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 29~~~~, 201~~9June 28, 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~~000-31051

SMTC CORPORATION

(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

~~DELAWARE~~Delaware

98-0197680

(STATE OR OTHER JURISDICTION OF

INCORPORATION OR ORGANIZATION)

(I.R.S. EMPLOYERIDENTIFICATION NO.)

7050 WOODBINE AVENUE

~~Suite 300~~

MARKHAM, ~~ONTARIO, CANADA~~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	~~NASDAQ The~~ 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~~“emerging growth ~~company.~~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 ☐

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 12, 2019,~~August 6, 2020, SMTC Corporation had ~~28,098,474~~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 ~~Opera~~~~tions~~Operations and Comprehensive Income (~~Loss~~)(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	~~Notes to Interim Consolidated~~Management’s Discussion and Analysis of Financial ~~Statements (unaudited)~~Condition and Results of Operations	822

Item 23	~~Management’s Discussion~~Quantitative and ~~Analysis of Financial Condition and Results of Operations~~Qualitative Disclosures About Market Risk	2835

Item 34	~~Quantitative~~Controls and ~~Qualitative Disclosures~~ A~~bout~~ ~~Market Risk~~Procedures	4036

PART II OTHER INFORMATION		37

Item 41A	~~Controls and Procedures~~ Risk factors	42

~~PART II OTHER INFORMATION~~		4237

Item 1A6	~~Risk factors~~Exhibits	42

~~Item 6~~	~~Exhibits~~	4338

~~SMTC CORPORATION~~

Part I FINANCIAL INFORMATION

Item 1 Financial Statements

Interim Consolidated Balance Sheets:

(Expressed in thousands of U.S. dollars)

(Unaudited)

September 29,
2019

December 30,
2018

Assets

Current assets:

Cash
$ 601 $ 1,601
Accounts receivable — net (note 4)
61,208 72,986
Unbilled contract assets (note 4)
26,790 20,405
Inventories (note 4)
49,535 53,203
Prepaid expenses and other assets
6,658 5,548
Derivative assets (note 11)
— 15
Income taxes receivable
358 160
Total current assets
145,150 153,918

Property, plant and equipment — net (note 4)
26,348 28,160
Operating lease right of use assets — net (notes 2 and 6)
3,887 —
Goodwill (note 4)
18,165 18,165
Intangible assets — net (note 4)
14,403 19,935
Deferred income taxes — net
366 380
Deferred financing costs — net
899 668
Total assets
$ 209,218 $ 221,226

Liabilities and Shareholders’ Equity

Current liabilities:

Revolving credit facility (note 5)
$ 34,840 $ 25,020
Accounts payable
67,082 76,893
Accrued liabilities (note 4)
13,387 13,040
Warrant liability (note 5)
1,090 2,009
Restructuring liability (note 12)
2,736 —
Contingent consideration (note 4)
— 3,050
Income taxes payable
94 12
Current portion of long-term debt (note 5)
1,250 1,368
Current portion of operating lease obligations (notes 2 and 6)
1,483 —
Current portion of finance lease obligations (notes 2 and 6)
1,316 1,547
Total current liabilities
123,278 122,939

Long-term debt (note 5)
34,154 56,039
Operating lease obligations (notes 2 and 6)
2,818 —
Finance lease obligations (notes 2 and 6)
9,105 9,947
Total liabilities
169,355 188,925

Shareholders’ equity:

Capital stock (note 7)
507 458
Additional paid-in capital
293,152 278,648
Deficit
(253,796 ) (246,805
)
39,863 32,301
Total liabilities and shareholders’ equity
$ 209,218 $ 221,226

	June 28, 2020			December 29, 2019
Assets
Current assets:
Cash	$	311		$	1,368
Accounts receivable — net (note 3)		65,071			69,919
Unbilled contract assets (note 3)		38,647			26,271
Inventories (note 3)		50,125			47,826
Prepaid expenses and other assets		6,813			7,044
Derivative assets (note 9)		459			—
Income taxes receivable		160			—
Total current assets		161,586			152,428
Property, plant and equipment — net (note 3)		23,495			25,310
Operating lease right of use assets — net		6,419			3,330
Goodwill (note 3)		18,165			18,165
Intangible assets — net (note 3)		10,383			12,747
Deferred income taxes — net		473			540
Deferred financing costs — net		749			859
Total assets	$	221,270		$	213,379
Liabilities and Shareholders’ Equity
Current liabilities:
Revolving credit facility (note 4)	$	33,943		$	34,701
Accounts payable		70,591			74,126
Accrued liabilities (note 3)		20,039			11,164
Warrant liability (note 4)		1,612			1,730
Restructuring liability (note 10)		675			1,597
Income taxes payable		267			157
Current portion of long-term debt (note 4)		1,875			1,250
Current portion of operating lease obligations		1,494			1,128
Current portion of finance lease obligations		1,110			1,226
Total current liabilities		131,606			127,079
Long-term debt (note 4)		32,903			33,750
Operating lease obligations		5,339			2,615
Finance lease obligations		8,278			8,838
Total liabilities		178,126			172,282
Shareholders’ equity:
Capital stock (note 5)		508			508
Additional paid-in capital		293,706			293,389
Deficit		(251,070	)		(252,800	)
		43,144			41,097
Total liabilities and shareholders’ equity	$	221,270		$	213,379

Commitments (note 11)

Subsequent event (note 12)

See accompanying notes to interim consolidated financial statements.

~~SMTC CORPORATION~~

Interim Consolidated Statements of ~~Opera~~~~tions~~Operations and Comprehensive Income (~~Loss~~)

(loss)

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

(Unaudited)

Three months ended

Nine months ended

September 29, 2019

September 30, 2018

September 29, 2019

September 30, 2018

Revenue (note 4)
$ 88,682 $ 53,677 $ 282,267 $ 135,276
Cost of sales (note 11)
79,776 48,440 255,740 121,906
Gross profit
8,906 5,237 26,527 13,370

Selling, general and administrative expenses
6,549 3,682 19,908 10,838
Change in fair value of warrant liability (note 5)
(858
)
— (919 ) —
Change in fair value of contingent consideration (note 4)
— — (3,050 ) —
Loss on disposal of property, plant and equipment
— 3 — 3
Restructuring charges (note 12)
6,454 58 8,624 154
Operating income (loss)
(3,239 ) 1,494 1,964 2,375
Interest expense (note 4)
2,679 485 8,349 1,195
Income (loss) before income tax expense
(5,918 ) 1,009 (6,385 ) 1,180
Income tax expense (recovery) (note 8):

Current
(103 ) 290 592 596
Deferred
(81 ) (145
)
14 (191
)
(184 ) 145 606 405
Net income (loss) and comprehensive income (loss)
$ (5,734 ) $ 864 $ (6,991 ) $ 775

Earnings per share of common stock:

Basic
$ (0.20 ) $ 0.04 $ (0.28 ) $ 0.04
Diluted
$ (0.20 ) $ 0.04 $ (0.28 ) $ 0.04
Weighted average number of shares outstanding (note 9):

Basic
28,057,763 19,335,253 24,954,875 17,866,399
Diluted
28,057,763 19,986,756 24,954,875 18,517,902

	Three months ended						Six months ended
	June 28, 2020			June 30, 2019			June 28, 2020			June 30, 2019
Revenue (note 3)	$	90,406		$	90,936		$	185,544		$	193,585
Cost of sales (note 9)		79,720			81,939			165,219			175,964
Gross profit		10,686			8,997			20,325			17,621
Selling, general and administrative expenses		7,107			6,560			14,326			13,359
Change in fair value of contingent consideration		—			—			—			(3,050	)
Restructuring charges (reversal) (notes 3 and 10)		(125	)		1,546			(346	)		2,170
Operating income		3,704			891			6,345			5,142
Fair value measurement loss (gain) on warrant liability (note 4)		399			40			(118	)		(61	)
Interest expense (note 3)		1,987			2,800			4,080			5,670
Net income (loss) before income taxes		1,318			(1,949	)		2,383			(467	)
Income tax expense (note 6):
Current		311			416			586			695
Deferred		52			103			67			95
		363			519			653			790
Net income (loss) and comprehensive income (loss)		955			(2,468	)		1,730			(1,257	)
Net income per share:
Basic	$	0.03		$	(0.10	)	$	0.06		$	(0.05	)
Diluted	$	0.03		$	(0.10	)	$	0.06		$	(0.05	)
Weighted average number of shares outstanding (note 7):
Basic		28,213,729			23,557,944			28,204,514			23,403,431
Diluted		29,493,472			23,557,944			29,484,257			23,403,431

See accompanying notes to interim consolidated financial statements.

~~SMTC CORPORATION~~

Interim Consolidated Statements of Changes in Shareholders’ Equity

(Expressed in thousands of U.S. dollars)

Three months ended ~~September 29, 2019~~June 28, 2020

(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
Treasury stock
21,264 — (75 ) — (75 )
Restricted stock units vested and stock options exercised
87,386 1 45 — 46

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

	Common Shares		Capital stock		Additional paid-in capital		Deficit			Total Shareholders’ equity
Balance, March 29, 2020		28,195,300	$	508	$	293,551	$	(252,025	)	$	42,034
RSU vested and stock options exercised		19,500		—		—		—			—
Stock-based compensation		—		—		155		—			155
Net income		—		—		—		955			955
Balance, June 28, 2020		28,214,800		508		293,706		(251,070	)		43,144

Three months ended ~~September~~June 30, ~~2018~~

~~(Unaudited)~~

Common
Shares

Capital
stock

Additional
paid-in
capital

Deficit

Total
Shareholders’
equity

Balance, July 1, 2018
17,303,510 $ 399 $ 265,916 $ (246,446
)
$ 19,869

Issuance of common shares from rights offering (note 7)
5,777,768 58 12,529 — 12,587
Stock-based compensation
— — 75 — 75
Net income
— — — 864 864
Balance, September 30, 2018
23,081,278 457 278,520 (245,582
)
33,395

~~Nine months ended September 29,~~ 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
Treasury stock
21,264 — (75 ) — (75 )
RSU vested and stock options exercised
267,063 3 43 — 46
Issuance of common shares from rights offering (note 7)
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

~~Nine months ended September 30, 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 (note 2)
— — — 320 320
RSU vested and stock options exercised
310,883 3 358 — 361
Issuance of common shares from rights offering (note 6)
5,777,768 58 12,529 — 12,587
Stock-based compensation
— — 278 — 278
Net income
— — — 775 775
Balance, September 30, 2018
23,081,278 457 278,520 (245,582
)
33,395

	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 issued in common shares		18,500		—		—		—			—
Issuance of common shares from rights offering		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

See accompanying notes to interim consolidated financial statements.

Six months ended June 28, 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		—		—		317		—			317
Net income		—		—		—		1,730			1,730
Balance, June 28, 2020		28,214,800	$	508	$	293,706	$	(251,070	)	$	43,144

Six months ended June 30, 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 issued in common shares		179,677		2		(2	)		—			—
Issuance of common shares from rights offering		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

~~SMTC CORPORATION~~

Interim Consolidated Statements of Cash Flows

(Expressed in thousands of U.S. dollars)

(Unaudited)

	Nine months ended						Six months ended
	September 29, 2019			September 30, 2018			June 28, 2020			June 30, 2019
Cash provided by (used in):
Operations:

Net income (loss)	$	(6,991	)	$	775

Net income(loss)							$	1,730		$	(1,257	)
Items not involving cash:

Depreciation of property, plant & equipment		4,902			2,426
Depreciation of property, plant and equipment								3,222			3,253
Amortization of intangible assets		5,532			—			2,364			3,688
Unrealized foreign exchange gain on unsettled forward exchange contracts		—			(338	)		(459	)		—
Loss on sale of property, plant and equipment		—			3
Write down of property, plant and equipment		261			—
Deferred income taxes (recovery)		14			(191	)
Amortization of deferred financing fees		1,300			34
Deferred income taxes								67			95
Amortization of deferred financing fees and debt insurance costs								588			545
Stock-based compensation		538			278			317			185
Change in fair value of warrant liability		(919	)		—			(118	)		(61	)
Change in fair value of contingent consideration		(3,050	)		—			—			(3,050	)

Change in non-cash operating working capital:
Accounts receivable		11,778			(12,096	)		4,848			8,035
Unbilled contract assets		(6,385	)		(8,183	)		(12,376	)		(7,214	)
Inventories		3,668			(6,009	)		(2,299	)		7,054
Prepaid expenses and other assets		(1,095	)		(1,002	)		231			(1,128	)
Income taxes payable		(116	)		(32	)
Income taxes receivable/payable								(50	)		203
Accounts payable		(9,845	)		16,582			(3,377	)		(10,130	)
Accrued liabilities		(265	)		2,449			8,875			(9	)
Restructuring liability		2,736			—			(919	)		(857	)
Net change in operating lease right of use asset and liability		414			—			1			465
		2,477			(5,304	)		2,645			(183	)
Financing:
Net advances of revolving credit facility		9,820			4,515
Repayments of revolving credit facility								(758	)		(11,272	)
Repayment of long-term debt		(22,625	)		(1,500	)		(625	)		(625	)
Advance of equipment facility		—			2,629
Deferred financing fees		(371	)		(48	)		(75	)		(50	)
Principal repayments of finance lease obligations		(1,199	)		(189	)		(676	)		(809	)
Proceeds from issuance of common stock through exercise of stock options		45			361
Proceeds from issuance of common stock through rights offerings		14,044			12,587			—			14,044
		(286	)		18,355			(2,134	)		1,288
Investing:
Purchase of property, plant and equipment		(3,191	)		(3,898	)		(1,568	)		(2,072	)
		(3,191	)		(3,898	)		(1,568	)		(2,072	)

(Decrease) increase in cash		(1,000	)		9,153
Decrease in cash								(1,057	)		(967	)
Cash, beginning of period		1,601			5,536			1,368			1,601
Cash, end of the period	$	601		$	14,689		$	311		$	634

Supplemental Information
Property, plant and equipment acquired that was unpaid in cash and included in accounts payable and accruals		418			55

Property, plant and equipment acquired through capital lease		126			627
Cash interest paid							$	3,946		$	2,363
Increase in operating right of use assets							$	3,840		$	5,559
Property, plant and equipment acquired that was unpaid in cash and included in accounts payable and accrued liabilities							$	71		$	260

See accompanying notes to interim consolidated financial statements.

~~SMTC CORPORATION~~

Unaudited Notes to Interim Consolidated Financial Statements

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

1.	Business and Nature of ~~the business~~Presentation

Background

SMTC Corporation (the “Company,” ~~“SMTC,”~~ “we,” ~~“us,~~“our,” or ~~“our”~~“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. We have~~fulfillment (“DOF”). SMTC has more than 50 manufacturing and assembly lines at strategically located facilities in the United States, ~~Mexico,~~Canada and ~~China~~Mexico that provide local support and manufacturing capabilities to our global customers. ~~Our~~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. As

Basis of ~~September 29, 2019, we had 2,941 employees of which 2,541 were full time and contract employees.~~

~~In September 2019, the Company announced plans to close its manufacturing operations in China before the end of fiscal 2019. See Note 4 and Note 12 for further disclosure.~~

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 ~~30, 2018,~~29, 2019, (“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.~~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 ~~30, 2018~~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.

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.

COVID-19 Pandemic

2.	~~Impact of~~ ~~adoption of ASC 842~~

In March 2020, the World Health Organization declared the novel coronavirus (COVID-19) outbreak a global pandemic. The COVID-19 pandemic has negatively impacted the global economy, disrupted supply chains, created significant volatility and disruption in financial markets and has resulted in an economic slowdown. In response to the impact of the COVID-19 pandemic, and given the uncertainty of its duration, the Company has initiated measures designed to protect our employees and will continue to adapt in order to maintain operations while providing a safe environment.

The Company ~~adopted Accounting Standards Update (“ASU”) No. 2016-02, Leases (Topic 842),~~is actively monitoring the global COVID-19 pandemic and continuously communicating with our customers, key suppliers, employees and union representatives, in addition to government and state representatives where our manufacturing facilities reside. We have experienced increased workplace absenteeism as illness, potential COVID-19 exposure for higher risk employees or personal commitments that restrict the ability of ~~December 31, 2018, using the modified retrospective approach, which allows comparative periods not~~some employees 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~~come 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.

work. The Company has ~~elected~~modified shift schedules and hired temporary labor to ~~exclude short-term leases from~~help address this situation and meet our customers’ product shipping schedules. During the ~~recognition requirements~~three months ended June 28, 2020, the Company incurred additional costs of ~~ASC 842. A lease is short-term if,~~$1,185 that we have attributed to the COVID-19 pandemic, including additional temporary headcount as at risk employees are mandated to stay home in our Mexico locations as well as the ~~commencement date, it has a term~~purchase of ~~less than or equal~~personal protective equipment and costs to ~~one year. Lease expense related~~sanitize and clean facilities.

As at June 28, 2020, the additional funds available to ~~short-term leases is recognized on a straight-line basis over~~borrow under our PNC Facility (as described and defined in note 4 below) after deducting the ~~lease term.~~ current borrowing base conditions and subject to debt covenants, should the Company require additional funding during the COVID-19 pandemic, was $30,875 (March 29, 2020 - $31,185). In addition, during the quarter ended June 28, 2020, the Company entered into amendments to its lending agreements with PNC and TCW, as disclosed in note 4, that would allow for the addback of certain costs attributable to the COVID-19 pandemic.

Transition of China Manufacturing

~~The adoption~~During the fourth quarter of 2019, we ceased manufacturing in China and began to relocate the equipment used at our Chinese manufacturing facility to our other North American sites. During the first quarter of 2020, the Company completed final shipments for customers serviced at our Chinese manufacturing facility and completed the relocation of the ~~new standard~~equipment to our other North American sites. 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. Revenues attributable to production from SMTC’s manufacturing operations in China declined in 2019 as compared to 2018, but more significant declines were anticipated in 2020 which would have resulted in negative operating margins from our China site. This ultimately resulted in the ~~recognition of operating lease right of use assets and operating lease obligations of $5,452 and $5,915, respectively on December 31, 2018. The difference between~~decision to close the ~~operating lease right of use asset and operating lease obligation related to accrued and prepaid rent of $463, which was reclassified~~manufacturing facility.

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 ~~operating lease right of use asset. The standard did not materially impact consolidated net loss and had no impact on cash flows.~~

3.	~~Recent Accounting Pronouncements Adopted~~

In June 2018, the Financial Accounting Standards Board (the “FASB”) published ASU 2018-07: Compensation – Stock Compensation (Topic 718): Improvements to Non-employee Share-Based Payment Accounting.Disclosure Requirements for Fair Value Measurement. The amendment ~~simplifies~~includes the ~~application~~removal, modification and addition of ~~share-based payment accounting for non-employees.~~disclosure requirements under Topic 820. The amendments in this ASU are effective for ~~public business~~all entities for ~~financial statements issued for~~fiscal years, and interim periods within those fiscal years, beginning after December 15, ~~2018, and interim periods within those fiscal years.~~2019. The impact of the adoption of the standard ~~did~~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 ~~have a~~ material ~~impact on~~to the ~~consolidated~~Company, as alternative reference rates are available under the agreements governing the financial ~~statements.~~instruments.

RecentAccounting Pronouncements Not Yet Adopted

In May 2016, the FASB published ASU ~~2016-13~~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, ~~2019~~2022 including interim periods with those years. The Company ~~continues to evaluate~~is currently evaluating the impact of this accounting ~~standard. The impact of adoption of~~standard, but it is expected that the new standard ~~has not yet been determined.~~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~~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.~~2022. The Company is currently evaluating the impact of ~~the adoption of the standard is being considered, however~~this accounting standard. However, it is expected that this may reduce the complexity of evaluating goodwill for impairment.

