SIGMATRON INTERNATIONAL INC - Quarter Report: 2022 July (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

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Form 10-Q

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(Mark One)

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

EXCHANGE ACT OF 1934

For the quarterly period ended July 31, 2022

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)

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

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

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

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

Large Accelerated Filer ¨     Accelerated Filer ¨

Non-accelerated Filer x      Smaller Reporting Company x

Emerging Growth Company ¨

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

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

Indicate the number of shares outstanding of the registrant’s common stock, $0.01 par value, as of September 8, 2022: 6,071,288

SigmaTron International, Inc.

Index

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SigmaTron International, Inc.

Condensed Consolidated Statements of Income

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SigmaTron International, Inc.

Condensed Consolidated Statements of Changes in Stockholders’ Equity

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SigmaTron International, Inc.

Condensed Consolidated Statements of Cash Flows

Note A - Description of the Business

SigmaTron International, Inc., its subsidiaries, foreign enterprises and international procurement office (collectively, the “Company”) operate in two reportable segments as an independent provider of electronic manufacturing services (“EMS”) and a provider of products to the Pet Tech market. The EMS segment includes printed circuit board assemblies, electro-mechanical subassemblies and completely assembled (box-build) electronic products. The Pet Tech reportable segment offers electronic products such as the Freedom Smart Dog Collar™, a wireless geo-mapped fence and wellness system, along with apparel and accessories. In connection with the production of assembled products, the EMS segment also provides services to its customers, including (1) automatic and manual assembly and testing of products; (2) material sourcing and procurement; (3) manufacturing and test engineering support; (4) design services; (5) warehousing and distribution services; (6) assistance in obtaining product approval from governmental and other regulatory bodies and (7) compliance reporting. The EMS segment produces the Freedom Smart Dog Collar™ sold by the Pet Tech segment.

Note B - Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of SigmaTron International, Inc. (“SigmaTron”), its wholly-owned subsidiaries, Standard Components de Mexico, S.A., AbleMex S.A. de C.V., Digital Appliance Controls de Mexico, S.A. de C.V., Spitfire Controls (Vietnam) Co. Ltd., Spitfire Controls (Cayman) Co. Ltd., and Wagz, Inc., wholly-owned foreign enterprises Suzhou SigmaTron Electronics Co. Ltd., and SigmaTron Electronic Technology Co., Ltd. (collectively, “SigmaTron China”), and its international procurement office, SigmaTron Taiwan (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 month period ended July 31, 2022 is not necessarily indicative of the results that may be expected for the year ending April 30, 2023. The condensed consolidated balance sheet at April 30, 2022, was derived from audited annual financial statements but does not contain all of the footnote 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, 2022.

Note C - Inventories, net

The components of inventory consist of the following:

Note D - Earnings Per Share and Stockholders’ Equity

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

Options to purchase 508,519 and 513,232 shares of common stock were outstanding and exercisable at July 31, 2022 and 2021, respectively. There were no options granted during the three month period ended July 31, 2022 and 102,000 options were granted during the three month period ended July 31, 2021. There was $94,893 and $20,035 stock option expense recognized for the three month periods ended July 31, 2022 and 2021, respectively. The balance of unrecognized compensation expense related to the Company’s stock option plans at July 31, 2022 and 2021 was $1,034,531 and $225,734, respectively. There were no anti-dilutive common stock equivalents and 72,643 anti-dilutive common stock equivalents at July 31, 2022 and July 31, 2021, respectively, which have been excluded from the calculation of diluted earnings per share.

Note E - Long-term Debt

Debt and capital lease obligations consisted of the following at July 31, 2022 and April 30, 2022:

Notes Payable – Secured lenders

On January 29, 2021, the Company entered into a Credit Agreement (the “Agreement”) with JPMorgan Chase Bank, N.A. (“Lender”), pursuant to which Lender provided the Company with a secured credit facility maturing on January 29, 2026, of which (a) up to $50,000,000 was available on a revolving loan basis, and (b) an aggregate of $6,500,000 was borrowed pursuant to two term loans (the “Facility”). The Facility was secured by substantially all of SigmaTron’s assets including mortgages on its two Illinois properties.

