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An Inside Scoop On Ample Hills: Schmitt Industries Got A Great Deal

Jun. 12, 2020 2:34 PM ETSchmitt Industries, Inc. (SMIT)89 Comments
Harry Sauers profile picture
Harry Sauers


  • In an 8-K filing, Schmitt Industries announced that it had acquired a business in bankruptcy proceedings called Ample Hills Creamery.
  • Schmitt paid $1mm plus the assumption of various leases, the value of which is currently unknown. Ample Hills currently pays around $118k per month in rent.
  • Ample Hills is a distressed but fast-growing ice cream chain that filed Chapter 11 bankruptcy in March. They do around $10mm in revenue and have pretty staggering losses.
  • Schmitt’s CEO has a strong record of successful turnarounds and distressed situations, and Ample Hills is a rare wonderful business at a wonderful price. SMIT stock stands to benefit.

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Schmitt Industries Background

Schmitt Industries (OTC:SMIT) is a manufacturing company now controlled by activist hedge fund manager Michael Zapata. I first covered Schmitt in “Schmitt Industries: Special Situation With 25% Upside” in October of 2019, and have followed (and owned shares of) Schmitt since then.

Zapata is a former Navy Seal who attended Columbia Business School’s value investing program, and has developed a strong track record at his fund, Sententia Capital. He compares value investing to Special Operations missions, which are often viewed as extremely risky. Zapata contradicts this idea, since taking precautions for known risk effectively makes the mission less risky than one that is viewed as low-risk, and therefore does not require precautions.

Since Zapata taking the helm of Schmitt, costs have been slashed and assets divested. Schmitt recently announced a modified Dutch tender offer between $3-3.25 per share. I don’t plan to participate, since that’s far too cheap relative to Schmitt’s liquidation value alone. Zapata has stated that he likes to look for distressed opportunities: “We look for... smoke or fire.” Despite its apparent lack of synergy with Schmitt’s industrial manufacturing businesses, Ample Hills looks like a bet with major future potential.

Assorted Ample Hills ice cream flavors.

Ample Hills Acquisition

Schmitt surprised investors with an 8-K filing stating that they will acquire the assets of Ample Hills Creamery, a fast-growing ice cream brand that has been hit hard by coronavirus shutdowns. They are quite leveraged, with only about $190k in assets and over $10mm in liabilities. They laid off all employees and filed for bankruptcy in March, citing insolvency due to opening a massive manufacturing facility in Brooklyn.

Ample Hills

This article was written by

Harry Sauers profile picture
Research Analyst at Gate City Capital Management, focused mostly on micro-caps & OTC. Interested in cigar butts, asset plays, liquidations, distressed, special situations, etc. Messages and emails are welcome.

Analyst’s Disclosure: I am/we are long SMIT. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (89)

Hillandale Advisors profile picture
Any news? Deadline for filing is likely March 30? Stores still closed?
Hillandale Advisors profile picture
what's the latest? stores still closed?
@Hillandale Advisors Stores are still closed, yes. I'm surprised they haven't filed already
from their website....
PORTLAND, OR, December 19, 2022 – Schmitt Industries, Inc. (NASDAQ: SMIT) today announced that Ample Hills Creamery will be shutting down operations for at least a week, effective immediately. This action is required while the company seeks the additional investment capital required for it to continue operations. There is no assurance that additional capital will be obtained and if the company cannot raise sufficient capital, it will be required to shut down operations indefinitely.
Jamm Systems profile picture
@vicmajid End of the journey! I remember all the excitement when they did the acquisition. Wondering what they could have done differently.

Here's my two cents:
1. Should have shut down or sold the non-ice cream activities right away. An unprofitable, undifferentiated distraction. Maybe could have pulled some cash out.

2. Would have thought hard about best way to use the factory facility.

3. Would it have been possible to find an influencer to partner with and increase online sales? Ice cream is such a local business, though...

4. IDK if the store expansions were the best move. Took cash, long payouts.

5. I would have tried to build the brand nationally by doing ghost kitchen production in other cities. There would be QC issues, but could be overcome. Would have cost very, very little compared to opening physical stores.

