Penguin Solutions, Inc. 10-K

10-K 1 sgh-10k_20200828.htm 10-K sgh-10k_20200828.htm UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 FORM 10‑K (Mark One) ☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended August 28, 2020 or ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to 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 if the registrant is a well‑known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒ Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒ 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 Act). Yes ☐ No ☒ The aggregate market value of the voting and non-voting common equity held by non-affiliates of the Registrant, based on the closing price of the shares of common stock on The NASDAQ Stock Market on February 28, 2020 (the last business day of the registrant’s most recently completed second fiscal quarter), was $376.1 million. Shares of common stock held by each executive officer, director, and their affiliated holders have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes. As of October 2, 2020, the registrant had 24,419,782 ordinary shares outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant’s Proxy Statement for the 2020 General Meeting are incorporated herein by reference in Part III of this Annual Report on Form 10-K to the extent stated herein. Such proxy statement will be filed with the Securities and Exchange Commission within 120 days of the registrant’s fiscal year ended August 28, 2020 . SMART GLOBAL HOLDINGS, INC. TABLE OF CONTENTS Page Part I. Item 1. Business 4 Item 1A. Risk Factors 15 Item 1B. Unresolved Staff Comments 55 Item 2. Properties 56 Item 3. Legal Proceedings 57 Item 4. Mine Safety Disclosures 58 Part II. Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 59 Item 6. Selected Financial Data 61 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 65 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 81 Item 8. Financial Statements and Supplementary Data 81 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 82 Item 9A. Controls and Procedures 82 Item 9B. Other Information 84 Part III. Item 10. Directors, Executive Officers and Corporate Governance 84 Item 11. Executive Compensation 84 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 84 Item 13. Certain Relationships and Related Transactions, and Director Independence 84 Item 14. Principal Accounting Fees and Services 84 Part IV. Item 15. Exhibits, Financial Statement Schedules 85 Item 16. Form 10-K Summary 85 SIGNATURES 91 CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS This Annual Report on Form 10-K (“Annual Report”) contains 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, which statements involve substantial risks and uncertainties. Forward-looking statements generally relate to future events or our future financial or operating performance. In some cases, you can identify forward-looking statements by the use of forward-looking words such as “anticipate,” “believe,” “could,” “expect,” “should,” “plan,” “intend,” “estimate” and “potential,” among others. Forward-looking statements appear in a number of places in this Annual Report and include, but are not limited to, statements regarding our intent, belief or current expectations. Forward-looking statements are based on our management’s beliefs and assumptions and on information currently available to our management. Such statements are subject to risks and uncertainties, and actual results may differ materially from those expressed or implied in the forward-looking statements due to various factors, including, but not limited to, those identified under the section entitled “Item 1A. Risk Factors” in this Annual Report. These risks and uncertainties include factors relating to: • the losses we have experienced in the past and may experience in the future; • the unpredictable fluctuation of our operating results from quarter to quarter; • the highly cyclical markets in which we compete have experienced severe downturns; • declines in memory component prices and average selling prices that may cause declines in our net sales and gross profit; • worldwide economic and political conditions in Brazil or other countries, as well as other factors may adversely affect our operations and cause fluctuations in the demand for our products; • our dependence on growth in the memory market in Brazil, which could cease or contract; • the dependence of our sales and profit margins in Brazil on the continuing existence of local content requirements for electronics products; • the dependence of a significant portion of our net sales on the continuing existence of, and demand from, a limited number of key customers; • the amount of corporate income and excise and import taxes we pay that may increase significantly if tax incentives or tax holiday arrangements in Brazil or Malaysia are discontinued or if our interpretations and assumptions with respect to such tax incentives or tax holiday arrangements are incorrect; • the negative impact on macro-economic conditions, our supply chain, the demand for our products and our overall operations as a result of the novel coronavirus (COVID-19); • other factors that may affect our financial condition, liquidity and results of operations; and • other risk factors discussed under “Item 1A. Risk Factors.” Forward-looking statements speak only as of the date they are made, and we do not undertake any obligation to update them in light of new information or future developments or to release publicly any revisions to these statements in order to reflect later events or circumstances or to reflect the occurrence of unanticipated events, except as otherwise required by the rules and regulations of the Securities and Exchange Commission. 2 ABOUT THIS ANNUAL REPORT Unless otherwise indicated or the context otherwise requires, all references in this Annual Report on Form 10-K to “SMART Global Holdings” or the “Company,” “Registrant,” “we,” “our,” “ours,” “us” or similar terms refer to SMART Global Holdings, Inc., or SMART Global Holdings, together with its subsidiaries, and, where the context requires, our predecessor entities. We use a 52- to 53-week fiscal year ending on the last Friday in August. Unless the context indicates otherwise, whenever we refer in this Annual Report to a particular year, with respect to ourselves, we mean the fiscal year ending in that particular calendar year. Financial information for two of our subsidiaries, SMART Modular Technologies Indústria de Componentes Eletrônicos Ltda., or SMART Brazil, and SMART Modular Technologies do Brasil Indústria e Comércio de Componentes Ltda., or SMART do Brazil, is included in our consolidated financial statements on a one-month lag because their fiscal years begin August 1 and end July 31. All references herein to the “real,” “reais” or “R$” are to the Brazilian real. All references herein to “U.S. dollars,” “dollars” or “$” are to U.S. dollars. Solely for the convenience of the reader, we have translated certain amounts in this Annual Report from reais into U.S. dollars using the exchange rate as reported by the Banco Central do Brasil as of July 31, 2020 of R$5.2033 to $1.00. These translations should not be considered representations that any such amounts have been, could have been or could be converted into U.S. dollars at that or at any other exchange rate as of that or any other date. In addition, translations should not be construed as representations that the real amounts represent or have been or could be converted into U.S. dollars as of that or any other date. 3 Part I. Item 1. Business Overview We are a leading designer and manufacturer of electronic products focused in memory and computing technology areas. We specialize in application specific product development and support for customers in enterprise, government and original equipment manufacturer, or OEM, markets. We support our customers with our worldwide manufacturing and supply chain management capabilities. We operate in three primary product areas: 1. Specialty Memory Products 2. Brazil Products 3. Specialty Compute and Storage Solutions In specialty memory products, we are a global leader serving the electronics industry for over 30 years. We have a leading market position worldwide as measured by revenue. We work closely with OEM customers to develop solutions which incorporate customer-specific requirements. Our products are designed-in by OEMs in the industrial, defense, networking and communications, enterprise storage and computing, and other vertical markets. We also offer customized, integrated supply chain services to enable our customers to better manage supply chain planning and execution, reduce costs and increase productivity. Our supply chain services are based on our proprietary software platform that we developed and integrated with our customers’ respective procurement management systems as well as our suppliers’ distribution management systems. In Brazil we have established a leading market position, as measured by market share, where we are the largest in-country manufacturer of memory and our products are designed-in by OEM customers for desktops, notebooks and servers, as well as mobile memory for smartphones. In this market, we process imported wafers and die and we cut, package and test them to create dynamic random access memory, or DRAM, modules and other DRAM and Flash-based products. We have a strategic, long-term relationship with a global memory wafer supplier that has provided us with a stable source of competitively priced wafers for the Brazil market. The relationship also provides our supplier with access to that market through our in-country infrastructure and capabilities. In our Specialty Compute and Storage Solutions, or SCSS, product group, we have expanded our serviceable markets into areas requiring specialized computing platforms in artificial intelligence, or AI, machine learning, or ML, advanced modeling and high performance computing, or HPC. Penguin Computing provides solutions to Tier 1 and a broad base of secondary customers in the financial services, energy, government, social media and education markets. We expanded SCSS in July 2019 to include embedded and wireless computing products through the acquisitions of Artesyn Embedded Computing, Inc., or AEC, and Inforce Computing, Inc., or Inforce. The AEC acquisition brought more than 30 years of experience with the design and manufacturing of standard and custom embedded computing products specializing in highly reliable, long life solutions for a range of customers in defense, telecommunications, network edge and industrial applications. Inforce is a leading system-on-module, or SOM; single board computer, or SBC; supplier supporting leading customers in IoT endpoint applications across industrial, digital health and smart city/building markets. After completion of these acquisitions, we changed the name of AEC to SMART Embedded Computing, Inc., or SMART EC, and changed the name of Inforce to SMART Wireless Computing, Inc., or SMART Wireless. Our Products and Services Specialty Memory Products In our specialty memory products business, we focus on the design and manufacture of application-specific products, technical support and value-added testing services that differ from the core focus of standard memory module providers. We collaborate closely with our global OEM customers throughout their design process and across multiple projects to create solutions for demanding applications with differentiated requirements, such as specific form factors, higher density, lower power, specific firmware or greater durability and reliability compared to standard solutions. We target opportunities where we believe we can be a primary supplier of longer-lifecycle solutions to OEM customers for diverse and growing end markets within the industrial, defense, networking and 4 communications, and enterprise storage and computing markets as well as other vertical markets. In this business, we offer an extensive portfolio of over 2,000 products available in standard and rugged formats. We offer an extensive lineup of DRAM modules utilizing a wide range of DRAM technologies from legacy Synchronous DRAM to double data-rate, or DDR, DDR2, DDR3 and leading edge, high-performance DDR4 DRAM devices. These technologies are incorporated into enterprise memory and hybrid memory solutions in standard and rugged formats. These modules encompass a broad range of form factors and functions, including dual in-line memory modules, or DIMMs, nonvolatile DIMMs, load reduced DIMMs, registered DIMMs, unbuffered DIMMs, small outline dual in-line memory modules, and mini-DIMMs and XR-DIMMs for industrial and defense, networking and communications, enterprise storage and computing, and other vertical markets. These memory modules come in configurations of up to 288 pins and densities of up to 128 gigabytes. We support leading-edge and emerging interconnect standards such as Gen-Z and OpenCAPI with our Gen-Z Memory module (ZMM) and Differential DIMM (DDIMM). We utilize advanced printed circuit board and device packaging/stacking technologies to achieve cost-effective, high-density solutions. We also develop specialized memory module designs based on specific OEM requirements. Our products are designed to meet the quality requirements of enterprise class systems pursuant to stringent specifications required by various high-speed applications. We also design and manufacture embedded and removable Flash memory products in a variety of form factors and capacities incorporated into storage and hybrid memory solutions in standard and rugged formats. Our wide range of Flash memory products includes Serial Advanced Technology Attachment, or SATA, and PCIe NVMe products in 2.5” enclosures, M.2 and other module form factors. We also offer Flash component products such as embedded MultiMediaCard, or eMMC, and embedded and removal products in USB, CompactFlash and SD/microSD Card configurations. Our Flash capabilities include application-specific and customized firmware development. We also offer supply chain services, including procurement, logistics, inventory management, temporary warehousing, programming, kitting and packaging services. We tailor our supply chain service offerings to meet the specific needs of our customers to enable our customers to manage supply chain planning and execution, which reduces costs and increases productivity. Our supply chain services are based on our proprietary software platform that we develop, which is then integrated with our customers’ respective procurement management systems as well as our suppliers’ distribution management systems. Our global footprint allows us to provide these services to our customers and their manufacturing partners in many regions of the world. Our global inventory management capabilities allow us to manage a vast array of customer and supplier part numbers across our worldwide manufacturing and logistics hubs, helping our customers minimize inventory levels while maintaining reliable delivery and availability of supply. Brazil Products In Brazil we manufacture DRAM modules for desktops, notebooks and servers, where local manufacturing requirements provide substantial financial incentives to our customers to procure locally manufactured memory modules. We have leveraged our experience and infrastructure in Brazil and now process, dice, package and test imported wafer products to create DRAM and Flash components. These capabilities have enabled us to significantly expand our product offering to add mobile memory products, primarily for smartphones. The expanded product offering includes mobile or low power DRAM, eMMC products, and embedded multi-chip package, or eMCP products for smartphones. We also have continued to build upon our success and are now expanding to include products for the IoT market. Specialty Compute and Storage Solutions Through Penguin Computing we offer specialty compute and storage system solutions to customers in a broad set of verticals including financial services, energy, government, social media and education end markets. We provide a broad portfolio of hardware and software products including solutions based on the Open Compute Project, or OCP. Our products include servers, software, integrated turn-key clusters, enterprise-grade storage, and bare metal HPC, all available in hardware or cloud-based solutions via Penguin Computing® On-Demand™ (POD™). Our product offering includes our Open Compute Tundra Extreme Scale products to solve technical challenges. We also provide turn-key storage solutions that provide power and flexibility with hardware optimized for software-defined storage based upon our Frostbyte™ storage platform. Our rackmount servers and GPU 5 accelerated computing platforms give customers powerful tools to implement their AI and ML advanced modeling and high performance computing applications. Complementing our compute, storage and networking hardware solutions is our Scyld Software line of cloud and cluster management software. These products provide advanced capabilities for management of HPC clusters from department-level systems to supercomputers. In addition, they enable customers to provide their own HPC cloud with remote access via our proprietary Cloud Workstation browser-based solution. Our SMART EC products, which are now part of SCSS, provide advanced computing solutions and low profile embedded computing solutions. Building on its long heritage, SMART EC is a well-recognized, leading provider of advanced computing solutions and professional services. Our high-end advanced computing system solutions include application-ready platforms, SBCs, enclosures, blades, enabling software, edge servers and network accelerator cards. SMART EC’s advanced computing board and system solutions include ATCA, VME, PCIe, rackmount server and failsafe products. The target markets for these products are defense, telecommunications infrastructure, industrial, network edge computing, and transportation applications. SMART Wireless products, which are also part of SCSS, include low profile wireless computing modules such as SOMs and SBCs for wireless computing endpoint applications. We offer standard and custom solutions, along with development boards and services for all forms of connected devices targeting IoT endpoint applications such as smart city, digital health, and smart office. Manufacturing and Test Manufacturing We have manufacturing facilities in Atibaia, Brazil, Newark, California and Penang, Malaysia. These manufacturing facilities have been ISO 9001:2015, ISO 14001:2015 and ISO 45001:2018 certified. We also have a test and integration facility in Tempe, Arizona for SMART EC and other products as well as a manufacturing and integration facility in Fremont, California where assembly and test of our Penguin Computing products is done. Additionally, we are a member of the Responsible Business Alliance, or RBA, and our manufacturing facilities are compliant with the RBA Code of Conduct which is increasingly a business requirement of our customers. We believe that our manufacturing operations for specialty memory products for OEM customers have benefited from our many years of design experience and our existing library of proven designs which stress high manufacturability and quality. Over 30 years of manufacturing experience enables us to quickly move from manufacturing initiation to full production volumes of new products, which is paramount in helping our customers achieve rapid time-to-market for their new product introductions. As a result of our design efficiencies, high level of automation and expertise in utilizing advanced manufacturing processes, we achieve high manufacturing yields and reduced direct labor costs and offer our customers quick turnaround of both small and large production orders, which is a key factor in enabling our build-to-order model. While we do not own or operate wafer fabs, we have capabilities for subsequent stages of the product manufacturing cycle. Our manufacturing capabilities in Brazil consist of receiving unmounted integrated circuits, or ICs, in wafer form from third-party wafer fabs, preparing and packaging the ICs into semiconductor components, testing the components, and in some cases placing these components on substrates or printed circuit boards to make modules or multi-chip packages. Our advanced manufacturing capabilities have enabled us to become the largest local manufacturer, as measured by market share, of DRAM components and DRAM modules for the desktop, notebook and server markets in Brazil, as well as various Flash-based products, including eMCP and eMMC products for the mobile phone market. Through our investments and experience in Brazil, we have developed expertise in semiconductor technology and advanced manufacturing and test that allows us to manufacture products with shrinking geometries and increasing complexity. We have made significant capital investments to expand our manufacturing and test capabilities and operate at a high level of efficiency. In our SCSS products, we have utilized two primary methods of fulfilling demand for products: building products to order and configuring products to order in each case using components and subassemblies that we acquire from a wide range of vendors. At Penguin Computing, we have developed capabilities for design and development of large scale systems and dense HPC clusters that have significant power requirements with manufacturing and test for our HPC products being done in Fremont, California. At SMART EC and SMART Wireless, we have developed capabilities for design and development of a wide range of embedded and wireless 6 computing products which we assemble or manufacture in our manufacturing facilities in Tempe, Arizona, Newark California and Penang, Malaysia. Product testing is an important aspect of our manufacturing operations and we believe that we have established substantial technical expertise in the testing of products for high-end applications. Our extensive testing capabilities not only help to ensure a low defect rate, but they also enable us, in certain situations, to sell specialized testing as an additional service. We design customer specific testing processes that differ from the core focus of standard providers. We have achieved stringent quality targets across a broad spectrum of system applications and customer-specific designs. Our staff includes experienced test engineers who have developed proprietary testing routines and parameters which, combined with our advanced test equipment, enable us to diagnose problems in components as well as in system design, and enable us to characterize the performance of new products and to provide high quality products in volume. We employ extensive software-based electrical and thermal simulations and test our designs on high-end functional testers utilizing a broad set of test suites. These tests are designed to meet the quality requirements of enterprise class systems pursuant to stringent specifications required by various high speed and high compute applications. We also conduct design verification testing of hardware and firmware as well as system integration and reliability testing. We work to continually improve our test routines and associated software and for our specialty memory products, we have developed a high-volume, fully automated reliability testing and screening capability substantially beyond standard industry practices that enables us to reduce the occurrence of early life failures and weak module fallout which can save our customers from the often significant expenses associated with replacing products that fail after their field deployment. Customers We believe our customers rely on us as a strategic supplier due to our application-specific products, quality and technical support, our global footprint and, in Brazil, our ability to provide locally manufactured products. We also provide customized, integrated supply chain services to certain OEM customers to assist them in the management and execution of their procurement processes. We believe our close collaboration with customers, customer-specific designs, long-lifecycle solutions and proprietary supply chain services create significant customer attachment. We sell our products and solutions directly to a diversified base of local and global OEM, enterprise and government customers. Our specialty memory products are sold primarily to OEM customers in industrial, defense, networking and communications, enterprise storage and computing, as well as other vertical markets. In SCSS, we sell Penguin Computing products to enterprise and government customers in financial services, energy, defense, social media and education end markets and we sell SMART EC products to OEM customers in defense, telecommunications infrastructure, industrial, network edge computing and transportation markets., In SMART Wireless, we sell products to OEMs in IoT endpoint applications such as smart city, digital health, and smart office markets. In Brazil, we sell to OEM customers in computing and mobile products. Overall, we served more than 800 end customers in fiscal 2020. In fiscal 2020, 2019 and 2018, sales to our ten largest end customers (including sales to contract manufacturers or ODMs at the direction of such end customers) accounted for 66%, 73% and 84% of net sales, respectively. Of our end customers, Samsung Electronics Co., Ltd., or Samsung, (for whom all sales are direct sales) accounted for 17%, 18% and 34% of net sales in fiscal 2020, 2019 and 2018, respectively; Nutanix, Inc., or Nutanix, accounted for 11% of net sales in fiscal 2020; Cisco Systems, Inc., or Cisco, accounted for 11% and 12% of net sales in fiscal 2019 and 2018, respectively; Lenovo Group Limited, or Lenovo, accounted for 13% and 11% of net sales in fiscal 2019 and 2018, respectively; and Dell Technologies Inc., or Dell, accounted for 10% of net sales in fiscal 2018. Direct sales to Flex accounted for 14%, 17% and 13% of net sales in fiscal 2020, 2019 and 2018, respectively. During these periods, no other customers accounted for more than 10% of our net sales. Our products are manufactured on a build-to-order basis. Our sales are made primarily pursuant to customer purchase orders and are not based on long-term supply agreements. Accordingly, we have limited backlog and we do not believe our backlog is material or indicative of anticipated net sales. 7 Suppliers To address the needs of our customers, we have developed and maintained relationships with leading semiconductor suppliers located in Asia, Europe and the Americas. Our semiconductor suppliers include many of the world’s largest memory manufacturers including Samsung Semiconductor, Inc., or Samsung, Micron Technology, Inc., or Micron, SK Hynix, Inc., or SK Hynix, and Kioxia (formerly Toshiba). They also include some of the world’s largest providers of computing, communications and graphics processers including Intel Corporation, or Intel,, Advanced Micro Devices, Inc., or AMD, Nvidia Corporation, or Nvidia and Qualcomm Incorporated, or Qualcomm; as well as providers of subsystems including Intel and Giga-Byte Technology Co., Ltd., or Giga-Byte; networking products including Artista Networks, Inc., or Artista, and Mellanox Technologies, Ltd., or Mellanox; and suppliers of software products including Red Hat, Inc., or Red Hat. We frequently work jointly with our suppliers in bidding for customers’ design-in opportunities. We also work closely with our suppliers to better ensure that materials are available and delivered on time. Our established global network of materials sourcing helps to ensure that our pricing remains competitive and that we are able to provide a stable source of supply for our customers. We believe that our longstanding relationships with leading suppliers put us in a favorable position to procure sufficient quantities of materials, including during periods of industry shortages. Our flexible and responsive global manufacturing capabilities, inventory management systems and global IT system allow us to cost-effectively move materials from one site to another and often deploy what might otherwise be excess inventory among other products and customers. We purchase almost all of our materials, including wafers used in our memory products in Brazil, from our suppliers on a purchase order basis and generally do not have long-term commitments from suppliers. Sales, Support and Marketing We primarily sell our products directly to global OEMs, enterprise, government and other end customers located across North America, Latin America, Asia and Europe. Our sales and marketing efforts are conducted through an integrated process incorporating our direct sales force, e-commerce, customer service representatives and our on-site field application engineers, or FAEs, with a network of independent sales representatives, distributors, integrators and resellers. Our sales and marketing efforts also include a high level of involvement from our senior executives. Larger customers are also often supported by dedicated sales and support teams. As of August 28, 2020, we had 147 sales and marketing personnel worldwide. Our on-site FAEs work closely with our sales team to provide product design support to our customers. Our FAEs collaborate closely with our customers, providing us with insight into their business models and product roadmaps and allowing us to identify opportunities at an early stage to help grow our business. The combination of our integrated sales network with our FAEs enables us to be more responsive and successful in navigating through each customer’s unique and oftentimes complex design qualification or bid proposal processes. Our marketing activities include advertising in technical journals, publishing articles in leading industry periodicals, social media, periodic webinars, publishing white papers, electronic newsletters, blogs and utilizing direct email solicitation. In addition to these marketing activities, we also participate in many industry trade shows worldwide. We have active memberships in industry organizations such as the Joint Electron Device Engineering Council, or JEDEC, the USB Implementers Forum, the SD Card Association, the Storage Networking Industry Association, the CompactFlash Association, Gen-Z Consortium, OpenCAPI Consortium, CXL Consortium, Trusted Computing Group, or TCG, the OCP, Sensor Open Systems Architecture, or SOSA, and Peripheral Component Interconnect Special Interest Group, or PCI-SIG. Research and Development The timely development of new products is essential to maintaining our competitive position. Our research and development activities are conducted primarily at our research and development centers in Newark, Fremont and Irvine, California; Bangalore and Kochin, India; Atibaia, Brazil; Penang, Malaysia; Tempe and Gilbert, Arizona; Seongnam-City, South Korea; New Taipei City, Taiwan; and Tewksbury, Massachusetts. Our research and development activities are focused on driving innovation in our products as well as continuous process improvement for our procurement, test and manufacturing. Our product development in specialty memory and Brazil includes innovations for next generation DRAM products, mobile DRAM, hybrid memories such as hybrid volatile and non-volatile DRAM or NVDIMM, enterprise memory, many Flash-based products, such as eMMC and eMCP. Our 8 research and product development for Penguin Computing includes server selection and design, design s to enable integration of racks and clusters, storage system design and evaluation, high performance network desi gn, component testing for switches, cables and interface devices, and development of software defined storage systems. Our product development for SMART EC and SMART Wireless includes embedded computer boards and systems . We plan to continue to devote research and development efforts to the innovation and design of these and other new products which address the requirements of our customers, with a focus on the faster growing markets. We continue to develop a broad offering of Flash-based products targeting the industrial, defense, communications, and enterprise storage and compute markets. In order to enhance our efforts to develop innovative Flash products, we continue to increase our engineering resources significantly, including in our research and development center in New Taipei City, where our engineering team is dedicated to firmware development, systems engineering and integration, system and platform validation and applications, and product and reliability engineering for new products. In addition, in order to take advantage of local regulations and government incentive programs for the growing mobile memory market in Brazil, we have invested substantial financial and management resources to expand our Brazilian research and development capabilities to enable us to develop a broad offering of Flash-based products for the local market. We are also working on expanding our offering for IoT and IIoT products and, through our acquisition of SMART Wireless, we now have over 40 design engineers combined in our two locations in India. Our advanced engineering and design capabilities allow us to address our customers’ increasingly complex needs. We design our products to be compatible with existing industry standards and, where appropriate, develop and promote new standards or provide custom solutions to meet customers’ requirements. An important aspect of our research and development effort is understanding the challenges presented by our customers’ requirements and addressing them by utilizing our industry knowledge, proprietary technologies and technical expertise. By working closely with our customers and suppliers, we are able to deliver technically advanced products designed to meet customer-specific needs with competitive solutions to satisfy our customers’ memory, storage and compute requirements, shorten their time-to-market and enhance the performance of our customers’ end products and applications. We spent $52.1 million, $47.9 million and $39.8 million on research and development in fiscal 2020, 2019, and 2018, respectively. As of August 28, 2020, we had 276 research and development personnel worldwide. Competition In our specialty memory products and our Brazil products, we primarily compete against global and local memory module providers, and to a lesser extent, large semiconductor memory IC manufacturers that utilize a portion of their capacity to manufacture memory modules. In our Penguin Computing products we primarily compete with global manufacturers of HPC products and services. In SMART EC products, we primarily compete with makers of ruggedized computer boards and systems as well as makers of edge computing devices. In SMART Wireless products, we primarily compete with providers of SOMs and SBCs. The principal competitive factors in our markets include the ability to meet customer-specific requirements and provide high product quality, strong technical support, technologically advanced products and services, advanced testing capabilities, flexible and global delivery options, reliable supply and reasonable pricing. Our principal competitors include: • Providers of specialty memory products, including Viking Technology (a division of Sanmina Corporation), or Viking Technology, ATP Electronics, Inc., or ATP, Unigen Corporation, or Unigen, Apacer Technology, Inc., or Apacer, Swissbit AG, or Swissbit, Innodisk Corporation, or Innodisk, Virtium LLC, or Virtium, and Transcend Information, Inc., or Transcend; • In Brazil, local manufacturers of DRAM modules and Flash products and local manufacturers of memory ICs, including HT Micron Semicondutores Ltda., or HT Micron, Adata Integration S/A, or Adata, Multilaser Indústria de Equipamentos de Informática Eletrônicos e Ópticos Ltda., or Multilaser, Cal-Comp Indústria de Semicondutores S/A, or Cal-Comp; • Semiconductor memory IC manufacturers that also manufacture DRAM modules and Flash products, including Samsung, Micron, Western Digital Corporation, or Western Digital, Intel, SK Hynix, and Kioxia (formerly Toshiba); 9 • In our supply chain services business, a broad set of companies, including distributors and third party logistics providers as well as our customers’ in-house solutions; • Providers of compute and storage systems, including HPE and Dell; • Semiconductor and subsystem manufacturers including Intel, NVIDIA, GigaByte, Quanta Services, Inc., or Quanta, Synnex Corporation, or Synnex, and Super Micro Computer, Inc., or Super Micro; • Providers of embedded computing platforms and systems including ADLink, Advantech, Kontron, Curtis Wright, and Mercury Systems; and • Providers of system-on-modules and single board computers including Lantronix, Intrynsic, Thundercomm, eInfochips and Toradex. Some of our global competitors are large international companies that have substantially greater financial, technical, marketing, distribution and other resources, as well as greater name recognition and longer-standing relationships with customers and suppliers than we do. In contrast with our focus on specialty or niche products with high levels of service and support, these competitors are generally focused on higher-volume memory, storage or compute products that are manufactured to industry standard specifications, and they have limited customization and service capabilities. We believe that our close collaboration with customers, customer-specific designs, long-lifecycle solutions and proprietary supply chain services create significant customer attachment that may provide an advantage when competing with the large international companies. In addition, some of our competitors are also our suppliers or customers. See “Item A. Risk Factors—Risks Relating to Our Business—Sales to a limited number of customers represents a significant portion of our net sales, and the loss of any key customer or key program, or the demands of our key customers, could materially harm our business, results of operations and financial condition” and “—Our dependence on a small number of sole or limited source suppliers subjects us to certain risks, including the risk that we may be unable to obtain adequate supplies at a reasonable price and in a timely manner.” In Brazil, other than the large, global semiconductor manufacturers, our competitors are generally much smaller in scale than we are in terms of revenue and capabilities for manufacturing and for research and development. To a lesser degree, we compete with companies that import DRAM and Flash components and products. Intellectual Property We rely on a combination of trade secrets, know-how, trademarks, copyright and, to a lesser extent, patents to protect our intellectual property rights. As of October 2, 2020, we have 153 issued patents, including 110 patents issued in the United States, 38 patents issued in China, 2 patents issued in Brazil and 3 patents issued in South Korea, expiring between 2022 and 2038, excluding any additional patent term for patent term adjustments. In addition, we have 30 patent applications pending, including 11 patent applications in the United States, 5 patent applications in China, 6 patent applications in Brazil, 7 patent applications in Malaysia and 1 patent application in Argentina. We also own a number of trademark registrations, including registrations in the United States for the word marks MHUB, SMART MODULAR TECHNOLOGIES and PENGUIN COMPUTING, and trademarks for our stylized “S” logo in combination with the word SMART and in combination with the words SMART MODULAR TECHNOLOGIES; a trademark in the US and Canada for the graphic logo containing the words PENGUIN COMPUTING; in Brazil, registrations for our stylized “S” logo in combination with the words SMART Modular Technologies; and in Canada, a registration for the word mark PENGUIN COMPUTING. With the acquisition of AEC, we acquired the following registered trademarks: CENTELLIS in the U.S., China, Canada, Mexico, Brazil, India, Germany, Norway, Russia, EU, Hong Kong, Japan, Korea, Taiwan, Australia; MAXCORE in Mexico, Germany, EU, India, Japan, Taiwan, Australia (and pending in U.S., Canada, Brazil, Norway, Russia, China, Hong Kong, Korea); CONTROLSAFE (and logo) in Japan, Norway, Korea, U.S. (and pending in Canada and China); FORCE in Norway, UK, WIPO, Austria, Benelux, Switzerland, Germany, EU, Spain, France, Italy, Montenegro, Serbia, Yugoslavia; SRSSTACKWARE in U.S., China; RAPIDEX in Germany; COMSTRUCT in UK; SPIDERWARE in China. 