CALGARY, May 3 /CNW/ - Alternative Fuel Systems (2004) Inc. ("AFS (2004)"
or the "Company") (TSX Venture: AFX) is pleased to provide an update on its
operations and financial position. As announced previously, the Company
commenced operations effective June 30, 2004 as a result of the completion of
a corporate restructuring on that date by its predecessor, 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). Since commencement of operations, we have been working primarily in
the following regions:
Iran
Over the past ten months, and through the second and third quarters of
2005, the Company is continuing its work on a contract signed in the spring of
2004 with Iran Heavy Diesel Engine Manufacturing Company ("DESA"). This
contract 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. The project involves the installation of fuelling equipment for
four generators at a plant in Iran. As previously announced, the total
contract value is USD $547,000, which has been secured by two letters of
credit issued by this customer. To the end of April, 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.
The engineering and design portions of the contract are substantially
complete and a significant portion of the equipment has already been shipped
to DESA. A group of DESA engineers are currently making the necessary
modifications to the initial engine to be converted which will accommodate the
installation of AFS (2004)'s fueling equipment. It is anticipated that
installation of the equipment and start-up testing of this initial engine will
be completed later this year.
Paul Newman, the Company's Vice President, Engineering, was recently in
Iran visiting several of DESA's plant sites and sites of other prospective
customers as part of a project review. Additional visits by AFS (2004) staff
are planned during the initial start-up and commissioning phase for this
project. The Company is currently in discussions with DESA on potential
development work for other engine platforms.
Natural gas is an attractive fuel source in Iran as there are significant
existing domestic natural gas reserves with a distribution infrastructure
already in existence. The use of natural gas fueling serves to reduce Iran's
dependence on gasoline and diesel fuels (which the country is forced to import
as the in-country demand for these fuels exceeds available refined products).
The larger, and more polluted Iranian cities also benefit from the use of
cleaner burning natural gas.
Europe
AFS (2004) utilizes a European distributor based in Denmark to handle the
logistics of most sales to European customers. At the moment, our biggest
selling product in Europe is the "Falcon" natural gas pressure regulator. A
significant end customer of this product is a European Original Equipment
Manufacturer ("OEM") of taxis who has been using this regulator in their new
vehicles. In addition, regulators are also being sold for bus and truck
applications. Regulator sales amounted to $339,000 for the six months ended
December 31, 2004 as announced in the press release of April 25, 2005.
China
We have received several orders for our newly developed natural gas
injector and associated components from a Chinese automotive OEM. In November
2004, we delivered an initial order of injectors and components to this client
valued at USD $33,000. During February and March of 2005, two separate supply
contracts were signed with this customer which involved the delivery of
injectors, parts, training and services for USD $149,000. The portion of these
contracts related to injectors and parts (USD $134,000) is backed by two
letters of credit, while the portion related to training and services (USD
$15,000) is at the discretion of the client. Product deliveries under these
contracts from January to April 2005 amounted to USD $24,000, with the
remaining shipments scheduled over the rest of 2005.
The Chinese government is working to improve the quality of air in some
of their major cities and reduce the country's dependence on imported oil in
the long-term. With the world's eyes on China for the 2008 summer Olympics,
the government is investing in alternative fuel buses to demonstrate
environmental progressiveness. Based on industry sources, The Beijing
Transport Authority currently has 2,000 buses that run on compressed natural
gas ("CNG") and plans on having more of its 118,000 bus fleet running on CNG
by the 2008 Olympics. Additionally, the City of Shanghai is evaluating the use
of CNG buses.
India and Southeast Asia
AFS (2004) has seen a significant increase in orders from customers in
India and Southeast Asia for our "Raven" natural gas ignition system. The
Raven is a computer controlled, distributorless ignition system designed for
diesel engines which have been converted to natural gas operation. Sales of
Ravens and components to customers in India and Southeast Asia from January to
April 2005 amounted to USD $115,000. Additional Raven orders are scheduled to
be delivered prior to the end of the second quarter.
The government of India has implemented natural gas vehicle initiatives
in several regions including Delhi, where vehicle owners that continue to use
older diesel engines face stiff penalties. We are also seeing markets for our
products developing in other parts of Southeast Asia due to the significant
price differential from using natural gas combined with the required
reductions in engine emissions.
U.S.A.
We have been involved with several different projects in the U.S. and we
have also been working with an automotive distributor in California who has
been a significant new customer. This distributor has placed orders totaling
USD $0.5 million with us since August 2004 for a variety of products including
our Raven ignition system and custom engine controllers. Per discussions with
this distributor, these Ravens and custom controllers are destined primarily
for Southeast Asia markets.
