SCHMITT INDUSTRIES: MANAGEMENT REPORT AND ANALYSIS OF THE FINANCIAL POSITION AND OPERATING RESULTS (Form 10-K)

0

PREVIEW

Schmitt Industries Inc. ("Schmitt," "Company" or "Registrant" or "we") is a
holding company owning subsidiaries engaged in diverse business activities. We
purchase companies where we believe we can help operate more effectively to
achieves their full potentials. We continually assess strategic opportunities to
improve shareholder value.



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 our recent acquisition of Ample Hills.



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As described in Note 12- Discontinued Operations, the Company sold the Schmitt
Dynamic Balance Systems ("SBS") business line on November 22, 2019. After the
sale of the SBS business, but prior to the acquisition of Ample Hills, the
Company conducted an analysis and determined that, based on the types of
products and services sold, and the manner in which the Company reviews and
manages operations, that it operated as one segment. Subsequent to the Ample
Hills acquisition, the Company determined that it had two distinct segments: the
Measurement Segment and the Ice Cream Segment.



On July 9, 2020, Buyer entered into an Asset Purchase Agreement (the
"Agreement"), dated as of June 29, 2020, with 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 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, the Company acquired the Ample Hills ice cream business as
of July 9, 2020. Following the Transactions, Ample Hills began reopening retail
locations, rehiring Ample Hills team members, and reopened the Red Hook ice
cream factory in Brooklyn, New York. Further, on May 28, 2021, the Company
opened a new retail location in Brooklyn, New York, bringing its total retail
locations to 11 as noted above. As the Transactions occurred after Fiscal 2020,
the results of Ample Hills are not reflected in the Company's results for Fiscal
2020, but are included in the results for Fiscal 2021 and anticipated to be a
significant component of the Company's results in fiscal years subsequent to the
acquisition.


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 2 - 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 affirms that the estimates, assumptions and judgments involved in the accounting policies described in Note 2 – Summary of significant accounting policies have the greatest potential impact on our consolidated financial statements and have deemed them to be our methods and critical accounting estimates.


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Revenue Recognition



The Company generates revenues from the following sources: (i) retail restaurant
sales, (ii) factory sales, (iii) measurement product sales, and (iv) remote
tank
monitoring services.



Retail Restaurant Sales, net



The Company's Ice Cream Segment generates revenues from retail restaurant sales
to its end-user customers at the time of sale, net of discounts, coupons,
employee meals, and complimentary meals and gift cards. Sales tax is collected
from customers and remitted to governmental authorities and is presented on a
net basis within revenue in our Consolidated Statement of Operations.



Factory Sales, net



The Company's Ice Cream Segment generates revenues from sales of finished goods
from its Brooklyn, New York factory, including wholesale, e-commerce, and
direct-to-consumer sales. These revenues, net of sales tax paid to states, are
recognized when control of the goods is transferred to the customer, in
accordance with the terms of the applicable agreement. The Company also
generates revenues by providing manufacturing production services to third
parties, and recognizes revenues as services 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.



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 in cases where consideration is received from customers before the Company fulfills its obligations in exchange for such consideration.


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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.



Intangible assets and depreciation

Intangible assets with indefinite useful life



The Company's indefinite-lived assets, included tradenames and trademarks for
the Company's Ice Cream Segment. The Company reviews the carrying values of
identifiable intangibles annually or whenever events or changes in circumstances
indicate that such carrying values may not be recoverable as required by ASC
350, Intangibles - Goodwill and Other. This guidance provides the option to
first assess qualitative factors to determine whether it is more likely than not
that the fair value of a reporting unit is less than its carrying value. If,
based on a review of qualitative factors, it is more likely than not that the
fair value of a reporting unit is less than its carrying value, the Company
performs a quantitative analysis. If the carrying value of a reporting unit
exceeds its fair value, we measure any intangible impairment losses as the
amount by which the carrying amount of a reporting unit exceeds its fair value,
not to exceed the total amount of the intangible allocated to that reporting
unit.


Unforeseen events, changes in circumstances, market conditions and material
differences in the value of intangible assets due to changes in estimates of
future cash flows could negatively affect the fair value of the Company's assets
and result in a non-cash impairment charge. Some factors considered important
that could trigger an impairment review include the following: significant
underperformance relative to expected historical or projected future operating
results, significant changes in the manner of the Company's use of acquired
assets or the strategy for its overall business and significant negative
industry or economic trends.



