What changed in this filing

/stocks — the workspaceLOADING

Item 9A. Controls and Procedures

2020-10-22 compared with 2019-11-06 · 502 added, 369 removed, 1154 unchanged (43% of the section changed)

9 unchanged sentences

Based on our evaluation under the 2013 Framework, management concluded that our internal control over financial reporting was effective as of August 28, 2020.

In July 2019, we completed the acquisitions of SMART Embedded Computing and SMART Wireless Computing.

For further discussion of these acquisitions, refer to Item 8:

“Financial Statements, Note 2:

Business Combinations.” The Securities and Exchange Commission permits companies to exclude acquisitions from their assessment of internal control over financial reporting during the first year of an acquisition, and our management has elected to exclude these companies from our assessment as of August 30, 2019.

These acquisitions constituted, in aggregate, 4% and 1% of our consolidated total assets and net sales as of and for the year ended August 30, 2019, respectively.

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.

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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 30, 2019 of the Company and our report dated November 6, 2019, expressed an unqualified opinion on those financial statements and included an explanatory paragraph relating to the Company’s adoption of Accounting Standards Update No.

2014-09 Revenue from Contracts with Customers, as amended (Topic 606).

As described in Management’s Report on Internal Control Over Financial Reporting, management excluded from its assessment the internal control over financial reporting of three acquisitions that were completed during the year ended August 30, 2019, which constitute, in aggregate, 4% of assets and 1% of net sales of the consolidated financial statement amounts as of and for the year ended August 30, 2019.

Accordingly, our audit did not include the internal control over financial reporting of three acquisitions.

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

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San Jose, California

November 6, 2019

October 22, 2020

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.

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.

Directors, Executive Officers and Corporate Governance

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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.smartm.com on the Investor Relations page.

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.

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Consolidated Statements of Comprehensive Income (Loss)

Consolidated Statements of Shareholders’ Equity (Deficit)

Consolidated Statements of Shareholders’ Equity

Consolidated Statements of Cash Flows

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Consolidated Statements of Comprehensive Income (Loss)

Consolidated Statements of Shareholders’ Equity (Deficit)

Consolidated Statements of Shareholders’ Equity

Consolidated Statements of Cash Flows

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We have audited the accompanying consolidated balance sheets of SMART Global Holdings, Inc.

and subsidiaries (the "Company") as of August 30, 2019 and August 31, 2018, the related consolidated statements of operations, comprehensive income (loss), shareholders' equity (deficit), and cash flows for each of the three years in the period ended August 30, 2019, and the related notes, (collectively referred to as the "financial statements").

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 30, 2019, 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 November 6, 2019, expressed an unqualified opinion on the Company's internal control over financial reporting.

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 revenue from contracts with customers in the year ended August 30, 2019 due to the adoption of Accounting Standards Update No.

2014-09 Revenue from Contracts with Customers, as amended (Topic 606) using the modified retrospective approach.

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

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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

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 the fair value of EC under the income approach.

This required a high degree of auditor judgment and an increased extent of effort when performing audit procedures to evaluate the reasonableness of management’s estimates and assumptions related to the forecasts of future net sales.

How the Critical Audit Matter Was Addressed in the Audit

Our audit procedures related to the forecasts of future net sales used to estimate the fair value for EC included the following, among others:

We tested the effectiveness of the controls over management’s goodwill impairment evaluation, including those over determining the fair value of EC and the forecasts of future net sales.

We evaluated the reasonableness of management’s forecasts of future net sales by comparing the forecasts to:

Historical net sales,

Management’s long-range plan, which was communicated to the Board of Directors,

Underlying inputs to the estimates, including but not limited to backlog, customer purchase order information, and contractual terms,

Analyst reports for the Company, as well as, analyst, industry reports, and comparison to historical growth rates for the companies in its peer group.

We evaluated whether the forecasts were consistent with evidence obtained in other areas of the audit.

We evaluated management's ability to accurately forecast future net sales by comparing actual results to management’s historical forecasts.

Long-Term Debt — Convertible Senior Notes due 2026 — Refer to Note 7 to the financial statements

Critical Audit Matter Description

During 2020, the Company issued $250.0 million in aggregate principal amount of 2.25% convertible senior notes due 2026 (the Notes).

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 separated the Notes into liability and equity components.

The carrying amount of the liability component of approximately $197.5 million was calculated by using the Company’s borrowing rate on the date of the issuance of the Notes to estimate the fair value of 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 of the liability component from the par value of the Notes.

Given the determination of the fair value of the liability component required management to make significant estimates and assumptions regarding the relevant valuation assumptions, auditing the valuation of the liability component required a high degree of auditor judgment and an increased extent of effort, including the need to involve professionals in our firm having expertise in the valuation of financial instruments, when performing audit procedures to evaluate management’s judgments and conclusions.

How the Critical Audit Matter Was Addressed in the Audit

Our audit procedures related to the valuation of the liability component included the following, among others:

We tested the effectiveness of the controls over the Company’s determination of the valuation of the liability component, including controls over the relevant assumptions.

With the assistance of our fair value specialists, we evaluated the appropriateness of the valuation methodology and the reasonableness of the valuation assumptions to determine the valuation of the liability component.

Additionally, we:

Tested the source information underlying the valuation assumptions used in the model to determine fair value.

Tested the mathematical accuracy of the valuation model.

Developed a range of independent estimates and compared those to the fair value of the liability component determined by management.

/s/ DELOITTE & TOUCHE LLP

San Jose, California

November 6, 2019

October 22, 2020

We have served as the Company's auditor since 2014.

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Property and equipment, net

Operating lease right-of-use assets

Other noncurrent assets

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Long-term debt

Long-term operating lease liabilities

Other long-term liabilities

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Selling, general, and administrative

Restructuring charge

Change in estimated fair value of acquisition-related

contingent consideration

Management advisory fees

Restructuring charge

Total operating expenses

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and Subsidiaries

Consolidated Statements of Shareholders’ Equity (Deficit)

(Dollars and shares in thousands)

Consolidated Statements of Shareholders’ Equity

(In thousands)

Ordinary shares

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shareholders’

equity (deficit)

Balances as of August 25, 2017

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restricted stock units (RSUs)

Withholding tax on RSUs

Issuance of ordinary shares from initial

public offering (IPO), net of issuance costs

Issuance of ordinary shares from exercise

Surrendered shares

Warrants issued in connection with debt

Foreign currency translation

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Issuance of ordinary shares from exercises

Issuance of ordinary shares from release of

Foreign currency translation

Balances as of August 31, 2018

Share-based compensation expense

Issuance of ordinary shares from exercises

Issuance of ordinary shares in connection

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Balances as of August 30, 2019

Share-based compensation expense

Issuance of ordinary shares from exercises

Issuance of ordinary shares from release of

Withholding tax on RSUs

Release of holdback shares in connection

with an acquisition

Issuance of ordinary shares from ESPP

Equity component of convertible notes due

Reclassification of capped calls to shareholders' equity

Foreign currency translation

Balances as of August 28, 2020

The accompanying notes are an integral part of these consolidated financial statements.

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Adjustments to reconcile net income (loss) to net cash provided by

(used in) operating activities:

operating activities:

Depreciation and amortization

Share-based compensation

Provision for doubtful accounts receivable

Share-based compensation expense

Provision for doubtful accounts receivable and sales returns

Deferred income tax benefit

Loss on disposal of property and equipment

Loss on extinguishment of debt

Loss on early repayment of debt

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

Loss on extinguishment of debt / revolver

Amortization of debt discounts and issuance costs

Amortization of operating lease right-of-use assets

Write-off of other assets

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Accounts payable

Operating lease liabilities

Accrued expenses and other liabilities

Net cash provided by (used in) operating activities

Net cash provided by operating activities

Cash flows from investing activities:

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Cash flows from financing activities:

Long-term debt payments

Long-term debt payments - Term Loan

Long-term debt payments - BNDES

Purchase of capped calls

Proceeds from convertible notes due 2026, net of discount

Payment for extinguishment of long-term debt

Proceeds from borrowings under revolving line of credit

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Proceeds from issuance of ordinary shares from ESPP

Issuance of ordinary shares from IPO, net of underwriting commissions

Payment of costs related to IPO

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Fees paid for revolving line of credit financing

Payment for extinguishment of long-term debt

Early debt payment for long-term debt

Net cash provided by (used in) financing activities

Net cash provided by financing activities

Effect of exchange rate changes on cash, cash equivalents and restricted cash

Net increase (decrease) in cash, cash equivalents and restricted cash*

Net increase in cash, cash equivalents and restricted cash

Cash, cash equivalents and restricted cash at beginning of period

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Capital expenditures included in accounts payable at period end

Reclassification of capped calls to shareholders' equity

Fair value of ordinary shares issued and holdback in connection with acquisition

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Fair value of contingent consideration for acquisition of business

Fair value of warrants issued

IPO costs included in accounts payable and accrued liabilities at period end

Unpaid debt fees related to term loan and revolver

Cash balance was adjusted to include restricted cash upon adoption of ASU 2016-18 in fiscal 2019 (see Note 1(u)).

The accompanying notes are an integral part of these consolidated financial statements.

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Notes to Consolidated Financial Statements

August 30, 2019, August 31, 2018 and August 25, 2017

Overview, Basis of Presentation and Significant Accounting Policies

On August 26, 2011, SMART Global Holdings, Inc., formerly known as Saleen Holdings, Inc., a Cayman Islands exempted company (SMART Global Holdings, and together with its subsidiaries, the Company), consummated a transaction with SMART Worldwide Holdings, Inc., formerly known as SMART Modular Technologies (WWH), Inc.

(SMART Worldwide), pursuant to an Agreement and Plan of Merger (the Merger Agreement) whereby, through a series of transactions, SMART Global Holdings acquired substantially all of the equity interests of SMART Worldwide with SMART Worldwide surviving as an indirect wholly owned subsidiary of SMART Global Holdings (the Acquisition).

(SMART Worldwide), pursuant to an Agreement and Plan of Merger whereby, through a series of transactions, SMART Global Holdings acquired substantially all of the equity interests of SMART Worldwide with SMART Worldwide surviving as an indirect wholly-owned subsidiary of SMART Global Holdings (the Acquisition).

SMART Global Holdings is an entity that was formed by investment funds affiliated with Silver Lake Partners and Silver Lake Sumeru (collectively Silver Lake).

As a result of the Acquisition, since there was a change of control resulting in Silver Lake as the controlling shareholder group, the Company applied the acquisition method of accounting and established a new basis of accounting.

The Company, through its subsidiaries, are leading designers and manufacturers of electronic products focused on memory and computing technology areas.

The Company specializes in application specific product development and support for customers in enterprise, government and OEM markets.

The Company, through its subsidiaries, is a leading designer and manufacturer of electronic products focused on memory and computing technology areas.

The Company specializes in application specific product development and support for customers in enterprise, government and original equipment manufacturer, or OEM markets.

Customers rely on SMART as a strategic supplier with top tier customer service, product quality, and technical support with engineering, sales, manufacturing, supply chain and logistics capabilities worldwide.

The Company targets customers in markets such as communications, storage, networking, mobile, industrial automation, industrial internet of things, government, military, edge computing and high performance computing.

The Company operates in three primary product areas:

Specialty Memory, Brazil and Specialty Compute and Storage Solutions.

The Company operates in three segments:

Specialty Memory Products, Brazil Products and Specialty Compute and Storage Solutions, or SCSS.

SMART Global Holding is domiciled in the Cayman Islands and has U.S.

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Actual results could differ from the estimates made by management.

Significant items subject to such estimates and assumptions include the useful lives of long-lived assets, the valuation of deferred tax assets, inventory and contingent consideration in business acquisitions, share-based compensation, the estimated net realizable value of Brazilian tax credits, income tax uncertainties and other contingencies.

