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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 September 27, 2020

☐	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 000-31051

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

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	SMTX	Nasdaq Global Select 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 November 5, 2020, SMTC Corporation had 28,214,800 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 Operations and Comprehensive Income (Loss) (unaudited)	4

	Interim Consolidated Statements of Changes in Shareholders’ Equity (unaudited)	5

	Interim Consolidated Statements of Cash Flows (unaudited)	6

	Notes to Interim Consolidated Financial Statements (unaudited)	7

Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	22

Item 3	Quantitative and Qualitative Disclosures About Market Risk	36

Item 4	Controls and Procedures	37

PART II OTHER INFORMATION		39

Item 1A	Risk factors	39

Item 6	Exhibits	40

Part I FINANCIAL INFORMATION

Item 1 Financial Statements

Interim Consolidated Balance Sheets:

(Expressed in thousands of U.S. dollars)

(Unaudited)

	September 27, 2020			December 29, 2019
Assets
Current assets:
Cash	$	169		$	1,368
Accounts receivable — net (note 3)		73,406			69,919
Unbilled contract assets (note 3)		42,736			26,271
Inventories (note 3)		51,537			47,826
Prepaid expenses and other assets		6,564			7,044
Derivative assets (note 9)		720			—
Income taxes receivable		160			—
Total current assets		175,292			152,428
Property, plant and equipment — net (note 3)		23,397			25,310
Operating lease right of use assets — net		5,897			3,330
Goodwill (note 3)		18,165			18,165
Intangible assets — net (note 3)		10,029			12,747
Deferred income taxes — net		555			540
Deferred financing costs — net		742			859
Total assets	$	234,077		$	213,379
Liabilities and Shareholders’ Equity
Current liabilities:
Revolving credit facility (note 4)	$	34,356		$	34,701
Accounts payable		77,979			74,126
Accrued liabilities (note 3)		23,125			11,164
Warrant liability (note 4)		1,745			1,730
Restructuring liability (note 10)		364			1,597
Income taxes payable		254			157
Current portion of long-term debt (note 4)		2,188			1,250
Current portion of operating lease obligations		1,452			1,128
Current portion of finance lease obligations		1,818			1,226
Total current liabilities		143,281			127,079
Long-term debt (note 4)		32,513			33,750
Operating lease obligations		5,042			2,615
Finance lease obligations		8,696			8,838
Total liabilities		189,532			172,282
Shareholders’ equity:
Capital stock (note 5)		508			508
Additional paid-in capital		293,864			293,389
Deficit		(249,827	)		(252,800	)
		44,545			41,097
Total liabilities and shareholders’ equity	$	234,077		$	213,379

Commitments (note 11)

See accompanying notes to interim consolidated financial statements.

Interim Consolidated Statements of Operations and Comprehensive Income (loss)

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

(Unaudited)

	Three months ended						Nine months ended
	September 27, 2020			September 29, 2019			September 27, 2020			September 29, 2019
Revenue (note 3)	$	99,547		$	88,682		$	285,091		$	282,267
Cost of sales (note 9)		88,445			79,776			253,664			255,740
Gross profit		11,102			8,906			31,427			26,527
Selling, general and administrative expenses		6,710			6,549			21,036			19,908
Change in fair value of contingent consideration		—			—			—			(3,050	)
Restructuring charges (notes 3 and 10)		871			6,454			525			8,624
Operating income		3,521			(4,097	)		9,866			1,045
Fair value measurement loss (gain) on warrant liability (note 4)		133			(858	)		15			(919	)
Interest expense (note 3)		1,941			2,679			6,021			8,349
Net income(loss) before income taxes		1,447			(5,918	)		3,830			(6,385	)
Income tax expense (recovery) (note 6):
Current		286			(103	)		872			592
Deferred		(82	)		(81	)		(15	)		14
		204			(184	)		857			606
Net income (loss) and comprehensive income (loss)		1,243			(5,734	)		2,973			(6,991	)
Net income (loss) per share:
Basic	$	0.04		$	(0.20	)	$	0.11		$	(0.28	)
Diluted	$	0.04		$	(0.20	)	$	0.10		$	(0.28	)
Weighted average number of shares outstanding (note 7):
Basic		28,214,800			28,057,763			28,207,943			24,954,875
Diluted		29,636,319			28,057,763			29,629,462			24,954,875

See accompanying notes to interim consolidated financial statements.

