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11.8.2006: Meldung: Dynetek Industries Ltd.: 2006 six month and second quarter results
Dynetek reports 2006 six month and second quarter results
Thursday August 10, 4:30 pm ET
<< - Record six month revenues of $17.6 million - up 21% from the first six months of 2005 - Record second quarter revenues of $8.8 million - up 26% from the second quarter of 2005 - Positive cash flow from operations of $1.4 million for the first six months of 2006 and $0.4 million for the second quarter of 2006
CALGARY, Aug. 10 /- Dynetek Industries Ltd., a leader in the design, manufacturing and marketing of proprietary fuel storage cylinders and systems for compressed natural gas (CNG) and hydrogen, today reported results for the three-months and six months ended June 30, 2006.
Conference call information is provided below.
Financial Highlights
- Total revenue for the six months ended June 30, 2006 of $17.6 million
increased $3.6 million or 21% from the same period of 2005.
- Total revenues for the three months ended June 30, 2006 of
$8.8 million increased $1.8 million or 26% from the comparative
second quarter of 2005.
- Cylinder and system sales for the six months ended June 30, 2006 of
$16.3 million increased $4.3 million or 36% compared with the
six months ended June 30, 2005.
- Cylinder and system sales for the three months ended June 30, 2006 of
$8.1 million increased $1.7 million or 27% from the comparative second
quarter of 2005.
- Contribution margins fell from 24% in the first quarter to 22% in the
second quarter.
- Cash flow from operations of $1.4 million for the first six months of
2006 and $0.4 million for the second quarter of 2006.
- Tenth consecutive quarter of positive EBITDA(1) including $0.6 million
for the three months ended June 30, 2006.
- Confirmed order book in excess of $16.9 million the majority to be
delivered in the latter half of 2006.
Robb Thompson, President and Chief Executive Officer, said the second quarter results reflect Dynetek"s continued commitment to focusing on CNG cylinder and system sales to our target market of bus and truck manufacturers predominantly in Europe and to tapping into new market opportunities for our bulk hauling technology.
"Unfortunately, the second quarter margins fell to 22% from 24% in the first quarter, as heavy rains and flooding shut down the manufacturing plant of a key raw material supplier and prevented it from delivering for a period. In order to maintain our market leadership and customer needs, we were forced to fill European customer orders on a more costly basis. We are taking steps to ensure this situation will not recur."
"The six-month net earnings and cash flow from operations are representative of what we, as an alternative energy company, can achieve with revenue streams from both CNG and compressed hydrogen", Mr. Thompson said. "Our CNG growth is particularly strong in Europe, which reconfirms that the CNG market place is where opportunities support revenue growth and sustained earnings. This contrasts with the hydrogen market where revenue growth leading to profitability is more limited for now."
"With the growth patterns we have experience and with our backlog orders at $16.9 million in the second quarter - the majority of which will be delivered this year, we believe we can continue to achieve the positive results of the first six months into the last six months of 2006."
(1) Earnings before interest, taxes, non-cash foreign exchange,
impairment of other assets, stock based compensation, depreciation
and amortization (EBITDA) is a non-GAAP measure and may not be
comparable to similar measures used by other companies. Management
believes EBITDA is a useful measure to assist in the assessment of
Dynetek"s ability to generate cash flows from its operations.
>>
OPERATIONAL HIGHLIGHTS
For the six months ended June 30, 2006 Dynetek reported net income of $0.1 million compared to a loss of ($0.5) million for the same period of 2005. For the three months ended June 30, 2006 Dynetek reported a net loss of ($0.2) million compared to a loss of ($0.4) million for the same period of 2005. In the first six months of 2006, Dynetek achieved total revenues of $17.6 million compared to $14.0 million for the same period of 2005. Cylinder and system sales for the six months ended June 30, 2006 were $16.3 million compared to $12.0 million for the same period of 2005. In the second quarter of 2006, Dynetek achieved total revenues of $8.8 million (2005 - $7.1 million) with cylinder and system sales of $8.1 million (2005 - $6.4 million) included in these second quarter results. The Company"s goal is to achieve increased cylinder and system sales in each quarter compared to the prior year comparative quarter. The Company recorded cash flow from operations of $1.4 million for the six months ended June 30, 2006, compared to $2.3 million for the same period of 2005. Cash flow from operations for the three months ended June 30, 2006 was $0.4 million compared to $2.5 million for the same period of 2005. The Company continues to have positive EBITDA1 and reported $1.4 million for the six months ended June 30, 2006 and positive EBITDA(1) of $0.6 million for the three months ended June 30, 2006 representing the tenth consecutive quarter.
The Company continues to focus its compressed natural gas cylinder sales in areas such as California and Europe. In Europe, the Company has seen strong growth due to the need to meet regulatory environmental requirements and the price differential of natural gas compared to diesel. In the first six months of 2006, Dynetek"s European operations achieved record cylinder and system sales of $9.5 million. Dynetek"s proprietary technology provides advantages such as less weight, more compressed natural gas on board and less operating costs, being the value proposition we offer our customers that our competitors cannot provide. This same model was used to develop the California market for heavy-duty trucks.
The cylinder and system sales from the Canadian operations for the six months ended June 30, 2006 were $6.8 million, an increase of 41% when compared to the comparable period of 2005. During the second quarter of 2006, Dynetek completed delivery ($3.0 million CDN) of the bulk transportation modules to John Thompson Engineering PTY, a division of Burns and Roe Worley, located in Sydney Australia. Dynetek"s BT modules will be used to transport compressed natural gas (CNG) to a power plant located in Western Australia.
Dynetek"s research and development team continues to focus its efforts on compressed hydrogen and related storage requirements. During the first six months of 2006 the Company continued to work with 9 different OEMs, including Ford, Hyundai, DaimlerChrysler and Nissan, to design, manufacture and deliver the hydrogen storage solution on 12 confidential development programs.
(1) Earnings before interest, taxes, non-cash foreign exchange,
impairment of other assets, stock based compensation, depreciation
and amortization (EBITDA) is a non-GAAP measure and may not be
comparable to similar measures used by other companies. Management
believes EBITDA is a useful measure to assist in the assessment of
Dynetek"s ability to generate cash flows from its operations.
MANAGEMENT"S DISCUSSION AND ANALYSIS
The following sets out management"s discussion and analysis of our
financial position and results of operations for the three months and six
months ended June 30, 2006 and 2005. The interim management"s discussion and
analysis (MD&A) updates our annual MD&A included in our 2005 Annual Report to
Shareholders, to which readers are referred. No update is provided where an
item is not material or where there has been no material change from the
discussion in our annual MD&A.
Financial Highlights
(tabular amounts in thousands of Canadian dollars,
except share capital and per share data)
(unaudited) Three months ended Six months ended
June 30 June 30
-----------------------------------------------
2006 2005 2006 2005
Revenue
Cylinder and system sales 8,090 6,356 16,323 12,032
Research and development
income 644 683 1,262 1,876
Investment and other income 38 11 57 68
-----------------------------------------------
8,772 7,050 17,642 13,976
Net earnings (loss) (149) (374) 67 (549)
Net earnings (loss) per
common share (basic and
fully diluted) (0.01) (0.02) 0.00 (0.03)
EBITDA(1) 566 262 1,386 796
Capital expenditures 385 448 830 810
Cash and cash equivalents 2,619 4,838 2,619 4,838
Non-cash working capital(2) 12,168 12,318 12,168 12,318
Cash flow from operations 380 2,450 1,376 2,299
Total assets 44,964 46,419 44,964 46,419
Long-term debt 1,327 1,661 1,327 1,661
Common shares
outstanding 20,940,451 20,939,701 20,940,451 20,939,701
Weighted average common
shares outstanding 20,939,911 20,638,780 20,939,911 20,638,780
-------------------------------------------------------------------------
(1) Earnings before interest, taxes, non-cash foreign exchange, stock
based compensation, depreciation and amortization (EBITDA) is a
non-GAAP measure and may not be comparable to similar measures used
by other companies. Management believes EBITDA is a useful measure to
assist in the assessment of Dynetek"s ability to generate cash flows
from its operations.
(2) Non-cash working capital is current assets after cash less current
liabilities.
Cylinder and system sales for the six months ended June 30, 2006 were $16.3 million, up 36% from $12.0 million for the same period of 2005. Cylinder and system sales for the three months ended June 30, 2006 were $8.1 million up $1.7 million or 27% for the same period in 2005. The Canadian dollar to US dollar exchange rate averaged $1.13 during the first six months of 2006 compared to $1.24 for the same period of 2005. Had the U.S. dollar to Canadian dollar exchange rate achieved the levels of the first six months of 2005 in the first six months of 2006, revenues would have been $0.7 million higher. The Canadian dollar to Euro exchange rate averaged $1.40 during the first six months of 2006 compared to $1.59 for the same period of 2005. Had the Euro to Canadian dollar exchange rate achieved the levels of the first six months of 2005 in the first six months of 2006, revenues would have been $1.3 million higher.
During the second quarter of 2006, customers who purchased the DyneCell fuel storage systems(R) for CNG included: Marubeni Metals Corp. (Japan), McNeilus Truck (United States), Iris Bus (Italy),Thomas Built Buses (United States), NEOMAN (Europe), Heuliez Bus (Europe), John Thompson Engineering (Australia), BredaMenarinibus (Europe) and Millennium Transit Services (United States). Customers who purchased hydrogen and other compressed gas fuel storage systems included: DaimlerChrysler (Germany), Hyundai (Korea), Ford Motor Company (United States), and Nissan (Japan).
Research and development income for the six months ended June 30, 2006 was $1.3 million, down 33% or $0.6 million from the same period in 2005. Research and development income for the second quarter was $ 0.6 million, down 14% or $0.1 million from the same period of 2005. During the first six months of 2006, Dynetek continued to be involved with Natural Resources Canada (NRCan) and 9 different Original Equipment Manufacturers (OEMs), including Ford, Hyundai, DaimlerChrysler and Nissan, to design, manufacture and deliver the hydrogen storage solution on 12 confidential development programs. Revenues received from the OEMs regarding these projects are recorded on billing milestones outlined in the contracts and, therefore, timing differences occur between when costs are incurred and funding is received. Non-repayable cost shared monies received from NRCan are recorded as revenue in the period it is invoiced.
