10-Q
TAYLOR DEVICES, INC. (TAYD)
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, 2020
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 |
| (Address of principal executive offices) | (Zip Code) |
716-694-0800
(Registrant’s telephone number, including area code)
NOT APPLICABLE
| (Former name, former address and former fiscal year, if changed since last report) |
|---|
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol | Name of each exchange on which registered |
|---|---|---|
| None | None | None |
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 ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically 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 ☒ 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 ☒ | Smaller reporting company ☒ |
| 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 ☒
As of September 23, 2020, there were outstanding 3,487,728 shares of the registrant’s common stock, par value $.025 per share.
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, 2020 and May 31, 2020 | 4 | |||
| Condensed Consolidated Statements of Income for the three months ended August 31, 2020 and 2019 | 5 | |||
| Condensed Consolidated Statements of Stockholders’ Equity for the three months ended August 31, 2020 and 2019 | 6 | |||
| Condensed Consolidated Statements of Cash Flows for the three months ended August 31, 2020 and 2019 | 7 | |||
| Notes to Condensed Consolidated Financial Statements | 8 | |||
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 10 | ||
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 16 | ||
| Item 4. | Controls and Procedures | 16 | ||
| PART II | OTHER INFORMATION | |||
| Item 1. | Legal Proceedings | 17 | ||
| Item 1A. | Risk Factors | 17 | ||
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 17 | ||
| Item 3. | Defaults Upon Senior Securities | 17 | ||
| Item 4. | Mine Safety Disclosures | 17 | ||
| Item 5. | Other Information | 18 | ||
| Item 6. | Exhibits | 18 | ||
| REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM | 19 | |||
| SIGNATURES | 20 |
-3-
| TAYLOR DEVICES, INC. AND SUBSIDIARY | ||||||
|---|---|---|---|---|---|---|
| Condensed Consolidated Balance Sheets | (Unaudited) | |||||
| August 31, | May 31, | |||||
| 2020 | 2020 | |||||
| Assets | ||||||
| Current assets: | ||||||
| Cash and cash equivalents | $ | 15,419,001 | $ | 15,159,827 | ||
| Short-term investments | 1,077,962 | 1,071,950 | ||||
| Accounts receivable, net | 4,708,831 | 5,819,471 | ||||
| Inventory | 9,550,392 | 10,107,437 | ||||
| Costs and estimated earnings in excess of billings | 1,676,993 | 1,754,573 | ||||
| Other current assets | 513,702 | 510,360 | ||||
| Total current assets | 32,946,881 | 34,423,618 | ||||
| Maintenance and other inventory, net | 1,090,754 | 879,050 | ||||
| Property and equipment, net | 9,362,463 | 9,407,490 | ||||
| Other assets | 196,842 | 195,621 | ||||
| Deferred income taxes | 170,115 | 170,115 | ||||
| Total assets | $ | 43,767,055 | $ | 45,075,894 | ||
| Liabilities and Stockholders' Equity | ||||||
| Current liabilities: | ||||||
| Short-term borrowings | $ | 1,461,500 | $ | 1,461,500 | ||
| Accounts payable | 1,127,246 | 1,370,175 | ||||
| Accrued commissions | 445,638 | 305,885 | ||||
| Other current liabilities | 856,029 | 1,663,914 | ||||
| Billings in excess of costs and estimated earnings | 109,622 | 736,866 | ||||
| Total current liabilities | 4,000,035 | 5,538,340 | ||||
| Stockholders' Equity: | ||||||
| Common stock and additional paid-in capital | 9,939,006 | 9,860,006 | ||||
| Retained earnings | 32,714,591 | 32,538,580 | ||||
| Stockholders’ equity before treasury stock | 42,653,597 | 42,398,586 | ||||
| Treasury stock - at cost | (2,886,577 | ) | (2,861,032 | ) | ||
| Total stockholders’ equity | 39,767,020 | 39,537,554 | ||||
| Total liabilities and stockholders’ equity | $ | 43,767,055 | $ | 45,075,894 | ||
| See notes to condensed consolidated financial statements. |