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Intangible assets with finite lives

Amortizable intangible assets include purchased technology and patents for the
Company's Measurement Segment and proprietary recipes and the Company's website
for its Ice Cream Segment. These assets are amortized over their estimated
useful lives ranging from three to fifteen years.



The Company reviews finite-lived intangible assets for impairment annually or
whenever events or changes in circumstances indicate the carrying amount of the
asset may not be recoverable. Recoverability is determined by comparing the
forecasted future net undiscounted cash flows from the operations to which the
assets relate, based on management's best estimates using the appropriate
assumptions and projections at the time, to the carrying amount of the assets.
If the carrying value is determined to be in excess of such undiscounted cash
flows, the asset is considered impaired and a loss is recognized equal to the
amount by which the carrying amount exceeds the estimated fair value of the
assets, which is determined by discounting future projected cash flows.



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. As the Company does not
have any outstanding debt other than the PPP loans discussed in Note 16 -
Long-Term Debt, to the extent not forgiven, or committed credit facilities, the
Company must estimate 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.



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.



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Each year the Company files income tax returns in the various taxing
jurisdictions in which it operates. These tax returns are subject to examination
and possible challenge by the taxing authorities. Positions challenged by the
taxing authorities may be settled or appealed by the Company. As a result, there
is an uncertainty in income taxes recognized in the Company's financial
statements in accordance with ASC Topic 740. The Company applies this guidance
by defining criteria that an individual income tax position must meet for any
part of the benefit of that position to be recognized in an enterprise's
financial statements and provides guidance on measurement, de-recognition,
classification, accounting for interest and penalties, accounting in interim
periods, disclosure, and transition.



Discussion of operating results from continuing operations



The Company has previously reported segment information for their two identified
reportable segments: Balancer and Measurement. As described in the accompanying
Consolidated Financial Statements, the Company sold the SBS business line on
November 22, 2019. This entity composed substantially all of the business
activities of the Company's legacy Balancer Segment. Subsequent to this sale,
management determined the Company had a single reportable segment (until the
acquisition of Ample Hills on July 9, 2020). Subsequent to the acquisition of
Ample Hills, the Company determined they have two segments: the Measurement
Segment and the Ice Cream Segment. The foregoing information presents the
balances and activities of the Measurement Segment for Fiscal 2021 and Fiscal
2020 and the activities of the Ice Cream Segment for Fiscal 2021.



COVID-19 Update



As of May 31, 2021, all of our manufacturing facilities and retail shops were
operational. Throughout the COVID-19 pandemic, the Company has been adhering to
mandates and other guidance from local governments and health authorities,
including the World Health Organization and the Centers for Disease Control and
Prevention. The Company has taken extraordinary measures and invested
significantly in practices to protect employees and reduce the risk of spreading
the virus, while continuing to operate where permitted and to the extent
possible. These actions include additional cleaning of our facilities,
staggering crews, incorporating visual cues to reinforce social distancing,
providing face coverings and gloves, as well as implementing daily health
validation at our manufacturing and office facilities. We expect to continue to
incur costs to maintain these precautionary measures for the foreseeable future.
The health and safety of our employees and our communities is our highest
priority.



Key Leadership Changes


At October 27, 2020, the Company announced the appointment of Lillian tung as the fifth member of its Board of Directors, with effect October 27, 2020.

At November 6, 2020, the Company announced the appointment of Philippe Bosco as CFO, in force December 1, 2020.


