The Company’s accounting principles are in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”). These consolidated financial statements are presented in United States (“U.S.”) dollars.  

 

 

The financial statements of entities which are controlled by the Company through voting equity interests, referred to as subsidiaries, are consolidated. The Company has interests in Variable Interest Entities in any of the years presented as all subsidiaries are wholly-owned. Inter-company accounts and transactions are eliminated upon consolidation.

 

 

The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the year. Significant estimates include, but are limited to, deferred tax asset valuation allowance, impairment of long-lived assets, including intangibles and operating lease right-of-use assets, impairment of goodwill, estimation of percentage completion on satisfying performance obligations under ASC Topic fair of value of assets and liabilities associated with business combinations, including contingent consideration and inventory valuation. These estimates and assumptions are based on management’s best estimates and judgment. Management evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors, including the current economic environment. Actual results differ from those estimates.

 

 

Revenue is derived primarily from the sale of electronics components that are built to customer specifications. Revenue from the sale of products is recognized as goods are manufactured over time. The Company has an enforceable right to payment for work completed to date and the goods do have an alternative use once the manufacturing process has commenced. The Company records an unbilled contract asset for finished goods associated with non-cancellable customer orders. Similarly, the Company records an unbilled contract asset for revenue related to its work-in-process (“WIP”) when the manufacturing process has commenced and there is a non-cancellable customer purchase order. The Company uses an input method of direct manufacturing inputs to measure progress towards satisfying its performance obligation associated with WIP inventory.

 

If assumptions change related to the inputs or outputs utilized to estimate the performance obligation associated with WIP inventory, this could have a material impact on the revenue and corresponding margin recognized.

 

In addition, the Company has contractual arrangements with the majority of its customers that provide for customers to purchase any unused inventory that the Company has purchased to fulfill that customer’s forecasted manufacturing demand. Revenue from the sale of excess inventory to the customer is recognized when performance obligation is complete to the customer which occurs when the inventory is shipped to the customer. The Company also derives revenue from engineering and design services. Service revenue is recognized as services are performed.

 

Sales taxes collected from customers and remitted to governmental authorities are presented on a net basis. 

 

 

The allowance for doubtful accounts reflects management’s best estimate of probable losses inherent in the accounts receivable balance. Management determines the allowance based on factors such as the length of time the receivables have been outstanding, customer and industry concentrations, credit insurance coverage, the current business environment and historical experience.

 

 

Inventories are valued, on a -in, -out basis, at the lower of cost and replacement cost for raw materials and at the lower of cost and net realizable value for finished goods that are recognized at a point in time.. The Company writes down estimated obsolete or excess inventory for the difference between the cost of inventory and estimated net realizable value based upon customer forecasts, shrinkage, the aging and future demand for the inventory, past experience with specific customers, and the ability to sell inventory back to customers or return to suppliers. If these assumptions change, additional write-downs be required. Parts and other inventory items relate to equipment servicing parts that are capitalized to inventory and expensed as utilized to service the equipment. Parts inventory is valued at lower of cost and net realizable value. 

 

Consignment inventory received from customers has value with the exception of labor and overhead charges on work in progress and finished goods consignment inventory.

 

 

The acquisition method of accounting is used to account for business combination. The consideration transferred in a business combination is measured at fair value at the date of acquisition. Acquisition-related transaction costs are recognized in the consolidated statements of loss and comprehensive loss as incurred. At the acquisition date, the identifiable assets acquired and the liabilities assumed are initially recognized at their fair value. Goodwill is measured as the excess of the sum of the consideration transferred and the fair value of the acquirer’s previously held equity interest in the acquire (if any) over the new of the acquisition-date amounts of the identifiable assets acquired and liabilities assumed. When the consideration transferred by the Company in a business combination includes assets or liabilities resulting from a contingent consideration arrangement, the contingent consideration is measured at its acquisition date fair values of the identifiable assets, liabilities and contingent consideration that qualify as measurement period adjustments are adjusted retrospectively, with corresponding adjustments against goodwill. Measurement period adjustments are adjustments that arise from additional information obtained during the measurement period (which cannot exceed year from the acquisition date) about facts and circumstances that existed at the acquisition date.