In ~~August 2018,~~December 2019, the FASB published ASU ~~2018-13: Fair Value Measurement~~2019-12: Income Taxes (Topic ~~820)~~740): ~~Disclosure Framework – Changes~~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 ~~Disclosure Requirements~~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 ~~Fair Value Measurement.~~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 ~~820 includes the removal, modification and additional of disclosure requirements. Topic 820~~740 is effective for ~~all~~public entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, ~~2019.~~2020. The impact of the adoption of the standard has not yet been determined and is ~~not expected to have a material impact on the consolidated financial statements.~~being evaluated.

4.3.	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:

~~(a)~~

~~Accounts receivable – net:~~

	September 29, 2019			December 30, 2018			June 28, 2020			December 29, 2019
Trade accounts receivable	$	62,330		$	72,937		$	67,192		$	71,113
Other receivables		723			447			188			1,098
Allowance for doubtful accounts		(1,845	)		(398	)		(2,309	)		(2,292	)
Total	$	61,208		$	72,986		$	65,071		$	69,919

The ~~increase of $1,447 in~~ allowance for doubtful accounts pertains primarily to one customer previously serviced out of Dongguan China. This was ~~primarily~~provisioned and included with the ~~result~~restructuring charges for the closure of ~~specific provisions~~the facility in 2019. Refer to note 10 for further details. To date, there has been no material impact of ~~$1,691~~the COVID-19 pandemic on ~~customers serviced in~~ the ~~Dongguan manufacturing facility (note 12).~~allowance for doubtful accounts.

Unbilled contract assets

~~(b)~~

~~Unbilled contract assets~~

September 29,
2019

December 30,
2018

Opening
$ 20,405 $ 3,734
Contract assets additions
266,778 205,387
Contract assets invoiced
(260,393 ) (188,716 )
Ending
$ 26,790 $ 20,405

~~(c)~~

~~Inventories:~~

September 29,
2019

December 30,
2018

Raw materials
$ 50,465 $ 52,102
Finished goods
— 418
Parts and other
633 896
Provision for obsolescence
(1,563 ) (213
)
Total
$ 49,535 $ 53,203

	June 28, 2020			December 29, 2019
Opening	$	26,271		$	20,405
Contract assets additions		172,217			350,709
Contract assets invoiced		(159,841	)		(344,843	)
Ending	$	38,647		$	26,271

Inventories:

	June 28, 2020			December 29, 2019
Raw materials	$	50,251		$	48,067
Parts and other		383			586
Provision for obsolescence		(509	)		(827	)
Total	$	50,125		$	47,826

The ~~increase of $1,350 in the~~ provision for obsolescence ~~was due~~primarily pertains to ~~specific provisions of $1,550 for~~ customers previously serviced out of the Dongguan ~~manufacturing~~facility. These have been provisioned and included with the restructuring charges for the closure of the facility ~~(note 12).~~in 2019. Refer to note 10 for further details.

Property, plant and equipment – net:

	June 28, 2020			December 29, 2019
Cost:
Land	$	1,648		$	1,648
Buildings (b)		18,985			18,985
Machinery and equipment (a) (e)		43,192			42,732
Office furniture and equipment (c) (e)		836			1,005
Computer hardware and software (d) (e)		3,679			3,979
Leasehold improvements (e)		4,240			4,265
		72,580			72,614
Less accumulated depreciation:
Land		—			—
Buildings (b)		(10,944	)		(10,392	)
Machinery and equipment (a) (e)		(32,700	)		(31,192	)
Office furniture and equipment (c) (e)		(393	)		(546	)
Computer hardware and software (d) (e)		(3,082	)		(3,289	)
Leasehold improvements (e)		(1,966	)		(1,885	)
		(49,085	)		(47,304	)
Property, plant and equipment—net	$	23,495		$	25,310

4.	~~Interim Consolidated financial statement details cont’d~~

~~(d)~~

~~Property, plant and equipment – net:~~

September 29,
2019

December 30,
2018

Cost:

Land
$ 1,648 $ 1,648
Buildings (b)
18,985 18,985
Machinery and equipment (a) (d)
41,702 40,083
Office furniture and equipment (c)(d)
979 845
Computer hardware and software (d)
3,894 3,945
Leasehold improvements (d)
4,230 3,863
71,439 69,368

Less accumulated depreciation:

Land
— —
Buildings (b)
(10,113
)
(9,190
)
Machinery and equipment (a) (d)
(29,548 ) (27,093
)
Office furniture and equipment (c)(d)
(509 ) (457
)
Computer hardware and software (d)
(3,164 ) (3,053
)
Leasehold improvements (d)
(1,756 ) (1,415
)
(45,091 ) (41,208
)
Property, plant and equipment—net (d)
$ 26,348 $ 28,160

(a)

Included within machinery and equipment were assets under ~~capital~~finance leases with costs of $2,275 and $2,275 and associated accumulated depreciation of ~~$834~~$1,196 and ~~$409~~$974 as of ~~September~~June 28, 2020 and December 29, 2019, ~~and December 30, 2018,~~ respectively. The related depreciation expense for the three months ended ~~September 29,~~June 28, 2020 and June 30, 2019 was $109 and ~~September 30, 2018 was~~ $142, ~~and $34,~~ respectively. The related depreciation expense for the ~~nine~~six months ended ~~September~~March 29, 2020 and June 30, 2019 was $222 and ~~September 30, 2018 was $426 and $70,~~$284, respectively.

(b)

~~(b)~~

Included within buildings are costs associated with Melbourne facility under finance ~~lease~~leases of $9,082 and associated accumulated depreciation of ~~$699~~$1,303 and ~~$96~~$900 as of ~~September~~June 28, 2020 and December 29, 2019, ~~and December 30, 2018,~~ respectively. The related depreciation expense for the three months ended ~~September 29,~~June 28, 2020 and June 30, 2019 ~~and September 30, 2018~~ was $201 and ~~$Nil,~~$201, respectively. The related depreciation expense for ~~the nine~~six months ended ~~September~~June 28, 2020 and June 30 29, 2019 was $403 and ~~September 30, 2018 was $603 and $Nil,~~$402, respectively.

(c)

Included within office furniture and equipment were assets under finance leases with costs of ~~$297~~$307 and associated accumulated depreciation of ~~$35~~$85 and ~~$NIL~~$52 as of ~~September~~June 28, 2020 and December 29, 2019, ~~and December 30, 2018,~~ respectively. The related depreciation expense for the three months ended ~~September 29,~~June 28, 2020 and June 30, 2019 was $16 and ~~September 30, 2018 was $9 and $NIL,~~$10, respectively. The related depreciation expense for the ~~nine~~six months ended ~~September~~June 28, 2020 and June 30 29, 2019 was $33 and ~~September 30, 2018 was $29 and $NIL,~~$20, respectively.

(d)

Included ~~in restructuring~~within computer hardware and ~~closure charges~~software were assets under finance leases with costs of $91 and associated accumulated depreciation of $66 and $51 as of June 28, 2020 and December 29, 2019, respectively. The related depreciation expense for the three months ended ~~September 29,~~June 28, 2020 and June 30, 2019 ~~were write down charges of $261 associated with property, plant~~was $8 and ~~equipment with no future benefit~~$8, respectively. The related todepreciation expense for the ~~Dongguan manufacturing facility (note 12). Write down charges of $129 were incurred on~~six months ended June 28, 2020 and June 30, 2019 was $15 and $15, respectively.

(e)

Fully depreciated machinery and equipment with cost of ~~$883~~$636 and accumulated amortization of ~~$754. Write down charges of $10 were incurred on~~$636 was written off in the six months ended June 28, 2020. Fully depreciated office furniture and fixtures with cost of ~~$35~~$209 and accumulated amortization of ~~$25. Write down charges of $39 were incurred on~~$209 was written off. Fully depreciated computer hardware and software with cost of ~~$252~~$414 and accumulated amortization of ~~$213.~~$414 was written off. Write ~~down~~off charges of ~~$83~~$3 were incurred on leasehold improvements with cost of ~~$111~~$185 and accumulated amortization of ~~$28.~~$182. These write off charges were incurred related to the closure of the Dongguan facility for those items not otherwise transferred to other manufacturing facilities.

Intangible assets:

	June 28, 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		(2,031	)		(1,414	)
Order backlog		(6,990	)		(5,333	)
Trade name		(1,300	)		(1,300	)
Non-compete agreements		(296	)		(206	)
		(10,617	)		(8,253	)
Intangible assets—net	$	10,383		$	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:

~~Interim Consolidated financial statement details cont’d~~

~~(e)~~

~~Intangible assets:~~

September 29,
2019

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
(1,105 ) (178 )
Order backlog
(4,168 ) (673 )
Trade name
(1,163 ) (188 )
Non-compete agreements
(161 ) (26 )
(6,597 ) (1,065 )
Intangible assets—net
$ 14,403 $ 19,935

	June 28, 2020		December 29, 2019
U.S.	$	3,115	$	3,824
Mexico		7,268		8,923
Total	$	10,383	$	12,747

Amortization expense of ~~$1,844 for the three months ended September 29, 2019 and $5,532 for the nine months ended September 29, 2019 are~~$2,364 is recorded in cost of sales in the consolidated statement of ~~operations~~income and comprehensive income ~~(loss).~~

for the six months ended June 28, 2020, and $3,688 for the six months ended June 30, 2019. Amortization expense for the next five years and thereafter is as follows:

~~(f)~~

~~Goodwill:~~

2020	$	682
2021		1,235
2022		1,235
2023		1,235
2024		1,235
2025 and thereafter		4,761
Total amortization	$	10,383

Goodwill:

The carrying value of goodwill as at ~~September 29, 2019~~June 28, 2020 was $18,165 (December ~~30, 2018~~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:

	June 28, 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 ~~as well as assessed~~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 half of 2020. While the COVID-19 pandemic creates significant uncertainty, in the near term, the Company did not identify any triggering events as at June 28, 2020.

Accrued liabilities:

~~(g)~~

~~Accrued liabilities:~~

September 29,
2019

December 30,
2018

Payroll
$ 5,655 $ 5,637
Customer related
2,764 2,237
Vendor related
2,464 2,048
Professional services
1,248 702

Rebates
— 236
Interest
552 381
Rent
— 428
Other
704 1,371
Total
$ 13,387 $ 13,040

	June 28, 2020		December 29, 2019
Payroll	$	6,029	$	5,504
Customer related		5,527		2,185
Deferred revenue		3,734		—
Vendor related		2,941		1,742
Professional services		760		612
Interest		402		860
Other		646		261
Total	$	20,039	$	11,164

~~(h)~~

~~Contingent Consideration~~ ~~Gain~~:

~~During~~Deferred Revenue is recorded when the ~~first quarter~~Company invoices and becomes eligible to receive payment for goods or services prior to the transferring of ~~2019, fair value~~goods or services to the customer under the terms of the ~~contingent consideration liability~~contract (i.e., all revenue recognition criteria are not yet met), which is included within accrued liabilities. As of June 28, 2020 and December 29, 2019, the balance of deferred revenue was ~~determined to be $0 which resulted in a gain of $3,050 being recognized.~~$3,734 and Nil, respectively. NaN revenue was recognized during the six months ended June 28, 2020. The ~~contingent consideration liability was initially recognized at fair value in the fourth quarter of 2018 and related to a contingent earn-out payment~~accounts receivable balances associated with the ~~acquisition of MC Assembly. Fair value estimate under purchase accounting of $3,050~~deferred revenue invoicing 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 resolved and no longer payable$3,734 as at ~~March 31, 2019.~~June 28, 2020. Deferred revenue is recognized into revenue when all revenue recognition criteria are met.

Consolidated Statements of Operations and Comprehensive Income (Loss)

Interest expense:

~~(i)~~

~~Interest expense:~~

Three months ended

Nine months ended

September 29,
2019

September 30,
2018

September 29,
2019

September 30,
2018

Long-term debt
$ 1,135 $ 107 $ 4,596 $ 321
Revolving credit facility
597 318 1,813 718
Equipment facility
— 43 — 57
Amortization of deferred financing fees
50 11 122 32
Amortization of debt issuance costs (1)
705 — 1,178 —
Obligations under capital leases
192 6 640 67
Interest expense
$ 2,679 $ 485 $ 8,349 $ 1,195

	Three months ended				Six months ended
	June 28, 2020		June 30, 2019		June 28, 2020		June 30, 2019
Long-term debt	$	1,020	$	1,709	$	2,068	$	3,461
Revolving credit facility		482		597		1,034		1,216
Amortization of deferred financing fees		55		38		110		72
Amortization of debt issuance costs		239		236		478		473
Obligations under finance leases		188		220		380		448
Other interest		3		—		10		—
Total	$	1,987	$	2,800	$	4,080	$	5,670

~~(1)~~

~~During three months ended September 29, 2019, $477 was expensed related to unamortized deferred financing fees on Term Loan B when it was paid in full during the quarter.~~

5.4.	~~Deb~~tDebt

(a) Revolving credit and long-term debt facilities

	June 28, 2020			December 29, 2019
Revolving credit facility	$	33,943		$	34,701
Term loans:
Term loan A facility	$	38,125		$	38,750
Less deferred debt issue costs		(2,070	)		(2,286	)
Less unamortized discount on debt		(1,277	)		(1,464	)
Total term loans	$	34,778		$	35,000
Less current portion		(1,875	)		(1,250	)
Long term portion	$	32,903		$	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~~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~~a grid ranging from ~~0.75%~~0.50% to ~~1.25%,~~1.00% or 1, 2 or 3-month fully-absorbed PNC LIBOR plus ~~an applicable margin~~a grid ranging from ~~2.5%~~1.50% to ~~3.00%~~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 usthe Company and certain of ~~our~~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”)~~, which~~. The Financing Agreement governs a term loan A facility ~~(“Term~~(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 ~~Loan~~ 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 ~~August 8, 2019,~~June 26, 2020, the Company, ~~and certain of its subsidiaries~~ entered into ~~that certain Amendments No. 2~~the Fourth Amendment to the Amended and Restated Revolving Credit and Security Agreement ~~(the “PNC Amendment No. 2”~~(“PNC Amendment”) and ~~that certain~~the Fifth Amendment ~~No. 3.~~ to the Financing Agreement ~~(the “TCW Amendment No. 3”~~(“TCW Amendment”). The PNC ~~Amendment No. 2,~~and TCW Amendments, among other things, ~~(i) increased~~amend the total amount available for borrowings under the PNC Facility to $65,000, (ii) provided for borrowings of up to $15,000 on assets located in Mexico, (iii) provided that borrowings under the PNC Facility 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) reset the financial covenants, and (v) permitted the pay down of the Term A Loan Facility by up to $10,000. The TCW Amendment No. 3, among other things, (i) provided for a $20,000 increase in the total amount available for borrowings under the PNC Facility, (ii) provided for the pay down of the Term A Loan Facility by up to $10,000, (iii) provided that the interest rate for borrowings under the Financing Agreement was 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) deleted the senior leverage ratio covenant, (v) amended 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 ended September 30, 2019, (vi) amended 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) reset the call protection on the Term Loan A Facility.

On September 27, 2019, the Company and certain of its subsidiaries entered into that certain Amendments No. 3 to the Amended and Restated Revolving Credit and Security Agreement (the “PNC Amendment No. 3”) and that certain Amendment No. 4. to the Financing Agreement (the “TCW Amendment No. 4”). The PNC Amendment No. 3, among other things, amended the (i) 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 ~~transition costs~~severance charges, accruals and ~~charges incurred on or before December 31, 2020~~reserves in connection with ~~the Company’s previously announced closure of business operations~~permanent headcount reductions, in ~~Dongguan, China, subject to certain exceptions,~~an aggregate amount not to exceed ~~(a)~~$1,000 with respect to ~~cash restructuring costs, $2,300, (b) with respect~~corporate selling, general and administrative employees, in each case, for the period from June 1, 2020, to ~~write-offs of accounts receivable, $1,623,~~ and ~~(c) with respect to write-offs of Inventory (as defined in~~including July 31, 2020. The PNC and TCW Amendments also amends the ~~Amended and Restated Revolving Credit and Security Agreement), $1,607, (ii)~~ definition of “Permitted ~~Intercompany Investments” by permitting certain investments by a Domestic Loan Party (as defined in the Amended and Restated Revolving Credit and Security Agreement)~~Purchase Money Indebtedness” to or in SMTC Electronics Dongguan Company Limited, a limited liability company organized under the laws of China (“SMTC Dongguan”), solely to facilitate the closure of business operations in Dongguan, China, so long as, among other things, (a) such Investments(i) allow for Indebtedness (as defined in the PNC Agreement) ~~are made~~pursuant to financing provided by a third party lender for any fixed or tangible assets acquired prior to ~~March 31,~~the June 26, 2020, ~~(b)~~and (ii) increase the aggregate principal amount of all ~~such Investments does not exceed $2,300 during the term of the Amended and Restated Revolving Credit and Security Agreement, (c) the Borrowers~~Indebtedness (as defined in the ~~Amended~~PNC Agreement and Restated Revolving Credit and Security Agreement) maintain certain minimum liquidity requirements and (iii) negative covenant regarding excess cash. The TCW Amendment No. 4, among other things, amended the (i) definition of “Consolidated EBITDA” by permitting an addback for restructuring and transition costs and charges incurred on or before December 31, 2020 in connection with the closure of business operations in Dongguan, China, subject to certain exceptions, not to exceed (a) with respect to cash restructuring costs, $2,300, (b) with respect to write-offs of accounts receivable, $1,623, and (c) with respect to write-offs of Inventory (as defined in the Financing Agreement), $1,607, (ii) definition of “Permitted Intercompany Investments” by permitting certain investments by a Domestic Loan Party (as defined in the Financing Agreement) to or in SMTC Dongguan solely to facilitate the closure of business operations in Dongguan, China, so long as, among other things, (a) such Investments (as defined in the Financing Agreement) are made prior to March 31, 2020, (b) the aggregate amount of all such Investments does not exceed $2,300 during the term of the Financing Agreement and (c) the Borrowers (as defined in the Financing Agreement) maintain certain minimum liquidity requirements and (iii) negative covenant regarding excess cash.

~~At September 29, 2019, $34,840 (December 30, 2018 - $25,020) was outstanding~~permitted under the PNC ~~Facility and is classified as a current liability based on the requirement~~Agreement to ~~hold a “lock-box” under the terms of the PNC Facility.~~ $3,750.

As at ~~September 29, 2019,~~June 28, 2020, the additional funds available to borrow under the PNC Facility after deducting the current borrowing base conditions ~~was $21,356~~were $30,875 (December ~~30, 2018~~29, 2019 - ~~$13,974)~~$21,644). The maximum amount of funds that could be available under the PNC ~~Revolving Credit~~ Facility is $65,000. 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 28, 2020, $33,943 (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~~June 28, 2020, $38,125 (December 29, 2019 ~~$39,376 (December 30, 2018~~ - ~~$50,000)~~$38,750) was outstanding under the TCW Term Loan A ~~Facility and $Nil (December 30, 2018 - $12,000) under the TCW Term Loan B~~ Facility. The ~~Term Loan A Facility is~~TCW Facilities are reported on the consolidated balance sheet net of deferred financing fees of ~~$2,413~~$2,070 (December ~~30, 2018~~29, 2019 - ~~$2,749)~~$2,286) and a discount on debt of ~~$1,559~~$1,277 (December ~~30, 2018~~29, 2019 - ~~$1,843)~~$1,464) 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 joint and several obligations of the Company and its subsidiaries that are borrowers under the Credit Facilities and are jointly and severally guaranteed by ~~certain~~ other subsidiaries of the Company. ~~Repayments~~Repayment under the PNC Facility and ~~the~~ 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.~~covenants, including restrictions on dividend payments. The financial covenants ~~under each Credit Facility~~ 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 29, 2019. Management projects~~June 28, 2020. The Company’s continued financial covenant compliance ~~with~~will depend on key variables, including the ~~financial covenants included in the Credit Facilities, however note that there are key assumptions included in these~~Company’s cash flow ~~projections to support covenant calculations specifically related to~~from earnings before interest, income taxes and depreciation as well as ~~anticipated~~ debt levels. ~~The estimate~~For context, assuming no change to forecast debt balances, a reduction of ~~cash flows are sensitive to these key assumptions, for instance, when considering our anticipated~~approximately 34% and 24% of earnings before interest, income taxes, depreciation and ~~depreciation~~amortization as defined in PNC Agreement and Financing Agreement over the next six ~~months~~month period, ~~a reduction of approximately 5%~~ could ~~result in the breach of a covenant relative to its impact on our trailing twelve months results used in calculating~~jeopardize covenant compliance inat the end of our ~~first quarter~~third and fourth quarters 2020, respectively, which test our ratios against twelve-month trailing results. The Company ~~safeguards against this through~~attempts to address risks of covenant compliance by taking measures to reduce its inventory, revolving credit facility and term debt balances ~~accordingly~~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 ~~order~~the short term based on our working capital needs, however if a number of our customers reduce or temporarily cease payments to ~~comply with lenders covenants.~~ 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 ~~will continue~~continues to monitor operations and results closely and manage debt levels relative to our operational results to ensure compliance with its lenders covenants.

