Edgar Filing: SCHMITT INDUSTRIES INC

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Form 10-Q

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, 2015

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from: To:

Commission File Number: 000-23996

SCHMITT INDUSTRIES, INC.

(Exact name of registrant as specified in its charter)

Oregon

93-1151989

(State or other jurisdiction of

incorporation or organization)

(IRS Employer

Identification Number)

2765 NW Nicolai Street, Portland, Oregon 97210-1818

(Address of principal executive offices) (Zip Code)

(503) 227-7908

(Registrant’s 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):

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, 2015


Common stock, no par value			2,995,910

SCHMITT INDUSTRIES, INC.

INDEX TO FORM 10-Q


		Page
Part I - FINANCIAL INFORMATION

Item 1.	Financial Statements:

	Consolidated Balance Sheets: – November 30, 2015 and May 31, 2015 (unaudited)		3

	Consolidated Statements of Operations and Comprehensive Loss: – For the Three and Six Months Ended November 30, 2015 and 2014 (unaudited)		4

	Consolidated Statements of Cash Flows: – For the Six Months Ended November 30, 2015 and 2014 (unaudited)		5

	Consolidated Statement of Changes in Stockholders’ Equity: – For the Six Months Ended November 30, 2015 (unaudited)		6

	Notes to Consolidated Interim Financial Statements		7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		13

Item 3.	Quantitative and Qualitative Disclosures About Market Risk		18

Item 4.	Controls and Procedures		18

Part II - OTHER INFORMATION

Item 6.	Exhibits		19

Signatures

Certifications

Page 2

PART I - FINANCIAL INFORMATION

Item 1.

Financial Statements

SCHMITT INDUSTRIES, INC.

CONSOLIDATED BALANCE SHEETS

(UNAUDITED)


	November 30, 2015			May 31, 2015
ASSETS
Current assets
Cash and cash equivalents	$	1,263,567		$	1,795,654
Accounts receivable, net		2,541,465			2,660,426
Inventories		4,640,873			4,557,567
Prepaid expenses		136,112			153,970
Income taxes receivable		1,841			1,029

		8,583,858			9,168,646

Property and equipment, net		1,026,095			1,110,878

Other assets
Intangible assets, net		768,646			824,411

TOTAL ASSETS	$	10,378,599		$	11,103,935

LIABILITIES & STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable	$	592,441		$	834,002
Accrued commissions		344,324			284,944
Accrued payroll liabilities		141,128			140,872
Other accrued liabilities		382,312			355,513

Total current liabilities		1,460,205			1,615,331

Stockholders’ equity
Common stock, no par value, 20,000,000 shares authorized, 2,995,910 shares issued and outstanding at November 30, 2015 and May 31, 2015		10,549,277			10,511,324
Accumulated other comprehensive loss		(376,259	)		(366,945	)
Accumulated deficit		(1,254,624	)		(655,775	)

Total stockholders’ equity		8,918,394			9,488,604

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	10,378,599		$	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 SIX MONTHS ENDED NOVEMBER 30, 2015 AND 2014

(UNAUDITED)


	Three Months Ended November 30,						Six Months Ended November 30,
	2015			2014			2015			2014
Net sales	$	3,073,769		$	3,151,504		$	6,178,153		$	6,200,792
Cost of sales		1,797,359			1,597,326			3,459,251			3,183,047

Gross profit		1,276,410			1,554,178			2,718,902			3,017,745

Operating expenses:
General, administration and sales		1,581,635			1,500,328			3,119,517			2,838,352
Research and development		72,500			124,651			159,412			197,095

Total operating expenses		1,654,135			1,624,979			3,278,929			3,035,447

Operating loss		(377,725	)		(70,801	)		(560,027	)		(17,702	)

Other income (loss), net		(19,091	)		3,336			(25,011	)		4,397

Loss before income taxes		(396,816	)		(67,465	)		(585,038	)		(13,305	)

