UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K /A
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE
THE SECURITIES EXCHANGE ACT OF 1934
Date of report (Date of earliest event reported):
January 22 , 2019 ( November 8, 2018)
SMTC CORPORATION
(Exact name of registrant as specified in its charter)
Delaware |
0-31051 |
98-0197680 |
||
(State or other jurisdiction of incorporation or organization) |
(Commission File Number) |
(I.R.S. Employer Identification No.) |
7050 Woodbine Avenue, Suite 300
Markham, Ontario, Canada L3R 4G8
(Address of Principal Executive Offices) (Zip Code)
Registrant’s telephone number, including area code: (905) 479-1810
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions ( see General Instruction A.2. below):
☐ Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
☐ Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
☐ Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
☐ Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))
Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (240.12b-2 of this chapter).
☐ Emerging Growth Company
☐ If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standard provided pursuant to Section 13(a) of the Exchange Act.
EXPLANATORY NOTE
On November 8, 2018, SMTC Corporation, a Delaware corporation (the “Company or SMTC”), entered a Stock Purchase Agreement (the “Purchase Agreement”), by and among the Company, MC Assembly Holdings, Inc., a Delaware corporation (the “MC Assembly”), each of the stockholders of MC Assembly (the “Sellers”), and Cyprium Investment Partners LLC, a Delaware limited liability company, in its capacity as a representative of the Sellers, pursuant to which the Company agreed to purchase all of the issued and outstanding shares of capital stock of MC Assembly from the Sellers.
This Amendment No. 1 on Form 8-K/A is being filed by the Company to amend the Current Report on Form 8-K filed on November 9, 2018 (the "Original Report"), solely to provide the disclosures required by Item 9.01 of the Form 8-K that were not previously filed with the Original Report. Except as provided herein, the disclosures made in the Original Report remain unchanged.
Item 9.01. Financial Statements and Exhibits.
(a) |
Financial Statements of Businesses Acquired. |
Filed as Exhibit 99.1 and incorporated in this Item 9.01 by reference are the audited consolidated financial statements of MC Assembly as of December 31, 2016, and December 31, 2017, and the related audited consolidated statements of operations and comprehensive loss, statements of stockholders’ equity, and statements of cash flow for each of the fiscal years then ended, together with the notes thereto and the report thereon, and filed as Exhibit 99.2 and incorporated in this Item 9.01 by reference are the unaudited interim consolidated balance sheet of MC Assembly as of September 30, 2018, and the related unaudited interim consolidated statements of operations and comprehensive loss, and statements of cash flow for the nine month periods ended September 30, 2018 and 2017.
(b) |
Pro Forma Financial Information. |
Filed as Exhibit 99.3 and incorporated in this Item 9.01 by reference are the unaudited pro forma combined financial statements of the Company as of December 31, 2017, and for the nine months period ended September 30, 2018.
(d) |
Exhibits. |
Exhibit
|
Description
|
|
23.1 |
||
99.1 |
||
99.2 |
||
99.3 |
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
Date: January 22, 2019 |
SMTC CORPORATION
By: /s/ Edward Smith Name: Edward Smith Title: President and Chief Executive Officer |
Exhibit 23.1
Consent of Independent Auditor
We hereby consent to the inclusion in this Form 8-K/A and the incorporation by reference in the Registration Statement (No. 333-204756) on Form S-8 and in the Registration Statements (No. 333-225819 and No. 333-225000) on Form S-3 of SMTC Corporation of our report dated January 22, 2019, with respect to the consolidated financial statements of MC Assembly Holdings, Inc. and its subsidiary, for the years ended December 31, 2017 and 2016.
/s/ RSM US LLP
West Palm Beach, Florida
January 22, 2019
Exhibit 99.1
M C Assembly Holdings, Inc. and Subsidiary
(d/b/a M.C. Assembly)
Consolidated Financial Report
December 31, 2017
Contents
Independent Auditor’s Report |
3 |
Financial Statements |
|
Consolidated balance sheets |
4-5 |
Consolidated statements of operations and comprehensive loss |
6 |
Consolidated statements of changes in stockholders’ equity |
7 |
Consolidated statements of cash flows |
8-9 |
Notes to consolidated financial statements |
10-23 |
Independent Auditor’s Report
To the Board of Directors
M C Assembly Holdings, Inc.
Report on the Financial Statements
We have audited the accompanying consolidated financial statements of M C Assembly Holdings, Inc. and Subsidiary (the Company), which comprise the consolidated balance sheets as of December 31, 2017 and 2016, the related consolidated statements of operations and comprehensive loss, changes in stockholders’ equity and cash flows for the years then ended, and the related notes to the consolidated financial statements (collectively, the financial statements).
Management’s Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.
Auditor’s Responsibility
Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of M C Assembly Holdings, Inc. and Subsidiary as of December 31, 2017 and 2016, and the results of their operations and their cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America.
/s/ RSM US LLP
West Palm Beach, Florida
January 22, 2019
M C Assembly Holdings, Inc. and Subsidiary |
(d/b/a M.C. Assembly) |
Consolidated Balance Sheets |
December 31, 2017 and 2016 |
Assets |
2017 |
2016 |
||||||
Current Assets |
||||||||
Cash |
$ | 7,210 | $ | 6,668 | ||||
Accounts Receivable, net of allowance for doubtful accounts 2017 $201,000; 2016 $4,100,000 |
22,275,186 | 18,089,744 | ||||||
Inventories, net |
22,635,415 | 24,977,147 | ||||||
Prepaid expenses and other current assets |
1,534,901 | 1,644,194 | ||||||
Deferred income taxes |
326,749 | 276,436 | ||||||
Total current assets |
46,779,461 | 44,994,189 | ||||||
Equipment, Building, and Leasehold Improvements |
||||||||
Machinery and equipment |
31,952,685 | 32,509,192 | ||||||
Office and computer equipment |
7,966,019 | 7,747,585 | ||||||
Building leasehold |
10,100,000 | 10,100,000 | ||||||
Leasehold improvements |
3,568,179 | 3,462,536 | ||||||
Vehicles |
105,893 | 113,755 | ||||||
53,692,776 | 53,933,068 | |||||||
Less accumulated depreciation and amortization |
37,105,821 | 34,622,260 | ||||||
16,586,955 | 19,310,808 | |||||||
Other assets |
9,372 | 1,144 | ||||||
Goodwill, net |
38,547,750 | 38,547,750 | ||||||
Deposits |
811,408 | 811,408 | ||||||
Total assets |
$ | 102,734,946 | $ | 103,665,299 |
See Notes to Consolidated Financial Statements. |
M C Assembly Holdings, Inc. and Subsidiary |
(d/b/a M.C. Assembly) |
Consolidated Balance Sheets (Continued) |
December 31, 2017 and 2016 |
Liabilities and Stockholders’ Equity |
2017 |
2016 |
||||||
Current Liabilities |
||||||||
Current maturities of capital lease obligations |
$ | 1,171,629 | $ | 1,063,757 | ||||
Accounts payable |
13,828,486 | 16,678,800 | ||||||
Accrued liabilities |
4,227,821 | 4,376,623 | ||||||
Accrued management fees |
1,375,000 | 1,375,000 | ||||||
Customer deposits |
1,011,137 | 1,510,026 | ||||||
Total current liabilities |
21,614,073 | 25,004,206 | ||||||
Other Liabilities |
||||||||
Line of credit, net of deferred costs 2017 - $207,000; 2016 - $285,000 |
22,560,113 | 18,748,074 | ||||||
Capital lease obligations, less current maturities |
9,851,904 | 10,633,055 | ||||||
Stockholder subordinated notes |
36,485,838 | 35,042,894 | ||||||
Junior subordinated notes |
2,265,733 | 2,007,409 | ||||||
Deferred income taxes - noncurrent liability |
326,749 | 276,436 | ||||||
Total liabilities |
93,104,410 | 91,712,074 | ||||||
Commitments and Contingencies |
||||||||
Stockholders’ Equity |
||||||||
Class A common stock – $0.001 par value; 1,940,000 shares authorized, 984,000 issued and outstanding |
984 | 984 | ||||||
Class B common stock – $0.001 par value; 60,000 shares authorized, 27,000 issued and outstanding |
27 | 27 | ||||||
Additional paid-in capital |
26,479,536 | 26,451,741 | ||||||
Accumulated other comprehensive loss |
(176,645 | ) | - | |||||
Accumulated deficit |
(16,673,366 | ) | (14,499,527 | ) | ||||
Total stockholders' equity |
9,630,536 | 11,953,225 | ||||||
$ | 102,734,946 | $ | 103,665,299 |
See Notes to Consolidated Financial Statements. |
M C Assembly Holdings, Inc. and Subsidiary |
(d/b/a M.C. Assembly) |
Consolidated Statements of Operations and Comprehensive Loss |
Years Ended December 31, 2017 and 2016 |
2017 |
2016 |
|||||||
Net Sales |
$ | 142,261,653 | $ | 177,535,184 | ||||
Cost of Goods Sold |
124,365,663 | 158,370,838 | ||||||
Gross profit |
17,895,990 | 19,164,346 | ||||||
Selling, General and Administrative Expenses |
11,893,953 | 18,162,977 | ||||||
Impairment Losses |
- | 782,241 | ||||||
Income from operations |
6,002,037 | 219,128 | ||||||
Other Income (Expense) |
||||||||
Interest expense |
(7,621,337 | ) | (7,387,730 | ) | ||||
Other income |
67,041 | 25,802 | ||||||
Other expense |
(591,790 | ) | (804,000 | ) | ||||
(8,146,086 | ) | (8,165,928 | ) | |||||
Loss before income taxes |
(2,144,049 | ) | (7,946,800 | ) | ||||
Income Tax Expense |
29,790 | 46,563 | ||||||
Net loss |
(2,173,839 | ) | (7,993,363 | ) | ||||
Other Comprehensive Loss |
||||||||
Net derivatives loss on hedge transactions |
(176,645 | ) | - | |||||
Comprehensive loss |
$ | (2,350,484 | ) | $ | (7,993,363 | ) |
See Notes to Consolidated Financial Statements. |
M C Assembly Holdings, Inc. and Subsidiary |
(d/b/a M.C. Assembly) |
Consolidated Statements of Changes in Stockholders' Equity |
Years Ended December 31, 2017 and 2016 |
Class A |
Class B |
Additional |
Accumulated |
|||||||||||||||||||||||||||||
Common Stock |
Common Stock |
Paid-in |
Accumulated |
Other Comprehensive |
||||||||||||||||||||||||||||
Shares |
Amount |
Shares |
Amount |
Capital |
Deficit |
Loss |
Total |
|||||||||||||||||||||||||
Balance, December 31, 2015 |
984,000 | $ | 984 | 27,000 | $ | 27 | $ | 26,431,226 | $ | (6,506,164 | ) | $ | - | $ | 19,926,073 | |||||||||||||||||
Net loss |
- | - | - | - | - | (7,993,363 | ) | - | (7,993,363 | ) | ||||||||||||||||||||||
Stock-based compensation |
- | - | - | - | 20,515 | - | - | 20,515 | ||||||||||||||||||||||||
Balance, December 31, 2016 |
984,000 | 984 | 27,000 | 27 | 26,451,741 | (14,499,527 | ) | - | 11,953,225 | |||||||||||||||||||||||
Net loss |
- | - | - | - | - | (2,173,839 | ) | - | (2,173,839 | ) | ||||||||||||||||||||||
Other comprehensive loss |
- | - | - | - | - | - | (176,645 | ) | (176,645 | ) | ||||||||||||||||||||||
Stock-based compensation |
- | - | - | - | 27,795 | - | - | 27,795 | ||||||||||||||||||||||||
Balance, December 31, 2017 |
984,000 | $ | 984 | 27,000 | $ | 27 | $ | 26,479,536 | $ | (16,673,366 | ) | $ | (176,645 | ) | $ | 9,630,536 |
See Notes to Consolidated Financial Statements. |
M C Assembly Holdings, Inc. and Subsidiary |
(d/b/a M.C. Assembly) |
Consolidated Statements of Cash Flows |
Years Ended December 31, 2017 and 2016 |
2017 |
2016 |
|||||||
Cash Flows From Operating Activities |
||||||||
Net loss |
$ | (2,173,840 | ) | $ | (7,993,363 | ) | ||
Adjustments to reconcile net loss to net cash (used in) provided by operating activities: |
||||||||
Gain on disposition of equipment and leasehold improvements |
(22,024 | ) | (155,496 | ) | ||||
Depreciation |
4,346,069 | 6,046,754 | ||||||
Amortization |
- | 223,498 | ||||||
Impairment loss on customer relationships |
- | 782,241 | ||||||
Amortization of deferred loan costs |
78,450 | 78,450 | ||||||
Interest added to principal on notes payable |
1,701,268 | 1,619,039 | ||||||
Stock-based compensation expense |
27,795 | 20,515 | ||||||
Foreign currency hedge loss |
(176,645 | ) | - | |||||
Changes in working capital components: |
||||||||
Accounts receivable |
(4,185,442 | ) | 2,848,265 | |||||
Inventories |
2,341,732 | 3,391,514 | ||||||
Prepaid expenses and other current assets |
109,293 | 151,503 | ||||||
Other assets |
(8,228 | ) | 13,952 | |||||
Accounts payable |
(2,850,314 | ) | (304,270 | ) | ||||
Customer deposits |
(498,889 | ) | 1,302,257 | |||||
Accrued liabilities |
(148,802 | ) | 404,885 | |||||
Net cash (used in) provided by operating activities |
(1,459,576 | ) | 8,429,744 | |||||
Cash Flows From Investing Activities |
||||||||
Purchases of equipment and leasehold improvements |
(1,176,001 | ) | (2,043,555 | ) | ||||
Proceeds from sale of equipment and leasehold improvements |
26,086 | 157,835 | ||||||
Deposits |
- | 87,116 | ||||||
Net cash used in investing activities |
(1,149,915 | ) | (1,798,604 | ) | ||||
Cash Flows From Financing Activities |
||||||||
Net borrowings (repayments) on line of credit |
3,733,589 | (5,672,941 | ) | |||||
Principal payments under capital lease obligations |
(1,123,556 | ) | (956,306 | ) | ||||
Net cash provided by (used in) financing activities |
2,610,033 | (6,629,247 | ) |
(Continued) |
M C Assembly Holdings, Inc. and Subsidiary |
(d/b/a M.C. Assembly) |
Consolidated Statements of Cash Flows (Continued) |
Years Ended December 31, 2017 and 2016 |
2017 |
2016 |
|||||||
Net increase in cash |
$ | 542 | $ | 1,893 | ||||
Cash |
||||||||
Beginning |
6,668 | 4,775 | ||||||
Ending |
$ | 7,210 | $ | 6,668 | ||||
Supplemental Disclosures of Cash Flow Information |
||||||||
Cash payments for interest |
$ | 5,819,922 | $ | 5,699,672 | ||||
Cash payments for income taxes |
$ | 41,247 | $ | 44,331 | ||||
Supplemental Schedule of Noncash Investing and Financing Activities: |
||||||||
Equipment acquired through capital leases |
$ | 450,277 | $ | 857,869 | ||||
Accrued interest added to principal balance of stockholder and junior subordinated notes payable |
$ | 1,701,268 | $ | 1,619,039 |
See Notes to Consolidated Financial Statements. |
M C Assembly Holdings, Inc. and Subsidiary
(d/b/a M.C. Assembly)
Notes to Consolidated Financial Statements
Note 1. Nature of Organization and Significant Accounting Policies
Formation and n ature of organization: M C Assembly Holdings, Inc. (Holdings) was established on February 27, 2007, for the purpose of acquiring the stock of M C Test Service, Inc. and its subsidiary M.C. Assembly International, LLC. Holdings is located in Melbourne, Florida, and assembles and sells printed circuit boards to customers throughout the United States.
On June 18, 2010, MC Assembly LLC (LLC) was formed as a subsidiary of M C Test Service, Inc. On June 30, 2010, LLC purchased substantially all of the assets and assumed certain liabilities of RWA, Inc. (d/b/a Chase EMS). LLC is located in Billerica, Massachusetts and is in the same industry as M C Test Service, Inc., providing contract electronic manufacturing services, including printed circuit board assembly, sub assembly, and fully-tested box build services.
