Item 1.
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Financial Statements
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SCHMITT INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
|
|
|
|
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August 31, 2017
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|
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May 31, 2017
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ASSETS
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Current assets
|
|
|
|
|
|
|
|
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Cash and cash equivalents
|
|
$
|
529,363
|
|
|
$
|
867,607
|
|
Accounts receivable, net
|
|
|
2,086,015
|
|
|
|
2,344,373
|
|
Inventories
|
|
|
4,544,943
|
|
|
|
4,204,723
|
|
Prepaid expenses
|
|
|
129,978
|
|
|
|
115,756
|
|
Income taxes receivable
|
|
|
3,082
|
|
|
|
7,310
|
|
|
|
|
|
|
|
|
|
|
|
|
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7,293,381
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|
|
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7,539,769
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|
|
|
|
|
|
|
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Property and equipment, net
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846,198
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|
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865,224
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|
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|
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|
|
|
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Other assets
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|
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Intangible assets, net
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575,205
|
|
|
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601,351
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|
|
|
|
|
|
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TOTAL ASSETS
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|
$
|
8,714,784
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|
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$
|
9,006,344
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|
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|
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LIABILITIES & STOCKHOLDERS
EQUITY
|
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Current liabilities
|
|
|
|
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Accounts payable
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$
|
1,055,690
|
|
|
$
|
1,101,066
|
|
Accrued commissions
|
|
|
303,114
|
|
|
|
300,234
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|
Accrued payroll liabilities
|
|
|
217,385
|
|
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360,239
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|
Other accrued liabilities
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288,663
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|
|
|
267,418
|
|
|
|
|
|
|
|
|
|
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Total current liabilities
|
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1,864,852
|
|
|
|
2,028,957
|
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|
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Stockholders equity
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Common stock, no par value, 20,000,000 shares authorized, 2,995,910 shares issued and outstanding
at August 31, 2017 and May 31, 2017
|
|
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10,670,654
|
|
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10,649,287
|
|
Accumulated other comprehensive loss
|
|
|
(442,296
|
)
|
|
|
(427,572
|
)
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Accumulated deficit
|
|
|
(3,378,426
|
)
|
|
|
(3,244,328
|
)
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|
|
|
|
|
|
|
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Total stockholders equity
|
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6,849,932
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|
|
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6,977,387
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|
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|
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TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
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$
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8,714,784
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|
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$
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9,006,344
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The accompanying notes are an integral part of these financial statements.
Page 3
SCHMITT INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
FOR THE THREE MONTHS ENDED AUGUST 31, 2017 AND 2016
(UNAUDITED)
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Three Months Ended
August 31,
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2017
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2016
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Net sales
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$
|
3,083,648
|
|
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$
|
2,892,532
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Cost of sales
|
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1,678,129
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|
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1,516,783
|
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Gross profit
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1,399,519
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1,375,749
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Operating expenses:
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General, administration and sales
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1,468,344
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1,412,669
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Research and development
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76,457
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78,847
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Total operating expenses
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1,544,801
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1,491,516
|
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Operating loss
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(145,282
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)
|
|
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(115,767
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)
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Other income (expense), net
|
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17,543
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|
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(1,833
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)
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Loss before income taxes
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(127,739
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)
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(117,600
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)
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Provision for income taxes
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|
6,359
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|
|
|
8,029
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|
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Net loss
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|
$
|
(134,098
|
)
|
|
$
|
(125,629
|
)
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|
|
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Net loss per common share:
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|
|
|
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Basic
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$
|
(0.04
|
)
|
|
$
|
(0.04
|
)
|
|
|
|
|
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|
|
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|
Weighted average number of common shares, basic
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2,995,910
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2,995,910
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Diluted
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$
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(0.04
|
)
|
|
$
|
(0.04
|
)
|
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Weighted average number of common shares, diluted
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2,995,910
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2,995,910
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Comprehensive loss
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|
|
|
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Net loss
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|
$
|
(134,098
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)
|
|
$
|
(125,629
|
)
|
Foreign currency translation adjustment
|
|
|
(14,724
|
)
|
|
|
(44,517
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)
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|
|
|
|
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Total comprehensive loss
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|
$
|
(148,822
|
)
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|
$
|
(170,146
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)
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The accompanying notes are an integral part of these financial statements.