As noted in our press release of April 15, we completed a go-kart natural
gas conversion project during 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. The
converted go-kart was exhibited at the Society of Automotive Engineers ("SAE")
International Congress held during April in Detroit.
We continue to work with a customer in California on a project involving
the conversion of waste disposal trucks to natural gas operation. As part of
the project, a prototype version of our "lean-burn" engine management system
was fitted on a re-engineered Cummins L-10 diesel engine for use in a test
vehicle. The first converted waste disposal truck has been in commercial
operation for about two and a half years in California. The lean-burn system
refers to a combustion process whereby volumes of air are drawn into the
internal combustion chamber in excess of what is typically required to
chemically burn the fuel. Operating with excess air provides improved
efficiency and exhaust emissions. As well, the noticeable reduction in engine
noise has been cited as a big plus by the customer. Although we have sold only
a few conversion systems to this client to date, this is a high visibility
project which showcases our engineering expertise.
Mexico
We have been selling engine management systems and components to Mexican
client, Ecomex since 1998. To date, Ecomex has converted approximately 1,850
microbuses to natural gas operation using our systems. However, as noted in
previous press releases, they are transitioning their business into
conversions of new vehicles and intend to phase out the retrofitting of
microbuses. As a result, sales to Ecomex have declined significantly in the
past six months compared to historical levels.
The two new vehicle types that Ecomex is hoping to convert on a
commercial basis are the Chevy Monza taxi and the "midi" bus. We have
developed an engine control system for the Monza which is relatively
inexpensive and has few components, making it easy to install. There are
currently three pilot project Monzas in service.
Engineering Capability
We have been emphasizing our "Mechatronic" engineering expertise to
current and potential new clients, 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 (like the go-kart conversion project). We continue to work on
new development projects, including work for new customers in Germany, China
and the U.S.
Gaseous Fuel Injector Opportunities
Using the expertise that we gained when developing the automotive gaseous
fuel injector we are now selling to our Chinese client, we have created a new,
high capacity fuel injector for use on large stationary engines. This new
product has been the key element in our Iran efforts, as well as providing us
the opportunity to be considered for other potential large engine projects. In
addition, our demonstrated skills in injector design have led to various other
potential projects involving customized products for niche markets.
Financial Summary
As reported in our press release of April 25, 2005 the Company recorded
revenue of $1.05 million for its first six months of operations to
December 31, 2004. During the first quarter of 2005 we recognized revenue of
approximately $640,000, bringing our total revenue for the nine month period
from July 1, 2004 to March 31, 2005 to just under $1.7 million.
As a result of the completion of our equity financings which closed on
April 15, 2005, we raised gross proceeds of $1.5 million (net proceeds of
approximately $1.3 million). After factoring in the proceeds from this
financing, we exited the first quarter of 2005 with a cash position (net of
customer deposits) of approximately $1.5 million.
Capital structure
Subsequent to the recently completed equity financings, AFS (2004) had
16,865,080 shares outstanding. In addition to these shares, the Company has
the following options and share purchase warrants outstanding:
<<
-------------------------------------------------------------------------
Potential
proceeds
realized
Description of Number Exercise Expiry in case of
option/warrant outstanding Price Dates full exercise
-------------------------------------------------------------------------
Stock options 360,000 $0.10 Dec. 16, 2010 $36,000
-------------------------------------------------------------------------
Settlement warrants 2,954,847 $0.105 July 27, 2007 $310,259
-------------------------------------------------------------------------
Share purchase warrants 5,000,000 $0.20 - 80% on $1,000,000
Apr. 15/06 and
remainder on
Oct. 15/06
-------------------------------------------------------------------------
Agents units 1,500,000 $0.15 Oct. 15, 2006 $225,000
-------------------------------------------------------------------------
Agents warrants 750,000 $0.20 Oct. 15, 2006 $150,000
-------------------------------------------------------------------------
Total 10,564,847 $1,721,259
-------------------------------------------------------------------------
In addition to these options and warrants, the Company has 2,500 "Carry-
over" options that were inherited from predecessor company, Alternative Fuel
Systems Inc. which have exercise prices in excess of $30.00 with expiry dates
from 12 to 20 months.
The above securities are described in the notes to the Company's audited
December 31, 2004 financial statements (filed on SEDAR) and previous press
releases.
Outlook
Since commencement of our operations on June 30, 2004, we have been
encouraged by the number of orders we have received from new clients in China,
India, Southeast Asia and the U.S. With our product offering, engineering
expertise and network of consultants, distributors and agents we are well
positioned for future growth.
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. The Company designs, develops and sells engine
control systems and related components for a variety of applications including
the conversion of diesel and gasoline engines to cleaner burning natural gas.
AFS (2004) 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 (2004)'s 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.
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