CALGARY, Aug. 16 /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 second quarter ended June
30, 2006. President and CEO Jim Perry stated that "we are pleased to report
that we have generated a modest positive cash flow from operations during the
first six months of this year, compared to a small loss in the same period
last year. Sales of our natural gas pressure regulators were especially strong
during the quarter, more than triple the sales of these products in Q2 of
2005. We have a significant backlog of orders, especially for our pressure
regulators. Because almost all of the parts used in these units are custom
made by outside suppliers, it has been a real challenge to get them to ramp up
to the level of production that we need. We are making good progress, and the
number of parts that are in short supply is shrinking."
For the three-month period ended June 30, 2006, the Company recognized
revenue of $531,000 from sales to clients primarily in Europe, the U.S. and
Asia. In the three months ended June 30 of 2005, revenue was $653,000. Mr.
Perry commented that, "similar to the parts situation with our pressure
regulator product line, we have had challenges with long lead times for
electronic components. One strategy we have been pursuing is to get customers
to commit to purchasing long lead-time items at a very early stage, so that
production is not unduly delayed. As a result, in Q3 we will be able to make
several large runs of engine controller boards that otherwise would have
slipped into the fourth quarter." AFS (2004) recorded a net loss of $80,000
during the quarter, compared to a net loss of $39,000 in the second quarter of
2005.
Management's Discussion and Analysis ("MD&A")
Below is Management's discussion and analysis of financial results for
the three and six-month periods ended June 30, 2006 and June 30, 2005.
Operating Results
Sales Revenue
Sales for the second quarter were comprised of the following (amounts in
thousands of Canadian dollars):
<<
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Three Months Ended Six Months Ended
June 30 June 30
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2006 2005 2006 2005
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Pressure regulators $ 384 $ 126 $ 770 $ 331
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Engine management systems 64 29 258 144
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Ignition systems and
other parts 62 480 95 746
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Subtotal Product Sales $ 510 $ 635 $ 1,123 $ 1,221
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Engineering services 21 18 58 91
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Total $ 531 $ 653 $ 1,181 $ 1,312
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>>
The decrease in revenue compared to that achieved in the second quarter
of 2005 was mostly due to the fact that sales of ignition systems for use in
Asia were impacted by a large, one-off project in 2005, while sales of the
same product line in 2006 were more in line with historical levels. This
change was offset by a significant ramping up of pressure regulator sales
during the quarter, primarily to a large European manufacturer of vehicles,
whose product line includes taxis and municipal vehicles such as police cars.
Engine management system sales were up during Q2 as custom engine controller
deliveries to a US based customer active in Asia were increased.
Gross margins
Gross margins realized in the second quarter were $227,000 or 45%
compared to 51% for the same quarter in 2005. This percentage is higher in
2005 reflecting the sale of products incorporating some parts with a zero cost
base that were acquired from predecessor company, AFS. The older zero cost
base inventory is steadily being depleted so that products being currently
manufactured are using newer inventory with a more normal cost base.
Operating and administrative expenses
Operating and administrative expenses for the three and six month periods
ended June 30, 2006 and June 30, 2005 were comprised of the following (amounts
in thousands of Canadian dollars):
<<
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Three months ended Six months ended
June 30 June 30
-------------------------------------------------------------------------
2006 2005 2006 2005
-------------------------------------------------------------------------
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Engineering & product
development $ 139 $ 159 $ 290 $ 295
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Administrative & other 112 145 214 273
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Sales & marketing 40 37 84 74
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Total $ 291 $ 341 $ 588 $ 642
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>>
Employee wages and benefits accounted for 73% (or $212,000) of the
$291,000 in total operating and administrative expenses recognized during the
second quarter of 2006. The reduction in administrative staff continues to be
reflected in the decreased expenses in the year over year comparisons.
Expenses for engineering and product development are down in 2006 compared to
2005 as delivery and customs charges that were previously expensed directly to
engineering are now being taken into inventory, then expensed through cost of
sales when products are sold.
The Company currently has 12 full time employees, with consultants,
distributors and agents in Europe, India, Iran and the U.S.
Liquidity and capital resources
Prepaid Expenses
At June 30, 2006 the balance of the prepaid expenses was $58,000 down
$88,000 from $146,000 at December 31, 2005. The decrease is due to prepaid
insurance premiums at year end being amortized monthly during the current
fiscal year.
Inventory
Inventory has increased in the second quarter of 2006 to $639,000
compared to the December 31, 2005 balance of $487,000, a change of $152,000.
During Q1 and Q2 larger purchases were made to raise inventory up to levels
needed to fulfill the higher demand for the Company's Falcon pressure
regulator in Europe.
Accounts payable and accrued liabilities
The accounts payable balance was $180,000 compared to $271,000 at
December 31, 2005. The decrease of $91,000 was attributed to a $61,000
reduction in trade payables and a further $30,000 decrease was due to
commission and royalty expense accruals being subsequently paid out.
Advances from customers
Advances from customers have decreased to $110,000 at June 30, 2006 from
a balance of $213,000 at December 31, 2005. The decrease is due to deposits
being applied to shipments made in the first and second quarters. 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 June 30, 2006:
AFS (2004) leases 5,800 square feet of warehouse, shop and office space,
which currently house 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.
