Quarterly Report (10-q)

Date : 08/09/2019 @ 10:09AM
Source : Edgar (US Regulatory)
Stock : SMTC Corporation (SMTX)
Quote : 3.595  0.145 (4.20%) @ 12:59AM

Quarterly Report (10-q)

 


 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549 

_________________

FORM 10-Q

_________________

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934  

 

 

 

For the quarterly period ended June 30 , 201 9

 

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 00 -31051

 

_________________

 

SMTC CORPORATION

(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

_________________

DELAWARE

98-0197680

(STATE OR OTHER JURISDICTION OF  

INCORPORATION OR ORGANIZATION)

(I.R.S. EMPLOYER   IDENTIFICATION NO.)

 

7050 WOODBINE AVENUE

Suite 300

MARKHAM, ONTARIO, CANADA L3R 4G8

(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)

 

(905) 479-1810

(REGISTRANT’S TELEPHONE NUMBER, INCLUDING AREA CODE)

 

 

Securities registered pursuant to Section 12(b) of the Act:

 

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, par value $0.01 per share

SMTX

NASDAQThe Nasdaq Global Market

 

_________________

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

 

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

 

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

 

Large accelerated filer    ☐            Accelerated filer    ☐            Non-accelerated filer    ☐            Smaller reporting company    ☒            Emerging growth company    ☐        

 

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

 

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

 

As of August 8, 2019, SMTC Corporation had 28,019,288 shares of common stock, par value $0.01 per share, outstanding.

 



 

 

   

 

SMTC CORPORATION

 

Table of Contents

 

PART I FINANCIAL INFORMATION

3

  

  

  

Item 1

Financial Statements

3

  

  

  

 

Interim Consolidated Balance Sheets (unaudited)

3

  

  

  

 

Interim Consolidated Statements of Opera tions and Comprehensive Loss (unaudited)

4

  

  

  

 

Interim Consolidated Statements of Changes in Shareholders’ Equity (unaudited)  

5

  

  

  

 

Interim Consolidated Statements of Cash Flows (unaudited)

7

  

  

  

 

Notes to Interim Consolidated Financial Statements (unaudited)

8

  

  

  

Item 2

Management’s Discussion and Analysis of Financial Condition and Results of Operations

27

  

  

  

Item 3

Quantitative and Qualitative Disclosures A bout Market Risk

37

  

  

  

Item 4

Controls and Procedures

39

  

  

PART II OTHER INFORMATION

39

  

  

  

Item 1A

Risk factors

39

 

 

 

Item 6

Exhibits

40

  

2

 

 

SMTC CORPORATION

Part I FINANCIAL INFORMATION

 

Item 1 Financial Statements

 

 

Interim Consolidated Balance Sheets:

(Expressed in thousands of U.S. dollars)

(Unaudited)

 

   

June 30 ,

201 9

   

December 30 ,

201 8

 

Assets

               

Current assets:

               

Cash

  $ 634     $ 1,601  

Accounts receivable — net (note 4)

    64,951       72,986  

Unbilled contract assets (note 4)

    27,619       20,405  

Inventories (note 4)

    46,149       53,203  

Prepaid expenses and other assets

    6,691       5,548  

Derivative assets (note 11)

          15  

Income taxes receivable

    158       160  

Total current assets

    146,202       153,918  
                 

Property, plant and equipment — net (note 4)

    26,855       28,160  

Operating lease right of use assets — net (notes 2 and 6)

    4,445        

Goodwill (note 4)

    18,165       18,165  

Intangible assets — net (note 4)

    16,247       19,935  

Deferred income taxes — net

    285       380  

Deferred financing costs — net

    646       668  

Total assets

  $ 212,845     $ 221,226  
                 

Liabilities and Shareholders’ Equity

               

Current liabilities:

               

Revolving credit facility (note 5)

  $ 13,748     $ 25,020  

Accounts payable

    66,639       76,893  

Accrued liabilities (note 4)

    12,174       13,040  

Warrant liability (note 5)

    1,948       2,009  

Contingent consideration (note 4)

          3,050  

Income taxes payable

    213       12  

Current portion of long-term debt (note 5)

    1,368       1,368  

Current portion of operating lease obligations (notes 2 and 6)

    1,891        

Current portion of finance lease obligations (notes 2 and 6)

    1,401       1,547  

Total current liabilities

    99,382       122,939  
                 

Long-term debt (note 5)

    55,887       56,039  

Operating lease obligations (notes 2 and 6)

    3,019        

Finance lease obligations (notes 2 and 6)

    9,284       9,947  

Total liabilities

    167,572       188,925  
                 

Shareholders’ equity:

               

Capital stock (note 7)

    506       458  

Additional paid-in capital

    292,829       278,648  

Deficit

    (248,062 )     (246,805

)

      45,273       32,301  

Total liabilities and shareholders’ equity

  $ 212,845     $ 221,226  

 

Commitments (note 12)

 

Subsequent events (note 13)

See accompanying notes to interim consolidated financial statements.

 

3

 

 

SMTC CORPORATION

 

Interim Consolidated Statements of Opera tions and Comprehensive Loss

 

(Expressed in thousands of U.S. dollars, except number of shares and per share amounts)

(Unaudited)

 

   

Three months ended

   

Six months ended

 
   

June 30 ,

201 9

   

July 1 ,

201 8

   

June 30 ,

201 9

   

July 1 ,

201 8

 

Revenue (note 4)

  $ 90,936     $ 44,479     $ 193,585     $ 81,599  

Cost of sales (note 11)

    81,939       40,196       175,964       73,466  

Gross profit

    8,997       4,283       17,621       8,133  

Selling, general and administrative expenses

    6,600       3,647       13,298       7,156  

Change in fair value of contingent consideration (note 4)

                (3,050 )      
                                 

Restructuring charges (note 4)

    1,546       96       2,170       96  

Operating income

    851       540       5,203       881  

Interest expense (note 4)

    2,800       403       5,670       710  

(Loss) income before income taxes

    (1,949 )     137       (467 )     171  

Income tax expense (recovery) (note 8):

                               

Current

    416       196       695       306  

Deferred

    103       38       95       (46 )
      519       234       790       260  

Net loss and comprehensive loss

  $ (2,468 )   $ (97

)

  $ (1,257 )   $ (89 )
                                 

Net loss per share of common stock:

                               

Basic

  $ (0.10 )   $ (0.01

)

  $ (0.05 )   $ (0.01 )

Diluted

  $ (0.10 )   $ (0.01

)

  $ (0.05 )   $ (0.01 )

Weighted average number of shares outstanding (note 9):

                               

Basic

    23,557,944       17,222,439       23,403,431       17,131,971  

Diluted

    23,557,944       17,222,439       23,403,431       17,131,971  

 

See accompanying notes to interim consolidated financial statements.

