0000922612 true This Form 10-Q/A amends the Original Filing to reflect the correction of errors in the previously issued unaudited interim condensed consolidated financial statements as of and for the six months ended November 30, 2021 related to the Company's accounting treatment of certain liabilities and expenses incurred that the Company failed to accrue for within the proper reporting period. Q2 2022 --05-31 NASDAQ 0000922612 2021-06-01 2021-11-30 0000922612 2021-12-31 0000922612 2021-11-30 0000922612 2021-05-31 0000922612 2021-09-01 2021-11-30 0000922612 2020-09-01 2020-11-30 0000922612 2020-06-01 2020-11-30 0000922612 2020-05-31 0000922612 2020-11-30 0000922612 us-gaap:CommonStockMember 2021-05-31 0000922612 us-gaap:RetainedEarningsMember 2021-05-31 0000922612 us-gaap:CommonStockMember 2020-05-31 0000922612 us-gaap:RetainedEarningsMember 2020-05-31 0000922612 us-gaap:CommonStockMember 2021-06-01 2021-11-30 0000922612 us-gaap:RetainedEarningsMember 2021-06-01 2021-11-30 0000922612 us-gaap:CommonStockMember 2020-06-01 2020-11-30 0000922612 us-gaap:RetainedEarningsMember 2020-06-01 2020-11-30 0000922612 us-gaap:CommonStockMember 2021-11-30 0000922612 us-gaap:RetainedEarningsMember 2021-11-30 0000922612 us-gaap:CommonStockMember 2020-11-30 0000922612 us-gaap:RetainedEarningsMember 2020-11-30 0000922612 us-gaap:InvestorMember 2021-11-30 0000922612 smit:AssetsHeldForSaleMember 2021-06-01 2021-11-30 0000922612 smit:AssetsHeldForSaleMember 2021-11-30 0000922612 smit:AssetsHeldForSaleMember smit:PortlandOregon2765NwNicolaiStMember 2021-11-30 0000922612 smit:AssetsHeldForSaleMember 2021-05-31 0000922612 srt:ScenarioPreviouslyReportedMember 2021-11-30 0000922612 srt:RestatementAdjustmentMember 2021-11-30 0000922612 srt:ScenarioPreviouslyReportedMember 2021-09-01 2021-11-30 0000922612 srt:RestatementAdjustmentMember 2021-09-01 2021-11-30 0000922612 srt:ScenarioPreviouslyReportedMember 2021-06-01 2021-11-30 0000922612 srt:RestatementAdjustmentMember 2021-06-01 2021-11-30 0000922612 srt:ScenarioPreviouslyReportedMember 2021-05-31 0000922612 srt:RestatementAdjustmentMember 2021-05-31 0000922612 srt:ScenarioPreviouslyReportedMember smit:IceCreamMember 2021-09-01 2021-11-30 0000922612 srt:RestatementAdjustmentMember smit:IceCreamMember 2021-09-01 2021-11-30 0000922612 smit:IceCreamMember 2021-09-01 2021-11-30 0000922612 srt:ScenarioPreviouslyReportedMember smit:IceCreamMember 2021-06-01 2021-11-30 0000922612 srt:RestatementAdjustmentMember smit:IceCreamMember 2021-06-01 2021-11-30 0000922612 smit:IceCreamMember 2021-06-01 2021-11-30 0000922612 srt:ScenarioPreviouslyReportedMember smit:MeasurementMember 2021-09-01 2021-11-30 0000922612 srt:RestatementAdjustmentMember smit:MeasurementMember 2021-09-01 2021-11-30 0000922612 smit:MeasurementMember 2021-09-01 2021-11-30 0000922612 srt:ScenarioPreviouslyReportedMember smit:MeasurementMember 2021-06-01 2021-11-30 0000922612 srt:RestatementAdjustmentMember smit:MeasurementMember 2021-06-01 2021-11-30 0000922612 smit:MeasurementMember 2021-06-01 2021-11-30 0000922612 srt:ScenarioPreviouslyReportedMember smit:IceCreamMember 2021-11-30 0000922612 srt:RestatementAdjustmentMember smit:IceCreamMember 2021-11-30 0000922612 smit:IceCreamMember 2021-11-30 0000922612 srt:ScenarioPreviouslyReportedMember smit:MeasurementMember 2021-11-30 0000922612 srt:RestatementAdjustmentMember smit:MeasurementMember 2021-11-30 0000922612 smit:MeasurementMember 2021-11-30 0000922612 srt:ScenarioPreviouslyReportedMember smit:CorporateAssetsMember 2021-11-30 0000922612 srt:RestatementAdjustmentMember