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: February 28, 2013

Or

¨ 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):

Large accelerated filer	¨	Accelerated filer	¨
Non-accelerated filer	¨	Smaller reporting company	x

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 April 1, 2013

Common stock, no par value 2,990,910

SCHMITT INDUSTRIES, INC.

INDEX TO FORM 10-Q

		Page
Part I - FINANCIAL INFORMATION
Item 1.	Financial Statements:
	Consolidated Balance Sheets: – February 28, 2013 and May 31, 2012 (unaudited)		3
	Consolidated Statements of Operations: – For the Three and Nine Months Ended February 28 and 29, 2013 and 2012 (unaudited)		4
	Consolidated Statements of Comprehensive Income: – For the Three and Nine Months Ended February 28 and 29, 2013 and 2012 (unaudited)		5
	Consolidated Statements of Cash Flows: – For the Nine Months Ended February 28 and 29, 2013 and 2012 (unaudited)		6
	Consolidated Statement of Changes in Stockholders’ Equity: – For the Nine Months Ended February 28, 2013 (unaudited)		7
	Notes to Consolidated Interim Financial Statements		8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		14
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		22
Item 4.	Controls and Procedures		22
Part II - OTHER INFORMATION
Item 6.	Exhibits		23
Signatures			23
Certifications

Page 2

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

SCHMITT INDUSTRIES, INC.

CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

	February 28, 2013			May 31, 2012
ASSETS
Current assets
Cash and cash equivalents	$	2,339,885		$	2,776,817
Accounts receivable, net of allowance of $26,596 and $26,720 at February 28, 2013 and May 31, 2012, respectively		2,098,229			2,493,889
Inventories		4,744,298			3,975,600
Prepaid expenses		156,185			186,489
Income taxes receivable		14,801			7,780
		9,353,398			9,440,575
Property and equipment
Land		299,000			299,000
Buildings and improvements		1,805,951			1,723,273
Furniture, fixtures and equipment		1,288,211			1,247,720
Vehicles		121,835			121,835
		3,514,997			3,391,828
Less accumulated depreciation and amortization		(2,150,254	)		(2,019,692	)
		1,364,743			1,372,136
Other assets
Intangible assets, net		1,111,937			1,213,204
TOTAL ASSETS	$	11,830,078		$	12,025,915
LIABILITIES & STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable	$	703,227		$	770,586
Accrued commissions		310,588			335,104
Accrued payroll liabilities		139,126			142,665
Other accrued liabilities		316,906			286,319
Total current liabilities		1,469,847			1,534,674
Long-term liabilities		—			7,500
Stockholders’ equity
Common stock, no par value, 20,000,000 shares authorized, 2,990,910 shares issued and outstanding at both February 28, 2013 and May 31, 2012		10,346,891			10,279,636
Accumulated other comprehensive loss		(328,500	)		(313,295	)
Retained earnings		341,840			517,400
Total stockholders’ equity		10,360,231			10,483,741
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	11,830,078		$	12,025,915

The accompanying notes are an integral part of these financial statements.

Page 3

SCHMITT INDUSTRIES, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE THREE AND NINE MONTHS ENDED FEBRUARY 28 AND 29, 2013 AND 2012

(UNAUDITED)

	Three Months Ended February 28 and 29,						Nine Months Ended February 28 and 29,
	2013			2012			2013			2012
Net sales	$	2,796,429		$	3,156,497		$	9,179,353		$	10,104,207
Cost of sales		1,438,831			1,616,534			4,405,579			5,389,802
Gross profit		1,357,598			1,539,963			4,773,774			4,714,405
Operating expenses:
General, administration and sales		1,366,587			1,448,818			4,523,320			4,481,536
Research and development		164,693			91,842			411,367			197,698
Total operating expenses		1,531,280			1,540,660			4,934,687			4,679,234
Operating income (loss)		(173,682	)		(697	)		(160,913	)		35,171
Other income (expense)		(2,347	)		6,901			6,080			33,031
Income (loss) before income taxes		(176,029	)		6,204			(154,833	)		68,202
Provision (benefit) for income taxes		15,075			(6,417	)		20,727			(3,271	)
Net income (loss)	$	(191,104	)	$	12,621		$	(175,560	)	$	71,473
Net earnings (loss) per common share:
Basic	$	(0.06	)	$	0.00		$	(0.06	)	$	0.02
Weighted average number of common shares, basic		2,990,910			2,939,281			2,990,910			2,910,401
Diluted	$	(0.06	)	$	0.00		$	(0.06	)	$	0.02
Weighted average number of common shares, diluted		2,990,910			2,964,892			2,990,910			2,937,019

The accompanying notes are an integral part of these financial statements.

Page 4

SCHMITT INDUSTRIES, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

FOR THE THREE AND NINE MONTHS ENDED FEBRUARY 28 AND 29, 2013 AND 2012

(UNAUDITED)

	Three Months Ended February 28 and 29,						Nine Months Ended February 28 and 29,
	2013			2012			2013			2012
Net income (loss)	$	(191,104	)	$	12,621		$	(175,560	)	$	71,473
Other comprehensive income (loss), net of tax: Foreign currency translation adjustments		(24,648	)		(4,390	)		(15,205	)		(49,661	)
Comprenhensive income (loss)	$	(215,752	)	$	8,231		$	(190,765	)	$	21,812

The accompanying notes are an integral part of these financial statements.

Page 5

SCHMITT INDUSTRIES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED FEBRUARY 28 AND 29, 2013 AND 2012

(UNAUDITED)

	Nine Months Ended February 28 and 29,
	2013			2012
Cash flows relating to operating activities
Net income (loss)	$	(175,560	)	$	71,473
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization		260,379			256,723
Gain on disposal of property and equipment		—			(18,014	)
Stock based compensation		67,255			149,278
(Increase) decrease in:
Accounts receivable		393,466			(58,885	)
Inventories		(772,380	)		(284,056	)
Prepaid expenses		29,870			42,514
Income taxes receivable		(7,021	)		(19,903	)
Increase (decrease) in:
Accounts payable		(66,416	)		(266,891	)
Accrued liabilities and customer deposits		(3,966	)		240,506
Net cash provided by (used in) operating activities		(274,373	)		112,745
Cash flows relating to investing activities
Purchase of property and equipment		(152,010	)		(269,113	)
Proceeds from sale of property and equipment		—			47,180
Net cash used in investing activities		(152,010	)		(221,933	)
Cash flows relating to financing activities
Proceeds from exercise of stock options		—			114,064
Net cash provided by operating activities		—			114,064
Effect of foreign exchange translation on cash		(10,549	)		(35,269	)
Decrease in cash and cash equivalents		(436,932	)		(30,393	)
Cash and cash equivalents, beginning of period		2,776,817			2,760,506
Cash and cash equivalents, end of period	$	2,339,885		$	2,730,113
Supplemental Disclosure of Cash Flow Information
Cash paid during the period for income taxes	$	35,248		$	16,632

The accompanying notes are an integral part of these financial statements.

Page 6

SCHMITT INDUSTRIES, INC.

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

FOR THE NINE MONTHS ENDED FEBRUARY 28, 2013

(UNAUDITED)

	Shares		Amount		Accumulated other comprehensive loss			Retained earnings			Total
Balance, May 31, 2012		2,990,910	$	10,279,636	$	(313,295	)	$	517,400		$	10,483,741
Stock-based compensation		—		67,255		—			—			67,255
Net loss		—		—		—			(175,560	)		(175,560	)
Other comprehensive loss		—		—		(15,205	)		—			(15,205	)
Balance, February 28, 2013		2,990,910	$	10,346,891	$	(328,500	)	$	341,840		$	10,360,231

The accompanying notes are an integral part of these financial statements.

Page 7

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 February 28, 2013 and its results of operations and its cash flows for the periods presented. The consolidated balance sheet at May 31, 2012 has been derived from the Annual Report on Form 10-K for the fiscal year ended May 31, 2012. 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, 2012. 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, 2013.

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.

Note 2:

INVENTORY

Inventory is 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 February 28, 2013 and May 31, 2012, inventories consisted of:

Inventory classification

	February 28, 2013		May 31, 2012
Raw materials	$	1,999,414	$	1,638,280
Work-in-process		1,015,324		980,092
Finished goods		1,729,560		1,357,228
	$	4,744,298	$	3,975,600

Page 8

Note 3:

LINE OF CREDIT

In February 2012, the Company extended its bank line of credit secured by U.S. accounts receivable, inventories and general intangibles through March 1, 2014 and raised the lending limit from $1.0 million to $2.0 million. Interest is payable at the bank’s prime rate (3.25% as of February 28, 2013) or LIBOR plus 2.0% (2.20% as of February 28, 2013). There were no outstanding balances on the line of credit at February 28, 2013 and May 31, 2012.

Note 4:

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 zero.

• 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.

The Company has computed, to determine stock-based compensation expense recognized for those options granted during the three and nine months ended February 28 and 29, 2013 and 2012, the value of all stock options granted using the Black-Scholes option pricing model. No stock options were issued during the nine months ended February 28 and 29, 2013 and 2012.

