smtx20190630

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

_________________

FORM 10-Q

_________________

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

	For the quarterly period ended June 30, 2019

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

	FOR THE TRANSITION PERIOD FROM TO

COMMISSION FILE NUMBER 000-31051

_________________

SMTC CORPORATION

(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

_________________

DELAWARE

98-0197680

(STATE OR OTHER JURISDICTION OF

INCORPORATION OR ORGANIZATION)

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

7050 WOODBINE AVENUE

Suite 300

MARKHAM, ONTARIO, CANADA L3R 4G8

(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)

(905) 479-1810

(REGISTRANT’S TELEPHONE NUMBER, INCLUDING AREA CODE)

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

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, par value $0.01 per share	SMTX	NASDAQThe Nasdaq Global Market

_________________

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

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

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

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

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

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

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

SMTC CORPORATION

Table of Contents

PART I FINANCIAL INFORMATION		3

Item 1	Financial Statements	3

	Interim Consolidated Balance Sheets (unaudited)	3

	Interim Consolidated Statements of Operations and Comprehensive Loss (unaudited)	4

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

	Interim Consolidated Statements of Cash Flows (unaudited)	7

	Notes to Interim Consolidated Financial Statements (unaudited)	8

Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	27

Item 3	Quantitative and Qualitative Disclosures About Market Risk	37

Item 4	Controls and Procedures	39

PART II OTHER INFORMATION		39

Item 1A	Risk factors	39

Item 6	Exhibits	40

SMTC CORPORATION

Part I FINANCIAL INFORMATION

	June 30, 2019			December 30, 2018
Assets
Current assets:
Cash	$	634		$	1,601
Accounts receivable — net (note 4)		64,951			72,986
Unbilled contract assets (note 4)		27,619			20,405
Inventories (note 4)		46,149			53,203
Prepaid expenses and other assets		6,691			5,548
Derivative assets (note 11)		—			15
Income taxes receivable		158			160
Total current assets		146,202			153,918

Property, plant and equipment — net (note 4)		26,855			28,160
Operating lease right of use assets — net (notes 2 and 6)		4,445			—
Goodwill (note 4)		18,165			18,165
Intangible assets — net (note 4)		16,247			19,935
Deferred income taxes — net		285			380
Deferred financing costs — net		646			668
Total assets	$	212,845		$	221,226

Liabilities and Shareholders’ Equity
Current liabilities:
Revolving credit facility (note 5)	$	13,748		$	25,020
Accounts payable		66,639			76,893
Accrued liabilities (note 4)		12,174			13,040
Warrant liability (note 5)		1,948			2,009
Contingent consideration (note 4)		—			3,050
Income taxes payable		213			12
Current portion of long-term debt (note 5)		1,368			1,368
Current portion of operating lease obligations (notes 2 and 6)		1,891			—
Current portion of finance lease obligations (notes 2 and 6)		1,401			1,547
Total current liabilities		99,382			122,939

Long-term debt (note 5)		55,887			56,039
Operating lease obligations (notes 2 and 6)		3,019			—
Finance lease obligations (notes 2 and 6)		9,284			9,947
Total liabilities		167,572			188,925

Shareholders’ equity:
Capital stock (note 7)		506			458
Additional paid-in capital		292,829			278,648
Deficit		(248,062	)		(246,805	)
		45,273			32,301
Total liabilities and shareholders’ equity	$	212,845		$	221,226

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

	Six months ended
	June 30, 2019			July 1, 2018
Cash provided by (used in):
Operations:

Net loss	$	(1,257	)	$	(89	)

Items not involving cash:

Depreciation of property, plant & equipment		3,253			1,543
Amortization of intangible assets		3,688			—
Unrealized foreign exchange gain on unsettled forward exchange contracts		—			(230	)
Deferred income taxes (recovery)		95			(46	)
Amortization of deferred financing fees		545			21
Stock-based compensation		185			203
Change in fair value of warrant liability		(61	)		—
Change in fair value of contingent consideration		(3,050	)		—

Change in non-cash operating working capital:
Accounts receivable		8,035			(3,016	)
Unbilled contract assets		(7,214	)		(6,488	)
Inventories		7,054			(2,851	)
Prepaid expenses and other assets		(1,128	)		(1,437	)
Income taxes payable		203			(48	)
Accounts payable		(10,130	)		8,995
Accrued liabilities		(866	)		1,361
Net change in operating lease right of use asset and liability		465			—
		(183	)		(2,082	)
Financing:
Net repayments of revolving credit facility		(11,272	)		(209	)
Repayment of long-term debt		(625	)		(1,000	)
Advance of equipment facility		—			1,894
Deferred financing fees		(50	)		(48	)
Principal repayments of finance lease obligations		(809	)		(94	)
Proceeds from issuance of common stock through rights offerings		14,044			361
		1,288			904
Investing:
Purchase of property, plant and equipment		(2,072	)		(2,405	)
		(2,072	)		(2,405	)

Decrease in cash		(967	)		(3,583	)
Cash, beginning of period		1,601			5,536
Cash, end of the period	$	634		$	1,953

Supplemental Information
Property, plant and equipment acquired that was unpaid in cash and included in accounts payable and accruals		260			43

Property, plant and equipment acquired through capital lease		—			533

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

2.	Impact of adoption of ASC 842

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

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

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

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

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

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

Recent Accounting Pronouncements Adopted

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

Recent Accounting Pronouncements Not Yet Adopted

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

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

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

4.	Interim Consolidated financial statement details

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

Consolidated Balance Sheets

Accounts receivable – net:

	June 30, 2019			December 30, 2018
Trade accounts receivable	$	64,566		$	72,937
Other receivables		957			447
Allowance for doubtful accounts		(572	)		(398	)
Total	$	64,951		$	72,986

