ALLOY STEEL INTERNATIONAL, INC. AND CONTROLLED ENTITIES

Transcription

1 ALLOY STEEL INTERNATIONAL, INC. AND CONTROLLED ENTITIES ANNUAL FINANCIAL STATEMENTS SEPTEMBER 30, 2018

2 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Independent Auditor s Report F-2 Consolidated Financial Statements Consolidated Balance Sheets as of September 30, 2018 and 2017 F-3 Consolidated Statements of Operations for the Years ended September 30, 2018 and 2017 Consolidated Statements of Comprehensive Income for the Years ended September 30, 2018 and 2017 Consolidated Statements of Stockholders' Equity to the Years ended September 30, 2018 and 2017 Consolidated Statements of Cash Flows for the Years ended September 30, 2018 and 2017 F-4 F-5 F-6 F-7 Notes to Consolidated Financial Statements F-8 F-17 F1

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4 CONSOLIDATED BALANCE SHEETS September 30, 2018 and 2017 Sep 18 $ Sep 17 $ ASSETS Note CURRENT ASSETS Cash and cash equivalents 3 11,317,071 12,910,894 Accounts receivable, less allowance for doubtful accounts of $54,325 at September 30, 2018 and $58,966 at September 5,784,116 3,469, Inventories 4 3,824,090 2,400,704 Prepaid expenses and other current assets 696, ,721 Assets held for sale 5 3,715,237 4,032,642 TOTAL CURRENT ASSETS 25,336,630 23,388,452 PROPERTY AND EQUIPMENT, net 6 3,117,523 2,448,339 OTHER ASSETS Deferred tax asset 7 242, ,519 TOTAL OTHER ASSETS 242, ,519 TOTAL ASSETS 28,697,004 26,060,310 CURRENT LIABILITIES LIABILITIES AND STOCKHOLDERS EQUITY Accounts payable 1,625,374 1,359,295 Royalties payable, related party 252,264 80,784 Current tax payable 496, ,467 Accrued payroll and related costs 586, ,473 TOTAL CURRENT LIABILITIES 2,960,424 2,682,019 LONG-TERM LIABILITIES Deferred tax liabilities 7 137, ,635 Other liabilities 45,337 69,867 TOTAL LONG-TERM LIABILITIES 183, ,502 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;17,042,000 and 17, 042,000 issued and outstanding at 170, ,420 September 30, 2018 and 2017 respectively Capital in excess of par value 1,769,382 1,769,382 Retained earnings 29,725,659 25,327,944 Accumulated other comprehensive income (loss) (6,112,052) (4,098,957) TOTAL STOCKHOLDERS EQUITY 25,553,409 23,168,789 TOTAL LIABILITIES AND STOCKHOLDERS EQUITY 28,697,004 26,060,310 F3

5 CONSOLIDATED STATEMENTS OF OPERATIONS Years Ended September 30, 2018 and 2017 Sep-18 Sep-17 $ $ Sales 26,284,683 21,734,832 Cost of sales related party (royalties) (1,367,843) (1,262,029) Cost of sales related party (materials) - (337,248) Cost of sales (14,581,281) (11,502,512) Gross Profit 10,335,559 8,633,043 Operating Expenses Selling, general and administrative expenses (4,100,607) (2,486,789) Impairment - (432,667) Rent expenses related party (701,135) (659,052) Profit From Operations 5,533,817 5,054,535 Other Income Interest income 173, ,295 Interest expense - (100) Sundry income 113,529 74,387 Realised foreign exchange profit (loss) (75,498) (20,378) Unrealised foreign exchange profit (loss) 517,621 (156,290) 729,308 36,914 Income Before Income Tax (Expense) 6,263,125 5,091,449 Income tax (expense) (1,865,410) (1,594,364) Net Income 4,397,715 3,497,085 Basic and Diluted Income per Common Share Weighted Average Common Shares Used in computing basic and diluted income per share 17,042,000 17,042,000 F4

6 ALLOY STEEL INTERNATIONAL INC. AND CONTROLLED ENTITIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME Years Ended September 30, 2018 and 2017 Sep-18 Sep-17 $ $ Net Income 4,397,715 3,497,085 Other Comprehensive Income Foreign currency translation adjustment (2,013,095) 641,465 Total Other Comprehensive Income (2,013,095) 641,465 Total Comprehensive Income 2,384,620 4,138,550 F5

