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CALGARY, May 17 /CNW/ - Alternative Fuel Systems (2004) Inc. ("AFS (2004)" or the "Company") (TSX Venture: AFX) announced today the Company's financial and operating results for the first quarter ended March 31, 2007.
For the three-month period ended March 31, 2007, the Company recognized revenue of $414,710 from sales to clients primarily in Europe, Asia and the US. In the first three months of 2006, revenue was $651,851. AFS (2004) recorded a net loss of $(125,561) during the quarter, compared to net income of $14,257 in the first quarter of 2006. President and CEO Jim Perry stated, "Slow sales of natural gas pressure regulators into Europe resulted in a significant decline in revenue for the first quarter. Our customer resumed production of their CNG vehicles mid-April, but at a reduced rate for the present. If and when production might increase is not yet clear, but it is encouraging that shipments to them have resumed."
The Company also announced that Joyce Berg, Chief Financial Officer, has decided to accept a position with another firm in Calgary. Mr. Perry said that, "We really appreciate the work that Joyce has done during her time here at AFS, and we wish her well in her new job." The Company has added a new Manager of Administration, and has arranged for interim financial reporting assistance to ensure that proper accounting and information flow to shareholders can continue going forward.
Management's Discussion and Analysis ("MD&A")
Below is Management's discussion and analysis of financial results for the three-month periods ended March 31, 2007 and March 31, 2006.
Sales Revenue
Sales for the first quarter were comprised of the following:
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Three Months Three Months
Ended Ended
March 31, March 31,
2007 2006
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Pressure regulators $ 253,789 $ 386,306
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Ignition systems and other parts 82,059 194,739
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Engine management systems 68,831 36,644
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Engineering revenue 10,031 33,162
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Total $ 414,710 $ 650,851
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Gross margins
Gross margins realized in the first quarter were $167,221 or 41% compared to 50% for the same quarter in 2006. This percentage is lower in 2007 as previous inventories of zero cost items have been used up and new inventory is now being purchased at market prices.
Operating and administrative expenses
Operating and administrative expenses for the three-month periods ended March 31, 2007 and March 31, 2006 were comprised of the following:
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Three months Three months
ended ended
March 31, March 31,
2007 2006
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Engineering & product development $ 134,826 $ 150,550
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Administrative & other 109,258 102,046
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Sales & marketing 44,920 43,981
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Total $ 289,004 $ 296,577
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Employee wages and benefits accounted for 74% or $214,889 (72% of the $296,577 - 2006) in total operating and administrative expenses recognized during the first quarter of 2007. Generally all departments' expenses are higher overall compared to the same quarter in 2006 due to salary and wage increases incurred in order to remain competitive in the Calgary market. The engineering and product development expenses dropped due to a vacant position.
The Company currently has 11 full time employees, with consultants, distributors and agents in Europe, India, Iran and the U.S.
Net Loss
AFS reported a net loss for the quarter ended March 31, 2007 of $125,561 ($0.01 per share) on a basic and diluted basis. There was a profit of $14,257 in the comparable quarter in 2006 ($0.01 per share).
Prepaid expenses and deposits
Prepaid expenses are increased to $66,927 as at March 31, 2007 compared to the December 31, 2006 balance of $32,177. The increase is due to the prepaid of the insurance premiums for the 2007 fiscal year.
Accounts payable and accrued liabilities
The March 31, 2007 balance for accounts payables decreased to $170,607 from the $205,095 balance at December 31, 2006. The decrease is due to the annual audit invoicing drawing down the accrual balance.
Advances from customers
Advances from customers has decreased to $80,634 at March 31, 2007 from a balance of $108,328 at December 31, 2006. The decrease is due to deposits being applied to shipments made in the first quarter. In order to mitigate the risk inherent in providing customized engineering and product development work, the Company generally requires that all new large orders be guaranteed by a deposit before work commences.
Contractual obligations
AFS (2004) had the following contractual obligation at March 31, 2007:
AFS (2004) leases 5,800 square feet of warehouse, shop and office space, which currently house all of the company's operations. A two-year lease was entered into effective July 1, 2006 with monthly payments of $4,688 to June 2008.
