| ITEM 7. |
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
OVERVIEW
Schmitt Industries Inc. (“Schmitt,”
“Company,” “Registrant” and “We”) is a holding company owning subsidiaries engaged in diverse business
activities. Schmitt’s operating businesses include propane tank monitoring solutions, precision measurement solutions and ice cream
production and distribution. Our subsidiaries include our Measurement Segment (“SMS”) and our Ice Cream Segment, which is
comprised of Ample Hills.
We
continually assess strategic opportunities to improve shareholder value. On April 14, 2022, the Company announced its intention to focus
on Ample Hills as its core business. This focus will enable Schmitt to accelerate its Ample Hills growth strategy while saving costs and
focusing resources on Ample Hills as Schmitt’s core business line. In conjunction with the focus on Ample Hills, the Company announced
a strategic review of its Schmitt Measurement Systems business lines based in Portland, Oregon.
On
July 9, 2020, Ample Hills Acquisition LLC (“Buyer”) entered
into an Asset Purchase Agreement (the “Agreement”), dated as of June 29, 2020, with Ample Hills. The Transactions closed on
July 9, 2020, the day after a sale order approving the Transactions was entered by the Bankruptcy Court. 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 Bankruptcy Courts. 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.
RECENT DEVELOPMENTS
Strategic Highlights
As disclosed above, on April 14, 2022, the Company
announced its intention to focus on Ample Hills and the Ice Cream Segment as its core business.
On May 2, 2022, the Company filed a shelf registration
statement for the sale of up to $100,000,000 in debt and equity securities. On May 20, 2022, the Company entered into a sales agreement
with Roth Capital Partners, LLC and filed a prospectus supplement for an at-the-market offering of up to $5,000,000 in common stock.
Subsequent to Fiscal Year 2022, the Company announced
additional strategic updates, including the sale and leaseback of the Nicolai buildings in Portland for $3.5 million gross sales proceeds.
The real estate transaction closed on July 18, 2022.
On July 20, 2022, the Company announced that it
entered into a non-binding term sheet which contemplates a potential reverse merger with Proton Green, LLC and the spin-off of Schmitt’s
Ample Hills business to pre-merger shareholders of Schmitt’s common stock. It is proposed that Proton Green would become a wholly
owned subsidiary of Schmitt, the Company would be renamed “Proton Green Corporation,” and the common stock would continue
to trade on the Nasdaq under a new symbol. If consummated, Ample Hills would become a standalone entity and the newly merged company would
retain any remaining components of the SMS businesses.
On September 17, 2022, the Company received notice
of termination of the previously announced non-binding term sheet with Proton Green regarding the reverse merger and spin-off of Schmitt’s
Ample Hills business. As a result of the termination, the transactions contemplated by the term sheet will not proceed.
SIGNIFICANT ACCOUNTING POLICIES
The analysis of the Company’s financial
condition and results of operations are based upon our Consolidated Financial Statements, which have been prepared in accordance with
Generally Accepted Accounting Principles in the U.S. (“GAAP”).
In preparing the Consolidated Financial Statements
certain estimates and judgments are required that affect the reported amounts within the Consolidated Statement of Operations and Balance
Sheet. Note–3 - Summary of Significant Accounting Policies, in the accompanying Notes to the Consolidated Financial Statements
describes the significant accounting policies and methods used in the preparation of our Consolidated Financial Statements.
Management asserts the estimates, assumptions
and judgments involved in the accounting policies described in Note–3 - Summary of Significant Accounting Policies have the
greatest potential impact on our Consolidated Financial Statements and have deemed these to be our critical accounting policies and estimates.
Revenue Recognition
The Company generates revenues from the following
sources: (i) retail restaurant sales, (ii) factory sales, (iii) measurement product sales, and (iv) remote tank monitoring services.
Retail Restaurant Sales, net
The Company's Ice Cream Segment generates revenues
from retail restaurant sales to its end-user customers at the time of sale, net of discounts, coupons, employee meals, and complimentary
meals and gift cards. Sales tax is collected from customers and remitted to governmental authorities and is presented on a net basis within
revenue in our Consolidated Statement of Operations.
Factory Sales, net
The Company’s Ice Cream Segment generates
revenues from sales of finished goods from its Brooklyn, New York factory, including wholesale, e-commerce, and direct-to-consumer
sales. These revenues, net of sales tax paid to states, are recognized when control of the goods is transferred to the customer, in accordance
with the terms of the applicable agreement. The Company also generates revenue by providing manufacturing production services to third
parties and recognizes revenues as services are provided to the customer.
Measurement Product Sales
The Company’s Measurement Segment determines
the amount of revenue it recognizes associated with the transfer of each product. For sales of products to all customers, each transaction
is evaluated to determine whether there is approval and commitment from both the Company and the customer for the transaction; whether
the rights of each party are specifically identified; whether the transaction has commercial substance; whether collectability from the
customer is probable at the inception of the contract and whether the transaction amount is defined. If a transaction to sell products
meets all of the above criteria, revenue is recognized for the sales of product at the time of shipment.
The Company incurs commission expense associated
with the sales of certain measurement products. The Company applies the practical expedient allowed under Accounting Standards Codification
(“ASC”) 340-40-25-4 by recognizing the expense at the time the product is shipped. These amounts are recorded within general,
administrative and sales expense. The Company also incurs costs related to shipping and handling of its products, the costs of which are
expensed as incurred as a component of cost of sales.
Remote Tank Monitoring Services
The Company's Measurement Segment revenues associated
with the Xact product line include satellite focused remote tank monitoring products and related monitoring services for markets in the
Internet of Things environment (“IoT”).
The Company determines the amount of revenue it
recognizes associated with the transfer of such services. For delivery of monitoring services to all customers, each transaction is evaluated
to determine whether there is approval and commitment from both the Company and the customer for the transaction; whether the rights of
each party are specifically identified; whether the transaction has commercial substance; whether collectability from the customer is
probable at the inception of the contract and whether the transaction amount is defined. If a transaction to provide monitoring services
meets all of the above criteria, revenue is recognized at the completion of the month in which monitoring services are provided.
Customer Deposits and Prepayments
The Company defers revenue recognition of revenues
in instances where consideration is received from customers in advance of the Company completing its obligations in exchange for such
consideration.
Business Combinations
In accordance with ASC 805 – Business
Combinations (“ASC 805”), the Company allocates the purchase consideration to the identifiable assets
acquired and liabilities assumed in business combinations based on their acquisition-date fair values. The excess of the purchase consideration
over the amounts assigned to the identifiable assets and liabilities is recognized as goodwill, or if the fair value of the net assets
acquired exceeds the purchase consideration, a bargain purchase gain is recorded. Factors giving rise to goodwill generally include operational
synergies that are anticipated as a result of the business combination and growth expected to result in economic benefits from access
to new customers and markets. The fair values of identifiable intangible assets acquired in business combinations are generally determined
using an income approach, requiring financial forecasts and estimates as well as market participant assumptions.
The incremental financial results of the Ample
Hills acquisition are included in the Company’s consolidated financial results from the respective acquisition date.
Bargain Purchase Gain
In
connection with the acquisition of Ample Hills during Fiscal 2021, the Company recorded an initial bargain purchase gain of $1,271,615
that was recorded as a component of other income on the Consolidated Statement of Operations. 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 during the year, which resulted in a reduction in the bargain purchase gain for Fiscal 2021 to $1,138,808.
The adjustments related to additional cure payments made during the 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 below, acquired over the estimated fair value of the consideration transferred to the sellers and their landlords. In accordance
with ASC 805, we have estimated the fair value of the net assets acquired as of the acquisition date.
Intangible Assets and Impairment
Indefinite-Lived Intangible Assets
Definite-lived and indefinite-lived intangible
assets arising from business combinations include patented technology, proprietary recipes, websites and trademarks and trade names. Definite-lived
intangible assets are amortized over the estimated period during which the asset is expected to contribute directly or indirectly to future
cash flows. Intangible assets that are considered to be indefinite-lived are not amortized.
Long-lived assets and certain identifiable intangible
assets to be held and used are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of
such assets may not be recoverable. Determination of recoverability is based on an estimate of undiscounted future cash flows resulting
from the use of the asset and its eventual disposition. Measurement of any impairment loss for long-lived assets and certain identifiable
intangible assets that management expects to hold, and use is based on the amount by which the carrying value exceeds the fair value of
the asset.
Inventories, net
Inventories are valued at the lower of cost or
net realizable value with cost determined on the average cost basis. Costs included in inventories consist of materials, labor and manufacturing
overhead, which are related to the purchase or production of inventories. Write-downs, when required, are made to reduce excess inventories
to their net realizable values. Such estimates are based on assumptions regarding future demand and market conditions. If actual conditions
become less favorable than the assumptions used, an additional inventory write-down may be required.
Lease Accounting – Leases
The Company evaluates their leases to determine
if they have the right to control the use of an asset, or groups of assets, for a period of time in exchange for consideration. If the
determine that they have the right to obtain substantially all of the economic benefits arising from the use of such asset, the recognize
a right-of-use asset and lease liability. The Company evaluates each lease to estimate their expected term which includes renewal options
that they are reasonably assured that they will exercise and they also evaluate the classification of the lease as either an operating
lease or a finance lease. As the Company’s leases do not provide an implicit rate, the Company must estimate an incremental borrowing
rate based on the information available at the time the lease is commenced or amended. The estimated rate is directly utilized in determining
the present value of the lease payments. The Company estimated the incremental borrowing rate based on prevailing financial market conditions,
peer company credit analyses and management judgment. The Company asses their right-of-use assets for impairment whenever events or changes
in circumstances indicate that the carrying value of such assets may not be recoverable.
Changes in assumptions regarding lease renewals
and estimated incremental borrowing rates may produce materially different amounts in the initial recognition of right-of-use assets and
lease liabilities. Additionally, an inability to perform on the Company’s strategic revenue and cash flow growth plans could result
in the recognition of impairment losses in future periods and could be material.
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 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 financial statements in accordance with ASC 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.
Discussion of Operating Results From Continuing
Operations
After
the acquisition of Ample Hills on July 9, 2020, the Company determined they have two segments: the Measurement Segment and the Ice Cream
Segment. On April 14, 2022, the Company announced its intention to focus on the Ice Cream Segment as its core business and simultaneously
launch a strategic review of the Company’s Measurement Segment, including the Xact and Acuity business lines. Management anticipates
disposing of the Measurement Segment through multiple transactions involving the sale of legal entities, assets, or a combination thereof.
In accordance with ASC 205-20, Presentation of Financial Statemen–s - Discontinued Operations, the Company determined that
the Xact business line met the conditions for a discontinued operation and is recorded as such in the consolidated financial statements.
The Company reports financial results for discontinued operations separately from continuing operations in order to distinguish the financial
impact of the potential disposal transaction from ongoing operations. Prior financial information has been updated to reflect the required
presentation for discontinued operations under ASC 205-20. See Note 4 – Assets Held for Sale and Operations Classified as Discontinued
Operations for further details.
COVID-19 Update
As
of May 31, 2022, all of our manufacturing facilities and retail shops were operational (except for new leases with shop openings forthcoming) .
Throughout the COVID-19 pandemic, the Company has been adhering to mandates and other guidance from local governments and health authorities,
including the World Health Organization and the Centers for Disease Control and Prevention. The Company has taken extraordinary measures
and invested significantly in practices to protect employees and reduce the risk of spreading the virus, while continuing to operate where
permitted and to the extent possible. These actions include additional cleaning of our facilities, staggering crews, incorporating visual
cues to reinforce social distancing, providing face coverings and gloves, as well as implementing daily health validation at our manufacturing
and office facilities. We expect to continue to incur costs to maintain these precautionary measures for the foreseeable future. The health
and safety of our employees and our communities is our highest priority.
Key Leadership Changes
On October 22, 2021, the Company announced the
appointment of Alex Zyngier to the Company Board of Directors, effective October 22, 2021. Mr. Zyngier replaces Steven Strom, who resigned
from the Board of Directors. On September 30, 2022, Lillian Tung tendered her resignation from the Board of Directors of the Company.
Neither Ms. Tung’s nor Mr. Strom's resignation was the result of any disagreements with the Company on any matters relating to its
operations, policies and practices.
Andrew Hines’ term as member of the Board
of Directors ended on December 10, 2021 as he did not stand for re-election at the Company’s 2021 annual meeting of the shareholders.
His former seat remains vacant as of May 31, 2022.