7 CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY Years Ended September 30, 2018 and 2017 Accumulated Capital in Other Total Common Stock Excess of Retained Comprehensive Stockholders Shares Amount Par Value Earnings Income (Loss) Equity $ $ $ $ $ Balances, October 1, ,042, ,420 1,769,382 27,980,975 (4,740,422) 25,180,355 Net Income Other comprehensive income ,497,085-3,497, , ,465 Common control Reserve (Note 1) Balances, September 30, (6,150,116) - (6,150,116) 17,042, ,420 1,769,382 25,327,944 (4,098,957) 23,168,789 Net Income Other comprehensive income (Loss) Balances, September 30, ,397,715-4,397, (2,013,095) (2,013,095) 17,042, ,420 1,769,382 29,725,659 (6,112,052) 25,553,409 (Note 1): During the financial year 2017 the Company acquired Matrix Metals International Pty Ltd, a commonly controlled entity. This transaction was accounted for using the historical cost basis of the assets and liabilities acquired. As no tangible assets or liabilities were acquired in the transaction, the entire balance of the transaction has been disclosed directly against retained earnings. F6

8 CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended September 30, 2018 and 2017 Sep-18 $ Sep-17 $ Cash Flows From Operating Activities Net income 4,397,715 3,497,085 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortisation 685, ,174 Impairment - 432,667 (Profit)/Loss on sale of plant and equipment (27,247) 28,834 Loss on liquidation of subsidiary - 276,071 Increase (decrease) in cash and cash equivalents attributable to changes in operating assets and liabilities: Accounts receivable (2,284,128) (217,169) Inventories (1,647,194) 507,019 Prepaid expenses and other current assets (175,468) (48,743) Accounts payable and other current liabilities 219, ,698 Income taxes payable (228,679) 902,225 Net Cash Provided by Operating Activities 940,653 6,088,861 Cash Flows From Investing Activities Purchase of property, plant and equipment (1,604,968) (1,573,758) Proceeds on sale of property, plant and equipment 39,287 27,179 Loans to companies 629 (273,933) Investment in common control subsidiary - (5,981,437) Net Cash (Used in) Investing Activities (1,565,052) (7,801,949) Cash Flows From Financing Activities Repayments on notes and loans payable - (12,688) Net Cash (Used in) Financing Activities - (12,688) Effect of Foreign Exchange Rate Changes on Cash and Cash Equivalents (969,424) 319,343 Net Increase (Decrease) in Cash and Cash Equivalents (1,593,823) (1,406,433) Cash and Cash Equivalents at Beginning of Period 12,910,894 14,317,327 Cash and Cash Equivalents at End of Period 11,317,071 12,910,894 Supplemental disclosures of cash flow information, Cash paid during the year for: Income taxes 2,094, ,642 Interest F7

9 1. Nature of operations NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Alloy Steel International, Inc. (AYSI), its 100% owned subsidiary, Alloy Steel Australia (Int) Pty Limited (ASAI) and its wholly owned entities PT Alloy Manufacturing Indonesia (PTAM) and Matrix Metal International Pty Ltd (MATRIX), wholly owned subsidiary Alloy Steel North America LLC (ASNA) (collectively the "Company") manufacture and distribute Arcoplate, a wear-resistant fused-alloy steel plate, to customers throughout the world. Company commenced Laser and Waterjet cutting during 2017 financial year and diversified in to areas of Wear Billets and Ceramics in Summary of significant accounting policies Basis of Presentation The Company adheres to accounting standards set by the Financial Accounting Standards Board (FASB). FASB sets generally accepted accounting principles (GAAP) in the United States of America that the Company follows to ensure the Company consistently reports its financial condition, results of operations and cash flows. References to GAAP issued by FASB in these notes are to FASB Accounting Standards Codification, sometimes referred to as the Codification or ASC. The Company's consolidated financial statements are denominated in United States dollars. Principles of Consolidation The consolidated financial statements include the accounts of AYSI, ASAI, PTAM and ASNA. All material intercompany balances and transactions have been eliminated in consolidation. Revenue Recognition The Company recognizes revenues when products are shipped and title passes to customers. Provisions are established, as appropriate, for returns and allowances and warranties in connection with sales. Cash and Cash Equivalents The Company considers all highly-liquid instruments purchased with initial maturities of three months or less to be cash equivalents. Accounts Receivable The Company carries its accounts receivable at cost less an allowance for doubtful accounts. On a periodic basis, the Company evaluates its receivables and establishes an allowance for doubtful accounts, based on the history of past write-offs and collections and current credit conditions. The Company has reviewed its outstanding accounts and, given the company s credit criteria and quality of clients, notwithstanding the current economic climate, Company has recognised an allowance for doubtful debts amounting to $54,325 for the year ended September 30, 2018 and was $58,966 for the year ended September 30, Accounts are written off as uncollectible once the Company has exhausted its collection efforts. Inventories Inventories consist of Arcoplate, materials used to manufacture Arcoplate, Wear Billets and Ceramics. Inventories are valued at the lower of cost or net realizable value. Cost is determined principally on the first-in, first-out method. F8

