UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF SECURITIES EXCHANGE ACT OF
1934
For the quarterly period ended JUNE 30, 2005
[_] 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 (I.R.S. Employer
incorporation or organization) 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 [X] No [_]
There were 16,950,000 shares of Common Stock outstanding as of August 10,
2005.
Transitional Small Business Disclosure Format (check one): Yes [_] No [X]
PART I
FINANCIAL INFORMATION
---------------------
ITEM 1. FINANCIAL STATEMENTS
--------------------
ALLOY STEEL INTERNATIONAL, INC. AND SUBSIDIARY
Condensed Consolidated Balance Sheets
June 30, September 30,
2005 2004
(unaudited)
ASSETS
------
CURRENT ASSETS
Cash and cash equivalents $ 297,264 $ 42,038
Accounts receivable, less allowance for doubtful accounts of
13,849 at June 30, 2005 and $53,087 at September 30, 2004. 434,819 818,864
Inventories 466,093 399,402
Prepaid expenses and other current assets 61,167 61,089
-----------------------------
TOTAL CURRENT ASSETS 1,259,343 1,321,393
-----------------------------
PROPERTY AND EQUIPMENT, net 1,741,022 1,616,357
-----------------------------
OTHER ASSETS
Intangibles 90,512 90,512
Other 9,244 3,226
Deferred tax assets 34,988 32,934
-----------------------------
134,744 126,672
-----------------------------
TOTAL ASSETS $ 3,135,109 $ 3,064,422
=============================
=============================
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES
Notes payable, current portion $ 126,571 $ 107,630
Accounts payable and other current liabilities 1,020,215 1,065,987
-----------------------------
TOTAL CURRENT LIABILITIES 1,146,786 1,173,617
-----------------------------
LONG-TERM LIABILITIES
Notes payable, less current portion 200,408 262,006
Loan payable, related party 150,581 141,742
Deferred tax liabilities 13,953 13,134
-----------------------------
364,942 416,882
-----------------------------
TOTAL LIABILITIES 1,511,728 1,590,499
=============================
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 582,900 474,541
Accumulated deficit (902,401) (943,500)
-----------------------------
TOTAL STOCKHOLDERS' EQUITY 1,623,381 1,473,923
-----------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 3,135,109 $ 3,064,422
=============================
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 NINE MONTHS ENDED
JUNE 30, JUNE 30,
2005 2004 2005 2004
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
SALES $ 924,178 $ 532,932 $ 2,600,127 $ 1,857,776
COST OF SALES 573,017 250,606 1,628,116 1,005,170
----------------------------------------------------------
GROSS PROFIT 351,161 282,326 972,011 852,606
OPERATING EXPENSES
Selling, general and administrative expenses 337,287 248,565 938,435 853,716
----------------------------------------------------------
INCOME (LOSS) FROM OPERATIONS 13,874 33,761 33,576 (1,110)
----------------------------------------------------------
OTHER INCOME (EXPENSE)
Interest income 3,110 2,286 10,399 6,790
Insurance recovery - (96) 4,642 1,415
Export grant received - (1,306) - 19,331
Unrealized foreign exchange gain 5,252 3,471 (7,543) 5,415
Profit on disposal of plant equipment - (171) - 2,523
Commission received - - 25 -
----------------------------------------------------------
8,362 4,184 7,523 35,474
----------------------------------------------------------
INCOME (LOSS) BEFORE INCOME TAX
EXPENSE (BENEFIT) 22,236 37,945 41,099 34,364
Income tax expense (benefit) - - - -
----------------------------------------------------------
NET INCOME (LOSS) $ 22,236 $ 37,945 $ 41,099 $ 34,364
==========================================================
BASIC INCOME (LOSS) AND DILUTED
INCOME (LOSS) PER COMMON SHARE $ 0.001 $ 0.002 $ 0.002 $ 0.002
----------------------------------------------------------
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING 16,950,000 16,950,000 16,950,000 16,950,000
==========================================================
COMPREHENSIVE INCOME (LOSS)
NET INCOME (LOSS) $ 22,236 $ 37,945 $ 41,099 $ 34,364
OTHER COMPREHENSIVE INCOME (LOSS)
Foreign currency translation adjustment (22,126) (176,349) 108,359 26,705
----------------------------------------------------------
COMPREHENSIVE INCOME (LOSS) $ 110 $ (138,404) $ 149,458 $ 61,069
==========================================================
See accompanying notes to condensed consolidated financial statements.