Interim Consolidated Statements of Changes in Shareholders’ Equity

(Expressed in thousands of U.S. dollars)

Three months ended September 27, 2020

(Unaudited)

	Common Shares		Capital stock		Additional paid-in capital		Deficit			Total Shareholders’ equity
Balance, June 28, 2020		28,214,800	$	508	$	293,706	$	(251,070	)	$	43,144
Stock-based compensation		—		—		158		—			158
Net income		—		—		—		1,243			1,243
Balance, September 27, 2020		28,214,800		508		293,864		(249,827	)		44,545

Three months ended September 29, 2019

(Unaudited)

	Common Shares		Capital stock		Additional paid-in capital			Deficit			Total Shareholders’ equity
Balance, June 30, 2019		28,011,088	$	506	$	292,829		$	(248,062	)	$	45,273
RSU vested and stock options exercised		87,386		1		45			—			46
Treasury stock		21,264		—		(75	)		—			(75	)
Stock-based compensation		—		—		353			—			353
Net loss		—		—		—			(5,734	)		(5,734	)
Balance, September 29, 2019		28,119,738	$	507	$	293,152		$	(253,796	)	$	39,863

See accompanying notes to interim consolidated financial statements.

Nine months ended September 27, 2020	Common Shares		Capital stock		Additional paid-in capital		Deficit			Total Shareholders’ equity
Balance, December 29, 2019		28,195,300	$	508	$	293,389	$	(252,800	)	$	41,097
RSU vested and stock options exercised		19,500		—		—		—			—
Stock-based compensation		—		—		475		—			475
Net income		—		—		—		2,973			2,973
Balance, September 27, 2020		28,214,800	$	508	$	293,864	$	(249,827	)	$	44,545

Nine months ended September 29, 2019	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		267,063		3		43			—			46
Treasury stock		21,264		—		(75	)		—			(75	)
Issuance of common shares from rights offering		4,642,030		46		13,998			—			14,044
Stock-based compensation		—		—		538			—			538
Net loss		—		—		—			(6,991	)		(6,991	)
Balance, September 29, 2019		28,119,738	$	507	$	293,152		$	(253,796	)	$	39,863

Interim Consolidated Statements of Cash Flows

(Expressed in thousands of U.S. dollars)

(Unaudited)

	Nine months ended
	September 27, 2020			September 29, 2019
Cash provided by (used in):
Operations:
Net income (loss)	$	2,973		$	(6,991	)
Items not involving cash:
Depreciation of property, plant and equipment		4,767			4,902
Amortization of intangible assets		2,718			5,532
Unrealized foreign exchange gain on unsettled forward exchange contracts		(720	)		—
Write down of property, plant and equipment		—			261
Deferred income taxes expense (recovery)		(15	)		14
Amortization of deferred financing fees and debt insurance costs		892			1,300
Stock-based compensation		475			538
Change in fair value of warrant liability		15			(919	)
Change in fair value of contingent consideration		—			(3,050	)
Change in non-cash operating working capital:
Accounts receivable		(3,487	)		11,778
Unbilled contract assets		(16,465	)		(6,385	)
Inventories		(3,711	)		3,668
Prepaid expenses and other assets		480			(1,095	)
Income taxes receivable/payable		(63	)		(116	)
Accounts payable		3,678			(9,845	)
Accrued liabilities		11,964			(265	)
Restructuring liability		(1,233	)		2,736
Net change in operating lease right of use asset and liability		184			414
		2,452			2,477
Financing:
Repayments (borrowing) of revolving credit facility		(345	)		9,820
Repayment of long-term debt		(937	)		(22,625	)
Deferred financing fees		(137	)		(371	)
Principal repayments of finance lease obligations		(997	)		(1,199	)
Proceeds from issuance of common stock through exercise of stock options		—			45
Proceeds from issuance of common stock through rights offerings		—			14,044
		(2,416	)		(286	)
Investing:
Purchase of property, plant and equipment		(1,235	)		(3,191	)
		(1,235	)		(3,191	)
Decrease in cash		(1,199	)		(1,000	)
Cash, beginning of period		1,368			1,601
Cash, end of the period	$	169		$	601

Supplemental Information
Cash interest paid	$	5,643		$	6,856
Increase in operating right of use assets	$	3,707		$	5,559
Property, plant and equipment acquired through capital lease	$	1,447		$	126
Property, plant and equipment acquired that was unpaid in cash and included in accounts payable and accrued liabilities	$	404		$	418

See accompanying notes to interim consolidated financial statements.

