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 October 31, 2022
OR
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
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 ¨
SigmaTron International, Inc.
October 31, 2022
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 December 8, 2022: 6,071,288
Index
PART 1.
FINANCIAL INFORMATION:
Page No.
Item 1.
Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets – October 31, 2022 (Unaudited) and April 30, 2022
4
Condensed Consolidated Statements of Income – (Unaudited)
Three and Six Months Ended October 31, 2022 and 2021
6
Condensed Consolidated Statements of Changes in Stockholders’
Equity – (Unaudited) Three and Six Months Ended October 31, 2022 and 2021
7
Condensed Consolidated Statements of Cash Flows – (Unaudited)
Six Months Ended October 31, 2022 and 2021
8
Notes to Condensed Consolidated Financial Statements – (Unaudited)
10
Item 2.
Management’s Discussion and Analysis of Financial Condition and
Results of Operations
30
Item 3.
Quantitative and Qualitative Disclosures About Market Risks
46
Item 4.
Controls and Procedures
PART II
OTHER INFORMATION:
Legal Proceedings
Item 1A.
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
47
Defaults Upon Senior Securities
Mine Safety Disclosures
Item 5.
Other Information
Item 6.
Exhibits
48
Signatures
49
Condensed Consolidated Balance Sheets
October 31,
2022
April 30,
(Unaudited)
Current assets:
Cash and cash equivalents
$
2,388,653
3,054,643
Accounts receivable, less allowance for doubtful accounts of
$100,000 at October 31, 2022 and April 30, 2022
47,591,181
41,153,248
Inventories, net
176,116,265
164,965,216
Prepaid expenses and other assets
1,498,256
2,213,895
Refundable and prepaid income taxes
645,833
1,238,973
Other receivables
5,646,815
6,318,164
Total current assets
233,887,003
218,944,139
Property, machinery and equipment, net
34,911,929
35,973,215
Intangible assets, net
11,938,574
12,409,478
Goodwill
13,320,534
Deferred income taxes
662,159
856,863
Right-of-use assets
9,331,783
10,946,764
Other assets
1,151,638
1,180,284
Total other long-term assets
36,404,688
38,713,923
Total assets
305,203,620
293,631,277
Liabilities and stockholders' equity:
Current liabilities:
Trade accounts payable
80,335,808
96,039,209
Accrued wages
8,718,999
9,180,582
Accrued expenses
3,406,067
3,172,922
Income taxes payable
1,295,845
802,556
Deferred revenue
13,421,645
11,394,820
Current portion of long-term debt
2,186,422
6,991,567
Current portion of finance lease obligations
1,674,002
1,410,675
Current portion of operating lease obligations
3,468,613
3,508,864
Total current liabilities
114,507,401
132,501,195
Long-term debt, less current portion
89,281,863
60,099,402
267,998
357,331
578,732
Finance lease obligations, less current portion
3,376,887
2,805,135
Operating lease obligations, less current portion
6,276,154
7,903,898
Other long-term liabilities
92,902
1,051,587
Total long-term liabilities
99,874,536
72,796,085
Total liabilities
214,381,937
205,297,280
Condensed Consolidated Balance Sheets - Continued
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, 6,071,288 and 6,026,788 shares issued and
outstanding at October 31, 2022 and April 30, 2022, respectively
60,470
60,379
Capital in excess of par value
41,893,458
41,654,410
Retained earnings
48,867,755
46,619,208
Total stockholders' equity
90,821,683
88,333,997
Total liabilities and stockholders' equity
The accompanying notes to the condensed consolidated financial statements are an integral part of these statements.
Condensed Consolidated Statements of Income
Three Months
Six Months
Ended
2021
Net sales
108,676,743
100,216,614
214,249,599
185,956,048
Cost of products sold
95,362,730
88,439,028
189,250,551
164,595,984
Gross profit
13,314,013
11,777,586
24,999,048
21,360,064
Selling and administrative expenses
9,245,157
6,805,756
18,106,375
12,916,771
Operating income
4,068,856
4,971,830
6,892,673
8,443,293
Gain on extinguishment of long-term debt
(6,282,973)
Other income
(35,814)
(36,562)
(71,630)
(73,703)
Interest expense, net
1,976,831
344,675
2,930,389
582,591
Income before income tax expense
2,127,839
4,663,717
4,033,914
14,217,378
Income tax expense
1,255,967
1,513,512
1,785,367
2,270,457
Net income
871,872
3,150,205
2,248,547
11,946,921
Earnings per share – basic
0.14
0.73
0.37
2.78
Earnings per share – diluted
0.69
2.69
Weighted average shares of common stock outstanding
Basic
6,071,288
4,313,623
6,065,098
4,294,517
Diluted
6,145,223
4,553,899
6,159,265
4,445,289
Condensed Consolidated Statements of Changes in Stockholders’ Equity
For the six months ended October 31, 2022 (Unaudited)
Capital in
Total
Preferred
Common
excess of par
Retained
stockholders’
stock
value
earnings
equity
Balance at May 1, 2022
Recognition of stock-basedcompensation
94,893
Restricted stock awards
55
49,818
49,873
1,376,675
Balance at July 31, 2022
60,434
41,799,121
47,995,883
89,855,438
76,568
36
17,769
17,805
Balance at October 31, 2022
For the six months ended October 31, 2021 (Unaudited)
Balance at May 1, 2021
42,560
23,751,461
36,755,040
60,549,061
20,035
15
13,342
13,357
8,796,716
Balance at July 31, 2021
42,575
23,784,838
45,551,756
69,379,169
122,885
Exercise of stock options
897
425,655
426,552
37
18,524
18,561
Balance at October 31, 2021
43,509
24,351,902
48,701,961
73,097,372
Condensed Consolidated Statements of Cash Flows
Six
Months Ended
Cash flows from operating activities
Adjustments to reconcile net income
to net cash used in operating activities:
Depreciation and amortization of property, machinery and equipment
2,919,066
2,773,922
Stock-based compensation
171,461
142,920
Restricted stock expense
67,678
31,918
Deferred income tax expense (benefit)
194,704
(92,925)
Amortization of intangible assets
470,904
173,610
Amortization of financing fees
169,482
37,208
Loss from disposal or sale of machinery and equipment
13,673
9,618
Changes in operating assets and liabilities, net of acquisition
Accounts receivable
(6,437,933)
(16,341,244)
Inventories
(11,151,049)
(35,078,520)
3,104,483
468,470
593,140
(108,655)
403,956
100,033
(15,703,401)
24,062,801
Operating lease liabilities
(1,667,995)
(1,287,382)
Accrued expenses and wages
(1,260,991)
2,407,671
2,026,825
6,366,871
Net cash used in operating activities
(23,837,450)
(10,669,736)
Cash flows from investing activities
Purchases of machinery and equipment
(271,997)
(3,107,854)
Advances on notes receivable
(3,962,000)
Net cash used in investing activities
(7,069,854)
Cash flows from financing activities
Proceeds from the exercise of common stock options
Proceeds under equipment notes
416,728
1,159,275
Payments under finance lease and sale leaseback agreements
(764,377)
(952,597)
Payments under equipment notes
(539,383)
(527,004)
Payments under building notes payable
(6,017,979)
(238,889)
Borrowings under term loan agreement
40,000,000
Payments under term loan agreement
(250,000)
Borrowings under revolving line of credit
245,043,994
208,787,919
Payments under revolving line of credit
(252,957,625)
(191,986,249)
Payments of debt financing costs
(1,487,901)
(18,300)
Net cash provided by financing activities
23,443,457
16,650,707
Condensed Consolidated Statements of Cash Flows - Continued
Change in cash and cash equivalents
(665,990)
(1,088,883)
Cash and cash equivalents at beginning of period
3,509,229
Cash and cash equivalents at end of period
2,420,346
Supplementary disclosures of cash flow information
Cash paid for interest
2,480,985
649,607
Cash paid for income taxes
567,282
2,382,322
Purchase of machinery and equipment financed
under finance leases
1,599,456
1,558,579
Financing of insurance policy
73,868
295,052
6,282,973
Notes to Condensed Consolidated Financial Statements
Note A - Description of the Business
SigmaTron International, Inc., its subsidiaries, foreign enterprises and international procurement office (collectively, the “Company”) operate in two reportable segments as an independent provider of electronic manufacturing services (“EMS”) and a provider of products to the Pet Tech market. The EMS segment includes printed circuit board assemblies, electro-mechanical subassemblies and completely assembled (box-build) electronic products. The Pet Tech reportable segment offers electronic products such as the Freedom Smart Dog Collar™, a wireless geo-mapped fence and wellness system, along with apparel and accessories. In connection with the production of assembled products, the EMS segment 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; (6) assistance in obtaining product approval from governmental and other regulatory bodies and (7) compliance reporting. The EMS segment produces the Freedom Smart Dog Collar™ sold by the Pet Tech segment.
