SigmaTron International, Inc. and Subsidiaries
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
April 30, 201
8
and 201
7
NOTE A - DESCRIP
TION OF THE BUSINESS
SigmaTron International, Inc., its subsidiaries, foreign enterprises and international procurement office (collectively, the “Company”) operates in
one
business segment as an independent provider of electronic manufacturing services (“EMS”), which includes printed circuit board assemblies and completely assembled (box-build) electronic products. In connection with the production of assembled products, the Company also provides services to its customers, including (1) automatic and manual assembly and testing of products; (2) material sourcing and procurement; (3) manufacturing and test engineering support; (4) design services; (5) warehousing and distribution services; and (6) assistance in obtaining product approval from governmental and other regulatory bodies. As of April 30, 201
8
, the Company provided these manufacturing services through an international network of facilities located in the United States, Mexico, China, Vietnam and Taiwan.
Approximately
14.0%
of the total non-current consolidated assets of the Company are located in foreign jurisdictions outside the United States as of April 30, 20
18 and 2017.
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation Policy
The consolidated financial statements include the accounts and transactions 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 SigmaTron International Trading Co., wholly-owned foreign enterprises Suzhou SigmaTron Electronics Co. Ltd., and SigmaTron Electronic Technology Co., Ltd. (collectively, “SigmaTron China”), and its international procurement office, SigmaTron Taiwan. The functional currency of the Mexican, Vietnamese and Chinese subsidiaries and procurement branch is the U.S. Dollar. Intercompany transactions are eliminated in the consolidated financial statements. The impact of currency fluctuations for the fiscal year ended April 30, 2018 resulted in net foreign currency transaction gains of approximately $125,000 compared to net foreign currency losses of $508,000 in the prior year.
Use of Estimates
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, reserves for inventory, lower of cost or market adjustment for inventory, contingent consideration, deferred taxes, uncertain tax positions, valuation allowance for deferred taxes and valuation of goodwill and long-lived assets. Actual results could materially differ from these estimates.
Cash and Cash Equivalents
Cash and cash equivalents include cash and all highly liquid short-term investments with original maturities within three months of the purchase date.
SigmaTron International, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
April 30, 201
8
and 201
7
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
Accounts Receivable
The majority of the Company’s accounts receivable are due from companies in the industrial electronics, consumer electronics and medical/life sciences industries. Credit is extended based on evaluation of a customer’s financial condition, and, generally, collateral is not required. Accounts receivable are due in accordance with agreed upon terms, and are stated at amounts due from customers net of an allowance for doubtful accounts. Accounts outstanding longer than the contractual payments terms are considered past due. The Company writes off accounts receivable when they are determined to be uncollectible.
The Company has arrangements with various financial institutions to sell certain eligible accounts receivable balances from specific customers. The accounts receivable balances sold are at the election of the Company and the Company incurred fees for such sales, which were not material for the year ended April 30, 2018 or 2017. The accounts receivable balances are derecognized at the time of sale, as the Company does not have continuing involvement after the point of sale. During the years ended April 30, 2018 and 2017, the Company sold without recourse trade receivables of approximately $78,000,000 and $95,000,000, respectively. Cash proceeds from these agreements are reflected as operating activities included in the change in accounts receivable in the Company's consolidated statements of cash flows.
Allowance for Doubtful Accounts
The Company’s allowance for doubtful accounts relates to receivables not expected to be collected from its customers. This allowance is based on management’s assessment of specific customer balances, considering the age of receivables and financial stability of the customer and a five year average of prior uncollectible amounts. If there is an adverse change in the financial condition of the Company’s customers, or if actual defaults are higher than provided for, an addition to the allowance may be necessary.
Inventories
Inventories are valued at cost. Cost is determined by an average cost method and the Company allocates labor and overhead to work-in-process and finished goods. In the event of an inventory write-down, the Company records expense to state the inventory at lower of cost or net realizable value. The Company establishes inventory reserves for valuation, shrinkage, and excess and obsolete inventory. The Company records provisions for inventory shrinkage based on historical experience to account for unmeasured usage or loss. The Company records provisions for excess and obsolete inventories for the difference between the cost of inventory and its estimated realizable value based on assumptions about future product demand and market conditions. For convenience, the Company records these inventory reserves against the inventory cost through a contra asset rather than through a new cost basis. Upon a subsequent sale or disposal of the impaired inventory, the corresponding reserve is relieved to ensure the cost basis of the inventory reflects any reductions. Actual results differing from these estimates could significantly affect the Company’s inventories and cost of products sold as the inventory is sold or otherwise relieved.
SigmaTron International, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
April 30, 201
8
and 201
7
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
Property, Machinery and Equipment
Property, machinery and equipment are valued at cost. The Company provides for depreciation and amortization using the straight-line method over the estimated useful life of the assets:
|
|
Buildings
|
20 years
|
Machinery and equipment
|
5-12 years
|
Office equipment and software
|
3-5 years
|
Tools and dies
|
12 months
|
Leasehold improvements
|
lesser of lease term or useful life
|
Expenses for repairs and maintenance are charged to selling and administrative expenses as incurred.
Deferred Financing Costs
Deferred financing costs consist of costs incurred to obtain the Company’s long-term debt and are amortized using the effective interest method over the term of the related debt. Deferred financing fees of $319,332 and $208,583 net of accumulated amortization of $75,585 and $11,916, respectively, as of April 30, 2018 and 2017, respectively, are deducted from long term debt on the Company’s balance sheet.
Income Taxes
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 calculation of the Company’s tax liabilities involves dealing with uncertainties in the application of complex tax laws and regulations in a multitude of jurisdictions across its global operations. Changes in tax laws and rates could also affect recorded deferred tax assets and liabilities in the future. Except as noted below, management is not aware of any such changes that would have a material effect on the Company’s results of operations, cash flows or financial position.
A tax benefit from an uncertain tax position may only be recognized when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, based on the technical merits.
SigmaTron International, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
April 30, 201
8
and 201
7
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
Income Taxes - Continued
The Company adjusts its tax liabilities when its judgment changes as a result of the evaluation of new information not previously available. Due to the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is materially different from its current estimate of the tax liabilities. These differences will be reflected as increases or decreases to income tax expense in the period in which they are determined.
Earnings per Share
Basic earnings per share are computed by dividing net income (loss) (the numerator) by the weighted-average number of common shares outstanding (the denominator) for the period. The computation of diluted earnings per share is similar to the computation of basic earnings per share, except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potentially dilutive common stock equivalents such as stock options and restricted stock, had been exercised or vested. There were 109,402 and 285,000 anti-dilutive common stock equivalents at April 30, 2018 and April 30, 2017, respectively, which have been excluded from the calculation of diluted earnings per share.
|
|
|
|
|
|
|
Twelve Months Ended
|
|
April 30,
|
|
2018
|
|
2017
|
|
|
|
|
|
|
Net (loss) income
|
$
|
(3,241,870)
|
|
$
|
1,390,206
|
Weighted-average shares
|
|
|
|
|
|
Basic
|
|
4,205,483
|
|
|
4,186,183
|
Effect of dilutive stock options
|
|
-
|
|
|
27,409
|
|
|
|
|
|
|
Diluted
|
|
4,205,483
|
|
|
4,213,592
|
|
|
|
|
|
|
Basic (loss) earnings per share
|
$
|
(0.77)
|
|
$
|
0.33
|
|
|
|
|
|
|
Diluted (loss) earnings per share
|
$
|
(0.77)
|
|
$
|
0.33
|
Revenue Recognition
Revenues from sales of the Company's electronic manufacturing services business are recognized when the finished good product is shipped to the customer. In general, and except for consignment inventory, it is the Company's policy to recognize revenue and related costs when the finished goods have been shipped from its facilities, which is also the same point in time that title passes under the terms of the purchase order and control passes to the customer. Finished goods inventory for certain customers is shipped from the Company to an independent warehouse for storage or shipped directly to the customer and stored in a segregated part of the customer’s own facility. Upon the customer’s request for finished goods inventory, the inventory is shipped to the customer if the inventory was stored off-site, or transferred from the segregated part of the customer’s facility for consumption or use by the customer. The Company recognizes revenue upon such shipment or transfer to the customer. The Company does not earn a fee for such arrangements. The Company from time to time may ship finished goods from its facilities, which is also the same point in time that title passes under the terms of the purchase order, and invoice the customer at the end of the calendar month. This is done only in special circumstances to accommodate a specific customer. Further, from time to time
SigmaTron International, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
April 30, 201
8
and 201
7
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
Revenue Recognition - Continued
customers request the Company hold finished goods after they have been invoiced to consolidate finished goods for shipping purposes. The Company generally provides a warranty for workmanship, unless the assembly was designed by the Company, in which case it warrants assembly/design. The Company does not have any installation, acceptance or sales incentives (although the Company has negotiated longer warranty terms in certain instances). The Company assembles and tests assemblies based on customers’ specifications. Historically, the amount of returns for workmanship issues has been de minimis under the Company’s standard or extended warranties.
Shipping and Handling Costs
The Company records shipping and handling costs for goods shipped to customers as selling and administrative expenses. Customers are typically invoiced for shipping costs and such amounts are included in net sales. Shipping and handling costs were not material to the financial statements for fiscal years 2018 or 2017.