Page 4
SCHMITT INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED AUGUST 31, 2017 AND 2016
(UNAUDITED)
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Three Months Ended
August 31,
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|
2017
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|
|
2016
|
|
Cash flows relating to operating activities
|
|
|
|
|
|
|
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Net loss
|
|
$
|
(134,098
|
)
|
|
$
|
(125,629
|
)
|
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
52,750
|
|
|
|
54,147
|
|
Gain on disposal of property and equipment
|
|
|
0
|
|
|
|
(17,509
|
)
|
Stock based compensation
|
|
|
21,367
|
|
|
|
9,438
|
|
(Increase) decrease in:
|
|
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|
|
|
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Accounts receivable
|
|
|
258,280
|
|
|
|
158,886
|
|
Inventories
|
|
|
(339,884
|
)
|
|
|
63,793
|
|
Prepaid expenses
|
|
|
(14,150
|
)
|
|
|
19,635
|
|
Income taxes receivable
|
|
|
4,228
|
|
|
|
2,326
|
|
Increase (decrease) in:
|
|
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|
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|
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Accounts payable
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|
|
(45,308
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)
|
|
|
(161,133
|
)
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Accrued liabilities and customer deposits
|
|
|
(118,566
|
)
|
|
|
27,328
|
|
Income taxes payable
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0
|
|
|
|
0
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|
|
|
|
|
|
|
|
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Net cash provided by (used in) operating activities
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|
|
(315,381
|
)
|
|
|
31,282
|
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|
|
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|
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Cash flows relating to investing activities
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|
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|
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Purchases of property and equipment
|
|
|
(7,578
|
)
|
|
|
(44,587
|
)
|
Proceeds from the sale of property and equipment
|
|
|
0
|
|
|
|
20,085
|
|
|
|
|
|
|
|
|
|
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Net cash used in investing activities
|
|
|
(7,578
|
)
|
|
|
(24,502
|
)
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|
|
|
|
|
|
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Effect of foreign exchange translation on cash
|
|
|
(15,285
|
)
|
|
|
6,692
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents
|
|
|
(338,244
|
)
|
|
|
13,472
|
|
Cash and cash equivalents, beginning of period
|
|
|
867,607
|
|
|
|
988,686
|
|
|
|
|
|
|
|
|
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Cash and cash equivalents, end of period
|
|
$
|
529,363
|
|
|
$
|
1,002,158
|
|
|
|
|
|
|
|
|
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Supplemental disclosure of cash flow information
|
|
|
|
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|
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Cash paid during the period for income taxes
|
|
$
|
2,131
|
|
|
$
|
5,703
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the period for interest
|
|
$
|
413
|
|
|
$
|
568
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial statements.
Page 5
SCHMITT INDUSTRIES, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS EQUITY
FOR THE THREE MONTHS ENDED AUGUST 31, 2017
(UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Accumulated
other
comprehensive
loss
|
|
|
Accumulated
deficit
|
|
|
Total
|
|
Balance, May 31, 2017
|
|
|
2,995,910
|
|
|
$
|
10,649,287
|
|
|
$
|
(427,572
|
)
|
|
$
|
(3,244,328
|
)
|
|
$
|
6,977,387
|
|
Stock-based compensation
|
|
|
0
|
|
|
|
21,367
|
|
|
|
0
|
|
|
|
0
|
|
|
|
21,367
|
|
Net loss
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
(134,098
|
)
|
|
|
(134,098
|
)
|
Other comprehensive loss
|
|
|
0
|
|
|
|
0
|
|
|
|
(14,724
|
)
|
|
|
0
|
|
|
|
(14,724
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, August 31, 2017
|
|
|
2,995,910
|
|
|
$
|
10,670,654
|
|
|
$
|
(442,296
|
)
|
|
$
|
(3,378,426
|
)
|
|
$
|
6,849,932
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial statements.
Page 6
SCHMITT INDUSTRIES, INC.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial
information included herein has been prepared by Schmitt Industries, Inc. (the Company or Schmitt) and its wholly owned subsidiaries. In the opinion of management, the accompanying unaudited Consolidated Financial Statements have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission and contain all adjustments, consisting only of normal recurring adjustments, necessary to present fairly its financial position as of August 31, 2017 and its
results of operations and its cash flows for the periods presented. The consolidated balance sheet at May 31, 2017 has been derived from the Annual Report on Form
10-K
for the fiscal year ended
May 31, 2017. The accompanying unaudited financial statements and related notes should be read in conjunction with the audited financial statements included in our Annual Report on Form
10-K
for the
fiscal year ended May 31, 2017. Operating results for the interim periods presented are not necessarily indicative of the results that may be experienced for the fiscal year ending May 31, 2018.