(c) Warrant liability

On November 8, 2018, 504,735 warrants were issued to TCW in connection with the ~~Term Loan A Facility~~Financing Agreement and ~~the Term Loan B Facility and~~are outstanding as at ~~December 30, 2018.~~June 28, 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 June 28, 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 ~~$2.13~~$3.15 per unit or ~~$1,090~~$1,612 as at ~~September~~June 28, 2020 ($3.38 per unit or $1,730 – December 29, 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, the warrants were exercisable to purchase 511,949 shares of common stock at September 29, 2019.2019). 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).

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 nine months ended September 29, 2019 was not significant.

Most leases contain renewal options, which are exercisable 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 September 29, 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 September 29, 2019.

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

~~Leases~~5.	~~Classification~~Capital stock	~~September 29~~~~, 2019~~ ~~($)~~
~~Assets~~
~~Operating lease assets~~	~~Operating lease right-of-use-asset~~		~~3,887~~
~~Finance lease assets (a)~~	~~Property, plant and equipment~~		~~10,134~~
~~Total leased assets~~
~~Liabilities~~
~~Current~~
~~Operating leases~~	~~Current portion of operating lease obligations~~		~~1,483~~
~~Finance leases~~	~~Current portion of finance lease obligations~~		~~1,316~~
~~Noncurrent~~
~~Operating leases~~	~~Operating lease obligations~~		~~2,818~~
~~Finance leases~~	~~Finance lease obligations~~		~~9,105~~
~~Total lease liabilities~~			~~14,722~~

~~(a)~~

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

Common shares

Three months
ended

Nine months
ended

Lease Cost
Classification

September 29,
2019 ($)

September 29,
2019 ($)

Operating lease costs

Fixed lease costs
Cost of sales
647 1,974

Finance lease costs

Depreciation of leased assets
Cost of sales
360 1,081
Interest on lease liabilities
Interest expense
192 640
Sublease income
Selling, general and administrative expenses
47 176

Maturity of lease liabilities as at September 29, 2019

Operating leases

Finance
leases

Total

2019
635 559 1,194
2020
1,371 1,982 3,353
2021
930 1,665 2,595
2022
632 1,323 1,955
2023
606 1,261 1,867
Thereafter
872 7,660 8,532
Total lease payments
5,046 14,450 19,496
Less: Interest
(745 ) (4,029 ) (4,774 )
Present value of lease liabilities
4,301 10,421 14,722

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
2,575 2,417
2020
1,371 1,953
2021
930 1,633
2022
632 1,291
2023
606 1,229
Thereafter
872 7,637
Total minimum lease payments
6,986 16,160
Less interest
(1,047 ) (4,666 )
Present value of capital lease obligations
5,939 11,494

~~Lease term and discount rate~~	~~September 29~~~~, 2019~~
~~Weighted average remaining term (years)~~
~~Operating leases~~		~~4.1~~
~~Finance leases~~		~~8.8~~
~~Weighted average discount rate~~
~~Operating leases~~		~~8.0~~	%
~~Finance leases~~		~~7.8~~	%

Other information

Three months ended
September 29, 2019

Nine months ended
September 29, 2019

Cash paid for amounts included in the measurement of lease liabilities

Operating cash flows from operating leases
609 1,614
Operating cash flows from finance leases
N/A N/A
Financing cash flows from finance leases
390 1,199
Leased assets obtained in exchange for new operating lease liabilities
— —
Leased assets obtained in exchange for new finance lease liabilities
126 126

7.	~~Capital stock~~

~~Common stock~~

Issued and outstanding:

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

Number
of shares
$

Balance at December 30, 2018
23,189,381 458
New share issuance - rights offering and registered direct offering
4,642,030 46
New share issuance - vested stock awards
267,063 3
Treasury stock (1)
21,264 —
Balance as September 29, 2019
28,119,738 507

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

~~(1)~~

Treasury stock represents vested restricted stock awards issued into shares of common stock withheld by the Company which employees forfeited to address the corresponding tax withholding during the nine months ended September 29, 2019.

Stock Options

For more detailed information regarding the Company’s stock option arrangements, see Note 67 of the consolidated financial statements within the Company’s Form ~~10-K.~~10-K for the fiscal period ended December 29, 2019. During the six month period ended June 28, 2020, there were no stock options granted, exercised or forfeited. A summary of stock option activity for the ~~nine-month~~six month period ended ~~September 29, 2019~~June 28, 2020 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
(25,450 ) 1.80
Outstanding at September 29, 2019
2,344,374 2.14 639 8.2
Exercisable at September 29, 2019
1,075,640 1.54 639 7.4

	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 June 28, 2020		2,344,374		2.14		1,757		7.4
Exercisable at June 28, 2020		1,088,140		1.55		1,741		6.7

During the three-month periods ended ~~September 29,~~June 28, 2020 and June 30, 2019, ~~and September 30, 2018,~~ the Company recorded stock-based compensation expense related to stock options and a corresponding increase in additional paid-in capital of $57 and ~~$27,~~$41, respectively. During the ~~nine-month~~six month periods ended ~~September 29,~~June 28, 2020 and June 30, 2019, ~~and September 30, 2018,~~ the Company recorded stock-based compensation expense related to stock options and a corresponding increase in additional paid-in capital of ~~$120~~$115 and ~~$86,~~$62, 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.

7.	~~Capital stock cont’d~~

Restricted Stock Units

and Restricted Stock Awards

For more detailed information regarding the Company’s Restricted Stock Units (“~~RSUs”~~RSU”) and Restricted Stock Awards (“RSA”) arrangements, see Note 67 of the ~~annual~~ consolidated financial statements within the Company’s Form 10-K for the ~~year~~fiscal period ended December ~~30, 2018, included in~~29, 2019. During the ~~Company’s Annual Report on Form 10-K.~~six month period ended June 28, 2020, 63,000 RSUs were granted. A summary of the RSU activity for the ~~nine-month~~six month period ended ~~September 29, 2019~~June 28, 2020 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
RSUs granted
122,500 3.58
RSUs vested and issued in common shares
(262,877 ) 1.31
RSUs forfeited
(25,000 ) 1.38
Outstanding balance at September 29, 2019
192,000 2.10 1.63

	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		63,000			2.74
RSU vested and issued in common shares		(19,500	)		1.28
RSU forfeited		—			—
Outstanding balance at June 28, 2020		391,500			3.19		2.24

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 ~~September 29,~~June 28, 2020 and June 30, 2019 ~~and September 30, 2018~~ related to the restricted stock units was ~~$296~~$98 and ~~$48,~~$56, respectively. Stock based compensation recognized during the ~~nine-month~~six month period ended ~~September 29,~~June 28, 2020, and June 30, 2019, ~~and September 30, 2018~~ related to the restricted stock units was ~~$418~~$202 and ~~$192,~~$123, 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 $9,136, 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 $14,044, after deducting the offering expenses of approximately $532 and fees payable by the Company.

8.6.	Income taxes

During the three month periods ended September 29, 2019 and September 30, 2018, the Company recorded a current income tax benefit of $103 and expense of $290, respectively, in connection with U.S. state taxes and taxes on profits in certain foreign jurisdictions, and deferred income tax recovery of $81 and $145, respectively, in connection with temporary differences related to the Mexican operations. The current income tax benefit of $103 recorded during the three months ended September 29, 2019, is comprised of additional current tax expense of $210, net of prior period income tax recoveries of $183 from the US and foreign jurisdictions together with a reduction in estimated current income tax expense attributable to foreign jurisdictions in the amount of $130.

~~During the nine~~six month period ended ~~September 29,~~June 28, 2020 and June 30, 2019, ~~and September 30, 2018,~~ the Company recorded current income tax expense ~~of $592~~$586 and ~~$596,~~$695, respectively, in connection with U.S. state taxes and taxes on profits in certain foreign jurisdictions, and deferred income tax expense of ~~$14~~$67 and ~~recovery of $191,~~$95, 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 ~~observable~~ 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.

On March 27, 2020, the U.S. federal government enacted The Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), which provides for certain tax relief with favorable implications for the Company. Most significantly, these provisions include a temporary relaxation of limitations on annual interest expense under Internal Revenue Code Section 163(j), and accelerated refund of certain federal tax credits. For the six months ended June 28, 2020, the current income tax benefit of these provisions is estimated to be $45, reflected in current tax expense.

9.7.	Earnings per common share

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

	Three months ended				Nine months ended				Three months ended				Six months ended
	September 29, 2019		September 30, 2018		September 29, 2019		September 30, 2018
(Number of common shares)									June 28, 2020		June 30, 2019		June 28, 2020		June 30, 2019
Basic weighted average shares outstanding		28,057,763		19,335,253		24,954,875		17,866,399		28,213,729		23,557,944		28,204,514		23,403,431
Dilutive stock awards ^{(1) (a)}		—		651,503		—		651,503
Dilutive stock awards ^(a,b)										1,279,743		—		1,279,743		—
Diluted weighted average shares outstanding		28,057,763		19,986,756		24,954,875		18,517,902		29,493,472		23,557,944		29,484,257		23,403,431

~~(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 ~~nine~~six months ended ~~September 29,~~June 28, 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 1,279,743 for the three and six months ended June 28, 2020, respectively, related to the outstanding unvested restricted stock units and incremental in-the-money stock options.

(b)

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 ~~754,820~~1,251,626 for the three and ~~nine~~six months ended ~~September 29,~~June 30, 2019, related to outstanding unvested restricted stock units and incremental in-the-money stock ~~options and outstanding warrants.~~options.

10.8.

Segmented information

~~General description~~

General description

~~The~~During the six months ended June 28, 2020, the Company is operated and managed ~~geographically and has production facilities~~by geographic region in the United States, Mexico and ~~China. The~~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 ~~utilizes~~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 ~~site~~ contribution ~~(site revenue~~(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. ~~Site contribution~~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 ~~site~~segment management isare 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						Three months ended						Six months ended
	September 29, 2019			September 30, 2018			September 29, 2019			September 30, 2018			June 28, 2020			June 30, 2019			June 28, 2020			June 30, 2019
Revenues
Revenue
Mexico	$	57,328		$	40,485		$	182,424		$	105,139		$	58,801		$	59,336		$	122,165		$	125,096
China		8,092			8,073			22,541			19,092			—			5,793			4,207			14,449
U.S.		27,426			8,581			86,448			19,167			32,136			29,211			65,517			59,022
Total	$	92,846		$	57,139		$	291,413		$	143,398		$	90,937		$	94,340		$	191,889		$	198,567

Intersegment revenue
Mexico	$	(550	)	$	(1,206	)	$	(1,293	)	$	(1,944	)	$	(147	)	$	(594	)	$	(2,569	)	$	(743	)
China		(3,580	)		(2,183	)		(7,687	)		(5,962	)		—			(2,681	)		(3,303	)		(4,107	)
U.S.		(34	)		(73	)		(166	)		(216	)		(384	)		(129	)		(473	)		(132	)
Total	$	(4,164	)	$	(3,462	)	$	(9,146	)	$	(8,122	)	$	(531	)	$	(3,404	)	$	(6,345	)	$	(4,982	)

Net external revenue
Mexico	$	56,778		$	39,279		$	181,131		$	103,195		$	58,654		$	58,742		$	119,596		$	124,353
China		4,512			5,890			14,854			13,130		$	—			3,112		$	904			10,342
U.S.		27,392			8,508			86,282			18,951			31,752			29,082			65,044			58,890
Total segment revenue (which also equals consolidated revenue)	$	88,682		$	53,677		$	282,267		$	135,276		$	90,406		$	90,936		$	185,544		$	193,585

Site Contribution
Segment contribution
Mexico	$	4,815		$	3,552		$	15,456		$	9,267		$	5,088		$	5,835		$	10,963		$	10,641
China		1,313			556			3,012			998		$	—			844			(2	)		1,699
U.S.		2,191			214			5,378			175			2,270			1,764			5,231			3,187
Total	$	8,319		$	4,322		$	23,846		$	10,440		$	7,358		$	8,443		$	16,192		$	15,527

Corporate costs		5,962			2,878			17,227			8,249
Corporate expenses														4,750			6,006			10,652			11,265
Restructuring charges (recovery)														(125	)		1,546			(346	)		2,170
Change in fair value of warrant liability		(858	)		—			(919	)		—			399			40			(118	)		(61	)
Change in fair value of contingent consideration		—			—			(3,050	)		—			—			—			—			(3,050	)
Unrealized foreign exchange gain on unsettled forward exchange contracts		—			(108	)		—			(338	)
Interest		2,679			485			8,349			1,195
Restructuring and closure charges		6,454			58			8,624			154
Earnings (loss) before income taxes	$	(5,918	)	$	1,009		$	(6,385	)	$	1,180
Unrealized foreign exchange loss on unsettled forward exchange contracts														(971	)		—			(459	)		—
Interest expense														1,987			2,800			4,080			5,670
Income(loss) before income taxes													$	1,318		$	(1,949	)	$	2,383		$	(467	)

Three months ended June 28, 2020	Mexico		U.S.		China		Total
Market Sector:
Test and Measurement	$	4,220	$	9,718	$	—	$	13,938
Retail and Payment Systems		6,750		—		—		6,750
Telecom, Networking and Communications		1,764		3,223		—		4,987
Medical and Safety		7,863		2,298		—		10,161
Industrial, Power and Clean Technology		30,952		7,339		—		38,291
Semiconductors		7,105		—		—		7,105
Avionics, Aerospace and Defense		—		9,174		—		9,174
Segment Revenue		58,654		31,752		—		90,406

Revenue by category	Mexico		U.S.		China		Total
Point in time	$	551	$	1,353		—		1,904
Over time		58,103		30,399		—		88,502
Total Revenue		58,654		31,752		—		90,406

Three months ended September 29, 2019

Mexico

U.S.

China

Total

Market Sector:

Test and Measurement
$ 19,188 $ 8,287 $ — $ 27,475
Retail and Payment Systems
10,460 — — 10,460
Telecom, Networking and Communications
3,986 1,393 4,192 9,571
Medical
7,861 2,637 40 10,538
Industrial, Power and Clean Technology
10,154 9,851 280 20,285
Semiconductor
5,129 — — 5,129
Aerospace and Defense
— 5,224 — 5,224
Segment Revenue
56,778 27,392 4,512 88,682

Three months ended June 30, 2019	Mexico		U.S.		China		Total
Market Sector:
Test and Measurement	$	2,403	$	9,648	$	—	$	12,051
Retail and Payment Systems		12,149		—		—		12,149
Telecom, Networking and Communications		3,503		2,314		2,200		8,017
Medical and Safety		8,093		3,104		47		11,244
Industrial, Power and Clean Technology		26,845		9,178		865		36,888
Semiconductors		5,749		16		—		5,765
Avionics, Aerospace and Defense		—		4,822		—		4,822
Segment Revenue		58,742		29,082		3,112		90,936

Revenue by category	Mexico		U.S.		China		Total
Point in time	$	781	$	1,386	$	73		2,240
Over time		57,961		27,696		3,039		88,696
Total Revenue		58,742		29,082		3,112		90,936

Six months ended June 28, 2020	Mexico		U.S.		China		Total
Market Sector:
Test and Measurement	$	8,404	$	17,766	$	—	$	26,170
Retail and Payment Systems		19,073		—		—		19,073
Telecom, Networking and Communications		4,799		7,014		714		12,527
Medical and Safety		16,426		4,875		130		21,431
Industrial, Power and Clean Technology		58,473		15,830		60		74,363
Semiconductors		12,421		—		—		12,421
Avionics, Aerospace and Defense		—		19,559		—		19,559
Segment Revenue		119,596		65,044		904		185,544

Revenue by category	Mexico		U.S.		China		Total
Point in time	$	1,050	$	2,420	$	452		3,922
Over time		118,546		62,624		452		181,622
Total Revenue		119,596		65,044		904		185,544

Six months ended June 30, 2019	Mexico		U.S.		China		Total
Market Sector:
Test and Measurement	$	4,434	$	20,654	$	—	$	25,088
Retail and Payment Systems		25,078		—		—		25,078
Telecom, Networking and Communications		7,507		4,391		6,884		18,782
Medical and Safety		16,501		6,756		441		23,698
Industrial, Power and Clean Technology		57,779		15,271		3,017		76,067
Semiconductors		13,054		16		—		13,070
Avionics, Aerospace and Defense		—		11,802		—		11,802
Segment Revenue		124,353		58,890		10,342		193,585

Revenue by category	Mexico		U.S.		China		Total
Point in time	$	1,216	$	3,098	$	76		4,390
Over time		123,137		55,792		10,266		189,195
Total Revenue		124,353		58,890		10,342		193,585

Three months ended September 30, 2018

Mexico

U.S.

China

Total

Market Sector:

Test and Measurement
$ 3,277 $ 7,181 $ — $ 10,458
Retail and Payment Systems
10,815 — — 10,815
Telecom, Networking and Communications
3,596 833 5,613 10,042
Medical
7,400 91 37 7,528
Industrial, Power and Clean Technology
6,495 403 240 7,138
Semiconductor
7,696 — — 7,696

Segment Revenue
39,279 8,508 5,890 53,677

Certain customers were reclassified from the Test and Measurement sector to the Industrial IoT, Power and Clean Technology sector during the three months ended June 28, 2020. The comparative periods have been adjusted to conform to this classification.

Nine months ended September 29, 2019

Mexico

U.S.

China

Total

Market Sector:

Test and Measurement
$ 59,054 $ 29,054 $ 2,447 $ 90,555
Retail and Payment Systems
35,537 — — �� 35,537
Telecom, Networking and Communications
11,495 5,783 11,078 28,356
Medical
24,362 9,393 482 34,237
Industrial, Power and Clean Technology
32,502 25,008 847 58,357
Semiconductor
18,181 16 — 18,197
Aerospace and Defense
— 17,028 — 17,028
Segment Revenue
181,131 86,282 14,854 282,267

Nine months ended September 30, 2018

Mexico

U.S.