Fair Value Measurements
Fair value measurements are determined based upon the exit price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants exclusive of any transaction costs. The Company utilizes a fair value hierarchy based upon the observability of inputs used in valuation techniques as follows:
Level 1: Observable inputs such as quoted prices in active markets;
Level 2: Inputs, other than quoted prices in active markets, that are observable either directly or indirectly; and
Level 3: Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.
Fair Value of Financial Instruments
The Company’s financial instruments include cash and cash equivalents, accounts receivable, note receivable, other receivables, accounts payable and accrued expenses which approximate fair value at April 30, 2018 and 2017, due to their short-term nature. The carrying amounts of the Company’s debt obligations approximate fair value based on future payments discounted at current interest rates for similar obligations or interest rates which fluctuate with the market.
The Company measured the contingent consideration included in the fiscal 2013 Spitfire acquisition under the fair value standard (primarily using level 3 measurement inputs). The contingent consideration continues to be measured and reported at fair value at each period end. The Company currently does not have any other non-financial assets and non-financial liabilities that are required to be measured at fair value on a recurring basis.
The Company entered into an Asset Purchase Agreement with Wagz, Inc. (Wagz) whereby the Company sold assets to Wagz for $350,000 cash, 600,000 shares of Wagz Class C Common Stock and an earn-out based on sales by Wagz generated from use of the assets through July 31, 2022. The earn-out is $6.00 per unit of a product specified in the asset purchase agreement and any upgrade to such product. The fair value of the non-cash consideration consisted of $600,000 for the 600,000 shares of Wagz common stock which is recorded within other assets. The Company determined the fair value of the equity using the price per common share received by Wagz in a recent financing transaction, a level 3 input. The Company did not assign any value to the earn-out because any receipts from the earn-out are contingent upon Wagz selling the product specified in the asset purchase agreement between the Company and Wagz.
SigmaTron International, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
April 30, 201
8
and 201
7
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
Goodwill
Goodwill represents the purchase price in excess of the fair value of assets acquired in business combinations. Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 350, “Intangibles – Goodwill and Other,” requires the Company to assess goodwill and other indefinite-lived intangible assets for impairment at least annually in the absence of an indicator of possible impairment and immediately upon an indicator of possible impairment. The Company is permitted the option to first assess qualitative factors to determine whether the existence of events and circumstances indicates that it is more likely than not that the fair value of any reporting unit is less than its corresponding carrying value. If, after assessing the totality of events and circumstances, the Company concludes that it is not more likely than not that the fair value of any reporting unit is less than its corresponding carrying value, then the Company is not required to take further action. However, if the Company concludes otherwise, then it is required to perform a quantitative impairment test, including computing the fair value
of the reporting unit and comparing that value to its carrying value (the “step 2” requirement). If the fair value is less than its carrying value, a second step of the test is required to determine if recorded goodwill is impaired. The Company also has the option to bypass the qualitative assessment for goodwill in any period and proceed directly to performing the
quantitative impairment test. The Company will be able to resume performing the qualitative assessment in any subsequent period. For fiscal 2017, the Company performed its annual goodwill impairment test as of February 1, 2017 and determined no impairment existed as of that date. The step one analysis was performed using a combination of a market approach and an income approach based on a discounted cash flow analysis.
For fiscal year 2018, the Company early adopted the guidance contained in Accounting Standards Update (ASU) No. 2017-04, “Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment,” which removes the step 2 requirement to perform a hypothetical purchase price allocation to measure goodwill impairment. Beginning with its February 1, 2018 goodwill impairment testing, goodwill impairment is the amount by which the Company’s single reporting unit carrying value exceeds its fair value, not to exceed the recorded amount of goodwill. To estimate the fair value of the Company’s equity, the Company used both a market approach based on the guideline companies’ method, and an income approach based on a discounted cash flow analysis. The value indicated by both methods was weighted to arrive at a concluded value. The carrying value of the Company’s equity was greater than the fair value of the Company based on the valuation analysis by an amount greater than the recorded amount of the goodwill. In the fourth quarter of fiscal 2018, the Company’s forecasted future cash flow declined from prior estimates. The Company is experiencing declining margins due to pricing pressures from vendors and customers. Also at this time, electronic component manufacturers began allocating components to their customers which required the Company to increase its investment in working capital. The decline in the forecasted cash flow resulted in a lower estimate of the fair value of the Company’s reporting unit causing the Company to take an impairment charge on all of its goodwill. The Company has begun taking steps to improve its margins and has negotiated an increase in its revolving credit facility to address its working capital needs.
Accordingly, the Company recognized a full goodwill impairment charge of $3,222,899.
Intangible Assets
Intangible assets are comprised of finite life intangible assets including patents, trade names, backlog, non-compete agreements, and customer relationships. Finite life intangible assets are amortized on a straight line basis over their estimated useful lives of 5 years for patents, 20 years for trade names, 1 year for backlog and 7 years for non-compete agreements except for customer relationships which are amortized on an accelerated basis over their estimated useful life of 15 years.
Impairment of Long-Lived Assets
The Company reviews long-lived assets, including amortizable intangible assets, for impairment. 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
SigmaTron International, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
April 30, 201
8
and 201
7
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
Impairment of Long-Lived Assets - Continued
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 for idle and underutilized equipment, and reviews business plans for possible impairment. As a result of the analysis performed in the fourth quarter of fiscal 2018, the Company determined that the carrying value of the trade name intangible asset was not recoverable and recorded a charge of $690,107 for the entire carrying amount. The Company’s analysis did not indicate that any of its other long-lived assets were impaired.
Settlement of Receivable, Related Sale of Assets and Investments
As more fully described in Note E – Related Parties, the Company has recorded an investment in Wagz, a privately held company whose equity does not have a readily determinable fair value. As permitted by ASC 321,
Investments - Equity Securities,
paragraph 321-35-2, the Company has elected to carry its investment in Wagz equity at its cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for identical or a similar investment of the same issuer until the investment no longer qualifies to be measured under paragraph 321-35-2. The balance at fiscal year ended April 30, 2018 was $600,000 which is recorded under other assets. For the fiscal year ended April 30, 2018, the Company has not recognized any impairment of this investment.
Stock Incentive Plans
Under the Company’s stock option plans, options to acquire shares of common stock have been made available for grant to certain employees and directors. Each option granted has an exercise price of not less than 100% of the market value of the common stock on the date of grant. The contractual life of each option is generally 10 years. The vesting of the grants varies according to the individual options granted. The Company measures the cost of employee services received in exchange for an equity award based on the grant date fair value and records that cost over the respective vesting period of the award.
Reclassifications
Certain reclassifications have been made to the previously reported 2017 financial statements to conform to the 2018 presentation. There was no change to net income.
New Accounting Standards
In May 2014, the FASB issued Accounting Standards Update (“ASU”) No. 2014-09,
"Revenue from Contracts with Customers"
(Topic 606)
which supersedes the revenue recognition requirements in ASC 605, “
Revenue Recognition”
. In summary, the core principle of this standard, along with various subsequent amendments, is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Additionally, the new standard requires enhanced disclosures about the nature, amount, timing, and uncertainty of revenue and cash flows arising from customer contracts, including revenue recognition policies to identify performance obligations, assets recognized from costs incurred to obtain and fulfill a contract, and significant judgments in measurements and recognition. The standard, as amended, was effective for annual periods beginning after December 15, 2017, including interim periods within that reporting period. Companies have the option of using either a full or modified retrospective approach in applying this standard.
SigmaTron International, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
April 30, 201
8
and 201
7
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
New Accounting Standards – Continued
To plan for the adoption of the standard, the Company conducted an analysis to determine the impact the new standard would have on its consolidated financial statements. This analysis included reviewing 1) contract terms and existing accounting policies to determine the financial impact of the standard, 2) data availability and system reports to meet the additional disclosure requirements of the standard, 3) any practical expedients the Company could elect upon adoption and 4) the control environment and internal processes to ensure the appropriate controls are in place. As part of implementation efforts we reviewed and modified our standard manufacturing agreement and invoice terms and conditions to emphasize that title, risk of loss and control of the finished goods products we sell transfers to our customers upon shipment.
The Company adopted the ASU on May 1, 2018 using the modified retrospective transition method, applying the guidance to those contracts which were not completed as of that date. The Company’s adoption of ASC 606 did not result in any changes in accounting requiring a transition adjustment to retained earnings.
Pursuant to the Company’s adoption of the standard, it is in the process of expanding its disclosures in the consolidated financial statements for revenue recognition, assets and liabilities relating to contracts with customers, the nature of the Company’s performance obligations and the manner by which the Company determines and allocates transaction prices to its performance obligations, and the significant judgments inherent in its revenue recognition policies. The Company also is in the process of implementing enhancements to its internal controls to support the Company’s ability to sustain compliance with the standard after adoption.
In February 2016, the FASB issued ASU No. 2016-02, “
Leases”
. The new standard establishes a right-of-use (ROU) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. A modified retrospective transition approach is required for capital leases and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. While the Company is still evaluating the impact of its pending adoption of the new standard on its consolidated financial statements, the Company expects that upon adoption in the fiscal year ending April 30, 2020, it will recognize ROU assets and lease liabilities and the amounts could be material.
