SCHMITT INDUSTRIES, INC. Forward-Looking Statements
This Quarterly Report filed with theSEC on Form 10-Q (the "Report"), including "Management's Discussion and Analysis of Financial Condition and Results of Operations" in this Item 2, contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 regarding future events and the future results ofSchmitt Industries, Inc. and its consolidated subsidiaries (the "Company") that are based on management's current expectations, estimates, projections and assumptions about the Company's business. Words such as "expects," "anticipates," "intends," "plans," "believes," "sees," "estimates" and variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve risks, uncertainties and assumptions that are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking statements due to numerous factors, including, but not limited to, those discussed in the "Risk Factors," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and elsewhere in this Report as well as those discussed from time to time in the Company's otherSecurities 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
Schmitt Industries, Inc. ("Schmitt" or the "Company") designs, manufactures and sells high precision test and measurement products, solutions and services. As described under Note 8, onOctober 10, 2019 , the Company entered into an agreement to sell the Schmitt Dynamic Balance Systems ("SBS") business line toTosei Engineering Corp. andTosei America, Inc. for a purchase price of$10,500,000 in cash (the"SBS Transaction"). The transaction closed onNovember 22, 2019 and included certain assets held by theU.S. parent company and all the outstanding stock of theUK subsidiary,Schmitt Europe Limited . As a result, the financial position, results of operations, and cash flows relating to our SBS business line are reported as discontinued operations in the accompanying financial statements.
We provide the products and services through our Acuity® and Xact® Product lines:
• Through its wholly owned subsidiary,
the Company manufacturers and sells products in two core product lines,
Acuity and Xact:
• Acuity® sells products, solutions and services that includes laser and
white light sensor distance, measurement and dimensional sizing
products;
• Xact® product line includes ultrasonic-based remote tank monitoring
products and related monitoring revenues for markets in the Internet
of Things ("IoT") environment. The Xact products measure the fill
levels of tanks holding propane, diesel and other tank-based liquids
and the related monitoring services, which includestransmission of
fill data from the tanks via satellite to a secure web site for
display.
The accompanying unaudited financial information should be read in conjunction
with our Annual Report on Form 10-K for the fiscal year ended
Highlights of the Three and Six Months Ended
• Company revenue decreased
months ended
months ended
11.5%, to
compared to
decrease is attributable to a decline in XACT and Acuity product revenue.
Xact's services in the "Internet of Things" environment continued to grow
with monitoring revenue increasing 13.0% and 14.6% to $380,975 and
$748,816 , respectively, for the three months and six months ended
November 30, 2019 .
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• Gross margin decreased 3.9% to 37.7% for the three months ended
November 30, 2019 as compared to 41.6% for the three months ended
November 30, 2018 . The decrease in gross margin was primarily due tounrecoverable inventory costs. Gross margin increased 0.7% to 40.7% for
the six months ended
months ended
primarily influenced by favorable product mix shifts and the
of discontinued product line items with no offsetting cost of sales.
• Operating expenses increased $173,104 , or 21.0%, to $998,607 for the
three months ended November 30, 2019 from $825,503 for the three months
ended
for the six months ended
six months ended
ended November 30, 2019 , respectively, that are not expected to be
incurred in future periods.
• Net loss from continuing operations was
diluted share, for the three months ended
to net loss of
three months ended
per fully diluted share, for the six months ended
compared to net loss of
for the six months ended
Critical Accounting Policies
There were no material changes in our critical accounting policies as disclosed in our Annual Report on Form 10-K for the year endedMay 31, 2019 , other than the adoption of Accounting Standards Update (ASU) No. 2016-02, "Leases (Topic 842)" which the Company adopted onJune 1, 2019 . See Note 1 "Leases" for further discussion and disclosures related to the adoption of ASU No. 2016-02.
