UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________________
FORM 10-Q
(Mark one)
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 31, 2020
or
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________________ to __________________
Commission File Number: 0-14443
____________________
INTERNATIONAL baler CORPORATION
(Exact name of registrant as specified in its charter)
Delaware | 13-2842053 |
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
| 5400 Rio Grande Avenure, Jacksonville, Florida 332254 | |
| (Address of principal executive offices) (Zip Code) | |
(904) 358-3812
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(g) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
| Common stock, $.01 par value per share | IBAL | Pink Sheets |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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 ☒ NO ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
YES ☐ NO ☒
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer ☐ | Accelerated filer ☐ |
| Smaller reporting company ☒ | |
| Emerging reporting company ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
YES ☐ NO ☒
As of September 11, 2020, there were 5,183,894 shares of common stock of the registrant outstanding.
| 1 |
INTERNATIONAL BALER CORPORATION
TABLE OF CONTENTS
| Page | |
| ITEM 1. FINANCIAL STATEMENTS | |
| Condensed Balance Sheets as of July 31, 2020, (unaudited) and October 31, 2019 | 3 |
| Condensed Statements of Income for the three months and nine months ended July 31, 2020 and 2019 (unaudited) | 4 |
| Condensed Statements of Stockholders’ Equity for the nine months ended July 31, 2020 and 2019 (unaudited) | 5 |
| Condensed Statements of Cash Flows for the nine months ended July 31, 2020 and 2019 (unaudited). | 6 |
| Notes to Condensed Financial Statements (unaudited) | 7 |
| ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | 12 |
| ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK | 14 |
| ITEM 4. CONTROLS AND PROCEDURES | 15 |
| PART II. OTHER INFORMATION | 15 |
| ITEM 1. LEGAL PROCEEDINGS | 15 |
| ITEM 5. OTHER INFORMATION 15 | 15 |
| ITEM 6. EXHIBITS | 16 |
| SIGNATURES | 17 |
| 2 |
| INTERNATIONAL BALER CORPORATION | ||||||||
| CONDENSED BALANCE SHEETS | ||||||||
July 31, 2020 | October 31, 2019 | |||||||
| Unaudited | ||||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 2,505,309 | $ | 2,714,764 | ||||
| Certificate of deposit | 1,011,215 | 1,003,389 | ||||||
| Accounts receivable, net of allowance for doubtful accounts of $6,000 at July 31, 2020 and $15,000 at October 31, 2019 | 694,803 | 644,915 | ||||||
| Inventories | 4,334,623 | 4,119,057 | ||||||
| Prepaid expense and other current assets | 133,793 | 77,858 | ||||||
| Total current assets | 8,679,743 | 8,559,983 | ||||||
| Property, plant and equipment, at cost: | 4,437,227 | 4,336,733 | ||||||
| Less: accumulated depreciation | 3,108,741 | 3,026,513 | ||||||
| Net property, plant and equipment | 1,328,486 | 1,310,220 | ||||||
| Other assets | ||||||||
| Deferred income taxes | 161,122 | 161,122 | ||||||
| Total other assets | 161,122 | 161,122 | ||||||
| TOTAL ASSETS | $ | 10,169,351 | $ | 10,031,325 | ||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | 265,454 | $ | 329,618 | ||||
| Accrued liabilities | 204,515 | 185,334 | ||||||
| Customer deposits | 508,977 | 656,569 | ||||||
| Total current liabilities | 978,946 | 1,171,521 | ||||||
| Notes payable | 626,466 | — | ||||||
| Total liabilities | 1,605,412 | 1,171,521 | ||||||
