UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form
Amendment No. 1
For the quarterly period ended
For the transition period from __________ to __________
Commission file number:
| (State or Other Jurisdiction of | (IRS Employer | |
| Incorporation or Organization) | Identification Number) |
| (Address of Principal Executive Offices) (Zip Code) |
(Registrant's Telephone Number, Including Area Code)
Securities registered under Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
Securities registered under Section 12(g) of the Act:
None
Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule
405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definitions of "large accelerated filer," "accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act. (check one):
| Large accelerated filer | ☐ | Accelerated filer | ☐ |
| ☒ | Smaller reporting company | ||
| Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant
is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐
The number of shares of each class of common stock outstanding as of September 30, 2021
| Common stock, no par value – outstanding |
EXPLANATORY NOTE
On September 20, 2022, Schmitt Industries, Inc. (the “Company”, “we”, “our” or “us”) filed a Current Report on Form 8-K disclosing that the Company determined that our previously issued financial statements contained in our Quarterly Reports on Form 10-Q for the periods ended August 31, 2021, November 30, 2021, and February 28, 2022 should no longer be relied upon due to the ineffective application of cut-off procedures resulting primarily in the exclusion of certain general and administrative expenses from the statement of operations in the Company’s unaudited interim condensed consolidated financial statements during the fiscal year ended May 31, 2022. For additional information, please refer to that certain Form 8-K, filed on September 20, 2022.
Background of Restatement
This Amendment No. 1 to the Quarterly Report on Form 10-Q/A (“Form 10-Q/A”) amends and restates certain items noted below in the Quarterly Report on Form 10-Q of the Company for the quarter ended August 31, 2021, as originally filed with the Securities and Exchange Commission (the “SEC”) on October 20, 2021 (the “Original Filing”). This Form 10-Q/A amends the Original Filing to reflect the correction of errors in the previously issued unaudited interim condensed consolidated financial statements as of and for the three months ended August 31, 2021 related to the Company’s accounting treatment of certain liabilities and expenses incurred that the Company failed to accrue for within the proper reporting period.
For the convenience of the reader, we have included all items in this Form Q/A which supersedes in its entirety the Original Form 10-Q.
The following sections in the Original Filing have been revised in this Form Q/A to reflect the restatement:
| · | Part I, Item 1, “Financial Statements” |
| · | Part I, Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations" |
| · | Part I, Item 4, “Controls and Procedures” |
| · | Part II, Item 1A, “Risk Factors” |
| · | Part II – Item 6. Exhibits. |
| · | the Chief Executive Officer and Chief Financial Officer certifications in Exhibits 31.1, 31.2, 32.1, and 32.2 |
This Form Q/A does not reflect adjustments for events occurring after the filing of the Original Filing except to the extent that they are otherwise required to be included and discussed herein and did not substantively modify or update the disclosures herein other than as required to reflect the adjustments described above. See Note 2 to the accompanying unaudited interim condensed consolidated financial statements, set forth in Item 1 of this Form 10-Q/A, for details of the restatement and its impact on the unaudited interim condensed consolidated financial statements.
Internal Control Considerations
In connection with the restatement, the Audit Committee concluded, with concurrence of management, that there were additional deficiencies in our internal control over financial reporting that constituted additional material weaknesses as of August 31, 2021. For a discussion of management's consideration of our disclosure controls and procedures and the material weaknesses identified, See Part I, Item 4, “Controls and Procedures” of this Form 10-Q/A.
SCHMITT INDUSTRIES, INC.
INDEX TO FORM 10-Q/A
| Page | ||
| Part I - FINANCIAL INFORMATION | ||
| Item 1: | Condensed Consolidated Financial Statements (unaudited) | 3 |
| Condensed Consolidated Balance Sheets (unaudited) | 3 | |
| Condensed Consolidated Statements of Operations (unaudited) | 4 | |
| Condensed Consolidated Statements of Cash Flows (unaudited) | 5 | |
| Condensed Consolidated Statements of Changes in Stockholders' Equity (unaudited) | 6 | |
| Notes to Unaudited Condensed Consolidated Interim Financial Statements | 7 | |
| Item 2: | Management's Discussion and Analysis of Financial Condition and Results of Operations | 26 |
| Item 3: | Quantitative and Qualitative Disclosures about Market Risk | 32 |
| Item 4: | Controls and Procedures | 32 |
| Part II - OTHER INFORMATION | ||
| Item 1A: | Risk Factors | 34 |
| Item 5: | Other Information | 35 |
| Item 6: | Exhibits | 35 |
| Signatures | ||
| Certifications | ||
PART I - FINANCIAL INFORMATION
Item 1: Financial Statements
SCHMITT INDUSTRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
August 31, 2021 (As Restated) | May 31, 2021 | |||||||
| ASSETS | ||||||||
| Current assets | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Accounts receivable, net | ||||||||
| Inventories, net | ||||||||
| Prepaid expenses | ||||||||
| Other current assets | ||||||||
| Income taxes receivable | ||||||||
| Total current assets | ||||||||
| Leasehold assets | ||||||||
| Property and equipment, net | ||||||||
| Property and equipment held for sale, net | ||||||||
| Leasehold, utilities and ERP deposits | ||||||||
| Other assets | ||||||||
| Intangible assets, net | ||||||||
| TOTAL ASSETS | $ | $ | ||||||
| LIABILITIES & STOCKHOLDERS' EQUITY | ||||||||
| Current liabilities | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued commissions | ||||||||
| Accrued payroll liabilities | ||||||||
| Accrued liabilities | ||||||||
| Customer deposits and prepayments | ||||||||
| Other accrued liabilities | ||||||||
| Current portion of long-term lease liabilities | ||||||||
| Current portion of long-term debt | ||||||||
| Total current liabilities | ||||||||
| Long-term debt, net current portion | ||||||||
| Long-term leasehold liabilities, net current portion | ||||||||
| Total liabilities | ||||||||
| Stockholders' equity | ||||||||
| Common stock, no par value, shares authorized, and shares issued and outstanding at August 31, 2021, respectively; and and shares issued and outstanding at May 31, 2021, respectively | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total stockholders' equity | ||||||||
| TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | $ | $ | ||||||
See accompanying notes to condensed consolidated financial statements
| 3 |
SCHMITT INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
FOR THE THREE MONTHS ENDED AUGUST 31, 2021 AND AUGUST 31, 2020
| Three Months Ended August 31, | ||||||||
2021 (As Restated) | 2020 | |||||||
| Net sales | $ | $ | ||||||
| Cost of revenue | ||||||||
| Gross profit | ||||||||
| Operating expenses | ||||||||
| Selling, general and administrative | ||||||||
| Transaction costs | ||||||||
| Research and development | ||||||||
| Total operating expenses | ||||||||
| Operating loss | ( | ) | ( | ) | ||||
| Bargain purchase gain | ||||||||
| Forgiveness of Paycheck Protection Program loan | ||||||||
| Interest expense | ( | ) | ( | ) | ||||
| Other income, net | ||||||||
| Loss before income taxes | ( | ) | ( | ) | ||||
| Income tax provision (benefit) | ( | ) | ||||||
| Net (loss) income | $ | ( | ) | $ | ||||
| Net (loss) income per common share | ||||||||
| Basic | $ | ( | ) | $ | ||||
| Weighted-average number of common shares, basic | ||||||||
| Diluted | $ | ( | ) | $ | ||||
| Weighted-average number of common shares, diluted | ||||||||
See accompanying notes to condensed consolidated financial statements
| 4 |
