UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

☒ Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended November 30, 2021

☐ Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from __________ to __________

Commission file number: 001-38964

SCHMITT INDUSTRIES, INC.

Oregon		93-1151989
(State or Other Jurisdiction of		(IRS Employer
Incorporation or Organization)		Identification Number)

2765 N.W. Nicolai Street

Portland, Oregon 97210

(Address of Principal Executive Offices) (Zip Code)

(503) 227-7908

(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
Common Stock - no par value		SMIT		NASDAQ Capital Market

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. Yes ☒ No ☐

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). Yes ☒ No ☐

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):

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 ☐ No ☒

The number of shares of outstanding common stock outstanding as of December 31, 2021:

Common Stock, no par value – outstanding

3,811,142

SCHMITT INDUSTRIES, INC.

INDEX TO FORM 10-Q

		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	20

Item 3:	Quantitative and Qualitative Disclosures about Market Risk	26

Item 4:	Controls and Procedures	27

Part II - OTHER INFORMATION

Item 1A:	Risk Factors	28

Item 5:	Other Information	28

Item 6:	Exhibits	29

Signatures

Certifications

	November 30, 2021			May 31, 2021
ASSETS
Current assets
Cash and cash equivalents	$	4,572,774		$	4,032,690
Accounts receivable, net		1,385,185			1,154,645
Inventories, net		1,825,636			1,553,310
Prepaid expenses		134,209			198,345
Income taxes receivable		5,701			18,057
Total current assets		7,923,505			6,957,047
Leasehold assets		11,688,920			10,448,486
Property and equipment, net		2,316,494			2,824,017
Property and equipment held for sale, net		433,410			174,847
Leasehold, utilities and ERP deposits		657,490			431,808
Other assets
Intangible assets, net		273,968			337,725
TOTAL ASSETS	$	23,293,787		$	21,173,930

LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable	$	677,791		$	583,750
Accrued commissions		63,076			60,614
Accrued payroll liabilities		614,483			527,608
Accrued liabilities		394,745			465,146
Customer deposits and prepayments		117,754			93,364
Other accrued liabilities		389,213			694,590
Current portion of long-term lease liabilities		1,224,648			1,042,331
Current portion of long-term debt		876,404			541,691
Total current liabilities		4,358,114			4,009,094
Long-term debt, net current portion		2,594,618			3,253,389
Long-term leasehold liabilities, net current portion		11,359,230			10,141,864
Total liabilities		18,311,962			17,404,347
Stockholders' equity
Common stock, no par value, 20,000,000 shares authorized, 4,229,193 and 3,811,142 shares issued and outstanding at November 30, 2021, respectively; and 4,204,553 and 3,786,502 shares issued and outstanding at May 31, 2021, respectively		12,292,728			12,223,359
Accumulated deficit		(7,310,903	)		(8,453,776	)
Total stockholders' equity		4,981,825			3,769,583
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	23,293,787		$	21,173,930


	Three Months Ended November 30,						Six Months Ended November 30,
	2021			2020			2021			2020
Net sales	$	2,961,965		$	2,029,712		$	6,721,140		$	3,537,197
Cost of revenue		1,356,874			1,067,599			2,706,849			1,967,440
Gross profit		1,605,091			962,113			4,014,291			1,569,757
Operating expenses
Selling, general and administrative		4,161,890			3,091,516			8,292,576			5,178,232
Transaction costs		—			—			—			125,167
Research and development		5,580			17,877			14,845			35,330
Total operating expenses		4,167,470			3,109,393			8,307,421			5,338,729
Operating loss		(2,562,379	)		(2,147,280	)		(4,293,130	)		(3,768,972	)
Bargain purchase gain		—			—			—			1,189,512
Adjustments to bargain purchase gain		—			(82,103	)		—			—
Gain on sale of property and equipment		4,598,095			—			4,598,095			—
Forgiveness of PPP loan		—			—			588,534			—
Interest expense		(18,303	)		(1,285	)		(29,579	)		(2,544	)
Other income (expense), net		173,274			(134,164	)		285,303			(36,836	)
Income (loss) before income taxes		2,190,687			(2,364,832	)		1,149,223			(2,618,840	)
Income tax provision (benefit)		2,775			1,637			6,350			(403,030	)
Net income (loss)	$	2,187,912		$	(2,366,469	)	$	1,142,873		$	(2,215,810	)