 

4

 

 

SMTC CORPORATION

 

Interim Consolidated Statements of Changes in Shareholders’ Equity

(Expressed in thousands of U.S. dollars)

 

Three months ended June 30, 2019

(Unaudited)

 

   

Common

Shares

   

Capital
stock

   

Additional
paid-in
capital

   

Deficit

   

Total
Shareholders’
equity

 
                                         

Balance, March 31, 2019

    23,350,558     $ 460     $ 278,734     $ (245,594

)

  $ 33,600  
                                         

RSU vested and stock options exercised

    18,500                          

Issuance of common shares from rights offering (note 6)

    4,642,030       46       13,998             14,044  

Stock-based compensation

                97             97  

Net loss

                      (2,468 )     (2,468 )

Balance, June 30, 2019

    28,011,088     $ 506     $ 292,829     $ (248,062 )   $ 45,273  

 

Three months ended July 1, 2018

(Unaudited)

 

   

Common

Shares

   

Capital
stock

   

Additional
paid-in
capital

   

Deficit

   

Total
Shareholders’
equity

 
                                         

Balance, April 1, 2018

    17,092,373     $ 397     $ 265,480     $ (246,349

)

  $ 19,528  

Impact of adoption of ASC 606

                             

RSU vested and issued in common shares

    211,137       2       359             361  

Stock-based compensation

                77             77  

Net loss

                      (97

)

    (97

)

Balance, July 1, 2018

    17,303,510     $ 399     $ 265,916     $ (246,446

)

  $ 19,869  

 

5

 

 

Six months ended June 30, 2019

(Unaudited)

 

   

Common

Shares

   

Capital
stock

   

Additional
paid-in
capital

   

Deficit

   

Total
Shareholders’
equity

 
                                         

Balance, December 30, 2018

    23,189,381     $ 458     $ 278,648     $ (246,805

)

  $ 32,301  
                                         

RSU vested and stock options exercised

    179,677       2       (2 )            

Issuance of common shares from rights offering (note 6)

    4,642,030       46       13,998             14,044  

Stock-based compensation

                185             185  

Net loss

                      (1,257 )     (1,257 )

Balance, June 30, 2019

    28,011,088     $ 506     $ 292,829     $ (248,062 )   $ 45,273  

 

Six months ended July 1, 2018

(Unaudited)

 

   

Common

Shares

   

Capital
stock

   

Additional
paid-in
capital

   

Deficit

   

Total
Shareholders’
equity

 
                                         

Balance, December 31, 2017

    16,992,627     $ 396     $ 265,355     $ (246,677

)

  $ 19,074  

Impact of adoption of ASC 606

                      320       320  

RSU vested and issued in common shares

    310,883       3       358             361  

Stock-based compensation

                203             203  

Net loss

                      (89

)

    (89

)

Balance, July 1, 2018

    17,303,510     $ 399     $ 265,916     $ (246,446

)

    19,869  

 

See accompanying notes to interim consolidated financial statements.

 

6

 

 

 

SMTC CORPORATION

Interim Consolidated Statements of Cash Flows

(Expressed in thousands of U.S. dollars)

(Unaudited)

 

   

Six months ended

 
   

June 3 0 ,

201 9

   

July 1 ,

201 8

 

Cash provided by (used in):

               

Operations:

               
                 

Net loss

  $ (1,257 )   $ (89

)

                 

Items not involving cash:

               
                 

Depreciation of property, plant & equipment

    3,253       1,543  

Amortization of intangible assets

    3,688        

Unrealized foreign exchange gain on unsettled forward exchange contracts

          (230

)

Deferred income taxes (recovery)

    95       (46

)

Amortization of deferred financing fees

    545       21  

Stock-based compensation

    185       203  

Change in fair value of warrant liability

    (61 )      

Change in fair value of contingent consideration

    (3,050 )      
                 

Change in non-cash operating working capital:

               

Accounts receivable

    8,035       (3,016

)

Unbilled contract assets

    (7,214 )     (6,488

)

Inventories

    7,054       (2,851

)

Prepaid expenses and other assets

    (1,128 )     (1,437

)

Income taxes payable

    203       (48

)

Accounts payable

    (10,130 )     8,995  

Accrued liabilities

    (866 )     1,361  
Net change in operating lease right of use asset and liability     465        
      (183 )     (2,082

)

Financing:

               

Net repayments of revolving credit facility

    (11,272 )     (209

)

Repayment of long-term debt

    (625 )     (1,000

)

Advance of equipment facility

          1,894  

Deferred financing fees

    (50 )     (48

)

Principal repayments of finance lease obligations

    (809 )     (94

)

Proceeds from issuance of common stock through rights offerings

    14,044       361  
      1,288       904  

Investing:

               

Purchase of property, plant and equipment

    (2,072 )     (2,405

)

      (2,072 )     (2,405 )
                 

Decrease in cash

    (967 )     (3,583

)

Cash, beginning of period

    1,601       5,536  

Cash, end of the period

  $ 634     $ 1,953  
                 

Supplemental Information

               

Property, plant and equipment acquired that was unpaid in cash and included in accounts payable and accruals

    260       43  
                 

Property, plant and equipment acquired through capital lease

          533  

 

See accompanying notes to interim consolidated financial statements.

   

7

 

 

SMTC CORPORATION

 

Unaudited Notes to Interim Consolidated Financial Statements

( Expressed in thousands of U.S. dollars, except number of shares and per share amounts)

 

 

1.

Nature of the business

 

SMTC Corporation (the “Company,” “SMTC,” “we,” “us,” or “our”) is a provider of end-to-end electronics manufacturing services, including product design and engineering services, printed circuit board assembly, production, enclosure, cable assembly, precision metal fabrication, systems integration and comprehensive testing services, configuration to order, build to order and direct order fulfillment. We have more than 50 manufacturing and assembly lines at strategically located facilities in the United States, Mexico, and China that provide local support and manufacturing capabilities to our global customers. Our services extend over the entire electronic product life cycle from new product development and new product introduction through to growth, maturity and end of life phases. As of June 30, 2019, we had 3,086 employees of which 2,559 were full time and contract employees.

 

The accompanying unaudited interim consolidated financial statements of the Company have been prepared in accordance with the accounting principles and methods of application disclosed in the audited consolidated financial statements within the Company’s Form 10-K for the fiscal period ended December 30, 2018, (“Form 10-K”) filed with the Securities and Exchange Commission (the “SEC”) on March 15, 2019, except for the adoption of the new accounting policies related to leases which is outlined in note 2. The accompanying unaudited interim consolidated financial statements include adjustments of a normal, recurring nature that are, in the opinion of management, necessary for a fair statement of the consolidated financial statements under generally accepted accounting principles in the United States (“U.S. GAAP”). These unaudited interim consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements contained in the Company’s Form 10-K. The consolidated balance sheet at December 30, 2018 was derived from the audited annual consolidated financial statements, but does not contain all of the footnote disclosures from the annual consolidated financial statements.

 

Unless otherwise specified or the context requires otherwise, all statements in these notes to the interim consolidated financial statements regarding financial figures are expressed in thousands of U.S. dollars.

 

8

 

 

 

2.

Impact of adoption of ASC 842

 

The Company adopted Accounting Standards Updated (“ASU”) No. 2016-02, Leases (Topic 842), as of December 31, 2018, using the modified retrospective approach, which allows comparative periods not to be restated. In addition, the Company elected the package of practical expedients permitted under the transition guidance within the new standard, which, among other things, allowed the Company to carry forward the historical lease classification, not reassess whether any expired or existing contracts are or contain leases and not to reassess initial direct costs for any existing leases. The Company also elected the hindsight expedient to determine the lease terms for existing leases. The election of the hindsight expedient did not have a significant impact on the calculation of the expected lease term.

