Item 1.
|
Financial Statements
|
SCHMITT INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
February 29, 2016
|
|
|
May 31, 2015
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
1,135,365
|
|
|
$
|
1,795,654
|
|
Accounts receivable, net
|
|
|
1,984,806
|
|
|
|
2,660,426
|
|
Inventories
|
|
|
4,774,992
|
|
|
|
4,557,567
|
|
Prepaid expenses
|
|
|
131,375
|
|
|
|
153,970
|
|
Income taxes receivable
|
|
|
1,343
|
|
|
|
1,029
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,027,881
|
|
|
|
9,168,646
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
995,780
|
|
|
|
1,110,878
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other assets
|
|
|
|
|
|
|
|
|
Intangible assets, net
|
|
|
740,764
|
|
|
|
824,411
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$
|
9,764,425
|
|
|
$
|
11,103,935
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES & STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
642,648
|
|
|
$
|
834,002
|
|
Accrued commissions
|
|
|
284,836
|
|
|
|
284,944
|
|
Accrued payroll liabilities
|
|
|
129,217
|
|
|
|
140,872
|
|
Other accrued liabilities
|
|
|
275,335
|
|
|
|
355,513
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
1,332,036
|
|
|
|
1,615,331
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity
|
|
|
|
|
|
|
|
|
Common stock, no par value, 20,000,000 shares authorized, 2,995,910 shares issued and outstanding
at February 29, 2016 and May 31, 2015
|
|
|
10,559,644
|
|
|
|
10,511,324
|
|
Accumulated other comprehensive loss
|
|
|
(421,725
|
)
|
|
|
(366,945
|
)
|
Accumulated deficit
|
|
|
(1,705,530
|
)
|
|
|
(655,775
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
8,432,389
|
|
|
|
9,488,604
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
|
|
$
|
9,764,425
|
|
|
$
|
11,103,935
|
|
|
|
|
|
|
|
|
|
|
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 AND NINE MONTHS ENDED FEBRUARY 29, 2016 AND FEBRUARY 28, 2015
(UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
February 29, 2016
|
|
|
February 28, 2015
|
|
|
February 29, 2016
|
|
|
February 28, 2015
|
|
|
|
|
|
|
Net sales
|
|
$
|
2,528,465
|
|
|
$
|
3,010,618
|
|
|
$
|
8,706,618
|
|
|
$
|
9,211,410
|
|
Cost of sales
|
|
|
1,465,104
|
|
|
|
1,660,256
|
|
|
|
4,924,355
|
|
|
|
4,843,303
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
1,063,361
|
|
|
|
1,350,362
|
|
|
|
3,782,263
|
|
|
|
4,368,107
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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|
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Operating expenses:
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
General, administration and sales
|
|
|
1,405,632
|
|
|
|
1,405,140
|
|
|
|
4,525,149
|
|
|
|
4,243,492
|
|
Research and development
|
|
|
68,023
|
|
|
|
95,730
|
|
|
|
227,435
|
|
|
|
292,825
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
1,473,655
|
|
|
|
1,500,870
|
|
|
|
4,752,584
|
|
|
|
4,536,317
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(410,294
|
)
|
|
|
(150,508
|
)
|
|
|
(970,321
|
)
|
|
|
(168,210
|
)
|
|
|
|
|
|
Other loss, net
|
|
|
(34,117
|
)
|
|
|
(15,578
|
)
|
|
|
(59,128
|
)
|
|
|
(11,181
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
|
(444,411
|
)
|
|
|
(166,086
|
)
|
|
|
(1,029,449
|
)
|
|
|
(179,391
|
)
|
|
|
|
|
|
Provision for income taxes
|
|
|
6,495
|
|
|
|
2,285
|
|
|
|
20,306
|
|
|
|
7,037
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(450,906
|
)
|
|
$
|
(168,371
|
)
|
|
$
|
(1,049,755
|
)
|
|
$
|
(186,428
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.15
|
)
|
|
$
|
(0.06
|
)
|
|
$
|
(0.35
|
)
|
|
$
|
(0.06
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares, basic
|
|
|
2,995,910
|
|
|
|
2,995,910
|
|
|
|
2,995,910
|
|
|
|
2,995,910
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
(0.15
|
)
|
|
$
|
(0.06
|
)
|
|
$
|
(0.35
|
)
|
|
$
|
(0.06
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares, diluted
|
|
|
2,995,910
|
|
|
|
2,995,910
|
|
|
|
2,995,910
|
|
|
|
2,995,910
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(450,906
|
)
|
|
$
|
(168,371
|
)
|
|
$
|
(1,049,755
|
)
|
|
$
|
(186,428
|
)
|
Foreign currency translation adjustment
|
|
|
(39,107
|
)
|
|
|
(36,239
|
)
|
|
|
(54,780
|
)
|
|
|
(115,148
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
$
|
(490,013
|
)
|
|
$
|
(204,610
|
)
|
|
$
|
(1,104,535
|
)
|
|
$
|
(301,576
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial statements.