Note B - Basis of Presentation
The accompanying unaudited condensed consolidated financial statements 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., and Wagz, Inc., wholly-owned foreign enterprises Wujiang SigmaTron Electronics Co. Ltd., and Wujiang SigmaTron Electronic Technology Co., Ltd. (collectively, “SigmaTron China”), and its international procurement office, SigmaTron International Inc. 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.
Note C - Inventories, net
The components of inventory consist of the following:
Finished products
25,837,505
22,175,641
Work-in-process
5,125,048
5,907,766
Raw materials
148,163,059
140,118,156
179,125,612
168,201,563
Less excess and obsolescence reserve
(3,009,347)
(3,236,347)
Note D - Earnings Per Share and Stockholders’ Equity
The following table sets forth the computation of basic and diluted earnings per share:
Three Months Ended
Six Months Ended
Weighted-average shares
Effect of dilutive stock options
73,935
240,276
94,167
150,772
Basic earnings per share
Diluted earnings per share
Options to purchase 508,519 and 429,561 shares of common stock were outstanding and exercisable at October 31, 2022 and 2021, respectively. There were no options granted during the three and six month periods ended October 31, 2022 and 102,000 options were granted during the six month period ended October 31, 2021. There was $76,568 and $122,885 stock option expense recognized for the three month periods ended October 31, 2022 and 2021, respectively. There was $171,461 and $142,920 stock option expense recognized for the six month periods ended October 31, 2022 and 2021, respectively. The balance of unrecognized compensation expense related to the Company’s stock option plans at October 31, 2022 and 2021 was $848,916 and $102,849, respectively. There were 40,798 anti-dilutive common stock equivalents and no anti-dilutive common stock equivalents for the three month period ended October 31, 2022 and 2021, respectively, which have been excluded
Note D - Earnings Per Share and Stockholders’ Equity - Continued
from the calculation of diluted earnings per share. There were 6,251 anti-dilutive common stock equivalents and no anti-dilutive common stock equivalents for the six month period ended October 31, 2022 and 2021, respectively, which have been excluded from the calculation of diluted earnings per share.
Note E - Long-term Debt
Debt and capital lease obligations consisted of the following at October 31, 2022 and April 30, 2022:
Debt:
Notes Payable - Secured lenders
88,666,746
56,830,377
Notes Payable - Buildings
441,361
6,459,340
Notes Payable - Equipment
4,079,637
4,202,292
Unamortized deferred financing costs
(1,719,459)
(401,040)
Total debt
91,468,285
67,090,969
Less current maturities
Long-term debt
Finance lease obligations
5,050,889
4,215,810
Total finance lease obligations, less current portion
Notes Payable – Secured lenders
On January 29, 2021, the Company entered into a Credit Agreement (the “Agreement”) with JPMorgan Chase Bank, N.A. (“Lender”), pursuant to which Lender provided the Company with a secured credit facility consisting of a revolving loan facility and a term loan facility (collectively, the “Facility”).
On July 18, 2022, SigmaTron, Wagz and Lender amended and restated the Agreement by entering into an Amended and Restated Credit Agreement (as so amended and restated, the “Credit Agreement”). The Facility, as amended, allows the Company to borrow on a revolving basis up to the lesser of (i) $70,000,000 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. The maturity date of the Facility was extended to July 18, 2027. Deferred financing costs of $296,802 and $128,733 were capitalized during the six month period ended October 31, 2022 and during the fiscal year ended April 30, 2022, respectively, which are amortized over the term of the Agreement. As of October 31, 2022, there was $48,916,746 outstanding and $19,150,939 of unused availability under the revolving Facility compared to an outstanding balance of $51,392,158 and $5,691,855 of unused availability at
Note E - Long-term Debt - Continued
April 30, 2022. As of October 31, 2022 and April 30, 2022, the unamortized amount offset against outstanding debt was $604,006 and $393,503, respectively.
Under the Credit Agreement, a minimum Fixed Charge Coverage Ratio (“FCCR”) financial covenant of 1.10x is applicable only during an FCCR trigger period which occurs when (a) commencing on the Effective Date and ending when the Term Loan Obligations have been Paid in Full and (b) following the Payment in Full of the Term Loan Obligations, (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. In addition, the Credit Agreement imposes a financial covenant that requires the Company to maintain a leverage ratio of Total Debt to EBITDA (each as defined in the Credit Agreement) for any twelve month period not to exceed a certain amount for each fiscal quarter through the maturity of the revolving Facility, which ratio (a) ranges from 5.75-to-1 for the fiscal quarter ending on October 31, 2022 to 3.00-to-1 for the fiscal quarter ending on July 31, 2026 (if the Term Loan Borrowing Base Coverage Ratio (as defined in the Credit Agreement) is less than or equal to 1.50-to-1) and (b) ranges from 5.75-to-1 for the fiscal quarter ending on October 31, 2022 to 4.00-to-1 for the fiscal quarter ending on July 18, 2027 (if the Term Loan Borrowing Base Coverage Ratio is greater than or equal to 1.50-to-1).
In connection with the closing of the Credit Agreement, Lender and TCW Asset Management Company LLC, as administrative agent under the Term Loan Agreement (as defined below), entered into the Intercreditor Agreement, dated July 18, 2022, and acknowledged by SigmaTron and Wagz (the “ICA”), to set forth and govern the lenders’ respective lien priorities, rights and remedies under the Credit Agreement and the Term Loan Agreement.
