| Summary Of Significant Accounting Policies | NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation Policy
The consolidated financial statements include the accounts and transactions of SigmaTron International, Inc. (“SigmaTron”), its wholly-owned subsidiaries, Standard Components de Mexico, S.A., AbleMex S.A. de C.V., Digital Appliance Controls de Mexico, S.A. de C.V., Spitfire Controls (Vietnam) Co. Ltd., Spitfire Controls (Cayman) Co. Ltd. and SigmaTron International Trading Co., wholly-owned foreign enterprises Suzhou SigmaTron Electronics Co. Ltd., and SigmaTron Electronic Technology Co., Ltd. (collectively, “SigmaTron China”), and its international procurement office, SigmaTron Taiwan. The functional currency of the Mexican, Vietnamese and Chinese subsidiaries and procurement branch is the U.S. Dollar. Intercompany transactions are eliminated in the consolidated financial statements. The impact of currency fluctuations for the fiscal year ended April 30, 2020, resulted in net foreign currency transaction losses of approximately $285,654 compared to net foreign currency losses of $433,742 in the prior year.
Use of Estimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates made in preparing the consolidated financial statements include depreciation and amortization periods, the allowance for doubtful accounts, reserves for inventory, lower of cost or 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.
Cash and Cash Equivalents
Cash and cash equivalents include cash and all highly liquid short-term investments with original maturities within three months of the purchase date.
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
Accounts Receivable
The majority of the Company’s accounts receivable are due from companies in the industrial electronics, consumer electronics and medical/life sciences industries. Credit is extended based on evaluation of a customer’s financial condition, and, generally, collateral is not required. Accounts receivable are due in accordance with agreed upon terms, and are stated at amounts due from customers net of an allowance for doubtful accounts. Accounts outstanding longer than the contractual payments terms are considered past due. The Company writes off accounts receivable when they are determined to be uncollectible.
The Company has arrangements with various financial institutions to sell certain eligible accounts receivable balances from specific customers without recourse. The accounts receivable balances sold are at the election of the Company. The Company incurred fees for such sales, which are reflected as selling and administrative expenses on the Company’s income statement and were not material for the fiscal year ended April 30, 2020 or April 30, 2019. The accounts receivable balances are derecognized at the time of sale, as the Company does not have continuing involvement after the point of sale. During the years ended April 30, 2020 and April 30, 2019, the Company sold without recourse trade receivables of approximately $85,000,000 and $77,000,000 , respectively. Cash proceeds from these agreements are reflected as operating activities included in the change in accounts receivable in the Company's consolidated statements of cash flows.
Allowance for Doubtful Accounts
The Company’s allowance for doubtful accounts relates to receivables not expected to be collected from its customers. This allowance is based on management’s assessment of specific customer balances, considering the age of receivables and financial stability of the customer and a five year average of prior uncollectible amounts. If there is an adverse change in the financial condition of the Company’s customers, or if actual defaults are higher than provided for, an addition to the allowance may be necessary.
Inventories
Inventories are valued at cost. Cost is determined by an average cost method and the Company allocates labor and overhead to work-in-process and finished goods. In the event of an inventory write-down, the Company records expense to state the inventory at lower of cost or net realizable value. The Company establishes inventory reserves for shrinkage and excess and obsolete inventory. The Company records provisions for inventory shrinkage based on historical experience to account for unmeasured usage or loss. Of the Company’s raw materials inventory, a substantial portion has been purchased to fulfill committed future orders or for which the Company is contractually entitled to recover its costs from its customers. For the remaining raw materials inventory, a provision for excess and obsolete inventories is recorded for the difference between the cost of inventory and its estimated realizable value based on assumptions about future product demand and market conditions. For convenience, the Company records these inventory reserves against the inventory cost through a contra asset rather than through a new cost basis. Upon a subsequent sale or disposal of the impaired inventory, the corresponding reserve is relieved to ensure the cost basis of the inventory reflects any reductions. Actual results differing from these estimates could significantly affect the Company’s inventories and cost of products sold as the inventory is sold or otherwise relieved.
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
Property, Machinery and Equipment
Property, machinery and equipment are valued at cost. The Company provides for depreciation and amortization using the straight-line method over the estimated useful life of the assets:
Buildings
20 years
Machinery and equipment
5 - 12 years
Office equipment and software
3 - 5 years
Tools and dies
12 months
Leasehold improvements
lesser of lease term or useful life
Expenses for repairs and maintenance are charged to selling and administrative expenses as incurred.
Deferred Financing Costs
Deferred financing costs consist of costs incurred to obtain the Company’s long-term debt and are amortized using the effective interest method over the term of the related debt. Deferred financing fees of $279,740 and $303,310 net of accumulated amortization of $277,518 and $166,689 , respectively, as of April 30, 2020 and April 30, 2019, respectively, are deducted from long term debt on the Company’s balance sheet.
