| SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES | NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES Basis of Presentation In the opinion of management of Schmitt Industries,
the accompanying audited Consolidated Financial Statements have been prepared pursuant to the rules and regulations of the Securities
and Exchange Commission (“SEC”) and contain all adjustments, consisting only of normal recurring adjustments, necessary to
present fairly its financial position as of May 31, 2021 and its results of operations and its cash flows for the periods presented. 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. Reclassification Certain amounts in the prior period consolidated
balance sheet have been reclassified to conform to the presentation of the current period. These reclassifications had no effect
on previously recorded net income. Use of Estimates The preparation of the Consolidated Financial
Statements in conformity with Generally Accepted Accounting Principals in the U.S. (“GAAP”) requires management to make estimates
and assumptions that affect the amounts reported in the Consolidated Financial Statements and accompanying notes. Actual results could
differ from those estimates. Liquidity Stockholder Our primary source of liquidity is our cash flows from operating activities
resulting from net income and management of working capital. As of May 31, 2021, our available funds consisted of $ 4,032,690 1,300,000 Business Combinations 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. 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 year ended May 31, 2021 and May 31, 2020, significant
contract balances were as follows:
Fiscal Year Ended May 31,
2021 2020
Contract liabilities:
Customer deposits, current $ 55,464 $ 12,239
Gift card liabilities, current 37,900 —
Total customer deposits and prepayments $ 93,364 $ 12,239 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 the sales, however, does not pay out commissions to its sales representatives until the related
sales invoice is paid by the customer. These amounts are recorded within general, administrative and sales expense. 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 and money
market funds. At times, balances may exceed federally insured limits. Restricted cash at the end of Fiscal 2020 consisted of an amount
held in escrow related to the sale of the SBS within the Measurement Segment, as described in notes to the financial statements.
The $ 420,000 192,034 227,966 The
following table provides a reconciliation of cash and cash equivalents and restricted cash as reported within the Consolidated Balance
Sheets as of May 31, 2021 and 2020 to the sum of the same such amounts as shown in the Consolidated Statement of Cash Flows for the respective
years then ended: Summary of Significant Accounting Policies - Schedule of Cash and Cash Equivalents
and Restricted Cash
Fiscal Year Ended May 31,
2021 2020
Cash and cash equivalents $ 4,032,690 $ 10,146,531
Restricted cash — 420,000
Total cash, cash equivalents and restricted cash shown in the Consolidated Statement of Cash Flows $ 4,032,690 $ 10,566,531 Accounts Receivable, net 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. Accounts receivable, net
consisted of the following:
Fiscal Year Ended May 31,
2021 2020
Receivables $ 1,252,968 $ 677,955
Less: allowance for doubtful accounts (98,323 ) (103,029 )
Accounts receivable, net $ 1,154,645 $ 574,926 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.
Fiscal Year Ended May 31,
2021 2020
Raw materials $ 901,464 $ 441,728
Work-in-process 35,160 525,615
Finished goods 731,826 379,449
Total inventory 1,668,450 1,346,792
Inventory reserves (115,140 ) (287,435 )
Inventory, net $ 1,553,310 $ 1,059,357 Property
and Equipment, net Property and equipment, net are stated at cost less
accumulated depreciation. Depreciation is computed using the straight-line method over estimated useful lives of three seven three twenty-five 427,161 56,554 Property and equipment balances as of May 31, 2021 and 2020, respectively, consisted of the
following: Summary of Significant Accounting Policies -
Schedule of Property, Plant and Equipment Furniture, Fixtures and Equipment Vehicles Buildings and Improvements Minimum Maximum
Fiscal Year Ended, May 31,
2021 2020
Land Land $ 159,000 $ 299,000
Buildings and improvements Buildings and Improvements 2,989,140 1,847,505
Furniture, fixtures and equipment
Furniture, Fixtures and Equipment 1,788,784 396,264
Total plant and equipment 4,936,924 2,542,769
Less accumulated depreciation (2,112,907 ) (1,890,633 )
Property and equipment, net $ 2,824,017 $ 652,136 Assets Held for Sale The Company owns a two story 35,050 25
Fiscal Year Ended, May 31,
2021
Land $ 140,000
Buildings and improvements 246,135
Total assets held for sale 386,135
Less: accumulated depreciation (211,288 )
Assets held for sale, net $ 174,847 Leases In February 2016, Financial Accounting Standards
Board (“FASB”) issued Accounting Standards Update (“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 in
a commercial lease agreement in which it is the lessor. This lease has been accounted for pursuant to Topic 842. The Company elected
the practical expedient to not separate lease and non-lease components and will present property revenues as other income, combined
based upon the lease being determined to be the predominant component. On November 22, 2019, the Company entered into a triple-net
lease agreement with Tosei, whereby Tosei will
lease the Company's building located at 2451 NW 28 th 23,282 120 The lessor commercial agreement contains a 10 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 in which it is the lessor (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 62 On December 1, 2020 the Company entered into
a triple-net lease agreement in which it is the lessor (the second “Humboldt Lease”) with Humboldt Street Collective,
LLC, whereby Humboldt will lease a portion of the Company’s building located at 2451 NW 28th Avenue, Portland, OR 97210 for a
