TIR Systems Ltd.
TSX : TIR

TIR Systems Ltd.

May 16, 2006 08:00 ET

TIR Systems Reports Second Quarter Financial Results for Fiscal 2006

VANCOUVER, BRITISH COLUMBIA--(CCNMatthews - May 16, 2006) - TIR Systems Ltd. (TSX:TIR), a world leader in light enabling technologies for LED-based Solid State Lighting (SSL), today announces its financial results for the second quarter of fiscal 2006 ("Q2 2006").

TIR SYSTEMS REPORTS 2006 SECOND QUARTER FINANCIAL RESULTS

- Signed new Lighting Manufacturing Partner Spectral GmbH

- Three TIR partners successfully launch LEXEL™-based products

- Increased SSL IP portfolio to five patents and 89 patent filings

- $30 million financing successfully completed

- Three experienced Directors added to Board

- New COO named, further strengthens management team

- Restructured business focused on commercializing LEXEL™ SSL technology

- Loss of $7.7 million for the quarter ($2.8 million due to restructuring)

- $23.6 million cash at end of period

Business Highlights

Lighting Manufacturing Partners

The highlight for the second quarter was signing our fourth lighting manufacturing partner Spectral GmbH, and watching the excitement and positive response of the lighting industry when three of our partners - Zumtobel, Lighting Service Inc. and Spectral - launched lighting products based on TIR's LEXEL™ technology.

In February, Lighting Services Inc. unveiled the world's first LEXEL™ based product at ARC06 in London, United Kingdom. In May, two of TIR's strategic partners, Zumtobel AG and Spectral GmbH successfully launched LEXEL™ based products at Light + Building 2006 in Frankfurt, Germany, one of the largest lighting exhibitions in the world. The response from all three product launches has been very encouraging, and the Company is seeing strong interest in the LEXEL™ technology. This is measured by the growing list of potential lighting manufacturing partners who, following the trade shows in London and Frankfurt, have expressed interest in producing LEXEL™-based products.

In addition to Zumtobel, Spectral and Lighting Services Incorporated, TIR has entered into a collaborative agreement with The Genlyte Group. The Company continues discussions ranging from early qualifications to detailed contract negotiations with several other lighting manufacturers. The nature of these discussions leads us to believe the consortium supporting the LEXEL™ as a new standard in Solid State Lighting will continue to expand.

SSL Technology and IP

We remain committed to the protection of our technology and intellectual property. The Company now has five issued SSL patents and has increased its patent filings by 44% since the beginning of the year. Our number of patent filings now stands at 89. At the same time, we are continuing to vigorously defend ourselves in the lawsuit with Color Kinetics Incorporated, which remains in the discovery stage.

Restructuring

"Based on the recent product launches by our partners, increased interest in TIR's LEXEL™ technology and the progress we have made with respect to being able to deliver commercial LEXEL™ units by the end of 2006, TIR is in a position to both accelerate and capitalize on the global transition to SSL products," said Leonard Hordyk, President and CEO, TIR Systems Ltd. "It is against this backdrop and after a re-evaluation of our corporate strategy that we made the decision to fundamentally restructure the Company. We are now better able to focus on commercializing our market-leading SSL technology for general lighting, while aligning ourselves with the strengths of lighting manufacturing partners who design, manufacture, market and distribute finished luminaires."

TIR's manufacturing partners will now lead the development of new, finished lighting products based on the LEXEL™ technology, and distribute such products under their brands and through their global distribution networks. TIR will continue manufacturing, selling and supporting its existing lighting products with a smaller, more efficient and highly skilled team, but will discontinue the development of finished luminaires. "We are confident in our strategy and excited about TIR's long-term prospects," added Mr. Hordyk.

Completed Financing

In January, the Company announced it had successfully completed the $30 million financing approved by shareholders. The capital was raised through the issuance of convertible debentures to fund research and development relating to our LEXEL™ technology as well as for general corporate purposes.

Board Appointments

As previously announced, TIR appointed three new directors in Q2 2006: Jean-Francois Heitz, Greg Peet and David Berkowitz. Mr. Heitz is a former Deputy Chief Financial Officer and Treasurer of Microsoft Corporation; Mr. Peet was most recently the head of McKesson Medical Imaging Group prior to serving as President and CEO of A.L.I. Technologies; and, Mr. Berkowitz is a Senior Vice President with Ventures West.

