in December 2008 QuestAir forecast that revenues in fiscal 2009 would be
in the range of $10 million to $12 million, and that cash used in operations
and capital expenditures would be in the range of $4 million to $5 million.
    "Assuming that exchange rates remain at current levels for the remainder
of fiscal 2009, we expect that our revenue for fiscal 2009 will be at the high
end of the $10 million to $12 million range," said Hall. "Similarly, our cash
usage was much lower than expected in the first quarter of the fiscal year due
to cost containment and strong foreign exchange gains. If current exchange
rates continue for the balance of fiscal 2009, we expect that cash used in
operations and capital requirements will be in the range of $3 million to $4
million for the full fiscal year."
    In spite of the strong financial results for the quarter ended December
31, 2008, as a supplier of capital equipment QuestAir faces a challenging
economic environment for its products. The credit crisis has limited access to
project financing for prospective customers and caused the delay or
cancelation of certain biogas projects. In addition, declining natural gas
prices are expected to affect smaller farm-scale biogas projects where the
economies of scale are not as strong.
    In addition, demand for hydrogen has declined in recent months as the
spreading global recession has impacted hydrogen-consuming industries such as
oil refining, glass manufacturing and the steel industry. A number of
potential hydrogen generation and hydrogen recovery projects have been delayed
or cancelled, particularly in Asia. This has reduced QuestAir's pipeline of
prospective new hydrogen PSA orders over the balance of this fiscal year,
noted Hall.
    "We remain optimistic that government initiatives to increase available
credit and to promote investments in renewable energy projects will help
increase demand for gas purification equipment," continued Hall. "At this
time, however, it is difficult to determine how long the current economic
conditions will impact our ability to secure new orders in the biogas and
industrial hydrogen markets."
    Despite current economic conditions, management is confident that
QuestAir is well positioned going forward from a cash, product and strategy
standpoint. The restructuring of QuestAir's operations that took effect in the
second quarter of fiscal 2008, together with the increased emphasis on
customer-funded development programs, have significantly lowered QuestAir's
operating expenses. QuestAir's strong cash balance and improved operational
results will help the Company weather the current recession.
    "In addition, our strategic focus on the biogas market has positioned
QuestAir to benefit from significant macro-economic drivers, including the
increased demand for domestic renewable energy and cleaner transportation
fuels," said Hall. "In particular, we are offering integrated biogas upgrading
plants, which provide project developers with a turn-key solution to upgrade
raw biogas to pipeline or vehicle fuel-grade product. This will also allow us
to expand our product offering to include operating and maintenance contracts
for such plants."

    Management Change

    The Company also announced that Sherry Tryssenaar, Chief Financial
Officer (CFO), has tendered her resignation from QuestAir effective March 13,
2009, to join Swiss Water Decaffeinated Coffee Co. Inc., based in Burnaby,
B.C. An external search will be initiated to fill the position. In the
interim, Karen Miller, QuestAir's Controller, has been appointed acting CFO.
    "I would like to thank Sherry for her leadership and many contributions
to QuestAir's success as we have expanded our sales into new markets,
prudently managed our cash resources, and implemented a strategic business
plan that has provided a solid foundation for growth," said Andrew Hall,
President and CEO, QuestAir. "On behalf of QuestAir, I wish Sherry well and
continued success in her future endeavours."
    "I have enjoyed working with my QuestAir colleagues and the Company's
executive team over the past 3 years, and I am very proud of QuestAir's
accomplishments in developing exceptional proprietary technologies, pursuing
new markets and growing the business," said Tryssenaar. "QuestAir has entered
fiscal 2009 with a compelling strategy, strong products, industry-leading
expertise and loyal customers, and is well positioned for long-term success."

    
    Q1 2009 Financial Results
    -------------------------

    Operating Results

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

    -------------------------------------------------------------------------
    (Unaudited)                               Three months ended December 31,
                                                         2008           2007
    -------------------------------------------------------------------------
    Gas purification systems                        2,045,168      1,362,811
    Engineering service contracts                   1,466,551        205,114
    -------------------------------------------------------------------------
    Total revenue                                  $3,511,719     $1,567,925
    -------------------------------------------------------------------------
    

