UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM10-Q
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended: November 30, 20172018
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:000-23996
SCHMITT INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
Oregon | 93-1151989 | |
(State or other jurisdiction of incorporation or organization) | (IRS Employer | |
Identification Number) |
2765 NW Nicolai Street, Portland, Oregon 97210-1818
(Address of principal executive offices) (Zip Code)
(503)227-7908
Indicate by check mark whether the registrant has (1) filed all reports required to be filed by Section 13 of 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 and posted on its Corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of RegulationS-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule12b-2 of the Exchange Act. (check one):
Large accelerated filer | ☐ | Accelerated filer | ☐ | |||
Non-accelerated filer | ☐ | Smaller reporting company | ☒ | |||
Emerging growth 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 Rule12b-2 of the Exchange Act). Yes ☐ No ☒
The number of shares of each class of common stock outstanding as of December 31, 20172018
Common stock, no par value | 3,994,545 |
SCHMITT INDUSTRIES, INC.
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Item 1. | |||||||||
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Consolidated Statements of Operations and Comprehensive Income (Loss):
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Consolidated Statements of Cash Flows:
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Consolidated Statement of Changes in Stockholders’ Equity:
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Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | ||||||||
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Item 6. | 20 | ||||||||
21 | |||||||||
Certifications |
Page 2
PART I - FINANCIAL INFORMATION
SCHMITT INDUSTRIES, INC.
(UNAUDITED)
November 30, 2017 | May 31, 2017 | November 30, 2018 | May 31, 2018 | |||||||||||||
ASSETS | ASSETS |
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Current assets | ||||||||||||||||
Cash and cash equivalents | $ | 586,986 | $ | 867,607 | $ | 1,299,886 | $ | 2,053,181 | ||||||||
Restricted cash | 56,583 | 58,352 | ||||||||||||||
Accounts receivable, net | 2,150,655 | 2,344,373 | 2,184,906 | 2,047,032 | ||||||||||||
Inventories | 4,792,085 | 4,204,723 | 6,077,054 | 5,710,888 | ||||||||||||
Prepaid expenses | 105,436 | 115,756 | 136,004 | 148,924 | ||||||||||||
Income taxes receivable | 714 | 7,310 | 4,435 | 0 | ||||||||||||
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7,635,876 | 7,539,769 | |||||||||||||||
Total current assets | 9,758,868 | 10,018,377 | ||||||||||||||
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Property and equipment, net | 819,219 | 865,224 | 734,687 | 770,915 | ||||||||||||
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Other assets | ||||||||||||||||
Intangible assets, net | 549,059 | 601,351 | 444,476 | 496,768 | ||||||||||||
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TOTAL ASSETS | $ | 9,004,154 | $ | 9,006,344 | $ | 10,938,031 | $ | 11,286,060 | ||||||||
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LIABILITIES & STOCKHOLDERS’ EQUITY | LIABILITIES & STOCKHOLDERS’ EQUITY |
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Current liabilities | ||||||||||||||||
Accounts payable | $ | 1,201,098 | $ | 1,101,066 | $ | 1,159,569 | $ | 1,024,256 | ||||||||
Accrued commissions | 266,727 | 300,234 | 191,281 | 194,797 | ||||||||||||
Accrued payroll liabilities | 229,584 | 360,239 | 186,488 | 188,568 | ||||||||||||
Other accrued liabilities | 318,929 | 267,418 | 269,402 | 358,790 | ||||||||||||
Income taxes payable | 0 | 3,993 | ||||||||||||||
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Total current liabilities | 2,016,338 | 2,028,957 | 1,806,740 | 1,770,404 | ||||||||||||
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Stockholders’ equity | ||||||||||||||||
Common stock, no par value, 20,000,000 shares authorized, 2,995,910 shares issued and outstanding at November 30, 2017 and May 31, 2017 | 10,690,126 | 10,649,287 | ||||||||||||||
Common stock, no par value, 20,000,000 shares authorized, 3,994,545 shares issued and outstanding at November 30, 2018 and May 31, 2018 | 13,094,639 | 13,085,652 | ||||||||||||||
Accumulated other comprehensive loss | (427,132 | ) | (427,572 | ) | (462,570 | ) | (536,307 | ) | ||||||||
Accumulated deficit | (3,275,178 | ) | (3,244,328 | ) | (3,500,778 | ) | (3,033,689 | ) | ||||||||
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Total stockholders’ equity | 6,987,816 | 6,977,387 | 9,131,291 | 9,515,656 | ||||||||||||
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TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 9,004,154 | $ | 9,006,344 | $ | 10,938,031 | $ | 11,286,060 | ||||||||
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The accompanying notes are an integral part of these financial statements.
Page 3
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
FOR THE THREE AND SIX MONTHS ENDED NOVEMBER 30, 20172018 AND 20162017
(UNAUDITED)
Three Months Ended November 30, | Six Months Ended November 30, | Three Months Ended November 30, | Six Months Ended November 30, | |||||||||||||||||||||||||||||
2017 | 2016 | 2017 | 2016 | 2018 | 2017 | 2018 | 2017 | |||||||||||||||||||||||||
Net sales | $ | 3,770,880 | $ | 2,655,561 | $ | 6,854,528 | $ | 5,548,093 | $ | 3,503,478 | $ | 3,770,880 | $ | 6,943,931 | $ | 6,854,528 | ||||||||||||||||
Cost of sales | 2,044,898 | 1,623,151 | 3,729,027 | 3,139,934 | 2,140,371 | 2,044,898 | 4,241,026 | 3,729,027 | ||||||||||||||||||||||||
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Gross profit | 1,725,982 | 1,032,410 | 3,125,501 | 2,408,159 | 1,363,107 | 1,725,982 | 2,702,905 | 3,125,501 | ||||||||||||||||||||||||
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Operating expenses: | ||||||||||||||||||||||||||||||||
General, administration and sales | 1,524,443 | 1,324,675 | 2,992,787 | 2,737,344 | 1,539,495 | 1,524,443 | 2,944,858 | 2,992,787 | ||||||||||||||||||||||||
Research and development | 100,760 | 60,277 | 177,217 | 139,124 | 47,924 | 100,760 | 96,161 | 177,217 | ||||||||||||||||||||||||
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Total operating expenses | 1,625,203 | 1,384,952 | 3,170,004 | 2,876,468 | 1,587,419 | 1,625,203 | 3,041,019 | 3,170,004 | ||||||||||||||||||||||||
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Operating income (loss) | 100,779 | (352,542 | ) | (44,503 | ) | (468,309 | ) | (224,312 | ) | 100,779 | (338,114 | ) | (44,503 | ) | ||||||||||||||||||
Other income (expense), net | 9,078 | (23,578 | ) | 26,621 | (25,411 | ) | (24,596 | ) | 9,078 | (116,247 | ) | 26,621 | ||||||||||||||||||||
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Income (loss) before income taxes | 109,857 | (376,120 | ) | (17,882 | ) | (493,720 | ) | (248,908 | ) | 109,857 | (454,361 | ) | (17,882 | ) | ||||||||||||||||||
Provision for income taxes | 6,609 | 6,350 | 12,968 | 14,379 | 6,362 | 6,609 | 12,728 | 12,968 | ||||||||||||||||||||||||
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Net income (loss) | $ | 103,248 | $ | (382,470 | ) | $ | (30,850 | ) | $ | (508,099 | ) | $ | (255,270 | ) | $ | 103,248 | $ | (467,089 | ) | $ | (30,850 | ) | ||||||||||
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Net income (loss) per common share: | ||||||||||||||||||||||||||||||||
Basic | $ | 0.03 | $ | (0.13 | ) | $ | (0.01 | ) | $ | (0.17 | ) | $ | (0.06 | ) | $ | 0.03 | $ | (0.12 | ) | $ | (0.01 | ) | ||||||||||
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Weighted average number of common shares, basic | 2,995,910 | 2,995,910 | 2,995,910 | 2,995,910 | 3,994,545 | 2,995,910 | 3,994,545 | 2,995,910 | ||||||||||||||||||||||||
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Diluted | $ | 0.03 | $ | (0.13 | ) | $ | (0.01 | ) | $ | (0.17 | ) | $ | (0.06 | ) | $ | 0.03 | $ | (0.12 | ) | $ | (0.01 | ) | ||||||||||
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Weighted average number of common shares, diluted | 3,024,099 | 2,995,910 | 2,995,910 | 2,995,910 | 3,994,545 | 3,024,099 | 3,994,545 | 2,995,910 | ||||||||||||||||||||||||
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Comprehensive income (loss) | ||||||||||||||||||||||||||||||||
Net income (loss) | $ | 103,248 | $ | (382,470 | ) | $ | (30,850 | ) | $ | (508,099 | ) | $ | (255,270 | ) | $ | 103,248 | $ | (467,089 | ) | $ | (30,850 | ) | ||||||||||
Foreign currency translation adjustment | 15,164 | (19,185 | ) | 440 | (63,702 | ) | (5,907 | ) | 15,164 | 73,737 | 440 | |||||||||||||||||||||
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Total comprehensive income (loss) | $ | 118,412 | $ | (401,655 | ) | $ | (30,410 | ) | $ | (571,801 | ) | $ | (261,177 | ) | $ | 118,412 | $ | (393,352 | ) | $ | (30,410 | ) | ||||||||||
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The accompanying notes are an integral part of these financial statements.