In March 2016, the FASB issued ASU No. 2016-09, “
Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting”,
a new accounting standard update intended to simplify several aspects of the accounting for share-based payment transactions including: income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. Specifically, the update requires that excess tax benefits and tax deficiencies (the difference between the deduction for tax purposes and the compensation cost recognized for financial reporting purposes) be recognized as income tax expense or benefit
in the consolidated statements of operations, introducing a new element of volatility to the provision for income taxes. This update is effective for fiscal years beginning after December 15, 2016. Early adoption is permitted. The Company adopted the ASU on May 1, 2017. Effective with the adoption of the ASU all share-based awards continue to be accounted for as equity awards, excess tax benefits recognized on stock-based compensation expense are reflected in the consolidated statements of operations as a component of the provision for income taxes on a prospective basis, excess tax benefits recognized on stock-based compensation expense are classified as an operating activity in the consolidated statements of cash flows on a prospective basis and the Company has elected to continue to estimate expected forfeitures over the course of a vesting period. The adoption of the ASU had no material impact on the retained earnings, other components of equity or net assets as of the beginning of the period of adoption.
SigmaTron International, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
April 30, 201
8
and 201
7
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
New Accounting Standards - Continued
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 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 public business entities, ASU 2016-13 is effective for annual and interim reporting periods beginning after December 15, 2019, and the guidance is to be applied using the modified-retrospective approach. Earlier adoption is permitted for annual and interim reporting periods beginning after December 15, 2018. The Company is currently evaluating the new guidance and has not determined the impact this ASU may have on its consolidated financial statements.
In August 2016, the FASB issued ASU Update No. 2016-15,
“Statement of Cash Flows- Classification of Certain Cash Receipts and Cash Payments,
” which is intended to reduce diversity in practice in how certain transactions are classified in the statements of cash flows. This update will be effective for fiscal years beginning after December 15, 2017 (the Company’s fiscal year ending April 30, 2019), and interim periods within those fiscal years. Early adoption is permitted, provided that all of the amendments are adopted in the same period. The guidance requires application using a retrospective transition method. The Company plans to adopt the ASU in its fiscal year ending April 30, 2019.
The Company does not expect the impact of the adoption of this ASU to have a material impact on the Company’s consolidated statements of cash flows.
In January 2017, the FASB issued ASU No. 2017-04, “
Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment
,” which removes the step 2 requirement to perform a hypothetical purchase price allocation to measure goodwill impairment. Goodwill impairment will now be the amount by which a reporting unit's carrying value exceeds its fair value, not to exceed the recorded amount of goodwill. This guidance is effective for public companies for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019, and early adoption is permitted. The Company early adopted this guidance in the third quarter of its fiscal year ending April 30, 2018 and is applying this guidance to all future tests.
In January 2017, the FASB issued ASU No. 2017-01, “
Business Combinations (Topic 805): Clarifying the Definition of a Business
,” which clarifies the definition of a business when evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. For public companies, this ASU is effective for annual periods beginning after December 15, 2017, including interim periods within those periods. The Company adopted this ASU in the fourth quarter of its fiscal year ending April 30, 2018. The Company will apply the clarified definition of a business, as applicable, from the period of adoption.
In February 2018, the FASB issued ASU No. 2018-02,
“Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.”
The guidance permits entities to reclassify tax effects stranded in Accumulated Other Comprehensive Income as a result of tax reform to retained earnings. This new guidance is effective for annual and interim periods in fiscal years beginning after December 15, 2018. Early adoption is permitted in annual and interim periods and can be applied retrospectively or in the period of adoption. The Company plans to adopt this ASU in the first quarter of its fiscal year ending April 30, 2019 and is currently evaluating the impact that its adoption may have on its consolidated financial statements.
SigmaTron International, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
April 30, 201
8
and 201
7
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
New Accounting Standards - Continued
In May 2018, the FASB issued ASU No. 2018-05,
Income Taxes (Topic 740): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118
, regarding the accounting implications of the recently issued Tax Cuts and Jobs Act (the “Act”). This standard is effective immediately. The update clarifies that in a company’s financial statements that include the reporting period in which the Act was enacted, the company must first reflect the income tax effects of the Act in which the accounting under GAAP is complete. These amounts would not be provisional amounts. The company would also report provisional amounts for those specific income tax effects for which the accounting under GAAP is incomplete but a reasonable estimate can be determined. The Company has recorded a provisional amount which it believes is a reasonable estimate of the effects of the Act on the Company’s financial statements as of April 30, 2018. Technical corrections or other forthcoming guidance could change how the Company interprets provisions of the Act, which may impact its effective tax rate and could affect its deferred tax assets, tax positions and/or its tax liabilities.
NOTE C - ALLOWANCE FOR DOUBTFUL ACCOUNTS
Changes in the Company’s allowance for doubtful accounts are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
|
2017
|
|
|
Beginning Balance
|
|
$
|
100,000
|
|
$
|
100,000
|
|
|
Bad debt expense
|
|
|
200,000
|
|
|
-
|
|
|
Write-offs
|
|
|
-
|
|
|
-
|
|
|
|
|
$
|
300,000
|
|
$
|
100,000
|
|
|
|
|
|
|
|
|
|
|
SigmaTron International, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
April 30, 201
8
and 201
7
NOTE D - INVENTORIES
Inventories consist of the following at April 30:
|
|
|
|
|
|
|
2018
|
|
2017
|
|
|
|
|
|
|
Finished products
|
$
|
20,404,849
|
|
$
|
20,291,768
|
Work-in-process
|
|
2,075,465
|
|
|
1,795,852
|
Raw materials
|
|
65,652,411
|
|
|
52,748,542
|
|
|
88,132,725
|
|
|
74,836,162
|
Less obsolescence reserve
|
|
1,202,932
|
|
|
1,264,924
|
|
$
|
86,929,793
|
|
$
|
73,571,238
|
Changes in the Company’s inventory obsolescence reserve are as follows:
|
|
|
|
|
|
|
2018
|
|
2017
|
|
|
|
|
|
|
Beginning balance
|
$
|
1,264,924
|
|
$
|
1,212,532
|
Provision for obsolescence
|
|
-
|
|
|
300,000
|
Write-offs
|
|
(61,992)
|
|
|
(247,608)
|
|
$
|
1,202,932
|
|
$
|
1,264,924
|
SigmaTron International, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
April 30, 201
8
and 201
7
NOTE E - RELATED PARTIES
In March, 2015,
two
of the Company’s executive officers invested in a start-up customer, Petzila, Inc. (“Petzila”). The executive officers’ investments constituted less than
2%
(individually and in aggregate) of the outstanding beneficial ownership of Petzila, according to information provided by Petzila to the executive officers. As of April 2018, Petzila owed the Company approximately
$3,652,800
, consisting of an outstanding note receivable of
$2,117,500
and account receivable of
$1,535,300
, compared to an outstanding note receivable and account receivable of approximately
$888,000
and
$1,271,000
, respectively, at April 30, 2017. As of April 2018, inventory on hand related to this customer approximated
$211,000
compared to
$310,000
at April 30, 2017. Sales to this customer have not been material for fiscal year 2018 or 2017.
On January 29, 2016, the Company entered into a memorandum of understanding with Petzila. Under the subsequent agreement, effective January 29, 2016, the then outstanding account receivable of approximately
$888,000
was converted into a short-term promissory note. The promissory note bore interest at the rate of
8%
per annum, payable at the maturity of the promissory note. The promissory note was scheduled to mature at the earlier of
October 31, 2016
, or within
10
days after the customer obtains certain equity financing, or at the closing of a sale of substantially all of Petzila’s stock or assets. As additional consideration, the Company received warrants under the agreement. The warrants were
ten
years in duration and at an exercise price of
$0.01
per share and for a number of shares determined pursuant to the warrant, expected to be, at a minimum, approximately
1%
of Petzila’s then - outstanding equity securities. The Company believed the warrants had nil value. Further,
the Company
was granted a security interest in Petzila’s accounts receivable and authority to access and be a signatory on its deposit accounts.
On December 6, 2016, the Company extended the maturity of the promissory note to
July 31, 2017
. The promissory note continued to bear interest at the rate of
8%
per annum, payable monthly. As consideration, the Company received additional warrants under the agreement, which the Company believed had nil value.
On August 25, 2017, effective as of July 31, 2017, the Company and Petzila entered into a new forbearance agreement. The Company agreed to extend the maturity of the promissory note and forbear exercising its remedies until the earliest of a capital raise, the sale of Petzila, or October 31, 2017, and to fund Petzila’s operations while Petzila explored its options by advancing a maximum of
$315,000
through October 31, 2017, pursuant to a new promissory note that bore interest at
8%
per annum. Additionally, should Petzila’s business be sold at a price exceeding
$5,000,000
and the amount necessary to pay its creditors, the Company would receive a fee in addition to the debt owed to the Company. The forbearance period and maturity date of the notes were set to expire on the earliest of a capital raise, the sale of Petzila or October 31, 2017, but the Company had a unilateral right to extend the forbearance period and maturity of the notes and to make additional advances and did so as discussed further below.
The Company’s right to receive the sale fee was an embedded derivative to the note receivable, which was required to be separated for accounting purposes. On July 31, 2017, the fair values of the new instruments received were as follows: note receivable
$887,531
, warrants
$0
and embedded derivative
$0
. After their initial recording at fair value, the note receivable and warrants were recorded at amortized cost. The embedded derivative will be recorded at fair value at each reporting period, with changes in value recognized as a gain or loss in the consolidated statement of operations. There was
no
gain or loss on the extinguishment, as the pre and post extinguishment fair values were consistent and there were no capitalized costs related to the extinguished instruments to expense.
