10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended: February 28, 2017

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  ☒    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  ☒    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	☒

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ☐    No  ☒

The number of shares of each class of common stock outstanding as of March 31, 2017

Common stock, no par value 2,995,910

SCHMITT INDUSTRIES, INC.

INDEX TO FORM 10-Q

		Page
Part I - FINANCIAL INFORMATION
Item 1.	Financial Statements:
	Consolidated Balance Sheets: – February 28, 2017 and May 31, 2016 (unaudited)		3
	Consolidated Statements of Operations and Comprehensive Loss: – For the Three and Nine Months Ended February 28, 2017 and February 29, 2016 (unaudited)		4
	Consolidated Statements of Cash Flows: – For the Nine Months Ended February 28, 2017 and February 29, 2016 (unaudited)		5
	Consolidated Statement of Changes in Stockholders’ Equity: – For the Nine Months Ended February 28, 2017 (unaudited)		6
	Notes to Consolidated Interim Financial Statements		7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		13
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		18
Item 4.	Controls and Procedures		18
Part II - OTHER INFORMATION
Item 6.	Exhibits		19
Signatures			20
Certifications

Page 2

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

SCHMITT INDUSTRIES, INC.

CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

	February 28, 2017			May 31, 2016
ASSETS
Current assets
Cash and cash equivalents	$	481,831		$	988,686
Accounts receivable, net		2,274,729			2,099,082
Inventories		4,342,217			4,727,977
Prepaid expenses		175,746			132,230
Income taxes receivable		4,941			8,432
		7,279,464			7,956,407
Property and equipment, net		887,229			965,452
Other assets
Intangible assets, net		629,233			712,881
TOTAL ASSETS	$	8,795,926		$	9,634,740
LIABILITIES & STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable	$	816,532		$	877,167
Accrued commissions		299,298			273,147
Accrued payroll liabilities		128,619			148,823
Other accrued liabilities		252,525			331,563
Total current liabilities		1,496,974			1,630,700
Stockholders’ equity
Common stock, no par value, 20,000,000 shares authorized, 2,995,910 shares issued and outstanding at February 28, 2017 and May 31, 2016		10,588,168			10,569,522
Accumulated other comprehensive loss		(478,820	)		(394,518	)
Accumulated deficit		(2,810,396	)		(2,170,964	)
Total stockholders’ equity		7,298,952			8,004,040
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	8,795,926		$	9,634,740

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

Page 3

SCHMITT INDUSTRIES, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

FOR THE THREE AND NINE MONTHS ENDED FEBRUARY 28, 2017 AND FEBRUARY 29, 2016

(UNAUDITED)

	Three Months Ended						Nine Months Ended
	February 28, 2017			February 29, 2016			February 28, 2017			February 29, 2016
Net sales	$	3,199,122		$	2,528,465		$	8,747,215		$	8,706,618
Cost of sales		1,984,580			1,465,104			5,124,514			4,924,355
Gross profit		1,214,542			1,063,361			3,622,701			3,782,263
Operating expenses:
General, administration and sales		1,263,529			1,405,632			4,000,873			4,525,149
Research and development		49,711			68,023			188,835			227,435
Total operating expenses		1,313,240			1,473,655			4,189,708			4,752,584
Operating loss		(98,698	)		(410,294	)		(567,007	)		(970,321	)
Other expense, net		(25,642	)		(34,117	)		(51,053	)		(59,128	)
Loss before income taxes		(124,340	)		(444,411	)		(618,060	)		(1,029,449	)
Provision for income taxes		6,993			6,495			21,372			20,306
Net loss	$	(131,333	)	$	(450,906	)	$	(639,432	)	$	(1,049,755	)
Net loss per common share:
Basic	$	(0.04	)	$	(0.15	)	$	(0.21	)	$	(0.35	)
Weighted average number of common shares, basic		2,995,910			2,995,910			2,995,910			2,995,910
Diluted	$	(0.04	)	$	(0.15	)	$	(0.21	)	$	(0.35	)
Weighted average number of common shares, diluted		2,995,910			2,995,910			2,995,910			2,995,910
Comprehensive loss
Net loss	$	(131,333	)	$	(450,906	)	$	(639,432	)	$	(1,049,755	)
Foreign currency translation adjustment		(20,600	)		(39,107	)		(84,302	)		(54,780	)
Total comprehensive loss	$	(151,933	)	$	(490,013	)	$	(723,734	)	$	(1,104,535	)

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

Page 4

SCHMITT INDUSTRIES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED FEBRUARY 28, 2017 AND FEBRUARY 29, 2016

(UNAUDITED)

	Nine Months Ended
	February 28, 2017			February 29, 2016
Cash flows relating to operating activities
Net loss	$	(639,432	)	$	(1,049,755	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		165,071			187,614
Gain on disposal of property and equipment		(7,223	)		(299	)
Stock based compensation		18,646			48,320
(Increase) decrease in:
Accounts receivable		(216,535	)		647,856
Inventories		329,250			(260,379	)
Prepaid expenses		(46,331	)		20,707
Income taxes receivable		3,491			(314	)
Increase (decrease) in:
Accounts payable		(52,392	)		(185,115	)
Accrued liabilities and customer deposits		(63,574	)		(87,380	)
Net cash used in operating activities		(509,029	)		(678,745	)
Cash flows relating to investing activities
Purchases of property and equipment		(48,510	)		(3,520	)
Proceeds from the sale of property and equipment		52,535			14,950
Net cash provided by investing activities		4,025			11,430
Effect of foreign exchange translation on cash		(1,851	)		7,026
Decrease in cash and cash equivalents		(506,855	)		(660,289	)
Cash and cash equivalents, beginning of period		988,686			1,795,654
Cash and cash equivalents, end of period	$	481,831		$	1,135,365
Supplemental disclosure of cash flow information
Cash paid during the period for income taxes	$	17,881		$	20,620
Cash paid during the period for interest	$	2,427		$	2,025

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

Page 5

SCHMITT INDUSTRIES, INC.

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

FOR THE NINE MONTHS ENDED FEBRUARY 28, 2017

(UNAUDITED)

	Shares		Amount		Accumulated other comprehensive loss			Accumulated deficit			Total
Balance, May 31, 2016		2,995,910	$	10,569,522	$	(394,518	)	$	(2,170,964	)	$	8,004,040
Stock-based compensation		0		18,646		0			0			18,646
Net loss		0		0		0			(639,432	)		(639,432	)
Other comprehensive loss		0		0		(84,302	)		0			(84,302	)
Balance, February 28, 2017		2,995,910	$	10,588,168	$	(478,820	)	$	(2,810,396	)	$	7,298,952

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

Page 6

SCHMITT INDUSTRIES, INC.

NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS

NOTE 1:

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The consolidated financial information included herein has been prepared by Schmitt Industries, Inc. (the Company or Schmitt) and its wholly owned subsidiaries. In the opinion of management, the accompanying unaudited Consolidated Financial Statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission and contain all adjustments, consisting only of normal recurring adjustments, necessary to present fairly its financial position as of February 28, 2017 and its results of operations and its cash flows for the periods presented. The consolidated balance sheet at May 31, 2016 has been derived from the Annual Report on Form 10-K for the fiscal year ended May 31, 2016. 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, 2016. 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, 2017.

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. The Company estimates customer product returns based on historical return patterns and reduces sales and cost of sales accordingly.

Financial Instruments

The carrying value of all other financial instruments potentially subject to valuation risk (principally consisting of cash and cash equivalents, accounts receivable and accounts payable) also approximates fair value because of their short-term maturities.

Accounts Receivable

The Company maintains credit limits for all customers based upon several factors, including but not limited to financial condition and stability, payment history, published credit reports and use of credit references. Management performs various analyses to evaluate accounts receivable balances to ensure recorded amounts reflect estimated net realizable value. This review includes using accounts receivable agings, other operating trends and relevant business conditions, including general economic factors, as they relate to each of the Company’s domestic and international customers. If these analyses lead management to the conclusion that potential significant accounts are uncollectible, a reserve is provided. The allowance for doubtful accounts was $41,525 and $42,387 as of February 28, 2017 and May 31, 2016, respectively.

Inventories

Inventories are valued at the lower of cost or market with cost determined on the average cost basis. Costs included in inventories consist of materials, labor and manufacturing overhead, which are related to the purchase or production of inventories. Write-downs, when required, are made to reduce excess inventories to their net realizable values. Such estimates are based on assumptions regarding future demand and market conditions. If actual conditions become less favorable than the assumptions used, an additional inventory write-down may be required. As of February 28, 2017 and May 31, 2016, inventories consisted of:

	February 28, 2017		May 31, 2016
Raw materials	$	1,955,787	$	2,030,655
Work-in-process		946,046		1,059,864
Finished goods		1,440,384		1,637,458
	$	4,342,217	$	4,727,977

Page 7

Property and Equipment

Property and equipment are stated at cost. Depreciation is computed using the straight-line method over estimated useful lives of three to seven years for furniture, fixtures and equipment; three years for vehicles; and twenty-five years for buildings and improvements. As of February 28, 2017 and May 31, 2016, property and equipment consisted of:

	February 28, 2017			May 31, 2016
Land	$	299,000		$	299,000
Buildings and improvements		1,814,524			1,814,524
Furniture, fixtures and equipment		1,241,675			1,344,343
Vehicles		44,704			96,587
		3,399,903			3,554,454
Less accumulated depreciation		(2,512,674	)		(2,589,002	)
	$	887,229		$	965,452

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, “Revenue from Contracts with Customers (Topic 606).” ASU 2014-09 affects any entity using U.S. GAAP that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards (e.g., insurance contracts or lease contracts). ASU 2014-09 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016.

