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Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations.
In addition to historical financial information, this discussion of the business of SigmaTron International, Inc. (“SigmaTron”), its wholly-owned subsidiaries Standard Components de Mexico S.A., AbleMex, S.A. de C.V., Digital Appliance Controls de Mexico, S.A. de C.V., Spitfire Controls (Vietnam) Co. Ltd., Spitfire Controls (Cayman) Co. Ltd., and Wagz, Inc. (“Wagz”), wholly-owned foreign enterprises Wujiang SigmaTron Electronics Co., Ltd. and Wujiang SigmaTron Electronic Technology Co., Ltd. and international procurement office SigmaTron International Inc. Taiwan Branch (collectively, the “Company”) and other Items in this Quarterly Report on Form 10-Q contain forward-looking statements concerning the Company’s business or results of operations. Words such as “continue,” “anticipate,” “will,” “expect,” “believe,” “plan,” and similar expressions identify forward-looking statements. These forward-looking statements are based on the current expectations of the Company. Because these forward-looking statements involve risks and uncertainties, the Company’s plans, actions and actual results could differ materially. Such statements should be evaluated in the context of the direct and indirect risks and uncertainties inherent in the Company’s business including, but not necessarily limited to, the risks inherent in any merger, acquisition or business combination (including the December 31, 2021 acquisition of Wagz); the Company’s continued dependence on certain significant customers; the continued market acceptance of products and services offered by the Company and its customers; pricing pressures from the Company’s customers, suppliers and the market; the activities of competitors, some of which may have greater financial or other resources than the Company; the variability of the Company’s operating results; the results of long-lived assets and goodwill impairment testing; the ability to achieve the expected benefits of acquisitions as well as the expenses of acquisitions; the collection of aged account receivables; the variability of the Company’s customers’ requirements; the impact of inflation on the Company’s operating results; the availability and cost of necessary components and materials; the impact acts of war may have to the supply chain; the ability of the Company and its customers to keep current with technological changes within its industries; regulatory compliance, including conflict minerals; the continued availability and sufficiency of the Company’s credit arrangements; the costs of borrowing under the Company’s senior and subordinated credit facilities, including under the rate indices that replaced LIBOR, and the recently increasing interest rates; the ability to meet the Company’s financial and restrictive covenants under its loan agreements; changes in U.S., Mexican, Chinese, Vietnamese or Taiwanese regulations affecting the Company’s business; the turmoil in the global economy and financial markets; the spread of COVID-19 and variants (commonly known as “COVID-19”) which has threatened the Company’s financial stability by causing a disruption to the Company’s global supply chain, and caused plant closings or reduced operations thus reducing output at those facilities; the continued availability of scarce raw materials, exacerbated by global supply chain disruptions, necessary for the manufacture of products by the Company; the stability of the U.S., Mexican, Chinese, Vietnamese and Taiwanese economic, labor and political systems and conditions; global business disruption caused by the Russia invasion of Ukraine and related sanctions; currency exchange fluctuations; and the ability of the Company to manage its growth. These and other factors which may affect the Company’s future business and results of operations are identified throughout the Company’s Annual Report on Form 10-K, and as risk factors, may be detailed from time to time in the Company’s filings with the Securities and Exchange Commission. These statements speak as of the date of such filings, and the Company undertakes no obligation to update such statements in light of future events or otherwise unless otherwise required by law.
Overview:
The Company operates in two reportable segments as an independent provider of EMS, and as a provider of products to the Pet Tech market.
The EMS segment includes printed circuit board assemblies, electro-mechanical subassemblies and completely assembled (box-build) electronic products.
In connection with the production of assembled products, the EMS segment provides services to its customers, including (1) automatic and manual assembly and testing of products; (2) material sourcing and procurement; (3) manufacturing and test engineering support; (4) design services; (5) warehousing and distribution services; (6) assistance in obtaining product approval from governmental and other regulatory bodies and (7) compliance reporting. The Company provides these services through an international network of facilities located in the United States, Mexico, China, Vietnam and Taiwan.
The Pet Tech reportable segment offers electronic products such as the Freedom Smart Dog Collar™, a wireless geo-mapped fence and wellness system, along with apparel and accessories. The EMS segment produces the Freedom Smart Dog Collar™ sold by the Pet Tech segment.
On April 28, 2023, with an effective date of April 1, 2023, the Company entered into a Stock Purchase Agreement (“SPA”) by and among the Company, Wagz, Vynetic LLC, a Delaware limited liability company (“Buyer”), and Terry B. Anderton, co-founder of Wagz and principal of Buyer (“Anderton”), pursuant to which the Company sold to Buyer 81% of the issued and outstanding shares of common stock of Wagz (the “Wagz Shares”) for the purchase price of one dollar. Under the SPA, the Company also agreed to provide a $900,000 working capital term loan (the “Wagz Loan”) to Wagz during the month of April 2023, while Wagz, Buyer and Anderton are actively seeking other capital and financing to support Wagz going forward. Pursuant to such agreement, Wagz issued to the Company a Promissory Note (the “Wagz Note”), pursuant to which the Company agreed to provide the Wagz Loan. The Wagz Note bears interest at a rate of 6% per annum, with the first payment of accrued interest due on March 31, 2024, followed by 24 equal monthly payments of principal and interest. A final payment is due on March 31, 2026. The Wagz Note is unsecured and contains customary covenants and events of default.
The Company relies on numerous third-party suppliers for components used in the Company’s production process. Certain of these components are available only from single-sources or a limited number of suppliers. In addition, a customer’s specifications may require the Company to obtain components from a single-source or a small number of suppliers. The loss of any such suppliers could have a material impact on the Company’s results of operations. Further, the Company could operate at a cost disadvantage compared to competitors who have greater direct buying power from suppliers. The Company does not enter into long-term purchase agreements with major or single-source suppliers. The Company believes that short-term purchase orders with its suppliers provides flexibility, given that the Company’s orders are based on the changing needs of its customers.
Sales can be an unreliable indicator of the Company’s financial performance. Sales levels can vary considerably among customers and products depending on the type of services (turnkey versus consignment) rendered by the Company and the demand by customers. Consignment orders require the Company to perform manufacturing services on components and other materials supplied by a customer, and the Company charges only for its labor, overhead and manufacturing costs, plus a profit. In the case of turnkey orders, the Company provides, in addition to manufacturing services, the components and other materials used in assembly. Turnkey contracts, in general, have a higher dollar
volume of sales for each given assembly, owing to inclusion of the cost of components and other materials in net sales and cost of goods sold. Variations in the number of turnkey orders compared to consignment orders can lead to significant fluctuations in the Company’s revenue and gross margin levels. Consignment orders accounted for less than 1% of the Company’s revenues for the three and nine month periods ended January 31, 2023 and January 31, 2022.
The Company’s international footprint provides our customers with flexibility within the Company to manufacture in China, Mexico, Vietnam or the U.S. We believe this strategy will continue to serve the Company well as its customers continuously evaluate their supply chain strategies.