| Commitments and contingencies (Note 9) | ||||||||
| Stockholders' equity: | ||||||||
| Preferred stock, par value $.0001,10,000,000 shares authorized, none issued | — | — | ||||||
| Common stock, par value $.01, 25,000,000 shares authorized;6,429,875 shares issued | 64,299 | 64,299 | ||||||
| Additional paid-in capital | 6,419,687 | 6,419,687 | ||||||
| Retained earnings | 2,761,363 | 3,057,228 | ||||||
| 9,245,349 | 9,541,214 | |||||||
| Less:Treasury stock, 1,245,980 shares, at cost | (681,410 | ) | (681,410 | ) | ||||
| Total stockholders' equity | 8,563,939 | 8,859,804 | ||||||
| TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | $ | 10,169,351 | $ | 10,031,325 | ||||
| See accompanying notes to condensed financial statements. | ||||||||
| 3 |
| INTERNATIONAL BALER CORPORATION | ||||||||||||||||
| CONDENSED STATEMENTS OF INCOME | ||||||||||||||||
| FOR THE THREE MONTHS AND NINE MONTHS ENDED JULY 31, 2020 AND 2019 | ||||||||||||||||
| UNAUDITED | ||||||||||||||||
| Three Months | Nine Months | |||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| Net sales: | ||||||||||||||||
| Equipment | $ | 1,937,971 | $ | 1,676,414 | $ | 4,648,093 | $ | 5,535,104 | ||||||||
| Parts and service | 727,267 | 730,710 | 2,042,349 | 2,255,827 | ||||||||||||
| Total net sales | 2,665,238 | 2,407,124 | 6,690,442 | 7,790,931 | ||||||||||||
| Cost of sales | 2,285,480 | 2,072,365 | 5,981,049 | 6,790,950 | ||||||||||||
| Gross profit | 379,758 | 334,759 | 709,393 | 999,981 | ||||||||||||
| Operating expense: | ||||||||||||||||
| Selling expense | 217,565 | 157,323 | 470,542 | 410,342 | ||||||||||||
| Administrative expense | 236,163 | 217,105 | 650,086 | 654,051 | ||||||||||||
| Total operating expense | 453,728 | 374,428 | 1,120,628 | 1,064,393 | ||||||||||||
| Operating loss | (73,970 | ) | (39,669 | ) | (411,235 | ) | (64,412 | ) | ||||||||
| Other income | ||||||||||||||||
| Interest income | 1,676 | 2,662 | 12,870 | 4,482 | ||||||||||||
| Other income | 10,500 | 175,841 | 10,500 | 175,841 | ||||||||||||
| Total other income | 12,176 | 178,503 | 23,370 | 180,323 | ||||||||||||
| (Loss) income before income taxes | (61,794 | ) | 138,834 | (387,865 | ) | 115,911 | ||||||||||
| Income tax (benefit) provision | (14,000 | ) | 34,000 | (92,000 | ) | 28,000 | ||||||||||
| Net (loss) income | $ | (47,794 | ) | $ | 104,834 | $ | (295,865 | ) | $ | 87,911 | ||||||
| (Loss) income per share, basic and diluted | $ | (0.01 | ) | $ | 0.02 | $ | (0.06 | ) | $ | 0.02 | ||||||
| Weighted average number of shares outstanding | 5,183,895 | 5,183,895 | 5,183,895 | 5,183,895 | ||||||||||||
| See accompanying notes to condensed financial statements. | ||||||||||||||||
| 4 |
| INTERNATIONAL BALER CORPORATION | ||||||||||||||||||||||||||||
| CONDENSED STATEMENTS OF STOCKHOLDERS' EQUITY | ||||||||||||||||||||||||||||
| FOR THE NINE MONTHS ENDED JULY 31, 2020 AND 2019 | ||||||||||||||||||||||||||||
| UNAUDITED | ||||||||||||||||||||||||||||
| Common Stock | Treasury Stock | |||||||||||||||||||||||||||
| Shares | Amount | Additional Paid in Capital | Retained Earnings | Shares | Amount | Total | ||||||||||||||||||||||
| Balance - October 31, 2019 | 6,429,875 | $ | 64,299 | $ | 6,419,687 | $ | 3,057,228 | 1,245,980 | $ | (681,410 | ) | $ | 8,859,804 | |||||||||||||||
| Net loss | (184,481 | ) | (184,481 | ) | ||||||||||||||||||||||||
| Balance - January 31, 2020 | 6,429,875 | 64,299 | 6,419,687 | 2,872,747 | 1,245,980 | (681,410 | ) | 8,675,323 | ||||||||||||||||||||
