Forward-Looking Statements
This Quarterly Report filed with theSEC on Form 10-Q (the "Report"), including "Management's Discussion and Analysis of Financial Condition and Results of Operations" in this Item 2, contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 regarding future events and the future results ofSchmitt Industries, Inc. and its consolidated subsidiaries that are based on management's current expectations, estimates, projections and assumptions about the Company's business. Words such as "expects," "anticipates," "intends," "plans," "believes," "sees," "estimates" and variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve risks, uncertainties and assumptions that are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking statements due to numerous factors, including, but not limited to, those discussed in the risk factors disclosed in our Annual Report on Form 10-K for the year endedMay 31, 2021 , as well as in "Management's Discussion and Analysis of Financial Condition and Results of Operations" and elsewhere in this Report as well as those discussed from time to time in the Company's otherSecurities and Exchange Commission filings and reports. In addition, such statements could be affected by general industry and market conditions. Such forward-looking statements speak only as of the date of this Report or, in the case of any document incorporated by reference, the date of that document, and we do not undertake any obligation to update any forward-looking statement to reflect events or circumstances after the date of this Report. If we update or correct one or more forward-looking statements, investors and others should not conclude that we will make additional updates or corrections with respect to other forward-looking statements. RESULTS OF OPERATIONS
· Ice Cream Segment. Through our wholly owned subsidiary,
ice cream and related products through a network of 11 individual retail
locations located inNew York ,New Jersey andCalifornia .
· Measurement Segment. Through its wholly owned subsidiary Schmitt Measurement
core product lines, Acuity® and Xact®.
- Acuity® sells products, solutions and services that includes laser and
white light sensor distance, measurement and dimensional sizing products.
- Xact® product line includes ultrasonic-based remote tank monitoring
products and related monitoring revenues for markets in the Internet of
Things ("IoT") environment. The Xact products measure the fill levels of
tanks holding propane, diesel and other tank-based liquids and the related monitoring services, which includes transmission of fill data from the tanks via satellite to a secure website for display.
The accompanying unaudited financial information should be read in conjunction
with our Annual Report on Form 10-K filed on
20 Table of Contents Highlights of the Three Months EndedNovember 30, 2021 andNovember 30, 2020 Three Months Ended November 30, YoY Change 2021 % 2020 % $ % Ice Cream Segment revenues$ 1,979,616 66.8 %$ 1,158,989 57.1 %$ 820,627 70.8 % Measurement Segment revenues 982,349 33.2 % 870,723 42.9 % 111,626 12.8 % Total revenue,
net 2,961,965 100.0 % 2,029,712 100.0 % 932,253 45.9 % Cost of sales 1,356,874 45.8 % 1,067,599 52.6 % 289,275 27.1 % Gross profit 1,605,091 54.2 % 962,113 47.4 % 642,978 66.8 % Selling, general and administrative 4,161,890 140.5 % 3,091,516 152.3 %