Revenue Recognition
The Company recognizes revenue for
sales and billing for freight charges upon delivery of the product to the customer at a fixed and determinable price with a reasonable assurance of collection, passage of title to the customer as indicated by shipping terms and fulfilment of all
significant obligations, pursuant to the guidance provided by Accounting Standards Codification (ASC) Topic 605. For sales to all customers, including manufacturer representatives, distributors or their third-party customers, these
criteria are met at the time product is shipped. When other significant obligations remain after products are delivered, revenue is recognized only after such obligations are fulfilled. In addition, judgments are required in evaluating the credit
worthiness of our customers. Credit is not extended to customers and revenue is not recognized until we have determined that collectability is reasonably assured. The Company estimates customer product returns based on historical return patterns and
reduces sales and cost of sales accordingly.
Financial Instruments
The carrying value of all other financial instruments potentially subject to valuation risk (principally consisting of cash and cash equivalents, accounts
receivable and accounts payable) also approximates fair value because of their short-term maturities.
Accounts Receivable
The Company maintains credit limits for all customers based upon several factors, including but not limited to financial condition and stability, payment
history, published credit reports and use of credit references. Management performs various analyses to evaluate accounts receivable balances to ensure recorded amounts reflect estimated net realizable value. This review includes using accounts
receivable agings, other operating trends and relevant business conditions, including general economic factors, as they relate to each of the Companys domestic and international customers. If these analyses lead management to the conclusion
that potential significant accounts are uncollectible, a reserve is provided. The allowance for doubtful accounts was $81,388 and $32,572 as of August 31, 2017 and May 31, 2017, respectively.
Inventories
Inventories are valued at the lower of cost
or market with cost determined on the average cost basis. Costs included in inventories consist of materials, labor and manufacturing overhead, which are related to the purchase or production of inventories. Write-downs, when required, are made to
reduce excess inventories to their net realizable values. Such estimates are based on assumptions regarding future demand and market conditions. If actual conditions become less favorable than the assumptions used, an additional inventory write-down
may be required. As of August 31, 2017 and May 31, 2017, inventories consisted of:
Page 7
|
|
|
|
|
|
|
|
|
|
|
August 31, 2017
|
|
|
May 31, 2017
|
|
Raw materials
|
|
$
|
2,112,384
|
|
|
$
|
1,773,368
|
|
Work-in-process
|
|
|
1,039,629
|
|
|
|
937,878
|
|
Finished goods
|
|
|
1,392,930
|
|
|
|
1,493,477
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,544,943
|
|
|
$
|
4,204,723
|
|
|
|
|
|
|
|
|
|
|
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed using the straight-line method over estimated useful lives of three to seven years for
furniture, fixtures and equipment; three years for vehicles; and twenty-five years for buildings and improvements. As of August 31, 2017 and May 31, 2017, property and equipment consisted of:
|
|
|
|
|
|
|
|
|
|
|
August 31, 2017
|
|
|
May 31, 2017
|
|
Land
|
|
$
|
299,000
|
|
|
$
|
299,000
|
|
Buildings and improvements
|
|
|
1,814,524
|
|
|
|
1,814,524
|
|
Furniture, fixtures and equipment
|
|
|
1,253,940
|
|
|
|
1,246,346
|
|
Vehicles
|
|
|
44,704
|
|
|
|
44,704
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,412,168
|
|
|
|
3,404,574
|
|
Less accumulated depreciation
|
|
|
(2,565,970
|
)
|
|
|
(2,539,350
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
846,198
|
|
|
$
|
865,224
|
|
|
|
|
|
|
|
|
|
|
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU)
No. 2014-09,
Revenue from Contracts with Customers (Topic 606). ASU
2014-09
affects any entity using U.S. GAAP that either enters into contracts with customers to transfer goods or services or enters into
contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards (e.g., insurance contracts or lease contracts). In August 2015, the FASB issued ASU
2015-14,
which defers the effective date of ASU
2014-09
by one year. The new guidance is effective for interim and annual reporting periods beginning after December 15, 2017. Early adoption is permitted as of the
date of the original effective date, for interim and annual reporting periods beginning after December 15, 2016. The Company is currently evaluating the provisions of ASU
2014-09
and the potential impact
on its consolidated financial statements. To date, the Company has examined its current revenue streams and does not believe that the adoption of this guidance will have a material impact on revenue recognition patterns as compared to revenue
recognition under existing guidance, as the Company expects that revenues generated will continue to be recognized upon the shipment of products to customers. The Company will continue to evaluate the impacts of the provisions of ASU
2014-09
through the date of adoption to ensure that preliminary conclusions continue to remain accurate. Additionally, the Company is assessing
ASU 2014-09s
impact
on its consolidated financial statement disclosures and currently expects to adopt
ASU 2014-09
on June 1, 2018 using the modified retrospective method.
