CALGARY, April 23 /CNW/ - Alternative Fuel Systems (2004) Inc. ("AFS" or the "Company") (TSX Venture: AFX) announced today that it achieved record revenue and profit for the year ended December 31, 2008. Total revenue for the year, including engineering and interest receipts, was $3,916,285, more than double the $1,839,974 recorded in 2007. Profit for 2008 was $494,316 compared to a loss of ($582,411) in the year ended December 31, 2007. AFS President and CEO Jim Perry said that "We are very pleased with the results for 2008. Dramatic increases in both of our business lines during the year not only resulted in record highs for revenue and profit, but also provided slightly more than $1/2 million in cash flow from operations."
In 2008, sales of natural gas pressure regulators were strong, especially in the last half of the year. That business line contributed about 65% of the Company's revenue in 2008. Significant growth was also recorded in the engine management and other electronic equipment business, where shipments to customers operating primarily in Southeast Asia increased as serial production of new vehicles using AFS products ramped up.
Mr. Perry added that "The global financial turmoil will definitely affect our pressure regulator sales going forward. We previously announced that the European manufacturer that purchased the bulk of our pressure regulators in 2008 has ceased production of the vehicle that used our products. In contrast, we are seeing considerable growth in our sales of engine management systems in Asia. The strong results in 2008 have resulted in AFS having a financial position with good cash reserves and no debt going into these difficult times".
Management's Discussion and Analysis ("MD&A")
Below is Management's discussion and analysis of financial results for the years ended December 31, 2008 and December 31, 2007.
Operating results: Sales revenue 2008 ------------------------------------------------------------------------- ($ thousand) Q1 Q2 Q3 Q4 Total ------------------------------------------------------------------------- Pressure regulators $462 $566 $735 $774 $2,537 Engine management systems 40 152 278 267 737 Ignition systems & other parts 73 97 116 122 408 ------------------------------------------------------------------------- Subtotal product sales $575 $815 $1,129 $1,163 $3,682 Engineering services 3 5 116 82 206 ------------------------------------------------------------------------- Total $578 $820 $1,245 $1,245 $3,888 ------------------------------------------------------------------------- Gross margin percentage 48% 44% 47% 38% 44% ------------------------------------------------------------------------- Sales revenue 2007 ------------------------------------------------------------------------- ($ thousand) Q1 Q2 Q3 Q4 Total ------------------------------------------------------------------------- Pressure regulators $254 $402 $216 $174 $1,046 Engine management systems 82 25 42 91 240 Ignition systems & other parts 69 54 120 153 396 ------------------------------------------------------------------------- Subtotal product sales $405 $481 $378 $418 $1,682 Engineering services 10 20 18 61 109 ------------------------------------------------------------------------- Total $415 $501 $396 $479 $1,791 ------------------------------------------------------------------------- Gross margin percentage 41% 40% 37% 15% 33% -------------------------------------------------------------------------
The 143% increase in pressure regulator sales in 2008 versus 2007 was primarily due to increased production in Europe of vehicles that use AFS products. Small increases in regulator sales were also seen for projects in the northwestern United States in the fall of 2008 when gasoline prices were at unusually high levels.
Sales of engine management systems in 2008 were slightly more than triple those recorded in 2007, as shipments to customers using these products in production vehicles in India and other southeastern Asian countries ramped up. In addition, a major customer based in the United States placed significant orders in 2008 for products also destined for sales in Southeast Asia.
Ignition systems and other parts sales remained steady year over year. Engineering revenue in 2008 was approximately double the amount recorded in 2007 due to development projects for engine management systems being billed during 2008.
Overall, gross margins for the year ended December 31, 2008 were improved by 30% as a result of higher volumes of product shipments, combined with changes in product mix toward items with higher margin. The lower margin in the fourth quarter of 2008 is primarily due to adjustment made to reconcile physical to book inventory. The low margin in the fourth quarter of 2007 was primarily due to the write off of obsolete inventory.
