| Significant Accounting Policies | NOTE
2
SIGNIFICANT ACCOUNTING POLICIES
Principles
of Consolidation
These
consolidated financial statements include those of the Company and
its wholly owned subsidiaries: Schmitt Measurement Systems, Inc.
(“SMS”), Schmitt Europe, Ltd. (“SEL”) and
Schmitt Industries (Canada) Limited. All significant intercompany
accounts and transactions have been eliminated in the preparation
of the consolidated financial statements.
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 fulfillment 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.
The Company estimates customer product returns based on historical
return patterns and reduces sales and cost of sales
accordingly.
Cash and
Cash Equivalents
The Company
generally invests excess cash in money market funds and investment
grade highly liquid securities. The Company considers securities
that are highly liquid, readily convertible into cash and have
original maturities of less than three months when purchased to be
cash equivalents. The Company’s cash consists of demand
deposits in large financial institutions. At times, balances may
exceed federally insured limits.
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 $42,387 and $56,370 as of May 31, 2016 and
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
May 31 inventories consisted of:
2016 2015
Raw materials $ 2,030,655 $ 1,845,037
Work-in-process 1,059,864 836,346
Finished goods 1,637,458 1,876,184
$ 4,727,977 $ 4,557,567
Property
and Equipment
Property and
equipment are stated at cost, less depreciation and
amortization. Depreciation is computed using the straight-line
method over estimated useful lives of three to seven years for
furniture, fixtures, and equipment; three years for vehicles; and
twenty-five years for buildings and improvements. Expenditures for
maintenance and repairs are charged to expense as incurred. As
of May 31 property and equipment consisted of:
2016 2015
Land $ 299,000 $ 299,000
Buildings and
improvements 1,814,524 1,814,524
Furniture, fixtures and
equipment 1,344,343 1,381,691
Vehicles 96,587 96,587
3,554,454 3,591,802
Less accumulated
depreciation (2,589,002 ) (2,480,924 )
$ 965,452 $ 1,110,878
Intangible
Assets
Amortizable
intangible assets, which include purchased technology and patents,
are amortized over their estimated useful lives ranging from five
to seventeen years. As of May 31, 2016 and 2015, amortizable
intangible assets were $2,200,883, and accumulated amortization was
$1,488,002 and $1,376,472, respectively. Amortization expense
for each of the following years ending May 31 is expected to
be as follows:
Year ending May
31,
2017 111,531
2018 104,583
2019 104,583
2020 104,583
2021 104,583
Thereafter 183,018
$ 712,881
Intangible
and other long-lived assets are reviewed for impairment whenever
events or changes in circumstances indicate the carrying amount of
the asset may not be recoverable. Recoverability is determined
by comparing the forecasted future net cash flows from the
operations to which the assets relate, based on management’s
best estimates using the appropriate assumptions and projections at
the time, to the carrying amount of the assets. If the
carrying value is determined to be in excess of future operating
cash flows, the asset is considered impaired and a loss is
recognized equal to the amount by which the carrying amount exceeds
the estimated fair value of the assets. As of May 31, 2016, no
impairment existed.
Foreign
Currency
Financial
statements for the Company’s subsidiaries outside the United
States are translated into U.S. dollars at year-end exchange rates
for assets and liabilities and weighted average exchange rates for
income and expenses. The resulting translation adjustments are
included as a separate component of stockholders’ equity
titled “Accumulated Other Comprehensive Loss.”
Transaction gains and losses are included in net income
(loss).
Advertising
Advertising
costs included in general, administration and sales, are expensed
when the advertising first takes place. Advertising expense
was $27,762, $33,451 and $45,155 for the years ended May 31, 2016,
2015 and 2014, respectively.
Research
and Development Costs
Research and
development costs, predominately internal labor costs and costs of
materials, are charged to expense when incurred.
Warranty
Reserve
Warranty
costs are estimated and charged to operations to cover a defined
warranty period. The estimated warranty cost is based on the
history of warranty claims for each particular product
type. For new product types without a warranty history,
preliminary estimates are based on historical information for
similar product types. The warranty reserve accruals, included
in other accrued liabilities, are reviewed periodically and updated
based on warranty trends.
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. The Company requires the measurement and recognition
of compensation for all stock-based awards made to employees and
directors including stock options based on estimated fair
values.
Stock-based
compensation recognized during the period is based on the value of
the portion 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.
Income
Taxes
The Company
applies the asset and liability method in recording income taxes,
under which deferred income tax assets and liabilities are
determined, based on the differences between the financial
reporting and tax bases of assets and liabilities and are measured
using currently enacted tax rates and laws. Additionally, deferred
tax assets are evaluated and a valuation allowance is established
if it is more likely than not that all or a portion of the deferred
tax asset will not be realized. Management continues to review the
level of the valuation allowance on a quarterly basis. There can be
no assurance that the Company’s future operations will
produce sufficient earnings so that the deferred tax asset can be
fully utilized. The Company currently maintains a full valuation
allowance against net deferred tax assets.
Earnings
(Loss) Per Share
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.
118, 3,375 and 7,636 potentially dilutive common shares from
outstanding stock options have been excluded from diluted earnings
(loss) per share for the years ended May 31, 2016, 2015 and 2014,
respectively.
Concentration of Credit Risk
Financial
instruments that potentially expose the Company to concentration of
credit risk are trade accounts receivable. Credit terms
generally include a discount of 1.5% if the invoice is paid within
ten days, with the net amount payable in 30 days.
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) approximates
fair value because of their short-term maturities.
Shipping
and Handling Charges
The Company
incurs costs related to shipping and handling of its manufactured
products. These costs are expensed as incurred as a component
of cost of sales. Shipping and handling charges related to the
receipt of raw materials are also incurred, which are recorded as a
cost of the related inventory.
Use of
Estimates
The
preparation of the consolidated financial statements in conformity
with accounting principles generally accepted in the United States
of America requires management to make estimates and assumptions
that affect the amounts reported in the consolidated financial
statements and accompanying notes. Actual results could differ
from those estimates.
Recent
accounting pronouncements
In May 2014,
the Financial Accounting Standards Board (FASB) issued Accounting
Standards Update (ASU) No. 2014-09, “Revenue from Contracts
with Customers (Topic 606).” ASU 2014-09 affects any entity
using U.S. GAAP that either enters into contracts with customers to
transfer goods or services or enters into contracts for the
transfer of nonfinancial assets unless those contracts are within
the scope of other standards (e.g., insurance contracts or lease
contracts). ASU 2014-09 is effective for fiscal years, and interim
periods within those fiscal years, beginning after December 15,
2016.
In August
2015, the FASB issued ASU 2015-14, which defers the effective date
of ASU 2014-09 by one year. The new guidance is effective for
interim and annual reporting periods beginning after December 15,
2017. Early adoption is permitted as of the date of the original
effective date, for interim and annual reporting periods beginning
after December 15, 2016.
The Company
is currently evaluating the provisions of ASU 2015-14 and ASU
2014-09. |
