CALGARY, April 25 /CNW/ - Alternative Fuel Systems (2004) Inc.
("AFS (2004)" or the "Company") (TSX Venture: AFX) announced today the
Company's financial results for the three and six-month initial operating
periods ended December 31, 2004. AFS (2004) commenced operations effective
June 30, 2004 as a result of the completion of a corporate restructuring on
that date by predecessor company, Alternative Fuel Systems Inc. ("AFS"). As
part of that restructuring, AFS sold substantially all of its natural gas
equipment business assets and liabilities to AFS (2004). On August 4, 2004,
AFS (2004) was listed for trading on the Canadian TSX Venture Exchange. Also,
on August 4th, AFS (which was re-named AFS Energy Inc. as part of the
restructuring) commenced trading on the NEX Board of the TSX Venture Exchange
under the symbol "AFE.H".
For the quarter ended December 31, 2004, AFS (2004) recognized revenue of
$513,000 on sales to clients in Europe, Iran, China, India, Mexico and the
U.S. Revenue for the six-month period ended December 31, 2004 (since
commencement of operations) was $1.05 million.
An accounting loss of $225,000 ($0.03 per share) was recognized during
the fourth quarter resulting in a loss for the six-month period ended December
31 of $279,000 ($0.04 per share). The losses incurred for the six-month period
were partly impacted by start-up costs such as the Company's public listing
(approximately $20,000) and higher than normal audit and annual meeting
expense accruals for the period recognized as a result of the short six-month
operating period (also approximately $20,000). The operating results since
June 30 were further impacted by foreign exchange losses of $23,000 from
devaluation of the Company's U.S. dollar denominated receivables.
As at December 31, 2004, AFS (2004) had a total of 6,865,080 common
shares outstanding and 10,184,927 shares on a fully diluted basis. The fully
diluted figure reflects 2,954,847 settlement warrants that were issued as part
of the restructuring of the predecessor company plus 365,000 stock options.
The settlement warrants have an exercise price of $0.105 and 360,000 of the
stock options have an exercise price of $0.10.
Management's Discussion and Analysis ("MD&A") for the three and six-month
periods ended December 31, 2004
Revenue
Sales for the three and six month periods ended December 31, 2004 were
comprised of the following (amounts in thousands of Canadian dollars):
<<
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Three months Six months
ended ended
Dec. 31, 2004 Dec. 31, 2004
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Engine management systems $135 $209
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Pressure regulators 210 339
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Parts and components 148 226
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Engineering services 20 276
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Total $513 $1,050
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Sales of engine management systems during the fourth quarter were
comprised of a shipment of controller packages to an Iranian client and two
shipments to Mexican client, Ecomex. The controller packages were sent to Iran
Heavy Diesel Engine Manufacturing Company ("DESA") as part of a contract with
DESA which covers the design and supply of fueling systems that will allow
4,300 horsepower diesel electrical generators to run on a mixture of diesel
fuel and natural gas. As previously announced, the total contract value is for
USD $547,000, which has been secured by two letters of credit issued by this
customer. As at April 21, 2005, a total of USD $448,000 has been billed on
this contract by AFS (2004) and its predecessor, and 92% of this amount has
been collected.
Systems shipped to Ecomex during the fourth quarter were for their
microbus natural gas conversion program as well as initial systems for their
proposed midi-bus conversion program. Retrofitting of microbuses has
significantly declined over historical levels as Ecomex transitions into
providing natural gas systems for new vehicles.
Sales of the Company's natural gas "Falcon" pressure regulator for the
three-month period ended December 31 amounted to $210,000, and were
substantially all to a European automotive distributor. A significant end
customer of this product is a European OEM manufacturer of taxis who has been
using this regulator in their new vehicles.
Parts and component sales during the fourth quarter of $148,000 related
primarily to shipments of the "Raven" ignition module and the newly developed
natural gas injector. Raven sales were to clients in India and to an
automotive distributor in the U.S. The majority of natural gas injector sales
(with associated components) were to a new client in China. AFS (2004) also
shipped an additional order to this Chinese client during the first quarter of
2005.
