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Year-over-year tone shift - average net-tone change across Risk Factors and MD&A vs the prior 10-K.
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MD&A (Item 7)
8,295 words
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
In addition to historical financial information, this discussion of the business of the Company and other Items in this Annual Report on Form 10-K contain forward-looking statements concerning the Company’s business or results of operations. See the section titled “Cautionary Note Regarding Forward-Looking Statements” for a discussion of these forward-looking statements and the associated risks and uncertainties.
Overview
The Company currently operates in one reportable segment as an independent provider of electronic manufacturing services (“EMS”) and provides manufacturing and assembly services ranging from the assembly of individual components to the assembly and testing of box-build electronic products. The Company has the ability to produce assemblies requiring mechanical as well as electronic capabilities. This includes printed circuit board assemblies, electro-mechanical subassemblies and completely assembled (box-build) electronic products.
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.
In connection with the production of assembled products, the Company 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 manufacturing services through an international network of facilities located in the United States, Mexico, China, Vietnam and Taiwan.
Sales can be a misleading 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 which require the Company to perform manufacturing services on components and other materials supplied by a customer accounted for less than 1% of the Company’s revenues for each of the fiscal years ended April 30, 2025 and April 30, 2024.
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.
Factors Affecting Results
Supply Chain Component Shortages and Tariffs. Supply chain component shortagesimproved significantly during fiscal 2025. The Company believes this led customers to reduce their inventory stocking levels during
fiscal 2025, resulting in lower revenue for the Company. The Company’s business, results of operations, and financial condition continue to be impacted by any supply chain issues due to world-wide component shortages. In addition, changes to tariff policies in the United States have been frequent and dramatic during the end of fiscal 2025 and into fiscal 2026 . These fluctuations may slow customer investment, negatively impacting the Company’s business, results of operations, and financial condition.
Recent Developments
The Company’s primary secured credit agreements, being the Amended and Restated Credit Agreement dated as of July 18, 2022 (as amended, restated, supplemented or otherwise modified from time to time, the “JPM Credit Agreement”) by and among the Company, the other loan party thereto and JPMorgan Chase Bank, N.A, as lender (“JPM”), and the Credit Agreement dated as of July 18, 2022 (as amended, restated, supplemented or otherwise modified from time to time, the “Term Loan Agreement” and together with the JPM Credit Agreement, the “Credit Agreements”) by and among the Company, 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”) , contain financial covenants relating to (i) the Fixed Charge Coverage Ratio (as defined in the Credit Agreements), which is the ratio of the Company’s fixed payments on its indebtedness made during any fiscal period minus non-financed capital expenditures to EBITDA (as defined in the Credit Agreements) and (ii) the Total Debt to EBITDA Ratio (as defined in the Credit Agreements), which is the ratio of the Company’s borrowed money or letters of credit to EBITDA.
As of August 19, 2024, the Company was not in compliance with the financial covenants under the Credit Agreements as follows: the Fixed Charge Coverage Ratio for multiple twelve month periods including those ending on April 30, 2024 and July 31, 2024 was less than 1.10:1.00, the Total Debt to EBITDA Ratio for the twelve month period ending on April 30, 2024 was greater than 4.50:1.00, and the Total Debt to EBITDA Ratio for the twelve month period ending on July 31, 2024 was greater than 4.25:1.00 (collectively, the “2024 Covenant Defaults”). In addition, the Company received a delinquency notification letter from Nasdaq, dated August 16, 2024, indicating that the Company was not in compliance with the continued listing requirements of Nasdaq for failing to timely file the Company ’ s F o rm 10- K annual report for the fiscal year ended April 30, 2024. This notification also constituted a default under the Credit Agreements (collectively with the 2024 Covenant Defaults, the “2024 Defaults”). The Company had 60 days from the date of the Nasdaq delinquency notice, or until October 15, 2024, to file a plan with Nasdaq to regain compliance. The Company filed its annual report for the fiscal year ended April 30, 2024 on September 3, 2024, and on September 10, 2024, the Company received a notification letter from Nasdaq indicating that the Company had regained compliance with the applicable continued listing requirements based on the filing of its F o rm 10- K .
Due to the 2024 Covenant Defaults, the facilities under the Credit Agreements were classified as current liabilities on the Consolidated Balance Sheet at July 31, 2024 and April 30, 2024. In addition, due to the lender demand of a Replacement Transaction (as defined in the Credit Agreements) by September 2025 and the risk of additional covenant compliance failures based on current revenue levels the Company continues to classify this debt as current liabilities as of April 30, 2025.
