What changed in this filing

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Item 1. Financial Statements

2021-07-06 compared with 2021-04-06 · 417 added, 298 removed, 909 unchanged (44% of the section changed)

3 unchanged sentences

Condensed Consolidated Balance Sheets

(In thousands, except per share data)

(In thousands, except par value)

Current assets:

Cash and cash equivalents

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

Accounts receivable, net of allowances of $ 622 and $ 101 as of May 28, 2021

and August 28, 2020, respectively

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Accounts payable

Accrued liabilities

Other current liabilities

Total current liabilities

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Authorized 200,000 shares;

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

issued and outstanding 24,238 and 24,419 as of May 28, 2021 and August 28, 2020, respectively

Additional paid-in capital

1 unchanged sentence

Retained earnings

Total shareholders’ equity

Total SGH shareholders’ equity

Noncontrolling interest in subsidiary

Total liabilities and shareholders’ equity

5 unchanged sentences

Three Months Ended

Six Months Ended

Nine Months Ended

Net sales (1)

3 unchanged sentences

Selling, general, and administrative

Change in estimated fair value of acquisition-related contingent consideration

Total operating expenses

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Net income (loss)

Net income attributable to noncontrolling interest

Net income (loss) attributable to SGH

Earnings per share:

Shares used in computing earnings per share:

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

Includes sales to affiliates of $ 20,103 and $ 53,251 in the three and nine months ended May 28, 2021 and $ 24,139 and $ 59,691 for the same periods ended May 29, 2020, respectively (see Note 3).

See accompanying notes to unaudited condensed consolidated financial statements.

4 unchanged sentences

Three Months Ended

Six Months Ended

Nine Months Ended

Net income (loss)

1 unchanged sentence

Foreign currency translation

Comprehensive income (loss)

Comprehensive loss

Comprehensive income attributable to noncontrolling interest

Comprehensive loss attributable to SGH

See accompanying notes to unaudited condensed consolidated financial statements.

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shareholders'

shareholders’

Balances as of August 30, 2019

1 unchanged sentence

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)

Withholding tax on restricted stock units (RSUs)

8 unchanged sentences

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

Ordinary shares

Non-controlling

comprehensive

shareholders'

shareholders’

Balances as of August 28, 2020

13 unchanged sentences

Balances as of February 26, 2021

Share-based compensation expense

Issuance of ordinary shares from exercises

Issuance of ordinary shares from release of RSUs

Issuance of ordinary shares from ESPP

Withholding tax on RSUs

Foreign currency translation

Acquisition of LED business

Net income (loss)

Balances as of May 28, 2021

See accompanying notes to unaudited condensed consolidated financial statements.

3 unchanged sentences

(In thousands)

Six Months Ended

Nine Months Ended

Cash flows from operating activities:

5 unchanged sentences

Deferred income tax benefit

(Gain) loss on disposal of property and equipment

Gain on disposal of property and equipment

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

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Amortization of operating lease right-of-use assets

Loss from mark-to-market adjustment of contingent consideration

Changes in operating assets and liabilities:

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Operating lease liabilities

Accrued expenses and other liabilities

Other current and long-term liabilities

Net cash provided by operating activities

2 unchanged sentences

Proceeds from sale of property and equipment

Acquisition of business, net of cash acquired

Net cash used in investing activities

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Payment for extinguishment of long-term debt

Net cash provided by (used in) financing activities

Net cash provided by financing activities

Effect of exchange rate changes on cash and cash equivalents

Net increase (decrease) in cash and cash equivalents

Net increase in cash and cash equivalents

Cash and cash equivalents at beginning of period

5 unchanged sentences

Noncash activities information:

Fair value of non-cash consideration for acquisition of business (see Note 2)

Capital expenditures included in accounts payable at period end

5 unchanged sentences

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.

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

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

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

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

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

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

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

The Company operates in three segments:

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

SMART Global Holdings businesses are leading designers and manufacturers of electronics for computing, memory and specialty LED solutions.

The Company specializes in application-specific product development and support for customers in enterprise, government, original equipment manufacturer (“OEM”) and other distribution and sales channels.

Customers rely on SMART as a strategic partner with high performing technology products, customer service, technical support and worldwide supply chain and logistics excellence.

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

The Company operates in four segments:

Specialty Memory Products (“Specialty”), Brazil Products (“Brazil”), Intelligent Platform Solutions (“IPS”), formerly Specialty Compute and Storage Solutions (“SCSS”), and LED Solutions (“LED”).

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

headquarters in Newark, California.

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

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

Basis of Presentation

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

The three and six months ended February 26, 2021 and February 28, 2020 were both 13-week and 26-week fiscal periods, respectively.

The three and nine months ended May 28, 2021 and May 29, 2020 were both 13-week and 39-week fiscal periods, respectively.

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

generally accepted accounting principles (“U.S.

GAAP) and in conformity with the rules and regulations of the Securities and Exchange Commission (SEC) applicable to interim financial information.

GAAP”) and in conformity with the rules and regulations of the Securities and Exchange Commission (the “SEC”) applicable to interim financial information.

As such, certain information and footnote disclosures normally included in complete annual financial statements prepared in accordance with U.S.

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Actual results could differ from the estimates made by management.

Significant items subject to such estimates and assumptions include the evaluation of the fair value of the Company's reporting units (as part of the Company’s goodwill impairment), accounting for the allocation of convertible debt between equity and debt, the useful lives of long-lived assets, the valuation of deferred tax assets, inventory, share-based compensation, the estimated net realizable value of Brazilian tax and financial credits, income tax uncertainties and other contingencies.

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 analysis), valuation and allocation of purchase price in connection with business acquisitions, accounting for the allocation of convertible debt between equity and debt, estimates of variable consideration, the useful lives of long-lived assets, the valuation of deferred tax assets, inventory,

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

The Company’s revenues include products and services.

The Company’s product revenues are predominantly derived from the sale of memory modules, flash memory cards, compute products and storage products, which the Company designs and manufactures.

The Company’s product revenues are predominantly derived from the sale of memory modules, flash memory cards, compute products, storage products and LED products (the latter as a result of our acquisition of CreeLED, Inc.

as discussed in Note 2), which the Company designs and manufactures.

The Company’s service revenues are derived from procurement, logistics, inventory management, temporary warehousing, kitting and packaging services.

Also, a small portion of the Company’s product sales include extended warranty and on-site services, subscriptions to the Company’s high performance computing environment, professional services, software and related support.

In addition, a small portion of the Company’s product sales include extended warranty and on-site services, subscriptions to the Company’s high performance computing environment, professional services, software and related support.

The Company determines revenue recognition through the following steps:

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and (5) recognition of revenue when, or as, a performance obligation is satisfied.

The Company’s contracts are executed through a combination of written agreements along with purchase orders with all customers including certain general terms and conditions.

The Company’s contracts are executed through a combination of written agreements along with purchase orders with customers, including certain general terms and conditions.

Generally, purchase orders entail products, quantities and prices, which define the performance obligations of each party and are approved and accepted by the Company.

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Payment terms vary by contract type and type of customer and generally range from 30 to 45 days from invoice.

Additionally, taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction, that are collected by the Company from a customer and deposited with the relevant government authority, are excluded from revenue.

Additionally, taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction, and that are collected by the Company from a customer and deposited with the relevant government authority, are excluded from revenue.

The transaction price is determined based on the consideration to which the Company will be entitled in exchange for transferring goods or services to the customer adjusted for estimated variable consideration.

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The standalone selling price for products primarily involves the cost to produce the deliverable plus the anticipated margin and for services is estimated based on the Company’s approved list price.

In the normal course of business, the Company does not accept product returns unless the items are defective as manufactured.

In the normal course of business, except as noted under LED products below, the Company does not accept product returns unless the items are defective as manufactured, nor does it typically provide customers with the right to a refund.

The Company establishes provisions for estimated returns and warranties.

In addition, the Company does not typically provide customers with the right to a refund and does not transact for noncash consideration.

In addition, the Company does not typically transact for noncash consideration.