| Net loss | (63,590 | ) | (63,590 | ) | ||||||||||||||||||||||||
| Balance - April 30, 2020 | 6,429,875 | 64,299 | 6,419,687 | 2,809,157 | 1,245,980 | (681,410 | ) | 8,611,733 | ||||||||||||||||||||
| Net loss | (47,794 | ) | (47,794 | ) | ||||||||||||||||||||||||
| Balance - July 31, 2020 | 6,429,875 | $ | 64,299 | $ | 6,419,687 | $ | 2,761,363 | 1,245,980 | $ | (681,410 | ) | $ | 8,563,939 | |||||||||||||||
| Common Stock | Treasury Stock | |||||||||||||||||||||||||||
| Shares | Amount | Additional Paid in Capital | Retained Earnings | Shares | Amount | Total | ||||||||||||||||||||||
| Balance - October 31, 2018 | 6,429,875 | $ | 64,299 | $ | 6,419,687 | $ | 3,380,842 | 1,245,980 | $ | (681,410 | ) | $ | 9,183,418 | |||||||||||||||
| Net loss | (18,788 | ) | (18,788 | ) | ||||||||||||||||||||||||
| Balance - January 31, 2019 | 6,429,875 | 64,299 | 6,419,687 | 3,362,054 | 1,245,980 | (681,410 | ) | $ | 9,164,630 | |||||||||||||||||||
| Net income | 1,865 | 1,865 | ||||||||||||||||||||||||||
| Balance - April 30, 2019 | 6,429,875 | 64,299 | 6,419,687 | 3,363,919 | 1,245,980 | (681,410 | ) | $ | 9,166,495 | |||||||||||||||||||
| Net income | 104,834 | 104,834 | ||||||||||||||||||||||||||
| Balance July 31, 2019 | 6,429,875 | $ | 64,299 | $ | 6,419,687 | $ | 3,468,753 | 1,245,980 | $ | (681,410 | ) | $ | 9,271,329 | |||||||||||||||
| See accompanying notes to condensed financial statements. | ||||||||||||||||||||||||||||
| 5 |
| INTERNATIONAL BALER CORPORATION | ||||||||
| CONDENSED STATEMENTS OF CASH FLOWS | ||||||||
| FOR THE NINE MONTHS ENDED JULY 31, 2020 AND 2019 | ||||||||
| UNAUDITED | ||||||||
| 2020 | 2019 | |||||||
| Cash flow from operating activities: | ||||||||
| Net (loss) income | $ | (295,865 | ) | $ | 87,911 | |||
| Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | ||||||||
| Depreciation and amortization | 161,400 | 157,430 | ||||||
| Gain on sale of fixed assets | (10,500 | ) | — | |||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | (49,888 | ) | (23,290 | ) | ||||
| Inventories | (215,566 | ) | (140,389 | ) | ||||
| Prepaid expenses and other assets | (55,935 | ) | 48,990 | |||||
| Accounts payable | (64,164 | ) | (89,281 | ) | ||||
| Accrued liabilities | 19,181 | (99,844 | ) | |||||
| Customer deposits | (147,592 | ) | (639,760 | ) | ||||
| Net cash used in operating activities | (658,929 | ) | (698,233 | ) | ||||
| Cash flows from investing activities: | ||||||||
| Purchase of property and equipment | (179,666 | ) | (244,580 | ) | ||||
| Proceeds received on sale of fixed assets | 10,500 | — | ||||||
| Interest earned on certificates of deposit | (7,826 | ) | — | |||||
| Net cash used in investing activities | (176,992 | ) | (244,580 | ) | ||||
| Cash flows from financing activities: | ||||||||
| Proceeds from PPP loan | 626,466 | — | ||||||
| Net cash provided by financing activities | 626,466 | — | ||||||
| Net decrease in cash and cash equivalents | (209,455 | ) | (942,813 | ) | ||||
| Cash and cash equivalents at beginning of period | 2,714,764 | 4,733,510 | ||||||
| Cash and cash equivalents at end of period | $ | 2,505,309 | $ | 3,790,697 | ||||
| See accompanying notes to condensed financial statements. | ||||||||
| 6 |
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 nine-month period ended July 31, 2020 are not necessarily indicative of the results that may be expected for the year ending October 31, 2020. The accompanying balance sheet as of October 31, 2019 was derived from the audited financial statements as of October 31, 2019.
