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SMART Global Holdings, Inc. - Quarter Report: 2021 February (Form 10-Q)

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

(Mark One)

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

For the quarterly period ended February 26, 2021

OR

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

Commission File Number: 001-38102

 

SMART GLOBAL HOLDINGS, INC.

(Exact Name of Registrant as Specified in its Charter)

 

Cayman Islands

98-1013909

( State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer
Identification No.)

c/o Maples Corporate Services Limited

P.O. Box 309

Ugland House

Grand Cayman, Cayman Islands

KY1-1104

(Address of principal executive offices)

(Zip Code)

Registrant’s telephone number, including area code: (510) 623-1231

 

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

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Ordinary shares, $0.03 par value per share

SGH

The NASDAQ Stock Market LLC

(NASDAQ Global Select Market)

 

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

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

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

 

Large accelerated filer

 

  

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

  

  

Smaller reporting company

 

 

 

 

 

 

 

 

Emerging growth company

 

 

 

 

 

 

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

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

As of March 26, 2021, the registrant had 23,850,274 ordinary shares outstanding.

 

 

 

 


 

Table of Contents

 

 

 

Page

PART I.

FINANCIAL INFORMATION

3

Item 1.

Financial Statements (Unaudited)

3

 

Condensed Consolidated Balance Sheets

3

 

Condensed Consolidated Statements of Operations

4

 

Condensed Consolidated Statements of Comprehensive Income (Loss)

5

 

Condensed Consolidated Statements of Shareholders’ Equity

6

 

Condensed Consolidated Statements of Cash Flows

7

 

Notes to Unaudited Condensed Consolidated Financial Statements

8

Item 2.

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

41

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

46

Item 4.

Controls and Procedures

46

PART II.

OTHER INFORMATION

49

Item 1.

Legal Proceedings

49

Item 1A.

Risk Factors

49

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

51

Item 3.

Defaults Upon Senior Securities

51

Item 4.

Mine Safety Disclosures

51

Item 6.

Exhibits

52

Signatures

53

 

 

 

1


 

 

Cautionary Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q includes a number of forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, that involve many risks and uncertainties. Forward-looking statements are identified by the use of the words “would,” “could,” “will,” “may,” “expect,” “believe,” “should,” “anticipate,” “if,” “future,” “intend,” “plan,” “estimate,” “potential,” “target,” “seek,” or “continue” and similar words and phrases, including the negatives of these terms, or other variations of these terms, that denote future events. These statements reflect our current views with respect to future events and our potential financial performance and are subject to risks and uncertainties that could cause our actual results and financial position to differ materially and adversely from what is projected or implied in any forward-looking statements included in this report. These factors include, but are not limited to, the risks described under the caption “Risk Factors” in the documents we file from time to time with the Securities and Exchange Commission, including in our Annual Report on Form 10-K for our fiscal year ended August 28, 2020, and in this report, and in Item 2 of Part I – “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this report. Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the forward-looking events and circumstances discussed in this report may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements. We make these forward-looking statements based upon information available on the date of this report, and we expressly disclaim any obligation to update or alter any forward-looking statements, whether as a result of new information or otherwise, except as required by law.

 

 

2


 

 

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

SMART Global Holdings, Inc.

and Subsidiaries

Condensed Consolidated Balance Sheets

(In thousands, except per share data)

(Unaudited)

 

 

 

February 26,

 

 

August 28,

 

 

 

2021

 

 

2020

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

139,803

 

 

$

150,811

 

Accounts receivable, net of allowances of $98 and $101 as of February 26, 2021

   and August 28, 2020, respectively

 

 

203,376

 

 

 

215,918

 

Inventories

 

 

189,327

 

 

 

162,991

 

Prepaid expenses and other current assets

 

 

46,321

 

 

 

26,990

 

Total current assets

 

 

578,827

 

 

 

556,710

 

Property and equipment, net

 

 

78,146

 

 

 

54,705

 

Operating lease right-of-use assets

 

 

25,049

 

 

 

25,013

 

Other noncurrent assets

 

 

16,924

 

 

 

20,554

 

Intangible assets, net

 

 

48,844

 

 

 

55,671

 

Goodwill

 

 

73,017

 

 

 

73,955

 

Total assets

 

$

820,807

 

 

$

786,608

 

Liabilities and Shareholders’ Equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

261,443

 

 

$

224,660

 

Accrued liabilities

 

 

61,581

 

 

 

57,829

 

Total current liabilities

 

 

323,024

 

 

 

282,489

 

Long-term debt

 

 

210,811

 

 

 

195,573

 

Long-term operating lease liabilities

 

 

21,342

 

 

 

20,829

 

Other long-term liabilities

 

 

7,071

 

 

 

5,613

 

Total liabilities

 

$

562,248

 

 

$

504,504

 

Commitments and contingencies (see Note 10)

 

 

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

 

 

 

Ordinary shares, $0.03 par value. Authorized 200,000 shares; issued and

   outstanding 23,841 and 24,419 as of February 26, 2021 and August 28, 2020,

   respectively

 

 

757

 

 

 

737

 

Additional paid-in capital

 

 

320,284

 

 

 

346,131

 

Accumulated other comprehensive loss

 

 

(233,830

)

 

 

(228,241

)

Retained earnings

 

 

171,348

 

 

 

163,477

 

Total shareholders’ equity

 

 

258,559

 

 

 

282,104

 

Total liabilities and shareholders’ equity

 

$

820,807

 

 

$

786,608

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

3


 

SMART Global Holdings, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations

(In thousands, except per share data)

(Unaudited)

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

February 26,

 

 

February 28,

 

 

February 26,

 

 

February 28,

 

 

 

2021

 

 

2020

 

 

2021

 

 

2020

 

Net sales (1)

 

$

304,009

 

 

$

272,042

 

 

$

595,705

 

 

$

544,060

 

Cost of sales

 

 

250,553

 

 

 

220,536

 

 

 

489,606

 

 

 

438,234

 

Gross profit

 

 

53,456

 

 

 

51,506

 

 

 

106,099

 

 

 

105,826

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

8,852

 

 

 

14,702

 

 

 

15,816

 

 

 

29,588

 

Selling, general, and administrative

 

 

31,664

 

 

 

28,648

 

 

 

69,720

 

 

 

62,201

 

Total operating expenses

 

 

40,516

 

 

 

43,350

 

 

 

85,536

 

 

 

91,789

 

Income from operations

 

 

12,940

 

 

 

8,156

 

 

 

20,563

 

 

 

14,037

 

Interest expense, net

 

 

(4,365

)

 

 

(4,150

)

 

 

(7,518

)

 

 

(8,642

)

Other expense, net

 

 

(1,531

)

 

 

(12,386

)

 

 

(699

)

 

 

(13,226

)

Total other expense

 

 

(5,896

)

 

 

(16,536

)

 

 

(8,217

)

 

 

(21,868

)

Income (loss) before income taxes

 

 

7,044

 

 

 

(8,380

)

 

 

12,346

 

 

 

(7,831

)

Provision for income taxes

 

 

1,200

 

 

 

1,340

 

 

 

4,475

 

 

 

1,665

 

Net income (loss)

 

$

5,844

 

 

$

(9,720

)

 

$

7,871

 

 

$

(9,496

)

Earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.24

 

 

$

(0.41

)

 

$

0.32

 

 

$

(0.40

)

Diluted

 

$

0.23

 

 

$

(0.41

)

 

$

0.31

 

 

$

(0.40

)

Shares used in computing earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

24,217

 

 

 

23,906

 

 

 

24,389

 

 

 

23,809

 

Diluted

 

 

25,203

 

 

 

23,906

 

 

 

25,221

 

 

 

23,809

 

 

(1)

Includes sales to affiliates of $18,173 and $33,148 in the three and six months ended February 26, 2021 and $18,597 and $35,553 for the same periods ended February 28, 2020, respectively (see Note 3).

See accompanying notes to unaudited condensed consolidated financial statements.

4


 

SMART Global Holdings, Inc. and Subsidiaries

Condensed Consolidated Statements of Comprehensive Income (Loss)

(In thousands)

(Unaudited)

 

  

 

Three Months Ended

 

 

Six Months Ended

 

 

 

February 26,

 

 

February 28,

 

 

February 26,

 

 

February 28,

 

 

 

2021

 

 

2020

 

 

2021

 

 

2020

 

Net income (loss)

 

$

5,844

 

 

$

(9,720

)

 

$

7,871

 

 

$

(9,496

)

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation

 

 

10,934

 

 

 

(10,772

)

 

 

(5,589

)

 

 

(21,016

)

Comprehensive income (loss)

 

$

16,778

 

 

$

(20,492

)

 

$

2,282

 

 

$

(30,512

)

 

See accompanying notes to unaudited condensed consolidated financial statements.

5


 

SMART Global Holdings, Inc. and Subsidiaries

Condensed Consolidated Statements of Shareholders’ Equity

(In thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

other

 

 

 

 

 

 

Total

 

 

 

Ordinary shares

 

 

paid-in

 

 

comprehensive

 

 

Retained

 

 

shareholders’

 

 

 

Shares

 

 

Amount

 

 

capital

 

 

loss

 

 

earnings

 

 

equity

 

Balances as of August 30, 2019

 

 

23,617

 

 

$

712

 

 

$

285,994

 

 

$

(177,866

)

 

$

164,620

 

 

$

273,460

 

Share-based compensation expense

 

 

 

 

 

 

 

 

5,956

 

 

 

 

 

 

 

 

 

5,956

 

Issuance of ordinary shares from exercises

 

 

86

 

 

 

2

 

 

 

1,164

 

 

 

 

 

 

 

 

 

1,166

 

Issuance of ordinary shares from release of restricted stock units (RSUs)

 

 

69

 

 

 

2

 

 

 

(2

)

 

 

 

 

 

 

 

 

 

Issuance of ordinary shares from employee share purchase plan (ESPP)

 

 

67

 

 

 

2

 

 

 

1,240

 

 

 

 

 

 

 

 

 

1,242

 

Withholding tax on restricted stock units (RSUs)

 

 

(1

)

 

 

 

 

 

(20

)

 

 

 

 

 

 

 

 

(20

)

Foreign currency translation

 

 

 

 

 

 

 

 

 

 

 

(10,244

)

 

 

 

 

 

(10,244

)

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

224

 

 

 

224

 

Balances as of November 29, 2019

 

 

23,838

 

 

 

718

 

 

 

294,332

 

 

 

(188,110

)

 

 

164,844

 

 

 

271,784

 

Share-based compensation expense

 

 

 

 

 

 

 

 

4,647

 

 

 

 

 

 

 

 

 

4,647

 

Issuance of ordinary shares from exercises

 

 

49

 

 

 

1

 

 

 

640

 

 

 

 

 

 

 

 

 

641

 

Issuance of ordinary shares from release of RSUs

 

 

117

 

 

 

4

 

 

 

(4

)

 

 

 

 

 

 

 

 

 

Withholding tax on RSUs

 

 

(11

)

 

 

 

 

 

(351

)

 

 

 

 

 

 

 

 

(351

)

Equity component of convertible notes due 2026, net

 

 

 

 

 

 

 

 

50,822

 

 

 

 

 

 

 

 

 

50,822

 

Foreign currency translation

 

 

 

 

 

 

 

 

 

 

 

(10,772

)

 

 

 

 

 

(10,772

)

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(9,720

)

 

 

(9,720

)

Balances as of February 28, 2020

 

 

23,993

 

 

$

723

 

 

$

350,086

 

 

$

(198,882

)

 

$

155,124

 

 

$

307,051

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

other

 

 

 

 

 

 

Total

 

 

 

Ordinary shares

 

 

paid-in

 

 

comprehensive

 

 

Retained

 

 

shareholders’

 

 

 

Shares

 

 

Amount

 

 

capital

 

 

loss

 

 

earnings

 

 

equity

 

Balances as of August 28, 2020

 

 

24,419

 

 

$

737

 

 

$

346,131

 

 

$

(228,241

)

 

$

163,477

 

 

$

282,104

 

Share-based compensation expense

 

 

 

 

 

 

 

 

11,088

 

 

 

 

 

 

 

 

 

11,088

 

Issuance of ordinary shares from exercises

 

 

59

 

 

 

2

 

 

 

1,335

 

 

 

 

 

 

 

 

 

1,337

 

Issuance of ordinary shares from release of RSUs

 

 

332

 

 

 

9

 

 

 

(9

)

 

 

 

 

 

 

 

 

 

Withholding tax on RSUs

 

 

(139

)

 

 

 

 

 

(3,483

)

 

 

 

 

 

 

 

 

(3,483

)

Issuance of ordinary shares from ESPP

 

 

88

 

 

 

3

 

 

 

1,765

 

 

 

 

 

 

 

 

 

1,768

 

Foreign currency translation

 

 

 

 

 

 

 

 

 

 

 

(16,523

)

 

 

 

 

 

(16,523

)

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,027

 

 

 

2,027

 

Balances as of November 27, 2020

 

 

24,759

 

 

 

751

 

 

 

356,827

 

 

 

(244,764

)

 

 

165,504

 

 

 

278,318

 

Share-based compensation expense

 

 

 

 

 

 

 

 

5,398

 

 

 

 

 

 

 

 

 

5,398

 

Issuance of ordinary shares from exercises

 

 

113

 

 

 

3

 

 

 

2,543

 

 

 

 

 

 

 

 

 

2,546

 

Issuance of ordinary shares from release of RSUs

 

 

73

 

 

 

3

 

 

 

(3

)

 

 

 

 

 

 

 

 

 

Withholding tax on RSUs

 

 

(4

)

 

 

 

 

 

(151

)

 

 

 

 

 

 

 

 

(151

)

Repurchase of ordinary shares

 

 

(1,100

)

 

 

 

 

 

(44,330

)

 

 

 

 

 

 

 

 

(44,330

)

Foreign currency translation

 

 

 

 

 

 

 

 

 

 

 

10,934

 

 

 

 

 

 

10,934

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

5,844

 

 

 

5,844

 

Balances as of February 26, 2021

 

 

23,841

 

 

$

757

 

 

$

320,284

 

 

$

(233,830

)

 

$

171,348

 

 

$

258,559

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

6


 

SMART Global Holdings, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

 

 

 

Six Months Ended

 

 

 

February 26,

 

 

February 28,

 

 

 

2021

 

 

2020

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net income (loss)

 

$

7,871

 

 

$

(9,496

)

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

17,160

 

 

 

18,979

 

Share-based compensation

 

 

16,486

 

 

 

10,603

 

Provision for doubtful accounts receivable and sales returns

 

 

(3

)

 

 

(27

)

Deferred income tax benefit

 

 

271

 

 

 

(360

)

(Gain) loss on disposal of property and equipment

 

 

984

 

 

 

(60

)

Loss on mark-to-market adjustment of the capped call

 

 

 

 

 

4,795

 

Loss on extinguishment of debt

 

 

 

 

 

6,630

 

Amortization of debt discounts and issuance costs

 

 

4,307

 

 

 

1,781

 

Amortization of operating lease right-of-use assets

 

 

2,913

 

 

 

2,282

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

10,082

 

 

 

(4,490

)

Inventories

 

 

(28,134

)

 

 

(45,549

)

Prepaid expenses and other assets

 

 

(19,126

)

 

 

6,496

 

Accounts payable

 

 

39,629

 

 

 

56,656

 

Operating lease liabilities

 

 

(2,742

)

 

 

(2,140

)

Accrued expenses and other liabilities

 

 

6,292

 

 

 

2,501

 

Net cash provided by operating activities

 

 

55,990

 

 

 

48,601

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Capital expenditures and deposits on equipment

 

 

(34,795

)

 

 

(9,368

)

Proceeds from sale of property and equipment

 

 

167

 

 

 

96

 

Net cash used in investing activities

 

 

(34,628

)

 

 

(9,272

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Repurchase of ordinary shares

 

 

(44,330

)

 

 

 

Proceeds from FINEP loan

 

 

11,439

 

 

 

 

Proceeds from borrowings under revolving line of credit

 

 

42,500

 

 

 

18,500

 

Repayments of borrowings under revolving line of credit

 

 

(42,500

)

 

 

(18,500

)

Proceeds from issuance of ordinary shares from share option exercises

 

 

3,883

 

 

 

1,807

 

Proceeds from issuance of ordinary shares from ESPP

 

 

1,768

 

 

 

1,242

 

Tax payments due upon issuance of ordinary shares for release of RSUs

 

 

(3,634

)

 

 

(371

)

Long-term debt payments - Term Loan

 

 

 

 

 

(5,625

)

Long-term debt payments - BNDES

 

 

 

 

 

(1,607

)

Purchase of capped call

 

 

 

 

 

(21,825

)

Proceeds from convertible notes due 2026, net of discount

 

 

 

 

 

243,125

 

Payment for extinguishment of long-term debt

 

 

 

 

 

(204,904

)

Net cash provided by (used in) financing activities

 

 

(30,874

)

 

 

11,842

 

Effect of exchange rate changes on cash and cash equivalents

 

 

(1,496

)

 

 

(7,450

)

Net increase (decrease) in cash and cash equivalents

 

 

(11,008

)

 

 

43,721

 

Cash and cash equivalents at beginning of period

 

 

150,811

 

 

 

98,139

 

Cash and cash equivalents at end of period

 

$

139,803

 

 

$

141,860

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

 

 

 

Cash paid during the period:

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

2,955

 

 

$

9,754

 

Cash paid for income taxes, net of refunds

 

 

3,243

 

 

 

3,546

 

Noncash activities information:

 

 

 

 

 

 

 

 

Capital expenditures included in accounts payable at period end

 

 

1,239

 

 

 

845

 

Unpaid debt fees related to convertible notes due 2026

 

 

 

 

 

1,115

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

7


 

SMART Global Holdings, Inc. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

(1)

Overview, Basis of Presentation and Significant Accounting Policies

(a)

Overview

On August 26, 2011, SMART Global Holdings, Inc., formerly known as Saleen Holdings, Inc., a Cayman Islands exempted company (SMART Global Holdings, and together with its subsidiaries, the Company), consummated a transaction with SMART Worldwide Holdings, Inc., formerly known as SMART Modular Technologies (WWH), Inc. (SMART Worldwide), pursuant to an Agreement and Plan of Merger whereby, through a series of transactions, SMART Global Holdings acquired substantially all of the equity interests of SMART Worldwide with SMART Worldwide surviving as an indirect wholly owned subsidiary of SMART Global Holdings (the Acquisition). SMART Global Holdings is an entity that was formed by investment funds affiliated with Silver Lake Partners and Silver Lake Sumeru (collectively Silver Lake). As a result of the Acquisition, since there was a change of control resulting in Silver Lake as the controlling shareholder group, the Company applied the acquisition method of accounting and established a new basis of accounting.

The Company, through its subsidiaries, is a leading designer and manufacturer of electronic products focused on computing and memory technology areas. The Company specializes in application specific product development and support for customers in enterprise, government and original equipment manufacturer, or OEM, markets. Customers rely on SMART as a strategic supplier with top tier customer service, product quality, and technical support with engineering, sales, manufacturing, supply chain and logistics capabilities worldwide. The Company targets customers in markets such as communications, storage, networking, mobile, industrial automation, industrial internet of things, government, military, edge computing and high performance computing.  The Company operates in three segments: Specialty Memory Products, Brazil Products and Specialty Compute and Storage Solutions, or SCSS.

SMART Global Holdings is domiciled in the Cayman Islands and has U.S. headquarters in Newark, California. The Company has operations in the United States, Brazil, Malaysia, Taiwan, Hong Kong, Scotland, Singapore, India, Netherlands, Germany and South Korea.

(b)

Basis of Presentation

The accompanying condensed consolidated financial statements comprise SMART Global Holdings and its wholly owned subsidiaries. Intercompany transactions have been eliminated in the condensed consolidated financial statements.

The Company uses a 52- to 53-week fiscal year ending on the last Friday in August. The three and six months ended February 26, 2021 and February 28, 2020 were both 13-week and 26-week fiscal periods, respectively.

The accompanying unaudited condensed consolidated financial statements and related notes have been prepared in accordance with U.S. generally accepted accounting principles (U.S. GAAP) and in conformity with the rules and regulations of the Securities and Exchange Commission (SEC) applicable to interim financial information. As such, certain information and footnote disclosures normally included in complete annual financial statements prepared in accordance with U.S. GAAP have been omitted in accordance with the rules and regulations of the SEC. In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments, consisting of normal recurring accruals, necessary to present fairly the financial position of the Company and its results of operations and cash flows for the interim periods presented. The financial data and other information disclosed in these notes to the condensed consolidated financial statements related to the interim periods are unaudited.

All financial information for two of the Company’s subsidiaries, SMART Modular Technologies Indústria de Componentes Eletrônicos Ltda. (SMART Brazil) and SMART Modular Technologies do Brasil Indústria e Comércio de Componentes Ltda. (SMART do Brazil), is included in the Company’s condensed consolidated financial statements on a one-month lag because their fiscal years begin August 1 and end July 31.

(c)

Use of Estimates

The preparation of condensed consolidated financial statements in conformity with 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 periods presented. Actual results could differ from the estimates made by management. Significant items subject to such estimates and assumptions include the evaluation of the fair value of the Company's reporting units (as part of the Company’s goodwill impairment), accounting for the allocation of convertible debt between equity and debt, the useful lives of long-lived assets, the valuation of deferred tax assets, inventory, share-based compensation, the estimated net realizable value of Brazilian tax and financial credits, income tax uncertainties and other contingencies.

8


 

(d)

Revenue

The Company’s revenues include products and services. The Company’s product revenues are predominantly derived from the sale of memory modules, flash memory cards, compute products and storage products, which the Company designs and manufactures. The Company’s service revenues are derived from procurement, logistics, inventory management, temporary warehousing, kitting and packaging services. Also, a small portion of the Company’s product sales include extended warranty and on-site services, subscriptions to the Company’s high performance computing environment, professional services, software and related support.

The Company determines revenue recognition through the following steps: (1) identification of the contract with a customer; (2) identification of the performance obligations in the contract; (3) determination of the transaction price; (4) allocation of the transaction price to the performance obligations in the contract; and (5) recognition of revenue when, or as, a performance obligation is satisfied.

The Company’s contracts are executed through a combination of written agreements along with purchase orders with all customers including certain general terms and conditions. Generally, purchase orders entail products, quantities and prices, which define the performance obligations of each party and are approved and accepted by the Company. The Company’s contracts with customers do not include extended payment terms. Payment terms vary by contract type and type of customer and generally range from 30 to 45 days from invoice. Additionally, taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction, that are collected by the Company from a customer and deposited with the relevant government authority, are excluded from revenue.

The transaction price is determined based on the consideration to which the Company will be entitled in exchange for transferring goods or services to the customer adjusted for estimated variable consideration.  Variable consideration may include discounts, rights of return, refunds, and other similar obligations. The Company allocates the transaction price to each distinct product and service based on its relative standalone selling price. The standalone selling price for products primarily involves the cost to produce the deliverable plus the anticipated margin and for services is estimated based on the Company’s approved list price.

In the normal course of business, the Company does not accept product returns unless the items are defective as manufactured. The Company establishes provisions for estimated returns and warranties. In addition, the Company does not typically provide customers with the right to a refund and does not transact for noncash consideration.

