form10qsb.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549


FORM 10-QSB


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

For the quarterly period ended June 30, 2007

 
¨
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 or organization)
  
(I.R.S. Employer Identification No.)


Alloy Steel International, Inc.
42 Mercantile Way Malaga
P.O. Box 3087 Malaga D C 6945
Western Australia
(Address of principal executive offices)

61 (8) 9248 3188
(Issuer’s telephone number)

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  þ  No  ¨


Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  ¨  No  þ


There were 16,950,000 shares of Common Stock outstanding as of July 31, 2007.


Transitional Small Business Disclosure Format (check one):  Yes  ¨  No þ
 

PART I
FINANCIAL INFORMATION
Item 1.
Financial Statements

ALLOY STEEL INTERNATIONAL, INC. AND SUBSIDIARY
Condensed Consolidated Balance Sheets
   
June 30,
    
September 30,
  
   
2007
    
2006
  
   
(unaudited)
        
ASSETS     
  
CURRENT ASSETS
            
Cash and cash equivalents
   $
5,932
     $
18,955
  
Accounts receivable, less allowance for doubtful accounts of nil June 30, 2007 and September 30, 2006
    
1,369,108
      
519,894
  
Inventories
    
1,009,366
      
530,530
  
Prepaid expenses and other current assets
    
31,865
      
70,786
  
TOTAL CURRENT ASSETS
    
2,416,271
      
1,140,165
  
                 
PROPERTY AND EQUIPMENT, NET
    
2,203,441
      
1,888,228
  
                 
OTHER ASSETS
                
Intangibles
    
90,512
      
90,512
  
Deferred tax assets
    
-
      
135,326
  
Other
    
11,404
      
10,034
  
     
101,916
      
235,872
  
TOTAL ASSETS
   $
4,721,628
     $
3,264,265
  
LIABILITIES AND STOCKHOLDERS’ EQUITY       
  
CURRENT LIABILITIES
                
Notes payable, current portion
    
76,675
      
65,966
  
Notes payable, officers, current portion
    
59,548
      
51,958
  
Accrued officers’ salaries
    
365,302
      
309,398
  
Royalties payable, related party
    
433,077
      
327,134
  
Current tax payable
    
126,473
      
-
  
Accounts payable and other current liabilities
    
846,207
      
539,495
  
TOTAL CURRENT LIABILITIES
    
1,907,282
      
1,293,951
  
                 
LONG-TERM LIABILITIES
                
Notes payable, less current portion
    
218,402
      
216,759
  
Notes payable, officers, less current portion
    
60,256
      
96,799
  
Employee entitlement provisions
    
8,526
      
6,379
  
Loan payable, related party
    
74,740
      
147,674
  
Deferred tax liability
    
47,532
      
-
  
TOTAL LONG-TERM LIABILITIES
    
409,456
      
467,611
  
                 
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
    
865,862
      
538,189
  
Accumulated deficit
     (403,854 )     (978,368 )
TOTAL STOCKHOLDERS’ EQUITY
    
2,404,890
      
1,502,703
  
                 
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
   $
4,721,628
     $
3,264,265
  
 
 
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,
  
   
2007
    
2006
    
2007
    
2006
  
   
(unaudited)
    
(unaudited)
    
(unaudited)
    
(unaudited)
  
                         
SALES
   $
1,883,689
     $
795,696
     $
5,295,810
     $
2,457,725
  
                                 
COST OF SALES
    
1,046,682
      
417,018
      
2,833,145
      
1,565,784
  
                                 
GROSS PROFIT
    
837,007
      
378,678
      
2,462,665
      
891,941
  
                                 
OPERATING EXPENSES
                                
Selling, general and administrative Expenses
    
535,451
      
437,938
      
1,627,173
      
1,243,777
  
INCOME (LOSS) FROM OPERATIONS
    
301,556
       (59,260 )    
835,492
       (351,836 )
                                 
OTHER INCOME (EXPENSE)
                                
Interest income
    
2,870
      
1,706
      
11,019
      
30,569
  
Interest expense
     (5,892 )     (5,993 )     (20,134 )     (16,425 )
Insurance recovery
    
12,669
       (401 )    
14,862
      
8,830
  
Profit on disposal of equipment
    
-
      
5,949
      
-
      
5,949
  
Other income
    
6,043
      
1
      
10,808
      
44
  
     
15,690
      
1,262
      
16,555
      
28,967
  
INCOME (LOSS) BEFORE INCOME TAX (EXPENSE) BENEFIT
    
317,246
       (57,998 )    
852,047
       (322,869 )
Income tax expense (benefit)
     (101,033 )    
-
       (277,531 )    
-
  