Unaudited Notes to Interim Consolidated Financial Statements

(in thousands)

1.	Business and Basis of Presentation

Background

SMTC Corporation (the “Company,” “we,” “our,” or “SMTC”) is a provider of end-to-end electronics manufacturing services (“EMS”), including product design and engineering services, printed circuit board assembly (“PCBA”), production, enclosure, cable assembly, precision metal fabrication, systems integration and comprehensive testing services, configuration to order (“CTO”), build to order (“BTO”) and direct order fulfillment (“DOF”). SMTC has more than 50 manufacturing and assembly lines at strategically located facilities in the United States, Canada and Mexico that provide local support and manufacturing capabilities to our global customers. SMTC’s services extend over the entire electronic product life cycle from new product development and new product introduction (“NPI”) through to growth, maturity and end of life phases.

Basis of Presentation

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 29, 2019, (“Form 10-K”) filed with the Securities and Exchange Commission (the “SEC”) on March 13, 2020. 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 29, 2019 was derived from the audited annual consolidated financial statements, but does not contain all of the footnote disclosures from the annual consolidated financial statements.

The preparation of financial statements requires management to make estimates and assumptions that affect the amounts reported in the unaudited condensed consolidated financial statements and accompanying notes. Due to the COVID-19 pandemic, the global economy and financial markets have been disrupted and there continues to be significant uncertainty about the length and severity of the consequences caused by the pandemic. Consequently, actual results could differ materially from these estimates and be significantly affected by the severity and duration of the pandemic, the extent of actions to contain or treat COVID-19, how quickly and to what extent normal economic and operating activity can resume, and the severity and duration of the global economic downturn that results from the pandemic.

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.

As at September 27, 2020, the additional funds available to borrow under our PNC Facility (as described and defined in note 4 below) after deducting the current borrowing base conditions and subject to debt covenants, should the Company require additional funding during the COVID-19 pandemic, was $30,464 (December 29, 2020 - $21,644).

Transition of China Manufacturing

During the fourth quarter of 2019, we ceased manufacturing in China and began to relocate the equipment used at our Dongguan manufacturing facility to our other North American sites. During the first quarter of 2020, we completed final shipments for customers serviced at our Chinese manufacturing facility and the relocation of that equipment. Customer concerns about uncertainties relating to the prolonged impact of tariffs and macro-economic factors caused a number of our customers to begin to re-evaluate demand for some of their products and reconsider where they outsource their manufacturing. These factors ultimately resulted in the decision to close the manufacturing facility. The closure of the Dongguan facility was substantially completed as at September 27, 2020 with final deregistration steps expected to be completed during the fourth quarter of 2020.

2.	Accounting Pronouncements

Recent Accounting Pronouncements Adopted

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. The amendment includes the removal, modification and addition of disclosure requirements under Topic 820. 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 expands the disclosure of certain assets and liabilities recorded at fair value.

In March 2020, the FASB published ASU 2020-04: Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The amendments in this update are elective and provide optional guidance for a limited period of

time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. The amendments in this Update are effective for all entities as of March 12, 2020, through December 31, 2022. An entity may elect to apply the amendments for contract modifications by Topic or Industry Subtopic as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020, or prospectively from a date within an interim period that includes or is subsequent to March 12, 2020, up to the date that the financial statements are available to be issued. Once elected for a Topic or an Industry Subtopic, the amendments in this Update must be applied prospectively for all eligible contract modifications for that Topic or Industry Subtopic. The impact of the adoption of the standard is not material to the Company, as alternative reference rates are available under the agreements governing the financial instruments.

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. In April 2019, the FASB published ASU 2019-04 Codification Improvements to Topic 326, Financial Instruments – Credit Losses, which made certain amendments and corrections to the original codification. In May 2019, the FASB published ASU 2019-05 Financial Instruments – Credit losses (Topic 326) which made transitional relief available, specifically allowing the option to elect a fair value option for financial instruments measured at amortized cost. In November 2019, the FASB published ASU 2019-11 Codification Improvements to Topic 326, Financial Instruments – Credit losses, which made certain amendments and corrections to the original codification. In November 2019, the FASB published ASU 2019-10 Financial Instruments – Credit losses (Topic 326), which made certain amendments to the effective dates of the new standard. The amendment is effective for the Company for years beginning after December 15, 2022 including interim periods with those years. On March 9, 2020, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2020-03 Codification Improvements to Financial Instruments. The Company is currently evaluating the impact of this accounting standard, but it is expected that the new standard may result in additional credit losses being recorded.

