SMTC CORP : Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-K)

You should read this Management's Discussion and Analysis of Financial Condition
and Results of Operation ("MD&A") in combination with the accompanying audited
consolidated financial statements and the accompanying notes to the consolidated
financial statements prepared in accordance with U.S. GAAP included within this
annual report on Form 10-K. Some of the information contained in this discussion
and analysis or set forth elsewhere in this Form 10-K, including information
with respect to our plans and strategies for our business, statements regarding
the industry outlook, our expectations regarding the future performance of our
business and the other non-historical statements contained herein, are
forward-looking statements. You should also review the "Risk Factors" in Item
1A. of this Form 10-K for a discussion of important factors that could cause
actual results to differ materially from the results described herein or implied
by such forward-looking statements.

This MD&A contains discussion in thousands of U.S. dollars unless specifically stated otherwise.

Overview

We are a provider of end-to-end electronics manufacturing services ("EMS"),
including product design and engineering services, printed circuit board
assembly ("PCBA"), production, enclosure, cable assembly, precision metal
fabrication, systems integration and comprehensive testing services,
configuration to order ("CTO"), build to order ("BTO") and direct order
fulfillment ("DOF"). At the end of 2020, we operated more than 50 manufacturing
and assembly lines in over 560,000 square feet of production space worldwide at
strategically located facilities in the United States and Mexico, that provide
local support, flexibility, fast turn around and delivery times, and low-cost,
volume manufacturing capabilities, as well as new product integration ("NPI")
services, to our global customers. Our services extend over the entire
electronic product life cycle from new product development and NPI through to
growth, maturity and end of life phases.

We are offer fully integrated contract manufacturing services to global OEMs,
technology companies and governmental entities. We have redefined our market
sectors from those previously reported. We are focused on seven market sectors:

  • Avionics, aerospace and defense


  • Industrial IoT, power and clean technology


  • Medical and safety


  • Retail and payment systems


  • Semiconductors


  • Telecom, networking and communications


  • Test and measurement





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Developments in the fiscal year ended January 3, 2021

Total revenue increased by $14.0 million or 3.8% in fiscal year 2020 compared to fiscal year 2019.

Net loss decreased to $0.6 million in fiscal year 2020 from a net loss of $6.0
million in fiscal year 2019. This was due primarily to revenue increases in
fiscal year 2020 in addition to decreased amortization of intangible assets of
$1.3 million and decreased restructuring expenses of $3.9 million, partially
offset by a change in fair value of contingent consideration resulting in a gain
of $3.1 million in the prior fiscal year which did not recur in fiscal year 2020
and increase of merger and acquisition costs of $1.3 million associated with the
proposed Merger.

Adjusted EBITDA increased to $27.4 million in fiscal year 2020 from $24.8
million in fiscal year 2019. Adjusted EBITDA Percentage increased to 7.1% in
fiscal year 2020 compared to 6.7% in fiscal year 2019. The improvement in
Adjusted EBITDA was primarily driven by increased revenue and increased
utilization at our manufacturing facilities.  For additional information and a
reconciliation of our Adjusted EBITDA and Adjusted EBITDA Percentage to the most
directly comparable GAAP financial measures, which are net loss and net loss
margin, see "Non-GAAP Financial Measures" below.

We continue to monitor the global COVID-19 pandemic and take steps to mitigate
the potential risks to us posed by its spread and related impacts. While our
business operations generally performed as expected during fiscal year 2020, the
COVID-19 pandemic continues to represent uncertainty for fiscal year 2021, and
has the potential to negatively impact our results of our operations, cash flows
and financial position.

The health and safety of our employees is a top priority for us. All of our
facilities remain in operation and we have progressively implemented measures to
safeguard our employees from COVID-19 infection and exposure, in accordance with
guidelines established by the Centers for Disease Control, the World Health
Organization, governmental requirements, and our own safety standards. These
consist of policies, procedures, protocols, and guidance related to, among other
things, COVID-19 symptom awareness, effective hygiene practices, travel
restrictions, visitor restrictions, social distancing, face covering
expectations, temperature and health screening, work-from-home requirements,
employee infection assessments, close contact tracing, enhanced workplace
cleaning, and large-scale decontamination. These efforts will continue as
requirements change, new risks are identified, and infections impact us. We
incurred $3.6 million in COVID-19 related expenditures during fiscal year 2020.

In addition, in all geographies in which we operate, regulatory authorities at
some point have imposed restrictions regarding the conduct of business and
people movement to safeguard its citizens. To address these requirements, we are
in continuous communication with our employees and union representatives, in
addition to government and state representatives where our manufacturing
facilities reside.

Our suppliers may face challenges in maintaining an adequate workforce or
securing materials from their own suppliers as a result of the COVID-19
pandemic. As a result, we may experience an inability to procure certain
components and materials on a timely basis, or increased shipping costs or lead
times. We continue to take steps to coordinate with our suppliers and validate
our suppliers' ability to deliver to us on time, which may also be affected by
the impact of the COVID-19 pandemic on their own financial condition.

In the fourth quarter of 2020, we approved our plans to close our Zacatecas
manufacturing operations and communicated to employees in January 2021. The
closure of the Zacatecas manufacturing facility is intended to reduce the labor
force, which is expected to impact approximately 570 employees at the Zacatecas
manufacturing facility. The closure of the Zacatecas facility was the result of
the decision to consolidate our Mexico operations which is expected to result in
cost savings. The customers previously serviced in Zacatecas will be transferred
to our Chihuahua Mexico facility. We expect the wind down and closure of the
Zacatecas facility to be substantially completed by the end of the first quarter
of fiscal year 2021.

As a result of the foregoing actions, we incurred incremental restructuring
costs totaling approximately $3.5 million in the fourth quarter of fiscal year
2020 or $4.4 million for fiscal year 2020 which included headcount reductions in
Zacatecas in the third quarter of fiscal year 2020. The closure of the facility
is expected to impact 857 Mexico FTEs. Of the total $4.4 million charge, $3.1
million related to severance charges, while $1.3 million related to other
closure activities and write down charges of accounts receivable, inventory and
property plant and equipment. In addition, $0.4 million restructuring charges
were incurred associated with U.S. FTEs. There were recoveries of $0.7 million
associated with recoveries of previous restructuring provisions associated with
the closure of the Dongguan facility.