-4- Table of Contents
| TAYLOR DEVICES, INC. AND SUBSIDIARY | ||||
|---|---|---|---|---|
| Condensed Consolidated Statements of Income | (Unaudited) | |||
| August 31, | ||||
| For the three months ended | 2020 | 2019 | ||
| Sales, net | $ | 5,759,457 | $ | 5,708,639 |
| Cost of goods sold | 4,204,889 | 4,025,762 | ||
| Gross profit | 1,554,568 | 1,682,877 | ||
| Selling, general and administrative expenses | 1,363,203 | 1,290,531 | ||
| Operating income | 191,365 | 392,346 | ||
| Other income, net | 9,646 | 37,231 | ||
| Income before provision for income taxes | 201,011 | 429,577 | ||
| Provision for income taxes | 25,000 | 75,000 | ||
| Net income | $ | 176,011 | $ | 354,577 |
| Basic and diluted earnings per common share | $ | 0.05 | $ | 0.10 |
| See notes to condensed consolidated financial statements. |
-5- Table of Contents
| TAYLOR DEVICES, INC. AND SUBSIDIARY | ||||||
|---|---|---|---|---|---|---|
| Condensed Consolidated Statements of Shareholders’ Equity | ||||||
| (Unaudited) | ||||||
| August 31, | ||||||
| For the three months ended | 2020 | 2019 | ||||
| Common Stock | ||||||
| Beginning of period | $ | 100,943 | $ | 100,735 | ||
| Issuance of shares for employee stock purchase plan | 9 | 8 | ||||
| Issuance of shares for employee stock option plan | 75 | — | ||||
| End of period | 101,027 | 100,473 | ||||
| Paid-in Capital | ||||||
| Beginning of period | 9,759,063 | 9,538,892 | ||||
| Issuance of shares for employee stock purchase plan | 3,729 | 3,369 | ||||
| Issuance of shares for employee stock option plan | 25,470 | — | ||||
| Stock options issued for services | 49,717 | 55,437 | ||||
| End of period | 9,837,979 | 9,597,698 | ||||
| Retained Earnings | ||||||
| Beginning of period | 32,538,580 | 29,508,604 | ||||
| Net income | 176,011 | 354,577 | ||||
| End of period | 32,714,591 | 29,863,181 | ||||
| Treasury Stock | ||||||
| Beginning of period | (2,861,032 | ) | (2,829,359 | ) | ||
| Issuance of shares for employee stock option plan | (25,545 | ) | — | |||
| End of period | (2,886,577 | ) | (2,829,359 | ) | ||
| Total stockholders' equity | $ | 39,767,020 | $ | 36,732,263 | ||
| See notes to condensed consolidated financial statements. |
-6- Table of Contents
| TAYLOR DEVICES, INC. AND SUBSIDIARY | ||||||
|---|---|---|---|---|---|---|
| Condensed Consolidated Statements of Cash Flows | ||||||
| (Unaudited) | ||||||
| August 31, | ||||||
| For the three months ended | 2020 | 2019 | ||||
| Operating activities: | ||||||
| Net income | $ | 176,011 | $ | 354,577 | ||
| Adjustments to reconcile net income to net cash flows from operating activities: | ||||||
| Depreciation | 289,485 | 280,398 | ||||
| Stock options issued for services | 49,717 | 55,437 | ||||
| Changes in other assets and liabilities: | ||||||
| Accounts receivable | 1,110,640 | (1,567,219 | ) | |||
| Inventory | 345,341 | (36,615 | ) | |||
| Costs and estimated earnings in excess of billings | 77,580 | 3,073,202 | ||||
| Other current assets | (3,342 | ) | 43,497 | |||
| Accounts payable | (242,929 | ) | 3,327 | |||
| Accrued commissions | 139,753 | (305,388 | ) | |||
| Billings in excess of costs and estimated earnings | (627,244 | ) | (398,423 | ) | ||
| Other current liabilities | (807,885 | ) | 231,251 | |||
| Net operating activities | 507,127 | 1,734,044 | ||||
| Investing activities: | ||||||
| Acquisition of property and equipment | (244,458 | ) | (72,919 | ) | ||
| Other investing activities | (7,233 | ) | (5,685 | ) | ||
| Net investing activities | (251,691 | ) | (78,604 | ) | ||
| Financing activities: | ||||||
| Proceeds from issuance of common stock, net | 3,738 | 3,377 | ||||
| Net change in cash and cash equivalents | 259,174 | 1,658,817 | ||||
| Cash and cash equivalents - beginning | 15,159,827 | 5,071,822 | ||||
| Cash and cash equivalents - ending | $ | 15,419,001 | $ | 6,730,639 | ||
| See notes to condensed consolidated financial statements. |
-7- Table of Contents
