What changed in this filing

/stocks — the workspaceLOADING

Item 9A. Controls and Procedures

2021-10-25 compared with 2020-10-22 · 85 added, 1561 removed, 95 unchanged (95% of the section changed)

1 unchanged sentence

Evaluation of Disclosure Controls and Procedures

An evaluation was performed under the supervision and with the participation of our Company’s management, including the Chief Executive Officer, or CEO, and Chief Financial Officer, or CFO, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e)) under the Securities Exchange Act of 1934 as amended.

Based on that evaluation, the Company’s management, including the CEO and CFO, concluded that as of August 28, 2020, the Company’s disclosure controls and procedures were effective to ensure the information required to be disclosed by an issuer in the reports that it files or submits under the Securities Exchange Act of 1934 is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

An evaluation was performed under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report.

Based upon that evaluation, our management, including our Chief Executive Officer and Chief Financial Officer, concluded that, as of August 27, 2021, our disclosure controls and procedures were effective to ensure the information required to be disclosed by an issuer in the reports that it files or submits under the Securities Exchange Act of 1934 is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures.

There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures.

2 unchanged sentences

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f).

Under the supervision and with the participation of our management, including our CEO and CFO, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control— Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 Framework) .

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

The effectiveness of our internal control over financial reporting as of August 28, 2020 has been audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their report that is included in this Annual Report on Form 10-K.

Internal control over financial reporting includes maintaining records that, in reasonable detail, accurately and fairly reflect our transactions;

providing reasonable assurance that transactions are recorded as necessary for the preparation of consolidated financial statements in accordance with accounting principles generally accepted in the United States of America;

providing reasonable assurance that receipts and expenditures of company assets are made in accordance with management authorization;

and providing reasonable assurance that unauthorized acquisition, use or disposition of company assets that could have a material effect on the consolidated financial statements would be prevented or detected on a timely basis.

Because of its inherent limitations, internal control over financial reporting is not intended to provide absolute assurance that a misstatement of our consolidated financial statements would be prevented or detected.

In March 2021, we completed the acquisition of Cree Inc.’s LED business.

For further discussion of this acquisition, refer to “Item 8.

Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – Business Acquisitions – LED Business.” The SEC permits companies to exclude acquisitions from their assessment of internal control over financial reporting during the first year of an acquisition, and our management has elected to exclude the LED Business from its assessment as of August 27, 2021.

The LED Business (excluding acquired intangible assets) constituted 22% and 15% of our consolidated total assets and consolidated net sales, respectively, as of and for the year ended August 27, 2021.

Management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

Based on this evaluation, management concluded that our internal control over financial reporting was effective as of August 27, 2021.

The effectiveness of our internal control over financial reporting as of August 27, 2021 has been audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their report, which is included in this Annual Report on Form 10-K.

Changes in Internal Control Over Financial Reporting

There has been no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fourth quarter of fiscal 2020 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Remediation :

Following the identification of a material weakness in prior periods as previously disclosed related to non-timely accounting for import taxes and correctness of import tax codes on legacy products (being those products introduced or commencing importation prior to 2015), management commenced the development and execution of a remediation plan.

The following remediation steps were completed:

Engaged an independent technical consultant to review the import tax codes assigned to our legacy products (being those products introduced or commencing importation prior to the process change adopted in 2015).

The review has been completed, which identified an incorrect import tax code that was corrected in the second quarter of fiscal 2021.

The underreported import tax and related interest has been paid, and was not considered material.

Strengthened the controls and procedures for the identification, review and approval of import tax codes.

Enhanced training for responsible personnel involved in determining import tax codes.

As of the date of this Annual Report on Form 10-K, we have remediated such material weakness.

Other than the remediation actions described above, during the fourth quarter of fiscal 2021, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

REPORT OF INDEPENDENT REGIST ERED PUBLIC ACCOUNTING FIRM

To the Shareholders and the Board of Directors of SMART Global Holdings, Inc.

5 unchanged sentences

2016-02, Leases (Topic 842) .

As described in Management’s Report on Internal Control Over Financial Reporting, management excluded from its assessment the internal control over financial reporting at the LED business acquired from Cree Inc.

(LED business), which was acquired on March 1, 2021, and whose financial statements (excluding acquired intangible assets) constitute 22% of assets and 15% of net sales of the consolidated financial statement amounts as of and for the year ended August 27, 2021.

Accordingly, our audit did not include the internal control over financial reporting at the LED business.

Basis for Opinion

17 unchanged sentences

October 25, 2021

Othe r Information

In consideration of the outstanding service that the Executive Chairman of the Board, and former President and Chief Executive Officer of the Company, Ajay Shah has provided and continues to provide to the Company, as well as Mr.

Shah’s instrumental role in selecting and recruiting Mr.

Adams as his successor to be the Company’s President and Chief Executive Officer, the Board approved certain modifications to two equity awards previously granted to Mr.

On October 20, 2020, the Board approved the acceleration of the remaining service-based vesting requirements contained in 90,000 performance-based restricted share awards and 180,000 time-based restricted share awards originally granted to Mr.

Shah on May 17, 2020.

These awards became fully vested, free of restrictions and non-forfeitable on October 20, 2020.

O ther Information

Disclosure Regarding Foreign Jurisdictions That Prevent Inspections

Not applicable.

The information required by Items 10, 11, 12, 13 and 14 is incorporated herein by reference to our 2021 Proxy Statement for our next Annual General Meeting to be filed with the SEC within 120 days after August 27, 2021.

Directors, Executive Officers and Corporate Governance

The information required by this item is incorporated by reference to our Proxy Statement for our next Annual General Meeting to be filed with the SEC within 120 days after the close of the year ended August 28, 2020.

Code of Conduct

The Company has adopted a code of business ethics and conduct (the “Code of Conduct”) that applies to all employees, officers and directors, including the principal executive officer, principal financial officer and principal accounting officer.

The Code of Conduct is available on the Company’s website at www.smartgh.com on the Investor Relations page.

The Company intends to post on its website all disclosures that are required by law or NASDAQ listing rules regarding any amendment to, or a waiver of, any provision of the Code of Conduct for the principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions.

Executive Compensation

Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

Certain Relationships and Related Transactions, and Director Independence

Principal Accounting Fees and Services

Principal Accountant Fees and Services

Exhibits and Financial Statement Schedules

The following documents are filed as a part of this report:

The following documents are filed as part of this report:

Financial Statements.

The following Consolidated Financial Statements are filed as part of this report under Item 8 “Financial Statements and Supplementary Data.”

Report of Independent Registered Public Accounting Firm

Consolidated Balance Sheets

Consolidated Statements of Operations

Consolidated Statements of Comprehensive Income (Loss)

Consolidated Statements of Shareholders’ Equity

Consolidated Statements of Cash Flows

Notes to Consolidated Financial Statements

Exhibits are listed on the Exhibit Index at the end of this report.

Form 10-K Summary

Not applicable.

INDEX TO FINANCIAL STATEMENTS

Report of Independent Registered Public Accounting Firm

Consolidated Balance Sheets

Consolidated Statements of Operations

Consolidated Statements of Comprehensive Income (Loss)

Consolidated Statements of Shareholders’ Equity

Consolidated Statements of Cash Flows

Notes to Consolidated Financial Statements

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders and the Board of Directors of SMART Global Holdings, Inc.

Opinion on the Financial Statements

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

and subsidiaries (the "Company") as of August 28, 2020 and August 30, 2019, the related consolidated statements of operations, comprehensive income (loss), shareholders' equity, and cash flows for each of the three years in the period ended August 28, 2020, and the related notes, (collectively referred to as the "financial statements").

In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of August 28, 2020 and August 30, 2019, and the results of its operations and its cash flows for each of the three years in the period ended August 28, 2020, in conformity with accounting principles generally accepted in the United States of America.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of August 28, 2020, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated October 22, 2020, expressed an unqualified opinion on the Company's internal control over financial reporting.