At February 28, 2013, the Company had a total of 281,666 outstanding stock options (228,330 vested and exercisable and 53,336 non-vested) with a weighted average exercise price of $4.16. The Company estimates that a total of approximately $23,000 will be recorded as additional stock-based compensation expense during the remainder of the year ending May 31, 2013 for all options that were outstanding as of February 28, 2013, but which were not yet vested.

Page 9

Outstanding Options						Exercisable Options
Number of Shares		Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (yrs)		Number of Shares		Weighted Average Exercise Price
	41,666	$	2.30		1.3		41,666	$	2.30
	160,000		3.65		8.3		106,664		3.65
	5,000		5.80		2.7		5,000		5.80
	75,000		6.16		5.2		75,000		6.16
	281,666	$	4.16		6.3		228,330	$	4.28

Options granted, exercised, and forfeited or canceled under the Company’s stock option plan during the three and nine months ended February 28, 2013 are summarized as follows:

	Three Months Ended February 28, 2013				Nine Months Ended February 28, 2013
	Number of Shares		Weighted Average Exercise Price		Number of Shares		Weighted Average Exercise Price
Options outstanding - beginning of period		281,666	$	4.16		281,666	$	4.16
Options granted		—		—		—		—
Options exercised		—		—		—		—
Options forfeited/canceled		—		—		—		—
Options outstanding - February 28, 2013		281,666	$	4.16		281,666	$	4.16

Note 5:

EPS RECONCILIATION

	Three Months Ended February 28 and 29,				Nine Months Ended February 28 and 29,
	2013		2012		2013		2012
Weighted average shares (basic)		2,990,910		2,939,281		2,990,910		2,910,401
Effect of dilutive stock options		—		25,611		—		26,618
Weighted average shares (diluted)		2,990,910		2,964,892		2,990,910		2,937,019

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. 9,594 and 11,924 potentially dilutive common shares from outstanding stock options have been excluded from diluted earnings (loss) per share for the three and nine months ended February 28, 2013, respectively.

Page 10

Note 6:

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.

On June 1, 2007, the Company adopted the provisions of ACS Topic 740. Other long-term liabilities related to tax contingencies were $0 and $7,500 as of February 28, 2013 and May 31, 2012, respectively. 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 February 28, 2013 and May 31, 2012.

Several tax years are subject to examination by major tax jurisdictions. In the United States, federal tax years for Fiscal 2007 and after are subject to examination. In the United Kingdom, tax years for Fiscal 2006 and after are subject to examination. In Canada, tax years for 2005 and after are subject to examination. In the United States, returns related to an acquired subsidiary for the year ended October 31, 1994 and the final return for the period ended May 19, 1995 are also subject to examination.

Effective Tax Rate

The effective tax rate on consolidated net loss was (13.4)% for the nine months ended February 28, 2013. 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 2013 will be approximately (60.3)% due to the items noted above.

Note 7:

SEGMENTS OF BUSINESS

The Company has two reportable business segments: dynamic balancing systems for the machine tool industry (Balancer) and laser-based and ultrasonic test and measurement systems (Measurement). The Company operates in three principal geographic markets: North America, Europe and Asia.

Page 11

Segment Information

	Three Months Ended February 28 and 29,
	2013						2012
	Balancer			Measurement			Balancer			Measurement
Gross sales	$	2,023,483		$	1,002,351		$	2,412,507		$	933,306
Intercompany sales		(213,564	)		(15,841	)		(181,924	)		(7,392	)
Net sales	$	1,809,919		$	986,510		$	2,230,583		$	925,914
Operating income (loss)	$	68,552		$	(242,234	)	$	270,113		$	(270,810	)
Depreciation expense	$	35,448		$	17,630		$	37,751		$	16,568
Amortization expense	$	—		$	33,659		$	—		$	33,659
Capital expenditures	$	9,393		$	—		$	1,098		$	7,027
	Nine Months Ended February 28 and 29,
	2013						2012
	Balancer			Measurement			Balancer			Measurement
Gross sales	$	6,539,053		$	3,288,795		$	7,786,463		$	3,038,822
Intercompany sales		(604,450	)		(44,045	)		(672,056	)		(49,022	)
Net sales	$	5,934,603		$	3,244,750		$	7,114,407		$	2,989,800
Operating income (loss)	$	167,791		$	(328,704	)	$	422,444		$	(387,273	)
Depreciation expense	$	105,662		$	53,741		$	105,099		$	50,648
Amortization expense	$	—		$	100,976		$	—		$	100,976
Capital expenditures	$	49,223		$	102,787		$	127,648		$	141,465

Geographic Information-Net Sales by Geographic Area

	Three Months Ended February 28 and 29,				Nine Months Ended February 28 and 29,
	2013		2012		2013		2012
North America	$	1,948,358	$	2,014,834	$	6,040,977	$	5,937,212
Europe		259,570		217,241		931,063		831,363
Asia		515,040		866,227		1,956,977		2,967,373
Other markets		73,461		58,195		250,336		368,259
Total Net Sales	$	2,796,429	$	3,156,497	$	9,179,353	$	10,104,207

Page 12

	Three Months Ended February 28 and 29,
	2013						2012
	United States			Europe			United States			Europe
Operating income (loss)	$	(142,189	)	$	(31,493	)	$	4,969		$	(5,666	)
Depreciation expense	$	53,078		$	—		$	54,319		$	—
Amortization expense	$	33,659		$	—		$	33,659		$	—
Capital expenditures	$	9,393		$	—		$	8,125		$	—
	Nine Months Ended February 28 and 29,
	2013						2012
	United States			Europe			United States			Europe
Operating income (loss)	$	(96,811	)	$	(64,102	)	$	(2,865	)	$	38,036
Depreciation expense	$	159,403		$			$	155,747		$	—
Amortization expense	$	100,976		$	—		$	100,976		$	—
Capital expenditures	$	152,010		$	—		$	269,113		$	—

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

Segment and Geographic Assets

	February 28, 2013		May 31, 2012
Segment assets to total assets
Balancer	$	5,354,559	$	4,872,664
Measurement		4,120,833		4,368,654
Corporate assets		2,354,686		2,784,597
Total assets	$	11,830,078	$	12,025,915
Geographic assets to long-lived assets
United States	$	1,364,743	$	1,372,136
Europe		—		—
Total assets	$	1,364,743	$	1,372,136
Geographic assets to total assets
United States	$	11,152,606	$	11,246,431
Europe		677,472		779,484
Total assets	$	11,830,078	$	12,025,915

Page 13

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 and balancing equipment (the Balancer segment) to the worldwide machine tool industry and through its wholly owned subsidiary, Schmitt Measurement Systems, Inc., 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, 2012.

“SBS,” “SMS,” “Acuity,” “Xact” and “Lasercheck” are registered trademarks owned by the Company.

For the three months ended February 28, 2013, total sales decreased $360,000, or 11.4%, to $2.8 million compared to $3.2 million in the three months ended February 29, 2012. For the nine months ended February 28, 2013, total sales decreased $925,000, or 9.2%, to $9.2 million from $10.1 million in the nine months ended February 29, 2012. 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, South America, Asia and Europe. Balancer segment sales decreased $421,000, or 18.9%, to $1.8 million for the three months ended February 28, 2013 compared to $2.2 million for the three months ended February 29, 2012. Balancer segment sales decreased $1.2 million, or 16.6%, to $5.9 million for the nine months ended February 28, 2013 compared to $7.1 million for the nine months ended February 29, 2012. These decreases in worldwide balancer sales are due to lower volumes of shipments, particularly to Asia. The Measurement segment product line consists of laser-based light-scatter, distance measurement and dimensional sizing products and remote tank monitoring products. Total Measurement segment sales increased $61,000, or 6.5%, to $987,000 for the three months ended February 28, 2013 compared to $926,000 for the three months ended February 29, 2012. The increase is primarily due to increases in volumes of remote tank monitoring product shipments offset by lower volumes of shipments of distance measurement and dimensional sizing laser-based products as compared to the same quarter in the prior year. Total Measurement segment sales increased $255,000, or 8.5%, to $3.2 million for the nine months ended February 28, 2013 compared to $3.0 million for the nine months ended February 29, 2012. The increase is primarily due to higher volumes of shipments of remote tank monitoring products and distance measurement and dimensional sizing laser-based products offset by decreases in shipments of laser-based light-scatter surface measurement products.

Operating expenses have decreased $9,000, or 0.6%, to $1.5 million for the three months ended February 28, 2013 from $1.5 million for the three months ended February 29, 2012. Operating expenses have increased $255,000, or 5.5%, to $4.9 million

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for the nine months ended February 28, 2013 from $4.7 million for the nine months ended February 29, 2012. General, administration and sales expenses have decreased $82,000, or 5.7%, to $1.4 million for the three months ended February 28, 2013 from $1.4 million for the same period in the prior year. General, administration and sales expenses have increased $42,000, or 0.9%, to $4.5 million for the nine months ended February 28, 2013 from $4.5 million for the same period in the prior year. Research and development expenses have increased $73,000, or 79.3%, to $165,000 for the three months ended February 28, 2013 from $92,000 for the three months ended February 29, 2012. Research and development expenses have increased $214,000, or 108.1%, to $411,000 for the nine months ended February 28, 2013 from $198,000 for the nine months ended February 29, 2012. Net loss was $191,000, or $0.06 per fully diluted share, for the three months ended February 28, 2013 as compared to net income of $13,000, or $0.00 per fully diluted share, for the three months ended February 29, 2012. Net loss was $176,000, or $0.06 per fully diluted share, for the nine months ended February 28, 2013 as compared to net income of $71,000, or $0.02 per fully diluted share, for the nine months ended February 29, 2012.