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, 2022. The Company is currently evaluating the impact of this accounting standard. However, it is expected that this may reduce the complexity of evaluating goodwill for impairment.

In December 2019, the FASB published ASU 2019-12: Income Taxes (Topic 740): Simplifying the Accounting for income taxes. The purpose of this codification is to simplify the accounting for income taxes, which addresses a number of topics including but not limited to the removal of certain exceptions currently included in the standard related to intraperiod allocation when there are losses, in addition to calculation of income taxes when current year-to-date losses exceed anticipated loss for the year. The amendment also simplifies accounting for certain franchise taxes and disclosure of the effect of enacted change in tax laws or rates. Topic 740 is effective for public entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. The impact of the adoption of the standard has not yet been determined and is being evaluated.

3.	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 income (loss).

Consolidated Balance Sheets

Accounts receivable – net:

	September 27, 2020			December 29, 2019
Trade accounts receivable	$	75,000		$	71,113
Other receivables		731			1,098
Allowance for doubtful accounts		(2,325	)		(2,292	)
Total	$	73,406		$	69,919

The allowance for doubtful accounts pertains primarily to one customer previously serviced out of Dongguan China. This was provisioned and included with the restructuring charges for the closure of the facility in 2019. Refer to note 10 for further details of the restructuring. To date, there has been no material impact of the COVID-19 pandemic on the allowance for doubtful accounts.

Unbilled contract assets

	September 27, 2020			December 29, 2019
Opening	$	26,271		$	20,405
Contract assets additions		276,330			350,709
Contract assets invoiced		(259,865	)		(344,843	)
Ending	$	42,736		$	26,271

Inventories:

	September 27, 2020			December 29, 2019
Raw materials	$	51,783		$	48,067
Parts and other		292			586
Provision for obsolescence		(538	)		(827	)
Total	$	51,537		$	47,826

The provision for obsolescence primarily pertains to customers previously serviced out of the Dongguan facility. These have been provisioned and included with the restructuring charges for the closure of the facility in 2019. Refer to note 10 for further details of the restructuring.

Property, plant and equipment – net:

	September 27, 2020			December 29, 2019
Cost:
Land	$	1,648		$	1,648
Buildings (b)		18,985			18,985
Machinery and equipment (a) (e)		44,116			42,732
Office furniture and equipment (c) (e)		869			1,005
Computer hardware and software (d) (e)		3,940			3,979
Leasehold improvements (e)		4,447			4,265
		74,005			72,614
Less accumulated depreciation:
Land		—			—
Buildings (b)		(11,220	)		(10,392	)
Machinery and equipment (a) (e)		(33,727	)		(31,192	)
Office furniture and equipment (c) (e)		(423	)		(546	)
Computer hardware and software (d) (e)		(3,162	)		(3,289	)
Leasehold improvements (e)		(2,076	)		(1,885	)
		(50,608	)		(47,304	)
Property, plant and equipment—net	$	23,397		$	25,310

(a)

Included within machinery and equipment were assets under finance leases with costs of $4,193 and $2,275 and associated accumulated depreciation of $1,539 and $974 as of September 27, 2020 and December 29, 2019, respectively. The related depreciation expense for the three months ended September 27, 2020 and September 29, 2019 was $134 and $142, respectively. The related depreciation expense for the nine months ended September 27, 2020 and September 29, 2019 was $356 and $426, respectively.

(b)

Included within buildings are costs associated with Melbourne facility under finance leases of $9,082 and associated accumulated depreciation of $1,504 and $900 as of September 27, 2020 and December 29, 2019, respectively. The related depreciation expense for the three months ended September 27, 2020 and September 29, 2019 was $201 and $201, respectively. The related depreciation expense for nine months ended September 27, 2020 and September 29, 2019 was $604 and $603, respectively.

(c)

Included within office furniture and equipment were assets under finance leases with costs of $307 and $307 and associated accumulated depreciation of $101 and $52 as of September 27, 2020 and December 29, 2019, respectively. The related depreciation expense for the three months ended September 27, 2020 and September 29, 2019 was $16 and $9, respectively. The related depreciation expense for the nine months ended September 27, 2020 and September 29, 2019 was $49 and $29, respectively.