Significant items subject to such estimates and assumptions include the evaluation of the fair value of the Company's reporting units (as part of the Company’s goodwill impairment), accounting for the allocation of convertible debt between equity and debt, the useful lives of long-lived assets, the valuation of deferred tax assets, inventory and contingent consideration in business acquisitions, share-based

compensation, the estimated net realizable value of Brazilian tax credits, income tax uncertainties and other contingencies.

The Company’s revenues include products and services.

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

Amounts for fiscal 2018 and 2017 are accounted for under ASC 605 (refer to Note 1(u)).

Amounts for fiscal 2018 are accounted for under ASC 605 (refer to Note 1(u)).

Gross billings to customers in the table above represents total amounts invoiced to customers during the period and is the sum of net sales plus material procurement costs of products the Company provides as an agent.

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The time between invoicing and when payment is due is not significant.

Changes in the accounts receivable, contract assets and the deferred revenues balances during the year ended August 30, 2019 are as follows (in thousands):

Changes in the accounts receivable, contract assets and the deferred revenues balances during the years ended August 28, 2020 and August 30, 2019 are as follows (in thousands):

Accounts receivable

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Deferred revenue

The increase in contract assets from $1.1 million at September 1, 2018 to $4.6 million as of August 30, 2019 was primarily driven by the recognition of revenue that had not yet been billed.

The increase in deferred revenue from $11.8 million to $24.2 million was due to additional funds collected for hosting and support contracts signed during the year in which billing occurred in advance of revenue recognition.

During fiscal 2019, $6.8 million of revenue recognized was included in the deferred revenue balance at the beginning of the period, which was offset by additional deferrals during the period.

The increase in contract assets from $4.6 million at August 30, 2019 to $5.1 million as of August 28, 2020 was primarily driven by the recognition of revenue that had not yet been billed.

The decrease in deferred revenue from $24.2 million to $20.1 million was due to fewer deferred services billed during the period.

During fiscal 2020 and fiscal 2019, $17.3 million and $6.8 million, respectively, of revenue recognized was included in the deferred revenue balance at the beginning of the period, which was offset by additional deferrals during the period.

Disaggregation of Revenue

The Company disaggregates revenue by source of revenue and geography;

The Company disaggregates revenue by segment and geography;

no other level of disaggregation is required considering the type of products, customer, markets, contracts, duration of contracts, timing of transfer of control and sales channels.

The revenue by geography is disclosed in Note 11, and revenue by source is as follows (in thousands):

Fiscal Year Ended

Specialty Memory

Specialty Compute and Storage Solutions

Total net sales

The revenue by segment and geography is disclosed in Note 11.

Revenue Allocated to Remaining Performance Obligations

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Cash and cash equivalents include cash on hand, cash deposited in checking and saving accounts, money market accounts and securities with maturities of less than 90 days at the time of purchase.

Due to the adoption of ASU 2016-18 in fiscal 2019, the presentation of the Statement of Cash Flows has been updated with the inclusion of restricted cash – refer to Note 1(u) for details.

Allowance for Doubtful Accounts

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Balance as of August 25, 2017

Charged to costs and other

Balance as of August 25, 2017

Charged to costs and other

Charges to costs and other

Additions from business acquisition (see Note 2)

Balance as of August 31, 2018

Changes to costs and other

Charges to costs and other

Additions from business acquisitions (see Note 2)

Balance as of August 30, 2019

Charges to costs and other

Balance as of August 28, 2020

Derivative Financial Instrument

The Company records the assets or liabilities associated with derivative instruments at fair value based on Level 2 inputs in prepaid expenses and other current assets or accrued liabilities, respectively, in the consolidated balance sheets.

The Company records the assets or liabilities associated with derivative instruments at fair value based on Level 2 inputs in prepaid expenses and other current assets and accrued liabilities, respectively, in the consolidated balance sheets.

The accounting for gains and losses resulting from changes in fair value depends on the use of the derivative and whether it is designated and qualifies for hedge accounting.

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Inventory write-downs are not reversed and create a new cost basis.

Financial Credits

In 1991, Brazil created the PPB/IT Program to incentivize local manufacturing by allowing qualified companies to receive incentives when they sell specified IT products, including desktops, notebooks, servers, SmartTVs and mobile products manufactured in Brazil.

In 2007, the Brazilian legislature created a program known as PADIS to promote the semiconductor industry.

The Company has been a participant in the PPB/IT Program and PADIS since 2011.

Among other incentives, the PPB/IT Program provided for certain reductions in the rate of IPI, a federal tax applied to industrial goods, as well as for PADIS companies, reducing to zero, IPI, import taxes and taxes known as PIS and COFINS levied over sales.

As part of making the PPB/IT and P ADIS Programs compatible with the principles of the World Trade Organization, or WTO, effective April 1, 2020, the reduction of the IPI for PPB/IT Program for certain types of customers was eliminated along with, for PADIS companies, the zero rates of IPI, PIS and COFINS levied over sales.

Instead, participants in the PPB/IT Program as well as PADIS companies, are entitled to financial credits calculated based on effective disbursements made on research and development under the aforementioned programs.

As a result, the PPB/IT Program and PADIS participants are entitled to a subsidy for operational costs, granted as financial credits, which may be used by participants either as a credit against certain federal taxes, or to request a refund in cash.

PADIS beneficiaries are entitled to a subsidy for operational costs granted as financial credits to be used against certain federal taxes, equivalent to 2.62 times the effective disbursements in research and development initiatives under PADIS, limited to a cap of 13.1% of the total incentivized revenues within the country.

The financial credits under the PPB/IT Program range from 2.73 to 3.41 times the research and development invested, limited to 10.92% to 13.65% of domestic gross sales revenues, depending on the location of the participant and on what products it manufactures and sells.

These multipliers and caps decline over time.

Under the current law, the financial credits are available for PADIS companies through January 2022 and for other PPB/IT Program participants through December 2029.

For year ended August 28, 2020, the Company recognized financial credits under PADIS totaling $6.4 million which are reported under research and development as a reduction of expense on the consolidated statements of operations.

As of August 28, 2020, unused financial credits totaling $6.4 million are reported under prepaid expenses and other current assets, and are expected to be applied against future taxes.

Prepaid State Value-Added Taxes (ICMS)

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The CAT 14 approval was not obtained until July 21, 2011, and from February 1, 2011 until the CAT 14 approval was granted, SMART do Brazil did not have sufficient ICMS collections against which to apply the credits accrued upon payment of the ICMS on SMART do Brazil’s imports and inputs locally acquired, and therefore, it generated additional excess ICMS credits.

As of August 28, 2020, the total ICMS tax credits reported on the Company’s accompanying consolidated balance sheet are R$21.2 million (or $4.1 million), of which (i) R$19.6 million (or $3.8 million) are fully vested ICMS credits, classified as other noncurrent assets, and (ii) R$1.6 million (or $0.3 million) are ICMS credits subject to vesting in 48 equal monthly amounts, classified as prepaid expenses and other current assets (R$0.7 million or $0.1 million), and other noncurrent assets (R$0.9 million or $0.2 million).

As of August 30, 2019, the total ICMS tax credits reported on the Company’s accompanying consolidated balance sheet are R$32.3 million (or $8.6 million), of which (i) R$7.2 million (or $1.9 million) are fully vested ICMS credits, classified as prepaid and other current assets, and R$23.2 million (or $6.2 million) are fully vested ICMS credits, classified as other noncurrent assets, and (ii) R$ 1.9 million (or $0.5 million) are ICMS credits subject to vesting in 48 equal monthly amounts, classified as prepaid expenses and other current assets (R$0.6 million or $0.2 million), and other noncurrent assets (R$1.3 million or $0.3 million).

As of August 31, 2018, the total ICMS tax credits reported on the Company’s accompanying consolidated balance sheet are R$45.3 million (or $12.1 million), of which (i) R$16.6 million (or $4.4 million) are fully vested ICMS credits, classified as prepaid and other current assets, and R$25.4 million (or $6.8 million) are fully vested ICMS credits, classified as other noncurrent assets, and (ii) R$ 3.3 million (or $ 0.9 are ICMS credits subject to vesting in 48 equal monthly amounts, classified as prepaid expenses and other current assets (R$0.6 million or $0.2 million), and other noncurrent assets (R$2.7 million or $0.7 million).

It is expected that the excess ICMS credits will continue to be recovered in fiscal 2021 through fiscal 2023.

The Company updates its forecast of the recoverability of the ICMS credits quarterly, considering the following key variables in Brazil:

The Company updates

its forecast of the recoverability of the ICMS credits quarterly, considering the following key variables in Brazil:

timing of government approvals of automated credit utilization, the total amount of sales, the product mix and the inter and intra state mix of sales.

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The Company has recorded valuation adjustments for the estimated discount and fees that the Company will need to offer in order to sell ICMS credits to other companies.

To adapt to the market, in the fourth quarter of fiscal 2020, the Company reassessed the discount rate for the sale of the ICMS credits to other companies, adjusting it to 22%, resulting in a charge of R$5.9 million (or $1.1 million) on the consolidated statements of operations.

In the first quarter of fiscal 2019, the Company sold R$17.7 million (or $3.4 million) of its ICMS credits that had been approved to be sold in December 2017.

The payments are to be received in 22 installments starting in the second quarter of fiscal 2019 through fiscal 2020.

The Company received a total of R$10.0 million (or $2.7 million) of the monthly installments during fiscal 2019.

The payments were received in 22 installments starting in the second quarter of fiscal 2019 through fiscal 2020, or R$10.0 million (or $1.9 million) and R$7.7 million (or $1.5 million) in fiscal 2019 and 2020, respectively, thus finalizing the receipt of all installments of the contract.

Property and Equipment

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Manufacturing equipment

Office furniture, software, computers and

Office furniture, software, computers

and equipment

Leasehold improvements*

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If the fair value of the reporting unit is determined to be more than its carrying value, no goodwill impairment is recognized.

The excess of the fair value of the reporting unit over the fair value of assets less liabilities is the implied value of goodwill and is used to determine the amount of impairment.

All of the $81.4 million carrying value of goodwill on the Company’s consolidated balance sheet as of August 30, 2019 is associated with the Company’s three reporting units (Specialty Memory, Brazil and Specialty Compute and Storage Solutions).

The Company determines the fair value of the Company's reporting units using the income approach methodology of valuation that includes the discounted cash flow method as well as the market approach which includes the guideline company method.

No impairment of goodwill was recognized through August 28, 2020.

1 unchanged sentence

Balance as of August 31, 2018

Provisional adjustment from business acquisition

Addition from business acquisition (see Note 2)

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Balance as of August 30, 2019

Provisional adjustments from business acquisition

Additions from business acquisitions (see Note 2)

Provisional adjustments from business

acquisition (see Note 2)

Translation adjustments

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Fiscal year ending August:

2025 and thereafter

Long-Lived Assets

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Assets to be disposed are reported at the lower of the carrying amount or fair value, less cost to sell.

No impairment of long-lived assets was recognized in fiscal 2019, 2018 and 2017.

Impairment of long-lived assets amounted to $2.7 million, $0 and $0 was recognized in fiscal 2020, 2019 and 2018.

Refer to Note 1(v) for more details.

Research and Development Expense

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The gains or losses resulting from the remeasurement process are recorded in other income (expense) in the accompanying consolidated statements of operations.

In fiscal 2019, 2018 and 2017, the Company recorded ($3.1) million, ($13.2) million and $0.3 million, respectively, of foreign exchange gains (losses) primarily related to its Brazilian operating subsidiaries.

In fiscal 2020, 2019 and 2018, the Company recorded $3.4 million, $3.1 million and $13.2 million, respectively, of foreign exchange losses primarily related to its Brazilian operating subsidiaries.

Share-Based Compensation

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

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

Fiscal Year Ended

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The Company performs periodic credit evaluations of its customers to minimize collection risk on accounts receivable and maintains allowances for potentially uncollectible accounts.