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, 2012.

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Discussion of Operating Results

	Three Months Ended February 28 and 29,
	2013					2012
Balancer sales	$	1,809,919		64.7	%	$	2,230,583		70.7	%
Measurement sales		986,510		35.3	%		925,914		29.3	%
Total sales		2,796,429		100.0	%		3,156,497		100.0	%
Cost of sales		1,438,831		51.5	%		1,616,534		51.2	%
Gross profit		1,357,598		48.5	%		1,539,963		48.8	%
Operating expenses:
General, administration and sales		1,366,587		48.9	%		1,448,818		45.9	%
Research and development		164,693		5.9	%		91,842		2.9	%
Total operating expenses		1,531,280		54.8	%		1,540,660		48.8	%
Operating loss		(173,682	)	-6.2	%		(697	)	0.0	%
Other income (expense)		(2,347	)	-0.1	%		6,901		0.2	%
Income (loss) before income taxes		(176,029	)	-6.3	%		6,204		0.2	%
Provision (benefit) for income taxes		15,075		0.5	%		(6,417	)	-0.2	%
Net income (loss)	$	(191,104	)	-6.8	%	$	12,621		0.4	%
	Nine Months Ended February 28 and 29,
	2013					2012
Balancer sales	$	5,934,603		64.7	%	$	7,114,407		70.4	%
Measurement sales		3,244,750		35.3	%		2,989,800		29.6	%
Total sales		9,179,353		100.0	%		10,104,207		100.0	%
Cost of sales		4,405,579		48.0	%		5,389,802		53.3	%
Gross profit		4,773,774		52.0	%		4,714,405		46.7	%
Operating expenses:
General, administration and sales		4,523,320		49.3	%		4,481,536		44.4	%
Research and development		411,367		4.5	%		197,698		2.0	%
Total operating expenses		4,934,687		53.8	%		4,679,234		46.3	%
Operating income (loss)		(160,913	)	-1.8	%		35,171		0.3	%
Other income		6,080		0.1	%		33,031		0.3	%
Income (loss) before income taxes		(154,833	)	-1.7	%		68,202		0.7	%
Provision (benefit) for income taxes		20,727		0.2	%		(3,271	)	0.0	%
Net income (loss)	$	(175,560	)	-1.9	%	$	71,473		0.7	%

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Sales – Sales in the Balancer segment decreased $421,000, or 18.9%, to $1.8 million for the three months ended February 28, 2013 compared to $2.2 million for the three months ended February 29, 2012. This decrease is primarily due to lower unit sales volumes in Asia and North America offset in part by increases in Europe during the third quarter of Fiscal 2013. Sales in Asia decreased $376,000, or 45.9%, for the three months ended February 28, 2013 as compared to the three months ended February 29, 2012. North American sales decreased $70,000, or 5.9%, in the three months ended February 28, 2013 compared to the same period in the prior year. European sales increased $30,000, or 17.2%, in the third quarter of Fiscal 2013 compared to the third quarter of Fiscal 2012. Sales in other regions of the world decreased $5,000, or 9.9%, in the third quarter of Fiscal 2013 as compared to the same quarter in the prior year. These decreases across most geographies are due primarily to lower volumes of shipments. The levels of demand for our Balancer products in any of the geographic markets cannot be forecasted with any certainty given the continuing volatility in the global economy and the historical volatility experienced in the manufacturing market.

Sales in the Balancer segment decreased $1.2 million, or 16.6%, to $5.9 million for the nine months ended February 28, 2013 compared to $7.1 million for the nine months ended February 29, 2012. This decrease is primarily due to lower unit sales volumes in Asia, North America and other regions of the world offset in part by increases in Europe during the first nine months of Fiscal 2013. Sales in Asia decreased $898,000, or 33.8%, for the nine months ended February 28, 2013 as compared to the nine months ended February 29, 2012. North American sales decreased $259,000, or 7.3%, in the nine months ended February 28, 2013 compared to the same period in the prior year. European sales increased $105,000, or 17.4%, in the first nine months of Fiscal 2013 compared to the first nine months of Fiscal 2012. Sales in other regions of the world decreased $128,000, or 46.1%, in the first nine months of Fiscal 2013 as compared to the same period in the prior year. These decreases across most geographies are due primarily to lower volumes of shipments.

Sales in the Measurement segment increased $61,000, or 6.5%, to $987,000 in the three months ended February 28, 2013 compared to $926,000 in the three months ended February 29, 2012. Sales of remote tank monitoring products increased $107,000 to $176,000 during the third quarter of Fiscal 2013 as compared to the same period in the prior year. Sales of light-scatter laser-based surface measurement products in the three months ended February 28, 2013 increased $8,000, or 11.2%, as compared to the same period in the prior year primarily due to higher sales volumes of surface roughness measurement products in the current year. Sales of laser-based distance measurement and dimensional sizing products decreased $55,000, or 7.0%, in the three months ended February 28, 2013 as compared to the same period in the prior year primarily due to lower volumes of shipments. Given the recent volatility in these markets, future sales of Measurement products cannot be forecasted with any certainty.

Sales in the Measurement segment increased $255,000, or 8.5%, to $3.2 million in the nine months ended February 28, 2013 compared to $3.0 million in the nine months ended February 29, 2012. Sales of remote tank monitoring products increased $409,000 to $564,000 during the first nine months of Fiscal 2013 as compared to the same period in the prior year. Sales of laser-based distance measurement and dimensional sizing products increased $66,000, or 3.0%, in the nine months ended February 28, 2013 as compared to the same period in the prior year primarily due to higher volumes of shipments. Sales of light-scatter laser-based surface measurement products in the nine months ended February 29, 2012 decreased $220,000, or 32.9%, as compared to the same period in the prior year primarily due to lower volumes of surface roughness measurement products in the current year.

Gross margin – Gross margin for the three months ended February 28, 2013 decreased slightly to 48.5% as compared to 48.8% for the three months ended February 29, 2012. Gross margin for the nine months ended February 28, 2013 increased to 52.0% as compared to 46.7% for the nine months ended February 29, 2012. This increase for the nine months is primarily due to a shift in the product sales mix toward higher margin products, lower sales volumes through the Asian distribution channels, which typically have higher discounts and lower margins, and the Company’s efforts to reduce the material costs from certain key suppliers.

Operating expenses – Operating expenses increased $9,000, or 0.6%, to $1.5 million for the three months ended February 28, 2013 as compared to $1.5 million for the three months ended February 29, 2012. General, administrative and selling expenses decreased $82,000, or 5.7%, for the three months ended February 28, 2013 as compared to the same period in the prior year primarily due to lower personnel costs partially offset by higher sales and marketing expenses. Research and development expenses increased $73,000, or 79.3%, to $165,000 as compared to $92,000 in the same period in the prior year primarily due to higher personnel costs and higher material costs associated with new product development related to existing product lines.

Operating expenses increased $255,000, or 5.5%, to $4.9 million for the nine months ended February 28, 2013 as compared to $4.7 million for the nine months ended February 29, 2012. General, administrative and selling expenses increased $42,000, or

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0.9%, for the three months ended February 28, 2013 as compared to the same period in the prior year primarily due to higher sales and marketing expenses associated with the Company’s largest trade show offset by lower personnel costs. Research and development expenses increased $214,000, or 108.1%, as compared to the same period in the prior year primarily due to higher personnel costs and higher material costs associated with new product development related to existing product lines.

Other income – Other income consists of interest income, foreign currency exchange gain (loss) and other income (expense). Interest income was $0 for both of the three-month periods ended February 28 and 29, 2013 and 2012. Interest income was $1,000 for both of the nine-month periods ended February 28 and 29, 2013 and 2012. Foreign currency exchange gains (losses) were $(3,000) and $16,000 for the three months ended February 28 and 29, 2013 and 2012, respectively. Foreign currency exchange gains were $5,000 and $23,000 for the nine months ended February 28 and 29, 2013 and 2012, respectively. Other income included a $18,000 gain on the sales of fixed assets for the nine months ended February 29, 2012.

Income tax provision – The Company’s effective tax rate on consolidated net loss was (13.4)% for the nine months ended February 28, 2013. The Company’s 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 2013 will be (60.3)% due to the items noted above.

Net income – Net loss increased to $191,000, or $0.06 per diluted share, for the three months ended February 28, 2013 as compared to net income of $13,000, or $0.00 per diluted share, for the three months ended February 29, 2012. Net loss increased due primarily to lower sales, lower gross profit, and higher research and development expenses offset in part by lower general, administrative and selling expenses during the three months ended February 28, 2013. Net loss increased to $176,000, or $0.06 per diluted share, for the nine months ended February 28, 2013 as compared to net income of $71,000, or $0.02 per diluted share, for the nine months ended February 29, 2012. Net loss increased due primarily to lower sales, higher general, administrative and selling expenses and higher research and development expenses offset by higher gross profit during the nine months ended February 28, 2013.