NOTE 2: STOCK OPTIONS AND STOCK-BASED COMPENSATION
Stock-based compensation includes expense charges for all stock-based awards to employees and directors granted under the Companys stock option plan.
Stock-based compensation recognized during the period is based on the portion of the grant date fair value of the stock-based award that will vest during the period, adjusted for expected forfeitures. Compensation cost for all stock-based awards is
recognized using the straight-line method. The Company uses the Black-Scholes option pricing model as its method of valuation for stock-based awards. The Black-Scholes option pricing model requires the input of highly subjective assumptions, and
other reasonable assumptions could provide differing results. These variables include, but are not limited to:
|
|
|
Risk-Free Interest Rate.
The Company bases the risk-free interest rate on the implied yield currently available on U.S. Treasury issues with an equivalent remaining term approximately equal to the expected life
of the award.
|
|
|
|
Expected Life.
The expected life of awards granted represents the period of time that they are expected to be outstanding. The Company determines the expected life based on historical experience with similar
awards, giving consideration to the contractual terms, vesting schedules and
pre-vesting
and post-vesting forfeitures.
|
Page 8
|
|
|
Expected Volatility.
The Company estimates the volatility of its common stock at the date of grant based on the historical volatility of its common stock. The volatility factor the Company uses is based on its
historical stock prices over the most recent period commensurate with the estimated expected life of the award. These historical periods may exclude portions of time when unusual transactions occurred.
|
|
|
|
Expected Dividend Yield.
The Company does not anticipate paying any cash dividends in the foreseeable future. Consequently, the Company uses an expected dividend yield of 0.
|
|
|
|
Expected Forfeitures.
The Company uses relevant historical data to estimate
pre-vesting
option forfeitures. The Company records stock-based compensation only for those
awards that are expected to vest.
|
To determine stock-based compensation expense recognized for those options granted during the three
months ended August 31, 2017 and 2016, the Company has computed the value of all stock options granted using the Black-Scholes option pricing model. No options were issued during the three months ended August 31, 2017 and 2016.
At August 31, 2017, the Company had a total of 360,000 outstanding stock options (200,830 vested and exercisable and 159,170
non-vested)
with a weighted average exercise price of $2.28. The Company estimates that $69,643 will be recorded as additional stock-based compensation expense over a weighted-average period of 1.2 years for all
options that were outstanding as of August 31, 2017, but which were not yet vested.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding Options
|
|
|
Exercisable Options
|
|
|
|
|
|
|
Number of
Shares
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Contractual
Life (yrs)
|
|
|
Number
of Shares
|
|
|
Weighted
Average
Exercise
Price
|
|
|
|
|
|
|
|
212,500
|
|
|
$
|
1.70
|
|
|
|
9.6
|
|
|
|
70,830
|
|
|
$
|
1.70
|
|
|
|
|
|
|
|
|
15,000
|
|
|
|
2.53
|
|
|
|
6.1
|
|
|
|
15,000
|
|
|
|
2.53
|
|
|
|
|
|
|
|
|
77,500
|
|
|
|
2.85
|
|
|
|
6.6
|
|
|
|
60,000
|
|
|
|
2.85
|
|
|
|
|
|
|
|
|
55,000
|
|
|
|
3.65
|
|
|
|
3.8
|
|
|
|
55,000
|
|
|
|
3.65
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
360,000
|
|
|
|
2.28
|
|
|
|
7.9
|
|
|
|
200,830
|
|
|
|
2.64
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options granted, exercised, and forfeited or canceled under the Companys stock option plan during the three months ended
August 31, 2017 are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
August 31, 2017
|
|
|
|
Number
of Shares
|
|
|
Weighted
Average
Exercise
Price
|
|
Options outstanding beginning of period
|
|
|
360,000
|
|
|
$
|
2.28
|
|
Options granted
|
|
|
0
|
|
|
|
0
|
|
Options exercised
|
|
|
0
|
|
|
|
0
|
|
Options forfeited/canceled
|
|
|
0
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
Options outstanding end of period
|
|
|
360,000
|
|
|
|
2.28
|
|
|
|
|
|
|
|
|
|
|
Page 9
NOTE 3: EPS RECONCILIATION
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
August 31,
|
|
|
|
2017
|
|
|
2016
|
|
Weighted average shares (basic)
|
|
|
2,995,910
|
|
|
|
2,995,910
|
|
Effect of dilutive stock options
|
|
|
0
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares (diluted)
|
|
|
2,995,910
|
|
|
|
2,995,910
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share is computed using the weighted average number of common shares outstanding. Diluted earnings
(loss) per share is computed using the weighted average number of common shares outstanding, adjusted for dilutive incremental shares attributed to outstanding options to purchase common stock. Common stock equivalents for stock options are computed
using the treasury stock method. In periods in which a net loss is incurred, no common stock equivalents are included since they are antidilutive and as such all stock options outstanding are excluded from the computation of diluted net loss in
those periods.