The Company relies on four suppliers for the majority of its raw materials.

At August 30, 2019 and August 31, 2018, the Company owed these four suppliers $110.9 million and $141.8 million, respectively, which was recorded as accounts payable and accrued liabilities.

The Company relies on three suppliers for the majority of its raw materials.

At August 28, 2020 and August 30, 2019, the Company owed these three suppliers $133.3 million and $91.5 million, respectively, which was recorded as accounts payable and accrued liabilities.

The inventory purchases from these suppliers in fiscal 2020, 2019 and 2018 were $0.9 billion, $1.2 billion and $1.5 billion, respectively.

New Accounting Pronouncements

In October 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No.

In August 2020, Financial Accounting Standards Board (“FASB”) issued Accounting Standards Updates (“ASU”) 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40):

Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity , which simplifies the accounting for convertible instruments by removing the separation models for (1) convertible debt with a cash conversion feature and (2) convertible instruments with a beneficial conversion feature.

As a result, a convertible debt instrument will be accounted for as a single liability measured at its amortized cost.

These changes will reduce reported interest expense and increase reported net income for entities that have issued a convertible instrument that was bifurcated according to previously existing rules.

Also, ASU 2020-06 requires the application of the if-converted method for calculating diluted earnings per share and the treasury stock method will be no longer available.

The new guidance is effective for fiscal years beginning after December 15, 2021, with early adoption permitted no earlier than fiscal years beginning after December 15, 2020.

The Board decided to allow entities to adopt the guidance through either a modified retrospective method of transition or a fully retrospective method of transition.

In applying the modified retrospective method, entities should apply the guidance to transactions outstanding as of the beginning of the fiscal year in which the amendments are adopted.

The Company is currently evaluating the impact of ASU 2020-06 on our consolidated financial statements.

In December 2019, the FASB issued ASU No.

2019-12, Income Taxes (Topic 740):

Simplifying the Accounting for Income Taxes .

The amendments will be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020, with early adoption permitted.

Depending on the amendment, adoption may be applied on a retrospective, modified retrospective or prospective basis.

The Company will not adopt this standard before the fiscal year in which it becomes effective.

In October 2018, the FASB issued ASU No.

2018-16, Derivatives and Hedging (Topic 815) Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes .

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ASU 2018-16 is effective for fiscal years, including interim periods within those fiscal years, beginning after December 15, 2018, on a prospective basis.

The Company will not adopt this standard before the fiscal year in which it becomes effective.

Based on derivative instruments held as of August 30, 2019, this standard is not expected to have a material impact on the Company’s consolidated financial statements.

In August 2018, the Securities and Exchange Commission (“SEC”) adopted amendments to certain disclosure requirements in Securities Act Release No.

33-10532, Disclosure Update and Simplification.

The amendments became effective on November 5, 2018.

The SEC staff subsequently indicated that it would not object if a filer’s first presentation of changes in shareholders’ equity is included in its Form 10-Q for the quarter that begins after the final rule’s effective date.

Among the amendments is the requirement to present the changes in shareholders’ equity in the interim financial statements (either in a separate statement or footnote) in quarterly reports on Form 10-Q.

The analysis should present a reconciliation of the beginning balance to the ending balance of each period for which a consolidated income statement is required to be filed.

The Company implemented this requirement as of the second quarter of fiscal 2019.

The Company adopted this ASU 2018-16 effective August 31, 2019 with no impact to its consolidated financial statements.

In February 2018, the FASB issued ASU No.

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The guidance also requires certain new disclosures regardless of the election.

The Company is required to adopt the guidance in the first quarter of fiscal 2020.

Early adoption is permitted;

however, the Company has elected to not early adopt this guidance.

The Company is currently evaluating the timing and the impact of these amendments to its consolidated financial statements.

In November 2016, the FASB issued ASU No.

2016-18, Statement of Cash Flows (Topic 230):

Restricted Cash , which clarifies the inclusion and presentation of changes in restricted cash and restricted cash equivalents in the statement of cash flows.

The Company adopted ASU 2016-18 in fiscal 2019 on a retrospective basis.

The following tabl e provides a reconciliation of c ash and cash equivalents as previously reported within the Consolidated Statements of Cash Flows to c ash, cash equivalents and restricted cash as currently reported in the Consolidated Statements of Cash Flows (in thousands):

Cash, cash equivalents as previously reported in the

Consolidated Statements of Cash Flows

Restricted cash (Other noncurrent assets)

Cash, cash equivalents as currently reported in the

Consolidated Statements of Cash Flows

In August 2016, the FASB issued ASU No.

2016-15, Cash Flow Statements, Classification of Certain Cash Receipts and Cash Payments .

The new guidance is intended to address the diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows under Topic 230, Statement of Cash Flows, and other Topics.

The guidance addresses eight specific cash flow classification issues with the objective of reducing diversity in practice.

The Company adopted ASU 2016-15 in fiscal 2019 on a retrospective basis.

The adoption of this standard did not have a material impact on its consolidated financial statements.

The Company was required to adopt the guidance in the first quarter of fiscal 2020.

The Company adopted this ASU 2018-02 effective August 31, 2019 with no impact to its consolidated financial statements.

In June 2016, the FASB issued ASU 2016-13, “ Financial Instruments-Credit Losses (Topic 326):

Measurement of Credit Losses on Financial Instruments ,” which requires the measurement and recognition of expected credit losses for financial assets held at amortized cost.

ASU 2016-13 replaces the existing incurred loss impairment model with a forward-looking expected credit loss model which will result in earlier recognition of credit losses.

The Company is required to adopt the new standards in the first quarter of fiscal 2021, with early adoption permitted.

The amendments require a modified-retrospective approach with a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period.

The Company does not expect the adoption of this guidance to have a material impact on its financial statements upon adoption.

In February 2016, the FASB issued ASU No.

2016-02, Leases (Topic 842) , which modified lease accounting for both lessees and lessors to increase transparency and comparability by recognizing lease assets and lease liabilities by lessees for those leases classified as operating leases under previous accounting standards and disclosing key information about leasing arrangements.

ASU 2016-02 will be effective for the Company beginning on August 31, 2019 and early adoption is permitted.

In transition, lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach.

In July 2018, the FASB issued ASU 2018-11, Targeted Improvements to ASC 842, Leases , which permits an entity to elect an additional transition method to the existing modified retrospective transition requirements.

Consequently, an entity’s reporting for the comparative periods presented in the financial statements in which it adopts the new leases standard will continue to be in accordance with the previous lease guidance in ASC Topic 840.

The Company intends to adopt the new standard using this optional transition method with the recognition of both a right-of-use asset of approximately $20.0 million to $24.0 million and a corresponding lease liability of approximately of $23.0 million to $27.0 million on the balance sheet upon adoption.

No impact on the net income is expected.

ASU 2016-02 is effective for annual reporting periods and interim periods within those years, beginning after December 15, 2018.

Effective August 31, 2019, the Company adopted Topic 842, using the modified retrospective transition approach.

The Company applied the new guidance to all leases existing as of the date of adoption.

The Company’s reported results for fiscal 2020 reflect the application of Topic 842, while prior period amounts have not been adjusted and continue to be reported in accordance with its historical accounting under Topic 840.

The Company elected the practical expedient package permitted under the transition approach.

As such, the Company did not reassess whether any expired or existing contracts are or contain leases, the Company did not reassess its historical lease classification, and the Company did not reassess its initial direct costs for any leases that existed prior to August 31, 2019.

The Company did not elect the use-of-hindsight.

The new standard also provides practical expedients for an entity’s ongoing accounting.

The Company elected the short-term lease recognition exemption.

This means, for those leases that qualify, the Company will not recognize a right-of-use asset or lease liability.

The Company also elected the practical expedient to not separate lease and non-lease components for all its leases.

As of the date of adoption, the Company recognized operating lease right-of-use assets of $24.3 million, with corresponding operating lease liabilities of $25.0 million on the consolidated balance sheets.

The difference between the operating lease right-of-use assets and operating lease liabilities primarily relates to deferred rent.

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

In May 2014, the FASB issued a new standard, ASU No.

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September 1, 2018).

The Company has completed its assessment and implemented policies, processes, and controls to support the standard measurement and disclosure requirements.

Under ASC 606, the Company recognized a change to the timing of revenue recognition in two areas.

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Accordingly, the Company will recognize revenue at the point in time when products made to the customer’s forecast are completed and made available to the customer.

Results for reporting periods beginning after September 1, 2018 are presented under ASC 606, while prior period amounts are not adjusted and continue to be reported in accordance with the prior accounting under ASC 605.

As a result of these changes, the Company recorded a net increase to opening retained earnings of $1.0 million as of September 1, 2018 due to the cumulative impact of adopting ASC 606, with a corresponding increase of $2.9 million in accounts receivables, $1.1 million in contract assets and a decrease of $3.0 million in inventory.

Effective September 1, 2018, the Company recognized revenue on NCNR customized product sales over time and customized product sales where control has deemed to pass before shipment at the time that those products are made available to the customer as opposed to at the time of shipment.

The following tables summarize the impacts of ASC 606 adoption on the Company's consolidated financial statements as of and fiscal year end of August 30, 2019 (in thousands).

Selected Consolidated Balance Sheet Line Items:

As of August 30, 2019

Accounts receivable

Prepaid expenses and other current assets

Accrued liabilities

Retained earnings

Selected Consolidated Statement of Operations Line Items:

Fiscal Year Ended August 30, 2019

Cost of sales

Provision for income taxes

Selected Consolidated Statement of Cash Flows Line Items :

Fiscal Year Ended August 30, 2019

Adjustment to reconcile net income to

net cash provided by operating activities:

Changes in operating assets and liabilities

Accounts receivable

Prepaid expenses and other assets

Accrued expenses and other liabilities

Net cash provided by operating activities

Restructuring Expense

In fiscal 2017 the Company had multiple reductions-in-force in order to streamline operations and achieve operating efficiencies.

During fiscal 2017, the Company recorded restructuring costs of $0.5 million for severance, severance-related benefits and building-related charges, of which $0.1 million was remaining to be paid as of August 25, 2017.

The reductions-in-force were completed by the end of the period.

Restructuring Charge

In fourth quarter of fiscal 2020, the Company made the decision to cease manufacturing and selling products under the battery product line, the operations of which are reported under the operating segment for Brazil products.

The decision to cease this activity is due to unattractive benefits for our customers in score based PPB which impacts the Company’s ability to remain competitive as customers can get these products cheaper from other international sources without a negative impact on their PPB score.

This action was put into effect as of the end of the fourth quarter of fiscal 2020, and all operations related to this product line ceased as of that date.

All employees associated with the product line were reassigned to other parts of the Company.

During fiscal 2020, the Company recorded restructuring charges amounting to $3.5 million, composed of $2.7 million of asset impairment, $0.4 million of deferred ICMS taxes related to impaired assets, and $0.4 million accrued for contract termination costs.

As of August 28, 2020, the amounts accrued for contract termination costs have yet to be paid.

The Company does not expect additional costs to be incurred before completion of the restructuring efforts.

The Company anticipates completion of these restructuring efforts, including payment on all outstanding amounts to be complete by January 2021.

Subsequent Events

On October18, 2020, SMART Global Holdings and Chili Acquisition, Inc., a wholly owned subsidiary of SMART Global Holdings (collectively with SMART Global Holdings and other subsidiaries of SMART Global Holdings that may receive some assets in connection with this transaction, SGH-Chili), entered into an Asset Purchase Agreement (the Purchase Agreement) with Cree, Inc., a North Carolina corporation (Cree).

The transaction, which was approved by both SMART Global Holdings’ Board of Directors and Cree’s Board of Directors, is targeted to close in the next 90 to 120 days, subject to customary closing conditions and governmental approvals.