Change in Accounting Principle

As discussed in Note 1 to the financial statements, the Company has changed its method of accounting for leases in the year ended August 28, 2020 due to the adoption of Accounting Standards Update No.

2016-02, Leases (Topic 842), using the modified retrospective approach.

Basis for Opinion

These financial statements are the responsibility of the Company's management.

Our responsibility is to express an opinion on the Company's financial statements based on our audits.

We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S.

federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB.

Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks.

Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements.

Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements.

We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current-period audit of the financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments.

The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing a separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

Goodwill— Embedded Computing Reporting Unit — Refer to Note 1 to the financial statements

Critical Audit Matter Description

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

The Company determines the fair value of its reporting units

using the discounted cash flow method and the market approach.

The determination of the fair value using the discounted cash flow method and the market approach requires management to make significant judgments and assumptions including, but not limited to, forecasts of future net sales, earnings before interest, and the selection of the discount rate.

As of August 28, 2020, the goodwill balance was $74.0 million, of which $26.9 million was allocated to the Embedded Computing Reporting Unit (“EC”), which is part of the Specialty Compute and Storage Solutions segment.

The fair value of EC exceeded its carrying value as of the measurement date.

We identified the goodwill valuation for EC as a critical audit matter due to the significant estimates and assumptions made by management to estimate the fair value of EC under the income approach.

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

How the Critical Audit Matter Was Addressed in the Audit

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

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

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

Historical net sales,

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

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

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

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

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

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

Critical Audit Matter Description

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

Upon conversion, the Company will pay or deliver, as applicable, cash, ordinary shares or a combination of cash and ordinary shares at the Company's election.

The Company separated the Notes into liability and equity components.

The carrying amount of the liability component of approximately $197.5 million was calculated by using the Company’s borrowing rate on the date of the issuance of the Notes to estimate the fair value of a similar debt instrument without the conversion feature.

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

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

How the Critical Audit Matter Was Addressed in the Audit

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

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

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

Additionally, we:

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

Tested the mathematical accuracy of the valuation model.

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

/s/ DELOITTE & TOUCHE LLP

San Jose, California

October 22, 2020

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

SMART Global Holdings, Inc.

and Subsidiaries

Consolidated Balance Sheets

(In thousands, except per share data)

Current assets:

Cash and cash equivalents

Accounts receivable, net of allowances of $101 and $184 as of

August 28, 2020 and August 30, 2019, respectively

Prepaid expenses and other current assets

Total current assets

Property and equipment, net

Operating lease right-of-use assets

Other noncurrent assets

Intangible assets, net

Liabilities and Shareholders’ Equity

Current liabilities:

Accounts payable

Accrued liabilities

Current portion of long-term debt

Total current liabilities

Long-term debt

Long-term operating lease liabilities

Other long-term liabilities

Total liabilities

Commitments and contingencies (see Note 10)

Shareholders’ equity:

Ordinary shares, $0.03 par value.

Authorized 200,000 shares;

outstanding 24,419 and 23,617 as of August 28, 2020 and

August 30, 2019, respectively

Additional paid-in capital

Accumulated other comprehensive loss

Retained earnings

Total shareholders’ equity

Total liabilities and shareholders’ equity

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

SMART Global Holdings, Inc.

and Subsidiaries

Consolidated Statements of Operations

(In thousands, except per share data)

Fiscal Year Ended

Net sales (1)

Cost of sales

Operating expenses:

Research and development

Selling, general, and administrative

Restructuring charge

Change in estimated fair value of acquisition-related

contingent consideration

Total operating expenses

Income from operations

Interest expense, net

Other expense, net

Total other expense

Income before income taxes

Provision for income taxes

Net income (loss)

Earnings per share:

Shares used in computing earnings per share:

Includes sales to affiliates of $75,837, $117,403 and $133,552 in fiscal 2020, 2019 and 2018, respectively (see Note 3).

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

SMART Global Holdings, Inc.

and Subsidiaries

Consolidated Statements of Comprehensive Income (Loss)

(In thousands)

Fiscal Year Ended

Net income (loss)

Other comprehensive income (loss):

Foreign currency translation

Comprehensive income (loss)

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

SMART Global Holdings, Inc.

and Subsidiaries

Consolidated Statements of Shareholders’ Equity

(In thousands)

Ordinary shares

comprehensive

shareholders’

Balances as of August 25, 2017

Share-based compensation expense

Issuance of ordinary shares from exercises

Issuance of ordinary shares from release of

restricted stock units (RSUs)

Foreign currency translation

Balances as of August 31, 2018

Share-based compensation expense

Issuance of ordinary shares from exercises

Issuance of ordinary shares in connection

with acquisition

Share consideration holdback in connection

with acquisition

Issuance of ordinary shares from release of

Withholding tax on RSUs

Issuance of ordinary shares from employee

share purchase plan (ESPP)

Effect of adopting ASC 606

Foreign currency translation

Balances as of August 30, 2019

Share-based compensation expense

Issuance of ordinary shares from exercises

Issuance of ordinary shares from release of

Withholding tax on RSUs

Release of holdback shares in connection

with an acquisition

Issuance of ordinary shares from ESPP

Equity component of convertible notes due

Reclassification of capped calls to shareholders' equity

Foreign currency translation

Balances as of August 28, 2020

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

SMART Global Holdings, Inc.

and Subsidiaries

Consolidated Statements of Cash Flows

(In thousands)

Fiscal Year Ended

Cash flows from operating activities:

Net income (loss)

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

operating activities:

Depreciation and amortization

Share-based compensation expense

Provision for doubtful accounts receivable and sales returns

Deferred income tax benefit

Loss on disposal of property and equipment

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

Loss on extinguishment of debt / revolver

Amortization of debt discounts and issuance costs

Amortization of operating lease right-of-use assets

Write-off of other assets

Change in fair value of contingent consideration

Changes in operating assets and liabilities:

Accounts receivable

Prepaid expenses and other assets

Accounts payable

Operating lease liabilities

Accrued expenses and other liabilities

Net cash provided by operating activities

Cash flows from investing activities:

Capital expenditures and deposits on equipment

Proceeds from sale of property and equipment

Acquisition of business, net of cash acquired

Net cash used in investing activities

Cash flows from financing activities:

Long-term debt payments - Term Loan

Long-term debt payments - BNDES

Purchase of capped calls

Proceeds from convertible notes due 2026, net of discount

Payment for extinguishment of long-term debt

Proceeds from borrowings under revolving line of credit

Repayments of borrowings under revolving line of credit

Proceeds from issuance of ordinary shares from share option exercises

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

Proceeds from issuance of ordinary shares from ESPP

Payment of costs related to IPO

Proceeds from issuance of long-term debt, net of costs paid

Fees paid for revolving line of credit financing

Net cash provided by financing activities

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

Net increase in cash, cash equivalents and restricted cash

Cash, cash equivalents and restricted cash at beginning of period

Cash, cash equivalents and restricted cash at end of period

Supplemental disclosures of cash flow information:

Cash paid during the year:

Cash paid for interest

Cash paid for income taxes, net of refunds

Noncash activities information:

Capital expenditures included in accounts payable at period end

Reclassification of capped calls to shareholders' equity

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

Acquisition consideration held back to satisfy potential indemnification claims

Fair value of contingent consideration for acquisition of business

Unpaid debt fees related to term loan and revolver

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

SMART Global Holdings, Inc.

and Subsidiaries

Notes to Consolidated Financial Statements

Overview, Basis of Presentation and Significant Accounting Policies

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

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

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

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

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

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

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

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

The Company operates in three segments:

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

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

headquarters in Newark, California.

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

Basis of Presentation

The accompanying consolidated financial statements comprise SMART Global Holdings and its wholly owned subsidiaries.

Intercompany transactions have been eliminated in the consolidated financial statements.

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

Fiscal 2020, 2019 and 2018 ended on August 28, 2020, August 30, 2019 and August 31, 2018, respectively, and included 52, 52 and 53 weeks, respectively.

All financial information for two of the Company’s subsidiaries, SMART Modular Technologies Indústria de Componentes Eletrônicos Ltda.

