10-Q 1 sgma-20201031x10q.htm 10-Q 20201031 Q2 10Q

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, 2020



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, 2020

 

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 8,  20204,257,508







 

2

 


 

 



SigmaTron International, Inc.



Index





 

 

 

 



 

 

 

 

PART 1.

FINANCIAL INFORMATION:         

 

Page No.



Item 1.

Condensed Consolidated Financial Statements

 

 



 

Condensed Consolidated Balance Sheets – October 31, 2020 (Unaudited) and April 30, 2020

 



 

Condensed Consolidated Statements of Operations – (Unaudited)

 

 



 

Three and Six Months Ended October 31, 2020 and 2019

 



 

Condensed Consolidated Statements of Changes in Stockholders’

 

 



 

Equity – (Unaudited) Three and Six Months Ended October 31, 2020 and 2019

 



 

Condensed Consolidated Statements of Cash Flows – (Unaudited)

 

 



 

Six Months Ended October 31, 2020 and 2019

 



 

Notes to Condensed Consolidated Financial Statements – (Unaudited)  

 

10 



Item 2.

Management’s Discussion and Analysis of Financial Condition and

 

 



 

Results of Operations

 

25 



Item 3.

Quantitative and Qualitative Disclosures About Market Risks

 

33 



Item 4.

Controls and Procedures

 

33 



 

 

 

 

PART II

OTHER INFORMATION:

 

 



Item 1.

Legal Proceedings

 

33 



Item 1A.

Risk Factors

 

34 



Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

34 



Item 3.

Defaults Upon Senior Securities

 

34 



Item 4.

Mine Safety Disclosures

 

34 



Item 5.

Other Information

 

34 



Item 6.

Exhibits

 

35 



 

Signatures

 

36 



 

 

 

 

 



 

3

 


 

 



SigmaTron International, Inc.

Condensed Consolidated Balance Sheets





 

 

 

 

 



 

 

 

 

 



 

October 31,

 

 

 



 

2020

 

 

April 30,



 

(Unaudited)

 

 

2020



 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

$

4,956,038 

 

$

6,779,445 



 

 

 

 

 

Accounts receivable, less allowance for doubtful accounts of

 

 

 

 

 

$395,969 and $727,252 at October 31, 2020 and April 30, 2020,
respectively

 

24,633,138 

 

 

30,804,976 

Inventories, net

 

83,940,180 

 

 

87,179,369 

Prepaid expenses and other assets

 

1,044,386 

 

 

1,510,943 

Refundable and prepaid income taxes

 

1,398,702 

 

 

1,699,970 

Other receivables

 

5,340,198 

 

 

2,642,094 



 

 

 

 

 

Total current assets

 

121,312,642 

 

 

130,616,797 



 

 

 

 

 

Property, machinery and equipment, net

 

33,735,679 

 

 

33,935,760 



 

 

 

 

 



 

 

 

 

 

Intangible assets, net

 

2,173,525 

 

 

2,350,949 

Deferred income taxes

 

285,105 

 

 

284,435 

Other assets

 

8,933,500 

 

 

8,891,090 

   

 

 

 

 

 

Total other long-term assets

 

11,392,130 

 

 

11,526,474 



 

 

 

 

 

Total assets

$

166,440,451 

 

$

176,079,031 



 

 

 

 

 

Liabilities and stockholders' equity:

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Trade accounts payable

$

44,482,696 

 

$

55,770,953 

Accrued wages

 

6,383,294 

 

 

4,206,825 

Accrued expenses

 

2,617,684 

 

 

2,670,504 

Income taxes payable

 

449,883 

 

 

469,143 

Current portion of long-term debt

 

5,380,120 

 

 

2,878,160 

Current portion of finance lease obligations

 

1,650,763 

 

 

1,902,295 

Current portion of operating lease obligations

 

2,078,990 

 

 

2,150,161 



 

 

 

 

 

Total current liabilities

 

63,043,430 

 

 

70,048,041 



 

 

 

 

 

Long-term debt, less current portion

 

36,882,880 

 

 

38,537,064 

Income taxes payable

 

404,975 

 

 

452,619 

Finance lease obligations, less current portion

 

1,124,309 

 

 

1,884,722 

Operating lease obligations, less current portion

 

5,457,117 

 

 

5,281,811 

Other long-term liabilities

 

869,460 

 

 

810,769 

Deferred income taxes

 

