| Summary Of Significant Accounting Policies | Basis of Presentation In the opinion of management of Schmitt Industries, Inc. (the "Company",
"Schmitt", "we" or "our"), the accompanying unaudited interim condensed consolidated financial statements
have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission and contain all adjustments,
consisting only of normal recurring adjustments, necessary to present fairly its financial position as of February 28, 2021 and
its results of operations and its cash flows for the periods presented. The condensed consolidated balance sheet at May 31,
2020 has been derived from the Annual Report on Form 10-K for the fiscal year ended May 31, 2020. The accompanying unaudited
condensed consolidated financial statements and related notes should be read in conjunction with the audited consolidated financial
statements included in our Annual Report on Form 10-K for the fiscal year ended May 31, 2020. Operating results for the interim
periods presented are not necessarily indicative of the results that may be experienced for the fiscal year ending May 31,
2021. Principles of Consolidation These condensed consolidated financial statements include those of
the Company and its wholly owned subsidiaries: Ample Hills Acquisition, LLC and Schmitt Measurement Systems, Inc.. All significant
intercompany accounts and transactions have been eliminated in the preparation of the consolidated condensed financial statements. Business Combination On July 9, 2020, Ample Hills Acquisition LLC ("Buyer"),
a New York limited liability company and wholly owned subsidiary of the Company, entered into an Asset Purchase Agreement (the
"Agreement"), dated as of June 29, 2020, with Ample Hills Holdings, Inc., a Delaware corporation, Ample Hills Creamery,
Inc., a New York corporation, and their subsidiaries (collectively, "Ample Hills"). The transactions contemplated by
the Agreement (the "Transactions") closed on July 9, 2020, the day after a sale order approving the Transactions was
entered by the Bankruptcy Court (defined below). The Ample Hills entities were debtors-in-possession under title 11 of the United
States Code, 11 U.S.C. § 101 et seq. pursuant to voluntary petitions for relief filed under chapter 11 of the Bankruptcy Code
on March 15, 2020 in the United States Bankruptcy Court for the Eastern District of New York (the "Bankruptcy Court").
The Transactions were conducted through a Bankruptcy Court-supervised process, subject to Bankruptcy Court-approved bidding procedures,
approval of the Transactions by the Bankruptcy Court, and the satisfaction of certain closing conditions. The Agreement provided that, upon the terms and subject to the conditions
set forth therein, Ample Hills sold, transferred and assigned to Buyer, or one or more of its affiliates, the Acquired Assets (as
defined in the Agreement) and Buyer, or one or more of its affiliates, assumed the Assumed Liabilities (as defined in the Agreement)
for a purchase price of $1.0 million. The Asset Acquisition includes the following assets, among other things, Ample Hills' equipment,
inventory, and all intellectual property, including the names and marks of "AMPLE HILLS" and "AMPLE HILLS CREAMERY"
and all derivatives thereof. Pursuant to the Agreement, Buyer also paid an additional approximately $0.7 million to certain landlords
of Ample Hills in exchange for the right to assume leases with such landlords. See Note 10 for acquisition accounting based on
the estimated fair value of assets acquired and liabilities assumed. The Company's strategy includes utilizing its capital for value opportunities.
Accordingly, the primary purpose of the Ample Hills acquisition was to capitalize on this strategy by purchasing a business with
a good brand name, which in light of the price we paid in bankruptcy, could have a significant upside. The Transactions were funded
by the Company with cash on hand and has been accounted for in accordance with ASC 805 - Business Combinations 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 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 and combined statements of operations. Factory
Sales, net The Company generates revenues
from sales from its Brooklyn, New York factory, including wholesale, e-commerce, direct-to-consumer, and
manufacturing production sales for third parties. These revenues are recognized when control of the goods is transferred to
the customer, in accordance with the terms of the applicable agreement. Payment terms are typically 30 days from the date
control over the product is transferred to the customer. Measurement
Product Sales The Company 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
products, which are accrued and expensed 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. Shipping and handling fees billed to customers, which are recognized at the time of
shipment as a component of net revenues, were $5,380 and $21,066 for the nine months ended February 28, 2021 and February 29, 2020,
respectively. Remote
Tank Monitoring Services The Company's Xact product line includes satellite focused remote
tank monitoring products and related monitoring services for markets in the Internet of Things ("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 February 28, 2021 and May 31, 2020, significant contract balances
were as follows:
February 28, 2021 May 31, 2020
Contract Liabilities:
Customer deposits, current $ 63,896 $ 12,239
Gift card liabilities, current 37,599 —
Total customer deposits and prepayments $ 101,495 $ 12,239 Cash, Cash Equivalents and Restricted Cash 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. At times,
balances may exceed federally insured limits. Restricted cash consists of an amount held in escrow related to the
sale of the balancer business segment and Ample Hills Retail Operations respectively, as described in the notes to the condensed
consolidated financial statements. Once certain events are complete, the restrictions on this cash payment will be released. The following table provides a reconciliation of cash and cash equivalents
and restricted cash as reported within the Consolidated Balance Sheets as of February 28, 2021 and May 31, 2020 to the sum
of the same such amounts as shown in the Consolidated Statement of Cash Flows for the three months ended February 28, 2021:
February 28, 2021 May 31, 2020
Cash and cash equivalents $ 3,600,230 $ 10,146,531
Restricted cash 566,134 420,000
Total cash, cash equivalents, and restricted cash shown $ 4,166,364 $ 10,566,531 Accounts Receivable The Company maintains credit limits for all customers based upon
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 provided. If these analyses
lead management to the conclusion that a customer account is uncollectible, the balance will be directly charged to bad debt expense.