Provision for income taxes		6,971			2,375			13,811			4,752

Net loss	$	(403,787	)	$	(69,840	)	$	(598,849	)	$	(18,057	)

Net loss per common share:

Basic	$	(0.13	)	$	(0.02	)	$	(0.20	)	$	(0.01	)

Weighted average number of common shares, basic		2,995,910			2,995,910			2,995,910			2,995,910

Diluted	$	(0.13	)	$	(0.02	)	$	(0.20	)	$	(0.01	)

Weighted average number of common shares, diluted		2,995,910			2,995,910			2,995,910			2,995,910

Comprehensive loss
Net loss	$	(403,787	)	$	(69,840	)	$	(598,849	)	$	(18,057	)
Foreign currency translation adjustment		(15,673	)		(50,785	)		(9,314	)		(78,909	)

Total comprehensive loss	$	(419,460	)	$	(120,625	)	$	(608,163	)	$	(96,966	)

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 31, 2015 AND 2014

(UNAUDITED)


	Six Months Ended November 30,
	2015			2014
Cash flows relating to operating activities
Net loss	$	(598,849	)	$	(18,057	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization		127,198			139,950
Gain on sale of property and equipment		(299	)		0
Stock based compensation		37,953			26,473
(Increase) decrease in:
Accounts receivable		115,949			(327,467	)
Inventories		(90,216	)		(21,292	)
Prepaid expenses		17,605			40,062
Income taxes receivable		(812	)		(387	)
Increase (decrease) in:
Accounts payable		(240,883	)		165,338
Accrued liabilities		87,286			250,603
Income taxes payable		0			(210	)

Net cash provided by (used in) operating activities		(545,068	)		255,013

Cash flows relating to investing activities
Proceeds from sale of property and equipment		14,950			0
Purchases of property and equipment		0			(13,050	)

Net cash provided by (used in) investing activities		14,950			(13,050	)

Effect of foreign exchange translation on cash		(1,969	)		(45,047	)

Increase (decrease) in cash and cash equivalents		(532,087	)		196,916

Cash and cash equivalents, beginning of period		1,795,654			1,510,565

Cash and cash equivalents, end of period	$	1,263,567		$	1,707,481

Supplemental disclosure of cash flow information

Cash paid during the period for income taxes	$	14,623		$	5,353

Cash paid during the period for interest	$	1,384		$	1,933

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, 2015

(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		37,953		0			0			37,953
Net loss		0		0		0			(598,849	)		(598,849	)
Other comprehensive loss		0		0		(9,314	)		0			(9,314	)

Balance, November 30, 2015		2,995,910	$	10,549,277	$	(376,259	)	$	(1,254,624	)	$	8,918,394

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, 2015 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 Company’s domestic and international customers. If these analyses lead management to the conclusion that potential significant accounts are uncollectible, a reserve is provided. The allowance for doubtful accounts was $44,258 and $56,370 as of November 30, 2015 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 November 30, 2015 and May 31, 2015, inventories consisted of:


	November 30, 2015		May 31, 2015
Raw materials	$	2,044,681	$	1,845,037
Work-in-process		975,886		836,346
Finished goods		1,620,306		1,876,184

	$	4,640,873	$	4,557,567

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, 2015 and May 31, 2015, property and equipment consisted of:


	November 30, 2015			May 31, 2015
Land	$	299,000		$	299,000
Buildings and improvements		1,814,524			1,814,524
Furniture, fixtures and equipment		1,342,745			1,381,691
Vehicles		96,587			96,587

		3,552,856			3,591,802
Less accumulated depreciation		(2,526,761	)		(2,480,924	)

	$	1,026,095		$	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 Company’s stock option plan. Stock-based compensation recognized during the period is based on the portion of the grant date fair value of the stock-based award that will vest during the period, adjusted for expected forfeitures. Compensation cost for all stock-based awards is recognized using the straight-line method. The Company uses the Black-Scholes option pricing model as its method of valuation for stock-based awards. The Black-Scholes option pricing model requires the input of highly subjective assumptions, and other reasonable assumptions could provide differing results. These variables include, but are not limited to:

•

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 six months ended November 30, 2015 and 2014, the Company has computed the value of all stock options granted using the Black-Scholes option pricing model. No options were issued during the six months ended November 30, 2015. 87,500 options were issued during the six months ended November 30, 2014.

