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 THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2006
[_] 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 Identification No.)
incorporation or organization)
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 August 14, 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
June 30, September 30,
2006 2005
(unaudited)
ASSETS
------
CURRENT ASSETS
Cash and cash equivalents $ 128,643 $ 127,920
Accounts receivable, less allowance for doubtful 289,021 591,782
accounts of $nil at June 30, 2006 and September 30,
2005.
Inventories 559,002 656,434
Income tax receivable 23,735 325,444
Prepaid expenses and other current assets 28,291 95,594
-------------------------------
TOTAL CURRENT ASSETS 1,028,692 1,797,174
-------------------------------
PROPERTY AND EQUIPMENT, net 1,847,440 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 $ 2,966,821 $ 3,639,611
===============================
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES
Notes payable, current portion $ 63,464 $ 62,567
Notes payable, officers, current portion 50,712 52,424
Accrued officers' salaries 288,746 224,096
Royalties payable, related party 309,201 262,578
Accounts payable and other current liabilities 394,450 882,952
-------------------------------
TOTAL CURRENT LIABILITIES 1,106,573 1,484,617
-------------------------------
LONG-TERM LIABILITIES
Notes payable, less current portion 228,276 35,750
Notes payable, officers, less current portion 103,010 146,895
Employee entitlement provisions 6,099 5,920
Loan payable, related party 144,372 150,344
-------------------------------
TOTAL LONG-TERM LIABILITIES 481,757 338,909
===============================
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; 169,500 169,500
16,950,000 issued and outstanding
Additional paid-in-capital 1,773,382 1,773,382
Accumulated other comprehensive income 492,820 577,545
Accumulated deficit (1,027,211) (704,342)
-------------------------------
TOTAL STOCKHOLDERS' EQUITY 1,408,491 1,816,085
-------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 2,966,821 $ 3,639,611
===============================
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,
2006 2005 2006 2005
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
SALES $ 795,696 $ 924,178 $ 2,457,725 $ 2,600,127
COST OF SALES 417,018 573,017 1,565,784 1,628,116
------------------------------------------------------
GROSS PROFIT 378,678 351,161 891,941 972,011
OPERATING EXPENSES
Selling, general and administrative
expenses 433,558 337,287 1,259,581 938,435
------------------------------------------------------
INCOME (LOSS) FROM OPERATIONS (54,880) 13,874 (367,640) 33,576
------------------------------------------------------
OTHER INCOME (EXPENSE)
Interest income 1,706 3,110 30,569 10,399
Insurance recovery (401) - 8,830 4,642
Unrealized foreign exchange gain (10,373) 5,252 (621) (7,543)
Profit on disposal of equipment 5,949 - 5,949 -
Commission received 1 - 44 25
------------------------------------------------------
3,118 8,362 44,771 7,523
------------------------------------------------------
INCOME (LOSS) BEFORE INCOME
TAX EXPENSE (BENEFIT) (57,998) 22,236 (322,869) 41,099
Income tax expense (benefit) - - - -
------------------------------------------------------
NET INCOME (LOSS) $ (57,998) $ 22,236 $ (322,869) $ 41,099
======================================================
BASIC INCOME (LOSS) AND DILUTED
INCOME (LOSS) PER COMMON SHARE $ (0.003) $ 0.001 $ (0.019) $ 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) $ (57,998) $ 22,236 $ (322,869) $ 41,099
OTHER COMPREHENSIVE INCOME (LOSS)
Foreign currency translation
adjustment 52,595 (22,126) (84,725) 108,359
------------------------------------------------------
COMPREHENSIVE INCOME (LOSS) $ (5,403) $ 110 $ (407,594) $ 149,458
======================================================
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,
2006 2005
(UNAUDITED) (UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (322,869) $ 41,099
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization 127,058 96,384
Profit on disposal of equipment (5,949) -
Increase (decrease) in cash and cash equivalents attributable to changes
in operating assets and liabilities:
Accounts receivable 284,446 439,026
Inventories 72,684 (42,152)
Prepaid expenses and other current assets 55,915 18,340
Income taxes receivable 294,150 (26,395)
Accrued officers' salaries 64,650 -
Accounts payable and other current liabilities (416,064) (73,986)
--------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 154,021 452,316
--------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (85,355) (99,148)
Payment for deposit for investment - (5,868)
Refund of deposit on equipment 10,746 -
Proceeds on disposal of equipment 6,544 -
--------------------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (68,065) (105,016)
--------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from notes payable 41,474 -
Repayment on notes and loans payable (265,742) (186,630)
--------------------------
NET CASH USED IN FINANCING ACTIVITIES (224,268) (186,630)
--------------------------
EFFECT OF FOREIGN EXCHANGE RATE CHANGES ON CASH AND CASH
EQUIVALENTS 139,035 94,556
--------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 723 255,226
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 127,920 42,038
--------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 128,643 $ 297,264
==========================
Supplemental disclosure of cash flow information, cash paid for interest $ 16,425 $ 8,144
==========================
Supplemental disclosure of non cash information, equipment acquired
under note payable $ 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, 2006 and for the
nine-month and three-month periods ended June 30, 2006 and 2005 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 report on Form 10-KSB for the year ended September 30, 2005. The results
of operations for the nine-month and three-month periods ended June 30, 2006 are
not necessarily indicative of the results that may occur for the year ending
September 30, 2006.
At June 30, 2006, the Company has a working capital deficit of $77,881 and an
accumulated deficit of $1,027,211. The Company has continued to sustain losses
from operations and for the nine months ended June 30, 2006, has incurred a net
loss of $322,869 compared to a net income of $41,099 for the nine months ended
June 30, 2005. 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 successfully increase the present level of sales at
a profitable margin.
