UNITED STATES

SECURITIES AND EXCHANGE COMMISSION



Washington, D.C. 20549



_________________





Form 10-Q



__________________



(Mark One)

 QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES

      EXCHANGE ACT OF 1934



For the quarterly period ended October 31, 2019



OR



 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES

     EXCHANGE ACT OF 1934



For the transition period from    to



Commission File Number 0-23248



SIGMATRON INTERNATIONAL, INC.

(Exact name of registrant as specified in its charter)

_________________





 

Delaware

36-3918470

(State or other jurisdiction of

(I.R.S. Employer

incorporation or organization)

Identification No.)



 

2201 Landmeier Road

 

Elk Grove Village,  Illinois

60007

(Address of principal executive offices)

(Zip Code)



Registrant’s telephone number, including area code:  (847)  956-8000





 

 

Title of each class

Common Stock $0.01 par value per share

Trading Symbol

SGMA

Name of each exchange on which registered

The NASDAQ Capital Market



__________________



Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes    No 


 

SigmaTron International, Inc.

October 31, 2019

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files.  Yes    No 



Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company.  See the definitions of a “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.



Large Accelerated Filer     Accelerated Filer 



Non-accelerated Filer            Smaller Reporting Company 



Emerging Growth Company 



If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.



Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act).  Yes    No 



Indicate the number of shares outstanding of the registrant’s common stock, $0.01 par value, as of December 6,  2019:  4,242,508







 

2

 


 

 



SigmaTron International, Inc.



Index





 

 

 

 



 

 

 

 

PART 1.

FINANCIAL INFORMATION:         

 

Page No.



Item 1.

Condensed Consolidated Financial Statements

 

 



 

Condensed Consolidated Balance Sheets – October 31, 2019 (Unaudited) and April 30, 2019

 



 

Condensed Consolidated Statements of Operations – (Unaudited)

 

 



 

Three and Six Months Ended October 31, 2019 and 2018

 



 

Condensed Consolidated Statements of Changes in Stockholders’

 

 



 

Equity – (Unaudited) Three and Six Months Ended October 31, 2019 and 2018

 



 

Condensed Consolidated Statements of Cash Flows – (Unaudited)

 

 



 

Six Months Ended October 31, 2019 and 2018

 



 

Notes to Condensed Consolidated Financial Statements – (Unaudited)  

 

10 



Item 2.

Management’s Discussion and Analysis of Financial Condition and

 

 



 

Results of Operations

 

22 



Item 3.

Quantitative and Qualitative Disclosures About Market Risks

 

30 



Item 4.

Controls and Procedures

 

30 



 

 

 

 

PART II

OTHER INFORMATION:

 

 



Item 1.

Legal Proceedings

 

30 



Item 1A.

Risk Factors

 

31 



Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

31 



Item 3.

Defaults Upon Senior Securities

 

31 



Item 4.

Mine Safety Disclosures

 

31 



Item 5.

Other Information

 

31 



Item 6.

Exhibits

 

32 



 

Signatures

 

33 



 

 

 

 

 



 

3

 


 

 



SigmaTron International, Inc.

Condensed Consolidated Balance Sheets





 

 

 

 

 



 

 

 

 

 



 

October 31,

 

 

 



 

2019

 

 

April 30,



 

(Unaudited)

 

 

2019



 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

$

3,470,466 

 

$

1,005,810 



 

 

 

 

 

Accounts receivable, less allowance for doubtful accounts of

 

 

 

 

 

$631,283 at October 31, 2019 and April 30, 2019

 

29,924,877 

 

 

31,441,381 

Inventories, net

 

71,415,245 

 

 

85,579,575 

Prepaid expenses and other assets

 

2,084,528 

 

 

2,436,894 

Refundable and prepaid income taxes

 

1,119,312 

 

 

1,339,739 

Other receivables

 

694,454 

 

 

1,741,890 



 

 

 

 

 

Total current assets

 

108,708,882 

 

 

123,545,289 



 

 

 

 

 

Property, machinery and equipment, net

 

32,018,795 

 

 

33,232,769 



 

 

 

 

 



 

 

 

 

 

Intangible assets, net

 

2,531,610 

 

 

2,713,360 

Deferred income taxes

 

384,021 

 

 

384,022 

Other assets

 

8,015,582 

 

 

1,589,325 

   

 

 

 

 

 

Total other long-term assets

 

10,931,213 

 

 

4,686,707 



 

 

 

 

 

Total assets

$

151,658,890 

 

$

161,464,765 



 

 

 

 

 

Liabilities and stockholders' equity:

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Trade accounts payable

$

34,953,236 

 

$

45,627,014 

Accrued wages

 

5,366,375 

 

 

4,680,399 

Accrued expenses

 

2,639,235 

 

 

2,410,311 

Income taxes payable

 

91,080 

 

 

60,921 

Current portion of long-term debt

 

691,701 

 

 

691,701 

Current portion of finance lease obligations

 