Page 8

At November 30, 2015, 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 $46,944 will be recorded as additional stock-based compensation expense over a weighted-average period of 1.4 years for all options that were outstanding as of November 30, 2015, 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		7.8		23,333	$	2.53
	112,500		2.84		8.5		45,835		2.85
	130,000		3.65		5.5		130,000		3.65
	50,000		6.25		2.5		50,000		6.25

	327,500		3.65		6.3		249,168		3.92

Options granted, exercised, and forfeited or canceled under the Company’s stock option plan during the three and six months ended November 30, 2015 are summarized as follows:


	Three Months Ended November 30, 2015					Six Months Ended November 30, 2015
	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 November 30,				Six Months Ended November 30,
	2015		2014		2015		2014
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 earnings (loss) per share is computed using the weighted average number of common shares outstanding. Diluted earnings (loss) per share is computed using the weighted average number of common shares outstanding, adjusted for dilutive incremental shares attributed to outstanding options to purchase common stock. Common stock equivalents for stock options are computed using the treasury stock method. In periods in which a net loss is incurred, no common stock equivalents are included since they are antidilutive and as such all stock options outstanding are excluded from the computation of diluted net loss in those periods.

Page 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 Company’s financial statements in accordance with ASC Topic 740. The Company applies this guidance by defining criteria that an individual income tax position must meet for any part of the benefit of that position to be recognized in an enterprise’s financial statements and provides guidance on measurement, de-recognition, classification, accounting for interest and penalties, accounting in interim periods, disclosure, and transition.

Other long-term liabilities related to tax contingencies were $0 as of both November 30, 2015 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 November 30, 2015 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 2.4% for the six months ended November 30, 2015. 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 6.8% 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 November 30,
	2015						2014
	Balancer			Measurement			Balancer			Measurement
Gross sales	$	2,192,878		$	1,187,847		$	2,250,911		$	1,204,966
Intercompany sales		(312,149	)		5,193			(328,062	)		23,689

Net sales	$	1,880,729		$	1,193,040		$	1,922,849		$	1,228,655

Operating loss	$	(203,149	)	$	(174,576	)	$	(37,759	)	$	(33,042	)

Depreciation expense	$	24,236		$	9,832		$	24,471		$	10,983

Amortization expense	$	0		$	27,883		$	0		$	29,808

Capital expenditures	$	0		$	0		$	4,477		$	0


	Six Months Ended November 30,
	2015						2014
	Balancer			Measurement			Balancer			Measurement
Gross sales	$	4,419,124		$	2,373,911		$	4,267,346		$	2,409,436
Intercompany sales		(610,900	)		(3,982	)		(504,327	)		28,337

Net sales	$	3,808,224		$	2,369,929		$	3,763,019		$	2,437,773

Operating income (loss)	$	(336,643	)	$	(223,384	)	$	(109,583	)	$	91,881

Depreciation expense	$	51,046		$	20,387		$	54,272		$	22,211

Amortization expense	$	0		$	55,765		$	0		$	63,467

Capital expenditures	$	0		$	0		$	13,050		$	0

Geographic Information – Net Sales by Geographic Area


	Three Months Ended November 30,				Six Months Ended November 30,
	2015		2014		2015		2014
North America	$	2,082,607	$	1,800,419	$	4,167,922	$	3,819,073
Europe		432,412		411,314		684,722		626,550
Asia		531,287		863,045		1,220,556		1,627,482
Other markets		27,463		76,726		104,953		127,687