During 2006, Dynetek received non-repayable cost shared monies of $0.4 million from NRCan for the development and testing of a 700bar (10000psi) complete fueling system.
Investment and other income for the six months ended June 30, 2006 was $0.1 million, comparable to the same period in 2005. In the second quarter of 2006, investment and other income was $38,000 compared to $11,000 for the same period of 2005.
Cost of goods sold was $12.5 million for six months ended June 30, 2006 compared to $9.0 million for the same period in 2005. Cost of goods sold was $6.3 million for three months ended June 30, 2006 compared to $4.8 million for the same period in 2005. Corresponding contribution margins for the six months ended June 30, 2006 were $3.8 million, or 23% of sales compared to $3.0 million or 25% of sales for the same period of 2005. Corresponding contribution margins for the three months ended June 30, 2006 were $1.8 million, or 22% of sales compared to $1.6 million or 25% of sales for the same period of 2006. The reduction in the contribution margin is reflective of the increase in carbon fibre pricing over the last year and increased freight charges.
General and administrative expense was $1.9 million for the six months ended June 30, 2006, $0.2 million higher than the $1.7 million for the same period of 2005. General and administrative expense was $1.0 million for the three months ended June 30, 2006 $0.1 million higher than $0.9 million for the same period of 2005. Overall general and administration costs decreased as a percentage of revenue from 12% in the first six months of 2005 to 11% in the first six months of 2006. Overall general and administration costs decreased as a percentage of revenue from 13% in the second quarter of 2005 to 11% in the second quarter of 2006.
Research and product development expense was $1.0 million for the six months ended June 30, 2006 compared to $1.7 million for the same period in 2005. Research and product development expense was $0.5 million for the quarter ended June 30, 2006 compared to $0.6 million for the same period in 2005. Research and development expense consists of materials, labour and costs of benefits and overhead related to research and development activity.
The majority of Dynetek"s research and development programs are co-funded with major OEMs and government (NRCan). The funding from the OEMs for the research and development programs is recorded as research and development revenue based on billing milestones outlined in the contracts. This can result in timing differences between when costs are incurred and funding is received. The government funding is recorded either as research and development income or loans. The cost shared monies received from NRCan, which is non-repayable, are recorded as research and development revenue in the period it is invoiced and the repayable government cost shared monies are recorded as a loan.
Marketing expense was $0.8 million for the six months ended June 30, 2006, comparable to the same period of 2005. Marketing expense was $0.4 million for the three months ended June 30, 2006, comparable to the same period of 2005. Overall marketing expense was 5% of sales for the six months ended June 30, 2006 compared to 6% of sales for the same period of 2005. Overall marketing expense was 5% of sales for the three months ended June 30, 2006 compared to 6% of sales for the same period of 2005.
Depreciation was $0.7 million for the six months ended June 30, 2006, $0.1 million higher than the $0.6 million for the same period of 2005. Depreciation was $0.4 million for the three months ended June 30, 2006, $0.1 million higher than the $0.3 million for the same period of 2005.
Amortization was $0.3 million for the six months ended June 30, 2006, which was $0.1 million higher than the same period of 2005. Amortization was $0.2 million for the three months ended June 30, 2006, which is $0.1 million than the $0.1 million for the same period of 2005. Items included in amortization expense include process and development costs, patents and deferred start-up costs for the European operation.
Foreign exchange for six months ended June 30, 2006 was a loss of ($0.2) million compared to a loss of ($0.4) million in the same period of 2005. Foreign exchange for three months ended June 30, 2006 was a loss of ($0.1) million which is comparable to the same period of 2005. Dynetek"s Canadian operations invoices the majority of its revenue in US dollars and the European operation invoices in Euros. The Company reports its results in Canadian dollars but the revenues are generated in US dollars, Euros and Canadian dollars. The foreign exchange loss in the first six months of 2006 is a result of a weakening of the United States dollar against the Canadian dollar resulting in a negative impact on the foreign denominated accounts receivable and cash when translating into Canadian dollars for financial reporting purposes and the settlement of accounts receivable transactions during the period.
To minimize exposure to foreign exchange fluctuations the Company began using monthly forward contracts in order to reduce the foreign exchange translation exposure on accounts receivable, payables and cash. The effect of the monthly forward contracts was a net cash outflow of $144,500 CAD for the six months ended June 30, 2006. Had the Company not entered into the contracts, the Company would have recorded a net foreign exchange loss of $71,500 CDN.
Net Earnings for the six months ended June 30, 2006 was $67,000 or $nil per common share compared to a loss of ($0.5) million or ($0.03) per common share for the comparable period. Net loss for the three months ended June 30, 2006 was ($0.1) million or ($0.01) per common share compared to ($0.4) million or ($0.02) per common share for the same period of 2005. The net income in the first six months is substantially the result of an increase in cylinder and system sales, a reduction of stock based compensation and a decrease in the foreign exchange loss. The net loss for the three months ended June 30, 2006 is substantially the result of a reduction of the margin and increases in depreciation expense and amortization of intangible assets and deferred costs.
VALVE DIVISION
The Valve Division is focused entirely on research and development activities. During the first six months of 2006 the Valve Division received no additional funding of non-repayable cost shared monies from NRCan compared to the $0.2 million received in 2005.
EUROPEAN OPERATIONS
Dynetek Europe GmbH ("Dynetek Germany") has progressed considerably since its inception in 2001 by obtaining cylinder and production certification, developing infrastructure, and marketing the DyneCell(R) primarily throughout Europe.
In the six months ended June 30, 2006 the subsidiary generated $9.5 million of revenue compared to $8.3 million in the same period of 2005. In the quarter ended June 30, 2006 the subsidiary generated $4.3 million of revenue compared to $4.8 million for the same period of 2005.
Summary of Quarterly Results
The following table shows selected unaudited financial information for the past nine quarters ending June 30, 2006. The information has been obtained from our quarterly unaudited financial statements, which have been prepared in accordance with Canadian GAAP and, in the opinion of management, have been prepared using accounting policies consistent with the audited financial statements and include all adjustments necessary for the fair presentation of the results of the interim periods. We expect our operating results to vary significantly from quarter to quarter and they should not be relied upon to predict future information.
(thousands of
Canadian dollars
except per ----------------------------
share data) June 30 Sept. 30 Dec. 31
(unaudited) 2004 2004 2004
----------------------------
Revenues
Cylinder and
system sales 4,403 5,270 8,177
Research &
development
income 1,406 723 576
Investment &
other income 18 10 29
----------------------------
5,827 6,003 8,782
Operating
expenses
Cost of goods
sold 3,277 3,893 6,090
Marketing &
general and
admin. 1,336 1,239 1,479
Research &
product
development 1,044 490 860
----------------------------
5,657 5,622 8,429
----------------------------
Earnings before
interest, income
taxes, non-cash
foreign
exchange, stock
based
compensation,
impairment of
other assets,
depreciation &
amortization(1) 170 381 353
----------------------------
Foreign exchange
(gain) loss (37) 226 71
Depreciation &
amortization 416 430 447
Stock based
compensation 87 88 144
Impairment of
other assets - - -
Income taxes 15 7 4
----------------------------
481 751 666
----------------------------
Net Income
(loss) (311) (370) (313)
----------------------------
----------------------------
Earnings (loss)
per share
Basic and fully
diluted (0.01) (0.02) (0.02)
----------------------------
----------------------------
(thousands of
Canadian dollars
except per ----------------------------------------------------------
share data) Mar. 31 June 30 Sept. 30 Dec. 31 Mar. 31 June 30
(unaudited) 2005 2005 2005 2005 2006 2006
----------------------------------------------------------
Revenues
Cylinder and
system sales 5,676 6,356 5,631 5,858 8,233 8,090
Research &
development
income 1,193 683 362 603 618 644
Investment &
other income 57 11 12 317 19 38
----------------------------------------------------------
6,926 7,050 6,005 6,778 8,870 8,772
Operating
expenses
Cost of goods
sold 4,175 4,796 4,139 4,538 6,241 6,307
Marketing &
general and
admin. 1,154 1,347 1,118 1,548 1,331 1,384
Research &
product
development 1,063 645 604 461 478 515
----------------------------------------------------------
6,392 6,788 5,861 6,547 8,050 8,206
----------------------------------------------------------
Earnings before
interest, income
taxes, non-cash
foreign
exchange, stock
based
compensation,
impairment of
other assets,
depreciation &
amortization(1) 534 262 144 231 820 566
----------------------------------------------------------
Foreign exchange
(gain) loss 241 127 357 258 70 146
Depreciation &
amortization 373 411 449 466 486 518
Stock based
compensation 95 99 100 106 48 51
Impairment of
other assets - - 535 - - -
Income taxes - - - - - -
----------------------------------------------------------
709 637 1,441 829 604 715
----------------------------------------------------------
Net Income
(loss) (175) (375) (1,297) (598) 216 (149)
----------------------------------------------------------
----------------------------------------------------------
Earnings (loss)
per share
Basic and fully
diluted (0.01) (0.02) (0.06) (0.03) 0.01 (0.01)
----------------------------------------------------------
----------------------------------------------------------
(1) Earnings before interest, taxes, stock based compensation, non-cash
foreign exchange, depreciation and amortization (EBITDA) is a
non-GAAP measure and may not be comparable to similar measures used
by other companies. Management believes EBITDA is a useful measure to
assist in the assessment of Dynetek"s ability to generate cash flows
from its operations.
Intangible assets and deferred costs
(thousands of Canadian dollars)
(unaudited) Three months ended Six months ended
June 30 June 30
2006 2005 2006 2005
-------------------------------------------------------------------------
Patents 21 121 22 258
Certification costs 278 277 628 377
Deferred Costs 24 - 44 -
-------------------------------------------------------------------------
323 398 694 635
-------------------------------------------------------------------------
Intangible asset expenditures for the six months ended June 30, 2006 were
$0.7 million compared to $0.6 million for the same period of 2005. The
additions for the three and six months ended June 30, 2006 were due to
certification and patent costs incurred during the period. The Company will
invest in patents and costs associated with product certification in future
years to ensure protection of our intellectual property, developed products
and production processes.