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.
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 SBA Paycheck Protection Program 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.
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
COVID-19 and CARES Act - Continued
As further described in Note H, the Company has applied for, and has received, funds under the Paycheck Protection 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 requires 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, it is later determined that it violated applicable laws or was otherwise ineligible to receive the PPP, the Company may be required to repay the PPP 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 and financial condition.
Income Taxes
The Company’s income tax expense, deferred tax assets and liabilities and reserves for unrecognized tax benefits reflect management’s best assessment of estimated future taxes to be paid. The Company is subject to income taxes in both the U.S. and several foreign jurisdictions. Significant judgments and estimates by management are required in determining the consolidated income tax expense assessment.
Deferred income tax assets and liabilities are determined based on differences between financial reporting and tax basis of assets and liabilities, and are measured using the enacted tax rates and laws that are expected to be in effect when the differences are expected to reverse. In evaluating the Company’s ability to recover its deferred tax assets within the jurisdiction from which they arise, the Company considers all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies and recent financial operations. In projecting future taxable income, the Company begins with historical results and changes in accounting policies, and incorporates assumptions including the amount of future state, federal and foreign pre-tax operating income, the reversal of temporary differences, and the implementation of feasible and prudent tax planning strategies. These assumptions require significant judgment and estimates by management about the forecasts of future taxable income and are consistent with the plans and estimates the Company uses to manage the underlying businesses. In evaluating the objective evidence that historical results provide, the Company considers three years of cumulative operating income and/or loss. Valuation allowances are established when necessary to reduce deferred income tax assets to an amount more likely than not to be realized.
A tax benefit from an uncertain tax position may only be recognized when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, based on the technical merits.
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
Income Taxes - Continued
The calculation of the Company’s tax liabilities involves dealing with uncertainties in the application of complex tax laws and regulations in a multitude of jurisdictions across its global operations. Changes in tax laws and rates could also affect recorded deferred tax assets and liabilities in the future. Except as noted below, management is not aware of any such changes that would have a material effect on the Company’s results of operations, cash flows or financial position.
The Company adjusts its tax liabilities when its judgment changes as a result of the evaluation of new information not previously available. Due to the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is materially different from its current estimate of the tax liabilities. These differences will be reflected as increases or decreases to income tax expense in the period in which they are determined.
Earnings per Share
Basic earnings per share are computed by dividing net income (loss) (the numerator) by the weighted-average number of common shares outstanding (the denominator) for the period. The computation of diluted earnings per share is similar to the computation of basic earnings per share, except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potentially dilutive common stock equivalents such as stock options and restricted stock, had been exercised or vested. There were 232,821 and 53,309 anti-dilutive common stock equivalents at April 30, 2020 and April 30, 2019, respectively, which have been excluded from the calculation of diluted earnings per share.
Fiscal Years Ended
April 30,
2020
2019
Net income (loss)
$ 443,102
$ (865,114)
Weighted-average shares
Basic
4,242,351
4,228,592
Effect of dilutive stock options
27,699
-
Diluted
4,270,050
4,228,592
Basic earnings (loss) per share
$ 0.10
$ (0.20)
Diluted earnings (loss) per share
$ 0.10
$ (0.20)
Revenue Recognition
The Company recognizes revenue when control of the promised goods or services are transferred to its customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services. The Company’s primary performance obligation to its customers is the production of finished goods electronic assembly products pursuant to purchase orders. The Company has concluded that control of the products it sells and transfers to its customers and an enforceable right to receive payment is customarily established at the point in time when the finished goods are shipped to its customers, or in some cases delivered pursuant to the specified shipping terms of each customer arrangement. With respect to consignment arrangements, control transfers and revenue is recognized at the point in time when the goods are shipped to the customer from the consignment location or when delivered to the customer (pursuant to agreed upon shipping terms). In those limited instances where finished goods
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
Revenue Recognition - Continued
delivered to the customer location are stored in a segregated area which are not controlled by the customer (title transfer, etc.) until they are pulled from the segregated area and consumed by the Company’s customer, revenue is recognized upon consumption. For tooling services, the Company’s performance obligation is satisfied at the point in time when the customer takes possession of dies or molds, which accounted for less than 1% of the Company’s revenue. For engineering, design, and testing services, the Company’s performance obligations are satisfied over time as the respective services are rendered as its customers simultaneously derive value from the Company’s performance.
From the time that a customer purchase order is received and contract is established, the Company’s performance obligations are typically fulfilled within a few weeks. The Company does not have any performance obligations that require more than one year to fulfill.