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, 2020 and May 31, 2020, the results of operations for the three months ended August 31, 2020 and 2019, and cash flows for the three months ended August 31, 2020 and 2019. 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, 2020. | |||
|---|---|---|---|---|
| 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 period ended August 31, 2020 and 2019, the net income was divided by 3,487,085 and 3,478,636 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, 2020 are not necessarily indicative of the results to be expected for the full year. | |||
| --- | --- | |||
| 6. | Recently issued Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) guidance has either been implemented or is not significant to the Company. | |||
| --- | --- | |||
| 7. | Inventory: | |||
| --- | --- | |||
| August 31, 2020 | May 31, 2020 | |||
| --- | --- | --- | --- | --- |
| Raw materials | $ | 637,444 | $ | 658,024 |
| Work-in-process | 8,472,445 | 8,586,404 | ||
| Finished goods | 540,503 | 963,009 | ||
| Gross inventory | 9,650,392 | 10,207,437 | ||
| Less allowance for obsolescence | 100,000 | 100,000 | ||
| Net inventory | $ | 9,550,392 | $ | 10,107,437 |
| 8. | Revenue Recognition: | |||
| --- | --- |
Revenue is recognized (generally at fixed prices) 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.
-8- Table of Contents
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 (generally less than one year) using costs incurred to date relative to total estimated costs at completion to measure progress toward satisfying our performance obligations. Incurred costs represent work performed, which corresponds with, and thereby best depicts, the transfer of control to the customer. Contract costs include labor, material and overhead. Adjustments to cost estimates are made periodically, and losses expected to be incurred on contracts in progress are charged to operations in the period such losses are determined. Other sales to customers are recognized upon shipment to the customer based on contract prices and terms. In the three months ended August 31, 2020, 36% of revenue was recorded for contracts in which revenue was recognized over time while 64% was recognized at a point in time. In the three months ended August 31, 2019, 58% of revenue was recorded for contracts in which revenue was recognized over time while 42% was recognized at a point in time.
Progress payments are typically negotiated for longer term projects. Payments are otherwise due once performance obligations are complete (generally at shipment and transfer of title). 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.
If applicable, the Company recognizes an asset for the incremental, material costs of obtaining a contract with a customer if the Company expects the benefit of those costs to be longer than one year and the costs are expected to be recovered. As of August 31, 2020 and May 31, 2020, the Company does not have material incremental costs on any open contracts with an original expected duration of greater than one year, and therefore such costs are expensed as incurred. These incremental costs include, but are not limited to, sales commissions incurred to obtain a contract with a customer.
-9- Table of Contents
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, 2020 and 2019 | |||
|---|---|---|---|
| Increase / | |||
| (Decrease) | |||
| Sales, net | $ | 51,000 | |
| Cost of goods sold | $ | 179,000 | |
| Selling, general and administrative expenses | $ | 73,000 | |
| Income before provision for income taxes | $ | (229,000 | ) |
| Provision for income taxes | $ | (50,000 | ) |
| Net income | $ | (179,000 | ) |
Sales under certain fixed-price contracts, in which the product has no alternative use to the Company and the Company has enforceable rights to payment for progress completed to date, inclusive of profit, 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.