Standard Products

The Company’s main performance obligations are to deliver the requested goods to customers according to the agreed-upon shipping terms. The Company recognizes revenue when control transfers to the customer (i.e., when the Company’s performance obligation is satisfied). The Company invoices the customer and recognizes revenues for such delivery when control transfers based on shipping terms.

Customized Products

For customized product sales with terms that require the customer to purchase 100% of all parts built to fulfill the customers forecast, the Company recognizes revenue when control of the underlying assets passes to the customer, as the customer is able to both direct the use of, and obtain substantially all of the remaining benefit from the assets; the customer has the significant risks and rewards associated with ownership of the assets; and the Company has a present right to payment. For these sales, control passes when the Company has made these products available to the customer and under the terms of the agreement cannot repurpose them without the customer’s express consent.  Accordingly, the Company will recognize revenue at the point in time when products made to the customer’s order or forecast are completed and made available to the customer.

Non-cancellable nonrefundable, or NCNR, customized product sales are recognized over time on a cost incurred basis. The customer obtains control and benefits from the services as they are performed over the period based on the cost input measure in the production process for the NCNR customized product. The terms within the NCNR sales orders provide the Company with a legally enforceable right to receive payment including a reasonable profit margin upon customer cancellation for performance completed to date. Accordingly, the Company recognizes revenue over time as customized products listed within the NCNR orders are completed.

Computing Products and Services

A small portion of the Company’s product sales includes extended warranty and on-site services, subscriptions to the Company’s high performance computing environment, professional consulting services including installation and other services, and hardware and software related support. Each contract may contain multiple performance obligations, which requires the transaction price to be allocated to each performance obligation. The Company allocates the consideration to each performance obligation based on the relative selling price. The Company uses best-estimated selling price, determined as the best estimate of the price at which the Company would transact if it sold the deliverable regularly on a stand-alone basis.  

9


 

For services provided to the customers over a period of time, such revenues are recognized over time in line with when the customer receives and consumes the benefit of the services. Extended warranty and on-site services, hardware support, software support, and subscription revenue for access to the Company’s high performance computing environment is deferred and recognized ratably over the contractual period as the Company transfers control as it satisfies its performance obligations over time as the services are rendered.  These services contracts are typically one to three years in length. Subscription revenue for certain customers is recognized based on the contractual fee to use the high-performance-computing environment.  Professional consulting services revenue is recognized as the service is performed and the customer obtains control and benefits from the services as they are performed over the period.  The methods of recognizing revenue for each of these products and services were selected because they reflect a faithful depiction of the transfer of control.

Agency Services

The Company has service performance obligations for agency related services such as procurement, logistics, inventory management, temporary warehousing, kitting and packaging services for certain agency basis customers. The agency services are also known as supply chain services and the performance obligations for these services consist of customized, integrated supply chain services management to assist customers in the planning, execution and overall management of the procurement processes.

For these customers that are accounted for on an agency basis, the Company recognizes as revenue the amount billed less the material procurement costs of products serviced as an agent with the cost of providing these services embedded with the cost of sales. The Company has separate agent performance obligations as follows: (a) procurement, logistics, and inventory management, (b) temporary warehousing, and (c) kitting and packaging services for these customers. Revenue from these arrangements is recognized as service revenue and is determined by a fee for services based on material procurement costs (i.e. fee as a percentage of the associated material being procured, warehoused, kitted or packaged). The Company recognizes revenue for procurement, logistics and inventory management upon the completion of the services or performance obligation, typically upon shipment of the product, as the criteria for over time recognition is not met.  For temporary warehousing, kitting and packaging services, revenue is recognized over time, but the period of performance is typically very short in duration. There are no obligations subsequent to shipment of the product under the agency arrangements.

Contract Costs

As a practical expedient, the Company recognizes the incremental costs of obtaining a contract, specifically commission expenses that have an amortization period of less than twelve months, as an expense when incurred. Additionally, the Company has adopted an accounting policy to recognize shipping and handling costs that occur after control transfers, if any, to the customer as a fulfillment activity. The Company records shipping and handling costs related to revenue transactions within cost of sales as a period cost.

Gross Billings and Net Sales

The following is a summary of the Company’s gross billings to customers and net sales for services and products (in thousands):

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

February 26,

 

 

February 28,

 

 

February 26,

 

 

February 28,

 

 

 

2021

 

 

2020

 

 

2021

 

 

2020

 

Service revenue, net

 

$

7,013

 

 

$

8,417

 

 

$

13,508

 

 

$

16,358

 

Cost of purchased materials - service (1)

 

 

144,109

 

 

 

148,863

 

 

 

275,633

 

 

 

294,889

 

Gross billings for services

 

 

151,122

 

 

 

157,280

 

 

 

289,141

 

 

 

311,247

 

Product net sales

 

 

296,996

 

 

 

263,625

 

 

 

582,197

 

 

 

527,702

 

Gross billings to customers

 

$

448,118

 

 

$

420,905

 

 

$

871,338

 

 

$

838,949

 

Product net sales

 

$

296,996

 

 

$

263,625

 

 

$

582,197

 

 

$

527,702

 

Service revenue, net

 

 

7,013

 

 

 

8,417

 

 

 

13,508

 

 

 

16,358

 

Net sales

 

$

304,009

 

 

$

272,042

 

 

$

595,705

 

 

$

544,060

 

 

 

(1)

Represents material procurement costs of products provided as an agent reported on a net basis.

Gross billings to customers in the table above represents total amounts invoiced to customers during the period and is the sum of net sales plus material procurement costs of products the Company provides as an agent. The amount invoiced to customers for agency related services is the total of the related material procurement costs and fees for providing its services. Gross billings to customers are reflected in accounts receivable for unpaid invoices as of the end of the period. Additionally, material procurement costs of products the Company manages as an agent on behalf of its customers on hand as of the end of the period are reflected in inventory. Both the amounts in accounts receivable and inventory impact the determination of net cash provided by (or used in) operations.

10


 

Contract Balances

The Company records accounts receivable when it has an unconditional right to consideration. Contract assets represent amounts recognized as revenue for which the Company does not have the unconditional right to consideration. All contract assets represent amounts related to invoices expected to be issued during the next 12-month period and are recorded as prepaid expenses and other current assets. Contract liabilities are recorded when cash payments are received or due in advance of performance. Contract liabilities consist of advance payments and deferred revenue, where the Company has unsatisfied performance obligations. Contract liabilities are classified as deferred revenue and are allocated between accrued liabilities and other long-term liabilities on our condensed consolidated balance sheet based on the timing of when the customer takes control of the asset or receives the benefit of the service. Payment terms vary by customer. The time between invoicing and when payment is due is not significant. Changes in the accounts receivable, contract assets and the deferred revenues balances during the six months ended February 26, 2021 are as follows (in thousands):

 

 

 

February 26,

2021

 

 

August 28,

2020

 

 

$ Change

 

Accounts receivable

 

$

203,376

 

 

$

215,918

 

 

$

(12,542

)

Contract assets

 

$

1,593

 

 

$

5,068

 

 

$

(3,475

)

Deferred revenue

 

$

24,848

 

 

$

20,124

 

 

$

4,724

 

 

The decrease in contract assets from $5.1 million as of August 28, 2020 to $1.6 million as of February 26, 2021 was primarily driven by billing amounts previously recorded as contract assets as of August 28, 2020. During the six months ended February 26, 2021, $11.0 million of revenue recognized was included in the deferred revenue balance at the beginning of the period, which was partially offset by additional deferrals during the period.

Disaggregation of Revenue

The Company disaggregates revenue by segment and geography; no other level of disaggregation is required considering the type of products, customer, markets, contracts, duration of contracts, timing of transfer of control, and sales channels. The revenue by segment and geography is disclosed in Note 11.

Revenue Allocated to Remaining Performance Obligations

The Company’s performance obligations related to product sales have a contractual duration of less than one year. The Company elected to apply the optional exemption practical expedient provided in ASC 606 and, therefore, is not required to disclose the aggregate amount of the transaction price allocated to those performance obligations that are unsatisfied or partially unsatisfied at the end of the reporting period.

Remaining performance obligations represent contracted revenue related to support services that have not yet been recognized. The Company expects to recognize revenue on the remaining performance obligations as follows (in thousands):

 

 

 

 

 

 

 

February 26,

2021

 

Within 1 year

 

 

 

 

 

$

20,400

 

2-3 years

 

 

 

 

 

 

3,528

 

Thereafter

 

 

 

 

 

 

920

 

 

 

 

 

 

 

$

24,848

 

 

(e)

Cash and Cash Equivalents

All highly liquid investments with maturities of 90 days or less from original dates of purchase are carried at cost, which approximates fair value, and are considered to be cash equivalents. Cash and cash equivalents include cash on hand, cash deposited in checking and saving accounts, money market accounts, and securities with maturities of less than 90 days at the time of purchase.

(f)

Allowance for Doubtful Accounts

The Company evaluates the collectability of accounts receivable based on a combination of factors. In cases where the Company is aware of circumstances that may impair a specific customer’s ability to meet its financial obligations, the Company records a specific allowance against amounts due and, thereby, reduces the net recognized receivable to the amount management reasonably believes will be collected. For all other customers, the Company recognizes allowances for doubtful accounts based on a combination of factors including the length of time the receivables are outstanding, industry and geographic concentrations, the current business environment and historical experience.

11


 

(g)

Derivative Financial Instrument

The Company records the assets or liabilities associated with derivative instruments at fair value based on Level 2 inputs in prepaid expenses and other current assets and accrued liabilities, respectively, in the condensed consolidated balance sheets. The accounting for gains and losses resulting from changes in fair value depends on the use of the derivative and whether it is designated and qualifies for hedge accounting. See Note 4 for further details.

(h)

Inventories

Inventories are valued at the lower of actual cost or net realizable value. Inventory value is determined on a specific identification basis for material and an allocation of labor and manufacturing overhead. At each balance sheet date, the Company evaluates the ending inventories for excess quantities and obsolescence. This evaluation includes an analysis of sales levels by product family and considers historical demand and forecasted demand in relation to the inventory on hand, competitiveness of product offerings, market conditions and product life cycles. The Company adjusts carrying value to the lower of its cost or net realizable value. Inventory write-downs are not reversed and create a new cost basis.

(i)

Brazil Taxes

Financial Credits

In 1991, Brazil created the PPB/IT Program to incentivize local manufacturing by allowing qualified companies to receive incentives when they sell specified IT products, including desktops, notebooks, servers, SmartTVs and mobile products manufactured in Brazil. In 2007, the Brazilian legislature created a program known as PADIS to promote the semiconductor industry. The Company has been a participant in the PPB/IT Program and PADIS since 2011. Among other incentives, the PPB/IT Program provided for certain reductions in the rate of IPI, a federal tax applied to industrial goods, as well as for PADIS companies, reducing to zero, IPI, import taxes and taxes known as PIS and COFINS levied over sales. As part of making the PPB/IT and PADIS Programs compatible with the principles of the World Trade Organization, or WTO, effective April 1, 2020, the reduction of the IPI for PPB/IT Program for certain types of customers was eliminated along with, for PADIS companies, the zero rates of IPI, PIS and COFINS levied over sales. Instead, participants in the PPB/IT Program as well as PADIS companies, are entitled to financial credits calculated based on effective disbursements made on research and development under the aforementioned programs.

 

As a result, the PPB/IT Program and PADIS participants are entitled to a subsidy for operational costs, granted as financial credits, which may be used by participants either as a credit against certain federal taxes, or to request a refund in cash. PADIS beneficiaries are entitled to a subsidy for operational costs granted as financial credits to be used against certain federal taxes, equivalent to 2.62 times the effective disbursements in research and development initiatives under PADIS, limited to a cap of 13.1% of the total incentivized revenues within the country. The financial credits under the PPB/IT Program range from 2.73 to 3.41 times the research and development invested, limited to 10.92% to 13.65% of domestic gross sales revenues, depending on the location of the participant and on what products it manufactures and sells. These multipliers and caps decline over time. Under the current law, the financial credits are available for PADIS companies through January 2022 and for other PPB/IT Program participants through December 2029.

For the three and six months ended February 26, 2021, the Company recognized financial credits under PADIS totaling $6.2 million and $14.0 million, respectively, and $0 for both of the corresponding periods of 2020, which are reported under research and development as a reduction of expense on the condensed consolidated statements of operations. As of February 26, 2021, unused financial credits totaling R$110.4 million (or $20.2 million) are reported under prepaid expenses and other current assets, and are expected to be applied against future taxes.

Although PADIS participants were entitled to financial credits since April 2, 2020, the effective utilization of such credits depended on a federal decree ruling the amendments to PADIS, which was not enacted until February 1, 2021. The Company obtained the recognition of the financial credits based on the R&D disbursements that were made from April 1, 2020 until December 31, 2020 on February 12, 2021. Given that financial credits can be applied for by PADIS participants on a quarterly basis, the Company expects to report and obtain the recognition of the financial credits related to the R&D disbursements that were made in the first quarter of calendar 2021 in April 2021.

Prepaid State Value-Added Taxes (ICMS)

Since 2004, the Sao Paulo State tax authorities have granted SMART Brazil a tax benefit to defer and eventually eliminate the payment of ICMS levied on certain imports from independent suppliers. This benefit, known as an ICMS Special Tax Regime, is subject to renewal every two years. When the then current ICMS Special Tax Regime expired on March 31, 2010, SMART Brazil timely applied for a renewal of the benefit, however, the renewal was not granted until August 4, 2010.

12


 

On June 22, 2010, the Sao Paulo authorities published a regulation allowing companies that applied for a timely renewal of an ICMS Special Regime to continue utilizing the benefit until a final conclusion on the renewal request was rendered. As a result of this publication, SMART Brazil was temporarily allowed to utilize the benefit while it waited for its renewal. From April 1, 2010, when the ICMS benefit lapsed, through June 22, 2010 when the regulation referred to above was published, SMART Brazil was required to pay the ICMS taxes on imports, which payments result in ICMS credits that may be used to offset ICMS obligations generated from sales by SMART Brazil of its products; however, the vast majority of SMART Brazil’s sales in Sao Paulo were either subject to a lower ICMS rate or were made to customers that were entitled to other ICMS benefits that enabled them to eliminate the ICMS levied on their purchases of products from SMART Brazil. As a result, from April 1, 2010 through June 22, 2010, SMART Brazil did not have sufficient ICMS collections against which to apply the credits and the credit balance increased significantly.

Effective February 1, 2011, in connection with its participation in a Brazilian government incentive program known as Support Program for the Technological Development of the Semiconductor and Display Industries Laws, or PADIS, SMART Brazil spun off the module manufacturing operations into SMART do Brazil, a separate subsidiary of the Company. In connection with this spin off, SMART do Brazil applied for a tax benefit from the State of Sao Paulo in order to obtain a deferral of state ICMS. This tax benefit is referred to as State PPB, or CAT 14. The CAT 14 approval was not obtained until July 21, 2011, and from February 1, 2011 until the CAT 14 approval was granted, SMART do Brazil did not have sufficient ICMS collections against which to apply the credits accrued upon payment of the ICMS on SMART do Brazil’s imports and inputs locally acquired, and therefore, it generated additional excess ICMS credits.

In January 2021, the Company purchased fixed assets for use in the Manufacturing process, but these were subsequently transferred out of the Manufacturing department to Research and Development, due to the delay of the uFS product process development. The production and sales of this product is now expected to commence in fiscal 2022. This transaction resulted in the reversal of R$8.4 million (or $1.5 million) of the ICMS credits. As a result, as of February 26, 2021, the total ICMS tax credits reported on the Company’s accompanying condensed consolidated balance sheet are R$12.5 million (or $2.3 million) are fully vested ICMS credits, classified as other noncurrent assets. As of August 28, 2020, the total ICMS tax credits reported on the Company’s accompanying condensed consolidated balance sheet are R$21.2 million (or $4.1 million), of which (i) R$19.6 million (or $3.8 million) are fully vested ICMS credits, classified as other noncurrent assets and (ii) R$1.6 million (or $0.3 million) are ICMS credits subject to vesting in 48 equal monthly amounts, classified as prepaid expenses and other current assets (R$0.7 million or $0.1 million) and other noncurrent assets (R$0.9 million or $0.2 million). It is expected that the excess ICMS credits will continue to be recovered in fiscal 2021 through fiscal 2023. The Company updates its forecast of the recoverability of the ICMS credits quarterly, considering the following key variables in Brazil: timing of government approvals of automated credit utilization, the total amount of sales, the product mix and the inter and intra state mix of sales. If these estimates or the mix of products or regions vary, it could take longer or shorter than expected to recover the accumulated ICMS credits, resulting in a reclassification of ICMS credits from current to noncurrent, or vice versa.

In April and June 2016, the Company filed cases with the State of Sao Paulo tax authorities to seek approval to sell these excess ICMS credits. In December 2017, the Company obtained approval to sell R$31.6 million (or $5.8 million) of its ICMS credits.  Once approved, sale of ICMS credits usually take several months to complete and typically incur a discount to the face amount of the credits sold, as well as fees for the arrangers of these sales which together aggregate 10% to 15% of the face amount of the credits being sold. Once the sale is complete, the tax authorities usually approve the transfer of credits in monthly installments and the proceeds resulting from the sale of the aforementioned credits shall be received by the Company accordingly. The Company has recorded valuation adjustments for the estimated discount and fees that the Company will need to offer in order to sell the ICMS credits. To adapt to the market, in the fourth quarter of fiscal 2020, the Company reassessed the discount rate for the sale of the ICMS credits to other companies, adjusting it to 22%, resulting in a charge of R$5.9 million (or $1.1 million) on the condensed consolidated statements of operations. In the first quarter of fiscal 2021, the Company further adjusted the discount rate to 26%, resulting in a charge of R$1.2 million (or $0.2 million). In the second quarter of fiscal 2021, the Company further adjusted the discount rate to 27%. Due to the reversal of part of the ICMS in January 2021, there was a reduction of R$2.5 million (or $0.5 million) in the calculated discount amount.

In the first quarter of fiscal 2019, the Company sold R$17.7 million (or $3.2 million) of its ICMS credits that had been approved to be sold in December 2017. The payments were received in 22 installments starting in the second quarter of fiscal 2019 through fiscal 2020, or R$10.0 million (or $1.8 million) and R$7.7 million (or $1.4 million) in fiscal 2019 and 2020, respectively, thus finalizing the receipt of all installments of the contract.

 

Import Taxes – Out-of-Period Adjustment

During the second quarter of fiscal 2021, the Company recorded an out-of-period adjustment to correct errors originating in previous periods related to understated import tax costs, which resulted in a $4.3 million increase in cost of sales and $0.8 million increase in interest expense, net. The tax impact of $1.7 million benefit for income taxes related to this adjustment is reflected in the Company’s annual effective tax rate for fiscal year ended August 27, 2021. The adjustment was not considered material to these interim financial statements for the three and six months ended February 26, 2021 nor to any previously issued interim or annual consolidated financial statements.

13


 

 

(j)

Property and Equipment

Property and equipment are recorded at cost. Depreciation and amortization are computed based on the shorter of the estimated useful lives or the related lease terms, using the straight-line method. Estimated useful lives are presented below:

 

 

 

Period

Asset:

 

 

Manufacturing equipment

 

2 to 5 years

Office furniture, software, computers and equipment

 

2 to 5 years

Leasehold improvements*

 

2 to 60 years

 

 

*

Includes the land lease for the Penang facility with a term expiring in 2070.

(k)

Goodwill

The Company performs a goodwill impairment test annually during the fourth quarter of its fiscal year and more frequently if events or circumstances indicate that impairment may have occurred. Such events or circumstances may, among others, include significant adverse changes in the general business climate. There were no events which required additional impairment in the six months ended February 26, 2021.    

When conducting the annual impairment test for goodwill, the Company compares the estimated fair value of a reporting unit containing goodwill to its carrying value. If the fair value of the reporting unit is determined to be more than its carrying value, no goodwill impairment is recognized. The Company determines the fair value of the Company's reporting units using the income approach methodology of valuation that includes the discounted cash flow method as well as the market approach which includes the guideline company method. No impairment of goodwill was recognized through February 26, 2021.      

The changes in the carrying amount of goodwill during the six months ended February 26, 2021 and fiscal 2020 are as follows (in thousands):

 

 

 

Specialty

Memory

Products

 

 

Brazil

Products

 

 

SCSS

 

 

Total

 

Balance as of August 30, 2019

 

$

14,720

 

 

$

26,029

 

 

$

40,674

 

 

$

81,423

 

Provisional adjustment from business acquisition (see Note 2)

 

 

 

 

 

 

 

 

(273

)

 

 

(273

)

Translation adjustments

 

 

 

 

 

(7,195

)

 

 

 

 

 

(7,195

)

Balance as of August 28, 2020

 

 

14,720

 

 

 

18,834

 

 

 

40,401

 

 

 

73,955

 

Translation adjustments

 

 

 

 

 

(938

)

 

 

 

 

 

(938

)

Balance as of February 26, 2021

 

$

14,720

 

 

$

17,896

 

 

$

40,401

 

 

$

73,017

 

 

(l)

Intangible Assets, Net

The following table summarizes the gross amounts and accumulated amortization of intangible assets by type as of February 26, 2021 and August 28, 2020 (dollars in thousands):

 

 

 

 

 

 

 

February 26, 2021

 

 

August 28, 2020

 

 

 

Weighted

 

 

Gross

 

 

 

 

 

 

 

 

 

 

Gross

 

 

 

 

 

 

 

 

 

 

 

avg.

 

 

Carrying

 

 

Accumulated

 

 

 

 

 

 

Carrying

 

 

Accumulated

 

 

 

 

 

 

 

life (yrs)

 

 

amount

 

 

amortization

 

 

Net

 

 

amount

 

 

amortization

 

 

Net

 

Customer relationships

 

4 - 7

 

 

$

52,300

 

 

$

(17,470

)

 

$

34,830

 

 

$

52,300

 

 

$

(12,899

)

 

$

39,401

 

Trademarks/tradename

 

5 - 7

 

 

 

13,100

 

 

 

(5,057

)

 

 

8,043

 

 

 

13,100

 

 

 

(4,095

)

 

 

9,005

 

Technology

 

 

4

 

 

 

10,350

 

 

 

(4,379

)

 

 

5,971

 

 

 

10,350

 

 

 

(3,085

)

 

 

7,265

 

Backlog

 

< 1

 

 

 

400

 

 

 

(400

)

 

 

 

 

 

400

 

 

 

(400

)

 

 

 

Total

 

 

 

 

 

$

76,150

 

 

$

(27,306

)

 

$

48,844

 

 

$

76,150

 

 

$

(20,479

)

 

$

55,671

 

 

14


 

 

Amortization expense related to intangible assets is detailed in the table below. Acquired intangibles are amortized on a straight-line basis over the remaining estimated economic life of the underlying intangible assets.

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

February 26,

 

 

February 28,

 

 

February 26,

 

 

February 28,

 

 

 

2021

 

 

2020

 

 

2021

 

 

2020

 

Amortization of intangible assets classification

   (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of sales

 

$

647

 

 

$

647

 

 

 

1,294

 

 

$

1,294

 

Selling, general and administrative

 

 

2,766

 

 

 

2,766

 

 

 

5,533

 

 

 

5,533

 

Total

 

$

3,413

 

 

$

3,413

 

 

$

6,827

 

 

$

6,827

 

 

Estimated amortization expense of these intangible assets for the next five fiscal years and all years thereafter are as follows (in thousands):

 

 

 

Amount

 

Fiscal year ending August:

 

 

 

 

Remainder of fiscal 2021

 

$

6,827

 

2022

 

 

12,768

 

2023

 

 

12,007

 

2024

 

 

9,092

 

2025 and thereafter

 

 

8,150

 

Total

 

$

48,844

 

 

(m)

Long-Lived Assets

Long-lived assets, excluding goodwill, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset group may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset group to the future undiscounted cash flows expected to be generated by the asset group. If such assets are considered to be impaired, the impairment is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed are reported at the lower of the carrying amount or fair value, less cost to sell. No impairment of long-lived assets was recognized during the six months ended February 26, 2021 and February 28, 2020.

