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 fiscal year endedMay 31, 2020 , 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
Schmitt operates a diversified business. The Company reports in two business segments, Ice Cream and Measurement.
· Ice Cream Segment. Through our wholly owned subsidiary,Ample Hills Acquisition, LLC , the Ice Cream Segment manufactures, wholesales, and
retails ice cream and related products through a network of 10 individual
retail locations located inNew York ,New Jersey andCalifornia . · Measurement Segment. Through its wholly owned subsidiary Schmitt
products in two core product lines, Acuity® and Xact®. - Acuity® sells products, solutions and services that includes laser and white light sensor distance, measurement and dimensional sizing products; - Xact® product line includes ultrasonic-based remote tank monitoring products and related monitoring revenues for markets in the Internet of Things ("IoT") environment. The Xact products measure the fill levels of tanks holding propane, diesel and other tank-based liquids and the related monitoring services, which includes
transmission of
fill data from the tanks via satellite to a secure web site for display.
The accompanying unaudited financial information should be read in conjunction
with our Annual Report on Form 10-K for the fiscal year ended
23 Table of Contents
Highlights of the Three and Six Months Ended
· Consolidated revenues increased$996,610 or 96.5% to$2,029,712 for the three months endedNovember 30, 2020 as compared to$1,033,102 for the three months endedNovember 30, 2019 . Consolidated revenues increased$1,409,318 or 66.2% to$3,537,197 for the six months endedNovember 30, 2020 as compared to$2,127,879 for the six months endedNovember 30, 2019 . · The Company's newly formed Ice Cream Segment generated revenues of$1,158,989 and$1,660,409 for the three and six-months endedNovember 30, 2020 . First quarter revenue from the Ice Cream Segment of$501,420 represents less than a month of retail operations as most ofAmple Hills' locations were opened only partway through August. · Measurement Segment revenue decreased$162,379 , or 15.7%, to$870,723
for the three months ended
for the three months ended
driven by a
decline was offset by an increase in Xact monitoring revenue of
or 10.3%. Measurement Segment revenue decreased
driven by a
an increase in Xact monitoring revenue of
months ended
monitoring devices continues to grow.
· Gross margin increased 9.7% and 3.6% to 47.4% and 44.4% for the three
and six months ended
for the three and six months ended
is a result of the start-up of the Ample Hill's factory and the decline
in low-margin Acuity sales.
· Operating expenses increased
three months ended
three months ended
2020 as compared to
inclusion of the
compensation, professional fees, build out of Xact monitoring tool, ERP
development and computer services. · Net loss from continuing operations was ($2,366,469 ) or ($0.63 ) per fully diluted share, for the three months endedNovember 30, 2020
compared to net loss from continuing operations of (
per fully diluted share, for the three months ended
2019. Net loss from continuing operations was (
per fully diluted share, for the six months ended
compared to net loss from continuing operations of (
per fully diluted share, for the six months ended
income for the three months ended
for the SBS business. Net income for the six months ended
2020 includes a
acquisition of
· There was a significant increase in capital expenditures, consistent
with the fiscal year 2021 plan, during the six months ended
2020 as compared to the three months ended
expenditures were
same period of 2019. Critical Accounting Policies The Company's critical accounting policies are disclosed in its Annual Report on Form 10-K for the year endedMay 31, 2020 . Subsequent to the filing of the Form 10-K, the Company completed its acquisition ofAmple Hills . In connection with this acquisition, the Company reports certain financial statement captions that it had not previously and, as such, has included the critical accounting policies associated with such items herein. 24 Table of Contents
Bargain Purchase Gain
In accordance with ASC 805 - Business Combinations, we have estimated the fair value of the net assets acquired as part of our purchase of theAmple Hills business. We have determined that the aggregate fair value of these assets is in excess of the fair value of the consideration transferred to the seller and their landlords. As such, we have recorded a bargain purchase gain for the three and six months endedNovember 30, 2020 . ASC 805 allows for a measurement period, not to exceed 12 months from the date of acquisition, for filers to compile sufficient information to complete their estimate of the fair value of the net assets acquired. As ofNovember 30, 2020 , the Company is still in this measurement period. Any significant adjustments to our estimates of fair value of acquired net assets in future periods could have significant impacts on reported results from such periods.