1,070,374 34.6 % Research & development 5,580 0.2 % 17,877 0.9 % (12,297 ) (68.8 %) Total operating
expenses 4,167,470 140.7 % 3,109,393 153.2 %
1,058,077 34.0 % Operating loss (2,562,379 ) (86.5 %) (2,147,280 ) (105.8 %) (415,099 ) (19.3 %)
Gain on sale of property and equipment 4,598,095 155.2 % - - 4,598,095 100.0 % Adjustments to bargain purchase gain - 0.0 % (82,103 ) (4.0 %) 82,103 100.0 % Interest expense (18,303 ) (0.6 %) (1,285 ) (0.1 %) 17,018 1324.4 % Other (expense) income, net 173,274 5.8 % (134,164 ) (6.6 %) 307,438 229.2 % Income (loss) before income taxes 2,190,687 74.0 % (2,364,832 ) (116.5 %) 4,555,519 192.6 % Income tax provision 2,775 0.1 % 1,637 0.1 % 1,138 69.5 % Net income (loss)$ 2,187,912 73.9 %$ (2,366,469 ) (116.6
%)$ 4,554,381 192.5 %
Highlights of the Six Months EndedNovember 30, 2021 andNovember 30, 2020
Six Months Ended November 30, YoY Change 2021 % 2020 % $ % Ice Cream Segment revenues$ 4,935,371 73.4 %$ 1,660,409 46.9 %$ 3,274,962 197.2 % Measurement Segment revenues 1,785,769 26.6 % 1,876,788 53.1 % (91,019 ) (4.8 %) Total revenue, net 6,721,140 100.0 % 3,537,197 100.0 % 3,183,943 90.0 % Cost of sales 2,706,849 40.3 % 1,967,440 55.6 % 739,408 37.6 % Gross profit 4,014,291 59.7 % 1,569,756 44.4 % 2,444,535 155.7 % Selling, general and administrative 8,292,576 123.4 % 5,178,232 146.4 %
3,114,344 60.1 % Transaction costs - 0.0 % 125,167 3.5 % (125,167 ) (100.0 %) Research & development 14,845 0.2 % 35,330 1.0 % (20,485 ) (58.0 %) Total operating
expenses 8,307,421 123.6 % 5,338,729 150.9 % 2,968,692 55.6 % Operating loss (4,293,130 ) (63.9 %) (3,768,972 ) (106.6 %) (524,158 ) 13.9 % Gain on sale of property and equipment 4,598,095 68.4 % - 0.0 %
4,598,095 100.0 % Bargain purchase gain - 0.0 % 1,189,512 33.6 % (1,189,512 ) (100.0 %) Forgiveness of PPP loan 588,534 8.8 % - 0.0 % 588,534 100.0 % Interest expense (29,579 ) (0.4 %) (2,544 ) (0.1 %) 27,035 1062.7 % Other income, net 285,303 4.2 % (36,836 ) (1.0 %) 322,139 874.5 % Income (loss) before income taxes 1,149,223 17.1 % (2,618,840 ) (74.0 %) 3,768,063 143.9 % Income tax provision (benefit) 6,350 0.1 % (403,030 ) (11.4 %) 409,380 101.6 % Net income
(loss)$ 1,142,873 17.0 %$ (2,215,810 ) (62.6 %)$ 3,358,683 151.6 %
· Consolidated revenues increased
months ended
ended
to
to
driven by the Ice Cream Segment, which generated revenues of
accounting for 66.8% and 73.4% of total revenue for the three and six month periods. 21 Table of Contents
· Gross margin increased to 54.2% for the three months ended
as compared to the three months ended
increased to 59.7%, for the six months ended
the six months ended
driven by improved performance in the Ice Cream Segment due to higher factory
utilization and production efficiencies, as well as a product mix shift in
Measurement Segment.
· Operating expenses increased
months ended
ended
primarily due to the inclusion of the
2020.
· Net income was
months ended
(
2020. Net income was
months ended
(
· Capital expenditures for the six months ended
as compared to
the six months ended
the new
2021. The remaining$69,909 was the result of expenditures on equipment upgrades at the Company'sRed Hook factory inBrooklyn, New York . Critical Accounting Policies The Company's critical accounting policies are disclosed in its Annual Report on Form 10-K for the year endedMay 31, 2021 filed onAugust 31, 2021 with theSecurities and Exchange Committee ("SEC"). There have been no changes subsequent toMay 31, 2021 .