Page 4
SCHMITT INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED FEBRUARY 29, 2016 AND FEBRUARY 28, 2015
(UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
February 29, 2016
|
|
|
February 28, 2015
|
|
Cash flows relating to operating activities
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(1,049,755
|
)
|
|
$
|
(186,428
|
)
|
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
187,614
|
|
|
|
201,982
|
|
Gain on sale of property and equipment
|
|
|
(299
|
)
|
|
|
0
|
|
Stock based compensation
|
|
|
48,320
|
|
|
|
49,713
|
|
(Increase) decrease in:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
647,856
|
|
|
|
(244,823
|
)
|
Inventories
|
|
|
(260,379
|
)
|
|
|
50,305
|
|
Prepaid expenses
|
|
|
20,707
|
|
|
|
(15,192
|
)
|
Income taxes receivable
|
|
|
(314
|
)
|
|
|
(190
|
)
|
Increase (decrease) in:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
|
(185,115
|
)
|
|
|
95,133
|
|
Accrued liabilities
|
|
|
(87,380
|
)
|
|
|
285,074
|
|
Income taxes payable
|
|
|
0
|
|
|
|
(210
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
|
(678,745
|
)
|
|
|
235,364
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows relating to investing activities
|
|
|
|
|
|
|
|
|
Proceeds from sale of property and equipment
|
|
|
14,950
|
|
|
|
0
|
|
Purchases of property and equipment
|
|
|
(3,520
|
)
|
|
|
(18,933
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
11,430
|
|
|
|
(18,933
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of foreign exchange translation on cash
|
|
|
7,026
|
|
|
|
(74,432
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents
|
|
|
(660,289
|
)
|
|
|
141,999
|
|
|
|
|
Cash and cash equivalents, beginning of period
|
|
|
1,795,654
|
|
|
|
1,510,565
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
1,135,365
|
|
|
$
|
1,652,564
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information
|
|
|
|
|
|
|
|
|
Cash paid during the period for income taxes
|
|
$
|
20,620
|
|
|
$
|
7,427
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the period for interest
|
|
$
|
2,025
|
|
|
$
|
2,709
|
|
|
|
|
|
|
|
|
|
|
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 NINE MONTHS ENDED FEBRUARY 29, 2016
(UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Accumulated
other
comprehensive
loss
|
|
|
Accumulated
deficit
|
|
|
Total
|
|
|
|
|
|
|
|
Balance, May 31, 2015
|
|
|
2,995,910
|
|
|
$
|
10,511,324
|
|
|
$
|
(366,945
|
)
|
|
$
|
(655,775
|
)
|
|
$
|
9,488,604
|
|
Stock-based compensation
|
|
|
0
|
|
|
|
48,320
|
|
|
|
0
|
|
|
|
0
|
|
|
|
48,320
|
|
Net loss
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
(1,049,755
|
)
|
|
|
(1,049,755
|
)
|
Other comprehensive loss
|
|
|
0
|
|
|
|
0
|
|
|
|
(54,780
|
)
|
|
|
0
|
|
|
|
(54,780
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, February 29, 2016
|
|
|
2,995,910
|
|
|
$
|
10,559,644
|
|
|
$
|
(421,725
|
)
|
|
$
|
(1,705,530
|
)
|
|
$
|
8,432,389
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 February 29, 2016 and its
results of operations and its cash flows for the periods presented. The consolidated balance sheet at May 31, 2015 has been derived from the Annual Report on Form 10-K for the fiscal year ended May 31, 2015. 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, 2015. 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, 2016.
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.
