FOR: QUESTAIR TECHNOLOGIES INC.
TSX, AIM SYMBOL: QAR
August 2, 2007
QuestAir Reports Third Quarter 2007 Results
BURNABY, BRITISH COLUMBIA--(CCNMatthews - Aug. 2, 2007) - QuestAir Technologies Inc. ("QuestAir" or "the Company")
(TSX:QAR)(AIM:QAR) reported today its unaudited financial and operational results for the third quarter of fiscal
2007, ended June 30, 2007. All amounts are in Canadian dollars unless otherwise noted.
Third Quarter Highlights
- QuestAir shipped the prototype H-6200 hydrogen purifier ("prototype plant") to an ExxonMobil refinery in France.
The prototype plant will be installed and tested at this demonstration site in order to generate additional data
to assist with marketing of this product to other refineries.
- The Company completed a reorganization of its operations during the third quarter to focus resources on
commercial activities and reduce research and development expenses.
- QuestAir received an order for a large-scale methane purification system, valued at US$2.85 million, which will
upgrade anaerobic digester gas created from organic waste to pipeline quality methane.
- Revenue was $3,616,088 for the quarter, increased by $2,422,708, or 203% compared to the same period in fiscal
2006. Revenue for the nine months was $6,132,310, increased by $1,270,813, or 26% from the same period last year.
- Sales order backlog at June 30, 2007 was $7,135,799, decreased by $377,027, or 5%, from March 31, 2007.
- Cash used by operations and capital requirements was $2,263,565 for the quarter, increased by $387,414, or 21%
compared to the same period in fiscal 2006. Cash used by operations and capital requirements for the nine months
was $7,577,816, compared to $5,922,222 for the same period in fiscal 2006. At June 30, 2007, the Company had
$12,207,557 in cash and short term investments, including restricted cash of $685,308.
- Net loss was $2,238,859 ($0.04 per share) for the quarter, increased by $104,045 or 5% compared to the same
period in fiscal 2006. Net loss for the nine months increased to $8,780,381 ($0.17 per share) from $7,538,338
($0.19 per share) for the same period in 2006.
Jonathan Wilkinson, President and CEO of QuestAir, said: "We are seeing continued growth in new gas purification
equipment orders, with year to date equipment orders exceeding $7.3 million. Much of this growth is due to
increased traction in the biomethane purification market. Orders for our M-3200 and M-3100 products for use in
biomethane applications have accounted for nearly half of the total value of equipment orders in the first nine
months of this fiscal year. Our gas purification products are well positioned to meet the emerging demand for
scalable systems that can upgrade renewable sources of biomethane to pipeline grade."
Outlook
Commenting on the outlook for the remainder of fiscal 2007, Wilkinson said:
"We are focused on three key priorities for the remainder of the fiscal year: the successful start up and
operation of the prototype plant at ExxonMobil's refinery in France; continued growth in the sales of our
commercial gas purification products; and ramping up our order-to-delivery capacity to ensure that we continue to
deliver our commercial products on time and on budget."
"During the third quarter of fiscal 2007, we shipped the prototype plant to an ExxonMobil refinery in France. The
prototype plant is now being installed at the refinery, and we expect to start up the plant in September. In
cooperation with refinery staff, we will conduct a series of tests on the unit over the next several months, to
demonstrate a number of operating conditions which may be encountered at other refineries. Following completion of
the test plan, the prototype plant will continue in regular operations at the refinery site."
"Our sales of our commercial products have exceeded our expectations this year, due to the rapid growth in the
biomethane market. Going forward, we expect to see continued growth in this market, driven by higher natural gas
prices and by social and political pressure to generate more energy from renewable sources."
"The rapid growth in commercial orders means that we need to expand our manufacturing capacity. We are investing
in additional engineering resources, and expanding our supply chain in order to meet the growing demand for our
products," Wilkinson added.
Based on financial results for the first nine months of the year, the current status of the Company's sales order
backlog and the expected timing of cash receipts and disbursements, management expects that recognized revenue for
fiscal 2007 will be within the range of $7 to $8 million, and that cash used in operations and capital
requirements for the full fiscal year will be between $10 and $12 million.
Q3 2007 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:
/T/
--------------------------------------------------------------------------
Three months ended Nine months ended
June 30, June 30,
(Unaudited) 2007 2006 2007 2006
--------------------------------------------------------------------------
Gas purification systems 3,333,135 573,898 5,613,688 3,277,939
Engineering service
contracts 282,953 619,482 518,622 1,583,558
--------------------------------------------------------------------------
Total revenue 3,616,088 1,193,380 6,132,310 4,861,497
--------------------------------------------------------------------------
/T/
Revenue from the sale of gas purification systems represents a more substantial portion of total revenues than in
prior periods, reflecting a change in the nature of the Company's sales order backlog. During the nine months
ended June 30, 2007, revenue from the sale of gas purification systems accounted for 92% of total revenue, up from
67% of total revenue during the same period in fiscal 2006.