(d)

Included within computer hardware and software were assets under finance leases with costs of $91 and associated accumulated depreciation of $73 and $51 as of September 27, 2020 and December 29, 2019, respectively. The related depreciation expense for the three months ended September 27, 2020 and September 29, 2019 was $7 and $8, respectively. The related depreciation expense for the nine months ended September 27, 2020 and September 29, 2019 was $22 and $23, respectively.

(e)	Fully depreciated property, plant and equipment with cost of $1,466 and accumulated amortization of $1,463 was written off in the nine months ended September 27, 2020.

Intangible assets:

	September 27, 2020			December 29, 2019
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		(2,340	)		(1,414	)
Order backlog		(6,990	)		(5,333	)
Trade name		(1,300	)		(1,300	)
Non-compete agreements		(341	)		(206	)
		(10,971	)		(8,253	)
Intangible assets—net	$	10,029		$	12,747

These intangible assets arose from the acquisition of MC Assembly Holdings Inc. (“MC Assembly”) in November 2018 and were allocated to the following operating segments:

	September 27, 2020		December 29, 2019
U.S.	$	3,009	$	3,824
Mexico		7,020		8,923
Total	$	10,029	$	12,747

Amortization expense of $2,718 was recorded in cost of sales in the consolidated statement of operations and comprehensive income(loss) for the nine months ended September 27, 2020, and $5,532 for the nine months ended September 29, 2019. Amortization expense for the next five years and thereafter is as follows:

2020	$	328
2021		1,235
2022		1,235
2023		1,235
2024		1,235
2025 and thereafter		4,761
Total amortization	$	10,029

Goodwill:

The carrying value of goodwill as at September 27, 2020 was $18,165 (December 29, 2019 – $18,165). This goodwill arose from the acquisition of MC Assembly in November 2018 and was allocated to the following operating segments that are expected to benefit from the synergies of this business combination and has not changed since the acquisition:

	September 27, 2020		December 29, 2019
U.S.	$	5,449	$	5,449
Mexico		12,716		12,716
Total	$	18,165	$	18,165

The carrying value of goodwill is assessed annually at year-end and at each reporting period for impairment triggers to determine whether there exists any indicators of impairment. The assessment is done at the operating segment level as the group of components (production facilities) within each operating segment all have similar economic characteristics. Our business operations have generally performed as expected during the first nine months of 2020. While the COVID-19 pandemic creates significant uncertainty, in the near term, the Company did not identify any triggering events as at September 27, 2020.

Accrued liabilities:

	September 27, 2020		December 29, 2019
Payroll	$	7,515	$	5,504
Customer related		6,347		2,185
Deferred revenue		5,915		—
Vendor related		1,436		1,742
Professional services		644		612
Interest		330		860
Other		938		261
Total	$	23,125	$	11,164

Deferred Revenue is recorded when the Company invoices and becomes eligible to receive payment for goods or services prior to the transferring of goods or services to the customer under the terms of the contract (i.e., all revenue recognition criteria are not yet met), which is included within accrued liabilities. As of September 27, 2020 and December 29, 2019, the balance of deferred revenue was $5,915 and Nil, respectively. Revenue of $899 was recognized during the nine months ended September 27, 2020. The accounts receivable balances associated with the deferred revenue invoicing was $5,915 as at September 27, 2020 with no corresponding deferred revenue invoices in accounts receivable as at December 29, 2019. Deferred revenue is recognized into revenue when all revenue recognition criteria are met.

Consolidated Statements of Operations and Comprehensive Income (Loss)

Interest expense:

	Three months ended				Nine months ended
	September 27, 2020		September 29, 2019		September 27, 2020		September 29, 2019
Long-term debt	$	1,012	$	1,135	$	3,080	$	4,596
Revolving credit facility		415		597		1,449		1,813
Amortization of deferred financing fees		59		50		169		122
Amortization of debt issuance costs		245		705		723		1,178
Obligations under finance leases		195		192		575		640
Other interest		15		—		25		—
Total	$	1,941	$	2,679	$	6,021	$	8,349

Debt

(a) Revolving credit and long-term debt facilities

	September 27, 2020			December 29, 2019
Revolving credit facility	$	34,356		$	34,701
Term loans:
Term loan A facility	$	37,813		$	38,750
Less deferred debt issue costs		(1,928	)		(2,286	)
Less unamortized discount on debt		(1,184	)		(1,464	)
Total term loans	$	34,701		$	35,000
Less current portion		(2,188	)		(1,250	)
Long term portion	$	32,513		$	33,750

