| Significant Accounting Policies | Principles of Consolidation These Consolidated Financial Statements include those of the Company
and its wholly owned subsidiaries: Schmitt Measurement Systems, Inc. and Schmitt Industries (Canada) Limited. All significant intercompany
accounts and transactions have been eliminated in the preparation of the Consolidated Financial Statements. Reclassification Certain amounts in the prior
period consolidated balance sheet have been reclassified to conform to the presentation of the current period. These
reclassifications had no effect on previously recorded net income. Revenue Recognition The Company determines the amount of revenue it recognizes associated
with the transfer of each product or service. For sale of products or delivery of monitoring services to all customers, each transaction
is evaluated to determine whether there is approval and commitment from both the Company and the customer for the transaction;
whether the rights of each party are specifically identified; whether the transaction has commercial substance; whether collectability
from the customer is probable at the inception of the contract and whether the transaction amount is defined. If a transaction
to sell products or provide monitoring services meets all of the above criteria, revenue is recognized for the sales of product
at the time of shipment or for monitoring services at the completion of the month in which monitoring services are provided. The Company incurs commissions associated with the sales of products,
which are accrued and expensed at the time the product is shipped. These amounts are recorded within general, administration and
sales expense. The Company also incurs costs related to shipping and handling of its products, the costs of which are expensed
as incurred as a component of cost of sales. Shipping and handling fees billed to customers, which are recognized at the time of
shipment as a component of net revenues, were $29,707 and $33,929 for the year ended May 31, 2020 and May 31, 2019, respectively. Cash, Cash Equivalents and Restricted Cash The Company generally invests its excess cash in money market funds.
The Company’s investment policy also allows for cash to be invested in investment grade highly liquid securities, and 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
and money market funds. At times, balances may exceed federally insured limits. Restricted cash consists of an amount held in escrow
related to the sale of the balancer business segment, as described in notes to the financial statements. Once certain events are
complete, the restrictions on this cash payment will be released. 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, 2020 and 2019
to the sum of the same such amounts as shown in the Consolidated Statement of Cash Flows for the respective years then ended:
Years ended May 31,
2020 2019
Cash and cash equivalents $ 10,146,531 $ 1,467,435
Restricted cash 420,000 -
Total cash, cash equivalents and restricted cash shown in the Consolidated Statement of Cash Flows $ 10,566,531 $ 1,467,435 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 aging reports, other operating trends and
relevant business conditions, including general economic factors, as they relate to each of the Company’s domestic and international
customers. In the event there is doubt about whether a customer account is collectible, a reserve is provided. If these analyses
lead management to the conclusion that a customer account is uncollectible, the balance will be directly charged to bad debt expense.
The allowance for doubtful accounts was $103,029 and $36,826 as of May 31, 2020 and 2019, 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. Inventory balances as of May 31, 2020 and 2019, respectively, consisted
of:
Fiscal Year ended, May 31,
2020 2019
Raw materials $ 154,293 $ 347,095
Work-in-process 525,615 376,375
Finished goods 379,449 517,662
Total Inventory $ 1,059,357 $ 1,241,132 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. Depreciation expense for the year ended May 31, 2020
and 2019 was $56,554 and $68,633, respectively. Net property, plant and equipment balances as
of May 31, 2020 and 2019, respectively, consisted of:
Fiscal Year ended, May 31,
2020 2019
Land $ 299,000 $ 299,000
Buildings and improvements 1,847,505 1,814,524
Furniture, fixtures and equipment 396,264 498,476
2,542,769 2,612,000
Less accumulated depreciation (1,890,633 ) (1,858,593 )
$ 652,136 $ 753,407 Lease Accounting The Company determines if an arrangement is a lease or a service
contract at inception. Where an arrangement is a lease the Company determines if it is an operating lease or a finance lease. Subsequently,
if the arrangement is modified the Company reevaluates the classification. Buildings leased to others under operating leases are
included in property, plant and equipment. On November 22, 2019, the Company entered in
a commercial lease agreement, which has been accounted for pursuant to (ASU) No. 2016-02, “Leases (Topic 842)”. The
Company elected the practical expedient to not separate lease and non-lease components and will present property revenues as other
income, combined based upon the lease being determined to be the predominant component. The lessor commercial agreement contains a 10-year
term with a renewal option to extend, which will be considered a new, separate contract and will be recognized at the time the
option is exercised on a straight-line basis over the renewal period, and early termination options based on established terms
specific to the individual agreement. Minimum future lease payments receivable are as follows:
Years ending May 31,
2021 $ 283,578
2022 291,906
2023 300,666
2024 309,870
2025 319,164
Thereafter 1,557,600
Total undiscounted cash flow $ 3,062,784 Intangible
Assets and Impairment 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,
2020 and May 31, 2019, amortizable intangible assets were $2,085,362 and $2,200,883, and accumulated amortization was
$1,797,760 and $1,808,698, respectively. Amortization expense for the year ended May 31, 2020 and May 31, 2019 was $104,583.