In August 2015, the FASB issued ASU 2015-14, which defers the effective date of ASU 2014-09 by one year. The new guidance is effective for interim and annual reporting periods beginning after December 15, 2017. Early adoption is permitted as of the date of the original effective date, for interim and annual reporting periods beginning after December 15, 2016.

In July 2015, the FASB issued ASU 2015-11, “Simplifying the Measurement of Inventory.” ASU 2015-11 requires an entity to measure in-scope inventory at the lower of cost and net realizable value. Net realizable value is defined as the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The amendments in ASU 2015-11 are effective on a prospective basis for public entities for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. Early application is permitted as of the beginning of an interim or annual reporting period.

The Company is currently evaluating the provisions of ASU 2014-09, ASU 2015-14 and ASU 2015-11.

NOTE 2:

STOCK OPTIONS AND STOCK-BASED COMPENSATION

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

• Risk-Free Interest Rate. The Company bases the risk-free interest rate on the implied yield currently available on U.S. Treasury issues with an equivalent remaining term approximately equal to the expected life of the award.

Page 8

• Expected Life. The expected life of awards granted represents the period of time that they are expected to be outstanding. The Company determines the expected life based on historical experience with similar awards, giving consideration to the contractual terms, vesting schedules and pre-vesting and post-vesting forfeitures.

• Expected Volatility. The Company estimates the volatility of its common stock at the date of grant based on the historical volatility of its common stock. The volatility factor the Company uses is based on its historical stock prices over the most recent period commensurate with the estimated expected life of the award. These historical periods may exclude portions of time when unusual transactions occurred.

• Expected Dividend Yield. The Company does not anticipate paying any cash dividends in the foreseeable future. Consequently, the Company uses an expected dividend yield of 0.

• Expected Forfeitures. The Company uses relevant historical data to estimate pre-vesting option forfeitures. The Company records stock-based compensation only for those awards that are expected to vest.

To determine stock-based compensation expense recognized for those options granted during the nine months ended February 28, 2017 and February 29, 2016, the Company has computed the value of all stock options granted using the Black-Scholes option pricing model. No options were issued during the nine months ended February 28, 2017 and February 29, 2016.

At February 28, 2017, the Company had a total of 147,500 outstanding stock options (130,000 vested and exercisable and 17,500 non-vested) with a weighted average exercise price of $3.11. The Company estimates that $8,054 will be recorded as additional stock-based compensation expense over a weighted-average period of 0.6 years for all options that were outstanding as of February 28, 2017, 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
15,000	$2.53	6.6	15,000	$2.53
77,500	2.85	7.1	60,000	2.85
55,000	3.65	4.3	55,000	3.65
147,500	3.11	6.0	130,000	3.15

Options granted, exercised, and forfeited or canceled under the Company’s stock option plan during the three and nine months ended February 28, 2017 are summarized as follows:

	Three Months Ended February 28, 2017				Nine Months Ended February 28, 2017
	Number of Shares		Weighted Average Exercise Price		Number of Shares		Weighted Average Exercise Price
Options outstanding - beginning of period		147,500	$	3.11		147,500	$	3.11
Options granted		0		0		0		0
Options exercised		0		0		0		0
Options forfeited/canceled		0		0		0		0
Options outstanding - end of period		147,500		3.11		147,500		3.11

Page 9

NOTE 3:

EPS RECONCILIATION

	Three Months Ended				Nine Months Ended
	February 28, 2017		February 29, 2016		February 28, 2017		February 29, 2016
Weighted average shares (basic)		2,995,910		2,995,910		2,995,910		2,995,910
Effect of dilutive stock options		0		0		0		0
Weighted average shares (diluted)		2,995,910		2,995,910		2,995,910		2,995,910

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

NOTE 4:

INCOME TAXES

The Company accounts for income taxes using the asset and liability method. This approach requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax basis of assets and liabilities. Deferred tax assets are reduced by a valuation allowance if, based on the weight of available evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Management continues to review the level of the valuation allowance on a quarterly basis. There can be no assurance that the Company’s future operations will produce sufficient earnings so that the deferred tax asset can be fully utilized. The Company currently maintains a full valuation allowance against net deferred tax assets.

Each year the Company files income tax returns in the various national, state and local income taxing jurisdictions in which it operates. These tax returns are subject to examination and possible challenge by the taxing authorities. Positions challenged by the taxing authorities may be settled or appealed by the Company. As a result, there is an uncertainty in income taxes recognized in the Company’s financial statements in accordance with ASC Topic 740. The Company applies this guidance by defining criteria that an individual income tax position must meet for any part of the benefit of that position to be recognized in an enterprise’s financial statements and provides guidance on measurement, de-recognition, classification, accounting for interest and penalties, accounting in interim periods, disclosure, and transition.

Other long-term liabilities related to tax contingencies were $0 as of both February 28, 2017 and May 31, 2016. 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, 2017 and May 31, 2016.

Several tax years are subject to examination by major tax jurisdictions. In the United States, federal tax years for Fiscal 2012 and after are subject to examination. In the United Kingdom, tax years for Fiscal 2012 and after are subject to examination. In Canada, tax years for Fiscal 2005 and after are subject to examination.

Effective Tax Rate

The effective tax rate on consolidated net loss was 3.5% for the nine months ended February 28, 2017. The effective tax rate on consolidated net loss differs from the federal statutory tax rate primarily due to 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 2017 will be approximately 7.3% due to the items noted above.

NOTE 5:

SEGMENTS OF BUSINESS

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

Page 10

Segment Information

	Three Months Ended
	February 28, 2017						February 29, 2016
	Balancer			Measurement			Balancer			Measurement
Gross sales	$	2,190,989		$	1,349,467		$	1,670,316		$	1,248,769
Intercompany sales		(341,334	)		0			(389,844	)		(776	)
Net sales	$	1,849,655		$	1,349,467		$	1,280,472		$	1,247,993
Operating income (loss)	$	(135,969	)	$	37,271		$	(348,631	)	$	(61,663	)
Depreciation expense	$	17,531		$	9,220		$	23,057		$	9,477
Amortization expense	$	0		$	27,883		$	0		$	27,882
Capital expenditures	$	3,923		$	0		$	3,520		$	0
	Nine Months Ended
	February 28, 2017						February 29, 2016
	Balancer			Measurement			Balancer			Measurement
Gross sales	$	5,631,370		$	3,955,384		$	6,089,441		$	3,622,681
Intercompany sales		(823,173	)		(16,366	)		(1,000,745	)		(4,759	)
Net sales	$	4,808,197		$	3,939,018		$	5,088,696		$	3,617,922
Operating income (loss)	$	(624,755	)	$	57,748		$	(684,196	)	$	(286,125	)
Depreciation expense	$	53,336		$	28,087		$	74,103		$	29,864
Amortization expense	$	0		$	83,648		$	0		$	83,647
Capital expenditures	$	48,510		$	0		$	3,520		$	0

Geographic Information – Net Sales by Geographic Area

	Three Months Ended				Nine Months Ended
	February 28, 2017		February 29, 2016		February 28, 2017		February 29, 2016
North America	$	2,118,627	$	1,776,511	$	5,861,484	$	5,944,433
Europe		393,963		238,553		1,044,869		923,275
Asia		637,360		467,508		1,585,839		1,688,064
Other markets		49,172		45,893		255,023		150,846
Total net sales	$	3,199,122	$	2,528,465	$	8,747,215	$	8,706,618

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	Three Months Ended
	February 28, 2017						February 29, 2016
	United States			Europe			United States			Europe
Operating income (loss)	$	(106,315	)		7,617		$	(336,999	)	$	(73,295	)
Depreciation expense	$	26,751		$	0		$	32,534		$	0
Amortization expense	$	27,883		$	0		$	27,882		$	0
Capital expenditures	$	3,923		$	0		$	3,520		$	0
	Nine Months Ended
	February 28, 2017						February 29, 2016
	United States			Europe			United States			Europe
Operating loss	$	(511,782	)		(55,225	)	$	(836,741	)	$	(133,580	)
Depreciation expense	$	81,423		$	0		$	103,967		$	0
Amortization expense	$	83,648		$	0		$	83,647		$	0
Capital expenditures	$	48,510		$	0		$	3,520		$	0

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

Segment and Geographic Assets

	February 28, 2017		May 31, 2016
Segment assets to total assets
Balancer	$	4,742,767	$	4,727,490
Measurement		3,566,387		3,910,132
Corporate assets		486,772		997,118
Total assets	$	8,795,926	$	9,634,740
Geographic assets to long-lived assets
United States	$	887,229	$	965,452
Europe		0		0
Total long-lived assets	$	887,229	$	965,452
Geographic assets to total assets
United States	$	7,947,168	$	8,772,666
Europe		848,758		862,074
Total assets	$	8,795,926	$	9,634,740

Page 12

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

Forward-Looking Statements

This Quarterly Report filed with the SEC on Form 10-Q (the “Report”), including “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Item 2, contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 regarding future events and the future results of Schmitt Industries, Inc. and its consolidated subsidiaries (the “Company”) that are based on management’s current expectations, estimates, projections and assumptions about the Company’s business. Words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “sees,” “estimates” and variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve risks, uncertainties and assumptions that are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking statements due to numerous factors, including, but not limited to, those discussed in the “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this Report as well as those discussed from time to time in the Company’s other Securities and Exchange Commission filings and reports. In addition, such statements could be affected by general industry and market conditions. Such forward-looking statements speak only as of the date of this Report or, in the case of any document incorporated by reference, the date of that document, and we do not undertake any obligation to update any forward-looking statement to reflect events or circumstances after the date of this Report. If we update or correct one or more forward-looking statements, investors and others should not conclude that we will make additional updates or corrections with respect to other forward-looking statements.