China

Total

Market Sector:

Test and Measurement
$ 10,772 $ 14,039 $ — $ 24,811
Retail and Payment Systems
27,215 — — 27,215
Telecom, Networking and Communications
9,053 3,672 12,022 24,747
Medical
21,788 270 44 22,102
Industrial, Power and Clean Technology
13,561 970 1,064 15,595
Semiconductor
20,806 — — 20,806

Segment Revenue
103,195 18,951 13,130 135,276

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 ~~nine~~six months ~~ended September 29, 2019 and September 30, 2018:~~ended:

	Three months ended				Nine months ended				Three months ended				Six months ended
	September 29, 2019		September 30, 2018		September 29, 2019		September 30, 2018		June 28, 2020		June 30, 2019		June 28, 2020		June 30, 2019
U.S.									$	375	$	256	$	919	$	517
Mexico	$	859	$	1,287	$	2,212	$	3,663		326		965		486		1,353
China		98		190		152		198		—		23		2		54
U.S.		446		21		963		579
Segment total		1,403		1,498		3,327		4,440		701		1,244		1,407		1,924
Corporate and other		—		7		24		117		3		24		3		24
Total	$	1,403	$	1,505	$	3,351	$	4,557	$	704	$	1,268	$	1,410	$	1,948

Property, plant and ~~equipment~~ ^{operating lease right of use assets (a)}

	September 29, 2019		December 30, 2018		June 28, 2020		December 29, 2019
U.S.					$	19,570	$	16,904
Mexico	$	11,560	$	11,851		10,221		10,970
China		630		1,153		—		670
U.S		14,047		15,013
Segment total		26,237		28,017		29,791		28,544
Corporate and other		111		143		123		96
Segment assets	$	26,3489	$	28,160
Total					$	29,914	$	28,640

Other long term segment assets (b)

	June 28, 2020		December 29, 2019
U.S.	$	8,564	$	9,273
Mexico		20,457		22,179
China		—		—
Segment total		29,021		31,452
Corporate and other		749		859
Total	$	29,770	$	32,311

Total segment assets (a)

	June 28, 2020		December 29, 2019
U.S.	$	125,222	$	112,789
Mexico		95,153		93,349
China		—		6,694
Segment total		220,375		212,832
Corporate and other		895		547
Total	$	221,270	$	213,379

^(a)

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

(b)	Includes Goodwill, Intangible assets, deferred income taxes and deferred financing costs.

Geographic revenue

The following table contains geographic ~~revenues~~revenue based on ~~the product shipment destination,~~our customer invoicing location, for the ~~three and nine~~six months ended ~~September 29, 2019~~June 28, 2020 and ~~September~~June 30, ~~2018:~~2019.

	Three months ended				Nine months ended				Three months ended				Six months ended
	September 29, 2019		September 30, 2018		September 29, 2019		September 30, 2018		June 28, 2020		June 30, 2019		June 28, 2020		June 30, 2019
U.S.	$	83,276	$	43,324	$	260,210	$	108,153	$	85,413	$	82,593	$	174,922	$	176,934
Canada		3,916		7,413		13,686		20,431		4,646		4,860		9,668		9,770
China		1,490		2,940		8,371		6,692		347		3,483		954		6,881
Total	$	88,682	$	53,677	$	282,267	$	135,276	$	90,406	$	90,936	$	185,544	$	193,585

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~~six months ended ~~September 29, 2019, one~~June 28, 2020, 1 customer exceeded 10% of total revenue, comprising ~~12.3%~~of 14.3% of total revenue across all geographic segments. During the ~~three~~six months ended ~~September~~June 30, ~~2018, three customers exceeded 10% of total revenues comprising 35.7% (12.8%, 12.0%, and 10.9%, respectively) of total revenues. During the nine months ended September 29,~~ 2019, ~~one~~1 customer exceeded 10% of total revenue, comprising ~~13.0%~~of 13.1% of total revenue across all geographic segments. ~~During the nine months ended September 30, 2018, two customers comprised 23.9% (13.5% and 10.4%, respectively) of total revenues.~~

As of ~~September 29, 2019, no~~June 28, 2020, 0 customers represented more than 10% of the trade accounts receivable. At December ~~30, 2018, two customers~~29, 2019, 1 customer comprised ~~21% (11% and~~ 10%~~, respectively)~~ of the Company’s trade accounts receivable. No other customers individually represented more than 10% of total revenue or trade accounts ~~receivable in either period.~~receivable.

~~11.~~9.

Derivative financial instruments

~~The~~During the six months ended June 28, 2020, 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.~~income (loss). The Company had no0 outstanding forward foreign exchange contracts in the ~~third quarter~~first half of 2019. ~~Included in cost~~

The following table presents a summary of ~~sales for~~ the ~~third quarter of 2019 was an~~outstanding foreign currency forward contracts as at June 28, 2020:

Currency

Buy/Sell

Foreign Currency Amount

Notional

Contract

Value

in USD

Mexican Peso

Buy

285,000 MXN

11,668

The unrealized gain recognized in earnings as a result of revaluing the instruments to fair value ~~of $NIL million. Included~~on June 28, 2020 for the six months period ended was $459 (June 30, 2019– $Nil) which was included in cost of sales ~~for~~in the ~~third quarter~~interim consolidated statement of ~~2018 was an unrealized gain recognized as a result of revaluing~~operations and comprehensive income (loss). Fair value is determined using the ~~instruments to fair value of $0.1 million,~~market approach with valuation based on market observables (Level 2 quantitative inputs in the hierarchy set forth under ASC 820 “Fair Value Measurements”).

The average contract and ~~a realized loss of $0.01 million. There was no~~mark-to-market rates for outstanding forward foreign exchange contracts ~~for the third quarter of 2019 and 2018.~~

were as follows:

~~September 29~~,

~~201~~9

June 28,

2020

~~December~~30,

~~201~~8

December 29,

2019

Average USD:PESO contract rate

24.43

N/A

~~20.43~~

Average USD:PESO mark-to-market rate

23.50

N/A

~~19.66~~

The derivative assets were $459 as at June 28, 2020 (June 30, 2019 –Nil) which reflected the fair market value of the unsettled forward foreign exchange contracts. There was 0 derivative liability as at June 28, 2020 or June 30, 2019.

12.10.

Restructuring ~~charge~~sCharges

Three months ended

September 29,
2019

September 30,
2018

Dongguan facility closure:

Involuntary employee termination benefits
$ 997 $ -
Other exit costs
1,040
Allowance for doubtful accounts receivables (note 4a)
1,691 -
Provision for obsolete raw material inventories (note 4c)
1,550 -
Write down of property, plant and equipment (note 4d)
261 -
5,539 -
Other involuntary employee termination benefits (U.S., Canada and Mexico)
915 58
6,454 58

Nine months ended

September 29,
2019

September 30,
2018

Dongguan facility closure:

Involuntary employee termination benefits
$ 997 $ -
Other exit costs
1,040
Allowance for doubtful accounts receivables (note 4a)
1,691 -
Provision for obsolete raw material inventories (note 4c)
1,550 -
Write down of property, plant and equipment (note 4d)
261 -
5,539 -
Other involuntary employee termination benefits (U.S., Canada and Mexico)
3,085 154
8,624 154

Dongguan facility ~~closure:~~

closure

In September 2019, the Company announced it plans to close its Dongguan manufacturing facility in China, concurrent with the ~~expiry~~expiration of the facility lease in December ~~2019.~~2019, which was extended to February 2020. The closure was formally approved by the Board of Directors in September 2019. The closure of the Dongguan manufacturing facility will impact approximately 137 employees at the Dongguan manufacturing facility. The employee group were notified of the closure in the last week of September 2019. A restructuring charge of ~~$5,539~~$5,000 was recorded in the ~~third quarter~~twelve months ended December 29, 2019 relating to the announced planned closure.

~~Other restructuring charges:~~

During the third quarter of 2019 involuntary employee termination benefit costs of $915 pursuant to one time termination plans were incurred related to the reduction of 19 full-time equivalents (“FTEs”) in U.S, 4 full-time equivalents (“FTEs”) in Markham, Canada and 89 FTEs and contract employees in Mexico.

During the nine months ended September 30, 2019 involuntary employee termination benefit costs of $3,085 pursuant to one time termination plans were incurred related to the reduction of 47 full-time equivalents (“FTEs”) in U.S, 8 full-time equivalents (“FTEs”) in Markham, Canada and 548 FTEs and contract employees in Mexico.

~~Restructuring Liability~~:

Termination benefits
and other exit costs

Balance as at December 31, 2018
$ -
Involuntary employee termination benefits
4,082
Other exit costs
1,040
Payments
(2,386 )
Amounts reversed unutilized
-
At September 29, 2019
$ 2,736

In September 2019, the Company announced it plans to close its Dongguan manufacturing facility in China, concurrent with the expiry of the facility lease in December 2019. The closure was formally approved by the Board of Directors in September 2019. The closure of the Dongguan ~~manufacturing~~ facility ~~will result~~resulted in a reduced labor force by approximately ~~135~~137 employees. The employee group was notified of the closure in the last week of September 2019. The ~~planned~~ closure of the Dongguan facility and majority of the cash outflows associated with the $2,037 included within the restructuring liability was for severance and other exit costs ~~is anticipated to be~~which was substantially completed by the end of the ~~fourth~~first quarter of ~~2019 (the remaining~~2020. During the six months ended June 28, 2020, restructuring ~~liability~~recoveries were recorded of ~~$699 at September 29, 2019 relates~~$346 primarily related to ~~other ongoing restructuring initiatives~~shipments and cash payments received on previously provisioned Dongguan inventory Remaining activities include a small number of support staff performing administrative duties, professional services to ~~right size~~be rendered with respect to the ~~Company’s workforce as noted above).~~closure activities, taxes and duties to be settled in addition to severance payments. Substantially all of the costs are anticipated to be spent by the third quarter of 2020. Manufacturing by the Company of certain products previously manufactured at the Dongguan ~~Facility will be~~facility has been transferred to the Company’s other manufacturing facilities. A restructuring charge of $5,000 was recorded in the twelve months ended December 29, 2019 relating to the announced planned closure.

Restructuring Liability

	Termination benefits and other exit costs
Balance as at December 29, 2019	$	1,597
Involuntary employee termination benefits		115
Other exit cost payments and provisions reversed unutilized		(183	)
Payments—Dongguan severance		(626	)
Payments (U.S., Canada and Mexico)		(228	)
At June 28, 2020	$	675

13.11.

Commitments

Purchase obligations ~~not~~0t recorded on the balance sheet as at ~~September 29, 2019~~June 28, 2020 consist of open non-cancellable purchase orders (PO) for raw materials for ~~$25,866~~$50,455, 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~~29, 2019, consisted of open non-cancellable purchase orders for raw materials for ~~$48,224~~$27,959 to be paid within 12 months of the PO issue date.

12.	Subsequent Events

Subsequent to June 28, 2020, and in part in response to economic conditions resulting from the COVID-19 pandemic, the Company effected cost-cutting measures including headcount reductions, the majority of which were at our Zacatecas, Mexico facility with a total cost amounting to $1,000.

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~~ ~~(the “SEC”)~~on March ~~15, 2019~~. 13, 2020.

The forward-looking statements in this discussion and elsewhere in this quarterly report, including those regarding the electronics manufacturing services industry, market conditions, our expectations regarding our future performance, liquidity and capital resources, the impact of accounting standards not yet adopted, compliance with financial covenants under our Credit Facilities, future response to and effects of the COVID-19 pandemic, including our continued operations, customer demand, supply chain availability and implementation of protective measures, public policy response to the COVID-19 pandemic including legislation or restrictions, our expectations regarding customer concentration, our expectations regarding timing and mitigation of the identified material weakness in internal control over financial reporting, 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 ~~with the SEC~~ on March ~~15, 2019~~,13, 2020, 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~~do not intend to update these forward-looking statements after the date of this ~~Form 10-Q,~~quarterly report, 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 (“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.~~fulfillment (“DOF”). We ~~have~~operate more than 50 manufacturing and assembly lines in over 555,000 square feet of production space worldwide at strategically located facilities in the United States ~~Canada,~~and Mexico, ~~and China~~ that provide local support, flexibility, fast turn around and delivery times, and low-cost, volume manufacturing capabilities, as well as new product integration (“NPI”) services, to our global customers. Our 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. As of ~~September 29, 2019,~~June 28, 2020, we had ~~2,941~~3,196 employees of which ~~2,541~~2,589 were full time and contract employees.

COVID-19 Update

Our business operations have generally performed as expected during the first half of 2020. However, the fast developing COVID-19 pandemic represents significant uncertainty for the remainder of the year. So far, while we have experienced some impact to our business from the COVID-19 pandemic, and experienced forecast fluctuations in the second quarter from our end customers, all of our facilities remain in operation and in compliance with applicable COVID-19 health and safety measures. While demand from our customers has remained relatively stable, the COVID-19 pandemic could impact our customers and may result in unpredictable reductions or increases in demand across the industry sectors we service. We are proactively coordinating with our customers and key suppliers in anticipation of further possible COVID-19-related disruptions, including potential materials constraints for inventory sourced from certain regions, increased shipping costs, delays and lead-times. As at June 28, 2020, the funds available to borrow under our PNC Facility (as described and defined below) after deducting the current borrowing base conditions and subject to debt covenants were $30.9 million.

The Company believes that the effects of the COVID-19 pandemic have the potential to negatively impact the results of our operations, cash flows and financial position. In ~~September 2019,~~response, management has implemented actions to mitigate the ~~Company announced~~potential financial impact, to protect the health of our employees and to comply with government regulations at each of our facilities. We are taking extensive precautions intended to protect the health and safety of our employees and to ensure business continuity. Despite these efforts it ~~plans~~is possible that an extended pandemic could disrupt the operation of one or more of our manufacturing facilities or our supply chain. Additionally, one or more of our manufacturing facilities may need to ~~close its Chinese manufacturing operation when its current Dongguan, China facility lease expires in December 2019 as approved~~limit operations or temporarily close. Although many of the products we manufacture for our customers are deemed essential, the COVID-19 pandemic may impact demand for our customers’ products, which could impact our production schedules. Our employees may be unable to perform their work due to illness caused by the ~~Board~~COVID-19 pandemic or local, state or federal orders and restrictions requiring employees to remain at home. These possible impacts could result from both the pandemic itself and the extensive public restrictions imposed to limit the spread of ~~Directors. The closure~~COVID-19. If one or more of our manufacturing facilities were temporarily closed or had its operations limited, or customers pushed out demand due to the Dongguan manufacturing facility is intended to reduce the labor force which is anticipated to impact approximately 135 employees at the Dongguan manufacturing facility. Impacted employees were notified in the last week of September 2019. The closure of the Dongguan facility will reduce forecasted losses thatpandemic, this would have ~~otherwise been incurred~~a material impact on our operations.

We are actively monitoring the global COVID-19 pandemic and in ~~fiscal 2020 as the Dongguan facility was not expected to be fully utilized. The wind down~~continuous communication with our employees and closure of the Dongguan facility is anticipated to be substantially completed by the end of the fourth quarter of 2019, however it is expected there will be some continued deregistration and filing requirements in 2020. Manufacturing by the Company of certain products previously manufactured at the Dongguan Facility will be transferred to the Company’s other manufacturing facilities.

During the three months ended September 29, 2019, restructuring charges of $5.5 million were recorded associated with the closure of the Dongguan manufacturing facility. Included in this total are charges of $2.0 million primarily related to severance and other facility closing chargesunion representatives, in addition to ~~$0.3~~government and state representatives where our manufacturing facilities reside. We have instructed those employees at higher risk of COVID-19 to stay home and have directed all non-essential employees to work remotely. For those employees continuing to work in our facilities, we have instituted programs of temperature metering, intensive cleaning and disinfection, social distancing and are prohibiting visitors to our sites. We have experienced increased workplace absenteeism as illness, potential COVID-19 exposure or personal commitments restrict the ability of some employees to come to work. The Company has modified shift schedules and hired temporary labor to help address this situation and meet our customers’ product shipping schedules. We anticipate incurring higher direct labor charges in the third quarter of 2020 as a result of this. Decisions on further measures or the continuation of these measures will depend on the impact of the COVID-19 pandemic on our operations and the requirements of each jurisdiction in which we operate.

We incurred an additional $1.2 million in ~~property, plant~~COVID-19 related expenses in the second quarter primarily due to the retention of temporary replacement labor, additional sanitation, cleaning and disinfection of facilities, personal protective equipment ~~write down charges, $1.7 million in write down of accounts receivable~~ and ~~$1.5 million in write down of inventory. The majority~~related supplies, costs related to facilitating social distancing and logistics costs associated with expediting inventory purchases from existing and new sources. With respect to liquidity, we are evaluating and taking actions to reduce costs and spending across our Company. This includes putting a pause on all non-essential new hiring and new programs and reducing our capital expenditures. While we are unable to determine or predict the nature, duration or scope of the ~~cash outlays associated~~overall impact the COVID-19 pandemic will have on our business, results of operations, liquidity or capital resources, we will continue to actively monitor the situation and may take further actions that alter our business operations to comply with required by federal, state or local authorities or that we determine are in the ~~$2.0 million in severance~~best interests of our employees, customers, suppliers, and ~~other facility closing activities are anticipated to be completed by the end of the fourth quarter of 2019.~~stockholders.

Results of Operations

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

Quarter ended ~~September 29~~~~, 201~~9June 28, 2020 compared with the quarter ended ~~September~~June 30,~~, 201~~8:

2019:

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

Three months ended
September 29, 2019

Three months ended
September 30, 2018

Change
2018 to 2019

$
%
$
%
$
%

Revenue
88.7 100.0 53.7 100.0 35.0 65.2
Cost of sales
79.8 90.0 48.5 90.3 31.3 64.5
Gross profit
8.9 10.0 5.2 9.7 3.7 71.2
Selling, general and administrative expenses
6.6 7.4 3.7 6.9 2.9 75.7
Change in fair value of warrant liability
(0.9 ) (1.0 ) — — (0.9 ) —
Restructuring charges
6.4 7.2 — — 6.4 —
Operating income
(3.2 ) (3.6 ) 1.5 2.8 (4.7 ) (313.3 )
Interest expense
2.7 3.0 0.5 0.9 2.2 440.0
Income (loss) before income taxes
(5.9 ) (6.7 ) 1.0 1.9 (6.9 ) (690.0 )
Income tax expense (recovery)

Current
(0.1 ) (0.1 ) 0.3 0.6 (0.4 ) (133.3 )
Deferred
(0.1 ) (0.1 ) (0.2 ) (0.2 ) 0.1 500.0
(0.2 ) (0.2 ) 0.1 0.2 (0.3 ) (300.0 )
Net income (loss)
(5.7 ) (6.4 ) 0.9 1.7 (6.6 ) (733.3 )

~~Revenue~~

Industry Sector

Three months ended
September 29,
2019

Three months ended
September 30,
2018

Change

$

%

$

%

$

%

Test and Measurement
27.5 31.0 10.5 19.5 17.0 161.9
Retail and Payment Systems
10.5 11.8 10.8 20.1 (0.3 ) (2.8 )
Telecom, Networking and Communications
9.6 10.8 10.1 18.8 (0.5 ) (5.0 )
Medical
10.5 11.8 7.5 14.0 3.0 40.0
Industrial, Power and Clean Technology

20.3 22.9 7.1 13.3 13.2 186
Semiconductor
5.1 5.8 7.7 14.3 (2.6 ) (33.8 )
Aerospace and Defense
5.2 5.9 — — 5.2

NA
Total
88.7 100.0 53.7 100.0 35.0 65.2

	Three months ended June 28, 2020						Three months ended June 30, 2019						Change 2019 to 2020
	$			%			$			%			$			%
Revenue		90.4			100.0			90.9			100.0			(0.5	)		(0.6	)
Cost of sales		79.7			88.2			81.9			90.1			(2.2	)		(2.7	)
Gross profit		10.7			11.8			9.0			9.9			1.7			18.9
Selling, general and administrative expenses		7.1			7.9			6.7			7.4			0.4			6.0
Restructuring charges (recovery)		(0.1	)		(0.1	)		1.5			1.7			(1.6	)		(106.7	)
Operating income		3.7			4.1			0.8			0.9			2.9			362.5
Fair value measurement loss (gain) on warrant liability		0.4			0.4			—			0.0			0.4		100
Interest expense		2.0			2.2			2.8			3.1			(0.8	)		(28.6	)
Income before income taxes		1.3			1.4			(2.0	)		(2.2	)		3.3			165.0
Income tax expense (recovery)
Current		0.3			0.3			0.4			0.4			(0.1	)		(25.0	)
Deferred		0.0			0.0			0.1			0.1			(0.1	)		(100.0	)
		0.3			0.3			0.5			0.6			(0.2	)		(40.0	)
Net income(loss)		1.0			1.1			(2.5	)		(2.8	)		3.5			140.0

Revenue ~~increased $35.0~~by Industry Sector

	Three months ended June 28, 2020				Three months ended June 30, 2019				Change
Industry Sector	$		%		$		%		$			%
Test and Measurement		13.9		15.4		12.1		13.3		1.8			14.9
Retail and Payment Systems		6.7		7.4		12.1		13.3		(5.4	)		(44.6	)
Telecom, Networking and Communications		5.0		5.5		8.0		8.8		(3.0	)		(37.5	)
Medical and Safety		10.2		11.3		11.2		12.3		(1.0	)		(8.9	)
Industrial, Power and Clean Technology		38.3		42.4		36.9		40.6		1.4			3.8
Semiconductors		7.1		7.9		5.8		6.4		1.3			22.4
Avionics, Aerospace and Defense		9.2		10.2		4.8		5.3		4.4			91.7
Total		90.4		100.0		90.9		100.0		(0.5	)		(0.6	)

Certain customers were reclassified from the test and measurement sector to the industrial IoT, power and clean technology sector during the three months ended June 28, 2020. The comparative periods have been adjusted to conform to this classification.