Unbilled contract assets

	June 30, 2019			December 30, 2018
Opening	$	20,405		$	3,734
Contract assets additions		51,826			205,387
Contract assets invoiced		(44,612	)		(188,716	)
Ending	$	27,619		$	20,405

Inventories:

	June 30, 2019			December 30, 2018
Raw materials	$	45,206		$	52,102
Finished goods		—			418
Parts and other		1,106			896
Provision for obsolescence		(163	)		(213	)
Total	$	46,149		$	53,203

4.	Interim Consolidated financial statement details cont’d

Property, plant and equipment – net:

	June 30, 2019			December 30, 2018
Cost:
Land	$	1,648		$	1,648
Buildings (b)		18,985			18,985
Machinery and equipment (a)		41,696			40,083
Office furniture and equipment (c)		865			845
Computer hardware and software (d)		4,072			3,945
Leasehold improvements		4,050			3,863
		71,316			69,368

Less accumulated depreciation:
Land		—			—
Buildings (b)		(9,813	)		(9,190	)
Machinery and equipment (a)		(29,210	)		(27,093	)
Office furniture and equipment (c)		(509	)		(457	)
Computer hardware and software (d)		(3,268	)		(3,053	)
Leasehold improvements		(1,661	)		(1,415	)
		(44,461	)		(41,208	)
Property, plant and equipment—net	$	26,855		$	28,160

(a)

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


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

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

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

4.	Interim Consolidated financial statement details cont’d

Intangible assets:

	June 30, 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		(796	)		(178	)
Order backlog		(3,003	)		(673	)
Trade name		(838	)		(188	)
Non-compete agreements		(116	)		(26	)
		(4,753	)		(1,065	)
Intangible assets—net	$	16,247		$	19,935

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

Goodwill:

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

Accrued liabilities:

	June 30, 2019		December 30, 2018
Payroll	$	5,330	$	5,637
Customer related		2,281		2,237
Vendor related		1,368		2,048
Professional services		765		702
Restructuring		857		—
Rebates		—		236
Interest		203		381
Rent		—		428
Other		1,370		1,371
Total	$	12,174	$	13,040

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

Contingent Consideration:

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

Consolidated Statements of Operations and Comprehensive Loss

Interest expense:

	Three months ended				Six months ended
	June 30, 2019		July 1, 2018		June 30, 2019		July 1, 2018
Long-term debt	$	1,709	$	105	$	3,461	$	214
Revolving credit facility		597		225		1,216		400
Equipment facility		—		14		—		14
Amortization of deferred financing fees		38		12		72		21
Amortization of debt issuance costs		236		—		473		—
Obligations under capital leases		220		47		448		61
Interest expense	$	2,800	$	403	$	5,670	$	710

Debt

(a) Revolving credit and long-term debt facilities

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

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

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

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

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

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

(b) Covenants

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

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

(c) Warrant liability

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

6.	Leases

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

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

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

Leases	Classification	June 30, 2019 ($)
Assets
Operating lease assets	Operating lease right-of-use-asset		4,445
Finance lease assets (a)	Property, plant and equipment		10,356
Total leased assets			14,801
Liabilities
Current
Operating leases	Current portion of operating lease obligations		1,891
Finance leases	Current portion of finance lease obligations		1,401
Noncurrent
Operating leases	Operating lease obligations		3,019
Finance leases	Finance lease obligations		9,284
Total lease liabilities			15,595

(a)

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

		Three months ended		Six months ended
Lease Cost	Classification	June 30, 2019 ($)		June 30, 2019 ($)
Operating lease costs
Fixed lease costs	Cost of sales		780		1,327


Finance lease costs
Depreciation of leased assets	Cost of sales		360		721
Interest on lease liabilities	Interest expense		220		448
Sublease income	Selling, general and administrative expenses		51		129

Maturity of lease liabilities as at June 30, 2019	Operating leases			Finance leases			Total
2019		1,377			1,160			2,494
2020		1,328			1,953			3,324
2021		930			1,633			2,563
2022		632			1,291			1,923
2023		606			1,229			1,835
Thereafter		872			7,637			8,509
Total lease payments		5,745			14,903			20,648
Less: Interest		(835	)		(4,218	)		(5,053	)
Present value of lease liabilities		4,910			10,685			15,595

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

	Operating leases			Finance leases
2019		2,590			2,417
2020		1,328			1,953
2021		930			1,633
2022		632			1,291
2023		606			1,229
Thereafter		872			7,637
Total minimum lease payments		6,958			16,160
Less interest		(1,043	)		(4,666	)
Present value of capital lease obligations		5,915			11,494

Lease term and discount rate	June 30, 2019
Weighted average remaining term (years)
Operating leases		3.5
Finance leases		8.6
Weighted average discount rate
Operating leases		8.0	%
Finance leases		7.8	%

Other information	Three months ended June 30, 2019		Six months ended June 30, 2019
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases		369		1,005
Operating cash flows from finance leases		N/A		N/A
Financing cash flows from finance leases		392		809
Leased assets obtained in exchange for new operating lease liabilities		—		—
Leased assets obtained in exchange for new finance lease liabilities		—		—

7.	Capital stock

Common stock

Issued and outstanding:

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

	Number of shares		$

Balance at December 30, 2018		23,189,381		458
New share issuance - rights and direct offerings		4,642,030		46
New share issuance - vested stock awards		179,677		2
Balance as June 30, 2019		28,011,088		506

Stock Options

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

	Number of options		Weighted average exercise price		Aggregate intrinsic value		Weighted average remaining contractual term (years)
Outstanding at December 30, 2018		1,719,824	$	1.55		1,998		8.6