The Facility under the Credit Agreement is secured by: (a) a first priority security interest in SigmaTron’s and Wagz’s (i) accounts and inventory (excluding Term Priority Mexican Inventory (as defined in the ICA) and certain inventory in transit, (ii) deposit accounts, (iii) proceeds of business interruption insurance that constitute ABL BI Insurance Share (as defined in the ICA), (iv) certain other property, including payment intangibles, instruments, equipment, software and hardware and similar systems, books and records, to the extent related to the foregoing, and (v) all proceeds of the foregoing, in each case, now owned or hereafter acquired (collectively, the “ABL Priority Collateral”); and (b) a second priority security interest in Term Priority Collateral (as defined below) other than (i) real estate and (ii) the equity interests of SigmaTron’s foreign subsidiaries (unless such a pledge is requested by Lender).
On July 18, 2022, SigmaTron, Wagz and TCW Asset Management Company LLC, as administrative agent, and other Lenders party thereto (collectively, “TCW”) entered into a Credit Agreement (the “Term Loan Agreement”) pursuant to which TCW made a term loan to the Company in the principal amount of $40,000,000 (the “TCW Term Loan”). The TCW Term Loan bears interest at a rate per annum based on SOFR, plus the Applicable Margin of 7.50% (each as defined in the Term Loan Agreement). The TCW Term Loan has a SOFR floor of 1.00%. The maturity date of the TCW Term Loan is July 18, 2027. The amount outstanding as of October 31, 2022, was $39,750,000. Deferred financing costs of $1,191,099 were capitalized during the six month period ended October 31, 2022. As of October 31, 2022, the unamortized amount offset against outstanding debt was $1,115,453.
The Term Loan Agreement imposes financial covenants, including covenants requiring the Company to maintain a minimum Fixed Charge Coverage Ratio (as defined in the Term Loan Agreement) of 1.10-to-1 and maintain the same leverage ratio of Total Debt to EBITDA as described above under the Credit Agreement. The Company is required to make quarterly repayments of the principal amount of the TCW Term Loan in amounts equal to $250,000 per fiscal quarter for the quarters beginning October 31, 2022 and $500,000 per fiscal quarter for quarters beginning October 31, 2024. The Term Loan Agreement also requires mandatory annual repayments equal to 50% of Excess Cash Flow (as defined in the Term Loan Agreement).
The TCW Term Loan is secured by: (a) a first priority security interest in all property of SigmaTron and Wagz that does not constitute ABL Priority Collateral, which includes: (i) SigmaTron’s and Wagz’s real estate other than SigmaTron’s Del Rio, Texas, warehouses, (ii) SigmaTron’s and Wagz’s machinery, equipment and fixtures (but excluding ABL Priority Equipment (as defined in the ICA)), (iii) the Term Priority Mexican Inventory, (as defined in the ICA), (iv) SigmaTron’s stock in its direct and indirect subsidiaries, (v) SigmaTron’s and Wagz’s general intangibles (excluding any that constitute ABL Priority Collateral), goodwill and intellectual property, (vi) the proceeds of business interruption insurance that constitute Term BI Insurance Share (as defined in the ICA), (vii) tax refunds, and (viii) all proceeds thereof, in each case, now owned or hereafter acquired (collectively, the “Term Priority Collateral”); and (b) a second priority security interest in all collateral that constitutes ABL Priority Collateral. Also, SigmaTron’s three Mexican subsidiaries pledged all of their assets as security for the TCW Term Loan.
On July 18, 2022, a portion of the proceeds of the TCW Term Loan was used to pay in full the term loan principal amount of $5,000,000 (the “FILO Term Loan”) that Lender extended to the Company under the Agreement on April 25, 2022.
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 U.S. Small Business Administration (the “SBA”) in the amount of $6,282,973 (the “PPP Loan”). The PPP Loan was scheduled 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 Statements of Income, in the six months ended October 31, 2021, as a non-cash gain upon extinguishment of long-term debt.
On March 15, 2019, the Company’s wholly-owned foreign enterprise, Wujiang SigmaTron Electronic Technology Co., Ltd., entered into a credit facility with China Construction Bank. On January 26, 2021, the agreement was amended and 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 Wujiang SigmaTron Electronic Technology Co., Ltd. can borrow up to 9,000,000 Renminbi, approximately $1,254,000 as of October 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% per annum. There was no outstanding balance under the facility at October 31, 2022 compared to an outstanding balance of $438,219 at April 30, 2022.
Notes Payable – Buildings
The Facility also included two term loans, in the aggregate principal amount of $6,500,000. A final aggregate payment of approximately $4,368,444 was due on or before January 29, 2026. On July 18, 2022, a portion of the proceeds of the TCW Term Loan was used to pay in full both term loans extended by Lender. The outstanding balance was $0 at October 31, 2022 compared to an outstanding balance of $5,994,445 at April 30, 2022.
The Company entered into a mortgage agreement on March 3, 2020, in the amount of $556,000, with The Bank and 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 $441,361 and $464,895 at October 31, 2022 and April 30, 2022, 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. The terms of the outstanding secured note agreements mature from November 1, 2022 through May 1, 2023, with quarterly installment payments ranging from $9,676 to $16,762 and a fixed interest rate ranging from 7.35% to 8.00% per annum.
The Company routinely enters into secured note agreements with FGI Equipment Finance LLC to finance the purchase of equipment. The terms of the outstanding secured note agreements mature from March 2025 through October 2027, with quarterly installment payments ranging from $10,723 to $69,439 and a fixed interest rate ranging from 8.25% to 9.25% per annum.
Annual maturities of the Company’s debt, net of deferred financing fees for the remaining periods, as of October 31, 2022, are as follows:
Secured lenders
Building
Equipment
For the remaining 6 months of the fiscal year ending April 30:
2023
500,000
24,218
555,522
1,079,740
For the fiscal years ending April 30:
2024
1,000,000
50,571
1,119,647
2,170,218
2025
1,750,000
53,557
1,205,779
3,009,336
2026
2,000,000
56,719
841,614
2,898,333
2027
81,697,287
60,068
291,085
82,048,440
2028
63,614
65,990
129,604
Thereafter
132,614
86,947,287
Finance Lease and Sales Leaseback Obligations
The Company enters into various finance lease and sales leaseback agreements. The terms of the outstanding lease agreements mature through October 1, 2026, with monthly installment payments ranging from $2,874 to $33,706 and a fixed interest rate ranging from 7.09% to 12.73% per annum.
Note F - Income Tax
The income tax expense was $1,255,967 for the three month period ended October 31, 2022 compared to an income tax expense of $1,513,512 for the same period in the prior fiscal year. The Company’s effective tax rate was 59.03% and 32.45% for the quarters ended October 31, 2022 and 2021, respectively. The increase in effective tax rate is due primarily to an increase in valuation allowance during the three month period ended October 31, 2022.
The income tax expense was $1,785,367 for the six month period ended October 31, 2022 compared to an income tax expense of $2,270,457 for the same period in the prior fiscal year. The Company’s effective tax rate was 44.26% and 15.97% for the six month period ended October 31, 2022 and 2021, respectively. The decrease in income tax expense for the six month period ended October 31, 2022 compared to the same period in the previous year is due to a decrease in income recognized in the current year compared to the previous year. The increase in effective tax rate for the six month period ended October 31, 2022 is due primarily to tax exempt income recognized in the previous year.
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 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.