Total net sales	$	3,073,769	$	3,151,504	$	6,178,153	$	6,200,792

Page 11


	Three Months Ended November 30,
	2015						2014
	United States			Europe			United States			Europe
Operating income (loss)	$	(374,243	)	$	(3,482	)	$	(102,407	)	$	31,606

Depreciation expense	$	34,068		$	0		$	35,454		$	0

Amortization expense	$	27,883		$	0		$	29,808		$	0

Capital expenditures	$	0		$	0		$	4,477		$	0


	Six Months Ended November 30,
	2015						2014
	United States			Europe			United States			Europe
Operating income (loss)	$	(499,742	)	$	(60,285	)	$	(36,467	)	$	18,765

Depreciation expense	$	71,433		$	0		$	76,483		$	0

Amortization expense	$	55,765		$	0		$	63,467		$	0

Capital expenditures	$	0		$	0		$	13,050		$	0

Note — Europe is defined as the European subsidiary, Schmitt Europe, Ltd.

Segment and Geographic Assets


	November 30, 2015		May 31, 2015
Segment assets to total assets
Balancer	$	4,884,201	$	5,059,567
Measurement		4,228,989		4,247,684
Corporate assets		1,265,409		1,796,684

Total assets	$	10,378,599	$	11,103,935

Geographic assets to long-lived assets
United States	$	1,026,095	$	1,110,878
Europe		0		0

Total long-lived assets	$	1,026,095	$	1,110,878

Geographic assets to total assets
United States	$	9,524,797	$	10,107,523
Europe		853,802		996,412

Total assets	$	10,378,599	$	11,103,935

Page 12

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

This Quarterly Report filed with the SEC on 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 of Schmitt Industries, Inc. and its consolidated subsidiaries (the “Company”) that are based on management’s current expectations, estimates, projections and assumptions about the Company’s business. Words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “sees,” “estimates” and variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve risks, uncertainties and assumptions that are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking statements due to numerous factors, including, but not limited to, those discussed in the “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this Report as well as those discussed from time to time in the Company’s other Securities and Exchange Commission filings and reports. In addition, such statements could be affected by general industry and market conditions. Such forward-looking statements speak only as of the date of this Report or, in the case of any document incorporated by reference, the date of that document, and we do not undertake any obligation to update any forward-looking statement to reflect events or circumstances after the date of this Report. If we update or correct one or more forward-looking statements, investors and others should not conclude that we will make additional updates or corrections with respect to other forward-looking statements.

RESULTS OF OPERATIONS

Overview

Schmitt Industries, Inc. 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 November 30, 2015, total sales decreased $77,735, or 2.5%, to $3,073,769 from $3,151,504 in the three months ended November 30, 2014. For the six months ended November 30, 2015, total sales increased $22,639, or 0.4%, to $6,178,153 from $6,200,792 in the six months ended November 30, 2014.

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, Europe and South America. Balancer segment sales decreased $42,120, or 2.2%, to $1,880,729 for the three months ended November 30, 2015 compared to $1,922,849 for the three months ended November 30, 2014, primarily attributed due to a significant decline in sales into China and decreased sales into Europe, offset by increased sales in North America for the quarter. Balancer segment sales increased $45,205, or 1.2%, to $3,808,224 for the six months ended November 30, 2015 compared to $3,763,019 for the six months ended November 30, 2014. The increase in worldwide balancer sales for the six month period ended November 30, 2015 is primarily attributed to stronger sales in North America, offset in part by a significant decline in sales into China and decreased sales into other parts of Asia and Europe for the first half of the fiscal year.

