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, 2003
[ ] 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 (I.R.S. Employer
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)
There were 16,950,000 shares of Common Stock outstanding as of February 14
2004.
Transitional Small Disclosure Format (check one): Yes [ ] No [X]
PART I
ITEM 1. FINANCIAL STATEMENTS
--------------------
ALLOY STEEL INTERNATIONAL, INC. AND SUBSIDIARY
Consolidated Balance Sheets
DECEMBER 31, SEPTEMBER 30,
2003 2003
(UNAUDITED)
ASSETS
------
CURRENT ASSETS
Cash and cash equivalents $ 178,092 $ 213,381
Accounts receivable, less allowance for doubtful
Accounts of $25,260 357,806 203,500
Inventories 374,577 311,456
Prepaid expenses and other current assets 41,829 31,269
TOTAL CURRENT ASSETS 952,304 759,606
-------------------------------
PROPERTY AND EQUIPMENT, net 1,674,717 1,501,169
OTHER ASSETS
Intangibles 90,512 90,512
-------------------------------
TOTAL ASSETS $ 2,717,533 $ 2,351,287
===============================
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES
Notes payable, current portion $ 56,198 $ 43,664
Accounts payable and other current liabilities 761,473 706,258
Income taxes payable (23,623) -
-------------------------------
TOTAL CURRENT LIABILITIES 794,048 749,922
LONG-TERM LIABILITIES
Notes payable, less current portion 106,120 90,494
Loan payable, related party 148,204 133,914
-------------------------------
TOTAL LIABILITIES 1,048,372 974,330
-------------------------------
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 570,673 373,352
Accumulated deficit (844,394) (939,277)
-------------------------------
TOTAL STOCKHOLDERS' EQUITY 1,669,161 1,376,957
-------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 2,717,533 $ 2,351,287
===============================
See accompanying notes to consolidated financial statements.
-1-
ALLOY STEEL INTERNATIONAL, INC. AND SUBSIDIARY
Consolidated Statements of Operations And Comprehensive Income (Loss)
THREE MONTHS ENDED DECEMBER 31, THREE MONTHS ENDED DECEMBER 31,
2003 2002
(UNAUDITED) (UNAUDITED)
SALES $ 664,532 $ 357,398
COST OF SALES 316,924 203,703
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GROSS PROFIT 347,608 153,695
OPERATING EXPENSES
Selling, general and administrative expenses 274,174 223,265
--------------------------------------------------------------------
INCOME (LOSS) FROM OPERATIONS 73,434 (69,570)
--------------------------------------------------------------------
OTHER INCOME
Interest income 2,083 3,054
Insurance recovery 42 2,290
Export grant received 19,323 17,475
--------------------------------------------------------------------
21,448 22,819
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INCOME (LOSS) BEFORE INCOME TAX
EXPENSE (BENEFIT) 94,882 (46,751)
Income tax expense (benefit) - -
--------------------------------------------------------------------
NET INCOME (LOSS) $ 94,882 $ (46,751)
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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) $ 94,882 ($46,751)
OTHER COMPREHENSIVE INCOME (LOSS)
FOREIGN CURRENCY TRANSLATION ADJUSTMENT 197,321 52,056
--------------------------------------------------------------------
Comprehensive Income (Loss) $ 292,203 $ 5,305
====================================================================
See accompanying notes to consolidated financial statements.
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ALLOY STEEL INTERNATIONAL, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
THREE MONTHS
ENDED THREE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
2003 2002
(UNAUDITED) (UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES
Net Profit (Loss) $ 94,882 $ (46,751)
Adjustments to reconcile net loss to net cash provided by operating
activities:
Depreciation 27,361 20,981
Increase (Decrease) in cash attributable to changes in operating assets
and liabilities:
Accounts receivable (154,306) (16,230)
Inventories (63,121) (25,666)
Prepaid expenses and other current assets (10,560) (2,780)
Accounts payable and other current liabilities 55,215 19,128
Income taxes payable (23,623) 5,981
------------------------------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (74,152) (45,337)
------------------------------------
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES
Purchase of property and equipment (17,996) (16,873)
------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (17,996) (16,873)
------------------------------------
CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES
Repayment of borrowings (11,102) (8,218)
------------------------------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (11,102) (8,218)
------------------------------------
Effect of foreign exchange rate on cash 67,961 6,178
------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (35,289) (64,250)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 213,382 288,448
------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 178,093 $ 224,198
====================================
See accompanying notes to consolidated financial statements.