A summary of the Company’s significant accounting policies follows:
Principles of consolidation: The consolidated financial statements include the accounts of Holdings and its wholly-owned subsidiary, M C Test Service, Inc., and M C Test Service, Inc.’s subsidiaries, M.C. Assembly International, LLC and MC Assembly LLC, which are single-member LLCs (collectively referred to as the Company). All material intercompany amounts and transactions are eliminated in consolidation.
Use of e stimates: The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (U.S. GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Accordingly, actual results could differ from those estimates.
Revenue recognition: The Company recognizes revenue when its product is shipped or delivered depending on the FOB terms per the sales agreement, at which time title and risk of loss passes to the customer. Revenues include sales of product to customers, net of discounts, if any.
The Company offers warranties to its customers for products that are not built in accordance with terms of the customer’s purchase agreement. The normal warranty period is one year. The Company’s warranties require it to repair or replace defective products during the warranty period at no cost to the customer. At the time product revenue is recognized, the Company records a liability for estimated costs that may be incurred under its warranties. The costs, which historically have not been significant, are estimated based on historical experience of costs incurred to repair returned products with specific warranty issues. Although historical warranty costs have been within expectations, there can be no assurance that future warranty costs will not exceed historical amounts. The Company periodically assesses the adequacy of its recorded warranty liability and adjusts the balance as necessary. As of December 31, 2017 and 2016, the accrued warranty balances were $93,000 and $147,000, respectively.
Accounts receivable : Accounts receivable are stated at net realizable value and are presented in the balance sheet net of an allowance for doubtful accounts. The allowance for doubtful accounts is estimated based on the Company’s historical percentage of accounts receivable written off which is applied to the aging of accounts as well as the existing economic conditions in the industry, and the financial stability of its customers. Accounts receivable are written off when they are determined to be uncollectible.
M C Assembly Holdings, Inc. and Subsidiary
(d/b/a M.C. Assembly)
Notes to Consolidated Financial Statements
Note 1. |
Nature of Organization and Significant Accounting Policies (Continued) |
Inventories: Inventories are stated the lower of cost and net realizable value. Net realizable value is defined as estimated selling price in the ordinary course of business less reasonably predictable costs of completion, disposal, and transportation. Cost is determined using the first-in, first-out method. An allowance for obsolescence is established to reduce obsolete inventory to its market value.
Equipment , b uilding and leasehold improvements : Equipment, building and leasehold improvements, including equipment and building acquired under capital lease obligations, are stated at cost less accumulated depreciation and amortization. Amortization expense on assets acquired under capital leases is included with depreciation expense on owned assets.
Depreciation is computed utilizing the straight-line method over the assets’ estimated useful lives of three to five years. Leasehold improvements are amortized over the shorter of estimated useful life or lease term. Expenditures for repairs and maintenance are charged to operations as incurred.
Deferred loan costs : Deferred loan costs consist of deferred financing costs from the Company’s revolving credit facility. Deferred loan costs are being amortized using the effective interest method over the life of the related loans with the unamortized balance presented net against the related debt liability. Deferred loan costs amortization is recorded as a component of interest expense.
Customer relationships : As part of the Chase EMS acquisition, the Company identified certain customer relationships as an intangible asset. The customer relationships were amortized on a straight-line basis over 10 years. In 2016, the Company determined the remaining balance for customer relationships was fully impaired as the customer list no longer contained current customers.
Goodwill and Other Intangible Assets: The Company’s goodwill was recorded as a result of the Company’s business combinations using the acquisition method of accounting. The Company does not amortize goodwill, but tests it at least annually for recoverability. Other intangible assets include customer lists. Such intangible assets are amortized on a straight-line basis over their estimated useful lives, which are generally two to five years.
Impairment of long-lived assets: Finite-lived intangible assets, other than goodwill, are tested for impairment based on undiscounted cash flows at an asset group level and, if impaired, written down by the amount by which the carrying value of the asset group exceeded its fair value, based on either discounted cash flows or market values. However, the carrying amount of a finite-lived asset can never been written down below its fair value.
Goodwill is tested annually for impairment, or sooner when circumstances indicate an impairment may exist, using a fair-value approach at the reporting unit level. A reporting unit is the operating segment, or a business which is one level below that operating segment (the “component” level) if discrete financial information is prepared and regularly reviewed by segment management at the component level. Components are aggregated as a single reporting unit if they have similar economic characteristic. The Company may elect to perform a qualitative assessment, based on relevant events and circumstances, to determine whether it is more likely than not that a fair value of the reporting unit is less than its carrying amount. Management determined that no impairment of long-lived assets occurred during the years ended December 31, 2017 and 2016. The Company tested its goodwill for impairment for the years ended December 31, 2017 and 2016 and determined that no impairment of goodwill occurred.
M C Assembly Holdings, Inc. and Subsidiary
(d/b/a M.C. Assembly)
Notes to Consolidated Financial Statements
Note 1. Nature of Organization and Significant Accounting Policies (Continued)
Customer d eposits : Customer deposits are cash collections received in advance to ensure the future delivery of goods and services. Customer deposits are classified as current liabilities as the goods and services are expected to be delivered within the next year.
Stock-based compensation: The costs of stock-based compensation are measured at fair value on each service grant date using the Black-Scholes option pricing model and recognized in the financial statements over the requisite service period with a corresponding increase to additional paid-in capital.
Income taxes: Deferred taxes are provided on a liability method whereby deferred tax assets are recognized for deductible temporary differences and operating loss and tax credit carryforwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.
The Company may recognize the tax benefit from an uncertain tax position only if it is more-likely-than-not that the tax position will be sustained on examination by taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement.
Shipping and handling: Shipping and handling costs are charged to cost of goods sold as incurred. For the years ended December 31, 2017 and 2016, the costs were approximately $732,000 and $1,009,000, respectively.
Fair value of financial instruments : The estimated fair values of the Company’s short-term financial instruments, including cash, accounts receivable, accounts payable and accrued expenses arising in the ordinary course of business, approximate their individual carrying amounts due to the relatively short period of time between their origination and expected realization. The carrying values of the line of credit approximate fair value as the agreement bears interest at a variable rate and there has been no significant changes in the Company’s credit risk. The estimated fair value of the stockholder and junior subordinated notes are based on the current rates offered to the Company for similar debt of the same remaining maturities.
Derivative financial instruments: The Company does not engage in currency speculation, however, we use foreign currency exchange rate derivatives on an ongoing basis to hedge against certain foreign currency-related exposures. Our risk-management objective for undertaking these cash-flow hedges is to mitigate the financial transaction fluctuations associated with the volatility of the U.S. Dollar (USD) compared to the Mexican Peso. The hedging program is structured using a rolling, layering strategy, using monthly hedges at different percentages per quarter. The rolling, layering strategy allows for dollar-cost averaging, reducing the volatility of USD cash flows. These cash-flow hedge contracts qualify for hedge accounting under Accounting Standards Codification (ASC) 815, Derivatives and Hedging . Accordingly, the fair value of these derivative instruments is included in other current assets on the consolidated balance sheet. The changes in the fair value of these derivative contracts are recognized in other comprehensive income in the consolidated statements of operations.
M C Assembly Holdings, Inc. and Subsidiary
(d/b/a M.C. Assembly)
Notes to Consolidated Financial Statements
Note 1. |
Nature of Organization and Significant Accounting Policies (Continued) |
Recent accounting pronouncements:
Recently adopted pronouncements:
In July 2015, the FASB issued ASU 2015-11, Inventory (Topic 330): Simplifyi ng the Measurement of Inventory. The amendments in this Update more closely align the measurement of inventory in U.S. GAAP with the measurement of inventory in International Financial Reporting Standards (IFRS).
FASB has amended some of the other guidance in Topic 330 to more clearly articulate the requirements for the measurement and disclosure of inventory. However, the FASB does not intend for those clarifications to result in any changes in practice. Other than the change in the subsequent measurement guidance from the lower of cost or market to the lower of cost and net realizable value for inventory within the scope of this Update, there are no other substantive changes to the guidance on measurement of inventory. For private companies, the amendments in this Update are effective for fiscal years beginning after December 15, 2016. The adoption of ASU 2015-11 had no impact on the consolidated financial statements.
In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. The new guidance is intended to more closely align hedge accounting with entities’ hedging strategies, simplify the application of hedge accounting, and increase the transparency of hedging programs. For cash flow and net investment hedges existing at the date of adoption, ASU 2017-12 must be applied through a cumulative-effect adjustment. The amended presentation and disclosure guidance is required only prospectively. The Company adopted this guidance for the fiscal year ended December 31, 2017.
On December 22, 2017, the President of the United States signed into law the Tax Cuts and Jobs Act (TCJA) tax reform legislation. This legislation makes significant changes in U.S. tax law including numerous changes to individual tax rules, a reduction in the corporate tax rates, changes to net operating loss carryforwards and carrybacks, and a repeal of the corporate alternative minimum tax. The legislation reduced the U.S. corporate tax rate from the current rate of 35% to 21%. As a result of the enacted law, the Company was required to revalue deferred tax assets and liability at the enacted rate (see Note 9). The other provisions of the TCJA did not have a material impact on the consolidated financial statements.
To be adopted in future period s :
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606) , which provides guidance for recognizing revenue. ASU 2014-09 updates the guidance on revenue recognition by improving the comparability of revenue practices across entities, industries, jurisdictions and capital markets, and ASU 2015-14 defers the effective date for annual reporting periods beginning after December 15, 2018, with early application permitted for annual periods beginning after December 15, 2016. The Company has not yet evaluated the impact this ASU will have on the consolidated financial statements.
In November 2015, the FASB issued ASU 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes. Under ASU 2015-17, a reporting entity is required to classify deferred tax assets and liabilities as noncurrent in a classified statement of financial position. For non-public business entities, the update is effective for financial statements issued for annual periods beginning after December 15, 2017. Entities may apply the update either prospectively to all deferred tax assets and liabilities, or retrospectively for all periods presented. If an entity applies the update prospectively, the entity shall disclose the nature and reason for the change in accounting principle and disclose that the prior periods were not retrospectively adjusted. If an entity adopts the update retrospectively, the
M C Assembly Holdings, Inc. and Subsidiary
(d/b/a M.C. Assembly)
Notes to Consolidated Financial Statements
Note 1. Nature of Organization and Significant Accounting Policies (Continued)
entity shall disclose the nature and reason of the change in accounting principle and disclose the quantitative effects of the accounting change on prior periods. The Company will not early adopt and is currently assessing the impact this ASU will have on future consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The update requires all lessees recognize the assets and liabilities that rise from leases. Elections may be available for those leases with terms of 12 months or less. The amendment still retains the distinction between finance leases and operating leases, with classification affecting the pattern of expense recognition in the consolidated statements of operations. The amendments in this ASU are effective for private business entities for financial statements issued for fiscal years beginning after December 15, 2019. The impact of the adoption of the standard is expected to result in the recognition of all leases with the correspondent assets and liabilities recorded in the consolidated financial statements. Management is currently evaluating the qualitative and quantitative impact of this standard.
In January 2017, the FASB issued ASU 2017-04, Intangibles-Goodwill and Other (Topic 350) : Simplifying the Test for Goodwill Impairment. The ASU simplifies the measurement of goodwill impairment by eliminating the requirement that an entity compute the implied fair value of goodwill based on the fair values of its assets and liabilities to measure impairment. Instead, goodwill impairment will be measured as the difference between the fair value of the reporting unit and the carrying value of the reporting unit. The ASU also clarifies the treatment of the income tax effect of tax deductible goodwill when measuring goodwill impairment loss. ASU 2017-04 will be effective for the Company beginning on January 1, 2022. The Company is currently evaluating the impact of the adoption of this guidance on its consolidated financial statements.
The FASB and other entities issued new, or modifications to, or interpretations of, existing accounting guidance during the year ended December 31, 2018. The Company has considered the new pronouncements that altered U.S. GAAP and other than as disclosed in these notes to the consolidated financial statements, does not believe that any other new or modified principles will have a material impact on the Company’s reported financial position or operations in the near term.
Subsequent e vents : Management has evaluated subsequent events through January 22, 2019 which is the date the consolidated financial statements were available to be issued.
Note 2. Goodwill
The following table represents the balance and changes in goodwill as of and for the years ended December 31, 2017 and 2016:
2017 |
2016 |
|||||||
Balance as of January 1, 2016 |
$ | 38,547,750 | $ | 38,547,750 | ||||
Accumulated impairment loss |
- | - | ||||||
Balance as of December 31, 2016 |
$ | 38,547,750 | $ | 38,547,750 | ||||
Accumulated impairment loss |
- | - | ||||||
Balance as of December 31, 2017 |
$ | 38,547,750 | $ | 38,547,750 |
M C Assembly Holdings, Inc. and Subsidiary
(d/b/a M.C. Assembly)
Notes to Consolidated Financial Statements
Note 3. Inventories
Inventories consisted of the following as of December 31, 2017 and 2016:
2017 |
2016 |
|||||||
Raw materials |
$ | 13,617,458 | $ | 15,430,573 | ||||
Work in process |
8,973,275 | 6,797,428 | ||||||
Finished goods |
2,384,220 | 6,096,202 | ||||||
24,974,953 | 28,324,203 | |||||||
Less allowance |
(2,339,538 | ) | (3,347,056 | ) | ||||
$ | 22,635,415 | $ | 24,977,147 |
Note 4. Line of Credit
The Company has a secured revolving line of credit with JPMorgan Chase Bank N.A. (Lender) containing a letter of credit commitment up to $1,500,000 and maximum borrowings of $38,000,000 with a maturity date of August 18, 2020. The amounts available under the line of credit are determined based upon a formula of eligible receivables and inventories. The line of credit is collateralized by a first lien on all assets of the Company. The Company is required to meet a fixed charge coverage ratio, only if the Company’s availability under the line is less than $5 million at the beginning of an interim financial statement reporting period and ending as soon as the Company’s availability remains in excess of $5 million for thirty (30) consecutive days, as long as no event of default has occurred. Interest is payable based upon monthly outstanding balance under the line of credit, at the prime rate as defined in the credit agreement, less 1.00% margin or, at the Company’s option, the Eurodollar Loan Rate plus 1.75% margin. As of December 31, 2017 and 2016, the effective interest rate was 3.25% and 2.59%, respectively. The outstanding balance on the lines of credit as of December 31, 2017 and 2016, was $22,766,738 and $19,033,149, respectively, net of deferred loan costs of $206,625 and $285,075, respectively. Borrowings under the line of credit are classified as non-current on the balance sheet due to the line of credit having a subjective acceleration clause and a springing lockbox arrangement whereby the Company is required to submit all payments on invoices to the lockbox, but the Lender can only access the lockbox if: (a) commencing on the date the Company fails to maintain availability of less than $5.5 million or upon any event of default occurring and (b) continuing until such time thereafter as no event of default is continuing and availability is greater than $5.5 million for a period of thirty (30) consecutive days.
Note 5. Stockholder Subordinated Notes
As of December 31, 2017, the Company’s Stockholder Subordinated Notes outstanding balance totaled $36,485,838 compared with the December 31, 2016, balance of $35,042,894. The Stockholder Subordinated Notes are unsecured, bear interest at a rate of 16%, payable quarterly in arrears, and are subordinated to the line of credit (see Note 4). The Stockholder Subordinated Notes mature on September 17, 2020. For the years ended December 31, 2017 and 2016, interest expense related to the Stockholder Subordinated Notes totaled $5,771,775 and $5,558,321, respectively, of which $4,328,831 and $4,168,741, respectively, was paid in cash and $1,442,944 and $1,389,580, respectively, was added to the principal balance.