NOTE 4: INCOME TAXES
The Company
accounts for income taxes using the asset and liability method. This approach requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax
basis of assets and liabilities. Deferred tax assets are reduced by a valuation allowance if, based on the weight of available evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Management
continues to review the level of the valuation allowance on a quarterly basis. There can be no assurance that the Companys future operations will produce sufficient earnings to that the deferred tax asset can be fully utilized. The Company
currently maintains a full valuation allowance against net deferred tax assets.
Each year the Company files income tax returns in the various national,
state and local income taxing jurisdictions in which it operates. These tax returns are subject to examination and possible challenge by the taxing authorities. Positions challenged by the taxing authorities may be settled or appealed by the
Company. As a result, there is an uncertainty in income taxes recognized in the Companys financial statements in accordance with ASC Topic 740. The Company applies this guidance by defining criteria that an individual income tax position must
meet for any part of the benefit of that position to be recognized in an enterprises financial statements and provides guidance on measurement,
de-recognition,
classification, accounting for interest and
penalties, accounting in interim periods, disclosure, and transition.
Other long-term liabilities related to tax contingencies were $0 as of both
August 31, 2017 and May 31, 2017. Interest and penalties associated with uncertain tax positions are recognized as components of the Provision for income taxes. The liability for payment of interest and penalties was $0 as of
August 31 2017 and May 31, 2017.
Several tax years are subject to examination by major tax jurisdictions. In the United States, federal tax
years ended May 31, 2014 and after are subject to examination. In the United Kingdom, tax years ended May 31, 2012 and after are subject to examination. In Canada, tax years after May 31, 2014 and after are subject to examination.
Effective Tax Rate
The effective tax rate on
consolidated net loss was 5.0% for the three months ended August 31, 2017. The effective tax rate on consolidated net loss differs from the federal statutory tax rate primarily due to changes in the deferred tax valuation allowance and certain
expenses not being deductible for income tax reporting purposes. Management believes the effective tax rate for Fiscal 2018 will be approximately 5.2% due to the items noted above.
Page 10
NOTE 5: SEGMENTS OF BUSINESS
The Company has two reportable business segments: dynamic balancing and process control systems for the machine tool industry (Balancer) and laser-based test
and measurement systems and ultrasonic measurement products (Measurement). The Company operates in three principal geographic markets: North America, Europe and Asia.
Segment Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended August 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
Balancer
|
|
|
Measurement
|
|
|
Balancer
|
|
|
Measurement
|
|
Gross sales
|
|
$
|
2,445,486
|
|
|
$
|
1,013,251
|
|
|
$
|
1,828,050
|
|
|
$
|
1,344,054
|
|
Intercompany sales
|
|
|
(375,089
|
)
|
|
|
|
|
|
|
(267,174
|
)
|
|
|
(12,398
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
2,070,397
|
|
|
$
|
1,013,251
|
|
|
$
|
1,560,876
|
|
|
$
|
1,331,656
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
$
|
(211,780
|
)
|
|
$
|
66,498
|
|
|
$
|
(212,839
|
)
|
|
$
|
97,072
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense
|
|
$
|
16,982
|
|
|
$
|
9,622
|
|
|
$
|
16,787
|
|
|
$
|
9,477
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense
|
|
$
|
0
|
|
|
$
|
26,146
|
|
|
$
|
0
|
|
|
$
|
27,883
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
$
|
7,578
|
|
|
$
|
0
|
|
|
$
|
44,587
|
|
|
$
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Geographic Information Net Sales by Geographic Area
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended August 31,
|
|
|
|
2017
|
|
|
2016
|
|
North America
|
|
$
|
1,791,101
|
|
|
$
|
1,954,362
|
|
Europe
|
|
|
517,863
|
|
|
|
323,412
|
|
Asia
|
|
|
749,422
|
|
|
|
498,620
|
|
Other markets
|
|
|
25,262
|
|
|
|
116,138
|
|
|
|
|
|
|
|
|
|
|
Total net sales
|
|
$
|
3,083,648
|
|
|
$
|
2,892,532
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended August 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
United States
|
|
|
Europe
|
|
|
United States
|
|
|
Europe
|
|
Operating income (loss)
|
|
$
|
(215,465
|
)
|
|
|
70,183
|
|
|
$
|
(94,165
|
)
|
|
|
(21,602
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense
|
|
$
|
26,604
|
|
|
$
|
0
|
|
|
$
|
26,264
|
|
|
$
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense
|
|
$
|
26,146
|
|
|
$
|
0
|
|
|
$
|
27,883
|
|
|
$
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
$
|
7,578
|
|
|
$
|
0
|
|
|
$
|
44,587
|
|
|
$
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note Europe is defined as the European subsidiary, Schmitt Europe, Ltd.