RESULTS OF OPERATIONS

Overview

Schmitt Industries, Inc. designs, manufactures and markets computer-controlled vibration detection, balancing and process control equipment (the Balancer segment) to the worldwide machine tool industry and through its wholly owned subsidiary, Schmitt Measurement Systems, Inc., designs, manufactures and markets precision laser-based surface measurement products, laser-based distance measurement products and ultrasonic measurement systems (the Measurement segment) for a variety of industrial applications worldwide. The Company sells and markets its products in Europe through its wholly owned subsidiary, Schmitt Europe Ltd. (SEL), located in the United Kingdom. The Company is organized into two operating segments: the Balancer segment and the Measurement segment. The accompanying unaudited financial information should be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended May 31, 2016.

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

For the three months ended February 28, 2017, total sales increased $670,657, or 26.5%, to $3,199,122 from $2,528,465 in the three months ended February 29, 2016. For the nine months ended February 28, 2017, total sales increased $40,597, or 0.5%, to $8,747,215 from $8,706,618 in the nine months ended February 29, 2016.

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 increased $569,183, or 44.5%, to $1,849,655 for the three months ended February 28, 2017 compared to $1,280,472 for the three months ended February 29, 2016, primarily due to stronger sales in North America, Europe, and China. Balancer segment sales decreased $280,499, or 5.5%, to $4,808,197 for the nine months ended February 28, 2017 compared to $5,088,696 for the nine months ended February 29, 2016, primarily due to weaker sales in North America, offset in part by stronger sales in Europe and China.

The Measurement segment product line consists of laser-based light-scatter, distance measurement and dimensional sizing products and ultrasonic-based remote tank monitoring products for propane and diesel tanks. Total Measurement segment sales increased $101,474, or 8.1%, to $1,349,467 for the three months ended February 28, 2017 compared to $1,247,993 for the three months ended February 29, 2016, primarily due to increases in sales of our Acuity laser-based distance measurement and dimensional-sizing products, increases in sales of our SMS laser-based surface measurement products and increases in sales of our Xact remote tank monitoring products and related revenues from monitoring services offset by decreases in sales associated with the Lasercheck product line. Total Measurement segment sales increased $321,096, or 8.9%, to $3,939,018 for the nine months ended February 28, 2017 compared to $3,617,922 for the nine months ended February 29, 2016, primarily due to increases in sales of our Xact remote tank monitoring products and related revenues from monitoring services offset by decreases in sales associated with the other product lines in the Measurement segment.

Page 13

Operating expenses decreased $160,415, or 10.9%, to $1,313,240 for the three months ended February 28, 2017 from $1,473,655 for the three months ended February 29, 2016. General, administration and sales expenses decreased $142,103, or 10.1%, to $1,263,529 for the three months ended February 28, 2017 from $1,405,632 for the same period in the prior year. Operating expenses decreased $562,876, or 11.8%, to $4,189,708 for the nine months ended February 28, 2017 from $4,752,584 for the nine months ended February 29, 2016. General, administration and sales expenses decreased $524,276, or 11.6%, to $4,000,873 for the nine months ended February 28, 2017 from $4,525,149 for the same period in the prior year.

Net loss was $131,333, or $(0.04) per fully diluted share, for the three months ended February 28, 2017 as compared to net loss of $450,906, or $(0.15) per fully diluted share, for the three months ended February 29, 2016. For the nine months ended February 28, 2017, net loss was $639,432, or $(0.21) per fully diluted share, as compared to net loss of $1,049,755, or $(0.35) per fully diluted share for the nine months ended February 29, 2016.

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, 2016.

Page 14

Discussion of Operating Results

	Three Months Ended
	February 28, 2017					February 29, 2016
Balancer sales	$	1,849,655		57.8	%	$	1,280,472		50.6	%
Measurement sales		1,349,467		42.2	%		1,247,993		49.4	%
Total net sales		3,199,122		100.0	%		2,528,465		100.0	%
Cost of sales		1,984,580		62.0	%		1,465,104		57.9	%
Gross profit		1,214,542		38.0	%		1,063,361		42.1	%
Operating expenses:
General, administration and sales		1,263,529		39.5	%		1,405,632		55.6	%
Research and development		49,711		1.6	%		68,023		2.7	%
Total operating expenses		1,313,240		41.1	%		1,473,655		58.3	%
Operating loss		(98,698	)	-3.1	%		(410,294	)	-16.2	%
Other expense, net		(25,642	)	-0.8	%		(34,117	)	-1.3	%
Loss before income taxes		(124,340	)	-3.9	%		(444,411	)	-17.6	%
Provision for income taxes		6,993		0.2	%		6,495		0.3	%
Net loss	$	(131,333	)	-4.1	%	$	(450,906	)	-17.8	%
	Nine Months Ended
	February 28, 2017					February 29, 2016
Balancer sales	$	4,808,197		55.0	%	$	5,088,696		58.4	%
Measurement sales		3,939,018		45.0	%		3,617,922		41.6	%
Total net sales		8,747,215		100.0	%		8,706,618		100.0	%
Cost of sales		5,124,514		58.6	%		4,924,355		56.6	%
Gross profit		3,622,701		41.4	%		3,782,263		43.4	%
Operating expenses:
General, administration and sales		4,000,873		45.7	%		4,525,149		52.0	%
Research and development		188,835		2.2	%		227,435		2.6	%
Total operating expenses		4,189,708		47.9	%		4,752,584		54.6	%
Operating loss		(567,007	)	-6.5	%		(970,321	)	-11.1	%
Other expense, net		(51,053	)	-0.6	%		(59,128	)	-0.7	%
Loss before income taxes		(618,060	)	-7.1	%		(1,029,449	)	-11.8	%
Provision for income taxes		21,372		0.2	%		20,306		0.2	%
Net loss	$	(639,432	)	-7.3	%	$	(1,049,755	)	-12.1	%

Sales – Sales in the Balancer segment increased $569,183, or 44.5%, to $1,849,655 for the three months ended February 28, 2017 as compared to $1,280,472 for the three months ended February 29, 2016. This increase is primarily attributed to stronger sales in North America, China and Europe. Sales in North America increased $201,633, or 32.7%, sales in China increased $252,595, or 161.1%, and sales in Europe increased $147,020, or 64.1%, for the three months ended February 28, 2017 as compared to the same period in the prior year. Sales in other parts of Asia decreased $44,347 or 18.1%, for the three months ended February 28, 2017 as compared to the same quarter in the prior year, while sales in other regions of the world increased $12,282, or 38.3%, for the three months ended February 28, 2017 as compared to the same quarter in the prior year.

Page 15

Sales in the Balancer segment decreased $280,499, or 5.5%, to $4,808,197 for the nine months ended February 28, 2017 as compared to $5,088,696 for the nine months ended February 29, 2016. This decrease is primarily driven by weaker sales in the North America market, offset by increased sales in Europe and China. Sales in North America decreased $346,614, or 12.9% for the nine months ended February 28, 2017 as compared to the same period in the prior year. This decrease was offset in part by increased sales in Europe and China. Sales in Europe increased $97,305, or 12.8%, for the nine months ended February 28, 2017 as compared to the same period in the prior year and sales in China increased $90,962, or 11.8% for the nine months ended February 28, 2017 as compared to the nine months ended February 29, 2016. Sales in other parts of Asia decreased $187,507, or 23.4%, and sales in other regions of the world increased $65,355, or 91.8%, for the nine months ended February 28, 2017 as compared to the same quarter in the prior year.

Sales in the Measurement segment increased $101,474, or 8.1%, to $1,349,467 for the three months ended February 28, 2017 compared to $1,247,993 for the three months ended February 29, 2016. Sales of Xact remote tank monitoring products and related revenues from monitoring services increased $59,689, or 11.6%, during the quarter ended February 28, 2017 as compared to the same period in the prior year. Sales of our Acuity laser-based distance measurement and dimensional-sizing products increased $24,424, or 4.3%, in the quarter ended February 28, 2017 as compared to the same quarter in the prior year and sales of our SMS laser-based surface measurement products increased $58,705, or 50.8%, for the three months ended February 28, 2017 as compared to the same period in the prior year. These increases were offset by decreases in sales of our Lasercheck products, which decreased $41,344, or 87.5%, during the third quarter of fiscal 2017 as compared to the same period in the prior year.

Sales in the Measurement segment increased $321,096, or 8.9%, to $3,939,018 for the nine months ended February 28, 2017 compared to $3,617,922 for the nine months ended February 29, 2016. Sales of Xact remote tank monitoring products and related revenues from monitoring services increased $596,165, or 48.0%, during the nine months ended February 28, 2017 as compared to the same period in the prior year. This increase was offset by decreases in sales of our Acuity laser-based distance measurement and dimensional-sizing products which decreased $173,987, or 9.2%, in the nine months ended February 28, 2017 as compared to the nine months ended February 29, 2016. Sales of our Lasercheck products decreased $98,553, or 54.7%, during the first nine months of fiscal 2017 as compared to the same period in the prior year and sales of our SMS laser-based surface measurement products decreased by $2,529, or 0.8%, for the nine months ended February 28, 2017 as compared to the same period in the prior year.