SCHMITT INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE THREE MONTHS ENDED AUGUST 31, 2021 AND AUGUST 31, 2020
| Three Months Ended August 31, | ||||||||
2021 (As Restated) | 2020 | |||||||
| Cash flows relating to operating activities | ||||||||
| Net (loss) income | $ | ( | ) | $ | ||||
| Adjustments to reconcile net (loss) income to net cash used in operating activities: | ||||||||
| Bargain purchase gain | ( | ) | ||||||
| Forgiveness of Paycheck Protection Program loan | ( | ) | ||||||
| Depreciation and amortization | ||||||||
| Stock-based compensation | ||||||||
| Non-cash lease costs | ||||||||
| (Increase) decrease in: | ||||||||
| Accounts receivable, net | ( | ) | ||||||
| Inventories, net | ( | ) | ( | ) | ||||
| Prepaid expenses | ( | ) | ( | ) | ||||
| Other current assets | ( | ) | ||||||
| Rent, utility deposits and ERP deposits | ( | ) | ( | ) | ||||
| Increase (decrease) in: | ||||||||
| Accounts payable | ||||||||
| Accrued liabilities and customer deposits | ||||||||
| Income taxes payable | ( | ) | ||||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| Cash flows relating to investing activities | ||||||||
| Acquisition of Ample Hills | $ | $ | ( | ) | ||||
| Purchases of property and equipment | ( | ) | ( | ) | ||||
| Net cash used in investing activities | $ | ( | ) | $ | ( | ) | ||
| Cash flows relating to financing activities | ||||||||
| Proceeds from Paycheck Protection Program, net of repayment | $ | $ | ||||||
| Repurchase of common stock | ( | ) | ||||||
| Net cash provided by financing activities | ||||||||
| Decrease in cash and cash equivalents | ( | ) | ( | ) | ||||
| Cash and cash equivalents, beginning of period | ||||||||
| Cash and cash equivalents, end of period | $ | $ | ||||||
| Supplemental disclosure of cash flow information | ||||||||
| Cash paid for income taxes, net of refunds | $ | $ | ||||||
| Cash paid during the period for interest | $ | $ | ||||||
See accompanying notes to condensed consolidated financial statements
| 5 |
SCHMITT INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(UNAUDITED)
FOR THE THREE MONTHS ENDED AUGUST 31, 2021 and AUGUST 31, 2020
| Shares | Amount | Accumulated Deficit | Total | |||||||||||||
| Balance, May 31, 2021 | $ | $ | ( | ) | $ | |||||||||||
| Stock-based compensation | — | |||||||||||||||
| Shares issued to directors, officers and others upon vesting of RSUs | ||||||||||||||||
| Net loss (As Restated) | — | ( | ) | ( | ) | |||||||||||
| Balance, August 31, 2021 (As Restated) | $ | $ | ( | ) | $ | |||||||||||
| Shares | Amount | Accumulated Deficit | Total | |||||||||||||
| Balance, May 31, 2020 | $ | $ | ( | ) | $ | |||||||||||
| Share repurchases | ( | ) | ( | ) | ( | ) | ||||||||||
| Shares issued to directors and officers upon vesting of RSUs | ||||||||||||||||
| Stock-based compensation | — | |||||||||||||||
| Net income | — | |||||||||||||||
| Balance, August 31, 2020 | $ | $ | ( | ) | $ | |||||||||||
See accompanying notes to condensed consolidated financial statements
| 6 |
SCHMITT INDUSTRIES, INC.
NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(UNAUDITED)
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 $
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 $
| 7 |
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 $
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. ASC-805 requires, among other things, an assignment of the acquisition consideration transferred to the sellers for the tangible and intangible assets acquired and liabilities assumed, using the bottom up approach, to estimate their value at acquisition date. Any excess of the fair value of the purchase consideration over these identified net assets is to be recorded as goodwill. Conversely, any excess of the fair value of the net assets acquired over the purchase consideration is recorded as a bargain purchase gain. Our estimates of fair value are based upon assumptions believed to be reasonable, yet are inherently uncertain and, as a result, may differ from actual performance. During the measurement period, not to exceed one year from the date of acquisition, the Company recorded adjustments to the estimated fair values of the assets acquired and liabilities assumed with a corresponding adjustment to goodwill or bargain purchase gain, as appropriate, in the period in which such revised estimates are identified. The purchase price allocation has been finalized as of May 31, 2021, within the measurement period, and no further adjustments will be made.
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.
| 8 |
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 | $ | $ | ||||||
| Gift card liabilities, current | ||||||||
| Total customer deposits and prepayments | $ | $ | ||||||
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.
| 9 |
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 | $ | $ | ||||||
| Less: allowance for doubtful accounts | ( | ) | ( | ) | ||||
| Accounts receivable, net | $ | $ | ||||||
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 (As Restated) | May 31, 2021 | |||||||
| Raw materials | $ | $ | ||||||
| Work-in-process | ||||||||
| Finished goods | ||||||||
| Total inventories | ||||||||
| Inventory reserves | ( | ) | ( | ) | ||||
| Inventory, net | $ | $ | ||||||
Property and Equipment, net
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 to years for furniture, fixtures, and equipment; years for vehicles; the lesser of the useful life or the remaining lease term for leasehold improvements; and years for buildings. Expenditures for maintenance and repairs are charged to expense as incurred. As of August 31, 2021 and May 31, 2021, property and equipment, net consisted of the following:
August 31, 2021 (As Restated) | May 31, 2021 | |||||||
| Land | $ | $ | ||||||
| Buildings and improvements | ||||||||
| Furniture, fixtures and equipment | ||||||||
| Total property and equipment | ||||||||
| Less accumulated depreciation | ( | ) | ( | ) | ||||
| Total property and equipment, net | $ | $ | ||||||
| 10 |
Assets Held for Sale
The Company owns a two story
| August 31, 2021 | May 31, 2021 | |||||||
| Land | $ | $ | ||||||
| Buildings and improvements | ||||||||
| Total property and equipment-held for sale | ||||||||
| Less accumulated depreciation | ( | ) | ( | ) | ||||
| Total property and equipment, net held for sale | $ | $ | ||||||
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 28th Avenue, Portland, OR 97210 for a base monthly fee of $
The lessor commercial agreement contains a
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 $
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 $
Bargain Purchase Gain
In connection with the acquisition of Ample Hills
on July 9, 2020, the Company recognized an initial bargain purchase gain of $
| 11 |
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. This guidance provides the option to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. If, based on a review of qualitative factors, it is more likely than not that the fair value of a reporting unit is less than its carrying value, the Company performs a quantitative analysis. If the carrying value of a reporting unit exceeds its fair value, the Company measures any intangible impairment losses as the amount by which the carrying amount of a reporting unit exceeds its fair value, not to exceed the total amount of the intangible allocated to that reporting unit.
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 changes 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 $
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. Amortization of intangible assets is recorded in selling, general and administrative expenses in the consolidated statements of operations.
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 $
| 12 |
Advertising
Advertising costs included in selling, general
and administrative expenses are expensed when the advertising first takes place. Advertising expense was $
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 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.
| 13 |
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.
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.