On December 31, 2021, the Company acquired 100% of the stock of Wagz under the terms of the Agreement and Plan of Merger dated July 19, 2021, as amended by the First Amendment to Agreement and Plan of Merger dated December 7, 2021 (the “Merger Agreement”). Wagz has developed and brought to market a high tech pet collar and has multiple other products in development. Wagz is an IoT company which both owns intellectual property and secures recurring revenue through subscriptions for its services. The results of Wagz have been included in the Company's consolidated financial results since the date of acquisition. The total consideration for the acquisition of Wagz was $23,656,233. The Company began its Pet Tech operations after the December 2021 acquisition of Wagz. On April 28, 2023, with an effective date of April 1, 2023, the Company sold a majority of its interest in Wagz, which operated the Pet Tech business.
The Company reported a pre-tax loss for the three months ended January 31, 2023 of $23,134,440. The results include a non-cash goodwill impairment charge of $13,320,534 and a non-cash intangible assets impairment charge of $9,527,773 related to the Pet Tech segment. See Note H – Significant Accounting Policies for more information. Pre-tax loss for the three months ended January 31, 2022 was $1,979,889. The Company recorded revenue of $93,219,753 and $93,682,451 in the three month periods ended January 31, 2023 and January 31, 2022, respectively.
The backlog for the EMS segment remains strong for the three and nine month periods ending January 31, 2023. Despite the continuing challenges in the electronic component marketplace, sales are running at high levels for the Company. The Company continues to see strength in the industrial electronics market, partially offset by a decrease in the consumer electronics market. Existing customers are slowly launching new products and the Company has several new opportunities that it plans to pursue. However, the Company does not foresee any near-term solution to the supply chain challenges that it has experienced over at least the last 18 months, and the Company has not seen any indication from the semiconductor companies that suggests otherwise. The Company expects the challenges to continue for fiscal 2024, based on what is known at this time. These supply chain challenges cause inventory to grow significantly and put pressure on cash flow. It also leads to manufacturing inefficiencies due to the uncertainty of when parts will be received.
The Pet Tech segment had a $26,027,124 pre-tax loss for the three month period ending January 31, 2023, which included a non-cash goodwill impairment charge of $13,320,534 and a non-cash intangible assets impairment charge of $9,527,773 . The Pet Tech segment sales were negatively impacted by a shortage of parts for production for several months, resulting in missing the holiday season for sales, a slowing economy relating to inflation and a slower than anticipated acceptance of the product by the market.
The Company reported a pre-tax loss for the nine month period ending January 31, 2023. Pre-tax loss for the nine month period ended January 31, 2023 was $19,100,526. The results include a non-cash goodwill impairment charge of $13,320,534 and a non-cash intangible assets impairment charge of
$9,527,773 related to the Pet Tech segment. See Note H – Significant Accounting Policies for more information. Pre-tax income for the nine month period ended January 31, 2022 was $12,237,489, which included forgiveness of the Company’s Small Business Administration Paycheck Protection Program Loan in the amount of $6,282,973 and a non-cash impairment charge of $6,300,235. The Company recorded revenue of $307,469,352 and $279,638,499 in the nine month periods ended January 31, 2023 and January 31, 2022, respectively.
The Pet Tech segment, had a $30,981,811 pre-tax loss for the nine month period ending January 31, 2023 which included a non-cash goodwill impairment charge of $13,320,534 and a non-cash intangible assets impairment charge of $9,527,773.
Results of Operations:
Consolidated Results
The following table sets forth the Company’s consolidated results of operations for the periods indicated.
| | | | | | |
| | Three Months Ended |
| | January 31, | | January 31, |
| | 2023 | | 2022 |
| | | | | | |
Net sales | | $ | 93,219,753 | | $ | 93,682,451 |
Cost of products sold | | | 82,193,416 | | | 81,257,305 |
Gross profit | | | 11,026,337 | | | 12,425,146 |
Selling and administrative expenses | | | 9,154,376 | | | 7,758,582 |
Impairment of notes receivable and investment | | | - | | | 6,300,235 |
Impairment of goodwill and other long-lived assets | | | 23,096,771 | | | - |
Operating loss | | | (21,224,810) | | | (1,633,671) |
Gain on extinguishment of long-term debt | | | - | | | - |
Other income | | | (496,507) | | | (35,813) |
Interest expense, net | | | 2,406,137 | | | 382,031 |
Loss before income tax expense | | | (23,134,440) | | | (1,979,889) |
Income tax (benefit) expense | | | (56,776) | | | 744,408 |
Net loss | | $ | (23,077,664) | | $ | ($2,724,297) |
Net Sales
Net sales decreased $462,698, or -0.5%, to $93,219,753 for the three month period ended January 31, 2023, compared to $93,682,451 for the same period in the prior fiscal year. The Federal Reserve has raised interest rates several times during the current fiscal quarter, which has negatively affected customer demand in the consumer electronics markets, but has not had the same effect in the industrial electronics and medical/life science markets. As a result, the Company’s sales increased for the three month period ended January 31, 2023, in industrial electronics and medical/life science compared to the same period in the prior fiscal year. The increase in sales was partially offset by a decrease in sales in consumer electronics.
Costs of products sold
Cost of products sold increased $936,111, or 1.2%, to $82,193,416 (88.2% of net sales) for the three month period ended January 31, 2023, compared to $81,257,305 (86.7% of net sales) for the same period in the prior fiscal year. The increase in cost of products sold as a percentage of sales is primarily due to higher material, logistics and other operating costs as a result of higher sales volumes and the impact of global supply chain disruptions that caused factory inefficiencies. Labor costs and other manufacturing costs were higher for the three month period ended January 31, 2023, than in the same period in the prior fiscal year, primarily due to inflationary pressures.
Gross profit
Gross profit margin was 11.8% of net sales, for the three month period ended January 31, 2023, compared to 13.3% for the same period in the prior fiscal year. The decrease in gross margins as a percentage of sales is primarily due to higher material, labor and other manufacturing costs during the third quarter of fiscal 2023, compared to the third quarter of fiscal 2022.
Selling and administrative expenses
Selling and administrative expenses increased $1,395,794, or 18.0% to $9,154,376 (9.8% of net sales) for the three month period ended January 31, 2023, compared to $7,758,582 (8.3% of net sales) for the same period in the prior fiscal year. The increase in selling and administrative expenses primarily relates to the Pet Tech segment which consisted of $2,795,786 for the three month period ended January 31, 2023. Wagz was acquired on December 31, 2021, and therefore, comparable information for the same period in the prior fiscal year consists of one month of activity. In addition, the EMS segment selling and administrative expense decreased for the three month period ended January 31, 2023, due to a decrease in bonus expense, partially offset with an increase in financing fees and higher costs due to inflationary pressures.