Discussion of Operating Results from Continuing Operations
Three Months Ended
November 30, 2019 November 30, 2018
Revenue 1,033,102 100.0 % 1,157,999 100.0 %
Cost of revenue 643,348 62.3 % 675,872 58.4 %
Gross profit 389,754 37.7 % 482,127 41.6 %
Operating expenses:
General, administration and sales 993,230 96.1 % 800,671 69.1 %
Research and development 5,377 0.5 % 24,832 2.1 %
Total operating expenses 998,607 96.7 % 825,503 71.3 %
Operating (loss) (608,853 ) -58.9 % (343,376 ) -29.7 %
Other income, net 5,356 0.5 % 6,006 0.5 %
(Loss) before income taxes (603,497 ) -58.4 % (337,370 ) -29.1 %
Provision for income taxes (4,439 ) -0.4 % 2,114 0.2 %
Net (loss) from continuing operations (599,058 ) -58.0 % (339,484 ) -29.3 %
Income from discontinued operations, including gain on sale, net of tax 5,117,005 495.3 % 84,212 7.3 % Net income (loss)$ 4,517,947 437.3 %$ (255,272 ) -22.0 % Page 17
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Six Months Ended
November 30, 2019 November 30, 2018
Revenue 2,127,879 100.0 % 2,404,121 100.0 %
Cost of sales 1,260,771 59.3 % 1,443,308 60.0 %
Gross profit 867,108 40.7 % 960,813 40.0 %
Operating expenses:
General, administration and sales 1,697,382 79.8 % 1,556,651 64.7 %
Research and development 8,463 0.4 % 47,408 2.0 %
Total operating expenses 1,705,845 80.2 % 1,604,059 66.7 %
Operating loss (838,737 ) -39.4 % (643,246 ) -26.8 %
Other income, net 9,723 0.5 % 12,776 0.5 %
Loss before income taxes (829,014 ) -39.0 % (630,470 ) -26.2 %
Provision for income taxes (7,829 ) -0.4 % 4,227 0.2 %
Net loss from continuing operations (821,185 ) -38.6 % (634,697 ) -26.4 %
Income from discontinued operations, including gain on sale, net of tax 5,509,010 258.9 % 167,608 7.0 % Net income (loss)$ 4,687,825 220.3 %$ (467,089 ) -19.4 % Company revenue decreased$124,897 or 10.8%, to$1,033,102 for the three months endedNovember 30, 2019 as compared to$1,157,999 inNovember 30, 2018 , primarily due to a 18.8% decrease in Xact product revenue and a 31.6% decrease in Acuity product revenue. Company revenue decreased$276,242 , or 11.5%, to$2,127,879 for the six months endedNovember 30, 2019 as compared to$2,404,121 inNovember 30, 2018 , primarily due to a 44.8% decrease in Xact product revenue and a 15.2% decrease in Acuity product revenue. Xact customers intermittently purchase Xact products based on their respective business needs and capital expenditure budgets, causing irregular product revenue over quarterly periods. Revenue by product line for three and six months endedNovember 30, 2019 and 2018 were as follows: Three Months Ended November 30, 2019 2018 Variance Acuity revenue$ 370,527 $ 541,978 $ (171,451 ) (31.6 %) Xact - product revenue 217,330 267,698 (50,368 ) (18.8 %) Xact - monitoring revenue 380,975 337,125 43,850 13.0 % Other revenue 64,270 11,198 53,072 473.9 % Total revenue$ 1,033,102 $
1,157,999 (124,897 ) (10.8 %)
Six Months Ended November 30,
2019 2018 Variance
Acuity $ 816,420 $ 962,350 $ (145,930 ) (15.2 %)
Xact - product sales 428,374 776,524 (348,150 ) (44.8 %)
Xact - monitoring revenues 748,816 653,298 95,518 14.6 %
Other revenue 134,269 11,949 122,320 1023.7 %
Total revenue $ 2,127,879 $ 2,404,121$ (276,242 ) (11.5 %) Page 18
-------------------------------------------------------------------------------- Gross Margin - Gross margin for the three months endedNovember 30, 2019 decreased to 37.7% as compared to 41.6% for the three months endedNovember 30, 2018 . The variances in gross margin between the periods presented were primarily due to unrecoverable inventory costs. Gross margin for the six months endedNovember 30, 2019 increased to 40.7% as compared to 40.0% for the six months endedNovember 30, 2018 . The variances in gross margin between the periods presented were primarily influenced by favorable product mix shifts, the$70,000 sale of discontinued product line items with no offsetting cost of sales. Operating Expenses - Operating expenses increased$173,104 , or 21.0%, to$998,607 for the three months endedNovember 30, 2019 from$825,503 for the three months endedNovember 30, 2018 . The increase in operating expenses for the three months endedNovember 30, 2019 is primarily due to increases in payroll taxes and benefits, insurance and professional, legal and accounting expenses. These results also include expenses of$466,707 incurred