(n)

Research and Development Expense

Research and development expenditures are expensed in the period incurred.

(o)

Income Taxes

The Company uses the asset and liability method of accounting for income taxes. Deferred tax assets and liabilities are recognized for the future consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis and net operating loss and credit carryforwards. When necessary, a valuation allowance is recorded to reduce tax assets to amounts expected to be realized. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income (or loss) in the period that includes the enactment date. The Company recognizes the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. The Company records interest and penalties related to unrecognized tax benefits in tax expense.

(p)

Foreign Currency Translation

For foreign subsidiaries using the local currency as their functional currency, assets and liabilities are translated at exchange rates in effect at the balance sheet date and income and expenses are translated at average exchange rates during the period. The effect of this translation is reported in other comprehensive income (loss). Exchange gains and losses arising from transactions denominated in a currency other than the functional currency of the respective foreign subsidiaries are included in results of operations.

For foreign subsidiaries using the U.S. dollar as their functional currency, the financial statements of these foreign subsidiaries are remeasured into U.S. dollars using the historical exchange rate for property and equipment and certain other nonmonetary assets and liabilities and related depreciation and amortization on these assets and liabilities. The Company uses the exchange rate at the

15


 

balance sheet date for the remaining assets and liabilities, including deferred taxes. A weighted average exchange rate is used for each period for revenues and expenses.

All foreign subsidiaries and branch offices, except Brazil and South Korea, use the U.S. dollar as their functional currency. The gains or losses resulting from the remeasurement process are recorded in other expense, net in the accompanying condensed consolidated statements of operations.

During the three and six months ended February 26, 2021 the Company recorded $0.8 million and $0.2 million, respectively, and $1.2 million and $2.1 million, respectively for the corresponding periods of 2020, of foreign exchange losses primarily related to its Brazilian operating subsidiaries.

(q)

Share-Based Compensation

The Company accounts for share-based compensation under ASC 718, Compensation—Stock Compensation, which requires companies to recognize in their statements of operations all share-based payments, including grants of share options and other types of equity awards, based on the grant-date fair value of such share-based awards.

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

February 26,

 

 

February 28,

 

 

February 26,

 

 

February 28,

 

 

 

2021

 

 

2020

 

 

2021

 

 

2020

 

Share-based compensation expense by category

   (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of sales

 

$

804

 

 

$

731

 

 

$

1,641

 

 

$

1,461

 

Research and development

 

 

810

 

 

 

783

 

 

 

1,588

 

 

 

1,527

 

Selling, general and administrative

 

 

3,784

 

 

 

3,133

 

 

 

13,257

 

 

 

7,615

 

Total

 

$

5,398

 

 

$

4,647

 

 

$

16,486

 

 

$

10,603

 

 

(r)

Loss Contingencies

The Company is subject to the possibility of various loss contingencies arising in the ordinary course of business. The Company considers the likelihood of a loss and the ability to reasonably estimate the amount of loss in determining the necessity for and amount of any loss contingencies. Estimated loss contingencies are accrued when it is probable that a liability has been incurred or an asset impaired and the amount of loss can be reasonably estimated. The Company regularly evaluates the most current information available to determine whether any such accruals should be recorded or adjusted.

(s)

Comprehensive Income (Loss)

Comprehensive income (loss) consists of net income (loss) and other gains and losses affecting shareholders’ equity that, under U.S. GAAP are excluded from net income (loss). For the Company, other comprehensive income (loss) generally consists of foreign currency translation adjustments.

(t)

Concentration of Credit and Supplier Risk

The Company’s concentration of credit risk consists principally of cash and cash equivalents and accounts receivable. The Company’s revenues and related accounts receivable reflect a concentration of activity with certain customers (see Note 12). The Company does not require collateral or other security to support accounts receivable. The Company performs periodic credit evaluations of its customers to minimize collection risk on accounts receivable and maintains allowances for potentially uncollectible accounts.

The Company relies on four suppliers for the majority of its raw materials. At February 26, 2021 and August 28, 2020, the Company owed these four suppliers $148.7 million and $139.5 million, respectively, which was recorded as accounts payable and accrued liabilities. The inventory purchases from these suppliers during the three and six months ended February 26, 2021 were $0.3 billion and $0.5 billion, respectively, and $0.2 billion and $0.5 billion, respectively for the corresponding periods of fiscal 2020.     

(u)

New Accounting Pronouncements

In August 2020, Financial Accounting Standards Board (“FASB”) issued Accounting Standards Updates (“ASU”) 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity, which simplifies the accounting for convertible instruments by removing the separation models for (1) convertible debt with a cash conversion feature and (2)

16


 

convertible instruments with a beneficial conversion feature. As a result, a convertible debt instrument will be accounted for as a single liability measured at its amortized cost. These changes will reduce reported interest expense and increase reported net income for entities that have issued a convertible instrument that was bifurcated according to previously existing rules. Also, ASU 2020-06 requires the application of the if-converted method for calculating diluted earnings per share and the treasury stock method will be no longer available. The new guidance is effective for fiscal years beginning after December 15, 2021, with early adoption permitted no earlier than fiscal years beginning after December 15, 2020. The FASB decided to allow entities to adopt the guidance through either a modified retrospective method of transition or a fully retrospective method of transition. In applying the modified retrospective method, entities should apply the guidance to transactions outstanding as of the beginning of the fiscal year in which the amendments are adopted. The Company is currently evaluating the impact of ASU 2020-06 on its condensed consolidated financial statements.

In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. The amendments will be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020, with early adoption permitted. Depending on the amendment, adoption may be applied on a retrospective, modified retrospective or prospective basis. The Company will not adopt this standard before the fiscal year in which it becomes effective. The Company is currently evaluating the impact of ASU 2019-12 on its condensed consolidated financial statements.

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” which requires the measurement and recognition of expected credit losses for financial assets held at amortized cost. ASU 2016-13 replaces the existing incurred loss impairment model with a forward-looking expected credit loss model which will result in earlier recognition of credit losses. The Company adopted the new standard effective August 29, 2020 using the modified-retrospective approach. Upon adoption, there was no impact on the Company’s condensed consolidated financial statements.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which modified lease accounting for both lessees and lessors to increase transparency and comparability by recognizing lease assets and lease liabilities by lessees for those leases classified as operating leases under previous accounting standards and disclosing key information about leasing arrangements, among other things. ASU 2016-02 is effective for annual reporting periods and interim periods within those years, beginning after December 15, 2018. Effective August 31, 2019, the Company adopted Topic 842, using the modified retrospective transition approach. The Company applied the new guidance to all leases existing as of the date of adoption. The Company’s reported results beginning in fiscal 2020 reflect the application of Topic 842, while prior period amounts have not been adjusted and continue to be reported in accordance with its historical accounting under Topic 840.

The Company elected the practical expedient package permitted under the transition approach. As such, the Company did not reassess whether any expired or existing contracts are or contain leases, the Company did not reassess its historical lease classification, and the Company did not reassess its initial direct costs for any leases that existed prior to August 31, 2019. The Company did not elect the use-of-hindsight. The new standard also provides practical expedients for an entity’s ongoing accounting. The Company elected the short-term lease recognition exemption. This means, for those leases that qualify, the Company will not recognize a right-of-use asset or lease liability. The Company also elected the practical expedient to not separate lease and non-lease components for all its leases.

As of the date of adoption, the Company recognized operating lease right-of-use assets of $24.3 million, with corresponding operating lease liabilities of $25.0 million on the condensed consolidated balance sheets. The difference between the operating lease right-of-use assets and operating lease liabilities primarily relates to deferred rent.

For further information regarding leases, see Note 5 Balance Sheet Details.       

(v)

Restructuring Charge

In fourth quarter of fiscal 2020, the Company made the decision to cease manufacturing and selling products under the battery product line, the operations of which are reported under the operating segment for Brazil products. The decision to cease this activity is due to unattractive benefits for our customers in score based PPB which impacts the Company’s ability to remain competitive as customers can get these products cheaper from other international sources without a negative impact on their PPB score. This action was put into effect as of the end of the fourth quarter of fiscal 2020, and all operations related to this product line ceased as of that date. All employees associated with the product line were reassigned to other parts of the Company.

During fiscal 2020, the Company recorded restructuring charges amounting to $3.5 million, composed of $2.7 million of asset impairment, $0.4 million of deferred ICMS taxes related to impaired assets, and $0.4 million accrued for contract termination costs. As of February 26, 2021, $0.4 million of contract termination costs have yet to be paid. The Company does not expect additional costs to be incurred before completion of the restructuring efforts. The Company anticipates completion of these restructuring efforts, including payment on all outstanding amounts to be complete by April 2021.

 

 

17


 

 

(2)

Business Acquisitions

Fiscal Year 2021

CreeLED, Inc. (SGH-CreeLED)

On March 1, 2021, pursuant to the previously announced Asset Purchase Agreement (the “APA”), dated October 18, 2020, as amended by the Amendment to Asset Purchase Agreement dated March 1, 2021 (the “Amendment”; and together with the APA, the “Purchase Agreement”) between Cree, Inc. (“Cree”), SMART Global Holdings, Inc., a Cayman Islands exempted company (“SGH”), and CreeLED, Inc. (formerly known as Chili Acquisition, Inc., “CreeLED”; CreeLED and SGH are collectively referred to as “SGH-CreeLED”), a Delaware corporation and wholly owned subsidiary of SGH (collectively with SGH, “SMART”), (i) Cree completed the sale to SMART of (a) certain equipment, inventory, intellectual property rights, contracts, and real estate comprising Cree’s LED Products segment, (b) all of the issued and outstanding equity interests of Cree Huizhou Solid State Lighting Company Limited, a limited liability company organized under the laws of the People’s Republic of China and an indirect wholly owned subsidiary of Cree, and (c) Cree’s ownership interest in Cree Venture LED Company Limited, Cree’s joint venture with San’an Optoelectronics Co., Ltd. (collectively, the “LED Business”), and (ii) SMART assumed certain liabilities related to the LED Business (collectively, (i) and (ii), the “LED Business Divestiture”). In connection with the LED Business Divestiture, Cree will retain certain assets used in and pre-closing liabilities associated with the LED Products segment.

The purchase price for the LED Business consisted of (i) a payment of $50 million in cash, subject to customary adjustments, (ii) an unsecured promissory note issued to Cree by SMART Global Holdings in the amount of $125 million (the Purchase Price Note), (iii) the potential to receive an earn-out payment of up to $125 million based on the revenue and gross profit performance of the LED Business in Cree’s first four full fiscal quarters following the closing (the Earnout Period), with a minimum payment of $2.5 million also payable in the form of an unsecured promissory note issued by SMART Global Holdings (the Earnout Note), and (iv) the assumption of certain liabilities. The Purchase Price Note and the Earnout Note, if earned and issued, will accrue interest at a rate of three-month LIBOR plus 3.0% payable interest only every three months with one bullet payment of principal and all accrued and unpaid interest payable on each note’s maturity date. The Purchase Price Note will mature on August 15, 2023, and the Earnout Note, if issued, will mature on March 27, 2025.

In connection with this transaction, Cree and SGH-CreeLED also entered into certain ancillary and related agreements, including (i) an Intellectual Property Assignment and License Agreement, (ii) a Transition Services Agreement, (iii) a Wafer Supply and Fabrication Services Agreement, and (iv) a Real Estate License Agreement.

The Purchase Agreement requires each of Cree and SGH-CreeLED to indemnify the other party for certain damages that the indemnified party may suffer following the closing of the transaction.

 

Fiscal Year 2019

SMART Embedded Computing, Inc. (SMART EC)

On July 8, 2019, SMART Global Holdings entered into a Stock Purchase Agreement (the Artesyn SPA), by and among SMART Global Holdings, Artesyn Embedded Computing, Inc., a Wisconsin corporation (AEC), Pontus Intermediate Holdings II, LLC, a Delaware limited liability company, and Pontus Holdings LLC, a Delaware limited liability company. Pursuant to the Artesyn SPA, on July 8, 2019, the Company agreed to purchase all of the shares of AEC, a private company based in Tempe, Arizona and Artesyn Netherlands B.V., a company with limited liability organized under the laws of the Netherlands (AEC and Artesyn Netherlands B.V., collectively Artesyn), both entities being subsidiaries of Artesyn Embedded Technologies, Inc. SMART Global Holdings through one or more subsidiaries, paid the Artesyn equityholders a base purchase price of approximately $75 million at closing using cash on hand. Pursuant to the Artesyn SPA, the former equityholders of Artesyn were also entitled to earn-out  payments of up to $10 million based on Artesyn’s achievement of specific gross revenue levels through December 31, 2019 plus additional earn-out payments of $0.10 for each dollar of gross revenue through December 31, 2019 over an agreed upon achievement level. The earn-out would have been payable, at the option of the Company, in either cash or ordinary shares of SMART Global Holdings.  SMART Global Holdings deposited $0.8 million of the purchase price into escrow as security for sellers’ indemnification obligations during the escrow period of one year. The Company changed the name of AEC to SMART Embedded Computing, Inc., or SMART EC. No earn-out was achieved.

Under the acquisition method of accounting, the assets acquired and liabilities assumed of SMART EC were recorded as of the acquisition date at their respective fair values. The reported consolidated financial condition after completion of the acquisition reflects these fair values. SMART EC’s results of operations are included in the condensed consolidated financial statements from the date of acquisition.

The initial fair value of contingent consideration was estimated at the date of acquisition to be $2.7 million, which was recorded as a current liability. The Company determined the fair value of the obligations to pay contingent consideration using a real options technique which incorporates various estimates, including projected gross revenue for the period, a volatility factor applied to gross

18


 

revenue based on year-on-year growth in gross revenue of comparable companies, discount rates and the estimated amount of time until final payment is made. This fair value measurement is based on significant inputs not observable in the market, which ASU 820-10-35 refers to as Level 3 inputs. The resulting probability-weighted cash flows were discounted using the Company’s estimated cost of debt of 8.50% derived from the Company’s interest rates from the existing line of credit (2.75% plus US Prime Rate) and its term loan (6.25% plus 3-month LIBOR).

During fiscal 2019, the Company adjusted the contingent consideration to its current fair value with such changes recognized in income from operations. Changes in fair values reflect new information about the probability and timing of meeting the conditions of the gross revenue target. As of February 26, 2021 and August 28, 2020, the fair value of the contingent consideration was $0.

A reconciliation of net cash exchanged in accordance with the Artesyn SPA to the total purchase price as of the closing date of the transaction, July 8, 2019, is presented below (in thousands):

 

 

 

Previously

Reported

 

 

Purchase Price

Allocation

Measurement

period

adjustment

 

 

As

Adjusted

 

Net cash for merger

 

$

74,358

 

 

$

 

 

$

74,358

 

Cash and cash equivalents acquired

 

 

37

 

 

 

 

 

 

37

 

Upfront payment in accordance with agreement

 

 

74,395

 

 

 

 

 

 

74,395

 

Post-closing adjustments in accordance with agreement

 

 

558

 

 

 

(234

)

 

 

324

 

Total consideration

 

 

74,953

 

 

 

(234

)

 

 

74,719

 

Estimated fair value of contingent consideration

 

 

2,700

 

 

 

-

 

 

 

2,700

 

Total purchase price

 

$

77,653

 

 

$

(234

)

 

$

77,419

 

 

 

The total purchase consideration has been allocated to the tangible and intangible assets acquired and liabilities assumed. The assets acquired and liabilities assumed at the acquisition date are based upon their respective fair values summarized below (in thousands):

 

 

 

Previously

Reported

 

 

Purchase Price

Allocation

Measurement

period

adjustment

 

 

As

Adjusted

 

Tangible assets acquired

 

$

16,482

 

 

$

 

 

$

16,482

 

Liabilities assumed

 

 

(7,840

)

 

 

 

 

 

(7,840

)

Identifiable intangible assets

 

 

41,900

 

 

 

 

 

 

41,900

 

Goodwill

 

 

27,111

 

 

 

(234

)

 

 

26,877

 

Total net assets acquired

 

$

77,653

 

 

$

(234

)

 

$

77,419

 

 

The provisional amounts presented in the table above pertained to the preliminary purchase price allocation reported in our Form 10-K for the fiscal 2019. The measurement period adjustment, as recognized in the fourth quarter of fiscal 2020, is related to the finalization of the net working capital adjustment. We do not believe that the measurement period adjustments had a material impact on our condensed consolidated statements of operations, balance sheets or cash flows in any periods previously reported. The final determination of the fair values were completed within the measurement period of up to one year from the acquisition date, and adjustments to provisional amounts that were identified during the measurement period were recorded in the reporting period in which the adjustment was determined.

Asset categories acquired included working capital, fixed assets, and identified intangible assets. The intangible assets are as follows (in thousands):

 

 

 

Amount

 

 

Estimated Useful

Life (in years)

Customer relationships

 

$

31,800

 

 

4-6 years

Technology

 

 

10,100

 

 

4 years

 

 

$

41,900

 

 

 

 

The excess of purchase price over the fair value amounts assigned to the assets acquired and liabilities assumed represents the goodwill amount resulting from the acquisition. The Company does not expect any portion of this goodwill to be deductible for tax purposes. The goodwill attributable to the SMART EC acquisition has been recorded as a noncurrent asset and is not amortized but is subject to an annual review for impairment. Factors that contributed to the recognition of goodwill include the broader reach and capabilities of the Company into new technologies, markets and channels that leverage its existing products and services. SMART EC

19


 

brings an outstanding customer base, solid products and strong supplier relationships to the Company in the defense, industrial IoT (IIoT), edge computing, and communications OEM markets. SMART EC will have substantially improved access to capital to drive additional investment in, and further development and growth of its products and services.

During fiscal 2020 and 2019, the Company incurred certain costs related to the acquisition, which are included in selling, general and administrative expense in the condensed consolidated statements of operations, these merger-related costs included professional fees in the amounts of $0.6 million and $1.0 million, respectively.

The revenue and net income earned by SMART EC following the acquisition are not material to the Company’s condensed consolidated results of operations for fiscal 2019.

SMART Wireless Computing, Inc. (SMART Wireless)

On July 9, 2019, SMART Global Holdings entered into an Agreement and Plan of Merger (the Inforce Merger Agreement), by and among SMART Global Holdings, Thor Acquisition Sub I, Inc., a California corporation and a wholly-owned indirect subsidiary of the SMART Global Holdings (Merger Sub I), Thor Acquisition Sub II, Inc., a Delaware corporation and a wholly-owned indirect subsidiary of the SMART Global Holdings (Merger Sub II), and Inforce Computing, Inc., a California corporation (Former Inforce). Pursuant to the Inforce Merger Agreement, on July 9, 2019, Merger Sub I was merged with and into Former Inforce, with Former Inforce continuing as the surviving corporation (the First Merger) and, immediately following the effectiveness of the First Merger, the surviving corporation of the First Merger was merged with and into Merger Sub II, with Merger Sub II surviving as a wholly-owned indirect subsidiary of SMART Global Holdings (the Inforce Merger). SMART Global Holdings through one or more subsidiaries, paid the Former Inforce equityholders approximately $14.6 million including amounts paid at closing composed of $3.2 million in cash and 382,788 of ordinary shares of SMART Global Holdings valued at $9.1 million, and amounts retained by the Company as security for the sellers’ indemnification obligations as well as any post-closing adjustments to the purchase price (the Holdback) composed of $0.7 million in cash and 67,550 of ordinary shares of SMART Global Holdings valued at $1.6 million. During the fourth quarter of fiscal 2020, the Company paid out $0.4 million in cash and issued all shares related to the Holdback. The Company changed the name of Inforce Computing to SMART Wireless Computing, Inc., or SMART Wireless.

Under the acquisition method of accounting, the assets acquired and liabilities assumed of SMART Wireless were recorded as of the acquisition date at their respective fair values. The reported condensed consolidated financial condition after completion of the acquisition reflects these fair values. SMART Wireless’ results of operations are included in the condensed consolidated financial statements from the date of acquisition.

A reconciliation of net cash exchanged in accordance with the Inforce Merger Agreement to the total purchase price as of the closing date of the transaction, July 9, 2019, is presented below (in thousands):

 

 

 

Previously

Reported

 

 

Purchase Price

Allocation

Measurement

period

adjustment

 

 

As

Adjusted

 

Net cash for merger

 

$

1,581

 

 

$

 

 

$

1,581

 

Cash and cash equivalents acquired

 

 

1,576

 

 

 

 

 

 

1,576

 

Upfront cash payment

 

 

3,157

 

 

 

 

 

 

3,157

 

Upfront shares issued

 

 

9,167

 

 

 

 

 

 

9,167

 

Upfront consideration in accordance with agreement

 

 

12,324

 

 

 

 

 

 

12,324

 

Purchase price holdback - cash due to pre-closing holders

 

 

413

 

 

 

 

 

 

413

 

Purchase price holdback - shares due to pre-closing holders

 

 

1,618

 

 

 

 

 

 

1,618

 

Post-closing adjustments in accordance with agreement

 

 

285

 

 

 

(39

)

 

 

246

 

Total purchase price

 

$

14,640

 

 

$

(39

)

 

$

14,601

 

 

20


 

 

The total purchase consideration has been allocated to the tangible and intangible assets acquired and liabilities assumed. The assets acquired and liabilities assumed at the acquisition date are based upon their respective fair values summarized below (in thousands):

 

 

 

Previously

Reported

 

 

Purchase Price

Allocation

Measurement

period

adjustment

 

 

As

Adjusted

 

Tangible assets acquired

 

$

5,266

 

 

$

 

 

$

5,266

 

Liabilities assumed

 

 

(5,643

)

 

 

 

 

 

(5,643

)

Identifiable intangible assets

 

 

6,700

 

 

 

 

 

 

6,700

 

Goodwill

 

 

8,317

 

 

 

(39

)

 

 

8,278

 

Total net assets acquired

 

$

14,640

 

 

$

(39

)

 

$

14,601

 

 

The provisional amounts presented in the table above pertained to the preliminary purchase price allocation reported in our Form 10-K for the fiscal 2019. The measurement period adjustment, as recognized in the fourth quarter of fiscal 2020, is related to the finalization of the net working capital adjustment. We do not believe that the measurement period adjustments had a material impact on our condensed consolidated statements of operations, balance sheets or cash flows in any periods previously reported. The final determination of the fair values were completed within the measurement period of up to one year from the acquisition date, and adjustments to provisional amounts that were identified during the measurement period were recorded in the reporting period in which the adjustment was determined.