Impairment of goodwill and other long-lived assets
In connection with the preparation and review of the financial statements for the quarter ended January 31, 2023, the Company revised the financial projections for its Pet Tech segment. The revised projections resulted in a triggering event for the Company’s goodwill and long-lived asset groups consisting of patents and trade names. As a result, the Company concluded that the carrying amount for goodwill and the long-lived asset groups was impaired and not expected to be recovered. Accordingly, a non-cash pre-tax goodwill impairment charge of $13,320,534 and a non-cash intangible assets impairment charge of $9,527,773, was recorded for the Company’s Pet Tech segment for the quarter ended January 31, 2023.
Interest expense, net
Interest expense, net, increased to $2,406,137 for the three month period ended January 31, 2023, compared to $382,031 for the same period in the prior fiscal year. The increase relates to higher average debt levels as well as increased interest rates for the three month period ended January 31, 2023.
Income tax expense
Income tax expense decreased $801,184 to an income tax benefit of $56,776 for the three month period ended January 31, 2023, compared to $744,408 for the same period in the prior fiscal year. The effective tax rate decreased to 0.25% for the three month period ended January 31, 2023, compared to 37.6% for the same period in the prior fiscal year due primarily due to variations in income earned by jurisdiction.
Net Loss
Net loss increased $20,353,367, to $23,077,664 for the three month period ended January 31, 2023, compared to $2,724,297 for the same period in the prior fiscal year. The increased net loss primarily relates to losses incurred for the Pet Tech segment (acquired December 31, 2021) including the goodwill and intangible assets impairment charge, higher interest expense due to higher average debt levels and increased interest rates, partially offset by a decrease in bonus expense.
EMS Segment
The following table sets forth the Company’s results of operations for the EMS segment for the periods indicated.
| | | | | | |
| | Three Months Ended |
| | January 31, | | January 31, |
| | 2023 | | 2022 |
| | | | | | |
Net sales | | $ | 92,736,725 | | $ | 93,478,557 |
Cost of products sold | | | 81,575,820 | | | 81,068,590 |
Gross profit | | | 11,160,905 | | | 12,409,967 |
Selling and administrative expenses | | | 6,358,591 | | | 6,979,780 |
Impairment of notes receivable and investment | | | - | | | 6,300,235 |
Operating income (loss) | | $ | 4,802,314 | | $ | (870,048) |
Net Sales
Net sales decreased $741,832, or -0.8%, to $92,736,725 for the three month period ended January 31, 2023, compared to $93,478,557 for the same period in the prior fiscal year. The Federal Reserve has raised interest rates several times during the current fiscal quarter, which has negatively affected customer demand in the consumer electronics markets, but has not had the same effect in the industrial electronics and medical/life science markets. As a result,the Company’s sales increased for the three month period ended January 31, 2023, in industrial electronics and medical/life science compared to the prior year. The increase in sales was partially offset by a decrease in sales in consumer electronics.
Costs of products sold
Cost of products sold increased $507,230, or 0.6%, to $81,575,820 (88.0% of net sales) for the three month period ended January 31, 2023, compared to $81,068,590 (86.7% of net sales) for the same period in the prior fiscal year. The increase in cost of products sold as a percentage of sales was
primarily due to higher material, logistics and other operating costs as a result of higher sales volumes and the impact of global supply chain disruptions that caused factory inefficiencies. Labor costs and other manufacturing costs were higher for the three month period ended January 31, 2023, than in the same period in the prior fiscal year, primarily due to inflationary pressures.
Gross profit
Gross profit margin was 12.0% of net sales, for the three month period ended January 31, 2023, compared to 13.3% for the same period in the prior fiscal year. The decrease in gross margins as a percentage of sales was primarily due to higher material, labor and other manufacturing costs during the third quarter of fiscal 2023, compared to the third quarter of fiscal 2022.
Selling and administrative expenses
Selling and administrative expenses decreased $621,189, or 8.9% to $6,358,591 (6.9% of net sales) for the three month period ended January 31, 2023, compared to $6,979,780 (7.5% of net sales) for the same period in the prior fiscal year. Selling and administrative expenses decreased for the three month period ended January 31, 2023, primarily due to a decrease in bonus expense, partially offset by an increase in financing fees.
Operating income/(loss)
Operating income (loss) increased $5,672,362, to $4,802,314 (5.2% of net sales) for the three month period ended January 31, 2023, compared to an operating loss of $(870,048) (-0.9% of net sales) for the same period in the prior fiscal year. The increase was primarily due to a non-cash impairment charge of $6,300,235 that was recorded for the same period in the prior fiscal year.
Pet Tech Segment
The following table sets forth the Company’s consolidated results of operations for the Pet Tech segment for the periods indicated. The three months ended January 31, 2022 consists of one month of activity, as the business was acquired on December 31, 2021.
| | | | | | |
| | Three Months Ended |
| | January 31, | | January 31, |
| | 2023 | | 2022 |
| | | | | | |
Net sales | | $ | 483,028 | | $ | 203,894 |
Cost of products sold | | | 617,596 | | | 188,715 |
Gross profit | | | (134,568) | | | 15,179 |
Selling and administrative expenses | | | 2,795,785 | | | 778,802 |
Impairment of goodwill and other long-lived assets | | | 23,096,771 | | | - |
Operating loss | | $ | (26,027,124) | | $ | (763,623) |
Net sales
Net sales increased $279,134, or 136.9%, to $483,028 for the three month period ended January 31, 2023 compared to $203,894 for the same period in the prior fiscal year. Sales for the period are
primarily comprised of hardware and accessories, as well as recurring subscription revenue. The three months ended January 31, 2022 consists of one month of activity, as the business was acquired on December 31, 2021.
Cost of products sold
Cost of products sold increased $428,881, to $617,596 (127.9% of net sales) for the three month period ended January 31, 2023, compared to $188,715 (92.6% of net sales) for the same period in the prior fiscal year. The increase as a percentage of sales is primarily due to material cost increases and lower sales volumes in the current period.
Gross profit
Gross profit margin was -27.9% of net sales for the three month period ended January 31, 2023 compared to gross profit margin of 7.4% for the same period in the prior fiscal year. The gross margin as a percentage of sales decreased primarily due to material price increases and lower sales volumes in the current period.
Selling and administrative expenses
Selling and administrative expenses increased $2,016,983, to $2,795,785 for the three month period ended January 31, 2023, compared to $778,802 for the same period in the prior fiscal year. Selling and administrative costs were primarily comprised of research and development costs for new products expected to launch in fiscal 2024, selling and marketing expenses, as well as general and administrative expenses.
Impairment of goodwill and other long-lived assets
In connection with the preparation and review of the financial statements for the quarter ended January 31, 2023, the Company revised the financial projections for its Pet Tech segment. The revised projections resulted in a triggering event for the Company’s goodwill and long-lived asset groups consisting of patents and trade names. As a result, the Company concluded that the carrying amount for goodwill and the long-lived asset groups was impaired and not expected to be recovered. Accordingly, a non-cash pre-tax goodwill impairment charge of $13,320,534 and a non-cash intangible assets impairment charge of $9,527,773, was recorded for the Company’s Pet Tech segment for the quarter ended January 31, 2023.
