UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
x |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended: November 30, 2014
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)
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Oregon |
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93-1151989 |
(State or other jurisdiction of
incorporation or organization) |
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(IRS Employer
Identification Number) |
2765 NW Nicolai Street, Portland, Oregon 97210-1818
(Address of principal executive offices) (Zip Code)
(503) 227-7908
(Registrants telephone number, including area code)
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 x 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 Regulation S-T during the preceding 12 months (or for such
shorter period that the registrant was required to submit and post such files). Yes x
No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of accelerated filer, large accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (check
one):
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Large accelerated filer |
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¨ |
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Accelerated filer |
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¨ |
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Non-accelerated filer |
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¨ |
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Smaller reporting company |
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x |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act). Yes ¨ No x
The number of shares of each class of common stock outstanding as of December 31, 2014
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Common stock, no par value |
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2,995,910 |
SCHMITT INDUSTRIES, INC.
INDEX TO FORM 10-Q
Page 2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
SCHMITT INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
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November 30, 2014 |
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May 31, 2014 |
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ASSETS |
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Current assets |
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Cash and cash equivalents |
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$ |
1,707,481 |
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$ |
1,510,565 |
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Accounts receivable, net |
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2,540,227 |
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|
2,235,194 |
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Inventories |
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4,793,479 |
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4,789,822 |
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Prepaid expenses |
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|
110,870 |
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152,237 |
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Income taxes receivable |
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1,726 |
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|
1,339 |
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9,153,783 |
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8,689,157 |
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Property and equipment, net |
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1,128,160 |
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1,191,591 |
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Other assets |
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Intangible assets, net |
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880,177 |
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943,643 |
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TOTAL ASSETS |
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$ |
11,162,120 |
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$ |
10,824,391 |
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LIABILITIES & STOCKHOLDERS EQUITY |
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Current liabilities |
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Accounts payable |
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$ |
674,097 |
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$ |
512,219 |
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Accrued commissions |
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269,530 |
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204,772 |
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Accrued payroll liabilities |
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121,023 |
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127,035 |
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Other accrued liabilities |
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554,656 |
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366,848 |
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Income taxes payable |
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0 |
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|
210 |
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Total current liabilities |
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1,619,306 |
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1,211,084 |
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Stockholders equity |
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Common stock, no par value, 20,000,000 shares authorized, 2,995,910 shares issued and outstanding at November 30, 2014 and
May 31, 2014 |
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10,465,223 |
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10,438,750 |
|
Accumulated other comprehensive loss |
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(342,246 |
) |
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|
(263,337 |
) |
Accumulated deficit |
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(580,163 |
) |
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(562,106 |
) |
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Total stockholders equity |
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9,542,814 |
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9,613,307 |
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TOTAL LIABILITIES AND STOCKHOLDERS EQUITY |
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$ |
11,162,120 |
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$ |
10,824,391 |
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The accompanying notes are an integral part of these financial statements.
Page 3
SCHMITT INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
FOR THE THREE AND SIX MONTHS ENDED NOVEMBER 30, 2014 AND 2013
(UNAUDITED)
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Three Months Ended November 30, |
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Six Months Ended November 30, |
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2014 |
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2013 |
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2014 |
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2013 |
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Net sales |
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$ |
3,151,504 |
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$ |
3,143,052 |
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$ |
6,200,792 |
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$ |
6,042,499 |
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Cost of sales |
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1,597,326 |
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1,675,184 |
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3,183,047 |
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3,243,509 |
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Gross profit |
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1,554,178 |
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1,467,868 |
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3,017,745 |
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2,798,990 |
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Operating expenses: |
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General, administration and sales |
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1,500,328 |
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1,507,046 |
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2,838,352 |
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2,858,748 |
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Research and development |
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124,651 |
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112,096 |
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197,095 |
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238,860 |
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Total operating expenses |
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1,624,979 |
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1,619,142 |
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3,035,447 |
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3,097,608 |
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Operating loss |
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(70,801 |
) |
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(151,274 |
) |
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(17,702 |
) |
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(298,618 |
) |
Other income (loss), net |
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3,336 |
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(9,546 |
) |
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|
4,397 |
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(6,093 |
) |
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Loss before income taxes |
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(67,465 |
) |
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(160,820 |
) |
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(13,305 |
) |
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(304,711 |
) |
Provision for income taxes |
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2,375 |
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|
2,381 |
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4,752 |
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5,049 |
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Net loss |
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$ |
(69,840 |
) |
|
$ |
(163,201 |
) |
|
$ |
(18,057 |
) |
|
$ |
(309,760 |
) |
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Net loss per common share: |
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Basic |
|
$ |
(0.02 |
) |
|
$ |
(0.05 |
) |
|
$ |
(0.01 |
) |
|
$ |
(0.10 |
) |
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Weighted average number of common shares, basic |
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2,995,910 |
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2,990,910 |
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2,995,910 |
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2,990,910 |
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Diluted |
|
$ |
(0.02 |
) |
|
$ |
(0.05 |
) |
|
$ |
(0.01 |
) |
|
$ |
(0.10 |
) |
|
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|
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|
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Weighted average number of common shares, diluted |
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|
2,995,910 |
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|
|
2,990,910 |
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|
|
2,995,910 |
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|
|
2,990,910 |
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Comprehensive loss |
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Net loss |
|
$ |
(69,840 |
) |
|
$ |
(163,201 |
) |
|
$ |
(18,057 |
) |
|
$ |
(309,760 |
) |
Foreign currency translation adjustment |
|
|
(50,785 |
) |
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|
49,324 |
|
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(78,909 |
) |
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|
52,924 |
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Total comprehensive loss |
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$ |
(120,625 |
) |
|
$ |
(113,877 |
) |
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$ |
(96,966 |
) |
|
$ |
(256,836 |
) |
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The accompanying notes are an integral part of these financial statements.
