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 DECEMBER 31, 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 [ ]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
There were 16,950,000 shares of Common Stock outstanding as of January 31, 2006.
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
December 31, September 30,
2005 2005
(unaudited)
ASSETS
------
CURRENT ASSETS
Cash and cash equivalents $ 134,097 $ 127,920
Accounts receivable, less allowance for doubtful
accounts of $nil at December 31, 2005 and September 30, 2005 569,095 591,782
Inventories 469,060 656,434
Income taxes receivable 68,231 325,444
Prepaid expenses and other current assets 46,492 95,594
-------------------------------
TOTAL CURRENT ASSETS 1,286,975 1,797,174
-------------------------------
PROPERTY AND EQUIPMENT, net 1,831,697 1,720,501
-------------------------------
OTHER ASSETS
Intangibles 90,512 90,512
Other 9,810 10,215
Deferred tax assets 20,367 21,209
-------------------------------
120,689 121,936
-------------------------------
TOTAL ASSETS $ 3,239,361 $ 3,639,611
===============================
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES
Notes payable, current portion $ 45,174 $ 62,567
Notes payable, officers, current portion 50,459 52,424
Accrued officers' salaries 245,756 224,096
Royalties payable, related party 281,302 262,578
Accounts payable and other current liabilities 516,412 882,952
-------------------------------
TOTAL CURRENT LIABILITIES 1,139,103 1,484,617
-------------------------------
LONG-TERM LIABILITIES
Notes payable, less current portion 204,909 35,750
Notes payable, officers, less current portion 128,418 146,895
Employee entitlement provisions 5,823 5,920
Loan payable, related party 144,372 150,344
-------------------------------
TOTAL LONG-TERM LIABILITIES 483,522 338,909
===============================
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 490,060 577,545
Accumulated deficit (816,206) (704,342)
-------------------------------
TOTAL STOCKHOLDERS' EQUITY 1,616,736 1,816,085
-------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 3,239,361 $ 3,639,611
===============================
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,
2005 2004
(UNAUDITED) (UNAUDITED)
SALES $ 980,460 $ 819,026
COST OF SALES 698,955 541,441
------------------------------
GROSS PROFIT 281,505 277,585
OPERATING EXPENSES
Selling, general and administrative
expenses 424,076 309,522
------------------------------
INCOME (LOSS) FROM OPERATIONS (142,571) (31,937)
------------------------------
OTHER INCOME (EXPENSE)
Interest income 24,515 3,809
Insurance recovery 6,167 329
Commission received 25
Management Fees - 354
------------------------------
30,707 4,492
------------------------------
INCOME (LOSS) BEFORE INCOME
TAX EXPENSE (BENEFIT) (111,864) (27,445)
Income tax expense (benefit) - -
------------------------------
NET INCOME (LOSS) $ (111,864) $ (27,445)
==============================
BASIC INCOME (LOSS) AND DILUTED
INCOME (LOSS) PER COMMON SHARE $ (0.006) $ (0.002)
------------------------------
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 16,950,000 16,950,000
==============================
COMPREHENSIVE INCOME (LOSS)
NET INCOME (LOSS) $ (111,864) $ (27,445)
OTHER COMPREHENSIVE
INCOME (LOSS)
Foreign currency translation
adjustment (87,485) 154,184
------------------------------
COMPREHENSIVE INCOME (LOSS) $ (199,349) $ 126,739
==============================
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
2005 2004
(UNAUDITED) (UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (111,864) $ (27,445)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization 40,011 31,516
Increase (decrease) in cash and cash equivalents attributable to changes
in operating assets and liabilities:
Accounts receivable (837) 542,507
Inventories 164,457 29,890
Prepaid expenses and other current assets 35,436 10,259
Income taxes receivable 249,067 -
Accrued officers' salaries 21,660 19,854
Accounts payable and other current liabilities (320,781) (215,115)
--------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 77,149 391,466
--------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (7,931) (40,215)
Payment for deposit for investment (4,296)
Refund of deposit on equipment 10,756
--------------------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 2,825 (44,511)
--------------------------
NET CASH USED IN FINANCING ACTIVITIES, REPAYMENTS ON
notes and loans payable (116,064) (62,881)
--------------------------
EFFECT OF FOREIGN EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS 42,267 42,788
--------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 6,177 326,862
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 127,920 42,038
--------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 134,097 $ 368,900
==========================
Supplemental disclosure of cash flow information, cash paid for interest $ 4,499 $ 2,919
==========================
Supplemental disclosure of noncash information, equipment acquired under
note payable $ 210,999 $ -
==========================
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
December 31, 2005 and for the three-month periods ended December 31, 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, 2005 audited consolidated financial statements
included in the registrant's annual report on Form 10-KSB. The results of
operations for the three-month period ended December 31, 2005 are not
necessarily indicative of the results that may occur for the year ending
September 30, 2006.
NOTE - 2 NEW ACCOUNTING PRONOUNCEMENTS
In May 2005, the Financial Accounting Standards Board ("FASB") issued SFAS No.