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RESULTS OF OPERATIONS



                                                      Fiscal Year Ended May 31,
                                        2021                             2020
Ice Cream Segment revenues         $  4,043,436           51.4 %    $          -              -
Measurement Segment revenues          3,820,914           48.6 %       4,189,924          100.0 %
Total revenue, net                    7,864,350          100.0 %       4,189,924          100.0 %
Cost of sales                         4,593,588           58.4 %       2,239,376           53.4 %
Gross profit                          3,270,762           41.6 %       1,950,548           46.6 %
General, administrative and
sales                                12,045,174          153.2 %       4,061,621           96.9 %
Impairment of intangible assets         903,422           11.5 %           
   -              -
Transaction costs                       125,167            1.6 %               -              -
Research & development                   83,130            1.1 %          68,849            1.6 %
Total operating expenses             13,156,893          167.3 %       4,130,470           98.6 %
Operating loss                       (9,886,131 )       (125.7 %)     (2,179,922 )        (52.0 %)
Bargain purchase gain                 1,138,808           14.5 %               -              -
Interest expense                        (19,038 )         (0.2 %)              -              -
Other income, net                       273,023            3.5 %         322,980            7.7 %
Loss before income taxes             (8,493,338 )       (108.0 %)     (1,856,942 )        (44.3 %)
Income tax benefit                     (403,666 )         (5.1 %)        (14,638 )         (0.3 %)
Net loss from continuing
operations                           (8,089,672 )       (102.9 %)     (1,842,304 )        (44.0 %)
Income from discontinued
operations, net of tax                        -              -         5,722,879          136.6 %
Net (loss) income                  $ (8,089,672 )       (102.9 %)   $  3,880,575           92.6 %



Year ended May 31, 2021 Compared to the closed financial year May 31, 2020

Consolidated Revenue - Consolidated revenue increased $3,674,426, or 87.7%, to
$7,864,350 in Fiscal 2021 from $4,189,924 in Fiscal 2020. The increase was
driven by the new Ice Cream Segment, which generated $4,043,436 in sales during
Fiscal 2021, accounting for 51.4% of total revenue for the fiscal year, offset
by a decrease in the Measurement Segment sales of $369,010, or 8.8%, to
$3,820,914 which accounted for 48.6% of total revenue. No revenues for the Ice
Cream Segment are included in Fiscal 2020 due to the acquisition occurring
subsequent to Fiscal 2020 year end.



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 11 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 2021 were $4,043,436.



Measurement Segment Revenue - The Measurement Segment includes two main product
lines: the Acuity product line, which includes laser-based distance measurement
and dimensional sizing laser sensor, and the Xact product line, which includes
ultrasonic-based remote tank monitoring products and related monitoring revenues
for markets in the LoT environment. All activity in the Company's Measurement
Segment was conducted in North America in Fiscal 2021 and substantially all
in
Fiscal 2020.



Measurement Segment Revenue decreased $369,010, or 8.8%, to $3,820,914 in Fiscal
2021 as compared to $4,189,924 in Fiscal 2020. The decrease in Fiscal 2021 is
driven by a decrease in Acuity and Xact product revenue of $162,684, or 9.7%,
and $216,138, or 26.2%, respectively. Additionally, other revenue decreased
$120,845, or 72.2%. These decreases were partially offset by an increase in Xact
monitoring revenue of $130,657, or 8.6%, in Fiscal 2021 as the Company's
installed base of monitoring devices continues to grow.



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Revenue by product line for the Measurement Segment for Fiscal 2021 compared to
Fiscal 2020 were as follows:



                                         Fiscal Year Ended, May 31,             Year-Over-Year Change
                                               2021             2020              $               %
Acuity                                   $    1,510,437     $ 1,673,121     $   (162,684 )        (9.7 %)
Xact - Product                                  608,976         825,114         (216,138 )       (26.2 %)
Xact - Monitoring                             1,654,867       1,524,210          130,657           8.6 %
Other                                            46,634         167,479         (120,845 )       (72.2 %)
 Total Measurement Segment
revenue-current product lines            $    3,820,914     $ 4,189,924     $   (369,010 )        (8.8 %)



Gross Margin - Consolidated gross margin for Fiscal 2021 decreased 5.0% to 41.6%
as compared to 46.6% in Fiscal 2020, primarily due to lower gross margins in the
newly acquired Ice Cream Segment and increased material costs for the
Measurement Segment due to market effects of the COVID-19 pandemic.



Measurement Segment gross margin for Fiscal 2021 decreased 2.6% to 44.0% as
compared to 46.6% in Fiscal 2020. The decrease was due to an increase of
material costs due to the market effects of the COVID-19 pandemic and a decrease
of sales from its discontinued product line, which had no associated cost of
sales.



Ice Cream Segment gross margin was 39.4% in Fiscal 2021. As the Company
continues to manage the day-to-day operations of the business and as capital
improvements are placed into service, the Company expects to be able to identify
opportunities to drive additional revenue and volume through their factory,
which will improve gross margin.



