CALGARY, Nov. 29 /CNW/ - Alternative Fuel Systems (2004) Inc. ("AFS or the Company") (TSX Venture: AFX) announced today financial and operating results for the third quarter ended September 30, 2007, including an update on projects in India. President and CEO Jim Perry stated that "Subsequent to the end of the third quarter, we announced receipt of more than $500,000 in orders for engine controllers from two large vehicle manufacturing companies in India. Since that time, we have made considerable progress in both hardware and software development. The first run of pre-production TATA ACE controllers should be ready to ship next week. Full production for both customers in India is scheduled to commence in early 2008. If these new vehicles are a success in the marketplace, they could represent a significant new business opportunity for AFS."
Mr. Perry added that "Production interruptions at our largest natural gas pressure regulator customer in Europe, to deal with problems not involving AFS, reduced revenue significantly during the third quarter. This customer is again building vehicles, although at a lower rate than was seen last year. Despite these challenges, we were still able to generate approximately $0.4 million in total revenue during the period. However, the reduced level of sales combined with factors such as foreign exchange losses due to the strength of the Canadian dollar resulted in a loss for the period."
For the three-month period ended September 30, 2007, the Company recognized revenue of $396,238 including engineering income and interest on cash balances. In the same period of the prior year, revenue of $762,114 was recorded. In the third quarter of 2007, a net loss of ($127,896) was incurred, compared to net income of $74,438 in the three months ended September 30, 2006.
Management's Discussion and Analysis ("MD&A")
Below is Management's discussion and analysis of financial results for the three and nine-month periods ended September 30, 2007 and September 30, 2006.
Operating Results
Sales Revenue
Sales for the third quarter were comprised of the following (amounts in thousands of Canadian dollars):
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Three Months Ended Nine Months Ended
September 30 September 30
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2007 2006 2007 2006
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Pressure regulators $ 216 $ 600 $ 873 $ 1,370
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Engine management systems 42 142 165 400
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Ignition systems and other parts 120 16 227 111
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Subtotal Product Sales $ 378 $ 758 $ 1,264 $ 1,881
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Engineering services 18 4 48 62
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Total $ 396 $ 762 $ 1,313 $ 1,943
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The decrease in sales revenue in the third quarter of 2007 versus the same period in 2006 was primarily due to a large European customer's interruptions in production of vehicles using AFS pressure regulators. The decrease in sales revenue during the first nine months of this year versus last year was primarily due to the same factor. In addition, in 2006, significant sales of engine control systems were made, primarily for use in Southeast Asia. The customer for the majority of these systems chose to order a large number of them at once, to achieve a better price point. Since most of the systems were delivered, the customer has been selling them to end users, but has not yet drawn down his inventory to the point that more units are required.
Gross margins
Gross margins realized in the third quarter was $138,632 (2006 - $368,256) or 36 % (2006 - 49%). A significant amount of pressure regulator parts inventory was purchased at a low cost from the predecessor company during the corporate restructuring that occurred in 2004. This low cost inventory has been gradually consumed in production, and as new inventory is purchased at today's cost and used, margins are lowered. In addition, fewer sales of higher margin engine management systems were recorded in the third quarter compared to the same period of 2006. Gross margins realized for the nine months ended September 30, 2007 was $497,411 (2006 - $905,400) or 39% (2006 - 48%). The margin percentage for the nine-month period was lower in 2007 primarily due to the same factors that affected the third quarter.
Operating and administrative expenses
Operating and administrative expenses for the three and nine month periods ended September 30, 2007 and September 30, 2006 were comprised of the following (amounts in thousands of Canadian dollars):
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Three months ended Nine months ended
September 30 September 30
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2007 2006 2007 2006
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Engineering & product development $ 128 $ 143 $ 399 $ 433
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Administrative & other 106 97 392 310
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Sales & marketing 44 42 132 126
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Total $ 278 $ 282 $ 923 $ 869
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Employee wages and benefits accounted for 69% of the $278,000 (2006 - 74% of the $282,000) in total operating and administrative expenses recognized during the third quarter of 2007. The decrease in Administrative and other costs in Q3 of 2007 was primarily due to a decrease in Engineering and product development of $15,000, offset by an increase in Administrative and other expenses of $9,000. For the nine months ended September 30, 2007, increased total operating and administrative expense over the same period in 2006 was primarily due to foreign exchange losses of more than $19,000 due to the rapid strengthening of the Canadian dollar during the period and increased professional fees of $48,000.
