| SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES | NOTE 1 - 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, collectively hereinafter the “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 August 31,
2021 and its results of operations and its cash flows for the periods presented. The consolidated balance sheet at May 31, 2021
has been derived from the Annual Report on Form 10-K for the fiscal year ended May 31, 2021. 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, 2021. 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,
2022. Principles of Consolidation These condensed 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 condensed 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 Principles 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 Our primary source of
liquidity is our cash flows from operating activities resulting from net income and management of working capital. As of
August 31, 2021, our available funds consisted of $ 2,725,643 Investor On August 7, 2021,
the Company received The Commitment Letter to Schmitt Industries (“Commitment”) from Michael Zapata, CEO. The Commitment
states that Sententia Capital Management LLC (“SCM”) or its affiliated entities will provide additional capital as required
to Schmitt up to $ 1,300,000
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 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 $ 1,000,000 700,000 Ample Hills Business
Acquisition 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 purchase price 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 Accounting Standard Codification
(“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 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 statement 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-consumer
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 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 commission expense
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 selling, general and
administrative expense. The Company also incurs costs related to shipping and handling of its products, 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
Internet of Things environment (“IoT”). 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 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 August 31, 2021 and May 31, 2021, significant customer deposits and prepayments
balances were as follows:
August
31, 2021 May
31, 2021
Contract Liabilities
Customer deposits, current $ 102,687 $ 55,464
Gift card liabilities, current 40,586 37,900
Total customer deposits and prepayments $ 143,273 $ 93,364 Seasonality The Company’s sales and earnings are seasonal
for the Ice Cream Segment, with significantly higher sales and earnings occurring during the warmer months of the year, which causes fluctuations
in the Company’s quarterly results of operations. In addition, quarterly results have been, and in the future are likely to be,
affected by the timing of new store openings. Because of the seasonality of the Company’s business and the impact of new store openings,
results for any quarter are not necessarily indicative of the results that may be achieved in other quarters. Cash and Cash Equivalents 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. 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:
August 31, May 31,
2021 2021
Accounts receivable $ 1,079,748 $ 1,252,968
Less: allowance for doubtful accounts (98,327 ) (98,323 )
Accounts receivable, net $ 981,421 $ 1,154,645 Inventories, net Inventories, net 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 August
31, 2021 and May 31, 2021 inventories consisted of the following:
August 31, 2021 May 31, 2021
Raw materials $ 1,059,697 $ 901,464
Work-in-process 28,396 35,160
Finished goods 836,023 731,826
Total inventories 1,924,116 1,668,450
Inventory reserves (100,779 ) (115,140 )
Inventory, net $ 1,823,337 $ 1,553,310 Property and Equipment, net Minimum Maximum Vehicles Property and equipment, net are stated at cost, less depreciation
and amortization. Depreciation is computed using the straight-line method over estimated useful lives of three
seven
three
twenty-five
August 31, 2021 May 31, 2021
Land Land $ 159,000 $ 159,000
Buildings and improvements Buildings and Improvements 3,052,166 2,989,140
Furniture, fixtures and equipment
Furniture, Fixtures and Equipment 1,840,685 1,788,784
Total property and equipment 5,051,851 4,936,924
Less accumulated depreciation (2,220,799 ) (2,112,907 )
Total property and equipment, net $ 2,831,052 $ 2,824,017 Assets Held for Sale The Company owns a two story 35,050 25
August 31, 2021 May 31, 2021
Land $ 140,000 $ 140,000
Buildings and improvements 246,135 246,135
Total property and equipment-held for sale 386,135 386,135
Less accumulated depreciation (211,288 ) (211,288 )
Total property and equipment, net held for sale $ 174,847 $ 174,847 Leases 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 Engineering Corp. and Tosei America, Inc. (collectively “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, 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
132,807
1,138,808 Ample Hills Business Acquisition Intangible Assets and Impairment 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. During the fourth quarter of the year ended May
31, 2021, the Company made an evaluation based on factors such as changes in the Ice Cream Segment’s forecasted financial information,
and concluded that a triggering event for an interim impairment analysis had occurred. As part of qualitative assessment, it was determined
that the carrying value of the Ample Hills tradename exceeded its estimated fair value. The tradename was valued using the relief-from-royalty
method – a variation of the income approach – which was used for the initial valuation of the tradename in connection with
the Company’s acquisition of Ample Hills. Due to a reduction in estimated total enterprise value as a result of the change in financial
projections, there is no incremental fair value to allocate to the tradename. Therefore, the Company recognized an impairment loss in
the amount of $ 903,422 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 Other accrued liabilities were $ 738,650 694,590 379,915 358,735 374,573 5,342 265,124 69,846 29,547 5,782 Advertising Advertising costs included in selling, general
and administrative expenses are expensed when the advertising first takes place. Advertising expense was $ 11,869 1,078 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 operating
expense 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 accrual, included in other accrued liabilities, is 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.
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. 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. 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. (Loss) Earnings Per Share Basic (loss) earnings per share is computed using
the weighted-average number of common shares outstanding. Diluted (loss) earnings 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 options for the three months
ended August 31, 2021 as a result of the Company’s net loss. 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. |
