FIRST LITHIUM LIMITED — Annual Report 2009

Aug 30, 2009

Appendix 4E Preliminary final report

Appendix 4E

Preliminary final report

1. Company details

Name of entity

Advanced Engine Components Limited

ABN or equivalent company Financial year ended (‘current Period ended (‘previous period’): reference period’) 067 009 081 770 30 June 2009 30 June 2008

2. Results for announcement to the market

2. Results for announcement to	the market $A’000’s
2.1 Revenues from operations 2.2 Loss from operations after tax attributable to members 2.3 Net loss for the period attributable to members	Up 3% to 4,827 Up 37% to (2,841) Up 37% to (2,841)
2.4Dividends		Amount per security	Franked amount persecurity
Final dividend proposed		Nil	Nil
Interimdividend		Nil	Nil
2.5 +Record date for determining entitlements to the final dividend.	N/A

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REVIEW OF OPERATIONS

The 2009 financial year has been a very challenging year for AEC.

The previous financial year (2008) recorded a 52% increase in sales revenue over the preceding year (2007). The current 2009 financial year was expected to continue and improve on that sales trend.

The first quarter of the 2009 financial year was very positive. Sales were 226% higher than the corresponding period of the prior year with strong forward orders and interest. On the back of this sales growth and interest, AEC completed an $873,000 capital raising, at 20 cents per share, and put in place a $2.0 million sales financing facility. These debt and equity raisings were expected to provide the Company with sufficient working capital through to a positive cash flow position.

In the second quarter, the impact of the global financial crisis on the economies and stock markets around the world began to affect AEC’s markets. The price of oil, a critical decision making factor in purchasing natural gas vehicles (“NGVs”), fell from an average US$136.44 per barrel in June/July 2008 to an average US$48.24 in November/December 2008. Demand slowed, deliveries were deferred and customer payments delayed.

Despite the impact of the global financial crisis on the final nine months of the financial year, AEC recorded an increase in year on year sales for the fifth financial year in a row. In addition, the Company advanced further in its mission to be the leading supplier of alternative fuel engine systems and components to the Asia Pacific Region through innovation and quality. These advances include:

• (a) signing of an engine development and ten year purchase agreement with Tata Motors Limited (“TML”) of India;

• (b) signing a strategic alliance agreement with Norinco Equipment Co Ltd (“Norinco Equipment”) of China for the marketing and sale of NGVs and products in the Chinese domestic and export markets;

• (c) doubling the number of NGVs using the AEC NGVS in the Asia Pacific Region;

• (d) a 65% increase in recurring sales of spares and consumables around the world;

• (e) commencement of commercial production of the more cost competitive and efficient fifth generation AEC electronic control unit (“ËCU”); and

• (f) strengthening of the AEC China management team.

Some of the key aspects of our operations in the year under review were:

Existing Markets

China continues to be the major market for AEC. For the 2009 financial year, China domestic sales represented 63% of AEC’s total sales compared to 40% for 2008.

By 30 June 2009, there were over 370 vehicles, in more than 27 Chinese cities, using the AEC natural gas vehicle system (“NGVS”).

Through the last nine months of the 2009 financial year AEC faced major negotiating difficulties with what had previously been AEC’s major customer in China. These difficulties have seen ongoing delays in payment to AEC, of amounts outstanding, and a current ceasing of all orders from that customer.

However, the period has also seen renewed interest in sale of NGV engines throughout China by Deutz (Dalian) Engine Co Ltd (“DDE”). DDE is a subsidiary of China First Auto Works Group Corporation (“FAW”) one of the largest vehicle manufacturers in China. In past years, AEC and DDE had collaborated in a number of engine developments and DDE had purchased, and for some years held, a large stock of AEC NGVS. This stockholding is now close to fully utilised.

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As part of DDE’s renewed interest DDE and AEC collaborated, in the second half of FY2009, on development of a hybrid natural gas -electric bus using the AEC NGVS. Buses using the hybrid system have been successfully trialled in route service and DDE’s commercial sales of the buses have now commenced.

The run down of DDE’s NGVS stock, through increasing sales of DDE LNG and CNG engines; the availability of AEC’s ECU5; and the development of the hybrid system, will result in increasing AEC NGVS sales to DDE throughout the 2010 financial year and beyond.

Sales of DDE, Aussen and Xilian engines, incorporating AEC’s NGVS, together with the Norinco Equipment alliance will ensure China remains a major sales market for AEC NGVS and components in 2010.