Gross margin – Gross margin for the three months ended February 28, 2017 decreased to 38.0% as compared to 42.1% for the three months ended February 29, 2016. Gross margin for the nine months ended February 28, 2017 decreased to 41.4% as compared to 43.4% for the nine months ended February 29, 2016. The fluctuations in gross margin in the three and nine month periods ended February 28, 2017 as compared to the same three and nine month periods in the prior fiscal year are primarily influenced by shifts in the product sales mix from our product lines.

Operating expenses – Operating expenses decreased $160,415, or 10.9%, to $1,313,240 for the three months ended February 28, 2017 as compared to $1,473,655 for the three months ended February 29, 2016. General, administrative and selling expenses decreased $142,103, or 10.1%, for the three months ended February 28, 2017 as compared to the same period in the prior year. These decreases are primarily driven by reductions in marketing costs, travel and entertainment expenses and personnel related expenses.

Operating expenses decreased $562,876, or 11.8%, to $4,189,708 for the nine months ended February 28, 2017 as compared to $4,752,584 for the nine months ended February 29, 2016. General, administrative and selling expenses decreased $524,276, or 11.6%, for the nine months ended February 28, 2017 as compared to the same period in the prior year. These decreases are primarily driven by reductions in sales commissions, marketing costs, travel and entertainment expense and personnel expenses.

Other income – Other income consists of interest income (expense), foreign currency exchange gain (loss) and other income (expense). Interest income (expense), net was $(259) and $(260) for the three months ended February 28, 2017 and February 29, 2016, respectively. Foreign currency exchange gains (losses) were $(16,203) and $(33,871) for the three months ended February 28, 2017 and February 29, 2016, respectively. The shifts in the foreign currency exchange are related to fluctuations of foreign currencies against the U.S. dollar during the current period. Other income (expense) was $(9,180) for the third quarter of fiscal 2017 as compared to $14 for the same period in the prior year.

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Other income consists of interest income (expense), foreign currency exchange gain (loss) and other income (expense). Interest income (expense), net was $(589) and $(1,293) for the nine months ended February 28, 2017 and February 29, 2016, respectively. Foreign currency exchange gains (losses) were $(58,209) and $(58,166) for the nine months ended February 28, 2017 and February 29, 2016, respectively. The shifts in the foreign currency exchange are related to fluctuations of foreign currencies against the U.S. dollar during the current period. Other income (expense) was $7,745 for the first nine months of fiscal 2017 as compared to $331 for the same period in the prior year.

Income taxes – The Company’s effective tax rate on consolidated net loss was 3.5% for the nine months ended February 28, 2017. 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 2017 will be approximately 7.3% due to the items noted above.

Net income (loss) – Net loss was $131,333, or $(0.04) per fully diluted share, for the three months ended February 28, 2017 as compared to net loss of $450,906, or $(0.15) per fully diluted share, for the three months ended February 29, 2016. For the nine months ended February 28, 2017, net loss was $639,432, or $(0.21) per fully diluted share, as compared to net loss of $1,049,755, or $(0.35) per fully diluted share for the nine months ended February 29, 2016.

LIQUIDITY AND CAPITAL RESOURCES

The Company’s working capital decreased to $5,782,490 as of February 28, 2017 as compared to $6,325,707 as of May 31, 2016. Cash and cash equivalents decreased $506,855 to $481,831 as of February 28, 2017 from $988,686 as of May 31, 2016.

Cash used in operating activities totaled $509,029 for the nine months ended February 28, 2017 as compared to cash used in operating activities of $678,745 for the nine months ended February 29, 2016. The change in cash used in operating activities was impacted, in part, by the difference in net loss of $639,432 for the nine months ended February 28, 2017 as compared to net loss of $1,049,755 for the same period in the prior year. Changes in accounts receivable, inventories, accounts payable and other accrued liabilities also impacted the total cash used in operating activities, with the result of the changes directly related to the timing of receipts and payments and the management of inventory levels across our product lines.

At February 28, 2017, the Company had accounts receivable of $2,274,729 as compared to $2,099,082 at May 31, 2016. The increase in accounts receivable of $175,647 was due to timing of receipts. Inventories decreased $385,760 to $4,342,217 as of February 28, 2017 as compared to $4,727,977 at May 31, 2016, which is due primarily to the timing of purchases across our product lines and reductions of inventories in our SMS product line. At February 28, 2017, total current liabilities decreased $133,726 to $1,496,974 as compared to $1,630,700 at May 31, 2016. The decrease in accounts payable and other accrued expenses is primarily due to the timing of payments to our vendors and the decrease in accrued commissions.

We believe that our existing cash and cash equivalents combined with the cash we anticipate to generate from operating activities will be sufficient to meet our cash requirements for the foreseeable future. We do not have any significant commitments nor are we aware of any significant events or conditions that are likely to have a material impact on our liquidity or capital resources.

Risk Factors

Please refer to the risk factors disclosed in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended May 31, 2016 for a listing of factors that could cause actual results or events to differ materially from those contained in any forward-looking statements made by or on behalf of the Company.

Page 17

Item 3. Quantitative and Qualitative Disclosures about Market Risk

There have been no material changes from the information previously reported under Item 7A of our Annual Report on Form 10-K for the fiscal year ended May 31, 2016.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

As of February 28, 2017, 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, 2017 that has materially affected, or is reasonably likely to materially affect, such internal control over financial reporting.

Page 18

PART II - OTHER INFORMATION

Item 6. Exhibits

Exhibit	Description
3.1	Second Restated Articles of Incorporation of Schmitt Industries, Inc. [Form 10-K for the fiscal year ended May 31, 1999, Exhibit 3(i)].
3.2	Second Restated Bylaws of Schmitt Industries, Inc. [Form 10-K for the fiscal year ended May 31, 1999, Exhibit 3(ii)].
4.1	See Exhibits 3.1 and 3.2 for provisions of the Articles of Incorporation and Bylaws defining the rights of security holders.
31.1	Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS	XBRL Instance Document.
101.SCH	XBRL Taxonomy Extension Schema Document.
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document.
101.LAB	XBRL Taxonomy Extension Label Linkbase Document.
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document.
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document.

Page 19

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 12, 2017	/s/ Ann M. Ferguson
		Ann M. Ferguson, Chief Financial Officer and Treasurer

Page 20

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, David M. Hudson, 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 12, 2017	/s/ David M. Hudson
		David M. Hudson, 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, Ann M. Ferguson, 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 12, 2017	/s/ Ann M. Ferguson
		Ann M. Ferguson, 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, 2017 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), we, David M. Hudson and Ann M. Ferguson, 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/ David M. Hudson

David M. Hudson

President and Chief Executive Officer

April 12, 2017

/s/ Ann M. Ferguson

Ann M. Ferguson

Chief Financial Officer and Treasurer

April 12, 2017

XML

Document and Entity Information - shares	9 Months Ended
	Feb. 28, 2017	Mar. 31, 2017
Document And Entity Information [Abstract]
Document Type	10-Q
Amendment Flag	false
Document Period End Date	Feb. 28, 2017
Document Fiscal Year Focus	2017
Document Fiscal Period Focus	Q3
Trading Symbol	SMIT
Entity Registrant Name	SCHMITT INDUSTRIES INC
Entity Central Index Key	0000922612
Current Fiscal Year End Date	--05-31
Entity Filer Category	Smaller Reporting Company
Entity Common Stock, Shares Outstanding		2,995,910

XML

Consolidated Balance Sheets - USD ($)	Feb. 28, 2017	May 31, 2016
Current assets
Cash and cash equivalents	$ 481,831	$ 988,686
Accounts receivable, net	2,274,729	2,099,082
Inventories	4,342,217	4,727,977
Prepaid expenses	175,746	132,230
Income taxes receivable	4,941	8,432
Total current assets	7,279,464	7,956,407
Property and equipment, net	887,229	965,452
Other assets
Intangible assets, net	629,233	712,881
TOTAL ASSETS	8,795,926	9,634,740
Current liabilities
Accounts payable	816,532	877,167
Accrued commissions	299,298	273,147
Accrued payroll liabilities	128,619	148,823
Other accrued liabilities	252,525	331,563
Total current liabilities	1,496,974	1,630,700
Stockholders' equity
Common stock, no par value, 20,000,000 shares authorized, 2,995,910 shares issued and outstanding at February 28, 2017 and May 31, 2016	10,588,168	10,569,522
Accumulated other comprehensive loss	(478,820)	(394,518)
Accumulated deficit	(2,810,396)	(2,170,964)
Total stockholders' equity	7,298,952	8,004,040
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$ 8,795,926	$ 9,634,740

XML

Consolidated Balance Sheets (Parenthetical) - $ / shares	Feb. 28, 2017	May 31, 2016
Statement of Financial Position [Abstract]
Common stock, par value
Common stock, shares authorized	20,000,000	20,000,000
Common stock, shares issued	2,995,910	2,995,910
Common stock, shares outstanding	2,995,910	2,995,910