smit:CorporateAssetsMember 2021-11-30 0000922612 smit:CorporateAssetsMember 2021-11-30 0000922612 2020-06-01 2021-05-31 0000922612 2020-07-08 2020-07-09 0000922612 2020-07-09 0000922612 smit:RestrictedStockUnitsServiceBasedRSUMember 2021-06-01 2021-11-30 0000922612 us-gaap:EmployeeStockOptionMember 2021-06-01 2021-11-30 0000922612 us-gaap:EmployeeStockOptionMember 2021-11-30 0000922612 smit:TripleNetLeaseAgreementToseiAmericaIncMember 2021-06-01 2021-11-30 0000922612 smit:TripleNetLeaseAgreementToseiAmericaIncMember 2021-11-30 0000922612 smit:TripleNetLeaseAgreementHumboldtLeaseMember 2021-06-01 2021-11-30 0000922612 smit:TripleNetLeaseAgreementHumboldtLeaseMember 2021-11-30 0000922612 smit:TripleNetLeaseAgreementSecondHumboldtLeaseMember 2021-06-01 2021-11-30 0000922612 smit:TripleNetLeaseAgreementSecondHumboldtLeaseMember 2021-11-30 0000922612 smit:HumboldtLeaseMember 2021-11-30 0000922612 us-gaap:OtherLiabilitiesMember 2021-11-30 0000922612 us-gaap:LandMember 2021-11-30 0000922612 us-gaap:LandMember 2021-05-31 0000922612 us-gaap:BuildingAndBuildingImprovementsMember 2021-11-30 0000922612 us-gaap:BuildingAndBuildingImprovementsMember 2021-05-31 0000922612 us-gaap:FurnitureAndFixturesMember 2021-11-30 0000922612 us-gaap:FurnitureAndFixturesMember 2021-05-31 0000922612 us-gaap:SalesRevenueNetMember us-gaap:CustomerConcentrationRiskMember 2021-09-01 2021-11-30 0000922612 us-gaap:SalesRevenueNetMember us-gaap:CustomerConcentrationRiskMember 2020-06-01 2020-11-30 0000922612 smit:IceCreamMember 2020-09-01 2020-11-30 0000922612 smit:MeasurementMember 2020-09-01 2020-11-30 0000922612 smit:IceCreamMember 2020-06-01 2020-11-30 0000922612 smit:MeasurementMember 2020-06-01 2020-11-30 0000922612 smit:IceCreamMember 2021-05-31 0000922612 smit:MeasurementMember 2021-05-31 0000922612 smit:CorporateAssetsMember 2021-05-31 0000922612 smit:MeasurementMember 2020-06-01 2021-05-31 0000922612 smit:IceCreamMember 2020-06-01 2021-05-31 0000922612 smit:MeasurementMember us-gaap:PatentedTechnologyMember 2021-06-01 2021-11-30 0000922612 smit:MeasurementMember us-gaap:PatentedTechnologyMember 2021-11-30 0000922612 smit:IceCreamMember smit:ProprietaryRecipesMember 2021-06-01 2021-11-30 0000922612 smit:IceCreamMember smit:ProprietaryRecipesMember 2021-11-30 0000922612 smit:IceCreamMember smit:CompanyWebsiteMember 2021-06-01 2021-11-30 0000922612 smit:IceCreamMember smit:CompanyWebsiteMember 2021-11-30 0000922612 smit:MeasurementMember us-gaap:PatentedTechnologyMember 2020-06-01 2021-05-31 0000922612 smit:MeasurementMember us-gaap:PatentedTechnologyMember 2021-05-31 0000922612 smit:IceCreamMember smit:ProprietaryRecipesMember 2020-06-01 2021-05-31 0000922612 smit:IceCreamMember smit:ProprietaryRecipesMember 2021-05-31 0000922612 smit:IceCreamMember smit:CompanyWebsiteMember 2020-06-01 2021-05-31 0000922612 smit:IceCreamMember smit:CompanyWebsiteMember 2021-05-31 0000922612 smit:PaycheckProtectionProgramMember smit:AmpleHillsMember 2021-11-30 0000922612 smit:PaycheckProtectionProgramMember smit:AmpleHillsMember 2021-06-01 2021-11-30 0000922612 smit:PaycheckProtectionProgramMember smit:AmpleHillsTwoMember 2021-11-30 0000922612 smit:PaycheckProtectionProgramMember smit:AmpleHillsTwoMember 2021-06-01 2021-11-30 0000922612 smit:PaycheckProtectionProgramMember 2021-11-30 0000922612 smit:PaycheckProtectionProgramMember srt:ParentCompanyMember 2021-05-31 0000922612 smit:PaycheckProtectionProgramMember 2020-06-01 2021-05-31 0000922612 smit:PaycheckProtectionProgramMember 2021-05-31 iso4217:USD xbrli:shares iso4217:USD xbrli:shares xbrli:pure utr:sqft