Tradenames, Trademarks, Recipes and the Company website
The trade names and marks obtained as part of our acquisition ofAmple Hills are considered to be indefinite-lived. The Proprietary recipes and website have lives of five and three years, respectively. For the indefinite lived intangibles, the assets are not subject to amortization but are tested annually. We will conduct our annual impairment test onMay 31 , or earlier if impairment indicators are present. As ofNovember 30, 2020 , the Company has not identified any events or circumstances indicating than an acceleration of this impairment test would be necessary. A quantitative impairment test would utilize a discounted relief-from-royalty model. The discounted cash flow analysis is subject to multiple variables requiring significant judgment including the selection of an appropriate discount rate that reasonably reflects the assumed rate of return that third party buyer would expect to receive if they were purchasing the tradename, the selection of a reasonable royalty rate that represents what the Company would pay a third party to access a similar tradename, as well as an estimate of future cash flows, which are based on our best estimates of future store openings and closings, the future performance of existing stores, the growth rate of sales as our ability to effectively manager future costs. Such inputs are highly subjective and actual results could differ substantially from our estimates. Revisions of such estimates, whether due to macroeconomic conditions or our inability to successfully execute on our revenue and profitability growth goals for the Ice Cream Segment could have a significant impact on future reported results. 25 Table of Contents Lease Accounting - Lessees
We evaluate our leases to determine if we have the right to control the use of an asset, or group of assets, for a period of time in exchange for consideration. If we determine that we have the right to obtain substantially all of the economic benefits arising from the use of such assets, we recognize a right-of-use asset and lease liability. We evaluate each lease to estimate its expected term which includes renewal options that we are reasonably assured that we will exercise and also evaluate the classification of the lease as either an operating lease or a finance lease. As our leases do not provide an implicit rate, we must estimate an incremental borrowing rate based on the information available at the time the lease is commenced or amended. This estimated rate is directly utilized in determining the present value of lease payments. As the Company does not have any outstanding debt, other than the PPP Loan referred to in Note 12 to the extent not forgiven, or committed credit facilities, we must estimate the incremental borrowing rate based on prevailing financial market conditions, peer company credit analyses, and management judgment. We assess our 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 our strategic revenue and cash flow growth plans could result in the recognition of impairment losses in future periods, which could be material.
Discussion of Operating Results from Continuing Operations
The Company has previously reported segment information between their two identified reportable segments: Balancer and Measurement. As described in the accompanying condensed consolidated financial statements, 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 ofAmple Hills closed during the quarter endedAugust 31, 2020 ). The foregoing information presents the balances and activities of the Measurement segment as of and for the three and six months endedNovember 30, 2020 as balances and activities of the newly identified Ice Cream Segment. Three Months Ended Six Months Ended November 30, 2020 November 30, 2019 November 30, 2020 November 30, 2019 Ice Cream revenue$ 1,158,989 57.1 % $ - 0.0 %$ 1,660,409 81.8 % $ - 0.0 % Measurement revenue 870,723 42.9 % 1,033,102 100.0 % 1,876,788 92.5 % 2,127,880 206.0 % Total net revenue 2,029,712 100.0 % 1,033,102 100.0 % 3,537,197 174.3 % 2,127,880 206.0 % Cost of revenue 1,067,599 52.6 % 643,348 62.3 % 1,967,441 96.9 % 1,260,771 122.0 % Gross profit 962,113 47.4 % 389,754 37.7 % 1,569,756 77.3 % 867,109 83.9 % Operating expenses: 0.0 % 0.0 % General, administration and sales 3,091,516 152.3 % 993,230
96.1 % 5,303,399 261.3 % 1,697,382 164.3 % Research and development
17,877 0.9 % 5,377 0.5 % 35,330 1.7 % 8,463 0.8 %
Total operating expenses 3,109,393 153.2 % 998,607
96.7 % 5,338,729 263.0 % 1,705,845 165.1 % Operating income (loss) (2,147,280 ) -105.8 % (608,853 )
-58.9 % (3,768,972 ) -185.7 % (838,736 ) -81.2 % Bargain Purchase Gain