Amortization expense for each of the following years ending May 31 is expected to be as follows;
Years ending May 31,
2021 $ 104,583
2022 104,583
2023 78,436
2024 -
2025 -
Thereafter -
$ 287,602 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, 2020, no impairment
existed. Customer deposits and prepayments Customer deposits and prepayments consists of amounts received from
customers as prepayments for orders that have been received and have been produced but have not yet shipped, credit balances for
items returned by customers for which refunds have not yet been provided and deposits made by customers in advance of production. Other accrued liabilities As of May 31, 2020, other accrued liabilities included $237,633 of accrued professional and legal expenses
related to transaction and turn-around costs, $121,959 in costs related to Xact Monitoring services provided to clients for
Fiscal Year 2020, and $82,811 of customer deposits due to SBS Accretech. It also included an accrual for warranty reserve
and sales return reserve, recurring professional expenses for consulting relationships, legal fees related to business
planning expenses, amounts financed on a short-term arrangement for the purchase of the Company’s new enterprise resource
planning software and amounts owing under various professional fee contracts for which invoices have not yet been received. 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 $7,767 and $22,018 for the years ended May 31, 2020
and 2019, 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 Each year the Company files income tax returns in the various 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. 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. Accrued Liabilities In Q4 of Fiscal 2020, the Company determined that it was more likely
than not that the Company had a pre-existing tax liability related to prior periods. The Company has analyzed the liability and
estimated it to be $265,349 as of May 31, 2020. Accordingly, the Company recognized $265,349 in operating expenses in Q4 of Fiscal
2020 to accrue for the liability. 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. There were 8,888 and 43,751 potentially dilutive common shares from outstanding
stock options have been excluded from diluted earnings (loss) per share for the years ended May 31, 2020 and 2019, 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 to 60 days or include
a discount of up to 1.5% if the invoice is paid within ten days, with the net amount payable in 30 days. Terms are set for each
account depending on the customer’s credit standing with the Company. 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 current
portion of long-term liability) approximates fair value because of their short-term maturities. Shipping and Handling 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 February 2016, the Financial Accounting Standards Board (“FASB”)
issued a new accounting standard on leasing. The new standard requires companies to record most leased assets and liabilities on
the balance sheet, and also proposed a dual model for recognizing expense. The Company adopted the standard as of June 1, 2019,
with retroactive reporting for prior periods (the comparative option). Adoption of these accounting changes did not have a material
impact on the Consolidated Financial Statements. In January 2017, the FASB issued a new accounting standard which
clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions
should be accounted for as acquisitions or disposals of assets or businesses. This guidance was effective for the Company beginning
in 2019. Adoption of these accounting changes did not have a material impact on the Consolidated Financial Statements. In May 2017, the FASB issued a new accounting standard which provides
guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification
accounting in ASC Topic 718. Under the guidance, modification accounting is required only if the fair value, the vesting conditions,
or the classification of the award (as equity or liability) changes as a result of the change in terms or conditions. This guidance
was effective for the Company beginning in 2019. Adoption of these accounting changes did not have a material impact on the Consolidated
Financial Statements. In June 2018, the FASB issued a new accounting standard which provides
guidance that expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from
nonemployees. This guidance was effective for the Company beginning in 2019, with early adoption permitted. Adoption of these accounting
changes did not have a material impact on the Consolidated Financial Statements. |