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q/A 

Amendment No.1

 

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

 

 

  

 

EXPLANATORY NOTE

 

On September 20, 2022, Schmitt Industries, Inc. (the “Company”, “we”, “our” or “us”) filed a Current Report on Form 8-K disclosing that the Company determined that our previously issued financial statements contained in our Quarterly Reports on Form 10-Q for the periods ended August 31, 2021, November 30, 2021, and February 28, 2022 should no longer be relied upon due to the ineffective application of cut-off procedures resulting primarily in the exclusion of certain general and administrative expenses from the statement of operations in the Company’s unaudited interim condensed consolidated financial statements during the fiscal year ended May 31, 2022. For additional information, please refer to that certain Form 8-K, filed on September 20, 2022.

 

Background of Restatement

 

This Amendment No. 1 to the Quarterly Report on Form 10-Q/A (“Form 10-Q/A”) amends and restates certain items noted below in the Quarterly Report on Form 10-Q of the Company for the quarter ended November 30, 2021, as originally filed with the Securities and Exchange Commission (the “SEC”) on January 14, 2022 (the “Original Filing”). This Form 10-Q/A amends the Original Filing to reflect the correction of errors in the previously issued unaudited interim condensed consolidated financial statements as of and for the three and six months ended November 30, 2021 related to the Company’s accounting treatment of certain liabilities and expenses incurred that the Company failed to accrue for within the proper reporting period.

 

For the convenience of the reader, we have included all items in this Form 10-Q/A which supersedes in its entirety the Original Form 10-Q.

 

The following sections in the Original Filing have been revised in this Form 10-Q/A to reflect the restatement:

 

·Part I, Item 1, “Financial Statements”

·Part I, Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations"

·Part I, Item 4, “Controls and Procedures”

·Part II, Item 1A, “Risk Factors”

·Part II – Item 6. Exhibits.

·the Chief Executive Officer and Chief Financial Officer certifications in Exhibits 31.1, 31.2, 32.1, and 32.2

 

This Form 10-Q/A does not reflect adjustments for events occurring after the filing of the Original Filing except to the extent that they are otherwise required to be included and discussed herein and did not substantively modify or update the disclosures herein other than as required to reflect the adjustments described above. See Note 2 to the accompanying unaudited interim condensed consolidated financial statements, set forth in Item 1 of this Form 10-Q/A, for details of the restatement and its impact on the unaudited interim condensed consolidated financial statements.

 

Internal Control Considerations

 

In connection with the restatement, the Audit Committee concluded, with concurrence of management, that there were additional deficiencies in our internal control over financial reporting that constituted additional material weaknesses as of November 30, 2021. For a discussion of management's consideration of our disclosure controls and procedures and the material weaknesses identified, See Part I, Item 4, Controls and Procedures of this Form 10-Q/A.

 

 

  

 

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 25
     
Item 3: Quantitative and Qualitative Disclosures about Market Risk 31
     
Item 4: Controls and Procedures 31
     
Part II - OTHER INFORMATION  
     
Item 1A: Risk Factors 33
     
Item 5: Other Information 34
     
Item 6: Exhibits 34
     
Signatures    
     
Certifications    

 

 

  

 

PART I - FINANCIAL INFORMATION

 

Item 1: Financial Statements

 

     SCHMITT INDUSTRIES, INC. 

