What changed in this filing

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Item 1. Financial Statements

2021-01-05 compared with 2020-07-07 · 350 added, 438 removed, 784 unchanged (50% of the section changed)

6 unchanged sentences

Cash and cash equivalents

Accounts receivable, net of allowances of $217 and $184 as of May 29, 2020

Accounts receivable, net of allowances of $ 89 and $ 101 as of November 27, 2020

and August 28, 2020, respectively

9 unchanged sentences

Accrued liabilities

Current portion of long-term debt

Total current liabilities

7 unchanged sentences

Authorized 200,000 shares;

outstanding 24,144 and 23,617 as of May 29, 2020 and August 30, 2019,

outstanding 24,759 and 24,419 as of November 27, 2020 and August 28, 2020,

Additional paid-in capital

6 unchanged sentences

and Subsidiaries

Condensed Consolidated Income Statements

Condensed Consolidated Statements of Operations

(In thousands, except per share data)

Three Months Ended

Nine Months Ended

Net sales (1)

8 unchanged sentences

Total other expense

Income (loss) before income taxes

Income before income taxes

Provision for income taxes

Net income (loss)

Earnings per share:

Shares used in computing earnings per share:

Includes sales to affiliates of $24,139 and $59,691 in the three and nine months ended May 29, 2020, respectively, and $26,427 and $94,641 for the same periods ended May 31, 2019, respectively (see Note 3).

Includes sales to affiliates of $ 14,975 and $ 16,956 in the three months ended November 27, 2020 and November 29, 2019, respectively (see Note 3).

See accompanying notes to unaudited condensed consolidated financial statements.

1 unchanged sentence

and Subsidiaries

Condensed Consolidated Statements of Comprehensive Income (Loss)

Condensed Consolidated Statements of Comprehensive Loss

(In thousands)

Three Months Ended

Nine Months Ended

Net income (loss)

Other comprehensive income (loss):

Other comprehensive loss:

Foreign currency translation

Comprehensive income (loss)

Comprehensive loss

See accompanying notes to unaudited condensed consolidated financial statements.

1 unchanged sentence

and Subsidiaries

Condensed Consolidated Statements of Equity

Condensed Consolidated Statements of Shareholders’ Equity

(In thousands)

5 unchanged sentences

Issuance of ordinary shares from exercises

Issuance of ordinary shares from release of

restricted stock units (RSUs)

Issuance of ordinary shares from employee share

purchase plan (ESPP)

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

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

Effect of adopting ASC 606

1 unchanged sentence

Balances as of November 29, 2019

Share-based compensation expense

Issuance of ordinary shares from exercises

Issuance of ordinary shares from release of RSUs

Withholding tax on RSUs

Foreign currency translation

Balances as of March 1, 2019

Share-based compensation expense

Issuance of ordinary shares from exercises

Issuance of ordinary shares from release of RSUs

Withholding tax on RSUs

Issuance of ordinary shares from ESPP

Foreign currency translation

Balances as of May 31, 2019

Ordinary shares

5 unchanged sentences

Issuance of ordinary shares from release of RSUs

Issuance of ordinary shares from ESPP

Withholding tax on RSUs

Foreign currency translation

Balances as of November 29, 2019

Share-based compensation expense

Issuance of ordinary shares from exercises

Issuance of ordinary shares from release of RSUs

Withholding tax on RSUs

Equity component of convertible notes due 2026, net

Foreign currency translation

Balances as of February 28, 2020

Share-based compensation expense

Issuance of ordinary shares from exercises

Issuance of ordinary shares from release of RSUs

Withholding tax on RSUs

Issuance of ordinary shares from ESPP

Reclassification of capped call upon modification of

articles of association (See Note 7)

Foreign currency translation

Balances as of May 29, 2020

Balances as of November 27, 2020

See accompanying notes to unaudited condensed consolidated financial statements.

SMART Gl obal Holdings, Inc.

SMART Global Holdings, Inc.

and Subsidiaries

1 unchanged sentence

(In thousands)

Nine Months Ended

Three Months Ended

Cash flows from operating activities:

Net income (loss)

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

Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation and amortization

2 unchanged sentences

Deferred income tax benefit

(Gain) Loss on disposal of property and equipment

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

Loss on extinguishment of debt / revolver

Gain on disposal of property and equipment

Amortization of debt discounts and issuance costs

10 unchanged sentences

Proceeds from sale of property and equipment

Acquisition of business, net of cash acquired

Net cash used in investing activities

Cash flows from financing activities:

Long-term debt payments - Term Loan

Long-term debt payments - BNDES

Purchase of capped call

Proceeds from convertible notes due 2026, net of discount

Payment for extinguishment of long-term debt

Proceeds from borrowings under revolving line of credit

3 unchanged sentences

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

Net cash provided by financing activities

Net cash used in financing activities

Effect of exchange rate changes on cash and cash equivalents

8 unchanged sentences

Capital expenditures included in accounts payable at period end

Unpaid debt fees related to convertible notes due 2026

See accompanying notes to unaudited condensed consolidated financial statements.

SMART Global Holdings, Inc.

and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

Basis of Presentation and Principles of Consolidation

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.

2 unchanged sentences

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

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

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

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

3 unchanged sentences

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

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

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

headquarters in Newark, California.

The Company has operations in the United States, Brazil, Malaysia, Taiwan, Hong Kong, Scotland, Singapore, India, Netherlands and South Korea.

The Company has operations in the United States, Brazil, Malaysia, Taiwan, Hong Kong, Scotland, Singapore, India, Netherlands, Germany and South Korea.

Basis of Presentation

2 unchanged sentences

The Company uses a 52- to 53-week fiscal year ending on the last Friday in August.

The three and nine months ended May 29, 2020 and May 31, 2019 were both 13-week and 39-week fiscal periods, respectively.

The three months ended November 27, 2020 and November 29, 2019 were both 13-week fiscal periods.

The accompanying unaudited condensed consolidated financial statements and related notes have been prepared in accordance with U.S.

9 unchanged sentences

Use of Estimates

The preparation of consolidated financial statements in conformity with U.S.

The preparation of condensed consolidated financial statements in conformity with U.S.

GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods presented.

Actual results could differ from the estimates made by management.

Significant items subject to such estimates and assumptions include the useful lives of long-lived assets, the valuation of deferred tax assets and inventory, 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 and financial credits, income tax uncertainties and other contingencies.

The Company’s revenues include products and services.

23 unchanged sentences

The Company recognizes revenue when control transfers to the customer (i.e., when the Company’s performance obligation is satisfied).

The Company invoices the customer and recognizes revenues for such delivery when control has transferred based on shipping terms.

The Company invoices the customer and recognizes revenues for such delivery when control transfers based on shipping terms.

Customized Products

3 unchanged sentences

For these sales, control passes when the Company has made these products available to the customer and under the terms of the agreement cannot repurpose them without the customer’s express consent.

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

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

Non-cancellable nonrefundable, or NCNR, customized product sales are recognized over time on a cost incurred basis.

8 unchanged sentences

For services provided to the customers over a period of time, such revenues are recognized over time in line with when the customer receives and consumes the benefit of the services.

Extended warranty and on-site services, hardware support, software support, and subscription revenue for access to the Company’s high performance computing environment is deferred and recognized ratably over the contractual per iod as the Company transfers control as it satisfies its performance obligations over time as the services are rendered.

Extended warranty and on-site services, hardware support, software support, and subscription revenue for access to the Company’s high performance computing environment is deferred and recognized ratably over the contractual period as the Company transfers control as it satisfies its performance obligations over time as the services are rendered.

These services contracts are typically one to three years in length.

Subscription revenue for certain customers is recognized based on the contractual fee to use the high-performance-computing environment.

Professional consulting services revenue is recognized as the service is performed and the customer obtains control and benefits from the services as they are performed over the perio d.

Professional consulting services revenue is recognized as the service is performed and the customer obtains control and benefits from the services as they are performed over the period.

The methods of recognizing revenue for each of these products and services were selected because they reflect a faithful depiction of the transfer of control.

12 unchanged sentences

As a practical expedient, the Company recognizes the incremental costs of obtaining a contract, specifically commission expenses that have an amortization period of less than twelve months , as an expense when incurred.

Additionally, the Company has adopted an accounting policy to recognize shipping costs that occur after control transfers, if any, to the customer as a fulfillment activity.

Additionally, the Company has adopted an accounting policy to recognize shipping and handling costs that occur after control transfers, if any, to the customer as a fulfillment activity.

The Company records shipping and handling costs related to revenue transactions within cost of sales as a period cost.

2 unchanged sentences

Three Months Ended

Nine Months Ended

Service revenue, net

6 unchanged sentences

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

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

The amount invoiced to customers for agency related services is the total of the related material procurement costs and fees for providing its services.