Standard Products

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Customized Products

For customized product sales with terms that require the customer to purchase 100 % of all parts built to fulfill the customers forecast, the Company recognizes revenue when control of the underlying assets passes to the customer, as the customer is able to both direct the use of, and obtain substantially all of the remaining benefit from the assets;

For customized product sales with terms that require the customer to purchase 100 % of all parts built to fulfill the customers forecast, the Company recognizes revenue when control of the underlying assets transfers to the customer, as the customer is able to both direct the use of, and obtain substantially all of the remaining benefit from the assets;

the customer has the significant risks and rewards associated with ownership of the assets;

and the Company has a present right to payment.

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

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

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

For these sales, control transfers 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 recognizes 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 (“NCNR”), customized product sales are recognized over time on a cost incurred basis.

The customer obtains control and benefits from the services as they are performed over the period based on the cost input measure in the production process for the NCNR customized product.

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Each contract may contain multiple performance obligations, which requires the transaction price to be allocated to each performance obligation.

The Company allocates the consideration to each performance obligation based on the relative selling price.

The Company allocates the consideration to each performance obligation based

on the relative selling price.

The Company uses best-estimated selling price, determined as the best estimate of the price at which the Company would transact if it sold the deliverable regularly on a stand-alone basis.

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

Extended warranty and on-site services, 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.

For services provided to customers over a period of time, revenue is recognized as the customer receives the benefit of the services.

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

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

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

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

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

Agency Services

1 unchanged sentence

The agency services are also known as supply chain services and the performance obligations for these services consist of customized, integrated supply chain services management to assist customers in the planning, execution and overall management of the procurement processes.

For these customers that are accounted for on an agency basis, the Company recognizes as revenue the amount billed less the material procurement costs of products serviced as an agent with the cost of providing these services embedded with the cost of sales.

For customers accounted for on an agency basis, the Company recognizes as revenue the amount billed less the material procurement costs of products serviced as an agent with the cost of providing these services embedded with the cost of sales.

The Company has separate agent performance obligations as follows:

(a) procurement, logistics, and inventory management, (b) temporary warehousing, and (c) kitting and packaging services for these customers.

Revenue from these arrangements is recognized as service revenue and is determined by a fee for services based on material procurement costs (i.e.

fee as a percentage of the associated material being procured, warehoused, kitted or packaged).

Revenue from these arrangements is recognized as service revenue and is determined by a fee for services based on material procurement costs (i.e., fee as a percentage of the associated material being procured, warehoused, kitted or packaged).

The Company recognizes revenue for procurement, logistics and inventory management upon the completion of the services or performance obligation, typically upon shipment of the product, as the criteria for over time recognition is not met.

1 unchanged sentence

There are no obligations subsequent to shipment of the product under the agency arrangements.

Distribution of Products

A substantial portion of the Company’s LED products are sold through distributors.

Distributors purchase the Company’s LED products and then resell to their own customer base, which may include value-added resellers, manufacturers who incorporate the Company’s LED products into their own manufactured goods or ultimate end users of the Company’s LED products.

The Company recognizes revenue upon shipment of its LED products to its distributors based on the amount of consideration to which the Company expects to be entitled to receive in exchange for LED products or services.

We generally offer price protection to our distributors, which is a form of variable consideration that decreases the transaction price.

Variable consideration is based on the expected value method, contractual terms, historical analysis of customer purchase volumes, or historical analysis using specific data for the type of consideration being assessed.

Variable consideration is recognized as a reduction of net revenue with a corresponding reserve at the time of revenue recognition.

Accordingly, estimates for these rights are recognized at the time of sale as a reduction of product revenue within other current liabilities in the accompanying condensed consolidated balance sheet.

Differences between the estimated and actual amounts are recognized as adjustments to revenue.

Contract Costs

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Three Months Ended

Six Months Ended

Nine Months Ended

Service revenue, net

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

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

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

Payment terms vary by customer.

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

Changes in the accounts receivable, contract assets and the deferred revenues balances during the six months ended February 26, 2021 are as follows (in thousands):

Accounts receivable

Changes in the contract assets and deferred revenue during the nine months ended May 28, 2021 are as follows (in thousands):

Contract assets

Deferred revenue

The decrease in contract assets from $ 5.1 million as of August 28, 2020 to $ 1.6 million as of February 26, 2021 was primarily driven by billing amounts previously recorded as contract assets as of August 28, 2020.

During the six months ended February 26, 2021, $ 11.0 million of revenue recognized was included in the deferred revenue balance at the beginning of the period, which was partially offset by additional deferrals during the period.

The decrease in contract assets from $ 5.1 million as of August 28, 2020 to $ 0.4 million as of May 28, 2021 was primarily driven by invoicing amounts previously recorded as contract assets as of August 28, 2020.

The increase in deferred revenue from $ 20.1 million to $ 21.0 million was due to greater deferred services billed during the period.

During the nine months ended May 28, 2021, $ 16.3 million of revenue recognized was included in contract liabilities balance as of August 28, 2020.

Disaggregation of Revenue

The Company disaggregates revenue by segment and geography.

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

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

Revenue Allocated to Remaining Performance Obligations

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The Company elected to apply the optional exemption practical expedient provided in ASC 606 and, therefore, is not required to disclose the aggregate amount of the transaction price allocated to those performance obligations that are unsatisfied or partially unsatisfied at the end of the reporting period.

Remaining performance obligations represent contracted revenue related to support services that have not yet been recognized.

Remaining performance obligations represent contracted revenue related to support services that have not yet been recognized and are therefore accounted for as deferred revenue .

The Company expects to recognize revenue on the remaining performance obligations as follows (in thousands) :

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Derivative Financial Instrument

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

The 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 other current liabilities, respectively, in the condensed consolidated balance sheets.

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

See Note 4 for further details.

Inventories are valued at the lower of actual cost or net realizable value.

Inventory value is determined on a specific identification basis for material and an allocation of labor and manufacturing overhead.

Inventories are valued at the lower of cost or net realizable value.

Under the LED segment, cost is determined on a first-in, first-out method or average cost method.

For all other segments, inventory value is determined on a specific identification basis for material and an allocation of labor and manufacturing overhead.

At each balance sheet date, the Company evaluates the ending inventories for excess quantities and obsolescence.

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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 1991, Brazil created Lei da Informática—Processo Produtivo Básico (“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.

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

For the three and six months ended February 26, 2021, the Company recognized financial credits under PADIS totaling $ 6.2 million and $ 14.0 million, respectively, and $ 0 for both of the corresponding periods of 2020, which are reported under research and development as a reduction of expense on the condensed consolidated statements of operations.

As of February 26, 2021, unused financial credits totaling R$ 110.4 million (or $ 20.2 million) are reported under prepaid expenses and other current assets, and are expected to be applied against future taxes.

Although PADIS participants were entitled to financial credits since April 2, 2020, the effective utilization of such credits depended on a federal decree ruling the amendments to PADIS, which was not enacted until February 1, 2021.

The Company obtained the recognition of the financial credits based on the R&D disbursements that were made from April 1, 2020 until December 31, 2020 on February 12, 2021.

Given that financial credits can be applied for by PADIS participants on a quarterly basis, the Company expects to report and obtain the recognition of the financial credits related to the R&D disbursements that were made in the first quarter of calendar 2021 in April 2021.

For the three and nine months ended May 28, 2021, the Company recognized financial credits under PADIS totaling $ 8.2 million and $ 22.2 million, respectively, and $ 0 for both of the corresponding periods of 2020, which are reported under research and development as a reduction of expense on the condensed consolidated statements of operations.

As of May 28, 2021, unused financial credits totaling R$ 108.1 million (or $ 20.0 million) are reported under prepaid expenses and other current assets and are expected to be applied against future taxes.

Although PADIS participants were entitled to financial credits since April 2, 2020, the effective utilization of such credits depended on a federal decree enacting the amendments to PADIS, which was not issued until February 1, 2021.

The Company obtained the recognition of the financial credits based on the research and development disbursements that were made from April 1, 2020 until December 31, 2020 on February 12, 2021 and from January 1, 2021 to March 31, 2021 on April 15, 2021.

Given that financial credits can be applied for by PADIS participants on a quarterly basis, the Company expects to report and obtain the recognition of the financial credits related to the research and development disbursements that were made in the second quarter of calendar 2021 in July 2021.

Prepaid State Value-Added Taxes (ICMS)

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

In January 2021, the Company purchased fixed assets for use in the Manufacturing process, but these were subsequently transferred out of the Manufacturing department to Research and Development, due to the delay of the uFS product process development.

