Alloy Steel International (AYSI) 10QSB 2007 Q2 Quarterly report (small business)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-QSB

(Mark One)

þ QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2007

¨ TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT

For the transition period from ____________ to ____________

Commission file number 0-32875

ALLOY STEEL INTERNATIONAL, INC.

(Exact name of small business issuer as specified in its charter)

Delaware	98-0233941
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

Alloy Steel International, Inc.

42 Mercantile Way Malaga

P.O. Box 3087 Malaga D C 6945

Western Australia

(Address of principal executive offices)

61 (8) 9248 3188

(Issuer’s telephone number)

Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  þ  No  ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  ¨  No  þ

There were 16,950,000 shares of Common Stock outstanding as of July 31, 2007.

Transitional Small Business Disclosure Format (check one):  Yes  ¨  No þ

PART I

FINANCIAL INFORMATION

Item 1. Financial Statements

ALLOY STEEL INTERNATIONAL, INC. AND SUBSIDIARY

Condensed Consolidated Balance Sheets

	June 30,			September 30,
	2007			2006
	(unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents	$	5,932		$	18,955
Accounts receivable, less allowance for doubtful accounts of nil June 30, 2007 and September 30, 2006		1,369,108			519,894
Inventories		1,009,366			530,530
Prepaid expenses and other current assets		31,865			70,786
TOTAL CURRENT ASSETS		2,416,271			1,140,165
PROPERTY AND EQUIPMENT, NET		2,203,441			1,888,228
OTHER ASSETS
Intangibles		90,512			90,512
Deferred tax assets		-			135,326
Other		11,404			10,034
		101,916			235,872
TOTAL ASSETS	$	4,721,628		$	3,264,265
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES
Notes payable, current portion		76,675			65,966
Notes payable, officers, current portion		59,548			51,958
Accrued officers’ salaries		365,302			309,398
Royalties payable, related party		433,077			327,134
Current tax payable		126,473			-
Accounts payable and other current liabilities		846,207			539,495
TOTAL CURRENT LIABILITIES		1,907,282			1,293,951
LONG-TERM LIABILITIES
Notes payable, less current portion		218,402			216,759
Notes payable, officers, less current portion		60,256			96,799
Employee entitlement provisions		8,526			6,379
Loan payable, related party		74,740			147,674
Deferred tax liability		47,532			-
TOTAL LONG-TERM LIABILITIES		409,456			467,611
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS’ EQUITY
Preferred Stock: $0.01 par value; authorized 3,000,000 shares; issued and outstanding – none
Common Stock: $0.01 par value; authorized 50,000,000 shares; 16,950,000 issued and outstanding		169,500			169,500
Additional paid-in-capital		1,773,382			1,773,382
Accumulated other comprehensive income		865,862			538,189
Accumulated deficit		(403,854	)		(978,368	)
TOTAL STOCKHOLDERS’ EQUITY		2,404,890			1,502,703
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	4,721,628		$	3,264,265

See accompanying notes to condensed consolidated financial statements

- 1 -

ALLOY STEEL INTERNATIONAL, INC. AND SUBSIDIARY

Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)

	Three Months Ended						Nine Months Ended
	June 30,						June 30,
	2007			2006			2007			2006
	(unaudited)			(unaudited)			(unaudited)			(unaudited)
SALES	$	1,883,689		$	795,696		$	5,295,810		$	2,457,725
COST OF SALES		1,046,682			417,018			2,833,145			1,565,784
GROSS PROFIT		837,007			378,678			2,462,665			891,941
OPERATING EXPENSES
Selling, general and administrative Expenses		535,451			437,938			1,627,173			1,243,777
INCOME (LOSS) FROM OPERATIONS		301,556			(59,260	)		835,492			(351,836	)
OTHER INCOME (EXPENSE)
Interest income		2,870			1,706			11,019			30,569
Interest expense		(5,892	)		(5,993	)		(20,134	)		(16,425	)
Insurance recovery		12,669			(401	)		14,862			8,830
Profit on disposal of equipment		-			5,949			-			5,949
Other income		6,043			1			10,808			44
		15,690			1,262			16,555			28,967
INCOME (LOSS) BEFORE INCOME TAX (EXPENSE) BENEFIT		317,246			(57,998	)		852,047			(322,869	)
Income tax expense (benefit)		(101,033	)		-			(277,531	)		-
NET INCOME (LOSS)	$	216,213		$	(57,998	)	$	574,516		$	(322,869	)
BASIC INCOME (LOSS) AND DILUTED INCOME (LOSS) PER COMMON SHARE	$	0.013		$	(0.003	)	$	0.034		$	(0.019	)
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING		16,950,000			16,950,000			16,950,000			16,950,000
COMPREHENSIVE INCOME (LOSS)
NET INCOME (LOSS)	$	216,213		$	(57,998	)	$	574,516		$	(322,869	)
OTHER COMPREHENSIVE INCOME (LOSS)
Foreign currency translation adjustment		143,289			52,595			327,673			(84,725	)
COMPREHENSIVE INCOME (LOSS)	$	359,502		$	(5,403	)	$	902,189		$	(407,594	)