Pursuant to the Purchase Agreement, Cree will sell to SGH-Chili, and SGH-Chili will (i) purchase from Cree, (a) certain equipment, inventory, intellectual property rights, contracts, and real estate comprising Cree’s LED Products business, which consists of LED chips and LED components, (b) all of the issued and outstanding equity interests of Cree Huizhou Solid State Lighting Company Limited, a limited liability company organized under the laws of the People’s Republic of China and an indirect wholly owned subsidiary of Cree, and (c) Cree’s ownership interest in Cree Venture LED Company Limited, Cree’s joint venture with San’an Optoelectronics Co., Ltd.

(collectively, the LED Business);

and (ii) assume certain liabilities related to the LED Business (collectively (i) and (ii), the Transaction).

Cree will retain certain assets used in and pre-closing liabilities associated with the LED Business.

The purchase price for the LED Business consists of (i) a payment of $50 million in cash, subject to customary adjustments, (ii) an unsecured promissory note issued to Cree by SMART Global Holdings in the amount of $125 million (the Purchase Price Note), (iii) the potential to receive an earn-out payment of up to $125 million based on the revenue and gross profit performance of the LED Business in the first four full fiscal quarters following the closing (the Earnout Period), also payable in the form of an unsecured promissory note of SMART Global Holdings (the Earnout Note), and (iv) the assumption of certain liabilities.

The Purchase Price Note and the Earnout Note, if earned, will accrue interest at a rate of three-month LIBOR plus 3.0% with interest paid every three months and one bullet payment of principal and all accrued and unpaid interest will be payable on each note’s maturity date.

The Purchase Price Note will mature on August 15, 2023, and the Earnout Note, if issued, will mature on the third anniversary of the completion of the Earnout Period.

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

The Purchase Agreement contains customary representations, warranties and covenants, including covenants to cooperate in seeking regulatory approvals.

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

The Transaction is subject to the satisfaction or waiver of a number of conditions including the receipt of governmental and regulatory consents and approvals and other customary closing conditions.

The Purchase Agreement provides for customary termination rights and also provides that, in the event the Purchase Agreement is terminated in connection with certain specified regulatory-related circumstances, SMART Global Holdings may be required to pay Cree a termination fee of $4 million.

Business Acquisitions

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SMART Global Holdings through one or more subsidiaries, paid the Artesyn equityholders a base purchase price of approximately $75 million at closing using cash on hand.

Pursuant to the Artesyn SPA, the former equityholders of Artesyn are also entitled to earn-out payments of up to $10 million based on Artesyn’s achievement of specific gross revenue levels through December 31, 2019 plus additional earn-out payments of $0.10 for each dollar of gross revenue through December 31, 2019 over an agreed upon achievement level.

The earn-out is payable, at the option of the Company, in either cash or ordinary shares of SMART Global Holdings.

Pursuant to the Artesyn SPA, the former equityholders of Artesyn were also entitled to earn-out payments of up to $10 million based on Artesyn’s achievement of specific gross revenue levels through December 31, 2019 plus additional earn-out payments of $0.10 for each dollar of gross revenue through December 31, 2019 over an agreed upon achievement level.

The earn-out would have been payable, at the option of the Company, in either cash or ordinary shares of SMART Global Holdings.

SMART Global Holdings deposited $0.8 million of the purchase price into escrow as security for sellers’ indemnification obligations during the escrow period of one year.

The Company changed the name of AEC to SMART Embedded Computing, Inc., or SMART EC.

No earn-out was achieved.

Under the acquisition method of accounting, the assets acquired and liabilities assumed of SMART EC were recorded as of the acquisition date at their respective fair values.

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The resulting probability-weighted cash flows were discounted using the Company’s estimated cost of debt of 8.50% derived from the Company’s interest rates from the existing line of credit (2.75% plus US Prime Rate) and its term loan (6.25% plus 3-month LIBOR).

Subsequent to the acquisition date, the Company adjusted the contingent consideration to its current fair value with such changes recognized in income from operations.

During fiscal 2019, the Company adjusted the contingent consideration to its current fair value with such changes recognized in income from operations.

Changes in fair values reflect new information about the probability and timing of meeting the conditions of the gross revenue target.

As of August 30, 2019, the fair value of the contingent consideration was $0.

As of August 28, 2020 and August 30, 2019, the fair value of the contingent consideration was $0.

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

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Cash and cash equivalents acquired

Upfront payment in accordance with agreement

Post-closing adjustments in accordance with agreement

Upfront payment in accordance with

Post-closing adjustments in accordance with

Total consideration

Estimated fair value of contingent consideration

Estimated fair value of contingent

consideration

Total purchase price

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Total net assets acquired

The provisional amounts presented in the table above pertained to the preliminary purchase price allocation reported in our Form 10-K for the fiscal 2019.

The measurement period adjustment, as recognized in the fourth quarter of fiscal 2020, is related to the finalization of the net working capital adjustment.

We do not believe that the measurement period adjustments had a material impact on our consolidated statements of operations, balance sheets or cash flows in any periods previously reported.

The final determination of the fair values were completed within the measurement period of up to one year from the acquisition date, and adjustments to provisional amounts that were identified during the measurement period were recorded in the reporting period in which the adjustment was determined.

Asset categories acquired included working capital, fixed assets, and identified intangible assets.

The intangible assets are as follows (in thousands):

Estimated Useful

Life (in years)

Customer relationships

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SMART EC will have substantially improved access to capital to drive additional investment in, and further development and growth of its products and services.

Due to the timing of acquisition, the total purchase consideration has been allocated to the tangible and intangible assets acquired and liabilities assumed based on a preliminary valuation analysis.

These preliminary values may change in future reporting periods upon finalization of the valuation and net working capital adjustment, which will occur no later than the fourth quarter of fiscal 2020.

During fiscal 2019 the Company incurred certain costs related to the acquisition , which are included in selling, general and administrative expense in the consolidated statement of operations.

Acquisition -related costs include the following (in thousands).

August 30, 2019

Professional fees

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

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

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

SMART Wireless Computing, Inc.

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SMART Global Holdings through one or more subsidiaries, paid the Former Inforce equityholders approximately $14.6 million including amounts paid at closing composed of $3.2 million in cash and 382,788 of ordinary shares of SMART Global Holdings valued at $9.1 million, and amounts retained by the Company as security for the sellers’ indemnification obligations as well as any post-closing adjustments to the purchase price (the Holdback) composed of $0.7 million in cash and 67,550 of ordinary shares of SMART Global Holdings valued at $1.6 million.

During the fourth quarter of fiscal 2020, the Company paid out $0.4 million in cash and issued all shares related to the Holdback.

The Company changed the name of Inforce Computing to SMART Wireless Computing, Inc., or SMART Wireless.

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Upfront shares issued

Upfront consideration in accordance with agreement

Purchase price holdback - cash due to pre-closing holders

Purchase price holdback - shares due to pre-closing holders

Post-closing adjustments in accordance with agreement (as of

August 30, 2019)

Upfront consideration in accordance with

Purchase price holdback - cash due to pre-closing

Purchase price holdback - shares due to pre-closing

Post-closing adjustments

Total purchase price

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Total net assets acquired

The provisional amounts presented in the table above pertained to the preliminary purchase price allocation reported in our Form 10-K for the fiscal 2019.

The measurement period adjustment, as recognized in the fourth quarter of fiscal 2020, is related to the finalization of the net working capital adjustment.

We do not believe that the measurement period adjustments had a material impact on our consolidated statements of operations, balance sheets or cash flows in any periods previously reported.

Asset categories acquired included working capital, fixed assets, and identified intangible assets.

The intangible assets are as follows (in thousands):

Estimated Useful

Life (in years)

Customer relationships

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SMART Wireless will have substantially improved access to capital to drive additional investment in, and further development and growth of its products and services.

Due to the timing of acquisition, the total purchase consideration has been allocated to the tangible and intangible assets acquired and liabilities assumed based on a preliminary valuation analysis.

These preliminary values may change in future reporting periods upon finalization of the valuation of net working capital adjustment, which will occur no later than the fourth quarter of fiscal 2020.

During fiscal 2019 the Company incurred certain costs related to the acquisition, which are included in selling, general and administrative expense in the consolidated statement of operations.

Merger-related costs include the following (in thousands):

August 30, 2019

Professional fees

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

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

Premiere Logistics

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SMART Global Holdings through one or more subsidiaries, paid the Penguin equityholders approximately $45 million at closing and assumed approximately $32.3 million of Penguin’s outstanding indebtedness.

SMART Global Holdings financed the acquisition with net proceeds of $60.0 million from the Incremental Amendment.

Holdings financed the acquisition with net proceeds of $60.0 million from the Incremental Amendment.

Pursuant to the Penguin Merger Agreement, the former equityholders of Penguin are also entitled to potential cash earn-out payments, up to $25.0 million based on Penguin’s achievement of specified gross profit levels through December 31, 2018.

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SMART Global Holdings notified the sellers of various disputes with respect to the closing balance sheet and other indemnity claims aggregating $4.9 million.

While the escrow claims have not been resolved, on July 23, 2019, the parties agreed to release $3.2 million of these funds to the former equityholders and $1.8 million of the escrow funds to SMART Global Holdings.

The balance of $3.0 million remains in escrow.

On July 23, 2019, the parties agreed to release $3.2 million of these funds to the former equityholders and $1.8 million of the escrow funds to SMART Global Holdings.

The parties agreed to release the remaining balance of $3.0 million on July 9, 2020, with $1.0 million released to the former equityholders and $2.0 million released to SMART Global Holdings, resulting in a gain on escrow settlement of $0.4 million recognized in Other expense, net on the statements of operations in the fourth quarter of fiscal 2020.

Under the acquisition method of accounting, the assets acquired and liabilities assumed of Penguin were recorded as of the acquisition date at their respective fair values.

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Changes in fair values reflect new information about the probability and timing of meeting the conditions of the gross profit target.

As of December 31, 2018 and August 31, 2018 , the fair value of the contingent consideration was $0.

As of August 30, 2019 , the fair value of the contingent consideration was $0.

A reconciliation of net cash exchanged in accordance with the purchase agreement to the total purchase price as of the closing date of the merger, June 8, 2018, is presented below (dollars in thousands):

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

Purchase Price

Measurement period

Tangible assets acquired

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Upon further analysis, the Company confirmed with the vendors that the stated inventory or an obligation by the vendors to refund the Company did not exist as of June 8, 2018, the acquisition date.

We do not believe that the measurement period adjustments had a material impact on our consolidated statements of operations, balance sheets or cash flows in any periods previously reported.

The Company does not believe that the measurement period adjustments had a material impact on its consolidated statements of operations, balance sheets or cash flows in any periods previously reported.

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The intangible assets are as follows (in thousands):

Estimated Useful

Life (in years)

Customer relationships

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This amount was primarily comprised of $7.9 million related to non-goodwill intangible assets and other fair market value adjustments, offset by net deferred tax assets including acquired net operating losses and research credit carryovers totaling $6.3 million .

During fiscal 2018 , the Company incurred certain costs related to the merger, which are included in selling, general and administrative expense on the statement of operations.

Merger-related costs include the following (in thousands):

August 31, 2018

Professional fees

Employee retention bonuses

For the period of June 8, 2018 (date of acquisition) to August 31, 2018, total revenues and net loss for Penguin amounted to $52.5 million and $0.7 million, respectively.

Unaudited Pro Forma Information

The results of operations related to the Penguin acquisition have been included in our consolidated income statements from the acquisition date.

The following unaudited pro forma financial information presents our combined results of operations as if the acquisition of Penguin and entering into the Incremental Amendment had occurred on August 27, 2016.

The unaudited pro forma financial information is not necessarily indicative of what our consolidated results of operations actually would have been had the acquisition been completed on August 27, 2016.

In addition, the unaudited pro forma financial information does not attempt to project the future results of operations of the combined company.

The actual results may differ significantly from the pro forma results presented here due to many factors.