1,898,876 

 

 

1,939,374 

Current portion of operating lease obligations

 

2,292,681 

 

 

 -

Contingent consideration

 

 -

 

 

57,537 

Current portion of deferred rent

 

 -

 

 

139,509 



 

 

 

 

 

Total current liabilities

 

47,933,184 

 

 

55,606,766 



 

 

 

 

 

Long-term debt, less current portion

 

35,646,524 

 

 

42,710,954 

Income taxes payable

 

452,619 

 

 

500,263 

Finance lease obligations, less current portion

 

2,412,326 

 

 

2,862,784 

Operating lease obligations, less current portion

 

4,494,767 

 

 

 -

Deferred rent, less current portion

 

 -

 

 

179,059 

Other long-term liabilities

 

1,227,254 

 

 

1,155,907 

Deferred income taxes

 

182,564 

 

 

161,583 



 

 

 

 

 

Total long-term liabilities

 

44,416,054 

 

 

47,570,550 



 

 

 

 

 

Total liabilities

 

92,349,238 

 

 

103,177,316 



 

 

 

 

 

4

 


 

 

Commitments and contingencies

 

 

 

 

 



 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

Preferred stock, $.01 par value; 500,000 shares

 

 

 

 

 

authorized, none issued or outstanding

 

 -

 

 

 -

Common stock, $.01 par value; 12,000,000 shares

 

 

 

 

 

authorized, 4,242,508 and 4,240,008 shares issued and

 

 

 

 

 

outstanding at October 31, 2019 and April 30, 2019, respectively

 

42,146 

 

 

42,146 

Capital in excess of par value

 

23,474,379 

 

 

23,474,379 

Retained earnings

 

35,793,127 

 

 

34,770,924 



 

 

 

 

 

Total stockholders' equity

 

59,309,652 

 

 

58,287,449 



 

 

 

 

 

Total liabilities and stockholders' equity

$

151,658,890 

 

$

161,464,765 



 

 

 

 

 

The accompanying notes to the condensed consolidated financial statements are an integral part of these statements.



























5

 


 

 

SigmaTron International, Inc.

Condensed Consolidated Statements of Operations









 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 



 

Three Months

 

 

Three Months

 

 

Six Months

 

 

Six Months



 

Ended

 

 

Ended

 

 

Ended

 

 

Ended

 

 

October 31,

 

 

October 31,

 

 

October 31,

 

 

October 31,



 

2019

 

 

2018

 

 

2019

 

 

2018



 

(Unaudited)

 

 

(Unaudited)

 

 

(Unaudited)

 

 

(Unaudited)



 

 

 

 

 

 

 

 

 

 

 

Net sales

$

74,855,312 

 

$

77,001,091 

 

$

148,865,293 

 

$

148,415,148 

Cost of products sold

 

67,725,826 

 

 

70,307,006 

 

 

134,775,475 

 

 

135,932,007 



 

 

 

 

 

 

 

 

 

 

 

Gross profit

 

7,129,486 

 

 

6,694,085 

 

 

14,089,818 

 

 

12,483,141 



 

 

 

 

 

 

 

 

 

 

 

Selling and administrative expenses

 

5,700,288 

 

 

5,817,155 

 

 

11,527,614 

 

 

11,751,271 



 

 

 

 

 

 

 

 

 

 

 

Operating income

 

1,429,198 

 

 

876,930 

 

 

2,562,204 

 

 

731,870 



 

 

 

 

 

 

 

 

 

 

 

Other income

 

(10,863)

 

 

(127,979)

 

 

(77,225)

 

 

(102,916)

Interest expense

 

462,772 

 

 

602,858 

 

 

1,054,000 

 

 

1,156,348 

Income (loss) before income tax expense

 

977,289 

 

 

402,051 

 

 

1,585,429 

 

 

(321,562)



 

 

 

 

 

 

 

 

 

 

 

Income tax expense

 

316,106 

 

 

1,125,992 

 

 

563,221 

 

 

928,986 



 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

$

661,183 

 

$

(723,941)

 

$

1,022,208 

 

$

(1,250,548)



 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

Earnings (loss) per share – basic

$

0.16 

 

$

(0.17)

 

$

0.24 

 

$

(0.30)



 

 

 

 

 

 

 

 

 

 

 

Earnings (loss) per share – diluted

$

0.15 

 

$

(0.17)

 

$

0.24 

 

$

(0.30)

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

Weighted average shares of common stock outstanding

 

 

 

 

 

 

 

 

 

 

 

Basic

 

4,242,508 

 

 

4,230,008 

 

 

4,242,196 

 

 

4,226,833 



 

 

 

 

 

 

 

 

 

 

 

Weighted average shares of common stock outstanding

 

 

 

 

 

 

 

 

 

 

 

Diluted

 

4,278,901 

 

 

4,230,008 

 

 

4,251,590 

 

 

4,226,833 



 

 

 

 

 

 

 

 

 

 

 

The accompanying notes to the condensed consolidated financial statements are an integral part of these statements.













