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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________
Form 10-Q
__________________
(Mark One)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended January 31, 2022
OR
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 0-23248
SIGMATRON INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
_________________
| |
Delaware | 36-3918470 |
(State or other jurisdiction of | (I.R.S. Employer |
incorporation or organization) | Identification No.) |
| |
2201 Landmeier Road | |
Elk Grove Village, Illinois | 60007 |
(Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code: (847) 956-8000
| | |
Title of each class Common Stock $0.01 par value per share | Trading Symbol SGMA | Name of each exchange on which registered The NASDAQ Capital Market |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files. Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of a “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer ¨ Accelerated Filer ¨
Non-accelerated Filer x Smaller Reporting Company x
Emerging Growth Company ¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). Yes ¨ No x
Indicate the number of shares outstanding of the registrant’s common stock, $0.01 par value, as of March 21, 2022: 6,021,688
SigmaTron International, Inc.
Index
SigmaTron International, Inc.
Condensed Consolidated Balance Sheets
| | | | | |
| | | | | |
| | January 31, | | | |
| | 2022 | | | April 30, |
| | (Unaudited) | | | 2021 |
| | | | | |
Current assets: | | | | | |
Cash and cash equivalents | $ | 3,146,746 | | $ | 3,509,229 |
| | | | | |
Accounts receivable, less allowance for doubtful accounts of | | | | | |
$100,000 at January 31, 2022 and April 30, 2021, respectively | | 36,854,823 | | | 28,783,161 |
Inventories, net | | 156,317,269 | | | 98,078,601 |
Prepaid expenses and other assets | | 2,632,395 | | | 1,314,834 |
Refundable and prepaid income taxes | | 1,820,764 | | | 388,766 |
Notes receivable | | - | | | 7,014,594 |
Other receivables | | 4,543,803 | | | 2,464,678 |
| | | | | |
Total current assets | | 205,315,800 | | | 141,553,863 |
| | | | | |
Property, machinery and equipment, net | | 36,403,379 | | | 34,186,918 |
| | | | | |
| | | | | |
Intangible assets, net | | 12,625,429 | | | 1,996,749 |
Goodwill | | 11,990,361 | | | - |
Deferred income taxes | | 677,699 | | | 1,647,143 |
Right-of-use operating lease assets | | 11,358,910 | | | 13,015,986 |
Other assets | | 1,267,108 | | | 1,772,748 |
| | | | | |
Total other long-term assets | | 37,919,507 | | | 18,432,626 |
| | | | | |
Total assets | $ | 279,638,686 | | $ | 194,173,407 |
| | | | | |
Liabilities and stockholders' equity: | | | | | |
Current liabilities: | | | | | |
Trade accounts payable | $ | 97,991,636 | | $ | 62,656,451 |
Accrued wages | | 8,393,229 | | | 6,283,987 |
Accrued expenses | | 3,661,445 | | | 2,457,882 |
Income taxes payable | | 742,650 | | | 1,331,504 |
Deferred revenue | | 9,419,469 | | | 423,971 |
Current portion of long-term debt | | 2,857,518 | | | 7,862,058 |
Current portion of finance lease obligations | | 1,212,713 | | | 1,455,638 |
Current portion of operating lease obligations | | 3,248,134 | | | 2,843,758 |
| | | | | |
Total current liabilities | | 127,526,794 | | | 85,315,249 |
| | | | | |
Long-term debt, less current portion | | 52,849,246 | | | 34,783,825 |
Income taxes payable | | 357,331 | | | 404,975 |
Finance lease obligations, less current portion | | 2,099,620 | | | 1,180,496 |
Operating lease obligations, less current portion | | 8,687,855 | | | 10,474,601 |
Other long-term liabilities | | 1,018,771 | | | 1,465,200 |
| | | | | |
Total long-term liabilities | | 65,012,823 | | | 48,309,097 |
| | | | | |
Total liabilities | | 192,539,617 | | | 133,624,346 |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
Commitments and contingencies | | | | | |
| | | | | |
Stockholders' equity: | | | | | |
Preferred stock, $0.01 par value; 500,000 shares | | | | | |
authorized, none issued or outstanding | | - | | | - |
Common stock, $0.01 par value; 12,000,000 shares | | | | | |
authorized, 6,021,688 and 4,269,508 shares issued and | | | | | |
outstanding at January 31, 2022 and April 30, 2021, respectively | | 59,958 | | | 42,560 |
Capital in excess of par value | | 50,321,355 | | | 23,751,461 |
Retained earnings | | 45,977,664 | | | 36,755,040 |
Treasury stock | | (9,259,908) | | | - |
| | | | | |
Total stockholders' equity | | 87,099,069 | | | 60,549,061 |
| | | | | |
Total liabilities and stockholders' equity | $ | 279,638,686 | | $ | 194,173,407 |
| | | | | |
The accompanying notes to the condensed consolidated financial statements are an integral part of these statements. |
SigmaTron International, Inc.
Condensed Consolidated Statements of Operations
| | | | | | | | | | | |
| | | | | | | | | | | |
| | Three Months | | | Three Months | | | Nine Months | | | Nine Months |
| | Ended | | | Ended | | | Ended | | | Ended |
| | January 31, | | | January 31, | | | January 31, | | | January 31, |
| | 2022 | | | 2021 | | | 2022 | | | 2021 |
| | (Unaudited) | | | (Unaudited) | | | (Unaudited) | | | (Unaudited) |
| | | | | | | | | | | |
Net sales | $ | 93,682,451 | | $ | 71,531,348 | | $ | 279,638,499 | | $ | 201,674,728 |
Cost of products sold | | 81,257,305 | | | 65,618,649 | | | 245,853,289 | | | 184,730,296 |
| | | | | | | | | | | |
Gross profit | | 12,425,146 | | | 5,912,699 | | | 33,785,210 | | | 16,944,432 |
| | | | | | | | | | | |
Selling and administrative expenses | | 7,758,582 | | | 5,212,629 | | | 20,675,353 | | | 15,693,893 |
Impairment of notes receivable and investment | | 6,300,235 | | | - | | | 6,300,235 | | | - |
| | | | | | | | | | | |
Operating (loss) income | | (1,633,671) | | | 700,070 | | | 6,809,622 | | | 1,250,539 |
| | | | | | | | | | | |
Gain on extinguishment of long-term debt | | - | | | - | | | (6,282,973) | | | - |
Other (income) expense | | (35,813) | | | 189,341 | | | (109,516) | | | 144,632 |
Interest expense | | 382,031 | | | 287,371 | | | 964,622 | | | 934,248 |
(Loss) income before income tax expense | | (1,979,889) | | | 223,358 | | | 12,237,489 | | | 171,659 |
| | | | | | | | | | | |
Income tax expense (benefit) | | 744,408 | | | (25,910) | | | 3,014,865 | | | 196,199 |
| | | | | | | | | | | |
Net (loss) income | $ | (2,724,297) | | $ | 249,268 | | $ | 9,222,624 | | $ | (24,540) |
| | | | | | | | | | | |
| | | | | | | | | | | |
(Loss) earnings per share – basic | $ | (0.58) | | $ | 0.06 | | $ | 2.08 | | $ | (0.01) |
| | | | | | | | | | | |
(Loss) earnings per share – diluted | $ | (0.58) | | $ | 0.06 | | $ | 1.97 | | $ | (0.01) |
| | | | | | | | | | | |
| | | | | | | | | | | |
Weighted average shares of common stock outstanding | | | | | | | | | | | |
Basic | | 4,729,619 | | | 4,257,508 | | | 4,439,551 | | | 4,255,334 |
| | | | | | | | | | | |
Weighted average shares of common stock outstanding | | | | | | | | | | | |
Diluted | | 4,729,619 | | | 4,310,290 | | | 4,682,598 | | | 4,255,334 |
| | | | | | | | | | | |
The accompanying notes to the condensed consolidated financial statements are an integral part of these statements. |
SigmaTron International, Inc.
Condensed Consolidated Statements of Changes in Stockholders’ Equity
| | | | | | | | | | | | | | | | | |
| For the nine months ended January 31, 2022 (Unaudited) |
| | | | | | | | Capital in | | | | | | | | | Total |
| | Preferred | | | Common | | | excess of par | | | Retained | | | Treasury | | | stockholders’ |
| | stock | | | stock | | | value | | | earnings | | | stock | | | equity |
| | | | | | | | | | | | | | | | | |
Balance at May 1, 2021 | $ | - | | $ | 42,560 | | $ | 23,751,461 | | $ | 36,755,040 | | $ | - | | $ | 60,549,061 |
| | | | | | | | | | | | | | | | | |
Recognition of stock-based
compensation | | - | | | - | | | 20,035 | | | - | | | - | | | 20,035 |
| | | | | | | | | | | | | | | | | |
Restricted stock awards | | - | | | 15 | | | 13,342 | | | - | | | - | | | 13,357 |
| | | | | | | | | | | | | | | | | |
Net income | | - | | | - | | | - | | | 8,796,716 | | | - | | | 8,796,716 |
| | | | | | | | | | | | | | | | | |
Balance at July 31, 2021 | $ | - | | $ | 42,575 | | $ | 23,784,838 | | $ | 45,551,756 | | $ | - | | $ | 69,379,169 |
| | | | | | | | | | | | | | | | | |
Recognition of stock-based
compensation | | - | | | - | | | 122,885 | | | - | | | - | | | 122,885 |
| | | | | | | | | | | | | | | | | |
Exercise of stock options | | - | | | 897 | | | 425,655 | | | - | | | - | | | 426,552 |
| | | | | | | | | | | | | | | | | |
Restricted stock awards | | - | | | 37 | | | 18,524 | | | - | | | - | | | 18,561 |
| | | | | | | | | | | | | | | | | |
Net income | | - | | | - | | | - | | | 3,150,205 | | | - | | | 3,150,205 |
| | | | | | | | | | | | | | | | | |
Balance at October 31, 2021 | $ | - | | $ | 43,509 | | $ | 24,351,902 | | $ | 48,701,961 | | $ | - | | $ | 73,097,372 |
| | | | | | | | | | | | | | | | | |
Recognition of stock-based
compensation | | - | | | - | | | 102,849 | | | - | | | - | | | 102,849 |
| | | | | | | | | | | | | | | | | |
Exercise of stock options | | - | | | 614 | | | 337,846 | | | - | | | - | | | 338,460 |
| | | | | | | | | | | | | | | | | |
Restricted stock awards | | - | | | 49 | | | 31,220 | | | - | | | - | | | 31,269 |
| | | | | | | | | | | | | | | | | |
Issuance of stock | | - | | | 320 | | | 276,800 | | | - | | | - | | | 277,120 |
| | | | | | | | | | | | | | | | | |
Issuance of stock for
acquisition | | - | | | 24,439 | | | 25,220,738 | | | - | | | - | | | 25,245,177 |
| | | | | | | | | | | | | | | | | |
Purchase of treasury stock
related to acquisition | | - | | | (8,973) | | | - | | | - | | | (9,259,908) | | | (9,268,881) |
| | | | | | | | | | | | | | | | | |
Net loss | | - | | | - | | | - | | | (2,724,297) | | | - | | | (2,724,297) |
| | | | | | | | | | | | | | | | | |
Balance at January 31, 2022 | $ | - | | $ | 59,958 | | $ | 50,321,355 | | $ | 45,977,664 | | $ | (9,259,908) | | $ | 87,099,069 |
| | | | | | | | | | | | | | |
| For the nine months ended January 31, 2021 (Unaudited) |
| | | | | | | | Capital in | | | | | | Total |
| | Preferred | | | Common | | | excess of par | | | Retained | | | stockholders’ |
| | stock | | | stock | | | value | | | earnings | | | equity |
| | | | | | | | | | | | | | |
Balance at May 1, 2020 | $ | - | | $ | 42,265 | | $ | 23,619,513 | | $ | 35,214,021 | | $ | 58,875,799 |
| | | | | | | | | | | | | | |
Restricted stock awards | | - | | | 31 | | | 15,198 | | | - | | | 15,229 |
| | | | | | | | | | | | | | |
Net loss | | - | | | - | | | - | | | (900,666) | | | (900,666) |
| | | | | | | | | | | | | | |
Balance at July 31, 2020 | $ | - | | $ | 42,296 | | $ | 23,634,711 | | $ | 34,313,355 | | $ | 57,990,362 |
| | | | | | | | | | | | | | |
Net income | | - | | | - | | | - | | | 626,858 | | | 626,858 |
| | | | | | | | | | | | | | |
Balance at October 31, 2020 | $ | - | | $ | 42,296 | | $ | 23,634,711 | | $ | 34,940,213 | | $ | 58,617,220 |
| | | | | | | | | | | | | | |
Recognition of stock-based
compensation | | - | | | - | | | | | | - | | | 0 |
| | | | | | | | | | | | | | |
Restricted stock awards | | - | | | 69 | | | 17,643 | | | - | | | 17,712 |
| | | | | | | | | | | | | | |
Net income | | - | | | - | | | - | | | 249,268 | | | 249,268 |
| | | | | | | | | | | | | | |
Balance at January 31, 2021 | $ | - | | $ | 42,365 | | $ | 23,652,354 | | $ | 35,189,481 | | $ | 58,884,200 |
SigmaTron International, Inc.
