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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the quarterly period ended November 30, 2021

 

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: 001-38964

 

SCHMITT INDUSTRIES, INC.

 

Oregon   93-1151989
(State or Other Jurisdiction of   (IRS Employer
Incorporation or Organization)   Identification Number)

 

2765 N.W. Nicolai Street
Portland, Oregon 97210
(Address of Principal Executive Offices) (Zip Code)

 

(503) 227-7908   

(Registrant's Telephone Number, Including Area Code)

 

Securities registered under Section 12(b) of the Act:

 

Title of each class   Trading Symbol(s)   Name of each exchange on which registered
Common Stock - no par value   SMIT   NASDAQ Capital Market

 

Securities registered under Section 12(g) of the Act: 

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 pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes ☒    No ☐

 

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

 

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

 

The number of shares of outstanding common stock outstanding as of December 31, 2021: 

 

Common Stock, no par value – outstanding 3,811,142

 

 

 

 

SCHMITT INDUSTRIES, INC.

 

  INDEX TO FORM 10-Q

 

    Page
     
Part I - FINANCIAL INFORMATION  
     
Item 1: Condensed Consolidated Financial Statements (unaudited) 3
       
  Condensed Consolidated Balance Sheets (unaudited) 3
     
  Condensed Consolidated Statements of Operations (unaudited) 4
     
  Condensed Consolidated Statements of Cash Flows (unaudited) 5
     
  Condensed Consolidated Statements of Changes in Stockholders' Equity (unaudited) 6
     
  Notes to Unaudited Condensed Consolidated Interim Financial Statements 7
     
Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations 20
     
Item 3: Quantitative and Qualitative Disclosures about Market Risk 26
     
Item 4: Controls and Procedures 27
     
Part II - OTHER INFORMATION  
     
Item 1A: Risk Factors 28
     
Item 5: Other Information 28
     
Item 6: Exhibits 29
     
Signatures    
     
Certifications    

 

 

Table of Contents 

 

PART I - FINANCIAL INFORMATION

 

Item 1: Financial Statements

 

     SCHMITT INDUSTRIES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS 

(UNAUDITED)  

 

   November 30, 2021  May 31, 2021
ASSETS          
Current assets          
Cash and cash equivalents  $4,572,774   $4,032,690 
Accounts receivable, net   1,385,185    1,154,645 
Inventories, net   1,825,636    1,553,310 
Prepaid expenses   134,209    198,345 
Income taxes receivable   5,701    18,057 
Total current assets   7,923,505    6,957,047 
Leasehold assets   11,688,920    10,448,486 
Property and equipment, net   2,316,494    2,824,017 
Property and equipment held for sale, net   433,410    174,847 
Leasehold, utilities and ERP deposits   657,490    431,808 
Other assets          
Intangible assets, net   273,968    337,725 
TOTAL ASSETS  $23,293,787   $21,173,930 
           
LIABILITIES & STOCKHOLDERS' EQUITY          
Current liabilities          
Accounts payable  $677,791   $583,750 
Accrued commissions   63,076    60,614 
Accrued payroll liabilities   614,483    527,608 
Accrued liabilities   394,745    465,146 
Customer deposits and prepayments   117,754    93,364 
Other accrued liabilities   389,213    694,590 
Current portion of long-term lease liabilities   1,224,648    1,042,331 
Current portion of long-term debt   876,404    541,691 
Total current liabilities   4,358,114    4,009,094 
Long-term debt, net current portion   2,594,618    3,253,389 
Long-term leasehold liabilities, net current portion   11,359,230    10,141,864 
Total liabilities   18,311,962    17,404,347 
Stockholders' equity          
Common stock, no par value, 20,000,000 shares authorized, 4,229,193 and 3,811,142 shares issued and outstanding at November 30, 2021, respectively; and 4,204,553 and 3,786,502 shares issued and outstanding at May 31, 2021, respectively   12,292,728    12,223,359 
Accumulated deficit   (7,310,903)   (8,453,776)
Total stockholders' equity   4,981,825    3,769,583 
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY  $23,293,787   $21,173,930 

 

See accompanying notes to condensed consolidated financial statements

 

3 

Table of Contents 

 

SCHMITT INDUSTRIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

FOR THE THREE AND SIX MONTHS ENDED NOVEMBER 30, 2021 AND NOVEMBER 30, 2020

  

                                 
   Three Months Ended November 30,  Six Months Ended November 30,
   2021  2020  2021  2020
Net sales  $2,961,965   $2,029,712   $6,721,140   $3,537,197 
Cost of revenue   1,356,874    1,067,599    2,706,849    1,967,440 
Gross profit   1,605,091    962,113    4,014,291    1,569,757 
Operating expenses                    
Selling, general and administrative   4,161,890    3,091,516    8,292,576    5,178,232 
Transaction costs               125,167 
Research and development   5,580    17,877    14,845    35,330 
Total operating expenses   4,167,470    3,109,393    8,307,421    5,338,729 
Operating loss   (2,562,379)   (2,147,280)   (4,293,130)   (3,768,972)
Bargain purchase gain               1,189,512 
Adjustments to bargain purchase gain       (82,103)        
Gain on sale of property and equipment   4,598,095        4,598,095     
    Forgiveness of PPP loan           588,534     
    Interest expense   (18,303)   (1,285)   (29,579)   (2,544)
    Other income (expense), net   173,274    (134,164)   285,303    (36,836)
Income (loss) before income taxes   2,190,687    (2,364,832)   1,149,223    (2,618,840)
Income tax provision (benefit)   2,775    1,637    6,350    (403,030)
Net income (loss)  $2,187,912   $(2,366,469)  $1,142,873   $(2,215,810)
                     
Net income (loss) per common share                    
    Basic  $0.58   $(0.63)  $0.30   $(0.59)
Weighted-average number of common shares, basic   3,784,000    3,763,156    3,785,997    3,763,454 
Diluted  $0.57   $(0.63)  $0.30   $(0.59)
Weighted-average number of common shares, diluted   3,819,616    3,763,156    3,814,909    3,763,454 

 

 

See accompanying notes to condensed consolidated financial statements

 

4 

Table of Contents 

 

     SCHMITT INDUSTRIES, INC.

 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED) 

FOR THE SIX MONTHS ENDED NOVEMBER 30, 2021 AND NOVEMBER 30, 2020

 

                 
  

Six Months Ended November 30,

   2021  2020
Cash flows relating to operating activities          
Net income (loss)  $1,142,873   $(2,215,810)
Adjustments to reconcile net income (loss) to net cash used in operating activities:          
Bargain purchase gain       (1,189,512)
Forgiveness of Paycheck Protection Program loan   (588,534)    
Depreciation and amortization   294,597    187,114 
Gain on sale of property and equipment   (4,598,095)    
Stock-based compensation   69,369    251,371 
Deferred income taxes       (406,304)
Non-cash lease costs   159,248     
(Increase) decrease in:          
Accounts receivable, net   (230,540)   (220,514)
Inventories, net   (272,326)   (60,250)
Prepaid expenses   64,136    (46,883)
Deposits on capital improvements to factory       (273,278)
Rent, utility deposits and ERP deposits   (225,682)   (79,170)
Leasehold assets       (360,896)
Income taxes receivable   12,356    (80,602)
Increase (decrease) in:          
Accounts payable   94,041    503,864 
Accrued liabilities and customer deposits   (262,052)   433,514 
Leasehold liabilities       773,670 
Net cash used in operating activities  $(4,340,609)  $(2,783,686)
           
Cash flows relating to investing activities          
Acquisition of Ample Hills  $   $(1,711,127)
Purchases of property and equipment   (181,707)   (258,371)
Proceeds from the sale of property and equipment   4,797,924     
Net cash provided by (used in) investing activities  $4,616,217   $(1,969,498)
           
Cash flows relating to financing activities          
Proceeds from Paycheck Protection Program, net of repayment  $264,476   $1,795,080 
Payments on short-term borrowing       (36,441)
Repurchase of common stock       (234,517)
Net cash provided by financing activities  $264,476   $1,524,122 
Increase (decrease) in cash and cash equivalents   540,084    (3,229,062)
Cash and cash equivalents, beginning of period   4,032,690    10,566,531 
Cash and cash equivalents, end of period  $4,572,774   $7,337,469 
Supplemental disclosure of cash flow information          
Cash paid for income taxes, net of refunds  $10,606   $80,600 
Cash paid for interest  $   $616 

 

See accompanying notes to condensed consolidated financial statements

 

5 

Table of Contents 

 

     SCHMITT INDUSTRIES, INC.

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY

(UNAUDITED)

FOR THE SIX MONTHS ENDED NOVEMBER 30, 2021 AND NOVEMBER 30, 2020

 

   Shares  Amount  Accumulated Deficit  Total
Balance, May 31, 2021   3,786,502   $12,223,359   $(8,453,776)  $3,769,583 
Shares issued to directors, officers and others upon vesting of RSUs   24,640             
Stock-based compensation       69,369        69,369 
Net income           1,142,873    1,142,873 
Balance, November 30, 2021   3,811,142   $12,292,728   $(7,310,903)  $4,981,825 

 

 

   Shares  Amount  Accumulated Deficit  Total
Balance, May 31, 2020   3,784,554   $12,257,306   $(364,104)  $11,893,202 
Share repurchases   (72,159)   (234,517)       (234,517)
Shares issued to directors and officers upon vesting of RSUs   57,290             
Stock-based compensation       251,371        251,371 
Net loss           (2,215,810)   (2,215,810)
Balance, November 30, 2020   3,769,685   $12,274,160   $(2,579,914)  $9,694,246 

 

See accompanying notes to condensed consolidated financial statements

 

6 

Table of Contents 

 

      SCHMITT INDUSTRIES, INC.

NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

(UNAUDITED)

 

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation

 

In the opinion of management of Schmitt Industries, Inc. (the "Company", "Schmitt", "we" or "our"), the accompanying unaudited interim condensed consolidated financial statements, (collectively hereinafter the “consolidated financial statements”), have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and contain all adjustments, consisting only of normal recurring adjustments, necessary to present fairly its financial position as of November 30, 2021 and its results of operations and its cash flows for the periods presented. The consolidated balance sheet at May 31, 2021 has been derived from the Annual Report on Form 10-K for the fiscal year ended May 31, 2021. The accompanying unaudited consolidated financial statements and related notes should be read in conjunction with the audited consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended May 31, 2021. Operating results for the interim periods presented are not necessarily indicative of the results that may be experienced for the fiscal year ending May 31, 2022.

 

Significant Accounting Policies

 

The Company’s significant accounting policies are described in “Note 2: Summary of Significant Accounting Policies” of our fiscal 2021 Form 10-K filed on August 31, 2021.

 

Principles of Consolidation

 

These consolidated financial statements include those of the Company and its wholly owned subsidiaries: Schmitt Measurement Systems, Inc. and Ample Hills Acquisition LLC. All significant intercompany accounts and transactions have been eliminated in the preparation of the consolidated financial statements.

 

Reclassifications

 

Certain amounts in the prior period consolidated statements of operations have been reclassified to conform to the presentation of the current period. These reclassifications had no effect on previously recorded net income (loss). 

 

Use of Estimates

 

The preparation of the consolidated financial statements in conformity with Generally Accepted Accounting Principles in the U.S. (“GAAP”) requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.

 

New Accounting Standards

 

The Company assesses the adoption impacts of recently issued accounting standards by the Financial Accounting Standards Board (“FASB”) on the Company's financial statements as well as material updates to previous assessments, if any, from the Company’s Annual Report on Form 10-K for the fiscal year ended May 31, 2021. There were no new material accounting standards issued in the six months ended November 30, 2021 that impacted the Company.

 

Recently Adopted Accounting Standards

 

There were no new material accounting standards adopted in the six months ended November 30, 2021. 

 

7 

 

Liquidity 

 

Our primary source of liquidity is our cash flows from operating activities resulting from net income and management of working capital. As of November 30, 2021, our available funds consisted of $4,572,774 in cash and cash equivalents. Management is seeking to sell additional assets held for sale as noted below, which would be a source of liquidity, in addition to sources related to the forgiveness of the Paycheck Protection Program (“PPP”) loans (see Note 13 – Long-Term Debt) and the commitment from Michael Zapata, our Chief Executive Officer (“CEO”), to provide additional capital if needed as noted below. We anticipate that the available funds and cash generated from operations and financing activities will be sufficient to meet cash and working capital requirements, including the anticipated level of capital expenditures to fund operations for at least one year after the date the consolidated financial statements are issued.

 

On August 7, 2021, the Company received The Commitment Letter to Schmitt Industries (“Commitment”) from our CEO. The Commitment states that Sententia Capital Management LLC (“SCM”) or its affiliated entities will provide additional capital as required to Schmitt up to $1,300,000 for the Company’s operations as needed through November 30, 2022. The Company has not requested or used any of the funds available as of November 30, 2021.

 

On November 10, 2021, the Company closed on the sale of its building located at 2451 NW 28th Avenue, Portland, OR 97210 for $5,100,000 with net proceeds of $4,723,346. The Company recorded a gain on sale of property and equipment totaling $4,598,095 on its consolidated statement of operations. The property associated with the sale was previously classified as assets held for sale. See below for further details.

 

Business Combinations

 

The Company accounts for business combinations in accordance with Accounting Standard Codification (“ASC”) 805 - Business Combinations. ASC 805 requires, among other things, an assignment of the acquisition consideration transferred to the sellers for the tangible and intangible assets acquired and liabilities assumed, using the bottom up approach, to estimate their value at the acquisition date. Any excess of the fair value of the purchase consideration over these identified net assets is to be recorded as goodwill. Conversely, any excess of the fair value of the net assets acquired over the purchase consideration is recorded as a bargain purchase gain. See Note 2 – Acquisition of Ample Hills.

 

Assets Held for Sale

 

Assets held for sale are stated at the lower of cost less depreciation or expected net realizable value. Depreciation is computed using the straight-line method over estimated useful lives of 25 years for building improvements. Expenditures for maintenance and repairs are charged to expense as incurred and are recorded within selling, general and administrative expenses on the consolidated statement of operations.

 

The Company owned a two story 35,050 sq. foot building in an industrial zone that was listed for sale in December 2020. On November 11, 2021, the Company announced the sale of this building located at 2451 NW 28th Avenue, Portland, OR 97210 for $5,100,000 with net proceeds of $4,723,346. The transaction was funded and closed on November 10, 2021. The Company recorded a gain on sale of property and equipment totaling $4,598,095 on its consolidated statement of operations. Assets held for sale as of May 31, 2021 are associated with this property, and therefore, not included in assets held for sale as of November 30, 2021. The Company previously leased this property to two lessees. See Note 5 – Leases for further information. As such, this lease has been terminated as of November 30, 2021.

 

The Company owns two office/industrial buildings with a total of 11,667 sq. feet located at 2765 NW Nicolai Street, Portland, OR 97210 that were listed for sale in November 2021. Assets held for sale as of November 30, 2021 are associated with these properties. The Company currently occupies part of this property and leases a portion to a third party. See Note 5 – Leases for further information on this lease. A potential transaction would be structured as a sale/leaseback, as the Company occupies 75% of the buildings.

 

8 

 

As of November 30, 2021 and May 31, 2021, assets held for sale consisted of the following:

 

   November 30, 2021  May 31, 2021
Land  $159,000   $140,000 
Buildings and improvements   1,616,250    246,135 
   Total property and equipment held for sale   1,775,250    386,135 
Less accumulated depreciation   (1,341,840)   (211,288)
Total property and equipment held for sale, net  $433,410   $174,847 

 

Concentration of Credit Risk 

 

Financial instruments that potentially expose the Company to concentration of credit risk are trade accounts receivable. Credit terms generally require an invoice to be paid within 30 to 60 days or include a discount of up to 1.5% if the invoice is paid within ten days, with the net amount payable in 30 days. Terms are set for each account depending on the customer's credit standing with the Company.

  

Financial Instruments

 

The carrying value of all other financial instruments potentially subject to valuation risk (principally consisting of cash and cash equivalents, accounts receivable, accounts payable, the current portion of the PPP loans, customer deposits and prepayments) approximates fair value because of their short-term maturities.

 

NOTE 2 - AMPLE HILLS BUSINESS ACQUISITION

 

On July 9, 2020, Ample Hills Acquisition LLC ("Buyer"), a New York limited liability company and wholly owned subsidiary of the Company, entered into an Asset Purchase Agreement (the "Agreement"), dated as of June 29, 2020, with Ample Hills Holdings, Inc., a Delaware corporation, Ample Hills Creamery, Inc., a New York corporation, and their subsidiaries (collectively, "Ample Hills"). The transactions contemplated by the Agreement (the "Transactions") closed on July 9, 2020, the day after a sale order approving the Transactions was entered by the Bankruptcy Court (defined below). The Ample Hills entities were debtors-in-possession under title 11 of the United States Code, 11 U.S.C. § 101 et seq. pursuant to voluntary petitions for relief filed under chapter 11 of the Bankruptcy Code on March 15, 2020 in the United States Bankruptcy Court for the Eastern District of New York (the "Bankruptcy Court"). The Transactions were conducted through a Bankruptcy Court-supervised process, subject to Bankruptcy Court-approved bidding procedures, approval of the Transactions by the Bankruptcy Court, and the satisfaction of certain closing conditions.

 

The Agreement assigned to Buyer, or one or more of its affiliates, the Acquired Assets (as defined in the Agreement) and Buyer, or one or more of its affiliates, assumed the Assumed Liabilities (as defined in the Agreement) for a purchase price of $1,000,000. The Asset Acquisition included the following assets, among other things, Ample Hills' equipment, inventory, and all intellectual property, including the names and marks of "AMPLE HILLS" and "AMPLE HILLS CREAMERY" and all derivatives thereof. Pursuant to the Agreement, Buyer also paid approximately $700,000 to certain landlords of Ample Hills in exchange for the right to assume leases with such landlords and $125,167 in transaction costs.

  

The Company's strategy includes utilizing its capital for value opportunities. Accordingly, the primary purpose of the Ample Hills acquisition was to capitalize on this strategy by purchasing a business with a good brand name, which in light of the purchase price paid in bankruptcy, could have a significant upside. The Transactions were funded by the Company with cash on hand and has been accounted for in accordance with ASC 805. Our estimates of fair value are based upon assumptions believed to be reasonable, yet are inherently uncertain and, as a result, may differ from actual performance. During the measurement period, not to exceed one year from the date of acquisition, the Company recorded adjustments to the estimated fair values of the assets acquired and liabilities assumed with a corresponding adjustment to goodwill or bargain purchase gain, as appropriate, in the period in which such revised estimates are identified. The purchase price allocation has been finalized as of May 31, 2021, within the measurement period, and no further adjustments will be made.

 

9 

 

In accordance with ASC 805, the Company has recognized the assets and liabilities of Ample Hills at fair value with the excess of such values over the fair value of consideration transferred to the seller presented as a bargain purchase gain recognized on the accompanying consolidated statement of operations during the year ended May 31, 2021. The foregoing amounts reflect our current estimates of fair value as of the July 9, 2020 acquisition date.

 

The following table summarizes the Company's fair value of the assets acquired, and liabilities assumed, as of July 9, 2020, for the Company's acquisition of Ample Hills.