Each customer purchase order sets forth the transaction price for the products and services purchased under that arrangement. The Company evaluates the credit worthiness of its customers and exercises judgment to recognize revenue based upon the amount the Company expects to be paid for each sales transaction it enters into with its customers. Some customer arrangements include variable consideration, such as volume rebates, some of which depend upon the Company’s customers meeting specified performance criteria, such as a purchasing level over a period of time. The Company exercises judgment to estimate the most likely amount of variable consideration at each reporting date.
The Company’s typical payment terms are 30 days and its sales arrangements do not contain any significant financing component for its customers. The Company’s customer arrangements do not generate contract assets or liabilities that are material to the consolidated financial statements. The Company generally provides a warranty for workmanship, unless the assembly was designed by the Company, in which case it warrants assembly/design. The Company assembles and tests assemblies based on customers’ specifications prior to shipment. Historically, the amount of returns for workmanship issues has been de minimis under the Company’s standard or extended warranties. The Company does not provide its customers the option to purchase additional warranties and, therefore, the Company’s warranties are not considered a separate service or performance obligation.
The Company utilizes the practical expedient to treat shipping and handling activities after the customer obtains control as fulfillment activities. The Company records shipping and handling costs as selling and administrative expenses and costs are accrued when revenue is recognized.
The Company pays sales commissions to its sales representatives which may be considered as incremental costs to obtain a contract. However, since the recoverability period is less than one year, the Company utilizes the practical expedient provided by the new revenue recognition accounting standard that allows an entity to expense the costs of obtaining a contract as incurred.
During fiscal year 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 April 30, 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 April 30, 2020, with an expected duration of greater than one year.
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
Revenue Recognition - Continued
The majority of sales are made to U.S. based customers. The following table presents the Company’s revenue disaggregated by the principal end-user markets it serves:
Year Ended April 30,
Year Ended April 30,
Net sales by end-market
2020
2019
Industrial Electronics
$ 158,972,238
$ 160,435,562
Consumer Electronics
105,903,419
115,099,199
Medical / Life Sciences
16,166,825
15,019,190
Total Net Sales
$ 281,042,482
$ 290,553,951
Shipping and Handling Costs
The Company records shipping and handling costs for goods shipped to customers as selling and administrative expenses. Customers are typically invoiced for shipping costs and such amounts are included in net sales. Shipping and handling costs were not material to the financial statements for fiscal years 2020 or 2019.
Fair Value Measurements
Fair value measurements are determined based upon the exit price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants exclusive of any transaction costs. The Company utilizes a fair value hierarchy based upon the observability of inputs used in valuation techniques as follows:
Level 1: Observable inputs such as quoted prices in active markets;
Level 2: Inputs, other than quoted prices in active markets, that are observable either directly or indirectly; and
Level 3: Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.
Fair Value of Financial Instruments
The Company’s financial instruments include cash and cash equivalents, accounts receivable, note receivable, other receivables, accounts payable and accrued expenses which approximate fair value at April 30, 2020 and April 30, 2019, due to their short-term nature. The carrying amounts of the Company’s debt obligations approximate fair value based on future payments discounted at current interest rates for similar obligations or interest rates which fluctuate with the market.
On April 30, 2018, the Company entered into an Asset Purchase Agreement with Wagz, Inc. (“Wagz”), whereby the Company sold certain assets to Wagz for $350,000 cash, in exchange for 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. As of April 30, 2020, and April 30, 2019 the Company did not assign any value to the earn-out because any receipts from the earn-out are highly uncertain and contingent upon Wagz selling the product specified in the asset purchase agreement between the Company and Wagz.
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
Fair Value of Financial Instruments - Continued
On June 4, 2020, SigmaTron and Wagz, Inc. (“Wagz”), a privately held company in the pet technology (“Pet Tech”) market, announced that they have executed a Letter of Intent (“LOI”) relating to a proposed business combination. Subject to the terms and conditions set forth in the LOI, SigmaTron expects to issue approximately 2,270,000 shares of SigmaTron common stock that would result in the stockholders of Wagz owning in the aggregate approximately one-third of the combined company. The potential benefits to the Company from that transaction were summarized in the June 4, 2020 announcement. The parties expect the transaction to close by the end of October 2020 and it remains subject to achievement of certain milestones and satisfaction of conditions by both parties prior to closing including finalizing a material definitive agreement and the Company raising additional capital that it projects will be needed for the expanded operations in the amount of approximately or not less than $7,500,000 .
Intangible Assets
Intangible assets are comprised of finite life intangible assets including non-compete agreements and customer relationships. Finite life intangible assets are amortized on a straight line basis over their estimated useful lives of 7 years for non-compete agreements except for customer relationships which are amortized on an accelerated basis over their estimated useful life of 15 years.