Condensed Consolidated Statements of Cash Flows
| | | | | |
| | | | | |
| | Nine | | | Nine |
| | Months Ended | | | Months Ended |
| | January 31, | | | January 31, |
| | 2022 | | | 2021 |
| | (Unaudited) | | | (Unaudited) |
| | | | | |
Cash flows from operating activities | | | | | |
Net income (loss) | $ | 9,222,624 | | $ | (24,540) |
| | | | | |
Adjustments to reconcile net income (loss) | | | | | |
to net cash (used in) provided by operating activities: | | | | | |
Depreciation and amortization of property, machinery and equipment | | 4,243,598 | | | 3,807,281 |
Stock-based compensation | | 245,769 | | | - |
Restricted stock expense | | 63,187 | | | 32,941 |
Impairment of notes receivable and investment | | 6,300,235 | | | - |
Deferred income tax expense (benefit) | | 754,444 | | | (46,690) |
Gain on extinguishment of long-term debt | | (6,282,973) | | | - |
Amortization of intangible assets | | 331,320 | | | 265,812 |
Amortization of financing fees | | 57,671 | | | 115,987 |
Loss from disposal or sale of machinery and equipment | | 17,411 | | | 171,698 |
| | | | | |
Changes in operating assets and liabilities, net of acquisition | | | | | |
Accounts receivable | | (7,889,599) | | | 4,515,391 |
Inventories | | (57,955,080) | | | 1,128,931 |
Prepaid expenses and other assets | | 1,018,385 | | | (926,407) |
Refundable and prepaid income taxes | | (1,431,998) | | | 752,140 |
Income taxes payable | | (636,498) | | | (63,229) |
Trade accounts payable | | 34,776,901 | | | (7,125,093) |
Operating lease liabilities | | (2,029,446) | | | (422,040) |
Accrued expenses and wages | | 2,208,496 | | | 1,739,518 |
Deferred revenue | | 8,512,477 | | | - |
Net cash (used in) provided by operating activities | | (8,473,076) | | | 3,921,700 |
| | | | | |
Cash flows from investing activities | | | | | |
Purchases of machinery and equipment | | (5,304,146) | | | (2,636,505) |
Cash assumed from acquisition | | 508,274 | | | - |
Advances on notes receivable | | (5,512,000) | | | (4,006,500) |
Net cash used in investing activities | | (10,307,872) | | | (6,643,005) |
| | | | | |
Cash flows from financing activities | | | | | |
Proceeds from the exercise of common stock options | | 765,012 | | | - |
Proceeds under equipment notes | | 1,159,275 | | | 2,397,015 |
Payments under finance lease and sale leaseback agreements | | (1,400,102) | | | (1,501,321) |
Payments under equipment notes | | (842,906) | | | (501,930) |
Proceeds under building notes payable | | - | | | 6,500,000 |
Payments under building notes payable | | (358,574) | | | (6,401,702) |
Borrowings under revolving line of credit | | 333,976,751 | | | 300,857,651 |
Payments under revolving line of credit | | (314,510,791) | | | (302,157,766) |
Payments of debt financing costs | | (74,453) | | | (505,408) |
Payments of debt | | (295,747) | | | - |
Net cash provided by (used in) financing activities | | 18,418,465 | | | (1,313,461) |
| | | | | |
| | | | | |
Change in cash and cash equivalents | | (362,483) | | | (4,034,766) |
Cash and cash equivalents at beginning of period | | 3,509,229 | | | 6,779,445 |
| | | | | |
Cash and cash equivalents at end of period | $ | 3,146,746 | | $ | 2,744,679 |
| | | | | |
Supplementary disclosures of cash flow information | | | | | |
Cash paid for interest | $ | 1,032,492 | | $ | 910,598 |
Cash paid for income taxes | | 4,293,279 | | | 367,061 |
Purchase of machinery and equipment financed | | | | | |
under finance leases | | 2,076,301 | | | 719,545 |
Financing of insurance policy | | 301,190 | | | 242,514 |
Issuance of stock for settlement of lease agreement | | 277,120 | | | - |
| | | | | |
The accompanying notes to the condensed consolidated financial statements are an integral part of these statements. |
Note A – Description of the Business
SigmaTron International, Inc., its subsidiaries (including the recent acquisition of Wagz, Inc.), foreign enterprises, international procurement office (collectively, the “Company”) operates in one business segment as an independent provider of electronic manufacturing services (“EMS”), which includes printed circuit board assemblies, completely assembled (box-build) electronic products. In addition, the Company provides products to the pet technology market. In connection with the production of assembled products, the Company also provides services to its customers, including (1) automatic and manual assemblies and testing of products; (2) material sourcing and procurement; (3) manufacturing and test engineering support; (4) design services; (5) warehousing and distribution services; and (6) assistance in obtaining product approval from governmental and other regulatory bodies.
Note B – Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of SigmaTron International, Inc. (“SigmaTron”), SigmaTron’s wholly-owned subsidiaries Standard Components de Mexico S.A., AbleMex, S.A. de C.V., Digital Appliance Controls de Mexico, S.A. de C.V., Spitfire Controls (Vietnam) Co. Ltd., Spitfire Controls (Cayman) Co. Ltd., and Wagz, Inc., wholly-owned foreign enterprises Wujiang SigmaTron Electronics Co., Ltd. and SigmaTron Electronic Technology Co., Ltd. and international procurement office SigmaTron Taiwan branch (collectively, the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, the condensed consolidated financial statements do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the three and nine month periods ended January 31, 2022 is not necessarily indicative of the results that may be expected for the year ending April 30, 2022. The condensed consolidated balance sheet at April 30, 2021, was derived from audited annual financial statements but does not contain all of the footnotes disclosures from the annual financial statements. For further information, refer to the condensed consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended April 30, 2021.
COVID-19 and CARES Act
A pandemic of respiratory diseases, including variants (commonly known as "COVID-19") began to spread globally, including to the United States, in early 2020. The full impact of the COVID-19 outbreak is inherently uncertain at the time of this report. The COVID-19 outbreak has resulted in travel restrictions and in some cases, prohibitions of non-essential activities, disruption and shutdown of certain businesses and greater uncertainty in global financial markets. The full extent to which COVID-19 impacts the Company’s business, global supply chain, results of operations and financial condition will depend on future developments, which are highly uncertain and cannot be predicted, including, but not limited to, the duration and spread of the outbreak within the U.S., China, Mexico, Vietnam and Taiwan, its severity, the actions to contain the virus or treat its impact, and how quickly and to what extent normal economic and operating conditions can resume.
Note B – Basis of Presentation - Continued
Even after COVID-19 has subsided, the Company may continue to experience materially adverse impacts to its business as a result of COVID-19’s global economic impact, including any recession that has occurred or may occur in the future. There are no comparable recent events which may provide guidance as to the effect of the spread of COVID-19, and, as a result, the ultimate impact of COVID-19, or a similar health epidemic or pandemic, is highly uncertain and subject to change. Although the Company cannot estimate the length or gravity of the impact of the COVID-19 outbreak at this time, if the pandemic continues or pre-pandemic conditions do not return, it may have a material adverse effect on the Company’s results of future operations, financial position, and liquidity in through fiscal year 2023.
On March 27, 2020, former President Trump signed into law the “Coronavirus Aid, Relief, and Economic Security (CARES) Act.” It also appropriated funds for the U.S. Small Business Administration (“SBA”) Paycheck Protection Program to extend loans (each, a “PPP Loan”) that are forgivable in certain situations to promote continued employment, as well as Economic Injury Disaster Loans to provide liquidity to small businesses harmed by COVID-19.
As further described in Note E, the Company received a PPP Loan in the amount of $6,282,973. The PPP Loan was due to mature on April 23, 2022. The Company was notified of the forgiveness of the PPP Loan by the SBA on July 9, 2021 and all principal and accrued interest were forgiven. The accounting for the forgiveness is reflected in the Company’s Statement of Operations under the caption “Gain of extinguishment of long-term debt”.
Under the terms of all PPP Loans, all aspects of the PPP Loan remain subject to review by the SBA for up to six years after forgiveness. While the Company is not aware of any issues, if it is later determined that it violated applicable laws or was otherwise ineligible to receive the PPP Loan, the Company will be required to repay the PPP Loan in its entirety in a lump sum and may be subject to additional penalties. If these events were to transpire, they could have a material adverse effect on the Company’s business, results of operations, financial condition and liquidity for the remainder of fiscal year 2022 and beyond.
Reclassifications
Certain amounts recorded in the prior-period consolidated financial statements have been reclassified to conform to the current-period financial statement presentation. These reclassifications had no effect on previously reported results of operations.
Note C – Inventories, net
The components of inventory consist of the following:
| | | | | |
| | | | | |
| January 31, | | April 30, |
| 2022 | | 2021 |
| | | | | |
Finished products | $ | 23,363,395 | | $ | 22,858,073 |
Work-in-process | | 1,638,122 | | | 5,601,560 |
Raw materials | | 133,719,681 | | | 72,033,278 |
| | 158,721,198 | | | 100,492,911 |
Less excess and obsolescence reserve | | (2,403,929) | | | (2,414,310) |
| $ | 156,317,269 | | $ | 98,078,601 |
Note D – Earnings Per Share and Stockholders’ Equity
The following table sets forth the computation of basic and diluted earnings (loss) per share:
| | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| | Jan 31, | | | Jan 31, | | | Jan 31, | | | Jan 31, |
| 2022 | | 2021 | | 2022 | | 2021 |
| | | | | | | | | | | |
Net (loss) income | $ | (2,724,297) | | $ | 249,268 | | $ | 9,222,624 | | $ | (24,540) |
Weighted-average shares | | | | | | | | | | | |
Basic | | 4,729,619 | | | 4,257,508 | | | 4,439,551 | | | 4,255,334 |
Effect of dilutive stock options | | - | | | 52,782 | | | 243,047 | | | - |
| | | | | | | | | | | |
Diluted | | 4,729,619 | | | 4,310,290 | | | 4,682,598 | | | 4,255,334 |
| | | | | | | | | | | |
Basic (loss) earnings per share | $ | (0.58) | | $ | 0.06 | | $ | 2.08 | | $ | (0.01) |
| | | | | | | | | | | |
Diluted (loss) earnings per share | $ | (0.58) | | $ | 0.06 | | $ | 1.97 | | $ | (0.01) |
Options to purchase 464,144 and 513,232 shares of common stock were outstanding at January 31, 2022 and 2021, respectively. There were 102,000 options granted during the nine month period ended January 31, 2022 and no options were granted during the nine month period ended January 31, 2021. There was $102,849 and $0 stock option expense recognized for the three month periods ended January 31, 2022 and 2021, respectively. There was $245,769 and $0 stock option expense recognized for the nine month periods ended January 31, 2022 and 2021, respectively. There was no balance of unrecognized compensation expense related to the Company’s stock option plans at January 31, 2022 and 2021. For the three month periods ended January 31, 2022 and 2021, 0 and 143,781 shares, respectively, were not included in the diluted weighted average common
Note D – Earnings Per Share and Stockholders’ Equity - Continued
shares outstanding calculation as they were anti-dilutive. For the nine month periods ended January 31, 2022 and 2021, 0 and 240,160 shares, respectively, were not included in the diluted weighted average common shares outstanding calculation as they were anti-dilutive.