41,060 

 

 

188,206 



 

 

 

 

 

Total long-term liabilities

 

44,779,801 

 

 

47,155,191 



 

 

 

 

 

Total liabilities

 

107,823,231 

 

 

117,203,232 



 

 

 

 

 

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, 4,257,508 and 4,242,508 shares issued and

 

 

 

 

 

outstanding at October 31, 2020 and April 30, 2020, respectively

 

42,296 

 

 

42,265 

Capital in excess of par value

 

23,634,711 

 

 

23,619,513 

Retained earnings

 

34,940,213 

 

 

35,214,021 



 

 

 

 

 

Total stockholders' equity

 

58,617,220 

 

 

58,875,799 



 

 

 

 

 

Total liabilities and stockholders' equity

$

166,440,451 

 

$

176,079,031 



 

 

 

 

 

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,



 

2020

 

 

2019

 

 

2020

 

 

2019



 

(Unaudited)

 

 

(Unaudited)

 

 

(Unaudited)

 

 

(Unaudited)



 

 

 

 

 

 

 

 

 

 

 

Net sales

$

69,618,424 

 

$

74,855,312 

 

$

130,143,380 

 

$

148,865,293 

Cost of products sold

 

62,858,882 

 

 

67,725,826 

 

 

119,111,647 

 

 

134,775,475 



 

 

 

 

 

 

 

 

 

 

 

Gross profit

 

6,759,542 

 

 

7,129,486 

 

 

11,031,733 

 

 

14,089,818 



 

 

 

 

 

 

 

 

 

 

 

Selling and administrative expenses

 

5,421,739 

 

 

5,700,288 

 

 

10,481,264 

 

 

11,527,614 



 

 

 

 

 

 

 

 

 

 

 

Operating income

 

1,337,803 

 

 

1,429,198 

 

 

550,469 

 

 

2,562,204 



 

 

 

 

 

 

 

 

 

 

 

Other income

 

(40,611)

 

 

(10,863)

 

 

(44,709)

 

 

(77,225)

Interest expense

 

308,613 

 

 

462,772 

 

 

646,877 

 

 

1,054,000 

Income (loss) before income tax expense

 

1,069,801 

 

 

977,289 

 

 

(51,699)

 

 

1,585,429 



 

 

 

 

 

 

 

 

 

 

 

Income tax expense

 

442,943 

 

 

316,106 

 

 

222,109 

 

 

563,221 



 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

$

626,858 

 

$

661,183 

 

$

(273,808)

 

$

1,022,208 



 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

Earnings (loss) per share – basic

$

0.15 

 

$

0.16 

 

$

(0.06)

 

$

0.24 



 

 

 

 

 

 

 

 

 

 

 

Earnings (loss) per share – diluted

$

0.15 

 

$

0.15 

 

$

(0.06)

 

$

0.24 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

Weighted average shares of common stock outstanding

 

 

 

 

 

 

 

 

 

 

 

Basic

 

4,257,508 

 

 

4,242,508 

 

 

4,254,247 

 

 

4,242,196 



 

 

 

 

 

 

 

 

 

 

 

Weighted average shares of common stock outstanding

 

 

 

 

 

 

 

 

 

 

 

Diluted

 

4,257,508 

 

 

4,278,901 

 

 

4,254,247 

 

 

4,251,590 



 

 

 

 

 

 

 

 

 

 

 

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, 2020 (Unaudited)



 

 

 

 

 

 

 

Capital in

 

 

 

 

 

Total



 

Preferred

 

 

Common

 

 

excess of par

 

 

Retained

 

 

stockholders’



 

stock

 

 

stock

 

 

value

 

 

earnings

 

 

equity



 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at May 1, 2020

$

 -

 

$

42,265 

 

$

23,619,513 

 

$

35,214,021 

 

$

58,875,799 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

Restricted stock awards

 

 -

 

 

31 

 

 

15,198 

 

 

 -

 

 

15,229 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

 -

 

 

 -

 

 

 -

 

 

(900,666)

 

 

(900,666)



 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at July 31, 2020

$

 -

 

$

42,296 

 

$

23,634,711 

 

$

34,313,355 

 

$

57,990,362 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 -

 

 

 -

 

 

 -

 

 

626,858 

 

 

626,858 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at October 31, 2020

$

 -

 

$

42,296 

 

$

23,634,711 

 

$

34,940,213 

 

$

58,617,220 



 

 

 

 

 

 

 

 

 

 

 

 

 

 









 

 

 

 

 

 

 

 

 

 

 

 

 

 



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 



 

 

 

 

 

 

 

 

 

 

 

 

 

 













7

 


 

 

SigmaTron International, Inc.