Capital Expenditures
(thousands of Canadian dollars)
(unaudited) Three months ended Six months ended
June 30 June 30
2006 2005 2006 2005
-------------------------------------------------------------------------
Building and leaseholds 16 34 23 348
Manufacturing equipment 165 446 351 2,788
Office furniture and other
equipment 14 - 19 -
Computer hardware and software 16 5 18 7
Manufacturing equipment under
construction 174 (37) 419 (2,333)
-------------------------------------------------------------------------
385 448 830 810
-------------------------------------------------------------------------
Capital expenditures for the six months ended June 30, 2006 were $0.8 million which is comparable to the same period in 2005. Capital expenditures for the three months ended June 30, 2006 were $0.4 million which is comparable to the same period in 2005.
The Company"s capital resource requirements consist of capital expenditures to maintain and improve the existing production line.
Financial Resources and Liquidity
The Company"s principal liquidity requirements relate to the increase in working capital required to maintain our increase in sales.
As at June 30, 2006 Dynetek had cash and cash equivalents of $2.6 million, compared to $3.0 million at March 31, 2006 and $2.8 million at December 31, 2005. Dynetek was cash flow positive from operations of $1.4 million for the six months ended June 30, 2006 and $0.4 million for the three months ended June 30, 2006. Dynetek"s working capital level was $14.8 million at June 30, 2006, as a result of the growth of the Company"s revenues and the increase in production levels to meet demand.
The Company"s investment in inventory resulted in an increase of $1.2 million to $11.6 million at June 30, 2006 from December 31, 2005. Work-in-progress represented by confirmed orders increased by $0.4 million to $3.0 million. Raw material levels increased by $1.2 million to $4.3 million as a result of carbon fiber deliveries received at the end of June. Finished goods inventory decreased by $0.4 million to $4.3 million from the December 31, 2005 levels.
At June 30, 2006 accounts receivable were $6.0 million a reduction of $0.5 million when compared to December 31, 2005. The Company seeks to manage the collection of receivables and the payment of payables in a manner that working capital levels will continue to fund ongoing operations. Accounts payable at June 30, 2006 were $5.7 million, compared to $5.1 million as at December 31, 2005.
The Company"s actual funding requirements will vary depending on a number of factors, including the increase of the CNG system sales on a global basis, the progress of research and development projects and the development of additional relationships with strategic partners. Dynetek remains committed to enhancing its technological leadership and remaining a market leader in the industrial gas fuel storage industry, including CNG and hydrogen.
The long-term debt relates to repayable research and development funding supplied by NRCan. These agreements allow Dynetek to retain the intellectual property and to receive long-term funding. The debt is repayable only in the form of royalties based on specific related commercial product sales and is interest free. The Company has $0.1 million to be repaid in 2006. The Company believes that additional cost shared monies will continue to be available from governments and OEMs for future research and development projects.
Dynetek continues to build on the strong strategic alliances with several major OEMs whereby confidential joint funding has been obtained to develop complete hydrogen fuel storage systems. Other research programs with strategic partners, such as government bodies, who provide financial and technical support, are also in place to explore other storage applications in the energy marketplace.
At June 30, 2006, the Company had an unused $5.0 million line of credit facility with a major chartered bank.
Transactions with Related Parties
For the six months ended June 30, 2006, the Company purchased under normal terms and conditions $5.1 million (2005 - $2.9 million) of material used in the production of lightweight fuel storage systems from Mitsubishi Rayon Corporation, a shareholder of the Company.
Outstanding Share Data
Issued and outstanding:
Number of Shares Amount
Balance December 31, 2004 20,547,232 52,589
Warrants exercised(i) 360,594 (225)
Options exercised 31,875 30
Reclassification of contributed surplus - 38
-------------------------------------------------------------------------
Balance at December 31, 2005 20,939,701 52,432
Options exercised 750 1
-------------------------------------------------------------------------
Balance at June 30, 2006 20,940,451 52,433
-------------------------------------------------------------------------
(i) On May 7, 2005 885,000 share purchase warrants were exercised in a
cashless conversion and 360,594 common shares were issued.
June 30 December 31
2006 2005
-------------------------------------------------------------------------
Securities convertible into common shares:
Stock options 1,162,750 1,180,500
Warrants 756,738 1,174,294
-------------------------------------------------------------------------
As at July 31, 2006 Common shares outstanding were 20,940,451, options outstanding of 1,141,500 and warrants outstanding of 493,722.
OUTLOOK
Revenues from CNG cylinder and system sales in each quarter of 2006 are expected to increase over the comparative quarter in 2005. This growth is expected primarily from the Company"s existing European operations and from new opportunities primarily in bulk hauling and the Californian market.
Revenue from compressed hydrogen cylinder and system sales will continue to vary on a quarter-to-quarter and year-to-year basis. This revenue is dependent on the compressed hydrogen storage requirements of OEMs and other industrial hydrogen companies. The Company is unable to influence the timing of the automotive OEMs compressed hydrogen development programs.
Research and development income is directly related to the Company plans for new products or processes which have the best opportunity of creating near-term revenues. The ability to generate funding from customers and partners dictates how much research and development occurs over any 12-month period. Timing differences can occur between when research and development costs are incurred and when revenue is invoiced and earned. Therefore a deficiency or surplus of revenues over expenditures may vary on a quarter-by-quarter basis. The Company"s goal over a twelve month fiscal period is be at least break-even with the research and development program.
In the third quarter of 2006 the Company will invest approximately $1.0 million in production expansion in the European operation to meet the growing demand for CNG solutions. The Company believes with these expenditures in manufacturing assets and additional space it has the assets in place to support its current rate of growth and has no plans for any additional significant expenditures on capital assets during the remainder of 2006. The Company will continue to seek international opportunities for additional production locations to provide near-term ongoing revenue growth. Potential production strategic partnerships and opportunities to finance international growth are reviewed on a case-by-case basis.
The Company continues to review all options to deal with growth and global prospects. As disclosed in March 2006, a Special Committee has been formed to review and advise the Board of Directors of strategic alternatives available to the Company for enhancing shareholder value, including, but not limited to, raising of capital, strategic partnerships or business combinations.
Additional information relating to Dynetek
Additional information concerning Dynetek, including the AIF, is available on SEDAR at www.sedar.com.
Dynetek Industries Ltd. is a leading international company engaged in the design, manufacturing and marketing of fueling systems and high-pressure components including valves and regulators. The key component of the storage system is the DyneCell(R) cylinder, capable of storing high pressure gases including compressed natural gas (CNG), hydrogen, and various industrial gases. Dynetek"s cylinder and fuel storage systems applications include but are not limited to: the transportation industry, including passenger automobiles, light and heavy-duty trucks, transit and school buses; the bulk hauling of compressed gases; and stationary storage or ground storage refueling applications.
Conference Call
Dynetek will hold a conference call and web cast on Friday, August 11, 2006 at 7:00 a.m. MST (9:00 a.m. EST) to discuss its Second Quarter 2006 financial and operating results and to provide an update on developments of the Company.
Participants in the continental United States and Canada can access the conference call at 1-800-741-3792. Participants calling from the UK geographic area can access the call at 1-800-528-0626 or 44-870-001-3126.
Digital replay of the call will be available approximately one hour after the call is completed and until August 25, 2006. To access the replay in the continental United States or Canada call 1-800-558-5253 or from outside this geographic area, call 1-416-626-4100. To access the replay in the UK geographic area call 1-800-692-0831 or 44-870-000-3081. The confirmation number for the replay is 21300853. The audio web cast can be accessed on Dynetek"s web site at www.dynetek.com and it will be archived for replay for 30 days.
Forward looking statements
In addition to historical information, this Interim Report and the management"s discussion and analysis of financial condition and results of operations contains forward-looking statements and should be read in conjunction with the financial statements and related notes for the year ended December 31, 2005. Forward-looking statements are based upon current assumptions, expectations and estimates that involve a number of risks and uncertainties and actual results could differ materially from those discussed in the forward-looking statements. Readers are encouraged to review the section in the Management"s Discussion and Analysis titled "Principal Risks and Uncertainties" for a discussion of factors that could affect Dynetek"s future operations and financial results. Forward-looking statements are based upon management"s assumptions, expectations and estimates at the time the statements are made. Dynetek does not update forward-looking statements should circumstances or management"s assumptions, expectations or estimates change.
Dynetek Industries Ltd.