10 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 2. Summary of significant accounting policies (continued) Impairment of Long-Lived Assets The Company periodically assesses the recoverability of the carrying amounts of long-lived assets, including intangible assets. An impairment loss is recognized when expected undiscounted future cash flows are less than the carrying amount of the asset. There was no impairment loss recognised on long lived assets during the financial year ended September 30, 2018 and $432,667 was recognised during the year ended September 30, An impairment charge of $nil in respect of the building under construction in Company s Indonesian subsidiary has been recognised during the year ended September 30, 2018 and $74,815 during the year ended September 30, The Board is confident that this impairment charge, which has been based on an assessment of the fair value is sufficient to cover any future losses arising from the Group s Indonesian activities. Property and Equipment Property and equipment are stated at cost less accumulated depreciation. Depreciation is computed using both the straight-line and declining value method over the estimated useful lives of the assets as follows: Asset Plant and equipment Furniture and fixtures Vehicles Office and computer equipment Estimated Useful Lives 5-10 years 5-7 years 3-8 years 3-5 years Maintenance and repairs are charged to operations, while betterments and improvements are capitalized. Advertising Advertising costs are charged to operations as incurred and were approximately $102,710 and $82,842 for the years ended September 30, 2018 and 2017, respectively. Income Taxes The Company uses an asset and liability approach to financial reporting for income taxes. Deferred income tax assets and liabilities are computed for differences between the financial statement and tax bases of assets and liabilities that will result in future taxable or deductible amounts, based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred income tax assets to the amount expected to be realized. The Company provides reserves for potential payments of tax to various tax authorities related to uncertain tax positions and other issues. Reserves are recorded based on a determination of whether and how much of a tax benefit taken in its tax filings or positions is more likely than not to be realized, assuming that the matter in question will be raised by the tax authorities. Potential interest and penalties associated with such uncertain tax positions are recorded as a component of income tax expense. The Company has made a comprehensive review of its uncertain tax positions. The Company believes appropriate provisions for outstanding issues have been made. Income per Common Share Basic income per share excludes dilution and is computed by dividing net income available to common stockholders by the weighted-average number of common shares outstanding during the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the Company. Diluted income per common share was the same as basic income per common share since there were no common stock equivalents outstanding for both years presented. F9

11 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 2. Summary of significant accounting policies (continued) Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Foreign Currency Translation Assets and liabilities of the Company s subsidiaries are translated into U.S. dollars at year-end exchange rates, revenues and expenses and cash flows are translated at average rates prevailing during the year. Share capital and retained earnings are translated at historical rates. Resulting translation adjustments are recorded as a component of accumulated other comprehensive income. Where the Company s subsidiaries undertake transactions in currencies other than their functional currency, the resulting gain or loss is recorded as income or expenditure as appropriate at the time the transaction is settled. Unsettled accounts at year end are revalued at the spot exchange rate as at that date and unrealized gains or losses are recorded in the Company s statement of operations. The functional currencies of each of the entities are o o o o Alloy Steel International Inc US Dollars Alloy Steel Australia (Int) Pty Ltd Australian Dollars PT Alloy Manufacturing Indonesia Australian Dollars Alloy Steel North America LLC US Dollars The consolidated group maintains cash balances at several financial institutions located within Australia and North America. The total of all accounts at each institution is insured up to $250,000 at 30 September 2018 and $250,000 at 30 September The group s uninsured cash balance at 30 September 2018 was approximately $10,927,288 and $12,545,672 at 30 September F10

