10-Q 1 e620459_10q-sii.htm

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 February 28, 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 each class of common stock outstanding as of March 31, 2021

Common stock, no par value

3,775,334

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	3

	Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)	4

	Condensed Consolidated Statements of Cash Flows	5

	Condensed Consolidated Statement of Changes in Stockholders' Equity	6

	Notes to Condensed Consolidated Interim Financial Statements	7

Item 2:	Management's Discussion and Analysis of Financial Condition and Results of Operations	23

Item 3:	Quantitative and Qualitative Disclosures about Market Risk	29

Item 4:	Controls and Procedures	29

Part II - OTHER INFORMATION

Item 1A:	Risk Factors	30

Item 5:	Other Information	31

Item 6:	Exhibits	32

Signatures

Certifications

	February 28, 2021			May 31, 2020
ASSETS
Current assets
Cash and cash equivalents	$	3,600,230		$	10,146,531
Restricted cash		566,134			420,000
Accounts receivable, net		956,871			574,926
Inventories		2,004,469			1,059,357
Prepaid expenses		99,927			60,674
Income taxes receivable		31,502			—
Total current assets		7,259,133			12,261,488
Leasehold assets		10,691,336			—
Property and equipment, net		2,176,308			486,789
Property and equipment held for sale, net		174,847			165,347
Leasehold, utilities, and ERP deposits		398,474			—
Deposits on capital improvements to factory		417,794			—
Other assets
Intangible assets, net		1,315,174			287,602
TOTAL ASSETS	$	22,433,066		$	13,201,226

LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable	$	744,249		$	267,660
Accrued commissions		110,229			41,450
Accrued payroll liabilities		272,213			86,372
Accrued liabilities		578,158			265,349
Customer deposits and prepayments		101,495			12,239
Other accrued liabilities		376,588			587,492
Income taxes payable		—			47,462
Current portion of long-term lease liabilities		942,058			—
Current portion of PPP loan		317,621			—
Total current liabilities		3,442,611			1,308,024
Long-term debt, net current portion		1,477,459			—
Long-term leasehold liabilities		10,345,466			—
Long-term deferred tax liability		46,934			—
Total liabilities		15,312,470			1,308,024
Stockholders' equity
Common stock, no par value, 20,000,000 shares authorized, 3,775,334 shares issued and outstanding at February 28, 2021 and 3,784,554 shares issued and outstanding at May 31, 2020		12,120,307			12,257,306
Accumulated deficit		(4,999,711	)		(364,104	)
Total stockholders' equity		7,120,596			11,893,202
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	22,433,066		$	13,201,226

	Three Months Ended February 28,						Nine Months Ended February 28,
	2021			2020			2021			2020
Net sales	$	1,668,444		$	1,094,967		$	5,205,641		$	3,222,846
Cost of revenue		837,254			491,346			2,804,694			1,752,116
Gross profit		831,190			603,621			2,400,947			1,470,730
Operating expenses
General, administrative and sales		3,313,918			1,011,414			8,492,150			2,785,816
Transaction costs		—			—			125,167			—
Research and development		21,732			23,908			57,062			32,371
Total operating expenses		3,335,650			1,035,322			8,674,379			2,818,187
Operating loss		(2,504,460	)		(431,701	)		(6,273,432	)		(1,347,457	)
Bargain purchase gain		(2,277	)		—			1,187,235			—
Other income (expense), net		85,303			187,218			45,923			196,941
Loss before income taxes		(2,421,434	)		(244,483	)		(5,040,274	)		(1,150,516	)
Income tax provision (benefit) from continuing operations		(1,637	)		(4,206	)		(404,667	)		(12,035	)
Net loss from continuing operations		(2,419,797	)		(240,277	)		(4,635,607	)		(1,138,481	)
Income from discontinued operations, net of tax		—			109,107			—			5,695,137
Net income (loss)	$	(2,419,797	)	$	(131,170	)	$	(4,635,607	)	$	4,556,656
Net loss per common share from continuing operations:
Basic	$	(0.64	)	$	(0.06	)	$	(1.23	)	$	(0.29	)
Weighted average number of common shares, basic		3,764,536			3,858,287			3,759,639			3,992,664
Diluted	$	(0.64	)	$	(0.06	)		(1.23	)	$	(0.29	)
Weighted average number of common shares, diluted		3,764,536			3,858,287			3,759,639			3,992,664
Net income per common share from discontinued operations:
Basic	$	—		$	0.03			—		$	1.43
Weighted average number of common shares, basic		3,764,536			3,858,287			3,759,639			3,992,664
Diluted	$	—		$	0.03			—		$	1.43
Weighted average number of common shares, diluted		3,764,536			3,858,287			3,759,639			3,992,664
Net income (loss) per common share:
Basic	$	(0.64	)	$	(0.03	)		(1.23	)	$	1.14
Weighted average number of common shares, basic		3,764,536			3,858,287			3,759,639			3,992,664
Diluted	$	(0.64	)	$	(0.03	)		(1.23	)	$	1.14
Weighted average number of common shares, diluted		3,764,536			3,858,287			3,759,639			3,992,664
Comprehensive income (loss)
Net income (loss)	$	(2,419,797	)	$	(131,170	)	$	(4,635,607	)	$	4,556,656
Foreign currency translation adjustment		—			—			—			527,827
Total comprehensive income	$	(2,419,797	)	$	(131,170	)	$	(4,635,607	)	$	5,084,483