On August 19, 2024 (the “Third Amendment Effective Date”), the Lender Parties waived the 2024 Defaults pursuant to (i) the Waiver and Amendment No. 3 to Credit Agreement (the “JPM Amendment”) between the Company and JPM, and (ii) the Waiver and Amendment No. 3 to Credit Agreement (the “TCW Amendment” and together with the JPM Amendment, the “2024 Amendments”) by and among the Company, the TCW Lenders, and the Agent. In consideration of the TCW Amendment, the Company and the Agent also entered into the Third Amendment Fee Letter to the TCW Credit Agreement (the “Fee Letter”) dated as of the Third Amendment Effective Date. The 2024 Amendments also amended the financial covenants and certain other terms of the Credit Agreements, including, among other things, that the Company will pursue and close a Replacement Transaction to pay the obligations under the Credit Agreements in full no later than September 30, 2025 unless the Company meets certain debt ratios for the twelve month period ending on August 31, 2025. See Waivers and Amendments No. 3 within Note H – Long-term Debt for more information. During March 2025, the Company and its lenders agreed to additional modifications designed to facilitate a Replacement Transaction. See Waivers and Amendments No. 4 within Note H – Long-term Debt for more information.
The Company has been taking steps to reduce its debt and cost structure. Most recently, since the beginning of calendar year 2024, these actions include the sale of its Elgin, Illinois property and consolidation of the Elgin operations to the Elk Grove Village, Illinois headquarters, reduction of headcounts at various operations and corporate, and inventory reduction. During December 2024, the Company executed a sale/leaseback transaction with respect to its Elk Grove Village, Illinois headquarters, using the proceeds to further reduce its debt position. For further discussion of the transaction, see Note J – Sale/Leaseback.
On the Closing Date, Transom completed the previously announced acquisition of the Company pursuant to the Merger Agreement , whereby the Company became a wholly owned subsidiary of Parent in the Merger. On the Closing Date, each issued and outstanding share of Common Stock was converted into the right to receive $3.02 in cash, less applicable taxes and withholdings. Also on the Closing Date, the Company’s obligations under the Credit Agreements were repaid in full.
The Company continues to explore other strategic initiatives and refinancing options to further reduce its debt to enable it to comply with increasingly stringent financial covenants. Delays or a failure to effectively reduce debt, including due to circumstances outside of our control, could have an adverse effect on our financial position and results of operations .
Critical Accounting Estimates:
Management Estimates and Uncertainties – The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates made in preparing the consolidated financial statements include depreciation and amortization periods, the allowance for doubtful accounts, excess and obsolete reserves for inventory, deferred income, deferred taxes, uncertain tax positions, valuation allowance for deferred taxes and valuation of goodwill and long-lived assets. Actual results could materially differ from these estimates.
The potential impact of continued economic uncertainty due to persistent inflation and continuing global supply chain shortages and unpredictability may have a significant adverse impact on the timing of delivery of customer orders and the levels of future customer orders.
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 valuation and excess and obsolete inventory for which the customer is not obligated. 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. 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.
Impairment of Long-Lived Assets – The Company reviews long-lived assets, including amortizable intangible assets, for impairment in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 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.
Fair Value Measurements Warrants – Fair value measurements are market-based measurements, not entity-specific measurements. Therefore, fair value measurements are determined based on the assumptions that market participants would use in pricing the asset or liability. The Company follows a three-level hierarchy to prioritize the inputs used in valuation techniques to derive fair values. The basis for fair value measurements for each level within the hierarchy is described below:
Level 1: Quoted prices in active markets for identical assets or liabilities.
Level 2: Quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs are observable in active markets.
Level 3: Valuations derived from valuation techniques in which one or more significant inputs are unobservable in active markets.
During third and fourth quarters of fiscal 2025, the Company valued its contingent warrants which are classified as liabilities under authoritative accounting standards. These common stock warrants are valued using a Monte Carlo model, with level 3 inputs such as expected volatility, risk-free interest rate, and expected number of warrants ultimately utilized and term that are not observable in active markets.
The fair value of the Company’s warrant liability for fiscal 2025 is as follows:
April 30,
Beginning balance
Contingent warrants issuance
Issuance of warrants
Change in fair value of warrants
Ending balance
Income Tax – The Company’s income tax expense, deferred tax assets and liabilities and reserves for unrecognized tax benefits reflect management’s best assessment of estimated future taxes to be paid. The Company is subject to income taxes in both the U.S. and several foreign jurisdictions. Significant judgments and estimates by management are required in determining the consolidated income tax expense assessment.