During the time from November l, 2017 through February 28, 2018, Petzila prepared and distributed a confidential information memorandum to potential buyers of its business, negotiated with interested buyers, and participated in due diligence. During that time, in an effort to enhance its secured position, the Company continued to provide working capital of
$105,000
each month and extended on a monthly basis the forbearance period and maturity of the notes. Petzila continued with its efforts to negotiate a sale of its business to a third party.
SigmaTron International, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
April 30, 201
8
and 201
7
NOTE E - RELATED PARTIES
-
Continued
During the time from March 1, 2018 through April 30, 2018, the Company continued to provide working capital of
$145,000
. Petzila continued with its efforts to negotiate a sale of its business to a third party.
On April 30, 2018 the Company foreclosed on its security interest and held a public sale of the assets in accordance with the requirements of Article 9 of the California Uniform Commercial Code. The Company acquired all of the assets of Petzila as the winning bidder at the public sale by a credit bid of
$3,500,000
, the aggregate amount of Petzila’s liability to the company.
Concurrent with the foreclosure sale, the Company entered into an Asset Purchase Agreement with Wagz, Inc. (Wagz) whereby the Company sold the assets to Wagz for
$350,000
cash,
600,000
shares of Wagz common stock and an earn-out based on sales by Wagz generated from use of the assets through
July 31, 2022
. The earn-out is
$6.00
per unit of a product specified in the asset purchase agreement and any upgrade to such product.
Accordingly, the Company recognized the fair value of the assets received from Wagz and derecognized the receivables from Petzila. The fair value of the assets received from Wagz was approximately
$950,000
; therefore, the Company recognized a loss of approximately $2,509,423 in its consolidated statement of operations for the year ended April 30, 2018.
The fair value of the non-cash consideration consisted of
$600,000
for the 600,000 shares of Wagz common stock which is recorded within other assets. The Company determined the fair value of the equity using the price per common share received by Wagz in a recent financing transaction, a level 3 input. The Company did not assign any value to the earn-out because any receipts from the earn-out are
highly uncertain and
contingent upon Wagz selling the product specified in the asset purchase agreement between the Company and Wagz.
SigmaTron International, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
April 30, 201
8
and 201
7
NOTE
F
- PROPERTY, MACHINERY AND EQUIPMENT, NET
Property, machinery and equipment consist of the following at April 30:
|
|
|
|
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
Land and buildings
|
$
|
17,072,098
|
|
$
|
16,969,769
|
Machinery and equipment
|
|
61,746,650
|
|
|
59,795,532
|
Office equipment and software
|
|
10,670,918
|
|
|
9,601,149
|
Leasehold improvements
|
|
2,673,100
|
|
|
2,622,870
|
Equipment under capital leases
|
|
12,417,034
|
|
|
8,752,613
|
|
|
|
|
|
|
|
|
104,579,800
|
|
|
97,741,933
|
|
|
|
|
|
|
Less accumulated depreciation
|
|
|
|
|
|
and amortization, including
|
|
|
|
|
|
amortization of assets under
|
|
|
|
|
|
capital leases of
$3,072,310
|
|
|
|
|
|
and
$2,093,544
at April 30,
|
|
|
|
|
|
2018 and 2017, respectively
|
|
69,290,803
|
|
|
64,733,219
|
|
|
|
|
|
|
Property, machinery and
|
|
|
|
|
|
equipment, net
|
|
|
|
|
|
|
$
|
35,288,997
|
|
$
|
33,008,714
|
Depreciation and amortization expense
of property, machinery and equipment
was
$
5
,
118
,297
and
$
4
,
708
,
876
for the years ended April 30, 201
8
and 201
7
, respectively.
SigmaTron International, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
April 30, 201
8
and 201
7
NOTE
G
- GOODWILL AND INTANGIBLE ASSET
S
Goodwill
The
carrying amount of
tax deductible
goodwill
for
the fiscal years ended April 30, 201
8
and 201
7 is as follows:
|
|
|
|
|
|
|
|
2018
|
|
|
2017
|
Beginning balance
|
$
|
3,222,899
|
|
$
|
3,222,899
|
Impairment
|
|
(3,222,899)
|
|
|
-
|
Ending balance
|
$
|
-
|
|
$
|
3,222,899
|
Intangible Asset
s
Intangible assets subject to amortization are summarized as of April 30, 201
8
as follows:
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
|
|
Remaining
|
|
Gross
|
|
|
|
|
Amortization
|
|
Carrying
|
|
Accumulated
|
|
Period (Years)
|
|
Amount
|
|
Amortization
|
|
|
|
|
|
|
|
|
Other intangible assets – Able
|
-
|
|
$
|
375,000
|
|
$
|
375,000
|
Customer relationships – Able
|
-
|
|
|
2,395,000
|
|
|
2,395,000
|
Spitfire:
|
|
|
|
|
|
|
|
Non-contractual customer relationships
|
9.08
|
|
|
4,690,000
|
|
|
1,609,670
|
Backlog
|
-
|
|
|
22,000
|
|
|
22,000
|
Trade names
|
14.08
|
|
|
-
|
|
|
-
|
Non-compete agreements
|
1.08
|
|
|
50,000
|
|
|
42,245
|
Patents
|
-
|
|
|
400,000
|
|
|
400,000
|
Total
|
|
|
$
|
7,932,000
|
|
$
|
4,843,915
|
For fiscal year 2018, the Company early adopted the guidance contained in Accounting Standards Update (ASU) No. 2017-04, “Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment,” which removes the step 2 requirement to perform a hypothetical purchase price allocation to measure goodwill impairment. Beginning with its February 1, 2018 goodwill impairment testing, goodwill impairment is the amount by which the Company’s single reporting unit carrying value exceeds its fair value, not to exceed the recorded amount of goodwill. To estimate the fair value of the Company’s equity, the Company used both a market approach based on the guideline companies’ method, and an income approach based on a discounted cash flow analysis. The value indicated by both methods was weighted to arrive at a concluded value. The carrying value of the Company’s equity was greater than the fair value of the Company based on the valuation analysis by an amount greater than the recorded amount of the goodwill. In the fourth quarter of fiscal 2018, the Company’s forecasted future cash flow declined from prior estimates. The Company is experiencing declining margins due to pricing pressures from vendors and customers. Also at this time, electronic component manufacturers began allocating components to their customers which required the Company to increase its investment in working capital. The decline in the forecasted cash flow resulted in a lower estimate of the fair value of the Company’s reporting unit causing the Company to take an impairment charge on all of its goodwill. The Company has begun taking steps to improve its margins and has negotiated an increase in its revolving credit facility to address its working capital needs.
Accordingly, the Company recognized a full goodwill impairment charge of $3,222,899.
SigmaTron International, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
April 30, 201
8
and 201
7
NOTE G - GOODWILL AND INTANGIBLE ASSETS - Continued
Intangible Assets - Continued
The Company reviews long-lived assets, including amortizable intangible assets, for impairment. 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 for idle and underutilized equipment, and reviews business plans for possible impairment. As a result of the analysis performed in the fourth quarter of fiscal 2018, the Company determined that the carrying value of the trade name intangible asset was not recoverable
and
recorded a charge of $690,107 for the entire carrying amount
.
The Company’s analysis did not indicate that any of its other long-lived assets were impaired.
Intangible assets subject to amortization are summarized as of April 30, 201
7
as follows:
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
|
|
Remaining
|
|
Gross
|
|
|
|
|
Amortization
|
|
Carrying
|
|
Accumulated
|
|
Period (Years)
|
|
Amount
|
|
Amortization
|
|
|
|
|
|
|
|
|
Other intangible assets – Able
|
-
|
|
$
|
375,000
|
|
$
|
375,000
|
Customer relationships – Able
|
-
|
|
|
2,395,000
|
|
|
2,395,000
|
Spitfire:
|
|
|
|
|
|
|
|
Non-contractual customer relationships
|
10.08
|
|
|
4,690,000
|
|
|
1,237,410
|
Backlog
|
-
|
|
|
22,000
|
|
|
22,000
|
Trade names
|
15.08
|
|
|
980,000
|
|
|
240,897
|
Non-compete agreements
|
2.08
|
|
|
50,000
|
|
|
35,105
|
Patents
|
0.08
|
|
|
400,000
|
|
|
393,353
|
Total
|
|
|
$
|
8,912,000
|
|
$
|
4,698,765
|
Estimated aggregate amortization expense for the Company’s intangible assets, which become fully amortized in 2032, for the remaining fiscal years is as follows:
|
|
|
|
|
For the fiscal year ending April 30:
|
|
|
|
|
|
2019
|
|
$
|
374,725
|
|
2020
|
|
|
362,410
|
|
2021
|
|
|
354,203
|
|
2022
|
|
|
346,582
|
|
2023
|
|
|
339,128
|
|
Thereafter
|
|
|
1,311,037
|
|
|
|
$
|
3,088,085
|
SigmaTron International, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
April 30, 201
8
and 201
7
NOTE G - GOODWILL AND INTANGIBLE ASSETS - Continued
Intangible Assets - Continued
Amortization expense was
$
4
35
,
0
43
and
$
4
90
,
010
for the years ended April 30, 201
8
and 201
7
, respectively.
In conjunction with the May 2012 acquisition of Spitfire, an estimate of the fair value of the contingent consideration,
$2,320,000
, was recorded based on expected operating results through fiscal 2019 and the specific terms of when such consideration would be earned. Those terms provide for additional consideration to be paid based on a percentage of sales and pre-tax profits over those years in excess of certain minimums. Payments are made quarterly each year and adjusted after each year-end audit.