Consolidated Balance Sheets
(thousands of Canadian dollars)
(unaudited)
June 30 December 31
2006 2005
-------------------------------------------------------------------------
ASSETS
Current assets
Cash and cash equivalents 2,619 2,809
Accounts receivable 6,023 6,516
Inventory (note 3) 11,585 10,392
Prepaid expenses 442 719
-------------------------------------------------------------------------
20,669 20,436
Intangible assets and deferred costs 5,432 5,054
Capital assets 16,358 16,216
Future income tax 2,505 2,505
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44,964 44,211
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LIABILITIES
Current liabilities
Accounts payable and accrued liabilities 5,731 5,145
Current portion of long-term debt 151 137
-------------------------------------------------------------------------
5,882 5,282
Long-term debt 1,327 1,341
SHAREHOLDERS" EQUITY
Share capital (note 4) 52,433 52,432
Contributed surplus (note 5) 2,281 2,182
Deficit (16,959) (17,026)
-------------------------------------------------------------------------
37,755 37,588
44,964 44,211
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes to the unaudited consolidated financial statements
CONSOLIDATED STATEMENTS OF OPERATIONS AND DEFICIT
(thousands of Canadian dollars except share capital and per share
amounts)
(unaudited)
Three months ended Six months ended
June 30 June 30
2006 2005 2006 2005
-------------------------------------------------------------------------
REVENUE
Sales 8,090 6,356 16,323 12,032
Research and development 644 683 1,262 1,876
Investment and other
income 38 11 57 68
-------------------------------------------------------------------------
8,772 7,050 17,642 13,976
EXPENSES
Cost of goods sold 6,307 4,796 12,548 8,971
General and
administrative 989 921 1,884 1,691
Research and product
development 515 645 993 1,708
Marketing 395 426 831 810
Depreciation 355 297 688 568
Amortization of
intangible assets and
deferred costs 163 113 316 215
Foreign exchange loss 146 127 216 368
Stock based compensation
(note 4) 51 99 99 194
-------------------------------------------------------------------------
8,921 7,424 17,575 14,525
-------------------------------------------------------------------------
Earnings (loss) before
income taxes (149) (374) 67 (549)
-------------------------------------------------------------------------
PROVISION FOR TAXES
Large corporations tax - - - -
-------------------------------------------------------------------------
- - - -
-------------------------------------------------------------------------
NET EARNINGS (LOSS) (149) (374) 67 (549)
-------------------------------------------------------------------------
Deficit, beginning
of period (16,810) (14,756) (17,026) (14,581)
-------------------------------------------------------------------------
DEFICIT, END OF PERIOD (16,959) (15,130) (16,959) (15,130)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Per Share Information
Net loss per share
(basic and diluted) (0.01) (0.02) 0.00 (0.03)
Weighted average number
of common shares
outstanding 20,939,911 20,638,780 20,939,911 20,638,780
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes to the unaudited consolidated financial statements
CONSOLIDATED STATEMENT OF CASH FLOWS
(thousands of Canadian dollars)
(unaudited)
Three months ended Six months ended
June 30 June 30
2006 2005 2006 2005
-------------------------------------------------------------------------
Cash flows provided by
(used for) operating activities
NET EARNINGS (LOSS) (149) (374) 67 (549)
Items not involving cash
Depreciation 355 297 688 568
Amortization of intangible
assets and deferred costs 163 113 316 215
Stock based compensation 51 99 99 194
Unrealized foreign exchange
loss (gain) (179) 229 (99) 400
-------------------------------------------------------------------------
241 364 1,071 828
Changes in non-cash working
capital
Accounts receivable 1,094 1,172 493 1,191
Inventory (542) (489) (1,193) (636)
Prepaid expenses 95 47 277 164
Accounts payable and
accrued liabilities (706) 1,487 586 977
Unrealized foreign
exchange gain (loss) in
non-cash working capital 198 (131) 142 (225)
-------------------------------------------------------------------------
Cash flow from operations 380 2,450 1,376 2,299
-------------------------------------------------------------------------
INVESTING ACTIVITIES
Other assets - (8) - (10)
Additions to intangible
assets and deferred
costs (323) (398) (694) (635)
Additions to capital
assets (385) (448) (830) (810)
Unrealized foreign
exchange gain (loss) in
investing activities - 8 - 10
-------------------------------------------------------------------------
(708) (846) (1,524) (1,445)
-------------------------------------------------------------------------
FINANCING ACTIVITIES
Exercise of options - - 1 30
-------------------------------------------------------------------------
- - 1 30
-------------------------------------------------------------------------
Foreign exchange gain
(loss) on cash held in
a foreign currency (19) (106) (43) (185)
-------------------------------------------------------------------------
Increase (decrease) in cash
and cash equivalents (347) 1,498 (190) 699
Cash and cash equivalents,
beginning of period 2,966 3,340 2,809 4,139
-------------------------------------------------------------------------
Cash and cash equivalents,
end of period 2,619 4,838 2,619 4,838
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Interest income received during the period ended June 30, 2006 was
$0.1 million (2005 - $0.1 million) and interest paid during the period
ended June 30, 2005 was $ nil (2005 - $ nil).
See accompanying notes to the unaudited consolidated financial statements
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the three and six months ended June 30, 2006 and 2005 and as at
June 30, 2006 and December 31, 2005
(tabular amounts in thousands of Canadian dollars, except share capital
amounts)
(unaudited)
1. BASIS OF PRESENTATION
The unaudited interim consolidated financial statements of Dynetek
Industries Ltd. ("Dynetek" or "the Company") have been prepared by
management in accordance with Canadian generally accepted accounting
principles. The unaudited interim consolidated financial statements have
been prepared following the same accounting policies and methods of
computation as the most recent annual audited consolidated financial
statements for the year ended December 31, 2005. The unaudited interim
consolidated financial statements should be read in conjunction with the
audited consolidated financial statements and the notes thereto in the
Company"s Annual Report for the year ended December 31, 2005.
2. SIGNIFICANT ACCOUNTING POLICIES
a) Revenue recognition
Cylinder and system revenue is recognized when finished goods are shipped
to the customer.
Research and development revenue is generated by projects co-funded with
the original equipment manufacturers (OEMs) and government agencies. This
revenue is recognized when contractual deliverables and milestones are
met. Timing differences can occur between when costs are incurred and
when revenue is invoiced and earned.
b) Research and development costs
Research and development costs are expensed as incurred.
(c) Use of estimates
The preparation of financial statements in conformity with Canadian
generally accepted accounting principles requires the Company"s
management to make estimates and assumptions that affect the amounts
reported in these financial statements and notes thereto. Actual results
could differ from those estimates.
3. INVENTORY
June 30 December 31
2006 2005
-------------------------------------------------------------------------
Raw materials 4,276 3,105
Work-in-progress 2,995 2,633
Finished goods 4,314 4,654
-------------------------------------------------------------------------
11,585 10,392
-------------------------------------------------------------------------
4. SHARE CAPITAL
The issued and outstanding common shares of the Company along with
securities convertible into common shares are as follows:
Issued and outstanding:
Number of Shares Amount
Balance December 31, 2004 20,547,232 52,589
Warrants exercised 360,594 (225)
Options exercised 31,875 30
Reclassification of contributed surplus - 38
-------------------------------------------------------------------------
Balance at December 31, 2005 20,939,701 52,432
Options exercised 750 1
-------------------------------------------------------------------------
Balance at June 30, 2006 20,940,451 52,433
-------------------------------------------------------------------------
June 30 December 31
2006 2005
-------------------------------------------------------------------------
Securities convertible into common shares:
Stock options 1,162,750 1,180,500
Warrants 756,738 1,174,294
-------------------------------------------------------------------------
The estimated fair value of the options used for accounting purposes has
been determined using the Black Scholes option-pricing model with the
following assumptions:
Six months ended
June 30
2006 2005
Weighted average risk-free interest rate 1.75 1.75
Weighted average expected life 5 Years 5 Years
Estimated volatility in the market price
of the common shares 82% 87%
Dividend yield 0% 0%
The weighted average fair value per option is $2.16 (2005 - $2.10).
10,500 options were issued to employees during the second quarter of
2006.
5. CONTRIBUTED SURPLUS
The following table summarizes information about contributed surplus.
Balance at December 31, 2005 2,182
Stock based compensation expense 99
-------------------------------------------------------------------------
Balance at June 30, 2006 2,281
-------------------------------------------------------------------------
6. TRANSACTIONS WITH RELATED PARTIES
For the six months ended June 30, 2006, the Company purchased under
normal terms and conditions $5.1 million (2005 -$2.9 million) of material
used in the production of lightweight fuel storage systems from
Mitsubishi Rayon Corporation, a shareholder of the Company.
7. SEGMENTED INFORMATION
The Company currently conducts business in one operating segment, which
involves the manufacture and sale of lightweight fuel storage systems.
The majority of the Company"s operations and assets relating to
commercial production were located in Canada at June 30, 2005. Revenues
attributed to foreign countries are based on the location of the
customer.
Three months ended Six months ended
June 30 June 30
2006 2005 2006 2005
Cylinder and system sales
Canada 92 154 175 364
United States 262 1,127 1,147 2,378
Japan 165 114 480 629
European Union 4,337 4,854 9,518 8,446
Australia 2,988 - 4,607 -
Other 246 107 396 215
-------------------------------------------------------------------------
8,090 6,356 16,323 12,032
-------------------------------------------------------------------------
Corporate Information
Board of Directors Officers and Management Bankers
Bank of Nova Scotia
Heinz O. Portmann Heinz O. Portmann Calgary, Alberta
Chairman of the Board Chairman of the Board
Dynetek Industries Ltd. Auditors
Calgary, Alberta Robb D. Thompson Deloitte & Touche LLP
President and Chief Calgary, Canada
Andrew T.B. Stuart(i) Executive Officer
Chairman Legal Counsel
Sustainability Shift Inc Michael D. Portmann Gowling Lafleur
Toronto, Ontario Vice President and Henderson LLP
General Manager Calgary, Alberta
Peter A. Leus(i)(v)
Director Ulrich Imhof Transfer Agent and
Starlaw Holdings Ltd. Vice President, Registrar
Montreal, Quebec Engineering CIBC Mellon Trust
Company
Michael J. Lang(x)(i) Dr. Christian Rasche with offices in
Chairman Managing Director Toronto, Montreal
Stonebridge Merchant Dynetek Europe GmbH and Calgary
Capital Corp.
Calgary, Alberta Karen Y. Minton
Vice President, Finance
Larry A. Wright(x)(v) and Administration Stock Listing
Executive Vice President Toronto Stock
Multimatic Inc Norman E. Hall Exchange
Markham, Ontario Corporate Secretary Trading Symbol: DNK
William K. Kovalchuk(x)
President
Claret Asset Management Corporate Head Office Investor Relations
Corp. 4410 - 46th Avenue SE To obtain additional
Montreal, Quebec Calgary, Alberta, Canada information about
T2B 3N7 Dynetek or to be
Robb D. Thompson Tel (403) 720 0262 placed on our mailing
President and Chief Fax (403) 720 0263 list for quarterly
Executive Officer Web site: reports please
Dynetek Industries Ltd. http://www.dynetek.com contact:
Calgary, Alberta Robb D. Thompson
Dynetek Industries
Ltd.
Subsidiary Investor Relations
Dynetek Europe GmbH 4410 - 46th Avenue SE
Breitscheider Weg 117a Calgary, Alberta,
D-40885 Ratingen Canada
Germany T2B 3N7
Tel (403) 720 0262
Fax (403) 720 0263
Email:
invest(at)dynetek.com
(x) Audit Committee member
(i) Compensation Committee member
(v) Corporate Governance Committee member
For further information
Robb D. Thompson, President and Chief Executive Officer, Dynetek Industries Ltd., 4410-46 Avenue S.E., Calgary, Alberta, T2B 3N7, Tel: (403) 720-0262, Toll-free: 1-888-396-3835, Fax: (403) 720-0263, Web: www.dynetek.com
Source: Dynetek Industries Ltd.