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Consolidated Statements of Operations and Comprehensive Loss - USD ($)	3 Months Ended		9 Months Ended
	Feb. 28, 2017	Feb. 29, 2016	Feb. 28, 2017	Feb. 29, 2016
Income Statement [Abstract]
Net sales	$ 3,199,122	$ 2,528,465	$ 8,747,215	$ 8,706,618
Cost of sales	1,984,580	1,465,104	5,124,514	4,924,355
Gross profit	1,214,542	1,063,361	3,622,701	3,782,263
Operating expenses:
General, administration and sales	1,263,529	1,405,632	4,000,873	4,525,149
Research and development	49,711	68,023	188,835	227,435
Total operating expenses	1,313,240	1,473,655	4,189,708	4,752,584
Operating loss	(98,698)	(410,294)	(567,007)	(970,321)
Other expense, net	(25,642)	(34,117)	(51,053)	(59,128)
Loss before income taxes	(124,340)	(444,411)	(618,060)	(1,029,449)
Provision for income taxes	6,993	6,495	21,372	20,306
Net loss	$ (131,333)	$ (450,906)	$ (639,432)	$ (1,049,755)
Net loss per common share:
Basic	$ (0.04)	$ (0.15)	$ (0.21)	$ (0.35)
Weighted average number of common shares, basic	2,995,910	2,995,910	2,995,910	2,995,910
Diluted	$ (0.04)	$ (0.15)	$ (0.21)	$ (0.35)
Weighted average number of common shares, diluted	2,995,910	2,995,910	2,995,910	2,995,910
Comprehensive loss
Net loss	$ (131,333)	$ (450,906)	$ (639,432)	$ (1,049,755)
Foreign currency translation adjustment	(20,600)	(39,107)	(84,302)	(54,780)
Total comprehensive loss	$ (151,933)	$ (490,013)	$ (723,734)	$ (1,104,535)

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Consolidated Statements of Cash Flows - USD ($)	9 Months Ended
	Feb. 28, 2017	Feb. 29, 2016
Cash flows relating to operating activities
Net loss	$ (639,432)	$ (1,049,755)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	165,071	187,614
Gain on disposal of property and equipment	(7,223)	(299)
Stock based compensation	18,646	48,320
(Increase) decrease in:
Accounts receivable	(216,535)	647,856
Inventories	329,250	(260,379)
Prepaid expenses	(46,331)	20,707
Income taxes receivable	3,491	(314)
Increase (decrease) in:
Accounts payable	(52,392)	(185,115)
Accrued liabilities and customer deposits	(63,574)	(87,380)
Net cash used in operating activities	(509,029)	(678,745)
Cash flows relating to investing activities
Purchases of property and equipment	(48,510)	(3,520)
Proceeds from the sale of property and equipment	52,535	14,950
Net cash provided by investing activities	4,025	11,430
Effect of foreign exchange translation on cash	(1,851)	7,026
Decrease in cash and cash equivalents	(506,855)	(660,289)
Cash and cash equivalents, beginning of period	988,686	1,795,654
Cash and cash equivalents, end of period	481,831	1,135,365
Supplemental disclosure of cash flow information
Cash paid during the period for income taxes	17,881	20,620
Cash paid during the period for interest	$ 2,427	$ 2,025

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Consolidated Statement of Changes in Stockholders' Equity - 9 months ended Feb. 28, 2017 - USD ($)	Total	Common Stock [Member]	Accumulated Other Comprehensive Loss [Member]	Accumulated Deficit [Member]
Beginning balance at May. 31, 2016	$ 8,004,040	$ 10,569,522	$ (394,518)	$ (2,170,964)
Beginning balance, shares at May. 31, 2016	2,995,910	2,995,910
Stock-based compensation	$ 18,646	$ 18,646	0	0
Net loss	(639,432)	0	0	(639,432)
Other comprehensive loss	(84,302)	0	(84,302)	0
Ending balance at Feb. 28, 2017	$ 7,298,952	$ 10,588,168	$ (478,820)	$ (2,810,396)
Ending balance, shares at Feb. 28, 2017	2,995,910	2,995,910

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Summary of Significant Accounting Policies

9 Months Ended

Feb. 28, 2017

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, 2017 and its results of operations and its cash flows for the periods presented. The consolidated balance sheet at May 31, 2016 has been derived from the Annual Report on Form 10-K for the fiscal year ended May 31, 2016. 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, 2016. 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, 2017.

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. The Company estimates customer product returns based on historical return patterns and reduces sales and cost of sales accordingly.

Financial Instruments

The carrying value of all other financial instruments potentially subject to valuation risk (principally consisting of cash and cash equivalents, accounts receivable and accounts payable) also approximates fair value because of their short-term maturities.

Accounts Receivable

The Company maintains credit limits for all customers based upon several factors, including but not limited to financial condition and stability, payment history, published credit reports and use of credit references. Management performs various analyses to evaluate accounts receivable balances to ensure recorded amounts reflect estimated net realizable value. This review includes using accounts receivable agings, other operating trends and relevant business conditions, including general economic factors, as they relate to each of the Company’s domestic and international customers. If these analyses lead management to the conclusion that potential significant accounts are uncollectible, a reserve is provided. The allowance for doubtful accounts was $41,525 and $42,387 as of February 28, 2017 and May 31, 2016, respectively.

Inventories

Inventories are valued at the lower of cost or market with cost determined on the average cost basis. Costs included in inventories consist of materials, labor and manufacturing overhead, which are related to the purchase or production of inventories. Write-downs, when required, are made to reduce excess inventories to their net realizable values. Such estimates are based on assumptions regarding future demand and market conditions. If actual conditions become less favorable than the assumptions used, an additional inventory write-down may be required. As of February 28, 2017 and May 31, 2016, inventories consisted of:

	February 28, 2017		May 31, 2016
Raw materials	$	1,955,787	$	2,030,655
Work-in-process		946,046		1,059,864
Finished goods		1,440,384		1,637,458
	$	4,342,217	$	4,727,977

Property and Equipment

Property and equipment are stated at cost. Depreciation is computed using the straight-line method over estimated useful lives of three to seven years for furniture, fixtures and equipment; three years for vehicles; and twenty-five years for buildings and improvements. As of February 28, 2017 and May 31, 2016, property and equipment consisted of:

	February 28, 2017			May 31, 2016
Land	$	299,000		$	299,000
Buildings and improvements		1,814,524			1,814,524
Furniture, fixtures and equipment		1,241,675			1,344,343
Vehicles		44,704			96,587
		3,399,903			3,554,454
Less accumulated depreciation		(2,512,674	)		(2,589,002	)
	$	887,229		$	965,452

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, “Revenue from Contracts with Customers (Topic 606).” ASU 2014-09 affects any entity using U.S. GAAP that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards (e.g., insurance contracts or lease contracts). ASU 2014-09 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016.

In August 2015, the FASB issued ASU 2015-14, which defers the effective date of ASU 2014-09 by one year. The new guidance is effective for interim and annual reporting periods beginning after December 15, 2017. Early adoption is permitted as of the date of the original effective date, for interim and annual reporting periods beginning after December 15, 2016.

In July 2015, the FASB issued ASU 2015-11, “Simplifying the Measurement of Inventory.” ASU 2015-11 requires an entity to measure in-scope inventory at the lower of cost and net realizable value. Net realizable value is defined as the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The amendments in ASU 2015-11 are effective on a prospective basis for public entities for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. Early application is permitted as of the beginning of an interim or annual reporting period.

The Company is currently evaluating the provisions of ASU 2014-09, ASU 2015-14 and ASU 2015-11.

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Stock Options and Stock-Based Compensation

9 Months Ended

Feb. 28, 2017

Disclosure of Compensation Related Costs, Share-based Payments [Abstract]

Stock Options and Stock-Based Compensation

NOTE 2:

STOCK OPTIONS AND STOCK-BASED COMPENSATION

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

• Risk-Free Interest Rate. The Company bases the risk-free interest rate on the implied yield currently available on U.S. Treasury issues with an equivalent remaining term approximately equal to the expected life of the award.

• Expected Life. The expected life of awards granted represents the period of time that they are expected to be outstanding. The Company determines the expected life based on historical experience with similar awards, giving consideration to the contractual terms, vesting schedules and pre-vesting and post-vesting forfeitures.

• Expected Volatility. The Company estimates the volatility of its common stock at the date of grant based on the historical volatility of its common stock. The volatility factor the Company uses is based on its historical stock prices over the most recent period commensurate with the estimated expected life of the award. These historical periods may exclude portions of time when unusual transactions occurred.

• Expected Dividend Yield. The Company does not anticipate paying any cash dividends in the foreseeable future. Consequently, the Company uses an expected dividend yield of 0.

• Expected Forfeitures. The Company uses relevant historical data to estimate pre-vesting option forfeitures. The Company records stock-based compensation only for those awards that are expected to vest.

To determine stock-based compensation expense recognized for those options granted during the nine months ended February 28, 2017 and February 29, 2016, the Company has computed the value of all stock options granted using the Black-Scholes option pricing model. No options were issued during the nine months ended February 28, 2017 and February 29, 2016.

