| 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. See Note
2 “Recent Accounting Pronouncements” for further
discussion related to the adoption of Accounting Standards Update
(ASU) No. 2014-09,
Cash, Cash Equivalents and Restricted Cash
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.
Restricted cash consists of an amount received from a customer in
December 2017 as part of an on-going
The following table provides a reconciliation of cash and cash
equivalents and restricted cash as reported within the Consolidated
Balance Sheets as of May 31, 2018 and 2017 to the sum of the
same such amounts as shown in the Consolidated Statement of Cash
Flows for the respective years then ended:
2018 2017
Cash and cash equivalents $ 2,053,181 $ 867,607
Restricted cash 58,352 0
Total cash, cash equivalents, and restricted cash shown in the
Consolidated Statement of Cash Flows $ 2,111,533 $ 867,607
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 $95,207 and $32,572 as of
May 31, 2018 and 2017, respectively.
Inventories
Inventories are valued at the lower of cost or net realizable value
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:
2018 2017
Raw materials $ 2,796,691 $ 1,773,368
Work-in-process 1,009,424 937,878
Finished goods 1,904,773 1,493,477
$ 5,710,888 $ 4,204,723
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:
2018 2017
Land $ 299,000 $ 299,000
Buildings and improvements 1,814,524 1,814,524
Furniture, fixtures and equipment 1,252,598 1,246,346
Vehicles 44,704 44,704
3,410,826 3,404,574
Less accumulated depreciation (2,639,911 ) (2,539,350 )
$ 770,915 $ 865,224
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, 2018 and
2017, amortizable intangible assets were $2,200,883, and
accumulated amortization was $1,704,115 and $1,599,532,
respectively. Amortization expense for each of the following years
ending May 31 is expected to be as follows:
Year ending
May 31,
2019 $ 104,583
2020 104,583
2021 104,583
2022 104,583
2023 78,436
Thereafter 0
$ 496,768
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,
2018, 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
Advertising
Advertising costs included in general, administration and sales,
are expensed when the advertising first takes place. Advertising
expense was $71,280, $30,500 and $27,762 for the years ended
May 31, 2018, 2017 and 2016, 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 basis 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. 0, 0 and 118
potentially dilutive common shares from outstanding stock options
have been excluded from diluted earnings (loss) per share for the
years ended May 31, 2018, 2017 and 2016, respectively.
Concentration of Credit Risk
Financial instruments that potentially expose the Company to
concentration of credit risk are trade accounts receivable. Credit
terms generally require an invoice to be paid within 30 days or
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. Some of the more significant estimates
relate to revenue recognition, including product returns, allowance
for doubtful accounts, reserves for excess and obsolete
inventories, estimated lives of long-lived assets, warranty
reserves, stock-based compensation and income taxes.
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (FASB) issued
ASU No. 2014-09, “Revenue from Contracts with Customers
(Topic 606),” with final amendments issued in 2016. The
guidance within ASU 2014-09 provides for a five-step model to
determine the revenue recognized for the transfer of goods or
services to customers that reflects the expected entitled
consideration in exchange for those goods or services. In addition,
the FASB introduced practical expedients related to disclosures of
remaining performance obligations, as well as other amendments
related to guidance on collectibility, non-cash consideration and
the presentation of sales and other similar taxes. Financial
statement disclosures required by the guidance provided will enable
users to understand the nature, amount, timing, judgments and
uncertainty of revenue and cash flows relating to customer
contracts.
The two permitted transition methods under the guidance are the
full retrospective approach or a cumulative effect adjustment to
the opening retained earnings in the year of adoption (modified
retrospective approach). The Company will adopt the guidance using
the modified retrospective approach when it becomes effective in
the first quarter of fiscal year 2019. The Company is utilizing a
comprehensive approach to assess the impact of the guidance by
reviewing current accounting policies and practices to identify
potential differences that would result from applying the new
requirements to revenue contracts, including evaluation of any
performance obligations. The Company is substantially complete with
its contract and business process reviews and implemented changes
to controls to support recognition and disclosures under the new
guidance. Based on the foregoing, this guidance is not expected to
have a material impact to the Company’s consolidated
financial statements or related disclosures. |