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 $14,774 and $56,370 as of February 29, 2016 and May 31, 2015, 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 February 29, 2016 and May 31, 2015, inventories consisted of:
|
|
|
|
|
|
|
|
|
|
|
February 29, 2016
|
|
|
May 31, 2015
|
|
Raw materials
|
|
$
|
2,058,153
|
|
|
$
|
1,845,037
|
|
Work-in-process
|
|
|
1,031,223
|
|
|
|
836,346
|
|
Finished goods
|
|
|
1,685,616
|
|
|
|
1,876,184
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,774,992
|
|
|
$
|
4,557,567
|
|
|
|
|
|
|
|
|
|
|
Page 7
Property and Equipment
Property and equipment are stated at cost less 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 February 29, 2016 and May 31, 2015, property and equipment consisted of:
|
|
|
|
|
|
|
|
|
|
|
February 29, 2016
|
|
|
May 31, 2015
|
|
Land
|
|
$
|
299,000
|
|
|
$
|
299,000
|
|
Buildings and improvements
|
|
|
1,814,524
|
|
|
|
1,814,524
|
|
Furniture, fixtures and equipment
|
|
|
1,343,612
|
|
|
|
1,381,691
|
|
Vehicles
|
|
|
96,587
|
|
|
|
96,587
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,553,723
|
|
|
|
3,591,802
|
|
Less accumulated depreciation
|
|
|
(2,557,943
|
)
|
|
|
(2,480,924
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
995,780
|
|
|
$
|
1,110,878
|
|
|
|
|
|
|
|
|
|
|
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.
|
|
|
|
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 nine months ended February 29, 2016 and
February 28, 2015, the Company has computed the value of all stock options granted using the Black-Scholes option pricing model. No options were granted during the nine months ended February 29, 2016. 87,500 options were granted during the
nine months ended February 28, 2015.
Page 8
At February 29, 2016, the Company had a total of 327,500 outstanding stock options (249,168 vested and
exercisable and 78,332 non-vested) with a weighted average exercise price of $3.65. The Company estimates that $36,578 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 February 29, 2016, 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
|
|
|
35,000
|
|
|
$
|
2.53
|
|
|
|
7.6
|
|
|
|
23,333
|
|
|
$
|
2.53
|
|
|
112,500
|
|
|
|
2.84
|
|
|
|
8.3
|
|
|
|
45,835
|
|
|
|
2.85
|
|
|
130,000
|
|
|
|
3.65
|
|
|
|
5.3
|
|
|
|
130,000
|
|
|
|
3.65
|
|
|
50,000
|
|
|
|
6.25
|
|
|
|
2.3
|
|
|
|
50,000
|
|
|
|
6.25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
327,500
|
|
|
|
3.65
|
|
|
|
6.1
|
|
|
|
249,168
|
|
|
|
3.92
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options granted, exercised, and forfeited or canceled under the Companys stock option plan during the three and nine
months ended February 29, 2016 are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
February 29, 2016
|
|
|
Nine Months Ended
February 29, 2016
|
|
|
|
Number of
Shares
|
|
|
Weighted
Average
Exercise Price
|
|
|
Number of
Shares
|
|
|
Weighted
Average
Exercise Price
|
|
Options outstanding - beginning of period
|
|
|
332,500
|
|
|
$
|
3.68
|
|
|
|
332,500
|
|
|
$
|
3.68
|
|
|
|
|
|
|
Options granted
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Options exercised
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Options forfeited/canceled
|
|
|
(5,000
|
)
|
|
|
5.80
|
|
|
|
(5,000
|
)
|
|
|
5.80
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding - end of period
|
|
|
327,500
|
|
|
|
3.65
|
|
|
|
327,500
|
|
|
|
3.65
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 3:
EPS RECONCILIATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
February 29, 2016
|
|
|
February 28, 2015
|
|
|
February 29, 2016
|
|
|
February 28, 2015
|
|
Weighted average shares (basic)
|
|
|
2,995,910
|
|
|
|
2,995,910
|
|
|
|
2,995,910
|
|
|
|
2,995,910
|
|
|
|
|
|
|
Effect of dilutive stock options
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares (diluted)
|
|
|
2,995,910
|
|
|
|
2,995,910
|
|
|
|
2,995,910
|
|
|
|
2,995,910
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic loss per share is computed using the weighted average number of common shares outstanding. Diluted 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 9
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.
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 February 29, 2016 and May 31, 2015. 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 February 29, 2016 and May 31, 2015.
Several tax years are subject to examination by major tax jurisdictions. In the United States, federal tax years for Fiscal 2012 and after are subject to
examination. In the United Kingdom, tax years for Fiscal 2012 and after are subject to examination. In Canada, tax years for Fiscal 2005 and after are subject to examination.
