NOTES
TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
1.
Nature of Business:
International
Baler Corporation (the “Company”) is a manufacturer of baling equipment which is designed to compress a variety of
materials into bales for easier handling, shipping, disposal, storage, and for recycling. Materials commonly baled include scrap
metal, corrugated boxes, newsprint, aluminum cans, plastic bottles, and other solid waste. More sophisticated applications include
baling of textile materials, fibers and synthetic rubber. The Company offers a wide variety of balers, standard models as well
as custom models, and conveyors to meet specific customer requirements.
The
Company’s customers include recycling facilities, distribution centers, textile mills, and companies which generate the
materials for baling and recycling. The Company sells its products worldwide with annual sales outside the United States typically
ranging from 10% to 35%.
2.
Basis of Presentation:
The
accompanying unaudited condensed financial statements have been prepared in accordance with accounting principles generally accepted
in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 8-03 of Regulation
S-X. Accordingly, they do not include all of the information in footnotes required by accounting principles generally accepted
in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting of
normal recurring accruals) considered necessary to make the financial statements not misleading have been included. Operating
results for the three-month period ended January 31, 2019 are not necessarily indicative of the results that may be expected for
the year ending October 31, 2019. The accompanying balance sheet as of October 31, 2018 was derived from the audited financial
statements as of October 31, 2018.
These
unaudited condensed financial statements and notes thereto should be read in conjunction with the Management’s Discussion
and the audited financial statements and notes thereto included in the Annual Report on Form 10-K for the year ended October 31,
2018.
3.
Summary of Significant Accounting Policies:
(a)
Accounts Receivable & Allowance for Doubtful Accounts:
Trade
accounts receivable are recorded at the invoiced amount and do not bear interest. The Company maintains an allowance for doubtful
accounts for estimated losses inherent in its accounts receivable. The Company reviews its allowance for doubtful accounts monthly
including the analysis of historical trends, customer credit worthiness and the aging of receivables. Account balances are charged
off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote.
(b)
Inventories:
Inventories
are stated at the lower of cost and net realizable value. Cost is determined by a method that approximates the first-in, first-out
method. Work in process and finished goods are valued based on underlying costs to manufacture balers which include direct materials,
direct and indirect labor, and overhead. The Company reviews inventory for obsolescence on a regular basis.
(c)
Warranties and Service:
The
Company typically warrants its products for one (1) year from the date of sale as to materials, three (3) years for structural
damage and six (6) months as to labor, and offers services for other required repairs and maintenance. Service is rendered by
repairing or replacing parts at the Company’s Jacksonville, Florida facility, by on-site service provided by Company personnel
who are based in Jacksonville, Florida or by local service agents who are engaged as needed. The Company maintains an accrued
liability for expected warranty claims. The warranty accrual is based on historical warranty costs, the quantity and types of
balers currently under warranty, and known warranty issues.
Following
is a tabular reconciliation of the changes in the warranty accrual for the three-month period ended January 31:
|
|
2019
|
|
2018
|
Beginning
balance
|
|
$
|
80,000
|
|
|
$
|
70,000
|
|
Warranty
service provided
|
|
|
(39,946
|
)
|
|
|
(33,604
|
)
|
New
product warranties
|
|
|
16,592
|
|
|
|
32,579
|
|
Changes
to pre-existing warranty accruals
|
|
|
13,354
|
|
|
|
(1,025
|
)
|
Ending
balance
|
|
$
|
70,000
|
|
|
$
|
70,000
|
|
(d)
Fair Value of Financial Instruments:
The
carrying amounts of the Company’s financial instruments, including cash and cash equivalents, short term certificates of
deposit, accounts receivable, accounts payable, accrued liabilities, and customer deposits, approximate their fair value due to
the short-term nature of these assets and liabilities.
(e)
Recent Accounting Pronouncements:
Recently
Adopted Accounting Pronouncements:
In
March 2018, the FASB issued ASU 2018-05,
Income Taxes (Topic 740), Amendment to SEC Paragraphs Pursuant to SEC Staff Accounting
Bulletin No. 118 (SEC Update)
, ("ASU-2015-05"). ASU 2018-05 amends certain Securities and Exchange Commission (“SEC”)
guidance under Topic 740 related to the Tax Cuts and Jobs Act of 2017. It also adds guidance to the FASB Accounting Standards
Codification that answers questions regarding how certain income tax effects from the Tax Cuts and Jobs Act of 2017 should be
applied to companies’ financial statements. The guidance lists which financial statement disclosures are required under
a measurement period approach. ASU 2018-05 was effective immediately and the Company made the disclosures required by ASU 2018-05
in Note 8 - Income Taxes.
