10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended August 31, 2018

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 0-3498

TAYLOR DEVICES INC

(Exact name of registrant as specified in its charter)

NEW YORK	16-0797789
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
90 Taylor Drive, North Tonawanda, New York	14120-0748
(Address of principal executive offices)	(Zip Code)

716-694-0800

(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes [X]      No [  ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X]     No [  ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer [   ]	Accelerated filer [   ]
Non-accelerated filer [   ] (Do not check if a smaller reporting company)	Smaller reporting company [X]
Emerging growth company [   ]

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes [  ]       No [X]

As of October 2, 2018, there were outstanding 3,467,560 shares of the registrant’s common stock, par value $.025 per share.

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TAYLOR DEVICES, INC.

Index to Form 10-Q

PART I	FINANCIAL INFORMATION		PAGE NO.
	Item 1.	Financial Statements
		Condensed Consolidated Balance Sheets as of August 31, 2018 and May 31, 2018	3
		Condensed Consolidated Statements of Income for the three months ended August 31, 2018 and 2017	4
		Condensed Consolidated Statements of Cash Flows for the three months ended August 31, 2018 and 2017	5
		Notes to Condensed Consolidated Financial Statements	6
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	9
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk		14
	Item 4.	Controls and Procedures		14
PART II	OTHER INFORMATION
	Item 1.	Legal Proceedings	15
	Item 1A.	Risk Factors	15
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	15
	Item 3.	Defaults Upon Senior Securities	15
	Item 4.	Mine Safety Disclosures	15
	Item 5.	Other Information	16
	Item 6.	Exhibits	16
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM			17
SIGNATURES			18

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TAYLOR DEVICES, INC. AND SUBSIDIARY
Condensed Consolidated Balance Sheets	(Unaudited)
	August 31,			May 31,
	2018			2018
Assets
Current assets:
Cash and cash equivalents	$	7,120,612		$	2,858,323
Short-term investments		1,041,894			1,039,082
Accounts receivable, net		4,829,299			6,265,864
Inventory		12,760,275			11,317,775
Costs and estimated earnings in excess of billings		4,261,750			6,356,963
Other current assets		305,828			447,162
Total current assets		30,319,658			28,285,169
Maintenance and other inventory, net		926,018			885,651
Property and equipment, net		9,749,013			9,935,625
Other assets		186,930			185,730
Deferred income taxes		219,115			219,115
	$	41,400,734		$	39,511,290
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable	$	1,898,110		$	1,460,175
Accrued commissions		926,375			983,260
Billings in excess of costs and estimated earnings		1,845,770			2,043,002
Other current liabilities		2,304,901			1,412,502
Total current liabilities		6,975,156			5,898,939
Stockholders' Equity:
Common stock and additional paid-in capital		9,550,026			9,482,630
Retained earnings		27,704,911			26,959,080
		37,254,937			36,441,710
Treasury stock -  at cost		(2,829,359	)		(2,829,359	)
Total stockholders’ equity		34,425,578			33,612,351
	$	41,400,734		$	39,511,290
See notes to condensed consolidated financial statements.

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TAYLOR DEVICES, INC. AND SUBSIDIARY
Condensed Consolidated Statements of Income	(Unaudited)
	August 31,
For the three months ended	2018			2017
Sales, net	$	7,314,094		$	6,567,720
Cost of goods sold		5,007,831			4,950,068
Gross profit		2,306,263			1,617,652
Selling, general and administrative expenses		1,374,617			1,207,568
Operating income		931,646			410,084
Other income (expense),  net		(12,814	)		3,663
Income before provision for income taxes		918,832			413,747
Provision for income taxes		178,000			112,000
Net income	$	740,832		$	301,747
Basic and diluted earnings per common share	$	0.21		$	0.09
See notes to condensed consolidated financial statements.

-4-

TAYLOR DEVICES, INC. AND SUBSIDIARY
Condensed Consolidated Statements of Cash Flows
	(Unaudited)
	August 31,
For the three months ended	2018			2017
Operating activities:
Net income	$	740,832		$	301,747
Adjustments to reconcile net income to net cash flows from operating activities:
Depreciation		287,014			261,584
Stock options issued for services		57,308			56,497
Changes in other assets and liabilities:
Accounts receivable		1,436,565			(745,914	)
Inventory		(381,751	)		298,419
Costs and estimated earnings in excess of billings		1,768,704			(1,518,003	)
Other current assets		141,334			109,892
Accounts payable		437,935			229,667
Accrued commissions		(56,885	)		60,059
Billings in excess of costs and estimated earnings		(172,127	)		(31,121	)
Other current liabilities		97,686			(5,896	)
Net operating activities		4,356,615			(983,069	)
Investing activities:
Acquisition of property and equipment		(100,402	)		(620,789	)
Other investing activities		(4,012	)		(3,321	)
Net investing activities		(104,414	)		(624,110	)
Financing activities:
Proceeds from issuance of common stock, net		10,088			119,075
Net change in cash and cash equivalents		4,262,289			(1,488,104	)
Cash and cash equivalents - beginning		2,858,323			3,324,934
Cash and cash equivalents - ending	$	7,120,612		$	1,836,830
See notes to condensed consolidated financial statements.

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TAYLOR DEVICES, INC.

Notes to Condensed Consolidated Financial Statements

1. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of the Company, the accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting of only normal recurring accruals) necessary to present fairly the financial position as of August 31, 2018 and May 31, 2018, the results of operations for the three months ended August 31, 2018 and 2017, and cash flows for the three months ended August 31, 2018 and 2017. These financial statements should be read in conjunction with the audited financial statements and notes thereto contained in the Company's Annual Report to Shareholders for the year ended May 31, 2018.

2. The Company has evaluated events and transactions for potential recognition or disclosure in the financial statements through the date the financial statements were issued.

3. There is no provision nor shall there be any provisions for profit sharing, dividends, or any other benefits of any nature at any time for this fiscal year.

4. For the three month periods ended August 31, 2018 and 2017, the net income was divided by 3,466,589 and 3,443,475 respectively, which is net of the Treasury shares, to calculate the net income per share.

5. The results of operations for the three month periods ended August 31, 2018 are not necessarily indicative of the results to be expected for the full year.