Effective Tax Rate
The effective tax rate on
consolidated net loss was 2.0% for the nine months ended February 29, 2016. 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 2016 will be approximately 2.3% due to the items noted above.
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.
Page 10
Segment Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
February 29, 2016
|
|
|
February 28, 2015
|
|
|
|
Balancer
|
|
|
Measurement
|
|
|
Balancer
|
|
|
Measurement
|
|
Gross sales
|
|
$
|
1,670,316
|
|
|
$
|
1,248,769
|
|
|
$
|
2,269,691
|
|
|
$
|
1,108,449
|
|
Intercompany sales
|
|
|
(389,844
|
)
|
|
|
(776
|
)
|
|
|
(366,209
|
)
|
|
|
(1,313
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
1,280,472
|
|
|
$
|
1,247,993
|
|
|
$
|
1,903,482
|
|
|
$
|
1,107,136
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
$
|
(348,631
|
)
|
|
$
|
(61,663
|
)
|
|
$
|
(127,375
|
)
|
|
$
|
(23,133
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense
|
|
$
|
23,057
|
|
|
$
|
9,477
|
|
|
$
|
23,271
|
|
|
$
|
10,879
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense
|
|
$
|
0
|
|
|
$
|
27,882
|
|
|
$
|
0
|
|
|
$
|
27,882
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
$
|
3,520
|
|
|
$
|
0
|
|
|
$
|
5,883
|
|
|
$
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
February 29, 2016
|
|
|
February 28, 2015
|
|
|
|
Balancer
|
|
|
Measurement
|
|
|
Balancer
|
|
|
Measurement
|
|
Gross sales
|
|
$
|
6,089,441
|
|
|
$
|
3,622,681
|
|
|
$
|
6,537,038
|
|
|
$
|
3,517,884
|
|
Intercompany sales
|
|
|
(1,000,745
|
)
|
|
|
(4,759
|
)
|
|
|
(870,537
|
)
|
|
|
27,025
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
5,088,696
|
|
|
$
|
3,617,922
|
|
|
$
|
5,666,501
|
|
|
$
|
3,544,909
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
$
|
(684,196
|
)
|
|
$
|
(286,125
|
)
|
|
$
|
(237,357
|
)
|
|
$
|
69,147
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense
|
|
$
|
74,103
|
|
|
$
|
29,864
|
|
|
$
|
77,543
|
|
|
$
|
33,090
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense
|
|
$
|
0
|
|
|
$
|
83,647
|
|
|
$
|
0
|
|
|
$
|
91,349
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
$
|
3,520
|
|
|
$
|
0
|
|
|
$
|
18,933
|
|
|
$
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Geographic Information Net Sales by Geographic Area
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
February 29,
2016
|
|
|
February 28,
2015
|
|
|
February 29,
2016
|
|
|
February 28,
2015
|
|
North America
|
|
$
|
1,776,511
|
|
|
$
|
1,894,564
|
|
|
$
|
5,944,433
|
|
|
$
|
5,713,638
|
|
Europe
|
|
|
238,553
|
|
|
|
226,011
|
|
|
|
923,275
|
|
|
|
852,561
|
|
Asia
|
|
|
467,508
|
|
|
|
807,875
|
|
|
|
1,688,064
|
|
|
|
2,435,357
|
|
Other markets
|
|
|
45,893
|
|
|
|
82,168
|
|
|
|
150,846
|
|
|
|
209,854
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net sales
|
|
$
|
2,528,465
|
|
|
$
|
3,010,618
|
|
|
$
|
8,706,618
|
|
|
$
|
9,211,410
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
February 29, 2016
|
|
|
February 28, 2015
|
|
|
|
United States
|
|
|
Europe
|
|
|
United States
|
|
|
Europe
|
|
Operating loss
|
|
$
|
(336,999
|
)
|
|
$
|
(73,295
|
)
|
|
$
|
(115,502
|
)
|
|
$
|
(35,006
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense
|
|
$
|
32,534
|
|
|
$
|
0
|
|
|
$
|
34,150
|
|
|
$
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense
|
|
$
|
27,882
|
|
|
$
|
0
|
|
|
$
|
27,882
|
|
|
$
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
$
|
3,520
|
|
|
$
|
0
|
|
|
$
|
5,883
|
|
|
$
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
February 29, 2016
|
|
|
February 28, 2015
|
|
|
|
United States
|
|
|
Europe
|
|
|
United States
|
|
|
Europe
|
|
Operating loss
|
|
$
|
(836,741
|
)
|
|
$
|
(133,580
|
)
|
|
$
|
(151,969
|
)
|
|
$
|
(16,241
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense
|
|
$
|
103,967
|
|
|
$
|
0
|
|
|
$
|
110,633
|
|
|
$
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense
|
|
$
|
83,647
|
|
|
$
|
0
|
|
|
$
|
91,349
|
|
|
$
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
$
|
3,520
|
|
|
$
|
0
|
|
|
$
|
18,933
|
|
|
$
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note Europe is defined as the European subsidiary, Schmitt Europe, Ltd.