Historical summary financial information
2008
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($ thousand, except per
share data) Q1 Q2 Q3 Q4 Total
-------------------------------------------------------------------------
Gross revenue 584 828 1,251 1,253 3,916
Net (loss) income (20) 37 277 200 494
Net (loss) income per
share (0.00) 0.00 0.02 0.01 0.03
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2007
-------------------------------------------------------------------------
($ thousand, except per
share data) Q1 Q2 Q3 Q4 Total
-------------------------------------------------------------------------
Gross revenue 425 513 378 523 1,839
Net (loss) income (126) (160) (128) (168) (582)
Net (loss) income per
share (0.01) (0.01) (0.01) (0.01) (0.03)
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Quarterly variations in gross revenue are primarily the result of
fluctuations in sales of natural gas pressure regulators. In both Q1 and Q3 of
2007, the largest customer for natural gas pressure regulators suspended
production of vehicles due to issues unrelated to AFS. In 2008, sales of
natural gas pressure regulators increased each quarter as this same customer
ramped up production. The variance between 2007 and 2008 revenues was again
primarily driven by increased sales of pressure regulators, combined with the
increase in sales of engine management systems.
Operating and administrative expenses
Operating and administrative expenses for the years ended December 31,
2007 and December 31, 2006 were comprised of the following:
2008
-------------------------------------------------------------------------
($ thousand, except per
% change) Q1 Q2 Q3 Q4 Total
-------------------------------------------------------------------------
Engineering & product
development $142 $139 $138 $134 $553
Administrative & other 119 121 114 111 465
Sales and marketing 48 45 49 47 189
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Total $309 $305 $301 $292 $1,207
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2007
-------------------------------------------------------------------------
($ thousand, except per
% change) Q1 Q2 Q3 Q4 Total
-------------------------------------------------------------------------
Engineering & product
development $135 $137 $128 $125 $525
Administrative & other 107 140 105 107 459
Sales and marketing 45 43 44 45 177
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Total $287 $320 $277 $277 $1,161
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The $28,000 increase in engineering and product development expenses in 2008 over the same period in 2007 was primarily due to increased salaries and benefits expense due to the addition of one technician during the third and fourth quarter of 2008. In 2007, the Company also had one less engineer for approximately half the year.
Employee wages and benefits accounted for 73 % or $875,691 (2007 - 66% or $819,000) of the $1,206,227 ($1,161,000 - 2007) total operating and administrative expenses recognized during the year. The increase in employee wages and benefits in the current year of 7% or $56,691(2007 - decrease of 7% or $13,000) was due to the hiring of an additional 5 people during the third and fourth quarter of 2008 to meet increased pressure regulators demand.
At the end of 2008, there were 17 full time employees. In the first quarter of 2009, staff was reduced as demand for pressure regulators in Europe slowed down dramatically when the Company's largest customer announced that they were ceasing production of the vehicle that used AFS products. The Company currently has 10 full time employees with consultants, distributors and agents in Europe, Asia and India
Compensation of Executive and Directors
The following table sets forth all compensation and awards paid by the Company to the executive officers for the year ended December 31:
Other
Named Executive Salary Bonus Compensation
Officer December 31 ($) ($) ($)
-------------------------------------------------------------------------
Jim F. Perry, President and 2008 165,167 NIL 14,141
Chief Executive Officer 2007 164,000 NIL 14,094
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Joyce Berg, Chief Financial 2008 0 NIL NIL
Officer(1) 2007 22,280 NIL NIL
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(1) The position of Chief Financial Officer was filled by Mr. Perry
during 2008 and part of 2007.
In addition to the above, the President and Chief Executive Officer and
Chief Financial Officer participate in the Company's stock-based compensation
plan:
Shares
acquired Aggregate Value of
on value In the Money
exercise realized Options at options at year
Name (No.) ($) year end (No.) end(2) ($)
--------- --------- -------------------- --------------------
Exer- Unexer- Exer- Unexer-
cisable cisable cisable cisable
--------- --------- --------- ---------
Jim F.