6. In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers. ASU 2014-09 is a comprehensive new revenue recognition model that requires a company to recognize revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. ASU 2014-09 also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. ASU 2014-09, as amended, is effective for annual reporting periods, and interim periods within that period, beginning after December 15, 2018 (fiscal year 2019 for the Company). Companies may use either a full retrospective or a modified retrospective approach to adopt ASU 2014-09. We adopted ASU 2014-09 on June 1, 2018 using the modified retrospective method, which required the recognition of the cumulative effect of the transition as an adjustment to retained earnings. The Company elected to apply the standard only to open contracts as of June 1, 2018. Based on the application of the changes described above, we recognized a transition adjustment of $4,999, which increased our June 1, 2018 retained earnings. ASU 2014-09 is not expected to have a material impact to net earnings for the year ended May 31, 2019. Refer to Note 8 for additional information.

Other recently issued Accounting Standards Codification (ASC) guidance has either been implemented or are not significant to the Company

7. Inventory:

	August 31, 2018			May 31, 2018
Raw materials		$	714,437		$	726,852
Work-in-process			11,393,646			9,990,225
Finished goods			752,192			700,698
Gross inventory			12,860,275			11,417,775
Less allowance for obsolescence			100,000			100,000
Net Inventory		$	12,760,275		$	11,317,775

-6-

8. Revenue Recognition:

As discussed in Note 6, ASU 2014-09 was adopted on June 1, 2018 using the modified retrospective method, which required the recognition of the cumulative effect of the transition as an adjustment to retained earnings.

Revenue is recognized when, or as, the Company transfers control of promised products or services to a customer in an amount that reflects the consideration to which the Company expects to be entitled in exchange for transferring those products or services.

A performance obligation is a promise in a contract to transfer a distinct good or service to the customer, and is the unit of account. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. The majority of our contracts have a single performance obligation as the promise to transfer the individual goods or services is not separately identifiable from other promises in the contracts which are, therefore, not distinct. Promised goods or services that are immaterial in the context of the contract are not separately assessed as performance obligations. In the three months ended August 31, 2018, 52% of revenue was recorded for contracts with a single performance obligation that was satisfied within the period. In the three months ended August 31, 2017, 36% of revenue was recorded for contracts with a single performance obligation that was satisfied within the period.

For contracts with customers in which the Company satisfies a promise to the customer to provide a product that has no alternative use to the Company and the Company has enforceable rights to payment for progress completed to date inclusive of profit, the Company satisfies the performance obligation and recognizes revenue over time, using costs incurred to date relative to total estimated costs at completion to measure progress toward satisfying our performance obligations. Incurred cost represents work performed, which corresponds with, and thereby best depicts, the transfer of control to the customer. Contract costs include labor, material and overhead. In the three months ended August 31, 2018, 48% of revenue was recorded for contracts in which revenue was recognized over time. In the three months ended August 31, 2017, 64% of revenue was recorded for contracts in which revenue was recognized over time.

We recognized the cumulative effect of initially applying the new revenue standard as an adjustment to the opening balance of retained earnings. The comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods.

The cumulative effect of the changes made to our consolidated June 1, 2018 balance sheet for the adoption of ASU 2014-09, were as follows:

Balance Sheet	Balance at May 31, 2018		Adjustments Due to ASU 2014-09			Balance at June 1, 2018
Assets
Inventory	$	11,317,775	$	1,101,116		$	12,418,891
Costs and estimated earnings in excess of billings	$	6,356,963		(326,509	)	$	6,030,454
Liabilities
Billings in excess of costs and estimated earnings	$	2,043,002		(25,105	)	$	2,017,897
Other accrued expenses	$	1,412,502	$	794,713		$	2,207,215
Equity
Retained earnings	$	26,959,080	$	4,999		$	26,964,079

-7-

In accordance with the new revenue standard requirements, the disclosure of the impact of adoption of ASU 2014-09 on our consolidated balance sheet and income statement was as follows:

	August 31, 2018
Balance Sheet	As Reported		Effect of Change Higher/(Lower)			Balances Without Adoption of ASU 2014-09
Assets
Inventory	$	12,760,275	$	1,065,474		$	11,694,801
Costs and estimated earnings in excess of billings	$	4,261,750	$	(352,361	)	$	4,614,111
Other current assets	$	305,828	$	(8,000	)	$	313,828
Liabilities
Other accrued expenses	$	2,304,901	$	670,313		$	1,634,588
Equity
Retained earnings	$	27,704,911	$	34,800		$	27,670,111

	For the Three Months ended August 31, 2018
Income Statement	As Reported		Effect of Change Higher/(Lower)		Balances Without Adoption of ASU 2014-09
Revenues
Sales, net	$	7,314,094	$	73,443	$	7,240,651
Costs and Expenses
Cost of goods sold	$	5,007,831	$	35,642	$	4,972,189
Provision for income taxes	$	178,000	$	8,000	$	170,000
Net income	$	740,832	$	29,801	$	711,031

-8-

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

Cautionary Statement

The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for forward-looking statements. Information in this Item 2, "Management's Discussion and Analysis of Financial Condition and Results of Operations," and elsewhere in this 10-Q and its Exhibits that does not consist of historical facts, are "forward-looking statements." Statements accompanied or qualified by, or containing, words such as "may," "will," "should," "believes," "expects," "intends," "plans," "projects," "estimates," "predicts," "potential," "outlook," "forecast," "anticipates," "presume," and "assume" constitute forward-looking statements and, as such, are not a guarantee of future performance. The statements involve factors, risks and uncertainties, the impact or occurrence of which can cause actual results to differ materially from the expected results described in such statements. Risks and uncertainties can include, among others, reductions in capital budgets by our customers and potential customers; changing product demand and industry capacity; increased competition and pricing pressures; advances in technology that can reduce the demand for the Company's products; the kind, frequency and intensity of natural disasters that affect demand for the Company’s products; and other factors, many or all of which are beyond the Company's control. Consequently, investors should not place undue reliance on forward-looking statements as predictive of future results. The Company disclaims any obligation to release publicly any updates or revisions to the forward-looking statements herein to reflect any change in the Company's expectations with regard thereto, or any changes in events, conditions or circumstances on which any such statement is based.