Page 11
Segment and Geographic Assets
|
|
|
|
|
|
|
|
|
|
|
February 29, 2016
|
|
|
May 31, 2015
|
|
Segment assets to total assets
|
|
|
|
|
|
|
|
|
Balancer
|
|
$
|
4,689,503
|
|
|
$
|
5,059,567
|
|
Measurement
|
|
|
3,938,214
|
|
|
|
4,247,684
|
|
Corporate assets
|
|
|
1,136,708
|
|
|
|
1,796,684
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
9,764,425
|
|
|
$
|
11,103,935
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Geographic assets to long-lived assets
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
995,780
|
|
|
$
|
1,110,878
|
|
Europe
|
|
|
0
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
Total long-lived assets
|
|
$
|
995,780
|
|
|
$
|
1,110,878
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Geographic assets to total assets
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
8,712,243
|
|
|
$
|
10,107,523
|
|
Europe
|
|
|
1,052,182
|
|
|
|
996,412
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
9,764,425
|
|
|
$
|
11,103,935
|
|
|
|
|
|
|
|
|
|
|
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, 2015.
SBS, SMS, Acuity, Xact, Lasercheck and AccuProfile are registered trademarks owned by
the Company.
For the three months ended February 29, 2016, total sales decreased $482,153, or 16.0%, to $2,528,465 from $3,010,618 in the three
months ended February 28, 2015. For the nine months ended February 29, 2016, total sales decreased $504,792, or 5.5%, to $8,706,618 from $9,211,410 in the nine months ended February 28, 2015.
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 decreased $623,010, or 32.7%, to $1,280,472 for the three months ended February 29, 2016 compared to $1,903,482 for the three months ended February 28, 2015,
primarily attributed to a significant decline in sales into China and North America for the quarter. Balancer segment sales decreased $577,805, or 10.2%, to $5,088,696 for the nine months ended February 29, 2016 compared to $5,666,501 for the
nine months ended February 28, 2015. The decrease in worldwide balancer sales for the nine month period ended February 29, 2016 is primarily attributed to a significant decline in sales into China and decreased sales into other parts of
Asia and Europe.
The Measurement segment product line consists of SMS® and Lasercheck® laser-based surface microroughness measurement system,
Acuity® laser-based distance measurement and dimensional sizing laser sensors, and Xact® ultrasonic-based remote tank monitoring products. Total Measurement segment sales increased $140,857, or 12.7%, to $1,247,993 for the three months ended
February 29, 2016 compared to $1,107,136 for the three months ended February 28, 2015. The increase is primarily due to increased sales in our Acuity product line. Total Measurement segment sales increased $73,013, or 2.1%, to $3,617,922
for the nine months ended February 29, 2016 compared to $3,544,909 for the nine months ended February 28, 2015, due to greater sales in the Acuity and Xact product lines, offset by lower sales in our SMS product line which included a CASI
sale in the nine months ended February 28, 2015 but did not include a CASI sale in the current fiscal year.
Page 13
Operating expenses decreased $27,215, or 1.8%, to $1,473,655 for the three months ended February 29, 2016
from $1,500,870 for the three months ended February 28, 2015. Operating expenses increased $216,267, or 4.8%, to $4,752,584 for the nine months ended February 29, 2016 from $4,536,317 for the nine months ended February 28, 2015.
General, administration and sales expenses increased $492 to $1,405,632 for the three months ended February 29, 2016 from $1,405,140 for the same period in the prior year. General, administration and sales expenses increased $281,657, or 6.6%,
to $4,525,149 for the nine months ended February 29, 2016 from $4,243,492 for the same period in the prior year.
