SCHMITT INDUSTRIES INC MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-K)

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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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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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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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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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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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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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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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.

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