Net income (loss) per common share
Basic	$	0.58		$	(0.63	)	$	0.30		$	(0.59	)
Weighted-average number of common shares, basic		3,784,000			3,763,156			3,785,997			3,763,454
Diluted	$	0.57		$	(0.63	)	$	0.30		$	(0.59	)
Weighted-average number of common shares, diluted		3,819,616			3,763,156			3,814,909			3,763,454


	Six Months Ended November 30,
	2021			2020
Cash flows relating to operating activities
Net income (loss)	$	1,142,873		$	(2,215,810	)
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Bargain purchase gain		—			(1,189,512	)
Forgiveness of Paycheck Protection Program loan		(588,534	)		—
Depreciation and amortization		294,597			187,114
Gain on sale of property and equipment		(4,598,095	)		—
Stock-based compensation		69,369			251,371
Deferred income taxes		—			(406,304	)
Non-cash lease costs		159,248			—
(Increase) decrease in:
Accounts receivable, net		(230,540	)		(220,514	)
Inventories, net		(272,326	)		(60,250	)
Prepaid expenses		64,136			(46,883	)
Deposits on capital improvements to factory		—			(273,278	)
Rent, utility deposits and ERP deposits		(225,682	)		(79,170	)
Leasehold assets		—			(360,896	)
Income taxes receivable		12,356			(80,602	)
Increase (decrease) in:
Accounts payable		94,041			503,864
Accrued liabilities and customer deposits		(262,052	)		433,514
Leasehold liabilities		—			773,670
Net cash used in operating activities	$	(4,340,609	)	$	(2,783,686	)

Cash flows relating to investing activities
Acquisition of Ample Hills	$	—		$	(1,711,127	)
Purchases of property and equipment		(181,707	)		(258,371	)
Proceeds from the sale of property and equipment		4,797,924			—
Net cash provided by (used in) investing activities	$	4,616,217		$	(1,969,498	)

Cash flows relating to financing activities
Proceeds from Paycheck Protection Program, net of repayment	$	264,476		$	1,795,080
Payments on short-term borrowing		—			(36,441	)
Repurchase of common stock		—			(234,517	)
Net cash provided by financing activities	$	264,476		$	1,524,122
Increase (decrease) in cash and cash equivalents		540,084			(3,229,062	)
Cash and cash equivalents, beginning of period		4,032,690			10,566,531
Cash and cash equivalents, end of period	$	4,572,774		$	7,337,469
Supplemental disclosure of cash flow information
Cash paid for income taxes, net of refunds	$	10,606		$	80,600
Cash paid for interest	$	—		$	616

	Shares		Amount		Accumulated Deficit			Total
Balance, May 31, 2021		3,786,502	$	12,223,359	$	(8,453,776	)	$	3,769,583
Shares issued to directors, officers and others upon vesting of RSUs		24,640		—		—			—
Stock-based compensation		—		69,369		—			69,369
Net income		—		—		1,142,873			1,142,873
Balance, November 30, 2021		3,811,142	$	12,292,728	$	(7,310,903	)	$	4,981,825

	November 30, 2021			May 31, 2021
Land	$	159,000		$	140,000
Buildings and improvements		1,616,250			246,135
Total property and equipment held for sale		1,775,250			386,135
Less accumulated depreciation		(1,341,840	)		(211,288	)
Total property and equipment held for sale, net	$	433,410		$	174,847

Purchase Price
Cash paid to sellers	$	1,000,000
Cash paid for cure costs		713,404
Total Purchase Price	$	1,713,404

Purchase Price Allocation
Assets Acquired
Right-of-use operating lease assets		10,645,098
Website		25,545
Tradename and trademarks		903,422
Proprietary recipes		146,739
Security deposits		225,180
Machinery and equipment		564,553
Leasehold improvements		815,798
Inventory		632,100
Total assets acquired	$	13,958,335

Liabilities Assumed
Right-of-use operating lease liabilities		10,645,098
Deferred tax liability		405,688
Customer deposits		20,204
Gift card liabilities		35,133
Total liabilities assumed	$	11,106,123
Net assets acquired		2,852,212
Gain on bargain purchase	$	1,138,808

Outstanding Options						Exercisable Options
Number of Shares		Weighted- Average Exercise Price		Weighted-Average Remaining Contractual Life (years)		Number of Shares		Weighted- Average Exercise Price
	22,500	$	1.70		5.3		22,500	$	1.70