Gross billings to customers are reflected in accounts receivable for unpaid invoices as of the end of the period.

Additionally, material procurement costs of products the Company manages as an agent on behalf of its customers on hand as of the end of the period are reflected in inventory.

Both the amounts in accounts receivable and inventory impact the determination of net cash provided by (or used in) operations.

Contract Balances

4 unchanged sentences

Contract liabilities consist of advance payments and deferred revenue, where the Company has unsatisfied performance obligations.

Contract liabilities are classified as deferred revenue and are allocated between accrued liabilities and other long-term liabilities of our condensed consolidated balance sheet based on the timing of when the customer takes control of the asset or receives the benefit of the service.

Contract liabilities are classified as deferred revenue and are allocated between accrued liabilities and other long-term liabilities on our condensed consolidated balance sheet based on the timing of when the customer takes control of the asset or receives the benefit of the service.

Payment terms vary by customer.

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

Changes in the accounts receivable, contract assets and the deferred revenues balances during the nine months ended May 29, 2020 are as follows (in thousands):

Changes in the accounts receivable, contract assets and the deferred revenues balances during the three months ended November 27, 2020 are as follows (in thousands):

Accounts receivable

1 unchanged sentence

Deferred revenue

The increase in contract assets from $4.6 million as of August 30, 2019 to $5.8 million as of May 29, 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 $23.9 million was due to more revenue recognition during the period.

During the nine months ended May 29, 2020, $13.0 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 decrease in contract assets from $ 5.1 million as of August 28, 2020 to $ 1.4 million as of November 27, 2020 was primarily driven by billing amounts previously recorded as contract assets as of August 28, 2020.

During the three months ended November 27, 2020, $ 6.1 million of revenue recognized was included in the deferred revenue balance at the beginning of the period, which was partially offset by additional deferrals during the period.

Disaggregation of Revenue

The Company disaggregates revenue by 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 source and geography is disclosed in Note 11.

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

Revenue Allocated to Remaining Performance Obligations

5 unchanged sentences

Cash and Cash Equivalents

All highly liquid investments with maturities of 90 days or less from original dates of purchase are carried at cost, which approximates fair value, and are considered to be cash.

All highly liquid investments with maturities of 90 days or less from original dates of purchase are carried at cost, which approximates fair value, and are considered to be cash equivalents.

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

4 unchanged sentences

Derivative Financial Instrument

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

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

6 unchanged sentences

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 the three months ended November 27, 2020 and November 29, 2019, the Company recognized financial credits under PADIS totaling $ 7.9 million and $ 0 , respectively, which are reported under research and development as a reduction of expense on the condensed consolidated statements of operations.

As of November 27, 2020, unused financial credits totaling $ 13.4 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)

Since 2004, the Sao Paulo State tax authorities have granted SMART Brazil a tax benefit to defer and eventually eliminate the payment of ICMS levied on certain imports from independent suppliers.

This benefit, known as an ICMS Special Regime, is subject to renewal every two years.

This benefit, known as an ICMS Special Tax Regime, is subject to renewal every two years .

When the then current ICMS Special Tax Regime expired on March 31, 2010, SMART Brazil timely applied for a renewal of the benefit, however, the renewal was not granted until August 4, 2010.

8 unchanged sentences

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 May 29, 2020 , the total ICMS tax credits reported on the Company’s accompanying condensed consolidated balance sheet are R$ 27 .

8 million (or $ 5 .

1 million), of which (i) R$ 1 .

6 million (or $ 0.

3 million) are fully vested ICMS credits, classified as prepaid and other current assets and R$ 24.

5 million (or $ 4 .

5 million) are fully vested ICMS credits, classified as other noncurrent assets, and (ii) R$ 1.

8 million (or $ 0.

3 million) are ICMS credits sub ject 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$ 1.

1 million or $0.

As of August 3 0 , 201 9 , the total ICMS tax credits reported on the Company’s accompanying condensed 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 mil lion) 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.

As of November 27, 2020, the total ICMS tax credits reported on the Company’s accompanying condensed consolidated balance sheet are R$ 17.6 million (or $ 3.0 million), of which (i) R$ 0.4 million (or $ 0.1 million) are fully vested ICMS credits, classified as prepaid and other current assets and R$ 17.1 million (or $ 3.0 million) are fully vested ICMS credits, classified as other noncurrent assets and (ii) R$ 0.1 million (or $ 0 ) are ICMS credits subject to vesting in 48 equal monthly amounts, classified as prepaid expenses and other current assets.

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

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

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

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

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

If these estimates or the mix of products or regions vary, it could take longer or shorter than expected to recover the accumulated ICMS credits, resulting in a reclassification of ICMS credits from current to noncurrent, or vice versa.

In April and June 2016, the Company filed cases with the State of Sao Paulo tax authorities to seek approval to sell excess ICMS credits.

In April and June 2016, the Company filed cases with the State of Sao Paulo tax authorities to seek approval to sell these excess ICMS credits.

In December 2017, the Company obtained approval to sell R$ 31.6 million (or $ 5.5 million) of its ICMS credits.

Once approved, sales of ICMS credits usually take three to six months to complete and typically incur a discount to the face amount of the credits sold, as well as fees for the arrangers of these sales which together aggregate 10% to 15% of the face amount of the credits being sold.

Once the sale agreement is complete, the tax authorities usually approve the transfer of credits in monthly installments and the proceeds resulting from the sale of the aforementioned credits shall be received by the Company accordingly.

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

In the first quarter of fiscal 2019, the Company received the approval to sell R$17.7 million (or $3.3 million) of its ICMS credits.

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$6.0 million (or $1.1 million) and R$10.0 million (or $1.8 million) of the monthly installments during nine months ended May 29, 2020 and fiscal 2019, respectively.

Once approved, sale of ICMS credits usually take several months to complete and typically incur a discount to the face amount of the credits sold, as well as fees for the arrangers of these sales which together aggregate 10 % to 15 % of the face amount of the credits being sold.

Once the sale is complete, the tax authorities usually approve the transfer of credits in monthly installments and the proceeds resulting from the sale of the aforementioned credits shall be received by the Company accordingly.

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

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

In the first quarter of fiscal 2021, the Company further adjusted the discount rate to 26 %, resulting in a charge of R$ 1.2 million (or $ 0.2 million).

In the first quarter of fiscal 2019, the Company sold R$ 17.7 million (or $ 3.1 million) of its ICMS credits that had been approved to be sold in December 2017.

The payments were received in 22 installments starting in the second quarter of fiscal 2019 through fiscal 2020, or R$ 10.0 million (or $ 1.7 million) and R$ 7.7 million (or $ 1.3 million) in fiscal 2019 and 2020, respectively, thus finalizing the receipt of all installments of the contract.

Property and Equipment

9 unchanged sentences

Such events or circumstances may, among others, include significant adverse changes in the general business climate.

There were no events which required additional impairment in the three and nine months ended May 29, 2020.

As of May 29, 2020 and August 30, 2019, the carrying value of goodwill on the Company’s condensed consolidated balance sheet was $73.5 million and $81.4 million, respectively.

There were no events which required additional impairment in the three months ended November 27, 2020.

When conducting the annual impairment test for goodwill, the Company compares the estimated fair value of a reporting unit containing goodwill to its carrying value.

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

All of the $73.5 million carrying value of goodwill on the Company’s condensed consolidated balance sheet as of May 29, 2020 is associated with the Company’s three reporting segments (Specialty Memory Products, Brazil Products and SCSS).

No impairment of goodwill was recognized through May 29, 2020.

The changes in the carrying amount of goodwill during the nine months ended May 29, 2020 and fiscal 201 9 are as follows (in thousands):

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 November 27, 2020.

The changes in the carrying amount of goodwill during the three months ended November 27, 2020 and fiscal 2020 are as follows (in thousands):

Balance as of August 30, 2019

Provisional adjustment from business acquisition (see Note 2)

Addition from business acquisition (see Note 2)

Translation adjustments

1 unchanged sentence

Translation adjustments

Balance as of May 29, 2020

Balance as of November 27, 2020

Intangible Assets, Net

The following table summarizes the gross amounts and accumulated amortization of intangible assets by type as of May 29, 2020 and August 30, 2019 (dollars in thousands):

The following table summarizes the gross amounts and accumulated amortization of intangible assets by type as of November 27, 2020 and August 28, 2020 (dollars in thousands):

November 27, 2020

August 28, 2020

1 unchanged sentence

Trademarks/tradename

Amortization expense related to intangible assets is detailed in the table below.

Amortization expense related to intangible assets totaled approximately $ 3.4 million for both the three months ended November 27, 2020 and November 29, 2019.

Acquired intangibles are amortized on a straight-line basis over the remaining estimated economic life of the underlying intangible assets.