Options granted		650,000		3.67
Options exercised		—		—
Options forfeited		—		—
Outstanding at June 30, 2019		2,369,824		2.13		2,608		8.4
Exercisable at June 30, 2019		1,101,090		1.54		2,552		7.6

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

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

7.	Capital stock cont’d

Restricted Stock Units

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

	Outstanding RSU			Weighted average stock price		Weighted average remaining contractual term (years)
Outstanding balance at December 30, 2018		357,377		$	0.96		1.21
RSU granted		37,500			3.67		—
RSU vested and issued in common shares		(179,677	)		0.40		—
RSU forfeited		—			—		—
Outstanding balance at June 30, 2019		215,200			1.90		1.61

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

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

Rights Offering and Registered Direct Offering

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

10.	Segmented information

General description

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

	Three months ended						Six months ended
	June 30, 2019			July 1, 2018			June 30, 2019			July 1, 2018
Revenues
Mexico	$	59,336		$	35,581		$	125,096		$	64,654
China		5,793			5,786			14,449			11,019
U.S.		29,211			5,331			59,022			10,586
Total	$	94,340		$	46,698		$	198,567		$	86,259

Intersegment revenue
Mexico	$	(594	)	$	(618	)	$	(743	)	$	(738	)
China		(2,681	)		(1,552	)		(4,107	)		(3,779	)
U.S.		(129	)		(49	)		(132	)		(143	)
Total	$	(3,404	)	$	(2,219	)	$	(4,982	)	$	(4,660	)

Net external revenue
Mexico	$	58,742		$	34,963		$	124,353		$	63,916
China		3,112			4,234			10,342			7,240
U.S.		29,082			5,282			58,890			10,443
Total segment revenue (which also equals consolidated revenue)	$	90,936		$	44,479		$	193,585		$	81,599

Site Contribution
Mexico	$	5,835		$	3,209		$	10,641		$	5,715
China		844			314			1,699			442
U.S.		1,764			(62	)		3,187			(39	)
Total	$	8,443		$	3,461		$	15,527		$	6,118

Corporate allocations		6,046			2,736			8,154			5,371
Unrealized foreign exchange (gain) loss on unsettled forward exchange contracts		—			89			—			(230	)
Interest		2,800			403			5,670			710
Restructuring charges		1,546			96			2,170			96
Earnings (loss) before income taxes	$	(1,949	)	$	137		$	(467	)	$	171

Three months ended June 30, 2019	Mexico		U.S.		China		Total
Market Sector:
Test and Measurement	$	19,949	$	9,705	$	865	$	30,519
Retail and Payment Systems		12,149		—		—		12,149
Telecom, Networking and Communications		3,503		2,314		2,200		8,017
Medical		8,093		3,104		47		11,244
Industrial, Power and Clean Technology		9,299		9,122		—		18,421
Semiconductor		5,749		16		—		5,765
Aerospace and Defense		—		4,821		—		4,821
Segment Revenue		58,742		29,082		3,112		90,936

Three months ended July 1, 2018	Mexico		U.S.		China		Total
Market Sector:
Test and Measurement	$	4,750	$	3,548	$	—	$	8,298
Retail and Payment Systems		9,450		—		—		9,450
Telecom, Networking and Communications		2,449		1,393		3,836		7,678
Medical		6,650		36		49		6,735
Industrial, Power and Clean Technology		4,154		305		349		4,808
Semiconductor		7,510		—		—		7,510
Segment Revenue		34,963		5,282		4,234		44,479

Six months ended June 30, 2019	Mexico		U.S.		China		Total
Market Sector:
Test and Measurement	$	39,865	$	20,765	$	2,450	$	63,080
Retail and Payment Systems		25,078		—		—		25,078
Telecom, Networking and Communications		7,507		4,391		6,884		18,782
Medical		16,501		6,756		440		23,697
Industrial, Power and Clean Technology		22,348		15,159		568		38,075
Semiconductor		13,054		16		—		13,070
Aerospace and Defense		—		11,803		—		11,803
Segment Revenue		124,353		58,890		10,342		193,585

Six months ended July 1, 2018	Mexico		U.S.		China		Total
Market Sector:
Test and Measurement	$	7,450	$	6,478	$	—	$	13,928
Retail and Payment Systems		16,650		—		—		16,650
Telecom, Networking and Communications		5,350		2,977		6,422		14,749
Medical		14,339		283		49		14,671
Industrial, Power and Clean Technology		7,017		705		769		8,491
Semiconductor		13,110		—		—		13,110
Segment Revenue		63,916		10,443		7,384		81,599

10.	Segmented information cont’d

Additions to property, plant and equipment

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

	Three months ended				Six months ended
	June 30, 2019		July 1, 2018		June 30, 2019		July 1, 2018
Mexico	$	965	$	2,288	$	1,353	$	2,376
China		23		8		54		8
U.S.		256		552		517		558
Segment total		1,244		2,848		1,924		2,942
Corporate and other		24		107		24		110
Total	$	1,268	$	2,955	$	1,948	$	3,052

Property, plant and equipment ^(a)

	June 30, 2019		December 30, 2018
Mexico	$	11,550	$	11,851
China		872		1,153
U.S		14,308		15,013
Segment total		26,730		28,017
Corporate and other		125		143
Segment assets	$	26,855	$	28,160

^(a)

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

Geographic revenue

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

	Three months ended				Six months ended
	June 30, 2019		July 1, 2018		June 30, 2019		July 1, 2018
U.S.	$	82,593	$	34,699	$	176,934	$	64,829
Canada		4,860		7,857		9,770		13,018
China		3,483		1,923		6,881		3,752
Total	$	90,936	$	44,479	$	193,585	$	81,599