LIQUIDITY AND CAPITAL RESOURCES

The Company’s working capital decreased $22,000 to $7.9 million as of February 28, 2013 from $7.9 million as of May 31, 2012. Cash and cash equivalents decreased $437,000 to $2.3 million as of February 28, 2013 from $2.8 million as of May 31, 2012.

Cash used in operating activities totaled $274,000 for the nine months ended February 28, 2013 as compared to cash provided by operating activities of $113,000 for the three months ended February 29, 2012. The decrease is primarily due to increases in inventories and net loss and decreases in accounts payable, offset by decreases in accounts receivable and stock-based compensation.

At February 28, 2013, the Company had accounts receivable of $2.1 million as compared to $2.5 million at May 31, 2012. The decrease in accounts receivable of $396,000 is due to the timing of sales and collections during the first nine months of Fiscal 2013. Inventories increased $769,000 to $4.7 million as of February 28, 2013 compared to $4.0 million at May 31, 2012. The increase in inventories is due primarily to the timing of inventory receipts, the build-up of inventories for new products in anticipation of sales and the sale of the inventories. At February 28, 2013, total current liabilities decreased $65,000 to $1.5 million as compared to $1.5 million at May 31, 2012. The decrease is primarily due to decreases in accounts payable associated with the timing of payments.

During the nine months ended February 28, 2013, net cash used in investing activities was $152,000, which consisted of additions to property and equipment. Additions to property and equipment consisted primarily of office and computer equipment and a new roof for one of our buildings.

The Company has a $2.0 million bank line of credit agreement secured by U.S. accounts receivable, inventories and general intangibles. Interest is payable at the bank’s prime rate (3.25% as of February 28, 2013), or LIBOR plus 2.0% (2.20% as of February 28, 2013), and the agreement expires on March 1, 2014. There were no outstanding balances on the line of credit at February 28, 2013 and May 31, 2012.

We believe that our existing cash and cash equivalents combined with the cash we anticipate to generate from operating activities and our available line of credit and financing available from other sources 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.

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Business Risks

The following are important 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 (see the forward-looking statements disclaimer at the beginning of Item 2 in this Report). In addition, the risks and uncertainties described below are not the only ones that the Company faces. Unforeseen risks could arise and problems or issues that the Company now views as minor could become more significant. If the Company were unable to adequately respond to significant risks and uncertainties, the Company’s business, financial condition or results of operations could be materially adversely affected. In addition, the Company cannot be certain that any actions taken to reduce known or unknown risks and uncertainties will be effective.

The general economic conditions and uncertainties may adversely affect the Company’s business, operating results and financial condition

The Company’s operations and performance depend significantly on worldwide economic conditions, particularly in the manufacturing and automotive sectors, and their impact on levels of capital investment, which have deteriorated significantly in the past and may become depressed, or be subject to further deterioration. Economic factors that could adversely influence demand for the Company’s products include uncertainty about global economic conditions leading to reduced levels of investment, customers’ and suppliers’ access to credit, unemployment and other macroeconomic factors affecting commercial and industrial spending behavior.

The past distress in the financial markets and global economy has resulted in reduced liquidity and a tightening of credit markets. As a result of these conditions, the Company could experience several potential adverse effects, including the inability of customers to obtain credit to finance purchases of the Company’s products, the insolvency of customers resulting in reduced sales and bad debts, and the insolvency of key suppliers resulting in product development and production delays.

The Company’s primary markets are volatile and unpredictable

The Company’s business depends on the demand for our various products in a variety of commercial and industrial markets. In the past, demand for our products in these markets has fluctuated due to a variety of factors, some of which are beyond our control, including: general economic conditions, both domestically and internationally, the timing, number and size of orders from, and shipments to, our customers as well as the relative mix of those orders and variations in the volume of orders for a particular product line in a particular quarter.

The Xact tank monitoring system may not become commercially viable and we may not be able to meet manufacturing requirements of large orders

In May 2009, the Company announced the introduction of the Xact tank monitoring system for measuring fill levels of industrial liquefied propane tanks and communicating that data via satellite to a secure web site. Although the initial acquisition and further development of the Xact product has negatively impacted recent operating results, the product should allow the Company to enter new measurement markets and is expected to add sales and profits to the Company in future years. However, anticipated market demand for the Xact product may not materialize and additional product or market opportunities may not be identified and developed and brought to market in a timely and cost-effective manner. Also, the Company may not be able to meet the manufacturing requirements of large orders in a timely and cost-effective manner. All of this could continue to negatively impact future operating results and result in large and immediate write-offs of recorded intangible asset balances.

New products may not be developed to satisfy changes in consumer demands

The failure to develop new technologies, or react to changes in existing technologies, could materially delay development of new products, which could result in decreased revenues and a loss of market share to competitors. Financial performance depends on the ability to design, develop, manufacture, assemble, test, market and support new products and enhancements on a timely and cost-effective basis. New product opportunities may not be identified and developed and brought to market in a timely and cost-effective manner. Products or technologies developed by other companies may render products or technologies obsolete or noncompetitive, or a fundamental shift in technologies in the product markets could have a material adverse effect on the Company’s competitive position within historic industries.

Failure to protect intellectual property rights could adversely affect future performance and growth

Failure to protect existing intellectual property rights may result in the loss of valuable technologies or paying other companies for infringing on their intellectual property rights. The Company relies on patent, trade secret, trademark and copyright law to protect such technologies. There is no assurance any of the Company’s U.S. patents will not be invalidated, circumvented, challenged or licensed to other companies.

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Competition is intense and the Company’s failure to compete effectively would adversely affect its business

Competition in the markets for the Company’s products is intense. The speed with which companies can identify new applications for the Company’s various technologies, develop products to meet those needs and supply commercial quantities at low prices to those new markets are important competitive factors. The principal competitive factors in the Company’s markets are product features, performance, reliability and price. Many of the Company’s competitors have greater financial, technical, research and development and marketing resources. No assurance can be given that the Company will be able to compete effectively in the future, and the failure to do so would have a material adverse effect on the Company’s business, financial condition and results of operations.

Production time and the overall cost of products could increase if any of the primary suppliers are lost or if a primary supplier increased the prices of raw materials

Manufacturing operations depend upon obtaining adequate supplies of raw materials on a timely basis. The results of operations could be adversely affected if adequate supplies of raw materials or components cannot be obtained in a timely manner or if the costs of raw materials or components increased significantly.

The Company may not be able to ramp up manufacturing to satisfy increasing demands, which may lead to the loss of significant revenue opportunities

The Company manufactures several different product lines, each of which involves complicated technology and requires significant individual attention for each product made. The production time for each product can vary, depending on a variety of circumstances, including component availability, timing of delivery of components from suppliers and employee availability. Should the Company experience a large increase in orders, an increase in the size of orders or a shortening of the required delivery time on existing orders, the Company may not be able to ramp up manufacturing to satisfy customer expectations, which may lead to the loss of significant revenue opportunities.

Fluctuations in quarterly and annual operating results make it difficult to predict future performance

Quarterly and annual operating results are likely to fluctuate in the future due to a variety of factors, some of which are beyond management’s control. As a result of quarterly operating fluctuations, it is important to realize quarter-to-quarter comparisons of operating results are not necessarily meaningful and should not be relied upon as indicators of future performance.

The Company may not be able to reduce operating costs quickly enough if sales decline

Operating expenses are generally fixed in nature and largely based on anticipated sales. However, should future sales decline significantly and rapidly, there is no guarantee management could take actions that would further reduce operating expenses in either a timely manner or without seriously impacting the operations of the Company.

The Company maintains a significant investment in inventories in anticipation of future sales

The Company believes it maintains a competitive advantage by shipping product to its customers more rapidly than its competitors. As a result, the Company has a significant investment in inventories. These inventories are recorded using the lower-of-cost or market method, which requires management to make certain estimates. Management evaluates the recorded inventory values based on customer demand, market trends and expected future sales and changes these estimates accordingly. A significant shortfall of sales may result in carrying higher levels of inventories of finished goods and raw materials thereby increasing the risk of inventory obsolescence and corresponding inventory write-downs. As a result, the Company may not carry adequate reserves to offset such write-downs.

Future success depends in part on attracting and retaining key management and qualified technical and sales personnel

Future success depends on the efforts and continued services of key management, technical and sales personnel. Significant competition exists for such personnel, and there is no assurance that key technical and sales personnel can be retained or that other highly qualified technical and sales personnel as required can be attracted, assimilated and retained. There is also no guarantee that key employees will not leave and subsequently compete against the Company. The inability to attract and retain key personnel could adversely impact the business, financial condition and results of operations.