See accompanying notes to condensed consolidated financial statements

- 2 -

ALLOY STEEL INTERNATIONAL, INC. AND SUBSIDIARY

Condensed Consolidated Statements of Cash Flows

	Nine Months Ended
	June 30,
	2007			2006
CASH FLOWS FROM OPERATING ACTIVITIES	(unaudited)			(unaudited)
Net income (loss)	$	574,516		$	(322,869	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization		123,136			127,058
Profit on disposal of equipment		-			(5,949	)
Increase (decrease) in cash and cash equivalents attributable to changes in operating assets and liabilities:
Accounts receivable		(729,467	)		284,446
Inventories		(380,925	)		72,684
Prepaid expenses and other current assets		16,371			55,915
Income taxes receivable		354,622			294,150
Accrued officers’ salaries		55,904			64,650
Accounts payable and other current liabilities		329,563			(416,064	)
NET CASH PROVIDED BY OPERATING ACTIVITIES		343,720			154,021
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment		(166,599	)		(85,355	)
Refund of deposit on equipment		-			10,746
Proceeds on disposal of equipment		-			6,544
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES		(166,599	)		(68,065	)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from notes payable		-			41,474
Repayments and notes and loans payable		(275,257	)		(265,742	)
NET CASH USED IN FINANCING ACTIVITIES		(275,257	)		(224,268	)
EFFECT OF FOREIGN EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS		85,113			139,035
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		(13,023	)		723
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD		18,955			127,920
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	5,932		$	128,643
Supplemental disclosure of cash flow information, cash paid for interest	$	20,134		$	16,425
Supplemental disclosure of non cash information, equipment acquired under note payable	$	28,865		$	240,610

See accompanying notes to condensed consolidated financial statements

- 3 -

ALLOY STEEL INTERNATIONAL, INC. AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements

Note 1 – Unaudited Statements and Liquidity

The accompanying condensed consolidated financial statements of Alloy Steel International, Inc. (“us” or “the Company”) as of June 30, 2007 and for the nine month and three month periods ended June 30, 2007 and 2006 are unaudited and reflect all adjustments of a normal and recurring nature to present fairly the financial position, results of operations and cash flows for the interim periods.  These unaudited condensed consolidated financial statements have been prepared by the Company pursuant to instructions to Form 10-QSB.  Pursuant to such instructions, certain financial information and footnote disclosures normally included in such financial statements have been omitted.  It is suggested that these condensed consolidated financial statements be read in conjunction with the financial statements and notes thereto included in the Company’s audited consolidated financial statements included in the registrant’s annual reporting on Form 10-KSB for the year ended September 30, 2006.  The results of operations for the nine month and three month periods ended June 30, 2007 are not necessarily indicative of the results that may occur for the year ending September 30, 2007.

At June 30, 2007, the Company has a working capital surplus of $508,989 and an accumulated deficit of $403,854. The Company is reviewing options to raise additional future capital through debt and/or equity financing, although it currently has no commitments to do so.  While management believes that its current cash resources should be adequate to fund its operations, the Company’s long-term liquidity is dependent on its ability to continue to successfully increase the present level of sales at a profitable margin.