10.	Segmented information cont’d

Significant customers and concentration of credit risk

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

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

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

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

13.	Subsequent events

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

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

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

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

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

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

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

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

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

Quarter ended June 30, 2019 compared with the quarter ended July 1, 2018:

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

Revenue increased $46.4 million to $90.9 million for the second quarter of 2019 from $44.5 million in the same period of 2018. With the acquisition of MC Assembly Holdings, Inc. (“MCA”), we recognized additional revenue of $40.2 million during the second quarter of 2019 compared to the same period during 2018. Net volume increases with customers serviced in the U.S. and Mexico in the test and measurement sector, represented an increase in revenue of $0.7 million with an additional $19.4 million represented from the MCA acquisition. One long-standing retail and payment systems customer serviced in Mexico represented an increase in revenue of $2.4 million. An increase of $2.0 million in the telecom, networking and communications sector was represented from the MCA acquisition, offset by a decrease in revenue of $1.2 million from 2 long standing customers serviced in Asia. Two customers serviced in Mexico in the semiconductor sector had decreased volumes resulting in $1.8 million of reduced revenue. In the industrial, power and clean technology sector, one customer serviced in the U.S. had increased volumes representing an increase of $3.6 million in revenue with an additional $9.7 million represented from the MCA acquisition. Also, revenue in the medical and aerospace and defense sectors increased as a result of the MCA acquisition, totaling $4.7 million and $4.8 million, respectively.

We recorded approximately $2.2 million and $0.5 million of revenue from sales of raw materials inventory to customers during the second quarter of 2019 and the second quarter of 2018, which generally carries limited margin. 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 55.9% of revenue during the second quarter of 2019, compared with 78.4% in the second quarter of 2018. Revenue from the largest customer during the second quarter of 2019 was $12.3 million representing 13.5% of total revenue. This compares with revenue from the three largest customers during the second quarter of 2018 of $6.4 million, $4.6 million, and $4.5 million representing 14.4%, 10.4%and 10.0% respectively of total revenue. No other customers represented more than 10% of revenue in either period.

During the second quarter of 2019, 64.6% of our revenue was attributable to production from our operations in Mexico, 32.0% of our revenue was attributable to production from our operations in the U.S. and 3.4% of our revenue was attributable to production from our operations in China. During the second quarter of 2018, 78.6% of our revenue was attributable to production from our operations in Mexico, 11.9% of our revenue was attributable to production from our operations in the U.S. and 9.5% of our revenue was attributable to production from our operations in China.

Gross profit for the second quarter of 2019 increased by $4.7 million to $9.0 million or 9.9% of revenue compared with $4.3 million or 9.7% 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 $10.8 million or 11.9% of revenue for the second quarter of 2019 compared with $4.3 million or 9.8% of revenue for the second quarter of 2018. This was due primarily to the $46.4 million increase in revenue quarter over quarter due to acquisition of MC Assembly and additional gross margin associated with contract assets of $0.6 due to higher finished goods and work in process inventory when compared to the same period in the prior year.

Adjusted gross margin, 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 adjusted gross margin as management considers gross margins 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 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:

EBITDA and Adjusted EBITDA, non-GAAP financial measures, are defined as earnings before interest, 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. Management presents EBITDA and Adjusted EBITDA, as it is utilized by management to monitor performance against budget as well as compliance with covenants governing our Credit Facilities (as defined below). 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 loss, the closest GAAP measure, to EBITDA and Adjusted EBITDA.

Adjusted EBITDA for three months ended June 30, 2019 increased by $4.5 million to $6.1 million compared with $1.6 million for the same period in 2018 due in large part to the acquisition of MC Assembly, which represented an increase in adjusted EBITDA of $3.9 million compared to the same period in the prior year, in addition to incremental gross profit associated with contract assets of $0.6 due to higher finished goods and work in process inventory when compared to the same period in the prior year.

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.

Selling, general and administrative expenses increased to $6.7 million in the second quarter of 2019 from $3.7 million in the same period in 2018, $2.2 million of selling general and administrative expenses relates to the MC assembly acquisition which were not reflected in the same period in the prior year. However, selling, general and administrative expenses decreased to 7.4% of revenue in the second quarter of 2019 down from 8.1% of revenue in the same period in 2018 due to the increase in revenue.

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.

Interest expense increased to $2.8 million in the second quarter of 2019 compared to $0.4 million in the same period in 2018. The increase was primarily the result of a higher average debt balance in the second quarter of 2019 and higher interest rates compared to the same period in 2018, specifically with $61.3 million of debt outstanding on the TCW Facilities related to financing the MCA acquisition. The weighted average interest rates with respect to the debt on our

Credit Facilities was 9.8%. The weighted average interest rates with respect to the debt on our predecessor PNC Facility (as defined below) was 5.7% for 2018.

The Company recorded current income tax expense of $0.4 million and $0.2 million, respectively, for each of the second quarters 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 $0.1 million and benefit of $0 for each of the second quarters of 2019 and 2018, in connection with temporary differences related to the Mexican operations.