(In thousands, except per share data)

Total net sales

Net income (loss)

Earnings per share:

The unaudited pro forma financial information above reflects the following material adjustments:

Incremental amortization expense related to the estimated fair value of identifiable intangible assets from the purchase price allocation.

Incremental interest expense and amortization of debt issuance costs related to our Incremental Amendment.

The adjustments to income tax expense as a result of the consolidation and pro forma adjustments.

During fiscal 2018, the Company incurred certain costs related to the acquisition, which are included in selling, general and administrative expense in the consolidated statements of operations, these merger-related costs included professional fees and employee retention bonuses in the amounts of $2.5 million and $1.2 million, respectively.

Related Party Transactions

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Fiscal Year Ended

Management advisory fees

As of August 28, 2020 and August 30, 2019, amounts due from these affiliates were $6.5 million and $8.2 million, respectively.

Management advisory fees represent fees paid to entities affiliated with Silver Lake pursuant to a management agreement that was terminated upon closing of the Company’s initial public offering on May 23, 2017 (the IPO).

There was no balance due under this agreement as of August 30, 2019 and August 31, 2018.

On July 9, 2019, SMART Wireless became a wholly-owned subsidiary of the Company (see Note 2).

Included in the selling shareholders of this acquisition were the Company’s CEO and two members of the Company’s Board of Directors, who became entitled to receive in the aggregate 397,407 in SGH common shares valued at $9.5 million (consisting of 337,692 shares issued upon closing and 59,715 shares that are subject to the Holdback).

Included in the selling shareholders of this acquisition were the Company’s former CEO and two members of the Company’s Board of Directors, who became entitled to receive in the aggregate 397,407 in SGH common shares valued at $9.5 million (consisting of 337,692 shares issued upon closing and 59,715 shares subject to the Holdback which were issued and paid in the fourth quarter of 2020).

Foreign Currency Exchange Contracts

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Foreign exchange forward contracts outstanding at August 28, 2020 are not designated as hedging instruments for hedge accounting purposes.

Accordingly, any gains or losses resulting from changes in the fair value of the non-designated forward contracts are reported in other income, net in the consolidated income statements.

The gains and losses on these forward contracts generally offset the gains and losses associated with the underlying foreign-currency-denominated balances, which are also reported in other income, net.

Accordingly, any gains or losses resulting from changes in the fair value of the non-designated forward contracts are reported in other income, net in the consolidated statements of operations.

As of August 28, 2020, the Company’s non-designated forward contacts resulted in a $0.1 million derivative asset and $0.9 million derivative liability.

As of August 30, 2019, the Company’s non-designated forward contacts resulted in a $36 thousand derivative asset and $0.2 million derivative liability.

For fiscal 2019, the Company recognized realized losses in the amount of $2.6 million, and net unrealized losses on the change in the fair value of the non-designated forward contracts in the amount of $0.1 million.

For fiscal 2020, the Company recognized realized gains in the amount of $11.1 million, and net unrealized gains on the change in the fair value of the non-designated forward contracts in the amount of $0.3 million.

For fiscal 2019, the Company recognized net realized losses in the amount of $2.6 million, and net unrealized losses on the change in the fair value of the non-designated forward contracts in the amount of $0.1 million.

Balance Sheet Details

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

Unbilled service receivables

Financial credits*

Contract assets**

Prepayment for VAT and other transaction taxes

Prepaid R&D expenses

Indemnification claims receivable**

Unbilled service receivables

Prepaid income taxes

Prepaid ICMS taxes in Brazil*

Prepayment for VAT and other transaction taxes

Indemnification claims receivable***

Other prepaid expenses and other current assets

Total prepaid expenses and other current assets

See Note 1(d).

See Note 1(i).

See Note 1(d).

Property and Equipment, Net

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

Deposits on equipment

Prepaid ICMS taxes in Brazil*

Deferred tax assets

Deferred tax asset

Prepaid R&D expense

Revolver debt fees

Tax receivable

Restricted cash**

Total other noncurrent assets

See Note 1(i).

See Note 7 and 1(u).

Accrued Liabilities

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VAT and other transaction taxes payable

Current portion of lease liabilities

Customer deposits

Income taxes payable

Accrued warranty reserve

Indemnification claims liability*

Income taxes payable

Other accrued liabilities

Total accrued liabilities

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

Operating leases are recorded in operating lease right-of-use assets, net, accrued liabilities, and long-term lease liabilities on the Company’s consolidated balance sheets.

For operating leases of buildings, the Company accounts for non-lease components, such as common area maintenance, as a component of the lease, and include it in the initial measurement of the Company’s operating lease assets and corresponding liabilities.

Operating lease assets are amortized on a straight-line basis in operating expenses over the lease term.

The Company does not have financing leases as of August 28, 2020.

The Company’s lease liabilities are recognized based on the present value of the remaining fixed lease payments, over the lease term, using a discount rate of similarly secured borrowings available to us.

The Company took into consideration its credit rating and the length of the lease when calculating the incremental borrowing rate.

The Company considers the options to extend or terminate the lease in determining the lease term, when it is reasonably certain to exercise one of the options.

For the purpose of lease liability measurement, the Company considers only payments that are fixed and determinable at the time of commencement.

Any variable payments that depend on an index or rate are expensed as incurred.

The Company’s lease terms may include options to extend when it is reasonably certain that it will exercise that

The Company’s lease assets also include any lease payments made and exclude any lease incentives received prior to commencement.

The Company’s lease assets are tested for impairment in the same manner as long-lived assets used in operations.

The Company generally recognize s sublease income on a straight-line basis over the sublease term.

The weighted-average remaining lease term for the Company’s operating leases was 7.6 years at August 28, 2020 and the weighted-average discount rate was 8.0%.

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

Fiscal Year Ended

Operating lease cost

Variable lease cost

Short-term lease cost

Total lease costs

Future minimum undiscounted payments under the Company’s non-cancelable operating leases were as follows as of August 28, 2020 (in thousands):

Fiscal year ending August:

Less Short-term lease commitments

Less imputed interest

Present value of total lease liabilities

As of August 28, 2020, the Company has additional operating lease commitments of approximately $218 thousand on an undiscounted basis for certain office leases that have not yet commenced.

These operating leases will commence during fiscal 2021, with lease terms of two and three years.

Right-of-use assets obtained in exchange for new operating lease liabilities for fiscal 2020 amounted to approximately $8.8 million.

The following table summarizes the future minimum lease payments due under operating leases as of August 30, 2019 and reflect the application of the prior lease standard (ASC 840, Leases).

These amounts were disclosed in the Company’s Annual Report on Form 10-K for the year ended August 30, 2019 (in thousands):

Fiscal year ending August:

Income before provision for income taxes for all annual periods presented consisted of the following (in thousands):

Fiscal Year Ended

Total income before income taxes

The components of the provision for income taxes are as follows (in thousands):

7 unchanged sentences

The effective income tax rate, expressed as a percentage of income before income taxes, varied from the U.S.

statutory income tax rate applied to loss before provision for income taxes as a result of the following items:

statutory income tax rate applied to profit or loss before provision for income taxes as a result of the following items:

Fiscal Year Ended

Statutory tax benefit rate

Statutory tax rate

Foreign income taxes at different rates

10 unchanged sentences

Share-based compensation

Research and other tax credits

carryforwards

Research and other tax credits carryforwards

Property and equipment

Lease liability

Net operating loss carryforwards

Deferred tax assets

Total deferred tax assets

Valuation allowance

Deferred tax assets after valuation

Net deferred tax assets

Deferred tax liabilities:

Right of use asset

Purchase accounting intangibles

8 unchanged sentences

TCJA also repealed the corporate AMT for tax years beginning after December 31, 2017, and provides that existing AMT credit carryovers are refundable in tax years beginning after December 31, 2017.

The Company has approximately $0.3 million of AMT credit carryovers that are expected to be fully refunded between 2019 and 2022.

This amount is recorded as a long term tax receivable within other long term assets on the consolidated balance sheet as of August 30, 2019.

The Company has approximately $0.5 million of AMT credit carryovers that are expected to be fully refunded in 2020.

In connection with the Company's acquisition of SMART Wireless during fiscal 2019, deferred tax liabilities were established on the acquired identifiable intangible assets.

4 unchanged sentences

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 in fiscal 2023 through fiscal 2038, if not utilized, and the state net operating loss carryforwards will expire in fiscal 2020 through fiscal 2038, both in varying amounts.

The federal net operating loss carryforwards of $113.7 million will expire in fiscal 2023 through fiscal 2038, if not utilized, and the remaining $17.2 million is indefinite lived.

The state net operating loss carryforwards will expire in fiscal 2023 through fiscal 2040, both in varying amounts.

In addition, the Company has U.S.

federal and state tax credit carryforwards of approximately $6.5 million and $0.7 million, respectively.

These federal and state carryforwards are subject to an annual limitation, under the provisions of Section 382 of the Internal Revenue Code of 1986.

Federal and state carryforwards prior to fiscal 2018 are subject to an annual limitation, under the provisions of Section 382 of the Internal Revenue Code of 1986.

Section 382 provides an annual limitation on net operating loss carryforwards following an ownership change.

1 unchanged sentence

In addition to other potential limitations, approximately $12.8 million and $1.4 million of acquired federal and state loss carryovers and $5.3 million and $0.4 million of acquired federal and state credit carryovers are subject to these limitations.

The Company has foreign net operating loss carryforwards of approximately $16.3 million and will expire 2020 through fiscal 2025.

The Company has foreign net operating loss carryforwards of approximately $16.2 million and will expire in fiscal 2021 through fiscal 2025.

The valuation allowance on deferred tax assets, primarily related to U.S.

10 unchanged sentences

(SMART Malaysia), has been approved for tax holidays for the operations of its Pioneer business and Global Supply Chain (GSC) business.

The Pioneer tax holiday commenced on January 1, 2014 and will expire on December 31, 2019.

The GSC tax holiday commenced on September 1, 2013 and expired on August 31, 2019.

New Pioneer and GSC tax holidays were effective beginning September 1, 2018 for up to ten years.

Both tax holidays are effective for up to ten years.

The Pioneer and GSC tax holidays commenced on September 1, 2018 and are scheduled to expire on August 31, 2028.

The Malaysian tax holidays are subject to certain conditions, with which SMART Malaysia has complied for all applicable periods in fiscal 2020, 2019 and 2018.

The net impact of these tax holidays in Malaysia, as compared to the Malaysia statutory tax rate, and was to decrease income tax expense by approximately $4.9 million ($0.21 per share), $9.1 million ($0.39 per share) and $6.1 million ($0.39 per share) in fiscal 2019, 2018 and 2017, respectively.

The net impact of these tax holidays in Malaysia, as compared to the Malaysia statutory tax rate, was to decrease income tax expense by approximately $3.9 million ($0.16 per share), $4.9 million ($0.21 per share) and $9.1 million ($0.39 per share) in fiscal 2020, 2019 and 2018, respectively.

Effective February 1, 2011, SMART Brazil began to participate in PADIS.

8 unchanged sentences

The Company records interest and penalties on unrecognized tax benefits as income tax expense.

The balance of accrued interest and penalties on unrecognized tax benefits was $ 1.6 million and $ 1.5 million as of both August 30, 2019 and August 31, 2018.

As of August 30, 2019, changes to the Company’s uncertain tax positions in the next twelve months that are reasonably possible are not expected to have a significant impact on our financial position or results of operations.

The balance of accrued interest and penalties on unrecognized tax benefits was $0.4 million and $1.6 million as of August 28, 2020 and August 30, 2019, respectively.

As of August 28, 2020, changes to the Company’s uncertain tax positions in the next twelve months that are reasonably possible are not expected to have a significant impact on the financial position or results of operations.