Note E – Long-term Debt
Debt and capital lease obligations consisted of the following at January 31, 2022 and April 30, 2021:
| | | | | |
| | Jan 31, | | | April 30, |
| | 2022 | | | 2021 |
| | | | | |
Debt: | | | | | |
Notes Payable - Banks | $ | 45,239,487 | | $ | 32,137,919 |
Notes Payable - Buildings | | 6,579,189 | | | 6,937,763 |
Notes Payable - Equipment | | 4,240,008 | | | 3,923,639 |
Unamortized deferred financing costs | | (351,920) | | | (353,438) |
Total debt | | 55,706,764 | | | 42,645,883 |
Less current maturities | | 2,857,518 | | | 7,862,058 |
Long-term debt | $ | 52,849,246 | | $ | 34,783,825 |
| | | | | |
Finance lease obligations | $ | 3,312,333 | | $ | 2,636,134 |
Less current maturities | | 1,212,713 | | | 1,455,638 |
Total finance lease obligations, less current portion | $ | 2,099,620 | | $ | 1,180,496 |
Notes Payable – Banks
Prior to January 29, 2021, the Company had a senior secured credit facility with U.S. Bank National Association (“U.S. Bank”). The revolving credit facility allowed the Company to borrow up to the lesser of (i) $45,000,000 (the “Revolving Line Cap”) less reserves or (ii) the Borrowing Base, but no more than 80% of the Company’s Revolving Line Cap. Prior to its payoff and termination, the U.S. Bank senior secured credit facility was due to expire on March 31, 2022. On January 29, 2021, the Company paid the balance outstanding under the senior secured credit facility in the amount of $25,574,733. The unamortized deferred financing costs of $158,476 were expensed in fiscal year 2021 upon extinguishment of the debt.
On January 29, 2021, the Company entered into a Credit Agreement (the “Agreement”) with JPMorgan Chase Bank, N.A. (“Lender”), pursuant to which Lender has agreed to provide the Company with a secured credit facility maturing on January 29, 2026, of which (a) up to $50,000,000 is available on a revolving loan basis, and (b) an aggregate of $6,500,000 was borrowed pursuant to two term loans (the “Facility”). The Facility is secured by substantially all of the Company’s assets including mortgages on its two Illinois properties.
Note E – Long-term Debt - Continued
The Facility allows the Company to choose among interest rates at which it may borrow funds for revolving loans: “CBFR Loans,” the interest on which is based on (A) the “REVLIBOR30 Rate” (as defined in the Agreement) unless the REVLIBOR30 Rate is not available, in which case the interest is generally the rate of interest last quoted by The Wall Street Journal as the “Prime Rate” in the U.S., plus (B) an applicable margin of 2.0% (effectively 2.25% per annum at January 31, 2022); or “Eurodollar Loans,” the interest on which is based on (X) an interest rate per annum (rounded upwards, if necessary, to the next 1/16 of 1%) equal to the LIBO Rate (as defined in the Agreement) for any interest period multiplied by the Standard Reserve Rate (as defined in the Agreement) plus (Y) an applicable margin of 2.0%. Under the revolving portion of the Facility, the Company may borrow up to the lesser of (i) $50,000,000 or (ii) an amount equal to a percentage of the eligible receivable borrowing base plus a percentage of the inventory borrowing base minus any reserves established by Lender. Under the Agreement, a minimum Fixed Charge Coverage Ratio (“FCCR”) financial covenant of 1.10x is applicable only during an FCCR trigger period which occurs when (i) an event of default (as defined in the Agreement) has occurred and is continuing, and Lender has elected to impose a FCCR trigger period upon notice to the Company or (ii) availability falls below the greater of (a) 10% of the revolving commitment and (b) the outstanding principal amount of the term loans. The Company was not in a FCCR trigger period as of January 31, 2022. Deferred financing costs of $56,154 and $361,734 were capitalized during the quarter ended January 31, 2022 and fiscal year ended April 30, 2021, respectively, which are amortized over the term of the Agreement. As of January 31, 2022, there was $43,937,445 outstanding and $8,629,221 of unused availability under the revolving Facility compared to an outstanding balance of $24,967,668 and $15,947,990 unused availability at April 30, 2021. As of January 31, 2022 and April 30, 2021, the unamortized amount offset against outstanding debt was $343,880 and $343,890, respectively.
On November 17, 2021, the Company and JPMorgan Chase Bank, N.A. entered into an amendment of the Facility. The amended Facility allows the Company to borrow up to the lesser of (i) $53,000,000 or (ii) an amount equal to a percentage of the eligible receivable borrowing base plus a percentage of the inventory borrowing base minus any reserves established by Lender. Further, the Facility was amended to allow in some circumstances customer deposits to be deemed eligible for collateral purposes.
On March 17, 2022, the Company and JPMorgan Chase Bank, N.A. entered into an amendment of the Facility. The amended Facility allows the Company to borrow up to the lesser of (i) $60,000,000 or (ii) an amount equal to a percentage of the eligible receivable borrowing base plus a percentage of the inventory borrowing base minus any reserves established by Lender. Further, the Facility was amended to allow in some circumstances accounts arising from sales of inventory subject to bill and hold arrangements to be deemed eligible for collateral purposes.
On April 23, 2020, the Company received a PPP Loan from U.S. Bank, as lender, pursuant to the Paycheck Protection Program of the CARES Act, as administered by the SBA in the amount of $6,282,973. The Company submitted its loan forgiveness application on March 26, 2021. The Company was notified of the forgiveness of the PPP Loan by the SBA on July 9, 2021 and all principal and accrued interest were forgiven. The accounting for the forgiveness is reflected in the Company’s Statement of Operations as a non-cash gain upon extinguishment of long-term debt.
Note E – Long-term Debt - Continued
Under the terms of all PPP Loans, all aspects of the PPP Loan remain subject to review by the SBA for up to six years after forgiveness. While the Company is not aware of any issues, if it is later determined that it violated applicable laws or was otherwise ineligible to receive the PPP Loan, the Company will be required to repay the PPP Loan in its entirety in a lump sum and may be subject to additional penalties. If these events were to transpire, they could have a material adverse effect on the Company’s business, results of operations, financial condition and liquidity for the remainder of fiscal year 2022 and beyond.
On March 15, 2019, the Company’s wholly-owned subsidiary, SigmaTron Electronic Technology Co., Ltd., entered into a credit facility with China Construction Bank. On January 26, 2021, the agreement was amended which terminated on January 6, 2022. On January 17, 2022, the agreement was renewed, and is scheduled to expire on December 23, 2022. Under the agreement SigmaTron Electronic Technology Co., Ltd. can borrow up to 9,000,000 Renminbi, approximately $1,411,853 as of January 31, 2022, and the facility is collateralized by Wujiang SigmaTron Electronics Co., Ltd.’s manufacturing building. Interest is payable monthly and the facility bears a fixed interest rate of 3.8%. The term of the facility extends to December 23, 2022. There was $1,302,042 outstanding under the facility at January 31, 2022 compared to an outstanding balance of $824,159 at April 30, 2021.
Notes Payable – Buildings
The Company entered into a mortgage agreement on December 21, 2017, in the amount of $5,200,000, with U.S. Bank to refinance the property that serves as the Company’s corporate headquarters and its Illinois manufacturing facility in Elk Grove Village, Illinois. The note required the Company to pay monthly principal payments in the amount of $17,333, bore interest at a fixed rate of 4.0% per year and was payable over a fifty one month period. Deferred financing costs of $74,066 were capitalized in fiscal year 2018 which were amortized over the term of the agreement. On January 29, 2021, the Company repaid its U.S. Bank mortgage in the amount outstanding of $4,576,000, using proceeds from the Facility extended by Lender. The Company recorded a prepayment penalty of $120,842 in fiscal year 2021. The remaining deferred financing costs of $21,365 were expensed in fiscal year 2021.
The Company entered into a mortgage agreement on December 21, 2017, in the amount of $1,800,000, with U.S. Bank to refinance the property that serves as the Company’s engineering and design center in Elgin, Illinois. The note required the Company to pay monthly principal payments in the amount of $6,000, bore interest at a fixed rate of 4.0% per year and was payable over a fifty one month period. Deferred financing costs of $65,381 were capitalized in fiscal year 2018 which were amortized over the term of the agreement. On January 29, 2021, the Company repaid its U.S. Bank mortgage in the amount outstanding of $1,584,000, using proceeds from the Facility extended by Lender. The Company recorded a prepayment penalty of $41,830 in fiscal year 2021. The remaining deferred financing costs of $18,859 were expensed in fiscal year 2021.
The Company’s Facility with Lender, entered into on January 29, 2021, also included two term loans, in the aggregate principal amount of $6,500,000. The loans require the Company to pay aggregate principal payments in the amount of $36,111 per month for 60 months, plus monthly payments of
Note E – Long-term Debt - Continued
interest thereon at (A) the REVLIBOR30 Rate, unless the REVLIBOR30 Rate is not available, in which case the interest is generally the rate of interest last quoted by The Wall Street Journal as the “Prime Rate” in the U.S., plus (B) an applicable margin of 2.5%; (effectively 2.75% per annum at January 31, 2022); or “Eurodollar Loans,” the interest on which is based on (X) an interest rate per annum (rounded upwards, if necessary, to the next 1/16 of 1%) equal to the LIBO Rate (as defined in the Agreement) for any interest period multiplied by the Standard Reserve Rate (as defined in the Agreement) plus (Y) an applicable margin of 2.5%. Deferred financing costs of $10,050 were capitalized during fiscal year 2021 which are amortized over the term of the agreement. As of January 31, 2022, the unamortized amount included as a reduction to long-term debt was $8,040. A final aggregate payment of approximately $4,368,444 is due on or before January 29, 2026. The outstanding balance was $6,102,778 at January 31, 2022 compared to an outstanding balance of $6,427,778 at April 30, 2021.
The Company entered into a mortgage agreement on March 3, 2020, in the amount of $556,000, with The Bank & Trust, SSB to finance the purchase of the property that serves as the Company’s warehousing and distribution center in Del Rio, Texas. The note requires the Company to pay monthly installment payments in the amount of $6,103. Interest accrues at a fixed rate of 5.75% per year until March 3, 2025, and adjusts thereafter, on an annual basis, equal to 1.0% over the Prime Rate as published by The Wall Street Journal. The note is payable over a 120 month period. The outstanding balance was $476,411 and $509,985 at January 31, 2022 and April 30, 2021, respectively.
Notes Payable – Equipment
The Company routinely enters into secured note agreements with Engencap Fin S.A. DE C.V. to finance the purchase of equipment located in Mexico. The terms of these secured note agreements mature from February 1, 2022 through May 1, 2023, with quarterly installment payments ranging from $11,045 to $37,941 and a fixed interest rate ranging from 6.65% to 8.00%.