Condensed Consolidated Statements of Cash Flows







 

 

 

 

 



 

 

 

 

 



 

Six

 

 

Six



 

Months Ended

 

 

Months Ended



 

October 31,

 

 

October 31,



 

2020

 

 

2019



 

(Unaudited)

 

 

(Unaudited)



 

 

 

 

 

Cash flows from operating activities

 

 

 

 

 

Net (loss) income

$

(273,808)

 

$

1,022,208 



 

 

 

 

 

Adjustments to reconcile net (loss) income

 

 

 

 

 

to net cash provided by operating activities:

 

 

 

 

 

Depreciation and amortization of property, machinery and equipment

 

2,529,756 

 

 

2,456,156 

Amortization of right-of-use operating lease assets

 

1,064,327 

 

 

1,080,505 

Restricted stock expense

 

15,229 

 

 

 -

Deferred income tax expense

 

(147,816)

 

 

20,982 

Amortization of intangible assets

 

177,424 

 

 

181,750 

Amortization of financing fees

 

76,248 

 

 

55,498 

Loss from disposal or sale of machinery and equipment

 

141,245 

 

 

17,598 

Changes in operating assets and liabilities

 

 

 

 

 

Accounts receivable

 

6,171,838 

 

 

1,516,504 

Inventories

 

3,239,189 

 

 

14,164,330 

Prepaid expenses and other assets

 

(423,910)

 

 

(43,197)

Refundable and prepaid income taxes

 

301,268 

 

 

220,427 

Income taxes payable

 

(66,904)

 

 

(17,485)

Trade accounts payable

 

(11,288,257)

 

 

(10,673,778)

Operating lease liabilities

 

104,135 

 

 

459,112 

Accrued expenses and wages

 

1,911,747 

 

 

932,247 



 

 

 

 

 

Net cash provided by operating activities

 

3,531,711 

 

 

11,392,857 



 

 

 

 

 

Cash flows from investing activities

 

 

 

 

 

Purchases of machinery and equipment

 

(2,470,920)

 

 

(588,334)

Advances on other receivables

 

(2,612,300)

 

 

 -



 

 

 

 

 

Net cash used in investing activities

 

(5,083,220)

 

 

(588,334)



 

 

 

 

 

Cash flows from financing activities

 

 

 

 

 

Proceeds under equipment notes

 

2,397,015 

 

 

 -

Payments of contingent consideration

 

 -

 

 

(57,537)

Payments under finance lease and sale leaseback agreements

 

(1,011,945)

 

 

(1,162,402)

Payments under equipment notes

 

(283,684)

 

 

(205,850)

Payments under building notes payable

 

(160,983)

 

 

(140,000)

Borrowings under revolving line of credit

 

164,562,061 

 

 

170,235,836 

Payments under revolving line of credit

 

(165,448,281)

 

 

(176,963,048)

Payments of debt financing costs

 

(326,081)

 

 

(46,866)



 

 

 

 

 

Net cash used in financing activities

 

(271,898)

 

 

(8,339,867)



 

 

 

 

 

8

 


 

 

Change in cash and cash equivalents

 

(1,823,407)

 

 

2,464,656 

Cash and cash equivalents at beginning of period

 

6,779,445 

 

 

1,005,810 



 

 

 

 

 

Cash and cash equivalents at end of period

$

4,956,038 

 

$

3,470,466 



 

 

 

 

 

Supplementary disclosures of cash flow information

 

 

 

 

 

Cash paid for interest

$

624,959 

 

$

1,053,706 

Cash paid for income taxes

 

134,355 

 

 

391,949 

Purchase of machinery and equipment financed

 

 

 

 

 

 under finance leases

 

 -

 

 

671,446 

Financing of insurance policy

 

302,074 

 

 

54,000 



 

 

 

 

 



 





 

9

 


 

SigmaTron International, Inc.