Page 4
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED NOVEMBER 30, 20172018 AND 20162017
(UNAUDITED)
Six Months Ended November 30, | Six Months Ended November 30, | |||||||||||||||
2017 | 2016 | 2018 | 2017 | |||||||||||||
Cash flows relating to operating activities | ||||||||||||||||
Net loss | $ | (30,850 | ) | $ | (508,099 | ) | $ | (467,089 | ) | $ | (30,850 | ) | ||||
Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||||||||||
Depreciation and amortization | 104,645 | 110,437 | 93,933 | 104,645 | ||||||||||||
(Gain) loss on disposal of property and equipment | 619 | (16,899 | ) | 0 | 619 | |||||||||||
Stock based compensation | 40,839 | 15,468 | 8,987 | 40,839 | ||||||||||||
(Increase) decrease in: | ||||||||||||||||
Accounts receivable | 218,163 | 238,684 | (156,969 | ) | 218,163 | |||||||||||
Inventories | (569,393 | ) | 206,624 | (384,280 | ) | (569,393 | ) | |||||||||
Prepaid expenses | 11,286 | (16,747 | ) | 12,081 | 11,286 | |||||||||||
Income taxes receivable | �� | 6,596 | 6,553 | (4,435 | ) | 6,596 | ||||||||||
Increase (decrease) in: | ||||||||||||||||
Accounts payable | 97,824 | (382,255 | ) | 138,428 | 97,824 | |||||||||||
Accrued liabilities and customer deposits | (114,766 | ) | (87,440 | ) | (89,889 | ) | (114,766 | ) | ||||||||
Income taxes payable | (3,993 | ) | 0 | |||||||||||||
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Net cash used in operating activities | (235,037 | ) | (433,674 | ) | (853,226 | ) | (235,037 | ) | ||||||||
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Cash flows relating to investing activities | ||||||||||||||||
Purchases of property and equipment | (8,467 | ) | (44,587 | ) | (5,517 | ) | (8,467 | ) | ||||||||
Proceeds from the sale of property and equipment | 1,500 | 20,085 | 0 | 1,500 | ||||||||||||
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Net cash used in investing activities | (6,967 | ) | (24,502 | ) | (5,517 | ) | (6,967 | ) | ||||||||
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Effect of foreign exchange translation on cash | (38,617 | ) | 12,697 | 103,679 | (38,617 | ) | ||||||||||
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Decrease in cash and cash equivalents | (280,621 | ) | (445,479 | ) | ||||||||||||
Cash and cash equivalents, beginning of period | 867,607 | 988,686 | ||||||||||||||
Decrease in cash, cash equivalents and restricted cash | (755,064 | ) | (280,621 | ) | ||||||||||||
Cash, cash equivalents and restricted cash, beginning of period | 2,111,533 | 867,607 | ||||||||||||||
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Cash and cash equivalents, end of period | $ | 586,986 | $ | 543,207 | ||||||||||||
Cash, cash equivalents and restricted cash, end of period | $ | 1,356,469 | $ | 586,986 | ||||||||||||
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Supplemental disclosure of cash flow information | ||||||||||||||||
Cash paid during the period for income taxes | $ | 6,322 | $ | 7,826 | $ | 21,155 | $ | 6,322 | ||||||||
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Cash paid during the period for interest | $ | 785 | $ | 1,726 | $ | 462 | $ | 785 | ||||||||
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The accompanying notes are an integral part of these financial statements.
Page 5
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
FOR THE SIX MONTHS ENDED NOVEMBER 30, 20172018
(UNAUDITED)
Shares | Amount | Accumulated other comprehensive loss | Accumulated deficit | Total | 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 | |||||||||||||||||||||||||||||
Balance, May 31, 2018 | 3,994,545 | $ | 13,085,652 | $ | (536,307 | ) | $ | (3,033,689 | ) | $ | 9,515,656 | |||||||||||||||||||||||||||||
Stock-based compensation | 0 | 40,839 | 0 | 0 | 40,839 | 0 | 8,987 | 0 | 0 | 8,987 | ||||||||||||||||||||||||||||||
Net loss | 0 | 0 | 0 | (30,850 | ) | (30,850 | ) | 0 | 0 | 0 | (467,089 | ) | (467,089 | ) | ||||||||||||||||||||||||||
Other comprehensive loss | 0 | 0 | 440 | 0 | 440 | 0 | 0 | 73,737 | 0 | 73,737 | ||||||||||||||||||||||||||||||
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Balance, November 30, 2017 | 2,995,910 | $ | 10,690,126 | $ | (427,132 | ) | $ | (3,275,178 | ) | $ | 6,987,816 | |||||||||||||||||||||||||||||
Balance, November 30, 2018 | 3,994,545 | $ | 13,094,639 | $ | (462,570 | ) | $ | (3,500,778 | ) | $ | 9,131,291 | |||||||||||||||||||||||||||||
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The accompanying notes are an integral part of these financial statements.
Page 6
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 November 30, 20172018 and its results of operations and its cash flows for the periods presented. The consolidated balance sheet at May 31, 20172018 has been derived from the Annual Report on Form10-K for the fiscal year ended May 31, 2017.2018. The accompanying unaudited financial statements and related notes should be read in conjunction with the audited financial statements included in our Annual Report on Form10-K for the fiscal year ended May 31, 2017.2018. 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, 2018.2019.
Revenue Recognition
On June 1, 2018, the Company adopted Accounting Standards Update (ASU)No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” using the modified retrospective approach. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements or related disclosures.
The Company determines the amount of revenue it recognizes revenue forassociated with the transfer of each product or service using the five-step model provided by Topic 606. For sales and billing for freight charges uponof products or 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 salesmonitoring services to all customers, including manufacturermanufacturing representatives, distributors or their third-party customers, theseeach transaction is evaluated to determine whether there is approval and commitment from both the Company and the customer for the transaction; whether the rights of each party are specifically identified; whether the transaction has commercial substance; whether collectability from the customer is probable at the inception of the contract and whether the transaction amount is defined. If a transaction to sell products or provide monitoring services meets all of the above criteria, are metrevenue is recognized for the sales of product at the time of shipment or for monitoring services at the completion of the month in which monitoring services are provided.
The Company incurs commissions associated with the sales of products, which are accrued and expensed at the time the product is shipped. When other significant obligations remain afterThese amounts are recorded within general, administration and sales expense.
The Company also incurs costs related to shipping and handling of its products, the costs of which are delivered, revenue is recognized only after such obligations are fulfilled. In addition, judgments are required in evaluating the credit worthinessexpensed as incurred as a component of our customers. Credit is not extendedcost of sales. Shipping and handling fees billed to customers and revenue is notare 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 costat the time of sales accordingly.shipment as a component of net sales.
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.
Restricted Cash
Restricted cash consists of an amount received from a customer in December 2017 as part of anon-going contract. The timeline for services being provided under this contract has been extended and is expected to be completed during the second half of Fiscal 2019, at which time the restrictions on this payment will lapse.