On January 3, 2021, we entered into a definitive merger agreement with an affiliate of H.I.G. Capital ("H.I.G."), a leading global alternative investment firm with $42 billion of equity capital under management. Under the terms of the

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Merger Agreement, an affiliate of H.I.G. will acquire all outstanding shares of
SMTC Corporation's common stock for $6.044 per share in cash. The transaction is
expected to close in the second quarter of fiscal year 2021. See also "Item 1A.
Risk Factors--"Risks Related to the Merger."

Results of Operations

The following table sets forth certain operating data expressed as a percentage of revenue for the years presented:

                                             Fiscal Year ended       Fiscal 

Year ended Fiscal Year ended

                                                January 3,             December 29,            December 30,
                                                   2021                    2019                    2018
Revenue                                                   100.0 %                 100.0 %                 100.0 %
Cost of sales                                              88.8                    90.1                    90.0
Gross profit                                               11.2                     9.9                    10.0
Selling, general and administrative
expenses                                                    7.6                     7.3                     8.4
Change in fair value of contingent
consideration                                                 -                    (0.8 )                     -
Restructuring charges                                       1.1                     2.1                     0.1
Operating earnings                                          2.5                     1.4                     1.5
Fair value measurement loss (gain) on
warrant liability                                           0.2                       -                       -
Interest expense                                            2.1                     2.9                     1.4
(Loss) earnings before income taxes                         0.2                    (1.5 )                   0.1
Income tax expense (recovery)
Current                                                     0.3                     0.2                     0.4
Deferred                                                   (0.0 )                  (0.1 )                     -
                                                            0.3                     0.1                     0.4
Net loss                                                   (0.1 )                  (1.6 )                  (0.3 )




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Fiscal year ended January 3, 2021 compared to the fiscal year ended December 29, 2019

A discussion of our comparison between fiscal year 2020 and fiscal year 2019 is
presented below. A discussion of the changes in our results of operations
between the fiscal years ended December 29, 2019 and December 30, 2018 has been
omitted from this Annual Report on Form 10-K but may be found in Item
7. Management's Discussion and Analysis of Financial Condition and Results of
Operations of our Annual Report on Form 10-K for the year ended December 29,
2019, filed with the SEC on March 13, 2020, which is available free of charge on
the SEC's website at www.sec.gov and our corporate website (www.smtc.com).



The industry sectors for the fiscal year ended December 29, 2019 have been
reclassified to align with the presentation for the fiscal year ended January 3,
2021. Upon review of customer sectors in fiscal year 2020, certain customers
were reclassified to new industry sectors as it was determined to be more
appropriate based on the end products we manufacture.

Revenue (in millions)





                                     Fiscal Year ended          Fiscal Year ended
                                         January 3,                December 29,
        Industry Sector                     2021                       2019                    Change
                                       $             %            $             %           $           %
Test and Measurement                     35.4         9.2           48.7        13.1       (13.3 )     (27.3 )
Retail and Payment Systems               41.1        10.6           46.1        12.4        (5.0 )     (10.8 )
Telecom, Networking and
Communications                           21.7         5.6           37.2        10.0       (15.5 )     (41.7 )
Medical and safety                       44.2        11.4           45.5        12.2        (1.3 )      (2.9 )
Industrial IoT, Power and Clean
Technology                              154.2        39.9          147.3        39.5         6.9         4.7
Semiconductors                           52.6        13.6           23.0         6.2        29.6       128.7
Avionics, Aerospace and Defense          37.3         9.7           24.7         6.6        12.6        51.0
Total                                   386.5       100.0          372.5       100.0        14.0         3.8






Total revenue increased by $14.0 million or 3.8% in fiscal year 2020 compared to
fiscal year 2019. We recognized incremental volume increases with existing
customers in the semiconductors; industrial IoT, power and clean technology; and
avionics, aerospace and defense sectors.

Revenue in the test and measurement sector decreased by $13.3 million year over year, due primarily to volume decreases with two long standing customers serviced in the U.S and one customer serviced in Mexico.

Revenue in the retail and payment sector decreased by $5.0 million year over year, due primarily to volume decreases with one customer serviced in Mexico.

Revenue in the telecom, networking and communications sector decreased by $15.5
million year over year, due primarily to decreased volumes with two customers
and one customer transferring business to other service providers all serviced
in Mexico, Additionally, the decline was also due to the loss of one customer
associated with the Dongguan China closure.



Revenue in the medical and safety sector decreased by $1.3 million year over
year, due primarily to decreased volume from one customer offset by increased
volume from another customer, both serviced in Mexico.



Revenue in the industrial IoT, power and clean technology sector increased by
$6.9 million year over year, due primarily to increased volumes from one
customer offset by decreased volumes from another customer, both serviced in
Mexico.



Revenue in the semiconductors sector increased by $29.6 million year over year,
due primarily to volume increases with three customers serviced in Mexico and
one customer serviced in the U.S.



Revenue in the avionics, aerospace and defense sector increased by $12.6 million
year over year, due primarily to increased volumes from two customers serviced
in the U.S.

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During fiscal year 2020, the Company recorded approximately $15.5 million of
sales of raw materials inventory to customers, which carried limited margin,
compared to $11.3 million in fiscal year 2019. The Company's contract terms are
structured such that it purchases raw materials based on a customer's purchase
orders. To the extent a customer subsequently requests that an order be changed,
whether cancelled or pushing out the demand, the customer is contractually
obligated to purchase the original on-order raw material at cost.

Due to changes in market conditions, the life cycle of products, the nature of
specific programs and other factors, revenues from any particular customer
typically vary from year to year. The Company's ten largest customers
represented 54.9% of revenue in fiscal year 2020, compared to 52.8% in fiscal
year 2019. Revenue from our largest customer during fiscal year 2020 was $47.2
million, representing 12.2% of revenue. This compared to revenue from our
largest customer during fiscal year 2019 of $47.7 million, representing 12.8% of
revenue. No other customer represented more than 10% of revenue in either year.

In addition to tracking our revenues based on industry sector, the Company also
monitors revenue (as well as associated segment contribution margin) based on
the geographic location of our operations, which in 2020 included Mexico, China
and the U.S. This is consistent with how we report our segmented information, as
set out in Note 11 to our consolidated financial statements.