 

Purchase Price   
Cash paid to sellers  $1,000,000 
Cash paid for cure costs   713,404 
Total Purchase Price  $1,713,404 
      
Purchase Price Allocation     
Assets Acquired     
Right-of-use operating lease assets   10,645,098 
Website   25,545 
Tradename and trademarks   903,422 
Proprietary recipes   146,739 
Security deposits   225,180 
Machinery and equipment   564,553 
Leasehold improvements   815,798 
Inventory   632,100 
Total assets acquired  $13,958,335 
      
Liabilities Assumed     
Right-of-use operating lease liabilities   10,645,098 
Deferred tax liability   405,688 
Customer deposits   20,204 
Gift card liabilities   35,133 
Total liabilities assumed  $11,106,123 
Net assets acquired   2,852,212 
Gain on bargain purchase  $1,138,808 

 

As a result of additional information obtained during the measurement period about the facts and circumstances that existed as of the acquisition date, the Company recorded measurement period adjustments which resulted in a reduction in the bargain purchase gain, which reduced it to $1,138,808. The adjustments related to additional cure payments made during the prior year, the discovery of obsolete inventory, and the reduction of the deferred tax liability. The bargain purchase gain amount represents the excess of the estimated fair value of the net assets and intangibles, described above, acquired over the estimated fair value of the consideration transferred to the sellers and their landlords. In accordance with ASC 805, the Company estimated the fair value of the net assets acquired as of the acquisition date.

 

Ample Hills was a privately held company that was acquired out of bankruptcy. Management has performed a thorough evaluation of the pre-bankruptcy books and found the records to not be auditable. Therefore, management engaged a third party consultant to assist in evaluating alternative means by which to provide historic financial data in future periods.

 

For further information see Note 12 – Intangible Assets, net for further details regarding the results of the Ice Cream Segment.

 

10 

 

NOTE 3 - STOCK OPTIONS AND STOCK-BASED COMPENSATION

 

Stock-based compensation includes expense charges for all stock-based awards to employees and directors granted under the Company's stock option plan. Stock-based compensation recognized during the period is based on the portion of the grant date fair value of the stock-based award that will vest during the period, adjusted for expected forfeitures. Compensation cost for all stock-based awards is recognized using the straight-line method.

 

Stock Options

 

At November 30, 2021, the Company had outstanding stock options to purchase 22,500 shares of common stock all of which are vested and exercisable with a weighted-average exercise price of $1.70. As all options outstanding as of November 30, 2021 were fully vested; the Company recorded no expense as additional stock-based compensation expense related to stock options during the quarter ending November 30, 2021.

 

Outstanding Options  Exercisable Options
Number of Shares  Weighted- Average Exercise Price  Weighted-Average Remaining Contractual Life (years)  Number of Shares  Weighted- Average Exercise Price
 22,500   $1.70    5.3    22,500   $1.70 

 

No stock options were granted, exercised, canceled or expired under the Company's stock-based compensation plans during the six months ended November 30, 2021.

 

Restricted Stock Units

 

Service-based and market-based restricted stock units (“RSUs”) are granted to key employees, members of the Company's Board of Directors and others. Service-based RSUs generally fully vest on the first anniversary date of the award. Market-based RSUs are contingent on continued service and vest based on the 15-day average closing price of the Company's common stock equal or exceeding certain targets established by the Compensation Committee of the Board of Directors. No market-based RSUs were granted in the six months ended November 30, 2021.

 

During the six months ended November 30, 2021, 9,457 service-based RSUs were granted.

 

RSU activity under the Company's stock-based compensation plans during the six months ended November 30, 2021 is summarized as follows:

 

   Number of Units  Weighted-Average Price at Grant Date  Aggregate Intrinsic Value
Non-vested RSUs - May 31, 2021   34,237   $4.71   $161,400 
RSUs granted   9,457   $4.18    39,551 
RSUs vested   (24,640)  $4.06    (99,948)
Non-vested RSUs – November 30, 2021   19,054   $5.30   $101,003 

 

During the three and six months ended November 30, 2021, total restricted stock-compensation expense recognized was $42,422 and $69,369, respectively, and has been recorded as selling, general and administrative expense in the consolidated statements of operations. Remaining stock-compensation expense on non-vested RSUs with a time-vesting condition is $57,548.

 

NOTE 4 – WEIGHTED-AVERAGE SHARES AND RECONCILIATION

 

Basic net (loss) income per share is computed using the weighted-average number of shares of common stock outstanding. Diluted net (loss) income per share is computed using the weighted-average number of shares of common stock outstanding, adjusted for dilutive incremental shares attributed to outstanding options to purchase common stock and RSUs vested but not issued. Common stock equivalents for stock options are computed using the treasury stock method. In periods in which a net loss is incurred, no common stock equivalents are included since they are antidilutive and as such all stock options outstanding are excluded from the computation of diluted net loss in those periods.

 

11 

 

For the three and six months ended November 30, 2021, potentially dilutive securities consisted of options to purchase 22,500 shares of common stock at $1.70 per share. Of these potentially dilutive securities, all of the shares of common stock underlying the options are excluded during the three and six months ended November 30, 2020 from the computation of diluted earnings per share because the Company incurred a net loss. In periods when a net loss is incurred, no common stock equivalents are included in the calculation of diluted net income or loss for the Company since they are antidilutive. As such, all stock options outstanding are excluded from the computation of diluted net income in those periods.

 

Basic weighted-average shares for the three and six months ended November 30, 2021 and November 30, 2020 were as follows:  

                                 
   Three Months Ended
November 30,
  Six Months Ended
November 30,
   2021  2020  2021  2020
Weighted-average shares (basic)   3,784,000    3,763,156    3,785,997    3,763,454 
Effect of dilutive stock options   35,616        28,912     
Weighted-average shares (diluted)   3,819,616    3,763,156    3,814,909    3,763,454 

 

NOTE 5 – LEASES

 

On November 22, 2019, the Company entered into a triple-net lease agreement with Tosei, whereby Tosei will lease the Company's building located at 2451 NW 28th Avenue, Portland, OR 97210 for a base monthly fee of $23,282 for a term of 120 months. This lease arrangement been accounted for pursuant to Accounting Standards Update (“ASU”) No. 2016-02, "Leases (Topic 842) (“ASU Topic 842”)". The Company presents property revenues as other income. As previously noted, this property was listed for sale in December 2020. On November 10, 2021, the Company closed on the sale of this property for $5,100,000 with net proceeds of $4,723,346. As such, this has been terminated as of November 30, 2021.

 

On October 1, 2020, the Company entered into the Humboldt Lease, whereby Humboldt will lease the Company's building located at 2765 NW Nicolai Street, Portland, OR 97210 for a monthly fee of $3,185 for a term of 62 months. This lease arrangement been accounted for pursuant to Topic 842. The Company presents property revenues as other income. Minimum future lease payments receivable are as follows: 

 

Years Ending May 31,   
2022  $19,682 
2023   40,151 
2024   41,356 
2025   42,597 
2026   14,338 
Total undiscounted cash flow  $158,124 

 

On December 1, 2020, the Company entered into the Second Humboldt Lease, whereby Humboldt will lease a portion of the Company’s building located at 2451 NW 28th Avenue, Portland, OR 97210 for a monthly fee of $4,596 for a lease term of 59 months. As noted above, on November 11, 2021, the Company announced the sale of this property. The transaction was funded and closed on November 10, 2021. As such, this lease has been terminated as of November 30, 2021.

 

In connection with the July 9, 2020 acquisition of Ample Hills, the Company has multiple real estate leases for its leased stores as well as a manufacturing facility that are recorded as operating leases under various non-cancellable operating leases. On November 12, 2021, the Company signed an additional retail lease agreement in conjunction with its new retail store located in New York. The store is scheduled to open during the spring of 2022. Payments on this lease will commence on April 22, 2022.

 

12 

 

To determine whether a contract is or contains a lease, the Company determines at contract inception whether it contains the right to control the use of an identified asset for a period of time in exchange for consideration to the counterparty in the transaction. If the Company determines that the contract provides the right to obtain substantially all of the economic benefit from the use of the leased asset, as well as the right for the Company to direct the asset's use, the Company recognizes a right-of-use asset and liability upon contract inception. The initial carrying value of the operating lease liability is determined by calculating the present value of future lease payments under the contract. The Company considers the future lease payments under the original terms of the contract, and also includes explicitly enumerated renewal periods where management is reasonably certain that such renewal options will be exercised. The Company’s operating leases contain varying terms and expire at various dates through 2030. For the three months ended November 30, 2021 and November 30, 2020, lease expenses under fixed term leases amounted to $486,039  and $424,284, respectively. For the six months ended November 30, 2021 and November 30, 2020, lease expenses under fixed term leases amounted to $926,903 and $690,092, respectively.

 

Certain of the Company’s operating leases contain variable lease payments, either in part or in total, related to certain performance targets by the Company at the underlying store locations. These variable leases costs are recognized as incurred in accordance with ASC 842 - Leases.

 

The Company's future minimum lease payments required under operating leases that have commenced as of November 30, 2021 were as follows:

 

Years Ending May 31,   
2022  $777,027 
2023   1,858,502 
2024   1,866,585 
2025   1,845,319 
2026   1,619,558 
Thereafter   7,146,576 
Total lease payments   15,113,567 
Less: imputed interest   (2,529,689)
Present value of lease payments   12,583,878 
less: current lease obligations   (1,224,648)
Long-term lease obligations  $11,359,230 

 

In order to calculate the operating lease asset and liability for a lease, ASC 842 - Leases requires that a lessee apply a discount rate equal to the rate implicit in a lease whenever such a rate is readily determinable. The Company's lease agreements do not provide a readily determinable implicit rate, nor is this rate available from our leasing counterparties. Consequently, the Company estimates an incremental borrowing rate to determine the present value of the lease payments. This incremental borrowing rate represents the Company's estimate of an interest rate that the Company would be able to obtain from a lender to borrow, on a collateralized basis, over a similar term to obtain an asset of similar value.