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 decreased $35,615, or 2.9%, to $1,193,040 for the three months ended November 30, 2015 compared to $1,228,655 for the three months ended November 30, 2014. The decrease is primarily due to lower SMS product line sales and the impact of the termination of a Latin American distributor for the Xact product line. Total Measurement segment sales decreased $67,844, or 2.8%, to $2,369,929 for the six months ended November 30, 2015 compared to $2,437,773 for the six months ended November 30, 2014, due to lower SMS product line sales and the impact of the termination of a Latin American distributor for the Xact product line.

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Operating expenses increased $29,156, or 1.8%, to $1,654,135 for the three months ended November 30, 2015 from $1,624,979 for the three months ended November 30, 2014. Operating expenses increased $243,482, or 8.0%, to $3,278,929 for the six months ended November 30, 2015 from $3,035,447 for the six months ended November 30, 2014. General, administration and sales expenses increased $81,307, or 5.4%, to $1,581,635 for the three months ended November 30, 2015 from $1,500,328 for the same period in the prior year. General, administration and sales expenses increased $281,165, or 9.9%, to $3,119,517 for the six months ended November 30, 2015 from $2,838,352 for the same period in the prior year.

Net loss was $403,787, or $(0.13) per fully diluted share, for the three months ended November 30, 2015 as compared to net loss of $69,840, or $(0.02) per fully diluted share, for the three months ended November 30, 2014. Net loss was $598,849, or $(0.20) per fully diluted share, for the six months ended November 30, 2015 as compared to net loss of $18,057, or $(0.01) per fully diluted share, for the six months ended November 30, 2014.

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.

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Discussion of Operating Results


	Three Months Ended November 30,
	2015					2014
Balancer sales	$	1,880,729		61.2	%	$	1,922,849		61.0	%
Measurement sales		1,193,040		38.8	%		1,228,655		39.0	%

Total sales		3,073,769		100.0	%		3,151,504		100.0	%
Cost of sales		1,797,359		58.5	%		1,597,326		50.7	%

Gross profit		1,276,410		41.5	%		1,554,178		49.3	%

Operating expenses:
General, administration and sales		1,581,635		51.5	%		1,500,328		47.6	%
Research and development		72,500		2.4	%		124,651		4.0	%

Total operating expenses		1,654,135		53.8	%		1,624,979		51.6	%

Operating loss		(377,725	)	-12.3	%		(70,801	)	-2.2	%

Other income (loss)		(19,091	)	-0.6	%		3,336		0.1	%

Loss before income taxes		(396,816	)	-12.9	%		(67,465	)	-2.1	%

Provision for income taxes		6,971		0.2	%		2,375		0.1	%

Net loss	$	(403,787	)	-13.1	%	$	(69,840	)	-2.2	%


	Six Months Ended November 30,
	2015					2014
Balancer sales	$	3,808,224		61.6	%	$	3,763,019		60.7	%
Measurement sales		2,369,929		38.4	%		2,437,773		39.3	%

Total sales		6,178,153		100.0	%		6,200,792		100.0	%
Cost of sales		3,459,251		56.0	%		3,183,047		51.3	%

Gross profit		2,718,902		44.0	%		3,017,745		48.7	%

Operating expenses:
General, administration and sales		3,119,517		50.5	%		2,838,352		45.8	%
Research and development		159,412		2.6	%		197,095		3.2	%

