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 .
· Measuring segment. Through the wholly owned subsidiary Schmitt Measurement
Core product lines, Acuity® and Xact®.
– Acuity® sells products, solutions and services that encompass lasers and white
Light sensor distance, measurement and sizing products.
– The Xact® product line includes ultrasonic-based remote tank monitoring products
and related surveillance revenue for Internet of Things (“IoT”) markets
Vicinity. The Xact products measure the levels of tanks
Propane, diesel and other tank based liquids and related monitoring
Services, including the transmission of filling 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
21
Highlights of the Three Months Ended February 28, 2022 and February 28, 2021
Three Months Ended February 28, YoY Change
2022 % 2021 % $ %
Ice Cream Segment revenues $ 972,920 52.6 % $ 621,730 37.3 % $ 351,190 56.5 %
Measurement Segment revenues 875,993 47.4 %
1,046,714 62.7 % (170,721 ) (16.3 %) Total revenue, net 1,848,913 100.0 % 1,668,444 100.0 % 180,469 10.8 % Cost of sales 912,076 49.3 % 837,254 50.2 % 74,822 8.9 % Gross profit 936,837 50.7 % 831,190 49.8 % 105,647 12.7 %
Selling, general and administrative 3,312,388 179.2 % 3,313,918 198.6 % (1,530 ) (0.0 %) Research & development 10,771 0.6 % 21,732 1.3 % (10,961 ) (50.4 %) Total operating expenses 3,323,159 179.7 % 3,335,650 199.9 % (12,491 ) (0.4 %) Operating loss (2,386,322 ) (129.1 %) (2,504,460 ) (150.1 %) 118,138 (4.7 %) Bargain purchase gain - 0.0 % (2,277 ) (0.1 %) 2,277 100.0 % Forgiveness of PPP loans 1,471,292 79.6 % - - 1,471,292 100.0 % Interest expense (8,232 ) (0.4 %) (5,400 ) (0.3 %) (2,832 ) 52.4 % Other (expense) income, net 38,286 2.1 % 90,703 5.4 % (52,417 ) (57.8 %) Income (loss) before income taxes (884,976 ) (47.9 %) (2,421,434 ) (145.1 %) 1,536,458 (63.5 %) Income tax provision (benefit) 8,268 0.4 %
(1,637 ) (0.1 %) 9,905 (605.1 %) Net income (loss)$ (893,244 ) (48.3 %)$ (2,419,797 ) (145.0 %)$ 1,526,553 (63.1 %)
Highlights of the Nine Months EndedFebruary 28, 2022 andFebruary 28, 2021
Nine Months Ended February 28, YoY Change
2022 % 2021 % $ %
Ice Cream Segment revenues $ 5,908,291 68.9 % $ 2,282,139 43.8 % $ 3,626,152 158.9 %
Measurement Segment revenues 2,661,762 31.1 %
2,923,502 56.2 % (261,740 ) (9.0 %) Total revenue, net 8,570,053 100.0 % 5,205,641 100.0 % 3,364,412 64.6 % Cost of sales 3,618,925 42.2 % 2,804,694 53.9 % 814,231 29.0 % Gross profit 4,951,128 57.8 % 2,400,947 46.1 % 2,550,181 106.2 %
Selling, general and administrative 11,604,964 135.4 % 8,492,150 163.1 % 3,112,814 36.7 % Transaction costs - 0.0 % 125,167 2.4 % (125,167 ) (100.0 %) Research & development 25,616 0.3 % 57,062 1.1 % (31,446 ) (55.1 %) Total operating expenses 11,630,580 135.7 %
8,674,379 166.6 % 2,956,201 34.1 % Operating loss (6,679,452 ) (77.9 %) (6,273,432 ) (120.5 %) (406,020 ) (6.5 %) Gain on sale of property and equipment 4,598,095 53.7 %
- 0.0 % 4,598,095 100.0 % Bargain purchase gain - 0.0 % 1,187,235 22.8 % (1,187,235 ) (100.0 %) Forgiveness of PPP loan 2,059,826 24. 0% - 0.0 % 2,059,826 100.0 % Interest expense (37,811 ) (0.4 %) (12,854 ) (0.2 %) (24,957) 194.2 % Other income, net 323,589 3.8 % 58,777 1.1 % 264,812 (450.5 %)
Income (loss) before income taxes 264,247 3.1 % (5,040,274 ) (96.8 %) 5,304,521 105.2 % Income tax provision (benefit) 14,618 0.2 %
(404,667 ) (7.8 %) 419,285 (103.6 %) Net income (loss)$ 249,629 2.9 %$ (4,635,607 ) (89.0 %)$ 4,885,236 105.4 % 22
· Group sales increased
months ended
completed
to
to
driven by the Ice Cream segment, which generated sales of
52.6% and 68.9% of total earnings for the three and nine months respectively
periods.