Operating loss
Operating loss increased $25,263,501, to $26,027,124 for the three month period ended January 31, 2023, compared to $763,623 for the same period in the prior fiscal year. The increased loss was primarily due to the non-cash goodwill impairment charge of $13,320,534, the non-cash intangible assets impairment charge of $9,527,773 and lower than expected sales.
Consolidated Results
The following table sets forth the Company’s consolidated results of operations for the periods indicated.
| | | | | | |
| | Nine Months Ended |
| | | January 31, | | | January 31, |
| | | 2023 | | | 2022 |
| | | | | | |
Net sales | | $ | 307,469,352 | | $ | 279,638,499 |
Cost of products sold | | | 271,443,967 | | | 245,853,289 |
Gross profit | | | 36,025,385 | | | 33,785,210 |
Selling and administrative expenses | | | 27,260,751 | | | 20,675,353 |
Impairment of notes receivable and investment | | | - | | | 6,300,235 |
Impairment of goodwill and other long-lived assets | | | 23,096,771 | | | - |
Operating (loss) income | | | (14,332,137) | | | 6,809,622 |
Gain on extinguishment of long-term debt | | | - | | | (6,282,973) |
Other income | | | (568,137) | | | (109,516) |
Interest expense, net | | | 5,336,526 | | | 964,622 |
(Loss) income before income tax expense | | | (19,100,526) | | | 12,237,489 |
Income tax expense | | | 1,728,591 | | | 3,014,865 |
Net (loss) income | | $ | ($20,829,117) | | $ | $9,222,624 |
Net Sales
Net sales increased $27,830,853, or 10.0%, to $307,469,352 for the nine month period ended January 31, 2023, compared to $279,638,499 for the same period in the prior fiscal year. The Federal Reserve has raised interest rates several times during the first nine months of fiscal 2023, which has negatively affected customer demand in the consumer electronics markets, but has not had the same effect in the industrial electronics and medical/life science markets. As a result, the Company’s sales increased for the nine month period ended January 31, 2023, in industrial electronics and medical/life science compared to the same period in the prior fiscal year. The increase in sales was partially offset by a decrease in sales in consumer electronics. Net sales were higher due to certain customer price increases implemented as a result of increased raw material and other operating costs that occurred during the nine month period ended January 31, 2023, as compared to the same period last fiscal year.
Costs of products sold
Cost of products sold increased $25,590,678, or 10.4%, to $271,443,967 (88.3% of net sales) for the nine month period ended January 31, 2023, compared to $245,853,289 (87.9% of net sales) for the same period in the prior fiscal year. The increase was primarily due to higher material, logistics and other operating costs as a result of higher sales volumes and the impact of global supply chain disruptions that caused factory inefficiencies. Labor costs and other manufacturing costs were higher for the nine month period ended January 31, 2023, than in the same period in the prior fiscal year, primarily due to inflationary pressures.
Gross profit
Gross profit margin was 11.7% of net sales, for the nine month period ended January 31, 2023, compared to 12.1% for the same period in the prior fiscal year. The decrease in gross margins as a percentage of sales is due to higher material, labor and other manufacturing costs during the nine month period ended January 31, 2023, than in the same period in the prior fiscal year.
Selling and administrative expenses
Selling and administrative expenses increased $6,585,398, or 31.9% to $27,260,751 (8.9% of net sales) for the nine month period ended January 31, 2023, compared to $20,675,353 (7.4% of net sales) for the same period in the prior fiscal year. The increase in selling and administrative expenses primarily relates to the Pet Tech segment which consisted of $7,866,222 for the nine month period ended January 31, 2023. Wagz was acquired on December 31, 2021, and therefore, comparable information for the same period in the prior fiscal year consists of one month of activity. In addition, the EMS segment selling and administrative expenses decreased for the nine month period ended January 31, 2023, primarily due to a decrease in bonus expense, partially offset by an increase in other professional fees related to the new and amended credit agreements finalized during the first quarter of fiscal year 2023, an increase in financing fees and higher costs due to inflationary pressures.
Impairment of goodwill and other long-lived assets
In connection with the preparation and review of the financial statements for the quarter ended January 31, 2023, the Company revised the financial projections for its Pet Tech segment. The revised projections resulted in a triggering event for the Company’s goodwill and long-lived asset groups consisting of patents and trade names. As a result, the Company concluded that the carrying amount for goodwill and the long-lived asset groups was impaired and not expected to be recovered. Accordingly, a non-cash pre-tax goodwill impairment charge of $13,320,534 and a non-cash intangible assets impairment charge of $9,527,773, was recorded for the Company’s Pet Tech segment for the quarter ended January 31, 2023.
Interest expense, net
Interest expense, net, increased to $5,336,526 for the nine month period ended January 31, 2023, compared to $964,622 for the same period in the prior fiscal year. The increase primarily relates to higher average debt levels as well as increased interest rates for the nine month period ended January 31, 2023.
Income tax expense
Income tax expense decreased $1,286,274 to $1,728,591 for the nine month period ended January 31, 2023, compared to $3,014,865 for the same period in the prior fiscal year. The effective tax rate decreased to (9.05)% for the nine month period ended January 31, 2023, compared to 24.64% for the same period in the prior year, primarily due to nondeductible expenses incurred in the current year and variations in income earned by jurisdiction. The decrease in income tax expense for the nine month period ended January 31, 2023 compared to the same period in the previous year is primarily due to decreased taxable income recognized in the current year compared to the previous year.
Net Income (Loss)
Net income (loss) decreased $30,051,741, to a net loss of $20,829,117 for the nine month period ended January 31, 2023, compared to a net income of $9,222,624 for the same period in the prior fiscal year. The decreased net income (loss) for the nine month period ended January 31, 2023, primarily relates to losses incurred for the Pet Tech segment including the goodwill and intangible assets impairment charge, higher interest expense due to higher than average debt levels and increased interest rates, partially offset by a decrease in bonus expense. In addition, a substantial part of the decrease in net income was attributable to the one-time extinguishment of the PPP Loan in the amount of $6,282,973 that was recorded as income during the nine month period ended January 31, 2022.
EMS Segment
The following table sets forth the Company’s results of operations for the EMS segment for the periods indicated.
| | | | | | |
| | Nine Months Ended |
| | | January 31, | | | January 31, |
| | | 2023 | | | 2022 |
| | | | | | |
Net sales | | $ | 306,147,772 | | $ | 279,434,605 |
Cost of products sold | | | 270,103,569 | | | 245,664,574 |
Gross profit | | | 36,044,203 | | | 33,770,031 |
Selling and administrative expenses | | | 19,394,529 | | | 19,896,551 |
Impairment of notes receivable and investment | | | | | | 6,300,235 |
Operating income | | $ | 16,649,674 | | $ | 7,573,245 |
Net Sales
Net sales increased $26,713,167, or 9.6%, to $306,147,772 for the nine month period ended January 31, 2023, compared to $279,434,605 for the same period in the prior fiscal year. The Federal Reserve has raised interest rates several times during the current fiscal quarter, which has negatively affected customer demand in the consumer electronics markets, but has not had the same effect in the industrial electronics and medical/life science markets. As a result, the Company’s sales increased for the nine month period ended January 31, 2023, in industrial electronics and medical/life science compared to the prior year. The increase in sales was partially offset by a decrease in sales in consumer electronics. Net sales were higher primarily due to certain customer price increases implemented as a result of increased raw material and other operating costs that occurred during the nine month period ended January 31, 2023, as compared to the nine months ended January 31, 2022.