M C Assembly Holdings, Inc. and Subsidiary
(d/b/a M.C. Assembly)
Notes to Consolidated Financial Statements
Note 5. Stockholder Subordinated Notes (Continued)
The estimated carrying amount and fair values of the Company’s Stockholder Notes as of December 31, 2017 and 2016, are as follows:
2017 |
2016 |
|||||||||||||||
Carrying |
Estimated |
Carrying |
Estimated |
|||||||||||||
Value |
Fair Value |
Value |
Fair Value |
|||||||||||||
Senior subordinated notes |
$ | 36,485,838 | $ | 39,080,804 | $ | 35,042,894 | $ | 37,535,235 |
Note 6. Junior Subordinated Notes
Junior subordinated notes consist of unsecured notes payable to the former stockholder (the Junior Notes). The Junior Notes were entered into in connection with the acquisition of M C Test Service, Inc. and are subordinated to the JPMorgan Chase line of credit (see Note 4) and the Stockholder Subordinated Notes (see Note 5). In conjunction with the line of credit (see Note 4), the Junior Notes were amended to be payable in full on September 17, 2020. The Junior Notes bear interest at 12% per annum payable quarterly in arrears. For the years ended December 31, 2017 and 2016, interest expense related to the Junior Notes totaled $258,324 and $229,459, respectively, all of which was added to the principal balance. The outstanding balance of the Junior Notes as of December 31, 2017 and 2016, was $2,265,733 and $2,007,409, respectively. As of December 31, 2017 and 2016, the carrying amount of the Junior Notes approximates fair value.
Note 7. Capital Lease Obligations
The Company leases various equipment and buildings under capital leases. These noncancellable leases have varying expiration dates through March 2030, and are payable in varying monthly installments totaling approximately $174,000 including implied interest at various rates ranging from 3% to 13%. These leases are collateralized by the equipment leased.
As of December 31, 2017 and 2016, equipment held under capital leases reported on the balance sheet, consists of the following:
2017 |
2016 |
|||||||
Equipment |
$ | 3,608,961 | $ | 3,307,669 | ||||
Less accumulated depreciation |
(2,014,378 | ) | (1,287,479 | ) | ||||
Equipment under capital leases, net |
$ | 1,594,583 | $ | 2,020,190 |
During 2014, the Company signed a facility lease agreement for a 134,900 square foot facility in Melbourne, Florida, with a commencement date of March 1, 2015, and an expiration date of February 28, 2030. Under the terms of the agreement, the Company began occupancy of the building on December 1, 2014, and was not obligated to make rental payments until March 1, 2015. The lease terms neither transfer title nor contain a bargain purchase option, however the present value of the minimum lease payments under the lease equal 90% or more of the fair value of the leased real estate. Further, the value of the land is less than 25% of the aggregate fair value of the leased property. Under ASC 840-30, Capital Leases, the facility lease qualifies for capital lease treatment and in accordance with ASC 840-10, as the fair value of the land is less than 25% of the fair value of the leased property, the land component is considered immaterial and the lease is accounted for as a single unit for the purposes of the minimum lease payment criterion.
M C Assembly Holdings, Inc. and Subsidiary
(d/b/a M.C. Assembly)
Notes to Consolidated Financial Statements
Note 7. Capital Lease Obligations (Continued)
As of December 31, 2017 and 2016, buildings held under capital leases, consist of the following:
2017 |
2016 |
|||||||
Buildings |
$ | 10,100,000 | $ | 10,100,000 | ||||
Less accumulated depreciation |
(2,042,077 | ) | (1,379,781 | ) | ||||
Buildings under capital leases, net |
$ | 8,057,923 | $ | 8,720,219 |
Future minimum lease payments under the equipment and building capital leases together with the present value of the minimum lease payments as of December 31, 2017, are as follows:
Years Ending December 31, |
Amount |
|||
2018 |
$ | 2,034,467 | ||
2019 |
1,984,125 | |||
2020 |
1,578,179 | |||
2021 |
1,381,408 | |||
2022 |
1,217,480 | |||
Thereafter |
8,386,901 | |||
Total minimum lease payments |
16,582,560 | |||
Less amount representing interest |
(5,559,027 | ) | ||
11,023,533 | ||||
Less current maturities of capital lease obligations |
(1,171,629 | ) | ||
$ | 9,851,904 |
Note 8. Incentive Compensation Plans and Employment Agreement
Incentive Compensation Plan
Effective January 13, 2017, the Board of Directors and the Company amended the MC Assembly Holdings, Inc. 2007 Key Employee Stock Option Plan (“2007 Plan”), reducing the shares of Class A Common Stock reserved under the plan from 88,889 shares to 23,778. Simultaneously, the Board of Directors and the Company created the MC Assembly Holdings, Inc. 2017 Employee Stock Option Plan (“2017 Plan”), reserving 111,111 of Class A Common Stock for option awards.
Both Plans expire on the tenth anniversary of the Effective Date and the options granted under either Plan expire after twelve years from date of grant. The Effective Date of the 2007 Plan is April 9, 2007, and the effective date of the 2017 Plan is January 13, 2017. The options under the 2007 Plan are fully vested and expire in 2.1 years. Options granted under the 2017 Plan vest ratably over five years and expire in 12 years. Under both Plans, the options become exercisable in ten years from the date of grant or upon a change in control, as defined in the Plan. The Board of Directors of the Company shall administer the Plans and determine the stock option exercise prices.
The Company is required to measure and recognize compensation expense at the fair value of stock awards determined at the date of grant. Compensation expense for awards and related tax effects are recognized as they vest.
The calculated value of each option award is estimated on the date of grant using an option valuation method that uses the assumptions noted below. The valuation technique incorporates assumptions for
M C Assembly Holdings, Inc. and Subsidiary
(d/b/a M.C. Assembly)
Notes to Consolidated Financial Statements
Note 8 . Incentive Compensation Plans and Employment Agreement (Continued)
the expected volatility of the stock price, the expected term of the option, expected dividends, forfeitures and risk-free interest rate for the expected term of the option. Expected volatility was based on the historical volatility of an appropriate industry sector index. The expected term of the option is based on the average period that the options vest and expire. The risk-free interest rate takes into account the time-value of money. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at time of grant.
As the Company’s stock is not traded in an active market, it is unable to determine a volatility estimate specific to the Company. Furthermore, management has not identified a similar company in this line of business listed in the marketplace. Therefore, the Company has used the calculated value method to value options, based on changes in an approximate industry sector index over the expected life of the options to estimate volatility of the Company’s stock price.
As of and for the year ended December 31, 2017, the Plan’s activity was as follows:
Weighted-Average |
Weighted-Average Remaining |
||||||||
2007 Stock Option Plan |
Shares Under Option |
Exercise Price |
Contract Term |
||||||
Outstanding as of December 31, 2016 |
88,889 | $ | 29.33 | ||||||
Granted |
- | - | |||||||
Forfeited |
- | - | |||||||
Cancelled |
(65,111 | ) | (28.13 | ) | |||||
Exercised |
- | - | |||||||
Outstanding as of December 31, 2017 |
23,778 | $ | 32.62 |
2.1 years |
|||||
Exercisable as of December 31, 2017 |
15,278 | $ | 32.62 |
2.1 years |
Weighted-Average |
Weighted-Average Remaining |
||||||||
2017 Stock Option Plan |
Shares Under Option |
Exercise Price |
Contract Term |
||||||
Outstanding as of December 31, 2016 |
- | $ | - | ||||||
Granted |
96,111 | 5.00 | |||||||
Forfeited |
(21,111 | ) | (5.00 | ) | |||||
Cancelled |
- | - | |||||||
Exercised |
- | - | |||||||
Outstanding as of December 31, 2017 |
75,000 | $ | 5.00 |
11.0 years |
|||||
Exercisable as of December 31, 2017 |
- | N/A |
Under the 2007 Plan, there were no stock options granted during the years ended December 31, 2017 and 2016. Total compensation expense recognized for 2007 Plan for the years ended December 31, 2017 and 2016, was $0 and $20,515, respectively.
Under the 2017 Plan, 96,111 stock options were granted on January 13, 2017, and 21,111 were forfeited by the year ended December 31, 2017. Total compensation expense recognized for the years ended December 31, 2017 and 2016, was $27,795 and $0, respectively. As of December 31, 2017, stock compensation cost for unvested awards under the 2017 Plan totaled $123,725. The weighted-average grant date fair value of the options awarded during 2017 was $2.02.
M C Assembly Holdings, Inc. and Subsidiary
(d/b/a M.C. Assembly)
Notes to Consolidated Financial Statements
Note 8. Incentive Compensation Plans and Employment Agreement (Continued)
Employment Agreement
The Company entered into an employment agreement with a key executive (the Executive). The agreement, which was amended in October 2013, terminated on October 31, 2016, unless earlier terminated by the Company for cause, as defined in the agreement and includes automatic renewal periods of one year, unless either party notifies the other in writing not less than ninety (90) days prior to expiration. As of December 31, 2017, neither party has given the other notice of termination of the agreement. If the agreement is terminated by the Company without cause, the Executive shall receive severance pay equal to the Executive’s current annual base salary payable over a twelve-month period.
As additional consideration for entering into the employment agreement, the Executive was issued 11,111 shares of restricted stock for $.001 per share. The restricted stock shall be automatically forfeited to the Company and the stock shall be canceled upon termination of the employment agreement or the Executive’s employment with the Company. The risk of forfeiture terminated as of February 27, 2013, at which time the restricted shares became full shares.
Note 9. Income Taxes
Temporary differences between the financial statement carrying amounts and tax bases of assets and liabilities that give rise to significant portions of the deferred tax assets and liabilities relate to the following as of December 31, 2017 and 2016:
2017 |
2016 |
|||||||
Current Asset |
||||||||
Differences related to accrued expenses and allowances |
$ | 776,057 | $ | 2,410,166 | ||||
Less valuation allowance |
(449,308 | ) | (2,133,730 | ) | ||||
Net current asset |
$ | 326,749 | $ | 276,436 | ||||
Noncurrent Asset |
||||||||
Differences related to accrued expenses and allowances |
$ | 707,336 | $ | 956,049 | ||||
Net operating loss carryforward |
4,133,953 | 3,736,333 | ||||||
4,841,289 | 4,692,382 | |||||||
Less valuation allowance |
(2,802,926 | ) | (4,154,186 | ) | ||||
2,038,363 | 538,196 | |||||||
Noncurrent Liability |
||||||||
Equipment and leasehold improvements, principally due to differences in depreciation |
(2,365,112 | ) | (814,632 | ) | ||||
Net noncurrent liability |
$ | (326,749 | ) | $ | (276,436 | ) |
Income tax expense consists of the following for the years ended December 31, 2017 and 2016:
2017 |
2016 |
|||||||
Current income tax expense |
||||||||
Federal |
$ | - | $ | - | ||||
State |
29,790 | 46,563 | ||||||
29,790 | 46,563 | |||||||
Deferred income tax expense |
||||||||
Federal |
- | - | ||||||
State |
- | - | ||||||
Total income tax expense |
$ | 29,790 | $ | 46,563 |
M C Assembly Holdings, Inc. and Subsidiary
(d/b/a M.C. Assembly)
Notes to Consolidated Financial Statements
Note 9. Income Taxes (Continued)
Based on the available objective evidence, including the Company’s recent history of losses, the Company has provided a full valuation allowance against its deferred tax assets as of December 31, 2017 and 2016. Income tax expense differed from the amounts computed by applying the statutory federal income tax rate to loss before income taxes as a result of the following for the years ended December 31, 2017 and 2016.
2017 |
2016 |
|||||||
Computed expected tax benefit |
$ | (655,731 | ) | $ | (1,933,842 | ) | ||
Nondeductible expenses |
12,745 | 29,328 | ||||||
Effect of state income tax, net of federal benefit |
(16,298 | ) | (1,310 | ) | ||||
Valuation allowance |
(3,035,682 | ) | 1,906,724 | |||||
Effect of federal rate change |
1,506,044 | - | ||||||
Property and equipment |
2,172,450 | - | ||||||
Other |
46,262 | 45,663 | ||||||
$ | 29,790 | $ | 46,563 |
Note 10. Commitments and Contingencies
Accrued liabilities - Accrued liabilities as of December 31, 2017 and 2016 are:
2017 |
2016 |
|||||||
Payroll |
$ | 1,468,545 | $ | 1,530,089 | ||||
Accrued facility rent |
963,873 | 845,521 | ||||||
Accrued interest |
16,955 | 6,310 | ||||||
Customer-related |
674,237 | 287,974 | ||||||
Accrued employee bonus |
154,393 | 410,647 | ||||||
Accrued commission |
248,067 | 291,017 | ||||||
Other accruals |
701,751 | 1,005,065 | ||||||
Accrued liabilities |
$ | 4,227,821 | $ | 4,376,623 |
Mexico Operations – The Company, through its wholly-owned subsidiary M.C. Assembly International, LLC, has an Amended and Restated Shelter Services Agreement (the Agreement) with an unrelated third party, Entrada, to provide a workforce, facilities, and allied services in Fresnillo, Zacatecas, Mexico. The Company pays a monthly fee (Facility Fee) for the use of the manufacturing facility based upon square feet utilized and reimburses Entrada for personnel and related costs plus a fee based on the number of hours worked. The Company operates in the manufacturing facility that is under lease by Entrada. The Company is obligated to pay the Facility Fee until the earlier of the expiration of the remainder of the lease of the facility, termination of the lease by Entrada, or use of the facility by another customer of Entrada. All inventory and equipment residing in the facility is the property of the Company. The Company is also responsible for certain common area costs and the cost of insurance.
Effective March 31, 2017, the Company signed the Third Modification to the Agreement to allow the direct payment of any reimbursable cost as defined by the Agreement to be made directly to Entrada by the Company and paid in Mexican pesos, if such relates to the payment of Mexican payroll or are invoiced in pesos and/or are required to be invoiced in pesos. To mitigate the currency-related exposures, the Company entered into cash flow foreign currency hedges (see Note 14).
M C Assembly Holdings, Inc. and Subsidiary
(d/b/a M.C. Assembly)
Notes to Consolidated Financial Statements
N ote 1 0 . Commitments and Contingencies (Continued)
On December 27, 2017, the Company and Entrada executed the Fourth Modification to the Agreement. This modification was due to the changes in Mexico’s tax laws impacting maquiladoras (Article 183 of Income Tax Law in effect as of January 1, 2014, “Ley del Impresto Sobre la Renta”) and Rule 3.20.6 of the 2017 Mexican Miscellaneous Tax Rules (“MTR”). The Fourth Modification extends the terms of the Agreement for the time necessary to further analyze the impact of these obligations and renegotiate certain terms and conditions of the Agreement. The term of the Agreement is renewed until January 31, 2018, and automatically renewed on a monthly basis thereafter unless either party provides a notice of intent to terminate at least 10 days prior to the end of the month. No such notice has been provided to date by either party to the Agreement.
For the years ended December 31, 2017 and 2016, payments for the Facility Fee under this Agreement totaled approximately $418,000 and $430,000, respectively.
Leases – The Company leases certain buildings and equipment under operating lease agreements. The leases expire at dates to September 2025.
In November 2014, the Company signed a facility lease agreement for a 57,990 square foot facility in Billerica, MA, with a commencement date of March 1, 2015 through September 30, 2025. The lease payments for this facility are included in the calculation of future minimum lease commitments shown below.
The future minimum lease commitments for these leases as of December 31, 2017, are as follows:
Years Ending December 31, |
||||
2018 |
$ | 537,787 | ||
2019 |
537,787 | |||
2020 |
537,787 | |||
2021 |
537,787 | |||
2022 |
537,787 | |||
Thereafter |
1,434,097 | |||
$ | 4,123,032 |
For the years ended December 31, 2017 and 2016, rent expense was approximately $1,347,000 and $1,452,000, respectively.
Health Insurance – The Company has a fully self-insured health and medical insurance program. There is a maximum amount of $200,000 per individual for both 2017 and 2016 for which the Company can be responsible. Furthermore, the Company’s total maximum claim liability per policy period was $2,763,000 and $3,066,000 for the years ended December 31, 2017 and 2016, respectively. Approximately $299,000 and $300,000 is included in accrued liabilities relating to this program as of December 31, 2017 and 2016, respectively. The total expense recognized under the program, which includes insurance premiums paid, for the years ended December 31, 2017 and 2016, was $2,503,000 and $3,552,000, respectively. A stop-loss insurance policy covers all claims in excess of the above amounts. In 2016, the Company filed and received payment for a reimbursement claim with the stop loss insurance provider of approximately $175,000. In 2017, the Company received reimbursement for 2016 plan year stop loss claims of $43,000. No stop loss insurance claims were filed as of December 31, 2017, for the 2017 plan year.