-10- Table of Contents
For the three months ended August 31, 2020 (All figures discussed are for the three months ended August 31, 2020 as compared to the three months ended August 31, 2019).
| Three months ended August 31 | Change | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2020 | 2019 | Amount | Percent | |||||||||
| Net Revenue | $ | 5,760,000 | $ | 5,709,000 | $ | 51,000 | 1 | % | ||||
| Cost of sales | 4,205,000 | 4,026,000 | 179,000 | 4 | % | |||||||
| Gross profit | $ | 1,555,000 | $ | 1,683,000 | $ | (128,000 | ) | -8 | % | |||
| … as a percentage of net revenues | 27 | % | 29 | % |
The Company's consolidated results of operations showed a 1% increase in net revenues and a decrease in net income of 50%. Revenues recorded in the current period for long-term construction projects (“Project(s)”) were 36% less than the level recorded in the prior year. The Company had 19 Projects in process during the current period as compared to 27 during the same period last year. Revenues recorded in the current period for other-than long-term construction projects (non-projects) were 52% more than the level recorded in the prior year. Total sales within the U.S. decreased 13% from the same period last year. Total sales to Asia increased 86% 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 (13%), as well as to industrial customers (17%). There was an increase in sales to customers in aerospace / defense (36%). Sales to customers in aerospace / defense in the same period last year were lower than any quarter since the second quarter of 2014 for the Company.
The gross profit as a percentage of net revenue of 27% in the current period is slightly less than the same period of the prior year (29%).
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 | ||||||
|---|---|---|---|---|---|---|
| 2020 | 2019 | |||||
| Industrial | 8 | % | 10 | % | ||
| Construction | 52 | % | 60 | % | ||
| Aerospace / Defense | 40 | % | 30 | % |
At August 31, 2019, the Company had 124 open sales orders in its backlog with a total sales value of $18.3 million. At August 31, 2020, the Company has slightly less open sales orders in its backlog (110 orders), and the total sales value is $10.3 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, 2020 and August 31, 2019, is as follows:
| Three months ended August 31 | ||||||
|---|---|---|---|---|---|---|
| 2020 | 2019 | |||||
| USA | 67 | % | 78 | % | ||
| Asia | 27 | % | 15 | % | ||
| Other | 6 | % | 7 | % |
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Selling, General and Administrative Expenses
| Three months ended August 31 | Change | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2020 | 2019 | Amount | Percent | |||||||||
| Outside Commissions | $ | 243,000 | $ | 252,000 | $ | (9,000 | ) | -4 | % | |||
| Other SG&A | 1,120,000 | 1,038,000 | 82,000 | 8 | % | |||||||
| Total SG&A | $ | 1,363,000 | $ | 1,290,000 | $ | 73,000 | 6 | % | ||||
| … as a percentage of net revenues | 24 | % | 23 | % |
Selling, general and administrative expenses increased by 6% from the prior year. Outside commission expense decreased by 4% from last year's level. Other selling, general and administrative expenses increased 8% from last year to this.
The above factors resulted in operating income of $191,000 for the three months ended August 31, 2020, 51% less than the $392,000 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 $50,000 and $55,000 of compensation cost for the three month periods ended August 31, 2020 and 2019.
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<br> 2020 | August<br> 2019 | |||||
|---|---|---|---|---|---|---|
| Risk-free interest rate: | 1.750 | % | 1.750 | % | ||
| Expected life of the options: | 3.9 years | 3.8 years | ||||
| Expected share price volatility: | 34 | % | 30 | % | ||
| Expected dividends: | zero | zero | ||||
| These assumptions resulted in estimated fair-market value per stock option: | $ | 2.88 | $ | 2.84 |
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.