October 31, 2020

 

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, 2020 is not necessarily indicative of the results that may be expected for the year ending April 30, 2021.  The condensed consolidated balance sheet at April 30, 2020, was derived from audited annual financial statements but does not contain all of the footnotes disclosures from the annual financial statements.  For further information, refer to the condensed consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended April 30, 2020



COVID-19 and CARES Act



A pandemic of respiratory disease (abbreviated "COVID-19") began to spread globally, including to the United States, in early 2020. On March 11, 2020, the World Health Organization (WHO) declared COVID-19 to be a public health emergency of international concern. The full impact of the COVID-19 outbreak is inherently uncertain at the time of this report. The COVID-19 outbreak has resulted in travel restrictions and in some cases, prohibitions of non-essential activities, disruption and shutdown of certain businesses and greater uncertainty in global financial markets. The full extent to which COVID-19 impacts the Company’s business, results of operations and financial condition will depend on future developments, which are highly uncertain and cannot be predicted, including, but not limited to, the duration and spread of the outbreak within the U.S., China, Mexico, Vietnam and Taiwan, its severity, the actions to contain the virus or treat its impact, and how quickly and to what extent normal economic and operating conditions can resume.

10

 


 

SigmaTron International, Inc.

October 31, 2020

 

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Note B - Basis of Presentation - Continued



Even after COVID-19 has subsided, the Company may continue to experience materially adverse impacts to its business as a result of its global economic impact, including any recession that has occurred or may occur in the future. There are no comparable recent events which may provide guidance as to the effect of the spread of COVID-19, and, as a result, the ultimate impact of COVID-19, or a similar health epidemic or pandemic, is highly uncertain and subject to change. The Company has adopted several measures in response to the COVID-19 outbreak.  To date, the Company has been able to continue to meet the needs of its customers.  Although the Company cannot estimate the length or gravity of the impact of the COVID-19 outbreak at this time, if the pandemic continues, it will have a material adverse effect on the Company’s results of future operations, financial position, and liquidity in fiscal year 2021.



On March 27, 2020, President Trump signed into law the “Coronavirus Aid, Relief, and Economic Security (CARES) Act.” The CARES Act, among other things, includes provisions relating to refundable payroll tax credits, deferment of employer side social security payments, net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations, increased limitations on qualified charitable contributions, and technical corrections to tax depreciation methods for qualified improvement property. It also appropriated funds for the U.S. Small Business Administration (“SBA”) Paycheck Protection Program (“PPP Loan”) loans that are forgivable in certain situations to promote continued employment, as well as Economic Injury Disaster Loans to provide liquidity to small businesses harmed by COVID-19.



As further described in Note E, the Company has applied for, and has received, funds under the PPP Loan in the amount of $6,282,973. The application for these funds required the Company to, in good faith, certify that the current economic uncertainty made the loan request necessary to support the ongoing operations of the Company. This certification further required the Company to take into account its current business activity and its ability to access other sources of liquidity sufficient to support ongoing operations in a manner that is not significantly detrimental to the business. The receipt of these funds, and the forgiveness of the loan attendant to these funds, is dependent on the Company having initially qualified for the loan and qualifying for the forgiveness of such loan based on its future adherence to the forgiveness criteria.



Due to the size of the PPP Loan, it is subject to review, which introduces a layer of uncertainty. If, despite the Company’s actions and certification that it satisfied all eligibility requirements for the PPP Loan, it is later determined that it violated applicable laws or was otherwise ineligible to receive the PPP Loan, the Company may be required to repay the PPP Loan in its entirety in a lump sum or be subject to additional penalties, which could also result in adverse publicity and damage to the Company’s reputation. If these events were to transpire, they could have a material adverse effect on the Company’s business, results of operations, financial condition and liquidity in fiscal year 2021 and beyond.





 

11

 


 

SigmaTron International, Inc.

October 31, 2020

 

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Note C - Inventories, net



The components of inventory consist of the following:









 

 

 

 

 



 

 

 

 

 



October 31,

 

April 30,



2020

 

2020



 

 

 

 

 

Finished products

$

22,153,570 

 

$

20,998,329 

Work-in-process

 

4,483,188 

 

 

5,215,280 

Raw materials

 

58,544,737 

 

 

62,316,122 



 

85,181,495 

 

 

88,529,731 

Less excess and obsolescence reserve

 

(1,241,315)

 

 

(1,350,362)



$

83,940,180 

 

$

87,179,369 

 



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,



2020

 

2019

 

2020

 

2019



 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

$

626,858 

 

$

661,183 

 

$

(273,808)

 