-3-
ALLOY STEEL INTERNATIONAL, INC. AND SUBSIDIARY
Notes to the Consolidated Financial Statements
NOTE 1 UNAUDITED STATEMENTS
The accompanying condensed consolidated financial statements of the Company as
of December 31, 2003 and for the three-month period ended December 31, 2002 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, 2003 audited 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, 2003 are not necessarily indicative of the
results that may occur for the year ending September 30, 2004.
NOTE 2 NEW ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board (FASB) issued SFAS No.'s
141 and 142, "Business Combinations" and "Goodwill and Other Intangibles". SFAS
No. 141 requires all business combinations initiated after June 30, 2001 to be
accounted for using the purchase method. Under SFAS No. 142, goodwill is no
longer subject to amortization over its estimated useful life. Rather, goodwill
is subjected to at least an annual assessment for impairment applying a
fair-market value based test. Additionally, an acquired intangible asset should
be separately recognized if the benefit of the intangible asset is obtained
through contractual or other legal rights, or if the intangible asset can be
sold, transferred, licensed, rented, or exchanged, regardless of the acquirer's
intent to do so. SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets" ("SFAS 144"), addresses the impairment for all tangible
assets. In July 2002, the FASB issued SFAS No. 146 "Accounting For Costs
Associated With Exit or Disposal Activities "SFAS No 146", which addresses
financial accounting and reporting for costs associated with exit or disposal
activities and nullifies EITF Issue No. 94-3, "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity (including
Certain Costs Incurred I a Restructuring)." SFAS 146 is effective for exit or
disposal activities that are initiated after December 31, 2002, with earlier
application encouraged. In December 2002, the FASB issued SFAS No. 148,
"Accounting for Stock-Based Compensation-Transition and Disclosure-an amendment
of FASB Statement No. 123 ("SFAS 148"), which amends FASB Statement No. 123,
Accounting for Stock-Based Compensation, to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, this Statement amends the
disclosure requirements of Statement 123 to require prominent disclosures in
both annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. SFAS 148 is effective for voluntary changes to the fair value based
method made in fiscal years beginning after December 15, 2003. The Company does
not anticipate these pronouncements will have a significant impact on its
consolidated financial position and results of operations.
NOTE 3 INVENTORIES
At December 31, 2003 (unaudited) and September 30, 2003 inventories consist of
the following:
Dec 31, 2003 Sept 30, 2003
Raw materials $ 171,514 $ 60,998
Finished goods $ 203,063 $ 250,458
------------- --------------
$ 374,577 $ 311,456
------------- --------------
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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 the primary cause of
down time, the period when machinery is not in operation due to wear or
malfunction. We believe that our Arcoplate product line will substantially lower
down time and the resulting lost production of our customers.
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 industrial use. Do to their angled and/or curved structures, material does
not flow uniformly through pipefittings, meaning pipefittings generally have
higher wear, resulting in a much shorter working life, than ordinary straight
pipe. The 3-D Pipefitting Cladder process will enable a wear resistant alloy
coating to be applied to interior surfaces of bends, elbow joints "T" sections
and "Y" sections of pipefittings, where wear is most likely to occur. We have
suspended development of the 3-D Pipefittings Cladder process until we resolve
the problems with the alloy feeder in our new Arcoplate production machine.
PLAN OF OPERATION
Our objective during the next 12 months is to expand our capacity to produce
Arcoplate with the completion of additional equipment. The additional machinery
will supplement our existing production equipment and will incorporate a
redesigned alloy feeder, due to engineering problems with the original design of
the alloy feeder which have delayed completion of this additional machinery. We
expect to commence trial production on the new machinery during the second
quarter of 2004.
We intend to achieve market penetration through a multi-step process. At the
local level, we intend to combine targeted marketing with advertising in trade
journals, newspapers 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 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, 2003 COMPARED WITH THE THREE MONTHS
ENDED DECEMBER 31, 2002
SALES
Alloy Steel had sales of $664,532 for the three months ended December 31, 2003,
compared to $357,398 for the three months ended December 31, 2002. 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 $ 0.71953, representing
the average foreign exchange rate for the three months ended December 31, 2003.