Deferred income tax assets and liabilities are determined based on differences between financial reporting and tax basis of assets and liabilities, and are measured using the enacted tax rates and laws that are expected to be in effect when the differences are expected to reverse. In evaluating the Company’s ability to recover its deferred tax assets within the jurisdiction from which they arise, the Company considers all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies and recent financial operations. In projecting future taxable income, the Company begins with historical results and changes in accounting policies, and incorporates assumptions including the amount of future state, federal and foreign pre-tax operating income, the reversal of temporary differences, and the implementation of feasible and prudent tax planning strategies. These assumptions require significant judgment and estimates by management about the forecasts of future taxable income and are consistent with the plans and estimates the Company uses to manage the underlying businesses. In evaluating the objective evidence that historical results provide, the Company considers three years of cumulative operating income and/or loss. Valuation allowances are established when necessary to reduce deferred income tax assets to an amount more likely than not to be realized. Given the Company’s recent operating losses, the Company determined that it may not reasonably rely on future forecasted income to benefit its deferred tax assets. For these reasons the Company established a full valuation allowance on its deferred tax assets as of October 31, 2024, which remains effective as of April 30, 2025.
New Accounting Standards:
See Note B – Summary of Significant Accounting Policies of Item 15(a) Exhibits and Financial Statement Schedules .
Results of Operations:
FISCAL YEAR ENDED APRIL 30, 2025 COMPARED
TO FISCAL YEAR ENDED APRIL 30, 2024
The following table sets forth the percentage relationships of gross profit and expense items to net sales for the years indicated:
Fiscal Years Ended
April 30,
Net sales
Costs of products sold
As a percent of net sales
Gross profit
As a percent of net sales
Selling and administrative expenses
As a percent of net sales
Operating income
Other income
Change in fair value of warrants
Interest expense, net
Loss before income taxes
Income tax (expense) benefit
Net loss
Net sales
Net sales decreased $69,167,702, or 18.5%, to $304,716,119 in fiscal 2025, compared to $373,883,821 in fiscal 2024. The decline was primarily attributable to a broad decline in customer demand in the consumer electronics, industrial electronics and medical/life science markets as compared to fiscal 2024 which we believe was driven by the return of a normalized supply chain.
Costs of products sold
Cost of products sold decreased $62,947,344, or 18.5%, to $277,410,159 (91.0% of net sales) for fiscal 2025, compared to $340,357,503 (91.0% of net sales) for the prior fiscal year. In fiscal 2025, the cost of products sold as a percentage of sales has remained consistent, compared to the prior fiscal year.
Gross profit margin
Gross profit margin was 9.0% of net sales, in fiscal year 2025 compared to 9.0% of net sales in fiscal 2024. In fiscal 2025, the gross margins as a percentage of sales has remained consistent, compared to the prior fiscal year.
Selling and administrative expenses
Selling and administrative expenses decreased $858,105, or 3.3%, to $25,534,298 (8.4% of net sales) in fiscal 2025, compared to $26,392,403 (7.1% of net sales) for the same period in the last fiscal year. The decrease in selling and administrative expenses is primarily due to a decrease in bonus expense and miscellaneous general and administrative expenses. Additional cost reductions were largely offset by increased professional services charges and the recording of warrant expense. Additional cost reductions were largely offset by increased professional services charges and the recording of warrant expense.
Other Income
Other income increased to $7,582,017 in fiscal 2025, compared to $466,704 in fiscal 2024. The increase in other income was primarily driven by the December 2024 sale/leaseback transaction for the facility located in Elk Grove Village, IL.
Change in fair value of warrants
Contingent warrants were issued at a valuation of $2,263,000 during fiscal 2025 using a Monte Carlo model with a subsequent change in the fair value of contingent warrants decreasing expense by $544,945, as well as the issuance of warrants in the amount of $770,250 for a net value as of April 30, 2025 of $947,805 in connection with the TCW Amendment which included the obligation to issue contingent warrants to purchase shares of the Company’s common stock. The valuation was based on the actual number of contingent warrants that can be issued under the TCW Amendment using the Monte Carlo model subject to remeasurement until warrants are issued, exercised or cancelled.
Interest expense, net
Interest expense, net, increased to $13,841,606 in fiscal 2025, compared to $10,362,038 for the prior fiscal year. The increase relates to additional interest for amendment fees for TCW and deferred financing costs as required by the debt modification during the second quarter of fiscal 2025.