 

The Company leases various office facilities and manufacturing equipment. The Company determines if an arrangement contains a lease at contract inception. An arrangement is, or contains, a lease if the agreement identifies an asset, implicitly or explicitly, that the Company has the right to use over a period of time. If an arrangement contains a lease, the Company classifies the lease as either an operating lease or as a finance lease based on the five criteria defined in Accounting Standards Codification (“ASC”) 842.

 

Lease liabilities are recognized at commencement date based on the present value of the remaining lease payments over the lease term. The corresponding right-of-use asset is recognized for the same amount as the lease liability adjusted for any payments made at or before the commencement date, any lease incentives received, and any initial direct costs. The Company’s lease agreements may include options to renew, extend or terminate the lease. These clauses are included in the initial measurement of the lease liability when at lease commencement the Company is reasonably certain that it will exercise such options. The discount rate used is the interest rate implicit in the lease or, if that cannot be readily determined, the Company's incremental borrowing rate.

 

Operating lease expense is recognized on a straight-line basis over the lease term and presented within cost of sales on the Company’s consolidated statements of operations. Finance lease right-of-use assets are amortized on a straight-line basis over the shorter of the useful life of the asset or the lease term. Interest expense on the finance lease liability is recognized using the effective interest rate method and is presented within interest expense on the Company’s consolidated statements of operations and comprehensive income. Variable rent payments related to both operating and finance leases are expensed as incurred. The Company’s variable lease payments primarily consists of real estate taxes, maintenance and usage charges. The Company made an accounting policy election to combine lease and non-lease components.

 

The Company has elected to exclude short-term leases from the recognition requirements of ASC 842. A lease is short-term if, at the commencement date, it has a term of less than or equal to one year. Lease expense related to short-term leases is recognized on a straight-line basis over the lease term. In addition, the company has also elected in accordance with Topic 842 to account for both the lease and non-lease components as a single component and account for it as a lease.

 

The adoption of the new standard resulted in the recording of additional net operating lease right of use assets and operating lease obligations of $5,452 and $5,915, respectively on December 31, 2018. The difference between the operating lease right of use asset and operating lease obligation related to accrued and prepaid rent of $463, which was reclassified to the operating lease right of use asset. The standard did not materially impact consolidated net loss and had no impact on cash flows.

 

9

 

 

 

3.

Recent Accounting Pronouncements Adopted

 

In June 2018, the Financial Accounting Standards Board (the “FASB”) published published ASU 2018-07: Compensation – Stock Compensation (Topic 718): Improvements to Non-employee Share-Based Payment Accounting. The amendment simplifies the application of share-based payment accounting for non-employees. The amendments in this ASU are effective for public business entities for financial statements issued for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. The impact of the adoption of the standard did not have a material impact on the consolidated financial statements.

 

 

Recent   Accounting Pronouncements Not Yet Adopted

 

In May 2016, the FASB published ASU 2016-13 Financial Instruments – Credit losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The main objective of Topic 326 is to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. To achieve this objective, the amendments in this update replace the incurred loss impairment methodology in current U.S. GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The amendment is effective for years beginning after December 15, 2019 including interim periods with those years. Early adoption is permitted only for those annual reporting periods beginning on or after December 15, 2018. The Company continues to evaluate the impact of this accounting standard. The impact of adoption of the standard has not yet been determined.

 

In January 2017, the FASB published ASU 2017-04: Intangibles – Goodwill and Other (Topic 350): Topic 350 seeks to simplify goodwill impairment testing requirements for public entities. Under the amendments in this update, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. Additionally, an entity should consider income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. The FASB also eliminated the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test. Therefore, the same impairment assessment applies to all reporting units. An entity is required to disclose the amount of goodwill allocated to each reporting unit with a zero or negative carrying amount of net assets. The amendments in this ASU are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The impact of the adoption of the standard is being considered, however it is expected that this may reduce the complexity of evaluating goodwill for impairment.

 

In August 2018, the FASB published ASU 2018-13: Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement. Topic 820 includes the removal, modification and additional of disclosure requirements. Topic 820 is effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The impact of the adoption of the standard is not expected to have a material impact on the consolidated financial statements.

 

10

 

 

 

4.

Interim Consolidated financial statement details

 

The following consolidated financial statement details are presented as of the period ended for the consolidated balance sheets and for the periods ended for each of the consolidated statements of operations and comprehensive loss.

 

Consolidated Balance Sheets

    

Accounts receivable – net:

 

   

June 30 , 201 9

   

December 30 , 201 8

 

Trade accounts receivable

  $ 64,566     $ 72,937  

Other receivables

    957       447  

Allowance for doubtful accounts

    (572 )     (398 )

Total

  $ 64,951     $ 72,986  

 

Unbilled contract assets

 

   

June 30 , 201 9

   

December 30 , 201 8

 

Opening

  $ 20,405     $ 3,734  

Contract assets additions

    51,826       205,387  

Contract assets invoiced

    (44,612 )     (188,716 )

Ending

  $ 27,619     $ 20,405  

 

Inventories:

 

   

June 30 , 201 9

   

 

December 30 , 201 8

 

Raw materials

  $ 45,206     $ 52,102  

Finished goods

          418  

Parts and other

    1,106       896  

Provision for obsolescence

    (163 )     (213

)

Total

  $ 46,149     $ 53,203  

 

11

 

 

4.

Interim Consolidated financial statement details cont’d

 

Property, plant and equipment – net:

 

   

June 30 ,

201 9

   

December 30 ,

201 8

 

Cost:

               

Land

  $ 1,648     $ 1,648  

Buildings (b)

    18,985       18,985  

Machinery and equipment (a)

    41,696       40,083  

Office furniture and equipment (c)

    865       845  

Computer hardware and software (d)

    4,072       3,945  

Leasehold improvements

    4,050       3,863  
      71,316       69,368  
                 

Less accumulated depreciation:

               

Land

           

Buildings (b)

    (9,813 )     (9,190

)

Machinery and equipment (a)

    (29,210 )     (27,093

)

Office furniture and equipment (c)

    (509 )     (457

)

Computer hardware and software (d)

    (3,268 )     (3,053

)

Leasehold improvements

    (1,661 )     (1,415

)

      (44,461 )     (41,208

)

Property, plant and equipment—net

  $ 26,855     $ 28,160  

 

 

(a)

Included within machinery and equipment were assets under capital leases with costs of $2,275 and associated accumulated depreciation of $692 and $409 as of June 30, 2019 and December 30, 2018, respectively. The related depreciation expense for the three months ended June 30, 2019 and July 1, 2018 was $142 and $21, respectively. The related depreciation expense for the six months ended June 30, 2019 and July 1, 2018 was $284 and $36, respectively.

 

  

(b)

 

Included within buildings are costs associated with Melbourne facility under finance lease of $9,082 and associated accumulated depreciation of $498 and $96 as of June 30, 2019 and December 30, 2018, respectively. The related depreciation expense for the three months ended June 30, 2019 and July 1, 2018 was $201 and $96, respectively. The related depreciation expense for the six months ended June 30, 2019 and July 1, 2018 was $402 and $192, respectively.