 

Other measurement period adjustments and continent consideration that is classified as a financial liability are remeasured at subsequent reporting dates, with the corresponding gain or loss recognized in the consolidated statement of loss and comprehensive loss.

 

 

Goodwill represents the excess of purchase price over the fair value of net identifiable assets acquired in a purchase business combination. Goodwill is subject to amortization and is tested for impairment annually or more frequently if events or circumstances indicate that the asset might be impaired. The Company assigns its goodwill to the reporting units (or groups of reporting units that have similar economic characteristics) that are expected to benefit from the synergies of the business combination and at least on an annual basis at the end of the quarter, performs a qualitative assessment of its reporting units goodwill and certain select quantitative calculations against its current long-range plan to determine whether it is more likely than (that is, a likelihood of more than percent) that the fair value of a reporting unit is less than its carrying amount. The Company assesses certain qualitative factors to determine whether the existence of events or circumstances leads to determination that it is more likely than that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, the Company determines it is more likely than that the fair value of a reporting unit is less than its carry amount, then performing the -step impairment test is unnecessary. When necessary, impairment of goodwill is tested at the reporting unit (or group of reporting units) level by comparing the reporting unit’s (or group of reporting units) carrying amount, including goodwill, to the fair value of the reporting unit (or group of reporting units). The fair value of the reporting unit (or group of reporting unit) is estimated using a discounted cash flow approach. If the carrying amount of the reporting unit (or group of reporting units) exceeds its fair value, then a step is performed to measure the amount of impairment loss, if any, by comparing the fair value of each identifiable asset and liability in the reporting unit (or group of reporting units) to the total fair value of the reporting unit (or group of reporting units). Any impairment loss is expensed in the consolidated statement of operations and is reversed if the fair value subsequently increases.

 

 

Intangible assets acquired in a business combination are recognized at fair value using generally accepted valuation methods appropriate for the type of intangible asset and reported separately from goodwill. Purchased intangible assets other than goodwill are amortized over their useful lives unless these lives are determined to be indefinite. Purchased intangible assets are carried at cost, less accumulated amortization. Amortization is computed over the estimated useful lives of the respective assets, generally to years. The Company periodically re-assesses the useful lives of its intangible assets when events or circumstances indicate that useful lives have significantly changed from the previous estimate. Definite-lived intangible assets consist primarily of customer relationships, order backlog, trade name and non-compete agreements. They are generally valued as the present value of estimated cash flows expected to be generated from the asset using a risk-adjusted discount rate. When determining the fair value of our intangible assets, estimates and assumptions about future expected revenue and remaining useful lives are used. Intangible assets are tested for impairment on an annual basis and during interim periods if indicators of impairment exist, and written down when impaired.

 

Amortization is generally calculated on a straight-line basis over the expected useful lives (in years) as follows:

 

Customer relationships		10
Order backlog		1.5
Trade name		1
Non-compete agreements		2

  

 

Plant and equipment are stated at cost less accumulated depreciation. Depreciation is generally calculated on a straight-line basis over the expected useful lives (in years) as follows:

 

Buildings	5	–	20
Machinery and equipment	7	–	15
Office furniture and equipment		7
Computer hardware and software		3

 

Land is recorded at cost and is depreciated. Leasehold improvements are amortized over the shorter of the lease term and estimated useful life of the underlying asset.

 

 

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 criteria defined in Accounting Standards Codification (“ASC”)

 

Commending 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 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. Prior to this accounting was only applied to finance leases.

 

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 A lease is short-term if, at the commencement date, it has a term of less than or equal to year. Lease expense related to short-term leases is recognized on a straight-line basis over the lease term. 

 

 

The Company accounts for income taxes using the asset and liability method. This approach recognizes the amount of taxes payable or refundable for the current year as well as deferred tax assets and liabilities for the future tax consequence of events recognized in the financial statements and tax returns. The effect of changes in tax rates is recognized in the year in which the rate change occurs.

 

In establishing the appropriate valuation allowances for deferred tax assets, the Company assesses its ability to realize its deferred tax assets based on available evidence, both positive and negative, to determine whether it is more likely than that the deferred tax assets or a portion thereof will be realized.