Three Months Ended

Nine Months Ended

Amortization of intangible assets classification (in thousands):

Amortization of intangible assets classification

(in thousands):

Cost of sales

1 unchanged sentence

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

Fiscal year ending August:

Fiscal year ending November:

Remainder of fiscal 2021

5 unchanged sentences

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

No impairment of long-lived assets was recognized during the three and nine months ended May 29, 2020.

No impairment of long-lived assets was recognized during the three months ended November 27, 2020 and November 29, 2019.

Research and Development Expense

18 unchanged sentences

A weighted average exchange rate is used for each period for revenues and expenses.

All foreign subsidiaries and branch offices, except those in Brazil and South Korea, use the U.S.

All foreign subsidiaries and branch offices, except Brazil and South Korea, use the U.S.

dollar as their functional currency.

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

During the three and nine months ended May 29, 2020, the Company recorded $0.5 million and $2.6 million, respectively, and $0.1 million and $3.5 million, respectively for the corresponding periods of 2019, of foreign exchange losses primarily related to its Brazilian operating subsidiaries.

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

During the three months ended November 27, 2020 and November 29, 2019, the Company recorded $ 0.6 million and ($ 0.9 ) million, respectively, of foreign exchange gains (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 income statement 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.

Three Months Ended

Nine Months Ended

Share-based compensation expense by category

11 unchanged sentences

GAAP are excluded from net income (loss).

The Company’s other comprehensive income (loss) generally consists of foreign currency translation adjustments.

For the Company, other comprehensive income (loss) generally consists of foreign currency translation adjustments.

Concentration of Credit and Supplier Risk

The Company’s concentration of credit risk consists principally of cash and cash equivalents and accounts receivable.

The Company’s revenue and related accounts receivable reflect a concentration of activity with certain customers (see Note 12).

The Company’s revenues and related accounts receivable reflect a concentration of activity with certain customers (see Note 12).

The Company does not require collateral or other security to support accounts receivable.

1 unchanged sentence

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

At May 29, 2020 and August 30, 2019, the Company owed these three suppliers $149.3 million and $91.5 million, respectively, which was recorded as accounts payable and accrued liabilities.

The inventory purchases from these suppliers during the three and nine months ended May 29, 2020 were $0.3 billion and $0.7 billion, respectively, and $0.2 billion and $1.0 billion, respectively for the corresponding periods of fiscal 2019.

At November 27, 2020 and August 28, 2020, the Company owed these three suppliers $ 127.2 million and $ 133.3 million, respectively, which was recorded as accounts payable and accrued liabilities.

The inventory purchases from these suppliers during both the three months ended November 27, 2020 and November 29, 2019 were $ 0.2 billion.

New Accounting Pronouncements

In December 2019, 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 its condensed consolidated financial statements.

In December 2019, the FASB issued ASU No.

2019-12, Income Taxes (Topic 740):

Simplifying the Accounting for Income Taxes .

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

Early adoption of the amendments is permitted.

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 is currently evaluating the impacts of adoption of the new guidance to its consolidated financial statements.

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 .

This standard amends ASC 815, Derivatives and Hedges , and permits the SOFR OIS rate as an approved rate to be used in valuing derivative instruments.

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

In February 2018, the FASB issued ASU No.

2018-02, Income Statement-Reporting Comprehensive Income (Topic 220):

Reclassification of Certain Tax Effects from Accumulated Comprehensive Income .

The new guidance allows companies to reclassify standard tax effects resulting from the Tax Act, from accumulated other comprehensive income to retained earnings.

The guidance also requires certai n new disclosures regardless of the election.

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 condensed consolidated financial stateme nts.

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

The Company is currently evaluating the impact of ASU 2019-12 on its condensed consolidated financial statements.

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

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

The Company adopted the new standard effective August 29, 2020 using the modified-retrospective approach.

Upon adoption, there was no impact on the Company’s condensed consolidated financial statements.

In February 2016, the FASB issued ASU No.

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

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

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

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

2014-09, Revenue from Contracts with Customers, as amended , which supersedes nearly all existing revenue recognition guidance.

The FASB has issued several amendments to the new standard, including clarification on identifying performance obligations.

The amendments include ASU No.

2016-08, Revenue from Contracts with Customers (Topic 606)—Principal versus Agent Considerations , which was issued in March 2016, and clarifies the implementation guidance for principal versus agent considerations in ASU 2014-09.

The new standard permits adoption either by using (i) a full retrospective approach for all periods presented in the period of adoption or (ii) a modified retrospective approach with the cumulative effect of initially applying the new standard recognized at the date of initial application and providing certain additional disclosures.

The new standard is effective for annual reporting periods beginning after December 15, 2017.

The Company adopted the new standard effective September 1, 2018 using the modified retrospective approach applied to all contracts that are not completed contracts at the date of initial adoption (i.e.

September 1, 2018).

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 November 27, 2020, $ 0.4 million of contract termination costs have yet to be paid.

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

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

Business Acquisitions

Fiscal Year 2021

CreeLED, Inc.

(SGH-CreeLED)

On October 18, 2020 , SMART Global Holdings and CreeLED, Inc.

(formerly known as 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-CreeLED), entered into an Asset Purchase Agreement (the CreeLED Purchase Agreement) with Cree, Inc., a North Carolina corporation (Cree).

As of November 27, 2020, 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 65 to 95 days, subject to customary closing conditions.

Pursuant to the CreeLED Purchase Agreement, Cree will sell to SGH-CreeLED, and SGH-CreeLED 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 Cree’s first four full fiscal quarters following the closing (the Earnout Period), also payable in the form of an unsecured promissory note issued by SMART Global Holdings (the Earnout Note), and (iv) the assumption of certain liabilities.

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

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

In connection with the Transaction, Cree and SGH-CreeLED 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 CreeLED 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-CreeLED 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 customary closing conditions.

The CreeLED Purchase Agreement provides for customary termination rights and also provides that, in the event the CreeLED 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.

Fiscal Year 2019

SMART Embedded Computing, Inc.

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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 were 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 was not achieved and nothing was paid.

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.

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

The reported consolidated financial condition after completion of the acquisition re flects these fair values.

SMART EC’s results of operations are included in the consolidated financial statements from the date of acquisition.

No earn-out was achieved.

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

The reported consolidated financial condition after completion of the acquisition reflects these fair values.

SMART EC’s results of operations are included in the condensed consolidated financial statements from the date of acquisition.

The initial fair value of contingent consideration was estimated at the date of acquisition to be $ 2.7 million, which was recorded as a current liability.

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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 May 29, 2020 and August 30, 2019, the fair value of the contingent consideration was $0.

As of November 27, 2020 and August 28, 2020, the fair value of the contingent consideration was $ 0 .

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

Purchase Price

Net cash for merger

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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

Tangible assets acquired

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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 condensed consolidated statements of operations, balance sheets or cash flows in any periods previously reported.

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

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

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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 acquisi tion, 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 the nine months ended Ma y 2 9 , 2020 and fiscal 2019 , the Company incurred certain costs related to the acquisition, which are include d in selling, general and administrative expense in the condensed consolidated statement of operations.

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

Professional fees

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

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

SMART Wireless Computing, Inc.

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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.

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

The reported consolidated financial condition after completion of the acquisition reflects these fair values.

SMART Wireless’ results of operations are included in the consolidated financial statements from the date of acquisition.

The reported condensed consolidated financial condition after completion of the acquisition reflects these fair values.

SMART Wireless’ results of operations are included in the condensed consolidated financial statements from the date of acquisition.

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

Purchase Price

Net cash for merger

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Purchase price holdback - shares due to pre-closing holders

Post-closing adjustments in accordance with agreement (as of

May 29, 2020)

Post-closing adjustments in accordance with agreement

Total purchase price

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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

Tangible assets acquired

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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.

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

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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 the nine months ended May 29, 2020 and fiscal 2019, the Company incurred certain costs related to the acquisition, which are included in selling, general and administrative expense in the condensed consolidated statement of operations.

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

Nine Months Ended

Professional fees

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

Premiere Logistics

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Results of operations of the businesses acquired have been included in the Company’s consolidated financial statements subsequent to the date of acquisition.

The revenue and net income earned by the businesses acquired following the acquisition are not material to our consolidated results of operations.

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

Fiscal Year 2018

Penguin Computing

On June 8, 2018, SMART Global Holdings entered into an Agreement and Plan of Merger (the Penguin Merger Agreement), by and among SMART Global Holdings, Glacier Acquisition Sub, Inc., a Delaware corporation and a wholly-owned indirect subsidiary of the SMART Global Holdings (Merger Sub), Penguin Computing, Inc., a California corporation (Penguin) and Fortis Advisors LLC, a Delaware limited liability company, solely in its capacity as the representative of the holders of the securities of Penguin.