CONDENSED CONSOLIDATED BALANCE SHEETS 

(UNAUDITED)  

 

  

November 30, 2021

(As Restated)

  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   1,830,445    1,553,310 
Prepaid expenses   134,209    198,345 
Income taxes receivable   3,128    18,057 
Total current assets   7,925,741    6,957,047 
Leasehold assets   11,688,920    10,448,486 
Property and equipment, net   2,329,215    2,824,017 
Property and equipment held for sale, net   433,410    174,847 
Leasehold, utilities and ERP deposits   721,773    431,808 
Other assets          
Intangible assets, net   273,968    337,725 
TOTAL ASSETS  $23,373,027   $21,173,930 
           
LIABILITIES & STOCKHOLDERS' EQUITY          
Current liabilities          
Accounts payable  $657,902   $583,750 
Accrued commissions   58,079    60,614 
Accrued payroll liabilities   614,483    527,608 
Accrued liabilities   394,248    465,146 
Customer deposits and prepayments   117,754    93,364 
Other accrued liabilities   771,664    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   4,715,182    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   18,669,030    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   (7,588,731)   (8,453,776)
Total stockholders' equity   4,703,997    3,769,583 
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY  $23,373,027   $21,173,930 

 

See accompanying notes to condensed consolidated financial statements

  

3 

  

 

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

(As Restated) 

      2020      

2021

(As Restated) 

      2020  
Net sales   $ 2,961,965     $ 2,029,712     $ 6,721,140     $ 3,537,197  
Cost of revenue     1,341,279       1,067,599       2,810,430       1,967,440  
 Gross profit     1,620,686       962,113       3,910,710       1,569,757  
Operating expenses                                
Selling, general and administrative     3,887,148       3,091,516       8,537,700       5,178,232  
Transaction costs                       125,167  
Research and development     5,580       17,877       14,845       35,330  
Total operating expenses     3,892,728       3,109,393       8,552,545       5,338,729  
Operating loss     (2,272,042 )     (2,147,280 )     (4,641,835 )     (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 )     357,430       (36,836 )
Income (loss) before income taxes     2,481,024       (2,364,832 )     872,645       (2,618,840 )
Income tax provision (benefit)     (1,825)       1,637       7,600       (403,030 )
Net income (loss)   $ 2,482,849     $ (2,366,469 )   $ 865,045     $ (2,215,810 )
                                 
Net income (loss) per common share                                
Basic   $ 0.66       (0.63 )   $ 0.23     $ (0.59 )
Weighted-average number of common shares, basic     3,784,000       3,763,156       3,785,997       3,763,454  
Diluted   $ 0.65     $ (0.63 )   $ 0.23     $ (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 

  

 

 

  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

(As Restated)

  2020
Cash flows relating to operating activities          
Net income (loss)  $865,045   $(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   (277,135)   (60,250)
Prepaid expenses   64,136    (46,883)
Deposits on capital improvements to factory         (273,278)
Rent, utility deposits and ERP deposits   (289,965)   (79,170)
Leasehold assets         (360,896)
Income taxes receivable   14,929    (80,602)
Increase (decrease) in:          
Accounts payable   74,152    503,864 
Accrued liabilities and customer deposits   114,906    433,514 
Leasehold liabilities         773,670 
Net cash used in operating activities  $(4,327,887)  $(2,783,686)
           
Cash flows relating to investing activities          
Acquisition of Ample Hills  $     $(1,711,127)
Purchases of property and equipment   (194,429)   (258,371)
Proceeds from the sale of property and equipment   4,797,924       
Net cash provided by (used in) investing activities  $4,603,495   $(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 

  

 

     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 (As Restated)   —            865,045    865,045 

Balance, November 30, 2021

(As Restated)

   3,811,142   $12,292,728   $(7,588,731)  $4,703,997 

 

 

   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 

  

 

SCHMITT INDUSTRIES, INC. 