NOTE 2 – RESTATEMENT OF PREVIOUSLY ISSUED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
As previously disclosed on Form 8-K filed on September 20, 2022, the Company determined that the Company’s previously issued financial statements for the period ended August 31, 2021 should no longer be relied upon due to errors in such condensed consolidated financial statements related to certain liabilities and expenses incurred that the Company failed to accrue for within the proper reporting periods, resulting primarily in the exclusion of certain general and administrative expenses from the statement of operations in the condensed financial statements.
| 14 |
The following errors were identified as part of the restatement:
| A. | The Company discovered expenses and liabilities incurred during the three-month period ended August 31, 2021 that it failed to accrue for properly. The additional expenses are primarily related to unpaid and unrecorded utility charges, professional fees and other operating expenses. |
| B. | The Company discovered that it did not properly record approximately $ |
The following reflects the restatement adjustments recorded in connection with the Company’s restatement of its consolidated financial statements:
| Balance Sheet | As of August 31, 2021 | |||||||||||||
| As previously Reported | Adjustment | As Restated | Reference | |||||||||||
| ASSETS | ||||||||||||||
| Current Assets | ||||||||||||||
| Cash and cash equivalents | $ | $ | $ | |||||||||||
| Accounts receivable, net | ||||||||||||||
| Inventories, net | A | |||||||||||||
| Prepaid expenses | ||||||||||||||
| Other current assets | ||||||||||||||
| Income tax receivable | ( | ) | A | |||||||||||
| Total current assets | A | |||||||||||||
| Leasehold assets | ||||||||||||||
| Property and equipment, net | A | |||||||||||||
| Property and equipment held for sale, net | ||||||||||||||
| Leasehold, utilities, and ERP deposits | A, B | |||||||||||||
| Other assets | ||||||||||||||
| Intangible assets, net | ||||||||||||||
| Total Assets | $ | $ | $ | A, B | ||||||||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||||||||
| Current liabilities | ||||||||||||||
| Accounts payable | $ | $ | ( | ) | $ | A | ||||||||
| Accrued commissions | ( | ) | A | |||||||||||
| Accrued payroll liabilities | ( | ) | A | |||||||||||
| Accrued liabilities | ( | ) | A | |||||||||||
| Customer deposits and prepayments | ||||||||||||||
| Other accrued liabilities | A | |||||||||||||
| Current portion of long-term lease liabilities | ||||||||||||||
| Current portion of long-term debt | ||||||||||||||
| Total current liabilities | A | |||||||||||||
| Long-term debt | ||||||||||||||
| Long-term leasehold liabilities | ||||||||||||||
| Total liabilities | A | |||||||||||||
| Total stockholders' equity | ||||||||||||||
| Common stock, no par value, 20,000,000 shares authorized, 4,218,530 and 3,800,479 shares issued and outstanding at August 31, 2021, respectively | ||||||||||||||
| Accumulated deficit | ( | ) | ( | ) | ( | ) | A, B | |||||||
| Total stockholders' equity | ( | ) | A, B | |||||||||||
| TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | $ | $ | $ | A, B | ||||||||||
| 15 |
| Statement of Operations | For the three months ended August 31, 2021 | |||||||||||||
| As previously Reported | Adjustment | As Restated | Reference | |||||||||||
| Net sales | $ | $ | $ | |||||||||||
| Cost of revenue | A | |||||||||||||
| Gross profit | ( | ) | A | |||||||||||
| Operating expenses | ||||||||||||||
| Selling, general and administrative | A | |||||||||||||
| Research & development | ||||||||||||||
| Total operating expenses | A | |||||||||||||
| Operating loss | ( | ) | ( | ) | ( | ) | A | |||||||
| Forgiveness of PPP loans | ||||||||||||||
| Interest expense | ( | ) | ( | ) | ||||||||||
| Other income, net | B | |||||||||||||
| Loss before income taxes | ( | ) | ( | ) | ( | ) | A, B | |||||||
| Income tax provision | A | |||||||||||||
| Net loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | A, B | ||||
| Net loss | ( | ) | ( | ) | ( | ) | A, B | |||||||
| Net loss per common share | ||||||||||||||
| Basic | $ | ( | ) | $ | ( | ) | $ | ( | ) | A, B | ||||
| Weighted average number of common shares, basic | ||||||||||||||
| Diluted | $ | ( | ) | $ | ( | ) | $ | ( | ) | A, B | ||||
| Weighted average number of common shares, diluted | ||||||||||||||
| Statement of Cash Flows | For the three months ended August 31, 2021 | |||||||||||||
| As previously Reported | Adjustment | As Restated | Reference | |||||||||||
| Cash flows relating to operating activities | ||||||||||||||
| Net loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | A, B | ||||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||||||||
| Forgiveness of PPP Loan | ( | ) | ( | ) | ||||||||||
| Depreciation and amortization | ||||||||||||||
| Stock-based compensation | ||||||||||||||
| Non-cash lease costs | ||||||||||||||
| (Increase) decrease in: | ||||||||||||||
| Accounts receivable, net | ||||||||||||||
| Inventories, net | ( | ) | ( | ) | ( | ) | A | |||||||
| Prepaid expenses | ( | ) | ( | ) | ||||||||||
| Other current assets | ( | ) | ( | ) | ||||||||||
| Rent, Utility Deposits, & ERP Deposits | ( | ) | ( | ) | ( | ) | A, B | |||||||
| Increase (decrease) in: | ||||||||||||||
| Accounts payable | ( | ) | A | |||||||||||
| Accrued liabilities and customer deposits | A | |||||||||||||
| Income taxes payable | A | |||||||||||||
| Net cash used in operating activities | $ | ( | ) | $ | $ | ( | ) | A, B | ||||||
| Cash flows relating to investing activities | ||||||||||||||
| Purchases of property and equipment | ( | ) | ( | ) | ( | ) | A | |||||||
| Net cash used in investing activities | $ | ( | ) | $ | ( | ) | $ | ( | ) | A | ||||
| Cash flows relating to financing activities | ||||||||||||||
| Proceeds from Paycheck Protection Program | ||||||||||||||
| Net cash provided by financing activities | $ | $ | $ | |||||||||||
| Decrease in cash and cash equivalents | ( | ) | ( | ) | ||||||||||
| Cash and cash equivalents, beginning of period | ||||||||||||||
| Cash and cash equivalents, end of period | ||||||||||||||
| Supplemental disclosure of cash flow information | ||||||||||||||
| Cash paid during the period for income taxes | ||||||||||||||
| Cash paid during the period for interest | ||||||||||||||
| 16 |
| Segment Information-Ice Cream | For the three months ended August 31, 2021 | |||||||||||||
| As previously Reported | Adjustment | As Restated | Reference | |||||||||||
| Revenue, net | $ | $ | $ | |||||||||||
| Gross Margin | $ | $ | ( | ) | $ | A | ||||||||
| Gross Margin % | % | ( | %) | % | A | |||||||||
| Operating loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | A, B | ||||
| Depreciation expense | $ | $ | $ | |||||||||||
| Amortization expense | $ | $ | $ | |||||||||||
| Capital expenditures | $ | $ | $ | A | ||||||||||
| Segment Information-Measurement | For the three months ended August 31, 2021 | ||||||||||||||
| As previously Reported | Adjustment | As Restated | |||||||||||||
| Revenue, net | $ | $ | $ | ||||||||||||
| Gross Margin | $ | $ | ( | ) | $ | A | |||||||||
| Gross Margin % | % | ( | %) | % | A | ||||||||||
| Operating loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | A | |||||
| Depreciation expense | $ | $ | $ | ||||||||||||
| Amortization expense | $ | $ | $ | ||||||||||||
| Capital expenditures | $ | $ | $ | ||||||||||||
| Segment Information- Assets | As of August 31, 2021 | |||||||||||||
| As previously Reported | Adjustment | As Restated | ||||||||||||
| Ice Cream Segment | $ | $ | $ | A, B | ||||||||||
| Measurement Segment | ( | ) | A | |||||||||||
| Corporate assets | ||||||||||||||
| Total Assets | $ | $ | $ | A, B | ||||||||||
NOTE 3 - RECENT ACCOUNTING PRONOUNCEMENTS
In December 2019, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2019-12: Simplifying the Accounting for Income Taxes (Topic 740). The objective of the standard is to improve areas of GAAP by removing certain exceptions permitted by ASC 740 and clarifying existing guidance to facilitate consistent application. The standard will become effective for the Company beginning on June 1, 2021. The Company adopted ASU 2019-12 effective June 1, 2021 and the adoption did not have an impact on the Company's financial condition or its results of operations.
In November 2019, the FASB issued ASU 2019-08, Compensation - Stock Compensation (Topic 718) and Revenue from Contracts with Customers (Topic 606): Codification Improvements - Share-based Consideration Payable to a Customer. The objective of the standard is to clarify that an entity must measure and classify share-based payment awards granted to a customer by applying the guidance in Topic 718. ASU 2019-08 is effective for fiscal years beginning after December 15, 2019, including interim reporting periods within those fiscal years. The Company adopted ASU 2019-08 effective June 1, 2020 and the adoption did not have an impact on the Company's financial condition or its results of operations.