The Facility allowed the Company to choose among interest rates at which it may borrow funds for revolving loans:  “CBFR Loans,” the interest on which is based on (A) the “REVLIBOR30 Rate” (as defined in the Agreement) unless the REVLIBOR30 Rate is not available, in which case the interest is generally the rate of interest last quoted by The Wall Street Journal as the “Prime Rate” in the U.S., plus (B) an applicable margin of 2.0% (effectively 3.70% per annum if in effect at July 31, 2022); or “Eurodollar Loans,” the interest on which is based on (X) an interest rate per annum (rounded upwards, if necessary, to the next 1/16 of 1%) equal to the LIBO Rate (as defined in the Agreement) for any interest period multiplied by the Standard Reserve Rate (as defined in the Agreement) plus (Y) an applicable margin of 2.0%.  Under the revolving portion of the Facility, the Company was able to borrow up to the lesser of (i) $50,000,000 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. Under the Agreement, a minimum Fixed Charge Coverage Ratio (“FCCR”) financial covenant of 1.10x is applicable only during an FCCR trigger period which occurs when (i) an event of default (as defined in the Agreement) has occurred and is continuing, and Lender has elected to impose a FCCR trigger period upon notice to the Company or (ii) availability falls below

Note E - Long-term Debt - Continued

the greater of (a) 10% of the revolving commitment and (b) the outstanding principal amount of the term loans. The Company was not in a FCCR trigger period as of July 31, 2022.

On November 17, 2021, the Company and Lender entered into an amendment of the Facility. The amended Facility allowed the Company to borrow under the revolving portion of the Facility up to the lesser of (i) $53,000,000 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. Further, the Facility was amended to allow in some circumstances customer deposits to be deemed eligible for collateral purposes.

Effective as of December 31, 2021, Wagz joined the Facility as a loan guarantor, and granted to the Lender a security interest in all of its assets, including its intellectual property.

On March 17, 2022, the Company and Lender entered into an amendment of the Facility. The amended Facility allowed the Company to borrow under the revolving portion of the Facility up to the lesser of (i) $60,000,000 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. Further, the Facility was amended to allow in some circumstances accounts arising from sales of inventory subject to bill and hold arrangements to be deemed eligible for collateral purposes, and to replace the interest rates based on the London interbank offered rate with rates based on the secured overnight financing rate as administered by the Federal Reserve Bank of New York. The Facility bears interest at the adjusted REVSOFR30 rate (as defined in the Credit Agreement). The interest rate per annum applicable to the Facility will be the Adjusted Term SOFR Rate (“SOFR”), plus the Applicable Margin of 2.0%.

On April 25, 2022, the Company and Lender entered into an amendment of the Facility. Under the amended Facility, Lender extended a term loan to the Company in the principal amount of $5,000,000 (the “FILO Term Loan”), the interest on which was based on (i) the “Adjusted Term SOFR Rate” for a one-month Interest Period (each, as defined in the Agreement), plus (ii) an applicable margin of 4.0% (effectively 5.70% per annum at July 31, 2022). The FILO Term Loan would have matured within 120 days from the date of the amendment. The amount outstanding as of April 30, 2022 was $5,000,000. There were no issuance costs associated with the FILO Term Loan. On July 18, 2022, a portion of the proceeds of the TCW Term Loan (as defined below) was used to pay in full the FILO Term Loan extended by Lender. The amount outstanding as of July 31, 2022 was $0.

On July 18, 2022, SigmaTron, Wagz and Lender amended and restated the Agreement by entering into an Amended and Restated Credit Agreement (“Credit Agreement”). The Facility, as amended, allows the Company to borrow on a revolving basis up to the lesser of (i) $70,000,000 or (ii) an amount equal to a percentage of the eligible receivable borrowing base plus a percentage of the inventory borrowing base minus any reserves established by Lender. The maturity date of the Facility was extended to July 18, 2027. Deferred financing costs of $208,407 and $128,733 were capitalized during the three month period ended July 31, 2022 and during the fiscal year ended April 30, 2022, respectively, which are amortized over the term of the Agreement. As of July 31, 2022, there was $43,875,455 outstanding and $16,465,162 of unused availability under the revolving Facility compared to an outstanding balance of $51,392,158 and $5,691,855 of unused availability at April 30, 2022. As of July 31, 2022

Note E - Long-term Debt - Continued

and April 30, 2022, the unamortized amount offset against outstanding debt was $547,969 and $393,503, respectively.

In connection with the closing of the Credit Agreement, Lender and TCW Asset Management Company LLC, as administrative agent under the Term Loan Agreement (as defined below), entered into the Intercreditor Agreement, dated July 18, 2022, and acknowledged by SigmaTron and Wagz (the “ICA”), to set forth and govern the lenders’ respective lien priorities, rights and remedies under the Credit Agreement and the Term Loan Agreement.

The Facility under the Credit Agreement is secured by: (a) a first priority security interest in SigmaTron’s and Wagz’s (i) accounts and inventory (excluding Term Priority Mexican Inventory (as defined in the ICA) and certain inventory in transit, (ii) deposit accounts, (iii) proceeds of business interruption insurance that constitute ABL BI Insurance Share (as defined in the ICA), (iv) certain other property, including payment intangibles, instruments, equipment, software and hardware and similar systems, books and records, to the extent related to the foregoing, and (v) all proceeds of the foregoing, in each case, now owned or hereafter acquired (collectively, the “ABL Priority Collateral”); and (b) a second priority security interest in Term Priority Collateral (as defined below) other than (i) real estate and (ii) unless Lender requests a pledge thereof following July 18, 2022, the equity interests of SigmaTron’s foreign subsidiaries.