Page 4
SCHMITT INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED NOVEMBER 30, 2014 AND 2013
(UNAUDITED)
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Six Months Ended November 30, |
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2014 |
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2013 |
|
Cash flows relating to operating activities |
|
|
|
|
|
|
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|
Net loss |
|
$ |
(18,057 |
) |
|
$ |
(309,760 |
) |
Adjustments to reconcile net loss to net cash provided by (used in) operating activities: |
|
|
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|
|
|
|
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Depreciation and amortization |
|
|
139,950 |
|
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|
175,304 |
|
Stock based compensation |
|
|
26,473 |
|
|
|
24,932 |
|
(Increase) decrease in: |
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Accounts receivable |
|
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(327,467 |
) |
|
|
(171,220 |
) |
Inventories |
|
|
(21,292 |
) |
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|
410,457 |
|
Prepaid expenses |
|
|
40,062 |
|
|
|
89,619 |
|
Income taxes receivable |
|
|
(387 |
) |
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|
26,486 |
|
Increase (decrease) in: |
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Accounts payable |
|
|
165,338 |
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|
|
(376,035 |
) |
Accrued liabilities and customer deposits |
|
|
250,603 |
|
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|
(73,194 |
) |
Income taxes payable |
|
|
(210 |
) |
|
|
0 |
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities |
|
|
255,013 |
|
|
|
(203,411 |
) |
|
|
|
|
|
|
|
|
|
Cash flows relating to investing activities |
|
|
|
|
|
|
|
|
Purchases of property and equipment |
|
|
(13,050 |
) |
|
|
(1,436 |
) |
|
|
|
|
|
|
|
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|
Net cash used in investing activities |
|
|
(13,050 |
) |
|
|
(1,436 |
) |
|
|
|
|
|
|
|
|
|
Cash flows relating to financing activities |
|
|
|
|
|
|
|
|
Increase in line of credit |
|
|
0 |
|
|
|
400,000 |
|
|
|
|
|
|
|
|
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|
Net cash provided by financing activities |
|
|
0 |
|
|
|
400,000 |
|
|
|
|
|
|
|
|
|
|
Effect of foreign exchange translation on cash |
|
|
(45,047 |
) |
|
|
11,411 |
|
|
|
|
|
|
|
|
|
|
Increase in cash and cash equivalents |
|
|
196,916 |
|
|
|
206,564 |
|
Cash and cash equivalents, beginning of period |
|
|
1,510,565 |
|
|
|
1,909,071 |
|
|
|
|
|
|
|
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|
|
Cash and cash equivalents, end of period |
|
$ |
1,707,481 |
|
|
$ |
2,115,635 |
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information |
|
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|
|
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|
Cash paid during the period for income taxes |
|
$ |
5,353 |
|
|
$ |
5,064 |
|
|
|
|
|
|
|
|
|
|
Cash paid during the period for interest |
|
$ |
1,933 |
|
|
$ |
7,178 |
|
|
|
|
|
|
|
|
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|
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 SIX MONTHS ENDED NOVEMBER 30, 2014
(UNAUDITED)
|
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Shares |
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Amount |
|
|
Accumulated other comprehensive loss |
|
|
Accumulated deficit |
|
|
Total |
|
Balance, May 31, 2014 |
|
|
2,995,910 |
|
|
$ |
10,438,750 |
|
|
$ |
(263,337 |
) |
|
$ |
(562,106 |
) |
|
$ |
9,613,307 |
|
Stock-based compensation |
|
|
0 |
|
|
|
26,473 |
|
|
|
0 |
|
|
|
0 |
|
|
|
26,473 |
|
Net loss |
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
(18,057 |
) |
|
|
(18,057 |
) |
Other comprehensive loss |
|
|
0 |
|
|
|
0 |
|
|
|
(78,909 |
) |
|
|
0 |
|
|
|
(78,909 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, November 30, 2014 |
|
|
2,995,910 |
|
|
$ |
10,465,223 |
|
|
$ |
(342,246 |
) |
|
$ |
(580,163 |
) |
|
$ |
9,542,814 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 November 30, 2014 and its
results of operations and its cash flows for the periods presented. The consolidated balance sheet at May 31, 2014 has been derived from the Annual Report on Form 10-K for the fiscal year ended May 31, 2014. 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, 2014. 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, 2015.