RESULTS OF OPERATIONS
| | |
Fiscal Year ended May 31, | |
YoY Change |
| | |
2022 | |
% | |
2021 | |
% | |
$ | |
% |
| Ice Cream Segment revenues | |
$ | 8,315,486 | | |
| 84.1 | % | |
$ | 4,043,436 | | |
| 72.2 | % | |
$ | 4,272,050 | | |
| 105.7 | % |
| Measurement Segment revenues | |
| 1,577,724 | | |
| 15.9 | % | |
| 1,557,023 | | |
| 27.8 | % | |
| 20,701 | | |
| 1.3 | % |
| Total revenue, net | |
| 9,893,210 | | |
| 100.0 | % | |
| 5,600,459 | | |
| 100.0 | % | |
| 4,292,751 | | |
| 76.6 | % |
| Cost of revenue | |
| 4,824,639 | | |
| 48.8 | % | |
| 3,535,778 | | |
| 63.1 | % | |
| 1,288,861 | | |
| 36.5 | % |
| Gross profit | |
| 5,068,571 | | |
| 51.2 | % | |
| 2,064,681 | | |
| 36.9 | % | |
| 3,003,890 | | |
| 145.5 | % |
| Selling, general and administrative | |
| 15,644,001 | | |
| 158.1 | % | |
| 11,398,113 | | |
| 203.5 | % | |
| 4,245,888 | | |
| 37.3 | % |
| Impairment of intangible assets | |
| — | | |
| 0.0 | % | |
| 903,422 | | |
| 16.1 | % | |
| (903,422 | ) | |
| (100.0 | %) |
| Transaction costs | |
| — | | |
| 0.0 | % | |
| 125,167 | | |
| 2.2 | % | |
| (125,167 | ) | |
| (100.0 | %) |
| Research & development | |
| 40,456 | | |
| 0.4 | % | |
| 69,601 | | |
| 1.2 | % | |
| (29,145 | ) | |
| (41.9 | %) |
| Total operating expenses | |
| 15,684,457 | | |
| 158.5 | % | |
| 12,496,303 | | |
| 223.1 | % | |
| 3,188,154 | | |
| 25.5 | % |
| Operating loss | |
| (10,615,886 | ) | |
| (107.3 | %) | |
| (10,431,622 | ) | |
| (186.3 | %) | |
| (184,264 | ) | |
| (1.8 | %) |
| Gain on sale of property and equipment | |
| 4,598,095 | | |
| 46.5 | % | |
| 24,208 | | |
| 0.4 | % | |
| 4,573,887 | | |
| 100.0 | % |
| Forgiveness of PPP loans | |
| 2,059,556 | | |
| 20.8 | % | |
| — | | |
| 0.0 | % | |
| 2,059,556 | | |
| 100.0 | % |
| Bargain purchase gain | |
| — | | |
| 0.0 | % | |
| 1,138,808 | | |
| 20.3 | % | |
| (1,138,808 | ) | |
| 100.0 | % |
| Interest expense | |
| (46,828 | ) | |
| (0.5 | %) | |
| (19,038 | ) | |
| (0.3 | %) | |
| (27,790 | ) | |
| 146.0 | % |
| Other income, net | |
| 315,376 | | |
| 3.2 | % | |
| 248,815 | | |
| 4.4 | % | |
| 66,561 | | |
| (26.8 | %) |
| Loss before income taxes from continuing operations | |
| (3,689,687 | ) | |
| (37.3 | %) | |
| (9,038,829 | ) | |
| (161.4 | %) | |
| 5,349,142 | | |
| 59.2 | % |
Income tax provision
(benefit) from continuing operations | |
| 19,197 | | |
| 0.2 | % | |
| (403,666 | ) | |
| (7.2 | %) | |
| 422,863 | | |
| (104.8 | %) |
| Net loss from continuing operations | |
| (3,708,884 | ) | |
| (37.5 | %) | |
| (8,635,163 | ) | |
| (154.2 | %) | |
| 4,926,279 | | |
| 57.0 | % |
| Income from discontinued operations, net of tax | |
| 425,108 | | |
| 4.3 | % | |
| 545,491 | | |
| 9.7 | % | |
| (120,383 | ) | |
| 22.1 | % |
| Net loss | |
$ | (3,283,776 | ) | |
| (33.2 | %) | |
$ | (8,089,672 | ) | |
| (144.4 | %) | |
$ | 4,805,896 | | |
| 59.4 | % |
Fiscal Year Ended May 31, 2022 Compared to Fiscal Year Ended
May 31, 2021
Consolidated Revenue - Consolidated
revenue increased $4,292,751, or 76.6%, to $9,893,210 in Fiscal 2022 from $5,600,459 in Fiscal 2021. The increase was driven by the Ice
Cream Segment, which generated $8,315,486 in sales during Fiscal 2022, accounting for 84.1% of total revenue for the fiscal year. The
Measurement Segment sales remained steady at $1,577,724 for Fiscal 2022, a slight increase of $20,701 over prior Fiscal 2021 of $1,557,023.
The Measurement Segment accounted for 15.9% of total revenue in Fiscal 2022.
Ice Cream Segment Revenue – The
Ice Cream Segment encompasses the operations of Ample Hills and focuses on the wholesale and retail sales of their ice cream and related
products through a network of individual retail locations located in New York, New Jersey and California, in addition to sales on the
Company’s website. Revenues for the Ice Cream Segment for Fiscal 2022 increased $4,272,050, or 105.7%, to $8,315,486, as compared
to $4,043,436 in Fiscal 2021.
Measurement
Segment Revenue – The Measurement Segment
includes one product line: the Acuity product line, which focuses on laser-based distance measurement and dimensional sizing laser sensors.
The Xact product line, which includes ultrasonic-based remote tank monitoring products and related monitoring revenues for markets in
the IoT environment, is classified as “held for sale” and reported separately. See Note 4 – Assets Held for Sale
and Operations Classified as Discontinued Operations for
further details. All activity in the Company’s Measurement Segment was conducted in North America in Fiscal 2022 and Fiscal 2021.
Measurement Segment Revenue increased $20,701,
or 1.3%, to $1,577,724 in Fiscal 2022 as compared to $1,557,023 in Fiscal 2021.
Gross
Profit – Consolidated gross profit for Fiscal
2022 is 51.2%, as compared to 36.9% in Fiscal 2021, primarily due to higher gross margins from the Ice Cream Segment.
Measurement Segment gross profit for Fiscal 2022,
consisting solely of the Acuity business as Xact is classified separately as held for sale, increased by 10.3% to 40.7% as compared to
30.4% in Fiscal 2021. The increase was due to implemented bill of material efficiencies which improved Acuity unit costs of production.
Ice
Cream Segment gross profit increased by 13.8% to 53.4% in Fiscal
2022, as compared to 39.4% in Fiscal 2021. As the Company continues to strive for efficiencies in the day-to-day operations of the business,
the Company expects to be able to manage costs and identify opportunities to drive additional revenue and volume through their factory,
which will further improve gross margin.
Operating
Expenses – Consolidated operating expenses increased $3,188,154, or 25.5% to $15,684,457 in Fiscal 2022 compared to $12,496,303
in Fiscal 2021. This increase was primarily due to the Ice Cream Segment, which had operating expenses of $12,019,919 in Fiscal 2022,
representing a $2,608,472, or 27.7%, increase from $9,411,447 in Fiscal 2021. The Ice Cream Segment accounted for 76.6% of total operating
expenses. Operating expenses for the Measurement Segment increased $579,682 or 18.8%, to
$3,664,538 in Fiscal 2022 from $3,084,856 in Fiscal 2021. The operating expense increase was driven by professional fees increase of $1,161,466,
or 67.7%, to $2,876,174 in Fiscal 2022, as compared to $1,714,708 in Fiscal 2021.
Other
Income - Other income primarily consists of rental income, interest income and other income. Other income was $315,376 for Fiscal
2022 as compared to $248,815 for Fiscal 2021.
Interest expense was $46,828 for Fiscal 2022 as
compared to $19,038 for Fiscal 2021.
Income
Tax Provision (Benefit from Income Taxes) –-
The effective tax rate in Fiscal 2022 was (0.59%), as compared
to 4.7% in Fiscal 2021. The effective tax rate on consolidated net loss in Fiscal 2022 and 2021 differs from the federal statutory
tax rate primarily due to changes in the deferred tax valuation allowance and the impact of certain expenses not being deductible for
income tax reporting purposes.
Net loss - Net loss in Fiscal 2022
was $3,283,776, or $0.97 per fully diluted share, and net loss in Fiscal 2021 was $8,089,672, or $2.29 per fully diluted share. The decrease
in net loss for Fiscal 2022 was primarily due to the Company’s $4,598,095 gain on sale of property and equipment and $2,059,556
forgiveness of PPP loans in Fiscal 2022.
NON-GAAP FINANCIAL MEASURES
Adjusted
EBITDA – Adjusted EBITDA, which excludes certain reorganization, legal and other professional expense and inventory adjustments,
was ($9,743,929) for Fiscal 2022 as compared to Adjusted EBITDA of ($8,419,539) in
Fiscal 2021.
Reconciliation
of EBITDA to Adjusted EBITDA – Adjusted EBITDA for Fiscal 2022 and Fiscal 2021 is calculated as follows on a consolidated
basis:
| | |
Fiscal Year Ended May 31, |
| | |
2022 | |
2021 |
| Loss before income taxes from continuing operations | |
$ | (3,689,687 | ) | |
$ | (9,038,829 | ) |
| Depreciation and amortization | |
| 437,183 | | |
| 443,926 | |
| Interest Expense | |
| 46,828 | | |
| 19,038 | |
| EBITDA from continuing operations | |
$ | (3,205,676 | ) | |
$ | (8,575,865 | ) |
| Adjusted for: | |
| | | |
| | |
| Gain on sale of property and equipment | |
| (4,598,095 | ) | |
| — | |
| Forgiveness of PPP loans | |
| (2,059,556 | ) | |
| — | |
| Bargain purchase gain | |
| — | | |
| (1,138,808 | ) |
| Impairment of intangible assets | |
| — | | |
| 903,422 | |
| Stock-based compensation | |
| 119,398 | | |
| 266,545 | |
| Income from discontinued product line | |
| | | |
| | |
| Reorganization, legal, and transaction fees | |
| — | | |
| 125,167 | |
| Adjusted EBITDA from continuing operations | |
$ | (9,743,929 | ) | |
$ | (8,419,539 | ) |
LIQUIDITY AND CAPITAL RESOURCES
The
Company's working capital decreased $4,770,031 to ($1,822,078) as of the end of Fiscal 2022 compared to $2,947,953 as
of the end of Fiscal 2021. The decrease in working capital in Fiscal 2022 was primarily the result of the following:
| |
· |
Cash and cash equivalents decreased $2,981,780 to $1,050,910 at the end of Fiscal 2022 as compared to $4,032,690 at the end of Fiscal 2021. |
| |
· |
Accounts payable increased $262,527 to $844,494 at the end of Fiscal 2022 as compared to $581,967 at the end of Fiscal 2021. |
| |
|
|
| |
· |
Other accrued liabilities increased $970,569 to $1,665,159 at the end of Fiscal 2022 as compared to $694,590 at the end of Fiscal 2021. |
| |
· |
Current portion of long-term lease liabilities increased $432,132 to $1,474,463 at the end of Fiscal 2022 as compared to $1,042,331 at the end of Fiscal 2021. |
| |
· |
Prepaid expenses decreased $103,697 to $94,648 at the end of Fiscal 2022 as compared to $198,345 at the end of Fiscal 2021. |
These decreases were partially offset by the following:
| |
· |
Inventories increased $192,107 to $1,443,529 at the end of Fiscal 2022 as compared to $1,251,422 at the end of Fiscal 2021. |
Net
cash used in operating activities for continuing operations was $8,096,389 in Fiscal 2022 as compared to net cash used in operating activities
for continuing operations of $7,466,978 in Fiscal 2021. The net loss of $3,283,776, a gain on sale of property and equipment of $4,598,095,
an increase in accounts receivable of $22,684, an increase in rent, utility deposits and ERP deposits of $239,105, an increase in inventories
of $192,107, and the forgiveness of PPP loans of $2,059,556 were the primary drivers of the overall operating cash usage for Fiscal 2022,
offset by non-cash lease costs of $365,856, depreciation and amortization of $437,183, stock based compensation expense of $119,398, a
decrease in prepaid expenses of $103,698, a decrease in income tax receivable of $21,196, an increase in accrued liabilities and customer
deposits of $989,076 and an increase in accounts payable of $262,527.
