Exhibit 10.1


 


	Principal Amount: $1,000,000	Issue Date: October 25, 2022
	 	 


PROMISSORY NOTE (this “Note”)


 


FOR VALUE
RECEIVED, SCHMITT INDUSTRIES, INC., an Oregon corporation (hereinafter called the “Borrower” or the “Company”)
(Trading Symbol: SMIT), hereby promises to pay to the order of Sententia Capital Management, LLC, a New York limited liability company,
or its registered assigns (the “Holder”), in the form of lawful money of the United States of America, the principal sum of
$1,000,000.00 (the “Principal Amount”), and to pay interest on the unpaid Principal Amount hereof at the rate of twelve percent
(12%) (the “Interest Rate”) per annum from the date hereof (the “Issue Date”) until the same becomes due and payable,
whether at maturity or upon acceleration or by prepayment or otherwise, as further provided herein. The maturity date shall be the earlier
of (a) one (1) year from the Issue Date, subject to two (2) six-month extensions at the option of the Company, or (b) the occurrence of
an Event of Default (the “Maturity Date”), and is the date upon which the Principal Amount and any accrued and unpaid interest
and other fees, shall be due and payable.


 


This Note may not be prepaid or repaid in whole or in part
except as otherwise explicitly set forth herein.


 


Any Principal
Amount or interest on this Note which is not paid when due shall bear interest at the rate of the lesser of (i) twenty two percent (22%)
per annum and (ii) the maximum amount permitted by law from the due date thereof until the same is paid (“Default Interest”).
Interest and Default Interest shall be computed on the basis of a 365-day year and the actual number of days elapsed.


 


All payments
due hereunder shall be made in lawful money of the United States of America. All payments shall be made at such address as the Holder
shall hereafter give to the Borrower by written notice made in accordance with the provisions of this Note. Whenever any amount expressed
to be due by the terms of this Note is due on any day which is not a business day, the same shall instead be due on the next succeeding
day which is a business day.


 


As used in
this Note, the term “business day” shall mean any day other than a Saturday, Sunday or a day on which commercial banks in
the city of New York, New York are authorized or required by law or executive order to remain closed; provided,
for the avoidance of doubt, that no such commercial banks shall be considered to be authorized or required by law or executive order to
remain closed as a result of “stay at home”, “shelter-in-place”, “non-essential employee” or other
similar orders or restrictions or the closure of any physical branch locations at the direction of any governmental authority so long
as the electronic funds transfer systems (including for wire transfers) of such commercial banks are generally open for sue by customers
on such day.


 


This Note
is free from all taxes, liens, claims and encumbrances with respect to the issue thereof and shall not be subject to preemptive rights
or other similar rights of shareholders of the Borrower and will not impose personal liability upon the holder thereof.


 


The following terms shall also apply to this Note:


 


ARTICLE I. PREPAYMENT AND GENERAL PROVISIONS


 


1.1  
Prepayment. At any time prior to the date that an Event of Default occurs under this Note, the Borrower shall have
the right, exercisable on five (5) days prior written notice to the Holder of the Note, to prepay the outstanding Principal Amount and
any interest then due under this Note in accordance with this Section 1.1, without premium or penalty. Any notice of prepayment hereunder
(an “Optional Prepayment Notice”) shall be delivered to the Holder of the Note at its registered addresses and shall state:
(1) that the Borrower is exercising its right to prepay the Note, and (2) the date of prepayment which shall be five (5) days from the
date of the Optional Prepayment Notice (the “Optional Prepayment Date”). On the Optional Prepayment Date, the Borrower shall
make payment of the amounts designated below to or upon the order of the Holder as specified by the Holder in writing to the Borrower.
If the Borrower delivers an Optional Prepayment Notice and fails to pay the applicable prepayment amount due to the Holder of the Note
as provided in this Section 1.1, then the Borrower shall forever forfeit its right to prepay any part of the Note pursuant to this Section
1.1.


