Schmitt Industries, Inc.
Annual Report 2022

 
 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-K
 
(Mark One)
 
☒
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the Fiscal year ended: May 31,
2022
 
or
 
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period
from  
Commission File Number:
001-38964
 
SCHMITT INDUSTRIES, INC. 
(Exact name of registrant as specified in its
charter)
 
Oregon
(State or other jurisdiction of 
incorporation or organization)
93-1151989
(IRS Employer 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 pursuant to 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 pursuant to Section 12(g)
of the Act:
 None
 
Indicate by check mark whether the registrant
is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
 
Indicate by check mark whether the registrant
is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes ☐ No ☒
 
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 (§ 232.405
of this chapter) 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.
 
Large accelerated filer ☐
Accelerated filer ☐
Non-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
has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control
over financial
reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or
issued its audit report. ☐
 
Indicate by check mark whether the registrant
is a shell company (as defined in Rule 12b-2 of the Exchange Act).
 
Yes ☐ No ☒
 
As of the last day of the second fiscal quarter
of 2022, the aggregate market value of registrant's common stock held by non-affiliates of the registrant was
$17,796,026 based upon the
closing price of $5.50 reported for such date on the NASDAQ Capital Market. As of September 30, 2022, the registrant had
3,872,134 outstanding
shares of common stock.
 

Documents Incorporated by Reference
 
Portions of the registrant's definitive Proxy
Statement for its 2022 Annual Meeting of Shareholders are incorporated by reference into Part III hereof.
 
 

 
 
SCHMITT INDUSTRIES, INC.
ANNUAL REPORT ON FORM 10-K 
FOR THE FISCAL YEAR ENDED MAY 31, 2022
 
TABLE OF CONTENTS
 
Part I
Item 1.
Business
3
Item 1A.
Risk Factors
9
Item 1B.
Unresolved Staff Comments
17
Item 2.
Properties
17
Item 3.
Legal Proceedings
18
Item 4.
Mine Safety Disclosures
18
 
 
 
Part II
Item 5.
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
18
Item 6.
Reserved
19
Item 7.
Management's Discussion and Analysis of Financial Condition and Results of Operations
19
Item 7A.
Quantitative and Qualitative Disclosures about Market Risk
28
Item 8.
Financial Statements and Supplementary Data
28
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
54
Item 9A.
Controls and Procedures
54
Item 9B.
Other Information
55
Item 9C.
Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
55 
 
Part III
Item 10.
Directors, Executive Officers and Corporate Governance
55
Item 11.
Executive Compensation
56
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
56
Item 13.
Certain Relationships and Related Transactions and Director Independence
56
Item 14.
Principal Accounting Fees and Services
56
 
 
 
Part IV
Item 15.
Exhibits and Financial Statement Schedules
56
Exhibits
 
57
Signatures
 
59
  
 

Table of Contents
 
PART I
 
Cautionary Note Regarding Forward-Looking Statements
 
Certain statements contained in this report are
forward-looking in nature. 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. Certain of such risks and uncertainty are discussed in the "Risk
Factors" section in Item 1A.
 
ITEM 1.
BUSINESS
 
Schmitt Industries Inc. (“Schmitt,”
“Company,” “Registrant” and “We”) is a holding company owning subsidiaries engaged in diverse business
activities.
We continually assess strategic opportunities to improve shareholder value.
 
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.
 
On
April 14, 2022, the Company announced its intention to focus on Ample Hills as its core business. This focus will enable Schmitt to accelerate
its
Ample Hills growth strategy while saving costs and focusing resources on Ample Hills as the Company’s core business line. In
conjunction with the focus
on Ample Hills, the Company announced a strategic review of its Schmitt Measurement Systems ("SMS")
business lines based in Portland, Oregon.  
 
The Company was originally incorporated under
the laws of British Columbia, Canada, in 1984 and was reincorporated under the laws of the State of
Oregon in 1995. Schmitt is an ISO
9001 certified company. Schmitt trades on the Nasdaq Composite Index (the “NASDAQ”) under the ticker “SMIT.”
Schmitt
Industries and Ample Hills, collectively, are referred to as the “Company,” “Schmitt,” “we” or “our”
throughout this document.
 
Schmitt’s operating businesses include propane
tank monitoring solutions, precision measurement solutions and ice cream production and sales through the
retail, wholesale, and e-commerce
channels. The Company operates as two reportable segments: the Measurement Segment and the Ice Cream Segment,
which is comprised of Ample
Hills.
 
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Ice Cream Segment
 
The Company’s Ice Cream Segment is comprised
of Ample Hills. Ample Hills primarily sells artisan ice cream directly to customers at its retail locations,
with additional sales by
the pint in grocery stores and through the internet on the Company’s website. The Company also sells ice cream cakes, serves ice
cream at catering events, and holds a variety of community-building events such as ice cream classes and live comedy and music performances.
 
Ample Hills revenues are generated through the
sale of the Company’s ice cream products at retail locations in New York, New Jersey and California, as
well e-commerce and wholesale
sales. The Company’s ice cream manufacturing is conducted in its Brooklyn, New York factory.
 
Products and Services 
 
The Company manufactures, wholesales and retails
 ice cream and related products. The factory produces ice cream for its retail, wholesale, and e-
commerce customers. The Company also utilizes
available capacity to manufacture ice cream for third parties through co-packing arrangements.
 
Customers and Markets 
 
The Company sells its ice cream wholesale to a
network of resellers, primarily located in the New York metropolitan area and throughout the northeast.
The Company is actively expanding
its wholesale footprint into other geographic regions. Additionally, customers nationwide can purchase products for
home delivery through
 the Company’s website. These wholesale and e-commerce sales are facilitated through the Company’s Brooklyn, New York
production
facility and at third party distribution centers located in Harrisburg, Pennsylvania and Reno, Nevada. Additionally, the Company operates
a
network of retail locations throughout New York, New Jersey and California where customers can purchase the Company’s ice cream
and ice cream-related
products. In July 2022, the Company opened its twelfth retail ice cream shop, located on the Upper West Side of
Manhattan, New York. In September
2022, the Company opened its thirteenth retail ice cream shop, located in Long Island City, Queens,
New York. The Company has signed leases for future
retail shops at Greenwich Village, New York, and Beverly Hills and Pasadena, California. 
 
Competition 
 
The Company faces intense competition in the ice
cream space. There is a large variety of internationally recognized and independently owned brands
providing products similar to those
of the Company.
 
Business and Marketing Strategy
 
The Ice Cream Segment facilitates wholesale activities
by actively marketing its products to resellers in the New York metropolitan area. Such activities
include accommodation of celebrations
by offering four different types of parties, comedy shows, concerts, ice cream classes, ice cream factory tours and
various other events.
Ample Hills has also built an “interactive ice cream museum” and party rooms that can be rented out and a scoop shop, all
of which
are located at the Red Hook Factory facility in Brooklyn, New York. Additionally, the Company markets its products for nationwide
e-commerce sales.
 
Manufacturing
 
The Company is the first company to pasteurize
on-site in New York City and is a registered dairy plant. All of the Company’s products are manufactured
in its 15,000
square foot Red Hook Factory production facility. The Company chooses the finest products to manufacture their end
products and pasteurizes
the milk, cream, sugar and eggs on-site.  
 
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Proprietary Technology
 
Ample Hills produces ice cream from scratch and
by hand at the Company’s 15,000 square foot Red Hook Factory in Brooklyn, New York. The Company
made ice cream history as the
 first to pasteurize on-site in New York City, which registered the plant as a dairy plant and earned the nickname of
“Brooklyn’s
freshest.” In addition, the Company bakes its mix-ins for the ice cream and controls every step of the process to create its ice
creams in-house
using its proprietary technology. The Company has 15 wholesale proprietary recipes and 55 retail proprietary recipes,
which were valued at $146,739 and
recorded as finite-lived (10 years) intangible assets in conjunction with the acquisition. As of May
31, 2022, the proprietary recipe intangible asset, net of
accumulated amortization, is $118,184.
   
Schmitt Industries Measurement Segment
 
The Company’s SMS family of products includes
the Acuity™ and XactTM product lines. The activities from these product lines comprise the Company’s
Measurement
 Segment. In this segment, the Company’s measurement solutions support a wide range of industries through laser solution products,
applications, and tank monitoring products.
 
ACUITY
 
Acuity
products utilize both triangulation and time-of-flight measurement principles and are known for their speed and accuracy. Acuity products
are used
in a wide variety of industrial, commercial and research applications. Xact ultrasonic measurement technology monitors the fill
levels of propane and other
liquid tanks via satellite-connected devices. Together with the Xact gauge reader, Xact systems can detect
and communicate fill levels, along with other
information such as tank size and configuration, to customers through the Internet of Things
(“IoT”) ecosystem using our satellite provider and a secure
website. Typical users of Xact systems are bulk propane, diesel,
jet fuel suppliers and ammonia users and distributors.  
 
Products and Services 
  
Products sold under the Acuity brand include lasers
utilizing both triangulation and time-of-flight methods of measurement, and confocal chromatic white
light sensors. These lasers
are used in a wide range of industrial applications including manufacturing, lumber production, steel casting, glass and paper
production,
medical imaging, crane control and micron-level part and surface inspection. 
 
On October 27, 2021, Schmitt announced the AR2700
High-Speed Long-Range Sensor, its highest speed long range sensor to date. This ultra-compact
rangefinder is eye-safe and can measure
natural targets up to 70 meters away or to retroreflective targets 270 meters away. A time-of-flight rangefinder, the
AR2700 measures
distance with a rapidly pulsing collimated laser beam that creates an infrared spot on a target surface. Designed for measurements of
moving targets, the distance sensor is ideal for detecting objects in industrial automation or for monitoring defined areas in transport
 and logistics
applications. Typical applications for the AR2700 include:
 
·
Bridge crane monitoring.
·
Trolley positioning.
·
Altitude measurements.
 
On January 18, 2022, Schmitt announced its new
8-inch Touch Panel Display. Building upon the technology from our previous 7-inch version, the 8-inch
Touch Panel Display comes with fully
revamped 2.0 software, the ability to communicate with up to 6 Acuity sensors, a full suite of connection ports, and
the ability to easily
perform sophisticated measurement applications such as plane analysis and thickness measurement.
 
The new 8-inch Touch Panel Display can be used
in many applications including:
 
·
Cut-to-length measurements in lumber and steel
industries.
·
Log length measurements.
·
General applications such as thickness, width,
height, and other dimensional measurements.
·
Plane analysis such as for battery expansion
or elevator control.
 
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Customers and Markets 
 
Acuity laser measurement sensors are used for
fast and accurate dimensional measurement in a wide range of applications, including factory automation,
surface profile scanning, crane
 positioning, road profiling, tire production, semiconductor manufacturing and many other industrial and commercial
applications. 
 
The market for Acuity lasers is growing as the
industry moves from a products market to a solutions-based market as customers seek tailored solutions to
solve complex problems in a
range of industrial and manufacturing businesses. 
 
Competition 
 
The Company believes the principal elements of
competition include quality of ongoing technical support and maintenance coupled with responsiveness to
customer needs, as well as price,
product quality, reliability and performance. The Acuity products market is extremely competitive, characterized by
rapidly changing technology,
and includes multinational competitors. Company pricing is intended to obtain market share and meet competitive supplier
prices. The market
strategy is to establish products with the best quality, reliability and performance and superior economic value. 
 
XACT REMOTE TANK MONITORING SYSTEMS
 
Xact product line includes satellite focused remote
tank monitoring products and related monitoring services for markets in the IoT environment. The
products measure the fill levels of tanks
holding propane, diesel and other tank-based liquids and the related monitoring services includes transmission of
fill data from the tanks
via satellite to a secure website for display. 
 
Products and Services 
 
Xact Satellite Remote Tank Monitors include both
ultrasonic and gauge reader sensors that provide remote fill level monitoring of propane, diesel and other
tank-based liquids for tanks
anywhere in the world. The Xact Tank Monitoring Systems are highly dependable, providing the ability to operate in a wide
range of
environments with temperatures ranging from -40ºC to 60ºC. The Xact systems can be used to monitor tanks as small
as 125 gallons (473 liters)
and as large as 90,000 gallons (340,686 liters).  With Xact, users access timely and accurate remote tank-based
 data on a consistent schedule or by
customized critical fill alarms to optimize inventory management processes.
 
The three main components to the Xact Tank Monitoring System are as
follows: 
 
Tank Sensors - Xact offers two
sensors, the Xact Ultrasonic sensor and the Xact Gauge Reader. 
 
The Xact Ultrasonic sensor incorporates patented
technology and is externally mounted to the bottom of the tank with no reliance on existing mechanical
gauges. The system employs a small
electrical pulse, which is able to calculate the precise fill level inside using patented sonar technology (measurement
accuracy to within
±2% for large tanks and ±1% for small tanks). Ultrasonic sensors work with any tank-based liquids including propane, diesel
and natural
gas. 
 
The Xact gauge reader connects to
the face of a float gauge and detects the fill level that is reported by the gauge. The system then transmits that data by
satellite in
the same manner as the ultrasonic sensor. Float gauges have a typical accuracy range of ±4% to ±8%. Gauge readers are primarily
used in the
propane industry to monitor propane tanks and support refill optimization for distributors and customers. 
 
Satellite Radio Transmitter
- The Xact radio transmitter is placed on the top of the tank and is connected by cable to the tank sensor or gauge reader.
The
transmitter transmits the tank data using the GlobalStar ® satellite network to the secure Xact website. Xact satellite
telemetry provides global coverage
with no dependence on land lines, cellular networks or Wi-Fi signals, making it a reliable
monitoring solution for tanks located anywhere in the world. 
 
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Xact Website - The
Xact website is a secured location providing controlled access to the tank data for each customer's various tank locations. Customers
can access the website to check fill levels and additional information such as temperature, battery status, GPS coordinates and map location.
In addition, the
data can also be integrated into customer back-office software via an application programming interface. This integration
can be automatically directed to a
customer's inventory or delivery management system for full automation of the delivery process.
 
On December 16,
2021, Schmitt announced the release of its new tank monitoring device, the Xact Reader – Cellular
(“XRC”), expanding Xact's existing
satellite product line.
 
The XRC is a plug-and-play device that can handle
any sensor with a 0 - 3.6VDC input and output. It also has capabilities to handle up to *4 sensors input
with a single head unit. Sensor
offerings include, but are not limited to:
 
·
Submersible Sensor – perfect for lubricants,
fuels, chemicals, and many other non-pressurized mediums.
·
Hall Effect Sensor – this is utilized mostly
in the propane industry. For use with "remote-ready dials."
·
Ultrasonic Sensor – The external ultrasonic
transducer that Xact is known for in our suite of satellite devices.
 
With this new device and suite of sensors, Xact
is ready to expand into all industries that handle the delivery and optimization of all bulk liquids.
 
Customers and Markets 
 
Accessing accurate fill level information is essential
to effectively manage inventory, improve delivery efficiency, reduce operating costs and increase
profitability, and justify capital expenditures
for fuel providers. Xact focuses on niche satellite solutions, which separates it from intense competition in the
cellular monitoring
industry. To reach our customers and fill gaps in cellular monitor customers, Xact partners with select cell providers to provide our
Xact
solution. Given the Company’s niche market, Xact is well positioned to partner with various providers to offer a full range
of solutions. 
 
Customers of the Xact Tank Monitoring System include
 large, regional and local propane distributors, such as Superior Propane (Canada), Suburban
Propane (U.S.), AmeriGas (U.S.), Dassel Petroleum
(U.S.) and TermoGas (Mexico). The Company is currently focusing its business development efforts
on the propane industry in the United
States and Canada. 
 
Competition 
 
Competitors offer telemetry options based on cellular
or closed-loop communication networks, whereas Xact telemetry is satellite based. General tank
monitoring competitors include: Anova (Wesroc),
 NasCorp (SkyTracker), WACnGO, Silicon Controls, TankScan, SkyBitz, Otodata, Angus Energy
(Gremlin), and Tank Utility. Competitors that
 offer satellite telemetry include Anova (WESROC), NasCorp (SkyTracker), and Micro-Design, Inc.
(LevelCon).
 
Backlog
 
Backlog is not a reliable indicator of the Company’s
performance. Normally, orders for the Measurement Segment are shipped within one to three weeks
after receipt unless the customer requests
otherwise.
 
Manufacturing
 
The Company uses a variety of sources for the
supply of raw materials for its product lines. Essential electronic components, available in large quantities
from various suppliers,
are assembled as electronic control units under the Company's quality and assembly standards. Company-owned software and
firmware are
coupled with the electronic components to provide the basis of the Company's various electronic control units. Management believes several
supply sources exist for all electronic components and assembly work incorporated into its electronic control systems. Mechanical parts
for the Company's
products are produced by high quality machine shops. The Company is not dependent on any one supplier of mechanical
components. In the event of
supply problems, the Company believes that two or three alternatives could be developed within 30 days. The
Company is subject to availability and
pricing on the various component parts purchased, which has had, and may continue to have, a material
impact on operations.
 
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The Company uses in-house skilled assemblers to
construct and test vendor-supplied components. Component inventory of finished vendor-supplied parts
is held on Company property to assure
adequate flow of parts to meet customer order requirements. Inventory is monitored by a computer control system
designed to assure timely
re-ordering of components. In-house personnel assemble various products and test all finished components before placing them in
the finished
 goods inventory. Finished goods inventory is maintained via computer to assure timely shipment and service to customers. All customer
shipments are from the finished goods inventory.
 
The Company's Quality Control Program first received
full ISO 9001 certification in 1996. In 2005, the Company received its certification to the newer
ISO 9001:2000 requirements and received
subsequent recertification and is current as of Fiscal year end 2022 with ISO 9001:2015 requirements.
 
Business and Marketing Strategy
 
The Company designs, manufactures and markets
all of its products with operations divided into a number of different channels and geographies. 
 
The Measurement Segment uses a variety of methods
to market and sell its products. Primarily, the Company’s sales and marketing managers direct the
overall worldwide sales and marketing
 efforts for the Acuity and Xact products, including the employment and management of representatives and
distributors in various markets.
 
Proprietary Technology
 
The Company's success in the Measurement Segment
 depends, in part, on its proprietary technology, which the Company protects through patents,
copyrights, trademarks, trade secrets and
other measures. Several patents, trademarks and copyrights currently protect this proprietary technology.  The
Company continues
 to focus resources on the research and development of new products and improvements and monitors the need to protect these
innovations
with new patents. While patents provide certain legal rights of enforceability, there can be no assurance the historic legal standards
surrounding
questions of validity and enforceability will continue to be applied or that current defenses with respect to issued patents
will, in fact, be considered
substantial in the future. There can be no assurance as to the degree and range of protection any patent
will afford and whether patents will be issued or the
extent to which the Company may inadvertently infringe upon patents granted to others.
 
The Company also relies upon trade secret protection
for its confidential and proprietary information. There can be no assurance that others will not
independently develop substantially equivalent
proprietary information and techniques or otherwise gain access to the Company's trade secrets or disclose
such technology or that the
Company can meaningfully protect its trade secrets.
 
While the Company pursues patent, trademark, trade
secret and copyright protection for products and various trademarks, it also relies on know-how and
continuing technology advancement,
manufacturing capabilities, affordable high-quality products, new product introduction and direct marketing efforts to
develop and maintain
its competitive position.
 
Product Development
 
The
Company maintains an ongoing research and development program to expand the product lines and capabilities of its Measurement Segment.
During
the year ended May 31, 2022 (“Fiscal 2022”) and the year ended May 31, 2021 (“Fiscal 2021”), the Company's
research and development expenses for
continuing operations totaled $40,456 (of which $40,098 was for the Measurement Segment) and $69,601
(of which $68,426 was for the Measurement
Segment), respectively.  
 
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Major Customers
 
With 
respect to the Company’s consolidated net revenues from continuing operations,
the Company is not dependent on any one or a few major customers.
The Company had one customer that accounted for 17.8% and 2.9% of accounts
receivable, net as of May 31, 2022 and 2021, respectively.
 
With respect to discontinued operations, the Company
had one customer that accounted for 11.2% and 15.4% of consolidated net revenues for the years
ended May 31, 2022 and 2021, respectively.
The Company had one customer that accounted for 43.3% and 25.0% of accounts receivable, net as of May 31,
2022 and 2021, respectively.
 