    Revenue from gas purification systems increased 50% compared to the same
period in fiscal 2008, as revenue from a large capacity H-3200 hydrogen
purifier, for use in a new hydrogen plant at an oil refinery in Montana, was
recognized during the first quarter of fiscal 2009. Also included in revenue
are a number of biogas purification systems, including an M-3200 PSA system
for the 'Biomethane for Vehicle Fuel' project located at the Hilarides Dairy
in Lindsay, California and two M-3200 PSA systems sold to Acrona Systems Ltd.
(formerly Verdesis Suisse) to purify methane generated from anaerobic
digestion of organic waste in Switzerland.
    The increase in revenue from engineering service contracts reflects the
higher value of these contracts in backlog compared to the prior periods. This
trend is expected to continue for several quarters as a result of the US$6.35
million engineering service contract that the Company signed with ExxonMobil
Research and Engineering in March 2008. This contract will elevate the revenue
recognized from engineering service contracts until it is completed in
December 2009.
    Fluctuations in recognized revenue and the receipt of new sales orders
are expected in the markets that the Company serves. In addition, the timing
of receipt of new engineering service contracts can vary from year to year.
Consequently, management believes that both recognized revenue and changes in
sales order backlog should be monitored together to determine the strength of
QuestAir's commercial operations.
    QuestAir's 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 quarter
ended December 31, 2008.

    
    -------------------------------------------------------------------------
    (Unaudited)                      For the quarter ended December 31, 2008
                                           Gas    Engineering
                                  Purification        Service
                                       Systems      Contracts          Total
    -------------------------------------------------------------------------
    Opening Balance                  5,502,442      5,365,446     10,867,888
      Bookings                       1,226,020        287,775      1,513,795
      Revenue                       (2,045,168)    (1,466,551)    (3,511,719)
      Adjustments(1)                   308,129        866,355      1,174,484
    -------------------------------------------------------------------------
    Ending Balance                   4,991,423      5,053,025     10,044,448
    -------------------------------------------------------------------------
    (1) Includes adjustments for fluctuations in foreign currency exchange
        rates.
    

    The total sales order backlog decreased by $823,440, or 8%, during the
first quarter of fiscal 2009. Favourable foreign exchange adjustments
increased the value of the Company's sales order backlog during the quarter,
partially offsetting the fact that new orders received were less than the
value of revenue recognized during the quarter. As discussed earlier in the
'Outlook' section, the current economic environment has impacted the Company's
ability to secure new orders for gas purification equipment, and without
foreign exchange gains, total sales order backlog would have been less than $9
million at December 31, 2008.
    The following table provides a calculation of gross profit for the
reported periods:

    
    -------------------------------------------------------------------------
    (Unaudited)                               Three months ended December 31,
                                                         2008           2007
    -------------------------------------------------------------------------
    Revenue                                         3,511,719      1,567,925
    Cost of goods sold                              1,704,689      1,319,736
    -------------------------------------------------------------------------
    Gross Profit                                    1,807,030        248,189
    Gross Margin (%)                                    51.5%          15.8%
    -------------------------------------------------------------------------
    

    Gross profit increased in the first quarter of fiscal 2009 compared to
the same period last year due in part to an increase in the amount of revenue
recognized on engineering service contracts, which tend to generate higher
gross margins than equipment sales. In addition, a warranty obligation expired
during the first quarter of fiscal 2009, resulting in a $367,626 reduction of
cost of goods sold in the quarter, contributing to the increased gross margin
compared to the same period in fiscal 2008. Margins are expected to fluctuate
from quarter to quarter depending on the mix of revenues recognized from
engineering service contracts and gas purification systems.
    Research and development ("R&D") expenses were $417,983 for the first
quarter of fiscal 2009, a decrease of 56% compared to $955,864 for the same
period in fiscal 2008. In the second quarter of fiscal 2008, management
decided to limit the amount of self-funded R&D activities in order to reduce
the Company's operational cash usage. As a result, R&D expenses have decreased
significantly compared to the prior period.
    General and administrative ("G&A") expenses were $680,270 for the first
quarter of fiscal 2009, a decrease of 23% compared to $885,568 for the same
period in fiscal 2008. The decrease is primarily related to a decrease in
overall facilities costs, including rent and associated utilities expenses, as
the Company reduced the size of its leased facilities at the end of fiscal
2008 to better match its current requirements. In addition, stock based
compensation expenses were much lower in the current quarter compared to the
first quarter of fiscal 2008.
    Operations expenses were $276,010 for the first quarter of fiscal 2009, a
decrease of 37% compared to $437,618 for the same period in fiscal 2008. This
decrease is due to a decrease in salary costs and related overheads, as
staffing levels have declined in the department compared to the same period in
fiscal 2008.
    Sales and marketing expenses were $295,598 for the first quarter of
fiscal 2009, a decrease of 26% compared to $401,576 for the same period in
fiscal 2008. The reduction in sales and marketing expenses for the quarter
reflects a decrease in salary costs and related overheads compared to the
prior period.
    Other income was $711,314 for the first quarter of fiscal 2009 as a
result of substantial foreign exchange gains compared to the same period in
fiscal 2008.
    The first quarter of fiscal 2009 was QuestAir's first profitable quarter
since inception. Net income was $692,951 compared to a loss of $2,390,476 for
the first quarter of fiscal 2008. Timing of revenue recognition, increased
gross profit and favorable foreign exchange gains have contributed to the
positive results in the current quarter. In spite of the net income in the
quarter, a net loss is projected for the full fiscal year.
    Capital expenditures net of proceeds on sale ("Net CAPEX") for the first
quarter of fiscal 2009 were $37,557 compared to $153,793 for the same prior in
fiscal 2008. It is expected that capital expenditures will fluctuate from year
to year depending on the requirements of specific product development programs
and administrative needs.