T
he Company decreased the estimated remaining payments expected to be paid under the agreement, which resulted in a decrease of
$353,591
and
$84,344
to the contingent consideration liability
for the fiscal years ended April 30, 2018 and 2017
, respectively
.
Any change in the Company’s estimate is reflected as a change in the contingent consideration liability and as additional charges or credits to selling and administrative expenses. The Company made payments totaling
$226,014
and
$273,672
for the years ended
April 30, 2018 and 2017
, respectively
. As of April 30, 2018, the contingent consideration liability was
$213,460
compared to
$523,818
at April 30, 2017.
NOTE H - LONG-TERM DEBT
Note Payable - Bank
Prior to March 31, 2017 the Company
had a senior secured credit facility with Wells Fargo, N.A. with a revolving credit limit up to
$30,000,000
. The credit facility was collateralized by substantially all of the Company’s domestically located assets and the Company had pledged
65%
of its equity ownership interest in some of its foreign entities. Prior to its payoff and termination, the Wells Fargo, N.A. senior secured credit facility was due to expire on
October 31, 2018
. On March 31, 2017, the Company paid the balance outstanding under the senior revolving credit facility in the amount of
$22,232,914
. The remaining deferred financing costs of
$68,475
were expensed in the fourth quarter of fiscal 2017.
On March 31, 2017, the Company entered into a
$35,000,000
senior secured credit facility with U.S. Bank, National Association (“U.S. Bank”), which expires on
March 31, 2022
. The credit facility is collateralized by substantially all of the Company’s domestically located assets. The facility allows the Company to choose among interest rates at which it may borrow funds: the bank fixed rate of
four
percent or LIBOR plus
one
and one half percent (effectively
3.83%
at April 30, 2018). Interest is due monthly. Under the senior secured credit facility, the Company may borrow up to the lesser of (i) $35,000,000 or (ii) an amount equal to a percentage of the eligible receivable borrowing base plus a percentage of the eligible inventory borrowing base (the “Borrowing Base”). Deferred financing costs of
$34,971
and
$207,647
were capitalized in the twelve month period ending April 30, 2018 and the fourth quarter of fiscal 2017, respectively, which are amortized over the term of the agreement. As of April 30, 2018 and April 30, 2017 the unamortized amount included in other assets was
$192,502
and
$204,186
, respectively. As of April 30, 2018, there was
$29,279,631
outstanding and
$5,720,369
of unused availability under the U.S. Bank facility compared to an outstanding balance of
$23,178,429
and
$11,821,571
of unused availability at April 30, 2017. At April 30, 2018, the Company was in compliance with its financial covenant and other restricted covenants under the credit facility.
On July 16, 2018, the Company and U.S. Bank entered into an amendment of the revolving credit facility. The amended revolving credit facility allows the Company to borrow up to the lesser of (i)
$45,000,000
less reserves or (ii) 90% of the Company’s Borrowing Base, except that the 90% limitation will expire if the Company’s actual revolving loans for the first 90 days after the amendment’s effective date are less than 80% of the Company’s Borrowing Base and the Company maintains a Fixed Charge Coverage Ratio of
1.2
to
1.0
for four consecutive quarters.
The amendment also imposes sublimits on categories of inventory equal to
$17,500,000
on raw materials and
$25,000,000
on finished goods.
SigmaTron International, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
April 30, 201
8
and 201
7
NOTE H - LONG-TERM DEBT - Continued
Note Payable - Bank - Continued
On August 4, 2015, the Company’s wholly-owned subsidiary, Wujiang SigmaTron Electronics Co., Ltd., entered into a credit facility with China Construction Bank. Under the agreement Wujiang SigmaTron Electronics Co., Ltd. could borrow up to
5,000,000
Renminbi and the facility was collateralized by Wujiang SigmaTron Electronics Co., Ltd.’s manufacturing building. Interest was payable monthly and the facility had a fixed interest rate of
6.67%
. The facility was due to expire on
August 3, 2017
. The credit facility was closed as of
March 1, 2017
.
On March 24, 2017, the Company’s wholly-owned subsidiary, SigmaTron Electronic Technology Co., Ltd., entered into a credit facility with China Construction Bank. Under the agreement SigmaTron Electronic Technology Co., Ltd. could borrow up to
9,000,000
Renminbi and the facility was collateralized by Wujiang SigmaTron Electronics Co., Ltd.’s manufacturing building. Interest was payable monthly and the facility had a fixed interest rate of
6.09%
. The term of the facility extended to
February 7, 2018
. The credit facility was closed as of
February 11, 2018
. There was
no
outstanding balance under the facility at April 30, 2017.
On February 12, 2018, the Company’s wholly-owned subsidiary, SigmaTron Electronic Technology Co., Ltd., entered into a credit facility with China Construction Bank. Under the agreement SigmaTron Electronic Technology Co., Ltd.
can borrow up to
5,000,000
Renminbi 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
6.09%
. The term of the facility extends to
February 7, 2019
. There was
no
outstanding balance under the facility at April 30, 2018.
Notes Payable - Buildings
The Company entered into a mortgage agreement on January 8, 2010, in the amount of
$2,500,000
, with Wells Fargo, N.A. to refinance the property that serves as the Company’s corporate headquarters and its Illinois manufacturing facility. On November 24, 2014, the Company refinanced the mortgage agreement with Wells Fargo, N.A. The note required the Company to pay monthly principal payments in the amount of
$9,500
, bore an interest rate of LIBOR plus
two
and one-quarter percent and was payable over a
sixty
month period. A final payment of approximately
$2,289,500
was due on or before
November 8, 2019
. On December 21, 2017, the Company repaid its Wells Fargo, N.A. mortgage agreement for the remaining amount outstanding of
$2,498,500
, using proceeds from the U.S. Bank mortgage agreement. The outstanding balance was
$2,574,500
at April 30, 2017.
The Company entered into a mortgage agreement on December 21, 2017, in the amount of
$5,200,000
, with U.S. Bank to refinance the property that serves as the Company’s corporate headquarters and its Illinois manufacturing facility. The note requires the Company to pay monthly principal payments in the amount of
$17,333
, bears interest at a fixed rate of
4.0%
per year and is payable over a
fifty-one
month period. Deferred financing costs of
$74,066
were capitalized in fiscal year 2018 which are amortized over the term of the agreement. As of April 30, 2018 the unamortized amount included in other assets was
$66,945
. A final payment of approximately
$4,347,778
is due on or before
March 31, 2022
. The outstanding balance was
$5,148,000
at April 30, 2018.
The Company entered into a mortgage agreement on October 24, 2013, in the amount of
$1,275,000
, with Wells Fargo, N.A. to finance the property that serves as the Company’s engineering and design center in Elgin, Illinois. The Wells Fargo, N.A. note required the Company to pay monthly principal payments in the amount of
$4,250
, bore interest at a fixed rate of
4.5%
per year and was payable over a
sixty
month period. A final payment of approximately
$1,030,000
was due on or before
October 2018
. On December 21, 2017, the Company repaid its Wells Fargo, N.A. mortgage agreement for the remaining amount outstanding of
$1,062,500
, using proceeds from the U.S. Bank mortgage agreement. The outstanding balance was
$1,096,500
at April 30, 2017.
SigmaTron International, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
April 30, 201
8
and 201
7
NOTE H - LONG-TERM DEBT - Continued
Notes Payable - Buildings - Continued
The Company entered into a mortgage agreement on December 21, 2017, in the amount of
$1,800,000
, with U.S. Bank to refinance the property that serves as the Company’s engineering and design center in Elgin, Illinois. The note requires the Company to pay monthly principal payments in the amount of
$6,000
, bears interest at a fixed rate of
4.0%
per year and is payable over a
fifty-one
month period. Deferred financing costs of
$65,381
were capitalized in the fiscal year 2018 which are amortized over the term of the agreement. As of April 30, 2018 the unamortized amount included in other assets was
$59,094
. A final payment of approximately
$1,505,000
is due on or before
March 31, 2022
. The outstanding balance was
$1,782,000
at April 30, 2018.
Notes Payable - Equipment
On November 1, 2016, the Company entered into a secured note agreement with Engencap Fin S.A. DE C.V. to finance the purchase of equipment in the amount of
$596,987
. The term of the agreement extends to
November 1, 2021
with average quarterly payments of
$35,060
beginning on
February 1, 2017
and a fixed interest rate of
6.65%
. The balance outstanding under this note agreement was
$447,741
and
$567,138
at April 30, 2018 and April 30, 2017, respectively.
On February 1, 2017, the Company entered into a secured note agreement with Engencap Fin S.A. DE C.V. to finance the purchase of equipment in the amount of
$335,825
. The term of the agreement extends to
February 1, 2022
with average quarterly payments of
$20,031
beginning on
May 1, 2017
and a fixed interest rate of
7.35%
. The balance outstanding under this note agreement was
$268,660
and
$335,825
at April 30, 2018 and April 30, 2017, respectively.
On June 1, 2017, the Company entered into a secured note agreement with Engencap Fin S.A. DE C.V. to finance the purchase of equipment in the amount of
$636,100
. The term of the agreement extends to
June 1, 2022
with average quarterly payments of
$37,941
beginning on
September 1, 2017
and a fixed interest rate of
7.35%
. The balance outstanding under this note agreement was
$540,685
at April 30, 2018.