As I think about it, what they really bought was a very strong brand name. There were cheaper ways to maximize the value of the brand than to open more physical stores. They had so little cash to start with, and should have thought more about the cash effects of seasonality, normal startup lifecycles and buildouts. It didn't help that they went through like 10 CFOs in a couple of years LOL...

The one good thing is they seem to have continued to honor the brand. It's still got a lot of value.

Just some random thoughts. I wish them the best!
Hillandale Advisors profile picture
@Jamm Systems Just to clarify, they didn't have to buy ice cream, but decide to buy and expand it. Then spin it off... Very difficult business in tough COVID / NYC / inflationary operating environment.
Hillandale Advisors profile picture
What’s the latest here? Big draw down…
Hillandale Advisors profile picture
Focus on ice cream!


PORTLAND, Ore., April 14, 2022 /PRNewswire/ -- Schmitt Industries, Inc. (NASDAQ: SMIT) (the "Company" or "Schmitt") today announced its results for the third quarter of fiscal year 2022. In addition, the Company announced its intention to focus on Ample Hills Creamery ("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 an independent company.

peace 2 u profile picture
@Hillandale Advisors

It is very difficult to run a business which has two very different divisions. Lead the parade of children to the ice cream counter.

Ben and Jerry's need some serious competition. Yummmmmm!

Just a thought (calorie?) or two.

Hillandale Advisors profile picture
Found a new 10% shareholder today!
Charlie's Munger profile picture
Piece of Smitt
Hillandale Advisors profile picture
Harry and team - what are your latest thoughts here? Stock down 57% off high and LTM free cash flow -$8.3mm. What are cash flow projections for NTM?
Miles P. Jennings profile picture
This link describes in detail the plans of former owners of Ample Hills to open major shop at Prospect Park. Scroll up and down this link to see property. As I recall the former owners planned to spend $1 million to renovate this 1920s fantastic site. Right by subway and next to entrance to park. We will see what it looks like on May 31st. newyorkyimby.com/...
Miles P. Jennings profile picture
New scoop shop opens on May 31st at Prospect Park---a new major shop. Freebies etc. celebration. https://www.amplehills.com/

Also, the long awaited android/iOS app for Xact customers: www.prnewswire.com/...
Hillandale Advisors profile picture
What do you think of earnings report?
Jamm Systems profile picture
@Hillandale Advisors Well, here's my thoughts. $3.3 million in cash, $2.4 million operating loss for Q2. Yeah, they have other assets for sale, but at the same time they'll need to raise a significant amount of money to bring Ample Hills to consistent profitability. Everyone loves management team, but when great management meets a mediocre business...

Revenue and gross margins were down once again for the measurement businesses, and anyway they are so small they don't move the needle.

Company has wonderful social media marketing, I am sure that management is energetic and capable. But there's only so much they can do. They need to make some deals, like (just wild thoughts here)-
* Selling off the measurement businesses
* Doing something with the factory to reduce the burn there
* Get creative with Ample Hills' growth plan
* Buy another ice cream brand?

Wouldn't be surprised to see a raise very soon, maybe in association with some M&A. IMO they are a bit late on this.

Another thought- results will seasonally be a ton better just because nobody goes to the ice cream store in January!

I think management will turn this into a (big) winner, but I am not long the stock myself just because of the uncertainty.
@Jamm Systems SMIT management has stated no money needs to be raised. Recent high cash burn was due to Ample Hills acquisition and restart costs. This all happened to take place in the middle of a pandemic as well with majority of AH locations in relatively locked down areas. Moreover, as vaccinations increase and Summer approaches, Ample Hills revenue should increase significantly reducing cash burn or perhaps even generating cash flow. Ample Hills is generating 40%+ Gross Margins in a Pandemic. Definitely not a mediocre business but a good business that requires some clean up due to previous owners that had very little business acumen
Jamm Systems profile picture
@WolvesWR18 The Ample Hills acquisition was nearly a year ago. IDK what acquisition costs were incurred during this quarter, but I doubt they were big.

I'm just saying that if a company burns more than 40% of their cash on hand in 3 months, and if same company needs to incur significant cap ex to become cash flow positive, and if Q2 is also likely to be cash negative, then the prudent thing is to do a raise.