Six months ended June 30, 2019 compared with the six months ended July 1, 2018:

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

Revenue increased $112.0 million to $193.6 million for the first half of 2019 from $81.6 million in the first half of 2018. With the acquisition of MCA, we reported additional revenue of $83.7 million during the first half of 2019 compared to July 1, 2018. Volume increases with two customers serviced in the U.S., along with one new customer serviced in China, partially offset by volume decreases with one customer serviced in Mexico in the test and measurement sector, represented an increase in revenue of $7.0 million with an additional $39.3 million represented from the MCA acquisition. Three long-standing retail and payment systems customers serviced in Mexico represented an increase in revenue of $8.1 million. An increase of $4.3 million in the telecom, networking and communications sector was due from the MCA acquisition. In the industrial, power and clean technology sector one customer serviced in Mexico and one customer serviced in the U.S. had increased volumes representing an increase of $9.6 million in revenue with additional $19.7 million represented from the MCA acquisition. Also, revenue increased as a result of the MCA acquisition in the medical, and aerospace and defense sectors totaling $9.0 million and $11.8 million respectively.

We recorded approximately $4.4 million and $1.3 million of revenue from sales of raw materials inventory to customers during the first quarter of 2019 and the first quarter of 2018, which generally carries limited margin. 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 54.9% of revenue during the first half of 2019, compared with 78.7% in the first quarter of 2018. Revenue from the largest customer during the first half of 2019 was $25.8 million representing 13.3% of total revenue. This compares with revenue from the three largest customers during the first half of 2018 of $11.4 million, $8.5 million, and $8.3 million representing 13.9%, 10.4%, and 10.1% respectively of total revenue. No other customers represented more than 10% of revenue in either period.

During the first half of 2019, 64.3% 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. During the first half of 2018, 78.3% of our revenue was attributable to production from our operations in Mexico, 12.8% of our revenue was attributable to production from our operations in the U.S. and 8.9% of our revenue was attributable to production from our operations in China.

Gross profit for the first half of 2019 increased by $9.5 million to $17.6 million or 9.1% of revenue compared with $8.1 million or 10.0% 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 $21.3 million or 11.0% of revenue for the first half of 2019 compared with $7.9 million or 9.7% of revenue for the first half of 2018. This was due primarily to the $111.9 million increase in revenue, of which $83.7 was due to acquisition of MC Assembly. The decrease in gross profit percentage was due in part to the amortization of intangible assets of $3.7 million included in cost of sales that was not included in the same period in the prior year.

Below is the reconciliation from the financial statement presentation of gross profit to the non-GAAP measure of adjusted gross profit:

EBITDA and Adjusted EBITDA, non-GAAP financial measures, are defined as earnings before interest, 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. Management presents EBITDA and Adjusted EBITDA, as it is utilized by management to monitor performance against budget as well as compliance with covenants governing our Credit Facilities. 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), the closest GAAP measure, to EBITDA and Adjusted EBITDA.

Adjusted EBITDA for six months ended June 30, 2019 increased by $9.1 million to $11.6 million compared with $2.5 million for the same period in 2018 due primarily to the acquisition of MC Assembly, which represented an increase in adjusted EBITDA of $7.1 million which was not included in the results in the same period in the prior year.

Selling, general and administrative expenses increased to $13.3 million in the first half of 2019 from $7.1 million in the same period in 2018, $4.9 million of selling general and administrative expenses relates to the MC assembly acquisition which were not reflected in the same period in the prior year. However, selling, general and administrative expenses decreased to 6.9% of revenue in the first half of 2019 down from 8.8% of revenue in the same period in 2018 due to increase in revenue and certain cost reductions due to restructuring that occurred in the first half of 2019.

During the first quarter of 2019, the fair value of the contingent consideration liability was determined to be $Nil resulting in a gain of $3.1 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 MC Assembly. 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 March 31, 2019. Based on actual earnings, the contingent consideration liability was considered resolved and no longer payable as at March 31, 2019.

During the first half of 2019, restructuring charges of $2.2 million were incurred related to the reduction of 28 FTEs in U.S. and 4FTEs in Canada and 459 FTEs and contract employees in Mexico.

Interest expense increased to $5.7 million in the first half of 2019 compared to $0.7 million in the same period in 2018. The increase was primarily the result of a higher average debt balance in the first half of 2019 and higher interest rates compared to the same period in 2018, specifically with $61.3 million issuance of debt on the TCW Facilities on November 8, 2018 in order to finance the MCA acquisition. The weighted average interest rates with respect to the debt on our Credit Facilities was 9.6%. The weighted average interest rates with respect to the debt on our predecessor PNC Facility was 5.6% for 2018.

The Company recorded current income tax expense of $0.7 million and $0.3 million, respectively, for each of first six 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 $0.1 million and benefit of $NIL million for each of first six months of 2019 and 2018, in connection with temporary differences related to the Mexican operations.

As at June 30, 2019, the Company’s liquidity is comprised of $0.6 million in cash on hand and $27.1 million of funds available to borrow under the PNC Facility and TCW Facility (each as defined below), which mature on November 8, 2023. The Company funds its operations by regularly utilizing its PNC Facility (refer to Note 5). 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.

Net cash used in operating activities during the first six months ended June 30, 2019 was $0.2 million. Cash of $10.1 million was used from accounts payable due to timing of payments and an increased inventory purchase compared to the same period in the prior year. Accounts payable days outstanding increased to 72 days for the first six months of 2019 compared to 71 days for the first six months of 2018. Working capital changes related to $7.1 million decrease in inventory offset by the $7.2 million of increase in unbilled contract assets. Inventory turnover, on an annualized basis was 4.5 times for the first six months of 2019 compared to 4.9 times for the first six months of 2018. Accounts receivable days outstanding decreased to 61 days from 62 days for the first six months of 2019 compared to the first six months of 2018 primarily the result of improved cash cycle days compared to the same period in the prior year in addition to higher collections in the final month of the quarter.