Litigation - The Company pursues legal proceedings, claims, and litigation against others and is subject to the same arising in the ordinary course of business. As required under the guidance for contingency losses, the Company establishes liabilities when a particular contingency is probable and reasonably estimable. No contingency was established as of December 31, 2017 and 2016.
M C Assembly Holdings, Inc. and Subsidiary
(d/b/a M.C. Assembly)
Notes to Consolidated Financial Statements
Note 11. Employee Benefit Plan
The Company sponsors a 401(k) Savings Plan (the 401(k) Plan). The 401(k) Plan covers substantially all employees meeting certain eligibility requirements. The Company may make contributions to the 401(k) Plan at its discretion. The Company matched 25% of contributions up to 5% of compensation for the years ended December 31, 2017 and 2016. Total contributions for the years ended December 31, 2017 and 2016, were approximately $138,000 and $158,000, respectively.
Note 12. Related Party Transactions
The Company entered into a management services agreement on February 2007 with certain stockholders of the Company (the Managers). Under the agreement, the Managers will provide advice and expertise on various corporate matters. The initial term of the agreement was five years, ended March 31, 2012, then automatically renews for successive one-year periods, continuing until the parties agree in writing to terminate with thirty days written notice or the Managers, together with their affiliates, cease to own common stock of MC Assembly Holdings, Inc. or cease to provide indebtedness to the Company and its affiliates. As consideration for the services, the Company pays the Managers $500,000 annually payable quarterly in advance on the first day of each fiscal quarter. Management fee expense for the years ended December 31, 2017 and 2016, was accrued $500,000 per year and is included as part of selling, general and administrative expenses in the accompanying consolidated statements of
operations. Management fees of $500,000 and $375,000 were paid in cash during the years ended December 31, 2017 and 2016, respectively. The accrued balance of management fees for the years ended December 31, 2017 and 2016, was approximately $1,375,000 and $1,375,000, respectively, and is included in accrued liabilities in the accompanying consolidated balance sheets.
Note 13. Receivables Facility
In August 2017, the Company began a program of selling current receivables for a single customer to JPMorgan Chase Bank, N.A. (the Receivables Facility). The cash generated from the sale funds the Company’s working capital earlier than the payment would otherwise be received from the customer. The receivables are sold on a non-recourse basis at a discount equal to 1.20% per annum plus the applicable London Interbank Offered Rate (LIBOR) rate. Total receivables sold through December 31, 2017, were $126,677 and proceeds received totaled $125,882, equivalent to a discount rate of 0.63%. The Company does not plan to expand this program beyond this sole customer.
Note 14. Derivative Financial Instruments
We do not engage in currency speculation; however, we utilize foreign currency exchange rate derivatives on an ongoing basis to hedge against certain foreign currency-related exposures. Our risk-management objective for undertaking these cash-flow hedges is to mitigate the financial transaction fluctuations associated with the volatility of the USD compared to the Mexican Pesos. MCA purchases Mexican pesos and sells USD to cover forecasted Mexico-site payroll and other expenses. At inception, we designate these hedges as cash-flow hedges and accordingly, gains and losses on the foreign exchange hedge are recorded to the accumulated other comprehensive income (loss) account on the consolidated balance sheet. Gains and losses on the future foreign exchange hedge are not recorded until the hedged transaction is completed.
As of December 31, 2017, the notional value of our outstanding foreign currency contracts to hedge certain foreign exchanged-related operating exposures was approximately $3,750,000 or fifty-percent (50%) of our projected annual spend, based on prior-year actuals and current-year forecast. These contracts range nominally in value from $333,333 to $133,333 and range in maturity up to twelve months from year end. The fair value of these foreign exchange contracts, reported in other current assets was ($176,645) and $0, as of December 31, 2017 and 2016, respectively. The amount of loss recognized on these derivatives was $176,645 and $0, for the years ended December 31, 2017 and 2016, respectively.
M C Assembly Holdings, Inc. and Subsidiary
(d/b/a M.C. Assembly)
Notes to Consolidated Financial Statements
Note 15. Significant Customers
The following summarizes the Company’s significant customer concentration as of and for the years ended December 31, 2017 and 2016:
2017 |
2016 |
|||||||||||||||||||||||||||
% of Total |
Account |
% of Total |
% of Total |
Account |
% of Total |
|||||||||||||||||||||||
Customer |
Revenues |
Rev |
Receivable |
AR |
Revenues |
Rev |
Receivable |
AR |
||||||||||||||||||||
Customer A |
$ | 48,879,009 | 34% | $ | 5,605,916 | 25% | $ | 45,150,000 | 25% | $ | 3,924,000 | 22% | ||||||||||||||||
Customer B |
- | 0% | - | 0% | 31,224,000 | 18% | 1,116,000 | 6% |
Note 16. Subsequent Events
On November 9, 2018, SMTC Corporation (NASDAQ: SMTX) acquired all of the outstanding shares of MC Assembly Holdings, Inc. SMTC believes the acquisition will result in a stronger company with an expanded market presence, a diversified customer base since there is no customer overlap or customer concentration, and greater financial resources. The combined company will operate under the name SMTC Corporation and currently plans to continue to operate and maintain the existing facilities operated by each Company.
The purchase price at closing was $65 million, subject to certain adjustments. Further, the sellers are eligible to earn up to an additional $5 million of consideration, contingent upon the performance of MC Assembly for the twelve calendar months ending March 31, 2019. As part of the acquisition, all existing debt of MC Assembly Holdings, Inc., excluding capital leases, was paid in full in connection with the sale.
23
Exhibit 99.2
M C Assembly Holdings, Inc. and Subsidiary
(d/b/a M.C. Assembly)
Unaudited Consolidated Financial Report
For the Nine Months Ended September 30, 2018
Contents
Financial Statements |
|
Unaudited consolidated balance sheets |
1-2 |
Unaudited consolidated statements of operations and comprehensive loss |
3 |
Unaudited consolidated statement of stockholders’ equity |
4 |
Unaudited consolidated statements of cash flows |
5-6 |
Notes to the unaudited consolidated financial statements |
7-18 |
M C Assembly Holdings, Inc. and Subsidiary |
(d/b/a M.C. Assembly) |
Consolidated Balance Sheets |
September 30, 2018 (Unaudited) |
December 31, 2017 |
|||||||
Assets |
||||||||
Current Assets |
||||||||
Cash |
$ | 14,350 | $ | 7,210 | ||||
Accounts receivable, net of allowance for doubtful accounts of 2018 $204,000; 2017 $201,000 |
24,502,825 | 22,275,186 | ||||||
Inventories, net |
33,446,922 | 22,635,415 | ||||||
Prepaid expenses and other current assets |
2,194,602 | 1,534,901 | ||||||
Deferred income taxes |
- | 326,749 | ||||||
Total current assets |
60,158,699 | 46,779,461 | ||||||
Equipment, Building, and Leasehold Improvements |
||||||||
Machinery and equipment |
33,114,958 | 31,952,685 | ||||||
Office and computer equipment |
8,355,034 | 7,966,019 | ||||||
Building leasehold |
10,100,000 | 10,100,000 | ||||||
Leasehold improvements |
3,645,307 | 3,568,179 | ||||||
Vehicles |
105,893 | 105,893 | ||||||
55,321,192 | 53,692,776 | |||||||
Less accumulated depreciation and amortization |
39,777,298 | 37,105,821 | ||||||
15,543,894 | 16,586,955 | |||||||
Other assets |
9,054 | 9,372 | ||||||
Goodwill |
38,547,750 | 38,547,750 | ||||||
Deposits |
813,439 | 811,408 | ||||||
Total assets |
$ | 115,072,836 | $ | 102,734,946 |
See Notes to Unaudited Consolidated Financial Statements. |
M C Assembly Holdings, Inc. and Subsidiary |
(d/b/a M.C. Assembly) |
Consolidated Balance Sheets (Continued) | ||||||||
September 30, 2018 (Unaudited) |
December 31, 2017 |
|||||||
Liabilities and Stockholders’ Equity |
||||||||
Current Liabilities |
||||||||
Current maturities of capital lease obligations |
$ | 1,263,300 | $ | 1,171,629 | ||||
Accounts payable |
25,459,305 | 13,828,486 | ||||||
Accrued liabilities |
6,472,312 | 4,227,821 | ||||||
Accrued management fees |
1,500,000 | 1,375,000 | ||||||
Customer deposits |
833,689 | 1,011,137 | ||||||
Total current liabilities |
35,528,606 | 21,614,073 | ||||||
Other Liabilities |
||||||||
Line of credit, net of deferred costs 2018 $148,000; 2017 - $207,000 |
22,673,746 | 22,560,113 | ||||||
Capital lease obligations, less current maturities |
9,136,936 | 9,851,904 | ||||||
Stockholder subordinated notes |
37,603,802 | 36,485,838 | ||||||
Junior subordinated notes |
2,480,452 | 2,265,733 | ||||||
Deferred income taxes - noncurrent liability |
- | 326,749 | ||||||
Total liabilities |
107,423,542 | 93,104,410 | ||||||
Commitments and Contingencies |
||||||||
Stockholders’ Equity |
||||||||
Class A common stock – $0.001 par value; 1,940,000 shares authorized, 984,000 issued and outstanding |
984 | 984 | ||||||
Class B common stock – $0.001 par value; 60,000 shares authorized, 27,000 issued and outstanding |
27 | 27 | ||||||
Additional paid-in capital |
26,479,536 | 26,479,536 | ||||||
Accumulated other comprehensive gain (loss) |
152,910 | (176,645 | ) | |||||
Accumulated deficit |
(18,984,163 | ) | (16,673,366 | ) | ||||
Total stockholders' equity |
7,649,294 | 9,630,536 | ||||||
Total liabilities and stockholders' equity |
$ | 115,072,836 | $ | 102,734,946 |
See Notes to Unaudited Consolidated Financial Statements. |
M C Assembly Holdings, Inc. and Subsidiary |
(d/b/a M.C. Assembly) |
Consolidated Statements of Operations and |
||||||||
Comprehensive Loss |
Nine Months Ended |
|||||||
September 30, 2018 (Unaudited) |
September 30, 2017 (Unaudited) |
|||||||
Net Sales |
$ | 111,181,729 | $ | 103,595,096 | ||||
Cost of Goods Sold |
97,764,541 | 91,212,445 | ||||||
Gross profit |
13,417,188 | 12,382,651 | ||||||
Selling, General and Administrative Expenses |
9,274,007 | 9,020,564 | ||||||
Income from operations |
4,143,181 | 3,362,087 | ||||||
Other Income (Expense) |
||||||||
Interest expense |
(6,000,003 | ) | (5,653,299 | ) | ||||
Other income |
27,153 | 66,295 | ||||||
Other expense |
(268,957 | ) | (532,753 | ) | ||||
(6,241,807 | ) | (6,119,757 | ) | |||||
Loss before income taxes |
(2,098,626 | ) | (2,757,670 | ) | ||||
Income Tax Expense |
212,171 | 32,734 | ||||||
Net loss |
(2,310,797 | ) | (2,790,404 | ) | ||||
Other Comprehensive Loss |
||||||||
Net derivatives gain on hedge transactions |
329,555 | 104,681 | ||||||
Comprehensive loss |
$ | (1,981,242 | ) | $ | (2,685,723 | ) |
See Notes to Unaudited Consolidated Financial Statements. |
M C Assembly Holdings, Inc. and Subsidiary |
(d/b/a M.C. Assembly) |
Consolidated Statement of Stockholders' Equity |
(Unaudited) |
Class A |
Class B |
Additional |
Accumulated |
|||||||||||||||||||||||||||||
Common Stock |
Common Stock |
Paid-in |
Accumulated |
Other Comprehensive |
||||||||||||||||||||||||||||
Shares |
Amount |
Shares |
Amount |
Capital |
Deficit |
(Loss) Gain |
Total |
|||||||||||||||||||||||||
Balance, December 31, 2017 |
984,000 | 984 | 27,000 | 27 | 26,479,536 | (16,673,366 | ) | (176,645 | ) | 9,630,536 | ||||||||||||||||||||||
Net loss |
- | - | - | - | - | (2,310,797 | ) | - | (2,310,797 | ) | ||||||||||||||||||||||
Other comprehensive gain |
- | - | - | - | - | - | 329,555 | 329,555 | ||||||||||||||||||||||||
Balance, September 30, 2018 |
984,000 | $ | 984 | 27,000 | $ | 27 | $ | 26,479,536 | $ | (18,984,163 | ) | $ | 152,910 | $ | 7,649,294 |
See Notes to Unaudited Consolidated Financial Statements. |
M C Assembly Holdings, Inc. and Subsidiary |
(d/b/a M.C. Assembly) |
Consolidated Statements of Cash Flows |
||||||||
Nine Months Ended |
||||||||
September 30, 2018 (Unaudited) |
September 30, 2017 (Unaudited) |
|||||||
Cash Flows From Operating Activities |
||||||||
Net loss |
$ | (2,310,797 | ) | $ | (2,790,404 | ) | ||
Adjustments to reconcile net loss to net cash provided by operating activities: |
||||||||
Gain on disposition of equipment and leasehold improvements |
(9,841 | ) | (21,524 | ) | ||||
Depreciation |
2,985,784 | 3,285,799 | ||||||
Amortization of deferred loan costs |
58,837 | 58,837 | ||||||
Interest added to principal on notes payable |
1,332,683 | 1,263,989 | ||||||
Foreign currency hedge gain |
329,555 | 104,661 | ||||||
Changes in working capital components: |
||||||||
Accounts receivable |
(2,227,639 | ) | (241,400 | ) | ||||
Inventories |
(10,811,507 | ) | (1,368,294 | ) | ||||
Prepaid expenses and other current assets |
(659,701 | ) | (36,781 | ) | ||||
Other assets |
318 | (7,800 | ) | |||||
Accounts payable |
11,630,818 | 664,377 | ||||||
Customer deposits |
(177,448 | ) | (1,154,934 | ) | ||||
Accrued management fees |
125,000 | - | ||||||
Accrued liabilities |
2,244,492 | 734,118 | ||||||
Net cash provided by operating activities |
2,510,554 | 490,644 | ||||||
Cash Flows From Investing Activities |
||||||||
Purchases of equipment and leasehold improvements |
(1,846,817 | ) | (1,009,698 | ) | ||||
Proceeds from sale of equipment and leasehold improvements |
180,931 | 25,584 | ||||||
Deposits |
(2,031 | ) | - | |||||
Net cash used in investing activities |
(1,667,917 | ) | (984,114 | ) | ||||
Cash Flows From Financing Activities |
||||||||
Net borrowings on line of credit |
54,797 | 1,336,812 | ||||||
Principal payments under capital lease obligations |
(890,294 | ) | (839,884 | ) | ||||
Net cash (used in) provided by financing activities |
(835,497 | ) | 496,928 |
(Continued) |
M C Assembly Holdings, Inc. and Subsidiary |
(d/b/a M.C. Assembly) |
Consolidated Statements of Cash Flows (Continued) |
||||||||
Nine Months Ended |
||||||||
September 30, 2018 (Unaudited) |
September 30, 2017 (Unaudited) |
|||||||
Net increase in cash |
$ | 7,140 | $ | 3,458 | ||||
Cash |
||||||||
Beginning |
7,210 | 6,668 | ||||||
Ending |
$ | 14,350 | $ | 10,126 | ||||
Supplemental Disclosures of Cash Flow Information |
||||||||
Cash payments for interest |
$ | 3,409,390 | $ | 4,286,097 | ||||
Cash payments for income taxes |
$ | 12,011 | $ | 32,734 | ||||
Supplemental Schedule of Noncash Investing and Financing Activities: |
||||||||
Equipment acquired through capital leases |
$ | 266,996 | $ | 450,278 | ||||
Accrued interest added to principal balance of stockholder and junior subordinated notes payable |
$ | 1,332,684 | $ | 1,263,989 |
See Notes to Unaudited Consolidated Financial Statements. |
M C Assembly Holdings, Inc. and Subsidiary
(d/b/a M.C. Assembly)
Notes to Unaudited Consolidated Financial Statements
Note 1. Nature of Organization and Significant Accounting Policies
Formation and n ature of organization: M C Assembly Holdings, Inc. (Holdings) was established on February 27, 2007, for the purpose of acquiring the stock of M C Test Service, Inc. and its subsidiary M.C. Assembly International, LLC. Holdings is located in Melbourne, Florida, and assembles and sells printed circuit boards to customers throughout the United States.