Page 11
Segment and Geographic Assets
|
|
|
|
|
|
|
|
|
|
|
August 31, 2017
|
|
|
May 31, 2017
|
|
Segment assets to total assets
|
|
|
|
|
|
|
|
|
Balancer
|
|
$
|
4,917,524
|
|
|
$
|
4,791,100
|
|
Measurement
|
|
|
3,264,815
|
|
|
|
3,340,327
|
|
Corporate assets
|
|
|
532,445
|
|
|
|
874,917
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
8,714,784
|
|
|
$
|
9,006,344
|
|
|
|
|
|
|
|
|
|
|
Geographic assets to long-lived assets
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
846,198
|
|
|
$
|
865,224
|
|
Europe
|
|
|
0
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
Total long-lived assets
|
|
$
|
846,198
|
|
|
$
|
865,224
|
|
|
|
|
|
|
|
|
|
|
Geographic assets to total assets
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
7,739,482
|
|
|
$
|
8,149,507
|
|
Europe
|
|
|
975,302
|
|
|
|
856,837
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
8,714,784
|
|
|
$
|
9,006,344
|
|
|
|
|
|
|
|
|
|
|
Page 12
Item 2.
|
Managements Discussion and Analysis of Financial Condition and Results of Operations
|
Forward-Looking Statements
This Quarterly Report filed
with the SEC on Form
10-Q
(the Report), including Managements Discussion and Analysis of Financial Condition and Results of Operations in this Item 2, contains forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of 1995 regarding future events and the future results of Schmitt Industries, Inc. and its consolidated subsidiaries (the Company) that are based on
managements current expectations, estimates, projections and assumptions about the Companys business. Words such as expects, anticipates, intends, plans, believes,
sees, estimates and variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve risks, uncertainties and
assumptions that are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking statements due to numerous factors, including, but not limited to, those discussed
in the Risk Factors, Managements Discussion and Analysis of Financial Condition and Results of Operations and elsewhere in this Report as well as those discussed from time to time in the Companys other Securities
and Exchange Commission filings and reports. In addition, such statements could be affected by general industry and market conditions. Such forward-looking statements speak only as of the date of this Report or, in the case of any document
incorporated by reference, the date of that document, and we do not undertake any obligation to update any forward-looking statement to reflect events or circumstances after the date of this Report. If we update or correct one or more
forward-looking statements, investors and others should not conclude that we will make additional updates or corrections with respect to other forward-looking statements.
RESULTS OF OPERATIONS
Overview
Schmitt Industries, Inc. designs, manufactures and markets computer-controlled vibration detection, balancing and process control equipment (the Balancer
segment) to the worldwide machine tool industry and through its wholly owned subsidiary, Schmitt Measurement Systems, Inc., designs, manufactures and markets precision laser-based surface measurement products, laser-based distance measurement
products and ultrasonic measurement systems (the Measurement segment) for a variety of industrial applications worldwide. The Company sells and markets its products in Europe through its wholly owned subsidiary, Schmitt Europe Ltd. (SEL), located in
the United Kingdom. The Company is organized into two operating segments: the Balancer segment and the Measurement segment. The accompanying unaudited financial information should be read in conjunction with our Annual Report on Form 10-K for the
fiscal year ended May 31, 2017.
SBS, SMS, Acuity, Xact, Lasercheck and
AccuProfile are registered trademarks owned by the Company.