After SigmaTron’s merger with Wagz, Inc. (“Wagz”) effective December 31, 2021, SigmaTron and Wagz (collectively, the “Company”) will file tax returns on a consolidated basis for periods ending after the merger. In evaluating the consolidated group’s ability to recover its deferred tax assets on a consolidated basis, and considering historical operating results of both companies, the consolidated group’s deferred tax assets are not more likely than not to be realized. Therefore, a valuation allowance was established on the group’s U.S. deferred tax assets during fiscal year 2022. The Company has established a valuation allowance of $4,627,775 on its federal and state NOL carryforwards and other U.S. deferred tax assets as of October 31, 2022. The Company had also established a valuation allowance of $452,484 on NOLs attributable to its Vietnam subsidiary as of October 31, 2022. Based on historical losses and forecasted future earnings, the Company had determined that the tax benefit from such assets are more likely than not to be realized. The Company’s valuation allowance was $5,080,259 and $4,543,819 as of October 31, 2022 and April 30, 2022, respectively.
Note F - Income Tax - Continued
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 $11,255,000 as of October 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 is 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, valuation allowance for deferred taxes and 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 the Company’s 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:
Net trade sales by end-market
Industrial Electronics
70,679,415
55,094,535
141,008,904
102,339,427
Consumer Electronics
32,028,590
39,712,171
60,926,794
72,316,047
Medical / Life Sciences
5,968,738
5,409,908
12,313,901
11,300,574
Total Net Trade Sales
Note H - Significant Accounting Policies - Continued
During the three and six month periods ending October 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 October 31, 2022. The Company is electing not to disclose the amount 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 October 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 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 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. The Company’s valuation allowance was $5,080,259 and $4,543,819 as of October 31, 2022 and April 30, 2022, respectively.
Impairment of Long-Lived Assets - The Company reviews long-lived assets, including amortizable intangible assets, for impairment in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 360: Property, Plant and Equipment. Property, machinery and equipment and finite life intangible assets are reviewed whenever events or changes in circumstances occur that indicate possible impairment. If events or changes in circumstances occur that indicate possible impairment, the Company first performs an impairment review based on an undiscounted cash flow analysis at the lowest level at which cash flows of the long-lived assets are largely independent of other groups of its assets and liabilities. This analysis requires management judgment with respect to changes in technology, the continued success of product lines, and future volume, revenue and expense growth rates. If the carrying value exceeds the undiscounted cash flows, the Company records an impairment, if any, for the difference between the estimated fair value of the asset group and its carrying value. The Company further conducts annual reviews of its long-lived asset groups for possible impairment. The Company’s analysis did not indicate that any of its other long-lived assets were impaired. The Company has yet to experience significant cancellations of orders; however, the potential impact of future disruptions, continued economic
uncertainty over COVID-19 may have a significant adverse impact on the timing of delivery of customer orders and the levels of future customer orders.
Goodwill - Goodwill represents the excess cost over fair value of the net assets of acquired businesses. The Company does not amortize goodwill and intangible assets that have indefinite lives. The Company performs an impairment assessment of goodwill and intangible assets with indefinite lives annually, or more frequently if triggering events occur, based on the estimated fair value of the related reporting unit or intangible asset. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. When performing its annual impairment assessment as of April 30, the Company evaluates the goodwill assigned to each of its reporting units for potential impairment by comparing the estimated fair value of the relevant reporting unit to the carrying value. The Company uses various Level 2 and Level 3 valuation techniques to determine the fair value of its reporting units, including discounting estimated future cash flows based on a cash flow forecast prepared by the relevant reporting unit and market multiples of relevant public companies. If the fair value of a reporting unit is less than its carrying value, a goodwill impairment loss is recorded for the difference. No impairment of goodwill was recorded for the six month period ended October 31, 2022.
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- 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 warehouse 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 includes 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.
At 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 as expense is recognized as incurred.
Note I – Leases – Continued
The following table presents lease assets and liabilities and their balance sheet classification:
Classification
Operating Leases:
Right-of-use Assets
Operating lease currentliabilities
Current portion of operating leaseobligations
Operating lease noncurrent liabilities
Operating lease obligations, less current portion
Finance Leases:
Property, machinery and equipment
6,340,887
5,561,243
Finance lease current liabilities
Current portion of finance leaseobligations
Finance lease noncurrent liabilities
Finance lease obligations, lesscurrent portion
The components of lease expense for the three and six month periods ended October 31, 2022 and 2021, are as follows:
Expense
Operating lease cost
Operating
629,094
589,654
1,252,905
1,181,058
Variable lease cost
54,816
97,354
109,631
194,708
Short term lease cost
2,250
1,800
4,500
3,600
Amortization of right-of-use assets
658,149
540,118
1,229,252
1,134,221
Interest expense
Interest
122,219
71,578
185,833
137,982
1,466,528
1,300,504
2,782,121
2,651,569
The weighted average lease term and discount rates for the quarters ended October 31, 2022 and 2021, are as follows:
Weighted average remaining lease term (months)
41.19
50.30
Weighted average discount rate
3.2%
3.1%
32.21
9.7%
8.9%
Future payments due under leases reconciled to lease liabilities are as follows:
Operating Leases
Finance Leases
1,815,098
1,132,572
3,136,737
1,895,835
2,476,375
1,674,988
2,017,498
1,007,719
445,298
177,773
74,382
133,717
Total undiscounted lease payments
10,099,105
5,888,887
Present value discount, less interest
354,338
837,998
Lease liability
9,744,767
Supplemental disclosures of cash flow information related to leases for the six months ended October 31, 2022 and 2021 are as follows:
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from finance leases
Operating cash flows from operating leases
166,664
198,729
Financing cash flows from finance leases
764,377
952,597
Supplemental non-cash information on lease liabilities arising from obtaining right-of-use assets:
Right-of-use assets obtained in exchange for new finance lease liabilities
Right-of-use assets obtained in exchange for operating lease liabilities
43,641
Note J – Acquisition
On December 31, 2021, the Company acquired 100% of the stock of Wagz under the terms of 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 (the “Merger Agreement”). Wagz has developed and brought to market a high tech pet collar and has multiple other products in development. Wagz is an internet of things (“IoT”) company which both owns intellectual property and secures recurring revenue through subscriptions for its services.
Prior to the acquisition, the Company had an investment in Wagz of $600,000, Convertible Secured Promissory Notes issued by Wagz of $12,000,000 and Secured Promissory Notes issued by Wagz of $1,380,705. Pursuant to the Merger Agreement, prior to the acquisition, the Convertible Secured Promissory Notes converted to 12,000,000 shares of Wagz common stock, resulting in a 25.5% ownership in Wagz. The Company's 25.5% equity interest in Wagz common stock was remeasured to fair value of $6,299,765, resulting in a non-cash impairment charge of $6,300,235 within the Statements of Income during fiscal year 2022.
Pursuant to the Merger Agreement, 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 for the fiscal year 2022. The treasury shares were retired as of April 30, 2022.
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
Secured Promissory Notes
1,380,173
Fair value of SigmaTron's equity interest in Wagz held prior to the business combination
6,299,765
23,656,233
The following table presents the purchase price allocation for Wagz. The Company is accounting for the acquisition under the acquisition method and is 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 estimates and assumptions.
Note J – Acquisition – Continued
The excess consideration was recorded as goodwill of $13,320,534, 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 recorded goodwill has been assigned to the Pet Tech reportable segment.