Page 7
The following table provides a reconciliation of cash and cash equivalents and restricted cash as reported within the Consolidated Balance Sheets as of November 30, 2018 and May 31, 2018 to the sum of the same such amounts as shown in the Consolidated Statement of Cash Flows for the six months ended November 30, 2018:
November 30, 2018 | May 31, 2018 | |||||||
Cash and cash equivalents | $ | 1,299,886 | $ | 2,053,181 | ||||
Restricted cash | 56,583 | 58,352 | ||||||
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Total cash, cash equivalents, and restricted cash shown in the Consolidated Statement of Cash Flows | $ | 1,356,469 | $ | 2,111,533 | ||||
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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 Company’s 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 $72,326$101,304 and $32,572$95,207 as of November 30, 20172018 and May 31, 2017,2018, respectively.
Inventories
Inventories are valued at the lower of cost or net realizable value 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 November 30, 20172018 and May 31, 2017,2018, inventories consisted of:
November 30, 2017 | May 31, 2017 | |||||||
Raw materials | $ | 2,050,894 | $ | 1,773,368 | ||||
Work-in-process | 1,116,650 | 937,878 | ||||||
Finished goods | 1,624,541 | 1,493,477 | ||||||
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$ | 4,792,085 | $ | 4,204,723 | |||||
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Page 7
November 30, 2018 | May 31, 2018 | |||||||
Raw materials | $ | 2,822,375 | $ | 2,796,691 | ||||
Work-in-process | 1,045,126 | 1,009,424 | ||||||
Finished goods | 2,209,553 | 1,904,773 | ||||||
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$ | 6,077,054 | $ | 5,710,888 | |||||
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Property and Equipment
Property and equipment are stated at cost, less accumulated depreciation and amortization. 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 November 30, 20172018 and May 31, 2017,2018, property and equipment consisted of:
November 30, 2017 | May 31, 2017 | November 30, 2018 | May 31, 2018 | |||||||||||||
Land | $ | 299,000 | $ | 299,000 | $ | 299,000 | $ | 299,000 | ||||||||
Buildings and improvements | 1,814,524 | 1,814,524 | 1,814,524 | 1,814,524 | ||||||||||||
Furniture, fixtures and equipment | 1,252,844 | 1,246,346 | 1,257,784 | 1,252,598 | ||||||||||||
Vehicles | 44,704 | 44,704 | 44,704 | 44,704 | ||||||||||||
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3,411,072 | 3,404,574 | 3,416,012 | 3,410,826 | |||||||||||||
Less accumulated depreciation | (2,591,853 | ) | (2,539,350 | ) | (2,681,325 | ) | (2,639,911 | ) | ||||||||
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$ | 819,219 | $ | 865,224 | $ | 734,687 | $ | 770,915 | |||||||||
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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,February 2016, the FASB issued ASU 2015-14, which defersNo. 2016-02, Leases (Topic 842), in order to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the effective date ofbalance sheet for most leases previously classified as operating leases. The ASU 2014-09 by one year. The new guidance is effective for interim and annual reporting periodsrequired to be applied using a modified retrospective approach at the beginning after December 15, 2017. Early adoption is permitted as of the dateearliest period presented, with optional practical expedients. The FASB recently proposed an optional transition alternative, which would allow for application of the original effective date, for interim and annual reporting periodsguidance at the beginning after December 15, 2016. of the period in which it is adopted, rather than at the beginning of the earliest comparative period presented. The Company will adopt the new standard on June 1, 2019.
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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 comparedincluding reviewing the standard’s provisions and gathering and analyzing data to revenue recognition under existing guidance, as the Company expects that revenues generated will continue to be recognized upon the shipmentsupport further evaluation of products to customers.all real estate andnon-real estate leases. The Company will continue to evaluateis also evaluating the impactsimpact of the provisions of ASU 2014-09 throughaccounting standard on the date of adoption to ensure that preliminary conclusions continue to remain accurate. Additionally, the Company is assessing ASU 2014-09’s impact on its consolidatedCompany’s financial statement disclosures, systems, processes and currently expects to adopt ASU 2014-09 on June 1, 2018 using the modified retrospective method.controls.
Subsequent Event
On December 20, 2017, the Company completed its Subscription Rights Offering (the “Rights Offering”) in which 998,635 common shares were issued, resulting in gross proceeds to the Company of $2,496,588. Pursuant to the Rights Offering, the Company issued one right for each common share to shareholders of record as of November 27, 2017. Holders of the rights were entitled to purchase common shares by submitting three rights and $2.50 for each share to be purchased. The new shares were issued on December 27, 2017.
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 Company’s 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:
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• | 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 andpre-vesting and post-vesting forfeitures. |
• | 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 estimatepre-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 six months ended November 30, 2017 and 2016,2018, the Company has computed the value of all stock options granted using the Black-Scholes option pricing model. No options were issued duringmodel as prescribed by ASC Topic 718 using the six months ended November 30, 2017 and 2016.following assumptions:
Six Months Ended | ||||
November 30, 2018 | ||||
Risk-free interest rate | 3.1 | % | ||
Expected life | 6.0 years | |||
Expected volatility | 46.3 | % |
At November 30, 2017,2018, the Company had a total of 360,000334,999 outstanding stock options (218,330(289,164 vested and exercisable and 141,670 45,835non-vested) with a weighted average exercise price of $2.28.$2.38. The Company estimates that $50,171$17,386 will be recorded as additional stock-based compensation expense over a weighted-average period of 1.01.4 years for all options that were outstanding as of November 30, 2017,2018, 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 | 9.4 | 70,830 | $ | 1.70 | ||||||||||
15,000 | 2.53 | 5.8 | 15,000 | 2.53 | ||||||||||||
77,500 | 2.85 | 6.4 | 77,500 | 2.85 | ||||||||||||
55,000 | 3.65 | 3.5 | 55,000 | 3.65 | ||||||||||||
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360,000 | 2.28 | 7.7 | 218,330 | 2.66 | ||||||||||||
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Outstanding Options | Exercisable Options | |||||||||||||||||
Number of | Weighted Average Exercise Price | Weighted Average Remaining Contractual Life (yrs) | Number of Shares | Weighted Average Exercise Price | ||||||||||||||
162,499 | $ | 1.70 | 7.7 | 131,664 | $ | 1.70 | ||||||||||||
30,000 | 2.49 | 7.2 | 15,000 | 2.53 | ||||||||||||||
87,500 | 2.82 | 5.4 | 87,500 | 2.82 | ||||||||||||||
55,000 | 3.65 | 2.1 | 55,000 | 3.65 | ||||||||||||||
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334,999 | 2.38 | 6.1 | 289,164 | 2.45 | ||||||||||||||
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Options granted, exercised, and forfeited or canceled under the Company’s stock option plan during the three and six months ended November 30, 20172018 are summarized as follows:
Three Months Ended November 30, 2017 | Six Months Ended November 30, 2017 | |||||||||||||||
Number of Shares | Weighted Average Exercise Price | Number of Shares | Weighted Average Exercise Price | |||||||||||||
Options outstanding—beginning of period | 360,000 | $ | 2.28 | 360,000 | $ | 2.28 | ||||||||||
Options granted | 0 | 0 | 0 | 0 | ||||||||||||
Options exercised | 0 | 0 | 0 | 0 | ||||||||||||
Options forfeited/canceled | 0 | 0 | 0 | 0 | ||||||||||||
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Options outstanding—end of period | 360,000 | 2.28 | 360,000 | 2.28 | ||||||||||||
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Six Months Ended November 30, 2018 | ||||||||
Number of Shares | Weighted Average Exercise Price | |||||||
Options outstanding - beginning of period | 318,332 | $ | 2.36 | |||||
Options granted | 25,000 | 2.53 | ||||||
Options exercised | 0 | 0 | ||||||
Options forfeited/canceled | (8,333 | ) | 1.70 | |||||
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Options outstanding - end of period | 334,999 | 2.38 | ||||||
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NOTE 3:
EPS RECONCILIATION
Three Months Ended November 30, | Six Months Ended November 30, | Three Months Ended November 30, | Six Months Ended November 30, | |||||||||||||||||||||||||||||
2017 | 2016 | 2017 | 2016 | 2018 | 2017 | 2018 | 2017 | |||||||||||||||||||||||||
Weighted average shares (basic) | 2,995,910 | 2,995,910 | 2,995,910 | 2,995,910 | 3,994,545 | 2,995,910 | 3,994,545 | 2,995,910 | ||||||||||||||||||||||||
Effect of dilutive stock options | 28,189 | 0 | 0 | 0 | 0 | 28,189 | 0 | 0 | ||||||||||||||||||||||||
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Weighted average shares (diluted) | 3,024,099 | 2,995,910 | 2,995,910 | 2,995,910 | 3,994,545 | 3,024,099 | 3,994,545 | 2,995,910 | ||||||||||||||||||||||||
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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.