Net loss was $450,906, or $(0.15)
per fully diluted share, for the three months ended February 29, 2016 as compared to net loss of $168,371, or $(0.06) per fully diluted share, for the three months ended February 28, 2015. Net loss was $1,049,755, or $(0.35) per fully
diluted share, for the nine months ended February 29, 2016 as compared to net loss of $186,428, or $(0.06) per fully diluted share, for the nine months ended February 28, 2015.
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, 2015.
Page 14
Discussion of Operating Results
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
February 29, 2016
|
|
|
February 28, 2015
|
|
|
|
|
|
|
Balancer sales
|
|
$
|
1,280,472
|
|
|
|
50.6
|
%
|
|
$
|
1,903,482
|
|
|
|
63.2
|
%
|
Measurement sales
|
|
|
1,247,993
|
|
|
|
49.4
|
%
|
|
|
1,107,136
|
|
|
|
36.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total sales
|
|
|
2,528,465
|
|
|
|
100.0
|
%
|
|
|
3,010,618
|
|
|
|
100.0
|
%
|
Cost of sales
|
|
|
1,465,104
|
|
|
|
57.9
|
%
|
|
|
1,660,256
|
|
|
|
55.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
1,063,361
|
|
|
|
42.1
|
%
|
|
|
1,350,362
|
|
|
|
44.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General, administration and sales
|
|
|
1,405,632
|
|
|
|
55.6
|
%
|
|
|
1,405,140
|
|
|
|
46.7
|
%
|
Research and development
|
|
|
68,023
|
|
|
|
2.7
|
%
|
|
|
95,730
|
|
|
|
3.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
1,473,655
|
|
|
|
58.3
|
%
|
|
|
1,500,870
|
|
|
|
49.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(410,294
|
)
|
|
|
-16.2
|
%
|
|
|
(150,508
|
)
|
|
|
-5.0
|
%
|
|
|
|
|
|
Other loss, net
|
|
|
(34,117
|
)
|
|
|
-1.3
|
%
|
|
|
(15,578
|
)
|
|
|
-0.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
|
(444,411
|
)
|
|
|
-17.6
|
%
|
|
|
(166,086
|
)
|
|
|
-5.5
|
%
|
|
|
|
|
|
Provision for income taxes
|
|
|
6,495
|
|
|
|
0.3
|
%
|
|
|
2,285
|
|
|
|
0.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(450,906
|
)
|
|
|
-17.8
|
%
|
|
$
|
(168,371
|
)
|
|
|
-5.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
February 29, 2016
|
|
|
February 28, 2015
|
|
|
|
|
|
|
Balancer sales
|
|
$
|
5,088,696
|
|
|
|
58.4
|
%
|
|
$
|
5,666,501
|
|
|
|
61.5
|
%
|
Measurement sales
|
|
|
3,617,922
|
|
|
|
41.6
|
%
|
|
|
3,544,909
|
|
|
|
38.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total sales
|
|
|
8,706,618
|
|
|
|
100.0
|
%
|
|
|
9,211,410
|
|
|
|
100.0
|
%
|
Cost of sales
|
|
|
4,924,355
|
|
|
|
56.6
|
%
|
|
|
4,843,303
|
|
|
|
52.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
3,782,263
|
|
|
|
43.4
|
%
|
|
|
4,368,107
|
|
|
|
47.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General, administration and sales
|
|
|
4,525,149
|
|
|
|
52.0
|
%
|
|
|
4,243,492
|
|
|
|
46.1
|
%
|
Research and development
|
|
|
227,435
|
|
|
|
2.6
|
%
|
|
|
292,825
|
|
|
|
3.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
4,752,584
|
|
|
|
54.6
|
%
|
|
|
4,536,317
|
|
|
|
49.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(970,321
|
)
|
|
|
-11.1
|
%
|
|
|
(168,210
|
)
|
|
|
-1.8
|
%
|
|
|
|
|
|
Other loss, net
|
|
|
(59,128
|
)
|
|
|
-0.7
|
%
|
|
|
(11,181
|
)
|
|
|
-0.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
|
(1,029,449
|
)
|
|
|
-11.8
|
%
|
|
|
(179,391
|
)
|
|
|
-1.9
|
%
|
|
|
|
|
|
Provision for income taxes
|
|
|
20,306
|
|
|
|
0.2
|
%
|
|
|
7,037
|
|
|
|
0.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(1,049,755
|
)
|
|
|
-12.1
|
%
|
|
$
|
(186,428
|
)
|
|
|
-2.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
Sales in the Balancer segment decreased $623,010, or 32.7%, to $1,280,472 for the three months ended
February 29, 2016 compared to $1,903,482 for the three months ended February 28, 2015. The decrease is primarily attributed due to a significant decline in sales into China and North America for the quarter. Sales in North America
decreased $289,990, or 32.0%, for the three months ended February 29, 2016 as compared to the three months ended February 28, 2015. China sales decreased $236,787, or 60.2%, for the three months ended February 29, 2016 as compared to
the three months ended February 28, 2015. Other Asia sales decreased $104,495, or 29.9%, in the three months ended February 29, 2016 compared to the same period in the prior year. Sales in other regions of the world decreased $37,767, or
54.1%, in the three months ended February 29, 2016 as compared to the same period in the prior year. These decreases were slightly offset by European sales which increased $46,029, or 25.1%, in the third quarter of Fiscal 2016 compared to the
third quarter of Fiscal 2015.