In January 2021, the Company purchased fixed assets for use its manufacturing process, but these were subsequently transferred to be used in research and development, due to the delay of the uFS product process development.

The production and sales of this product is now expected to commence in fiscal 2022.

This transaction resulted in the reversal of R$ 8.4 million (or $ 1.6 million) of the ICMS credits.

As a result, as of February 26, 2021, the total ICMS tax credits reported on the Company’s accompanying condensed consolidated balance sheet are R$ 12.5 million (or $ 2.3 million) are fully vested ICMS credits, classified as other noncurrent assets.

In April 2021, due to needs in the production process, the equipment returned to the manufacturing area and, consequently, the Company regained the right to the ICMS credits, in the same amount reversed in January 2021, that is, R$ 8.4 million (or $ 1.6 million).

As a result, as of May 28, 2021, the total ICMS tax credits reported on the Company’s accompanying condensed consolidated balance sheet are R$ 16.7 million (or $ 3.1 million) are fully vested ICMS credits, classified as other noncurrent assets.

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

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Due to the reversal of part of the ICMS in January 2021, there was a reduction of R$ 2.5 million (or $ 0.5 million) in the calculated discount amount.

In the third quarter of fiscal 2021, the Company reassessed the discount rate to 36 %, resulting in a charge of R$ 2.4 million (or $ 0.4 million).

In the first quarter of fiscal 2019, the Company sold R$ 17.7 million (or $ 3.3 million) of its ICMS credits that had been approved to be sold in December 2017.

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During the second quarter of fiscal 2021, the Company recorded an out-of-period adjustment to correct errors originating in previous periods related to understated import tax costs, which resulted in a $ 4.3 million increase in cost of sales and $ 0.8 million increase in interest expense, net.

The tax impact of $ 1.7 million benefit for income taxes related to this adjustment is reflected in the Company’s annual effective tax rate for fiscal year ended August 27, 2021.

The adjustment was not considered material to these interim financial statements for the three and six months ended February 26, 2021 nor to any previously issued interim or annual consolidated financial statements.

The tax impact of the $ 1.7 million benefit for income taxes related to this adjustment will be reflected in the Company’s annual effective tax rate for fiscal year ending August 27, 2021.

The adjustment was not considered material to the interim financial statements for the nine months ended May 28, 2021 nor to any previously issued interim or annual consolidated financial statements.

Property and Equipment

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Manufacturing equipment

Buildings and building improvements

5 to 40 years

Office furniture, software, computers and equipment

Leasehold improvements*

2 to 60 years

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

Shorter of estimated useful life or lease term

Includes the land leases for the Penang facility with a term expiring in 2070 and 2 parcels in Huizhou with terms expiring in 2057 and 2082 .

The Company performs a goodwill impairment test annually during the fourth quarter of its fiscal year and more frequently if events or circumstances indicate that impairment may have occurred.

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

There were no events which required additional impairment in the six months ended February 26, 2021.

There were no events which required impairment analysis in the nine months ended May 28, 2021.

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

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

No impairment of goodwill was recognized through February 26, 2021.

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

No impairment of goodwill was recognized through May 28, 2021.

The changes in the carrying amount of goodwill during the nine months ended May 28, 2021 and fiscal 2020 are as follows (in thousands):

Balance as of August 30, 2019

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Translation adjustments

Balance as of February 26, 2021

Balance as of May 28, 2021

Intangible Assets, Net

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

February 26, 2021

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

August 28, 2020

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Three Months Ended

Six Months Ended

Nine Months Ended

Amortization of intangible assets classification

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

No impairment of long-lived assets was recognized during the six months ended February 26, 2021 and February 28, 2020.

No impairment of long-lived assets was recognized during the three and nine months ended May 28, 2021 and May 29, 2020.

Research and Development Expense

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dollars using the historical exchange rate for property and equipment and certain other nonmonetary assets and liabilities and related depreciation and amortization on these assets and liabilities.

The Company uses the exchange rate at the

balance sheet date for the remaining assets and liabilities, including deferred taxes.

The Company uses the exchange rate at the balance sheet date for the remaining assets and liabilities, including deferred taxes.

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

2 unchanged sentences

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

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

During the three and nine months ended May 28, 2021 the Company recorded $ 1.0 million and $ 1.2 million, respectively, and $ 0.5 million and $ 2.6 million, respectively for the corresponding periods of 2020, of foreign exchange losses primarily related to its Brazilian operating subsidiaries.

Share-Based Compensation

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Three Months Ended

Six Months Ended

Nine Months Ended

Share-based compensation expense by category

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

At February 26, 2021 and August 28, 2020, the Company owed these four suppliers $ 148.7 million and $ 139.5 million, respectively, which was recorded as accounts payable and accrued liabilities.

The inventory purchases from these suppliers during the three and six months ended February 26, 2021 were $ 0.3 billion and $0.5 billion, respectively, and $ 0.2 billion and $ 0.5 billion, respectively for the corresponding periods of fiscal 2020.

At May 28, 2021 and August 28, 2020, the Company owed these four suppliers $ 180.2 million and $ 139.5 million, respectively, which was recorded as accounts payable and other current liabilities.

The inventory purchases from these suppliers during the three and nine months ended May 28, 2021 were $ 0.4 billion and $ 0.9 billion, respectively, and $ 0.3 billion and $ 0.7 billion, respectively for the corresponding periods of fiscal 2020.

New Accounting Pronouncements

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

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

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.

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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 af ter December 15, 2020.

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

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

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

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

The Company is currently evaluating the impact of ASU 2020-06 on its condensed consolidated financial statements in addition to whether it would early adopt this accounting standard as permitted in fiscal 2022.

In December 2019, the FASB issued ASU No.

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

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

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

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In February 2016, the FASB issued ASU No.

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

other things.

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

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

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

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

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

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Restructuring Charge

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

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

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

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

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

As of February 26, 2021, $ 0.4 million of contract termination costs have yet to be paid.

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

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

During the fourth quarter of 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 May 28, 2021, the contract termination costs have been paid.

The Company does not expect additional costs to be incurred in connection with these restructuring efforts.

Business Acquisitions

Fiscal Year 2021

CreeLED, Inc.

(SGH-CreeLED)

On March 1, 2021, pursuant to the previously announced Asset Purchase Agreement (the “APA”), dated October 18, 2020 , as amended by the Amendment to Asset Purchase Agreement dated March 1, 2021 (the “Amendment”;

and together with the APA, the “Purchase Agreement”) between Cree, Inc.

(“Cree”), SMART Global Holdings, Inc., a Cayman Islands exempted company (“SGH”), and CreeLED, Inc.

(formerly known as Chili Acquisition, Inc., “CreeLED”;

CreeLED and SGH are collectively referred to as “SGH-CreeLED”), a Delaware corporation and wholly owned subsidiary of SGH (collectively with SGH, “SMART”), (i) Cree completed the sale to SMART of (a) certain equipment, inventory, intellectual property rights, contracts, and real estate comprising Cree’s LED Products segment, (b) all of the issued and outstanding equity interests of Cree Huizhou Solid State Lighting Company Limited, a limited liability company organized under the laws of the People’s Republic of China and an indirect wholly owned subsidiary of Cree, and (c) Cree’s ownership interest in Cree Venture LED Company Limited, Cree’s joint venture with San’an Optoelectronics Co., Ltd.

(collectively, the “LED Business”), and (ii) SMART assumed certain liabilities related to the LED Business (collectively, (i) and (ii), the “LED Business Divestiture”).

In connection with the LED Business Divestiture, Cree will retain certain assets used in and pre-closing liabilities associated with the LED Products segment.

The purchase price for the LED Business consisted of (i) a payment of $ 50 million in cash, subject to customary adjustments, (ii) an unsecured promissory note issued to Cree by SMART Global Holdings in the amount of $ 125 million (the Purchase Price Note), (iii) the potential to receive an earn-out payment of up to $ 125 million based on the revenue and gross profit performance of the LED Business in Cree’s first four full fiscal quarters following the closing (the Earnout Period), with a minimum payment of $ 2.5 million also payable in the form of an unsecured promissory note issued by SMART Global Holdings (the Earnout Note), and (iv) the assumption of certain liabilities.