Pursuant to the Penguin Merger Agreement, on June 8, 2018, Merger Sub was merged with and into Penguin, with Penguin surviving as a wholly-owned indirect subsidiary of SMART Global Holdings (the Penguin Merger).

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 (as defined in Note 7).

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

No earn-out amounts were achieved.

After closing of the Penguin Merger, SMART Global Holdings deposited $6.0 million of the purchase price into escrow as security for Penguin’s indemnification obligations during the escrow period of one year.

SMART Global Holdings also deposited $2.0 million of the purchase price into escrow as security for customary post-closing adjustments to the purchase price.

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.

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.

The reported consolidated financial condition after completion of the acquisition reflects these fair values.

Penguin’s results of operations are included in the consolidated financial statements from the date of acquisition.

The initial fair value of contingent consideration was estimated at the date of acquisition to be $3.0 million , which was recorded as a current liability.

The Company determined the fair value of the obligations to pay contingent consideration using a real options technique which incorporates various estimates, including projected gross profit for the period, a volatility factor applied to gross profit based on year-on-year growth in gross profit of comparable companies, discount rates and the estimated amount of time until final payment is made.

This fair value measurement is based on significant inputs not observable in the market, which ASU 820-10-35 refers to as Level 3 inputs.

The resulting probability-weighted cash flows were discounted using the US Information Technology B Corporate Bond Yields of 4.06%, which is representative of a market participant assumption.

Subsequent to the acquisition date, 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 profit target.

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 (in thousands):

Net cash for merger

Cash and cash equivalents acquired

Upfront payment in accordance with agreement

Post-closing adjustments in accordance with agreement

Total consideration

Estimated fair value of contingent consideration

Total purchase price

The total purchase consideration has been allocated to the tangible and intangible assets acquired and liabilities assumed.

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

Purchase Price

Tangible assets acquired

Liabilities assumed

Identifiable intangible assets

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 year ended August 31, 2018.

The measurement period adjustment, as recognized in the third quarter of fiscal 2019, is related to the reduction of inventory originally represented by the sellers as held by vendors for repairs.

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.

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

Existing order backlog

The excess of purchase price over the fair value amounts assigned to the assets acquired and liabilities assumed represents the goodwill amount resulting from the acquisition.

The Company does not expect any portion of this goodwill to be deductible for tax purposes.

The goodwill attributable to the Penguin Merger has been recorded as a noncurrent asset and is not amortized, but is subject to an annual review for impairment.

Factors that contributed to the recognition of goodwill include the broader reach and capabilities of the Company into new technologies, markets and channels that leverage its existing products and services.

Penguin brings an outstanding customer base, solid products and strong supplier relationships to the Company in the specialty compute, storage and networking markets.

Conversely, Penguin will have substantially improved access to capital to drive additional investment in, and further development and growth of its product and services.

As part of the Penguin Merger, the Company recorded a net deferred tax liability of $1.6 million .

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 .

The revenue and net income earned by the businesses acquired following the acquisition are not material to our condensed consolidated results of operations.

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

Related Party Transactions

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Three Months Ended

Nine Months Ended

As of May 29, 2020 and August 30, 2019, amounts due from these affiliates were $8.9 million and $8.2 million, respectively.

As of November 27, 2020 and August 28, 2020, amounts due from these affiliates were $ 5.0 million and $ 6.5 million, respectively.

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

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

Foreign Currency Exchange Contracts

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The Company does not use foreign currency contracts for speculative or trading purposes.

Foreign exchange forward contracts outstanding at May 29, 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 (expense) in the condensed 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 (expense).

As of May 29, 2020, the Company’s non-designated forward contacts resulted in a $2.9 million derivative asset and a $0.4 million derivative liability.

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

For the three and nine months ended May 29, 2020, the Company recognized realized gains in the amount of $8.8 million and $9.5 million, respectively, and net unrealized gains on the change in the fair value of the non-designated forward contracts in the amount of $2.1 million and $3.3 million, respectively.

For the three and nine months ended May 31, 2019, the Company recognized realized losses in the amount of $0.5 million and $2.5 million, respectively, and net unrealized losses on the change in the fair value of the non-designated forward contracts in the amount of $2.1 million and $0.6 million, respectively.

Foreign exchange forward contracts outstanding at November 27, 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 condensed consolidated statements of operations.

As of November 27, 2020, the Company’s non-designated forward contacts resulted in a $ 2.1 million derivative asset.

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

For the three months ended November 27, 2020, the Company recognized realized gains in the amount of $ 2.4 million, and net unrealized gains on the change in the fair value of the non-designated forward contracts in the amount of $ 2.9 million .

For the three months ended November 29, 2019, the Company recognized realized losses in the a mount of $ 0.8 million, and net unrealized losses on the change in the fair value of the non-designated forward contracts in the amount of $ 0.8 million.

Balance Sheet Details

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Total inventories*

As of May 29, 2020 and August 30, 2019, 16% and 25%, respectively, of total inventories represented inventory held under the Company's supply chain services.

As of November 27, 2020 and August 28, 2020, 11 % and 17 %, respectively, of total inventories represented inventory held under the Company's supply chain services.

Prepaid Expenses and Other Current Assets

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

Financial credits*

Prepayment for VAT and other transaction taxes

Unbilled service receivables

Contract assets**

Prepaid income taxes

Unbilled service receivables

Indemnification claims receivable**

Derivative assets

Prepayment for VAT and other transaction taxes

Prepaid R&D expenses

Prepaid ICMS taxes in Brazil***

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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Includes Penang facility, which is situated on leased land.

Depreciation and amortization expense for property and equipment during the three and nine months ended May 29, 2020 was approximately $5.4 million and $17.6 million, respectively, and $5.8 million and $17.1 million, respectively for the corresponding periods of fiscal 2019.

Depreciation and amortization expense for property and equipment during the three months ended November 27, 2020 and November 29, 2019 was approximately $ 5.0 million and $ 6.1 million, respectively,

Other Noncurrent Assets

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

Deposits on equipment

Prepaid ICMS taxes in Brazil*

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Accrued liabilities consisted of the following (in thousands):

Deferred revenue

Accrued employee compensation

Customer deposits

Deferred revenue

Current portion of lease liabilities

VAT and other transaction taxes payable

Indemnification claims liability*

Accrued warranty reserve

Income taxes payable

Customer deposits

Accrued warranty reserve

Other accrued liabilities

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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, and operating lease liabilities , current and non-current on the Company’s condensed consolidated balance sheets.

For operating leas es of buildings, the Company account s 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 a ssets are amortized on a straight-line basis in operating expenses over the lease term.

The Company does not have financing leases as of May 29, 2020.

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

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

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

The Company does not have financing leases as of November 27, 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.

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

The weighted-average remaining lease term for the Company’s operating leases was 7.5 years at May 29, 2020 and the weighted-average discount rate was 7.9%.

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

Three Months Ended

November 27, 2020

November 29, 2019

Operating lease cost

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Total lease costs

Future minimum undiscounted payments under the Company’s non-cancelable operating leases were as follows as of May 29, 2020 (in thousands):

Weighted-average remaining lease term

Weighted-average discount rate

Future minimum undiscounted payments under the Company’s non-cancelable operating leases were as follows as of November 27, 2020 (in thousands):

Fiscal year ending August:

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Present value of total lease liabilities

Right-of-use assets obtained in exchange for new operating lease liabilities for the three and nine months ended May 29, 2020 amounted to $0.9 million and $8.9 million, respectively.

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

As of November 27, 2020, the Company has additional operating lease commitments of approximately $ 5.8 million on an undiscounted basis for an office building lease that has not yet commenced.

This operating lease is expected to commence in April 2021 with a lease term of 10.4 years.

Right-of-use assets obtained in exchange for new operating lease liabilities for the three months ended November 27, 2020 and November 29, 2019 amounted to $ 0.1 million and $ 4.7 million, respectively.

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

Three Months Ended

Nine Months Ended

Provision for income taxes

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

Provision for income taxes increased by $2.2 million and decreased by $8.4 million for the three and nine months ended May 29, 2020, as compared to the same periods in the prior year, primarily due to the profits and related taxes in non-U.S.

Provision for income taxes for the three months ended November 27, 2020 increased by $ 3.0 million as compared to the same period in the prior year, primarily due to the profits and related taxes in non-U.S.

jurisdictions.

As of May 29, 2020 , the Company has a full valuation allowance for its net deferred tax assets associated with its U.S.

As of November 27, 2020, the Company has a full valuation allowance for its net deferred tax assets associated with its U.S.

The amount of the deferred tax asset considered realizable could be adjusted if significant positive evidence increases.

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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 May 29, 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 any fiscal quarter commencing after the fiscal quarter ending on November 27, 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;

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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 det ermined by deducting the fair value of the liability component from the par value of the Notes.