Page 10
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 Company’s future operations will produce sufficient earnings to thatallow for the deferred tax asset canto 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 Company’s 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 enterprise’s 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 November 30, 20172018 and May 31, 2017.2018. 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 November 30, 20172018 and May 31, 2017.2018.
Several tax years are subject to examination by major tax jurisdictions. In the United States, federal tax years ended May 31, 20142015 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 ended May 31, 20142013 and after are subject to examination.
Effective Tax Rate
The effective tax rate on consolidated net loss was 72.2%2.8% for the six months ended November 30, 2017.2018. 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 20182019 will be approximately 11.4%9.8% due to the items noted above.
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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.
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Segment Information
Three Months Ended November 30, | Three Months Ended November 30, | |||||||||||||||||||||||||||||||
2017 | 2016 | 2018 | 2017 | |||||||||||||||||||||||||||||
Balancer | Measurement | Balancer | Measurement | |||||||||||||||||||||||||||||
Gross sales | $ | 2,639,442 | $ | 1,540,034 | $ | 1,612,330 | $ | 1,261,863 | ||||||||||||||||||||||||
Intercompany sales | (408,596 | ) | 0 | (214,664 | ) | (3,968 | ) | |||||||||||||||||||||||||
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| Balancer | Measurement | Balancer | Measurement | |||||||||||||||||||||||||
Net sales | $ | 2,230,846 | $ | 1,540,034 | $ | 1,397,666 | $ | 1,257,895 | $ | 2,345,480 | $ | 1,157,998 | $ | 2,230,846 | $ | 1,540,034 | ||||||||||||||||
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Operating income (loss) | $ | (88,986 | ) | $ | 189,765 | $ | (273,715 | ) | $ | (78,827 | ) | $ | (343,717 | ) | $ | 119,405 | $ | (88,986 | ) | $ | 189,765 | |||||||||||
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Depreciation expense | $ | 16,388 | $ | 9,361 | $ | 19,018 | $ | 9,390 | $ | 11,571 | $ | 8,999 | $ | 16,388 | $ | 9,361 | ||||||||||||||||
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Amortization expense | $ | 0 | $ | 26,146 | $ | 0 | $ | 27,882 | $ | 0 | $ | 26,146 | $ | 0 | $ | 26,146 | ||||||||||||||||
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Capital expenditures | $ | 889 | $ | 0 | $ | 0 | $ | 0 | $ | 267 | $ | 0 | $ | 889 | $ | 0 | ||||||||||||||||
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Six Months Ended November 30, | Six Months Ended November 30, | |||||||||||||||||||||||||||||||
2017 | 2016 | 2018 | 2017 | |||||||||||||||||||||||||||||
Balancer | Measurement | Balancer | Measurement | Balancer | Measurement | Balancer | Measurement | |||||||||||||||||||||||||
Gross sales | $ | 5,084,928 | $ | 2,553,285 | $ | 3,440,380 | $ | 2,605,917 | ||||||||||||||||||||||||
Intercompany sales | (783,685 | ) | 0 | (481,838 | ) | (16,366 | ) | |||||||||||||||||||||||||
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Net sales | $ | 4,301,243 | $ | 2,553,285 | $ | 2,958,542 | $ | 2,589,551 | $ | 4,539,812 | $ | 2,404,119 | $ | 4,301,243 | $ | 2,553,285 | ||||||||||||||||
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Operating income (loss) | $ | (300,766 | ) | $ | 256,263 | $ | (486,926 | ) | $ | 18,617 | $ | (606,218 | ) | $ | 268,104 | $ | (300,766 | ) | $ | 256,263 | ||||||||||||
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Depreciation expense | $ | 33,370 | $ | 18,983 | $ | 35,805 | $ | 18,867 | $ | 23,643 | $ | 17,998 | $ | 33,370 | $ | 18,983 | ||||||||||||||||
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Amortization expense | $ | 0 | $ | 52,292 | $ | 0 | $ | 55,765 | $ | 0 | $ | 52,292 | $ | 0 | $ | 52,292 | ||||||||||||||||
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Capital expenditures | $ | 8,467 | $ | 0 | $ | 44,587 | $ | 0 | $ | 5,517 | $ | 0 | $ | 8,467 | $ | 0 | ||||||||||||||||
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Geographic Information – Net Sales by Geographic Area
Three Months Ended November 30, | Six Months Ended November 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
North America | $ | 2,484,977 | $ | 1,788,495 | $ | 4,276,078 | $ | 3,742,857 | ||||||||
Europe | 457,036 | 327,494 | 974,899 | 650,906 | ||||||||||||
Asia | 795,483 | 449,859 | 1,544,905 | 948,479 | ||||||||||||
Other markets | 33,384 | 89,713 | 58,646 | 205,851 | ||||||||||||
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Total net sales | $ | 3,770,880 | $ | 2,655,561 | $ | 6,854,528 | $ | 5,548,093 | ||||||||
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Three Months Ended November 30, | Six Months Ended November 30, | |||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
North America | $ | 1,965,706 | $ | 2,484,977 | $ | 4,165,907 | $ | 4,276,078 | ||||||||
Europe | 505,788 | 457,036 | 879,251 | 974,899 | ||||||||||||
Asia | 977,175 | 795,483 | 1,801,951 | 1,544,905 | ||||||||||||
Other markets | 54,809 | 33,384 | 96,822 | 58,646 | ||||||||||||
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Total net sales | $ | 3,503,478 | $ | 3,770,880 | $ | 6,943,931 | $ | 6,854,528 | ||||||||
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Three Months Ended November 30, | ||||||||||||||||
2017 | 2016 | |||||||||||||||
United States | Europe | United States | Europe | |||||||||||||
Operating income (loss) | $ | 31,655 | 69,124 | $ | (311,302 | ) | (41,240 | ) | ||||||||
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Depreciation expense | $ | 25,749 | $ | 0 | $ | 28,408 | $ | 0 | ||||||||
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Amortization expense | $ | 26,146 | $ | 0 | $ | 27,882 | $ | 0 | ||||||||
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Capital expenditures | $ | 889 | $ | 0 | $ | 0 | $ | 0 | ||||||||
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Six Months Ended November 30, | ||||||||||||||||
2017 | 2016 | |||||||||||||||
United States | Europe | United States | Europe | |||||||||||||
Operating income (loss) | $ | (183,810 | ) | 139,307 | $ | (405,467 | ) | (62,842 | ) | |||||||
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Depreciation expense | $ | 52,353 | $ | 0 | $ | 54,672 | $ | 0 | ||||||||
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Amortization expense | $ | 52,292 | $ | 0 | $ | 55,765 | $ | 0 | ||||||||
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Capital expenditures | $ | 8,467 | $ | 0 | $ | 44,587 | $ | 0 | ||||||||
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Three Months Ended November 30, | ||||||||||||||||
2018 | 2017 | |||||||||||||||
United States (2) | Europe (1) | United States (2) | Europe (1) | |||||||||||||
Operating income (loss) | $ | (262,909 | ) | $ | 38,597 | $ | 31,655 | $ | 69,124 | |||||||
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Depreciation expense | $ | 20,570 | $ | 0 | $ | 25,749 | $ | 0 | ||||||||
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Amortization expense | $ | 26,146 | $ | 0 | $ | 26,146 | $ | 0 | ||||||||
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Capital expenditures | $ | 267 | $ | 0 | $ | 889 | $ | 0 | ||||||||
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Six Months Ended November 30, | ||||||||||||||||
2018 | 2017 | |||||||||||||||
United States (2) | Europe (1) | United States (2) | Europe (1) | |||||||||||||
Operating income (loss) | $ | (394,099 | ) | 55,985 | $ | (183,810 | ) | 139,307 | ||||||||
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Depreciation expense | $ | 41,641 | $ | 0 | $ | 52,353 | $ | 0 | ||||||||
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Amortization expense | $ | 52,292 | $ | 0 | $ | 52,292 | $ | 0 | ||||||||
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Capital expenditures | $ | 5,517 | $ | 0 | $ | 8,467 | $ | 0 | ||||||||
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Note – – Europe is defined as