   

(c)

Included within office furniture and equipment were assets under finance leases with costs of $158 and associated accumulated depreciation of $25 and $NIL as of June 30, 2019 and December 30, 2018, respectively. The related depreciation expense for the three months ended June 30, 2019 and July 1, 2018 was $10 and $NIL, respectively. The related depreciation expense for the six months ended June 30, 2019 and July 1, 2018 was $20 and $NIL, respectively.

 

 

(d)

Included within computer hardware and software were assets under finance leases with costs of $91 and associated accumulated depreciation of $35 and $5 as of June 30, 2019 and December 30, 2018, respectively. The related depreciation expense for the three months ended June 30, 2019 and July 1, 2018 was $8 and $5, respectively. The related depreciation expense for the six months ended June 30, 2019 and July 1, 2018 was $15 and $5, respectively.

 

12

 

 

4.

Interim Consolidated financial statement details cont’d

 

 

Intangible assets:

 

   

June 30 ,

201 9

   

December 30,

2018

 

Cost:

               

Customer relationships

  $ 12,350     $ 12,350  

Order backlog

    6,990       6,990  

Trade name

    1,300       1,300  

Non-compete agreements

    360       360  
      21,000       21,000  
                 

Less accumulated amortization:

               

Customer relationships

    (796 )     (178 )

Order backlog

    (3,003 )     (673 )

Trade name

    (838 )     (188 )

Non-compete agreements

    (116 )     (26 )
      (4,753 )     (1,065 )

Intangible assets—net

  $ 16,247     $ 19,935  

 

Amortization expense of $1,844 for the three months ended June 30, 2019 and $3,688 for the six months ended June 30, 2019 are recorded in cost of sales in the consolidated statement of operations and comprehensive loss.

 

 

 

Goodwill:

 

The carrying value of goodwill as at June 30, 2019 was $18,165 (December 30, 2018 – $18,165). The carrying value of goodwill is assessed annually as well as assessed each reporting period for impairment triggers to determine whether there exists any indicators of impairment.

 

 

 

Accrued liabilities: 

 

   

June 30 ,

201 9

   

December 30 ,

201 8

 

Payroll

  $ 5,330     $ 5,637  

Customer related

    2,281       2,237  

Vendor related

    1,368       2,048  

Professional services

    765       702  

Restructuring

    857        

Rebates

          236  

Interest

    203       381  

Rent

          428  

Other

    1,370       1,371  

Total

  $ 12,174     $ 13,040  

   

During the second quarter of 2019, restructuring charges of $1,546 were incurred related to the reduction of 18 full-time equivalents (“FTEs”) in U.S and 292 FTEs and contract employees in Mexico. During the first quarter of 2019, restructuring charges of $624 were incurred related to the reduction of 10 full-time equivalents (“FTEs”) in U.S. and 4 FTEs in Canada and 167 FTEs  and contract employees in Mexico. As at June 30, 2019, the company had $857 of accrued restructuring charges remaining to be paid.

 

13

 

 

Contingent Consideration: 

 

 

During the first quarter of 2019, fair value of the contingent consideration liability was determined to be $0 which resulted in a gain of $3,050 being recognized. The contingent consideration liability was initially recognized at fair value in the fourth quarter of 2018 and related to a contingent earn-out payment associated with the acquisition of MC Assembly. Fair value estimate under purchase accounting of $3,050 was derived from a multiple of earnings based on MC Assembly’s forecasted twelve-month earnings for the period ended March 31, 2019. Based on actual earnings, the contingent consideration liability was considered resolved and no longer payable as at March 31, 2019.

 

Consolidated Statements of Opera tions and Comprehensive Loss

 

Interest expense:

 

   

Three months ended

   

Six months ended

 
   

June 30 ,

201 9

   

July 1 ,

201 8

   

June 30 ,

201 9

   

July 1 ,

201 8

 

Long-term debt

  $ 1,709     $ 105     $ 3,461     $ 214  

Revolving credit facility

    597       225       1,216       400  

Equipment facility

          14             14  

Amortization of deferred financing fees

    38       12       72       21  

Amortization of debt issuance costs

    236             473        

Obligations under capital leases

    220       47       448       61  

Interest expense

  $ 2,800     $ 403     $ 5,670     $ 710  

 

14

 

 

 

5.

Deb t

 

  (a) Revolving credit and long-term debt facilities 

 

The Company borrows money under an Amended and Restated Revolving Credit and Security Agreement with PNC Bank, National Association (“PNC”), which governs the Company’s Revolving Credit Facility (“PNC Facility”). The PNC Facility has a term ending on November 8, 2023. Advances made under the PNC Facility bear interest at the U.S. base rate plus an applicable margin ranging from 0.50% to 1.00%, or LIBOR plus an applicable margin ranging from 1.50% to 2.00%. The base commercial lending rate should approximate U.S. prime rate.  

 

The Company also borrows money under a Financing Agreement (the “Financing Agreement”), by and among us and certain of our subsidiaries, the lenders party to the Financing Agreement from time to time (collectively, the “Lenders”), and TCW Asset Management Company LLC, as collateral agent for the Lenders (“TCW”), which governs a term loan A facility (“Term A Loan Facility”) and a term loan B facility (“Term Loan B Facility” and, together with the Term Loan A Facility, the “TCW Facilities” and, together with the PNC Facility, the “Credit Facilities”). The TCW Facilities mature on November 8, 2023 (the “Maturity Date”). The Term Loan A Facility bears interest, as selected by the Company at the time of borrowing, at the base rate plus an applicable margin of 5.00%. The Term Loan B Facility bears interest, as selected by the Company at the time of borrowing, at the base rate plus an applicable margin of 8.50% or LIBOR plus an applicable margin of 10.50%. The base rate should approximate U.S. prime rate. Payments made under the Term Loan A Facility at any time prior to the Maturity Date (other than scheduled amortization payments and mandatory prepayments) are subject to an applicable premium equal to the amount of such payment multiplied by (i) 3.00% in the event that such payment occurs before the first anniversary of the closing date (November 8, 2018), (ii) 2.00% in the event that such payment occurs after the first anniversary of the closing date and on or before the second anniversary of the closing date and (iii) 1.00% in the event that such payment occurs after the second anniversary of the closing date and on or before the third anniversary of the closing date. No such applicable premium is payable for any payment of loans made under the Term Loan A Facility occurring after the third anniversary of the Closing Date.

 

As at June 30, 2019, the funds available to borrow under the PNC Facility after deducting the current borrowing base conditions was $27,144 (December 30, 2018 - $13,974).The maximum amount of funds that could be available under the PNC Revolving Credit Facility is $45,000. However, availability under the PNC Revolving Credit Facility is subject to certain conditions, including borrowing base conditions based on eligible inventory and accounts receivable, and certain conditions as determined by PNC. The Company is required to use a “lock-box” arrangement for the PNC Facility, whereby remittances from customers are swept daily to reduce the borrowings under this facility.

 

At June 30, 2019, $13,748 (December 30, 2018 - $25,020) was outstanding under the PNC Facility and is classified as a current liability based on the requirement to hold a “lock-box” under the terms of the PNC Facility.