Thailand and Indonesia purchases of natural gas engines from AEC, as a percentage of AEC sales, were considerably lower in 2009 (5%) than 2008 (37%). The Thai NGV market was impacted by the low oil price and political instability. Delays in the Indonesian market were more related to lack of natural gas infrastructure. Interest and activity increased in both countries in the latter part of the 2009 financial year. Sales orders recommenced subsequent to year end and will continue throughout the 2010 financial year.

France continues to be a stable market for AEC with ongoing sales of spares and consumables. Sales for 2009 were up 63% to $1.4 million. Sales to France represented 30% of total sales compared to 19% for 2008.

Australian domestic sales remain relatively low at 2% in 2009 compared to 4% in 2008. These sales relate to services, spares and consumables, mainly to Perth Public Transport Authority, for existing bus engines converted to AEC’s NGVS. In addition, AEC has two vehicles with Isuzu engines (190hp and 220hp) converted to CNG and a vehicle with an Isuzu 255hp engine converted to LNG, operating commercially in Australia. A further vehicle, with an Isuzu 295hp engine, is in the final stages of development. Although Australia is unlikely to be a major market, Australian sales of the AEC NGVS for the Isuzu 295hp engine will increase with completion of development prior to 31 December 2009.

Future Markets

India is recognized as the most exciting NGV market in the world. It is currently the 5th largest NGV market in the world with 28 city projects in process, involving 450,000 vehicles and 373 natural gas refueling stations. Over 220 Indian cities are planned for CNG development involving more than 12,000 km of networked pipeline. This pipeline network is in addition to the Iran-Pakistan-India pipeline and the Turkmenistan-Afghanistan-Pakistan-India pipeline. By the end of calendar 2009 gas availability in India will have doubled and by 2012 India’s CNG pipeline will connect 15 states and reach a population of 160 million people.

Legislation in India requires all buses and trucks, servicing the major cities, to comply with Euro 4 emission standards by 1 April 2010. This requirement increases to Euro 5 by 1 April 2014. These increasingly stringent standards are a major competitive advantage to AEC’s technology which already has the capability of Euro 5.

In October 2008, AEC signed a letter of intent to enter into a 10 year purchase agreement with TML in India. In December 2008 AEC and TML executed the purchase agreement. TML is India’s largest automobile company, the world’s fourth largest truck manufacturer and the world’s second largest bus manufacturer.

AEC’s development of naturally aspirated and turbo charged natural gas versions of TML’s four and six cylinder engines is well advanced with two reference engines having been sent to AEC in Australia. Development is expected to be completed, with start of commercial production, in the first half of calendar 2010.

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In March 2009, AEC entered into a strategic alliance agreement with Norinco Equipment in China . Norinco Equipment, a subsidiary of the State Owned Enterprise China North Industries Group Corporation, is involved in the development and export of CNG vehicles, engines and related natural gas products from China. AEC, in conjunction with Norinco Equipment, has already commenced discussions with parties in Egypt , Iran, Myanmar and Thailand. The Board of AEC believe the links with Norinco Equipment will be very important to AEC’s future development in China and many other countries around the world.

FINANCIAL REVIEW

Income Statement

Although low, at 3%, the 2009 financial year was AEC’s fifth year in a row of year on year growth in sales. The 2008 sales were 52% higher than 2007; 2007 was 20% higher than 2006; and 2006 was 45% higher than 2005.

The $2.8 million loss for the financial year was 37% higher than the $2.1 million loss for 2008.

Despite the increased loss, the 2009 financial year showed the resilience of the AEC business model to a downturn in economic cycles. Sales of NGVS kits increased to 39% (2008: 29%) of total sales, mainly in the first quarter; sales of engines decreased to 7% (2008: 37%); but most importantly, sales of spares and consumables increased from $1.5 million (33%) in 2008 to $2.6 million (53%) in 2009. Sales of spares and consumables will increase exponentially each year, regardless of economic conditions, with every new vehicle utilising the AEC NGVS that becomes operational.

The Gross Margin was down for 2009 (32%) compared to 2008 (40%). Margins on NGVS were consistent in both periods; margins on engines were well down, due to different markets, but with little impact on the overall margin due to the small dollar value; and margins on spares and consumables were up.

The main reason for the drop in the margin related to warranty claims in the China market. The high level of these claims reflects the many different geographical and climatic conditions in which the AEC NGVS operates throughout China; the customer’s lack of knowledge for the different operating characteristics of NGVs; and the need in some cases, particularly LNG vehicles, for AEC to alter the operating capabilities of the NGVS. AEC is confident, although issues will always arise in new markets, that 2010 will see warranty claims return to normal acceptable levels.

Earnings before interest, tax, depreciation and amortisation (“EBITDA”) was a loss of $1.46 million in 2009 compared to a loss of $1.2 million in 2008. The variation in the EBITDA loss is materially the same as the variation in the warranty claim figure.