(1) | “Europe” is defined in the above chart to include results from the European subsidiary, Schmitt Europe Ltd. |
(2) | “United States” is defined to include remainder of the results not included in the European subsidiary. |
Segment and Geographic Assets
November 30, 2017 | May 31, 2017 | November 30, 2018 | May 31, 2018 | |||||||||||||
Segment assets to total assets | ||||||||||||||||
Balancer | $ | 5,302,684 | $ | 4,791,100 | $ | 6,505,775 | $ | 6,461,974 | ||||||||
Measurement | 3,113,770 | 3,340,327 | 3,071,352 | 2,712,553 | ||||||||||||
Corporate assets | 587,700 | 874,917 | 1,360,904 | 2,111,533 | ||||||||||||
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Total assets | $ | 9,004,154 | $ | 9,006,344 | $ | 10,938,031 | $ | 11,286,060 | ||||||||
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Geographic assets to long-lived assets | ||||||||||||||||
United States | $ | 819,219 | $ | 865,224 | ||||||||||||
Europe | 0 | 0 | ||||||||||||||
United States (2) | $ | 734,687 | $ | 770,915 | ||||||||||||
Europe (1) | 0 | 0 | ||||||||||||||
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Total long-lived assets | $ | 819,219 | $ | 865,224 | $ | 734,687 | $ | 770,915 | ||||||||
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Geographic assets to total assets | ||||||||||||||||
United States | $ | 7,833,228 | $ | 8,149,507 | ||||||||||||
Europe | 1,170,926 | 856,837 | ||||||||||||||
United States (2) | $ | 9,748,277 | $ | 10,110,683 | ||||||||||||
Europe (1) | 1,189,754 | 1,175,377 | ||||||||||||||
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Total assets | $ | 9,004,154 | $ | 9,006,344 | $ | 10,938,031 | $ | 11,286,060 | ||||||||
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(1) | “Europe” includes assets held by the European subsidiary, Schmitt Europe Ltd. |
(2) | “United States” includes remainder of the assets not held by the European subsidiary. |
Page 1213
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
This Quarterly Report filed with the SEC on Form10-Q (the “Report”), including “Management’s 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 management’s current expectations, estimates, projections and assumptions about the Company’s 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,” “Management’s 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 Company’s 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. (the Company), an Oregon corporation, designs, manufactures and marketssells high precision test and measurement products for two main business segments: the Balancer segment and the Measurement segment. For the Balancer segment, the Company designs, manufactures and sells computer-controlled vibration detection, balancing and process control equipment (the Balancer segment) tosystems for 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)particularly for a variety of industrial applications worldwide.grinding machines. The Company sellsalso provides sales and markets its products inservice for Europe and Asia through its wholly owned subsidiary, Schmitt Europe Ltd.Limited (SEL), located in Coventry, England and through its sales representative office located in Shanghai, China. For the United Kingdom. TheMeasurement segment, the Company is organized intodesigns, manufacturers and sells products in two operating segments:core product lines: the Balancer segmentAcuity® product line, which includes laser and white light sensor distance, measurement and dimensional sizing products; and the Measurement segment.Xact® product line, which includes remote tank monitoring products that measure the fill levels of tanks holding propane, diesel and other tank-based liquids and the related monitoring services, which includes transmission of fill data from the tanks via satellite to a secure web site for display. The accompanying unaudited financial information should be read in conjunction with our Annual Report on Form10-K for the fiscal year ended May 31, 2017.2018.
“SBS,” “SMS,” “Acuity,” “Xact”, “Lasercheck” and “AccuProfile” are registered trademarks owned by the Company.
ForHighlights of the Three and Six Months Ended November 30, 2018
Balancer segment sales increased $114,634, or 5.1%, to $2,345,480 for the three months ended November 30, 2017, total sales increased $1,115,319, or 42.0%, to $3,770,880 from $2,655,561 in the three months ended November 30, 2016. For the six months ended November 30, 2017, total sales increased $1,306,435, or 23.5%, to $6,854,528 from $5,548,093 in the six months ended November 30, 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 $833,180, or 59.6%,2018 as compared to $2,230,846 for the three months ended November 30, 2017 compared2017. Balancer segment sales increased $238,569, or 5.5%, to $1,397,666$4,539,812 for the threesix months ended November 30, 2016. Balancer segment sales increased $1,342,701, or 45.4%,2018 as compared to $4,301,243 for the six months ended November 30, 2017 compared2017.
Measurement segment sales decreased $382,036, or 24.8%, to $2,958,542$1,157,998 for the sixthree months ended November 30, 2016.
The Measurement segment product lines consist of laser and white light distance measurement and dimensional sizing products and ultrasonic-based remote tank monitoring products for propane, diesel and other tank-based liquids. Total Measurement segment sales increased $282,139, or 22.4%,2018 as compared to $1,540,034 for the three months ended November 30, 2017 compared2017. Measurement segment sales decreased $149,166, or 5.8%, to $1,257,895$2,404,119 for the threesix months ended November 30, 2016. Total Measurement segment sales decreased $36,266, or 1.4%, to2018 from $2,553,285 for the six months ended November 30, 20172017.
Within the Measurement segment, Xact monitoring revenues continued to grow, increasing 19.0% for the three months ended November 30, 2018 compared to $2,589,551the three months ended November 30, 2017. Xact monitoring revenues increased 17.0% for the six months ended November 30, 2016.2018 as compared to the same period in the prior year.
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Operating expenses increased $240,251,decreased $37,784, or 17.3%2.3%, to $1,587,419 for the three months November 30, 2018 from $1,625,203 for the three months ended November 30, 2017, from $1,384,952and decreased $128,985, or 4.1%, to $3,041,019 for the threesix months ended November 30, 2016. General, administration and sales expenses increased $199,768, or 15.1%, to $1,524,443 for the three months ended November 30, 2017 from $1,324,675 for the same period in the prior year. Operating expenses increased $293,536, or 10.2%,2018 compared to $3,170,004 for the six months ended November 30, 2017 from $2,876,468 for2017. These results includenon-recurring 2018 proxy and reorganization expenses of $125,280 and $257,330 incurred during the six monthsthree-month andsix-month periods ended November 30, 2016. General, administration and sales expenses increased $255,443, or 9.3%, to $2,992,787 for the six months ended November 30, 2017 from $2,737,344 for2018, respectively, that were not incurred during the same periodperiods in the prior year.
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Net income was $103,248, or $0.03 per fully diluted share, for the three months ended November 30, 2017 as compared to net loss of $382,470, or $(0.13) per fully diluted share, for the three months ended November 30, 2016. For the six months ended November 30, 2017, net loss was $30,850, or $(0.01) per fully diluted share, as compared to net loss of $508,099, or $(0.17) per fully diluted share, for the six months ended November 30, 2016.
Critical Accounting Policies
There were no material changes in our critical accounting policies as disclosed in our Annual Report on Form10-K for the year ended May 31, 2017.2018, other than the adoption of Accounting Standards Update (ASU)No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” which the Company adopted on June 1, 2018. See Note 1 “Revenue Recognition” for further discussion and disclosures related to the adoption of ASUNo. 2014-09.