 

Asset categories acquired included working capital, fixed assets, and identified intangible assets. The intangible assets are as follows (in thousands):

 

 

 

Amount

 

 

Estimated Useful

Life (in years)

Customer relationships

 

$

5,800

 

 

5 years

Technology

 

 

900

 

 

5 years

 

 

$

6,700

 

 

 

 

The excess of purchase price over the fair value amounts assigned to the assets acquired and liabilities assumed represents the goodwill amount resulting from the acquisition. The Company does not expect any portion of this goodwill to be deductible for tax purposes. The goodwill attributable to the SMART Wireless acquisition has been recorded as a noncurrent asset and is not amortized, but is subject to an annual review for impairment. Factors that contributed to the recognition of goodwill include the broader reach and capabilities of the Company into new technologies, markets and channels that leverage its existing products and services. SMART Wireless is a fast growing developer of high-performance production-ready ARM ISA-based embedded computing platforms for IoT applications enabling the next generation of connected devices. SMART Wireless brings an outstanding customer base, solid products and strong supplier relationships to the Company in the medical imaging, video conferencing, AR/VR computing, IIoT, commercial drones and robotics markets. SMART Wireless will have substantially improved access to capital to drive additional investment in, and further development and growth of its products and services.

During fiscal 2020 and 2019, the Company incurred certain costs related to the acquisition, which are included in selling, general and administrative expense in the condensed consolidated statements of operations, these merger-related costs included professional fees in the amounts of $0.2 million and $0.5 million, respectively.

The revenue and net income earned by SMART Wireless following the acquisition are not material to the Company’s condensed consolidated results of operations for fiscal 2019.        

Premiere Logistics

In February 2019, the Company acquired all of the outstanding shares of Premiere Customs Brokers, Inc. and Premiere Logistics, Inc., both privately-held California corporations (collectively Premiere Logistics). The primary purpose of this acquisition is to provide the Company with cost savings solutions in support of its own freight and logistics requirements. In connection with the acquisition, the Company paid upfront cash consideration of $0.2 million.

21


 

The assets acquired and liabilities assumed at the acquisition date are based on their respective fair values summarized below (in thousands):

 

Tangible assets acquired

 

$

277

 

Liabilities assumed

 

 

(168

)

Identifiable intangible assets

 

 

83

 

Total net assets acquired

 

$

192

 

 

Results of operations of the businesses acquired have been included in the Company’s consolidated financial statements subsequent to the date of acquisition. The revenue and net income earned by the businesses acquired following the acquisition are not material to our condensed consolidated results of operations.

No pro forma financial information is presented for any of the acquisitions in fiscal 2019 as the impact is not material, individually or in the aggregate, to the Company’s condensed consolidated statements of operations.                 

          

(3)

Related Party Transactions

In the normal course of business, the Company had transactions with its affiliates as follows (in thousands):

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

February 26,

 

 

February 28,

 

 

February 26,

 

 

February 28,

 

 

 

2021

 

 

2020

 

 

2021

 

 

2020

 

Affiliates:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

18,173

 

 

$

18,597

 

 

$

33,148

 

 

$

35,553

 

 

As of February 26, 2021 and August 28, 2020, amounts due from these affiliates were $6.6 million and $6.5 million, respectively.

On July 9, 2019, SMART Wireless became a wholly-owned subsidiary of the Company (see Note 2). Included in the selling shareholders of this acquisition were the Company’s former CEO and two members of the Company’s Board of Directors, who became entitled to receive in the aggregate 397,407 SGH common shares valued at $9.5 million (consisting of 337,692 shares issued upon closing and 59,715 shares that were subject to the Holdback which were issued and paid in the fourth quarter of 2020).  

(4)

Foreign Currency Exchange Contracts

The Company transacts business in various foreign currencies and has international sales and expenses denominated in foreign currencies, subjecting the Company to foreign currency risk. The Company utilizes foreign exchange forward contracts to mitigate foreign currency exchange rate risk associated with foreign-currency-denominated assets and liabilities, primarily third party payables.  The Company does not use foreign currency contracts for speculative or trading purposes.

Foreign exchange forward contracts outstanding at February 26, 2021 are not designated as hedging instruments for hedge accounting purposes. Accordingly, any gains or losses resulting from changes in the fair value of the non-designated forward contracts are reported in other income, net in the condensed consolidated statements of operations. The gains and losses on these forward contracts generally offset the gains and losses associated with the underlying foreign-currency-denominated balances, which are also reported in other income, net.  

As of February 26, 2021, the Company’s non-designated forward contacts resulted in a $2.3 million derivative asset.  As of August 28, 2020, the Company’s non-designated forward contracts resulted in a $0.1 million derivative asset and a $0.9 million derivative liability. For the three and six months ended February 26, 2021, the Company recognized realized gains in the amount of $2.7 million and $0.3 million, respectively, and net unrealized gains on the change in the fair value of the non-designated forward contracts in the amount of $0.1 million and $3.0 million, respectively. For the three and six months ended February 28, 2020, the Company recognized realized losses in the amount of $70 thousand and $0.9 million, respectively, and net unrealized losses on the change in the fair value of the non-designated forward contracts in the amount of $2.0 million and $1.1 million, respectively.

 

22


 

 

(5)

Balance Sheet Details

Inventories

Inventories consisted of the following (in thousands):

 

 

 

February 26,

 

 

August 28,

 

 

 

2021

 

 

2020

 

Raw materials

 

$

89,177

 

 

$

89,943

 

Work in process

 

 

31,985

 

 

 

16,672

 

Finished goods

 

 

68,165

 

 

 

56,376

 

Total inventories*

 

$

189,327

 

 

$

162,991

 

 

 

*

As of February 26, 2021 and August 28, 2020, 12% and 17%, respectively, of total inventories represented inventory held under the Company's supply chain services.

Prepaid Expenses and Other Current Assets

Prepaid expenses and other current assets consisted of the following (in thousands):

 

 

 

February 26,

 

 

August 28,

 

 

 

2021

 

 

2020

 

Financial credits*

 

$

20,170

 

 

$

6,359

 

Prepayment for VAT and other transaction taxes

 

 

4,607

 

 

 

2,119

 

Unbilled service receivables

 

 

3,231

 

 

 

1,265

 

Prepaid income taxes

 

 

2,647

 

 

 

1,201

 

Prepaid R&D expenses

 

 

2,336

 

 

 

1,865

 

Derivative assets**

 

 

2,277

 

 

 

112

 

Contract assets***

 

 

1,593

 

 

 

5,068

 

Other prepaid expenses and other current assets

 

 

9,460

 

 

 

9,001

 

Total prepaid expenses and other current assets

 

$

46,321

 

 

$

26,990

 

 

 

*

See Note 1(i).

 

**

See Note 4

 

***

See Note 1(d).

Property and Equipment, Net

Property and equipment consisted of the following (in thousands):

 

 

 

February 26,

 

 

August 28,

 

 

 

2021

 

 

2020

 

Office furniture, software, computers and equipment

 

$

28,907

 

 

$

21,528

 

Manufacturing equipment

 

 

131,536

 

 

 

113,035

 

Leasehold improvements*

 

 

27,239

 

 

 

27,706

 

 

 

 

187,682

 

 

 

162,269

 

Less accumulated depreciation and amortization

 

 

109,536

 

 

 

107,564

 

Net property and equipment

 

$

78,146

 

 

$

54,705

 

 

 

*

Includes Penang facility, which is situated on leased land.

Depreciation and amortization expense for property and equipment during the three and six months ended February 26, 2021 was approximately $5.4 million and $10.3 million, respectively and $6.0 million and $12.2 million, respectively for the corresponding periods of fiscal 2020.   

23


 

Other Noncurrent Assets

Other noncurrent assets consisted of the following (in thousands):

 

 

 

February 26,

 

 

August 28,

 

 

 

2021

 

 

2020

 

Deposits on equipment

 

$

6,207

 

 

$

8,170

 

Deferred tax asset

 

 

2,884

 

 

 

3,450

 

Prepaid ICMS taxes in Brazil*

 

 

2,283

 

 

 

3,976

 

Prepaid R&D expense

 

 

1,009

 

 

 

1,356

 

Other

 

 

4,541

 

 

 

3,602

 

Total other noncurrent assets

 

$

16,924

 

 

$

20,554

 

 

 

*

See Note 1(i).

  

 

Accrued Liabilities

Accrued liabilities consisted of the following (in thousands):

 

 

 

February 26,

 

 

August 28,

 

 

 

2021

 

 

2020

 

Deferred revenue

 

$

20,400

 

 

$

17,264

 

Accrued employee compensation

 

 

17,636

 

 

 

16,862

 

VAT and other transaction taxes payable

 

 

7,751

 

 

 

6,143

 

Current portion of lease liabilities

 

 

4,998

 

 

 

5,304

 

Income taxes payable

 

 

1,930

 

 

 

1,352

 

Customer deposits

 

 

1,921

 

 

 

3,917

 

Accrued warranty reserve

 

 

1,255

 

 

 

1,316

 

Other accrued liabilities

 

 

5,690

 

 

 

5,671

 

Total accrued liabilities

 

$

61,581

 

 

$

57,829

 

 

Leases

The Company determines if an arrangement is a lease as well as the classification of the lease at inception for arrangements with an initial term of more than 12 months, and classifies it as either finance or operating.

Operating leases are recorded in operating lease right-of-use assets, net, accrued liabilities, and long-term lease liabilities on the Company’s condensed consolidated balance sheets. For operating leases of buildings, the Company accounts for non-lease components, such as common area maintenance, as a component of the lease, and include it in the initial measurement of the Company’s operating lease assets and corresponding liabilities. Operating lease assets are amortized on a straight-line basis in operating expenses over the lease term.

The Company does not have financing leases as of February 26, 2021.

The Company’s lease liabilities are recognized based on the present value of the remaining fixed lease payments, over the lease term, using a discount rate of similarly secured borrowings available to us. The Company took into consideration its credit rating and the length of the lease when calculating the incremental borrowing rate. The Company considers the options to extend or terminate the lease in determining the lease term, when it is reasonably certain to exercise one of the options. For the purpose of lease liability measurement, the Company considers only payments that are fixed and determinable at the time of commencement. Any variable payments that depend on an index or rate are expensed as incurred. The Company’s lease terms may include options to extend when it is reasonably certain that it will exercise that option. The Company’s lease assets also include any lease payments made and exclude any lease incentives received prior to commencement. The Company’s lease assets are tested for impairment in the same manner as long-lived assets used in operations. The Company generally recognizes sublease income on a straight-line basis over the sublease term.  

24


 

The components of lease costs are as follows (in thousands):

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

February 26,

2021

 

 

February 28,

2020

 

 

February 26,

2021

 

 

February 28,

2020

 

Operating lease cost

 

$

1,915

 

 

$

1,665

 

 

$

3,454

 

 

$

3,123

 

Variable lease cost

 

 

288

 

 

 

188

 

 

 

560

 

 

 

355

 

Short-term lease cost

 

 

57

 

 

 

82

 

 

 

115

 

 

 

216

 

Total lease costs

 

$

2,260

 

 

$

1,935

 

 

$

4,129

 

 

$

3,694

 

Weighted-average remaining lease term

 

7.2 years

 

 

8.0 years

 

 

7.2 years

 

 

8.0 years

 

Weighted-average discount rate

 

 

8.0

%

 

 

8.0

%

 

 

8.0

%

 

 

8.0

%

 

Future minimum undiscounted payments under the Company’s non-cancelable operating leases were as follows as of February 26, 2021 (in thousands):

 

Fiscal year ending August:

 

Amount

 

Remainder of 2021

 

$

3,831

 

2022

 

 

6,226

 

2023

 

 

5,073

 

2024

 

 

3,683

 

2025 and thereafter

 

 

18,316

 

Total

 

 

37,129

 

Less Short-term lease commitments

 

 

(154

)

Less imputed interest

 

 

(10,632

)

Present value of total lease liabilities

 

$

26,343

 

 

As of February 26, 2021, the Company has additional operating lease commitments of approximately $5.8 million on an undiscounted basis for an office building lease that has not yet commenced. This operating lease is expected to commence in April 2021 with a lease term of 10.4 years.

 

Right-of-use assets obtained in exchange for new operating lease liabilities for the three and six months ended February 26, 2021 were $3.2 million and $3.3 million, respectively, and $3.1 million and $8.0 million, respectively for the corresponding periods in fiscal 2020.

 

 

(6)

Income Taxes

Provision for income taxes for the three and six month periods presented consisted of the following (in thousands):

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

February 26,

 

 

February 28,

 

 

February 26,

 

 

February 28,

 

 

 

2021

 

 

2020

 

 

2021

 

 

2020

 

Provision for income taxes

 

$

1,200

 

 

$

1,340

 

 

$

4,475

 

 

$

1,665

 

 

Income tax expense includes a provision for federal, state and foreign taxes based on the annual estimated effective tax rate applicable to the Company and its subsidiaries, adjusted for certain discrete items which are fully recognized in the period they occur.

Provision for income taxes for the three and six months ended February 26, 2021 decreased by $0.1 million and increased by $2.8 million, respectively, as compared to the same period in the prior year, primarily due to the profits and related taxes in non-U.S. jurisdictions.  

As of February 26, 2021, the Company has a full valuation allowance for its net deferred tax assets associated with its U.S. operations.  The amount of the deferred tax asset considered realizable could be adjusted if significant positive evidence increases.

Determining the consolidated provision for income tax expense, income tax liabilities, and deferred tax assets and liabilities involves judgment. The Company calculates and provides for income taxes in each of the tax jurisdictions in which it operates, which involves estimating current tax exposures, as well as making judgments regarding the recoverability of deferred tax assets in each jurisdiction.  The estimates used could differ from actual results, which may have a significant impact on operating results in future periods.

25


 

(7)

Long-Term Debt

Convertible Senior Notes due 2026

In February 2020, the Company issued $250.0 million in aggregate principal amount of 2.25% convertible senior notes due 2026 (the Notes) in a private placement, including $30.0 million in aggregate principal amount of the Notes that the Company issued resulting from initial purchasers fully exercising their option to purchase additional notes.

The Notes are general unsecured obligations and bear interest at an annual rate of 2.25% per year, payable semi-annually on February 15 and August 15 of each year, beginning on August 15, 2020. The Notes are governed by an indenture (the Indenture) between the Company and U.S. Bank National Association, as trustee. The Notes will mature on February 15, 2026, unless earlier converted, redeemed or repurchased. No sinking fund is provided for the Notes.

The initial conversion rate of the Notes is 24.6252 ordinary shares per $1,000 principal amount of Notes, which represents an initial conversion price of approximately $40.61 per ordinary share. The conversion rate is subject to adjustment upon the occurrence of certain specified events as set forth in the Indenture.

The holders of the Notes may convert their Notes at their option in the following circumstances:

 

during any fiscal quarter commencing after the fiscal quarter ending on February 26, 2021 (and only during such fiscal quarter), if the last reported sale price per ordinary share exceeds 130% of the conversion price for each of at least 20 trading days, whether or not consecutive, during the 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding fiscal quarter;

 

during the five consecutive business days immediately after any 10 consecutive trading day period (such 10 consecutive trading day period, the measurement period) in which the trading price per $1,000 principal amount of Notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price per ordinary share on such trading day and the conversion rate on such trading day;

 

upon the occurrence of certain corporate events or distributions on the Company’s ordinary shares, as provided in the Indenture;

 

if the Company calls such Notes for redemption; and

 

on or after August 15, 2025 until the close of business on the second scheduled trading day immediately before the maturity date.

Upon conversion, the Company will pay or deliver, as applicable, cash, ordinary shares or a combination of cash and ordinary shares at the Company's election. The Company’s intent is to settle conversions through combination settlement with a specified dollar amount of $1,000 per $1,000 principal amount of Notes, which involves repayment of the principal portion of such Notes in cash and any excess of the conversion value over the principal amount in ordinary shares, with cash in lieu of any fractional ordinary shares.

Upon the occurrence of a “make-whole fundamental change” (as defined in the Indenture), the Company will in certain circumstances increase the conversion rate for a specified period of time. In addition, upon the occurrence of a “fundamental change” (as defined in the Indenture), holders of the Notes may require the Company to repurchase their Notes at a cash repurchase price equal to the principal amount of the Notes to be repurchased, plus accrued and unpaid interest, if any.

If any taxes imposed or levied by or on behalf of the Cayman Islands (or certain other jurisdictions described in the Indenture) are required to be withheld or deducted from any payments or deliveries made under or with respect to the Notes, then, subject to certain exceptions, the Company will pay or deliver to the holder of each Note such additional amounts as may be necessary to ensure that the net amount received by the beneficial owner of such Note after such withholding or deduction (and after withholding or deducting any taxes on the additional amounts) will equal the amounts that would have been received by such beneficial owner had no such withholding or deduction been required.

The Company has a right to redeem the Notes, in whole or in part, at its option at any time, and from time to time, from February 21, 2023 through the 40th scheduled trading day immediately before the maturity date, at a cash redemption price equal to the principal amount of the Notes to be redeemed, plus accrued and unpaid interest. However, the repurchase right is only applicable if the last reported per share sale price of ordinary share exceeds 130% of the conversion price on each of at least twenty trading days during the thirty consecutive trading days ending on, and including, the trading day immediately before the redemption notice date for such redemption.

In accounting for the issuance of the Notes, the Company separated the Notes into liability and equity components. The carrying amount of the liability component of approximately $197.5 million was calculated by using a discount rate of 6.53%, which was the Company’s borrowing rate on the date of the issuance of the Notes for a similar debt instrument without the conversion feature. The carrying amount of the equity component of approximately $52.5 million, representing the conversion option, was determined by deducting the fair value of the liability component from the par value of the Notes. The equity component of the Notes is included in additional paid-in capital in the condensed consolidated balance sheet and is not remeasured as long as it continues to meet the conditions for equity classification, which the Company will reassess every reporting period. The difference between the principal

26


 

amount of the Notes and the liability component (the debt discount) is amortized to interest expense using the effective interest method over the term of the Notes.

Debt issuance costs for the issuance of the Notes were approximately $8.0 million, consisting of initial purchasers' discount and other issuance costs. In accounting for the transaction costs, the Company allocated the total amount incurred to the liability and equity components using the same proportions as the proceeds from the Notes. Transaction costs attributable to the liability component were approximately $6.3 million, were recorded as debt issuance cost (presented as contra debt in the condensed consolidated balance sheet) and are being amortized to interest expense over the term of the Notes using the effective interest method. The transaction costs attributable to the equity component were approximately $1.7 million and were netted with the equity component in shareholders’ equity.

The carrying value of the Notes is as follows (in thousands):

 

 

 

February 26,

 

 

August 28,

 

 

 

2021

 

 

2020

 

Principal

 

$

250,000

 

 

$

250,000

 

Unamortized debt discount

 

 

(44,873

)

 

 

(48,586

)

Unamortized issuance costs

 

 

(5,395

)

 

 

(5,841

)

Net carrying amount

 

$

199,732

 

 

$

195,573

 

 

As of February 26, 2021, the remaining life of the Notes was approximately 60 months. The unamortized debt discounts and unamortized debt issuance cost are amortized over the remaining useful life, using an effective interest rate of 7.06%.

As of February 26, 2021 the carrying value of the equity component was $50.8 million, net of the issuance costs of $1.7 million.

The following table sets forth the total interest expense recognized related to the Notes (in thousands):

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

February 26,

2021

 

 

February 28,

2020

 

 

February 26,

2021

 

 

February 28,

2020

 

Contractual interest expenses

 

$

1,391

 

 

$

297

 

 

$

2,781

 

 

$

297

 

Amortization of debt discount

 

 

1,873

 

 

 

399

 

 

 

3,713

 

 

 

399

 

Amortization of debt issuance costs

 

 

225

 

 

 

6

 

 

 

446

 

 

 

6

 

Total interest cost recognized

 

$

3,489

 

 

$

702

 

 

$

6,940

 

 

$

702

 

 

As of February 26, 2021 and August 28, 2020, the total estimated fair value for the Notes was determined to be $339.3 million and $221.5 million, respectively based on the closing trading price per $100 of the Notes as of the last day of trading for the period. The Company considers the fair value of the Notes to be a Level 2 measurement due to the limited trading activity.

 

There are no future minimum principal payments made under the Notes as of February 26, 2021, the full amount of $250.0 million is due in fiscal 2026.  

Capped Calls

In connection with the offering of the Notes, the Company entered into privately-negotiated capped call transactions, at arms-length, with certain counterparties (the “capped calls”). The capped calls each have an initial strike price of approximately $40.61 per share, subject to certain adjustments, which corresponds to the initial conversion price of the Notes. The capped calls have initial cap prices of $54.145 per share, which are subject to certain adjustments. The capped calls cover, subject to anti-dilution adjustments, approximately 6.2 million of the Company’s ordinary shares. The capped calls are generally intended to reduce the potential economic dilution to the Company’s ordinary shares upon any conversion of Notes and/or offset any potential cash payments the Company is required to make in excess of the principal amount of converted Notes, as the case may be, with such reduction and/or offset subject to a cap based on the cap price. The capped calls expire February 15, 2026 (the maturity date of the Notes), subject to earlier exercise. The capped calls are subject to either adjustment or termination upon the occurrence of specified extraordinary events affecting the Company, including mergers, tender offers and delistings involving the Company. In addition, the capped calls are subject to certain specified additional disruption events that may give rise to a termination of the capped calls, including insolvency filings and hedging disruptions.

The capped calls were originally classified as noncurrent derivative assets due to the capped calls only being settleable in cash until the Company has obtained shareholder approval for repurchasing its ordinary shares. The capped calls were initially recognized at fair value of $21.8 million, reflecting the premium paid by the Company to the capped call counterparties.   The related noncurrent derivative assets were classified as a Level 3 measurement as the Company used stock price volatility implied from options traded with a substantially shorter term, which made this an unobservable input that is significant to the valuation.

27


 

In a meeting of the Company’s shareholders held on March 30, 2020, the holders of the Company’s ordinary shares voted in favor of a proposal to amend and restate the Company’s memorandum and articles of association to permit the Company to purchase or otherwise acquire its ordinary shares in such amounts and at such prices and at such time and from time to time as the Company’s board of directors may approve in the future. This amendment and restatement also enables the Company to utilize shares or cash, or any combination thereof, in order to settle the capped call transactions, which resulted in the reclassification of the related non-current derivative asset to additional paid in capital within Shareholders’ Equity in an amount equal to the fair value of the capped calls as of March 30, 2020. The fair value of the capped calls on March 30, 2020 was approximately $14.1 million.  The Company recognized a loss of approximately $7.7 million in fiscal 2020, due to remeasurement of the capped calls at fair value. These losses are included in the condensed consolidated statement of operations within Other expense, net.

Amended Credit Agreement

On August 9, 2017, SMART Worldwide, SMART Modular Technologies (Global), Inc. (Global), and SMART Modular Technologies, Inc. (SMART Modular) entered into a Second Amended and Restated Credit Agreement (together with all related loan documents, as amended from time to time including as amended by the Incremental Amendment as defined below, the Amended Credit Agreement) with certain lenders which amended and restated that certain Amended and Restated Credit Agreement dated as of November 5, 2016 (the ARCA), which had amended and restated that certain Credit Agreement dated as of August 26, 2011 (the Original Credit Agreement). The Company’s subsidiaries named as borrowers in the Amended Credit Agreement and certain other subsidiaries that entered into a guarantee with respect to the Amended Credit Agreement including Penguin, SMART EC and SMART Wireless, are collectively referred to as the Loan Parties and together with SMART Modular Technologies Sdn. Bhd. (SMART Malaysia), the Credit Group. The Amended Credit Agreement provides for $165 million of initial term loans (the Initial Term Loan) with a maturity date of August 9, 2022, and $50 million of revolving loans with a maturity date of February 9, 2021 (the Initial Revolver Maturity Date) which revolving loan maturity date automatically extends to February 9, 2022 if the total leverage ratio of the Credit Group is less than 3.0:1.0 on the Initial Revolver Maturity Date. SMART Global Holdings is not a party to the Amended Credit Agreement.