-12- Table of Contents
A summary of changes in the stock options outstanding during the three month period ended August 31, 2020 is presented below:
| Weighted- | ||||
|---|---|---|---|---|
| Number of | Average | |||
| Options | Exercise Price | |||
| Options outstanding and exercisable at May 31, 2020: | 252,250 | $ | 11.52 | |
| Options granted: | 17,250 | $ | 10.05 | |
| Less: Options exercised: | 3,000 | $ | 8.52 | |
| Options outstanding and exercisable at August 31, 2020: | 266,500 | $ | 11.46 | |
| Closing value per share on NASDAQ at August 31, 2020: | $ | 9.35 |
Capital Resources 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, 2020 were $244,000 compared to $73,000 in the same period of the prior year. As of August 31, 2020, the Company has commitments for capital expenditures totaling $300,000 during the next twelve months.
During 2020, the Company received a loan totaling $1,462,000 from the Small Business Administration (SBA) under the Paycheck Protection Program of the Coronavirus Aid, Relief and Economic Security (CARES) Act, in response to the Coronavirus pandemic described below. Some or all of the loan may be forgiven if certain criteria are met. Otherwise, the loan is unsecured, has a deferment on payments for 6 months after a decision on forgiveness has been made, then is payable over a negotiable period of time, and bears interest at 1%.
The Company believes it is carrying adequate insurance coverage on its facilities and their contents.
| Inventory and Maintenance Inventory<br><br> <br>**** | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| August 31, 2020 | May 31, 2020 | Increase /(Decrease) | |||||||||||
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
| Raw materials | $ | 637,000 | $ | 658,000 | $ | (21,000 | ) | -3 | % | ||||
| Work-in-process | 8,472,000 | 8,586,000 | (114,000 | ) | -1 | % | |||||||
| Finished goods | 441,000 | 863,000 | (422,000 | ) | -49 | % | |||||||
| Inventory | 9,550,000 | 90 | % | 10,107,000 | 92 | % | (557,000 | ) | -6 | % | |||
| Maintenance and other inventory | 1,091,000 | 10 | % | 879,000 | 8 | % | 212,000 | 24 | % | ||||
| Total | $ | 10,641,000 | 100 | % | $ | 10,986,000 | 100 | % | $ | (345,000 | ) | -3 | % |
| Inventory turnover | 1.6 | 1.7 |
NOTE: Inventory turnover is annualized for the three month period ended August 31, 2020.
Inventory, at $9,550,000 as of August 31, 2020, is $557,000 less than the prior year-end level of $10,107,000. Approximately 89% of the current inventory is work in process, 4% is finished goods, and 7% 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 zero and $45,000 for the three month periods ended August 31, 2020 and 2019. The Company continues to rework slow-moving inventory, where applicable, to convert it to product to be used on customer orders.