Note 2 – New Accounting Pronouncements

In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair Value Measurements”.  This statement generally clarifies the manner in which an entity is required to measure the fair value of its assets and liabilities, emphasizing that fair value is a market-based measurement and not an entity-specific measurement.  This statement is effective for accounting changes made in the fiscal years beginning after November 15, 2007.  Adoption of the provisions of the Statement is not expected to have a material effect on the operations or financial position of the Company.

Note 3 – Inventories

At June 30, 2007, (unaudited) and September 30, 2006, inventories consisted of the following:

	June 30, 2007		Sept 30, 2006
Raw materials	$	660,499	$	284,814
Work in progress		36,704		49,990
Finished goods		312,163		195,726
	$	1,009,366	$	530,530

Item 2. Management’s Discussion and Analysis

You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our financial statements, the notes to our financial statements and other financial information contained elsewhere in this filing.

Overview

We manufacture and distribute Arcoplate ™, a wear-resistant alloy overlay wear plate, through a patented production process.  The patented process by which we manufacture Arcoplate enables us to smoothly and evenly apply overlay to a sheet of steel, creating a metallurgical bond between the alloy and the steel backing plate that is resistant to wear caused by impact and/or abrasion and helps prevent material from adhering or binding to equipment (referred to as “hangup”).  We believe that, in the mining and mineral processing industries, wear is the primary cause of down time, the period when machinery is not in operation due to wear or malfunction.  We believe that use of our Arcoplate product line will substantially reduce wear and hangup, resulting in decreased down time and increased productivity for our customers.

- 4 -

We also intend to commercially develop the 3-D Pipefitting Cladder process, a computer driven and software based mechanical system for depositing a profiled layer of wear resistant alloy onto interior surfaces of pipefittings, targeted for mining and dredging use.  Design work for this is at an advanced stage and we expect to have prototype equipment completed within the next two years.

Results of Operations

For the Three and Nine Months Ended June 30, 2007 Compared with the Three and Nine Months Ended June 30, 2006

Sales

Alloy Steel had sales of $1,883,689 for the three months ended June 30, 2007, compared to $795,696 for the three months ended June 30, 2006.  These sales consist solely of the sale of our Arcoplate product.  Substantially all of our sales during the periods were denominated in Australian dollars.  Sales were converted into U.S. dollars at the conversion rate of $0.79564 for the nine months ended June 30, 2007 and $0.74367 for the nine months ended June 30, 2006 representing the average foreign exchange rate for the respective periods.

Alloy Steel had sales of $5,295,810 and $2,457,725 for the nine months ended June 30, 2007 and the nine months ended June 30, 2006 respectively.  These sales consist solely of our Arcoplate product.

The sales increase in both periods is attributable to increased orders from new mining projects in Australia.

Gross Profit and Cost of Sales

Alloy Steel had cost of sales of $1,046,682 for the three months ended June 30, 2007, compared to $417,018 for the three months ended June 30, 2006.  The gross profit amounted to $837,007 for the three months ended June 30, 2007, compared to $378,678 for the three months ended June 30, 2006.  The gross profit percentage decreased from 46.6% to 44.4%.  The decrease in gross profit percentage is attributable to increased raw material costs.

Alloy Steel had a cost of sales of $2,833,145 and $1,565,784 for the nine months ended June 30, 2007 and the nine months ended June 30, 2006 respectively.  Alloy Steel’s gross profit was $2,462,665 or 46.5% of sales, and $891,941 or 36.3% of sales, for the respective nine months periods.

Operating Expenses

Alloy Steel had no material operating expenses other than selling, general and administrative expenses for the three and nine months ended June 30, 2007 and 2006.

Alloy Steel had selling, general and administrative expenses of $535,451 for the three months ended June 30, 2007, compared to $437,938 for the three months ended June 30, 2006.

Alloy Steel has operating expenses of $1,627,173 and $1,243,777 for the nine months ended June 30, 2007 and nine months ended June 30, 2006 respectively.

Our operating expenses consist primarily of management salaries, marketing expenses and travel expenses.

Factors contributing to the increased expenditure for both the three month and nine month periods ending June 30, 2007, include the additional staff employed, increased travel expenditure to assist marketing and depreciation of the completed manufacturing equipment.