 

At June 30, 2019, $49,375 (December 30, 2018 - $50,000) was outstanding under the TCW Term Loan A Facility and $12,000 (December 30, 2018 - $12,000) under the TCW Term Loan B Facility. The TCW Term Loan Facilities are reported on the consolidated balance sheet net of deferred financing fees of $ 2,466 (December 30, 2018 - $2,749) and a discount on debt of $1,653 (December 30, 2018 - $1,843) related to the outstanding warrants described below. On July 3, 2019, the Company repaid the TCW Term Loan B Facility in full.

 

The Credit Facilities are a joint and several obligations of the Company and its subsidiaries that are borrowers under the facilities and are jointly and severally guaranteed by other subsidiaries of the Company. Repayment under the PNC Facility and TCW Facilities are collateralized by the assets of the Company and each of its subsidiaries.

 

15

 

 

(b) Covenants

 

The Credit Facilities contain certain financial and non-financial covenants. The financial covenants under each Credit Facility require the Company to maintain a fixed charge coverage ratio, a total leverage ratio, and a senior leverage ratio quarterly during the term of the Credit Facilities.

 

The Company is in compliance with the financial covenants included in the Credit Facilities as at June 30, 2019. Management projects compliance with the financial covenants included in the Credit Facilities. Regarding the senior and total debt leverage ratios, these projections are sensitive to estimates, specifically forecasted adjusted earnings before interest, taxes and depreciation and projected debt balances at each reporting period.

 

(c) Warrant liability

 

       On November 8, 2018, 504,735 warrants were issued to TCW and outstanding as at December 30, 2018.  These warrants are exercisable on a cashless basis, or for an exercise price of $0.01.  The Company initially recorded the value of the warrants as a warrant liability with a corresponding discount on the long-term debt in the amount of $1,898. The fair value has been assessed at $3.86 per unit or $1,948 as at June 30, 2019.  As a result of the anti-dilution provision contained in the warrants that was triggered in connection with the Rights Offering and the Registered Direct Offering (each as defined below), the warrants were exercisable to purchase 511,949 shares of common stock at June 30, 2019.  The fair value of the warrant obligation is presented as a warrant liability on the consolidated balance sheet with changes to the fair value recorded each reporting period as either a gain or a loss in the consolidated statement of operations and comprehensive loss in selling, general and administrative expenses.

 

16

 

 

 

6.

Leases  

 

 

The Company leases certain facility leases in various jurisdictions, including office space and manufacturing, warehouse space. The Company also leases certain production equipment. Leases with an initial term of 12 months or less are not recorded on the balance sheet. Lease expense is recognized on a straight-line basis over the lease term. Total short-term lease costs for the three and six months ended June 30, 2019 was not significant.

 

Most leases contain renewal options, which are at the Company’s sole discretion. The extension terms are typically one to five years. Some leases may include options to purchase the leased property. The depreciable life is limited to the lease term unless title transfers or it is reasonably certain that a purchase option will be exercised. Operating lease liabilities recognized do not include $1,522 related to options to extend lease terms that are not reasonably certain of being exercised at June 30, 2019. Finance lease liabilities do not include $6,456 related to options to extend lease terms that are not reasonably certain of being exercised at June 30, 2019.

 

We rent or sublease one facility lease that is not occupied by SMTC.    

 

 

Leases

Classification

 

June 30 , 2019 ($)

 

Assets

         

Operating lease assets

Operating lease right-of-use-asset

    4,445  

Finance lease assets (a)

Property, plant and equipment

    10,356  

Total leased assets

      14,801  

Liabilities

         

Current

         

Operating leases

Current portion of operating lease obligations

    1,891  

Finance leases

Current portion of finance lease obligations

    1,401  

Noncurrent

         

Operating leases

Operating lease obligations

    3,019  

Finance leases

Finance lease obligations

    9,284  

Total lease liabilities

    15,595  

 

 

(a)

Refer to note 4 for details of the corresponding balances and accumulated amortization included within property, plant and equipment

 

 

     

Three months

ended

   

Six months

ended

 

Lease Cost

Classification

 

June 30 ,

2019 ($)

   

June 30 ,

2019 ($)

 

Operating lease costs

                 

Fixed lease costs

Cost of sales

    780       1,327  
                   
                   

Finance lease costs

                 

Depreciation of leased assets

Cost of sales

    360       721  

Interest on lease liabilities

Interest expense

    220       448  

Sublease income

Selling, general and administrative expenses

    51       129  

 

17

 

 

Maturity of lease liabilities as at June 30, 2019

 

Operating leases

   

Finance

leases

   

Total

 

2019

    1,377       1,160       2,494  

2020

    1,328       1,953       3,324  

2021

    930       1,633       2,563  

2022

    632       1,291       1,923  

2023

    606       1,229       1,835  

Thereafter

    872       7,637       8,509  

Total lease payments

    5,745       14,903       20,648  

Less: Interest

    (835 )     (4,218 )     (5,053 )

Present value of lease liabilities

    4,910       10,685       15,595  

 

The company’s future minimum lease payments as of December 30, 2018, in accordance with legacy lease accounting standards, under non-cancelable operating and financing lease agreements were as follows:

 

   

Operating leases

   

Finance leases

 

2019

    2,590       2,417  

2020

    1,328       1,953  

2021

    930       1,633  

2022

    632       1,291  

2023

    606       1,229  

Thereafter

    872       7,637  

Total minimum lease payments

    6,958       16,160  

Less interest

    (1,043 )     (4,666 )

Present value of capital lease obligations

    5,915       11,494  

 

 

Lease term and discount rate

 

June 30 , 2019

   

Weighted average remaining term (years)

         

Operating leases

    3.5    

Finance leases

    8.6    

Weighted average discount rate

         

Operating leases

    8.0 %  

Finance leases

    7.8 %  

 

 

Other information

 

Three months ended

June 30, 2019

   

Six months ended

June 30, 2019

 

Cash paid for amounts included in the measurement of lease liabilities

               

Operating cash flows from operating leases

    369       1,005  

Operating cash flows from finance leases

    N/A       N/A  

Financing cash flows from finance leases

    392       809  

Leased assets obtained in exchange for new operating lease liabilities

           

Leased assets obtained in exchange for new finance lease liabilities

           

 

18

 

 

 

7 .

Capital stock  

 

Common stock

 

Issued and outstanding:

 

The issued and outstanding number of shares common stock included in shareholders’ equity consisted of the following:

 

   

Number
of shares

    $  
                 

Balance at December 30, 2018

    23,189,381       458  

New share issuance - rights and direct offerings

    4,642,030       46  

New share issuance - vested stock awards

    179,677       2  

Balance as June 30, 2019

    28,011,088       506  

 

  Stock Options

 

For more detailed information regarding the Company’s stock option arrangements, see Note 6 of the consolidated financial statements within the Company’s Form 10-K. A summary of stock option activity for the six-month period ended June 30, 2019 is as follows:

 

 

   

Number
of options

   

Weighted
average
exercise
price

   

Aggregate
intrinsic
value

   

Weighted
average
remaining
contractual
term (years)

 

Outstanding at December 30, 2018

    1,719,824     $ 1.55       1,998       8.6  
                                 

Options granted

    650,000       3.67                  

Options exercised

                           

Options forfeited

                           

Outstanding at June 30, 2019

    2,369,824       2.13       2,608       8.4  

Exercisable at June 30, 2019

    1,101,090       1.54       2,552       7.6  

 

During the three-month periods ended June 30, 2019 and July 1, 2018, the Company recorded stock-based compensation expense related to stock options and a corresponding increase in additional paid-in capital of $41 and $34, respectively. During the six-month periods ended June 30, 2019 and July 1, 2018, the Company recorded stock-based compensation expense related to stock options and a corresponding increase in additional paid-in capital of $62 and $59, respectively.