-13- Table of Contents
Accounts Receivable, Costs and Estimated Earnings in Excess of Billings (“CIEB"), and Billings in Excess of Costs and Estimated Earnings ("BIEC")
| August 31, 2020 | May 31, 2020 | Increase /(Decrease) | |||||||
|---|---|---|---|---|---|---|---|---|---|
| Accounts receivable | $ | 4,709,000 | $ | 5,819,000 | $ | (1,110,000 | ) | -19 | % |
| CIEB | 1,677,000 | 1,755,000 | (78,000 | ) | -4 | % | |||
| Less: BIEC | 110,000 | 737,000 | (627,000 | ) | -85 | % | |||
| Net | $ | 6,276,000 | $ | 6,837,000 | $ | (561,000 | ) | -8 | % |
| Number of an average day’s sales outstanding in accounts receivable | 74 | 68 |
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 $4,709,000 as of August 31, 2020 includes $211,000 of an allowance for doubtful accounts (“Allowance”). The accounts receivable balance as of May 31, 2020 of $5,819,000 included an Allowance of $211,000. The number of an average day's sales outstanding in accounts receivable (“DSO”) increased slightly from 68 days at May 31, 2020 to 74 at August 31, 2020. 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 26% less than in the fourth quarter of the prior year. The level of accounts receivable at the end of the current fiscal quarter is 19% less than the level at the end of the prior year. The decrease in the level of an average day’s sales off-set by the decrease in the level of accounts receivable caused the DSO to increase from last year end to this quarter-end. The Company expects to collect the net accounts receivable balance 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 $1,677,000 balance in this account at August 31, 2020 is 4% 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. 23% of the CIEB balance as of the end of the last fiscal quarter, May 31, 2020, was billed to those customers in the current fiscal quarter ended August 31, 2020. 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, 2020 | May 31, 2020 | |||
|---|---|---|---|---|
| Costs | $ | 2,472,000 | $ | 2,615,000 |
| Estimated Earnings | 440,000 | 540,000 | ||
| Less: Billings to customers | 1,235,000 | 1,400,000 | ||
| CIEB | $ | 1,677,000 | $ | 1,755,000 |
| Number of Projects in progress | 8 | 10 |
As noted above, BIEC represents billings to customers in excess of revenues recognized. The $110,000 balance in this account at August 31, 2020 is down 85% from the $737,000 balance at the end of the prior year.
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.
-14- Table of Contents
The balances in this account are comprised of the following components:
| August 31, 2020 | May 31, 2020 | |||
|---|---|---|---|---|
| Billings to customers | $ | 3,766,000 | $ | 7,794,000 |
| Less: Costs | 2,211,000 | 3,781,000 | ||
| Less: Estimated Earnings | 1,445,000 | 3,276,000 | ||
| BIEC | $ | 110,000 | $ | 737,000 |
| Number of Projects in progress | 3 | 5 |
Summary of factors affecting the balances in CIEB and BIEC:
| August 31, 2020 | May 31, 2020 | |||||
|---|---|---|---|---|---|---|
| Number of Projects in progress | 11 | 15 | ||||
| Aggregate percent complete | 79 | % | 80 | % | ||
| Average total sales value of Projects in progress | $ | 732,000 | $ | 830,000 | ||
| Percentage of total value invoiced to customer | 62 | % | 74 | % |
The Company's backlog of sales orders at August 31, 2020 is $10.3 million, up slightly from the $9.8 million at the end of the prior year. $1.5 million of the current backlog is on Projects already in progress.
Other Balance Sheet Items
Accounts payable, at $1,127,000 as of August 31, 2020, is 18% less than the prior year-end. 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, 2020 are $446,000, up 46% from the $306,000 accrued at the prior year-end. Other current liabilities decreased 49% from the prior year-end, to $856,000. This decrease is primarily due to a decrease in accrued incentive compensation and customer advance payments. The Company expects the current accrued amounts to be paid or applied during the next twelve months.
Management believes the Company's cash flows from operations are sufficient to fund ongoing operations and capital improvements for the next twelve months.
Coronavirus Pandemic
Company management currently does not have reason to believe that the COVID-19 pandemic will adversely affect our ability to meet our obligations to our customers. Our top priorities continue to be the health and safety of our employees and their families along with supporting our customers. Thanks to the careful adherence to our COVID-19 safety measures by our workforce as well as our customers and suppliers, we remain in a strong position with respect to being able to process existing orders and we are quite prepared to process new orders as they are secured. Our high-spirited, healthy workforce continues to adjust their work schedules as the needs arise.
While the majority of our customers remain open to continue to receive shipments from us and issue new purchase orders to us, many of our construction customers continue to delay ordering materials while they attempt to determine the extent and impact of the pandemic on their projects. This continues to keep our backlog of sales orders at a lower level.
The liquidity of the Company remains strong at this time. Management, however, is concerned about the uncertainty of the length of time during which the virus will continue to spread throughout the world before effective vaccines have been developed, distributed and administered, as well as the level of impact it will have on the various economies of the world. A prolonged economic downturn would have a negative impact on our operations and our liquidity. For this reason, we have applied for and have received assistance from the federal government under provisions of the CARES Act, as discussed above.