Perry Nil Nil 249,200 68,800 696 Nil
------- --------- --------- --------- --------- --------- ---------
(2) Value is calculated based upon the difference between the exercise
price of the options and the 10-day average closing price of the
Common Shares on the Exchange of $0.103 at December 31, 2008.
(3) All options granted to the former Chief Financial Officer were
forfeited upon her departure from the Company in 2007.
During the year, $350 in cash was paid to each outside director of the
Company to attend meetings. Each director was also granted stock options
during the year.
Financial Position
The following table outlines the changes in the balance sheet from
December 31, 2007 to December 31, 2008:
Change ($) Change (%)
Increase Increase
(decrease) (decrease) Explanation
-------------------------------------------------------------------------
Cash and short-term See statements of cash
investments 447,594 46% flow.
Accounts receivable 253,656 111% Increase due to an
increase in operating
activity levels in Q4 of
2008 versus Q4 of 2007.
Approximately 65% of the
accounts receivable
related to one major
customer, of which was
aged 30 days or less. It
was 100% collected
subsequent to year end.
Prepaid expenses Increase due to timing of
and deposits 49,306 416% prepayment of annual
insurance at the end of
Q4 in 2008 versus
prepayment of the same
insurance in Q1 of 2008.
Inventory 201,089 29% Increase due to purchases
to meet higher sales
volumes and orders.
Property, plant Net increase due to
and equipment 10,483 6% purchases of production
tooling equipment of
$53,699 offset by
amortization of $43,216.
Intangible assets (17,843) (38%) Net decrease due to
amortization of $20,138
partially offset by
purchases of $2,295.
Accounts payable 190,631 70% Increase primarily due to
& accrued a $101,595 increase in
liabilities trade accounts payable as
a result of increased
operating activity levels
in Q3 of 2008 versus Q4
of 2007.
Advances from 221,485 379% In order to mitigate the
customers risk inherent in
providing customized
engineering and product
development work, the
Company generally
requires a deposit on all
new large orders before
work commences. 70% of
these advances are from
one customer.
Capital stock 2,825 .1% Increase due to exercise,
in Q1, of 16,000 employee
stock options at $0.10
per share, plus $1,225.
Fair value of those
options exercised charged
to share capital.
Contributed surplus 35,028 7% Change from December 31,
2007 due to impact of
stock-based compensation
expense of $36,253 offset
by fair value of stock
options of $1,225
exercised in Q1.
Deficit (494,316) (43%) The decrease in the
deficit is due to the
impact of net income of
$494,316 for the year
ended December 31, 2008.
Net income (loss) and cash flow
AFS reported net income for the year ended December 31, 2008 of $494,316 or $0.03 per share on a basic and diluted basis. The net loss for the year ended December 31, 2007 was ($582,411) or ($0.03 per share). Offsetting this net income was an overall decrease in working capital for the year of ($91,935) versus an overall increase in working capital of $ 19,254 for 2007. The decrease in working capital for the year ended December 31, 2008 was primarily due to a $253,656 increase in accounts receivable, $49,306 increase in prepaid expenses and a $201,089 increase in inventory, offset by a $190,631 increase in accounts payable and accrued liabilities and a $221,485 increase in advances from customers.
Cash flow from operations for the year was $501,988 versus a cash outflow for the year ended December 31, 2007 of $484,134. This change is due to the factors discussed above.