Page 15
Sales in the Balancer segment decreased $577,805, or 10.2%, to $5,088,696 for the nine months ended
February 29, 2016 compared to $5,666,501 for the nine months ended February 28, 2015. The decrease in worldwide balancer sales for the nine month period ended February 29, 2016 is primarily attributed to a significant decline in sales
into China and decreased sales into other parts of Asia and Europe. China sales decreased $470,673, or 37.9%, for the nine months ended February 29, 2016 as compared to the nine months ended February 28, 2015. Other Asia sales decreased
$79,384, or 9.0%, in the nine months ended February 29, 2016 compared to the same period in the prior year. European sales decreased $11,543, or 1.5%, in the first three quarters of Fiscal 2016 compared to the first three quarter of Fiscal
2015. Sales in other regions of the world decreased $63,558, or 47.2%, in the nine months ended February 29, 2016 as compared to the same period in the prior year. Sales in North America increased $47,353, or 1.8%, for the nine months ended
February 29, 2016 as compared to the nine months ended February 28, 2015. The levels of demand for our Balancer products in any of the geographic markets cannot be forecasted with any certainty given the recent volatility in the global
economy and the historical volatility experienced in these markets.
Sales in the Measurement segment increased $140,857, or 12.7%, to $1,247,993 in the
three months ended February 29, 2016 compared to $1,107,136 in the three months ended February 28, 2015. Sales of Acuity laser-based distance measurement and dimensional sizing products increased in the amount of $133,594, or 30.6%, for
the three months ended February 29, 2016 as compared to the same period in the prior year. Sales of SMS light-scatter laser-based surface measurement products in the three months ended February 29, 2016 increased $53,857, or 87.2%, as
compared to the same period in the prior year. Sales of Xact remote tank monitoring products and revenues from monitoring services also posted an increase of $11,037, or 2.2%, for the third quarter of Fiscal 2016 as compared to the same period in
the prior year. These increases were offset in part by decreases in sales of our Lasercheck products which decreased $57,631, or 55.0%, for the three months ended February 29, 2016 as compared to the same period in the prior year.
Sales in the Measurement segment increased $73,013, or 2.1%, to $3,617,922 in the nine months ended February 29, 2016 compared to $3,544,909 in the nine
months ended February 28, 2015. Sales of Acuity laser-based distance measurement and dimensional sizing products increased $412,449, or 28.0%, for the nine months ended February 29, 2016 as compared to the same period in the prior year. In
addition, sales of Xact remote tank monitoring products and revenues from monitoring services increased $64,631, or 5.5%, during the first three quarters of Fiscal 2016 as compared to the same period in the prior year. Sales of SMS and Lasercheck
light-scatter laser-based surface measurement products in the nine months ended February 29, 2016 decreased $404,067, or 45.3%, as compared to the same period in the prior year. Given the recent volatility in these markets, future sales of
laser-based measurement products cannot be forecasted with any certainty.
Gross margin
Gross margin for the three months ended
February 29, 2016 decreased to 42.1% as compared to 44.9% for the three months ended February 28, 2015. Gross margin for the nine months ended February 29, 2016 decreased to 43.4% as compared to 47.4% for the nine months ended
February 28, 2015. The overall decrease in gross margin in both the three and nine months periods ended February 29, 2016 as compared to the three and nine month ended February 28, 2015 is primarily influenced by shifts in the product
sales mix.