In
May 2014, the FASB issued ASU 2014-09 establishing Accounting Standards Codification (“ASC”) Topic 606,
Revenue
from Contracts with Customers
(“ASC 606”). ASC 606 establishes a single comprehensive model for entities to use
in accounting for revenue arising from contracts with customers and supersedes most of the existing revenue recognition guidance.
This standard requires an entity to recognize revenue to depict the transfer of promised goods or services to customers in an
amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services and
also requires certain additional disclosures. The Company adopted this standard effective November 1, 2018 using the modified
retrospective approach, which requires applying the new standard to all existing contracts not yet completed as of the effective
date and recording a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year of adoption. Based
on an evaluation of the impact ASC 606 the Company concluded that ASC 606 did not have a material impact on the process for, timing
of, and presentation and disclosure of revenue recognition from customers therefore the Company did not record a cumulative transition
adjustment.
Recently
Issued Accounting Pronouncements Not Yet Adopted:
In
February 2016, the FASB issued ASU No. 2016-02,
Leases,
("ASU 2016-02"). ASU 2016-02 requires lessees
to recognize assets and liabilities for most leases. All leases will be required to be recorded on the balance sheet with the
exception of short-term leases. Early application is permitted. The guidance must be adopted using a modified retrospective transition
method. ASU 2016-02 is effective for financial statements issued for annual periods beginning after December 15, 2018, and interim
periods within those annual periods. ASU 2016-02 will therefore be effective in our fiscal year beginning November 1, 2019. We
are evaluating the effect that ASU 2016-02 will have on our financial statements and related disclosures, however, we do not expect
it to be material as we are not party to a significant number of leases. The Company has not yet selected a transition method.
4.
Revenue from Contracts with Customers:
a)
Overview
The
Company adopted ASC 606 on November 1. 2018. The Company recognizes revenues from the sale of finished products upon shipment
and the transfer of control to the customer. The other elements may include installation and, generally, a one-year warranty.
Equipment installation revenue is valued based on estimated service person hours to complete installation and is recognized when
the labor has been completed and the equipment has been accepted by the customer, which is generally within a couple days of the
delivery of the equipment. Warranty revenue, if sold separately, is valued based on estimated service person hours to complete
a service and generally is recognized over the contract period.
All
other product sales with customer specific acceptance provisions are recognized at a point in time upon customer acceptance and
the delivery of the parts or service. Revenues related to spare part sales are recognized upon shipment or delivery based on the
trade terms.
Generally,
pricing is fixed and the majority of the Company’s contracts have short duration and a single performance obligation to
deliver a configured to order baler and related equipment to the customer. The Company has elected to expense shipping and handling
costs as incurred.
b)
Disaggregation of Revenue
Disaggregated
revenue is by primary geographic market is as follows:
Equipment Revenue by Geographic Area
|
|
Three
Months Ended
January 31, 2019
|
United
States
|
|
$
|
1,659,224
|
|
International
|
|
|
—
|
|
Total
|
|
$
|
1,659,224
|
|
c)
Contract Balances
Contract
balances include accounts receivable and contract liabilities. Contract liabilities are reported as Customer Deposits on the accompanying
Balance Sheets and consist of advances or deposits from customers before revenue is recognized. The change in contract liabilities
is due to the timing of customer deposits for baler orders offset by customer deposits recognized as revenue during the period.
The
Company does not record contract assets because the construction of a configured to order baler does not create an asset with
an alternative use to the Company. The Company expenses incremental costs of obtaining or fulfilling a contract.
5.
Related Party Transactions:
The
Estate of Leland E. Boren is a stockholder of the Company and is the owner of Avis Industrial Corporation (Avis). The Estate controls
over 80% of the outstanding shares of the Company. Avis owns 100% of The American Baler Company, a competitor of the Company.