10 While many of our products contain proprietary aspects, the majority of our products are built to meet industry standards, such as those set by JEDEC, the standards-setting organization for the semiconductor industry. The absence of patent protection for most of our products means that we cannot prevent our competitors from reverse-engineering and duplicating those products. Much of our intellectual property is know-how and trade secrets, and often we rely on the technological skills and innovation of our personnel rather than on patent protection. We believe that our continued success depends largely on our customer relationships, manufacturing and support capabilities and the technical expertise we have developed in manufacturing and designing products, and we rely on trade secret laws and non-disclosure agreements to protect this aspect of our business. Employees As of August 28, 2020, we had 1,754 full-time employees. Our employee relations in Brazil are subject to Brazilian labor laws and regulations as well as collective bargaining arrangements that are negotiated every year. Five of these collective bargaining agreements are specific to our company while there are other collective bargaining agreements that are generally applicable to certain segments of the electronics industry. The applicable labor laws and regulations, as well as the collective bargaining agreements, principally relate to matters such as general working conditions, working time compensation, paid vacation and sick days and other mandatory benefits, length of the workday and payments for overtime, profit sharing and severance. Although a very small number of our employees in Brazil are members of a labor union, all employees in Brazil are represented by the unions for labor and employment matters. We have never experienced a work stoppage in any of our locations worldwide, and we consider our employee relations to be good. Brazil Local Manufacturing Requirements The Brazilian government has a long history of utilizing local manufacturing requirements to promote job creation, sustain economic growth and increase the competitiveness of various domestic industries. These regulations have also helped enable the expansion of the Brazilian middle class. These requirements have been important in the development of numerous industries in Brazil, including automotive, oil and gas, aerospace and healthcare. Beginning in 1991, local manufacturing regulations were introduced to vitalize Brazil’s IT industry as government programs began to be implemented to incentivize manufacturers to establish and expand their operations in Brazil and to incentivize OEMs to apply and utilize locally manufactured components for their products. We have participated in three government investment incentive programs. • Lei da Informática—Processo Produtivo Básico, 1991, extended through 2029, or PPB/IT Program: Provides for significant relief from various tax provisions for companies that develop or produce computing and automation goods and invest in IT-related research and development in Brazil. The PPB/IT Program requirements for local manufacturing are published publicly on a periodic basis. OEMs that are PPB/IT Program-compliant and who fulfill the regulatory requirements receive substantial benefits including a reduction in excise taxes on their purchases from qualified suppliers as well as a reduction in the taxes that they are required to charge on sales to their end customers. These tax benefits are a strong incentive for OEMs to purchase products from local manufacturers such as our Brazilian subsidiaries. The PPB/IT Program requirements for locally sourced memory components from calendar years 2008 through August 2020 were enacted through several ordinances portions of which are set forth below. • Lei do Bem, 2005 : Fosters technology innovation in Brazil by providing a reduction in corporate income tax through the allowance of deductions for expenses related to research and development activities. • PADIS, 2007 : Awards incentives and significant tax relief, including reductions in the Brazilian aggregate statutory income tax rates, to semiconductor and display companies that invest in research and development and that promote the development, design, test and packaging processes in Brazil. Furthermore, combining PADIS with PPB/IT Program-compliance can provide additional financial incentives to OEMs that apply or utilize memory components that are locally processed from wafers. 11 Below is a table that sets forth the historical local manufacturing requirements that were in effect as of August 2020. PPB/IT Program Requirements for PC and Server Memory (1) 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Notebook DRAM IC Packaging 30 % 30 % 40 % 50 % 60 % 80 % 80 % 80 % 70 % 80 % 80 % N/A Desktop DRAM IC Packaging 10 % 10 % 10 % 10 % 30 % 50 % 60 % 80 % 80 % 80 % 80 % N/A Server DRAM IC Packaging 80 % 80 % 80 % 80 % 80 % 80 % 80 % 80 % 80 % 80 % 80 % N/A PPB/IT Program Requirements for Mobile Memory (1) 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Notebook SSD IC Package 0 % 0 % 35 % 40 % 30 % 40 % 40 % 35 % 50 % 50 % 50 % N/A SSD Module Flash IC Package 0 % 0 % 0 % 0 % 40 % 60 % 80 % 30 % 40 % 60 % 60 % N/A Mobile/Smartphones microSD Cards 0 % 0 % 0 % 5 % 5 % 10 % 20 % 40 % 50 % 50 % 50 % N/A All Other Memory Types (2) 0 % 0 % 0 % 0 % 0 % 5 % 20 % 30 % 30 % 50 % 60 % N/A PPB/IT Program Requirements for TV 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 TV IC Package 0 % 0 % 0 % 0 % 0 % 0 % 0 % 30 % 40 % 40 % 40 % 40 % (1) Revoked effective July 2019. (2) Includes mobile DRAM, eMMC and eMCP. Source : Brazilian Ministry of Science, Technology and Innovation, Interministerial Ordinances 287/2014, 85/2014, 239/2016, 179/2016, 141/2015, 263/2014, 14/2016, 21/2017, 41/2017, 52/2017, 03/2018, 20/2018, 44/2018 and 52/2018. As the leading local manufacturer, as measured by market share, of desktop, notebook and server DRAM modules and DRAM components as well as DRAM and Flash mobile memory products in Brazil, we have benefited from these requirements and incentives. In 2013, the European Union, or EU, later joined by Japan, requested the establishment of a panel within the World Trade Organization, or WTO, to determine whether the structure of certain programs enacted by the Brazilian government concerning incentives and local content requirements for the automotive and several other industries (including the IT industry and including portions of Lei do Bem that do not relate to our business, as well as PADIS and the PPB/IT Program), were inconsistent with WTO rules. On August 30, 2017 the WTO panel released a report and on December 13, 2018, after hearing appeals, the appellate body of the WTO released its decision in which it upheld some of the panel’s findings that certain of the incentives available to us in Brazil are contrary to certain of the principles of the WTO agreements while also rejecting some of the complaints by the EU and Japan. The WTO’s decision does not impact the benefits that we receive under Lei do Bem. The appellate body also noted that it would not contravene the principles of the WTO agreements for Brazil to establish local manufacturing processes as a condition to benefit from incentives granted by the government provided that certain conditions are met. In response to the WTO report, government authorities in Brazil revoked several ordinances that established local content requirements under the PPB/IT Program, many of which were related to our local business. The revocation became effective June 30, 2019. Government officials in Brazil have continued to express their intent to restructure the incentives to be consistent with the WTO principles while still continuing to support local industry. In June 2019, the authorities in Brazil published the first of a series of new ordinances, effective as of July 1, 2019, that provide a structure for revised support for local manufacturing utilizing a score-based point system for eligibility for incentives. In this system, each manufacturing process within an electronic device is assigned a different number of points. Our manufacturing processes related to memory products are a valuable part of the electronics manufacturing chain and, as such, are expected to provide our customers the opportunity to accomplish a significant number of the overall points required if they purchase products manufactured by us in Brazil. 12 As part of making the local regulation compatible with the WTO principles, the government of Brazil also enacted a new law that provides for changes in the mechanism of incentives granted to the IT sector that impacts SMART Brazil and SMART do Brazil as well as their customers. Effective April 1, 2020, the reduction of the IPI for PPB/IT Program was eliminated for certain types of customers along with, for PADIS companies, the zero rates of IPI, PIS and COFINS levied on sales . Instead, participants in the PPB/IT Program as well as PADIS companies, are entitled to a subsidy of operational costs in the form of financial credits calculated based on effective disbursements made on research and development initiatives under the aforesaid programs. These financial credits may be used by participants either as a credit against certain federal taxes, or to request a refund in cash. PADIS beneficiaries are entitled t o financial credits equivalent to 2.62 times the effective disbursements on research and development initiatives under PADIS, limited to a cap of 1 3.1% 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 invest ment , 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. Notwithstanding the legislative changes that took effect in April 2020, IPI on sales to OEM and contract manufacturing customers are still suspended under the PPB/IT Program. Such sales to OEM and contract manufacturing customers are also not subject to the research and development investment requirements and therefore not eligible for financial credits . While we believe that the score-based system will continue to incentivize our Brazilian customers to purchase products from us in Brazil, there can be no assurance that the replacement programs will ultimately be structured and implemented in a way that will provide the same or a similar level of support and benefit for our customers and our business as was previously in place. There can also be no assurance that the WTO, the EU and Japan will agree that this new program structure is compliant with the WTO agreements. Any adverse change in legislation or in the impact and effectiveness of the local incentives programs, or our failure to meet the requirements of any of the regulations, could significantly reduce the demand for, the profit margins on, and the competitiveness of our products in Brazil, and would have a material adverse effect on our business, results of operations and financial condition. See “Item A. Risk Factors—Risks Relating to Our Business—Risks Related to our International Operations— Our success in Brazil depends in part on Brazilian laws establishing incentives for local manufacturing of electronics products. The elimination of or a reduction in the incentives for local manufacturing, or our inability to secure the benefits of these regulations, could significantly reduce the demand for, and the profit margins on, our products in Brazil.” Environmental Regulations Our operations and properties are subject to a variety of environmental laws and regulations of the United States and other jurisdictions governing, among other things, air emissions, wastewater discharges, management and disposal of hazardous and non-hazardous materials and wastes, reverse logistics (take-back policy) and remediation of releases of hazardous materials. The presence of lead in quantities not believed to be significant have been found in the ground under one of the multi-tenant buildings we lease in Brazil. While we did not cause the contamination, we may be held responsible if remediation is required, although we may be entitled to seek indemnification from responsible parties under Brazilian law and from our lessor under our lease. We cannot be certain that identification of presently unidentified environmental conditions, more vigorous enforcement by regulatory agencies, enactment of more stringent laws and regulations or other unanticipated events will not arise in the future and cause additional material liabilities which could have a material adverse effect on our business, financial condition and results of operations. 13 Corporate Information Our address in the Cayman Islands is c/o Maples Corporate Services Limited, P.O. Box 309, Ugland House, Grand Cayman, KY1-1104, Cayman Islands. Our U.S. principal executive offices are located at 39870 Eureka Drive, Newark, California 94560. Our telephone number at this address is (510) 623-1231. Our principal website is http://www.smartgh.com . The information contained on, or that can be accessed through, our website is not a part of this Annual Report. SMART Global Holdings, SMART Modular Technologies, SMART, the SMART logo, Penguin Computing, the Penguin Computing logo, and our other trademarks or service marks appearing in this Annual Report are our property. Trade names, trademarks and service marks of other companies appearing in this Annual Report are the property of the respective holders. Available Information We make available, free of charge through our website, our annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, and amendments to those reports, filed or furnished pursuant to Sections 13(a) or Section 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after they have been electronically filed with, or furnished to, the Securities Exchange Commission, or SEC. The public may read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F. Street, NE, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an internet site (http://www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. 14 Item 1A. R isk Factors You should carefully consider the risks and uncertainties described below and the other information in this Annual Report on Form 10-K, including “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and related notes. Our business, financial condition or results of operations could be materially and adversely affected if any of these risks occurs and, as a result, the market price of our ordinary shares could decline and you could lose all or part of your investment. This Annual Report also contains forward-looking statements that involve risks and uncertainties. See “Cautionary Note Regarding Forward-Looking Statements” for additional information. Our actual results could differ materially and adversely from those anticipated in these forward-looking statements as a result of certain factors, including the risks facing our company described below and elsewhere in this Annual Report. Risks Relating to Our Business 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 millions of infections and over one million deaths worldwide, as of the date of filing of this Annual 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. Similarly, while we have not yet experienced a major disruption in our supply chain as a result of the COVID-19 pandemic, 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 delays or reductions in our ability to manufacture and ship products to our customers. The pandemic may also impact the demand for our customers’ products or our 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 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. 15 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 decreases in sales 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. Our operating results have fluctuated in the past and may fluctuate from quarter to quarter in the future, which makes them difficult to predict. Our quarterly operating results have fluctuated in the past and may fluctuate in the future. As a result, our past quarterly operating results are not necessarily indicative of future performance. Furthermore, we may not be able to maintain the margins we have achieved in recent periods. Our operating results in any given quarter can be influenced by numerous factors, many of which we are unable to predict or are outside of our control, including: • the adverse effects of COVID-19 on economic conditions and on our business; • interruptions in supply or operations as a result of COVID-19 outbreaks or preventative measures taken by governments or businesses to slow such outbreaks or spreads; • the cyclical nature of the markets in which we compete; • changes in memory component prices or the average selling prices of our products, including fluctuations in the market price of DRAM and Flash memory components; • lack of growth or contraction or increased competition in the memory market in Brazil or other markets; • adverse changes to the local content regulations in Brazil; • corruption or adverse political situations in Brazil or other markets; • increased trade restrictions or trade wars; • the loss of, significant reduction in sales to, or demand from, one or more key customers; • industry consolidation, which may further reduce the number of our potential customers and/or suppliers; • fluctuations in the markets served by our OEM, enterprise and government customers; 16 • difficulty matching our purchasing and production to customer demand, which is difficult to forecast accurately; • cancellations, modifications or delays in customer orders, product returns and inventory value or obsolescence risk; • competitive developments, including the introduction of new competitive products; • our failure to develop new or enhanced products and introduce them in a timely manner; • reductions in government spending; and • the other factors described in this “Item 1A. Risk Factors” section and elsewhere in this report. Due to the various factors mentioned above and other factors, the results of any prior quarterly or annual period should not be relied upon as an indication of our future operating performance. In one or more future periods, our results of operations may fall below the expectations of securities analysts and investors. In that event, the market price of our ordinary shares would likely decline. In addition, the market price of our ordinary shares may fluctuate or decline regardless of our operating performance. We have experienced losses in the past and may experience losses in the future. Our business has experienced quarterly and annual operating losses during the periods presented in the financial statements included in this Annual Report. For example, in fiscal 2020, we had a net loss of $1.1 million. Our ability to maintain profitability depends in part on revenue growth from, among other things, increased demand for our memory solutions, products and related service offerings in our current markets including Brazil, growth in our SCSS business unit including the recently acquired companies SMART EC and SMART Wireless, as well as our ability to expand into new markets. We may not be successful in achieving the revenue and revenue growth necessary to maintain profitability. Moreover, as we continue to expend substantial funds for research and development projects, enhancements to sales and marketing efforts, integration of acquisitions and to otherwise operate our business, we cannot assure you that we will maintain profitability on an annual or quarterly basis even if our revenue does grow. The markets in which we compete historically have been highly cyclical and have experienced severe downturns that have materially adversely affected, and may in the future materially adversely affect, our business, results of operations and financial condition. Historically, the markets in which we compete have been highly cyclical and have experienced significant downturns often connected with, or in anticipation of, maturing product cycles of both component suppliers and electronic equipment manufacturers, and/or declines in general economic conditions. These downturns have been characterized by diminished product demand, production overcapacity, high inventory levels and accelerated erosion of selling prices and inventory values. Our business depends on the continued growth of the electronics industry and on end-user demand for our customers’ products. Economic downturns often have had an adverse effect upon manufacturers and end-users of electronics products. The timing of new product developments, the lifecycle of existing electronics products and the level of acceptance and growth of new products can also affect demand for our products. Downturns in the markets we serve could have a significant negative impact on the demand for our products. Additionally, due to changing conditions, our customers have experienced and may in the future experience periods of excess inventory that could have a significant adverse impact on our sales. During a downturn in any of the markets that we serve, there is also a higher risk that some of our trade receivables become delinquent or even uncollectible and that our inventory would decrease in value. We cannot predict the timing or the severity of the cycles within our industry. In particular, it is difficult to predict how long and to what levels any industry upturn or downturn, or general economic strength or weakness, will last or develop. We, as well as our OEM customers, primarily serve end users in the industrial, networking and communications, storage and computing, mobile products, defense, financial services, energy, social media, education, network edge computing, transportation, and IoT endpoint applications markets. Sales of our products are dependent upon demand in these markets. From time to time, each of these markets has experienced cyclical downturns, often in connection with, or in anticipation of, declines in general economic conditions, and we may 17 experience substantial period-to-period fluctuations in our operating results due to factors affecting these markets. Changes in end-user demand for our customers’ products and services could have a material adverse effect on demand for our products and services, particularly if the customer has accumulated excess inventories of products purchased from us or from competitors selling similar products. Reduced demand for our products could have a material adverse effect on our business, results of operations and financial condition. Declines in memory component prices and our average selling prices may result in declines in our net sales and gross profit and could have a material adverse effect on our business, results of operations and financial condition. The markets for our specialty memory and Brazil products have historically been characterized by declines in average selling prices. Our average selling prices may decline due to several factors, including general declines in demand for our products and excess supply of DRAM and Flash memory components as a result of overcapacity. In the past, transitions to smaller design geometries and other factors causing overcapacity in memory markets have led to significant increases in the worldwide supply of memory components. If not accompanied by increases in demand, supply increases usually result in significant declines in component prices and, in turn, declines in the average selling prices and profit margins of our products. During periods of overcapacity, our net sales may decline if we fail to increase sales volume of existing products or to introduce and sell new products in quantities sufficient to offset declines in selling prices. Our efforts to increase sales or to introduce new products to offset the impact of declines in average selling prices may not be successful. Furthermore, our competitors and customers also impose significant pricing pressures on us. These declines in average selling prices have in the past had, and may again in the future have, a material adverse effect on our business, results of operations and financial condition. Declines in prices also could affect the valuation of our inventory, which could result in inventory write-downs. Declines in average selling prices also might enable OEMs to pre-install higher density memory modules into new systems at existing price points, thereby reducing the demand for future memory upgrades. In addition, our net sales and gross profit may be negatively affected by shifts in our product mix during periods of declining average selling prices. Worldwide economic and political conditions as well as other factors may adversely affect our operations and cause fluctuations in demand for our products. Uncertainty in global economic and political conditions poses a risk to the overall economy, as consumers and businesses have made it difficult for customers, suppliers and us to accurately forecast and plan future business activities. Declines in the worldwide semiconductor market, economic conditions or consumer confidence would likely decrease the overall demand for our products. Other factors that could cause demand for our products to fluctuate include: • a downturn in the computing, networking, communications, storage, aerospace, defense, mobile or industrial markets; • changes in consumer confidence caused by changes in market conditions, including changes in the credit markets, expectations for employment and inflation and energy prices; • corruption or adverse political situations in Brazil or other markets; • increased trade restrictions or trade wars; • changes in the level of customers’ components inventory; • competitive pressures, including pricing pressures, from companies that have competing products, architectures, manufacturing technologies and marketing programs; • changes in technology or customer product needs; • strategic actions taken by our competitors; and • market acceptance of our products. If demand for our products decreases, our manufacturing or assembly and test capacity could be underutilized, and we may be required to record an impairment on our long-lived assets, including facilities and equipment, as well 18 as intangible assets, which would increase our expenses. In addition, if product demand decreases or we fail to forecast demand accurately, we could be required to write-off inventory or record underutilization charges, which would have a negative impact on our profitability. If product demand increases more or faster than anticipated, we may not be able to add manufacturing or assembly and test capacity fast enough to meet market demand. These changes in demand for our products, and changes in our customers’ product needs, could have a variety of negative effects on our competitive position and our financial results, and, in certain cases, may reduce our net sales, increase our costs, lower our profit margins or require us to recognize impairments of our assets. The occurrence of any of the foregoing could have a material adverse effect on our business, results of operations and financial condition. Changes in U.S. trade policies, including the imposition of tariffs and a potential resulting or expanded trade war, could have a material adverse impact on our business. We source materials from and sell products in foreign countries, including China, making the price and availability of our merchandise susceptible to international trade risks and other international conditions. In addition, many of our customers rely heavily on international trade. The imposition of tariffs, duties, border adjustment taxes or other trade restrictions by the United States could also result in the adoption of new or increased tariffs or other trade restrictions by other countries. The tariffs may in the future increase our cost of materials and may cause us to increase prices to our customers which we believe may reduce demand for our products. Our price increases may not be sufficient to fully offset the impact of the tariffs and result in lowering our margin on products sold. If the U.S. government increases or implements additional tariffs, or if additional tariffs or trade restrictions are implemented by other countries, the resulting trade barriers could have a significant adverse impact on our suppliers, our customers and on our business. We are not able to predict future trade policy of the U.S. or of any foreign countries in which we operate or purchase goods, or the terms of any renegotiated trade agreements, or their impact on our business. The adoption and expansion of trade restrictions and tariffs, quotas and embargoes, the occurrence of a “trade war,” or other governmental action related to tariffs or trade agreements or policies, has the potential to adversely impact demand for our products, our costs, our customers, our suppliers and the world and U.S. economies, which in turn could have a material adverse effect on our business, operational results, financial position and cash flows. Sales to a limited number of customers represent a significant portion of our net sales, and the loss of any key customer or key program, or the demands of our key customers, could materially harm our business, results of operations and financial condition. Our principal end customers include global OEMs that compete in the computing, networking, communications, storage, aerospace, defense, mobile and industrial markets. In fiscal 2020, 2019 and 2018, sales to our ten largest end customers (including sales to contract manufacturers or ODMs at the direction of such end customers) accounted for 66%, 73% and 84% of net sales, respectively. Of our end customers, Samsung Electronics Co., Ltd., or Samsung, (for whom all sales are direct sales) accounted for 17%, 18% and 34% of net sales in fiscal 2020, 2019 and 2018, respectively; Nutanix, Inc., or Nutanix, accounted for 11% of net sales in fiscal 2020; Cisco Systems, Inc., or Cisco, accounted for 11% and 12% of net sales in fiscal 2019 and 2018, respectively; Lenovo Group Limited, or Lenovo, accounted for 13% and 11% of net sales in fiscal 2019 and 2018, respectively; and Dell Technologies Inc., or Dell, accounted for 10% of net sales in fiscal 2018. Direct sales to Flex accounted for 14%, 17% and 13% of net sales in fiscal 2020, 2019 and 2018, respectively. While Samsung is a significant customer of ours, purchasing embedded multichip packages, or eMCP, products from us in their smartphone division and DRAM modules from us in their PC division, Samsung’s semiconductor division is also a major supplier and a competitor. See “Risk Factors—Risks Relating to Our Business— Our dependence on a small number of sole or limited source suppliers subjects us to certain risks, including the risk that we may be unable to obtain adequate supplies at reasonable prices and in a timely manner” and “—The markets we serve are intensely competitive, and we may not be able to maintain or improve our competitive position.” We expect that sales to relatively few customers will continue to account for a significant percentage of our net sales for the foreseeable future. However, we can provide no assurance that any of these customers or any of our other customers will continue to utilize our products or our services at current levels, or at all. Although we have master agreements with some of our customers, these agreements govern the terms and conditions of the relationship and do not contain requirements for them to purchase minimum volumes. 19 Our customer concentration may also subject us to perceived or actual bargaining leverage that our key customers may have, given their relative size and importance to us. Since a large percentage of our sales is to a small number of customers that are primarily large OEMs, these customers are able to exert, have exerted and we expect will continue to exert, pressure on us to make concessions on price and on terms and conditions which can adversely affect our business, results of operations and financial condition. If our key customers seek to negotiate their agreements on terms less favorable to us and we accept such unfavorable terms, such unfavorable terms may have a material adverse effect on our business, results of operations and financial condition. Accordingly, unless and until we diversify and expand our customer base, our future success will significantly depend upon the timing and volume of business from our largest customers and the financial and operational success of these customers. If we were to lose one of our key customers or have a key customer cancel a key program or otherwise significantly reduce its volume of business with us, our sales and profitability would be materially reduced and our business and financial condition would be seriously harmed. The markets that we serve are intensely competitive, and we may not be able to maintain or improve our competitive position. The markets that we serve are characterized by intense competition. Our competitors include many large domestic and international companies that have substantially greater financial, technical, marketing, distribution and other resources, greater name recognition, broader product lines, lower cost structures and longer-standing relationships with customers and suppliers than we do. As a result, our competitors may be able to respond better to new or emerging technologies or standards and to changes in customer requirements. Further, some of our competitors are in a better financial and marketing position from which to influence industry acceptance of a particular product standard or competing technology than we are. Our competitors may also be able to devote greater resources to the development, promotion and sale of products, and may be able to deliver competitive products at a lower price than we can. Our primary competitors in the specialty memory market include Viking Technology, ATP, Unigen, Apacer, Swissbit, Innodisk, Virtium and Transcend. In Brazil, we compete against local manufacturers of DRAM modules and local manufacturers of memory ICs, including HT Micron, Adata, Cal Comp and Multilaser. We compete globally against semiconductor memory IC manufacturers that also manufacture DRAM ICs and modules and Flash products, including Samsung, Micron, Western Digital, Intel, SK Hynix and Kioxia (formerly known as Toshiba). While these companies generally focus on higher volume commodity products, they sometimes compete with some of our specialty memory products. In addition to competing with certain portions of our product offerings, Samsung is also a major supplier and a significant customer. See “Risk Factors—Risks Relating to Our Business—Sales to a limited number of customers represents a significant portion of our net sales, and the loss of any key customer or key program, or the demands of our key customers, could materially harm our business, results of operations and financial condition” and “—Our dependence on a small number of sole or limited source suppliers subjects us to certain risks, including the risk that we may be unable to obtain adequate supplies at a reasonable price and in a timely manner.” In our supply chain services business, we compete in a fragmented market with a broad set of companies, including distributors and third party logistics providers as well as our customers’ in-house solutions. Through imports of DRAM components and modules and Flash products, we face some of the same competitors in Brazil as we do elsewhere. We also face competition from local manufacturers of DRAM modules and Flash products, and expect to face more competition in the future from local semiconductor packaging companies, such as HT Micron Semiconductors S/A and Adata Integration Brazil S/A, which began production of new packagings plants in Brazil in the first half of calendar years 2014 and 2017, respectively. We believe that import duties and local manufacturing requirements in Brazil give us an advantage over companies that import DRAM modules or Flash products or import memory components into Brazil; however, that competitive advantage may become less significant in the event that competitors build manufacturing facilities in Brazil or local manufacturing regulations change or are eliminated. As the local market grows, competition may increase in Brazil. In our Penguin Computing business, we compete with HPE, Dell, Cray (recently acquired by HPE), and other smaller companies manufacturing computing components and products. We also compete with the direct to customer efforts from several of our large partners including Intel Corporation, or Intel, NVIDIA Corporation, or NVIDIA, GigaByte, Quanta Services, Inc., or Quanta, Synnex Corporation, or Synnex, and Super Micro Computer, Inc., or Super Micro. 