Results of Operations

A summary of the period to period changes in the principal items included in the condensed consolidated statements of income is shown below:

Summary comparison of the three months ended August 31, 2018 and 2017
	Increase /
	(Decrease)
Sales, net	$	746,000
Cost of goods sold	$	58,000
Selling, general and administrative expenses	$	167,000
Income before provision for income taxes	$	505,000
Provision for income taxes	$	66,000
Net income	$	439,000

Sales under certain fixed-price contracts, requiring substantial performance over several periods prior to commencement of deliveries, are accounted for under the percentage-of-completion method of accounting whereby revenues are recognized based on estimates of completion prepared on a ratio of cost to total estimated cost basis. Costs include all material and direct and indirect charges related to specific contracts.

Adjustments to cost estimates are made periodically and any losses expected to be incurred on contracts in progress are charged to operations in the period such losses are determined. However, any profits expected on contracts in progress are recognized over the life of the contract.

For financial statement presentation purposes, the Company nets progress billings against the total costs incurred on uncompleted contracts. The asset, "costs and estimated earnings in excess of billings," represents revenues recognized in excess of amounts billed. The liability, "billings in excess of costs and estimated earnings," represents billings in excess of revenues recognized.

-9-

For the three months ended August 31, 2018 (All figures discussed are for the three months ended August 31, 2018 as compared to the three months ended August 31, 2017).

	Three months ended August 31						Change
	2018			2017			Amount		Percent
Net Revenue	$	7,314,000		$	6,568,000		$	746,000		11	%
Cost of sales		5,008,000			4,950,000			58,000		1	%
Gross profit	$	2,306,000		$	1,618,000		$	688,000		43	%
… as a percentage of net revenues		32	%		25	%

The Company's consolidated results of operations showed an 11% increase in net revenues and an increase in net income of 145%. Revenues recorded in the current period for long-term construction projects (“Project(s)”) were 17% less than the level recorded in the prior year. We had 27 Projects in process during the current period compared with 34 during the same period last year. Revenues recorded in the current period for other-than long-term construction projects (non-projects) were 62% more than the level recorded in the prior year. Total sales within the U.S. increased 37% from the same period last year. Total sales to Asia decreased 54% from the same period of the prior year. Sales decreases were recorded over the same period last year to customers involved in construction of buildings and bridges (3%), as well as to industrial customers (19%). There was a substantial increase in sales to customers in aerospace / defense (43%). Please refer to the charts, below, which show the breakdown of sales. The gross profit as a percentage of net revenue of 32% in the current period is an improvement from the same period of the prior year (25%). The increase in gross profit as a percentage of net revenue is primarily due to a shift in the product / customer mix noted above. The Company generally realizes a greater gross margin on domestic and aerospace / defense sales than it does on exports and construction sales.

Sales of the Company’s products are made to three general groups of customers: industrial, construction and aerospace / defense. A breakdown of sales to the three general groups of customers is as follows:

	Three months ended August 31
	2018			2017
Industrial		6	%		9	%
Construction		50	%		57	%
Aerospace / Defense		44	%		34	%

At August 31, 2017, the Company had 141 open sales orders in our backlog with a total sales value of $21.6 million. At August 31, 2018, the Company has 16% fewer open sales orders in our backlog (118 orders), and the total sales value is $22.6 million.

The Company's backlog, revenues, commission expense, gross margins, gross profits, and net income fluctuate from period to period. The changes in the current period, compared to the prior period, are not necessarily representative of future results.

Net revenue by geographic region, as a percentage of total net revenue for the three month periods ended August 31, 2018 and August 31, 2017 is as follows:

	Three months ended August 31
	2018			2017
USA		84	%		68	%
Asia		11	%		28	%
Other		5	%		4	%

-10-

Selling, General and Administrative Expenses

	Three months ended August 31						Change
	2018			2017			Amount		Percent
Outside Commissions	$	349,000		$	281,000		$	68,000		24	%
Other SG&A		1,026,000			927,000			99,000		11	%
Total SG&A	$	1,375,000		$	1,208,000		$	167,000		14	%
… as a percentage of net revenues		19	%		18	%

Selling, general and administrative expenses increased by 14% from the prior year. Outside commission expense increased by 24% from last year's level. This increase is due to an increase in domestic commissionable sales from last year’s level. Other selling, general and administrative expenses increased 11% from last year to this. This increase is primarily due to an increase in marketing expenses along with an increase in freight charges incurred for shipments to customers.

The above factors resulted in operating income of $932,000 for the three months ended August 31, 2018, 127% more than the $410,000 in the same period of the prior year.

Stock Options

The Company has a stock option plan which provides for the granting of nonqualified or incentive stock options to officers, key employees and non-employee directors. Options granted under the plan are exercisable over a ten year term. Options not exercised at the end of the term expire.

The Company expenses stock options using the fair value recognition provisions of the FASB ASC. The Company recognized $57,000 and $56,000 of compensation cost for the three month periods ended August 31, 2018 and 2017.

The fair value of each stock option grant has been determined using the Black-Scholes model. The model considers assumptions related to exercise price, expected volatility, risk-free interest rate, and the weighted average expected term of the stock option grants. Expected volatility assumptions used in the model were based on volatility of the Company's stock price for the thirty month period ending on the date of grant. The risk-free interest rate is derived from the U.S. treasury yield. The Company used a weighted average expected term.

The following assumptions were used in the Black-Scholes model to estimate the fair market value of the Company's stock option grants:

	August 2018			August 2017
Risk-free interest rate:		2.625	%		2.250	%
Expected life of the options:		3.7 years			3.6 years
Expected share price volatility:		31	%		28	%
Expected dividends:		zero			zero
These assumptions resulted in estimated fair-market value per stock option:	$	3.18		$	3.01

The ultimate value of the options will depend on the future price of the Company's common stock, which cannot be forecast with reasonable accuracy.