Total Revenue decreased $0.5 million to ~~$88.7~~$90.4 million for the ~~third~~second quarter of ~~2019~~2020 from ~~$53.7~~$90.9 million in the same period in the prior year due to some demand reductions from retail payment systems and commercial avionics program, among others, and order rescheduling from other customers in the latter part of ~~2018. With~~ the ~~acquisition~~second quarter of ~~MC Assembly Holdings, Inc. (“MCA”), we recognized additional revenue~~2020. We believe this resulted in part from the COVID-19 pandemic and our customers modifying their requirements in response to the shifting demand of ~~$41.0~~their respective end customers.

Revenue increased $4.2 million ~~during~~in the ~~third~~test and measurement sector compared to the second quarter of 2019, ~~which was not included~~primarily due to volume increases for two customers serviced in Mexico.

Revenue decreased $5.4 million in the ~~same period during 2018. Net~~retail and payment systems sector compared to the second quarter of 2019, primarily due to decreased volume ~~decreases with~~from one long-standing customer serviced in Mexico.

Revenue decreased $3.0 million in the telecom, networking and communications sector compared to the second quarter of 2019, primarily due to decreased volume from two customers serviced in Mexico and one customer disengaging in China due to the Dongguan facility closure.

Revenue decreased $1.0 million in the medical and safety sector compared to the second quarter of 2019, primarily due to one customer serviced in the U.S. experiencing reduced volumes due to the customer’s program transitioning to end-of-life.

Revenue decreased $1.0 million in the test and measurement sector, represented a decrease in revenue of $1.6 million with an additional $18.5 million in revenue represented from the MCA acquisition. Volume increases of one long-standing retail and payment systems customer serviced in Mexico, offset by volume decreases of one long-standing customer also serviced in Mexico represented a decrease in revenue of $0.3 million. In the telecom, networking and communications sector, an increase in volume from a long-standing customer serviced in Asia was offset by decreased volume from two long standing customers (one serviced in Asia; one serviced in Mexico), and the move of business to other manufacturers from one customer serviced in Asia, resulted in reduced revenue of $2.2 million. An additional $1.8 million in revenue was represented from the MCA acquisition in the telecom, networking and communications sector. Revenue in the medical sector had $3.6 million in revenue resulting from the MCA acquisition, offset by decreased volumes of $1.4 million from one customer serviced in Mexico. In the industrial IoT, power and clean technology sector ~~one customer~~compared to the second quarter of 2019, primarily due to decreased volume from two customers serviced in Mexico and two customers serviced in the U.S. ~~had increased volumes,~~, partially offset by one customer serviced in Mexico with ~~a reduction in volume, representing an increase of $1.0~~increased volumes.

Revenue increased $1.3 million in ~~revenue with an additional $11.9~~the semiconductors sector compared to the second quarter of 2019, due to increased volume from one customer serviced in Mexico.

Revenue increased $4.4 million ~~represented from~~in the ~~MCA acquisition. Two~~avionics, aerospace and defense sector compared to the second quarter of 2019, due to the addition of three new customers serviced in the U.S.

Revenue by Geography

During the second quarter of 2020, 64.9% of our revenue was attributable to production from our operations in Mexico and 35.1% of our revenue was attributable to production from our operations in the ~~semiconductor sector had decreased volumes resulting~~U.S. During the second quarter of 2019, 64.6% of our revenue was attributable to production from our operations in ~~$2.6 million~~Mexico, 32.0% of ~~reduced revenue. Also,~~our revenue was attributable to production from our operations in the ~~aerospace~~U.S. and ~~defense sectors increased $5.5 million as a result~~3.4% of our revenue was attributable to production from our operations in China. Following the ~~MCA acquisition.~~closure of our Dongguan manufacturing facility in China, manufacturing of certain products previously manufactured at that facility has been transferred to the Company’s other manufacturing facilities.

Additional Revenue Information

We recorded ~~$3.6~~approximately $1.9 million and ~~$0.6~~$2.2 million of revenue from sales of raw materials inventory to customers during the ~~third~~second quarter of 2020 and the second quarter of 2019, ~~and the third quarter of 2018, which carried limited margin.~~respectively. The Company purchases raw materials based on customer purchase orders. When a customer requires an order to be altered or changed, the customer is generally obligated to purchase the original on-order raw material at cost, to the extent the materials are not consumed within a specified period.

Due to changes in market conditions, the life cycle of products, the nature of specific programs and other factors, revenue from a particular customer typically varies from quarter-to-quarter and year-to-year. The Company’s ten largest customers represented ~~53.1%~~62.4% of revenue during the ~~third~~second quarter of ~~2019,~~2020, compared with ~~78.9%~~55.9% in the ~~third~~second quarter of ~~2018.~~2019. Revenue from the largest customer during the ~~third~~second quarter of ~~2019~~2020 was ~~$10.9~~$14.6 million representing ~~12.3%~~16.1% of total revenue. This compares with revenue from the ~~three~~ largest ~~customers~~customer during the ~~third~~second quarter of ~~2018~~2019 of ~~$6.9 million, $6.4 million, and $5.8~~$12.3 million representing ~~12.8%, 12.0% and 10.9% respectively~~13.5% of total revenue. No other customers represented more than 10% of revenue in either period.

During the third quarter of 2019, 64.0% of our revenue was attributable to production from our operations in Mexico, 30.9% of our revenue was attributable to production from our operations in the U.S. and 5.1% of our revenue was attributable to production from our operations in China. During the third quarter of 2018, 73.1% of our revenue was attributable to production from our operations in Mexico, 15.9% of our revenue was attributable to production from our operations in the U.S. and 11.0% of our revenue was attributable to production from our operations in China.

Gross Profit

Gross profit for the ~~third~~second quarter of ~~2019~~2020 increased by ~~$3.7~~$1.7 million to ~~$8.9~~$10.7 million or ~~10.0%~~11.8% of revenue compared with ~~$5.2~~$9.0 million or ~~9.7%~~9.9% of revenue for the same period in ~~2018.~~2019. When excluding unrealized foreign exchange ~~gains~~gain on unsettled forward contracts ,amortization of intangible assets and COVID-19 related expenses, the adjusted gross profit was $11.7 million or 13.0% of revenue for the second quarter of 2020 compared with $10.8 million or 11.9% of revenue for the second quarter of 2019. When excluding unrealized foreign exchange gain on unsettled forward contracts and amortization of intangible assets, ~~the adjusted~~ gross profit was ~~$10.8~~consistent with the same period in the prior year.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased to $7.1 million ~~or 12.1%~~in the second quarter of ~~revenue for~~2020 from $6.7 million in the same period in 2019, mainly due to increased professional services rendered primarily related to additional compliance obligations under the Sarbanes-Oxley Act of 2002, increased variable compensation as well as new headcount additions in the second quarter of 2020.

Restructuring Charges

During the second quarter of 2020, restructuring recoveries were recorded of $0.1 million primarily related to the cash collections of previously provisioned inventory included in the Dongguan facility. During the second quarter of 2019, restructuring charges of $1.5 million were incurred related to the reduction of 18 full-time equivalents (“FTEs”) in U.S. and 292 FTEs and contract employees in Mexico.

As at June 28, 2020, the Company had $0.7 million of accrued restructuring charges remaining related to Dongguan to be paid by the end of the third quarter of 2020 mainly related to employee severance, estimated taxes and duties including shipping costs to pay for transfer of inventory and equipment to other facilities.

Interest Expense

Interest expense decreased to $2.0 million in the second quarter of 2020 compared to $2.8 million in the same period in 2019, respectively. The decrease was primarily the result of the pay down of the Term Loan B Facility in addition to lower average debt balance in the second quarter of 2020 compared to the same period in 2019. The weighted average interest rates with ~~$5.1 million or 9.6% of revenue~~respect to the debt on our PNC and TCW Facilities was 7.3%. The weighted average interest rates for the ~~third~~same period in the prior year was 9.8%.

Income Tax Expense

The Company recorded current income tax expense of $0.3 and $0.4 million for the second quarters of 2020 and 2019, in connection with U.S. state taxes and taxes on profits in certain foreign jurisdictions, and deferred income tax benefit of $Nil and $0.1 million in the second quarter of ~~2018.~~2020 and 2019, in connection with temporary differences related to the Mexican operations.

The US Congress passing of The Coronavirus Aid, Relief, and Economic Security Act (CARES Act), enacted March 27, 2020, provides for certain tax relief with favorable implications for the Company. Most significantly, these provisions include a temporary relaxation of limitations on annual interest expense under Internal Revenue Code Section 163(j), and accelerated refund of certain federal tax credits. For the six months ended June 28, 2020, the current income tax benefit of these provisions is estimated to be $0.1 million, reflected in current tax expense.

Non-GAAP Financial Measures

To supplement our consolidated financial statements, which are prepared and presented in accordance with U.S. GAAP, we use the following non-GAAP financial measures: Adjusted Gross Profit, EBITDA, Adjusted EBITDA and Adjusted Net Income (collectively the “Non-GAAP Financial Measures”). We believe that these Non-GAAP Financial Measures, when used in conjunction with GAAP financial measures, provide useful information about operating results, enhance the overall understanding of past financial performance and future prospects, and allow for greater transparency with respect to the key metrics we use in our financial and operational decision making, as they exclude the effects of items that may not be indicative of, or are unrelated to, our underlying operating results, such as expenses related to the COVID-19 pandemic. The Company’s management believes that adjusting for the additional temporary costs attributable to the COVID-19 pandemic allows for a better comparison of the Company’s performance to prior periods, which is consistent with our recent amendments to the financial covenants in our financing agreements. These non-GAAP measures are used by the Company’s management to manage and monitor the Company’s performance, and also frequently used by analysts, investors and other interested parties to evaluate companies in our industry. The presentation of this financial information is not intended to be considered in isolation or as a substitute for, or superior to, the financial information prepared and presented in accordance with U.S. GAAP, and they should not be construed as an inference that our future results will be unaffected by any items adjusted for in these non-GAAP measures. In evaluating these non-GAAP measures, you should be aware that in the future we may incur expenses that are the same as or similar to some of those adjusted in this presentation. The Non-GAAP Financial Measures that we use are not necessarily comparable to similarly titled measures used by other companies due to different methods of calculation.

Net Income and Adjusted Net Income Reconciliation

Adjusted Net Income, a non-GAAP financial measure, is defined as Net Income before amortization of intangible assets, restructuring charges, stock-based compensation, fair value adjustment of warrant liability, merger and acquisition related expenses and unrealized foreign exchange gains and losses on unsettled forward foreign exchange contracts and COVID-19 related expenses. Management presents Adjusted Net Income, as it is believed the information is useful to investors in understanding and evaluating our operating results as it aligns the net income (loss) with those adjustments made to EBITDA and gross profit.

Below is the reconciliation of Net Income to Adjusted Net Income (in thousands):

	June 28, 2020			June 30, 2019
Net Income(loss)	$	955		$	(2,468	)
Add:
Amortization of intangible assets		846			1,844
Restructuring charges (recovery)		(125	)		1,546
Stock based compensation		155			97
Fair value adjustment of warrant liability		399			40
Merger and acquisitions related expenses		—			73
COVID-19 related expenses (1)		1,185			—
Unrealized foreign exchange gain on unsettled forward foreign exchange contracts		(971	)		—
Adjusted Net Income	$	2,444		$	1,132

(1)

Includes costs attributable to the COVID-19 pandemic, including retention of temporary replacement labor, additional sanitation, cleaning and disinfection of facilities, personal protective equipment and related supplies, costs associated with facilitating social distancing and logistics costs associated with expediting inventory purchases from existing and new sources.

Net income increased to $1.0 million from $2.5 million loss in the second quarter of 2020 and 2019, respectively. This was due ~~primarily~~ to increased gross profit, driven by a gain on unrealized foreign exchange gain on unsettled forward contracts and a reduction in amortization of intangible assets. Also contributing was a decrease in interest expense and decreased restructuring cost recorded in the ~~incremental margin earned on $41.0~~second quarter of 2020 over the same period in the prior year. The net income in the second quarter of 2020 was partially offset with costs incurred of $1.2 million related to COVID-19 not incurred for the same period in the prior year. When excluding the items in the reconciliation above, Adjusted Net Income increased $1.3 million in the second quarter of ~~increased revenue from MCA acquisition.~~2020 over the same period in the prior year.

Gross Profit and Adjusted Gross Profit Reconciliation

Adjusted Gross ~~Margin Reconciliation:~~

~~Adjusted gross margin,~~Profit, a non-GAAP financial measure, is defined as gross profit exclusive of unrealized foreign exchange gains or losses on unsettled forward foreign exchange contracts and the amortization of intangible assets. ~~Management presents~~The Company calculates an adjusted gross ~~margin~~profit amount as ~~management considers~~we consider gross ~~margins~~profit exclusive of such unrealized foreign exchange gains or losses on unsettled forward foreign exchange contracts to be a meaningful measure as it is non-cash and management does not consider the mark-to-market valuation reflective of operating performance in the current period. Management also excludes the impact of intangible assets amortization as these charges are non-cash in nature and are not believed to be reflective of operating performance. We also believe adjusted gross ~~margin~~profit provides useful information to investors in understanding and evaluating our operating results in the same manner as management.

Below is the reconciliation from the financial statement presentation of gross profit to the non-GAAP measure of adjusted gross ~~profit:~~profit (in thousands):

	Three months ended September, 2019			Three months ended September 30, 2018			Three months ended June 28, 2020			Three months ended June 30, 2019
Gross profit	$	8,906		$	5,237		$	10,686		$	8,997
Add:
Unrealized foreign exchange gains on unsettled forward exchange contracts		—			(108	)
Unrealized foreign exchange gain on unsettled forward exchange contracts								(971	)		—
Amortization of intangible assets		1,844			—			846			1,844
COVID-19 related expenses (1)								1,185			—
Adjusted gross profit	$	10,750		$	5,129		$	11,746		$	10,841
Adjusted gross profit percentage		12.1	%		9.6	%		13.0	%		11.9	%

(1)

EBITDA and Adjusted EBITDA ~~Reconciliation:~~

Reconciliation

EBITDA and Adjusted EBITDA, non-GAAP financial measures, are defined as earnings before interest, ~~income~~ taxes, depreciation and amortization, with Adjusted EBITDA also excluding restructuring charges, stock-based compensation, ~~fair value adjustment of warrant liability, fair value adjustment to contingent consideration, merger and acquisition related expenses and~~ unrealized foreign exchange gains and losses on unsettled forward foreign exchange ~~contracts.~~contracts, fair value adjustment of warrant liability and merger and acquisition related expenses and COVID-19 related expenses. Management presents EBITDA and Adjusted EBITDA, as ~~it is~~they are utilized by management to monitor performance against budget as well as compliance with ~~covenants governing our Credit Facilities (as defined below).~~bank covenants. We also believe EBITDA and Adjusted EBITDA provide useful information to investors in understanding and evaluating our operating results in the same manner as management.

Below is the reconciliation of net income (loss) ~~income,~~, the closest GAAP measure, to EBITDA and Adjusted ~~EBITDA.~~EBITDA (in thousands).

	Three months ended September 29, 2019			Three months ended September 30, 2018			Three months ended June 28, 2020			Three months ended June 30, 2019
Net (loss) income	$	(5,734	)	$	864
Net income(loss)							$	955		$	(2,468	)
Add:

Depreciation of property, plant and equipment		1,649			883			1,619			1,626
Amortization of intangible assets		1,844			—			846			1,844
Interest		2,679			485			1,987			2,800
Income taxes		(184	)		145			363			519
EBITDA	$	254		$	2,377		$	5,770		$	4,321

Add:

Restructuring charges		6,454			58
Restructuring charges (recovery)								(125	)		1,546
Stock based compensation		353			75			155			97
Fair value adjustment of warrant liability		(858	)		—			399			40
Fair value adjustment to contingent consideration								—			—
Merger and acquisition related expenses		68			—			—			73
COVID-19 related expenses (1)								1,185			—
Unrealized foreign exchange gain on unsettled forward exchange contracts		—			(108	)		(971	)		—
Adjusted EBITDA	$	6,271		$	2,402		$	6,413		$	6,077

(1)

Adjusted EBITDA for three months ended ~~September 29, 2019~~June 28, 2020 increased by ~~$3.9~~$0.3 million to ~~$6.3~~$6.4 million compared with ~~$2.4~~$6.1 million for the same period in ~~2018~~2019 due to the increase in ~~large part~~gross profit, partially offset by increased selling, general and administrative expenses.

Six months ended June 28, 2020, compared with the six months ended June 30, 2019:

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

	Six months ended June 28, 2020						Six months ended June 30, 2019						Change 2019 to 2020
	$			%			$			%			$			%
Revenue		185.5			100.0			193.6			100.0			(8.1	)		(4.2	)
Cost of sales		165.2			89.1			176.0			90.9			(10.8	)		(6.1	)
Gross profit		20.3			10.9			17.6			9.1			2.7			15.3
Selling, general and administrative expenses		14.3			7.7			13.3			6.9			1.0			7.5
Change in fair value of contingent consideration		—			—			(3.1	)		(1.6	)		3.1			100.0
Restructuring charges (recovery)		(0.3	)		(0.2	)		2.2			1.1			(2.5	)		(113.6	)
Operating income		6.3			3.4			5.2			2.7			1.1			21.2
Fair value measurement loss (gain) on warrant liability		(0.1	)		(0.1	)		—			0.0			(0.1	)	100
Interest expense		4.1			2.2			5.7			2.9			(1.6	)		(28.1	)
Income before income taxes		2.3			1.2			(0.5	)		(0.3	)		2.8			560.0
Income tax expense (recovery)
Current		0.6			0.3			0.7			0.4			(0.1	)		(14.3	)
Deferred		0.0			0.0			0.1			0.1			(0.1	)		(100.0	)
		0.6			0.3			0.8			0.4			(0.2	)		(25.0	)
Net income(loss)		1.7			0.9			(1.3	)		(0.7	)		3.0			230.8

Revenue by Industry Sector

	Six months ended June 28, 2020				Six months ended June 30, 2019				Change
Industry Sector	$		%		$		%		$			%
Test and Measurement		26.1		14.1		25.3		13.1		0.8			3.2
Retail and Payment Systems		19.0		10.2		25.0		12.9		(6.0	)		(24.0	)
Telecom, Networking and Communications		12.5		6.7		18.8		9.7		(6.3	)		(33.5	)
Medical and Safety		21.5		11.6		23.7		12.2		(2.2	)		(9.3	)
Industrial, Power and Clean Technology		74.4		40.1		75.9		39.2		(1.5	)		(2.0	)
Semiconductors		12.4		6.7		13.1		6.8		(0.7	)		(5.3	)
Avionics, Aerospace and Defense		19.6		10.6		11.8		6.1		7.8			66.1
Total		185.5		100.0		193.6		100.0		(8.1	)		(4.2	)

Total revenue decreased $8.1 million to $185.5 million for the first half of 2020 from $193.6 million in the same period in the prior year primarily due to backlog fulfillment in the first half of 2019 associated with the acquisition of MC Assembly ~~which~~in November 2018, customer disengagement in China due to the Dongguan facility closure in the first quarter of 2020, along with some demand reductions from retail payment systems and commercial avionics programs, among others, and order rescheduling from other North America customers in the latter part of the second quarter of 2020. We believe this resulted in part from the COVID-19 pandemic and our customers modifying their requirements in response to shifting demand of their respective end customers.