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

The Purchase Price Note will mature on August 15, 2023 , and the Earnout Note, if issued, will mature on March 27, 2025 .

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

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

On March 1, 2021, pursuant to the previously announced Asset Purchase Agreement, dated October 18, 2020 , as amended by the Amendment to Asset Purchase Agreement dated March 1, 2021 (as amended, the “CreeLED Purchase Agreement”), each between Cree, Inc.

(“Cree”), SGH and CreeLED, Inc.

(formerly known as Chili Acquisition, Inc., a Delaware corporation and wholly owned subsidiary of SGH), (i) Cree completed the sale to SGH of (a) certain equipment, inventory, intellectual property rights, contracts, and real estate comprising Cree’s LED products segment, (b) all of the issued and outstanding equity interests of Cree Huizhou Solid State Lighting Company Limited, a limited liability company organized under the laws of the People’s Republic of China and an indirect wholly owned subsidiary of Cree, and (c) Cree’s 51 % ownership interest in Cree Venture LED Company Limited, Cree’s joint venture with San’an Optoelectronics Co., Ltd.

(“San’an”), and (ii) SGH assumed certain liabilities related to the LED business (collectively, (i) and (ii), the “LED Business”).

In connection with the transaction, Cree retained certain assets used in and pre-closing liabilities associated with its LED products segment.

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

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

The LED Business’s results of operations are included in the condensed consolidated financial statements from the date of acquisition.

The acquisition of the LED Business, a global industry leader, further enhances the Company’s growth and diversification strategy and fits well with its other specialty businesses in computing and memory.

The LED Business comprises a broad portfolio of highly efficient LED chips and high-performance LED components within the industry, including general lighting, specialty lighting, large-format video screens and outdoor and architectural lighting.

The LED Business will operate as the Company’s LED Solutions segment.

Purchase Price

The purchase price for the LED Business consisted of (i) a payment of $ 50 million in cash, subject to customary adjustments, (ii) an unsecured promissory note issued to Cree by the Company in the amount of $ 125 million (the “Purchase Price Note”), (iii) an earn-out payment of up to $ 125 million based on the revenue and gross profit performance of the LED Business in Cree’s first four full fiscal quarters following the closing (the “Earnout Period”), with a minimum payment of $ 2.5 million, payable in the form of an unsecured promissory note to be issued by the Company (the “Earnout Note”), and (iv) the assumption of certain liabilities.

Purchase Price Note bears interest at LIBOR plus 3.0 % and is due on August 15, 2023 .

T he Earnout Note will begin to bear interest upon completion of the Earnout Period at LIBOR plus 3.0 % and is due on March 27 , 2025 .

The preliminary estimated purchase price is as follows (in thousands):

Additional payment for estimated net working capital adjustment (1)

Estimated fair value of Purchase Price Note

Estimated fair value of Earnout Note

_______________

(1) Includes $ 15.3 million paid at closing and an estimated $ 7.6 million payable subsequent to the end of the third quarter of fiscal 2021 upon completion of the review of the assets acquired and liabilities assumed.

Contingent Consideration

The Earnout Note is accounted for as contingent consideration.

The initial fair value of the Earnout Note was estimated as of the date of acquisition to be $ 28.1 million and was preliminarily valued using a Monte Carlo simulation analysis in a risk-neutral framework with assumptions for volatility, market price of risk adjustment, risk-free rate, and cost of debt.

This fair value measurement is based on significant inputs not observable in the market.

The Earnout Note is revalued each quarter and any change in valuation is reflected in the Company’s condensed consolidated statements of operations.

During the third quarter of fiscal 2021, the Company adjusted the fair value of the Earnout Note to its current fair value with such change recognized in income from operations.

The change in fair value reflects new information about the probability and timing of meeting the conditions of the revenue and gross profit targets.

As of May 28, 2021, the fair value of the Earnout Note was $ 44.5 million.

Provisional Valuation

The Company estimated the provisional fair value of the assets and liabilities of the LED Business as of March 1, 2021 , the acquisition date.

Due to the timing of acquisition and the contractual provisions to review the net working capital of the acquired LED Business, the estimated purchase price has been allocated to the tangible and intangible assets acquired and liabilities assumed based on preliminary valuation analyses.

These preliminary values may change in future reporting periods upon finalization of the net working capital adjustment and the allocation of consideration to the assets acquired and liabilities assumed.

The provisional valuation of the LED Business assets acquired and liabilities assumed, noncontrolling interest in subsidiary, and consideration are as follows (in thousands):

Cash and cash equivalents

Accounts receivable, net

Prepaid expenses and other current assets

Property and equipment, net

Operating lease right-of-use assets

Intangible assets, net

Other noncurrent assets

Accounts payable

Other current liabilities

Long-term operating lease liabilities

Other long-term liabilities

Total net assets acquired

Noncontrolling interest in subsidiary

Consideration

The estimated fair values and useful lives of the intangible asset acquired are as follows (in thousands):

Estimated Useful

Life (in years)

Tradenames/Tradenames

Customer relationships

Order backlogs

Technology intangible assets were valued using the multi-period excess earnings method based on the discounted cash flow and technology obsolescence rate.

The discounted cash flow requires the use of significant assumptions, including projected revenue, expenses, capital expenditures and other costs, and discount rates calculated based on the cost of equity adjusted for various risks, including the size of the acquiree, industry risk, and other risk factors.

Tradenames/trademarks intangible assets were valued using the relief from royalty method, which is the discounted cash flow savings accruing to the owner by virtue of the fact that the owner is not required to license the tradenames/trademarks from a third party.

Key assumptions included attributable revenue expected from the tradenames/trademarks, royalty rates, and assumed asset life.

Customer relationships intangible assets were valued using the multi-period excess earnings method, which is the present value of the projected cash flows that are expected to be generated by the existing intangible asset after reduction by an estimated fair rate of return on contributory assets required to generate the customer relationship revenues.

Key assumptions included discounted cash flow, estimated life cycle, and customer attrition rates.

Order backlog intangible assets represent the value of existing firm purchase orders in place at the time of acquisition and were valued using the discounted cash flow method, which accounts for the expected profit related to the purchase orders.

Unaudited Pro Forma Financial Information

The following unaudited pro forma financial information presents the Company’s combined results of operations as if the acquisition of the LED Business had occurred on August 31, 2019.

The unaudited pro forma financial information is based on various adjustments and assumptions and is not necessarily indicative of what the Company’s results of operations actually would have been had the acquisition been completed as of August 31, 2019 or will be for any future periods.

Furthermore, the pro forma financial information does not include adjustments to reflect any potential revenue, synergies or dis-synergies, or cost savings that may be achievable in connection with the acquisition, or the associated costs that may be necessary to achieve such revenues, synergies or cost savings.

The unaudited pro forma financial information for the three months ended May 29, 2020 combines the results of operations of the Company for the three months ended May 29, 2020 and the results of operations of the LED Business for the three months ended March 29, 2020.

The unaudited pro forma financial information for the nine months ended May 28, 2021 combines the results of operations of the Company for the nine months ended May 28, 2021 (which include the results of the LED Business beginning on the March 1, 2021 acquisition date) and the results of operations of the LED Business for the six months ended December 27, 2020.

The unaudited pro forma financial information for the nine months ended May 29, 2020 combines the results of operations of the Company for the nine months ended May 29, 2020 and the results of operations of the LED Business for the nine months ended March 29, 2020.

Three Months Ended

Nine Months Ended

(in thousands, except per share data)

Total net sales

Net loss attributable to SGH

Earnings per share:

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

• Incremental cost of sales related to the esti mated fair value of inventories.

• Incremental depreciation expense related to the estimated fair value of property and equipment.

• Incremental amortization expense related to the estimated fair value of identifiable intangible assets.

• Incremental interest expense related to the Purchase Price Note and the Earnout Note.

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

Acquisition-related transaction expenses were $ 5.8 million for the nine months ended May 28, 2021, and are reflected in selling, general, and administrative expenses in the accompanying condensed consolidated statements of operations.

For the period from March 1, 2021, the acquisition date, to May 28, 2021, revenues for the LED Business were $ 101.8 million, while earnings were not material.