Cash
508,274
Working capital
224,046
Property, plant and equipment
201,839
Acquired intangible assets
10,960,000
Right-of-use operating lease assets
647,076
6,000
Operating lease obligations
(647,077)
Deferred tax liability
(215,000)
Other liabilities
(1,349,459)
Fair value of purchase consideration
The intangible assets acquired in the Wagz acquisition consisted of the following:
Expected Weighted
Amortization
Fair Value
Period
Trade name
1,230,000
20 years
Patents
9,730,000
18 years
The fair value recorded as of April 30, 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 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 intangible asset, 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 using the internal rate of return.
Note K – Intangible Assets
Intangible assets subject to amortization are summarized as of October 31, 2022 and April 30, 2022, as follows:
October 31,2022
April 30, 2022
Gross
Net
Carrying
Accumulated
Amount
Spitfire:
Non-contractual customer relationship
4,690,000
(3,209,713)
1,480,287
(3,039,837)
1,650,163
Wagz:
(51,250)
1,178,750
(20,500)
1,209,500
(450,463)
9,279,537
(180,185)
9,549,815
15,650,000
(3,711,426)
(3,240,522)
Estimated aggregate amortization expense for the Company’s intangible assets, which become fully amortized in 2040, for the remaining periods as of October 31, 2022, are as follows:
470,280
933,898
926,758
919,751
912,956
7,774,931
Amortization expense was $235,142 and $86,488 for the three month periods ended October 31, 2022 and October 31, 2021, respectively. Amortization expense was $470,904 and $173,610 for the six month periods ended October 31, 2022 and October 31, 2021, respectively.
Note L – Segment and Geographic Area Information
The Company’s reportable segments are strategic business units that offer different products and services. They are managed separately because each business requires different technology and marketing strategies. Separate financial information is regularly evaluated by the Chief Operating Decision Maker (“CODM”) in deciding how to allocate resources. For the Company, the CODM is the Company’s Chief Executive Officer.
The EMS reportable segment includes printed circuit board assemblies, electro-mechanical subassemblies and completely assembled (box-build) electronic products. In connection with the production of assembled products, the EMS segment 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; (6) assistance in obtaining product approval from governmental and other regulatory bodies and (7) compliance reporting. The EMS segment produces the Freedom Smart Dog Collar™ sold by the Pet Tech segment.
The Pet Tech reportable segment offers electronic products such as the Freedom Smart Dog Collar™, a wireless geo-mapped fence and wellness system, along with apparel and accessories.
The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies. The CODM allocates resources to and evaluates the performance of each operating segment based on operating income.
Note L – Segment and Geographic Area Information – Continued
The tables below present information about the Company’s reportable segments for the three month periods ended October 31, 2022 and October 31, 2021.
Three Months Ended October 31, 2022
EMS
Pet Tech
Segment
Consolidated
Net sales (1)
108,221,067
455,676
Operating income (loss)
6,799,982
(2,731,126)
Income before income taxes
697,940
38,515
736,455
Depreciation and amortization of property, machinery and equipment
1,456,624
10,662
1,467,286
84,628
150,514
235,142
Identifiable assets
281,517,954
23,685,666
(1)The EMS segment manufactures products sold to the Pet Tech segment. Related intersegment sales of $644,097 have been eliminated.
Three Months Ended October 31, 2021
1,054,729
1,417,645
86,488
250,203,733
The tables below present information about the Company’s reportable segments for the six month periods ended October 31, 2022 and October 31, 2021.
Six Months Ended October 31, 2022
Net sales (2)
213,411,047
838,552
11,847,360
(4,954,687)
1,772,695
98,758
1,871,453
2,889,751
29,315
169,876
301,028
(2)The EMS segment manufactures products sold to the Pet Tech segment. Related intersegment sales of $727,613 have been eliminated.
Six Months Ended October 31, 2021
4,666,433
The following tables set forth net sales and tangible long-lived assets by geographic area where the Company operates. Tangible long-lived assets include property, plant and equipment and operating lease assets.
Net sales:
U.S.
29,236,679
23,198,568
55,127,307
42,182,937
China
13,380,106
10,166,868
26,972,492
22,197,547
Vietnam
2,762,806
3,476,162
6,355,450
7,451,093
Mexico
63,297,152
63,375,016
125,794,350
114,124,471
Total net sales
Tangible long-lived assets include property, plant and equipment and operating lease assets consisted of the following at October 31, 2022 and April 30, 2022:
Tangible long-lived assets, net:
20,984,270
21,968,745
4,615,270
4,778,610
17,588,951
19,606,131
Other
1,055,221
566,493
Total tangible long-lived assets, net
44,243,712
46,919,979
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., and Wagz, Inc. (“Wagz”), wholly-owned foreign enterprises Wujiang SigmaTron Electronics Co., Ltd. and Wujiang SigmaTron Electronic Technology Co., Ltd. and international procurement office SigmaTron International Inc. 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 31, 2021 acquisition of Wagz); 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 and goodwill 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; the costs of borrowing under the Company’s senior and subordinated credit facilities, including under the rate indices that replaced LIBOR, including recently increasing interest rates; 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, and 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 of 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 two reportable segments as an independent provider of EMS, and as a provider of products to the Pet Tech market.
The EMS segment includes printed circuit board assemblies, electro-mechanical subassemblies and completely assembled (box-build) electronic products.
In connection with the production of assembled products, the EMS segment 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; (6) assistance in obtaining product approval from governmental and other regulatory bodies and (7) compliance reporting. The Company provides these services through an international network of facilities located in the United States, Mexico, China, Vietnam and Taiwan.
The Pet Tech reportable segment offers electronic products such as the Freedom Smart Dog Collar™, a wireless geo-mapped fence and wellness system, along with apparel and accessories. The EMS segment produces the Freedom Smart Dog Collar™ sold by the Pet Tech segment.
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. 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 an unreliable 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 six month periods ended October 31, 2022 and October 31, 2021.
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 100% of the stock of Wagz under the terms of 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 (the “Merger Agreement”). Wagz has
developed and brought to market a high tech pet collar and has multiple other products in development. Wagz is an IoT company which both owns intellectual property and secures recurring revenue through subscriptions for its services. 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 $23,656,233. The Company began its Pet Tech operations after the December 2021 acquisition of Wagz.
The Company reported a solid quarter, despite the challenges presented by the ongoing global supply chain issues. Pre-tax income for the three months ended October 31, 2022 was $2,127,839, which included an expected pre-tax loss of $2,731,126 for Wagz, our Pet Tech segment IoT start-up business acquired in December 2021. Pre-tax income for the three months ended October 31, 2021 was $4,663,717. The Company recorded revenue of $108,676,743 and $100,216,614 in the three month periods ended October 31, 2022 and October 31, 2021, respectively.
The backlog for the EMS segment remains strong and growing for the three month period ending October 31, 2022. Despite the continuing challenges in the electronic component marketplace, sales are running at record levels for the Company. The Company continues to see strength in the industrial marketplace. Existing customers are slowly launching new products and the Company has several new opportunities that look promising. Unfortunately, it sees no end in sight to the supply chain challenges that we have been dealing with for at least 18 months and few of the semiconductor companies are suggesting otherwise. The challenges will certainly continue for the balance of fiscal 2023, based on what is known at this time. This causes inventory to grow significantly and puts pressure on cash flow. It also leads to manufacturing inefficiencies due to the uncertainty of when parts will be received.