 

The Company’s lease term and discount rates were as follows:

 

   November 30, 2021
Weighted-average remaining lease term (years)   7.67 
Weighted-average discount rate   3.87%

 

13 

 

NOTE 6 – PROPERTY AND EQUIPMENT, NET

 

The Company’s property and equipment, net consisted of the following:

 

   November 30, 2021  May 31, 2021
Land   $   $159,000 
Buildings and improvements    1,480,679    2,989,140 
Furniture, fixtures and equipment    1,827,315    1,788,784 
   Total property and equipment   3,307,994    4,936,924 
Less: accumulated depreciation   (991,500)   (2,112,907)
Total property and equipment, net  $2,316,494   $2,824,017 

 

Depreciation expense for the three months ended November 30, 2021 and 2020 was $113,240 and $68,561, respectively. Depreciation expense for the six months ended November 30, 2021 and 2020 was $230,839 and $124,795, respectively.

 

NOTE 7 - CUSTOMER CONCENTRATION

 

The Company had one customer who accounted for 11.0% of net revenues for the three months ended November 30, 2021. The Company had one customer who accounted for 16.2% of net revenues for the six months ended November 30, 2020.

 

NOTE 8 – ACCOUNTS RECEIVABLE, NET

 

The Company’s accounts receivable, net consisted of the following: 

 

   November 30,  May 31,
   2021  2021
Accounts receivable  $1,479,192   $1,252,968 
Less: allowance for doubtful accounts   (94,007)   (98,323)
Accounts receivable, net  $1,385,185   $1,154,645 

 

NOTE 9 – INVENTORIES, NET

 

The Company’s inventories, net consisted of the following: 

 

   November 30, 2021  May 31, 2021
Raw materials  $887,829   $901,464 
Work-in-process   28,958    35,160 
Finished goods   1,009,628    731,826 
Total inventories   1,926,415    1,668,450 
Less: inventory reserves   (100,779)   (115,140)
Inventories, net  $1,825,636   $1,553,310 

 

NOTE 10 - INCOME TAXES

 

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

 

14 

 

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

 

As of November 30, 2021 and of May 31, 2021, the Company had no other long-term liabilities related to income tax contingencies. Interest and penalties associated with uncertain tax positions are recognized as components of the "Provision for income taxes." The Company had no liability for payment of interest and penalties as of November 30, 2021 and May 31, 2021.

 

Several tax years are subject to examination by major tax jurisdictions. In the United States, federal tax years ended May 31, 2018 and after are subject to examination.

 

Effective Tax Rate

 

The effective tax rate was 0.1% and 0.6%, respectively, for the three and six months ended November 30, 2021. The effective tax rate was (0.1%) and (15.4%), respectively, for the three and six months ended November 30, 2020. The effective tax rate on consolidated net income (loss) for the three months ended November 30, 2021 and November 30, 2020 differs from the federal statutory tax rate primarily due to changes in the deferred tax asset valuation allowance. For the three months ended November 30, 2020, the tax benefit recorded related to the bargain purchase gain and changes in the deferred tax asset valuation allowance 

 

NOTE 11 - SEGMENT INFORMATION

 

As described in Note 2 - Ample Hills Business Acquisition, the Company closed on the acquisition of Ample Hills on July 9, 2020. As a result of the acquisition of Ample Hills, the Company now has two reportable business segments: the Ice Cream Segment and the Measurement Segment. The Ice Cream Segment encompasses the activities of Ample Hills and focuses on the wholesale and retail sales of the Company’s ice cream products from 12 separate retail locations in New York, New Jersey and California. The Measurement Segment focuses on laser-based test and measurement systems and ultrasonic products. All of the Company’s operations are conducted within North America.

 

The foregoing information presents the balances and activities of the Measurement Segment for the three and six months ended November 30, 2021 and November 30, 2020. For the Ice Cream Segment, the balances and activities for the three and six months ended November 30, 2021 are included, however, due to the acquisition occurring on July 9, 2020, only a portion of balances and activities are presented for the three and six months ended November 30, 2020.

 

The following table present the activity for the three months ended November 30, 2021 and 2020:  

                                 
   Three Months Ended November 30,
   2021  2020
   Ice Cream  Measurement  Ice Cream  Measurement
Revenue, net  $1,979,616   $982,349   $1,158,989   $870,723 
Gross margin  $1,128,655   $476,436   $467,714   $494,399 
Gross margin %   57.0%   48.5%   40.4%   56.8%
Operating loss  $(1,922,873)  $(639,506)  $(1,737,598)  $(409,682)
Depreciation expense  $106,747   $6,493   $59,160   $9,401 
Amortization expense  $5,733   $26,145   $6,017   $26,146 
Capital expenditures  $57,074   $   $111,387   $13,680 

 

15 

 

The following table present the activity for the six months ended November 30, 2021 and 2020: 

                                 
   Six Months Ended November 30,
   2021  2020
   Ice Cream  Measurement  Ice Cream  Measurement
Revenue, net  $4,935,371   $1,785,769   $1,660,409   $1,876,788 
Gross margin  $3,137,845   $876,446   $681,136   $888,621 
Gross margin %   63.6%   49.1%   41.0%   47.4%
Operating loss  $(3,138,091)  $(1,155,039)  $(2,700,352)  $(1,068,620)
Depreciation expense  $214,639   $16,200   $94,486   $30,309 
Amortization expense  $11,466   $52,292   $10,028   $52,291 
Capital expenditures  $181,707   $   $232,051   $26,320 

 

Segment Assets

 

   November 30, 2021  May 31,2021
Segment assets to total assets          
Ice Cream Segment  $9,898,380   $10,713,832 
Measurement Segment   2,270,087    2,565,701 
Corporate assets   11,125,320    7,894,397 
Total assets  $23,293,787   $21,173,930 

 

NOTE 12 - INTANGIBLE ASSETS

 

Indefinite-Lived Intangible Assets

 

In connection with the acquisition of Ample Hills on July 9, 2020, the Company acquired tradenames and trademarks related to the Ample Hills business. The Company estimated the fair value of these assets utilizing the relief-from-royalty method. These assets were determined to be indefinite-lived and are not amortized, but instead are reviewed for impairment at least annually or whenever events or changes in circumstances indicate that such carrying values may not be recoverable as required by ASC 350, Intangibles — Goodwill and Other. The Company first performs a qualitative analysis to determine if it is “more likely than not” that an impairment event has occurred. If it is deemed to be more likely than not, then the Company will perform a qualitative analysis to estimate the fair value of the assets based on their discounted future cash flows. Should the carrying value of such assets exceed this fair value estimate, then an impairment charge for the difference will be recognized in earnings. The Company’s annual qualitative impairment analysis indicated that it was more likely than not that the indefinite-lived assets were impaired and, accordingly, a quantitative analysis was performed.

 

During the fourth quarter of the fiscal year ended May 31, 2021, the Company made an evaluation based on factors such as changes in the Ice Cream Segment’s growth rate and recent trends in the Ice Cream Segment’s forecasted financial information, and concluded that a triggering event for an interim impairment analysis had occurred. As part of qualitative assessment, it was determined that the carrying value of the Ample Hills tradenames exceeded the estimated fair value. The tradename was valued using the relief-from-royalty method – a variation of the income approach – which was used for the initial valuation of the tradename in connection with the Company’s acquisition of Ample Hills. Due to a reduction in estimated total enterprise value as a result of the change in financial projections, there is no incremental fair value to allocate to the tradenames. Therefore, during the fiscal year ended May 31, 2021, the Company recognized an impairment loss in the amount of $903,422, which equals the total carrying value of the tradenames as of the testing date.

 

Finite-lived Intangible Assets

 

Amortizable intangible assets include purchased technology and patents for the Company’s Measurement Segment and proprietary recipes and the Company’s website for its Ice Cream Segment. These assets are amortized over their estimated useful lives ranging from three to fifteen years. In total, the weighted-average remaining amortization period of the Company’s intangible assets was 4.62 years as of November 30, 2021.

 

16 

 

As of November 30, 2021 and May 31, 2021, for the Measurement Segment, the gross carrying value of amortizable intangible assets was $1,663,538, and accumulated amortization was $1,528,226 and $1,475,935, respectively, which includes fully amortized assets. Amortization expense for the Measurement Segment for the three months ended November 30, 2021 and November 30, 2020 was $26,145 and $26,146, respectively. Amortization expense for the Measurement Segment for the six months ended November 30, 2021 and November 30, 2020 was $52,292 and $52,291, respectively. The weighted-average remaining amortization period for Measurement Segment intangible assets was 1.25 years as of November 30, 2021.

 

As of November 30, 2021 and May 31, 2021, for the Ice Cream Segment, the gross carrying value of amortizable intangible assets was $172,184, and accumulated amortization was $33,528 and $22,062, respectively. Amortization expense for the Ice Cream Segment for the three and six months ended November 30, 2021 was $5,733 and $11,466, respectively. Amortization expense for the Ice Cream Segment for the three and six months ended November 30, 2020 was $6,017 and $10,028, respectively. The weighted-average remaining amortization period for Ice Cream Segment intangible assets was 7.92 years as of November 30, 2021.