Annual information
Summary of the last three year's annual information:
2008 2007 2006
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Total revenue $3,916,285 $1,839,074 $2,510,815
Net income (loss) $494,316 ($582,411) ($100,393)
Basic and diluted loss per share 0.03 (0.03) (0.01)
Total assets $3,071,303 $2,127,018 $2,696,712
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The increase in revenue in 2008 compared to the prior two years was primarily due to increased sales of natural gas pressure regulators as previously discussed. The decrease in net loss, and swing to net income over the last three years is also primarily a result of increased regulator revenue in 2008. The increase of $374,591 in total assets over the last three years is primarily due to an increase in accounts receivable of $212,350, an increase in prepaid expenses of $28,975 and an increase of $242,075 in inventory. Specifically, the increase in inventory since 2006 is a function of both increased cost and increased quantities. These are offset by a decrease in cash and short-term investments over the last three years of $52,703 and a net decrease of property, plant and equipment and intangibles of $56,106.
Capital stock a) Authorized Unlimited common voting shares without nominal or par value b) Issued As at December 31, 2008, the Company had 16,998,080 (2007 - 16,982,080) shares outstanding. The issued capital stock increased during the year by 16,000 shares due to the exercise of 16,000 stock options in the first quarter of 2008. As of April 21, 2009, the number of shares outstanding is unchanged from the December 31, 2008 balance.
Commitments
In November 2005, the Company entered into a license agreement effective July 1, 2006 to June 30, 2011. Under the terms of this license the Company is required to pay a royalty to the licensor for each regulator sold. During the year ended December 31, 2008, the Company paid $152,700 (2007 - $68,665) to the licensor.
AFS leases 5,800 square feet of warehouse, shop and office space, which currently house all of its operations. The lease agreement is for a two-year period from July 1, 2008 to June 30, 2010 with monthly lease payments of $6,283.
Contingent liabilities
Included in the package of assets and liabilities acquired from AFS Energy was a contingent liability to repay certain government funding from the National Research Council of Canada (the "NRC") that had been previously received by AFS Energy. The original funding amount was $310,000, of which approximately $114,000 had been repaid to September 30, 2004. The net amount remaining of $196,000 is repayable by the Company on a quarterly basis at a rate of 0.75% of gross sales recognized in the related period. During the year ended December 31, 2008, the Company repaid an additional $29,109 (2007 - $14,299) to the NRC in respect of this government funding bringing the total repayments to date to approximately $199,236 (balance at end of 2007 - $170,127).
The Company will continue to make repayments to the NRC until the earlier of the full repayment or December 31, 2011. The repayment rate of 0.75% is subject to periodic review by the NRC, which has the discretion to increase the rate to 1.5%.
The Company also provides warranty on the electronic fuel management systems, natural gas pressure regulators, and related components that it sells. Warranty costs are accrued as a percentage of sales and recognized as cost of sales. The warranty provision is an estimate and the impact of future costs associated with repairs of products under warranty could have a material effect on these financial statements.
Related party transaction
During the year, the Company paid legal fees in the amount of $1,482 to a firm in which a director of the Company is a partner.
Liquidity and capital resources
In April 2005 the Company closed a series of equity financings, which raised gross proceeds of $1.5 million.
For the twelve months ended December 31, 2008, there was a total increase in cash of $447,594 from the December 31, 2007 balance. Excluding non-cash transactions such as amortization and stock based compensation expense of $99,607 this increase was primarily due to net income from operations of $494,316 and proceeds from exercise of stock options of $1,600 offset by a decrease in working capital of ($91,935) and purchase of equipment of ($55,994),
At December 31, 2008, the Company's capital resources included total working capital of $2,120,839. This is comprised of cash and short-term investments of $1,412,535, $906,686 inventory, accounts receivable of $482,716 and prepaid expenses of $61,152 offset by accounts payable and accrued liabilities of $462,396 and advances from customers of $279,854.
The current business environment is very uncertain. Commodity price fluctuations, credit restrictions and capital market volatility have combined to make forecasting very difficult. As a result, the Company is focusing on controlling costs and preserving capital, while working with its customers to bring new projects into production. Currently, the Company has no outstanding debt and had a cash balance of more than $1.4 million at the end of 2008. As part of the Company's management of liquidity and capital resources, discretionary spending and the cash burn rate are monitored to proactively manage the cash and working capital position of the Company. Management anticipates that this level of resources will be sufficient to allow the Company to continue to operate in the coming year.
