AFS announces 2006 financial and operating results



    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):

    
    -------------------------------------------------------------------------
                 2006                            Q1      Q2      Q3      Q4
    -------------------------------------------------------------------------
    Pressure regulator                          $386    $384    $600    $323
    -------------------------------------------------------------------------
    Engine management systems                    195      64     142      53
    -------------------------------------------------------------------------
    Ignition systems & other parts                33      62      16     137
                                                  --      --      --     ---
    -------------------------------------------------------------------------
      Subtotal Product Sales                    $614    $510    $758    $513
    -------------------------------------------------------------------------

    -------------------------------------------------------------------------
    Engineering services                          37      21       4       4
                                                  --      --       -       -
    -------------------------------------------------------------------------
      Total                                     $651    $531    $762    $517
    -------------------------------------------------------------------------


    -------------------------------------------------------------------------
                 2005                            Q1      Q2      Q3      Q4
    -------------------------------------------------------------------------
    Pressure Regulator                          $205    $126    $224    $205
    -------------------------------------------------------------------------
    Engine Management Systems                    115      29      40      99
    -------------------------------------------------------------------------
    Ignition systems & other parts               266     480     195      97
                                                 ---     ---     ---      --
    -------------------------------------------------------------------------
      Subtotal Product Sales                    $586    $635    $459    $401
    -------------------------------------------------------------------------

    -------------------------------------------------------------------------
    Engineering services                          73      18      72      49
                                                  --      --      --      --
    -------------------------------------------------------------------------
      Total                                     $659    $653    $531    $450
    -------------------------------------------------------------------------
    

    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):

    
    -------------------------------------------------------------------------
                 2006                            Q1      Q2      Q3      Q4
    -------------------------------------------------------------------------
    Engineering & product development           $151    $139    $143    $130
    -------------------------------------------------------------------------
    Administrative & other                       102     112      97     103
    -------------------------------------------------------------------------
    Sales & marketing                             44      40      42      48
                                                  --      --      --      --
    -------------------------------------------------------------------------
    Total                                       $297    $291    $282    $281
    -------------------------------------------------------------------------


    -------------------------------------------------------------------------
                 2005                            Q1      Q2      Q3      Q4
    -------------------------------------------------------------------------
    Engineering & product development           $136    $159    $143    $150
    -------------------------------------------------------------------------
    Administrative & other                       128     145     111      90
    -------------------------------------------------------------------------
    Sales & marketing                             37      37      38      39
                                                  --      --      --      --
    -------------------------------------------------------------------------
    Total                                       $301    $341    $292    $279
    -------------------------------------------------------------------------
    

    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
                                                         $             $
    -------------------------------------------------------------------------
    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
    -------------------------------------------------------------------------

                                                     2,432,392     2,595,484
    -------------------------------------------------------------------------

    Property, plant and equipment                      209,015       215,297

    Intangible assets                                   55,305       119,180
    -------------------------------------------------------------------------

                                                     2,696,712     2,929,961
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    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
    -------------------------------------------------------------------------

                                                       331,531       501,975
    -------------------------------------------------------------------------

    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)
    -------------------------------------------------------------------------

                                                     2,365,181     2,427,986
    -------------------------------------------------------------------------

                                                     2,696,712     2,929,961
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------



    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
                                                         $             $
    -------------------------------------------------------------------------

    Product revenue                                  2,394,401     2,081,671

    Cost of revenue                                  1,300,374     1,095,203
    -------------------------------------------------------------------------

    Gross Margin                                     1,094,027       986,468

    Engineering revenue                                 65,857       211,689
    Interest and Other Income                           50,557        25,467

    -------------------------------------------------------------------------
                                                     1,210,441     1,223,624
    -------------------------------------------------------------------------

    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
    -------------------------------------------------------------------------

                                                     1,310,834     1,417,738
    -------------------------------------------------------------------------

    Income (Loss) for the period                      (100,393)     (194,114)

    Deficit - Beginning of period                     (473,179)     (279,065)
    -------------------------------------------------------------------------

    Deficit - End of period                           (573,572)     (473,179)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Basic and diluted income (loss) per common share     (0.01)        (0.01)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------



    ALTERNATIVE FUEL SYSTEMS (2004) INC.
    Statements of Cash Flows
    (Unaudited)
    (expressed in Canadian dollars)

                                                   Year Ended    Year Ended
                                                   December 31,  December 31,
                                                       2006          2005
                                                         $             $
    -------------------------------------------------------------------------

    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
    -------------------------------------------------------------------------
    Cash flow from operations                           40,901        (6,868)

    Change in non-cash working capital items          (197,401)       52,082
    -------------------------------------------------------------------------

                                                      (156,500)       45,214
    -------------------------------------------------------------------------

    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
    -------------------------------------------------------------------------
    Cash flow from investing                           (48,549)       59,189

    -------------------------------------------------------------------------

    Financing activities
    Net proceeds from share issue                            -     1,266,248
    Proceeds from exercise of warrants                  15,000             -
    -------------------------------------------------------------------------
    Cash flow from financing                            15,000     1,266,248

    -------------------------------------------------------------------------
    Increase (decrease) in cash & short-term
     investments                                      (190,049)    1,370,651

    Cash & short-term investments - beginning
     of period                                       1,655,287       284,636
    -------------------------------------------------------------------------

    Cash & short-term investments - end of period    1,465,238     1,655,287
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

    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.





For further information:

For further information: Jim Perry, President and CEO, Phone: (403)
516-6632, E-mail: jperry@afsglobal.com; or Joyce Berg, Chief Financial
Officer, (403) 516-6626, E-mail: jberg@afsglobal.com; Visit our website at:
www.afsglobal.com

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ALTERNATIVE FUEL SYSTEMS (2004) INC.

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