20 In our SMART E C products, we compete with providers of embedded computing platforms and systems including ADLink, Advantech, Kontron, Curtis Wright, and Mercury Systems . In our SMART Wireless products, we compete with providers of SOMs and SBCs including Lantronix, Intrynsic, Thundercomm, eInfochips and Toradex. We face competition from existing competitors and expect to face new companies that may enter our existing or future markets with similar or alternative products, which may be less costly or provide additional features. We also face competition from current and prospective customers that evaluate our capabilities against the merits of manufacturing products internally. Competition may also arise due to the development of cooperative relationships among our current and potential competitors and/or suppliers or third parties to increase the ability of their products to address the needs of our prospective customers. Accordingly, it is possible that new competitors or alliances among competitors and/or suppliers may emerge and acquire significant market share. We expect that our competitors will continue to improve the performance of their current products, reduce their prices and introduce new products that may offer greater performance and improved pricing, any of which could cause a decline in sales or market acceptance of our products. In addition, our competitors may develop enhancements to, or future generations of, competitive products that may render our technology or products obsolete or uncompetitive. To remain competitive, we must continue to provide technologically advanced products and manufacturing services, maintain high quality, offer flexible delivery schedules, deliver finished products on a reliable basis, reduce manufacturing and testing costs, and compete favorably on the basis of price. Competitive pressure has led in the past and may continue to lead to intensified price competition resulting in lower net sales and profit margins which could negatively impact our financial performance. Our efforts to maintain and improve our competitive position, or our failure to do so, could have a material adverse effect on our business, results of operations and financial condition. Industry consolidation and company failures may reduce the number of our potential customers, increase our reliance on our existing key customers and negatively impact the competitiveness of our supplier base. Many of our customer and supplier markets are characterized by a limited number of large companies. Some participants in the industries in which we serve have merged and/or been acquired, and this trend may continue. In addition, there have been company failures among both our customer and supplier base. Industry consolidation and company failures could decrease the number of potential significant customers for our products and services. Consolidation and company failures in some of our customers’ industries may also result in the loss of customers. The decrease in the number of potential significant customers will increase our reliance on key customers and, due to the increased size of these companies, may negatively impact our bargaining position and thus our profit margins. Furthermore, the loss of, or a relatively reduced relationship with, key customers due to industry consolidation and company failures could negatively impact our business, results of operations and financial condition. Additionally, consolidation and company failures in our supplier base could reduce our purchasing alternatives and reduce the competition for our business resulting in higher cost of goods and less availability of components which would have a negative impact on our business, results of operations and financial condition. Customer demand is difficult to forecast accurately and, as a result, we may be unable to optimally match purchasing and production to customer demand, which may have a material adverse effect on our business, results of operations and financial condition. In most cases we do not obtain long-term purchase orders or commitments from our customers but instead we work with our customers to develop non-binding estimates or forecasts of future requirements. Utilizing these non-binding estimates or forecasts, we make significant decisions based on our estimates of customer requirements including determining the levels of business that we will seek and accept, production scheduling, component purchasing and procurement commitments, inventory levels, personnel and production facility needs and other resource requirements. A variety of conditions, both specific to each individual customer and generally affecting each customer’s industry, may cause customers to cancel, reduce or delay orders that were either previously made or anticipated, and often with little or no notice to us. Generally, customers may cancel, reduce or delay purchase orders and commitments without penalty. The short-term and flexible nature of commitments by many of our customers, and the possibility of unexpected changes in demand for their products, reduces our ability to accurately estimate future customer requirements. On occasion, customers may require rapid increases in production, which can challenge our resources and can reduce profit margins. We may not have sufficient capacity at any given time to 21 meet our customers’ demands. Downturns in the markets in which our customers compete can, and have, caused our customers to significantly reduce the amount of products ordered from us or to cancel or delay existing orders leading to lower utilization of our facilities. This in turn can cause us to have more inventory than we need and can result in inventory write-downs or write-offs. Additionally, as many of our costs and operating expenses are relatively fixed, reduction in customer demand would have an adverse effect on our operating income, results of operations and financial condition. We may experience inventory write-downs or write-offs. To the extent we manufacture products or make purchases in anticipation of future demand that does not materialize, or in the event a customer cancels or reduces outstanding orders, we could experience an unanticipated increase in our inventory. We have had in the past and expect we could again have in the future, inventory write-downs and/or write-offs due to obsolescence, excess quantities and declines in market value below our costs. In particular, if product obsolescence causes product demand to decrease or we fail to forecast demand accurately, we could be required to write-off inventory or record under-utilization charges, which would have a negative impact on our profit margins and our profitability. Any one or more of these occurrences could have a negative impact on our results of operations and financial condition. Our inventory write-downs were $4.7 million, $9.0 million and $5.2 million for fiscal 2020, 2019 and 2018, respectively. In connection with delivering our supply chain services, we make significant inventory purchases based on customer forecasts and/or customer purchase orders. In most instances, forecasts are non-binding and purchase orders can be rescheduled at the customer’s option, often times without penalty. When actual consumption does not meet the customer’s forecast or the customer’s purchase orders, it will result in unanticipated and sometimes significant increases in our inventory. Additionally, some of our logistics transactions contemplate extended periods of inventory management. These programs generally obligate customers to eventually purchase certain aged logistics inventory with minimal right to price reductions, and typically provide for periodic carrying charges. We can provide no assurance, however, that the customers will comply with these obligations. If a customer of our supply chain services has significant delays in delivery of inventory, we could have liability to the customer and this could have a negative impact on our profitability. If a customer of our supply chain services fails to consume the inventory that we purchase for it, this could result in significant inventory write-downs or write-offs. Any one or more of these occurrences could have a significant negative impact on our cash flows, business, results of operations and financial condition. At the end of each of the last four fiscal quarters, logistics inventory (including inventory specifically requested by customers) ranged between 16% and 25% of our total inventory. New product development requires significant investment. Our failure to develop new or enhanced products and introduce them in a timely manner would undermine our competitiveness. The markets that we serve are subject to rapid technological change, product obsolescence, frequent new product introductions and feature enhancements, changes in end-user requirements and evolving industry standards. Our ability to successfully compete and to continue to grow our business depends in significant part upon our ability to develop, introduce and sell new and enhanced products on a timely and cost-effective basis, and to anticipate and respond to changing customer requirements. We have experienced, and may experience in the future, delays and unanticipated expenses in the development and introduction of new products. A failure to develop products with required feature sets or performance standards, or a delay as short as a number of weeks in bringing a new product to market could significantly reduce our return on investment as well as our net sales, all of which would have a material adverse effect on our business, results of operations and financial condition. 22 Delays in the development, introduction and qualification of new products could provide a competitor a first-to-market advantage and allow a competitor to achieve greater market share. These delays could also result in customers having the right to cancel orders without penalty. Defects or errors found in our products after sampling or commencement of commercial shipments could result in delays in market acceptance of our products. Lack of market acceptance for our new products for any reason would jeopardize our ability to recoup substantial research and development expenditures, hurt our reputation and have a material adverse effect on our business, results of operations and financial condition. Accordingly, we can provide no assurance that our future product development efforts will be successful or result in products that gain market acceptance. We have invested in the past and expect in the future to invest in new technologies and emerging markets. If these new technologies and emerging markets fail to gain acceptance or to grow, it would have a material adverse effect on our business, results of operations and financial condition. We have made and expect to continue to make significant investments in various products. There is significant competition for many new products and markets and we can provide no assurance that we will develop and introduce products in a timely manner or that our new products will gain market acceptance, be price competitive or result in any significant increase in our net sales. If these investments fail to provide the expected returns, then such failure would have a material adverse effect on our business, results of operations and financial condition. Our OEM customers require that our products undergo a lengthy and expensive process of evaluation and qualification without any assurance of net sales. Our products are often incorporated into our OEM customers’ systems at the design stage. As a result, we rely on OEMs to select our product designs, which we refer to as design wins, and then to qualify our products for production buys. We often incur significant expenditures in the development of a new product without any assurance that any OEM will select our product for design into its system. Additionally, in some instances, we are dependent on third parties to obtain or provide information that we need to achieve a design win. These third parties may not supply this information to us on a timely basis, if at all. Furthermore, even if an OEM designs one of our products into its system, we cannot be assured that they will qualify or use our product in production, that the OEM’s product will be commercially successful or that we will receive significant orders as a result of that design win or qualification. Generally, our OEM customers are not obligated to purchase our products even if we get a design win. If we are unable to achieve design wins or if our OEM customers’ systems incorporating our products are not commercially successful, it could have a material adverse effect on our business, results of operations and financial condition. In addition, because the qualification process is both product-specific and platform-specific, our existing customers sometimes require us to requalify our products, or to qualify our new products, for use in new platforms or applications. For example, as our OEM customers transition from third generation double date-rate, or DDR3, DRAM architectures, or fourth generation DDR, or DDR4, DRAM architectures, we must design and qualify new products for use by those customers. In the past, the process of design and qualification has taken several months to complete, during which time our net sales to those customers declined significantly. After our products are qualified, it can take several months before the customer begins production and we begin to generate net sales from such customer. Likewise, when our suppliers discontinue production of components, it may be necessary for us to design and qualify new products for our customers. Such customers may require of us or we may decide to purchase an estimated quantity of discontinued memory components necessary to ensure a steady supply of existing products until products with new components can be qualified. Purchases of this nature may affect our liquidity. Additionally, our estimation of quantities required during the transition may be incorrect, which could adversely impact our results of operations through lost revenue opportunities or charges related to excess and obsolete inventory. We must devote substantial resources, including design, engineering, sales, marketing and management efforts, to qualify our products with prospective customers in anticipation of sales. Significant delays in the qualification process could result in an inability to keep up with rapid technological change or new, competitive technologies. If we delay or do not succeed in qualifying a product with an existing or prospective customer, we will not be able to sell that product to that customer, which may result in us losing potential revenue and holding excess or obsolete inventory, any of which may have a material adverse effect on our business, results of operations and financial condition. 23 If our OEM customers decide to utilize standardized solutions instead of our specialty products, our net sales and market share may decline. Many of our specialty products are specifically designed for our OEM customers’ systems. In an effort to reduce costs or to assure, a number of our OEM customers design standardized or commodity modules or subsystems into their products. Although we also manufacture standard modules and subsystems, an increase in such efforts by our customers could reduce the demand for our higher priced specialized or customized solutions, which in turn would have a negative impact on our business, results of operations and financial condition. In addition, when customers utilizing custom solutions choose to adopt a standard instead of custom modules or subsystems, new competitors producing standardized modules or subsystems may take a portion of our customers’ business previously purchased from us. Our dependence on a small number of sole or limited source suppliers subjects us to certain risks, including the risk that we may be unable to obtain adequate supplies at reasonable prices and in a timely manner. We are dependent upon a small number of sole or limited source suppliers for certain materials, including certain critical components, we use in manufacturing our products. We purchase almost all of our materials from our suppliers on a purchase order basis and generally do not have long-term commitments from suppliers. Our suppliers are not required to supply us with any minimum quantities and there is no assurance that our suppliers will supply the quantities of components we may need to meet our production goals. In our specialty memory products, our major suppliers include Samsung, Micron and SK Hynix. These suppliers also compete with us in the memory market. For example, while Samsung, Micron and SK Hynix all sell DRAM modules to us, and Samsung and Micron supply us with DRAM ICs, Flash ICs and finished products, they also compete with us by selling DRAM ICs and modules and Flash ICs and finished products to many of our customers, usually focusing on higher volume commodity products. Samsung is also a significant customer, as Samsung’s smartphone division purchases eMCPs from us, and its PC division purchases DRAM modules from us. In Brazil, we purchase the wafers used in our memory products exclusively from a single global memory wafer supplier. The target volume and pricing of wafers are established annually, and our purchases are generally made monthly on a purchase order basis and are not cancelable. In the event that our wafer supply relationship or our purchase orders are terminated, or if our supplier’s production of silicon wafers is reduced or disrupted, we may be unable to obtain sufficient quantities of high-quality wafers at reasonable prices, and in a timely manner, to fulfill our Brazilian customers’ requirements. In addition, there can be no assurance that we will reach agreement with our wafer supplier on the pricing and quantities of wafers that they will supply and we will purchase. In our SCSS business, our major suppliers include Intel, NVIDIA and Qualcomm. These suppliers also compete with us in specialty compute products. The markets in which we operate have experienced, and may experience in the future, shortages in components, including DRAM and Flash ICs, which are essential components of our memory products, as well as processors, motherboard and communications products which are essential to our SCSS products. These shortages cause some suppliers to place their customers, including us, on component allocation. As a result, we may not be able to obtain the components that we need to fill customer orders. If any of our suppliers experience quality control or intellectual property infringement problems, we may not be able to fill customer orders. Furthermore, our products that utilize that supplier’s components may be disqualified by one or more of our customers and we may not be able to fill their orders. The inability to fill customer orders due to shortages or long lead-times from suppliers could cause delays, customer cancellations, disruptions or reductions in product shipments or require costly product redesigns and/or re-qualifications which could, in turn, damage relationships with current or prospective customers, increase costs and have a material adverse effect on our business, results of operations and financial condition. A disruption in or termination of our supply relationship with any of our significant suppliers or our inability to develop relationships with new suppliers, if required, would cause delays, disruptions or reductions in product manufacturing and shipments or require product redesigns which could damage relationships with our customers, increase our costs or the prices we need to charge for our products and could materially and adversely affect our business, results of operations and financial condition. 24 Unless we maintain manufacturing efficiency, we may not remain profitable and our future profitability could be materially adversely affected. The industries in which we conduct business are characterized by constant and rapid technological changes and product obsolescence. For example, new manufacturing process technologies using smaller feature sizes and offering better performance characteristics are generally introduced every one to two years. The introduction of new manufacturing process technologies allows us to increase the functionality of our products while at the same time optimizing performance parameters, decreasing power consumption and/or increasing storage capacity. In order to remain competitive, it is essential that we secure the capabilities to develop and qualify new manufacturing process technologies. If we are delayed in transitioning to new technologies, our business, results of operations and financial condition could be materially adversely affected. If the lifecycle of a product is shortened as a result of the introduction of a new technology, we may be forced to transition our manufacturing capabilities to a new configuration more quickly than originally planned. This can result in increased capital and other expenditures. This can also cause decreases in demand for the older technology products and our manufacturing or assembly and test capacity to be under-utilized. As a result, we may be required to record additional obsolescence charges or an impairment on our long-lived assets, including facilities and equipment, as well as intangible assets, which would increase our expenses. When new technologies are introduced, the capacity to manufacture the new products often cannot meet the demand and product shortages can arise. If we or our suppliers cannot support such demand, we may not be able to fill customer orders or participate in new markets as they emerge. Our manufacturing efficiency can significantly affect our results of operations, and we cannot be sure that we will be able to maintain or increase our manufacturing efficiency to the same extent as our competitors. We continuously modify our manufacturing processes in an effort to improve yields and product performance and decrease costs. During periods when we are implementing new process technologies, manufacturing facilities may not be fully productive and may experience higher than acceptable defect rates. We may fail to achieve acceptable yields or may experience product delivery delays as a result of, among other things, capacity constraints, delays in the development of new process technologies, increased defect rates, changes in our process technologies, upgrades or expansion of existing facilities, impurities or other difficulties in the manufacturing process. Any of these occurrences could adversely impact our relationships with customers, cause harm to our reputation in the marketplace, cause customers to move future business to our competitors or cause us to make financial concessions to our customers. Improving our manufacturing efficiency in future periods is dependent on our ability to: • develop advanced process technologies and advanced products that utilize those technologies; • successfully transition to more advanced process technologies; • continue to reduce test times; • ramp product and process technology improvements rapidly and effectively to commercial volumes across our facilities; • achieve acceptable levels of manufacturing output and yields, which may decrease as we implement more advanced technologies; and • maintain our quality controls and rely upon the quality and process controls of our suppliers. 25 Disruption of our operations at our manufacturing facilities would substantially harm our business. We rely on a limited number of production facilities for each of our various product lines. A disruption at one of our manufacturing facilities could adversely impact our manufacturing operations and consequently our customer relations and our business. Such a disruption could result from, among other things, local outbreaks of COVID-19 or other infectious diseases, sustained process abnormalities, government intervention, waste disposal issues, power failures or other circumstances, or from ramp-up related challenges, such as obtaining sufficient raw materials, hiring of qualified factory personnel, installation and efficient operation of new equipment and management and coordination of our logistics networks within our global operations. We maintain insurance to protect against certain claims associated with business interruption, however, our insurance may not cover all or any part of a particular loss. Since a large percentage of our production is done in a small number of facilities, a disruption to operations, or a loss that is in excess of, or excluded from, our insurance coverage could adversely impact our business, results of operations and financial condition. We are subject to a number of procurement laws and regulations. Our business and our reputation could be adversely affected if we fail to comply with these laws. With respect to a portion of our business, we must comply with and are affected by laws and regulations relating to the award, administration and performance of government contracts in the U.S. and other countries. Government contract laws and regulations affect how we do business with our customers and impose certain risks and costs on our business. A violation of specific laws and regulations by us, our employees, others working on our behalf, a supplier or a venture partner, could harm our reputation and result in the imposition of fines and penalties, the termination of our contracts, suspension or debarment from bidding on or being awarded contracts, loss of our ability to export products or services and civil or criminal investigations or proceedings. In some instances a government agency may terminate any of our government contracts and subcontracts either at its convenience or for default based on our performance. A termination arising out of our default may expose us to liability including for excess costs incurred by the customer in procuring undelivered services and solutions from another source and such termination may have a material adverse effect on our ability to compete for future contracts and orders. In addition, on those contracts for which we are teamed with others and are not the prime contractor, the government could terminate a prime contract under which we are a subcontractor, notwithstanding the quality of our services as a subcontractor. In the case of termination for default, the government could make claims to reduce the contract value or recover its procurement costs and could assess other special penalties. Government agencies routinely audit and investigate government contractors. These agencies review a contractor’s performance under its contracts, its cost structure, its business systems and compliance with applicable laws, regulations and standards. Certain government agencies have the ability to decrease or withhold certain payments when it deems systems subject to its review to be inadequate. Additionally, any costs found to be misclassified may be subject to repayment. If an audit or investigation uncovers improper or illegal activities, we may be subject to civil or criminal penalties and administrative sanctions, including reductions of the value of contracts, contract modifications or terminations, forfeiture of profits, suspension of payments, penalties, fines and suspension, or prohibition from doing business with the government. In addition, we could suffer serious reputational harm if allegations of impropriety were made against us. Similar government oversight exists in most other countries where we conduct business. The U.S. government may terminate, cancel, modify or curtail our contracts at any time and, if we do not replace them, we may be unable to achieve or sustain revenue growth and may suffer a decline in revenues and profitability. Certain of the U.S. government programs in which we participate as a contractor or subcontractor may extend for several years and include one or more base years and one or more option years. Under some contracts, the government generally has the right not to exercise options to extend or expand our contracts and may otherwise terminate, cancel, modify or curtail our contracts at its convenience. Any decision by a government agency not to exercise contract options or to terminate, cancel, modify or curtail any major programs or contracts would adversely affect our revenues, revenue growth and profitability. We may experience periodic performance issues under certain of our contracts. Depending on the nature and value of the contract, a performance issue or termination for default could cause our actual results to differ from those anticipated and could harm our reputation and our operating results and financial condition. 26 If our products are defective or are used in defective systems, we may be subject to warranty, product recalls or product liability claims. If our products are defectively manufactured, contain defective components or are used in defective or malfunctioning systems, we could be subject to warranty and product liability claims and product recalls, safety alerts or advisory notices. While we have product liability insurance coverage, it may not be adequate to satisfy claims made against us. We also may be unable to obtain insurance in the future at satisfactory rates or in adequate amounts. Warranty and product liability claims or product recalls, regardless of their ultimate outcome, could have an adverse effect on our business, financial condition and reputation, and on our ability to attract and retain customers. In addition, we may determine that it is in our best interest to accept product returns in circumstances where we are not contractually obligated to do so to maintain good relations with our customers. Accepting product returns may adversely impact our results of operations and financial condition. Cyber-attacks or other data security incidents that disrupt our operations or result in the breach or other compromise of proprietary or confidential information about our company, our workforce, our customers, or other third parties could disrupt our business, harm our reputation, cause us to lose customers, and expose us to costly regulatory enforcement and litigation. We may manage, store, transmit and otherwise process various proprietary information and sensitive personal or confidential data. In addition, our cloud computing businesses routinely process, store and transmit data, including sensitive and personally identifiable information, for our customers. We may experience breaches or other compromises of the information technology systems we use for these purposes, as criminal or other actors may be able to penetrate our network security and misappropriate or compromise our information or that of third parties, create system disruptions or cause shutdowns. There are numerous and evolving risks to cybersecurity and privacy, including criminal hackers, hacktivists, state-sponsored intrusions, industrial espionage, employee malfeasance, and human or technological error. Computer hackers and others routinely attempt to breach the security of technology products, services and systems, and to fraudulently induce employees, customers, and other third parties to disclose information or unwittingly provide access to systems or data. The risk of such attacks includes attempted breaches not only of our own products, services and systems, but also those of customers, contractors, business partners, vendors and other third parties. Our products, services and systems may be used in critical company, customer, government or other third-party operations, or involve the storage, processing and transmission of sensitive data, including valuable intellectual property, classified information, other proprietary or confidential data, regulated data, and personal information of employees, customers and others. Successful breaches, employee malfeasance, or human or technological error could result in, for example, unauthorized access to, disclosure, modification, misuse, loss, or destruction of company, customer, government or other third party data or systems; theft of sensitive, regulated, classified or confidential data including personal information and intellectual property; the loss of access to critical data or systems through ransomware, destructive attacks or other means; and business delays, service or system disruptions or denials of service. Further, hardware and operating system software and applications that we produce or procure from third parties may contain defects in design or manufacture, including "bugs" and other problems that could unexpectedly interfere with the operation of such systems. The costs to address product defects or any of the foregoing security problems and security vulnerabilities before or after a cyber incident could be significant. Remediation efforts may not be successful and could result in interruptions, delays, or cessation of service, and loss of existing or potential customers that may impede our sales, manufacturing, distribution, or other critical functions. We could lose existing or potential customers for outsourcing services or other information technology solutions in connection with any actual or perceived security vulnerabilities in our products. In addition, breaches of our security measures and the unapproved dissemination of proprietary information or sensitive or confidential data about us or our customers or other third parties could expose us, our customers, or other third parties affected to a risk of loss or misuse of this information, result in regulatory enforcement, litigation and potential liability, damage our brand and reputation, or otherwise harm our business. Further, we rely in certain limited capacities on third-party data management providers and other vendors whose possible security problems and security vulnerabilities may have similar detrimental effects on us. We are subject to laws, rules, and regulations in the United States and other countries relating to the collection, use, transmission, processing and security of user and other data. Our ability to execute transactions and to possess, process, transmit and use personal information and data in conducting our business subjects us to legislative and regulatory burdens that, among other things, may require us to notify regulators and customers, 27 employees, or other individuals of a data security breach, including in the EU and the European Economic Area where the General Data Protection Regulation, or GDPR, took effect in May 2018, in Brazil where the LGPD data privacy laws are being implemented and in California where the California Consumer Privacy Act, or CCPA, recently became law. We have incurred, and will continue to incur, significant expenses to comply with mandatory privacy and security standards and protocols imposed by law, regulation, industry standards, or contractual obligations, but despite such expenditures may face regulatory and other legal actions in the event of a data breach or perceived or actual non-compliance with such requirements. The various data privacy enactments impose significant obligations and compliance with these obligations depends in part on how particular regulators apply and interpret them. In particular, if we fail to comply with the GDPR, or if regulators assert we have failed to comply with the GDPR, it may lead to regulatory enforcement actions, which can result in monetary penalties of up to 4% of worldwide revenue, private lawsuits, or reputational damage. Open source development and licensing practices may limit the value of our SCSS software assets. If open source programmers do not continue to develop and enhance open source technologies, we may be unable to develop new technologies, adequately enhance our existing technologies or meet customer requirements for innovation, quality and price. Many of our SCSS offerings, including Linux-based products, are built primarily from software components licensed under various open source licenses. While some components are developed by our employees, we obtain many components from software developed and released by contributors to independent open source software development projects. Open source licenses grant licensees broad permissions to use, copy, modify and redistribute the software. Certain open source licenses, such as the GNU General Public License, impose significant limits on our ability to license derivative works under more restrictive terms and generally require us to disclose the source code of such works. The inclusion of software components governed by such licenses in our offerings may limit our ability to use traditional proprietary software licensing models for those offerings. As a result, while we may have substantial copyright interests in our software technologies, open source development and licensing practices may have the effect of limiting the value of our software copyright assets. If open source programmers fail to adequately further develop and enhance open source technologies, we would have to rely on other parties to develop and enhance our offerings or we would need to develop and enhance our offerings with our own resources. We cannot predict whether further developments and enhancements to these technologies would be available from reliable alternative sources. Moreover, if third-party software programmers fail to adequately further develop and enhance open source technologies, the development and adoption of these technologies could be stifled and our offerings could become less competitive. Delays in developing, completing or delivering new or enhanced offerings could result in delayed or reduced revenue for those offerings and could also adversely affect customer acceptance of those offerings. Because of the characteristics of open source software, there are few technology barriers to entry into the open source market by new competitors and it may be relatively easy for competitors, some of which may have greater resources than we have, to enter our markets and compete with us. One of the characteristics of open source software is that anyone may modify and redistribute the existing open source software and use it to compete with us. Such competition can develop without the degree of overhead and lead time required by traditional proprietary software companies. It is possible for competitors with greater resources than ours to develop their own open source solutions or acquire a smaller business that has developed open source offerings that compete with our offerings, potentially reducing the demand for, and putting price pressure on, our offerings. In addition, some competitors make their open source software available for free download and use on an ad hoc basis or may position their open source software as a loss leader. We cannot guarantee that we will be able to compete successfully against current and future competitors or that competitive pressure and/or the availability of open source software will not result in price reductions, reduced operating margins and loss of market share. Additionally, any failure by us to provide high-quality technical support, or the perception that we do not provide high-quality technical support, could harm our reputation and negatively impact our ability to sell subscriptions for our open source offerings to existing and prospective customers. If we are unable to differentiate our open source offerings from those of our competitors or compete effectively with other open source offerings, our business, financial condition, operation results and cash flows could be adversely affected. 