On June 18, 2010, MC Assembly LLC (LLC) was formed as a subsidiary of M C Test Service, Inc. On June 30, 2010, LLC purchased substantially all of the assets and assumed certain liabilities of RWA, Inc. (d/b/a Chase EMS). LLC is located in Billerica, Massachusetts and is in the same industry as M C Test Service, Inc., providing contract electronic manufacturing services, including printed circuit board assembly, sub assembly, and fully-tested box build services.
Basis of presentation: The consolidated financial statements include the accounts of the Company. Intercompany transactions and accounts with subsidiaries have been eliminated. The interim financial statements included herein have been prepared by the Company without audit, pursuant to the rules and regulations promulgated by the Securities and Exchange Commission (the SEC). Certain information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) have been omitted pursuant to SEC rules and regulations; nevertheless, management believes the disclosures are adequate to make the information presented not misleading. These consolidated financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Company’s consolidated financial statements for the year ended December 31, 2017 included elsewhere in this Form 8K/A. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full year.
The consolidated financial statements reflect all adjustments that, in the opinion of management are both of a normal and recurring nature and necessary for the fair presentation of the results for the interim period presented. The preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. As a result, actual results could differ from those estimates.
Principles of consolidation: The consolidated financial statements include the accounts of Holdings and its wholly-owned subsidiary, M C Test Service, Inc., and M C Test Service, Inc.’s subsidiaries, M.C. Assembly International, LLC and MC Assembly LLC, which are single-member LLCs (collectively referred to as the Company). All material intercompany amounts and transactions are eliminated in consolidation.
Use of e stimates: The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (U.S. GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Accordingly, actual results could differ from those estimates.
Customer relationships : As part of the Chase EMS acquisition, the Company identified certain customer relationships as an intangible asset. The customer relationships were amortized on a straight-line basis over 10 years. In 2016, the Company determined the remaining balance for customer relationships was fully impaired as the customer list no longer contained current customers.
Goodwill and Other Intangible Assets: The Company’s goodwill was recorded as a result of the Company’s business combinations using the acquisition method of accounting. The Company does not amortize goodwill, but tests it at least annually for recoverability. Other intangible assets include customer lists. Such intangible assets are amortized on a straight-line basis over their estimated useful lives, which are generally two to five years.
M C Assembly Holdings, Inc. and Subsidiary
(d/b/a M.C. Assembly)
Notes to Unaudited Consolidated Financial Statements
Note 1. Nature of Organization and Significant Accounting Policies (Continued)
Impairment of long-lived assets: Finite-lived intangible assets, other than goodwill, are tested for impairment based on undiscounted cash flows at an asset group level and, if impaired, written down by the amount by which the carrying value of the asset group exceeded its fair value, based on either discounted cash flows or market values. However, the carrying amount of a finite-lived asset can never been written down below its fair value.
Goodwill is tested annually for impairment, or sooner when circumstances indicate an impairment may exist, using a fair-value approach at the reporting unit level. A reporting unit is the operating segment, or a business which is one level below that operating segment (the “component” level) if discrete financial information is prepared and regularly reviewed by segment management at the component level. Components are aggregated as a single reporting unit if they have similar economic characteristic. The Company may elect to perform a qualitative assessment, based on relevant events and circumstances, to determine whether it is more likely than not that a fair value of the reporting unit is less than its carrying amount. For the nine months ended September 30, 2018 and 2017, management determined that there were no triggering events which required an impairment test to be performed.
Income taxes: Deferred taxes are provided on a liability method whereby deferred tax assets are recognized for deductible temporary differences and operating loss and tax credit carryforwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.
The Company may recognize the tax benefit from an uncertain tax position only if it is more-likely-than-not that the tax position will be sustained on examination by taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement.
Shipping and handling: Shipping and handling costs are charged to cost of goods sold as incurred. For the nine months ended September 30, 2018 and September 30, 2017, the costs were approximately $553,000 and $599,000, respectively.
Fair value of financial instruments : The estimated fair values of the Company’s short-term financial instruments, including cash, accounts receivable, accounts payable and accrued expenses arising in the ordinary course of business, approximate their individual carrying amounts due to the relatively short period of time between their origination and expected realization. The carrying values of the line of credit approximate fair value as the agreement bears interest at a variable rate and there has been no significant changes in the Company’s credit risk. The estimated fair value of the stockholder and junior subordinated notes are based on the current rates offered to the Company for similar debt of the same remaining maturities.
Derivative financial instruments: The Company does not engage in currency speculation, however, we use foreign currency exchange rate derivatives on an ongoing basis to hedge against certain foreign currency-related exposures. Our risk-management objective for undertaking these cash-flow hedges is to mitigate the financial transaction fluctuations associated with the volatility of the U.S. Dollar (USD) compared to the Mexican Peso. The hedging program is structured using a rolling, layering strategy, using monthly hedges at different percentages per quarter. The rolling, layering strategy allows for dollar-cost averaging, reducing the volatility of USD cash flows. These cash-flow hedge contracts qualify for hedge accounting under Accounting Standards Codification (ASC) 815, Derivatives and Hedging . Accordingly, the fair value of these derivative instruments is included in other current assets on the consolidated balance sheet. The changes in the fair value of these derivative contracts are recognized in other comprehensive income in the consolidated statements of operations.
M C Assembly Holdings, Inc. and Subsidiary
(d/b/a M.C. Assembly)
Notes to Unaudited Consolidated Financial Statements
Note 1. Nature of Organization and Significant Accounting Policies (Continued)
Recent accounting pronouncements:
Recently adopted pronouncements:
On December 22, 2017, the President of the United States signed into law the Tax Cuts and Jobs Act (TCJA) tax reform legislation. This legislation makes significant changes in U.S. tax law including numerous changes to individual tax rules, a reduction in the corporate tax rates, changes to net operating loss carryforwards and carrybacks, and a repeal of the corporate alternative minimum tax. The legislation reduced the U.S. corporate tax rate from the current rate of 35% to 21%. As a result of the enacted law, the Company was required to revalue deferred tax assets and liability at the enacted rate (see Note 9). The other provisions of the TCJA did not have a material impact on the consolidated financial statements.
To be adopted in future period s :
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606) , which provides guidance for recognizing revenue. ASU 2014-09 updates the guidance on revenue recognition by improving the comparability of revenue practices across entities, industries, jurisdictions and capital markets, and ASU 2015-14 defers the effective date for annual reporting periods beginning after December 15, 2018, with early application permitted for annual periods beginning after December 15, 2016. The Company has not yet evaluated the impact this ASU will have on the consolidated financial statements.
In November 2015, the FASB issued ASU 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes. Under ASU 2015-17, a reporting entity is required to classify deferred tax assets and liabilities as noncurrent in a classified statement of financial position. For non-public business entities, the update is effective for financial statements issued for annual periods beginning after December 15, 2017. Entities may apply the update either prospectively to all deferred tax assets and liabilities, or retrospectively for all periods presented. If an entity applies the update prospectively, the entity shall disclose the nature and reason for the change in accounting principle and disclose that the prior periods were not retrospectively adjusted. If an entity adopts the update retrospectively, the entity shall disclose the nature and reason of the change in accounting principle and disclose the quantitative effects of the accounting change on prior periods. The Company will not early adopt and is currently assessing the impact this ASU will have on future consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The update requires all lessees recognize the assets and liabilities that rise from leases. Elections may be available for those leases with terms of 12 months or less. The amendment still retains the distinction between finance leases and operating leases, with classification affecting the pattern of expense recognition in the consolidated statements of operations. The impact of the adoption of the standard is expected to result in the recognition of all leases with the correspondent assets and liabilities recorded in the consolidated financial statements. Management is currently evaluating the qualitative and quantitative impact of this standard.
In January 2017, the FASB issued ASU 2017-04, Intangibles-Goodwill and Other (Topic 350) : Simplifying the Test for Goodwill Impairment. The ASU simplifies the measurement of goodwill impairment by eliminating the requirement that an entity compute the implied fair value of goodwill based on the fair values of its assets and liabilities to measure impairment. Instead, goodwill impairment will be measured as the difference between the fair value of the reporting unit and the carrying value of the reporting unit. The ASU also clarifies the treatment of the income tax effect of tax deductible goodwill when measuring goodwill impairment loss. ASU 2017-04 will be effective for the Company beginning on January 1, 2022. The Company is currently evaluating the impact of the adoption of this guidance on its consolidated financial statements.
M C Assembly Holdings, Inc. and Subsidiary
(d/b/a M.C. Assembly)
Notes to Unaudited Consolidated Financial Statements
Note 1. Nature of Organization and Significant Accounting Policies (Continued)
The FASB and other entities issued new, or modifications to, or interpretations of, existing accounting guidance during the nine months ended September 30, 2018. The Company has considered the new pronouncements that altered U.S. GAAP and other than as disclosed in these notes to the unaudited consolidated financial statements, does not believe that any other new or modified principles will have a material impact on the Company’s reported financial position or operations in the near term.
Subsequent e vents : Management has evaluated subsequent events through January 22, 2019 which is the date the consolidated financial statements were available to be issued.
Note 2. Goodwill
The following table represents the balance and changes in goodwill as of and for the periods ending September 30, 2018 and December 31, 2017:
September 30, 2018 |
December 31, 2017 |
|||||||
Balance as of January 1, 2017 |
$ | 38,547,750 | $ | 38,547,750 | ||||
Accumulated impairment loss |
- | - | ||||||
Balance as of December 31, 2017 |
$ | 38,547,750 | $ | 38,547,750 | ||||
Accumulated impairment loss |
- | - | ||||||
Balance as of September 30, 2018 |
$ | 38,547,750 | $ | 38,547,750 |
Note 3. Inventories
Inventories consisted of the following as of September 30, 2018 and December 31, 2017:
September 30, 2018 |
December 31, 2017 |
|||||||
Raw materials |
$ | 22,916,556 | $ | 13,617,458 | ||||
Work in process |
9,633,660 | 8,973,275 | ||||||
Finished goods |
3,226,925 | 2,384,220 | ||||||
35,777,141 | 24,974,953 | |||||||
Less allowance |
(2,330,257 | ) | (2,339,538 | ) | ||||
$ | 33,446,884 | $ | 22,635,415 |
M C Assembly Holdings, Inc. and Subsidiary
(d/b/a M.C. Assembly)
Notes to Unaudited Consolidated Financial Statements
Note 4. Line of Credit
The Company has a secured revolving line of credit with JPMorgan Chase Bank N.A. (Lender) containing a letter of credit commitment up to $1,500,000 and maximum borrowings of $38,000,000 with a maturity date of August 18, 2020. The amounts available under the line of credit are determined based upon a formula of eligible receivables and inventories. The line of credit is collateralized by a first lien on all assets of the Company. The Company is required to meet a fixed charge coverage ratio, only if the Company’s availability under the line is less than $5 million at the beginning of an interim financial statement reporting period and ending as soon as the Company’s availability remains in excess of $5 million for thirty (30) consecutive days, as long as no event of default has occurred. Interest is payable based upon monthly outstanding balance under the line of credit, at the prime rate as defined in the credit agreement, less 1.00% margin or, at the Company’s option, the Eurodollar Loan Rate plus 1.75% margin. For the nine months ended September 30, 2018 and September 30, 2017, the effective interest rate was 4.25% and 3.06%, respectively. The outstanding balance on the lines of credit as of September 30, 2018 and December 31, 2017, was $22,673,746 and $22,766,738, respectively, net of deferred loan costs of $148,000 and $207,000, respectively. Borrowings under the line of credit are classified as non-current on the balance sheet due to the line of credit having a subjective acceleration clause and a springing lockbox arrangement whereby the Company is required to submit all payments on invoices to the lockbox, but the Lender can only access the lockbox if: (a) commencing on the date the Company fails to maintain availability of less than $5.5 million or upon any event of default occurring and (b) continuing until such time thereafter as no event of default is continuing and availability is greater than $5.5 million for a period of thirty (30) consecutive days.
Note 5. Stockholder Subordinated Notes
As of September 30, 2018, the Company’s Stockholder Subordinated Notes outstanding balance totaled $37,603,802 compared with the December 31, 2017, balance of $36,485,838. The Stockholder Subordinated Notes are unsecured, bear interest at a rate of 16%, payable quarterly in arrears, and are subordinated to the line of credit (see Note 4). The Stockholder Subordinated Notes mature on September 17, 2020. For the nine months ended September 30, 2018 and September 30, 2017, interest expense related to the Stockholder Subordinated Notes totaled $4,471,859 and $4,295,005, respectively, of which $3,353,894 and $3,221,254, respectively, was paid in cash and $1,117,965 and $1,073,751, respectively, was added to the principal balance.
The estimated carrying amount and fair values of the Company’s Stockholder Notes as of September 30, 2018 and December 31, 2017, are as follows:
September 30, 2018 |
December 31, 2017 |
|||||||||||||||
Carrying |
Estimated |
Carrying |
Estimated |
|||||||||||||
Value |
Fair Value |
Value |
Fair Value |
|||||||||||||
Senior subordinated notes |
$ | 37,603,802 | $ | 39,635,573 | $ | 36,485,838 | $ | 39,080,804 |
Note 6. Junior Subordinated Notes
Junior subordinated notes consist of unsecured notes payable to the former stockholder (the Junior Notes). The Junior Notes were entered into in connection with the acquisition of M C Test Service, Inc. and are subordinated to the JPMorgan Chase line of credit (see Note 4) and the Stockholder Subordinated Notes (see Note 5). In conjunction with the line of credit (see Note 4), the Junior Notes were amended to be payable in full on September 17, 2020. The Junior Notes bear interest at 12% per annum payable quarterly in arrears. For the nine months ended September 30, 2018 and 2017, interest expense related to the Junior Notes totaled $214,719 and $190,238, respectively, all of which was added to the principal balance. The outstanding balance of the Junior Notes as of September 30, 2018 and December 31, 2017, was $2,480,452 and $2,265,733, respectively. As of September 30, 2018 and December 31, 2017, the carrying amount of the Junior Notes approximates fair value.
M C Assembly Holdings, Inc. and Subsidiary
(d/b/a M.C. Assembly)
Notes to Unaudited Consolidated Financial Statements
Note 7. Capital Lease Obligations
The Company leases various equipment and buildings under capital leases. These noncancellable leases have varying expiration dates through March 2030, and are payable in varying monthly installments totaling approximately $174,000 including implied interest at various rates ranging from 3% to 13%. These leases are collateralized by the equipment leased.
As of September 30, 2018 and December 31, 2017, equipment held under capital leases reported on the consolidated balance sheet consists of the following:
September 30, 2018 |
December 31, 2017 |
|||||||
Equipment |
$ | 3,787,713 | $ | 3,608,961 | ||||
Less accumulated depreciation |
(2,570,802 | ) | (2,014,378 | ) | ||||
Equipment under capital leases, net |
$ | 1,216,911 | $ | 1,594,583 |
During 2014, the Company signed a facility lease agreement for a 134,900 square foot facility in Melbourne, Florida, with a commencement date of March 1, 2015, and an expiration date of February 28, 2030. Under the terms of the agreement, the Company began occupancy of the building on December 1, 2014, and was not obligated to make rental payments until March 1, 2015. The lease terms neither transfer title nor contain a bargain purchase option, however the present value of the minimum lease payments under the lease equal 90% or more of the fair value of the leased real estate. Further, the value of the land is less than 25% of the aggregate fair value of the leased property. Under ASC 840-30, Capital Leases, the facility lease qualifies for capital lease treatment and in accordance with ASC 840-10, as the fair value of the land is less than 25% of the fair value of the leased property, the land component is considered immaterial and the lease is accounted for as a single unit for the purposes of the minimum lease payment criterion.