Operating Expenses - Consolidated operating expenses increased $9,026,423, or
218.5% to $13,156,893 in Fiscal 2021 compared to $4,130,470 in Fiscal 2020. This
increase was primarily due to the inclusion of the Ice Cream Segment, which had
operating expenses of $9,411,447 in Fiscal 2021 and accounted for 71.5% of total
operating expenses. Operating expenses for the Measurement Segment decreased
$385,024 or 9.3%, to $3,745,446 in Fiscal 2021 from $4,130,470 in Fiscal 2020.
Further detail of the increase in operating expenses include the following
items
in Fiscal 2021:


Impairment of assets with indefinite duration of $ 903,422.

Increased professional fees $ 279,673, or 19.5%, to $ 1,714,708 during fiscal year 2021

compared to $ 1,435,035 during fiscal year 2020. The increase is mainly attributable to

Taking into account the 2021 financial year Vast hills professional fees totaling $ 705,150 this

were not included in fiscal 2020, offset by a decrease in professional fees

   within the Measurement Segment.



The increase in operating expenses was partially offset by the following:

The stock-based compensation expense has decreased $ 87,503, or 24.7% at $ 266,545; in taxation

2021 compared to $ 354,048 in 2020. The majority of compensation in shares in

fiscal year 2021 and fiscal year 2020 were due to the issuance and acquisition of the performance

   based Restricted Stock Units ("RSUs").




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Bargain Purchase Gain - As previously noted above, in connection with
acquisition of Ample Hills during Fiscal 2021, the Company recorded a bargain
purchase gain of $1,271,615 that was recorded as a component of net income.
Adjustments of $132,807 were recorded to the bargain purchase gain subsequent to
the initial recording of the gain that reduced the bargain purchase gain 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. This bargain purchase gain represents the excess of the estimated
fair value of the net assets acquired over the estimated fair value of the
consideration transferred to the sellers and their landlords.



Other Income - Other income primarily consists of rental income, interest income
and foreign currency exchange gain (in Fiscal 2020 only) and other income. Other
income was $273,023 for Fiscal 2021 as compared to $322,980 for Fiscal 2020. The
decrease in other income was primarily due to the Tosei restricted cash
write-off of $219,872 that was settled in May of 2021, partially offset by an
increase in rental income of $181,495 or 96.8% to $369,159 in Fiscal 2021 as
compared to $187,664 in Fiscal 2020 due to rent collected under the lease
executed with Tosei in November of 2019.



Interest income was $9,661 for Fiscal 2021 as compared to $67,129 for Fiscal
2020. Interest income was offset by interest expense of $19,038 and $2,435 for
Fiscal 2021 and Fiscal 2020, respectively. Fluctuations in interest income are
impacted by the levels of our average cash and investment balances and changes
in interest rates.


Benefit from Income Taxes - The effective tax rate in Fiscal 2021 was 4.7%, as
compared 1.2% in Fiscal 2020. The effective tax rate on consolidated net (loss)
income in Fiscal 2021 and 2020 differs from the federal statutory tax rate
primarily due to changes in the deferred tax valuation allowance and the impact
of certain expenses not being deductible for income tax reporting purposes.



Net loss - Net loss from continuing operations in Fiscal 2021 was $8,089,672, or
$2.15 per fully diluted share, and net loss from continuing operations in Fiscal
2020 was $1,842,304, or $0.47 per fully diluted share. The increase in net loss
for Fiscal 2021 was primarily due to the Ice Cream Segment's operating loss of
$6,299,858, the Measurement Segment's operating loss of $1,789,814 and an
impairment of intangible assets of $903,422, partially offset by the inclusion
of a $1,138,808 bargain purchase gain in Fiscal 2020 as a result of the
acquisition of Ample Hills, which was not present in Fiscal 2021 results.



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NON-GAAP FINANCIAL MEASURES



Adjusted EBITDA - Adjusted EBITDA, which excludes certain reorganization, legal
and other professional expense and inventory adjustments, was ($7,834,723) for
Fiscal 2021 as compared to Adjusted EBITDA of ($573,502) in Fiscal 2020.