Income tax expense
Income tax expense increased $6,587,188 to an income tax expense of $6,311,926 for fiscal 2025, compared to an income tax benefit of $275,262 for the prior fiscal year. The effective tax rate decreased to -160.1% for fiscal 2025, compared to 10% for fiscal 2024. The increase in income tax expense for fiscal 2025 compared to fiscal 2024 is primarily due to an increase in the valuation allowance recorded during fiscal 2025. The decrease in effective tax rate is due to variations in income earned by jurisdiction and the recording of valuation allowance.
Net income/loss
Net loss increased $7,768,751, to a net loss of $10,254,908 for fiscal 2025, compared to net loss of $2,486,157 for the prior fiscal year. The increase in net loss primarily relates to lower sales volumes, a warrant remeasurement, deferred financing costs related to debt modification, higher labor and other fixed manufacturing costs, severance related costs and a full valuation allowance on deferred tax assets. The increase in net loss is partially offset with the gain related to the December 2024 sale/leaseback transaction for the facility located in Elk Grove Village, IL in the amount of $7,175,191.
Liquidity and Capital Resources:
Over the past two years the Company has been in non-compliance with certain financial covenants in its credit agreements (further discussion in Note H – Long-term Debt. Accordingly, beginning in August 2024 and continuing through July 28, 2025, the Company negotiated with its secured lenders to amend the applicable credit agreements. Under the terms of those amended agreements, the Company was required to pursue and close a Replacement Transaction to pay the Obligations (as defined in the Credit Agreements) in full no later than September 30, 2025 unless the Company meets certain debt ratios for the twelve month period ending on August 31, 2025. Furthermore, as of April 30, 2025, there remained a risk of additional covenant failures based on the Company’s revenue levels. On the Closing Date, in connection with the Merger, the Company’s obligations under the credit agreements were repaid in full.
The Company has reduced its debt by selling assets, reducing workforce, and reducing its capital requirements to improve operating performance. D uring December 2024, the Company executed a sale/leaseback transaction with respect to its Elk Grove Village, Illinois headquarters, using the proceeds to reduce its debt position.
The Company’s primary sources of liquidity have traditionally been comprised of cash and cash equivalents as well as availability under credit agreements in place at the time.
In the event customers delay orders or future payments are not made timely, economic conditions remain impacted for longer than the Company expects or deteriorate further, the tariff issues persist or worsen, the Company experiences continued supply chain disruptions on certain raw materials, the Company desires to expand its operations, its business grows more rapidly than expected, the Company fails to effectively reduce debt, any new public health crises arise, or geopolitical risks continue or worsen , the Company’s liquidity position could be severely impacted and 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.
Operating Activities
Cash flow provided by operating activities was $18,530,322 for the fiscal year ended April 30, 2025, compared to cash flow provided by operating activities of $27,760,048 for the prior fiscal year. The decrease in cash flow provided by operating activities was primarily the result of a decrease in inventory in the amount of $20,554,334, an increase in operating lease liabilities in the amount of $3,524,612 and a decrease in prepaid expenses and other assets in the amount of $2,443,120 partially offset by a decrease in customer deposits in the amount of $4,116,762.
Investing Activities
Cash provided by investing activities was $7,100,406 for fiscal 2025, compared to cash provided by investing activities of $117,112 for fiscal 2024. The increase was primarily the result of the Company’s purchases of $1,191,692 in machinery and equipment to be used in the ordinary course of business and the sale/leaseback pf the Company’s principal manufacturing facility in Elk Grove Village, Illinois in December 2024, which provided net proceeds of $8,292,098. The Company anticipates future purchases of machinery and equipment will be funded by lease transactions. However, there is no assurance that the Company will be able to obtain funding for leases at acceptable terms, if at all, in the future.
Financing Activities
Cash used in financing activities was $25,015,838 for the fiscal year ended April 30, 2025, compared to cash used in financing activities of $26,278,929 for fiscal 2024. The decrease in cash used in financing activities was primarily the result of payments under the line of credit and term loan agreements.
Financing Summary
Debt and finance lease obligations consisted of the following at April 30, 2025 and April 30, 2024:
Debt:
Notes Payable - Banks
Notes Payable - Buildings
Notes Payable - Equipment
Unamortized deferred financing costs
Total debt
Less current maturities*
Long-term debt
Finance lease obligations
Less current maturities
Total finance lease obligations, less current portion
* Due to the 2024 Covenant Defaults, the facilities under the Credit Agreements were classified as current liabilities on the Consolidated Balance Sheet at July 31, 2024 and April 30, 2024. In addition, due to the lender demand of a Replacement Transaction by September 2025 and the risk of additional covenant compliance failures based on current revenue levels the Company continues to classify this debt as current liabilities as of April 30, 2025.