During fiscal year 2020, 62.0% of our revenue was attributable to our operations
in Mexico, 37.8% in the U.S and 0.2% in China. During fiscal year 2019, 63.3% of
our revenue was attributable to our operations in Mexico, 31.6% in the U.S. and
5.1% in China.

Gross Profit

Gross profit increased to $43.3 million in fiscal year 2020 from $37.0 million
in fiscal year 2019. Gross profit percentage was 11.2% and 9.9% in fiscal year
2020 and fiscal year 2019. When excluding the impact of the unrealized foreign
exchange gains on unsettled forward contracts, amortization of intangible assets
and COVID- 19 related expenses, the Adjusted Gross Profit Percentage increased
to 12.6% in fiscal year 2020 from 11.9% in the prior fiscal year. This was due
primarily to incremental gross profit of $6.3 million due to the revenue
increase, in addition to improved product mix and cost reductions, primarily
related to headcount. For additional information and a reconciliation of
Adjusted Gross Profit Percentage to the most directly comparable GAAP financial
measure, which is gross profit percentage, see "Non-GAAP Financial Measures"
below.

Selling, General & Administrative Expenses

Selling, general and administrative expenses increased to $29.6 million in
fiscal year 2020 from $27.0 million in fiscal year 2019 primarily due to the
increase of $1.0 million in merger and acquisition expenses related to the
proposed Merger, increased variable compensation over the prior fiscal year and
additional headcount. There was one more week of payroll compensation in fiscal
year 2020 compared to fiscal year 2019. Selling, general and administrative
expenses as a percentage of revenue were 7.7% of revenue in fiscal year 2020 and
7.3% in fiscal year 2019.

Change in fair value of warrant liability

For the fiscal year ended January 3, 2021, the Company recorded a $0.9 million
expense as a result of the valuation of the 651,949 outstanding warrants issued
to TCW. During the fourth quarter of fiscal year 2020, an additional 140,000 of
warrants were issued to TCW in connection with and as part of the consideration
paid by the Company for the TCW Amendment. The fair value has been assessed at
$4.96 per unit representing a fair value of $3.2 million as at January 3, 2021
which represented an increase in the stock price from the prior valuation
assessment at December 29, 2019. For the fiscal year ended December 29, 2019 the
Company recorded a $0.3 million gain as a result of the valuation of the 511,949
outstanding warrants issued to TCW.

Change in fair value of contingent consideration

During the first quarter of fiscal year 2019, the fair value of the contingent
consideration liability that was payable to the former owners of MCA was
determined to be $0.0 resulting in the recognition of a gain of $3.1 million.
The contingent consideration liability was initially recognized at fair value in
the fourth quarter of fiscal year 2018 and related to a contingent earn-out
payment associated with the MCA Acquisition. The fair value estimate under
purchase accounting of the $3.1 million was derived from a multiple of earnings
based on MCA's forecasted twelve-month earnings for the period ended March 31,
2019. Based on results, the contingent consideration liability was considered
resolved and no longer payable as at March 31, 2019.

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Restructuring Charges



During 2020, restructuring charges of $4.1 million were incurred. Primarily, the
charges related to the planned closure of the Zacatecas facility with charges
incurred of $4.4 million, of which $3.1 million related severance charges
impacting 857 FTEs in Zacatecas, in addition to charges of $1.3 million
including ongoing administrative staff charges to close the facility and certain
provisions on property, plant and equipment, accounts receivable and inventory.
In addition, restructuring charges of $0.4 million were incurred related to the
reduction of 20 FTEs in the U.S. This was offset by recoveries and reversals of
existing provisions of $0.7 million related to the closure of the Dongguan
facility. During 2019, restructuring charges of $5.0 million were incurred
related to the closure of the Dongguan facility related to the reduction of 137
FTEs in China, including ongoing administrative staff charges to close the
facility and certain provisions on property, plant and equipment, accounts
receivable and inventory. In addition, restructuring charges of $3.0 million
were incurred related to the reduction of 47 FTEs in U.S., 8 FTEs in Canada and
630 FTEs and contract employees in Mexico.



Interest Expense



Interest expense decreased to $8.0 million in 2020 compared to $10.6 million in
2019. The decrease primarily resulted from the pay down of the Term Loan B
Facility in fiscal year 2019 in addition to lower average debt balance in 2020
compared to fiscal year 2019. The weighted average interest rates with respect
to the debt on our Credit Facilities was 7.2%. The weighted average interest
rates for the same period in the prior year was 11.2%. due to higher interest
rates incurred on the term loan facility B as well as reductions in interest
rates.



Income Tax Expense



The net tax expense for 2020 of $1.2 million related to taxes incurred in Mexico
due to profits in that jurisdiction in addition to minimum taxes and state taxes
in the U.S. The current income tax expense of $1.2 million was partially offset
by $0.03 million in deferred tax recovery recorded related to temporary
differences on assets and liabilities in Mexico, which have resulted in an
increase to the corresponding deferred tax asset. The net tax expense for 2019
of $0.8 million related to taxes incurred in Mexico due to profits in that
jurisdiction in addition to minimum taxes and state taxes in the U.S. The
current income tax expense of $0.9 million was partially offset by $0.1 million
in deferred tax recovery recorded related to temporary differences on assets and
liabilities in Mexico, which have resulted in an increase to the corresponding
deferred tax asset.

Net Loss

Net loss decreased to $0.6 million in fiscal year 2020 from a net loss $6.0
million in 2019. This was due primarily to the increased revenue in 2020 and
corresponding gross margin improvement, in addition to a decrease in
restructuring expenses of $3.8 million, partially offset by incremental COVID-19
related expenditures of $3.9 million. Adjusted Net Income increased $5.0 million
in 2020 compared to 2019. For additional information and a reconciliation of
Adjusted Net Income to the most directly comparable GAAP financial measure,
which is net loss, see "Non-GAAP Financial Measures" below.

Non-GAAP Financial Measures

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

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of those adjusted in this presentation. The Non-GAAP Financial Measures that we
use are not necessarily comparable to similarly titled measures used by other
companies due to different methods of calculation.