The Pet Tech segment, had a $2,731,126 pre-tax loss for the three month period ending October 31, 2022. The segment continues to make progress on the design and engineering front with the performance of the Freedom Smart Dog Collar™, as well as a new product that will be introduced early next year. It is also working on related products, with several large OEM’s and interest in the Pet Tech industry remains strong.
The Company reported a solid six month period ending October 31, 2022, despite the challenges presented by the ongoing global supply chain issues. Pre-tax income for the six month period ended October 31, 2022 was $4,033,914, which included an expected pre-tax loss of $4,954,687 for Wagz, our Pet Tech segment IoT start-up business acquired in December 2021. Pre-tax income for the six month period ended October 31, 2021 was $14,217,378, which included forgiveness of the Company’s Small Business Administration Paycheck Protection Program Loan in the amount of $6,282,973. The Company recorded revenue of $214,249,599 and $185,956,048 in the six month periods ended October 31, 2022 and October 31, 2021, respectively.
The backlog for the EMS segment remains strong and growing for the six month period ending October 31, 2022. Despite the continuing challenges in the electronic component marketplace, sales are running at record levels for the Company. The Company continues to see strength in the industrial marketplace. Existing customers are slowly launching new products and the Company has several new opportunities that look promising. Unfortunately, it sees no end in sight to the supply chain challenges that we have been dealing with for at least 18 months and few of the semiconductor companies are suggesting otherwise. The challenges will certainly continue for the balance of fiscal 2023, based on what is known at this time. This causes inventory to grow significantly and puts pressure on cash flow. It also leads to manufacturing inefficiencies due to the uncertainty of when parts will be received.
The Pet Tech segment, had a $4,954,687 pre-tax loss for the six month period ending October 31, 2022 as anticipated. The segment continues to make progress on the design and engineering front with the performance of the Freedom Smart Dog Collar™, as well as a new product that will be introduced early next year. It is also working on related products, with several large OEM’s and interest in the Pet Tech industry remains strong.
Results of Operations:
Consolidated Results
The following table sets forth the Company’s consolidated results of operations for the periods indicated.
$3,150,205
Net Sales
Net sales increased $8,460,129, or 8.4%, to $108,676,743 for the three month period ended October 31, 2022, compared to $100,216,614 for the same period in the prior fiscal year. The Federal Reserve has raised interest rates several times during the current fiscal quarter, which has negatively affected customer demand in the consumer electronics markets, but has not had the same effect in the industrial electronics and medical/life science markets. As a result, the Company’s sales increased for the three month period ended October 31, 2022, in industrial electronics and medical/life science compared to the same period in the prior fiscal year. The increase in sales was partially offset by a decrease in sales in consumer electronics. Net sales were higher due to certain customer price increases implemented as a result of increased raw material and other operating costs that occurred during the three month period ended October 31, 2022, as compared to the same period last fiscal year.
Costs of products sold
Cost of products sold increased $6,923,702, or 7.8%, to $95,362,730 (87.7% of net sales) for the three month period ended October 31, 2022, compared to $88,439,028 (88.2% of net sales) for the same period in the prior fiscal year. The slight decrease in cost of products sold as a percentage of sales is due to customer price increases, partially offset with higher material, logistics and other operating
costs as a result of higher sales volumes and the impact of global supply chain disruptions that caused factory inefficiencies. Labor costs and other manufacturing costs were higher for the three month period ended October 31, 2022, than in the same period in the prior fiscal year, primarily due to inflationary pressures.
Gross profit margin was 12.3% of net sales, for the three month period ended October 31, 2022, compared to 11.8% for the same period in the prior fiscal year. The increase in gross margins as a percentage of sales is due to customer price increases, partially offset with high material, labor and other manufacturing costs during the second quarter of fiscal 2023, compared to the second quarter of fiscal 2022.
Selling and administrative expenses increased $2,439,401, or 35.8% to $9,245,157 (8.5% of net sales) for the three month period ended October 31, 2022, compared to $6,805,756 (6.8% of net sales) for the same period in the prior fiscal year. Of the $2,439,401 increase, $2,739,060 relates to the Wagz business, acquired on December 31, 2021, and therefore, comparable information is not available for the three months ended October 31, 2021. In addition, selling and administrative expenses increased for the three month period ended October 31, 2022, due to an increase in financing fees and higher costs due to inflationary pressures, which was partially offset with a decrease in bonus expense.
Interest expense, net, increased to $1,976,831 for the three month period ended October 31, 2022, compared to $344,675 for the same period in the prior fiscal year. The increase relates to higher average debt levels as well as increased interest rates for the three month period ended October 31, 2022.
Income tax expense decreased $257,545 to $1,255,967 for the three month period ended October 31, 2022, compared to $1,513,512 for the same period in the prior fiscal year. The effective tax rate increased to 59.03% for the three month period ended October 31, 2022, compared to 32.45% for the same period in the prior fiscal year due primarily to an increase in valuation allowance during the three month period ended October 31, 2022.
Net Income
Net income decreased $2,278,333, or 72.3%, to $871,872 for the three month period ended October 31, 2022, compared to $3,150,205 for the same period in the prior fiscal year. The decreased net income primarily relates to losses incurred for the Pet Tech segment (acquired December 31, 2021), and higher interest expense due to higher average debt levels and increased interest rates during the second quarter of fiscal 2023, compared to the second quarter of fiscal 2022.
EMS Segment
The following table sets forth the Company’s results of operations for the EMS segment for the periods indicated.
94,914,988
13,306,079
6,506,097
Net sales increased $8,004,453, or 8.0%, to $108,221,067 for the three month period ended October 31, 2022, compared to $100,216,614 for the same period in the prior fiscal year. The Federal Reserve has raised interest rates several times during the current fiscal quarter, which has negatively affected customer demand in the consumer electronics markets, but has not had the same effect in the industrial electronics and medical/life science markets. As a result,the Company’s sales increased for the three month period ended October 31, 2022, in industrial electronics and medical/life science compared to the prior year. The increase in sales was partially offset by a decrease in sales in consumer electronics. Net sales were higher due to certain customer price increases implemented as a result of increased raw material and other operating costs that occurred during the three month period ended October 31, 2022, as compared to the same period last fiscal year.
Cost of products sold increased $6,475,960, or 7.3%, to $94,914,988 (87.7% of net sales) for the three month period ended October 31, 2022, compared to $88,439,028 (88.2% of net sales) for the same period in the prior fiscal year. The slight decrease in cost of products sold as a percentage of sales is due to customer price increases, partially offset with higher material, logistics and other operating costs as a result of higher sales volumes and the impact of global supply chain disruptions that caused factory inefficiencies. Labor costs and other manufacturing costs were higher for the three month period ended October 31, 2022, than in the same period in the prior fiscal year, primarily due to inflationary pressures.
Gross profit margin was 12.3% of net sales, for the three month period ended October 31, 2022, compared to 11.8% for the same period in the prior fiscal year. The increase in gross margins as a percentage of sales is due to customer price increases, partially offset with higher material, labor and other manufacturing costs during the second quarter of fiscal 2023, compared to the second quarter of fiscal 2022.