At February 28, 2017, the Company had a total of 147,500 outstanding stock options (130,000 vested and exercisable and 17,500 non-vested) with a weighted average exercise price of $3.11. The Company estimates that $8,054 will be recorded as additional stock-based compensation expense over a weighted-average period of 0.6 years for all options that were outstanding as of February 28, 2017, 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
15,000	$2.53	6.6	15,000	$2.53
77,500	2.85	7.1	60,000	2.85
55,000	3.65	4.3	55,000	3.65
147,500	3.11	6.0	130,000	3.15

Options granted, exercised, and forfeited or canceled under the Company’s stock option plan during the three and nine months ended February 28, 2017 are summarized as follows:

	Three Months Ended February 28, 2017				Nine Months Ended February 28, 2017
	Number of Shares		Weighted Average Exercise Price		Number of Shares		Weighted Average Exercise Price
Options outstanding - beginning of period		147,500	$	3.11		147,500	$	3.11
Options granted		0		0		0		0
Options exercised		0		0		0		0
Options forfeited/canceled		0		0		0		0
Options outstanding - end of period		147,500		3.11		147,500		3.11

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EPS Reconciliation

9 Months Ended

Feb. 28, 2017

Earnings Per Share [Abstract]

EPS Reconciliation

NOTE 3:

EPS RECONCILIATION

	Three Months Ended				Nine Months Ended
	February 28, 2017		February 29, 2016		February 28, 2017		February 29, 2016
Weighted average shares (basic)		2,995,910		2,995,910		2,995,910		2,995,910
Effect of dilutive stock options		0		0		0		0
Weighted average shares (diluted)		2,995,910		2,995,910		2,995,910		2,995,910

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

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Income Taxes

9 Months Ended

Feb. 28, 2017

Income Tax Disclosure [Abstract]

Income Taxes

NOTE 4:

INCOME TAXES

The Company accounts for income taxes using the asset and liability method. This approach requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax basis of assets and liabilities. Deferred tax assets are reduced by a valuation allowance if, based on the weight of available evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Management continues to review the level of the valuation allowance on a quarterly basis. There can be no assurance that the Company’s future operations will produce sufficient earnings so that the deferred tax asset can be fully utilized. The Company currently maintains a full valuation allowance against net deferred tax assets.

Each year the Company files income tax returns in the various national, state and local income taxing jurisdictions in which it operates. These tax returns are subject to examination and possible challenge by the taxing authorities. Positions challenged by the taxing authorities may be settled or appealed by the Company. As a result, there is an uncertainty in income taxes recognized in the Company’s financial statements in accordance with ASC Topic 740. The Company applies this guidance by defining criteria that an individual income tax position must meet for any part of the benefit of that position to be recognized in an enterprise’s financial statements and provides guidance on measurement, de-recognition, classification, accounting for interest and penalties, accounting in interim periods, disclosure, and transition.

Other long-term liabilities related to tax contingencies were $0 as of both February 28, 2017 and May 31, 2016. 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, 2017 and May 31, 2016.

Several tax years are subject to examination by major tax jurisdictions. In the United States, federal tax years for Fiscal 2012 and after are subject to examination. In the United Kingdom, tax years for Fiscal 2012 and after are subject to examination. In Canada, tax years for Fiscal 2005 and after are subject to examination.

Effective Tax Rate

The effective tax rate on consolidated net loss was 3.5% for the nine months ended February 28, 2017. The effective tax rate on consolidated net loss differs from the federal statutory tax rate primarily due to 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 2017 will be approximately 7.3% due to the items noted above.

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Segments of Business

9 Months Ended

Feb. 28, 2017

Segment Reporting [Abstract]

Segments of Business

NOTE 5:

SEGMENTS OF BUSINESS

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

Segment Information

	Three Months Ended
	February 28, 2017						February 29, 2016
	Balancer			Measurement			Balancer			Measurement
Gross sales	$	2,190,989		$	1,349,467		$	1,670,316		$	1,248,769
Intercompany sales		(341,334	)		0			(389,844	)		(776	)
Net sales	$	1,849,655		$	1,349,467		$	1,280,472		$	1,247,993
Operating income (loss)	$	(135,969	)	$	37,271		$	(348,631	)	$	(61,663	)
Depreciation expense	$	17,531		$	9,220		$	23,057		$	9,477
Amortization expense	$	0		$	27,883		$	0		$	27,882
Capital expenditures	$	3,923		$	0		$	3,520		$	0
	Nine Months Ended
	February 28, 2017						February 29, 2016
	Balancer			Measurement			Balancer			Measurement
Gross sales	$	5,631,370		$	3,955,384		$	6,089,441		$	3,622,681
Intercompany sales		(823,173	)		(16,366	)		(1,000,745	)		(4,759	)
Net sales	$	4,808,197		$	3,939,018		$	5,088,696		$	3,617,922
Operating income (loss)	$	(624,755	)	$	57,748		$	(684,196	)	$	(286,125	)
Depreciation expense	$	53,336		$	28,087		$	74,103		$	29,864
Amortization expense	$	0		$	83,648		$	0		$	83,647
Capital expenditures	$	48,510		$	0		$	3,520		$	0

Geographic Information – Net Sales by Geographic Area

	Three Months Ended				Nine Months Ended
	February 28, 2017		February 29, 2016		February 28, 2017		February 29, 2016
North America	$	2,118,627	$	1,776,511	$	5,861,484	$	5,944,433
Europe		393,963		238,553		1,044,869		923,275
Asia		637,360		467,508		1,585,839		1,688,064
Other markets		49,172		45,893		255,023		150,846
Total net sales	$	3,199,122	$	2,528,465	$	8,747,215	$	8,706,618

	Three Months Ended
	February 28, 2017						February 29, 2016
	United States			Europe			United States			Europe
Operating income (loss)	$	(106,315	)		7,617		$	(336,999	)	$	(73,295	)
Depreciation expense	$	26,751		$	0		$	32,534		$	0
Amortization expense	$	27,883		$	0		$	27,882		$	0
Capital expenditures	$	3,923		$	0		$	3,520		$	0
	Nine Months Ended
	February 28, 2017						February 29, 2016
	United States			Europe			United States			Europe
Operating loss	$	(511,782	)		(55,225	)	$	(836,741	)	$	(133,580	)
Depreciation expense	$	81,423		$	0		$	103,967		$	0
Amortization expense	$	83,648		$	0		$	83,647		$	0
Capital expenditures	$	48,510		$	0		$	3,520		$	0

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

Segment and Geographic Assets

	February 28, 2017		May 31, 2016
Segment assets to total assets
Balancer	$	4,742,767	$	4,727,490
Measurement		3,566,387		3,910,132
Corporate assets		486,772		997,118
Total assets	$	8,795,926	$	9,634,740
Geographic assets to long-lived assets
United States	$	887,229	$	965,452
Europe		0		0
Total long-lived assets	$	887,229	$	965,452
Geographic assets to total assets
United States	$	7,947,168	$	8,772,666
Europe		848,758		862,074
Total assets	$	8,795,926	$	9,634,740

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Summary of Significant Accounting Policies (Policies)

9 Months Ended

Feb. 28, 2017

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, 2017 and its results of operations and its cash flows for the periods presented. The consolidated balance sheet at May 31, 2016 has been derived from the Annual Report on Form 10-K for the fiscal year ended May 31, 2016. 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, 2016. 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, 2017.

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. The Company estimates customer product returns based on historical return patterns and reduces sales and cost of sales accordingly.

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.

Accounts Receivable

Accounts Receivable

The Company maintains credit limits for all customers based upon several factors, including but not limited to financial condition and stability, payment history, published credit reports and use of credit references. Management performs various analyses to evaluate accounts receivable balances to ensure recorded amounts reflect estimated net realizable value. This review includes using accounts receivable agings, other operating trends and relevant business conditions, including general economic factors, as they relate to each of the Company’s domestic and international customers. If these analyses lead management to the conclusion that potential significant accounts are uncollectible, a reserve is provided. The allowance for doubtful accounts was $41,525 and $42,387 as of February 28, 2017 and May 31, 2016, respectively.

Inventories

Inventories

Inventories are valued at the lower of cost or market with cost determined on the average cost basis. Costs included in inventories consist of materials, labor and manufacturing overhead, which are related to the purchase or production of inventories. Write-downs, when required, are made to reduce excess inventories to their net realizable values. Such estimates are based on assumptions regarding future demand and market conditions. If actual conditions become less favorable than the assumptions used, an additional inventory write-down may be required. As of February 28, 2017 and May 31, 2016, inventories consisted of:

	February 28, 2017		May 31, 2016
Raw materials	$	1,955,787	$	2,030,655
Work-in-process		946,046		1,059,864
Finished goods		1,440,384		1,637,458
	$	4,342,217	$	4,727,977

Property and Equipment

Property and Equipment

Property and equipment are stated at cost. Depreciation is computed using the straight-line method over estimated useful lives of three to seven years for furniture, fixtures and equipment; three years for vehicles; and twenty-five years for buildings and improvements. As of February 28, 2017 and May 31, 2016, property and equipment consisted of:

	February 28, 2017			May 31, 2016
Land	$	299,000		$	299,000
Buildings and improvements		1,814,524			1,814,524
Furniture, fixtures and equipment		1,241,675			1,344,343
Vehicles		44,704			96,587
		3,399,903			3,554,454
Less accumulated depreciation		(2,512,674	)		(2,589,002	)
	$	887,229		$	965,452

Recent Accounting Pronouncements

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, “Revenue from Contracts with Customers (Topic 606).” ASU 2014-09 affects any entity using U.S. GAAP that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards (e.g., insurance contracts or lease contracts). ASU 2014-09 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016.

In August 2015, the FASB issued ASU 2015-14, which defers the effective date of ASU 2014-09 by one year. The new guidance is effective for interim and annual reporting periods beginning after December 15, 2017. Early adoption is permitted as of the date of the original effective date, for interim and annual reporting periods beginning after December 15, 2016.

In July 2015, the FASB issued ASU 2015-11, “Simplifying the Measurement of Inventory.” ASU 2015-11 requires an entity to measure in-scope inventory at the lower of cost and net realizable value. Net realizable value is defined as the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The amendments in ASU 2015-11 are effective on a prospective basis for public entities for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. Early application is permitted as of the beginning of an interim or annual reporting period.

