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.
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.
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.
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).
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.
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.
There were no new material accounting standards adopted in the six
months ended 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.
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 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.
As of November 30, 2021 and May 31, 2021, assets
held for sale consisted of the following:
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.
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.
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 reflects the restatement adjustments recorded in connection
with the Company’s restatement of its consolidated financial statements:
Restatement of Previously Issued Condensed Consolidated
Financial Statements - Schedule of Prior Period Adjustments
|
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|
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|
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|
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|
|
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 |
Previously Reported
Total Adjustments
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|
|
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|
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 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 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 | | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 | |
$ | — | | |
$ | — | | |
$ | — | | |
|
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|
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|
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|
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 | |
|
|
|
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|
|
|
|
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|
|
| |
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 | |
|
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|
|
|
|
|
|
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 | |
$ | — | | |
$ | — | | |
$ | — | | |
| | |
|
|
|
|
|
|
|
|
|
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|
|
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|
|
| |
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 | |
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.
Ample Hills Business Acquisition - Schedule of Purchase
Price Allocation
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 |
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.
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:
Stock Options and Stock-Based Compensation - Schedule of Restricted Stock Unit Activity
| |
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:
Weighted-Average
Shares and Reconciliation - Schedule of Weighted-Average Number of Shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Three Months Ended November 30, | |
Six Months Ended November 30, |
| |
2021 | |
2020 | |
2021 | |
2020 |
Weighted-average shares (basic) | |
| 3,784,000 | | |
| 3,763,156 | | |
| 3,785,997 | | |
| 3,763,454 | |
Effect of dilutive stock options | |
| 35,616 | | |
| — | | |
| 28,912 | | |
| — | |
Weighted-average shares (diluted) | |
| 3,819,616 | | |
| 3,763,156 | | |
| 3,814,909 | | |
| 3,763,454 | |
NOTE 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.
The Company's future minimum lease payments required
under operating leases that have commenced as of November 30, 2021 were as follows:
Leases - Schedule of Future Minimum Lease Payments for Operating Leases
Other Liabilities
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:
Leases - Schedule of Lease Terms and Discount Rates
|
|
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:
Property and Equipment, Net - Schedule of
Property, Plant and Equipment, Net
| |
November 30, 2021 (As Restated) | |
May 31, 2021 |
Land Land | |
$ | — | | |
$ | 159,000 | |
Buildings and improvements Buildings and Improvements | |
| 1,493,400 | | |
| 2,989,140 | |
Furniture, fixtures and equipment
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
Revenue
Customer
The Company had one customer who accounted for
11.0% of net revenues for the three months ended November 30, 2021. The Company had one customer who accounted for 16.2% of net revenues
for the six months ended November 30, 2020.
NOTE 9 – ACCOUNTS RECEIVABLE, NET
The Company’s accounts receivable, net consisted
of the following:
Accounts Receivable, Net - Schedule of
Accounts Receivable, Net
| |
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:
Inventories, Net - Schedule of Inventories, Current
|
|
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.
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: Segment Information
- Schedule of Segment Reporting Information by Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
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 | |
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.
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:
Intangible Assets - Schedule of Finite-Lived Intangible Assets
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 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 | |
Estimated amortization expense for each of the following years is as
follows:
Intangible Assets - Schedule of Finite-Lived
Intangible Assets Future Amortization Expense
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.
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.
Schmitt Industries
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:
Long-Term Debt - Schedule of Debt
| |
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.