 

Certain stock options outstanding have market conditions such that the awards are vested and exercisable only if the Company’s stock exceeds specified targets during the vesting period. If the market conditions are not met, the stock options will not vest and will expire.

 

19

 

 

 

   

7 .

Capital stock cont’d

  

Restricted Stock Units

 

For more detailed information regarding the Company’s Restricted Stock Units (“RSU”) arrangements, see Note 6 of the consolidated financial statements within the Company’s Form 10-K. A summary of the RSU activity for the six-month period ended June 30, 2019 is as follows:

  

   

Outstanding
RSU

   

Weighted
average
stock
price

   

Weighted
average
remaining
contractual
term (years)

 

Outstanding balance at December 30, 2018

    357,377     $ 0.96       1.21  

RSU granted

    37,500       3.67        

RSU vested and issued in common shares

    (179,677

)

    0.40        

RSU forfeited

                 

Outstanding balance at June 30, 2019

    215,200       1.90       1.61  

  

Certain RSUs outstanding have a market condition such that the awards are vested and issuable only if the market price of the Company’s stock meets or exceeds a specified target during the vesting period. If the market condition is not met, the RSUs will not vest and will be forfeited.

 

Stock based compensation recognized during the three-month period ended June 30, 2019 and July 1, 2018 related to the restricted stock units was $56 and $43, respectively.  Stock based compensation recognized during the six-month period ended June 30, 2019 and July 1, 2018 related to the restricted stock units was $123 and $144, respectively.  

 

Rights Offering and Registered Direct Offering

 

In June 2019, the Company completed its (i) offering of subscription rights (the “Rights Offering”) to the Company’s stockholders and holders of the Company’s outstanding warrants as of the close of business on May 24, 2019, which was fully subscribed for the maximum offering amount of $9,135,978, and (ii) registered direct offering (the “Registered Direct Offering” and, together with the Rights Offering, the “Offerings”) of 1,732,483 shares of the Company’s common stock directly to certain investors, resulting in net proceeds to the Company of approximately $14.0 million, after deducting the offering expenses of approximately $0.4 million and fees payable by the Company.

 

20

 

 

 

8 .

Income taxes  

 

During the six-month period ended June 30, 2019 and July 1, 2018, the Company recorded current income tax expense of $695 and $306, respectively, in connection with U.S. state taxes and taxes on profits in certain foreign jurisdictions. The Company also recorded deferred income tax expense of $95 and deferred income tax recovery of $46, respectively, in connection with temporary differences related to the Mexican operations.

 

     In assessing the realization of deferred tax assets, management considers whether it is more likely than not that some portion or all of its deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income. Management considers the scheduled reversal of deferred tax liabilities, change of control limitations, projected future taxable income and tax planning strategies in making this assessment. Guidance under ASC 740, Income Taxes, (“ASC 740”) states that forming a conclusion that a valuation allowance is not needed is difficult when there is negative evidence, such as cumulative losses in recent years in the jurisdictions to which the deferred tax assets relate. The U.S., Canadian and Asian jurisdictions continue to have a full valuation allowance recorded against the deferred tax assets.  

 

 

9 .

Earnings per common share

 

The following table details the weighted average number of shares of common stock outstanding for the purposes of computing basic and diluted earnings per common share for the following periods:

 

   

Three months ended

   

Six months ended

 
   

June 30 ,

201 9

   

July 1 ,

201 8

   

June 30 ,

201 9

   

July 1 ,

201 8

 

Basic weighted average shares outstanding

    23,557,944       17,222,439       23,403,431       17,131,971  

Dilutive stock awards (1) (a) (b)

                       

Diluted weighted average shares outstanding

    23,557,944       17,222,439       23,403,431       17,131,971  

 

(1)

Dilutive stock awards include outstanding restricted stock units, warrants and in the money stock options determined using the treasury stock method

 

 

(a)   For the three and six months ended June 30, 2019, as a result of net loss for the period, dilutive stock awards are not presented as this would be antidilutive. Had there been net income for the periods, the dilutive stock awards would have been calculated as 1,251,626 for the three and six months ended June 30, 2019 related to outstanding unvested restricted stock units and incremental in-the-money stock options.
     
     
     

(b)

 

For the three and six months ended July 1, 2018, as a result of net loss for the period, dilutive stock awards are not presented as this would be antidilutive. Had there been net income for the periods, the dilutive stock awards would have been calculated as 644,503 and 663,816, respectively for the three and six months ended July 1, 2018 related to outstanding unvested restricted stock units and incremental in-the-money stock options.

 

21

 

 

 

10 .

Segmented information

 

    

General description

 

The Company is operated and managed geographically and has production facilities in the United States, Mexico and China. The Company utilizes reportable segment’s site contribution (site revenue minus operating expenses, excluding unrealized foreign exchange, corporate allocations and restructuring expenses) to monitor reportable segment performance. Site contribution is utilized by the chief operating decision-maker as the indicator of reportable segment performance, as it reflects costs which our operating site management is directly responsible for. Intersegment adjustments reflect intersegment sales that are generally recorded at prices that approximate arm’s-length transactions. In assessing the performance of the reportable segments, management attributes site revenue to the reportable segment that ships the product to the customer, irrespective of the product’s destination. Information about the reportable segments is as follows:

 

   

Three months ended

   

Six months ended

 
   

June 30 ,

201 9

   

July 1 ,

201 8

   

June 30 ,

201 9

   

July 1 ,

201 8

 

Revenues

                               

Mexico

  $ 59,336     $ 35,581     $ 125,096     $ 64,654  

China

    5,793       5,786       14,449       11,019  

U.S.

    29,211       5,331       59,022       10,586  

Total

  $ 94,340     $ 46,698     $ 198,567     $ 86,259  
                                 

Intersegment revenue

                               

Mexico

  $ (594 )   $ (618

)

  $ (743 )   $ (738

)

China

    (2,681 )     (1,552

)

    (4,107 )     (3,779

)

U.S.

    (129 )     (49

)

    (132 )     (143

)

Total

  $ (3,404 )   $ (2,219

)

  $ (4,982 )   $ (4,660

)

                                 

Net external revenue

                               

Mexico

  $ 58,742     $ 34,963     $ 124,353     $ 63,916  

China

    3,112       4,234       10,342       7,240  

U.S.

    29,082       5,282       58,890       10,443  

Total segment revenue (which also equals consolidated revenue)

  $ 90,936     $ 44,479     $ 193,585     $ 81,599  
                                 

Site Contribution

                               

Mexico

  $ 5,835     $ 3,209     $ 10,641     $ 5,715  

China

    844       314       1,699       442  

U.S.