Thursday August 10, 4:30 pm ET
<< - Record six month revenues of $17.6 million - up 21% from the first six months of 2005 - Record second quarter revenues of $8.8 million - up 26% from the second quarter of 2005 - Positive cash flow from operations of $1.4 million for the first six months of 2006 and $0.4 million for the second quarter of 2006
CALGARY, Aug. 10 /- Dynetek Industries Ltd., a leader in the design, manufacturing and marketing of proprietary fuel storage cylinders and systems for compressed natural gas (CNG) and hydrogen, today reported results for the three-months and six months ended June 30, 2006.
Conference call information is provided below.
Financial Highlights
- Total revenue for the six months ended June 30, 2006 of $17.6 million
increased $3.6 million or 21% from the same period of 2005.
- Total revenues for the three months ended June 30, 2006 of
$8.8 million increased $1.8 million or 26% from the comparative
second quarter of 2005.
- Cylinder and system sales for the six months ended June 30, 2006 of
$16.3 million increased $4.3 million or 36% compared with the
six months ended June 30, 2005.
- Cylinder and system sales for the three months ended June 30, 2006 of
$8.1 million increased $1.7 million or 27% from the comparative second
quarter of 2005.
- Contribution margins fell from 24% in the first quarter to 22% in the
second quarter.
- Cash flow from operations of $1.4 million for the first six months of
2006 and $0.4 million for the second quarter of 2006.
- Tenth consecutive quarter of positive EBITDA(1) including $0.6 million
for the three months ended June 30, 2006.
- Confirmed order book in excess of $16.9 million the majority to be
delivered in the latter half of 2006.
Robb Thompson, President and Chief Executive Officer, said the second quarter results reflect Dynetek"s continued commitment to focusing on CNG cylinder and system sales to our target market of bus and truck manufacturers predominantly in Europe and to tapping into new market opportunities for our bulk hauling technology.
"Unfortunately, the second quarter margins fell to 22% from 24% in the first quarter, as heavy rains and flooding shut down the manufacturing plant of a key raw material supplier and prevented it from delivering for a period. In order to maintain our market leadership and customer needs, we were forced to fill European customer orders on a more costly basis. We are taking steps to ensure this situation will not recur."
"The six-month net earnings and cash flow from operations are representative of what we, as an alternative energy company, can achieve with revenue streams from both CNG and compressed hydrogen", Mr. Thompson said. "Our CNG growth is particularly strong in Europe, which reconfirms that the CNG market place is where opportunities support revenue growth and sustained earnings. This contrasts with the hydrogen market where revenue growth leading to profitability is more limited for now."
"With the growth patterns we have experience and with our backlog orders at $16.9 million in the second quarter - the majority of which will be delivered this year, we believe we can continue to achieve the positive results of the first six months into the last six months of 2006."
(1) Earnings before interest, taxes, non-cash foreign exchange,
impairment of other assets, stock based compensation, depreciation
and amortization (EBITDA) is a non-GAAP measure and may not be
comparable to similar measures used by other companies. Management
believes EBITDA is a useful measure to assist in the assessment of
Dynetek"s ability to generate cash flows from its operations.
>>
OPERATIONAL HIGHLIGHTS
For the six months ended June 30, 2006 Dynetek reported net income of $0.1 million compared to a loss of ($0.5) million for the same period of 2005. For the three months ended June 30, 2006 Dynetek reported a net loss of ($0.2) million compared to a loss of ($0.4) million for the same period of 2005. In the first six months of 2006, Dynetek achieved total revenues of $17.6 million compared to $14.0 million for the same period of 2005. Cylinder and system sales for the six months ended June 30, 2006 were $16.3 million compared to $12.0 million for the same period of 2005. In the second quarter of 2006, Dynetek achieved total revenues of $8.8 million (2005 - $7.1 million) with cylinder and system sales of $8.1 million (2005 - $6.4 million) included in these second quarter results. The Company"s goal is to achieve increased cylinder and system sales in each quarter compared to the prior year comparative quarter. The Company recorded cash flow from operations of $1.4 million for the six months ended June 30, 2006, compared to $2.3 million for the same period of 2005. Cash flow from operations for the three months ended June 30, 2006 was $0.4 million compared to $2.5 million for the same period of 2005. The Company continues to have positive EBITDA1 and reported $1.4 million for the six months ended June 30, 2006 and positive EBITDA(1) of $0.6 million for the three months ended June 30, 2006 representing the tenth consecutive quarter.
The Company continues to focus its compressed natural gas cylinder sales in areas such as California and Europe. In Europe, the Company has seen strong growth due to the need to meet regulatory environmental requirements and the price differential of natural gas compared to diesel. In the first six months of 2006, Dynetek"s European operations achieved record cylinder and system sales of $9.5 million. Dynetek"s proprietary technology provides advantages such as less weight, more compressed natural gas on board and less operating costs, being the value proposition we offer our customers that our competitors cannot provide. This same model was used to develop the California market for heavy-duty trucks.
The cylinder and system sales from the Canadian operations for the six months ended June 30, 2006 were $6.8 million, an increase of 41% when compared to the comparable period of 2005. During the second quarter of 2006, Dynetek completed delivery ($3.0 million CDN) of the bulk transportation modules to John Thompson Engineering PTY, a division of Burns and Roe Worley, located in Sydney Australia. Dynetek"s BT modules will be used to transport compressed natural gas (CNG) to a power plant located in Western Australia.
Dynetek"s research and development team continues to focus its efforts on compressed hydrogen and related storage requirements. During the first six months of 2006 the Company continued to work with 9 different OEMs, including Ford, Hyundai, DaimlerChrysler and Nissan, to design, manufacture and deliver the hydrogen storage solution on 12 confidential development programs.
(1) Earnings before interest, taxes, non-cash foreign exchange,
impairment of other assets, stock based compensation, depreciation
and amortization (EBITDA) is a non-GAAP measure and may not be
comparable to similar measures used by other companies. Management
believes EBITDA is a useful measure to assist in the assessment of
Dynetek"s ability to generate cash flows from its operations.
MANAGEMENT"S DISCUSSION AND ANALYSIS
The following sets out management"s discussion and analysis of our
financial position and results of operations for the three months and six
months ended June 30, 2006 and 2005. The interim management"s discussion and
analysis (MD&A) updates our annual MD&A included in our 2005 Annual Report to
Shareholders, to which readers are referred. No update is provided where an
item is not material or where there has been no material change from the
discussion in our annual MD&A.
Financial Highlights
(tabular amounts in thousands of Canadian dollars,
except share capital and per share data)
(unaudited) Three months ended Six months ended
June 30 June 30
-----------------------------------------------
2006 2005 2006 2005
Revenue
Cylinder and system sales 8,090 6,356 16,323 12,032
Research and development
income 644 683 1,262 1,876
Investment and other income 38 11 57 68
-----------------------------------------------
8,772 7,050 17,642 13,976
Net earnings (loss) (149) (374) 67 (549)
Net earnings (loss) per
common share (basic and
fully diluted) (0.01) (0.02) 0.00 (0.03)
EBITDA(1) 566 262 1,386 796
Capital expenditures 385 448 830 810
Cash and cash equivalents 2,619 4,838 2,619 4,838
Non-cash working capital(2) 12,168 12,318 12,168 12,318
Cash flow from operations 380 2,450 1,376 2,299
Total assets 44,964 46,419 44,964 46,419
Long-term debt 1,327 1,661 1,327 1,661
Common shares
outstanding 20,940,451 20,939,701 20,940,451 20,939,701
Weighted average common
shares outstanding 20,939,911 20,638,780 20,939,911 20,638,780
-------------------------------------------------------------------------
(1) Earnings before interest, taxes, non-cash foreign exchange, stock
based compensation, depreciation and amortization (EBITDA) is a
non-GAAP measure and may not be comparable to similar measures used
by other companies. Management believes EBITDA is a useful measure to
assist in the assessment of Dynetek"s ability to generate cash flows
from its operations.
(2) Non-cash working capital is current assets after cash less current
liabilities.
Cylinder and system sales for the six months ended June 30, 2006 were $16.3 million, up 36% from $12.0 million for the same period of 2005. Cylinder and system sales for the three months ended June 30, 2006 were $8.1 million up $1.7 million or 27% for the same period in 2005. The Canadian dollar to US dollar exchange rate averaged $1.13 during the first six months of 2006 compared to $1.24 for the same period of 2005. Had the U.S. dollar to Canadian dollar exchange rate achieved the levels of the first six months of 2005 in the first six months of 2006, revenues would have been $0.7 million higher. The Canadian dollar to Euro exchange rate averaged $1.40 during the first six months of 2006 compared to $1.59 for the same period of 2005. Had the Euro to Canadian dollar exchange rate achieved the levels of the first six months of 2005 in the first six months of 2006, revenues would have been $1.3 million higher.
During the second quarter of 2006, customers who purchased the DyneCell fuel storage systems(R) for CNG included: Marubeni Metals Corp. (Japan), McNeilus Truck (United States), Iris Bus (Italy),Thomas Built Buses (United States), NEOMAN (Europe), Heuliez Bus (Europe), John Thompson Engineering (Australia), BredaMenarinibus (Europe) and Millennium Transit Services (United States). Customers who purchased hydrogen and other compressed gas fuel storage systems included: DaimlerChrysler (Germany), Hyundai (Korea), Ford Motor Company (United States), and Nissan (Japan).
Research and development income for the six months ended June 30, 2006 was $1.3 million, down 33% or $0.6 million from the same period in 2005. Research and development income for the second quarter was $ 0.6 million, down 14% or $0.1 million from the same period of 2005. During the first six months of 2006, Dynetek continued to be involved with Natural Resources Canada (NRCan) and 9 different Original Equipment Manufacturers (OEMs), including Ford, Hyundai, DaimlerChrysler and Nissan, to design, manufacture and deliver the hydrogen storage solution on 12 confidential development programs. Revenues received from the OEMs regarding these projects are recorded on billing milestones outlined in the contracts and, therefore, timing differences occur between when costs are incurred and funding is received. Non-repayable cost shared monies received from NRCan are recorded as revenue in the period it is invoiced.
