CALGARY, April 27 /CNW/ - Alternative Fuel Systems (2004) Inc. ("AFS" or the "Company") (TSX Venture: AFX) announced today the Company's financial and operating results for the year ended December 31, 2006. President and CEO Jim Perry stated, "although our major customer in Europe stopped their production of CNG vehicles in the last six weeks of 2006, we were still able to end up the year with a small positive cash flow from operations. The customer commenced production again mid-April 2007, at a low rate, and we have been informed that volume should increase over the next month or two."
For the year ended December 31, 2006, the Company recognized revenue of $2,460,258 from sales to clients primarily in Europe, the U.S. and Asia. AFS recorded a net loss of $100,000 ($.01 per share) for the year. Revenue for the year ended December 31, 2005 totaled $2,293,000 and the net loss for this period was $194,000 ($.01 per share).
Management's Discussion and Analysis ("MD&A")
Below is Management's discussion and analysis of financial results for the years ended December 31, 2006 and December 31, 2005.
Sales Revenue
Summary of Quarterly Results (amounts in thousands of Canadian dollars):
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2006 Q1 Q2 Q3 Q4
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Pressure regulator $386 $384 $600 $323
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Engine management systems 195 64 142 53
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Ignition systems & other parts 33 62 16 137
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Subtotal Product Sales $614 $510 $758 $513
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Engineering services 37 21 4 4
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Total $651 $531 $762 $517
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2005 Q1 Q2 Q3 Q4
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Pressure Regulator $205 $126 $224 $205
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Engine Management Systems 115 29 40 99
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Ignition systems & other parts 266 480 195 97
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Subtotal Product Sales $586 $635 $459 $401
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Engineering services 73 18 72 49
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Total $659 $653 $531 $450
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Sales of the Company's "Falcon" natural gas pressure regulator for the year ended December 31, 2006 amounted to $1,693,000, more than double the sales of $760,000 for the year ended December 31, 2005. Sales of this product in the last quarter 2006, while higher than in the same period of 2005, were lower than in the previous quarter of 2006 as the primary customer for this product stopped production in order to resolve issues unrelated to AFS. Subsequent to year-end, the Company was informed that production would resume at a low rate, commencing in April of 2007.
Engine management system sales during 2006 increased to $454,000 as compared to $283,000 in sales of this product recorded in the period ended December 31, 2005. Conversely sales of ignition systems decreased substantially from $1,038,000 to $248,000 for the year ended December 31, 2006. The sales numbers support a growing preference for the more complex and robust engine management systems over ignition-only solutions in Southeast Asia. Engineering income was also less than recorded in 2005, since the bulk of the engineering work for the Iran electrical generator conversion project has been completed.
Gross margins
Gross margins realized in the year were $1,094,000 or 46% compared to margins of $986,000 or 47% in the year ended December 31, 2005. This percentage is higher than historical margins for the business (which have typically been in the range of 35% to 40%) reflecting the sale of inventory incorporating some parts with a zero cost base that were acquired from predecessor company Alternative Fuel Systems Inc. as part of our corporate reorganization in 2004.
Operating and administrative expenses
Operating and administrative expenses for the years ended December 31, 2006 and December 31, 2005 were comprised of the following:
Summary of Quarterly Results (amounts in thousands of Canadian dollars):
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2006 Q1 Q2 Q3 Q4
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Engineering & product development $151 $139 $143 $130
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Administrative & other 102 112 97 103
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Sales & marketing 44 40 42 48
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Total $297 $291 $282 $281
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2005 Q1 Q2 Q3 Q4
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Engineering & product development $136 $159 $143 $150
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Administrative & other 128 145 111 90
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Sales & marketing 37 37 38 39
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Total $301 $341 $292 $279
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Employee wages and benefits accounted for 72% or $832,000 (71% or $865,000 - 2005) of the $1,151,000 ($1,213,000 - 2005) in total operating and administrative expenses recognized during the year. Although the total expenses in the fourth quarter in 2006 are comparable to the total in the fourth quarter of 2005, there is some change in the distribution of the expenses between the three functional areas. Generally all departments' expenses are higher overall due to salary and wage increases incurred in order to remain competitive in the Calgary market. The engineering and product development expenses dropped in Q4 2006 due to a vacant position.
The Company currently has 11 full time employees, with consultants, distributors and agents in Europe, India, Iran and the U.S.
An additional 11% (12% - 2005) or $129,000 ($146,000 - 2005) was attributed to insurance expenses and public company costs such as audit, annual meeting and stock exchange fees. Public company costs were higher in 2005 due to the extra expenditures associated with the April 15, 2005 equity financing.