Employees
 
As
of May 31, 2022, the Company employed 157 individuals, none of which were covered by a collective bargaining agreement.    
 
Other Information
 
Our primary website is www.schmittindustries.com.
We make available on this website, free of charge, our annual reports on Form 10-K, quarterly reports
on Form 10-Q, current reports on
Form 8-K and amendments to those reports pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably
practicable after
we electronically file such material with, or furnish such information to, the Securities and Exchange Commission (“SEC”).
Reports and
other information we file with the SEC may also be viewed at the SEC’s website at www.sec.gov.
  
ITEM 1A.
RISK FACTORS
 
General Risk Factors
 
The following are important 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 (see the forward-looking statements disclaimer at the beginning of Part 1, Item 1 in this Report). In addition, the
risks and
 uncertainties described below are not the only ones that the Company faces. Unforeseen risks could arise and problems or issues that the
Company now views as minor could become more significant. If the Company was unable to adequately respond to any risks, the Company's
business,
financial condition or results of operations could be materially adversely affected. In addition, the Company cannot be certain
that any actions taken to
reduce known or unknown risks and uncertainties will be effective.
 
We have incurred significant losses and have
an accumulated deficit. If we cannot achieve profitability, the market price of our common stock could decline
significantly.
 
As 
of May 31, 2022, we had cash and cash equivalents of $1,050,910 and working capital
deficiency of $1,822,078 compared to cash and cash equivalents
of $4,032,690 and working capital of $2,947,953 as of May 31, 2021 for
continuing operations. Our primary sources of cash are cash generated from the
sale of assets as the Company realigns its operating businesses
and a loan from Sententia Capital Management.
 
We incurred a net loss of $3,283,776 for the fiscal
year ended May 31, 2022, compared to a net loss of $8,089,672 for the fiscal year ended May 31, 2021,
and have incurred additional net
losses since inception. At May 31, 2022, we had an accumulated deficit of $11,737,552. Our ability to increase our
revenues from the sale
of our products will depend on our ability to successfully implement our growth strategy and the continued expansion of our
markets. If
our revenues do not grow or if our operating expenses continue to increase, we may not be able to become profitable and the market price
of our
common stock could decline. In addition, to the extent that we continue to incur losses or want to expand our operations, we may
need to seek additional
financing. There can be no assurance that we will be able to obtain additional financing and any additional financing
could be dilutive to our stockholders.
 
Our auditors have issued a “going concern”
audit opinion.
 
Our independent auditors have indicated in their
report on our May 31, 2022 financial statements that there is substantial doubt about our ability to continue
as a going concern. A “going
concern” opinion indicates that the financial statements incorporated in this annual report have been prepared assuming that
we
will continue as a going concern for one year from the date the financial statements are issued and do not include any adjustments to
reflect the possible
future effects on the recoverability and classification of assets, or the amounts and classification of liabilities
that may result if we do not continue as a
going concern. Therefore, you should not rely on our balance sheet as an indication of the
amount of proceeds that would be available to satisfy claims of
creditors, and potentially be available for distribution to shareholders,
in the event of liquidation. 
 
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General economic conditions and uncertainties
may adversely affect the Company's business, operating results and financial condition.
 
The Company's operations and performance depend
 significantly on worldwide economic conditions, particularly in the industrial and manufacturing
sectors, and their impact on levels of
 capital spending. Economic factors that could adversely influence demand for the Company's products include
uncertainty about global economic
conditions leading to reduced levels of investment, reduction in demand for our customers' products, customers' and
suppliers' access
to credit and the stability of the global financial system, the overall health of our markets, unemployment and other macroeconomic
factors
generally affecting commercial and industrial spending behavior.
 
Past distress in the global financial markets
and global economy resulted in reduced liquidity and a tightening of credit markets. If these conditions were to
reoccur, the Company
could experience several potential adverse effects, including the inability of customers to obtain credit to finance purchases of the
Company's products, the insolvency of customers resulting in reduced revenues and bad debts, and the insolvency of key suppliers resulting
in product
development and production delays.
 
Further, the current Russia-Ukraine conflict has
created extreme volatility in the global financial markets and is expected to have further global economic
consequences, including disruptions
of the global supply chain and energy markets. Any such volatility and disruptions may have adverse consequences on
us or the third parties
on whom we rely. If the equity and credit markets deteriorate, including as a result of political unrest or war, it may make any
necessary
debt or equity financing more difficult to obtain in a timely manner or on favorable terms, more costly or more dilutive. Our business,
financial
condition and results of operations may be materially and adversely affected by any negative impact on the global economy and
capital markets resulting
from the conflict in Ukraine or any other geopolitical tensions.
 
Our profitability is vulnerable to inflation
and cost increases.
 
Current and future increases in costs such as
 the cost of raw materials, components, merchandise, shipping rates, freight costs, fuel costs and store
occupancy costs may reduce our
 profitability. These cost increases may be the result of inflationary pressures that could further reduce our sales or
profitability.
Increases in other operating costs, including changes in energy prices, wage rates and lease and utility costs, may increase our cost
of goods
sold or operating expenses. Competitive pressures in our industry may have the effect of inhibiting our ability to reflect these
increased costs in the prices
of our products and therefore reduce our profitability. 
 
The Company's primary markets are volatile
and unpredictable.
 
The Company's business depends on the demand for
our various products in a variety of commercial and industrial markets. In the past, demand for our
products in these markets has fluctuated
due to a variety of factors, some of which are beyond our control, including: general economic conditions, both
domestically and internationally,
the timing, number and size of orders from, and shipments to, our customers as well as the relative mix of those orders
and variations
in the volume of orders for a particular product line in a particular quarter.
 
Technological advancement and potential competition.
 
The failure to develop new products or enhance
existing products or react to changes in existing technologies could result in decreased revenues and a loss
of market share to competitors.
 
Competition is intense and the Company's failure
to compete effectively would adversely affect its business.
 
The speed with which the Company can identify
new applications for the Company's various technologies, develop products to meet those needs and
supply commercial quantities at low
prices to those new markets are important competitive factors. The principal competitive factors in the Company's
markets are product
 features, performance, reliability and price. Many of the Company's competitors have greater financial, technical, engineering,
production
and marketing resources than we do. Those competitors with greater resources may, in addition to other things, be able to better withstand
periodic downturns, compete more effectively on the basis of price and technology, or more quickly develop enhancements to products that
compete with
the products we manufacture and market. New companies may enter the markets in which we compete, further increasing competition
in those markets. No
assurance can be given that the Company will be able to compete effectively in the future, and the failure to do
so would have a material adverse effect on
the Company's business, financial condition and results of operations.
 
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The Company may experience increased pricing
pressure.
 
We have experienced and may continue to experience
pricing pressure in the sale of our products, from both competitors and customers. Our business,
financial condition, margins or results
of operations may be materially and adversely affected by competitive pressure and intense price-based competition.
 
Production time and the overall cost of products
could increase if any of the primary suppliers are lost or if a primary supplier increased the prices of raw
materials.
 
Manufacturing operations could be adversely affected
if adequate supplies of raw materials cannot be obtained in a timely manner or if raw material costs
increase significantly.
 
The Company may not be able to ramp up manufacturing
to satisfy increasing orders, which may lead to the loss of significant revenue opportunities.
 
The Company manufactures several different product
lines, all of which involve complicated technology and individual attention for each product made.
The production time for each product
 can vary, depending on a variety of circumstances, including component availability, timing of delivery of
components from suppliers and
 employee availability. Should the Company receive a large increase in orders, an increase in the size of orders or a
shortening of the
required delivery time on existing orders, the Company may not be able to ramp up manufacturing to satisfy customer expectations,
which
may lead to the loss of significant revenue opportunities.
 
The Company maintains a significant investment
in inventories in anticipation of future revenues.
 
The Company believes it maintains a competitive
advantage by shipping product to its customers more rapidly than its competitors and therefore maintains
a significant investment in inventories.
These inventories are recorded using the lower of cost or net realizable method, which requires management to
make certain estimates.
Management evaluates the recorded inventory values based on customer demand, market trends and expected future revenues, and
changes valuation
 estimates accordingly. A significant shortfall of revenues may result in carrying higher levels of finished goods and raw materials
thereby
increasing the risk of inventory obsolescence and corresponding inventory write-downs. As a result, the Company may not carry adequate
reserves
to offset such write-downs.
 
The Company may not be able to reduce operating
costs quickly enough if revenues decline.
 
Operating expenses are generally fixed in nature
and largely based on anticipated revenues. However, should future revenues decline significantly and
rapidly, there is no guarantee management
could take actions that would further reduce operating expenses in either a timely manner or without seriously
impacting the operations
of the Company.
 
Future success depends in part on attracting
and retaining key management and qualified technical and sales personnel.
 
Future success depends on the efforts and continued
services of key management, technical and sales personnel. Significant competition exists for such
personnel and there is no assurance
key technical and sales personnel can be retained or that other highly qualified technical and sales personnel as required
can be attracted,
assimilated and retained. There is also no guarantee that key employees will not leave and subsequently compete against the Company.
The
inability to attract and retain key personnel could adversely impact the business, financial condition and results of operations. 
 
Changes in the effective tax rate may have
an adverse effect on the Company's results of operations.
 
The Company's future effective tax rate may be
adversely affected by a number of factors including: the jurisdictions in which profits are determined to be
earned and taxed; the resolution
of issues arising from future, potential tax audits with various tax authorities; changes in the share valuation of our deferred
tax assets
and liabilities; adjustments to estimated taxes upon finalization of various tax returns; increases in expenses not deductible for tax
purposes;
changes in available tax credits; changes in stock-based compensation expense; changes in tax laws or the interpretations of
such tax laws and changes in
generally accepted accounting principles.
 
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Failure to protect intellectual property rights
could adversely affect future performance and growth.
 
Failure to protect existing intellectual property
rights may result in the loss of valuable technologies or paying other companies for infringing on their
intellectual property rights.
The Company relies on patent, trade secret, trademark and copyright law to protect such technologies. There is no assurance
any of the
Company's U.S. patents will not be invalidated, circumvented, challenged or licensed to other companies.
 
Failure to protect our technology systems from
cybersecurity occurrences may have an adverse effect on the Company's operations.
 
As part of operations management, we use information
 technologies for various business functions, including; data processing, data store, and to
communication amongst personnel, customers
 and suppliers. Further, we use information technologies to process financial information and results of
operations for internal reporting
purposes and to comply with regulatory, legal and tax requirements. We rely on third party providers for some of these
information technologies
and support.
 
Despite our security design and controls and other
operational safeguards, and those of our third party providers, our information technology systems may
be vulnerable to a variety of interruptions,
including during the process of upgrading or replacing hardware, software, databases or components thereof,
natural disasters, terrorist
attacks, telecommunications failures, computer viruses, cyber-attacks, hackers, unauthorized access attempts and other security
issues
 or may be breached due to employee error, malfeasance or other disruptions. Such occurrences could result in operational disruptions or
 the
misappropriation of data that could subject our organization to civil and criminal penalties, litigation or have a negative impact
on our reputation.
 
Many of our information technology systems also
contain proprietary and other confidential information related to our business, such as business plans and
research and development initiatives.
Failure to protect existing intellectual property rights may result in the loss of valuable technologies or paying other
companies for
infringing on their intellectual property rights. The Company relies on patent, trade secret, trademark and copyright law to protect such
technologies. There is no assurance any of the Company's U.S. patents will not be invalidated, circumvented, challenged or licensed to
other companies.
 
Changes in securities laws and regulations
have increased and could continue to increase Company expenses.
 
Changes
in the laws and regulations affecting public companies, including the provisions of the Sarbanes-Oxley Act of 2002 and rules promulgated
by the
Securities and Exchange Commission (“SEC”)   have
increased and may continue to increase Company expenses as the Company devotes resources to
ensure compliance with all applicable laws
and regulations. In addition, the NASDAQ Capital Market, on which the Company's common stock is listed,
has also adopted comprehensive
 rules and regulations relating to corporate governance. These laws, rules and regulations have increased the scope,
complexity and cost
 of corporate governance, reporting and disclosure practices. The Company may be required to hire additional personnel and use
outside
legal, accounting and advisory services to address these laws, rules and regulations. The Company also expects these developments to make
it more
difficult and more expensive for the Company to obtain director and officer liability insurance in the future, and the Company
may be required to accept
reduced coverage or incur substantially higher costs to obtain coverage. Further, the Company's board members,
 Chief Executive Officer and Chief
Financial Officer could face an increased risk of personal liability in connection with the performance
of their duties. As a result, we may have difficulty
attracting and retaining qualified board members and executive officers, which would
adversely affect the Company.
 
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Pandemics or disease outbreaks, such as the
current novel coronavirus (“COVID-19”) pandemic may disrupt our business, which could materially affect
our operations and
results of operations.
 
Pandemics or disease outbreaks such as the COVID-19
pandemic, have and may continue to impact customer traffic at Company-owned locations, may
make it more difficult to staff our Company-owned
locations, and, in more severe cases, may cause a temporary inability to obtain supplies, increase
commodity costs or continue to cause
full and partial closures of our affected Company-owned locations, sometimes for prolonged periods of time. The
Company previously implemented
closures, modified hours or reductions in on-site staff, resulting in cancelled shifts for some of the Company employees.
These changes
and any additional changes may materially adversely affect our business or results of operations, and may impact our liquidity or financial
condition, particularly if these changes are in place for a significant amount of time. In addition, our operations could be disrupted
if any of our employees
or employees of the Company's suppliers and business partners were or are suspected of having COVID-19 or other
illnesses since this could require the
Company, its suppliers or its business partners to quarantine some or all such employees, close
and disinfect locations and other facilities or, in the case of
our suppliers, delay in delivering the Company's products. If a significant
percentage of the Company's workforce, our suppliers and business partners are
unable to work, including because of illness, travel or
government restrictions in connection with pandemics or disease outbreaks (including the current
COVID-19 pandemic), the Company's operations
may be negatively impacted, potentially materially adversely affecting the Company's business, liquidity,
financial condition or results
of operations. Furthermore, such viruses may be transmitted through human contact, and the risk of contracting viruses has
caused and
could continue to cause employees or guests to avoid gathering in public places, which has had, and could further have, adverse effects
on guest
traffic at our locations or the ability to adequately staff locations. The Company could also be adversely affected if government
authorities impose or
reinstate restrictions on public gatherings, human interactions, operations of businesses or mandatory closures,
seek voluntary closures, restrict hours of
operations or impose curfews, restrict the import or export of products or if suppliers issue
mass recalls of products. Additional regulation or requirements
with respect to the compensation of the Company's employees and the employees
 of our business partners could also have an adverse effect on the
Company's business. The implementation of such measures and if COVID-19
or other disease continues to spread significantly, the perceived risk of
infection or health risk may adversely affect the Company's
business, liquidity, financial condition and results of operations.
 
Our results of operations could in the future
be materially adversely impacted by the COVID-19 pandemic.
 
The global spread of COVID-19 has created significant
volatility and uncertainty and economic disruption. The extent to which the COVID-19 pandemic
impacts our business, operations and financial
results will depend on numerous evolving factors that we may not be able to accurately predict, including:
the duration and scope of the
 pandemic; governmental, business and individuals' actions that have been and continue to be taken in response to the
pandemic; the impact
of the pandemic on economic activity and actions taken in response; the effect on our customers and customer demand for our
products,
solutions, and services; our ability to sell and provide our products, solutions, and services, including as a result of travel restrictions
and people
working from home; the ability of our customers to pay for our products, solutions, and services; and any closures of our and
our customers' offices and
facilities. Clients may also slow down decision making, delay planned work or seek to terminate existing agreements.
Any of these events could cause or
contribute to the risks and uncertainties enumerated in the Annual Report and could materially adversely
affect our business, financial condition, results of
operations and/or stock price.
 
We have identified a material weakness in our
internal control over financial reporting which 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 Item 9A,
management identified material weaknesses
in our internal control over financial reporting related to the financial reporting cycle.
 
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. Management has developed a remediation
plan in response to the material weakness identified. During Fiscal 2022, management added additional experienced accounting personnel
and continued to
leverage external accounting resources to strengthen the financial close and reporting process so as to more effectively
detect such misstatements in a more
timely fashion. The Company intends to continue strengthening its internal resources while utilizing
an external consulting firm to support public reporting
requirements.
 
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.
 
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Material weaknesses in our internal control over
financial reporting have required us to restate our financial statements 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 restated its unaudited interim condensed   consolidated
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.
 
If the Small Business Administration (“SBA”)
does not grant forgiveness of our loans under the Paycheck Protection Program (“PPP”), our business
operations and cash flow
likely will be adversely affected, and we may be limited in our ability to grow our operations until the unforgiven portion of this
loan
is repaid.
 
On July 30, 2020, the Company was granted two
PPP loans by the SBA (collectively the “First Draw PPP Loan”) under two notes payable dated July 30,
2020 and funds were disbursed
on August 3, 2020. On April 6, 2021, the Company was granted the third PPP loan (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. During the fiscal year ended May 31, 2022, the Company’s
First Draw PPP Loan was fully forgiven by the
SBA. The Company is currently seeking forgiveness of the balance of the Second Draw PPP
Loan.
 
Under
the terms of the PPP, the principal balance and interest due under the Notes will be forgiven if we meet certain conditions related
to the use of the
loan proceeds. While we expect that the Second Draw PPP Loan will be materially forgiven, we cannot be certain
that the SBA will grant forgiveness of
the entirety of our loan. If we do not receive forgiveness of our loan, we will be obligated
to start making payments on the portion of the principal and
interest that is not forgiven so that it will be fully repaid no later
than five years from the date of issuance, unless we are able to negotiate new payment
terms.  
 
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Risks Related to Ample Hills
 
Our strategy to increase our growth through acquisitions may be
unsuccessful and could adversely affect our business and results.
 
As part of our growth strategy, we intend to further
acquire other businesses; however, there is no assurance that we will be able to identify appropriate
acquisition targets, successfully
acquire identified targets or successfully integrate the business of acquired companies to realize the full benefits of the
combined businesses.
 
While we acquired Ample Hills in connection with
our growth strategy to acquire other businesses, we can provide no assurance that we will identify
appropriate acquisition targets, successfully
complete any future acquisitions or successfully integrate the business of companies we do acquire. Even if we
successfully acquire a
business entity, there is no assurance that our combined business will become profitable. The process of completing the integration of
acquired businesses could cause an interruption of, or loss of momentum in, the activities of our company and the loss of key personnel.
The diversion of
management's attention and any delays or difficulties encountered in connection with the pursuit of business acquisitions
and the integration of acquired
businesses, and the incurrence of significant, acquisition related costs in connection with proposed and
completed acquisitions, could have an adverse effect
on our business, financial condition or results of operations.
 
Further, as part of our strategy, we intend to
increase focus on Ample Hills to accelerate its growth while saving costs and focusing resources on Ample
Hills; however, there is no
assurance that we will be able to successfully achieve the anticipated cost savings and other benefits from these actions within
the expected
 timeframe as such actions are subject to many estimates and assumptions. These estimates and assumptions are subject to significant
economic,
competitive, and other uncertainties, some of which are beyond our control. If these estimates and assumptions are incorrect, if we experience
delays, or if other unforeseen events occur, our business and consolidated financial position and results of operations could be adversely
affected.
 
We may not be able to achieve the anticipated synergies and benefits
from business acquisitions.
 
Acquisitions involve many complexities, including,
 but not limited to, risks associated with the acquired business’ past activities, loss of customers,
regulatory changes that are
not anticipated, difficulties in integrating personnel and human resource programs, integrating accounting systems and other
infrastructures,
general underperformance of the business under our control versus the prior owners, unanticipated expenses and liabilities, and the impact
on its internal controls of compliance with the regulatory requirements under the Sarbanes-Oxley Act of 2002. There is no guarantee that
our acquisitions
will increase the profitability and cash flow of the Company, and its efforts could cause unforeseen complexities and
additional cash outflows, including
financial losses. As a result, the realization of anticipated synergies or benefits from acquisitions
 may be delayed or substantially reduced and could
potentially result in the impairment of our investment in these businesses.
  