And there's nothing wrong with that! I'm puzzled why if a company does a raise these days, it's seen as a bad thing. If SMIT can get high ROI for the money raised, then we should be happy they're doing a raise.

Prudent management doesn't let cash on hand get down close to $0! You should have a significant cushion, because stuff happens. If I were SMIT management, the current cash level is close to as low as I would ever want it to be.

In this case, a raise would accelerate their move towards being cash flow positive. It would enable them to fully utilize their factory. It would help build the brand.
Jamm Systems profile picture
Wow, belay my last! Receivables are up 38% in the last six months, from $575K to $795K, NOT 70%. I read the wrong line in the 10Q!! Really, really sorry about my error below.

On the other hand, that other line that I thought was receivables was really inventories, which indeed are up from $1,059,000 to $1,751,707. Inventory broke down as follows-

Raw materials up $911K

Work in process down $412K

Finished goods up $193K (from 379K to 572K).

I am guessing that most of that increase in raw materials is for Ample Hills. Ample Hills revenue for the quarter was $1.15MM, while Measurement was $871K. I guess that Ample Hills might need a surprisingly large amount of raw materials- I would have thought they could buy ingredients almost just in time.

Sorry again about my misreading the receivables #s.
peace 2 u profile picture
@Jamm Systems

I accept your work; however, I believe that you failed remember that green tea leaves are read differently from the brown ones.

It appears that the company opened a processing plant for ice cream in Oregon. Although there are several stores in California, I did not see any mention of stores in the West other than California.

Please recall that the ice cream business started out in a warehouse in New York. I never understood how it was related to a measurement business. It would appear that some efforts are being made to expand the ice cream business across the country. It is hard to justify the costs of shipping a few gallons of ice cream 500 miles from Oregon to California.

The green tea leaves are properly understood when the raw materials (what is needed for making ice cream) are paired with the processing facility in Oregon.

Just a thought or two
Jamm Systems profile picture
Well, here's my one cent on the earnings announced 1/14-

At least revenue grew.

Cash has fallen from $10 million to $6.7 million in six months. Receivables strangely are way up, from $1 million to $1.7 million- and it's not people buying ice cream on time. Related to asset sale??

Biggest issue- the measurement business was weak, so they can't count on it to bail out the highly seasonal ice cream activity. This quarter it was down 16% YOY; last quarter only 8%. Yeah, recurring revenue was up, but only by $40K LOL (that's K, not M).

The numbers will look dramatically different during the summer - though that's one quarter out of four. But I don't think a good summer can bail out steep operating losses the other three quarters.

I just don't see them as having the cash to grow their way into profitability from ice cream sales, even with sale of their building (asking $5.5 million). It'll take too much time and $$. They need to change their trajectory. A raise for sure would help, but franchising or some sort of wholesale deal would be better. I have total confidence in Zapata's ability to pull something off, but he oughta get after it.

It was all in all a bad quarter in my opinion, but hey the stock is up at the start today, so clearly I know absolutely nothing (which gets reinforced to me anyway on a daily basis!!)

I'd expect a significant move soon by them.
Jamm Systems profile picture
@Lane Sigurd Also not for nothin', SMIT does a terrific job on social media.
Jamm Systems profile picture
@Harry Sauers Harry, I really am pulling for SMIT, but the latest earnings are dismal. Ice cream melts, cash flows, and restarts take time.

For the quarter, Ample Hills (AH) only generated $500K, despite having at least six stores open for all of August (the busiest month of the year). In normal times, I would have hoped for significantly more, even twice that.

The measurement group had an operating loss of $600K. Monitoring results were better, but it's a tiny activity even by SMIT standards.

Overall they used a bit over $1 million in cash, and now they have the weakest nine months of the year ahead, as far as AH goes.

One certainly can put an asterisk next to all the results. AH was a restart, and surely COVID affected everything.

I'm curious to see whether SMIT will double down behind AH, or whether there will be more M&A ahead. The results of AH were understandable. The results of the measurement group were, to me, more of a concern.