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Discussion of Operating Results
Three Months Ended | Three Months Ended | |||||||||||||||||||||||||||||||
November 30, 2017 | November 30, 2016 | November 30, 2018 | November 30, 2017 | |||||||||||||||||||||||||||||
Balancer sales | $ | 2,230,846 | 59.2 | % | $ | 1,397,666 | 52.6 | % | $ | 2,345,480 | 66.9 | % | $ | 2,230,846 | 59.2 | % | ||||||||||||||||
Measurement sales | 1,540,034 | 40.8 | % | 1,257,895 | 47.4 | % | 1,157,998 | 33.1 | % | 1,540,034 | 40.8 | % | ||||||||||||||||||||
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Total sales | 3,770,880 | 100.0 | % | 2,655,561 | 100.0 | % | ||||||||||||||||||||||||||
Total net sales | 3,503,478 | 100.0 | % | 3,770,880 | 100.0 | % | ||||||||||||||||||||||||||
Cost of sales | 2,044,898 | 54.2 | % | 1,623,151 | 61.1 | % | 2,140,371 | 61.1 | % | 2,044,898 | 54.2 | % | ||||||||||||||||||||
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Gross profit | 1,725,982 | 45.8 | % | 1,032,410 | 38.9 | % | 1,363,107 | 38.9 | % | 1,725,982 | 45.8 | % | ||||||||||||||||||||
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Operating expenses: | ||||||||||||||||||||||||||||||||
General, administration and sales | 1,524,443 | 40.4 | % | 1,324,675 | 49.9 | % | 1,539,495 | 43.9 | % | 1,524,443 | 40.4 | % | ||||||||||||||||||||
Research and development | 100,760 | 2.7 | % | 60,277 | 2.3 | % | 47,924 | 1.4 | % | 100,760 | 2.7 | % | ||||||||||||||||||||
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Total operating expenses | 1,625,203 | 43.1 | % | 1,384,952 | 52.2 | % | 1,587,419 | 45.3 | % | 1,625,203 | 43.1 | % | ||||||||||||||||||||
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Operating income (loss) | 100,779 | 2.7 | % | (352,542 | ) | -13.3 | % | (224,312 | ) | (6.4 | %) | 100,779 | 2.7 | % | ||||||||||||||||||
Other Income (loss), net | 9,078 | 0.2 | % | (23,578 | ) | -0.9 | % | |||||||||||||||||||||||||
Other income (expense), net | (24,596 | ) | (0.7 | %) | 9,078 | 0.2 | % | |||||||||||||||||||||||||
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Income (loss) before income taxes | 109,857 | 2.9 | % | (376,120 | ) | -14.2 | % | (248,908 | ) | (7.1 | %) | 109,857 | 2.9 | % | ||||||||||||||||||
Provision for income taxes | 6,609 | 0.2 | % | 6,350 | 0.2 | % | 6,362 | 0.2 | % | 6,609 | 0.2 | % | ||||||||||||||||||||
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Net income (loss) | $ | 103,248 | 2.7 | % | $ | (382,470 | ) | -14.4 | % | $ | (255,270 | ) | (7.3 | %) | $ | 103,248 | 2.7 | % | ||||||||||||||
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Six Months Ended | Six Months Ended | |||||||||||||||||||||||||||||||
November 30, 2017 | November 30, 2016 | November 30, 2018 | November 30, 2017 | |||||||||||||||||||||||||||||
Balancer sales | $ | 4,301,243 | 62.8 | % | $ | 2,958,542 | 53.3 | % | $ | 4,539,812 | 65.4 | % | $ | 4,301,243 | 62.8 | % | ||||||||||||||||
Measurement sales | 2,553,285 | 37.2 | % | 2,589,551 | 46.7 | % | 2,404,119 | 34.6 | % | 2,553,285 | 37.2 | % | ||||||||||||||||||||
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Total sales | 6,854,528 | 100.0 | % | 5,548,093 | 100.0 | % | ||||||||||||||||||||||||||
Total net sales | 6,943,931 | 100.0 | % | 6,854,528 | 100.0 | % | ||||||||||||||||||||||||||
Cost of sales | 3,729,027 | 54.4 | % | 3,139,934 | 56.6 | % | 4,241,026 | 61.1 | % | 3,729,027 | 54.4 | % | ||||||||||||||||||||
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Gross profit | 3,125,501 | 45.6 | % | 2,408,159 | 43.4 | % | 2,702,905 | 38.9 | % | 3,125,501 | 45.6 | % | ||||||||||||||||||||
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Operating expenses: | ||||||||||||||||||||||||||||||||
General, administration and sales | 2,992,787 | 43.7 | % | 2,737,344 | 49.3 | % | 2,944,858 | 42.4 | % | 2,992,787 | 43.7 | % | ||||||||||||||||||||
Research and development | 177,217 | 2.6 | % | 139,124 | 2.5 | % | 96,161 | 1.4 | % | 177,217 | 2.6 | % | ||||||||||||||||||||
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Total operating expenses | 3,170,004 | 46.2 | % | 2,876,468 | 51.8 | % | 3,041,019 | 43.8 | % | 3,170,004 | 46.2 | % | ||||||||||||||||||||
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Operating loss | (44,503 | ) | -0.6 | % | (468,309 | ) | -8.4 | % | (338,114 | ) | (4.9 | %) | (44,503 | ) | (0.6 | %) | ||||||||||||||||
Other income (loss), net | 26,621 | 0.4 | % | (25,411 | ) | -0.5 | % | |||||||||||||||||||||||||
Other income (expense), net | (116,247 | ) | (1.7 | %) | 26,621 | 0.4 | % | |||||||||||||||||||||||||
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Loss before income taxes | (17,882 | ) | -0.3 | % | (493,720 | ) | -8.9 | % | (454,361 | ) | (6.5 | %) | (17,882 | ) | (0.3 | %) | ||||||||||||||||
Provision for income taxes | 12,968 | 0.2 | % | 14,379 | 0.3 | % | 12,728 | 0.2 | % | 12,968 | 0.2 | % | ||||||||||||||||||||
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Net loss | $ | (30,850 | ) | -0.5 | % | $ | (508,099 | ) | -9.2 | % | $ | (467,089 | ) | (6.7 | %) | $ | (30,850 | ) | (0.5 | %) | ||||||||||||
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Net Sales – Sales inTotal net sales for the Company decreased $267,402, or 7.1%, to $3,503,478 for the three months ended November 30, 2018 from $3,770,880 for the three months ended November 30, 2017. Total net sales for the Company increased $89,403, or 1.3%, to $6,943,931 for the six months ended November 30, 2018 from $6,854,528 for the six months ended November 30, 2017.
Balancer Segment – The Balancer segment focuses its sales efforts onend-users, rebuilders and original equipment manufacturers of grinding machines within the worldwide machine tool industry, with our primary target geographic markets being North America, Asia, and Europe. Balancer segment sales increased $833,180,$114,634, or 59.6%5.1%, to $2,345,480 for the three months ended November 30, 2018 as compared to $2,230,846 for the three months ended November 30, 20172017. Balancer segment sales increased $238,569, or 5.5%, to $4,539,812 for the six months ended November 30, 2018 as compared to $1,397,666$4,301,243 for the six months ended November 30, 2017. The increase in the three-month results was primarily attributed to stronger sales in Asia, offset by decreased sales in North America. The increase in thesix-month results was primarily driven by stronger sales in Asia, offset by decreased sales in both the North American and European markets.
Sales by geographic markets for the Balancer segment for the three and six months ended November 30, 2018 and 2017 were as follows:
Three Months Ended November 30, | ||||||||||||||||
2018 | 2017 | Variance | ||||||||||||||
North America | $ | 881,715 | $ | 1,062,738 | $ | (181,023 | ) | (17.0 | %) | |||||||
Asia | 929,507 | 630,672 | 298,835 | 47.4 | % | |||||||||||
Europe | 498,700 | 520,162 | (21,462 | ) | (4.1 | %) | ||||||||||
Other | 35,558 | 17,274 | 18,284 | 105.8 | % | |||||||||||
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Total Balancer segment sales | $ | 2,345,480 | $ | 2,230,846 | $ | 114,634 | 5.1 | % | ||||||||
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Six Months Ended November 30, | ||||||||||||||||
2018 | 2017 | Variance | ||||||||||||||
North America | $ | 1,872,596 | $ | 1,912,880 | $ | (40,284 | ) | (2.1 | %) | |||||||
Asia | 1,719,093 | 1,377,469 | 341,624 | 24.8 | % | |||||||||||
Europe | 870,552 | 968,358 | (97,806 | ) | (10.1 | %) | ||||||||||
Other | 77,571 | 42,536 | 35,035 | 82.4 | % | |||||||||||
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Total Balancer segment sales | $ | 4,539,812 | $ | 4,301,243 | $ | 238,569 | 5.5 | % | ||||||||
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The levels of demand for our Balancer products in any of these geographic markets cannot be forecasted with any certainty given current economic trends and the historical volatility experienced in this market.