Total operating expenses		3,278,929		53.1	%		3,035,447		49.0	%

Operating loss		(560,027	)	-9.1	%		(17,702	)	-0.3	%

Other income (loss)		(25,011	)	-0.4	%		4,397		0.1	%

Loss before income taxes		(585,038	)	-9.5	%		(13,305	)	-0.2	%

Provision for income taxes		13,811		0.2	%		4,752		0.1	%

Net loss	$	(598,849	)	-9.7	%	$	(18,057	)	-0.3	%

Sales – Sales in the Balancer segment decreased $42,120, or 2.2%, to $1,880,729 for the three months ended November 30, 2015 compared to $1,922,849 for the three months ended November 30, 2014. The decrease is primarily attributed to a significant decline in sales into China and decreased sales into Europe, offset by increased sales in North America for the second quarter. Sales in North America increased $209,424, or 25.1%, for the three months ended November 30, 2015 as compared to the three months ended November 30, 2014. China sales decreased $168,564, or 45.7%, for the three months ended November 30, 2015 as compared to the three months ended November 30, 2014. Other Asia sales increased $9,107, or 3.0%, in the three months ended November 30, 2015 compared to the same period in the prior year. European sales decreased $73,241, or 18.8%, in the second quarter of Fiscal 2016 compared to the second quarter of Fiscal 2015. Sales in other regions of the world decreased $18,846, or 76.1%, in the three months ended November 30, 2015 as compared to the same period in the prior year.

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Sales in the Balancer segment increased $45,205, or 1.2%, to $3,808,224 for the six months ended November 30, 2015 compared to $3,763,019 for the six months ended November 30, 2014. The increase is primarily attributed to stronger sales in North America, offset in part by a significant decline in sales into China and decreased sales into Europe for the first half of the fiscal year. Sales in North America increased $337,343, or 19.5%, for the six months ended November 30, 2015 as compared to the six months ended November 30, 2014. China sales decreased $233,886, or 27.6%, for the six months ended November 30, 2015 as compared to the six months ended November 30, 2014. Other Asia sales increased $25,111, or 4.7%, in the six months ended November 30, 2015 compared to the same period in the prior year. European sales decreased $57,573, or 9.8%, in the first half of Fiscal 2016 compared to the first half of Fiscal 2015. Sales in other regions of the world decreased $25,790, or 39.7%, in the six months ended November 30, 2015 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 decreased $35,615, or 2.9%, to $1,193,040 in the three months ended November 30, 2015 compared to $1,228,655 in the three months ended November 30, 2014. The decrease is primarily due to lower SMS product line sales and the impact of the termination of one of the Latin American distributors for the Xact product line, offset by increased sales in the Acuity product line. Sales of SMS and Lasercheck light-scatter laser-based surface measurement products in the three months ended November 30, 2015 decreased $92,089, or 33.8%, as compared to the same period in the prior year. In addition, sales of Xact remote tank monitoring products and revenues from monitoring services decreased $8,216, or 12.1%. These decreases were offset by the increase in sales of Acuity laser-based distance measurement and dimensional sizing products in the amount of $64,690, or 4.2%, for the three months ended November 30, 2015 as compared to the same period in the prior year

Sales in the Measurement segment decreased $67,844, or 2.8%, to $2,369,929 in the six months ended November 30, 2015 compared to $2,437,773 in the six months ended November 30, 2014. The decrease is primarily due to lower SMS product line sales and the impact of the termination of one of the Latin American distributors for the Xact product line, offset by increased sales in the Acuity product line. Sales of SMS and Lasercheck light-scatter laser-based surface measurement products in the six months ended November 30, 2015 decreased $400,292, or 55.2%, as compared to the same period in the prior year. These in decreases were in part offset by the increase in sales of Acuity laser-based distance measurement and dimensional sizing products in the amount of $278,853, or 26.9%, for the six months ended November 30, 2015 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 $53,595, or 8.0%. 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, 2015 decreased to 41.5% as compared to 49.3% for the three months ended November 30, 2014. Gross margin for the six months ended November 30, 2015 decreased to 44.0% as compared to 48.7% for the six months ended November 30, 2014. The overall decrease in gross margin in both the three and six months ended November 30, 2015 as compared to the three and six months ended November 30, 2014 is primarily influenced by shifts in the product sales mix and the impact of the termination of a Latin American distributor for the Xact product line.

Operating expenses – Operating expenses increased $29,156, or 1.8%, to $1,654,135 for the three months ended November 30, 2015 as compared to $1,624,979 for the three months ended November 30, 2014. General, administrative and sales expenses increased $81,307, or 5.4%, for the three months ended November 30, 2015 as compared to the same period in the prior year due in part 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. Research and development expenses decreased $52,151, or 41.8%, as compared to the same period in the prior year.