As of September 30, 2018 and December 31, 2017, buildings held under capital leases, reported on the consolidated balance sheet, consist of the following:
September 30, 2018 |
December 31, 2017 |
|||||||
Buildings |
$ | 10,100,000 | $ | 10,100,000 | ||||
Less accumulated depreciation |
(2,538,798 | ) | (2,042,077 | ) | ||||
Buildings under capital leases, net |
$ | 7,561,202 | $ | 8,057,923 |
Future minimum lease payments under the equipment and building capital leases together with the present value of the minimum lease payments as of September 30, 2018, are as follows:
2018 (remainder) |
$ | 522,063 | ||
2019 |
2,046,667 | |||
2020 |
1,640,721 | |||
2021 |
1,443,950 | |||
2022 |
1,280,021 | |||
Thereafter |
8,410,986 | |||
Total minimum lease payments |
15,344,408 | |||
Less amount representing interest |
(4,944,172 | ) | ||
10,400,236 | ||||
Less current maturities of capital lease obligations |
(1,263,300 | ) | ||
$ | 9,136,936 |
M C Assembly Holdings, Inc. and Subsidiary
(d/b/a M.C. Assembly)
Notes to Unaudited Consolidated Financial Statements
Note 8. Incentive Compensation Plans and Employment Agreement
Effective January 13, 2017, the Board of Directors and the Company amended the MC Assembly Holdings, Inc. 2007 Key Employee Stock Option Plan (“2007 Plan”), reducing the shares of Class A Common Stock reserved under the plan from 88,889 shares to 23,778. Simultaneously, the Board of Directors and the Company created the MC Assembly Holdings, Inc. 2017 Employee Stock Option Plan (“2017 Plan”), reserving 111,111 of Class A Common Stock for option awards.
Both Plans expire on the tenth anniversary of the Effective Date and the options granted under either Plan expire after twelve years from date of grant. The Effective Date of the 2007 Plan is April 9, 2007, and the effective date of the 2017 Plan is January 13, 2017. The options under the 2007 Plan are fully vested and expire in 1.4 years. Options granted under the 2017 Plan vest ratably over five years and expire in 12 years. Under both Plans, the options become exercisable in ten years from the date of grant or upon a change in control, as defined in the Plan. The Board of Directors of the Company shall administer the Plans and determine the stock option exercise prices.
The Company is required to measure and recognize compensation expense at the fair value of stock awards determined at the date of grant. Compensation expense for awards and related tax effects are recognized as they vest.
The calculated value of each option award is estimated on the date of grant using an option valuation method that uses the assumptions noted below. The valuation technique incorporates assumptions for the expected volatility of the stock price, the expected term of the option, expected dividends, forfeitures and risk-free interest rate for the expected term of the option. Expected volatility was based on the historical volatility of an appropriate industry sector index. The expected term of the option is based on the average period that the options vest and expire. The risk-free interest rate takes into account the time-value of money. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at time of grant.
As the Company’s stock is not traded in an active market, it is unable to determine a volatility estimate specific to the Company. Furthermore, management has not identified a similar company in this line of business listed in the marketplace. Therefore, the Company has used the calculated value method to value options, based on changes in an approximate industry sector index over the expected life of the options to estimate volatility of the Company’s stock price.
For the nine months ended September 30, 2018, the Plan’s activity was as follows:
Weighted-Average |
Weighted-Average Remaining |
||||||||
2007 Stock Option Plan |
Shares Under Option |
Exercise Price |
Contract Term |
||||||
Outstanding as of December 31, 2017 |
88,889 | $ | 29.33 | ||||||
Granted |
- | - | |||||||
Forfeited |
- | - | |||||||
Cancelled |
(65,111 | ) | (28.13 | ) | |||||
Exercised |
- | - | |||||||
Outstanding as of September 30, 2018 |
23,778 | $ | 32.62 |
1.4 years |
|||||
Exercisable as of September 30, 2018 |
15,278 | $ | 32.62 |
1.4 years |
Weighted-Average |
Weighted-Average Remaining |
||||||||
2017 Stock Option Plan |
Shares Under Option |
Exercise Price |
Contract Term |
||||||
Outstanding as of December 31, 2017 |
75,000 | $ | - | ||||||
Granted |
5,500 | 5.00 | |||||||
Forfeited |
- | - | |||||||
Cancelled |
- | - | |||||||
Exercised |
- | - | |||||||
Outstanding as of September 30, 2018 |
80,500 | $ | 5.00 |
10.25 years |
|||||
Exercisable as of September 30, 2018 |
- | N/A |
M C Assembly Holdings, Inc. and Subsidiary
(d/b/a M.C. Assembly)
Notes to Unaudited Consolidated Financial Statements
Note 8. Incentive Compensation Plans and Employment Agreement (Continued)
Under the 2007 Plan, there were no stock options granted during the nine months ended September 30, 2018 and 2017. No compensation expense was recognized for 2007 Plan for the nine months ended September 30, 2018 and 2017.
Under the 2017 Plan, 96,111 stock options were granted on January 13, 2017, and 20,000 were forfeited during the nine months ended September 30, 2017. During the nine months ended September 30, 2018, an additional 5,500 shares were granted. No compensation expense was recorded for the nine months ended September 30, 2018 or September 30, 2017. As of September 30, 2018, stock compensation cost for unvested awards under the 2017 Plan totaled $123,725. The weighted-average grant date fair value of the options awarded during 2018 was $2.92.
The Company entered into an employment agreement with a key executive (the Executive). The agreement, which was amended in October 2013, terminated on October 31, 2016, unless earlier terminated by the Company for cause, as defined in the agreement and includes automatic renewal periods of one year, unless either party notifies the other in writing not less than ninety (90) days prior to expiration. As of December 31, 2017, neither party has given the other notice of termination of the agreement. If the agreement is terminated by the Company without cause, the Executive shall receive severance pay equal to the Executive’s current annual base salary payable over a twelve-month period.
As additional consideration for entering into the employment agreement, the Executive was issued 11,111 shares of restricted stock for $.001 per share. The restricted stock shall be automatically forfeited to the Company and the stock shall be canceled upon termination of the employment agreement or the Executive’s employment with the Company. The risk of forfeiture terminated as of February 27, 2013, at which time the restricted shares became full shares.
Note 9. Income Taxes
Temporary differences between the financial statement carrying amounts and tax bases of assets and liabilities that give rise to significant portions of the deferred tax assets and liabilities relate to the following as of September 30, 2018 and December 31, 2017:
September 30, 2018 |
December 31, 2017 |
|||||||
Current Asset |
||||||||
Differences related to accrued expenses and allowances |
$ | - | $ | 776,057 | ||||
Less valuation allowance |
- | (449,308 | ) | |||||
Net current asset |
$ | - | $ | 326,749 | ||||
Noncurrent Asset |
||||||||
Differences related to accrued expenses and allowances |
$ | 2,655,664 | $ | 707,336 | ||||
Net operating loss carryforward |
3,610,231 | 4,133,953 | ||||||
6,265,895 | 4,841,289 | |||||||
Less valuation allowance |
(3,888,347 | ) | (2,802,926 | ) | ||||
2,377,548 | 2,038,363 | |||||||
Noncurrent Liability |
||||||||
Equipment and leasehold improvements, principally due to differences in depreciation |
(2,377,548 | ) | 2,365,112 | |||||
Net noncurrent liability |
$ | - | $ | (326,749 | ) |
M C Assembly Holdings, Inc. and Subsidiary
(d/b/a M.C. Assembly)
Notes to Unaudited Consolidated Financial Statements
Note 9. Income Taxes (Continued)
Income tax expense consists of the following for the nine months ended September 30, 2018 and 2017:
September 30, 2018 |
September 30, 2017 |
|||||||
Current income tax expense |
||||||||
Federal |
$ | - | $ | - | ||||
Foreign |
200,160 | - | ||||||
State |
12,011 | 32,734 | ||||||
212,171 | 32,734 | |||||||
Deferred income tax expense |
||||||||
Federal |
- | - | ||||||
State |
- | - | ||||||
Total income tax expense |
$ | 212,171 | $ | 32,734 |
Based on the available objective evidence, including the Company’s recent history of losses, the Company has provided a full valuation allowance against its deferred tax assets as of September 30, 2018 and December 31, 2017. Income tax expense differed from the amounts computed by applying the statutory federal income tax rate to loss before income taxes as a result of the following for the nine months ended September 30, 2018 and 2017.
September 30, 2018 |
September 30, 2017 |
|||||||
Computed expected tax benefit |
$ | (440,711 | ) | $ | (937,608 | ) | ||
Nondeductible expenses |
(38,343 | ) | 12,745 | |||||
Effect of state income tax, net of federal benefit |
(74,287 | ) | 49,504 | |||||
Valuation allowance |
636,113 | (1,165,664 | ) | |||||
Property and equipment |
- | 2,177,108 | ||||||
Other |
129,399 | (103,351 | ) | |||||
$ | 212,171 | $ | 32,734 |
Note 10. Commitments and Contingencies
Accrued liabilities – Accrued liabilities as of September 30, 2018 and December 31, 2017 are as follows:
September 30, 2018 |
December 31, 2017 |
|||||||
Payroll |
$ | 1,856,628 | $ | 1,468,545 | ||||
Accrued facility rent |
1,027,076 | 963,873 | ||||||
Accrued interest |
1,215,103 | 16,955 | ||||||
Customer-related |
559,511 | 674,237 | ||||||
Accrued employee bonus |
391,293 | 154,393 | ||||||
Accrued commission |
311,004 | 248,067 | ||||||
Other accruals |
1,111,697 | 701,751 | ||||||
$ | 6,472,312 | $ | 4,227,821 |
Mexico Operations – The Company, through its wholly-owned subsidiary M.C. Assembly International, LLC, has an Amended and Restated Shelter Services Agreement (the Agreement) with an unrelated third party, Entrada, to provide a workforce, facilities, and allied services in Fresnillo, Zacatecas, Mexico. The Company pays a monthly fee (Facility Fee) for the use of the manufacturing facility based upon square feet utilized and reimburses Entrada for personnel and related costs plus a fee based on the number of hours worked. The Company operates in the manufacturing facility that is under lease by Entrada. The Company is obligated to pay the Facility Fee until the earlier of the expiration of the remainder of the lease of the facility, termination of the lease by Entrada, or use of the facility by another customer of Entrada. All inventory and equipment residing in the facility is the property of the Company. The Company is also responsible for certain common area costs and the cost of insurance.
M C Assembly Holdings, Inc. and Subsidiary
(d/b/a M.C. Assembly)
Notes to Unaudited Consolidated Financial Statements
Note 10. Commitments and Contingencies (Continued)
Effective March 31, 2017, the Company signed the Third Modification to the Agreement to allow the direct payment of any reimbursable cost as defined by the Agreement to be made directly to Entrada by the Company and paid in Mexican pesos, if such relates to the payment of Mexican payroll or are invoiced in pesos and/or are required to be invoiced in pesos. To mitigate the currency-related exposures, the Company entered into cash flow foreign currency hedges (see Note 13).
On December 27, 2017, the Company and Entrada executed the Fourth Modification to the Agreement. This modification was due to the changes in Mexico’s tax laws impacting maquiladoras (Article 183 of Income Tax Law in effect as of January 1, 2014, “Ley del Impresto Sobre la Renta”) and Rule 3.20.6 of the 2017 Mexican Miscellaneous Tax Rules (“MTR”). The Fourth Modification extends the terms of the Agreement for the time necessary to further analyze the impact of these obligations and renegotiate certain terms and conditions of the Agreement. The term of the Agreement is renewed until January 31, 2018, and automatically renewed on a monthly basis thereafter unless either party provides a notice of intent to terminate at least 10 days prior to the end of the month. No such notice has been provided to date by either party to the Agreement.
For the nine months ended September 30, 2018 and 2017, payments for the Facility Fee under this Agreement totaled approximately $328,000 and $313,000, respectively.
Leases – The Company leases certain buildings and equipment under operating lease agreements. The leases expire at dates to September 2025.
In November 2014, the Company signed a facility lease agreement for a 57,990 square foot facility in Billerica, MA, with a commencement date of March 1, 2015 through September 30, 2025. The lease payments for this facility are included in the calculation of future minimum lease commitments shown below.
The future minimum lease commitments for these operating leases as of September 30, 2018 are as follows:
2018 (remainder) |
$ | 140,917 | ||
2019 |
563,670 | |||
2020 |
561,513 | |||
2021 |
537,787 | |||
2022 |
537,787 | |||
Thereafter |
1,434,097 | |||
$ | 3,775,771 |
For the nine months ended September 30, 2018 and 2017, rent expense was approximately $1,068,000 and $1,008,000, respectively.
Health Insurance – The Company has a fully self-insured health and medical insurance program. There is a maximum amount of $200,000 per individual for both 2018 and 2017 for which the Company can be responsible. Furthermore, the Company’s total maximum claim liability per policy period was $2,727,000 and $2,763,000 as of September 30, 2018 and December 31, 2017, respectively. Approximately $211,000 and $299,000 is included in accrued liabilities relating to this program as of September 30, 2018 and December 31, 2017, respectively. The total expense recognized under the program, which includes insurance premiums paid, for the nine months ended September 30, 2018 and September 30, 2017, was $2,038,000 and $1,749,000, respectively. A stop-loss insurance policy covers all claims in excess of the above amounts in 2018 and 2017. In May, 2017, the Company received reimbursement for 2016 plan year stop loss claims of $43,000. No stop loss insurance claims were filed for the nine months ended September 30, 2018, for the 2018 plan year.
M C Assembly Holdings, Inc. and Subsidiary
(d/b/a M.C. Assembly)
Notes to Unaudited Consolidated Financial Statements
Note 10. Commitments and Contingencies (Continued)
Litigation - The Company pursues legal proceedings, claims, and litigation against others and is subject to the same arising in the ordinary course of business. As required under the guidance for contingency losses, the Company establishes liabilities when a particular contingency is probable and reasonably estimable. No contingency was established as of September 30, 2018 and December 30, 2017.
Note 11. Related Party Transactions
The Company entered into a management services agreement on February 2007 with certain stockholders of the Company (the Managers). Under the agreement, the Managers will provide advice and expertise on various corporate matters. The initial term of the agreement was five years, ended March 31, 2012, then automatically renews for successive one-year periods, continuing until the parties agree in writing to terminate with thirty days written notice or the Managers, together with their affiliates, cease to own common stock of MC Assembly Holdings, Inc. or cease to provide indebtedness to the Company and its affiliates. As consideration for the services, the Company pays the Managers $500,000 annually payable quarterly in advance on the first day of each fiscal quarter. Management fee expense for the nine months ended September 30, 2018 and 2017, was accrued $375,000 per year and is included as part of selling, general and administrative expenses in the accompanying consolidated statements of operations. Management fees of $250,000 and $375,000 were paid in cash during the nine months ended September 30, 2018 and 2017, respectively. The accrued balance of management fees as of September 30, 2018 and December 31, 2017, was approximately $1,500,000 and $1,375,000, respectively, and is included in accrued liabilities in the accompanying consolidated balance sheets.
Note 12. Receivables Facility
In August 2017, the Company began a program of selling current receivables for a single customer to JPMorgan Chase Bank, N.A. (the Receivables Facility). The cash generated from the sale funds the Company’s working capital earlier than the payment would otherwise be received from the customer. The receivables are sold on a non-recourse basis at a discount equal to 1.20% per annum plus the applicable London Interbank Offered Rate (LIBOR) rate. Total receivables sold through September 30, 2018 and December 31, 2017, were $540,677 and $126,677 and proceeds received totaled $535,173 and $125,882, equivalent to a discount rate of 1.02% and 0.63%, respectively. The Company does not plan to expand this program beyond this sole customer.
Note 13. Derivative Financial Instruments
We do not engage in currency speculation; however, we utilize foreign currency exchange rate derivatives on an ongoing basis to hedge against certain foreign currency-related exposures. Our risk-management objective for undertaking these cash-flow hedges is to mitigate the financial transaction fluctuations associated with the volatility of the USD compared to the Mexican Pesos. MCA purchases Mexican pesos and sells USD to cover forecasted Mexico-site payroll and other expenses. At inception, we designate these hedges as cash-flow hedges and accordingly, gains and losses on the foreign exchange hedge are recorded to the accumulated other comprehensive income (loss) account on the consolidated balance sheet. Gains and losses on the future foreign exchange hedge are not recorded until the hedged transaction is completed.