The increase in revenue from gas purification systems for the quarter and nine months ended June 30, 2007 resulted
primarily from revenue being recognized from the sale of a US$2 million M-3100 system to recover pipeline grade
methane from landfill gas at the Rumpke Sanitary Landfill in Cincinnati, Ohio.
Fluctuations in recognized revenue and the receipt of new sales orders are to be expected in the industrial
markets that QuestAir currently serves. Accordingly, recognized revenue and changes in sales order backlog should
be monitored together to determine the strength of 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 and nine months ended June 30, 2007.
/T/
-------------------------------------------------------------
For the three months ended June 30, 2007
Gas Engineering
Purification Service
(Unaudited) Systems Contracts Total
-------------------------------------------------------------
Opening Balance 7,078,336 434,491 7,512,827
Bookings 3,254,422 363,000 3,617,422
Revenue (3,333,135) (282,953) (3,616,088)
Adjustments(1) (339,539) (38,823) (378,362)
-------------------------------------------------------------
Ending Balance 6,660,084 475,715 7,135,799
-------------------------------------------------------------
-------------------------------------------------------------
For the nine months ended June 30, 2007
Gas Engineering
Purification Service
(Unaudited) Systems Contracts Total
-------------------------------------------------------------
Opening Balance 4,908,298 135,594 5,043,892
Bookings 7,350,387 901,275 8,251,662
Revenue (5,613,688) (518,622) (6,132,310)
Adjustments(1) 15,087 (42,532) (27,445)
-------------------------------------------------------------
Ending Balance 6,660,084 475,715 7,135,799
-------------------------------------------------------------
(1) Includes adjustments for fluctuations in foreign currency exchange
rates.
/T/
The total sales order backlog decreased by $377,028, or 5%, during the third quarter of fiscal 2007, driven by
fluctuations in foreign currency exchange rates. During the quarter, QuestAir received an order for an M-3100
system to upgrade anaerobic digester gas created from organic waste to pipeline quality methane, making a
significant contribution to maintaining backlog levels after the recognition of $3,616,088 in revenue during the
quarter. Also during the quarter, QuestAir received a small follow-on engineering services contract related to the
refinery development program with ExxonMobil Research and Engineering ("EMRE").
The table below provides a calculation of gross profit for the reported periods:
/T/
--------------------------------------------------------------------------
Three months ended Nine months ended
June 30, June 30,
(Unaudited) 2007 2006 2007 2006
--------------------------------------------------------------------------
Sales 3,616,088 1,193,380 6,132,310 4,861,497
Cost of goods sold 2,381,958 714,014 5,972,116 3,823,872
--------------------------------------------------------------------------
Gross Profit 1,234,130 479,366 160,194 1,037,625
Gross Margin (%) 34.1% 40.2% 2.6% 21.3%
--------------------------------------------------------------------------
/T/
The decrease in gross margin for the quarter ended June 30, 2007 compared to the same period in fiscal 2006
resulted from a change in the mix of revenues recognized during the quarter. In the most recent quarter 8% of
revenue was from engineering service contracts compared to 52% in the prior period. Engineering service contracts
typically contribute higher gross margins. The decrease in gross margin for the nine months ended June 30, 2007
resulted from the recognition of an estimated loss on the prototype plant being recognized in the second quarter.
Sales and marketing expenses were $587,651 for the quarter ended June 30, 2007, increased by 20% compared to
$489,328 for the same period in fiscal 2006. Sales activities increased in the quarter compared to the prior
period, resulting in an overall increase in commissions and other sales and marketing expenses. For the nine
months ended June 30, 2007, sales and marketing expenses were $1,615,703, increased by 10% compared to $1,472,316
for the same period in 2006. This increase is also attributed to an increased level of sales activities compared
to the prior period.
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:
/T/
--------------------------------------------------------------------------
Three months ended Nine months ended
June 30, June 30,
(Unaudited) 2007 2006 2007 2006
--------------------------------------------------------------------------
Gross R&D Expenditure 1,561,165 1,640,794 4,717,091 5,133,296
Less: Government &
Partner Funding (320,345) (404,481) (1,032,571) (1,370,758)
--------------------------------------------------------------------------
Net R&D Expenditure 1,240,820 1,236,313 3,684,520 3,762,538
--------------------------------------------------------------------------
/T/
The 5% and 8% reduction in gross R&D expenditures for the quarter and nine months ended June 30, 2007 compared to
the same periods in fiscal 2006 was due to a reduction in the amount of R&D undertaken, as resources were
redirected towards supporting commercial sales efforts and the construction of the prototype plant. Government
funding decreased for the quarter and nine months in proportion to the reduction in R&D undertaken on the refinery
development program with EMRE, which is eligible for funding from Technology Partnerships Canada.