The equity component of the Notes is included in additional paid-in capital in the condensed consolidated balance sheet and is not remeasured as long as it cont inues to meet the conditions for equity classification, which the Company will reassess every reporting period.

The carrying amount of the equity component of approximately $ 52.5 million, representing the conversion option, was determined by deducting the fair value of the liability component from the par value of the Notes.

The equity component of the Notes is included in additional paid-in capital in the condensed consolidated balance sheet and is not remeasured as long as it continues to meet the conditions for equity classification, which the Company will reassess every reporting period.

The difference between the principal 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.

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Transaction costs attributable to the liability component were approximately $ 6.3 million, were recorded as debt issuance cost (presented as contra debt in the condensed consolidated balance sheet) and are being amortized to interest expense over the term of the Notes using the effective interest method.

The transaction costs attributable to the equity component were approximately $1.7 million and were netted with the equity component in stockholders’ equity.

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):

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Net carrying amount

As of May 29, 2020, the remaining life of the Notes was approximately 69 months.

As of November 27, 2020, the remaining life of the Notes was approximately 63 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 May 29, 2020, the carrying value of the equity component was $50.8 million, net of the issuance costs of $1.7 million.

As of November 27, 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):

Three Months Ended

Nine Months Ended

November 27, 2020

Contractual interest expenses

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Total interest cost recognized

The total estimated fair value for the Notes was determined to be $219.7 million based on the closing trading price per $100 of the Notes as of the last day of trading for the period.

As of November 27, 2020 and August 28, 2020, t he total estimated fair value for the Notes was determined to be $ 243.8 million and $ 221.5 million, respectively based on the closing trading price per $ 100 of the Notes as of the last day of trading for the period.

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

There are no future minimum principal payments made under the Notes as of November 27, 2020, the full amount of $ 250.0 million is due in fiscal 2026.

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”).

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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 asset s 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 initia lly 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 use d stock price volatility implied from options traded with a substantially shorter term, which ma d e this an unobservable input that is significant to the valuation.

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 future.

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

The Company recognized a loss of approximately $2.9 million and $7.7 million for the three and nine months ended on May 29, 2020, respectively , due to remeasurement of the capped calls at fair value.

These losses are included in the condensed consolidated income statement within Other income (expense), net.

The Company recognized a loss of approximately $ 7.7 million in fiscal 2020, due to remeasurement of the capped calls at fair value.

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

Amended Credit Agreement

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(SMART Malaysia), the Credit Group.

The Amended Credit Agreement provided for a $165 million of initial term loans (the Initial Term Loan) with a maturity date of August 9, 2022, and $50 million of revolving loans with a maturity date of February 9, 2021 (the Initial Revolver Maturity Date) which revolving loan maturity date would have automatically extended to February 9, 2022 if the total leverage ratio of the Credit Group was less than 3.0:1.0 on the Initial Revolver Maturity Date.

The Amended Credit Agreement provides for $ 165 million of initial term loans (the Initial Term Loan) with a maturity date of August 9, 2022 , and $ 50 million of revolving loans with a maturity date of February 9, 2021 (the Initial Revolver Maturity Date) which revolving loan maturity date automatically extends to February 9, 2022 if the total leverage ratio of the Credit Group is less than 3.0 :1.0 on the Initial Revolver Maturity Date.

SMART Global Holding is not a party to the Amended Credit Agreement.

On June 8, 2018, SMART Worldwide, Global and SMART Modular entered into an Incremental Facility Agreement (the Incremental Amendment) which provided for incremental term loans under the Amended Credit Agreement in the aggregate amount of $60 million (the Incremental Term Loans) which Incremental Term Loans were on substantially identical terms as the Initial Term Loans.

On June 8, 2018, SMART Worldwide, Global and SMART Modular entered into an Incremental Facility Agreement (the Incremental Amendment) which provided for incremental term loans under the Amended Credit Agreement in the aggregate amount of $ 60 million (the Incremental Term Loans) which Incremental Term Loans are on substantially identical terms as the Initial Term Loans.

Pursuant to the Incremental Amendment, the borrowers agreed to pay the structuring advisor a $ 0.6 million fee pursuant to a separate agreement.

On October 2, 2018, SMART Worldwide, SMART Worldwide, Global and SMART Modular entered into the Second Amendment to the Amended Credit Agreement (the Second Amendment) which did not become effective until October 25, 2018.

On October 2, 2018, SMART Worldwide, Global and SMART Modular entered into the Second Amendment to the Amended Credit Agreement (the Second Amendment) which did not become effective until October 25, 2018.

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

In addition, the borrowers were granted a holiday from the obligation to repay any loans as a result of excess cash flow that would otherwise be due with respect to any period of fiscal 2019.

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

In addition, the Amended Credit Agreement was secured by a pledge of the capital stock of, or equity interests in, most of the subsidiaries of SMART Worldwide (including, without limitation, SMART Malaysia, Penguin, SMART EC and SMART Wireless) and by substantially all of the assets of the subsidiaries of SMART Worldwide, excluding the assets of SMART Malaysia and certain other subsidiaries.

The Amended Credit Agreement contained various representations and warranties and affirmative and negative covenants that are usual and customary for loans of this nature including, among other things, limitations on the Credit Group’s ability to engage in certain transactions, incur debt, pay dividends, and make investments.

The Amended Credit Agreement also required that the Credit Group maintain a Secured Leverage Ratio not in excess of 3.5:1.0 as of the end of each fiscal quarter (commencing with the fiscal quarter ending November 24, 2017) and puts restrictions on the Credit Group’s ability to retain cash proceeds from the sale of certain assets with net proceeds in excess of $2 million, subject to customary six-month reinvestment rights.

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

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

The Amended Credit Agreement contains various representations and warranties and affirmative and negative covenants that are usual and customary for loans of this nature including, among other things, limitations on the Credit Group’s ability to engage in certain transactions, incur debt, pay dividends, and make investments.

The Amended Credit Agreement also requires that the Credit Group maintain a Secured Leverage Ratio not in excess of 3.5 :1.0 as of the end of each fiscal quarter (commencing with the fiscal quarter ending November 24, 2017) and puts restrictions on the Credit Group’s ability to retain cash proceeds from the sale of certain assets with net proceeds in excess of $ 2 million, subject to customary six-month reinvestment rights.

The Incremental Amendment required the Credit Group to repay the Penguin Credit Facility, as defined below, and to pledge as collateral, all of the capital stock of and substantially all of the assets of Penguin within 60 days after the closing of the Penguin acquisition.

Interest and Interest Rates .

Loans under the Amended Credit Agreement accrue d interest at a rate per annum equal to an applicable margin plus, at the borrowers’ option, either a LIBOR rate, or a base rate.

The applicable margin for term loans wit h respect to LIBOR borrowings was 6.25% and with re spect to base rate borrowings was 5.

The interest rate on the Initial T erm L oans and Incremental Term Loans was 8.

14 % through May 29, 2020 , respectively.

The applicable margin for revolving loans adjusted 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%.

Loans under the Amended Credit Agreement accrue interest at a rate per annum equal to an applicable margin plus, at the borrowers’ option, either a LIBOR rate, or a base rate.

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

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

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

Interest on base rate loans is payable on the last day of each calendar quarter.

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

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

Principal Payments .

The Amended Credit Agreement required quarterly repayments of principal under the Initial Term Loans equal to 2.5% of $165 million, or $4.1 million per fiscal quarter and, commencing on November 30, 2018, quarterly repayments of principal under the Incremental Term Loans equal to 2.5% of $60 million, or $1.5 million per fiscal quarter.

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

During the three and nine months ended May 29, 2020, the borrowers made scheduled principal payments of $0 and $5.6 million, respectively and $0 for the corresponding periods in fiscal 2019.

The Amended Credit Agreement requires quarterly repayments of principal under the Initial Term Loans equal to 2.5 % of $ 165 million, or $ 4.1 million per fiscal quarter and, commencing on November 30, 2018, quarterly repayments of principal under the Incremental Term Loans equal to 2.5 % of $ 60 million, or $ 1.5 million per fiscal quarter.

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

During the three months ended November 27, 2020 and November 29, 2019, the borrowers made scheduled principal payments of $ 0 and $ 5.6 million, respectively.

Prepayments .

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

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

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

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

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

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

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

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

As a result of the Second Amendment, the borrowers were granted a holiday from the obligation to repay any loans as a result of excess cash flow that would otherwise have been due with respect to any period of fiscal 2019.

No mandatory prepayments were required for the three and nine months ended May 29, 2020 or for fiscal 2019.

On June 2, 2017, SMART Global Holdings contributed $61.0 million from the proceeds of the IPO closed in May 2017.