The aggregate changes in the balance of unrecognized tax benefits were as follows (in thousands):

Unrecognized tax benefits, beginning of

Tax positions taken in prior periods:

Gross increases

Gross decreases

Tax positions taken in current period:

Gross increases

Unrecognized tax benefits, end of period

Gross amount of unrecognized tax benefits as of the beginning of

Increases related to prior year tax provisions

Decrease related to prior year tax provisions

Increase related to current year tax provisions

Lapse of statute of limitation

Gross amount of unrecognized tax benefits as of the end of

The total amount of unrecognized tax benefits that would affect the effective tax rate, if recognized is $1.7 million and $1.6 million for fiscal 2020 and 2019, respectively.

3 unchanged sentences

Generally, in the major state jurisdictions, the tax periods ended August 2013 through August 2019 remain open to state income/franchise tax examination.

In addition, any prior year that generated a net operating loss or tax credit carryforward available for use in the taxable periods ending after August 2012 and August 2011 for federal and state income/franchise taxes, respectively, remains open to income tax examination to the extent of such net operating loss carryforward.

The Company’s non-U.S.

2 unchanged sentences

The years that are open for examination by the tax authorities of these jurisdictions vary by country.

The earliest year open for examination is the fiscal year ended 2003 in the U.S.

and the fiscal year ended August 2010 for any non-U.S.

Long-Term Debt

Convertible Senior Notes due 2026

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

The Notes are general unsecured obligations and bear interest at an annual rate of 2.25% per year, payable semi-annually on February 15 and August 15 of each year, beginning on August 15, 2020 .

The Notes are governed by an indenture (the Indenture) between the Company and U.S.

Bank National Association, as trustee.

The Notes will mature on February 15, 2026, unless earlier converted, redeemed or repurchased.

No sinking fund is provided for the Notes.

The initial conversion rate of the Notes is 24.6252 ordinary shares per $1,000 principal amount of Notes, which represents an initial conversion price of approximately $40.61 per ordinary share.

The conversion rate is subject to adjustment upon the occurrence of certain specified events as set forth in the Indenture.

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

during any fiscal quarter commencing after the fiscal quarter ending on 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;

if the Company calls such Notes for redemption;

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.

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

Unamortized debt discount

Unamortized issuance costs

Net carrying amount

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):

Contractual interest expenses

Amortization of debt discount

Amortization of debt issuance costs

Total interest cost recognized

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.

The Company considers the fair value of the Notes to be a Level 2 measurement due to the limited trading activity.

In connection with the offering of the Notes, the Company entered into privately-negotiated capped call transactions, at arms-length, with certain counterparties (the “capped calls”).

The capped calls each have an initial strike price of approximately $40.61 per share, subject to certain adjustments, which corresponds to the initial conversion price of the Notes.

The capped calls have initial cap prices of $54.145 per share, which are subject to certain adjustments.

The capped calls cover, subject to anti-dilution adjustments, approximately 6.2 million of the Company’s ordinary shares.

The capped calls are generally intended to reduce the potential economic dilution to the Company’s ordinary shares upon any conversion of Notes and/or offset any potential cash payments the Company is required to make in excess of the principal amount of converted Notes, as the case may be, with such reduction and/or offset subject to a cap based on the cap price.

The capped calls expire February 15, 2026 (the maturity date of the Notes), subject to earlier exercise.

The capped calls are subject to either adjustment or termination upon the occurrence of specified extraordinary events affecting the Company, including mergers, tender offers and delistings involving the Company.

In addition, the capped calls are subject to certain specified additional disruption events that may give rise to a termination of the capped calls, including insolvency filings and hedging disruptions.

The capped calls were originally classified as noncurrent derivative assets due to the capped calls only being settleable in cash until the Company has obtained shareholder approval for repurchasing its ordinary shares.

The capped calls were initially recognized at fair value of $21.8 million, reflecting the premium paid by the Company to the capped call counterparties.

The related noncurrent derivative assets were classified as a Level 3 measurement as the Company used stock price volatility implied from options traded with a substantially shorter term, which made this an unobservable input that is significant to the valuation.

In a meeting of the Company’s shareholders held on March 30, 2020, the holders of the Company’s ordinary shares voted in favor of a proposal to amend and restate the Company’s memorandum and articles of association to permit the Company to purchase or otherwise acquire its ordinary shares in such amounts and at such prices and at such time and from time to time as the Company’s board of directors may approve in the

This amendment and restatement also enables the Company to utilize shares or cash, or any combination thereof, in order to settle the capped call transactions, which resulted in the reclassification of the related non-current derivative asset to additional paid in capital within Shareholders’ Equity in an amount equal to the fair value of the capped calls as of March 30, 2020.

The fair value of the capped calls on March 30, 2020 was approximately $14.1 million.

The Company recognized a loss of approximately $7.7 million for the year ended on August 28, 2020, due to remeasurement of the capped calls at fair value.

These losses are included in the consolidated statements of operations within Other expense, net.

Amended Credit Agreement

19 unchanged sentences

The applicable margin for term loans with respect to LIBOR borrowings is 6.25% and with respect to base rate borrowings is 5.25%.

The interest rate on the Initial Term Loans was 8.43%, 8.6% and 7.57% as of August 30, 2019, August 31, 2018 and August 25, 2017, respectively.

The interest rate on the Incremental Term Loans was 8.71% and 8.58% as of August 30, 2019 and August 31, 2018, respectively.

The interest rate on the Initial Term Loans Incremental Term Loans was 8.16% and 8.14% through the second quarter of fiscal 2020, respectively.

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

4 unchanged sentences

As a result of the Second Amendment, the borrowers were granted a holiday in fiscal 2019 from the obligation to make quarterly repayments of principal under the Initial Term Loans and the Incremental Term Loans.

During fiscal 2019 and 2018, the borrowers made scheduled principal payments of $0 million and $16.5 million, respectively.

During fiscal 2020 and 2019, the borrowers made scheduled principal payments of $5.6 million and $0, respectively.

Prepayments .

14 unchanged sentences

Those fees allocated to the revolving line of credit are being amortized to interest expense ratably over the life of the revolving line of credit.

As of August 30, 2019 and August 31, 2018, the outstanding principal balance of all term loans under the Amended Credit Agreement was $208.5 million and there were no outstanding revolving loans.

The fair value of the term loans as of August 30, 2019 and August 31, 2018 was estimated to be approximately $210.6 million and $207.5 million, respectively.

In February 2020, the Company used net proceeds from the offering of the Notes to repay in full all outstanding principal balances, and to pay the associated prepayment premiums, accrued and unpaid interest and related fees and expenses, of the term loans under the Second Amended and Restated Credit Agreement, dated as of August 9, 2017, among certain of the Company’s subsidiaries.

The Company paid $208.7 million toward the full repayment of the outstanding debt including $202.9 million of principal, $3.8 million of accrued interest and $2.0 million of prepayment premiums.

Unamortized debt discounts and issuance costs as of February 11, 2020 amounted to $4.6 million.

As a result of the early repayment of the term loans the Company recognized a loss on extinguishment of debt in Other expense, net of $6.6 million.

As of August 28, 2020 and August 30, 2019, the outstanding principal balance of all term loans under the Amended Credit Agreement was $0 and $208.5 million, respectively, and there were no outstanding revolving loans.

The fair value of the term loans as of August 30, 2019 was estimated to be approximately $210.6 million.

Since the Company used broker quotes from inactive markets and there were no unobservable inputs, this was treated as a Level 2 financial instrument.

Penguin Credit Agreement

On June 8, 2018 in connection with the Penguin acquisition, the Company assumed the outstanding balances due under that certain credit agreement dated January 8, 2018 between Penguin and Wells Fargo Capital Finance, LLC (the Penguin Credit Facility) which had an outstanding balance of $32.3 million as of June 8, 2018.

In addition, on June 8, 2018, SMART Global Holdings entered into a guarantee with Wells Fargo Capital Finance, LLC (WFCF) whereby SMART Global Holdings guaranteed the repayment and full performance of Penguin under the Penguin Credit Facility.

As required under the Incremental Amendment, the Company paid off the outstanding balance under the Penguin Credit Facility in August 2018.

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

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

The Third Amended and Restated Credit Agreement also reduces the applicable margin on revolving loans incurred thereunder.

Under the Third Amended and Restated Credit Agreement, loans bear interest at a rate per annum equal to either, at the borrowers’ option, a LIBOR rate or a base rate, in each case plus an applicable margin.

The applicable margin was reduced by 25 basis points and will now be (i) 3.75% per annum with respect to LIBOR borrowings, and 2.75% per annum with respect to base rate borrowings when the First Lien Leverage Ratio, as defined in the Third Amended and Restated Credit Agreement, is greater than 2.25 to 1.00 and (ii) 3.50% per annum with respect to LIBOR borrowings, and 2.50% per annum with respect to base rate borrowings when the First Lien Leverage Ratio is less than or equal to 2.25 to 1.00.

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

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

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

The Third Amended and Restated Credit Agreement is jointly and severally guaranteed on a senior basis by certain subsidiaries of Global (excluding, among other subsidiaries, SMART Malaysia).

In addition, the Third Amended and Restated Credit Agreement is secured by a pledge of the capital stock of, or equity interests in, most of the subsidiaries of SMART Worldwide (including, without limitation, SMART Malaysia, Penguin, SMART EC.

and SMART Wireless) and by substantially all of the assets of the subsidiaries of Holdings, excluding the assets of SMART Malaysia and certain other subsidiaries.

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

BNDES Credit Agreements

2 unchanged sentences

SMART Brazil’s obligations under the BNDES 2013 Credit Agreement were guaranteed by Banco Itaú BBA S.A., or Itaú Bank, which guarantee was in turn secured by a guarantee from SMART Brazil and SMART do Brazil and a commitment by SMART Brazil to maintain minimum cash balances with Itaú Bank equal to 11.85% of the maximum aggregate balance of principal, interest and fees outstanding under the BNDES 2013 Credit Agreement.

The committed amount was R$6.0 million (or $1.6 million), which is shown on the Company’s consolidated balance sheets as restricted cash in other noncurrent assets as of August 31, 2018.

Approximately half of the available debt under the BNDES 2013 Credit Agreement accrues interest at a fixed rate while the other half accrues interest at a floating rate.

The facility under the BNDES 2013 Credit Agreement is a term loan fully amortizing in 48 equal monthly installments beginning on August 15, 2015 with the final principal payment paid on July 15, 2019.

As of August 30, 2019, SMART Brazil had no outstanding debt under the BNDES 2013 Credit Agreement.

As of August 31, 2018, SMART Brazil’s outstanding debt under the BNDES 2013 Credit Agreement was R$12.9 million (or $3.4 million), of which R$6.3 million (or $1.7 million) accrues interest at the fixed rate of 3.5% and R$6.6 million (or $1.7 million) of the debt accrues interest at the floating rate of 0.5% above the TJLP rate published by the Central Bank of Brazil, or BZTJLP (5.0%), combined corresponding to an overall effective interest rate of 5.5% per annum.

As of August 28, 2020 and August 30, 2019, SMART Brazil had no outstanding debt under the BNDES 2013 Credit Agreement.

In December 2014, SMART Brazil, entered into a second credit facility with BNDES, referred to as the BNDES 2014 Credit Agreement.

7 unchanged sentences

The available debt under the BNDES 2014 Credit Agreement accrues interest at a fixed rate of 4% per annum.

The BNDES 2014 Credit Agreement is a term loan fully amortizing in 48 equal monthly installments beginning on August 15, 2016 with the final principal payment being due on July 15, 2020.

As of August 30, 2019 and August 31, 2018, SMART Brazil’s outstanding debt under the BNDES 2014 Credit Agreement was R$13.2 million (or $3.5 million) and R$26.4 million (or $7.0 million), respectively.

The BNDES 2014 Credit Agreement is a term loan fully amortizing in 48 equal monthly installments beginning on August 15, 2016 with the final principal payment paid on July 15, 2020.