Net cash generated from financing activities during the first six months of 2019 and 2018 was $1.3 million and $0.9 million, respectively. During the six months ended June 30, 2019, the Company generated net cash by $14.0 million from issuance of common stock through the rights offering. The Company made net repayments to the revolving debt of $11.3 million compared to net repayments of $0.2 million for the same period in 2018. The Company also paid down its long-term debt in the amount of $0.6 million and $1.0 million, respectively in the six months ended June 30, 2019 and July 1, 2018. Principal repayments on capital lease obligations were $0.8 million in the six months ended June 30, 2019 compared to $0.1 million in the same period in prior year.

Net cash used in investing activities during the six months ended June 30, 2019 was $2.1 million compared to $2.4 million in the same period of 2018, related to capital asset purchases.

The Company also borrows money under a Financing Agreement (the “Financing Agreement”), by and among us and certain of our subsidiaries, the lenders party to the Financing Agreement from time to time (collectively, the “Lenders”), and TCW Asset Management Company LLC, as collateral agent for the Lenders ( “TCW”), which governs a term loan A facility (“Term A Loan Facility”) and a term loan B facility (“Term Loan B Facility” and, together with the Term Loan A Facility, the “TCW Facilities” and, together with the PNC Facility, the “Credit Facilities”). The TCW Facilities mature on November 8, 2023 (the “Maturity Date”). The Term Loan A Facility bears interest, as selected by the Company at the time of borrowing, at the base rate plus an applicable margin of 5.00%. The Term Loan B Facility bears interest, as selected by the Company at the time of borrowing, at the base rate plus an applicable margin of 8.50% or LIBOR plus an applicable margin of 10.50%. The base rate should approximate U.S. prime rate. Payments made under the Term Loan A Facility at any time prior to the Maturity Date (other than scheduled amortization payments and mandatory prepayments) are subject to an applicable premium equal to the amount of such payment multiplied by (i) 3.00% in the event that such payment occurs before the first anniversary of the closing date, (ii) 2.00% in the event that such payment occurs after the first anniversary of the closing date and on or before the second anniversary of the closing date and (iii) 1.00% in the event that such payment occurs after the second anniversary of the closing date and on or before the third anniversary of the closing date. No such applicable premium is payable for any payment of loans made under the Term Loan A Facility occurring after the third anniversary of the Closing Date. 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 facilities and are jointly and severally guaranteed by other subsidiaries of the Company. Repayment under the PNC Facility and TCW Facilities are collateralized by the assets of the Company and each of its subsidiaries. The Credit Facilities contain certain financial and non-financial covenants. The financial covenants under each Credit Facility require the Company to maintain a fixed charge coverage ratio, a total leverage ratio, and a senior leverage ratio quarterly during the term of the Credit Facilities. The Company is in compliance with the financial covenants included in the Credit Facilities as at June 30, 2019. Management projects compliance with the financial covenants included in the Credit Facilities.

We believe that 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 no assurance can be given in this regard, particularly with respect to amounts available from lenders. 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 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.

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 $9.1 million 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 $14.2 million, after deducting the offering expenses and fees payable the Company. The proceeds of the Offerings were used, in part, to repay the TCW Term Loan B Facility in full as at July 3, 2019.

The Company borrows money under the PNC Facility. The PNC Facility has a term ending on November 8, 2023. Advances made under the PNC Facility bear interest at the U.S. base rate plus an applicable margin ranging from 0.50% to 1.00%, or LIBOR plus an applicable margin ranging from 1.50% to 2.00%. The base commercial lending rate should approximate U.S. prime rate. The base commercial lending rate should approximate U.S. prime rate.

The Company also borrows money under the Financing Agreement the TCW Facilities mature on November 8, 2023. The Term Loan A Facility bears interest, as selected by the Company at the time of borrowing, at the base rate plus an applicable margin of 5.00%. The Term Loan B Facility bears interest, as selected by the Company at the time of borrowing, at the base rate plus an applicable margin 8.50% or LIBOR plus an applicable margin of 10.50%. The base rate should approximate U.S. prime rate. In July 2019, the Company paid the Term Loan B Facility in full.

The impact of a 10% change in interest rates would have a material impact on our reported earnings.

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 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. 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:

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 Company takes measures to reduce credit risk, these charges can 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 30, 2019.

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 June 30, 2019, the Company’s liquidity was comprised of $0.6 million in cash on hand and $27.1 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 $45.0 million of which $27.1 million of funds were available as at June 30, 2019 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.

Subsequent to June 30, 2019, the Company used the net proceeds from a rights offering to repay the $12.0 million of borrowings outstanding under its Term Loan B facility.

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 30, 2019, are comprised of the following:

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. 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 effective during and as at June 30, 2019 to ensure that information required to be disclosed by the Company in reports that it files or submits under the Securities Exchange Act of 1934, as amended, is (i) recorded, processed, summarized and reported within the time periods specified in the applicable Securities and Exchange Commission 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.

There were no changes in the Company’s internal control over financial reporting that occurred during the quarter ended June 30, 2019 that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

There are no other material changes to the risk factors disclosed in the “Risk Factors” section of the Company’s Annual Report on Form 10-K for the year ended December 30, 2018.

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.