(SMART Brazil) and SMART Modular Technologies do Brasil Indústria e Comércio de Componentes Ltda.

(SMART do Brazil), is included in the Company’s consolidated financial statements on a one-month lag because their fiscal years begin August 1 and end July 31.

Use of Estimates

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

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

Actual results could differ from the estimates made by management.

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

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

The Company’s revenues include products and services.

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

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

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

The Company determines revenue recognition through the following steps:

(1) identification of the contract with a customer;

(2) identification of the performance obligations in the contract;

(3) determination of the transaction price;

(4) allocation of the transaction price to the performance obligations in the contract;

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

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

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

The Company’s contracts with customers do not include extended payment terms.

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

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

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

Variable consideration may include discounts, rights of return, refunds, and other similar obligations.

The Company allocates the transaction price to each distinct product and service based on its relative standalone selling price.

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

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

The Company establishes provisions for estimated returns and warranties.

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

Standard Products

The Company’s main performance obligations are to deliver the requested goods to customers according to the agreed-upon shipping terms.

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

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

Customized Products

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

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

and the Company has a present right to payment.

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

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

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

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

The terms within the NCNR sales orders provide the Company with a legally enforceable right to receive payment including a reasonable profit margin upon customer cancellation for performance completed to date.

Accordingly, the Company recognizes revenue over time as customized products listed within the NCNR orders are completed.

Computing Products and Services

A small portion of the Company’s product sales includes extended warranty and on-site services, subscriptions to the Company’s high performance computing environment, professional consulting services including installation and other services, and hardware and software related support.

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

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

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

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

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

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

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

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

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

Agency Services

The Company has service performance obligations for agency related services such as procurement, logistics, inventory management, temporary warehousing, kitting and packaging services for certain agency basis customers.

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

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

The Company has separate agent performance obligations as follows:

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

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

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

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

For temporary warehousing, kitting and packaging services, revenue is recognized over time, but the period of performance is typically very short in duration.

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

Contract Costs

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

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

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

Gross Billings and Net Sales

The following is a summary of the Company’s gross billings to customers and net sales for services and products (in thousands):

Fiscal Year Ended

Service revenue, net

Cost of purchased materials - service (1)

Gross billings for services

Product net sales

Gross billings to customers

Product net sales

Service revenue, net

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

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

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

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

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

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

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

Contract Balances

The Company records accounts receivable when it has an unconditional right to consideration.

Contract assets represent amounts recognized as revenue for which the Company does not have the unconditional right to consideration.

All contract assets represent amounts related to invoices expected to be issued during the next 12-month period and are recorded as prepaid expenses and other current assets.

Contract liabilities are recorded when cash payments are received or due in advance of performance.

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 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 years ended August 28, 2020 and August 30, 2019 are as follows (in thousands):

Accounts receivable

Contract assets

Deferred revenue

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

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

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

Disaggregation of Revenue

The Company disaggregates revenue by 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

The Company’s performance obligations related to product sales have a contractual duration of less than one year.

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.

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

Within 1 year

Cash and Cash Equivalents

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

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

Allowance for Doubtful Accounts

The Company evaluates the collectability of accounts receivable based on a combination of factors.

In cases where the Company is aware of circumstances that may impair a specific customer’s ability to meet its financial obligations, the Company records a specific allowance against amounts due and, thereby, reduces the net recognized receivable to the amount management reasonably believes will be collected.

For all other customers, the Company recognizes allowances for doubtful accounts based on a combination of factors including the length of time the receivables are outstanding, industry and geographic concentrations, the current business environment and historical experience.

The changes in the accounts receivable allowances and sales returns during fiscal 2020, 2019 and 2018 are as follows (in thousands):

Balance as of August 25, 2017

Charges to costs and other

Additions from business acquisition (see Note 2)

Balance as of August 31, 2018

Charges to costs and other

Additions from business acquisitions (see Note 2)

Balance as of August 30, 2019

Charges to costs and other

Balance as of August 28, 2020

Derivative Financial Instrument

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

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

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.

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

This evaluation includes an analysis of sales levels by product family and considers historical demand and forecasted demand in relation to the inventory on hand, competitiveness of product offerings, market conditions and product life cycles.

The Company adjusts carrying value to the lower of its cost or net realizable value.

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

Financial Credits

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

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

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

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

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

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

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

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

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

These multipliers and caps decline over time.

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

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

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

Prepaid State Value-Added Taxes (ICMS)

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

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

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

On June 22, 2010, the Sao Paulo authorities published a regulation allowing companies that applied for a timely renewal of an ICMS Special Regime to continue utilizing the benefit until a final conclusion on the renewal request was rendered.

As a result of this publication, SMART Brazil was temporarily allowed to utilize the benefit while it waited for its renewal.

From April 1, 2010, when the ICMS benefit lapsed, through June 22, 2010 when the regulation referred to above was published, SMART Brazil was required to pay the ICMS taxes on imports, which payments result in ICMS credits that may be used to offset ICMS obligations generated from sales by SMART Brazil of its products;

however, the vast majority of SMART Brazil’s sales in Sao Paulo were either subject to a lower ICMS rate or were made to customers that were entitled to other ICMS benefits that enabled them to eliminate the ICMS levied on their purchases of products from SMART Brazil.

As a result, from April 1, 2010 through June 22, 2010, SMART Brazil did not have sufficient ICMS collections against which to apply the credits and the credit balance increased significantly.

Effective February 1, 2011, in connection with its participation in a Brazilian government incentive program known as Support Program for the Technological Development of the Semiconductor and Display Industries Laws, or PADIS, SMART Brazil spun off the module manufacturing operations into SMART do Brazil, a separate subsidiary of the Company.

In connection with this spin off, SMART do Brazil applied for a tax benefit from the State of Sao Paulo in order to obtain a deferral of state ICMS.

This tax benefit is referred to as State PPB, or CAT 14.

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

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

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

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

The Company updates

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

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

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

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

In December 2017, the Company obtained approval to sell R$31.6 million (or $6.1 million) of its ICMS credits.

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

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

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

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

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

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

Property and Equipment

Property and equipment are recorded at cost.

Depreciation and amortization are computed based on the shorter of the estimated useful lives or the related lease terms, using the straight-line method.

Estimated useful lives are presented below:

Manufacturing equipment

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.

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.

As of August 28, 2020 and August 30, 2019, the carrying value of goodwill on the Company’s consolidated balance sheet was $74.0 million and $81.4 million, respectively.

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

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

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

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

The changes in the carrying amount of goodwill during fiscal 2020 and 2019 are as follows (in thousands):

Balance as of August 31, 2018

Provisional adjustment from business acquisition

Addition from business acquisition (see Note 2)

Translation adjustments

Balance as of August 30, 2019

Provisional adjustments from business

acquisition (see Note 2)

Translation adjustments

Balance as of August 28, 2020

Intangible Assets, Net

The following table summarizes the gross amounts and accumulated amortization of intangible assets by type as of August 28, 2020 and August 30, 2019 (dollars in thousands):

August 28, 2020

August 30, 2019

Customer relationships

Trademarks/tradename

Amortization expense related to intangible assets totaled approximately $13.7 million, $5.6 million and $6.1 million in fiscal 2020, 2019 and 2018, respectively.

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

Fiscal Year Ended

Amortization of intangible assets classification

(in thousands):

Cost of sales

Research and development

Selling, general and administrative

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

Fiscal year ending August:

Long-Lived Assets

Long-lived assets, excluding goodwill, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset group may not be recoverable.

Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset group to the future undiscounted cash flows expected to be generated by the asset group.

If such assets are considered to be impaired, the impairment is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets.

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

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

Refer to Note 1(v) for more details.

Research and Development Expense

Research and development expenditures are expensed in the period incurred.

The Company uses the asset and liability method of accounting for income taxes.

Deferred tax assets and liabilities are recognized for the future consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis and net operating loss and credit carryforwards.

When necessary, a valuation allowance is recorded to reduce tax assets to amounts expected to be realized.

Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.