During 2006, Dynetek received non-repayable cost shared monies of $0.4 million from NRCan for the development and testing of a 700bar (10000psi) complete fueling system.
Investment and other income for the six months ended June 30, 2006 was $0.1 million, comparable to the same period in 2005. In the second quarter of 2006, investment and other income was $38,000 compared to $11,000 for the same period of 2005.
Cost of goods sold was $12.5 million for six months ended June 30, 2006 compared to $9.0 million for the same period in 2005. Cost of goods sold was $6.3 million for three months ended June 30, 2006 compared to $4.8 million for the same period in 2005. Corresponding contribution margins for the six months ended June 30, 2006 were $3.8 million, or 23% of sales compared to $3.0 million or 25% of sales for the same period of 2005. Corresponding contribution margins for the three months ended June 30, 2006 were $1.8 million, or 22% of sales compared to $1.6 million or 25% of sales for the same period of 2006. The reduction in the contribution margin is reflective of the increase in carbon fibre pricing over the last year and increased freight charges.
General and administrative expense was $1.9 million for the six months ended June 30, 2006, $0.2 million higher than the $1.7 million for the same period of 2005. General and administrative expense was $1.0 million for the three months ended June 30, 2006 $0.1 million higher than $0.9 million for the same period of 2005. Overall general and administration costs decreased as a percentage of revenue from 12% in the first six months of 2005 to 11% in the first six months of 2006. Overall general and administration costs decreased as a percentage of revenue from 13% in the second quarter of 2005 to 11% in the second quarter of 2006.
Research and product development expense was $1.0 million for the six months ended June 30, 2006 compared to $1.7 million for the same period in 2005. Research and product development expense was $0.5 million for the quarter ended June 30, 2006 compared to $0.6 million for the same period in 2005. Research and development expense consists of materials, labour and costs of benefits and overhead related to research and development activity.
The majority of Dynetek"s research and development programs are co-funded with major OEMs and government (NRCan). The funding from the OEMs for the research and development programs is recorded as research and development revenue based on billing milestones outlined in the contracts. This can result in timing differences between when costs are incurred and funding is received. The government funding is recorded either as research and development income or loans. The cost shared monies received from NRCan, which is non-repayable, are recorded as research and development revenue in the period it is invoiced and the repayable government cost shared monies are recorded as a loan.
Marketing expense was $0.8 million for the six months ended June 30, 2006, comparable to the same period of 2005. Marketing expense was $0.4 million for the three months ended June 30, 2006, comparable to the same period of 2005. Overall marketing expense was 5% of sales for the six months ended June 30, 2006 compared to 6% of sales for the same period of 2005. Overall marketing expense was 5% of sales for the three months ended June 30, 2006 compared to 6% of sales for the same period of 2005.
Depreciation was $0.7 million for the six months ended June 30, 2006, $0.1 million higher than the $0.6 million for the same period of 2005. Depreciation was $0.4 million for the three months ended June 30, 2006, $0.1 million higher than the $0.3 million for the same period of 2005.
Amortization was $0.3 million for the six months ended June 30, 2006, which was $0.1 million higher than the same period of 2005. Amortization was $0.2 million for the three months ended June 30, 2006, which is $0.1 million than the $0.1 million for the same period of 2005. Items included in amortization expense include process and development costs, patents and deferred start-up costs for the European operation.
Foreign exchange for six months ended June 30, 2006 was a loss of ($0.2) million compared to a loss of ($0.4) million in the same period of 2005. Foreign exchange for three months ended June 30, 2006 was a loss of ($0.1) million which is comparable to the same period of 2005. Dynetek"s Canadian operations invoices the majority of its revenue in US dollars and the European operation invoices in Euros. The Company reports its results in Canadian dollars but the revenues are generated in US dollars, Euros and Canadian dollars. The foreign exchange loss in the first six months of 2006 is a result of a weakening of the United States dollar against the Canadian dollar resulting in a negative impact on the foreign denominated accounts receivable and cash when translating into Canadian dollars for financial reporting purposes and the settlement of accounts receivable transactions during the period.
To minimize exposure to foreign exchange fluctuations the Company began using monthly forward contracts in order to reduce the foreign exchange translation exposure on accounts receivable, payables and cash. The effect of the monthly forward contracts was a net cash outflow of $144,500 CAD for the six months ended June 30, 2006. Had the Company not entered into the contracts, the Company would have recorded a net foreign exchange loss of $71,500 CDN.
Net Earnings for the six months ended June 30, 2006 was $67,000 or $nil per common share compared to a loss of ($0.5) million or ($0.03) per common share for the comparable period. Net loss for the three months ended June 30, 2006 was ($0.1) million or ($0.01) per common share compared to ($0.4) million or ($0.02) per common share for the same period of 2005. The net income in the first six months is substantially the result of an increase in cylinder and system sales, a reduction of stock based compensation and a decrease in the foreign exchange loss. The net loss for the three months ended June 30, 2006 is substantially the result of a reduction of the margin and increases in depreciation expense and amortization of intangible assets and deferred costs.
VALVE DIVISION
The Valve Division is focused entirely on research and development activities. During the first six months of 2006 the Valve Division received no additional funding of non-repayable cost shared monies from NRCan compared to the $0.2 million received in 2005.
EUROPEAN OPERATIONS
Dynetek Europe GmbH ("Dynetek Germany") has progressed considerably since its inception in 2001 by obtaining cylinder and production certification, developing infrastructure, and marketing the DyneCell(R) primarily throughout Europe.
In the six months ended June 30, 2006 the subsidiary generated $9.5 million of revenue compared to $8.3 million in the same period of 2005. In the quarter ended June 30, 2006 the subsidiary generated $4.3 million of revenue compared to $4.8 million for the same period of 2005.
Summary of Quarterly Results
The following table shows selected unaudited financial information for the past nine quarters ending June 30, 2006. The information has been obtained from our quarterly unaudited financial statements, which have been prepared in accordance with Canadian GAAP and, in the opinion of management, have been prepared using accounting policies consistent with the audited financial statements and include all adjustments necessary for the fair presentation of the results of the interim periods. We expect our operating results to vary significantly from quarter to quarter and they should not be relied upon to predict future information.
(thousands of
Canadian dollars
except per ----------------------------
share data) June 30 Sept. 30 Dec. 31
(unaudited) 2004 2004 2004
----------------------------
Revenues
Cylinder and
system sales 4,403 5,270 8,177
Research &
development
income 1,406 723 576
Investment &
other income 18 10 29
----------------------------
5,827 6,003 8,782
Operating
expenses
Cost of goods
sold 3,277 3,893 6,090
Marketing &
general and
admin. 1,336 1,239 1,479
Research &
product
development 1,044 490 860
----------------------------
5,657 5,622 8,429
----------------------------
Earnings before
interest, income
taxes, non-cash
foreign
exchange, stock
based
compensation,
impairment of
other assets,
depreciation &
amortization(1) 170 381 353
----------------------------
Foreign exchange
(gain) loss (37) 226 71
Depreciation &
amortization 416 430 447
Stock based
compensation 87 88 144
Impairment of
other assets - - -
Income taxes 15 7 4
----------------------------
481 751 666
----------------------------
Net Income
(loss) (311) (370) (313)
----------------------------
----------------------------
Earnings (loss)
per share
Basic and fully
diluted (0.01) (0.02) (0.02)
----------------------------
----------------------------
(thousands of
Canadian dollars
except per ----------------------------------------------------------
share data) Mar. 31 June 30 Sept. 30 Dec. 31 Mar. 31 June 30
(unaudited) 2005 2005 2005 2005 2006 2006
----------------------------------------------------------
Revenues
Cylinder and
system sales 5,676 6,356 5,631 5,858 8,233 8,090
Research &
development
income 1,193 683 362 603 618 644
Investment &
other income 57 11 12 317 19 38
----------------------------------------------------------
6,926 7,050 6,005 6,778 8,870 8,772
Operating
expenses
Cost of goods
sold 4,175 4,796 4,139 4,538 6,241 6,307
Marketing &
general and
admin. 1,154 1,347 1,118 1,548 1,331 1,384
Research &
product
development 1,063 645 604 461 478 515
----------------------------------------------------------
6,392 6,788 5,861 6,547 8,050 8,206
----------------------------------------------------------
Earnings before
interest, income
taxes, non-cash
foreign
exchange, stock
based
compensation,
impairment of
other assets,
depreciation &
amortization(1) 534 262 144 231 820 566
----------------------------------------------------------
Foreign exchange
(gain) loss 241 127 357 258 70 146
Depreciation &
amortization 373 411 449 466 486 518
Stock based
compensation 95 99 100 106 48 51
Impairment of
other assets - - 535 - - -
Income taxes - - - - - -
----------------------------------------------------------
709 637 1,441 829 604 715
----------------------------------------------------------
Net Income
(loss) (175) (375) (1,297) (598) 216 (149)
----------------------------------------------------------
----------------------------------------------------------
Earnings (loss)
per share
Basic and fully
diluted (0.01) (0.02) (0.06) (0.03) 0.01 (0.01)
----------------------------------------------------------
----------------------------------------------------------
(1) Earnings before interest, taxes, stock based compensation, non-cash
foreign exchange, depreciation and amortization (EBITDA) is a
non-GAAP measure and may not be comparable to similar measures used
by other companies. Management believes EBITDA is a useful measure to
assist in the assessment of Dynetek"s ability to generate cash flows
from its operations.
Intangible assets and deferred costs
(thousands of Canadian dollars)
(unaudited) Three months ended Six months ended
June 30 June 30
2006 2005 2006 2005
-------------------------------------------------------------------------
Patents 21 121 22 258
Certification costs 278 277 628 377
Deferred Costs 24 - 44 -
-------------------------------------------------------------------------
323 398 694 635
-------------------------------------------------------------------------
Intangible asset expenditures for the six months ended June 30, 2006 were
$0.7 million compared to $0.6 million for the same period of 2005. The
additions for the three and six months ended June 30, 2006 were due to
certification and patent costs incurred during the period. The Company will
invest in patents and costs associated with product certification in future
years to ensure protection of our intellectual property, developed products
and production processes.