Fiscal Year 2019

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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.

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

(“SMART EC”).

No earn-out was achieved.

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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.

revenue based on year-on-year growth in gross revenue of comparable companies, discount rates and the estimated amount of time until final payment is made.

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

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

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

As of February 26, 2021 and August 28, 2020, the fair value of the contingent consideration was $ 0 .

For the earn-out period ended December 31, 2019, the required gross revenue levels were not achieved.

No additional consideration was included in the purchase price as a result of the earn-out provisions.

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

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

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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.

brings an outstanding customer base, solid products and strong supplier relationships to the Company in the defense, industrial IoT (IIoT), edge computing, and communications OEM markets.

SMART EC brings an outstanding customer base, solid products and strong supplier relationships to the Company in the defense, industrial IoT (“IIoT”), edge computing, and communications OEM markets.

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

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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.

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

(“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.

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

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 Wireless is a fast growing developer of high-performance production-ready ARM ISA-based embedded computing platforms for IoT applications enabling the next generation of connected devices.

SMART Wireless brings an outstanding customer base, solid products and strong supplier relationships to the Company in the medical imaging, video conferencing, AR/VR computing, IIoT, commercial drones and robotics markets.

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

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

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Three Months Ended

Six Months Ended

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

Nine Months Ended

As of May 28, 2021 and August 28, 2020, amounts due from these affiliates were $ 14.2 million and $ 6.5 million, respectively.

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

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

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 February 26, 2021 are not designated as hedging instruments for hedge accounting purposes.

Foreign exchange forward contracts outstanding at May 28, 2021 are not designated as hedging instruments for hedge accounting purposes.

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

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

As of February 26, 2021, the Company’s non-designated forward contacts resulted in a $ 2.3 million derivative asset.

As of May 28, 2021, the Company’s non-designated forward contacts resulted in a $ 3.4 million derivative liability.

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

For the three and six months ended February 26, 2021, the Company recognized realized gains in the amount of $ 2.7 million and $ 0.3 million, respectively, and net unrealized gains on the change in the fair value of the non-designated forward contracts in the amount of $ 0.1 million and $ 3.0 million, respectively .

For the three and six months ended February 28, 2020, the Company recognized realized losses in the amount of $ 70 thousand and $ 0.9 million, respectively, and net unrealized losses on the change in the fair value of the non-designated forward contracts in the amount of $ 2.0 million and $ 1.1 million, respectively.

For the three and nine months ended May 28, 2021, the Company recognized net realized losses in the amount of $ 4.2 million and $ 3.5 million, respectively, and net unrealized gains on the change in the fair value of the non-designated forward contracts in the amount of $ 5.6 million and $ 2.5 million, respectively.

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.

Balance Sheet Details

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Total inventories*

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

As of May 28, 2021 and August 28, 2020, 7 % and 17 %, respectively, of total inventories represented inventory held under the Company's supply chain services.

Prepaid Expenses and Other Current Assets

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Prepayment for VAT and other transaction taxes

Prepaid R&D expenses

Unbilled service receivables

Prepaid income taxes

Prepaid R&D expenses

Derivative assets**

Contract assets***

Other prepaid expenses and other current assets

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See Note 1(i).

See Note 1(d).

Property and Equipment, Net

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Manufacturing equipment

Leasehold improvements*

Building and building improvements*

Less accumulated depreciation and amortization

Net property and equipment

Includes Penang facility, which is situated on leased land.

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

Includes facilities in Penang and Huizhou, which are situated on leased land.

Depreciation and amortization expense for property and equipment during the three and nine months ended May 28, 2021 was approximately $ 9.1 million and $ 19.5 million, respectively and $ 5.4 million and $ 17.6 million, respectively for the corresponding periods of fiscal 2020.

Other Noncurrent Assets

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

Deposits on equipment

Deferred tax asset

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Prepaid R&D expense

Deposits on equipment

Total other noncurrent assets

See Note 1(i).

Accrued Liabilities

Accrued liabilities consisted of the following (in thousands):

Other Current Liabilities

Other current liabilities consisted of the following (in thousands):

Accrued compensation

Line of credit

Accrued variable consideration

Deferred revenue

Accrued employee compensation

VAT and other transaction taxes payable

Current portion of lease liabilities

VAT and other transaction taxes payable

Income taxes payable

Customer deposits

Derivative liabilities

Accrued warranty reserve

Other accrued liabilities

Total accrued liabilities

Other current liabilities

Total other current liabilities

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

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

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 s such in the initial measurement of the Company’s operating lease assets and corresponding liabilities.

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

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

The Company does not have financing leases as of May 28, 2021.

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

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Three Months Ended

Six Months Ended

Nine Months Ended

Operating lease cost

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Weighted-average discount rate

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

Future minimum undiscounted payments under the Company’s non-cancelable operating leases were as follows as of May 28, 2021 (in thousands):

Fiscal year ending August:

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Present value of total lease liabilities

As of February 26, 2021, the Company has additional operating lease commitments of approximately $ 5.8 million on an undiscounted basis for an office building lease that has not yet commenced.

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

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

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

Right-of-use assets obtained in exchange for new operating lease liabilities for the three and nine months ended May 28, 2021 were $ 13.6 million and $ 16.9 million, respectively, and $ 0.9 million and $ 8.9 million, respectively for the corresponding periods in fiscal 2020.

Noncontrolling Interest

In connection with the Company’s acquisition of the LED Business on March 1, 2021 , the Company has a 51 % ownership interest in Cree Venture LED Company Limited (the “Cree Joint Venture”), a joint venture with San’an.

The Cree Joint Venture has a five -member board of directors, three of which are designated by the Company and two of which are designated by San’an.

As a result of the Company’s majority voting interest, the Company consolidates the operations of the Cree Joint Venture and reports its results of operations within the Company’s LED Products segment.

The Cree Joint Venture has a manufacturing agreement pursuant to which San’an supplies the Cree Joint Venture with mid-power LED products, and the Company and the Cree Joint Venture have a sales agency agreement pursuant to which the Company is

the independent sales representative of the Cree Joint Venture.

The Cree Joint Venture produces and delivers to market high performing, mid-power lighting class LEDs serving the N orth and South America, Europe, Japan and China markets .

The 49 % ownership interest held by San’an is classified as noncontrolling interest in the accompanying condensed consolidated balance sheet.

Subsequent to the acquisition of the LED Business, noncontrolling interest increased by $ 0.6 million in the third quarter of fiscal 2021 for the San’an share of net income from the Cree Joint Venture.

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

Three Months Ended

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

Provision for income taxes for the three and nine months ended May 28, 2021 increased by $ 1.3 million and $ 4.1 million, respectively, as compared to the same period in the prior year, primarily due to the profits and related taxes in non-U.S.

jurisdictions.

As of February 26, 2021, the Company has a full valuation allowance for its net deferred tax assets associated with its U.S.

As of May 28, 2021, 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 February 26, 2021 (and only during such fiscal quarter), if the last reported sale price per ordinary share exceeds 130 % of the conversion price for each of at least 20 trading days, whether or not consecutive, during the 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding fiscal quarter;

during any fiscal quarter commencing after the fiscal quarter ending on May 28, 2021 (and only during such fiscal quarter), if the last reported sale price per ordinary share exceeds 130 % of the conversion price for each of at least 20 trading days, whether or not consecutive, during the 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding fiscal quarter;

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

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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.

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

Debt issuance costs for the issuance of the Notes were approximately $ 8.0 million, consisting of initial purchasers' discount and other issuance costs.

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Net carrying amount

As of February 26, 2021, the remaining life of the Notes was approximately 60 months.

As of May 28, 2021, the remaining life of the Notes was approximately 57 months.

The unamortized debt discounts and unamortized debt issuance cost are amortized over the remaining useful life, using an effective interest rate of 7.06 %.

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

As of May 28, 2021 the carrying value of the equity component was $ 50.8 million, net of the issuance costs of $ 1.7 million.

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

Three Months Ended

Six Months Ended

Nine Months Ended

Contractual interest expenses

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Total interest cost recognized

As of February 26, 2021 and August 28, 2020, t he total estimated fair value for the Notes was determined to be $ 339.3 million and $ 221.5 million, respectively based on the closing trading price per $ 100 of the Notes as of the last day of trading for the period.