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A summary of changes in the stock options outstanding during the three month period ended August 31, 2018 is presented below:

			Weighted-
	Number of		Average
	Options		Exercise Price
Options outstanding and exercisable at May 31, 2018:		271,750	$	11.33
Options granted:		18,000	$	11.79
Options exercised:		750	$	7.04
Options outstanding and exercisable at August 31, 2018:		289,000	$	11.37
Closing value per share on NASDAQ at August 31, 2018:			$	11.73

Capital Resources, Line of Credit and Long-Term Debt

The Company's primary liquidity is dependent upon the working capital needs. These are mainly inventory, accounts receivable, costs and estimated earnings in excess of billings, accounts payable, accrued commissions, and billings in excess of costs and estimated earnings. The Company's primary source of liquidity has been operations.

Capital expenditures for the three months ended August 31, 2018 were $100,000 compared to $621,000 in the same period of the prior year. As of August 31, 2018, the Company has commitments for capital expenditures totaling $120,000 during the next twelve months.

The Company believes it is carrying adequate insurance coverage on its facilities and their contents.

Effective August 30, 2017, the Company replaced its bank credit facility with a $10,000,000 bank demand line of credit, with interest payable at the Company's option of 30, 60 or 90 day LIBOR rate plus 2.25%. There is no balance outstanding as of August 31, 2018 or as of May 31, 2018. The line is unsecured and includes a negative pledge of the Company’s real property. This line of credit is subject to the usual terms and conditions applied by the bank, is subject to renewal annually, and is not subject to an express requirement on the bank’s part to lend.

Inventory and Maintenance Inventory
	August 31, 2018				May 31, 2018				Increase /(Decrease)
Raw materials	$	714,000			$	727,000			$	(13,000	)	-2	%
Work-in-process		11,394,000				9,990,000				1,404,000		14	%
Finished goods		652,000				600,000				52,000		9	%
Inventory		12,760,000	93	%		11,317,000	93	%		1,443,000		13	%
Maintenance and other inventory		926,000	7	%		886,000	7	%		40,000		5	%
Total	$	13,686,000	100	%	$	12,203,000	100	%	$	1,483,000		12	%
Inventory turnover		1.5				1.5

NOTE: Inventory turnover is annualized for the three month period ended August 31, 2018.

Inventory, at $12,760,000 as of August 31, 2018, is $1,443,000, or 13%, more than the prior year-end level of $11,317,000. Almost three-quarters of this increase is attributable to the adoption of ASU 2014-09, as noted above in note 8 to the financial statements. The effect of this adoption on the level of inventory is expected to reverse within this fiscal year as product is shipped to our customers in the affected sales contracts. Approximately 89% of the current inventory is work in process, 5% is finished goods, and 6% is raw materials.

Maintenance and other inventory represent stock that is estimated to have a product life cycle in excess of twelve months. This stock represents certain items the Company is required to maintain for service of products sold and items that are generally subject to spontaneous ordering. This inventory is particularly sensitive to technological obsolescence in the near term due to its use in industries characterized by the continuous introduction of new product lines, rapid technological advances and product obsolescence. Management of the Company has recorded an allowance for potential inventory obsolescence. The provision for potential inventory obsolescence was $40,000 and $45,000 for each of the three month periods ended August 31, 2018 and 2017. The Company continues to rework slow-moving inventory, where applicable, to convert it to product to be used on customer orders.

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Accounts Receivable, Costs and Estimated Earnings in Excess of Billings (“CIEB"), and Billings in Excess of Costs and Estimated Earnings ("BIEC")

	August 31, 2018		May 31, 2018		Increase /(Decrease)
Accounts receivable	$	4,829,000	$	6,266,000	$	(1,437,000	)	-23	%
CIEB		4,262,000		6,357,000		(2,095,000	)	-33	%
Less: BIEC		1,846,000		2,043,000		(197,000	)	-10	%
Net	$	7,245,000	$	10,580,000	$	(3,335,000	)	-32	%
Number of an average day’s sales outstanding in accounts receivable		59		88

The Company combines the totals of accounts receivable, the current asset, CIEB, and the current liability, BIEC, to determine how much cash the Company will eventually realize from revenue recorded to date. As the accounts receivable figure rises in relation to the other two figures, the Company can anticipate increased cash receipts within the ensuing 30-60 days.

Accounts receivable of $4,829,000 as of August 31, 2018 includes approximately $1,292,000 of amounts retained by customers on Projects. It also includes $110,000 of an allowance for doubtful accounts (“Allowance”). The accounts receivable balance as of May 31, 2018 of $6,266,000 included an Allowance of $110,000. The number of an average day's sales outstanding in accounts receivable (“DSO”) decreased significantly from 88 days at May 31, 2018 to 59 at August 31, 2018. The DSO is a function of 1.) the level of sales for an average day (for example, total sales for the past three months divided by 90 days) and 2.) the level of accounts receivable at the balance sheet date. The level of sales for an average day in the first quarter of the current fiscal year is 14% more than in the fourth quarter of the prior year. The level of accounts receivable at the end of the current fiscal quarter is 23% less than the level at the end of the prior year. The significant decrease in the level of accounts receivable combined with the increase in the level of an average day’s sales caused the DSO to decrease from last year end to this quarter-end. The primary reasons for the decrease in the level of accounts receivable from last year end to this quarter-end was significantly lower billings for Projects in August 2018 ($1.3 million) compared to May 2018 ($2.6 million). It is expected that amounts retained by customers under contracts will be released in the normal course of the business in accordance with the related contracts. The Company expects to collect the net accounts receivable balance, including the retainage, during the next twelve months.

As noted above, CIEB represents revenues recognized in excess of amounts billed. Whenever possible, the Company negotiates a provision in sales contracts to allow the Company to bill, and collect from the customer, payments in advance of shipments. Unfortunately, such provisions are often not possible. The $4,262,000 balance in this account at August 31, 2018 is 33% less than the prior year-end balance. This decrease is the result of normal flow of the projects through production with billings to the customers as permitted in the related contracts. The Company expects to bill the entire amount during the next twelve months. 37% of the CIEB balance as of the end of the last fiscal quarter, May 31, 2018, was billed to those customers in the current fiscal quarter ended August 31, 2018. The remainder will be billed as the Projects progress, in accordance with the terms specified in the various contracts.

The balances in this account are comprised of the following components:

	August 31, 2018		May 31, 2018
Costs	$	7,372,000	$	9,939,000
Estimated Earnings		2,597,000		3,529,000
Less: Billings to customers		5,707,000		7,111,000
CIEB	$	4,262,000	$	6,357,000
Number of Projects in progress		13		19

As noted above, BIEC represents billings to customers in excess of revenues recognized. The $1,846,000 balance in this account at August 31, 2018 is down 10% from the $2,043,000 balance at the end of the prior year.