	Number of Units			Weighted-Average Price at Grant Date		Aggregate Intrinsic Value
Non-vested RSUs - May 31, 2021		34,237		$	4.71	$	161,400
RSUs granted		9,457		$	4.18		39,551
RSUs vested		(24,640	)	$	4.06		(99,948	)
Non-vested RSUs – November 30, 2021		19,054		$	5.30	$	101,003


	Three Months Ended November 30,				Six Months Ended November 30,
	2021		2020		2021		2020
Weighted-average shares (basic)		3,784,000		3,763,156		3,785,997		3,763,454
Effect of dilutive stock options		35,616		—		28,912		—
Weighted-average shares (diluted)		3,819,616		3,763,156		3,814,909		3,763,454

Years Ending May 31,
2022	$	19,682
2023		40,151
2024		41,356
2025		42,597
2026		14,338
Total undiscounted cash flow	$	158,124

Years Ending May 31,
2022	$	777,027
2023		1,858,502
2024		1,866,585
2025		1,845,319
2026		1,619,558
Thereafter		7,146,576
Total lease payments		15,113,567
Less: imputed interest		(2,529,689	)
Present value of lease payments		12,583,878
less: current lease obligations		(1,224,648	)
Long-term lease obligations	$	11,359,230

	November 30, 2021			May 31, 2021
Raw materials	$	887,829		$	901,464
Work-in-process		28,958			35,160
Finished goods		1,009,628			731,826
Total inventories		1,926,415			1,668,450
Less: inventory reserves		(100,779	)		(115,140	)
Inventories, net	$	1,825,636		$	1,553,310


	Three Months Ended November 30,
	2021						2020
	Ice Cream			Measurement			Ice Cream			Measurement
Revenue, net	$	1,979,616		$	982,349		$	1,158,989		$	870,723
Gross margin	$	1,128,655		$	476,436		$	467,714		$	494,399
Gross margin %		57.0	%		48.5	%		40.4	%		56.8	%
Operating loss	$	(1,922,873	)	$	(639,506	)	$	(1,737,598	)	$	(409,682	)
Depreciation expense	$	106,747		$	6,493		$	59,160		$	9,401
Amortization expense	$	5,733		$	26,145		$	6,017		$	26,146
Capital expenditures	$	57,074		$	—		$	111,387		$	13,680


	Six Months Ended November 30,
	2021						2020
	Ice Cream			Measurement			Ice Cream			Measurement
Revenue, net	$	4,935,371		$	1,785,769		$	1,660,409		$	1,876,788
Gross margin	$	3,137,845		$	876,446		$	681,136		$	888,621
Gross margin %		63.6	%		49.1	%		41.0	%		47.4	%
Operating loss	$	(3,138,091	)	$	(1,155,039	)	$	(2,700,352	)	$	(1,068,620	)
Depreciation expense	$	214,639		$	16,200		$	94,486		$	30,309
Amortization expense	$	11,466		$	52,292		$	10,028		$	52,291
Capital expenditures	$	181,707		$	—		$	232,051		$	26,320

	November 30, 2021
Weighted-average remaining lease term (years)		7.67
Weighted-average discount rate		3.87	%

	November 30, 2021			May 31, 2021
Land Land	$	—		$	159,000
Buildings and improvements Buildings and Improvements		1,480,679			2,989,140
Furniture, fixtures and equipment Furniture, Fixtures and Equipment		1,827,315			1,788,784
Total property and equipment		3,307,994			4,936,924
Less: accumulated depreciation		(991,500	)		(2,112,907	)
Total property and equipment, net	$	2,316,494		$	2,824,017

	November 30,			May 31,
	2021			2021
Accounts receivable	$	1,479,192		$	1,252,968
Less: allowance for doubtful accounts		(94,007	)		(98,323	)
Accounts receivable, net	$	1,385,185		$	1,154,645

	November 30, 2021		May 31,2021
Segment assets to total assets
Ice Cream Segment	$	9,898,380	$	10,713,832
Measurement Segment		2,270,087		2,565,701
Corporate assets		11,125,320		7,894,397
Total assets	$	23,293,787	$	21,173,930

As of November 30, 2021	Useful Life (Years)	Gross Carrying Value		Accumulated Amortization			Net Carrying Value
Finite-lived intangible assets subject to amortization:
Measurement Segment
Patented technology Patented Technology	15	$	1,663,538	$	(1,528,226	)	$	135,312
Measurement Segment finite-lived assets			1,663,538		(1,528,226	)		135,312