12 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 3. Cash and cash equivalents Cash at bank $ 11,317,071 $ 12,910,894 $ 11,317,071 $ 12,910,894 Reconciliation of cash Cash at the end of the financial year as shown in the statement of cash flows is reconciled to items in the Consolidated Balance Sheet as follows Cash and cash equivalents $ 11,317,071 $ 12,910,894 $ 11,317,071 $ 12,910,894 Currency Risk Cash balances are held in the following denominations. US Dollars Australian Dollars European Union Euros The US Dollar value of local currency balances were as follows Australian Dollars $ 6,791,014 $ 6,903,245 European Union Euros $ 6,791,067 $ 6,903,299 Exposure to currency risk may result in the fair value of future cash flows of cash fluctuating due to movement in foreign exchange rates of currencies in which the group hold which are in currencies other than USD. 4. Inventories Inventories consist of the following at September 30, 2018 and 2017: Raw materials $ 1,364,523 $ 1,212,201 Work in progress 307, ,846 Finished goods 2,151, ,657 $ 3,824,090 $ 2,400,704 F11

13 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 5. Assets held for sale Leasehold Land $ 2,006,002 $ 2,177,382 Building under construction $ 1,709,235 $ 1,855,260 3,715,237 4,032,642 During the financial year 2015 the Board made a decision to sell the land and buildings of the Indonesian Subsidiary. The property is currently on market and accordingly it was reclassified as a current asset. The Board received number of inquiries to acquire the land and buildings of PTAMI, but has not formally closed a sale as at 30 September Management consider Net Realisable Value of the land and buildings to be $3,715,237 as at September 30, 2018 and $4,032,642 as at September 30, There was no impairment recognised during 2018 financial year and $74,815 was recognised during 2017 financial year in respect of land and buildings in the Company s Indonesian subsidiary. Reconciliation of the movement of land and building at September 30, 2018 and 2017 Opening balance $ 4,032,642 $ 4,000,000 Impairment - (74,815) Exchange differences (317,405) 107,457 Closing balance $ 3,715,237 $ 4,032, Property and equipment Property and equipment consists of the following at September 30, 2018 and 2017: Plant and equipment 3,797,874 2,843,076 Furniture and fixtures 144, ,952 Vehicles 602, ,258 Leasehold Improvements 429, ,495 Office and computer equipment 585, ,253 5,559,923 4,427,034 Less accumulated depreciation (2,442,400) (1,978,695) $ (2,442,400) $ (1,978,695) Net property and equipment $ 3,117,523 $ 2,448,339 Depreciation and amortization expense for the years ended September 30, 2018 and 2017 was $685,970 and $570,174 respectively. There was no impairment expense of property and equipment recognised for the year ended September 30, 2018 and $357,852 for the year ended September 30, F12

14 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 7. Income Taxes Income before income tax expense for the years ended September 30, 2018 and 2017 were derived in the following jurisdictions: Australia $ 6,206,155 $ 5,418,689 Indonesia (74,215) (167,915) United States 131,185 (159,325) $ 6,263,125 $ 5,091,449 Net income tax expense for the years ended September 30, 2018 and 2017 were incurred in the following jurisdictions: Australia $ 1,865,410 $ 1,594,364 Indonesia - - United States - - $ 1,865,410 $ 1,594, Income taxes (continued) The components of the income tax expense (benefit) are as follows for the years ended September 30, 2018 and 2017: Current Foreign $ 1,894,616 $ 1,623,674 Deferred Foreign (29,206) (29,310) $ 1,865,410 $ 1,594,364 The components of the deferred tax assets and liabilities consist of the following at September 30, 2018 and 2017: Deferred tax assets Timing differences 242, ,519 Deferred tax liabilities Other (137,834) (139,635) Deferred tax assets/(liabilities), net $ 105,017 $ 83,884 ALLOY STEEL INTERNATIONAL, INC. AND CONTROLLED ENTITIES F13

15 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The effective tax rate in 2018 and 2017 differs from the U.S. federal statutory rate as follows: U.S. federal statutory rate 34% 34% (Benefit)of lower foreign effective tax rate (4%) (3%) Cost of higher foreign effective tax rate - - Effective tax rate 30% 31% The Company has considered its income tax positions, including any positions that may be considered uncertain by the relevant tax authorities in the jurisdictions in which the Company operates. As of September 30, 2018 and 2017, the Company had no uncertain tax positions. The following table summarizes tax years that remain subject to examination by major tax jurisdictions: Jurisdiction Open Years United States Australia F14