The Company is currently evaluating the provisions of ASU 2014-09, ASU 2015-14 and ASU 2015-11.

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Summary of Significant Accounting Policies (Tables)

9 Months Ended

Feb. 28, 2017

Accounting Policies [Abstract]

Inventories

As of February 28, 2017 and May 31, 2016, inventories consisted of:

	February 28, 2017		May 31, 2016
Raw materials	$	1,955,787	$	2,030,655
Work-in-process		946,046		1,059,864
Finished goods		1,440,384		1,637,458
	$	4,342,217	$	4,727,977

Summary of Property and Equipment

As of February 28, 2017 and May 31, 2016, property and equipment consisted of:

	February 28, 2017			May 31, 2016
Land	$	299,000		$	299,000
Buildings and improvements		1,814,524			1,814,524
Furniture, fixtures and equipment		1,241,675			1,344,343
Vehicles		44,704			96,587
		3,399,903			3,554,454
Less accumulated depreciation		(2,512,674	)		(2,589,002	)
	$	887,229		$	965,452

XML

Stock Options and Stock-Based Compensation (Tables)

9 Months Ended

Feb. 28, 2017

Disclosure of Compensation Related Costs, Share-based Payments [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
15,000	$2.53	6.6	15,000	$2.53
77,500	2.85	7.1	60,000	2.85
55,000	3.65	4.3	55,000	3.65
147,500	3.11	6.0	130,000	3.15

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, 2017 are summarized as follows:

	Three Months Ended February 28, 2017				Nine Months Ended February 28, 2017
	Number of Shares		Weighted Average Exercise Price		Number of Shares		Weighted Average Exercise Price
Options outstanding - beginning of period		147,500	$	3.11		147,500	$	3.11
Options granted		0		0		0		0
Options exercised		0		0		0		0
Options forfeited/canceled		0		0		0		0
Options outstanding - end of period		147,500		3.11		147,500		3.11

XML

EPS Reconciliation (Tables)

9 Months Ended

Feb. 28, 2017

Earnings Per Share [Abstract]

Schedule of Earnings Per Share

Three Months Ended					Nine Months Ended
	February 28, 2017		February 29, 2016			February 28, 2017		February 29, 2016
Weighted average shares (basic)		2,995,910		2,995,910			2,995,910		2,995,910
Effect of dilutive stock options		0		0			0		0
Weighted average shares (diluted)		2,995,910		2,995,910			2,995,910		2,995,910

XML

Segments of Business (Tables)

9 Months Ended

Feb. 28, 2017

Segment Reporting [Abstract]

Segment Information

Segment Information

	Three Months Ended
	February 28, 2017						February 29, 2016
	Balancer			Measurement			Balancer			Measurement
Gross sales	$	2,190,989		$	1,349,467		$	1,670,316		$	1,248,769
Intercompany sales		(341,334	)		0			(389,844	)		(776	)
Net sales	$	1,849,655		$	1,349,467		$	1,280,472		$	1,247,993
Operating income (loss)	$	(135,969	)	$	37,271		$	(348,631	)	$	(61,663	)
Depreciation expense	$	17,531		$	9,220		$	23,057		$	9,477
Amortization expense	$	0		$	27,883		$	0		$	27,882
Capital expenditures	$	3,923		$	0		$	3,520		$	0
	Nine Months Ended
	February 28, 2017						February 29, 2016
	Balancer			Measurement			Balancer			Measurement
Gross sales	$	5,631,370		$	3,955,384		$	6,089,441		$	3,622,681
Intercompany sales		(823,173	)		(16,366	)		(1,000,745	)		(4,759	)
Net sales	$	4,808,197		$	3,939,018		$	5,088,696		$	3,617,922
Operating income (loss)	$	(624,755	)	$	57,748		$	(684,196	)	$	(286,125	)
Depreciation expense	$	53,336		$	28,087		$	74,103		$	29,864
Amortization expense	$	0		$	83,648		$	0		$	83,647
Capital expenditures	$	48,510		$	0		$	3,520		$	0

Geographic Information-Net Sales by Geographic Area

Geographic Information – Net Sales by Geographic Area

	Three Months Ended				Nine Months Ended
	February 28, 2017		February 29, 2016		February 28, 2017		February 29, 2016
North America	$	2,118,627	$	1,776,511	$	5,861,484	$	5,944,433
Europe		393,963		238,553		1,044,869		923,275
Asia		637,360		467,508		1,585,839		1,688,064
Other markets		49,172		45,893		255,023		150,846
Total net sales	$	3,199,122	$	2,528,465	$	8,747,215	$	8,706,618

Segment Information of Operating Income (Loss) and Expenditure by Geographic Areas

Three Months Ended
	February 28, 2017						February 29, 2016
	United States			Europe			United States			Europe
Operating income (loss)	$	(106,315	)		7,617		$	(336,999	)	$	(73,295	)
Depreciation expense	$	26,751		$	0		$	32,534		$	0
Amortization expense	$	27,883		$	0		$	27,882		$	0
Capital expenditures	$	3,923		$	0		$	3,520		$	0
	Nine Months Ended
	February 28, 2017						February 29, 2016
	United States			Europe			United States			Europe
Operating loss	$	(511,782	)		(55,225	)	$	(836,741	)	$	(133,580	)
Depreciation expense	$	81,423		$	0		$	103,967		$	0
Amortization expense	$	83,648		$	0		$	83,647		$	0
Capital expenditures	$	48,510		$	0		$	3,520		$	0

Segment and Geographic Assets

Segment and Geographic Assets

	February 28, 2017		May 31, 2016
Segment assets to total assets
Balancer	$	4,742,767	$	4,727,490
Measurement		3,566,387		3,910,132
Corporate assets		486,772		997,118
Total assets	$	8,795,926	$	9,634,740
Geographic assets to long-lived assets
United States	$	887,229	$	965,452
Europe		0		0
Total long-lived assets	$	887,229	$	965,452
Geographic assets to total assets
United States	$	7,947,168	$	8,772,666
Europe		848,758		862,074
Total assets	$	8,795,926	$	9,634,740

XML

Summary of Significant Accounting Policies - Additional Information (Detail) - USD ($)	9 Months Ended
	Feb. 28, 2017	May 31, 2016
Significant Accounting Policies [Line Items]
Allowance for doubtful accounts	$ 41,525	$ 42,387
Vehicles [Member]
Significant Accounting Policies [Line Items]
Property and equipment, useful life	3 years
Building and Improvements [Member]
Significant Accounting Policies [Line Items]
Property and equipment, useful life	25 years
Minimum [Member] | Furniture, Fixtures and Equipment [Member]
Significant Accounting Policies [Line Items]
Property and equipment, useful life	3 years
Maximum [Member] | Furniture, Fixtures and Equipment [Member]
Significant Accounting Policies [Line Items]
Property and equipment, useful life	7 years

XML

Summary of Significant Accounting Policies - Schedule of Inventories (Detail) - USD ($)	Feb. 28, 2017	May 31, 2016
Inventory, Net [Abstract]
Raw materials	$ 1,955,787	$ 2,030,655
Work-in-process	946,046	1,059,864
Finished goods	1,440,384	1,637,458
Inventories	$ 4,342,217	$ 4,727,977

XML

Summary of Significant Accounting Policies - Summary of Property and Equipment (Detail) - USD ($)	Feb. 28, 2017	May 31, 2016
Property, Plant and Equipment [Line Items]
Property, plant and equipment, gross	$ 3,399,903	$ 3,554,454
Less accumulated depreciation	(2,512,674)	(2,589,002)
Property, plant and equipment, net	887,229	965,452
Land [Member]
Property, Plant and Equipment [Line Items]
Property, plant and equipment, gross	299,000	299,000
Building and Improvements [Member]
Property, Plant and Equipment [Line Items]
Property, plant and equipment, gross	1,814,524	1,814,524
Furniture, Fixtures and Equipment [Member]
Property, Plant and Equipment [Line Items]
Property, plant and equipment, gross	1,241,675	1,344,343
Vehicles [Member]
Property, Plant and Equipment [Line Items]
Property, plant and equipment, gross	$ 44,704	$ 96,587

XML

Stock Options and Stock-Based Compensation - Additional Information (Detail) - USD ($)	3 Months Ended	9 Months Ended
	Feb. 28, 2017	Feb. 28, 2017	Feb. 29, 2016	Nov. 30, 2016	May 31, 2016
Disclosure of Compensation Related Costs, Share-based Payments [Abstract]
Expected dividend rate		0.00%
Options Granted	0	0	0
Outstanding stock options, total	147,500	147,500		147,500	147,500
Vested and exercisable stock options	130,000	130,000
Non-vested shares	17,500	17,500
Weighted average exercise price	$ 3.11	$ 3.11		$ 3.11	$ 3.11
Additional stock-based compensation expense	$ 8,054	$ 8,054
Additional stock-based compensation expense weighted average period		7 months 6 days

