1) Why was the inventory (particularly the finished goods) number so high? Does this represent a pending shipment that should show up as revenue in the next quarter?
2) Did the natural gas shortage caused by the Varanus Island explosion reduce customer orders or affect deliveries in deliveries in the June quarter?
3) Did the construction of the new mill affect quarterly revenues? E.g., were workers pulled off of production to help with the construction of the new mill?
4) Are there any other specific factors which contributed to the 40% sequential decline in revenues from the March quarter to the June quarter, or is this just a result of 'lumpiness' of revenue?
5) Do you expect that higher revenue quarters will have higher margins, as a result of better allocation of fixed costs?
6) Did you hire a salesman this past quarter (I noticed you were recruiting one in Western Canada)? Was that part of the increased sales and administrative labor costs you cited as a factor in the higher SG&A?
7) Are you considering any measures to increase communications with shareholders? I know you mentioned during our previous correspondence that you were working to complete the investor section of Alloy Steel's website, but are you considering holding quarterly conference calls or issuing periodic press releases?
Here are his responses:
In response to your questions today:-
1. Inventory was built up in anticipation of a large order which has been received and revenue will emerge in the September quarter.
2/3/4. The gas problems had a small effect on orders but more particularly clients were looking at their own budgets and holding off ordering until after June 30. June 30 is the financial year end in Australia.
These factors plus in this industry there are other variables like the timing of plant shutdowns for repairs and the construction of new plant which we cannot predict; will cause fluctuations in quarterly revenue.
5. While overhead is better absorbed in high revenue quarters, it maybe that some high revenue sales have a lower profit mark up which affects the bottom line
6. We are currently negotiating with parties with the view to employment as sales persons for mainland USA and Canada.
7. Website is still unfortunately still a ‘work in progress’; we are looking at a various IR firms to possibly use for communications. We have been and will increase frequency where there is something to communicate in lodging 8Ks.
This provides some helpful clarity, particular the answer to 1), which is encouraging. I may have a follow up question re 6). I'll post any follow up Q&A in the comment thread below.
Update: As mentioned in the comment thread, since the company valued inventory in the 10Q by cost (using the GAAP standard of lower of cost or market value), the "finished goods" number mentioned in the 10Q, $785,430, actually represents about twice that amount of deferred sales, since the company has profit margins of about 50%.