Alloy Steel International (AYSI) 10-Q 2010 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended December 31, 2009

¨ 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 registrant 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)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   Yes   ¨     No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer”, “accelerated filer”, “non-accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer  ¨	Accelerated filer  ¨
Non-accelerated filer  ¨ (Do not check if a smaller reporting company)	Smaller reporting company  þ

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 17,350,000 shares of Common Stock outstanding as of January 31, 2010.

PART I

FINANCIAL INFORMATION

Item 1. Financial Statements

ALLOY STEEL INTERNATIONAL, INC. AND SUBSIDIARY

Condensed Consolidated Balance Sheets

	December 31, 2009			September 30, 2009
	(unaudited)
ASSETS
Current Assets
Cash and cash equivalents	$	2,721,387		$	424,090
Accounts receivable, less allowance for doubtful accounts of $nil at December 31, 2009 and September 30, 2009		1,709,404			3,104,393
Inventories		3,048,500			2,247,759
Prepaid expenses and other current assets		98,689			82,948
Total Current Assets		7,577,980			5,859,190
Property and Equipment, net		3,706,479			3,350,600
Other Assets
Investments		234,850			222,702
Other		17,863			17,863
Total Other Assets		252,713			240,565
Total Assets	$	11,537,172		$	9,450,355
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities
Notes payable, current portion	$	136,938		$	93,868
Accrued officers’ salaries		3,798			11,745
Royalties payable, related party		1,036,839			936,829
Current tax payable		718,880			-
Accounts payable and other current liabilities		1,848,852			2,338,297
Total Current Liabilities		3,745,307			3,380,739
Long-Term Liabilities
Notes payable, less current portion		302,498			145,843
Notes payable, officers, current portion		225			255
Employee entitlement provisions		13,230			11,916
Deferred Tax Liabilities		12,420			212,338
Total Long-Term Liabilities		328,403			370,352
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; 17,350,000  issued and outstanding		173,500			173,500
Capital in excess of par value		1,767,512			1,767,512
Accumulated other comprehensive income		4,419,790			2,830,721
Accumulated income		1,108,805			931,743
Non controlling interest		(6,145	)		(4,212	)
Total Stockholders’ Equity		7,463,462			5,699,264
Total Liabilities and Stockholders’ Equity	$	11,537,172		$	9,450,355

See accompanying notes to condensed consolidated financial statements

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ALLOY STEEL INTERNATIONAL, INC. AND SUBSIDIARY

Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)

	Three Months Ended
	December 31,
	2009			2008
	(unaudited)			(unaudited)
Sales	$	5,842,028		$	1,845,504
Cost of Sales		2,488,865			1,149,433
Gross Profit		3,353,163			696,701
Operating Expenses
Selling, general and administrative expenses		1,126,539			677,265
Income (Loss) From Operations		2,226,624			18,806
Other Income (Expense)
Interest income		3,721			15,019
Interest expense		(10,266	)		(4,949	)
Insurance recovery		7,336			6,093
Impairment expense		(3,684	)		(11,355	)
Other income		13,551			7,735
		10,658			12,543
Income (Loss) Before Income Tax Expense (Benefit)		2,246,097			31,349
Income tax expense (benefit)		740,074			30,977
Net Income (Loss)		1,506,023			372
Net (income) loss attributable to non-controlling interests		1,929			2,578
Net Income (Loss) attributable to Stockholders	$	1,507,952		$	2,950
Basic Income (Loss) and Diluted Income (Loss) per Common Share	$	0.087		$	0.000
Weighted Average Common Shares Outstanding		17,350,000			17,350,000
Comprehensive Income (Loss)
Net Income (Loss)	$	1,507,952		$	2,950
Other Comprehensive Income (Loss)
Foreign currency translation adjustment		139,566			(963,467	)
Comprehensive Income (Loss)	$	1,647,518		$	(960,517	)