Net Loss
AFS reported a net loss for the year ended December 31, 2006 of $100,000 ($0.01 per share) on a basic and diluted basis. The net loss for the year ended December 31, 2005 was $194,114 ($0.01 per share) on a basic and diluted basis.
Accounts receivable
As at December 31, 2006 accounts receivable amounted to $270,000 compared to the December 31, 2005 balance of $307,000, due to the billing of a few larger than average orders shipped out just prior to the 2005 year end.
Prepaid expenses
As at December 31, 2006, the Company had $32,000 of prepaid expenses and deposits on its balance sheet as compared to $146,000 at December 31, 2005. The decrease in 2006 is due to insurance premiums relating to 2007 being paid in early January 2007, not in December as they had been the year before.
Inventory
At December 31, 2006 the inventory balance was $665,000 compared to the December 31, 2005 balance of $487,000. The inventory carried has increased throughout the year to accommodate the increased demand for the Falcon regulators. Sales of this product in 2006 were double those recorded in 2005, with correspondingly higher inventory levels required to maintain production.
Accounts payable and accrued liabilities
As at December 31, 2006 the accounts payable and accrued liabilities balance was decreased compared to the December 31, 2005 balance. The decrease is due to the timing of the payment of the prepaid insurance premiums for the upcoming fiscal year.
Advances from customers
As at December 31, 2006 advances from customers amounted to $108,000 down considerably from the balance of $212,663 at December 31, 2005. The decrease is due to a 50% deposit received from a U.S. customer prior to December 31, 2005 as prepayment for a substantial contract for a custom built product. The product was subsequently shipped in the second and third quarters of 2006 and the deposit was drawn down against the related invoicing.
Contractual obligations
AFS leases 5,800 square feet of warehouse, shop and office space, which currently house all of the company's operations. The lease agreement runs until June 30, 2008 with monthly lease payments of $4,688 for the remaining period.
Liquidity and Cash Flow from Operations
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 is better capitalized to pursue potential business opportunities and increase its sustainability period.
Cash flow from operations was positive in three of the four quarters in 2006 and positive for the entire year overall ($41,000). For the year end December 31, 2005 cash flow was slightly less than break even ($6,900 decrease). Continuing efforts to increase margins and control operating and administrative costs have enabled AFS to be self-sustaining through operations and maintain a sufficient amount of cash in reserve for capital investment in production equipment. Cash balances decreased overall in the year 2006 due in large part to a $49,000 in capital expenditures and a decrease in non-cash working capital. Non-cash working capital decreased $197,000 due mostly to an additional $178,000 increase in inventory to accommodate the rise in sales volumes of the natural gas pressure regulators.
Critical accounting estimates
The Company's December 31, 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. There is no guarantee that such estimates are accurate.
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 delivered. 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 depreciation and amortization. The depreciation and
amortization expense and related accumulated depreciation and
amortization is computed by the declining balance method as
follows:
Machine and equipment 20% per annum
Computer hardware and software 33%
Furniture, fixtures and office equipment 20%
Vehicles 20%
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.
The Company's product license was amortized on the straight-line
basis over the remaining term of the license to June 30, 2006
(note 4). Patents and trademarks are amortized on the straight-
line basis over five years.
Disclosure Controls and Procedures
The Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the Company's internal control over financial reporting as of December 31, 2006, pursuant to the requirements of Multilateral Instrument 52-109 of the Canadian Securities Administrators.
Internal Control over Financial Reporting
AFS management has concluded that as at December 31, 2006, the following weaknesses existed in the design of internal control over financial reporting. These weaknesses should also be considered as weaknesses in the Company's disclosure controls and procedures.
The Company does not have an adequate segregation of duties within the Finance function due to a small staff complement. As a result there is no independent review of more complex areas of accounting and certain accounting estimates prepared by the CFO.
Management concluded and the Board of Directors agreed that, taking into account the best interests of the company and its shareholders, the Company does not have sufficient size and scale to warrant the hiring of additional staff to correct the weaknesses in the segregation of duties at this time.
Notwithstanding these weaknesses, based on the Company's mitigating procedures, the CEO and CFO have satisfied themselves that these weaknesses have not resulted in material errors in the financial statements.
Subsequent to the December 31, 2006 year-end, management has implemented a procedure for another officer of the company to review and sign off on the listing of net payroll deposits and disbursements.
There have been no changes in the Company's internal control over financial reporting that occurred during the most recent interim period ended December 31, 2006 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
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. There is potential for exchange loss and gains affecting net income due to fluctuations in foreign currency valuations.