NOTES TO THE 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 14 – 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 3 – 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 6 – 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 6 – 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 – RESTATEMENT OF PREVIOUSLY ISSUED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

As previously disclosed on Form 8-K filed on September 20, 2022, the Company determined that the Company’s previously issued condensed consolidated financial statements for the period ended November 30, 2021 should no longer be relied upon due to errors in such condensed consolidated financial statements related to certain liabilities and expenses incurred that the Company failed to accrue for within the proper reporting periods, resulting primarily in the exclusion of certain general and administrative expenses from the statement of operations in the condensed financial statements.

 

The following errors were identified as part of the restatement:

 

A.The Company discovered expenses and liabilities incurred during the three and six month periods ended November 30, 2021 that it failed to accrue for properly. The additional expenses are primarily related to unpaid and unrecorded utility charges, professional fees and other operating expenses.

 

B.The Company discovered that it did not properly record approximately $72,000 in leasehold security deposits that it acquired from Ample Hills in the Transactions in fiscal year ended May 31, 2021. The Company determined that the error was immaterial to the prior year and has recorded this transaction as of August 31, 2021 as an out of period adjustment.

 

9 

  

 

The following reflects the restatement adjustments recorded in connection with the Company’s restatement of its consolidated financial statements:

                             
Balance Sheet  As of November 30, 2021   
   As previously reported  Total Adjustments  As Restated  Reference
ASSETS            
Current Assets                  
Cash and cash equivalents  $4,572,774   $     $4,572,774    
Accounts receivable, net   1,385,185          1,385,185    
Inventories, net   1,825,636    4,809    1,830,445    A
Prepaid expenses   134,209          134,209    
Income tax receivable   5,701    (2,573)   3,128    A
Total current assets   7,923,505    2,236    7,925,741    A
Leasehold assets   11,688,920          11,688,920    
Property and equipment, net   2,316,494    12,721    2,329,215    A
Property and equipment held for sale, net   433,410          433,410    
Leasehold, utilities, and ERP deposits   657,490    64,283    721,773    A, B
Other assets                  
Intangible assets, net   273,968          273,968    
Total Assets  $23,293,787   $79,240   $23,373,027    A, B
                   
LIABILITIES AND STOCKHOLDERS' EQUITY                  
Current liabilities                  
Accounts payable  $677,791   $(19,889)  $657,902    A
Accrued commissions   63,076    (4,997)   58,079    A
Accrued payroll liabilities   614,483          614,483    
Accrued liabilities   394,745    (497)   394,248    A
Customer deposits and prepayments   117,754          117,754    
Other accrued liabilities   389,213    382,451    771,664    A
Current portion of long-term lease liabilities   1,224,648          1,224,648    
Current portion of long-term debt   876,404          876,404    
Total current liabilities   4,358,114    357,068    4,715,182    A
Long-term debt   2,594,618          2,594,618    
Long-term leasehold liabilities   11,359,230          11,359,230    
Total liabilities   18,311,962    357,068    18,669,030    A
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   12,292,728          12,292,728    
Accumulated deficit   (7,310,903)   (277,828)   (7,588,731)   A, B
Total stockholders' equity   4,981,825    (277,828)   4,703,997    A, B
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY  $23,293,787   $79,240   $23,373,027    A, B

 

10 

  

  

                                 
Statement of Operations  For the three months ended November 30, 2021   
   As previously reported  Total Adjustments  As Restated  Reference
Net sales  $2,961,965   $     $2,961,965      
Cost of revenue   1,356,874    (15,595)   1,341,279     A  
Gross profit   1,605,091    15,595    1,620,686     A  
Operating expenses                     
Selling, general and administrative   4,161,890    (274,742)   3,887,148     A  
Research & development   5,580          5,580      
Total operating expenses   4,167,470    (274,742)   3,892,728     A  
Operating loss   (2,562,379)   290,337    (2,272,042)    A  
Gain on sale of property and equipment   4,598,095          4,598,095      
Interest expense   (18,303)         (18,303)     
Other income, net   173,274          173,274      
Income before income taxes   2,190,687    290,337    2,481,024     A  
Income tax provision (benefit)   2,775    (4,600)   (1,825)    A  
Net income  $2,187,912   $294,937   $2,482,849     A  
Net income per common share:                    
Basic  $0.58   $0.08   $0.66     A  
Weighted average number of common shares, basic   3,784,000          3,784,000      
Diluted  $0.57   $0.08   $0.65     A  
Weighted average number of common shares, diluted   3,819,616          3,819,616      