Revenue increased $1.1 million in the test and measurement sector compared to the first half of 2019, primarily due to volume increases for three customers (two serviced in Mexico; one serviced in the U.S.), partially offset by volume decreases for one customer serviced in the U.S.

Revenue decreased $6.0 million in the retail and payment systems sector compared to the first half of 2019, primarily due to decreased volume from two customers serviced in Mexico.

Revenue decreased $6.3 million in the telecom, networking and communications sector compared to the first half of 2019, primarily due to decreased volume from one customer serviced in Mexico and two customers disengaging in China due to the Dongguan facility closure, partially offset by one customer serviced in the U.S. with increased volumes.

Revenue decreased $2.2 million in the medical and safety sector compared to the first half of 2019, primarily due to one customer serviced in the U.S. experiencing reduced volumes due to the customer’s program transitioning to end-of-life and decreased volume from one other customer serviced in Mexico, partially offset by one customer serviced in Mexico with increased volumes.

Revenue decreased $1.8 million in the industrial IoT, power and clean technology sector compared to the first half of 2019, primarily due to decreased volume from three customers (two serviced in Mexico; one serviced in the U.S.), partially offset by three customers (two serviced in Mexico; one serviced in the U.S.) with increased volumes.

Revenue decreased $0.7 million in the semiconductors sector compared to the first half of 2019, due to decreased volume from one customer serviced in Mexico, offset by one customer serviced in Mexico with increased volumes.

Revenue increased $7.8 million in the avionics, aerospace and defense sector compared to the first half of 2019, due to volumes increases with two customers serviced in the U.S., as well as the addition of three new customers serviced in the U.S.

Revenue by Geography

During the first half of 2020, 64.4% of our revenue was attributable to production from our operations in Mexico, 35.0% of our revenue was attributable to production from our operations in the U.S. and 0.6% of our revenue was attributable to production from our operations in China. During the first half of 2019, 64.2% of our revenue was attributable to production from our operations in Mexico, 30.4% of our revenue was attributable to production from our operations in the U.S. and 5.3% of our revenue was attributable to production from our operations in China. Following the closure of our Dongguan manufacturing facility in China, manufacturing of certain products previously manufactured at that facility has been transferred to the Company’s other manufacturing facilities.

Additional Revenue Information

We recorded approximately $3.9 million and $4.4 million of revenue from sales of raw materials inventory to customers during the first half of 2020 and the first half of 2019. The Company purchases raw materials based on customer purchase orders. When a customer requires an order to be altered or changed, the customer is generally obligated to purchase the original on-order raw material at cost, to the extent the materials are not consumed within a specified period.

The Company’s ten largest customers represented ~~an increase~~55.7% of revenue during the first half of 2020, compared with 53.6% in ~~Adjusted EBITDA~~the first half of ~~$3.3~~2019. Revenue from the largest customer during the first half of 2020 was $26.6 million representing 14.3% of total revenue. This compares with revenue from the largest customer during the first half of 2019 of $25.8 million representing 13.3% of total revenue. No other customers represented more than 10% of revenue in either period.

Gross Profit

Gross profit for the first half of 2020 increased by $2.7 million to $20.3 million or 10.9% of revenue compared with $17.6 million or 9.1% of revenue for the same period in 2019. When excluding unrealized foreign exchange gain on unsettled forward contracts, amortization of intangible assets and COVID-19 related expenses, the adjusted gross profit was $23.4 million or 12.6% of revenue for the first half of 2020 compared with $21.3 million or 11.0% of revenue for the first half of 2019. This was due primarily to higher gross profit due to product mix and lower variable manufacturing expenses.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased to $14.3 million in the first half of 2020 from $13.3 million in the same period in 2019, mainly due to increased professional services rendered related to additional compliance obligations under the Sarbanes-Oxley Act of 2002, as well as new headcount hired in the first half of 2020.

Change in fair value of contingent consideration

During the first half of 2019, it was determined that there was no fair value of the contingent consideration liability, and that no obligation existed resulting in a recognized gain of $3.1 million. The contingent consideration liability was initially recognized at fair value in the fourth quarter of 2018 and relates to a contingent earn-out payment associated with the acquisition of MC Assembly. The fair value estimate under purchase accounting of $3.1 million was derived from a multiple of earnings based on MC Assembly’s forecasted twelve-month earnings for the period ended June 30, 2019. Based on actual earnings, the contingent consideration liability was considered resolved and no longer payable as at June 30, 2019. No contingent consideration existed as at June 28, 2020.

Restructuring Charges

During the first half of 2020, restructuring recoveries were $0.3 million primarily related to the cash collections of previously provisioned inventory included in the Dongguan facility. During the first half of 2019, restructuring charges of $2.2 million were incurred related to the reduction of 28 full-time equivalents (“FTEs”) in the U.S. and 4 FTEs in Canada and 459 FTEs and contract employees in Mexico. As at June 28, 2020, the Company had $675 of accrued restructuring charges remaining to be paid by the end of the third quarter of 2020.

Interest Expense

Interest expense decreased to $4.1 million in the first half of 2020 compared to $5.7 million in the same period in 2019. The decrease was primarily the result of the pay down of the Term Loan B Facility in addition to lower average debt balance in the first half of 2020 compared to the same period in 2019. The weighted average interest rates with respect to the debt on our PNC and TCW Facilities was 7.5%. The weighted average interest rates for the same period in the prior ~~year.~~year was 9.6%.

Income Tax Expense

The Company recorded current income tax expense of $0.6 million and $0.7 million for the first half of 2020 and 2019, in connection with U.S. state taxes and taxes on profits in certain foreign jurisdictions, and deferred income tax benefit of $Nil and $0.1 million in the first half of 2020 and 2019, in connection with temporary differences related to the Mexican operations.

Non-GAAP Financial Measures

~~Net~~ ~~Income (L~~~~oss~~)To supplement our consolidated financial statements, which are prepared and presented in accordance with U.S. GAAP, we use the following non-GAAP financial measures: Adjusted Gross Profit, EBITDA, Adjusted EBITDA and Adjusted Net Income ~~(Loss) Reconciliation:~~(collectively the “Non-GAAP Financial Measures”). We believe that these Non-GAAP Financial Measures, when used in conjunction with GAAP financial measures, provide useful information about operating results, enhance the overall understanding of past financial performance and future prospects, and allow for greater transparency with respect to the key metrics we use in our financial and operational decision making, as they exclude the effects of items that may not be indicative of, or are unrelated to, our underlying operating results, such as expenses related to the COVID-19 pandemic. The Company’s management believes that adjusting for the additional temporary costs attributable to the COVID-19 pandemic allows for a better comparison of the Company’s performance to prior periods, which is consistent with our recent amendments to the financial covenants in our financing agreements. These non-GAAP measures are used by the Company’s management to manage and monitor the Company’s performance, and also frequently used by analysts, investors and other interested parties to evaluate companies in our industry. The presentation of this financial information is not intended to be considered in isolation or as a substitute for, or superior to, the financial information prepared and presented in accordance with U.S. GAAP, and they should not be construed as an inference that our future results will be unaffected by any items adjusted for in these non-GAAP measures. In evaluating these non-GAAP measures, you should be aware that in the future we may incur expenses that are the same as or similar to some of those adjusted in this presentation. The Non-GAAP Financial Measures that we use are not necessarily comparable to similarly titled measures used by other companies due to different methods of calculation.

Net Income and Adjusted Net Income Reconciliation

Adjusted Net Income, ~~(Loss),~~ a non-GAAP financial measure, is defined as Net Income ~~(Loss)~~ before amortization of intangible assets, restructuring charges, stock-based compensation, fair value adjustment of warrant liability, fair value adjustment to contingent consideration, merger and acquisition related expenses and unrealized foreign exchange gains and losses on unsettled forward foreign exchange ~~contracts.~~contracts and COVID-19 related expenses. Management presents Adjusted Net Income, ~~(Loss),~~ as it is believed the information is useful to investors in understanding and evaluating our operating results as it aligns the net income (loss) with those adjustments made to EBITDA and gross profit.

Below is the reconciliation of ~~net loss~~Net Income to Adjusted Net ~~(Loss) Income:~~Income (in thousands):

	Three months ended September 29, 2019			Three months ended September 30, 2018			Six months ended June 28, 2020			Six months ended June 30, 2019
Net (loss) income	$	(5,734	)	$	864
Net Income(loss)							$	1,730		$	(1,257	)
Add:


Amortization of intangible assets		1,844			—			2,364			3,688
Restructuring charges		6,454			58
Restructuring charges (recovery)								(346	)	$	2,170
Stock based compensation		353			75			317			185
Fair value adjustment of warrant liability		(858	)		—			(118	)		(61	)
Merger and acquisition related expenses		68			—
Unrealized foreign exchange gain on unsettled forward exchange contracts		—			(108	)
Fair value adjustment of contingent consideration											(3,050	)
Merger and acquisitions related expenses								—			164
COVID-19 related expenses (1)								1,185			—
Unrealized foreign exchange gain on unsettled forward foreign exchange contracts								(459	)		—
Adjusted Net Income	$	2,127		$	889		$	4,673		$	1,839

(1)

~~Selling, General and Administrative Expenses~~

~~Selling, general and administrative expenses~~Net income increased to ~~$6.5~~$1.7 million from a $1.3 million loss in the ~~third~~first half of 2020 and 2019. In addition, the increase in net income was due to increased gross profit, unrealized foreign exchange gain on unsettled forward contracts, reduction in restructuring costs recorded in the second quarter of 2019 from $3.7 million in the same period in 2018, with $2.2 million of the selling general and administrative expenses increase in the third quarter of 2019 related to the MCA acquisition which were not reflected in2020 over the same period in the prior year. ~~Therefore selling, general and administrative expenses increased to 7.3% of revenue~~When excluding the items noted in the ~~third quarter of 2019 up from 6.9% of revenue in the same period in 2018.~~

~~Change in fair value of warrant liability~~

For the three months ended September 29, 2019 the Company recorded a $0.9 million gain as a result of the valuation of the 504,735 outstanding warrants issued to TCW. The fair value has been assessed at $2.13 per unit or $1,090 as at September 29, 2019 which was a reduction in the stock price from the prior valuation assessment at June 30, 2019.

~~Restructuring Charges~~

During the third quarter of 2019, restructuring charges of $5.5 million were accrued related to the Company’s previously announced closure of business operations in Dongguan, China, in addition to $0.9 million were incurred related to the reduction of 19 full-time equivalents (“FTEs”) in U.S, 4 FTEs in Canada and 89 FTEs and contract employees in Mexico. The $5.5 million of restructuring charges related to estimated closure costs of the Dongguan facility. These charges include $2.0 million of severance and other facility closure activities primarily related to severance charges of $1.4 million the reduction of 137 FTEs in addition to tax and duties accrued of $0.2 million and equipment decommissioning and facility charges of $0.4 million. In addition, included in the restructuring charges is a $1.7 million write down of accounts receivable, $1.5 million write down of inventory and $0.3 million write down of property, plant and equipment.

~~Interest Expense~~

~~Interest expense~~above reconciliation, Adjusted Net Income increased to $2.7 million in the third quarter of 2019 compared to $0.5 million in the same period in 2018. The increase was primarily the result of a higher average debt balance in the third quarter of 2019 and higher interest rates compared to the same period in 2018, specifically with $39.4 million of debt outstanding on the Term A Loan Facility related to financing the MCA acquisition. In addition to higher revolving credit facility balance utilized to support working capital needs of Company post acquisition of MCA. The weighted average interest rates with respect to the debt on our Credit Facilities was 12.2%. The weighted average interest rates with respect to the debt on our predecessor PNC Facility (as defined below) was 5.9% for the third quarter of 2018.

~~Income Tax Expense~~

The Company recorded current income tax recovery of $0.1 million and expense $0.3 million, respectively, for each of the third quarters of 2019 and 2018, in connection with U.S. state taxes and taxes on profits in certain foreign jurisdictions, and deferred income tax benefit of $0.1 million and deferred income tax expense of $0.1 million, respectively, for each of the second quarters of 2019 and 2018, in connection with temporary differences related to the Mexican operations. The recovery for the three months ended September 29, 2019 was due to recovery of taxes from the prior year, in addition to reduction of 2019 estimated taxes.

~~Nine months~~ ~~ended~~ ~~September 29~~~~, 201~~9 ~~compared with the~~ ~~nine months~~ ~~ended~~ ~~September 30~~~~, 201~~8:

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

Nine months ended
September 29, 2019

Nine months ended
September 30, 2018

Change
2018 to 2019

$
%
$
%
$
%

Revenue
282.3 100.0 135.3 100.0 147.0 108.6
Cost of sales
255.7 90.6 121.9 90.1 133.8 109.8
Gross profit
26.6 9.4 13.4 9.9 13.2 98.5
Selling, general and administrative expenses

19.9
7.0 10.8 8.0 9.1 84.3
Change in fair value of warrant liability
(0.9 ) (0.3 ) — — (0.9 )
Change in fair value of contingent consideration
(3.0 ) (1.1 ) — — (3.0 )
Restructuring charges
8.6 3.0 0.2 0.1 8.4 4,200.0
Operating income
2.0 0.7 2.4 1.8 (0.4 ) (16.7 )
Interest expense
8.4 3.0 1.2 0.9 7.2 600.0
Income (loss) before income taxes
(6.4 ) (2.3
)
1.2 0.9 (7.6 ) (633.3 )
Income tax expense

Current
0.6 0.2 0.6 0.4 — —
Deferred
— — (0.2 ) (0.1 ) (0.2 ) 100.0
0.6 0.2 0.4 0.3 0.2 50.0
Net (loss) income
(7.0 ) (2.5 ) 0.8 0.6 (7.8 ) (975.0 )

~~Revenue~~

Industry Sector

Nine months ended
September 29,
2019

Nine months ended
September 30,
2018

Change

$
%
$
%
$
%

Test and Measurement
90.6 32.1 24.8 18.3 65.8 265.3
Retail and Payment Systems
35.5 12.6 27.2 20.1 8.3 30.5
Telecom, Networking and Communications
28.4 10.1 24.8 18.4 3.6 14.5
Medical
34.2 12.1 22.1 16.3 12.1 54.8
Industrial, Power and Clean Technology
58.4 20.7 15.6 11.5 42.8 274.4
Semiconductor
18.2 6.4 20.8 15.4 (2.6 ) (12.5 )
Aerospace and Defense
17.0 6.0 — — 17.0

NA
Total
282.3 100.0 135.3 100.0 147.0 108.6

~~Revenue increased $147.0 million to $282.3 million for the first nine months of 2019 from $135.3~~$2.8 million in the first ~~nine months~~quarter half of ~~2018. With the acquisition of MCA, we reported additional revenue of $122.8 million during the first nine months of 2019 which was not included in~~2020 over the same period in the prior ~~year. Volume increases with two customer serviced~~year, which is mainly due to increased gross profit, reduced interest expense due to reduction in ~~the U.S., along with one new customer serviced in China,~~debt and partially offset by ~~volume decreases with one customer serviced in Mexico in the test~~increased selling, general and ~~measurement sector, represented an increase in revenue of $7.6 million with an additional $58.3 million represented from the MCA acquisition. Two long-standing retail~~administrative expense.

Gross Profit and payment systems customers serviced in Mexico represented an increase in revenue of $7.5 million. In the telecom, networking and communications sector an increase in volume from one customer serviced in Asia, offset by decreases in volume from three customers (one serviced in Asia; one serviced in Mexico; and one serviced in the U.S.), and the move of business to other manufacturers from one customer serviced in Asia, represented a decrease in revenue of $1.9 million, with an additional $5.3 million of revenue from the MCA acquisition. In the industrial, power and clean technology sector one customer serviced in the U.S. had increased volumes representing an increase of $10.0 million in revenue with additional $30.1 million driven by the MCA acquisition. Also, revenue increased as a result of the MCA acquisition in the medical, and aerospace and defense sectors totaling $11.9 million and $17.3 million respectively.

We recorded $8.0 million and $1.9 million of revenue from sales of raw materials inventory to customers during the first nine months of 2019 and the first nine months of 2018, respectively, which carried limited margin.

Due to changes in market conditions, the life cycle of products, the nature of specific programs and other factors, revenue from a particular customer typically varies from quarter-to-quarter and year-to-year. The Company’s ten largest customers represented 54.0% of revenue during the first nine months of 2019, compared with 78.5% in the first nine months of 2018. Revenue from the largest customer during the first nine months of 2019 was $36.7 million representing 13.0% of total revenue. This compares with revenue from the two largest customers during the first nine months of 2018 of $18.2 million and $14.1 million representing 13.5% and 10.4% respectively of total revenue. No other customers represented more than 10% of revenue in either period.

During the first nine months of 2019, 64.2% of our revenue was attributable to production from our operations in Mexico, 30.6% of our revenue was attributable to production from our operations in the U.S. and 5.2% of our revenue was attributable to production from our operations in China. During the first nine months of 2018, 76.3% of our revenue was attributable to production from our operations in Mexico, 14.0% of our revenue was attributable to production from our operations in the U.S. and 9.7% of our revenue was attributable to production from our operations in China.

Adjusted Gross Profit

Gross profit for the first nine months of 2019 increased by $13.2 million to $26.6 million or 9.4% of revenue compared with $13.4 million or 9.9% of revenue for the same period in 2018. When excluding unrealized foreign exchange gains on unsettled forward contracts and amortization of intangible assets, the adjusted gross profit was $32.1 million or 11.4% of revenue for the first nine months of 2019 compared with $13.0 million or 9.6% of revenue for the first nine months of 2018. This was due primarily to incremental margin on $124.4 million of additional revenue due to the acquisition of MCA. The decrease in gross profit percentage was due in part to the amortization of intangible assets of $5.5 million included in cost of sales that was not included in the same period in the prior year.

Reconciliation

Adjusted Gross ~~Margin Reconciliation:~~

Below is the reconciliation from the financial statement presentation of gross profit to the non-GAAP measure of adjusted gross ~~profit:~~profit (in thousands):

	Nine months ended September 29, 2019			Nine months ended September 30, 2018			Six months ended June 28, 2020			Six months ended June 30, 2019
Gross profit	$	26,527		$	13,370		$	20,325		$	17,621
Add:
Unrealized foreign exchange gains on unsettled forward exchange contracts		—			(338	)
Unrealized foreign exchange gain on unsettled forward exchange contracts								(459	)		—
Amortization of intangible assets		5,532			—			2,364			3,688
COVID-19 related expenses (1)								1,185			—
Adjusted gross profit	$	32,059		$	13,032		$	23,415		$	21,309
Adjusted gross profit percentage		11.4	%		9.6	%		12.6	%		11.0	%

(1)

EBITDA and Adjusted EBITDA ~~Reconciliation:~~

Reconciliation

EBITDA and Adjusted EBITDA, non-GAAP financial measures, are defined as earnings before interest, ~~income~~ taxes, depreciation and amortization, with Adjusted EBITDA also excluding restructuring charges, stock-based compensation, unrealized foreign exchange gains and losses on unsettled forward foreign exchange contracts, fair value adjustment of warrant liability, fair value adjustment to contingent consideration and merger and acquisition related expenses and ~~unrealized foreign exchange gains and losses on unsettled forward foreign exchange contracts.~~COVID-19 related expenses. Management presents EBITDA and Adjusted EBITDA, as ~~it is~~they are utilized by management to monitor performance against budget as well as compliance with ~~covenants governing our Credit Facilities.~~bank covenants. We also believe EBITDA and Adjusted EBITDA provide useful information to investors in understanding and evaluating our operating results in the same manner as management.