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

As a result of the Second Amendment, the borrowers were granted a holiday from the obligation to repay any loans as a result of excess cash flow that would otherwise be due with respect to any period of fiscal 2019.

No mandatory prepayments were required for the three months ended November 27, 2020 or for fiscal 2019.

On June 2, 2017, SMART Global Holdings contributed to Global $ 61.0 million from the proceeds of the IPO closed in May 2017.

Global in turn used the proceeds to pay down the original term loans under the Original Credit Agreement, as required under the ARCA, which resulted in a $ 6.7 million loss on early repayment of long-term debt.

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Term loans under the Amended Credit Agreement were issued at a discount of 2.0 % of the then outstanding principal amount of $ 165 million, for a discount of $ 3.3 million.

The Company incurred $8.7 million in debt issuance costs upon entering into the Amended Credit Agreement, of which $5.3 million was attributable to the term loans and recorded as a direct reduction to the face amount of the term loans, and $3.4 million was allocated to the revolving line of credit and recorded as a separate asset on the balance sheet.

Debt issuance costs and debt discount related to term loans were amortized to interest expense based on the effective interest rate method over the life of the term loans.

The Company incurred $ 8.7 million debt issuance costs upon entering into the Amended Credit Agreement, of which $ 5.3 million was attributable to the term loans and recorded as a direct reduction to the face amount of the term loans, and $ 3.4 million was allocated to the revolving line of credit and recorded as a separate asset on the balance sheet.

Debt issuance costs and debt discount related to term loans are being amortized to interest expense based on the effective interest rate method over the life of the term loans.

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

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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 income (expense), net of $6.6 million.

As of May 29, 2020 and August 30, 2019, the outstanding principal balance of all term loans under the Amended Cred it 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 .

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 November 27, 2020 and August 28, 2020, the outstanding principal balance of all term loans under the Amended Credit Agreement was $ 0 and there were no outstanding revolving loans.

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

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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 which relates to costs from replacing one of the banks participating in the new credit agreement.

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

ABL Credit Agreement

On December 23, 2020, subsequent to the date of the balance sheet, SMART Modular, SMART EC, Penguin (Penguin together with SMART Modular and SMART EC, collectively the ABL Borrowers), certain other U.S.

subsidiaries of the Company party thereto as guarantors (such other U.S.

subsidiaries, together with the Borrowers, collectively the ABL Loan Parties) entered into a Loan, Guaranty and Security Agreement (the ABL Credit Agreement) with the financial institutions party to the ABL Credit Agreement from time to time as lenders (the ABL Lenders), and Bank of America, N.A., as administrative agent for the ABL Lenders.

The ABL Credit Agreement provides for a senior secured asset-based revolving credit facility in an aggregate principal amount of up to $ 100 million.

The ABL Borrowers have the option to increase the total commitments under the ABL Credit Agreement to $ 150 million, subject to certain conditions, including obtaining commitments from one or more lenders.

The ABL Credit Agreement provides that up to $ 30 million of revolving credit facility is available for issuances of letters of credit, and allows for swingline loans in an amount not to exceed $ 15 million.

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

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

The applicable margin is (i) 1.75 % per annum with respect to LIBOR borrowings, and 0.75 % per annum with respect to base rate borrowings when average daily Availability, as defined in the ABL Credit Agreement, is equal to or greater than $ 50 million, (ii) 2.00 % per annum with respect to LIBOR borrowings, and 1.00 % per annum with respect to base rate borrowings when average daily Availability is less than $ 50 million and greater than or equal to $ 35 million, and (iii) 2.25 % per annum with respect to LIBOR borrowings, and 1.25 % per annum with respect to base rate borrowings when average daily Availability is less than $ 35 million.

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

The ABL Borrowers are not required to make any scheduled amortization payments.

The principal amount outstanding under the ABL Credit Agreement will be due and payable in full and the Commitments available thereunder shall terminate, on December 23, 2023 .

The ABL Credit Agreement contains customary affirmative and negative covenants and restrictions typical for a financing of this nature that, among other things, restrict the ABL Loan Parties’ ability to incur additional debt, pay dividends and make distributions, make certain investments and acquisitions, enter into certain transactions, repurchase its stock and prepay certain indebtedness, create liens, enter into agreements with affiliates, and transfer and sell material assets and merge or consolidate.

In the event that certain minimum availability thresholds are not met on the last day of any period of four fiscal quarters, the ABL Borrowers will be required to maintain (i) a minimum Borrower Fixed Charge Coverage Ratio (as defined in the ABL Credit Agreement) of not less than 1.0 to 1.0, and (ii) a minimum Global Fixed Charge Coverage Ratio (as defined in the ABL Credit Agreement) of not less than 1.0 to 1.0, in each case, as of such last day of any period of four fiscal quarters.

Subject to the Intercreditor Agreement (as defined below), non-compliance with one or more of the covenants and restrictions could result in the full or partial principal balance of the ABL Credit Agreement becoming immediately due and payable and termination of the commitments available thereunder.

The ABL Credit Agreement is jointly and severally guaranteed on a senior basis by the ABL Loan Parties.

In addition, the ABL Credit Agreement is secured by a pledge of the capital stock of, or equity interests in, the ABL Loan Parties and by substantially all of the assets of the ABL Loan Parties subject to customary exceptions.

In connection with the ABL Credit Agreement, the ABL Loan Parties entered into a customary intercreditor agreement (the Intercreditor Agreement) in relation to the Third Amended and Restated Credit Agreement which Intercreditor Agreement governs how the collateral securing the respective obligations under the ABL Credit Agreement and the Third Amended and Restated Credit Agreement will be treated among the secured parties.

Pursuant to the ABL Credit Agreement and Intercreditor Agreement, the obligations under the ABL Credit Agreement are secured by (1) a first-priority security interest, subject to certain customary exceptions, in assets held by the ABL Loan Parties consisting of accounts receivable, inventory and intangible assets to the extent attached to the foregoing, books and records related to the foregoing and the proceeds thereof, and (2) a second-priority security interest, subject to certain customary exceptions, in substantially all other present and future tangible and intangible assets held by the ABL Loan Parties and proceeds of the foregoing;

and the obligations under the Third Amended and Restated Credit Agreement are secured by (1) a second-priority security interest, subject to certain customary exceptions, in assets held by the ABL Loan Parties consisting of accounts receivable, inventory and intangible assets to the extent attached to the foregoing, books and records related to the foregoing and the proceeds thereof, and (2) a first-priority security interest in, subject to certain customary exceptions, substantially all other present and future tangible and intangible assets held by the Loan Parties and proceeds of the foregoing.

FINEP Credit Agreement

In December 2020, subsequent to the date of the balance sheet, SMART Brazil entered into a credit facility with the Funding Authority for Studies and Projects, or FINEP, referred to as the FINEP Credit Agreement.

FINEP is an organization of the Brazilian federal government under the Ministry of Science, Technology and Innovation, devoted to funding science and technology in the country.

Under the FINEP Credit Agreement, a total of R$ 102.2 million (or $ 19.2 million) has been made available to SMART Brazil for investments in technology innovation projects that will be used in infrastructure and research and development conducted in Brazil as well as for acquisitions of equipment.

Outstanding debt under the FINEP Credit Agreement accrues interest at a fixed rate of 2.8 % per annum and the agreement includes an obligation to draw down the entire loan within specified periods of time or pay unused commitment fees of 0.1 % per month.

The agreement also includes an initial administration fee of 1.09 %, which is deducted from each advance of funds under the loan agreement.

The FINEP Credit Agreement is a term loan payable interest only for the first 18 months then fully amortizing in 67 equal monthly installments of principal and interest beginning in August 2022 with the final payment of principal and all accrued and unpaid interest being due in January 2028 .

Banco Votorantim S.A.

and Banco Alfa de Investimento S.A.

each guarantee 49% and 51% respectively of SMART Brazil’s obligations under the FINEP Credit Agreement which guarantees are backed by unsecured loan agreements with SMART Brazil and SMART do Brazil.

The guarantees to FINEP need to be renewed annually.

Banco Alfa de Investimento S.A.

and Banco Votorantim S.A charge 1.3% and 1.7%, respectively per annum, on the aggregate of the total outstanding principal balance plus any amount remaining available to be borrowed under the FINEP Credit Agreement, plus commissions, administrative fees, interest and contractual penalties.

While the FINEP Credit Agreement does not include any financial covenants, it contains affirmative and negative covenants customary for loans of this nature, including, among other things, an obligation to comply with all laws and regulations;

a right for FINEP to terminate the loan in the event of a change of effective control;

and an obligation to inform FINEP about any filing of registration of intellectual property rights before the Brazilian Patent and Trademark Office, or INPI, that may result from usage of the funds, among others.

The first advance in the amount of R$ 60.7 million (or $ 10.5 million) was received on December 30, 2020.