The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income (or loss) in the period that includes the enactment date.

The Company recognizes the effect of income tax positions only if those positions are more likely than not of being sustained.

Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized.

Changes in recognition or measurement are reflected in the period in which the change in judgment occurs.

The Company records interest and penalties related to unrecognized tax benefits in tax expense.

Foreign Currency Translation

For foreign subsidiaries using the local currency as their functional currency, assets and liabilities are translated at exchange rates in effect at the balance sheet date and income and expenses are translated at average exchange rates during the period.

The effect of this translation is reported in other comprehensive income (loss).

Exchange gains and losses arising from transactions denominated in a currency other than the functional currency of the respective foreign subsidiaries are included in results of operations.

For foreign subsidiaries using the U.S.

dollar as their functional currency, the financial statements of these foreign subsidiaries are remeasured into U.S.

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.

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

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

dollar as their functional currency.

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

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

Share-Based Compensation

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

Fiscal Year Ended

Share-based compensation expense by category

(in thousands):

Cost of sales

Research and development

Selling, general and administrative

Loss Contingencies

The Company is subject to the possibility of various loss contingencies arising in the ordinary course of business.

The Company considers the likelihood of a loss and the ability to reasonably estimate the amount of loss in determining the necessity for and amount of any loss contingencies.

Estimated loss contingencies are accrued when it is probable that a liability has been incurred or an asset impaired and the amount of loss can be reasonably estimated.

The Company regularly evaluates the most current information available to determine whether any such accruals should be recorded or adjusted.

Comprehensive Income (Loss)

Comprehensive income (loss) consists of net income (loss) and other gains and losses affecting shareholders’ equity that, under U.S.

GAAP are excluded from net income (loss).

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

Concentration of Credit and Supplier Risk

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

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

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

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

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

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

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

New Accounting Pronouncements

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

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

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

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

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

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

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

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

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

In December 2019, the FASB issued ASU No.

2019-12, Income Taxes (Topic 740):

Simplifying the Accounting for Income Taxes .

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

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

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

In October 2018, the FASB issued ASU No.

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

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

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

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

In February 2018, the FASB issued ASU No.

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

Reclassification of Certain Tax Effects from Accumulated Comprehensive Income .

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

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

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

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

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

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

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

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

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

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

In February 2016, the FASB issued ASU No.

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

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

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

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

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

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

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

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

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

The Company elected the short-term lease recognition exemption.

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

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

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

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

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

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

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

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

The amendments include ASU No.

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

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

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

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

September 1, 2018).

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

The first relates to customized product sales orders deemed NCNR.

Under previous accounting standards, the Company recognized revenue and costs related to these sales when products were shipped or delivered to the customers based on the terms of the purchase orders and sales agreements.

Under ASC 606, the terms within the NCNR sales orders that provide the Company with a legally enforceable right to receive payment including a reasonable profit margin upon customer cancellation for performance completed to date will affect the timing of revenue recognition.

Accordingly, the Company will recognize revenue over time as customized products listed within the NCNR orders are completed.

The second change for the Company under ASC 606 relates to the timing of revenue recognition for customized product sales with terms that require the customer to purchase 100% of all parts built to fulfill the customers forecast.

Under previous accounting standards, the Company recognized revenue and costs related to these sales when products are shipped or delivered to the end-customers based on the terms of the purchase orders and sales agreements.

Under ASC 606, the Company recognizes revenue when control of the underlying assets passes to the customer, as the customer is able to both direct the use of, and obtain substantially all of the remaining benefit from the assets;

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

and the Company has a present right to payment.

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

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

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

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

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

Restructuring Charge

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

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

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

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

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

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

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

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

Subsequent Events

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

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

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

(collectively, the LED Business);

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

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

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

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

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

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

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

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

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

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

Business Acquisitions

Fiscal Year 2019

SMART Embedded Computing, Inc.

On July 8, 2019, SMART Global Holdings entered into a Stock Purchase Agreement (the Artesyn SPA), by and among SMART Global Holdings, Artesyn Embedded Computing, Inc., a Wisconsin corporation (AEC), Pontus Intermediate Holdings II, LLC, a Delaware limited liability company, and Pontus Holdings LLC, a Delaware limited liability company.

Pursuant to the Artesyn SPA, on July 8, 2019, the Company agreed to purchase all of the shares of AEC, a private company based in Tempe, Arizona and Artesyn Netherlands B.V., a company with limited liability organized under the laws of the Netherlands (AEC and Artesyn Netherlands B.V., collectively Artesyn), both entities being subsidiaries of Artesyn Embedded Technologies, Inc.

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

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

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

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

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

No earn-out was achieved.

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

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

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

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

The Company determined the fair value of the obligations to pay contingent consideration using a real options technique which incorporates various estimates, including projected gross 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.

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

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

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

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

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

Net cash for merger

Cash and cash equivalents acquired

Upfront payment in accordance with

Post-closing adjustments in accordance with

Total consideration

Estimated fair value of contingent

consideration

Total purchase price

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

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

Tangible assets acquired

Liabilities assumed

Identifiable intangible assets

Total net assets acquired

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

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

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

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

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

The intangible assets are as follows (in thousands):

Customer relationships

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

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

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

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

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.

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

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

SMART Wireless Computing, Inc.

(SMART Wireless)

On July 9, 2019, SMART Global Holdings entered into an Agreement and Plan of Merger (the Inforce Merger Agreement), by and among SMART Global Holdings, Thor Acquisition Sub I, Inc., a California corporation and a wholly-owned indirect subsidiary of the SMART Global Holdings (Merger Sub I), Thor Acquisition Sub II, Inc., a Delaware corporation and a wholly-owned indirect subsidiary of the SMART Global Holdings (Merger Sub II), and Inforce Computing, Inc., a California corporation (Former Inforce).

Pursuant to the Inforce Merger Agreement, on July 9, 2019, Merger Sub I was merged with and into Former Inforce, with Former Inforce continuing as the surviving corporation (the First Merger) and, immediately following the effectiveness of the First Merger, the surviving corporation of the First Merger was merged with and into Merger Sub II, with Merger Sub II surviving as a wholly-owned indirect subsidiary of SMART Global Holdings (the Inforce Merger).

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

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

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

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

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

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

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

Net cash for merger

Cash and cash equivalents acquired

Upfront cash payment

Upfront shares issued

Upfront consideration in accordance with

Purchase price holdback - cash due to pre-closing

Purchase price holdback - shares due to pre-closing

Post-closing adjustments

Total purchase price

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

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

Tangible assets acquired

Liabilities assumed

Identifiable intangible assets

Total net assets acquired

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

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

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

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

The intangible assets are as follows (in thousands):

Customer relationships

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

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

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

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.

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

Premiere Logistics

In February 2019, the Company acquired all of the outstanding shares of Premiere Customs Brokers, Inc.

and Premiere Logistics, Inc., both privately-held California corporations (collectively Premiere Logistics).

The primary purpose of this acquisition is to provide the Company with cost savings solutions in support of its own freight and logistics requirements.

In connection with the acquisition, the Company paid upfront cash consideration of $0.2 million.

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

Tangible assets acquired

Liabilities assumed

Identifiable intangible assets

Total net assets acquired

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

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

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

Fiscal Year 2018

Penguin Computing

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

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

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

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

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

No earn-out amounts were achieved.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Net cash for merger

Cash and cash equivalents acquired

Upfront payment in accordance with agreement

Post-closing adjustments in accordance with agreement

Total consideration

Estimated fair value of contingent consideration

Total purchase price

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

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

Tangible assets acquired

Liabilities assumed

Identifiable intangible assets

Total net assets acquired

The provisional amounts presented in the table above pertained to the preliminary purchase price allocation reported in our Form 10-K for the fiscal year ended August 31, 2018.

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

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

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

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

The intangible assets are as follows (in thousands):

Customer relationships

Existing order backlog

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

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

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

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

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

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

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

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

Related Party Transactions

In the normal course of business, the Company had transactions with its affiliates as follows (in thousands):

Fiscal Year Ended

As of August 28, 2020 and August 30, 2019, amounts due from these affiliates were $6.5 million and $8.2 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 in SGH common shares valued at $9.5 million (consisting of 337,692 shares issued upon closing and 59,715 shares subject to the Holdback which were issued and paid in the fourth quarter of 2020).