 






     


     


    

 


1.2  
Repayment from Proceeds. If, at any time prior to the full repayment of this Note, the Company receives cash proceeds
from any source or series of related or unrelated sources, including but not limited to, from payments from customers, the issuance of
equity or debt, the conversion of outstanding warrants of the Borrower, the issuance of securities pursuant to an equity line of credit
of the Borrower or the sale of assets, the Borrower shall, within one (1) business day of Borrower’s receipt of such proceeds, inform
the Holder of or publicly disclose such receipt, following which the Holder shall have the right in its sole discretion to require the
Borrower to immediately apply up to 100% of such proceeds to repay all or any portion of the outstanding Principal Amount and interest
(including any Default Interest) then due under this Note. Failure of the Borrower to comply with this provision shall constitute an Event
of Default.


 


1.3  
Effect of Merger, Consolidation, Etc. At the option of the Holder, the sale, conveyance or disposition of all or
substantially all of the assets of the Borrower, or the consolidation, merger or other business combination of the Borrower with or into
any other Person (as defined below) or Persons when the Borrower is not the survivor shall be deemed to be an Event of Default pursuant
to which the Borrower shall be required to pay to the Holder upon the consummation of and as a condition to such transaction an amount
equal to the Default Amount (as defined in this Note). “Person” shall mean any individual, corporation, limited liability
company, partnership, association, trust or other entity or organization.


 


ARTICLE II. RANKING AND
CERTAIN COVENANTS


 


2.1  
Ranking and Security. The indebtedness evidenced by this Note and the payment of the principal, interest, fees, penalties
or other amounts due or payable hereunder shall be Senior (as hereinafter defined) to, and have priority in right of payment over, all
indebtedness of the Company, now outstanding or hereinafter incurred. “Senior” as used herein shall be deemed to mean that,
in the event of any default in the payment of the obligations represented by this Note (after giving effect to "cure" provisions,
if any) or of any liquidation, insolvency, bankruptcy, reorganization, or similar proceedings relating to the Company, all sums payable
on this Note shall first be paid in full, with interest, if any, before any payment is made upon any other indebtedness, now outstanding
or hereinafter incurred, and, in any such event, any payment or distribution of any character which shall be made in respect of any other
indebtedness of the Company, shall be paid over to the Holder for application to the payment hereof, unless and until the obligations
under this Note (which shall mean the principal and other obligations arising out of, premium, if any, interest on, and any costs and
expenses payable under, this Note) shall have been paid and satisfied in full.


 


2.2  
Other Indebtedness. So long as the Borrower shall have any obligation under this Note, the Borrower shall not (directly
or indirectly through any Subsidiary or affiliate) incur or suffer to exist or guarantee any indebtedness that is senior to or pari passu
with (in priority of payment and performance) the Borrower’s obligations hereunder.


 


2.3  
Restriction on Stock Repurchases and Debt Repayments. So long as the Borrower shall have any obligation under this Note,
the Borrower shall not without the Holder’s written consent redeem, repurchase or otherwise acquire (whether for cash or in exchange
for property or other securities or otherwise) in any one transaction or series of related transactions any shares of capital stock of
the Borrower or any warrants, rights or options to purchase or acquire any such shares, or repay any pari passu or subordinated indebtedness
of Borrower.


 


2.4 
3(a)(10) Transaction. So long as this Note is outstanding, the Borrower shall not enter into any transaction or arrangement
structured in accordance with, based upon, or related or pursuant to, in whole or in part, Section 3(a)(10) of the Securities Act (a “3(a)(10)
Transaction”). In the event that the Borrower does enter into, or makes any issuance of Common Stock related to a 3(a)(10) Transaction
while this Note is outstanding, a liquidated damages charge of 25% of the outstanding principal balance of this Note, but not less than
$25,000, will be assessed and will become immediately due and payable to the Holder at its election in the form of a cash payment or added
to the balance of this Note (under Holder's and Borrower's expectation that this amount will tack back to the Issue Date).