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, accounts payable and the line of credit) 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 $59,321 and $63,297 as of November 30, 2014 and May 31, 2014, 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 November 30, 2014 and May 31, 2014, inventories consisted of:
|
|
|
|
|
|
|
|
|
|
|
November 30, 2014 |
|
|
May 31, 2014 |
|
Raw materials |
|
$ |
2,092,996 |
|
|
$ |
1,888,985 |
|
Work-in-process |
|
|
1,033,600 |
|
|
|
994,009 |
|
Finished goods |
|
|
1,666,883 |
|
|
|
1,906,828 |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
4,793,479 |
|
|
$ |
4,789,822 |
|
|
|
|
|
|
|
|
|
|
Page 7
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed using the straight-line method over estimated useful lives of three to seven years for
furniture, fixtures and equipment; three years for vehicles; and twenty-five years for buildings and improvements. As of November 30, 2014 and May 31, 2014, property and equipment consisted of:
|
|
|
|
|
|
|
|
|
|
|
November 30, 2014 |
|
|
May 31, 2014 |
|
Land |
|
$ |
299,000 |
|
|
$ |
299,000 |
|
Buildings and improvements |
|
|
1,814,524 |
|
|
|
1,805,951 |
|
Furniture, fixtures and equipment |
|
|
1,373,248 |
|
|
|
1,370,131 |
|
Vehicles |
|
|
86,838 |
|
|
|
86,838 |
|
|
|
|
|
|
|
|
|
|
|
|
|
3,573,610 |
|
|
|
3,561,920 |
|
Less accumulated depreciation |
|
|
(2,445,450 |
) |
|
|
(2,370,329 |
) |
|
|
|
|
|
|
|
|
|
|
|
$ |
1,128,160 |
|
|
$ |
1,191,591 |
|
|
|
|
|
|
|
|
|
|
Note 2:
LINE OF CREDIT
The Company had a $2
million bank line of credit secured by U.S. accounts receivable, inventories, general intangibles and a depository account. The line of credit was subject to certain covenant requirements if draws on the line were executed. Interest was payable at
the banks prime rate or LIBOR plus 2.0%. The term on the line of credit expired on September 1, 2014, and the Company chose not to renew the line. The outstanding balance on the line of credit was $0 at May 31, 2014.
Note 3:
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 zero. |
|
|
|
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.
|
Page 8
To determine stock-based compensation expense recognized for those options granted during the six months ended
November 30, 2014 and 2013, the Company has computed the value of all stock options granted using the Black-Scholes option pricing model. 87,500 and 35,000 options were issued during the six months ended November 30, 2014 and
November 30, 2013, respectively.
At November 30, 2014, the Company had a total of 332,500 outstanding stock options (205,002 vested and
exercisable and 127,498 non-vested) with a weighted average exercise price of $3.68. The Company estimates that $130,999 will be recorded as additional stock-based compensation expense for all options that were outstanding as of November 30,
2014, 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 |
|
|
|
8.9 |
|
|
|
11,668 |
|
|
$ |
2.53 |
|
112,500 |
|
|
2.84 |
|
|
|
9.5 |
|
|
|
8,334 |
|
|
|
2.90 |
|
130,000 |
|
|
3.65 |
|
|
|
6.5 |
|
|
|
130,000 |
|
|
|
3.65 |
|
5,000 |
|
|
5.80 |
|
|
|
0.9 |
|
|
|
5,000 |
|
|
|
5.80 |
|
50,000 |
|
|
6.25 |
|
|
|
3.5 |
|
|
|
50,000 |
|
|
|
6.25 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
332,500 |
|
|
3.68 |
|
|
|
7.2 |
|
|
|
205,002 |
|
|
|
4.24 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options granted, exercised, and forfeited or canceled under the Companys stock option plan during the three and six
months ended November 30, 2014 are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended November 30, 2014 |
|
|
Six Months Ended November 30, 2014 |
|
|
|
Number of Shares |
|
|
Weighted Average Exercise Price |
|
|
Number of Shares |
|
|
Weighted Average Exercise Price |
|
Options outstanding - beginning of period |
|
|
245,000 |
|
|
$ |
3.99 |
|
|
|
281,666 |
|
|
$ |
3.77 |
|
Options granted |
|
|
87,500 |
|
|
|
2.82 |
|
|
|
87,500 |
|
|
|
2.82 |
|
Options exercised |
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
Options forfeited/canceled |
|
|
0 |
|
|
|
0 |
|
|
|
(36,666 |
) |
|
|
2.30 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding - end of period |
|
|
332,500 |
|
|
|
3.68 |
|
|
|
332,500 |
|
|
|
3.68 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 4:
EPS RECONCILIATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended November 30, |
|
|
Six Months Ended November 30, |
|
|
|
2014 |
|
|
2013 |
|
|
2014 |
|
|
2013 |
|
Weighted average shares (basic) |
|
|
2,995,910 |
|
|
|
2,990,910 |
|
|
|
2,995,910 |
|
|
|
2,990,910 |
|
Effect of dilutive stock options |
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares (diluted) |
|
|
2,995,910 |
|
|
|
2,990,910 |
|
|
|
2,995,910 |
|
|
|
2,990,910 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share is computed using the weighted average number of common shares outstanding. Diluted earnings
(loss) per share is computed using the weighted average number of common shares outstanding, adjusted for
Page 9
dilutive incremental shares attributed to outstanding options to purchase common stock. Common stock equivalents for stock options are computed using the treasury stock method. In periods in
which a net loss is incurred, no common stock equivalents are included since they are antidilutive and as such all stock options outstanding are excluded from the computation of diluted net loss in those periods.
Note 5:
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 November 30, 2014 and May 31, 2014. 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, 2014 and May 31, 2014.