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ALLOY STEEL INTERNATIONAL, INC. AND SUBSIDIARY
Condensed Consolidated Statements of Cash Flows
NINE MONTHS ENDED
JUNE 30,
2005 2004
(UNAUDITED) (UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 41,099 $ 34,364
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation 96,384 84,764
Profit on disposal of plant equipment - (2,523)
Increase (decrease) in cash and cash equivalents attributable to changes
in operating assets and liabilities:
Accounts receivable 439,026 (256,147)
Inventories (42,152) (102,462)
Prepaid expenses and other current assets 18,340 2,123
Accounts payable and other current liabilities (73,986) 308,724
Income taxes payable (26,395) (12,024)
----------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 452,316 56,819
----------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (99,148) (69,715)
Payment for deposit for investment (5,868) -
Proceeds on disposal of plant equipment - 3,158
----------------------------
NET CASH USED IN INVESTING ACTIVITIES (105,016) (66,557)
----------------------------
NET CASH USED IN FINANCING ACTIVITIES,
Repayment of borrowings (186,630) (37,020)
----------------------------
Effect of foreign exchange rate changes on cash and cash equivalents 94,556 2,822
----------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 255,226 (43,936)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 42,038 213,381
----------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 297,264 $ 169,445
============================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION, CASH PAID FOR INTEREST $ 8,144 $ 6,086
============================
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 accompany condensed consolidated financial statements of the Company as of
June 30, 2005 and for the nine-month and three-month periods ended June 30, 2005
and 2004 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 September 30, 2004 audited financial statements included in the
registrant's annual report on Form 10-KSB. The results of operations for the
nine-month and three-month periods ended June 30, 2005 are not necessarily
indicative of the results that may occur for the year ending September 30, 2005.
NOTE - 2 NEW ACCOUNTING PRONOUNCEMENTS
In December 2004, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 123(R), "Accounting for Stock-Based Compensation (Revised)". SFAS No. 123(R)
supersedes APB No. 25 and its related implementation guidance. SFAS No. 123(R)
establishes standards for the accounting for transactions in which an entity
exchanges its equity instruments for goods or services. It also addresses
transactions in which an entity incurs liabilities in exchange for goods or
services that are based on the fair value of the entity's instruments or that
may be settled by the issuance of those equity instruments. SFAS No. 123(R)
focuses primarily on accounting for transactions in which an entity obtains
employee services in share-based payment transactions. SFAS No. 123(R) requires
a public entity to measure the cost of employee services received in exchange
for an award of equity instruments based on the grant-date fair value of the
award (with limited exceptions). That cost will be recognized over the period
during which an employee is required to provide service in exchange for the
award during the requisite service period (usually the vesting period). No
compensation costs are recognized for equity instruments for which employees do
not render the requisite service. The grant-date fair value of employee share
options and similar instruments will be estimated using option-pricing models
adjusted for the unique characteristics of those instruments (unless observable
market prices for the same or similar instruments are available). If an equity
award is modified after the grant date, incremental compensation cost will be
recognized in an amount equal to the excess of the fair value of the modified
award over the fair value of the original award immediately before the
modification. The Company has not completed its evaluation of SFAS No. 123(R)
but expects that the adoption of this new standard, which will take effect
January 1, 2006, will not have a material impact on the operating results of the
Company.
The Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standards (SFAS) No. 151, "Inventory Costs, an Amendment of
Accounting Research Bulletin (ARB) No. 43, Chapter 4", in November 2004. This
statement amends the guidance in ARB No. 43 Chapter 4 "Inventory Pricing" to
clarify the accounting for abnormal amounts of idle facility expense, freight,
handling costs and wasted material. SFAS No. 151 requires that those items be
recognized as current period charges regardless of whether they meet the
criterion of "so abnormal." In addition, this statement requires that allocation
of fixed production overheads to the costs of conversion be based on the normal
capacity of the production facilities. The provisions of this statement will be
effective for inventory costs incurred during fiscal years beginning after June
15, 2005. The Company is currently evaluating the impact that this statement
will have on its financial statements.
NOTE - 3 INVENTORIES
At June 30, 2005 (unaudited) and September 30, 2004 inventories consisted of the
following:
June 30, 2005 Sept 30, 2004
Raw materials $ 145,251 $ 119,098
Finished goods 320,842 280,304
------------------------------
$ 466,093 $ 399,402
------------------------------
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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 the 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. 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 lower down time and the resulting lost production of our customers
and accordingly return a higher profit margin to the company.
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. As the additional plant for the production of
Arcoplate has been completed and is now in operation, engineering and design
work for the 3-D Pipefitting Cladder process is proceeding.
PLAN OF OPERATION
With additional production capacity now available (utilizing the 600MM wide
plate), our objectives for the forthcoming period are to expand our market size
both locally and internationally.
We intend to achieve market penetration through a multi-step process. At the
local level, we intend to combine targeted personal sales contacts with
advertising in trade journals and magazines. At the international level, we
intend to establish market presence by visiting international trade shows,
presenting technical papers at industry conferences, and appointing distributors
and stockists who will be trained to present and promote Arcoplate products as
a solution for wear-related problems.
- 5 -
RESULTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED JUNE 30, 2005 COMPARED WITH THE THREE
AND NINE MONTHS ENDED JUNE 30, 2004
SALES
Alloy Steel had sales of $924,178 for the three months ended June 30, 2005,
compared to $532,932 for the three months ended June 30, 2004. 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 $0.768 for the three
months ended June 30, 2005 and $0.716 for the three months ended June 30, 2004
representing the average foreign exchange rate for the respective periods.
Alloy Steel had sales of $2,600,127 and $1,857,776 for the nine months ended
June 30, 2005 and nine months ended June 30, 2004, respectively. These sales
consist solely of the sale of our Arcoplate product.
The sales increase as achieved has come about due to increased acceptance of the
product in the market place and new users placing orders.
GROSS PROFIT AND COSTS OF SALES
Alloy Steel had cost of sales of $573,017 for the three months ended June 30,
2005, compared to $250,606 for the three months ended June 30, 2004. The gross
profit amounted to $351,161 for the three months ended June 30, 2005 compared to
$282,326 for the three months ended June 30, 2004. The gross profit percentage
decreased from 53% to 38%. The decrease in gross profit percentage is primarily
attributable to competitive pricing (not discounts) in certain market areas and
increase in raw material costs.
Alloy Steel had cost of sales of $1,628,116 and $1,005,170 for the nine months
ended June 30, 2005 and nine months ended June 30, 2004, respectively. Alloy
Steel's gross profit was $972,011 or 37% of sales, and $852,606 or 46% of sales,
for the respective nine month periods.
OPERATING EXPENSES
Alloy Steel had selling, general and administrative expenses of $337,287 for the
three months ended June 30, 2005, compared to $248,565 for the three months
ended June 30, 2004.
Alloy Steel had operating expenses of $938,435 and $853,716 for the nine months
ended June 30, 2005 and nine months ended June 30, 2004, respectively. Our
operating expenses consist primarily of management salaries, marketing expenses
and travel expenses. The company also employed additional marketing personnel in
this period.
INCOME BEFORE TAXES
Alloy Steel's net income before taxes was $22,236 for the three months ended
June 30, 2005, compared to $37,945 for the three months ended June 30, 2004.