28 In our SCSS business, we regularly contribute software source code under open source licenses and have made other technology we developed available under other open licenses, and we include open source software in our products. For example, we have contributed certain technology related to our products to the Open Compute Project Foundation, a non-profit entity that shares and develops such information with the technology community, under the Open Web Foundation License. As a result of our open source contributions and the use of open source in our products, we may license or be required to license or disclose code and/or innovations that turn out to be material to our business and may also be exposed to increased litigation risk. As a result of making certain of our technology available to third parties, the value of our brands and other intangible assets may be diminished and competitors may be able to more effectively mimic our products, services, and methods of operations which could have an adverse effect on our business and financial results. Likewise, if the protection of our proprietary rights is inadequate to prevent unauthorized use or appropriation by third parties, the value of our brands and other intangible assets may be diminished and competitors may be able to more effectively mimic our products, services, and methods of operations. Any of these events could have an adverse effect on our business and financial results. We could be prevented from selling or developing our software if the GNU General Public License and similar licenses under which our technologies are developed and licensed are not enforceable or are modified so as to become incompatible with other open source licenses. A number of our SCSS offerings have been developed and licensed under the GNU General Public License and similar open source licenses. These licenses state that any program licensed under them may be liberally copied, modified and distributed. It is possible that a court would hold these licenses to be unenforceable or that someone could assert a claim for proprietary rights in a program developed and distributed under them. Additionally, if any of the open source components of our offerings may not be liberally copied, modified or distributed, then our ability to distribute or develop all or a portion of our offerings could be adversely impacted. In addition, licensors of open source software employed in our offerings may, from time to time, modify the terms of their license agreements in such a manner that those license terms may become incompatible with other open source licenses in our offerings or our end user license agreement, and thus could, among other consequences, prevent us from distributing the software code subject to the modified license. Our indemnification obligations to our customers and suppliers for product defects, intellectual property infringement and other matters could require us to pay substantial damages. A number of our product sales and product purchase agreements provide that we will defend, indemnify and hold harmless our customers and suppliers from damages and costs which may arise from various matters including, without limitation, product warranty claims or claims for injury or damage resulting from defects in, or usage of, our products or the products of our suppliers. In addition, we currently have in effect a number of agreements in which we agree to defend, indemnify and hold harmless our customers and suppliers from damages and costs which may arise from the infringement or alleged infringement by our products of third-party patents, trademarks or other intellectual property rights. We periodically have to respond to claims and may have to litigate indemnification obligations in the future. Indemnification obligations could require us to expend significant amounts of money to defend claims and/or to pay damages or settlement amounts. We maintain insurance to protect against certain claims associated with the use of our products; however, our insurance may not cover all or any part of a claim asserted against us. Our insurance does not cover intellectual property infringement in most instances. A claim brought against us that is in excess of, or excluded from, our insurance coverage could adversely impact our business, results of operations and financial condition. 29 Certain of our products are used in transportation safety devices and a product failure could result in significant losses. Certain of our products are used in transportation safety devices in the rail industry. These products are certified by independent auditors to safety integrity level, or SIL, 4 standards and are subsequently integrated into larger systems designed by our OEM customers and then go through rigorous testing and additional certification processes. In the event that our products fail to perform as expected, accidents and significant losses could occur. While our contracts for the sale of these products typically contain disclaimers, there can be no assurance that we would be insulated from liability in the event of an accident. Additionally, in the event of an accident, even if our product is ultimately determined not to be at fault, the costs of an investigation could be substantial. We may need to raise additional funds, which may not be available on acceptable terms or at all. We may need to raise additional funds, which we may seek to obtain through, among other things, public or private equity offerings and debt financings. Our future capital requirements will depend on many factors, including, without limitation, our levels of net sales, our levels of inventory, the timing and extent of expenditures to support research and development activities, the expansion of manufacturing and test capacity and the continued market acceptance of our products. Additional funds may not be available on terms acceptable to us, or at all. If we issue equity or convertible debt securities to raise additional funds, our existing shareholders may experience dilution and the new equity or debt securities may have rights, preferences, and privileges senior to those of our then existing shareholders. If we incur additional debt, it may increase our leverage relative to our earnings or to our equity capitalization, as well as impose financial and operating covenants that could restrict the operations of our business. In addition, our existing indebtedness may limit our ability to obtain additional financing in the future, as discussed in greater detail below under “—Risks Relating to our Debt—Our indebtedness could impair our financial condition and harm our ability to operate our business.” In fiscal 2020, 2019 and 2018, we spent $32.4 million, $33.4 million and $25.7 million, respectively, on capital expenditures, which we used, among other things, to expand manufacturing and test capacity as well as research and development. We plan to continue to make capital expenditures in the future. If our expected returns on these investments are not achieved, it could adversely impact our business, results of operations and financial condition. In fiscal 2019, we spent $76.1 million to acquire SMART EC, SMART Wireless and Premiere Customs Brokers and Premiere Logistics and in fiscal 2018, we spent $45.1 million to acquire Penguin Computing. We plan to continue exploring additional acquisition opportunities in the future. If our expected returns on these transactions are not achieved, it could adversely impact our business, results of operations and financial condition. If adequate capital is not available when needed, we may be required to modify our business model and operations to reduce spending. This could cause us to be unable to execute our business plan, take advantage of future opportunities or respond to competitive pressures or customer requirements. It may also cause us to delay, scale back or eliminate some or all of our research and development programs, or to reduce or cease operations, which could adversely impact our business, results of operations and financial condition. We have in the past and may in the future make acquisitions of companies and/or technologies which involve numerous risks. If we are not successful in integrating the technologies, operations and personnel of acquired businesses or fail to realize the anticipated benefits of an acquisition, our business, results of operations and financial condition may be adversely affected. As part of our business and growth strategy, we have in the past and may in the future acquire or make significant investments in businesses, products or technologies, such as our acquisitions of Penguin Computing, SMART EC, SMART Wireless, Premiere Customs Brokers and Premiere Logistics, in an effort to complement our existing product offering, expand our market coverage, increase our engineering workforce or enhance our technological capabilities. Any acquisitions or investments would expose us to the risks commonly encountered in acquisitions of businesses or technologies. Such risks include, among others: • problems integrating the purchased operations, technologies, products or personnel; • unanticipated costs or expenses associated with an acquisition or investment, including write-offs of tangible assets as well as goodwill or other intangible assets; 30 • negative effects on profitability resulting from an acquisition or investment; • adverse effects on existing business relationships with suppliers and customers; • risks associated with entering markets in which we have little or no prior experience and markets with complex government regulations; • loss of key employees of the acquired business; and • litigation arising from an acquired company’s operations. Problems encountered in connection with an acquisition could divert the attention of management, utilize scarce corporate resources and otherwise harm our business. If we make any future acquisitions, we could issue ordinary shares that would dilute our existing shareholders’ percentage ownership, incur substantial additional debt, expend cash and reduce our cash reserves or assume additional liabilities. Furthermore, acquisitions may require material charges and could result in adverse tax consequences, substantial depreciation, deferred compensation charges, liabilities under earn-out provisions, the amortization of amounts related to deferred compensation and identifiable purchased intangible assets or impairment of goodwill or other intangibles, any of which could negatively impact our business, results of operations and financial condition. We are unable to predict whether or when any prospective acquisition candidate will become available or the likelihood that any acquisition will be completed. We may expend significant resources and management time pursuing an acquisition that we are unable to consummate. Even if we do find suitable acquisition opportunities, we may not be able to consummate the acquisitions on commercially acceptable terms or at all, or may not realize the anticipated benefits of any acquisitions we do undertake. Our investments in private companies are subject to risk of loss of investment capital. These investments are inherently risky because the markets for the technologies or products they may have under development are typically in the early stages and may never materialize. We could lose our entire investment in these companies. In connection with the sale of our storage business, we agreed to indemnify SanDisk against specified losses. In August 2013, we completed the sale of substantially all of the business unit which was focused on solid state drives, which we referred to as the Storage Business, to SanDisk (now a part of Western Digital) for approximately $304 million in cash, subject to certain escrows and holdbacks. The sale agreement for the Storage Business, or the Sale Agreement, contained certain indemnification obligations that are typical for transactions of this nature, including, among others, for losses arising from breaches of our representations and warranties relating to the sale, as well as for taxes arising with respect to pre-closing tax periods. 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 us under the indemnification provisions of the Sale Agreement in connection with a lawsuit filed by Netlist, Inc., or Netlist, against SanDisk alleging that certain products of the Storage Business that we sold to SanDisk 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, our indemnification obligation in respect of intellectual property matters, including those claimed by SanDisk, is subject to a deductible of approximately $1.8 million and a cap of $60.9 million. The SanDisk claim included what purported to be an estimate of SanDisk’s alleged indemnifiable losses that is greater than the cap in the Sale Agreement for intellectual property matters. We believe that the allegations giving rise to the indemnification claim are without merit and we intend to dispute SanDisk’s claim for indemnification. In addition, there may be other grounds for us to dispute the indemnification claim and/or the amounts of any indemnifiable losses of SanDisk. While we believe that the infringement claims are without merit, we can provide no assurance that SanDisk will be successful in defending the infringement claims against Netlist or that we will otherwise be successful in disputing the indemnification claim and/or the amount of indemnifiable losses against SanDisk. On May 19, 2020 the court entered an order granting the joint stipulation of dismissal filed by Netlist and SanDisk. In addition to the infringement claim described above, we continue to have an obligation to indemnify SanDisk for certain specified matters, including tax obligations for pre-closing tax periods, some of which indemnification obligations are capped at certain amounts and survive for periods of time set forth in the Sale Agreement. An indemnity claim brought against us by SanDisk, including the claim described above, could have a material adverse effect on our business, results of operations and financial condition. 31 Our future success is dependent on our ability to retain key personnel, including our executive officers, and to attract qualified personnel. If we lose the services of these individuals or are unable to attract new talent, our business may be adversely affected. Our future operating results depend in significant part upon the continued contributions of our key senior management and technical personnel, many of whom would be difficult to replace. We are particularly dependent on the continued service of Ajay Shah, our Executive Chairman, Mark Adams, our President and Chief Executive Officer, and Jack Pacheco, our Executive Vice President, Chief Operating Officer and Chief Financial Officer. Our future operating results also depend in significant part upon our ability to attract, train and retain qualified management, including for manufacturing and quality assurance, engineering, design, finance, marketing, sales and support personnel. We are continually recruiting such personnel in various parts of the world. However, competition for such personnel can be strong and we can provide no assurance that we will be successful in attracting or retaining such personnel now or in the future. In addition, particularly in the high-technology industry, the value of stock options, restricted stock units (RSUs), grants or other share-based compensation is an important element in the retention of employees. Declines in the value of our ordinary shares could adversely affect our ability to retain employees and we may have to take additional steps to make the equity component of our compensation packages more attractive to attract and retain employees. These steps could result in dilution to shareholders. In Brazil in particular, there is limited availability of labor with the technical skills required for our operations. As a result, we rely heavily on our ability to train personnel or relocate individuals from outside of the country. Relocation from a foreign country is expensive. To keep pace with our anticipated growth in Brazil, we anticipate the need to increase the number of our technical personnel. Additionally, to meet the obligations associated with certain local manufacturing incentives, we are required to invest in research and development activities which could require an increase in engineering and other technical personnel. To the extent that competitors enter or expand in the local market, our labor force could be targeted, which could result in the loss of personnel and/or the increase in wages to retain personnel. The loss of any key employee, the failure of any key employee to adequately perform in his or her current position, our inability to attract, train and retain skilled employees as needed or the inability of our key employees to expand, train and manage our employee base as needed, could have a material adverse effect on our business, results of operations and financial condition. We rely, in part, on third-party sales representatives to assist in selling our products, and the failure of these representatives to perform as expected could reduce our future sales. Sales of our products to some of our OEM customers are accomplished, in part, through the efforts of third-party sales representatives. We are unable to predict the extent to which these third-party sales representatives will be successful in marketing and selling our products. Moreover, many of these third-party sales representatives also market and sell competing products and may more aggressively pursue sales of our competitors’ products. Our third-party sales representatives may terminate their relationships with us at any time on short or no notice. Our future performance may also depend, in part, on our ability to attract and retain additional third-party sales representatives that will be able to market and support our products effectively, especially in markets in which we have not previously sold our products. If we cannot retain our current third-party sales representatives or recruit additional or replacement third-party sales representatives or if these sales representatives are not effective, it could have a material adverse effect on our business, results of operations and financial condition. If we are unable to protect our intellectual property, our operating results may be adversely affected. Our success is dependent, in part, upon protecting our intellectual property rights. We rely on a combination of trade secrets, know-how, trademarks, copyright and, to a lesser extent, patents. We do not own or apply for patents in respect of the majority of our products. The absence of patent protection for most of our products means that we cannot prevent our competitors from reverse-engineering and duplicating our products. We believe that our continued success depends largely on the technical expertise we have developed in manufacturing and designing products, and we rely on confidential proprietary information, including trade secrets and know-how to develop and maintain our competitive position. Any disclosure to or misappropriation by third parties of our confidential proprietary information could enable competitors to quickly duplicate or surpass our technological achievements, thus eroding our competitive position in our market. We seek to protect our confidential 32 proprietary information, in part, by confidentiality and non-disclosure agreements and invention assignment agreements with our employees, consultants, advisors, contractors and collaborators. These agreements are designed to protect our proprietary information, however, we cannot be certain that such agreements have been entered into with all relevant parties, and we cannot be certain that our trade secrets and other confidential proprietary information will not be disclosed or that competitors will not otherwise gain access to our trade secrets or independently develop substantially equivalent information and techniques. For example, any of these parties may breach the agreements and disclose our proprietary information, including our trade secrets, and we may not be able to obtain adequate remedies for such breaches. We also seek to preserve the integrity and confidentiality of our confidential proprietary information by maintaining physical security of our premises and physical and electronic security of our information technology systems, but it is possible that these security measures could be breached. If any of our confidential proprietary information were to be lawfully obtained or independently developed by a competitor, we would have no right to prevent such competitor from using that technology or information to compete with us, which could harm our competitive position. It is possible that our efforts to protect our intellectual property rights may not: • prevent our competitors from independently developing similar products, duplicating our products or from designing around the patents owned by us; • prevent third-party patents from having an adverse effect on our ability to do business; • prevent disputes with third parties regarding ownership of our intellectual property rights; • prevent the challenge, invalidation or circumvention of our existing patents; • result in issued patents or registered trademarks from any of our pending applications; or • result in patents that lead to commercially viable products or provide competitive advantages for our products. If any of our issued patents are found to be invalid or if any of our patent applications are rejected, our ability to exclude competitors from making, using or selling the same or similar products as us could be compromised. In addition, because we conduct a substantial portion of our operations and sell a large percentage of our products outside the United States, we have exposure to intellectual property risks from operating in foreign countries, many of which have laws that may not adequately protect our intellectual property rights. Activities in the area of intellectual property rights, including litigation and various patent processes can cause us to incur substantial expenses. We are currently involved in contested proceedings, which may result in decisions against us. The markets in which we compete are characterized by frequent claims alleging misappropriation of trade secrets or infringement of patents, trademarks, copyrights or other intellectual property rights of others. From time to time, third parties may assert against us or our customers alleged infringement of such intellectual property rights on technologies that are important to our business. We can provide no assurance that third parties will not in the future pursue claims against us or our customers with respect to the alleged infringement of intellectual property rights. In addition, litigation or other legal and technical processes may be necessary to protect our intellectual property rights, to determine the validity and scope of the proprietary rights of others or to defend against third party claims of infringement and/or invalidity. Litigation and other legal and administrative processes, whether as plaintiff, defendant, or otherwise, could result in substantial costs and diversion of resources and management attention and could have a material adverse effect on our business, results of operations and financial condition, whether or not such litigation or other processes are ultimately determined in our favor. In the event of an adverse result in, or a settlement of, a litigation matter, we could be required to pay substantial damages or settlement amounts; cease the manufacture, use, import and sale of certain products or components; expend significant resources to develop or acquire rights to use non-infringing technology; and/or discontinue the use of certain processes or obtain licenses and pay one-time fees and/or on-going royalties to use the infringing or allegedly infringing technology. The occurrence of any of the foregoing could result in unexpected expenses or require us to recognize an impairment of our assets, which would reduce the value of our assets and increase our expenses. Alternate technology development or license negotiations would likely result in significant expenses and divert the efforts of our technical and management personnel. We cannot assure that we would be successful in such development or negotiations. 33 Moreover, there could be public announcements of the results of interim proceedings or developments. If securities analysts or investors perceive these announcements or results to be negative, it could have a substantial adverse effect on the price of our ordinary shares. As we increase our sales, develop more technology and expand our product offerings, the possibility of being involved in more intellectual property contests grows. Increased intellectual property contests could have a material adverse effect on our business, results of operations and financial condition. We may not have rights to manufacture and sell particular products that we currently offer, or we may be required to pay a royalty to sell certain products. The memory, storage and compute markets are constantly undergoing rapid technological change and evolving industry standards. From time to time, third parties may claim that we are infringing upon technology to which they have proprietary rights and that we require a license to manufacture and/or sell certain of our products. If we are unable to supply certain products at competitive prices due to royalty payments we are required to make or at all because we were unable to secure a required license, our customers might cancel orders or seek other suppliers to replace us, which could have a material adverse effect on our business, results of operations and financial condition. Changes in, or interpretations of, tax regulations or rates, or changes in the geographic dispersion of our net sales, or changes in other tax benefits, may adversely affect our income, value-added and other taxes, which may in turn have a material adverse effect on our business, results of operations, and financial condition. Our future effective tax rates could be unfavorably affected by the resolution of issues arising from tax audits with various tax authorities in the United States and abroad; adjustments to income taxes upon finalization of various tax returns; increases in expenses not deductible for tax purposes, including write-offs of acquired in-process research and development and impairments of goodwill in connection with acquisitions; changes in available tax credits; changes in tax laws or regulations or tax rates; changes in the interpretation or application of tax laws; changes in tax regulations or rates; increases or decreases in the amount of net sales or earnings in countries with particularly high or low statutory tax rates; changes in exemptions from taxes in certain jurisdictions or in connection with certain transactions; or by changes in the valuation of our deferred tax assets and liabilities. In addition, taxable income in any jurisdiction is dependent upon acceptance of our operational practices and intercompany transfer pricing by local tax authorities as being on an arm’s length basis. Due to inconsistencies in application of the arm’s length standard among taxing authorities, as well as lack of adequate treaty-based protection, transfer pricing challenges by tax authorities could, if successful, substantially increase our income tax expense. While we enjoy and expect to continue to enjoy beneficial tax treatment in certain foreign jurisdictions, most notably Brazil and Malaysia, we are subject to meeting specific conditions in order to receive the beneficial treatment. Additionally, many of the beneficial treatments must be renewed periodically, and our enjoyment thereof is conditioned upon compliance with several legal requirements and is subject to change. See “—Risks Relating to our International Operations—If the government incentives or tax holiday arrangements from which we benefit in Brazil or Malaysia change or cease to be in effect or applicable in part or in whole, for any reason, or if our assumptions and interpretations regarding tax laws and incentive or holiday arrangements prove to be incorrect, the amount of corporate income, excise, import and contribution taxes we have to pay could increase significantly.” We are subject to tax examination in the United States and in foreign jurisdictions, including in Brazil where we have had several audits and are currently being audited with respect to certain taxes. We regularly assess the likelihood of outcomes resulting from these examinations to determine the adequacy of our provision for taxes and have reserved for potential adjustments that may result from current examinations. We believe such estimates to be reasonable; however, there can be no assurance that the final determination of any examinations will be in the amounts of our estimates. Any significant variance in the results of an examination as compared to our estimates, any failure to continue to receive any beneficial tax treatment in any of our foreign locations or any increase in our future effective tax rates due to any of the factors set forth above or otherwise could reduce net income and have a material adverse effect on our business, results of operations and financial condition. 34 Our ability to use our net operating loss carryforwards are limited. As of August 28, 2020, we had U.S. federal and state net operating loss carryforwards of approximately $130.9 million and $52.6 million, respectively. The federal net operating loss carryforwards will expire, if not utilized, in fiscal 2023 through fiscal 2038, and the state net operating loss carryforwards will expire in fiscal 2023 through fiscal 2040, both in varying amounts, if not utilized. In addition, under Section 382 of the Internal Revenue Code of 1986, as amended, or the Code, if a corporation undergoes an “ownership change,” the corporation’s ability to use its pre-change net operating loss carryforwards to offset its post-change taxable income may be limited. In general, an “ownership change” will occur if there is a cumulative change in our ownership by certain “5-percent shareholders” that exceeds 50 percentage points over a rolling three-year period. Similar rules may apply under state tax laws. Our net operating loss carryforwards are subject to limitations per Section 382 of the Code. We have experienced ownership changes in the past, and we may experience ownership changes in the future as a result of future transactions in our ordinary shares, some changes of which may be outside our control. As a result, our ability to use our pre-change net operating loss carryforwards to offset post-change U.S. federal and state taxable income may be subject to additional limitations. If our goodwill or intangible assets become impaired, we may be required to record a significant charge to earnings. Under U.S. GAAP, we review our long-lived intangible and tangible assets for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. Goodwill is required to be tested for impairment at least annually. Factors that may be considered a change in circumstances indicating that the carrying value of our goodwill or other intangible assets may not be recoverable include declines in our share price and market capitalization or future cash flow projections. We may be required to record a significant charge to earnings in our financial statements during the period in which any impairment of our goodwill or other intangible assets is determined. Impairment charges could have a material adverse effect on our business, results of operations and financial condition. We are subject to a variety of federal, state, foreign and international laws and regulatory regimes. Failure to comply with governmental laws and regulations could subject us to, among other things, mandatory product recalls, penalties and investigation and legal expenses which could have an adverse effect on our business, results of operations and financial condition. Our business is subject to regulation by various U.S. federal and state governmental agencies. Such regulation includes, without limitation, the radio frequency emission regulatory activities of the Federal Communications Commission, the antitrust regulatory activities of the Federal Trade Commission, or FTC, and the Department of Justice, the consumer protection laws of the FTC, the import/export regulatory activities of the Department of Commerce, the product safety regulatory activities of the Consumer Products Safety Commission, the regulatory activities of the Occupational Safety and Health Administration, the environmental regulatory activities of the Environmental Protection Agency, the labor regulatory activities of the Equal Employment Opportunity Commission, the export control regulatory activities of the Department of State, and tax and other regulations by a variety of regulatory authorities in each of the areas in which we conduct business. We are also subject to similar, and in some cases additional, regulation in other countries where we conduct business, including import and export laws and foreign currency control. In certain jurisdictions, such regulatory requirements may be more stringent and complex than in the United States. We are also subject to a variety of U.S. federal and state employment and labor laws and regulations, including, without limitation, the Americans with Disabilities Act, the Federal Fair Labor Standards Act, the Worker Adjustment and Restructuring Notification Act, which requires employers to give affected employees at least 60 days’ notice of a plant closing or a mass layoff, and other regulations related to working conditions, wage-hour pay, overtime pay, employee benefits, antidiscrimination and termination of employment. Like other companies operating or selling internationally, we are subject to the Foreign Corrupt Practices Act, or FCPA, and other laws which generally prohibit improper payments or offers of payments to foreign governments and their officials and political parties by U.S. companies and their intermediaries for the purpose of obtaining or retaining business or otherwise obtaining favorable treatment. We are also subject to similar or even more restrictive anticorruption laws imposed by the governments of other countries where we do business, including the UK Bribery Act, the Malaysian Anticorruption Act and the Brazil Clean Company Act. We make sales and operate in countries 35 known to experience corruption that are rated as high-risk nations. Our business activities in such countries create the risk of unauthorized conduct by one or more of our employees, consultants, customs brokers, freight forwarders, sales agents or distributors that could be in violation of various laws including the FCPA or similar local regulations. In addition, we may be held liable for actions taken by such parties even though such parties are not subject to the FCPA or similar laws. Any determination that we have violated the FCPA or similar laws may result in severe criminal or civil sanctions, and we may be subject to other liabilities that could have a material adverse effect on our business, results of operations and financial condition. Our Brazilian operations are subject to periodic and regular investigations by labor officials and governmental bodies, including the Brazilian Ministry of Labor and the Brazilian Labor Public Prosecutor’s Office, with respect to our compliance with labor rules and regulations. Although we believe that we comply with all of the laws and regulations applicable to our business and activities performed in Brazil, these investigations could result in fines and proceedings that may materially and adversely affect our business, results of operations and financial condition. Noncompliance with applicable regulations or requirements could subject us to investigations, sanctions, mandatory product recalls, enforcement actions, disgorgement of profits, disbarment from government projects, fines, damages and civil and criminal penalties or injunctions that could harm our business, results of operations and financial condition. In addition, from time to time we have received, and may receive in the future, correspondence from former employees and parties with whom we have done business, threatening to bring claims against us alleging that we have violated one or more regulations related to customs, labor and employment, foreign currency control or other laws or regulations. An adverse outcome in any litigation or proceeding related to such matters could require us to pay damages, attorneys’ fees and/or other costs. If any governmental sanctions were to be imposed, or if we were not to prevail in any civil action or criminal proceeding, our business, results of operations and financial condition could be materially adversely affected. In addition, responding to any litigation or action would likely result in a significant diversion of management’s attention and resources and a significant increase in professional fees. We could incur substantial costs or liabilities as a result of violations of environmental laws. Our operations and properties are subject to a variety of U.S., foreign government and international environmental laws and regulations governing, among other things, environmental licensing and registries, protection of flora and fauna, air emissions, use of water resources, wastewater discharges, management and disposal of hazardous and non-hazardous materials and wastes, reverse logistics (take-back policy) and remediation of releases of hazardous materials. Our failure to comply with present and future requirements, or the management of known or identification of new or unknown contamination, could cause us to incur substantial costs, including cleanup costs, indemnifications, compensations, fines, suspension of activities and other penalties, investments to upgrade our facilities or change our processes or curtailment of operations. For example, the presence of lead in quantities not believed to be significant have been found in the ground under one of the multi-tenant buildings we lease in Brazil. While we did not cause the contamination, we may be held responsible if remediation is required, although we may be entitled to seek indemnification from responsible parties under Brazilian law and from our lessor under our lease. The identification of presently unidentified environmental conditions, more vigorous enforcement by regulatory agencies, enactment of more stringent laws and regulations or other unanticipated events may arise in the future and give rise to material environmental liabilities and related costs. The occurrence of any of the foregoing could have a material adverse effect on our business, results of operations and financial condition. Worldwide political conditions and threats of terrorist attacks may adversely affect our operations and demand for our products. Armed conflicts around the world could have an impact on our sales, our supply chain and our ability to deliver products to our customers. Political and economic instability in some regions of the world could also have a negative impact on our business. More generally, various events could cause consumer confidence and spending to decrease, or could result in increased economic or financial volatility, any of which could result in a decrease in demand for our products. 