Engineering revenue for the fourth quarter of 2004 of $20,000 was from
design work on a stationary power engine controller for a U.S. client. Six-
month engineering revenue of $276,000 included $256,000 of billings to Iranian
client, DESA under the contract outlined above.
We have been emphasizing our "Mechatronic" engineering expertise, where
we can use our skills in mechanical design in conjunction with expertise in
electronics and software to undertake complex projects. With this capability,
we have been successful in getting customers to fund a variety of development
activities that might lead to future business. A good example is a go-kart
conversion project that the Company completed in the first quarter of 2005. By
converting the kart to natural gas operation, our U.S. based customer hopes to
be able to demonstrate significant savings in energy costs for air handling at
indoor go-kart tracks compared to the massive amounts of air that must be
circulated to remove pollutants produced by conventional gasoline powered
karts.
Gross Margins
Average gross margins realized in the fourth quarter were $185,000 or
36%, in line with historical margin percentages for the business which have
typically been in the range of 35% to 40%. The six-month period margin of 51%
(or $536,000) reflected a sales mix which contained a significant amount of
high-margin engineering revenue.
Operating and administrative expenses
Operating and administrative expenses for the three and six-month periods
ended December 31, 2004 were comprised of the following (amounts in thousands
of Canadian dollars):
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Three months Six months
ended ended
Dec. 31/04 Dec. 31/04
------------ ------------
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Engineering & product development $160 $300
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Administrative & other 170 332
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Sales & marketing 36 77
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Total $366 $709
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Employee wages and benefits accounted for 60% of the $366,000 in total
operating and administrative expenses recognized in the fourth quarter.
Additional significant expense categories in the fourth quarter were as
follows: 11% (or $42,000) was attributed to year-end audit and annual meeting
expense accruals, 6% ($23,000) for product development costs related primarily
to work on the Company's new natural gas injector and the DESA project, 4%
(or $14,000) attributed to foreign exchange losses reflecting the devaluation
of U.S. dollar denominated receivables, and 4% ($14,000) for facility costs.
The expense accruals for the year-end audit and annual meeting are normally
spread across four quarters. However due to the commencement of operations mid
way through 2004, almost the entire amount of these accruals was booked in the
fourth quarter.
AFS (2004) currently has 11 full time employees, with consultants,
distributors and agents in Canada, Europe, India, Iran and the U.S. The
Company operates from a 5,800 square foot facility located in Calgary.
Net loss
AFS (2004) reported a net loss for the three months ended December 31,
2004 of $225,000 ($0.03 per share) bringing the net loss for the six-month
period ended December 31, 2004 to $279,000 ($0.04 per share).
Liquidity, Capital Resources and Business Risk
At December 31, 2004, the Company had a limited amount of available
capital as reflected by the year-end cash and short-term investments balance
of $285,000, plus liquid working capital (ie accounts receivable net of
accounts payable and accrued liabilities) of an additional $5,000. However, 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) is better
capitalized to pursue potential business opportunities and increase its
sustainability period. The Company's long-term viability still depends on its
ability to generate cash from operating activities and/or raising additional
funds in the equity markets.
Critical Accounting Estimates
The Company's December 31, 2004 period end financial statements contain
the following significant accounting estimates made by management: valuation
of the assets and liabilities purchased from AFS at June 30, 2004, ongoing
valuation of inventory and assessment of its net realizable value,
determination of the liability related to product warranty costs,
recoverability of the carrying values of property, plant and equipment and
intangible assets and the valuation of settlement warrants issued to the
former employees of AFS. Actual results could vary materially from these
estimates.
Financial Statements
Below are the unaudited interim financial statements for the three and
six-month periods ended December 31, 2004. The audited December 31, 2004
financial statements are scheduled to be filed on SEDAR (ie www.sedar.com) on
or before April 30, 2005.
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ALTERNATIVE FUEL SYSTEMS (2004) INC.