As of May 28, 2021 and August 28, 2020, t he total estimated fair value for the Notes was determined to be $ 334.2 million and $ 221.5 million, respectively based on the closing trading price per $ 100 of the Notes as of the last day of trading for the period.

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

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

There are no future minimum principal payments made under the Notes as of May 28, 2021, 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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These losses are included in the condensed consolidated statement of operations within Other expense, net.

Purchase Price Note

In connection with the acquisition of the LED Business on March 1, 2021, the Company issued an unsecured promissory note to Cree in the amount of $ 125 million.

The Purchase Price Note bears interest at LIBOR plus 3.0 % and is due on August 15, 2023.

Interest is payable quarterly, beginning in June 2021.

Amended Credit Agreement

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(“Global”), and SMART Modular Technologies, Inc.

(SMART Modular) entered into a Second Amended and Restated Credit Agreement (together with all related loan documents, as amended from time to time including as amended by the Incremental Amendment as defined below, the Amended Credit Agreement) with certain lenders which amended and restated that certain Amended and Restated Credit Agreement dated as of November 5, 2016 (the ARCA), which had amended and restated that certain Credit Agreement dated as of August 26, 2011 (the Original Credit Agreement).

The Company’s subsidiaries named as borrowers in the Amended Credit Agreement and certain other subsidiaries that entered into a guarantee with respect to the Amended Credit Agreement including Penguin, SMART EC and SMART Wireless, are collectively referred to as the Loan Parties and together with SMART Modular Technologies Sdn.

(SMART Malaysia), the Credit Group.

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

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

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

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

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

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

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

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

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

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.

(“SMART Modular”) entered into a Second Amended and Restated Credit Agreement (together with all related loan documents, as amended by the First and Second 2018 Amendments as defined below, the “2017 Credit Agreement”) with certain lenders.

The 2017 Credit Agreement amended and restated that certain Amended and Restated Credit Agreement dated as of November 5, 2016 (the “2016 Credit Agreement”), which had amended and restated that certain Credit Agreement dated as of August 26, 2011 (the “2011 Credit Agreement”).

The Company’s subsidiaries that are named as borrowers in the 2017 Credit Agreement and certain other subsidiaries that entered into a guarantee with respect to the 2017 Credit Agreement, including Penguin, SMART EC and

SMART Wireless, are collectively referred to as the “Loan Parties” and together with SMART Modular Technologies Sdn.

(“SMART Malaysia”), the “Credit Group.” The 2017 Credit Agreement provide d 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 would have automatically extend ed to February 9, 2022 if the total lever age ratio of the Credit Group was less than 3.0 :1.0 on the Initial Revolver Maturity Date.

SMART Global Holding s was not a party to the 2011, 2016 or 2017 Credit Agreement s .

On June 8, 2018, SMART Worldwide, Global and SMART Modular entered into an Incremental Facility Agreement (the “First 2018 Amendment”) which provided for incremental term loans under the 2017 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.

Pursuant to the First 2018 Amendment, the borrowers agreed to pay the structuring advisor a $ 0.6 million fee pursuant to a separate agreement.

On October 2, 2018, SMART Worldwide, Global and SMART Modular entered into a Second Amendment to the Amended Credit Agreement (the “Second 2018 Amendment”) which did not become effective until October 25, 2018 and which, among other things, created certain holidays from principal repayments.

The 2017 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 2017 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 2017 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 2017 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 First 2018 Amendment required the Credit Group to repay the Penguin Credit Facility, as defined below, and to pledge as collateral, all of the capital stock of and substantially all of the assets of Penguin within 60 days after the closing of the Penguin acquisition.

Interest and Interest Rates .

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

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

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

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

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

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

Loans under the 2017 Credit Agreement accrued 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 was 6.25 % and with respect to base rate borrowings was 5.25 %.

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

Under the 2017 Credit Agreement, 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 %.

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

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

Principal Payments .

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

The 2017 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 quarterly repayments of principal under the Initial Term Loans and the Incremental Term Loans.

During the three and six months ended February 26, 2021 and February 28, 2020, the borrowers made scheduled principal payments of $ 0 , $ 0 , $ 0 and $ 5.6 million, respectively.

Prepayments .

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

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

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

The borrowers have the right at any time to make optional prepayments of the principal amounts outstanding under the 2017 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 2017 Credit Agreement.

The 2017 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 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;

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 debt permitted to be incurred under the Amended Credit Agreement.

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

No mandatory prepayments were required for the three months ended February 26, 2021 or for fiscal 2020.

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 2017 Credit Agreement.

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

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

As of August 9, 2017, prior to the one year anniversary of the ARCA, the Credit Group entered into the Amended Credit Agreement with new term loans in the aggregate principal amount of $ 165 million with different lenders.

The proceeds from the Amended Credit Agreement were used to fully repay and refinance the term loans under the ARCA in the principal amount of $ 151.0 million, which resulted in a write off of $ 15.2 million of original issue discount and debt issuance costs as an extinguishment loss.

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

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

Global in turn used the proceeds to pay down the original term loans under the 2011 Credit Agreement, as required under the 2016 Credit Agreement, which resulted in a $ 6.7 million loss on early repayment of long-term debt.

As of August 9, 2017, prior to the one year anniversary of the 2016 Credit Agreement, the Credit Group entered into the 2017 Credit Agreement with new term loans in the aggregate principal amount of $ 165 million with different lenders.

The proceeds from the 2017 Credit Agreement were used to fully repay and refinance the term loans under the 2016 Credit Agreement in the principal amount of $ 151.0 million, which resulted in a write off of $ 15.2 million of original issue discount and debt issuance costs as an extinguishment loss.

Term loans under the 2017 Credit Agreement were issued at a discount of 2.0 % of the then outstanding principal amount of $ 165 million, for a discount of $ 3.3 million.

The Company incurred $ 8.7 million debt issuance costs upon entering into the 2017 Credit Agreement, of which $ 5.3 million was attributable to the term loans and recorded as a direct reduction to the face amount of the term loans, and $ 3.4 million was allocated to the revolving line of credit and recorded as a separate asset on the balance sheet.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

On March 6, 2020, SMART Worldwide, Global and SMART Modular entered into a third amended and restated credit agreement (the “Amended Credit Agreement”) which amended and restated the 2017 Credit Agreement, including amendments thereto.

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

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

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

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

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

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

The Amended Credit Agreement also increases the cap on the run rate cost savings add-back to the definition of Consolidated EBITDA to 35 %, from 20 % in the 2017 Credit Agreement and extends the time period for run rate cost savings actions to 24 months, from 12 months in the 2017 Credit Agreement.

The Amended Credit Agreement also makes certain changes and/or improvements to the covenants and other terms in the 2017 Credit Agreement, including, among other things, (i) the elimination of the quarterly/annual lender call requirements, (ii) the expansion of the provisions for “Limited Conditionality Transactions” to include dividend declarations and irrevocable prepayment notices, (iii) the addition of debt and lien baskets permitting the incurrence of up to $ 150 million of “asset-based” revolving facilities, (iv) the addition of certain debt and lien baskets permitting the incurrence of additional debt and liens based on compliance with certain specified leverage and/or interest coverage ratios and (v) adjustments to threshold amounts and baskets under certain other covenants.

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

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.

As a result of the Amended 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.

During the three and nine months ended May 28, 2021 and May 29, 2020, the borrowers made scheduled principal payments of $ 0 , $ 0 , $ 0 and $ 5.6 million, respectively.

No mandatory prepayments were required for the three and nine months ended May 28, 2021 or for fiscal 2020.

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

ABL Credit Agreement

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

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

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

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

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

In connection with the ABL Credit Agreement, the ABL Loan Parties entered into a customary intercreditor agreement (the “Intercreditor Agreement”) in relation to the Amended Credit Agreement which Intercreditor Agreement governs how the collateral securing the respective obligations under the ABL Credit Agreement and the Amended 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 Amended Credit Agreement are secured by (1) a second-priority security interest, subject to certain customary exceptions, in assets held by the ABL Loan Parties consisting of accounts receivable, inventory and intangible assets to the extent attached to the foregoing, books and records related to the foregoing and the proceeds thereof, and (2) a first-priority security interest in, subject to certain customary exceptions, substantially all other present and future tangible and intangible assets held by the Loan Parties and proceeds of the foregoing.