Income (Loss) Before Taxes

Alloy Steel’s income before income tax (benefit) was $317,246 for the three months ended June 30, 2007, compared to a loss of $(57,998) for the three months ended June 30, 2006.

- 5 -

Alloy Steel had a net income before income taxes of $852,047 and a net loss of $(322,869) for the nine months ended June 30, 2007 and nine months ended June 30, 2006 respectively.

Net Income (Loss)

Alloy Steel had a net income of $216,213 or $0.013 per share, for the three months ended June 30, 2007, compared to a net loss of $(57,998), or $(0.003) per share, for the three months ended June 30, 2006.

An adjustment to recognize the use of prior year tax losses of Alloy Steel’s Australian subsidiary was made the previous quarter as it is highly likely that the subsidiary will recoup all prior year tax losses.

Alloy Steel had a net income of $574,516 or $0.034 per share, and a net loss of $(322,869) or $(0.019) per share for the nine months ended June 30, 2007 and nine months ended June 30, 2006 respectively.

Liquidity and Capital Resources

For the nine months ended June 30, 2007, net cash provided by operating activities was $343,720 consisting of net income of $574,516 adjusted for depreciation of $123,136 to reconcile net income to net cash provided by operating activities and a decrease in cash and cash equivalents attributable to changes in operating assets and liabilities of $353,932 which consisted primarily of a decrease in accounts receivable of $729,467 and a decrease in inventories of $380,925 and an increase in other current assets $16,371 which was offset by an increase in income tax payable of $354,622 and an increase in accounts payable and other current liabilities of $385,467.

At June 30, 2007, the Company had a working capital surplus of $508,989.

We anticipate that the funding of our working capital needs will come primarily from the cash generated from our operations.  To the extent that the cash generated from our operations is insufficient to meet our working capital needs or our needs to purchase machinery or equipment, then we will need to raise capital from the sale of securities in private offerings or loans.  We have no commitments for raising capital.  The sale of additional equity or convertible debt securities could result in dilution to our stockholders.  There can be no assurance that financing will be available in amounts or on terms acceptable to us, if at all.

The Company is reviewing options to raise additional future capital through debt and/or equity financing, although it currently has no commitments to do so.  While management believes that its current cash resources should be adequate to fund its operations, the Company’s long-term liquidity is dependent on its ability to continue to successfully increase the present level of sales at a profitable margin.

Significant Changes in Number of Employees

It is expected an additional five (5) production employees will be employed in the next three months.

Purchase or Sale of Plant and Significant Equipment

We have no material commitments for financing to purchase or construct machinery to expand our capacity to produce Arcoplate or for the 3-D Pipefitting Cladder process.

Effect of Recent Accounting Pronouncements

In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair Value Measurements”.  This statement generally clarifies the manner in which an entity is required to measure the fair value of its assets and liabilities, emphasizing that fair value is a market-based measurement and not an entity-specific measurement.  This statement is effective for accounting changes made in the fiscal years beginning after November 15, 2007.  Adoption of the provisions of the Statement is not expected to have a material effect on the operations or financial position of the Company.

- 6 -

Item 3. Controls and Procedures

Based on their evaluation as of the end of the period covered by this Quarterly Report on Form 10-QSB, our management, including our Chief Executive Office and Chief Financial Officer, concluded that our disclosure controls and procedures, as defined in Rules 13a – 15(e) and 15d – 15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), were effective.

During the quarter under report, there was no change in our internal control over financial report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Item 6. Exhibits

31.1 Certification of the Chief Executive Officer required by Rule 13a-14(a) or Rule 15d-14(a).

31.2 Certification of the Chief Financial Officer required by Rule 13a-14(a) or Rule 15d-14(a).

32.1 Certification of the Chief Executive Officer required by Rule 13a-14(b) or Rule 15d-14(b) and 18 U.S.C. 1350.

32.2 Certification of the Chief Financial Officer required by Rule 13a-14(b) or Rule 15d-14(b) and 18 U.S.C. 1350.

- 7 -

SIGNATURES

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Date:	August 10, 2007	ALLOY STEEL INTNERATIONAL, INC.
			By:	/s/ Alan Winduss
				Alan Winduss, Chief Financial Officer
				(Principal Financial Officer)

- 8 -