Contingent liabilities
During the first quarter ended March 31, 2007, there were no material changes in the contingent liabilities as disclosed in the audited December 31, 2006 financial statements.
Liquidity and cash flow from operations
On April 15, 2005, the Company closed a series of equity financings (as announced in the press release on April 18, 2005) which raised gross proceeds of $1.5 million. As a result of these financings, AFS (2004) remains well capitalized to pursue potential business opportunities and increase its sustainability period. During the first quarter ended March 31, 2007 there was a total decrease in cash of $206,906 from the December 31, 2006 balance. $6,054 was invested in capital equipment. A net loss of $125,562, the result of slow sales in the first quarter accounted for a large portion of the decrease as well. The balance of the cash decrease was due the decrease in accounts payable and advances from customers.
Critical accounting estimates
The Company's March 31, 2007 period end financial statements contain significant accounting estimates made by management, including ongoing valuation of inventory and assessment of its net realizable value, determination of the liability related to product warranty costs, and recoverability of the carrying values of property, plant and equipment and intangible assets. There is no guarantee that such estimates are accurate.
Disclosure Controls and Procedures
The Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the Company's internal control over financial reporting as of March 31, 2007, pursuant to the requirements of Multilateral Instrument 52-109 of the Canadian Securities Administrators.
Internal control over financial reporting
There were no changes in the Company's internal controls over financial reporting that occurred during the three months ended March 31, 2007. A full discussion of the internal controls over financial reporting is included in the Company's MD&A for the year ended December 31, 2006.
Financial Instruments
On January 1, 2007, the Company adopted the new CICA Handbook Sections 3855 - Financial Instruments - Recognition and Measurement, 1530 - Comprehensive Income, and 3865 - Hedges. The financial instruments standard establishes the recognition and measurement criteria of financial assets, financial liabilities and derivatives. All financial instruments are required to be measured at fair value on initial recognition of the instrument, except for certain related party transactions. Measurement in subsequent periods depends on whether the financial instrument has been classified as held-for-trading, available-for-sale, held to maturity, loans and receivables, or other financial liabilities as defined by the standard. Financial assets and financial liabilities held-for-trading are measured at fair value with changes in those fair values recognized in net earnings. Financial assets available-for-sale is measured at fair value, with changes in those fair values recognized in other comprehensive income. The method used by the Company in determining the fair value of financial instruments are unchanged as a result of implementing the new standard.
The Company has no financial instruments or activities that give rise to other comprehensive income. The Company's cash and cash equivalents are designated as held-for-trading and are measured at carrying value, which approximates fair value due to the short-term nature of these instruments. Accounts receivable and accounts payable and accrued liabilities are measured at cost.
Business Risks
Key Business Risks and Uncertainties
Small Customer Base - AFS has a small number of customers, some of which are major contributors to the Company's revenue stream. If one of these major customers ceases to use AFS products, a significant impact on sales volume would occur.
Foreign Exchange Rate Risk - Almost all of Alternative Fuel Systems invoicing to customers is due and payable in US dollars. AFS is exposed to USD to CDN dollar exchange rate risk. There is potential for exchange loss and gains affecting net income due to fluctuations in foreign currency valuations.
Major Competitors - AFS has a number of competitors that are much larger in size and which have considerably more resources than the Company. Although AFS has been successful in gaining business through quality products and customer service, other players in the market may develop competing technologies.
Fuel Pricing and Infrastructure - growth in the Company's primary markets is dependent on a number of factors, including having a favorable price differential between conventional fuels and natural gas, and having sufficient fueling stations to make natural gas vehicles attractive to customers. There can be no assurance that either or both of these factors will continue to be present in any particular market.
Dependence Upon Key Personnel - AFS depends on its senior management and its technical staff. If the Company is unable to attract and retain key personnel, it may have a material adverse effect on the business.
Financial Statements
Below are the unaudited interim financial statements for the three month periods ended March 31, 2007 and 2006. These interim financial statements have not been reviewed by the Company's external auditor in accordance with section 7050, "Auditor Review of Interim Financial Statements" of the Canadian Institute of Chartered Accountants Handbook.