NOTE 4 - AMPLE HILLS BUSINESS ACQUISITION
As described in Note 1, the Company closed on
the Ample Hills acquisition on July 9, 2020. The Company paid the sellers $
In accordance with ASC 805 - Business Combinations, the Company has recognized the assets and liabilities of Ample Hills at fair value with the excess of such values over the fair value of consideration transferred to the seller presented as a bargain purchase gain recognized on the accompanying consolidated statement of operations during the year ended May 31, 2021. The foregoing amounts reflect our current estimates of fair value as of the July 9, 2020 acquisition date.
| 17 |
The following table summarizes the Company's fair value of the assets acquired, and liabilities assumed, as of July 9, 2020, for the Company's acquisition of Ample Hills.
| Purchase Price | ||||
| Cash paid to sellers | $ | |||
| Cash paid for cure costs | ||||
| Total Purchase Price | $ | |||
| Purchase Price Allocation | ||||
| Assets Acquired | ||||
| Right-of-use operating lease assets | ||||
| Website | ||||
| Tradename and trademarks | ||||
| Proprietary recipes | ||||
| Security deposits | ||||
| Machinery and equipment | ||||
| Leasehold improvements | ||||
| Inventory | ||||
| Total assets acquired | $ | |||
| Liabilities Assumed | ||||
| Right-of-use operating lease liabilities | ||||
| Deferred tax liability | ||||
| Customer deposits | ||||
| Gift card liabilities | ||||
| Total liabilities assumed | $ | |||
| Net assets acquired | ||||
| Gain on bargain purchase | $ | |||
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 which resulted in a reduction in the bargain purchase gain, reducing it to $
Ample Hills was a privately held company that was acquired out of bankruptcy. Management has performed a thorough evaluation of the pre-bankruptcy books and found the records to not be auditable. Therefore, management has engaged a third party consultant to assist in evaluating alternative means by which to provide historic financial data in future periods.
For further information see Note 11 – Intangibles Assets, net for further details regarding the results of the Ice Cream segment.
Stock-based compensation includes expense charges for all stock-based awards to employees and directors granted under the Company's stock option plan. Stock-based compensation recognized during the period is based on the portion of the grant date fair value 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.
| 18 |
Stock Options
At August 31, 2021, the Company had outstanding stock options to purchase shares of Common Stock all of which are vested and exercisable with a weighted-average exercise price of $. As all options outstanding as of August 31, 2021 were fully vested; the Company recorded no expense as additional stock-based compensation expense related to stock options during the quarter ending August 31, 2021.
| Outstanding Options | Exercisable Options | |||||||||||||||||
| Number of Shares | Weighted- Average Exercise Price | Weighted-Average Remaining Contractual Life (years) | Number of Shares | Weighted- Average Exercise Price | ||||||||||||||
| $ | $ | |||||||||||||||||
No stock options were granted, exercised, canceled or expired under the Company's stock-based compensation plans during the three months ended August 31, 2021.
Restricted Stock Units
Service-based and market-based 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. No market-based RSUs were granted in the three months ended August 31, 2021.
During the three months ended August 31, 2021, service-based RSUs were granted.
| Number of Units | Weighted-Average Price at Grant Date | Aggregate Intrinsic Value | ||||||||||
| Non-vested RSUs - May 31, 2021 | $ | $ | ||||||||||
| RSUs granted | $ | |||||||||||
| RSUs vested | ( | ) | $ | ( | ) | |||||||
| Non-vested RSUs – August 31, 2021 | $ | $ | ||||||||||
During the three months ended August 31, 2021,
total restricted stock-compensation expense recognized was $
Basic net (loss) income per share is computed using the weighted-average number of shares of common stock outstanding. Diluted net (loss) income per share is computed using the weighted-average number of shares of common stock outstanding, adjusted for dilutive incremental shares attributed to outstanding options to purchase common stock and RSUs vested but not issued. 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.
| 19 |
For the three months ended August 31, 2021, potentially dilutive securities consisted of options to purchase shares of common stock at $ per share. Of these potentially dilutive securities, all of the shares of common stock underlying the options are excluded from the computation of diluted earnings per share because the Company incurred a net loss. In periods when a net loss is incurred, no common stock equivalents are included in the calculation of diluted net income or loss for the Company since they are antidilutive. As such, all stock options outstanding are excluded from the computation of diluted net income in those periods.
| Three Months Ended August 31, | ||||||||
| 2021 | 2020 | |||||||
| Weighted-average shares (basic) | ||||||||
| Effect of dilutive stock options | ||||||||
| Weighted-average shares (diluted) | ||||||||
NOTE 7 - 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.
Each year the Company files income tax returns in the various national, state and local income 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 consolidated 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.
As of August 31, 2021 and of May 31, 2021 the Company had no other long-term liabilities related to income tax contingencies. Interest and penalties associated with uncertain tax positions are recognized as components of the "Provision for income taxes." The Company had no liability for payment of interest and penalties as of August 31, 2021 and May 31, 2021.
Several tax years are subject to examination by major tax jurisdictions. In the United States, federal tax years ended May 31, 2018 and after are subject to examination.
Effective Tax Rate
The effective tax rate was (
NOTE 8 - LEASES
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 28th Avenue, Portland, OR
97210 for a base monthly fee of $
| 20 |
The lessor commercial agreement contains a
| Years Ending May 31, | ||||
| 2022 | $ | |||
| 2023 | ||||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| Thereafter | ||||
| Total undiscounted cash flow | $ | |||
On October 1, 2020, the Company entered into the
Humboldt Lease, whereby Humboldt will lease the Company's building located at 2755 NW Nicolai Street, Portland, OR 97210 for a monthly
fee of $
| Years Ending May 31, | ||||
| 2022 | $ | |||
| 2023 | ||||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| Thereafter | ||||
| Total undiscounted cash flow | $ | |||
On December 1, 2020 the Company entered into the
Second Humboldt Lease, 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 $
| Years Ending May 31, | ||||
| 2022 | $ | |||
| 2023 | ||||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| Thereafter | ||||
| Total undiscounted cash flow | $ | |||
In connection with the July 9, 2020 acquisition of Ample Hills, the Company has multiple real estate leases for its leased stores as well as a manufacturing facility that are recorded as operating leases under various non-cancellable operating leases.
To determine whether a contract is or contains
a lease, the Company determines at contract inception whether it contains the right to control the use of an identified asset for a period
of time in exchange for consideration to the counterparty in the transaction. If the Company determines that the contract provides the
right to obtain substantially all of the economic benefit from the use of the leased asset, as well as the right for the Company to direct
the asset's use, the Company recognizes a right-of-use asset and liability upon contract inception. The initial carrying value of the
operating lease liability is determined by calculating the present value of future lease payments under the contract. The Company considers
the future lease payments under the original terms of the contract and also includes explicitly enumerated renewal periods where management
is reasonably certain that such renewal options will be exercised. The Company’s operating leases contain varying terms and expire
at various dates through 2030. For the three months ended August 31, 2021 and August 31, 2020 lease expenses under fixed term leases amounted
to $
| 21 |
Certain of the Company’s operating leases contain variable lease payments, either in part or in total, related to certain performance targets by the Company at the underlying store locations. These variable leases costs are recognized as incurred in accordance with ASC 842 - Leases.