Ice Cream Segment
Proprietary recipes	10		146,739		(21,244	)		125,495
Company website	3		25,445		(12,284	)		13,161
Ice Cream Segment finite-lived intangible assets			172,184		(33,528	)		138,656
Total finite-lived intangible assets		$	1,835,722	$	(1,561,754	)	$	273,968

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		15	$	1,663,538	$	(1,475,935	)	$	187,603
Measurement Segment finite-lived assets				1,663,538		(1,475,935	)		187,603

Ice Cream Segment
Proprietary recipes		10		146,739		(13,934	)		132,805
Company website		3		25,445		(8,128	)		17,317
Ice Cream Segment finite-lived intangible assets				172,184		(22,062	)		150,122
Total finite-lived intangible assets			$	1,835,722	$	(1,497,997	)	$	337,725

Year Ending May 31,
2022	$	68,341
2023		101,370
2024		15,313
2025		14,621
2026		14,621
Thereafter		59,702
Total expected amortization expense	$	273,968

	November 30, 2021		May 31, 2021
PPP Loan Balance
Current	$	876,404	$	541,691
Long-term		2,594,618		3,253,389
Total PPP Loan Balance	$	3,471,022	$	3,795,080

	Three Months Ended November 30,												YoY Change
	2021			%			2020			%			$			%
Ice Cream Segment revenues	$	1,979,616			66.8	%	$	1,158,989			57.1	%	$	820,627			70.8	%
Measurement Segment revenues		982,349			33.2	%		870,723			42.9	%		111,626			12.8	%
Total revenue, net		2,961,965			100.0	%		2,029,712			100.0	%		932,253			45.9	%
Cost of sales		1,356,874			45.8	%		1,067,599			52.6	%		289,275			27.1	%
Gross profit		1,605,091			54.2	%		962,113			47.4	%		642,978			66.8	%
Selling, general and administrative		4,161,890			140.5	%		3,091,516			152.3	%		1,070,374			34.6	%
Research & development		5,580			0.2	%		17,877			0.9	%		(12,297	)		(68.8	%)
Total operating expenses		4,167,470			140.7	%		3,109,393			153.2	%		1,058,077			34.0	%
Operating loss		(2,562,379	)		(86.5	%)		(2,147,280	)		(105.8	%)		(415,099	)		(19.3	%)
Gain on sale of property and equipment		4,598,095			155.2	%		—			—			4,598,095			100.0	%
Adjustments to bargain purchase gain		—			0.0	%		(82,103	)		(4.0	%)		82,103			100.0	%
Interest expense		(18,303	)		(0.6	%)		(1,285	)		(0.1	%)		17,018			1324.4	%
Other (expense) income, net		173,274			5.8	%		(134,164	)		(6.6	%)		307,438			229.2	%
Income (loss) before income taxes		2,190,687			74.0	%		(2,364,832	)		(116.5	%)		4,555,519			192.6	%
Income tax provision		2,775			0.1	%		1,637			0.1	%		1,138			69.5	%
Net income (loss)	$	2,187,912			73.9	%	$	(2,366,469	)		(116.6	%)	$	4,554,381			192.5	%

	Three Months Ended November 30,				YoY Change
	2021		2020		$			%
Acuity revenue	$	456,533	$	337,325	$	119,208			35.3	%
Xact - product revenue		120,051		94,413		25,638			27.2	%
Xact - monitoring revenue		391,508		420,133		(28,625	)		(6.8	%)
Other		14,257		18,852		(4,595	)		(24.4	%)
Total Measurement Segment revenue	$	982,349	$	870,723	$	111,626			12.8	%

	Six Months Ended November 30,				YoY Change
	2021		2020		$			%
Acuity revenue	$	712,658	$	703,673	$	8,985			1.3	%
Xact - product revenue		209,968		307,406		(97,438	)		(31.7	%)
Xact - monitoring revenue		792,198		808,570		(16,372	)		(2.0	%)
Other		70,945		57,139		13,806			24.2	%
Total Measurement Segment revenue	$	1,785,769	$	1,876,788	$	(91,020	)		(4.8	%)

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)

		SCHMITT INDUSTRIES, INC.
		(Registrant)

Date:	January 14, 2022	/s/ Philip Bosco
		Philip Bosco, Chief Financial Officer

Large accelerated filer

Accelerated filer

Non-accelerated Filer

Smaller reporting company

Emerging growth company

SEC Form 10-Q filed by Schmitt Industries, Inc.