In Fiscal 2021, the net loss of $8,089,672, a bargain purchase gain of $1,138,808, an
increase in accounts receivable of $730,971, a decrease in deferred income taxes of $453,238, an increase in rent, utility deposits and
ERP deposits of $206,628, and increase in inventories of $153,955 and an increase in prepaid expenses of $84,388 were the primary drivers
of the overall operating cash usage for Fiscal 2021, offset by an impairment of indefinite-lived intangible assets of $903,422, non-cash
lease costs of $735,709, depreciation and amortization of $443,926,
stock based compensation expense of $266,545, an increase in accrued liabilities and customer deposits of $799,862, and
an increase of accounts payable of $330,945 were the primary drivers of the overall operating cash usage for Fiscal 2021.
Net
cash provided by investing activities was $3,801,019 in Fiscal 2022 as compared to net cash used in investing activities of $3,035,184
for Fiscal 2021. The net cash provided by investing activities
for Fiscal 2022 is driven by the $4,797,924 proceeds from the sale of property and equipment, offset by the $996,905 purchases of property
and equipment, used primarily to build out the Ample Hills retail footprint.
Net cash provided by financing activities was
$1,264,476 in Fiscal 2022 as compared to net cash provided by financing activities of $3,441,305 for Fiscal 2021. The net cash provided
by financing activities was due to the proceeds from a $1,000,000 promissory note and $264,476 proceeds from the Paycheck Protection Program.
Management is pursuing multiple sources of
liquidity. On April 14, 2022, Schmitt announced its intention to focus on Ample Hills as its core business. In conjunction
with the focus on Ample Hills, the Company also announced the strategic review of its Measurement segment, which could result in a
sale of one or both of those businesses. On May 2, 2022, the Company filed
a shelf registration statement for the sale of up to $100,000,000 in debt and equity securities. On May 20, 2022, the
Company entered into a sales agreement with Roth Capital Partners, LLC and filed a prospectus supplement for an at-the-market
offering of up to $5,000,000 in common stock.
Historically, the Company’s primary sources
of liquidity have been cash and cash equivalents, cash flows from operations (when available) and cash flows from investing and financing
activities, including proceeds from the sale of property and equipment, funding under business loans and credit agreements and the sale
of equity securities.
The
Company currently projects that it will need additional capital to fund its current operations and capital investment requirements until
the Company scales to a revenue level that permits cash self-sufficiency. As a result, the Company needs to raise additional capital or
secure debt funding to support on-going operations until such time. This projection is based on the Company’s current expectations
regarding product sales and service, cost structure, cash burn rate and other operating assumptions. The sources of this capital are anticipated
to be from the sale of equity and/or debt. Alternatively, or in addition, the Company may seek to sell additional assets or portions of
its business. Any of the foregoing may not be achievable on favorable terms, or at all, and may require the consent of current debt and/or
equity holders to the modification of existing agreements, which may or may not be granted. Additionally, any debt or equity transactions
may cause significant dilution to existing stockholders .
Recently Issued Accounting Guidance
Refer to Note 3 – Summary of Significant
Accounting Policies in the accompanying Notes to the Consolidated Financial Statements for a discussion of recent accounting pronouncements.
| Item 8. |
Financial Statements and Supplementary Data |
Report of Independent Registered Public Accounting Firm
To the shareholders and the Board of Directors of Schmitt Industries,
Inc.
Opinion on the Financial Statements
We have audited the accompanying Consolidated
Balance Sheets of Schmitt Industries, Inc. (the "Company") as of May 31, 2022 and 2021, the related Consolidated Statement of
Operations, Stockholders’ Equity and Cash Flows for the years ended May 31, 2022 and 2021 and the related notes (collectively referred
to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial
position of the Company as of May 31, 2022 and 2021, and the consolidated results of its operations and its cash flows for the years then
ended, in conformity with accounting principles generally accepted in the United States of America.
Substantial Doubt Regarding the Company’s
Ability to Continue as a Going Concern
The accompanying consolidated financial statements
have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the
Company has suffered recurring losses from operations, has an accumulated deficit and does not believe that its current level of cash
and cash equivalents is sufficient to fund continuing operations. These factors raise substantial doubt about its ability to continue
as a going concern. Management's plans in regard to these matters are also described in Note 2. The consolidated financial statements
do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These consolidated financial statements are the
responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial
statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States)
(“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws
and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the
standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we
engaged to perform, an audit of its internal control over financial reporting. As part of our audit, we are required to obtain an understanding
of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s
internal control over financial reporting. Accordingly, we express no such opinion.
Our audit included performing procedures to assess
the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures
that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the
consolidated financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by
management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audit provides
a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below
are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated
to the audit committee and that (i) relate to accounts or disclosures that are material to the consolidated financial statements and (ii)
involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any
way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters
below, providing a separate opinion on the critical audit matters or on the accounts or disclosures to which they relate.
Going
Concern Assessment
As described in Note 2 to the consolidated financial
statements, the Company has suffered recurring losses from operations, has an accumulated deficit and does not believe that its current
level of cash and cash equivalents is sufficient to fund continuing operations. The Company determined these, and other factors, raised
substantial doubt as to the Company's ability to continue as a going concern one year from the issuance date of the consolidated financial
statements. In making this determination, management prepared a one-year cash flow projection. Management used significant assumptions
in preparing the one-year cash flow projection, which included expected operating costs and financing obligations.
How We Addressed the Matter in Our Audit
The principal considerations for our determination
that the evaluation of management's going concern analysis was a critical audit matter are the significant judgment and subjectivity from
management when evaluating the uncertainty related to the Company's future cash flow projection and a high degree of auditor judgment
in evaluating management's forecasts for at least the next 12 months.
The primary procedures we performed to address
the critical audit matter included:
| • | Evaluating the reasonableness of key assumptions and estimates used by the management in the one-year
cash flow projection in the light of its existing operating requirements and plans. |
| • | Testing the completeness, accuracy, and relevance of underlying data in the one-year cash flow projection. |
| • | Evaluating the reasonableness of management's plans on the cash flow requirements of the operations. |
| • | Evaluating the adequacy of the Company's disclosure of management's plans in the notes to the consolidated
financial statements. |
/s/ UHY LLP
We have served as the Company’s auditor
since 2021.
Melville, New York
October 13, 2022
PCAOB ID Number 1195
SCHMITT INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
| | |
| |
|
| | |
Fiscal Year Ended May 31, |
| | |
2022 | |
2021 |
| ASSETS | |
| |
|
| Current assets | |
| | | |
| | |
| Cash and cash equivalents | |
$ | 1,050,910 | | |
$ | 4,032,690 | |
| Accounts receivable, net | |
| 751,551 | | |
| 728,867 | |
| Inventories, net | |
| 1,443,529 | | |
| 1,251,422 | |
| Prepaid expenses | |
| 94,648 | | |
| 198,345 | |
| Income tax receivable | |
| — | | |
| 18,057 | |
| Current portion of assets held for sale as discontinued operations | |
| 665,206 | | |
| 727,666 | |
| Total current assets | |
| 4,005,844 | | |
| 6,957,047 | |
| Leasehold assets | |
| 14,282,286 | | |
| 10,448,486 | |
| Property and equipment, net | |
| 2,947,628 | | |
| 2,823,366 | |
| Property and equipment held for sale, net | |
| 433,410 | | |
| 174,847 | |
| Non-current assets held for sale as discontinued operations | |
| 482,279 | | |
| 298,507 | |
| Leasehold, utilities, and ERP deposits | |
| 560,660 | | |
| 321,555 | |
| Other assets | |
| | | |
| | |
| Intangible assets, net | |
| 127,189 | | |
| 150,122 | |
| TOTAL ASSETS | |
$ | 22,839,296 | | |
$ | 21,173,930 | |
| | |
| | | |
| | |
| LIABILITIES & STOCKHOLDERS' EQUITY | |
| | | |
| | |
| Current liabilities | |
| | | |
| | |
| Accounts payable | |
$ | 844,494 | | |
$ | 581,967 | |
| Accrued commissions | |
| 66,083 | | |
| 60,614 | |
| Accrued payroll liabilities | |
| 540,895 | | |
| 514,660 | |
| Accrued liabilities | |
| 429,003 | | |
| 465,146 | |
| Customer deposits and prepayments | |
| 116,309 | | |
| 93,364 | |
| Other accrued liabilities | |
| 1,668,298 | | |
| 694,590 | |
| Current portion of long-term lease liabilities | |
| 1,474,463 | | |
| 1,042,331 | |
| Current portion of long-term debt | |
| 503,219 | | |
| 541,691 | |
| Liabilities held for sale as discontinued operations | |
| 185,158 | | |
| 14,731 | |
| Total current liabilities | |
| 5,827,922 | | |
| 4,009,094 | |
| Long-term debt | |
| 2,496,781 | | |
| 3,253,389 | |
| Long-term leasehold liabilities | |
| 13,909,388 | | |
| 10,141,864 | |
| Total liabilities | |
| 22,234,091 | | |
| 17,404,347 | |
| Stockholders' equity | |
| | | |
| | |
| Common stock, no par value, 20,000,000 shares authorized, 4,243,775 and 3,825,724 shares issued and outstanding at May 31, 2022, respectively; and 4,204,553 and 3,786,502 shares issued and outstanding at May 31, 2021, respectively | |
| 12,342,757 | | |
| 12,223,359 | |
| Accumulated deficit | |
| (11,737,552 | ) | |
| (8,453,776 | ) |
| Total stockholders' equity | |
| 605,205 | | |
| 3,769,583 | |
| TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | |
$ | 22,839,296 | | |
$ | 21,173,930 | |
The accompanying notes are an integral part of
these consolidated financial statements.
SCHMITT INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
| | |
| |
|
| | |
Fiscal Year Ended May 31, |
| | |
2022 | |
2021 |
| Net sales | |
$ | 9,893,210 | | |
$ | 5,600,459 | |
| Cost of revenue | |
| 4,824,639 | | |
| 3,535,778 | |
| Gross profit | |
| 5,068,571 | | |
| 2,064,681 | |
| Operating expenses: | |
| | | |
| | |
| General, administrative and sales | |
| 15,644,001 | | |
| 11,398,113 | |
| Impairment of intangible assets | |
| — | | |
| 903,422 | |
| Transaction costs | |
| — | | |
| 125,167 | |
| Research & development | |
| 40,456 | | |
| 69,601 | |
| Total operating expenses | |
| 15,684,457 | | |
| 12,496,303 | |
| Operating loss | |
| (10,615,886 | ) | |
| (10,431,622 | ) |
| Gain on sale of property and equipment | |
| 4,598,095 | | |
| 24,208 | |
| Bargain purchase gain | |
| — | | |
| 1,138,808 | |
| Forgiveness of PPP loans | |
| 2,059,556 | | |
| — | |
| Interest expense | |
| (46,828 | ) | |
| (19,038 | ) |
| Other income, net | |
| 315,376 | | |
| 248,815 | |
| Income tax provision (benefit) from continuing operations | |
| 19,197 | | |
| (403,666 | ) |
| Net loss from continuing operations | |
| (3,708,884 | ) | |
| (8,635,163 | ) |
| Income from discontinued operations, net of tax | |
| 425,108 | | |
| 545,491 | |
| Net loss | |
$ | (3,283,776 | ) | |
$ | (8,089,672 | ) |
| | |
| | | |
| | |
| | |
| | | |
| | |
| Net loss per common share from continuing operations: | |
| | | |
| | |
| Basic | |
$ | (0.97 | ) | |
$ | (2.29 | ) |
| Weighted average number of common shares, basic | |
| 3,808,446 | | |
| 3,765,783 | |
| Diluted | |
| (0.97 | ) | |
$ | (2.29 | ) |
| Weighted average number of common shares, diluted | |
| 3,808,446 | | |
| 3,765,783 | |
| Net income per common share from discontinued operations: | |
| | | |
| | |
| Basic | |
$ | 0.11 | | |
$ | 0.15 | |
| Weighted average number of common shares, basic | |
| 3,808,446 | | |
| 3,765,783 | |
| Diluted | |
| 0.11 | | |
$ | 0.15 | |
| Weighted average number of common shares, diluted | |
| 3,808,446 | | |
| 3,765,783 | |
| Net loss per common share: | |
| | | |
| | |
| Basic | |
$ | (0.86 | ) | |
$ | (2.15 | ) |
| Weighted average number of common shares, basic | |
| 3,808,446 | | |
| 3,765,783 | |
| Diluted | |
| (0.86 | ) | |
$ | (2.15 | ) |
| Weighted average number of common shares, diluted | |
| 3,808,446 | | |
| 3,765,783 | |
The accompanying notes are an integral part of
these consolidated financial statements.