As of May 28, 2021 and August 28, 2020, outstanding principal balance of the ABL Credit Agreement was $ 25.0 million and $ 0 , respectively.

FINEP Credit Agreement

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The first advance in the amount of R$ 60.7 million (or $ 11.7 million) was received on December 30, 2020.

As of February 26, 2021 and August 28, 2020, outstanding principal balance of the FINEP Credit Agreement was $R 60.7 million (or $ 11.1 million) and $ 0 , respectively.

The fair value of amounts outstanding under the FINEP Credit Agreements as of February 26, 2021 and August 28, 2020 were estimated to be approximately $ 9.9 million and $ 0 , respectively.

As of May 28, 2021 and August 28, 2020, outstanding principal balance of the FINEP Credit Agreement was $R 60.7 million (or $ 11.2 million) and $ 0 , respectively.

The fair value of amounts outstanding under the FINEP Credit Agreements as of May 28, 2021 and August 28, 2020 were estimated to be approximately $ 10.1 million and $ 0 , respectively.

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

BNDES Credit Agreements

In December 2013, SMART Brazil, entered into a credit facility with the Brazilian Development Bank, or BNDES (such loan the BNDES 2013 Credit Agreement).

In December 2013, SMART Brazil, entered into a credit facility with the Brazilian Development Bank, or BNDES (the “BNDES 2013 Credit Agreement”).

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

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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.

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 packaging and for acquisitions of equipment not otherwise available in the Brazilian domestic market.

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

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

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

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

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

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

The Convertible Senior Notes, due 2026, Purchase Price Note, due 2023, FINEP Credit Agreement and ABL Credit Agreement are classified as follows in the accompanying consolidating balance sheets (in thousands):

Purchase price note

Unamortized debt discount

Unamortized debt issuance costs

Long-term debt

The future minimum principal payments under the Notes, FINEP Credit Agreement and Purchase Price Note as of May 28, 2021 are (in thousands):

Purchase Price Note

Fiscal year ending August:

Remainder of fiscal 2021

Financial Instruments

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

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

The Company’s Level 3 liabilities include the contingent consideration related to the acquisition of the LED business (see Note 2), which had a fair value of $ 44.5 million as of May 28, 2021.

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

Quoted Prices

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Inputs (Level 3)

Balances as of February 26, 2021:

Balances as of May 28, 2021:

Cash and cash equivalents

Derivative financial instruments (1)

Total assets measured at fair value

Derivative financial instruments (1)

Acquisition-related contingent consideration (3)

Total liabilities measured at fair value

Balances as of August 28, 2020:

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Total liabilities measured at fair value

Included in other current liabilities on the Company’s condensed consolidated balance sheets - see Note 4.

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

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

Included in other long-term liabilities on the Company’s condensed consolidated balance sheets.

Share-Based Compensation and Employee Benefit Plans

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On January 29, 2019, the shareholders approved an amendment to the SMART Global Holdings, Inc.

Amended and Restated 2017 Share Incentive Plan (as amended, the SGH Plan) which amendment increased the reserve under the SGH Plan by 1,500,000 shares effective as of February 1, 2019.

Amended and Restated 2017 Share Incentive Plan (as amended, the “Original SGH Plan”) which amendment increased the reserve under the Original SGH Plan by 1,500,000 shares effective as of February 1, 2019.

On February 12, 2021 the shareholders approved an amendment to the Original SGH Plan (as further amended, the “SGH Plan”), which amendment increased the reserve under the Original SGH Plan by 1,000,000 shares effective February 12, 2021.

The SGH Plan provides for grants of equity awards to employees, directors and consultants of SMART Global Holdings and its subsidiaries.

As of February 15, 2021, the Board of Directors approved the SMART Global Holdings, Inc.

2021 Share Inducement Plan (the “Inducement Plan,” together with the SGH Plan the “SGH Plans”), which authorizes

an additional 2,000,000 shares available for grant under the terms of the plan.

Options granted under the SGH Plan provide the option to purchase SMART Global Holdings’ ordinary shares at the fair value of such shares on the grant date.

The options and RSUs generally vest over a four-year period beginning on the grant date and generally have a ten-year term.

O ptions and RSUs under the SGH Plans generally vest over a four-year period beginning on the grant date and generally have a ten-year term.

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

As of February 26, 2021, there were 7,991,358 ordinary shares reserved for issuance under the Company’s equity incentive plans, of which 4,285,831 ordinary shares were available for grant.

As of May 28, 2021 , there were 5,684,558 ordinary shares reserved for issuance under the SGH P lans , of which 1,911,550 ordinary shares were available for grant under the SGH Plan and 882,713 ordinary shares were available for grant under the Inducement Plan .

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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Three Months Ended

Six Months Ended

Nine Months Ended

Stock options:

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Expected volatility

46.10% - 57.10%

Risk-free interest rate

0.40% - 1.68%

Expected dividends

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Options cancelled

Options outstanding at February 26, 2021

Options exercisable at February 26, 2021

Options outstanding at May 28, 2021

Options exercisable at May 28, 2021

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

The Black-Scholes weighted average fair value of options granted under the SGH Plan during the three and six months ended February 26, 2021 was $ 0 and $ 13.30 per share, respectively, and $ 0 and $ 11.85 per share, respectively for the corresponding periods of fiscal 2020.

The total intrinsic value of employee stock options exercised in the three and six months ended February 26, 2021 was $ 2.0 million and $ 2.4 million, respectively and $ 1.1 million and $ 2.5 million, respectively for the corresponding periods of fiscal 2020.

As of February 26, 2021, there was approximately $ 9.7 million of unrecognized compensation costs related to stock options under the SGH Plan, which will be recognized over a weighted average period of 1.94 years.

The Black-Scholes weighted average fair value of options granted under the SGH Plan during the three and nine months ended May 28, 2021 was $ 0 and $ 13.30 per share, respectively, and $ 9.76 and $ 9.89 per share, respectively for the corresponding periods of fiscal 2020.

The total intrinsic value of employee stock options exercised in the three and nine months ended May 28, 2021 was $ 4.0 million and $ 6.4 million, respectively and $ 0.1 million and $ 2.6 million, respectively for the corresponding periods of fiscal 2020.

As of May 28, 2021, there was approximately $ 8.1 million of unrecognized compensation costs related to stock options under the SGH Plan, which will be recognized over a weighted average period of 1.80 years.

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

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Awards forfeited and cancelled

Awards outstanding at February 26, 2021

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

Awards outstanding at May 28, 2021

In May 2020, the Company granted a performance-based RSA which has both service and performance conditions.

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

this resulted in an additional $ 5.8 million share-based compensation expense in the three months ended November 27, 2020 and the six months ended February 26, 2021.

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

this resulted in an additional $ 5.8 million share-based compensation expense in the three months ended November 27, 2020 and the nine months ended May 28, 2021.

In May 2019, the Company granted a PSU which has both service and performance conditions.

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

The share-based compensation expense related to RSAs, RSUs and PSUs during the three and six months ended February 26, 2021 was approximately $ 3.2 million and $ 12.2 million, respectively, and $ 2.5 million and $ 4.4 million for the corresponding period in fiscal 2020.

The total fair value of shares vested during the three and six months ended February 26, 2021 was approximately $ 3.0 million and $ 11.4 million, respectively, and $ 3.8 million and $ 5.9 million, respectively for the corresponding periods of fiscal 2020.

As of February 26, 2021, there was approximately $ 33.3 million of unrecognized compensation costs related to awards under the SGH Plan, which will be recognized over a weighted average period of 2.71 years.

The share-based compensation expense related to RSAs, RSUs and PSUs during the three and nine months ended May 28, 2021 was approximately $ 6.1 million and $ 18.3 million, respectively, and $ 2.9 million and $ 7.3 million for the corresponding period in fiscal 2020.

The total fair value of shares vested during the three and nine months ended May 28, 2021 was approximately $ 7.3 million and $ 18.7 million, respectively, and $ 1.5 million and $ 7.4 million, respectively for the corresponding periods of fiscal 2020.

As of May 28, 2021, there was approximately $ 86.9 million of unrecognized compensation costs related to awards under the SGH Plan, which will be recognized over a weighted average period of 3.22 years.