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 a grid ranging from 0.50% to 1.00% or 1, 2 or 3-month fully-absorbed PNC LIBOR plus a grid 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 the Company and certain of its 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”). The Financing Agreement governs a term loan A facility (the “Term A Loan Facility” and together with the PNC Facility, the “Credit Facilities” and previously governed a term loan B facility (the “Term Loan B Facility”) until it was paid in full on July 3, 2019. The Term Loan A Facility matures on November 8, 2023 (the “Maturity Date”). The Term Loan A Facility bears interest 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%. 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 November 8, 2019, (ii) 2.00% in the event that such payment occurs after November 8, 2019 and on or before November 8, 2020, and (iii) 1.00% in the event that such payment occurs after November 8, 2020 and on or before November 8, 2021. No such applicable premium is payable for any payment of loans made under the Term Loan A Facility occurring after November 8, 2021.

On June 26, 2020, the Company, entered into the Fourth Amendment to the Amended and Restated Revolving Credit and Security Agreement (“PNC Fourth Amendment”) and the Fifth Amendment to the Financing Agreement (“TCW Fifth Amendment”). The PNC Fourth Amendment and TCW Fifth Amendment, among other things, amend the definition of “Consolidated EBITDA” by permitting an addback for (i) non-recurring labor costs, temporary employee bonuses to reduce absenteeism, personal protective equipment costs, facility sanitation costs, and excess freight and logistics costs, not to exceed $1,200, and (ii) restructuring and severance charges, accruals and reserves in connection with permanent headcount reductions, in an aggregate amount not to exceed $1,000 with respect to corporate selling, general and administrative employees, in each case, for the period from June 1, 2020, to and including July 31, 2020. The PNC Fourth Amendment and TCW Fifth Amendment also amends the definition of “Permitted Purchase Money Indebtedness” to (i) allow for Indebtedness (as defined in the PNC Agreement) pursuant to financing provided by a third party lender for any fixed or tangible assets acquired prior to the June 26, 2020, and (ii) increase the aggregate principal amount of all Indebtedness (as defined in the PNC Agreement and Financing Agreement) permitted under the PNC Agreement to $3,750.

On September 25, 2020, the Company, entered into the Fifth Amendment to the Amended and Restated Revolving Credit and Security Agreement (“PNC Fifth Amendment”). The PNC Fifth Amendment, among other things, (i) amends the definition of “Consolidated EBITDA” by permitting an addback for non-recurring labor costs, temporary employee bonuses to reduce absenteeism, personal protective equipment costs, facility sanitation costs, and excess freight and logistics costs, not to exceed an additional $1,500for the three months ended September 27, 2020, and (ii) provides for borrowings of up to $2,000 on certain consigned assets. On September 25, 2020, the Company entered into the Sixth Amendment to the Financing Agreement (“TCW Sixth Amendment”). The TCW Sixth Amendment, among other things, amends the definition of “Consolidated EBITDA” by permitting an addback for non-recurring labor costs, temporary employee bonuses to reduce absenteeism, personal protective equipment costs, facility sanitation costs and excess freight and logistics costs, not to exceed an additional $1,500 for the three months ended September 27, 2020.

As at September 27, 2020, the additional funds available to borrow under the PNC Facility after deducting the current borrowing base conditions were $30,464 (December 29, 2019 - $21,644). The maximum amount of funds that could be available under the PNC Facility is $65,000. However, availability under the PNC 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 September 27, 2020, $34,356 (December 29, 2019 - $34,701) 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 September 27, 2020, $37,813 (December 29, 2019 - $38,750) was outstanding under the TCW Term Loan A Facility. The TCW Facilities are reported on the consolidated balance sheet net of deferred financing fees of $1,928 (December 29, 2019 - $2,286) and a discount on debt of $1,184 (December 29, 2019 - $1,464) related to the outstanding warrants described below.

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

(b) Covenants

The Credit Facilities contain certain financial and non-financial covenants, including restrictions on dividend payments. The financial covenants require the Company to maintain a fixed charge coverage ratio and a total leverage ratio quarterly during the term of the Credit Facilities.