(82,103 ) -4.0 % - 0.0 % 1,189,512 58.6 % - 0.0 % Other expense, net (135,449 ) -6.7 % 5,356
0.5 % (39,380 ) -1.9 % 9,700 0.9 % Income (loss) before income taxes
(2,364,832 ) -116.5 % (603,497 )
-58.4 % (2,618,840 ) -129.0 % (829,036 ) -80.2 % Provision for income taxes
1,637 0.1 % (4,439 )
-0.4 % (403,030 ) -19.9 % (23,824 ) -2.3 % Net income (loss)
(2,366,469 ) -116.6 % (599,058 ) -58.0 % (2,215,810 ) -109.2 % (805,212 ) -77.9 % 26 Table of Contents
Consolidated Revenue- Consolidated revenue increased$996,610 or 96.5%, to$2,029,712 for the three months endedNovember 30, 2020 from$1,033,102 for the three months endedNovember 30, 2019 . Consolidated revenue increased$1,409,318 or 66.2%, to$3,537,197 for the six months endedNovember 30, 2020 from$2,127,879 for the six months endedNovember 30, 2019 . The decrease in the Measurement Segment was offset by$1,660,409 in revenues in the newly identified Ice Cream Segment for the period from the acquisition ofAmple Hills (July 9, 2020 ) throughNovember 30, 2020 . 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 10 individual retail locations located inNew York ,New Jersey andCalifornia . 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 decreased$162,379 , or 15.7%, to$870,723 for the three months endedNovember 30, 2020 as compared to$1,033,102 for the three months endedNovember 30, 2019 . The decrease is primarily driven by a$122,917 , or 56.6%, decrease in Xact Product sales. The decline was offset by an increase in Xact monitoring revenue of$39,158 , or 10.3%. Measurement Segment revenue decreased$251,092 , or 11.8%, to$1,876,788 for the six months endedNovember 30, 2020 as compared to$2,127,879 for the six months endedNovember 30, 2019 . The decrease is driven by a$120,968 , or 28.2%, decrease in Xact Product sales and a$112,747 , or 13.8%, decrease in Acuity Sales. The decline was offset by an increase in Xact monitoring revenue of$59,754 , or 8.0%, for the six months endedNovember 30, 2020 as the Company's installed base of monitoring devices continues to grow.
Revenue by product line for the Measurement Segment for three months and six
months ended
Three Months Ended November 30, Six Months Ended November 30, 2020 2019 2020 2019 Acuity revenue 337,325 370,527 703,673 816,420 Xact - product revenue 94,413 217,330 307,406 428,374 Xact - monitoring revenue 420,133 380,975 808,570 748,816 Total Measurement segment
revenue - current product lines 851,871 968,832 1,819,649 1,993,610 Total Measurement segment revenue - discontinued product lines 18,852 64,270$ 57,139 $ 134,270 Total Measurement segment revenue 870,723 1,033,102 1,876,788 2,127,880 Gross Margin - Ice Cream Segment gross margin was 40.3% and 41.0% for the three and six month period endedNovember 30, 2020 . As the Company continues to manage the day-to-day operations of the business and as CAPEX improvements are placed into service, we expect to be able to identify opportunities to drive additional revenue and volume through our factory, which will improve gross margin. Measurement Segment gross margin for the three months endedNovember 30, 2020 increased 19.1% to 56.8% as compared to 37.7% for the three months endedNovember 30, 2019 . Margins for the six months endedNovember 30, 2020 increased 6.7% to 47.4% as compared to 40.7% for the six months endedNovember 30, 2019 . 27 Table of Contents
Operating Expenses - Ice Cream Segment operating expenses for the Ice Cream Segment were$2,205,196 and$3,381,377 for the three and six month periods endedNovember 30, 2020 respectively. Results from this segment are entirely attributable to our Ample Hills business, which was acquired onJuly 9, 2020 . As the Company continues to manage the day-to-day operations of the business, we expect to be able to identify opportunities that will allow us to more efficiently manage operating expenses in future periods. Measurement Segment operating expenses decreased$94,412 , or 9.4%, to$904,195 for the three months endedNovember 30, 2020 from$998,607 for the three months endedNovember 30, 2019 . Measurement Segment operating expenses increased$251,508 , or 14.7%, to$1,957,353 for the six months endedNovember 30, 2020 from$1,705,845 for the six months endedNovember 30, 2019 . The increase in operating expenses for the six months endedNovember 30, 2020 is primarily due to increased stock-based compensation, professional fees, and investments to develop our new ERP system and to invest in our Xact tank monitoring business. Additionally, corporate payroll expenses increased due to the hiring of a new CFO and the CEO transitioning to payroll in the three months ended November