Measurement Segment – The Measurement segment includes two main product lines: the Acuity® product line, which includes laser-based distance measurement and dimensional sizing laser sensors; and the Xact® product line, which includes ultrasonic-based remote tank monitoring products and related monitoring revenues. Measurement segment sales decreased $382,036, or 24.8%, to $1,157,998 for the three months ended November 30, 2016. This increase is attributed2018 as compared to stronger sales across our North America, Asia and Europe markets. Sales in North America increased $342,633, or 47.6%, sales in Asia increased $286,179, or 122.3%, and sales in Europe increased $208,701, or 49.5%,$1,540,034 for the three months ended November 30, 20172017. This decrease is primarily driven by aone-time significant contract in Acuity that was realized in the second quarter of Fiscal 2018. In addition, Xact product sales decreased in the second quarter of Fiscal 2019 as compared to the same period in the prior year as a result of the shift in timing of deliveries associated with one of Xact’s major customer’s planned deployment schedule. These decreases were offset by the increase in Xact monitoring revenues, which increased 19.0% as product previously sold was deployed and measurements began.
Measurement segment sales decreased $149,166, or 5.8%, to $2,404,119 for the six months ended November 30, 2018 from $2,553,285 for the six months ended November 30, 2017. This decrease is primarily driven by aone-time large contract in Acuity that was realized in the second quarter of Fiscal 2018 and softer sales that occurred for Acuity during the first quarter of Fiscal 2019 as compared to the same period in the prior year. SalesThis decrease was offset by the increases in other regions of the world decreased $4,333 for the three months ended November 30, 2017 as compared to the same quarterXact product sales and monitoring revenues. The increase in Xact product sales was driven by very strong results experienced in the prior year.
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Salesfirst quarter of Fiscal 2019. Xact monitoring revenues increased 17.0% in the Balancer segment increased $1,342,701, or 45.4%, to $4,301,243 for the six months ended November 30, 2017 as compared to $2,958,542 for the six months ended November 30, 2016. This increase is attributed to stronger sales across our North America, Asia and Europe markets. Sales in North America increased $389,667, or 25.6%, sales in Asia increased $489,234, or 102.1%, and sales in Europe increased $513,440, or 59.4%, for the six months ended November 30, 2017 as compared to the same period in the prior year. Sales in other regions of the world decreased $49,640 for the six months ended November 30, 2017 as compared to the same quarter in the prior year.
Sales in the Measurement segment increased $282,139, or 22.4%, to $1,540,034 for the three months ended November 30, 2017 compared to $1,257,895 for the three months ended November 30, 2016. Sales of our Acuity laser and white light sensor distance measurement and dimensional-sizing products increased $349,637, or 71.8%, for the three months ended November 30, 2017 as compared to the same quarter in the prior year. While sales of Xact products decreased $58,714, or 14.6%, during the quarter ended November 30, 20172018 as compared to the same period in the prior year revenues derived from the Xact monitoring services increased $32,539, or 12.6%, for the quarter ended November 30, 2017 as compared to the same quarter in the prior year. Sales of our Lasercheckproduct previously sold was deployed and SMS products decreased $41,323, or 37.9%, during the second quarter of fiscal 2018 as compared to the same period in the prior year. During fiscal 2017, the Company made the decision to no longer focus on and eventually phase out the SMS and Lasercheck product lines.measurements began.
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Sales inby product line for the Measurement segment decreased $36,266, or 1.4%, to $2,553,285 for the three and six months ended November 30, 2018 and 2017 compared to $2,589,551 for the six months ended November 30, 2016. Sales of our Acuity laser-based distance measurement and dimensional-sizing products increased $301,300, or 26.9%, in the six months ended November 30, 2017were as compared to the six months ended November 30, 2016. While sales of Xact products decreased $286,060, or 37.4%, during the six months ended November 30, 2017 as compared to the same period in the prior year, revenues derived from the Xact monitoring services increased $80,113, or 16.1%, during the first half of fiscal 2018 as compared to the same period in the prior year. Sales of our Lasercheck and SMS products decreased $131,619, or 63.6%, for the six months ended November 30, 2017 as compared to the same period in the prior year. During fiscal 2017, the Company made the decision to no longer focus on and eventually phase out the SMS and Lasercheck product lines.follows:
Three Months Ended November 30, | ||||||||||||||||
2018 | 2017 | Variance | ||||||||||||||
Acuity | $ | 541,978 | $ | 837,575 | $ | (295,597 | ) | (35.3 | %) | |||||||
Xact - product sales | 267,698 | 351,666 | (83,968 | ) | (23.9 | %) | ||||||||||
Xact - monitoring revenues | 337,125 | 283,226 | 53,899 | 19.0 | % | |||||||||||
Lasercheck | 0 | 46,950 | (46,950 | ) | (100.0 | %) | ||||||||||
SMS | 11,197 | 20,617 | (9,420 | ) | ||||||||||||
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Total Measurement segment sales | $ | 1,157,998 | $ | 1,540,034 | $ | (382,036 | ) | (24.8 | %) | |||||||
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Six Months Ended November 30, | ||||||||||||||||
2018 | 2017 | Variance | ||||||||||||||
Acuity | $ | 962,350 | $ | 1,420,210 | $ | (457,860 | ) | (32.2 | %) | |||||||
Xact - product sales | 776,524 | 499,686 | 276,838 | 55.4 | % | |||||||||||
Xact - monitoring revenues | 653,298 | 558,182 | 95,116 | 17.0 | % | |||||||||||
Lasercheck | 0 | 54,590 | (54,590 | ) | (100.0 | %) | ||||||||||
SMS | 11,947 | 20,617 | (8,670 | ) | ||||||||||||
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Total Measurement segment sales | $ | 2,404,119 | $ | 2,553,285 | $ | (149,166 | ) | (5.8 | %) | |||||||
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Gross marginMargin – Gross margin for the three months ended November 30, 2017 increased2018 decreased to 45.8%38.9% as compared to 38.9%45.8% for the three months ended November 30, 2016.2017. Gross margin for the six months ended November 30, 2017 increased2018 decreased to 45.6%38.9% as compared to 43.4%45.6% for the six months ended November 30, 2016.2017. The fluctuationsvariances in gross margin inbetween the three and six month periods ended November 30, 2017 as compared to the same three and six month periods in the prior fiscal year arepresented were influenced by shifts in the product sales mix from our five product lines in Fiscal 2017 to ouracross the Company’s three product lines, increases in overall product costs incurred due to prior purchasing practices, and the shift in SBS product sales from the European and North American markets into the Asian markets which we expect to moderate in the second half of Fiscal 2018.2019.
Operating expensesExpenses – Operating expenses increased $240,251,decreased $37,784, or 17.3%2.3%, to $1,587,419 for the three months November 30, 2018 from $1,625,203 for the three months ended November 30, 2017 as compared2017. The decrease in operating expenses was driven, in part, by the following:
Decrease in administrative wages and related payroll expenses in the amount of $77,479, or 20.4%, related to $1,384,952 forthe realigning of the management team which occurred in the second half of Fiscal 2018. The results include $42,500 innon-recurring 2018 proxy and reorganization expenses that were incurred during the three months ended November 30, 2016. General, administrative2018 that were not incurred during the same period in the prior year;
Decrease in research and sellingdevelopment expense in the amount of $52,836, or 52.4%, as a result of the shift of engineering resources towards support of existing product initiatives rather than research and development; and
Decrease in commission expense in the amount of $109,227, or 38.9%, as a result of the restructuring of the Company’s sales commissions programs that occurred during Fiscal 2018.
These decreases were offset by:
Increase in legal and other professional expenses increased $199,768,in the amount of $133,545, or 15.1%41.3%, forwhich includes $82,780 innon-recurring 2018 proxy and reorganization expenses that were incurred during the three months ended November 30, 2016 as compared to2018 that were not incurred during the same period in the prior year. These increases are primarily due to increasesyear; and
Increase in professional expenses, personnel expenses and sales commissions, offset by reductions in marketing and trade show expense andexpenses in the amount of $45,425, or 70.2%, related to the 2018 IMTS trade show, which only occurs every other sales-related travel and entertainment expense.year.