	Three months ended						Six months ended
	June 30, 2019			July 1, 2018			June 30, 2019			July 1, 2018
Revenue (note 4)	$	90,936		$	44,479		$	193,585		$	81,599
Cost of sales (note 11)		81,939			40,196			175,964			73,466
Gross profit		8,997			4,283			17,621			8,133
Selling, general and administrative expenses		6,600			3,647			13,298			7,156
Change in fair value of contingent consideration (note 4)		—			—			(3,050	)		—

Restructuring charges (note 4)		1,546			96			2,170			96
Operating income		851			540			5,203			881
Interest expense (note 4)		2,800			403			5,670			710
(Loss) income before income taxes		(1,949	)		137			(467	)		171
Income tax expense (recovery) (note 8):
Current		416			196			695			306
Deferred		103			38			95			(46	)
		519			234			790			260
Net loss and comprehensive loss	$	(2,468	)	$	(97	)	$	(1,257	)	$	(89	)

Net loss per share of common stock:
Basic	$	(0.10	)	$	(0.01	)	$	(0.05	)	$	(0.01	)
Diluted	$	(0.10	)	$	(0.01	)	$	(0.05	)	$	(0.01	)
Weighted average number of shares outstanding (note 9):
Basic		23,557,944			17,222,439			23,403,431			17,131,971
Diluted		23,557,944			17,222,439			23,403,431			17,131,971

	Three months ended				Six months ended
	June 30, 2019		July 1, 2018		June 30, 2019		July 1, 2018
Basic weighted average shares outstanding		23,557,944		17,222,439		23,403,431		17,131,971
Dilutive stock awards ^{(1) (a) (b)}		—		—		—		—
Diluted weighted average shares outstanding		23,557,944		17,222,439		23,403,431		17,131,971

Industry Sector	Three months ended June 30, 2019				Three months ended July 1, 2018				Change
	$		%		$		%		$			%
Test and Measurement		30.6		33.7		8.3		18.6		22.3			268.67
Retail and Payment Systems		12.1		13.3		9.5		21.3		2.6			27.37
Telecom, Networking and Communications		8.0		8.8		7.6		17.1		0.4			5.26
Medical		11.2		12.3		6.8		15.3		4.4			64.71
Industrial, Power and Clean Technology		18.4		20.2		4.8		10.8		13.6			283.33
Semiconductor		5.8		6.4		7.5		16.9		(1.7	)		(22.67	)
Aerospace and Defense		4.8		5.3		—		—		4.8			—
Total		90.9		100.0		44.5		100.0		46.4			104.27

	Three months ended June 30, 2019			Three months ended July 1, 2018
Gross profit	$	8,997		$	4,283
Add:
Unrealized foreign exchange gains on unsettled forward exchange contracts		—			89
Amortization of intangible assets		1,844			—
Adjusted gross profit	$	10,841		$	4,372
Adjusted gross profit percentage		11.9	%		9.8	%

Industry Sector	Six months ended June 30, 2019				Six months ended July 1, 2018				Change
	$		%		$		%		$		%
Test and Measurement		63.1		32.6		13.8		16.9		49.3		357.25
Retail and Payment Systems		25.0		12.9		16.8		20.5		8.2		48.81
Telecom, Networking and Communications		18.8		9.7		14.8		18.3		4.0		27.03
Medical		23.7		12.2		14.6		17.9		9.1		62.33
Industrial, Power and Clean Technology		38.1		19.7		8.5		10.3		29.6		348.24
Semiconductor		13.1		6.8		13.1		16.1		—		—
Aerospace and Defense		11.8		6.1		—		—		11.8		—
Total		193.6		100.0		81.6		100.0		112.0		137.25

	Common Shares		Capital stock		Additional paid-in capital		Deficit			Total Shareholders’ equity

Balance, March 31, 2019		23,350,558	$	460	$	278,734	$	(245,594	)	$	33,600

RSU vested and stock options exercised		18,500		—		—		—			—
Issuance of common shares from rights offering (note 6)		4,642,030		46		13,998		—			14,044
Stock-based compensation		—		—		97		—			97
Net loss		—		—		—		(2,468	)		(2,468	)
Balance, June 30, 2019		28,011,088	$	506	$	292,829	$	(248,062	)	$	45,273

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



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

	June 30, 2019		December 30, 2018
Average USD:CAD contract rate		N/A		N/A
Average USD:CAD mark-to-market rate		N/A		N/A
Average USD:PESO contract rate		N/A		20.43
Average USD:PESO mark-to-market rate		N/A		19.66

	Three months ended June 30, 2019						Three months ended July 1, 2018					Change 2018 to 2019
	$			%			$			%		$			%
Revenue		90.9			100.0			44.5			100.0		46.4			104.3
Cost of sales		81.9			90.1			40.2			90.3		41.7			103.7
Gross profit		9.0			9.9			4.3			9.7		4.7			109.3
Selling, general and administrative expenses		6.7			7.4			3.7			8.1		3.0			81.1
Restructuring		1.5			1.7			0.1			0.2		1.4			1,400.0
Operating income		0.8			0.9			0.5			1.4		0.3			60.0
Interest expense		2.8			3.1			0.4			1.0		2.4			600.0
Income (loss) before income taxes		(2.0	)		(2.2	)		0.1			0.4		(2.1	)		(2,100.0	)
Income tax expense (recovery)
Current		0.4			0.4			0.2			0.4		0.2			100.0
Deferred		0.1			0.1			—			—		0.1			100.0
		0.5			0.6			0.2			0.4		0.3			150.0
Net loss		(2.5	)		(2.8	)		(0.1	)		0.0		(2.4	)		(2,400.0	)

	Three months ended June 30, 2019			Three months ended July 1, 2018
Net loss	$	(2,468	)	$	(97	)
Add:


Amortization of intangible assets		1,844			—
Restructuring charges		1,546			96
Stock based compensation		97			77
Fair value adjustment of warrant liability		40			—
Merger and acquisition related expenses		73			—
Unrealized foreign exchange gain on unsettled forward exchange contracts		—			89
Adjusted Net Income	$	1,132		$	165