XML

Stock Options and Stock-Based Compensation - Schedule of Outstanding Stock Options (Detail) - $ / shares	9 Months Ended
	Feb. 28, 2017	Nov. 30, 2016	May 31, 2016
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Number of Shares, Outstanding Options	147,500	147,500	147,500
Weighted Average Exercise Price, Outstanding Options	$ 3.11	$ 3.11	$ 3.11
Weighted Average Remaining Contractual Life (yrs), Outstanding Options	6 years
Exercisable Options, Number of Shares	130,000
Exercisable Options, Weighted Average Exercise Price	$ 3.15
Options 1 [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Number of Shares, Outstanding Options	15,000
Weighted Average Exercise Price, Outstanding Options	$ 2.53
Weighted Average Remaining Contractual Life (yrs), Outstanding Options	6 years 7 months 6 days
Exercisable Options, Number of Shares	15,000
Exercisable Options, Weighted Average Exercise Price	$ 2.53
Options 2 [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Number of Shares, Outstanding Options	77,500
Weighted Average Exercise Price, Outstanding Options	$ 2.85
Weighted Average Remaining Contractual Life (yrs), Outstanding Options	7 years 1 month 6 days
Exercisable Options, Number of Shares	60,000
Exercisable Options, Weighted Average Exercise Price	$ 2.85
Options 3 [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Number of Shares, Outstanding Options	55,000
Weighted Average Exercise Price, Outstanding Options	$ 3.65
Weighted Average Remaining Contractual Life (yrs), Outstanding Options	4 years 3 months 18 days
Exercisable Options, Number of Shares	55,000
Exercisable Options, Weighted Average Exercise Price	$ 3.65

XML

Stock Options and Stock-Based Compensation - Schedule of Options Granted, Exercised, and Forfeited or Canceled (Detail) - $ / shares	3 Months Ended	9 Months Ended
	Feb. 28, 2017	Feb. 28, 2017	Feb. 29, 2016
Disclosure of Compensation Related Costs, Share-based Payments [Abstract]
Number of Shares, Options outstanding - beginning of period	147,500	147,500
Number of Shares, Options granted	0	0	0
Number of Shares, Options exercised	0	0
Number of Shares, Options forfeited/canceled	0	0
Number of Shares, Options outstanding - end of period	147,500	147,500
Weighted Average Exercise Price, Options outstanding - beginning of period	$ 3.11	$ 3.11
Weighted Average Exercise Price, Options granted	0	0
Weighted Average Exercise Price, Options exercised	0	0
Weighted Average Exercise Price, Options forfeited/canceled	0	0
Weighted Average Exercise Price, Options outstanding - end of period	$ 3.11	$ 3.11

XML

EPS Reconciliation - Schedule of Earnings Per Share (Detail) - shares	3 Months Ended		9 Months Ended
	Feb. 28, 2017	Feb. 29, 2016	Feb. 28, 2017	Feb. 29, 2016
Earnings Per Share [Abstract]
Weighted average shares (basic)	2,995,910	2,995,910	2,995,910	2,995,910
Effect of dilutive stock options	0	0	0	0
Weighted average shares (diluted)	2,995,910	2,995,910	2,995,910	2,995,910

XML

EPS Reconciliation - Additional Information (Detail)	9 Months Ended
	Feb. 28, 2017 shares
Earnings Per Share [Abstract]
Antidilutive common stock equivalents	0

XML

Income Taxes - Additional Information (Detail) - USD ($)	9 Months Ended	12 Months Ended
	Feb. 28, 2017	May 31, 2017	May 31, 2016
Income Tax Contingency [Line Items]
Other long-term liabilities related to uncertain tax positions	$ 0		$ 0
Liability for payment of interest and penalties	$ 0		$ 0
Effective tax rate on consolidated net loss	3.50%
Forecast [Member]
Income Tax Contingency [Line Items]
Effective tax rate for Fiscal 2017		7.30%
Earliest tax year [Member] | Canada [Member]
Income Tax Contingency [Line Items]
Income tax examination period under examination	2005
Domestic Tax Authority [Member] | Earliest tax year [Member]
Income Tax Contingency [Line Items]
Income tax examination period under examination	2012
Foreign Tax Authority [Member] | Earliest tax year [Member] | United Kingdom [Member]
Income Tax Contingency [Line Items]
Income tax examination period under examination	2012

XML

Segments of Business - Additional Information (Detail)	9 Months Ended
	Feb. 28, 2017 Segment Markets
Segment Reporting [Abstract]
Number of reportable business segments | Segment	2
Number of geographic markets in which entity operates | Markets	3

XML

Segments of Business - Segment Information (Detail) - USD ($)	3 Months Ended		9 Months Ended
	Feb. 28, 2017	Feb. 29, 2016	Feb. 28, 2017	Feb. 29, 2016
Segment Reporting Information [Line Items]
Net sales	$ 3,199,122	$ 2,528,465	$ 8,747,215	$ 8,706,618
Operating income (loss)	(98,698)	(410,294)	(567,007)	(970,321)
Capital expenditures			48,510	3,520
Measurement [Member]
Segment Reporting Information [Line Items]
Net sales	1,349,467	1,247,993	3,939,018	3,617,922
Operating income (loss)	37,271	(61,663)	57,748	(286,125)
Depreciation expense	9,220	9,477	28,087	29,864
Amortization expense	27,883	27,882	83,648	83,647
Capital expenditures	0	0	0	0
Balancer [Member]
Segment Reporting Information [Line Items]
Net sales	1,849,655	1,280,472	4,808,197	5,088,696
Operating income (loss)	(135,969)	(348,631)	(624,755)	(684,196)
Depreciation expense	17,531	23,057	53,336	74,103
Amortization expense	0	0	0	0
Capital expenditures	3,923	3,520	48,510	3,520
Operating Segments [Member] | Measurement [Member]
Segment Reporting Information [Line Items]
Net sales	1,349,467	1,248,769	3,955,384	3,622,681
Operating Segments [Member] | Balancer [Member]
Segment Reporting Information [Line Items]
Net sales	2,190,989	1,670,316	5,631,370	6,089,441
Intersegment Eliminations [Member] | Measurement [Member]
Segment Reporting Information [Line Items]
Net sales	0	(776)	(16,366)	(4,759)
Intersegment Eliminations [Member] | Balancer [Member]
Segment Reporting Information [Line Items]
Net sales	$ (341,334)	$ (389,844)	$ (823,173)	$ (1,000,745)

XML

Segments of Business - Geographic Information - Net Sales by Geographic Area (Detail) - USD ($)	3 Months Ended		9 Months Ended
	Feb. 28, 2017	Feb. 29, 2016	Feb. 28, 2017	Feb. 29, 2016
Revenues from External Customers and Long-Lived Assets [Line Items]
Total net sales	$ 3,199,122	$ 2,528,465	$ 8,747,215	$ 8,706,618
North America [Member]
Revenues from External Customers and Long-Lived Assets [Line Items]
Total net sales	2,118,627	1,776,511	5,861,484	5,944,433
Europe [Member]
Revenues from External Customers and Long-Lived Assets [Line Items]
Total net sales	393,963	238,553	1,044,869	923,275
Asia [Member]
Revenues from External Customers and Long-Lived Assets [Line Items]
Total net sales	637,360	467,508	1,585,839	1,688,064
Other markets [Member]
Revenues from External Customers and Long-Lived Assets [Line Items]
Total net sales	$ 49,172	$ 45,893	$ 255,023	$ 150,846

XML

Segments of Business - Segment Information of Operating Income (Loss) and Expenditure by Geographic Areas (Detail) - USD ($)		3 Months Ended		9 Months Ended
		Feb. 28, 2017	Feb. 29, 2016	Feb. 28, 2017	Feb. 29, 2016
Revenues from External Customers and Long-Lived Assets [Line Items]
Operating income (loss)		$ (98,698)	$ (410,294)	$ (567,007)	$ (970,321)
Capital expenditures				48,510	3,520
United States [Member]
Revenues from External Customers and Long-Lived Assets [Line Items]
Operating income (loss)		(106,315)	(336,999)	(511,782)	(836,741)
Depreciation expense		26,751	32,534	81,423	103,967
Amortization expense		27,883	27,882	83,648	83,647
Capital expenditures		3,923	3,520	48,510	3,520
Europe [Member]
Revenues from External Customers and Long-Lived Assets [Line Items]
Operating income (loss)	[1]	7,617	(73,295)	(55,225)	(133,580)
Depreciation expense	[1]	0	0	0	0
Amortization expense	[1]	0	0	0	0
Capital expenditures	[1]	$ 0	$ 0	$ 0	$ 0

[1] Note - - Europe is defined as the European subsidiary, Schmitt Europe, Ltd.

XML

Segments of Business - Segment and Geographic Assets (Detail) - USD ($)	Feb. 28, 2017	May 31, 2016
Segment Reporting Information [Line Items]
Segment and geographic assets to total assets	$ 8,795,926	$ 9,634,740
Geographic assets to long-lived assets	887,229	965,452
Segment and geographic assets to total assets	8,795,926	9,634,740
United States [Member]
Segment Reporting Information [Line Items]
Segment and geographic assets to total assets	7,947,168	8,772,666
Geographic assets to long-lived assets	887,229	965,452
Segment and geographic assets to total assets	7,947,168	8,772,666
Europe [Member]
Segment Reporting Information [Line Items]
Segment and geographic assets to total assets	848,758	862,074
Geographic assets to long-lived assets	0	0
Segment and geographic assets to total assets	848,758	862,074
Operating Segments [Member] | Balancer [Member]
Segment Reporting Information [Line Items]
Segment and geographic assets to total assets	4,742,767	4,727,490
Segment and geographic assets to total assets	4,742,767	4,727,490
Operating Segments [Member] | Measurement [Member]
Segment Reporting Information [Line Items]
Segment and geographic assets to total assets	3,566,387	3,910,132
Segment and geographic assets to total assets	3,566,387	3,910,132
Corporate Assets [Member]
Segment Reporting Information [Line Items]
Segment and geographic assets to total assets	486,772	997,118
Segment and geographic assets to total assets	$ 486,772	$ 997,118