· Gross margin increased to 50.7% in the past three months
compared to the past three months
increased to 57.8% for the past nine months
the nine months came to an end
was driven by improved performance in the Ice Cream segment due to higher
factory utilization and production efficiency, and a shift in product mix
in Measurement Segment.
· Operating costs decreased
months ended
completed
especially by including the
2020.
The net loss was (
months ended
(
2021. Net income was
months ended
(
· Capital expenditures for the past nine months
compared to
The company’s investments are mainly related to its
expansion efforts, as well as expenditures on equipment upgrades at the Company'sRed Hook factory inBrooklyn, New York .
Critical Accounting Principles
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, 2019 . 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 first quarter of fiscal 2021 endedAugust 31, 2020 . Subsequent to the acquisition ofAmple 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 nine months endedFebruary 28, 2022 . Consolidated Revenue- Consolidated revenues increased$180,469 , or 10.8%, to$1,848,913 for the three months endedFebruary 28, 2022 , as compared to$1,668,444 for the three months endedFebruary 28, 2021 . Consolidated revenues increased$3,364,412 , or 64.6%, to$8,570,053 for the nine months endedFebruary 28, 2022 , as compared to$5,205,641 for the nine months endedFebruary 28, 2021 . The increase was driven by the Ice Cream Segment, which generated revenues of$972,920 and$5,908,291 for the three and nine months endedFebruary 28, 2022 , respectively, accounting for 52.6% and 68.9% of total revenue for
the
three and nine month periods.
23
Ice Cream Segment - The Ice Cream Segment encompasses the operations of Ample
Hills Acquisition, LLC and focuses on the retail and wholesale sales of ice
cream and related products through a network of 11 individual retail locations
located in New York , New Jersey and California .
Ice Cream Segment revenue increased $351,190 , or 56.5%, to $972,920 for the
three months ended February 28, 2022 , as compared to $621,730 , for the three
months ended February 28, 2021 . Ice Cream Segment revenue increased $3,626,152 ,
or 158.9%, to $5,908,291 for the nine months ended February 28, 2022 , as
compared to $2,282,139 for the nine months ended February 28, 2021 . The increase
was primarily due to the inclusion of Ice Cream Segment revenue for the entire
nine months ended February 28, 2022 , versus partial inclusion for the nine
months ended February 28, 2021 , as the acquisition occurred on July 9, 2020 . In
addition, the Company opened an additional retail location on May 28, 2021 .
Measurement Segment - The Measurement Segment includes two main product
lines: the Acuity product line, which includes laser-based distance measurement
and dimensional sizing laser sensors; and the Xact product line, which includes
ultrasonic-based remote tank monitoring products and related monitoring revenues
for markets in the IoT environment. Substantially all activity of our
Measurement Segment is conducted in North America .
Measurement Segment revenue decreased $170,721 or 16.3%, to $875,993 for the
three months ended February 28, 2022 , as compared to $1,046,714 for the three
months ended February 28, 2021 . Measurement Segment revenue decreased $261,741 ,
or 9.0%, to $2,661,762 for the nine months ended February 28, 2022 , as compared
to $2,923,502 for the nine months ended February 28, 2021 . For the three months
ended February 28, 2022 , the decrease is driven by a decrease in Acuity revenue
of $106,420 and decreases in Xact product revenue and Xact monitoring revenue of
$29,720 and $33,976 , respectively. For the nine months ended February 28, 2022 ,
the decrease is primarily driven by a decrease in Xact product revenue and Xact
monitoring revenue of $127,156 and $50,349 , respectively, as well as a decrease
in Acuity revenue of $97,435 .