On June 8, 2018, SMART Worldwide, Global and SMART Modular entered into an Incremental Facility Agreement (the Incremental Amendment) which provided for incremental term loans under the Amended Credit Agreement in the aggregate amount of $60 million (the Incremental Term Loans) which Incremental Term Loans are on substantially identical terms as the Initial Term Loans. Pursuant to the Incremental Amendment, the borrowers agreed to pay the structuring advisor a $0.6 million fee pursuant to a separate agreement.

On October 2, 2018, SMART Worldwide, Global and SMART Modular entered into the Second Amendment to the Amended Credit Agreement (the Second Amendment) which did not become effective until October 25, 2018. As a result of the Second Amendment, the borrowers were granted a holiday from the obligation to make quarterly repayments of principal under the Initial Term Loans and the Incremental Term Loans at any time with respect to fiscal 2019. In addition, the borrowers were granted a holiday from the obligation to repay any loans as a result of excess cash flow that would otherwise be due with respect to any period of fiscal 2019.

The Amended Credit Agreement is jointly and severally guaranteed on a senior basis by certain subsidiaries of Global (excluding, among other subsidiaries, SMART Malaysia). In addition, the Amended Credit Agreement is secured by a pledge of the capital stock of, or equity interests in, most of the subsidiaries of SMART Worldwide (including, without limitation, SMART Malaysia, Penguin, SMART EC and SMART Wireless) and by substantially all of the assets of the subsidiaries of SMART Worldwide, excluding the assets of SMART Malaysia and certain other subsidiaries.

Covenants. The Amended Credit Agreement contains various representations and warranties and affirmative and negative covenants that are usual and customary for loans of this nature including, among other things, limitations on the Credit Group’s ability to engage in certain transactions, incur debt, pay dividends, and make investments. The Amended Credit Agreement also requires that the Credit Group maintain a Secured Leverage Ratio not in excess of 3.5:1.0 as of the end of each fiscal quarter (commencing with the fiscal quarter ending November 24, 2017) and puts restrictions on the Credit Group’s ability to retain cash proceeds from the sale of certain assets with net proceeds in excess of $2 million, subject to customary six-month reinvestment rights. The Incremental Amendment required the Credit Group to repay the Penguin Credit Facility, as defined below, and to pledge as collateral, all of the capital stock of and substantially all of the assets of Penguin within 60 days after the closing of the Penguin acquisition.

Interest and Interest Rates. Loans under the Amended Credit Agreement accrue interest at a rate per annum equal to an applicable margin plus, at the borrowers’ option, either a LIBOR rate, or a base rate. The applicable margin for term loans with respect to LIBOR borrowings is 6.25% and with respect to base rate borrowings is 5.25%. The interest rate on the Initial Term Loans and Incremental Term Loans was 8.16% was 8.14% through the second quarter of fiscal 2020, respectively. 

The applicable margin for revolving loans adjusts every quarter based on the Secured Leverage Ratio for the most recent fiscal quarter with the applicable margin for revolving loans with respect to LIBOR borrowings ranging from 3.75% to 4.00% and the applicable margin for revolving loans with respect to base rate borrowings ranging from 2.75% to 3.00%.

28


 

Interest on base rate loans is payable on the last day of each calendar quarter. Interest on LIBOR-based loans is payable every one, two, three, six, nine or twelve months after the date of each borrowing, dependent on the particular interest rate period selected with respect to such borrowing.

Principal Payments. The Amended Credit Agreement requires quarterly repayments of principal under the Initial Term Loans equal to 2.5% of $165 million, or $4.1 million per fiscal quarter and, commencing on November 30, 2018, quarterly repayments of principal under the Incremental Term Loans equal to 2.5% of $60 million, or $1.5 million per fiscal quarter.  As a result of the Second Amendment, the borrowers were granted a holiday in fiscal 2019 from the obligation to make quarterly repayments of principal under the Initial Term Loans and the Incremental Term Loans. During the three and six months ended February 26, 2021 and February 28, 2020, the borrowers made scheduled principal payments of $0, $0, $0 and $5.6 million, respectively.  

Prepayments. The borrowers have the right at any time to make optional prepayments of the principal amounts outstanding under the Amended Credit Agreement provided that prepayments of principal which are voluntary or will be made in connection with certain transactions were subject to prepayment premiums of 3%, 2%, and 1% during the first, second and third years, respectively, after the effective date of the Amended Credit Agreement.

The Amended Credit Agreement also requires certain mandatory prepayments of principal whereby the borrowers must prepay outstanding loans, subject to certain exceptions, which include, among other things:

 

(i) 75% of excess cash flow on a semi-annual basis if the total leverage ratio is greater than 1.5:1.0, (ii) 50% of excess cash flow on a semi-annual basis if the total leverage ratio is greater than 1.0:1.0 but less than or equal to 1.5:1.0 and (iii) 25% of excess cash flow on an annual basis if the secured leverage ratio is less than or equal to 1.0:1.0, which amounts will be reduced by any voluntary prepayments of principal made in the applicable period;

 

100% of the net proceeds of certain asset sales or other dispositions of property of Global or any of its restricted subsidiaries, subject to customary rights to reinvest the proceeds within six months; and

 

100% of the net cash proceeds of incurrence of certain debt by Global or any of its restricted subsidiaries, other than proceeds from debt permitted to be incurred under the Amended Credit Agreement.

As a result of the Second Amendment, the borrowers were granted a holiday from the obligation to repay any loans as a result of excess cash flow that would otherwise be due with respect to any period of fiscal 2019. No mandatory prepayments were required for the three months ended February 26, 2021 or for fiscal 2020.

On June 2, 2017, SMART Global Holdings contributed to Global $61.0 million from the proceeds of the IPO closed in May 2017. Global in turn used the proceeds to pay down the original term loans under the Original Credit Agreement, as required under the ARCA, which resulted in a $6.7 million loss on early repayment of long-term debt. As of August 9, 2017, prior to the one year anniversary of the ARCA, the Credit Group entered into the Amended Credit Agreement with new term loans in the aggregate principal amount of $165 million with different lenders. The proceeds from the Amended Credit Agreement were used to fully repay and refinance the term loans under the ARCA in the principal amount of $151.0 million, which resulted in a write off of $15.2 million of original issue discount and debt issuance costs as an extinguishment loss.

Term loans under the Amended Credit Agreement were issued at a discount of 2.0% of the then outstanding principal amount of $165 million, for a discount of $3.3 million. The Company incurred $8.7 million debt issuance costs upon entering into the Amended Credit Agreement, of which $5.3 million was attributable to the term loans and recorded as a direct reduction to the face amount of the term loans, and $3.4 million was allocated to the revolving line of credit and recorded as a separate asset on the balance sheet. Debt issuance costs and debt discount related to term loans are being amortized to interest expense based on the effective interest rate method over the life of the term loans. Those fees allocated to the revolving line of credit were amortized to interest expense ratably over the life of the revolving line of credit.

In February 2020, the Company used net proceeds from the offering of the Notes to repay in full all outstanding principal balances, and to pay the associated prepayment premiums, accrued and unpaid interest and related fees and expenses, of the term loans under the Second Amended and Restated Credit Agreement, dated as of August 9, 2017, among certain of the Company’s subsidiaries. The Company paid $208.7 million toward the full repayment of the outstanding debt including $202.9 million of principal, $3.8 million of accrued interest and $2.0 million of prepayment premiums. Unamortized debt discounts and issuance costs as of February 11, 2020 amounted to $4.6 million. As a result of the early repayment of the term loans the Company recognized a loss on extinguishment of debt in other expense, net of $6.6 million.

As of February 26, 2021 and August 28, 2020, the outstanding principal balance of all term loans under the Amended Credit Agreement was $0 and there were no outstanding revolving loans.  

On March 6, 2020, SMART Worldwide, Global and SMART Modular entered into a third amended and restated credit agreement (the Third Amended and Restated Credit Agreement) which amended and restated the Amended Credit Agreement and the Second Amendment.

The Third Amended and Restated Credit Agreement provides for an extension of the maturity on the $50 million revolving credit facility from February 9, 2021, to March 6, 2025.

29


 

The Third Amended and Restated Credit Agreement also reduces the applicable margin on revolving loans incurred thereunder. Under the Third Amended and Restated Credit Agreement, loans bear interest at a rate per annum equal to either, at the borrowers’ option, a LIBOR rate or a base rate, in each case plus an applicable margin. The applicable margin was reduced by 25 basis points and will now be (i) 3.75% per annum with respect to LIBOR borrowings, and 2.75% per annum with respect to base rate borrowings when the First Lien Leverage Ratio, as defined in the Third Amended and Restated Credit Agreement,  is greater than 2.25 to 1.00 and (ii) 3.50% per annum with respect to LIBOR borrowings, and 2.50% per annum with respect to base rate borrowings when the First Lien Leverage Ratio is less than or equal to 2.25 to 1.00.

The Third Amended and Restated Credit Agreement also modifies the financial maintenance covenant included therein to be set at a First Lien Leverage Ratio of 3.50 to 1.00 and to be applicable only if drawn revolving loans (plus issued letters of credit in excess of $10 million) outstanding as of the last day of any quarter exceed 30% of the aggregate revolving commitments available under the Third Amended and Restated Credit Agreement.

The Third Amended and Restated Credit Agreement also increases the cap on the run rate cost savings add-back to the definition of Consolidated EBITDA to 35%, from 20% in the Amended Credit Agreement and extends the time period for run rate cost savings actions to 24 months, from 12 months in the Amended Credit Agreement.

The Third Amended and Restated Credit Agreement also makes certain changes and/or improvements to the covenants and other terms in the Amended Credit Agreement, including, among other things, (i) the elimination of the quarterly/annual lender call requirements, (ii) the expansion of the provisions for “Limited Conditionality Transactions” to include dividend declarations and irrevocable prepayment notices, (iii) the addition of debt and lien baskets permitting the incurrence of up to $150 million of “asset-based” revolving facilities, (iv) the addition of certain debt and lien baskets permitting the incurrence of additional debt and liens based on compliance with certain specified leverage and/or interest coverage ratios and (v) adjustments to threshold amounts and baskets under certain other covenants.

The Third Amended and Restated Credit Agreement is jointly and severally guaranteed on a senior basis by certain subsidiaries of Global (excluding, among other subsidiaries, SMART Malaysia). In addition, the Third Amended and Restated Credit Agreement is secured by a pledge of the capital stock of, or equity interests in, most of the subsidiaries of SMART Worldwide (including, without limitation, SMART Malaysia, Penguin, SMART EC. and SMART Wireless) and by substantially all of the assets of the subsidiaries of Holdings, excluding the assets of SMART Malaysia and certain other subsidiaries.

As a result of the Third Amendment and Restated Credit Agreement, approximately $0.2 million was recognized as loss on extinguishment in Other expenses, net in fiscal 2020, which relates to costs from replacing one of the banks participating in the new credit agreement.

ABL Credit Agreement

On December 23, 2020, SMART Modular, SMART EC, Penguin (Penguin together with SMART Modular and SMART EC, collectively the ABL Borrowers), certain other U.S. subsidiaries of the Company party thereto as guarantors (such other U.S. subsidiaries, together with the Borrowers, collectively the ABL Loan Parties) entered into a Loan, Guaranty and Security Agreement (the ABL Credit Agreement) with the financial institutions party to the ABL Credit Agreement from time to time as lenders (the ABL Lenders), and Bank of America, N.A., as administrative agent for the ABL Lenders.

The ABL Credit Agreement provides for a senior secured asset-based revolving credit facility in an aggregate principal amount of up to $100 million. The ABL Borrowers have the option to increase the total commitments under the ABL Credit Agreement to $150 million, subject to certain conditions, including obtaining commitments from one or more lenders. The ABL Credit Agreement provides that up to $30 million of revolving credit facility is available for issuances of letters of credit, and allows for swingline loans in an amount not to exceed $15 million.

Availability of borrowings under the ABL Credit Agreement are based upon monthly (or, in certain cases, weekly) borrowing base certifications valuing eligible inventory and eligible accounts receivable, as reduced by certain reserves in effect from time to time.

Under the ABL Credit Agreement, loans bear interest at a rate per annum equal to either, at the ABL Borrowers’ option, a LIBOR rate or a base rate, in each case plus an applicable margin. The applicable margin is (i) 1.75% per annum with respect to LIBOR borrowings, and 0.75% per annum with respect to base rate borrowings when average daily Availability, as defined in the ABL Credit Agreement, is equal to or greater than $50 million, (ii) 2.00% per annum with respect to LIBOR borrowings, and 1.00% per annum with respect to base rate borrowings when average daily Availability is less than $50 million and greater than or equal to $35 million, and (iii) 2.25% per annum with respect to LIBOR borrowings, and 1.25% per annum with respect to base rate borrowings when average daily Availability is less than $35 million.

In addition to paying interest on outstanding principal, the ABL Borrowers are required to pay a monthly unused line fee of (a) 0.35%, if average daily Revolver Usage (as defined in the ABL Credit Agreement) was less than 50% of the Commitments (as defined in the ABL Credit Agreement) during the preceding calendar month, or (b) 0.25%, if average daily Revolver Usage was equal to or greater than 50% of the Commitments during such month.

 

30


 

 

The ABL Borrowers are not required to make any scheduled amortization payments. The principal amount outstanding under the ABL Credit Agreement will be due and payable in full and the Commitments available thereunder shall terminate, on December 23, 2023. The ABL Credit Agreement contains customary affirmative and negative covenants and restrictions typical for a financing of this nature that, among other things, restrict the ABL Loan Parties’ ability to incur additional debt, pay dividends and make distributions, make certain investments and acquisitions, enter into certain transactions, repurchase its stock and prepay certain indebtedness, create liens, enter into agreements with affiliates, and transfer and sell material assets and merge or consolidate. In the event that certain minimum availability thresholds are not met on the last day of any period of four fiscal quarters, the ABL Borrowers will be required to maintain (i) a minimum Borrower Fixed Charge Coverage Ratio (as defined in the ABL Credit Agreement) of not less than 1.0 to 1.0, and (ii) a minimum Global Fixed Charge Coverage Ratio (as defined in the ABL Credit Agreement) of not less than 1.0 to 1.0, in each case, as of such last day of any period of four fiscal quarters. Subject to the Intercreditor Agreement (as defined below), non-compliance with one or more of the covenants and restrictions could result in the full or partial principal balance of the ABL Credit Agreement becoming immediately due and payable and termination of the commitments available thereunder.    

The ABL Credit Agreement is jointly and severally guaranteed on a senior basis by the ABL Loan Parties. In addition, the ABL Credit Agreement is secured by a pledge of the capital stock of, or equity interests in, the ABL Loan Parties and by substantially all of the assets of the ABL Loan Parties subject to customary exceptions. In connection with the ABL Credit Agreement, the ABL Loan Parties entered into a customary intercreditor agreement (the Intercreditor Agreement) in relation to the Third Amended and Restated Credit Agreement which Intercreditor Agreement governs how the collateral securing the respective obligations under the ABL Credit Agreement and the Third Amended and Restated Credit Agreement will be treated among the secured parties. Pursuant to the ABL Credit Agreement and Intercreditor Agreement, the obligations under the ABL Credit Agreement are secured by (1) a first-priority security interest, subject to certain customary exceptions, in assets held by the ABL Loan Parties consisting of accounts receivable, inventory and intangible assets to the extent attached to the foregoing, books and records related to the foregoing and the proceeds thereof, and (2) a second-priority security interest, subject to certain customary exceptions, in substantially all other present and future tangible and intangible assets held by the ABL Loan Parties and proceeds of the foregoing; and the obligations under the Third Amended and Restated Credit Agreement are secured by (1) a second-priority security interest, subject to certain customary exceptions, in assets held by the ABL Loan Parties consisting of accounts receivable, inventory and intangible assets to the extent attached to the foregoing, books and records related to the foregoing and the proceeds thereof, and (2) a first-priority security interest in, subject to certain customary exceptions, substantially all other present and future tangible and intangible assets held by the Loan Parties and proceeds of the foregoing.

As of February 26, 2021 and August 28, 2020, outstanding principal balance of the ABL Credit Agreement was $0.

FINEP Credit Agreement

In December 2020, SMART Brazil entered into a credit facility with the Funding Authority for Studies and Projects, or FINEP, referred to as the FINEP Credit Agreement. FINEP is an organization of the Brazilian federal government under the Ministry of Science, Technology and Innovation, devoted to funding science and technology in the country. Under the FINEP Credit Agreement, a total of R$102.2 million (or $18.7 million) has been made available to SMART Brazil for investments in technology innovation projects that will be used in infrastructure and research and development conducted in Brazil  as well as for acquisitions of equipment.

Outstanding debt under the FINEP Credit Agreement accrues interest at a fixed rate of 2.8% per annum and the agreement includes an obligation to draw down the entire loan within specified periods of time or pay unused commitment fees of 0.1% per month. The agreement also includes an initial administration fee of 1.09%, which is deducted from each advance of funds under the loan agreement.

The FINEP Credit Agreement is a term loan payable interest only for the first 18 months then fully amortizing in 67 equal monthly installments of principal and interest beginning in June 2022 with the final payment of principal and all accrued and unpaid interest being due in December 2027.

Banco Votorantim S.A. and Banco Alfa de Investimento S.A. each guarantee 49% and 51% respectively of SMART Brazil’s obligations under the FINEP Credit Agreement which guarantees are backed by unsecured loan agreements with SMART Brazil and SMART do Brazil. The guarantees to FINEP need to be renewed annually. Banco Alfa de Investimento S.A. and Banco Votorantim S.A charge 1.3% and 1.7%, respectively per annum, on the aggregate of the total outstanding principal balance plus any amount remaining available to be borrowed under the FINEP Credit Agreement, plus commissions, administrative fees, interest and contractual penalties.

While the FINEP Credit Agreement does not include any financial covenants, it contains affirmative and negative covenants customary for loans of this nature, including, among other things, an obligation to comply with all laws and regulations; a right for FINEP to terminate the loan in the event of a change of effective control; and an obligation to inform FINEP about any filing of registration of intellectual property rights before the Brazilian Patent and Trademark Office, or INPI, that may result from usage of the funds, among others.

31


 

The first advance in the amount of R$60.7 million (or $11.7 million) was received on December 30, 2020. As of February 26, 2021 and August 28, 2020, outstanding principal balance of the FINEP Credit Agreement was $R60.7 million (or $11.1 million) and $0, respectively.

The fair value of amounts outstanding under the FINEP Credit Agreements as of February 26, 2021 and August 28, 2020 were estimated to be approximately $9.9 million and $0, respectively. Since the Company used broker quotes from inactive markets and there were no unobservable inputs, this was treated as a Level 2 financial instrument.  

BNDES Credit Agreements

In December 2013, SMART Brazil, entered into a credit facility with the Brazilian Development Bank, or BNDES (such loan the BNDES 2013 Credit Agreement). Under the BNDES 2013 Credit Agreement, a total of R$50.6 million (or $9.7 million) was made available to SMART Brazil for investments in infrastructure, research and development conducted in Brazil and acquisitions of equipment not otherwise available in the Brazilian domestic market. SMART Brazil’s obligations under the BNDES 2013 Credit Agreement were guaranteed by Banco Itaú BBA S.A., or Itaú Bank, which guarantee was in turn secured by a guarantee from SMART Brazil and SMART do Brazil and a commitment by SMART Brazil to maintain minimum cash balances with Itaú Bank equal to 11.85% of the maximum aggregate balance of principal, interest and fees outstanding under the BNDES 2013 Credit Agreement.

Approximately half of the available debt under the BNDES 2013 Credit Agreement accrued interest at a fixed rate while the other half accrued interest at a floating rate. The facility under the BNDES 2013 Credit Agreement was a term loan fully amortizing in 48 equal monthly installments beginning on August 15, 2015 with the final principal payment paid on July 15, 2019. 

In December 2014, SMART Brazil, entered into a second credit facility with BNDES, referred to as the BNDES 2014 Credit Agreement. The BNDES 2013 Credit Agreement and the BNDES 2014 Credit Agreement are collectively referred to as the BNDES Agreements. Under the BNDES 2014 Credit Agreement, a total of R$52.8 million (or $10.1 million) was made available to SMART Brazil for research and development conducted in Brazil related to integrated circuit (IC) packaging and for acquisitions of equipment not otherwise available in the Brazilian domestic market.

The available debt under the BNDES 2014 Credit Agreement accrued interest at a fixed rate of 4% per annum. The BNDES 2014 Credit Agreement is a term loan fully amortizing in 48 equal monthly installments beginning on August 15, 2016 with the final principal paid on July 15, 2020.  

As of February 26, 2021 and August 28, 2020, SMART Brazil had no outstanding debt under both the BNDES 2013 and 2014 Credit Agreements.

While the BNDES Credit Agreements did not include any financial covenants, they contained affirmative and negative covenants customary for loans of this nature, including, among other things, an obligation to comply with all laws and regulations; a right for BNDES to terminate the loan in the event of a change of effective control; and a prohibition against the disposition or encumbrance, without BNDES consent, of intellectual property developed with the funds from the loans. The BNDES 2013 Credit Agreement included an obligation to draw down the entire loan within specified periods of time or pay unused commitment fees of 0.1% which unused commitment fees are no longer in effect. The BNDES 2014 Credit Agreement required a loan fee of 0.3% of the total face amount of the loan facility.

   

(8)

Financial Instruments

Fair Value of Financial Instruments

The fair value of the Company’s cash, cash equivalents, accounts receivable and accounts payable approximates the carrying amount due to the relatively short maturity of these items. Cash and cash equivalents consist of funds held in general checking and savings accounts, money market accounts, and securities with maturities of less than 90 days at the time of purchase. The Company does not have investments in variable rate demand notes or auction rate securities.

The FASB guidance establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets to identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are described below:

 

Level 1. Valuations based on quoted prices in active markets for identical assets or liabilities that an entity has the ability to access. The Company’s Level 1 assets include funds held in general checking accounts, savings accounts and money market funds that are classified as cash equivalents.

 

Level 2. Valuations based on quoted prices for similar assets or liabilities, quoted prices for identical assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable data for substantially the full term of the assets and liabilities. The Company’s Level 2 assets and liabilities include derivative financial instruments.

32


 

 

Level 3. Valuations based on inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.    

Assets and liabilities measured at fair value on a recurring basis include the following (in millions):

 

 

 

Quoted Prices

in Active

Markets for

Identical Assets

or Liabilities

(Level 1)

 

 

Observable/

Unobservable

Inputs

Corroborated

by Market Data

(Level 2)

 

 

Significant

Unobservable

Inputs (Level 3)

 

 

Total

 

Balances as of February 26, 2021:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

139.8

 

 

$

 

 

$

 

 

$

139.8

 

Derivative financial instruments(1)

 

 

 

 

 

2.3

 

 

 

 

 

 

2.3

 

Total assets measured at fair value

 

$

139.8

 

 

$

2.3

 

 

$

 

 

$

142.1

 

Balances as of August 28, 2020:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

150.8

 

 

$

 

 

$

 

 

$

150.8

 

Derivative financial instruments(1)

 

 

 

 

 

0.1

 

 

 

 

 

 

0.1

 

Total assets measured at fair value

 

$

150.8

 

 

$

0.1

 

 

$

 

 

$

150.9

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative financial instruments(2)

 

$

 

 

$

0.9

 

 

$

 

 

$

0.9

 

Total liabilities measured at fair value

 

$

 

 

$

0.9

 

 

$

 

 

$

0.9

 

 

(1)

Included in prepaid expenses and other current assets on the Company's condensed consolidated balance sheets - see Note 4.