Major Competitors - AFS has a number of competitors that are much larger in size and which 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 Instruments
The Company's financial instruments consist of cash, accounts receivable, accounts payable and accrued liabilities. The fair value of these financial instruments approximates their carrying values due to their relatively short term to maturity of the instruments.
The Canadian Institute of Chartered Accountants has implemented new standards 3855 and 3861 for fiscal years commencing on or after October 1, 2006. Section 3855 deals with the recognition and measurement of financial instruments at fair market value whereby financial assets and liabilities are accounted for a fair value when an entity becomes a party to the contractual provisions of the financial instrument. Section 3861 applies to interim and annual financial statements and revises the requirements for accounting policy disclosures, and specifies new requirements for disclosures about fair value. The Company has evaluated their current contracts due and payable in USD and have determined that there is no material impact expected when the contract is settled.
Commitments and Contingencies
AFS leases 5,800 square feet of warehouse, shop and office space in Calgary, Canada, which currently house all its operations. The space is leased until June 30, 2008 with monthly lease payments of $4,688.
Financial Statements
Below are the audited financial statements for the years ended December 31, 2006 and December 31, 2005.
ALTERNATIVE FUEL SYSTEMS (2004) INC.
Balance Sheets
(Unaudited)
(expressed in Canadian dollars)
December 31, December 31,
2006 2005
$ $
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Assets
Current assets
Cash and short-term investments 1,465,238 1,655,287
Accounts receivable 270,366 307,352
Prepaid expenses and deposits 32,177 145,904
Inventory 664,611 486,941
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2,432,392 2,595,484
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Property, plant and equipment 209,015 215,297
Intangible assets 55,305 119,180
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2,696,712 2,929,961
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Liabilities
Current liabilities
Accounts payable and accrued liabilities 205,095 271,210
Advances from customers 108,328 212,663
Deferred revenue 18,108 18,102
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331,531 501,975
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Shareholders' Equity
Capital stock 2,442,621 2,423,571
Warrants 195,450 270,200
Settlement warrants 171,000 171,000
Contributed surplus 129,682 36,394
Deficit (573,572) (473,179)
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2,365,181 2,427,986
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2,696,712 2,929,961
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ALTERNATIVE FUEL SYSTEMS (2004) INC.
Statements of Operations and Deficit
(Unaudited)
(expressed in Canadian dollars)
Year Ended Year Ended
December 31, December 31,
2006 2005
$ $
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Product revenue 2,394,401 2,081,671
Cost of revenue 1,300,374 1,095,203
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Gross Margin 1,094,027 986,468
Engineering revenue 65,857 211,689
Interest and Other Income 50,557 25,467
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1,210,441 1,223,624
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Expenses
Operating and administration
Engineering and product development 562,655 587,747
Administrative and other 414,250 473,799
Sales and marketing 173,699 151,383
Repayment of research funding 18,586 17,242
Depreciation of property, plant & equipment 54,264 61,176
Amortization of intangible assets 64,792 109,545
Stock option compensation 22,588 16,846
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1,310,834 1,417,738
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Income (Loss) for the period (100,393) (194,114)
Deficit - Beginning of period (473,179) (279,065)
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Deficit - End of period (573,572) (473,179)
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Basic and diluted income (loss) per common share (0.01) (0.01)
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ALTERNATIVE FUEL SYSTEMS (2004) INC.
Statements of Cash Flows
(Unaudited)
(expressed in Canadian dollars)
Year Ended Year Ended
December 31, December 31,
2006 2005
$ $
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Cash provided by (used in)
Operating activities
Income (loss) for the period (100,393) (194,114)
Items not involving cash
Depreciation and amortization 119,056 170,721
Gain on sale of equipment (350) (321)
Stock option compensation 22,588 16,846
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Cash flow from operations 40,901 (6,868)
Change in non-cash working capital items (197,401) 52,082
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(156,500) 45,214
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Investing activities
Purchase of equipment and intangible assets (48,899) (28,522)
Proceeds on disposal of office equipment 350 1,000
Cash held in trust - 50,000
Due from AFS Energy Inc. - 36,711
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Cash flow from investing (48,549) 59,189
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Financing activities
Net proceeds from share issue - 1,266,248
Proceeds from exercise of warrants 15,000 -
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Cash flow from financing 15,000 1,266,248
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Increase (decrease) in cash & short-term
investments (190,049) 1,370,651
Cash & short-term investments - beginning
of period 1,655,287 284,636
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Cash & short-term investments - end of period 1,465,238 1,655,287
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AFS is a Canadian company providing innovative and cost-effective solutions to the growing global problem of harmful exhaust emissions from internal combustion engines. AFS 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 and marketing and product development plans based on the current expectations of management.
AFS 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.