Revenue by product line for the metering segment for the three months just ended
Three Months Ended
February 28, YoY Change
2022 2021 $ %
Acuity revenue $ 373,193 $ 479,613 $ (106,420 ) (22.2 %)
Xact - product revenue 108,810 138,530 (29,720 ) (21.5 %)
Xact - monitoring revenue 394,595 428,571 (33,976 ) (7.9 %)
Other (605 ) -
(605) – Total revenue of meter segment
Revenue by product line for the measurement segment for the past nine months
Nine Months Ended
February 28, YoY Change
2022 2021 $ %
Acuity revenue $ 1,085,851 $ 1,183,286 $ (97,435 ) (8.2 %)
Xact - product revenue 318,778 445,934 (127,156 ) (28.5 %)
Xact - monitoring revenue 1,186,793 1,237,142 (50,349 ) (4.1 %)
Other 70,340 57,140
13,200 23.1% total sales Segment Measurement
24
Gross Margin - Ice Cream Segment gross margin for the three months ended
February 28, 2022 decreased to 40.1%, as compared to 42.4% for the three months
ended February 28, 2021 . Ice Cream Segment gross margin for the nine months
ended February 28, 2022 increased to 59.7%, as compared to 41.4% for the nine
months ended February 28, 2021 . The Ice Cream Segment's performance was driven
by improved factory utilization and yield.
Measurement Segment gross margin for the three months ended February 28, 2022
increased to 62.5%, as compared to 54.2% for the three months ended February 28,
2021 . Measurement Segment gross margin for the nine months ended February 28,
2022 increased to 53.5% as compared to 49.8% for the nine months ended February
28, 2021 . Measurement Segment's improved margin was driven by a higher
percentage of Xact Monitoring revenue.
Operating Expenses - Ice Cream Segment operating expenses decreased $236,056 or
9.6%, to $2,227,303 for the three months ended February 28, 2022 , as compared to
$2,463,359 for the three months ended February 28, 2021 . Ice Cream Segment
operating expenses increased $2,656,813 or 45.4%, to $8,503,239 for the nine
months ended February 28, 2022 , as compared to $5,846,426 for the nine months
ended February 28, 2021 . The increase was primarily due to the inclusion of the
Ample Hills business, acquired in July 2020 .
Measurement Segment operating expenses increased $223,564 , or 25.6%, to
$1,095,856 for the three months ended February 28, 2022 , as compared to
$872,292 for the three months ended February 28, 2021 . Measurement Segment
operating expenses increased $299,387 , or 10.6%, to $3,127,341 for the nine
months ended February 28, 2022 , as compared to $2,827,953 for the nine months
ended February 28, 2021 . 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 nine months ended February
28, 2022 , the Company recorded a gain on the sale of property and equipment
totaling $4,598,095 . The gain is primarily the result of the sale of a two story
35,050 sq. foot building located at 2451 NW 28th Avenue , Portland, OR. On
November 10, 2021 , the Company closed on the sale of this building for
$5,100,000 gross proceeds.
Bargain Purchase Gain - In connection with the acquisition of Ample Hills on
July 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 ended May
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 of May 31, 2021 , within the measurement period, and no further
adjustments will be made.
Interest Expense - Interest expense was $8,232 for the three months ended
February 28, 2022 , as compared to $5,400 for the three months ended February 28,
2021 . Interest expense was $37,811 for the nine months ended February 28, 2022 ,
as compared to $12,854 for the nine months ended February 28, 2021 .