Adjusted Net Income Reconciliation:

Adjusted Net Income, a non-GAAP financial measure, is defined as net loss before
amortization of intangible assets, restructuring charges, stock-based
compensation, fair value adjustment of warrant liability, fair value adjustment
of contingent consideration, merger and acquisition related expenses, COVID-19
related expenses and unrealized foreign exchange gains and losses on unsettled
forward foreign exchange contracts.

Below is the reconciliation of Adjusted Net Income to net loss, which is the most directly comparable GAAP financial measure (in thousands):

                                                         Fiscal Year ended        Year ended
                                                            January 3,           December 29,
                                                               2021                  2019
Net loss                                                $              (581 )   $       (5,995 )
Add:
Amortization of intangible assets                                     3,046              7,188
Restructuring charges                                                 4,125              7,955
Stock based compensation                                                761                775
Fair value adjustment of warrant liability                              852               (279 )
Fair value adjustment of contingent consideration                         -             (3,050 )
Merger and acquisition related expenses                               1,340                286
COVID-19 related expenses (1)                                         3,457                  -
Unrealized foreign exchange gain on unsettled forward
foreign exchange contracts                                           (1,055 )                -
Adjusted Net Income                                     $            11,945     $        6,880




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

Adjusted Gross Profit and Adjusted Gross Profit Percentage Reconciliation

Adjusted Gross Profit, a non-GAAP financial measure, is defined as gross profit
exclusive of amortization of intangible assets, unrealized foreign exchange
gains or losses on unsettled forward foreign exchange contracts and COVID-19
related expenses. Adjusted Gross Profit Percentage, a non-GAAP financial
measure, is defined as Adjusted Gross Profit divided by revenue.

Below is the reconciliation of Adjusted Gross Profit and Adjusted Gross Profit
Percentage to gross profit and gross profit margin, respectively, which are the
most directly comparable GAAP financial measures (in thousands):



                                                         Fiscal Year ended       Fiscal Year ended
                                                            January 3,             December 29,
                                                               2021                    2019
Gross profit                                            $            43,273     $            37,021
Add (deduct):
Amortization of intangible assets                                     3,046                   7,188
Unrealized foreign exchange gain on unsettled forward
foreign exchange contracts                                           (1,055 )                     -
COVID-19 related expenses (1)                                         3,457                       -
Adjusted Gross Profit                                   $            48,721     $            44,209
Adjusted Gross Profit Percentage                                       12.6 %                  11.9 %




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

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The Company has used forward foreign exchange contracts to reduce its exposure
to foreign exchange currency rate fluctuations related to forecasted Mexican
peso expenditures. These contracts are effective as hedges from an economic
perspective, but do not meet the requirements for hedge accounting under ASC
Topic 815 "Derivatives and Hedging". Accordingly, changes in the fair value of
these contracts are recognized in earnings in the consolidated statement of
operations and comprehensive loss. Included in cost of sales in 2020 was a
realized gain of $0.6 million and in fiscal 2019 a realized loss of $0.1
million. In 2020, as a result of revaluing the outstanding forward contracts to
fair value, an unrealized gain of $1.1 million was recorded compared to an
unrealized gain of $0.0 million in 2019, which was included in cost of sales.



                                        January 3, 2021       December 29, 2019
Average USD:PESO contract rate                     25.20                    

-

Average USD:PESO mark-to-market rate               20.10                       -

EBITDA, Adjusted EBITDA and Adjusted EBITDA Percentage Reconciliation

EBITDA and Adjusted EBITDA, non-GAAP financial measures, are defined as earnings
before interest expense, income tax expense (recovery), 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,
COVID-19 related expenses and unrealized foreign exchange gains and losses on
unsettled forward foreign exchange contracts. Adjusted EBITDA Percentage is
defined as Adjusted EBITDA as a percentage of revenue.

Below is the reconciliation of EBITDA, Adjusted EBITDA and Adjusted EBITDA Percentage to the most directly comparable GAAP financial measures, which are net loss, net loss and net loss margin, respectively (in thousands):

                                                         Year ended         Year ended
                                                         January 3,        December 29,
                                                            2021               2019
Net loss                                                $        (581 )   $       (5,995 )
Reconciling items:
Depreciation of property, plant and equipment                   6,168       

6,548

Amortization of intangible assets                               3,046              7,188
Interest                                                        8,049             10,562
Income tax expense                                              1,226                788
EBITDA                                                  $      17,908     $       19,091
Additional reconciling items:
Restructuring charges                                           4,125              7,955
Stock-based compensation                                          761                776
Fair value adjustment of warrant liability                        852               (279 )
Merger and acquisition related expenses                         1,340       

286

Fair value adjustment of contingent consideration                   -             (3,050 )
Unrealized foreign exchange gain on unsettled forward
foreign exchange contracts                                     (1,055 )                -
COVID-19 related expenses (1)                                   3,457                  -
Adjusted EBITDA                                         $      27,388     $       24,779
Adjusted EBITDA Percentage                                        7.1 %              6.7 %




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

Off-Balance Sheet Arrangements

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As of January 3, 2021 and December 29, 2019, we did not have any material off-balance sheet arrangements (as defined in Item 303(a)(4)(ii) of Regulation S-K).

Liquidity and Capital Resources

As at January 3, 2021, the Company's liquidity was comprised of $0.6 million of
cash on hand and $28.4 million of funds available to borrow under the PNC
Facility, which matures on November 8, 2023. The Company funds its operations by
regularly utilizing its PNC Facility (refer to Note 5 of the consolidated
financial statements included in Part IV of this Form 10-K). The Company manages
its 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.



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



The following table summarizes cash flow changes for the following periods (in
millions):



                                 Year ended            Year ended
                              January 3, 2021       December 29, 2019
Cash provided by (used in):
Operating activities          $            5.0     $               5.7
Financing activities                      (3.7 )                  (2.0 )
Investing activities                      (2.1 )                  (3.9 )
Decrease in cash                          (0.8 )                  (0.2 )
Cash, beginning of year                    1.4                     1.6
Cash, end of the year         $            0.6     $               1.4




2020



Net cash provided by operating activities for fiscal year 2020 was $5.0 million.
This was mainly driven by the change in non-cash items. Significant non-cash
charges included $6.2 million of depreciation of property, plant and equipment,
$3.0 million of intangible asset amortization and $1.2 million in amortization
of deferred financing fees. This was partially offset by the loss on the warrant
revaluation of $0.9 million. Non-cash items were partially offset with changes
in working capital. Primarily the $13.1 million increase in the unbilled
contract asset due to incremental increase in inventory year over year partially
offset by increased accrued liabilities, due in large part to deferred revenue
in addition to an increased restructuring charges. Accounts receivable days
outstanding was 61 days in 2020 and 2019. Accounts payable days outstanding was
72 days in 2020 and 2019. Inventory turnover was 4.0 times or 91 days in 2020
compared to 4.3 times or 85 days in 2019.