SCHMITT INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Common Stock
Accumulated Deficit
| | |
| |
| |
| |
|
| | |
| | | |
| | | |
| Accumulated | | |
| | |
| | |
| Shares | | |
| Amount | | |
| deficit | | |
| Total | |
| Balance, May 31, 2020 | |
| 3,784,554 | | |
$ | 12,257,306 | | |
$ | (364,104 | ) | |
$ | 11,893,202 | |
| Share repurchases | |
| (72,101 | ) | |
| (234,517 | ) | |
| — | | |
| (234,517 | ) |
| Shares issued to directors, officers and employees upon vesting of RSUs | |
| 88,449 | | |
| — | | |
| — | | |
| — | |
| Stock-based compensation | |
| — | | |
| 266,545 | | |
| — | | |
| 266,545 | |
| Repurchase of restricted stock units | |
| (14,400 | ) | |
| (65,975 | ) | |
| — | | |
| (65,975 | ) |
| Net loss | |
| — | | |
| — | | |
| (8,089,672 | ) | |
| (8,089,672 | ) |
| Balance, May 31, 2021 | |
| 3,786,502 | | |
$ | 12,223,359 | | |
$ | (8,453,776 | ) | |
$ | 3,769,583 | |
| Shares issued to directors, officers and employees upon vesting of RSUs | |
| 39,222 | | |
| — | | |
| — | | |
| — | |
| Stock-based compensation | |
| — | | |
| 119,398 | | |
| — | | |
| 119,398 | |
| Net loss | |
| — | | |
| — | | |
| (3,283,776 | ) | |
| (3,283,776 | ) |
| Balance, May 31, 2022 | |
| 3,825,724 | | |
$ | 12,342,757 | | |
$ | (11,737,552 | ) | |
$ | 605,205 | |
The accompanying notes are an integral part of
these consolidated financial statements.
SCHMITT INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
| | |
| |
| |
|
| | |
| |
Fiscal Year Ended May 31, |
| | |
| |
2022 | |
2021 |
| Cash flows relating to operating activities | |
| | | |
| | | |
| | |
| Net loss | |
| | | |
$ | (3,283,776 | ) | |
$ | (8,089,672 | ) |
| Adjustments to reconcile net loss to net cash used in operating activities: | |
| | | |
| | | |
| | |
| Bargain purchase gain | |
| | | |
| — | | |
| (1,138,808 | ) |
| Forgiveness of PPP Loans | |
| | | |
| (2,059,556 | ) | |
| — | |
| Intangible impairment | |
| | | |
| — | | |
| 903,422 | |
| Depreciation and amortization | |
| | | |
| 437,183 | | |
| 443,926 | |
| Gain on disposal of property and equipment | |
| | | |
| (4,598,095 | ) | |
| (24,208 | ) |
| Stock-based compensation | |
| | | |
| 119,398 | | |
| 266,545 | |
| Deferred income taxes | |
| | | |
| — | | |
| (453,238 | ) |
| Non-cash lease costs | |
| | | |
| 365,856 | | |
| 735,709 | |
| (Increase) decrease in: | |
| | | |
| | | |
| | |
| Accounts receivable, net | |
| | | |
| (22,684 | ) | |
| (730,971 | ) |
| Inventories, net | |
| | | |
| (192,107 | ) | |
| (153,955 | ) |
| Prepaid expenses | |
| | | |
| 103,698 | | |
| (84,388 | ) |
| Income tax receivable | |
| | | |
| 18,057 | | |
| (65,519 | ) |
| Rent, Utility Deposits, & ERP Deposits | |
| | | |
| (239,105 | ) | |
| (206,628 | ) |
| Increase (decrease) in: | |
| | | |
| | | |
| | |
| Accounts payable | |
| | | |
| 262,527 | | |
| 330,945 | |
| Accrued liabilities and customer deposits | |
| | | |
| 992,215 | | |
| 799,862 | |
| Net cash used in operating activities - continuing operations | |
| | | |
| (8,096,389 | ) | |
| (7,466,978 | ) |
| Net cash provided by operating activities - discontinued operations | |
| | | |
| 49,114 | | |
| 527,016 | |
| Net cash used in operating activities - total | |
| | | |
$ | (8,047,275 | ) | |
$ | (6,939,962 | ) |
| Cash flows relating to investing activities | |
| | | |
| | | |
| | |
| Acquisition of Ample Hills | |
| | | |
$ | — | | |
$ | (1,665,854 | ) |
| Purchases of property and equipment | |
| | | |
| (996,905 | ) | |
| (1,404,830 | ) |
| Gain on sale of property and equipment | |
| | | |
| 4,797,924 | | |
| 35,500 | |
| Net cash provided by (used in) investing activities | |
| | | |
$ | 3,801,019 | | |
$ | (3,035,184 | ) |
| Cash flows relating to financing activities | |
| | | |
| | | |
| | |
| Proceeds from Paycheck Protection Program | |
| | | |
$ | 264,476 | | |
$ | 4,059,556 | |
| Repayments on Paycheck Protection Program | |
| | | |
| — | | |
| (264,476 | ) |
| Proceeds from short-term borrowing | |
| | | |
| 1,000,000 | | |
| — | |
| Payments on short-term borrowing | |
| | | |
| — | | |
| (53,283 | ) |
| Repurchase of common stock | |
| | | |
| — | | |
| (300,492 | ) |
| Net cash provided by financing activities | |
| | | |
| 1,264,476 | | |
| 3,441,305 | |
| Decrease in cash and cash equivalents | |
| | | |
| (2,981,780 | ) | |
| (6,533,841 | ) |
| Cash and cash equivalents, beginning of
period | |
| | | |
| 4,032,690 | | |
| 10,566,531 | |
| Cash and cash equivalents, end of
period | |
| | | |
$ | 1,050,910 | | |
$ | 4,032,690 | |
| Supplemental disclosure of cash flow information | |
| | | |
| | | |
| | |
| Cash paid during the period for income taxes | |
| | | |
$ | 19,197 | | |
$ | 80,600 | |
| Cash paid during the period for interest | |
| | | |
$ | 63 | | |
$ | 616 | |
The accompanying notes are an integral part
of these consolidated financial statements.
Schmitt Industries, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MAY 31,
2022 AND 2021
NOTE 1 – ORGANIZATION AND BUSINESS OPERATIONS
Schmitt Industries, Inc. (the "Company",
"Schmitt", "we" or "our") operates a diversified business providing highly precise test and measurement
products, as well as providing quality consumer products through the Company’s ice cream manufacturing and retail business. Through
its wholly owned subsidiary, Schmitt Measurement Systems, Inc. (the “Measurement Segment”), the Company manufactures and sells
products in two core product lines, Acuity Lasers and Xact Tank Monitoring.
| |
· |
Acuity™ was acquired
in June of 2000 and manufactures and markets dimensional and distance measurement lasers. These laser products utilize both
triangulation and time-of-flight measurement principles and are known for their speed and accuracy. The Acuity products are used in
a wide variet y of industrial, commercial and research applications. |
| |
· |
Xact™ was acquired
in February of 2008 and offers ultrasonic measurement technology for the remote monitoring of the fill levels of propane and other
liquid tanks. Together with the Xact gauge reader, the satellite-focused Xact systems can detect and communicate fill levels, along
with other information such as tank size and configuration, to customers through the “Internet of Things”
(“IoT”) ecosystem using the Company’s satellite provider and a secure website. Typical users of Xact systems are
bulk propane, diesel, jet fuel suppliers and ammonia users and distributors. As of May 31, 2022, the Xact product line is classified as held-for-sale and considered discontinued operations of
the Company. See further discussion in Note 4 – Assets held for sale and operations classified as discontinued operations. |
Through its wholly owned subsidiary, Ample Hills
Acquisition LLC, and its subsidiaries (collectively, “Ample Hills” or “Ice Cream Segment”), the Company manufactures,
wholesales and retails ice cream and related products through a network of retail locations located in New York, New Jersey and California.
Unless otherwise noted, discussion in these Notes to Consolidated Financial Statements refers to our continuing operations. Refer to Note
4, Assets held for sale and operations classified as discontinued operations, for additional information regarding the discontinued operations.
NOTE 2 – LIQUIDITY AND GOING CONCERN
Historically, the Company’s
primary sources of liquidity have been cash and cash equivalents, cash flows from operations (when available) and cash flows from investing
and financing activities, including proceeds from the sale of property and equipment, funding under business loans and credit agreements
and the sale of equity securities. As of May 31, 2022, the Company had an aggregate cash and cash equivalent balance of $1,050,910 and
a net working capital deficit from continuing operations of $1,822,078. On July 18, 2022, the Company executed the sale of its Portland
real estate for $3,268,533 net proceeds.
Subsequent Event
The Company currently projects
that it will need additional capital to fund its current operations and capital investment requirements until the Company scales to a
revenue level that permits cash self-sufficiency. As a result, the Company needs to raise additional capital or secure debt funding to
support on-going operations until such time. This projection is based on the Company’s current expectations regarding product sales
and service, cost structure, cash burn rate and other operating assumptions. The sources of this capital are anticipated to be from the
sale of equity and/or debt. Alternatively, or in addition, the Company may seek to sell additional assets or portions of its business
(see Note 4 – Assets held for sale and operations classified as discontinued operations). Any of the foregoing may not be achievable
on favorable terms, or at all, and may require the consent of current debt and/or equity holders to the modification of existing agreements,
which may or may not be granted. Additionally, any debt or equity transactions may cause significant dilution to existing stockholders.
If the Company is unable to raise
additional capital moving forward, its ability to operate in the normal course and continue to invest in its product portfolio may be
negatively impacted and the Company may be forced to scale back operations or divest some or all of its products.
These factors raise substantial
doubt about the ability of the Company to continue as a going concern. Unless management is able to obtain additional financing,
it is unlikely that the Company will be able to meet its funding requirements during the next 12 months. The consolidated financial statements
do not include any adjustments that might result from the outcome of this uncertainty.
NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Basis of Presentation
The Company prepares its consolidated financial
statements in accordance with accounting principles generally accepted in the United States (“US GAAP” or “GAAP”).
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.
Use of Estimates
The preparation of the consolidated financial
statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported
amounts of sales and expenses during the reporting period.
Making estimates requires management to exercise
significant judgment. It is at least reasonably possible that estimates made as of the date of the consolidated financial statements could
change in the near term due to one or more future events. Accordingly, the actual results could differ significantly from those estimates.
Significant accounting estimates reflected in the Company’s consolidated financial statements include, but are not limited to, revenue
recognition, estimates of impairment on long-lived assets, allowance for doubtful accounts, recognition and measurement of income tax
assets, valuation of stock-based compensation, the valuation of net assets acquired and the identification and measurements inherent in
the classification of certain components of our operations as discontinued operations.
Reclassification
Certain amounts in the prior period consolidated statement
of operations have been reclassified to conform to the presentation of the current period. These reclassifications had no effect on previously
recorded net loss.
Segment Reporting
The Company’s reportable segments are based
on the “management” approach, meaning they are based on the way management views the business, the internal reports it reviews
and the way it manages the business, assesses performance, and makes decisions. The chief operating decision maker reviews revenue, gross
margin and the operating performance of each reportable segment. The Company’s reportable segments during the years ended May 31,
2022 and 2021 were the Ice Cream Segment and Measurement Segment.
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 5 – Ample Hills Business
Acquisition.
Revenue Recognition
The Company generates revenues from the following
sources: (i) retail restaurant sales, (ii) factory sales, (iii) measurement product sales, and (iv) remote tank monitoring services.
Retail Restaurant Sales, net
The Company's Ice Cream Segment generates revenues
from retail restaurant sales to its end-user customers at the time of sale, net of discounts, coupons, employee meals, and complimentary
meals and gift cards. Sales tax is collected from customers and remitted to governmental authorities and is presented on a net basis within
revenue in our Consolidated Statements of Operations.