    1,764       (62

)

    3,187       (39

)

Total

  $ 8,443     $ 3,461     $ 15,527     $ 6,118  
                                 

Corporate allocations

    6,046       2,736       8,154       5,371  

Unrealized foreign exchange (gain) loss on unsettled forward exchange contracts

          89             (230

)

Interest

    2,800       403       5,670       710  

Restructuring charges

    1,546       96       2,170       96  

Earnings (loss) before income taxes

  $ (1,949 )   $ 137     $ (467 )   $ 171  

 

22

 

 

Three months ended June 30 , 2019

 

Mexico

   

U . S .

   

China

   

Total

 

Market Sector:

                               

Test and Measurement

  $ 19,949     $ 9,705     $ 865     $ 30,519  

Retail and Payment Systems

    12,149                   12,149  

Telecom, Networking and Communications

    3,503       2,314       2,200       8,017  

Medical

    8,093       3,104       47       11,244  

Industrial, Power and Clean Technology

    9,299       9,122             18,421  

Semiconductor

    5,749       16             5,765  

Aerospace and Defense

          4,821             4,821  

Segment Revenue

    58,742       29,082       3,112       90,936  

 

 

 

Three months ended July 1, 2018

 

Mexico

   

U . S .

   

China

   

Total

 

Market Sector:

                               

Test and Measurement

  $ 4,750     $ 3,548     $     $ 8,298  

Retail and Payment Systems

    9,450                   9,450  

Telecom, Networking and Communications

    2,449       1,393       3,836       7,678  

Medical

    6,650       36       49       6,735  

Industrial, Power and Clean Technology

    4,154       305       349       4,808  

Semiconductor

    7,510                   7,510  

Segment Revenue

    34,963       5,282       4,234       44,479  

 

 

 

Six months ended June 30 , 2019

 

Mexico

   

U . S .

   

China

   

Total

 

Market Sector:

                               

Test and Measurement

  $ 39,865     $ 20,765     $ 2,450     $ 63,080  

Retail and Payment Systems

    25,078                   25,078  

Telecom, Networking and Communications

    7,507       4,391       6,884       18,782  

Medical

    16,501       6,756       440       23,697  

Industrial, Power and Clean Technology

    22,348       15,159       568       38,075  

Semiconductor

    13,054       16             13,070  

Aerospace and Defense

          11,803             11,803  

Segment Revenue

    124,353       58,890       10,342       193,585  

 

 

Six months ended July 1, 2018

 

Mexico

   

U . S .

   

China

   

Total

 

Market Sector:

                               

Test and Measurement

  $ 7,450     $ 6,478     $     $ 13,928  

Retail and Payment Systems

    16,650                   16,650  

Telecom, Networking and Communications

    5,350       2,977       6,422       14,749  

Medical

    14,339       283       49       14,671  

Industrial, Power and Clean Technology

    7,017       705       769       8,491  

Semiconductor

    13,110                   13,110  

Segment Revenue

    63,916       10,443       7,384       81,599  

 

23

 

 

10 .

Segmented information cont’d

  

Additions to property, plant and equipment

 

The following table contains additions, including those acquired through capital leases, to property, plant and equipment for the three and six months ended June 30, 2019 and July 1, 2018:

 

   

Three months ended

   

Six months ended

 
   

June 30 ,

2019

   

July 1 ,

2018

   

June 30 ,

2019

   

July 1 ,

2018

 

Mexico

  $ 965     $ 2,288     $ 1,353     $ 2,376  

China

    23       8       54       8  

U.S.

    256       552       517       558  

Segment total

    1,244       2,848       1,924       2,942  

Corporate and other

    24       107       24       110  

Total

  $ 1,268     $ 2,955     $ 1,948     $ 3,052  

 

 

    

Property, plant and equipment (a)

 

   

June 30 ,

201 9

   

December 30 ,

201 8

 

Mexico

  $ 11,550     $ 11,851  

China

    872       1,153  

U.S

    14,308       15,013  

Segment total

    26,730       28,017  

Corporate and other

    125       143  

Segment assets

  $ 26,855     $ 28,160  

 

 

(a)

Property, plant and equipment information is based on the principal location of the asset.

 

Geographic revenue

 

The following table contains geographic revenues based on the product shipment destination, for the three and six months ended June 30, 2019 and July 1, 2018:

 

   

Three months ended

   

Six months ended

 
   

June 30 ,

2019

   

July 1 ,

2018

   

June 30 ,

2019

   

July 1 ,

2018

 

U.S.

  $ 82,593     $ 34,699     $ 176,934     $ 64,829  

Canada

    4,860       7,857       9,770       13,018  

China

    3,483       1,923       6,881       3,752  

Total

  $ 90,936     $ 44,479     $ 193,585     $ 81,599  

 

24

 

 

10 .

Segmented information cont’d

  

Significant customers and concentration of credit risk

 

Sales of the Company’s products are concentrated in certain cases among specific customers in the same industry. The Company is subject to concentrations of credit risk in trade receivables. The Company considers concentrations of credit risk in establishing the allowance for doubtful accounts and believes the recorded allowances are adequate.

 

The Company expects to continue to depend upon a relatively small number of customers for a significant percentage of its revenue. In addition to having a limited number of customers, the Company manufactures a limited number of products for each customer. If the Company loses any of its larger customers or any product line manufactured for one of its larger customers, it could experience a significant reduction in revenue. Also, the insolvency of one or more of its larger customers or the inability of one or more of its larger customers to pay for its orders could decrease revenue. As many costs and operating expenses are relatively fixed, a reduction in net revenue can decrease profit margins and adversely affect the business, financial condition and results of operations.

 

During the three months ended June 30, 2019, one customer exceeded 10% of total revenue, comprising 13.5% of total revenue across all geographic segments. During the three months ended July 1, 2018, three customers exceeded 10% of total revenues comprising 34.8% (14.4%, 10.4%, and 10.0%, respectively) of total revenues. During the six months ended June 30, 2019, one customer exceeded 10% of total revenue, comprising 13.3% of total revenue across all geographic segments. During the six months ended July 1, 2018, three customers comprised 34.4% (13.9%, 10.4% and 10.1%, respectively) of total revenues.

 

As of June 30, 2019, no customers represented more than 10% of the trade accounts receivable. At December 30, 2018, two customers comprised 21% (11% and 10%, respectively) of the Company’s trade accounts receivable. No other customers individually represented more than 10% of trade accounts receivable in either period.

 

25

 

 

 

11.