$

1,022,208 

Weighted-average shares

 

 

 

 

 

 

 

 

 

 

 

Basic

 

4,257,508 

 

 

4,242,508 

 

 

4,254,247 

 

 

4,242,196 

Effect of dilutive stock options

 

 -

 

 

36,393 

 

 

 -

 

 

9,394 



 

 

 

 

 

 

 

 

 

 

 

Diluted

 

4,257,508 

 

 

4,278,901 

 

 

4,254,247 

 

 

4,251,590 



 

 

 

 

 

 

 

 

 

 

 

Basic earnings (loss) per share

$

0.15 

 

$

0.16 

 

$

(0.06)

 

$

0.24 



 

 

 

 

 

 

 

 

 

 

 

Diluted earnings (loss) per share

$

0.15 

 

$

0.15 

 

$

(0.06)

 

$

0.24 



Options to purchase 513,232 and 465,232 shares of common stock were outstanding at October 31, 2020 and 2019, respectively.  There were no options granted during the six month periods ended October 31, 2020 and 2019.  There was no stock option expense recognized for the three and six month periods ended October 31, 2020 and 2019.  There was no balance of unrecognized compensation expense related to the Company’s stock option plans at October 31, 2020 and 2019.  For the three month period ended October 31, 2020 and 2019,  314,740 and 147,706 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, 2020 and 2019, 306,420 and 241,465 shares, respectively, were not included in the diluted weighted average common shares outstanding calculation as they were anti-dilutive.

12

 


 

SigmaTron International, Inc.

October 31, 2020

 

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Note E - Long-term Debt



Debt and capital lease obligations consisted of the following at October 31, 2020 and April 30, 2020:







 

 

 

 

 



 

October 31,

 

 

April 30,



 

2020

 

 

2020



 

 

 

 

 

Debt:

 

 

 

 

 

Notes Payable - Banks

$

32,312,729 

 

$

33,472,125 

Notes Payable - Buildings

 

6,761,578 

 

 

6,922,561 

Notes Payable - Equipment

 

3,413,609 

 

 

1,300,278 

Unamortized deferred financing costs

 

(224,916)

 

 

(279,740)

Total debt

 

42,263,000 

 

 

41,415,224 

Less current maturities

 

5,380,120 

 

 

2,878,160 

Long-term debt

$

36,882,880 

 

$

38,537,064 



 

 

 

 

 

Finance lease obligations

$

2,775,072 

 

$

3,787,017 

Less current maturities

 

1,650,763 

 

 

1,902,295 

Total finance lease obligations, less current portion

$

1,124,309 

 

$

1,884,722 



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 1.75% at October 31, 2020).  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 of $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.





13

 


 

SigmaTron International, Inc.

October 31, 2020

 

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Note E - Long-term Debt - Continued 



On July 15, 2020 and August 7, 2020, the Company and U.S. Bank entered into amendments of the revolving credit facility.  The amendments revised the Fixed Charge Coverage Ratio.



On September 8, 2020, 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 80% of the Company’s Revolving Line Cap.  The amendment also imposes sublimits on categories of other investments to $4,000,000.



As of October 31, 2020, there was $25,500,000 outstanding and $4,286,052 of unused availability under the U.S. Bank facility compared to an outstanding balance of $26,884,494 and $13,850,575 of unused availability at April 30, 2020.  Deferred financing costs of $13,369 and $21,424 were capitalized during the three and six month periods ended October 31, 2020, respectively, which are amortized over the term of the agreement.  As of October 31, 2020 and April 30, 2020, the unamortized amount offset against outstanding debt was $179,328 and $218,062, respectively.    



On April 23, 2020, the Company received a PPP Loan from U.S. Bank, as lender, pursuant to the CARES Act, as administered by the SBA in the amount of $6,282,973. The PPP Loan, in the form of a promissory note, matures on April 23, 2022.  No additional collateral or guarantees were provided by the Company for the PPP Loan. The PPP Loan provides for customary events of default.  Under the CARES Act, loan forgiveness may be available for the sum of documented payroll costs, rent payments, mortgage interest and covered utilities during the 24-week period beginning on the date of loan disbursement.  The amount of loan forgiveness will be reduced if recipients terminate employees or reduce salaries during the covered period.  The Company may be required to repay any portion of the outstanding principal that is not forgiven, along with accrued interest, and it cannot provide any assurance that it will be eligible for loan forgiveness, or that any amount of the PPP Loan will ultimately be forgiven by the SBA.  All aspects of the PPP Loan are subject to review by the SBA, including without limitation, the Company’s eligibility for and the size of the loan.  The review procedures have not been made public.  The Company cannot predict the outcome of that review nor be assured that all or any part of the PPP Loan will be forgiven.  To the extent that all or part of the PPP Loan is not forgiven, the Company will be required to make payments, including interest accruing at an annual interest rate of 1.0%, beginning on the date of disbursement.