The Company was in compliance with the covenants included in the Credit Facilities as at September 27, 2020. The Company’s continued financial covenant compliance will depend on key variables, including the Company’s cash flow from earnings before interest, income taxes and depreciation as well as debt levels. For context, assuming no change to forecast debt balances, a reduction of approximately 14% of forecast earnings before interest, income taxes, depreciation and amortization as defined in PNC Agreement and Financing Agreement over the next twelve month period, could jeopardize covenant compliance at the end of our third quarter 2021. The Company attempts to address risks of covenant compliance by taking measures to reduce its inventory, revolving credit facility and term debt balances as necessary.

Market conditions, including the implications of the COVID-19 pandemic, may negatively impact our ability to secure and source alternative methods of financing. We do not currently foresee a material impact in the short term based on our working capital needs, however if a number of our customers reduce or temporarily cease payments to us, this would present a risk and negatively impact our cash flow and ability to meet our working capital obligations to operate our business, which could require us to secure alternative methods of financing.

The Company continues to monitor operations and results closely and manage debt levels relative to our operational results to ensure compliance with its lenders covenants.

On November 8, 2018, 504,735 warrants were issued to TCW in connection with the Financing Agreement and are outstanding as at September 27, 2020. As a result of the anti-dilution provisions contained in the warrants that were triggered in connection with the Rights Offering and the Registered Direct Offering in June 2019, the warrants were exercisable to purchase an additional 7,214 shares of common stock (or a total of 511,949 shares) at September 27, 2020. 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 $3.41 per unit or $1,746 as at September 27, 2020 ($3.38 per unit or $1,730 – December 29, 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 income (loss).

5.	Capital stock

Common shares

Issued and outstanding:

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

	Number of shares		$
Balance at December 29, 2019	$	28,195,300	$	508
New share issuance-vested stock awards		19,500		-
Balance September 27, 2020	$	28,214,800	$	508

Stock Options

For more detailed information regarding the Company’s stock option arrangements, see Note 7 of the consolidated financial statements within the Company’s Form 10-K for the fiscal period ended December 29, 2019. During the nine months ended September 27, 2020, there were no stock options granted, exercised or forfeited. A summary of stock option activity for the nine months ended September 27, 2020 is as follows:

	Number of options		Weighted average exercise price		Aggregate intrinsic value		Weighted average remaining contractual term (years)
Outstanding at December 29, 2019		2,344,374	$	2.14		2,016		7.9
Options granted		—		—		—		—
Options exercised		—		—		—		—
Options forfeited		—		—		—		—
Outstanding at September 27, 2020		2,344,374		2.14		2,049		7.2
Exercisable at September 27, 2020		1,088,140		1.55		2,024		6.5

During the three-month periods ended September 27, 2020 and September 29, 2019, the Company recorded stock-based compensation expense related to stock options and a corresponding increase in additional paid-in capital of $57 and $57, respectively. During the nine months ended September 27, 2020 and September 29, 2019, the Company recorded stock-based compensation expense related to stock options and a corresponding increase in additional paid-in capital of $172 and $120, 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.

Restricted Stock Units and Restricted Stock Awards

For more detailed information regarding the Company’s Restricted Stock Units (“RSU”) and Restricted Stock Awards (“RSA”) arrangements, see Note 7 of the consolidated financial statements within the Company’s Form 10-K for the fiscal period ended December 29, 2019. During the nine months ended September 27, 2020, 178,000 RSUs were granted. A summary of the RSU activity for the nine months ended September 27, 2020 is as follows:

	Outstanding RSU			Weighted average stock price			Weighted average remaining contractual term (years)
Outstanding balance at December 29, 2019		348,000		$	3.16			2.23
RSU granted		178,000			2.92
RSU vested and issued in common shares		(19,500	)		1.28
RSU forfeited		(27,500	)		(1.28	)
Outstanding at September 27, 2020		479,000			3.14			2.18

Stock based compensation recognized during the three-month period ended September 27, 2020 and September 29, 2019 related to the restricted stock units was $101 and $296, respectively. Stock based compensation recognized during the nine months ended September 27, 2020, and September 29, 2019, related to the restricted stock units was $303 and $418, respectively.

6.	Income taxes

During the nine months ended September 27, 2020 and September 29, 2019, the Company recorded current income tax expense $872 and $592, respectively, in connection with U.S. state taxes and taxes on profits in certain foreign jurisdictions, and deferred income tax (recovery) expense of ($15) and $14, 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.