-13-

The balance in this account fluctuates in the same manner and for the same reasons as the account “costs and estimated earnings in excess of billings”, discussed above. Final delivery of product under these contracts is expected to occur during the next twelve months.

The balances in this account are comprised of the following components:

	August 31, 2018		May 31, 2018
Billings to customers	$	5,827,000	$	6,246,000
Less: Costs		2,902,000		2,574,000
Less: Estimated Earnings		1,079,000		1,629,000
BIEC	$	1,846,000	$	2,043,000
Number of Projects in progress		7		7

Summary of factors affecting the balances in CIEB and BIEC:

	August 31, 2018			May 31, 2018
Number of Projects in progress		20			26
Aggregate percent complete		51	%		72	%
Average total sales value of Projects in progress	$	1,290,000		$	942,000
Percentage of total value invoiced to customer		45	%		55	%

The Company's backlog of sales orders at August 31, 2018 is $22.6 million, down slightly from the $23.1 million at the end of the prior year. $11.9 million of the current backlog is on Projects already in progress.

Other Balance Sheet Items

Accounts payable, at $1,898,000 as of August 31, 2018, is 30% more than the prior year-end. This increase is due to significant inventory purchases in August in support of some large projects in California. Commission expense on applicable sales orders is recognized at the time revenue is recognized. The commission is paid following receipt of payment from the customers. Accrued commissions as of August 31, 2018 are $926,000, down 6% from the $983,000 accrued at the prior year-end. Other current liabilities increased significantly from the prior year-end, to $2,305,000. This increase is primarily due to increases in 1.) customer advance payments and 2.) accrued tax obligations. The increase in accrued taxes is due to more sales orders subject to state sales tax. The increase in customer advance payments is attributable to the adoption of ASU 2014-09, as noted above in note 8 to the financial statements. The effect of this adoption on the level of customer advance payments is expected to reverse within this fiscal year as product is shipped to our customers in the affected sales contracts. The Company expects the current accrued amounts to be paid during the next twelve months.

Management believes the Company's cash flows from operations and borrowing capacity under the bank line of credit are sufficient to fund ongoing operations and capital improvements for the next twelve months.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Smaller reporting companies are not required to provide the information called for by this item.

Item 4. Controls and Procedures

(a)        Evaluation of disclosure controls and procedures.

The Company's principal executive officer and principal financial officer have evaluated the Company's disclosure controls and procedures as of August 31, 2018 and have concluded that as of the evaluation date, the disclosure controls and procedures were effective to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms and that information required to be disclosed in the reports we file or submit under the Exchange Act is accumulated and communicated to our management, including our chief executive officer and chief financial officer to allow timely decisions regarding required disclosure.

-14-

(b)        Changes in internal control over financial reporting.

There have been no changes in the Company's internal controls over financial reporting that occurred during the fiscal quarter ended August 31, 2018 that have materially affected, or are reasonably likely to materially affect, the Company's control over financial reporting.

Part II - Other Information

ITEM 1	Legal Proceedings
	There are no other legal proceedings except for routine litigation incidental to the business.
ITEM 1A	Risk Factors
	Smaller reporting companies are not required to provide the information called for by this item.
ITEM 2	Unregistered Sales of Equity Securities and Use of Proceeds
	(a)	The Company sold no equity securities during the fiscal quarter ended August 31, 2018 that were not registered under the Securities Act.
	(b)	Use of proceeds following effectiveness of initial registration statement:
		Not Applicable
	(c)	Repurchases of Equity Securities – Quarter Ended August 31, 2018
		Period	(a) Total Number of Shares Purchased	(b) Average Price Paid Per Share	(c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	(d) Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs
		June 1, 2018 -
		June 30, 2018	-	-	-	-
		July 1, 2018 -
		July 31, 2018	-	-	-	-
		August 1, 2018 -
		August 31, 2018	-	-	-	-
		Total	-	-	-	-
ITEM 3	Defaults Upon Senior Securities
	None
ITEM 4	Mine Safety Disclosures
	Not applicable

-15-

ITEM 5	Other Information
	(a)	Information required to be disclosed in a Report on Form 8-K, but not reported
		None
	(b)	Material changes to the procedures by which Security Holders may recommend nominees to the Registrant's Board of Directors
		None

ITEM 6	Exhibits
	31(i)	Rule 13a-14(a) Certification of Chief Executive Officer.
	31(ii)	Rule 13a-14(a) Certification of Chief Financial Officer.
	32(i)	Section 1350 Certification of Chief Executive Officer.
	32(ii)	Section 1350 Certification of Chief Financial Officer.
	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

-16-

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders

Taylor Devices, Inc.

Results of Review of Interim Financial Information

We have reviewed the accompanying condensed consolidated balance sheet of Taylor Devices, Inc. and Subsidiary (the Company) as of August 31, 2018, and the related condensed consolidated statements of income for the three months ended August 31, 2018 and 2017 and cash flows for the three months ended August 31, 2018 and 2017, and the related notes (collectively referred to as the interim financial information). Based on our reviews, we are not aware of any material modifications that should be made to the condensed consolidated financial statements referred to above for them to be in conformity with accounting principles generally accepted in the United States of America.

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheet of the Company as of May 31, 2018, and the related consolidated statements of income, stockholders’ equity, and cash flows for the year then ended (not presented herein); and in our report dated August 9, 2018, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of May 31, 2018, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

Basis for Review Results

These financial statements are the responsibility of the Company's management. We conducted our review in accordance with the standards of the PCAOB. A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the PCAOB, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Lumsden & McCormick, LLP

Buffalo, New York

October 4, 2018

-17-

TAYLOR DEVICES, INC.

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.

TAYLOR DEVICES, INC.