Capital Expenditures
(thousands of Canadian dollars)
(unaudited) Three months ended Six months ended
June 30 June 30
2006 2005 2006 2005
-------------------------------------------------------------------------
Building and leaseholds 16 34 23 348
Manufacturing equipment 165 446 351 2,788
Office furniture and other
equipment 14 - 19 -
Computer hardware and software 16 5 18 7
Manufacturing equipment under
construction 174 (37) 419 (2,333)
-------------------------------------------------------------------------
385 448 830 810
-------------------------------------------------------------------------
Capital expenditures for the six months ended June 30, 2006 were $0.8 million which is comparable to the same period in 2005. Capital expenditures for the three months ended June 30, 2006 were $0.4 million which is comparable to the same period in 2005.
The Company"s capital resource requirements consist of capital expenditures to maintain and improve the existing production line.
Financial Resources and Liquidity
The Company"s principal liquidity requirements relate to the increase in working capital required to maintain our increase in sales.
As at June 30, 2006 Dynetek had cash and cash equivalents of $2.6 million, compared to $3.0 million at March 31, 2006 and $2.8 million at December 31, 2005. Dynetek was cash flow positive from operations of $1.4 million for the six months ended June 30, 2006 and $0.4 million for the three months ended June 30, 2006. Dynetek"s working capital level was $14.8 million at June 30, 2006, as a result of the growth of the Company"s revenues and the increase in production levels to meet demand.
The Company"s investment in inventory resulted in an increase of $1.2 million to $11.6 million at June 30, 2006 from December 31, 2005. Work-in-progress represented by confirmed orders increased by $0.4 million to $3.0 million. Raw material levels increased by $1.2 million to $4.3 million as a result of carbon fiber deliveries received at the end of June. Finished goods inventory decreased by $0.4 million to $4.3 million from the December 31, 2005 levels.
At June 30, 2006 accounts receivable were $6.0 million a reduction of $0.5 million when compared to December 31, 2005. The Company seeks to manage the collection of receivables and the payment of payables in a manner that working capital levels will continue to fund ongoing operations. Accounts payable at June 30, 2006 were $5.7 million, compared to $5.1 million as at December 31, 2005.
The Company"s actual funding requirements will vary depending on a number of factors, including the increase of the CNG system sales on a global basis, the progress of research and development projects and the development of additional relationships with strategic partners. Dynetek remains committed to enhancing its technological leadership and remaining a market leader in the industrial gas fuel storage industry, including CNG and hydrogen.
The long-term debt relates to repayable research and development funding supplied by NRCan. These agreements allow Dynetek to retain the intellectual property and to receive long-term funding. The debt is repayable only in the form of royalties based on specific related commercial product sales and is interest free. The Company has $0.1 million to be repaid in 2006. The Company believes that additional cost shared monies will continue to be available from governments and OEMs for future research and development projects.
Dynetek continues to build on the strong strategic alliances with several major OEMs whereby confidential joint funding has been obtained to develop complete hydrogen fuel storage systems. Other research programs with strategic partners, such as government bodies, who provide financial and technical support, are also in place to explore other storage applications in the energy marketplace.
At June 30, 2006, the Company had an unused $5.0 million line of credit facility with a major chartered bank.
Transactions with Related Parties
For the six months ended June 30, 2006, the Company purchased under normal terms and conditions $5.1 million (2005 - $2.9 million) of material used in the production of lightweight fuel storage systems from Mitsubishi Rayon Corporation, a shareholder of the Company.
Outstanding Share Data
Issued and outstanding:
Number of Shares Amount
Balance December 31, 2004 20,547,232 52,589
Warrants exercised(i) 360,594 (225)
Options exercised 31,875 30
Reclassification of contributed surplus - 38
-------------------------------------------------------------------------
Balance at December 31, 2005 20,939,701 52,432
Options exercised 750 1
-------------------------------------------------------------------------
Balance at June 30, 2006 20,940,451 52,433
-------------------------------------------------------------------------
(i) On May 7, 2005 885,000 share purchase warrants were exercised in a
cashless conversion and 360,594 common shares were issued.
June 30 December 31
2006 2005
-------------------------------------------------------------------------
Securities convertible into common shares:
Stock options 1,162,750 1,180,500
Warrants 756,738 1,174,294
-------------------------------------------------------------------------
As at July 31, 2006 Common shares outstanding were 20,940,451, options outstanding of 1,141,500 and warrants outstanding of 493,722.
OUTLOOK
Revenues from CNG cylinder and system sales in each quarter of 2006 are expected to increase over the comparative quarter in 2005. This growth is expected primarily from the Company"s existing European operations and from new opportunities primarily in bulk hauling and the Californian market.
Revenue from compressed hydrogen cylinder and system sales will continue to vary on a quarter-to-quarter and year-to-year basis. This revenue is dependent on the compressed hydrogen storage requirements of OEMs and other industrial hydrogen companies. The Company is unable to influence the timing of the automotive OEMs compressed hydrogen development programs.
Research and development income is directly related to the Company plans for new products or processes which have the best opportunity of creating near-term revenues. The ability to generate funding from customers and partners dictates how much research and development occurs over any 12-month period. Timing differences can occur between when research and development costs are incurred and when revenue is invoiced and earned. Therefore a deficiency or surplus of revenues over expenditures may vary on a quarter-by-quarter basis. The Company"s goal over a twelve month fiscal period is be at least break-even with the research and development program.
In the third quarter of 2006 the Company will invest approximately $1.0 million in production expansion in the European operation to meet the growing demand for CNG solutions. The Company believes with these expenditures in manufacturing assets and additional space it has the assets in place to support its current rate of growth and has no plans for any additional significant expenditures on capital assets during the remainder of 2006. The Company will continue to seek international opportunities for additional production locations to provide near-term ongoing revenue growth. Potential production strategic partnerships and opportunities to finance international growth are reviewed on a case-by-case basis.
The Company continues to review all options to deal with growth and global prospects. As disclosed in March 2006, a Special Committee has been formed to review and advise the Board of Directors of strategic alternatives available to the Company for enhancing shareholder value, including, but not limited to, raising of capital, strategic partnerships or business combinations.
Additional information relating to Dynetek
Additional information concerning Dynetek, including the AIF, is available on SEDAR at www.sedar.com.
Dynetek Industries Ltd. is a leading international company engaged in the design, manufacturing and marketing of fueling systems and high-pressure components including valves and regulators. The key component of the storage system is the DyneCell(R) cylinder, capable of storing high pressure gases including compressed natural gas (CNG), hydrogen, and various industrial gases. Dynetek"s cylinder and fuel storage systems applications include but are not limited to: the transportation industry, including passenger automobiles, light and heavy-duty trucks, transit and school buses; the bulk hauling of compressed gases; and stationary storage or ground storage refueling applications.
Conference Call
Dynetek will hold a conference call and web cast on Friday, August 11, 2006 at 7:00 a.m. MST (9:00 a.m. EST) to discuss its Second Quarter 2006 financial and operating results and to provide an update on developments of the Company.
Participants in the continental United States and Canada can access the conference call at 1-800-741-3792. Participants calling from the UK geographic area can access the call at 1-800-528-0626 or 44-870-001-3126.
Digital replay of the call will be available approximately one hour after the call is completed and until August 25, 2006. To access the replay in the continental United States or Canada call 1-800-558-5253 or from outside this geographic area, call 1-416-626-4100. To access the replay in the UK geographic area call 1-800-692-0831 or 44-870-000-3081. The confirmation number for the replay is 21300853. The audio web cast can be accessed on Dynetek"s web site at www.dynetek.com and it will be archived for replay for 30 days.
Forward looking statements
In addition to historical information, this Interim Report and the management"s discussion and analysis of financial condition and results of operations contains forward-looking statements and should be read in conjunction with the financial statements and related notes for the year ended December 31, 2005. Forward-looking statements are based upon current assumptions, expectations and estimates that involve a number of risks and uncertainties and actual results could differ materially from those discussed in the forward-looking statements. Readers are encouraged to review the section in the Management"s Discussion and Analysis titled "Principal Risks and Uncertainties" for a discussion of factors that could affect Dynetek"s future operations and financial results. Forward-looking statements are based upon management"s assumptions, expectations and estimates at the time the statements are made. Dynetek does not update forward-looking statements should circumstances or management"s assumptions, expectations or estimates change.
Dynetek Industries Ltd.