6

 


 

 

SigmaTron International, Inc.

Condensed Consolidated Statements of Changes in Stockholders’ Equity







 

 

 

 

 

 

 

 

 

 

 

 

 

 



For the six months ended October 31, 2019 (Unaudited)



 

 

 

 

 

 

 

Capital in

 

 

 

 

 

Total



 

Preferred

 

 

Common

 

 

excess of par

 

 

Retained

 

 

stockholders’



 

stock

 

 

stock

 

 

value

 

 

earnings

 

 

equity



 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at May 1, 2019

$

 -

 

$

42,146 

 

$

23,474,379 

 

$

34,770,924 

 

$

58,287,449 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cumulative-effect adjustment for the adoption of Topic 842

 

 -

 

 

 -

 

 

 -

 

 

(5)

 

 

(5)



 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 -

 

 

 -

 

 

 -

 

 

361,025 

 

 

361,025 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at July 31, 2019

$

 -

 

$

42,146 

 

$

23,474,379 

 

$

35,131,944 

 

$

58,648,469 



 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 -

 

 

 -

 

 

 -

 

 

661,183 

 

 

661,183 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at October 31, 2019

$

 -

 

$

42,146 

 

$

23,474,379 

 

$

35,793,127 

 

$

59,309,652 









 

 

 

 

 

 

 

 

 

 

 

 

 

 



For the six months ended October 31, 2018 (Unaudited)



 

 

 

 

 

 

 

Capital in

 

 

 

 

 

Total



 

Preferred

 

 

Common

 

 

excess of par

 

 

Retained

 

 

stockholders’



 

stock

 

 

stock

 

 

value

 

 

earnings

 

 

equity



 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at May 1, 2018

$

 -

 

$

41,896 

 

$

23,132,017 

 

$

35,636,038 

 

$

58,809,951 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

 -

 

 

 -

 

 

 -

 

 

(526,607)

 

 

(526,607)



 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at July 31, 2018

$

 -

 

$

41,896 

 

$

23,132,017 

 

$

35,109,431 

 

$

58,283,344 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

Restricted stock awards

 

 -

 

 

146 

 

 

116,154 

 

 

 -

 

 

116,300 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

 -

 

 

 -

 

 

 -

 

 

(723,941)

 

 

(723,941)



 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at October 31, 2018

$

 -

 

$

42,042 

 

$

23,248,171 

 

$

34,385,490 

 

$

57,675,703 













7

 


 

 

SigmaTron International, Inc.

Condensed Consolidated Statements of Cash Flows







 

 

 

 

 



 

 

 

 

 



 

Six

 

 

Six



 

Months Ended

 

 

Months Ended



 

October 31,

 

 

October 31,



 

2019

 

 

2018 (As Revised)



 

(Unaudited)

 

 

(Unaudited)



 

 

 

 

 

Cash flows from operating activities

 

 

 

 

 

Net income (loss)

$

1,022,208 

 

$

(1,250,548)



 

 

 

 

 

Adjustments to reconcile net income (loss)

 

 

 

 

 

to net cash provided by (used in) operating activities:

 

 

 

 

 

Depreciation and amortization

 

2,456,156 

 

 

2,515,042 

Amortization of right-of-use operating leased assets

 

1,080,505 

 

 

 -

Restricted stock expense

 

 -

 

 

116,300 

Deferred income tax expense

 

20,982 

 

 

597,134 

Amortization of intangible assets

 

181,750 

 

 

187,645 

Amortization of financing fees

 

55,498 

 

 

42,604 

Fair value adjustment of contingent consideration

 

 -

 

 

34,621 

Loss from disposal or sale of machinery and equipment

 

17,598 

 

 

2,845 



 

 

 

 

 

Changes in operating assets and liabilities

 

 

 

 

 

Accounts receivable

 

1,516,504 

 

 

(7,310,364)

Inventories

 

14,164,330 

 

 

(2,472,799)

Prepaid expenses and other assets

 

(43,197)

 

 

(201,372)

Refundable and prepaid income taxes

 

220,427 

 

 

56,027 

Income taxes payable

 

(17,485)

 

 

18,115 

Trade accounts payable

 

(10,673,778)

 

 

3,334,880 

Deferred rent

 

 -

 

 

(136,484)

Operating lease liabilities

 

459,112 

 

 

 -

Accrued expenses and wages

 

932,247 

 

 

577,251 



 

 

 

 

 

Net cash provided by (used in) operating activities

 

11,392,857 

 

 

(3,889,103)



 

 

 

 

 

Cash flows from investing activities

 

 

 

 

 

Purchases of machinery and equipment

 

(588,334)

 

 

(1,528,211)



 

 

 

 

 

Net cash used in investing activities

 

(588,334)

 

 

(1,528,211)



 

 

 

 

 

Cash flows from financing activities

 