Notes Payable – Banks
As of April 30, 2025, the Company’s primary secured credit agreements included (i) the Amended and Restated Credit Agreement dated as of July 18, 2022 (as amended, restated, supplemented or otherwise modified from time to time, the “JPM Credit Agreement”) by and between the Company and JPMorgan Chase Bank, N.A, as lender (“JPM”), which provides for a secured credit facility consisting of a revolving loan facility and, until July 2022, a term loan facility, and (ii) the Credit Agreement dated as of July 18, 2022 (as amended, restated, supplemented or otherwise modified from time to time, the “Term Loan Agreement” and together with the JPM Credit Agreement, the “Credit Agreements”) by and among the Company, 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 provides for a term loan facility . The facility under the JPM Credit Agreement, as amended, allowed 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 “Revolving Commitment”). The maturity date of the facility is July 18, 2027.
The Credit Agreements contain financial covenants relating to (i) the Fixed Charge Coverage Ratio (as defined in the Credit Agreements), which is the ratio of the Company’s fixed payments on its indebtedness made during any fiscal period minus non-financed capital expenditures to EBITDA (as defined in the Credit Agreements) and (ii) the Total Debt to EBITDA Ratio (as defined in the Credit Agreements), which is the ratio of the Company’s borrowed money or letters of credit to EBITDA.
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 (as defined in the JPM Credit Agreement), 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.
In connection with the entry into the JPM Credit Agreement, Lender and TCW, as administrative agent under the Term Loan Agreement, entered into the Intercreditor Agreement, dated July 18, 2022, and acknowledged by SigmaTron (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.
Th e facility under the JPM Credit Agreement is secured by: (a) a first priority security interest in SigmaTron’s (i) accounts receivable 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). As of April 30, 2025, there was $12,909,002 outstanding and $14,180,691 of unused availability under the revolving loan facility compared to an outstanding balance of $28,598,719 and $13,443,766 of unused availability at April 30, 2024. As of April 30, 2025 and April 30, 2024, the unamortized deferred financing amount offset against outstanding debt was $786,882 and $592,664, respectively.
The Term Loan Agreement provides for a term loan from the TCW Lenders to the Company in the principal amount of $40,000,000 (the “TCW Term Loan”). The TCW Term Loan bears i nterest 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 April 30, 2025, was $40,006,558 compared to an outstanding balance of $37,503,301 at April 30, 2024. As of April 30, 2025 and April 30, 2024, the unamortized deferred financing amount offset against outstanding debt was $2,859,746 and $935,492, respectively.
The TCW Term Loan is secured by: (a) a first priority security interest in all property of SigmaTron that does not constitute ABL Priority Collateral, which includes: (i) SigmaTron’s machinery, equipment and fixtures (but excluding ABL Priority Equipment (as defined in the ICA)) , (ii) the Term Priority Mexican Inventory (as defined in the ICA), (iii) SigmaTron’s stock in its direct and indirect subsidiaries, (iv) SigmaTron’s general intangibles (excluding any that constitute ABL Priority Collateral), goodwill and intellectual property, (v) the proceeds of business interruption insurance that constitute Term BI Insurance Share (as defined in the ICA) , (vi) tax refunds, and (vii) 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. The net proceeds received by the Company from the sale of the Elgin, Illinois, property in February, 2024, reduced the TCW Term Loan.
Waivers and Amendments Nos. 1 & 2
In March 2023, the Company received default notices from JPM and TCW due to non-compliance with certain financial covenants under their respective Credit Agreements, including the Fixed Charge Coverage Ratio and Total Debt to EBITDA Ratio. Additionally, the Company received a delinquency notification from Nasdaq for failing to timely file its Form 10-Q for the fiscal quarter ended January 31, 2023, which also constituted a default under the Credit Agreements. Consequently, the total debt balances were classified as current liabilities. On April 28, 2023, the Company entered into waivers with JPM and TCW, which waived certain events of default and amended terms of the Credit Agreements. These amendments included requirements to maintain a minimum of $2.5 million in revolver availability, modifications to the definition of EBITDA, and adjustments to the Total Debt to EBITDA Ratios. On June 15, 2023, the Company executed further amendments to extend TCW’s ability to trigger a potential corporate restructuring to occur no earlier than August 1, 2023.