The 2009 EBITDA also benefited from foreign exchange gains of $590,000, included as Other Income, and a saving in Australian employment and other overhead costs. However, these gains and savings were more than offset by additional China overheads, principally marketing related, for employee costs; travel and external testing. These additional costs will benefit AEC throughout 2010 and beyond.

Borrowing costs were $353,000 higher in 2009 than 2008. This reflects the difficulty in obtaining finance in the current economic climate. However, half of this increase relates to the book value of share options issued as part of the refinancing. This willingness of financiers, both external and related, to accept equity as part of their financing consideration reflects their long term belief in AEC’s future.

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Balance Sheet

As at 30 June 2009 AEC’s working capital, excluding short term interest bearing loans and provision for long service leave, is $1.6 million higher than as at 30 June 2008. This improvement is principally the result of a $2.0 million increase in trade receivables. Unfortunately, this increase is the result of delayed payments rather than increased sales. AEC continues to negotiate to reduce the amounts owing by the major customer. The reduction is occurring slowly and will continue through the 2010 financial year.

Delays in trade receivables have principally been funded by short term interest bearing loans from related parties. In addition, a short term borrowing of $750,000 from a third party has been refinanced and assigned to related parties. The other major increase in short term borrowings relates to the reclassification of the convertible note, held by a related party, being reclassified from a long term borrowing to a short term borrowing pursuant to the terms of that note.

As at 30 June 2009, other than low value leasing and premium funding loans, all interest bearing secured borrowings are from parties related to the Directors of AEC.

SUMMARY

The 2009 financial year, although starting well, has been a very challenging year for AEC. The main focus, because of international economic conditions, has been on cash flow and funding of delayed orders, deliveries and receipts from customers.

However, added to Government stimulus packages beneficial to AEC, the key business drivers for AEC remain positive:

• the current price of oil above US$70 per barrel;

• security of energy concerns; and

• environmental concerns.

As a result, the usage of compressed natural gas (CNG), liquefied natural gas (LNG), bio methane, hydrogen blended with CNG (HCNG) and natural gas – electric hybrid systems, all of which require the AEC NGVS or equivalent, are increasingly being accepted as the preferred alternative fuel of choice for Governments and heavy duty vehicle users around the world.

Together with the key business drivers, AEC’s newly established relationships with TML and Norinco Equipment are expected to provide positive results for AEC in the 2010 financial year.

While the key focus in the short term must remain on cash flow and funding, AEC is seeing renewed interest and demand particularly in China, Thailand, Indonesia and India.

Tony Middleton Managing Director 31 August 2009

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3. Consolidated income statement

3. Consolidated income statement
Revenues from operations Other income Share of loss of joint venture Expenses from ordinary activities, excluding borrowing costs (refer note 3.1) Borrowing costs	Current period - $A'000	Previous corresponding period -$A'000
	4,827 811 - (7,677) (802)	4,673 213 (29) (6,481) (449)
Loss before income tax Income taxexpense	(2,841) -	(2,073) -
Net loss for the period Netloss attributable tominorityinterests	(2,841) -	(2,073) -
Net loss attributable to members	(2,841)	(2,073)

Notes to the consolidated income statement

3.1 Expenses from ordinary activities (excluding borrowing costs)

Details of “Expenses from ordinary activities” by nature	Details of “Expenses from ordinary activities” by nature	Current period $A'000	Previous corresponding period $A'000
	Cost of sales Employee benefits expense Depreciation and amortisation expense Impairment Other expenses from ordinaryactivities	(3,283) (2,666) (532) (51) (1,145)	(2,827) (2,509) (424) - (721)
	Total Expenses	(7,677)	(6,481)

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3.2 Other disclosures relating to the income statement

	Current period - $A'000	Previous corresponding period -$A'000
Net gain/(loss) on the disposal of assets: - property, plant and equipment	1	-
Net revenue/(expense) since the beginning of the reporting period resulting from deductions from the carrying amounts of assets : - amortisation of non-current assets - depreciation of non-current assets -Provision for doubtful debts written back - Impairment	(341) (191) - (51)	(219) (205) 130 -