If the benefits of any completed or proposed merger or acquisition
do not meet the expectations of investors, stockholders or financial analysts, the market
price of our common stock may decline.
 
If the benefits of any completed (including Ample
 Hills) or proposed merger or acquisition (including Ample Hills) do not meet the expectations of
investors or securities analysts, the
market price of our common stock prior to such acquisition may decline. The market values of our common stock at the
time of an acquisition
may vary significantly from their prices on the date the acquisition target was identified.
  
Increases in the cost of food and paper products
could harm our profitability and operating results.
 
The cost of the food and paper products we use
depends on a variety of factors, many of which are beyond our control. We are unable to predict the future
cost of our ice cream and expect
to experience price volatility for our ice cream products. To the extent that dairy prices increase as compared to earlier
periods, it
could impact our results of operations. If the price of dairy or other food products that we use in our operations significantly increases,
or tariffs
are imposed, and we choose not to pass, or cannot pass, these increases on to our customers, our operating margins will decrease
and such decrease in
operating margins could have a material adverse effect on our business, results of operations or financial condition.
 
Fluctuations in weather, supply and demand and
 economic conditions could adversely affect the cost, availability and quality of some of our critical
products, including dairy. Our inability
to obtain requisite quantities of high-quality ingredients would adversely affect our ability to provide the menu
items that are central
 to our business, and the highly competitive nature of our industry may limit our ability to pass through increased costs to our
customers.
Continuing increases in the cost of fuel would increase the distribution costs of our prime products thereby increasing the food and paper
cost to
us, thus negatively affecting profitability.
 
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The retail business of the food service industry
is highly competitive, and that competition could lower revenues, margins and market share.
 
The retail business of the food service industry
is intensely competitive regarding price, service, location, personnel and type and quality of product. We
compete with international,
national, regional and local retailers primarily through the quality, variety and value perception of the products offered. Other
key
competitive factors include the number of locations, quality and speed of service, attractiveness of facilities, effectiveness of advertising
and marketing
programs, and new product development. We anticipate competition will continue to focus on convenience and pricing. Many
of our competitors have
substantially larger marketing budgets, which may provide them with a competitive advantage. Changes in pricing
or other marketing strategies by these
competitors can have an adverse impact on our sales, earnings and growth. Extensive price discounting
in the retail business of the food service industry
could have an adverse effect on our financial results.
 
In addition, we compete within the food service
market and the retail business not only for customers but also for management and hourly employees. If we
are unable to maintain our competitive
position, we could experience downward pressure on prices, lower demand for products, reduced margins, the
inability to take advantage
of new business opportunities and the loss of market share.
 
The Seasonality of Our Sales and New Store Openings Can Have a Significant
Impact on Our Financial Results from Quarter to Quarter.
 
Our sales and earnings are seasonal, with significantly
higher sales and earnings occurring during the warmer months of the year, which causes fluctuations
in our 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 our 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.
 
Any perceived or real health risks related
to the food industry could adversely affect our ability to sell our products.
 
We are subject to risks affecting the food industry
generally, including risks posed by the following; food spoilage, contamination, or product tampering,
consumer product liability claims,
and potential cost and disruption of a product recall.
 
Our products are susceptible to contamination
by disease-producing organisms, or pathogens, such as listeria monocytogenes, salmonella, campylobacter,
hepatitis A, trichinosis and
generic E. coli. Because these pathogens are generally found in the environment, there is a risk that these pathogens could be
introduced
to our products as a result of improper handling at the manufacturing, processing, foodservice or consumer level. Our suppliers' manufacturing
facilities and products, as well as our Company operations, are subject to extensive laws and regulations relating to health, food preparation,
sanitation and
safety standards. Difficulties or failures by these companies in obtaining any required licenses or approvals or otherwise
complying with such laws and
regulations could adversely affect our revenue that is generated from these companies. Furthermore, we cannot
 assure you that compliance with
governmental regulations by our suppliers or in connection with the Company's operations will eliminate
the risks related to food safety.
 
Events reported in the media, or food tampering,
whether or not accurate, can cause damage to the Company's reputation and affect sales and profitability.
Reports, whether true or not,
of food-borne illnesses (such as e-coli, avian flu, hepatitis A, trichinosis or salmonella) and injuries caused by food tampering
have
in the past severely injured the reputations of participants in the retail business and could in the future affect our business as well.
Our brand's
reputation is an important asset to the business; as a result, anything that damages our brand's reputation could immediately
and severely hurt system-wide
sales and, accordingly, revenue and profits. If customers become ill from food-borne illnesses or food tampering,
we could also be forced to temporarily
close some, or all, locations. In addition, instances of food-borne illnesses or food tampering,
even those occurring solely at the locations of competitors,
could, by resulting in negative publicity about the foodservice industry,
adversely affect system sales on a local, regional or system-wide basis. A decrease
in customer traffic as a result of these health concerns
or negative publicity, or as a result of a temporary closure of any of our Company-owned locations,
could materially harm our business,
results of operations and financial condition.
 
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Additionally, we may be subject to liability if
 the consumption of any of our products causes injury, illness or death. A significant product liability
judgment or a widespread product
 recall may negatively impact our sales and profitability for a period of time depending on product availability,
competitive reaction
and consumer attitudes. Even if a product liability claim is unsuccessful or is not fully pursued, the negative publicity surrounding
any
assertion that our products caused illness or injury could adversely affect our reputation with existing and potential customers and
our corporate and brand
image. Injury to the Company's reputation would likely reduce revenue and profits.
 
Negative publicity, including complaints on
social media platforms and other internet-based communications, could damage our reputation and harm our
guest traffic, and in turn, negatively
impact our business, financial condition, results of operations and prospects.
 
There has been a marked increase in the use of
social media platforms and similar devices, including blogs, social media websites and other forms of
internet-based communications that
allow individuals to access a broad audience of consumers and other interested persons. Consumers value readily
available information
concerning goods and services that they have or plan to purchase, and may act on such information without further investigation or
authentication.
The availability of information on social media platforms is virtually immediate, as is its impact. Many social media platforms immediately
publish the content their subscribers and participants can post, often without filters or checks on accuracy of the content posted. The
opportunity for
dissemination of information, including inaccurate information, is seemingly limitless and readily available. Information
 concerning our business and
products may be posted on such platforms at any time. Information posted may be adverse to our interests or
may be inaccurate, each of which may harm
our performance, prospects or business. The harm may be immediate without affording us an opportunity
for redress or correction. Such platforms could
also be used for dissemination of trade secret information, compromising valuable Company
 assets. In sum, the dissemination of information online,
regardless of its accuracy, could harm our business, financial condition, results
of operations and prospects.
 
ITEM 1B.
UNRESOLVED STAFF COMMENTS
  
None.
 
ITEM 2.
PROPERTIES
 
As of May 31, 2022, the Company owned two buildings
in Portland, Oregon totaling a combined 11,667 square feet of office space on 23,274 square feet
of land. Both of these buildings are
classified as assets held for sale. One of the buildings is associated with the Measurement Segment, and one is leased to
Humboldt Street
Collective, LLC. See Note 3 – Summary of Significant Accounting Policies for further information on this lease. On July 18,
2022 these
buildings were sold to Tofte Farms, LLC for a purchase price of $3.5 million.
  
The Ice Cream Segment leases all properties which
includes a 15,000 square foot manufacturing facility in Brooklyn, New York and retail locations located
in New York, New Jersey and California.
The following table lists our corporate headquarters and our principal manufacturing and warehousing facilities
for the Measurement Segment
and the Ice Cream Segment, in addition to our retail properties as of May 31, 2022:
 
Facility Name
Facility Location
Facility Type/Usage
 
Measurement Segment
 
Portland
Portland, Oregon
Corporate Headquarters/Manufacturing/Administrative
Portland storage facility
Portland, Oregon
Investment-leased
 
 
 
 
Ice Cream Segment
 
Red Hook Facility
Brooklyn, New York
Manufacturing/Administrative
Red Hook Retail
Brooklyn, New York
Retail
Astoria
Queens, New York
Retail
Chelsea
Manhattan, New York
Retail
Fireboat
Brooklyn, New York
Retail
Gowanus
Brooklyn, New York
Retail
Prospect Heights
Brooklyn, New York
Retail
Dekalb
Brooklyn, New York
Retail
Jersey City
Jersey City, New Jersey
Retail
Essex
Manhattan, New York
Retail
Long Beach
Long Beach, California
Retail
Prospect Park West
Brooklyn, New York
Retail
Upper West Side
Manhattan, New York
Retail (opened July 2022)
Long Island City
Queens, New York
Retail (opened September 2022)
Greenwich Village
Manhattan, New York
Retail (opening forthcoming)
Beverly Hills
Beverly Hills, California
Retail (opening forthcoming)
Pasadena
Pasadena, California
Retail (opening forthcoming)
 
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ITEM 3.
LEGAL PROCEEDINGS
 
 
As of the reporting date of the annual report, there are no pending
legal proceedings that are material to the Company.
 
ITEM 4.
MINE SAFETY DISCLOSURES
 
Not applicable.
 
PART II
 
ITEM 5.
MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES
OF EQUITY SECURITIES
 
The Company’s common stock is traded on
the NASDAQ Capital Market under the symbol “SMIT.”
 
As
of September 30, 2022, there were 3,872,134 shares of common stock outstanding held by 70 holders of record.
  
The Company has not paid any dividends on its
common stock since 1994. The Company’s current policy is to retain earnings to finance the Company’s
business. Future dividends
will be dependent upon the Company’s financial condition, results of operations, current and anticipated cash requirements,
acquisition
plans and plans for expansion and any other factors that the Company’s Board of Directors deems relevant. The Company has no present
intention of paying dividends on its common stock in the foreseeable future.
 
The following table shows information about equity
awards under the Company’s equity compensation plans at May 31, 2022:
 
Plan Category
 
Number of Securities
to be issued upon
exercise of
outstanding awards  
Weighted-
average
exercise price
of outstanding
awards
 
Number of Securities
remaining available
for future issuance
under equity
compensation plans
(excluding securities
in column a)
 
   
(a)
     
(b)
     
(c)
 
 
     
       
       
 
Equity compensation plans approved by security holders
   
32,833    $
2.71     
348,051 
Equity compensation plans not approved by security holders
   
-     
-     
- 
    Total
   
32,833    $
2.71     
348,051 
 
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Recent Sales of Unregistered Securities
 
None.
 
Issuer Purchases of Equity Securities
 
None.
 
ITEM 6.
RESERVED
 
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
  
OVERVIEW
 
Schmitt Industries Inc. (“Schmitt,”
“Company,” “Registrant” and “We”) is a holding company owning subsidiaries engaged in diverse business
activities.
Schmitt’s operating businesses include propane tank monitoring solutions, precision measurement solutions and ice cream
production and distribution. Our
subsidiaries include our Measurement Segment (“SMS”) and our Ice Cream Segment, which is
comprised of Ample Hills.
 
We
continually assess strategic opportunities to improve shareholder value. On April 14, 2022, the Company announced its intention to focus
on Ample
Hills as its core business. This focus will enable Schmitt to accelerate its Ample Hills growth strategy while saving costs and
focusing resources on Ample
Hills as Schmitt’s core business line. In conjunction with the focus on Ample Hills, the Company announced
a strategic review of its Schmitt Measurement
Systems business lines based in Portland, Oregon.      
  
On
July 9, 2020, Ample Hills Acquisition LLC (“Buyer”)   entered
into an Asset Purchase Agreement (the “Agreement”), dated as of June 29, 2020, with
Ample Hills. The Transactions closed on
July 9, 2020, the day after a sale order approving the Transactions was entered by the Bankruptcy Court. 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 Bankruptcy Courts. 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.
 
RECENT DEVELOPMENTS
 
Strategic Highlights
 
As disclosed above, on April 14, 2022, the Company
announced its intention to focus on Ample Hills and the Ice Cream Segment as its core business.
 
On May 2, 2022, the Company filed a shelf registration
statement for the sale of up to $100,000,000 in debt and equity securities. On May 20, 2022, the
Company entered into a sales agreement
 with Roth Capital Partners, LLC and filed a prospectus supplement for an at-the-market offering of up to
$5,000,000 in common stock.
 
Subsequent to Fiscal Year 2022, the Company announced
additional strategic updates, including the sale and leaseback of the Nicolai buildings in Portland
for $3.5 million gross sales proceeds.
The real estate transaction closed on July 18, 2022.
 
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Table of Contents
 
On July 20, 2022, the Company announced that it
entered into a non-binding term sheet which contemplates a potential reverse merger with Proton Green,
LLC and the spin-off of Schmitt’s
Ample Hills business to pre-merger shareholders of Schmitt’s common stock. It is proposed that Proton Green would
become a wholly
owned subsidiary of Schmitt, the Company would be renamed “Proton Green Corporation,” and the common stock would continue
to
trade on the Nasdaq under a new symbol. If consummated, Ample Hills would become a standalone entity and the newly merged company would
retain
any remaining components of the SMS businesses.
 
On September 17, 2022, the Company received notice
of termination of the previously announced non-binding term sheet with Proton Green regarding the
reverse merger and spin-off of Schmitt’s
Ample Hills business. As a result of the termination, the transactions contemplated by the term sheet will not
proceed.
 
SIGNIFICANT ACCOUNTING POLICIES
 
The analysis of the Company’s financial
 condition and results of operations are based upon our Consolidated Financial Statements, which have been
prepared in accordance with
Generally Accepted Accounting Principles in the U.S. (“GAAP”).
  
In preparing the Consolidated Financial Statements
certain estimates and judgments are required that affect the reported amounts within the Consolidated
Statement of Operations and Balance
 Sheet. Note–3 - Summary of Significant Accounting Policies, in the accompanying Notes to the Consolidated
Financial Statements
describes the significant accounting policies and methods used in the preparation of our Consolidated Financial Statements.
 
Management asserts the estimates, assumptions
 and judgments involved in the accounting policies described in Note–3 - Summary of Significant
Accounting Policies have the
greatest potential impact on our Consolidated Financial Statements and have deemed these to be our critical accounting
policies and estimates.
 
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 revenue by providing manufacturing production services
to third
parties and recognizes revenues as services are provided to the customer.
 
Measurement Product Sales
 
The Company’s Measurement Segment determines
the amount of revenue it recognizes associated with the transfer of each product. For sales of products
to all customers, each transaction
is evaluated to determine whether there is approval and commitment from both the Company and the customer for the
transaction; whether
the rights of each party are specifically identified; whether the transaction has commercial substance; whether collectability from the
customer is probable at the inception of the contract and whether the transaction amount is defined. If a transaction to sell products
meets all of the above
criteria, revenue is recognized for the sales of product at the time of shipment.
 
The Company incurs commission expense associated
with the sales of certain measurement products. The Company applies the practical expedient allowed
under Accounting Standards Codification
(“ASC”) 340-40-25-4 by recognizing the expense at the time the product is shipped. These amounts are recorded
within general,
administrative and sales expense. The Company also incurs costs related to shipping and handling of its products, the costs of which are
expensed as incurred as a component of cost of sales.
 
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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 revenue recognition of revenues
in instances where consideration is received from customers in advance of the Company completing
its obligations in exchange for such
consideration.
 
Business Combinations
 
In accordance with ASC 805 – Business
Combinations (“ASC 805”), the Company allocates the purchase consideration to the identifiable assets
acquired
and liabilities assumed in business combinations based on their acquisition-date fair values. The excess of the purchase consideration
over the amounts
assigned to the identifiable assets and liabilities is recognized as goodwill, or if the fair value of the net assets
acquired exceeds the purchase consideration,
a bargain purchase gain is recorded. Factors giving rise to goodwill generally include operational
synergies that are anticipated as a result of the business
combination and growth expected to result in economic benefits from access
to new customers and markets. The fair values of identifiable intangible assets
acquired in business combinations are generally determined
 using an income approach, requiring financial forecasts and estimates as well as market
participant assumptions.
 
The incremental financial results of the Ample
 Hills acquisition are included in the Company’s consolidated financial results from the respective
acquisition date.
 
Bargain Purchase Gain
 
In
connection with the acquisition of Ample Hills during Fiscal 2021, the Company recorded an initial bargain purchase gain of $1,271,615
that was
recorded as a component of other income on the Consolidated Statement of Operations. 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
during the year, which resulted in a reduction in the bargain purchase gain for Fiscal 2021 to $1,138,808.
The adjustments related to additional cure
payments made during the year, the discovery of obsolete inventory, and the reduction of the
deferred tax liability. The bargain purchase gain amount
represents the excess of the estimated fair value of the net assets and intangibles,
 described below, acquired over the estimated fair value of the
consideration transferred to the sellers and their landlords. In accordance
with ASC 805, we have estimated the fair value of the net assets acquired as of the
acquisition date.
 
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Table of Contents
 
Intangible Assets and Impairment
 
Indefinite-Lived Intangible Assets
 
Definite-lived and indefinite-lived intangible
 assets arising from business combinations include patented technology, proprietary recipes, websites and
trademarks and trade names. Definite-lived
intangible assets are amortized over the estimated period during which the asset is expected to contribute
directly or indirectly to future
cash flows. Intangible assets that are considered to be indefinite-lived are not amortized.   
 
Long-lived assets and certain identifiable intangible
assets to be held and used are reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of
such assets may not be recoverable. Determination of recoverability is based on an estimate of undiscounted future
cash flows resulting
from the use of the asset and its eventual disposition. Measurement of any impairment loss for long-lived assets and certain identifiable
intangible assets that management expects to hold, and use is based on the amount by which the carrying value exceeds the fair value of
the asset. 
  
Inventories, net
 
Inventories are valued at the lower of cost or
net realizable value with cost determined on the average cost basis. Costs included in inventories consist of
materials, labor and manufacturing
overhead, which are related to the purchase or production of inventories. Write-downs, when required, are made to
reduce excess inventories
to their net realizable values. Such estimates are based on assumptions regarding future demand and market conditions. If actual
conditions
become less favorable than the assumptions used, an additional inventory write-down may be required.
 
Lease Accounting – Leases
 
The Company evaluates their leases to determine
if they have the right to control the use of an asset, or groups of assets, for a period of time in exchange
for consideration. If the
determine that they have the right to obtain substantially all of the economic benefits arising from the use of such asset, the
recognize
a right-of-use asset and lease liability. The Company evaluates each lease to estimate their expected term which includes renewal options
that
they are reasonably assured that they will exercise and they also evaluate the classification of the lease as either an operating
lease or a finance lease. As the
Company’s leases do not provide an implicit rate, the Company must estimate an incremental borrowing
rate based on the information available at the time
the lease is commenced or amended. The estimated rate is directly utilized in determining
the present value of the lease payments. The Company estimated
the incremental borrowing rate based on prevailing financial market conditions,
peer company credit analyses and management judgment. The Company
asses their right-of-use assets for impairment whenever events or changes
in circumstances indicate that the carrying value of such assets may not be
recoverable.
 
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Table of Contents
 
Changes in assumptions regarding lease renewals
 and estimated incremental borrowing rates may produce materially different amounts in the initial
recognition of right-of-use assets and
lease liabilities. Additionally, an inability to perform on the Company’s strategic revenue and cash flow growth plans
could result
in the recognition of impairment losses in future periods and could be material.
 
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 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 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.
 
Discussion of Operating Results From Continuing
Operations
 
After
the acquisition of Ample Hills on July 9, 2020, the Company determined they have two segments: the Measurement Segment and the Ice Cream
Segment. On April 14, 2022, the Company announced its intention to focus on the Ice Cream Segment as its core business and simultaneously
launch a
strategic review of the Company’s Measurement Segment, including the Xact and Acuity business lines. Management anticipates
 disposing of the
Measurement Segment through multiple transactions involving the sale of legal entities, assets, or a combination thereof.
In accordance with ASC 205-20,
Presentation of Financial Statemen–s - Discontinued Operations, the Company determined that
the Xact business line met the conditions for a discontinued
operation and is recorded as such in the consolidated financial statements.
The Company reports financial results for discontinued operations separately
from continuing operations in order to distinguish the financial
 impact of the potential disposal transaction from ongoing operations. Prior financial
information has been updated to reflect the required
presentation for discontinued operations under ASC 205-20. See Note 4 – Assets Held for Sale and
Operations Classified as Discontinued
Operations for further details.    
 