BNDES Credit Agreements

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Under the BNDES 2013 Credit Agreement, a total of R$ 50.6 million (or $ 9.7 million) was made available to SMART Brazil for investments in infrastructure, research and development conducted in Brazil and acquisitions of equipment not otherwise available in the Brazilian domestic market.

SMART Brazil’s obligations under the BNDES 2013 Credit Agreement were guaranteed by Banco Itaú BBA S.A., or Itaú Bank, which guarantee was in turn secured by a guarantee from SMART Brazil and SMART do Brazil in favor of Itaú Bank 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.

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

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

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

As of May 29, 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.

The BNDES 2013 Credit Agree ment and the BNDES 2014 Credit Agreement are collectively referred to as the BNDES Credit Agreements.

Under the BNDES 2014 Credit Agreement, a total of R$52.8 million (or $ 9.7 million) was made available to SMART Brazil for research and development conduct ed in Brazil related to integrated circuit (IC) packaging and for acquisitions of equipment not otherwise available in the Brazilian domestic market.

Prior to July 2018, SMART Brazil’s obligations under the BNDES 2014 Credit Agreement was also guaranteed by Itaú Bank, which guarantee was in turn secured by a guarantee from SMART Brazil and SMART do Brazil in favor of Itaú Bank and a commitment by SMART Brazil to maintain minimum cash balances with Itaú Bank equal to 30.31% of the maximum aggregate balance of principal, interest and fees outstanding under the BNDES 2014 Credit Agreement, or approximately R$16.0 million (or $4.3 million) of required cash balances.

In July 2018, SMART Brazil entered into guarantee arrangements with Banco Votorantim S.A.

which bank in turn replaced the guarantees of the BNDES Credit Agreements previously issued by Itaú Bank.

As a result, the guarantees with Itaú Bank were cancelled and Itaú Bank returned R$22.0 million (or $5.9 million) of committed balances to SMART Brazil in the first quarter of fiscal 2019.

As such, the Company no longer has any restricted cash on its condensed consolidated balance sheets as of February 28, 2020.

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 May 29, 2020 and August 30, 2019, SMART Brazil’s outstanding debt under the BNDES 2014 Credit Agreement was R$3.3 million (or $0.6 million) and R$13.2 million (or $3.5 million), respectively.

While the BNDES Credit 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;

The BNDES 2013 Credit Agreement and the BNDES 2014 Credit Agreement are collectively referred to as the BNDES Agreements.

Under the BNDES 2014 Credit Agreement, a total of R$ 52.8 million (or $ 10.1 million) was made available to SMART Brazil for research and development conducted in Brazil related to integrated circuit (IC) packaging and for acquisitions of equipment not otherwise available in the Brazilian domestic market.

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

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

As of November 27, 2020 and August 28, 2020, SMART Brazil had no outstanding debt under both the BNDES 2013 and 2014 Credit Agreements.

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

a right for BNDES to terminate the loan in the event of a change of effective control;

and a prohibition against the disposition or encumbrance, without BNDES consent, of intellectual property developed with the funds from the loans.

The BNDES 2013 Credit Agreement included an obligation to draw down the entire loan within specified periods of time or pay unused commitment fees of 0.1%.

The BNDES 2013 Credit Agreement included an obligation to draw down the entire loan within specified periods of time or pay unused commitment fees of 0.1 % which unused commitment fees are no longer in effect.

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

The fair value of amounts outstanding under the BNDES Credit Agreements as of May 29, 2020 and August 30, 2019 were estimated to be approximately $0.6 million 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 Convertible Senior Notes, due 2026, Amended Credit Agreement and the BNDES 2014 Agreement are classified as follows in the accompanying consolidating balance sheets (in thousands):

BNDES 2014 principal balance

Unamortized debt discount

Unamortized debt issuance costs

Current portion of long-term debt

Long-term debt

The future minimum principal payments under the Notes and the BNDES 2014 Agreement as of May 29, 2020 are (in thousands):

Fiscal year ending August:

Remainder of fiscal 2020

Financial Instruments

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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 Notes, term loans under the Amended Credit Agreement, BNDES Credit Agreements and derivative financial instruments.

The Company’s Level 2 assets and liabilities include 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 assets and liabilities include the contingent consideration related to the SMART EC acquisition (see Note 2), which had a fair value of $0 as of May 29, 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):

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Inputs (Level 3)

Balances as of May 29, 2020:

Balances as of November 27, 2020:

Cash and cash equivalents

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Total assets measured at fair value

Derivative financial instruments (3)

BNDES Credit Agreements (4)

Total liabilities measured at fair value

Balances as of August 28, 2020:

Cash and cash equivalents

Derivative financial instruments (1)

Total assets measured at fair value

BNDES Credit Agreement (4)

Derivative financial instruments (2)

Acquisition-related contingent consideration

Total liabilities measured at fair value

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

Included under long-term debt on the Company's condensed consolidated balance sheets - see Note 7.

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

Included in current portion of long-term debt on the Company’s condensed consolidated balance sheets – see Note 7.

Share-Based Compensation and Employee Benefit Plans

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Options granted after August 26, 2011 and before September 23, 2014 have an eight year term.

As of May 29, 2020, there were 4,753,443 ordinary shares reserved for issuance under the SGH Plan, of which 1,472,199 ordinary shares were available for grant.

As of November 27, 2020, there were 5,173,251 ordinary shares reserved for issuance under the SGH Plan, of which 1,394,395 ordinary shares were available for grant.

As of August 28, 2020, there were 4,545,631 ordinary shares reserved for issuance under the SGH Plan, of which 1,432,721 ordinary shares were available for grant.

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

The expected volati lity 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 conside ration to vesting schedules and the historical exercise patterns.

The expected volatility is based on the historical volatilities of the common stock of comparable publicly traded companies.

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

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

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Three Months Ended

Nine Months Ended

Stock options:

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Expected volatility

46.10% - 57.10%

41.68% - 45.76%

Risk-free interest rate

0.40% - 1.68%

2.62% - 2.88%

Expected dividends

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Options cancelled

Options outstanding at May 29, 2020

Options exercisable at May 29, 2020

Options vested and expected to vest at May 29, 2020

Options outstanding at November 27, 2020

Options exercisable at November 27, 2020

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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The exercisability of Market-Based Options will depend upon the 30 -trading day rolling average closing price of Company’s ordinary shares.

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

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 was determined by using a Monte Carlo valuation model, using the following assumptions:

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

One of the performance-based stock options was cancelled in November 2019, resulting in an additional $ 2.0 million share-based compensation expense recorded in the first quarter of fiscal 2020.

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 Black-Scholes weighted average fair value of options granted under the SGH Plan during the three and nine months ended May 29, 2020 was $9.76 and $9.89 per share, respectively, and $0 and $9.83 per share, respectively for the corresponding periods of fiscal 2019.

The total intrinsic value of employee stock options exercised in the three and nine months ended May 29, 2020 was $0.1 million and $2.6 million, respectively, and $0.3 million and $6.1 million, respectively for the corresponding periods of fiscal 2019.

As of May 29, 2020, there was approximately $13.1 million of unrecognized compensation costs related to stock options under the SGH Plan, which will be recognized over a weighted average period of 2.36 years.

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

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

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

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

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

The Black-Scholes weighted average fair value of options granted under the SGH Plan during the three months ended November 27, 2020 and November 29, 2019 was $ 13.30 and $ 11.85 per share, respectively.

The total intrinsic value of employee stock options exercised in the three months ended November 27, 2020 and November 29, 2019 was $ 0.4 million and $ 1.3 million, respectively.

As of November 27, 2020, there was approximately $ 11.7 million of unrecognized compensation costs related to stock options under the SGH Plan, which will be recognized over a weighted average period of 2.14 years.

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

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

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Awards granted

Awards vested and paid out

Awards vested and released

Awards forfeited and cancelled

Awards outstanding at May 29, 2020

Awards outstanding at November 27, 2020

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

As of May 29, 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 $0.1 million of share-based compensation expense recognized for this award in the three and nine months ended May 29, 2020.

In October 2020, the Company modified this RSA, as well as another time-based RSA, to immediately vest and release;

this resulted in an additional $ 5.8 million share-based compensation expense in the three months ended November 27, 2020.

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

As of November 29, 2019, the Company deemed it probable that the service condition would be met, however, since the attainment of the performance condition for this award changed to not probable, there was $ 0.8 million of share-based compensation expense reversed for this award in the three months ended November 29, 2019.

The share-based compensation expense related to RSAs, RSUs and PSUs during the three and nine months ended May 29, 2020 was approximately $2.9 million and $7.3 million, respectively, and $1.8 million and $4.9 million, respectively for the corresponding periods of fiscal 2019.