36 Additionally, the occurrence or threat of terrorist attacks may in the future adversely affect demand for our products. In addition, such attacks may negatively affect our operations directly or indirectly and such attacks or other armed conflicts may directly impact our facilities or those of our suppliers or customers. Such attacks may make travel and the transportation of our products more difficult and more expensive, ultimately having a negative effect on our business. Any such occurrences could have a material adverse effect on our business, results of operations and financial condition. Our operations in different parts of the world could be subject to natural disasters, health epidemics or pandemics and other business disruptions, which could have a material adverse effect on our business, results of operation and financial condition. Our operations in different parts of the world could be subject to natural disasters, including earthquakes, monsoons, cyclones and floods. For example, our United States headquarters in Newark, California and our Penguin Computing operations in Fremont, California are located near major earthquake fault lines. Our manufacturing facility in Penang, Malaysia is also prone to natural disasters, such as cyclones, monsoons and floods. In the event of a major earthquake, cyclone, monsoon or other natural or manmade disaster, we could experience business interruptions, destruction of facilities and/or loss of life, any of which could materially adversely affect our business. In addition, our business could be adversely affected by the outbreak of diseases, epidemics or pandemics. Any outbreak of disease or other adverse public health developments in any of the locations in which we conduct business could severely disrupt our business or the business of our customers and suppliers, which could in turn materially adversely affect our business. Since a large percentage of our production is done in a small number of facilities, a disruption to operations could have a material adverse effect on our business, results of operations and financial condition. Risks Relating to our International Operations We depend on the desktop, notebook, server and smartphone markets in Brazil, and lack of growth, or the occurrence of contraction, in these markets have in the past, and could again in the future, have a material adverse impact on our business, results of operations and financial condition. A significant portion of our sales and operations are focused on Brazil. Sales to customers in Brazil accounted for 35%, 44% and 62% of our net sales in fiscal 2020, 2019 and 2018, respectively. We have invested substantial financial and management resources to develop a research and development center and a semiconductor packaging and test facility in Brazil in order to target the growing market for memory in Brazil and to take advantage of certain Brazilian laws and government incentives, as described below in “—Risks Relating to our International Operations.” Our future financial performance will depend in large part on growth in the Brazilian market, which may not grow again at historical rates, or at all. Demand for our products in Brazil is dependent upon, among other things, demand in the markets served by our customers, including the Brazilian computing and mobile markets. From time to time, the markets served by our Brazilian customers have experienced significant downturns, often in connection with political unrest or in connection with, or in anticipation of, declines in general economic conditions. A decline or significant shortfall in demand in any of the markets that we serve could have a significant negative impact on the demand for our products. In addition, a prolonged economic downturn in Brazil, even absent a worldwide economic downturn, may lead to higher interest rates or significant changes in currency exchange rates, the rate of inflation in Brazil, or an inability of our Brazilian customers and suppliers to access capital on acceptable terms. Our customers and suppliers in Brazil could experience cash flow problems, credit defaults or other financial hardships. In addition, as discussed in greater detail below, our sales and our profit margins in Brazil have been favorably impacted by laws that established local content requirements for electronics products which laws have been undergoing changes as a result rulings by the WTO. See “—Our success in Brazil depends in part on Brazilian laws establishing incentives for local manufacturing of electronics products. The elimination of or a reduction in the incentives for local manufacturing, or our inability to secure the benefits of these regulations, could significantly reduce the demand for, and the profit margins on, our products in Brazil.” 37 Any of these circumstances could have a material adverse effect on our business, results of operations and financial condition. Our success in Brazil depends in part on Brazilian laws establishing incentives for local manufacturing of electronics products. The elimination of or a reduction in the incentives for local manufacturing, or our inability to secure the benefits of these regulations, could significantly reduce the demand for, and the profit margins on, our products in Brazil. Successive Brazilian governmental administrations have adopted economic policies intended to foster innovation and investment in local production, stimulate job growth, provide stimulus to exports and defend local manufacturers in various industries. In recent decades, the Brazilian government identified the design and manufacture of ICs as a priority and established tax incentives and local content requirements intended to promote the development of the local IT industry. These incentives include the PPB/IT Program, PADIS and Lei do Bem. The law that provides the PPB/IT Program benefits is currently legislated to remain in force through the end of 2029. The PPB/IT Program is intended to promote local manufacturing by allowing qualified companies to receive incentives when they sell specified IT products, including desktops, notebooks, servers, SmartTVs and mobile products that contain components that are manufactured in Brazil. The PPB/IT Program, through the enactment of several ordinances, provided for reduced Brazilian federal excise tax rate, or the IPI, for qualified parties as compared to the rate that is required to be collected by non-qualified parties. The PPB/IT Program provided an incentive for certain customers to purchase products from us because they were not required to pay the regular level of IPI on their purchases. Under the PPB/IT Program, the percentage of local content required in specified IT products increased significantly from 2006 to 2019. For example, under the PPB/IT Program, from 2006 to 2019, the total requirement of DRAM modules made with locally packaged DRAM ICs for notebook computers increased from 0% to 80%. In order to receive the intended treatment as a PPB/IT Program supplier, our subsidiary, SMART do Brazil, was required to invest in research and development activities in an amount equal to 4% of its gross annual sales revenues reduced by the following: the cost of raw materials qualified as products eligible for the PPB/IT Program, including the ICs that were purchased from our other Brazilian subsidiary, SMART Brazil, and that were used to make memory modules; applicable sales taxes; the value of products exported out of Brazil; and the value of products shipped to the Manaus Free Trade Zone. Brazil’s local content requirements for the IT industry have been subjected to criticism by other governments and international organizations. In 2013, the European Union, or the EU, later joined by Japan, requested the establishment of a panel within the World Trade Organization, or the WTO, to determine whether the structure of certain programs enacted by the Brazilian government concerning incentives and local content requirements for the automotive and several other industries (including the IT industry and including portions of Lei do Bem that do not relate to our business, PADIS and the PPB/IT Program), are inconsistent with WTO rules. On August 30, 2017, the WTO panel released a report and on December 13, 2018, after hearing appeals, the appellate body of the WTO released its decision in which it upheld some of the panel’s findings that, among other things, the tax exemptions, reductions and suspensions granted for the automotive, IT and other industries amount to subsidies that are inconsistent with the principles of the various WTO agreements, while also rejecting some of the complaints by the EU and Japan. The WTO’s decision included a recommendation that Brazil withdraw certain of the subsidies, however, it does not impact the benefits that we receive under Lei do Bem. The appellate body also noted that it would not contravene the principles of the WTO agreements for Brazil to establish local manufacturing processes as a condition to benefit from incentives granted by the government provided that certain conditions are met. In response to the WTO report, government authorities in Brazil revoked several ordinances that established local content requirements under the PPB/IT Program, many of which were related to our local business. The revocation became effective June 30, 2019. Government officials in Brazil have continued to express their intent to restructure the incentives to be consistent with the WTO principles while still continuing to support local industry. In June 2019, the authorities in Brazil published the first of a series of new ordinances, effective as of July 1, 2019, that provided a structure for revised support for local manufacturing utilizing a score-based point system for eligibility for incentives. In this system, each manufacturing process within an electronic device is assigned a different number of points. Our manufacturing processes related to memory products are a valuable part of the electronics manufacturing chain and, as such, are expected to provide our customers the opportunity to accomplish a significant number of the overall points required if they purchase products manufactured by us in Brazil. 38 As part of making the local regulation compatible with the WTO principles, the government of Brazil also enacted a new law that provides for changes in the mechanism of incentives granted to the IT sector that impacts SMART Brazil and SMART do Brazil as well as their customers. As a result of the changes, the reduction of the IPI for PPB/IT Program was eliminated along with, for PADIS companies, the zero rates of IPI, PIS and COFINS levied over sales. While participants in the PPB/IT Program will no longer be allowed some of the prior benefits, these participants will be granted financial credits based on varying multipliers of effective disbursement s on research and development initiatives subject to varying caps related to certain percentages of the sales revenue within the country. These financial credits can be used by participants either as a credit against certain taxes, or to request a refund in cash. See Business section - “Brazil Local Manufacturing Requirements” and Risk Factors “If the government incentives or tax holiday arrangements from which we benefit in Brazil or Malaysia change or cease to be in effect or applicable in part or in whole, for any reason, or if our assumptions and interpretations regarding tax laws and incentive or holiday arrangements prove to be incorrect, the amount of corporate income, excise, import and contribution taxes we have to pay could increase significantly.” While we believe that this score-based system will continue to incentivize our Brazilian customers to purchase products from us in Brazil, there can be no assurance that the replacement programs will ultimately provide the same or a similar level of support and benefit for our customers and our business as was previously in place. There can also be no assurance that the WTO, the EU and Japan will agree that this new program structure is compliant with the WTO agreements. Any adverse change in legislation or in the impact and effectiveness of the local incentives programs, or our failure to meet the requirements of any of the regulations, could significantly reduce the demand for, the profit margins on, and the competitiveness of our products in Brazil, and would have a material adverse effect on our business, results of operations and financial condition. In addition, we benefit from various other tax incentives extended to us in Brazil to promote the development of the local IT industry, and are subject to related risks, as described below. Significant changes in the political or economic environments in Brazil or Malaysia could adversely affect our business, results of operations and financial condition. We have significant operations in Malaysia and Brazil. The governments of these countries frequently intervene in their respective economies and occasionally make significant changes in policies and regulations. The Brazilian government’s actions to control inflation and other policies and regulations have often involved, among other measures, increases in interest rates, changes in tax policies, price controls, currency devaluations, capital controls and limits on imports. Our business, results of operations and financial condition, as well as the market price of our securities, may be adversely affected by changes in these and in other countries, to policies or regulations involving or affecting general economic factors, such as: • interest rates; • exchange rates and currency controls and restrictions on the movement of capital out of country; • currency fluctuations; • import and export controls; • inflation; • liquidity of the domestic capital and lending markets; • reduction or cancellation of tax incentives to which we are currently entitled; • other changes to tax and regulatory policies; and • other political, social and economic developments. The political environment in Brazil has influenced and continues to influence the performance of the country’s economy. Recurring economic and political instability as well as corruption scandals in Brazil contribute to a reduction in market confidence in the Brazilian economy. Moreover, we cannot predict the outcome or future effects of new political administrations in Brazil and cannot predict which policies will be adopted or modified or the effect thereof on Brazilian economy and on our business. Any new policies or changes in current policies may have a material adverse effect on our business and financial condition. 39 If the government incentives or tax holiday arrangements from which we benefit in Brazil or Malaysia change or cease to be in effect or applicable in part or in whole, for any reason, or if our assumptions and interpretations regarding tax laws and incentive or holiday arrangements prove to be incorrect, the amount of corporate income, excise, import and contribution taxes we have to pay could increase significantly. We have structured our operations in a manner designed to maximize our benefit from various government incentives and/or tax holidays extended to manufacturers in Brazil and Malaysia to encourage investment and employment. In Brazil, we participate in the following government investment incentive programs, among others: • Support Program for the Technological Development of the Semiconductor and Display Industries (PADIS), 2007. PADIS is designed to promote the development of the local semiconductor industry. We began operations under the PADIS rules in February 2011 and have been qualified for beneficial tax treatment in connection with several products that we manufacture in Brazil. The PADIS benefits include: (i) relief from Brazil’s corporate income tax, resulting in a reduction in the Brazilian statutory income tax rate from 34% to 9% on taxable income from the semiconductor IC portion of our operations, (ii) relief from the PIS and COFINS Contributions, the IPI, and Brazil’s import tax, on both the import and domestic acquisition of fixed assets, inputs, software and sale of final products eligible for PADIS, and (iii) relief from Brazil’s tax on outbound royalties, or CIDE. Effective April 1, 2020, the reduction of the IPI, PIS and COFINS rates to zero percent on our sales is no longer available as a result of a December 2019 amendment to the PADIS Program intended at making PADIS compatible with the principles of the WTO. Instead, participants in the PADIS program are entitled to financial credits based on varying multipliers of their annual research and development, or R&D, investments subject to caps related to certain percentages of the sales revenue within the country. PADIS companies are entitled to financial credits equivalent to 2.62 times the effective disbursements on research and development initiatives under PADIS limited to a cap of 13.1% of total incentivized revenues within the country. These financial credits can be used by participants either as a credit against certain taxes, or to request a refund in cash. To realize these benefits, our subsidiary, SMART Brazil, is required to invest a percentage of its gross annual semiconductor sales revenues (reduced by certain permitted deductions) in research and development activities conducted in Brazil each calendar year. The applicable percentage was 3% for 2015, increasing to 4% for 2016 through 2018, and increasing to 5% for 2019 and beyond. As part of the amendment effective on April 1, 2020, the amount of permitted deductions from gross revenues has decreased. Furthermore, SMART Brazil is not permitted to distribute to shareholders (through dividends, capital reductions or otherwise) the amount of corporate income taxes not paid as a result of the PADIS benefits. Failure to comply with our obligations under the PADIS could result in significant penalties and could also result in the suspension of our participation in PADIS and ultimate termination of PADIS should SMART Brazil fail to repair the infraction within 90 days or should SMART Brazil have PADIS suspended twice in the period of two years. If SMART Brazil’s participation in PADIS were terminated, it would be permitted to reapply for the program only after a two-year period. • Lei da Informática—Processo Produtivo Básico (PPB/IT Program), 1991, extended through 2029. Brazil’s PPB/IT Program, in which we also began to participate in February 2011, is intended to promote local manufacturing by allowing qualified PPB/IT Program companies to sell certain IT products with a reduced rate of IPI as compared to the rate that is required to be collected by non-qualified suppliers. Effective April 1, 2020, the reduction of the IPI is no longer available on sales to certain customers as a result of an amendment to the PPB/IT Program which was intended at making the PPB/IT Program compatible with the principles of the WTO. Instead, PPB/IT Program participants are entitled to financial credits calculated based on the R&D investments made under PPB/IT Program, that can be used by the participants either as a credit against certain taxes, or for a request of a refund in cash. The multipliers of the financial credits range from 2.7 to 3.4 times the R&D invested, limited to 10.92% to 13.65% of the gross sales revenues, until December 31, 2024, depending on the location of the participant and on what products it manufactures and sells. The financial credits will be gradually reduced over time to a range of 2.73 to 3.41 times the R&D invested, limited to 10.92% to 13.65% of the gross annual sales revenues by December 31, 2029 when the PPB/IT Program is scheduled to expire. The PPB/IT Program provided an incentive for certain customers to purchase from us because our sales were not subject to the regular level of IPI before March 31, 2020, and effective April 1, 2020, our OEM and contract manufacturing customers will benefit from the PPB/IT Program as they will be 40 allowed to purchase qualified products from us with the suspension of IPI. In order to receive the intended treatment as a PPB/IT Program supplier, our subsidiary SMART do Brazil is required to invest in research and development activities conducted in Brazil in an amount equal to 4% of its gross annual sales revenues reduced by the following prior to March 31, 2020: the cost of raw materials qualified as products eligible for the PPB/IT Program, including the ICs that are purchased from our other Brazilian subsidiary, SMART Brazil, and that are used to make memory modules; applicable sales taxes; the value of products exported out of Brazil; and the value of products shipped to the Manaus Free Trade Zone. Effective April 1, 2020, the annual R&D investment is calculated over the gross annual sales of qualified products made by SMART do Brazil to customers that do not benefit from the PPB/IT Law (and, therefore, will be subject to the ordinary IPI rate), reduced by sales to the Manaus Free Trade Zone, cancelations of sales, devolution of products, IPI and ICMS-ST, plus PIS, COFINS and statutory ICMS. Failure to comply with our obligations under the PPB/IT Program would result in significant penalties and could also result in the suspension of our participation in the PPB/IT Program and ultimate termination should SMART do Brazil fail to cure the infraction within 180 days. Compliance with these programs is measured annually, on a calendar year basis. We believe that we have fulfilled these research and development investment requirements through calendar 2019, however, for certain years the authorities in Brazil have not yet completed the relevant review. For calendar years 2011 to 2016, the authorities requested additional information in order to review whether certain of our reported research and development investments as required for SMART do Brazil qualify for the PPB/IT Program and for calendar years 2011, 2013, 2014 and 2015 the authorities have rejected some of our submissions. We believe that all of our research and development investments do qualify and we intend to appeal the decision of the authorities. The rejected submissions aggregate approximately R$4.5 million (or $0.9 million). While we believe that all of our reported investments qualify for the research and development requirements, we cannot provide assurance that the Brazilian authorities will agree with our classification or that our appeals will be successful. If our appeals are not successful, we may be required to make incremental payments to the authorities or to make incremental research and development investments in the future. If we fail to make the additional payments or additional investments if required, we may lose the anticipated benefits of these programs and could be penalized for failing to make the research and development investments when required, or, where applicable, for failing to pay required statutory income taxes, or to collect the required PIS/COFINS and IPI upon our sales, or ultimately to return either partially or in total, the financial credits granted to us after April 1, 2020 plus significant penalties. In addition, there is a risk that modifications to laws may prohibit, interrupt, limit, terminate early or change the use of these existing tax incentives. Additionally, we cannot provide assurance that we will be able to make the required investments in the future. In 2013, the EU, later joined by Japan, requested the establishment of a panel within the WTO to determine whether the structure of certain programs enacted by the Brazilian government concerning incentives and local content requirements for the automotive and several other industries (including the IT industry and including portions of Lei do Bem that do not relate to our business, as well as PADIS and the PPB/IT Program), were inconsistent with WTO rules. See “Risks Related to our International Operations—Our success in Brazil depends in part on Brazilian laws establishing incentives for local manufacturing of electronics products. The elimination of or a reduction in the incentives for local manufacturing, or our inability to secure the benefits of these regulations, could significantly reduce the demand for, and the profit margins on, our products in Brazil.” In addition, we have obtained tax incentives from Malaysia, which provide that certain classes of income we earn in Malaysia are subject to tax holidays. Each tax incentive is separate and distinct from the others and may be granted, withheld, extended, modified, truncated, complied with or terminated independently without any effect on the other incentives. To retain these tax benefits in Malaysia, we must continue to meet certain operating conditions specific to each incentive relating to, among other things, investments in fixed assets, research and development expenditures, minimum operating expenditures, required ratio of staff with degrees in science and technology, local purchasing programs, minimum numbers of patents with local involvement and registration and segregated accounting for the covered products or businesses. If we cannot or elect not to comply with the operating conditions included in any particular tax incentive, we will lose the related tax benefits. In such event, we could be required to refund material tax benefits previously realized by us with respect to that incentive and, depending on the incentive at issue, could likely be required to modify our operational structure and tax strategy. Any such modified structure or strategy may not be as beneficial to us from an income tax expense or operational perspective as the benefits provided under the present tax incentive arrangements. We have received approvals for these tax incentives for up to 41 ten years beginning September 2019, subject to certain operating conditions. The impact of these tax incentives will be recorded in the period in which they are realized. Our interpretations and conclusions regarding the tax incentives are not binding on any taxing authority. If our assumptions about tax and other laws are incorrect, if these tax incentives are substantially modified or rescinded or if we fail to meet the conditions of any of the tax incentives, we could suffer material adverse tax and other financial consequences including owing significant amounts of taxes and penalties that would increase our expenses, reduce our profitability and adversely affect our cash flows, results of operations and financial condition. If Brazilian administrative tax courts find that we have used an incorrect product code on our imports, then the amount of administrative penalties and interest that we have to pay on past transactions could have a material adverse effect on our business, results of operations and financial condition. On February 23, 2012, Brazilian federal tax authorities served our Brazilian operating subsidiary, SMART Brazil, with a tax assessment for approximately R$117.0 million (or $22.5 million) (the First Assessment), alleging that SMART Brazil had incorrectly used an import product classification code for its imports of unmounted ICs for the five calendar years of 2007 through and including 2011. Brazilian federal tax authorities subsequently served a second assessment for an administrative penalty of approximately R$6.0 million (or $1.2 million) (the Second Assessment) for the alleged use of an improper import code. Each assessment is subject to increases for interest and other charges. In March 2012, SMART Brazil filed defenses to the tax assessments. On May 2, 2013, the first level administrative tax court ruled in favor of the tax authorities and against SMART Brazil for the First Assessment, but did not rule on the Second Assessment for the administrative penalty. SMART Brazil filed an appeal on May 31, 2013 at the second level tax court known as CARF. SMART Brazil’s appeal resulted in a unanimous favorable decision rejecting the position of the tax authorities. Subsequently, the tax authorities filed a request for clarification of certain points in the decision published by CARF, and on September 17, 2014, we received a unanimous ruling rejecting the tax authorities request 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 we 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. Due to the issuance of these tax assessments, Brazilian federal tax authorities conducted an enrollment of assets of SMART Brazil. Brazilian legislation states that whenever the sum of the debts owed to the Brazilian Revenue Service exceeds 30% of the known equity of a company and R$2.0 million (or $0.4 million), the Brazilian Revenue Service may conduct an enrollment of assets of SMART Brazil, which is a means of monitoring the company’s equity. During this period, the taxpayer must notify the Brazilian Revenue Service of any disposal, encumbrance or transfer of the assets or rights enrolled within five days from the occurrence of the act; if the company does not provide such notice, then the Brazilian Revenue Service may file a tax injunction. The enrollment does not constitute a lien or encumbrance on the assets. The assets covered by the enrollment are typically assets classified as fixed assets or non-current assets and include assets that are subject to any form of registration before a public deed service or equivalent, such as real estate and vehicles. Other assets may be subject to enrollment in the event that the assets described above are not sufficient to satisfy the amount of the tax liability. The enrollment does not create any limitation or prohibition against remitting dividends or making cash payments of interest on equity. After the First Assessment has been extinguished, we petitioned to have the enrollment cancelled and the tax authorities substantially reduced the amount of the enrollment to R$13.9 million (or $2.7 million) as of January 31, 2017. After the Second Assessment was extinguished, we petitioned the tax authorities again to cancel the enrollment. There can be no assurance that the enrollment will be cancelled unless all of the assessments are extinguished. 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 as discussed above for 2012 and 2013 (the Third Assessment). This new assessment does not seek import duties and related taxes on DRAM products and only seeks import duties and related taxes on Flash unmounted components with respect to the months 42 of January 2012 to June 2012. This is because SMART Brazil’s imports of DRAM unmounted components were subject to 0% import duties and related taxes, and after June 2012, SMART Brazil’s imports of Flash unmounted components became subject to 0% import duties and related taxes as a result of PADIS. 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 has filed defenses to this assessment. We believe that SMART Brazil used the correct product code on its imports and that the Third Assessment is incorrect. 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. As a result of the CARF decision in favor of SMART Brazil on the First Assessment and the Second Assessment, as well as the basis given by the tax authorities in the favorable ruling on the Third Assessment, we believe that the probability of any material charges as a result of the Third Assessment is remote. We can provide no assurance that SMART Brazil ultimately will prevail on the remaining tax assessments or the administrative penalties, and no amounts have been accrued in the financial statements for any such assessments or penalties. In addition, in the event that SMART Brazil does not prevail, the amount of the assessments and the penalties and interest could have a material adverse effect on our business, results of operations and financial condition. Our business is subject to the risks generally associated with international business operations. Sales outside of the United States accounted for 57%, 68% and 84% of our net sales in fiscal 2020, 2019 and 2018, respectively. In addition, a significant portion of our product design and manufacturing is performed at our facilities in Brazil and Malaysia. In addition, a significant amount of our product design activities are performed in Taiwan and India. As a result, our business is and will continue to be subject to the risks generally associated with international business operations in Brazil, Malaysia and other foreign countries, including: • changes in tax and other laws and regulations, including recent tariffs; • changes in social, political and economic conditions; • transportation delays; • power and other utility shutdowns or shortages; • limitations on foreign investment; • restrictions on currency convertibility and volatility of foreign exchange markets; • import-export quotas; • increased trade regulations or trade wars; • corruption or adverse political situations in Brazil or other markets; • changes in local labor conditions; • difficulties resulting from different employment regulations; • difficulties in obtaining governmental approvals; • expropriation and nationalization of our assets in a particular jurisdiction; and • restrictions on repatriation of cash, dividends or profits. Some of the foreign countries in which we do business or have operations have been subject to social and political instability in the past, and interruptions in operations could occur in the future. Our net sales, results of operations and financial condition could be adversely affected by any of the foregoing factors. 