AFS (2004) announces third quarter financial and operating results



    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):

    
    -------------------------------------------------------------------------
                                       Three Months Ended  Nine Months Ended
                                          September 30        September 30
    -------------------------------------------------------------------------
                                          2007      2006      2007      2006
    -------------------------------------------------------------------------
    Pressure regulators                $   216   $   600   $   873   $ 1,370
    -------------------------------------------------------------------------
    Engine management systems               42       142       165       400
    -------------------------------------------------------------------------
    Ignition systems and other parts       120        16       227       111
    -------------------------------------------------------------------------
      Subtotal Product Sales           $   378   $   758   $ 1,264   $ 1,881
    -------------------------------------------------------------------------
    Engineering services                    18         4        48        62
    -------------------------------------------------------------------------
      Total                            $   396   $   762   $ 1,313   $ 1,943
    -------------------------------------------------------------------------
    

    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):

    
    -------------------------------------------------------------------------
                                       Three months ended  Nine months ended
                                          September 30        September 30
    -------------------------------------------------------------------------
                                          2007      2006      2007      2006
    -------------------------------------------------------------------------

    -------------------------------------------------------------------------
    Engineering & product development  $   128   $   143   $   399   $   433
    -------------------------------------------------------------------------
    Administrative & other                 106        97       392       310
    -------------------------------------------------------------------------
    Sales & marketing                       44        42       132       126
    -------------------------------------------------------------------------
    Total                              $   278   $   282   $   923   $   869
    -------------------------------------------------------------------------
    

    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
                                                        $             $
    -------------------------------------------------------------------------
    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
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
                                                     2,024,321     2,432,392
    -------------------------------------------------------------------------

    Property, plant and equipment                      192,137       209,015

    Intangible assets                                   40,876        55,305
    -------------------------------------------------------------------------
                                                     2,257,334     2,696,712
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    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
    -------------------------------------------------------------------------
                                                       300,056       331,531
    -------------------------------------------------------------------------

    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)
    -------------------------------------------------------------------------
                                                     1,957,278     2,365,181
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
                                                     2,257,334     2,696,712
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    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
                                       $          $          $          $
    -------------------------------------------------------------------------

    Product revenue                 378,417    757,557  1,264,394  1,881,232

    Cost of revenue                 239,785    389,301    766,983    975,832
    -------------------------------------------------------------------------

    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

    -------------------------------------------------------------------------
                                    166,385    384,143    578,070  1,004,027
    -------------------------------------------------------------------------

    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
    -------------------------------------------------------------------------
                                    294,281    309,705    991,446    995,111
    -------------------------------------------------------------------------

    (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)
    -------------------------------------------------------------------------

    Deficit - End of period        (986,948)  (464,263)  (986,948)  (464,263)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Basic and diluted (loss)
     earnings per common share        (0.01)      0.00      (0.02)      0.00
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    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
                                       $          $          $          $
    -------------------------------------------------------------------------
    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
    -------------------------------------------------------------------------
                                   (115,152)    96,735   (356,234)   119,981

    Change in non-cash working
     capital items                  (71,869)    44,288    (35,865)  (239,046)
    -------------------------------------------------------------------------

    Cash flow from operations      (187,021)   141,023   (392,099)  (119,065)
    -------------------------------------------------------------------------

    Investing activities
    Purchase of equipment and
     intangible assets                 (350)   (13,569)   (20,362)   (37,206)
    -------------------------------------------------------------------------

    Financing activities
    Proceeds from exercise of
     warrants                             -          -          -     15,000
    -------------------------------------------------------------------------

    (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
    -------------------------------------------------------------------------

    Cash & short-term
     investments - end of
     period                       1,052,777  1,514,016  1,052,777  1,514,016
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    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.

    
                   Visit our website at: www.afsglobal.com
    





For further information:

For further information: Jim Perry, President and CEO, Phone: (403)
516-6632, E-mail: jperry@afsglobal.com

Organization Profile

ALTERNATIVE FUEL SYSTEMS (2004) INC.

More on this organization


Custom Packages

Browse our custom packages or build your own to meet your unique communications needs.

Start today.

CNW Membership

Fill out a CNW membership form or contact us at 1 (877) 269-7890

Learn about CNW services

Request more information about CNW products and services or call us at 1 (877) 269-7890