 

 

 

 

Proceeds under equipment notes

 

 -

 

 

182,557 

Payments of contingent consideration

 

(57,537)

 

 

(55,075)

Payments under finance lease and sale leaseback agreements

 

(1,162,402)

 

 

(1,246,334)

Payments under equipment notes

 

(205,850)

 

 

(196,723)

Payments under building notes payable

 

(140,000)

 

 

(140,000)

Borrowings under revolving line of credit

 

170,235,836 

 

 

172,159,933 

Payments under revolving line of credit

 

(176,963,048)

 

 

(165,255,327)

Payments of debt financing costs

 

(46,866)

 

 

(24,197)



 

 

 

 

 

Net cash (used in) provided by financing activities

 

(8,339,867)

 

 

5,424,834 



 

 

 

 

 

Change in cash and cash equivalents

 

2,464,656 

 

 

7,520 

8

 


 

 

Cash and cash equivalents at beginning of period

 

1,005,810 

 

 

1,721,599 



 

 

 

 

 

Cash and cash equivalents at end of period

$

3,470,466 

 

$

1,729,119 



 

 

 

 

 

Supplementary disclosures of cash flow information

 

 

 

 

 

Cash paid for interest

$

1,053,706 

 

$

1,087,181 

Cash paid for income taxes

 

391,949 

 

 

274,476 

Purchase of machinery and equipment financed

 

 

 

 

 

 under finance leases

 

671,446 

 

 

131,232 

Financing of insurance policy

 

54,000 

 

 

30,000 



 

 

 

 

 





 





 

9

 


 

SigmaTron International, Inc.

October 31, 2019

 

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Note A - Description 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. 



Note B - Basis of Presentation



The accompanying unaudited condensed consolidated financial statements of SigmaTron International, Inc. (“SigmaTron”), SigmaTron’s wholly-owned subsidiaries Standard Components de Mexico S.A., AbleMex, S.A. de C.V., Digital Appliance Controls de Mexico, S.A. de C.V., Spitfire Controls (Vietnam) Co. Ltd., Spitfire Controls (Cayman) Co. Ltd. and wholly-owned foreign enterprises Wujiang SigmaTron Electronics Co., Ltd. and SigmaTron Electronic Technology Co., Ltd. (“SigmaTron China”) and international procurement office SigmaTron Taiwan branch (collectively, the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X.



Accordingly, the condensed consolidated financial statements do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements.  In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included.  Operating results for the three and six month period ended October 31, 2019 is not necessarily indicative of the results that may be expected for the year ending April 30, 2020.  The condensed consolidated balance sheet at April 30, 2019, was derived from audited annual financial statements but does not contain all of the footnotes disclosures from the annual financial statements.  For further information, refer to the  consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended April 30, 2019

 

10

 


 

SigmaTron International, Inc.

October 31, 2019

 

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Note C - Inventories, net



The components of inventory consist of the following:









 

 

 

 

 



 

 

 

 

 



October 31,

 

April 30,



2019

 

2019



 

 

 

 

 

Finished products

$

22,624,437 

 

$

20,682,669 

Work-in-process

 

4,365,499 

 

 

3,037,810 

Raw materials

 

45,572,214 

 

 

63,203,068 



 

72,562,150 

 

 

86,923,547 

Less excess and obsolescence reserve

 

(1,146,905)

 

 

(1,343,972)



$

71,415,245 

 

$

85,579,575 

 



Note D - Earnings Per Share and Stockholders’ Equity



The following table sets forth the computation of basic and diluted earnings (loss) per share:







 

 

 

 

 

 

 

 

 

 

 



Three Months Ended

 

Six Months Ended



October 31,

 

October 31,



2019

 

2018

 

2019

 

2018



 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

$

661,183 

 

$

(723,941)

 

$

1,022,208 

 

$

(1,250,548)

Weighted-average shares

 

 

 

 

 

 

 

 

 

 

 

Basic

 

4,242,508 

 

 

4,230,008 

 

 

4,242,196 

 

 

4,226,833 

Effect of dilutive stock options

 

36,393 

 

 

 -

 

 

9,394 

 

 

 -



 

 

 

 

 

 

 

 

 

 

 

Diluted

 

4,278,901 

 

 

4,230,008 

 

 

4,251,590 

 

 

4,226,833 



 

 

 

 

 

 

 

 

 

 

 

Basic earnings (loss) per share

$

0.16 

 

$

(0.17)

 

$

0.24 

 

$

(0.30)



 

 

 

 

 

 

 

 

 

 

 

Diluted earnings (loss) per share

$

0.15 

 

$

(0.17)

 

$

0.24 

 

$

(0.30)



Options to purchase 465,232 and 347,318 shares of common stock were outstanding at October 31, 2019 and 2018, respectively.  There were no options granted during the six month periods ended October 31, 2019 and 2018.  There was no stock option expense recognized for the three and six month periods ended October 31, 2019 and 2018.  There was no balance of unrecognized compensation expense related to the Company’s stock option plans at October 31, 2019 and 2018.  For the three month periods ended October 31, 2019 and 2018, 147,706 and 24,459 shares, respectively, were not included in the diluted weighted average common shares outstanding calculation as they were anti-dilutive.    For the six month periods ended October 31, 2019 and 2018, 241,465 and 29,080 shares, respectively, were not included in the diluted weighted average common shares outstanding calculation as they were anti-dilutive. 