Several tax years are subject to examination by major tax jurisdictions. In the United States, federal tax years for Fiscal 2011 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 35.7% for the six months ended November 30, 2014. The effective tax rate on consolidated net income (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 2015 will be approximately 2.3% due to the items noted above.
Note 6:
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 November 30, |
|
|
|
2014 |
|
|
2013 |
|
|
|
Balancer |
|
|
Measurement |
|
|
Balancer |
|
|
Measurement |
|
Gross sales |
|
$ |
2,250,911 |
|
|
$ |
1,204,966 |
|
|
$ |
2,233,836 |
|
|
$ |
1,182,514 |
|
Intercompany sales |
|
|
(328,062 |
) |
|
|
23,689 |
|
|
|
(267,914 |
) |
|
|
(5,384 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
1,922,849 |
|
|
$ |
1,228,655 |
|
|
$ |
1,965,922 |
|
|
$ |
1,177,130 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss |
|
$ |
(37,759 |
) |
|
$ |
(33,042 |
) |
|
$ |
(127,360 |
) |
|
$ |
(23,914 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense |
|
$ |
24,471 |
|
|
$ |
10,983 |
|
|
$ |
37,848 |
|
|
$ |
15,218 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense |
|
$ |
0 |
|
|
$ |
29,808 |
|
|
$ |
0 |
|
|
$ |
33,658 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures |
|
$ |
4,477 |
|
|
$ |
0 |
|
|
$ |
1,093 |
|
|
$ |
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended November 30, |
|
|
|
2014 |
|
|
2013 |
|
|
|
Balancer |
|
|
Measurement |
|
|
Balancer |
|
|
Measurement |
|
Gross sales |
|
$ |
4,267,346 |
|
|
$ |
2,409,436 |
|
|
$ |
4,402,408 |
|
|
$ |
2,193,330 |
|
Intercompany sales |
|
|
(504,327 |
) |
|
|
28,337 |
|
|
|
(534,670 |
) |
|
|
(18,569 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
3,763,019 |
|
|
$ |
2,437,773 |
|
|
$ |
3,867,738 |
|
|
$ |
2,174,761 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
$ |
(109,583 |
) |
|
$ |
91,881 |
|
|
$ |
(240,376 |
) |
|
$ |
(58,242 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense |
|
$ |
54,272 |
|
|
$ |
22,211 |
|
|
$ |
76,147 |
|
|
$ |
31,840 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense |
|
$ |
0 |
|
|
$ |
63,467 |
|
|
$ |
0 |
|
|
$ |
67,317 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures |
|
$ |
13,050 |
|
|
$ |
0 |
|
|
$ |
1,436 |
|
|
$ |
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Geographic Information-Net Sales by Geographic Area
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended November 30, |
|
|
Six Months Ended November 30, |
|
|
|
2014 |
|
|
2013 |
|
|
2014 |
|
|
2013 |
|
North America |
|
$ |
1,800,419 |
|
|
$ |
1,811,421 |
|
|
$ |
3,819,073 |
|
|
$ |
3,692,273 |
|
Europe |
|
|
411,314 |
|
|
|
566,210 |
|
|
|
626,550 |
|
|
|
875,341 |
|
Asia |
|
|
863,045 |
|
|
|
695,396 |
|
|
|
1,627,482 |
|
|
|
1,373,181 |
|
Other markets |
|
|
76,726 |
|
|
|
70,025 |
|
|
|
127,687 |
|
|
|
101,704 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net sales |
|
$ |
3,151,504 |
|
|
$ |
3,143,052 |
|
|
$ |
6,200,792 |
|
|
$ |
6,042,499 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Page 11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended November 30, |
|
|
|
2014 |
|
|
2013 |
|
|
|
United States |
|
|
Europe |
|
|
United States |
|
|
Europe |
|
Operating income (loss) |
|
$ |
(102,407 |
) |
|
$ |
31,606 |
|
|
$ |
(127,149 |
) |
|
$ |
(24,125 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense |
|
$ |
35,454 |
|
|
$ |
0 |
|
|
$ |
53,066 |
|
|
$ |
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense |
|
$ |
29,808 |
|
|
$ |
0 |
|
|
$ |
33,658 |
|
|
$ |
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures |
|
$ |
4,477 |
|
|
$ |
0 |
|
|
$ |
1,093 |
|
|
$ |
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended November 30, |
|
|
|
2014 |
|
|
2013 |
|
|
|
United States |
|
|
Europe |
|
|
United States |
|
|
Europe |
|
Operating income (loss) |
|
$ |
(36,467 |
) |
|
$ |
18,765 |
|
|
$ |
(256,741 |
) |
|
$ |
(41,877 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense |
|
$ |
76,483 |
|
|
$ |
0 |
|
|
$ |
107,987 |
|
|
$ |
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense |
|
$ |
63,467 |
|
|
$ |
0 |
|
|
$ |
67,317 |
|
|
$ |
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures |
|
$ |
13,050 |
|
|
$ |
0 |
|
|
$ |
1,436 |
|
|
$ |
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note Europe is defined as the European subsidiary, Schmitt Europe, Ltd.