On January 1, 2014, Avis acquired The Harris Waste Management Group, Inc. (Harris), also a competitor of the Company. On July
31, 2014 Harris acquired the assets of IPS Balers, Inc. in Baxley, Georgia, another competitor of the Company. These baler companies
operate completely independent of each other. The company had no purchases from these companies in the first quarter of fiscal
2019 and in the fiscal years ending October 31, 2018 and 2017. The Company had no sales to The American Baler Company in the first
quarter of fiscal 2019 and in the fiscal years ended October 31, 2018 and 2017. The Company sold five closed door horizontal balers
and one conveyor to Harris Waste Management for $295,032 in fiscal 2018 and had no sales to Harris Waste Management in the fiscal
year ended October 31, 2017 or in the first quarter of fiscal 2019.
6.
Inventories:
Inventories
consisted of the following:
|
|
January
31,
2019
|
|
October
31,
2018
|
Raw
materials
|
|
$
|
2,036,188
|
|
|
$
|
1,901,707
|
|
Work
in process
|
|
|
2,092,663
|
|
|
|
2,166,663
|
|
Finished
goods
|
|
|
180,715
|
|
|
|
188,715
|
|
|
|
$
|
4,309,566
|
|
|
$
|
4,257,085
|
|
7. Debt:
The
Company has a $1,650,000 line of credit agreement with First Merchants Bank of Muncie, Indiana which was renewed on May 15, 2018.
The line of credit allows the Company to borrow at an interest rate equal to the Wall Street Journal prime rate minus 0.95%, adjusting
daily. The line of credit is secured by all assets of the Company and expires on May 15, 2019. The line of credit had no outstanding
balance at January 31, 2019 and at October 31, 2018.
8. Income
Taxes:
Tax
assets are recognized in the balance sheet if it is more likely than not that they will be realized on future tax returns. Factors
considered included, historical results of operations, volatility of the economic conditions and projected earnings based on current
operations. Based on this evidence, it is more likely than not that the deferred tax assets would be realized. Accordingly, there
is no valuation allowance as of January 31, 2019 and at October 31, 2018. However, if it is determined that all or part of the
deferred tax assets will not be used in the future, an adjustment to the deferred tax assets would be charged against net income
in the period such determination is made. As of January 31, 2019 and October 31, 2018, net deferred tax assets were $61,494.
The
Company records interest related to unrecognized tax benefits in interest expense and penalties in selling, general, and administrative
expenses.
The
Tax Cuts and Jobs Act of 2017 (the “Act”) was signed into United States tax law on December 22, 2017. The Act makes
significant changes to the U.S. corporate income tax system, including a Federal corporate rate reduction from 35% to 21%, and
changes in business-related exclusions, and deductions and credits. As a result of the income tax rate reduction, the Company
recorded a reduction of net deferred income tax assets of approximately $10,000 during the first quarter of the fiscal year ending
October 31, 2018.
9. Commitments
and Contingencies:
The
Company, in the ordinary course of business, is subject to claims made, and from time to time is named as a defendant in legal
proceedings relating to the sales of its products. The Company believes that the reserves reflected in its financial statements
are adequate to pay losses and loss adjustment expenses which may result from such claims and proceedings; however, such estimates
may be more or less than the amount ultimately paid when the claims are settled. In the opinion of management, the ultimate disposition
of these matters will not have a material adverse effect on the Company’s financial position, results of operations, or
liquidity.
On
December 1, 2017 the Company was served with a complaint related to an injury to an employee working at Integrated Coating and
Seed Technology Inc.,(INCOTEC). The employee was operating a baler manufactured by the Company in 1994. The injury occurred on
December 4, 2015. The plaintiff is Star Insurance Company. The Company’s insurer has retained an attorney and has begun
the discovery process. The Company believes its exposure is $25,000, the amount of the Company’s deductible on its insurance
policy. Accordingly, the Company accrued $25,000 during the six months ended April 30, 2018.
In
December 2018 the Company discovered an employee theft of Company property. At the date of this report the Company has researched
what items were stolen and our estimate is that the value of the stolen items was approximately $200,000. Since the Company conducts
a physical inventory at the end of each fiscal year, any losses incurred for the fiscal year ended October 31, 2018 would have
been reflected in the operating results of the Company for that fiscal year. The Company carries Crime Insurance which has an
upper limit of $1,000,000 and a deductible of $25,000.