11

 


 

SigmaTron International, Inc.

October 31, 2019

 

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Note E - Long-term Debt



Debt and capital lease obligations consisted of the following at October 31, 2019 and April 30, 2019:







 

 

 

 

 



 

October 31,

 

 

April 30,



 

2019

 

 

2019



 

 

 

 

 

Debt:

 

 

 

 

 

Notes Payable - Banks

$

29,000,000 

 

$

35,727,212 

Notes Payable - Buildings

 

6,510,000 

 

 

6,650,000 

Notes Payable - Equipment

 

1,122,903 

 

 

1,328,753 

Unamortized deferred financing costs

 

(294,678)

 

 

(303,310)

Total debt

 

36,338,225 

 

 

43,402,655 

Less current maturities

 

691,701 

 

 

691,701 

Long-term debt

$

35,646,524 

 

$

42,710,954 



 

 

 

 

 

Finance lease and sale leaseback obligations

$

4,311,202 

 

$

4,802,158 

Less current maturities

 

1,898,876 

 

 

1,939,374 

Total finance lease obligations, less current portion

$

2,412,326 

 

$

2,862,784 



Notes Payable – Banks



On March 31, 2017, the Company entered into a $35,000,000 senior secured credit facility with 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 five percent or LIBOR plus one and one half percent (effectively 3.44% at October 31, 2019).  Interest is due monthly. 



On July 16, 2018, the Company and U.S. Bank entered into an amendment of the revolving line of credit under the senior secured credit facility.  The amended revolving credit facility allows the Company to borrow up to the lesser of (i) $45,000,000 (the “Revolving Line Cap”) less reserves or (ii) the Borrowing Base, but no more than 90% of the Company’s Revolving Line Cap, except that the 90% limitation will expire if (i) the Company’s actual revolving loans for 90 consecutive days after the amendment’s effective date are less than 80% of the Company’s Borrowing Base and (ii) 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 $10,500,000 on raw materials, $10,000,000 on finished goods and $28,000,000 on all eligible inventory. 



On December 13, 2018, the Company and U.S. Bank entered into an amendment of the revolving credit facility.  The amendment provides an exception to otherwise ineligible foreign receivables for up to $3,000,000 of receivables paid by certain enumerated account debtors outside of the U.S. and Canada.





12

 


 

SigmaTron International, Inc.

October 31, 2019

 

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Note E - Long-term Debt - Continued 



On August 26, 2019, the Company and U.S. Bank entered into an amendment of the revolving credit facility.  The amendment allows the Company to borrow up to the lesser of (i) the Revolving Line Cap less reserves or (ii) the Borrowing Base, but no more than 95% of the Company’s Revolving Line Cap until February 26, 2020 and 90% on and after February 26, 2020. 



As of October 31, 2019, there was $29,000,000 outstanding and $11,544,524 of unused availability under the U.S. Bank facility compared to an outstanding balance of $35,727,212 and $6,645,730 of unused availability at April 30, 2019.  At October 31, 2019, the Company was in compliance with its financial covenant and other restrictive covenants under the credit facility.  Deferred financing costs of $40,907 and $46,866 were capitalized during the three and six month periods ended October  31, 2019, respectively, which are amortized over the term of the agreement.  As of October  31, 2019 and April 30, 2019, the unamortized amount offset against outstanding debt was $216,869 and $209,162, respectively.    



On March 15, 2019, 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, approximately $709,000 as of October  31, 2019, and the facility is collateralized by Wujiang SigmaTron Electronic 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 March 14, 2024.  There was no outstanding balance under the facility at October  31, 2019 and April 30, 2019.



The Company is in compliance with its financial covenant and other restrictive covenants and anticipates that its credit facilities, expected future cash flows from operations and leasing resources are adequate to meet its working capital requirements, and fund capital expenditures for the next 12 months.  In addition, if customers delay orders, future payments are not made timely, the Company desires to expand its operations, its business grows more rapidly than expected, or the current economic climate deteriorates, additional financing resources may be necessary. There is no assurance that the Company will be able to obtain equity or debt financing at acceptable terms, or at all, in the future.  There is no assurance that the Company will be able to retain or renew its credit agreements in the future, or that any retention or renewal will be on the same terms as currently exist.



Notes Payable – Buildings



The Company entered into a mortgage agreement on December 21, 2017, in the amount of $5,200,000, with U.S. Bank to refinance the property that serves as the Company’s corporate headquarters and its Illinois manufacturing facility in Elk Grove Village, Illinois.  The note 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

13

 


 

SigmaTron International, Inc.