during the three-month period endedNovember 30, 2019 , that are not expected to be incurred in future periods. Operating expenses increased$101,786 , or 6.3%, to$1,705,845 for the six months endedNovember 30, 2019 from$1,604,059 for the six months endedNovember 30, 2018 . The increase in operating expenses for the six months endedNovember 30, 2019 is primarily due to increases in payroll taxes and benefits and insurance expenses. These results also include expenses of$508,681 incurred during the six-month period endedNovember 30, 2019 , that are not expected to be incurred in future periods. Other Income (Expense) - Other income (expense) consists of interest income, interest expense, foreign currency exchange gain (loss) and other income (expense). Interest income was$5,398 for the three months endedNovember 30, 2019 as compared to$6,839 for the three months endedNovember 30, 2018 . Fluctuations in interest income are impacted by the levels of our average cash and investment balances and changes in interest rates. Interest expense was$362 for the three months endedNovember 30, 2019 as compared to$199 for the three months endedNovember 30, 2018 . Interest income was$9,684 for the six months endedNovember 30, 2019 as compared to$14,308 for the six months endedNovember 30, 2018 . Fluctuations in interest income are impacted by the levels of our average cash and investment balances and changes in interest rates. Interest expense was$2,435 for the six months endedNovember 30, 2019 as compared to$462 for the six months endedNovember 30, 2018 . The foreign currency exchange gain and loss fluctuates with the strength of foreign currencies against theU.S. dollar during the respective periods. Foreign currency exchange loss was$247 for the three months endedNovember 30, 2019 as compared to foreign currency exchange loss of$644 for the three months endedNovember 30, 2018 . Foreign currency exchange loss was$1,126 for the six months endedNovember 30, 2019 as compared to foreign currency exchange loss of$1,093 for the six months endedNovember 30, 2018 . Income Taxes- The effective tax rate for continuing operations for the three months endedNovember 30, 2019 was (0.7)%. The effective tax rate for the three months endedNovember 30, 2018 was 0.6%. The effective tax rate for the six months endedNovember 30, 2019 was (0.9)%. The effective tax rate for the six months endedNovember 30, 2018 was 0.7%. The effective tax rate on consolidated net income for the three and six months endedNovember 30, 2019 and 2018 differs from the federal statutory tax rate primarily due to changes in the deferred tax valuation allowance and the impact of certain expenses not being deductible for income tax reporting purposes. Net Income (Loss) - Net loss was$(599,058) , or$(0.15) per fully diluted share, for the three months endedNovember 30, 2019 compared to net loss of$(339,484) , or$(0.08) per fully diluted share, for the three months endedNovember 30, 2018 . Net loss was$(821,185) , or$(0.20) per fully diluted share, for the six months endedNovember 30, 2019 compared to net income loss of$(634,697) , or$(0.16) per fully diluted share, for the six months endedNovember 30, 2018 . Income from Discontinued Operations, Including Gain on Sale, Net of Tax - OnNovember 22, 2019 , we sold the net assets of our SBS business. The gain on the sale of this business together with the earnings from these discontinued operations, net of tax, totaled$5,117,005 and$5,509,010 for the three and six months endedNovember 30, 2019 , respectively. This compares to the earnings from these discontinued operations of$84,212 and$167,608 from the three and six months endedNovember 30, 2018 , respectively. Page 19
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LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital increased
Cash, cash equivalents and restricted cash increased$11,058,027 to$12,525,462 as ofNovember 30, 2019 from$1,467,435 as ofMay 31, 2019 . The primary reason for this increase was the proceeds received from the SBS Transaction. Cash generated by operating activities from continuing operations totaled$519,210 for the six months endedNovember 30, 2019 as compared to cash used in operating activities from continuing operations of$768,578 for the six months.
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