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 10,000,000 Renminbi, approximately $1,490,000 as of October 31, 2020, 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 March 14, 2024.  There was $498,275 outstanding under the facility at October 31, 2020 compared to an outstanding balance of $304,658 at April 30, 2020.



14

 


 

SigmaTron International, Inc.

October 31, 2020

 

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Note E - Long-term Debt - Continued 



The Company is in compliance with its financial covenant as of October 31, 2020.



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 of October 31, 2020, the unamortized amount included as a reduction to long-term debt was $24,214A final payment of approximately $4,347,778 is due on or before March 31, 2022The outstanding balance was $4,628,000 and $4,732,000 at October 31, 2020 and April 30, 2020, 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, 2020 the unamortized amount included as a reduction to long-term debt was $21,374A final payment of approximately $1,505,000 is due on or before March 31, 2022The outstanding balance was $1,602,000 and $1,638,000 at October 31, 2020 and April 30, 2020, respectively. 



The Company entered into a mortgage agreement on March 3, 2020, in the amount of $556,000, with The Bank and Trust SSB to purchase the property that serves as the Company’s warehousing and distribution center in Del Rio, Texas.  The note requires the Company to pay monthly installment payments in the amount of $6,103, bears interest at a fixed rate of 5.75% per year and is payable over a 120 month period.  The outstanding balance was $531,578 and $552,561 at October 31, 2020 and April 30, 2020, 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 mature from November 2021 through May 2023, with quarterly installment payments ranging from $11,045 to $37,941 and a fixed interest rate ranging from 6.65% to 8.00%.



The Company routinely enters into secured note agreements with FGI Equipment Finance LLC to finance the purchase of equipment. The terms of these secured note agreements mature from March 2025 through October 2025, with quarterly installment payments ranging from $10,723 to $69,439 and a fixed interest rate of 8.25%.



15

 


 

SigmaTron International, Inc.

October 31, 2020

 

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Note E - Long-term Debt - Continued 



Annual maturities of the Company’s debt, net of deferred financing fees for the remaining periods as of October 31, 2020, are as follows:







 

 

 

 

 

 

 

 

 

 

 

 



 

Bank

 

Building

 

Equipment

 

Total



 

 

 

 

 

 

 

 

 

 

 

 

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

2021

$

4,168,854 

 

$

161,593 

 

$

438,870 

 

$

4,769,317 

For the fiscal years ending April 30:

2022

 

27,420,684 

 

 

6,135,090 

 

 

877,428 

 

 

34,433,202 



2023

 

 -

 

 

47,752 

 

 

652,117 

 

 

699,869 



2024

 

498,275 

 

 

50,571 

 

 

592,628 

 

 

1,141,474 



2025

 

 -

 

 

53,557 

 

 

633,149 

 

 

686,706 



2026

 

 -

 

 

56,719 

 

 

219,417 

 

 

276,136 



Thereafter

 

 -

 

 

256,296 

 

 

 -

 

 

256,296 



 

$

32,087,813 

 

$

6,761,578 

 

$

3,413,609 

 

$

42,263,000 



 

 

 

 

 

 

 

 

 

 

 

 



Finance Lease and Sales Leaseback Obligations



The Company enters into various finance lease and sales leaseback agreements.  The terms of the lease agreements mature through November 2023, with monthly installment payments ranging from $1,455 to $40,173 and a fixed interest rate ranging from 3.75% to 12.73%.  