The total fair value of shares vested during the three and nine months ended May 29, 2020 was approximately $1.5 million and $7.4 million, respectively, and $1.2 million and $4.5 million, respectively, for the corresponding periods of fiscal 2019.

As of May 29, 2020, there was approximately $30.9 million of unrecognized compensation costs related to awards under the SGH Plan, which will be recognized over a weighted average period of 2.66 years.

Employee Share Purchase Plan

The share-based compensation expense related to RSAs, RSUs and PSUs during the three months ended November 27, 2020 and November 29, 2019 was approximately $ 9.0 million and $ 1.9 million, respectively.

The total fair value of shares vested during the three months ended November 27, 2020 and November 29, 2019 was approximately $ 8.4 million and $ 2.1 million, respectively.

As of November 27, 2020 , there was approximately $ 30.8 million of unrecognized compensation costs related to awards under the SGH Plan, which will be recognized over a weighted average period of 2.75 years.

Employee Stock Purchase Plan

In January 2018, the Company’s shareholders approved the SGH 2018 Employee Share Purchase Plan (the Purchase Plan) under which an aggregate of 650,000 of ordinary shares have been approved for issuance to eligible employees.

The Purchase Plan generally permits employees to purchase ordinary shares at 85% of the lower of the fair market value of the ordinary shares at the beginning or at the end of each purchase period, which is generally six months.

The Purchase Plan generally permits employees to purchase ordinary shares at 85 % of the lower of the fair market value of the ordinary shares at the beginning of the offering period or at the end of purchase period, which is generally six months.

Rights to purchase ordinary shares are granted during the first and third quarter of each fiscal year.

The Purchase Plan terminates in January 2028 .

As of May 29, 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 November 27, 2020, 353,334 ordinary shares have been purchased under the Purchase Plan and 896,666 ordinary shares are reserved for future purchases by eligible employees.

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

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The Company may also make discretionary matching contributions, which vest immediately, as periodically determined by management.

The matching contributions made by the Company during the three and nine months ended May 29, 2020 were approximately $0.7 million and $1.8 million, respectively, and $0.6 million and $1.4 million, respectively for the corresponding periods of fiscal 2019.

The matching contributions made by the Company during the three months ended November 27, 2020 and November 29, 2019 were approximately $ 0.7 million and $ 0.4 million, respectively.

Commitments and Contingencies

Minimum rent payments under operating leases are recognized on a straight-line basis over the term of the lease including any periods of free rent.

Rent expense for operating leases during the three and nine months ended May 29, 2020 was $2.1 million and $5.8 million, respectively, and $1.2 million and $3.5 million, respectively, for the corresponding periods of fiscal 2019.

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

Fiscal year ending August:

Refer to Note 5 for related fiscal 2020 information on leases.

Product Warranty and Indemnities

Rent expense for operating leases during the three months ended November 27, 2020 and November 29, 2019 was $ 1.9 million and $ 1.8 million, respectively.

(b) Product Warranty and Indemnities

Product warranty reserves are established in the same period that revenue from the sale of the related products is recognized, or in the period that a specific issue arises as to the functionality of a Company’s product.

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Three Months Ended

Nine Months Ended

Beginning accrued warranty reserve

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

In addition to potential liability for warranties related to defective products, the Company currently has in effect a number of agreements in which it has agreed to defend, indemnify and hold harmless its customers and suppliers from damages and costs, which may arise from product defects as well as from any alleged infringement by its products on third-party patents, trademarks or other proprietary rights.

In addition to potential liability for warranties related to defective products, the Company currently has in effect a number of agreements in which it has agreed to defend, indemnify and hold harmless its customers and suppliers from damages and costs, which may arise from product defects as well as from any alleged infringement by its products of third-party patents, trademarks or other proprietary rights.

The Company believes its internal development processes and other policies and practices limit its exposure related to such indemnities.

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(Netlist) against SanDisk alleging that certain products sold in the Sale infringe various Netlist patents, which SanDisk in turn alleges would, if true, constitute a breach of representations and warranties under the Sale Agreement.

Under the Sale Agreement, the Company’s indemnification obligation in respect of intellectual property matters, such as those claimed by SanDisk, is subject to a deductible of approximately $1.8 million and a cap of $60.9 million.

Under the Sale Agreement, the Company’s

indemnification obligation in respect of intellectual property matters, such as those claimed by SanDisk, is subject to a deductible of approximately $ 1.8 million and a cap of $ 60.9 million.

As required in the Sale Agreement, the SanDisk claim purported to include a preliminary good faith estimate of SanDisk’s alleged indemnifiable losses, which estimate was greater than the Sale Agreement cap for intellectual property matters.

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

In November 2020, Western Digital made a request for reimbursement of legal fees in connection with this matter.

The Company believes that this request is without merit.

Contingencies

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The Third Assessment does not seek import duties and related taxes on Dynamic Random Access Memory (DRAM) products and only seeks import duties and related taxes on Flash unmounted components with respect to the months of January 2012 to June 2012.

This is because SMART Brazil’s imports of DRAM unmounted components were subject to 0%, and, after June 2012, SMART Brazil’s imports of Flash unmounted components also became subject to 0% import duties and related taxes, both as a result of PADIS.

This is because SMART Brazil’s imports of DRAM unmounted components were subject to 0 %, and, after June 2012, SMART Brazil’s imports of Flash unmounted components became subject to 0 % import duties and related taxes, both as a result of PADIS.

Even with this 0%, if SMART Brazil is found to have used the incorrect product classification code, SMART Brazil will be subject to an administrative penalty equal to 1 % of the value of the imports.

SMART Brazil 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 decisions in favor of SMART Brazil on the First Assessment and the Second Assessment were published.

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 May 29, 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 these disputed assessments to have a material impact on its consolidated financial position, results of operations or cash flows.

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 $ 1.0 million) as of November 27, 2020.

As a result of the CARF decisions in favor of SMART Brazil on the First Assessment and the Second Assessment, as well as the basis given by the tax authorities in favorable ruling on the Third Assessment, the Company believes that the probability of any material charges as a result of the Third Assessment is remote and the Company does not expect the resolution of this disputed assessment to have a material impact on its condensed consolidated financial position, results of operations or cash flows.

While the Company believes that the Third Assessment is incorrect, there can be no assurance that SMART Brazil will prevail in the disputes.

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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.

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

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

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

The 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 three and nine months ended, are not material to the financial statements (dollars in thousands):

Three Months Ended

Nine Months Ended

Adjusted Gross

Adjusted Gross Profit and Adjusted Gross Margin excludes share-based compensation (see Note 1(s)), intangible amortization (see Note 1(l)) and corporate expenses ($0.1 million and $0.2 million, respectively).

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

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

Three Months Ended

Nine Months Ended

Adjusted Gross

Adjusted Gross Profit and Adjusted Gross Margin excludes share-based compensation (see Note 1(s)) and intangible amortization (see Note 1(l) and corporate expenses ($0.2 million and $0.2 million, respectively).

A summary of the Company’s net sales by geographic area, based on the ship-t o location of the customer, property and equipment by geographic area is as follows (in thousands):

November 27, 2020

November 29, 2019

Adjusted Gross Profit

Adjusted Gross Margin

Adjusted Gross Profit and Adjusted Gross Margin excludes share-based compensation (see Note 1(q)), intangible amortization (see Note 1(l)) and corporate expenses ($ 17 thousand and $ 45 thousand, for the three months ended November 27, 2020 and November 29, 2019, respectively).

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

Three Months Ended

Nine Months Ended

Geographic Net Sales:

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Three Months Ended

Nine Months Ended

November 27, 2020

November 29, 2019

Customer A (1)

Customer B (2)

Customer C (1)

Customer D (2)

Customer E (2)

Brazil Products customer

Specialty Memory Products customer

As of May 29, 2020, two direct customers that represented less than 10% of net sales, Customers F and G, accounted for approximately 18% and 10% 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 12%, 15% and 15% of accounts receivable, respectively.

As of November 27, 2020, three direct customer represented less than 10% of net sales, Customer B, C and D, accounted for approximately 14 %, 12 % and 12 % of accounts receivable, respectively.

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

Earnings Per Share

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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 t he Company has the intent and ability to settle the aggregate principal amount of the Notes plus any in 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 c onversion 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 t he 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 averag e market price of the Company’s ordinary shares for a given period exceeds the conversion price of $40.61 per share for the Notes.

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.

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Three Months Ended

Nine Months Ended

Net income (loss)

Weighted average shares outstanding:

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Other Income (Expense), Net

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

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

Three Months Ended

Nine Months Ended

Foreign currency gains (losses)

Loss on capped call mark-to-market adjustment

Loss on early extinguishment of debt/revolver

Total other income (expense), net

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-Q

Item 1. Financial Statements