Costs of products sold
Cost of products sold increased $24,438,995, or 9.9%, to $270,103,569 (88.2% of net sales) for the nine month period ended January 31, 2023, compared to $245,664,574 (87.9% of net sales) for the same period in the prior fiscal year. The increase in cost of products sold as a percentage of sales is primarily due to higher material, logistics and other operating costs as a result of higher sales volumes and the impact of global supply chain disruptions that caused factory inefficiencies. Labor costs and
other manufacturing costs were higher for the nine month period ended January 31, 2023, than in the same period in the prior fiscal year, primarily due to inflationary pressures.
Gross profit
Gross profit margin was 11.8% of net sales, for the nine month period ended January 31, 2023, compared to 12.1% for the same period in the prior fiscal year. The decrease in gross margins as a percentage of sales was primarily due to higher material, labor and other manufacturing costs during the nine month period ended January 31, 2023 compared to the same period in the prior fiscal year.
Selling and administrative expenses
Selling and administrative expenses decreased $502,022, or -2.5% to $19,394,529 (6.3% of net sales) for the nine month period ended January 31, 2023, compared to $19,896,551 (7.1% of net sales) for the same period in the prior fiscal year. Selling and administrative expenses decreased for the nine month period ended January 31, 2023, primarily due to a decrease in bonus expense, which was partially offset by an increase in other professional fees, related to the new and amended credit agreements finalized during the first quarter of fiscal year 2023, an increase in financing fees and higher costs due to inflationary pressures.
Operating income
Operating income increased $9,076,429, or 119.8%, to $16,649,674 (5.4% of net sales) for the nine month period ended January 31, 2023, compared to $7,573,245 (2.7% of net sales) for the same period in the prior fiscal year. The increase was primarily due to higher sales, partially offset by higher material, logistics and other operating costs.
Pet Tech Segment
The following table sets forth the Company’s results of operations for the Pet Tech segment for the periods indicated. The nine months ended January 31, 2022 consists of one month of activity, as the business was acquired on December 31, 2021.
| | | | | | |
| | Nine Months Ended |
| | | January 31, | | | January 31, |
| | | 2023 | | | 2022 |
| | | | | | |
Net sales | | $ | 1,321,580 | | $ | 203,894 |
Cost of products sold | | | 1,340,398 | | | 188,715 |
Gross profit | | | (18,818) | | | 15,179 |
Selling and administrative expenses | | | 7,866,222 | | | 778,802 |
Impairment of goodwill and other long-lived assets | | | 23,096,771 | | | - |
Operating loss | | $ | (30,981,811) | | $ | (763,623) |
Net sales
Net sales increased $1,117,686 to $1,321,580 for the nine month period ended January 31, 2023 compared to $203,894 for the same period in the prior fiscal year. Sales for the period are primarily
comprised of hardware and accessories, as well as recurring subscription revenue. The nine months ended January 31, 2022 consists of one month of activity, as the business was acquired on December 31, 2021. The Pet Tech segment experienced supply chain issues, causing certain inventory shortages during the first quarter of fiscal year 2023, which negatively affected hardware sales. Those specific supply chain issues were resolved in late June 2022.
Cost of products sold
Cost of products sold increased $1,151,683 to $1,340,398 (101.4% of net sales) for the nine month period ended January 31, 2023, compared to $188,715 (92.6% of net sales) for the same period in the prior fiscal year. Cost of products sold as a percentage of sales increased during the current period primarily due to material cost increases and lower sales volumes.
Gross profit
Gross profit margin was -3.9% of net sales, for the nine month period ended January 31, 2023, compared to a gross profit margin of 7.4% for the same period in the prior fiscal year. Gross profit margins were negative in the current period due to material cost increases and lower sales volumes.
Selling and administrative expenses
Selling and administrative expenses increased $7,087,420, to $7,866,222 for the nine month period ended January 31, 2023, compared to $778,802 for the same period in the prior fiscal year. Selling and administrative costs were primarily comprised of research and development costs for new products expected to launch in fiscal 2024, selling and marketing expenses, as well as general and administrative expenses.
Impairment of goodwill and other long-lived assets
In connection with the preparation and review of the financial statements for the quarter ended January 31, 2023, the Company revised the financial projections for its Pet Tech segment. The revised projections resulted in a triggering event for the Company’s goodwill and long-lived asset groups consisting of patents and trade names. As a result, the Company concluded that the carrying amount for goodwill and the long-lived asset groups was impaired and not expected to be recovered. Accordingly, a non-cash pre-tax goodwill impairment charge of $13,320,534 and a non-cash intangible assets impairment charge of $9,527,773, was recorded for the Company’s Pet Tech segment for the quarter ended January 31, 2023.
Operating loss
Operating loss increased $30,218,188, to $30,981,811 for the nine month period ended January 31, 2023, compared to $763,623 for the same period in the prior fiscal year. The increased loss was primarily due to the non-cash goodwill impairment charge of $13,320,534, the non-cash intangible assets impairment charge of $9,527,773 and lower than expected sales.
Liquidity and Capital Resources:
Operating Activities.
Cash flow used in operating activities was $33,982,948 for the nine months ended January 31, 2023, compared to cash flow used in operating activities of $8,473,076 for the same period in the prior fiscal year. Cash flow used in operating activities was primarily the result of an increase in inventory in the amount of $11,826,862 and a decrease in accounts payable in the amount of $26,890,132. Cash flow from operating activities was offset by a decrease in prepaid expenses and other assets in the amount of $2,221,514. The increase in inventory is the result of an increase in inventory purchases to satisfy customer orders. Further, capacity issues in the component marketplace made it difficult to obtain some components to complete assemblies for shipping.
Cash flow used in operating activities was $8,473,076 for the nine months ended January 31, 2022, which included the effect of the extinguishment of the PPP Loan debt. Cash flow used in operating activities was primarily the result of an increase in both inventory and accounts receivable in the amount of $57,955,080 and $7,889,599, respectively. Cash flow from operating activities was offset by an increase in accounts payable and deferred revenue in the amount of $34,776,901 and $8,512,477, respectively.
Investing Activities.
Cash used in investing activities was $1,566,036 for the nine months ended January 31, 2023. During the first nine months of fiscal year 2023, the Company purchased $1,620,957 in machinery and equipment to be used in the ordinary course of business. The Company has received forecasts from current customers for increased business that would require additional investment in capital equipment and facilities. The Company anticipates purchases will be funded by lease transactions. However, there is no assurance that such increased business will be obtained or that the Company will be able to obtain funding for leases at acceptable terms, if at all, in the future.