Below is the reconciliation of net income (loss) ~~income,~~, the closest GAAP measure, to EBITDA and Adjusted ~~EBITDA.~~

Nine months
ended
September 29, 2019

Nine months
ended
September 30, 2018

Net (loss) income
$ (6,991 ) $ 775
Add:

Depreciation of property, plant and equipment
4,902 2,426
Amortization of intangible assets
5,532 —
Interest
8,349 1,195
Income taxes
606 405
EBITDA
$ 12,398 $ 4,801

Add:

Restructuring charges
8,624 154
Stock based compensation
538 278
Fair value adjustment of warrant liability
(919 ) —
Fair value adjustment to contingent consideration
(3,050 ) —
Merger and acquisition related expenses
232 —
Unrealized foreign exchange gain on unsettled forward exchange contracts
— (338
)
Adjusted EBITDA
$ 17,823 $ 4,895

~~Adjusted~~ EBITDA for nine months ended September 29, 2019 increased by $12.9 million to $17.8 million compared with $4.9 million for the same period in 2018 due primarily to the acquisition of MCA, which represented an increase in Adjusted EBITDA of $10.3 million which was not included in the results in the same period in the prior year.(in thousands).

	Six months ended June 28, 2020			Six months ended June 30, 2019
Net income(loss)	$	1,730		$	(1,257	)
Add:
Depreciation of property, plant and equipment		3,222			3,253
Amortization of intangible assets		2,364			3,688
Interest		4,080			5,670
Income taxes		653			790
EBITDA	$	12,049		$	12,144
Add:
Restructuring charges (recovery)		(346	)		2,170
Stock based compensation		317			185
Fair value adjustment of warrant liability		(118	)		(61	)
Fair value adjustment to contingent consideration		—			(3,050	)
Merger and acquisition related expenses		—			164
COVID-19 related expenses (1)		1,185			—
Unrealized foreign exchange gain on unsettled forward exchange contracts		(459	)		—
Adjusted EBITDA	$	12,628		$	11,552

~~Net~~ ~~Income (L~~~~oss~~~~) and Adjusted Net Income~~ ~~Reconciliation:~~

Adjusted Net Income (Loss), a non-GAAP financial measure, is defined as Net Income (Loss) before amortization of intangible assets, restructuring charges, stock-based compensation, fair value adjustment of warrant liability, fair value adjustment to contingent consideration, merger and acquisition related expenses and unrealized foreign exchange gains and losses on unsettled forward foreign exchange contracts. Management presents Adjusted Net Income (Loss), as it is believed the information is useful to investors in understanding and evaluating our operating results as it aligns the net income (loss) with those adjustments made to EBITDA and gross profit.

~~Below is the reconciliation of net (loss) income to Adjusted Net (Loss) Income:~~

Nine months
ended
September 29, 2019

Nine months
ended
September 30, 2018

Net (loss) income
$ (6,991 ) $ 775
Add:

Amortization of intangible assets
5,532 —
Restructuring charges
8,624 154
Stock based compensation
538 278
Fair value adjustment of warrant liability
(919 ) —
Fair value adjustment to contingent consideration
(3,050 ) —
Merger and acquisition related expenses
232 —
Unrealized foreign exchange gain on unsettled forward exchange contracts
— (338 )
Adjusted Net Income
$ 3,966 $ 869

~~Selling, General and Administrative Expenses~~

Selling, general and administrative expenses increased to $19.9 million in the first nine months of 2019 from $10.8 million in the same period in 2018, with $7.0 million of the selling general and administrative expenses increase related to MCA which were not reflected in the same period in the prior year. However, selling, general and administrative expenses decreased to 7.1% of revenue in the first nine months of 2019 down from 8.0% of revenue in the same period in 2018 due to increase in revenue and certain cost reductions and savings from restructuring that occurred in the first nine months of 2019.

~~Change in fair value of warrant liability~~

For the nine months ended September 29, 2019 the Company recorded a $0.9 million gain as a result of the valuation of the 504,735 outstanding warrants issued to TCW. The fair value has been assessed at $2.13 per unit or $1,090 as at September 29, 2019 which was a reduction in the stock price from the prior valuation assessment at December 30, 2018.

~~Change in fair value of contingent consideration~~

During the first quarter of 2019, the fair value of the contingent consideration liability was determined to be $Nil resulting in a gain of $3.0 million being recognized. The contingent consideration liability was initially recognized at fair value in the fourth quarter of 2018 and relates to a contingent earn-out payment associated with the acquisition of MCA. Fair value estimate under purchase accounting of $3.0 million was derived from a multiple of earnings based on MCA’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.

(1)

~~Restructuring charges~~

During the first nine months of 2019, $8.6 million of restructuring charges were incurred related to the reduction of 137 FTEs in China, 28 FTEs in U.S., 4 FTEs in Canada and 459 FTEs and contract employees in Mexico. The majority of the charges were incurred during the three months ended September 29, 2019 as it related to the closure of the Dongguan manufacturing facility. During the three months ended September 29, 2019, restructuring charges of $5.5 million were incurred related to Dongguan facility exit, in addition to $0.9 million were incurred related to the reduction of 19 FTEs in U.S, 4 FTEs in Canada and 89 FTEs and contract employees in Mexico. The $5.5 million of restructuring charges related to estimated closure costs of the Dongguan facility. These charges include $2.0 million of severance and other facility closure activities primarily related to severance charges of $1.4 million the reduction of 137 FTEs in addition to tax and duties accrued of $0.2 million and equipment decommissioning and facility charges of $0.4 million. In addition, included in the restructuring charges is a $1.7 million write down of accounts receivable, $1.5 million write down of inventory and $0.3 million write down of property, plant and equipment.

~~Interest Expense~~

Interest expense increased to $8.4 million in the first nine months of 2019 compared to $1.2 million in the same period in 2018. The increase was primarily the result of debt incurred to finance the acquisition of MCA, in addition to higher average interest rates compared to the same period in 2018. The weighted average interest rates with respect to the debt on our Credit Facilities was 10.5%. The weighted average interest rates with respect to the debt on our predecessor PNC Facility was 5.7% for 2018.

~~Income Tax Expense~~

The Company recorded current income tax expense of $0.6 million and $0.6 million, respectively, for each of first nine months of 2019 and 2018, in connection with U.S. state taxes and taxes on profits in certain foreign jurisdictions, and deferred income tax expense of $NIL million and benefit of $0.2 million for each of first nine months of 2019 and 2018, in connection with temporary differences related to the Mexican operations.

Liquidity

As at ~~September 29, 2019,~~June 28, 2020, the Company’s liquidity iswas comprised of ~~$0.6~~$0.3 million in cash on hand and ~~$21.4~~$30.9 million of funds available to borrow under the PNC Facility, which matures on November 8, 2023. The Company funds its operations by regularly utilizing its PNC Facility (refer to Note 5)4). The Company manages it capital requirements through budgeting and forecasting processes while monitoring for compliance with bank covenants. Funds available under the PNC Facility are managed on a weekly basis, based on the cash flow requirements of the various operating segments. Cash flows generated from operations are immediately applied towards paying down the PNC Facility.

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 seek alternative methods of financing.

Net cash generated in operating activities during the ~~first nine~~three six months ended ~~September 29, 2019~~June 28, 2020, was $2.6 ~~million. Cash~~million compared to $0.2 million used for the same period in the prior year. Working capital changes related to $4.8 million accounts receivable reduction were offset by the $12.4 million increase in the unbilled contract asset. Accounts receivable days sales outstanding increased to 62 days in the first half quarter of ~~$8.6~~2020 from 61 days for the first half of 2019. In addition, accrued liabilities increased $8.8 million ~~was used from accounts payable~~due to deferred revenue for the first half of 2020, partially offset by reduction in Accounts Payable of $3.4 million due to timing of payments. Accounts payable days outstanding decreased to 7170 days for the first ~~nine months~~half of ~~2019~~2020 compared to 7372 days for the first ~~nine months~~half of ~~2018. Working capital changes related to $3.7 million decrease in inventory offset by the $6.4 million of increase in unbilled contract assets.~~2019. Inventory turnover, on an annualized basis, ~~was 4.4~~decreased to 4.3 times for the first ~~nine months~~half of ~~2019~~2020 compared to ~~4.9~~4.5 times for the first ~~nine months~~half of 2018. The reduction in inventory turns was due in large part to timing of inventory receipts due to demand changes not entirely offset by revenue levels. Accounts receivable days outstanding was 61 days for the first nine months of 2019 and 2018.

2019.

Net cash used ~~from~~in financing activities during the first ~~nine months~~half of ~~2019~~2020 was ~~$0.4 million.~~$2.1 million compared to net cash generated by $1.3 million for the first half of 2019. During the ~~nine months ended September 29,~~first half of 2020 and 2019, the Company ~~generated net cash by $14.0 million from issuance of common stock through the Rights Offering (as defined below). The Company~~ made net ~~advances from~~repayments to the revolving ~~credit facility~~debt of ~~$9.8~~$0.8 million ~~compared to $4.5~~and $11.3 million, ~~for the same period in 2018.~~respectively. The Company also paid down its long-term debt in the amount of ~~$22.6~~$0.6 million ~~and $1.5 million, respectively~~ in the ~~nine months ended September 29, 2019~~first quarters of 2020 and ~~September 30, 2018.~~2019. Principal repayments on capital lease obligations were ~~$1.2~~$0.4 million in the ~~nine months ended September 29, 2019~~first half of 2020 compared to ~~$0.2~~$0.8 million in the same period in the prior year.

Net cash used in investing activities during the ~~nine months ended September 29, 2019~~first half of 2020 was ~~$3.2~~$1.6 million compared to ~~$3.9~~$2.1 million in the ~~same period~~first half of ~~2018,~~2019, related to capital asset purchases.

Capital Resources

The Company borrows money under ~~an Amended and Restated Revolving Credit and Security Agreement with~~the PNC ~~Bank, National Association (“PNC”),~~Facility, 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 0.75% to 1.25%, or LIBOR plus an applicable margin ranging from 2.50% to 3.00%. 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, together with~~ the PNC Facility, the “Credit Facilities”), and previously governed a term loan B facility (the “Term Loan B Facility”) until it was repaid in full on July 3, 2019 with a portion of the proceeds from the Offerings (as defined below). The Term A Loan Facility that matures on ~~November 8, 2023 (the “Maturity Date”).~~the Maturity Date. The Term Loan A Facility bears interest at 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 ~~the~~ 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 August 8, 2019, the Company and certain of its subsidiaries entered into that certain Amendments No. 2 to the Amended and Restated Revolving Credit and Security Agreement (the “PNC Amendment No. 2”) and that certain Amendment No. 3. to the Financing Agreement (the “TCW Amendment No. 3”). The PNC Amendment No. 2, among other things, (i) increased the total amount available for borrowings under the PNC Facility to $65,000, (ii) provided for borrowings of up to $15,000 on assets located in Mexico, (iii) provided that borrowings under the PNC Facility 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) reset the financial covenants, and (v) permitted the pay down of the Term A Loan Facility by up to $10,000. The TCW Amendment No. 3, among other things, (i) provided for a $20,000 increase in the total amount available for borrowings under the PNC Facility, (ii) provided for the pay down of the Term A Loan Facility by up to $10,000, (iii) provided that the interest rate for borrowings under the Financing Agreement was 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) deleted the senior leverage ratio covenant, (v) amended 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 ended September 30, 2019, (vi) amended 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) reset the call protection on the Term Loan A Facility.

On September 27, 2019, the Company and certain of its subsidiaries entered into that certain Amendments No. 3 to the Amended and Restated Revolving Credit and Security Agreement (the “PNC Amendment No. 3”) and that certain Amendment No. 4. to the Financing Agreement (the “TCW Amendment No. 4”). The PNC Amendment No. 3, among other things, amended the (i) definition of “Consolidated EBITDA” by permitting an addback for restructuring and transition costs and charges incurred on or before December 31, 2020 in connection with the Company’s previously announced closure of business operations in Dongguan, China, subject to certain exceptions, not to exceed (a) with respect to cash restructuring costs, $2,300, (b) with respect to write-offs of accounts receivable, $1,623, and (c) with respect to write-offs of Inventory (as defined in the Amended and Restated Revolving Credit and Security Agreement), $1,607, (ii) definition of “Permitted Intercompany Investments” by permitting certain investments by a Domestic Loan Party (as defined in the Amended and Restated Revolving Credit and Security Agreement) to or in SMTC Electronics Dongguan Company Limited, a limited liability company organized under the laws of China (“SMTC Dongguan”), solely to facilitate the closure of business operations in Dongguan, China, so long as, among other things, (a) such Investments (as defined in the PNC Agreement) are made prior to March 31, 2020, (b) the aggregate amount of all such Investments does not exceed $2,300 during the term of the Amended and Restated Revolving Credit and Security Agreement, (c) the Borrowers (as defined in the Amended and Restated Revolving Credit and Security Agreement) maintain certain minimum liquidity requirements and (iii) negative covenant regarding excess cash. The TCW Amendment No. 4, among other things, amended the (i) definition of “Consolidated EBITDA” by permitting an addback for restructuring and transition costs and charges incurred on or before December 31, 2020 in connection with the closure of business operations in Dongguan, China, subject to certain exceptions, not to exceed (a) with respect to cash restructuring costs, $2,300, (b) with respect to write-offs of accounts receivable, $1,623, and (c) with respect to write-offs of Inventory (as defined in the Financing Agreement), $1,607, (ii) definition of “Permitted Intercompany Investments” by permitting certain investments by a Domestic Loan Party (as defined in the Financing Agreement) to or in SMTC Dongguan solely to facilitate the closure of business operations in Dongguan, China, so long as, among other things, (a) such Investments (as defined in the Financing Agreement) are made prior to March 31, 2020, (b) the aggregate amount of all such Investments does not exceed $2,300 during the term of the Financing Agreement and (c) the Borrowers (as defined in the Financing Agreement) maintain certain minimum liquidity requirements and (iii) negative covenant regarding excess cash.

The Credit Facilities are 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 Term A Loan Facility are collateralized by the assets of the Company and each of its subsidiaries. The Credit Facilities contain certain financial and non-financial ~~covenants.~~covenants, including restrictions on dividend payments. The financial covenants under each Credit Facility 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 iswas in compliance with the financial covenants included in the Credit Facilities as at ~~September 29, 2019. Management projects compliance with the financial covenants included in the Credit Facilities.~~

June 28, 2020.

We believe that our sources of liquidity and capital, including cash we expect to generate from operations, available cash and amounts available under our Credit Facilities, will be adequate to meet our debt service requirements, capital expenditures and working capital needs at our current level of operations for the next twelve ~~months, although~~months. However, we make no assurance ~~can be given in this regard,~~that these sources of liquidity and capital, particularly with respect to amounts available from ~~lenders.~~lenders, will be sufficient to meet our future needs. We have agreed to a borrowing base formula under which the amount we are permitted to borrow under the PNC Facility is based on our accounts receivable and inventory. Further, ~~there can be~~we make no assurance that our business will generate sufficient cash flow from operations or that future borrowings will be available to enable us to service our indebtedness. Our future operating performance and ability to service indebtedness will be subject to future economic conditions and to financial, business and other factors, certain of which are beyond our control.

~~Rights Offering and Registered Direct Offering~~

~~In June 2019,~~Market conditions, including the ~~Company completed its (i) offering of subscription rights (the “Rights Offering”) to the Company’s stockholders and holders~~implications of the ~~Company’s outstanding warrants as~~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 ~~close~~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. In order to meet our customers’ delivery requirements, we have incurred and may continue to incur COVID-19 related expenses. These are primarily due to incremental logistics costs associated with expediting inventory purchases from existing and new sources, and labor and production inefficiencies and retention of temporary replacement labor to address workplace absenteeism due to illness, potential COVID-19 exposure or personal commitments. We are currently taking steps to limit our expenses, including putting a pause on ~~May 24, 2019, which was fully subscribed for the maximum offering amount of $9.1 million~~all non-essential new hiring and ~~(ii) registered direct offering (the “Registered Direct Offering”~~new programs, 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 and fees payable the Company. The proceeds of the Offerings were used, in part, to repay the Term Loan B Facility in full as at July 3, 2019.

~~Off Balance Sheet Arrangements~~

~~As of September 29, 2019, the Company had no material off balance sheet arrangements as defined by the rules of the SEC.~~reducing our third quarter capital expenditures.

Item 3 Quantitative and Qualitative Disclosures about Market Risk

Interest Rate Risk

The Company borrows money under the PNC ~~Facility. The PNC~~ Facility, which 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 0.75% to 1.25%, or LIBOR plus an applicable margin ranging from 2.50% to 3.00%. The base commercial lending rate should approximate U.S. prime rate. ~~The base commercial lending rate should approximate U.S. prime rate.~~

The Company also borrows money ~~under~~pursuant to the Financing Agreement. The Term A Loan A Facility matures on ~~November 8, 2023.~~its Maturity Date. The Term Loan A Facility bears interest at 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%. ~~In July 2019, the Company paid~~Payments made under the Term Loan BA 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 ~~full.~~ 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.

The impact of a 10% change in interest rates would be estimated to have ~~a material~~the following impact on our reported earnings.

10% increase in interest rate (million)		$	0.7			$	0.5
10% decrease in interest rate (million)		$	(0.7	)		$	(0.5	)

Foreign Currency Exchange Risk

Given our global business operations, we are exposed to exchange rate fluctuations on expenditures denominated in foreign currencies. However, most of our sales and component purchases are denominated in U.S. dollars, which limits our foreign currency risk. Our foreign exchange risk relates primarily to our Canadian, Mexican and Asian payroll, ~~Euro based~~Euro-based component purchases and other operating expenses denominated in local currencies in our geographic locations. To mitigate this risk, the Company enters into forward foreign exchange contracts to reduce its exposure to foreign exchange currency rate fluctuations related to forecasted ~~Canadian dollar and~~ Mexican ~~peso.~~peso expenditures. The strengthening of the ~~Canadian dollar and~~ Mexican peso would result in an increase in costs to the organization and may lead to a reduction in reported earnings.

The impact of a 10% change in exchange rates would be estimated to have the following impact on cost of sales for the Company:

10% increase in both the CAD and PESO foreign exchange rates (million)
$ 2.2
10% decrease in both the CAD and PESO foreign exchange rates (million)
$ (2.6 )

10% increase in both the CAD and PESO

foreign exchange rates (million)

1.4

10% decrease in both the CAD and PESO

foreign exchange rates (million)

(1.7

)

Credit Risk

In the normal course of operations, there is a risk that a counterparty may default on its contractual obligations to us which would result in a financial loss that could impact our reported earnings. In order to mitigate this risk, we complete credit approval procedures for new and existing customers and obtain credit insurance where it is financially viable to do so given anticipated revenue volumes, in addition to monitoring our customers’ financial performance. We believe our procedures in place to mitigate customer credit risk and the respective allowance for doubtful accounts are adequate. ~~The~~Although the Company takes measures to reduce credit risk, these charges can have a material impact on our financial performance.