We have to hope for some sort of catalyst here, otherwise it'll be a long winter.
Lane Sigurd profile picture
In the 10-Q it says that number "represents less than a month of retail operations as most of Ample Hills’ locations were opened only partway through August".
Jamm Systems profile picture
@Lane Sigurd Lane, here's the "scoop" (had to say it!)-

3 stores opened July 23

2 opened July 28

2 opened Aug 7

1 opened Aug 20

Based on the data from the AH bankruptcy, one might have expected these stores to have generated somewhere between $1 and $1.5 million (using actual per-store revenue, but guesstimating seasonality effects).

But there was nothing "normal" about August 2020. There were both COVID effects and restart effects. So it's easy to understand the fact that the stores didn't do as well as last year! All I'm doing is pointing out that there's a long way to go, and there's no hard evidence yet pointing towards a quick recovery for AH. That said, I'm 100% a Schmitt/Zapata fan and want them to succeed.
Lane Sigurd profile picture
From BK filings avg of top 7 locations + wholesale was $608k per month in 2019. Avg in Jan/Feb 2020, which is probably the bottom of seasonality, of those same locations + wholesale was $376k/month. I wouldn't have concluded from this data that newly opened stores in August would do $1mm to $1.5mm.
peace 2 u profile picture
Re: Ice Cream

Covid - 19 has been good to the ice cream store just down the street. They seem to have a line from opening to closing.

With all of the lockdowns, people just seem to want to go out for a treat.

Before the lockdowns, the store did fairly well even in the middle of winter.

Maybe the ice cream and soda shops of my youth are making a come-back.

"What is old, is new again."

Just a thought or two.
Jamm Systems profile picture
Just read over the 10-K. Positive view unchanged. A couple of observations-

Overall, it's hard to conclude anything from the #s. No Ample Hills results; Covid; transaction costs; effects from sale of SBS; and (small) inventory write down. Still...

* Company used $228K in operations in the fourth quarter. Not bad at all.

* They noted that they intend to do more acquisitions in the future.

* They upgraded their ERP system.

* They actually had some ($36K, up from $4K!) R&D expense (which might just be a reclassification of other costs). That's only $13K a month, probably one person. Mild criticism here- it's a failure of imagination not to see opportunity to do more R&D to grow Acuity and Xact. Well-reasoned innovation can be lower risk than acquisitions. Benefits of innovation are not just financial; the process is valuable for the team.

* Service (tank monitoring) revenue was up 11%, to $1.5 million, which was 36% of sales. The increase was a bit under 4% of sales. I suppose you could say it was meaningful for a tiny company!

On other fronts, I noticed they opened an Ample Hills store in Long Beach, CA, didn't expect that!

We will get our first decent look at how things will go in more "normal" times after Q1, but it might really be at their annual meeting that we'll get a clear view. If they serve Ample Hills ice cream at the meeting, I might just go! (Hope to see other SA'ers there!)
Low Tide Investments profile picture
Hey Jamm. Great comment. You may be interested in listening to episode 5 of the podcast the founders started, which discusses their financial problems (here is the link: anchor.fm/... Among other things, they noted that:

1. The funding round prior to going bankrupt, Ample Hills was valued at $40-45mm -15:25 mins in

2. Breakeven on the factory is 400,000 gallons (out of the 500,000 they have) - 24 mins in

3. In order to become profitable and not lose money "hand over fist", they would need to open 10-12 more shops from the 13 already opened - 23 mins in
Jamm Systems profile picture
@Low Tide Investments good morning, Low Tide! So right now Schmitt has about 10 stores open. Does that mean they are losing money even faster than the old owners were? Or are they not using the factory?
Harry Sauers profile picture
It's likely there will be a bit of a cash runway needed to get through COVID, then the winter. I would find it very hard to believe that AH is losing money that fast under competent management and a restructured capital base, plus ~$1.5M in PPP loans.

The stores are EBITDA-profitable on a standalone basis (or at least were) and Ample Hills ice cream is available in grocery stores now (Whole Foods I believe), which are immensely mitigating factors. The biz itself is fine, with a couple of factory-related kinks (I'm still surprised Schmitt kept it), it just needs competent ownership/management and restructured financials.
peace 2 u profile picture

I believe that horse has left the barn.