Balance sheet
(unaudited)
(expressed in Canadian dollars)
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As at
December 31,
2004
$
Assets
Current assets
Cash and short-term investments 284,636
Cash held in trust 50,000
Accounts receivable 266,388
Due from AFS Energy Inc. 36,711
Prepaid expenses and deposits 61,293
Inventory 566,003
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1,265,031
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Property, plant and equipment 250,175
Intangible assets 227,180
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1,742,386
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Liabilities
Current liabilities
Accounts payable and accrued liabilities 261,678
Advances from customers 97,368
Provision for royalty commitment 27,000
Deferred revenue 17,334
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403,380
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Shareholders' Equity
Capital stock 1,427,523
Settlement warrants 171,000
Contributed surplus 19,548
Deficit (279,065)
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1,339,006
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1,742,386
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ALTERNATIVE FUEL SYSTEMS (2004) INC.
Statements of Operations and Deficit
(Unaudited)
(expressed in Canadian dollars)
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Three months Six months
ended ended
Dec. 31, 2004 Dec. 31, 2004
$ $
Product revenue 492,510 773,538
Engineering revenue 20,313 276,146
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512,823 1,049,684
Cost of revenue 327,705 513,033
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Gross Margin 185,118 536,651
Expenses
Operating and administration
Engineering and product development 160,639 300,360
Administrative and other 169,820 331,962
Sales and marketing 36,313 77,284
Repayment of research funding 3,846 7,872
Depreciation and amortization 33,916 65,406
Provision for royalty commitment - 27,000
Stock option compensation 5,832 5,832
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410,366 815,716
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Loss for the period (225,248) (279,065)
Deficit - Beginning of period (53,817) -
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Deficit - End of period (279,065) (279,065)
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Basic and diluted loss per common share (0.03) (0.04)
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ALTERNATIVE FUEL SYSTEMS (2004) INC.
Statements of Cash Flow
(Unaudited)
(expressed in Canadian dollars)
-------------------------------------------------------------------------
Three months Six months
ended ended
Dec. 31, 2004 Dec. 31, 2004
$ $
Cash provided by (used in)
Operating activities
Loss for the period (225,248) (279,065)
Items not involving cash
Depreciation and amortization 33,916 65,406
Provision for royalty commitment - 27,000
Stock option compensation 5,832 5,832
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Cash flow from operations (185,500) (180,827)
Change in non-cash working capital items 212,969 213,414
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27,469 32,587
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Investing activities
Proceeds on disposal of vehicle and equipment - 154,400
Due from AFS Energy Inc. (9,585) 97,649
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(9,585) 252,049
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Increase in cash & short-term investments 17,884 284,636
Cash & short-term investments - beginning
of period 266,752 -
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Cash & short-term investments - end of period 284,636 284,636
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ALTERNATIVE FUEL SYSTEMS (2004) INC.
Supplemental Schedule to Statements of Cash Flow
(Unaudited)
(expressed in Canadian dollars)
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Three months Six months
ended ended
Dec. 31, 2004 Dec. 31, 2004
$ $
Schedule of non-cash investing and
financing activities
Purchase of assets and liabilities from
AFS(x) - (1,441,229)
Shares issued in consideration for purchase
of assets and liabilities from AFS
(6,931,040 common shares) - 1,441,229
Issue of settlement warrants to extinguish
severance liability transferred from AFS - 171,000
Payment of severance liability transferred
from AFS - (171,000)
Cancellation of shares by two shareholders - (13,716)
Contributed surplus recognized on share
cancellation - 13,716
(x) Summary of assets and liabilities purchased
from AFS:
Cash held in trust 50,000
Accounts receivable 329,948
Amounts due from AFS 134,360
Prepaid expenses and deposits 73,384
Inventory 650,019
Property, plant and equipment 420,129
Intangible assets 277,032
Accounts payable and accrued liabilities (280,268)
Severance liability (171,000)
Customer advances (36,985)
Contract holdbacks (5,390)
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1,441,229
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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. 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 AFS' business, 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
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