 

 

                             
   For the six months ended November 30, 2021   
   As previously reported  Total Adjustments  As Restated   
Net Sales  $6,721,140   $     $6,721,140    
Cost of revenue   2,706,849    103,581    2,810,430    A
Gross profit   4,014,291    (103,581)   3,910,710    A
Operating expenses                  
Selling, general and administrative   8,292,576    245,124    8,537,700    A
Research & development   14,845          14,845    
Total operating expenses   8,307,421    245,124    8,552,545    A
Operating loss   (4,293,130)   (348,705)   (4,641,835)   A
Gain on sale of property and equipment   4,598,095          4,598,095    
Forgiveness of PPP loans   588,534          588,534    
Interest expense   (29,579)         (29,579)   
Other income, net   285,303    72,127    357,430    B
Income before income taxes   1,149,223    (276,578)   872,645    A, B
Income tax provision (benefit)   6,350    1,250    7,600    A
Net income  $1,142,873   $(277,828)  $865,045    A, B
Net income per common share                  
Basic  $0.30   $(0.07)  $0.23    A, B
Weighted average number of common shares, basic   3,785,997          3,785,997    
Diluted  $0.30   $(0.07)  $0.23    A, B
Weighted average number of common shares, diluted   3,814,909          3,814,909    

 

 

11 

  

 

                             
Statement of Cash Flows  For the six months ended November 30, 2021   
   As previously reported  Total Adjustments  As Restated  Reference
Cash flows relating to operating activities                  
 Net income  $1,142,873   $(277,828)  $865,045    A, B
Adjustments to reconcile net income to net cash used in operating activities:                  
Forgiveness of Paycheck Protection Program Loan   (588,534)         (588,534)   
Depreciation and amortization   294,597          294,597    
Gain on disposal of property and equipment   (4,598,095)         (4,598,095)   
Stock-based compensation   69,369          69,369    
Non-cash lease costs   159,248          159,248    
(Increase) decrease in:                  
Accounts receivable, net   (230,540)         (230,540)   
Inventories, net   (272,326)   (4,809)   (277,135)   A
Prepaid expenses   64,136          64,136    
Rent, utility deposits, & ERP deposits   (225,682)   (64,283)   (289,965)   A, B
Income taxes receivable   12,356    2,573    14,929    A
(Increase) decrease in:                  
Accounts payable   94,041    (19,889)   74,152    A
Accrued liabilities and customer deposits   (262,052)   376,958    114,906    A
Net cash used in operating activities  $(4,340,609)  $12,722   $(4,327,887)   A, B
Cash flows relating to investing activities                  
 Purchases of property and equipment   (181,707)   (12,722)   (194,429)   A
 Proceeds from the sale of property and equipment   4,797,924          4,797,924    
Net cash provided by investing activities  $4,616,217   $(12,722)  $4,603,495    A
Cash flows relating to financing activities                  
Proceeds from Paycheck Protection Program  $264,476   $     $264,476    
Net cash provided by financing activities  $264,476   $     $264,476    
Increase in cash and cash equivalents   540,084         $540,084    
Cash and cash equivalents, beginning of period   4,032,690          4,032,690    
Cash and cash equivalents, end of period  $4,572,774   $     $4,572,774    
Supplemental disclosure of cash flow information                  
Cash paid for income taxes, net of refunds  $10,606   $     $10,606    
Cash paid for interest  $     $     $      

 

12 

  

 

                                 
Segment Information-Ice Cream  For the three months ended November 30, 2021   
   As previously reported  Total Adjustments  As Restated  Reference
Revenue, net  $1,979,616   $     $1,979,616      
Gross Margin  $1,128,655   $(24,512)  $1,104,143    A 
Gross Margin %   57.0%   (1.2%)   55.8%   A 
Operating loss  $(1,922,873)  $190,542   $(1,732,331)   A 
Depreciation expense  $106,747   $     $106,747      
Amortization expense  $5,733   $     $5,733      
Capital expenditures  $57,074   $11,053   $68,127    A 

 