(Registrant)

Date:	October 4, 2018	/s/Alan R. Klembczyk
		Alan R. Klembczyk President (Principal Executive Officer)

Date:	October 4, 2018	/s/Mark V. McDonough
		Mark V. McDonough Chief Financial Officer

EX-31

Exhibit 31(i)

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

PURSUANT TO RULE 13a - 14(a) OF THE SECURITIES EXCHANGE ACT OF 1934,

AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Alan R. Klembczyk, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Taylor Devices, 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 13a-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 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: October 4, 2018	/s/ Alan R. Klembczyk
	Alan R. Klembczyk Chief Executive Officer

EX-32

Exhibit 32(i)

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906

OF THE SARBANES-OXLEY ACT OF 2002

In connect with the quarterly report of Taylor Devices, Inc. ("the Company") on Form 10-Q for the quarter ended August 31, 2018 to be filed with Securities and Exchange Commission on or about the date hereof (the
"Report"), I, Alan R. Klembczyk Chief Executive Officer of the Company, certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that:

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

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of the dates and for the periods covered by the Report.

It is not intended that this statement be deemed to be filed for purposes of the Securities Exchange Act of 1934.

Date: October 4, 2018	By:	/s/ Alan R. Klembczyk
		Alan R. Klembczyk Chief Executive Officer

EX-31

Exhibit 31(ii)

CERTIFICATION OF CHIEF FINANCIAL OFFICER

PURSUANT TO RULE 13a - 14(a) OF THE SECURITIES EXCHANGE ACT OF 1934,

AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Mark V. McDonough, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Taylor Devices, 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 13a-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 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: October 4, 2018	/s/ Mark V. McDonough
	Mark V. McDonough Chief Financial Officer

EX-32

Exhibit 32(ii)

CERTIFICATION OF CHIEF FINANCIAL OFFICER

PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906

OF THE SARBANES-OXLEY ACT OF 2002

In connect with the quarterly report of Taylor Devices, Inc. (the "Company") on Form 10-Q for the quarter ended August 31, 2018 to be filed with Securities and Exchange Commission on or about the date hereof (the "Report"), I, Mark V. McDonough, Chief Financial Officer of the Company, certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that:

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

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of the dates and for the periods covered by the Report.

It is not intended that this statement be deemed to be filed for purposes of the Securities Exchange Act of 1934.

Date: October 4, 2018	By:	/s/ Mark V. McDonough
		Mark V. McDonough, Chief Financial Officer

XML

Document and Entity Information - USD ($)	3 Months Ended
	Aug. 31, 2018	Oct. 04, 2018	Oct. 02, 2018
Document And Entity Information
Entity Registrant Name	TAYLOR DEVICES INC
Entity Central Index Key	0000096536
Document Type	10-Q
Document Period End Date	Aug. 31, 2018
Amendment Flag	false
Current Fiscal Year End Date	--05-31
Is Entity's Reporting Status Current?	Yes
Is Entity Emerging Growth Company?	false
Entity Filer Category	Non-accelerated Filer
Entity Small Business	true
Entity Public Float		$ 39,500,000
Entity Common Stock, Shares Outstanding			3,467,560
Document Fiscal Year Focus	2019
Document Fiscal Period Focus	Q1

XML

Condensed Consolidated Balance Sheets - USD ($)	Aug. 31, 2018	May 31, 2018
Current assets:
Cash and cash equivalents	$ 7,120,612	$ 2,858,323
Short-term investments	1,041,894	1,039,082
Accounts receivable, net	4,829,299	6,265,864
Inventory	12,760,275	11,317,775
Costs and estimated earnings in excess of billings	4,261,750	6,356,963
Other current assets	305,828	447,162
Total current assets	30,319,658	28,285,169
Maintenance and other inventory, net	926,018	885,651
Property and equipment, net	9,749,013	9,935,625
Other assets	186,930	185,730
Deferred income taxes	219,115	219,115
Total assets	41,400,734	39,511,290
Current liabilities:
Accounts payable	1,898,110	1,460,175
Accrued commissions	926,375	983,260
Billings in excess of costs and estimated earnings	1,845,770	2,043,002
Other current liabilities	2,304,901	1,412,502
Total current liabilities	6,975,156	5,898,939
Stockholders' Equity:
Common stock and additional paid-in capital	9,550,026	9,482,630
Retained earnings	27,704,911	26,959,080
Stockholders’ equity before treasury stock	37,254,937	36,441,710
Treasury stock -  at cost	(2,829,359)	(2,829,359)
Total stockholders’ equity	34,425,578	33,612,351
Total liabilities and stockholders’ equity	$ 41,400,734	$ 39,511,290

XML

Condensed consolidated statements of income - USD ($)	3 Months Ended
	Aug. 31, 2018	Aug. 31, 2017
Income Statement [Abstract]
Sales, net	$ 7,314,094	$ 6,567,720
Cost of goods sold	5,007,831	4,950,068
Gross profit	2,306,263	1,617,652
Selling, general and administrative expenses	1,374,617	1,207,568
Operating income	931,646	410,084
Other income (expense),  net	(12,814)	3,663
Income before provision for income taxes	918,832	413,747
Provision for income taxes	178,000	112,000
Net income	$ 740,832	$ 301,747
Basic and diluted earnings per common share	$ 0.21	$ 0.09

XML

Condensed consolidated statements of cash flows - USD ($)	3 Months Ended
	Aug. 31, 2018	Aug. 31, 2017
Operating activities:
Net income	$ 740,832	$ 301,747
Adjustments to reconcile net income to net cash flows from operating activities:
Depreciation	287,014	261,584
Stock options issued for services	57,308	56,497
Changes in other assets and liabilities:
Accounts receivable	1,436,565	(745,914)
Inventory	(381,751)	298,419
Costs and estimated earnings in excess of billings	1,768,704	(1,518,003)
Other current assets	141,334	109,892
Accounts payable	437,935	229,667
Accrued commissions	(56,885)	60,059
Billings in excess of costs and estimated earnings	(172,127)	(31,121)
Other current liabilities	97,686	(5,896)
Net operating activities	4,356,615	(983,069)
Investing activities:
Acquisition of property and equipment	(100,402)	(620,789)
Other investing activities	(4,012)	(3,321)
Net investing activities	(104,414)	(624,110)
Financing activities:
Proceeds from issuance of common stock, net	10,088	119,075
Net change in cash and cash equivalents	4,262,289	(1,488,104)
Cash and cash equivalents - beginning	2,858,323	3,324,934
Cash and cash equivalents - ending	$ 7,120,612	$ 1,836,830

XML

Notes to Condensed Consolidated Financial Statements

3 Months Ended

Aug. 31, 2018

Organization, Consolidation and Presentation of Financial Statements [Abstract]

Notes to Condensed Consolidated Financial Statements

Notes to Condensed Consolidated Financial Statements

1. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of the Company, the accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting of only normal recurring accruals) necessary to present fairly the financial position as of August 31, 2018 and May 31, 2018, the results of operations for the three months ended August 31, 2018 and 2017, and cash flows for the three months ended August 31, 2018 and 2017. These financial statements should be read in conjunction with the audited financial statements and notes thereto contained in the Company's Annual Report to Shareholders for the year ended May 31, 2018.