 






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2.5 
Preservation of Business and Existence, etc. So long as the Borrower shall have any obligation under this Note, the Borrower
shall not, without the Holder’s written consent, (a) change the nature of its business;


 


(b) sell, divest, change the
structure of any material assets other than in the ordinary course of business; (c) enter into a Variable Rate Transaction; or (d) enter
into any merchant cash advance transactions. In addition, so long as the Borrower shall have any obligation under this Note, the Borrower
shall maintain and preserve, and cause each of its subsidiaries to maintain and preserve, its existence, rights and privileges, and become
or remain, and cause each of its subsidiaries (other than dormant subsidiaries that have no or minimum assets) to become or remain, duly
qualified and in good standing in each jurisdiction in which the character of the properties owned or leased by it or in which the transaction
of its business makes such qualification necessary.


 


2.6 
Use of Proceeds. The proceeds of the Note shall be used exclusively for working capital of the Borrower and its subsidiaries
in accordance with the Approved Budget, in form and substance acceptable to Holder, to be prepared by the Company and furnished to the
Holder setting forth the expenditures and revenues of the Company as set forth on the budget approved by the parties (“Approved
Budget”). Borrower shall not pay any expenses save those set forth in the Approved Budget. The Approved Budget reflects, on a line-item
basis, anticipated cash receipts and expenditures on a weekly basis and includes all necessary and required expenses that Borrower expects
to incur each month of the Approved Budget. The Approved Budget shall be revised by the end of each month during the term of the Note,
and shall remain subject to the consent of the Holder. Not later than the second business day of each week commencing with the second
week of the period covered by the Approved Budget, Borrower shall provide Holder with a variance report, reflecting on a line-item basis,
actual cash disbursements and revenues for the preceding week and the percentage variance (“Variance Percent”) of such actual
disbursements and revenues from those reflected in the Approved Budget for that period. Any disbursement by Borrower other than for budgeted
amounts as set forth in the Approved Budget shall constitute an Event of Default under the Note unless Holder has agreed to the those
changes in writing; provided, however, Borrower may make payments in exceeds of the total budgeted disbursements so long as the Variance
Percent of the aggregate of all actual disbursements for each week shall not exceed ten percent (10%) of the budgeted disbursements for
that week (“Allowed Disbursement Variance”). Any amount included in the Approved Budget that is not incurred or paid during
a particular week shall be permitted to be carried over into subsequent weeks of the Approved Budget. The foregoing shall be tested each
week pursuant to a variance report delivered by Borrower to Holder on the Wednesday of each week reflecting on a line-item basis Borrower’s
actual performance compared to the Approved Budget for the applicable period after Closing and the Variance Percent of Borrower’s
actual results from those reflected


 


2.7 
Fees. In addition to the terms above, the Company shall be pay the fees to the Holder set forth below:


 


(a) Commitment Fee: Three percent (3%) of the
Principal Amount of the Note shall be deemed earned at the Issue Date and added to the Principal Amount.


 


(b) Exit Fee:
Two percent (2%) of the Principal Amount shall be deemed earned at Maturity and added to the Principal Amount.


 


(c) Extension
Fee: Three percent (3%) of the Principal Amount shall be deemed earned at the exercise of each six-month extension and added to the
Principal.


 


(d) Monitor
Fee: The Company shall pay to the Holder ten thousand dollars ($10,000.00) per year paid in cash as a monitor fee.


 


2.8      
Security Agreement and Subsidiary Guarantee. Borrower, its subsidiaries and the Holder shall enter into a Security Agreement,
dated as of the date hereof (the “Security Agreement”) and a Subsidiary Guarantee, dated as of the date hereof (the “Subsidiary
Guarantee”, and together with the Security Agreement and this Note, the “Transaction Documents”).


 


2.9      
Lost, Stolen or Mutilated Note. Upon receipt by the Company of evidence reasonably satisfactory to the Company of the loss,
theft, destruction or mutilation of this Note, and, in the case of loss, theft or destruction, of any indemnification undertaking by the
Holder to the Company in customary form and, in the case of mutilation, upon surrender and cancellation of this Note, the Company shall
execute and deliver to the Holder a new Note.