Selling and administrative expenses decreased $299,659, or 4.4% to $6,506,097 (6.0% of net sales) for the three month period ended October 31, 2022, compared to $6,805,756 (6.8% of net sales) for the same period in the prior fiscal year. Selling and administrative expenses decreased for the three month period ended October 31, 2022, due to a decrease in bonus expense, partially offset by an increase in financing fees.
Operating income increased $1,828,152, or 36.8%, to $6,799,982 (6.3% of net sales) for the three month period ended October 31, 2022, compared to $4,971,830 (5.0% of net sales) for the same period in the prior fiscal year. The increase was primarily due to higher sales, partially offset by higher material, logistics and other operating costs.
Pet Tech Segment
Wagz was acquired on December 31, 2021, and therefore does not have comparable financial results for the three month period ended October 31, 2021.
The following table sets forth the Company’s consolidated results of operations for the Pet Tech segment for the periods indicated.
447,742
7,934
2,739,060
Operating loss
Net sales were $455,676 for the three month period ended October 31, 2022. Sales for the period are primarily comprised of hardware and accessories, as well as recurring subscription revenue.
Cost of products sold was $447,742 (98.3% of net sales) for the three month period ended October 31, 2022.
Gross profit margin was $7,934 (1.7% of net sales) for the three month period ended October 31, 2022.
Selling and administrative expenses were $2,739,060 for the three month period ended October 31, 2022. Selling and administrative costs are primarily comprised of research and development costs for new products expected to launch in fiscal 2024, selling and marketing expenses, as well as general and administrative expenses.
Operating loss for the three month period ended October 31, 2022 was $2,731,126.
Impairment of notes receivable and investment
$2,248,547
$11,946,921
Net sales increased $28,293,551, or 15.2%, to $214,249,599 for the six month period ended October 31, 2022, compared to $185,956,048 for the same period in the prior fiscal year. The Federal Reserve has raised interest rates several times during the first six months of fiscal 2023, which has negatively affected customer demand in the consumer electronics markets, but has not had the same effect in the industrial electronics and medical/life science markets. As a result, the Company’s sales increased for the six month period ended October 31, 2022, in industrial electronics and medical/life science compared to the same period in the prior fiscal year. The increase in sales was partially offset by a
decrease in sales in consumer electronics. Net sales were higher due to certain customer price increases implemented as a result of increased raw material and other operating costs that occurred during the six month period ended October 31, 2022, as compared to the same period last fiscal year
Cost of products sold increased $24,654,567, or 15.0%, to $189,250,551 (88.3% of net sales) for the six month period ended October 31, 2022, compared to $164,595,984 (88.5% of net sales) for the same period in the prior fiscal year. The slight decrease in cost of products sold as a percentage of sales is due to customer price increases, partially offset with higher material, logistics and other operating costs as a result of higher sales volumes and the impact of global supply chain disruptions that caused factory inefficiencies. Labor costs and other manufacturing costs were higher for the six month period ended October 31, 2022, than in the same period in the prior fiscal year, primarily due to inflationary pressures.
Gross profit margin was 11.7% of net sales, for the six month period ended October 31, 2022, compared to 11.5% for the same period in the prior fiscal year. The increase in gross margins as a percentage of sales is due to customer price increases, partially offset with high material, labor and other manufacturing costs during the first half of fiscal 2023, compared to the first half of fiscal 2022.
Selling and administrative expenses increased $5,189,604, or 40.2% to $18,106,375 (8.5% of net sales) for the six month period ended October 31, 2022, compared to $12,916,771 (6.9% of net sales) for the same period in the prior fiscal year. Of the $5,189,604 increase, $5,070,436 relates to the Wagz business, acquired on December 31, 2021, and therefore, comparable information is not available for the six months ended October 31, 2021. In addition, selling and administrative expenses increased for the six month period ended October 31, 2022, due to an increase in other professional fees related to the new and amended credit agreements finalized during the first quarter of fiscal year 2023, an increase in financing fees and higher costs due to inflationary pressures, which was partially offset with a decrease in bonus expense.
Interest expense, net, increased to $2,930,389 for the six month period ended October 31, 2022, compared to $582,591 for the same period in the prior fiscal year. The increase relates to higher average debt levels as well as increased interest rates for the six month period ended October 31, 2022.
Income tax expense decreased $485,090 to $1,785,367 for the six month period ended October 31, 2022, compared to $2,270,457 for the same period in the prior fiscal year. The effective tax rate increased to 44.26% for the three month period ended October 31, 2022, compared to 15.97% for the same period in the prior year is due primarily to tax exempt income recognized in the previous year.
The decrease in income tax expense for the six month period ended October 31, 2022 compared to the same period in the previous year is due to a decrease in income recognized in the current year compared to the previous year.
Net income decreased $9,698,374, or 81.2%, to $2,248,547 for the six month period ended October 31, 2022, compared to $11,946,921 for the same period in the prior fiscal year. A substantial part of the decrease in net income was attributable to the one-time extinguishment of the PPP Loan in the amount of $6,282,973 that was recorded as income during the six month period ended October 31, 2021. In addition, net income decreased for the six month period ended October 31, 2022, due to the Wagz Pet Tech segment, which incurred a loss of $4,954,687 during the period, which did not have activity in the first half of fiscal 2022.
188,527,748
24,883,299
13,035,939
Net sales increased $27,454,999, or 14.8%, to $213,411,047 for the six month period ended October 31, 2022, compared to $185,956,048 for the same period in the prior fiscal year. The Federal Reserve has raised interest rates several times during the current fiscal quarter, which has negatively affected customer demand in the consumer electronics markets, but has not had the same effect in the industrial electronics and medical/life science markets. As a result, the Company’s sales increased for the six month period ended October 31, 2022, in industrial electronics and medical/life science compared to the prior year. The increase in sales was partially offset by a decrease in sales in consumer electronics. Net sales were higher due to certain customer price increases implemented as a result of increased raw material and other operating costs that occurred during the six month period ended October 31, 2022, as compared to the six months ended October 31, 2021.
Cost of products sold increased $23,931,764, or 14.5%, to $188,527,748 (88.3% of net sales) for the six month period ended October 31, 2022, compared to $164,595,984 (88.5% of net sales) for the same period in the prior fiscal year. The slight decrease in cost of products sold as a percentage of sales is due to customer price increases, partially offset with higher material, logistics and other operating costs as a result of higher sales volumes and the impact of global supply chain disruptions that caused factory inefficiencies. Labor costs and other manufacturing costs were higher for the six month period ended October 31, 2022, than in the same period in the prior fiscal year, primarily due to inflationary pressures.
Gross profit margin was 11.7% of net sales, for the six month period ended October 31, 2022, compared to 11.5% for the same period in the prior fiscal year. The increase in gross margins as a percentage of sales is due to customer price increases, partially offset with higher material, labor and other manufacturing costs during the first half of fiscal 2023, compared to the first half of fiscal 2022.
Selling and administrative expenses increased $119,168, or 0.9% to $13,035,939 (6.1% of net sales) for the six month period ended October 31, 2022, compared to $12,916,771 (6.9% of net sales) for the same period in the prior fiscal year. Selling and administrative expenses increased for the six month period ended October 31, 2022, due to an increase in other professional fees, related to the new and amended credit agreements finalized during the first quarter of fiscal year 2023, an increase in financing fees and higher costs due to inflationary pressures, which was partially offset with a decrease in bonus expense.