43 Our global operations expose us to numerous and sometimes conflicting legal and regulatory requirements, and violation of these regulations could harm our business. We are subject to numerous, and sometimes conflicting, legal regimes on matters as diverse as anticorruption, import/export controls, content requirements, trade restrictions, tariffs, taxation, sanctions, immigration, internal and disclosure control obligations, securities regulation, anti-competition, data privacy and labor relations. This includes in emerging markets where legal systems may be less developed or familiar to us. Compliance with diverse legal requirements is costly, time consuming and requires significant resources. Violations of one or more of these regulations in the conduct of our business could result in significant fines, criminal sanctions against us or our officers, prohibitions on doing business and damage to our reputation. Violations of these regulations in connection with the performance of our obligations to our customers or suppliers also could result in liability for significant monetary damages, fines and/or criminal prosecution, unfavorable publicity and other reputational damage, restrictions on our ability to process information and allegations by our customers or suppliers that we have not performed our contractual obligations. Due to the varying degrees of development of the legal systems of the countries in which we operate or sell, local laws might be insufficient to protect our rights. Our operations in foreign countries are more difficult to manage, which may expose us to additional risks that may not exist in the United States, which in turn could have a negative impact on our business, results of operations and financial condition. A significant portion of our operations is outside of the United States. Additionally, international sales account for a significant portion of our overall sales. In some of the countries in which we operate or sell our products, it is difficult to recruit, employ and retain qualified personnel to manage and oversee our local operations, sales and other activities. The effects of instabilities in the labor market, including strikes, work stoppages, protests and changes in employment regulations, increases in wages and the conditions of collective bargaining agreements could directly affect the development of our activities and those of our customers, which could have a material adverse effect on our results. Further, given our executive officers’ lack of physical proximity to our foreign country activities and the inherent limitations of cross-border information flow, our executive officers may at times face extra challenges in their ability to effectively oversee the day-to-day management of our international operations. The challenges facing management to effectively recruit, employ and retain qualified personnel and to otherwise effectively manage our international operations could result in compliance, control or other issues that could have a material adverse impact on our business, results of operations and financial condition. If we were to lose the tax-related benefits of being a Cayman Islands company, our business could be adversely affected. We are a Cayman Islands company and operate through subsidiaries in a number of countries throughout the world. As a result, income generated in certain non-U.S. subsidiaries is not subject to taxation in the United States. We are subject to changes in tax laws, treaties and regulations or the interpretation or enforcement thereof in the United States, the Cayman Islands and jurisdictions in which we or any of our subsidiaries operate or are resident. In the past, legislative proposals have been introduced in the United States that, if enacted into law, could result in us being considered a U.S. company for tax purposes. This could have the effect of subjecting a larger portion of our worldwide income to U.S. taxation. While no such laws have been enacted to date, there can be no assurance that they will not be enacted in the future. Unfavorable currency exchange rate fluctuations could cause currency exchange losses, result in our products becoming relatively more expensive to our overseas customers and increase our manufacturing costs, each of which could adversely affect our business and our profitability. Our international sales and our operations in foreign countries expose us to certain risks associated with fluctuating currency values and exchange rates. Because some 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. Some of the sales of our products, including sales in Brazil, are denominated in foreign currencies. Gains and losses on the conversion to U.S. dollars of such revenues and of other associated monetary assets and liabilities, as well as profits and losses incurred in certain countries, may contribute to fluctuations in the value of our assets 44 and our results of operations. We also have costs and expenses that are denominated in foreign currencies, and decreases in the value of the U.S. dollar could result in increases in such costs that could have a significant negative impact on our results of operations. In addition, fluctuating values between the U.S. dollar and other currencies can result in currency gains which are used in the computation of foreign taxes and can increase foreign taxable income. In fiscal 2019, we began using foreign exchange forward contracts in Brazil to mitigate foreign currency exchange rate risk associated with foreign-currency-denominated assets and liabilities, primarily third party payables. We do not use foreign currency contracts for speculative or trading purposes. Foreign exchange forward contracts outstanding at August 28, 2020 are not designated as hedging instruments for hedge accounting purposes. As a result of the COVID-19 pandemic, the exchange rate of the Brazilian Reais has experienced wide fluctuations and increased from 4.0307 on December 31, 2019 to as high as 5.4760 as of June 30, 2020. This substantial increase could have a significant negative impact on the economy in Brazil and on the cost of and demand for our products. We are a holding company. If enacted, exchange controls may limit our ability to receive dividends and other distributions from our foreign subsidiaries. We conduct all of our operations through subsidiaries and are dependent on dividends or other intercompany transfers of funds from our subsidiaries to meet our obligations and pay intercompany dividends. If enacted, restrictions on intercompany dividends or other distributions in certain jurisdictions could have a material adverse effect on our ability to transfer funds from certain subsidiaries. Additionally, Brazilian law permits the Brazilian government to impose temporary restrictions on conversions of Brazilian currency into foreign currencies and on remittances to foreign investors of proceeds from their investments in Brazil whenever there is a serious imbalance in Brazil’s balance of payments or there are reasons to expect a pending serious imbalance. The Brazilian government may take similar measures in the future. Any imposition of restrictions on conversions and remittances could hinder or prevent us from converting Brazilian reais into U.S. dollars or other foreign currencies and remitting abroad dividends, distributions or the proceeds from operations in Brazil. Inflation and certain measures by the Brazilian government to curb inflation have historically adversely affected the Brazilian economy and Brazilian securities market, and high levels of inflation in the future would adversely affect our business, results of operations and financial condition. In the past, Brazil has experienced extremely high rates of inflation. Inflation and some of the measures taken by the Brazilian government in an attempt to curb inflation have had significant negative effects on the Brazilian economy generally. Inflation, policies adopted to curb inflationary pressures and uncertainties regarding possible future governmental intervention have contributed to economic uncertainty and heightened volatility in the Brazilian securities market. Since the introduction of the real in 1994, Brazil’s inflation rate has been substantially lower than in previous periods. According to the Extended National Consumer Price Index (Índice Nacional de Preços ao Consumidor Amplo), Brazilian inflation rates were 4.3%, 3.7%, 2.9%, 6.3%, 10.7%, 6.4%, 5.9%, 5.8% and 6.5% in 2019, 2018, 2017, 2016, 2015, 2014, 2013, 2012 and 2011, respectively. However, the Brazilian government’s measures to control inflation have often included maintaining a tight monetary policy with high interest rates, thereby restricting the availability of credit and reducing economic growth. The Central Bank of Brazil has frequently adjusted the interest rate in situations of economic uncertainty and to achieve objectives under the economic policy of the Brazilian government. Inflation, along with government measures to curb inflation and public speculation about possible future government measures, have had significant negative effects on the Brazilian economy and contributed to economic uncertainty in Brazil and heightened volatility in the Brazilian securities market, which may have an adverse effect on us. If Brazil experiences substantial inflation or deflation in the future, our business may be adversely affected. In addition, we may not be able to adjust the prices we charge our customers to offset the impact of inflation on our expenses, leading to an increase in our expenses and a reduction in our net operating margin. This could have a material adverse impact on our business, results of operations and financial condition. 45 Developments and the perception of risk in other countries, such as the 2008-2009 developments in the global financial markets, and particularly in emerging market countries, may adversely affect the perceived value of companies with substantial operations in Brazil, causing the market price of our ordinary shares to decline. The market value of securities of companies with substantial operations in Brazil is affected to varying degrees by political, economic and market conditions in other countries, including other Latin American and emerging market countries. Developments or economic conditions in other emerging market countries have at times significantly affected the availability of credit to the Brazilian economy and resulted in considerable outflows of funds from Brazil and decreases in the amount of foreign investments in Brazil. Although economic conditions in these countries may differ significantly from economic conditions in Brazil, investors’ reactions to developments in these other countries, such as the 2008-2009 developments in the global financial markets, may have an adverse effect on the market value of Brazilian companies or companies with significant operations in Brazil. Since a significant portion of our total assets is located in Brazil, a decrease of the perceived value of companies with substantial operations in Brazil could adversely impact the market price of our ordinary shares. Risks Relating to our Debt Our indebtedness could impair our financial condition and harm our ability to operate our business. Certain of our subsidiaries have incurred indebtedness under a senior secured term loan and revolving credit facility, which we refer to, together with all related loan documents, as amended and restated in March 2020 and as amended thereafter, as the Amended Credit Agreement. The obligations under the Amended Credit Agreement are jointly and severally guaranteed on a senior basis by certain of our subsidiaries and secured by a pledge of the capital stock of, or equity interests in, most of our subsidiaries and by substantially all of our assets and those of our subsidiaries. Our Brazilian operating subsidiary, SMART Brazil, had previously incurred additional indebtedness under a credit facility with the Brazilian Development Bank, or BNDES, which we refer to, together with all related loan documents and as amended from time to time, as the BNDES 2013 Credit Agreement. Under the BNDES 2013 Credit Agreement, credit in the amount of R$50.6 million (or $9.7 million) was made available to SMART Brazil for investments in infrastructure, research and development in Brazil and acquisitions of equipment not otherwise available in the Brazilian domestic market. The BNDES 2013 Credit Agreement was repaid in full as of July 15, 2019. In December 2014, SMART Brazil entered into a second credit facility with BNDES, which we refer to, together with all related loan documents and as amended from time to time, 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 IC packaging and for acquisitions of equipment not otherwise available in the Brazilian domestic market. The BNDES 2014 Credit Agreement was repaid in full as of July 15, 2020. SMART Brazil’s obligations under the BNDES Agreements were guaranteed by Banco Votorantim S/A, or Banco Votorantim. SMART Brazil entered into an agreement with Banco Votorantim to assure payment to Banco Votorantim in the event that BNDES collects on either of the guarantees. As of August 28, 2020, there were no balances outstanding under the term loans of the Amended Credit Agreement or under the BNDES Credit Agreements. As of August 28, 2020, there was no outstanding balance under the revolver portion of the Amended Credit Agreement. We have a right to draw an additional $50.0 million under the revolving loan provisions of the Amended Credit Agreement. In February 2020, we 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 we 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 us 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. 46 As of August 28, 2020, the balance outstanding under the Notes, was $250 million of principal and $0.2 million of accrued and unpaid interest. Our indebtedness may have important consequences, including, but not limited to, the following: • increasing our vulnerability to general economic downturns and adverse industry conditions; • requiring us to dedicate a significant portion of our cash flows from operations to the payment of interest and principal on our debt, which would reduce the funds available to us for our working capital, capital expenditures or other general corporate requirements; • limiting our flexibility in planning for, or reacting to, changes in our business and industry; • placing us at a competitive disadvantage compared to our competitors with less indebtedness or more liquidity; and • limiting our ability to obtain additional financing in the future for working capital, capital expenditures, acquisitions, general corporate purposes or other purposes. All of our debt under the Amended Credit Agreement bears interest at variable rates. If the rates were to increase significantly, our ability to borrow additional funds may be reduced and the risks related to our indebtedness would be exacerbated. Our Amended Credit Agreement contains restrictions that limit our flexibility in operating our business. Our Amended Credit Agreement contains restrictive covenants that limit our ability to engage in specified transactions and prohibit us from voluntarily prepaying certain of our other indebtedness. These covenants limit our ability to, among other things: • incur additional indebtedness; • pay dividends on, or repurchase or make distributions in respect of, our capital stock or make other restricted payments; • make certain investments, including limitations on capital expenditures and acquisitions; • sell or transfer assets; • enter into or effect sale leaseback transactions; • enter into swap agreements; • prepay, repurchase, redeem, otherwise defease or amend the terms of any subordinated indebtedness; • change fiscal periods; • create liens; • acquire companies; • enter into contractual obligations that restrict our ability to grant liens on assets or capital stock; • change the character of our business; • consolidate, merge, sell or otherwise dispose of all or substantially all of our assets; and • enter into certain transactions with affiliates. Under the Amended Credit Agreement, in certain circumstances we also are required to satisfy and maintain specified financial ratios if we have outstanding debt under the revolver. Our ability to meet those financial ratios could be affected by events beyond our control, and there can be no assurance that we will meet those ratios. The failure to comply with any of these covenants would cause a default under the Amended Credit Agreement. A default, if not waived, could result in acceleration of the outstanding indebtedness under the Amended Credit Agreement as well as under the Notes, in which case such indebtedness would become immediately due and 47 payable. If any default occurs, we may not be able to pay our debt or borrow sufficient funds to refinance it. Even if new financing is available, it may not be available on terms that are acceptable to us. Complying with these covenants may cause us to take actions that we otherwise would not take or not take actions that we otherwise would take. We may be unable to raise the funds necessary to repurchase the Notes for cash following a fundamental change, or to pay any cash amounts due upon conversion, and our other indebtedness may limit our ability to repurchase the Notes or pay cash upon their conversion. Holders of the Notes, may, subject to a limited exception, require us to repurchase their Notes following a “fundamental change” (as defined in the indenture governing the Notes, or the Indenture), before the maturity date at a cash repurchase price generally equal to the principal amount of the Notes to be repurchased, plus accrued and unpaid interest, if any. In addition, upon conversion, we will satisfy part or all of our conversion obligation in cash unless we elect to settle conversions solely in ordinary shares (other than paying cash in lieu of delivering any fractional share). We may not have enough available cash or be able to obtain financing at the time we are required to repurchase the Notes or pay the cash amounts due upon conversion. In addition, applicable law, regulatory authorities and the agreements governing our other indebtedness, including our Amended Credit Agreement, may restrict our ability to repurchase the Notes or pay the cash amounts due upon conversion. Our failure to repurchase Notes or to pay the cash amounts due upon conversion when required will constitute a default under the Indenture. A default under the Indenture or the fundamental change itself could also lead to a default under agreements governing our other indebtedness, which may result in that other indebtedness becoming immediately payable in full. We may not have sufficient funds to satisfy all amounts due under the other indebtedness and the Notes. Provisions in the Notes and the Indenture could delay or prevent an otherwise beneficial takeover of us. Certain provisions in the Notes and the Indenture could make a third-party attempt to acquire us more difficult or expensive. For example, if a takeover constitutes a “fundamental change”, then noteholders will have the right to require us to repurchase their Notes for cash. In addition, if a takeover constitutes a “make-whole fundamental change” (as defined in the Indenture), then we may be required to temporarily increase the conversion rate. In either case, and in other cases, our obligations under the Notes and the Indenture could increase the cost of acquiring us or otherwise discourage a third party from acquiring us, including in a transaction that noteholders or holders of our ordinary shares may view as favorable. The accounting method for the Notes could adversely affect our reported financial condition and results. The accounting method for reflecting the Notes on our balance sheet, accruing interest expense for the Notes and reflecting the underlying ordinary shares in our reported diluted earnings per share may adversely affect our reported earnings and financial condition. In accounting for the issuance of the Notes, we separated the Notes into liability and equity components. Under applicable accounting principles, the initial liability carrying amount of the Notes is the fair value of a similar debt instrument that does not have a conversion feature, valued using our cost of capital for straight, non-convertible debt. We reflected the difference between the net proceeds from the issuance of the Notes and the initial carrying amount as a debt discount for accounting purposes, which will be amortized into interest expense over the term of the Notes. As a result of this amortization, the interest expense that we expect to recognize for the Notes for accounting purposes will be greater than the cash interest payments we will pay on the Notes, which will result in lower reported income or higher reported losses. The lower reported income or higher reported loss resulting from this accounting treatment could depress the trading price of our ordinary shares and the Notes. In addition, because we intend to settle conversions by paying the conversion value in cash up to the principal amount being converted and any excess in shares, we expect to be eligible to use the treasury stock method to reflect the shares underlying the Notes in our diluted earnings per share. Under this method, if the conversion value of the Notes exceeds their principal amount for a reporting period, then we will calculate our diluted earnings per share assuming that all the Notes were converted and that we issued ordinary shares to settle the excess. However, if reflecting the Notes in diluted earnings per share in this manner is anti-dilutive, or if the conversion value of the Notes does not exceed their principal amount for a reporting period, then the shares underlying the Notes will not be reflected in our diluted earnings per share. In addition, if accounting standards change in the future and we are not 48 permitted to use the treasury stock method, then our diluted earnings per share may decline. For example, in August 20 20 , the Financial Accounting Standards Board issue d Accounting Standards Updates 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 to amend these accounting standards to eliminate the treasury stock method for convertible instruments and instead require application of the “if-converted” method. This amendment is required to be implemented no later than September 2022. Under that method, if it is adopted, diluted earnings per share would generally be calculated assuming that all the Notes were converted solely into ordinary shares at the beginning of the reporting period, unless the result would be anti-dilutive. The application of the if-converted method may reduce our reported diluted earnings per share. Furthermore, if any of the conditions to the convertibility of the Notes is satisfied, then we may be required under applicable accounting standards to reclassify the liability carrying value of the Notes as a current, rather than a long-term, liability. This reclassification could be required even if no noteholders convert their Notes and could materially reduce our reported working capital. The conditional conversion feature of the Notes, if triggered, may adversely affect our financial condition and operating results. In the event the conditional conversion feature of the Notes is triggered, holders of Notes will be entitled to convert the Notes at any time during specified periods at their option. If one or more holders elect to convert their Notes, unless we elect to satisfy our conversion obligation by delivering solely ordinary shares (other than paying cash in lieu of delivering any fractional ordinary share), we would be required to settle a portion or all of our conversion obligation through the payment of cash, which could adversely affect our liquidity. The capped call transactions may affect the value of the Notes and our ordinary shares. In connection with the pricing of the Notes, we have entered into privately negotiated capped call transactions, or Capped Calls, with certain financial institutions. The Capped Calls are expected generally to reduce the potential economic dilution to holders of our ordinary shares upon any conversion of the Notes, with such reduction and/or offset subject to a cap. At the time of the issuance of the Notes, we were not permitted under the terms of our amended and restated memorandum and articles of association, to repurchase our ordinary shares. As such, until we notified the counterparties to the Capped Calls that we have obtained shareholder approval to receive shares in connection with the Capped Calls, we were only entitled to receive cash upon settlement, cancellation or termination of the Capped Calls. On March 30, 2020 we received such shareholder approval and on March 31, 2020 we notified the counterparties to the Capped Calls of this approval. In connection with establishing their initial hedges of the Capped Calls, the Capped Call counterparties or their respective affiliates likely entered into various derivative transactions with respect to our ordinary shares and/or purchased ordinary shares concurrently with or shortly after the pricing of the Notes. In addition, the Capped Call counterparties and/or their respective affiliates may modify their hedge positions by entering into or unwinding various derivatives with respect to our ordinary shares and/or purchasing or selling our ordinary shares or other securities of ours in secondary market transactions prior to the maturity of the Notes (and are likely to do so during any Observation Period (as defined in the Indenture) related to a conversion of Notes). This activity could also cause or avoid an increase or a decrease in the market price of our ordinary shares or the Notes. The potential effect, if any, of these transactions and activities on the trading price of our ordinary shares or the Notes will depend in part on market conditions. Any of these activities could adversely affect the trading price of our ordinary shares or the Notes. Our ability to generate cash to service or to pay off our debt depends on many factors beyond our control. Our ability to make scheduled payments on, to refinance, or to pay off our debt obligations depends on the financial condition and operating performance of our business. This, to a certain extent, is subject to prevailing economic and competitive conditions and to certain financial, business, regulatory and other factors beyond our control. Our business may not generate sufficient cash flows from operations, and future borrowings may not be available to us under the Amended Credit Agreement in an amount sufficient to enable us to service our debt or to 49 fund our other liquidity needs. If we are unable to meet our debt obligations or fund our other liquidity needs, we may need to restructure or refinance all or a portion of our debt or sell certain of our assets on or before the maturity of our debt. We may not be able to restructure or refinance any of our debt on commercially reasonable terms, if at all, which could cause us to default on our debt obligations and impair our liquidity. Any refinancing of our indebtedness could be at higher interest rates and may require us to comply with more onerous covenants that could further restrict our business operations. The outstanding principal balance of all revolving loans under the Amended Credit Agreement is due in full in March 2025. As of August 28, 2020, there was no outstanding principal balance of our revolving loans and the outstanding principal balance of the Notes was $250 million. If we are not able to refinance or restructure our debt obligations before they become due, this could cause us to default on our debt obligations and impair our liquidity. In addition, if our cash flows and capital resources are insufficient to fund our debt service obligations, we may be forced to reduce or delay investments and capital expenditures, or to sell assets or seek additional capital. These alternative measures may not be available to us, may not be successful and may not permit us to meet our scheduled debt service obligations, which could result in substantial liquidity problems. Our Amended Credit Agreement restricts our ability to dispose of our assets and use the proceeds from the disposition. We may not be able to consummate those dispositions or to obtain the proceeds which we could realize from them, and these proceeds may not be adequate to meet any debt service obligations then due. Any of these circumstances could have a material adverse effect on our business, results of operations and financial condition. Disruption in the financial markets may adversely impact the availability and cost of credit and cause other disruptions and additional costs at a time when we may need capital to refinance our debt or to fund growth. Refinancing our existing debt or securing new debt or equity financing may be difficult, expensive, dilutive or impossible. As in the past, future instability in the financial markets may have an adverse effect on the U.S. and/or world economy which could adversely impact our business. If we are not able to obtain the capital required to refinance our existing debt or to fund future growth or if we are required to incur significant expenses and/or dilution to do so, this could have a material adverse effect on our business, results of operations and financial condition and may require us to undertake alternative plans, such as selling assets, reducing or delaying capital investments or downsizing our business. Risks Relating to Investments in Cayman Islands Companies We are a Cayman Islands company and, because the rights of shareholders under Cayman Islands law differ from those under U.S. law, shareholders may have difficulty protecting their shareholder rights. Our corporate affairs are governed by our amended and restated memorandum and articles of association, the Cayman Islands Companies Law (2020 Revision), or the Companies Law, and the common law of the Cayman Islands. The rights of shareholders to take action against the directors, actions by minority shareholders and the fiduciary responsibilities of our directors to us under Cayman Islands law are to a large extent governed by the common law of the Cayman Islands. The common law of the Cayman Islands is derived in part from comparatively limited judicial precedent in the Cayman Islands as well as from English common law, which has persuasive, but not binding, authority on a court in the Cayman Islands. The rights of our shareholders and the fiduciary responsibilities of our directors under Cayman Islands law are not as clearly established as they would be under statutes or judicial precedent in some jurisdictions in the United States. In particular, the Cayman Islands has a less exhaustive body of securities laws as compared to the United States, and some states, such as Delaware, have more fulsome and judicially interpreted bodies of corporate law. It may be difficult to enforce a judgment of U.S. courts for civil liabilities under U.S. federal securities laws against us in the Cayman Islands. We are a company incorporated under the laws of the Cayman Islands. The Cayman Islands courts are unlikely: • to recognize or enforce against us judgments of courts of the United States based on certain civil liability provisions of U.S. securities laws; or 50 • to impose liabilities against us, in original actions brought in the Cayman Islands, based on certain civil liability provisions of U.S. securities laws that are penal in nature. Although there is no statutory enforcement in the Cayman Islands of judgments obtained in the United States, the courts of the Cayman Islands will recognize and enforce a foreign money judgment of a foreign court of competent jurisdiction without retrial on the merits based on the principle that a judgment of a competent foreign court imposes upon the judgment debtor an obligation to pay the sum for which judgment has been given provided certain conditions are met. For a foreign judgment to be enforced in the Cayman Islands, such judgment must be final and conclusive and for a liquidated sum, and must not be in respect of taxes or a fine or penalty, inconsistent with a Cayman Islands judgment in respect of the same matter, impeachable on the grounds of fraud or obtained in a manner, and/or be of a kind the enforcement of which is, contrary to natural justice or the public policy of the Cayman Islands (awards of punitive or multiple damages may well be held to be contrary to public policy). A Cayman Islands Court may stay enforcement proceedings if concurrent proceedings are being brought elsewhere. As a result of all of the above, public shareholders may have more difficulty protecting their interests in the face of actions taken by management, members of the board of directors or controlling shareholders than they would as public shareholders of a U.S. company. Risks Relating to Our Ordinary Shares Influence by our principal shareholders could adversely affect our other shareholders. As of October 2, 2020, 48% of our ordinary shares outstanding immediately after our initial public offering, or IPO, in May 2017 were owned by Silver Lake Partners III Cayman (AIV III), L.P., Silver Lake Sumeru Fund Cayman, L.P. (investment funds affiliated with Silver Lake Partners and Silver Lake Sumeru, collectively Silver Lake) and their affiliates, including certain of our directors. Pursuant to the terms of the Amended and Restated Sponsors Shareholder Agreement dated as of May 30, 2017, or the Sponsor Shareholder Agreement, entered into in connection with the IPO, Silver Lake has the right to nominate members of our board of directors as follows: so long as Silver Lake and their affiliates own, in the aggregate, (i) less than 50% but at least 35% of our ordinary shares outstanding immediately after the IPO, Silver Lake will be entitled to nominate four directors, (ii) less than 35% but at least 20% of our ordinary shares outstanding immediately after the IPO, Silver Lake will be entitled to nominate three directors, (iii) less than 20% but at least 10% of our ordinary shares outstanding immediately after the IPO, Silver Lake will be entitled to nominate two directors, (iv) less than 10% but at least 5% of our ordinary shares outstanding immediately after the IPO, Silver Lake will be entitled to nominate one director, and (v) less than 5% of our ordinary shares outstanding immediately after the IPO, Silver Lake will not be entitled to nominate any directors. The Sponsor Shareholder Agreement further provides that, for so long as Silver Lake collectively owns ordinary shares in an amount equal to or greater than 25% of our ordinary shares outstanding immediately following the IPO, in addition to the approval of our board of directors, the approval of Silver Lake will be required for certain corporate actions such as change in control transactions, acquisitions with a value in excess of $5 million and any material change in the nature of the business conducted by us or our subsidiaries. As a result, based on Silver Lake’s ownership of our ordinary shares and the rights in the Sponsor Shareholder Agreement, Silver Lake has significant ability to nominate members of our board of directors, and thereby influence our management and affairs. Silver Lake will continue to have significant influence over our affairs for the foreseeable future. This concentrated control will limit the ability of other shareholders to influence corporate matters and, as a result, we may take actions that our other shareholders do not view as beneficial. For example, this concentration of control could have the effect of delaying or preventing a change in control or otherwise discouraging a potential acquirer from attempting to obtain control of us, which in turn could cause the market price of our ordinary shares to decline or prevent our shareholders from realizing a premium over the market price for their ordinary shares. Furthermore, Silver Lake may have interests that are different from, or opposed to, the interests of the public shareholders. 51 The price of our ordinary shares may be volatile and subject to wide fluctuations. The market price of the securities of technology companies can be especially volatile. Broad market and industry factors may adversely affect the market price of our ordinary shares regardless of our actual operating performance. The market price of our ordinary shares could be subject to wide fluctuations in response to the risk factors listed in this section and others beyond our control, including, among other things: • the impacts of the COVID-19 pandemic on our business; • actual or anticipated variations in our operating results; • overall conditions in our industry; • events affecting Brazil or the market for our products there; • addition or loss of a major customer or of significant business at a major customer; • changes in laws or regulations applicable to our products or our operations; • actual or anticipated changes in our growth rate relative to our competitors; • announcements of technological innovations by us or other companies operating in our industry; • announcements by us or our competitors of significant acquisitions, strategic partnerships, divestitures, restructuring initiatives or other events that affect us or companies in our industry; • additions or departures of key personnel; • competition from existing products or new products that may emerge; • the failure of financial analysts to cover our company; • negative or inaccurate coverage by financial analysts; • changes in financial estimates by financial analysts, any failure by us to meet or exceed any of these estimates or changes in the recommendations of any financial analysts that elect to follow our company or our competitors; • changes in the market valuations of other companies operating in our industry; • developments in existing litigation or disputes or the filing of new litigation or claims against us; • disputes or other developments related to proprietary rights, including patents, litigation matters and our ability to obtain intellectual property protection for our technologies; • announcement of, or expectation of, additional financing efforts; • future sales of our ordinary shares; • share price and volume fluctuations attributable to inconsistent trading volume levels of our ordinary shares; • the expiration of contractual lock-up agreements with us and our executive officers, directors and shareholders; and • general economic and market conditions. In addition, the stock market in general has experienced substantial price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of particular companies affected. These broad market and industry factors may materially harm the market price of our ordinary shares, regardless of our operating performance. In the past, following periods of volatility in the market price of certain companies’ securities, securities class action litigation has been instituted against these companies. This litigation, if instituted against us, could adversely affect our financial condition or results of operations. 