Segment and Geographic Assets
|
|
|
|
|
|
|
|
|
|
|
November 30, 2014 |
|
|
May 31, 2014 |
|
Segment assets to total assets |
|
|
|
|
|
|
|
|
Balancer |
|
$ |
4,975,158 |
|
|
$ |
4,863,423 |
|
Measurement |
|
|
4,477,755 |
|
|
|
4,449,064 |
|
Corporate assets |
|
|
1,709,207 |
|
|
|
1,511,904 |
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
11,162,120 |
|
|
$ |
10,824,391 |
|
|
|
|
|
|
|
|
|
|
Geographic assets to long-lived assets |
|
|
|
|
|
|
|
|
United States |
|
$ |
1,128,160 |
|
|
$ |
1,191,591 |
|
Europe |
|
|
0 |
|
|
|
0 |
|
|
|
|
|
|
|
|
|
|
Total long-lived assets |
|
$ |
1,128,160 |
|
|
$ |
1,191,591 |
|
|
|
|
|
|
|
|
|
|
Geographic assets to total assets |
|
|
|
|
|
|
|
|
United States |
|
$ |
10,126,585 |
|
|
$ |
10,090,242 |
|
Europe |
|
|
1,035,535 |
|
|
|
734,149 |
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
11,162,120 |
|
|
$ |
10,824,391 |
|
|
|
|
|
|
|
|
|
|
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, 2014.
SBS, SMS, Acuity, Xact, Lasercheck and
AccuProfile are registered trademarks owned by the Company.
For the three months ended November 30, 2014, total sales increased $8,452,
or 0.3%, to $3,151,504 from $3,143,052 in the three months ended November 30, 2013. For the six months ended November 30, 2014, total sales increased $158,293, or 2.6%, to $6,200,792 from $6,042,499 in the six months ended
November 30, 2013.
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, South America, Asia and Europe. Balancer segment sales decreased $43,073, or 2.2%, to $1,922,849 for the three months ended November 30, 2014 compared to $1,965,922 for the three
months ended November 30, 2013, primarily due to softer sales in North America, offset in part by increased sales into Asia and Europe. Balancer segment sales decreased $104,719, or 2.7%, to $3,763,019 for the six months ended November 30,
2014 compared to $3,867,738 for the six months ended November 30, 2013. The decrease in worldwide balancer sales for the six month period ended November 30, 2014 is attributed to softer sales in our North American market, offset in part by
increased sales in Asia.
The Measurement segment product line consists of laser-based light-scatter, distance measurement and dimensional sizing products
and ultrasonic-based remote tank monitoring products for propane and diesel tanks. Total Measurement segment sales increased $51,525, or 4.4%, to $1,228,655 for the three months ended November 30, 2014 compared to $1,177,130 for the three
months ended November 30, 2013, primarily due to an increase in revenues associated with the sales of remote tank monitoring products and related monitoring services, offset in part by a decrease in sales of our laser-based light-scatter
surface measurement products. Total Measurement segment sales increased $263,012, or 12.1%, to $2,437,773 for the six months ended November 30, 2014 compared to $2,174,761 for the six months ended November 30, 2013. The increase in
worldwide measurement system sales for the six month period ended November 30, 2014 is primarily due to the delivery and acceptance of one of our CASI® (Complete Angle Scatter Instrument)
Scatterometer during the first quarter of Fiscal 2015 and an increase in revenues associated with the sales of remote tank monitoring products and related monitoring services.
Page 13
Operating expenses increased $5,837, or 0.4%, to $1,624,979 for the three months ended November 30, 2014
from $1,619,142 for the three months ended November 30, 2013. Operating expenses decreased $62,161, or 2.0%, to $3,035,447 for the six months ended November 30, 2014 from $3,097,608 for the six months ended November 30, 2013. General,
administration and sales expenses decreased $6,718, or 0.4%, to $1,500,328 for the three months ended November 30, 2014 from $1,507,046 for the same period in the prior year. General, administration and sales expenses decreased $20,396, or
0.7%, to $2,838,352 for the six months ended November 30, 2014 from $2,858,748 for the same period in the prior year. Research and development expenses increased $12,555, or 11.2%, to $124,651 for the three months ended November 30, 2014
from $112,096 for the three months ended November 30, 2013. Research and development expenses decreased $41,765, or 17.5%, to $197,095 for the six months ended November 30, 2014 from $238,860 for the six months ended November 30,
2013.
Net loss was $69,840, or $(0.02) per fully diluted share, for the three months ended November 30, 2014 as compared to net loss of $163,201, or
$(0.05) per fully diluted share, for the three months ended November 30, 2013. Net loss was $18,057, or $(0.01) per fully diluted share, for the six months ended November 30, 2014 as compared to net loss of $309,760, or $(0.10) per fully
diluted share, for the six months ended November 30, 2013.
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, 2014.