Operating expenses increased $243,482, or 8.0%, to $3,278,929 for the six months ended November 30, 2015 as compared to $3,035,447 for the six months ended November 30, 2014. General, administrative and sales expenses increased $281,165, or 9.9%, for the six months ended November 30, 2015 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. Research and development expenses decreased $37,683, or 19.1%, as compared to the same period in the prior year.

Other income – Other income consists of interest income (expense), foreign currency exchange gain (loss) and other income (expense). Interest income (expense), net was $(483) and $1,743 for the three months ended November 30, 2015 and 2014, respectively and $(1,033) and $(1,886) for the six months ended November 30, 2015 and 2014, respectively. Foreign currency exchange gains (losses) were $(18,916) and $1,578 for the three months ended November 30, 2015 and 2014, respectively and $(24,295) and $6,255 for the six months ended November 30, 2015 and 2014, respectively. The shifts in the foreign currency exchange are related to fluctuations of foreign currencies against the U.S. dollar during the current period.

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Income taxes – The Company’s effective tax rate on consolidated net loss was 2.4% for the six months ended November 30, 2015. 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 6.8% due to the items noted above.

Net loss – Net loss was $403,787, or $(0.13) per diluted share, for the three months ended November 30, 2015 as compared to a net loss of $69,840, or $(0.02) per diluted share, for the three months ended November 30, 2014. Net loss was $598,849, or $(0.20) per diluted share, for the six months ended November 30, 2015 as compared to a net loss of $18,057, or $(0.01) per diluted share, for the same period in the prior year. Net loss for the three and six months ended November 30, 2015 decreased as compared to the same periods in the prior year primarily due to shifts in product mix with decreased sales of higher margin products and one-time charges associated with the termination of a Latin American distributor for the Xact product line.

LIQUIDITY AND CAPITAL RESOURCES

The Company’s working capital decreased to $7,123,653 as of November 30, 2015 as compared to $7,553,315 as of May 31, 2015. Cash and cash equivalents decreased $532,087 to $1,263,567 as of November 30, 2015 from $1,795,654 as of May 31, 2015.

Cash used in operating activities totaled $545,068 for the six months ended November 30, 2015 as compared to cash provided by operating activities of $255,013 for the six months ended November 30, 2014. The change in cash used in operating activities was primarily impacted by the net loss of $598,849 for the six months ended November 30, 2015 as compared to net loss of $18,057 for the six months ended November 30, 2014. 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 November 30, 2015, the Company had accounts receivable of $2,541,465 as compared to $2,660,426 at May 31, 2015. The decrease in accounts receivable of $118,961 was due to timing of receipts. Inventories increased $83,306 to $4,640,873 as of November 30, 2015 compared to $4,557,567 at May 31, 2015, which is due primarily to the timing of purchases across our product lines. At November 30, 2015, total current liabilities decreased $155,126 to $1,460,205 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 an increase 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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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, 2015.

Item 4.

Controls and Procedures

Evaluation of Disclosure Controls and Procedures

As of November 30, 2015, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and the Company’s Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures, as such term is defined in Rule 13a-15(e) of the Securities Exchange Act of 1934 (the “Exchange Act”). Based on the evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of the period covered by this Report, the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed in the Company’s Exchange Act reports is (1) recorded, processed, summarized and reported in a timely manner, and (2) accumulated and communicated to the Company’s management, including the Company’s Chief Executive Officer and the Company’s Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives, and management necessarily is required to use its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

Changes in Internal Control Over Financial Reporting

There has been no change in the Company’s internal control over financial reporting that occurred during the Company’s fiscal quarter ended November 30, 2015 that has materially affected, or is reasonably likely to materially affect, such internal control over financial reporting.

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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 Company’s 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 Company’s 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.

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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.

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Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company