	Six months ended June 30, 2019						Six months ended July 1, 2018						Change 2018 to 2019
	$			%			$			%			$			%
Revenue		193.6			100.0			81.6			100.0			112.0			137.3
Cost of sales		176.0			90.9			73.5			90.0			102.5			139.5
Gross profit		17.6			9.1			8.1			10.0			9.5			117.3
Selling, general and administrative expenses		13.3			6.9			7.1			8.8			6.2			87.3
Change in fair value of contingent consideration		(3.1	)		(1.6	)		—			—			(3.1	)		100.0
Restructuring		2.2			1.1			0.1			0.1			2.1			2,100.0
Operating income		5.2			2.7			0.9			1.1			4.3			477.8
Interest expense		5.7			2.9			0.7			0.9			5.0			714.3
Income (loss) before income taxes		(0.5	)		(0.3	)		0.2			0.2			(0.7	)		(350.0	)
Income tax expense
Current		0.7			0.4			0.3			0.3			0.4			133.3
Deferred		0.1			0.1			—			—			0.1			100.0
		0.8			0.4			0.3			0.3			0.5			166.7
Net loss		(1.3	)		(0.7	)		(0.1	)		(0.1	)		(1.2	)		(1,200.0	)

	Six months ended June 30, 2019			Six months ended July 1, 2018
Gross profit	$	17,621		$	8,133
Add:
Unrealized foreign exchange gains on unsettled forward exchange contracts		—			(230	)
Amortization of intangible assets		3,688			—
Adjusted gross profit	$	21,309		$	7,903
Adjusted gross profit percentage		11.0	%		9.7	%

	Six months ended June 30, 2019			Six months ended July 1, 2018
Net loss	$	(1,257	)	$	(89	)
Add:


Amortization of intangible assets		3,688			—
Restructuring charges		2,170			96
Stock based compensation		185			203
Fair value adjustment of warrant liability		(61	)		—
Fair value adjustment to contingent consideration		(3,050	)		—
Merger and acquisition related expenses		164			—
Unrealized foreign exchange gain on unsettled forward exchange contracts		—			(230	)
Adjusted Net Income (Loss)	$	1,839		$	(20	)

10% increase in interest rate (million)		$	0.6
10% decrease in interest rate (million)		$	(0.6	)

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)		$	(2.7	)

	As at June 30, 2019				As at December 30, 2018
	Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
Level 1
Cash	$	634	$	634	$	1,601	$	1,601


Level 2
Revolving credit facility		13,748		13,748		25,020		25,020
Current and long term debt		57,255		61,375		57,407		62,000
Warrant liability		1,948		1,948		2,009		2,009

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

3.1	Certificate of Amendment to Certificate of Incorporation (1)
10.1	First Amendment to Amended and Restated Revolving Credit and Security Agreement with PNC, dated March 29, 2019. (2)
10.2	Amendment No. 1 and Waiver to Financing Agreement with TCW, dated March 29, 2019 (3).
10.3+	SMTC Corporation 2019 Incentive Plan (4).
10.4	Common Stock Purchase Agreement, dated as of May 23, 2019, by the purchasers listed on Schedule A thereto and SMTC Corporation (5).
10.5	Backstop Agreement, dated as of May 29, 2019, by and between SMTC Corporation and Gregory Weaver (6).
10.6	Backstop Agreement, dated as of June 10, 2019, by and between SMTC Corporation and Casey Capital, LLC (7).
10.7	Amendment to Backstop Agreement, dated as of June 11, 2019, by and between SMTC Corporation and Gregory Weaver (8).
10.8	Backstop Agreement, dated as of June 13, 2019, by and between SMTC Corporation and DNY US Invest Corp (9).
31.1*	Certification of Edward Smith pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated August 8, 2019.
31.2*	Certification of Steve Waszak pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated August 8, 2019.
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 August 8, 2019.
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 August 8, 2019.
101.INS*	XBRL Instance
101.SCH*	XBRL Taxonomy Extension Schema
101.CAL*	XBRL Taxonomy Extension Calculation
101.DEF*	XBRL Taxonomy Extension Definition
101.LAB*	XBRL Taxonomy Extension Labels
101.PRE*	XBRL Taxonomy Extension Presentation
+ Represents management contract or compensatory plan or agreement.

* Filed herewith

**Furnished herewith

(1)	Filed as Exhibit 3.1 to the registrant’s Current Report on Form 8-K filed on May 14, 2019 (File No. 000-31051) and incorporated by reference herein.
(2)	Filed as Exhibit 10.1 to the registrant’s Current Report on Form 8-K filed on April 4, 2019 (File No. 000-31051) and incorporated by reference herein.
(3)	Filed as Exhibit 10.2 to the registrant’s Current Report on Form 8-K filed on April 4, 2019 (File No. 000-31051) and incorporated by reference herein.
(4)	Filed as Appendix A to the Company’s Definitive Proxy Statement on Schedule 14A filed on March 27, 2019 (File No. 000-31051) and incorporated by reference herein.
(5)	Filed as Exhibit 10.1 to the registrant’s Current Report on Form 8-K filed on May 24, 2019 (File No. 000-31051) and incorporated by reference herein.
(6)	Filed as Exhibit 10.1 to the registrant’s Current Report on Form 8-K filed on June 4, 2019 (File No. 000-31051) and incorporated by reference herein.
(7)	Filed as Exhibit 10.1 to the registrant’s Current Report on Form 8-K filed on June 14, 2019 (File No. 000-31051) and incorporated by reference herein.
(8)	Filed as Exhibit 10.2 to the registrant’s Current Report on Form 8-K filed on June 14, 2019 (File No. 000-31051) and incorporated by reference herein.
(9)	Filed as Exhibit 10.3 to the registrant’s Current Report on Form 8-K filed on June 14, 2019 (File No. 000-31051) and incorporated by reference herein.

	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: August 8, 2019