(2)

Included in accrued liabilities on the Company's condensed consolidated balance sheets - see Note 4.

 

 

(9)

Share-Based Compensation and Employee Benefit Plans

(a)

Share-Based Compensation

Equity Awards

On August 26, 2011, the board of directors adopted the Saleen Holdings, Inc. 2011 Stock Incentive Plan which was amended and restated as of May 18, 2017 to be known as the SMART Global Holdings, Inc. Amended and Restated 2017 Share Incentive Plan. On January 29, 2019, the shareholders approved an amendment to the SMART Global Holdings, Inc. Amended and Restated 2017 Share Incentive Plan (as amended, the SGH Plan) which amendment increased the reserve under the SGH Plan by 1,500,000 shares effective as of February 1, 2019. The SGH Plan provides for grants of equity awards to employees, directors and consultants of SMART Global Holdings and its subsidiaries. Options granted under the SGH Plan provide the option to purchase SMART Global Holdings’ ordinary shares at the fair value of such shares on the grant date. The options and RSUs generally vest over a four-year period beginning on the grant date and generally have a ten-year term. Options granted after August 26, 2011 and before September 23, 2014 have an eight year term. As of February 26, 2021, there were 7,991,358 ordinary shares reserved for issuance under the Company’s equity incentive plans, of which 4,285,831 ordinary shares were available for grant. As of August 28, 2020, there were 4,545,631 ordinary shares reserved for issuance under the SGH Plan, of which 1,432,721 ordinary shares were available for grant.

Summary of Assumptions and Activity

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model that uses the assumptions noted in the following table.

The expected volatility is based on the historical volatilities of the common stock of comparable publicly traded companies. The expected term of options granted represents the weighted average period of time that options granted are expected to be outstanding and we apply the simplified approach in which the expected term is the mid-point between the vesting date and the expiration date. The risk-free interest rate for the expected term of the option is based on the average U.S. Treasury yield curve at the end of the quarter in which the option was granted.

33


 

The following assumptions were used to value the Company’s stock options:

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

February 26,

 

 

February 28,

 

 

February 26,

 

 

February 28,

 

 

 

2021

 

 

2020

 

 

2021

 

 

2020

 

Stock options:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Expected term (years)

 

 

 

 

 

 

 

 

6.25

 

 

 

6.25

 

Expected volatility

 

 

 

 

 

 

 

 

52.07

%

 

 

46.10

%

Risk-free interest rate

 

 

 

 

 

 

 

 

0.49

%

 

 

1.68

%

Expected dividends

 

 

 

 

 

 

 

 

 

 

 

 

 

SGH Plan—Options

A summary of option activity for the SGH Plan is presented below (dollars and shares in thousands, except per share data):

 

 

 

 

 

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

 

 

 

 

 

Weighted

 

 

average

 

 

 

 

 

 

 

 

 

 

 

average

 

 

remaining

 

 

 

 

 

 

 

 

 

 

 

per share

 

 

contractual

 

 

Aggregate

 

 

 

 

 

 

 

exercise

 

 

term

 

 

intrinsic

 

 

 

Shares

 

 

price

 

 

(years)

 

 

value

 

Options outstanding at August 28, 2020

 

 

2,109

 

 

$

29.45

 

 

 

6.95

 

 

$

7,225

 

Options granted

 

 

250

 

 

 

26.99

 

 

 

 

 

 

 

 

 

Options exercised

 

 

(172

)

 

 

22.58

 

 

 

 

 

 

 

 

 

Options cancelled

 

 

(23

)

 

 

30.31

 

 

 

 

 

 

 

 

 

Options outstanding at February 26, 2021

 

 

2,164

 

 

$

29.70

 

 

 

6.84

 

 

$

36,761

 

Options exercisable at February 26, 2021

 

 

921

 

 

$

28.81

 

 

 

6.11

 

 

$

16,475

 

 

In March 2018, the Company granted two performance-based stock options that contained a stock market index as a benchmark for performance (Market-Based Options). The share-based compensation expense for these options is recognized over the requisite service period by tranche. The exercisability of Market-Based Options will depend upon the 30-trading day rolling average closing price of Company’s ordinary shares. If the target price is not achieved by the end of 4th or 7th anniversary of the respective grant date, the options will expire. The fair value of Market-Based Options was determined by using a Monte Carlo valuation model, using the following assumptions: expected term (years) 1.10 – 4.00, expected volatility 46.29%, risk-free interest rate 2.75% and no expected dividend. One of the performance-based stock options was cancelled in November 2019, resulting in an additional $2.0 million share-based compensation expense recorded in the first quarter of fiscal 2020. In August 2020, the Company modified the remaining performance-based stock options to remove one of the service conditions to allow the continuation of vesting of the unvested options subject to the remaining service condition. This modification led to an updated fair value using the Monte Carlo valuation model for the Market-Based Options, with the following assumptions: expected volatility 56.07% and risk-free interest rate 0.34%. The modification of this option, as well as a time-based option also granted in March 2018, led to a reversal of $2.3 million share-based compensation expense in the fourth quarter of fiscal 2020.  

 

The Black-Scholes weighted average fair value of options granted under the SGH Plan during the three and six months ended February 26, 2021 was $0 and $13.30 per share, respectively, and $0 and $11.85 per share, respectively for the corresponding periods of fiscal 2020.  The total intrinsic value of employee stock options exercised in the three and six months ended February 26, 2021 was $2.0 million and $2.4 million, respectively and $1.1 million and $2.5 million, respectively for the corresponding periods of fiscal 2020.  As of February 26, 2021, there was approximately $9.7 million of unrecognized compensation costs related to stock options under the SGH Plan, which will be recognized over a weighted average period of 1.94 years.

34


 

SGH Plan—Restricted Stock Awards (RSAs), Restricted Stock Units (RSUs) and Performance Stock Units (PSUs)

A summary of the changes in RSAs and RSUs outstanding is presented below (dollars and shares in thousands, except per share data):

 

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

 

 

 

 

 

average

 

 

 

 

 

 

 

 

 

 

 

grant date

 

 

Aggregate

 

 

 

 

 

 

 

fair value

 

 

intrinsic

 

 

 

Shares

 

 

per share

 

 

value

 

Awards outstanding at August 28, 2020

 

 

1,273

 

 

$

26.19

 

 

$

31,721

 

Awards granted

 

 

717

 

 

 

25.33

 

 

 

 

 

Awards vested and released

 

 

(405

)

 

 

26.90

 

 

 

 

 

Awards forfeited and cancelled

 

 

(43

)

 

 

28.25

 

 

 

 

 

Awards outstanding at February 26, 2021

 

 

1,542

 

 

$

25.55

 

 

$

71,980

 

 

In May 2020, the Company granted a performance-based restricted share award (RSA) which has both service and performance conditions.  In October 2020, the Company modified this RSA, as well as another time-based RSA, to immediately vest and release; this resulted in an additional $5.8 million share-based compensation expense in the three months ended November 27, 2020 and the six months ended February 26, 2021.

 

In May 2019, the Company granted a performance-based restricted share unit award (PSU) which has both service and performance conditions. As of November 29, 2019, the Company deemed it probable that the service condition would be met, however, since the attainment of the performance condition for this award changed to not probable, there was $0.8 million of share-based compensation expense reversed for this award in the three months ended November 29, 2019.  

The share-based compensation expense related to RSAs, RSUs and PSUs during the three and six months ended February 26, 2021 was approximately $3.2 million and $12.2 million, respectively, and $2.5 million and $4.4 million for the corresponding period in fiscal 2020.  The total fair value of shares vested during the three and six months ended February 26, 2021 was approximately $3.0 million and $11.4 million, respectively, and $3.8 million and $5.9 million, respectively for the corresponding periods of fiscal 2020. As of February 26, 2021, there was approximately $33.3 million of unrecognized compensation costs related to awards under the SGH Plan, which will be recognized over a weighted average period of 2.71 years.

Employee Stock Purchase Plan

In January 2018, the Company’s shareholders approved the SGH 2018 Employee Share Purchase Plan (the Purchase Plan) under which an aggregate of 650,000 of ordinary shares have been approved for issuance to eligible employees. The Purchase Plan generally permits employees to purchase ordinary shares at 85% of the lower of the fair market value of the ordinary shares at the beginning of the offering period or at the end of purchase period, which is generally six months. Rights to purchase ordinary shares are granted during the first and third quarter of each fiscal year.  The Purchase Plan terminates in January 2028. As of February 26, 2021, 353,334 ordinary shares have been purchased under the Purchase Plan and 896,666 ordinary shares are reserved for future purchases by eligible employees. As of August 28, 2020, 266,816 ordinary shares have been purchased under the Purchase Plan and 683,184 ordinary shares are reserved for future purchases by eligible employees.

Equity Rights and Restrictions

The holders of ordinary shares of SMART Global Holdings are entitled to such dividends and other distributions as may be declared by the board of directors of SMART Global Holdings from time-to-time, out of the funds of SMART Global Holdings lawfully available therefor.

Substantially all SMART Global Holdings shares owned by employees, by certain former lenders of the Company, and all shares underlying the SMART Global Holdings options, PSUs and RSUs are subject to either the Employee Investors Shareholders Agreement dated August 26, 2011 (the Employee Investors Shareholders Agreement), the Amended and Restated Investors Shareholders Agreement dated as of November 5, 2016 (as amended by Amendment No. 5, Amendment No. 4, Amendment No. 3, Amendment No. 2 and subsequent amendments, the Amended and Restated Investors Shareholders Agreement) and the Amended and Restated Sponsors Shareholders Agreement dated May 30 2017 (as amended, the Sponsor Shareholder Agreement; the Employee Investors Shareholders Agreement, the Amended and Restated Investors Shareholders Agreement and the Sponsor Shareholder Agreement are collectively referred to as the Shareholders Agreements). Under the terms of the Shareholders Agreements, such shares are subject to certain restrictions on sale and could become subject to lock-up restrictions in the event of any future registered public offerings by the Company.

35


 

On January 7, 2021, the Company agreed to repurchase an aggregate of 1,100,000 of its ordinary shares, $0.03 par value per share from Silver Lake Partners III Cayman (AIV III), L.P., Silver Lake Technology Investors III Cayman, L.P., Silver Lake Sumeru Fund Cayman, L.P. and Silver Lake Technology Investors Sumeru Cayman, L.P. at a purchase price of $40.30 per share for aggregate consideration of approximately $44.3 million, in a privately negotiated transaction. The transaction closed on January 15, 2021.

(b)

Savings and Retirement Program

The Company offers a 401(k) Plan to U.S. employees, which provides for tax-deferred salary deductions for eligible U.S. employees. Employees may contribute up to 60% of their annual eligible compensation to this plan, limited by an annual maximum amount determined by the U.S. Internal Revenue Service. The Company may also make discretionary matching contributions, which vest immediately, as periodically determined by management. The matching contributions made by the Company during the three and six months ended February 26, 2021 were approximately were approximately $0.6 million and $1.3 million, respectively and $0.6 million and $1.1 million, respectively for the corresponding periods of fiscal 2020.   

(10)

Commitments and Contingencies

(a)

Commitments

Minimum rent payments under operating leases are recognized on a straight-line basis over the term of the lease including any periods of free rent. Rent expense for operating leases during the three and six months ended February 26, 2021 was $2.3 million and $4.1 million, respectively, and $1.9 million and $3.7 million, respectively for the corresponding periods of fiscal 2020.  

(b)Product Warranty and Indemnities

Product warranty reserves are established in the same period that revenue from the sale of the related products is recognized, or in the period that a specific issue arises as to the functionality of a Company’s product. The amounts of the reserves are based on established terms and the Company’s best estimate of the amounts necessary to settle future and existing claims on products sold as of the balance sheet date.

The following table reconciles the changes in the Company’s accrued warranty (in thousands):

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

February 26,

 

 

February 28,

 

 

February 26,

 

 

February 28,

 

 

 

2021

 

 

2020

 

 

2021

 

 

2020

 

Beginning accrued warranty reserve

 

$

1,261

 

 

$

1,749

 

 

$

1,316

 

 

$

1,770

 

Warranty claims

 

 

(222

)

 

 

(420

)

 

 

(535

)

 

 

(1,136

)

Provision for product warranties

 

 

216

 

 

 

279

 

 

 

474

 

 

 

974

 

Ending accrued warranty reserve

 

$

1,255

 

 

$

1,608

 

 

$

1,255

 

 

$

1,608

 

 

Product warranty reserves are recorded in accrued liabilities in the accompanying condensed consolidated balance sheets.

In addition to potential liability for warranties related to defective products, the Company currently has in effect a number of agreements in which it has agreed to defend, indemnify and hold harmless its customers and suppliers from damages and costs, which may arise from product defects as well as from any alleged infringement by its products of third-party patents, trademarks or other proprietary rights. The Company believes its internal development processes and other policies and practices limit its exposure related to such indemnities. Maximum potential future payments cannot be estimated because many of these agreements do not have a maximum stated liability. However, to date, the Company has not had to reimburse any of its customers or suppliers for any losses related to these indemnities. The Company has not recorded any liability in its financial statements for such indemnities.

36


 

(c)

Legal Matters

From time to time, the Company is involved in legal matters that arise in the normal course of business. Litigation in general and intellectual property, employment and shareholder litigation in particular, can be expensive and disruptive to normal business operations. Moreover, the results of complex legal proceedings are difficult to predict. The Company believes that it has defenses to the cases pending, including those set forth below. Except as noted below, the Company is not currently able to estimate, with reasonable certainty, the possible loss, or range of loss, if any, from such legal matters, and accordingly, no provision for any potential loss, which may result from the resolution of these matters, has been recorded in the accompanying condensed consolidated financial statements.

Indemnification Claims by SanDisk

In August 2013, the Company completed the sale (the Sale) of substantially all of the business unit which was focused on solid state drives, to SanDisk Corporation (now a part of Western Digital). In connection with the Sale the sale agreement (Sale Agreement) contained certain indemnification obligations, including, among others, for losses arising from breaches of representations and warranties relating to the Sale. These indemnification obligations are subject to a number of limitations, including certain deductibles and caps and limited time periods for making indemnification claims. On August 21, 2014, SanDisk made a claim against the Company under the indemnification provisions of the Sale Agreement in connection with a lawsuit filed by Netlist, Inc. (Netlist) against SanDisk alleging that certain products sold in the Sale infringe various Netlist patents, which SanDisk in turn alleges would, if true, constitute a breach of representations and warranties under the Sale Agreement. Under the Sale Agreement, the Company’s indemnification obligation in respect of intellectual property matters, such as those claimed by SanDisk, is subject to a deductible of approximately $1.8 million and a cap of $60.9 million. As required in the Sale Agreement, the SanDisk claim purported to include a preliminary good faith estimate of SanDisk’s alleged indemnifiable losses, which estimate was greater than the Sale Agreement cap for intellectual property matters. The Company believes that the allegations giving rise to the indemnification claim are without merit and the Company is disputing SanDisk’s claim for indemnification. In addition, there may be other grounds for the Company to dispute the indemnification claim and/or the amounts of any indemnifiable losses of SanDisk. On May 19, 2020 the court entered an order granting a joint stipulation of dismissal filed by Netlist and SanDisk. In November 2020, Western Digital made a request for reimbursement of legal fees in connection with this matter. The Company believes that this request is without merit.

(d)

Contingencies

Import Duty Tax assessment in Brazil

On February 23, 2012, SMART Brazil was served with a notice of a tax assessment for approximately R$117 million (or $21.4 million) (the First Assessment). The First Assessment was from the federal tax authorities of Brazil and related to four taxes in connection with importation processes. The tax authorities claimed that SMART Brazil categorized its imports of unmounted integrated circuits in the format of wafers under an incorrect product classification code, which carries an import duty of 0%. The authorities alleged that a different classification code should have been used that would require an 8% import duty and the authorities were seeking to recover these duties, as well as other related taxes, for the five calendar years of 2007 through and including 2011. Subsequent to the initial assessment, SMART Brazil received a second notice of an additional administrative penalty of approximately R$6.0 million (or $1.1 million) directly related to the same issue and which has been imposed exclusively for the alleged usage of an inappropriate import tax code (the Second Assessment).

In March 2012, SMART Brazil filed defenses to the First Assessment and the Second Assessment. On May 2, 2013, the first level administrative tax court issued a ruling in favor of the tax assessor and against SMART Brazil on the First Assessment. On May 31, 2013, SMART Brazil filed an appeal to the second level tax court known as CARF. The appeal was heard on November 26, 2013 and SMART Brazil received a unanimous favorable ruling rejecting the position of the tax authorities. Subsequently, the tax authorities filed a request for clarification and on September 17, 2014, SMART Brazil received a unanimous ruling rejecting the request from the tax authorities for clarification. On November 7, 2014, the tax authorities notified CARF that they would not be appealing the CARF decision, and the First Assessment has been extinguished. On February 6, 2018, the first level administrative court unanimously ruled in favor of SMART Brazil with respect to the Second Assessment. Due to the size of the Second Assessment, Brazil law required that the tax authorities appeal the decision to CARF. The appeal on the Second Assessment was heard on December 11, 2018 and SMART Brazil received a unanimous favorable ruling rejecting the position of the tax authorities. The tax authorities did not file any request for clarification or appeal and, as a result, the Second Assessment was extinguished in May 2019.

On December 12, 2013, SMART Brazil received another notice of assessment in the amount of R$3.6 million (or $0.7 million) with respect to the same import-related tax issues and penalties discussed above for 2012 and 2013 (the Third Assessment). The Third Assessment does not seek import duties and related taxes on Dynamic Random Access Memory (DRAM) products and only seeks import duties and related taxes on Flash unmounted components with respect to the months of January 2012 to June 2012. This is because SMART Brazil’s imports of DRAM unmounted components were subject to 0%, and, after June 2012, SMART Brazil’s imports of Flash unmounted components became subject to 0% import duties and related taxes, both as a result of PADIS. Even with this 0%, if SMART Brazil is found to have used the incorrect product classification code, SMART Brazil will be subject to an administrative penalty equal to 1% of the value of the imports. SMART Brazil intends to vigorously fight this matter and has filed

37


 

defenses to the Third Assessment. The Company believes that SMART Brazil used the correct product code on its imports and that the Third Assessment is incorrect.  Although SMART Brazil did not receive the Third Assessment until December 12, 2013, the Third Assessment was issued before the CARF decision in favor of SMART Brazil on the First Assessment as discussed above was published. On September 8, 2020, the first level administrative court unanimously ruled in favor of SMART Brazil with respect to the Third Assessment. Due to the size of the Third Assessment, Brazil law required that the tax authorities appeal the decision to CARF.

The amounts claimed by the tax authorities on the Third Assessment are subject to increases for interest and other charges, which resulted in a combined assessment balance of approximately R$5.8 million (or $1.1 million) as of February 26, 2021.

As a result of the CARF decisions in favor of SMART Brazil on the First Assessment and the Second Assessment, as well as the basis given by the tax authorities in favorable ruling on the Third Assessment, the Company believes that the probability of any material charges as a result of the Third Assessment is remote and the Company does not expect the resolution of this disputed assessment to have a material impact on its condensed consolidated financial position, results of operations or cash flows. While the Company believes that the Third Assessment is incorrect, there can be no assurance that SMART Brazil will prevail in the disputes.

(11)

Segment and Geographic Information

The Company’s chief operating decision-maker (CODM), the President and CEO, evaluates operating results to make decisions about allocating resources and assessing performance of the Company.  The Company operates in three segments consisting of Specialty Memory Products, Brazil Products and SCSS. These segments are determined based on source of revenue and geography. The Company's CODM evaluates the operating results and performance of the segments based on gross profit and gross margin. The accounting policies and basis of presentation of the reportable segments are the same as those described in Note 1 – “Basis of Presentation”.

The following table shows operating results net of inter-segment revenues, which for the respective three and six months ended, are not material to the financial statements (dollars in thousands):

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

February 26, 2021

 

 

February 26, 2021

 

 

 

Specialty

Memory

Products

 

 

Brazil

Products

 

 

SCSS

 

 

Total

 

 

Specialty

Memory

Products

 

 

Brazil

Products

 

 

SCSS

 

 

Total

 

Net Revenue

 

$

115,452

 

 

$

103,145

 

 

$

85,412

 

 

$

304,009

 

 

$

236,109

 

 

$

208,312

 

 

$

151,284

 

 

$

595,705

 

Adjusted Gross Profit

 

$

18,574

 

 

$

15,649

 

 

$

25,022

 

 

$

59,245

 

 

$

36,819

 

 

$

33,531

 

 

$

43,006

 

 

$

113,356

 

Adjusted Gross Margin

 

 

16

%

 

 

15

%

 

 

29

%

 

 

19

%

 

 

16

%

 

 

16

%

 

 

28

%

 

 

19

%

 

Adjusted Gross Profit and Adjusted Gross Margin excludes share-based compensation (see Note 1(q)), intangible amortization (see Note 1(l)) and corporate expenses ($6 thousand and $23 thousand, respectively).

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

February 28, 2020

 

 

February 28, 2020

 

 

 

Specialty

Memory

Products

 

 

Brazil

Products

 

 

SCSS

 

 

Total

 

 

Specialty

Memory

Products

 

 

Brazil

Products

 

 

SCSS

 

 

Total

 

Net Revenue

 

$

111,455

 

 

$

97,700

 

 

$

62,887

 

 

$

272,042

 

 

$

214,984

 

 

$

191,699

 

 

$

137,377

 

 

$

544,060

 

Adjusted Gross Profit

 

$

20,784

 

 

$

14,497

 

 

$

17,660

 

 

$

52,941

 

 

$

40,119

 

 

$

31,155

 

 

$

37,406

 

 

$

108,680

 

Adjusted Gross Margin

 

 

19

%

 

 

15

%

 

 

28

%

 

 

19

%

 

 

19

%

 

 

16

%

 

 

27

%

 

 

20

%

 

Adjusted Gross Profit and Adjusted Gross Margin excludes share-based compensation (see Note 1(q)), intangible amortization (see Note 1(l)) and corporate expenses ($57 thousand and $0.1 million, respectively).

 

 

38


 

 

A summary of the Company’s net sales by geographic area, based on the ship-to location of the customer, property and equipment by geographic area is as follows (in thousands):

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

February 26,

 

 

February 28,

 

 

February 26,

 

 

February 28,

 

 

 

2021

 

 

2020

 

 

2021

 

 

2020

 

Geographic Net Sales:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S.