The Company routinely enters into secured note agreements with FGI Equipment Finance LLC to finance the purchase of equipment located in Mexico. The terms of these secured note agreements mature from March 1, 2025 through October 1, 2026, with quarterly installment payments ranging from $10,723 to $71,326 and a fixed interest rate of 8.25%.
Note E – Long-term Debt - Continued
Annual maturities of the Company’s debt, net of deferred financing fees for the remaining periods as of January 31, 2022, are as follows:
| | | | | | | | | | | | |
| | Bank | | Building | | Equipment | | Total |
| | | | | | | | | | | | |
For the remaining 3 months of the fiscal year ending April 30: | 2022 | $ | - | | $ | 119,850 | | $ | 290,446 | | $ | 410,296 |
For the fiscal years ending April 30: | 2023 | | 1,302,042 | | | 481,085 | | | 1,029,618 | | | 2,812,745 |
| 2024 | | - | | | 483,904 | | | 1,002,250 | | | 1,486,154 |
| 2025 | | - | | | 486,890 | | | 1,077,625 | | | 1,564,515 |
| 2026 | | 43,593,565 | | | 4,743,124 | | | 701,712 | | | 49,038,401 |
| 2027 | | - | | | 60,068 | | | 138,357 | | | 198,425 |
| Thereafter | | - | | | 196,228 | | | - | | | 196,228 |
| | $ | 44,895,607 | | $ | 6,571,149 | | $ | 4,240,008 | | $ | 55,706,764 |
| | | | | | | | | | | | |
Finance Lease and Sales Leaseback Obligations
The Company enters into various finance lease and sales leaseback agreements. The terms of the lease agreements mature through November 1, 2025, with monthly installment payments ranging from $1,455 to $40,173 and a fixed interest rate ranging from 3.75% to 12.73%.
Note F – Income Tax
The income tax expense was $744,408 for the three month period ended January 31, 2022 compared to an income tax benefit of $25,910 for the same period in the prior fiscal year. The Company’s effective tax rate was 37.60% and (11.60)% for the quarters ended January 31, 2022 and 2021, respectively. The increase in income tax expense for the three month period ended January 31, 2022 compared to the same period in the previous year is due to increased taxable income recognized in the current quarter compared to the previous year, and variations in income earned by jurisdiction. The increase in effective tax rate is due to variations in income earned by jurisdiction.
The income tax expense was $3,014,865 for the nine month period ended January 31, 2022 compared to an income tax expense of $196,199 for the same period in the prior fiscal year. The Company’s effective tax rate was 24.64% and 114.29% for the nine month period ended January 31, 2022 and 2021, respectively. The increase in income tax expense for the nine month period ended January 31, 2022 compared to the same period in the previous year is due to increased income recognized in the current year compared to the previous year. The decrease in effective tax rate for the nine month period ended January 31, 2022 is due to variations in income earned by jurisdiction.
As described in Note E, the Company received a PPP Loan under the CARES Act of $6,282,973. For federal income tax purposes, the CARES Act expressly provides that any forgiveness or cancellation of all or part of such loans will not be treated as income for tax purposes. On January 6, 2021 the IRS issued Revenue Ruling 2021-02 allowing deductions for the payments of eligible expenses when such payments would result in the forgiveness of a loan under the PPP. The ruling supersedes previous IRS guidance stating that such deductions would be disallowed. The Company received full forgiveness of
Note F – Income Tax - Continued
its PPP Loan on July 9, 2021. In accordance with the CARES Act and IRS Revenue Ruling 2021-02, the loan forgiveness amount was excluded from income for tax purposes during the three month period ended July 31, 2021.
Pursuant to SigmaTron’s acquisition with Wagz, Inc. (“Wagz”), it is expected that SigmaTron and Wagz (collectively, the “Company”) will file tax returns on a consolidated basis for periods ending after the merger. In evaluating the group’s ability to recover its deferred tax assets on a consolidated basis, and considering historical operating results of both companies, the group’s deferred tax assets are not more likely than not to be realized. Therefore, a valuation allowance of $3,232,998 was established as of December 31, 2021. This amount includes a valuation allowance of $2,581,817 against Wagz’s deferred tax assets recorded through the opening balance sheet and $651,181 against SigmaTron’s deferred tax assets as of December 31, 2021. During the current quarter the Company determined based on historical operating income and recent financial results that the loss carryforwards and other deferred tax assets of one of its Chinese subsidiaries, which were previously offset by a full valuation allowance, would more likely than not be utilized. For this reason a reduction of $524,517 and related discrete benefit associated with these deferred tax assets was recognized in the current quarter. The Company’s valuation allowance was $3,483,732 and $1,138,736 as of January 31, 2022 and April 30, 2021, respectively.
The Company has not changed its plans to indefinitely reinvest the earnings of the Company’s foreign subsidiaries. The cumulative amount of unremitted earnings for which U.S. income taxes have not been recorded is $8,910,000 as of January 31, 2022.
Note G – Commitments and Contingencies
From time to time the Company is involved in legal proceedings, claims or investigations that are incidental to the conduct of the Company’s business. In future periods, the Company could be subjected to cash cost or non-cash charges to earnings if any of these matters are resolved on unfavorable terms. However, although the ultimate outcome of any legal matter cannot be predicted with certainty, based on present information, including management’s assessment of the merits of any particular claim, the Company does not expect that these legal proceedings or claims will have any material adverse impact on its future consolidated financial position, results of operations or cash flows.
Note H – Significant Accounting Policies
Management Estimates and Uncertainties - The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates made in preparing the consolidated financial statements include depreciation and amortization periods, the allowance for doubtful accounts, excess and obsolete reserves for inventory, deferred income, deferred taxes, uncertain tax positions, valuation allowance for deferred taxes and
Note H – Significant Accounting Policies - Continued
valuation of goodwill and long-lived assets. Actual results could materially differ from these estimates.
The potential impact of future disruptions and continued economic uncertainty over COVID-19, including variants, and the global supply chain may have a significant adverse impact on the timing of delivery of customer orders and the levels of future customer orders. It is possible that these potential adverse impacts may result in the recognition of material impairments of the Company’s long-lived assets or other related charges in future periods.
Revenue Recognition - The following table presents the Company’s revenue disaggregated by the principal end-user markets it serves:
| | | | | | | | | | | | | |
| | | | Three Months Ended | | | Nine Months Ended |
| | | | January 31, | | | January 31, | | | January 31, | | | January 31, |
| Net trade sales by
end-market | | | 2022 | | | 2021 | | | 2022 | | | 2021 |
| Industrial Electronics | | $ | 48,955,249 | | $ | 36,433,938 | | $ | 151,294,676 | | $ | 108,705,275 |
| Consumer Electronics | | | 39,234,459 | | | 30,680,777 | | | 111,550,506 | | | 82,520,093 |
| Medical / Life Sciences | | | 5,492,743 | | | 4,416,633 | | | 16,793,317 | | | 10,449,360 |
| Total Net Trade Sales | | $ | 93,682,451 | | $ | 71,531,348 | | $ | 279,638,499 | | $ | 201,674,728 |
| | | | | | | | | | | | | |
During the three and nine month periods ending January 31, 2022, no revenues were recognized from performance obligations satisfied or partially satisfied in previous periods and no amounts were allocated to performance obligations that remain unsatisfied or partially unsatisfied at January 31, 2022. The Company is electing not to disclose the value of the remaining unsatisfied performance obligation with a duration of one year or less as permitted by the practical expedient in ASU 2014-09,
“Revenue from Contracts with Customers.” The Company had no material remaining unsatisfied performance obligations as of January 31, 2022, with an expected duration of greater than one year.
Income Tax - The Company’s income tax expense, deferred tax assets and liabilities and reserves for unrecognized tax benefits reflect management’s best assessment of estimated future taxes to be paid. The Company is subject to income taxes in both the U.S. and several foreign jurisdictions. Significant judgments and estimates by management are required in determining the consolidated income tax expense assessment.
Deferred income tax assets and liabilities are determined based on differences between financial reporting and tax basis of assets and liabilities, and are measured using the enacted tax rates and laws that are expected to be in effect when the differences are expected to reverse. In evaluating the Company’s ability to recover its deferred tax assets within the jurisdiction from which they arise, the Company considers all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies and recent financial operations. In projecting future taxable income, the Company begins with historical results and changes in accounting policies, and incorporates assumptions including the amount of future state, federal and foreign pre-tax operating income, the reversal of temporary differences, and the
Note H – Significant Accounting Policies - Continued
implementation of feasible and prudent tax planning strategies. These assumptions require significant judgment and estimates by management about the forecasts of future taxable income and are consistent with the plans and estimates the Company uses to manage the underlying businesses. In evaluating the objective evidence that historical results provide, the Company considers, among other factors, three years of cumulative operating income and/or loss. Valuation allowances are established when necessary to reduce deferred income tax assets to an amount more likely than not to be realized.
Investment in Wagz - The Company had recorded an investment in Wagz, Inc. (“Wagz”), a privately held company whose equity did not have a readily determinable fair value. As permitted by ASC 321, Investments - Equity Securities, paragraph 321-35-2, the Company had elected to carry its investment in Wagz equity at its cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for identical or similar investments of the same issuer until the investment no longer qualified to be measured under paragraph 321-35-2. The recognized fair value of Wagz common stock was $600,000 at April 30, 2021 which was recorded within Other assets in the Consolidated Balance Sheet. On December 31, 2021, the Company acquired 100% of the Wagz stock.
On May 29, 2020, the Company and Wagz, a privately held company in the pet technology market, entered into a Convertible Secured Promissory Note in the principal sum of up to $4,052,478. Between January 27, 2021 and December 31, 2021, Wagz issued additional convertible secured promissory notes and secured notes aggregating to $7,947,522 and $977,133, respectively (collectively, the “Notes”) which were accounted for as Notes receivable in the Consolidated Balance Sheet. The Notes were due (the “Maturity Date”) on the earliest to occur of (a) December 31, 2021 or, if the closing of the Company’s proposed acquisition of Wagz (the “Closing”) does not occur due to the Company’s termination, that date which is twelve (12) months after the date of such termination, (b) upon the closing of a sale of all or substantially all of the assets or common stock of Wagz (other than the Closing), or (c) an Event of Default (as defined in the Notes). Interest is payable at the rate of four percent (4%) per annum and is payable on the Maturity Date. The Notes were
Note H – Significant Accounting Policies - Continued
collateralized by substantially all assets of Wagz. The Notes do not meet the accounting definition of a security and are accounted for under ASC 310, Receivables, at amortized cost.
On December 31, 2021, the Company consummated the merger contemplated by the Agreement and Plan of Merger, dated July 19, 2021, as amended by the First Amendment to Agreement and Plan of Merger dated December 7, 2021. Please refer to Note J – Acquisition for more information.
Prior to the acquisition, the Company had an investment in Wagz, along with Convertible Secured Promissory Notes and Secured Promissory Notes issued by Wagz, for a total of $12,600,000. As per the merger agreement and just prior to the acquisition, all of these items converted to 12,600,000 shares of Wagz common stock, resulting in a 25.5% ownership in Wagz. The Company's 25.5% equity interest of Wagz common stock was remeasured to fair value of $6,300,000, resulting in a non-cash impairment charge of $6,300,235. The loss is included in Impairment of notes receivable and investment in operating expenses within the Statements of Operations for the three and nine month periods ended January 31, 2022. The fair value of the Company’s noncontrolling interest in Wagz was determined using a market approach. This fair value measurement is based on significant inputs that are not observable in the market and thus represents a fair value measurement categorized within Level 3 of the fair value hierarchy, with a key assumption being the revenue multiple of comparable public companies in the Pet Tech market. See Note J - Acquisition for more information.