3.3 Revision of Accounting Estimates

Details of Revision of Accounting Estimates in accordance with AASB 118

None

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4 Condensed consolidated balance sheet Current assets Cash and cash equivalents Trade and other receivables Inventories	At end of current period $A’000	As shown in last annual report $A'000
	280 4,108 1,605	169 2,062 1,499
Total current assets	5,993	3,730
Non-current assets Investments accounted for using the equity method Property, plant and equipment (net) Intangibles assets (net)	40 419 4,233	40 600 3,587
Total non-current assets	4,692	4,227
Total assets	10,685	7,957
Current liabilities Trade and other payables Interest-bearing loans and borrowings Provisions	2,644 8,822 324	1,964 2,067 257
Total current liabilities	11,790	4,288
Non-current liabilities Interest-bearing loans and borrowings	-	2,975
Total non-current liabilities	-	2,975
Total liabilities	11,790	7,263
Net assets /(liabilities)	(1,105)	694
Equity Contributed equity Reserves Accumulated losses	18,366 1,307 (20,778)	17,482 1,149 (17,937)
Equity attributable to members of the parent entity Minority interests in controlled entities	(1,105) -	694 -
Total equity	(1,105)	694

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5 Condensed consolidated statement of cash flows

5Condensed consolidated statement o	f cash flows
Cash flows related to operating activities Receipts from customers (inclusive of gst) Payments to suppliers and employees (inclusive of gst) Interest received Interest and other costs of financepaid	Current period $A'000	Previous corresponding period -$A'000
	4,661 (6,446) 4 (652)	3,534 (5,140) 19 (91)
Net operating cash flows	(2,433)	(1,678)
Cash flows related to investing activities Payment for purchases of property, plant and equipment Payment for purchases of joint venture, net of cash acquired Payment for capitalised development costs	(7) - (1,103)	(21) (70) (1,081)
Net investing cash flows	(1,110)	(1,172)
Cash flows related to financing activities Proceeds from issues of shares Transaction costs associated with issue of shares Proceeds from borrowings Repayments ofborrowings	946 (62) 4,273 (1,503)	2,300 (76) 1,666 (1,482)
Net financing cash flows	3,654	2,408
Net increase (decrease) in cash held Cashat beginning ofperiod	111 169	(442) 611
Cash at end ofperiod	280	169

5.1 Non-cash financing and investing activities

Details of financing and investing transactions which have had a material effect on consolidated assets and liabilities but did not involve cash flows are as follows.

During the financial year 2009:

(i) Insurance premiums with a fair value of $134,922 (2008: $214,174) were financed. (ii) A loan of $750,000 from CIM Special Situations Fund Limited was assigned to a syndicate lead by Norvest Corporate Pty Ltd, a company related to a Director of AEC.

(iii) The Company facilitated a US$700,000 (AUD1,010,393) loan from an unrelated company, CCM Global Limited, to the Thailand joint venture company, Monika AEC Limited. The loan was delivered directly to Monika AEC Limited and did not involve cash flow through ACE. ACE has recorded an asset and a liability of US$700,000 (AUD1,010,393)in the consolidated accounts. For facilitating the loan ACE is entitled to a margin on interest payable.

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5.2 Reconciliation of cash

5.2 Reconciliation of cash
Reconciliation of cash at the end of the period (as shown in the condensed consolidated statement of cash flows) to the related items in the accountsis asfollows.	Current period $A'000	Previous corresponding period - $A'000
Cash Cashon hand and at bank	- 280	- 169
Total cash at end of period	280	169

5.3 Reconciliation of profit from ordinary activities after income tax to net cash inflow from operating activities

	Current period $A'000	Previous corresponding period - $A'000
Net Loss Depreciation and amortisation Government grant received for capitalised development costs Provision for doubtful debt written back Cost of share based payment Share of loss of joint venture Unrealised foreign exchange (gain)/loss (Increase) decrease in assets: (Increase) decrease in trade and other receivables (Increase) decrease in inventories Increase (decrease) in liabilities: Increase (decrease) in trade and other payables Increase(decrease)inprovisions	(2,841) 532 116 - 166 - (11) (1,036) (106) 680 67	(2,073) 424 109 (130) 88 29 22 (1,009) (34) 833 63
Net cash (used in) from operating activities	(2,433)	(1,678)

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6 Segment Information

Geographic segments

The Group’s primary segment reporting format is geographic segment as the Group’s risks and rates of return are affected predominantly by relative performance of product in the geographic segment. The Group’s geographic segments are determined based on the relative performance of the segment. The following table present revenue, expenditure and certain asset information regarding geographic segments for the year ended 30 June 2009.