On October 1, 2017, the Company entered into a secured note agreement with Engencap Fin S.A. DE C.V. to finance the purchase of equipment in the amount of
$307,036
. The term of the agreement extends to
November 1, 2022
with average quarterly payments of
$18,314
beginning on
February 1, 2018
and a fixed interest rate of
7.35%
. The balance outstanding under this note agreement was
$291,684
at April 30, 2018.
Capital Lease and Sale Leaseback Obligations
From October 2013 through June 2017, the Company entered into various capital lease and sales leaseback agreements with Associated Bank, National Association to purchase equipment totaling
$6,893,596
. The terms of the lease agreements extend to
September 2018
through
May 2022
with monthly installment payments ranging from
$1,455
to
$40,173
and a fixed interest rate ranging from
3.75%
to
4.90%
. The balance outstanding under these capital lease agreements was
$2,923,524
and
$3,627,760
at April 30, 2018 and April 30, 2017, respectively. The net book value of the equipment under these leases was
$4,799,827
and
$4,713,044
at April 30, 2018 and April 30, 2017, respectively.
From April 2014 through July 2015, the Company entered into various capital lease agreements with CIT Finance LLC to purchase equipment totaling
$2,512,051
. The terms of the lease agreements extend to
March 2019
through
July 2020
with monthly installment payments ranging from
$1,931
to
$12,764
and a fixed interest rate ranging from
5.65%
through
6.50%
. The balance outstanding under these capital lease agreements was
$984,031
and
$1,448,269
at April 30, 2018 and April 30, 2017, respectively. The net book value of the equipment under these leases was
$1,736,688
and
$1,946,026
at April 30, 2018 and April 30, 2017, respectively.
SigmaTron International, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
April 30, 201
8
and 201
7
NOTE H - LONG-TERM DEBT - Continued
Capital Lease and Sale Leaseback Obligations
-
Continued
From September 2017 through April 2018, the Company entered into various capital lease and sales leaseback agreements with First American Equipment Finance to purchase equipment totaling
$3,011,387
. The terms of the lease agreements extend to
August 2021
through
April 2022
with monthly installment payments ranging from
$6,716
to
$20,093
and a fixed interest rate ranging from
5.82%
through
7.23%
. The balance outstanding under these capital lease agreements was
$2,688,029
at April 30, 2018. The net book value of the equipment under these leases was
$2,808,209
at April 30, 2018.
The aggregate amount of debt, net of deferred financing fees, maturing in each of the following fiscal years and thereafter is as follows:
|
|
|
|
|
Fiscal Year
|
Total
|
|
|
|
|
|
|
|
2019
|
$
|
655,190
|
|
|
2020
|
|
655,190
|
|
|
2021
|
|
655,190
|
|
|
2022
|
|
35,473,499
|
|
|
|
$
|
37,439,069
|
|
|
|
|
|
|
|
See Note M - Leases, Page
F-3
5
for future maturities under capital lease obligations.
Other Long-Term Liabilities
As of April 30, 2018 and 2017, the Company had recorded $1,130,557 and $991,017, respectively, for seniority premiums and retirement accounts related to benefits for employees,
$1,052,082
and
$913,827
of which, respectively, are for the Company’s foreign subsidiaries.
SigmaTron International, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
April 30, 201
8
and 201
7
NOTE I - ACCRUED EXPENSES AND WAGES
Accrued expenses consist of the following at April 30:
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
121,845
|
|
$
|
90,639
|
|
Commissions
|
|
|
187,936
|
|
|
143,738
|
|
Professional fees
|
|
|
322,377
|
|
|
419,801
|
|
Other - Purchases
|
|
|
156,634
|
|
|
117,069
|
|
Other
|
|
|
2,142,000
|
|
|
1,550,808
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,930,792
|
|
$
|
2,322,055
|
|
Accrued wages consist of the following at April 30:
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
Wages
|
|
$
|
1,945,142
|
|
$
|
1,785,078
|
|
Bonuses
|
|
|
467,306
|
|
|
819,207
|
|
Foreign wages
|
|
|
1,318,307
|
|
|
1,885,317
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,730,755
|
|
$
|
4,489,602
|
|
SigmaTron International, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
April 30, 201
8
and 201
7
NOTE J - INCOME TAX
U.S. and foreign (loss) income before income tax (benefit) expense for the years ended April 30 are as follows:
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
$
|
(5,906,596)
|
|
$
|
1,326,266
|
|
Foreign
|
|
|
1,604,274
|
|
|
1,171,417
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(4,302,322)
|
|
$
|
2,497,683
|
|
Income Tax Provision
The income tax (benefit) expense for the years ended April 30 consists of the following:
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
|
|
|
|
|
Federal
|
|
$
|
433,291
|
|
$
|
501,226
|
|
State
|
|
|
28,296
|
|
|
13,697
|
|
Foreign
|
|
|
712,846
|
|
|
589,913
|
|
Total Current
|
|
|
1,174,433
|
|
|
1,104,836
|
|
|
|
|
|
|
|
|
|
Deferred
|
|
|
|
|
|
|
|
Federal
|
|
|
(1,551,921)
|
|
|
(54,213)
|
|
State
|
|
|
(240,647)
|
|
|
59,884
|
|
Foreign
|
|
|
(442,317)
|
|
|
(3,030)
|
|
Total Deferred
|
|
|
(2,234,885)
|
|
|
2,641
|
|
|
|
|
|
|
|
|
|
Income tax
|
|
$
|
(1,060,452)
|
|
$
|
1,107,477
|
|
|
|
|
|
|
|
|
|
SigmaTron International, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
April 30, 201
8
and 201
7
NOTE J - INCOME TAX - Continued
Income Tax Provision - Continued
The difference between the income tax (benefit) expense and the amounts computed by applying the statutory Federal income tax rates to income before tax expense for the years ended April 30 are as follows:
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
U.S Federal Provision:
|
|
|
|
|
|
|
|
At statutory rate
|
|
$
|
(1,325,872)
|
|
$
|
849,215
|
|
State taxes
|
|
|
(151,508)
|
|
|
42,643
|
|
Change in valuation allowance
|
|
|
-
|
|
|
78,100
|
|
Foreign tax differential
|
|
|
60,302
|
|
|
(89,885)
|
|
Impact of state tax rate change
|
|
|
3,670
|
|
|
5,920
|
|
Impact of foreign permanent items
|
|
|
23,106
|
|
|
7,171
|
|
Tax law changes
|
|
|
581,222
|
|
|
28,599
|
|
Foreign currency exchange gain/loss
|
|
|
(172,062)
|
|
|
328,239
|
|
Foreign inflation adjustment
|
|
|
(129,227)
|
|
|
(61,707)
|
|
Stock based compensation
|
|
|
49,917
|
|
|
(80,818)
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
$
|
(1,060,452)
|
|
$
|
1,107,477
|
|
SigmaTron International, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
April 30, 201
8
and 201
7
NOTE J - INCOME TAX - Continued
Deferred Tax Assets and Liabilities
Deferred income taxes reflect the net tax effects of loss and credit carryforwards and temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the deferred tax assets and liabilities for federal, state and foreign income taxes are as follows:
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
Deferred Tax Assets
|
|
|
|
|
|
|
|
Federal, foreign & state NOL carryforwards
|
|
$
|
730,561
|
|
$
|
29,168
|
|
Foreign tax credit
|
|
|
78,100
|
|
|
78,100
|
|
Reserves and accruals
|
|
|
598,364
|
|
|
723,313
|
|
Stock based compensation
|
|
|
314,221
|
|
|
462,156
|
|
Inventory
|
|
|
869,471
|
|
|
1,177,067
|
|
Other intangibles
|
|
|
834,512
|
|
|
206,736
|
|
Deferred rent
|
|
|
114,171
|
|
|
211,509
|
|
Allowance for doubtful accounts
|
|
|
76,500
|
|
|
38,360
|
|
Other DTA
|
|
|
-
|
|
|
13,839
|
|
Federal benefit of state
|
|
|
-
|
|
|
45,589
|
|
Total Gross Deferred Tax Assets
|
|
|
3,615,900
|
|
|
2,985,837
|
|
Less: Valuation allowance
|
|
|
(78,100)
|
|
|
(78,100)
|
|
|
|
|
|
|
|
|
|
Net Deferred Tax Assets
|
|
$
|
3,537,800
|
|
$
|
2,907,737
|
|
|
|
|
|
|
|
|
|
Deferred Tax Liabilities
|
|
|
|
|
|
|
|
Other assets
|
|
$
|
(3,485)
|
|
$
|
(318,830)
|
|
Property, machinery & equipment
|
|
|
(2,198,332)
|
|
|
(3,441,393)
|
|
Prepaids
|
|
|
(203,924)
|
|
|
(272,718)
|
|
Federal benefit of state
|
|
|
(22,378)
|
|
|
-
|
|
Total Deferred Tax Liabilities
|
|
$
|
(2,428,119)
|
|
$
|
(4,032,941)
|
|
|
|
|
|
|
|
|
|
Net Deferred Tax Asset (Liability)
|
|
$
|
1,109,681
|
|
$
|
(1,125,204)
|
|
On December 22, 2017, the U.S. Government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the Tax Act). The Tax Act makes broad and complex changes to the U.S. tax code, including, but not limited to: (1) reducing the U.S. federal corporate tax rate from
35%
to
21%
; (2) changing rules related to uses and limitations of net operating loss carryforwards created in tax years beginning after December 31, 2017; (3) bonus depreciation that will allow for full expensing of qualified property; (4) creating a new limitation on deductible interest expense; (5) eliminating the corporate alternative minimum tax; and (6) new tax rules related to foreign operations.