Waivers and Amendments No. 3
As of August 19, 2024, the Company was not in compliance with the financial covenants under the Credit Agreements as follows: the Fixed Charge Coverage Ratio for multiple twelve month periods including those ending on April 30, 2024 and July 31, 2024 was less than 1.10:1.00, the Total Debt to EBITDA Ratio for the twelve month period ending on April 30, 2024 was greater than 4.50:1.00, and the Total Debt to EBITDA Ratio for the twelve month period ending on July 31, 2024 was greater than 4.25:1.00 (collectively, the “2024 Covenant Defaults”).
Due to the 2024 Covenant Defaults, the facilities under the Credit Agreements were classified as current liabilities on the Consolidated Balance Sheet at July 31, 2024 and April 30, 2024. In addition, due to the lender demand of a Replacement Transaction by September 2025 and the risk of additional covenant compliance failures based on current revenue levels the Company continues to classify this debt as current liabilities as of April 30, 2025.
In addition, the Company received a delinquency notification letter from Nasdaq, dated August 16, 2024, indicating that the Company was not in compliance with the continued listing requirements of Nasdaq for failing to timely file the Company ’ s F o rm 10- K annual report for the fiscal year ended April 30, 2024. This notification also constituted a default under the Credit Agreements (collectively with the 2024 Covenant Defaults, the “2024 Defaults”). The Company had 60 days from the date of the Nasdaq delinquency notice, or until October 15, 2024, to file a plan with Nasdaq to regain compliance. The Company filed its annual report for the fiscal year ended April 30, 2024 on September 3, 2024, and on September 10, 2024, the Company received a notification letter from Nasdaq indicating that the Company had regained compliance with the applicable continued listing requirements based on the filing of it s F o rm 10- K .
On August 19, 2024 (the “Third Amendment Effective Date”), the Lender Parties waived the 2024 Defaults pursuant to (i) the Waiver and Amendment No. 3 to Credit Agreement (the “JPM Amendment”) between the Company and JPM, and (ii) the Waiver and Amendment No. 3 to Credit Agreement (the “TCW Amendment” and together with the JPM Amendment, the “2024 Amendments”) by and among the Company, the TCW Lenders, and the Agent. In consideration of the TCW Amendment, the Company and the Agent also entered into the Third Amendment Fee Letter (the “Fee Letter”) dated as of the Third Amendment Effective Date. The 2024 Amendments provided for, among other things, a waiver of the Company’s noncompliance with the financial covenants relating to (i) the Fixed Charge Coverage Ratio (as defined in the Credit Agreements), and (ii) the Total Debt to EBITDA Ratio (as defined in the Credit Agreements), in each case as of the Third Amendment Effective Date.
The 2024 Amendments also amended other provisions of the Credit Agreements, including to: (i) modify the minimum ratios under the Fixed Charge Coverage Ratio to range from 0.70:1.0 for the twelve months ending as of July 31, 2024, to 1.00:1.0 for the twelve months ending as of September 30, 2025 and thereafter, measured monthly; (ii) adjust the maximum ratios under the Total Debt to EBITDA Ratio to range from 6.50:1.0 for the twelve months ending as of July 31, 2024, to 3.50:1.0 for the twelve months ending as of April 30, 2027, measured quarterly; (iii) modify the definition of EBITDA to allow for additional adjustments for certain transactions and charges; (iv) provide for the reimbursement of certain fees by the Company in connection with the Amendments or the transactions contemplated thereby; (v) increase the minimum required Availability (as defined in the JPM Credit Agreement) to $3.5 million starting on the Third Amendment Effective Date; (vi) provide that the Company must pursue and close a Replacement Transaction to pay the Obligations (as defined in the Credit Agreements) in full no later than September 30, 2025 unless the Company meets certain debt ratios for the twelve month period ending on August 31, 2025; and (vii) require the Company to engage a financial advisor if requested by the Agent after November 1, 2024.
In addition, pursuant to the JPM Amendment, the parties agreed to reduce the Revolving Commitment (as defined in the JPM Credit Agreement) from $70 million to $55 million as of the Third Amendment Effective Date and pay to JPM certain amendment fees and certain additional fees if the Company does not meet certain financial milestones by the applicable measurement periods specified in the JPM Amendment.