Cash used in investing activities was $10,307,872 for the nine months ended January 31, 2022. During the first nine months of fiscal year 2022, the Company purchased $5,304,146 in machinery and equipment used in the ordinary course of business. During the first nine months of fiscal year 2022 the Company made advances of $5,512,000 to Wagz.
Financing Activities.
Cash provided by financing activities of $33,967,070 for the first nine months ended January 31, 2023, was primarily the result of net borrowings under the line of credit and term loan agreement.
Cash provided by financing activities of $18,418,465 for the first nine months ended January 31, 2022, was primarily the result of net borrowings under the line of credit.
Financing Summary.
Notes Payable – Secured lenders
On January 29, 2021, the Company entered into a Credit Agreement (the “JPM Agreement”) with JPMorgan Chase Bank, N.A. (“Lender” or “JPM”), pursuant to which Lender provided the Company with a secured credit facility consisting of a revolving loan facility and a term loan facility (collectively, the “Facility”).
On July 18, 2022, SigmaTron, Wagz and Lender amended and restated the JPM Agreement by entering into an Amended and Restated Credit Agreement (as so amended and restated, the “JPM Credit Agreement”). The Facility, as amended, allows the Company to borrow on a revolving basis up to the lesser of (i) $70,000,000 or (ii) an amount equal to a percentage of the eligible receivable borrowing base plus a percentage of the inventory borrowing base minus any reserves established by Lender. The maturity date of the Facility is July 18, 2027. Deferred financing costs of $321,827 and $128,733 were capitalized during the nine month period ended January 31, 2023 and during the fiscal year ended April 30, 2022, respectively, which are amortized over the term of the JPM Credit Agreement. As of January 31, 2023, there was $59,738,228 outstanding and $3,485,599 of unused availability under the revolving amended Facility compared to an outstanding balance of $51,392,158 and $5,691,855 of unused availability at April 30, 2022. As of January 31, 2023 and April 30, 2022, the unamortized amount offset against outstanding debt was $596,211 and $393,503, respectively.
Under the JPM Credit Agreement, a minimum Fixed Charge Coverage Ratio (“FCCR”) financial covenant of 1.10x is applicable only during an FCCR trigger period which occurs when (a) commencing on the Effective Date and ending when the Term Loan Obligations (as defined in the JPM Credit Agreement) have been paid in full and (b) following the payment in full of the Term Loan Obligations, (i) an event of default (as defined in the JPM Credit Agreement) has occurred and is continuing, and Lender has elected to impose a FCCR trigger period upon notice to the Company or (ii) availability falls below the greater of (a) 10% of the revolving commitment and (b) the outstanding principal amount of the term loans. In addition, prior to the amendment to the JPM Credit Agreement pursuant to the JPM Waiver (as discussed below under “Waiver, Consent and Amendment to Credit Agreements”), the JPM Credit Agreement imposed a financial covenant that required the Company to maintain a leverage ratio of Total Debt to EBITDA (each as defined in the JPM Credit Agreement) for any twelve month period ending on the last day of a fiscal quarter through the maturity of the revolving Facility not to exceed a certain amount, which ratio (a) ranged from 5.00-to-1 for fiscal quarters beginning with the fiscal quarter ending on January 31, 2023 to 3.00-to-1 for the fiscal quarter ending on July 31, 2026 (if the Term Loan Borrowing Base Coverage Ratio (as defined in the JPM Credit Agreement) as of the end of the applicable fiscal quarter is less than or equal to 1.50-to-1) and (b) ranged from 5.50-to-1 for the fiscal quarter ending on January 31, 2023 to 4.00-to-1 for the fiscal quarters beginning with the fiscal quarter ending on July 31, 2026 (if the Term Loan Borrowing Base Coverage Ratio as of the end of the applicable fiscal quarter is greater than 1.50-to-1).
In addition, the JPM Credit Agreement imposes a cash dominion period if there is an event of default or if availability is less than 10% of the Revolving Commitment, and such requirement continues until there is no event of default and availability is greater than 10% of the Revolving Commitment, in each case for 30 consecutive days. Based on this criteria, the total debt balances for the Facility must be classified as a current liability on the Condensed Consolidated Balance Sheet as of January 31, 2023.
In connection with the entry into the JPM Credit Agreement, Lender and TCW Asset Management Company LLC, as administrative agent under the Term Loan Agreement (as defined below), entered
into the Intercreditor Agreement, dated July 18, 2022, and acknowledged by SigmaTron and Wagz (the “ICA”), to set forth and govern the lenders’ respective lien priorities, rights and remedies under the JPM Credit Agreement and the Term Loan Agreement.
The Facility under the JPM Credit Agreement is secured by: (a) a first priority security interest in SigmaTron’s and Wagz’s (i) accounts and inventory (excluding Term Priority Mexican Inventory (as defined in the ICA) and certain inventory in transit, (ii) deposit accounts, (iii) proceeds of business interruption insurance that constitute ABL BI Insurance Share (as defined in the ICA), (iv) certain other property, including payment intangibles, instruments, equipment, software and hardware and similar systems, books and records, to the extent related to the foregoing, and (v) all proceeds of the foregoing, in each case, now owned or hereafter acquired (collectively, the “ABL Priority Collateral”); and (b) a second priority security interest in Term Priority Collateral (as defined below) other than (i) real estate and (ii) the equity interests of SigmaTron’s foreign subsidiaries (unless such a pledge is requested by Lender).
On July 18, 2022, SigmaTron, Wagz and TCW Asset Management Company LLC, as administrative agent, and other Lenders party thereto (collectively, “TCW”) entered into a Credit Agreement (the “Term Loan Agreement”) pursuant to which TCW made a term loan to the Company in the principal amount of $40,000,000 (the “TCW Term Loan”). The TCW Term Loan bears interest at a rate per annum based on SOFR, plus the Applicable Margin of 7.50% (each as defined in the Term Loan Agreement). The TCW Term Loan has a SOFR floor of 1.00%. The maturity date of the TCW Term Loan is July 18, 2027. The amount outstanding as of January 31, 2023, was $39,500,000. Deferred financing costs of $1,210,481 were capitalized during the nine month period ended January 31, 2023. As of January 31, 2023, the unamortized amount offset against outstanding debt was $1,074,686.
The Term Loan Agreement imposes financial covenants, including covenants requiring the Company to maintain a minimum Fixed Charge Coverage Ratio (as defined in the Term Loan Agreement) of 1.10-to-1 and maintain the same leverage ratio of Total Debt to EBITDA as described above under the JPM Credit Agreement. The Company is required to make quarterly repayments of the principal amount of the TCW Term Loan in amounts equal to $250,000 per fiscal quarter for the quarters beginning October 31, 2022 and $500,000 per fiscal quarter for quarters beginning October 31, 2024. The Term Loan Agreement also requires mandatory annual repayments equal to 50% of Excess Cash Flow (as defined in the Term Loan Agreement).