 

The Company follows the guidance under Income Taxes ASC with respect to accounting for uncertainty in income taxes recognized in the Company’s financial statements. This guidance prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return, and also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.

 

This guidance requires the Company to determine if it is more likely than that the tax position will be sustained based on the technical merits of the position and for those tax positions that meet the more likely than threshold, the Company would recognize the largest amount of tax benefit or obligation that is greater than percent likely of being realized when ultimately settled with the tax authorities.

 

 

Basic earnings per share is calculated using the weighted average number of common shares outstanding during the year. Diluted earnings per share is calculated using the weighted average number of common shares plus the dilutive potential common shares outstanding during the year. Anti-dilutive potential common shares are excluded. The treasury stock method is used to compute the potential dilutive effect of stock options and outstanding restricted stock units.

 

 

The functional currency of the parent company and all foreign operations is the U.S. dollar. Monetary assets and liabilities denominated in foreign currencies are translated into U.S. dollars at the year-end rates of exchange. Non-monetary assets and liabilities denominated in foreign currencies are translated at historical rates and revenue and expenses are translated at average exchange rates prevailing during the month of the transaction. Exchange gains or losses are reflected in the consolidated statements of operations and comprehensive loss.

 

 

The Company accounts for derivative financial instruments (forward foreign exchange contracts) in accordance with applicable guidance. In accordance with these standards, all derivative instruments are recorded on the balance sheet at their respective fair values. Changes in fair value of derivatives that are designated as hedges are recorded in the consolidated statement of operations and comprehensive loss as a component of cost of sales.

 

The carrying amounts of cash, accounts receivable, accounts payable and accrued liabilities approximate fair values due to the short-term nature of these instruments. The fair values of the revolving credit facility and finance lease obligations approximate the carrying values as the obligations bear rates currently available for debt with similar terms, maturities and credit rating.

 

The Company accounts for outstanding warrants based on the fair value of the underlying obligation. The Company has outstanding warrants with cashless exercise prices, and therefore the underlying shares expected to be issued are valued at the Company’s stock price as this reflects the best estimate of the fair value of the warrant obligation. 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.

 

 

Shipping and handling costs are included as a component of cost of sales.

 

 

The Company applies ASC “Compensation – Stock Compensation”, (“ASC ) using a fair value based method for all outstanding awards. The fair value at grant date of stock options is estimated using the Black-Scholes option-pricing model, while the fair value of restricted stock units (“RSU’s) is based on the closing stock price at the date of grant. The fair value of stock options and RSU’s with a market-based performance condition is estimated using the Cox, Ross and Rubenstein binomial model (“Binomial Model”). Compensation expense is recognized over the stock option and RSU vesting period on a straight line basis. ASC also requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.

 

 

In accordance with ASC “Fair Value Measurements and Disclosures”, (“ASC ), the Company determines fair value as an exit price, representing the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. ASC establishes a hierarchical structure to prioritize the inputs to valuation techniques used to measure fair value into tiers:

 

Level - Quoted prices in active markets for identical assets or liabilities

Level - Observable inputs other than quoted prices in active markets for identical assets and liabilities

Level - observable pricing inputs in the market (e.g., discounted cash flows)

 

Financial assets and financial liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurements. The assessment of the significance of a particular input to the fair value measurements requires judgment, and affect the valuation of the assets and liabilities being measured and their placement within the fair value hierarchy.

 

 

The Company tests long-lived assets or asset groups held and used for recoverability when events or changes in circumstances indicate that their carrying amount be recoverable. Circumstances which could trigger a review include, but are limited to: significant decreases in the market price of the asset; significant adverse changes in the business climate or legal factors; the accumulation of costs significantly in excess of the amount originally expected for the acquisition or construction of the asset; current period cash flow or operating losses combined with a history of losses or a forecast of continuing losses associated with the use of the asset; and a current expectation that the asset will more likely than be sold or disposed significantly before the end of its estimated useful life. Recoverability is assessed based on the carrying amount of the asset and the sum of the undiscounted cash flows expected to result from the use and the eventual disposal of the asset. If the carrying value of the asset is recoverable, the impairment loss is measured as the amount by which the carrying amount exceeds fair value. For assets classified as held for sale, an impairment loss is recognized when the carrying amount exceeds the fair value less costs to sell.