Discussion of Operating Results
The Company has previously reported segment information between their two identified reportable segments: the Balancer Segment and the Measurement Segment. As described in the Company's Annual Report on Form 10-K for the year endedMay 31, 2021 , the Company sold the Dynamic Balance Systems ("SBS") business line onNovember 22, 2020 . This entity composed substantially all of the business activities of the Company's legacy Balancer Segment. Subsequent to this sale, Management determined that the Company had a single reportable segment, until the acquisition of Ample Hills closed during the first fiscal quarter of 2021 endedAugust 31, 2020 . Subsequent to the acquisition of Ample Hills, the Company has two identifiable reportable segments: the Measurement Segment and the Ice Cream Segment. The foregoing information presents the balances and activities of the Measurement Segment and the Ice Cream Segment as of and for the three and six months endedNovember 30, 2021 . Consolidated Revenue- Consolidated revenues increased$932,253 , or 45.9%, to$2,961,965 for the three months endedNovember 30, 2021 , as compared to$2,029,712 for the three months endedNovember 30, 2020 . Consolidated revenues increased$3,183,943 , or 90.0%, to$6,721,140 for the six months endedNovember 30, 2021 , as compared to$3,537,197 for the six months endedNovember 30, 2020 . The increase was driven by the Ice Cream Segment, which generated revenues of$1,979,616 and$4,935,371 for the three and six months endedNovember 30, 2021 , respectively, accounting for 66.8% and 73.4% of total revenue for the three and six month periods. Ice Cream Segment - The Ice Cream Segment encompasses the operations ofAmple Hills Acquisition, LLC and focuses on the wholesale and retail sales of ice cream and related products through a network of 11 individual retail locations located inNew York ,New Jersey andCalifornia . 22 Table of Contents Ice Cream Segment revenue increased$820,627 , or 70.8%, to$1,979,616 for the three months endedNovember 30, 2021 , as compared to$1,158,989 , for the three months endedNovember 30, 2020 . Ice Cream Segment revenue increased$3,274,962 , or 197.2%, to$4,935,371 for the six months endedNovember 30, 2021 , as compared to$1,660,409 for the six months endedNovember 30, 2020 . The increase was primarily due to the inclusion of Ice Cream Segment revenue for the entire six months endedNovember 30, 2021 versus partial inclusion for the six months endedNovember 30, 2020 , as the acquisition occurred onJuly 9, 2020 . In addition, the Company opened an additional retail location onMay 28, 2021 . Measurement Segment - The Measurement Segment includes two main product lines: the Acuity product line, which includes laser-based distance measurement and dimensional sizing laser sensors; and the Xact product line, which includes ultrasonic-based remote tank monitoring products and related monitoring revenues for markets in the IoT environment. Substantially all activity of our Measurement Segment is conducted inNorth America . Measurement Segment revenue increased$111,626 , or 12.8%, to$982,349 for the three months endedNovember 30, 2021 , as compared to$870,723 for the three months endedNovember 30, 2020 . Measurement Segment revenue decreased$91,019 , or 4.8%, to$1,785,769 for the six months endedNovember 30, 2021 , as compared to$1,876,788 for the six months endedNovember 30, 2020 . For the three months endedNovember 30, 2021 , the increase is primarily driven by an increase in Acuity and Xact product revenue of$119,208 and$25,638 , respectively, offset by a decrease in Xact monitoring revenue of$28,625 , or 6.8%. For the six months endedNovember 30, 2021 , the decrease is primarily driven by a decrease in Xact product revenue and Xact monitoring revenue of$97,438 and$16,372 , respectively, offset by an increase in other revenue and Acuity revenue of$13,805 and$8,985 , respectively.