The Company currently has 11 full time employees, with consultants, distributors and agents in Europe, India, Iran and the U.S.
Net Loss and Cash Flow
AFS reported a net loss for the quarter ended September 30, 2007 of $(127,896) ($0.01 per share on a basic and diluted basis). The net income in the comparable quarter in 2006 was $74,438 ($0.00 per share). Added to this net loss was an overall decrease in working capital in the third quarter of 2007 of $(71,869) versus an increase in working capital of $44,288 in the same quarter of 2006. The decease in working capital in the third quarter was primarily due to a decrease in Accounts Payable of $93,000, an increase in Accounts Receivable of $25,000 and an increase in inventory of $15,000 during the quarter, offset by an increase in Advances from Customers of $32,000 and a decrease in Prepaid expenses of $29,000.
Cash outflow from operations for the third quarter of 2007 was $(187,021) versus a cash flow of $141,023 in the third quarter of 2006. This is due to the factors discussed above.
Accounts Receivable
Accounts receivable has decreased to $230,779 as at September 30, 2007 compared to the December 31, 2006 balance of $270,366. As previously discussed above, this decrease is primarily due to a production interruption at our largest customer in Europe, to deal with problems not involving AFS.
Prepaid Expenses
Prepaid expenses decreased to $20,238 as at September 30, 2007 compared to the December 31, 2006 balance of $32,177. The decrease is primarily due to a performance bond deposit, which has now been taken into income as the requirement of the contract has been fulfilled.
Inventory
Inventory has increased in the third quarter of 2007 to $720,527 compared to the December 31, 2006 balance of $664,611, a change of $55,916. During the third quarter, inventory buildup for pressure regulator production increased, as the Company's largest customer for this product line resumed production of natural gas fueled vehicles, albeit at a very low rate.
Accounts payable and accrued liabilities
The September 30, 2007 accounts payable balance increased to $214,437 from $205,095 at December 31, 2006. The increase of $9,342 was attributed to increased purchases of inventory for both pressure regulators and engine control modules.
Advances from customers
Advances from customers have decreased to $70,204 at September 30, 2007 from a balance of $108,328 at December 31, 2006. The decrease is due to customer deposits being applied to third quarter shipments. 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.
Capital Stock
During the third quarter ended September 30, 2007, there were no changes in the authorized or issued capital stock as disclosed in the audited December 31, 2006 financial statements.
Contractual obligations
AFS leases 5,800 square feet of warehouse, shop and office space, which currently houses all of the company's operations. A new two-year lease was entered into effective July 1, 2006, with monthly lease payments of $4,688 to September 30, 2008.
Contingent liabilities
During the third quarter ended September 30, 2007, there were no material changes in the contingent liabilities as disclosed in the audited December 31, 2006 financial statements.
Liquidity and Capital Resources
In April 2005 the Company closed a series of equity financings, which raised gross proceeds of $1.5 million. As a result of these financings, AFS remains well capitalized to pursue potential business opportunities and increase its sustainability period. Through September 30, 2007 there was a total decrease in cash of $412,461 from the December 31, 2006 balance. This is primarily due to the net loss from operations of $(413,376).
Critical accounting estimates
The Company's September 30, 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 has evaluated the effectiveness of the company's internal control over financial reporting as of September 30, 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 September 30, 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 methods 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, which due to the short-term nature of these items is estimated to equal their fair values.
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. Fluctuations in foreign currency valuations may result in exchange losses or gains that would affect net income.
Major Competitors - AFS has a number of competitors that are much larger in size and 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 September 30, 2007 and 2006 and for the nine month period ended September 30, 2007.
Notice of No Auditor review of Interim Financial Statements
Under National Instruments 51-102, Part 4, subsection 4.3(3) (a), if an auditor has not performed a review of the interim financial statements they must be accompanied by a notice indicating that the financial statements have not been reviewed by an auditor. The accompanying unaudited interim financial statements of the Company have been prepared by and are the responsibility of the management of the Company. The Company's independent auditor has not performed a review of these financial statements in accordance with the standards established by the Canadian institute of Chartered Accountants for a review of interim financial statements by an entity's auditor.