COVID-19 Update
 
As
of May 31, 2022, all of our manufacturing facilities and retail shops were operational (except for new leases with shop openings forthcoming)  .
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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Table of Contents
 
Key Leadership Changes
 
On October 22, 2021, the Company announced the
appointment of Alex Zyngier to the Company Board of Directors, effective October 22, 2021. Mr.
Zyngier replaces Steven Strom, who resigned
from the Board of Directors. On September 30, 2022, Lillian Tung tendered her resignation from the Board
of Directors of the Company.
Neither Ms. Tung’s nor Mr. Strom's resignation was the result of any disagreements with the Company on any matters
relating to its
operations, policies and practices.
  
Andrew Hines’ term as member of the Board
of Directors ended on December 10, 2021 as he did not stand for re-election at the Company’s 2021 annual
meeting of the shareholders.
His former seat remains vacant as of May 31, 2022. 
 
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Table of Contents
 
RESULTS OF OPERATIONS
 
 
 
Fiscal Year ended May 31,
 
YoY Change
 
 
2022
 
%
 
2021
 
%
 
$
 
%
Ice Cream Segment revenues
 
$
8,315,486   
 
84.1%  
$
4,043,436   
 
72.2%  
$
4,272,050    105.7%
Measurement Segment revenues
 
 
1,577,724   
 
15.9%  
 
1,557,023   
 
27.8%  
 
20,701   
1.3%
Total revenue, net
 
 
9,893,210   
 
100.0%  
 
5,600,459   
 
100.0%  
 
4,292,751   
76.6%
Cost of revenue
 
 
4,824,639   
 
48.8%  
 
3,535,778   
 
63.1%  
 
1,288,861   
36.5%
Gross profit
 
 
5,068,571   
 
51.2%  
 
2,064,681   
 
36.9%  
 
3,003,890    145.5%
Selling, general and administrative
 
 
15,644,001   
 
158.1%  
 
11,398,113   
 
203.5%  
 
4,245,888   
37.3%
Impairment of intangible assets
 
 
—     
 
0.0%  
 
903,422   
 
16.1%  
 
(903,422)  (100.0%)
Transaction costs
 
 
—     
 
0.0%  
 
125,167   
 
2.2%  
 
(125,167)  (100.0%)
Research & development
 
 
40,456   
 
0.4%  
 
69,601   
 
1.2%  
 
(29,145)   (41.9%)
Total operating expenses
 
 
15,684,457   
 
158.5%  
 
12,496,303   
 
223.1%  
 
3,188,154   
25.5%
Operating loss
 
 
(10,615,886)  
 
(107.3%) 
 
(10,431,622)  
 
(186.3%) 
 
(184,264)  
(1.8%)
Gain on sale of property and
equipment
 
 
4,598,095   
 
46.5%  
 
24,208   
 
0.4%  
 
4,573,887    100.0%
Forgiveness of PPP loans
 
 
2,059,556   
 
20.8%  
 
—     
 
0.0%  
 
2,059,556    100.0%
Bargain purchase gain
 
 
—     
 
0.0%  
 
1,138,808   
 
20.3%  
  (1,138,808)   100.0%
Interest expense
 
 
(46,828)  
 
(0.5%) 
 
(19,038)  
 
(0.3%) 
 
(27,790)   146.0%
Other income, net
 
 
315,376   
 
3.2%  
 
248,815   
 
4.4%  
 
66,561    (26.8%)
Loss before income taxes from
continuing operations 
 
 
(3,689,687)  
 
(37.3%) 
 
(9,038,829)  
 
(161.4%) 
 
5,349,142   
59.2%
Income tax provision
(benefit) from
continuing operations 
 
 
19,197   
 
0.2%  
 
(403,666)  
 
(7.2%) 
 
422,863   (104.8%)
Net loss from continuing operations
 
 
(3,708,884)  
 
(37.5%) 
 
(8,635,163)  
 
(154.2%) 
 
4,926,279   
57.0%
Income from discontinued operations,
net of tax
 
 
425,108   
 
4.3%  
 
545,491   
 
9.7%  
 
(120,383)  
22.1%
Net loss
 
$
(3,283,776)  
 
(33.2%) 
$
(8,089,672)  
 
(144.4%) 
$
4,805,896   
59.4%
 
Fiscal Year Ended May 31, 2022 Compared to Fiscal Year Ended
May 31, 2021
 
Consolidated Revenue - Consolidated
revenue increased $4,292,751, or 76.6%, to $9,893,210 in Fiscal 2022 from $5,600,459 in Fiscal 2021. The increase
was driven by the Ice
Cream Segment, which generated $8,315,486 in sales during Fiscal 2022, accounting for 84.1% of total revenue for the fiscal year.
The
Measurement Segment sales remained steady at $1,577,724 for Fiscal 2022, a slight increase of $20,701 over prior Fiscal 2021 of $1,557,023.
The
Measurement Segment accounted for 15.9% of total revenue in Fiscal 2022.
 
Ice Cream Segment Revenue – The
Ice Cream Segment encompasses the operations of Ample Hills and focuses on the wholesale and retail sales of their
ice cream and related
products through a network of individual retail locations located in New York, New Jersey and California, in addition to sales on the
Company’s website. Revenues for the Ice Cream Segment for Fiscal 2022 increased $4,272,050, or 105.7%, to $8,315,486, as compared
to $4,043,436 in
Fiscal 2021.
 
Measurement
Segment Revenue   – The Measurement Segment
includes one product line: the Acuity product line, which focuses on laser-based distance
measurement and dimensional sizing laser sensors.
The Xact product line, which includes ultrasonic-based remote tank monitoring products and related
monitoring revenues for markets in
the IoT environment, is classified as “held for sale” and reported separately. See Note 4 – Assets Held for Sale
and
Operations Classified as Discontinued Operations   for
 further details. All activity in the Company’s Measurement Segment was conducted in North
America in Fiscal 2022 and Fiscal 2021.
 
Measurement Segment Revenue increased $20,701,
or 1.3%, to $1,577,724 in Fiscal 2022 as compared to $1,557,023 in Fiscal 2021.
 
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Table of Contents
 
Gross
Profit   – Consolidated gross profit for Fiscal
2022 is 51.2%, as compared to 36.9% in Fiscal 2021, primarily due to higher gross margins from the
Ice Cream Segment.
 
Measurement Segment gross profit for Fiscal 2022,
consisting solely of the Acuity business as Xact is classified separately as held for sale, increased by
10.3% to 40.7% as compared to
30.4% in Fiscal 2021. The increase was due to implemented bill of material efficiencies which improved Acuity unit costs
of production.
 
Ice
Cream Segment gross profit increased by 13.8% to 53.4%  in Fiscal
2022, as compared to 39.4% in Fiscal 2021. As the Company continues to strive for
efficiencies in the day-to-day operations of the business,
the Company expects to be able to manage costs and identify opportunities to drive additional
revenue and volume through their factory,
which will further improve gross margin.
 
Operating
Expenses – Consolidated operating expenses increased $3,188,154, or 25.5% to $15,684,457 in Fiscal 2022 compared to $12,496,303
in Fiscal
2021. This increase was primarily due to the Ice Cream Segment, which had operating expenses of $12,019,919 in Fiscal 2022,
representing a $2,608,472,
or 27.7%, increase from $9,411,447 in Fiscal 2021. The Ice Cream Segment accounted for 76.6% of total operating
expenses. Operating expenses for the
Measurement Segment increased $579,682 or 18.8%,  to
$3,664,538 in Fiscal 2022 from $3,084,856 in Fiscal 2021. The operating expense increase was
driven by professional fees increase of $1,161,466,
or 67.7%, to $2,876,174 in Fiscal 2022, as compared to $1,714,708 in Fiscal 2021. 
 
Other
Income - Other income primarily consists of rental income, interest income and other income. Other income was $315,376 for Fiscal
2022 as
compared to $248,815  for Fiscal 2021.
 
Interest expense was $46,828 for Fiscal 2022 as
compared to $19,038 for Fiscal 2021.
 
Income
Tax Provision (Benefit from Income Taxes)   –-
The effective tax rate in Fiscal 2022 was (0.59%),   as compared
to 4.7% in Fiscal 2021. The
effective tax rate on consolidated net loss in Fiscal 2022 and 2021 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 in Fiscal 2022
was $3,283,776, or $0.97 per fully diluted share, and net loss in Fiscal 2021 was $8,089,672, or $2.29 per fully diluted
share. The decrease
in net loss for Fiscal 2022 was primarily due to the Company’s $4,598,095 gain on sale of property and equipment and $2,059,556
forgiveness of PPP loans in Fiscal 2022.
 
NON-GAAP FINANCIAL MEASURES
 
Adjusted
 EBITDA – Adjusted EBITDA, which excludes certain reorganization, legal and other professional expense and inventory adjustments,
 was
($9,743,929) for Fiscal 2022 as compared to Adjusted EBITDA of ($8,419,539)  in
Fiscal 2021.
 
Reconciliation
of EBITDA to Adjusted EBITDA – Adjusted EBITDA for Fiscal 2022 and Fiscal 2021 is calculated as follows on a consolidated
basis:    
  
 
 
Fiscal Year Ended May 31,
 
 
2022
 
2021
Loss before income taxes from continuing operations
 
$
(3,689,687)  
$
(9,038,829)
Depreciation and amortization
 
 
437,183   
 
443,926 
Interest Expense
 
 
46,828   
 
19,038 
EBITDA from continuing operations
 
$
(3,205,676)  
$
(8,575,865)
Adjusted for:
 
 
    
 
  
Gain on sale of property and equipment
 
 
(4,598,095)  
 
—   
Forgiveness of PPP loans
 
 
(2,059,556)  
 
—   
Bargain purchase gain
 
 
—     
 
(1,138,808)
Impairment of intangible assets
 
 
—     
 
903,422 
Stock-based compensation
 
 
119,398   
 
266,545 
Income from discontinued product line
 
 
    
 
  
Reorganization, legal, and transaction fees
 
 
—     
 
125,167 
Adjusted EBITDA from continuing operations
 
$
(9,743,929)  
$
(8,419,539)
 
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Table of Contents
 
LIQUIDITY AND CAPITAL RESOURCES
 
The
Company's working capital decreased $4,770,031 to ($1,822,078) as of the end of Fiscal 2022 compared to $2,947,953  as
of the end of Fiscal 2021.
The decrease in working capital in Fiscal 2022 was primarily the result of the following:
 
 
·
Cash and cash equivalents decreased $2,981,780 to $1,050,910 at the end of Fiscal 2022 as compared to $4,032,690 at the end of Fiscal 2021.
 
 
·
Accounts payable increased $262,527 to $844,494 at the end of Fiscal 2022 as compared to $581,967 at the end of Fiscal 2021.
 
 
 
 
·
Other accrued liabilities increased $970,569 to $1,665,159 at the end of Fiscal 2022 as compared to $694,590 at the end of Fiscal 2021.
 
 
·
Current portion of long-term lease liabilities increased $432,132 to $1,474,463 at the end of Fiscal 2022 as compared to $1,042,331 at the end of
Fiscal 2021.
 
 
·
Prepaid expenses decreased $103,697 to $94,648 at the end of Fiscal 2022 as compared to $198,345 at the end of Fiscal 2021.
 
These decreases were partially offset by the following:
 
 
·
Inventories increased $192,107 to $1,443,529 at the end of Fiscal 2022 as compared to $1,251,422 at the end of Fiscal 2021.  
 
Net
cash used in operating activities for continuing operations was $8,096,389 in Fiscal 2022 as compared to net cash used in operating activities
for
continuing operations of $7,466,978 in Fiscal 2021. The net loss of $3,283,776, a gain on sale of property and equipment of $4,598,095,
an increase in
accounts receivable of $22,684, an increase in rent, utility deposits and ERP deposits of $239,105, an increase in inventories
 of $192,107, and the
forgiveness of PPP loans of $2,059,556 were the primary drivers of the overall operating cash usage for Fiscal 2022,
offset by non-cash lease costs of
$365,856, depreciation and amortization of $437,183, stock based compensation expense of $119,398, a
 decrease in prepaid expenses of $103,698, a
decrease in income tax receivable of $21,196, an increase in accrued liabilities and customer
deposits of $989,076  and an increase in accounts payable of
$262,527.
In Fiscal 2021, the net loss of $8,089,672, a bargain purchase gain of $1,138,808,  an
increase in accounts receivable of $730,971, a decrease in
deferred income taxes of $453,238, an increase in rent, utility deposits and
ERP deposits of $206,628, and increase in inventories of $153,955 and an
increase in prepaid expenses of $84,388 were the primary drivers
of the overall operating cash usage for Fiscal 2021, offset by an impairment of indefinite-
lived intangible assets of $903,422, non-cash
lease costs of $735,709,  depreciation and amortization of $443,926,
stock based compensation expense of
$266,545, an increase in accrued liabilities and customer deposits of $799,862,  and
an increase of accounts payable of $330,945 were the primary drivers
of the overall operating cash usage for Fiscal 2021.
 
Net
cash provided by investing activities was $3,801,019 in Fiscal 2022 as compared to net cash used in investing activities of $3,035,184
for Fiscal 2021.
The net cash   provided by investing activities
for Fiscal 2022 is driven by the $4,797,924 proceeds from the sale of property and equipment, offset by the
$996,905 purchases of property
and equipment, used primarily to build out the Ample Hills retail footprint.
 
Net cash provided by financing activities was
$1,264,476 in Fiscal 2022 as compared to net cash provided by financing activities of $3,441,305 for Fiscal
2021. The net cash provided
by financing activities was due to the proceeds from a $1,000,000 promissory note and $264,476 proceeds from the Paycheck
Protection Program.
 
Management is pursuing multiple sources of
liquidity. On April 14, 2022, Schmitt announced its intention to focus on Ample Hills as its core business.  In
conjunction
with the focus on Ample Hills, the Company also announced the strategic review of its Measurement segment, which could result in a
sale of
one or both of those businesses. On May 2, 2022, the Company filed
 a shelf registration statement for the sale of up to $100,000,000 in debt and
equity securities. On May 20, 2022, the
Company entered into a sales agreement with Roth Capital Partners, LLC and filed a prospectus supplement for an
at-the-market
offering of up to $5,000,000 in common stock.
   
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Historically, the Company’s primary sources
of liquidity have been cash and cash equivalents, cash flows from operations (when available) and cash flows
from investing and financing
activities, including proceeds from the sale of property and equipment, funding under business loans and credit agreements
and the sale
of equity securities.
 
The
Company currently projects that it will need additional capital to fund its current operations and capital investment requirements until
the Company
scales to a revenue level that permits cash self-sufficiency. As a result, the Company needs to raise additional capital or
secure debt funding to support on-
going operations until such time. This projection is based on the Company’s current expectations
regarding product sales and service, cost structure, cash
burn rate and other operating assumptions. The sources of this capital are anticipated
to be from the sale of equity and/or debt. Alternatively, or in addition,
the Company may seek to sell additional assets or portions of
its business. Any of the foregoing may not be achievable on favorable terms, or at all, and
may require the consent of current debt and/or
equity holders to the modification of existing agreements, which may or may not be granted. Additionally,
any debt or equity transactions
may cause significant dilution to existing stockholders  .
 
Recently Issued Accounting Guidance
 
Refer to Note 3 – Summary of Significant
Accounting Policies in the accompanying Notes to the Consolidated Financial Statements for a discussion of
recent accounting pronouncements.
 
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
Interest Rate Risk
 
The Company did not have any derivative financial
instruments as of the end of Fiscal 2022. However, the Company could be exposed to interest rate risk
at any time in the future and, therefore,
employs established policies and procedures to manage its exposure to changes in the market risk of its cash
equivalents.
 
The Company's interest income and expense are
most sensitive to changes in the general level of U.S. interest rates. In this regard, changes in the U.S.
interest rates affect the interest
earned on the Company's interest-bearing cash equivalents and short-term investments. The Company has no credit line or
other long-term
obligations whose interest rates are based on variable rates that may fluctuate over time based on economic changes in the environment.
Therefore, at this time, the Company is not subject to interest rate risk on outstanding interest-bearing obligations if market interest
rates fluctuate and does
not expect any change in the interest rates to have a material effect on the Company's results from operations.
   
Item 8.
Financial Statements and Supplementary Data
  
Report of Independent Registered Public Accounting Firm
To the shareholders and the Board of Directors of Schmitt Industries,
Inc.
 
Opinion on the Financial Statements
 
We have audited the accompanying Consolidated
Balance Sheets of Schmitt Industries, Inc. (the "Company") as of May 31, 2022 and 2021, the related
Consolidated Statement of
Operations, Stockholders’ Equity and Cash Flows for the years ended May 31, 2022 and 2021 and the related notes (collectively
referred
 to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial
 position of the
Company as of May 31, 2022 and 2021, and the consolidated results of its operations and its cash flows for the years then
ended, in conformity with
accounting principles generally accepted in the United States of America.
 
Substantial Doubt Regarding the Company’s
Ability to Continue as a Going Concern
 
The accompanying consolidated financial statements
have been prepared assuming that the Company will continue as a going concern. As discussed in
Note 2 to the financial statements, the
Company has suffered recurring losses from operations, has an accumulated deficit and does not believe that its
current level of cash
and cash equivalents is sufficient to fund continuing operations. These factors raise substantial doubt about its ability to continue
as a
going concern. Management's plans in regard to these matters are also described in Note 2. The consolidated financial statements
do not include any
adjustments that might result from the outcome of this uncertainty.
 
Basis for Opinion
 
These consolidated financial statements are the
responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s
consolidated financial
statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board
(United States)
(“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws
and the
applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
 
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We conducted our audit in accordance with the
standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated
 financial statements are free of material misstatement, whether due to error or fraud. The Company is not
required to have, nor were we
engaged to perform, an audit of its internal control over financial reporting. As part of our audit, we are required to obtain an
understanding
of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s
internal
control over financial reporting. Accordingly, we express no such opinion.
 
Our audit included performing procedures to assess
the risks of material misstatement of the consolidated financial statements, whether due to error or
fraud, and performing procedures
that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and
disclosures in the
consolidated financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by
management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audit provides
a reasonable basis
for our opinion.
 
Critical Audit Matters
 
The critical audit matters communicated below
 are matters arising from the current period audit of the consolidated financial statements that were
communicated or required to be communicated
to the audit committee and that (i) relate to accounts or disclosures that are material to the consolidated
financial statements and (ii)
involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not
alter in any
way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters
below,
providing a separate opinion on the critical audit matters or on the accounts or disclosures to which they relate.
 
Going
Concern Assessment
 
As described in Note 2 to the consolidated financial
statements, the Company has suffered recurring losses from operations, has an accumulated deficit and
does not believe that its current
level of cash and cash equivalents is sufficient to fund continuing operations. The Company determined these, and other
factors, raised
substantial doubt as to the Company's ability to continue as a going concern one year from the issuance date of the consolidated financial
statements. In making this determination, management prepared a one-year cash flow projection. Management used significant assumptions
in preparing
the one-year cash flow projection, which included expected operating costs and financing obligations.
 
How We Addressed the Matter in Our Audit
 
The principal considerations for our determination
that the evaluation of management's going concern analysis was a critical audit matter are the significant
judgment and subjectivity from
management when evaluating the uncertainty related to the Company's future cash flow projection and a high degree of
auditor judgment
in evaluating management's forecasts for at least the next 12 months.
 
The primary procedures we performed to address
the critical audit matter included:
 
•
Evaluating the reasonableness of key assumptions and estimates used by the management in the one-year
cash flow projection in the light of its
existing operating requirements and plans.
 
•
Testing the completeness, accuracy, and relevance of underlying data in the one-year cash flow projection.
 
•
Evaluating the reasonableness of management's plans on the cash flow requirements of the operations.
 
•
Evaluating the adequacy of the Company's disclosure of management's plans in the notes to the consolidated
financial statements.
  
/s/ UHY LLP
 
We have served as the Company’s auditor
since 2021.
 