 






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ARTICLE III. EVENTS OF
DEFAULT


 


It shall be considered an event of
default if any of the following events listed in this Article III (each, an “Event of Default”) shall occur (whatever the
reason for such event and whether such event shall be voluntary or involuntary or effected by operation of law or pursuant to any judgment,
decree or order of any court, or any order, rule or regulation of any administrative or governmental body):


 


3.1  
Failure to Pay Principal or Interest. The Borrower fails to pay the Principal Amount hereof or interest thereon when due
on this Note, whether at maturity, upon acceleration or otherwise, or fails to fully comply with Section 1.2 of this Note.


 


3.2    
Receiver or Trustee. The Borrower or any subsidiary of the Borrower shall make an assignment for the benefit of creditors,
or apply for or consent to the appointment of a receiver or trustee for it or for a substantial part of its property or business, or such
a receiver or trustee shall otherwise be appointed.


 


3.3  
Judgments. Any money judgment, writ or similar process shall be entered or filed against the Borrower or any subsidiary
of the Borrower or any of its property or other assets for more than $100,000, and shall remain unvacated, unbonded or unstayed for a
period of twenty (20) days unless otherwise consented to by the Holder, which consent will not be unreasonably withheld.


 


3.4    
Bankruptcy. Bankruptcy, insolvency, reorganization or liquidation proceedings or other proceedings, voluntary or involuntary,
for relief under any bankruptcy law or any law for the relief of debtors shall be instituted by or against the Borrower or any subsidiary
of the Borrower.


 


3.5      
Liquidation. Any dissolution, liquidation, or winding up of Borrower or any substantial portion of its business.


 


3.6     
Cessation of Operations. Any cessation of operations by Borrower or Borrower admits it is otherwise generally unable to
pay its debts as such debts become due, provided, however, that any disclosure of the Borrower’s ability to continue as a “going
concern” shall not be an admission that the Borrower cannot pay its debts as they become due.


 


3.7       
Maintenance of Assets. The failure by Borrower to maintain any material intellectual property rights, personal, real property
or other assets which are necessary to conduct its business (whether now or in the future).


 


3.8     
Cross-Default. The declaration of an event of default by any lender or other extender of credit to the Company under any
notes, loans, agreements or other instruments of the Company evidencing any indebtedness of the Company (including those filed as exhibits
to or described in the Company’s filings with the SEC), after the passage of all applicable notice and cure or grace periods.


 


3.9     
Variable Rate Transactions. The Borrower consummates a variable rate transaction at any time on or after the Issue Date.


 


3.10  
Rights and Remedies Upon an Event of Default.


 


Upon the
occurrence of any Event of Default specified in this Article III, this Note shall become immediately due and payable, and the Borrower
shall pay to the Holder, in full satisfaction of its obligations hereunder, an amount equal to the Principal Amount then outstanding plus
accrued interest (including any Default Interest) through the date of full repayment multiplied by 22% (collectively the “Default
Amount”), as well as all costs, including, without limitation, legal fees and expenses, of collection, all without demand, presentment
or notice, all of which hereby are expressly waived by the Borrower.


 


Upon the
payment in full of the Default Amount, the Holder shall promptly surrender this Note to or as directed by the Company. In connection with
such acceleration described herein, the Holder need not provide, and the Company hereby waives, any presentment, demand, protest or other
notice of any kind, and the Holder may immediately and without expiration of any grace period enforce any and all of its rights and remedies
hereunder and all other remedies available to it under applicable law. Such acceleration may be rescinded and annulled by Holder at any
time prior to payment hereunder and the Holder shall have all rights as a holder of the Note until such time, if any, as the Holder receives
full payment pursuant to this Section 3.13. No such rescission or annulment shall affect any subsequent Event of Default or impair any
right consequent thereon.


 






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ARTICLE IV. MISCELLANEOUS


 


4.1   
Notices. All notices, demands, requests, consents, approvals, and other communications required or permitted hereunder shall
be in writing and, unless otherwise specified herein, shall be (i) personally served, (ii) deposited in the mail, registered or certified,
return receipt requested, postage prepaid, (iii) delivered by reputable air courier service with charges prepaid, or (iv) transmitted
by hand delivery, telegram, e-mail or facsimile, addressed as set forth below or to such other address as such party shall have specified
most recently by written notice. Any notice or other communication required or permitted to be given hereunder shall be deemed effective
(a) upon hand delivery or delivery by e-mail or facsimile, with accurate confirmation generated by the transmitting facsimile machine,
at the address or number designated below (if delivered on a business day during normal business hours where such notice is to be received),
or the first business day following such delivery (if delivered other than on a business day during normal business hours where such notice
is to be received) or (b) on the second business day following the date of mailing by express courier service, fully prepaid, addressed
to such address, or upon actual receipt of such mailing, whichever shall first occur. The addresses for such communications shall be:


 


If to the Borrower, to:


 


SCHMITT INDUSTRIES, INC.