Changes in the effective tax rate may have an adverse effect on the Company’s results of operations

The Company’s future effective tax rate may be adversely affected by a number of factors including: the jurisdictions in which profits are determined to be earned and taxed; the resolution of issues arising from future potential tax audits with various tax authorities; changes in the valuation of our deferred tax assets and liabilities; adjustments to estimated taxes upon finalization of various tax returns; increases in expenses not deductible for tax purposes; changes in available tax credits; changes in stock-based compensation expense; changes in tax laws or the interpretations of such tax laws and changes in generally accepted accounting principles.

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Changes in securities laws and regulations have increased and will continue to increase Company expenses

Changes in the laws and regulations affecting public companies, including the provisions of the Sarbanes-Oxley Act of 2002 and rules promulgated by the Securities and Exchange Commission, have increased and will continue to increase Company expenses as the Company devotes resources to ensure compliance with all applicable laws and regulations. In addition, the NASDAQ Capital Market, on which the Company’s common stock is listed, has also adopted comprehensive rules and regulations relating to corporate governance. These laws, rules and regulations have increased the scope, complexity and cost of corporate governance, reporting and disclosure practices. The Company may be required to hire additional personnel and use outside legal, accounting and advisory services to address these laws, rules and regulations. The Company also expects these developments to make it more difficult and more expensive for the Company to obtain director and officer liability insurance in the future, and the Company may be required to accept reduced coverage or incur substantially higher costs to obtain coverage. Further, the Company’s board members, Chief Executive Officer and Chief Financial Officer could face an increased risk of personal liability in connection with the performance of their duties. As a result, we may have difficulty attracting and retaining qualified board members and executive officers, which would adversely affect the Company.

The Company faces risks from international sales and currency fluctuations

The Company markets and sells its products worldwide and international sales have accounted for and are expected to continue to account for a significant portion of future revenue. International sales are subject to a number of risks, including: the imposition of governmental controls; trade restrictions; difficulty in collecting receivables; changes in tariffs and taxes; difficulties in staffing and managing international operations; political and economic instability; general economic conditions; and fluctuations in foreign currencies. No assurances can be given that these factors will not have a material adverse effect on future international sales and operations and, consequently, on business, financial condition and results of operations.

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Item 3. Quantitative and Qualitative Disclosures about Market Risk

Interest Rate Risk

The Company did not have any derivative financial instruments as of February 28, 2013. However, the Company could be exposed to interest rate risk at any time in the future and, therefore, employs established policies and procedures to manage its exposure to changes in the market risk of its marketable securities.

The Company’s interest income and expense are most sensitive to changes in the general level of U.S. and European interest rates. In this regard, changes in U.S. and European interest rates affect the interest earned on the Company’s interest bearing cash equivalents and short term investments. The Company has a variable rate line of credit facility with a bank but there was no outstanding balance as of February 28, 2013. Also, there is no other long-term obligation whose interest rates are based on variable rates that may fluctuate over time based on economic changes in the environment. Therefore, at this time, the Company is not subject to interest rate risk on outstanding interest bearing obligations if market interest rates fluctuate and does not expect any change in the interest rates to have a material effect on the Company’s results from operations.

Foreign Currency Risk

The Company markets and sells its products worldwide and international sales have accounted for and are expected to continue to account for a significant portion of future revenue. The Company operates a subsidiary in the United Kingdom and acquires certain materials and services from vendors transacted in foreign currencies. Therefore, the Company’s business and financial condition is sensitive to currency exchange rates and any other restrictions imposed on applicable currencies. For the three months ended February 28 and 29, 2013 and 2012, results of operations included gains (losses) on foreign currency translation of $(3,000) and $16,000, respectively. For the nine months ended February 28 and 29, 2013 and 2012, results of operations included gains on foreign currency translation of $5,000 and $23,000, respectively.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

As of February 28, 2013, 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 February 28, 2013 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.DEF	XBRL Taxonomy Extension Definition Linkbase Document **
101.LAB	XBRL Taxonomy Extension Label Linkbase Document **
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document **

 * Furnished herewith.

** Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Section 11 or 12 of the Securities Act of 1933, as amended, or Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

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.

	SCHMITT INDUSTRIES, INC.
	(Registrant)
Date: April 9, 2013	/s/ Jeffrey T Siegal
	Jeffrey T Siegal, Chief Financial Officer and Treasurer

Page 23

EX-31.1

Exhibit 31.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, James A. Fitzhenry, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Schmitt Industries, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13-15(f) and 15d-15(f))for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: April 9, 2013	/s/ James A. Fitzhenry
	James A. Fitzhenry, President and Chief Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Jeffrey T Siegal, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Schmitt Industries, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: April 9, 2013	/s/ Jeffrey T Siegal
	Jeffrey T Siegal, Chief Financial Officer and Treasurer

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Schmitt Industries, Inc. (the “Company”) on Form 10-Q for the fiscal quarter ended February 28, 2013 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), we, James A. Fitzhenry and Jeffrey T Siegal, President and Chief Executive Officer and Chief Financial Officer and Treasurer, respectively, of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that to our knowledge:

(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ James A. Fitzhenry

James A. Fitzhenry

President and Chief Executive Officer

April 9, 2013

/s/ Jeffrey T Siegal

Jeffrey T Siegal

Chief Financial Officer and Treasurer

April 9, 2013

XML

EPS Reconciliation (Details)	3 Months Ended		9 Months Ended
	Feb. 28, 2013	Feb. 29, 2012	Feb. 28, 2013	Feb. 29, 2012
Schedule of earnings per share
Weighted average shares (basic)	2,990,910	2,939,281	2,990,910	2,910,401
Effect of dilutive stock options		25,611		26,618
Weighted average shares (diluted)	2,990,910	2,964,892	2,990,910	2,937,019

XML

Inventory

9 Months Ended

Feb. 28, 2013

Inventory [Abstract]

INVENTORY

Note 2:

INVENTORY

Inventory is 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 February 28, 2013 and May 31, 2012, inventories consisted of:

Inventory classification

	February 28, 2013		May 31, 2012
Raw materials	$	1,999,414	$	1,638,280
Work-in-process		1,015,324		980,092
Finished goods		1,729,560		1,357,228
	$	4,744,298	$	3,975,600

XML

Segments of Business (Details 1) (USD $)	3 Months Ended		9 Months Ended
	Feb. 28, 2013	Feb. 29, 2012	Feb. 28, 2013	Feb. 29, 2012
Geographic Information-Net Sales by Geographic Area
Total Net Sales	$ 2,796,429	$ 3,156,497	$ 9,179,353	$ 10,104,207
Operating income (loss)	(173,682)	(697)	(160,913)	35,171
United States [Member]
Geographic Information-Net Sales by Geographic Area
Operating income (loss)	(142,189)	4,969	(96,811)	(2,865)
Depreciation expense	53,078	54,319	159,403	155,747
Amortization expense	33,659	33,659	100,976	100,976
Capital expenditures	9,393	8,125	152,010	269,113
North America [Member]
Geographic Information-Net Sales by Geographic Area
Total Net Sales	1,948,358	2,014,834	6,040,977	5,937,212
Europe [Member]
Geographic Information-Net Sales by Geographic Area
Total Net Sales	259,570	217,241	931,063	831,363
Operating income (loss)	(31,493)	(5,666)	(64,102)	38,036
Depreciation expense
Amortization expense
Capital expenditures
Asia [Member]
Geographic Information-Net Sales by Geographic Area
Total Net Sales	515,040	866,227	1,956,977	2,967,373
Other Markets [Member]
Geographic Information-Net Sales by Geographic Area
Total Net Sales	$ 73,461	$ 58,195	$ 250,336	$ 368,259

XML

Segments of Business (Details) (USD $)	3 Months Ended		9 Months Ended
	Feb. 28, 2013	Feb. 29, 2012	Feb. 28, 2013	Feb. 29, 2012
Segment Information
Net sales	$ 2,796,429	$ 3,156,497	$ 9,179,353	$ 10,104,207
Operating income (loss)	(173,682)	(697)	(160,913)	35,171
Balancer [Member]
Segment Information
Gross sales	2,023,483	2,412,507	6,539,053	7,786,463
Intercompany sales	(213,564)	(181,924)	(604,450)	(672,056)
Net sales	1,809,919	2,230,583	5,934,603	7,114,407
Operating income (loss)	68,552	270,113	167,791	422,444
Depreciation expense	35,448	37,751	105,662	105,099
Amortization expense
Capital expenditures	9,393	1,098	49,223	127,648
Measurement [Member]
Segment Information
Gross sales	1,002,351	933,306	3,288,795	3,038,822
Intercompany sales	(15,841)	(7,392)	(44,045)	(49,022)
Net sales	986,510	925,914	3,244,750	2,989,800
Operating income (loss)	(242,234)	(270,810)	(328,704)	(387,273)
Depreciation expense	17,630	16,568	53,741	50,648
Amortization expense	33,659	33,659	100,976	100,976
Capital expenditures		$ 7,027	$ 102,787	$ 141,465

XML

Segments of Business (Details 2) (USD $)	Feb. 28, 2013	May 31, 2012
Segment and Geographic Assets
Segment assets to total assets	$ 11,830,078	$ 12,025,915
Geographic assets to long-lived assets	1,364,743	1,372,136
Geographic assets to total assets	11,830,078	12,025,915
United States [Member]
Segment and Geographic Assets
Geographic assets to long-lived assets	1,364,743	1,372,136
Geographic assets to total assets	11,152,606	11,246,431
Europe [Member]
Segment and Geographic Assets
Geographic assets to long-lived assets
Geographic assets to total assets	677,472	779,484
Balancer [Member]
Segment and Geographic Assets
Segment assets to total assets	5,354,559	4,872,664
Measurement [Member]
Segment and Geographic Assets
Segment assets to total assets	4,120,833	4,368,654
Corporate assets [Member]
Segment and Geographic Assets
Segment assets to total assets	$ 2,354,686	$ 2,784,597

XML

Segments of Business (Details Textual)	9 Months Ended
	Feb. 28, 2013 Segment GeographicMarket
Segments of Business (Textual) [Abstract]
Number of reportable business segments	2
Number of geographic markets in which entity operates	3

XML

Summary of Significant Accounting Policies

9 Months Ended

Feb. 28, 2013

Summary of Significant Accounting Policies [Abstract]

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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 February 28, 2013 and its results of operations and its cash flows for the periods presented. The consolidated balance sheet at May 31, 2012 has been derived from the Annual Report on Form 10-K for the fiscal year ended May 31, 2012. 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, 2012. 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, 2013.