154, "Accounting Changes and Error Corrections." This statement generally
requires retrospective application to prior periods' financial statements of
voluntary changes in accounting principles unless it is impracticable to
determine either the period-specific effects or the cumulative effect of the
change. Under the prior rules, changes in accounting principles were generally
recognized by including in net income of the period of the previous guidance for
reporting the correction of an error in previously issued financial statements,
change in accounting estimate or justification of a change in accounting
principle on the basis of preferability. This statement is effective for
accounting changes made in the fiscal years beginning after December 15, 2005.
Adoption of the provisions of the Statement is not expected to have a material
effect on the operations or financial position of the Company.
In December 2004, the 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. Adoption of the provisions
of the Statement is not expected to have a material effect on the operations or
financial position of the Company.
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs, an Amendment
of Accounting Research Bulletin (ARB) No. 43, Chapter 4". 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.
Adoption of the provisions of the Statement is not expected to have a material
effect on the operations or financial position of the Company.
- 4 -
NOTE - 3 INVENTORIES
At December 31, 2005 (unaudited) and September 30, 2005 inventories consisted of
the following:
December 31, September 30,
2005 2005
Raw materials $ 169,015 $ 217,878
Work in progress - 154,620
Finished goods 300,045 283,936
-----------------------------
$ 469,060 $ 656,434
-----------------------------
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 substantially
lowers down time and the resultant lost production and accordingly returns a
higher profit margin to the producer.
We also intend to commercially develop the 3-D Pipefitting Cladder process,
which is a computer driven and software based mechanical system for depositing a
profiled layer of wear resistant alloy onto interior surfaces of pipefittings,
specifically targeted for mining and dredging use. Design work for this is
continuing.
PLAN OF OPERATION
With additional production capacity now available (utilizing the 600MM wide
plate), our objectives for the forthcoming period are to continue 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 MONTHS ENDED DECEMBER 31, 2005 COMPARED WITH THE THREE
MONTHS ENDED DECEMBER 31, 2004
SALES
Alloy Steel had sales of $980,460 for the three months ended December 31, 2005,
compared to $819,026 for the three months ended December 31, 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 $0.74439 for the three
months ended December 31, 2005 and $0.75778 for the three months ended December
31, 2004 representing the average foreign exchange rate for the respective
periods.
The sales increase is attributable 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 $698,955 for the three months ended December
31, 2005, compared to $541,441 for the three months ended December 31, 2004. The
gross profit amounted to $281,505 for the three months ended December 31, 2005
compared to $277,585 for the three months ended December 31, 2004. The gross
profit percentage decreased from 33.9% to 28.7%. The decrease in gross profit
percentage is primarily attributable to competitive pricing (not discounts) in
certain market areas and an increase in raw material costs.
OPERATING EXPENSES
Alloy Steel had selling, general and administrative expenses of $424,076 for the
three months ended December 31, 2005, compared to $309,522 for the three months
ended December 31, 2004.
Our operating expenses consist primarily of management salaries, marketing
expenses and travel expenses. The company also employed additional marketing
personnel in this period.
INCOME (LOSS) BEFORE TAXES
Alloy Steel's loss before income tax (benefit) was a loss of $(111,864) for
the three months ended December 31, 2005, compared to a loss of $(27,445) for
the three months ended December 31, 2004.
NET INCOME (LOSS)
Alloy Steel had a net loss of $(111,864) or $(0.006) per share, for the three
months ended December 31, 2005, compared to a net loss of $(27,445) or $(0.002)
per share, for the three months ended December 31, 2004.
LIQUIDITY
For the three months ended December 31, 2005, net cash provided by operating
activities was $77,149 , consisting of a net loss of $111,864, depreciation and
amortization of $40,011 and a decrease in accounts receivable, inventories,
income tax receivable, prepaid expenses and other current assets of $448,123
offset by a decrease in accounts payable and other current liabilities of
$299,121.
As of December 31, 2005, we had a working capital surplus of $147,871.
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
- 6 -
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
In this period the purchase of a plasma profile cutter was completed and there
are no other commitments for capital expenditure.
EFFECT OF RECENT ACCOUNTING PRONOUNCEMENTS
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections." This statement generally requires retrospective application to
prior periods' financial statements of voluntary changes in accounting
principles unless it is impracticable to determine either the period-specific
effects or the cumulative effect of the change. Under the prior rules, changes
in accounting principles were generally recognized by including in net income of
the period of the previous guidance for reporting the correction of an error in
previously issued financial statements, change in accounting estimate or
justification of a change in accounting principle on the basis of preferability.
This statement is effective for accounting changes made in the fiscal years
beginning after December 15, 2005. Adoption of the provisions of the Statement
is not expected to have a material effect on the operations or financial
position of the Company.
In December 2004, the 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. Adoption of the provisions
of the Statement is not expected to have a material effect on the operations or
financial position of the Company.
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs, an Amendment
of Accounting Research Bulletin (ARB) No. 43, Chapter 4". 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.
Adoption of the provisions of the Statement is not expected to have a material
effect on the operations or financial position of the Company.
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: February 14, 2006 ALLOY STEEL INTERNATIONAL, INC.
By: /s/ Alan Winduss
----------------------------------
Alan Winduss, Chief Financial Officer
(Principal Financial Officer)
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