In addition, pursuant to the TCW Amendment the parties agreed to (i) amend the principal payment schedule under the TCW Term Loan to $250,000 per quarter; (ii) extend the PIK Period (as defined in the Term Loan Agreement) for three additional quarters beyond October 31, 2024 if the Total Debt to EBITDA Ratio exceeds a certain threshold as of certain dates; (iii) permit the Company to elect to pay on a quarterly basis in-kind a portion of the Baseline Applicable Margin (as defined in the Term Loan Agreement) per annum provided no default or event of default under the Term Loan Agreement has occurred; (iv) increase a portion of the Term Loan Borrowing Base (as defined in the Term Loan Agreement) based on the value of the Company’s real estate; (v) reduce the asset coverage pre-payment ratio under the TCW Term Loan to 90% of the outstanding principal balance; and (vi) provide the Agent with the right to appoint a non-voting observer to attend regular meetings of the Company’s Board of Directors and any relevant committees.
Also on August 19, 2024, and in connection with the TCW Amendment, the Company entered into the Fee Letter, which provides for a payment to the Agent of $395,000 added to the principal amount owed under the TCW Term Loan and for certain monthly ticking fees equal to a range of percentages of the outstanding principal amount under the TCW Term Loan, provided the Company does not meet certain financial milestones by the applicable dates provided therein. In addition, pursuant to the Fee Letter, if the Company does not meet certain financial metrics from December 2024 to September 2025 as defined in the agreement, the Company has agreed to deliver to the Agent warrants to purchase shares of the Company’s common stock (the “Warrants”) in an amount equal to a percentage of the outstanding common stock of the Company on a fully diluted basis ranging from 1.25% (as of December 1, 2024) to 17.5% (as of September 1, 2025). The exercise price for the Warrants will be $0.01 per share and the Warrants would vest immediately upon issuance. The value of Warrants issued was $770,253 as of April 30, 2025.
The Company evaluated the accounting for the warrants associated with the Fee Letter to determine whether the warrants should be classified as equity or as a derivative liability on the consolidated balance sheet. In accordance with ASC 815-40, Derivatives and Hedging - Contracts in the Entity’s Own Equity (ASC 815-40), the Company classifies a warrant as equity if it is indexed to the Company’s equity and several specific conditions for equity classification are met. A warrant is not considered indexed to the Company’s equity in general when it contains certain types of exercise contingencies or adjustments to exercise price. If a warrant is not indexed to the Company’s equity or it has net cash settlement that results in the warrants to be accounted for under ASC 480, Distinguishing Liabilities from Equity, or ASC 815-40, it is classified as a derivative liability which is carried on the consolidated balance sheet at fair value with any changes in its fair value recognized currently in the statement of operations. The Company concluded that the warrants shall be classified as a liability upon entering into the Fee Letter and as a result recorded a liability of $2,263,000. In subsequent periods, these warrants are subject to remeasurement. As of April 30, 2025, the warrants were valued at $947,805. The remeasurement of the warrants is recorded within the change in fair value of warrants within the Consolidated Statements of Operations.
January 2025 Amendment
On January 10, 2025, the Company and JPM entered into Amendment No. 4 to the JPM Credit Agreement to increase the maximum letter of credit exposure permitted thereunder from $1,000,000 to $2,500,000.
All other material terms of the Credit Agreements, as amended by the foregoing Amendments, remain unchanged.
Waivers and Amendments No. 4
On March 28, 2025 (the “March 2025 Amendment Effective Date”), the Company entered into (i) the Waiver and Amendment No. 5 to Credit Agreement (as amended, restated, supplemented or otherwise modified from time to time, the “March 2025 JPM Amendment”) between the Company and JPMorgan Chase Bank, N.A., as lender (“JPM”), to that certain Amended and Restated Credit Agreement between the Company and JPM dated as of July 18, 2022 (as amended, restated, supplemented or otherwise modified from time to time, the “JPM Credit Agreement”); and (ii) the Waiver and Amendment No. 4 to Credit Agreement (as amended, restated, supplemented or otherwise modified from time to time, the “March 2025 TCW Amendment;” together with the March 2025 JPM Amendment, the “March 2025 Amendments”) by and among the Company, the lenders identified therein (the “Lenders”) and TCW Asset Management Company LLC, as administrative agent for the Lenders (in such capacity, the “Agent;” collectively the Agent and the Lenders, the “TCW Lenders;” and collectively, JPM and the TCW Lenders, the “Lender Parties”), to that certain Credit Agreement dated as of July 18, 2022 among the Company, the Lenders and the Agent (as amended, restated, supplemented or otherwise modified from time to time, the “TCW Credit Agreement;” together with the JPM Credit Agreement, the “Credit Agreements”).