 

The following tables present the major components of finite-intangible assets which are subject to amortization as of November 30, 2021 and May 31, 2021:

 

As of November 30, 2021 

Useful

Life

(Years)

 

Gross

Carrying

Value

 

Accumulated

Amortization

 

Net

Carrying

Value

Finite-lived intangible assets subject to amortization:                  
Measurement Segment                  
Patented technology   15  $1,663,538   $(1,528,226)  $135,312 
Measurement Segment finite-lived assets      1,663,538    (1,528,226)   135,312 
                   
Ice Cream Segment                  
Proprietary recipes  10   146,739    (21,244)   125,495 
Company website  3   25,445    (12,284)   13,161 
        Ice Cream Segment finite-lived intangible assets      172,184    (33,528)   138,656 
Total finite-lived intangible assets     $1,835,722   $(1,561,754)  $273,968 

 

As of May 31, 2021 

Useful

Life

(Years)

 

Gross

Carrying

Value

 

Accumulated

Amortization

 

Net

Carrying

Value

Finite-lived intangible assets subject to amortization:                     
Measurement Segment                     
Patented technology   15   $1,663,538   $(1,475,935)   $187,603 
Measurement Segment finite-lived assets        1,663,538    (1,475,935)    187,603 
                      
Ice Cream Segment                     
Proprietary recipes   10    146,739    (13,934)    132,805 
Company website   3    25,445    (8,128)    17,317 
        Ice Cream Segment finite-lived intangible assets        172,184    (22,062)    150,122 
Total finite-lived intangible assets       $1,835,722   $(1,497,997)   $337,725 

 

 

17 

 

Estimated amortization expense for each of the following years is as follows:

 

Year Ending May 31,        
2022     $ 68,341
2023       101,370
2024       15,313
2025       14,621
2026       14,621
Thereafter       59,702
   Total expected amortization expense     $ 273,968

 

Finite-lived intangible assets are reviewed for impairment whenever events or changes in circumstances indicate the carrying amount of the asset may not be recoverable. Recoverability is determined by comparing the forecasted future net undiscounted cash flows from the operations to which the assets relate, based on management's best estimates using the appropriate assumptions and projections at the time, to the carrying amount of the assets. If the carrying value is determined to be in excess of such undiscounted cash flows, the asset is considered impaired and a loss is recognized equal to the amount by which the carrying amount exceeds the estimated fair value of the assets, which is determined by discounting future projected cash flows.

 

NOTE 13 – LONG-TERM DEBT

 

Paycheck Protection Program Loan

 

On March 21, 2020, the Coronavirus Aid Relief and Economic Security Ace (“CARES ACT”) was enacted. The CARES ACT established the PPP, which funds eligible businesses through federally guaranteed loans. Under the PPP, companies are eligible for forgiveness of principal and accrued interest if the proceeds are used for eligible costs, which include, but are not limited to, payroll, benefits, mortgage, lease and utility expenses.

 

The Company received three PPP loans during the fiscal year ended May 31, 2021, one of which was forgiven during the six months ended November 30, 2021. The remaining PPP loans are as follows:

 

    Loan Amount   Issuance Date   Maturity Period   Interest Rate
PPP Loans                            
Ample Hills   $ 1,471,022     July 30, 2020     5 years       1.0%  
Ample Hills     2,000,000     April 6, 2021     5 years       1.0%  
Total PPP Loan Balance   $ 3,471,022                      

 

The first two loans (one of which was forgiven during the six months ended November 30, 2021 and therefore excluded from the table) were granted on July 30, 2020 (collectively the “First Draw PPP Loan”) under two notes payable. Both notes were issued July 30, 2020 and funds were disbursed on August 3, 2020. The third loan was granted April 6, 2021 (the “Second Draw PPP Loan”) under a note payable. The note payable issued by Ample Hills for the Second Draw PPP Loan was dated April 6, 2021 (the three notes collectively the “Notes”) and funds were disbursed April 6, 2021. The Notes mature five years from the date of issuance and bear interest annually of 1.0%. Interest is accrued monthly, commencing on the date of issuance. Principal and interest is paid monthly through the maturity date, commencing on July 30, 2020 for the First Draw PPP Loan and April 6, 2021 for the Second Draw PPP Loan, unless forgiven as described below. The Notes may be prepaid at any time prior to maturity with no prepayment penalties. As noted above, Loan proceeds may be used only for eligible expense. Ample Hills has used and intends to use the remaining funds for eligible purposes, including the re-hiring of Ample Hill’s workforce, The Company or Ample Hills, as applicable, is currently seeking forgiveness of the balance of the First Draw PPP Loan and for the Second Draw PPP Loan.

 

Forgiveness of the Loans is available for principal that is used for the limited purposes that qualify for forgiveness under the requirements of the Small Business Administration (“SBA”), in addition to accrued interest. To obtain forgiveness, the Company must request it, provide documentation in accordance with SBA requirements and certify that the amounts requested to be forgiven qualify under those requirements. There is no guarantee that the remaining Loans will be forgiven by the SBA and therefore, the Company has recorded a $3,471,022 loan payable on the consolidated balance sheet as of the end of November 30, 2021. Of this amount, $876,404 has been recorded as a current liability to reflect the amount due within the twelve months through November 30, 2022.

 

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On August 2, 2021, the Company requested forgiveness of the First Draw PPP loan and provided documentation in accordance with SBA requirements and certified the amounts requested to be forgiven qualified under the requirements. On August 28, 2021, the Company received correspondence from Bank of America, which included a Notice of Paycheck Protection Program Forgiveness Payment from SBA for a portion of the First Draw PPP Loan in the amount of $588,534. The Company must retain all records for the PPP loan for six years from the date the loan is forgiven. Additionally, subsequent to receiving the First Draw PPP Loan in fiscal 2021, the Company repaid $264,476. During the six months ended November 30, 2021, Bank of America returned this payment to the Company as a result of a portion of the First Draw PPP loan being forgiven.

 

On December 15, 2021 and December 22, 2021, respectively, for the remaining portion of the First Draw PPP loan and the Second PPP loan, the Company provided documentation in accordance with SBA requirements and certified the amounts requested to be forgiven qualified under the requirements.

 

As of November 30, 2021 and May 31, 2021, the Company has the following current and long-term liabilities recorded for the PPP loans:

 

  

November 30, 2021

  May 31, 2021
PPP Loan Balance          
Current  $876,404   $541,691 
Long-term   2,594,618    3,253,389 
Total PPP Loan Balance  $3,471,022   $3,795,080 

 

 NOTE 14 – COMMITMENTS AND CONTINGENCIES

 

In a transaction related to the acquisition of Schmitt Measurement Systems, Inc., formerly TMA Technologies, Inc. ("TMA"), the Company established a royalty pool and vested in each shareholder and debt holder of the acquired company an interest in the royalty pool equal to the amount invested or loaned including interest payable through March 1995. The royalty pool is funded at 5% of net revenues (defined as gross sales less returns, allowances and sales commissions) of the Company's surface measurement products and future derivative products developed by Schmitt Industries, Inc., which utilize these technologies. As part of the royalty pool agreement, each former shareholder and debt holder released TMA from any claims with regards to the acquisition except their rights to future royalties. Royalty expense for the three months ended November 30, 2021 and November 30, 2020 amounted to $11,787 and $6,506, respectively. Royalty expense for the six months ended November 30, 2021 and November 30, 2020 amounted to $19,429 and $12,486, respectively.

 

During the Company’s fiscal year ended May 31, 2020 (“Fiscal 2020”), the Company determined that it was more likely than not that the Company had a pre-existing tax liability related to prior periods. The Company has analyzed the liability and estimated it to be $265,349 and accordingly, the Company recognized estimated liability in operating expenses in Fiscal 2020 and recorded an accrual for the liability. Management has evaluated the exposure related to this matter and believes that the remaining liability is its best estimate as of November 30, 2021. 

 

NOTE 15 - SUBSEQUENT EVENTS

 

The Company has evaluated subsequent events through the filing of this Quarterly Report on Form 10-Q and determined that there have been no events that have occurred that would require adjustments to our disclosures in the consolidated financial statements.

 

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

 

Forward-Looking Statements

 

This Quarterly Report filed with the SEC on Form 10-Q (the "Report"), including "Management's Discussion and Analysis of Financial Condition and Results of Operations" in this Item 2, contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 regarding future events and the future results of Schmitt Industries, Inc. and its consolidated subsidiaries that are based on management's current expectations, estimates, projections and assumptions about the Company's business. Words such as "expects," "anticipates," "intends," "plans," "believes," "sees," "estimates" and variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve risks, uncertainties and assumptions that are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking statements due to numerous factors, including, but not limited to, those discussed in the risk factors disclosed in our Annual Report on Form 10-K for the year ended May 31, 2021, as well as in "Management's Discussion and Analysis of Financial Condition and Results of Operations" and elsewhere in this Report as well as those discussed from time to time in the Company's other Securities and Exchange Commission filings and reports. In addition, such statements could be affected by general industry and market conditions.

 

Such forward-looking statements speak only as of the date of this Report or, in the case of any document incorporated by reference, the date of that document, and we do not undertake any obligation to update any forward-looking statement to reflect events or circumstances after the date of this Report. If we update or correct one or more forward-looking statements, investors and others should not conclude that we will make additional updates or corrections with respect to other forward-looking statements.

 

RESULTS OF OPERATIONS

 

Schmitt Industries, Inc. (the "Company", "Schmitt", "we" or "our") operates a diversified business. The Company reports in two business segments, the Ice Cream Segment and the Measurement Segment.

 

  ·    Ice Cream Segment. Through our wholly owned subsidiary, Ample Hills Acquisition, LLC, the Ice Cream Segment manufactures, wholesales, and retails ice cream and related products through a network of 11 individual retail locations located in New York, New Jersey and California.