52 An active trading market for our ordinary shares may not be maintained. Our ordinary shares are listed on the NASDAQ. However, we can provide no assurance that we will be able to maintain an active trading market for our ordinary shares on NASDAQ or any other exchange in the future. If there is no active market for our ordinary shares, the market price and liquidity of our ordinary shares may be materially and adversely affected. The lack of an active market may reduce the fair market value of our ordinary shares or impair your ability to sell the ordinary shares at the time you may wish to sell them or at a price that you consider reasonable. Investors in our ordinary shares may experience a significant decrease in the value of their shares regardless of our operating performance or prospects. If financial analysts do not publish research or reports about our business, or publish negative reports about our business, our share price and trading volume could decline. The trading market for our ordinary shares depends in part on the research and reports that financial analysts publish about us or our business. We do not have any control over these analysts. If one or more of the analysts who cover us downgrade our shares, change their opinion of our shares, or provide a negative opinion about our company, our share price would likely decline. If one or more of these analysts cease coverage of our company or fail to regularly publish reports on us, we could lose visibility in the financial markets, which could cause our share price or trading volume to decline. If our estimates or judgments relating to our critical accounting policies are based on assumptions that change or prove to be incorrect, our results of operations could fall below expectations of securities analysts and investors, resulting in a decline in the market price of our ordinary shares. The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, as described in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations,” the results of which form the basis for making judgments about the carrying values of assets, liabilities, equity, revenue and expenses that are not readily apparent from other sources. Significant assumptions and estimates used in preparing our consolidated financial statements include those related to revenue recognition, accounts receivable, inventory valuation, income taxes, impairment of long-lived assets and long-lived assets to be disposed, share-based compensation and fair value of ordinary shares. If our assumptions change or if actual circumstances differ from those in our assumptions, our results of operations may be adversely affected and may fall below the expectations of securities analysts and investors, resulting in a decline in the market price of our ordinary shares. Future sales of our ordinary shares in the public market, or the perception that these sales may occur, could cause our share price to fall. Sales of substantial amounts of our ordinary shares in the public market, including sales of our ordinary shares by us or our affiliates pursuant to the Shelf Registration Statement, defined below, or otherwise, or the perception that these sales may occur, could cause the market price of our ordinary shares to decline. This could also impair our ability to raise additional capital through the sale of our equity securities. Under our amended and restated memorandum and articles of association, we are authorized to issue up to 200,000,000 ordinary shares, of which 24,419,435 ordinary shares were outstanding as of August 28, 2020. Out of our ordinary shares outstanding as of August 28, 2020, 9,653,377 shares are held by our affiliates and our current directors, executive officers and their respective affiliates, which are eligible for resale in the public markets, subject to Rule 144 under the Securities Act of 1933, as amended, the Securities Act. In addition, on September 20, 2018, we filed a shelf registration statement on Form S-3 with the SEC that was declared effective by the SEC on October 9, 2018 (the Shelf Registration Statement), which permits us to offer up to $150 million of ordinary shares, preferred shares, debt securities, warrants and purchase contracts in one or more offerings and in any combination, including in units from time to time, and which permits Silver Lake to sell up to 9,256,755 of our ordinary shares from time to time. We have also filed registration statements on Form S-8 to register the total number of shares of our common stock that may be issued under the SMART Global Holdings, Inc. 2017 Share Incentive Plan, or as amended, the SGH Plan, including the equity awards issued to our executive officers and directors, and shares purchased under the SMART Global 53 Holdings, Inc. 2018 Employee Share Purchase Plan, or ESPP . As of August 28, 2020, there were 2,109,469 options outstanding to purchase our ordinary shares, and 1,273,441 RSUs outstanding under the SGH Plan, and there are 1,432,721 additional shares available for issuance under the SGH Plan and 683,184 shares available for purchase under the ESPP. These ordinary shares can be freely sold in the public market upon issuance under the SGH Plan or purchase under the ESPP subject to any restrictions on such shares pursuant to the respective plan documents. In addition, certain of our existing shareholders and holders of options and RSUs, in the event they become exercisable, have the right to demand that we file a registration statement covering the offer and sale of their ordinary shares and shares issuable under such options and RSUs under the Securities Act and to require us to include their securities on a registration statement filed by us. While these holders, other than Silver Lake, waived their right to include their shares in the Shelf Registration Statement, if we file a registration statement in the future for the purpose of selling additional ordinary shares to raise capital and are required to include ordinary shares held by these shareholders pursuant to the exercise of their registration rights, our ability to raise capital may be impaired. In addition, if we conduct an offering under our Shelf Registration Statement, our ability to raise capital in such offering may be impaired. We cannot predict the size of future sales or issuances of our ordinary shares or the effect, if any, that such future sales and issuances would have on the market price of our ordinary shares. The requirements of being a public company have and will continue to increase our costs and may disrupt the regular operations of our business. As a public company, our legal, accounting, reporting and other administrative costs have and will continue to increase. We also anticipate that we will continue to incur costs associated with corporate governance requirements, including requirements under the Sarbanes-Oxley Act, as well as rules implemented by the SEC and NASDAQ. We expect these rules and regulations to increase our legal and financial compliance costs and make some management and corporate governance activities more time consuming and costly, particularly now that we are no longer an “emerging growth company.” These rules and regulations may make it more difficult and more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. This could have an adverse impact on our ability to recruit and bring on qualified directors. The additional demands associated with being a public company may disrupt regular operations of our business by diverting the attention of some of our senior management team away from revenue producing activities to management and administrative oversight, adversely affecting our ability to attract and complete business opportunities and increasing the difficulty in both retaining professionals and managing and growing our businesses. Any of these effects could harm our business, financial condition and results of operations. While we were an “emerging growth company” under the JOBS Act, our independent registered public accounting firm was not required to attest to the effectiveness of our internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act. We are no longer an emerging growth company as of the beginning of our fiscal 2018, and our independent registered public accounting firm is required to attest to the effectiveness of our internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act as of August 31, 2018. In addition, in connection with the implementation of the necessary procedures and practices related to internal control over financial reporting, we may identify deficiencies that we may not be able to remediate in time to meet the deadline imposed by the Sarbanes-Oxley Act for compliance with the requirements of Section 404. Failure to comply with Section 404 could subject us to regulatory scrutiny and sanctions, impair our ability to raise revenue, cause investors to lose confidence in the accuracy and completeness of our financial reports and negatively affect the price of our ordinary shares. 54 Anti-takeover provisions in our organizational documents may discourage our acquisition by a third party, which could limit shareholders’ opportunity to sell their ordinary shares at a premium. Our amended and restated memorandum and articles of association include provisions that could limit the ability of others to acquire control of us, modify our structure or cause us to engage in change of control transactions. These provisions include, among other things: • a classified board of directors with staggered three-year terms; • restrictions on the ability of our shareholders to call meetings or make shareholder proposals; • our amended and restated memorandum and articles of association may only be amended by a vote of shareholders representing at least 75% of the outstanding ordinary shares or by a unanimous written consent; • so long as Silver Lake collectively owns at least 40% of the number of our outstanding ordinary shares, directors may be removed with or without cause, the size our board may be increased and vacancies on the board may be filled upon the affirmative vote of a majority of our outstanding ordinary shares; however, at any time when Silver Lake owns less than 40% of our outstanding ordinary shares, shareholders will not be permitted to increase the size of our board, fill vacancies on our board or remove directors without cause; and • the ability of our board of directors, without action by our shareholders, to issue 30,000,000 preferred shares and to issue additional ordinary shares that could have the effect of impeding the success of an attempt to acquire us or otherwise effect a change in control. These provisions could deter, delay or prevent a third party from acquiring control of us in a tender offer or similar transactions, even if such transaction would benefit our shareholders. Even in the absence of a takeover attempt, the existence of these provisions may adversely affect the prevailing market price of our ordinary shares if they are viewed as discouraging future takeover attempts. As of October 2, 2020, 40% of our outstanding ordinary shares were owned by Silver Lake and their affiliates, including certain of our directors and our former Chief Executive Officer. We do not anticipate paying any cash dividends in the foreseeable future. We currently intend to retain our future earnings, if any, for the foreseeable future, to repay indebtedness and to fund the development and growth of our business. We do not intend to pay any dividends to holders of our ordinary shares. In addition, our Amended Credit Agreement contains restrictions on our ability to pay dividends. As a result, capital appreciation in the price of our ordinary shares, if any, will be your only source of gain on an investment in our ordinary shares. Item 1B. Unresolved Staff Comments. None. 55 Item 2. P roperties We have facilities in Newark, Fremont, Huntington Beach and Irvine California; Atibaia, Brazil; Penang, Malaysia; Gilbert and Tempe, Arizona; New Taipei City, Taiwan; Seongnam-City, South Korea; Tewksbury, Massachusetts; Bangalore and Cochin, India; East Kilbride, Scotland; and Houston, Texas. Facility size Leased or Lease Location (Sq. Feet) Owned Expiration Capabilities Newark, CA 79,480 Leased April 2021 U.S. Headquarters Procurement R&D Manufacturing Sales Supply Chain Services 30,000 Leased February 2022 Supply Chain Services Fremont, CA 44,256 Leased July 2030 Manufacturing Procurement Sales IT 42,050 Leased December 2030 Manufacturing R&D Sales Atibaia, Brazil 87,449 Leased June 2032 Procurement 66,024 Leased October 2027 R&D Manufacturing Sales Penang, Malaysia* 86,730 Owned N/A Procurement R&D Manufacturing Sales Supply Chain Services 25,750 Leased July 2022 Procurement Supply Chain Services 27,620 Leased September 2022 Procurement Tempe, AZ 92,741 Leased September 2021 R&D Sales New Taipei City, Taiwan 14,788 Leased November 2024 Procurement R&D 2,589 Leased November 2024 Sales R&D Seongnam-City, South Korea 12,622 Leased July 2021 R&D Gilbert, AZ 9,750 Leased December 2021 Procurement R&D Sales Tewksbury, MA 7,666 Leased September 2023 R&D Bangalore, India 2,500 Leased March 2021 R&D Bangalore, India 2,500 Leased March 2022 R&D Cochin, India 2,495 Leased August 2021 R&D Irvine, CA 4,394 Leased August 2022 Procurement R&D Sales East Kilbride, Scotland 3,300 Leased July 2024 Supply Chain Services Houston, TX 2,415 Leased June 2024 Sales Huntington Beach, CA 57,800 Leased January 2025 Logistics Services * Our Penang facility is situated on leased land with a term expiring in 2070. We also lease a number of smaller design, planning and sales facilities worldwide. On October 8, 2020 we entered into a lease for 21,365 square feet in Milpitas, California which is expected to be the Company’s new U.S. corporate headquarters. The lease is expected to commence in the second calendar quarter of 2021 and has a term of 125 months expiring in 2031. 56 Item 3. Lega l Proceedings We are currently involved in, and may in the future be involved in, legal proceedings, claims and government investigations in the ordinary course of business. We are involved in litigation, and may in the future be involved in litigation, with third parties asserting, among other things, infringement of their intellectual property rights. We are currently involved in several proceedings, including the following: 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. Import Duty Tax assessment in Brazil On February 23, 2012, SMART Brazil was served with a notice of a tax assessment for approximately R$117.0 million (or $22.5 million) (the First Assessment). The First Assessment was from the federal tax authorities of Brazil and related to four taxes in connection with the 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 $1.2 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. 57 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 also 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 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 decisions in favor of SMART Brazil on the First Assessment and the Second Assessment were published. On September 8, 20 20 , 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$5.7 million (or $1.1 million) as of August 28, 2020. 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 the 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 these disputed assessments to have a material impact on its 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. Item 4. Mine Safety Disclosures. Not applicable. 58 Part II. Item 5. Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Market Information for Ordinary Shares On May 24, 2017, our ordinary shares began trading on the NASDAQ Global Select Market under the symbol “SGH”. Prior to that date, there was no public trading market for our common stock. Shares sold in our initial public offering, or IPO, were priced at $11.00 per share on May 23, 2017. Holders As of October 2, 2020 there were 78 registered holders of record of our ordinary shares (not including beneficial holders of our ordinary shares in street names). Dividends We have not paid any cash dividends on our ordinary shares, and we do not currently intend to pay any cash dividends on our ordinary shares in the foreseeable future. We currently intend to retain all available funds and any future earnings to support operations and to finance the growth and development of our business. Any future determination to pay dividends will be made at the discretion of our board of directors subject to applicable laws and will depend upon, among other factors, our results of operations, financial condition, contractual restrictions and capital requirements. Our future ability to pay cash dividends on our capital stock may also be limited by the terms of any future debt or preferred securities or future credit facility. Unregistered Sales of Equity Securities SMART EC Acquisition In connection with the SMART EC acquisition as described in Item 15, Consolidated Financial Statements, Note 2, the seller was entitled to earn-out payments of up to $10 million based on 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 our option, in either cash or in the ordinary shares of SMART Global Holdings, Inc., par value $0.03 per share, the Shares, with each of the Shares to be valued at the volume weighted average daily price of the Shares as traded on the Nasdaq Global Select Market and reported on Bloomberg, measured over the ten trading-day period of such Shares immediately preceding and ended December 30, 2019. In the event that any earn-out is achieved and we elect to pay the earn-out consideration in Shares, then, pursuant to the Artesyn SPA, we will use our reasonable best efforts to (i) cause a registration statement on Form S-3 to be filed with the U.S. Securities and Exchange Commission on or before the forty-fifth day following the earn-out determination date with respect to the resale of such Shares by the seller and (ii) cause such registration statement to become effective and to remain effective until the first to occur of (A) such time that all such Shares have been sold by seller and (B) the first anniversary of the date of such effectiveness. No earn out was achieved and therefore no shares were issued. SMART Wireless Acquisition In connection with the acquisition of SMART Wireless, as described in Item 15, Consolidated Financial Statements, Note 2, SMART Global Holdings, Inc., issued 382,788 Shares as part of the merger consideration and retained as security for the sellers’ indemnification obligations as well as any post-closing adjustments to the purchase price (the Holdback), $0.7 million in cash and 67,550 in Shares . The Shares issued in connection with this transaction were also subject to a lock-up period, pursuant to which the Shares could not be sold for one year following the closing date of July 9, 2019. The lock-up has now expired and the 67.550 shares retained as security for the seller’s indemnification obligations as well as any post-closing adjustments to the purchase price, have been released. 59 All of the Shares issued in the SMART Wireless t ransaction were issued in reliance upon the exemption from registration available under Section 4(a)(2) of the Securities Act, including Regulation D promulgated thereunder. SMART Global Holdings, Inc. did not engage in any form of general solicitation or general advertising in connection with the Inforce t ransaction. Each of the Inforce s hareholder s receiving Shares also represented that it was an “accredited investor” as defined in the Securities Act and that it was acquiring such securities for its own account and not for distribution. All Shares issued in this transaction have a legend stating that the se S hares have not been registered under the Securities Act and cannot be transferred until properly registered under the Securities Act or an exemption applies. This exemption is based on certain representations, warrant ie s, agreements, and covenants co ntained in the merger agreement entered into in connection with this transaction. Stock Performance Graph This performance graph shall not be deemed “soliciting material” or to be “filed” with the Securities and Exchange Commission, or the SEC, for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or the Exchange Act, or otherwise subject to the liabilities under that Section, and shall not be deemed to be incorporated by reference into any of our filings under the Securities Act of 1933, as amended, or the Securities Act, except as shall be expressly set forth by specific reference in such filing. The following performance graph shows the cumulative total stockholders return of an investment of $100 in cash on August 30, 2019 through August 28, 2020, in our common stock, the NASDAQ Composite Index and Philadelphia Semiconductor Index and assuming that all dividends were reinvested. The stock price performance on the following graph is not necessarily indicative of future price performance of our stock. 60 Item 6. Selecte d Financial Data The following tables present our historical selected consolidated financial data. The selected consolidated statement of operations data for the years ended August 28, 2020, August 30, 2019 and August 31, 2018, and the selected consolidated balance sheet data as of August 28, 2020 and August 30, 2019 are derived from our audited consolidated financial statements that are included elsewhere in this report. The selected statement of operations data for the year ended August 25, 2017 and August 26, 2016, and the selected consolidated balance sheet data as of August 31, 2018, August 25, 2017 and August 26, 2016 are derived from our audited consolidated balance sheet as of such dates and is not included in this report. Our historical results are not necessarily indicative of the results that may be expected in the future. We maintain our books and records in U.S. dollars and prepare our consolidated financial statements in accordance with U.S. GAAP. This financial information should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements, including the notes thereto, included elsewhere in this report. Fiscal Year Ended August 28, August 30, August 31, August 25, August 26, 2020 2019 2018 2017 2016 (in thousands, other than per share data) Consolidated Statement of Operations Data: Net sales $ 1,122,377 $ 1,211,999 $ 1,288,821 $ 761,291 $ 534,423 Cost of sales (1)(2) 905,981 974,472 997,235 599,041 427,491 Gross profit 216,396 237,527 291,586 162,250 106,932 Operating expenses: Research and development (1) (2) 52,056 47,920 39,824 38,160 38,116 Selling, general, and administrative (1) (2) 119,523 103,226 84,541 66,759 57,495 Restructuring charge 3,487 — — 457 1,135 Change in estimated fair value of acquisition- related contingent consideration — (2,700 ) (3,000 ) — — Management advisory fees — — — 3,000 4,001 Total operating expenses 175,066 148,446 121,365 108,376 100,747 Income from operations 41,330 89,081 170,221 53,874 6,185 Interest expense, net (15,000 ) (20,716 ) (19,144 ) (29,204 ) (25,575 ) Other income (expense), net (16,970 ) (2,161 ) (13,299 ) (22,551 ) 1,874 Total other expense (31,970 ) (22,877 ) (32,443 ) (51,755 ) (23,701 ) Income (loss) before income taxes 9,360 66,204 137,778 2,119 (17,516 ) Provision for income taxes 10,503 14,872 18,315 9,914 2,444 Net income (loss) $ (1,143 ) $ 51,332 $ 119,463 $ (7,795 ) $ (19,960 ) Earnings per share: Basic $ (0.05 ) $ 2.24 $ 5.42 $ (0.49 ) $ (1.44 ) Diluted $ (0.05 ) $ 2.19 $ 5.17 $ (0.49 ) $ (1.44 ) Shares used in computing earnings per share: Basic 23,994 22,959 22,051 15,785 13,841 Diluted 23,994 23,468 23,119 15,785 13,841 (1) Includes share-based compensation expense as follows: Cost of sales $ 3,022 $ 2,485 $ 1,335 $ 636 $ 461 Research and development 3,069 2,654 1,460 655 725 Selling, general and administrative 12,625 13,060 7,763 4,073 2,686 (2) Includes amortization of intangible assets expense as follows: 61 Cost of sales $ 2,587 $ 566 $ 7 $ — $ — Research and development — — 987 4,897 4,897 Selling, general and administrative 11,067 5,048 5,136 7,042 8,471 Fiscal Year Ended August 28, August 30, August 31, August 25, August 26, 2020 2019 2018 2017 2016 (dollars in thousands) Other Financial Data: Adjusted EBITDA (1) $ 104,211 $ 134,673 $ 195,540 $ 99,387 $ 51,760 Gross billings to customers (2) $ 1,727,075 $ 2,158,302 $ 2,302,214 $ 1,625,547 $ 1,925,047 Days sales outstanding (DSO) (3) 46 37 38 41 27 Inventory turns (4) 9 16 9 12 18 Days payable outstanding (DPO) (5) 54 31 40 47 40 (1) We define Adjusted EBITDA as our net income (loss) plus net interest expense, income tax expense, depreciation and amortization expense, share-based compensation, acquisition-related expenses, integration/restructuring charges and other infrequent or unusual items. We have provided a reconciliation below of Adjusted EBITDA to net income (loss), the most directly comparable U.S. GAAP financial measure. We have included Adjusted EBITDA in this report because it is a key measure used by our management and board of directors to understand and evaluate our core operating performance and trends, to prepare and approve our annual budget and to develop short-term and long-term operational and compensation plans. In particular, the exclusion of certain non-cash, non-recurring or infrequent expenses in calculating Adjusted EBITDA can provide useful measures for period-to-period comparisons of our core business. Accordingly, we believe that Adjusted EBITDA provides useful information to investors and others in understanding and evaluating our operating results in the same manner as our management and board of directors. Adjusted EBITDA has limitations as an analytical tool, and you should not consider this measure in isolation or as a substitute for analysis of our results as reported under U.S. GAAP. Some of these limitations are: • Adjusted EBITDA does not consider the cost of equity-based compensation, which is an ongoing expense for us; • Adjusted EBITDA does not reflect past cash capital expenditures and future requirements for replacements or for new capital expenditures; • Adjusted EBITDA does not reflect tax payments that may represent a reduction in cash available to us; and • Other companies, including companies in our industry, may calculate Adjusted EBITDA differently, which reduces its usefulness as a comparative measure. 62 Because of these limitations, you should consider Adjusted EBITDA along with other financial performance measures, including various cash flow metrics, net income (loss) and our other U.S. GAAP results. A reconciliation of Adjusted EBITDA to net income (loss) is provided below: Fiscal Year Ended August 28, August 30, August 31, August 25, August 26, 2020 2019 2018 2017 2016 (in thousands) Net income (loss) $ (1,143 ) $ 51,332 $ 119,463 $ (7,795 ) $ (19,960 ) Share-based compensation expense 18,716 18,199 10,558 5,364 3,872 Amortization of intangible assets 13,654 5,614 6,130 11,939 13,368 Interest expense, net 15,000 20,716 19,144 29,204 25,575 Provision for income tax 10,503 14,872 18,315 9,914 2,444 Depreciation 22,776 23,592 20,052 21,300 18,111 Integration / Restructuring expenses 9,072 — — 457 1,135 COVID-19 expenses 510 — — — — Capped calls MTM adjustment* 7,719 — — — — Gain on settlement of indemnity claim (364 ) — — — — Extinguishment of term loan / revolver** 6,822 — — 16,579 — Acquisition-related expenses*** 946 2,922 3,435 25 1,611 Contingent consideration fair value adjustment*** — (2,700 ) (3,000 ) — — Purchase accounting adjustment*** — — 631 — — Legal fees - term loan (payment holiday) — 126 — — — S-1 related costs — — 812 — — Loss on early repayment of debt**** — — — 6,743 — Debt extension costs***** — — — 1,745 — Management advisory fees — — — 3,000 4,001 Investment advisory fees — — — 540 — Obsolete inventory related to restructuring — — — 372 — Valuation adjustment related to prepaid state value-added taxes — — — — 908 Misappropriated product shipment — — — — 695 Adjusted EBITDA $ 104,211 $ 134,673 $ 195,540 $ 99,387 $ 51,760 * Mark-to Market Adjustment for Capped Calls related to the convertible note. ** Primarily consists of $6.6 million loss on extinguishment of Term Loan in February 2020, $15.2 million loss on extinguishment of long-term debt for principal payment of $151.0 million in August 2017 and a $1.4 million loss on a February 2017 extinguishment. *** Amounts in fiscal 2020, 2019 and 2018 related to acquisitions of SMART EC and SMART Wireless (July 2019) and Penguin Computing (June 2018). * *** Loss on early payment of term loan for principal amount of $61.1 million in June 2017 related to the IPO. ***** Debt extension costs associated with the amendment of our senior secured term loan and revolving credit facility in November 2016. (2) Gross billings to customers consists of product net sales and our gross billings for services. We provide procurement, logistics, inventory management, kitting or packaging services for certain customers. We account for sales from these services on an agency basis (that is, we recognize the fees associated with serving as an agent with no associated cost of sales). We recognize revenue for these arrangements as service revenue, which is determined as a fee for services based on material procurement costs. See Note 1(d) to our consolidated financial statements. (3) We calculate days sales outstanding as (i) accounts receivable outstanding as of the period end divided by (ii) gross billings to customers for the period (iii) divided by the number of days in the period. 63 (4) We calculate inventory turns as (i) cost of sales plus cost of purchased materials—service for the period, on an annualized basis (i.e., multiplied by four and then divided by the number of quarters in the period) divided by (ii) inventory as of the period end. (5) We calculate days payables outstanding as (i) accounts payable outstanding as of the period end divided by (ii) (x) cost of sales plus cost of purchased materials—service for the period divided by (y) the number of days in the period. As of August 28, August 30, August 31, August 25, August 26, 2020 2019 2018 2017 2016 (in thousands) Consolidated Balance Sheet Data: Cash and cash equivalents $ 150,811 $ 98,139 $ 31,375 $ 22,436 $ 58,634 Working capital 274,221 234,360 226,264 107,115 90,095 Total assets 786,608 704,137 672,762 480,028 458,655 Long-term debt 195,573 182,450 184,190 154,450 225,587 Total shareholders' equity (deficit) 282,104 273,460 187,128 82,396 (1,237 ) 64 Item 7. 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 Annual Report on Form 10-K. 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 below and elsewhere in this report. See also “Cautionary Note Regarding Forward-Looking Statements” at the beginning of this report. We use a 52- to 53-week fiscal year ending on the last Friday in August. Unless the context indicates otherwise, whenever we refer in this report to a particular year, with respect to ourselves, we mean the fiscal year ending in that particular calendar year. Financial information for two of our subsidiaries SMART Brazil and SMART do Brazil is included in our consolidated financial statements on a one-month lag because their fiscal years begin August 1 and end July 31. For an overview of our business, see “Part I – Item 1. Business Overview.” Components of Operating Results Net Sales We generate product revenues predominantly from sales of our solutions, which include memory components and modules and specialty compute and storage products, to OEMs, as well as end users that compete in the computing, networking, communications, storage, aerospace, defense, mobile and industrial markets. Sales of our products are made primarily pursuant to purchase orders and are not based on long-term supply agreements. We generate service revenue by providing procurement, logistics, inventory management, temporary warehousing, kitting and packaging services. Our net sales are substantially dependent upon demand in the end markets for our customers’ products and fluctuations in end-user demand can have a rapid and material effect on our net sales. Furthermore, sales to relatively few customers have accounted for, and we expect for the foreseeable future will continue to account for, a significant percentage of our net sales. Cost of Sales The most significant components of cost of sales are materials, fixed manufacturing costs, labor, depreciation, freight and customs charges. Increases in capital expenditures may increase our future cost of sales due to higher levels of depreciation expense. Cost of sales also includes any inventory write-downs. We have in the past, and may in the future, write down inventory for a variety of reasons, including obsolescence, excess quantities and declines in market value below our cost. A significant percentage of our cost of sales consists of the cost of DRAM and Flash components and wafers. While we have historically received competitive pricing and have had consistent sources of supply for these supplies, we do not have agreements that provide us with fixed pricing or guarantees of supply. Increases in DRAM pricing typically improve our margins, at least in the short term and particularly in our operations in Brazil, as we consume previously purchased inventory. However, declines in DRAM pricing often require us to reduce our prices even as we consume higher priced DRAM inventory, thereby reducing our margins. Gross Profit Gross profit and gross margin has been and will continue to be affected by a variety of factors, including the average sales prices of our products, manufacturing and overhead costs, the mix of products sold and our ability to leverage our existing infrastructure as we continue to grow. We expect our gross margins to fluctuate over time depending on the factors described above. Operating Expenses Our operating expenses consist of research and development expense, selling, general and administrative expense and management advisory fees. Personnel costs are the most significant component of operating expenses. 65 Research and development expense. Research and development expense consists primarily of personnel costs, consulting costs, allocated overhead and other costs to support our development activities. To date, we have expensed all research and development costs as incurred. We expect research and development expense to increase in absolute dollars as we continue to invest in our research and product development efforts to enhance our product capabilities and access new customer markets, although such expense may fluctuate as a percentage of total net sales. In order to qualify for certain tax incentives under PADIS and PPB/IT Program in Brazil, we are required to expend a minimum amount on research and development in Brazil. Selling, general and administrative expense. Sales and marketing expense consists primarily of personnel costs, sales commission costs and allocated overhead. We expense sales commission costs as incurred. Sales and marketing expense also includes costs for recruiting and training channel partners, market development programs, promotional and other marketing activities, travel, office equipment and outside consulting costs. We expect sales and marketing expense to increase in absolute dollars as we expand our sales and marketing headcount in all markets and expand our international operations, although such expense may fluctuate as a percentage of net sales. General and administrative expense consists primarily of personnel costs, facilities and non-manufacturing equipment costs, allowances for bad debt and other support costs, including utilities, insurance and professional fees. We have experienced and will continue to experience increased general and administrative expenses as a result of being a publicly-traded company, including significant increased legal and accounting costs related to compliance with rules and regulations implemented by the SEC and NASDAQ, as well as additional insurance, investor relations and other costs associated with being a public company. Interest Expense, Net Interest expense, net consists primarily of interest expense on our debt obligations. Other Expense, Net Other expense, net includes gains and losses from foreign currency transactions and other non-operating items. Provision for Income Taxes We record income taxes using the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in our financial statements or tax returns. In estimating future tax consequences, we generally consider all expected future events other than enactments or changes in the tax law or rates. We provide valuation allowances when necessary to reduce deferred tax assets to the amount expected to be realized. We recognize a tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. We then measure the tax benefits recognized in the financial statements from such positions based on the largest benefit that has a greater than 50% likelihood of being realized upon settlement. In the event that we recognize any unrecognized tax benefits, the effective tax rate will be affected. If recognized, approximately $1.7 million of unrecognized tax benefit would impact the effective tax rate at August 28, 2020. Although we believe our estimates are reasonable, we cannot assure that the final tax outcome of these matters will be the same as these estimates. We update these estimates quarterly based on factors such as changes in facts or circumstances, changes in tax law, new audit activity and effectively settled issues. We follow specific and detailed guidelines in each tax jurisdiction regarding the recoverability of any tax assets recorded on the balance sheet and provide necessary valuation allowances as required. Future realization of deferred tax assets ultimately depends on the existence of sufficient taxable income of the appropriate character (for example, ordinary income or capital gain) within the carryback or carryforward periods available under the tax law. We regularly review our deferred tax assets for recoverability based on historical taxable income, projected future taxable income, the expected timing of the reversals of existing temporary differences and tax planning strategies. Our judgments regarding future profitability may change due to many factors, including future market conditions 66 and our ability to successfully execute our business plans and/or tax planning strategies. Should there be a change in our ability to recover our deferred tax assets, our tax provision would increase or decrease in the period in which the assessment is changed. Results of Operations The following is a summary of our results of operations for the periods presented. The period-to-period comparison of results is not necessarily indicative of results for future periods. Fiscal Year Ended August 28, 2020 % of sales* August 30, 2019 % of sales* August 31, 2018 % of sales* Consolidated Statement of Operations Data: Net sales $ 1,122,377 100 % $ 1,211,999 100 % $ 1,288,821 100 % Cost of sales (1)(2) 905,981 81 % 974,472 80 % 997,235 77 % Gross profit 216,396 19 % 237,527 20 % 291,586 23 % Operating expenses: Research and development (1) (2) 52,056 5 % 47,920 4 % 39,824 3 % Selling, general and administrative (1) (2) 119,523 11 % 103,226 9 % 84,541 7 % Restructuring charge 3,487 0 % — — — — Change in estimated fair value of acquisition-related contingent consideration — — (2,700 ) 0 % (3,000 ) 0 % Total operating expenses 175,066 16 % 148,446 12 % 121,365 9 % Income from operations 41,330 4 % 89,081 7 % 170,221 13 % Other income (expense): Interest expense, net (15,000 ) (1 %) (20,716 ) (2 %) (19,144 ) (1 %) Other expense, net (16,970 ) (2 %) (2,161 ) 0 % (13,299 ) (1 %) Total other expense (31,970 ) (3 %) (22,877 ) (2 %) (32,443 ) (3 %) Income before income taxes 9,360 1 % 66,204 5 % 137,778 11 % Provision for income taxes 10,503 1 % 14,872 1 % 18,315 1 % Net income (loss) $ (1,143 ) 0 % $ 51,332 4 % $ 119,463 9 % Earnings per share: Basic $ (0.05 ) $ 2.24 $ 5.42 Diluted $ (0.05 ) $ 2.19 $ 5.17 Shares used in computing earnings per share: Basic 23,994 22,959 22,051 Diluted 23,994 23,468 23,119 * Summations may not compute precisely due to rounding. (1) Includes share-based compensation expense as follows: Cost of sales $ 3,022 $ 2,485 $ 1,335 Research and development 3,069 2,654 1,460 Selling, general and administrative 12,625 13,060 7,763 (2) Includes amortization of intangible assets expense as follows: Cost of sales $ 2,587 $ 566 $ 7 Research and development — — 987 Selling, general and administrative 11,067 5,048 5,136 67 Comparison of the Years Ended August 28, 2020 and August 30, 2019 Fiscal Year Ended Change August 28, 2020 August 30, 2019 Amount % (in thousands, except percentages) Net sales $ 1,122,377 $ 1,211,999 $ (89,622 ) (7.4 %) Cost of sales (1) 905,981 974,472 (68,491 ) (7.0 %) Gross profit $ 216,396 $ 237,527 $ (21,131 ) (8.9 %) Gross margin 19.3 % 19.6 % (1) Includes share-based compensation expense of $3.0 million and $2.5 million, and intangible amortization of $2.6 million and $0.6 million in fiscal 2020 and 2019, respectively. Net Sales, Cost of Sales and Gross Margin Net sales decreased by $89.6 million, or 7.4%, during fiscal 2020 compared to the prior fiscal year. Net sales were negatively impacted by a decrease in Brazil product sales of $147.1 million, or a decline of 27.4% compared to the prior year. The decrease in Brazil was primarily due to 50.1% and 36.5% lower average selling prices for DRAM and mobile memory, respectively. Net sales were positively impacted by higher overall revenue from SCSS of $48.6 million, or an increase of 22.4% over the prior fiscal year, primarily driven by our two acquisitions in July 2019 which did not contribute to sales for the full year in fiscal 2019, partially offset by lower Penguin revenue due to lower federal spending as a result of COVID-19. In addition, our sales of Specialty products increased by $8.9 million, or 1.9% over the prior fiscal year, primarily due to higher Flash revenue resulting from 59.2% higher average selling prices mainly due to increased OEM sales , partially offset by lower DRAM revenue resulting from 18.4% lower average selling prices mainly due to a change in product mix. Cost of sales decreased by $68.5 million, or 7.0%, during fiscal 2020 compared to the prior fiscal year, primarily due to lower cost of materials of $78.2 million or 9.2% due to lower level of sales, partially offset by higher production costs related to the increased revenue and additional costs from the SCSS acquisitions. Included in the cost of sales changes was a favorable foreign exchange impact of $4.5 million due to locally sourced cost of sales in Brazil. Gross margin remained relatively flat at 19.3% during fiscal 2020, compared to 19.6% for fiscal 2019. 