General and Administrative ("G&A") expenses were $1,324,820 for the third quarter of fiscal 2007, increased by 71%
from $775,809 for the same period in fiscal 2006. For the nine months ended June 30, 2007, G&A expenses were
$3,151,230, increased by 27% from $2,475,989 for the same period in 2006. The increase in G&A expenses the quarter
and nine months ended June 30, 2007 resulted primarily from severance costs and termination benefits of $560,808
being recognized related to the restructuring of the Company's operations in the third quarter.
Amortization expenses were $209,647 for the quarter ended June 30, 2007 compared to $187,360 for the same period
in fiscal 2006. The increase relates to the addition of a three-year capital lease for modeling software during
the current quarter. For the nine months ended June 30, 2007 amortization was $641,459 compared to $951,218 for
the same period in fiscal 2006. The decrease in amortization expenses was a result of certain capital assets
becoming fully amortized during the current and prior fiscal years.
Other income and expenses netted to an expense of $110,051 for the quarter ended June 30, 2007 compared to income
of $74,630 for the same period in fiscal 2006. Losses from foreign exchange fluctuations and unrealized losses on
embedded derivatives were only partially offset by interest income in the quarter ended June 30, 2007. For the
nine months ended June 30, 2007 other income was $152,337 compared to $86,098 for the same period in fiscal 2006.
The increase in other income for the first nine months of fiscal 2007 resulted from higher interest income earned
during the period, which was partially offset by losses from foreign exchange fluctuations and unrealized losses
on embedded derivatives.
Net loss for the quarter ended June 30, 2007 was $2,238,859 ($0.04 per share) compared to $2,134,814 ($0.05 per
share) for the same period in fiscal 2006. Net loss for the nine months ended June 30, 2007 was $8,780,381 ($0.17
per share) compared to $7,538,338 ($0.19 per share) for the same period in fiscal 2006. The 16% increase in the
net loss for the nine months was primarily a result of reduced gross profits compared to the prior period, as well
as higher G&A expenses associated with the restructuring of the Company's operations in the third quarter.
Loss per share is calculated based on the weighted average number of common shares outstanding through the
quarter. The reduction in the loss per share for the quarter and nine months ended June 30, 2007 was a result of
an increase in the weighted average number of common shares outstanding compared to the prior period.
Capital expenditures net of government funding and proceeds on sale ("Net CAPEX") for the third quarter of fiscal
2007 was $30,954, compared to $353,454 for the same period in fiscal 2006. Net CAPEX for the nine months ended
June 30, 2007 was $381,008, compared to $750,971 for the same period in 2006. 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
Cash and short-term investments were $11,522,249 at June 30, 2007, compared to $13,124,503 at March 31, 2007. Not
included in cash and short-term investments at June 30, 2007 was $685,308 of restricted cash, which secures
customer deposits pending completion of certain customer orders.
Cash used by operations and capital requirements for the third quarter of fiscal 2007 was $2,263,565, compared to
$1,876,151 for the same period in fiscal 2006. The increase in cash used by operations and capital requirements
during the quarter was driven by significant changes in non-cash working capital accounts. Deferred revenue
decreased $1,049,259 as revenue recognized in the quarter exceeded new customer deposits on work in progress. The
recognition of revenue in the quarter also lowered inventory by $797,026, as the reallocation to costs of sales
from work in progress more than offset inventory purchases during the quarter. Cash used by operations and capital
requirements for the nine months ended June 30, 2007 was $7,577,816, compared to $5,922,222 for the same period in
fiscal 2006. Higher operating losses and decreases in accounts payable and accrued liabilities were partially
offset by increases in deferred revenue compared to the prior period.
During fiscal 2005, the Company signed a credit facilities agreement with Comerica Bank. This agreement is amended
and restated each year as part of the annual renewal of these facilities, most recently in June 2007. The amended
credit facilities include a US$1 million accounts receivable line of credit and a US$1 million term loan, in
addition to $1,069,762 outstanding under the prior term loan agreements. Both facilities are secured by the assets
of the Company with certain exceptions. As at June 30, 2007, the Company had drawn $1,054,511 against the term
loans net of repayments, and is in compliance with all of its bank covenants.