							Accumulated
							other
							comprehensive		Accumulated
	Shares			Amount			income (loss)		deficit			Total
Balance, May 31, 2020		3,784,554		$	12,257,306		$	—		(364,104	)	$	11,893,202
Share repurchases		(72,101	)		(234,517	)		—		—			(234,517	)
Shares issued to directors and officers upon vesting of RSUs		77,281			—			—		—			—
Stock-based compensation		—			163,493			—		—			163,493
Repurchase of restricted stock units		(14,400	)		(65,975	)		—		—			(65,975	)
Net income		—			—			—		(4,635,607	)		(4,635,607	)
Balance, February 28, 2021		3,775,334		$	12,120,307		$	—	$	(4,999,711	)	$	7,120,596

	February 28, 2021		May 31, 2020
Contract Liabilities:
Customer deposits, current	$	63,896	$	12,239
Gift card liabilities, current		37,599		—
Total customer deposits and prepayments	$	101,495	$	12,239

	February 28, 2021		May 31, 2020
Raw materials	$	1,026,515	$	154,293
Work-in-process		79,809		525,615
Finished goods		898,144		379,449
Total inventories	$	2,004,469	$	1,059,357

	February 28, 2021			May 31, 2020
Land	$	159,000		$	159,000
Buildings and improvements		2,814,299			1,612,003
Funiture, fixtures, equipment, and vehicle		1,100,187			396,264
	$	4,284,774		$	2,167,267
Less accumulated depreciation		(1,897,178	)		(1,680,478	)
Total property and equipment	$	2,176,308		$	486,789

	February 28, 2021			May 30, 2020
Land	$	140,000		$	140,000
Buildings and Improvements		246,135			235,502
	$	386,135		$	375,502
Less accumulated depreciation		(211,288	)		(210,155	)
Carrying Value	$	174,847		$	165,347

Outstanding Options						Exercisable Options
Number of Shares		Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (yrs)		Number of Shares		Weighted Average Exercise Price
	22,500	$	1.70		6.10		22,500	$	1.70

	Number of Units			Weighted Average Price at Grant Date		Aggregate Intrinsic Value
Non-vested restricted stock units - May 31, 2020		55,147		$	3.28	$	180,882
Restricted stock units granted		62,881			4.62		290,529
Restricted stock units vested		(83,072	)		3.78		(313,976	)
Non-vested restricted stock units - February 28, 2021		34,956		$	4.50	$	157,435

	Three Months Ended February 28,				Nine Months Ended February 28,
	2021		2020		2021		2020
Weighted average shares (basic)		3,764,536		3,858,287		3,759,639		3,992,664
Effect of dilutive stock options		—		—		—		—
Weighted average shares (diluted)		3,764,536		3,858,287		3,759,639		3,992,664

	Years Ending May 31,
2021	$	71,943
2022		291,906
2023		300,666
2024		309,870
2025		319,164
Thereafter		1,557,600
Total undiscounted cash flow	$	2,851,149

	Years ending May 31,
2021	$	13,787
2022		55,977
2023		57,656
2024		59,386
2025		61,167
Thereafter		16,671
Total undiscounted cash flow	$	264,645

Fiscal Years Ended May 31,
2021	$	285,064
2022		1,457,541
2023		1,714,502
2024		1,720,065
2025		1,694,403
Thereafter		6,549,088
Total lease payments	$	13,420,663
Less: imputed interest		(2,133,140	)
Present value of lease payments	$	11,287,524
less: current lease obligations		(942,058	)
Long-term lease obligations	$	10,345,466