Employee Stock Purchase Plan

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The Purchase Plan terminates in January 2028 .

As of February 26, 2021, 353,334 ordinary shares have been purchased under the Purchase Plan and 896,666 ordinary shares are reserved for future purchases by eligible employees.

As of May 28, 2021, 443,437 ordinary shares have been purchased under the Purchase Plan and 806,563 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 six months ended February 26, 2021 were approximately were approximately $ 0.6 million and $ 1.3 million, respectively and $ 0.6 million and $ 1.1 million, respectively for the corresponding periods of fiscal 2020.

The matching contributions made by the Company during the three and nine months ended May 28, 2021 were approximately were approximately $ 1.0 million and $ 2.4 million, respectively and $ 0.7 million and $ 1.8 million, respectively for the corresponding periods of fiscal 2020.

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 six months ended February 26, 2021 was $ 2.3 million and $ 4.1 million, respectively, and $ 1.9 million and $ 3.7 million, respectively for the corresponding periods of fiscal 2020.

Rent expense for operating leases during the three and nine months ended May 28, 2021 was $ 3.4 million and $ 7.5 million, respectively, and $ 2.1 million and $ 5.8 million, respectively for the corresponding periods of fiscal 2020.

(b) Product Warranty and Indemnities

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Three Months Ended

Six Months Ended

Nine Months Ended

Beginning accrued warranty reserve

Warranty claims

LED business acquired warranty reserves

Provision for product warranties

Ending accrued warranty reserve

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

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

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

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Moreover, the results of complex legal proceedings are difficult to predict.

The Company believes that it has defenses to the cases pending, including those set forth below.

The Company believes that it has defenses to

the cases pending, including those set forth below.

Except as noted below, the Company is not currently able to estimate, with reasonable certainty, the possible loss, or range of loss, if any, from such legal matters, and accordingly, no provision for any potential loss, which may result from the resolution of these matters, has been recorded in the accompanying condensed consolidated financial statements.

1 unchanged sentence

In August 2013, the Company completed the sale (the “Sale”) of substantially all of the business unit which was focused on solid state drives, to SanDisk Corporation (now a part of Western Digital).

In connection with the Sale the sale agreement (Sale Agreement) contained certain indemnification obligations, including, among others, for losses arising from breaches of representations and warranties relating to the Sale.

In connection with the Sale the sale agreement (the “Sale Agreement”) contained certain indemnification obligations, including, among others, for losses arising from breaches of representations and warranties relating to the Sale.

These indemnification obligations are subject to a number of limitations, including certain deductibles and caps and limited time periods for making indemnification claims.

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Import Duty Tax assessment in Brazil

On February 23, 2012, SMART Brazil was served with a notice of a tax assessment for approximately R$ 117 million (or $ 21.4 million) (the First Assessment).

The First Assessment was from the federal tax authorities of Brazil and related to four taxes in connection with importation processes.

The tax authorities claimed that SMART Brazil categorized its imports of unmounted integrated circuits in the format of wafers under an incorrect product classification code, which carries an import duty of 0 %.

The authorities alleged that a different classification code should have been used that would require an 8 % import duty and the authorities were seeking to recover these duties, as well as other related taxes, for the five calendar years of 2007 through and including 2011.

Subsequent to the initial assessment, SMART Brazil received a second notice of an additional administrative penalty of approximately R$ 6.0 million (or $ 1.1 million) directly related to the same issue and which has been imposed exclusively for the alleged usage of an inappropriate import tax code (the Second Assessment).

In March 2012, SMART Brazil filed defenses to the First Assessment and the Second Assessment.

On May 2, 2013, the first level administrative tax court issued a ruling in favor of the tax assessor and against SMART Brazil on the First Assessment.

On May 31, 2013, SMART Brazil filed an appeal to the second level tax court known as CARF.

The appeal was heard on November 26, 2013 and SMART Brazil received a unanimous favorable ruling rejecting the position of the tax authorities.

Subsequently, the tax authorities filed a request for clarification and on September 17, 2014, SMART Brazil received a unanimous ruling rejecting the request from the tax authorities for clarification.

On November 7, 2014, the tax authorities notified CARF that they would not be appealing the CARF decision, and the First Assessment has been extinguished.

On February 6, 2018, the first level administrative court unanimously ruled in favor of SMART Brazil with respect to the Second Assessment.

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

The appeal on the Second Assessment was heard on December 11, 2018 and SMART Brazil received a unanimous favorable ruling rejecting the position of the tax authorities.

The tax authorities did not file any request for clarification or appeal and, as a result, the Second Assessment was extinguished in May 2019.

On December 12, 2013, SMART Brazil received another notice of assessment in the amount of R$ 3.6 million (or $ 0.7 million) with respect to the same import-related tax issues and penalties discussed above for 2012 and 2013 (the Third Assessment).

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

On February 23, 2012, SMART Brazil was served with a notice of a tax assessment for approximately R$ 117 million (approximately $ 21.7 million) (the “First Assessment”).

On March 6, 2012, SMART Brazil received a second notice of an additional administrative penalty of approximately R$ 6.0 million (approximately $ 1.1 million) directly related to the same issue (the “Second Assessment”) SMART Brazil objected to both assessments, the Brazilian authorities issued unanimous rulings in SMART Brazil’s favor, and both assessments have been definitively extinguished.

On December 12, 2013, prior to the First Assessment and Second Assessment having been extinguished, SMART Brazil received a third notice of assessment in the amount of R$ 3.6 million (approximately $ 0.7 million) (the “Third Assessment”).

The Third Assessment relates to the same tax issues and penalties that were at issue in the First Assessment and Second Assessment.

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

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

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

SMART Brazil intends to vigorously fight this matter and has filed

defenses to the Third Assessment.

The Company believes that SMART Brazil used the correct product code on its imports and that the Third Assessment is incorrect.

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

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

SMART Brazil believes it has used the correct product codes and intends to vigorously fight this matter and has filed defenses to the Third Assessment.

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

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

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

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

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

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 favorably 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 dispute.

Segment and Geographic Information

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

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

The Company operates in four segments consisting of Specialty Memory Products, Brazil Products, IPS (formerly SCSS) and LED Solutions.

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

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

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

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

Six Months Ended

February 26, 2021

Nine Months Ended

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 ($ 6 thousand and $ 23 thousand, respectively).

Adjusted Gross Profit and Adjusted Gross Margin excludes share-based compensation (see Note 1(q)), intangible amortization (see Note 1(l)), LED net inventory adjustment ($ 7.1 million) and corporate expenses ($ 8 thousand and $ 15 thousand, respectively).

Three Months Ended

Six Months Ended

February 28, 2020

Nine Months Ended

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 ($ 57 thousand and $ 0.1 million, respectively).

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

Six Months Ended

Nine Months Ended

Geographic Net Sales:

Other Americas

Property and Equipment, Net:

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Three Months Ended

Six Months Ended

February 26, 2021

February 28, 2020

February 26, 2021

February 28, 2020

Nine Months Ended

Customer A (1)

Customer B (2)

Brazil Products customer

Specialty Memory Products customer

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

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

Customer C (2)

Customer D (3)

Brazil customer

Specialty customer

As of May 28, 2021, three direct customers that represented less than 10% of net sales, Customer E, F and G, each accounted for approximately 15 %, 13 % and 13 % of accounts receivable, respectively.

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

Earnings Per Share

6 unchanged sentences

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

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

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

Until the third quarter of fiscal 2021, the Company’s weighted average ordinary share price since the issuance of the Notes has been below the conversion price.

For the three months ended May 28, 2021, the weighted average ordinary share price was above the conversion price, and as such, the Notes would have been dilutive and included in dilutive shares had it not been for the net loss in the quarter.

For the nine months ended May 28, 2021 and the three- and nine-months ended May 29, 2020, as a result of being below the conversion price, the Notes were anti-dilutive and were excluded from dilutive shares.

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

Three Months Ended

Six Months Ended

Nine Months Ended

Net income (loss)

Net income attributable to noncontrolling interest

Net income (loss) attributable to SGH

Weighted average shares outstanding:

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Three Months Ended

Six Months Ended

Nine Months Ended

Foreign currency losses

3 unchanged sentences

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