Melville, New York
October 13, 2022
PCAOB ID Number 1195
 
 29

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SCHMITT INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
 
 
 
 
 
 
 
 
Fiscal Year Ended May 31,
 
 
2022
 
2021
ASSETS
 
 
 
 
Current assets
 
 
    
 
  
Cash and cash equivalents
 
$
1,050,910   
$
4,032,690 
Accounts receivable, net
 
 
751,551   
 
728,867 
Inventories, net
 
 
1,443,529   
 
1,251,422 
Prepaid expenses
 
 
94,648   
 
198,345 
Income tax receivable
 
 
—
 
 
18,057 
Current portion of assets held for sale as discontinued operations
 
 
665,206   
 
727,666 
Total current assets
 
 
4,005,844   
 
6,957,047 
Leasehold assets
 
 
14,282,286   
 
10,448,486 
Property and equipment, net
 
 
2,947,628   
 
2,823,366 
Property and equipment held for sale, net
 
 
433,410   
 
174,847 
Non-current assets held for sale as discontinued operations
 
 
482,279   
 
298,507 
Leasehold, utilities, and ERP deposits
 
 
560,660   
 
321,555 
Other assets
 
 
    
 
  
Intangible assets, net
 
 
127,189   
 
150,122 
TOTAL ASSETS
 
$
22,839,296   
$
21,173,930 
 
 
 
    
 
  
LIABILITIES & STOCKHOLDERS' EQUITY
 
 
    
 
  
Current liabilities
 
 
    
 
  
Accounts payable
 
$
844,494   
$
581,967 
Accrued commissions
 
 
66,083   
 
60,614 
Accrued payroll liabilities
 
 
540,895   
 
514,660 
Accrued liabilities
 
 
429,003   
 
465,146 
Customer deposits and prepayments
 
 
116,309   
 
93,364 
Other accrued liabilities
 
 
1,668,298   
 
694,590 
Current portion of long-term lease liabilities
 
 
1,474,463   
 
1,042,331 
Current portion of long-term debt
 
 
503,219   
 
541,691 
Liabilities held for sale as discontinued operations
 
 
185,158   
 
14,731 
Total current liabilities
 
 
5,827,922   
 
4,009,094 
Long-term debt
 
 
2,496,781   
 
3,253,389 
Long-term leasehold liabilities
 
 
13,909,388   
 
10,141,864 
Total liabilities
 
 
22,234,091   
 
17,404,347 
Stockholders' equity
 
 
    
 
  
Common stock, no par value, 20,000,000 shares authorized, 4,243,775 and 3,825,724 shares issued and
outstanding at May 31, 2022, respectively; and 4,204,553 and 3,786,502 shares issued and outstanding at
May 31, 2021, respectively
 
 
12,342,757   
 
12,223,359 
Accumulated deficit
 
 
(11,737,552)  
 
(8,453,776)
Total stockholders' equity
 
 
605,205   
 
3,769,583 
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
 
$
22,839,296   
$
21,173,930 
 
The accompanying notes are an integral part of
these consolidated financial statements.
 
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SCHMITT INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
 
 
 
 
 
 
 
 
Fiscal Year Ended May 31,
 
 
2022
 
2021
Net sales
 
$
9,893,210   
$
5,600,459 
Cost of revenue
 
 
4,824,639   
 
3,535,778 
Gross profit
 
 
5,068,571   
 
2,064,681 
Operating expenses:
 
 
    
 
  
General, administrative and sales
 
 
15,644,001   
 
11,398,113 
Impairment of intangible assets
 
 
—     
 
903,422 
Transaction costs
 
 
—     
 
125,167 
Research & development
 
 
40,456   
 
69,601 
Total operating expenses
 
 
15,684,457   
 
12,496,303 
Operating loss
 
 
(10,615,886)  
 
(10,431,622)
Gain on sale of property and equipment
 
 
4,598,095   
 
24,208 
Bargain purchase gain
 
 
—     
 
1,138,808 
Forgiveness of PPP loans
 
 
2,059,556   
 
—   
Interest expense
 
 
(46,828)  
 
(19,038)
Other income, net
 
 
315,376   
 
248,815 
Loss before income taxes for continuing operations
 
 
(3,689,687)  
 
(9,038,829)
Income tax provision (benefit) from continuing operations
 
 
19,197   
 
(403,666)
Net loss from continuing operations
 
 
(3,708,884)  
 
(8,635,163)
Income from discontinued operations, net of tax
 
 
425,108   
 
545,491 
Net loss
 
$
(3,283,776)  
$
(8,089,672)
 
 
 
    
 
  
 
 
 
    
 
  
Net loss per common share from continuing operations:
 
 
    
 
  
Basic
 
$
(0.97)  
$
(2.29)
Weighted average number of common shares, basic
 
 
3,808,446   
 
3,765,783 
Diluted
 
 
(0.97)  
$
(2.29)
Weighted average number of common shares, diluted
 
 
3,808,446   
 
3,765,783 
Net income per common share from discontinued operations:
 
 
    
 
  
Basic
 
$
0.11   
$
0.15 
Weighted average number of common shares, basic
 
 
3,808,446   
 
3,765,783 
Diluted
 
 
0.11   
$
0.15 
Weighted average number of common shares, diluted
 
 
3,808,446   
 
3,765,783 
Net loss per common share:
 
 
    
 
  
Basic
 
$
(0.86)  
$
(2.15)
Weighted average number of common shares, basic
 
 
3,808,446   
 
3,765,783 
Diluted
 
 
(0.86)  
$
(2.15)
Weighted average number of common shares, diluted
 
 
3,808,446   
 
3,765,783 
 
The accompanying notes are an integral part of
these consolidated financial statements.
 
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SCHMITT INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
 
 
 
 
 
 
 
 
 
  
 
 
     
 
       Accumulated       
 
 
 
   
 Shares 
     
 Amount 
     
 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, officers and employees upon
vesting of RSUs
 
 
88,449   
 
—     
 
—     
 
—   
 Stock-based compensation
 
 
—     
 
266,545   
 
—     
 
266,545 
 Repurchase of restricted stock units
 
 
(14,400)  
 
(65,975)  
 
—     
 
(65,975) 
 Net loss
 
 
—     
 
—     
 
(8,089,672)  
 
(8,089,672)
 Balance, May 31, 2021
 
 
3,786,502   
$
12,223,359   
$
(8,453,776)  
$
3,769,583 
 Shares issued to directors, officers and employees upon
vesting of RSUs
 
 
39,222   
 
—     
 
—     
 
—   
 Stock-based compensation
 
 
—     
 
119,398   
 
—     
 
119,398 
 Net loss
 
 
—     
 
—     
 
(3,283,776)  
 
(3,283,776)
 Balance, May 31, 2022
 
 
3,825,724   
$
12,342,757   
$
(11,737,552)  
$
605,205 
 
The accompanying notes are an integral part of
these consolidated financial statements. 
 
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SCHMITT INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
 
 
 
 
 
 
 
 
 
 
 
Fiscal Year Ended May 31,
 
 
 
 
2022
 
2021
Cash flows relating to operating activities
 
 
    
 
    
 
  
Net loss
 
 
    
$
(3,283,776)  
$
(8,089,672)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
    
 
    
 
  
Bargain purchase gain
 
 
    
 
—     
 
(1,138,808)
Forgiveness of PPP Loans
 
 
    
 
(2,059,556)  
 
—   
Intangible impairment
 
 
   
 
—     
 
903,422 
Depreciation and amortization
 
 
    
 
437,183   
 
443,926 
Gain on disposal of property and equipment
 
 
    
 
(4,598,095)  
 
(24,208)
Stock-based compensation
 
 
    
 
119,398   
 
266,545 
Deferred income taxes
 
 
    
 
—     
 
(453,238)
Non-cash lease costs
 
 
    
 
365,856   
 
735,709 
(Increase) decrease in:
 
 
    
 
    
 
  
Accounts receivable, net
 
 
    
 
(22,684)  
 
(730,971)
Inventories, net
 
 
    
 
(192,107)  
 
(153,955)
Prepaid expenses
 
 
    
 
103,698   
 
(84,388)
Income tax receivable
 
 
    
 
18,057   
 
(65,519)
Rent, Utility Deposits, & ERP Deposits
 
 
    
 
(239,105)  
 
(206,628)
Increase (decrease) in:
 
 
    
 
    
 
  
Accounts payable
 
 
    
 
262,527   
 
330,945 
Accrued liabilities and customer deposits
 
 
    
 
992,215   
 
799,862 
Net cash used in operating activities - continuing operations
 
 
    
 
(8,096,389)  
 
(7,466,978)
Net cash provided by operating activities - discontinued operations
 
 
    
 
49,114  
 
527,016 
Net cash used in operating activities - total
 
 
    
$
(8,047,275)  
$
(6,939,962)
Cash flows relating to investing activities
 
 
    
 
    
 
  
Acquisition of Ample Hills
 
 
    
$
—     
$
(1,665,854)
Purchases of property and equipment
 
 
    
 
(996,905)  
 
(1,404,830)
Gain on sale of property and equipment
 
 
    
 
4,797,924   
 
35,500 
Net cash provided by (used in) investing activities
 
 
    
$
3,801,019   
$
(3,035,184)
Cash flows relating to financing activities
 
 
    
 
    
 
  
Proceeds from Paycheck Protection Program
 
 
    
$
264,476   
$
4,059,556 
Repayments on Paycheck Protection Program
 
 
    
 
—     
 
(264,476)
Proceeds from short-term borrowing
 
 
    
 
1,000,000   
 
—   
Payments on short-term borrowing
 
 
    
 
—     
 
(53,283)
Repurchase of common stock
 
 
    
 
—     
 
(300,492)
Net cash provided by financing activities
 
 
    
 
1,264,476   
 
3,441,305 
Decrease in cash and cash equivalents
 
 
    
 
(2,981,780)  
 
(6,533,841)
Cash and cash equivalents, beginning of
period
 
 
    
 
4,032,690   
 
10,566,531 
Cash and cash equivalents, end of
period
 
 
    
$
1,050,910   
$
4,032,690 
Supplemental disclosure of cash flow information
 
 
    
 
    
 
  
Cash paid during the period for income taxes
 
 
    
$
19,197   
$
80,600 
Cash paid during the period for interest
 
 
    
$
63   
$
616 
 
The accompanying notes are an integral part
of these consolidated financial statements.
 
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Schmitt Industries, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MAY 31,
2022 AND 2021
 
NOTE 1 – ORGANIZATION AND BUSINESS OPERATIONS
 
Schmitt Industries, Inc. (the "Company",
"Schmitt", "we" or "our") operates a diversified business providing highly precise test and measurement
products,
as well as providing quality consumer products through the Company’s ice cream manufacturing and retail business. Through
its wholly owned subsidiary,
Schmitt Measurement Systems, Inc. (the “Measurement Segment”), the Company manufactures and sells
products in two core product lines, Acuity Lasers
and Xact Tank Monitoring.  
 
 
·
Acuity™ was acquired
in June of 2000 and manufactures and markets dimensional and distance measurement lasers. These laser products utilize
both
triangulation and time-of-flight measurement principles and are known for their speed and accuracy. The Acuity products are used in
a wide
variet y of industrial, commercial and research applications.
 
 
·
Xact™ was acquired
in February of 2008 and offers ultrasonic measurement technology for the remote monitoring of the fill levels of propane and
other
liquid tanks. Together with the Xact gauge reader, the satellite-focused Xact systems can detect and communicate fill levels, along
with other
information such as tank size and configuration, to customers through the “Internet of Things”
(“IoT”) ecosystem using the Company’s satellite
provider and a secure website. Typical users of Xact systems are
bulk propane, diesel, jet fuel suppliers and ammonia users and distributors. As of
May 31, 2022, the Xact product line is classified as held-for-sale and considered discontinued operations of
the Company. See further discussion
in Note 4 – Assets held for sale and operations classified as discontinued operations.
 
Through its wholly owned subsidiary, Ample Hills
Acquisition LLC, and its subsidiaries (collectively, “Ample Hills” or “Ice Cream Segment”), the
Company manufactures,
wholesales and retails ice cream and related products through a network of retail locations located in New York, New Jersey and
California.
Unless otherwise noted, discussion in these Notes to Consolidated Financial Statements refers to our continuing operations. Refer to Note
4, Assets held for sale and operations classified as discontinued operations, for additional information regarding the discontinued operations.
 
NOTE 2 – LIQUIDITY AND GOING CONCERN
 
Historically, the Company’s
primary sources of liquidity have been cash and cash equivalents, cash flows from operations (when available) and cash flows
from investing
and financing activities, including proceeds from the sale of property and equipment, funding under business loans and credit agreements
and the sale of equity securities. As of May 31, 2022, the Company had an aggregate cash and cash equivalent balance of $1,050,910 and
a net working
capital deficit from continuing operations of $1,822,078. On July 18, 2022, the Company executed the sale of its Portland
real estate for $3,268,533 net
proceeds.
 
The Company currently projects
that it will need additional capital to fund its current operations and capital investment requirements until the Company
scales to a
revenue level that permits cash self-sufficiency. As a result, the Company needs to raise additional capital or secure debt funding to
support on-
going operations until such time. This projection is based on the Company’s current expectations regarding product sales
and service, cost structure, cash
burn rate and other operating assumptions. The sources of this capital are anticipated to be from the
sale of equity and/or debt. Alternatively, or in addition,
the Company may seek to sell additional assets or portions of its business
(see Note 4 – Assets held for sale and operations classified as discontinued
operations). Any of the foregoing may not be achievable
on favorable terms, or at all, and may require the consent of current debt and/or equity holders to
the modification of existing agreements,
which may or may not be granted. Additionally, any debt or equity transactions may cause significant dilution to
existing stockholders.
 
If the Company is unable to raise
additional capital moving forward, its ability to operate in the normal course and continue to invest in its product portfolio
may be
negatively impacted and the Company may be forced to scale back operations or divest some or all of its products.
 
These factors raise substantial
doubt about the ability of the Company to continue as a going concern. Unless management is able to obtain additional
financing,
it is unlikely that the Company will be able to meet its funding requirements during the next 12 months. The consolidated financial statements
do
not include any adjustments that might result from the outcome of this uncertainty.
 
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NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
 
Basis of Presentation
 
The Company prepares its consolidated financial
statements in accordance with accounting principles generally accepted in the United States (“US GAAP”
or “GAAP”). 
 
Principles of Consolidation
 
These consolidated financial statements include
those of the Company and its wholly owned subsidiaries: Schmitt Measurement Systems, Inc. and Ample
Hills Acquisition, LLC. All significant
 intercompany accounts and transactions have been eliminated in the preparation of the consolidated financial
statements.
 
Use of Estimates
 
The preparation of the consolidated financial
statements in conformity with US GAAP requires management to make estimates and assumptions that affect
the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the
reported
amounts of sales and expenses during the reporting period.
 
Making estimates requires management to exercise
 significant judgment. It is at least reasonably possible that estimates made as of the date of the
consolidated financial statements could
change in the near term due to one or more future events. Accordingly, the actual results could differ significantly
from those estimates.
Significant accounting estimates reflected in the Company’s consolidated financial statements include, but are not limited to, revenue
recognition, estimates of impairment on long-lived assets, allowance for doubtful accounts, recognition and measurement of income tax
assets, valuation of
stock-based compensation, the valuation of net assets acquired and the identification and measurements inherent in
the classification of certain components
of our operations as discontinued operations.
 
Reclassification
 
Certain amounts in the prior period consolidated statement
of operations have been reclassified to conform to the presentation of the current period. These
reclassifications had no effect on previously
recorded net loss.
 
Segment Reporting
 
The Company’s reportable segments are based
on the “management” approach, meaning they are based on the way management views the business, the
internal reports it reviews
and the way it manages the business, assesses performance, and makes decisions. The chief operating decision maker reviews
revenue, gross
margin and the operating performance of each reportable segment. The Company’s reportable segments during the years ended May 31,
2022 and 2021 were the Ice Cream Segment and Measurement Segment.
 
Business Combinations
 
The Company accounts for business combinations 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 the 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. See Note 5 – Ample Hills Business
Acquisition.
  
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.
 
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Retail Restaurant Sales, net
 
The Company's Ice Cream Segment generates revenues
from retail restaurant sales to its end-user customers at the time of sale, net of discounts, coupons,
employee meals, and complimentary
meals and gift cards. Sales tax is collected from customers and remitted to governmental authorities and is presented
on a net basis within
revenue in our Consolidated Statements of Operations.
 
Factory Sales, net
 
The Company’s Ice Cream Segment generates
 revenues from  sales of finished goods from its Brooklyn, New York factory,  including wholesale, e-
commerce, and direct-to-customer
sales. These revenues, net of sales tax paid to states, are recognized when control of the goods is transferred to the
customer, in accordance
with the terms of the applicable agreement. The Company also generates revenues by providing manufacturing production services
to third
parties and recognizes revenues as services are provided to the customer.
 
Measurement Product Sales
 
The Company’s Measurement Segment determines
the amount of revenue it recognizes associated with the transfer of each product. For sales of products
to all customers, each transaction
is evaluated to determine whether there is approval and commitment from both the Company and the customer for the
transaction; whether
the rights of each party are specifically identified; whether the transaction has commercial substance; whether collectability from the
customer is probable at the inception of the contract and whether the transaction amount is defined. If a transaction to sell products
meets all of the above
criteria, revenue is recognized for the sales of product at the time of shipment.
 
The Company incurs commissions associated with
the sales of certain measurement products. The Company applies the practical expedient allowed under
ASC 340-40-25-4 by recognizing the
expense at the time the product is shipped. These amounts are recorded within general, administrative and sales
expense. The Company also
incurs costs related to shipping and handling of its products, the costs of which are expensed as incurred as a component of
cost of sales.
 
Remote Tank Monitoring Services
 
The Company's Measurement Segment revenues associated
 with the Xact product line include satellite focused remote tank monitoring products and
related monitoring services for markets in the
IoT environment.
 
The Company determines the amount of revenue it
recognizes associated with the transfer of such services. For delivery of monitoring services to all
customers, each transaction is evaluated
 to determine whether there is approval and commitment from both the Company and the customer for the
transaction; whether the rights of
each party are specifically identified; whether the transaction has commercial substance; whether collectability from the
customer is
probable at the inception of the contract and whether the transaction amount is defined. If a transaction to provide monitoring services
meets all
of the above criteria, revenue is recognized at the completion of the month in which monitoring services are provided.
 
Customer Deposits and Prepayments
 
The Company defers revenue recognition of revenues
in instances where consideration is received from customers in advance of the Company completing
its obligations in exchange for such
consideration. As of the fiscal years ended May 31, 2022 and 2021, significant contract balances were as follows: 
 
 
   
   
   
 
 
 
Fiscal Year Ended May 31,
 
 
2022
 
2021
Contract liabilities:
 
 
    
 
  
Customer deposits, current
 
$
68,199   
$
55,464 
Gift card liabilities, current
 
 
48,110   
 
37,900 
Total customer deposits and prepayments
 
$
116,309   
$
93,364 
 
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Commission costs are calculated as a percentage
of sales for Acuity sales within the Measurement Segment and paid to both internal and external sales
representatives. The Company accrues
for the commission expense at the time of sale and pays the commission to the sales representative once customer
payment is collected.
These amounts are recorded within general, administrative and sales expense.
 
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 and money
market funds. At times, balances may exceed federally insured limits. As of May 31, 2022 and May 31, 2021, the Company had cash
and cash equivalents
of $1,050,910 and $4,032,690, respectively.
 
Accounts Receivable, net
 
Accounts
receivable arise from granting credit to customers in the normal course
of business, are unsecured and are presented net of an allowance for
doubtful accounts.  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.
 
Inventories, net
 
Inventories are valued at the lower of cost or
net realizable value with cost determined on the average cost basis. Costs included in inventories consist of
materials, labor and manufacturing
overhead, which are related to the purchase or production of inventories. Write-downs, when required, are made to
reduce excess inventories
to their net realizable values. Such estimates are based on assumptions regarding future demand and market conditions. If actual
conditions
become less favorable than the assumptions used, an additional inventory write-down may be required. 
 
Property and Equipment, net
 
Property and equipment are stated at cost
less accumulated depreciation. Depreciation is computed using the straight-line method over estimated useful
lives of three
to seven
years for furniture, fixtures, and equipment; three
years for vehicles; and the lesser of the remaining lease term or useful life for
leasehold improvements.
 