As of August 28, 2020 and August 30, 2019, SMART Brazil’s outstanding debt under the BNDES 2014 Credit Agreement was $0 and R$13.2 million (or $3.5 million), respectively.

While the BNDES Agreements do not include any financial covenants, they contain affirmative and negative covenants customary for loans of this nature, including, among other things, an obligation to comply with all laws and regulations;

3 unchanged sentences

The BNDES 2014 Credit Agreement required a loan fee of 0.3% of the total face amount of the loan facility.

The fair value of amounts outstanding under the BNDES Agreements as of August 30, 2019 and August 31, 2018 was estimated to be approximately $3.3 million and $9.4 million, respectively.

The fair value of amounts outstanding under the BNDES Agreements as of August 28, 2020 and August 30, 2019 was estimated to be approximately $0 and $3.3 million, respectively.

Since the Company used broker quotes from inactive markets and there were no unobservable inputs, this was treated as a Level 2 financial instrument.

The Amended Credit agreement and the BNDES Agreements are classified as follows in the accompanying consolidating balance sheets (in thousands):

BNDES 2013 principal balance

The Convertible Senior Notes, due 2026, Amended Credit agreement and the BNDES Agreements are classified as follows in the accompanying consolidating balance sheets (in thousands):

BNDES 2014 principal balance

3 unchanged sentences

Long-term debt

The future minimum principal payments under the Amended Credit Agreement and the BNDES 2014 Agreement as of August 30, 2019 are (in thousands):

Fiscal year ending August:

There are no future minimum principal payments made under the Notes as of August 28, 2020, the full amount of $250.0 million is due in fiscal 2026.

Financial Instruments

7 unchanged sentences

Valuations based on quoted prices in active markets for identical assets or liabilities that an entity has the ability to access.

The Company’s Level 1 assets include funds held in general checking accounts, savings accounts and money market funds that are classified as cash equivalents and restricted cash which is classified under long-term assets.

The Company’s Level 1 assets include funds held in general checking accounts, savings accounts and money market funds that are classified as cash equivalents.

Valuations based on quoted prices for similar assets or liabilities, quoted prices for identical assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable data for substantially the full term of the assets and liabilities.

The Company’s Level 2 liabilities include the term loans under the Amended Credit Agreement and the BNDES Credit Agreements that are classified as long-term debt and derivative financial instruments.

The Company’s Level 2 assets and liabilities include the derivative financial instruments.

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

The Company’s Level 3 liabilities include the contingent considerations related to the SMART EC and Penguin acquisitions (see Note 2), which had a fair value of $0 as of August 30, 2019 and August 31, 2018, respectively.

The Company’s Level 3 assets and liabilities include the contingent considerations related to the SMART EC acquisitions (see Note 2), which had a fair value of $0 as of August 28, 2020 and August 30, 2019.

Additionally, the capped calls (see Note 7) were financial instruments up until they were reclassified to shareholders’ equity on March 30, 2020.

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

5 unchanged sentences

Cash and cash equivalents

Derivative financial instruments (1)

Total assets measured at fair value

Term loans (1)

BNDES Credit Agreement (2)

Derivative financial instruments (2)

Acquisition-related contingent consideration

Total liabilities measured at fair value

1 unchanged sentence

Cash and cash equivalents

Restricted cash (4)

Total assets measured at fair value

Term loans (1)

BNDES Credit Agreements (1)

Derivative financial instruments (2)

Acquisition-related contingent consideration

Total liabilities measured at fair value

Included under long-term debt on the Company's consolidated balance sheets.

Included under current portion of long-term debt on the Company’s consolidated balance sheets.

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

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

Included in other noncurrent assets on the Company’s consolidated balance sheets – see Note 5.

Share-Based Compensation and Employee Benefit Plans

15 unchanged sentences

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 expected term of options granted represents the weighted average period of time that options granted are expected to be outstanding and we apply the simplified approach in which the expected term is the mid-point between the vesting date and the expiration date.

The risk-free interest rate for the expected term of the option is based on the average U.S.

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Options exercisable at August 28, 2020

Options vested and expected to vest at

August 30, 2019

In March 2018, the Company granted two performance-based stock options that contained a stock market index as a benchmark for performance (Market-Based Options).

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If the target price is not achieved by the end of 4 th or 7 th anniversary of the respective grant date, the options will expire.

The fair value of Market-Based Options is determined by using a Monte Carlo valuation model, using the following assumptions:

Three Months Ended

Stock options:

Expected term (years)

Expected volatility

Risk-free interest rate

Expected dividends

The fair value of Market-Based Options was determined by using a Monte Carlo valuation model, using the following assumptions:

expected term (years) 1.10 – 4.00, expected volatility 46.29%, risk-free interest rate 2.75% and no expected dividends.

One of the performance-based options was cancelled in November 2019, resulting in an additional $2.0 million share-based compensation expense

recorded in the first quarter of fiscal 2020.

In August 2020, the Company modified the remaining performance-based stock options to remove one of the service conditions to allow the continuation of vesting of the unvested options subject to the remaining service condition.

This modification led to an updated fair value usi ng the Monte Carlo valuation model for the Market-Based Options, with the following assumptions:

expected volatility 56.07% and risk-free interest rate 0.34%.

The modification of this option, as well as a time-based option also granted in March 2018, led to a reversal of $2.3 million share-based compensation expense in the fourth quarter of fiscal 2020 .

The Black-Scholes weighted average fair value of options granted under the SGH Plan in fiscal 2020, 2019 and 2018 was $11.46, $10.16 and $18.18 per share, respectively.

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

The fair value of RSUs is determined using the fair value of the Company’s common stock on the date of grant.

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

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

Awards outstanding at August 25, 2017

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Awards vested and paid out

Awards forfeited and cancelled

Awards outstanding at August 31, 2018

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Awards outstanding at August 28, 2020

In May 2019, the Company granted a performance-based restricted share unit award (PSU) which has both service and performance conditions.

In May 2020, the Company granted a performance-based restricted share award (RSA) which has both service and performance conditions.

As of August 28, 2020, the Company has deemed it probable that the service condition will be met, and the attainment of the performance condition for this award is probable.

As such, there was $0.8 million of share-based compensation expense recognized for this award in fiscal 2019.

The share-based compensation expense related to RSAs, RSUs and PSUs in fiscal 2019, 2018 and 2017 was approximately $7.9 million, $2.7 million and $1.0 million, respectively.

On October 20, 2020, the Company modified this award, as well as another time-based award, both for the former CEO, to accelerate the remaining service-based vesting requirements in this award such that they became fully vested as of the acceleration date.

These modifications will result in additional share-based compensation expense in the first quarter of fiscal 2021 when the acceleration occurs.

In May 2019, the Company granted a performance-based restricted share unit award (PSU) which has both service and performance conditions.

As of November 29, 2019, the Company deemed it probable that the service condition will be met, and the attainment of the performance condition for this award changed to not probable.

As such, there was $0.8 million of share-based compensation expense reversed for this award in the three months ended November 29, 2019.

The total fair value of shares vested in fiscal 2020, 2019, and 2018 was approximately $12.5 million, $6.8 million and $4.0 million, respectively.

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As of August 28, 2020, 266,816 ordinary shares have been purchased under the Purchase Plan and 683,184 ordinary shares are reserved for future purchases by eligible employees.

As of August 31, 2018, the number of ordinary shares reserved for future purchases by eligible employees was 350,000.

As of August 30, 2019, 109,910 ordinary shares have been purchased under the Purchase Plan and 540,090 ordinary shares are reserved for future purchases by eligible employees.

Equity Rights and Restrictions

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Rent expense for operating leases in fiscal 2020, 2019 and 2018 was $7.9 million, $5.0 million and $3.3 million, respectively.

Future minimum lease payments under all leases as of August 30, 2019 are as follows (in thousands):

Fiscal year ending August:

Product Warranty and Indemnities

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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.

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.

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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 September 10, 2012, SMART Modular filed a complaint in the Eastern District of California (the EDCA) against Netlist alleging infringement of certain claims of SMART Modular’s U.S.

8,250,295 (the ‘295 patent) and seeking, among other things, a preliminary injunction.

Netlist filed certain counterclaims alleging, among other things, attempted monopolization, collusion, unfair competition, fraud on the U.S.

Patent and Trademark Office (the USPTO) and sham litigation, and asserting that the ‘295 patent is invalid.

In July 2013, Netlist filed a lawsuit in the Central District of California against SMART Modular alleging claims very similar to Netlist’s counterclaims set forth in the EDCA case.

Netlist later amended its complaint to add additional parties, including SMART Worldwide.

Netlist has sought compensatory damages for the harm it claims to have suffered, as well as an award of treble damages and attorneys’ fees.

The claims against SMART Modular and SMART Worldwide were transferred to the EDCA.

In January 2019 the parties entered into stipulated settlements to dismiss with prejudice, all claims and counterclaims in both actions with no amounts for damages being paid by either party and with each party to bear their own costs.

On May 19, 2020 the court entered an order granting a joint stipulation of dismissal filed by Netlist and SanDisk.

Contingencies

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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 has filed defenses to the Third Assessment.

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.

SMART Brazil intends to vigorously fight this matter.

Although SMART Brazil did not receive the Third Assessment until December 12, 2013, the Third Assessment was issued before the CARF decision in favor of SMART Brazil on the First Assessment as discussed above was published.

Although SMART Brazil did not receive the Third Assessment until December 12, 2013, the Third Assessment was issued before the CARF decision in favor of SMART

Brazil on the First Assessment as discussed above was published.

On September 8, 2020, the first level administrative court unanimously ruled in favor of SMART Brazil with respect to the Third Assessment.

Due to the size of the Third Assessment, Brazil law required that the tax authorities appeal the decision to CARF.

The amounts claimed by the tax authorities on the Third Assessment are subject to increases for interest and other charges, which resulted in a combined assessment balance of approximately R$5.7 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, the Company believes that the probability of any material charges as a result of the Third Assessment is remote and the Company does not expect the resolution of this disputed assessment to have a material impact on its consolidated financial position, results of operations or cash flows.

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 this disputed assessment 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.

Segment and Geographic Information

The Company operates in one reportable segment:

the design, manufacture and sale of specialty memory solutions and services to the electronics industry.

The Company’s chief operating decision-maker, the President and CEO, evaluates financial performance on a company-wide basis.

The Company’s chief operating decision-maker (CODM), the President and CEO, evaluates operating results to make decisions about allocating resources and assessing performance of the Company.

Prior to the start of fiscal 2020, the Company operated in one segment.

During the first quarter of fiscal year 2020, management further reevaluated and refined its segment reporting to align with the Company's broader strategy and how it manages business operations, driven in part by the Company’s recent business acquisitions.

The Company now operates in three segments consisting of Specialty Memory Products, Brazil Products and SCSS.

These segments are determined based on source of revenue and geography.

The Company's CODM evaluates the operating results and performance of the segments based on gross profit and gross margin.

The accompanying prior year disclosures have been revised to reflect this change.

The accounting policies and basis of presentation of the reportable segments are the same as those described in Note 1 – “Basis of Presentation and Principals of Consolidation.”

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

Fiscal Year Ended

August 28, 2020

Adjusted Gross Profit

Adjusted Gross Margin

Fiscal Year Ended

August 30, 2019

Adjusted Gross Profit

Adjusted Gross Margin

Fiscal Year Ended

August 31, 2018

Adjusted Gross Profit

Adjusted Gross Margin

Adjusted Gross Profit and Adjusted Gross Margin excludes share-based compensation (see Note 1( q )), intan gible amortization (see Note 1(l )) and corporate expenses ($0.2 million, $0.2 million and $0 for fiscal 2020, 2019 and 2018, respectively).

Fiscal 2018 does not include SMART EC and SMART Wireless.

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

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August 31, 2018

As of August 30, 2019, three direct customers that represented less than 10% of net sales, Customers E, F and G, accounted for approximately 15%, 15% and 12% of accounts receivable, respectively.