    Liquidity and Capital Resources

    At December 31, 2008 cash and short-term investments totaled $9,032,063,
compared to $9,327,297 at September 30, 2008. Not included in cash and short
term investments at December 31, 2008 and September 30, 2008 was $281,005 of
restricted cash to secure letters of credit with customers.
    Cash used by operations and capital requirements decreased 95% in the
first quarter of fiscal 2009 to $153,062, compared to $2,826,852 for the same
period in fiscal 2008. Cash inflows related to net income in the first quarter
of fiscal 2009 were offset by cash outflows related to working capital
accounts. In addition, there were fewer capital expenditures during the
quarter compared to the same period in fiscal 2008.
    In addition to cash reserves, the Company has access to a US$1 million
accounts receivable line of credit and a US$1 million term loan. As at
December 31, 2008, the Company had drawn $190,924 under the term loan, as well
as $338,501 (net of repayments) under prior term loan agreements. QuestAir is
in compliance with all bank covenants.
    QuestAir's authorized share capital consists of an unlimited number of
common shares, of which 11,269,318 common shares were issued and outstanding
as of January 31, 2009. The Company also has an unlimited number of preferred
shares authorized, none of which are issued.
    Further information on QuestAir's financial results for the quarter ended
December 31, 2008 can be found in the Company's 'Management Discussion and
Analysis' ("MD&A") at www.sedar.com.

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

    -------------------------------------------------------------------------
    Unaudited (expressed in Canadian dollars)           As at          As at
                                                  December 31,  September 30,
                                                         2008           2008
    Assets
    Current assets
    Cash and cash equivalents                      $9,032,063     $9,265,249
    Restricted cash                                   281,005        281,005
    Short-term investments                                  -         62,048
    Accounts receivable- net of allowance for
     doubtful accounts of $92,689 (2008 - $92,689)    989,212        974,404
    Inventories                                     3,755,510      5,214,342
    Prepaid expenses                                  309,480        199,269
                                                 ----------------------------
                                                   14,367,270     15,996,317
    Long-term  assets
    Property, plant and equipment                   1,212,010      1,329,986
    Other long-term assets                            178,930        178,930
                                                 ----------------------------
                                                  $15,758,210    $17,505,233
                                                 ----------------------------
                                                 ----------------------------
    Liabilities
    Current liabilities
    Accounts payable and accrued liabilities       $2,040,252     $2,896,719
    Deferred revenue                                3,249,034      4,735,258
    Current portion of bank debt                      356,319        443,345
    Obligation under capital lease                    120,722        105,479
                                                 ----------------------------
                                                    5,766,327      8,180,801
    Long-term liabilities
    Bank debt                                         173,106        228,262
                                                 ----------------------------
                                                    5,939,433      8,409,063
                                                 ----------------------------
    Shareholders' Equity
    Share capital
    Authorized
      Unlimited common shares, voting, no par value
      Unlimited preferred shares,
       issuable in series, no par value
    Common shares                                 115,373,625    115,363,615
    Contributed surplus                             8,882,871      8,863,225
    Deficit                                      (114,437,719)  (115,130,670)
                                                 ----------------------------
                                                    9,818,777      9,096,170
                                                 ----------------------------
                                                  $15,758,210    $17,505,233
                                                 ----------------------------
                                                 ----------------------------

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


    Statements of Operations, Comprehensive Income (Loss) and Deficit
    -----------------------------------------------------------------