Net cash used from financing activities during 2020 was $3.7 million. The
Company paid down its long-term debt in the amount of $1.6 million and $23.3
million, respectively in 2020 and 2019. During 2019, $14.0 million was raised
via a rights offering and a registered direct offering, and utilized to pay down
the Term Loan B Facility in fiscal year 2019. Principal repayments on finance
lease obligations were $1.5 million in fiscal year 2020 compared to $1.6 million
in fiscal year 2019.



Cash used in investing activities for fiscal year 2020 of $2.1 million in fiscal
year 2020 compared to $3.9 million in fiscal year 2019, related to capital asset
purchases.

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2019



Net cash provided by operating activities for 2019 was $5.7 million. This was
mainly driven by net collections of accounts receivable of $3.1 million, reduced
inventory balances compared to the prior year end of $5.4 million, partially
offset by increased payments in accounts payable and accrued liabilities of $2.6
million and $2.5 million respectively.  Significant non-cash charges included in
the net loss from operations when added back contributed to the cash flow from
operations, which pertained to $7.2 million of intangible asset amortization,
$6.5 million of depreciation of property, plant and equipment and $1.6 million
in amortization of deferred financing fees partially offset by the add back of
the gain on the contingent consideration of $3.1 million. Accounts receivable
days reduced to 61 days in 2019 from 64 days in 2018 due to improved
collections. Accounts payable days outstanding for 2019 decreased to 72 days
versus 91 days for 2018, due to timing of payments. Inventory turnover was 4.3
times or 85 days in 2019 compared to 4.0 times or 91 days in 2018.



Net cash used from financing activities during 2019 was $2.0 million. During
2019, the Company generated net cash of $14.0 million from issuance of common
stock through the Rights Offering. The Company received net advances from the
PNC Facility of $9.7 million compared to $12.8 million for 2018. The Company
paid down its long-term debt in the amount of $23.3 million and $8.0 million,
respectively in 2019 and 2018. Principal repayments on finance lease obligations
were $1.6 million in 2019 compared to $0.5 million in prior year.



Cash used in investing activities for 2019 of $3.9 million in 2019 compared to
$72.0 million in 2018 due to the acquisition of MCA in 2018 of $67.6 million and
capital expenditures of $4.4 million.



Credit Facilities



The Company borrows money under the PNC Facility. The PNC Facility matures on
November 8, 2023. Borrowings made under the PNC Facility bear interest at the
U.S. base rate plus an applicable margin ranging from 0.75% to 1.25%, or LIBOR
plus an applicable margin ranging from 2.50% to 3.00%. The base commercial
lending rate should approximate U.S. prime rate.



The Company also borrows money under the Financing Agreement, which governs a
term loan A facility ("Term A Loan Facility), and previously governed a term
loan B facility (the "Term Loan B Facility") until it was repaid in full on July
3, 2019 with a portion of the proceeds from the Offerings. The Term A Loan
Facility matures on November 8, 2023 (the "Maturity Date"). The Term Loan A
Facility bore interest LIBOR plus an applicable margin of 8.75% through June 30,
2020, and borrowings under the Financing Agreement thereafter bear interest at
LIBOR plus an applicable margin ranging from 7.25% to 8.75%. Payments made under
the Term Loan A Facility at any time prior to the Maturity Date (other than
scheduled amortization payments and mandatory prepayments) are subject to an
applicable premium equal to the amount of such payment multiplied by (i) 3.00%
in the event that such payment occurs before November 8, 2019, (ii) 2.00% in the
event that such payment occurs after the November 8, 2019 and on or before
November 8, 2020 and (iii) 1.00% in the event that such payment occurred after
November 8, 2020 and on or before November 8, 2021. No such applicable premium
is payable for any payment of loans made under the Term Loan A Facility
occurring after November 8, 2021.



On March 29, 2019, the Company and certain of its subsidiaries entered into that
certain Amendment No. 1 to Amended and Restated Revolving Credit and Security
Agreement ("PNC Amendment No. 1") and that certain Amendment No. 1. to the
Financing Agreement (the "TCW Amendment No. 1"). The PNC Amendment No. 1 and TCW
Amendment No. 1 amends the required senior leverage ratio initially set forth in
the PNC Agreement and Financing Agreement by increasing the senior debt leverage
ratio from "3.50x" to "3.75x" for the first quarter of 2019.



On July 3, 2019, the Company and certain of its subsidiaries entered into that
certain Amendment No. 2 to the Financing Agreement (the "TCW Amendment No.
2"). The TCW Amendment No. 2, among other things, provides that the net cash
proceeds received by the loan parties from the Company's (i) offering of
subscription rights to the Company's stockholders and holders of the Company's
outstanding warrants that closed in June 2019, and (ii) registered direct
offering of shares of the Company's common stock directly to certain investors
that closed in June 2019, shall be applied (a) first, to the Company's term loan
B facility (and the accrued and unpaid interest thereon) until paid in full in
the aggregate amount of $12.0 million, and (b) second, for working capital and
general corporate purposes.