Foreign Currency Exchange Contracts

The Company transacts business in various foreign currencies and has international sales and expenses denominated in foreign currencies, subjecting the Company to foreign currency risk.

The Company utilizes foreign exchange forward contracts to mitigate foreign currency exchange rate risk associated with foreign-currency-denominated assets and liabilities, primarily third party payables.

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

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

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

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 (expenses).

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

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

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

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

Balance Sheet Details

Inventories consisted of the following (in thousands):

Raw materials

Work in process

Finished goods

Total inventories*

As of August 28, 2020 and August 30, 2019, 17% and 25%, respectively, of total inventories represented inventory held under the Company's supply chain services.

Prepaid Expenses and Other Current Assets

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

Financial credits*

Contract assets**

Prepayment for VAT and other transaction taxes

Prepaid R&D expenses

Unbilled service receivables

Prepaid income taxes

Prepaid ICMS taxes in Brazil*

Indemnification claims receivable***

Other prepaid expenses and other current assets

Total prepaid expenses and other current assets

See Note 1(i).

See Note 1(d).

Property and Equipment, Net

Property and equipment consisted of the following (in thousands):

Office furniture, software, computers and equipment

Manufacturing equipment

Leasehold 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 was approximately $22.8 million, $23.6 million and $20.0 million in fiscal 2020, 2019 and 2018, respectively.

Other Noncurrent Assets

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

Deposits on equipment

Prepaid ICMS taxes in Brazil*

Deferred tax asset

Prepaid R&D expense

Total other noncurrent assets

See Note 1(i).

Accrued Liabilities

Accrued liabilities consisted of (in thousands):

Deferred revenue

Accrued employee compensation

VAT and other transaction taxes payable

Current portion of lease liabilities

Customer deposits

Income taxes payable

Accrued warranty reserve

Indemnification claims liability*

Other accrued liabilities

Total accrued liabilities

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Fiscal Year Ended

Operating lease cost

Variable lease cost

Short-term lease cost

Total lease costs

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

Fiscal year ending August:

Less Short-term lease commitments

Less imputed interest

Present value of total lease liabilities

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

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

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

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

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

Fiscal year ending August:

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

Fiscal Year Ended

Total income before income taxes

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

Fiscal Year Ended

Other foreign

Federal and state

Other foreign

Total income tax provision

In applying the statutory tax rate in the effective income tax rate reconciliation, the Company used the U.S.

statutory tax rate, rather than the Cayman Islands zero percent tax rate.

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

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

Fiscal Year Ended

Statutory tax rate

Foreign income taxes at different rates

State income tax, net of federal tax benefit

Tax on uncertain tax positions

Change in valuation allowance

Non-deductible expenses

Change in U.S.

federal tax rate

Effective income tax rate

The tax effects of temporary differences that gave rise to significant portions of deferred tax assets and liabilities are as follows (in thousands):

Deferred tax assets:

Accruals and allowances

Share-based compensation

Research and other tax credits carryforwards

Property and equipment

Lease liability

Net operating loss carryforwards

Total deferred tax assets

Valuation allowance

Net deferred tax assets

Deferred tax liabilities:

Right of use asset

Purchase accounting intangibles

Net deferred tax liabilities

Net deferred tax assets

The Company records its deferred tax assets within other long term assets on the consolidated balance sheets as of August 28, 2020 and August 30, 2019.

On December 22, 2017, the Tax Cuts and Jobs Act (P.L.

115-97) (TCJA) was signed into law.

Among other changes is a permanent reduction in the federal corporate income tax rate from 35% to 21% effective January 1, 2018.

As a result of the reduction in the corporate income tax rate, the Company revalued its net deferred tax asset during the year ended August 31, 2018.

The Company reduced the value of its net deferred tax asset of approximately $15.7 million, which was offset by the change in valuation allowance of $15.7 million.

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

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

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

These deferred tax liabilities exceeded the acquired deferred tax assets by $1.2 million and created additional sources of income to realize a tax benefit for the Company's deferred tax assets.

As such, authoritative guidance requires the impact on the acquiring company's deferred tax assets and liabilities caused by an acquisition be recorded in the acquiring company's financial statements outside of acquisition accounting.

Accordingly, the valuation allowance on a portion of the Company's deferred tax assets was released and resulted in an income tax benefit of $1.2 million.

As of August 28, 2020, the Company had U.S.

federal and state net operating loss carryforwards of approximately $130.9 million and $52.6 million, respectively.

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

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

In addition, the Company has U.S.

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

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

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

Any unused annual limitation is carried forward and added to the limitation in the subsequent year.

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

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

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

net operating loss carry forwards and tax credit carryforwards and Netherlands net operating loss carryforwards, was $38.9 million and $36.7 million as of August 28, 2020 and August 30, 2019, respectively.

The increase in valuation allowance of $2.2 million is primarily attributable to the valuation allowance on foreign losses acquired from the SMART EC acquisition in fiscal 2019.

The Company intends to maintain a valuation allowance until sufficient positive evidence exists to support the realization of such deferred tax assets.

Provisions have been made for deferred income taxes on undistributed earnings of foreign subsidiaries to the extent that dividend payments by such foreign subsidiaries are expected to result in additional tax liability.

The undistributed foreign earnings of approximately $224.4 million would not be included in U.S.

taxable income because the U.S.

subsidiaries are not direct or indirect shareholders of these foreign subsidiaries.

The Company, a Cayman Islands entity, is the indirect holding company for which the Cayman Islands do not assess income taxes.

The undistributed foreign earnings would incur an insignificant amount of foreign country withholding taxes if it were to be distributed to the Company due to foreign tax laws and rulings.

The Company’s Malaysia subsidiary, SMART Modular Technologies Sdn.

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

Both tax holidays are effective for up to ten years.

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

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

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

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

This program is specifically designed to promote the development of the local semiconductor industry.

The Brazilian government has approved multiple applications for different products by SMART Brazil for certain beneficial tax treatment under the PADIS incentive.

This beneficial tax treatment includes a reduction in the Brazil statutory income tax rate from 34% to 9% on taxable income for the Brazilian semiconductor operations of SMART Brazil.

The net impact of the PADIS beneficial tax treatment, as compared to the Brazilian statutory tax rate, was to decrease income tax expense by approximately $9.6 million ($0.40 per share), $11.4 million ($0.49 per share) and $30.5 million ($1.32 per share) for fiscal 2020, 2019 and 2018, respectively.

In order to receive the expected benefits, SMART Brazil is required to invest 5% of its net semiconductor sales in research and development (R&D) activities each calendar year, which is the measurement period.

In May 2014, the R&D investment requirement was reduced to 3% for calendar years 2014 and 2015.

SMART Brazil fulfilled this R&D investment requirement in calendar years 2018 and 2019, and expects to fulfill this R&D requirement in calendar year 2020.

The total gross amount of unrecognized tax benefits was approximately $16.5 million and $15.0 million as of August 28, 2020 and August 30, 2019, respectively.

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

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

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

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

Gross amount of unrecognized tax benefits as of the beginning of

Increases related to prior year tax provisions

Decrease related to prior year tax provisions

Increase related to current year tax provisions

Lapse of statute of limitation

Gross amount of unrecognized tax benefits as of the end of

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

The Company’s U.S.

subsidiaries file federal and state income/franchise tax returns in the United States.

The tax periods ended August 2004 through August 2019 remain open to federal income tax examination.

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

The Company’s non-U.S.

subsidiaries file income tax returns in various non-U.S.

jurisdictions, including Malaysia, Brazil, Luxembourg, United Kingdom, Hong Kong, South Korea, Taiwan, Singapore and Italy.

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

Long-Term Debt

Convertible Senior Notes due 2026

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

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

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

Bank National Association, as trustee.