For the three months ended August 31, 2017, total sales increased $191,116, or
6.6%, to $3,083,648 from $2,892,532 in the three months ended August 31, 2016. Balancer segment sales focus throughout the world on end-users, rebuilders and original equipment manufacturers of grinding machines with the target geographic markets in
North America, Asia and Europe. Balancer segment sales increased $509,521, or 32.6%, to $2,070,397 for the three months ended August 31, 2017 compared to $1,560,876 for the three months ended August 31, 2016, primarily due to stronger sales in all
three of our target markets Europe, Asia and North America. The Measurement segment product line consists of laser-based light-scatter, distance measurement and dimensional sizing products and ultrasonic-based remote tank monitoring products
for propane and diesel tanks. Total Measurement segment sales decreased $318,405, or 23.9%, to $1,013,251 for the three months ended August 31, 2017 compared to $1,331,656 for the three months ended August 31, 2016, primarily due to decreases in
sales in both the Xact and Acuity product lines in addition to the impact on sales associated with the phase out of the SMS and Lasercheck product lines.
Operating expenses increased $53,285, or 3.6%, to $1,544,801 for the three months ended August 31, 2017 as compared to $1,491,516 for the three months ended
August 31, 2016. General, administrative and selling expenses increased $55,675, or 3.9%, for the three months ended August 31, 2017 as compared to the same period in the prior year. Research and development expenses decreased $2,390, or 3.0%, to
$76,457 for the three months ended August 31, 2017 from $78,847 for the three months ended August 31, 2016.
Net loss was $134,098, or $(0.04) per
fully diluted share, for the three months ended August 31, 2017 as compared to net loss of $125,629, or $(0.04) per fully diluted share, for the three months ended August 31, 2016.
Page 13
Critical Accounting Policies
There were no material changes in our critical accounting policies as disclosed in our Annual Report on Form 10-K for the year ended May 31, 2017.
Discussion of Operating Results
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended August 31,
|
|
|
|
2017
|
|
|
2016
|
|
Balancer sales
|
|
$
|
2,070,397
|
|
|
|
67.1
|
%
|
|
$
|
1,560,876
|
|
|
|
54.0
|
%
|
Measurement sales
|
|
|
1,013,251
|
|
|
|
32.9
|
%
|
|
|
1,331,656
|
|
|
|
46.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total sales
|
|
|
3,083,648
|
|
|
|
100.0
|
%
|
|
|
2,892,532
|
|
|
|
100.0
|
%
|
Cost of sales
|
|
|
1,684,129
|
|
|
|
54.6
|
%
|
|
|
1,516,783
|
|
|
|
52.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
1,399,519
|
|
|
|
45.4
|
%
|
|
|
1,375,749
|
|
|
|
47.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General, administration and sales
|
|
|
1,468,344
|
|
|
|
47.6
|
%
|
|
|
1,412,669
|
|
|
|
48.8
|
%
|
Research and development
|
|
|
76,457
|
|
|
|
2.5
|
%
|
|
|
78,847
|
|
|
|
2.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
1,544,801
|
|
|
|
50.1
|
%
|
|
|
1,491,516
|
|
|
|
51.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(145,282
|
)
|
|
|
(4.7
|
)%
|
|
|
(115,767
|
)
|
|
|
(4.0
|
)%
|
Other income (expense), net
|
|
|
17,543
|
|
|
|
0.6
|
%
|
|
|
(1,833
|
)
|
|
|
(0.1
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
|
(127,739
|
)
|
|
|
(4.1
|
)%
|
|
|
(117,600
|
)
|
|
|
(4.1
|
)%
|
Provision for income taxes
|
|
|
6,359
|
|
|
|
0.2
|
%
|
|
|
8,029
|
|
|
|
0.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(134,098
|
)
|
|
|
(4.3
|
)%
|
|
$
|
(125,629
|
)
|
|
|
(4.3
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
Sales in the Balancer segment increased $509,521, or 32.6%, to $2,070,397 for the three months ended
August 31, 2017 compared to $1,560,876 for the three months ended August 31, 2016. This increase is primarily attributed to stronger sales in all three of our
target markets Europe, Asia and North America. European sales increased $203,055, or 82.8%, in the first quarter of Fiscal 2018 compared to the first quarter of Fiscal 2017. Sales into Asia increased $304,739, or 68.9%, and North America
sales increased $47,034, or 5.9%, for the three months ended August 31, 2017 as compared to the three months ended August 31, 2016. These increases were offset by a decrease in sales in other regions of the world of $45,307, or 64.2%, in the first
quarter of Fiscal 2018 as compared to the same quarter in the prior year.