As of September 30, 2018, the notional value of our outstanding foreign currency contracts to hedge certain foreign exchanged-related operating exposures was approximately $3,750,000 or fifty-percent (50%) of our projected annual spend, based on prior-year actuals and current-year forecast. These contracts range nominally in value from $333,333 to $133,333 and range in maturity up to twelve months from year end. The fair value of these foreign exchange contracts, reported in other current assets was $152,911 and ($176,644), as of September 30, 2018 and December 31, 2017, respectively. The amount of gain recognized on these derivatives was $329,955 and $104,681, for the periods ended September 30, 2018 and 2017, respectively.
M C Assembly Holdings, Inc. and Subsidiary
(d/b/a M.C. Assembly)
Notes to Unaudited Consolidated Financial Statements
Note 14. Significant Customers
The following summarizes the Company’s significant customer concentration for the nine months ended September 30, 2018 and 2017:
Nine months ended September 30, |
||||||||||||||||||||||||||||
2018 |
2017 |
|||||||||||||||||||||||||||
% of Total |
Account |
% of Total |
% of Total |
Account |
% of Total |
|||||||||||||||||||||||
Customer |
Revenues |
Rev |
Receivable |
AR |
Revenues |
Rev |
Receivable |
AR |
||||||||||||||||||||
Customer A |
$ | 38,249,007 | 34% | $ | 6,030,234 | 25% | $ | 35,534,677 | 34% | $ | 5,326,164 | 29% |
Note 15. Subsequent Events
On November 9, 2018, SMTC Corporation (NASDAQ: SMTX) acquired all of the outstanding shares of MC Assembly Holdings, Inc. SMTC believes the acquisition will result in a stronger company with an expanded market presence, a diversified customer base since there is no customer overlap or customer concentration, and greater financial resources. The combined company will operate under the name SMTC Corporation and currently plans to continue to operate and maintain the existing facilities operated by each Company.
The purchase price at closing was $65 million, subject to certain adjustments. Further, the sellers are eligible to earn up to an additional $5 million of consideration, contingent upon the performance of MC Assembly for the twelve calendar months ending March 31, 2019. As part of the acquisition, all existing debt of MC Assembly Holdings, Inc., excluding capital leases, was paid in full in connection with the sale.
18
Exhibit 99.3
UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
The following unaudited pro forma combined balance sheet and statements of operations and comprehensive income (loss) are presented to give effect to the acquisition of MC Assembly Holdings, Inc. ("MC Assembly") by SMTC Corporation (“The Company or SMTC”). The pro forma information was prepared based on the historical financial statements and related notes of SMTC and MC Assembly, as adjusted for the pro forma impact of applying the acquisition method of accounting in accordance with Generally Accepted Accounting Principles in the United States (“U.S. GAAP”). The pro forma adjustments are based upon available information and assumptions that SMTC believes are reasonable. The allocation of the purchase price of the MC Assembly acquisition reflected in these unaudited pro forma combined financial statements has been based upon preliminary estimates of the fair value of assets acquired and liabilities assumed. The pro forma adjustments are therefore preliminary and have been prepared to illustrate the estimated effect of the acquisition.
The following unaudited pro forma combined financial statements are based on SMTC’s historical consolidated financial statements and MC Assembly’s historical consolidated financial statements as adjusted to give effect to the SMTC’s acquisition of MC Assembly and the related financing transactions. The unaudited pro forma combined statements of operations and comprehensive income (loss) for the nine months ended September 30, 2018 and the twelve months ended December 31, 2017 give effect to these transactions as if they had occurred on January 1, 2017. The unaudited pro forma combined balance sheet as of September 30, 2018 gives effect to these transactions as if they had occurred on September 30, 2018.
The unaudited pro forma combined financial statements were prepared using the acquisition method of accounting with SMTC treated as the acquiring entity. Accordingly, the aggregate value of the consideration paid by SMTC to complete the acquisition was allocated to the assets acquired and liabilities assumed from MC Assembly based upon their estimated fair values on the closing date of the acquisition. SMTC has not completed the detailed valuations necessary to estimate the fair value of the assets acquired and the liabilities assumed from MC Assembly and the related allocations of purchase price. Additionally, a final determination of the fair value of assets acquired and liabilities assumed from MC Assembly will be based on the actual net tangible and intangible assets and liabilities of MC Assembly that existed as of the closing date. Accordingly, the pro forma purchase price adjustments presented herein are preliminary, and may not reflect any final purchase price adjustments made. SMTC estimated the fair value of MC Assembly's assets and liabilities based on discussions with MC Assembly's management, due diligence and preliminary work performed by third-party valuation specialists. As the final valuations are being performed, increases or decreases in the fair value of relevant balance sheet amounts will result in adjustments, which may result in material differences from the information presented herein.
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS AND COMPREHENSIVE LOSS
FOR THE YEAR ENDED DECEMBER 31, 2017
(in thousands, except per share amounts)
(Unaudited) |
SMTC |
MC Assembly |
Pro forma adjustments |
Pro forma footnotes |
Reclassifications and accounting |
Combined |
|||||||||||||||||
year ended |
year ended |
(note 6) | (note 6) | policies (note 5) |
year ended |
||||||||||||||||||
(Expressed in thousands of U.S. dollars, except number of shares and per share amounts) |
December 31, 2017 |
December 31, 2017 |
December 31, 2017 |
||||||||||||||||||||
Revenue |
$ | 139,231 | $ | 142,262 | - | - | $ | 281,493 | |||||||||||||||
Cost of sales |
128,380 | 124,366 | (340 | ) | (5) | 177 | 252,583 | ||||||||||||||||
Gross profit |
10,851 | 17,896 | 340 | (177 | ) | 28,910 | |||||||||||||||||
Selling, general and administrative expenses |
13,960 | 11,894 | (500 | ) | (9) | 22 | 25,376 | ||||||||||||||||
Intangible asset amortization |
- | - | 7,375 | (6) | - | 7,375 | |||||||||||||||||
Impairment of property, plant and equipment |
1,601 | - | - | - | 1,601 | ||||||||||||||||||
Gain on sale of property, plant and equipment |
(60 | ) | - | - | (22 | ) | (82 | ) | |||||||||||||||
Restructuring charges |
1,732 | - | - | - | 1,732 | ||||||||||||||||||
Operating (loss) earnings |
(6,382 | ) | 6,002 | (6,535 | ) | (177 | ) | (7,092 | ) | ||||||||||||||
Interest expense |
903 | 7,621 | (49 | ) | (4) | - | 8,475 | ||||||||||||||||
Other expense |
- | 525 | - | - | 525 | ||||||||||||||||||
Loss before income taxes |
(7,285 | ) | (2,144 | ) | (6,486 | ) | (177 | ) | (16,092 | ) | |||||||||||||
Income tax expense (recovery) |
|||||||||||||||||||||||
Current |
639 | 30 | - | - | 669 | ||||||||||||||||||
Deferred |
(79 | ) | - | - | - | (79 | ) | ||||||||||||||||
560 | 30 | - | - | 590 | |||||||||||||||||||
Net loss |
(7,845 | ) | (2,174 | ) | (6,486 | ) | (177 | ) | (16,682 | ) | |||||||||||||
Other comprehensive loss |
- | (177 | ) | - | 177 | - | |||||||||||||||||
Net loss, also being comprehensive loss |
$ | (7,845 | ) | $ | (2,351 | ) | (6,486 | ) | - | $ | (16,682 | ) | |||||||||||
Basic loss per share |
$ | (0.47 | ) | $ | (0.99 | ) | |||||||||||||||||
Diluted loss per share |
$ | (0.47 | ) | $ | (0.99 | ) | |||||||||||||||||
Weighted average number of shares outstanding |
|||||||||||||||||||||||
Basic |
16,788,231 | 16,788,231 | |||||||||||||||||||||
Diluted |
16,788,231 | 16,788,231 |
Supplemental information: |
The SMTC year ended December 31, 2017 consolidated statement of operations and comprehensive loss includes total amortization expense of $3,588 |
The MC Assembly year ended December 31, 2017 consolidated statement of operations and comprehensive loss includes total amortization expense of $4,346 |
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) FOR THE NINE MONTHS PERIOD ENDED SEPTEMBER 30, 2018
(in thousands, except per share amounts)
(Unaudited) |
SMTC Nine months ended |
MC Assembly Nine months ended |
Pro forma adjustments (note 6) |
Pro forma footnotes (note 6) |
Reclassifications and accounting policies (note 5) |
Combined Nine months ended |
|||||||||||||||||
(Expressed in thousands of U.S. dollars, except number of shares and per share amounts) |
September 30, 2018 |
September 30, 2018 |
September 30, 2018 |
||||||||||||||||||||
Revenue |
$ | 135,276 | $ | 111,182 | $ | - | $ | 2,366 | $ | 248,824 | |||||||||||||
Cost of sales |
121,906 | 97,765 | (255 | ) | (5) | 1,843 | 221,259 | ||||||||||||||||
Gross profit |
13,370 | 13,417 | 255 | 523 | 27,565 | ||||||||||||||||||
Selling, general and administrative expenses |
10,838 | 9,274 | (375 | ) | (9) | 9 | 19,746 | ||||||||||||||||
Intangible asset amortization |
- | - | 3,391 | (6) | - | 3,391 | |||||||||||||||||
Loss/(gain) on sale of property, plant and equipment |
3 | - | - | (9 | ) | (6 | ) | ||||||||||||||||
Restructuring charges |
154 | - | - | - | 154 | ||||||||||||||||||
Operating earnings (loss) |
2,375 | 4,143 | (2,761 | ) | 523 | 4,280 | |||||||||||||||||
Interest expense |
1,195 | 6,000 | (37 | ) | (4) | - | 7,158 | ||||||||||||||||
Other expense/Income |
- | 242 | - | - | 242 | ||||||||||||||||||
Earnings (loss) before income taxes |
1,180 | (2,099 | ) | (2,724 | ) | 523 | (3,120 | ) | |||||||||||||||
Income tax expense (recovery) |
|||||||||||||||||||||||
Current |
596 | 212 | - | - | 808 | ||||||||||||||||||
Deferred |
(191 | ) | - | - | - | (191 | ) | ||||||||||||||||
405 | 212 | - | - | 617 | |||||||||||||||||||
Net earnings (loss) |
775 | (2,311 | ) | (2,724 | ) | 523 | (3,737 | ) | |||||||||||||||
Other comprehensive income |
- | 330 | - | (330 | ) | - | |||||||||||||||||
Net earnings (loss), also being comprehensive income (loss) |
$ | 775 | $ | (1,981 | ) | $ | (2,724 | ) | $ | 193 | $ | (3,737 | ) | ||||||||||
Basic earnings (loss) per share |
0.04 | $ | (0.21 | ) | |||||||||||||||||||
Diluted earnings (loss) per share |
0.04 | $ | (0.20 | ) | |||||||||||||||||||
Weighted average number of shares outstanding |
|||||||||||||||||||||||
Basic |
17,866,399 | 17,866,399 | |||||||||||||||||||||
Diluted |
18,517,902 | 19,022,637 |
Supplemental information: |
The SMTC nine months ended September 30, 2018 consolidated statement of operations and comprehensive income includes total amortization expense of $2,426 |
The MC Assembly nine months ended September 30, 2018 consolidated statement of operations and comprehensive loss includes total amortization expense of $2,986 |
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
AS OF SEPTEMBER 30, 2018
(in thousands)
(Unaudited) |
SMTC |
MC Assembly |
Pro forma adjustments (note 6) |
Pro forma footnotes (note 6) |
Reclassifications and accounting policies (note 5) |
Combined |
|||||||||||||||||
(Expressed in thousands of U.S. dollars, except number of shares and per share amounts) |
September 30, 2018 |
September 30, 2018 |
September 30, 2018 |
||||||||||||||||||||
Assets |
|||||||||||||||||||||||
Current assets: |
|||||||||||||||||||||||
Cash and cash equivalents |
$ | 14,689 | $ | 14 | $ | (12,587 | ) | (1) | - | $ | 2,116 | ||||||||||||
Accounts receivable - net |
41,206 | 24,503 | (96 | ) | (2) | - | 65,613 | ||||||||||||||||
Unbilled contract assets |
8,503 | - | - | 2,366 | 10,869 | ||||||||||||||||||
Inventories |
28,372 | 33,447 | (2,083 | ) | (3) | (2,174 | ) | 57,562 | |||||||||||||||
Prepaid expenses and other assets |
3,144 | 2,195 | (27 | ) | (2) | - | 5,312 | ||||||||||||||||
Total current assets |
95,914 | 60,159 | (14,793 | ) | 192 | 141,472 | |||||||||||||||||
Property, plant and equipment - net |
12,351 | 15,544 | (809 | ) | (5) | - | 27,086 | ||||||||||||||||
Deposits and other assets |
- | 822 | - | - | 822 | ||||||||||||||||||
Intangible assets - net |
- | - | 21,000 | (6) | - | 21,000 | |||||||||||||||||
Goodwill |
- | 38,548 | (17,718 | ) | (6) | - | 20,830 | ||||||||||||||||
Deferred income taxes - net |
496 | - | - | - | 496 | ||||||||||||||||||
Deferred financing costs - net |
108 | - | 702 | (4) | - | 810 | |||||||||||||||||
Total assets |
$ | 108,869 | $ | 115,073 | $ | (11,618 | ) | $ | 192 | 212,516 | |||||||||||||
Liabilities and Shareholders' Equity |
|||||||||||||||||||||||
Current liabilities: |
|||||||||||||||||||||||
Revolving credit facility |
$ | 16,706 | $ | - | $ | 6,685 | (4) | - | $ | 23,391 | |||||||||||||
Accounts payable |
41,649 | 25,459 | - | - | 67,108 | ||||||||||||||||||
Accrued liabilities |
7,273 | 6,472 | 1,034 | (4) | 834 | 15,613 | |||||||||||||||||
Accrued management fees |
- | 1,500 | (1,500 | ) | (9) | - | - | ||||||||||||||||
Customer deposits |
- | 834 | - | (834 | ) | - | |||||||||||||||||
Earnout liability (note 3) |
- | - | 3,050 | - | 3,050 | ||||||||||||||||||
Income taxes payable |
16 | - | - | - | 16 | ||||||||||||||||||
Current portion of equipment facility |
953 | - | (953 | ) | (4) | - | - | ||||||||||||||||
Current portion of long-term debt |
2,000 | - | (2,000 | ) | (4) | - | - | ||||||||||||||||
Current portion of capital lease obligations |
305 | 1,263 | - | - | 1,568 | ||||||||||||||||||
Total current liabilities |
68,902 | 35,528 | 6,316 | - | 110,746 | ||||||||||||||||||
Long-term debt - net |
4,500 | - | 52,733 | (4) | - | 57,233 | |||||||||||||||||
Line of credit |
- | 22,674 | (22,674 | ) | (4) | - | - | ||||||||||||||||
Stockholder subordinated debt |
- | 37,604 | (37,604 | ) | (4) | - | - | ||||||||||||||||
Junior subordinated debt |
- | 2,480 | (2,480 | ) | (4) | - | - | ||||||||||||||||
Warrant liability |
- | - | 1,898 | (8) | - | 1,898 | |||||||||||||||||
Equipment facility |
1,676 | - | (1,676 | ) | (4) | - | - | ||||||||||||||||
Capital lease obligations |
396 | 9,137 | - | - | 9,533 | ||||||||||||||||||
Total liabilities |
75,474 | 107,423 | (3,487 | ) | - | 179,410 | |||||||||||||||||
Shareholders’ equity: |
|||||||||||||||||||||||
Capital stock |
457 | 1 | (1 | ) | (7) | - | 457 | ||||||||||||||||
Additional paid-in capital |
278,520 | 26,480 | (26,480 | ) | (7) | - | 278,520 | ||||||||||||||||
Accumulated OCI |
- | 153 | (153 | ) | (7) | - | - | ||||||||||||||||
Deficit |
(245,582 | ) | (18,984 | ) | 18,695 | (7) | - | (245,871 | ) | ||||||||||||||
Total shareholders' equity |
33,395 | 7,650 | (7,939 | ) | - | 33,106 | |||||||||||||||||
Total liabilities and shareholders' equity |
$ | 108,869 | $ | 115,073 | $ | (11,426 | ) | $ | - | $ | 212,516 |
NOTES TO THE UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
NOTE 1 - DESCRIPTION OF THE TRANSACTION
On November 8, 2018, SMTC Corporation, entered a certain Stock Purchase Agreement, by and among the Company, MC Assembly Holdings, Inc., each of the stockholders of the Target (the “Sellers”), and Cyprium Investment Partners LLC, in its capacity as a representative of the Sellers, pursuant to which the Company agreed to purchase all of the issued and outstanding shares of capital stock of Target from the Sellers (such transaction, the “MC Acquisition”). The MC Acquisition includes an initial purchase price of approximately $65,000,000 in cash plus a potential earnout of up to $5,000,000 in cash payable by the Company upon the achievement of certain performance milestones determined after the completion of the Company’s first fiscal quarter of 2019. The Purchase Agreement and the MC Acquisition were unanimously approved by the Board of Directors of the Company, and the MC Acquisition closed on November 8, 2018.