Senior Management

In February, Neil McDonnell, formerly Chief Operating Officer of Mobile Data Systems, was named Chief Operating Officer. "This addition, coupled with the strength of senior management already in place, provides us with a very capable and experienced team who are committed to aggressively pursuing our strategy," said Hordyk.

Financial Performance

Restructuring

As a direct result of the restructuring of the business announced on April 13, 2006, the Company eliminated 42 jobs and is expected to incur restructuring charges of up to $5.4 million, $2.8 million was taken in the second quarter, with the balance of up to $2.6 million to be incurred primarily over the next four to six quarters. The breakdown of the restructuring consisted of the following:

- $1.6 million relating to the impairment in value of inventory

- $1.2 million relating to the impairment in value of capital assets and certain patents

- $585,000 of severance costs; and,

- Up to $2.0 million relating to carrying costs associated with a portion of our leased facility which is expected to be vacated

The Company expects to realize annual cost savings of $5 million as a result of the restructuring. This is comprised of $2.5 million in salary and related benefits, $2.0 million of product development costs and $500,000 in marketing, travel and other general expenses.

The Second Quarter 2006, ended March 31, 2006

The second quarter was in line with our announced restructuring, and our long-term strategy and opportunity remains intact. The net loss for Q2 2006 was $7.7 million compared to a net loss for the second quarter of fiscal 2005 ("Q2 2005") of $2.7 million. The increased loss was due primarily to restructuring charges of $2.8 million comprised of the impairment in value of inventory and capital assets of $1.6 million and $1.2 million, respectively. In addition the loss reflects (i) increased legal expenses of $561,600 relating primarily to ongoing litigation, (ii) increased net research and development expenses of $497,200, relating primarily to heightened activity associated with the commercialization of the LEXEL™ and (iii) an increase in net interest expense of $905,400 due to the outstanding convertible debentures.

For the six month period ending March 31, 2006, the net loss was $11.4 million compared to a net loss for the same period of the prior year of $5.6 million. In addition to the factors noted above, the increased net loss for the six month period reflects a lower gross profit and higher net interest expense, partially offset by a lower tax expense, in Q1 2006 compared to Q1 2005.

Revenue for Q2 2006 was $2.7 million compared to $3.5 million for Q2 2005, representing a decrease of 22.5%. The decrease was observed in both Architectural segments with a nominal increase in revenue observed in the Corporate Identity market, in line with our restructuring initiative.

For the six month period ending March 31, 2006, revenue decreased by 25.5% compared to the same period in the prior year. This decrease was observed in both the Architectural - Light Pipe and Corporate Identity market segments, partially offset by an increase in revenues from the Architectural - SSL market segments.

Gross profit was $1.6 million lower in Q2 2006 compared to Q2 2005. The decrease is attributable primarily to $1.6 million in charges for inventory impairment attributed to the restructuring of the business. Negating the effect of these inventory obsolescence charges, overall gross margins would have been 22.3% in Q2 2006, 5.5% higher than those reported in Q2 2005 and more than offsetting the lower revenue reported in Q2 2006 compared to Q2 2005.

For the six months ending March 31, 2006 the Company reported a negative gross profit of $181,400 compared to a gross profit of $2.0 million for the comparable period of the prior year primary due to restructuring charges noted above and lower revenue compared to the same period of the prior year.

Teleconference Call

TIR Systems will be holding a conference call for the investment community on Tuesday, 16 May at 8:00 a.m. Pacific Time (11:00 a.m. Eastern Time), to discuss the financial results for the second quarter of fiscal 2006 ending March 31, 2006. To participate, please dial 1-877 563-6442 toll free.

A playback of the call will be available from 4 p.m. (Pacific Time), on Tuesday 16 May, until Tuesday, 30 May, 2006. To access the replay, please call 1-416-626-4100 or 1-800-558-5253 and quote reference number 21292002. A recording of the call is also available at our website at www.tirsys.com from Tuesday, May 16th, 2006.

About LEXEL™

The LEXEL™ is a perfectly controllable new solid state light source incorporating light emitting diodes (LEDs) that has the potential to use up to 80% less energy to produce the same amount of light as a conventional light source and does not degrade its output or color temperature over its estimated 50,000 hour life. LEXEL™ combines breakthroughs in thermal design, optics, and feedback to provide precise color temperature control and dimming in a cost effective design, resulting in a truly intelligent light source for illumination.