On August 8, 2019, the Company and certain of its subsidiaries entered into the
second Amendment to the Amended and Restated Revolving Credit and Security
Agreement (the "PNC Amendment No. 2") and the third Amendment to the Financing
Agreement (the "TCW Amendment No. 3"). The PNC Amendment No. 2, among other
things, (i) increased the

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total amount available for borrowings under the PNC Facility to $65 million,
(ii) provided for borrowings of up to $15 million on assets located in Mexico,
(iii) provided that borrowings under the PNC Facility bear interest at the U.S.
base rate plus an applicable margin ranging from 0.75% to 1.25%, or LIBOR plus
an applicable margin ranging from 2.50% to 3.00%, (iv) reset the financial
covenants, and (v) permitted the pay down of the Term A Loan Facility by up to
$10 million. The TCW Amendment No. 3, among other things, (i) provided for a $20
million increase in the total amount available for borrowings under the PNC
Facility, (ii) provided for the pay down of the Term A Loan Facility by up to
$10 million, (iii) provided that the interest rate for borrowings under the
Financing Agreement was reset to LIBOR plus an applicable margin of 8.75%
through June 30, 2020, and borrowings under the Financing Agreement will
thereafter bear interest at LIBOR plus an applicable margin ranging from 7.25%
to 8.75%, (iv) deleted the senior leverage ratio covenant, (v) amended the total
leverage ratio covenant, including the definition of total leverage ratio, to
increase the maximum total leverage on a quarterly basis beginning with the
fiscal quarter ended September 30, 2019, (vi) amended the fixed charge coverage
ratio covenant to decrease the minimum fixed charge coverage ratio on a
quarterly basis beginning with the fiscal quarter ending September 30, 2020
through the fiscal quarter ending December 31, 2021 and (vii) reset the call
protection on the Term Loan A Facility.



On September 27, 2019, the Company and certain of its subsidiaries entered into
the third Amendment to the Amended and Restated Revolving Credit and Security
Agreement (the "PNC Amendment No. 3") and the fourth Amendment to the Financing
Agreement (the "TCW Amendment No. 4"). The PNC Amendment No. 3, among other
things, amended the (i) definition of "Consolidated EBITDA" by permitting an
addback for restructuring and transition costs and charges incurred on or before
December 31, 2020 in connection with the Company's previously announced closure
of business operations in Dongguan, China, subject to certain exceptions, not to
exceed (a) with respect to cash restructuring costs, $2.3 million, (b) with
respect to write-offs of accounts receivable, $1.6 million, and (c) with respect
to write-offs of Inventory (as defined in the Amended and Restated Revolving
Credit and Security Agreement), $1.6 million, (ii) definition of "Permitted
Intercompany Investments" by permitting certain investments by a Domestic Loan
Party (as defined in the Amended and Restated Revolving Credit and Security
Agreement) to or in SMTC Electronics Dongguan Company Limited, a limited
liability company organized under the laws of China ("SMTC Dongguan"), solely to
facilitate the closure of business operations in Dongguan, China, so long as,
among other things, (a) such Investments (as defined in the PNC Agreement) are
made prior to March 31, 2020, (b) the aggregate amount of all such Investments
does not exceed $2.3 million during the term of the Amended and Restated
Revolving Credit and Security Agreement, (c) the Borrowers (as defined in the
Amended and Restated Revolving Credit and Security Agreement) maintain certain
minimum liquidity requirements and (iii) negative covenant regarding excess
cash. The TCW Amendment No. 4, among other things, amended the (i) definition of
"Consolidated EBITDA" by permitting an addback for restructuring and transition
costs and charges incurred on or before December 31, 2020 in connection with the
closure of business operations in Dongguan, China, subject to certain
exceptions, not to exceed (a) with respect to cash restructuring costs, $2.3
million, (b) with respect to write-offs of accounts receivable, $1.6 million,
and (c) with respect to write-offs of Inventory (as defined in the Financing
Agreement), $1.6 million, (ii) definition of "Permitted Intercompany
Investments" by permitting certain investments by a Domestic Loan Party (as
defined in the Financing Agreement) to or in SMTC Dongguan solely to facilitate
the closure of business operations in Dongguan, China, so long as, among other
things, (a) such Investments (as defined in the Financing Agreement) are made
prior to March 31, 2020, (b) the aggregate amount of all such Investments does
not exceed $2.3 million during the term of the Financing Agreement and (c) the
Borrowers (as defined in the Financing Agreement) maintain certain minimum
liquidity requirements and (iii) negative covenant regarding excess cash.



On June 26, 2020, the Company, entered into the Fourth Amendment to the Amended
and Restated Revolving Credit and Security Agreement ("PNC Amendment No. 4") and
the Fifth Amendment to the Financing Agreement ("TCW Amendment No. 5"). PNC
Amendment No. 4, among other things, amended the definition of "Consolidated
EBITDA" by permitting an addback for (i) non-recurring labor costs, temporary
employee bonuses to reduce absenteeism, personal protective equipment costs,
facility sanitation costs, and excess freight and logistics costs, (a) $200,000
for the fiscal quarter ended March 31, 2020, and (b) $1.0 million for the fiscal
quarter ended June 30, 2020, and (ii) restructuring and severance charges,
accruals and reserves in connection with permanent headcount reductions, in an
aggregate amount not to exceed (a) $844,000 with respect to employees at the
Zacatecas, Mexico facility and (b) $156,000 with respect to corporate selling,
general and administrative employees, in each case, for the period from June 1,
2020, to and including July 31, 2020. PNC Amendment No. 4 also amended the
definition of "Permitted Purchase Money Indebtedness" to (i) allow for
Indebtedness (as defined in the amended and restated revolving credit and
security agreement) pursuant to financing provided by Mazuma Capital Corp for
any fixed or tangible assets acquired prior to the June 26, 2020, and (ii)
increase the aggregate principal amount of all Indebtedness (as defined in the
amended and restated revolving credit and security agreement) permitted under
the amended and restated revolving credit and security agreement to $3.75
million. In connection with PNC Amendment No. 4, the Company paid PNC an
amendment fee of $50,000. TCW Amendment No. 5, among other things, amended the
definition of "Consolidated EBITDA" by permitting an addback for (i)
non-recurring labor costs, temporary employee bonuses to reduce absenteeism,
personal protective equipment costs, facility sanitation costs, and excess
freight and logistics costs, not to exceed (a) $200,000 for the fiscal quarter
ended March 31, 2020, and (b)

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$1.0 million for the fiscal quarter ended June 30, 2020, and (ii) restructuring
and severance charges, accruals and reserves in connection with permanent
headcount reductions, in an aggregate amount not to exceed (a) $844,000 with
respect to employees at the Zacatecas, Mexico facility and (b) $156,000 with
respect to corporate selling, general and administrative employees, in each
case, for the period from June 1, 2020, to and including July 31, 2020. TCW
Amendment No. 5 also amended the definition of "Permitted Purchase Money
Indebtedness" to (i) allow for Indebtedness (as defined in the financing
agreement) pursuant to financing provided by Mazuma Capital Corp for any fixed
or tangible assets acquired prior to June 26, 2020, and (ii) increase the
aggregate principal amount of all Indebtedness (as defined in the financing
agreement) permitted under the financing agreement to $3.75 million. In
connection with the TCW Amendment, the Company paid TCW an amendment fee of
$75,000.