Other Income, Net - Other income, net, primarily consists of rental income,
interest income and other income. Other income, net was $38,286 for the three
months ended February 28, 2022 , as compared to other income of $90,703 for the
three months ended February 28, 2021 . Other income, net, was $323,590 for the
nine months ended February 28, 2022 , as compared to $58,777 for the nine months
ended February 28, 2021 .
25
Income Taxes - The effective tax rate was 0.9% and 5.5%, respectively, for the three and nine months endedFebruary 28, 2022 . The effective tax rate was (0.1%) and (8.0%), respectively, for the three and nine months endedFebruary 28, 2021 . The effective tax rate on consolidated net loss for the three months endedFebruary 28, 2022 andFebruary 28, 2021 differs from the federal statutory tax rate primarily due to changes in the deferred tax asset valuation allowance. For the three months endedFebruary 28, 2021 , the tax benefit recorded related to the bargain purchase gain and changes in the deferred tax asset valuation allowance. Net Income (Loss) - Net loss was ($893,244 ), or ($0.24 ), per fully diluted share, for the three months endedFebruary 28, 2022 , as compared to net loss of (2,419,797), or ($0.64 ), per fully diluted share, for the three months endedFebruary 28, 2021 . Net income was$249,629 , or$0.07 , per fully diluted share, for the nine months endedFebruary 28, 2022 , as compared to net loss of ($4,635,607 ), or ($1.23 ), per fully diluted share, for the nine months endedFebruary 28, 2021 . COVID-19 Update
As ofFebruary 28, 2022 , 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 decreased
Net cash used in operating activities was$6,907,162 during the nine months endedFebruary 28, 2022 , as compared to net cash used in operating activities of$5,657,905 during the nine months endedFebruary 28, 2021 . The net cash used in operating activities was primarily driven by a gain on disposal of property and equipment of$4,598,095 and forgiveness of part of the First Draw PPP Loan received through the Paycheck Protection Program ("PPP") totaling$2,059,826 . These uses of cash were offset by net income of$249,629 , depreciation and amortization of$401,448 , non-cash lease costs of$92,042 , stock-based compensation of$95,016 , an increase in inventories of$638,534 , an increase in rent, utility deposits and ERP deposits of$397,193 , a decrease in accounts receivable, net of$217,836 , a decrease in accrued liabilities and customer deposits of$409,187 , a decrease in accounts payable of$27,776 , and a decrease in prepaid expenses of$167,478 . Net cash provided by investing activities was$4,609,237 for the nine months endedFebruary 28, 2022 , as compared to net cash used in investing activities of$2,188,225 for the nine months endedFebruary 28, 2021 . The net cash provided by investing activities for the nine months endedFebruary 28, 2022 is driven by proceeds from the sale of property and equipment of$4,797,924 , offset partially by purchases of property and equipment of$188,687 . The net cash used in investing activities for the nine months endedFebruary 28, 2021 was primarily the result of the acquisition of Ample Hills and associated cure costs totaling$1,713,404 and purchases of property and equipment totaling$510,321 , partially offset by proceeds from the sale of property and equipment of$35,500 . Net cash provided by financing activities was$264,476 during the nine months endedFebruary 28, 2022 , as compared to net cash provided by financing activities of$1,445,963 for the nine months endedFebruary 28, 2021 . The net cash provided by financing activities for the nine months endedFebruary 28, 2022 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 nine months endedFebruary 28, 2021 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$300,492 and payments on short-term borrowing of$48,625 . Management is seeking to sell the assets held for sale, which would be a source of liquidity for the Company, though there can be no assurance as to whether the Company will consummate a sale or as to the proceeds the Company would receive in any such sale. 26 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 loan is 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 throughFebruary 28, 2023 . The Company has not requested or used any of the$1,300,000 as ofFebruary 28, 2022 .
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 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 . InFebruary 2022 , the Company received notification that the remaining First Draw PPP Loan had been forgiven by the SBA in the amount of$1,471,022 . 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 nine months endedFebruary 28, 2022 , 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 nine months endedFebruary 28, 2022 , 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 leastApril 2023 and alleviates substantial doubt about the Company's ability to continue as a going concern.
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