	Three Months Ended February 28,
	2021						2020
	Ice Cream			Measurement			Ice Cream		Measurement
Net revenue	$	621,730		$	1,046,714		$	—	$	1,094,697
Gross margin	$	263,355		$	567,834		$	—	$	603,621
Gross margin %		42.4	%		54.2	%		—		55.1	%
Operating income (loss)	$	(2,200,003	)	$	(304,458	)	$	—	$	(431,701	)
Depreciation expense		82,480		$	10,588		$	—	$	37,803
Amortization expense	$	6,017		$	21,562		$	—	$	11,657
Capital expenditures	$	249,012		$	2,938		$	—	$	13,566

	February 28, 2021
Weighted average remaining lease term (years)		7.64
Weighted average discount rate		3.87	%

	Three Months Ended,				Nine Months Ended,
	February 28, 2021		February 29, 2020		February 28, 2021		February 29, 2020
Net revenue	$	—	$	—	$	—	$	4,343,008
Cost of revenue		—		—		—		2,374,251
Gross profit		—		—		—		1,968,757
Operating expenses:
General, administration and sales		—		—		—		1,252,222
Research and development		—		—		—		35,920
Total operating expenses		—		—		—		1,288,142
Operating income		—		—		—		680,615
Other expense, net		—		—		—		(140,923	)
Income before taxes		—		—		—		539,692
Provision for income taxes		—		—		—		7,589
Net income from discontinued operations	$	—	$	—	$	—	$	532,103

	Nine Months Months February 28,
	2021						2020
	Ice Cream*			Measurement			Ice Cream		Measurement
Net revenue	$	2,282,139		$	2,923,502		$	—	$	3,222,846
Gross margin	$	944,493		$	1,456,454		$	—	$	1,470,730
Gross margin %		41.4	%		49.8	%		—		45.6	%
Operating income (loss)	$	(4,901,933	)	$	(1,371,500	)	$	—	$	(1,345,457	)
Depreciation expense	$	176,966		$	40,868		$	—	$	78,437
Amortization expense	$	16,045		$	73,853		$	—	$	42,643
Capital expenditures	$	481,063		$	29,258		$	—	$	28,256

	February 28, 2021		May 31, 2020
Segment assets to total assets
Ice Cream	$	10,982,933	$	—
Measurement		2,450,195		2,251,090
Corporate assets		8,999,948		10,950,136
Total assets	$	22,433,066	$	13,201,226

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		26,601
Tradename and trademarks		938,863
Proprietary Recipes		152,006
Security deposits		225,180
Machinery and equipment		581,616
Leasehold improvements		852,848
Inventory		632,100
Total Assets Acquired	$	14,054,312

Liabilities Assumed
Right-of-use operating lease liabilities		10,645,098
Deferred Tax Liability		453,238
Customer Deposits		20,204
Gift card liabilities		35,133
Total Liabilities Assumed	$	11,153,673
Net Assets Acquired		2,900,639
Gain on bargain purchase	$	1,187,235

	February 28, 2021		May 31, 2020
Paycheck Protection Program Loan Balance
Current		317,621		—
Long-term		1,477,459		—
Total Paycheck Protection Program Loan Balance		1,795,080		—