About the Company

TIR Systems Ltd., a world leader in light enabling technology, is building the foundations for tomorrow's lighting. TIR developed the LEXEL™, which is the first, fully integrated, Light Emitting Diode (LED) based light source, designed specifically to produce high quality white light essential for general lighting applications. The benefits of the LEXEL™ technology will encourage a more rapid adoption of Solid State Lighting and the LEXEL™ is positioned to become a new standard in the global lighting market.

This News Release contains forward-looking statements or information within the meaning of applicable Canadian securities legislation regarding our strategy, future operations, future financial position prospects and plans and objectives of management. Forward-looking statements or information are statements about the future and are inherently uncertain, and will be impacted by known and unknown risks, uncertainties and other factors that may cause our actual results to be materially different from any future results, performance or achievements expressed or implied by such statements. Forward-looking statements or information include, but are not limited to, those with respect to the anticipated value of orders for our product or the launch of our new products. Factors that could cause such actual events or results expressed or implied by such forward-looking statements or information to differ materially from any future results, performance or achievements, expressed or implied by such statements include, but are not limited to; the risk that we are dependent on a single customer for a significant portion of our sales revenue; future sales of our existing products and our new products may be less than expected; our ability to maintain and expand our intellectual property portfolio, the successful development or acquisition of complementary or supplementary products for our Light Pipe or Solid State Lighting product lines, our ability to develop our customer base, and our ability to manufacture products at attractive gross margins, our ability to introduce commercially viable LEXEL™-based products in a reasonable time frame, our future operating results are uncertain and likely to fluctuate; and the patent litigation initiated by Color Kinetics may be unfavourable and have an adverse impact on our financial results; manufacturing risks; product liability risks; the effect of competition may have an adverse impact on our sales and profitability; the Company's need for additional future capital, which may not be available in a timely manner or at all; exchange rate fluctuations between the US and Canadian currencies, which may decrease revenues reported in Canadian dollars; as well as a description of other risks and uncertainties affecting the Company and its business, as contained in the Company's most recent Annual Information Form and other subsequent news releases and filings with the Canadian Securities Regulatory Authorities, any of which could cause actual revenues to vary materially from the Company's anticipated future results. Forward-looking statements or information are based on the beliefs, opinions and expectations of the Company's management at the time they are made, and the Company does not assume any obligation to update its forward-looking statement or information if those beliefs, opinions or expectations change, or there is new information or other circumstances should change.



Incorporated under the laws of British Columbia
BALANCE SHEETS
Unaudited
As at March 31, September 30,
2006 2005
ASSETS $ $
CURRENT
Cash and cash equivalents 23,591,500 2,650,300
Accounts receivable 3,138,000 3,054,900
Government grants receivable 1,645,700 883,000
Other receivable - 216,600
Inventory 2,392,500 2,984,600
Prepaid expenses 385,800 363,700
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TOTAL CURRENT ASSETS 31,153,500 10,153,100
Capital assets 3,341,900 4,454,600
Patents and acquired
intellectual property 895,800 794,600
Deferred charges - 180,300
Deferred financing charges 589,700 240,000
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TOTAL ASSETS 35,980,900 15,822,600
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LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT
Accounts payable 2,267,600 1,974,900
Accrued liabilities 4,376,300 3,843,000
Customer deposits and deferred
revenue 1,106,700 723,300
Current portion of long term debt 248,900 241,500
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TOTAL CURRENT LIABILITIES 7,999,500 6,782,700

Long term debt 1,273,900 1,400,200
Convertible debentures 13,086,800 -
--------------------------------------------------------------------
TOTAL LIABILITIES 22,360,200 8,182,900
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Commitments and contingencies

SHAREHOLDERS' EQUITY
Share capital 22,552,800 22,454,000
Contributed surplus 19,089,200 1,774,400
Deficit (28,021,300) (16,588,700)
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TOTAL SHAREHOLDERS' EQUITY 13,620,700 7,639,700
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TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY 35,980,900 15,822,600
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STATEMENTS OF LOSS AND DEFICIT
Unaudited Three months ended Six months ended
March 31, March 31, March 31, March 31,
2006 2005 2006 2005
$ $ $ $
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REVENUE 2,692,600 3,473,900 6,795,100 9,118,900
Cost of Sales 3,729,300 2,892,100 6,976,500 7,078,200
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Gross Profit
(Loss) (1,036,700) 581,800 (181,400) 2,040,700
--------------------------------------------------------------------