NET INCOME (LOSS)
   $
216,213
     $ (57,998 )   $
574,516
     $ (322,869 )
BASIC INCOME (LOSS) AND DILUTED INCOME (LOSS) PER COMMON SHARE
   $
0.013
     $ (0.003 )   $
0.034
     $ (0.019 )
                                 
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
    
16,950,000
      
16,950,000
      
16,950,000
      
16,950,000
  
                                 
COMPREHENSIVE INCOME (LOSS)
                                
                                 
NET INCOME (LOSS)
   $
216,213
     $ (57,998 )   $
574,516
     $ (322,869 )
OTHER COMPREHENSIVE INCOME (LOSS)
                                
Foreign currency translation adjustment
    
143,289
      
52,595
      
327,673
       (84,725 )
COMPREHENSIVE INCOME (LOSS)
   $
359,502
     $ (5,403 )   $
902,189
     $ (407,594 )


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,
  
   
2007
    
2006
  
CASH FLOWS FROM OPERATING ACTIVITIES
  
(unaudited)
    
(unaudited)
  
             
Net income (loss)
   $
574,516
     $ (322,869 )
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
                
Depreciation and amortization
    
123,136
      
127,058
  
Profit on disposal of equipment
    
-
       (5,949 )
Increase (decrease) in cash and cash equivalents attributable to changes in operating assets and liabilities:
                
Accounts receivable
     (729,467 )    
284,446
  
Inventories
     (380,925 )    
72,684
  
Prepaid expenses and other current assets
    
16,371
      
55,915
  
Income taxes receivable
    
354,622
      
294,150
  
Accrued officers’ salaries
    
55,904
      
64,650
  
Accounts payable and other current liabilities
    
329,563
       (416,064 )
NET CASH PROVIDED BY OPERATING ACTIVITIES
    
343,720
      
154,021
  
                 
CASH FLOWS FROM INVESTING ACTIVITIES
                
Purchase of property and equipment
     (166,599 )     (85,355 )
Refund of deposit on equipment
    
-
      
10,746
  
Proceeds on disposal of equipment
    
-
      
6,544
  
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES
     (166,599 )     (68,065 )
                 
                 
CASH FLOWS FROM FINANCING ACTIVITIES
                
Proceeds from notes payable
    
-
      
41,474
  
Repayments and notes and loans payable
     (275,257 )     (265,742 )
NET CASH USED IN FINANCING ACTIVITIES
     (275,257 )     (224,268 )
                 
EFFECT OF FOREIGN EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS
    
85,113
      
139,035
  
                 
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
     (13,023 )    
723
  
                 
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
    
18,955
      
127,920
  
                 
CASH AND CASH EQUIVALENTS AT END OF PERIOD
   $
5,932
     $
128,643
  
                 
Supplemental disclosure of cash flow information, cash paid for interest
   $
20,134
     $
16,425
  
                 
Supplemental disclosure of non cash information, equipment acquired under note payable
   $
28,865
     $
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, 2007 and for the nine month and three month periods ended June 30, 2007 and 2006 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 reporting on Form 10-KSB for the year ended September 30, 2006.  The results of operations for the nine month and three month periods ended June 30, 2007 are not necessarily indicative of the results that may occur for the year ending September 30, 2007.

At June 30, 2007, the Company has a working capital surplus of $508,989 and an accumulated deficit of $403,854. 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 continue to successfully increase the present level of sales at a profitable margin.

Note 2 – New Accounting Pronouncements

In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair Value Measurements”.  This statement generally clarifies the manner in which an entity is required to measure the fair value of its assets and liabilities, emphasizing that fair value is a market-based measurement and not an entity-specific measurement.  This statement is effective for accounting changes made in the fiscal years beginning after November 15, 2007.  Adoption of the provisions of the Statement is not expected to have a material effect on the operations or financial position of the Company.

Note 3 – Inventories

At June 30, 2007, (unaudited) and September 30, 2006, inventories consisted of the following:

   
June 30, 2007
    
Sept 30, 2006
  
Raw materials
   $
660,499
     $
284,814
  
Work in progress
    
36,704
      
49,990
  
Finished goods
    
312,163
      
195,726
  
    $
1,009,366
     $
530,530
  
 
Item 2. Management’s Discussion and Analysis

You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our financial statements, the notes to our financial statements and other financial information contained elsewhere in this filing.

Overview

We manufacture and distribute Arcoplate ™, a wear-resistant alloy overlay wear plate, 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.

- 4 -

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 at an advanced stage and we expect to have prototype equipment completed within the next two years.

Results of Operations

For the Three and Nine Months Ended June 30, 2007 Compared with the Three and Nine Months Ended June 30, 2006

Sales

Alloy Steel had sales of $1,883,689 for the three months ended June 30, 2007, compared to $795,696 for the three months ended June 30, 2006.  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 $0.79564 for the nine months ended June 30, 2007 and $0.74367 for the nine months ended June 30, 2006 representing the average foreign exchange rate for the respective periods.