In November 2020, Wagz sought short-term financing for its operations and secured a commitment from Angel Business Credit, LLC (“ABC”) for a loan of $250,000 conditioned on Wagz granting ABC a security interest in its assets and Gary R. Fairhead executing a personal guaranty. Mr. Fairhead is SigmaTron’s President and CEO; his personal guaranty requires the approval of the Audit Committee of SigmaTron’s Board of Directors. After consideration, the Audit Committee determined that Mr. Fairhead’s guaranty was in the best interests of the Company and approved the guaranty. The loan closed on November 12, 2020, and its principal, plus interest equal to $5,000, were due on the maturity date, December 10, 2020. The loan was paid in full on December 8, 2020. As a result, Mr. Fairhead’s guaranty was cancelled and ABC’s security interest was terminated.
New Accounting Standards:
In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” ASU 2016-13, as amended by ASU 2019-04 and ASU 2019-05, that introduces a new forward-looking approach, based on expected losses, to estimate credit losses on certain types of financial instruments, including trade receivables. The estimate of expected credit losses will require entities to incorporate considerations of historical information, current information and reasonable and supportable forecasts. This ASU also expands the disclosure requirements to enable users of financial statements to understand the entity’s assumptions, models and methods for estimating expected credit losses. For small reporting companies, ASU 2016-
Note H – Significant Accounting Policies - Continued
13 is effective for annual and interim reporting periods beginning after December 15, 2022, and the guidance is to be applied using the modified-retrospective approach. Earlier adoption is permitted. The Company is currently evaluating the impact of this guidance on its consolidated financial statements.
In March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting”, which provides optional expedients and exceptions for a period of time to ease the potential burden in accounting for the transition from reference rates that are expected to be discontinued. Regulators and market participants in various jurisdictions have undertaken efforts to eliminate certain reference rates and introduce new reference rates that are based on a larger and more liquid population of observable transactions. The amendments in this update apply only to contracts, hedging relationships and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. The expedients and exceptions provided by the amendments do not apply to contract modifications made and hedging relationships entered into or evaluated after December 31, 2022, except for hedging relationships existing as of December 31, 2022, that an entity has elected certain optional expedients for and that are retained through the end of the hedging relationship. In January 2021, the FASB issued clarification on the scope of relief related to the reference rate reform. The Company is currently evaluating the impact of this guidance on its consolidated financial statements.
Note I – Leases
The Company leases office and storage space, vehicles and other equipment under non-cancellable operating leases with initial terms typically ranging from 1 to 5 years. At contract inception, the Company reviews the facts and circumstances of the arrangement to determine if the contract is or contains a lease. The Company follows the guidance in Topic 842 “Leases” to evaluate whether the contract has an identified asset; if the Company has the right to obtain substantially all economic benefits from the asset; and if the Company has the right to direct the use of the underlying asset. When determining if a contract has an identified asset, the Company considers both explicit and implicit assets, and whether the supplier has the right to substitute the asset. When determining if the Company has the right to direct the use of an underlying asset, the Company considers if it has the right to direct how and for what purpose the asset is used throughout the period of use and if it controls the decision-making rights over the asset.
The Company’s lease terms may include options to extend or terminate the lease. The Company exercises judgment to determine the term of those leases when extension or termination options are present and include such options in the calculation of the lease term when it is reasonably certain that it will exercise those options.
The Company has elected to include both lease and non-lease components in the determination of lease payments. Payments made to a lessor for items such as taxes, insurance, common area maintenance, or other costs commonly referred to as executory costs, are also included in lease payments if they are fixed. The fixed portion of these payments are included in the calculation of the lease liability, while any variable portion would be recognized as variable lease expenses, when incurred. Variable payments made to third parties for these, or similar costs, such as utilities, are not included in the calculation of lease payments.
Note I – Leases - Continued
At lease commencement, lease-related assets and liabilities are measured at the present value of future lease payments over the lease term. As most of the Company’s leases do not provide an implicit rate, the Company exercises judgment in determining the incremental borrowing rate based on the information available when the lease commences to measure the present value of future payments.
Operating lease expense is recognized on a straight-line basis over the lease term. Finance lease cost includes amortization, which is recognized on a straight-line basis over the expected life of the leased asset, and interest expense, which is recognized following an effective interest rate method.
Operating leases are included in other assets, current operating lease obligations, and operating lease obligations (less current portion) on the Company’s consolidated balance sheet. Finance leases are included in property, plant and equipment and current and long-term portion of finance lease obligations on the Company’s consolidated balance sheet. Short term leases with an initial term of 12 months or less are not presented on the balance sheet with expense recognized as incurred.
The following table presents lease assets and liabilities and their balance sheet classification:
| | | | | | | |
| | | | January 31, | | | April 30, |
| Classification | | | 2022 | | | 2021 |
Operating Leases: | | | | | | | |
Right-of-use Assets | Right-of-use operating lease assets | | $ | 11,358,910 | | $ | 13,015,986 |
Operating lease current
liabilities | Current portion of operating lease
obligations | | | 3,248,134 | | | 2,843,758 |
Operating lease noncurrent
liabilities | Operating lease obligations, less
current portion | | | 8,687,855 | | | 10,474,601 |
Finance Leases: | | | | | | | |
Right-of-use Assets | Property, machinery and equipment,
net | | | 6,587,925 | | | 5,843,068 |
Finance lease current
liabilities | Current portion of finance lease
obligations | | | 1,212,713 | | | 1,455,638 |
Finance lease noncurrent
liabilities | Finance lease obligations, less
current portion | | | 2,099,620 | | | 1,180,496 |
Note I – Leases – Continued
The components of lease expense for the three and nine month periods ended January 31, 2022 and 2021, are as follows:
| | | | | | | | | |
| | | Three Months | | Three Months | | Nine Months | | Nine Months |
| | | Ended | | Ended | | Ended | | Ended |
| Expense | | January 31, | | January 31, | | January 31, | | January 31, |
| Classification | | 2022 | | 2021 | | 2022 | | 2021 |
Operating Leases: | | | | | | | | | |
Operating lease cost | Operating | | 602,488 | | 351,751 | | 1,783,546 | | 1,078,763 |
Variable lease cost | Operating | | 53,960 | | 80,109 | | 161,765 | | 236,803 |
Short term lease cost | Operating | | 1,800 | | 1,350 | | 5,400 | | 4,050 |
Finance Leases: | | | | | | | | | |
Amortization of
right-of-use assets | Operating | | 548,833 | | 457,359 | | 1,683,054 | | 1,370,094 |
Interest expense | Interest | | 63,808 | | 70,698 | | 201,791 | | 193,099 |
Total | | | 1,270,889 | | 961,267 | | 3,835,556 | | 2,882,809 |
The weighted average lease term and discount rates for the quarters ended January 31, 2022 and 2021, are as follows:
| | | | |
| | |
| | January 31, | | January 31, |
| | 2022 | | 2021 |
Operating Leases: | | | | |
Weighted average remaining lease term (months) | | 48.44 | | 57.80 |
Weighted average discount rate | | 3.2% | | 3.0% |
Finance Leases: | | | | |
Weighted average remaining lease term (months) | | 33.31 | | 32.75 |
Weighted average discount rate | | 9.1% | | 7.7% |
Note I – Leases – Continued
Future payments due under leases reconciled to lease liabilities are as follows:
| | | | | | |
| | | Operating Leases | | | Finance Leases |
For the remaining 3 months of the fiscal year ending April 30: | | | | | | |
2022 | | $ | 896,602 | | $ | 528,795 |
For the fiscal years ending April 30: | | | | | | |
2023 | | | 3,600,025 | | | 1,749,125 |
2024 | | | 3,126,044 | | | 1,418,540 |
2025 | | | 2,508,077 | | | 1,197,692 |
2026 | | | 2,019,426 | | | 530,423 |
2027 | | | 445,296 | | | - |
Thereafter | | | 150,252 | | | - |
Total undiscounted lease payments | | | 12,745,722 | | | 5,424,575 |
Present value discount, less interest | | | 809,733 | | | 2,112,242 |
Lease liability | | $ | 11,935,989 | | $ | 3,312,333 |
Supplemental disclosures of cash flow information related to leases for the nine months ended January 31, 2022 and 2021 are as follows:
| | |
| | |
| Nine Months Ended |
| January 31, | January 31, |
Other Information | 2022 | 2021 |
Cash paid for amounts included in the measurement of lease liabilities: | | |
Operating cash flows from finance leases | 201,791 | 193,099 |
Operating cash flows from operating leases | 290,431 | 162,220 |
Financing cash flows from finance leases | 1,400,102 | 1,501,321 |
Supplemental non-cash information on lease labilities arising from
obtaining right-of-use assets: | | |
Right-of-use assets obtained in exchange for
new finance lease liabilities | 2,076,301 | 719,545 |
Right-of-use assets obtained in exchange for
operating lease liabilities | 1,657,076 | 1,192,690 |
Note J – Acquisition
On December 31, 2021, the Company acquired 100% of the stock of Wagz, Inc. (“Wagz”), a pet technology (“Pet Tech”) company. Wagz has developed a collar, among other things, which will diversify the Company’s product offering.
Prior to the acquisition, the Company had an investment in Wagz, along with Convertible Secured Promissory Notes and Secured Promissory Notes issued by Wagz, for a total of $12,600,000. As per the merger agreement, prior to the acquisition, all of these items converted to 12,600,000 shares of Wagz common stock, resulting in a 25.5% ownership in Wagz. As described in Note H, the Company's 25.5% equity interest of Wagz common stock was remeasured to fair value of $6,299,765, resulting in a non-cash impairment charge of $6,300,235.
As per the Agreement and Plan of Merger, as amended by the First Amendment to Agreement and Plan of Merger dated December 7, 2021, 2,443,870 shares of common stock of the Company were issued in the merger for a value of $25,245,177, of which 1,546,592 shares are allocated to Wagz shareholders (excluding the Company) for a total value of $15,976,295, and 897,278 shares are allocated to the Company and treated as treasury stock for a total value of $9,268,881, recorded in the Statements of Changes in Stockholders’ Equity under Issuance of stock for acquisition and Purchase of treasury stock related to acquisition, respectively.
The following table summarizes the consideration for the acquisition of Wagz:
| | |
Consideration | | |
Issuance of 1,546,592 common stock of SigmaTron | $ | 15,976,295 |
Fair value of consideration transferred | | 15,976,295 |
Fair value of SigmaTron's equity interest in Wagz held
prior to the business combination (Note H) | | 6,299,765 |
| $ | 22,276,060 |
The following table presents the preliminary purchase price allocation for Wagz. The Company is accounting for the acquisition under the acquisition method and required to measure identifiable assets acquired and liabilities assumed of the acquiree at fair value on the closing date. The fair value of the majority of the assets was determined by a third party valuation firm using management estimates and assumptions including intangible assets of $ 9,730,000 for patents and $1,230,000 for trade names. The appropriate fair values of the assets acquired and liabilities assumed are based on preliminary estimates and assumptions. These preliminary estimates and assumptions could change significantly during the purchase price measurement period as the Company finalizes the valuations of the assets acquired and liabilities assumed.