NOTE 2 - BASIS OF PRO FORMA PRESENTATION
The unaudited pro forma combined balance sheet has been prepared to reflect as if the MC Acquisition and the Company’s related financing transactions occurred as of September 30, 2018. The unaudited pro forma combined statements of operations and comprehensive income (loss) combine the results of operations of SMTC and MC Assembly for the fiscal year ended December 31, 2017 and nine months period ended September 30, 2018 as if the MC Acquisition and the Company’s financing transactions occurred on January 1, 2017. The unaudited pro forma combined balance sheet as of September 30, 2018 was prepared utilizing SMTC’s and MC Assembly’s historical balance sheets as of September 30, 2018, respectively. The unaudited pro forma combined statements of operations and comprehensive income (loss) for the year ended December 31, 2017 and nine months period ended September 30, 2018 was prepared utilizing SMTC’s and MC Assembly’s historical income statements for the year ended December 31, 2017 and nine months period ended September 30, 2018.
The unaudited pro forma combined financial statements have been prepared for illustrative purposes only and are not necessarily indicative of the consolidated financial position or results of operations in future periods or the results that actually would have been achieved had SMTC and MC Assembly been a combined company during the respective periods presented. These unaudited pro forma combined financial statements should be read in conjunction with SMTC's historical consolidated financial statements and related notes included in its Annual Report on Form 10-K for the fiscal year ended December 31, 2017 and Form 10-Q for nine months period ended September 30, 2018 filed with the Securities and Exchange Commission (the "SEC") on March 8, 2018 and November 7, 2018 respectively. Certain reclassifications have been made to the historical presentation of SMTC and MC Assembly to conform to the presentation used in the unaudited pro forma combined financial statements, as described below in Note 5.
SMTC expects to incur costs and realize benefits associated with integrating the operations of SMTC and MC Assembly. The unaudited pro forma combined financial statements do not reflect the costs of any integration activities or any benefits that may result from operating efficiencies or revenue synergies. The unaudited pro forma combined statement of operations and comprehensive income (loss) does not reflect any non-recurring charges directly related to the acquisition that the combined company may incur upon completion of the transaction.
NOTE 3 - ESTIMATED PRELIMINARY PURCHASE PRICE CONSIDERATION
The table below represents the total estimated preliminary purchase price consideration (amounts in thousands):
Purchase Price - Cash |
$ | 65,000 | ||
Estimated earnout |
3,050 | |||
Working capital adjustment |
1,052 | |||
Total purchase consideration |
$ | 69,102 |
SMTC acquired 100% of the outstanding common shares of MC Assembly. The estimated earnout is based upon the achievement of certain performance milestones determined after the completion of the Company’s first fiscal quarter of 2019. The estimated fair value of the earnout is based on forecasted results, and may change upon the resolution of the contingency at the end of the Company’s first fiscal quarter of 2019. This fair value adjustment is not reflected as a pro forma adjustment to the year ended December 31, 2017 or nine months period ended September 30, 2018 statement of operations and comprehensive loss as it is reflected as part of the purchase price. This is recorded as a pro forma adjustment as an accrual as at September 30, 2018. The working capital adjustment was cash settled at time of closing on November 8, 2018.
NOTE 4 - ESTIMATED PRELIMINARY PURCHASE PRICE ALLOCATION
The table below represents the estimated preliminary purchase price allocation to the net assets acquired based on their estimated fair values, as well as the associated estimated useful lives of the acquired intangible assets (amounts in thousands). Such amounts were estimated using the interim financial statements of MC Assembly as of November 8, 2018. The financial statement amounts closely approximated those balances in the interim financial statement as of September 30, 2018. As the final valuations are being performed, increases or decreases in the fair value of relevant balance sheet amounts may result in adjustments, which may result in material differences from the information presented herein.
Fair Value |
||||||||
Total purchase consideration | $ | 69,102 | ||||||
A SSETS |
||||||||
852 | ||||||||
Accounts Receivable |
19,763 | |||||||
I NVENTORY |
34,929 | |||||||
P REPAIDS |
2,529 | |||||||
P ROPERTY , P LANT AND E QUIPMENT |
14,578 | |||||||
Total assets |
72,651 | 72,651 | ||||||
L IABILITIES |
||||||||
A CCOUNTS P AYABLE |
27,961 | |||||||
A CCRUALS |
7,148 | |||||||
C APITAL L EASE O BLIGATION |
10,270 | |||||||
Total liabilities |
45,379 | 45,379 | ||||||
Net tangible assets |
27,272 | |||||||
Excess Purchase Price to Allocate |
41,830 | |||||||
Intangible Assets |
||||||||
Customer relationships |
12,350 | |||||||
Backlog |
6,990 | |||||||
Trade names |
1,300 | |||||||
Noncompetition agreements |
360 | |||||||
Total intangible assets |
21,000 | |||||||
RESIDUAL GOODWILL |
$ | 20,830 |
NOTE 5 - RECLASSIFICATION AND ACCOUNTING POLICY ADJUSTMENTS (amounts in thousands)
Certain reclassifications have been made to the historical presentation of MC Assembly to conform to the presentation used in the unaudited pro forma combined financial statements. They include the following:
Unaudited consolidated balance sheet
● |
Adjustments were made to reflect the adoption of ASC 606 revenue from contracts effective January 1, 2018. Pro forma adjustments have been recorded to unbilled contract assets of $2,366 representing the increase in unbilled contract assets as at September 30, 2018 compared to January 1, 2018. There is a corresponding reduction to the inventory balance of $2,174 |
● |
Customer deposits were reclassified to accrued liabilities |
Unaudited consolidated statement of operations and comprehensive loss
● |
Adjustments were made to reflect the adoption of ASC 606 revenue from contracts. For the September 30, 2018 nine months ended consolidated statements of operations and comprehensive loss, adjustments of $2,366 were made increasing revenue and $2,174 increasing cost of sales with additional gross margin of $192 |
● |
Reclassified losses and gains on sale of property plant and equipment as a separate line item |
● |
Amounts previously reported under other comprehensive losses relating to unrealized foreign exchange gains or losses on unsettled forward contracts has been reclassified to cost of goods sold |
NOTE 6 - PRO FORMA ADJUSTMENTS (amounts in thousands)
Adjustments to the pro forma consolidated balance sheets:
(1) |
The pro forma adjustments to cash and cash equivalents, reflects the $12,587 of SMTC cash paid for the acquisition. |
(2) |
The pro forma adjustment to accounts receivable of $96 reflects the adjustment to record the fair value of accounts receivable acquired. A pro forma adjustment to prepaid expenses and other assets of $27 reflects prepaid charges with no future benefit post acquisition for cancelled services. |
(3) |
The pro forma adjustment to inventory reflects approximately $455 of estimated fair value increase for acquired inventory at the assumed acquisition date. The increased valuation of the inventory will increase cost of sales as the acquired inventory is sold after the closing date of the acquisition. The pro forma adjustment to inventory was offset by an estimated fair value adjustment for excess and obsolete inventory items in the amount of $2,538 that are not believed to be recoverable |
(4) |
Pro forma adjustments related to Debt and other transaction costs are outlined as follows: |
Debt |
Revolver |
Equipment Facility (current) |
Long-term debt (current) |
Equipment Facility (long-term) |
Long-term Debt |
Accruals |
||||||||||||||||||
Eliminate MC Assembly debt |
$ | - | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||||
Eliminate SMTC debt - current |
16,706 | 953 | 2,000 | - | - | - | ||||||||||||||||||
Eliminate SMTC debt - long term |
- | - | - | 1,676 | 4,500 | - | ||||||||||||||||||
Total historical financial statements |
16,706 | 953 | 2,000 | 1,676 | 4,500 | - | ||||||||||||||||||
Paydown from SMTC cash at time of acquistion |
12,587 | - | - | - | - | - | ||||||||||||||||||
Revolver drawing at time of acquisition |
19,272 | - | - | - | - | - | ||||||||||||||||||
Term debt ($50M+$12M) |
- | - | - | - | 62,000 | - | ||||||||||||||||||
Transaction costs reclassified |
- | - | - | - | 2,869 | - | ||||||||||||||||||
Discount on term debt (note 8) |
- | - | - | - | 1,898 | - | ||||||||||||||||||
Transaction costs unpaid accrued |
- | - | - | - | - | 839 | ||||||||||||||||||
Pro forma adjustment combined |
6,685 | (953 | ) | (2,000 | ) | (1,676 | ) | 52,733 | 839 |
A) |
Total transaction costs of $4,521 were paid at time of closing; |
a. |
$702 has been reflected as a pro forma adjustment classified in deferred financing fees incurred at the closing of the transaction that have been capitalized as deferred financing fees |
b. |
$2,869 has been reflected as a pro forma adjustment as an offset to long-term debt |
|
c. | The issuance of the warrants have a corresponding discount of $1,898 reducing the long-term debt (see note 8) |
d. |
Additional transaction fees of $1,789 were incurred at time of closing of which $839 was unpaid and included as a pro forma adjustment to accruals. These are not recurring expenses, $1,789 has also been recorded as a pro forma adjustment against shareholder’s equity (see note 7) |
B) |
The accrual pro forma adjustment of $1,034 is comprised of $839 related to accrued transaction costs not paid at time of closing in addition to a fair value adjustment of $195 to accruals related to other operating expenses |
C) |
At time of closing, the historical debt facilities, including the revolver, equipment facility and long term debt for both SMTC and MC Assembly were extinguished and replaced with the new debt |
Interest (nine months ended September 30, 2018) |
Interest (annualized) |
Year ended December 31, 2017 |
Nine months ended September 30, 2018 |
||||||||||||||
MC Assembly |
$ | 6,000 | $ | 8,000 | |||||||||||||
SMTC |
1,195 | 1,593 | |||||||||||||||
$ | 7,195 | $ | 9,593 |
Combined (MC Assembly and SMTC) |
30-Sep-18 |
Interest |
Annualized |
|||||||||||||||||
Revolver |
$ | 23,391 | 6.50 | % | $ | 1,520 | ||||||||||||||
Term Debt - Subordinated A |
50,000 | 10.5 | % | 5,250 | ||||||||||||||||
Term Debt - Subordinated B |
12,000 | 14.0 | % | 1,680 | ||||||||||||||||
$ | 85,391 | $ | 8,450 | |||||||||||||||||
Interest - Debt (Cash) |
$ | (1,143 | ) | $ | (1,143 | ) | $ | (857 | ) | |||||||||||
Interest - Amortization Debt Fees |
714 | 536 | ||||||||||||||||||
Interest - Amortization of Discount on debt |
380 | 285 | ||||||||||||||||||
Total pro forma adjustment |
$ | (49 | ) | $ | (37 | ) |
Pro forma adjustments to interest expense were calculated using the closing debt balances presented in the adjusted September 30, 2018 combined balance sheet. The interest expense calculated on the $702 and $2,869 of deferred financing fees amortized over a five-year period. In addition, interest is calculated based on the discount on the debt of $1,898 related to the warrants issued at the time of the acquisition. The discount to the debt is amortized to interest expense over a five-year period.
(5) |
The pro forma adjustment to property, plant and equipment reflects a fair value decrease of $809. The corresponding pro forma adjustments reducing amortization expenses were made of $255 and $340, respectively in the statements of comprehensive income and loss for the nine months ended September 30, 2018 and the year ended December 31, 2017. |
(6) |
The pro forma adjustment to goodwill and intangible assets includes the following (amounts in thousands): |
The addition of intangible assets of $21,000 as a result of the estimated preliminary purchase price allocation is comprised of the following:
Intangible Assets |
(in 000's) |
Estimated useful life (years) |
Year ended December 31, 2017 |
Nine months ended September 30, 2018 |
||||||||||||
Customer relationships |
$ | 12,350 | 10 | $ | 1,235 | $ | 926 | |||||||||
Backlog |
6,990 | 1.5 | 4,660 | 2,330 | ||||||||||||
Trade names |
1,300 | 1 | 1,300 | - | ||||||||||||
Noncompetition agreements |
360 | 2 | 180 | 135 | ||||||||||||
Total Purchased Intangible Assets |
$ | 21,000 | $ | 7,375 | $ | 3,391 |
The pro forma adjustment to amortization expense of $7,375 in the year ended December 31, 2017 and $3,391 for the nine months ended September 30, 2018 reflect the corresponding amortization based on the estimated useful lives of the underlying intangible assets.
The pro forma adjustment to goodwill includes the following:
Goodwill and Intangibles |
(in 000's) |
|||
Elimination of MC Assembly historical goodwill balance |
$ | (38,548 | ) | |
Addition of goodwill as a result of preliminary purchase price allocation |
20,830 | |||
Total pro forma adjustment to goodwill |
$ | (17,718 | ) |
(7) |
The pro forma adjustments to total shareholders’ equity include the following (amounts in thousands): |
Historical MC Assembly shareholders’ equity |
Capital stock |
Additional paid-in capital |
Accumulated OCI |
Deficit |
||||||||||||
MC Assembly equity as at September 30, 2018 | 1 | 26,480 | 153 | (18,984 | ) | |||||||||||
Eliminate historical MC Assembly equity |
(1) | (26,480 | ) | (153 | ) | 18,984 | ||||||||||
Transaction Costs |
(1,789 | ) | ||||||||||||||
Management fee accrual reversal |
1,500 | |||||||||||||||
Pro forma adjustment |
(1) | (26,480 | ) | (153 | ) | 18,695 |
(8) |
Pro forma adjustments were made to reflect the issuance of 504,735 warrants to TCW at the closure of the transaction. These warrants have an estimated valuation at the time of acquisition of $1,898. This is reported as a discount to the term debt as at September 30, 2018. In addition a warrant liability is reported as a separate line item on the combined balance sheet for the same value. The discount on the debt will be amortized to interest expense over a 5-year period. Amortization of the discount on the debt will be presented as interest expense of which $285 has been presented in the September 30, 2018 nine months ended statement of comprehensive income (loss) and $380 in the December 31, 2017 statement of comprehensive loss. |
(9) |
Pro forma adjustments were made of $375 and $500 in the September 30, 2018 nine months ended statement of comprehensive income (loss) in the December 31, 2017 statement of operations and comprehensive loss, respectively removing management fees from MC Assembly’s historical financial statements. The management fees will not be a recurring expense post acquisition. In the September 30, 2018 balance sheet of MC Assembly, $1,500 remained unpaid and therefore is recorded as a pro forma adjustment reducing accruals and a corresponding reduction to retained earnings. |
(10) |
The income tax effect of the pro forma adjustments has been determined with reference to the statutory rates in effect during the twelve months ended December 31, 2017, and the nine months ended September 30, 2018. These adjustments did not result in a change to the combined current income tax expense of SMTC and MC Assembly during the reporting periods as the pro forma adjustments created additional losses in the combined statement of comprehensive income (loss). Changes to SMTC and MC Assembly combined deferred tax assets and liabilities as a result of the preliminary purchase price allocation is fully offset by a corresponding net reduction to its valuation allowance. |
(11) |
The pro forma adjustments to basic and diluted loss per common shares outstanding were calculated at $(0.21) and $(0.20) for the nine months period ended September 30, 2018. The pro forma adjustments to basic and diluted loss per common shares outstanding were calculated at $(0.99) for the twelve months ended December 31, 2018. The diluted number of common shares has been increased to reflect the issued warrants of 504,735. |