Reconciliation of EBITDA to Adjusted EBITDA - Adjusted EBITDA for Fiscal 2021
and Fiscal 2020 is calculated as follows on a consolidated basis and by segment:



                                                         Fiscal Year Ended May 31,
                                                           2021             2020

Loss before taxes on profits from continuing operations $ (8,493,338) $ (1,856,942)
Depreciation and amortization

                              549,223          

161,137

EBITDA from continuing operations                     $ (7,944,115 )   $ (1,695,805 )
Adjusted for:
Bargain purchase gain                                   (1,138,808 )       

Impairment of intangible assets                            903,422         

Stock-based compensation                                   266,545         

354,048

Income from discontinued product line                      (46,934 )       (167,479 )
Reorganization, legal, and transaction fees                125,167         

842 162

Inventory valuation adjustments                                  -         

76,099

Software write-downs                                             -         

17,473

Adjusted EBITDA from continuing operations            $ (7,834,723 )   $  
(573,502 )



LIQUIDITY AND CAPITAL RESOURCES

The Company’s working capital decreased $ 8,005,511 To $ 2,947,953 at the end of the 2021 financial year compared to $ 10,953,464 at the end of Fiscal Year 2020. The decrease in working capital during Fiscal Year 2021 is mainly explained by the following:

Cash and cash equivalents decreased $ 6,113,841 To $ 4,032,690 at the end of

        Fiscal 2021 as compared to $10,146,531 at the end of Fiscal 2020. The
        decrease in cash in Fiscal 2021 was primarily due to the net loss from

continuation of the activities of $ 8,089,672 with the compensatory market

        purchase gain of $1,138,808. In addition, cash and cash equivalents
        included proceeds from the sale of SBS in Fiscal 2020.




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· From the May 31, 2021, the Company had no restricted cash, a decrease compared to May 31st,

   2020 of $420,000.



Increased accounts payable $ 316,090 To $ 583,750 at the end of the 2021 financial year as

   compared to $267,660 at the end of Fiscal 2020.



Payroll charges have increased $ 441,236 To $ 527,608 at the end of the exercise

2021 compared to $ 86,372 at the end of fiscal 2020.

Accrued expenses have increased $ 199,797 To $ 465,146 at the end of the 2021 financial year as

   compared to $265,349 at the end of Fiscal 2020.



Other accrued charges increased $ 107,098 To $ 694,590 at the end of the exercise

   2021 as compared to $587,492 at the end of Fiscal 2020.



The Company had no short-term portion of long-term lease debts at the end of

Fiscal year 2020. After the implementation of the update of accounting standards (“ASU”)

N ° 2016-02, Baux (Subject 842) on June 1, 2019, the Company has registered a

long term rental liabilities. At the end of the 2021 financial year, the Company

$ 1,042,331 in the current part of long-term rental debts, mainly

related to leases acquired under the Vast hills acquisition.

The Company has not received any loans under the PPP in tax matters

2020 and, as such, had no short-term portion of long-term debt. As a result of

COVID-19 relief in fiscal year 2021, the Company recorded the

        portion of PPP totaling $541,691 as of the end of Fiscal 2021.



These decreases were partially offset by the following:

Accounts receivable, net, increased $ 579,719 To $ 1,154,645 at the end of the exercise

2021 compared to $ 574,926 at the end of fiscal 2020.

Increased inventories $ 493,953 To $ 1,553,310 at the end of the 2021 financial year as

compared to $ 1,059,357 at the end of fiscal 2020.

Prepaid expenses increased $ 137,671 To $ 198,345 at the end of the 2021 financial year as

   compared to $60,674 at the end of Fiscal 2020.




Net cash used in operating activities for continuing operations was $6,939,962
in Fiscal 2021 as compared to cash used in operating activities of $228,994 in
Fiscal 2020. The net loss of $8,089,672, a bargain purchase gain of $1,138,808,
an increase in accounts receivable of $579,719, an decrease in deferred income
taxes of $453,238, an increase in rent, utility deposits and ERP deposits of
$206,628, 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 $549,223, stock based
compensation expense of $266,545, and an increase in accrued liabilities and
customer deposits of $793,082, accounts payable of $316,090 and inventories of
$138,147. In Fiscal 2020, net income of $3,880,575, depreciation and
amortization of $161,137, stock-based compensation of $354,048 and an increase
in inventories of $181,775, accounts payable of $165,094, accrued liabilities
and customer deposits of $328,450 and accrued taxes of $265,349, offset by a
gain on sale of discontinued operations before income taxes of $5,166,845 were
the primary drivers of the overall operating cash usage for Fiscal 2020.