Due to the Tax Act, the SEC staff issued Staff Accounting Bulletin 118 (“SAB 118”), which provides guidance on accounting for the tax effects of the Tax Act. SAB 118 provides a measurement period that should not extend beyond
SigmaTron International, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
April 30, 201
8
and 201
7
NOTE J - INCOME TAX - Continued
Deferred Tax Assets and Liabilities - Continued
one year from the Tax Act enactment date for companies to complete the accounting under ASC 740. In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the Tax Act for which the accounting under ASC 740 is complete. To the extent that a company’s accounting for certain income tax effects of the Tax Act is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements. If a company cannot determine a provisional estimate to be included in the financial statements, it should continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect immediately before the enactment of the Tax Act.
Due to the timing of the enactment and the complexity involved in applying the provisions of the Tax Act, the Company has made reasonable estimates for certain effects of the Tax Act and recorded provisional amounts in its financial statements as of April 30, 2018. As the Company collects and prepares necessary calculations of cumulative earnings and profits, tax pools and amounts held in cash or other specified assets, as well as interprets the Tax Act and any additional guidance issued by the U.S. Treasury Department, the IRS, and other standard-setting bodies, the Company may make adjustments to the provisional amounts. Those adjustments may materially impact its provision for income taxes and effective tax rate in the period in which the adjustments are made. The Company expects to complete its accounting for the tax effects of the Tax Act in fiscal year 2019.
In connection with the Company’s initial analysis of the impact of the Tax Act, we recognized a provisional amount of
$566,000
, which is included as a component of income tax expense.
Provisional Amounts
The Company remeasured certain deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which is generally 21%. However, the Company is still analyzing certain aspects of the Tax Act and refining its calculations, which could potentially affect the measurement of these balances or potentially give rise to new deferred tax amounts. The provisional amount recorded related to the remeasurement of the Company’s deferred tax balance resulted in an increase in income tax expense of
$25,000
for the year ended April 30, 2018.
Prior to the enactment of Tax Act, the Company had not recorded U.S. income taxes on the undistributed earnings of the Company’s foreign subsidiaries. The earnings of the foreign subsidiaries have been indefinitely reinvested, and as a result, no deferred tax liability was previously recorded. In light of the Tax Act and the one-time transition tax, for the period ended January 31, 2018, the Company recorded a provisional amount for its one-time transition tax liability for the cumulative undistributed earnings of its foreign subsidiaries, resulting in an increase in income tax expense of
$541,000
for the year ended April 30, 2018.
The one-time transition tax is based on total post-1986 earnings and profits (E&P) that the Company previously deferred from U.S. income taxes. The entire amount of the transition tax liability, except for
$70,000
, is recorded as a long-term liability. The Company has not yet completed its calculation of the total post-1986 E&P for these foreign subsidiaries. Further, the transition tax is based in part on the amount of those earnings held in cash and other specified assets. This amount may change when the Company finalizes the calculation of post-1986 foreign E&P previously deferred from U.S. federal taxation and finalize the amounts held in cash or other specified assets.
As of April 30, 2018 the Company had a net operating loss carryforward for federal income tax purposes of approximately
$1,068,000
which is carried forward indefinitely. The Company has state net operating loss carry-forwards totaling approximately
$976,000
at April 30, 2018, that will begin to expire in fiscal year
April 30, 2025
. The Company had foreign net operating loss carryforwards of
$1,825,000
as of April 30, 2018 which will begin to expire in
2023
. The Company recognizes a valuation allowance if, based on the weight of available evidence, it is more likely than not that some portion, or all, of a deferred tax asset will not be realized. The Company determined it is more likely than not that it will realize the deferred tax assets due to the reversal of deferred tax liabilities and
SigmaTron International, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
April 30, 201
8
and 201
7
NOTE J - INCOME TAX - Continued
Deferred Tax Assets and Liabilities - Continued
forecast of future earnings. The deferred tax assets exceed the deferred tax liabilities and based on the reversing pattern in addition to the forecast of future earnings, the Company has concluded that all of the deferred tax liabilities are expected to reverse within the period of time available to fully utilize all the deferred tax assets. Therefore, the Company has concluded that a valuation allowance is not required as of April 30, 2018, related to net operating loss carryforwards. The Company has established a valuation allowance of
$78,100
related to its foreign tax credit carry-forward. The Company’s estimate of cumulative taxable income during the foreign tax credit carryforward period is insufficient to support that the tax benefit from the foreign tax credit is more likely than not to be realized.
As a result of the Tax Act, the historic undistributed earnings of the Company’s foreign subsidiaries will be taxed in the U.S. via the one-time repatriation tax in fiscal 2018. As a result of this transition tax, the Company may repatriate its cash and cash equivalents held by its foreign subsidiaries without such funds being subject to further U.S. income tax liability. Certain unrepatriated foreign earnings remain subject to local country withholding taxes upon repatriation. The Company continues to apply its permanent reinvestment assertion on the cumulative amount of unremitted earnings of
$13,085,000
as of April 30, 2018 from its foreign subsidiaries.
Unrecognized Tax Benefits
The Company has not identified any uncertain tax positions or expects any to be taken in the Company’s tax returns. For the fiscal year ended April 30, 2018 and 2017, the amount of consolidated worldwide liability for uncertain tax positions that impacted the Company’s effective tax rate was
$0
for each year.
Other
Interest and penalties related to tax positions taken in the Company’s tax returns are recorded in income tax expense and miscellaneous selling, general and administrative expense, respectively, in the consolidated statements of operations. For the fiscal year ended April 30, 2018 and 2017, the amount included in the Company’s balance sheet for such liabilities was
$0
for each year.
The Company is subject to taxation in the U.S. and various state and foreign jurisdictions. With few exceptions, the Company is no longer subject to state, local or foreign examinations by tax authorities for tax years before fiscal year 2015. The Internal Revenue Service previously concluded an audit of the Company’s fiscal year 2013 tax return, and a no change letter was issued.
NOTE K - 401(k) RETIREMENT SAVINGS PLAN
The Company sponsors 401(k) retirement savings plans, which are available to all non-union U.S. employees. The Company may elect to match participant contributions up to
$300
per participant annually. The Company contributed
$
90
,
744
and
$
91
,
686
to the plans during the fiscal years ended April
30, 201
8
and 201
7
,
respectively. The Company
incurred
total expenses of
$
12
,
7
0
0
and
$
8
,
00
0
for the fiscal years ended April 30, 201
8
and 201
7
, respectively, relating to costs associated with the administration of the plans.
SigmaTron International, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
April 30, 201
8
and 201
7
NOTE L - MAJOR CUSTOMERS AND CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to concentration of credit risk consist principally of uncollateralized accounts receivable. For the year ended April 30, 201
8
,
two
customers accounted for
20.2
%
and
13.3
%
of net sales of the Company, and
6
.
0
%
and
2.9
%
, respectively, of accounts receivable at April 30, 201
8
. For the year ended April 30, 201
7
,
two
customers accounted for
26.7
%
and
1
2
.
6
%
of net sales of the Company and
8.4
%
and
4.2
%
, respectively, of accounts receivable at April 30, 201
7
. Further, the Company has
$
1
,
325
,
149
in cash in China as of April 30, 201
8
. Effective May 1, 2015, China implemented a deposit insurance program to insure up to approximately
$81,000
in deposits, under certain circumstances.
Funds above this amount are not insured by a guaranteed deposit insurance system.
NOTE M - LEASES
The Company leases certain facilities and office space under various operating leases expiring at various dates through
April
202
3
. The Company also leases various machinery and equipment under capital leases.
Future minimum lease payments under leases with terms of one year or more are as follows:
|
|
|
|
|
|
|
|
|
Capital
|
|
|
Operating
|
|
Years ending April 30,
|
|
Leases
|
|
|
Leases
|
|
|
|
|
|
|
|
|
2019
|
$
|
2,685,337
|
|
$
|
2,326,475
|
|
2020
|
|
2,041,239
|
|
|
1,860,538
|
|
2021
|
|
1,618,137
|
|
|
1,371,245
|
|
2022
|
|
874,589
|
|
|
707,338
|
|
2023
|
|
12,244
|
|
|
685,986
|
|
|
|
|
|
|
|
|
Total future minimum lease payments
|
$
|
7,231,546
|
|
$
|
6,951,582
|
|
|
|
|
|
|
|
|
Less amounts representing interest
|
|
613,162
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,618,384
|
|
|
|
|
|
|
|
|
|
|
|
Less Current Portion
|
|
2,320,538
|
|
|
|
|
|
|
|
|
|
|
|
Long Term Portion
|
$
|
4,297,846
|
|
|
|
|
SigmaTron International, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
April 30, 201
8
and 201
7
NOTE M - LEASES - Continued
Rent expense incurred under operating leases was
$2,
3
91
,
328
and
$2,
363
,
778
for the years ended April 30, 201
8
and 201
7
, respectively.
In September 2010, the Company entered into a real estate lease agreement in Union City, CA, to rent approximately
117,000
square feet of manufacturing and office space. Under the terms of the lease agreement, the Company receives incentives over the life of the lease, which extends through
March 2021
. The amount of the deferred rent income recorded for the fiscal year ended April 30, 2018 was
$103,599
compared to
$79,575
in fiscal year 2017. In addition, the landlord provided the Company tenant incentives of
$418,000
, which are being amortized over the life of the lease. The balance of deferred rent at April 30, 2018 was
$447,073
compared to
$550,672
at April 30, 2017.