68 Operating Expenses Fiscal Year Ended Change August 28, 2020 August 30, 2019 Amount % (in thousands, except percentages) Operating expenses: Research and development (1) (2) $ 52,056 $ 47,920 $ 4,136 8.6 % Selling, general and administrative (1) (2) 119,523 103,226 16,297 15.8 % Restructuring 3,487 — 3,487 100.0 % Change in estimated fair value of acquisition- related contingent consideration — (2,700 ) 2,700 (100.0 %) Total operating expenses $ 175,066 $ 148,446 $ 26,620 17.9 % (1) Includes share-based compensation expense as follows: Research and development $ 3,069 $ 2,654 $ 415 15.6 % Selling, general and administrative 12,625 13,060 (435 ) (3.3 %) Total $ 15,694 $ 15,714 $ (20 ) (0.1 %) (2) Includes amortization of intangible assets expense as follows: Selling, general and administrative 11,067 5,048 6,019 119.2 % Total $ 11,067 $ 5,048 $ 6,019 119.2 % Research and Development Expense Research and development, or (“R&D”), expense increased by $4.1 million, or 8.6% in fiscal 2020 compared to the prior fiscal year primarily due to $12.4 million higher costs from the addition of our SCSS acquisitions, partially offset by $6.4 million of Brazil financial credits resulting from amendments to the IT law implemented in April 2020. Included in the R&D expense increase was a favorable foreign exchange impact of $2.2 million. Selling, General and Administrative Expense Selling, general and administrative, or (“SG&A”), expense increased by $16.3 million, or 15.8%, during fiscal 2020 compared to the prior fiscal year. The increase was primarily due to $16.8 million of higher costs from the addition of our SCSS acquisitions (including intangible amortization expense), as well as integration expenses associated with the acquisitions. Included in the SG&A expense increase was a favorable foreign exchange impact of $1.5 million. Restructuring Charge In fourth quarter of fiscal 2020, we made the decision to cease manufacturing and selling of 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 our ability to remain competitive as customers can get these products cheaper from other international sources without having 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 business. During fiscal 2020, we 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 August 28, 2020, the amounts accrued for contract termination costs have yet to be paid. We do not expect additional costs to be incurred before completion of the restructuring efforts. We anticipate completion of these restructuring efforts, including payment on all outstanding amounts to be complete by January 2021. 69 Other Income (Expense) Fiscal Year Ended Change August 28, 2020 August 30, 2019 Amount % (in thousands, except percentages) Other income (expense): Interest expense, net $ (15,000 ) $ (20,716 ) $ 5,716 (27.6 %) Other expense, net (16,970 ) (2,161 ) (14,809 ) 685.3 % Total other expense $ (31,970 ) $ (22,877 ) $ (9,093 ) 39.7 % Interest expense, net decreased $5.7 million, or 27.6%, during fiscal 2020 compared to the prior fiscal year primarily due to lower interest expense resulting from the issuance of our Notes and the extinguishment of our term loans in the second quarter of fiscal 2020. For additional information, see Note 7, Long-Term Debt , in our Notes to Consolidated Financial Statements in this Annual Report on Form 10-K. Other expense, net increased by $14.8 million primarily due to $7.7 million mark-to-market losses on the Capped Calls and $6.8 million extinguishment loss on long-term debt and revolver. Provision for Income Taxes Fiscal Year Ended Change August 28, 2020 August 30, 2019 Amount % (in thousands, except percentages) Provision for income taxes $ 10,503 $ 14,872 $ (4,369 ) (29.4 %) Provision for income taxes decreased by $4.4 million, or 29.4% compared to the prior fiscal year primarily due to lower income in non-U.S. jurisdictions subject to tax. Our Malaysian subsidiary was previously approved for income tax holidays for the operations of its Pioneer business and Global Supply Chain (GSC) business. We have received approvals for a continuation of these tax incentives for up to ten years, subject to certain operating conditions. The impact of these tax incentives will be recorded in the period in which they become effective. In general, these future tax holidays will have tax rates greater than our prior approved tax holidays, and therefore we expect that our effective income tax rate in the future may be higher depending on a combination of our overall and jurisdictional profitability. For additional information, see Note 6, Income Taxes , in our Notes to Consolidated Financial Statements in this Annual Report on Form 10-K. Comparison of the Years Ended August 30, 2019 and August 31, 2018 Fiscal Year Ended Change August 30, 2019 August 31, 2018 Amount % (in thousands, except percentages) Net sales $ 1,211,999 $ 1,288,821 $ (76,822 ) (6.0 %) Cost of sales (1) 974,472 997,235 (22,763 ) (2.3 %) Gross profit $ 237,527 $ 291,586 $ (54,059 ) (18.5 %) Gross margin 19.6 % 22.6 % (1) Includes share-based compensation expense of $2.5 million and $0.6 million, and intangible amortization of $1.3 million and $0 million in fiscal 2019 and 2018, respectively. Net Sales, Cost of Sales and Gross Margin Net sales decreased by $76.8 million, or 6.0%, during fiscal 2019 compared to the prior fiscal year. Net sales were negatively impacted by lower mobile memory and DRAM sales in Brazil in fiscal 2019 of $266.0 million, or a decline of 33.3% from the prior fiscal year. These decreases were primarily due to lower customer demand for 70 mobile memory and DRAM products of 25% and 26%, respectively, as well as 22% lower average selling prices for mobile memory. The decreases in Brazil were partially offset by additional sales from Penguin Computing for the full year in fiscal 2019 compared to just a partial year in fiscal 2018. Penguin, which was acquired in June 2018, contributed additional revenue of $150.4 million in fiscal 2019 as compared to the prior fiscal year as Penguin’s results were only consolidated into the Company’s results for one quarter in fiscal 2018. The sales decrease was also offset in part by 7% higher Specialty DRAM sales in fiscal 2019 as compared to the prior fiscal year, which was driven by 8% higher average selling prices due to changes in product mix, as well as sales of new products and increased customer penetration. Cost of sales decreased by $22.8 million, or 2.3%, during fiscal 2019 compared to the prior fiscal year, primarily due to a decrease of 4.6% in the cost of materials for the lower level of sales, offset by higher production costs related to the increased revenue and additional costs for the new SCSS business. Included in the cost of sales decreases was a favorable foreign exchange impact of $6.8 million due to locally sourced cost of sales in Brazil. Gross margin decreased to 19.6% during fiscal 2019, compared to 22.6% for fiscal 2018, primarily due to higher cost of sales for SCSS, as well as fixed manufacturing costs for Brazil. Operating Expenses Fiscal Year Ended Change August 30, 2019 August 31, 2018 Amount % (in thousands, except percentages) Operating expenses: Research and development (1) (2) $ 47,920 $ 39,824 $ 8,096 20.3 % Selling, general and administrative (1) (2) 103,226 84,541 18,685 22.1 % Change in estimated fair value of acquisition- related contingent consideration (2,700 ) (3,000 ) 300 (10.0 %) Total operating expenses $ 148,446 $ 121,365 $ 27,081 22.3 % (1) Includes share-based compensation expense as follows: Research and development $ 2,654 $ 1,460 $ 1,194 81.8 % Selling, general and administrative 13,060 7,763 5,297 68.2 % Total $ 15,714 $ 9,223 $ 6,491 70.4 % (2) Includes amortization of intangible assets expense as follows: Research and development $ — $ 987 $ (987 ) (100.0 %) Selling, general and administrative 5,048 5,136 (88 ) (1.7 %) Total $ 5,048 $ 6,123 $ (1,075 ) (17.6 %) Research and Development Expense Research and development, or R&D, expense increased by $8.1 million, or 20.3% in fiscal 2019 compared to the prior fiscal year mainly due to $7.8 million higher costs from our new SCSS businesses, as well as higher depreciation and share-based compensation, partially offset by lower intangible amortization expense as some intangible assets became fully amortized. Included in the R&D expense increase was a favorable foreign exchange impact of $2.3 million. Selling, General and Administrative Expense Selling, general and administrative, or SG&A, expense increased by $18.7 million, or 22.1%, during fiscal 2019 compared to the prior fiscal year. The increase was primarily due to $22.8 million higher costs from our new SCSS business, as well as higher share based compensation, partially offset by lower professional services and 71 personnel-related expenses. Included in the SG&A expense increase was a favorable foreign exchange impact of $1.4 million. Other Income (Expense) Fiscal Year Ended Change August 30, 2019 August 31, 2018 Amount % (in thousands, except percentages) Other income (expense): Interest expense, net $ (20,716 ) $ (19,144 ) $ (1,572 ) 8.2 % Other expense, net (2,161 ) (13,299 ) 11,138 (83.8 %) Total other expense $ (22,877 ) $ (32,443 ) $ 9,566 (29.5 %) Interest expense, net increased $1.6 million, or 8.2%, during fiscal 2019 compared to the prior fiscal year primarily due to higher interest expense from an incremental loan in connection with the Penguin acquisition. Other expense, net decreased by $11.1 million, or 83.8% over the prior fiscal year primarily due to $10.1 million foreign currency gains/losses. Provision for Income Taxes Fiscal Year Ended Change August 30, 2019 August 31, 2018 Amount % (in thousands, except percentages) Provision for income taxes $ 14,872 $ 18,315 $ (3,443 ) (18.8 %) Provision for income taxes decreased by $3.4 million, or 18.8% during fiscal 2019 compared to the prior fiscal year primarily due to lower income in non-U.S. jurisdictions subject to tax. Our Malaysian subsidiary was approved for income tax holidays for the operations of its Pioneer business and Global Supply Chain (GSC) business. We have received approvals for a continuation of these tax incentives for up to ten years, subject to certain operating conditions. The impact of these tax incentives will be recorded in the period in which they become effective. In general, these future tax holidays will have tax rates greater than our prior approved tax holidays, thus our effective income tax rate in the future may be higher depending on a combination of our overall and jurisdictional profitability. Liquidity and Capital Resources Fiscal Year Ended August 28, 2020 August 30, 2019 August 31, 2018 (in thousands) Cash provided by operating activities $ 87,205 $ 169,657 $ 67,907 Cash used in investing activities (32,041 ) (109,440 ) (67,749 ) Cash provided by financing activities 12,594 100 7,944 Effect of exchange rate changes on cash and cash equivalents (15,086 ) 588 (331 ) Net increase in cash and cash equivalents $ 52,672 $ 60,905 $ 7,771 At August 28, 2020, we had cash and cash equivalents of $150.8 million, of which approximately $95.3 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 72 extinguishment of long-term debt and $21.8 million for purchasing privately-negotiated capped calls. For additional information, s ee Note 7 , Long-Term Debt , in our Notes to Consolidated Financial Statements in this Annual Report on Form 10-K . In July 2019, we acquired SMART EC and SMART Wireless for purchase prices of approximately $77 million and $15 million, respectively. We financed these acquisitions using cash from operations, as well as approximately $11 million in SGH ordinary shares attributable to the SMART Wireless acquisition. In June 2018, we acquired Penguin for a purchase price of approximately $45 million and assumed approximately $32.3 million of Penguin’s outstanding indebtedness. We financed this acquisition with net proceeds from the $60 million Incremental Amendment. For additional information, see Note 2, Business Acquisitions , and Note 7, Long-Term Debt , in our Notes to Consolidated Financial Statements in this Annual Report on Form 10-K. 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. Operating Activities During fiscal 2020, cash provided by operating activities was $87.2 million. The primary factors affecting our cash flows during this period were a $1.1 million net loss, $7.5 million in change in our net operating assets and liabilities and $80.8 million of non-cash related expenses. The $7.5 million change in net operating assets and liabilities consisted of a decrease of $5.8 million in prepaid expenses and other assets and increases of $70.1 million in accounts payable and $0.5 million in accrued expenses and other liabilities, offset by increases of $12.3 million in accounts receivable and $51.8 million in inventory and a decrease of $4.8 million in operating leases. 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 manufacturing from contract manufacturers to the company due to our recent acquisitions, as well as higher purchases for certain programs. During fiscal 2019, cash provided by operating activities was $169.7 million. The primary factors affecting our cash flows during this period were a $51.3 million net income, $71.6 million in change in our net operating assets and liabilities and $46.8 million of non-cash related expenses. The $71.6 million change in net operating assets and liabilities consisted of decreases of $35.2 million in accounts receivable and $102.1 million in inventory and an increase of $0.4 million in accrued expenses and other liabilities, offset by increases of $1.6 million in prepaid expenses and other assets and a decrease of $64.6 million in accounts payable. The decrease in accounts receivable was primarily due to lower gross sales. The decreases in inventory and accounts payable were primarily due to the reduction of inventory along all business areas as product lead times and average selling prices reduced. Investing Activities Net cash used in investing activities during fiscal 2020 was $32.0 million consisting primarily of purchases of property and equipment. Net cash used in investing activities during fiscal 2019 was $109.4 million consisting primarily of $76.1 million for the new SCSS acquisitions, net of cash acquired, and $33.4 million used for purchases of property and equipment. Financing Activities Net cash provided by financing activities during fiscal 2020 was $12.6 million, consisting primarily of $243.1 million proceeds from issuance of convertible notes and $5.5 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, $8.5 million long-term debt payments for both the Amended Credit Agreement and the BNDES Credit Agreement and $0.8 million for withholding tax on restricted stock units. Net cash provided by financing activities during fiscal 2019 was $0.1 million, consisting primarily of $7.4 million of proceeds from issuance of ordinary shares from share option exercises and purchases 73 under our employee share purchase plan, offset by $6.8 million of long-term debt payments for the BNDES Credit Agreements and $0.5 million for withholding tax on the vesting of restricted share units. Contractual Obligations Our contractual obligations as of August 28, 2020 are set forth below: Payments due by Period 1 year 2-3 years 4-5 years After 5 years Total (in millions) Notes $ — $ — $ — $ 250.0 $ 250.0 Interest expense in connection with the Notes 5.6 11.3 11.3 2.8 31.0 Operating leases 7.2 8.7 6.5 14.2 36.6 Non-cancellable product purchase commitments 49.9 — — — 49.9 Total contractual obligations $ 62.7 $ 20.0 $ 17.8 $ 267.0 $ 367.5 As of August 28, 2020, we had gross unrecognized tax benefits of $16.5 million which includes penalties and interest. Approximately $0.4 million has been recorded as a noncurrent liability. At this time, we are unable to make a reasonably reliable estimate of the timing of payments in individual years in connection with these tax liabilities and therefore such amounts are not included in the above contractual obligation table. 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 August 28, 2020 (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; 74 • 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 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 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 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. 75 The carrying value of the Notes is as follows (in thousands): August 28, 2020 Principal $ 250,000 Unamortized debt discount 48,586 Unamortized issuance costs 5,841 Net carrying amount $ 195,573 As of August 28, 2020, the remaining life of the Notes was approximately 66 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 August 28, 2020, 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): August 28, 2020 Contractual interest expenses $ 3,078 Amortization of debt discount 3,914 Amortization of debt issuance costs 471 Total interest cost recognized $ 7,463 The total estimated fair value for the Notes was determined to be $221.5 million based on the closing trading price per $100 of the Notes as of the last day of trading for the period. There are no future minimum principal payments under the Notes until the full amount of $250.0 million is due in fiscal 2026 Off-Balance Sheet Arrangements As of August 28, 2020 and August 30, 2019, we did not have any off-balance sheet arrangements or relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which are typically established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. Critical Accounting Policies We believe the following critical accounting policies are the most significant to the presentation of our financial statements and they at times require the most difficult, subjective and complex estimates. Revenue Recognition 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. 76 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. 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, 77 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 our gross billings to customers and net sales for services and products (in thousands): Fiscal Year Ended August 28, August 30, August 31, 2020 2019 2018 (2) Service revenue, net $ 32,204 $ 42,527 $ 42,978 Cost of purchased materials - service (1) 604,698 946,303 1,013,393 Gross billings for services 636,902 988,830 1,056,371 Product net sales 1,090,173 1,169,472 1,245,843 Gross billings to customers $ 1,727,075 $ 2,158,302 $ 2,302,214 Product net sales $ 1,090,173 $ 1,169,472 $ 1,245,843 Service revenue, net 32,204 42,527 42,978 Net sales $ 1,122,377 $ 1,211,999 $ 1,288,821 (1) Represents material procurement costs of products provided as an agent reported on a net basis. (2) Amounts for fiscal 2018 are accounted for under ASC 605 (refer to Note 1(u)). 78 Inventory Valuation At each balance sheet date, we evaluate our ending inventories for excess quantities and obsolescence. This evaluation includes analysis of sales levels by product family. Among other factors, we consider historical demand and forecasted demand in relation to the inventory on hand, competitiveness of product offerings, market conditions and product life cycles when determining obsolescence and net realizable value. We adjust the carrying values to approximate the lower of our manufacturing cost or net realizable value. Inventory cost is determined on a specific identification basis and includes material, labor and manufacturing overhead. From time to time, our customers may request that we purchase and maintain significant inventory of raw materials for specific programs. Such inventory purchases are evaluated for excess quantities and potential obsolescence and could result in a provision at the time of purchase or subsequent to purchase. Inventory levels may fluctuate based on inventory held under service arrangements. Our provisions for excess and obsolete inventory are also impacted by our arrangements with our customers and/or suppliers, including our ability or inability to re-sell such inventory to them. If actual market conditions or our customers’ product demands are less favorable than those projected or if our customers or suppliers are unwilling or unable to comply with any arrangements related to their purchase or sale of inventory, additional provisions may be required and would have a negative impact on our gross margins in that period. We have had material inventory write-downs in the past for reasons such as obsolescence, excess quantities and declines in market value below our costs, and we may be required to do so from time to time in the future. Our inventory write-downs were $4.7 million, $9.0 million and $5.2 million for fiscal 2020, 2019 and 2018, respectively. Income Taxes We use 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 or reduced to value tax assets to amounts expected to be realized. The effect of changes in tax rates is recognized in the period in which the rate change occurs. The calculation of our tax liabilities involves accounting for uncertainties in the application of complex tax rules, regulations and practices. We recognize benefits for uncertain tax positions based on a two-step process. The first step is to evaluate the tax position for recognition of a benefit (or the absence of a liability) by determining if the weight of available evidence indicates that it is more likely than not that the position taken will be sustained upon audit, including resolution of related appeals or litigation processes, if any. If it is not, in our judgment, more likely than not that the position will be sustained, then we do not recognize any benefit for the position. If it is more likely than not that the position will be sustained, a second step in the process is required to estimate how much of the benefit we will ultimately receive. This second step requires that we estimate and measure the tax benefit as the largest amount that is more than 50% likely of being realized upon ultimate settlement. It is inherently difficult and subjective to estimate such amounts. We reevaluate these uncertain tax positions on a quarterly basis. The total amount of unrecognized tax benefits that would affect the effective tax rate, if recognized, is $1.7 million as of August 28, 2020. This evaluation is based on a number of factors including, but not limited to, changes in facts or circumstances, changes in tax law, new facts, correspondence with tax authorities during the course of an audit, effective settlement of audit issues and commencement of new audit activity. Such a change in recognition or measurement could result in the recognition of a tax benefit or an additional charge to the tax provision in the period. Goodwill Valuation We perform a goodwill impairment test annually during the fourth quarter of our 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. When conducting the annual impairment test for goodwill, we compare 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. We determine the fair value of the our 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. These approaches use significant unobservable inputs, or Level 3 inputs, as defined by the fair value hierarchy and require us to make significant management judgments and assumptions including, but not limited to, future net sales, earnings before interest, and the selection of the discount rate. These assumptions consider our budgets, business plans and economic projections, and are believed to reflect market participant views. Some of the inherent estimates and assumptions used in determining fair value of the reporting units are outside the control of management. While we believe we have made reasonable estimates and assumptions 79 to calculate the fair value of the reporting units, it is possible a material change could occur. If our actual results are not consistent with our estimates and assumptions used to calculate fair value, it could result in material impairments of our goodwill. For additional information, s ee Note 1(k), Goodwill , in our Notes to Consolidated Financial Statements in this Annual Report on Form 10-K . Based on the results of the impairment test, the fair values exceed the respective carrying values for each reporting unit. Accordingly, no impairment of goodwill was recognized through August 28, 2020. The estimated forecasted results used in the discounted cash flow portion of the impairment analysis reflect our best estimates as of August 28, 2020. Long-Lived Assets Valuation We review our long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the future undiscounted cash flows expected to be generated by the asset. 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. Share-Based Compensation We recognize compensation costs related to share-based awards granted to employees based on the estimated fair value of the awards on the date of grant. We estimate the grant date fair value of options, and the resulting share-based compensation expense, using the Black-Scholes option-pricing model. The grant date fair value of the share-based awards is generally recognized on a straight-line basis over the requisite service period, which is generally the vesting period of the respective awards. The Black-Scholes model requires the use of subjective and highly complex assumptions which determine the fair value of share-based option awards. 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 giving consideration to vesting schedules and the historical exercise patterns. 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. We used the following assumptions to value options granted under the SGH Plan during fiscal 2020, 2019 and 2018: Fiscal Year Ended August 28, August 30, August 31, 2020 2019 2018 Stock options: Expected term (years) 6.25 6.25 6.25 Expected volatility 46.10% - 57.10% 41.68% - 48.15% 39.00% - 46.27% Risk-free interest rate 0.40% - 1.68% 1.42% - 2.88% 2.15% - 2.82% Expected dividends — — — The following table sets forth our total share-based compensation expense during fiscal 2020, 2019 and 2018 (in thousands): Fiscal Year Ended August 28, August 30, August 31, 2020 2019 2018 Share-based compensation expense by category (in thousands): Cost of sales $ 3,022 $ 2,485 $ 1,335 Research and development 3,069 2,654 1,460 Selling, general and administrative 12,625 13,060 7,763 Total $ 18,716 $ 18,199 $ 10,558 80 Item 7A. Quantitative and Qualita tive 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 United States dollars, increases in the value of the United States 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 reais. In addition, we have certain costs that are denominated in foreign currencies, and decreases 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. We utilize foreign exchange forward contracts to mitigate foreign currency exchange rate risk associated with foreign-currency-denominated assets and liabilities, primarily third party payables in Brazil. We do not use foreign currency contracts for speculative or trading purposes. Foreign exchange forward contracts outstanding at August 28, 2020 are not designated as hedging instruments for hedge accounting purposes. We do not currently purchase financial instruments to hedge foreign exchange risk, but may do so in the future. 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 reais. Approximately 35%, 44% and 62% of our net sales during fiscal 2020, 2019 and 2018, respectively, originated in reais. We present our 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 combined 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 consolidated statement 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 consolidated statement of operations is also impacted by foreign currency gains and losses recorded in Other Income (Expense) 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 fiscal 2020, 2019 and 2018, we recorded $3.4 million, $3.1 million, and $13.2 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 as of May 29, 2020. Although we did not have any revolving balances outstanding as of August 28, 2020, the revolving facility under the Amended Credit Agreement provides for borrowings of up to $50 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 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 $0.5 million per year. Item 8. Financial Statements and Supplementary Data The financial statements and supplemental financial information required by this item are presented beginning on page F-1 in Part IV, Item 15 of this annual report on Form 10-K and are incorporated herein by reference, and the supplementary data required by this item is included in Note 15, Selected Quarterly Information, in our notes to consolidated financial statements. 81 Item 9. Changes in and Disagreements with Accou ntants on Accounting and Financial Disclosure None. Item 9A. Controls and Procedures Evaluation of Disclosure Controls and Procedures An evaluation was performed under the supervision and with the participation of our Company’s management, including the Chief Executive Officer, or CEO, and Chief Financial Officer, or CFO, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e)) under the Securities Exchange Act of 1934 as amended. Based on that evaluation, the Company’s management, including the CEO and CFO, concluded that as of August 28, 2020, the Company’s disclosure controls and procedures were effective to ensure the information required to be disclosed by an issuer in the reports that it files or submits under the Securities Exchange Act of 1934 is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives. Management’s Report on Internal Control Over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f). Under the supervision and with the participation of our management, including our CEO and CFO, 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) . Based on our evaluation under the 2013 Framework, management concluded that our internal control over financial reporting was effective as of August 28, 2020. The effectiveness of our internal control over financial reporting as of August 28, 2020 has been audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their report that is included in this Annual Report on Form 10-K. Changes in Internal Control Over Financial Reporting There has been no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fourth quarter of fiscal 2020 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. 82 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Shareholders and the Board of Directors of SMART Global Holdings, Inc. Opinion on Internal Control over Financial Reporting We have audited the internal control over financial reporting of SMART Global Holdings, Inc. and subsidiaries (the “Company”) as of August 28, 2020, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of August 28, 2020, based on criteria established in Internal Control — Integrated Framework (2013) issued by COSO. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the year ended August 28, 2020 of the Company and our report dated October 22, 2020, expressed an unqualified opinion on those financial statements and included an explanatory paragraph relating to the Company’s adoption of Accounting Standards Update No. 2016-02, Leases (Topic 842) . Basis for Opinion The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Definition and Limitations of Internal Control over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. /s/ DELOITTE & TOUCHE LLP San Jose, California October 22, 2020 83 Item 9B. Othe r Information In consideration of the outstanding service that the Executive Chairman of the Board, and former President and Chief Executive Officer of the Company, Ajay Shah has provided and continues to provide to the Company, as well as Mr. Shah’s instrumental role in selecting and recruiting Mr. Adams as his successor to be the Company’s President and Chief Executive Officer, the Board approved certain modifications to two equity awards previously granted to Mr. Shah. On October 20, 2020, the Board approved the acceleration of the remaining service-based vesting requirements contained in 90,000 performance-based restricted share awards and 180,000 time-based restricted share awards originally granted to Mr. Shah on May 17, 2020. These awards became fully vested, free of restrictions and non-forfeitable on October 20, 2020. Item 10. Directors, Executive Officers and Corporate Governance The information required by this item is incorporated by reference to our Proxy Statement for our next Annual General Meeting to be filed with the SEC within 120 days after the close of the year ended August 28, 2020. Code of Conduct The Company has adopted a code of business ethics and conduct (the “Code of Conduct”) that applies to all employees, officers and directors, including the principal executive officer, principal financial officer and principal accounting officer. The Code of Conduct is available on the Company’s website at www.smartgh.com on the Investor Relations page. The Company intends to post on its website all disclosures that are required by law or NASDAQ listing rules regarding any amendment to, or a waiver of, any provision of the Code of Conduct for the principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions. Item 11. Executive Compensation The information required by this item is incorporated by reference to our Proxy Statement for our next Annual General Meeting to be filed with the SEC within 120 days after the close of the year ended August 28, 2020. Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters The information required by this item is incorporated by reference to our Proxy Statement for our next Annual General Meeting to be filed with the SEC within 120 days after the close of the year ended August 28, 2020. Item 13. Certain Relationships and Related Transactions, and Director Independence The information required by this item is incorporated by reference to our Proxy Statement for our next Annual General Meeting to be filed with the SEC within 120 days after the close of the year ended August 28, 2020. Item 14. Principal Accounting Fees and Services The information required by this item is incorporated by reference to our Proxy Statement for our next Annual General Meeting to be filed with the SEC within 120 days after the close of the year ended August 28, 2020. 84 PART IV . Item 15. Exhibits and Financial Statement Schedules (a) The following documents are filed as a part of this report: (1) Financial Statements. The following Consolidated Financial Statements are filed as part of this report under Item 8 “Financial Statements and Supplementary Data.” Report of Independent Registered Public Accounting Firm F-2 Consolidated Balance Sheets F-5 Consolidated Statements of Operations F-6 Consolidated Statements of Comprehensive Income (Loss) F-7 Consolidated Statements of Shareholders’ Equity F-8 Consolidated Statements of Cash Flows F-9 Notes to Consolidated Financial Statements F-10 (2) Exhibits. Exhibits are listed on the Exhibit Index at the end of this report. Item 16. Form 10-K Summary Not applicable. 85 INDEX TO FINANCIAL STATEMENTS Page Report of Independent Registered Public Accounting Firm F-2 Consolidated Balance Sheets F-5 Consolidated Statements of Operations F-6 Consolidated Statements of Comprehensive Income (Loss) F-7 Consolidated Statements of Shareholders’ Equity F-8 Consolidated Statements of Cash Flows F-9 Notes to Consolidated Financial Statements F-10 F-1 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Shareholders and the Board of Directors of SMART Global Holdings, Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of SMART Global Holdings, Inc. and subsidiaries (the "Company") as of August 28, 2020 and August 30, 2019, the related consolidated statements of operations, comprehensive income (loss), shareholders' equity, and cash flows for each of the three years in the period ended August 28, 2020, and the related notes, (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of August 28, 2020 and August 30, 2019, and the results of its operations and its cash flows for each of the three years in the period ended August 28, 2020, in conformity with accounting principles generally accepted in the United States of America. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of August 28, 2020, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated October 22, 2020, expressed an unqualified opinion on the Company's internal control over financial reporting. Change in Accounting Principle As discussed in Note 1 to the financial statements, the Company has changed its method of accounting for leases in the year ended August 28, 2020 due to the adoption of Accounting Standards Update No. 2016-02, Leases (Topic 842), using the modified retrospective approach. Basis for Opinion These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matters The critical audit matters communicated below are matters arising from the current-period audit of the financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing a separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. Goodwill— Embedded Computing Reporting Unit — Refer to Note 1 to the financial statements Critical Audit Matter Description 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. The Company determines the fair value of its reporting units F-2 using the discounted cash flow method and the market approach. The determination of the fair value using the discounted cash flow method and the market approach requires management to make significant judgments and assumptions including, but not limited to, forecasts of future net sales, earnings before interest, and the selection of the discount rate. As of August 28, 2020, the goodwill balance was $74.0 million, of which $26.9 million was allocated to the Embedded Computing Reporting Unit (“EC”), which is part of the Specialty Compute and Storage Solutions segment. The fair value of EC exceeded its carrying value as of the measurement date. We identified the goodwill valuation for EC as a critical audit matter due to the significant estimates and assumptions made by management to estimate th