Sales in the Measurement segment decreased $318,405, or 23.9%, to $1,013,251
for the three months ended August 31, 2017 compared to $1,331,656 for the three months ended August 31, 2016. Sales of Xact remote tank monitoring products and related revenues from monitoring services decreased $179,772, or 29.8%, during the first
quarter of Fiscal 2018 as compared to the same period in the prior year. Sales of our Acuity laser-based distance measurement and dimensional-sizing products decreased $48,337, or 7.7%, in the quarter ended August 31, 2017 as compared to the same
quarter in the prior year. During FY2017, the Company made the decision to no longer focus on and eventually phase out the SMS and Lasercheck product lines. As a result, sales of our SMS laser-based surface measurement products decreased by $72,888,
or 100.0%, for the three months ended August 31, 2017 as compared to the same period in the prior year and sales of our Lasercheck products decreased $17,408, or 69.5%, during the first quarter of Fiscal 2018 as compared to the same period in the
prior year.
Gross margin
Gross margin for the three months ended August 31, 2017 decreased to 45.4% as compared to 47.6% for the three
months ended August 31, 2016. The fluctuations in gross margin in the three months period ended August 31, 2017 compared to the same three month period in the prior fiscal year is primarily influenced by shifts in the product sales mix involving our
three main product lines.
Operating expenses
Operating expenses increased $53,285, or 3.6%, to $1,544,801 for the three months ended August
31, 2017 as compared to $1,491,516 for the three months ended August 31, 2016. General, administrative and selling
Page 14
expenses increased $55,675, or 3.9%, for the three months ended August 31, 2017 as compared to the same period in the prior year primarily due to an increase in professional fees and other
administrative expenses offset, in part, by a reduction in sales commissions, sales-related travel and trade show costs.
Other income
Other
income consists of interest income (expense), foreign currency exchange gain (loss) and other income (expense). Interest income (expense), net was $97 and $(356) for the three months ended August 31, 2017 and 2016, respectively. Foreign currency
exchange gains (losses) were $17,441 and $(18,999) for the three months ended August 31, 2017 and 2016, respectively. The shifts in the foreign currency exchange are related to fluctuations of foreign currencies against the U.S. dollar during the
current period. Other income (expense) was $5 for the first quarter of Fiscal 2018 as compared to $17,522 for the same period in the prior year.
Income taxes
The Companys effective tax rate on consolidated net loss was 5.0% for the three months ended August 31, 2017. The effective
tax rate on consolidated net loss differs from the federal statutory tax rate primarily due to the amount of income from foreign jurisdictions, changes in the deferred tax valuation allowance and certain expenses not being deductible for income tax
reporting purposes. Management believes the effective tax rate for Fiscal 2018 will be approximately 5.2% due to the items noted above.
Net income
(loss)
Net loss was $134,098, or $(0.04) per diluted share, for the three months ended August 31, 2017 as compared to a net loss was $125,629, or $(0.04) per diluted share, for the three months ended August 31, 2016. The changes in the
net loss in the first quarter of Fiscal 2018 is related to increases in operating expenses as compared to the related period in the prior year offset by changes in foreign currency gains/losses in the respective periods.
LIQUIDITY AND CAPITAL RESOURCES
The Companys
working capital decreased to $5,428,529 as of August 31, 2017 as compared to $5,510,812 as of May 31, 2017. Cash and cash equivalents decreased $338,244 to $529,363 as of August 31, 2017 from $867,607 as of May 31, 2017.
Cash used in operating activities totaled $315,381 for the three months ended August 31, 2017 as compared to cash provided by operating activities of $31,282
for the three months ended August 31, 2016. The change in cash provided by (used in) operating activities was primarily impacted by changes in accounts receivable, inventories and accounts payable and other accrued liabilities, with the result of
the changes directly related to the timing of receipts and payments and the management of our inventory levels.
At August 31, 2017, the Company had
accounts receivable of $2,086,015 as compared to $2,344,373 at May 31, 2017. The decrease in accounts receivable of $258,358 was due to timing of receipts. Inventories increased $340,220 to $4,544,943 as of August 31, 2017 as compared to $4,204,723
at May 31, 2017, which is due primarily to the timing of purchases across our three main product lines. At August 31, 2017, total current liabilities decreased $164,105 to $1,864,52 as compared to $2,028,957 at May 31, 2017. The decrease in accounts
payable and other accrued expenses is primarily due to the timing of payments to our vendors and decreases in payroll related liabilities.
We believe
that our existing cash and cash equivalents combined with the cash we anticipate to generate from operating activities will be sufficient to meet our cash requirements for the foreseeable future. We do not have any significant commitments nor are we
aware of any significant events or conditions that are likely to have a material impact on our liquidity or capital resources.
Risk Factors
Please refer to the risk factors disclosed in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended May 31, 2017 for a
listing of factors that could cause actual results or events to differ materially from those contained in any forward-looking statements made by or on behalf of the Company.