On May 31, 2012, the Company entered into a lease agreement in Tijuana, MX, to rent approximately
112,000
square feet of manufacturing and office space. Under the terms of the lease agreement, the Company receives incentives over the life of the lease, which extends through
November 2018
. The amount of the deferred rent income for the fiscal year ended April 30, 2018 was
$139,437
compared to
$127,967
in fiscal year 2017. The balance of deferred rent at April 30, 2018 was
$85,527
compared to
$224,964
at April 30, 2017.
NOTE N - STOCK COMPENSATION
AND EQUITY TRANSACTIONS
The Company has stock option plans (“Option Plans”) under which certain employees and non-employee directors may acquire shares of common stock. All Option Plans have been approved by the Company’s shareholders. At April 30, 201
8
, the Company has
117,914
shares available for future issuance to employees under the employee plans and
none
are available under the non-employee director plans. The Option Plans are interpreted and administered by the Compensation Committee of the Board of Directors. The maximum term of options granted under the Option Plans is generally
10
years. Options granted under the Option Plans are either incentive stock options or nonqualified options. Each option under the Option Plans is exercisable for one share of stock. Options forfeited under the Option Plans are available for reissuance. Options granted under these plans are granted at an exercise price equal to the fair market value of a share of the Company’s common stock on the date of grant.
The Company granted
25,000
options to employees in fiscal year 2014. The Company recognized approximately
$
0
and
$
3
,
5
00
in compensation expense in fiscal year 201
8
and 201
7
, respectively. The balance of unrecognized compensation expense
was
$0
at April 30, 201
8 and 2017
.
The Company granted
285,000
options to employees in fiscal year 2016. The Company recognized approximately
$
83
,700
and
$
325
,
7
00
in compensation expense in fiscal year
201
8
and
201
7
, respectively
. The balance of unrecognized compensation expense
was approximately
$0
and
$83,700
at April 30, 201
8 and 2017, respectively.
In
October
2017 and
2016, the Company issued
1
2
,5
0
0
and
1
1
,
250
shares of restricted stock pursuant to the 2013 Non-Employee Director Restricted Stock Plan, which fully vest
ed
on April 1, 201
8
and 201
7
, respectively. The Company recognized
$
0
and
$
6
0
,649
in compensation expense
in fiscal year 201
8
and 201
7
, respectively.
The balance of unrecognized compensation expense related to the Company’s restricted stock award was
$
0
at
April
3
0
, 201
8
and 201
7
.
SigmaTron International, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
April 30, 201
8
and 201
7
NOTE N - STOCK COMPENSATION
AND EQUITY TRANSACTIONS
- Continued
The table below summarizes option activity through April 30, 201
8
:
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
|
|
Number of
|
|
|
securities to be
|
|
|
Weighted-
|
|
options
|
|
|
issued upon
|
|
|
average
|
|
exercisable
|
|
|
exercise of
|
|
|
exercise
|
|
at end
|
|
|
outstanding options
|
|
|
price
|
|
of year
|
Outstanding at April 30, 2016
|
|
367,963
|
|
|
5.84
|
|
172,513
|
Options exercised during 2017
|
|
(1,200)
|
|
|
3.60
|
|
|
Outstanding at April 30, 2017
|
|
366,763
|
|
|
5.85
|
|
269,863
|
Options exercised during 2018
|
|
(19,445)
|
|
|
4.94
|
|
|
Outstanding at April 30, 2018
|
|
347,318
|
|
$
|
5.90
|
|
347,318
|
Intrinsic value is calculated as the positive difference between the market price of the Company’s common stock and the exercise price of the underlying options. During the fiscal years ended April 30, 201
8
and 201
7
, the aggregate intrinsic value of options exercised was
$
35
,
8
2
0
and
$
2
,
1
72
,
respectively. As of April 30, 201
8
and 201
7
, the aggregate intrinsic value of in the money options outstanding was
$
305
,
396
and
$
1
35
,151
, respectively.
Information with respect to stock options outstanding and exercisable at April 30, 201
8
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding and exercisable
|
|
|
|
|
|
|
|
|
|
Number
|
|
Weighted-average
|
|
Weighted-
|
|
|
outstanding at
|
|
remaining
|
|
average
|
|
|
April 30, 2018
|
|
contract life
|
|
exercise price
|
Range of exercise prices
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ 3.60-6.45
|
|
347,318
|
|
6.69 years
|
$
|
5.90
|
|
|
|
|
|
|
|
|
|
347,318
|
|
|
$
|
5.90
|
As of April 30, 2018 there were no non-vested stock options.
The Company implemented an employee stock purchase plan (“ESPP”) for all eligible employees on February 1, 2014. The ESPP reserved
500,000
shares of common stock for issuance to employees. In addition, the number of shares of common stock reserved for issuance under the plan automatically increases on the first day of the Company’s fiscal years by
25,000
shares. The ESPP was terminated effective August 15, 2016. Final purchases under the ESPP were completed on August 31, 2016.
There were
0
and
1
,6
58
shares issued under the ESPP and the Company recorded
$
0
and
$3,
559
in compensation expense, for fiscal years ended April 30, 201
8
and 201
7
, respectively.
SigmaTron International, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
April 30, 201
8
and 201
7
NOTE O - SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following is a summary of unaudited quarterly financial data for fiscal year 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
2018
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
71,224,293
|
|
$
|
72,959,074
|
|
$
|
65,733,723
|
|
$
|
68,214,619
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
6,757,054
|
|
|
7,103,568
|
|
|
5,897,340
|
|
|
6,844,956
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income
|
|
|
580,845
|
|
|
1,151,454
|
|
|
(115,872)
|
|
|
(5,918,749)
|
taxes (1), (2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
382,882
|
|
|
736,115
|
|
|
31,338
|
|
|
(4,392,205)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share
|
|
$
|
0.09
|
|
$
|
0.17
|
|
$
|
0.01
|
|
$
|
(1.04)
|
Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share
|
|
$
|
0.09
|
|
$
|
0.17
|
|
$
|
0.01
|
|
$
|
(1.04)
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares- Basic
|
|
|
4,195,985
|
|
|
4,201,442
|
|
|
4,209,566
|
|
|
4,215,258
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares- Diluted
|
|
|
4,269,501
|
|
|
4,326,854
|
|
|
4,356,509
|
|
|
4,215,258
|
|
1.)
|
|
The Company records inventory reserves for valuation and shrinkage throughout the year based on historical data. In the fourth quarter of fiscal 2018 physical inventory results were completed resulting in an increase in income before income taxes of approximately
$1,500,000
.
|
|
2.)
|
|
The Company recognized a full goodwill impairment charge of $3,222,899, an impairment of intangible assets in the amount of $690,107 and the write off of the account receivable and note receivable related to Petzila in the amount of $2,509,423.
|
The aggregate after-tax effect for the above adjustments in the fourth quarter of fiscal 2018 was a decrease to basic earnings (loss) per share of
$0.55
.
SigmaTron International, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
April 30, 201
8
and 201
7
NOTE O - SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) - Continued
The following is a summary of unaudited quarterly financial data for fiscal year 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
2017
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
59,184,975
|
|
$
|
66,159,586
|
|
$
|
62,164,167
|
|
$
|
65,861,447
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit (1)
|
|
|
5,770,234
|
|
|
5,818,669
|
|
|
5,686,959
|
|
|
7,899,446
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income
|
|
|
226,858
|
|
|
26,616
|
|
|
89,036
|
|
|
2,155,173
|
taxes (1), (2), (3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
146,597
|
|
|
33,295
|
|
|
(47,852)
|
|
|
1,258,166
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share
|
|
$
|
0.04
|
|
$
|
0.01
|
|
$
|
(0.01)
|
|
$
|
0.30
|
Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share
|
|
$
|
0.03
|
|
$
|
0.01
|
|
$
|
(0.01)
|
|
$
|
0.30
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares- Basic
|
|
|
4,183,955
|
|
|
4,185,752
|
|
|
4,186,813
|
|
|
4,188,279
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares- Diluted
|
|
|
4,214,535
|
|
|
4,225,874
|
|
|
4,186,813
|
|
|
4,207,266
|
|
1.)
|
|
Due to a fire at one of the Company’s plants during 2017, the Company recorded expense of approximately
$230,000
in prior quarters in costs of goods sold that was realized as an insurance recovery during the fourth quarter of 2017 as recovery was considered probable. As part of this settlement, a gain of approximately $277,000 was also recorded in the fourth quarter of fiscal 2017 due to the insurance claim exceeding the net book value of the replacement machinery and equipment destroyed.
|
|
2.)
|
|
The Company records inventory reserves for valuation and shrinkage throughout the year based on historical data. In the fourth quarter of fiscal 2017 physical inventory results were completed and the Company adjusted the estimate which increased income before income taxes by approximately $780,000.
|
|
3.)
|
|
As discussed in Note G, during the fourth quarter of fiscal 2017 the Company recorded a change in estimate related to Contingent Consideration which increased income before income tax expense in the amount of approximately $247,000.
|
The aggregate after-tax effect for the above adjustments in the fourth quarter of fiscal 2017 was an increase to basic earnings per share of
$0.21
.
SigmaTron International, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
April 30, 201
8
and 201
7
NOTE
P
-
LITIGATION
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 or results of operations.