Property and Equipment Held for Sale, net
 
Property and equipment held for sale are stated
at the lower of cost less depreciation or expected net realizable value. Depreciation is computed using the
straight-line method over
estimated useful lives of 25 years for building improvements. Expenditures for maintenance and repairs are charged to expense
as
incurred and are recorded within selling, general and administrative expenses on the consolidated statement of operations.
 
The Company owned a two story 35,050 square
foot building in an industrial zone that was listed for sale in December 2020. On November 10, 2021, the
Company sold the building located
at 2451 NW 28th Avenue, Portland, OR 97210 for $5,100,000 with
net proceeds of $4,753,724. The Company
recorded
a gain on sale of property and equipment totaling $4,598,095 on
its consolidated statement of operations. Assets held for sale as of May 31, 2021 are
associated with this property, and therefore, not
included in assets held for sale as of May 31, 2022. The Company previously leased this property to two
lessees, as described further
in Note 12 – Leases. As such, this lease has been terminated as of May 31, 2022.
 
The Company owns two industrial office buildings
totaling 11,667 sq. feet located at 2765 NW Nicolai Street, Portland, OR 97210 that were listed for sale
in November 2021. Assets
held for sale as of May 31, 2022 are associated with these properties. The Company currently occupies part of this property and
leases
a portion to a third party, as described further in Note 12 – Leases. A potential sale transaction would be structured
as a sale-leaseback, as the
Company occupies approximately 75% of the buildings.
 
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As of the fiscal years ended May 31, 2022 and
2021, property and equipment held for sale consisted of the following:
 
 
   
   
   
 
 
 
Fiscal Year Ended May 31,
 
 
2022
 
2021
Land
 
$
159,000   
$
140,000 
Buildings and improvements
 
 
1,616,250   
 
246,135 
Total assets hold for sale
 
 
1,775,250   
 
386,135 
Less accumulated depreciation
 
 
(1,341,840)  
 
(211,288)
Property and equipment, net
 
$
433,410   
$
174,847 
 
On July 15, 2022, subsequent to the Company’s
fiscal year end, the Company executed the sale and leaseback of these assets. See further discussion in
Note 20 – Subsequent
Events.
 
Leases
 
On June 1, 2019, the Company adopted ASC
842, Leases (“ASC 842”), using the modified retrospective approach and electing the option to not apply the
guidance to comparative periods, which continue to be presented under the accounting methods in effect for those periods.
 
To determine whether a contract is or contains
a lease, the Company determines at contract inception whether it conveys the right to control the use of an
identified asset for a period
of time in exchange for consideration. If the contract provides for the right to obtain substantially all of the economic benefit
from,
and direct the use of, the leased asset, the Company recognizes a right-of-use asset and lease 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, along with explicitly enumerated
renewal periods where management is reasonably certain
that such renewal options will be exercised.
 
In order to calculate the right-of-use asset and
lease liability for an operating lease, ASC 842 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.
 
Intangible Assets
 
Definite-lived and indefinite-lived intangible
 assets arising from business combinations include patented technology, proprietary recipes, websites and
trademarks and trade names. Definite-lived
intangible assets are amortized over the estimated period during which the asset is expected to contribute
directly or indirectly to future
cash flows. Intangible assets that are considered to be indefinite-lived are not amortized.  
 
Long-lived assets and certain identifiable intangible
assets to be held and used are reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of
such assets may not be recoverable. Determination of recoverability is based on an estimate of undiscounted future
cash flows resulting
from the use of the asset and its eventual disposition. Measurement of any impairment loss for long-lived assets and certain identifiable
intangible assets that management expects to hold, and use is based on the amount by which the carrying value exceeds the fair value of
the asset.
 
Advertising Costs
 
Advertising costs included in general, administrative
and sales, are expensed when the advertising first takes place. Advertising expense was $38,628 and
$63,635 for the years ended May 31,
2022, and 2021, respectively.
 
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Research and Development Costs
 
Research and development costs, predominately
internal labor costs and costs of materials, are charged to expense when incurred.
 
Shipping and Handling
 
The Company incurs costs related to shipping and
handling of its manufactured products. These costs are expensed as incurred as a component of cost of
sales. Shipping and handling charges
related to the receipt of raw materials are also incurred, which are recorded as a cost of the related inventory.
 
Warranty Reserve
 
Warranty costs are estimated and charged to operations
to cover a defined warranty period. The estimated warranty cost is based on the history of warranty
claims for each particular product
type. For new product types without a warranty history, preliminary estimates are based on historical information for
similar product
types. The warranty reserve accruals, included in other accrued liabilities, are reviewed periodically and updated based on warranty trends.
 
Stock-Based Compensation
 
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 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.
 
Income Taxes
 
The Company accounts for income taxes using the
asset and liability method. This approach requires the recognition of deferred tax assets and liabilities
for the expected future tax
consequences of temporary differences between the carrying amounts and the tax basis of assets and liabilities. Deferred tax
assets are
reduced by a valuation allowance if, based on the weight of available evidence, it is more likely than not that some portion or all of
the deferred
tax assets will not be realized. Management continues to review the level of the valuation allowance on a quarterly basis.
There can be no assurance that the
Company’s future operations will produce sufficient earnings to allow for the deferred tax asset
to be fully utilized. The Company currently maintains a full
valuation allowance against net deferred tax assets.
 
The Company applies the asset and liability method
in recording income taxes, under which deferred income tax assets and liabilities are determined, based
on the differences between the
financial reporting and tax bases of assets and liabilities and are measured using currently enacted tax rates and laws.
Additionally,
deferred tax assets are evaluated and a valuation allowance is established if it is more likely than not that all or a portion of the
deferred tax
asset will not be realized. Management continues to review the level of the valuation allowance on a quarterly basis. 
 
Each year the Company files income tax
returns in the various taxing jurisdictions in which it operates. These tax returns are subject to examination and
possible
challenge by the taxing authorities. Positions challenged by the taxing authorities may be settled or appealed by the Company. As a
result, there is
an uncertainty in income taxes recognized in the Company's consolidated financial statements in accordance with ASC
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.
 
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Earnings (Loss) Per Share
 
Pursuant to ASC 260, Earnings Per Share,
basic net loss per common share is computed by dividing net loss by the weighted average number of common
shares outstanding during the
reporting periods.
 
Diluted net loss per share is based on the weighted
average number of shares outstanding during the periods plus the effect, if any, of the potential exercise
or conversion of securities,
such as warrants and restricted stock units that would cause the issuance of additional shares of common stock. In computing
the basic
and diluted net loss per share applicable to common stockholders during the periods listed in the consolidated statements of operations,
the
weighted average number of shares are the same for both basic and diluted net loss per share due to the fact that when a net loss
exists, dilutive shares are
not included in the calculation as the impact is anti-dilutive. An anti-dilutive impact is an increase in
earnings per share or a decrease in net loss per share
that would result from the conversion, exercise, or issuance of certain contingent
securities.
 
Concentration of Credit Risk
 
Financial instruments, which potentially subject the
Company to concentrations of credit risk, consist primarily of cash and accounts receivable. Cash held
by the Company, in financial institutions,
regularly exceeds the federally insured limit of $250,000. With respect to continuing operations, the Company is
not dependent on
any one or a few major customers. See further information in Note 18 – Customer Concentration.
 
Fair Value of Financial Instruments
 
Fair value is the price that would be received
from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the
measurement date. When
determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, the Company
considers
the principal or most advantageous market in which it would transact, and it considers assumptions that market participants would use
when
pricing the asset or liability.
 
ASC 820, Fair Value Measurements and Disclosures provides
a fair value hierarchy, which prioritizes the inputs to valuation techniques used to measure
fair value into three broad levels. The level
in the hierarchy within which the fair value measurement in its entirety falls is based upon the lowest level of
input that is significant
to the fair value measurement as follows:
·
Level 1 — inputs are based upon unadjusted
quoted prices for identical assets or liabilities traded in active markets.
·
Level 2 — inputs are based upon quoted
prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets
and liabilities in markets
that are not active and model-based valuation techniques for which all significant assumptions are observable in the
market or can be
corroborated by observable market data for substantially the full term of the assets or liabilities.
·
Level 3 — inputs are generally unobservable
and typically reflect management’s estimates of assumptions that market participants would use
in pricing the asset or liability.
The fair values are therefore determined using model-based techniques that include option pricing models,
discounted cash flow models,
and similar techniques.
 
Assets measured at fair value on a non-recurring
basis include tangible and intangible assets. Such assets are reviewed annually for impairment indicators.
If a triggering event has occurred,
the assets are re-measured when the estimated fair value of the corresponding asset group is less than the carrying value.
The fair value
measurements, in such instances, are based on significant unobservable inputs (Level 3).
 
The carrying amounts of the Company’s financial
 instruments, which include accounts receivables, customer deposits, accounts payable and accrued
expenses, approximate their fair values,
principally due to their short-term nature, maturities or nature of interest rates.
 
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Recently Issued Accounting Pronouncements
 
In May 2021, the Financial Accounting Standards
Board (“FASB”) issued Accounting Standards Update (“ASU”) 2021-04, Earnings Per Share (Topic
260),
 Debt-Modifications and Extinguishments (Subtopic 470-50), Compensation-Stock Compensation (Topic 718), and Derivatives and
 Hedging-
Contracts in Entity’s Own Equity (Subtopic 815-40). This ASU reduces diversity in an issuer’s accounting
for modifications or exchanges of freestanding
equity-classified written call options (for example, warrants) that remain equity classified
after modification or exchange. This ASU provides guidance for
a modification or an exchange of a freestanding equity-classified written
call option that is not within the scope of another Topic. It specifically addresses:
(1) how an entity should treat a modification of
the terms or conditions or an exchange of a freestanding equity-classified written call option that remains
equity classified after modification
or exchange; (2) how an entity should measure the effect of a modification or an exchange of a freestanding equity-
classified written
 call option that remains equity classified after modification or exchange; and (3) how an entity should recognize the effect of a
modification
or an exchange of a freestanding equity-classified written call option that remains equity classified after modification or exchange.
This ASU
will be effective for all entities for fiscal years beginning after December 15, 2021. An entity should apply the amendments
prospectively to modifications
or exchanges occurring on or after the effective date of the amendments. Early adoption is permitted, including
 adoption in an interim period. The
Company is currently evaluating the new standard to determine the potential impact on its financial
 condition, results of operations, cash flows, and
financial statement disclosures.
 
In June 2016, the FASB issued ASU 2016-13, Financial
Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.
The ASU adds to US GAAP an
impairment model known as the current expected credit loss (CECL) model, which is based on expected losses rather than
incurred losses.
The objectives of the CECL model are to: (1) reduce the complexity in US GAAP by decreasing the number of credit impairment models
that
entities use to account for debt instruments, (2) eliminate the barrier to timely recognition of credit losses by using an expected loss
model instead of an
incurred loss model, (3) require an entity to recognize an allowance of lifetime expected credit losses, and (4)
not require a specific method for entities to
use in estimating expected credit losses. This ASU will be effective for fiscal years beginning
 after December 15, 2022. An entity should apply the
amendment on a prospective basis at the beginning of the interim period that includes
the adoption date. The Company is currently evaluating the new
standard to determine the potential impact on its financial condition,
results of operations, cash flows, and financial statement disclosures. 
 
NOTE 4 – ASSETS HELD FOR SALE AND OPERATIONS
CLASSFIED AS DISCONTINUED OPERATIONS
 
On April 14, 2022, the Company announced its intention
to focus on the Ice Cream Segment as its core business and simultaneously launch a strategic
review of the Company’s Measurement
Segment, including the Xact and Acuity business lines. Management anticipates disposing of the Measurement
Segment through multiple transactions
involving the sale of legal entities, assets, or a combination thereof. In accordance with ASC 205-20, Presentation of
Financial Statements
- Discontinued Operations, the Company determined that the Xact business line met the conditions for a discontinued operation and
is recorded as such in the consolidated financial statements. The Company reports financial results for discontinued operations separately
from continuing
operations in order to distinguish the financial impact of the potential disposal transaction from ongoing operations.
 
The following table presents the Company’s
consolidated assets and liabilities recorded in “Assets held for sale as discontinued operations” and “Liabilities
held
for sale as discontinued operations,” respectively, on the Company’s consolidated balance sheets as of May 31, 2022 and 2021:
 
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Fiscal Year Ended May 31,
 
 
2022
 
2021
ASSETS
 
 
 
 
Current assets
 
 
    
 
  
Accounts receivable, net
 
$
382,361   
$
425,778 
Inventories
 
 
282,845   
 
301,888 
Total current assets
 
 
665,206   
 
727,666 
Property and equipment, net
 
 
452   
 
651 
Leasehold, utilities, and ERP deposits
 
 
394,676   
 
110,253 
Intangible assets, net
 
 
87,152   
 
187,603 
TOTAL ASSETS
 
$
1,147,486   
$
1,026,173 
 
 
 
    
 
  
LIABILITIES
 
 
    
 
  
Current liabilities
 
 
    
 
  
Accounts payable
 
$
180,613   
$
1,783 
Accrued payroll liabilities
 
 
4,545   
 
12,948 
Total current liabilities
 
 
185,158   
 
14,731 
TOTAL LIABILITIES
 
$
185,158   
$
14,731 
 
The following table presents the Company’s
net income from discontinued operations for the years ended May 31, 2022 and 2021:
 
 
 
   
   
   
 
 
 
Fiscal Year Ended May 31,
 
 
2022
 
2021
Net sales
 
$
2,069,496   
$
2,263,891 
Cost of revenue
 
 
1,130,050   
 
1,057,810 
Gross profit
 
 
939,446   
 
1,206,081 
Operating expenses
 
 
    
 
  
General, administrative and sales
 
 
514,338   
 
647,061 
Research & development
 
 
—     
 
13,529 
Total operating expenses
 
 
514,338   
 
660,590 
Operating income
 
 
425,108   
 
545,491 
Income before income taxes
 
 
425,108   
 
545,491 
Income tax provision (benefit) from discontinued operations
 
 
—     
 
—   
Income from discontinued operations, net of tax
 
$
425,108   
$
545,491 
 
On May 17, 2022, the Company announced that it had
entered into a letter of intent to sell all assets related to its Xact business line. As noted in Note 20 –
Subsequent Events,
on June 16, 2022, the Company announced that the letter of intent had been terminated.
 
NOTE 5 – AMPLE HILLS BUSINESS ACQUISITION
 
On July 9, 2020, the Ample Hills Acquisition LLC
entered into an agreement to acquire Ample Hills Holdings, Inc. and Ample Hills Creamery, Inc. and
their subsidiaries (collectively the
“Ample Hills Entities”). The Ample Hills Entities were a debtor-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.
The acquisition was
conducted through a bankruptcy court-supervised process subject to bidding procedures and certain closing conditions.
 
The terms of the agreement provided that the Company
acquired select assets and liabilities of the Ample Hills Entities for a base purchase price of
$1,000,000. Pursuant to the agreement,
the Company also paid an additional $713,404 to certain landlords of the Ample Hills Entities in exchange for the
right to assume existing
 retail leases. The Company incurred $125,167 in transaction costs related to acquisition, which were recorded as operating
expenses on
 income statement. Payment of the base purchase price, cure payments, and transaction costs was funded using cash on-hand as of the
acquisition
date.
 
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The Company's operating 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 price paid in bankruptcy, could have a significant
upside.
 
In accordance with ASC 805, the Company
has recognized the assets acquired and liabilities assumed at fair value as of the acquisition date. 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.
 
Under ASC 805, any excess of the fair value of
the purchase consideration over the 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. The excess of the aggregate fair
value of
 the identifiable net assets acquired over the total purchase price was $1,138,808, which was recorded as a bargain purchase gain on the
accompanying consolidated statement of operations for the fiscal year ended May 31, 2021. The bargain purchase gain was primarily due
to the fair value
of the identifiable intangible assets acquired. The purchase price allocation has been finalized as of May 31, 2021,
within the measurement period, and no
further adjustments will be made.
 
The following table summarizes the Company’s purchase price allocation
for the acquisition of Ample Hills:
 
Purchase Price
 
 
Cash paid to sellers
 
$
1,000,000 
Cure payments
 
 
713,404 
Total purchase price
 
$
1,713,404 
 
 
 
  
Purchase Price Allocation
 
 
  
Assets Acquired
 
 
  
Right-of-use operating lease assets
 
$
10,645,098 
Website
 
 
25,445 
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
 
 
  
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 
 
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NOTE 6 – ACCOUNTS RECEIVABLE, NET
 
Accounts receivable, net consisted of the following:
  
 
 
   
   
   
 
 
 
Fiscal Year Ended May 31,
 
 
2022
 
2021
Receivables
 
$
838,825   
$
775,431 
Less: allowance for doubtful accounts
 
 
(87,274)  
 
(46,564)
Accounts receivable, net
 
$
751,551   
$
728,867 
 
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Table of Contents
 
NOTE 7 – INVENTORIES, NET
 
Inventories, net consisted of the following:
 
 
 
 
   
   
   
 
 
 
Fiscal Year Ended May 31,
 
 
2022
 
2021
Raw materials
 
$
905,376   
$
607,825 
Work-in-process
 
 
64,390   
 
35,160 
Finished goods
 
 
574,645   
 
687,488 
Total inventory
 
 
1,544,411   
 
1,330,473 
Inventory reserves
 
 
(100,882)  
 
(79,051)
Inventory, net
 
$
1,443,529   
$
1,251,422 
 
NOTE 8 – PROPERTY AND EQUIPMENT, NET
 
Property and equipment, net consisted of the following:
 
 
 
 
Fiscal Year Ended May 31,
 
 
2022
 
2021
Land
 
$
—     
$
159,000 
Buildings and improvements
 
 
2,072,231   
 
2,989,140 
Furniture, fixtures and equipment
 
 
2,051,722   
 
1,787,264 
Total plant and equipment
 
 
4,123,953   
 
4,935,404 
Less accumulated depreciation
 
 
(1,176,325)  
 
(2,112,038)
Property and equipment, net
 
$
2,947,628   
$
2,823,366 
 
Depreciation expense for the fiscal years ended
May 31, 2022 and 2021 was $414,250 and $421,864, respectively.
 
NOTE 9 - INCOME TAXES
 
Effective Tax Rate
 
The effective tax rate for Fiscal 2022 and Fiscal
2021 was (0.59%) and 4.7%, respectively. The effective tax rate on consolidated net loss for Fiscal 2022
and Fiscal 2021 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.
 
The provision for income taxes for the fiscal years ended May 31, 2022
and 2021 was as follows:
 
 
   
   
   
 
 
 
Fiscal Year Ended May 31,
 
 
2022
 
2021
Current provision for continued operations
 
$
19,197   
$
(403,666)
Current provision for discontinued operations
 
 
—     
 
—   
Deferred provision
 
 
5,167,143   
 
2,203,268 
Change in valuation allowance
 
 
(5,167,143)  
 
(2,203,268)
Total provision for income taxes
 
$
19,197   
$
(403,666)
 
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Deferred tax assets are comprised of the following components as of
May 31, 2022 and 2021:
 
 
   
   
   
 
 
 
Fiscal Year Ended May 31,
 
 
2022
 
2021
Basis difference for assets
 
$
(55,507)  
$
(541,015)
Inventory related items
 
 
38,912   
 
30,910 
Lease right-of-use assets
 
 
321,405   
 
197,573 
Other reserves and liabilities
 
 
260,068   
 
163,348 
Net operating loss carryforward
 
 
4,228,721   
 
3,333,873 
General business and other credit carry forward
 
 
373,544   
 
450,252 
Gross deferred tax assets
 
 
5,167,143   
 
3,634,941 
Deferred tax asset valuation allowance
 
 
(5,167,143)  
 
(3,634,941)
Net deferred tax assets
 
$
—     
$
—   
 
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. The Company
has recorded a substantial deferred tax asset related to temporary differences between book and tax basis of assets and liabilities
and
net operating loss carryforwards. During the fiscal year ended May 31, 2022, the Company increased its valuation allowance by $1,532,202
due to the
increase in net operating loss carryforwards generated by the Fiscal 2022 results. During the fiscal year ended May 31, 2021,
the Company increased its
valuation allowance $2,203,268. The Company has provided a full valuation allowance against all of its deferred
tax assets as the recent losses from
continuing operations have been given more weight than projected future income when determining the
need for a valuation allowance.
 