The Company's future minimum lease payments required under operating leases that have commenced as of August 31, 2021 were as follows:
|
Years Ending May 31, 2021 | ||||
| 2022 | $ | |||
| 2023 | ||||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| Thereafter | ||||
| Total lease payments | ||||
| Less: imputed interest | ( |
|||
| Present value of lease payments | ||||
| less: current lease obligations | ( |
|||
| Long-term lease obligations | $ | |||
In order to calculate the operating lease asset and liability for a lease, ASC 842 - Leases requires that a lessee apply a discount rate equal to the rate implicit in a lease whenever such a rate is readily determinable. The Company's lease agreements do not provide a readily determinable implicit rate, nor is this rate available from our leasing counterparties. Consequently, the Company estimates an incremental borrowing rate to determine the present value of the lease payments. This incremental borrowing rate represents the Company's estimate of an interest rate that the Company would be able to obtain from a lender to borrow, on a collateralized basis, over a similar term to obtain an asset of similar value.
Lease term and discount rates were as follows:
| August 31, 2021 | ||||
| Weighted-average remaining lease term (years) | ||||
| Weighted-average discount rate | % | |||
NOTE 9 - CUSTOMER CONCENTRATION
The Company had no customers who exceeded 10%
of net revenues for the three months ended August 31, 2021. The Company had one customer who accounted for
NOTE 10 - SEGMENT INFORMATION
As described in Note 4 - Ample Hills Business Acquisition, the Company closed on the acquisition of Ample Hills during the Fiscal 2021. With the acquisition of Ample Hills, the Company now has two reportable business segments, the Ice Cream Segment and the Measurement Segment. The Ice Cream Segment encompasses the activities of Ample Hills and focuses on the wholesale and retail sales of the Company’s ice cream products from 11 separate retail locations in New York, New Jersey and California. The Measurement Segment focuses on laser-based test and measurement systems and ultrasonic products. All of the Company’s operations are conducted within North America.
| 22 |
The foregoing information presents the balances and activities of the Measurement Segment for both the three months ended August 31, 2021 and August 31, 2020. For the Ice Cream Segment, the balances and activities for the three months ended August 31, 2021 are included, however, due to the acquisition occurring on July 9, 2020, only a portion of balances and activities are presented for the three months ended August 31, 2020.
Segment Information
| Three Months Ended August 31, | ||||||||||||||||
2021 (As Restated) | 2020 | |||||||||||||||
| Ice Cream | Measurement | Ice Cream | Measurement | |||||||||||||
| Revenue, net | $ | $ | $ | $ | ||||||||||||
| Gross margin | $ | $ | $ | $ | ||||||||||||
| Gross margin % | % | % | % | % | ||||||||||||
| Operating loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Depreciation expense | $ | $ | $ | $ | ||||||||||||
| Amortization expense | $ | $ | $ | $ | ||||||||||||
| Capital expenditures | $ | $ | $ | $ | ||||||||||||
Segment Assets
August 31, 2021 (As Restated) | May 31, 2021 | |||||||
| Segment assets to total assets | ||||||||
| Ice Cream Segment | $ | $ | ||||||
| Measurement Segment | ||||||||
| Corporate assets | ||||||||
| Total assets | $ | $ | ||||||
NOTE 11 - INTANGIBLE ASSETS
Indefinite-Lived Intangible Assets
In connection with the acquisition of Ample Hills on July 9, 2020, the Company acquired tradenames and trademarks related to the Ample Hills business. The Company estimated the fair value of these assets utilizing the relief-from-royalty method. These assets were determined to be indefinite-lived and are not amortized, but instead are reviewed for impairment at least 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. The Company first performs a qualitative analysis to determine if it is “more likely than not” that an impairment event has occurred. If it is deemed to be more likely than not, then the Company will perform a qualitative analysis to estimate the fair value of the assets based on their discounted future cash flows. Should the carrying value of such assets exceed this fair value estimate, then an impairment charge for the difference will be recognized in earnings. The Company’s annual qualitative impairment analysis indicated that it was more likely than not that the indefinite-lived assets were impaired and, accordingly, a quantitative analysis was performed.
During the fourth quarter of the fiscal year ended
May 31, 2021, the Company made an evaluation based on factors such as changes in the Ice Cream Segment’s growth rate and recent
trends 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, during the fiscal year ended May 31, 2021, the Company recognized an impairment loss in the amount
of $
| 23 |
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. In
total, the weighted-average remaining amortization period of the Company’s intangible assets was
As of August 31, 2021 and May 31, 2021, for the
Measurement Segment, the gross carrying value of amortizable intangible assets was $
As of August 31, 2021 and May 31, 2021, for the
Ice Cream Segment, the gross carrying value of amortizable intangible assets was $
The following tables present the major components of finite-intangible assets which are subject to amortization as of August 31, 2021 and May 31, 2021:
| As of August 31, 2021 | Useful Life (Years) | Gross Carrying Value | Accumulated Amortization | Net Carrying Value | ||||||||||||
| Finite-lived intangible assets subject to amortization: | ||||||||||||||||
| Measurement Segment | ||||||||||||||||
| Patented technology | $ | $ | ( | ) | $ | |||||||||||
| Measurement Segment finite-lived assets | ( | ) | ||||||||||||||
| Ice Cream Segment | ||||||||||||||||
| Proprietary recipes | ( | ) | ||||||||||||||
| Company website | ( | ) | ||||||||||||||
| Ice Cream Segment finite-lived intangible assets | ( | ) | ||||||||||||||
| Total finite-lived intangible assets | $ | $ | ( | ) | $ | |||||||||||
| As of May 31, 2021 | Useful Life (Years) | Gross Carrying Value | Accumulated Amortization | Net Carrying Value | ||||||||||||
| Finite-lived intangible assets subject to amortization: | ||||||||||||||||
| Measurement Segment | ||||||||||||||||
| Patented technology | $ | $ | ( | ) | $ | |||||||||||
| Measurement Segment finite-lived assets | ( | ) | ||||||||||||||
| Ice Cream Segment | ||||||||||||||||
| Proprietary recipes | ( | ) | ||||||||||||||
| Company website | ( | ) | ||||||||||||||
| Ice Cream Segment finite-lived intangible assets | ( | ) | ||||||||||||||
| Total finite-lived intangible assets | $ | $ | ( | ) | $ | |||||||||||
| 24 |
Estimated amortization expense for each of the following years is as follows:
| Year Ending May 31, | ||||
| 2022 | $ | |||
| 2023 | | |||
| 2024 | | |||
| 2025 | ||||
| 2026 | ||||
| Thereafter | ||||
| Total expected amortization expense | $ | |||
Finite-lived intangible assets are reviewed for impairment 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.
NOTE 12 – LONG-TERM DEBT
Paycheck Protection Program Loan
On March 21, 2020, the Coronavirus Aid Relief and Economic Security Ace (“CARES ACT”) was enacted. The CARES ACT established the PPP, which funds eligible businesses through federally guaranteed loans. Under the PPP, companies are eligible for forgiveness of principal and accrued interest if the proceeds are used for eligible costs, which include, but are not limited to, payroll, benefits, mortgage, lease, and utility expenses.
The Company received three PPP loans during the fiscal year ended May 31, 2021, one of which was forgiven during the three months ended August 31, 2021. The remaining PPP loans are as follows:
| Loan Amount | Issuance Date | Maturity Period | Interest Rate | |||||||||||
| PPP Loans | ||||||||||||||
| Ample Hills | $ | % | ||||||||||||
| Ample Hills | % | |||||||||||||
| Total PPP Loan Balance | $ | |||||||||||||
The first two loans (one of which was forgiven during the three months ended August 31, 2021 and therefore excluded from the table) were granted on July 30, 2020 (collectively the “First Draw PPP Loan”) under two notes payable. Both notes were issued July 30, 2020 and funds were disbursed on August 3, 2020. The third loan was granted April 6, 2021 (the “Second Draw PPP Loan”) under a note payable. The note payable issued by Ample Hills for the Second Draw PPP Loan was dated April 6, 2021 (the three notes collectively the “Notes”) and funds were disbursed April 6, 2021. The Notes mature five years from the date of issuance and bear interest annually of 1.0%. Interest is accrued monthly, commencing on the date of issuance. Principal and accrued interest are payable monthly through the maturity date, commencing on July 30, 2020 for the First Draw PPP Loan and April 6, 2021 for the Second Draw PPP Loan, unless forgiven as described below. The Notes may be prepaid at any time prior to maturity with no prepayment penalties. As noted above, Loan proceeds may be used only for eligible expenses. The Company has used and intends to use the remaining funds for eligible purposes, including the re-hiring of Ample Hill’s workforce, The Company is currently seeking forgiveness of the balance of the First Draw PPP Loan and intends on seeking forgiveness for the Second Draw PPP Loan.