As of August 31, 2018, four direct customers that represented less than 10% of net sales, Customers E, F, G and H, accounted for approximately 15%, 19%, 17% and 11% of accounts receivable, respectively.

Customer A (1)

Customer B (2)

Customer C (1)

Customer D (2)

Customer E (2)

Brazil Products customer

Specialty Memory Products customer

As of August 28, 2020, two direct customers that represented less than 10% of net sales, Customers F and G, accounted for approximately 19% and 15% of accounts receivable, respectively.

As of August 30, 2019, three direct customers that represented less than 10% of net sales, Customers F, G and H, accounted for approximately 15%, 12% and 15% of accounts receivable, respectively.

Earnings Per Share

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Diluted earnings per share is calculated by dividing the net income (loss) by the weighted average of ordinary shares and dilutive potential ordinary shares outstanding during the period.

Dilutive potential ordinary shares consist of dilutive shares issuable upon the exercise of outstanding stock options and vesting of RSUs computed using the treasury stock method.

Dilutive potential ordinary shares consist of dilutive shares issuable upon the exercise of outstanding stock options, vesting of RSUs and the Notes computed using the treasury stock method.

The dilutive weighted shares are excluded from the computation of diluted net loss per share when a net loss is recorded for the period as their effect would be anti-dilutive.

As the Company has the intent and ability to settle the aggregate principal amount of the Notes plus any accrued and unpaid interest in cash and any excess in the Company’s ordinary shares, the Company uses the treasury stock method for calculating any potential dilutive effect of the conversion spread on diluted net income per share, if applicable.

In order to compute the dilutive effect, the number of shares included in the denominator of diluted net income per share is determined by dividing the conversion spread value of the “in-the-money” Notes by the Company’s average share price during the period and including the resulting share amount in the diluted net income per share denominator.

The conversion spread will have a dilutive impact on net income per ordinary share when the average market price of the Company’s ordinary shares for a given period exceeds the conversion price of $40.61 per share for the Notes.

The Company’s weighted average ordinary share price since the issuance of the Notes has been below the conversion price.

Therefore, the Notes would have been anti-dilutive and have been excluded from dilutive shares.

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

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Fiscal Year Ended

Foreign currency gains (losses)

Loss on extinguishment of debt

Loss on early repayment of debt

Foreign currency losses

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

Loss on extinguishment of debt/revolver

Total other expense, net

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Income from operations

Net income (loss)

Earnings per share

5 unchanged sentences

Stock Purchase Agreement, dated as of July 8, 2019, by and among Artesyn Embedded Computing, Inc., Pontus Intermediate Holdings II, LLC, Pontus Holdings, LLC and SMART Global Holdings, Inc.

Amended and Restated Memorandum and Articles of Association of SMART Global Holdings, Inc.

Second Amended and Restated Memorandum and Articles of Association of SMART Global Holdings, Inc.

Amended and Restated Sponsor Shareholders Agreement, dated as of May 30, 2017, by and among the Issuer, SLP III Cayman, SLTI III Cayman, SLS Cayman, SLTI Sumeru Cayman, Mr.

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Description of Securities Registered Under Section 12 of the Exchange Act

Indenture, dated as of February 11, 2020, between SMART Global Holdings, Inc.

and US Bank National Association

Form of 2.25% Convertible Senior notes due 2026 (included as Exhibit A to Exhibit 4.10)

Form of Indemnification Agreement entered into with each of the Registrant’s officers and directors

1 unchanged sentence

Amended and Restated 2017 Share Incentive Plan

Offer Letter by and between the Registrant and Ajay Shah, dated March 13, 2018

Offer Letter by and between the Registrant and Mark Adams, dated August 12, 2020

Amended and Restated Employment Agreement between SMART Modular Technologies, Inc.

and Jack Pacheco

Employment Agreement, dated as of October 10, 2011, between SMART Modular Technologies, Inc.

and Jack Pacheco

and Jack Pacheco, dated December 19, 2017

Severance and Change of Control Agreement, dated as of December 10, 2010, between SMART Modular Technologies (WWH), Inc.

and Alan Marten

Severance and Change of Control Agreement, dated as of December 10, 2010, between SMART Modular Technologies (WWH), Inc.

Severance and Change of Control Agreement, dated as of August 28, 2020, between SMART Global Holdings, Inc.

and Bruce Goldberg

1 unchanged sentence

and KiWan Kim

Credit Agreement, dated as of August 26, 2011, among SMART Modular Technologies (Global Memory Holdings), Inc., SMART Modular Technologies (Global), Inc., SMART Modular Technologies, Inc., the Lender Parties thereto and JPMorgan Chase Bank, N.A., as Administrative Agent

Amendment No.

1 to Credit Agreement, dated as of December 13, 2011, among SMART Modular Technologies (Global Memory Holdings), Inc., SMART Modular Technologies (Global), Inc., SMART Modular Technologies, Inc., the lenders party thereto and JPMorgan Chase Bank, N.A., as Administrative Agent

First Refinancing Amendment to Credit Agreement, dated as of August 20, 2014, among SMART Modular Technologies (Global Holdings), Inc., SMART Modular Technologies (Global), Inc., SMART Modular Technologies, Inc., the new revolving lenders party thereto and JPMorgan Chase Bank, N.A., as Administrative Agent

Third Amended and Restated Credit Agreement, dated as of March 6, 2020, among SMART Modular Technologies (Global Memory Holdings), Inc., SMART Modular Technologies (Global), Inc., SMART Modular Technologies, Inc., the Lender Parties thereto and Barclays Bank, PLC, as Administrative Agent

Master Guarantee Agreement, dated as of August 26, 2011, among SMART Modular Technologies (Global Memory Holdings), Inc., SMART Modular Technologies (Global), Inc., SMART Modular Technologies, Inc., the subsidiary guarantors identified therein and JPMorgan Chase Bank, N.A.

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as Administrative Agent

Amendment No.

2 to Credit Agreement, dated as of September 19, 2014, among SMART Modular Technologies (Global Holdings), Inc., SMART Modular Technologies (Global), Inc., SMART Modular Technologies, Inc., the lenders party thereto and Barclays Bank PLC, as Administrative Agent

Amendment No.

3 to Credit Agreement, dated as of December 4, 2015, among SMART Worldwide Holdings, Inc., SMART Modular Technologies (Global), Inc., the revolving lenders party thereto and Barclays Bank PLC, as Administrative Agent

Amendment No.

4 to Credit Agreement, dated as of November 5, 2016, among SMART Worldwide Holdings, Inc., SMART Modular Technologies (Global), Inc., the lenders party thereto and Barclays Bank PLC, as Administrative Agent

Amended and Restated Credit Agreement, dated as of November 5, 2016, among SMART Worldwide Holdings, Inc., SMART Modular Technologies (Global), Inc., SMART Modular Technologies, Inc., the lenders party thereto and Barclays Bank PLC, as Administrative Agent

Lease Agreement, dated as of February 18, 2009, between Newark Eureka Industrial Capital LLC and SMART Modular Technologies, Inc.

First Amendment to Lease Agreement, dated as of April 29, 2014, between Newark Eureka Industrial Capital LLC and SMART Modular Technologies, Inc .

Amended and Restated Transaction and Management Fee Agreement, dated as of November 5, 2016, among SMART Worldwide Holdings, Inc., Silver Lake Management Company III, L.L.C.

and Silver Lake Management Company Sumeru, L.L.C.

Stock Purchase Agreement, dated as of July 2, 2013, among SMART Storage Systems (Global Holdings), Inc., SanDisk Corporation, SanDisk Manufacturing and solely for the purposes of Section 5.7(c), Section 5.8, Article VIII and Article IX, Saleen Holdings, Inc., Saleen Intermediate Holdings, Inc.

and SMART Worldwide Holdings, Inc .

Receivables Purchase Agreement, dated as of May 16, 2012, among SMART Modular Technologies, Inc., SMART Modular Technologies (Europe) Limited and Wells Fargo Bank, N.A.

First Amendment to Receivables Purchase Agreement, dated as of March 28, 2013, among SMART Modular Technologies, Inc., SMART Modular Technologies (Europe) Limited and Wells Fargo Bank, N.A., and confirmed by SMART Modular Technologies (Global Holdings), Inc., SMART Modular Technologies (Global), Inc.

Second Amended and Restated Credit Agreement, dated as of August 9, 2017, among SMART Worldwide Holdings, Inc., SMART Modular Technologies (Global), Inc., SMART Modular Technologies, Inc., the lenders party thereto and Barclays Bank PLC, as Administrative Agent and as Collateral Agent

Incremental Facility Amendment, dated as of June 8, 2018, to the Second Amended and Restated Credit Agreement, dated as of August 9, 2017 (as amended, supplemented or otherwise modified from time to time) among SMART Worldwide Holdings, Inc., SMART Modular Technologies (Global), Inc., SMART Modular Technologies, Inc., Barclays Bank PLC, as Administrative Agent and the other Lenders party thereto

Second Amendment, dated as of October 12, 2018 and effective October 25, 2018, to the Second Amended and Restated Credit Agreement, dated as of August 9, 2017 (as amended, supplemented or otherwise modified from time to time) among SMART Worldwide Holdings, Inc., and SMART Modular Technologies (Global), Inc., SMART Modular Technologies, Inc., Barclays Bank PLC, as Administrative Agent and other Lenders party thereto

Lease Agreement between Regency Tasman Holdings, LLC and SMART Modular Technologies, dated October 8, 2020

Form of Confirmation for the Base Capped Call Transactions

Form of Confirmation for the Additional Capped Call Transactions

List of Subsidiaries of Registrant

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XBRL Taxonomy Extension Presentation Linkbase Document

Constitutes a management contract or compensatory plan or arrangement.

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

SMART Global Holdings, Inc.

November 6, 2019

/s/ Ajay Shah

Chairman of the Board, President and Chief Executive Officer

October 22, 2020

/s/ Mark Adams

President and Chief Executive Officer

POWER OF ATTORNEY AND SIGNATURES

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below hereby constitutes and appoints Ajay Shah, Jack Pacheco and Bruce Goldberg, and each of them, as his or her true and lawful attorney-in-fact and agent with full power of substitution, for him or her in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto and other documents in connection therewith, with the SEC, granting unto said attorney-in-fact and agent full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully for all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent, or his substitute, may lawfully do or cause to be done by virtue hereof.

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below hereby constitutes and appoints Mark Adams, Jack Pacheco and Bruce Goldberg, and each of them, as his or her true and lawful attorney-in-fact and agent with full power of substitution, for him or her in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto and other documents in connection therewith, with the SEC, granting unto said attorney-in-fact and agent full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully for all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent, or his substitute, may lawfully do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant in the capacities and on the dates indicated.

/s/ Ajay Shah

Chairman of the Board, President and Chief

Executive Officer (Principal Executive

November 6, 2019

/s/ Mark Adams

President and Chief Executive Officer (Principal Executive Officer and Director)

October 22, 2020

/s/ Jack Pacheco

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Officer (Principal Financial and Accounting

November 6, 2019

October 22, 2020

/s/ Ajay Shah

Executive Chairman

of the Board of Directors

October 22, 2020

/s/ Ajay Shah

/s/ Randy Furr

November 6, 2019

October 22, 2020

/s/ Kenneth Hao

November 6, 2019

October 22, 2020

/s/ Bryan Ingram

November 6, 2019

/s/ Paul Mercadante

November 6, 2019

Paul Mercadante

October 22, 2020

/s/ Sandeep Nayyar

November 6, 2019

October 22, 2020

Sandeep Nayyar

/s/ Mukesh Patel

November 6, 2019

October 22, 2020

/s/ Maximiliane Straub

November 6, 2019

October 22, 2020

Maximiliane Straub

/s/ Jason White

November 6, 2019

October 22, 2020

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 9A. Controls and Procedures