 

  ·    Measurement Segment. Through its wholly owned subsidiary Schmitt Measurement Systems, Inc., the Measurement Segment manufactures and sells products in two core product lines, Acuity® and Xact®.

   

  - Acuity® sells products, solutions and services that includes laser and white light sensor distance, measurement and dimensional sizing products.

 

  - Xact® product line includes ultrasonic-based remote tank monitoring products and related monitoring revenues for markets in the Internet of Things ("IoT") environment. The Xact products measure the fill levels of tanks holding propane, diesel and other tank-based liquids and the related monitoring services, which includes transmission of fill data from the tanks via satellite to a secure website for display.

 

The accompanying unaudited financial information should be read in conjunction with our Annual Report on Form 10-K filed on August 31, 2021.

 

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Highlights of the Three Months Ended November 30, 2021 and November 30, 2020

 

   Three Months Ended November 30,  YoY Change
   2021   %  2020  %  $  %
Ice Cream Segment revenues  $1,979,616    66.8%  $1,158,989    57.1%  $820,627    70.8%
Measurement Segment revenues   982,349    33.2%   870,723    42.9%   111,626    12.8%
Total revenue, net   2,961,965    100.0%   2,029,712    100.0%   932,253    45.9%
Cost of sales   1,356,874    45.8%   1,067,599    52.6%   289,275    27.1%
Gross profit   1,605,091    54.2%   962,113    47.4%   642,978    66.8%
Selling, general and administrative   4,161,890    140.5%   3,091,516    152.3%   1,070,374    34.6%
Research & development   5,580    0.2%   17,877    0.9%   (12,297)   (68.8%)
Total operating expenses   4,167,470    140.7%   3,109,393    153.2%   1,058,077    34.0%
Operating loss   (2,562,379)   (86.5%)   (2,147,280)   (105.8%)   (415,099)   (19.3%)
    Gain on sale of property and equipment   4,598,095    155.2%           4,598,095    100.0%
Adjustments to bargain purchase gain       0.0%   (82,103)   (4.0%)   82,103    100.0%
Interest expense   (18,303)   (0.6%)   (1,285)   (0.1%)   17,018    1324.4%
Other (expense) income, net   173,274    5.8%   (134,164)   (6.6%)   307,438    229.2%
Income (loss) before income taxes   2,190,687    74.0%   (2,364,832)   (116.5%)   4,555,519    192.6%
Income tax provision   2,775    0.1%   1,637    0.1%   1,138    69.5%
Net income (loss)  $2,187,912    73.9%  $(2,366,469)   (116.6%)  $4,554,381    192.5%

 

Highlights of the Six Months Ended November 30, 2021 and November 30, 2020

 

   Six Months Ended November 30,     YoY Change
   2021   %  2020  %  $  %
Ice Cream Segment revenues  $4,935,371    73.4%  $1,660,409    46.9%  $3,274,962    197.2%
Measurement Segment revenues   1,785,769    26.6%   1,876,788    53.1%   (91,019)   (4.8%)
Total revenue, net   6,721,140    100.0%   3,537,197    100.0%   3,183,943    90.0%
Cost of sales   2,706,849    40.3%   1,967,440    55.6%   739,408    37.6%
Gross profit   4,014,291    59.7%   1,569,756    44.4%   2,444,535    155.7%
Selling, general and administrative   8,292,576    123.4%   5,178,232    146.4%   3,114,344    60.1%
Transaction costs       0.0%   125,167    3.5%   (125,167)   (100.0%)
Research & development   14,845    0.2%   35,330    1.0%   (20,485)   (58.0%)
Total operating expenses   8,307,421    123.6%   5,338,729    150.9%   2,968,692    55.6%
Operating loss   (4,293,130)   (63.9%)   (3,768,972)   (106.6%)   (524,158)   13.9%
Gain on sale of property and equipment   4,598,095    68.4%       0.0%   4,598,095    100.0%
Bargain purchase gain       0.0%   1,189,512    33.6%   (1,189,512)   (100.0%)
Forgiveness of PPP loan   588,534    8.8%       0.0%   588,534    100.0%
Interest expense   (29,579)   (0.4%)   (2,544)   (0.1%)   27,035    1062.7%
Other income, net   285,303    4.2%   (36,836)   (1.0%)   322,139    874.5%
Income (loss) before income taxes   1,149,223    17.1%   (2,618,840)   (74.0%)   3,768,063    143.9%
Income tax provision (benefit)   6,350    0.1%   (403,030)   (11.4%)   409,380    101.6%
Net income (loss)  $1,142,873    17.0%  $(2,215,810)   (62.6%)  $3,358,683    151.6%

 

·Consolidated revenues increased $932,253, or 45.9%, to $2,961,965 for the three months ended November 30, 2021, as compared to $2,029,712 for the three months ended November 30, 2020. Consolidated revenues increased $3,183,943, or 90.0%, to $6,721,140 for the six months ended November 30, 2021, as compared to $3,537,197 for the six months ended November 30, 2020. The increase was driven by the Ice Cream Segment, which generated revenues of $1,979,616 and $4,935,371 for the three and six months ended November 30, 2021, respectively, accounting for 66.8% and 73.4% of total revenue for the three and six month periods.

 

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·Gross margin increased to 54.2% for the three months ended November 30, 2021, as compared to the three months ended November 30, 2020 of 47.4%. Gross margin increased to 59.7%, for the six months ended November 30, 2021, as compared to the six months ended November 30, 2020 of 44.4%. The Company’s gross margin was driven by improved performance in the Ice Cream Segment due to higher factory utilization and production efficiencies, as well as a product mix shift in Measurement Segment.

 

·Operating expenses increased $1,058,077, or 34.0%, to $4,167,470 for the three months ended November 30, 2021, as compared to $3,109,393 for the three months ended November 30, 2020. Operating expenses increased $2,968,692, or 55.6%, to $8,307,421 for the six months ended November 30, 2021, as compared to $5,338,729 for the six months ended November 30, 2020. The increase was primarily due to the inclusion of the Ample Hills business, acquired in July 2020.

 

·Net income was $2,187,912, or $0.57, per fully diluted share, for the three months ended November 30, 2021, as compared to net loss of ($2,366,469), or ($0.63), per fully diluted share, for the three months ended November 30, 2020. Net income was $1,142,873, or $0.30, per fully diluted share, for the six months ended November 30, 2021, as compared to net loss of ($2,215,810), or ($0.59), per fully diluted share, for the six months ended November 30, 2020. 

 

·Capital expenditures for the six months ended November 30, 2021 were $181,707 as compared to $258,371 during the six months ended November 30, 2020. During the six months ended November 30, 2021, an additional $111,798 was invested in the new Ample Hills Prospect Park West retail location that opened May 28, 2021. The remaining $69,909 was the result of expenditures on equipment upgrades at the Company’s Red Hook factory in Brooklyn, New York.

 

Critical Accounting Policies

 

The Company's critical accounting policies are disclosed in its Annual Report on Form 10-K for the year ended May 31, 2021 filed on August 31, 2021 with the Securities and Exchange Committee (“SEC”). There have been no changes subsequent to May 31, 2021.

 

Discussion of Operating Results

 

The Company has previously reported segment information between their two identified reportable segments: the Balancer Segment and the Measurement Segment. As described in the Company’s Annual Report on Form 10-K for the year ended May 31, 2021, the Company sold the Dynamic Balance Systems ("SBS") business line on November 22, 2020. This entity composed substantially all of the business activities of the Company's legacy Balancer Segment. Subsequent to this sale, Management determined that the Company had a single reportable segment, until the acquisition of Ample Hills closed during the first fiscal quarter of 2021 ended August 31, 2020. Subsequent to the acquisition of Ample Hills, the Company has two identifiable reportable segments: the Measurement Segment and the Ice Cream Segment. The foregoing information presents the balances and activities of the Measurement Segment and the Ice Cream Segment as of and for the three and six months ended November 30, 2021.

 

Consolidated RevenueConsolidated revenues increased $932,253, or 45.9%, to $2,961,965 for the three months ended November 30, 2021, as compared to $2,029,712 for the three months ended November 30, 2020. Consolidated revenues increased $3,183,943, or 90.0%, to $6,721,140 for the six months ended November 30, 2021, as compared to $3,537,197 for the six months ended November 30, 2020. The increase was driven by the Ice Cream Segment, which generated revenues of $1,979,616 and $4,935,371 for the three and six months ended November 30, 2021, respectively, accounting for 66.8% and 73.4% of total revenue for the three and six month periods.

 

Ice Cream Segment - The Ice Cream Segment encompasses the operations of Ample Hills Acquisition, LLC and focuses on the wholesale and retail sales of ice cream and related products through a network of 11 individual retail locations located in New York, New Jersey and California. 

 

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Ice Cream Segment revenue increased $820,627, or 70.8%, to $1,979,616 for the three months ended November 30, 2021, as compared to $1,158,989, for the three months ended November 30, 2020. Ice Cream Segment revenue increased $3,274,962, or 197.2%, to $4,935,371 for the six months ended November 30, 2021, as compared to $1,660,409 for the six months ended November 30, 2020. The increase was primarily due to the inclusion of Ice Cream Segment revenue for the entire six months ended November 30, 2021 versus partial inclusion for the six months ended November 30, 2020, as the acquisition occurred on July 9, 2020. In addition, the Company opened an additional retail location on May 28, 2021.

 

Measurement Segment - The Measurement Segment includes two main product lines: the Acuity product line, which includes laser-based distance measurement and dimensional sizing laser sensors; and the Xact product line, which includes ultrasonic-based remote tank monitoring products and related monitoring revenues for markets in the IoT environment. Substantially all activity of our Measurement Segment is conducted in North America. 