 

$

126,803

 

 

$

111,413

 

 

$

244,097

 

 

$

230,618

 

Brazil

 

 

103,162

 

 

 

97,573

 

 

 

208,344

 

 

 

192,372

 

Asia

 

 

51,596

 

 

 

44,783

 

 

 

100,401

 

 

 

84,008

 

Europe

 

 

16,298

 

 

 

10,942

 

 

 

28,612

 

 

 

21,343

 

Other Americas

 

 

6,150

 

 

 

7,331

 

 

 

14,251

 

 

 

15,719

 

Total

 

$

304,009

 

 

$

272,042

 

 

$

595,705

 

 

$

544,060

 

 

 

 

 

February 26,

 

 

August 28,

 

 

 

2021

 

 

2020

 

Property and Equipment, Net:

 

 

 

 

 

 

 

 

U.S.

 

$

17,520

 

 

$

11,635

 

Brazil

 

 

48,275

 

 

 

30,648

 

Malaysia

 

 

10,269

 

 

 

10,209

 

Other

 

 

2,082

 

 

 

2,213

 

Total

 

$

78,146

 

 

$

54,705

 

 

(12)

Major Customers

A majority of the Company’s net sales are attributable to customers operating in the information technology industry. Net sales to significant end user customers, including sales to their manufacturing subcontractors, defined as net sales in excess of 10% of total net sales, are as follows (dollars in thousands):

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

February 26, 2021

 

 

February 28, 2020

 

 

February 26, 2021

 

 

February 28, 2020

 

 

 

Amount

 

 

Percentage

of net sales

 

 

Amount

 

 

Percentage

of net sales

 

 

Amount

 

 

Percentage

of net sales

 

 

Amount

 

 

Percentage

of net sales

 

Customer A(1)

 

$

52,269

 

 

 

17

%

 

$

56,054

 

 

 

21

%

 

$

104,917

 

 

 

18

%

 

$

106,069

 

 

 

19

%

Customer B(2)

 

 

32,411

 

 

 

11

%

 

 

28,837

 

 

 

11

%

 

 

 

 

 

 

 

 

54,748

 

 

 

10

%

 

 

$

84,680

 

 

 

28

%

 

$

84,891

 

 

 

32

%

 

$

104,917

 

 

 

18

%

 

$

160,817

 

 

 

29

%

 

(1)

Brazil Products customer

(2)

Specialty Memory Products customer

 

 

As of February 26, 2021, three direct customers that represented less than 10% of net sales, Customer C, D and E, each accounted for approximately 13% of accounts receivable, respectively. As of August 28, 2020, two direct customers that represented less than 10% of net sales, Customers C and D, accounted for approximately and 19% and 15% of accounts receivable, respectively.

(13)

Earnings Per Share

Basic earnings per share is calculated by dividing net income (loss) by the weighted average of ordinary shares outstanding during the period. Diluted earnings per share is calculated by dividing the net income (loss) by the weighted average of ordinary shares and dilutive potential ordinary shares outstanding during the period. Dilutive potential ordinary shares consist of dilutive shares issuable upon the exercise of outstanding stock options, vesting of RSUs and the Notes computed using the treasury stock method. The dilutive weighted shares are excluded from the computation of diluted net loss per share when a net loss is recorded for the period as their effect would be anti-dilutive.

 

39


 

 

As the Company has the intent and ability to settle the aggregate principal amount of the Notes plus any accrued and unpaid interest in cash and any excess in the Company’s ordinary shares, the Company uses the treasury stock method for calculating any potential dilutive effect of the conversion spread on diluted net income per share, if applicable. In order to compute the dilutive effect, the number of shares included in the denominator of diluted net income per share is determined by dividing the conversion spread value of the “in-the-money” Notes by the Company’s average share price during the period and including the resulting share amount in the diluted net income per share denominator. The conversion spread will have a dilutive impact on net income per ordinary share when the average market price of the Company’s ordinary shares for a given period exceeds the conversion price of $40.61 per share for the Notes.

 

The Company’s weighted average ordinary share price since the issuance of the Notes has been below the conversion price. Therefore, the Notes would have been anti-dilutive and have been excluded from dilutive shares.

The following table sets forth for all periods presented the computation of basic and diluted earnings per share, including the reconciliation of the numerator and denominator used in the calculation of basic and diluted earnings per share (dollars and shares in thousands, except per share data):

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

February 26,

 

 

February 28,

 

 

February 26,

 

 

February 28,

 

 

 

2021

 

 

2020

 

 

2021

 

 

2020

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

5,844

 

 

$

(9,720

)

 

$

7,871

 

 

$

(9,496

)

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

24,217

 

 

 

23,906

 

 

 

24,389

 

 

 

23,809

 

Diluted

 

 

25,203

 

 

 

23,906

 

 

 

25,221

 

 

 

23,809

 

Earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.24

 

 

$

(0.41

)

 

$

0.32

 

 

$

(0.40

)

Diluted

 

$

0.23

 

 

$

(0.41

)

 

$

0.31

 

 

$

(0.40

)

Anti-dilutive weighted shares excluded from the

   computation of diluted earnings per share

 

 

7,229

 

 

 

7,411

 

 

 

7,308

 

 

 

7,520

 

 

 

(14)

Other Income (Expense), Net

The following table provides the detail of other expense, net as follows (in thousands):

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

February 26,

 

 

February 28,

 

 

February 26,

 

 

February 28,

 

 

 

2021

 

 

2020

 

 

2021

 

 

2020

 

Foreign currency losses

 

$

(843

)

 

$

(1,191

)

 

$

(201

)

 

$

(2,102

)

Loss on capped call mark-to-market adjustment

 

 

 

 

 

(4,795

)

 

 

 

 

 

(4,795

)

Loss on early extinguishment of debt

 

 

 

 

 

(6,630

)

 

 

 

 

 

(6,630

)

Other

 

 

(688

)

 

 

230

 

 

 

(498

)

 

 

301

 

Total other expense, net

 

$

(1,531

)

 

$

(12,386

)

 

$

(699

)

 

$

(13,226

)

 

 

40


 

 

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

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the condensed consolidated financial statements and the notes to those statements included elsewhere in this Quarterly Report on Form 10-Q, and with the consolidated financial statements and management’s discussion and analysis of our financial condition and results of operations in our Annual Report on Form 10-K for our fiscal year ended August 28, 2020 (our “Annual Report”). This discussion contains forward looking statements that involve risks and uncertainties. Our actual results could differ materially from those contained in these forward-looking statements due to a number of factors, including those discussed under the caption “Risk Factors” in our Annual Report and elsewhere in this report. See also “Cautionary Note Regarding Forward-Looking Statements” at the beginning of this report.

Overview

SMART is comprised of business units that are leading designers and manufacturers of electronic products focused on computing and memory technology. The company specializes in application-specific product development and support for customers in enterprise, government and original equipment manufacturer, or OEM, sales channels. Customers rely on SMART businesses as their strategic suppliers with top tier customer service, product quality, and technical support with engineering, sales, manufacturing, supply chain and logistics capabilities worldwide. The company supports customers in markets such as computing, including edge and high performance computing, communications, storage, networking, mobile, industrial automation, industrial internet of things, government and military.  SMART operates in three segments: Specialty Memory products, Brazil products and Specialty Compute and Storage Solutions, or SCSS.

Recent Developments

Acquisition of CreeLED, Inc.

On March 1, 2021, pursuant to the Purchase Agreement, we and Cree completed the LED Business Divestiture, whereby we acquired Cree’s LED Business and assumed certain liabilities related to Cree’s LED Business.

The purchase price for the LED Business consisted of (i) a payment of $50 million in cash, subject to customary adjustments, (ii) the Purchase Price Note, (iii) the potential to receive an earn-out payment of up to $125 million based on the revenue and gross profit performance of the LED Business during the Earnout Period, also payable in the form of an Earnout Note, and (iv) the assumption of certain liabilities. The Purchase Price Note and the Earnout Note, if earned and issued, will accrue interest at a rate of three-month LIBOR plus 3.0% payable interest only every three months with one bullet payment of principal and all accrued and unpaid interest payable on each note’s maturity date. The Purchase Price Note will mature on August 15, 2023, and the Earnout Note, if issued, will mature on March 27, 2025.

In connection with this transaction, Cree and SGH-CreeLED also entered into certain ancillary and related agreements, including (i) an Intellectual Property Assignment and License Agreement, (ii) a Transition Services Agreement, (iii) a Wafer Supply and Fabrication Services Agreement, and (iv) a Real Estate License Agreement.

The CreeLED Purchase Agreement contains customary representations, warranties and covenants.  The Purchase Agreement also requires each of Cree and SGH-CreeLED to indemnify the other party for certain damages that the indemnified party may suffer following the closing of the transaction.

COVID-19

The outbreak of coronavirus disease 2019 (“COVID-19”) has resulted in over a hundred million infections and over two and a half million deaths worldwide, as of the date of filing of this Quarterly Report, and continues to spread in the United States, Asia, Europe and Brazil, the major markets in which we operate. The COVID-19 pandemic has resulted in significant governmental measures being implemented to control the spread of the virus, and our operations as well as the operations of our suppliers, customers and third-party sales representatives and distributors have been and will continue to be disrupted by varying individual and governmental responses to COVID-19 around the world such as business shutdowns, stay-at-home directives, travel restrictions, border closures, and other travel or health-related restrictions as well as by absenteeism, quarantines, self-isolations, office and factory closures, delays on deliveries, and disruptions to ports and other freight infrastructure. These restrictions have caused consumers and businesses to reduce their activities and their spending, have caused a slowdown in the global economy and have had, and may continue to have, a negative impact on our sales and marketing, and our product development activities. While we have not yet experienced a significant disruption of our operations as a result of the COVID-19 pandemic, the pandemic has resulted in reduced sales volumes of certain product lines within our SCSS business in the second half of fiscal 2020 as well as in the first half of fiscal 2021, and if these conditions continue, or if we have an outbreak in any of our facilities, such reduced sales volumes may continue or worsen and we may, among other issues, experience, in any or all product lines, delays in product development, a decreased ability to support our customers, disruptions in sales and manufacturing activities and overall reduced productivity each of which could have a negative impact on our ability to meet customer commitments and on our revenue and profitability. The reduction of investment in

41


 

new capacity due to the pandemic, coupled with strong demand to expand delivery and logistics, internet and cloud services as well as a rebound in economic conditions and general demand at a pace faster than expected, has resulted in significant supply shortages that may impact our ability to manufacture products for our customers and may result in rising prices of the materials we need to manufacture our products. We may not be able to pass on these rising costs to our customers which could result in a negative impact to our gross margins.

Results of Operations

The following is a summary of our results of operations for the three and six months ended February 26, 2021 and February 28, 2020:

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

February 26,

2021

 

 

% of

sales*

 

 

February 28,

2020

 

 

% of

sales*

 

 

February 26,

2021

 

 

% of

sales*

 

 

February 28,

2020

 

 

% of

sales*

 

 

 

(in thousands, other than percentages and per share data)

 

 

(in thousands, other than percentages and per share data)

 

Condensed Consolidated Statements of Operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

304,009

 

 

 

100

%

 

$

272,042

 

 

 

100

%

 

$

595,705

 

 

 

196

%

 

$

544,060

 

 

 

100

%

Cost of sales (1)(2)

 

 

250,553

 

 

 

82

%

 

 

220,536

 

 

 

81

%

 

 

489,606

 

 

 

161

%

 

 

438,234

 

 

 

81

%

Gross profit

 

 

53,456

 

 

 

18

%

 

 

51,506

 

 

 

19

%

 

 

106,099

 

 

 

35

%

 

 

105,826

 

 

 

19

%

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development (1)

 

 

8,852

 

 

 

3

%

 

 

14,702

 

 

 

5

%

 

 

15,816

 

 

 

5

%

 

 

29,588

 

 

 

5

%

Selling, general and administrative (1) (2)

 

 

31,664

 

 

 

10

%

 

 

28,648

 

 

 

11

%

 

 

69,720

 

 

 

23

%

 

 

62,201

 

 

 

11

%

Total operating expenses

 

 

40,516

 

 

 

13

%

 

 

43,350

 

 

 

16

%

 

 

85,536

 

 

 

28

%

 

 

91,789

 

 

 

17

%

Income from operations

 

 

12,940

 

 

 

4

%

 

 

8,156

 

 

 

3

%

 

 

20,563

 

 

 

7

%

 

 

14,037

 

 

 

3

%

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense, net

 

 

(4,365

)

 

 

(1

%)

 

 

(4,150

)

 

 

(2

%)

 

 

(7,518

)

 

 

(2

%)

 

 

(8,642

)

 

 

(2

%)

Other expense, net

 

 

(1,531

)

 

 

(1

%)

 

 

(12,386

)

 

 

(5

%)

 

 

(699

)

 

 

0

%

 

 

(13,226

)

 

 

(2

%)

Total other expense

 

 

(5,896

)

 

 

(2

%)

 

 

(16,536

)

 

 

(6

%)

 

 

(8,217

)

 

 

(3

%)

 

 

(21,868

)

 

 

(4

%)

Income (loss) before income taxes

 

 

7,044

 

 

 

2

%

 

 

(8,380

)

 

 

(3

%)

 

 

12,346

 

 

 

4

%

 

 

(7,831

)

 

 

(1

%)

Provision for income taxes

 

 

1,200

 

 

 

0

%

 

 

1,340

 

 

 

0

%

 

 

4,475

 

 

 

1

%

 

 

1,665

 

 

 

0

%

Net income (loss)

 

$

5,844

 

 

 

2

%

 

$

(9,720

)

 

 

(4

%)

 

$

7,871

 

 

 

3

%

 

$

(9,496

)

 

 

(2

%)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.24

 

 

 

 

 

 

$

(0.41

)

 

 

 

 

 

$

0.32

 

 

 

 

 

 

$

(0.40

)

 

 

 

 

Diluted

 

$

0.23

 

 

 

 

 

 

$

(0.41

)

 

 

 

 

 

$

0.31

 

 

 

 

 

 

$

(0.40

)

 

 

 

 

Shares used in computing earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

24,217

 

 

 

 

 

 

 

23,906

 

 

 

 

 

 

 

24,389

 

 

 

 

 

 

 

23,809

 

 

 

 

 

Diluted

 

 

25,203

 

 

 

 

 

 

 

23,906

 

 

 

 

 

 

 

25,221

 

 

 

 

 

 

 

23,809

 

 

 

 

 

* Summations may not compute precisely due to rounding.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1) Includes share-based compensation expense as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of sales

 

$

804

 

 

 

 

 

 

$

731

 

 

 

 

 

 

$

1,641

 

 

 

 

 

 

$

1,461

 

 

 

 

 

Research and development

 

 

810

 

 

 

 

 

 

 

783

 

 

 

 

 

 

 

1,588

 

 

 

 

 

 

 

1,527

 

 

 

 

 

Selling, general and administrative

 

 

3,784

 

 

 

 

 

 

 

3,133

 

 

 

 

 

 

 

13,257

 

 

 

 

 

 

 

7,615

 

 

 

 

 

(2) Includes amortization of intangible assets expense as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of sales

 

$

647

 

 

 

 

 

 

$

647

 

 

 

 

 

 

$

1,294

 

 

 

 

 

 

$

1,294

 

 

 

 

 

Selling, general and administrative

 

 

2,766

 

 

 

 

 

 

 

2,766

 

 

 

 

 

 

 

5,533

 

 

 

 

 

 

 

5,533

 

 

 

 

 

 

Three and Six Months Ended February 26, 2021 as Compared to the Three and Six Months Ended February 28, 2020

Net Sales

Net sales increased by $32.0 million, or 11.8%, during the three months ended February 26, 2021 compared to the same period in the prior year, and by $51.6 million, or 9.5%, during the six months ended February 26, 2021 compared to the same period in the prior year. Net sales were positively impacted by higher SCSS product sales of $22.5 million, or an increase of 35.8%, and $13.9 million, or an increase of 10.1%, for the three and six-month period, respectively, primarily due to increased volume of sales with one of our largest customers in the SCSS segment. In addition, our sales of Brazil products and Specialty Memory increased by $5.4 million and $4.0 million, or 5.6% and 3.6%, respectively, for the three-month period, and by $16.6 million and $21.1 million, or 8.7% and 9.8%, respectively, for the six-month period, primarily due to higher DRAM revenue and higher average selling prices for mobile memory for Brazil and higher DRAM revenue for Specialty Memory product, resulting from a change in product mix.     

42


 

Cost of Sales

Cost of sales increased by $30.0 million, or 13.6%, during the three months ended February 26, 2021 compared to the same period in the prior year, and by $51.4 million, or 11.7%, during the six months ended February 26, 2021 compared to the same period in the prior year. The increase in the three and six-month periods was primarily due to higher cost of materials of $27.9 million and $48.3 million or 15% and 13%, respectively, due to the higher level of sales. Material costs of our Brazil products were negatively impacted in the three months ended February 26, 2021 due to a $4.3 million out-of-period adjustment related to import taxes in Brazil. For additional information, see Note 1(i) in our Notes to Unaudited Condensed Consolidated Financial Statements. Included in the cost of sales increases were favorable foreign exchange impacts of $2.4 million and $4.9 million for the three and six-month periods, respectively, due to locally sourced cost of sales in Brazil.     

Gross Profit

Gross margin decreased to 17.6% during the three months ended February 26, 2021 compared to 18.9% for the same period in the prior year, and decreased to 17.8% during the six months ended February 26, 2021 compared to 19.5% for the same period in the prior year, primarily due to higher material costs for our Brazil and Specialty Memory products, as well as the out-of-period Brazil adjustment.

Research and Development Expense

Research and development (“R&D”) expense decreased $5.9 million, or 39.8%, during the three months ended February 26, 2021 compared to the same period in the prior year, and $13.8 million, or 46.5%, during the six months ended February 26, 2021 compared to the same period in the prior year. The decrease was primarily due to $6.1 million and $14.0 million in the three and six-month periods, respectively, of Brazil financial credits resulting from amendments to the IT law implemented in April 2020.  For additional information, see Note 1(i) in our Notes to Unaudited Condensed Consolidated Financial Statements. Included in the R&D expense decreases were unfavorable foreign exchange impacts of $1.0 million and $3.0 million for the three and six-month periods, respectively.

Selling, General and Administrative Expense

Selling, general and administrative (“SG&A”) expense increased by $3.0 million, or 10.5%, during the three months ended February 26, 2021 compared to the same period in the prior year, and $7.5 million, or 12.1%, during the six months ended February 26, 2021 compared to the same period in the prior year. The increases were primarily due to higher share-based compensation expense of $0.7 million and $5.6 million in the three and six-month periods, respectively, resulting from awards acceleration and additional grants, as well as higher personnel-related and facilities expenses. For additional information, see Note 9 in our Notes to Unaudited Condensed Consolidated Financial Statements. Included in the SG&A expense increases were favorable foreign exchange impacts of $0.5 million and $1.1 million for the three and six-month periods, respectively.

Other Income (Expense)

Interest expense, net increased $0.2 million, or 5.2%, during the three months ended February 26, 2021 compared to the same period in the prior year, and decreased $1.1 million, or 13.0%, during the six months ended February 26, 2021 compared to the same period in the prior year, primarily due to lower interest expense resulting from the issuance of our convertible senior notes and the extinguishment of our term loans in the second quarter of fiscal 2020. For additional information, see Note 7 in our Notes to Unaudited Condensed Consolidated Financial Statements.

Other income (expense), net decreased by $10.9 million and $12.5 million for the three and six month periods, respectively, primarily due to $6.6 million extinguishment loss of long-term debt and $4.8 million mark-to-market losses on the capped calls in the second quarter of fiscal 2020, as well as foreign currency losses.

Provision for Income Taxes

Income tax expense includes a provision for federal, state and foreign taxes based on the annual estimated effective tax rate applicable to SMART, adjusted for certain discrete items which are fully recognized in the period they occur.

Provision for income taxes decreased by $0.1 million and increased by $2.8 million for the three and six months ended February 26, 2021, respectively, compared to the same period in the prior year, primarily due to the profits and related taxes in non-U.S. jurisdictions.  

As of February 26, 2021, SMART has a full valuation allowance for our net deferred tax assets associated with our U.S. operations. The amount of the deferred tax asset considered realizable could be adjusted if significant positive evidence increases.

43


 

Determining the consolidated provision for income tax expense, income tax liabilities and deferred tax assets and liabilities involves judgment. SMART calculates and provides for income taxes in each of the tax jurisdictions in which it operates, which involves estimating current tax exposures as well as making judgments regarding the recoverability of deferred tax assets in each jurisdiction. The estimates used could differ from actual results, which may have a significant impact on operating results in future periods.

Liquidity and Capital Resources  

 

  

 

Six Months Ended

 

 

 

February 26,

2021

 

 

February 28,

2020

 

 

 

(in thousands)

 

Cash provided by operating activities

 

$

55,990

 

 

$

48,601

 

Cash used in investing activities

 

 

(34,628

)

 

 

(9,272

)

Cash provided by (used in) financing activities

 

 

(30,874

)

 

 

11,842

 

Effect of exchange rate changes on cash and cash equivalents

 

 

(1,496

)

 

 

(7,450

)

Net increase (decrease) in cash and cash equivalents

 

$

(11,008

)

 

$

43,721

 

 

At February 26, 2021, we had cash and cash equivalents of $139.8 million, of which approximately $80.8 million was held outside of the United States.

In February 2020, we issued $250.0 million in aggregate principal amount of 2.25% convertible senior notes due 2026 for which we received proceeds of $243.1 million, net of issuance costs. We used $204.9 million for extinguishment of long-term debt and $21.8 million for purchasing privately-negotiated capped calls. For additional information, see Note 7 in our Notes to Unaudited Condensed Consolidated Financial Statements.

On March 1, 2021, as part of the acquisition of CreeLED, Inc., we paid Cree $50.0 million in cash and issued Cree a $125 million Purchase Price Note. Cree also has the potential to receive an earn-out payment of up to $125 million based on the revenue and gross profit performance of the LED Business during the Earnout Period with a minimum payment of $2,500,000, payable in the form of an Earnout Note. The Purchase Price Note and the Earnout Note, if earned and issued, will accrue interest at a rate of three-month LIBOR plus 3.0% with interest paid every three months, and one bullet payment of principal and all accrued and unpaid interest will be payable on each of the notes’ respective maturity dates. The Purchase Price Note will mature on August 15, 2023, and the Earnout Note will mature on the third anniversary of the completion of the Earnout Period.

We expect that our existing cash and cash equivalents, line of credit and cash generated by operating activities will be sufficient to fund our operations for at least the next twelve months. Our principal uses of cash and capital resources are acquisitions, debt service requirements as described below, capital expenditures, R&D expenditures and working capital requirements. We expect that future capital expenditures will focus on expanding capacity of our operations, expanding our R&D activities, manufacturing equipment upgrades, acquisitions and IT infrastructure and software upgrades. Cash and cash equivalents consist of funds held in demand deposit accounts and money market funds. We do not enter into investments for trading or speculative purposes.

During the six months ended February 26, 2021, cash provided by operating activities was $56.0 million. The primary factors affecting our cash flows during this period were $42.1 million of non-cash related expenses, $6.0 million change in our net operating assets and liabilities, and $7.9 million of net income. The $6.0 million change in net operating assets and liabilities consisted of a decrease of $10.1 million in accounts receivable and increases of $39.6 million of accounts payable and $6.3 million in accrued expense and other liabilities, offset by increases of $28.1 million in inventory and $19.1 million in prepaid expenses and other assets and a decrease of $2.8 million of operating lease liabilities. The decrease in accounts receivable was primarily due to timing of sales, and the increase in accounts payable was primarily due to timing of payments. The increase in inventory was primarily due to higher purchases for certain programs.