Operating income increased $3,404,067, or 40.3%, to $11,847,360 (5.6% of net sales) for the six month period ended October 31, 2022, compared to $8,443,293 (4.5% of net sales) for the same period in the prior fiscal year. The increase was primarily due to higher sales, partially offset by higher material, logistics and other operating costs.
Wagz was acquired on December 31, 2021, and therefore does not have comparable financial results for the six month period ended October 31, 2021.
The following table sets forth the Company’s results of operations for the Pet Tech segment for the periods indicated.
722,803
115,749
5,070,436
Net sales were $838,552 for the six month period ended October 31, 2022. Sales for the period are primarily comprised of hardware and accessories, as well as recurring subscription revenue. The Pet Tech segment experienced supply chain issues, causing certain inventory shortages during the first quarter of fiscal year 2023, which negatively affected hardware sales. Those specific supply chain issues were resolved in late June 2022.
Cost of products sold was $722,803 (86.2% of net sales) for the six month period ended October 31, 2022.
Gross profit margin was $115,749 (25.4% of net sales) for the six month period ended October 31, 2022.
Selling and administrative expenses were $5,070,436 for the six month period ended October 31, 2022. Selling and administrative costs are primarily comprised of research and development costs for new products expected to launch in fiscal 2024, selling and marketing expenses, as well as general and administrative expenses.
Operating loss for the six month period ended October 31, 2022 was $4,954,687.
Liquidity and Capital Resources:
Operating Activities.
Cash flow used in operating activities was $10,669,736 for the six months ended October 31, 2021, which included the effect of the extinguishment of the PPP Loan debt. Cash flow used in operating activities was primarily the result of an increase in both inventory and accounts receivable in the amount of $35,078,520 and $16,341,244, respectively. Cash flow from operating activities was offset by an increase in accounts payable and deferred revenue in the amount of $24,062,801 and $6,366,871, respectively.
Investing Activities.
Cash used in investing activities was $271,997 for the six months ended October 31, 2022. During the first six months of fiscal year 2023 the Company purchased $271,997 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. 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.
Cash used in investing activities was $7,069,854 for the six months ended October 31, 2021. During the first six months of fiscal year 2022, the Company purchased $3,107,854 in machinery and equipment used in the ordinary course of business. The Company made additional machinery and equipment purchases of $1,641,685 during the balance of fiscal year 2022. During the first six months of fiscal year 2022 the Company made advances of $3,962,000 to Wagz.
Financing Activities.
Cash provided by financing activities of $23,443,457 for the first six months ended October 31, 2022, was primarily the result of net borrowings under the line of credit and term loan agreement.
Cash provided by financing activities of $16,650,707 for the first six months ended October 31, 2021, was primarily the result of net borrowings under the line of credit.
Financing Summary.
On July 18, 2022, SigmaTron, Wagz and Lender amended and restated the Agreement by entering into an Amended and Restated Credit Agreement (as so amended and restated, the “Credit Agreement”). The Facility, as amended, allows the Company to borrow on a revolving basis up to the lesser of (i) $70,000,000 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. The maturity date of the Facility was extended to July 18, 2027. Deferred financing costs of $296,802 and $128,733 were capitalized during the six month period ended October 31, 2022 and during the fiscal year ended April 30, 2022, respectively, which are amortized over the term of the Agreement. As of October 31, 2022, there was $48,916,746 outstanding and $19,150,939 of unused availability under the revolving Facility compared to an outstanding balance of $51,392,158 and $5,691,855 of unused availability at April 30, 2022. As of October 31, 2022 and April 30, 2022, the unamortized amount offset against outstanding debt was $604,006 and $393,503, respectively.
Under the Credit Agreement, a minimum Fixed Charge Coverage Ratio (“FCCR”) financial covenant of 1.10x is applicable only during an FCCR trigger period which occurs when (a) commencing on the Effective Date and ending when the Term Loan Obligations have been Paid in Full and (b) following the Payment in Full of the Term Loan Obligations, (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. In addition, the Credit Agreement imposes a financial covenant that requires the Company to maintain a leverage ratio of Total Debt to EBITDA (each as defined in the Credit Agreement) for any twelve month period not to exceed a certain amount for each fiscal quarter through the maturity of the revolving Facility, which
ratio (a) ranges from 5.75-to-1 for the fiscal quarter ending on October 31, 2022 to 3.00-to-1 for the fiscal quarter ending on July 31, 2026 (if the Term Loan Borrowing Base Coverage Ratio (as defined in the Credit Agreement) is less than or equal to 1.50-to-1) and (b) ranges from 5.75-to-1 for the fiscal quarter ending on October 31, 2022 to 4.00-to-1 for the fiscal quarter ending on July 18, 2027 (if the Term Loan Borrowing Base Coverage Ratio is greater than or equal to 1.50-to-1).
The TCW Term Loan is secured by: (a) a first priority security interest in all property of SigmaTron and Wagz that does not constitute ABL Priority Collateral, which includes: (i) SigmaTron’s and Wagz’s real estate other than SigmaTron’s Del Rio, Texas, warehouses, (ii) SigmaTron’s and Wagz’s machinery, equipment and fixtures (but excluding ABL Priority Equipment (as defined in the ICA)), (iii) the Term Priority Mexican Inventory (as defined in the ICA), (iv) SigmaTron’s stock in its direct and indirect subsidiaries, (v) SigmaTron’s and Wagz’s general intangibles (excluding any that constitute ABL Priority Collateral), goodwill and intellectual property, (vi) the proceeds of business interruption insurance that constitute Term BI Insurance Share (as defined in the ICA), (vii) tax
refunds, and (viii) all proceeds thereof, in each case, now owned or hereafter acquired (collectively, the “Term Priority Collateral”); and (b) a second priority security interest in all collateral that constitutes ABL Priority Collateral. Also, SigmaTron’s three Mexican subsidiaries pledged all of their assets as security for the TCW Term Loan.
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 six month period ended October 31, 2022, resulted in net foreign currency transaction losses of $797,459 compared to net foreign currency losses of approximately $121,400 for the same period in the prior year. During the six months of fiscal year 2023, the Company paid approximately $33,630,000 to its foreign subsidiaries for manufacturing services. All intercompany balances have been eliminated upon consolidation.
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 believes 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 and the continuing global supply chain disruptions in the electronic component marketplace have been challenging. Prices for raw materials necessary for production have fluctuated significantly in the past and the Company is currently experiencing upward pricing pressure on raw materials. The Company anticipates supply chain and raw material price volatility will continue during fiscal 2023.
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.
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 October 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 October 31, 2022.
Internal Controls:
There has been no change in the Company’s internal control over financial reporting during the six months ended October 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.
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.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
Item 6.Exhibits.
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).
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).
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).
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).
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)
101.SCH
Inline XBRL Taxonomy Extension Schema Document
101.CAL
Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF
Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE
Inline XBRL Taxonomy Extension Presentation Linkbase Document
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.
/s/ Gary R. Fairhead
December 12, 2022
Gary R. Fairhead
Date
CEO (Principal Executive Officer)
/s/ James J. Reiman
James J. Reiman
Chief Financial Officer, Secretary and Treasurer
(Principal Financial Officer and Principal
Accounting Officer)