On June 6, 2003, QuestAir was awarded a $9,600,000 conditionally repayable loan from TPC, a funding program
administered by Industry Canada. At June 30, 2007, the Company had claimed $8,814,405 against this loan. Based on
forecasted R&D expenditures, the Company expects to draw approximately one half the remaining $785,595 of TPC
funding by the end of fiscal 2007.
QuestAir's authorized share capital consists of an unlimited number of common shares, of which 52,530,494 common
shares were issued and outstanding as of June 30, 2007, increased by 26,574 or 0.05% from March 31, 2007. The
Company also has an unlimited number of preferred shares authorized, none of which are issued. In addition, there
were 4,752,838 stock options and 192,308 share purchase warrants outstanding at June 30, 2007.
Further information on the Company's financial results for the quarter can be found at www.sedar.com.
/T/
Balance Sheets
--------------
--------------------------------------------------------------------------
As at As at
June 30, September 30,
Unaudited (expressed in Canadian dollars) 2007 2006
ASSETS
Current assets:
Cash and cash equivalents $11,461,803 $11,018,800
Restricted cash 685,308 1,256,354
Short-term investments 60,446 7,400,000
Accounts receivable 1,677,485 1,476,024
Grants and funding receivables 673,958 454,597
Inventories 3,086,177 3,510,508
Prepaid expenses 261,768 337,335
--------------------------
17,906,945 25,453,618
Property, plant and equipment 1,887,156 2,103,626
Other long-term assets 169,760 125,000
--------------------------
$19,963,861 $27,682,244
--------------------------
--------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 3,471,960 $ 4,413,717
Deferred revenue 3,086,527 1,946,781
Current portion of bank debt 564,306 351,398
Current portion of capital lease obligation 104,764 -
Derivatives 90,747 -
--------------------------
7,318,304 6,711,896
Long term liabilities:
Bank debt 490,205 532,852
Capital lease obligation 104,765 -
--------------------------
7,913,274 7,244,748
--------------------------
Shareholders' equity:
Share capital
Authorized
Unlimited common shares, voting, no par value
Unlimited preferred shares, issuable in series,
no par value
Common shares 109,359,654 109,020,202
Contributed surplus 6,541,639 6,462,772
Deficit (103,850,706) (95,045,478)
--------------------------
12,050,587 20,437,496
--------------------------
$19,963,861 $27,682,244
--------------------------
--------------------------
--------------------------------------------------------------------------
Statements of Operations, Comprehensive Loss and Deficit
--------------------------------------------------------
--------------------------------------------------------------------------
For the For the
Unaudited three months ended nine months ended
(expressed in June 30, June 30, June 30, June 30,
Canadian dollars) 2007 2006 2007 2006
Revenues $ 3,616,088 $ 1,193,380 $ 6,132,310 $ 4,861,497
Cost of goods
sold 2,381,958 714,014 5,972,116 3,823,872
---------------------------------------------------------
Gross Profit 1,234,130 479,366 160,194 1,037,625
---------------------------------------------------------
Operating
expenses
Research and
development
- net 1,240,820 1,236,313 3,684,520 3,762,538
General and
administration 1,324,820 775,809 3,151,230 2,475,989
Sales and
marketing 587,651 489,328 1,615,703 1,472,316
Amortization 209,647 187,360 641,459 951,218
---------------------------------------------------------
3,362,938 2,688,810 9,092,912 8,662,061
---------------------------------------------------------
Loss before
undernoted (2,128,808) (2,209,444) (8,932,718) (7,624,436)
---------------------------------------------------------
Other income
(expense)
Interest income 118,833 90,316 414,965 179,779
Other (228,884) (15,686) (262,628) (93,681)
---------------------------------------------------------
(110,051) 74,630 152,337 86,098
---------------------------------------------------------
Loss for the
period (2,238,859) (2,134,814) (8,780,381) (7,538,338)
Other
comprehensive
income - - - -
---------------------------------------------------------
Comprehensive loss
for
the period (2,238,859) (2,134,814) (8,780,381) (7,538,338)
Deficit
- Beginning
of period (101,611,847) (90,186,084) (95,045,478) (84,782,560)
Unrealized
foreign
exchange loss
on derivatives - - (24,847) -
---------------------------------------------------------
Deficit - End
of period $(103,850,706) $(92,320,898) $(103,850,706) $(92,320,898)
---------------------------------------------------------
Basic and
diluted loss
per share $ (0.04) $ (0.05) $ (0.17) $ (0.19)
Weighted
average
number
of common
shares
outstanding 52,519,392 42,498,492 52,451,434 39,091,486