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, 2019.
The Company is closely monitoring ongoing developments in connection with the COVID-19 global pandemic, which has had an adverse impact on sales as many customers are holding off purchasing new equipment. The Company has taken actions to protect its employees, customers and vendors with such actions as employees working from home and employees at work at the Company’s facilities are separated as much as possible. Travel has been limited and face to face meetings with vendors and customers is being limited. The Company's operations are vulnerable to the reduced economic activity caused by the COVID-19 outbreak, which was declared a pandemic in March 2020 and led many local, state and national government jurisdictions to put in place temporary social distancing and shelter-in-place mandates. In May and early June, many governments began phased reopenings of their economies. These phased approaches promote economic activity while adhering to new guidelines and enhanced safety measures. The extent to which the COVID-19 pandemic impacts the Company will depend on numerous factors and future developments that the Company cannot predict, including the severity of the virus; the occurrence of a “second wave” or additional spikes; the duration of the outbreak; governmental, business or other actions taken in response to the pandemic; and impacts on the Company's supply chain, its ability to keep operating locations open, and on customer demand. If the pandemic persists or worsens, the estimates and assumptions management made as of July 31, 2020 could change in subsequent interim reports and upon final determination at year-end, and it is reasonably possible such changes could be significant. The Company has evaluated subsequent events through the date the condensed consolidated financial statements covered by this quarterly report were issued. The Company will continue to evaluate the nature and extent of these potential impacts to its business and consolidated financial statements.
| 7 |
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 nine-month period ended July 31:
| 2020 | 2019 | |||||||
| Beginning balance | $ | 60,000 | $ | 80,000 | ||||
| Warranty service provided | (86,686 | ) | (111,987 | ) | ||||
| New product warranties | 46,480 | 55,351 | ||||||
| Changes to pre-existing warranty accruals | 20,206 | 46,636 | ||||||
| Ending balance | $ | 40,000 | $ | 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) Advertising Expenses
Advertising costs are expensed as incurred. Advertising expense was $83,386 and $112,384 for the nine months ended July 31, 2020 and 2019, respectively, and are included in selling expense on the accompanying Condensed Statements of Income.
| 8 |
(f) Recent Accounting Pronouncements:
Recently Adopted Accounting Pronouncements:
Changes to U.S. GAAP are established by the Financial Accounting Standards Board (“FASB”) in the form of ASUs to the FASB Accounting Standards Codification (“ASC”). The Company considers the applicability and impact of all ASUs and any not listed below were assessed and determined to be not applicable or are expected to have a minimal impact on the Company's condensed consolidated financial statements
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 of 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.
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 was adopted in our fiscal year beginning November 1, 2019. The Company has concluded that ASU 2016-02 had no material effect on our financial statements and related disclosures.
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 completed 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 made- to- order baler and related equipment to the customer. The Company has elected to expense shipping and handling costs as incurred.
In the first nine months ended in July 31, 2020 deferred revenue of $566,300 from the fiscal year ended October 31, 2019 was recognized in net sales.
| 9 |
b) Disaggregation of Revenue
Disaggregated revenue by primary geographic market is as follows:
| Revenue by Geographic Area | Nine Months Ended July 31 | |||||||
| 2020 | 2019 | |||||||
| United States | $ | 6,446,678 | $ | 6,506,854 | ||||
| International | 243,764 | 1,284,077 | ||||||
| Total | $ | 6,690,442 | $ | 7,790,931 | ||||
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 nine months of fiscal 2020 and in the fiscal year ended October 31, 2019. The Company had no sales to The American Baler Company in the first nine months of fiscal 2020 and in the fiscal year ended October 31, 2019. The Company sold two closed door horizontal balers to Harris Waste Management for $122,950 in fiscal 2019 and had no sales to Harris Waste Management in the first nine months of fiscal 2020.