NOTE - 2 NEW ACCOUNTING PRONOUNCEMENTS
In May 2005, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("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. 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.
- 4 -
NOTE - 3 INVENTORIES
At June 30, 2006 (unaudited) and September 30, 2005, inventories consisted of
the following:
June 30, 2006 Sept 30, 2005
Raw materials $ 264,837 $ 217,878
Work in Progress 31,940 154,620
Finished goods 262,225 283,936
------------------------------
$ 559,002 $ 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 ArcoplateTM, 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.
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 in an advanced stage and we
expect to have prototype equipment completed within the next year.
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.
RESULTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED JUNE 30, 2006 COMPARED WITH THE THREE
AND NINE MONTHS ENDED JUNE 30, 2005
SALES
Alloy Steel had sales of $795,696 for the three months ended June 30, 2006,
compared to $924,178 for the three months ended June 30, 2005. 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 $0.74367 for the nine
months ended June 30, 2006 and $0.768 for the nine months ended June 30, 2005
representing the average foreign exchange rate for the respective periods.
Alloy Steel had sales of $2,457,725 and $2,600,127 for the nine months ended
June 30, 2006 and nine months ended June 30, 2005, respectively. These sales
consist solely of the sale of our Arcoplate product.
The sales reduction was primarily due to the delay in receiving orders from end
users due to their maintenance programmes.
- 5 -
GROSS PROFIT AND COSTS OF SALES
Alloy Steel had cost of sales of $417,018 for the three months ended June 30,
2006, compared to $573,017 for the three months ended June 30, 2005. The gross
profit amounted to $378,678 for the three months ended June 30, 2006 compared to
$351,161 for the three months ended June 30, 2005. The gross profit percentage
increased from 38.0% to 47.6%. The increase in gross profit percentage is
primarily attributable to negotiating better raw material costs with suppliers.
Alloy Steel had cost of sales of $1,565,784 and $1,628,116 for the nine months
ended June 30, 2006 and nine months ended June 30, 2005, respectively. Alloy
Steel's gross profit was $891,941 or 36.3% of sales, and $972,011 or 37.4% of
sales, for the respective nine month 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, 2006 and
2005.
Alloy Steel had selling, general and administrative expenses of $433,558 for the
three months ended June 30, 2006, compared to $337,287 for the three months
ended June 30, 2005.
Alloy Steel had selling, general and administrative expenses of $1,259,581 and
$938,435 for the nine months ended June 30, 2006 and 2005, 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 ended June 30, 2006, included additional staff employed,
increased travel expenditure to assist marketing and depreciation of the
completed manufacturing equipment.
INCOME (LOSS) BEFORE TAXES
Alloy Steel's loss before income tax (benefit) was ($57,998) for the three
months ended June 30, 2006, compared to an income of $22,236 for the three
months ended June 30, 2005.
Alloy Steel had a loss before income tax (benefit) of ($322,869) and an income
of $41,099 for the nine months ended June 30, 2006 and nine months ended June
30, 2005, respectively.
Factors contributing to the loss before income tax for both the three month and
nine month periods ended June 30, 2006, include the delays in orders received
from customers, and the increased expenditure of additional staff employed,
increased travel expenditure to assist marketing and depreciation of the
completed manufacturing equipment.
NET INCOME (LOSS)
Alloy Steel had a net loss of ($57,998), or ($0.003) per share, for the three
months ended June 30, 2006, compared to a net income of $22,236, or $0.001 per
share, for the three months ended June 30, 2005.
Alloy Steel had a net loss of ($322,869), or ($0.019) per share, and a net
income of $41,099, or $0.002 per share for the nine months ended June 30, 2006
and 2005, respectively.
LIQUIDITY AND CAPITAL RESOURCES
For the nine months ended June 30, 2006, net cash provided by operating
activities was $154,021 despite a net loss of $322,869. This was primarily due
to an adjustment for depreciation and amortization of $127,058 to reconcile net
income (loss) to net cash provided by operating activities and an increase in
cash and cash equivalents attributable to changes in operating assets and
liabilities of $355,781, which consisted primarily of an increase in accounts
receivable of $284,446 and an income tax receivable of $294,150, and was offset
by an increase in accounts payable and other current liabilities of $416,064.
- 6 -
The positive cash result has been generated by the allowance of research and
development concessions to the Company by the relevant Australian government
authorities. Future cashflows from sales are anticipated to be sufficient to
sustain the Company's operations. The Company is also reviewing available
options to raise capital in alternative markets, although it currently has no
commitments to do so.
As of June 30, 2006, we had a working capital deficit of $77,881.
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
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 the machinery for the 3-D
Pipefitting Cladder process.
EFFECT OF RECENT ACCOUNTING PRONOUNCEMENTS
In May 2005, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ('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. 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.
- 7 -
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.
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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
We held our Annual Meeting of Stockholders on June 27, 2006. The item presented
was as follows:
To ratify the appointment of Rothstein Kass & Company, Certified Public
Accountants PC as Auditors for the Company for the fiscal year ending
September 30, 2006: Rothstein Kass & Company, Certified Public Accountants
PC was ratified as the Company's auditors with 10,798,000 votes for, nil
votes against and nil abstentions.
- 8 -
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.
- 9 -
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 14, 2006 ALLOY STEEL INTERNATIONAL, INC.
By: /s/ Alan Winduss
----------------------------
Alan Winduss,
Chief Financial Officer
(Principal Financial Officer)
- 10 -