2765 N.W. Nicolai Street


Portland, Oregon 97210


Attention: Philip Bosco, CFO


e-mail: pbosco@schmitt-ind.com


 


If to the Holder:


 


Sententia
Capital Management, LLC


Attention: Michael Zapata


e-mail: mzapata@sententiacapital.com


 


4.2  
Amendments. This Note and any provision hereof may only be amended by an instrument in writing signed by the Borrower and
the Holder. The term “Note” and all reference thereto, as used throughout this instrument, shall mean this instrument as originally
executed, or if later amended or supplemented, then as so amended or supplemented.


 


4.3  
Assignability. This Note shall be binding upon the Borrower and its successors and assigns, and shall inure to be the benefit
of the Holder and its successors and assigns. The Borrower shall not assign this Note or any rights or obligations hereunder without the
prior written consent of the Holder. The Holder may assign its rights hereunder without the consent of the Borrower.


 


4.4  
Cost of Collection. If default is made in the payment of this Note, the Borrower shall pay the Holder hereof costs of collection,
including reasonable attorneys’ fees.


 






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4.5  
Governing Law; Venue;
Attorney’s Fees. This Note shall be
governed by and
construed in accordance with the laws of the State of Delaware without regard to principles of conflicts of laws. Any action brought
by either party against the other concerning the transactions contemplated by this Note or any other agreement, certificate, instrument
or document contemplated hereby shall be brought only in the Court of Chancery of the State of Delaware or, to the extent such court does
not have subject matter jurisdiction, the United States District Court for the District of Delaware or, to the extent that neither of
the foregoing courts has jurisdiction, the Superior Court of the State of Delaware. The Borrower hereby irrevocably waives any objection
to jurisdiction and venue of any action instituted hereunder and shall not assert any defense based on lack of jurisdiction or venue or
based upon forum non conveniens. THE BORROWER HEREBY IRREVOCABLY WAIVES ANY RIGHT IT MAY HAVE, AND AGREES NOT TO REQUEST, A
JURY TRIAL FOR THE ADJUDICATION OF ANY DISPUTE HEREUNDER OR IN CONNECTION WITH OR ARISING OUT OF THIS NOTE OR ANY TRANSACTIONS CONTEMPLATED
HEREBY. Each party hereby irrevocably waives personal service of process and consents to process being served in any suit, action
or proceeding in connection with this Note or any other agreement, certificate, instrument or document contemplated hereby or thereby
by mailing a copy thereof via registered or certified mail or overnight delivery (with evidence of delivery) to such party at the address
in effect for notices to it under this Note and agrees that such service shall constitute good and sufficient service of process and notice
thereof. Nothing contained herein shall be deemed to limit in any way any right to serve process in any other manner permitted by law.
The prevailing party in any action or dispute brought in connection with this the Note or any other agreement, certificate, instrument
or document contemplated hereby or thereby shall be entitled to recover from the other party its reasonable attorney’s fees and
costs.


 


4.6  
Certain Amounts. Whenever pursuant to this Note the Borrower is required to pay an amount in excess of the outstanding Principal
Amount (or the portion thereof required to be paid at that time) plus accrued and unpaid interest plus Default Interest on such interest,
the Borrower and the Holder agree that the actual damages to the Holder from the receipt of cash payment on this Note may be difficult
to determine and the amount to be so paid by the Borrower represents stipulated damages and not a penalty.


