Penguin Solutions, Inc. 10-K

Item 5. Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Market Information for Ordinary Shares On May 24, 2017, our ordinary shares began trading on the NASDAQ Global Select Market under the symbol “SGH”. Prior to that date, there was no public trading market for our common stock. Shares sold in our initial public offering, or IPO, were priced at $11.00 per share on May 23, 2017. Holders As of October 2, 2020 there were 78 registered holders of record of our ordinary shares (not including beneficial holders of our ordinary shares in street names). Dividends We have not paid any cash dividends on our ordinary shares, and we do not currently intend to pay any cash dividends on our ordinary shares in the foreseeable future. We currently intend to retain all available funds and any future earnings to support operations and to finance the growth and development of our business. Any future determination to pay dividends will be made at the discretion of our board of directors subject to applicable laws and will depend upon, among other factors, our results of operations, financial condition, contractual restrictions and capital requirements. Our future ability to pay cash dividends on our capital stock may also be limited by the terms of any future debt or preferred securities or future credit facility. Unregistered Sales of Equity Securities SMART EC Acquisition In connection with the SMART EC acquisition as described in Item 15, Consolidated Financial Statements, Note 2, the seller was entitled to earn-out payments of up to $10 million based on achievement of specific gross revenue levels through December 31, 2019 plus additional earn-out payments of $0.10 for each dollar of gross revenue through December 31, 2019 over an agreed upon achievement level. The earn-out would have been payable, at our option, in either cash or in the ordinary shares of SMART Global Holdings, Inc., par value $0.03 per share, the Shares, with each of the Shares to be valued at the volume weighted average daily price of the Shares as traded on the Nasdaq Global Select Market and reported on Bloomberg, measured over the ten trading-day period of such Shares immediately preceding and ended December 30, 2019. In the event that any earn-out is achieved and we elect to pay the earn-out consideration in Shares, then, pursuant to the Artesyn SPA, we will use our reasonable best efforts to (i) cause a registration statement on Form S-3 to be filed with the U.S. Securities and Exchange Commission on or before the forty-fifth day following the earn-out determination date with respect to the resale of such Shares by the seller and (ii) cause such registration statement to become effective and to remain effective until the first to occur of (A) such time that all such Shares have been sold by seller and (B) the first anniversary of the date of such effectiveness. No earn out was achieved and therefore no shares were issued. SMART Wireless Acquisition In connection with the acquisition of SMART Wireless, as described in Item 15, Consolidated Financial Statements, Note 2, SMART Global Holdings, Inc., issued 382,788 Shares as part of the merger consideration and retained as security for the sellers’ indemnification obligations as well as any post-closing adjustments to the purchase price (the Holdback), $0.7 million in cash and 67,550 in Shares . The Shares issued in connection with this transaction were also subject to a lock-up period, pursuant to which the Shares could not be sold for one year following the closing date of July 9, 2019. The lock-up has now expired and the 67.550 shares retained as security for the seller’s indemnification obligations as well as any post-closing adjustments to the purchase price, have been released. 59 All of the Shares issued in the SMART Wireless t ransaction were issued in reliance upon the exemption from registration available under Section 4(a)(2) of the Securities Act, including Regulation D promulgated thereunder. SMART Global Holdings, Inc. did not engage in any form of general solicitation or general advertising in connection with the Inforce t ransaction. Each of the Inforce s hareholder s receiving Shares also represented that it was an “accredited investor” as defined in the Securities Act and that it was acquiring such securities for its own account and not for distribution. All Shares issued in this transaction have a legend stating that the se S hares have not been registered under the Securities Act and cannot be transferred until properly registered under the Securities Act or an exemption applies. This exemption is based on certain representations, warrant ie s, agreements, and covenants co ntained in the merger agreement entered into in connection with this transaction. Stock Performance Graph This performance graph shall not be deemed “soliciting material” or to be “filed” with the Securities and Exchange Commission, or the SEC, for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or the Exchange Act, or otherwise subject to the liabilities under that Section, and shall not be deemed to be incorporated by reference into any of our filings under the Securities Act of 1933, as amended, or the Securities Act, except as shall be expressly set forth by specific reference in such filing. The following performance graph shows the cumulative total stockholders return of an investment of $100 in cash on August 30, 2019 through August 28, 2020, in our common stock, the NASDAQ Composite Index and Philadelphia Semiconductor Index and assuming that all dividends were reinvested. The stock price performance on the following graph is not necessarily indicative of future price performance of our stock. 