Primary reporting geographic segments 30 June 2009 Segment Revenue: Sales to external customers Inter-segment sales Total sales revenue Other revenue Total segment revenue Inter-segment sales elimination Unallocated revenue Consolidated revenue Segment Result: Segment result Unallocated revenue less unallocated expenses Income tax expenses Net profit/(loss) for the year Segment Assets and Liabilities: Segment assets Intersegment elimination Total assets Segment liabilities Intersegment elimination Total liabilities	France $A’000 Australia $A’000 South East Asia $A’000 China $A’000	Consolidated $A’000
	1,444 110 220 3,053 - 1,877 - 56	4,827 1,933
	1,444 1,987 220 3,109 - 144 41 626	6,760 811
	1,444 2,131 261 3,735	7,571 (1,933) -
	772 (3,427) 203 (389)
		5,638
		(2,841) - -
	- 10,065 40 3,545
		(2,841)
		13,650 (2,965)
	- 10,545 - 4,210
		10,685
		14,755 (2,965)
		11,790

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7 Dividends

7.1 Individual dividends per security

==> picture [429 x 169] intentionally omitted <==

----- Start of picture text -----

Date Amount per Franked Amount per
dividend is security amount per security of
payable security at foreign
30% tax source
dividend
N/A N/A N/A N/A
Final dividend: Current year
N/A N/A N/A N/A
Previous year
N/A N/A N/A N/A
Interim dividend: Current year
N/A N/A N/A N/A
Previous year
----- End of picture text -----

7.2 Total dividend per security (interim plus final)

		Current year	Previous year
	+Ordinary securities	N/A	N/A

8 Dividend Reinvestment Plans

The[+] dividend or distribution plans shown below are in operation. N/A

The last date(s) for receipt of election notices for the +dividend or distribution plans N/A

Any other disclosures in relation to dividends (distributions). N/A

9 Consolidated retained profits

Retained profits at the beginning of the financial period Net loss attributable to members	Current period - $A'000	Previous corresponding period -$A'000
	(17,937) (2,841)	(15,864) (2,073)
Retained profits at end of financial period	(20,778)	(17,937)

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10 NTA backing

10 NTA backing
	Current period ($)	Previous corresponding Period ($)
Net tangible asset backing per+ordinary security	(0.036)	(0.020)

11 Control over entities

11.1 Control gained over entities

Name of entity (or group of entities)	N/A
Date control gained		N/A
Contribution of such entities to the reporting entity’s profit/ (loss) from ordinary activities during the period (where material).		Nil
Profit(loss) from ordinary activities and extraordinary items after tax of the controlled entity (or group of entities) for the whole of the previous corresponding period.		Nil

11.2 Loss of control over entities

	11.2 Loss of control over entities	es
	Name of entity (or group of entities) N/A Date control lost Contribution of such entities to the reporting entity’s profit/ (loss) from ordinary activities during the period (where material). Consolidated profit/(loss) from ordinary activities of the controlled entity (or group of entities) whilst controlled during the whole of the previous corresponding period (where material).	N/A
			Nil
			Nil
			Nil

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12 Earnings per share

12 Earnings per share
	Current period ($)	Previous corresponding Period ($)
Net Loss attributable to ordinary equity holders of the parent Weighted average number of ordinary shares for basic earnings per share Effect of dilution: Share options Weighted average no of ordinary shares adjusted for the effect of dilution. Loss per Share - Basic loss per share - Dilutedloss pershare	(2,840,527) 148,139,591 - 148,139,591 ($0.019) ($0.019)	(2,072,610) 137,734,574 44,161 137,778,735 ($0.015) ($0.015)

13 Details of associates and joint venture entities

Name of associate/joint venture	Reporting entity’s percentage holding	Reporting entity’s percentage holding	Reporting entity’s percentage holding	Reporting entity’s percentage holding
Monika AEC Limited	Current Period		Previous corresponding period
		26		21
Group’s aggregate share of associates’ and joint venture entities’ profits/(losses) : Profit/(loss) from ordinary activities before tax Income tax on ordinary activities Profit/(loss) from ordinary activities after tax Extraordinary items net of tax Net profit/(loss) Adjustments Share of net profit/(loss) of associates and joint venture entities		Current period $A'000		Previous corresponding period - $A'000
		39 -		(16) -
		39 -		(16) -
		39 (39)		(16) (13)
		-		(29)

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14 Significant Information

Details of any other significant information needed by an investor to make an informed assessment of the entity’s financial performance and financial position.

None

15. This report is based on[+] accounts to which one of the following applies. (Tick one)

� The[+] accounts have been � The[+] accounts have been audited. subject to review. � The[+] accounts are in the process of being reviewed. √ The[+] accounts are in the � The[+] accounts have not yet process of being audited. been audited or reviewed.

16. If the accounts have not yet been audited or subject to review and are likely to be subject to dispute or qualification, details are described below

17. If the accounts have been audited or subject to review and are subject to dispute or qualification, details are described below

Sign here: ............................................................ Date: 31 August 2009 (Managing Director)

Print name: A. Middleton

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