GROSS PROFIT AND COSTS OF SALES
Alloy Steel had cost of sales of $ 316,924 for the three months ended December
31, 2003, compared to $203,703 for the three months ended December 31, 2002. The
gross profit amounted to $ 347,608 for the three months ended December 31, 2003
compared to $ 153,695 for the three months ended December 31, 2002. The gross
profit percentage increased by 52% from 43%.
OPERATING EXPENSES
Alloy Steel had selling, general and administrative expenses of $ 274,174 for
the three months ended December 31, 2003, compared to $ 223,265 for the three
months ended December 31, 2002. The increase was primarily due to extra
marketing and engineering labor costs.
INCOME BEFORE TAXES
Alloy Steel's profit before taxes was $ 94,882 for the three months ended
December 31, 2003 compared to a loss of $ 46,751 for the three months ended
December 31, 2002.
NET PROFIT
Alloy Steel had a net profit of $ 94,882, or $ 0.006 per share, for the three
months ended December 31, 2003, compared to a net loss of $ 46,751 or
$0.002 per share, for the three months ended December 31, 2002.
LIQUIDITY
For the nine months ended December 31, 2003, the total cash used in operating
activities was ($ 74,152) consisting of a net profit of $ 94,882, an increase in
accounts payable and other current liabilities of $ 55,215, a decrease in
inventories of $ 63,121, a decrease in accounts receivable of $ 154,306 and a
decrease of income tax payable of $ 23,623.
As of the three months ended December 31, 2003, we had a working capital surplus
of $ 158,256.
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 the purchase of machinery or equipment, then we will need to raise capital
from the sale of securities in private offerings or by loan funds. We have no
commitments for 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.
-6-
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 currently being
modified to rectify engineering problems in the alloy feeder. We have no
material commitments for the additional financing for the addition of the
machinery to expand our capacity to produce Arcoplate or the machinery for the
3-D Pipefitting Cladder process.
EFFECT OF RECENT ACCOUNTING PRONOUNCEMENTS
Effect of Recent Accounting Pronouncements In July 2001, the Financial
Accounting Standards Board (FASB) issued SFAS No.'s 141 and 142, "Business
Combinations" and "Goodwill and Other Intangibles". SFAS No. 141 requires all
business combinations initiated after June 30, 2001 to be accounted for using
the purchase method. Under SFAS No. 142, goodwill is no longer subject to
amortization over its estimated useful life. Rather, goodwill is subjected to at
least an annual assessment for impairment applying a fair-market value based
test. Additionally, an acquired intangible asset should be separately recognized
if the benefit of the intangible asset is obtained through contractual or other
legal rights, or if the intangible asset can be sold, transferred, licensed,
rented, or exchanged, regardless of the acquirer's intent to do so. SFAS No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS
144"), addresses the impairment for all tangible assets. In July 2002, the FASB
issued SFAS No. 146 "Accounting For Costs Associated With Exit or Disposal
Activities "SFAS No, 146", which addresses financial accounting and reporting
for costs associated with exit or disposal activities and nullifies EITC Issue
No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and
Other Costs to Exit an Activity (including Certain Costs Incurred I a
Restructuring)." SFAS 146 is effective for exit or disposal activities that are
initiated after December 31, 2002, with earlier application encouraged. In
December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure-an amendment of FASB Statement No. 123
("SFAS 148"), which amends FASB Statement No. 123, Accounting for Stock-Based
Compensation, to provide alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation. In addition, this Statement amends the disclosure requirements of
Statement 123 to require prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. SFAS 148 is
effective for voluntary changes to the fair value based method made in fiscal
years beginning after December 15, 2003. The Company does not anticipate these
pronouncements will have a significant impact on its consolidated financial
position and results of operations.
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 - 15a(e) and 15d - 15(e) under the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), were effective.
-7-
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) 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.
(b) Reports on Form 8-K.
None.
-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 23, 2004 ALLOY STEEL INTERNATIONAL, INC.
By: /s/ Alan Winduss
-------------------------------------
Alan Winduss, Chief Financial Officer
(Principal Financial Officer)
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