ALTERNATIVE FUEL SYSTEMS (2004) INC.
Balance Sheets
(Unaudited)
(expressed in Canadian dollars, except per share data)
As at As at
September 30, December 31,
2007 2006
$ $
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Assets
Current assets
Cash and short-term investments 1,052,777 1,465,238
Accounts receivable 230,779 270,366
Prepaid expenses and deposits 20,238 32,177
Inventory 720,527 664,611
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2,024,321 2,432,392
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Property, plant and equipment 192,137 209,015
Intangible assets 40,876 55,305
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2,257,334 2,696,712
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Liabilities
Current liabilities
Accounts payable and accrued liabilities 214,437 205,095
Advances from customers 70,204 108,328
Deferred revenue 15,415 18,108
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300,056 331,531
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Shareholders' Equity
Capital stock (note 2) 2,442,621 2,442,621
Warrants - 195,450
Settlement warrants - 171,000
Contributed surplus (note 2) 501,605 129,682
Deficit (986,948) (573,572)
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1,957,278 2,365,181
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2,257,334 2,696,712
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Commitments (note 4)
Contingencies (note 5)
See accompanying notes to the financial statements.
ALTERNATIVE FUEL SYSTEMS (2004) INC.
Statements of Operations (Loss), Comprehensive Income (Loss) and Deficit
(Unaudited)
(expressed in Canadian dollars, except per share data)
For the three months For the nine months
ended September 30 ended September 30
2007 2006 2007 2006
$ $ $ $
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Product revenue 378,417 757,557 1,264,394 1,881,232
Cost of revenue 239,785 389,301 766,983 975,832
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Gross margin 138,632 368,256 497,411 905,400
Engineering revenue 17,821 4,557 48,315 62,342
Interest and Other Income 9,932 11,330 32,344 36,285
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166,385 384,143 578,070 1,004,027
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Expenses
Operating and administration
Engineering and product
development 127,599 143,398 399,355 433,368
Administrative and other 106,073 96,701 392,193 310,355
Sales and marketing 43,900 41,593 132,071 125,773
Repayment of research funding 3,965 5,716 10,685 14,550
Depreciation of property,
plant & equipment 12,452 13,262 36,724 40,649
Amortization of intangible
assets 4,987 4,951 14,945 59,840
Stock-based compensation (4,695) 4,084 5,473 10,576
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294,281 309,705 991,446 995,111
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(Loss) Income and
Comprehensive (Loss) Income
for the period (127,896) 74,438 (413,376) 8,916
Deficit - Beginning of period (859,052) (538,701) (573,572) (473,179)
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Deficit - End of period (986,948) (464,263) (986,948) (464,263)
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Basic and diluted (loss)
earnings per common share (0.01) 0.00 (0.02) 0.00
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See accompanying notes to the financial statements.
ALTERNATIVE FUEL SYSTEMS (2004) INC.
Statements of Cash Flows
(Unaudited)
(expressed in Canadian dollars, except per share data)
For the three months For the nine months
ended September 30 ended September 30
2007 2006 2007 2006
$ $ $ $
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Cash provided by (used in)
Operating activities
(Loss) income for the period (127,896) 74,438 (413,376) 8,916
Items not involving cash:
Depreciation and
amortization 17,439 18,213 51,669 100,489
Stock-based compensation (4,695) 4,084 5,473 10,576
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(115,152) 96,735 (356,234) 119,981
Change in non-cash working
capital items (71,869) 44,288 (35,865) (239,046)
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Cash flow from operations (187,021) 141,023 (392,099) (119,065)
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Investing activities
Purchase of equipment and
intangible assets (350) (13,569) (20,362) (37,206)
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Financing activities
Proceeds from exercise of
warrants - - - 15,000
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(Decrease) increase in cash
& short-term investments (187,371) 127,454 (412,461) (141,271)
Cash & short-term
investments - beginning of
period 1,240,148 1,386,562 1,465,238 1,655,287
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Cash & short-term
investments - end of
period 1,052,777 1,514,016 1,052,777 1,514,016
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See accompanying notes to the financial statements.
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.
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