During the six months ended February 28, 2020, cash provided by operating activities was $48.6 million. The primary factors affecting our cash flows during this period were $44.6 million of non-cash related expenses and $13.5 million change in our net operating assets and liabilities, partially offset by $9.5 million of net loss. The $13.5 million change in net operating assets and liabilities consisted of increases of $4.5 million in accounts receivable and $45.6 million in inventory, and a decrease of $2.1 million of operating lease liabilities, offset by a decrease of $6.5 million in prepaid expenses and other assets and increases of $56.7 million of accounts payable and $2.5 million in accrued expense and other liabilities. The increase in accounts receivable was primarily due to timing of sales, while the increases in inventory and accounts payable were primarily due to the transition of inventory from contract manufacturers to the company due to our recent acquisitions, as well as higher purchases for certain programs.

Net cash used in investing activities during the six months ended February 26, 2021 was $34.6 million consisting primarily of purchases of property and equipment and deposits. Net cash used in investing activities during the six months ended February 28, 2020 was $9.3 million consisting primarily of purchases of property and equipment.  

Net cash provided by financing activities during the six months ended February 26, 2021 was $30.9 million, consisting primarily of $11.4 million proceeds from issuance of the FINEP loan and $5.6 million proceeds from issuance of ordinary shares from

44


 

share option exercises and employee share purchase plans, partially offset by $44.3 million payment for repurchase of ordinary shares and $3.6 million for withholding tax on restricted stock units. Net cash used in financing activities during the six months ended February 28, 2020 was $11.8 million, consisting primarily of $243.1 million proceeds from issuance of convertible notes and $3.0 million proceeds from issuance of ordinary shares from share option exercises and employee share purchase plans, partially offset by $204.9 million payment for extinguishment of long-term debt, $21.8 million purchase of capped calls, $7.2 million long-term debt payments for both the Amended Credit Agreement and the BNDES Credit Agreement and $0.4 million for withholding tax on restricted stock units.

There have been no material changes to contractual obligations previously disclosed in our Annual Report.

Off-Balance Sheet Arrangements

We do not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. In addition, we do not have any undisclosed borrowings or debt, and we have not entered into any synthetic leases. We are, therefore, not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in such relationships.

We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial conditions, net sales or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.

Recent Accounting Pronouncements

See Note 1 of our Notes to Unaudited Condensed Consolidated Financial Statements for information regarding the effect of recent accounting pronouncements on our financial statements.

Critical Accounting Policies

The preparation of financial statements and related disclosures 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 disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, we evaluate our estimates, including those listed below. We base our estimates on historical facts and various other assumptions that we believe to be reasonable at the time the estimates are made. Actual results could differ from those estimates.

Our critical accounting policies are as follows:

 

Revenue recognition;

 

Inventory valuation;

 

Income taxes;

 

Goodwill valuation;

 

Impairment of long-lived assets and long-lived assets to be disposed; and

 

Share-based compensation.

Our critical accounting policies are important to the portrayal of our financial condition and results of operations, and require us to make judgments and estimates about matters that are inherently uncertain. There have been no material changes to our critical accounting policies and estimates disclosed in “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates” and Note 1, Overview, Basis of Presentation and Significant Accounting Policies, in each case in our Annual Report.

 

45


 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Our exposure to market rate risk includes risk of foreign currency exchange rate fluctuations, changes in interest rates and translation risk.

Foreign Exchange Risks

We are subject to inherent risks attributed to operating in a global economy. Our international sales and our operations in foreign countries subject us to risks associated with fluctuating currency values and exchange rates. Because a portion of our sales are denominated in U.S. dollars, increases in the value of the U.S. dollar could increase the price of our products so that they become relatively more expensive to customers in a particular country, possibly leading to a reduction in sales and profitability in that country. A significant portion of the sales of our products are denominated in Brazil reais. In addition, we have certain costs that are denominated in foreign currencies, and increases in the value of the U.S. dollar could result in increases in such costs that could have a material adverse effect on our results of operations. Beginning in the first quarter of fiscal 2019, we entered into forward contracts to hedge a portion of our foreign exchange risk in Brazil.

As a result of our international operations, we generate a portion of our net sales and incur a portion of our expenses in currencies other than the U.S. dollar, particularly the Brazil reais. Approximately 35% of our net sales during six months ended February 26, 2021 and February 28, 2020, originated in reais. We present our condensed consolidated financial statements in U.S. dollars, and we must translate the assets, liabilities, net sales and expenses of a substantial portion of our foreign operations into U.S. dollars at applicable exchange rates. Consequently, increases or decreases in the value of the U.S. dollar may affect the value of these items with respect to our non-U.S. dollar businesses in our condensed consolidated financial statements, even if their value has not changed in their local currency. Our customer pricing and material cost of sales are based on U.S. dollars, as is the global market for memory products. Accordingly, the impact of currency fluctuations to our condensed consolidated statements of operations is primarily to our other costs of sales (i.e., non-material components) and our operating expenses as those items are typically denominated in local currency. Our condensed consolidated statements of operations are also impacted by foreign currency gains and losses recorded in Other income (expense), net arising from transactions denominated in a currency other than the functional currency of the respective subsidiary. These translations could significantly affect the comparability of our results between financial periods or result in significant changes to the carrying value of our assets, liabilities and equity. As a result, changes in foreign currency exchange rates impact our reported results.

During the six months ended February 26, 2021 and February 28, 2020, we recorded $0.2 million and $2.1 million, respectively, of foreign exchange losses.

Interest Rate Risk

We are subject to interest rate risk in connection with our short-term debt under the Amended Credit Agreement and ABL Credit Agreement as of February 26, 2021. Although we did not have any revolving balances outstanding as of February 26, 2021, the revolving facilities under the Amended Credit Agreement and ABL Credit Agreement provide for borrowings of up to $150 million that would also bear interest at variable rates. Assuming that we will satisfy the financial covenants required to borrow and that the revolving loans under the Amended Credit Agreement and ABL Credit Agreement were fully drawn and other variables are held constant, each 1.0% increase in interest rates on our variable rate borrowings would result in an increase in annual interest expense and a decrease in our cash flow and income before taxes of $1.5 million per year.

Item 4. Controls and Procedures

Limitation on Effectiveness of Controls

Any control system, no matter how well designed and operated, can provide only reasonable assurance as to the tested objectives. The design of any control system is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote. The inherent limitations in any control system include the realities that judgments related to decision-making can be faulty, and that reduced effectiveness in controls can occur because of simple errors or mistakes. Due to the inherent limitations in a cost-effective control system, misstatements due to error may occur and may not be detected.

46


 

Evaluation of Disclosure Controls and Procedures

Management is required to evaluate our disclosure controls and procedures, as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”). Disclosure controls and procedures are controls and other procedures designed to provide reasonable assurance that information required to be disclosed in our reports filed under the Exchange Act, such as this Quarterly Report on Form 10-Q, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include controls and procedures designed to provide reasonable assurance that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer as appropriate, to allow timely decisions regarding required disclosure. Based on our management’s evaluation (with the participation of our principal executive officer and principal financial officer), our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were not effective as of February 26, 2021, the end of the period covered by this interim report, due to a material weakness in our internal control over financial reporting.

As described in Item 9A “Controls and Procedures” in our Annual Report on Form 10-K/A for the year ended August 28, 2020, filed on April 6, 2021, management performed its assessment of the effectiveness of our internal control over financial reporting as of August 28, 2020 and concluded that our internal control over financial reporting as of that date was not effective because of the material weakness described below.

Inadequate and ineffective controls over accounting for import taxes

Our internal controls were not adequately designed to provide reasonable assurance that the timely accounting for import taxes, including the related financial statement disclosures, was recorded in accordance with generally accepted accounting principles in the United States of America. Specifically, upon the introduction of a new product or the commencement of importation of a new product in a particular country, we are required to assign a tax code that will determine, among other things, the tax rate on imports of these products. Beginning in 2015, we redesigned our internal controls surrounding the evaluation of new import tax codes to incorporate a review by an independent technical consultant, however, these redesigned controls were not applied to confirm the correctness of the codes on legacy products (being those products introduced or commencing importation prior to 2015) in a specific country, and, as a result, the incorrect import tax code on certain legacy products was not identified in a timely manner. This resulted in management not timely recording and paying for import taxes on certain legacy products.

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis. Management reevaluated the design and operating effectiveness of our internal control over financial reporting and concluded that our internal control over financial reporting as of August 28, 2020 was not effective due to the material weakness described above.

Remediation plans and steps taken

Following the identification of the foregoing material weakness, management commenced the development and execution of a remediation plan, which is ongoing. Management believes that the implementation of this plan will remediate the material weakness described above.

The following steps of the remediation plan are currently in varying stages of completion, and management may determine to enhance controls and/or implement additional controls as the implementation procedures are performed and testing of the operating effectiveness of the controls is completed:

 

The Company engaged an independent technical consultant to review the import tax codes assigned to our legacy products (being those products introduced or commencing importation prior to the process change adopted in 2015). As a result of the independent and internal review of import tax codes for a specific country, an incorrect code was identified and corrected in the second quarter of fiscal 2021, and management believes that the impact of the material weakness was limited to this single code.

 

The Company will enhance training for responsible personnel involved in determining import tax codes.

The Audit Committee of the Board of Directors of the Company has directed management to develop a plan and timetable for the implementation of the foregoing remedial measures (to the extent not already completed) and will monitor their implementation. Management expects these remedial actions and/or other actions related to this material weakness to be effectively implemented in fiscal year 2021.

In connection with management’s evaluation, the Company corrected the import tax code for certain legacy products prior to 2015, recorded an out-of-period adjustment in the second quarter of fiscal year 2021 to correct for underreported import tax costs, voluntarily disclosed to the taxing authority, and paid the underreported import tax and related interest.

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As of the date of this Quarterly Report on Form 10-Q, we have not fully remediated such material weakness and as a result, our Chief Executive Officer and Chief Financial Officer have concluded that a material weakness continues to exist as of the end of the period covered by this Quarterly Report on Form 10-Q.

 

 

 

Changes in Internal Control over Financial Reporting

Except for the identified material weakness described above, there were no changes in our internal control over financial reporting during the quarter ended February 26, 2021, which were identified in connection with management’s evaluation required by paragraph (d) of Rules 13a-15 and 15d-15 under the Exchange Act, that have materially affected or are reasonably likely to materially affect our internal control over financial reporting. 

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PART II. OTHER INFORMATION

Information with respect to this item may be found in Note 10, Commitments and Contingencies, in our Notes to Unaudited Condensed Consolidated Financial Statements included in Part I, Item 1, of this Quarterly Report on Form 10-Q, which information is incorporated herein by reference. 

Item 1A. Risk Factors

Other than as described below, there have been no material changes to the risks described in Part I, Item 1A, "Risk Factors," in our Annual Report on Form 10-K for our fiscal year ended August 28, 2020.  These risk factors could materially and adversely affect our business, financial condition and results of operations, and the market price of our ordinary shares could decline. These risk factors do not identify all risks that we face – our operations could also be affected by factors that are not presently known to us or that we currently consider to be immaterial to our operations. Due to risks and uncertainties, known and unknown, our past financial results may not be a reliable indicator of future performance and historical trends should not be used to anticipate results or trends in future periods.

We face risks related to the novel coronavirus (COVID-19) as well as other pandemics, which could significantly disrupt our operations, including our manufacturing, research and development, and sales and marketing activities, and which could have a material adverse impact on our business, financial condition, operating results and cash flows.

The outbreak of coronavirus disease 2019 (“COVID-19”) has resulted in over a hundred million infections and over two and a half million deaths worldwide, as of the date of filing of this Quarterly Report, and continues to spread in the United States, Asia, Europe and Brazil, the major markets in which we operate. The COVID-19 pandemic has resulted in significant governmental measures being implemented to control the spread of the virus, and our operations as well as the operations of our suppliers, customers and third-party sales representatives and distributors have been and will continue to be disrupted by varying individual and governmental responses to COVID-19 around the world such as business shutdowns, stay-at-home directives, travel restrictions, border closures, and other travel or health-related restrictions as well as by absenteeism, quarantines, self-isolations, office and factory closures, delays on deliveries, and disruptions to ports and other freight infrastructure. These restrictions have caused consumers and businesses to reduce their activities and their spending, have caused a slowdown in the global economy and have had, and may continue to have, a negative impact on our sales and marketing, and our product development activities. While we have not yet experienced a significant disruption of our operations as a result of the COVID-19 pandemic, the pandemic has resulted in reduced sales volumes of certain product lines within our SCSS business in the second half of fiscal 2020 and if these conditions continue, or if we have an outbreak in any of our facilities, such reduced sales volumes may continue or worsen and we may, among other issues, experience, in any or all product lines, delays in product development, a decreased ability to support our customers, disruptions in sales and manufacturing activities and overall reduced productivity each of which could have a negative impact on our ability to meet customer commitments and on our revenue and profitability.

While initially we did not experience a major disruption in our supply chain as a result of the COVID-19 pandemic, the reduction of investment in new capacity due to the pandemic, coupled with strong demand to expand delivery and logistics, internet and cloud services as well as a rebound in economic conditions and general demand at a pace faster than expected has resulted in significant supply shortages that may impact our ability to manufacture products for our customers and may result in rising prices of the materials we need to manufacture our products. We may not be able to pass on these rising costs to our customers which could result in a negative impact to our gross margins. Furthermore, if there is a significant outbreak or if travel restrictions or stay-at-home or work remote or from home conditions or other governmental or voluntary restrictions relating to the COVID-19 pandemic significantly impact our suppliers’ ability to manufacture or deliver raw materials or provide key components or services, we could experience more delays or reductions in our ability to manufacture and ship products to our customers. While certain segments of our customer base are experiencing strong demand, the pandemic may negatively impact the demand for other segments for our customer base or those customers’ ability to manufacture their products, which could reduce their demand for our products or services. While we do not know and cannot quantify specific impacts, we expect we may be negatively affected if we continue to encounter manufacturing or supply chain problems, reductions in demand due to disruptions in the operations of our customers or their end customers, disruptions in local and global economies, volatility in the global financial markets, overall reductions in demand, restrictions on the export or shipment of our products or other COVID-19 ramifications.

The impact of the effects of COVID-19 on our business may worsen in the future. We source our materials from different parts of the world that have been affected by the virus and if the impacts of the pandemic worsen in any of these geographies, it could have an adverse impact on our supply chain and our ability to get the materials we need to build our products.

Government shutdown orders or stay-at-home directives or individual decisions to reduce work and commercial activities, or an outbreak among or quarantine of the employees in any of our facilities, could cause significant interruptions to, or temporary closures of our operations. Since a large percentage of our production is done in a small number of facilities, a disruption to operations in any one facility could have a material impact on our business.

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In addition, COVID-19 has in the short-term, and, together with other disease outbreaks, may over the longer term, adversely affect the economies and financial markets within many countries and regions, including in the United States, Brazil, Asia and Europe, which are the primary geographic areas in which we conduct business, resulting in a significant economic downturn.

Moreover, to the extent the COVID-19 pandemic or any worsening of the global business and economic environment as a result thereof, continues to adversely affect our business and financial results, it may also have the effect of heightening or exacerbating many of the other risks described in these Risk Factors, such as those relating to factors affecting fluctuations in our operating results from quarter to quarter, worldwide economic and political conditions, changes in the political or economic environments in Brazil, Malaysia or other international geographies in which we do business, reliance on a limited number of customers for a significant portion of our net sales, inventory write-downs or write-offs, our dependence on a small number of sole or limited source suppliers, our ability to maintain manufacturing efficiency, disruption of our operations at our manufacturing facilities, our reliance on third-party sales representatives to assist in selling our products, risks generally associated with international business operations, risks related to foreign currency exchange rates, our high level of indebtedness, including our need to generate sufficient cash flows to service our indebtedness and our ability to comply with the covenants contained in the agreements that govern our indebtedness and our ability raise additional funds when and as needed.

There can be no assurance that negative impacts resulting from the wide-ranging effects of COVID-19 will be offset by increased sales in subsequent periods.

We are unable to accurately predict the impact that COVID-19 will have on future periods due to various uncertainties and future developments, including the ultimate geographic spread of the virus, the severity of the disease, the duration of the outbreak, the occurrence of other epidemics, the imposition of related public health measures and travel and business restrictions or other actions that may be taken by governmental authorities in an effort to contain or treat the virus, all of which, together with the disruptions and other factors discussed above could have a material adverse effect on our customer relationships, operating results, cash flows, financial condition and have a negative impact on our stock price.

We have identified a material weakness in our internal control over financial reporting and may identify additional material weaknesses in the future or otherwise fail to maintain an effective system of internal controls, which could lead investors to lose confidence in the accuracy and completeness of our financial reports.

As a public company, we are required to maintain internal control over financial reporting and to report any material weaknesses in such internal control. Section 404 of the Sarbanes-Oxley Act of 2002 requires that we evaluate and determine the effectiveness of our internal control over financial reporting. This assessment includes disclosure of any material weaknesses in our internal control over financial reporting identified by our management or by our independent registered public accounting firm. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim consolidated financial statements will not be prevented or detected on a timely basis.

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control— Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 Framework). In connection with their evaluation, management has identified a material weakness in the design of internal controls that are meant to provide reasonable assurance that the timely accounting for import taxes, including the related financial statement disclosures, was recorded in accordance with generally accepted accounting principles in the United States of America. In Part I, Item 4 in this Form 10-Q and in Part II, Item 9A of our Form 10-K/A filed April 6, 2021, we reported this material weakness in our internal controls over financial reporting.

 While we have taken measures to remediate the identified material weakness, we cannot provide assurance that the remediation measures will be successful. Although we believe our remediation measures and historical efforts have strengthened our internal control over financial reporting, we cannot be certain that our revised internal control practices will ensure that we will have or maintain adequate internal control over financial reporting in future periods or that we will not identify additional material weaknesses in future periods, and we cannot be certain that we will be successful in preventing or remediating future significant deficiencies or material weaknesses in internal control over financial reporting if significant deficiencies or material weaknesses are identified.

Effective internal control over financial reporting is necessary for us to provide reliable and timely financial reports and, together with adequate disclosure controls and procedures, are designed to reasonably detect and prevent fraud. Our failure to implement and maintain effective internal control over financial reporting could adversely impact our ability to report our financial results accurately and on a timely basis which could result in errors in our consolidated financial statements and/or result in a restatement of our consolidated financial statements. These activities could cause us to fail to meet our reporting obligations and could cause a decline in the trading price of our ordinary shares. If our financial statements are not accurate, investors may not have a complete understanding of our operations. We may also incur significant costs and diversion of management resources in an effort to enhance our controls and procedures. Any such diversion of management’s attention from other business concerns could harm our results of operations. In addition, we could become subject to investigations by the stock exchange on which our ordinary shares are listed, the SEC or other regulatory authorities, which could require additional financial and management resources.

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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Share repurchase activity during the three months ended February 26, 2021 was as follows:

 

Period

 

Total Number of

Ordinary Shares

Purchased (1)

 

 

Average Price

Paid per

Ordinary Share

 

 

Total Number of

Ordinary Shares Purchased as

Part of Publicly

Announced

Plans or Programs

 

 

Maximum Number of Ordinary Shares that

May Yet Be

Purchased

Under the Plans or Programs

November 28, 2020 – December 27, 2020

 

 

 

 

$

 

 

 

 

 

 

December 28, 2020 – January 27, 2021

 

 

1,100,000

 

 

$

40.30

 

 

 

 

 

 

January 28, 2021 – February 26, 2021

 

 

 

 

$

 

 

 

 

 

 

Total

 

 

1,100,000

 

 

$

40.30

 

 

 

 

 

 

(1) On January 7, 2021, the Company agreed to repurchase an aggregate of 1,100,000 of its ordinary shares, $0.03 par value per share, from Silver Lake Partners III Cayman (AIV III), L.P., Silver Lake Technology Investors III Cayman, L.P., Silver Lake Sumeru Fund Cayman, L.P. and Silver Lake Technology Investors Sumeru Cayman, L.P. (collectively, “Silver Lake”) at a purchase price of $40.30 per share (the “Purchase Price”), for aggregate consideration of approximately $44.3 million, in a privately negotiated transaction (the “Repurchases”). The Purchase Price represented a discount to the $41.38 closing price of the Company’s ordinary shares on the Nasdaq Global Select Market on January 7, 2021 of 2.61%. The Company used available cash to finance these Repurchases. The Repurchases were approved by a committee of the Board of Directors of the Company composed solely of independent directors that are not affiliated with Silver Lake. The Repurchases closed on January 15, 2021.

 

Item 3. Defaults Upon Senior Securities

 

None.

Item 4. Mine Safety Disclosures

 

Not applicable.

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Item 6. Exhibits

 

Exhibit No.

 

Exhibit Title

 

 

 

    10.2*

 

Second Amendment to Lease, dated as of December 3, 2020, between SMART Modular Technologies, Inc. and Thomson Logistics Assets, LLC.

 

 

 

    10.3

 

Loan, Guaranty and Security Agreement dated as of December 23, 2020, among SMART Modular Technologies, Inc., SMART Embedded Computing, Inc., and Penguin Computing, Inc., as borrowers, the financial institutions party thereto as Lenders, and Bank of America, N.A. as the agent for the lenders (incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K filed with the SEC on December 29, 2020).

 

 

 

    10.4***

 

SMART Global Holdings, Inc. 2021 Inducement Plan (effective as of February 15, 2021) (incorporated by reference to Exhibit 99.1 of SMART’s Form 8-K, as filed with the Securities and Exchange Commission on January 22, 2021, Commission File No. 00-38102).

 

 

 

    10.5*

 

Form of Restricted Share Unit Award Agreement Under the SMART Global Holdings, Inc. 2021 Inducement Plan.

 

 

 

    31.1*

 

Certification of Principal Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002.

 

 

 

    31.2*

 

Certification of Principal Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002.

 

 

 

    32.1**

 

Certification of Principal Executive Officer pursuant 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

 

    32.2**

 

Certification of Principal Financial Officer pursuant 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

 

  101.INS

 

Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because XBRL tags are embedded within the Inline XBRL document.

 

 

 

  101.SCH

 

Inline XBRL Taxonomy Extension Schema Document

 

 

 

  101.CAL

 

Inline XBRL Taxonomy Extension Calculation Linkbase Document

 

 

 

  101.LAB

 

Inline XBRL Taxonomy Extension Label Linkbase Document

 

 

 

  101.PRE

 

Inline XBRL Taxonomy Extension Presentation Linkbase Document

 

 

 

  101.DEF

 

Inline XBRL Taxonomy Extension Definition Linkbase Document

 

 

 

  104

 

Cover Page Interactive Data File (formatted as inline XBRL with applicable taxonomy extension information contained in Exhibits 101)

 

*

Filed herewith.

**

Furnished herewith.

***    Incorporated by reference.

52


 

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

SMART GLOBAL HOLDINGS, INC.

 

 

 

 

Date: April 6, 2021

By:

 /s/ MARK ADAMS

 

 

 Name:

 Mark Adams

 

 

 Title: 

 President and Chief Executive Officer

(Principal Executive Officer and Director)

 

Date: April 6, 2021

By:

 /s/ KEN RIZVI

 

 

 Name:

 Ken Rizvi

 

 

 Title: 

 Senior Vice President and Chief Financial Officer

 (Principal Financial and Accounting Officer)

 

53