 

Measurement Segment revenue increased $111,626, or 12.8%, to $982,349 for the three months ended November 30, 2021, as compared to $870,723 for the three months ended November 30, 2020. Measurement Segment revenue decreased $91,019, or 4.8%, to $1,785,769 for the six months ended November 30, 2021, as compared to $1,876,788 for the six months ended November 30, 2020. For the three months ended November 30, 2021, the increase is primarily driven by an increase in Acuity and Xact product revenue of $119,208 and $25,638, respectively, offset by a decrease in Xact monitoring revenue of $28,625, or 6.8%. For the six months ended November 30, 2021, the decrease is primarily driven by a decrease in Xact product revenue and Xact monitoring revenue of $97,438 and $16,372, respectively, offset by an increase in other revenue and Acuity revenue of $13,805 and $8,985, respectively.

 

Revenue by product line for the Measurement Segment for the three months ended November 30, 2021 and November 30, 2020, respectively, were as follows: 

 

  

Three Months Ended

November 30,

  YoY Change
   2021  2020  $  %
Acuity revenue  $456,533   $337,325   $119,208    35.3%
Xact - product revenue   120,051    94,413    25,638    27.2%
Xact - monitoring revenue   391,508    420,133    (28,625)   (6.8%)
Other   14,257    18,852    (4,595)   (24.4%)
Total Measurement Segment revenue  $982,349   $870,723   $111,626    12.8%

 

Revenue by product line for the Measurement Segment for the six months ended November 30, 2021 and November 30, 2020, respectively, were as follows: 

 

  

Six Months Ended

November 30,

  YoY Change
   2021  2020  $  %
Acuity revenue  $712,658   $703,673   $8,985    1.3%
Xact - product revenue   209,968    307,406    (97,438)   (31.7%)
Xact - monitoring revenue   792,198    808,570    (16,372)   (2.0%)
Other   70,945    57,139    13,806    24.2%
Total Measurement Segment revenue  $1,785,769   $1,876,788   $(91,020)   (4.8%)

 

Gross Margin – Ice Cream Segment gross margin for the three months ended November 30, 2021 increased to 57.0%, as compared to 40.4% for the three months ended November 30, 2020. Ice Cream Segment gross margin for the six months ended November 30, 2021 increased to 63.6%, as compared to 41.0% for the six months ended November 30, 2020. The Ice Cream Segment’s improved performance was driven by improved factory utilization, yield and a seasonal increase in higher margin retail sales.

 

Measurement Segment gross margin for the three months ended November 30, 2021 decreased to 48.5%, as compared to 56.8% for the three months ended November 30, 2020. Measurement Segment gross margin for the six months ended November 30, 2021 increased to 49.1% as compared to 47.4% for the six months ended November 30, 2020. Measurement Segment’s improved margin was the driven by a higher percentage of Xact Monitoring revenue.

 

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Operating Expenses – Operating expenses increased $1,058,077, or 34.0%, to $4,167,470 for the three months ended November 30, 2021, as compared to $3,109,393 for the three months ended November 30, 2020. Operating expenses increased $2,968,692, or 55.6%, to $8,307,421 for the six months ended November 30, 2021, as compared to $5,338,729 for the six months ended November 30, 2020. The increase was primarily due to the inclusion of the Ample Hills business, acquired in July 2020.

 

Ice Cream Segment operating expenses increased $846,332 or 38.4%, to $3,051,528 for the three months ended November 30, 2021, as compared to $2,205,196 for the three months ended November 30, 2020. Ice Cream Segment operating expenses increased $2,894,448, or 85.6%, to $6,275,936 for the six months ended November 30, 2021, as compared to $3,381,488 for the six months ended November 30, 2020.

 

Measurement Segment operating expenses increased $211,745, or 23.4%, to $1,115,942 for the three months ended November 30, 2021, as compared to $904,197 for the three months ended November 30, 2020. Measurement Segment operating expenses increased $74,244, or 3.8%, to $2,031,485 for the six months ended November 30, 2021, as compared to $1,957,241for the six months ended November 30, 2020. The operating expense increase was driven by higher corporate administrative costs supporting the Measurement businesses, as well as higher professional fees.

 

Gain on Sale of Property and Equipment – During the three and six months ended November 30, 2021, the Company recorded a gain on the sale of property and equipment totaling $4,598,095. The gain is the result of the sale of a two story 35,050 sq. foot building in an industrial zone that was listed for sale in December 2020 and equipment related to Ample Hills. On November 10, 2021, the Company closed on the sale of this building located at 2451 NW 28th Avenue, Portland, OR 97210 for $5,100,000 with net proceeds of $4,723,346.

 

Bargain Purchase Gain - In connection with the acquisition of Ample Hills on July 9, 2020, the Company recognized an initial bargain purchase gain of $1,271,615 that was recorded as a component of other income on the consolidated statement of operations. The bargain purchase gain amount represents the excess of the estimated fair value of net assets acquired over the estimated fair value of the consideration transferred to the sellers and their landlords. In accordance with ASC 805 - Business Combinations (“ASC 805"), we have estimated the fair value of the net assets acquired as of the acquisition date. As a result of additional information obtained during the measurement period about the facts and circumstances that existed as of the acquisition date, the Company recorded measurement period adjustments of $132,807 during the year ended May 31, 2021, which decreased the total bargain purchase gain recognized to $1,138,808. The adjustments were primarily related to additional cure payments subsequent to the acquisition which related to circumstances that existed prior to the acquisition date, and the identification of acquired inventory deemed obsolete as of the acquisition date. See Note 2 – Ample Hills Business Acquisition for further discussion. The purchase price allocation has been finalized as of May 31, 2021, within the measurement period, and no further adjustments will be made.

 

Interest Expense – Interest expense was $18,303 for the three months ended November 30, 2021, as compared to $1,285 for the three months ended November 30, 2020. Interest expense was $29,579 for the six months ended November 30, 2021, as compared to $2,544 for the six months ended November 30, 2020.

 

Other Income (Expense), Net - Other income, net primarily consists of rental income, interest income and other income (expense). Other income was $173,274 for the three months ended November 30, 2021, as compared to other income (expense) of ($134,164) for the three months ended November 30, 2020. Other income (expense), net was $285,303 for the six months ended November 30, 2021, as compared to ($36,836) for the six months ended November 30, 2020.

 

Interest income was $388 for the three months ended November 30, 2021, as compared to $2,495 for the three months ended November 30, 2020. Interest income was $1,158 for the six months ended November 30, 2021, as compared to $6,743 for the six months ended November 30, 2020. Fluctuations in interest income are impacted by the levels of our average cash and investment balances and changes in interest rates

 

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Income Taxes - The effective tax rate was 0.1% and 0.6%, respectively, for the three and six months ended November 30, 2021. The effective tax rate was (0.1%) and (15.4%), respectively, for the three and six months ended November 30, 2020. The effective tax rate on consolidated net loss for the three months ended November 30, 2021 and November 30, 2020 differs from the federal statutory tax rate primarily due to changes in the deferred tax asset valuation allowance. For the three months ended November 30, 2020, the tax benefit recorded related to the bargain purchase gain and changes in the deferred tax asset valuation allowance 

 

Net Income (Loss) - Net income was $2,187,912, or $0.57, per fully diluted share, for the three months ended November 30, 2021, as compared to net loss of ($2,366,469), or ($0.63), per fully diluted share, for the three months ended November 30, 2020. Net income was $1,142,873, or $0.30, per fully diluted share, for the six months ended November 30, 2021, as compared to net loss of ($2,215,810), or ($0.59), per fully diluted share, for the six months ended November 30, 2020. 

 

COVID-19 Update

 

As of November 30, 2021, all of the Company’s manufacturing facilities and retail shops were operational. Throughout the COVID-19 pandemic, the Company has been adhering to mandates and other guidance from local governments and health authorities, including the World Health Organization and the Centers for Disease Control and Prevention. The Company has taken extraordinary measures and invested significantly in practices to protect employees and reduce the risk of spreading the virus, while continuing to operate where permitted and to the extent possible. These actions include additional cleaning of our facilities, staggering crews, incorporating visual cues to reinforce social distancing, providing face coverings and gloves, as well as implementing daily health validation at our manufacturing and office facilities. We expect to continue to incur costs to maintain these precautionary measures for the foreseeable future. The health and safety of our employees and our communities is our highest priority.

 

LIQUIDITY AND CAPITAL RESOURCES

 

The Company's working capital increased $617,438 to $3,565,391 as of November 30, 2021, as compared to $2,947,953 as of May 31, 2021. 

 

Net cash used in operating activities was $4,340,609 during the six months ended November 30, 2021, as compared to net cash used in operating activities of $2,783,686 during the six months ended November 30, 2020. The net cash used in operating activities was primarily driven by a gain on disposal of property and equipment of $4,598,095, forgiveness of part of the First Draw PPP Loan received through the Paycheck Protection Program (“PPP”) totaling $588,534, an increase in inventories of $272,326, a decrease in accrued liabilities and customer deposits of $262,052, an increase in accounts receivable, net of $230,540 and an increase in rent, utility deposits and ERP deposits of $225,682. These uses of cash were offset by net income of $1,142,873, depreciation and amortization of $294,597, non-cash lease costs of $159,248, stock-based compensation of $69,369, an increase in accounts payable of $94,041, a decrease in prepaid expenses of $64,136 and an increase in income taxes receivable of $12,356.

 

Net cash provided by investing activities was $4,616,217 for the six months ended November 30, 2021, as compared to net cash used in investing activities of $1,969,498 for the six months ended November 30, 2020. The net cash provided by investing activities for the six months ended November 30, 2021 is driven by proceeds from the sale of property and equipment of $4,797,924, offset partially by purchases of property and equipment of $181,707. The net cash used in investing activities for the six months ended November 30, 2020 was the result of the acquisition of Ample Hills and associated cure costs totaling $1,711,127, in addition to purchases of property and equipment totaling $258,371.