2. The Company has evaluated events and transactions for potential recognition or disclosure in the financial statements through the date the financial statements were issued.

3. There is no provision nor shall there be any provisions for profit sharing, dividends, or any other benefits of any nature at any time for this fiscal year.

4. For the three month periods ended August 31, 2018 and 2017, the net income was divided by 3,466,589 and 3,443,475 respectively, which is net of the Treasury shares, to calculate the net income per share.

5. The results of operations for the three month periods ended August 31, 2018 are not necessarily indicative of the results to be expected for the full year.

6. In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers. ASU 2014-09 is a comprehensive new revenue recognition model that requires a company to recognize revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. ASU 2014-09 also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. ASU 2014-09, as amended, is effective for annual reporting periods, and interim periods within that period, beginning after December 15, 2018 (fiscal year 2019 for the Company). Companies may use either a full retrospective or a modified retrospective approach to adopt ASU 2014-09. We adopted ASU 2014-09 on June 1, 2018 using the modified retrospective method, which required the recognition of the cumulative effect of the transition as an adjustment to retained earnings. The Company elected to apply the standard only to open contracts as of June 1, 2018. Based on the application of the changes described above, we recognized a transition adjustment of $4,999, which increased our June 1, 2018 retained earnings. ASU 2014-09 is not expected to have a material impact to net earnings for the year ended May 31, 2019. Refer to Note 8 for additional information.

Other recently issued Accounting Standards Codification (ASC) guidance has either been implemented or are not significant to the Company

7. Inventory:

	August 31, 2018			May 31, 2018
Raw materials		$	714,437		$	726,852
Work-in-process			11,393,646			9,990,225
Finished goods			752,192			700,698
Gross inventory			12,860,275			11,417,775
Less allowance for obsolescence			100,000			100,000
Net Inventory		$	12,760,275		$	11,317,775

-6-

8. Revenue Recognition:

As discussed in Note 6, ASU 2014-09 was adopted on June 1, 2018 using the modified retrospective method, which required the recognition of the cumulative effect of the transition as an adjustment to retained earnings.

Revenue is recognized when, or as, the Company transfers control of promised products or services to a customer in an amount that reflects the consideration to which the Company expects to be entitled in exchange for transferring those products or services.

A performance obligation is a promise in a contract to transfer a distinct good or service to the customer, and is the unit of account. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. The majority of our contracts have a single performance obligation as the promise to transfer the individual goods or services is not separately identifiable from other promises in the contracts which are, therefore, not distinct. Promised goods or services that are immaterial in the context of the contract are not separately assessed as performance obligations. In the three months ended August 31, 2018, 52% of revenue was recorded for contracts with a single performance obligation that was satisfied within the period. In the three months ended August 31, 2017, 36% of revenue was recorded for contracts with a single performance obligation that was satisfied within the period.

For contracts with customers in which the Company satisfies a promise to the customer to provide a product that has no alternative use to the Company and the Company has enforceable rights to payment for progress completed to date inclusive of profit, the Company satisfies the performance obligation and recognizes revenue over time, using costs incurred to date relative to total estimated costs at completion to measure progress toward satisfying our performance obligations. Incurred cost represents work performed, which corresponds with, and thereby best depicts, the transfer of control to the customer. Contract costs include labor, material and overhead. In the three months ended August 31, 2018, 48% of revenue was recorded for contracts in which revenue was recognized over time. In the three months ended August 31, 2017, 64% of revenue was recorded for contracts in which revenue was recognized over time.

We recognized the cumulative effect of initially applying the new revenue standard as an adjustment to the opening balance of retained earnings. The comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods.

The cumulative effect of the changes made to our consolidated June 1, 2018 balance sheet for the adoption of ASU 2014-09, were as follows:

Balance Sheet	Balance at May 31, 2018		Adjustments Due to ASU 2014-09			Balance at June 1, 2018
Assets
Inventory	$	11,317,775	$	1,101,116		$	12,418,891
Costs and estimated earnings in excess of billings	$	6,356,963		(326,509	)	$	6,030,454
Liabilities
Billings in excess of costs and estimated earnings	$	2,043,002		(25,105	)	$	2,017,897
Other accrued expenses	$	1,412,502	$	794,713		$	2,207,215
Equity
Retained earnings	$	26,959,080	$	4,999		$	26,964,079

-7-

In accordance with the new revenue standard requirements, the disclosure of the impact of adoption of ASU 2014-09 on our consolidated balance sheet and income statement was as follows:

	August 31, 2018
Balance Sheet	As Reported		Effect of Change Higher/(Lower)			Balances Without Adoption of ASU 2014-09
Assets
Inventory	$	12,760,275	$	1,065,474		$	11,694,801
Costs and estimated earnings in excess of billings	$	4,261,750	$	(352,361	)	$	4,614,111
Other current assets	$	305,828	$	(8,000	)	$	313,828
Liabilities
Other accrued expenses	$	2,304,901	$	670,313		$	1,634,588
Equity
Retained earnings	$	27,704,911	$	34,800		$	27,670,111

	For the Three Months ended August 31, 2018
Income Statement	As Reported		Effect of Change Higher/(Lower)		Balances Without Adoption of ASU 2014-09
Revenues
Sales, net	$	7,314,094	$	73,443	$	7,240,651
Costs and Expenses
Cost of goods sold	$	5,007,831	$	35,642	$	4,972,189
Provision for income taxes	$	178,000	$	8,000	$	170,000
Net income	$	740,832	$	29,801	$	711,031