I believe that the liquidation value of the company is still over $10.00 per share. I believe that the $5.00 horse will soon be leaving.

All of this is another way of saying that I do not expect SMIT to remain at these prices very long.

Just a thought or two.

Blevinati profile picture
Does anyone believe that this $SMIT will fall back towards $4 for a dip buy? I'm pretty bullish on this, but want to get that good entry!
Harry Sauers profile picture
If I had a clue about timing / short term pricing, I wouldn't be buying cigar butts!

SMIT's had a strong run-up lately. Is it cheap still? Depends how you slice it.

On one hand: AH alone is *probably* worth north of $10M. However, execution risk and the possibility of it being a fad could render it worth closer to $3-4M or so. It's no doubt a bet on future prospects rather than hard assets, but even ignoring Ample Hills SMIT is hardly expensive: even a conservative, hard-asset valuation is about in line with current prices and suggests a steep margin of safety.

On the other hand: We aren't out of the woods yet on the macro side, and ice cream doesn't sell too well in NYC during the cold months. Mike Zapata is a fantastic capital allocator and NYC native, but there's plenty of unknowns regarding running an ice cream chain. It will be essential to execute on 1) the factory 2) re-opening physical stores and 3) scaling to nationwide distribution and grocery stores. If any of these fail, the value of AH is very much in question since it may not survive as a going concern without additional capital.

I'm long and don't see compelling reason to sell into the current wave of discovery. It's not obviously dumb money (retail) flowing into a pump and dump like I've sold into with APWC, OXBR, etc. in the past.
Blevinati profile picture
Thanks @Harry Sauers for the time on this reply. I'm long now on a small position and am adding on dips. Cheers and thanks again for your additive opinion!
Thanks for the write up and comments here. I’d be interested to hear views/background info on Zapata. At first sight it seems a little disingenuous to announce a delisting, then launch a tender offer (offering institutions a way out at a low price) and then announce that there will NOT be a delisting after all. But I haven’t done a lot of work here - am I missing something?
Harry Sauers profile picture
This article addresses Mr. Zapata's track record fairly well: lowtideinvestments.com/...

I find him to be a man of extremely high integrity and a strong focus on value generation. He's certainly a bit unorthodox, and there is room to critique him (poison pill, not selling RE sooner, not as aggressive w/ buybacks, etc) but you would be hard pressed to find a manager of his size that I would more happily trust with my money.

I believe the tender offer and delisting were announced prior to (seriously) looking at Ample Hills. The AH acquisition fundamentally changes the approach to maximizing shareholder value: continued profitable revenue growth trumps priming the business for a shorter-term acquisition. I think it's an act of good faith to extend the tender offer, but obviously it won't be participated in if shares hold current price levels. I'll take a free put option.

All that being said, it's very much an odd move to give a lowball tender offer prior to delisting. Notably, none of management participated, which should be telling to anyone doing their DD. I think it might have been a move to make sure his shareholder base was aligned with his vision, but this is entirely conjecture and I can't say I agree with that rationale.

Delisting makes sense when you're slicing up the business and <$1m in reporting costs outweighs the benefits of being listed on a major exchange, which is the case for failing industrial business lines with some RE to monetize. With high revenue growth and a high-quality brand, remaining listed will likely create over $1M worth of shareholder value. For that matter, the AH acquisition already has.
Low Tide Investments profile picture
Thanks Harry. Appreciate the kind words. I agree. Was surprised to see the dutch tender range unchanged, but that may be more of a testament to Zapata's deep value approach.

The situation with Ample Hills has been fluid. The dutch tender was announced on June 3rd. On June 9th, Schmitt found out they were the successful bidder of Ample Hills. In the press release from 7/13 where the cancelled the delisting, they specifically state that they aren't delisting anymore BECAUSE of the Ample Hills acquisition. We think it is a significant market signal that they cancelled the delisting because it implies they will be able to justify the expenses of remaining listed/SEC registered due to the Ample Hills acquisition... meaning they expect significant growth in revenue and/or market cap in the future.
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