Net cash used in investing activities for continuing operations was $3,035,184
in Fiscal 2021 as compared to net cash provided by investing activities of
$10,396,607 for Fiscal 2020. The net cash used in investing activities for
Fiscal 2021 is driven by the $1,665,854 acquisition of Ample Hills, in addition
to purchases of property and equipment and upgrades totaling $1,404,830, to
increase factory capabilities, establish the Ample Hills commissary, and
renovate retail locations, which includes $438,370 for the opening of a new
Ample Hills retail location in Brooklyn, New York. Schmitt's Measurement Segment
incurred expenditures associated with the build out of Xact monitoring tool of
$110,253 in Fiscal 2021.  Fiscal 2020 investing activity is related to the sale
of the SBS business. See Note 12 - Discontinued Operations, to the financial
statements below for further details.



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Net cash provided by financing activities was $3,441,305 in Fiscal 2021 as
compared to net cash used in financing activities of $1,391,576 for Fiscal 2020.
The net cash provided by financing activities was primarily due to the proceeds
from the Paycheck Protection Program totaling $4,059,556, offset by repayments
to the program of $264,476, the repurchase of common stock related to the stock
buyback program totaling $234,517 and the repurchase of RSUs totaling $65,975.
The net cash used in financing activities for Fiscal 2020 was due to the
repurchase of shares from a large company stockholder totaling $1,350,681. See
the notes to the financial statements for further details on the share
repurchase.



Management is seeking to sell the assets held for sale, which would be a source
of liquidity. Additionally, a stockholder of the Company has committed to
providing additional capital up to $1,300,000, to the extent necessary to fund
operations.


We believe our existing cash and cash equivalents combined with the cash we
anticipate generating from operating and financing activities will be sufficient
to meet our working capital requirements for the next twelve months. In the
Fiscal Year ended May 31, 2021, the Company had a significant reduction in its
cash and cash equivalents due to planned capital expenditures. The Company's
plans for the current Fiscal Year do not require capital investments at the
same
level.



The Company's primary source of working capital is cash generated through the
sale of assets as the company realigns its operating businesses and PPP loans.
As of May 31, 2021, our available funds consisted of $4,032,690 in cash and cash
equivalents. The Company is seeking to sell real estate used in connection with
SBS Business unit which was sold in 2019. The Company may also seek additional
financing for working capital purposes or to facilitate accelerating its
business plans. Any subsequent financing may have dilutive effects on our
current shareholders. Shareholder Sententia Capital Management, LLC which is
controlled by Michael Zapata, the Company's Chairman and CEO, has committed
$1,300,000, to the extent necessary to fund operations through August 31, 2022.



QUARTERLY FINANCIAL DATA – Continuing operations

In thousands, except information per share


                                               Fiscal Quarter of 2020 Ended,
                                8/31/2019       11 /31/2019       2/28/2020       5/31/2020
Consolidated revenue          $     1,095     $       1,033     $     1,095     $       967
Gross profit                  $       477     $         390     $       604     $       480
Net loss                      $      (222 )   $        (676 )   $      (240 )   $      (704 )
Net loss per share, basic     $     (0.06 )   $       (0.17 )   $     (0.06 )   $     (0.18 )
Net loss per share, diluted   $     (0.06 )   $       (0.17 )   $     (0.06
)   $     (0.18 )




                                                       Fiscal Quarter of 2021 Ended,
                                         8/31/2020       11/30/2020       2/28/2021       5/31/2021
Consolidated revenue                   $     1,507     $      2,030     $     1,668     $     2,659
Gross profit                           $       608     $        962     $       831     $       870
Net income (loss)                      $       151     $     (2,366 )   $    (2,420 )   $    (3,455 )
Net income (loss) per share, basic     $      0.04     $      (0.63 )   $     (0.64 )   $     (0.92 )
Net income (loss) per share, diluted   $      0.04     $      (0.63 )   $  
  (0.64 )   $     (0.92 )



Recently issued accounting guidelines



Refer to Note 3 - Recently Issued Accounting Guidance in the accompanying Notes
to the Consolidated Financial Statements for a discussion of recent accounting
pronouncements.



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