 

Net cash provided by financing activities was $264,476 during the six months ended November 30, 2021, as compared to net cash provided by financing activities of $1,524,122 for the six months ended November 30, 2020. The net cash provided by financing activities for the six months ended November 30, 2021 was due to the forgiveness of part of the First Draw PPP Loan received through the PPP, which resulted in a repayment to the Company of $264,476 for a loan payment previously made by the Company on this loan. The net cash provided by financing activities for the six months ended November 30, 2020 was primarily the result of proceeds received by the Company for the First Draw PPP Loan totaling $2,059,556, offset by a repayment of the PPP loan totaling $264,476, the repurchases of common stock totaling $234,517 and payments on short-term borrowing of $36,441.

 

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Management is seeking to sell the assets held for sale, which would be a source of liquidity for the Company. 

 

We believe that our existing cash and cash equivalents combined with the cash we anticipate generating from operating and financing activities will be sufficient to meet our cash requirements for the foreseeable future. We do not have any significant commitments nor are we aware of any significant events or conditions that are likely to have a material impact on our liquidity or capital resources. The Company may seek to generate additional cash, whether the remaining PPP loans are forgiven or otherwise. Such efforts could include the sale of previously disclosed real estate efforts or additional financing. Any subsequent equity financing sought may have dilutive effects on our current shareholders. The Company has no agreements or understandings with respect to the foregoing.

 

On August 7, 2021, the Company received The Commitment Letter to Schmitt Industries (“Commitment”) from Michael Zapata, our Chief Executive Officer (“CEO”). The Commitment states that Sententia Capital Management LLC (“SCM”) or its affiliated entities will provide additional capital as required to Schmitt up to $1,300,000 for the Company’s operations as needed through November 30, 2022. The Company has not requested or used any of the $1,300,000 as of November 30, 2021.

 

On August 2, 2021, the Company requested forgiveness of the First Draw PPP Loan and provided documentation in accordance with SBA requirements and certified the amounts requested to be forgiven qualified under the requirements. On August 28, 2021, the Company received correspondence from Bank of America, which included a Notice of Paycheck Protection Program Forgiveness Payment from SBA for a portion of the First Draw PPP Loan in the amount of $588,534. The Company must retain all records for the PPP loan for six years from the date the loan is forgiven. Additionally, subsequent to receiving the First Draw PPP Loan in fiscal 2021, the Company repaid $264,476. During the six months ended November 30, 2021, Bank of America returned this payment to the Company as a result of a portion of the First Draw PPP loan being forgiven.

 

Going Concern

 

In connection with preparing the consolidated financial statements for the three and six months ended November 30, 2021, management evaluated whether there were conditions and events, considered in the aggregate, that raised substantial doubt about the Company’s ability to continue as a going concern within one year from the date the financial statements are issued. In making this assessment we performed a comprehensive analysis of our current circumstances including our financial position and cash usage forecasts. The analysis used to determine the Company’s ability as a going concern does not include cash sources outside the Company’s direct control that management expects to be available within the next 12 months. The Company has incurred significant losses and has not demonstrated sufficient revenues to achieve profitable operations on a consolidated basis. In addition, the Company will continue to generate losses from operations for at least one year and will require additional financing until the operations achieve profitability. These factors could create substantial doubt as to the Company’s ability to continue as a going concern for at least one year after the date our unaudited condensed consolidated financial statements are issued. However, management expects that our existing cash and cash equivalents, planned sale of real estate assets, our access to the Sententia Capital Management Commitment Letter, and any potential additional equity financing, will be sufficient to fund our anticipated level of operations through at least January 2023 and alleviates substantial doubt about the Company’s ability to continue as a going concern.

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

 

There have been no material changes from the information previously reported under Item 7A of our Annual Report on Form 10-K for the year ended May 31, 2021.

 

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Item 4. Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Securities Exchange Act of 1934, as amended (Exchange Act), is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms. Our disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is accumulated and communicated to management as appropriate to allow timely decisions regarding required disclosures. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives, and management necessarily is required to use its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

 

An evaluation was carried out under the supervision and with the participation of the Company’s management, including the CEO and Chief Financial Officer (“CFO”), of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report as defined in Exchange Act Rule 13a-15(e) and Rule 15d-15(e). Based on that evaluation, the CEO and CFO have concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were not effective in ensuring that information required to be disclosed in our Exchange Act reports is (1) recorded, processed, summarized and reported in a timely manner, and (2) accumulated and communicated to our management, including our CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure.

 

As previously disclosed in Item 9A of our Annual Report on Form 10-K for the year ended May 31, 2021, management had concluded that there was a material weakness in internal control over financial reporting due to deficiencies in the design and operation of internal controls over segregation of duties; and ineffective management review over accounting reconciliations for stock-based compensation, accounts receivable, accounts payable, inventory, accrued liabilities, sales taxes, expense classification, depreciation of property and equipment, net and earnings per share. We are in the process of remediating the material weakness as of the end of the period covered by this Quarterly Report on Form 10-Q.

 

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements would not be prevented or detected on a timely basis. As a result of the material weakness, our CEO and CFO have concluded that, as of November 30, 2021, the end of the period covered by this report, our disclosure controls and procedures were not effective at a reasonable assurance level.

 

Remediation of Material Weaknesses

 

Management developed a remediation plan in response to the material weakness identified. Management has leveraged additional accounting resources, both internal and external, to strengthen the financial close and reporting process so as to more effectively detect such misstatements in a more timely fashion. Additional accounting resources include the Company’s announcement of the appointment of Philip Bosco as CFO on November 6, 2020, effective December 1, 2020. In addition, a consulting firm has been engaged to assist with the development and implementation of our internal controls remediation plan.

 

The remediation plan includes both management’s assessment and recommendations from independent accounting advisors used in the review process.  This remediation plan is intended to address the identified material weakness and enhance our overall control environment. 

 

This quarterly report does not include an attestation report of the Company's registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by the Company's registered public accounting firm pursuant to SEC rules adopted in conformity with the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.

 

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Notwithstanding the identified material weaknesses, management believes that the consolidated financial statements included in this Quarterly Report on Form 10-Q present fairly, in all material respects, our financial position, results of operations, and cash flows as of and for the periods presented in accordance with U.S. GAAP.

 

Changes in Internal Control Over Financial Reporting

 

In the fiscal year ending May 31, 2021, the Company acquired the Ample Hills business. As of November 30, 2021, management has expanded the head count in the accounting and finance department and is in the process of integrating this new business line into the Company's overall internal control environment. Further, management has performed a thorough review of processes and procedures to ensure appropriate segregation of duties are in place to improve the internal control environment. Management anticipates completing these integration efforts by the end of the fiscal year ending May 31, 2022.

 

During the fiscal year ended May 31, 2021, the Company identified an error in its recording of market-based stock compensation, and recorded an adjustment to the consolidated balance sheet as of May 31, 2021, the consolidated statement of operations and the consolidated statement of changes in stockholders equity for the periods then ended.

 

Other than the above referenced matter, including those described in the Remediation of Material Weakness section above, there has been no change in the Company's internal control over financial reporting that occurred during the Company's quarter ended November 30, 2021 that has materially affected, or is reasonably likely to materially affect, such internal control over financial reporting.

 

Part II - OTHER INFORMATION

 

Item 1A. Risk Factors

 

Please refer to the risk factors disclosed in Part I, Item 1A of our Annual Report on Form 10-K for the year ended May 31, 2021, and to the disclosure relating to material weaknesses due to deficiencies in the design of internal controls under  Item 4. Controls and Procedures  of this Form 10-Q for the three and six months ended November 30, 2021, for a listing of factors that could cause actual results or events to differ materially from those contained in any forward-looking statements made by or on behalf of the Company.

 

Item 5. Other Information

 

None.

 

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Item 6. Exhibits

 

Exhibit Description
   
31.1 Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
   
31.2 Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
   
32.1 Certification of Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
   
101.INS XBRL Instance Document.
   
101.SCH XBRL Taxonomy Extension Schema Document.
   
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document.
   
101.LAB XBRL Taxonomy Extension Label Linkbase Document.
   
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document.
   
101.DEF XBRL Taxonomy Extension Definition Linkbase Document.
   
104 Cover Page Interactive Data File (formatted in Inline XBRL and contained in Exhibit 101)

 

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  SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

       SCHMITT INDUSTRIES, INC.
    (Registrant)
     
Date: January 14, 2022   /s/ Philip Bosco
    Philip Bosco, Chief Financial Officer
       

 

 

 

EXHIBIT 31.1

 

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

 

I, Michael R. Zapata, certify that:

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

Date: January14, 2022  

/s/ Michael R. Zapata

      Michael R. Zapata, Chairman and Chief Executive Officer

 

 

EXHIBIT 31.2

 

CERTIFICATION PURSUANT TO 

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

 

I, Philip Bosco, certify that:

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

Date: January 14, 2022   /s/ Philip Bosco
      Philip Bosco, Chief Financial Officer and Treasurer

 

 

Exhibit 32.1

 

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

 

In connection with the Quarterly Report of Schmitt Industries, Inc. (the "Company") on Form 10-Q for the fiscal quarter ended November 30, 2021 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), we, Michael R. Zapata and Philip Bosco, President and Chief Executive Officer and Chief Financial Officer and Treasurer, respectively, of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that to our knowledge:

 

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

 

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

 

/s/ Michael R. Zapata

 
Michael R. Zapata  
Chairman and Chief Executive Officer  
January 14, 2022  
   

/s/ Philip Bosco

 
Philip Bosco  
Chief Financial Officer and Treasurer  
January 14, 2022