Our Supply Chain Management team is in communication with our partners around the globe so that we can be updated on any delays that may occur. To date, there have been no significant delays in receiving our raw materials, purchased components or outside services that affect our final product.
-15- Table of Contents
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, 2020 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.
(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, 2020 that have materially affected, or are reasonably likely to materially affect, the Company's control over financial reporting.
-16- Table of Contents
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, 2020 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, 2020 | ||||||
| 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, 2020 - | |||||||
| June 30, 2020 | - | - | - | - | |||
| July 1, 2020 - | |||||||
| July 31, 2020 | - | - | - | - | |||
| August 1, 2020 - | |||||||
| August 31, 2020 | - | - | - | - | |||
| Total | - | - | - | - | |||
| ITEM 3 | Defaults Upon Senior Securities | ||||||
| None | |||||||
| ITEM 4 | Mine Safety Disclosures | ||||||
| Not applicable | |||||||
| 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 |
-17- Table of Contents
| 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 |
-18- Table of Contents
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, 2020, and the related condensed consolidated statements of income, shareholders’ equity, and cash flows for the three months ended August 31, 2020 and 2019, 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, 2020, 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 7, 2020, 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, 2020, 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
September 25, 2020
-19- Table of Contents
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: | September 25, 2020 | /s/Timothy J. Sopko |
| --- | --- | --- |
| Timothy J. Sopko<br><br> <br>Chief Executive Officer<br><br> <br>(Principal Executive Officer) | ||
| Date: | September 25, 2020 | /s/Mark V. McDonough |
| --- | --- | --- |
| Mark V. McDonough<br><br> <br>Chief Financial Officer |
Exhibit 31(i)
CERTIFICATION****OF CHIEF EXECUTIVE OFFICER
PURSUANT TO RULE 13a - 14(a) OF THE SECURITIESEXCHANGE ACT OF 1934,
AS ADOPTED PURSUANT TO SECTION 302 OF THESARBANES-OXLEY ACT OF 2002
I, Timothy J. Sopko, certify that:
I have reviewed this quarterly report on Form 10-Q of Taylor Devices, Inc.;
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;
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;
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
- 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: September 25, 2020 | /s/ Timothy J. Sopko |
|---|---|
| Timothy J. Sopko<br><br> <br>Chief Executive Officer |
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-OXLEYACT OF 2002
In connect with the quarterly report of Taylor Devices, Inc. ("the Company") on Form 10-Q for the quarter ended August 31, 2020 to be filed with Securities and Exchange Commission on or about the date hereof (the
"Report"), I, Timothy J. Sopko 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: September 25, 2020 | By: | /s/ Timothy J. Sopko |
|---|---|---|
| Timothy J. Sopko<br><br> <br>Chief Executive Officer |
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-OXLEYACT OF 2002
In connect with the quarterly report of Taylor Devices, Inc. (the "Company") on Form 10-Q for the quarter ended August 31, 2020 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: September 25, 2020 | By: | /s/ Mark V. McDonough |
|---|---|---|
| Mark V. McDonough,<br><br> <br>Chief Financial Officer |
Exhibit 31(ii)
CERTIFICATION****OF CHIEF FINANCIAL OFFICER
PURSUANT TO RULE 13a - 14(a) OF THE SECURITIESEXCHANGE ACT OF 1934,
AS ADOPTED PURSUANT TO SECTION 302 OF THESARBANES-OXLEY ACT OF 2002
I, Mark V. McDonough, certify that:
I have reviewed this quarterly report on Form 10-Q of Taylor Devices, Inc.;
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;
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;
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
- 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: September 25, 2020 | /s/ Mark V. McDonough |
|---|---|
| Mark V. McDonough<br><br> <br>Chief Financial Officer |