Future business direction
As announced in a Press Release on January 23, 2009, AFS was informed by its European representative that the major vehicle manufacturer (the "OEM") that was purchasing the bulk of the Company's natural gas pressure regulators planned to discontinue the production of the vehicle that uses those products. The production halt has since occurred. As a result, a significant portion of the Company's revenue stream going forward will be affected. In 2008, pressure regulator sales to this OEM through AFS's European representative amounted to about fifty-five percent of the Company's revenue.
It is expected that this production halt will have some impact on the Company's revenues in the first quarter of 2009 (the period ending March 31, 2009). However, its effects later in the year will probably be material. AFS is concentrating on growing the engine management system side of its business to try and compensate for this anticipated decline in regulator sales. Vehicle manufacturers are customers that order large volumes of product and who are generally reluctant to change suppliers once a relationship has been established. Although these customers can be very demanding and price conscious, in the opinion of AFS management, they offer the best opportunity for growth of AFS revenues. Forecasting sales volume to the vehicle manufacturers is always a challenge, since the Compressed Natural Gas market is relatively small and not "main line" business for them. As a result, the manufacturers can change production levels at short notice. However, the significant regulatory changes being enacted in many countries in order to address pollution and greenhouse gas emissions are expected to lead to increased use of alternative fuels. These changes could lead to significantly higher volumes of natural gas fuelled vehicles being manufactured, and could provide increased opportunities for the Company.
It should be noted that the current business environment is very uncertain. Commodity price fluctuations, credit restrictions, capital market volatility and other factors outside the Company's control have combined to make forecasting very difficult. It is not possible to determine what portion of the anticipated regulator sales decline might be offset by increased sales of other products in the coming year.
Significant accounting policies a) Revenue recognition Revenues from the sale of electronic fuel management systems, natural gas pressure regulators and related components are recognized at the time these items are shipped and collection is reasonably assured. Other revenues are recognized at the time services are rendered. b) Inventory Inventory, which is primarily electronic fuel management systems, natural gas pressure regulators and related components, is valued at the lower of cost determined on a weighted average basis, and net realizable value. c) Property, plant and equipment Property, plant and equipment are recorded at cost, less accumulated amortization. The amortization expense and related accumulated amortization is computed by the declining balance method as follows: Machine and equipment 20% per annum Computer hardware and software 33% per annum Furniture, fixtures and office equipment 20% per annum Vehicles 20% per annum d) Intangible assets Research and development expenditures (with the exception of those which are capital in nature) are expensed as incurred unless a development project meets the criteria for deferral under Canadian generally accepted accounting principles. Patents and trademarks are amortized on a straight-line basis over five years. e) Product warranty cost The Company accrues product warranty costs relating to sales of fuel management systems, natural gas pressure regulators and related components. This warranty estimate, which is calculated as a percentage of sales, is adjusted periodically to reflect actual product return rates. f) Critical accounting estimates The preparation of financial statements in conformity with Canadian generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The most significant estimates relate to valuation of inventory and assessment of net realizable value, determining the liability relating to product warranty costs, recoverability of the carrying values of property, plant and equipment and intangible assets, and assessment of recoverability of accounts receivable. Actual results could differ materially from these estimates. Key Business Risks and Uncertainties a) 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 were to cease to use AFS products, a significant impact on sales volume would occur. b) Financial Resources - The Company has limited financial resources compared to those of its larger competitors, some of which are major multinational corporations. Although AFS has raised funds in the equity markets in times past, there is no guarantee that the Company will be able to access such markets in future if additional resources are required. c) Foreign Exchange Rate Risk - Almost all of AFS's invoicing to customers is due and payable in Euros or US dollars. AFS is exposed to Euro to CDN and USD to Canadian dollar exchange rate risk. Fluctuations in foreign currency valuations may result in exchange losses or gains that would affect net income. d) 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. e) Government Regulations - Sales of AFS products in a number of jurisdictions such as India and other Southeast Asian markets are driven in part by local government regulations on vehicle emissions. If these regulations are changed so that vehicles no longer have to meet such emissions restrictions, a significant negative change in AFS sales might follow. f) 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. g) 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. New accounting policies On January 1, 2008 the Company adopted the following CICA Handbook sections: a) "Capital Disclosures", Section 1535 required disclosure of the Company's objectives, policies and processes for managing its capital. This included qualitative information regarding AFS's objectives, policies and processes for managing capital and quantitative data about what AFS manages as capital. These disclosures are based on information that is provided internally by AFS's key management. b) "Inventories", Section 3031 provides guidance on the determination of cost and its subsequent recognition as an expense, including any write- down to the net realizable value, and on the cost formulas that are used to assign costs to inventories. There was no impact on our financial position or results of operations as a result of the adoption of this standard. c) "Financial Instruments - Disclosures", Section 3862 and "Financial Instruments - Presentation", Section 3863 replaced Section 3861 "Financial Instruments - Disclosures and Presentation" which revised and enhanced financial instruments disclosure requirements and left unchanged its presentation requirements. These new sections placed increased emphasis on disclosures about the nature and extent of risks arising from financial instruments and how AFS manages those risks.
The CICA has issued the following new Handbook Section that will become effective for the Company beginning January 1, 2009. Section 3064, "Goodwill and Intangible Assets," deals with the accounting treatment of internally developed intangibles and the recognition of such assets. The Company does not expect that the adoption of this standard will have a material effect on its financial statements.
Adoption of International Financial Reporting Standards
In 2006, the CICA Accounting Standards Board (AcSB) adopted a strategic plan for the direction of accounting standards in Canada. As part of that plan, the AcSB confirmed in February 2008 that International Financial Reporting Standards (IFRS) will replace Canadian GAAP in 2011 for profit-orientated Canadian publicly accountable enterprises. As the Company will be required to report its results in accordance with IFRS starting in 2011, the Company is assessing the potential impacts of the changeover accordingly.
Forward-looking statements
Certain statements in this MD&A including but not limited to (i) statements that may contain words such as "anticipate", "could", "expect", "seek", "may", "might", "intend", "will", "believe", "should", "project", "forecast", "plan" and similar expressions, including the negatives thereof, (ii) statements that are based on current expectations and estimates about the markets in which the Company operates and (iii) statements of belief, intentions and expectations about developments, results and events that will or may occur in the future, constitute "forward-looking statements" and are based on certain assumptions and analysis made by the Company. Forward-looking statements in this MD&A specifically include, but are not limited to, statements with respect to future business opportunities, nature and timing thereof; business strategy; expansion and growth of the Company's business and operations and other such matters as the case may be. Such forward-looking statements are subject to important risks, uncertainties and assumptions which are difficult to predict and that may affect the Company's operations, including, but not limited to: the impact of general economic conditions; industry conditions; customer base changes; financial market conditions; government and regulatory developments; oil and natural gas product supply, demand and pricing; foreign exchange rates; competition; market conditions in the countries where the Company operates; and the Company's ability to attract and retain qualified personnel. The Company's actual results, performance or achievements could differ materially from those expressed in, or implied by, these forward-looking statements and, accordingly, no assurance can be given that any of the events anticipated by the forward-looking statements will transpire or occur, or if any of them do transpire or occur, what benefits or disadvantage the Company may derive therefrom. Except as required by applicable securities laws, the Company undertakes no intention or obligation to update or revise any forward-looking statements.
All forward-looking statements contained in this document are expressly qualified by this cautionary statement. Further information about the factors affecting forward-looking statements is available in the Company's current financial statements and other documents that the Company files from time to time with securities regulatory authorities. Copies of these documents are available without charge from the Company or electronically on the internet on the Company's SEDAR profile at www.sedar.com.
%SEDAR: 00020995E