October 31, 2019

 

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Note E - Long-term Debt - Continued 



of October 31, 2019 and April 30, 2019, the unamortized amount included as a reduction to long-term debt was $41,347 and $50,142, respectivelyA final payment of approximately $4,347,778 is due on or before March 31, 2022The outstanding balance was $4,836,000 and $4,940,000 at October, 31 2019 and April 30, 2019, respectively.



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 October 31, 2019 and April 30, 2019, the unamortized amount included as a reduction to long-term debt was $36,462 and $44,006, respectivelyA final payment of approximately $1,505,000 is due on or before March 31, 2022The outstanding balance was $1,674,000 and $1,710,000 at October, 31 2019 and April 30, 2019, respectively. 



Notes Payable – Equipment



The Company routinely enters into secured note agreements with Engencap Fin S.A. DE C.V. to finance the purchase of equipment. The terms of these secured note agreements extend to November 2021 through May 2023, with quarterly installment payments ranging from $11,045 to $37,941 and at fixed interest rates ranging from 6.65% to 8.00%.



Annual maturities of the Company’s debt, net of deferred financing fees for the remaining periods as of October  31, 2019, are as follows:







 

 

 

 

 

 

 

 

 

 

 

 



 

Bank

 

Building

 

Equipment

 

Total



 

 

 

 

 

 

 

 

 

 

 

 

For the remaining 6 months of the fiscal year ending April 30:

2020

$

 -

 

$

140,000 

 

$

205,851 

 

$

345,851 

For the fiscal years ending April 30:

2021

 

 -

 

 

280,000 

 

 

411,701 

 

 

691,701 



2022

 

28,783,131 

 

 

6,012,191 

 

 

381,852 

 

 

35,177,174 



2023

 

 -

 

 

 -

 

 

114,372 

 

 

114,372 



2024

 

 -

 

 

 -

 

 

9,127 

 

 

9,127 



 

$

28,783,131 

 

$

6,432,191 

 

$

1,122,903 

 

$

36,338,225 



 

 

 

 

 

 

 

 

 

 

 

 







14

 


 

SigmaTron International, Inc.

October 31, 2019

 

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Note E - Long-term Debt - Continued 



Finance Lease and Sales Leaseback Obligations



The Company enters into various finance lease and sales leaseback agreements.  The terms of the lease agreements mature through May 2023, with monthly installment payments ranging from $1,455 to $40,173 and a fixed interest rate ranging from 3.75% to 9.40%.  





Note F - Income Tax



The income tax expense was $316,106 for the three month period ended October 31, 2019 compared to an income tax expense of $1,125,992 for the same period in the prior fiscal year.  The Company’s effective tax rate was 32.35% and 280.06% for the three month period ended October 31, 2019 and 2018, respectively.  The income tax expense was $563,221 for the six month period ended October 31, 2019 compared to an income tax expense of $928,986 for the same period in the prior fiscal year.  The Company’s effective tax rate was 35.52% and (288.9)% for the six month period ended October 31, 2019 and 2018, respectively.  The decrease in income tax expense for both the three month and six month periods ended October 31, 2019 and the decrease in the effective tax rate for the three month period ended October 31, 2019 compared to the same periods in the previous year is due primarily to a discrete income tax expense of $457,011 in the prior year as the result of a valuation allowance established on certain foreign net operating loss carryforwards. The increase in effective tax rate for the six month period in the current year compared to the same period in the previous year is due primarily to an overall loss that was recognized in the prior year compared to income recognized in the current year.



Note G - Commitments and Contingencies



From time to time the Company is involved in legal proceedings, claims or investigations that are incidental to the conduct of the Company’s business. In future periods, the Company could be subjected to cash cost or non-cash charges to earnings if any of these matters are resolved on unfavorable terms. However, although the ultimate outcome of any legal matter cannot be predicted with certainty, based on present information, including management’s assessment of the merits of any particular claim, the Company does not expect that these legal proceedings or claims will have any material adverse impact on its future consolidated financial position, results of operations or cash flows.



15

 


 

SigmaTron International, Inc.

October 31, 2019

 

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Note H - Critical Accounting Policies



Management Estimates and Uncertainties -  The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period.  Significant estimates made in preparing the consolidated financial statements include depreciation and amortization periods, the allowance for doubtful accounts, reserves for inventory, contingent consideration, deferred taxes, uncertain tax positions, valuation allowance for deferred taxes and valuation of long-lived assets.  Actual results could materially differ from these estimates.