While we continue to communicate with our customers and monitor cash collections, market conditions, including as a result of the COVID-19 pandemic, may negatively impact our customers’ ability to pay. We do not currently foresee a material impact in the short term based on our customers’ payment patterns, however if a number of our customers reduce or temporarily cease payments to us, this would present a risk and any charges could have a material impact on our financial performance.

There is limited risk of financial loss of defaults on our outstanding forward currency contracts as the counterparty to the transactions had a Standard and Poor’s rating of A- or above as at June 28, 2020.

Liquidity Risk

There is a risk that we may not have sufficient cash available to satisfy our financial obligations as they come due. The financial liabilities we have recorded in the form of accounts payable, accrued liabilities and other current liabilities are primarily due within 90 days with the exception of the current portion of capital lease obligations which could exceed 90 days and our PNC Facility which utilizes a lock-box to pay down the obligation effectively daily. As at ~~September 29, 2019,~~June 28, 2020, the Company’s liquidity ~~was~~is comprised of ~~$0.6~~$0.3 million in cash on hand and ~~$21.4~~$30.9 million of funds available to borrow under the PNC Facility. We believe that cash flow from operations, together with cash on hand and our PNC Facility, which has a maximum credit limit of $65.0 million of which ~~$21.4~~$30.9 million of funds were available as at ~~September 29, 2019~~June 28, 2020 is sufficient to fund our financial obligations. However, availability under the PNC Facility is subject to certain conditions, including borrowing base conditions based on eligible inventory and accounts receivable, as determined by the ~~lender.~~lender in addition to being subject to certain debt covenants.

~~On July 3, 2019,~~Market conditions, including as a result of the ~~Company used~~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 ~~net proceeds from the Rights Offering~~short term based on our working capital needs, however, if a number of our customers reduce or temporarily cease payments to ~~repay the $12.0 million~~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 seek alternative methods of ~~borrowings outstanding under its Term Loan B Facility.~~

financing, which may only be available to use on unfavorable terms, if at all.

Fair Value Measurement

The carrying values of the Company’s cash, accounts receivable, accounts payable and accrued liabilities due within one-year approximate fair values due to the short-term maturity of these instruments. The Company’s financial instruments at June 28, 2020, are comprised of the following:

As at September, 2019

As at December 30, 2018

Carrying
Amount

Estimated
Fair Value

Carrying
Amount

Estimated
Fair Value

Level 1

Cash
$ 601 $ 601 $ 1,601 $ 1,601

Level 2

Revolving credit facility
34,840 34,840 25,020 25,020
Current and long term debt
35,404 39,375 57,407 62,000
Warrant liability
1,090 1,090 2,009 2,009

Level 3

Contingent consideration
— — 3,050 3,050

	As at June 28, 2020				As at December 29, 2019
	Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
Level 1
Cash	$	311	$	311	$	1,368	$	1,368
Level 2
Revolving credit facility		33,943		33,943		34,701		34,701
Current and long term debt		34,778		38,125		35,000		38,750
Warrant liability		1,612		1,612		1,730		1,730

Item 4 Controls and Procedures

Evaluation of Disclosure Controls and Procedures.

As of the end of the period covered by this quarterly report, the Company’s Chief Executive Officer (Principal Executive Officer) and Chief Financial Officer (Principal Accounting Officer) have conducted an evaluation of the Company’s disclosure controls and ~~procedures.~~procedures as defined in Rules 13a-15(e) and 15(d)-15(e) under the Exchange Act. Based on their evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures ~~are~~were not effective during and as at ~~September~~June 28, 2020 due to a material weakness in internal control over financial reporting that was disclosed in our Annual Report on Form 10-K for the fiscal year ended December 29, 2019 (the “2019 Form 10-K”). As previously described in Part II, Item 9A of our 2019 Form 10-K, we implemented a remediation plan to ~~ensure~~address the material weakness. The material weakness will not be considered remediated, however, until the applicable controls operate for a sufficient period of time and management has concluded, through testing, that ~~information required to~~these controls are operating effectively. We expect that the remediation of this material weakness will be ~~disclosed~~completed by the ~~Company in reports that it files or submits under the Securities Exchange Act~~end of 1934, as amended, is (i) recorded, processed, summarized and reported within the time periods specified in the applicable SEC rules and forms and (ii) accumulated and communicated to the Company’s management, including the Company’s Chief Executive Officer and the Company’s Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.2020.

Changes in Internal Control over Financial Reporting

~~There~~Except for the material weakness identified during the fiscal quarter ended December 29, 2019, as of June 28, 2020, there were no changes in the Company’s internal control over financial reporting that occurred during the fiscal quarter ended ~~September 29, 2019~~June 28, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Part II OTHER INFORMATION

Item 1 Legal Proceedings

None.

Item 1A Risk Factors

~~There~~The following additional risk factor should be read in conjunction with the risk factors previously disclosed in Part I, Item 1A, “Risk Factors,” of our Form 10-K for the fiscal year ended December 29, 2019 (“Annual Report”) and our other reports and registration statements filed with the SEC. The developments described in this additional risk factor have heightened, or in some cases manifested, certain of the risks disclosed in the risk factor section of our Annual Report, and such risk factors are further qualified by the information relating to the COVID-19 pandemic that is described in this Quarterly Report on Form 10-Q, including in the additional risk factor below. Except as described herein, there have been no ~~other~~ material changes ~~to the~~in our risk factors disclosed in our Annual Report.

The effect of COVID-19 on our operations and the ~~“Risk Factors” section~~operations of our customers, suppliers and logistics providers may have a material, adverse impact on our financial condition and results of operations.

Our global operations expose us to risk arising from the global COVID-19 pandemic, which may impact our employees, operations, supply chain and distribution system. Indirect results of the COVID-19 pandemic, including public and private sector policies intended to reduce the transmission of COVID-19, could affect our employees, reduce capacity utilization levels, require the closure of facilities, or interrupt our supply chain. Factory closures or reductions in capacity utilization levels could cause us to incur direct costs and lose revenue. Closures or reductions in the capacity utilization of our suppliers could reduce our ability to source materials and meet production requirements. The COVID-19 pandemic may also impact our customers and create unpredictable changes in demand for our manufacturing services. The duration and extent of these impacts, most of which are beyond our control, continue to evolve and remain uncertain. Due to these possible impacts of the COVID-19 pandemic and as generally described in this quarterly report, the Company’s ~~Annual Report on Form 10-K~~consolidated financial position, results of operations and cash flows for the ~~year ended December 30, 2018.~~first half of 2020 are not necessarily indicative of future performance.

Item 2 Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3 Defaults Upon Senior Securities

None.

Item 4 Mine Safety Disclosures

Not applicable.

Item 5 Other Information

None.

~~None~~

Item 6 Exhibits

EXHIBIT INDEX

~~EXHIBIT INDEX~~

10.1	Fourth Amendment ~~No. 2~~ to Amended and Restated Revolving Credit and Security Agreement, by and among SMTC Corporation, SMTC Manufacturing Corporation of California, SMTC Mex Holdings, Inc., HTM Holdings, Inc., MC Test Service, Inc., MC Assembly International LLC, MC Assembly LLC, the financial institutions party thereto and PNC Bank, National Association, as agent for the lenders, dated ~~August 8, 2019~~June 26, 2020 (1).

10.2	Amendment No. 35 to Financing Agreement, by and among SMTC Corporation, the borrowers party thereto, each other loan party thereto, the lenders party thereto, TCW Asset Management Company LLC, as administrative agent for the lenders, and TCW Asset Management Company LLC, as collateral agent for the lenders, dated ~~August 8, 2019~~June 26, 2020 (2).
~~10.3~~	Amendment No. 3 to Amended and Restated Revolving Credit and Security Agreement, by and among SMTC Corporation, SMTC Manufacturing Corporation of California, SMTC Mex Holdings, Inc., HTM Holdings, Inc., MC Test Service, Inc., MC Assembly International LLC, MC Assembly LLC, the financial institutions party thereto and PNC Bank, National Association, as agent for the lenders, dated September 27, 2019 (3).
~~10.4~~	Amendment No. 4 to Financing Agreement, by and among SMTC Corporation, the borrowers party thereto, each other loan party thereto, the lenders party thereto, TCW Asset Management Company LLC, as administrative agent for the lenders, and TCW Asset Management Company LLC, as collateral agent for the lenders, dated September 27, 2019 (4).
31.1*	Certification of Edward Smith pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated ~~November 12, 2019.~~August 6, 2020.

31.2*	Certification of Steve Waszak pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated ~~November 12, 2019.~~August 6, 2020.

32.1*	Certification of Edward Smith, pursuant to Section 1350, Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, dated ~~November 12, 2019.~~August 6, 2020.

32.2*	Certification of Steve Waszak, pursuant to Section 1350, Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, dated ~~November 12, 2019.~~August 6, 2020.

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*	Filed herewith

(1)	**Furnished herewith ~~(1)~~ Filed as Exhibit 10.1 to the registrant’s Current Report on Form 8-K filed on ~~August 12, 2019~~June 29, 2020 (File No. 000-31051) and incorporated by reference herein.

(2)

Filed as Exhibit 10.2 to the registrant’s Current Report on Form 8-K filed on ~~August 12, 2019 (File No. 000-31051) and incorporated by reference herein.~~

~~(3) Filed as Exhibit 10.1 to the registrant’s Current Report on Form 8-K filed on October 2, 2019 (File No. 000-31051) and incorporated by reference herein.~~

~~(4) Filed as Exhibit 10.1 to the registrant’s Current Report on Form 8-K filed on October 2, 2019~~June 29, 2020 (File No. 000-31051) and incorporated by reference herein.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, SMTC Corporation has duly caused this report to be signed on its behalf by the undersigned thereto duly authorized.

	SMTC CORPORATION

	By:	/s/ Edward Smith
	Name:	Edward Smith
	Title:	President and Chief Executive Officer

	By:	/s/ Steve Waszak
	Name:	Steve Waszak
	Title:	Chief Financial Officer (Principal Accounting Officer)
Date: ~~November 12, 2019~~ August 6, 2020

	Three months ended						Nine months ended
	September 29, 2019			September 30, 2018			September 29, 2019			September 30, 2018
Revenue (note 4)	$	88,682		$	53,677		$	282,267		$	135,276
Cost of sales (note 11)		79,776			48,440			255,740			121,906
Gross profit		8,906			5,237			26,527			13,370

Selling, general and administrative expenses		6,549			3,682			19,908			10,838
Change in fair value of warrant liability (note 5)		(858	)		—			(919	)		—
Change in fair value of contingent consideration (note 4)		—			—			(3,050	)		—
Loss on disposal of property, plant and equipment		—			3			—			3
Restructuring charges (note 12)		6,454			58			8,624			154
Operating income (loss)		(3,239	)		1,494			1,964			2,375
Interest expense (note 4)		2,679			485			8,349			1,195
Income (loss) before income tax expense		(5,918	)		1,009			(6,385	)		1,180
Income tax expense (recovery) (note 8):
Current		(103	)		290			592			596
Deferred		(81	)		(145	)		14			(191	)
		(184	)		145			606			405
Net income (loss) and comprehensive income (loss)	$	(5,734	)	$	864		$	(6,991	)	$	775

Earnings per share of common stock:
Basic	$	(0.20	)	$	0.04		$	(0.28	)	$	0.04
Diluted	$	(0.20	)	$	0.04		$	(0.28	)	$	0.04
Weighted average number of shares outstanding (note 9):
Basic		28,057,763			19,335,253			24,954,875			17,866,399
Diluted		28,057,763			19,986,756			24,954,875			18,517,902

	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
Treasury stock		21,264		—		(75	)		—			(75	)
Restricted stock units vested and stock options exercised		87,386		1		45			—			46

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

	September 29, 2019			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		(1,105	)		(178	)
Order backlog		(4,168	)		(673	)
Trade name		(1,163	)		(188	)
Non-compete agreements		(161	)		(26	)
		(6,597	)		(1,065	)
Intangible assets—net	$	14,403		$	19,935

		Three months ended		Nine months ended
Lease Cost	Classification	September 29, 2019 ($)		September 29, 2019 ($)
Operating lease costs
Fixed lease costs	Cost of sales		647		1,974


Finance lease costs
Depreciation of leased assets	Cost of sales		360		1,081
Interest on lease liabilities	Interest expense		192		640
Sublease income	Selling, general and administrative expenses		47		176

Maturity of lease liabilities as at September 29, 2019	Operating leases			Finance leases			Total
2019		635			559			1,194
2020		1,371			1,982			3,353
2021		930			1,665			2,595
2022		632			1,323			1,955
2023		606			1,261			1,867
Thereafter		872			7,660			8,532
Total lease payments		5,046			14,450			19,496
Less: Interest		(745	)		(4,029	)		(4,774	)
Present value of lease liabilities		4,301			10,421			14,722

	Operating leases			Finance leases
2019		2,575			2,417
2020		1,371			1,953
2021		930			1,633
2022		632			1,291
2023		606			1,229
Thereafter		872			7,637
Total minimum lease payments		6,986			16,160
Less interest		(1,047	)		(4,666	)
Present value of capital lease obligations		5,939			11,494

Other information	Three months ended September 29, 2019		Nine months ended September 29, 2019
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases		609		1,614
Operating cash flows from finance leases		N/A		N/A
Financing cash flows from finance leases		390		1,199
Leased assets obtained in exchange for new operating lease liabilities		—		—
Leased assets obtained in exchange for new finance lease liabilities		126		126

	Number of shares		$

Balance at December 30, 2018		23,189,381		458
New share issuance - rights offering and registered direct offering		4,642,030		46
New share issuance - vested stock awards		267,063		3
Treasury stock (1)		21,264		—
Balance as September 29, 2019		28,119,738		507

	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		(25,450	)		1.80
Outstanding at September 29, 2019		2,344,374			2.14		639		8.2
Exercisable at September 29, 2019		1,075,640			1.54		639		7.4

Three months ended September 29, 2019	Mexico		U.S.		China		Total
Market Sector:
Test and Measurement	$	19,188	$	8,287	$	—	$	27,475
Retail and Payment Systems		10,460		—		—		10,460
Telecom, Networking and Communications		3,986		1,393		4,192		9,571
Medical		7,861		2,637		40		10,538
Industrial, Power and Clean Technology		10,154		9,851		280		20,285
Semiconductor		5,129		—		—		5,129
Aerospace and Defense		—		5,224		—		5,224
Segment Revenue		56,778		27,392		4,512		88,682

	Three months ended
	September 29, 2019		September 30, 2018
*Dongguan facility closure:*
Involuntary employee termination benefits	$	997	$	-
Other exit costs		1,040
Allowance for doubtful accounts receivables (note 4a)		1,691		-
Provision for obsolete raw material inventories (note 4c)		1,550		-
Write down of property, plant and equipment (note 4d)		261		-
		5,539		-
Other involuntary employee termination benefits (U.S., Canada and Mexico)		915		58
		6,454		58

	Termination benefits and other exit costs
Balance as at December 31, 2018	$	-
Involuntary employee termination benefits		4,082
Other exit costs		1,040
Payments		(2,386	)
Amounts reversed unutilized		-
At September 29, 2019	$	2,736

	Three months ended September 29, 2019						Three months ended September 30, 2018						Change 2018 to 2019
	$			%			$			%			$			%
Revenue		88.7			100.0			53.7			100.0			35.0			65.2
Cost of sales		79.8			90.0			48.5			90.3			31.3			64.5
Gross profit		8.9			10.0			5.2			9.7			3.7			71.2
Selling, general and administrative expenses		6.6			7.4			3.7			6.9			2.9			75.7
Change in fair value of warrant liability		(0.9	)		(1.0	)		—			—			(0.9	)		—
Restructuring charges		6.4			7.2			—			—			6.4			—
Operating income		(3.2	)		(3.6	)		1.5			2.8			(4.7	)		(313.3	)
Interest expense		2.7			3.0			0.5			0.9			2.2			440.0
Income (loss) before income taxes		(5.9	)		(6.7	)		1.0			1.9			(6.9	)		(690.0	)
Income tax expense (recovery)
Current		(0.1	)		(0.1	)		0.3			0.6			(0.4	)		(133.3	)
Deferred		(0.1	)		(0.1	)		(0.2	)		(0.2	)		0.1			500.0
		(0.2	)		(0.2	)		0.1			0.2			(0.3	)		(300.0	)
Net income (loss)		(5.7	)		(6.4	)		0.9			1.7			(6.6	)		(733.3	)

Industry Sector	Three months ended September 29, 2019				Three months ended September 30, 2018				Change
	$		%		$		%		$			%
Test and Measurement		27.5		31.0		10.5		19.5		17.0			161.9
Retail and Payment Systems		10.5		11.8		10.8		20.1		(0.3	)		(2.8	)
Telecom, Networking and Communications		9.6		10.8		10.1		18.8		(0.5	)		(5.0	)
Medical		10.5		11.8		7.5		14.0		3.0			40.0
Industrial, Power and Clean Technology		20.3		22.9		7.1		13.3		13.2			186
Semiconductor		5.1		5.8		7.7		14.3		(2.6	)		(33.8	)
Aerospace and Defense		5.2		5.9		—		—		5.2			NA
Total		88.7		100.0		53.7		100.0		35.0			65.2

	Nine months ended September 29, 2019						Nine months ended September 30, 2018						Change 2018 to 2019
	$			%			$			%			$			%
Revenue		282.3			100.0			135.3			100.0			147.0			108.6
Cost of sales		255.7			90.6			121.9			90.1			133.8			109.8
Gross profit		26.6			9.4			13.4			9.9			13.2			98.5
Selling, general and administrative expenses	19.9				7.0			10.8			8.0			9.1			84.3
Change in fair value of warrant liability		(0.9	)		(0.3	)		—			—			(0.9	)
Change in fair value of contingent consideration		(3.0	)		(1.1	)		—			—			(3.0	)
Restructuring charges		8.6			3.0			0.2			0.1			8.4			4,200.0
Operating income		2.0			0.7			2.4			1.8			(0.4	)		(16.7	)
Interest expense		8.4			3.0			1.2			0.9			7.2			600.0
Income (loss) before income taxes		(6.4	)		(2.3	)		1.2			0.9			(7.6	)		(633.3	)
Income tax expense
Current		0.6			0.2			0.6			0.4			—			—
Deferred		—			—			(0.2	)		(0.1	)		(0.2	)		100.0
		0.6			0.2			0.4			0.3			0.2			50.0
Net (loss) income		(7.0	)		(2.5	)		0.8			0.6			(7.8	)		(975.0	)

Industry Sector	Nine months ended September 29, 2019				Nine months ended September 30, 2018				Change
	$		%		$		%		$			%
Test and Measurement		90.6		32.1		24.8		18.3		65.8			265.3
Retail and Payment Systems		35.5		12.6		27.2		20.1		8.3			30.5
Telecom, Networking and Communications		28.4		10.1		24.8		18.4		3.6			14.5
Medical		34.2		12.1		22.1		16.3		12.1			54.8
Industrial, Power and Clean Technology		58.4		20.7		15.6		11.5		42.8			274.4
Semiconductor		18.2		6.4		20.8		15.4		(2.6	)		(12.5	)
Aerospace and Defense		17.0		6.0		—		—		17.0			NA
Total		282.3		100.0		135.3		100.0		147.0			108.6

10% increase in both the CAD and PESO foreign exchange rates (million)		$	2.2
10% decrease in both the CAD and PESO foreign exchange rates (million)		$	(2.6	)

	As at September, 2019				As at December 30, 2018
	Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
Level 1
Cash	$	601	$	601	$	1,601	$	1,601


Level 2
Revolving credit facility		34,840		34,840		25,020		25,020
Current and long term debt		35,404		39,375		57,407		62,000
Warrant liability		1,090		1,090		2,009		2,009

Level 3
Contingent consideration		—		—		3,050		3,050