Consolidated Balance Sheets
(thousands of Canadian dollars)
(unaudited)
June 30 December 31
2006 2005
-------------------------------------------------------------------------
ASSETS
Current assets
Cash and cash equivalents 2,619 2,809
Accounts receivable 6,023 6,516
Inventory (note 3) 11,585 10,392
Prepaid expenses 442 719
-------------------------------------------------------------------------
20,669 20,436
Intangible assets and deferred costs 5,432 5,054
Capital assets 16,358 16,216
Future income tax 2,505 2,505
-------------------------------------------------------------------------
44,964 44,211
-------------------------------------------------------------------------
-------------------------------------------------------------------------
LIABILITIES
Current liabilities
Accounts payable and accrued liabilities 5,731 5,145
Current portion of long-term debt 151 137
-------------------------------------------------------------------------
5,882 5,282
Long-term debt 1,327 1,341
SHAREHOLDERS" EQUITY
Share capital (note 4) 52,433 52,432
Contributed surplus (note 5) 2,281 2,182
Deficit (16,959) (17,026)
-------------------------------------------------------------------------
37,755 37,588
44,964 44,211
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes to the unaudited consolidated financial statements
CONSOLIDATED STATEMENTS OF OPERATIONS AND DEFICIT
(thousands of Canadian dollars except share capital and per share
amounts)
(unaudited)
Three months ended Six months ended
June 30 June 30
2006 2005 2006 2005
-------------------------------------------------------------------------
REVENUE
Sales 8,090 6,356 16,323 12,032
Research and development 644 683 1,262 1,876
Investment and other
income 38 11 57 68
-------------------------------------------------------------------------
8,772 7,050 17,642 13,976
EXPENSES
Cost of goods sold 6,307 4,796 12,548 8,971
General and
administrative 989 921 1,884 1,691
Research and product
development 515 645 993 1,708
Marketing 395 426 831 810
Depreciation 355 297 688 568
Amortization of
intangible assets and
deferred costs 163 113 316 215
Foreign exchange loss 146 127 216 368
Stock based compensation
(note 4) 51 99 99 194
-------------------------------------------------------------------------
8,921 7,424 17,575 14,525
-------------------------------------------------------------------------
Earnings (loss) before
income taxes (149) (374) 67 (549)
-------------------------------------------------------------------------
PROVISION FOR TAXES
Large corporations tax - - - -
-------------------------------------------------------------------------
- - - -
-------------------------------------------------------------------------
NET EARNINGS (LOSS) (149) (374) 67 (549)
-------------------------------------------------------------------------
Deficit, beginning
of period (16,810) (14,756) (17,026) (14,581)
-------------------------------------------------------------------------
DEFICIT, END OF PERIOD (16,959) (15,130) (16,959) (15,130)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Per Share Information
Net loss per share
(basic and diluted) (0.01) (0.02) 0.00 (0.03)
Weighted average number
of common shares
outstanding 20,939,911 20,638,780 20,939,911 20,638,780
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes to the unaudited consolidated financial statements
CONSOLIDATED STATEMENT OF CASH FLOWS
(thousands of Canadian dollars)
(unaudited)
Three months ended Six months ended
June 30 June 30
2006 2005 2006 2005
-------------------------------------------------------------------------
Cash flows provided by
(used for) operating activities
NET EARNINGS (LOSS) (149) (374) 67 (549)
Items not involving cash
Depreciation 355 297 688 568
Amortization of intangible
assets and deferred costs 163 113 316 215
Stock based compensation 51 99 99 194
Unrealized foreign exchange
loss (gain) (179) 229 (99) 400
-------------------------------------------------------------------------
241 364 1,071 828
Changes in non-cash working
capital
Accounts receivable 1,094 1,172 493 1,191
Inventory (542) (489) (1,193) (636)
Prepaid expenses 95 47 277 164
Accounts payable and
accrued liabilities (706) 1,487 586 977
Unrealized foreign
exchange gain (loss) in
non-cash working capital 198 (131) 142 (225)
-------------------------------------------------------------------------
Cash flow from operations 380 2,450 1,376 2,299
-------------------------------------------------------------------------
INVESTING ACTIVITIES
Other assets - (8) - (10)
Additions to intangible
assets and deferred
costs (323) (398) (694) (635)
Additions to capital
assets (385) (448) (830) (810)
Unrealized foreign
exchange gain (loss) in
investing activities - 8 - 10
-------------------------------------------------------------------------
(708) (846) (1,524) (1,445)
-------------------------------------------------------------------------
FINANCING ACTIVITIES
Exercise of options - - 1 30
-------------------------------------------------------------------------
- - 1 30
-------------------------------------------------------------------------
Foreign exchange gain
(loss) on cash held in
a foreign currency (19) (106) (43) (185)
-------------------------------------------------------------------------
Increase (decrease) in cash
and cash equivalents (347) 1,498 (190) 699
Cash and cash equivalents,
beginning of period 2,966 3,340 2,809 4,139
-------------------------------------------------------------------------
Cash and cash equivalents,
end of period 2,619 4,838 2,619 4,838
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Interest income received during the period ended June 30, 2006 was
$0.1 million (2005 - $0.1 million) and interest paid during the period
ended June 30, 2005 was $ nil (2005 - $ nil).
See accompanying notes to the unaudited consolidated financial statements
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the three and six months ended June 30, 2006 and 2005 and as at
June 30, 2006 and December 31, 2005
(tabular amounts in thousands of Canadian dollars, except share capital
amounts)
(unaudited)
1. BASIS OF PRESENTATION
The unaudited interim consolidated financial statements of Dynetek
Industries Ltd. ("Dynetek" or "the Company") have been prepared by
management in accordance with Canadian generally accepted accounting
principles. The unaudited interim consolidated financial statements have
been prepared following the same accounting policies and methods of
computation as the most recent annual audited consolidated financial
statements for the year ended December 31, 2005. The unaudited interim
consolidated financial statements should be read in conjunction with the
audited consolidated financial statements and the notes thereto in the
Company"s Annual Report for the year ended December 31, 2005.
2. SIGNIFICANT ACCOUNTING POLICIES
a) Revenue recognition
Cylinder and system revenue is recognized when finished goods are shipped
to the customer.
Research and development revenue is generated by projects co-funded with
the original equipment manufacturers (OEMs) and government agencies. This
revenue is recognized when contractual deliverables and milestones are
met. Timing differences can occur between when costs are incurred and
when revenue is invoiced and earned.
b) Research and development costs
Research and development costs are expensed as incurred.
(c) Use of estimates
The preparation of financial statements in conformity with Canadian
generally accepted accounting principles requires the Company"s
management to make estimates and assumptions that affect the amounts
reported in these financial statements and notes thereto. Actual results
could differ from those estimates.
3. INVENTORY
June 30 December 31
2006 2005
-------------------------------------------------------------------------
Raw materials 4,276 3,105
Work-in-progress 2,995 2,633
Finished goods 4,314 4,654
-------------------------------------------------------------------------
11,585 10,392
-------------------------------------------------------------------------
4. SHARE CAPITAL
The issued and outstanding common shares of the Company along with
securities convertible into common shares are as follows:
Issued and outstanding:
Number of Shares Amount
Balance December 31, 2004 20,547,232 52,589
Warrants exercised 360,594 (225)
Options exercised 31,875 30
Reclassification of contributed surplus - 38
-------------------------------------------------------------------------
Balance at December 31, 2005 20,939,701 52,432
Options exercised 750 1
-------------------------------------------------------------------------
Balance at June 30, 2006 20,940,451 52,433
-------------------------------------------------------------------------
June 30 December 31
2006 2005
-------------------------------------------------------------------------
Securities convertible into common shares:
Stock options 1,162,750 1,180,500
Warrants 756,738 1,174,294
-------------------------------------------------------------------------
The estimated fair value of the options used for accounting purposes has
been determined using the Black Scholes option-pricing model with the
following assumptions:
Six months ended
June 30
2006 2005
Weighted average risk-free interest rate 1.75 1.75
Weighted average expected life 5 Years 5 Years
Estimated volatility in the market price
of the common shares 82% 87%
Dividend yield 0% 0%
The weighted average fair value per option is $2.16 (2005 - $2.10).
10,500 options were issued to employees during the second quarter of
2006.
5. CONTRIBUTED SURPLUS
The following table summarizes information about contributed surplus.
Balance at December 31, 2005 2,182
Stock based compensation expense 99
-------------------------------------------------------------------------
Balance at June 30, 2006 2,281
-------------------------------------------------------------------------
6. TRANSACTIONS WITH RELATED PARTIES
For the six months ended June 30, 2006, the Company purchased under
normal terms and conditions $5.1 million (2005 -$2.9 million) of material
used in the production of lightweight fuel storage systems from
Mitsubishi Rayon Corporation, a shareholder of the Company.
7. SEGMENTED INFORMATION
The Company currently conducts business in one operating segment, which
involves the manufacture and sale of lightweight fuel storage systems.
The majority of the Company"s operations and assets relating to
commercial production were located in Canada at June 30, 2005. Revenues
attributed to foreign countries are based on the location of the
customer.
Three months ended Six months ended
June 30 June 30
2006 2005 2006 2005
Cylinder and system sales
Canada 92 154 175 364
United States 262 1,127 1,147 2,378
Japan 165 114 480 629
European Union 4,337 4,854 9,518 8,446
Australia 2,988 - 4,607 -
Other 246 107 396 215
-------------------------------------------------------------------------
8,090 6,356 16,323 12,032
-------------------------------------------------------------------------
Corporate Information
Board of Directors Officers and Management Bankers
Bank of Nova Scotia
Heinz O. Portmann Heinz O. Portmann Calgary, Alberta
Chairman of the Board Chairman of the Board
Dynetek Industries Ltd. Auditors
Calgary, Alberta Robb D. Thompson Deloitte & Touche LLP
President and Chief Calgary, Canada
Andrew T.B. Stuart(i) Executive Officer
Chairman Legal Counsel
Sustainability Shift Inc Michael D. Portmann Gowling Lafleur
Toronto, Ontario Vice President and Henderson LLP
General Manager Calgary, Alberta
Peter A. Leus(i)(v)
Director Ulrich Imhof Transfer Agent and
Starlaw Holdings Ltd. Vice President, Registrar
Montreal, Quebec Engineering CIBC Mellon Trust
Company
Michael J. Lang(x)(i) Dr. Christian Rasche with offices in
Chairman Managing Director Toronto, Montreal
Stonebridge Merchant Dynetek Europe GmbH and Calgary
Capital Corp.
Calgary, Alberta Karen Y. Minton
Vice President, Finance
Larry A. Wright(x)(v) and Administration Stock Listing
Executive Vice President Toronto Stock
Multimatic Inc Norman E. Hall Exchange
Markham, Ontario Corporate Secretary Trading Symbol: DNK
William K. Kovalchuk(x)
President
Claret Asset Management Corporate Head Office Investor Relations
Corp. 4410 - 46th Avenue SE To obtain additional
Montreal, Quebec Calgary, Alberta, Canada information about
T2B 3N7 Dynetek or to be
Robb D. Thompson Tel (403) 720 0262 placed on our mailing
President and Chief Fax (403) 720 0263 list for quarterly
Executive Officer Web site: reports please
Dynetek Industries Ltd. http://www.dynetek.com contact:
Calgary, Alberta Robb D. Thompson
Dynetek Industries
Ltd.
Subsidiary Investor Relations
Dynetek Europe GmbH 4410 - 46th Avenue SE
Breitscheider Weg 117a Calgary, Alberta,
D-40885 Ratingen Canada
Germany T2B 3N7
Tel (403) 720 0262
Fax (403) 720 0263
Email:
invest(at)dynetek.com
(x) Audit Committee member
(i) Compensation Committee member
(v) Corporate Governance Committee member
For further information
Robb D. Thompson, President and Chief Executive Officer, Dynetek Industries Ltd., 4410-46 Avenue S.E., Calgary, Alberta, T2B 3N7, Tel: (403) 720-0262, Toll-free: 1-888-396-3835, Fax: (403) 720-0263, Web: www.dynetek.com
Source: Dynetek Industries Ltd.