Forgiveness of the Loans is available for principal
that is used for the limited purposes that qualify for forgiveness under the requirements of the Small Business Administration (“SBA”),
in addition to accrued interest. To obtain forgiveness, the Company must request it, provide documentation in accordance with SBA requirements
and certify that the amounts requested to be forgiven qualify under those requirements. There is no guarantee that the remaining Loans
will be forgiven by the SBA and therefore, the Company has recorded a $
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On August 2, 2021, the Company requested, provided
documentation in accordance with SBA requirements and certified the amounts requested to be forgiven qualified under the requirements.
On August 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 $
As of August 31, 2021 and May 31, 2021, the Company has the following current and long-term liabilities recorded for the PPP loans:
| August 31, 2021 | May 31, 2021 | |||||||
| PPP Loan Balance | ||||||||
| Current | $ | $ | ||||||
| Long-term | ||||||||
| Total PPP Loan Balance | $ | $ | ||||||
NOTE 13 – COMMITMENTS AND CONTINGENCIES
In a transaction related to the acquisition of
Schmitt Measurement Systems, Inc., formerly TMA Technologies, Inc. ("TMA"), the Company established a royalty pool and vested
in each shareholder and debt holder of the acquired company an interest in the royalty pool equal to the amount invested or loaned including
interest payable through March 1995. The royalty pool is funded at 5% of net revenues (defined as gross sales less returns, allowances
and sales commissions) of the Company's surface measurement products and future derivative products developed by Schmitt Industries, Inc.,
which utilize these technologies. As part of the royalty pool agreement, each former shareholder and debt holder released TMA from any
claims with regards to the acquisition except their rights to future royalties. Royalty expense for the three months ended August 31,
2021 and August 31, 2020 amounted to $
In the Company’s fiscal year ended May 31,
2020 (“Fiscal 2020”), the Company determined that it was more likely than not that the Company had a pre-existing tax liability
related to prior periods. The Company has analyzed the liability and estimated it to be $
NOTE 14 - SUBSEQUENT EVENTS
The Company has evaluated subsequent events through the filing of this Quarterly Report on Form 10-Q/A, and determined that there have been no events that have occurred that would require adjustments to our disclosures in the condensed consolidated financial statements.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
This Quarterly Report filed with the SEC on Form 10-Q/A (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 of Schmitt 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 ended May 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 other Securities and Exchange Commission filings and reports. In addition, such statements could be affected by general industry and market conditions.
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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 Industries, Inc. (the "Company", "Schmitt", "we" or "our") operates a diversified business. The Company reports in two business segments, the Ice Cream Segment and the Measurement Segment.
| · | 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 11 individual retail locations located in New York, New Jersey and California. |
| · | Measurement Segment. Through its wholly owned subsidiary Schmitt Measurement Systems, Inc., the Measurement Segment manufactures and sells 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 Fiscal 2021.
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Highlights of the Three Months Ended August 31, 2021 and August 31, 2020
| Three Months Ended August 31, | YoY Change | |||||||||||||||||||||||
| 2021 | % | 2020 | % | $ | % | |||||||||||||||||||
| Ice Cream Segment revenues | $ | 2,955,755 | 78.6 | % | $ | 501,420 | 33.3 | % | $ | 2,454,335 | 489.5 | % | ||||||||||||
| Measurement Segment revenues | 803,420 | 21.4 | % | 1,006,065 | 66.7 | % | (202,645 | ) | (20.1 | )% | ||||||||||||||
| Total revenue, net | 3,759,175 | 100.0 | % | 1,507,485 | 100.0 | % | 2,251,690 | 149.4 | % | |||||||||||||||
| Cost of sales | 1,469,150 | 39.1 | % | 899,841 | 59.7 | % | 569,309 | 63.3 | % | |||||||||||||||
| Gross profit | 2,290,025 | 60.9 | % | 607,644 | 40.3 | % | 1,682,381 | 276.9 | % | |||||||||||||||
| Selling, general and administrative | 4,650,552 | 123.7 | % | 2,211,883 | 146.7 | % | 2,438,669 | 110.3 | % | |||||||||||||||
| Research & development | 9,265 | 0.2 | % | 17,453 | 1.2 | % | (8,188 | ) | (46.9 | )% | ||||||||||||||
| Total operating expenses | 4,659,817 | 124.0 | % | 2,229,336 | 147.9 | % | 2,430,481 | 109.0 | % | |||||||||||||||
| Operating loss | (2,369,792 | ) | (63.0 | )% | (1,621,692 | ) | (107.6 | )% | (748,100 | ) | 46.1 | % | ||||||||||||
| Bargain purchase gain | — | 0.0 | % | 1,271,615 | 84.4 | % | (1,271,615 | ) | (100.0 | )% | ||||||||||||||
| Forgiveness of PPP loan | 588,534 | 15.7 | % | — | — | % | 588,534 | 100.0 | % | |||||||||||||||
| Interest expense | (11,276 | ) | (0.3 | )% | (2,511 | ) | (0.2 | )% | (8,765 | ) | 349.1 | % | ||||||||||||
| Other income, net | 184,156 | 4.9 | % | 98,580 | 6.5 | % | 85,576 | 86.8 | % | |||||||||||||||
| Loss before income taxes | (1,608,378 | ) | (42.8 | )% | (254,008 | ) | (16.8 | )% | (1,354,370 | ) | 533.2 | % | ||||||||||||
| Income tax provision (benefit) | 9,425 | 0.3 | % | (404,667 | ) | (26.8 | )% | 414,092 | (102.3 | )% | ||||||||||||||
| Net (loss) income | $ | (1,617,803 | ) | (43.0 | )% | $ | 150,659 | 10.0 | % | $ | (1,768,462 | ) | (1,173.8 | )% | ||||||||||
| · | Consolidated revenues increased $2,251,690, or 149.4%, to $3,759,175, for the three months ended August 31, 2021, as compared to $1,507,485 for the three months ended August 31, 2020. The increase was driven by the new Ice Cream Segment acquired on July 9, 2020 which generated revenues of $2,955,755 for the three months ended August 31, 2021, accounting for 78.6% of total revenue for the three month period. |
| · | Gross margin increased to 60.9% for the three months ended August 31, 2021, as compared to the three months ended August 31, 2020 of 40.3%. The Company’s gross margin was driven by improved performance in the Ice Cream Segment due to higher factory utilization and production efficiencies, as well as a product mix shift in Measurement Segment. |
| · | Operating expenses increased $2,430,481, or 109.0%, to $4,659,817 for the three months ended August 31, 2021, as compared to $2,229,336 for the three months ended August 31, 2020. The increase was primarily due to the inclusion of the Ample Hills business, acquired in July 2020. |
| · | Net loss was ($1,617,803), or ($0.43), per fully diluted share, for the three months ended August 31, 2021, as compared to net income of $150,659 or $0.04 per fully diluted share, for the three months ended August 31, 2020. Income generated in the comparative period was the result of the bargain gain and income tax benefit related to the acquisition of Ample Hills. |
| · | Capital expenditures for the three months ended August 31, 2021 were $126,302, as compared to $133,303 during the three months ended August 31, 2020. During the three months ended August 31, 2021, an additional $64,551 was invested in the new Ample Hills Prospect Park West retail location that opened May 28, 2021. The remaining $61,751 was the result of expenditures on equipment upgrades at the Company’s Red Hook factory in Brooklyn, New York. |
Critical Accounting Policies
The Company's critical accounting policies are disclosed in its Annual Report on Form 10-K for the year ended May 31, 2021. There have been no changes subsequent to May 31, 2021.