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.

XML

Consolidated Balance Sheets (Unaudited) (USD $)	Feb. 28, 2013	May 31, 2012
Current assets
Cash and cash equivalents	$ 2,339,885	$ 2,776,817
Accounts receivable, net of allowance of $26,596 and $26,720 at February 28, 2013 and May 31, 2012, respectively	2,098,229	2,493,889
Inventories	4,744,298	3,975,600
Prepaid expenses	156,185	186,489
Income taxes receivable	14,801	7,780
Total current assets	9,353,398	9,440,575
Property and equipment
Land	299,000	299,000
Buildings and improvements	1,805,951	1,723,273
Furniture, fixtures and equipment	1,288,211	1,247,720
Vehicles	121,835	121,835
Property, plant and equipment, gross	3,514,997	3,391,828
Less accumulated depreciation and amortization	(2,150,254)	(2,019,692)
Property, plant and equipment, net	1,364,743	1,372,136
Other assets
Intangible assets, net	1,111,937	1,213,204
TOTAL ASSETS	11,830,078	12,025,915
Current liabilities
Accounts payable	703,227	770,586
Accrued commissions	310,588	335,104
Accrued payroll liabilities	139,126	142,665
Other accrued liabilities	316,906	286,319
Total current liabilities	1,469,847	1,534,674
Long-term liabilities		7,500
Stockholders' equity
Common stock, no par value, 20,000,000 shares authorized, 2,990,910 shares issued and outstanding at both February 28, 2013 and May 31, 2012	10,346,891	10,279,636
Accumulated other comprehensive loss	(328,500)	(313,295)
Retained earnings	341,840	517,400
Total stockholders' equity	10,360,231	10,483,741
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$ 11,830,078	$ 12,025,915

XML

Consolidated Statements of Cash Flows (Unaudited) (USD $)	9 Months Ended
	Feb. 28, 2013	Feb. 29, 2012
Cash flows relating to operating activities
Net income (loss)	$ (175,560)	$ 71,473
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization	260,379	256,723
Gain on disposal of property and equipment		(18,014)
Stock based compensation	67,255	149,278
(Increase) decrease in:
Accounts receivable	393,466	(58,885)
Inventories	(772,380)	(284,056)
Prepaid expenses	29,870	42,514
Income taxes receivable	(7,021)	(19,903)
Increase (decrease) in:
Accounts payable	(66,416)	(266,891)
Accrued liabilities and customer deposits	(3,966)	240,506
Net cash provided by (used in) operating activities	(274,373)	112,745
Cash flows relating to investing activities
Purchase of property and equipment	(152,010)	(269,113)
Proceeds from sale of property and equipment		47,180
Net cash used in investing activities	(152,010)	(221,933)
Cash flows relating to financing activities
Proceeds from exercise of stock options		114,064
Net cash provided by financing activities		114,064
Effect of foreign exchange translation on cash	(10,549)	(35,269)
Decrease in cash and cash equivalents	(436,932)	(30,393)
Cash and cash equivalents, beginning of period	2,776,817	2,760,506
Cash and cash equivalents, end of period	2,339,885	2,730,113
Supplemental Disclosure of Cash Flow Information
Cash paid during the period for income taxes	$ 35,248	$ 16,632

XML

Stock Options and Stock-Based Compensation (Details) (USD $)				9 Months Ended
	Feb. 28, 2013	Nov. 30, 2012	May 31, 2012	Feb. 28, 2013 Options 1 [Member]	Feb. 28, 2013 Options 2 [Member]	Feb. 28, 2013 Options 3 [Member]	Feb. 28, 2013 Options 4 [Member]	Feb. 28, 2013 Options 5 [Member]
Schedule of outstanding stock options
Number of Shares, Outstanding Options	281,666	281,666	281,666	41,666	160,000	5,000	75,000	281,666
Weighted Average Exercise Price, Outstanding Options	$ 4.16	$ 4.16	$ 4.16	$ 2.30	$ 3.65	$ 5.80	$ 6.16	$ 4.16
Weighted Average Remaining Contractual Life (yrs), Outstanding Options				1 year 3 months 18 days	8 years 3 months 18 days	2 years 8 months 12 days	5 years 2 months 12 days	6 years 3 months 18 days
Exercisable Options, Number of Shares	228,330			41,666	106,664	5,000	75,000	228,330
Exercisable Options, Weighted Average Exercise Price				$ 2.30	$ 3.65	$ 5.80	$ 6.16	$ 4.28

XML

Stock Options and Stock-Based Compensation (Details Textual) (USD $)	9 Months Ended
	Feb. 28, 2013	Feb. 29, 2012	Nov. 30, 2012	May 31, 2012
Stock Options and Stock Based Compensation (Textual) [Abstract]
Expected dividend rate	0.00%
Stock options issued	$ 0	$ 0
Outstanding stock options, total	281,666		281,666	281,666
Vested and exercisable Stock options	228,330
Non-vested Shares	53,336
Weighted average exercise price	$ 4.16		$ 4.16	$ 4.16
Additional stock-based compensation expense	$ 23,000

XML

Consolidated Statement of Changes in Stockholders' Equity (Unaudited) (USD $)	Total	Common Stock	Accumulated other comprehensive loss	Retained earnings
Beginning balance at May. 31, 2012	$ 10,483,741	$ 10,279,636	$ (313,295)	$ 517,400
Beginning balance, shares at May. 31, 2012		2,990,910
Stock-based compensation	67,255	67,255
Net loss	(175,560)			(175,560)
Other comprehensive loss	(15,205)		(15,205)
Ending balance at Feb. 28, 2013	$ 10,360,231	$ 10,346,891	$ (328,500)	$ 341,840
Ending balance, shares at Feb. 28, 2013		2,990,910

XML

Consolidated Balance Sheets (Parenthetical) (Unaudited) (USD $)	Feb. 28, 2013	May 31, 2012
Consolidated Balance Sheets [Abstract]
Accounts receivable, net of allowance	$ 26,596	$ 26,720
Common stock, par value
Common stock, shares authorized	20,000,000	20,000,000
Common stock, shares issued	2,990,910	2,990,910
Common stock, shares outstanding	2,990,910	2,990,910

XML

Stock Options and Stock Based Compensation (Tables)

9 Months Ended

Feb. 28, 2013

Stock Options and Stock-Based Compensation [Abstract]

Schedule of outstanding stock options

Outstanding Options						Exercisable Options
Number of Shares		Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (yrs)		Number of Shares		Weighted Average Exercise Price
	41,666	$	2.30		1.3		41,666	$	2.30
	160,000		3.65		8.3		106,664		3.65
	5,000		5.80		2.7		5,000		5.80
	75,000		6.16		5.2		75,000		6.16
	281,666	$	4.16		6.3		228,330	$	4.28

Schedule of options granted, exercised, and forfeited or canceled

Options granted, exercised, and forfeited or canceled under the Company’s stock option plan during the three and nine months ended February 28, 2013 are summarized as follows:

	Three Months Ended February 28, 2013				Nine Months Ended February 28, 2013
	Number of Shares		Weighted Average Exercise Price		Number of Shares		Weighted Average Exercise Price
Options outstanding - beginning of period		281,666	$	4.16		281,666	$	4.16
Options granted		—		—		—		—
Options exercised		—		—		—		—
Options forfeited/canceled		—		—		—		—
Options outstanding - February 28, 2013		281,666	$	4.16		281,666	$	4.16

XML

Document and Entity Information	9 Months Ended
	Feb. 28, 2013	Apr. 01, 2013
Document and Entity Information [Abstract]
Entity Registrant Name	SCHMITT INDUSTRIES INC
Entity Central Index Key	0000922612
Document Type	10-Q
Amendment Flag	false
Document Period End Date	Feb. 28, 2013
Document Fiscal Period Focus	Q3
Document Fiscal Year Focus	2013
Current Fiscal Year End Date	--05-31
Entity Filer Category	Smaller Reporting Company
Entity Common Stock, Shares Outstanding		2,990,910