Note F - Income Tax



The income tax expense was $442,943 for the three month period ended October 31, 2020 compared to an income tax expense of $316,106 for the same period in the prior fiscal year.  The Company’s effective tax rate was 41.40% and 32.35% for the quarters ended October 31, 2020 and 2019, respectively.  The income tax expense was $222,109 for the six month period ended October 31, 2020 compared to an income tax expense of $563,221 for the same period in the prior fiscal year.  The Company’s effective tax rate was (429.63)% and 35.52% for the six month period ended October 31, 2020 and 2019, respectively.  The increase in income tax expense and effective tax rate for the three month period ended October 31, 2020 compared to the same period in the previous year is due to an increase in income and variations in income earned by jurisdiction in the current period compared to the same period in the previous year. The decrease in income tax expense and effective tax rate for the six month period ended October 31, 2020 compared to the same period in the previous year is due to a decrease in income in the current six month period compared to the same period in the previous year.  The negative effective tax rate in the current six month period is due to an overall pre-tax loss recognized in the current period but recognition of tax expense due to the mix of income by jurisdiction.     



As described in Note E, the Company received a PPP Loan under the CARES Act of $6,282,963. For federal income tax purposes, the CARES Act expressly provides that any forgiveness or cancellation of all or part of such loans will not be treated as income for tax purposes. It is expected, however, that if the loan is deemed forgiven any deductions for the covered expenses that gave rise to the loan forgiveness will be disallowed to prevent a double tax benefit. As of October 31, 2020, the loan has not been forgiven and thus the expenses have not been disallowed for federal income tax purposes.

16

 


 

SigmaTron International, Inc.

October 31, 2020

 

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Note F - Income Tax - Continued



On November 18, 2020 the IRS issued Revenue Ruling 2020-27 which holds that a taxpayer’s covered expenses are not deductible if the taxpayer reasonably expects the loan to be forgiven. If the Company’s eligible expenses are deemed nondeductible prior to loan forgiveness, it is expected that the Company’s current tax liability will increase and that a deferred tax asset will be established related to those expenses.  The Company has not changed its plans to indefinitely reinvest the earnings of the Company’s foreign subsidiaries.  The cumulative amount of unremitted earnings for which U.S. income taxes have not been recorded is $4,681,000 as of October 31, 2020. 



Note G - Commitments and Contingencies



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



Note H - 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, lower of cost or net realizable value for inventory, deferred income, deferred taxes, uncertain tax positions, valuation allowance for deferred taxes and valuation of long-lived assets.  Actual results could materially differ from these estimates.



The potential impact of future disruptions and continued economic uncertainty over COVID-19 may have a significant adverse impact on the timing of delivery of customer orders and the levels of future customer orders.  It is reasonably possible that these potential adverse impacts may result in the recognition of material impairments of the Company’s long-lived assets or other related charges in future periods.

17

 


 

SigmaTron International, Inc.

October 31, 2020

 

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Note H - Critical Accounting Policies - Continued



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

 

 

2020

 

 

2019

 

 

2020

 

 

2019



Industrial Electronics

 

$

35,654,079 

 

$

41,398,201 

 

$

72,271,337 

 

$

84,246,913 



Consumer Electronics

 

 

30,671,077 

 

 

28,815,556 

 

 

51,839,316 

 

 

55,474,743 



Medical / Life Sciences

 

 

3,293,268 

 

 

4,641,555 

 

 

6,032,727 

 

 

9,143,637 



Total Net Trade Sales

 

$

69,618,424 

 

$

74,855,312 

 

$

130,143,380 

 

$

148,865,293 



 

 

 

 

 

 

 

 

 

 

 

 

 



During the three and six month periods ending October 31, 2020,  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, 2020.  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, 2020, with an expected duration of greater than one year.



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



Deferred income tax assets and liabilities are determined based on differences between financial reporting and tax basis of assets and liabilities, and are measured using the enacted tax rates and laws that are expected to be in effect when the differences are expected to reverse.  In evaluating the Company’s ability to recover its deferred tax assets within the jurisdiction from which they arise, the Company considers all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies and recent financial operations.  In projecting future taxable income, the Company begins with historical results and changes in accounting policies, and incorporates assumptions including the amount of future state, federal and foreign pre-tax operating income, the reversal of temporary differences, and the implementation of feasible and prudent tax planning strategies.  These assumptions require significant judgment and estimates by management about the forecasts of future taxable income and are consistent with the plans and estimates the Company uses to manage the underlying businesses.  In evaluating the objective evidence that historical results provide, the Company considers three years of cumulative operating income and/or loss.  Valuation allowances are established when necessary to reduce deferred income tax assets to an amount more likely than not to be realized.    The Company’s valuation allowance was $645,538 and $ 989,194 as of October 31, 2020 and April 30, 2020, respectively.