On September 25, 2020, the Company, entered into the Fifth Amendment to the
Amended and Restated Revolving Credit and Security Agreement ("PNC Amendment No.
5") and the Sixth Amendment to the Financing Agreement ("TCW Amendment No.
6"). PNC Amendment No. 5, among other things, (i) amended the definition of
"Consolidated EBITDA" by permitting an addback for non-recurring labor costs,
temporary employee bonuses to reduce absenteeism, personal protective equipment
costs, facility sanitation costs, and excess freight and logistics costs, not to
exceed an additional $1.5 million for the fiscal quarter ended September 27,
2020, and (ii) provides for borrowings of up to $2.0 million on certain
consigned assets. TCW Amendment No. 6, among other things, amended the
definition of "Consolidated EBITDA" by permitting an addback for non-recurring
labor costs, temporary employee bonuses to reduce absenteeism, personal
protective equipment costs, facility sanitation costs, and excess freight and
logistics costs, not to exceed an additional $1.5 million for the fiscal quarter
ended September 27, 2020.



On December 28, 2020, the Company, entered into the Sixth Amendment to the
Amended and Restated Revolving Credit and Security Agreement ("PNC Amendment No.
6"), and the seventh Amendment to the Financing Agreement (the "TCW Amendment
No. 7"). PNC Amendment No. 6, among other things: (i) amended the definition of
"Consolidated EBITDA" by permitting addbacks with respect to the Company's
Zacatecas, Mexico facility for (A) restructuring and severance charges, accruals
and reserves in connection with permanent headcount reductions in an amount not
to exceed an additional $1.0 million for the period from June 1, 2020 through
and including July 31, 2020, (B) cash severance and other facility closure and
relocation costs in an amount not to exceed an additional $4.0 million from
December 28, 2020 and ending on June 30, 2021, and (C) write-offs of accounts
receivable, inventory and fixed assets in an amount not to exceed an additional
$1.5 million from December 28, 2020 and ending on June 30, 2021; and (ii)
revises the required liquidity covenants from the period beginning on December
28, 2020 and ending on the later to occur of June 30, 2021 or the permanent
closure of the Company's Zacatecas, Mexico facility. TCW Amendment No. 7, among
other things: (i) amends the definition of "Consolidated EBITDA" by permitting
addbacks with respect to the Company's Zacatecas, Mexico facility for (A)
restructuring and severance charges, accruals and reserves in connection with
permanent headcount reductions in an amount not to exceed an additional $1.0
million for the period from June 1, 2020 through and including July 31, 2020,
(B) cash severance and other facility closure and relocation costs in an amount
not to exceed an additional $4.0 million from December 28, 2020 and ending on
June 30, 2021, and (C) write-offs of accounts receivable, inventory and fixed
assets in an amount not to exceed an additional $1.5 million from December 28,
2020 and ending on June 30, 2021, (ii) prohibits the Liquidity (as defined in
TCW Amendment No. 7) of the Company and its subsidiaries from being less than
$7.5 million during the period beginning on December 28, 2020 and ending on the
later to occur of June 30, 2021 or the permanent closure of the Company's
Zacatecas, Mexico facility; and (iii) amends the total debt leverage ratios (iv)
permits add back of certain expenditures related to COVID-19 pandemic; and (v)
provides for the issuance to each other loan party that is a party to the
financing agreement and each financial institution that is a party to the
financing agreement (collectively, the TCW Lender") or their designees of the
Warrants (as defined below).



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. Repayments under the
Credit Facilities are collateralized by the assets of the Company and each of
its subsidiaries. The Credit Facilities contain certain financial and
non-financial covenants, including restrictions on dividend payments. The
financial covenants under each Credit Facility require the Company to maintain a
fixed charge coverage ratio and a total leverage ratio quarterly during the term
of the Credit Facilities. The Company was in compliance with the financial
covenants included in the Credit Facilities as at January 3, 2021. Management
projects compliance with the financial covenants included in the Credit
Facilities.



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Subscription Agreement and Warrants

In connection with and as part of the consideration paid by the Company for TCW
Amendment No.7, on December 28, 2020, the Company entered into the Seventh
Amendment Subscription Agreement (the "Subscription Agreement") with certain of
the TCW Lenders, relating to the issuance and sale by the Company of warrants
(the "Warrants") to purchase an aggregate of 140,000 shares of the Company's
common stock (the "Warrant Shares"). The Warrants were exercisable beginning on
the date of original issuance at a nominal exercise price of $0.01 per share,
subject to adjustment as provided therein, and expire 84 months after the date
of issuance. The Warrants also provide for an adjustment in the number of shares
of the Company's common stock underlying the Warrants if the Company, subject to
certain exceptions, issues, or is deemed to have issued, shares of the Company's
common stock at a price that is less than the fair market value of the Company's
common stock at the time of such issuance or deemed issuance.

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 $9.1 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 $14.0 million, after deducting the offering expenses
and fees payable the Company. The proceeds of the Offerings were used, in part,
to repay the Term Loan B Facility in full as at July 3, 2019.

Accounting changes and recent accounting pronouncements

Recently adopted Accounting Pronouncements

In August 2018, the FASB published ASU 2018-13: Fair Value Measurement (Topic
820): Disclosure Framework - Changes to the Disclosure Requirements for Fair
Value Measurement. The amendment includes the removal, modification and addition
of disclosure requirements under Topic 820. The amendments in this ASU are
effective for all entities for fiscal years, and interim periods within those
fiscal years, beginning after December 15, 2019. The impact of the adoption of
the standard had no impact on the consolidated financial statements.