 

  

Costs associated with restructuring activities are accounted for in accordance with ASC Topic “Exit or Disposal Cost Obligations” (ASC ), or ASC Topic “Compensation – Nonretirement Postemployment Benefits” (ASC ), as applicable. Under ASC liabilities for contractual employee severance are recorded when payment of severance is considered probable and the amount can be estimated. Liabilities for restructuring costs other than employee severance are accounted for in accordance with ASC only when they are incurred.

 

 

The Company sponsors defined contribution pension plans and other post-employment benefit plans for certain employees. Contributions to the defined contribution pension plans are recognized as an expense as services are rendered by employees. The costs of the other post-employment benefit plans are actuarially determined. The liability recognized in the balance sheet in respect of the post-employment benefit plans for certain employees is the present value of the defined other post-employment benefit obligation at the end of the reporting period as determined by the Company’s actuary.

 

 

 

The Company leases various office facilities and manufacturing equipment. The Company determines if the lease should be classified as an operating lease or a capital lease based on the criteria defined in ASC

 

If determined to be an operating lease, the lease charges are expensed on a straight-line basis over the lease term and presented within cost of sales on the Company’s consolidated statements of operations. Capital leases are calculated at the inception of the lease based on the present value of the remaining lease payments over the lease term. 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. Capitalized lease 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.

 

 

Revenue is derived primarily from the sale of electronics components that are built to customer specifications. Revenue from the sale of products, including inventory held on consignment from customers, is recognized when goods are shipped to customers (FoB Shipping Point) once title has passed to the customer, persuasive evidence of an arrangement exists, price is fixed or determinable, performance has occurred, all customer-specified test criteria have been met and collectability is reasonably assured. Revenue recognized from consignment inventory sales consists of labor and overhead charges once performance has occurred, which is determined once the consignment inventory is shipped to the customer.

 

In addition, the Company has contractual arrangements with the majority of its customers that provide for customers to purchase any unused inventory that the Company has purchased to fulfill that customer’s forecasted manufacturing demand. Revenue from the sale of excess inventory to the customer is recognized when title passes to the customer which occurs when the inventory is shipped to the customer. The Company also derives revenue from engineering and design services. Service revenue is recognized as services are performed.

 

Sales taxes collected from customers and remitted to governmental authorities are presented on a net basis. 

 

 

 

Effective the Company applied a modified retrospective adoption of ASC Revenue from Contracts with Customers. The primary impact of the new standard results in a change to the timing of the Company’s revenue recognition policy for our custom manufacturing services to recognizing revenue “over time” as products are manufactured as opposed to a “point in time” model upon shipment (prior revenue recognition policy). The transitional adjustment resulted in the recognition of unbilled contract assets for revenue with a corresponding reduction in finished goods and work-in-process inventory. The Company recognized the cumulative effect of initially applying the new revenue standard as an adjustment to its opening deficit balance at included in shareholders’ equity. The comparative information has been restated and continues to be reported under the accounting standards in effect for those periods.  The Company is applying the new revenue standard only to contracts completed as of the date of initial application, referred to as open contracts.  The Company also does disclose the information about remaining performance obligations that have original expected durations of year or less. 

 

The Company primarily provides contract manufacturing services to its customers. The customer provides a design, the Company procures materials and manufactures to that design and ships the product to the customer or customer designated location. Revenue is derived primarily from the manufacturing of these electronics components that are built to customer specifications. Revenue is recognized as the customized components are manufactured over time. The Company has an enforceable right to payment for work completed to date and the goods do have an alternative use once the manufacturing process has commenced. The Company records an unbilled contract asset for finished goods associated with non-cancellable customer orders. Similarly, the Company records an unbilled contract asset for revenue related to its work-in-process (“WIP”) when the manufacturing process has commenced and there is a non-cancellable customer purchase order. The Company uses an input method of direct manufacturing inputs to measure progress towards satisfying its performance obligation associated with WIP inventory.