The TCW Term Loan is secured by: (a) a first priority security interest in all property of SigmaTron and Wagz that does not constitute ABL Priority Collateral, which includes: (i) SigmaTron’s and Wagz’s real estate other than SigmaTron’s Del Rio, Texas, warehouses, (ii) SigmaTron’s and Wagz’s machinery, equipment and fixtures (but excluding ABL Priority Equipment (as defined in the ICA)), (iii) the Term Priority Mexican Inventory (as defined in the ICA), (iv) SigmaTron’s stock in its direct and indirect subsidiaries, (v) SigmaTron’s and Wagz’s general intangibles (excluding any that constitute ABL Priority Collateral), goodwill and intellectual property, (vi) the proceeds of business interruption insurance that constitute Term BI Insurance Share (as defined in the ICA), (vii) tax refunds, and (viii) all proceeds thereof, in each case, now owned or hereafter acquired (collectively, the “Term Priority Collateral”); and (b) a second priority security interest in all collateral that constitutes ABL Priority Collateral. Also, SigmaTron’s three Mexican subsidiaries pledged all of their assets as security for the TCW Term Loan.
On July 18, 2022, a portion of the proceeds of the TCW Term Loan was used to pay in full the term loan principal amount of $5,000,000 (the “FILO Term Loan”) that Lender extended to the Company under the JPM Agreement on April 25, 2022.
Waiver, Consent and Amendment to Credit Agreements
On March 2, 2023, the Company received notices of default from both JPM and TCW. The Notices indicated the occurrence of certain events of default under the JPM Credit Agreement and the Term Loan Agreement.
The JPM Notice indicated that the Lender was informed of the occurrence of events of defaults and the continuation thereof under the JPM Credit Agreement as a result of the Company’s failure to maintain a FCCR for the twelve month period ending January 31, 2023 of at least 1.10x as required under the JPM Credit Agreement (the “JPM Covenant Defaults”).
The TCW Notice indicated that Agent and TCW Lenders were informed of the occurrence of events of default and the continuation thereof under the Term Loan Agreement (described below) as a result of the Company permitting the Total Debt to EBITDA Ratio for the twelve month period ending on January 31, 2023 to be greater than 5.00:1.00 in violation of the Term Loan Agreement and the Company’ failure to maintain FCCR as required under the JPM Credit Agreement (the “TCW Covenant Defaults” and together with the JPM Covenant Defaults, the “Defaults”).
As a result of the Defaults, the Company was not in compliance with its financial covenants under the Credit Agreements as of January 31, 2023. Due to the Notices received on March 2, 2023, from each of JPM and the TCW Lenders and Agent, the total debt balances for both the Facility and the TCW Term Loan (as defined below) have been classified as a current liability on the Condensed Consolidated Balance Sheet as of January 31, 2023.
On April 28, 2023, the Company entered into (i) a Waiver, Consent and Amendment No. 1 to the JPM Credit Agreement (“JPM Waiver”) with Wagz and JPM, as lender, which waived certain events of default under and amended certain terms of the JPM Credit Agreement and (ii) a Waiver, Consent and Amendment No. 1 to the Credit Agreement (“TCW Waiver”) with Wagz, the financial institutions identified therein (the “TCW Lenders”) and TCW Asset Management Company LLC as administrative agent for the TCW Lenders (in such capacity, the “Agent” and collectively with the TCW Lenders and JPM, the “Lender Parties”), which waived certain events of default under and amended certain terms of the Term Loan Agreement (together with the JPM Credit Agreement the “Credit Agreements”). The Company entered into the JPM Waiver and TCW Waiver (together, the “Waivers”) after receiving on March 2, 2023, the Event of Default and Reservation of Rights notice from each of JPM (“JPM Notice”) and the TCW Lenders and Agent (“TWC Notice” together with the JPM Notice, the “Notices”). As previously disclosed, the Notices indicated the occurrence of certain events of default under the JPM Credit Agreement and the Term Loan Agreement. As a result of these events of default, the Company was not in compliance with its financial covenants under the Credit Agreements as of January 31, 2023.
Among other things, the Waivers amended the Credit Agreements to (x) require that the Company maintain a minimum of $2.5 million in revolver availability under the JPM Credit Agreement, (y) modify the definition of EBITDA to allow adjustments to account for Wagz operating losses, impairment charges relating to the write-down of the Wagz business, the Wagz Note (as defined below) and net assets of the Company and Wagz, and expenses relating to the Waivers, the Wagz sale and SPA (as defined below), and (z) modify the existing Total Debt to EBITDA Ratios (as defined in the Credit Agreements) as follows:
| | | | |
Fiscal Quarter | | Total Debt to EBITDA Ratio* (as amended) | | Total Debt to EBITDA Ratio* (prior to amendment) |
| | | | |
October 31,2023 | | 4.50:1.0 | | 4.25:1.0 |
January 31, 2024 | | 4.50:1.0 | | 4.00:1.0 |
April 30, 2024 | | 4.50:1.0 | | 4.00:1.0 |
July 31, 2024 | | 4.25:1.0 | | 3.75:1.0 |
October 31, 2024 | | 4.00:1.0 | | 3.75:1.0 |
* Assumes the Term Loan Borrowing Base Coverage Ratio (as defined in the Credit Agreements) is less than or equal to 1.50:1.0.
In addition, pursuant to the TCW Waiver, if the Total Debt to EBITDA Ratio for the trailing twelve month period as of the end of the most recently ended third fiscal quarter exceeds the ratios that were in effect prior to the amendment (as set forth in the far right column of the table above) for a fiscal quarter during the PIK Period (defined in the Term Loan Agreement), then the Applicable Margin under the Term Loan Agreement in respect of the outstanding TCW Term Loan incurred thereunder would increase by an amount equal to 1.0% per annum for the fiscal quarter, with such interest being paid in kind. Furthermore, the JPM Waiver modified the definition of Applicable Margin from a fixed amount equal to 2.0% to an amount that varies from 2.00% (for revolver availability greater than or equal to $20.0 million), to 2.50% (for revolver availability greater than or equal to $10.0 million), to 3.00% (for revolver availability less than $10.0 million), and fixed the Applicable Margin at 3.00% for six months starting April 1, 2023.
In exchange for such agreements, the Lender Parties have agreed to waive all of the existing events of default under the Credit Agreements through March 31, 2023, consent to the sale of Wagz and release Wagz and its property and the Company’s 81% interest in Wagz that was sold to Buyer (as disclosed below) from the lien of the Lender Parties.
