6-Aug-2010
Quarterly Report
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 produced through a patented process. We believe that wear is the largest single factor leading to production losses in the mining, mineral-processing, and steel manufacturing industries. Consequently, wear solutions are indispensable for these businesses. The wearing of metal parts is generally defined as a gradual decay or breakdown of the metal. This wear of equipment may be due to many causes and accordingly, the selection of wear plate solutions can be a relatively complex process.
In order to minimize the effects of wear, businesses have traditionally employed such wear-combating materials as rubber compounds, ceramics, alloy castings, welded overlay wear plates, and quenched and tempered carbon steel plates. We believe that each of these materials offer a limited solution to the problem of wear. While tungsten carbide is generally recognized by the mining, mineral-processing and steel manufacturing industries as the most wear-resistant material suitable for industrial use, because of its high carbide content, we believe that the high costs associated with tungsten carbide make it impractical for most businesses. We believe that Arcoplate provides industry with solutions to most wear-related problems at a cost which is competitive with conventional welded overlay wear plates and substantially lower than tungsten carbide.
Results of Operations
For the Three and Nine Months Ended June 30, 2010 Compared with the Three and Nine Months Ended June 30, 2009
Sales
Alloy Steel had sales of $4,770,846 for the three months ended June 30, 2010, compared to $1,307,160 for the three months ended June 30, 2009. 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 $0.89896 for the three months ended June 30, 2010 and $0.69961 for the three months ended June 30, 2009 representing the average foreign exchange rate for the respective year to date periods.
Alloy Steel had sales of $15,741,798 and $4,632,438 for the nine months ended June 30, 2010 and the nine months ended June 30, 2009 respectively. These sales consist solely of our Arcoplate products.
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The increase in sales for the period is a result of the continuing return to normal operations by several of the Company's customers after the downturn experienced by the world economy during the same period last year. During the quarter, the demand for our product continued to increase as mining companies continued to return to their normal level of exploration and production. The Company has continued to promote its product in the market place as a superior option for maintenance.
Gross Profit and Cost of Sales
Alloy Steel had cost of sales of $2,643,220 for the three months ended June 30, 2010, compared to $1,092,332 for the three months ended June 30, 2009. The gross profit amounted to $2,127,626 for the three months ended June 30, 2010, compared to $214,828 for the three months ended June 30, 2009.
Alloy Steel had a cost of sales of $7,252,241 and $3,006,545 for the nine months ended June 30, 2010 and the nine months ended June 30, 2009 respectively. Alloy Steel's gross profit was $8,489,557 or 53.9% of sales, and $1,625,893 or 35.1% of sales, for the respective nine month periods. The increase in gross profit percentage is attributable mainly to increased margins on various orders as demand has continued to grow allowing the Company to return to more normal pricing models from the discount pricing models that were being used to generate sales during the downturn, increased efficiencies in production gained with the additional manufacturing capacity provided by the new mill completed prior to the global economic downturn, arising from an increased absorption of overheads due to the increased volume of production, and a decrease in the amount of raw materials being consumed during the testing phase of the new mill during the period to June 30, 2009.
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, 2010 and 2009.
Alloy Steel had selling, general and administrative expenses of $1,407,452 for the three months ended June 30, 2010, compared to $805,294 for the three months ended June 30, 2009.
Alloy Steel had operating expenses of $3,894,080 and $2,130,305 for the nine months ended June 30, 2010 and nine months ended June 30, 2009 respectively.
The expenditure for the three and nine month periods ended June 30, 2010 increased compared to the three and nine month periods ended June 30, 2009 as operations continued to return to a normal state with the increase in orders received from customers. Areas in which costs increased include bonuses paid in line with the increased sales achieved, administrative staff remuneration through increased salaries and additional staff and increased off-site temporary storage costs for goods produced and raw materials. These increased costs have been partially offset by the production efficiencies noted above.
Income (Loss) Before Taxes
Alloy Steel's income before income tax expense was $698,985 for the three months ended June 30, 2010, compared to an loss before income tax of ($582,863) for the three months ended June 30, 2009.
Alloy Steel had a net income before income taxes of $4,618,021 and a net loss before income taxes of ($463,700) for the nine months ended June 30, 2010 and nine months ended June 30, 2009 respectively.
Net Income (Loss)
Alloy Steel had a net income of $357,319, or $0.021 per share, for the three months ended June 30, 2010, compared to a net loss of ($437,951), or ($0.003) per share, for the three months ended June 30, 2009.
Alloy Steel had a net income of $2,974,859, or $0.171 per share, and ($396,002), or ($0.023) per share, for the nine months ended June 30, 2010 and nine months ended June 30, 2009 respectively.
It is noted that predominantly all operations of Alloy Steel are conducted by the Australian subsidiary, and therefore, the majority of the amounts reported are initially recorded in Australian dollars by the subsidiary. The value of the Australian dollar compared to the US dollar has been volatile over the reporting period, and therefore the exchange rate movement continues to have a reasonable impact upon the value reported by the Company. This is evident in the calculation of the Company's comprehensive income for the period which reflects a foreign currency translation loss of $270,841 for the nine months ended June 30, 2010 compared with a foreign currency translation loss of $162,328 for the nine months ended June 30, 2009.
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Liquidity and Capital Resources
For the nine months ended June 30, 2010, net cash used by operating activities was $3,340,316. The net income may be reconciled to this amount by an adjustment for depreciation and amortization of $240,626, a write down of assets to fair values of $20,913, income received in forms other than cash of $4,916, a loss on the disposal of fixed assets of $5,892, noncontrolling shareholders interests in subsidiary loss of $2,044 and a decrease in cash and cash equivalents attributable to changes in operating assets and liabilities of $104,986, which consisted primarily of a decrease in accounts receivable of $404,656 and an increase in inventories of $870,066, an increase in other current assets of $48,376, and a decrease in accounts payable and other current liabilities of $39,661, offset by an increase in tax payable of $658,433.
At June 30, 2010, the Company had a working capital surplus of $4,415,756.
The Company is actively reviewing options to raise additional capital through debt and/or equity financing. Although it currently has no commitment to do so, any additional capital raised would be applied to the research of nanotechnology and to an overseas manufacturing expansion.
Significant Changes in Number 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
Other than as described in Item 5 below, we have no material commitments for financing to purchase or construct machinery to expand our capacity to produce Arcoplate.
Effect of Recent Accounting Pronouncements
The effect of recent accounting pronouncements has been detailed above in Note 2 to the Financial Statements contained in Item 1.
FORWARD-LOOKING