Page 14
Discussion of Operating Results
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended November 30, |
|
|
|
2014 |
|
|
2013 |
|
Balancer sales |
|
$ |
1,922,849 |
|
|
|
61.0 |
% |
|
$ |
1,965,922 |
|
|
|
62.5 |
% |
Measurement sales |
|
|
1,228,655 |
|
|
|
39.0 |
% |
|
|
1,177,130 |
|
|
|
37.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total sales |
|
|
3,151,504 |
|
|
|
100.0 |
% |
|
|
3,143,052 |
|
|
|
100.0 |
% |
Cost of sales |
|
|
1,597,326 |
|
|
|
50.7 |
% |
|
|
1,675,184 |
|
|
|
53.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
1,554,178 |
|
|
|
49.3 |
% |
|
|
1,467,868 |
|
|
|
46.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General, administration and sales |
|
|
1,500,328 |
|
|
|
47.6 |
% |
|
|
1,507,046 |
|
|
|
47.9 |
% |
Research and development |
|
|
124,651 |
|
|
|
4.0 |
% |
|
|
112,096 |
|
|
|
3.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
1,624,979 |
|
|
|
51.6 |
% |
|
|
1,619,142 |
|
|
|
51.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss |
|
|
(70,801 |
) |
|
|
-2.2 |
% |
|
|
(151,274 |
) |
|
|
-4.8 |
% |
Other income (loss) |
|
|
3,336 |
|
|
|
0.1 |
% |
|
|
(9,546 |
) |
|
|
-0.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes |
|
|
(67,465 |
) |
|
|
-2.1 |
% |
|
|
(160,820 |
) |
|
|
-5.1 |
% |
Provision for income taxes |
|
|
2,375 |
|
|
|
0.1 |
% |
|
|
2,381 |
|
|
|
0.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(69,840 |
) |
|
|
-2.2 |
% |
|
$ |
(163,201 |
) |
|
|
-5.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended November 30, |
|
|
|
2014 |
|
|
2013 |
|
Balancer sales |
|
$ |
3,763,019 |
|
|
|
60.7 |
% |
|
$ |
3,867,738 |
|
|
|
64.0 |
% |
Measurement sales |
|
|
2,437,773 |
|
|
|
39.3 |
% |
|
|
2,174,761 |
|
|
|
36.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total sales |
|
|
6,200,792 |
|
|
|
100.0 |
% |
|
|
6,042,499 |
|
|
|
100.0 |
% |
Cost of sales |
|
|
3,183,047 |
|
|
|
51.3 |
% |
|
|
3,243,509 |
|
|
|
53.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
3,017,745 |
|
|
|
48.7 |
% |
|
|
2,798,990 |
|
|
|
46.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General, administration and sales |
|
|
2,838,352 |
|
|
|
45.8 |
% |
|
|
2,858,748 |
|
|
|
47.3 |
% |
Research and development |
|
|
197,095 |
|
|
|
3.2 |
% |
|
|
238,860 |
|
|
|
4.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
3,035,447 |
|
|
|
49.0 |
% |
|
|
3,097,608 |
|
|
|
51.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss |
|
|
(17,702 |
) |
|
|
-0.3 |
% |
|
|
(298,618 |
) |
|
|
-4.9 |
% |
Other income (loss) |
|
|
4,397 |
|
|
|
0.1 |
% |
|
|
(6,093 |
) |
|
|
-0.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes |
|
|
(13,305 |
) |
|
|
-0.2 |
% |
|
|
(304,711 |
) |
|
|
-5.0 |
% |
Provision for income taxes |
|
|
4,752 |
|
|
|
0.1 |
% |
|
|
5,049 |
|
|
|
0.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(18,057 |
) |
|
|
-0.3 |
% |
|
$ |
(309,760 |
) |
|
|
-5.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales Sales in the Balancer segment decreased $43,073, or 2.2%, to $1,922,849 for the three months ended
November 30, 2014 compared to $1,965,922 for the three months ended November 30, 2013. This decrease is primarily attributed to softer sales in our North America market, offset in part by increased sales in Asia and Europe. Sales in North
America decreased $182,279, or 17.9%, for the three months ended November 30, 2014 as compared to the three months ended November 30, 2013. Asia sales increased $98,889, or 17.2%, in the three months ended November 30, 2014 compared
to the same period in the prior year. European sales increased $68,928, or 21.4%, in the second quarter of Fiscal 2015 compared to the second quarter of Fiscal 2014. Sales in other regions of the world decreased $28,611, or 53.6%, in the second
quarter of Fiscal 2015 as compared to the same quarter in the prior year.
Page 15
Sales in the Balancer segment decreased $104,719, or 2.7%, to $3,763,019 for the six months ended
November 30, 2014 compared to $3,867,738 for the six months ended November 30, 2013. This decrease is primarily due to lower unit sales in North America, offset in part by increased sales into the Asia market. Sales in North America
decreased $288,481, or 14.3%, for the six months ended November 30, 2014 as compared to the six months ended November 30, 2013. Asia sales increased $152,487, or 12.4%, in the six months ended November 30, 2014 compared to the same
period in the prior year. European sales increased $33,792, or 6.1%, in the first half of Fiscal 2015 compared to the first half of Fiscal 2014. Sales in other regions of the world decreased $2,517, or 3.7%, in the six months ended November 30,
2014 as compared to the same period in the prior year. 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 $51,525, or 4.4%, to $1,228,655 in the three months ended
November 30, 2014 compared to $1,177,130 in the three months ended November 30, 2013. Sales of remote tank monitoring products and revenues from monitoring services increased $127,296, or 57.6%, to $348,454 during the second quarter of
Fiscal 2015 as compared to $221,158 for the same period in the prior year. Sales of light-scatter laser-based surface measurement products in the three months ended November 30, 2014 decreased $95,821, or 31.4%, as compared to the same period
in the prior year primarily due to the delivery and acceptance of one of our CASI® products during the quarter ended November 30, 2013. Sales of laser-based distance measurement and
dimensional sizing products were relatively flat as compared to the same period in the prior year, increasing $18,242, or 3.1%.