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Notes to Condensed Consolidated Financial Statements (Tables)

3 Months Ended

Aug. 31, 2018

Inventory Disclosure [Abstract]

Inventory

	August 31, 2018			May 31, 2018
Raw materials		$	714,437		$	726,852
Work-in-process			11,393,646			9,990,225
Finished goods			752,192			700,698
Gross inventory			12,860,275			11,417,775
Less allowance for obsolescence			100,000			100,000
Net Inventory		$	12,760,275		$	11,317,775

Impact of Adoption of Standards Related to Revenue Recognition

Balance Sheet	Balance at May 31, 2018		Adjustments Due to ASU 2014-09			Balance at June 1, 2018
Assets
Inventory	$	11,317,775	$	1,101,116		$	12,418,891
Costs and estimated earnings in excess of billings	$	6,356,963		(326,509	)	$	6,030,454
Liabilities
Billings in excess of costs and estimated earnings	$	2,043,002		(25,105	)	$	2,017,897
Other accrued expenses	$	1,412,502	$	794,713		$	2,207,215
Equity
Retained earnings	$	26,959,080	$	4,999		$	26,964,079

Revenue Impact on Financial Statements Balance Sheet

	August 31, 2018
Balance Sheet	As Reported		Effect of Change Higher/(Lower)			Balances Without Adoption of ASU 2014-09
Assets
Inventory	$	12,760,275	$	1,065,474		$	11,694,801
Costs and estimated earnings in excess of billings	$	4,261,750	$	(352,361	)	$	4,614,111
Other current assets	$	305,828	$	(8,000	)	$	313,828
Liabilities
Other accrued expenses	$	2,304,901	$	670,313		$	1,634,588
Equity
Retained earnings	$	27,704,911	$	34,800		$	27,670,111

Revenue Impact on Financial Statements Income Statement

	For the Three Months ended August 31, 2018
Income Statement	As Reported		Effect of Change Higher/(Lower)		Balances Without Adoption of ASU 2014-09
Revenues
Sales, net	$	7,314,094	$	73,443	$	7,240,651
Costs and Expenses
Cost of goods sold	$	5,007,831	$	35,642	$	4,972,189
Provision for income taxes	$	178,000	$	8,000	$	170,000
Net income	$	740,832	$	29,801	$	711,031

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Notes to Condensed Consolidated Financial Statements (Details Narrative) - shares	3 Months Ended
	Aug. 31, 2018	Aug. 31, 2017
Organization, Consolidation and Presentation of Financial Statements [Abstract]
Weighted Average Number of Shares Outstanding, Basic and Diluted	3,466,589	3,443,475

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Inventory (Details) - USD ($)	Aug. 31, 2018	May 31, 2018
Inventory Disclosure [Abstract]
Raw materials	$ 714,437	$ 726,852
Work-in-process	11,393,646	9,990,225
Finished goods	752,192	700,698
Gross inventory	12,860,275	11,417,775
Less allowance for obsolescence	100,000	100,000
Net Inventory	$ 12,760,275	$ 11,317,775

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Impact of Adoption of Standards Related to Revenue Recognition (Details) - USD ($)	Aug. 31, 2018	Jun. 01, 2018	May 31, 2018
Revenue, Initial Application Period Cumulative Effect Transition [Line Items]
Inventory	$ 12,760,275		$ 11,317,775
Costs and estimated earnings in excess of billings	4,261,750		6,356,963
Billings in excess of costs and estimated earnings	1,845,770		2,043,002
Other accrued expenses	2,304,901		1,412,502
Retained earnings	27,704,911		26,959,080
Calculated under Revenue Guidance in Effect before Topic 606 [Member]
Revenue, Initial Application Period Cumulative Effect Transition [Line Items]
Inventory	11,694,801	$ 12,418,891	11,317,775
Costs and estimated earnings in excess of billings	4,614,111	6,030,454	6,356,963
Billings in excess of costs and estimated earnings		2,017,897	2,043,002
Other accrued expenses	1,634,588	2,207,215	1,412,502
Retained earnings	$ 27,670,111	26,964,079	$ 26,959,080
Difference between Revenue Guidance in Effect before and after Topic 606 [Member]
Revenue, Initial Application Period Cumulative Effect Transition [Line Items]
Inventory		1,101,116
Costs and estimated earnings in excess of billings		(326,509)
Billings in excess of costs and estimated earnings		(25,105)
Other accrued expenses		794,713
Retained earnings		$ 4,999

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Revenue Impact on Financial Statements Balance Sheet (Details) - USD ($)	Aug. 31, 2018	Jun. 01, 2018	May 31, 2018
Inventory	$ 12,760,275		$ 11,317,775
Costs and estimated earnings in excess of billings	4,261,750		6,356,963
Other current assets	305,828		447,162
Other accrued expenses	2,304,901		1,412,502
Retained earnings	27,704,911		26,959,080
Calculated under Revenue Guidance in Effect before Topic 606 [Member]
Inventory	11,694,801	$ 12,418,891	11,317,775
Costs and estimated earnings in excess of billings	4,614,111	6,030,454	6,356,963
Other current assets	313,828
Other accrued expenses	1,634,588	2,207,215	1,412,502
Retained earnings	27,670,111	$ 26,964,079	$ 26,959,080
Accounting Standards Update 2014-09 [Member]
Inventory	1,065,474
Costs and estimated earnings in excess of billings	(352,361)
Other current assets	(8,000)
Other accrued expenses	670,313
Retained earnings	$ 34,800

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Revenue Impact on Financial Statements Income Statement (Details) - USD ($)	3 Months Ended
	Aug. 31, 2018	Aug. 31, 2017
Sales, net	$ 7,314,094	$ 6,567,720
Cost of goods sold	5,007,831	4,950,068
Provision for income taxes	178,000	112,000
Net income	740,832	$ 301,747
Calculated under Revenue Guidance in Effect before Topic 606 [Member]
Sales, net	7,240,651
Cost of goods sold	4,972,189
Provision for income taxes	170,000
Net income	711,031
Accounting Standards Update 2014-09 [Member]
Sales, net	73,443
Cost of goods sold	35,642
Provision for income taxes	8,000
Net income	$ 29,801