Investment in Wagz - As more fully described in Note I - Related Parties, the Company has recorded an investment in Wagz Inc. (“Wagz”), a privately held company whose equity does not have a readily

18

 


 

SigmaTron International, Inc.

October 31, 2020

 

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Note H - Critical Accounting Policies - Continued



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.  At October 31, 2020 and April 30, 2020, the Company continued to recognize the fair value of the Wagz common stock at $600,000.    



On May 29, 2020, Wagz entered into a Convertible Secured Promissory Note with the Company in the principal sum of up to $4,052,478.  The outstanding principal amount of the Note is due and payable on the earliest to occur of (1) August 31, 2021; (2) upon the closing of a sale of all or substantially all of the assets or common stock of  Wagz; or (3) an event of default (the Maturity Date). Interest is payable at the rate of four percent (4%) per annum and is payable on the Maturity Date. The Note is collateralized against substantially all assets of Wagz.  At October 31, 2020, $3,778,179 was outstanding under other receivables compared to $768,500 at April 30, 2020.



On June 4, 2020, the Company and Wagz announced that they had executed a letter of intent (“LOI”) relating to a proposed business combination.  Subject to the terms and conditions set forth in the LOI, the Company expects to issue approximately 2,270,000 shares of its common stock that would result in the stockholders of Wagz owning in the aggregate approximately one-third of the combined company.  The parties expect the transaction to close by the end of the third quarter of fiscal year 2021 and the acquisition remains subject to achievement of certain milestones and satisfaction of conditions by both parties prior to closing such as finalizing a material definitive agreement,  the Company raising additional capital that it projects will be needed for the expanded operations, and the approval by the stockholders of both the Company and Wagz



New Accounting Standards:



In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” ASU 2016-13, as amended by ASU 2019-04 and ASU 2019-05, 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.



In December 2019, the FASB issued ASU 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes”, which simplifies accounting for income taxes by removing certain exceptions to intra-period allocations, investments, calculations in interim periods and to improve consistent application. ASU 2019-12 is effective for annual and interim reporting periods beginning



19

 


 

SigmaTron International, Inc.

October 31, 2020

 

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Note H - Critical Accounting Policies – Continued



after December 15, 2020. The Company is currently evaluating the new guidance and has not determined the impact this ASU may have on its consolidated financial statements.



In March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting”, which provides optional guidance for a period of time to ease the potential burden in accounting for the transition from reference rates that are expected to be discontinued. Regulators and market participants in various jurisdictions have undertaken efforts to eliminate certain reference rates and introduce new reference rates that are based on a larger and more liquid population of observable transactions. The changes provide optional expedients and exceptions for applying US GAAP to contract, hedging relationships and other transactions affected by reference rate reform. ASU 2020-04 is effective for all entities as of March 12, 2020 and can be adopted no later than December 31, 2022. 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 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 the most 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. Accordingly, the Company recognized the fair value of the assets received from Wagz and derecognized the receivables from Petzila. 



In November 2020, Wagz sought short-term financing for its operations and secured a commitment from Angel Business Credit, LLC (“ABC”) for a loan of $250,000 conditioned on Wagz granting ABC a security interest in its assets and Gary R. Fairhead executing a personal guaranty.  Mr. Fairhead is the Company’s President and CEO; his personal guaranty requires the approval of the Audit Committee of the Company’s Board of Directors.  After consideration, the Audit Committee determined that 

20

 


 

SigmaTron International, Inc.

October 31, 2020

 

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Note I - Related Parties Continued



Mr. Fairhead’s guaranty was in the best interests of the Company and approved the guaranty.  The loan closed on November 12, 2020, and its principal, plus interest equal to $5,000, are due on the maturity date, December 10, 2020.  The loan was paid in full on December 8, 2020.  As a result, Mr. Fairhead’s guaranty was cancelled and ABC’s security interest was terminated.



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



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SigmaTron International, Inc.

October 31, 2020

 

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Note J – Leases Continued



obligations on the Company’s consolidated balance sheet. Short term leases with an initial term of 12 months or less are not presented on the balance sheet with expense recognized as incurred.



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



 

 

 

 

 

 

 



 

 

 

October 31,

 

 

April 30,



Classification

 

 

2020

 

 

2020

Operating Leases:

 

 

 

 

 

 

 

Right-of-use Assets

Other assets

 

$

7,333,290