Discussion of Operating Results
Subsequent to the acquisition of Ample 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 months ended August 31, 2021.
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Consolidated Revenue- Consolidated revenue increased $2,251,690, or 149.4%, to $3,759,175 for the three months ended August 31, 2021, as compared to $1,507,485 for the three months ended August 31, 2020. The decrease in the Measurement Segment was offset by increased revenues in the Ice Cream Segment.
Ice Cream Segment - The Ice Cream Segment encompasses the operations of Ample Hills Acquisition, LLC and focuses on the wholesale and retail 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 $2,454,335, or 489.5%, to $2,955,755 for the three months ended August 31, 2021, as compared to $501,420 for the three months ended August 31, 2020. The increase was primarily due to the inclusion of a partial quarter for the three months ended August 31, 2020, 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 $202,645, or 20.1%, to $803,420 for the three months ended August 31, 2021, as compared to $1,006,065 for the three months ended August 31, 2020. The decrease is primarily driven by a decrease in Acuity and Xact product revenue of $110,223 and $123,076, respectively. The decline was offset by an increase in Xact monitoring revenue of $12,253, or 3.2%.
Revenue by product line for the Measurement Segment for the three months ended August 31, 2021 and August 31, 2020, respectively, were as follows:
Three Months Ended August 31, | YoY Change | |||||||||||||||
| 2021 | 2020 | $ | % | |||||||||||||
| Acuity revenue | $ | 256,125 | $ | 366,348 | $ | (110,223 | ) | (30.1 | )% | |||||||
| Xact - product revenue | 89,917 | 212,993 | (123,076 | ) | (57.8 | )% | ||||||||||
| Xact - monitoring revenue | 400,690 | 388,437 | 12,253 | 3.2 | % | |||||||||||
| Other | 56,688 | 38,287 | 18,401 | 48.1 | % | |||||||||||
| Total Measurement Segment revenue | $ | 803,420 | $ | 1,006,065 | $ | (202,645 | ) | (20.1 | )% | |||||||
Gross Margin – Ice Cream Segment gross margin for the three months ended August 31, 2021 increased 19.6% (or 42.7% increase) to 65.5%, as compared to 45.9% for the three months ended August 31, 2020. The Ice Cream Segment’s improved performance was driven by improved factory utilization, yield and a seasonal increase in higher margin retail sales. Measurement Segment gross margin for the three months ended August 31, 2021 increased to 44.0% as compared to 39.2% for the three months ended August 31, 2020. The Measurement Segment’s improved margin was driven by a higher percentage of Xact Monitoring revenue.
Operating Expenses – For the three months ended August 31, 2021, operating expenses increased $2,430,481 to $4,659,817, as compared to $2,229,336 for the three months ended August 31, 2020. This is primarily driven by the new Ice Cream Segment, which had operating expenses of $3,123,029 for the three months ended August 31, 2021 and accounted for 67.0% of total operating expenses for the three month period. Results from the Ice Cream Segment are entirely attributable to our Ample Hills business, which was acquired on July 9, 2020.
Ice Cream Segment operating expenses increased $2,196,398, or 237.0%, to $3,123,029 for the three months ended August 31, 2021, as compared to $926,631 for the three months ended August 31, 2020.
Measurement Segment operating expenses increased $234,083, or 18.0%, to $1,536,788 for the three months ended August 31, 2021, as compared to $1,302,705 for the three months ended August 31, 2020. The operating expense increase was driven by higher corporate administrative costs supporting the Measurement Segment businesses, as well as higher professional fees.
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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 4 – Ample Hills Business Acquisition for further discussion.
Subsequent to the measurement period, the Company identified an additional $72,127 of leasehold and utility deposits that were not correctly recorded. As such, the Company has recorded and out of period adjustment related to such deposits with a corresponding increase to other income. The Company has concluded the out-of-period adjustment is not material to any of the Company’s previously issued quarterly or annual financial statements.
Other Income - Other income primarily consists of rental income, interest income and other income (expense). Other income was $184,156 for the three months ended August 31, 2021, as compared to $98,580 for the three months ended August 31, 2020.
Interest income was $4,049 for the three months ended August 31, 2021, as compared to $4,248 for the three months ended August 31, 2020. Fluctuations in interest income are impacted by the levels of our average cash and investment balances and changes in interest rates.
Income Taxes - The effective tax rate for the three months ended August 31, 2021 was (0.1)%, as compared to 159.3% for the three months ended August 31, 2020. The effective tax rate on consolidated net income for the three months ended August 31, 2020 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 was ($1,617,803), or ($0.43) per fully diluted share, for the three months ended August 31, 2021, compared to net income of $150,659, or $0.04 per fully diluted share, for the three months ended August 31, 2020.
COVID-19 Update
As of August 31, 2021, all of our 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 the World Health Organization and the Centers 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.
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LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital decreased $1,850,348 to $1,097,605 as of August 31, 2021 as compared to $2,947,953 as of May 31, 2021.
Net cash used in operating activities was $1,445,221 during the three months ended August 31, 2021, as compared to net cash used in operating activities of $836,523 during the three months ended August 31, 2020. The net loss of $1,617,803, an increase in inventories of $276,051, the forgiveness of part of the First Draw PPP Loan received through the Paycheck Protection Program (“PPP”) totaling $588,534, an increase in other current assets of $264,476, and an increase in rent, utility deposits and ERP deposits of $146,973 were the primary drivers of the overall operating cash usage for the three months ended August 31, 2021. These uses of cash were offset by an increase in accrued liabilities and customer deposits of $980,571, a decrease in accounts receivable, net of $173,224, depreciation and amortization of $149,478, non-cash lease costs of $90,018, stock-based compensation of $26,927, an increase in accounts payable of $16,724 and an increase in income taxes payable of $16,954.
Net cash used in investing activities was $126,302 for the three months ended August 31, 2021, as compared to net cash used in investing activities of $1,802,180 for the three months ended August 31, 2020. The net cash used in investing activities for the three months ended August 31, 2021 is driven by $126,302 of purchases associated with the new Prospect Park West retail location and factory upgrades. The net cash used in investing activities for the three months ended August 31, 2020 were significantly higher as a result of the acquisition of Ample Hills and associated our costs totaling $1,668,877, in addition to purchases of property and equipment totaling $133,303.
Net cash provided by financing activities was $264,476 during the three months ended August 31, 2021, as compared to net cash provided by financing activities of $1,543,447 for the three months ended August 31, 2020. The net cash provided by financing activities for the three months ended August 31, 2021 was primarily due to the forgiveness of part of the First Draw PPP Loan received through the PPP, which resulted in repayments 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 three months ended August 31, 2020 was primarily the result of proceeds received by the Company for the First Draw PPP Loan totaling $1,777,964, offset by repurchases of common stock totaling $234,517.
Management is seeking to sell the assets held for sale, which would be a source of liquidity for the Company.
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. As the Company had a significant reduction in its cash and cash equivalents due to planned capital expenditures, the Company may also seek to generate additional cash, whether the Second Draw 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.
On August 7, 2021, the Company received The Commitment Letter to Schmitt Industries (“Commitment”) from Michael Zapata, CEO. The Commitment states that 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 through August 31, 2022. The Company has not requested or used any of the $1,300,000 as of August 31, 2021.
On August 2, 2021, the Company requested, provided documentation in accordance with SBA requirements and certified the amounts requested to be forgiven qualified under the requirements. On August 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. 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. Bank of America is returning this payment to the Company as a result of the loan being forgiven. The Company has recorded this amount in prepaid expenses and other current assets on the consolidated balance sheet.