Sales in the Measurement
segment increased $263,012, or 12.1%, to $2,437,773 in the six months ended November 30, 2014 compared to $2,174,761 in the six months ended November 30, 2013. Sales of remote tank monitoring products and revenues from monitoring services
increased $142,061, or 26.7%, to $673,745 during the first half of Fiscal 2014 as compared to $531,684 for the same period in the prior year. Sales of light-scatter laser-based surface measurement products in the six months ended November 30,
2014 increased $265,249, or 74.1%, as compared to the same period in the prior year. These increases were offset by the decrease in sales of laser-based distance measurement and dimensional sizing products in the amount of $143,646, or 12.2%, for
the six months ended November 30, 2014 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 November 30, 2014 increased to 49.3% as compared to 46.7% for the three months ended
November 30, 2013. Gross margin for the six months ended November 30, 2014 increased to 48.7% as compared to 46.3% for the six months ended November 30, 2013. The overall increase in gross margin in both the three and six months
periods ended November 30, 2014 as compared to the three and six month periods in the first half of the prior fiscal year is primarily influenced by shifts in the product sales mix involving our five product lines.
Operating expenses Operating expenses increased $5,837, or 0.4%, to $1,624,979 for the three months ended November 30, 2014 as compared to
$1,619,142 for the three months ended November 30, 2013. General, administrative and selling expenses decreased $6,718, or 0.4%, for the three months ended November 30, 2014 as compared to the same period in the prior year primarily due to
increases in trade show expenses offset by reductions in professional fees and general office and utilities costs. Research and development expenses increased $12,555, or 11.2%, as compared to the same period in the prior year based on several new
development projects within our existing product lines occurring during the latter part of the second quarter of Fiscal 2015. Operating expenses decreased $62,161, or 2.0%, to $3,035,447 for the six months ended November 30, 2014 as compared to
$3,097,608 for the six months ended November 30, 2013. General, administrative and selling expenses decreased $20,396, or 0.7%, for the six months ended November 30, 2014 as compared to the same period in the prior year primarily due to
increases in trade show expenses offset by reductions in professional fees and general office and utilities costs. Research and development expenses decreased $41,765, or 17.5%, as compared to the same period in the prior year due to the completion
of development projects within our existing product lines in the first quarter offset by an increase in costs associated with several new development projects occurring during the latter part of the second quarter of Fiscal 2015.
Other income Other income consists of interest income (expense), foreign currency exchange gain (loss) and other income (expense). Interest
income (expense), net was $1,743 and $(5,120) for the three months ended November 30, 2014 and 2013, respectively and $(1,886) and $(6,803) for the six months ended November 30, 2014 and 2013, respectively. Foreign currency exchange gains
(losses) were $1,578 and $(3,979) for the three months ended November 30, 2014 and 2013, respectively and $6,255 and $1,157 for the six months ended November 30, 2014 and 2013, respectively. The shifts in the foreign currency exchange are
related to fluctuations of foreign currencies against the U.S. dollar during the current period.
Page 16
Income taxes The Companys effective tax rate on consolidated net loss was 35.7% for the six
months ended November 30, 2014. The effective tax rate on consolidated net income (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 2015 will be approximately 2.3% due to the items noted above
Net loss Net loss was $69,840, or $(0.02) per diluted share, for the three months ended November 30, 2014 as compared to a net loss of
$163,201, or $(0.05) per diluted share, for the three months ended November 30, 2013. Net loss for the second quarter of Fiscal 2015 decreased as compared to the same period in the prior year primarily due to shifts in product mix with
increased sales of higher margin products. Net loss was $18,057, or $(0.01) per diluted share, for the six months ended November 30, 2014 as compared to a net loss of $309,760, or $(0.10) per diluted share, for the same period in the prior
year. Net loss for the first half of Fiscal 2015 decreased as compared to the same period in the prior year primarily due to shifts in product mix with increased sales of higher margin products along with decreases in certain operating expenses.
LIQUIDITY AND CAPITAL RESOURCES
The Companys
working capital increased to $7,534,477 as of November 30, 2014 as compared to $7,478,073 as of May 31, 2014. Cash and cash equivalents increased $196,916 to $1,707,481 as of August 31, 2014 from $1,510,565 as of May 31, 2014.
Cash provided by operating activities totaled $255,013 for the six months ended November 30, 2014 as compared to cash used in operating activities
of $203,411 for the six months ended November 30, 2013. The increase in cash provided by operating activities was primarily impacted by the $18,057 in net loss for the first half of Fiscal 2015 as compared to $309,760 of net loss in the first
half of Fiscal 2014. Changes in accounts receivable and accounts payable and other accrued liabilities also impacted the total cash provided/used and the changes are the result of timing of receipts and payments.
At November 30, 2014, the Company had accounts receivable of $2,540,227 as compared to $2,235,194 at May 31, 2014. The increase in accounts
receivable of $305,033 was due to timing of receipts. Inventories increased $3,657 to $4,793,479 as of November 30, 2014 compared to $4,789,822 at May 31, 2014, which is due in part to a planned inventory purchase within the Xact® product line and targeted increases in our SBS product line, offset by decreases in inventories in our other product lines. At November 30, 2014, total current liabilities increased $408,222
to $1,619,306 as compared to $1,211,084 at May 31, 2014. The increase in accounts payable and other accrued expenses is primarily due to the timing of payments to our vendors and an increase in accrued commissions.