ALTERNATIVE FUEL SYSTEMS (2004) INC.
Balance Sheets
(Unaudited)
(expressed in Canadian dollars)
March 31, December 31,
2007 2006
$ $
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Assets
Current assets
Cash and short-term investments 1,258,332 1,465,238
Accounts receivable 293,126 270,366
Prepaid expenses and deposits 66,927 32,177
Inventory 641,697 664,611
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2,260,082 2,432,392
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Property, plant and equipment 203,082 209,015
Intangible assets 50,492 55,305
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2,513,656 2,696,712
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Liabilities
Current liabilities
Accounts payable and accrued liabilities 170,607 205,095
Advances from customers 80,634 108,328
Deferred revenue 18,108 18,108
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269,349 331,531
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Shareholders' Equity
Capital stock 2,442,621 2,442,621
Warrants 195,450 195,450
Settlement warrants 171,000 171,000
Contributed surplus 134,369 129,682
Deficit (699,133) (573,572)
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2,244,307 2,365,181
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2,513,656 2,696,712
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ALTERNATIVE FUEL SYSTEMS (2004) INC.
Statements of Income (Loss), Comprehensive Income (Loss) and Deficit
(Unaudited)
(expressed in Canadian dollars)
For the three months
ended March 31
2007 2006
$ $
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Product revenue 404,679 614,207
Cost of revenue 237,458 304,471
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Gross Margin 167,221 309,736
Engineering revenue 10,031 36,644
Interest and Other Income 10,788 11,718
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188,040 358,098
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Expenses
Operating and administration
Engineering and product development 134,826 150,550
Administrative and other 109,258 102,046
Sales and marketing 44,920 43,981
Repayment of research funding 3,110 4,865
Depreciation of property, plant & equipment 11,821 13,582
Amortization of intangible assets 4,979 27,439
Stock option compensation 4,687 1,378
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313,601 343,841
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Income (Loss) and Comprehensive Income (Loss) (125,561) 14,257
Deficit - Beginning of period (573,572) (473,179)
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Deficit - End of period (699,133) (458,922)
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Basic and diluted income (loss)
per common share (0.01) 0.00
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ALTERNATIVE FUEL SYSTEMS (2004) INC.
Statements of Cash Flows
(Unaudited)
(expressed in Canadian dollars)
For the three months
ended March 31
2007 2006
$ $
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Cash provided by (used in)
Operating activities
Income (loss) for the period (125,561) 14,257
Items not involving cash
Depreciation and amortization 16,800 41,021
Stock option compensation 4,687 1,378
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(104,074) 56,656
Change in non-cash working capital items (96,778) (310,693)
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Cash flow from operations (200,852) (254,037)
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Investing activities
Purchase of equipment and intangible assets (6,054) (14,411)
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Cash flow from investing (6,054) (14,411)
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Decrease in cash & short-term investments (206,906) (268,448)
Cash & short-term investments
- beginning of period 1,465,238 1,655,287
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Cash & short-term investments - end of period 1,258,332 1,386,839
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AFS (2004) is a Canadian company providing innovative and cost-effective solutions to the growing global problem of harmful exhaust emissions from internal combustion engines. AFS (2004) has commercialized electronic engine management systems enabling diesel and gasoline engines to operate on cleaner burning natural gas and other alternative fuels. The Company is headquartered in Calgary, Canada and trades on the TSX Venture Exchange under the trading symbol AFX.
Forward-looking statements - this news release may contain forward-looking statements about the business of AFS (2004) and marketing and product development plans based on the current expectations of management.
AFS (2004) cautions investors that any forward-looking statements are subject to various risks, uncertainties and other factors that could cause the Company's actual results to differ materially from those expressed in, or implied by forward looking statements. These risks, uncertainties and other factors include, without limitation, uncertainty related to the Company's ability to successfully implement its business strategy; the risk that product development projects may not be completed successfully or in a timely manner; the ability of the Company to successfully negotiate and execute definitive agreements with its customers; the development of competing technologies and the possibility of increased competition; fluctuating energy prices; uncertainties involving government policies and government regulations affecting the Company's business.
Visit our website at: www.afsglobal.com.