Operating expenses increased $293,536,decreased $128,985, or 10.2%4.1%, to $3,041,019 for the six months November 30, 2018 from $3,170,004 for the six months ended November 30, 2017 as compared2017. The decrease in operating expenses was driven, in part, by the following:
Decrease in administrative wages and related payroll expenses in the amount of $189,910, or 24.5%, related to $2,876,468 forthe realigning of the management team which occurred in the second half of Fiscal 2018. The results include $42,500 innon-recurring 2018 proxy and reorganization expenses that were incurred during the six months ended November 30, 2016. General, administrative2018 that were not incurred during the same period in the prior year;
Decrease in research and sellingdevelopment expense in the amount of $81,056, or 45.7%, as a result of the shift of engineering resources towards support of existing product initiatives rather than research and development; and
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Decrease in commission expense in the amount of $141,317, or 26.7%, as a result of the restructuring of the Company’s sales commissions programs that occurred during Fiscal 2018.
These decreases were offset by:
Increase in legal and other professional expenses increased $255,443,in the amount of $295,700, or 9.3%52.9%, forwhich includes $214,830 innon-recurring 2018 proxy and reorganization expenses that were incurred during the six months ended November 30, 2016 as compared to2018 that were not incurred during the same period in the prior year. These increases are primarily due to increasesyear; and
Increase in professional and personnel expense, offset by reductions in marketing and trade show expense andexpenses in the amount of $39,970, or 37.4%, related to the 2018 IMTS trade show, which only occurs every other sales-related travel and entertainment expense.year.
Other incomeIncome (Expense) – Other income (expense) consists of interest income (expense), foreign currency exchange gain (loss), interest income (expense) and other income (expense). Interest income (expense), net was $(65)Foreign currency exchange gains (losses) were $(31,250) and $26$9,747 for the three months ended November 30, 20172018 and 2016, respectively. Foreign currency exchange gains (losses) were $9,747 and $(23,007) for the three months ended November 30, 2017, and 2016, respectively. The shifts in the foreign currency exchange are related to significant fluctuations of foreign currencies against the U.S. dollar during the current period.period of Fiscal 2019. Interest income (expense), net was $6,640 and $(65) for the three months ended November 30, 2018 and 2017, respectively. Other income (expense) was $(604)$14 for the secondfirst quarter of fiscal 2017Fiscal 2019 as compared to $(597)$(605) for the same period in the prior year.
Other income consists of interest income (expense), foreignForeign currency exchange gain (loss)gains (losses) were $(130,122) and other income (expense). Interest income (expense), net was $32 and $(330)$27,188 for the six months ended November 30, 20172018 and 2016, respectively. Foreign currency exchange gains (losses) were $27,188 and $(42,006) for the six months ended November 30, 2017, and 2016, respectively. The shifts in the foreign currency exchange are related to significant fluctuations of foreign currencies against the U.S. dollar during the current period.period of Fiscal 2019. Interest income (expense), net was $13,847 and $33 for the six months ended November 30, 2018 and 2017, respectively. Other income (expense) was $(599)$28 for the first six monthshalf of fiscal 2018Fiscal 2019 as compared to $16,925$(600) for the same period in the prior year.
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Income taxesTaxes – The Company’s effective tax rate on consolidated net loss was 72.2%2.8% for the six months ended November 30, 2017.2018. 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 20182019 will be approximately 11.4%9.8% due to the items noted above.
Net income (loss)Income (Loss) – Net loss was $255,270, or $(0.06) per fully diluted share, for the three months ended November 30, 2018 as compared to net income wasof $103,248, or $0.03 per fully diluted share, for the three months ended November 30, 2017 as compared to net loss of $382,470, or $(0.13) per fully diluted share, for the three months ended November 30, 2016. For the six months ended November 30, 2017, net2017. Net loss was $30,850,$467,089, or $(0.01) per fully diluted share, as compared to net loss of $508,099, or $(0.17)$(0.12) per fully diluted share, for the six months ended November 30, 2016.2018 as compared to net loss of $30,850, or $(0.01) per fully diluted share, for the six months ended November 30, 2017.
LIQUIDITY AND CAPITAL RESOURCES
The Company’s working capital increaseddecreased $295,845 to $5,619,538$7,952,128 as of November 30, 20172018 as compared to $5,510,812$8,247,973 as of May 31, 2017. 2018.
Cash, and cash equivalents and restricted cash decreased $280,621$755,064 to $586,986$1,356,469 as of November 30, 20172018 from $867,607$2,111,533 as of May 31, 2017.
2018. Cash used in operating activities totaled $235,037$853,226 for the six months ended November 30, 20172018 as compared to cash used in operating activities of $433,674$235,037 for the six months ended November 30, 2016.2017. The change in cash used in operating activities was impacted, in part, by the difference in net loss of $30,850 for the six months ended November 30, 2017 as compared to net loss of $508,099 for the same period$467,089, along with increases in the prior year. Changes ininventories and accounts receivable, inventories, accounts payable and other accrued liabilities alsoprimarily impacted the total cash used in operating activities withfor the result ofsix months ended November 30, 2018. The changes in accounts receivable and inventories had the changes directly related tolargest impact on the timing of receipts and payments andcash used in operating activities for the targeted increases in inventory levels within our SBS and Acuity product lines.six-month period ended November 30, 2017.
At November 30, 2017,2018, the Company had accounts receivable of $2,150,655$2,184,906 as compared to $2,344,373$2,047,032 at May 31, 2017.2018. The decreaseincrease in accounts receivable of $193,718$137,874 was due to timing of receipts. Inventories increased $587,362$366,166 to $4,792,085$6,077,054 as of November 30, 20172018 as compared to $4,204,723$5,710,888 at May 31, 2017,2018, which is due primarily to the targeted increases in inventory levels within our SBS and AcuityXact product lines. At November 30, 2017,2018, total current liabilities decreased $12,619increased $36,336 to $2,016,338$1,806,740, as compared to $2,028,957$1,770,404 at May 31, 2017.2018. The decreaseincrease in current liabilities is primarily due to the timing of payments to our vendors, sales representatives and Company personnel and the decrease in accrued commissions.
On December 20, 2017, the Company completed its Subscription Rights Offering (the “Rights Offering”) in which 998,635 common shares were issued, resulting in gross proceeds to the Company of $2,496,588. Pursuant to the Rights Offering, the Company issued one right for each common share to shareholders of record as of November 27, 2017. Holders of the rights were entitled to purchase common shares by submitting three rights and $2.50 for each share to be purchased. The new shares were issued on December 27, 2017.personnel.
We believe that our existing cash and cash equivalents combined with the cash we anticipate to generategenerating from operating activities and the Rights Offering discussed above 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.
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Risk Factors
Please refer to the risk factors disclosed in Part I, Item 1A of our Annual Report on Form10-K for the fiscal year ended May 31, 20172018 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.
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Item 3. Quantitative and Qualitative Disclosures about Market Risk
There have been no material changes from the information previously reported under Item 7A of our Annual Report on Form10-K for the fiscal year ended May 31, 2017.2018.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
As of November 30, 2017,2018, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and the Company’s Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures, as such term is defined in Rule13a-15(e) of the Securities Exchange Act of 1934 (the “Exchange Act”). Based on the evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of the period covered by this Report, the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed in the Company’s Exchange Act reports is (1) recorded, processed, summarized and reported in a timely manner, and (2) accumulated and communicated to the Company’s management, including the Company’s Chief Executive Officer and the Company’s Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives, and management necessarily is required to use its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
Changes in Internal Control Over Financial Reporting
There has been no change in the Company’s internal control over financial reporting that occurred during the Company’s fiscal quarter ended November 30, 20172018 that has materially affected, or is reasonably likely to materially affect, such internal control over financial reporting.
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On January 8, 2019, Schmitt Industries, Inc. (the “Company”) was served with a complaint filed by North American Satellite Corp., Insite Platform Partners, and Rick Humphreys (collectively, the “Plaintiffs”) in the Circuit Court of the State of Oregon against the Company. The complaint makes various allegations specific to patent infringement, tortious interference, unfair competition, conspiracy, conspiracy to induce breach of contract, and conversion, with the total amount of $10,000,000 being sought by the Plaintiffs. The Company believes the complaint is without merit and intends to defend the claim vigorously.
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Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
SCHMITT INDUSTRIES, INC. | ||||||
(Registrant) | ||||||
Date: January 11, | /s/ Ann M. Ferguson | |||||
Ann M. Ferguson, Chief Financial Officer and Treasurer | ||||||
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