30, 2020. Bargain Purchase Gain -In connection with the acquisition of Ample Hills during the quarter endedAugust 31, 2020 the Company recorded a bargain purchase gain of$1,271,615 that was recorded as a component of net income. An adjustment was recorded to the bargain purchase gain in in the quarter endedNovember 30, 2020 in the amount of$82,103 , reducing the bargain gain for the six months endedNovember 30, 2020 to$1,189,512 . This amount represents the excess of the estimated fair value of the net assets acquired over the estimated fair value of the consideration transferred to the sellers and their landlords. Other Income (Expense) - Other income (expense) consists of rental income, interest income, interest expense, foreign currency exchange gain (loss) and other income (expense). Rental income was$86,887 and$181,219 for the three and six month period endedNovember 30, 2020 as compared to$0 and$0 for the three and six month period endedNovember 30, 2020 , respectively. Interest income was$2,495 and$6,743 respectively for the three and six months endedNovember 30, 2020 as compared to$5,398 and$9,684 for the three and six months endedNovember 30, 2019 . Fluctuations in interest income are impacted by the levels of our average cash and investment balances and changes in interest rates. Interest expense was ($4,943 ) for the three months endedNovember 30, 2020 as compared to ($362 ) for the three months endedNovember 30, 2019 . During the six months endedNovember 30, 2020 , management booked reserve against escrow cash related to the sale of the SBS business in fiscal year 2020, in the amount of$220,000 to other expenses. Foreign currency exchange loss was$0 for the three months endedNovember 30, 2020 as compared to foreign currency exchange loss of$247 for the three months endedNovember 30, 2019 . The foreign currency exchange gain and loss fluctuates with the strength of foreign currencies against theU.S. dollar during the respective periods. Income Taxes - The effective tax rate for the three months endedNovember 30, 2020 was (0.1)%, as compared to (0.7)% for the three months endedNovember 30, 2019 . The effective tax rate on consolidated net income for the three months endedAugust 31, 2020 and 2019 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 from continuing operations was ($2,366,469 ) or ($0.63 ) per fully diluted share, for the three months endedNovember 30, 2020 compared to net loss from continuing operations of ($599,058 ) or ($0.15 ) per fully diluted share, for the three months endedNovember 30, 2019 . Net loss from continuing operations was ($2,215,810 ) or ($0.59 ) per fully diluted share, for the six months endedNovember 30, 2020 compared to net loss from continuing operations of ($821,185 ) or ($0.20 ) per fully diluted share, for the six months ended
November 30, 2019 . 28 Table of Contents
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital decreased
Cash, cash equivalents and restricted cash decreased$3,229,062 to$7,337,469 as ofNovember 30, 2020 from$10,566,531 as ofMay 31, 2020 . Cash used in operating activities totaled$2,783,686 the six months endedNovember 30, 2020 as compared to cash provided in operating activities of$692,049 for the six months endedNovember 30, 2019 . Net loss from continuing operations of$2,215,810 along with the offsetting bargain purchase gain of$1,189,512 primarily impacted the total cash from operating activities for the six months endedNovember 30, 2020 . AtNovember 30, 2020 , the Company had accounts receivable of$795,440 as compared to$574,926 atMay 31, 2020 , an increase of$220,514 . Inventories increase$692,350 to$1,751,707 as ofNovember 30, 2020 as compared to$1,059,357 atMay 31, 2020 . AtNovember 30, 2020 , total current liabilities increased$1,718,284 to$3,026,308 as compared to$1,308,024 atMay 31, 2020 . The increase in current liabilities is primarily due to liabilities associated with the acquisition of Ample Hills. Capital expenditures increased significantly, consistent with the fiscal year 2021 plan, during the three and six months endedNovember 30, 2020 . During the six months endingNovember 30, 2020 the Company incurred$258,371 in capital expenditure as compared to$14,690 for the six month period endedNovember 30, 2019 . The increase in in capital expenditures is primarily due to the need to repair equipment at the Ice Cream segment's factory and retail locations as well as the build-out of the segment's newLong Beach, California andBrooklyn ,
New York locations. We believe that our existing cash and cash equivalents combined with the cash we anticipate generating from operating 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.
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