6. Inventories:
Inventories consisted of the following:
| July 31, 2020 | October 31, 2019 | |||||||
| Raw materials | $ | 2,435,1778 | $ | 2,035,612 | ||||
| Work in process | 1,558,861 | 1,239,861 | ||||||
| Finished goods | 340,584 | 843,584 | ||||||
| $ | 4,334,623 | $ | 4,119,057 | |||||
7. Debt:
The Company had a $1,650,000 line of credit agreement with First Merchants Bank of Muncie, Indiana which was renewed on May 15, 2020 with a $1,000,000 line of credit limit. 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, 2021. The line of credit had no outstanding balance at July 31, 2020 and at October 31, 2019.
On April 16, 2020 the Company received a $626,466 loan made pursuant to the terms of the Paycheck Protection Program authorized by the CARES Act. The loan has a two-year term and accrues simple interest at a fixed annual rate of 1.00%. Under the terms of the CARES Act guidelines, a portion of the loan up to 100% may be forgiven by the U.S. Small Business Administration if the amount spent is within the timeframe and under the guidelines that have been set for forgiveness.
| 10 |
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 July 31, 2020 and at October 31, 2019. 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 July 31, 2020 and October 31, 2019, net deferred tax assets were $161,122.
The Company records interest related to unrecognized tax benefits in interest expense and penalties in selling, general, and administrative expenses.
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 settled this claim in March 2020. The Company’s liability on this settlement of the claim was $20,645 which has been paid.
In December 2018 the Company discovered an employee theft of Company property. The Company researched what items were stolen and estimated 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 were 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. In May 2019 the Company’s insurer approved the crime insurance claim and agreed to reimburse the Company $175,841. Insurance proceeds were received in May of 2019 and were recorded as other income in the accompanying condensed statements of income.
| 11 |
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
In this Quarterly Report on Form 10-Q, the terms “Company,” “we,” “us,” and “our,” refer to International Baler Corporation.
Forward Looking Statements
This Quarterly Report on Form 10-Q includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical fact, including statements regarding industry prospects or future results of operations or financial position, made in this Quarterly Report on Form 10-Q are forward-looking. We use words such as anticipates, believes, expects, future, intends, and similar expressions to identify forward-looking statements. Forward-looking statements reflect management’s current expectations and are inherently uncertain. Actual results could differ materially for a variety of reasons, including, but not limited to, changes in general economic conditions, the impact and the unknown risks relating to the COVID-19 pandemic, changing competition and our ability to market and sell our commercial and industrial balers. These risks and uncertainties, as well as other risks and uncertainties, could cause our actual results to differ significantly from management’s expectations. The forward-looking statements included in this Quarterly Report on Form 10-Q reflect the beliefs of our management on the date of this Quarterly Report. We undertake no obligation to update publicly any forward-looking statements for any reason.
General
The following discussion should be read together with our unaudited condensed financial statements and the related notes thereto included in Part I, Item 1 “Financial Statements”. For further information, refer to the Company’s Annual Report on Form 10-K for the year ended October 31, 2019, and the Management Discussion and Analysis of Financial Condition and Results of Operations included in this Form 10-Q.
Results of Operations:
Three Months Ended July 31, 2020 (“third quarter of fiscal 2020”) compared to the three months ended July 31, 2019 (“third quarter of fiscal 2019”)
The Company had net sales of $2,665,238 for the third quarter of fiscal 2020 compared to net sales of $2,407,124 for the third fiscal quarter of 2019. The increase in sales was the result of a shipment of two large two-ram balers and one large auto-tie baler to one customer. The total sales value of this order was $1,380,750. In the third quarter of fiscal 2020 the Company sold fourteen balers and conveyors versus twenty-eight in the prior year third quarter.
Gross profit as a percentage of sales increased slightly from 13.9% in the third quarter of fiscal 2019 to 14.2% in the current year third quarter.