Note J – Acquisition – Continued
The preliminary excess consideration was recorded as goodwill and approximated $11,990,361, all of which is non-deductible for tax purposes. Goodwill represents future economic benefits arising from other assets acquired that could not be individually identified including workforce additions, growth opportunities, and increased presence in the Pet Tech market. The final purchase price allocation is expected to be completed no later than April 30, 2022.
| | | |
Cash | | $ | 508,274 |
Working capital | | | 174,046 |
Property, plant and equipment | | | 201,839 |
Acquired intangible assets | | | 10,960,000 |
Right-of-use operating lease assets | | | 647,076 |
Other assets | | | 6,000 |
Operating lease obligations | | | (647,077) |
Deferred tax liability | | | (215,000) |
Other liabilities | | | (1,349,459) |
Goodwill | | | 11,990,361 |
Fair value of purchase consideration | | $ | 22,276,060 |
The intangible assets acquired in the Wagz acquisition consisted of the following:
| | | | | |
| | | | | Expected Weighted |
| | | Provisional | | Amortization |
| | | Fair Value | | Period |
Trade name | | $ | 1,230,000 | | 20 years |
Patents | | | 9,730,000 | | 18 years |
| | $ | 10,960,000 | | |
The fair values of acquired intangibles are provisional pending receipt of final valuations of those assets. The provisional fair value recorded as of January 31, 2022 is based on significant inputs that are not observable in the market and thus represents a fair value measurement categorized within Level 3 of the fair value hierarchy. The provisional fair value of the acquired trade names and patents was determined using the relief from royalty method, which is a risk-adjusted discounted cash flow approach. The relief from royalty method values an intangible asset by estimating the royalties saved through ownership of the asset. The relief from royalty method requires identifying the future revenue that would be generated by the trademark, multiplying it by a royalty rate deemed to be avoided through ownership of the asset and discounting the projected royalty savings amounts back to the acquisition date.
Note J – Acquisition – Continued
Acquisition related costs of $129,747 and $476,734 were incurred in relation to the acquisition of Wagz for the three and nine months ended January 31, 2022, respectively, which have been reported in selling and administrative expenses.
The amounts of Wagz’s revenue and net income (loss) included in the Company’s Statements of Operations for the three and nine month periods ended January 31, 2022; and the supplemental proforma unaudited revenue and net income (loss) of the combined entity had the acquisition date been May 1, 2020 for the three and nine month period ended January 31, 2022 and 2021, are as follows:
| | | | | | |
| | | | | | |
| | | Revenue | | | Net Income (Loss) |
| | | | | | |
Actual from January 1, 2022 to January 31, 2022 | | $ | 202,800 | | $ | (528,795) |
Supplemental proforma information: | | | | | | |
Three months ended January 31, 2022 | | | 94,051,530 | | | 1,593,424 |
Nine months ended January 31, 2022 | | | 280,475,134 | | | 10,434,921 |
Three months ended January 31, 2021 | | | 71,887,917 | | | (1,991,641) |
Nine months ended January 31, 2021 | | | 202,089,026 | | | (3,559,291) |
Supplemental pro forma net income (loss) were adjusted to exclude $128,747 and $476,734 of acquisition-related costs incurred in the three and nine month periods ended January 31, 2022, respectively. Supplemental pro forma net income (loss) were adjusted to include $149,431 and $448,292 of amortization costs incurred in the three and nine month periods ended January 31, 2022 and 2021, respectively. Supplemental pro forma net loss was adjusted to exclude $86,002 of acquisition-related costs incurred in the three month period ended January 31, 2021. Supplemental pro forma net loss for the nine month period ended January 31, 2021 was adjusted to include these charges.
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations.
In addition to historical financial information, this discussion of the business of SigmaTron International, Inc. (“SigmaTron”), its wholly-owned subsidiaries Standard Components de Mexico S.A., AbleMex, S.A. de C.V., Digital Appliance Controls de Mexico, S.A. de C.V., Spitfire Controls (Vietnam) Co. Ltd., Spitfire Controls (Cayman) Co. Ltd., Wagz, Inc., wholly-owned foreign enterprises Wujiang SigmaTron Electronics Co., Ltd. and SigmaTron Electronic Technology Co., Ltd. and international procurement office SigmaTron Taiwan branch (collectively, the “Company”) and other Items in this Quarterly Report on Form 10-Q contain forward-looking statements concerning the Company’s business or results of operations. Words such as “continue,” “anticipate,” “will,” “expect,” “believe,” “plan,” and similar expressions identify forward-looking statements. These forward-looking statements are based on the current expectations of the Company. Because these forward-looking statements involve risks and uncertainties, the Company’s plans, actions and actual results could differ materially. Such statements should be evaluated in the context of the direct and indirect risks and uncertainties inherent in the Company’s business including, but not necessarily limited to, the risks inherent in any merger, acquisition or business combination (including the December 2021 transaction with Wagz,Inc.); the Company’s continued dependence on certain significant customers; the continued market acceptance of products and services offered by the Company and its customers; pricing pressures from the Company’s customers, suppliers and the market; the activities of competitors, some of which may have greater financial or other resources than the Company; the variability of the Company’s operating results; the results of long-lived assets impairment testing; the ability to achieve the expected benefits of acquisitions as well as the expenses of acquisitions; the collection of aged account receivables; the variability of the Company’s customers’ requirements; the impact of inflation on the Company’s operating results; the availability and cost of necessary components and materials; the impact acts of war may have to the supply chain; the ability of the Company and its customers to keep current with technological changes within its industries; regulatory compliance, including conflict minerals; the continued availability and sufficiency of the Company’s credit arrangements, including the phase-out of LIBOR; the ability to meet the Company’s financial and restrictive covenants under its loan agreements; changes in U.S., Mexican, Chinese, Vietnamese or Taiwanese regulations affecting the Company’s business; the turmoil in the global economy and financial markets; the spread of COVID-19 and variants (commonly known as “COVID-19”) which has threatened the Company’s financial stability by causing a disruption to the Company’s global supply chain, caused plant closings or reduced operations thus reducing output at those facilities; the continued availability of scarce raw materials, exacerbated by global supply chain disruptions, necessary for the manufacture of products by the Company; the stability of the U.S., Mexican, Chinese, Vietnamese and Taiwanese economic, labor and political systems and conditions; global business disruption caused by the Russia invasion in Ukraine and related sanctions: currency exchange fluctuations; and the ability of the Company to manage its growth. These and other factors which may affect the Company’s future business and results of operations are identified throughout the Company’s Annual Report on Form 10-K, and as risk factors, may be detailed from time to time in the Company’s filings with the Securities and Exchange Commission. These statements speak as of the date of such filings, and the Company undertakes no obligation to update such statements in light of future events or otherwise unless otherwise required by law.
Overview:
The Company operates in one business segment as an independent provider of EMS, which includes printed circuit board assemblies, completely assembled (box-build) electronic products. In addition, the Company provides products to the pet technology market. In connection with the production of assembled products, the Company also provides services to its customers, including (1) automatic and manual assembly and testing of products; (2) material sourcing and procurement; (3) manufacturing and test engineering support; (4) design services; (5) warehousing and distribution services; and (6) assistance in obtaining product approval from governmental and other regulatory bodies. The Company provides these manufacturing services through an international network of facilities located in the United States, Mexico, China, Vietnam and Taiwan.
The Company relies on numerous third-party suppliers for components used in the Company’s production process. Certain of these components are available only from single-sources or a limited number of suppliers. In addition, a customer’s specifications may require the Company to obtain components from a single-source or a small number of suppliers. The loss of any such suppliers could have a material impact on the Company’s results of operations. Global supply chain disruptions have severely restricted the Company’s ability to secure predictable levels of raw materials at stable prices. Further, the Company could operate at a cost disadvantage compared to competitors who have greater direct buying power from suppliers. The Company does not enter into long-term purchase agreements with major or single-source suppliers. The Company believes that short-term purchase orders with its suppliers provides flexibility, given that the Company’s orders are based on the changing needs of its customers.
Sales can be a misleading indicator of the Company’s financial performance. Sales levels can vary considerably among customers and products depending on the type of services (turnkey versus consignment) rendered by the Company and the demand by customers. Consignment orders require the Company to perform manufacturing services on components and other materials supplied by a customer, and the Company charges only for its labor, overhead and manufacturing costs, plus a profit. In the case of turnkey orders, the Company provides, in addition to manufacturing services, the components and other materials used in assembly. Turnkey contracts, in general, have a higher dollar volume of sales for each given assembly, owing to inclusion of the cost of components and other materials in net sales and cost of goods sold. Variations in the number of turnkey orders compared to consignment orders can lead to significant fluctuations in the Company’s revenue and gross margin levels. Consignment orders accounted for less than 1% of the Company’s revenues for the three and nine month periods ended January 31, 2022 and January 31, 2021. Further, sales for the nine months ended January 31, 2022 included significant premiums of approximately 10% of net sales related to raw materials charges to the Company’s customers with roughly the same amount included in cost of products sold.
The Company’s international footprint provides our customers with flexibility within the Company to manufacture in China, Mexico, Vietnam or the U.S. We believe this strategy will continue to serve the Company well as its customers continuously evaluate their supply chain strategies.
On December 31, 2021, the Company acquired Wagz, Inc. (“Wagz”), a pet technology (“Pet Tech”) company. Wagz has been an innovator in the Pet Tech market and has developed a collar, among other things, modernizing pet containment with satellite based geofence pet containment technology that is humane and does not rely on shock. Wagz developed technology that transforms a pet owner’s cell phone into an invisible leash which integrates artificial intelligence to monitor and enhance overall
pet health. The results of Wagz have been included in the Company's consolidated financial results since the date of acquisition. The total consideration for the acquisition of Wagz was $22,276,060.
The Company reported record quarterly sales and operating results for the quarter ended January 31, 2022. The results were driven by strong and growing demand from existing customers and several new customers. Backlog remains strong. Unfortunately, the volatility of the electronics marketplace remains and is not improving. The Company continues to experience shortages that affected final production for the Company’s customers causing them to push out consumption of assemblies from the Company. Accordingly, the Company continues to be negatively affected by the disruptions in the component marketplace. There is no predictability regarding when theses disruptions will occur and it is a challenge in terms of reacting to these disruptions.
Results of Operations:
The following table sets forth selective financial data as a percentage of net sales for the periods indicated.
| | | | | | | |
| | | | | | | |
| Three Months Ended | | Nine Months Ended |
| January 31, | | January 31, | | January 31, | | January 31, |
| 2022 | | 2021 | | 2022 | | 2021 |
| (Unaudited) | | (Unaudited) | | (Unaudited) | | (Unaudited) |
| | | | | | | |
Net sales | 100.0% | | 100.0% | | 100.0% | | 100.0% |
Operating expenses: | | | | | | | |
Cost of products sold | 86.7 | | 91.7 | | 87.9 | | 91.6 |
Selling and administrative expenses | 8.3 | | 7.3 | | 7.4 | | 7.8 |
Impairment of notes receivable
and investment | 6.7 | | 0.0 | | 2.3 | | 0.0 |
Total operating expenses | 101.7 | | 99.0 | | 97.6 | | 99.4 |
Operating (loss) income | -1.7% | | 1.0% | | 2.4% | | 0.6% |
Net Sales
Net sales increased for the three month period ended January 31, 2022, to $93,682,451 from $71,531,348 for the three month period ended January 31, 2021. Net sales increased for the nine month period ended January 31, 2022, to $279,638,499 from $201,674,728 for the nine month period ended January 31, 2021. There were $202,800 sales from Wagz included in the activity for the three and nine month period ended January 31, 2022. Wagz was acquired on December 31, 2021. See Note J – Acquisition for more information regarding the acquisition. The Company’s sales increased for the three and nine month periods ended January 31, 2022, as compared to the prior year in the consumer electronics, industrial electronics and medical/life science marketplaces. Sales for the three and nine month periods increased due to increasing demand from existing and new customers.
Gross Profit
Gross profit dollars increased during the three month period ended January 31, 2022, to $12,425,146 or 13.3% of net sales compared to $5,912,699 or 8.3% of net sales for the same period in the prior fiscal year. Gross profit dollars increased during the nine month period ended January 31, 2022, to $33,785,210 or 12.1% of net sales compared to $16,944,432 or 8.4% of net sales for the same period in the prior fiscal year. The increase in gross profit for the three and nine month periods ended January 31, 2022, was primarily the result of increased sales due to increased customer demand and lower operating costs compared to the same period in the prior year.