XML

EPS Reconciliation (Tables)

9 Months Ended

Feb. 28, 2013

EPS Reconciliation [Abstract]

Schedule of earnings per share

	Three Months Ended February 28 and 29,				Nine Months Ended February 28 and 29,
	2013		2012		2013		2012
Weighted average shares (basic)		2,990,910		2,939,281		2,990,910		2,910,401
Effect of dilutive stock options		—		25,611		—		26,618
Weighted average shares (diluted)		2,990,910		2,964,892		2,990,910		2,937,019

XML

Consolidated Statements of Operations (Unaudited) (USD $)	3 Months Ended		9 Months Ended
	Feb. 28, 2013	Feb. 29, 2012	Feb. 28, 2013	Feb. 29, 2012
Consolidated Statements of Operations [Abstract]
Net sales	$ 2,796,429	$ 3,156,497	$ 9,179,353	$ 10,104,207
Cost of sales	1,438,831	1,616,534	4,405,579	5,389,802
Gross profit	1,357,598	1,539,963	4,773,774	4,714,405
Operating expenses:
General, administration and sales	1,366,587	1,448,818	4,523,320	4,481,536
Research and development	164,693	91,842	411,367	197,698
Total operating expenses	1,531,280	1,540,660	4,934,687	4,679,234
Operating income (loss)	(173,682)	(697)	(160,913)	35,171
Other income (expense)	(2,347)	6,901	6,080	33,031
Income (loss) before income taxes	(176,029)	6,204	(154,833)	68,202
Provision (benefit) for income taxes	15,075	(6,417)	20,727	(3,271)
Net income (loss)	$ (191,104)	$ 12,621	$ (175,560)	$ 71,473
Net earnings (loss) per common share:
Basic	$ (0.06)	$ 0.00	$ (0.06)	$ 0.02
Weighted average number of common shares, basic	2,990,910	2,939,281	2,990,910	2,910,401
Diluted	$ (0.06)	$ 0.00	$ (0.06)	$ 0.02
Weighted average number of common shares, diluted	2,990,910	2,964,892	2,990,910	2,937,019

XML

EPS Reconciliation

9 Months Ended

Feb. 28, 2013

EPS Reconciliation [Abstract]

EPS RECONCILIATION

Note 5:

EPS RECONCILIATION

	Three Months Ended February 28 and 29,				Nine Months Ended February 28 and 29,
	2013		2012		2013		2012
Weighted average shares (basic)		2,990,910		2,939,281		2,990,910		2,910,401
Effect of dilutive stock options		—		25,611		—		26,618
Weighted average shares (diluted)		2,990,910		2,964,892		2,990,910		2,937,019

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. 9,594 and 11,924 potentially dilutive common shares from outstanding stock options have been excluded from diluted earnings (loss) per share for the three and nine months ended February 28, 2013, respectively.

XML

Stock Options and Stock-Based Compensation

9 Months Ended

Feb. 28, 2013

Stock Options and Stock-Based Compensation [Abstract]

STOCK OPTIONS AND STOCK-BASED COMPENSATION

Note 4:

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 zero.

• 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.

The Company has computed, to determine stock-based compensation expense recognized for those options granted during the three and nine months ended February 28 and 29, 2013 and 2012, the value of all stock options granted using the Black-Scholes option pricing model. No stock options were issued during the nine months ended February 28 and 29, 2013 and 2012.

At February 28, 2013, the Company had a total of 281,666 outstanding stock options (228,330 vested and exercisable and 53,336 non-vested) with a weighted average exercise price of $4.16. The Company estimates that a total of approximately $23,000 will be recorded as additional stock-based compensation expense during the remainder of the year ending May 31, 2013 for all options that were outstanding as of February 28, 2013, 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
	41,666	$	2.30		1.3		41,666	$	2.30
	160,000		3.65		8.3		106,664		3.65
	5,000		5.80		2.7		5,000		5.80
	75,000		6.16		5.2		75,000		6.16
	281,666	$	4.16		6.3		228,330	$	4.28

Options granted, exercised, and forfeited or canceled under the Company’s stock option plan during the three and nine months ended February 28, 2013 are summarized as follows:

	Three Months Ended February 28, 2013				Nine Months Ended February 28, 2013
	Number of Shares		Weighted Average Exercise Price		Number of Shares		Weighted Average Exercise Price
Options outstanding - beginning of period		281,666	$	4.16		281,666	$	4.16
Options granted		—		—		—		—
Options exercised		—		—		—		—
Options forfeited/canceled		—		—		—		—
Options outstanding - February 28, 2013		281,666	$	4.16		281,666	$	4.16

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Stock Options and Stock-Based Compensation (Details 1) (USD $)	3 Months Ended	9 Months Ended
	Feb. 28, 2013	Feb. 28, 2013
Schedule of options granted, exercised, and forfeited or canceled
Number of Shares, Options outstanding - beginning of period	281,666	281,666
Weighted Average Exercise Price, Options outstanding - beginning of period	$ 4.16	$ 4.16
Number of Shares, Options granted
Weighted Average Exercise Price, Options granted
Number of Shares, Options exercised
Weighted Average Exercise Price, Options exercised
Number of Shares, Options forfeited/canceled
Weighted Average Exercise Price, Options forfeited/canceled
Number of shares, Options outstanding - end of period	281,666	281,666
Weighted Average Exercise Price, Options outstanding - end of the period	$ 4.16	$ 4.16

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Segments of Business (Tables)

9 Months Ended

Feb. 28, 2013

Segments of Business [Abstract]

Segment Information

Segment Information

	Three Months Ended February 28 and 29,
	2013						2012
	Balancer			Measurement			Balancer			Measurement
Gross sales	$	2,023,483		$	1,002,351		$	2,412,507		$	933,306
Intercompany sales		(213,564	)		(15,841	)		(181,924	)		(7,392	)
Net sales	$	1,809,919		$	986,510		$	2,230,583		$	925,914
Operating income (loss)	$	68,552		$	(242,234	)	$	270,113		$	(270,810	)
Depreciation expense	$	35,448		$	17,630		$	37,751		$	16,568
Amortization expense	$	—		$	33,659		$	—		$	33,659
Capital expenditures	$	9,393		$	—		$	1,098		$	7,027
	Nine Months Ended February 28 and 29,
	2013						2012
	Balancer			Measurement			Balancer			Measurement
Gross sales	$	6,539,053		$	3,288,795		$	7,786,463		$	3,038,822
Intercompany sales		(604,450	)		(44,045	)		(672,056	)		(49,022	)
Net sales	$	5,934,603		$	3,244,750		$	7,114,407		$	2,989,800
Operating income (loss)	$	167,791		$	(328,704	)	$	422,444		$	(387,273	)
Depreciation expense	$	105,662		$	53,741		$	105,099		$	50,648
Amortization expense	$	—		$	100,976		$	—		$	100,976
Capital expenditures	$	49,223		$	102,787		$	127,648		$	141,465

Geographic Information-Net Sales by Geographic Area

Geographic Information-Net Sales by Geographic Area

	Three Months Ended February 28 and 29,				Nine Months Ended February 28 and 29,
	2013		2012		2013		2012
North America	$	1,948,358	$	2,014,834	$	6,040,977	$	5,937,212
Europe		259,570		217,241		931,063		831,363
Asia		515,040		866,227		1,956,977		2,967,373
Other markets		73,461		58,195		250,336		368,259
Total Net Sales	$	2,796,429	$	3,156,497	$	9,179,353	$	10,104,207

	Three Months Ended February 28 and 29,
	2013						2012
	United States			Europe			United States			Europe
Operating income (loss)	$	(142,189	)	$	(31,493	)	$	4,969		$	(5,666	)
Depreciation expense	$	53,078		$	—		$	54,319		$	—
Amortization expense	$	33,659		$	—		$	33,659		$	—
Capital expenditures	$	9,393		$	—		$	8,125		$	—
	Nine Months Ended February 28 and 29,
	2013						2012
	United States			Europe			United States			Europe
Operating income (loss)	$	(96,811	)	$	(64,102	)	$	(2,865	)	$	38,036
Depreciation expense	$	159,403		$			$	155,747		$	—
Amortization expense	$	100,976		$	—		$	100,976		$	—
Capital expenditures	$	152,010		$	—		$	269,113		$	—

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

Segment and Geographic Assets

Segment and Geographic Assets

	February 28, 2013		May 31, 2012
Segment assets to total assets
Balancer	$	5,354,559	$	4,872,664
Measurement		4,120,833		4,368,654
Corporate assets		2,354,686		2,784,597
Total assets	$	11,830,078	$	12,025,915
Geographic assets to long-lived assets
United States	$	1,364,743	$	1,372,136
Europe		—		—
Total assets	$	1,364,743	$	1,372,136
Geographic assets to total assets
United States	$	11,152,606	$	11,246,431
Europe		677,472		779,484
Total assets	$	11,830,078	$	12,025,915

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Summary of Significant Accounting Policies (Policies)

9 Months Ended

Feb. 28, 2013

Summary of Significant Accounting Policies [Abstract]

Basis of Presentation

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 February 28, 2013 and its results of operations and its cash flows for the periods presented. The consolidated balance sheet at May 31, 2012 has been derived from the Annual Report on Form 10-K for the fiscal year ended May 31, 2012. 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, 2012. 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, 2013.