                                 
   For the six months ended November 30, 2021   
   As previously reported  Total Adjustments  As Restated   
Revenue, net  $4,935,371   $     $4,935,371      
Gross Margin  $3,137,845   $(97,522)  $3,040,323    A 
Gross Margin %   63.6%   (2.0%)   61.6%   A 
Operating loss  $(3,138,091)  $(222,329)  $(3,360,420)   A 
Depreciation expense  $214,639   $     $214,639      
Amortization expense  $11,466   $     $11,466      
Capital expenditures  $181,707   $12,722   $194,429    A 

 

                                 
Segment Information-Measurement  For the three months ended November 30, 2021   
   As previously reported  Total Adjustments  As Restated   
Revenue, net  $982,349   $     $982,349      
Gross Margin  $476,436   $40,107   $516,543    A 
Gross Margin %   48.5%   4.1%   52.6%   A 
Operating loss  $(639,506)  $99,795   $(539,711)   A 
Depreciation expense  $6,493   $     $6,493      
Amortization expense  $26,145   $     $26,145      
Capital expenditures  $     $     $        

 

                                 
   For the six months ended November 30, 2021   
   As previously reported  Total Adjustments  As Restated   
Revenue, net  $1,785,769   $     $1,785,769      
Gross Margin  $876,446   $(6,059)  $870,387    A 
Gross Margin %   49.10%   (0.3%)   48.8%   A 
Operating loss  $(1,155,039)  $(126,376)  $(1,281,415)   A 
Depreciation expense  $16,200   $     $16,200      
Amortization expense  $52,292   $     $52,292      
Capital expenditures  $     $     $        

 

                                 
Segment Information- Assets  As of November 30, 2021   
   As previously reported  Total Adjustments  As Restated   
Ice Cream Segment  $9,898,380   $81,814   $9,980,194    A, B 
Measurement Segment  $2,270,087   $(2,574)  $2,267,513    A 
Corporate assets   11,125,320        11,125,320    
Total Assets  $23,293,787  $79,240  $23,373,027   A, B 

 

13 

  

 

NOTE 3 - 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.

 

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     25,445
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

 

14 

  

 

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 13 – Intangible Assets, net for further details regarding the results of the Ice Cream Segment.

 

NOTE 4 - 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.

 

15 

  

 

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 5 – 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.

 

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 

 

16 

  

 

NOTE 6 – 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.

 

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.

 

17 

  

 

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 %

 

NOTE 7 – PROPERTY AND EQUIPMENT, NET

 

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

 

  

November 30, 2021

(As Restated)

  May 31, 2021
Land   $     $159,000 
Buildings and improvements    1,493,400    2,989,140 
Furniture, fixtures and equipment    1,827,315    1,788,784 
   Total property and equipment   3,320,715    4,936,924 
Less: accumulated depreciation   (991,500)   (2,112,907)
Total property and equipment, net  $2,329,215   $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 8 - 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.

 

18 

  

 

NOTE 9 – 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 10 – INVENTORIES, NET

 

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

 

   

November 30, 2021

(As Restated) 

  May 31, 2021
Raw materials   $ 887,829     $ 901,464  
Work-in-process     28,958       35,160  
Finished goods     1,014,437       731,826  
Total inventories     1,931,224       1,668,450  
Less: inventory reserves     (100,779 )     (115,140 )
Inventories, net   $ 1,830,445     $ 1,553,310  
                           

 

NOTE 11 - 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.

 

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.

 

19 

  

 

NOTE 12 - SEGMENT INFORMATION

 

As described in Note 3 - 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 (As Restated)  2020
   Ice Cream  Measurement  Ice Cream  Measurement
Revenue, net  $1,979,616   $982,349   $1,158,989   $870,723 
Gross margin  $1,104,143   $516,543   $467,714   $494,399 
Gross margin %   55.8%   52.6%   40.4%   56.8%
Operating loss  $(1,732,331)  $(539,711)  $(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  $68,127   $     $111,387   $13,680 

 

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

 