monthly fee of $ 4,596 59 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 Business Combinations 132,807 1,138,808 Ample Hills Business Acquisition Intangible Assets Indefinite-Lived Intangible Assets The Company’s indefinite-lived assets included
tradenames and trademarks for the Company’s Ice Cream Segment. The Company reviews the carrying values of identifiable intangibles
annually or whenever events or changes in circumstances indicate that such carrying values may not be recoverable as required by ASC 350, Intangibles — Goodwill
and Other Unforeseen events,
changes in circumstances, market conditions and material differences in the value of intangible assets due to changes in estimates of
future cash flows could negatively affect the fair value of the Company’s assets and result in a non-cash impairment charge. Some
factors considered important that could trigger an impairment review include the following: significant underperformance relative to expected
historical or projected future operating results, significant c hanges in the manner of the Company’s
use of acquired assets or the strategy for its overall business and significant negative industry or economic trends. Finite-lived Intangible
Assets Amortizable intangible assets, include
purchased technology and patents for the Company’s Measurement Segment and proprietary recipes and the Company’s website
for its Ice Cream Segment. These assets are amortized over their estimated
useful lives ranging from three to fifteen years The Company reviews finite-lived intangible assets
for impairment annually or whenever events or changes in circumstances indicate the carrying amount of the asset may not be recoverable.
Recoverability is determined by comparing the forecasted future net undiscounted cash flows from the operations to which the assets relate,
based on management's best estimates using the appropriate assumptions and projections at the time, to the carrying amount of the assets.
If the carrying value is determined to be in excess of such undiscounted cash flows, the asset is considered impaired and a loss is recognized
equal to the amount by which the carrying amount exceeds the estimated fair value of the assets, which is determined by discounting future
projected cash flows. Other Accrued Liabilities As of May 31, 2021, other accrued
liabilities includes $ 433,128 261,462 203,198 95,802 82,380 62,204 34,019 Foreign Currency Prior to Fiscal 2021, the Company translated U.S.
dollars at year-end exchange rates for assets and liabilities and weighted-average exchange rates for income and expenses. In Fiscal 2020,
the resulting translation adjustments are included as a separate component of stockholders' equity titled "Accumulated Other Comprehensive
Loss." In addition, translation gains and losses are included in net income for Fiscal 2020. The Company no longer has subsidiaries
outside the U.S. as of the end of Fiscal 2020, and therefore, no foreign currency translation is required for Fiscal 2021. Advertising Advertising costs included in general, administrative
and sales, are expensed when the advertising first takes place. Advertising expense was $ 63,635 7,767 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/Restricted Stock Units 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 and market-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. Market-based RSUs are contingent on continued service and vest based on the 15-day average
closing price of the Company's Common Stock equal or exceeding certain targets established by the Compensation Committee of the Board
of Directors. The lattice model utilizes multiple input variables
that determine the probability of satisfying the market conditions stipulated in the award and calculates the fair value of the market-based
RSUs. The expected stock price volatility for each grant is based on the historical volatility of the Company's stock for a period equivalent
to the derived service period of each grant. The expected dividend yield is based on annual expected dividend payments. The average risk-free
interest rate is based on the treasury yield rates as of the date of grant for a period equivalent to the derived service period of each
grant. The fair value of each RSU is amortized over the requisite or derived service period, which is up to five years. 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 financial statements in accordance with ASC Topic 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 Basic earnings (loss) per share is computed using
the weighted-average number of common shares outstanding. Diluted earnings (loss) per share is computed using the weighted-average number
of common shares outstanding, adjusted for dilutive incremental shares attributed to outstanding options to purchase common stock. Common
stock equivalents for stock options are computed using the treasury stock method. In periods in which a net loss is incurred, no common
stock equivalents are included since they are antidilutive and as such all stock options outstanding are excluded from the computation
of diluted net loss in those periods. There were no potentially dilutive common shares from outstanding stock option for 2021 as a result
of the Company’s net loss. There were 8,888 Concentration of Credit Risk Financial instruments that potentially expose
the Company to concentration of credit risk are trade accounts receivable. Credit terms generally require an invoice to be paid within
30 to 60 days or include a discount of up to 1.5% if the invoice is paid within ten days, with the net amount payable in 30 days. Terms
are set for each account depending on the customer's credit standing with the Company. Financial Instruments The carrying value of all other financial instruments
potentially subject to valuation risk (principally consisting of cash and cash equivalents, accounts receivable, accounts payable, the
current portion of PPP loans, customer deposits and prepayments) approximates fair value because of their short-term maturities. |