Revenue by product line for the Measurement Segment for the three months ended
Three Months Ended November 30, YoY Change 2021 2020 $ % Acuity revenue$ 456,533 $ 337,325 $ 119,208 35.3 % Xact - product revenue 120,051 94,413 25,638 27.2 % Xact - monitoring revenue 391,508 420,133 (28,625 ) (6.8 %) Other 14,257 18,852 (4,595 ) (24.4 %)
Total Measurement Segment revenue$ 982,349 $ 870,723 $ 111,626
12.8 %
Revenue by product line for the Measurement Segment for the six months ended
Six Months Ended November 30, YoY Change 2021 2020 $ % Acuity revenue$ 712,658 $ 703,673 $ 8,985 1.3 % Xact - product revenue 209,968 307,406 (97,438 ) (31.7 %) Xact - monitoring revenue 792,198 808,570 (16,372 ) (2.0 %) Other 70,945 57,139
13,806 24.2 %
Total Measurement Segment revenue
Gross Margin - Ice Cream Segment gross margin for the three months endedNovember 30, 2021 increased to 57.0%, as compared to 40.4% for the three months endedNovember 30, 2020 . Ice Cream Segment gross margin for the six months endedNovember 30, 2021 increased to 63.6%, as compared to 41.0% for the six months endedNovember 30, 2020 . The Ice Cream Segment's improved performance was driven by improved factory utilization, yield and a seasonal increase in higher margin retail sales. Measurement Segment gross margin for the three months endedNovember 30, 2021 decreased to 48.5%, as compared to 56.8% for the three months endedNovember 30, 2020 . Measurement Segment gross margin for the six months endedNovember 30, 2021 increased to 49.1% as compared to 47.4% for the six months endedNovember 30, 2020 . Measurement Segment's improved margin was the driven by a higher percentage of Xact Monitoring revenue. 23 Table of Contents
Operating Expenses - Operating expenses increased$1,058,077 , or 34.0%, to$4,167,470 for the three months endedNovember 30, 2021 , as compared to$3,109,393 for the three months endedNovember 30, 2020 . Operating expenses increased$2,968,692 , or 55.6%, to$8,307,421 for the six months endedNovember 30, 2021 , as compared to$5,338,729 for the six months endedNovember 30, 2020 . The increase was primarily due to the inclusion of the Ample Hills business, acquired inJuly 2020 . Ice Cream Segment operating expenses increased$846,332 or 38.4%, to$3,051,528 for the three months endedNovember 30, 2021 , as compared to$2,205,196 for the three months endedNovember 30, 2020 . Ice Cream Segment operating expenses increased$2,894,448 , or 85.6%, to$6,275,936 for the six months endedNovember 30, 2021 , as compared to$3,381,488 for the six months endedNovember 30, 2020 . Measurement Segment operating expenses increased$211,745 , or 23.4%, to$1,115,942 for the three months endedNovember 30, 2021 , as compared to$904,197 for the three months endedNovember 30, 2020 . Measurement Segment operating expenses increased$74,244 , or 3.8%, to$2,031,485 for the six months endedNovember 30, 2021 , as compared to$1,957 ,241for the six months endedNovember 30, 2020 . The operating expense increase was driven by higher corporate administrative costs supporting the Measurement businesses, as well as higher professional fees. Gain on Sale of Property and Equipment - During the three and six months endedNovember 30, 2021 , the Company recorded a gain on the sale of property and equipment totaling$4,598,095 . The gain is the result of the sale of a two story 35,050 sq. foot building in an industrial zone that was listed for sale inDecember 2020 and equipment related to Ample Hills. OnNovember 10, 2021 , the Company closed on the sale of this building located at2451 NW 28th Avenue ,Portland, OR 97210 for$5,100,000 with net proceeds of$4,723,346 . Bargain Purchase Gain - In connection with the acquisition of Ample Hills onJuly 9, 2020 , the Company recognized an initial bargain purchase gain of$1,271,615 that was recorded as a component of other income on the consolidated statement of operations. The bargain purchase gain amount represents the excess of the estimated fair value of net assets acquired over the estimated fair value of the consideration transferred to the sellers and their landlords. In accordance with ASC 805 - Business Combinations ("ASC 805"), we have estimated the fair value of the net assets acquired as of the acquisition date. As a result of additional information obtained during the measurement period about the facts and circumstances that existed as of the acquisition date, the Company recorded measurement period adjustments of$132,807 during the year endedMay 31, 2021 , which decreased the total bargain purchase gain recognized to$1,138,808 . The adjustments were primarily related to additional cure payments subsequent to the acquisition which related to circumstances that existed prior to the acquisition date, and the identification of acquired inventory deemed obsolete as of the acquisition date. See Note 2 - Ample Hills Business Acquisition for further discussion. The purchase price