The March 2025 Amendments amended the Credit Agreements to: (A) suspend the Fixed Charge Coverage Ratio and the Total Debt to EBITDA Ratio covenants (each as defined in the Credit Agreements) until the first quarter of FY2026; (B) require that Trailing Three Month EBITDA (as defined in the March 2025 Amendments) as of each month-end be not less than $250,000; (C) replace the conditional obligation of the Company to close a Replacement Transaction to pay the Obligations (each as defined in the Credit Agreements) in full no later than September 30, 2025 with requirements that the Company deliver at least one indication of
interest for a Replacement Transaction, which has been accomplished, and a signed exclusivity agreement which includes a letter of intent with terms for a Replacement Transaction by April 3, 2025, and further that it commence a tender offer for the Replacement Transaction by May 15, 2025, and close it within 45 days thereafter, with an extension of up to 30 days if the tender offer is extended under the agreement for the Replacement Transaction; (D) modify the definition of EBITDA to allow for additional adjustments for certain financial advisor and legal fees; (E) reduce the minimum required Availability (as defined in the JPM Credit Agreement) to $3.0 million; (F) apply the net proceeds of the sale and leaseback of the Company’s Elk Grove Village, Illinois, headquarters to reduce principal of the revolving line of credit under the JPM Credit Agreement; and (G) waive any noncompliance with certain covenants as of the March 2025 Amendment Effective Date.
In addition, pursuant to the March 2025 JPM Amendment, the parties agreed to (i) reduce the Revolving Commitment (as defined in the JPM Credit Agreement) to $35 million; (ii) establish a $3.7 million reserve block against Availability; and (iii) pay JPM a $25,000 amendment fee and, if a Replacement Transaction is not consummated as specified in the March 2025 JPM Amendment, an additional amendment fee.
In addition, pursuant to the March 2025 TCW Amendment, the parties agreed to (i) remove the asset coverage pre-payment ratio covenant under the TCW Term Loan; and (ii) provide the Agent with the right to require the Company to enlarge the financial advisor’s scope of services after an event of default after the March 2025 Amendment Effective Date.
All other material terms of the Credit Agreements, as amended by the March 2025 Amendments, remain unchanged. Descriptions of the material terms and conditions of the Credit Agreements were previously disclosed by the Company in its Annual Report on Form 10-K for the fiscal year ended April 30, 2022, filed on July 27, 2022, in its Form 8-K filed on May 4, 2023, in its Form 8-K filed on June 23, 2023, in its Form 8-K filed on August 22, 2024, and in subsequent Quarterly Reports on Form 10-Q, and are incorporated herein by reference.
On the Closing Date, in connection with the Merger, the Company’s obligations under the credit agreements were repaid in full.
China Construction Bank
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. The agreement has been renewed each time it expired in accordance with its terms on January 26, 2021, January 17, 2022, February 17, 2023, and March 1, 2024. On January 22, 2025, the agreement was renewed, and is scheduled to expire on January 19, 2026. Under the agreement Wujiang SigmaTron Electronic Technology Co., Ltd. can borrow up to 10,000,000 Renminbi, approximately $1,400,000 as of January 31, 2025, 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 3.15% per annum. There was no outstanding balance under the facility at April 30, 2025 and April 30, 2024, respectively.
Notes Payable – Buildings
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 $313,015 and $366,572 at April 30, 2025 and April 30, 2024, 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, which had a fixed interest rate of 8.00% per annum, matured on May 1, 2023, and the final quarterly installment payment of $9,310 was paid.
The Company routinely enters into secured note agreements including with FGI Equipment Finance LLC to finance the purchase of equipment. The terms of the outstanding secured note agreements mature from March 2025 through January 2029, with quarterly installment payments ranging from $10,723 to $69,439 and a fixed interest rate ranging from 8.25% to 12.00% per annum.
Other
The Company provides funds for administration and manufacturing services such as salaries, wages, overhead and capital expenditure items as necessary to operate its Mexican, Vietnamese and Chinese subsidiaries and the international procurement office in Taiwan. 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 fiscal year ended April 30, 2025, resulted in net foreign currency transaction losses of $981,838 compared to net foreign currency losses of $796,315 in the prior year. In fiscal year 2025, the Company paid approximately $52,550,000 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 $17,820,000 as of April 30, 2025.
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. The supply chain disruptions have improved during fiscal 2025. The Company anticipates the supply chain disruptions will continue to improve during fiscal 2026.