The allowance for doubtful accounts was $94,007 and $103,029 as of February 28, 2021 and May 31, 2020, respectively. Inventories 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. As of February
28, 2021 and May 31, 2020 inventories consisted of:
February 28, 2021 May 31, 2020
Raw materials $ 1,026,515 $ 154,293
Work-in-process 79,809 525,615
Finished goods 898,144 379,449
Total inventories $ 2,004,469 $ 1,059,357 Property and Equipment Property and equipment are stated at cost, less depreciation and amortization. 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; the lesser
of the useful life or the remaining lease term for leasehold improvements; and twenty-five years for buildings. Expenditures
for maintenance and repairs are charged to expense as incurred. As of February 28, 2021 and May 31, 2020, property and equipment
consisted of:
February 28, 2021 May 31, 2020
Land $ 159,000 $ 159,000
Buildings and improvements 2,814,299 1,612,003
Furniture, fixtures, equipment, and vehicle $ 1,100,187 $ 396,264
4,284,774 2,167,267
Less accumulated depreciation (1,897,178 ) (1,680,478 )
Total property and equipment $ 2,176,308 $ 486,789 Assets Held for Sale The Company owns a two story 35,050 sq. foot building in
industrial zoning that has been listed for sale. Assets held for sale are stated at the lower of cost less depreciation or
expected net realizable value. Depreciation is computed using the straight-line method over estimated useful lives of 25
years for building improvements. Expenditures for maintenance and repairs are charged to expense as incurred. As of February
28, 2021 and May 31, 2020, assets held for sale consisted of:
February 28, 2021 May 31, 2020
Land $ 140,000 $ 140,000
Buildings and Improvements 246,135 235,502
$ 386,135 $ 375,502
Less accumulated depreciation (211,288 ) (210,155 )
Carrying Value $ 174,847 $ 165,347 Leases In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic
842), in order to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities
on the balance sheet for most leases previously classified as operating leases. Subsequent amendments have been issued by the FASB
to clarify the codification and to correct unintended application of the new guidance. The ASU is required to be applied using
a retrospective approach with two disclosure methods permissible. The full retrospective approach requires that the guidance be
applied to each lease that existed at the beginning of the earliest comparative period presented. The modified retrospective approach
requires that the guidance be applied to each lease that existed as of the beginning of the reporting period in which the entity
first applied the standard. In July 2018, the FASB issued ASU No. 2018-11, Leases: Targeted Improvements, which provides an
option to apply the guidance prospectively, instead of retrospectively, and allows for other classification provisions. On June 1, 2019, the Company adopted the new standard 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. On November 22, 2019, the Company entered into a commercial lease
agreement in which it is the lessor. This agreement contains a 10-year term with a renewal option to extend. On July 9, 2020, the Company executed a business combination through
its acquisition of Ample Hills. In connection with this business combination, the Company became the lessee for multiple leased
stores and a manufacturing facility. Upon acquisition, the Company renegotiated the terms of these leases. Upon acquisition, the
lease liabilities were measured based upon the present value of future lease payments. On October 1, 2020 the Company entered into
a triple-net lease agreement (the "Humboldt Lease") with Humboldt Street Collective, LLC ("Humboldt"), whereby
Humboldt will lease the Company's building located at 2765-2755 NW Nicolai Street, Portland, OR 97210 for a monthly fee of $3,185
for a term of 62 months. Bargain Purchase Gain In connection with the acquisition of Ample
Hills during the quarter ended August 31, 2020 the Company recorded a bargain purchase gain of $1,271,615 that was recorded as
a component of net income. 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 nine months ended February
28, 2021 in the amount of $2,277, which resulted in a reduction in the bargain purchase gain for the nine months ended February
28, 2021 to $1,187,235. The adjustment related to additional cure payments made during the quarter and obsolete inventory acquired
as part of the acquisition. 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 - Business Combinations Intangible Assets In connection with the acquisition of Ample
Hills during the quarter ended August 31, 2020 the Company acquired multiple intangible assets including the names and marks, proprietary
recipes, and company website related to the Ample Hills business. The Company has determined that the aggregate fair value of such
intangibles upon the closing of the acquisition was $1,117,470. The Company estimated the fair value of these assets utilizing
the relief-from-royalty method, for the Proprietary Recipes and Tradename, which requires assumptions related to projected sales
from its annual long-range plan; assumed royalty rates that could be payable if the Company did not own the trademarks; and a discount
rate. For the website, the Reproduction Cost Approach was used which estimates the cost to replace the website. These assets have
been determined to be indefinite-lived and are not amortized, but instead are reviewed for impairment at least annually or more
frequently if indicators of impairment exist. As of February 28, 2021 and May 31, 2020, net amortizable intangible assets were
$1,315,174 and $287,602, respectively. Use of Estimates The preparation of the condensed consolidated financial statements
in conformity with accounting principles generally accepted in the United States of America requires management to make estimates
and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. Actual
results could differ from those estimates. |
