Discontinued Operations

12 Months Ended

May 31, 2020

Discontinued Operations and Disposal Groups [Abstract]

Discontinued Operations

On October 10, 2019, the Company entered into an agreement (“Purchase Agreement”) to sell the Schmitt Dynamic Balance Systems (“SBS”) business line to Tosei Engineering Corp. and Tosei America, Inc. (collectively “Tosei” or Buyer) for a purchase price of $10,500,000 in cash. The transaction closed on November 22, 2019 and included certain assets held by the U.S. parent company and all the outstanding stock of the UK subsidiary, Schmitt Europe Limited. As a result, the financial position, results of operations, and cash flows relating to our SBS business line are reported as discontinued operations in the accompanying financial statements.

The consideration included $9,940,000 in unrestricted cash from the Buyer at closing, plus $420,000 to be placed into an escrow account, net of $140,000 in minimum cash settled via the funds flow at closing. Remaining escrow funds become unrestricted after certain events are completed and after one year from closing. The Purchase Agreement requires an adjustment to purchase price after closing based on the difference between (a) the calculated amount of working capital at closing and (b) the target working capital of $4,200,000. The closing working capital calculation resulted in $107,000 in net proceeds paid from Buyer to Seller in February 2020.

In connection with the Purchase Agreement, the Company entered into a Transition Service Agreement (“TSA”) with the Buyer during the transition of certain accounting and treasury processes. The Company has collected approximately $80,000 of cash belonging to the buyer via the TSA that is included in the cash and cash equivalents, accounts receivable, and other accrued liabilities at May 31, 2020.

The following table summarizes the consideration and gain recognized in the year ended May 31, 2020 associated with the sale of the SBS Business:

Purchase Price	$	10,500,000
Cash in SEL		69,157
Less:
Net assets sold	$	4,460,177
Minimum cash		140,000
Transaction fees		453,287
Release of cumulative translation adjustment from OCI		455,848
Plus or minus:
Closing adjustments		107,000
Pre-tax gain on sale	$	5,166,845
Income taxes		62,100
Gain on sale, net of income taxes	$	5,104,745

The following are the carrying amounts of assets and liabilities classified as held for sale and included as a part of discontinued operations:

	2020		2019
Accounts receivable, net	$	-	$	1,365,114
Inventories		-		3,777,913
Prepaid expenses		-		49,357
Current assets held for sale	$	-	$	5,192,384
Property and equipment, net		-		85,967
Noncurrent assets held for sale	$	-	$	85,967
Accounts payable	$	-	$	393,773
Accrued commissions		-		128,453
Accrued payroll liabilities		-		127,124
Customer deposits and prepayments		-		109,860
Other accrued liabilities		-		89,939
Current liabilities held for sale	$	-	$	849,149
Net assets held for sale	$	-	$	4,429,202

The following is a composition of the line items constituting income from discontinued operations:

	Fiscal year ended, May 31,
	2020			2019
Net Sales	$	4,343,008		$	9,080,717
Cost of revenue		2,374,251			5,876,176
Gross profit		1,968,757			3,204,541
Operating expenses:
General, administration and sales		1,252,222			2,771,254
Research and development		35,920			72,208
Total operating expenses		1,288,142			2,843,462
Operating income		680,615			361,079
Other income (expense), net		(63,904	)		(85,972	)
Income before Taxes		616,711			275,107
Provision for Income taxes		(1,423	)		17,665
Net income from discontinued operations	$	618,134		$	257,442