	Three Months Ended																Nine Months Ended
	February 28,										YoY Change						February 28,										YoY Change
	2021					2020					$			%			2021					2020					$			%
Ice Cream revenue	$	621,730		37.3	%	$	—		0.0	%	$	621,730			100.0	%	$	2,282,139		43.8	%	$	—		0.0	%	$	2,282,139			100.0	%
Measurement revenue		1,046,714		62.7	%		1,094,967		100.0	%		(48,253	)		-4.4	%		2,923,502		56.2	%		3,222,846		100.0	%		(299,344	)		-9.3	%
Total net revenue	$	1,668,444		100.0	%	$	1,094,967		100.0	%	$	573,477			52.4	%	$	5,205,641		100.0	%	$	3,222,846		100.0	%	$	1,982,795			61.5	%
Cost of revenue		837,254		50.2	%		491,346		44.9	%		345,908			70.4	%		2,804,694		53.9	%		1,752,116		54.4	%		1,052,578			60.1	%
Gross profit	$	831,190		49.8	%	$	603,621		55.1	%	$	227,569			37.7	%	$	2,400,947		46.1	%	$	1,470,730		45.6	%	$	930,217			63.2	%
Operating expenses:
General, administration and sales	$	3,313,918		198.6	%	$	1,011,414		92.4	%	$	2,302,504			227.7	%	$	8,492,150		163.1	%	$	2,785,816		86.4	%	$	5,706,334			204.8	%
Transaction Costs		—		0.0	%		—		0.0	%		—			0.0	%		125,167		2.4	%		—		0.0	%		125,167			100.0	%
Research and development		21,732		1.3	%		23,908		2.2	%		(2,176	)		-9.1	%		57,062		1.1	%		32,371		1.0	%		24,691			76.3	%
Total operating expenses		3,335,650		199.9	%		1,035,322		94.6	%		2,300,328			222.2	%		8,674,379		166.6	%		2,818,187		87.4	%		5,856,192			207.8	%
Operating income (loss)	$	(2,504,460	)	-150.1	%	$	(431,701	)	-39.4	%	$	(2,072,759	)		480.1	%	$	(6,273,432	)	-120.5	%	$	(1,347,457	)	-41.8	%	$	(4,925,975	)		365.6	%
Other income (expense), net		85,303		5.1	%		187,218		17.1	%		(101,915	)		-54.4	%		45,923		0.9	%		196,941		6.1	%		(151,018	)		-76.7	%
Bargain Purchase Gain		(2,277	)	-0.1	%		—		0.0	%		(2,277	)		-100.0	%		1,187,235		22.8	%		—		0.0	%		1,187,235			100.0	%
Income (loss) before income taxes	$	(2,421,434	)	-145.1	%	$	(244,483	)	-22.3	%	$	(2,176,951	)		890.4	%	$	(5,040,274	)	-96.8	%	$	(1,150,516	)	-35.7	%	$	(3,889,758	)		338.1	%
Provision for income taxes		(1,637	)	-0.1	%		(4,206	)	-0.4	%		2,569			-61.1	%		(404,667	)	-7.8	%		(12,035	)	-0.4	%		(392,632	)		3262.4	%
Net income (loss)	$	(2,419,797	)	-145.0	%	$	(240,277	)	-21.9	%	$	(2,179,520	)		907.1	%	$	(4,635,607	)	-89.0	%	$	(1,138,481	)	-35.3	%	$	(3,497,126	)		307.2	%

	·	Consolidated revenues increased $573,477, or 52.4%, and $1,982,795, or 61.5%, for the three months and nine ended February 28, 2021 as compared to fiscal year 2020. The increase was driven by the new ice cream segment acquired in July of 2020 which generated revenues of $621,730 and $2,282,139 for the three and nine-months ended February 28, 2021, accounting for 37.3% and 43.8% of total revenue for the three and nine month periods, respectively.
	·	Gross margin decreased 5.3% and increased 0.5% for the three and nine months ended February 28, 2021, respectively as compared to the three and nine months ended February 29, 2020.
	·	Operating expenses increased $2,300,328, or 222.2%, to $3,335,650 for the three months ended February 28, 2021 as compared to fiscal year 2020. The increase was primarily due to the inclusion of the Ample Hills business, along with increased stock compensation, professional fees, build out of Xact monitoring tool, ERP development and computer services.
	·	Net loss from continuing operations was ($2,419,797), or ($0.64), per fully diluted share, for the three months ended February 28, 2021 compared to net loss from continuing operations of ($240,277) or ($0.06) per fully diluted share, for the three months ended February 29, 2020. Net loss from continuing operations was ($4,635,607), or ($1.23), per fully diluted share, for the nine months ended February 28, 2021 compared to net loss from continuing operations of ($1,138,481) or ($0.29) per fully diluted share, for the nine months ended February 29, 2020. Net income for the three months ended November 30, 2019 includes a $5,117,005 gain, net of tax, associated with the sale of the net assets for the SBS business. Net income for the nine months ended November 30, 2020 includes a $1,187,235 bargain purchase gain as a result of the acquisition of Ample Hills.
	·	There was a significant increase in capital expenditures tied to the factory improvements and build out at our new Brooklyn location. Capital expenditures for the nine months ended February 28, 2021 were $510,321, compared to $28,256 in the same period of fiscal 2020.

Exhibit	Description


3.1	Articles of Amendment to Articles of Incorporation of Schmitt Industries, Inc. (incorporated by reference to Exhibit 3.1 filed with the Company’s Current Report on Form 8-K filed with the SEC on January 27, 2021).

4.1	Amendment to Rights Agreement, dated as of January 25, 2021, between the Corporation and Broadridge Corporate Issuer Solutions, Inc., as Rights Agent. (incorporated by reference to Exhibit 4.1 filed with the Company’s Current Report on Form 8-K filed with the SEC on January 27, 2021).


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.

		SCHMITT INDUSTRIES, INC.
		(Registrant)

Date:	April 22, 2021	/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.