Factory Sales, net
The Company’s Ice Cream Segment generates
revenues from sales of finished goods from its Brooklyn, New York factory, including wholesale, e-commerce, and direct-to-customer
sales. These revenues, net of sales tax paid to states, are recognized when control of the goods is transferred to the customer, in accordance
with the terms of the applicable agreement. The Company also generates revenues by providing manufacturing production services to third
parties and recognizes revenues as services are provided to the customer.
Measurement Product Sales
The Company’s Measurement Segment determines
the amount of revenue it recognizes associated with the transfer of each product. For sales of products to all customers, each transaction
is evaluated to determine whether there is approval and commitment from both the Company and the customer for the transaction; whether
the rights of each party are specifically identified; whether the transaction has commercial substance; whether collectability from the
customer is probable at the inception of the contract and whether the transaction amount is defined. If a transaction to sell products
meets all of the above criteria, revenue is recognized for the sales of product at the time of shipment.
The Company incurs commissions associated with
the sales of certain measurement products. The Company applies the practical expedient allowed under ASC 340-40-25-4 by recognizing the
expense at the time the product is shipped. These amounts are recorded within general, administrative and sales expense. The Company also
incurs costs related to shipping and handling of its products, the costs of which are expensed as incurred as a component of cost of sales.
Remote Tank Monitoring Services
The Company's Measurement Segment revenues associated
with the Xact product line include satellite focused remote tank monitoring products and related monitoring services for markets in the
IoT environment.
The Company determines the amount of revenue it
recognizes associated with the transfer of such services. For delivery of monitoring services to all customers, each transaction is evaluated
to determine whether there is approval and commitment from both the Company and the customer for the transaction; whether the rights of
each party are specifically identified; whether the transaction has commercial substance; whether collectability from the customer is
probable at the inception of the contract and whether the transaction amount is defined. If a transaction to provide monitoring services
meets all of the above criteria, revenue is recognized at the completion of the month in which monitoring services are provided.
Customer Deposits and Prepayments
The Company defers revenue recognition of revenues
in instances where consideration is received from customers in advance of the Company completing its obligations in exchange for such
consideration. As of the fiscal years ended May 31, 2022 and 2021, significant contract balances were as follows:
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|
|
|
|
|
|
| | |
Fiscal Year Ended May 31, |
| | |
2022 | |
2021 |
| Contract liabilities: | |
| | | |
| | |
| Customer deposits, current | |
$ | 68,199 | | |
$ | 55,464 | |
| Gift card liabilities, current | |
| 48,110 | | |
| 37,900 | |
| Total customer deposits and prepayments | |
$ | 116,309 | | |
$ | 93,364 | |
Commission costs are calculated as a percentage
of sales for Acuity sales within the Measurement Segment and paid to both internal and external sales representatives. The Company accrues
for the commission expense at the time of sale and pays the commission to the sales representative once customer payment is collected.
These amounts are recorded within general, administrative and sales expense.
Cash and Cash Equivalents
The Company generally invests its excess cash
in money market funds. The Company's investment policy also allows for cash to be invested in investment grade highly liquid securities,
and the Company considers securities that are highly liquid, readily convertible into cash and have original maturities of less than three
months when purchased to be cash equivalents. The Company's cash consists of demand deposits in large financial institutions and money
market funds. At times, balances may exceed federally insured limits. As of May 31, 2022 and May 31, 2021, the Company had cash
and cash equivalents of $1,050,910 and $4,032,690, respectively.
Accounts Receivable, net
Accounts
receivable arise from granting credit to customers in the normal course
of business, are unsecured and are presented net of an allowance for doubtful accounts. The Company maintains credit limits for
all customers based on several factors, including but not limited to financial condition and stability, payment history, published credit
reports and use of credit references. Management performs various analyses to evaluate accounts receivable balances to ensure recorded
amounts reflect estimated net realizable value. This review includes using accounts receivable aging reports, other operating trends and
relevant business conditions, including general economic factors, as they relate to each of the Company's domestic and international customers.
In the event there is doubt about whether a customer account is collectible, a reserve is recorded. If these analyses lead management
to the conclusion that a customer account is uncollectible, the balance will be directly charged to bad debt expense.
Inventories, net
Inventories are valued at the lower of cost or
net realizable value with cost determined on the average cost basis. Costs included in inventories consist of materials, labor and manufacturing
overhead, which are related to the purchase or production of inventories. Write-downs, when required, are made to reduce excess inventories
to their net realizable values. Such estimates are based on assumptions regarding future demand and market conditions. If actual conditions
become less favorable than the assumptions used, an additional inventory write-down may be required.
Property and Equipment, net
Property and equipment are stated at cost
less accumulated depreciation. Depreciation is computed using the straight-line method over estimated useful lives of three
to seven
years for furniture, fixtures, and equipment; three
years for vehicles; and the lesser of the remaining lease term or useful life for leasehold improvements.
Property and Equipment Held for Sale, net
Property and equipment 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 square
foot building in an industrial zone that was listed for sale in December 2020. On November 10, 2021, the Company sold the building located
at 2451 NW 28th Avenue, Portland, OR 97210 for $5,100,000 with
net proceeds of $4,753,724. 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 May 31, 2022. The Company previously leased this property to two lessees, as described further
in Note 12 – Leases. As such, this lease has been terminated as of May 31, 2022.
The Company owns two industrial office buildings
totaling 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 May 31, 2022 are associated with these properties. The Company currently occupies part of this property and leases
a portion to a third party, as described further in Note 12 – Leases. A potential sale transaction would be structured
as a sale-leaseback, as the Company occupies approximately 75% of the buildings.
As of the fiscal years ended May 31, 2022 and
2021, property and equipment held for sale consisted of the following:
Summary of Significant Accounting Policies -
Schedule of Assets Held for Sale
Assets Held for Sale
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|
| | |
Fiscal Year Ended May 31, |
| | |
2022 | |
2021 |
| Land | |
$ | 159,000 | | |
$ | 140,000 | |
| Buildings and improvements | |
| 1,616,250 | | |
| 246,135 | |
| Total assets hold for sale | |
| 1,775,250 | | |
| 386,135 | |
| Less accumulated depreciation | |
| (1,341,840 | ) | |
| (211,288 | ) |
| Property and equipment, net | |
$ | 433,410 | | |
$ | 174,847 | |
On July 15, 2022, subsequent to the Company’s
fiscal year end, the Company executed the sale and leaseback of these assets. See further discussion in Note 20 – Subsequent
Events.
Leases
On June 1, 2019, the Company adopted ASC
842, Leases (“ASC 842”), using the modified retrospective approach and electing the option to not apply the
guidance to comparative periods, which continue to be presented under the accounting methods in effect for those periods.
To determine whether a contract is or contains
a lease, the Company determines at contract inception whether it conveys the right to control the use of an identified asset for a period
of time in exchange for consideration. If the contract provides for the right to obtain substantially all of the economic benefit from,
and direct the use of, the leased asset, the Company recognizes a right-of-use asset and lease 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, along with explicitly enumerated
renewal periods where management is reasonably certain that such renewal options will be exercised.
In order to calculate the right-of-use asset and
lease liability for an operating lease, ASC 842 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.
Intangible Assets
Definite-lived and indefinite-lived intangible
assets arising from business combinations include patented technology, proprietary recipes, websites and trademarks and trade names. Definite-lived
intangible assets are amortized over the estimated period during which the asset is expected to contribute directly or indirectly to future
cash flows. Intangible assets that are considered to be indefinite-lived are not amortized.
Long-lived assets and certain identifiable intangible
assets to be held and used are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of
such assets may not be recoverable. Determination of recoverability is based on an estimate of undiscounted future cash flows resulting
from the use of the asset and its eventual disposition. Measurement of any impairment loss for long-lived assets and certain identifiable
intangible assets that management expects to hold, and use is based on the amount by which the carrying value exceeds the fair value of
the asset.
Advertising Costs
Advertising costs included in general, administrative
and sales, are expensed when the advertising first takes place. Advertising expense was $38,628 and $63,635 for the years ended May 31,
2022, and 2021, respectively.
Research and Development Costs
Research and development costs, predominately
internal labor costs and costs of materials, are charged to expense when incurred.
Shipping and Handling
The Company incurs costs related to shipping and
handling of its manufactured products. These costs are expensed as incurred as a component of cost of sales. Shipping and handling charges
related to the receipt of raw materials are also incurred, which are recorded as a cost of the related inventory.
Warranty Reserve
Warranty costs are estimated and charged to operations
to cover a defined warranty period. The estimated warranty cost is based on the history of warranty claims for each particular product
type. For new product types without a warranty history, preliminary estimates are based on historical information for similar product
types. The warranty reserve accruals, included in other accrued liabilities, are reviewed periodically and updated based on warranty trends.
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. The Company requires the measurement
and recognition of compensation for all stock-based awards made to employees and directors including stock options based on estimated
fair values.
Stock-based compensation recognized during the
period is based on the value of the portion 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.
Restricted Stock Units
Service-based restricted stock units (“RSUs”)
are granted to key employees and members of the Company's Board of Directors. Service-based RSUs generally fully vest on the first anniversary
date of the award.
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.
The Company applies the asset and liability method
in recording income taxes, under which deferred income tax assets and liabilities are determined, based on the differences between the
financial reporting and tax bases of assets and liabilities and are measured using currently enacted tax rates and laws. Additionally,
deferred tax assets are evaluated and a valuation allowance is established if it is more likely than not that all or a portion of the
deferred tax asset will not be realized. Management continues to review the level of the valuation allowance on a quarterly basis.
Each year the Company files income tax
returns in the various 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
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.
Earnings (Loss) Per Share
Pursuant to ASC 260, Earnings Per Share,
basic net loss per common share is computed by dividing net loss by the weighted average number of common shares outstanding during the
reporting periods.
Diluted net loss per share is based on the weighted
average number of shares outstanding during the periods plus the effect, if any, of the potential exercise or conversion of securities,
such as warrants and restricted stock units that would cause the issuance of additional shares of common stock. In computing the basic
and diluted net loss per share applicable to common stockholders during the periods listed in the consolidated statements of operations,
the weighted average number of shares are the same for both basic and diluted net loss per share due to the fact that when a net loss
exists, dilutive shares are not included in the calculation as the impact is anti-dilutive. An anti-dilutive impact is an increase in
earnings per share or a decrease in net loss per share that would result from the conversion, exercise, or issuance of certain contingent
securities.
Concentration of Credit Risk
Financial instruments, which potentially subject the
Company to concentrations of credit risk, consist primarily of cash and accounts receivable. Cash held by the Company, in financial institutions,
regularly exceeds the federally insured limit of $250,000. With respect to continuing operations, the Company is not dependent on
any one or a few major customers. See further information in Note 18 – Customer Concentration.
Fair Value of Financial Instruments
Fair value is the price that would be received
from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When
determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, the Company considers
the principal or most advantageous market in which it would transact, and it considers assumptions that market participants would use
when pricing the asset or liability.
ASC 820, Fair Value Measurements and Disclosures provides
a fair value hierarchy, which prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The level
in the hierarchy within which the fair value measurement in its entirety falls is based upon the lowest level of input that is significant
to the fair value measurement as follows:
| · | Level 1 — inputs are based upon unadjusted
quoted prices for identical assets or liabilities traded in active markets. |
| · | Level 2 — inputs are based upon quoted
prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets
that are not active and model-based valuation techniques for which all significant assumptions are observable in the market or can be
corroborated by observable market data for substantially the full term of the assets or liabilities. |
| · | Level 3 — inputs are generally unobservable
and typically reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability.
The fair values are therefore determined using model-based techniques that include option pricing models, discounted cash flow models,
and similar techniques. |
Assets measured at fair value on a non-recurring
basis include tangible and intangible assets. Such assets are reviewed annually for impairment indicators. If a triggering event has occurred,
the assets are re-measured when the estimated fair value of the corresponding asset group is less than the carrying value. The fair value
measurements, in such instances, are based on significant unobservable inputs (Level 3).
The carrying amounts of the Company’s financial
instruments, which include accounts receivables, customer deposits, accounts payable and accrued expenses, approximate their fair values,
principally due to their short-term nature, maturities or nature of interest rates.