--------------------------------------------------------------------------
Statements of Cash Flows
------------------------
--------------------------------------------------------------------------
For the For the
Unaudited three months ended nine months ended
(expressed in June 30, June 30, June 30, June 30,
Canadian dollars) 2007 2006 2007 2006
Cash flows from
operating
activities
Loss for the
period $ (2,238,859) $ (2,134,814) $ (8,780,381) $ (7,538,338)
Items not
involving cash
Amortization 209,647 187,360 641,459 951,218
Gain on sale of
property,
plant and
equipment (2,214) (350) (2,564) (8,424)
Unrealized
foreign
exchange
loss on
Derivatives 56,059 - 65,899 -
Non-cash
compensation
expense 104,986 127,101 350,434 373,591
Foreign currency
loss (gain) (18,605) - (18,605) 503
---------------------------------------------------------
(1,888,986) (1,820,703) (7,743,758) (6,221,450)
---------------------------------------------------------
Changes in non-cash
operating working
capital
Accounts, grants and
funding
Receivables (276,679) 976,076 (420,822) 463,330
Inventories 797,027 (584,676) 424,331 (197,881)
Prepaid expenses 127,697 (178,503) 30,806 (215,202)
Accounts payable and
accrued
liabilities 57,588 635,126 (627,112) 1,146,080
Deferred revenue (1,049,258) (550,017) 1,139,746 (146,128)
---------------------------------------------------------
(343,625) 298,006 546,949 1,050,199
---------------------------------------------------------
(2,232,611) (1,522,697) (7,196,809) (5,171,251)
---------------------------------------------------------
Cash flows from
investing
activities
Decrease
(increase)
in short-term
investments 4,939,554 (7,400,000) 7,339,554 (7,400,000)
Purchase of
property,
plant and
equipment (48,539) (383,773) (414,806) (841,442)
Government grants
and funding
related to
property, plant
and equipment 5,888 29,969 21,751 86,621
Proceeds on sale or
property, plant
and equipment 11,697 350 12,048 3,850
Decrease (increase)
in restricted
cash 678,639 - 571,046 (1,112,731)
---------------------------------------------------------
5,587,239 (7,753,454) 7,529,593 (9,263,702)
---------------------------------------------------------
Cash flows from
financing
activities
Issuance of
common shares - 20,000,250 - 20,000,250
Share issue
costs - (1,497,328) - (1,497,328)
Issuance of
common shares
on exercise of
stock options 9,097 5,064 67,885 84,486
Issuance of bank
debt 214,254 153,446 462,759 153,446
Repayment of bank
debt (112,749) (58,472) (292,495) (130,752)
Repayment of
obligations
under capital
lease (127,930) (110,860) (127,930) (110,860)
---------------------------------------------------------
(17,328) 18,492,100 110,219 18,499,242
---------------------------------------------------------
Increase in cash
and equivalents 3,337,300 9,215,949 443,003 4,064,289
Cash and
equivalents
- Beginning of
period 8,124,503 5,262,559 11,018,800 10,414,219
---------------------------------------------------------
Cash and
equivalents
- End of
period $ 11,461,803 $ 14,478,508 $ 11,461,803 $ 14,478,508
--------------------------------------------------------------------------
/T/
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
Certain statements in this press release may constitute "forward-looking" statements which involve known and
unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of
the Company, or industry results, to be materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. When used in this press release, such statements use such
words as "anticipate", "believe", "plan", "estimate", "expect", "intend", "may", "will" and other similar
terminology. These statements reflect current expectations regarding future events and operating performance and
speak only as of the date of this press release. Forward-looking statements involve significant risks and
uncertainties, should not be read as guarantees of future performance or results, and will not necessarily be
accurate indications of whether or not such results will be achieved. A number of factors could cause actual
results to differ materially from the results discussed in the forward-looking statements.
-30-
FOR FURTHER INFORMATION PLEASE CONTACT:
QuestAir Technologies Inc.
Sherry Tryssenaar
Chief Financial Officer
(604) 454-1134
(604) 454-1137 (FAX)
Email: tryssenaar@questairinc.com
Website: www.questairinc.com
OR
Buchanan Communications
Charles Ryland
UK Media Contact
+44 (0) 20 7466 5000
OR
Buchanan Communications
Ben Willey
UK Media Contact
+44 (0) 20 7466 5000
OR
Karyo Edelman
Stephen Burega
Canadian Media Contact
(604) 623-3007
OR
Canaccord Adams
Mark Ashurst
+44 207 050 6500
OR
Canaccord Adams
Erin Needra
+44 207 050 6500
-0-
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