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

No sinking fund is provided for the Notes.

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

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

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

during any fiscal quarter commencing after the fiscal quarter ending on August 28, 2020 (and only during such fiscal quarter), if the last reported sale price per ordinary share exceeds 130% of the conversion price for each of at least 20 trading days, whether or not consecutive, during the 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding fiscal quarter;

during the five consecutive business days immediately after any 10 consecutive trading day period (such 10 consecutive trading day period, the measurement period) in which the trading price per $1,000 principal amount of Notes for each trading day of the measurement period was less than

98% of the product of the last reported sale price per ordinary share on such trading day and the conversion rate on such trading day;

upon the occurrence of certain corporate events or distributions on the Company’s ordinary shares, as provided in the Indenture;

if the Company calls such Notes for redemption;

on or after August 15, 2025 until the close of business on the second scheduled trading day immediately before the maturity date.

Upon conversion, the Company will pay or deliver, as applicable, cash, ordinary shares or a combination of cash and ordinary shares at the Company's election.

The Company’s intent is to settle conversions through combination settlement with a specified dollar amount of $1,000 per $1,000 principal amount of Notes, which involves repayment of the principal portion of such Notes in cash and any excess of the conversion value over the principal amount in ordinary shares, with cash in lieu of any fractional ordinary shares.

Upon the occurrence of a “make-whole fundamental change” (as defined in the Indenture), the Company will in certain circumstances increase the conversion rate for a specified period of time.

In addition, upon the occurrence of a “fundamental change” (as defined in the Indenture), holders of the Notes may require the Company to repurchase their Notes at a cash repurchase price equal to the principal amount of the Notes to be repurchased, plus accrued and unpaid interest, if any.

If any taxes imposed or levied by or on behalf of the Cayman Islands (or certain other jurisdictions described in the Indenture) are required to be withheld or deducted from any payments or deliveries made under or with respect to the Notes, then, subject to certain exceptions, the Company will pay or deliver to the holder of each Note such additional amounts as may be necessary to ensure that the net amount received by the beneficial owner of such Note after such withholding or deduction (and after withholding or deducting any taxes on the additional amounts) will equal the amounts that would have been received by such beneficial owner had no such withholding or deduction been required.

The Company has a right to redeem the Notes, in whole or in part, at its option at any time, and from time to time, from February 21, 2023 through the 40th scheduled trading day immediately before the maturity date, at a cash redemption price equal to the principal amount of the Notes to be redeemed, plus accrued and unpaid interest.

However, the repurchase right is only applicable if the last reported per share sale price of ordinary share exceeds 130% of the conversion price on each of at least twenty trading days during the thirty consecutive trading days ending on, and including, the trading day immediately before the redemption notice date for such redemption.

In accounting for the issuance of the Notes, the Company separated the Notes into liability and equity components.

The carrying amount of the liability component of approximately $197.5 million was calculated by using a discount rate of 6.53%, which was the Company’s borrowing rate on the date of the issuance of the Notes for a similar debt instrument without the conversion feature.

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

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

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

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

In accounting for the transaction costs, the Company allocated the total amount incurred to the liability and equity components using the same proportions as the proceeds from the Notes.

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

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

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

Unamortized debt discount

Unamortized issuance costs

Net carrying amount

As of August 28, 2020, the remaining life of the Notes was approximately 66 months.

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

As of August 28, 2020, the carrying value of the equity component was $50.8 million, net of the issuance costs of $1.7 million.

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

Contractual interest expenses

Amortization of debt discount

Amortization of debt issuance costs

Total interest cost recognized

The total estimated fair value for the Notes was determined to be $221.5 million based on the closing trading price per $100 of the Notes as of the last day of trading for the period.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Amended Credit Agreement

On August 9, 2017, SMART Worldwide, SMART Modular Technologies (Global), Inc.

(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 Loans) with a maturity date of August 9, 2022, and $50 million of revolving loans with a maturity date of February 9, 2021 (the Initial Revolver Maturity Date) which revolving loan maturity date automatically extends to February 9, 2022 if the total leverage ratio of the Credit Group is less than 3.0:1.0 on the Initial Revolver Maturity Date.

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

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

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 Incremental Term Loans was 8.16% and 8.14% through the second quarter of fiscal 2020, respectively.

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

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.

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.

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

During fiscal 2020 and 2019, the borrowers made scheduled principal payments of $5.6 million and $0, 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 are made in connection with certain transactions will be subject to prepayment premiums of 3%, 2% and 1% during the first, second and third years, respectively, after the effective date of the Amended Credit Agreement.

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

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

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

100% of the net cash proceeds of incurrence of certain debt by Global or any of its restricted subsidiaries, other than proceeds from 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 fiscal 2020 or 2019.

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

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

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.

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 are being 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.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

BNDES Credit Agreements

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

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

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

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

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

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

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.

Prior to July 2018, SMART Brazil’s obligations under the BNDES 2014 Credit Agreement were also guaranteed by Itaú Bank, which guarantee was in turn secured by a guarantee from SMART Brazil and SMART do Brazil in favor of Itaú Bank and a commitment by SMART Brazil to maintain minimum cash balances with Itaú Bank equal to 30.31% of the maximum aggregate balance of principal, interest and fees outstanding under the BNDES 2014 Credit Agreement, or approximately R$16.0 million (or $4.3 million) of required cash balances, which is shown on the Company’s consolidated balance sheets as restricted cash in other noncurrent assets as of August 31, 2018.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

BNDES 2014 principal balance

Unamortized debt discount

Unamortized debt issuance costs

Current portion of long-term debt

Long-term debt

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

Financial Instruments

Fair Value of Financial Instruments

The fair value of the Company’s cash, cash equivalents, accounts receivable and accounts payable approximates the carrying amount due to the relatively short maturity of these items.

Cash and cash equivalents consist of funds held in general checking and savings accounts, money market accounts, and securities with maturities of less than 90 days at the time of purchase.

The Company does not have investments in variable rate demand notes or auction rate securities.

The FASB guidance establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value.

The hierarchy gives the highest priority to unadjusted quoted prices in active markets to identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements).

The three levels of the fair value hierarchy are described below:

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

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

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

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

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

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

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

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

Quoted Prices

Identical Assets

or Liabilities

by Market Data

Balances as of August 28, 2020:

Cash and cash equivalents

Derivative financial instruments (1)

Total assets measured at fair value

Derivative financial instruments (2)

Total liabilities measured at fair value

Balances as of August 30, 2019:

Cash and cash equivalents

Total assets measured at fair value

Derivative financial instruments (2)

Acquisition-related contingent consideration

Total liabilities measured at fair value

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

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

Share-Based Compensation and Employee Benefit Plans

Share-Based Compensation

Equity Awards

On August 26, 2011, the board of directors adopted the Saleen Holdings, Inc.

2011 Stock Incentive Plan which was amended and restated as of May 18, 2017 to be known as the SMART Global Holdings, Inc.

Amended and Restated 2017 Share Incentive Plan.

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.

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

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.

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

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.

As of August 30, 2019, there were 4,803,315 ordinary shares reserved for issuance under the SGH Plan, of which 1,427,339 ordinary shares were available for grant.

Summary of Assumptions and Activity

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

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

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

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

Treasury yield curve at the end of the quarter in which the option was granted.

The following assumptions were used to value the Company’s stock options granted in the below fiscal years:

Fiscal Year Ended

Stock options:

Expected term (years)

Expected volatility

46.10% - 57.10%

41.68% - 48.15%

39.00% - 46.27%

Risk-free interest rate

0.40% - 1.68%

1.42% - 2.88%

2.15% - 2.82%

Expected dividends

SGH Plan—Options

A summary of option activity for the SGH Plan is presented below (dollars and shares in thousands, except per share data):

Options outstanding at August 25, 2017

Options granted

Options exercised

Options forfeited and cancelled

Options outstanding at August 31, 2018

Options granted

Options exercised

Options forfeited and cancelled

Options outstanding at August 30, 2019

Options granted

Options exercised

Options forfeited and cancelled

Options outstanding at August 28, 2020

Options exercisable at August 28, 2020

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

The share-based compensation expense for these options is recognized over the requisite service period by tranche.