Contingent liabilities
During the first quarter ended June 30, 2006, there were no material
changes in the contingent liabilities as disclosed in the audited December 31,
2005 financial statements.
Liquidity, capital resources and business risk
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. As of August 15, 2006 the Company has $16,940,080
issued shares, 9,379,847 exercisable warrants outstanding, and 746,500 stock
options granted.
Critical accounting estimates
The Company's June 30, 2006 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.
Disclosure Controls and Procedures
The Company has established disclosure controls and procedures to ensure
that information disclosed in the MD&A and the related financial statements
was properly recorded, processed, summarized and reported to the Board and the
Audit Committee. The Company's chief executive officer and chief financial
officer have evaluated and are satisfied with the effectiveness of these
disclosure controls and procedures for the period ending December 31, 2005.
There have been no changes in the Company's internal controls that occurred
during the Company's interim period, the six months ended June 30, 2006 that
have materially affected or are reasonably likely to materially affect AFS'
internal controls over financial reporting.
Financial Statements
Below are the unaudited interim financial statements for the three and
six month periods ended June 30, 2006 and 2005. 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)
June 30, December 31,
2006 2005
$ $
-------------------------------------------------------------------------
Assets
Current assets
Cash and short-term investments 1,386,562 1,655,287
Accounts receivable 331,452 307,352
Prepaid expenses and deposits 58,356 145,904
Inventory 638,712 486,941
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2,415,082 2,595,484
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Property, plant and equipment 210,727 215,297
Intangible assets 65,111 119,180
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2,690,920 2,929,961
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Liabilities
Current liabilities
Accounts payable and accrued liabilities 179,534 271,210
Advances from customers 110,041 212,663
Deferred revenue 17,389 18,102
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306,964 501,975
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Shareholders' Equity
Capital stock 2,438,571 2,423,571
Warrants 266,450 270,200
Settlement warrants 171,000 171,000
Contributed surplus 46,636 36,394
Deficit (538,701) (473,179)
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2,383,956 2,427,986
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2,690,920 2,929,961
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ALTERNATIVE FUEL SYSTEMS (2004) INC.
Statements of Operations and Deficit
(Unaudited)
(expressed in Canadian dollars)
For the three months For the six months
ended June 30 ended June 30
2006 2005 2006 2005
$ $ $ $
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Product revenue 509,468 635,319 1,123,675 1,220,603
Cost of revenue 282,060 309,572 586,531 679,975
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Gross Margin 227,408 325,747 537,144 540,628
Engineering revenue 21,141 17,771 57,785 91,109
Interest and Other Income 13,237 8,212 24,955 8,212
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261,786 351,730 619,884 639,949
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Expenses
Operating and
administration
Engineering and product
development 139,420 158,748 289,970 295,159
Administrative and
other 111,608 144,816 213,654 272,804
Sales and marketing 40,199 37,194 84,180 74,252
Repayment of research
funding 3,969 4,898 8,834 9,847
Depreciation of property,
plant & equipment 13,805 15,306 27,387 30,030
Amortization of intangible
assets 27,450 27,390 54,889 54,764
Stock option compensation 5,114 1,958 6,492 3,416
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341,565 390,310 685,406 740,272
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Loss for the period (79,779) (38,580) (65,522) (100,323)
Deficit - Beginning of
period (458,922) (340,808) (473,179) (279,065)
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Deficit - End of period (538,701) (379,388) (538,701) (379,388)
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Basic and diluted loss per
common share (0.00) (0.01) (0.00) (0.01)
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ALTERNATIVE FUEL SYSTEMS (2004) INC.
Statements of Cash Flows
(Unaudited)
(expressed in Canadian dollars)
For the three months For the six months
ended June 30 ended June 30
2006 2005 2006 2005
$ $ $ $
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Cash provided by (used in)
Operating activities
Loss for the period (79,779) (38,580) (65,522) (100,323)
Items not involving cash
Depreciation and
amortization 41,255 42,696 82,276 84,794
Stock option compensation 5,114 1,958 6,492 3,416
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Cash flow from operations (33,410) 6,074 23,246 (12,113)
Change in non-cash
working capital items 27,360 (99,590) (283,333) 51,532
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(6,050) (93,516) (260,087) 39,419
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Investing activities
Purchase of equipment
and intangible assets (9,227) (16,219) (23,638) (22,740)
Cash held in trust - 50,000 - 50,000
Net proceeds from share issue - 1,266,248 - 1,266,248
Proceeds from exercise
of warrants 15,000 - 15,000 -
Due from AFS Energy Inc. - 30,671 - 36,711
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5,773 1,330,700 (8,638) 1,330,219
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(Decrease) increase in cash
& short-term investments (277) 1,237,184 (268,725) 1,369,638
Cash & short-term
investments
- beginning of period 1,386,839 417,090 1,655,287 284,636
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Cash & short-term
investments
- end of period 1,386,562 1,654,274 1,386,562 1,654,274
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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.
%SEDAR: 00020995E