Derivative financial instruments

   

 

The Company previously entered into forward foreign exchange contracts to reduce its exposure to foreign exchange currency rate fluctuations related to forecasted Canadian dollar and Mexican peso expenditures. These contracts were effective as hedges from an economic perspective, but do not meet the requirements for hedge accounting under ASC Topic 815 “Derivatives and Hedging”. Accordingly, changes in the fair value of these contracts were recognized into net income in the consolidated statement of operations and comprehensive income. The Company had no forward foreign exchange contracts in the second quarter of 2019. Included in cost of sales for the second quarter of 2019 was an unrealized gain recognized as a result of revaluing the instruments to fair value of $NIL million. Included in cost of sales for the second quarter of 2018 was an unrealized loss recognized as a result of revaluing the instruments to fair value of $89, and a realized loss of $139. The average contract and mark-to-market rates for outstanding forward foreign exchange contracts were as follows;

 

 

   

June 30 ,

201 9

   

December 30 ,

201 8

 

Average USD:CAD contract rate

    N/A       N/A  

Average USD:CAD mark-to-market rate

    N/A       N/A  

Average USD:PESO contract rate

    N/A       20.43  

Average USD:PESO mark-to-market rate

    N/A       19.66  

 

  

  

 

12 .

Commitments

 

Purchase obligations not recorded on the balance sheet as at June 30, 2019 consist of open non-cancellable purchase orders (PO) for raw materials for $32,521 which are expected to be paid within 12 months of the PO issue date. Purchase obligations not recorded on the balance sheet as at December 30, 2018 consisted of open non-cancellable purchase orders for raw materials for $21,715 to be paid within 12 months of the PO issue date.

 

 

13 .

Subsequent event s

 

 On June 28, 2019 the Company announced the completion of its (i) offering of subscription rights (the “Rights Offering”) to the Company’s stockholders and holders of the Company’s outstanding warrants as of the close of business on May 24, 2019, which expired on June 20, 2019 and was fully subscribed for the maximum offering amount of $9,135, and (ii) registered direct offering (the “Registered Direct Offering” and, together with the Rights Offering, the “Offerings”) of 1,732,483 shares of the Company’s common stock directly to certain investors, each as previously disclosed in the Company’s Form 8-K filed on May 24, 2019. The Company received aggregate gross proceeds from the Offerings of approximately $14.6 million, comprised of (i) approximately $9,136 in gross proceeds from the Rights Offering and (ii) approximately $5,440 in gross proceeds from the Registered Direct Offering. Subsequent to June 30, 2019, the Company used the net proceeds from the Offerings to repay the $12,000 of borrowings outstanding under its Term Loan B facility as at July 03, 2019.

 

On August 8, 2019, the Company entered into that certain Amendment No. 2 to the Amended and Restated Revolving Credit and Security Agreement with PNC dated as of November 8, 2018, as amended on March 29, 2019.  The Amendment, among other things, (i) increases the total amount available for borrowings under the PNC Facilities to $65.0 million, (ii) provides for borrowings of up $15.0 million on assets located in Mexico, (iii) provides that borrowings under the PNC Facilities will bear interest at the U.S. base rate plus an applicable margin ranging from 0.75% to 1.25%, or LIBOR plus an applicable margin ranging from 2.50% to 3.00%, (iv) resets the financial covenants contained in the PNC Agreement to mirror those contained in the Financing Agreement (as defined herein), and (v) permits the paydown of the TCW Facility (as defined herein) by up to $10.0 million, as discussed below.

 

On August 8, 2019, the Company entered into that certain Amendment No. 3. to the TCW Financing Agreement, dated as of November 8, 2018, as amended on March 29, 2019, as amended on July 3, 2019.  The TCW Amendment, among other things, (i) provides for a $20.0 million increase in the total amount available for borrowings under the PNC Facilities, as discussed above, (ii) provides for the paydown of the Term Loan A (as defined in the Financing Agreement) by up to $10.0 million, (iii) provides that the interest rate for borrowings under the Financing Agreement will be reset to LIBOR plus an applicable margin of 8.75% through June 30, 2020, and borrowings under the Financing Agreement will thereafter bear interest at LIBOR plus an applicable margin ranging from 7.25% to 8.75%, (iv) deletes the senior leverage ratio covenant, (v) amends the total leverage ratio covenant, including the definition of total leverage ratio, to increase the maximum total leverage on a quarterly basis beginning with the fiscal quarter ending September 30, 2019, (vi) amends the fixed charge coverage ratio covenant to decrease the minimum fixed charge coverage ratio on a quarterly basis beginning with the fiscal quarter ending September 30, 2020 through the fiscal quarter ending December 31, 2021 and (vii) resets the call protection on the Term Loan A.

 

26

 

 

 

  Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Where we say “we”, “us”, “our”, the “Company” or “SMTC”, we mean SMTC Corporation or SMTC Corporation and its subsidiaries, as the context may require. Where we refer to the “industry”, we mean the electronics manufacturing services industry.

 

You should read this Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) in combination with the accompanying unaudited interim consolidated financial statements and related notes as well as the audited consolidated financial statements and the accompanying notes to the consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) included within the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 15, 2019 . The forward-looking statements in this discussion regarding the electronics manufacturing services industry, our expectations regarding our future performance, liquidity and capital resources and other non-historical statements in this discussion include numerous risks and uncertainties, some of which are as described in the “Risk Factors” section in the Annual Report on Form 10-K filed on March 15, 2019 , as updated by Item 1A in Part II of this quarterly report. Certain statements in this MD&A contain words such as “could”, “expects”, “may”, “anticipates”, “believes”, “intends”, “estimates”, “plans”, “envisions”, “seeks” and other similar language and are considered forward looking statements or information under applicable securities laws. These statements are based on our current expectations, estimates, forecasts and projections about the operating environment, economies and markets in which we operate. These statements are subject to important assumptions, risks and uncertainties, which are difficult to predict and the actual outcome may be materially different. Except as required by applicable law, we may not update these forward-looking statements after the date of this Form 10-Q, even though our situation may change in the future. All forward-looking statements attributable to us are expressly qualified by these cautionary statements.

 

This MD&A contains discussion in U.S. dollars (US$) unless specifically stated otherwise.

 

Background

 

 

We are a provider of end-to-end electronics manufacturing services, including product design and engineering services, printed circuit board assembly, production, enclosure, cable assembly, precision metal fabrication, systems integration and comprehensive testing services, configuration to order, build to order and direct order fulfillment. We have more than 50 manufacturing and assembly lines at strategically located facilities in the United States, Canada, Mexico, and China that provide local support and manufacturing capabilities to our global customers. Our services extend over the entire electronic product life cycle from new product development and new product introduction through to growth, maturity and end of life phases. As of June 30, 2019, we had 3,086 employees of which 2,559 were full time and contract employees.

 

27

 

 

Results of Operations  

 

The unaudited interim consolidated financial statements of SMTC are prepared in accordance with U.S. GAAP.

 

Quarter ended June 30 , 201 9 compared with the quarter ended July 1 , 201 8 :

 

The following table sets forth summarized operating results in millions of US$ for the periods indicated:

 

   

Three months ended

June 30 , 201 9

   

Three months ended

July 1 , 201 8

   

Change

201 8 to 201 9

 
    $    

%

    $    

%

       

%

 

Revenue

    90.9       100.0       44.5       100.0       46.4       104.3  

Cost of sales

    81.9       90.1       40.2       90.3       41.7       103.7  

Gross profit

    9.0       9.9       4.3       9.7       4.7       109.3  

Selling, general and administrative expenses

    6.7       7.4       3.7       8.1       3.0       81.1  

Restructuring

    1.5       1.7       0.1       0.2       1.4       1,400.0  

Operating income

    0.8       0.9       0.5       1.4