Alloy Steel had net income before taxes of $41,099 and $34,364 for the nine
months ended June 30, 2005 and nine months ended June 30, 2004, respectively.
NET INCOME
Alloy Steel had net income of $22,236 or $0.001 per share, for the three months
ended June 30, 2005, compared to $37,945 or $ 0.002 per share for the three
months ended June 30, 2004.
Alloy Steel had net income of $41,099 or $0.002 per share, and $34,364 or $0.002
per share, for the nine months ended June 30, 2005 and nine months ended June
30, 2004, respectively.
- 6 -
LIQUIDITY
For the nine months ended June 30, 2005, net cash provided by operating
activities was $452,316, consisting of net income of $41,099, depreciation and
amortization of $96,384 and a decrease in accounts receivable and other current
assets of $415,214 offset by a decrease in accounts payable and other current
liabilities of $100,381.
As of June 30, 2005, we had a working capital surplus of $112,557.
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.
SIGNIFICANT CHANGES IN NUMBERS OF EMPLOYEES
No significant change in the number of employees is anticipated in the next 3
months.
PURCHASE OR SALE OF PLANT AND SIGNIFICANT EQUIPMENT
The machinery to expand our capacity to produce Arcoplate is completed and
operational. We have no material commitments for the additional financing to
purchase or construct machinery to expand our capacity to produce Arcoplate or
the machinery for the 3-D Pipefitting Cladder process.
EFFECT OF RECENT ACCOUNTING PRONOUNCEMENTS
In December 2004, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 123(R), "Accounting for Stock-Based Compensation (Revised)". SFAS No. 123(R)
supersedes APB No. 25 and its related implementation guidance. SFAS No. 123(R)
establishes standards for the accounting for transactions in which an entity
exchanges its equity instruments for goods or services. It also addresses
transactions in which an entity incurs liabilities in exchange for goods or
services that are based on the fair value of the entity's instruments or that
may be settled by the issuance of those equity instruments. SFAS No. 123(R)
focuses primarily on accounting for transactions in which an entity obtains
employee services in share-based payment transactions. SFAS No. 123(R) requires
a public entity to measure the cost of employee services received in exchange
for an award of equity instruments based on the grant-date fair value of the
award (with limited exceptions). That cost will be recognized over the period
during which an employee is required to provide service in exchange for the
award during the requisite service period (usually the vesting period). No
compensation costs are recognized for equity instruments for which employees do
not render the requisite service. The grant-date fair value of employee share
options and similar instruments will be estimated using option-pricing models
adjusted for the unique characteristics of those instruments (unless observable
market prices for the same or similar instruments are available). If an equity
award is modified after the grant date, incremental compensation cost will be
recognized in an amount equal to the excess of the fair value of the modified
award over the fair value of the original award immediately before the
modification. The Company has not completed its evaluation of SFAS No. 123(R)
but expects that the adoption of this new standard, which will take effect
January 1, 2006, will not have a material impact on the operating results of the
Company.
The Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standards (SFAS) No. 151, "Inventory Costs, an Amendment of
Accounting Research Bulletin (ARB) No. 43, Chapter 4", in November 2004. This
statement amends the guidance in ARB No. 43 Chapter 4 "Inventory Pricing" to
clarify the accounting for abnormal amounts of idle facility expense, freight,
handling costs and wasted material. SFAS No. 151 requires that those items be
recognized as current period charges regardless of whether they meet the
criterion of "so abnormal." In addition, this statement requires that allocation
of fixed production overheads to the costs of conversion be based on the normal
capacity of the production facilities. The provisions of this statement will be
effective for inventory costs incurred during fiscal years beginning after June
15, 2005. The Company is currently evaluating the impact that this statement
will have on its financial statements.
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 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.
- 7 -
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).
32.2 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.
- 8 -
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, 2005 ALLOY STEEL INTERNATIONAL, INC.
By: /s/ Alan Winduss
------------------------------------------
Alan Winduss, Chief Financial Officer
(Principal Financial Officer)
- 9 -