During the six months ended November 30, 2014, net cash used by investing activities was $13,050, which was for building improvements necessary for the
installation of manufacturing equipment being leased by the Company and purchase of office furniture.
The Company had a $2 million bank line of credit
secured by U.S. accounts receivable, inventories, general intangibles and a depository account. The line of credit was subject to certain covenant requirements if draws on the line were executed. Interest was payable at the banks prime rate or
LIBOR plus 2.0%. The term on the line of credit expired on September 1, 2014, and the Company chose not to renew the line. The outstanding balance on the line of credit was $0 at May 31, 2014.
We believe that our existing cash and cash equivalents combined with the cash we anticipate to generate from operating activities and financing available from
other sources 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, 2014 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.
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
Form 10-K for the fiscal year ended May 31, 2014.
Page 17
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
As of
November 30, 2014, the Company carried out an evaluation, under the supervision and with the participation of the Companys management, including the Companys Chief Executive Officer and the Companys Chief Financial Officer, of
the effectiveness of the design and operation of the Companys disclosure controls and procedures, as such term is defined in Rule 13a-15(e) of the Securities Exchange Act of 1934 (the Exchange Act). Based on the evaluation, the
Companys Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of the period covered by this Report, the Companys disclosure controls and procedures are effective to ensure that information required to be
disclosed in the Companys Exchange Act reports is (1) recorded, processed, summarized and reported in a timely manner, and (2) accumulated and communicated to the Companys management, including the Companys Chief
Executive Officer and the Companys 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 Companys internal control over financial reporting that occurred
during the Companys fiscal quarter ended November 30, 2014 that has materially affected, or is reasonably likely to materially affect, such internal control over financial reporting.
Page 18
PART II - OTHER INFORMATION
Item 6. Exhibits
|
|
|
Exhibit |
|
Description |
|
|
3.1 |
|
Second Restated Articles of Incorporation of Schmitt Industries, Inc. (the Company). Incorporated by reference to Exhibit 3(i) to the Companys Annual Report on Form 10-K for the fiscal year ended May 31,
1998. |
|
|
3.2 |
|
Second Restated Bylaws of the Company. Incorporated by reference to Exhibit 3(ii) to the Companys Annual Report on Form 10-K for the fiscal year ended May 31, 1998. |
|
|
4.1 |
|
See Exhibits 3.1 and 3.2 for provisions of the Articles of Incorporation and Bylaws defining the rights of security holders. |
|
|
31.1 |
|
Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
31.2 |
|
Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
32.1 |
|
Certification of Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|
|
101.INS |
|
XBRL Instance Document. |
|
|
101.SCH |
|
XBRL Taxonomy Extension Schema Document. |
|
|
101.CAL |
|
XBRL Taxonomy Extension Calculation Linkbase Document. |
|
|
101.LAB |
|
XBRL Taxonomy Extension Label Linkbase Document. |
|
|
101.PRE |
|
XBRL Taxonomy Extension Presentation Linkbase Document. |
|
|
101.DEF |
|
XBRL Taxonomy Extension Definition Linkbase Document. |
SIGNATURES
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. |
|
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(Registrant) |
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Date: January 13, 2015 |
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/s/ Ann M. Ferguson |
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Ann M. Ferguson, Chief Financial Officer and Treasurer |
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Page 19
Exhibit 31.1
CERTIFICATION PURSUANT TO
18
U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I,
James A. Fitzhenry, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Schmitt Industries, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The
registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined
in Exchange Act Rules 13-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or
caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or
caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrants disclosure controls
and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the
registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over
financial reporting; and
5. The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants
internal control over financial reporting.
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Date: January 13, 2015 |
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/s/ James A. Fitzhenry |
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James A. Fitzhenry, President and Chief Executive Officer |
Exhibit 31.2
CERTIFICATION PURSUANT TO
18
U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I,
Ann M. Ferguson, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Schmitt Industries, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The
registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined
in Exchange Act Rules 13-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or
caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or
caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrants disclosure controls
and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the
registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over
financial reporting; and
5. The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants
internal control over financial reporting.
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Date: January 13, 2015 |
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/s/ Ann M. Ferguson |
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Ann M. Ferguson, Chief Financial Officer and Treasurer |
Exhibit 32.1
CERTIFICATION PURSUANT TO
18
U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In
connection with the Quarterly Report of Schmitt Industries, Inc. (the Company) on Form 10-Q for the fiscal quarter ended November 30, 2014 as filed with the Securities and Exchange Commission on the date hereof (the
Report), we, James A. Fitzhenry and Ann M. Ferguson, President and Chief Executive Officer and Chief Financial Officer and Treasurer, respectively, of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to §
906 of the Sarbanes-Oxley Act of 2002, that to our knowledge:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934, as amended; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the Company.
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/s/ James A. Fitzhenry |
James A. Fitzhenry President and Chief
Executive Officer January 13, 2015 |
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/s/ Ann M. Ferguson |
Ann M. Ferguson |
January 13, 2015 |
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