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

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

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

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

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

recorded in the first quarter of fiscal 2020.

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

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

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

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

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

The total intrinsic value of employee stock options exercised in fiscal 2020, 2019 and 2018 was approximately $3.0 million, $7.4 million and $19.5 million, respectively.

As of August 28, 2020, there was approximately $10.1 million of unrecognized compensation costs related to stock options under the SGH Plan, which will be recognized over a weighted average period of 1.97 years.

As of August 30, 2019, there was approximately $17.9 million of unrecognized compensation costs related to stock options under the SGH Plan, which will be recognized over a weighted average period of 2.37 years.

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

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

Awards outstanding at August 25, 2017

Awards granted

Awards vested and paid out

Awards forfeited and cancelled

Awards outstanding at August 31, 2018

Awards granted

Awards vested and paid out

Awards forfeited and cancelled

Awards outstanding at August 30, 2019

Awards granted

Awards vested and paid out

Awards forfeited and cancelled

Awards outstanding at August 28, 2020

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

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

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

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

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

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

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

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

As of August 28, 2020, there was approximately $28.6 million of unrecognized compensation costs related to awards under the SGH Plan, which will be recognized over a weighted average period of 2.66 years.

Employee Stock Purchase Plan

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

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

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

The Purchase Plan terminates in January 2028.

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

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

Equity Rights and Restrictions

The holders of ordinary shares of SMART Global Holdings are entitled to such dividends and other distributions as may be declared by the board of directors of SMART Global Holdings from time-to-time, out of the funds of SMART Global Holdings lawfully available therefor.

Substantially all SMART Global Holdings shares owned by employees, by certain former lenders of the Company, and all shares underlying the SMART Global Holdings options, PSUs and RSUs are subject to either the Employee Investors Shareholders Agreement dated August 26, 2011 (the Employee Investors Shareholders Agreement), the Amended and Restated Investors Shareholders Agreement dated as of November 5, 2016 (as amended by Amendment No.

5, Amendment No.

4, Amendment No.

3, Amendment No.

2 and subsequent amendments, the Amended and Restated Investors Shareholders Agreement) and the Amended and Restated Sponsors Shareholders Agreement dated May 30, 2017 (as amended, the Sponsor Shareholder Agreement;

the Employee Investors Shareholders Agreement, the Amended and Restated Investors Shareholders Agreement and the Sponsor Shareholder Agreement are collectively referred to as the Shareholders Agreements).

Under the terms of the Shareholders Agreements, such shares are subject to certain restrictions on sale and could become subject to lock-up restrictions in the event of any future registered public offerings by the Company.

Savings and Retirement Program

The Company offers a 401(k) Plan to U.S.

employees, which provides for tax-deferred salary deductions for eligible U.S.

Employees may contribute up to 60% of their annual eligible compensation to this plan, limited by an annual maximum amount determined by the U.S.

Internal Revenue Service.

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

The matching contributions made by the Company in fiscal 2020, 2019 and 2018 were approximately $2.3 million, $2.0 million and $1.2 million, respectively.

Commitments and Contingencies

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

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

Product Warranty and Indemnities

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

The amounts of the reserves are based on established terms and the Company’s best estimate of the amounts necessary to settle future and existing claims on products sold as of the balance sheet date.

The following table reconciles the changes in the Company’s accrued warranty (in thousands):

Fiscal Year Ended

Beginning accrued warranty reserve

Additions from business acquisitions (see Note 2)

Provision for product warranties

Warranty claims

Ending accrued warranty reserve

Product warranty reserves are recorded in accrued liabilities in the accompanying 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.

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

Maximum potential future payments cannot be estimated because many of these agreements do not have a maximum stated liability.

However, to date, the Company has not had to reimburse any of its customers or suppliers for any losses related to these indemnities.

The Company has not recorded any liability in its financial statements for such indemnities.

Legal Matters

From time to time, the Company is involved in legal matters that arise in the normal course of business.

Litigation in general and intellectual property, employment and shareholder litigation in particular, can be expensive and disruptive to normal business operations.

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.

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 consolidated financial statements.

Indemnification Claims by SanDisk

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

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

These indemnification obligations are subject to a number of limitations, including certain deductibles

and caps and limited time periods for making indemnification claims.

On August 21, 2014, SanDisk made a claim against the Company under the indemnification provisions of the Sale Agreement in connection with a lawsuit filed by Netlist, Inc.

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

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

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

The Company believes that the allegations giving rise to the indemnification claim are without merit and the Company is disputing SanDisk’s claim for indemnification.

In addition, there may be other grounds for the Company to dispute the indemnification claim and/or the amounts of any indemnifiable losses of SanDisk.

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

Contingencies

Import Duty Tax assessment in Brazil

On February 23, 2012, SMART Brazil was served with a notice of a tax assessment for approximately R$117.0 million (or $22.5 million) (the First Assessment).

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

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

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

Subsequent to the initial assessment, SMART Brazil received a second notice of an additional administrative penalty of approximately R$6.0 million (or $1.2 million) directly related to the same issue and which has been imposed exclusively for the alleged usage of an inappropriate import tax code (the Second Assessment).

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

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

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

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

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

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

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

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

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

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

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

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

This is because SMART Brazil’s imports of DRAM unmounted components were subject to 0%, and, after June 2012, SMART Brazil’s imports of Flash unmounted components 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 of SMART Brazil with respect to the Third Assessment.

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

The amounts claimed by the tax authorities on the Third Assessment are subject to increases for interest and other charges, which resulted in a combined assessment balance of approximately R$5.7 million (or $1.1 million) as of August 28, 2020.

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

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

Segment and Geographic Information

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

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

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

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

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

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

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

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

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

Fiscal Year Ended

August 28, 2020

Adjusted Gross Profit

Adjusted Gross Margin

Fiscal Year Ended

August 30, 2019

Adjusted Gross Profit

Adjusted Gross Margin

Fiscal Year Ended

August 31, 2018

Adjusted Gross Profit

Adjusted Gross Margin

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

Fiscal 2018 does not include SMART EC and SMART Wireless.

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

Fiscal Year Ended

Geographic Net Sales:

Other Americas

Property and Equipment, Net:

Major Customers

A majority of the Company’s net sales are attributable to customers operating in the information technology industry.

Net sales to significant end user customers, including sales to their manufacturing subcontractors, defined as net sales in excess of 10% of total net sales, are as follows (dollars in thousands):

Fiscal Year Ended

August 28, 2020

August 30, 2019

August 31, 2018

Customer A (1)

Customer B (2)

Customer C (1)

Customer D (2)

Customer E (2)

Brazil Products customer

Specialty Memory Products customer

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

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

Earnings Per Share

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

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

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

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

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

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

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

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

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

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

Fiscal Year Ended

Net income (loss)

Weighted average shares outstanding:

Earnings per share:

Anti-dilutive weighted shares excluded from the

computation of diluted earnings per share

Other Expense, Net

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

Fiscal Year Ended

Foreign currency losses

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

Loss on extinguishment of debt/revolver

Total other expense, net

Selected Quarterly Information (Unaudited)

The following tables set forth certain data from the Company's consolidated statements of operations for each of the quarters in fiscal 2020 and 2019.

The unaudited quarterly consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements contained herein and include all adjustments that the Company considers necessary for a fair presentation of such information when read in conjunction with the Company's annual audited consolidated financial statements and notes thereto appearing elsewhere in this report.

The operating results for any quarter are not necessarily indicative of the results for any subsequent period or for the entire fiscal year.

Three Months Ended

(unaudited, in thousands except per share amounts)

Income from operations

Net income (loss)

Earnings per share

Shares used in per share

EXHIBIT INDEX

Financial Statements and Supplementary Data.”

Certain Financial Statement Schedules have been omitted since they are either not required, not applicable or the information is otherwise included.

See “Index to Exhibits” within Item 15 below.