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Going Concern
In connection with preparing the condensed consolidated financial statements for the three months ended August 31, 2021, 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, and potential additional equity financing, will be sufficient to fund our anticipated level of operations through at least October 2022 and alleviates substantial doubt about the Company’s ability to continue as a going concern.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
There have been no material changes from the information previously reported under Item 7A of our Annual Report on Form 10-K for the year ended May 31, 2021.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Securities Exchange Act of 1934, as amended (Exchange Act), is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms. Our disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is accumulated and communicated to management as appropriate to allow timely decisions regarding required disclosures. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives, and management necessarily is required to use its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
An evaluation was carried out under the supervision and with the participation of the Company’s management, including the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report as defined in Exchange Act Rule 13a-15(e) and Rule 15d-15(e). Based on that evaluation, the CEO and CFO have concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were not effective in ensuring that information required to be disclosed in our Exchange Act reports is (1) recorded, processed, summarized and reported in a timely manner, and (2) accumulated and communicated to our management, including our CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure.
As previously disclosed in Item 9A of our Annual Report on Form 10-K for the year ended May 31, 2021, management had concluded that there was a material weakness in internal control over financial reporting due to deficiencies in the design and operation of internal controls over segregation of duties; and ineffective management review over accounting reconciliations for stock-based compensation, accounts receivable, accounts payable, inventory, accrued liabilities, sales taxes, expense classification, depreciation of property and equipment, net and earnings per share. We are in the process of remediating the material weakness as of the end of the period covered by this Quarterly Report on Form 10-Q/A.
In addition to the previously disclosed in Item 9A of our Annual Report on Form 10-K for the year ended May 31, 2021, management identified errors related to the accounting treatment of certain general and administrative expenses that were excluded from the statement of operations, as well as the improper recognition of certain deposits acquired in connection with the acquisition of Ample Hills that, when considered in the aggregate, required a restatement of the unaudited consolidated financial statements as of and for the three months ended August 31, 2021. Refer to Note 2 of “Restatement Of Previously Issued Condensed Consolidated Financials Statements” for further discussion surrounding the restatement.
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A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements would not be prevented or detected on a timely basis. As a result of the material weakness, our CEO and CFO have concluded that, as of August 31, 2021, the end of the period covered by this report, our disclosure controls and procedures were not effective at a reasonable assurance level.
Remediation of Material Weaknesses
Management has developed a remediation plan in response to the material weakness identified. Management has leveraged additional accounting resources, both internal and external, to strengthen the financial close and reporting process so as to more effectively detect such misstatements in a more timely fashion. Additional accounting resources include the Company’s announcement of the appointment of Philip Bosco as Chief Financial Officer on November 6, 2020, effective December 1, 2020. In addition, a consulting firm has been engaged to assist with the development and implementation of our internal controls remediation plan.
The remediation plan includes both management’s assessment and recommendations from independent accounting advisors used in the review process. This remediation plan is intended to address the identified material weaknesses and enhance our overall control environment.
This quarterly report does not include an attestation report of the Company's registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by the Company's registered public accounting firm pursuant to SEC rules adopted in conformity with the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.
Notwithstanding the identified material weaknesses, management believes that the consolidated financial statements included in this Quarterly Report on Form 10-Q/A present fairly, in all material respects, our financial position, results of operations, and cash flows as of and for the periods presented in accordance with U.S. GAAP.
Changes in Internal Control Over Financial Reporting
In the fiscal year ending May 31, 2021, the Company acquired the Ample Hills business. As of August 31, 2021, management has expanded the head count in the accounting and finance department and is in the process of integrating this new business line into the Company's overall internal control environment. Further, management has performed a thorough review of processes and procedures to ensure appropriate segregation of duties are in place to improve the internal control environment. Management anticipates completing these integration efforts by the end of the fiscal year ending May 31, 2022.
During the year ended May 31, 2021, the Company identified an error in its recording of market-based stock compensation, and recorded an adjustment to the consolidated balance sheet as of May 31, 2021, the consolidated statement of operations and comprehensive (loss) income and the consolidated statement of changes in stockholders equity for the periods then ended.
Other than the material weaknesses discussed above, including those described in the Remediation of Material Weakness section above, there has been no change in the Company's internal control over financial reporting that occurred during the Company's quarter ended August 31, 2021 that has materially affected, or is reasonably likely to materially affect, such internal control over financial reporting.
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Part II - OTHER INFORMATION
None.
Item 1A. Risk Factors
There have been no material changes, other than as described below, from the risk factors set forth in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended May 31, 2021. In addition, please refer to the risk factors disclosed in Part I, Item 1A of our Annual Report on From 10-K for the fiscal year ended May 31, 2021 and the disclosure relating to material weaknesses due to deficiencies in the design of internal controls under Item 4 - Controls and Procedures of this Form 10-Q/A for the three months ended August 31, 2021, for a listing of factors that could cause actual results or events to differ materially from those contained in any forward-looking statements made by or on behalf of the Company.
We have identified material weaknesses in our internal control over financial reporting which have resulted in and
could, if not remediated, result in material misstatements in our financial statements.
Our management is responsible for establishing and maintaining adequate internal control over our financial reporting. As disclosed in the Company’s Form 10-K for the fiscal year ended May 31, 2021 and this Form 10-Q/A, management identified material weaknesses in our internal control over financial reporting related to the applicable financial reporting cycles.
A material weakness is defined as a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. As a result of our material weaknesses, management concluded that our internal control over financial reporting was not effective. We are actively engaged in a remediation plan designed to address these material weaknesses. Management intends to leverage additional accounting resources, both internal and external, to strengthen the financial close and reporting process so as to more effectively detect such misstatements in a more timely fashion. The remediation plan includes both management’s assessment and recommendations from independent accounting advisors used in the review process. This remediation plan is intended to address the identified material weaknesses and enhance our overall control environment.
Material weaknesses in our internal control over financial reporting have required us to restate our financial results and if our remedial measures are insufficient to address the material weaknesses, or if additional material weaknesses or significant deficiencies in our internal control are discovered or occur in the future, our consolidated financial statements may contain material misstatements and we could be required to restate our financial results. We can give no assurance that the measures we have taken and plan to take in the future will remediate the material weakness identified or that any additional material weaknesses or restatements of financial results will not arise in the future due to a failure to implement and maintain adequate internal control over financial reporting or circumvention of these controls. In addition, even if we are successful in strengthening our controls and procedures, in the future those controls and procedures may not be adequate to prevent or identify irregularities or errors or to facilitate the fair presentation of our financial statements.
We may face litigation and other risks as a result of the material weaknesses in our internal control over financial reporting.
The Company has disclosed its intention to restate its unaudited condensed financial statements for the fiscal periods beginning August 31, 2021 through February 28, 2022. As a result of material weaknesses that we have identified in our internal control over financial reporting, the restatement, the adjustments relating to certain liabilities and expenses incurred that the Company failed to accrue for within the proper reporting periods, and other matters raised or that may in the future be raised by the SEC or others, we may be subject to potential litigation or other disputes which may include, among others, claims invoking the federal and state securities laws, contractual claims or other claims arising from the restatement and material weaknesses in our internal control over financial reporting and the preparation of our financial statements. We can provide no assurance that such litigation or dispute will not arise in the future. Any such litigation or dispute, whether successful or not, could have a material adverse effect on our business, results of operations and financial condition.
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Item 5. Other Information
None.
Item 6. Exhibits
| Exhibit | Description |
| 31.1 | Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| 31.2 | Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| 32.1 | Certification of Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| 101.INS | XBRL Instance Document. |
| 101.SCH | XBRL Taxonomy Extension Schema Document. |
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document. |
| 101.LAB | XBRL Taxonomy Extension Label Linkbase Document. |
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document. |
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document. |
| 104 | Cover Page Interactive Data File (formatted in Inline XBRL and contained in Exhibit 101) |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| SCHMITT INDUSTRIES, INC. | |||
| (Registrant) | |||
| Date: | October 12, 2022 | /s/ Philip Bosco | |
| Philip Bosco, Chief Financial Officer | |||
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