See accompanying notes to condensed consolidated financial statements

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ALLOY STEEL INTERNATIONAL, INC. AND SUBSIDIARY

Condensed Consolidated Statements of Cash Flows

	Three Months Ended
	December 31,
	2009			2008
	(unaudited)			(unaudited)
Cash Flows From Operating Activities
Net income (loss)	$	1,507,952		$	2,950
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization		70,157			40,904
Dividends reinvested directly to investments		(3,419	)		(1,499	)
Reversal of write down of investment assets		(3,684	)		11,355
Profit on disposal of fixed assets		(1,447	)		-
Loss attributable to non-controlling interests		(1,929	)		(2,578	)
Increase (decrease) in cash and cash equivalents attributable to changes in operating assets and liabilities:
Accounts receivable		1,673,274			526,405
Inventories		(654,276	)		(428,238	)
Prepaid expenses and other current assets		(29,346	)		(6,958	)
Accrued officers’ salaries		(7,496	)		(3,253	)
Accounts payable and other current liabilities		(449,01	)		84,852
Income taxes payable		538,127			(166,166	)
Net Cash Provided by Operating Activities		2,638,903			57,774
Cash Flows From Investing Activities
Purchase of property and equipment		(352,272	)		(81,551	)
Investment in joint venture		-			(18,524	)
Purchase of listed financial assets		(11	)		-
Net Cash Provided by (Used in) Investing Activities		352,283			(100,075	)
Cash Flows From Financing Activities
Proceeds from borrowings		-			255
Repayments on notes and loans payable		205,893			(15,060	)
Net Cash Used in Financing Activities		205,893			(14,805	)
Effect of Foreign Exchange Rate Changes on Cash and Cash Equivalents		(195,216	)		(106,961	)
Net Increase (Decrease) in Cash and Cash Equivalents		2,297,297			(164,067	)
Cash and Cash Equivalents at Beginning of Period		424,090			664,054
Cash and Cash Equivalents at End of Period	$	2,721,387		$	499,987
Supplemental disclosure of cash flow information, cash paid for interest	$	10,266		$	4,949
Supplemental disclosure of non cash information, equipment acquired under note payable	$	206,915		$	-

See accompanying notes to condensed consolidated financial statements

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ALLOY STEEL INTERNATIONAL, INC. AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements

Note 1 – Unaudited Statements

The accompanying condensed consolidated financial statements of Alloy Steel International, Inc. (“us” or “the Company”) as of December 31, 2009 and for the three month periods ended December 31, 2009 and 2008 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-Q.  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-K for the year ended September 30, 2009.  The results of operations for the three month period ended December 31, 2009 are not necessarily indicative of the results that may occur for the year ending September 30, 2010.

Note 2 – New Accounting Pronouncements

In October 2009, the FASB issued authoritative guidance for revenue recognition for multiple-deliverable arrangements. This authoritative guidance impacts the determination of when the individual deliverables included in a multiple-deliverable arrangement may be treated as separate units of accounting. Additionally, this guidance modifies the manner in which the transaction consideration is allocated across the separately identified deliverables by no longer permitting the residual method of allocating arrangement consideration. The new guidance is effective for transactions entered into or modified in fiscal years beginning after June 15, 2010, which for the Company will be the first quarter of fiscal 2011. The Company is currently evaluating the potential impact of this authoritative guidance on the Company’s financial position and results of operations.

In June 2009, the FASB issued authoritative guidance on variable interest entities, which becomes effective the first annual reporting period beginning after November 15, 2009 and will be effective for the Company in fiscal 2011. This authoritative guidance requires revised evaluations of whether entities represent variable interest entities, ongoing assessments of control over such entities, and additional disclosures for variable interests. The Company is currently evaluating the potential impact of this authoritative guidance on the Company’s financial position and results of operations.

Note 3 – Inventories

At December 31, 2009 (unaudited) and September 30, 2009, inventories consisted of the following:

	Dec 31, 2009		Sept 30 , 2009
	(unaudited)
Raw materials	$	1,150,115	$	642,461
Work in progress		181,833		124,343
Finished goods		1,716,552		1,480,955
	$	3,048,500	$	2,247,759

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 produced through a patented process.  We believe that wear is the largest single factor leading to production losses in the mining, mineral-processing, and steel manufacturing industries. Consequently, wear solutions are indispensable for these businesses.  The wearing of metal parts is generally defined as a gradual decay or breakdown of the metal.  This wear of equipment may be due to many causes and accordingly, the selection of wear plate solutions can be a relatively complex process.

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In order to minimize the effects of wear, businesses have traditionally employed such wear-combating materials as rubber compounds, ceramics, alloy castings, welded overlay wear plates, and quenched and tempered carbon steel plates.  We believe that each of these materials offer a limited solution to the problem of wear.  While tungsten carbide is generally recognized by the mining, mineral-processing and steel manufacturing industries as the most wear-resistant material suitable for industrial use, because of its high carbide content, we believe that the high costs associated with tungsten carbide make it impractical for most businesses.  We believe that Arcoplate provides industry with solutions to most wear-related problems at a cost which is competitive with conventional welded overlay wear plates and substantially lower than tungsten carbide.

Results of Operations

For the Three Months Ended December 31, 2009 Compared with the Three Months Ended December 31, 2008

Sales

Alloy Steel had sales of $5,842,028 for the three months ended December 31, 2009, compared to $1,845,504 for the three months ended December 31, 2008.  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 $0.90837 for the three months ended December 31, 2009 and $0.67306 for the three months ended December 31, 2008 representing the average foreign exchange rate for the respective periods.