INDEX TO EXHIBITS

Incorporated by Reference

2 unchanged sentences

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

Asset Purchase Agreement dated October 18, 2020, between Cree, Inc., SMART Global Holdings, Inc.

and CreeLED, Inc.

(formerly known as Chili Acquisition, Inc.)

Amendment to Asset Purchase Agreement dated March 1, 2021, between Cree, Inc., SMART Global Holdings, Inc.

and CreeLED, Inc.

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

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

Shah, Krishnan-Shah Family Partners, L.P., Fund No.

1, Krishnan-Shah Family Partners, L.P., Fund No.

3, Krishnan-Shah Family Partners, L.P., Fund No.

4, and The Ajay B.

Shah and Lata K.

Shah 1996 Trust u/a/d 5/28/1996

Amended and Restated Registration Rights Agreement, dated as of November 5, 2016, by and among SMART Global Holdings, Inc., Silver Lake Partners III Cayman (AIV III), L.P., Silver Lake Technology Investors III Cayman, L.P., Silver Lake Sumeru Fund Cayman, L.P., Silver Lake Technology Investors Sumeru Cayman, L.P., Mr.

Shah, Krishnan-Shah Family Partners, L.P., Fund No.

1, Krishnan-Shah Family Partners, L.P., Fund No.

3, Krishnan-Shah Family Partners, L.P., Fund No.

4, The Ajay B.

Shah and Lata K.

Shah 1996 Trust u/a/d 5/28/1996, Mr.

Patel, Patel Family Partners, LP – Fund No.

2, The Patel Revocable Trust u/a/d 6/6/2002, the Management Holders and the Warrant Holders

Saleen Holdings, Inc.

Employee Investors Shareholders Agreement, dated as of August 26, 2011, by and among Saleen Holdings, Inc., Silver Lake Partners III Cayman (AIV III), L.P., Silver Lake Technology Investors III Cayman, L.P., Silver Lake Sumeru Fund Cayman, L.P., Silver Lake Technology Investors Sumeru Cayman, L.P.

and the Employee Investors

Amended and Restated Investors Shareholders Agreement, dated as of November 5, 2016, by and among SMART Global Holdings, Inc., Silver Lake Partners III Cayman (AIV III), L.P., Silver Lake Technology Investors III Cayman, L.P., Silver Lake Sumeru Fund Cayman, L.P., Silver Lake Technology Investors Sumeru Cayman, L.P., the Management Investors and the Warrant Investors and Form of Amendment No.

2 to Investors Shareholders Agreement, by and among SMART Global Holdings, Inc., Silver Lake Partners III Cayman (AIV III), L.P., Silver Lake Technology Investors III Cayman, L.P., Silver Lake Sumeru Fund Cayman, L.P.

and Silver Lake Technology Investors Sumeru Cayman, L.P., the Management Investors and the Warrant Investors

Amendment No.

and Silver Lake Technology Investors Sumeru Cayman, L.P., the Management Investors and the Warrant Investors

Amendment No.

3 to Investors Shareholders Agreement, by and among SMART Global Holdings, Inc., Silver Lake Partners III Cayman (AIV III), L.P., Silver Lake Technology Investors III Cayman, L.P., Silver Lake Sumeru Fund Cayman, L.P., and Silver Lake Technology Investors Sumeru Cayman, L.P., the Management Investors and the Warrant Investors

Amendment No.

4 to Investors Shareholders Agreement, by and among SMART Global Holdings, Inc., Silver Lake Partners III Cayman (AIV III), L.P., Silver Lake Technology Investors III Cayman, L.P., Silver Lake Sumeru Fund Cayman, L.P., and Silver Lake Technology Investors Sumeru Cayman, L.P., the Management Investors and the Warrant Investors

Amendment No.

5 to Investors Shareholders Agreement dated as of June 20, 2018, by and among SMART Global Holdings, Inc., Silver Lake Partners III Cayman (AIV III), L.P., Silver Lake Technology Investors III Cayman, L.P., Silver Lake Sumeru Fund Cayman, L.P., Silver Lake Technology Investors Sumeru Cayman, L.P., the Management Investors (as defined in the A&R Investors Shareholders Agreement) and the Warrant Investors.

Description of Securities Registered Under Section 12 of the Exchange Act

2 unchanged sentences

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

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

SMART Global Holdings, Inc.

Amended and Restated 2017 Share Incentive Plan

Amendment to the SMART Global Holdings, Inc.

Amended and Restated 2017 Share Incentive Plan

Amendment to the SMART Global Holdings, Inc.

Amended and Restated 2017 Share Incentive Plan

SMART Global Holdings, Inc.

2021 Inducement Plan (effective as of February 15, 2021)

Form of Restricted Share Unit Award Agreement Under the SMART Global Holdings, Inc.

2021 Inducement Plan

SMART Global Holdings, Inc.

Employee Share Purchase Plan

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

1 unchanged sentence

and Jack Pacheco, dated December 19, 2017

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

and Alan Marten

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

and Bruce Goldberg

Severance and Change of Control Agreement, dated as of December 18, 2014, between SMART Modular Technologies (WWH), Inc.

and KiWan Kim

Offer Letter by and between SMART Global Holdings, Inc.

and Ken Rizvi, dated January 31, 2021

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

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

3 unchanged sentences

as Administrative Agent

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

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

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

and SMART Worldwide Holdings, Inc .

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

Form of Confirmation for the Base Capped Call Transactions

Form of Confirmation for the Additional Capped Call Transactions

Loan, Guaranty and Security Agreement dated as of December 23, 2020, among SMART Modular Technologies, Inc., SMART Embedded Computing, Inc., and Penguin Computing, Inc., as borrowers, the financial institutions party thereto as Lenders, and Bank of America, N.A.

as the agent for the lenders

Promissory Note, dated March 1, 2021, made by SMART Global Holdings, Inc.

in favor of CreeLED, Inc.

Form of Earnout Note

List of Subsidiaries of Registrant

7 unchanged sentences

Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

XBRL Instance Document

XBRL Taxonomy Extension Schema Document

XBRL Taxonomy Extension Calculation Linkbase Document

XBRL Taxonomy Extension Definition Linkbase Document

XBRL Taxonomy Extension Label Linkbase Document

XBRL Taxonomy Extension Presentation Linkbase Document

Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because XBRL tags are embedded within the Inline XBRL document

Inline XBRL Taxonomy Extension Schema Document

Inline XBRL Taxonomy Extension Calculation Linkbase Document

Inline XBRL Taxonomy Extension Definition Linkbase Document

Inline XBRL Taxonomy Extension Label Linkbase Document

Inline XBRL Taxonomy Extension Presentation Linkbase Document

Cover Page Interactive Data File (embedded within the Inline XBRL document)

Constitutes a management contract or compensatory plan or arrangement.

Portions of this exhibit have been omitted pursuant to Rule 601(b)(2) of Regulation S-K.

The omitted information is not material and would likely cause competitive harm to the registrant if publicly disclosed.

Form 10-K Summary

Not applicable.

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

SMART Global Holdings, Inc.

October 25, 2021

SMART Global Holdings, Inc.

/s/ Mark Adams

President and Chief Executive Officer

/s/ Ken Rizvi

Senior Vice President and Chief Financial Officer

POWER OF ATTORNEY AND SIGNATURES

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

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

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

/s/ Mark Adams

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

President and Chief Executive Officer and Director

October 25, 2021

/s/ Jack Pacheco

Executive Vice President and Chief Financial

Officer (Principal Financial and Accounting

(Principal Executive Officer)

/s/ Ken Rizvi

Senior Vice President and Chief Financial Officer

October 25, 2021

(Principal Financial and Accounting Officer)

/s/ Ajay Shah

Executive Chairman

of the Board of Directors

Chairman of the Board of Directors

October 25, 2021

/s/ Ajay Shah

/s/ Randy Furr

October 25, 2021

/s/ Kenneth Hao

/s/ Penelope Herscher

October 25, 2021

Penelope Herscher

/s/ Bryan Ingram

11 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-K

Item 9A. Controls and Procedures