In March 2020, the FASB published ASU 2020-04: Reference Rate Reform (Topic
848): Facilitation of the Effects of Reference Rate Reform on Financial
Reporting. The amendments in this update are elective and provide optional
guidance for a limited period of time to ease the potential burden in accounting
for (or recognizing the effects of) reference rate reform on financial
reporting. The amendments in this Update are effective for all entities as of
March 12, 2020, through December 31, 2022. An entity may elect to apply the
amendments for contract modifications by Topic or Industry Subtopic as of any
date from the beginning of an interim period that includes or is subsequent to
March 12, 2020, or prospectively from a date within an interim period that
includes or is subsequent to March 12, 2020, up to the date that the financial
statements are available to be issued. Once elected for a Topic or an Industry
Subtopic, the amendments in this Update must be applied prospectively for all
eligible contract modifications for that Topic or Industry Subtopic. The impact
of the adoption of the standard is not material to the Company, as alternative
reference rates are available under the agreements governing the financial
instruments.

Recent Accounting Pronouncements Not Yet Adopted

In May 2016, the FASB published ASU 2016-13: Financial Instruments - Credit
losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The
main objective of Topic 326 is to provide financial statement users with more
decision-useful information about the expected credit losses on
financial instruments and other commitments to extend credit held by a reporting
entity at each reporting date. To achieve this objective, the amendments in this
update replace the incurred loss impairment methodology in current U.S. GAAP
with a methodology that reflects expected credit losses and requires
consideration of a broader range of reasonable and supportable information to
inform credit loss estimates. In April 2019, the FASB published ASU 2019-04
Codification Improvements to Topic 326, Financial Instruments - Credit Losses,
which made certain amendments and corrections to the original codification. In
May 2019, the FASB published ASU 2019-05 Financial Instruments - Credit losses
(Topic 326) which made transitional relief available, specifically allowing the
option to elect a fair value option for financial instruments measured at
amortized cost. In November 2019, the FASB published ASU 2019-11 Codification
Improvements to Topic 326, Financial Instruments - Credit losses, which made
certain amendments and corrections to the original codification. In November
2019, the FASB published ASU 2019-10 Financial Instruments -

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Credit losses (Topic 326), which made certain amendments to the effective dates
of the new standard. The amendment is effective for the Company for years
beginning after December 15, 2022 including interim periods with those years. On
March 9, 2020, the Financial Accounting Standards Board (FASB) issued Accounting
Standards Update (ASU) No. 2020-03 Codification Improvements to Financial
Instruments. The Company is currently evaluating the impact of this accounting
standard, but it is expected that the new standard may result in additional
credit losses being recorded.

In January 2017, the FASB published ASU 2017-04: Intangibles - Goodwill and
Other (Topic 350): Topic 350 seeks to simplify goodwill impairment testing
requirements for public entities. Under the amendments in this update, an entity
should perform its annual, or interim, goodwill impairment test by comparing the
fair value of a reporting unit with its carrying amount. An entity should
recognize an impairment charge for the amount by which the carrying amount
exceeds the reporting unit's fair value; however, the loss recognized should not
exceed the total amount of goodwill allocated to that reporting unit.
Additionally, an entity should consider income tax effects from any
tax-deductible goodwill on the carrying amount of the reporting unit when
measuring the goodwill impairment loss, if applicable. The FASB also eliminated
the requirements for any reporting unit with a zero or negative carrying amount
to perform a qualitative assessment and, if it fails that qualitative test, to
perform Step 2 of the goodwill impairment test. Therefore, the same impairment
assessment applies to all reporting units. An entity is required to disclose the
amount of goodwill allocated to each reporting unit with a zero or negative
carrying amount of net assets. The amendments in this ASU are effective for all
smaller reporting companies for fiscal years, and interim periods within those
fiscal years, beginning after December 15, 2022. The Company is currently
evaluating the impact of this accounting standard. However, it is expected that
this may reduce the complexity of evaluating goodwill for impairment.

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

Critical Accounting Policies and Estimates

The preparation of financial statements requires us 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 reporting
period. Actual results could differ from those estimates.



Note 3 to the consolidated financial statements describe the significant
accounting policies and methods used in the preparation of our consolidated
financial statements. The following critical accounting policies are affected
significantly by judgments, assumptions and estimates used in the preparation of
the consolidated financial statements. We believe the following critical
accounting policies affect our more significant judgments and estimates used in
the preparation of our consolidated financial statements.

Deferred Tax Asset Valuation Allowance

In assessing the realization of deferred tax assets, we consider whether it is
more likely than not that some portion or all of the deferred tax assets will
not be realized. The ultimate realization of deferred tax assets is dependent
upon the generation of future taxable income. We consider the scheduled reversal
of deferred tax liabilities, projected future taxable income and tax planning
strategies in making this assessment. Guidance under ASC 740 states that forming
a conclusion that a valuation allowance is not needed is difficult when there is
negative evidence, such as cumulative losses in recent years in the
jurisdictions to which the deferred tax assets relate. Management reassessed its
historical cumulative earnings in recent years, in addition to its expectation
of earnings in future years. As a result of the reassessment performed, a full
valuation allowance related to the deferred tax assets arising in Canada, United
States and Asia is appropriate. There is no valuation allowance related to
deferred tax assets in Mexico.

The percentage of completion of unbilled contract asset

The Company recognizes revenue for custom manufacturing services over time as
products are manufactured, and corresponding unbilled contract assets relating
to the work-in-progress (WIP) and finished goods inventory. Management is
required to use significant judgment to estimate the percentage of completion of
its unbilled contract assets relating to WIP

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inventory using manufacturing inputs to determine the portion of the performance
obligation that has been satisfied. If assumptions change related to the
manufacturing inputs utilized to estimate the percentage of completion, this
could have a material impact on unbilled contract asset relating to WIP
inventory, revenue and corresponding margin recognized.





Goodwill



Goodwill represents the excess of purchase price over the fair value of net
identifiable assets acquired in a purchase business combination. Goodwill is not
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 fourth 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 not
(that is, a likelihood of more than 50 percent) that the fair value of a
reporting unit is less than its carrying amount. The Company first assesses
certain qualitative factors to determine whether the existence of events or
circumstances leads to determination that it is more likely than not 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
not more likely than not that the fair value of a reporting unit is less than
its carry amount, then performing the two-step impairment test is unnecessary.
When necessary, impairment of goodwill is tested at the reporting unit level (or
group of reporting units) 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 units) 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 second 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 comprehensive loss and is not reversed if the fair value
subsequently increases. Based on the qualitative assessment performed, goodwill
was not tested for impairment in the years ended January 31, 2021 and December
29, 2019.









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