The Company has federal net operating loss carryforwards
of $14,532,066 which begin to expire in 2037 along with the federal general business and other
credit carryforwards. The Company has state
net operating loss carryforwards of $19,984,566 which begin to expire in 2031.
 
The provision for income taxes differs from the
amount of income taxes determined by applying the U.S. statutory federal tax rate to pre-tax loss due to the
following:
 
 
Fiscal Year Ended May 31,
 
 
2022
 
2021
Statutory federal rate
 
 
21.00%  
 
21.0%
State Taxes, net of federal benefit
 
 
12.37%  
 
5.8%
Change in deferred tax valuation allowance
 
 
(47.06)% 
 
(25.8)%
Bargain Gain
 
 
—  %  
 
4.8%
R&D tax credits
 
 
—  %  
 
—  %
Effect of foreign income tax rates
 
 
—  %  
 
—  %
State minimum taxes
 
 
—  %  
 
(0.1)%
Permanent and other differences
 
 
13.10%  
 
(1.0)%
Effective Tax Rate
 
 
(0.59)% 
 
4.7%
 
Interest and penalties associated with uncertain
tax positions are recognized as components of the Provision for income taxes. There was no liability for
payment of interest and penalties
as of May 31, 2022 and May 31, 2021. Several tax years are subject to examination by major tax jurisdictions. In the
United States, federal
tax years for the years ended May 31, 2019 and after are subject to examination.
 
NOTE 10 – STOCK OPTIONS AND STOCK-BASED
COMPENSATION
 
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.
 
There were no options granted during the fiscal
years ended May 31, 2022 and 2021 and the Company had outstanding stock options to purchase 22,500
shares of Common Stock as of May 31,
2022 and 2021. All outstanding options are fully vested and exercisable with a weighted-average exercise price of
$1.70. As all options
outstanding as of May 31, 2022 and 2021 were fully vested, the Company did not record any additional stock-based compensation
expense
during the fiscal years ended May 31, 2022 and 2021.
 
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Options
granted, exercised, canceled and expired under the Company's stock-based comp ensation plans during the fiscal years ended May 31,
2022 and
2021 are summarized as follows:
 
 
 
Number of 
 Shares
 
Weighted-
Average 
Exercise Price 
 
Weighted-
Average 
 Remaining 
 Contractual
 Term (Years)
 
Aggregate 
Intrinsic  
Value 
Options outstanding and exercisable - May 31, 2020
 
 
22,500   
$
1.70   
 
6.9   
$
38,250 
Options granted
 
 
—     
 
—     
 
    
 
  
Options exercised
 
 
—     
$
—     
 
    
 
  
Options forfeited/canceled
 
 
—     
$
—     
 
    
 
  
Options outstanding and exercisable - May 31, 2021
 
 
22,500   
$
1.70   
 
5.8   
$
38,250 
Options granted
 
 
—     
 
—     
 
    
 
  
Options exercised
 
 
—     
$
—     
 
    
 
  
Options forfeited/canceled
 
 
—     
$
—     
 
    
 
  
Options outstanding and exercisable - May 31, 2022
 
 
22,500   
$
1.70   
 
4.8   
$
38,250 
 
 
Restricted Stock Units
 
Service-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.
 
During the fiscal year ended May 31, 2021, there
were 76,315 service-based RSUs granted. The total fair value of the RSUs at grant date was $372,717. Of
the service-based RSUs outstanding,
97,225 units vested, and no units canceled.
 
During the fiscal year ended May 31, 2022, there
were 19,286 service-based RSUs granted. The total fair value of the RSUs at grant date was $86,463. Of
the service-based RSUs outstanding,
35,330 units vested, and 7,860 units canceled. RSU activity under the Company's stock-based compensation plans
during the fiscal year
ended May 31, 2022 and 2021 are summarized as follows:
 
 
 
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
 
 
76,315   
 
4.88   
 
372,717 
Restricted stock units vested
 
 
(97,225)  
 
4.03   
 
(392,199)
Non-vested restricted stock units – May 31, 2021
 
 
34,237   
$
4.71   
$
161,400 
Restricted stock units granted
 
 
19,286   
 
4.48   
 
86,463 
Restricted stock units forfeited
 
 
(7,860)  
 
5.60   
 
(44,018)
Restricted stock units vested
 
 
(35,330)  
 
4.33   
 
(153,018)
Non-vested restricted stock units – May 31, 2022
 
 
10,333   
$
4.92   
$
50,827 
 
During fiscal years ended May 31, 2022 and 2021,
total restricted stock unit compensation expense recognized was $119,398 and $266,545, respectively,
and has been recorded as general,
administrative and sales expense in the Consolidated Statements of Operations. Stock compensation expense related to
non-vested restricted
stock units with a time vesting condition was $40,436 and $81,385 for the years ended May 31, 2022 and 2021, respectively.
 
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NOTE 11 – WEIGHTED-AVERAGE SHARES AND RECONCILIATION
 
For the fiscal years ended May 31, 2022 and
May 31, 2021, potentially dilutive securities consisted of options of 22,500
shares of Common Stock at $1.70
per share. Of these potentially dilutive securities, none of the shares of Common Stock underlying the options are included in the
computation of diluted
earnings per share because the Company incurred a net loss from continuing operations. In periods when a net
loss is incurred in continuing operations, no
Common Stock equivalents are included in the calculation of diluted net income or loss
from discontinued operations or overall Company net income or
loss since they are antidilutive. As such, all stock options
outstanding are excluded from the computation of diluted net income in those periods.
 
The following table is a reconciliation of the
 numerators and denominators of the basic and diluted per share computations for loss from continuing
operations for fiscal years ended
May 31, 2022 and 2021, respectively:
 
 
 
Net
 
Weighted-Avg
 
Per Share
 
 
(Loss) Income
 
Shares
 
Amount
Fiscal year ended May 31, 2022
 
 
    
 
    
 
  
Basic earnings per share from continuing operations
 
 
    
 
    
$
(0.97)
Loss available to stockholders
 
$
(3,708,844)  
 
3,808,446   
 
—   
Loss available to common stockholders
 
$
(3,708,844)  
 
3,808,446   
$
(0.97)
 
 
 
    
 
    
 
  
Basic earnings per share from discontinued operations
 
 
    
 
    
$
0.11 
Income available to stockholders
 
$
425,108   
 
3,808,446   
 
—   
Income available to common stockholders
 
$
425,108   
 
3,808,446   
$
0.11 
Fiscal year ended May 31, 2021
 
 
    
 
    
 
  
Basic earnings per share from continuing operations
 
 
    
 
    
$
(2.29)
Loss available to stockholders
 
$
(8,635,163)  
 
3,765,783   
 
  
Loss available to common stockholders
 
$
(8,635,163)  
 
3,765,783   
$
(2.29)
 
 
 
    
 
    
 
  
Basic earnings per share from discontinued operations
 
 
    
 
    
$
0.15 
Income available to stockholders
 
$
545,491   
 
3,765,783   
 
—   
Income available to common stockholders
 
$
545,491   
 
3,765,783   
$
0.15 
 
NOTE 12 - LEASES
 
As a Lessor
 
On November 22, 2019, the Company entered into
a commercial lease agreement in which Tosei America, Inc. leased the Company's building located at
2451 NW 28th Avenue, Portland,
OR 97210 for a monthly fee of $23,282 over a term of 120 months. The Company elected to apply the practical expedient
to not separate
 lease and non-lease components, and has presented property revenues as other income, based upon the lease being the predominant
component
of the arrangement. The Company sold this property on November 10, 2021, and is no longer a party to the lease as of that date.
 
On October 1, 2020, the Company entered into
a commercial lease agreement in which Humboldt Street Collective, LLC will lease the Company's building
located at 2765 NW Nicolai
Street, Portland, OR 97210 for a monthly fee of $3,185
over a term of 62
months. As discussed in Note 20 – Subsequent
Events, the Company executed the sale and leaseback of this building
on July 15, 2022, and therefore is no longer a lessor under this arrangement.
 
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On December 1, 2020, the Company entered into
 a commercial lease agreement in which Humboldt Street Collective, LLC, leased a portion of the
Company’s building located at 2451
NW 28th Avenue, Portland, OR 97210 for a monthly fee of $4,596
for a term of 59
months.
 
As of May 31, 2022, minimum future lease payments
receivable are as follows: 
 
 
 
 
Years Ending May 31,
2023
   
 
97,807 
2024
   
 
100,742 
2025
   
 
103,764 
2026
   
 
47,585 
Total undiscounted cash flows
   
$
349,898 
 
As a Lessee
 
In connection with the acquisition of Ample Hills,
the Company assumed multiple real estate leases for retail store locations and a manufacturing facility,
all of which are classified as
 operating leases under ASC 842. The Company has since entered into three additional retail lease agreements which
commenced during the
fiscal year ended May 31, 2022, all of which are classified as operating leases under ASC 842.
 
The Company’s operating leases contain varying
terms and expire at various dates through 2042. Lease expenses under fixed term leases were $1,843,932
and $1,438,502 for the years ended
May 31, 2022 and 2021, respectively.
 
Certain of the Company’s operating leases
contain variable lease payments related to certain performance targets by the Company at the respective store
locations. These variable
leases costs are recognized as incurred in accordance with ASC 842.
 
The Company’s future minimum lease payments
required under operating leases that have commenced as of May 31, 2022 were as follows:
 
Years Ending May 31,
   
 
  
2023
   
$
2,047,329 
2024
   
 
2,030,688 
2025
   
 
1,993,618 
2026
   
 
1,782,111 
2027
   
 
1,412,915 
Thereafter
   
 
11,184,613 
Total lease payments
   
 
20,451,274 
    Less: imputed interest
   
 
(5,067,423)
Present value of future lease payments
   
 
15,383,851 
    Less: current portion of long-term lease liabilities
   
 
(1,474,463)
Long-term lease liabilities, net of current portion
   
$
13,909,388 
 
The weighted-average remaining lease term and
weighted-average discount rate for operating leases that have commenced as of May 31, 2022 are as
follows:
 
 
 
as of May 31, 2022
Weighted-average remaining lease term (years)
 
 
11.28 
Weighted-average discount rate
 
 
4.56%
 
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Table of Contents
 
NOTE 13 – 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 Paycheck
Protection Program (“PPP”)
which provides funding to 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 Fiscal 2021, two of which were forgiven during the year ended May 31, 2022. The remaining outstanding
PPP loan is
as follows:
 
 
 
Loan Amount
 
Issuance Date
 
Maturity Period
 
Interest
Rate
Second Draw PPP Loan (Ample Hills)
 
$
2,000,000   
April 6, 2021
 
 
5 years
   
 
1.0%
  Total PPP Loan Balance
 
$
2,000,000   
  
 
    
 
  
 
The first two loans (both of which were forgiven during
Fiscal 2022 and therefore excluded from the table) were granted on July 30, 2020 (collectively the
“First Draw PPP Loans”)
under two notes payable. Both notes were issued July 30, 2020 and funds were disbursed on August 3, 2020. The third loan was
granted and
issued on April 6, 2021 (the “Second Draw PPP Loan”) to Ample Hills under a note payable which matures five years from the
date of
issuance and bears interest annually of 1.0%. Interest is accrued monthly, commencing on the date of issuance. Principal and interest
is paid monthly
through the maturity date, commencing on April 6, 2021 for the Second Draw PPP Loan, unless forgiven as described below.
The note may be prepaid at
any time prior to maturity with no prepayment penalties. As noted above, Loan proceeds may be used only for
eligible expense. Ample Hills has used and
intends to use the remaining funds for eligible purposes, including the re-hiring of its workforce.
Ample Hills is currently seeking forgiveness of the
balance of the Second Draw PPP Loan.
 
Forgiveness of the Second Draw PPP Loan 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 Second Draw Loan will be forgiven by the SBA and therefore, the Company has recorded a $2,000,000 loan payable on the consolidated
balance
sheet as of the end of May 31, 2022. Of this amount, $503,219 has been recorded as a current liability to reflect the amount due
within the twelve months
through May 31, 2023.
 
On August 2, 2021, the Company requested forgiveness of the First Draw PPP Loan and 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.
 During the twelve months ended May 31, 2022, Bank of America
returned this payment to the Company as a result of a portion of the First
Draw PPP loan being forgiven.
 
On December 15, 2021 and December 22, 2021, respectively,
for the remaining portion of the First Draw PPP Loan and the Second Draw PPP Loan, the
Company provided documentation in accordance with
 SBA requirements and certified the amounts requested to be forgiven qualified under the
requirements. During the twelve months ended May
 31, 2022, the Company received notification that the remaining First Draw PPP Loan had been
forgiven by the SBA and subsequently recognized
a $2,059,556 gain on the forgiveness of this loan.
 
Although the Company has applied for forgiveness
of the entire Second Draw PPP Loan, there is no guarantee that the loan will be forgiven by the SBA.
 
Interest expense on the PPP loans during the years
ended May 31, 2022 and 2021 was $42,713 and $19,038, respectively. As of May 31, 2022 and May 31,
2021 there was $2,000,000 and $3,795,080
outstanding under the PPP loans, respectively.
 
Related Party Promissory Note
 
On August 7, 2021, the Company received The
Commitment Letter to Schmitt Industries (“Commitment”) from an entity affiliated with our CEO. The
Commitment states
 that Sententia Capital Management LLC 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 February 28, 2023. On April 13, 2022,  the Company formalized drawdown terms
 and
extended the maturity date on the loan through the maturity date which was October
28, 2023. Drawdown
terms include: 1.0% origination fee, 18-month
term after drawdown, and an 8.0% payment-in-kind interest rate. Interest
expense on the promissory note for the fiscal years ended May 31, 2022 and 2021
was $4,115
and $0,
respectively. As of May 31, 2022 and May 31, 2021 there was $1,000,000
and $0
outstanding under the promissory note, respectively.
 
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Table of Contents
 
As of May 31, 2022 and 2021, respectively, the
Company had the following current and long-term liabilities recorded for their debt obligations:
 
 
Fiscal Year Ended May 31,
 
 
2022
 
2021
Current portion
 
$
503,219   
$
541,691 
Long-term portion
 
 
2,496,781   
 
3,253,389 
Total
 
$
3,000,000   
$
3,795,080 
 
Principal payments of outstanding long-term debt
as of May 31, 2022 are as follows:
Year ending May 31:
 
 
2023
   
$
503,219 
2024
   
 
1,512,389 
2025
   
 
513,380 
2026
   
 
471,012 
Total principal payments
   
$
3,000,000 
 
NOTE 14 – INTANGIBLE ASSETS
 
 Intangible assets include the Company’s
website and proprietary recipes for its Ice Cream Segment. These assets are amortized over their estimated useful
lives ranging from three
to ten years.
 
 
As of May 31, 2022 and May 31, 2021, for the Ice
 Cream Segment, the gross carrying value of amortizable intangible assets was $172,184, and
accumulated amortization was $44,995 and $22,062,
respectively. Amortization expense for the Ice Cream Segment for the years ended May 31, 2022 and
May 31, 2021 was $22,933 and $22,062,
respectively. The weighted-average remaining amortization period for Ice Cream Segment intangible assets was
7.59 years as of May 31,
2022.
 
 The following table presents the major components of finite-intangible assets which are subject to amortization as of May 31, 2022 and May 31, 2021:
 
As of May 31, 2022
 
Useful Life (Years) 
Gross Carrying
Value
 
Accumulated
Amortization
 
Net Carrying
Value
Finite-lived intangible assets subject to amortization:
 
 
    
 
    
 
    
 
  
Ice Cream Segment
 
 
    
 
    
 
    
 
  
Proprietary recipes
 
 
10
   
$
146,739   
$
28,555   
$
118,184 
Company website
 
 
3
   
 
25,445   
 
16,440   
 
9,005 
Ice Cream Segment finite-lived intangible assets
 
 
    
$
172,184   
$
44,995   
$
127,189 
 
As of May 31, 2021
 
Useful Life (Years) 
Gross Carrying
Value
 
Accumulated
Amortization
 
Net Carrying
Value
Finite-lived intangible assets subject to amortization:
 
 
    
 
    
 
    
 
  
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 
 
 
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Table of Contents
 
Estimated amortization expense for each of the following years is as
follows:
  
Year Ending May 31,
   
  
2023
  $
22,933 
2024
   
15,313 
2025
   
14,621 
2026
   
14,621 
2027
   
14,621 
Thereafter 
   
45,080 
  Total expected amortization expense   
  $
127,189 
 
During the fourth quarter of fiscal 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, the Company recognized an impairment loss in the amount
of $903,422,
which equals the total carrying value of the Tradename as of the testing date.
 
NOTE 15 – SEGMENT INFORMATION
 
 Presented below is certain information by
reportable segment. The Company uses the same accounting policies for each reportable segment as it uses for
the Company as a whole.
 
Segment Information
 
 
 
Fiscal Year Ended, May 31,
 
 
2022
 
2021
 
 
Ice Cream
 
Measurement
 
Ice Cream*
 
Measurement
Net revenue
 
$
8,315,486   
$
1,577,724   
$
4,043,436   
$
1,557,023 
Gross margin
 
$
4,426,579   
$
641,992   
$
1,591,207   
$
473,474 
Gross margin %
 
 
53.2% 
 
40.7% 
 
39.4% 
 
30.4%
Operating Expenses
 
$
12,019,919   
$
3,664,538   
$
9,411,447   
$
3,084,856 
Operating loss
 
$
(7,593,342)  
$
(3,022,544)  
$
(7,820,240)  
$
(2,611,382)
Depreciation expense
 
$
395,071   
$
19,179   
$
377,641   
$
44,223 
Amortization expense
 
$
22,933   
$
—     
$
22,062   
$
—   
Capital expenditures
 
$
967,757   
$
29,148   
$
1,382,959   
$
21,871 
 
(*) Ice Cream Segment activity for Fiscal 2021
includes activities from the date of acquisition (July 9, 2020) through May 31, 2021.
 
Segment Assets
 
 
 
Fiscal Year Ended May 31,
 
 
2022
 
2021
Segment assets to total assets
 
 
    
 
  
Ice Cream Segment
 
$
10,463,502   
$
10,713,832 
Measurement Segment
 
 
2,245,663   
 
2,565,701 
Corporate assets
 
 
10,130,131   
 
7,894,397 
Total assets
 
$
22,839,296   
$
21,173,930 
 
All of the Company’s operations for both the Ice Cream Segment
and the Measurement Segment are conducted within North America. 
 
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Table of Contents
 
NOTE 16 - EMPLOYEE BENEFIT PLANS
 
The Company adopted the Schmitt Industries, Inc.
401(k) Profit Sharing Plan & Trust effective June 1, 1996. Employees must meet certain age and service
requirements to be eligible.
Participants may contribute up to 15% of their eligible compensation which may be partially matched by the Company. The
Company may make
 further contributions in the form of a profit-sharing contribution or a discretionary contribution. The Company made matching
contributions
 in conjunction with employee contributions to the plan totaling $43,761 and $55,005 during the years ended May 31, 2022 and 2021,
respectively.
 
NOTE 17 - 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 regard to the acquisition
except their rights to future royalties. Royalty expense applicable to the fiscal years ended May
31, 2022 and 2021 amounted to $19,429 and $32,106,
respectively.
 
In 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 $265,349 and accordingly, the Company recognized estimated liability in operating expenses in
Fiscal 2020 and recorded
an accrual for the liability. Management has evaluated the exposure related to this matter and believes that the remaining liability
is
its best estimate as of May 31, 2022.  
 
NOTE 18 – CUSTOMER CONCENTRATION
 
With respect to the Company’s consolidated net
revenues from continuing operations, the Company is not dependent on any one or a few major customers.
The Company had one customer that
accounted for 17.8% and 2.9% of accounts receivable, net as of May 31, 2022 and 2021, respectively.
 
With respect to discontinued operations, the Company
had one customer that accounted for 11.2% and 15.4% of consolidated net revenues for the years
ended May 31, 2022 and 2021, respectively.
The Company had one customer that accounted for 43.3% and 25.0% of accounts receivable, net as of May 31,
2022 and 2021, respectively.
 