allocation has been finalized as ofMay 31, 2021 , within the measurement period, and no further adjustments will be made. Interest Expense - Interest expense was$18,303 for the three months endedNovember 30, 2021 , as compared to$1,285 for the three months endedNovember 30, 2020 . Interest expense was$29,579 for the six months endedNovember 30, 2021 , as compared to$2,544 for the six months endedNovember 30, 2020 . Other Income (Expense), Net - Other income, net primarily consists of rental income, interest income and other income (expense). Other income was$173,274 for the three months endedNovember 30, 2021 , as compared to other income (expense) of ($134,164 ) for the three months endedNovember 30, 2020 . Other income (expense), net was$285,303 for the six months endedNovember 30, 2021 , as compared to ($36,836 ) for the six months endedNovember 30, 2020 . Interest income was$388 for the three months endedNovember 30, 2021 , as compared to$2,495 for the three months endedNovember 30, 2020 . Interest income was$1,158 for the six months endedNovember 30, 2021 , as compared to$6,743 for the six months endedNovember 30, 2020 . Fluctuations in interest income are impacted by the levels of our average cash and investment balances and changes in interest rates 24 Table of Contents
Income Taxes - The effective tax rate was 0.1% and 0.6%, respectively, for the three and six months endedNovember 30, 2021 . The effective tax rate was (0.1%) and (15.4%), respectively, for the three and six months endedNovember 30, 2020 . The effective tax rate on consolidated net loss for the three months endedNovember 30, 2021 andNovember 30, 2020 differs from the federal statutory tax rate primarily due to changes in the deferred tax asset valuation allowance. For the three months endedNovember 30, 2020 , the tax benefit recorded related to the bargain purchase gain and changes in the deferred tax asset valuation allowance Net Income (Loss) - Net income was$2,187,912 , or$0.57 , per fully diluted share, for the three months endedNovember 30, 2021 , as compared to net loss of ($2,366,469 ), or ($0.63 ), per fully diluted share, for the three months endedNovember 30, 2020 . Net income was$1,142,873 , or$0.30 , per fully diluted share, for the six months endedNovember 30, 2021 , as compared to net loss of ($2,215,810 ), or ($0.59 ), per fully diluted share, for the six months ended
November 30, 2020 . COVID-19 Update
As ofNovember 30, 2021 , all of the Company's manufacturing facilities and retail shops were operational. Throughout the COVID-19 pandemic, the Company has been adhering to mandates and other guidance from local governments and health authorities, including theWorld Health Organization and theCenters for Disease Control and Prevention . The Company has taken extraordinary measures and invested significantly in practices to protect employees and reduce the risk of spreading the virus, while continuing to operate where permitted and to the extent possible. These actions include additional cleaning of our facilities, staggering crews, incorporating visual cues to reinforce social distancing, providing face coverings and gloves, as well as implementing daily health validation at our manufacturing and office facilities. We expect to continue to incur costs to maintain these precautionary measures for the foreseeable future. The health and safety of our employees and our communities is our highest priority.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital increased
Net cash used in operating activities was$4,340,609 during the six months endedNovember 30, 2021 , as compared to net cash used in operating activities of$2,783,686 during the six months endedNovember 30, 2020 . The net cash used in operating activities was primarily driven by a gain on disposal of property and equipment of$4,598,095 , forgiveness of part of the First Draw PPP Loan received through the Paycheck Protection Program ("PPP") totaling$588,534 , an increase in inventories of$272,326 , a decrease in accrued liabilities and customer deposits of$262,052 , an increase in accounts receivable, net of$230,540 and an increase in rent, utility deposits and ERP deposits of$225,682 . These uses of cash were offset by net income of$1,142,873 , depreciation and amortization of$294,597 , non-cash lease costs of$159,248 , stock-based compensation of$69,369 , an increase in accounts payable of$94,041 , a decrease in prepaid expenses of$64,136 and an increase in income taxes receivable of$12,356 . Net cash provided by investing activities was$4,616,217 for the six months endedNovember 30, 2021 , as compared to net cash used in investing activities of$1,969,498 for the six months endedNovember 30, 2020 . The net cash provided by investing activities for the six months endedNovember 30, 2021 is driven by proceeds from the sale of property and equipment of$4,797,924 , offset partially by purchases of property