Revenue Recognition

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

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.

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Income Taxes

9 Months Ended

Feb. 28, 2013

Income Taxes [Abstract]

INCOME TAXES

Note 6:

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.

On June 1, 2007, the Company adopted the provisions of ACS Topic 740. Other long-term liabilities related to tax contingencies were $0 and $7,500 as of February 28, 2013 and May 31, 2012, respectively. 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 February 28, 2013 and May 31, 2012.

Several tax years are subject to examination by major tax jurisdictions. In the United States, federal tax years for Fiscal 2007 and after are subject to examination. In the United Kingdom, tax years for Fiscal 2006 and after are subject to examination. In Canada, tax years for 2005 and after are subject to examination. In the United States, returns related to an acquired subsidiary for the year ended October 31, 1994 and the final return for the period ended May 19, 1995 are also subject to examination.

Effective Tax Rate

The effective tax rate on consolidated net loss was (13.4)% for the nine months ended February 28, 2013. 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 2013 will be approximately (60.3)% due to the items noted above.

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Segments of Business

9 Months Ended

Feb. 28, 2013

Segments of Business [Abstract]

SEGMENTS OF BUSINESS

Note 7:

SEGMENTS OF BUSINESS

The Company has two reportable business segments: dynamic balancing systems for the machine tool industry (Balancer) and laser-based and ultrasonic test and measurement systems (Measurement). The Company operates in three principal geographic markets: North America, Europe and Asia.

Segment Information

	Three Months Ended February 28 and 29,
	2013						2012
	Balancer			Measurement			Balancer			Measurement
Gross sales	$	2,023,483		$	1,002,351		$	2,412,507		$	933,306
Intercompany sales		(213,564	)		(15,841	)		(181,924	)		(7,392	)
Net sales	$	1,809,919		$	986,510		$	2,230,583		$	925,914
Operating income (loss)	$	68,552		$	(242,234	)	$	270,113		$	(270,810	)
Depreciation expense	$	35,448		$	17,630		$	37,751		$	16,568
Amortization expense	$	—		$	33,659		$	—		$	33,659
Capital expenditures	$	9,393		$	—		$	1,098		$	7,027
	Nine Months Ended February 28 and 29,
	2013						2012
	Balancer			Measurement			Balancer			Measurement
Gross sales	$	6,539,053		$	3,288,795		$	7,786,463		$	3,038,822
Intercompany sales		(604,450	)		(44,045	)		(672,056	)		(49,022	)
Net sales	$	5,934,603		$	3,244,750		$	7,114,407		$	2,989,800
Operating income (loss)	$	167,791		$	(328,704	)	$	422,444		$	(387,273	)
Depreciation expense	$	105,662		$	53,741		$	105,099		$	50,648
Amortization expense	$	—		$	100,976		$	—		$	100,976
Capital expenditures	$	49,223		$	102,787		$	127,648		$	141,465

Geographic Information-Net Sales by Geographic Area

	Three Months Ended February 28 and 29,				Nine Months Ended February 28 and 29,
	2013		2012		2013		2012
North America	$	1,948,358	$	2,014,834	$	6,040,977	$	5,937,212
Europe		259,570		217,241		931,063		831,363
Asia		515,040		866,227		1,956,977		2,967,373
Other markets		73,461		58,195		250,336		368,259
Total Net Sales	$	2,796,429	$	3,156,497	$	9,179,353	$	10,104,207

	Three Months Ended February 28 and 29,
	2013						2012
	United States			Europe			United States			Europe
Operating income (loss)	$	(142,189	)	$	(31,493	)	$	4,969		$	(5,666	)
Depreciation expense	$	53,078		$	—		$	54,319		$	—
Amortization expense	$	33,659		$	—		$	33,659		$	—
Capital expenditures	$	9,393		$	—		$	8,125		$	—
	Nine Months Ended February 28 and 29,
	2013						2012
	United States			Europe			United States			Europe
Operating income (loss)	$	(96,811	)	$	(64,102	)	$	(2,865	)	$	38,036
Depreciation expense	$	159,403		$			$	155,747		$	—
Amortization expense	$	100,976		$	—		$	100,976		$	—
Capital expenditures	$	152,010		$	—		$	269,113		$	—

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

Segment and Geographic Assets

	February 28, 2013		May 31, 2012
Segment assets to total assets
Balancer	$	5,354,559	$	4,872,664
Measurement		4,120,833		4,368,654
Corporate assets		2,354,686		2,784,597
Total assets	$	11,830,078	$	12,025,915
Geographic assets to long-lived assets
United States	$	1,364,743	$	1,372,136
Europe		—		—
Total assets	$	1,364,743	$	1,372,136
Geographic assets to total assets
United States	$	11,152,606	$	11,246,431
Europe		677,472		779,484
Total assets	$	11,830,078	$	12,025,915

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Inventory (Tables)

9 Months Ended

Feb. 28, 2013

Inventory [Abstract]

Inventories

As of February 28, 2013 and May 31, 2012, inventories consisted of:

Inventory classification

	February 28, 2013		May 31, 2012
Raw materials	$	1,999,414	$	1,638,280
Work-in-process		1,015,324		980,092
Finished goods		1,729,560		1,357,228
	$	4,744,298	$	3,975,600

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Line of Credit (Details) (USD $)	9 Months Ended
	Feb. 28, 2013	May 31, 2012	Feb. 29, 2012
Line of Credit Facility [Line Items]
Libor plus rate	2.00%
Line of Credit (Textual) [Abstract]
Line of credit facility, current borrowing capacity			$ 1,000,000
Line of credit facility, increased borrowing capacity			2,000,000
Bank's prime rate	3.25%
Interest rate description	LIBOR plus 2.0%
Line of credit facility, amount outstanding	$ 0	$ 0
LIBOR Plus Rate [Member]
Line of Credit Facility [Line Items]
Libor plus rate	2.20%

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EPS Reconciliation (Details Textual)	3 Months Ended	9 Months Ended
	Feb. 28, 2013	Feb. 28, 2013
EPS Reconciliation (Textual) [Abstract]
Outstanding stock options from dilutive common shares	9,594	11,924

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Consolidated Statements of Comprehensive Income (Unaudited) (USD $)	3 Months Ended		9 Months Ended
	Feb. 28, 2013	Feb. 29, 2012	Feb. 28, 2013	Feb. 29, 2012
Consolidated Statements of Comprehensive Income [Abstract]
Net income (loss)	$ (191,104)	$ 12,621	$ (175,560)	$ 71,473
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments	(24,648)	(4,390)	(15,205)	(49,661)
Comprehensive income (loss)	$ (215,752)	$ 8,231	$ (190,765)	$ 21,812

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Line of Credit

9 Months Ended

Feb. 28, 2013

Line of Credit [Abstract]

LINE OF CREDIT

Note 3:

LINE OF CREDIT

In February 2012, the Company extended its bank line of credit secured by U.S. accounts receivable, inventories and general intangibles through March 1, 2014 and raised the lending limit from $1.0 million to $2.0 million. Interest is payable at the bank’s prime rate (3.25% as of February 28, 2013) or LIBOR plus 2.0% (2.20% as of February 28, 2013). There were no outstanding balances on the line of credit at February 28, 2013 and May 31, 2012.

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Income Taxes (Details) (USD $)	9 Months Ended
	Feb. 28, 2013	May 31, 2012
Income Taxes (Textual) [Abstract]
Other long-term liabilities related to tax contingencies	$ 0	$ 7,500
Liability for payment of interest and penalties	$ 0	$ 0
Effective tax rate on consolidated net loss	13.40%
Effective tax rate for Fiscal 2013	60.30%
Domestic Tax Authority [Member]
Income Taxes (Textual) [Abstract]
Income Tax Examination Period under Examination	In the United States, federal tax years for Fiscal 2007 and after are subject to examination.
Domestic Tax Authority [Member] | Subsidiaries [Member]
Income Taxes (Textual) [Abstract]
Income Tax Examination Period under Examination	In the United States, returns related to an acquired subsidiary for the year ended October 31, 1994 and the final return for the period ended May 19, 1995 are also subject to examination.
Foreign Tax Authority [Member]
Income Taxes (Textual) [Abstract]
Income Tax Examination Period under Examination	In the United Kingdom, tax years for Fiscal 2006 and after are subject to examination.
CANADA [Member]
Income Taxes (Textual) [Abstract]
Income Tax Examination Period under Examination	In Canada, tax years for 2005 and after are subject to examination

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Inventory (Details) (USD $)	Feb. 28, 2013	May 31, 2012
Inventories
Raw materials	$ 1,999,414	$ 1,638,280
Work-in-process	1,015,324	980,092
Finished goods	1,729,560	1,357,228
Inventory Net	$ 4,744,298	$ 3,975,600