60 Item 6. Selecte d Financial Data The following tables present our historical selected consolidated financial data. The selected consolidated statement of operations data for the years ended August 28, 2020, August 30, 2019 and August 31, 2018, and the selected consolidated balance sheet data as of August 28, 2020 and August 30, 2019 are derived from our audited consolidated financial statements that are included elsewhere in this report. The selected statement of operations data for the year ended August 25, 2017 and August 26, 2016, and the selected consolidated balance sheet data as of August 31, 2018, August 25, 2017 and August 26, 2016 are derived from our audited consolidated balance sheet as of such dates and is not included in this report. Our historical results are not necessarily indicative of the results that may be expected in the future. We maintain our books and records in U.S. dollars and prepare our consolidated financial statements in accordance with U.S. GAAP. This financial information should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements, including the notes thereto, included elsewhere in this report. Fiscal Year Ended August 28, August 30, August 31, August 25, August 26, 2020 2019 2018 2017 2016 (in thousands, other than per share data) Consolidated Statement of Operations Data: Net sales $ 1,122,377 $ 1,211,999 $ 1,288,821 $ 761,291 $ 534,423 Cost of sales (1)(2) 905,981 974,472 997,235 599,041 427,491 Gross profit 216,396 237,527 291,586 162,250 106,932 Operating expenses: Research and development (1) (2) 52,056 47,920 39,824 38,160 38,116 Selling, general, and administrative (1) (2) 119,523 103,226 84,541 66,759 57,495 Restructuring charge 3,487 — — 457 1,135 Change in estimated fair value of acquisition- related contingent consideration — (2,700 ) (3,000 ) — — Management advisory fees — — — 3,000 4,001 Total operating expenses 175,066 148,446 121,365 108,376 100,747 Income from operations 41,330 89,081 170,221 53,874 6,185 Interest expense, net (15,000 ) (20,716 ) (19,144 ) (29,204 ) (25,575 ) Other income (expense), net (16,970 ) (2,161 ) (13,299 ) (22,551 ) 1,874 Total other expense (31,970 ) (22,877 ) (32,443 ) (51,755 ) (23,701 ) Income (loss) before income taxes 9,360 66,204 137,778 2,119 (17,516 ) Provision for income taxes 10,503 14,872 18,315 9,914 2,444 Net income (loss) $ (1,143 ) $ 51,332 $ 119,463 $ (7,795 ) $ (19,960 ) Earnings per share: Basic $ (0.05 ) $ 2.24 $ 5.42 $ (0.49 ) $ (1.44 ) Diluted $ (0.05 ) $ 2.19 $ 5.17 $ (0.49 ) $ (1.44 ) Shares used in computing earnings per share: Basic 23,994 22,959 22,051 15,785 13,841 Diluted 23,994 23,468 23,119 15,785 13,841 (1) Includes share-based compensation expense as follows: Cost of sales $ 3,022 $ 2,485 $ 1,335 $ 636 $ 461 Research and development 3,069 2,654 1,460 655 725 Selling, general and administrative 12,625 13,060 7,763 4,073 2,686 (2) Includes amortization of intangible assets expense as follows: 61 Cost of sales $ 2,587 $ 566 $ 7 $ — $ — Research and development — — 987 4,897 4,897 Selling, general and administrative 11,067 5,048 5,136 7,042 8,471 Fiscal Year Ended August 28, August 30, August 31, August 25, August 26, 2020 2019 2018 2017 2016 (dollars in thousands) Other Financial Data: Adjusted EBITDA (1) $ 104,211 $ 134,673 $ 195,540 $ 99,387 $ 51,760 Gross billings to customers (2) $ 1,727,075 $ 2,158,302 $ 2,302,214 $ 1,625,547 $ 1,925,047 Days sales outstanding (DSO) (3) 46 37 38 41 27 Inventory turns (4) 9 16 9 12 18 Days payable outstanding (DPO) (5) 54 31 40 47 40 (1) We define Adjusted EBITDA as our net income (loss) plus net interest expense, income tax expense, depreciation and amortization expense, share-based compensation, acquisition-related expenses, integration/restructuring charges and other infrequent or unusual items. We have provided a reconciliation below of Adjusted EBITDA to net income (loss), the most directly comparable U.S. GAAP financial measure. We have included Adjusted EBITDA in this report because it is a key measure used by our management and board of directors to understand and evaluate our core operating performance and trends, to prepare and approve our annual budget and to develop short-term and long-term operational and compensation plans. In particular, the exclusion of certain non-cash, non-recurring or infrequent expenses in calculating Adjusted EBITDA can provide useful measures for period-to-period comparisons of our