Revenue Recognition - The following table presents the Company’s revenue disaggregated by the principal end-user markets it serves:







 

 

 

 

 

 

 

 

 



 

 

Three Months Ended

 

Six Months Ended



 

 

October 31,

 

October 31,



Net trade sales by
end-market

 

2019

 

2018

 

2019

 

2018



Industrial Electronics

 

41,398,201 

 

41,583,723 

 

84,246,913 

 

79,718,825 



Consumer Electronics

 

28,815,556 

 

31,490,883 

 

55,474,743 

 

60,691,796 



Medical / Life Sciences

 

4,641,555 

 

3,926,485 

 

9,143,637 

 

8,004,527 



Total Net Trade Sales

 

74,855,312 

 

77,001,091 

 

148,865,293 

 

148,415,148 



 

 

 

 

 

 

 

 

 



During the three and six month periods ending October 31, 2019, no revenues were recognized from performance obligations satisfied or partially satisfied in previous periods and no amounts were allocated to performance obligations that remain unsatisfied or partially unsatisfied at October 31, 2019.  The Company is electing not to disclose the value of the remaining unsatisfied performance obligation with a duration of one year or less as permitted by the practical expedient in ASU 2014-09, “Revenue from Contracts with Customers.”  The Company had no material remaining unsatisfied performance obligations as of October 31, 2019, with an expected duration of greater than one year.



Income Tax - The Company’s income tax expense, deferred tax assets and liabilities and reserves for unrecognized tax benefits reflect management’s best assessment of estimated future taxes to be paid.  The Company is subject to income taxes in both the U.S. and several foreign jurisdictions.  Significant judgments and estimates by management are required in determining the consolidated income tax expense assessment.



Deferred income tax assets and liabilities are determined based on differences between financial reporting and tax basis of assets and liabilities, and are measured using the enacted tax rates and laws that are expected to be in effect when the differences are expected to reverse.  In evaluating the Company’s ability to recover its deferred tax assets within the jurisdiction from which they arise, the Company considers all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies and recent financial

16

 


 

SigmaTron International, Inc.

October 31, 2019

 

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Note H - Critical Accounting Policies - Continued



operations.  In projecting future taxable income, the Company begins with historical results and changes in accounting policies, and incorporates assumptions including the amount of future state, federal and foreign pre-tax operating income, the reversal of temporary differences, and the implementation of feasible and prudent tax planning strategies.  These assumptions require significant judgment and estimates by management about the forecasts of future taxable income and are consistent with the plans and estimates the Company uses to manage the underlying businesses.  In evaluating the objective evidence that historical results provide, the Company considers three years of cumulative operating income and/or loss.  Valuation allowances are established when necessary to reduce deferred income tax assets to an amount more likely than not to be realized.    The Company’s valuation allowance was $1,372,643 and $1,294,605 as of October 31, 2019 and April 30, 2019, respectively.



Revisions - Previously reported cash flows from financing activities for the six month period ended October 31, 2018 have been revised to reflect the classification of payments and borrowings under the Company’s revolving line of credit presented in the condensed consolidated statement of cash flows. The revision had no impact on total cash flows from financing activities, net loss or net loss per share, or the condensed consolidated balance sheets or statements of operations or stockholders’ equity. See Note B, “Summary of Significant Accounting Policies” in the Company’s 2019 10-K for additional information on these revisions.



New Accounting Standards:



In February 2016, the FASB issued ASU 2016-02, as amended, Leases (Topic 842), which requires a lessee to record a right-of-use asset and a lease liability for all leases with a term greater than twelve months regardless of whether the lease is classified as an operating lease or a financing lease.



Effective May 1, 2019, the Company adopted the new standard under the modified retrospective approach, applying the current-period adjustment method.  Under the transition guidance of the modified retrospective approach there are a number of optional practical expedients made available to simplify the transition of the new standard. The Company has elected the following:



·

The condensed consolidated balance sheets for reporting periods beginning on or after May 1, 2019 are presented under the new guidance, while prior period amounts are not adjusted and continue to be reported in accordance with ASC Topic 840, Leases. The Company recognized a cumulative effect adjustment to the opening balance of retained earnings in the period of adoption of $5. 

·

The Company has elected to utilize the package of practical expedients permitted under the transition guidance in the standard, which allowed the Company to not reassess (i) whether any expired or existing contracts contain leases, (ii) historical lease classification, and (iii) initial direct costs.

·

The Company has elected to combine lease and non-lease components as a single component for all asset classes.

·

The Company has elected to not assess whether existing or expired land easements that were not previously accounted for as leases under Topic 840 are or contain a lease under this Topic.

·

The Company has elected to keep leases with an initial term of 12 months or less off of the balance sheet.

17

 


 

SigmaTron International, Inc.

October 31, 2019

 

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Note H - Critical Accounting Policies - Continued



Upon adoption, the Company recorded Right-of-use ("ROU") assets and lease liabilities relating to operating leases of $6,017,771 and $6,290,289, respectively. The changes did not have a material impact on our results of operations or cash flows. The discount rates used to calculate the ROU assets and lease liabilities as of the effective date were based on the remaining lease terms as of the effective date. See Note J - Leases, for the impact on the financial statements and related disclosures from the adoption of this standard.