Alloy Steel had sales of $5,295,810 and $2,457,725 for the nine months ended June 30, 2007 and the nine months ended June 30, 2006 respectively.  These sales consist solely of our Arcoplate product.

The sales increase in both periods is attributable to increased orders from new mining projects in Australia.

Gross Profit and Cost of Sales

Alloy Steel had cost of sales of $1,046,682 for the three months ended June 30, 2007, compared to $417,018 for the three months ended June 30, 2006.  The gross profit amounted to $837,007 for the three months ended June 30, 2007, compared to $378,678 for the three months ended June 30, 2006.  The gross profit percentage decreased from 46.6% to 44.4%.  The decrease in gross profit percentage is attributable to increased raw material costs.

Alloy Steel had a cost of sales of $2,833,145 and $1,565,784 for the nine months ended June 30, 2007 and the nine months ended June 30, 2006 respectively.  Alloy Steel’s gross profit was $2,462,665 or 46.5% of sales, and $891,941 or 36.3% of sales, for the respective nine months 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, 2007 and 2006.

Alloy Steel had selling, general and administrative expenses of $535,451 for the three months ended June 30, 2007, compared to $437,938 for the three months ended June 30, 2006.

Alloy Steel has operating expenses of $1,627,173 and $1,243,777 for the nine months ended June 30, 2007 and nine months ended June 30, 2006 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 ending June 30, 2007, include the additional staff employed, increased travel expenditure to assist marketing and depreciation of the completed manufacturing equipment.

Income (Loss) Before Taxes

Alloy Steel’s income before income tax (benefit) was $317,246 for the three months ended June 30, 2007, compared to a loss of $(57,998) for the three months ended June 30, 2006.

- 5 -

Alloy Steel had a net income before income taxes of $852,047 and a net loss of $(322,869) for the nine months ended June 30, 2007 and nine months ended June 30, 2006 respectively.

Net Income (Loss)

Alloy Steel had a net income of $216,213 or $0.013 per share, for the three months ended June 30, 2007, compared to a net loss of $(57,998), or $(0.003) per share, for the three months ended June 30, 2006.

An adjustment to recognize the use of prior year tax losses of Alloy Steel’s Australian subsidiary was made the previous quarter as it is highly likely that the subsidiary will recoup all prior year tax losses.

Alloy Steel had a net income of $574,516 or $0.034 per share, and a net loss of $(322,869) or $(0.019) per share for the nine months ended June 30, 2007 and nine months ended June 30, 2006 respectively.

Liquidity and Capital Resources

For the nine months ended June 30, 2007, net cash provided by operating activities was $343,720 consisting of net income of $574,516 adjusted for depreciation of $123,136 to reconcile net income to net cash provided by operating activities and a decrease in cash and cash equivalents attributable to changes in operating assets and liabilities of $353,932 which consisted primarily of a decrease in accounts receivable of $729,467 and a decrease in inventories of $380,925 and an increase in other current assets $16,371 which was offset by an increase in income tax payable of $354,622 and an increase in accounts payable and other current liabilities of $385,467.

At June 30, 2007, the Company had a working capital surplus of $508,989.

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.

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 continue to successfully increase the present level of sales at a profitable margin.

Significant Changes in Number of Employees

It is expected an additional five (5) production employees will be employed 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 for the 3-D Pipefitting Cladder process.

Effect of Recent Accounting Pronouncements

In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair Value Measurements”.  This statement generally clarifies the manner in which an entity is required to measure the fair value of its assets and liabilities, emphasizing that fair value is a market-based measurement and not an entity-specific measurement.  This statement is effective for accounting changes made in the fiscal years beginning after November 15, 2007.  Adoption of the provisions of the Statement is not expected to have a material effect on the operations or financial position of the Company.

- 6 -

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 Office 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 report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.


Item 6.
Exhibits

 
Certification of the Chief Executive Officer required by Rule 13a-14(a) or Rule 15d-14(a).

 
Certification of the Chief Financial Officer required by Rule 13a-14(a) or Rule 15d-14(a).

 
Certification of the Chief Executive Officer required by Rule 13a-14(b) or Rule 15d-14(b) and 18 U.S.C. 1350.

 
Certification of the Chief Financial Officer required by Rule 13a-14(b) or Rule 15d-14(b) and 18 U.S.C. 1350.
 
- 7 -

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, 2007
 ALLOY STEEL INTNERATIONAL, INC.  
           
           
     
By:
/s/ Alan Winduss
  
       
Alan Winduss, Chief Financial Officer
  
       
(Principal Financial Officer)
  
 

- 8 -