                                 
   Six Months Ended November 30,
   2021 (As Restated)  2020
   Ice Cream  Measurement  Ice Cream  Measurement
Revenue, net  $4,935,371   $1,785,769   $1,660,409   $1,876,788 
Gross margin  $3,040,323   $870,387   $681,136   $888,621 
Gross margin %   61.6%   48.8%   41.0%   47.4%
Operating loss  $(3,360,420)  $(1,281,415)  $(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  $194,429   $     $232,051   $26,320 

 

Segment Assets

 

   November 30, 2021 (As Restated)  May 31, 2021
Segment assets to total assets          
Ice Cream Segment  $9,980,194   $10,713,832 
Measurement Segment   2,267,513    2,565,701 
Corporate assets   11,125,320    7,894,397 
Total assets  $23,373,027   $21,173,930 

 

20 

  

 

NOTE 13 - 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.

 

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.

 

21 

  

 

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 

 

22 

  

 

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 14 – 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.

 

23 

  

 

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 15 – 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 16 - 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 unaudited interim condensed consolidated financial statements.

 

24 

  


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/A (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.

 

25 

  

 

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

 

   Three Months Ended November 30,  YoY Change
  

2021

(As Restated) 

  %  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%   2,029,712    100.0%   932,253    45.9%
Cost of sales   1,341,279    45.3%   1,067,599    52.6%   273,680    25.6%
Gross profit   1,620,686    54.7%   962,113    47.4%   658,573    68.5%
Selling, general and administrative   3,887,148    131.2%   3,091,516    152.3%   795,632    25.7%
Research & development   5,580    0.2%   17,877    0.9%   (12,297)   (68.8%)
Total operating expenses   3,892,728    131.4%   3,109,393    153.2%   783,335    25.2%
Operating loss   (2,272,042)   (76.7%)   (2,147,280)   (105.8%)   (124,762)   5.8%
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   2,481,024    83.8%   (2,364,832)   (116.5%)   4,845,856    204.9%
Income tax provision   (1,825)   (0.1%)   1,637    0.1%   3,462    (211.5%)
Net income (loss)  $2,482,849    83.8%  $(2,366,469)   (116.6%)  $4,849,318    204.9%

 

 

  

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

 

   Six Months Ended November 30,     YoY Change
  

2021

(As Restated)

   %  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   2,810,430    41.8%   1,967,440    55.6%   842,990    42.8%
Gross profit   3,910,710    58.2%   1,569,757    44.4%   2,340,953    149.1%
Selling, general and administrative   8,537,700    127.0%   5,178,232    146.4%   3,359,468    64.9%
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   8,552,545    127.2%   5,338,729    150.9%   3,213,816    60.2%
Operating loss   (4,641,835)   (69.1%)   (3,768,972)   (106.6%)   (872,863)   23.2%
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   357,430    5.3%   (36,836)   (1.0%)   394,266    1070.3%
Income (loss) before income taxes   872,645    13.0%   (2,618,840)   (74.0%)   3,491,485    133.3%
Income tax provision (benefit)   7,600    0.1%   (403,030)   (11.4%)   410,630    101.9%
Net income (loss)  $865,045    12.9%  $(2,215,810)   (62.6%)  $3,080,855    139.0%

 

 

  · 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.

 

  · Gross margin increased to 54.7% 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 58.2%, 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 $783,335, or 25.2%, to $3,892,728 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 $3,213,816, or 60.2%, to $8,552,545 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 $2,482,849, or $0.65, 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 $865,045, or $0.23, 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 $194,429 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 $82,631 was the result of expenditures on equipment upgrades at the Company’s Red Hook factory in Brooklyn, New York.

 

26 

  

 

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. 

 

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 $13,806 and $8,985, respectively.

 

27 

  

 

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   $(91,019)   (4.8%)

 

Gross Margin – Ice Cream Segment gross margin for the three months ended November 30, 2021 increased to 55.8%, 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 61.6%, 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 52.6%, 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 48.8% 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.

 

Operating Expenses – Operating expenses increased $783,335, or 25.2%, to $3,892,728 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 $3,213,816 or 60.2%, to $8,552,545 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 $631,278 or 28.6%, to $2,836,474 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 $3,019,255, or 89.3%, to $6,400,743 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 $152,057, or 16.8%, to $1,056,254 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 $194,561, or 9.9%, to $2,151,802 for the six months ended November 30, 2021, as compared to $1,957,241 for 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 g