Selling and Administrative Expenses
Selling and administrative expenses increased to $7,758,582 or 8.3% of net sales for the three month period ended January 31, 2022, compared to $5,212,629 or 7.3% of net sales for the same period in the prior fiscal year. The net increase in selling and administrative expenses for the three month period ended January 31, 2022, was attributable to administrative expenses for the Wagz operations ($129,747 were transaction costs for the Wagz acquisition) and an increase in bonus expense. The increase in the foregoing expenses was partially offset by a decrease in financing fees and accounting professional fees. Selling and administrative expenses increased to $20,675,353 or 7.4% of net sales for the nine month period ended January 31, 2022, compared to $15,693,893 or 7.8% of net sales for the same period in the prior fiscal year. The net increase in selling and administrative expenses for the nine month period ended January 31, 2022, was attributable to administrative expenses for the Wagz operations ($476,734 were transaction costs for the Wagz acquisition) and an increase in bonus expense. The increase in the foregoing expenses was partially offset by a decrease in legal professional fees.
Impairment of notes receivable and investment
Prior to the closing of the Wagz transaction, the Company had an initial investment in Wagz, along with Convertible Secured Promissory Notes and Secured Promissory Notes issued by Wagz, for a total of $12,600,000. As per the merger agreement and just prior to the merger, all of these items converted to Wagz common stock, resulting in a 25.5% ownership in Wagz. The Company's 25.5% equity interest of Wagz common stock was remeasured to fair value of $6,299,765, resulting in a non-cash impairment charge of $6,300,235.
Interest Expense
Interest expense increased to $382,031 for the three month period ended January 31, 2022, compared to $287,371 for the same period in the prior fiscal year. Interest expense increased to $964,622 for the nine month period ended January 31, 2022, compared to $934,248 for the same period in the prior fiscal year. The increase in interest expense for the three and nine month periods ended January 31, 2022, were due to the increased borrowings under the Company’s banking arrangements.
Income Tax Expense
The income tax expense was $744,408 for the three month period ended January 31, 2022, compared to an income tax benefit of $25,910 for the same period in the prior fiscal year. The Company’s effective tax rate was 37.60% and (11.60)% for the quarters ended January 31, 2022 and 2021, respectively. The income tax expense was $3,014,865 for the nine month period ended January 31, 2022, compared to an income tax expense of $196,199 for the same period in the prior fiscal year. The
Company’s effective tax rate was 24.64% and 114.29% for the nine month period ended January 31, 2022 and 2021, respectively. The increase in income tax expense for the three month period ended January 31, 2022 compared to the same period in the previous year is due to increased income recognized in the current quarter compared to the previous year. The increase in effective tax rate is due to variations in income earned by jurisdiction in the current period compared to the same period in the previous year. The increase in income tax expense for the nine month period ended January 31, 2022 compared to the same period in the previous year is due to increased income recognized in the current year compared to the previous year. The decrease in effective tax rate for the nine month period ended January 31, 2022 is due to variations in income earned by jurisdiction in the current period compared to the same period in the previous year. Related to the Wagz acquisition, a valuation allowance of $3,232,998 was established as of December 31, 2021. This amount includes a valuation allowance of $2,581,817 against Wagz’s deferred tax assets recorded through the opening balance sheet and $651,181 against SigmaTron’s deferred tax assets as of December 31, 2021. During the current quarter the Company determined based on historical operating income and recent financial results that the loss carryforwards and other deferred tax assets of one of its Chinese subsidiaries, which were previously offset by a full valuation allowance, would more likely than not be utilized. For this reason a reduction of $524,517 and related discrete benefit associated with these deferred tax assets was recognized in the current quarter. The Company’s valuation allowance was $3,483,732 and $1,138,736 as of January 31, 2022 and April 30, 2021, respectively.
Net Income
Net income decreased to a net loss of $2,724,297 for the three month period ended January 31, 2022, compared to a net income of $249,268 for the same period in the prior fiscal year. Net income increased to $9,222,624 for the nine month period ended January 31, 2022, compared to a net loss of $24,540 for the same period in the prior fiscal year. A substantial part of the increase in net income for the nine month period ended January 31, 2022 was attributable to the one-time gain recorded upon the extinguishment of the PPP Loan debt during the three month period ending July 31, 2021. Basic and diluted loss per share for the third quarter of fiscal year 2022 were $0.58 each, compared to basic and diluted earnings per share of $0.06 each for the same period in the prior fiscal year. Basic and diluted earnings per share for the nine month period ended January 31, 2022 were $2.08 and $1.97 respectively, compared to basic and diluted loss per share of $0.01 each for the same period in the prior fiscal year.
Liquidity and Capital Resources:
Operating Activities.
Cash flow used in operating activities was $8,473,076 for the nine months ended January 31, 2022. During the first nine months of fiscal year 2022, cash flow used in operating activities was primarily the result of an increase in both inventory and accounts receivable in the amount of $57,955,080 and $7,889,599, respectively. Cash flow from operating activities was offset by an increase in accounts payable and deferred revenue in the amount of $34,776,901 and $8,512,477, respectively. The increase in inventory is the result of an increase in inventory purchases to satisfy customer orders. Further, capacity issues in the component industry made it difficult to obtain some components to complete assemblies for shipping. The increase in accounts payable is the result of more favorable payment terms with vendors and increased inventory purchases.
Cash flow provided by operating activities was $3,921,700 for the nine months ended January 31, 2021. During the first nine months of fiscal year 2021, cash flow provided by operating activities was primarily the result of a decrease in accounts receivable and inventory of $4,515,391 and $1,128,931, respectively. Cash flow provided by operating activities was partially offset by the result of a decrease in accounts payable of $7,125,093. The decrease in accounts payable was primarily the result of the timing of payments in the ordinary course of business.
Investing Activities.
Cash used in investing activities was $10,307,872 for the nine months ended January 31, 2022. During the first nine months of fiscal year 2022 the Company purchased $5,304,146 in machinery and equipment to be used in the ordinary course of business. The Company has received forecasts from current customers for increased business that would require additional investment in capital equipment and facilities. To the extent that these forecasts come to fruition, the Company anticipates that it will make additional machinery and equipment purchases up to $994,015 in fiscal year 2022. The Company anticipates purchases will be funded by lease transactions. However, there is no assurance that such increased business will be obtained or that the Company will be able to obtain funding for leases at acceptable terms, if at all, in the future. During the first nine months of fiscal year 2022 the Company made advances of $5,512,000 to Wagz. On December 31, 2021, the Company consummated the transactions contemplated by the Agreement and Plan of Merger, dated July 19, 2021, as amended by the First Amendment to Agreement and Plan of Merger dated December 7, 2021. Please refer to Note J – Acquisition for more information.
Cash used in investing activities was $6,643,005 for the nine months ended January 31, 2021. During the first nine months of fiscal year 2021, the Company purchased $2,636,505 in machinery and equipment used in the ordinary course of business. The Company made additional machinery and equipment purchases of $2,110,811 during the balance of fiscal year 2021. During the first nine months of fiscal year 2021 the Company made advances of $4,006,500 to Wagz.
Financing Activities.
Cash provided by financing activities of $18,418,465 for the first nine months ended January 31, 2022, was primarily the result of net borrowings under the line of credit.
Cash used in financing activities of $1,313,461 for the first nine months ended January 31, 2021, was primarily the result of net payments under the line of credit.
Financing Summary.
Notes Payable – Banks
Prior to January 29, 2021, the Company had a senior secured credit facility with U.S. Bank National Association (“U.S. Bank”). The revolving credit facility allowed the Company to borrow up to the lesser of (i) $45,000,000 (the “Revolving Line Cap”) less reserves or (ii) the Borrowing Base, but no more than 80% of the Company’s Revolving Line Cap. Prior to its payoff and termination, the U.S. Bank senior secured credit facility was due to expire on March 31, 2022. On January 29, 2021, the Company paid the balance outstanding under the senior secured credit facility in the amount of $25,574,733. The unamortized deferred financing costs of $158,476 were expensed in fiscal year 2021 upon extinguishment of the debt.
On January 29, 2021, the Company entered into a Credit Agreement (the “Agreement”) with JPMorgan Chase Bank, N.A. (“Lender”), pursuant to which Lender has agreed to provide the Company with a secured credit facility maturing on January 29, 2026, of which (a) up to $50,000,000 is available on a revolving loan basis, and (b) an aggregate of $6,500,000 was borrowed pursuant to two term loans (the “Facility”). The Facility is secured by substantially all of the Company’s assets including mortgages on its two Illinois properties.
The Facility allows the Company to choose among interest rates at which it may borrow funds for revolving loans: “CBFR Loans,” the interest on which is based on (A) the “REVLIBOR30 Rate” (as defined in the Agreement) unless the REVLIBOR30 Rate is not available, in which case the interest is generally the rate of interest last quoted by The Wall Street Journal as the “Prime Rate” in the U.S., plus (B) an applicable margin of 2.0% (effectively 2.25% per annum at January 31, 2022); or “Eurodollar Loans,” the interest on which is based on (X) an interest rate per annum (rounded upwards, if necessary, to the next 1/16 of 1%) equal to the LIBO Rate (as defined in the Agreement) for any interest period multiplied by the Standard Reserve Rate (as defined in the Agreement) plus (Y) an applicable margin of 2.0%. Under the revolving portion of the Facility, the Company may borrow up to the lesser of (i) $50,000,000 or (ii) an amount equal to a percentage of the eligible receivable borrowing base plus a percentage of the inventory borrowing base minus any reserves established by Lender. Under the Agreement, a minimum Fixed Charge Coverage Ratio (“FCCR”) financial covenant of 1.10x is applicable only during an FCCR trigger period which occurs when (i) an event of default (as defined in the Agreement) has occurred and is continuing, and Lender has elected to impose a FCCR trigger period upon notice to the Company or (ii) availability falls below the greater of (a) 10% of the revolving commitment and (b) the outstanding principal amount of the term loans. The Company was not in a FCCR trigger period as of January 31, 2022. Deferred financing costs of $56,154 and $361,734 were capitalized during the quarter ended January 31, 2022 and fiscal year ended April 30, 2021, respectively, which are amortized over the term of the Agreement. As of January 31, 2022, there was $43,937,445 outstanding and $8,629,221 of unused availability under the revolving Facility compared to an outstanding balance of $24,967,668 and $15,947,990 unused availability at April 30, 2021. As of January 31, 2022 and April 30, 2021, the unamortized amount offset against outstanding debt was $343,880 and $343,890, respectively.
On November 17, 2021, the Company and JPMorgan Chase Bank, N.A. entered into an amendment of the Facility. The amended Facility allows the Company to borrow up to the lesser of (i) $53,000,000 or (ii) an amount equal to a percentage of the eligible receivable borrowing base plus a percentage of the inventory borrowing base minus any reserves established by Lender. Further, the Facility was amended to allow in some circumstances customer deposits to be deemed eligible for collateral purposes.
On March 17, 2022, the Company and JPMorgan Chase Bank, N.A. entered into an amendment of the Facility. The amended Facility allows the Company to borrow up to the lesser of (i) $60,000,000 or (ii) an amount equal to a percentage of the eligible receivable borrowing base plus a percentage of the inventory borrowing base minus any reserves established by Lender. Further, the Facility was amended to allow in some circumstances accounts arising from sales of inventory subject to bill and hold arrangements to be deemed eligible for collateral purposes.
On April 23, 2020, the Company received a PPP Loan from U.S. Bank, as lender, pursuant to the Paycheck Protection Program of the CARES Act, as administered by the SBA in the amount of $6,282,973. The Company submitted its loan forgiveness application on March 26, 2021. The Company was notified of the forgiveness of the PPP Loan by the SBA on July 9, 2021 and all principal and accrued interest were forgiven. The accounting for the forgiveness is reflected in the Company’s Statement of Operations as a non-cash gain upon extinguishment of long-term debt.