Total operating expenses, consisting of selling expenses and administrative expenses, increased by 21.2% to $453,728 in the third quarter of fiscal 2020 compared to $374,428 in the third quarter of fiscal 2019. Selling expenses in 2020 included a commission payment of $97,050 related to the large sales order mentioned previously. The Company did not furlough or layoff any employees as a result of the pandemic virus.
The Company’s net loss before income taxes was $61,794 in the third quarter of 2020 compared to net income of $138,834 in the third quarter of 2019. In the third quarter of fiscal 2019 the Company recorded other income from insurance proceeds received from a crime insurance claim (see note 9).
| 12 |
The Company had an income tax benefit of $14,000 in the third quarter of 2020 compared to a tax provision of $34,000 in the third quarter of 2019. As a result of the foregoing, the Company had a net loss of $47,794 in the third quarter of fiscal 2020 versus net income of $104,834 in the prior year third quarter.
Nine Months Ended July 31, 2020 (“nine months of fiscal 2020”) compared to the nine months ended July 31, 2019 (“nine months of fiscal 2019”)
The Company had net sales of $6,690,442 in the first nine months of fiscal 2020, compared to net sales of $7,790,931 in the same period of 2019. The lower sales were due to the deteriorating market conditions starting in March 2020. Sales in the first nine months of fiscal 2020 included six auto-tie balers and four two-ram balers versus eight auto-tie baler and six two-ram balers in the nine months of the prior fiscal year.
Total operating expenses, consisting of selling expenses and administrative expenses, increased by 5.3% to $1,120,628 in the nine months of fiscal 2020 compared to $1,064,393 in the same period in fiscal 2019. Selling expenses included a commission payment of $97,050 relating to the large sales order mentioned previously. The Company did not furlough or layoff any employees as a result of the pandemic virus.
Interest income increased to $12,870 for the nine months of fiscal 2020 compared to $4,482 for the nine months of fiscal 2019.
The Company’s net loss before income taxes was $387,865 in the nine months of fiscal 2020 compared to pre-tax income of $115,911 in the nine months of fiscal 2019. The net loss in the nine months of 2020 was principally due to the Company’s decreased revenues and lower gross profit margin.
The Company had an income tax benefit of $92,000 in the first nine months of 2020 compared to a tax provision of $28,000 in the nine months of 2019.
As a result of the forgoing, the Company had a net loss of $295,865 in the first nine months of fiscal 2020 compared net income of $87,911 in the first nine months of 2019.
Financial Condition and Liquidity:
Net working capital at July 31, 2020 was $7,700,797 as compared to $7,388,462 at October 31, 2019. The Company currently believes that it will have sufficient cash flow to be able to fund operating activities for the next twelve months.
Average days sales outstanding (DSO) in the first nine months of fiscal 2020 were 32.5 days, as compared to 23.0 days in the first nine months of fiscal 2019. Days sales outstanding was negatively impacted in fiscal 2020 by one customer who bought a proto-type baler and did not make the final payment of $546,000 for sixty-seven days. DSO is calculated by dividing the total of the month-end net accounts receivable balances for the period by six, and dividing that result by the average day’s sales for the period (period sales ÷ 273).
During the nine months ended July 31, 2020 and 2019, the Company made additions to plant and equipment of $179,666 and $244,580, respectively.
The Company had a $1,650,000 line of credit agreement with First Merchants Bank of Muncie, Indiana which was renewed on May 15, 2020 with a $1,000,000 line of credit limit. 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, 2020. The line of credit had no outstanding balance at July 31, 2020 and at October 31, 2019.
| 13 |
On April 16, 2020 the Company received a $626,466 loan made pursuant to the terms of the Paycheck Protection Program (PPP) authorized by the CARES Act. The loan has a two-year term and accrues simple interest at a fixed annual rate of 1.00%. Under the terms of the CARES Act guidelines, a portion of the loan up to 100% may be forgiven by the U.S. Small Business Administration if the amount spent is within the timeframe and under the guidelines that have been set for forgiveness. The Company has used the proceeds from PPP as described in the program for full forgiveness of the loan and the Company anticipates that the loan will be forgiven.