Recently Issued Accounting Pronouncements
In May 2021, the Financial Accounting Standards
Board (“FASB”) issued Accounting Standards Update (“ASU”) 2021-04, Earnings Per Share (Topic 260),
Debt-Modifications and Extinguishments (Subtopic 470-50), Compensation-Stock Compensation (Topic 718), and Derivatives and
Hedging-Contracts in Entity’s Own Equity (Subtopic 815-40). This ASU reduces diversity in an issuer’s accounting
for modifications or exchanges of freestanding equity-classified written call options (for example, warrants) that remain equity classified
after modification or exchange. This ASU provides guidance for a modification or an exchange of a freestanding equity-classified written
call option that is not within the scope of another Topic. It specifically addresses: (1) how an entity should treat a modification of
the terms or conditions or an exchange of a freestanding equity-classified written call option that remains equity classified after modification
or exchange; (2) how an entity should measure the effect of a modification or an exchange of a freestanding equity-classified written
call option that remains equity classified after modification or exchange; and (3) how an entity should recognize the effect of a modification
or an exchange of a freestanding equity-classified written call option that remains equity classified after modification or exchange.
This ASU will be effective for all entities for fiscal years beginning after December 15, 2021. An entity should apply the amendments
prospectively to modifications or exchanges occurring on or after the effective date of the amendments. Early adoption is permitted, including
adoption in an interim period. The Company is currently evaluating the new standard to determine the potential impact on its financial
condition, results of operations, cash flows, and financial statement disclosures.
In June 2016, the FASB issued ASU 2016-13, Financial
Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The ASU adds to US GAAP an
impairment model known as the current expected credit loss (CECL) model, which is based on expected losses rather than incurred losses.
The objectives of the CECL model are to: (1) reduce the complexity in US GAAP by decreasing the number of credit impairment models that
entities use to account for debt instruments, (2) eliminate the barrier to timely recognition of credit losses by using an expected loss
model instead of an incurred loss model, (3) require an entity to recognize an allowance of lifetime expected credit losses, and (4)
not require a specific method for entities to use in estimating expected credit losses. This ASU will be effective for fiscal years beginning
after December 15, 2022. An entity should apply the amendment on a prospective basis at the beginning of the interim period that includes
the adoption date. The Company is currently evaluating the new standard to determine the potential impact on its financial condition,
results of operations, cash flows, and financial statement disclosures.
NOTE 4 – ASSETS HELD FOR SALE AND OPERATIONS
CLASSFIED AS DISCONTINUED OPERATIONS
On April 14, 2022, the Company announced its intention
to focus on the Ice Cream Segment as its core business and simultaneously launch a strategic review of the Company’s Measurement
Segment, including the Xact and Acuity business lines. Management anticipates disposing of the Measurement Segment through multiple transactions
involving the sale of legal entities, assets, or a combination thereof. In accordance with ASC 205-20, Presentation of Financial Statements
- Discontinued Operations, the Company determined that the Xact business line met the conditions for a discontinued operation and
is recorded as such in the consolidated financial statements. The Company reports financial results for discontinued operations separately
from continuing operations in order to distinguish the financial impact of the potential disposal transaction from ongoing operations.
The following table presents the Company’s
consolidated assets and liabilities recorded in “Assets held for sale as discontinued operations” and “Liabilities held
for sale as discontinued operations,” respectively, on the Company’s consolidated balance sheets as of May 31, 2022 and 2021:
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|
| | |
Fiscal Year Ended May 31, |
| | |
2022 | |
2021 |
| ASSETS | |
| |
|
| Current assets | |
| | | |
| | |
| Accounts receivable, net | |
$ | 382,361 | | |
$ | 425,778 | |
| Inventories | |
| 282,845 | | |
| 301,888 | |
| Total current assets | |
| 665,206 | | |
| 727,666 | |
| Property and equipment, net | |
| 452 | | |
| 651 | |
| Leasehold, utilities, and ERP deposits | |
| 394,676 | | |
| 110,253 | |
| Intangible assets, net | |
| 87,152 | | |
| 187,603 | |
| TOTAL ASSETS | |
$ | 1,147,486 | | |
$ | 1,026,173 | |
| | |
| | | |
| | |
| LIABILITIES | |
| | | |
| | |
| Current liabilities | |
| | | |
| | |
| Accounts payable | |
$ | 180,613 | | |
$ | 1,783 | |
| Accrued payroll liabilities | |
| 4,545 | | |
| 12,948 | |
| Total current liabilities | |
| 185,158 | | |
| 14,731 | |
| TOTAL LIABILITIES | |
$ | 185,158 | | |
$ | 14,731 | |
The following table presents the Company’s
net income from discontinued operations for the years ended May 31, 2022 and 2021:
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Fiscal Year Ended May 31, |
| | |
2022 | |
2021 |
| Net sales | |
$ | 2,069,496 | | |
$ | 2,263,891 | |
| Cost of revenue | |
| 1,130,050 | | |
| 1,057,810 | |
| Gross profit | |
| 939,446 | | |
| 1,206,081 | |
| Operating expenses | |
| | | |
| | |
| General, administrative and sales | |
| 514,338 | | |
| 647,061 | |
| Research & development | |
| — | | |
| 13,529 | |
| Total operating expenses | |
| 514,338 | | |
| 660,590 | |
| Operating income | |
| 425,108 | | |
| 545,491 | |
| Income before income taxes | |
| 425,108 | | |
| 545,491 | |
| Income tax provision (benefit) from discontinued operations | |
| — | | |
| — | |
| Income from discontinued operations, net of tax | |
$ | 425,108 | | |
$ | 545,491 | |
On May 17, 2022, the Company announced that it had
entered into a letter of intent to sell all assets related to its Xact business line. As noted in Note 20 – Subsequent Events,
on June 16, 2022, the Company announced that the letter of intent had been terminated.
NOTE 5 – AMPLE HILLS BUSINESS ACQUISITION
On July 9, 2020, the Ample Hills Acquisition LLC
entered into an agreement to acquire Ample Hills Holdings, Inc. and Ample Hills Creamery, Inc. and their subsidiaries (collectively the
“Ample Hills Entities”). The Ample Hills Entities were a debtor-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.
The acquisition was conducted through a bankruptcy court-supervised process subject to bidding procedures and certain closing conditions.
The terms of the agreement provided that the Company
acquired select assets and liabilities of the Ample Hills Entities for a base purchase price of $1,000,000. Pursuant to the agreement,
the Company also paid an additional $713,404 to certain landlords of the Ample Hills Entities in exchange for the right to assume existing
retail leases. The Company incurred $125,167 in transaction costs related to acquisition, which were recorded as operating expenses on
income statement. Payment of the base purchase price, cure payments, and transaction costs was funded using cash on-hand as of the acquisition
date.
The Company's operating 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 price paid in bankruptcy, could have a significant upside.
In accordance with ASC 805, the Company
has recognized the assets acquired and liabilities assumed at fair value as of the acquisition date. 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.
Under ASC 805, any excess of the fair value of
the purchase consideration over the 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. The excess of the aggregate fair value of
the identifiable net assets acquired over the total purchase price was $1,138,808, which was recorded as a bargain purchase gain on the
accompanying consolidated statement of operations for the fiscal year ended May 31, 2021. The bargain purchase gain was primarily due
to the fair value of the identifiable intangible assets acquired. The purchase price allocation has been finalized as of May 31, 2021,
within the measurement period, and no further adjustments will be made.
The following table summarizes the Company’s purchase price allocation
for the acquisition of Ample Hills:
Ample Hills Business Acquisition - Schedule of Purchase
Price Allocation
| Purchase Price | |
|
| Cash paid to sellers | |
$ | 1,000,000 | |
| Cure payments | |
| 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 | |
| | |
| 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 | |
NOTE 6 – ACCOUNTS RECEIVABLE, NET
Accounts receivable, net consisted of the following:
Accounts Receivable, Net - Schedule of
Accounts Receivable, Net
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|
|
|
|
| | |
Fiscal Year Ended May 31, |
| | |
2022 | |
2021 |
| Receivables | |
$ | 838,825 | | |
$ | 775,431 | |
| Less: allowance for doubtful accounts | |
| (87,274 | ) | |
| (46,564 | ) |
| Accounts receivable, net | |
$ | 751,551 | | |
$ | 728,867 | |
NOTE 7 – INVENTORIES, NET
Inventories, net consisted of the following:
Inventories, Net - Schedule of Inventories,
Current
| |
|
|
|
|
|
|
|
|
| | |
Fiscal Year Ended May 31, |
| | |
2022 | |
2021 |
| Raw materials | |
$ | 905,376 | | |
$ | 607,825 | |
| Work-in-process | |
| 64,390 | | |
| 35,160 | |
| Finished goods | |
| 574,645 | | |
| 687,488 | |
| Total inventory | |
| 1,544,411 | | |
| 1,330,473 | |
| Inventory reserves | |
| (100,882 | ) | |
| (79,051 | ) |
| Inventory, net | |
$ | 1,443,529 | | |
$ | 1,251,422 | |
NOTE 8 – PROPERTY AND EQUIPMENT, NET
Property and equipment, net consisted of the following:
Property and Equipment, Net - Schedule
of Property, Plant and Equipment, Net
| | |
Fiscal Year Ended May 31, |
| | |
2022 | |
2021 |
| Land | |
$ | — | | |
$ | 159,000 | |
| Buildings and improvements | |
| 2,072,231 | | |
| 2,989,140 | |
| Furniture, fixtures and equipment | |
| 2,051,722 | | |
| 1,787,264 | |
| Total plant and equipment | |
| 4,123,953 | | |
| 4,935,404 | |
| Less accumulated depreciation | |
| (1,176,325 | ) | |
| (2,112,038 | ) |
| Property and equipment, net | |
$ | 2,947,628 | | |
$ | 2,823,366 | |
Depreciation expense for the fiscal years ended
May 31, 2022 and 2021 was $414,250 and $421,864, respectively.
NOTE 9 - INCOME TAXES
Effective Tax Rate
The effective tax rate for Fiscal 2022 and Fiscal
2021 was (0.59%) and 4.7%, respectively. The effective tax rate on consolidated net loss for Fiscal 2022 and Fiscal 2021 differs from the
federal statutory tax rate primarily due to changes in the deferred tax valuation allowance and the impact of certain expenses not being
deductible for income tax reporting purposes.
The provision for income taxes for the fiscal years ended May 31, 2022
and 2021 was as follows:
Income Taxes - Schedule of Components of Income Tax Expense Benefit
| |
|
|
|
|
|
|
|
|
| | |
Fiscal Year Ended May 31, |
| | |
2022 | |
2021 |
| Current provision for continued operations | |
$ | 19,197 | | |
$ | (403,666 | ) |
| Current provision for discontinued operations | |
| — | | |
| — | |
| Deferred provision | |
| 5,167,143 | | |
| 2,203,268 | |
| Change in valuation allowance | |
| (5,167,143 | ) | |
| (2,203,268 | ) |
| Total provision for income taxes | |
$ | 19,197 | | |
$ | (403,666 | ) |
Deferred tax assets are comprised of the following components as of
May 31, 2022 and 2021:
Income Taxes - Schedule of Deferred Tax Assets and Liabilities
| |
|
|
|
|
|
|
|
|
| | |
Fiscal Year Ended May 31, |
| | |
2022 | |
2021 |
| Basis difference for assets | |
$ | (55,507 | ) | |
$ | (541,015 | ) |
| Inventory related items | |
| 38,912 | | |
| 30,910 | |
| Lease right-of-use assets | |
| 321,405 | | |
| 197,573 | |
| Other reserves and liabilities | |
| 260,068 | | |
| 163,348 | |
| Net operating loss carryforward | |
| 4,228,721 | | |
| 3,333,873 | |
| General business and other credit carry forward | |
| 373,544 | | |
| 450,252 | |
| Gross deferred tax assets | |
| 5,167,143 | | |
| 3,634,941 | |
| Deferred tax asset valuation allowance | |
| (5,167,143 | ) | |
| (3,634,941 | ) |
| Net deferred tax assets | |
$ | — | | |
$ | — | |
Deferred tax assets are evaluated and a valuation
allowance is established if it is more likely than not that all or a portion of the deferred tax asset will not be realized. The Company
has recorded a substantial deferred tax asset related to temporary differences between book and tax basis of assets and liabilities and
net operating loss carryforwards. During the fiscal year ended May 31, 2022, the Company increased its valuation allowance by $1,532,202
due to the increase in net operating loss carryforwards generated by the Fiscal 2022 results. During the fiscal year ended May 31, 2021,
the Company increased its valuation allowance $2,203,268. The Company has provided a full valuation allowance against all of its deferred
tax assets as the recent losses from continuing operations have been given more weight than projected future income when determining the
need for a valuation allowance.