16 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 8. Commitments and contingencies Operating Lease The Company leases its office and manufacturing space from a related party for approximately $722,135 for the year ended September 30, 2018 plus certain expenses (as defined in the agreement). The Company entered in to a new lease agreement on March 01, 2014 for a five year term with the option of renewing for a further nine years. Rent expense for the years ended September 30, 2018 and 2017 was approximately $701,135 and $659,052 respectively. Operating Lease Commitments Non cancellable operating lease commitments not capitalised in the financial statements Minimum lease payments payable 2018 $ - $ 659, , ,605 $ 260,126 $ 933,657 Building Construction The Company entered into an agreement with PT Bimo Prasetyo through its Indonesian subsidiary PT Alloy Manufacturing Indonesia for the construction of a building. The contract value for the building was 35,600,000,000 Indonesian Rupiah (IRP) (approximately US $ 2,388,000) as at September 30, The construction of the building is currently on hold and land and buildings were placed on sale due to changes in business conditions. Payments of IRP 20,186,000,000 (approximately US$ 1,354,000) have been made to balance date. Further payments of IRP 15,414,000,000 (approximately US$ 1,034,000) remain outstanding at balance date. However there has been no further progress on construction since 2013 and it is highly unlikely that this amount will become payable. Amended and Restated Intellectual Property License Agreement On September 1, 2016, the Company entered into an intellectual property license agreement (the 2016 License Agreement ) with an entity controlled by the Kostecki family, holders of nearly 60% of our outstanding common stock. In addition to clarifying the description of the intellectual property licensed to the Company under the agreement, the revised agreement extended the term of the historical intellectual property license originally entered into with Gene Kostecki, the deceased founder of the Company. The 2017 License Agreement extended the term of the license for twenty five years with three options to extend for further terms of ten years each. Under the terms of the 2017 License Agreement, the Company is required to pay royalties of 6% on the gross sales of Arcoplate products, calculated monthly the same royalty rate as applies under the replaced agreement. At September 30, 2018 and 2017, approximately $252,000 and $81,000 respectively, was payable under this agreement. The royalty expense was approximately $1,368,000 and $1,262,000 for the years ended September 30, 2018 and 2017, respectively. F15

17 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 9. Major customers, suppliers and geographic information The Company had revenues from four major customers for the years ended September 30, 2018 and two customers for the year ended September 30, 2017 of approximately $7,755,481 and $6,407,367 respectively. Accounts receivable due from these customers were approximately 1,805,466 and $1,081,104 at September 30, 2018 and Revenue Customer A 9% Customer B 7% Customer C 7% Customer D 7% 2017 Revenue Customer A 18% Customer B 12% For the years ended September 30, 2018 and 2017, the Company purchased inventories approximately 17% from two suppliers and 19% from two suppliers, respectively. For the years ended September 30, 2018 and 2017, revenues were derived from the following: Australia 72% 77% Americas 17% 15% Other 11% 8% 100% 100% Revenue is attributed to each country based on the location of the customer. For the years ended September 30, 2018 and 2017, fixed assets were located in the following countries: Indonesia (not productive) 46% 62% Australia 54% 36% Americas - 2% 100% 100% 10. Recently issued accounting standards In May 2014, the FASB issued ASC 606, Revenue from Contracts with Customers. ASC 606 establishes a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes the most current revenue recognition guidance. The effective date for this ASC is annual reporting periods beginning after December 15, 2018 and interim reporting periods within annual reporting periods beginning after December 15, Although the Directors anticipate that the adoption of ASC 606 may have an impact on the Group s financial statements, it is believed that the impact will not be material. In February 2016, the FASB issued ASC 842 Leases. This standard provides a single lessee accounting model requiring lessees to recognise assets and liabilities for all leases. The effective date for this ASC is annual reporting periods beginning after December 15, 2019 and interim periods thereafter. The directors anticipate that the adoption of ASC 842 will have a material impact on the Group's financial statements. F16

18 11. Subsequent Events NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Management has performed a review of subsequent events through to December 20, 2018 the date the financial statements were available to be issued and discloses the following: Incorporation of Subsidiary in Singapore Company incorporated Arco Weld Pte. Ltd. a Subsidiary in Singapore on November 8, Singapore Subsidiary will initially procure welding consumables and production inputs from Asia and further afield on behalf of the Company s Perth based production facility. It is also proposed that Arco Weld will act as sales agent for the sale of products manufactured in Australia, developing new sales opportunities outside of Australia. F17