Under the terms of all PPP Loans, all aspects of the PPP Loan remain subject to review by the SBA for up to six years after forgiveness. While the Company is not aware of any issues, if it is later determined that it violated applicable laws or was otherwise ineligible to receive the PPP Loan, the Company will be required to repay the PPP Loan in its entirety in a lump sum and may be subject to additional penalties. If these events were to transpire, they could have a material adverse effect on the
Company’s business, results of operations, financial condition and liquidity for the remainder of fiscal year 2022 and beyond.
On March 15, 2019, the Company’s wholly-owned subsidiary, SigmaTron Electronic Technology Co., Ltd., entered into a credit facility with China Construction Bank. On January 26, 2021, the agreement was amended which terminated on January 6, 2022. On January 17, 2022, the agreement was renewed, and is scheduled to expire on December 23, 2022. Under the agreement SigmaTron Electronic Technology Co., Ltd. can borrow up to 9,000,000 Renminbi, approximately $1,411,853 as of January 31, 2022, and the facility is collateralized by Wujiang SigmaTron Electronics Co., Ltd.’s manufacturing building. Interest is payable monthly and the facility bears a fixed interest rate of 3.8%. The term of the facility extends to December 23, 2022. There was $1,302,042 outstanding under the facility at January 31, 2022 compared to an outstanding balance of $824,159 at April 30, 2021.
Notes Payable – Buildings
The Company entered into a mortgage agreement on December 21, 2017, in the amount of $5,200,000, with U.S. Bank to refinance the property that serves as the Company’s corporate headquarters and its Illinois manufacturing facility in Elk Grove Village, Illinois. The note required the Company to pay monthly principal payments in the amount of $17,333, bore interest at a fixed rate of 4.0% per year and was payable over a fifty one month period. Deferred financing costs of $74,066 were capitalized in fiscal year 2018 which were amortized over the term of the agreement. On January 29, 2021, the Company repaid its U.S. Bank mortgage in the amount outstanding of $4,576,000, using proceeds from the Facility extended by Lender. The Company recorded a prepayment penalty of $120,842 in fiscal year 2021. The remaining deferred financing costs of $21,365 were expensed in fiscal year 2021.
The Company entered into a mortgage agreement on December 21, 2017, in the amount of $1,800,000, with U.S. Bank to refinance the property that serves as the Company’s engineering and design center in Elgin, Illinois. The note required the Company to pay monthly principal payments in the amount of $6,000, bore interest at a fixed rate of 4.0% per year and was payable over a fifty one month period. Deferred financing costs of $65,381 were capitalized in fiscal year 2018 which were amortized over the term of the agreement. On January 29, 2021, the Company repaid its U.S. Bank mortgage in the amount outstanding of $1,584,000, using proceeds from the Facility extended by Lender. The Company recorded a prepayment penalty of $41,830 in fiscal year 2021. The remaining deferred financing costs of $18,859 were expensed in fiscal year 2021.
The Company’s Facility with Lender, entered into on January 29, 2021, also included two term loans, in the aggregate principal amount of $6,500,000. The loans require the Company to pay aggregate principal payments in the amount of $36,111 per month for 60 months, plus monthly payments of interest thereon at (A) the REVLIBOR30 Rate, unless the REVLIBOR30 Rate is not available, in which case the interest is generally the rate of interest last quoted by The Wall Street Journal as the “Prime Rate” in the U.S., plus (B) an applicable margin of 2.5%; (effectively 2.75% per annum at January 31, 2022); or “Eurodollar Loans,” the interest on which is based on (X) an interest rate per annum (rounded upwards, if necessary, to the next 1/16 of 1%) equal to the LIBO Rate (as defined in the Agreement) for any interest period multiplied by the Standard Reserve Rate (as defined in the Agreement) plus (Y) an applicable margin of 2.5%. Deferred financing costs of $10,050 were capitalized during fiscal year 2021 which are amortized over the term of the agreement. As of January 31, 2022, the unamortized amount included as a reduction to long-term debt was $8,040. A final aggregate payment of approximately $4,368,444 is due on or before January 29, 2026. The
outstanding balance was $6,102,778 at January 31, 2022 compared to an outstanding balance of $6,427,778 at April 30, 2021.
The Company entered into a mortgage agreement on March 3, 2020, in the amount of $556,000, with The Bank & Trust, SSB to finance the purchase of the property that serves as the Company’s warehousing and distribution center in Del Rio, Texas. The note requires the Company to pay monthly installment payments in the amount of $6,103. Interest accrues at a fixed rate of 5.75% per year until March 3, 2025, and adjusts thereafter, on an annual basis, equal to 1.0% over the Prime Rate as published by The Wall Street Journal. The note is payable over a 120 month period. The outstanding balance was $476,411 and $509,985 at January 31, 2022 and April 30, 2021, respectively.
Notes Payable – Equipment
The Company routinely enters into secured note agreements with Engencap Fin S.A. DE C.V. to finance the purchase of equipment located in Mexico. The terms of these secured note agreements mature from February 1, 2022 through May 1, 2023, with quarterly installment payments ranging from $11,045 to $37,941 and a fixed interest rate ranging from 6.65% to 8.00%.
The Company routinely enters into secured note agreements with FGI Equipment Finance LLC to finance the purchase of equipment located in Mexico. The terms of these secured note agreements mature from March 1, 2025 through October 1, 2026, with quarterly installment payments ranging from $10,723 to $71,326 and a fixed interest rate of 8.25%.
Finance Lease and Sales Leaseback Obligations
The Company enters into various finance lease and sales leaseback agreements. The terms of the lease agreements mature through November 1, 2025, with monthly installment payments ranging from $1,455 to $40,173 and a fixed interest rate ranging from 3.75% to 12.73%.
Other
The Company provides funds for salaries, wages, overhead and capital expenditure items as necessary to operate its wholly-owned Mexican, Vietnamese and Chinese subsidiaries and the Taiwan IPO. The Company provides funding in U.S. Dollars, which are exchanged for Pesos, Dong, Renminbi, and New Taiwan dollars. The fluctuation of currencies from time to time, without an equal or greater increase in inflation, could have a material impact on the financial results of the Company. The impact of currency fluctuations for the nine month period ended January 31, 2022, resulted in net foreign currency transaction losses of $120,601 compared to net foreign currency losses of approximately $168,539 for the same period in the prior year. During the nine months of fiscal year 2022, the Company paid approximately $46,620,000 to its foreign subsidiaries for manufacturing services. All intercompany balances have been eliminated upon consolidation.
The Company has not changed its plans to indefinitely reinvest the earnings of the Company’s foreign subsidiaries. The cumulative amount of unremitted earnings for which U.S. income taxes have not been recorded is $8,910,000 as of January 31, 2022.
Conditions surrounding COVID-19 change rapidly and additional impacts of which the Company is not currently aware may arise. Based on past performance and current expectations, the Company
believe’s that the existing sources of liquidity, including current cash, will provide sufficient resources to meet known capital requirements and working capital needs through the next twelve months.
The impact of inflation on the Company’s net sales, revenues and income from operations for the past two fiscal years has been minimal.
Off-balance Sheet Transactions:
The Company has no off-balance sheet transactions.
Tabular Disclosure of Contractual Obligations:
As a smaller reporting company, as defined in Item 10(f)(1) of Regulation S-K under the Exchange Act, the Company is not required to provide the information required by this item.
Item 3.Quantitative and Qualitative Disclosures About Market Risks.
As a smaller reporting company, as defined in Item 10(f)(1) of Regulation S-K under the Exchange Act, the Company is not required to provide the information required by this item.
Item 4.Controls and Procedures.
Disclosure Controls:
The Company’s management, including its Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of its disclosure controls and procedures (as defined under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and Rules 13a-15(e) and 15(d)-15(e) thereunder) as of January 31, 2022. The Company’s disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives and its Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective at the reasonable assurance level as of January 31, 2022.
Internal Controls:
There has been no change in the Company’s internal control over financial reporting during the nine months ended January 31, 2022, that has materially affected or is reasonably likely to materially affect, its internal control over financial reporting. The Company’s internal controls over financial reporting are designed to provide reasonable assurance regarding the reliability of financial reporting and preparation of financial statements for external purposes in accordance with U.S. GAAP. On November 8, 2021, the Company announced that James J Reiman has been elected Chief Financial Officer , Vice President Finance, Treasurer and Secretary of SigmaTron International, Inc, effective immediately. The change in Chief Financial Officer did not affect the Company’s internal controls over financial reporting.
PART II – OTHER INFORMATION
Item 1. Legal Proceedings.
From time to time the Company is involved in legal proceedings, claims, or investigations that are incidental to the Company’s business. In future periods, the Company could be subjected to cash cost or non-cash charges to earnings if any of these matters are resolved on unfavorable terms. However, although the ultimate outcome of any legal matter cannot be predicted with certainty, based on present information, including management’s assessment of the merits of any particular claim, the Company does not expect these legal proceedings or claims will have any material adverse impact on its future consolidated financial position, results of operations or cash flows.
Item 1A. Risk Factors.
As a smaller reporting company, as defined in Item 10(f)(1) of Regulation S-K under the Exchange Act, the Company is not required to provide the information required by this item.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
See the disclosures made relating to Unregistered Sales of Equity Securities contained in the Form 8-K Current Report relating to the Closing of the Merger Agreement with Wagz, dated as of December 31, 2021, and filed on January 6, 2022.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
On March 17, 2022, the Company and JPMorgan Chase Bank, N.A. entered into an amendment of the Facility, attached as Exhibit 10.1. The amended Facility allows the Company to borrow up to the lesser of (i) $60,000,000 or (ii) an amount equal to a percentage of the eligible receivable borrowing base plus a percentage of the inventory borrowing base minus any reserves established by Lender.
On March 22, 2022, the Registrant issued a press release announcing its financial results for the quarter ended January 31, 2022, a copy of which is attached as Exhibit 99.1. The exhibit is being provided herein in lieu of a filing under Item 202(a) of Form 8-K, and is furnished to, but not filed with, the Securities and Exchange Commission.
Item 6.Exhibits.
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10.1 | Fifth Amendment to Credit Agreement entered into as of March 17, 2022, by and between SigmaTron International, Inc., and JPMorgan Chase Bank, N.A. |
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31.1 | Certification of Principal Executive Officer of the Company Pursuant to Rule 13a-14(a) under the Exchange Act, as adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350). |
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31.2 | Certification of Principal Financial Officer of the Company Pursuant to Rule 13a-14(a) under the Exchange Act, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350). |
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32.1 | Certification by the Principal Executive Officer of SigmaTron International, Inc. Pursuant to Rule 13a-14(b) under the Exchange Act and Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350). |
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32.2 | Certification by the Principal Financial Officer of SigmaTron International, Inc. Pursuant to Rule 13a-14(b) under the Exchange Act and Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350). |
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99.1 | SigmaTron International, Inc. press release dated March 22, 2022 |
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101.INS | Inline XBRL Instance Document (the instance document does not appear in the interactive data file because its XBRL tags are embedded within the inline XBRL document) |
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101.SCH | Inline XBRL Taxonomy Extension Schema Document |
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101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document |
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101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document |
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101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document |
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101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document |
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104 | Cover Page Interactive Data File (embedded within the Inline XBRL document and contained in Exhibit 101) |
SIGNATURES:
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
SIGMATRON INTERNATIONAL, INC.
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/s/ Gary R. Fairhead | | March 22, 2022 |
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Gary R. Fairhead | | Date |
CEO (Principal Executive Officer) | | |
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/s/ James J. Reiman | | March 22, 2022 |
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James J. Reiman | | Date |
Chief Financial Officer, Secretary and Treasurer | | |
(Principal Financial Officer and Principal | | |
Accounting Officer) | | |
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