and equipment of$181,707 . The net cash used in investing activities for the six months endedNovember 30, 2020 was the result of the acquisition of Ample Hills and associated cure costs totaling$1,711,127 , in addition to purchases of property and equipment totaling$258,371 . Net cash provided by financing activities was$264,476 during the six months endedNovember 30, 2021 , as compared to net cash provided by financing activities of$1,524,122 for the six months endedNovember 30, 2020 . The net cash provided by financing activities for the six months endedNovember 30, 2021 was due to the forgiveness of part of the First Draw PPP Loan received through the PPP, which resulted in a repayment to the Company of$264,476 for a loan payment previously made by the Company on this loan. The net cash provided by financing activities for the six months endedNovember 30, 2020 was primarily the result of proceeds received by the Company for the First Draw PPP Loan totaling$2,059,556 , offset by a repayment of the PPP loan totaling$264,476 , the repurchases of common stock totaling$234,517 and payments on short-term borrowing of$36,441 . 25 Table of Contents
Management is seeking to sell the assets held for sale, which would be a source of liquidity for the Company.
We believe that our existing cash and cash equivalents combined with the cash we anticipate generating from operating and financing activities will be sufficient to meet our cash requirements for the foreseeable future. We do not have any significant commitments nor are we aware of any significant events or conditions that are likely to have a material impact on our liquidity or capital resources. The Company may seek to generate additional cash, whether the remaining PPP loans are forgiven or otherwise. Such efforts could include the sale of previously disclosed real estate efforts or additional financing. Any subsequent equity financing sought may have dilutive effects on our current shareholders. The Company has no agreements or understandings with respect
to the foregoing. OnAugust 7, 2021 , the Company received The Commitment Letter toSchmitt Industries ("Commitment") fromMichael Zapata , our Chief Executive Officer ("CEO"). The Commitment states thatSententia Capital Management LLC ("SCM") or its affiliated entities will provide additional capital as required to Schmitt up to$1,300,000 for the Company's operations as needed throughNovember 30, 2022 . The Company has not requested or used any of the$1,300,000 as ofNovember 30, 2021 .
OnAugust 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. OnAugust 28, 2021 , the Company received correspondence fromBank of America , which included a Notice of Paycheck Protection Program Forgiveness Payment from SBA for a portion of the First Draw PPP Loan in the amount of$588,534 . The Company must retain all records for the PPP loan for six years from the date the loan is forgiven. Additionally, subsequent to receiving the First Draw PPP Loan in fiscal 2021, the Company repaid$264,476 . During the six months endedNovember 30, 2021 ,Bank of America returned this payment to the Company as a result of a portion of the First Draw PPP loan being forgiven. Going Concern
In connection with preparing the consolidated financial statements for the three and six months endedNovember 30, 2021 , management evaluated whether there were conditions and events, considered in the aggregate, that raised substantial doubt about the Company's ability to continue as a going concern within one year from the date the financial statements are issued. In making this assessment we performed a comprehensive analysis of our current circumstances including our financial position and cash usage forecasts. The analysis used to determine the Company's ability as a going concern does not include cash sources outside the Company's direct control that management expects to be available within the next 12 months. The Company has incurred significant losses and has not demonstrated sufficient revenues to achieve profitable operations on a consolidated basis. In addition, the Company will continue to generate losses from operations for at least one year and will require additional financing until the operations achieve profitability. These factors could create substantial doubt as to the Company's ability to continue as a going concern for at least one year after the date our unaudited condensed consolidated financial statements are issued. However, management expects that our existing cash and cash equivalents, planned sale of real estate assets, our access to theSententia Capital Management Commitment Letter, and any potential additional equity financing, will be sufficient to fund our anticipated level of operations through at leastJanuary 2023 and alleviates substantial doubt about the Company's ability to continue as a going concern.
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