The Company has federal net operating loss carryforwards
of $14,532,066 which begin to expire in 2037 along with the federal general business and other credit carryforwards. The Company has state
net operating loss carryforwards of $19,984,566 which begin to expire in 2031.
Federal
State
The provision for income taxes differs from the
amount of income taxes determined by applying the U.S. statutory federal tax rate to pre-tax loss due to the following:
Income Taxes - Schedule of Effective Income Tax Rate Reconciliation
| | |
Fiscal Year Ended May 31, |
| | |
2022 | |
2021 |
| Statutory federal rate | |
| 21.00 | % | |
| 21.0 | % |
| State Taxes, net of federal benefit | |
| 12.37 | % | |
| 5.8 | % |
| Change in deferred tax valuation allowance | |
| (47.06 | )% | |
| (25.8 | )% |
| Bargain Gain | |
| — | % | |
| 4.8 | % |
| R&D tax credits | |
| — | % | |
| — | % |
| Effect of foreign income tax rates | |
| — | % | |
| — | % |
| State minimum taxes | |
| — | % | |
| (0.1 | )% |
| Permanent and other differences | |
| 13.10 | % | |
| (1.0 | )% |
| Effective Tax Rate | |
| (0.59 | )% | |
| 4.7 | % |
Interest and penalties associated with uncertain
tax positions are recognized as components of the Provision for income taxes. There was no liability for payment of interest and penalties
as of May 31, 2022 and May 31, 2021. Several tax years are subject to examination by major tax jurisdictions. In the United States, federal
tax years for the years ended May 31, 2019 and after are subject to examination.
NOTE 10 – 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.
There were no options granted during the fiscal
years ended May 31, 2022 and 2021 and the Company had outstanding stock options to purchase 22,500 shares of Common Stock as of May 31,
2022 and 2021. All outstanding options are fully vested and exercisable with a weighted-average exercise price of $1.70. As all options
outstanding as of May 31, 2022 and 2021 were fully vested, the Company did not record any additional stock-based compensation expense
during the fiscal years ended May 31, 2022 and 2021.
Options
granted, exercised, canceled and expired under the Company's stock-based comp ensation plans during the fiscal years ended May 31,
2022 and 2021 are summarized as follows:
Stock Options and Stock-Based Compensation -
Schedule of Stock Option Activity
| | |
Number of Shares | |
Weighted- Average Exercise Price | |
Weighted- Average Remaining Contractual Term (Years) | |
Aggregate Intrinsic Value |
| Options outstanding and exercisable - May 31, 2020 | |
| 22,500 | | |
$ | 1.70 | | |
| 6.9 | | |
$ | 38,250 | |
| Options granted | |
| — | | |
| — | | |
| | | |
| | |
| Options exercised | |
| — | | |
$ | — | | |
| | | |
| | |
| Options forfeited/canceled | |
| — | | |
$ | — | | |
| | | |
| | |
| Options outstanding and exercisable - May 31, 2021 | |
| 22,500 | | |
$ | 1.70 | | |
| 5.8 | | |
$ | 38,250 | |
| Options granted | |
| — | | |
| — | | |
| | | |
| | |
| Options exercised | |
| — | | |
$ | — | | |
| | | |
| | |
| Options forfeited/canceled | |
| — | | |
$ | — | | |
| | | |
| | |
| Options outstanding and exercisable - May 31, 2022 | |
| 22,500 | | |
$ | 1.70 | | |
| 4.8 | | |
$ | 38,250 | |
Restricted Stock Units
Service-based RSUs are granted to key employees
and members of the Company's Board of Directors. Service-based RSUs generally fully vest on the first anniversary date of the award.
During the fiscal year ended May 31, 2021, there
were 76,315 service-based RSUs granted. The total fair value of the RSUs at grant date was $372,717. Of the service-based RSUs outstanding,
97,225 units vested, and no units canceled.
During the fiscal year ended May 31, 2022, there
were 19,286 service-based RSUs granted. The total fair value of the RSUs at grant date was $86,463. Of the service-based RSUs outstanding,
35,330 units vested, and 7,860 units canceled. RSU activity under the Company's stock-based compensation plans during the fiscal year
ended May 31, 2022 and 2021 are summarized as follows:
| | |
Number of Units | |
Weighted- Average Price at Grant Date | |
Aggregate Intrinsic Value |
| Non-vested restricted stock units – May 31, 2020 | |
| 55,147 | | |
$ | 3.28 | | |
$ | 180,882 | |
| Restricted stock units granted | |
| 76,315 | | |
| 4.88 | | |
| 372,717 | |
| Restricted stock units vested | |
| (97,225 | ) | |
| 4.03 | | |
| (392,199 | ) |
| Non-vested restricted stock units – May 31, 2021 | |
| 34,237 | | |
$ | 4.71 | | |
$ | 161,400 | |
| Restricted stock units granted | |
| 19,286 | | |
| 4.48 | | |
| 86,463 | |
| Restricted stock units forfeited | |
| (7,860 | ) | |
| 5.60 | | |
| (44,018 | ) |
| Restricted stock units vested | |
| (35,330 | ) | |
| 4.33 | | |
| (153,018 | ) |
| Non-vested restricted stock units – May 31, 2022 | |
| 10,333 | | |
$ | 4.92 | | |
$ | 50,827 | |
During fiscal years ended May 31, 2022 and 2021,
total restricted stock unit compensation expense recognized was $119,398 and $266,545, respectively, and has been recorded as general,
administrative and sales expense in the Consolidated Statements of Operations. Stock compensation expense related to non-vested restricted
stock units with a time vesting condition was $40,436 and $81,385 for the years ended May 31, 2022 and 2021, respectively.
NOTE 11 – WEIGHTED-AVERAGE SHARES AND RECONCILIATION
For the fiscal years ended May 31, 2022 and
May 31, 2021, potentially dilutive securities consisted of options of 22,500
shares of Common Stock at $1.70
per share. Of these potentially dilutive securities, none of the shares of Common Stock underlying the options are included in the
computation of diluted earnings per share because the Company incurred a net loss from continuing operations. In periods when a net
loss is incurred in continuing operations, no Common Stock equivalents are included in the calculation of diluted net income or loss
from discontinued operations or overall Company net income or loss since they are antidilutive. As such, all stock options
outstanding are excluded from the computation of diluted net income in those periods.
Common Stock Options
The following table is a reconciliation of the
numerators and denominators of the basic and diluted per share computations for loss from continuing operations for fiscal years ended
May 31, 2022 and 2021, respectively:
Weighted-Average Shares and Reconciliation
- Schedule of Earnings Per Share, Basic and Diluted
| | |
Net | |
Weighted-Avg | |
Per Share |
| | |
(Loss) Income | |
Shares | |
Amount |
| Fiscal year ended May 31, 2022 | |
| | | |
| | | |
| | |
| Basic earnings per share from continuing operations | |
| | | |
| | | |
$ | (0.97 | ) |
| Loss available to stockholders | |
$ | (3,708,844 | ) | |
| 3,808,446 | | |
| — | |
| Loss available to common stockholders | |
$ | (3,708,844 | ) | |
| 3,808,446 | | |
$ | (0.97 | ) |
| | |
| | | |
| | | |
| | |
| Basic earnings per share from discontinued operations | |
| | | |
| | | |
$ | 0.11 | |
| Income available to stockholders | |
$ | 425,108 | | |
| 3,808,446 | | |
| — | |
| Income available to common stockholders | |
$ | 425,108 | | |
| 3,808,446 | | |
$ | 0.11 | |
| Fiscal year ended May 31, 2021 | |
| | | |
| | | |
| | |
| Basic earnings per share from continuing operations | |
| | | |
| | | |
$ | (2.29 | ) |
| Loss available to stockholders | |
$ | (8,635,163 | ) | |
| 3,765,783 | | |
| | |
| Loss available to common stockholders | |
$ | (8,635,163 | ) | |
| 3,765,783 | | |
$ | (2.29 | ) |
| | |
| | | |
| | | |
| | |
| Basic earnings per share from discontinued operations | |
| | | |
| | | |
$ | 0.15 | |
| Income available to stockholders | |
$ | 545,491 | | |
| 3,765,783 | | |
| — | |
| Income available to common stockholders | |
$ | 545,491 | | |
| 3,765,783 | | |
$ | 0.15 | |
NOTE 12 - LEASES
As a Lessor
On November 22, 2019, the Company entered into
a commercial lease agreement in which Tosei America, Inc. leased the Company's building located at 2451 NW 28th Avenue, Portland,
OR 97210 for a monthly fee of $23,282 over a term of 120 months. The Company elected to apply the practical expedient to not separate
lease and non-lease components, and has presented property revenues as other income, based upon the lease being the predominant component
of the arrangement. The Company sold this property on November 10, 2021, and is no longer a party to the lease as of that date.
On October 1, 2020, the Company entered into
a commercial lease agreement in which Humboldt Street Collective, LLC will lease the Company's building located at 2765 NW Nicolai
Street, Portland, OR 97210 for a monthly fee of $3,185
over a term of 62
months. As discussed in Note 20 – Subsequent Events, the Company executed the sale and leaseback of this building
on July 15, 2022, and therefore is no longer a lessor under this arrangement.
On December 1, 2020, the Company entered into
a commercial lease agreement in which Humboldt Street Collective, LLC, leased 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 term of 59
months.
As of May 31, 2022, minimum future lease payments
receivable are as follows:
Leases - Schedule of Future Minimum Lease Payments Receivable
| | |
|
| Years Ending May 31, |
| 2023 | | |
| 97,807 | |
| 2024 | | |
| 100,742 | |
| 2025 | | |
| 103,764 | |
| 2026 | | |
| 47,585 | |
| Total undiscounted cash flows | | |
$ | 349,898 | |
As a Lessee
In connection with the acquisition of Ample Hills,
the Company assumed multiple real estate leases for retail store locations and a manufacturing facility, all of which are classified as
operating leases under ASC 842. The Company has since entered into three additional retail lease agreements which commenced during the
fiscal year ended May 31, 2022, all of which are classified as operating leases under ASC 842.
The Company’s operating leases contain varying
terms and expire at various dates through 2042. Lease expenses under fixed term leases were $1,843,932 and $1,438,502 for the years ended
May 31, 2022 and 2021, respectively.
Certain of the Company’s operating leases
contain variable lease payments related to certain performance targets by the Company at the respective store locations. These variable
leases costs are recognized as incurred in accordance with ASC 842.
The Company’s future minimum lease payments
required under operating leases that have commenced as of May 31, 2022 were as follows:
Leases - Schedule of Future Minimum Lease Payments for Operating Leases
| Years Ending May 31, | | |
| | |
| 2023 | | |
$ | 2,047,329 | |
| 2024 | | |
| 2,030,688 | |
| 2025 | | |
| 1,993,618 | |
| 2026 | | |
| 1,782,111 | |
| 2027 | | |
| 1,412,915 | |
| Thereafter | | |
| 11,184,613 | |
| Total lease payments | | |
| 20,451,274 | |
| Less: imputed interest | | |
| (5,067,423 | ) |
| Present value of future lease payments | | |
| 15,383,851 | |
| Less: current portion of long-term lease liabilities | | |
| (1,474,463 | ) |
| Long-term lease liabilities, net of current portion | | |
$ | 13,909,388 | |
The weighted-average remaining lease term and
weighted-average discount rate for operating leases that have commenced as of May 31, 2022 are as follows:
Leases - Schedule of Lease Terms and Discount Rates
| | |
as of May 31, 2022 |
| Weighted-average remaining lease term (years) | |
| 11.28 | |
| Weighted-average discount rate | |
| 4.56 | % |
NOTE 13 – LONG-TERM DEBT
Paycheck Protection Program Loan
On March 21, 2020, the Coronavirus Aid Relief
and Economic Security Ace (“CARES ACT”) was enacted. The CARES ACT established the Paycheck Protection Program (“PPP”)
which provides funding to 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 Fiscal 2021, two of which were forgiven during the year ended May 31, 2022. The remaining outstanding PPP loan is
as follows:
Long-Term Debt - Schedule of Long-Term Debt
| | |
Loan Amount | |
Issuance Date | |
Maturity Period | |
Interest Rate |
| Second Draw PPP Loan (Ample Hills) | |
$ | 2,000,000 | | |
April 6, 2021 | |
| 5 years | | |
| 1.0 | % |
| Total PPP Loan Balance | |
$ | 2,000,000 | | |
| |
| | | |
| | |
The first two loans (both of which were forgiven during
Fiscal 2022 and therefore excluded from the table) were granted on July 30, 2020 (collectively the “First Draw PPP Loans”)
under two notes payable. Both notes were issued July 30, 2020 and funds were disbursed on August 3, 2020. The third loan was granted and
issued on April 6, 2021 (the “Second Draw PPP Loan”) to Ample Hills under a note payable which matures five years from the
date of issuance and bears 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 April 6, 2021 for the Second Draw PPP Loan, unless forgiven as described below.
The note 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 its workforce.
Ample Hills is currently seeking forgiveness of the balance of the Second Draw PPP Loan.
Forgiveness of the Second Draw PPP Loan 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 Second Draw Loan will be forgiven by the SBA and therefore, the Company has recorded a $2,000,000 loan payable on the consolidated
balance sheet as of the end of May 31, 2022. Of this amount, $503,219 has been recorded as a current liability to reflect the amount due
within the twelve months through May 31, 2023.
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 twelve months ended May 31, 2022, 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 Draw PPP Loan, the Company provided documentation in accordance with
SBA requirements and certified the amounts requested to be forgiven qualified under the requirements. During the twelve months ended May
31, 2022, the Company received notification that the remaining First Draw PPP Loan had been forgiven by the SBA and subsequently recognized
a $2,059,556 gain on the forgiveness of this loan.
Although the Company has applied for forgiveness
of the entire Second Draw PPP Loan, there is no guarantee that the loan will be forgiven by the SBA.
Interest expense on the PPP loans during the years
ended May 31, 2022 and 2021 was $42,713 and $19,038, respectively. As of May 31, 2022 and May 31, 2021 there was $2,000,000 and $3,795,080
outstanding under the PPP loans, respectively.
Related Party Promissory Note
On August 7, 2021, the Company received The
Commitment Letter to Schmitt Industries (“Commitment”) from an entity affiliated with our CEO. The Commitment states
that Sententia Capital Management LLC 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 February 28, 2023. On April 13, 2022, the Company formalized drawdown terms
and extended the maturity date on the loan through the maturity date which was October
28, 2023. Drawdown
terms include: 1.0% origination fee, 18-month term after drawdown, and an 8.0% payment-in-kind interest rate. Interest
expense on the promissory note for the fiscal years ended May 31, 2022 and 2021 was $4,115
and $0,
respectively. As of May 31, 2022 and May 31, 2021 there was $1,000,000
and $0
outstanding under the promissory note, respectively.
Investor
As of May 31, 2022 and 2021, respectively, the
Company had the following current and long-term liabilities recorded for their debt obligations:
Long-Term Debt - Schedule of Debt
| | |
Fiscal Year Ended May 31, |
| | |
2022 | |
2021 |
| Current portion | |
$ | 503,219 | | |
$ | 541,691 | |
| Long-term portion | |
| 2,496,781 | | |
| 3,253,389 | |
| Total | |
$ | 3,000,000 | | |
$ | 3,795,080 | |
Principal payments of outstanding long-term debt
as of May 31, 2022 are as follows:
Long-Term Debt - Schedule of Maturities
of Long-Term Debt
| Year ending May 31: | |
|
| 2023 | | |
$ | 503,219 | |
| 2024 | | |
| 1,512,389 | |
| 2025 | | |
| 513,380 | |
| 2026 | | |
| 471,012 | |
| Total principal payments | | |
$ | 3,000,000 | |
NOTE 14 – INTANGIBLE ASSETS
Intangible assets include the Company’s
website and proprietary recipes for its Ice Cream Segment. These assets are amortized over their estimated useful lives ranging from three
to ten years.
Minimum
Maximum
As of May 31, 2022 and May 31, 2021, for the Ice
Cream Segment, the gross carrying value of amortizable intangible assets was $172,184, and accumulated amortization was $44,995 and $22,062,
respectively. Amortization expense for the Ice Cream Segment for the years ended May 31, 2022 and May 31, 2021 was $22,933 and $22,062,
respectively. The weighted-average remaining amortization period for Ice Cream Segment intangible assets was 7.59 years as of May 31,
2022.
The following table presents the major components of finite-intangible assets which are subject to amortization as of May 31, 2022 and May 31, 2021:
Intangible Assets - Intangible Assets - Schedule of Finite-Lived Intangible Assets
| As of May 31, 2022 | |
Useful Life (Years) | |
Gross Carrying Value | |
Accumulated Amortization | |
Net Carrying Value |
| Finite-lived intangible assets subject to amortization: | |
| | | |
| | | |
| | | |
| | |
| Ice Cream Segment | |
| | | |
| | | |
| | | |
| | |
| Proprietary recipes | |
| 10 | | |
$ | 146,739 | | |
$ | 28,555 | | |
$ | 118,184 | |
| Company website | |
| 3 | | |
| 25,445 | | |
| 16,440 | | |
| 9,005 | |
| Ice Cream Segment finite-lived intangible assets | |
| | | |
$ | 172,184 | | |
$ | 44,995 | | |
$ | 127,189 | |
| As of May 31, 2021 | |
Useful Life (Years) | |
Gross Carrying Value | |
Accumulated Amortization | |
Net Carrying Value |
| Finite-lived intangible assets subject to amortization: | |
| | | |
| | | |
| | | |
| | |
| 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 | |
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, | |
| | |
| 2023 | |
$ | 22,933 | |
| 2024 | |
| 15,313 | |
| 2025 | |
| 14,621 | |
| 2026 | |
| 14,621 | |
| 2027 | |
| 14,621 | |
| Thereafter | |
| 45,080 | |
| Total expected amortization expense | |
$ | 127,189 | |
During the fourth quarter of fiscal 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 Tradename
exceeded its 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 tradename. Therefore, the Company recognized an impairment loss in the amount of $903,422,
which equals the total carrying value of the Tradename as of the testing date.
NOTE 15 – SEGMENT INFORMATION
Presented below is certain information by
reportable segment. The Company uses the same accounting policies for each reportable segment as it uses for the Company as a whole.
Segment Information
| | |
Fiscal Year Ended, May 31, |
| | |
2022 | |
2021 |
| | |
Ice Cream | |
Measurement | |
Ice Cream* | |
Measurement |
| Net revenue | |
$ | 8,315,486 | | |
$ | 1,577,724 | | |
$ | 4,043,436 | | |
$ | 1,557,023 | |
| Gross margin | |
$ | 4,426,579 | | |
$ | 641,992 | | |
$ | 1,591,207 | | |
$ | 473,474 | |
| Gross margin % | |
| 53.2 | % | |
| 40.7 | % | |
| 39.4 | % | |
| 30.4 | % |
| Operating Expenses | |
$ | 12,019,919 | | |
$ | 3,664,538 | | |
$ | 9,411,447 | | |
$ | 3,084,856 | |
| Operating loss | |
$ | (7,593,342 | ) | |
$ | (3,022,544 | ) | |
$ | (7,820,240 | ) | |
$ | (2,611,382 | ) |
| Depreciation expense | |
$ | 395,071 | | |
$ | 19,179 | | |
$ | 377,641 | | |
$ | 44,223 | |
| Amortization expense | |
$ | 22,933 | | |
$ | — | | |
$ | 22,062 | | |
$ | — | |
| Capital expenditures | |
$ | 967,757 | | |
$ | 29,148 | | |
$ | 1,382,959 | | |
$ | 21,871 | |
(*) Ice Cream Segment activity for Fiscal 2021
includes activities from the date of acquisition (July 9, 2020) through May 31, 2021.
Segment Assets
| | |
Fiscal Year Ended May 31, |
| | |
2022 | |
2021 |
| Segment assets to total assets | |
| | | |
| | |
| Ice Cream Segment | |
$ | 10,463,502 | | |
$ | 10,713,832 | |
| Measurement Segment | |
| 2,245,663 | | |
| 2,565,701 | |
| Corporate assets | |
| 10,130,131 | | |
| 7,894,397 | |
| Total assets | |
$ | 22,839,296 | | |
$ | 21,173,930 | |
All of the Company’s operations for both the Ice Cream Segment
and the Measurement Segment are conducted within North America.
NOTE 16 - EMPLOYEE BENEFIT PLANS
The Company adopted the Schmitt Industries, Inc.
401(k) Profit Sharing Plan & Trust effective June 1, 1996. Employees must meet certain age and service requirements to be eligible.
Participants may contribute up to 15% of their eligible compensation which may be partially matched by the Company. The Company may make
further contributions in the form of a profit-sharing contribution or a discretionary contribution. The Company made matching contributions
in conjunction with employee contributions to the plan totaling $43,761 and $55,005 during the years ended May 31, 2022 and 2021, respectively.
NOTE 17 - 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 regard to the acquisition except their rights to future royalties. Royalty expense applicable to the fiscal years ended May
31, 2022 and 2021 amounted to $19,429 and $32,106, respectively.
In 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 May 31, 2022.
NOTE 18 – CUSTOMER CONCENTRATION
With respect to the Company’s consolidated net
revenues from continuing operations, the Company is not dependent on any one or a few major customers. The Company had one customer that
accounted for 17.8% and 2.9% of accounts receivable, net as of May 31, 2022 and 2021, respectively.
With respect to discontinued operations, the Company
had one customer that accounted for 11.2% and 15.4% of consolidated net revenues for the years ended May 31, 2022 and 2021, respectively.
The Company had one customer that accounted for 43.3% and 25.0% of accounts receivable, net as of May 31, 2022 and 2021, respectively.
Customer
Revenues
Accounts Receivable
NOTE 19 – OUT-OF-PERIOD ADJUSTMENTS
Out-Of-Period Adjustments
During Fiscal 2022, the Company recorded an out-of-period
adjustment of $72,000 to record additional leasehold security deposits that were acquired in the Ample Hills business acquisition. The
adjustment resulted in an increase to leasehold security deposits of $72,000 and an increase to other income of $72,000. Management evaluated
the impact of this out-of-period adjustment and concluded that it is not material to any current or prior annual periods.
During Fiscal 2021, the Company recorded an out-of-period
adjustment related to the manner in which the Company calculated and recorded market-based stock-based compensation expense. The impact
of this adjustment resulted in a decrease to stock-based compensation expense of $243,187 for the year ended May 31, 2021 and a decrease
to common stock of $243,187 as of May 31, 2021. Management evaluated the impact of this out-of-period adjustment and concluded that it
is not material to any current or prior annual periods.
NOTE 20 – SUBSEQUENT EVENTS
Subsequent Events
On June 2, 2022, the Company announced that
it entered into an agreement for the sale of its Nicolai Street real estate for $3,268,533
net proceeds. The transaction closed on July 15, 2022 and was structured as a sale-leaseback in which the Company agreed to lease
a portion of the building from the buyer-lessor for a period of five years.
On June 16, 2022, the Company announced a new
Ample Hills retail lease in Manhattan's historic Greenwich Village.
On June 16, 2022, the Company
announced that the Board of the Company did not approve the proposed transaction involving the sale of the Xact business line, and that
the letter of intent for the proposed transaction had been formally terminated.
On July 20, 2022, the Company announced that it
entered into a non-binding term sheet which contemplates the potential reverse merger with Proton Green, LLC and the spin-off of Schmitt’s
Ample Hills business to pre-merger shareholders of Schmitt’s common stock. It is contemplated that Proton Green would become a wholly
owned subsidiary of Schmitt, the Company would be renamed “Proton Green Corporation”, and the common stock would continue
to trade on the Nasdaq under a new symbol. If consummated, Ample Hills would become a standalone entity and the newly merged company would
retain any remaining components of the SMS business.
On September 17, 2022, the Company received notice
of termination of the previously announced non-binding term sheet with Proton Green, LLC (“Proton Green”) regarding the reverse
merger with Proton Green and spin-off of Schmitt’s Ample Hills business.
On September 20, 2022, the Company determined that
the Company’s previously-issued condensed consolidated interim financial statements included in the associated Form 10-Qs for the
periods ended August 31, 2021, November 30, 2021 and February 28, 2022, including the comparative periods, should no longer be relied
upon due to certain errors in 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 interim financial statements during the fiscal year
ended May 31, 2022. On October 12, 2022, the Company filed Form 10-Q/A’s for each respective interim period with restated interim
financial statements reflecting adjustments recorded to correct the errors.