EXPENSES
Sales and
marketing 1,171,600 1,305,900 2,427,900 2,600,900
Customer service
and support 323,800 338,600 672,700 770,900
General and
administrative 1,986,300 1,042,500 3,795,300 2,029,600
Research and
development 1,554,600 977,800 2,633,300 1,824,300
Less government
assistance (440,300) (360,700) (814,000) (11,900)
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4,596,000 3,304,100 8,715,200 7,213,800
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IMPAIRMENT OF
CAPITAL ASSETS
AND INTELLECTUAL
PROPERTY 1,175,800 - 1,175,800 -
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LOSS FROM
OPERATIONS (6,808,500) (2,722,300) (10,072,400) (5,173,100)

Interest and
other income 247,400 30,700 438,900 57,300
Interest expense
and financing
charges (1,157,200) (35,100) (1,803,300) (71,700)
Foreign exchange
gain (loss) 4,700 36,300 4,200 (116,900)
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LOSS BEFORE
INCOME TAXES (7,713,600) (2,690,400) (11,432,600) (5,304,400)

Provision for
income taxes - - - 277,000

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NET LOSS (7,713,600) (2,690,400) (11,432,600) (5,581,400)

Deficit,
beginning of
period (20,307,700) (6,437,900) (16,588,700) (3,546,900)
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Deficit, end of
period (28,021,300) (9,128,300) (28,021,300) (9,128,300)
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Loss per share
Basic and
diluted (0.34) (0.12) (0.50) (0.25)
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STATEMENT OF CASH FLOWS
Unaudited Three months ended Six months ended
March 31, March 31, March 31, March 31,
2006 2005 2006 2005
$ $ $ $
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Operating
Activities
Net loss (7,713,600) (2,690,400) (11,432,600) (5,581,400)
Adjustments for
non-cash items:
Future income
tax expense - - - 277,000
Reduction in
investment tax
credits - - - 714,000
Depreciation and
amortization 328,200 322,500 618,900 624,900
Impairment of
capital assets
and patents 1,175,800 - 1,175,800 -
Amortization of
deferred charges 101,400 67,900 180,300 134,700
Amortization of
deferred
financing
charges 29,800 - 47,600 -
Accretion of
unamortized
discount 537,100 - 797,900 -
Stock-based
compensation 249,200 213,700 378,500 465,700
Gain on disposal
of capital
assets - - 1,700 -
Changes in
non-cash working
capital
balances:
Accounts
receivable 889,900 895,600 (83,100) 1,560,400
Government
grants
receivable (236,700) (452,800) (762,700) 731,900
Accounts
receivable 216,600 - 216,600 -
Inventory 683,100 (133,200) 592,100 (154,800)
Prepaid expenses 61,100 (48,100) (22,100) (9,600)
Accounts payable 323,900 (648,400) 194,400 (1,124,300)
Accrued
liabilities 156,700 (373,100) 533,300 (1,191,600)
Customer
deposits 268,000 13,900 383,400 (524,100)
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Cash (used in)
operating
activities (2,929,500) (2,832,400) (7,180,000) (4,077,200)
--------------------------------------------------------------------

FINANCING
ACTIVITIES
Issue of common
shares, net of
share issue
costs 64,500 9,900 64,500 9,062,700
Issue of
convertible
debentures, net
of financing
costs 2,477,100 - 28,832,200 -
(Repayment) of
leasehold
improvement loan (16,600) (14,900) (32,600) (29,600)
(Repayment) of
capital lease
obligations (41,900) (41,400) (84,900) (82,500)
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Cash provided by
(used in)
financing
activities 2,483,100 (46,400) 28,779,200 8,950,600
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INVESTING
ACTIVITIES
Acquisition of
capital assets,
net (372,100) (356,300) (566,000) (652,500)
Acquisition of
patents and
intellectual
property (18,300) (67,400) (92,000) (81,900)
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Cash (used in)
investing
activities (390,400) (423,700) (658,000) (734,400)
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(Decrease)
increase in cash
and cash
equivalents (836,800) (3,302,500) 20,941,200 4,139,000
Cash and cash
equivalents,
beginning of
period 24,428,300 8,669,400 2,650,300 1,227,900
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Cash and cash
equivalents, end
of period 23,591,500 5,366,900 23,591,500 5,366,900
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Supplemental
disclosures of
cash flow
information
--------------------------------------------------------------------
Cash paid for
interest 30,500 35,100 61,500 71,700
Warrants issued
as compensation - - 215,700 -
Debentures
converted into
common shares 34,300 - 34,300 -
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The TSX has not reviewed and does not accept responsibility for the adequacy or accuracy of the content of this News Release.

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