Impairment of Long-Lived Assets
The Company reviews long-lived assets, including amortizable intangible assets, for impairment in accordance with FASB AC 360: Property, Plant and Equipment . Property, machinery and equipment and finite life intangible assets are reviewed whenever events or changes in circumstances occur that indicate possible impairment. If events or changes in circumstances occur that indicate possible impairment, the Company first performs an impairment review based on an undiscounted cash flow analysis at the lowest level at which cash flows of the long-lived assets are largely independent of other groups of its assets and liabilities. This analysis requires management judgment with respect to changes in technology, the continued success of product lines, and future volume, revenue and expense growth rates. If the carrying value exceeds the undiscounted cash flows, the Company records an impairment, if any, for the difference between the estimated fair value of the asset group and its carrying value. The Company further conducts annual reviews of its long-lived asset groups for possible impairment. The Company’s analysis for fiscal year 2020 and 2019 did not indicate that any of its other long-lived assets were impaired. The Company has yet to experience significant supply chain interruptions or material cancellations of orders; however, the potential impact of future disruptions, 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 or other related charges in future periods.
Investment in Wagz
As more fully described in Note E - Related Parties, the Company has recorded an investment in Wagz, a privately held company whose equity does not have a readily determinable fair value. As permitted by ASC 321, Investments - Equity Securities, paragraph 321-35-2, the Company has elected to carry its investment in Wagz equity at its cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for identical or a similar investment of the same issuer until the investment no longer qualifies to be measured under paragraph 321-35-2. At April 30, 2019, the Company continued to recognize the fair value of the Wagz common stock at $600,000; it reduced the fair market of the Wagz inventory by $109,046 and it reserved as bad debt the Wagz total account receivable of $331,283 . At April 30, 2020, the Company continued to recognize the fair value of the Wagz common stock at $600,000; the reduction in the fair market of the Wagz inventory by $109,046 and the reserve as bad debt for the Wagz total account receivable of $331,283 .
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
Investment in Wagz - Continued
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 shall be 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. At April 30, 2020, $768,500 was outstanding under other receivables.
On June 4, 2020, the Company and Wagz announced that they have executed a 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 October 2020 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 and the Company raising of additional capital that it projects will be needed for the expanded operations in the amount of at least $7,500,000.
Stock Incentive Plans
Under the Company’s stock option plans, options to acquire shares of common stock have been made available for grant to certain employees and directors. Each option granted has an exercise price of not less than 100% of the market value of the common stock on the date of grant. The contractual life of each option is generally 10 years. The vesting of the grants varies according to the individual options granted. The Company measures the cost of employee services received in exchange for an equity award based on the grant date fair value and records that cost over the respective vesting period of the award.
New Accounting Standards
In February 2016, the FASB issued ASU 2016-02, as amended, Leases (Topic 842), which requires a lessee to record a right-of-use asset and a lease liability for all leases with a term greater than twelve months regardless of whether the lease is classified as an operating lease or a financing lease.
Effective May 1, 2019, the Company adopted the new standard under the modified retrospective approach, applying the current-period adjustment method. Under the transition guidance of the modified retrospective approach there are a number of optional practical expedients made available to simplify the transition of the new standard. The Company has elected the following:
·
The condensed consolidated balance sheets for reporting periods beginning on or after May 1, 2019 are presented under the new guidance, while prior period amounts are not adjusted and continue to be reported in accordance with ASC Topic 840, Leases . The Company recognized a cumulative effect adjustment to the opening balance of retained earnings in the period of adoption of $5.
·
The Company has elected to utilize the package of practical expedients permitted under the transition guidance in the standard, which allowed the Company to not reassess (i) whether any expired or existing contracts contain leases, (ii) historical lease classification, and (iii) initial direct costs.
·
The Company has elected to combine lease and non-lease components as a single component for all asset classes.
·
The Company has elected to not assess whether existing or expired land easements that were not previously accounted for as leases under Topic 840 are or contain a lease under this Topic.
·
The Company has elected to keep leases with an initial term of 12 months or less off of the balance sheet.
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
New Accounting Standards - Continued
Upon adoption, the Company recorded Right-of-use ("ROU") assets and lease liabilities relating to operating leases of $6,017,771 and $6,290,289 , respectively. The changes did not have a material impact on our results of operations
or cash flows. The discount rates used to calculate the ROU assets and lease liabilities as of the effective date were based on the remaining lease terms as of the effective date. See Note M - Leases, for the impact on the financial statements and related disclosures from the adoption of this standard.
In June 2016, the FASB issued ASU No. 2016-1 |