7.	Earnings per common share

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

	Three months ended				Nine months ended
(Number of common shares)	September 27, 2020		September 29, 2019		September 27, 2020		September 29, 2019
Basic weighted average shares outstanding		28,214,800		28,057,763		28,207,943		24,954,875
Dilutive stock awards ^(a,b)		1,421,519		—		1,421,519		—
Diluted weighted average shares outstanding		29,636,319		28,057,763		29,629,462		24,954,875

(a)

For the three and nine months ended September 27, 2020, as a result of net income for the periods, dilutive earnings per share were calculated using the treasury stock method. The dilutive stock awards have been calculated as 1,421,519 for the three and nine months ended September 27, 2020, related to the outstanding unvested restricted stock units and incremental in-the-money stock options.

(b)

For the three and nine months ended September 29, 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 754,820 for the three and nine months ended September 29, 2019, related to outstanding unvested restricted stock units and incremental in-the-money stock options.

8.	Segmented information

General description

During the nine months ended September 27, 2020, the Company operated and managed by geographic region in the United States, Mexico and China, which are our operating and reportable segments. Commencing in the three months ended June 28, 2020, China is no longer included as a reportable segment. During the three months ended March 29, 2020, the Company completed final shipments for customers serviced in our Chinese manufacturing facility and the relocation of the equipment to our other North American sites. We utilize each reportable segment’s contribution (revenue minus operating expenses, excluding unrealized foreign exchange gain (loss) on unsettled forward foreign exchange contracts, corporate allocations and restructuring expenses) to monitor reportable segment performance. Contribution by country is utilized by the chief operating decision-maker (defined as the Chief Executive Officer) as the indicator of reportable segment performance, as it reflects costs which our operating segment management are 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						Nine months ended
	September 27, 2020			September 29, 2019			September 27, 2020			September 29, 2019
Revenue
Mexico	$	61,625		$	57,328		$	183,791		$	182,424
China		—			8,092			4,206			22,541
U.S.		38,227			27,426			103,744			86,448
Total	$	99,852		$	92,846		$	291,741		$	291,413
Intersegment revenue
Mexico	$	(136	)	$	(550	)	$	(2,706	)	$	(1,293	)
China		—			(3,580	)		(3,302	)		(7,687	)
U.S.		(169	)		(34	)		(642	)		(166	)
Total	$	(305	)	$	(4,164	)	$	(6,650	)	$	(9,146	)
Net external revenue
Mexico	$	61,489		$	56,778		$	181,085		$	181,131
China		—			4,512			904			14,854
U.S.		38,058			27,392			103,102			86,282
Total segment revenue (which also equals consolidated revenue)	$	99,547		$	88,682		$	285,091		$	282,267
Segment contribution
Mexico	$	5,334		$	4,815		$	16,297		$	15,456
China		—			1,313			(2	)		3,012
U.S.		2,521			2,191			7,753			5,378
Total	$	7,855		$	8,319		$	24,048		$	23,846
Corporate expenses		3,725			5,962			14,377			17,227
Restructuring charges		871			6,454			525			8,624
Change in fair value of warrant liability		133			(858	)		15			(919	)
Change in fair value of contingent consideration		—			—			—			(3,050	)
Unrealized foreign exchange gain on unsettled forward exchange contracts		(262	)		—			(720	)		—
Interest expense		1,941			2,679			6,021			8,349
Income (loss) before income taxes	$	1,447		$	(5,918	)	$	3,830		$	(6,385	)

Three months ended September 27, 2020	Mexico		U.S.		China		Total
Market Sector:
Test and Measurement	$	147	$	8,019	$	—	$	8,166
Retail and Payment Systems		10,295		—		—		10,295
Telecom, Networking and Communications		2,755		2,021		—		4,776
Medical and Safety		7,072		4,198		—		11,270
Industrial IoT, Power and Clean Technology		29,629		7,387		—		37,016
Semiconductors		11,591		4,436		—		16,027
Avionics, Aerospace and Defense		—		11,997		—		11,997
Segment Revenue		61,489		38,058		—		99,547

Revenue by category	Mexico		U.S.		China		Total
Point in time	$	1,142	$	3,697	$	—	$	4,839
Over time		60,347		34,361		—		94,708
Total Revenue		61,489		38,058		—		99,547

Three months ended September 29, 2019	Mexico		U.S.		China		Total
Market Sector:
Test and Measurement	$	534	$	8,287	$	—	$	8,821

SMTC CORP 10-Q