In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” ASU 2016-13, as amended by ASU 2019-04 and ASU 2019-05, introduces a new forward-looking approach, based on expected losses, to estimate credit losses on certain types of financial instruments, including trade receivables. The estimate of expected credit losses will require entities to incorporate considerations of historical information, current information and reasonable and supportable forecasts.  This ASU also expands the disclosure requirements to enable users of financial statements to understand the entity’s assumptions, models and methods for estimating expected credit losses. For small reporting companies, ASU 2016-13 is effective for annual and interim reporting periods beginning after December 15, 2022, and the guidance is to be applied using the modified-retrospective approach. Earlier adoption is permitted 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.



Note I - 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.  



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), an unrelated party,” 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.



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.  As of April 30, 2019 and October 31, 2019, 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.



18

 


 

SigmaTron International, Inc.

October 31, 2019

 

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Note J - Leases



The Company leases office and storage space, vehicles and other equipment under non-cancellable operating leases with initial terms typically ranging from 1 to 5 years.  At contract inception, the Company reviews the facts and circumstances of the arrangement to determine if the contract is or contains a lease.  The Company follows the guidance in Topic 842 to evaluate whether the contract has an identified asset; if the Company has the right to obtain substantially all economic benefits from the asset; and if the Company has the right to direct the use of the underlying asset.  When determining if a contract has an identified asset, the Company considers both explicit and implicit assets, and whether the supplier has the right to substitute the asset.  When determining if the Company has the right to direct the use of an underlying asset, the Company considers if they have the right to direct how and for what purpose the asset is used throughout the period of use and if they control the decision-making rights over the asset.



The Company’s lease terms may include options to extend or terminate the lease.  The Company exercises judgment to determine the term of those leases when extension or termination options are present and include such options in the calculation of the lease term when it is reasonably certain that it will exercise those options.



The Company has elected to include both lease and non-lease components in the determination of lease payments. Payments made to a lessor for items such as taxes, insurance, common area maintenance, or other costs commonly referred to as executory costs, are also included in lease payments if they are fixed. The fixed portion of these payments are included in the calculation of the lease liability, while any variable portion would be recognized as variable lease expenses, when incurred. Variable payments made to third parties for these, or similar costs, such as utilities, are not included in the calculation of lease payments.



At commencement, lease-related assets and liabilities are measured at the present value of future lease payments over the lease term. As most of the Company’s leases do not provide an implicit rate, the Company exercises judgment in determining the incremental borrowing rate based on the information available at when the lease commences to measure the present value of future payments.



Operating lease expense is recognized on a straight-line basis over the lease term. Finance lease cost includes amortization, which is recognized on a straight-line basis over the expected life of the leased asset, and interest expense, which is recognized following an effective interest rate method.



Operating leases are included in other assets, current operating lease obligations, and operating lease obligations (less current portion) on the Company’s consolidated balance sheet. Finance leases are included in property, plant and equipment and current and long-term portion of finance lease obligations on the Company’s consolidated balance sheet. Short term leases with an initial term of 12 months or less are not presented on the balance sheet with expense recognized as incurred.

19

 


 

SigmaTron International, Inc.

October 31, 2019

 

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Note J - Leases - Continued



The following table presents lease assets and liabilities and their balance sheet classification:



 

 

 



 

 

October 31,



Classification

 

2019

Operating Leases:

 

 

 

Right-of-use Assets

Other assets

$

6,567,272 

Operating lease current liabilities

Current portion of operating lease obligations

 

2,292,681 

Operating lease noncurrent liabilities

Operating lease obligations, less current portion

 

4,494,767 

Finance Leases:

 

 

 

Right-of-use Assets

Property, plant and equipment

 

10,793,496 

Finance lease current liabilities

Current portion of finance lease obligations

 

1,898,876 

Finance lease noncurrent liabilities

Finance lease obligations, less current portion

 

2,412,326 



The components of lease expense for the three and six month periods ended October 31, 2019, are as follows:







 

 

 

 

 



 

 

Three Months

 

Six Months



 

 

Ended

 

Ended



 

 

October 31,

 

October 31,



Classification

 

2019

 

2019

Operating Leases:

 

 

 

 

 

Operating lease cost

Operating expenses

 

625,339 

 

1,219,833 

Variable lease cost

Operating expenses

 

73,897 

 

147,794 

Short term lease cost

Operating expenses

 

1,350 

 

2,700 

Finance Leases:

 

 

 

 

 

Amortization of right-of-use assets

Operating expenses

 

384,192 

 

731,567 

Interest expense

Interest expense

 

74,340 

 

142,126 

Total

 

 

1,159,118 

 

2,244,020 



The weighted average lease term and discount rates are as follows:







 

 



 

October 31,



 

2019

Operating Leases:

 

 

Weighted average remaining lease term (months)

 

44.20

Weighted average discount rate

 

3.9%

Finance Leases:

 

 

Weighted average remaining lease term (months)