    -------------------------------------------------------------------------
    Unaudited (expressed in Canadian dollars)     For the three months ended
                                                  December 31,   December 31,
                                                         2008           2007

    Revenues                                       $3,511,719     $1,567,925
    Cost of goods sold                              1,704,689      1,319,736
                                                 ----------------------------
    Gross profit                                    1,807,030        248,189
                                                 ----------------------------

    Operating expenses
    Research and development                          417,983        955,864
    General and administration                        680,270        885,568
    Operations                                        276,010        437,618
    Sales and marketing                               295,598        401,576
    Amortization                                      155,532        174,021
                                                 ----------------------------
                                                    1,825,393      2,854,647
                                                 ----------------------------
    Loss before undernoted                            (18,363)    (2,606,458)
                                                 ----------------------------

    Other income (expense)
    Foreign exchange gain                             708,657        111,979
    Interest income                                    36,533         69,290
    Other income (expense)                            (33,876)        34,713
                                                 ----------------------------
                                                      711,314        215,982
                                                 ----------------------------
    Income (loss) and comprehensive income
     (loss) for the period                            692,951     (2,390,476)
    Deficit - Beginning of period                (115,130,670)  (107,487,737)
                                                 ----------------------------
    Deficit - End of period                     $(114,437,719) $(109,878,213)
                                                 ----------------------------
                                                 ----------------------------
    Basic and diluted earnings (loss) per share         $0.06         $(0.45)
    Weighted average number of common
     shares outstanding                            11,268,807      5,256,213
    -------------------------------------------------------------------------


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

    -------------------------------------------------------------------------
    Unaudited (expressed in Canadian dollars)     For the three months ended
                                                  December 31,   December 31,
                                                         2008           2007
    Cash flows from operating activities
    Income (loss) for the period                     $692,951    $(2,390,476)
      Items not involving cash
        Amortization                                  155,532        174,021
        Unrealized foreign exchange gain
         on derivatives                                  (384)       (73,941)
        Non-cash compensation expense                  29,646        104,947
        Foreign currency loss (gain)                   15,244           (689)
                                                 ----------------------------
                                                      892,989     (2,186,138)
                                                 ----------------------------
    Changes in non-cash operating working capital
      Accounts, grants and funding receivables        (14,808)    (1,446,495)
      Inventories                                   1,458,832     (1,268,105)
      Prepaid expenses                               (110,211)       151,809
      Accounts payable and accrued liabilities       (856,083)       420,838
      Deferred revenue                             (1,486,224)     1,655,032
                                                 ----------------------------
                                                   (1,008,494)      (486,921)
                                                 ----------------------------
                                                     (115,505)    (2,673,059)
                                                 ----------------------------
    Cash flows from investing activities
    Decrease in short-term investments                 62,048      3,060,447
    Increase in short-term investments                      -        (62,048)
    Purchase of property, plant and equipment         (37,557)      (153,793)
    Decrease in restricted cash                             -         84,085
                                                 ----------------------------
                                                       24,491      2,928,691
                                                 ----------------------------

    Cash flows from financing activities
    Issuance of common shares on exercise of
     stock options                                         10            143
    Term loan advance                                       -          7,250
    Repayment of bank debt                           (142,182)      (141,802)
                                                 ----------------------------
                                                     (142,172)      (134,409)
                                                 ----------------------------
    (Decrease) Increase in cash and
     cash equivalents                                (233,186)       121,223
    Cash and cash equivalents -
     Beginning of period                            9,265,249      5,726,245
                                                 ----------------------------
    Cash and cash equivalents - End of period      $9,032,063     $5,847,468
                                                 ----------------------------
                                                 ----------------------------

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


    About QuestAir Technologies Inc.

    QuestAir Technologies, Inc. is a developer and supplier of proprietary
gas purification systems for several large international markets, including
biogas production, natural gas processing and oil refining. QuestAir is based
in Burnaby, British Columbia and its shares trade 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 our 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.
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, other than as required by law.

    %SEDAR: 00021328E




For further information:

For further information: QuestAir Technologies Inc.: Andrew Hall, Chief
Executive Officer, Phone: (604) 453-6967, Email: hall@questairinc.com, Web:
www.questairinc.com; Sherry Tryssenaar, Chief Financial Officer, Phone: (604)
453-6902, Email: tryssenaar@questairinc.com; Media contacts: Ian Noble and
Steve Burega, Karyo Communications, Phone: (604) 623-3007,
ian.noble@karyo-edelman.com, stephen.burega@karyo-edelman.com

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