Background

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

Basis of Presentation

The accompanying unaudited interim consolidated financial statements of the Company have been prepared in accordance with the accounting principles and methods of application disclosed in the audited consolidated financial statements within the Company’s Form 10-K for the fiscal period ended December 29, 2019, (“Form 10-K”) filed with the Securities and Exchange Commission (the “SEC”) on March 13, 2020.  The accompanying unaudited interim consolidated financial statements include adjustments of a normal, recurring nature that are, in the opinion of management, necessary for a fair statement of the consolidated financial statements under generally accepted accounting principles in the United States (“U.S. GAAP”). These unaudited interim consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements contained in the Company’s Form 10-K. The consolidated balance sheet at December 29, 2019 was derived from the audited annual consolidated financial statements, but does not contain all of the footnote disclosures from the annual consolidated financial statements.

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

COVID-19 Pandemic

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

The Company is actively monitoring the global COVID-19 pandemic and continuously communicating with our customers, key suppliers, employees and union representatives, in addition to government and state representatives where our manufacturing facilities reside. We have experienced increased workplace absenteeism as illness, potential COVID-19 exposure for higher risk employees or personal commitments that restrict the ability of some employees to come to work.  The Company has modified shift schedules and hired temporary labor to help address this situation and meet our customers’ product shipping schedules.  During the three months ended June 28, 2020, the Company incurred additional costs of $1,185 that we have attributed to the COVID-19 pandemic, including additional temporary headcount as at risk employees are mandated to stay home in our Mexico locations as well as the purchase of personal protective equipment and costs to sanitize and clean facilities.

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

Transition of China Manufacturing

During the fourth quarter of 2019, we ceased manufacturing in China and began to relocate the equipment used at our Chinese manufacturing facility to our other North American sites. During the first quarter of 2020, the Company completed final shipments for customers serviced at our Chinese manufacturing facility and completed the relocation of the equipment to our other North American sites. Customer concerns about uncertainties relating to the prolonged impact of tariffs and macro-economic factors caused a number of our customers to begin to re-evaluate demand for some of their products and reconsider where they outsource their manufacturing. Revenues attributable to production from SMTC’s manufacturing operations in China declined in 2019 as compared to 2018, but more significant declines were anticipated in 2020 which would have resulted in negative operating margins from our China site. This ultimately resulted in the decision to close the manufacturing facility.