Operating expenses
Operating expenses decreased $27,215, or 1.8%, to $1,473,655 for the three months ended February 29,
2016 as compared to $1,500,870 for the three months ended February 28, 2015. General, administrative and sales expenses increased $492 for the three months ended February 29, 2016 as compared to the same period in the prior year with
increases in sales-related travel expense offset by reductions in sales commissions and professional, legal and accounting expenses. This increase in general, administrative and sales expense was offset by a decrease in spending of $27,707, or
28.9%, for research and development for the quarter ended February 29, 2016 as compared to the same quarter in the prior year.
Operating expenses
increased $216,267, or 4.8%, to $4,752,584 for the nine months ended February 29, 2016 as compared to $4,536,317 for the nine months ended February 28, 2015. General, administrative and sales expenses increased $281,657, or 6.6%, for the
nine months ended February 29, 2016 as compared to the same period in the prior year due to increases in sales commissions and personnel expense, increases in patent expenses and increases in sales-related travel and general office and
utilities costs offset by a reduction in trade show expenses. This increase was offset by a decrease in spending of $65,390, or 22.3%, for research and development for the first three quarters of Fiscal 2016 as compared to the same period in the
prior year.
Page 16
Other income
Other income consists of interest income (expense), foreign currency exchange gain
(loss) and other income (expense). Interest income (expense), net was $(260) and $(742) for the three months ended February 29, 2016 and February 28, 2015, respectively and $(1,293) and $(2,628) for the nine months ended February 29,
2016 and February 28, 2015, respectively. Foreign currency exchange gains (losses) were $(33,871) and $(14,848) for the three months ended February 29, 2016 and February 28, 2015, respectively and $(58,166) and $(8,593) for the nine
months ended February 29, 2016 and February 28, 2015, respectively. The shifts in the foreign currency exchange are related to fluctuations of foreign currencies against the U.S. dollar during the periods noted.
Income taxes
The Companys effective tax rate on consolidated net loss was 2.0% for the nine months ended February 29, 2016. 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 2016 will be approximately 2.3% due to the items noted above.
Net
loss
Net loss was $450,906, or $(0.15) per diluted share, for the three months ended February 29, 2016 as compared to a net loss of $168,371, or $(0.06) per diluted share, for the three months ended February 28, 2015. Net loss
was $1,049,755, or $(0.35) per diluted share, for the nine months ended February 29, 2016 as compared to a net loss of $186,428, or $(0.06) per diluted share, for the same period in the prior year. Net loss for the three months ended
February 29, 2016 is primarily due to decreases in balancer sales and the impact of shifts in product mix towards lower margin products offset by increased sales of products in the measurement segment and decreases in operating expenses. Net
loss for the nine months ended February 29, 2016 is primarily due to decreases in balancer sales, the impact of shifts in product mix towards lower margin products and increases in operating expenses offset in part by increases in sales of
measurement products.
LIQUIDITY AND CAPITAL RESOURCES
The Companys working capital decreased to $6,695,845 as of February 29, 2016 as compared to $7,553,315 as of May 31, 2015. Cash and cash
equivalents decreased $660,289 to $1,135,365 as of February 29, 2016 from $1,795,654 as of May 31, 2015.
Cash used in operating activities
totaled $678,745 for the nine months ended February 29, 2016 as compared to cash provided by operating activities of $235,364 for the nine months ended February 28, 2015. The change in cash used in operating activities was primarily
impacted by the net loss of $1,049,755 for the nine months ended February 29, 2016 as compared to net loss of $186,428 for the nine months ended February 28, 2015. Changes in accounts receivable, inventories and accounts payable and other
accrued liabilities also impacted the total cash provided by/used in operating activities and the changes are the result of timing of receipts and payments.
At February 29, 2016, the Company had accounts receivable of $1,984,806 as compared to $2,660,426 at May 31, 2015. The decrease in accounts
receivable of $675,620 was due to timing of receipts. Inventories increased $217,425 to $4,774,992 as of February 29, 2016 compared to $4,557,567 at May 31, 2015, which is due primarily to the timing of purchases across our product lines.
At February 29, 2016, total current liabilities decreased $283,295 to $1,332,036 as compared to $1,615,331 at May 31, 2015. The decrease in accounts payable and other accrued expenses is primarily due to the timing of payments to our
vendors and a decrease in accrued commissions.
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, 2015 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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