In the event that the Company’s line of credit would not be available, the Company would pursue a line of credit from other sources, and take steps to minimize expenditures, such as delaying capital expenditures and reducing overhead costs.
The Company had cash deposits in banks of $3,470,153 and $3,411,825 above the FDIC insured limit of $250,000 per bank at July 31, 2020 and October 31, 2019, respectively.
Impact of the COVID-19 Pandemic
We are closely monitoring ongoing developments in connection with the COVID-19 global pandemic, which has had an adverse impact on sales as many customers are holding off purchasing new equipment.
As of the date of this report, the COVID-19 pandemic has not materially adversely impacted our capital and financial resources. Due to the economic uncertainty that has resulted from the pandemic, and the potential impact of such to our stakeholders, we are unable to predict with certainty any potential impacts to our business. Additionally, because we are unable to determine the ultimate severity or duration of the outbreak or its long-term effects on, among other things, the global, national or local economies, the capital and credit markets, our workforce, our customers or our suppliers, at this time we are unable to predict the adverse extent that the COVID-19 crisis will have on our business, financial condition, liquidity and results of operations.
Off-Balance Sheet Arrangements
As of July 31, 2020, the Company has no material off-balance sheet arrangements with unconsolidated entities.
Critical Accounting Estimates
There have been no material changes to the critical accounting policies disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended October 31, 2019.
Recent Accounting Pronouncements
See Note 1(f) to our Financial Statements for a discussion of recent accounting pronouncements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to changes in interest rates as a result of its financing activities, including its borrowings on the revolving line of credit facility. Based on the current level of borrowings, a change in interest rates is not expected to have a material effect on operations or financial position.
| 14 |
ITEM 4. CONTROLS AND PROCEDURES
Controls and Procedures
The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed by the Company in reports that it files or submits under the Securities Exchange Act, is recorded, processed, summarized and reported, within the time periods
specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including the Company’s Chief Executive Officer (CEO) and Chief Financial Officer (CFO), as appropriate, to allow timely decisions regarding required disclosures.
As of July 31, 2020, the end of the period covered by this Quarterly Report on Form 10-Q, and under the supervision and with the participation of the management, including the Company’s CEO and CFO, management evaluated the effectiveness of the Company’s disclosure controls and procedures. Based on this evaluation and subject to the foregoing, the Company’s CEO and CFO concluded that the Company’s disclosure controls and procedures were effective.
Management, with the participation of the Company’s principal executive and principal financial officers, also assessed the effectiveness of the Company’s internal control over financial reporting as of July 31, 2020. This assessment was performed using the criteria established under the Internal Control-Integrated Framework established by Committee of Sponsoring Organization of the Treadway Commission (“COSO”).
The Company previously reported a material weakness in certain purchasing and inventory controls in its Annual Report on Form 10-K for the year ending October 31, 2018. During the second quarter of the fiscal year ended October 31, 2019, management made certain improvements to purchasing controls, logical access controls to inventory records, and physical access to inventory items. Management believes the control improvements that have been initiated have fully remediated the control weakness previously reported and that and that internal controls over financial reporting were effective as of July 31, 2020.
In designing and evaluating the control systems, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is necessarily required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
Changes in Internal Control over Financial Reporting
The Company’s management, including CEO and CFO, confirm that there were no changes in the Company’s internal control over financial reporting during the fiscal quarter ended July 31, 2020, other than those related to the material weakness described above, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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 settled this claim in March 2020. The Company’s liability on the settlement of this claim was $20,645 which has been paid.
ITEM 5. OTHER INFORMATION
None
| 15 |
ITEM 6. EXHIBITS
The following exhibits are submitted herewith:
| 16 |
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrant has caused this report to be signed on its behalf by the undersigned there unto duly authorized.
| INTERNATIONAL BALER CORPORATION | ||
| Dated: September 11, 2020 | By: | /s/ Victor W. Biazis |
| Victor W. Biaziz | ||
| Cheif Executive Officer | ||
| By: | /s/ William E. Nielsen | |
| William E. Nielsen | ||
| Chief Financial Officer |
| 17 |