core business. Accordingly, we believe that Adjusted EBITDA provides useful information to investors and others in understanding and evaluating our operating results in the same manner as our management and board of directors. Adjusted EBITDA has limitations as an analytical tool, and you should not consider this measure in isolation or as a substitute for analysis of our results as reported under U.S. GAAP. Some of these limitations are: • Adjusted EBITDA does not consider the cost of equity-based compensation, which is an ongoing expense for us; • Adjusted EBITDA does not reflect past cash capital expenditures and future requirements for replacements or for new capital expenditures; • Adjusted EBITDA does not reflect tax payments that may represent a reduction in cash available to us; and • Other companies, including companies in our industry, may calculate Adjusted EBITDA differently, which reduces its usefulness as a comparative measure. 62 Because of these limitations, you should consider Adjusted EBITDA along with other financial performance measures, including various cash flow metrics, net income (loss) and our other U.S. GAAP results. A reconciliation of Adjusted EBITDA to net income (loss) is provided below: Fiscal Year Ended August 28, August 30, August 31, August 25, August 26, 2020 2019 2018 2017 2016 (in thousands) Net income (loss) $ (1,143 ) $ 51,332 $ 119,463 $ (7,795 ) $ (19,960 ) Share-based compensation expense 18,716 18,199 10,558 5,364 3,872 Amortization of intangible assets 13,654 5,614 6,130 11,939 13,368 Interest expense, net 15,000 20,716 19,144 29,204 25,575 Provision for income tax 10,503 14,872 18,315 9,914 2,444 Depreciation 22,776 23,592 20,052 21,300 18,111 Integration / Restructuring expenses 9,072 — — 457 1,135 COVID-19 expenses 510 — — — — Capped calls MTM adjustment* 7,719 — — — — Gain on settlement of indemnity claim (364 ) — — — — Extinguishment of term loan / revolver** 6,822 — — 16,579 — Acquisition-related expenses*** 946 2,922 3,435 25 1,611 Contingent consideration fair value adjustment*** — (2,700 ) (3,000 ) — — Purchase accounting adjustment*** — — 631 — — Legal fees - term loan (payment holiday) — 126 — — — S-1 related costs — — 812 — — Loss on early repayment of debt**** — — — 6,743 — Debt extension costs***** — — — 1,745 — Management advisory fees — — — 3,000 4,001 Investment advisory fees — — — 540 — Obsolete inventory related to restructuring — — — 372 — Valuation adjustment related to prepaid state value-added taxes — — — — 908 Misappropriated product shipment — — — — 695 Adjusted EBITDA $ 104,211 $ 134,673 $ 195,540 $ 99,387 $ 51,760 * Mark-to Market Adjustment for Capped Calls related to the convertible note. ** Primarily consists of $6.6 million loss on extinguishment of Term Loan in February 2020, $15.2 million loss on extinguishment of long-term debt for principal payment of $151.0 million in August 2017 and a $1.4 million loss on a February 2017 extinguishment. *** Amounts in fiscal 2020, 2019 and 2018 related to acquisitions of SMART EC and SMART Wireless (July 2019) and Penguin Computing (June 2018). * *** Loss on early payment of term loan for principal amount of $61.1 million in June 2017 related to the IPO. ***** Debt extension costs associated with the amendment of our senior secured term loan and revolving credit facility in November 2016. (2) Gross billings to customers consists of product net sales and our gross billings for services. We provide procurement, logistics, inventory management, kitting or packaging services for certain customers. We account for sales from these services on an agency basis (that is, we recognize the fees associated with serving as an agent with no associated cost of sales). We recognize revenue for these arrangements as service revenue, which is determined as a fee for services based on material procurement costs. See Note 1(d) to our consolidated financial statements. (3) We calculate days sales outstanding as (i) accounts receivable outstanding as of the period end divided by (ii) gross billings to customers for the period (iii) divided by the number of days in the period. 63 (4) We calculate inventory turns as (i) cost of sales plus cost of purchased materials—service for the period, on an annualized basis (i.e., multiplied by four and then divided by the number of quarters in the period) divided by (ii) inventory as of the period end. (5) We calculate days payables outstanding as (i) accounts payable outstanding as of the period end divided by (ii) (x) cost of sales plus cost of purchased materials—service for the period divided by (y) the number of days in the period. As of August 28, August 30, August 31, August 25, August 26, 2020 2019 2018 2017 2016 (in thousands) Consolidated Balance Sheet Data: Cash and cash equivalents $ 150,811 $ 98,139 $ 31,375 $ 22,436 $ 58,634 Working capital 274,221 234,360 226,264 107,115 90,095 Total assets 786,608 704,137 672,762 480,028 458,655 Long-term debt 195,573 182,450 184,190 154,450 225,587 Total shareholders' equity (deficit) 282,104 273,460 187,128 82,396 (1,237 ) 64