 

In addition, the Company has contractual arrangements with the majority of its customers that provide for customers to purchase any unused inventory that the Company has purchased to fulfill that customer’s forecasted manufacturing demand. Revenue from the sale of any excess inventory to the customer is recognized at a point in time when control transfers, which is typically when title passes to the customer upon shipment. The Company also derives revenue from the sale of procured finished goods, specifically for resale. Revenue from the sales of these goods is recognized when control transfers at a point in time, which is typically when title passes to the customer. The Company also derives revenue from engineering and design services. Service revenue is recognized over time as services are performed.

 

Sales taxes collected from customers and remitted to governmental authorities are presented on a net basis. 

 

The cumulative effect of the changes to our consolidated balance sheet in connection with the adoption of ASC  Revenue from Contracts with Customers was as follows:

 

		Balance at December 31, 2017 (pre-adoption of ASC 606)				ASC Topic 606 adjustments				Balance at January 1, 2018
Assets
Inventories		$	22,363			$	(3,414	)		$	18,949
Unbilled contract assets			—				3,734				3,734
Shareholders’ Equity
Total shareholders’ equity		$	19,074			$	320			$	19,394

 

The following table presents the impacted financial statements line items in the consolidated balance sheet as of

 

		Balances pre adoption of ASC 606				ASC Topic 606 adjustments				As reported
Unbilled contract assets		$	—			$	20,405			$	20,405
Inventories			73,075				(20,013	)			53,062
Total shareholders’ equity			30,916				392				31,308

The following table presents the impacted financial statement line items in the consolidated statements of operations and comprehensive income (loss) for the year ended

		Balances pre adoption of ASC 606				ASC Topic 606 adjustments				As reported
Revenues
Revenue		$	211,597				4,534				216,131
Cost of sales			190,007				4,463				194,470
Gross profit			21,590				71				21,661
Income tax expense			677				—				677
Net loss			(519	)			71				(448	)

 

 

The Company adopted Accounting Standards Update (“ASU”) - Leases (Topic ), as of as started in Note

 

In the Financial Accounting Standards Board (the “FASB”) published ASU - Compensation – Stock Compensation (Topic ): 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 and interim periods within those fiscal years. The impact of the adoption of the standard did have a material impact on the consolidated financial

 

 

In the FASB published ASU - Financial Instruments – Credit losses (Topic ): Measurement of Credit Losses on Financial Instruments. The main objective of Topic 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 the FASB published ASU - Codification Improvements to Topic Financial Instruments – Credit Losses, which made certain amendments and corrections to the original codification. In the FASB published ASU - Financial Instruments – Credit losses (Topic ) which made transitional relief available, specifically allowing the option to elect a fair value option for financial instruments measured at amortized cost. In the FASB published ASU - Codification Improvements to Topic Financial Instruments – Credit losses, which made certain amendments and corrections to the original codification. The amendment is effective for years beginning after including interim periods with those years. The Company continues to evaluate the impact of this accounting standard. The impact of adoption of the standard has yet been determined.

 

In the FASB published ASU - Income Taxes (Topic ): Simplifying the Accounting for income taxes. The purpose of this codification is the simply the accounting for income taxes, which addresses a number of topics including but limited to the removal of certain exceptions currently included in the standard related to intraperiod allocation when there are losses, in addition to calculation of income taxes when current year to date losses exceed anticipated loss for the year. The amendment also simplifies accounting for certain franchise taxes and disclosure of the effect of enacted change in tax laws or rates. Topic is effective for public entities for fiscal years, and interim periods within those fiscal years, beginning after The impact of the adoption of the standard has yet been determined and is being evaluated.

 

In the FASB published ASU - Intangibles – Goodwill and Other (Topic ): Topic 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 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 or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 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 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 The impact of the adoption of the standard is being considered, however it is expected that this reduce the complexity of evaluating goodwill for impairment.

 

In the FASB published ASU - Fair Value Measurement (Topic ): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement. Topic includes the removal, modification and additional of disclosure requirements. Topic is effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after The impact of the adoption of the standard is expected to have a material impact on the consolidated financial statements.