 


4.7     
Remedies. The Borrower acknowledges that a breach by it of its obligations hereunder will cause irreparable harm to the
Holder, by vitiating the intent and purpose of the transaction contemplated hereby. Accordingly, the Borrower acknowledges that the remedy
at law for a breach of its obligations under this Note will be inadequate and agrees, in the event of a breach or threatened breach by
the Borrower of the provisions of this Note, that the Holder shall be entitled, in addition to all other available remedies at law or
in equity, and in addition to the penalties assessable herein, to an injunction or injunctions restraining, preventing or curing any breach
of this Note and to enforce specifically the terms and provisions thereof, without the necessity of showing economic loss and without
any bond or other security being required.


 


4.8     
Construction; Headings. This Note shall be deemed to be jointly drafted by the Company and all the Holder and shall not
be construed against any person as the drafter hereof. The headings of this Note are for convenience of reference and shall not form part
of, or affect the interpretation of this Note.


 


4.9     
Usury. To the extent it may lawfully do so, the Company hereby agrees not to insist upon or plead or in any manner whatsoever
claim, and will resist any and all efforts to be compelled to take the benefit or advantage of, usury laws wherever enacted, now or at
any time hereafter in force, in connection with any action or proceeding that may be brought by the Holder in order to enforce any right
or remedy under this Note. Notwithstanding any provision to the contrary contained in this Note, it is expressly agreed and provided that
the total liability of the Company under this Note for payments which under the applicable law are in the nature of interest shall not
exceed the maximum lawful rate authorized under applicable law (the “Maximum Rate”), and, without limiting the foregoing,
in no event shall any rate of interest or default interest, or both of them, when aggregated with any other sums which under the applicable
law in the nature of interest that the Company may be obligated to pay under this Note exceed such Maximum Rate. It is agreed that if
the maximum contract rate of interest allowed by applicable law and applicable to this Note is increased or decreased by statute or any
official governmental action subsequent to the Issue Date, the new maximum contract rate of interest allowed by law will be the Maximum
Rate applicable to this Note from the effective date thereof forward, unless such application is precluded by applicable law. If under
any circumstances whatsoever, interest in excess of the Maximum Rate is paid by the Company to the Holder with respect to indebtedness
evidenced by this the Note, such excess shall be applied by the Holder to the unpaid principal balance of any such indebtedness or be
refunded to the Company, the manner of handling such excess to be at the Holder’s election.


 


4.10  
Severability. In the event that any provision of this Note is invalid or unenforceable under any applicable statute or rule
of law (including any judicial ruling), then such provision shall be deemed inoperative to the extent that it may conflict therewith and
shall be deemed modified to conform with such statute or rule of law. Any such provision which may prove invalid or unenforceable under
any law shall not affect the validity or enforceability of any other provision of this Note.


 






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4.11   
Dispute Resolution. In the case of a dispute as to any prepayment amount or Default Amount, Issue, Closing or Maturity Date,
or the applicable prepayment amount(s) (as the case may be), the Borrower or the Holder shall submit the disputed determinations or arithmetic
calculations via facsimile (i) within one (1) business day after receipt of the applicable notice giving rise to such dispute to the Borrower
or the Holder or (ii) if no notice gave rise to such dispute, at any time after the Holder learned of the circumstances giving rise to
such dispute. If the Holder and the Borrower are unable to agree upon such determination or calculation within one (1) business day of
such disputed determination or arithmetic calculation (as the case may be) being submitted to the Borrower or the Holder, then the Borrower
shall, within one (1) business day, submit the disputed arithmetic calculation of any prepayment amount or Default Amount, to an independent,
outside accountant selected by the Holder that is reasonably acceptable to the Borrower. The Borrower shall cause at its expense the investment
bank or the accountant to perform the determinations or calculations and notify the Borrower and the Holder of the results no later than
one (1) business day from the time it receives such disputed determinations or calculations. Such investment bank’s or accountant’s
determination or calculation shall be binding upon all parties absent demonstrable error.


 


[signature page follows]


 






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IN WITNESS WHEREOF, Borrower
has caused this Note to be signed in its name by its duly authorized officer on October 25, 2022.


 


SCHMITT INDUSTIRES, INC.


 


	By: /s/ Philip Bosco
	       Name: Philip Bosco
	       Title: Chief Financial Officer