The increase in sales for the period is representative of a return to normal operations by several of the Company’s customers after the downturn experienced by the world economy during the same period last year.  During the quarter, the demand for our product increased with various mining companies announcing new mining projects were being considered or recommenced where they had been delayed and/or existing mining projects were being brought back to normal production.  The Company has continued to promote its product in the market place as a superior option for maintenance.

Gross Profit and Cost of Sales

Alloy Steel had cost of sales of $2,488,865 for the three months ended December 31, 2009, compared to $1,149,433 for the three months ended December 31, 2008.  The gross profit amounted to $3,353,163 for the three months ended December 31, 2009, compared to $696,701 for the three months ended December 31, 2008.  The gross profit percentage increased from 37.7% to 57.0%.  The increase in gross profit percentage is attributable mainly to increased margins on various orders outside of the discounted sales prices used for securing long term contracts.

Operating Expenses

Alloy Steel had no material operating expenses other than selling, general and administrative expenses for the three months ended December 31, 2009 and 2008.

Alloy Steel had selling, general and administrative expenses of $1,126,539 for the three months ended December 31, 2009, compared to $677,265 for the three months ended December 31, 2008.

The expenditure for the 3 months ended December 31, 2009 increased compared to the three months ended December 31, 2008 due to operations retaining to a normal state as increased orders were received from customers.

Income (Loss) Before Taxes

Alloy Steel’s income before income tax (benefit) was $2,246,097 for the three months ended December 31, 2009, compared to $31,349 for the three months ended December 31, 2008.

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Net Income (Loss)

Alloy Steel had a net income of $1,507,952 or $0.087 per share, for the three months ended December 31, 2009, compared to $2,950, or $0.000 per share, for the three months ended December 31, 2008.

Liquidity and Capital Resources

For the three months ended December 31, 2009, net cash provided by operating activities was $2,638,903.  The net income may be reconciled to this amount by an adjustment for depreciation and amortization of $70,157, a reversal of previous write down of assets to fair values of $3,684, income received in forms other than cash of $3,419, a profit on the disposal of fixed assets of $1,447, non-controlling shareholders interests in subsidiary loss of $1,929 and an increase in cash and cash equivalents attributable to changes in operating assets and liabilities of $1,071,273, which consisted primarily of a decrease in accounts receivable of $1,673,274 and increase in tax payable of $538,127, which was offset by an increase in inventories and other current assets of $683,622, and an increase in accounts payable and other current liabilities of $449,010.

At December 31, 2009, the Company had a working capital surplus of $3,832,673.

The Company is actively reviewing options to raise additional capital through debt and/or equity financing.  Although it currently has no commitment to do so, any additional capital raised would be applied to the research of nanotechnology and to an overseas manufacturing expansion.  The Company is also considering a division of share capital of 5 shares for every 1 share currently held to improve liquidity in the market and promoting the trading of shares.

Significant Changes in Number of Employees

No significant change in the number of employees is anticipated 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.

Effect of Recent Accounting Pronouncements

In October 2009, the FASB issued authoritative guidance for revenue recognition for multiple-deliverable arrangements. This authoritative guidance impacts the determination of when the individual deliverables included in a multiple-deliverable arrangement may be treated as separate units of accounting. Additionally, this guidance modifies the manner in which the transaction consideration is allocated across the separately identified deliverables by no longer permitting the residual method of allocating arrangement consideration. The new guidance is effective for transactions entered into or modified in fiscal years beginning after June 15, 2010, which for the Company will be the first quarter of fiscal 2011. The Company is currently evaluating the potential impact of this authoritative guidance on the Company’s financial position and results of operations.

In June 2009, the FASB issued authoritative guidance on variable interest entities, which becomes effective the first annual reporting period beginning after November 15, 2009 and will be effective for the Company in fiscal 2011. This authoritative guidance requires revised evaluations of whether entities represent variable interest entities, ongoing assessments of control over such entities, and additional disclosures for variable interests. The Company is currently evaluating the potential impact of this authoritative guidance on the Company’s financial position and results of operations.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

There have been no material changes in the risks faced by the Company as disclosed on the Form 10K for the year ended September 30, 2009.

Item 4. Controls and Procedures

Based on their evaluation as of the end of the period covered by this Quarterly Report on Form 10-Q, our management, including our Chief Executive Officer 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.

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

PART II.

OTHER INFORMATION

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.

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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:      February 11, 2010	ALLOY STEEL INTNERATIONAL, INC.
	By:	/s/ Alan Winduss
		Alan Winduss, Chief Financial Officer
		(Principal Financial Officer)

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