On March 15, 2019, the Company’s wholly-owned foreign enterprise, Wujiang SigmaTron Electronic Technology Co., Ltd., entered into a credit facility with China Construction Bank. On January 26, 2021, the agreement was amended and terminated on January 6, 2022. On January 17, 2022, the agreement was renewed, and terminated on December 23, 2022. On February 17, 2023, the agreement was renewed, and is scheduled to expire on February 7, 2024. Under the agreement Wujiang SigmaTron Electronic Technology Co., Ltd. can borrow up to 10,000,000 Renminbi, approximately $1,479,000 as of January 31, 2023, and the facility is collateralized by Wujiang SigmaTron Electronics Co., Ltd.’s manufacturing building. Interest is payable monthly and the facility bears a fixed interest rate of 3.35% per annum. There was $739,601 outstanding under the facility at January 31, 2023 compared to an outstanding balance of $438,219 at April 30, 2022.
PPP Loan
On April 23, 2020, the Company received a PPP loan from U.S. Bank, as lender, pursuant to the Paycheck Protection Program of the CARES Act, as administered by the U.S. Small Business Administration (the “SBA”) in the amount of $6,282,973 (the “PPP Loan”). The PPP Loan was scheduled to mature on April 23, 2022. The Company was notified of the forgiveness of the PPP Loan by the SBA on July 9, 2021 and all principal and accrued interest were forgiven. The
accounting for the forgiveness is reflected in the Company’s Statements of Operations, in the nine months ended January 31, 2022, as a non-cash gain upon extinguishment of long-term debt.
Notes Payable – Buildings
The Facility (as defined above) also included two term loans, in the aggregate principal amount of $6,500,000. A final aggregate payment of approximately $4,368,444 was due on or before January 29, 2026. On July 18, 2022, a portion of the proceeds of the TCW Term Loan was used to pay in full both term loans extended by Lender. The outstanding balance was $0 at January 31, 2023 compared to an outstanding balance of $5,994,445 at April 30, 2022.
The Company entered into a mortgage agreement on March 3, 2020, in the amount of $556,000, with The Bank and Trust SSB to finance the purchase of the property that serves as the Company’s warehousing and distribution center in Del Rio, Texas. The note requires the Company to pay monthly installment payments in the amount of $6,103. Interest accrues at a fixed rate of 5.75% per year until March 3, 2025, and adjusts thereafter, on an annual basis, equal to 1.0% over the Prime Rate as published by The Wall Street Journal. The note is payable over a 120 month period. The outstanding balance was $429,339 and $464,895 at January 31, 2023 and April 30, 2022, respectively.
Notes Payable – Equipment
The Company routinely entered into secured note agreements with Engencap Fin S.A. DE C.V. to finance the purchase of equipment. The terms of the outstanding secured note agreement mature on May 1, 2023, with quarterly installment payments ranging from $9,493 to $9,310 and a fixed interest rate of 8.00% per annum.
The Company routinely enters into secured note agreements with FGI Equipment Finance LLC to finance the purchase of equipment. The terms of the outstanding secured note agreements mature from March 2025 through October 2027, with quarterly installment payments ranging from $10,723 to $69,439 and a fixed interest rate ranging from 8.25% to 9.25% per annum.
Finance Lease and Sales Leaseback Obligations
The Company enters into various finance lease and sales leaseback agreements. The terms of the outstanding lease agreements mature through October 1, 2026, with monthly installment payments ranging from $2,874 to $33,706 and a fixed interest rate ranging from 7.09% to 12.73% per annum.
Other
The Company provides funds for salaries, wages, overhead and capital expenditure items as necessary to operate its wholly-owned Mexican, Vietnamese and Chinese subsidiaries and the Taiwan IPO. The Company provides funding in U.S. Dollars, which are exchanged for Pesos, Dong, Renminbi, and New Taiwan dollars. The fluctuation of currencies from time to time, without an equal or greater increase in inflation, could have a material impact on the financial results of the Company. The impact of currency fluctuations for the nine month period ended January 31, 2023, resulted in net foreign currency transaction losses of $602,313 compared to net foreign currency losses of approximately $120,601 for the same period in the prior year. During the nine months of fiscal year 2023, the Company paid approximately $47,800,000 to its foreign subsidiaries for manufacturing services. All intercompany balances have been eliminated upon consolidation.
The Company has not changed its plans to indefinitely reinvest the earnings of the Company’s foreign subsidiaries. The cumulative amount of unremitted earnings for which U.S. income taxes have not been recorded is $13,657,000 as of January 31, 2023.
The Company anticipates that its credit facilities, expected future cash flow from operations and leasing resources are adequate to meet its working capital requirements and fund capital expenditures for the next 12 months. However, in the event customers delay orders or 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.
The impact of inflation and the continuing global supply chain disruptions in the electronic component marketplace have been challenging. Prices for raw materials necessary for production have fluctuated significantly in the past and the Company is currently experiencing upward pricing pressure on raw materials. The Company anticipates supply chain and raw material price volatility will continue during fiscal 2024.
Item 3.Quantitative and Qualitative Disclosures About Market Risks.
As a smaller reporting company, as defined in Item 10(f)(1) of Regulation S-K under the Exchange Act, the Company is not required to provide the information required by this item.
Item 4.Controls and Procedures.
Disclosure Controls:
The Company’s management, including its Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of its disclosure controls and procedures (as defined under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and Rules 13a-15(e) and 15(d)-15(e) thereunder) as of January 31, 2023. The Company’s disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives and its Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective at the reasonable assurance level as of January 31, 2023.
Internal Controls:
There has been no change in the Company’s internal control over financial reporting during the three months ended January 31, 2023, that has materially affected or is reasonably likely to materially affect its internal control over financial reporting. The Company’s internal controls over financial reporting are designed to provide reasonable assurance regarding the reliability of financial reporting and preparation of financial statements for external purposes in accordance with U.S. GAAP.
PART II – OTHER INFORMATION
Item 1. Legal Proceedings.
From time to time the Company is involved in legal proceedings, claims, or investigations that are incidental to the Company’s business. In future periods, the Company could be subjected to cash cost or non-cash charges to earnings if any of these matters are resolved on unfavorable terms. However, although the ultimate outcome of any legal matter cannot be predicted with certainty, based on present information, including management’s assessment of the merits of any particular claim, the Company does not expect these legal proceedings or claims will have any material adverse impact on its future consolidated financial position, results of operations or cash flows.
Item 1A. Risk Factors.
As a smaller reporting company, as defined in Item 10(f)(1) of Regulation S-K under the Exchange Act, the Company is not required to provide the information required by this item.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities.
None beyond what was previously disclosed.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
None.
SIGNATURES:
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
SIGMATRON INTERNATIONAL, INC.
| | |
/s/ Gary R. Fairhead | | May 18, 2023 |
| | |
Gary R. Fairhead | | Date |
CEO (Principal Executive Officer) | | |
| | |
| | |
/s/ James J. Reiman | | May 18, 2023 |
| | |
James J. Reiman | | Date |
Chief Financial Officer, Secretary and Treasurer | | |
(Principal Financial Officer and Principal | | |
Accounting Officer) | | |
Sigmatron (NASDAQ:SGMA)
過去 株価チャート
から 11 2024 まで 12 2024
Sigmatron (NASDAQ:SGMA)
過去 株価チャート
から 12 2023 まで 12 2024