NOTE 19 – OUT-OF-PERIOD ADJUSTMENTS
 
During Fiscal 2022, the Company recorded an out-of-period
adjustment of $72,000 to record additional leasehold security deposits that were acquired in
the Ample Hills business acquisition. The
adjustment resulted in an increase to leasehold security deposits of $72,000 and an increase to other income of
$72,000. Management evaluated
the impact of this out-of-period adjustment and concluded that it is not material to any current or prior annual periods.
 
During Fiscal 2021, the Company recorded an out-of-period
adjustment related to the manner in which the Company calculated and recorded market-based
stock-based compensation expense. The impact
of this adjustment resulted in a decrease to stock-based compensation expense of $243,187 for the year
ended May 31, 2021 and a decrease
to common stock of $243,187 as of May 31, 2021. Management evaluated the impact of this out-of-period adjustment
and concluded that it
is not material to any current or prior annual periods.
 
NOTE 20 – SUBSEQUENT EVENTS
 
On June 2, 2022, the Company announced that
it entered into an agreement for the sale of its Nicolai Street real estate for $3,268,533
net proceeds. The
transaction closed on July 15, 2022 and was structured as a sale-leaseback in which the Company agreed to lease
a portion of the building from the buyer-
lessor for a period of five years.
 
On June 16, 2022, the Company announced a new
Ample Hills retail lease in Manhattan's historic Greenwich Village.
 
On June 16, 2022, the Company
announced that the Board of the Company did not approve the proposed transaction involving the sale of the Xact business
line, and that
the letter of intent for the proposed transaction had been formally terminated.
 
On July 20, 2022, the Company announced that it
entered into a non-binding term sheet which contemplates the potential reverse merger with Proton
Green, LLC and the spin-off of Schmitt’s
Ample Hills business to pre-merger shareholders of Schmitt’s common stock. It is contemplated that Proton
Green would become a wholly
owned subsidiary of Schmitt, the Company would be renamed “Proton Green Corporation”, and the common stock would
continue
to trade on the Nasdaq under a new symbol. If consummated, Ample Hills would become a standalone entity and the newly merged company
would
retain any remaining components of the SMS business.
 
On September 17, 2022, the Company received notice
 of termination of the previously announced non-binding term sheet with Proton Green, LLC
(“Proton Green”) regarding the reverse
merger with Proton Green and spin-off of Schmitt’s Ample Hills business. 
 
On September 20, 2022, the Company determined that
the Company’s previously-issued condensed consolidated interim financial statements included in
the associated Form 10-Qs for the
periods ended August 31, 2021, November 30, 2021 and February 28, 2022, including the comparative periods, should
no longer be relied
upon due to certain errors in 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 interim financial statements during the fiscal year
ended May 31, 2022. On
October 12, 2022, the Company filed Form 10-Q/A’s for each respective interim period with restated interim
financial statements reflecting adjustments
recorded to correct the errors.
 
 
 53

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ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
 
None.
 
ITEM 9A.
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.
 
Management's Report on Internal Control Over Financial Reporting
 
The Company’s management is responsible
for establishing and maintaining adequate internal controls over financial reporting (as defined in Exchange
Act Rules 13a-15(f) and 15d-15(f)).
Under the supervision and with the participation of our management, including our CEO and CFO, we conducted an
evaluation of the effectiveness
of our internal controls over financial reporting based on the framework in Internal Controls - Integrated Framework issued
by
 the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the framework in Internal Control
 -
Integrated Framework, our management concluded that our internal controls over financial reporting were not effective as of May
31, 2022.
 
Our CEO and CFO concluded that we have a material
weakness in internal control over financial reporting due to deficiencies in the design and operation
of internal controls over the application
of cut-off procedures to identify and accrue liabilities, as well as insufficient and imprecise management review
controls in the financial
close process relating to the accounting for accounts payable, expense classification, accrued liabilities, and inventory.
 
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 consolidated 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 May 31, 2022 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 weaknesses   identified.
 During Fiscal 2022, management hired additional
experienced accounting personnel and continued to leverage external accounting resources
to strengthen the financial close and reporting process so as to
more effectively detect such misstatements in a more timely fashion. The
Company overhauled its entire accounts payable team and hired experienced
personnel to record invoices in accordance with Generally Accepted
Accounting Principles. The Company intends to continue strengthening its internal
accounting resources while utilizing an external consulting
firm to support public reporting requirements.
 
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Table of Contents
 
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 annual 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 Annual Report on
Form 10-K 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 prior fiscal year ending May 31, 2021, the Company acquired the Ample Hills business. As of May 31, 2022, management has expanded
the head
count in the accounting and finance department and integrated the 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
and controls in the financial closing
process related to stock-based compensation, accounts receivable, sales taxes, depreciation of property
and equipment, and earnings per share, are in place
to improve the internal control environment. Management will continue to focus on
 remediating     the remaining identified material weaknesses and
anticipates completing these efforts by the end of the fiscal year ending May 31, 2023.
 
During Fiscal 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 Income (Loss) and the Consolidated Statement of
Changes in Stockholders
Equity for the periods then ended.
 
Other than the above referenced matter, and the
matter 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 fiscal year ended May 31, 2022 that has materially affected, or is
reasonably
likely to materially affect, such internal control over financial reporting.
 
ITEM 9B.
OTHER INFORMATION
 
Certain information required by Part III is included
in the Company’s definitive Proxy Statement for its 2021 Annual Meeting of Shareholders (“Proxy
Statement”) and is incorporated
herein by reference. The Proxy Statement will be filed pursuant to Regulation 14A of the Securities Exchange Act of 1934
not later than
120 days after the end of the fiscal year covered by this Report.
  
ITEM 9C.
DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS
 
Not applicable.
 
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
 
The information required by this item is included
 in the Company’s Proxy Statement relating to the 2022 Annual Meeting of Shareholders and is
incorporated herein by reference.
 
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Table of Contents
 
ITEM 11.
EXECUTIVE COMPENSATION
 
The information required by this item is included
 in the Company’s Proxy Statement relating to the 2022 Annual Meeting of Shareholders and is
incorporated herein by reference.
 
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
 
The information required by this item is included
 in the Company’s Proxy Statement relating to the 2022 Annual Meeting of Shareholders and is
incorporated herein by reference.
 
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
 
The information required by this item is included
 in the Company’s Proxy Statement relating to the 2022 Annual Meeting of Shareholders and is
incorporated herein by reference.
 
ITEM 14.
PRINCIPAL ACCOUNTING FEES AND SERVICES
 
The information required by this item is included
 in the Company’s Proxy Statement relating to the 2022 Annual Meeting of Shareholders and is
incorporated herein by reference.
  
PART IV
 
ITEM 15.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
 
(4)
Financial Statements
 
 
(1) Consolidated Balance Sheets as of May 31, 2022 and 2021
 
 
(2) Consolidated Statements of Operations for the years ended May 31, 2022 and 2021
 
 
(3) Consolidated Statements of Cash Flows for the years ended May 31, 2022 and 2021
 
 
(4) Consolidated Statements of Changes in Stockholders’ Equity for the years ended May 31, 2022 and 2021
 
 
(5) Notes to Consolidated Financial Statements for the years ended May 31, 2022 and 2021
 
 
(6) Reports of Independent Registered Public Accounting Firms
 
(b)
Financial Statement Schedules: All
financial statement schedules are omitted either because they are not applicable, not required,
or the
required information is included in the financial statements or notes thereto. 
 
I
Exhibits: Reference
is made to the list on page 67 and 68 of the Exhibits filed with this report.
 
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Table of Contents
 
INDEX TO EXHIBITS 
 
Exhibits
 
Description 
 
Exhibits marked with an asterisk (*) are incorporated by reference to exhibits or appendices previously filed with the Securities and Exchange Commission,
as indicated by the references in brackets. All other exhibits are filed herewith.
 
 
 
 
 
  *2.1 
Asset Purchase Agreement, dated June 29, 2020, by and among Ample Hills Acquisition LLC, Ample Hills Holdings, Inc., Ample Hills
Creamery, Inc., and the Ample Hills subsidiaries.
[Form 8-K filed on July 15, 2020, Exhibit 2.1]
  
 
  *3.1 
Second Restated Articles of Incorporation of Schmitt Industries, Inc.
[Form 10-K for the fiscal year ended May 31, 1998, Exhibit
3(i)]
  
 
  *3.2 
Articles of Amendment to Articles of Incorporation of Schmitt Industries, Inc.
[Form 8-K filed on July 2, 2019, Exhibit 3.1]
  
 
*3.3 
Articles of Amendment to Articles of Incorporation of Schmitt Industries, Inc.
[Form 8-K filed on January 27, 2021, Exhibit 3.1]
  
 
  *3.3 
Second Restated Bylaws of Schmitt Industries, Inc.
[Form 10-K for the fiscal year ended May 31, 1998, Exhibit
3(ii)]
  
 
  *4.1 
See exhibits 3.1 and 3.2 for provisions of the Articles of Incorporation and Bylaws defining the rights of security holders.
  
 
  *4.2 
Section 382 Rights Agreement, dated as of July 1, 2019, between Schmitt Industries, Inc. and Broadridge Corporate Issuer Solutions, Inc.
[Form 8-K filed on July 2, 2019, Exhibit 4.1]
  
 
4.3 
Amendment to Rights Agreement, dated as of January 25, 2021, between the Corporation and Broadridge Corporate Issuer Solutions, Inc., as
Rights Agent.
[Form 8-K filed on January 27, 2021, Exhibit 4.1]
  
 
 4.4 
Description of Securities
[Form 10-K for the fiscal year ended May 31, 2020, Exhibit 4.3]
  
 
*10.1† 
Schmitt Industries, Inc. 2014 Equity Incentive Plan.
[Appendix A to Schedule 14A filed on August 26, 2014]
  
 
*10.2 
Asset Purchase Agreement and Stock Purchase Agreement dated October 9, 2019.
[Form 8-K filed on October 11, 2019, Exhibit 1.01(A)]
  
 
*10.3 
Transition Services Agreement, dated November 22, 2019 between the Company and Tosei America, Inc.
[Form 8-K filed on November 27, 2019, Exhibit 99.1]
  
 
*10.4 
Lease Agreement, dated November 22, 2019 between the Company and Tosei America, Inc.
[Form 8-K filed on November 27, 2019, Exhibit 99.2] 
  
 
*10.5† 
Employment Agreement for Jamie Schmidt dated January 14, 2020.
[Form 8-K filed on January 16, 2020, Exhibit 10.1]
  
 
  *10.6 
Promissory Note, dated August 3, 2020
[Form 10-K for the fiscal year ended May 31, 2020, Exhibit 10.6]
  
 
  *10.7 
Promissory Note, dated August 3, 2020
[Form 10-K for the fiscal year ended May 31, 2020, Exhibit 10.7]
  
 
*10.8 
Multi-Tenant Net Lease dated October 1, 2020 between Humboldt Street Collective, LLC and Schmitt Industries, Inc.
[Form 10-Q for the fiscal quarter ended August 31, 2020, Exhibit 10.1]
 
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Table of Contents
 
*10.9† Chief Executive Officer Agreement dated September 30, 2020 between Schmitt Industries, Inc. and Michael R. Zapata.
[Form 10-Q for the fiscal quarter ended August 31, 2020, Exhibit 10.2]
  
 
*10.10† Chief Financial Officer Agreement dated November 16, 2020 between SCHMITT INDUSTRIES, Inc. and Philip Bosco.
[Form 10-Q for the fiscal quarter ended November 30, 2020, Exhibit
10.3]
  
 
*10.11 
Multi-Tenant Net Lease dated December 1, 2020 between Humboldt Street Collective, LLC and Schmitt Industries, Inc.
[Form 10-Q for the fiscal quarter ended November 30, 2020, Exhibit
10.4]
  
 
*10.12 
Real Estate Purchase and Sale Agreement, dated October 14, 2021, between Schmitt Industries, Inc. and Sierra Auto Properties LLC
[Form 8-K filed on November 17, 2021, Exhibit 10.1]
  
 
*10.13 
Secured Grid Promissory Note, dated April 13, 2022, in favor of Sententia Capital Management LLC
[Form 10-Q for the fiscal quarter ended February 28, 2022, Exhibit
10.1]
  
 
*10.14 
Sales Agreement, dated May 20, 2022, between the Company and Roth Capital Partners, LLC
[Form 8-K filed May 20, 2022, Exhibit 10.1]
  
 
*10.15 
Real Estate Purchase and Sale Agreement, dated June 2, 2022, between Schmitt Industries, Inc. and Tofte Farms, LLC.
[Form 8-K filed June 7, 2022, Exhibit 10.1]
  
 
*14.1 
Code of Ethics and Business Conduct.
[Form 10-K for the fiscal year ended May 31, 2004, Exhibit
14.1]
  
 
  21.1 
Subsidiaries of Schmitt Industries, Inc. as of May 31, 2021.
 
 
 
  23.1 
Consent of Independent Registered Public Accounting Firm.
 
 
 
  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)
  
 
† 
Management contract or compensatory plan or arrangement required to be filed as an exhibit to this Form 10-K
 
 58

Table of Contents
 
SIGNATURES
 
Pursuant to the requirements of Section 13
or 15(d) 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.
 
 
 
 
By:
/s/ Michael R. Zapata
 
 
Michael R. Zapata
 
 
President and Chief Executive Officer
 
 
 
Date: October 13, 2022
 
Pursuant to the requirements of the Securities
Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant
and in the capacities indicated
on October 13, 2022.
 
Signature
 
Title 
 
 
 
/s/  Michael R. Zapata
Michael R. Zapata
 
President and Chief Executive Officer
(Principal Executive Officer)
 
 
 
/s/  Philip Bosco
Philip Bosco
 
Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer)
 
 
 
/s/  Charles Davidson
Charles Davidson
 
Director
 
 
 
/s/  Alexandre Zygnier
Alexandre Zygnier
 
Director
 
 59 
 

 
 
 
Subsidiary
State of Incorporation
 
 
Schmitt Measurement Systems, Inc.
Oregon
Ample Hills Acquisition LLC
New York
Ample Hills Sub 1 LLC
New York
Ample Hills Sub 2 LLC
New York
Ample Hills Sub 3 LLC
New York
Ample Hills Sub 4 LLC
New York
Ample Hills Sub 5 LLC
New York
Ample Hills Sub 6 LLC
New York
Ample Hills Sub 7 LLC
New York
Ample Hills Sub 8 LLC
New York
Ample Hills Sub 9 LLC
New York
Ample Hills Sub 10 LLC
New York
Ample Hills Sub 11 LLC
New York
Ample Hills Sub 12 LLC
New York
Ample Hills Sub 13 LLC
New York
Ample Hills Sub 14 LLC
New York
Ample Hills Sub 15 LLC
New York
Ample Hills Sub 16 LLC
New York
 
 
2765 NW Nicolai Street, Portland,
Oregon 97210 | 503.227.7908 | schmittindustries.com
 

 
 
 
 
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM’S
CONSENT
 
We consent to the incorporation by reference in
the Registration Statements (Form S-3 No. 333-264622 and 333-226581 and Form S-8 No. 333-03910 and
333-229591) of Schmitt Industries,
Inc. of our report dated October 13, 2022, relating to the consolidated financial statements of Schmitt Industries, Inc.,
which report
appears in the Annual Report on Form 10-K of Schmitt Industries, Inc. as of May 31, 2022 and 2021 and for the years then ended.
 
/s/ UHY LLP
 
Melville, NY 
October 13, 2022
 
 

 
EXHIBIT 31.1
 
CERTIFICATION PURSUANT TO
18 U.S. C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF
2002
 
I, Michael R. Zapata, certify that:
 
1. I have reviewed this annual report on Form 10-K of Schmitt
Industries, Inc.;
 
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this report;
 
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this report;
 
4. The registrant’s other certifying officer and I are responsible
for establishing and maintaining disclosure controls and procedures (as defined in Exchange
Act Rules 13a-15(e) and 15d-15(e)) and
internal control over financial reporting (as defined in Exchange Act Rules 13-15(f) and 15d-15(f)) for the
registrant
and have:
 
(a) Designed such disclosure controls and
procedures, or caused such disclosure controls and procedures to be designed under our supervision, to
ensure that material information
relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities,
particularly
during the period in which this report is being prepared;
 
(b) Designed such internal control over financial
reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes
in accordance with
generally accepted accounting principles;
 
(c) Evaluated the effectiveness of the registrant’s
disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and
procedures, as of the end of the period covered by this report based on such evaluation; and
 
(d) Disclosed in this report any change in the
registrant’s internal control over financial reporting that occurred during the registrant’s most recent
fiscal quarter (the
registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially
affect,
the registrant’s internal control over financial reporting; and
 
5. The registrant’s other certifying officer and I have disclosed,
based on our most recent evaluation of internal control over financial reporting, to the
registrant’s auditors and the audit committee
of the registrant’s board of directors (or persons performing the equivalent functions):
 
(a) All significant deficiencies and material
weaknesses in the design or operation of internal control over financial reporting which are reasonably
likely to adversely affect the
registrant’s ability to record, process, summarize and report financial information; and
 
(b) Any fraud, whether or not material, that involves
management or other employees who have a significant role in the registrant’s internal control
over financial reporting.
 
Date:  October 13, 2022
 
/s/ Michael R. Zapata
 
 
 
Michael R. Zapata, Chairman and Chief Executive Officer
 

 
EXHIBIT 31.2
 
CERTIFICATION PURSUANT TO
18 U.S. C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF
2002
 
I, Philip Bosco, certify that:
 
1. I have reviewed this annual report on Form 10-K of Schmitt
Industries, Inc.;
 
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under
which such statements were made, not misleading with respect to the period covered by this report;
 
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this report;
 
4. The registrant’s other certifying officer and I are responsible
for establishing and maintaining disclosure controls and procedures (as defined in Exchange
Act Rules 13a-15(e) and 15d-15(e)) and
internal control over financial reporting (as defined in Exchange Act Rules 13-15(f) and 15d-15(f)) for the
registrant
and have:
 
(a) Designed such disclosure controls and
procedures, or caused such disclosure controls and procedures to be designed under our supervision, to
ensure that material information
relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities,
particularly
during the period in which this report is being prepared;
 
(b) Designed such internal control over financial
reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes
in accordance with
generally accepted accounting principles;
 
(c) Evaluated the effectiveness of the registrant’s
disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and
procedures, as of the end of the period covered by this report based on such evaluation; and
 
(d) Disclosed in this report any change in the
registrant’s internal control over financial reporting that occurred during the registrant’s most recent
fiscal quarter (the
registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially
affect,
the registrant’s internal control over financial reporting; and
 
5. The registrant’s other certifying officer and I have disclosed,
based on our most recent evaluation of internal control over financial reporting, to the
registrant’s auditors and the audit committee
of the registrant’s board of directors (or persons performing the equivalent functions):
 
(a) All significant deficiencies and material
weaknesses in the design or operation of internal control over financial reporting which are reasonably
likely to adversely affect the
registrant’s ability to record, process, summarize and report financial information; and
 
(b) Any fraud, whether or not material, that involves
management or other employees who have a significant role in the registrant’s internal control
over financial reporting.
 
 
 
 
 
Date:
October 13, 2022
 
/s/ Philip Bosco
 
 
 
Philip Bosco, Chief Financial Officer and Treasurer
 

 
EXHIBIT 32.1
 
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
 
In connection with the Annual Report of Schmitt Industries, Inc. (the
“Company”) on Form 10-K for the fiscal year ended May 31, 2022 as filed with the
Securities and Exchange Commission
on the date hereof (the “Report”), we, Michael R. Zapata, Chairman and Chief Executive Officer and Philip Bosco,
Chief Financial
Officer and Treasurer, of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley
Act of
2002, that to our knowledge:
 
(1) The Report fully complies with the requirements
of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
 
(2) The information contained in the Report fairly
presents, in all material respects, the financial condition and results of operations of the Company.
 
/s/ Michael R. Zapata
 
Michael R. Zapata
 
Chairman and Chief Executive Officer
 
October 13, 2022
 
 
 
/s/ Philip Bosco
 
Philip Bosco
 
Chief Financial Officer and Treasurer
 
October 13, 2022