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 July 31, 2022, was $40,000,000. Deferred financing costs of $1,082,500 were capitalized during the three month period ended July 31, 2022. As of July 31, 2022, the unamortized amount offset against outstanding debt was $1,064,458.

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, (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.

Note E - Long-term Debt - Continued

On April 23, 2020, the Company received a PPP loan from U.S. Bank, as lender, pursuant to the Paycheck Protection Program of the CARES Act, as administered by the U.S. Small Business Administration (the “SBA”) in the amount of $6,282,973 (the “PPP Loan”). The PPP Loan was scheduled to mature on April 23, 2022. The Company was notified of the forgiveness of the PPP Loan by the SBA on July 9, 2021 and all principal and accrued interest were forgiven. The accounting for the forgiveness is reflected in the Company’s Statements of Income, in the three months ended July 31, 2021, as a non-cash gain upon extinguishment of long-term debt.

On March 15, 2019, the Company’s wholly-owned subsidiary, SigmaTron Electronic Technology Co., Ltd., entered into a credit facility with China Construction Bank. On January 26, 2021, the agreement was amended and terminated on January 6, 2022. On January 17, 2022, the agreement was renewed, and is scheduled to expire on December 23, 2022. Under the agreement SigmaTron Electronic Technology Co., Ltd. can borrow up to 9,000,000 Renminbi, approximately $1,334,579 as of July 31, 2022, and the facility is collateralized by Wujiang SigmaTron Electronics Co., Ltd.’s manufacturing building. Interest is payable monthly and the facility bears a fixed interest rate of 3.8% per annum. There was $771,090 outstanding under the facility at July 31, 2022 compared to an outstanding balance of $438,219 at April 30, 2022.

Notes Payable – Buildings

The Company’s Facility with Lender, entered into on January 29, 2021, also included two term loans, in the aggregate principal amount of $6,500,000. The loans required the Company to pay aggregate principal payments in the amount of $36,111 per month for 60 months, plus monthly payments of interest thereon at (A) the REVLIBOR30 Rate, unless the REVLIBOR30 Rate is not available, in which case the interest is generally the rate of interest last quoted by The Wall Street Journal as the “Prime Rate” in the U.S., plus (B) an applicable margin of 2.5% (effectively 4.20% per annum if in effect at July 31, 2022); or “Eurodollar Loans,” the interest on which is based on (X) an interest rate per annum (rounded upwards, if necessary, to the next 1/16 of 1%) equal to the LIBO Rate (as defined in the Agreement) for any interest period multiplied by the Standard Reserve Rate (as defined in the Agreement) plus (Y) an applicable margin of 2.5%. Deferred financing costs of $10,050 were capitalized during fiscal year 2021 which were amortized over the term of the Agreement. As of July 31, 2022, the unamortized amount included as a reduction to long-term debt was $0. 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 July 31, 2022 compared to an outstanding balance of $5,994,445 at April 30, 2022.

The Company entered into a mortgage agreement on March 3, 2020, in the amount of $556,000, with The Bank and Trust SSB to finance the purchase of the property that serves as the Company’s warehousing and distribution center in Del Rio, Texas. The note requires the Company to pay monthly installment payments in the amount of $6,103. Interest accrues at a fixed rate of 5.75% per year until March 3, 2025, and adjusts thereafter, on an annual basis, equal to 1.0% over the Prime

Note E - Long-term Debt - Continued

Rate as published by The Wall Street Journal. The note is payable over a 120 month period. The outstanding balance was $453,213 and $464,895 at July 31, 2022 and April 30, 2022, respectively.

Notes Payable – Equipment

The Company routinely enters into secured note agreements with Engencap Fin S.A. DE C.V. to finance the purchase of equipment. The terms of the outstanding secured note agreements mature from November 1, 2022 through May 1, 2023, with quarterly installment payments ranging from $11,045 to $37,941 and a fixed interest rate ranging from 6.65% to 8.00% per annum.

The Company routinely enters into secured note agreements with FGI Equipment Finance LLC to finance the purchase of equipment. The terms of the outstanding secured note agreements mature from March 2025 through May 2027, with quarterly installment payments ranging from $10,723 to $69,439 and a fixed interest rate of 8.25% per annum.

Annual maturities of the Company’s debt, net of deferred financing fees for the remaining periods, as of July 31, 2022, are as follows: