What changed in this filing

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Item 1. Financial Statements

2021-01-28 compared with 2020-10-29 · 273 added, 232 removed, 598 unchanged (46% of the section changed)

Financial Statements (Unaudited)

Consolidated Balance Sheets as of September 27, 2020 and June 28, 2020

Consolidated Statements of Operations for the three months ended September 27, 2020 and September 29, 2019

Consolidated Statements of Comprehensive Loss for the three months ended September 27, 2020 and September 29, 2019

Consolidated Statements of Shareholders' Equity for the three months ended September 27, 2020 and September 29, 2019

Consolidated Statements of Cash Flows for the three months ended September 27, 2020 and September 29, 2019

Consolidated Balance Sheets as of December 27, 2020 and June 28, 2020

Consolidated Statements of Operations for the three and six months ended December 27, 2020 and December 29, 2019

Consolidated Statements of Comprehensive Loss for the three and six months ended December 27, 2020 and December 29, 2019

Consolidated Statements of Shareholders' Equity for the six months ended December 27, 2020 and December 29, 2019

Consolidated Statements of Cash Flows for the six months ended December 27, 2020 and December 29, 2019

Notes to Unaudited Consolidated Financial Statements

1 unchanged sentence

in millions of U.S.

Dollars, except share data in thousands September 27, 2020 June 28, 2020

Dollars, except share data in thousands December 27, 2020 June 28, 2020

Current assets:

8 unchanged sentences

Current assets held for sale 1.7 1.3

Current assets of discontinued operations 237.3 116.0

Total current assets 1,479.3 1,592.8

5 unchanged sentences

Other assets 33.9 33.6

Long-term assets of discontinued operations — 270.1

Total assets $ 3,124.9 $ 3,231.0

6 unchanged sentences

Other current liabilities 26.3 22.2

Current liabilities of discontinued operations 70.7 60.2

Total current liabilities 385.6 291.2

4 unchanged sentences

Other long-term liabilities 49.9 43.8

Long-term liabilities of discontinued operations — 9.8

Total long-term liabilities 867.7 850.6

2 unchanged sentences

Preferred stock, par value $ 0.01 ;

3,000 shares authorized at September 27, 2020 and June 28, 2020;

3,000 shares authorized at December 27, 2020 and June 28, 2020;

none issued and outstanding

Common stock, par value $ 0.00125 ;

200,000 shares authorized at September 27, 2020 and June 28, 2020;

110,296 and 109,230 shares issued and outstanding at September 27, 2020 and June 28, 2020, respectively

200,000 shares authorized at December 27, 2020 and June 28, 2020;

110,977 and 109,230 shares issued and outstanding at December 27, 2020 and June 28, 2020, respectively

Additional paid-in-capital 3,155.9 3,106.2

2 unchanged sentences

Total shareholders’ equity 1,864.9 2,083.1

Non-controlling interest 6.4 6.1

Noncontrolling interest from discontinued operations 6.7 6.1

Total equity 1,871.6 2,089.2

2 unchanged sentences

UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS

Three months ended

September 27, 2020 September 29, 2019

Three months ended Six months ended

December 27, 2020 December 29, 2019 December 27, 2020 December 29, 2019

in millions of U.S.

7 unchanged sentences

Amortization or impairment of acquisition-related intangibles 3.6 3.6 7.2 7.2

(Gain) loss on disposal or impairment of other assets ( 0.2 ) 1.0

Goodwill impairment 105.7 —

Loss on disposal or impairment of other assets 0.4 0.8 0.7 1.6

Other operating expense 2.6 10.9 11.2 17.0

Operating loss ( 57.6 ) ( 63.4 ) ( 119.8 ) ( 105.6 )

Non-operating expense (income), net 14.0 ( 1.6 )

Non-operating (income) expense, net ( 3.1 ) ( 5.0 ) 10.8 ( 6.6 )

Loss before income taxes ( 54.5 ) ( 58.4 ) ( 130.6 ) ( 99.0 )

Income tax expense 0.1 0.5

Income tax benefit ( 0.2 ) ( 0.5 ) ( 1.0 ) ( 1.8 )

Net loss from continuing operations ( 54.3 ) ( 57.9 ) ( 129.6 ) ( 97.2 )

Net (loss) income from discontinued operations ( 28.4 ) 3.9 ( 137.2 ) 5.4

Net loss ( 82.7 ) ( 54.0 ) ( 266.8 ) ( 91.8 )

Net income attributable to noncontrolling interest 0.3 —

Net income from discontinued operations attributable to noncontrolling interest 0.3 0.3 0.6 0.3

Net loss attributable to controlling interest ($ 83.0 ) ($ 54.3 ) ($ 267.4 ) ($ 92.1 )

Basic and diluted loss per share

Continuing operations ($ 0.49 ) ($ 0.54 ) ($ 1.18 ) ($ 0.90 )

Net loss attributable to controlling interest ($ 0.75 ) ($ 0.50 ) ($ 2.42 ) ($ 0.86 )

2 unchanged sentences

UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

Three months ended

Three months ended Six months ended

(in millions of U.S.

Dollars) September 27, 2020 September 29, 2019

Dollars) December 27, 2020 December 29, 2019 December 27, 2020 December 29, 2019

Net loss ($ 82.7 ) ($ 54.0 ) ($ 266.8 ) ($ 91.8 )

Other comprehensive loss:

Net unrealized gain on available-for-sale securities — 0.5

Net unrealized (loss) gain on available-for-sale securities ( 0.5 ) ( 0.3 ) ( 0.5 ) 0.2

Comprehensive loss ( 83.2 ) ( 54.3 ) ( 267.3 ) ( 91.6 )

Net income attributable to non-controlling interest 0.3 —

Net income from discontinued operations attributable to noncontrolling interest 0.3 0.3 0.6 0.3

Comprehensive loss attributable to controlling interest ($ 83.5 ) ($ 54.6 ) ($ 267.9 ) ($ 91.9 )

1 unchanged sentence

UNAUDITED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

Common Stock Additional Paid-in Capital Accumulated Deficit Accumulated Other Comprehensive Income Total Equity - Controlled Interest Non-controlling Interest Total Equity

Common Stock Additional Paid-in Capital Accumulated Deficit Accumulated Other Comprehensive Income Total Equity - Controlled Interest Non-controlling Interest from Discontinued Operations Total Equity

(in millions of U.S Dollars, except share data) Number of Shares Par Value

7 unchanged sentences

Balance at September 27, 2020 110,296 $ 0.1 $ 3,116.2 ($ 1,223.6 ) $ 16.0 $ 1,908.7 $ 6.4 $ 1,915.1

Net (loss) income — — — ( 83.0 ) — ( 83.0 ) 0.3 ( 82.7 )

Unrealized loss on available-for-sale securities — — — — ( 0.5 ) ( 0.5 ) — ( 0.5 )

Comprehensive (loss) income ( 83.5 ) 0.3 ( 83.2 )

Tax withholding on vested equity awards — — ( 1.6 ) — — ( 1.6 ) — ( 1.6 )

Stock-based compensation — — 18.6 — — 18.6 — 18.6

Exercise of stock options and issuance of shares 681 — 22.7 — — 22.7 — 22.7

Balance at December 27, 2020 110,977 $ 0.1 $ 3,155.9 ($ 1,306.6 ) $ 15.5 $ 1,864.9 $ 6.7 $ 1,871.6

The accompanying notes are an integral part of the consolidated financial statements

UNAUDITED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

Common Stock Additional Paid-in Capital Accumulated Deficit Accumulated Other Comprehensive Income Total Equity - Controlled Interest Non-controlling Interest Total Equity

(in millions of U.S.

8 unchanged sentences

Balance at September 29, 2019 107,697 $ 0.1 $ 2,895.8 ($ 885.3 ) $ 10.0 $ 2,020.6 $ 5.0 $ 2,025.6

Net (loss) income — — — ( 54.3 ) — ( 54.3 ) 0.3 ( 54.0 )

Unrealized loss on available-for-sale securities — — — — ( 0.3 ) ( 0.3 ) — ( 0.3 )

Comprehensive (loss) income ( 54.6 ) 0.3 ( 54.3 )

Tax withholding on vested equity awards — — ( 0.4 ) — — ( 0.4 ) — ( 0.4 )

Stock-based compensation — — 13.4 — — 13.4 — 13.4

Exercise of stock options and issuance of shares 334 — 10.7 — — 10.7 — 10.7

Balance at December 29, 2019 108,031 $ 0.1 $ 2,919.5 ($ 939.6 ) $ 9.7 $ 1,989.7 $ 5.3 $ 1,995.0

The accompanying notes are an integral part of the consolidated financial statements

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

Three months ended

Six months ended

(in millions of U.S.

Dollars) September 27, 2020 September 29, 2019

Dollars) December 27, 2020 December 29, 2019

Operating activities:

Net loss ($ 266.8 ) ($ 91.8 )

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

Net (loss) income from discontinued operations ( 137.2 ) 5.4

Net loss from continuing operations ( 129.6 ) ( 97.2 )

Adjustments to reconcile net loss from continuing operations to net cash used in operating activities:

Depreciation and amortization 56.2 46.2

1 unchanged sentence

Stock-based compensation 27.4 27.1

Goodwill impairment 105.7 —

Loss on disposal or impairment of long-lived assets 1.5 1.6

Amortization of premium/discount on investments 3.2 0.2

Loss (gain) on equity investment 3.4 ( 3.5 )

Foreign exchange (gain) loss on equity investment ( 0.5 ) 0.1

Realized gain on sale of investments ( 0.2 ) ( 0.1 )

Gain on equity investment ( 7.0 ) ( 9.9 )

Foreign exchange gain on equity investment ( 3.2 ) ( 1.3 )

Deferred income taxes 2.3 ( 2.4 )

6 unchanged sentences

Accrued contract liabilities 3.8 10.0

Cash provided by (used in) operating activities 0.4 ( 20.0 )

Net cash used in operating activities of continuing operations ( 32.1 ) ( 39.6 )

Net cash provided by operating activities of discontinued operations 6.2 27.8

Cash used in operating activities ( 25.9 ) ( 11.8 )

Investing activities:

5 unchanged sentences

Proceeds from sale of short-term investments 24.1 61.8

Net cash used in investing activities of continuing operations ( 52.5 ) ( 120.9 )

Net cash provided by investing activities of discontinued operations 2.7 0.4

Cash used in investing activities ( 49.8 ) ( 120.5 )

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Commitments and Contingencies

Reportable Segments

Restructuring

Subsequent Events

Note 1 – Basis of Presentation and New Accounting Standards

(the Company) is an innovator of wide bandgap semiconductors, focused on silicon carbide and gallium nitride materials, devices for power and radio-frequency (RF) applications and specialty lighting-class light emitting diode (LED) products.

The Company's silicon carbide and gallium nitride (GaN) materials and devices are targeted for applications such as transportation, power supplies, inverters and wireless systems.

(the Company) is an innovator of wide bandgap semiconductors, focused on silicon carbide and gallium nitride (GaN) materials and devices for power and radio-frequency (RF) applications.

The Company's silicon carbide and GaN materials and devices are targeted for applications such as transportation, power supplies, inverters and wireless systems.

In addition, the Company is an innovator of specialty lighting-class light emitting diode (LED) products.

The Company's LEDs are targeted for use in indoor and outdoor lighting, electronic signs and signals and video displays.

The Company operates in two reportable segments:

• Wolfspeed , which consists of silicon carbide and GaN materials, power devices and RF devices based on wide bandgap semiconductor materials and silicon.

As discussed more fully below in Note 2, “Discontinued Operations,” on October 18, 2020, the Company entered into a definitive agreement to sell certain assets and subsidiaries comprising its former LED Products segment (the LED Business) to SMART Global Holdings, Inc.

(SGH) and its wholly owned newly-created acquisition subsidiary (collectively with SGH, SMART) for up to $ 300 million, including fixed upfront and deferred payments and contingent consideration (the LED Business Divestiture).

As a result, the Company has classified the results and cash flows of the LED Products segment as discontinued operations in its consolidated statements of operations and consolidated statements of cash flows for all periods presented.

Additionally, the related assets and liabilities associated with the discontinued operations are classified as held for sale in the consolidated balance sheets.

Unless otherwise noted, discussion within these notes to the consolidated financial statements relates to the Company's continuing operations.

The Company’s continuing operations consist of the Wolfspeed business, which includes silicon carbide and GaN materials, power devices and RF devices based on wide bandgap semiconductor materials and silicon.

The Company’s materials products and power devices are used in electric vehicles, motor drives, power supplies, solar and transportation applications.

The Company’s materials products and RF devices are used in military communications, radar, satellite and telecommunication applications.

• LED Products , which consists of LED chips and LED components.

The Company's LED products enable its customers to develop and market LED-based products for lighting, video screens, automotive and specialty lighting applications.

The majority of the Company's products are manufactured at its production facilities located in North Carolina, California, Arkansas and China.

3 unchanged sentences

is a North Carolina corporation established in 1987, and its headquarters are in Durham, North Carolina.

As discussed more fully below in Note 16, “Subsequent Events,” on October 18, 2020, the Company entered into a definitive agreement to sell certain assets and subsidiaries comprising its LED Products segment (the LED Business) to SMART Global Holdings, Inc.

(SGH) and its wholly owned subsidiary Chili Acquisition, Inc.

(collectively with SGH, SMART) for up to $ 300 million, including fixed upfront and deferred payments and contingent consideration (the LED Business Divestiture).

Following the completion of the LED Business Divestiture, the Company will operate solely in the Wolfspeed segment.

Basis of Presentation

The consolidated financial statements presented herein have been prepared by the Company and have not been audited.

In the opinion of management, all normal and recurring adjustments necessary to fairly state the consolidated financial position, results of operations, comprehensive loss, shareholders' equity and cash flows at September 27, 2020, and for all periods presented, have been made.

In the opinion of management, all normal and recurring adjustments necessary to fairly state the consolidated financial position, results of operations, comprehensive loss, shareholders' equity and cash flows at December 27, 2020, and for all periods presented, have been made.

All material intercompany accounts and transactions have been eliminated.

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These financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended June 28, 2020 (fiscal 2020).

The results of operations for the three months ended September 27, 2020 are not necessarily indicative of the operating results that may be attained for the entire fiscal year ending June 27, 2021 (fiscal 2021).

The results of operations for the three and six months ended December 27, 2020 are not necessarily indicative of the operating results that may be attained for the entire fiscal year ending June 27, 2021 (fiscal 2021).

Additionally, the impact of the COVID-19 pandemic to the results of operations is uncertain.

2 unchanged sentences

Actual amounts could differ materially from those estimates.

Certain accounting matters that generally require consideration of forecasted financial information were assessed regarding impacts from the COVID-19 outbreak as of September 27, 2020 and through the date of this Quarterly Report using reasonably available information as of those dates.

The Company revised income tax expense for the three and six months ended December 29, 2019 to correct the income tax provision calculation for the second quarter of fiscal 2020.

The Company increased income tax expense for the three and six months ended December 29, 2019, resulting in a net increase to net loss of $ 1.5 million in each period.

The Company will also

revise the unaudited statements of operations for the three months ended March 29, 2020 in the unaudited interim consolidated financial statements to be filed in the Quarterly Report on Form 10-Q for the corresponding period in fiscal 2021 to decrease income tax expense by $ 1.5 million for the three months ended March 29, 2020, which will result in a net decrease to net loss of $ 1.5 million for the three months ended March 29, 2020.

No revision will be required to the unaudited statement of operations for the nine months ended March 29, 2020 in the unaudited interim consolidated financial statements to be filed in the Quarterly Report on Form 10-Q for the corresponding period in fiscal 2021.

The Company concluded these errors were not material individually or in the aggregate to any of the periods impacted.

Certain accounting matters that generally require consideration of forecasted financial information were assessed regarding impacts from the COVID-19 outbreak as of December 27, 2020 and through the date of this Quarterly Report using reasonably available information as of those dates.

The accounting matters assessed included, but were not limited to, allowance for doubtful accounts, the carrying value of goodwill and other long-lived tangible and intangible assets, the potential impact to earnings of unrealized losses on investments, valuation allowances for tax assets and the ability to estimate an annual effective tax rate.

While the assessments resulted in no material impacts to the consolidated financial statements as of and for the quarter

ended September 27, 2020, the Company believes the full impact of the outbreak remains uncertain and will continue to assess if ongoing developments related to the outbreak may cause future material impacts to our consolidated financial statements.

While the assessments resulted in no material impacts to the consolidated financial statements as of and for the quarter ended December 27, 2020, the Company believes the full impact of the outbreak remains uncertain and will continue to assess if ongoing developments related to the outbreak may cause future material impacts to its consolidated financial statements.

Segment Reporting

As a result of the pending LED Business Divestiture, the Company has determined that it operates a single reporting segment within continuing operations, Wolfspeed.

Accordingly, the Chief Operating Decision Maker (CODM) allocates resources and assesses performance on a consolidated basis.

The Company's identified CODM is the Chief Executive Officer.

Recently Adopted Accounting Pronouncements

4 unchanged sentences

GAAP with a methodology that reflects expected credit losses.

The Company adopted this standard using the modified retrospective transition method on June 29, 2020, the first day of the Company's 2021 fiscal year.

The Company adopted this standard using the modified retrospective transition method on June 29, 2020, the first day of its 2021 fiscal year.

Upon adoption, prior period balances were not adjusted and the Company determined no cumulative-effect adjustment to retained earnings as of June 29, 2020 was required.

14 unchanged sentences

Note 2 – Discontinued Operations

The Company did not have any discontinued operations activity for the three months ended September 27, 2020 and September 29, 2019.

On October 18, 2020, the Company entered into an Asset Purchase Agreement (the Purchase Agreement) with SMART with respect to the LED Business Divestiture.

The transaction is targeted to close in the first calendar quarter of 2021, subject to customary closing conditions and governmental approvals.

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

(collectively, the LED Business);

and (ii) assume certain liabilities related to the LED Business.

The Company will retain certain assets used in and pre-closing liabilities associated with the LED Products segment.

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 the Company by SGH 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 a unsecured promissory note of SGH (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 closing of the LED Business Divestiture, the Company and SMART will also enter into certain ancillary and related agreements, including (i) an Intellectual Property Assignment and License Agreement, which will assign to SMART certain intellectual property owned by the Company and its affiliates and license to SMART certain additional intellectual property owned by the Company, (ii) a Transition Services Agreement, which is designed to ensure a smooth transition of the LED Business to SMART, (iii) a Wafer Supply and Fabrication Services Agreement (the Wafer Supply Agreement), pursuant to which the Company will supply SMART with certain silicon carbide materials and fabrication services for four years , and (iv) a Real Estate License Agreement, which will allow SMART to use certain premises owned by the Company to conduct the LED Business for a period of up to 24 months after closing.

The completion of the LED Business Divestiture is subject to the satisfaction or waiver of a number of conditions set forth in the Purchase Agreement, including the receipt of governmental and regulatory consents and approvals and expiration of any mandatory waiting period related thereto, and other customary closing conditions.

The Purchase Agreement provides for customary termination rights of the parties.

Because the LED Business Divestiture represents a strategic shift that will have a major effect on the Company’s operations and financial results, the Company has classified the results of the LED Business as discontinued operations in the Company’s consolidated statements of operations for all periods presented.

The Company ceased recording depreciation and amortization of long-lived assets conveying in the Purchase Agreement upon classification as discontinued operations in October 2020.

Additionally, the related assets and liabilities associated with discontinued operations are classified as held for sale in the consolidated balance sheets.

The assets and liabilities held for sale as of December 27, 2020 are classified as current in the consolidated balance sheet as the Company expects the transaction to close and proceeds to be collected within one year.

The following table presents the financial results of the LED Business as (loss) income from discontinued operations, net of income taxes in the Company's consolidated statements of operations:

Three months ended Six months ended

(in millions of U.S.

Dollars) December 27, 2020 December 29, 2019 December 27, 2020 December 29, 2019

Revenue, net $ 105.2 $ 119.2 $ 206.3 $ 234.3

Cost of revenue, net 80.4 92.9 163.0 186.3

Gross profit 24.8 26.3 43.3 48.0

Operating expenses:

Research and development 8.0 8.6 16.4 17.1

Sales, general and administrative 9.0 7.8 16.9 16.4

Goodwill impairment 6.9 — 112.6 —

Impairment on assets held for sale 19.5 — 19.5 —

(Gain) loss on disposal or impairment of long-lived assets ( 0.5 ) — ( 1.0 ) 0.2

Other operating expense 7.7 2.9 12.5 4.0

Operating (loss) income ( 25.8 ) 7.0 ( 133.6 ) 10.3

Non-operating income ( 0.1 ) ( 0.1 ) — ( 0.1 )

(Loss) income before income taxes ( 25.7 ) 7.1 ( 133.6 ) 10.4

Income tax expense 2.7 3.2 3.6 5.0

Net (loss) income ( 28.4 ) 3.9 ( 137.2 ) 5.4

Net income attributable to noncontrolling interest 0.3 0.3 0.6 0.3

Net (loss) income attributable to controlling interest ($ 28.7 ) $ 3.6 ($ 137.8 ) $ 5.1

As of September 27, 2020, the Company determined it would more likely than not sell all or a portion of the assets comprising the LED Products segment below carrying value.

As a result, the Company recorded an impairment to goodwill of $ 105.7 million.

As of December 27, 2020, the Company recorded an additional impairment to goodwill of $ 6.9 million and an impairment to assets held for sale associated with the pending LED Business Divestiture of $ 19.5 million.

The following table presents the assets and liabilities of the LED Business classified as discontinued operations:

(in millions of U.S.

Dollars) December 27, 2020 June 28, 2020

Short-term investments $ 8.0 $ 12.0

Accounts receivable, net 48.1 41.6

Inventories 49.8 57.2

Prepaid expenses 0.4 0.1

Other current assets 4.7 5.1

Current assets of discontinued operations 111.0 116.0

Property and equipment, net 57.8 60.3

Goodwill 58.3 180.3

Intangible assets, net 22.7 22.7

Deferred tax assets 5.1 5.1

Other assets 1.9 1.7

Valuation allowance on held for sale assets ( 19.5 ) —

Long-term assets of discontinued operations (1)

Accounts payable and accrued expenses 34.2 31.0

Accrued contract liabilities 22.1 24.1

Income taxes payable 0.9 2.0

Other current liabilities 3.4 3.1

Current liabilities of discontinued operations 60.6 60.2

Other long-term liabilities 10.1 9.8

Long-term liabilities of discontinued operations (1)

(1) Long-term assets and liabilities of discontinued operations as of December 27, 2020 are classified as current on the consolidated balance sheet as the Company expects the transaction to close within twelve months of the balance sheet date.

Note 3 – Revenue Recognition

In accordance with FASB Accounting Standards Codification 606 "Revenue from Contracts with Customers" (ASC 606), the Company follows a five-step approach defined by the new standard for recognizing revenue, consisting of the following:

In accordance with FASB Accounting Standards Codification 606 "Revenue from Contracts with Customers" (ASC 606), the Company follows a five-step approach defined by the standard for recognizing revenue, consisting of the following:

(1) identify the contract with a customer;

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and (5) recognize revenue when, or as, the entity satisfies a performance obligation.

Contract liabilities primarily include various rights of return and customer deposits, as well as deferred revenue, price protection guarantees and the Company's liability under the LED Supply Agreement.

Contract liabilities were $ 78.3 million as of September 27, 2020 and $ 80.3 million as of June 28, 2020.

The decrease was primarily due to lower reserve liabilities and continued fulfillment on the LED Supply Agreement.

Contract liabilities primarily include various rights of return and customer deposits, as well as deferred revenue and price protection guarantees.

Contract liabilities were $ 51.7 million as of December 27, 2020 and $ 47.9 million as of June 28, 2020.

The increase was primarily due to increased reserve liabilities.

Contract liabilities are recorded within accrued contract liabilities and other long-term liabilities on the balance sheet.

Before the adoption of ASC 606, liabilities relating to various rights of return were recorded as a deduction to accounts receivable.

Disaggregated revenue by geography is presented in Note 14, "Reportable Segments".

For the three months ended September 27, 2020, the Company recognized revenue of $ 1.0 million that was included in contract liabilities as of June 28, 2020.

The amount recognized primarily related to the recognition of contingent liabilities related to the LED Supply Agreement and deferred revenue.

Revenue recognized related to performance obligations that were satisfied or partially satisfied in previous periods was not material for the three months ended September 27, 2020.

For the three and six months ended December 27, 2020, the Company did not recognize any revenue that was included in contract liabilities as of June 28, 2020.

Revenue recognized related to performance obligations that were satisfied or partially satisfied in previous periods was not material for the three and six months ended December 27, 2020.

The Company conducts business in several geographic areas.

Revenue is attributed to a particular geographic region based on the shipping address for the products.

Disaggregated revenue from external customers by geographic area is as follows:

Three months ended Six months ended

December 27, 2020 December 29, 2019 December 27, 2020 December 29, 2019

(in millions of U.S.

Dollars) Revenue % of Revenue Revenue % of Revenue Revenue % of Revenue Revenue % of Revenue

United States $ 25.0 19.7 % $ 28.7 23.8 % $ 53.9 22.2 % $ 56.3 22.7 %

China 24.2 19.1 % 14.4 11.9 % 46.6 19.2 % 33.9 13.6 %

Europe 53.3 42.0 % 45.8 37.9 % 89.1 36.7 % 90.8 36.6 %

Other 24.5 19.2 % 31.8 26.4 % 52.9 21.9 % 67.4 27.1 %

Total $ 127.0 $ 120.7 $ 242.5 $ 248.4

Note 4 – Leases

2 unchanged sentences

Variable costs include lease payments that were volume or usage-driven in accordance with the use of the underlying asset, as well as non-lease components incurred with respect to actual terms rather than contractually fixed amounts.

The Company's finance lease obligations primarily relate to Wolfspeed manufacturing space in Malaysia and a 49 -year ground lease on a future silicon carbide fabrication facility in New York.

The Company's finance lease obligations primarily relate to manufacturing space in Malaysia and a 49 -year ground lease on a future silicon carbide fabrication facility in New York.

Balance Sheet

1 unchanged sentence

Operating Leases:

September 27, 2020 June 28, 2020

December 27, 2020 June 28, 2020

Right-of-use asset (1)

5 unchanged sentences

Finance lease assets (4)

$ 11.2 $ 15.4

Current portion of finance lease liabilities 0.4 3.6

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Statement of Operations

Operating lease expense was $ 1.6 million and $ 1.4 million for the three months ended September 27, 2020 and September 29, 2019, respectively.

Short-term lease expense, variable lease expense and lease income were immaterial for the three months ended September 27, 2020 and September 29, 2019.

Finance lease amortization was $ 0.2 million and interest expense was $ 0.1 million for the three months ended September 27, 2020.

Finance lease amortization and interest expense were not recorded for the three months ended September 29, 2019.

Operating lease expense was $ 1.4 million and $ 2.8 million for the three and six months ended December 27, 2020, respectively, and $ 1.2 million and $ 2.4 million for the three and six months ended December 29, 2019, respectively.

Short-term lease expense, variable lease expense and lease income were immaterial for the three and six months ended December 27, 2020 and December 29, 2019.

Finance lease amortization was $ 0.2 million and $ 0.4 million and interest expense was $ 0.1 million and $ 0.2 million for the three and six months ended December 27, 2020, respectively.

Finance lease amortization and interest expense were less than $ 0.1 million for the three and six months ended December 29, 2019.

Cash flow information consisted of the following:

Three months ended

Six months ended

(in millions of U.S.

Dollars) September 27, 2020 September 29, 2019

Dollars) December 27, 2020 December 29, 2019

Cash used in operating activities:

3 unchanged sentences

Cash paid for principal portion of finance leases 0.2 0.1

Non-cash operating activities:

Non-cash activities:

Operating lease additions due to adoption of ASC 842 — 11.0

1 unchanged sentence

Finance lease additions — 3.3

Non-cash investing activities (1) :

Transfer of finance lease liability to accounts payable and accrued expenses (2)

(1) Less than $ 0.1 million for the six months ended December 29, 2019.

(2) In the first quarter of fiscal 2021, the Company executed the available bargain purchase option for certain finance leases relating to property and equipment, net, in order to purchase the assets.

Lease Liability Maturities

Maturities of operating and finance lease liabilities as of September 27, 2020 were as follows (in millions of U.S.

Maturities of operating and finance lease liabilities as of December 27, 2020 were as follows (in millions of U.S.

Fiscal Year Ending Operating Leases Finance Leases Total

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(in millions of U.S.

Dollars) September 27, 2020 June 28, 2020

Dollars) December 27, 2020 June 28, 2020

Billed trade receivables $ 81.1 $ 71.5

5 unchanged sentences

(in millions of U.S.

Dollars) September 27, 2020

Dollars) December 27, 2020

Balance at beginning of period $ 0.7

4 unchanged sentences

(in millions of U.S.

Dollars) September 27, 2020 June 28, 2020

Dollars) December 27, 2020 June 28, 2020

Raw material $ 43.5 $ 36.9

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Inventories $ 144.3 $ 121.9

In addition to inventory held by the Company associated with the Wolfspeed business, the Company holds inventory related to a future Wafer Supply Agreement to be entered into in connection with the LED Business Divestiture as well as unallocated inventoried costs consisting primarily of manufacturing employees’ stock-based compensation, profit sharing and quarterly or annual incentive compensation, matching contributions under the Company’s 401(k) plan, and acquisition related costs.

December 27, 2020 June 28, 2020

Wolfspeed $ 116.4 $ 97.3

Inventory related to future Wafer Supply Agreement 17.1 19.0

Unallocated inventories 10.8 5.6

Consolidated inventories $ 144.3 $ 121.9

Accounts Payable and Accrued Expenses

1 unchanged sentence

(in millions of U.S.

Dollars) September 27, 2020 June 28, 2020

Dollars) December 27, 2020 June 28, 2020

Accounts payable, trade $ 85.1 $ 88.1

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Other operating expense consisted of the following:

Three months ended

Three months ended Six months ended

(in millions of U.S.

Dollars) September 27, 2020 September 29, 2019

Dollars) December 27, 2020 December 29, 2019 December 27, 2020 December 29, 2019

Factory optimization restructuring $ 1.3 $ 1.2 $ 2.9 $ 2.4

8 unchanged sentences

(in millions of U.S.

Dollars) September 27, 2020 June 28, 2020

Dollars) December 27, 2020 June 28, 2020

Currency translation gain $ 9.5 $ 9.5

1 unchanged sentence

Accumulated other comprehensive income, net of taxes $ 15.5 $ 16.0

(1) Amounts as of September 27, 2020 and June 28, 2020 include a $ 2.4 million loss related to tax on unrealized gain (loss) on available-for-sale securities.

(1) Amounts as of December 27, 2020 and June 28, 2020 include a $ 2.4 million loss related to tax on unrealized gain (loss) on available-for-sale securities.

Reclassifications Out of Accumulated Other Comprehensive Income

Less than $ 0.1 million was reclassified for each of the three month periods ended September 27, 2020 and September 29, 2019.

Reclassifications out of accumulated other comprehensive income were $ 0.2 million for the three and six months ended December 27, 2020 and $ 0.1 million for the three and six months ended December 29, 2019.

Amounts were reclassified to non-operating expense, net on the consolidated statements of operations.

Non-Operating Expense, net

The following table summarizes the components of non-operating expense, net:

Three months ended

Non-Operating (Income) Expense, net

The following table summarizes the components of non-operating (income) expense, net:

Three months ended Six months ended

(in millions of U.S.

Dollars) September 27, 2020 September 29, 2019

Dollars) December 27, 2020 December 29, 2019 December 27, 2020 December 29, 2019

Foreign currency loss, net ($ 2.2 ) ($ 1.3 ) ($ 2.4 ) ($ 1.2 )

Loss (gain) on equity investment, net 3.4 ( 3.5 )

Gain on sale of investments, net ( 0.2 ) ( 0.1 ) ( 0.2 ) ( 0.1 )

Gain on equity investment, net ( 10.4 ) ( 6.4 ) ( 7.0 ) ( 9.9 )

Interest income ( 2.2 ) ( 4.7 ) ( 4.9 ) ( 10.2 )

1 unchanged sentence

Other, net — ( 0.2 ) 0.3 ( 0.3 )

Non-operating expense, net $ 14.0 ($ 1.6 )

The change in loss (gain) on equity investment, net is due to the decrease in the Lextar Electronics Corporation (Lextar) stock price.

Non-operating (income) expense, net ($ 3.1 ) ($ 5.0 ) $ 10.8 ($ 6.6 )

The change in gain on equity investment, net is due to fluctuations in the Lextar Electronics Corporation (Lextar) stock price.

Statements of Cash Flows - non-cash activities

Three months ended

Non-cash operating activities September 27, 2020 September 29, 2019

Six months ended

December 27, 2020 December 29, 2019

Lease asset and liability additions (1)

Lease asset and liability modifications, net 0.2 4.8

Non-cash investing and financing activities

Transfer of finance lease liability to accounts payable and accrued expenses (2)

(1) The total amount of lease asset and liability additions for the three months ended September 29, 2019 relates to the increase of right-of-use assets and matching lease liabilities as a result of adopting ASC 842.

(1) $ 11.0 million of the lease asset and liability additions for the six months ended December 29, 2019 relates to the increase of right-of-use assets and matching lease liabilities as a result of adopting ASC 842.

See Note 4, "Leases", for further information.

Accrued property and equipment as of September 27, 2020 and September 29, 2019 was $ 108.2 million and $ 8.8 million, respectively.

Accrued property and equipment as of December 27, 2020 and December 29, 2019 was $ 145.0 million and $ 6.2 million, respectively.

Note 6 – Investments

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Other long-term investments consist of the Company's ownership interest in Lextar.

Short-term investments as of September 27, 2020 and June 28, 2020 consisted of the following:

September 27, 2020

Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Credit Loss Allowance (1)

Short-term investments as of December 27, 2020 and June 28, 2020 consisted of the following:

December 27, 2020

Amortized Cost Gross Unrealized Gains Gross Unrealized Losses (1)

Credit Loss Allowance (2)

Estimated Fair Value

4 unchanged sentences

Certificates of deposit 7.7 — — — 7.7

Variable rate demand note 2.1 — — — 2.1

Commercial paper 1.7 — — — 1.7

11 unchanged sentences

Total short-term investments $ 782.0 $ 8.9 $ — $ 790.9

(1) The Company had an unrealized loss of less than $ 0.1 million as of December 27, 2020 and June 28, 2020.

(2) Credit loss allowance is applicable beginning in the first quarter of fiscal 2021 due to adoption of ASU 2016-13, which replaced the Company's other than temporary impairment analysis with an expected credit losses model.

(2) The Company had an unrealized loss of less than $0.1 million as of June 28, 2020.

The Company does not include accrued interest in estimated fair values of short-term investments and does not record an allowance for credit losses on receivables related to accrued interest.

Accrued interest receivable was $ 4.1 million and $ 4.3 million as of September 27, 2020 and June 28, 2020, respectively, and is recorded in other current assets on the consolidated balance sheets.

Accrued interest receivable was $ 3.8 million and $ 4.3 million as of December 27, 2020 and June 28, 2020, respectively, and is recorded in other current assets on the consolidated balance sheets.

When necessary, write offs of noncollectable interest income are recorded as a reversal to interest income.

There were no write offs of noncollectable interest income for each of the three month periods ended September 27, 2020 and September 29, 2019.

There were no write offs of noncollectable interest income for each of the three and six month periods ended December 27, 2020 and December 29, 2019.

The following tables present the gross unrealized losses and estimated fair value of the Company’s short-term investments, aggregated by investment type and the length of time that individual securities have been in a continuous unrealized loss position:

September 27, 2020

December 27, 2020

Less than 12 Months Greater than 12 Months Total

Fair Value Unrealized Loss Fair Value Unrealized Loss Fair Value Unrealized Loss

Fair Value Unrealized Loss (1)

Fair Value Unrealized Loss Fair Value Unrealized Loss

Municipal bonds $ 1.0 $ — $ — $ — $ 1.0 $ —

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Number of securities with an unrealized loss 46 — 46

(1) S ecurities with an unrealized loss of less than 12 months as of June 28, 2020 have an unrealized loss value of less than $0.1 million, individually and in the aggregate.

(1) S ecurities with an unrealized loss of less than 12 months for the periods as of December 27, 2020 and June 28, 2020 have an unrealized loss value of less than $ 0.1 million, individually and in the aggregate.

The Company utilizes specific identification in computing realized gains and losses on the sale of investments.

There were less than $0.1 million of realized losses on the sale of investments for each of the three month periods ended September 27, 2020 and September 29, 2019.

Realized losses are included in non-operating expense in the consolidated statements of operations.

Unrealized gains and losses are included as a separate component of equity, net of tax, unless the Company evaluates there is an expected credit loss.

Realized gains of $ 0.2 million for the three and six months ended December 27, 2020 and $ 0.1 million for the three and six months ended December 29, 2019 are included in non-operating expense in the consolidated statements of operations.

Unrealized gains and losses are included as a separate component of equity, net of tax, unless the Company determines there is an expected credit loss.

The Company evaluates its investments for expected credit losses.

The Company believes it is able to and intends to hold each of the investments held with an unrealized loss as of September 27, 2020 until the investments fully recover in market value.

None of the investments with an unrealized loss as of September 27, 2020 had credit downgrades in the current period.

No allowance for credit losses was recorded as of September 27, 2020.

The contractual maturities of short-term investments as of September 27, 2020 were as follows:

The Company believes it is able to and intends to hold each of the investments held with an unrealized loss as of December 27, 2020 until the investments fully recover in market value.

None of the investments with an unrealized loss as of December 27, 2020 had credit downgrades in the current period.

No allowance for credit losses was recorded as of December 27, 2020.

The contractual maturities of short-term investments as of December 27, 2020 were as follows:

Within One Year After One, Within Five Years After Five, Within Ten Years After Ten Years Total

4 unchanged sentences

Certificates of deposit 7.7 — — — 7.7

Variable rate demand note — — — 2.1 2.1

Commercial paper 1.7 — — — 1.7

11 unchanged sentences

The financial assets for which the Company performs recurring fair value remeasurements are cash equivalents, short-term investments and long-term investments.

As of September 27, 2020 and June 28, 2020, financial assets utilizing Level 1 inputs included money market funds and U.S.

As of December 27, 2020 and June 28, 2020, financial assets utilizing Level 1 inputs included money market funds and U.S.

treasury securities.

4 unchanged sentences

These sources determine prices utilizing market income models which factor in, where applicable, transactions of similar assets in active markets, transactions of identical assets in infrequent markets, interest rates, bond or credit default swap spreads and volatility.

The Company did not have any financial assets requiring the use of Level 3 inputs as of September 27, 2020 and June 28, 2020.

The Company did not have any financial assets requiring the use of Level 3 inputs as of December 27, 2020 and June 28, 2020.

The following table sets forth financial instruments carried at fair value within the U.S.

GAAP hierarchy:

September 27, 2020 June 28, 2020

December 27, 2020 June 28, 2020

(in millions of U.S.

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Note 8 – Goodwill and Intangible Assets

The following table summarizes changes in goodwill during the three months ended September 27, 2020:

The following table summarizes changes in goodwill during the six months ended December 27, 2020:

(in millions of U.S.

Dollars) Wolfspeed LED Products Total

Dollars) Total

Balance at June 28, 2020 $ 349.7

Impairment — ( 105.7 ) ( 105.7 )

Balance at September 27, 2020 $ 349.7 $ 74.6 $ 424.3

The Company reviews goodwill for impairment whenever events or circumstances indicate potential impairment.

In the first quarter of fiscal 2021, the Company determined it would more likely than not sell all or a portion of the assets comprising the LED Products segment below carrying value.

As a result of this triggering event, the Company recorded an impairment to goodwill of $ 105.7 million as of September 27, 2020.

As of September 27, 2020, the potential sale had not met the held-for-sale criteria.

On October 18, 2020, the Company entered into a definitive agreement with SMART related to the LED Business Divestiture.

See Note 16, "Subsequent Events," for additional information on the transaction.

Transfer in connection with LED Business Divestiture (1)

Balance at December 27, 2020 $ 359.2

(1) In the second quarter of fiscal 2021, the Company determined that as part of its goodwill impairment analysis on held for sale assets related to the pending LED Business Divestiture, it was necessary to transfer a portion of goodwill from the former LED Products segment, now classified as discontinued operations, to goodwill associated with continuing operations.

Intangible Assets, net

The following table presents the components of intangible assets, net:

September 27, 2020 June 28, 2020

December 27, 2020 June 28, 2020

(in millions of U.S.

3 unchanged sentences

Non-compete agreements 12.2 ( 8.6 ) 3.6 12.2 ( 7.1 ) 5.1

Trade names 0.5 ( 0.5 ) — 0.5 ( 0.5 ) —

Acquisition related intangible assets 177.0 ( 56.1 ) 120.9 177.0 ( 48.9 ) 128.1

1 unchanged sentence

Total intangible assets $ 246.7 ($ 97.8 ) $ 148.9 $ 246.3 ($ 89.4 ) $ 156.9

Total amortization of acquisition-related intangibles assets was $ 3.6 million and $ 3.6 million for the three months ended September 27, 2020 and September 29, 2019, respectively.

Total amortization of patents and licensing rights was $ 2.3 million and $ 2.2 million for the three months ended September 27, 2020 and September 29, 2019.

Total amortization of acquisition-related intangibles assets was $ 3.6 million and $ 7.2 million for the three and six months ended December 27, 2020 and $ 3.6 million and $ 7.2 million for the three and six months ended December 29, 2019.

Total amortization of patents and licensing rights was $ 1.4 million and $ 2.6 million for the three and six months ended December 27, 2020 and $ 1.2 million and $ 2.4 million for the three and six months ended December 29, 2019.

Total future amortization expense of intangible assets is estimated to be as follows:

11 unchanged sentences

Revolving Line of Credit

As of September 27, 2020, the Company had a $ 125.0 million secured revolving line of credit (the Credit Agreement) under which the Company can borrow, repay and reborrow loans from time to time prior to its scheduled maturity date of January 9, 2023.

As of December 27, 2020, the Company had a $ 125.0 million secured revolving line of credit (the Credit Agreement) under which the Company can borrow, repay and reborrow loans from time to time prior to its scheduled maturity date of January 9, 2023.

The Credit Agreement requires the Company to maintain a ratio of certain cash equivalents and marketable securities to outstanding loans and letter of credit obligations greater than 1.25 :1, with no other financial covenants.

The Company classifies balances outstanding under the Credit Agreement as long-term debt in the consolidated balance sheets.

As of September 27, 2020, the Company had no outstanding borrowings under the Credit Agreement, $ 125.0 million in available commitments under the Credit Agreement and $ 125.0 million available for borrowing.

For the three months ended September 27, 2020, the average interest rate was 0.00 %.

As of September 27, 2020, the unused line fee on available borrowings is 25 basis points.

As of December 27, 2020, the Company had no outstanding borrowings under the Credit Agreement, $ 125.0 million in available commitments under the Credit Agreement and $ 125.0 million available for borrowing.

For the three and six months ended December 27, 2020, the average interest rate was 0.00 %.

As of December 27, 2020, the unused line fee on available borrowings is 25 basis points.

2023 Convertible Notes

42 unchanged sentences

(in millions of U.S.

Dollars) September 27, 2020 June 28, 2020

Dollars) December 27, 2020 June 28, 2020

Principal $ 999.8 $ 999.8

3 unchanged sentences

(in millions of U.S.

Dollars) September 27, 2020 June 28, 2020

Dollars) December 27, 2020 June 28, 2020

Discount related to value of conversion option $ 262.3 $ 262.3

3 unchanged sentences

The interest expense, net recognized related to the Notes is as follows:

Three months ended

Three months ended Six months ended

(in millions of U.S.

Dollars) September 27, 2020 September 29, 2019

Dollars) December 27, 2020 December 29, 2019 December 27, 2020 December 29, 2019

Interest expense, net of capitalized interest $ 2.8 $ 1.2 $ 6.0 $ 2.5

2 unchanged sentences

The Company capitalizes interest related to the Notes in connection with the building of a new silicon carbide fabrication facility in New York.

For the three months ended September 27, 2020, the Company capitalized $ 0.2 million of interest expense and $ 0.4 million of amortization of discount and issuance costs.

No interest expense was capitalized for the three months ended September 29, 2019.

The estimated fair value of the Notes is $ 1,333.2 million as of September 27, 2020, as determined by a Level 2 valuation.

For the three and six months ended December 27, 2020, the Company capitalized $ 0.6 million and $ 0.8 million of interest expense, respectively, and $ 1.3 million and $ 1.7 million of amortization of discount and issuance costs, respectively.

No interest expense was capitalized for the three and six months ended December 29, 2019.

The estimated fair value of the Notes is $ 2,053.8 million as of December 27, 2020, as determined by a Level 2 valuation.

Note 10 – Loss Per Share

The details of the computation of basic and diluted loss per share are as follows:

Three months ended

Three months ended Six months ended

(in millions of U.S.

Dollars, except share data) September 27, 2020 September 29, 2019

Net loss attributable to controlling interest ($ 184.4 ) ($ 37.8 )

Dollars, except share data) December 27, 2020 December 29, 2019 December 27, 2020 December 29, 2019

Net loss from continuing operations ($ 54.3 ) ($ 57.9 ) ($ 129.6 ) ($ 97.2 )

Net (loss) income from discontinued operations ( 28.4 ) 3.9 ( 137.2 ) 5.4

Net income from discontinued operations attributable to noncontrolling interest 0.3 0.3 0.6 0.3

Net (loss) income from discontinued operations attributable to controlling interest ( 28.7 ) 3.6 ( 137.8 ) 5.1

Weighted average shares - basic and diluted (in thousands) 110,688 107,925 110,297 107,519

Loss per share - basic and diluted:

Net loss attributable to controlling interest ($ 1.68 ) ($ 0.35 )

Diluted net loss per share is the same as basic net loss per share for the periods presented due to potentially dilutive items being anti-dilutive given the Company's net loss.

For the three months ended September 27, 2020 and September 29, 2019, 4.5 million and 5.9 million, respectively, of weighted average shares were excluded from the calculation of diluted loss per share because their effect would be anti-dilutive.

Future earnings per share of the Company are also subject to dilution from conversion of its Notes under certain conditions as described in Note 9, “Long-term Debt.”

Continuing operations ($ 0.49 ) ($ 0.54 ) ($ 1.18 ) ($ 0.90 )

Discontinued operations attributable to controlling interest ($ 0.26 ) $ 0.03 ($ 1.25 ) $ 0.05

Diluted net loss per share is the same as basic net loss per share for the periods presented due to potentially dilutive items being anti-dilutive given the Company's net loss from continuing operations.

For the three and six months ended December 27, 2020, 3.5 million and 3.9 million of weighted average shares were excluded from the calculation of diluted loss per share because their effect would be anti-dilutive.

For the three and six months ended December 29, 2019, 5.2 million and 5.5 million of weighted average shares were excluded from the calculation of diluted loss per share because their effect would be anti-dilutive.

In addition, future earnings per share of the Company are also subject to dilution from conversion of its Notes under certain conditions as described in Note 9, “Long-term Debt.”

Note 11 – Stock-Based Compensation

15 unchanged sentences

Stock Option Awards

A summary of stock option awards outstanding as of September 27, 2020 and changes during the three months then ended is as follows:

A summary of stock option awards outstanding as of December 27, 2020 and changes during the six months then ended is as follows:

(shares in thousands) Number of Shares Weighted Average Exercise Price

3 unchanged sentences

Forfeited or expired ( 10 ) $ 64.51

Outstanding at September 27, 2020 600 $ 33.49

Outstanding at December 27, 2020 235 $ 27.94

Restricted Stock Awards and Units

A summary of nonvested restricted stock awards (RSAs) and restricted stock unit awards (RSUs) outstanding as of September 27, 2020 and changes during the three months then ended is as follows:

A summary of nonvested restricted stock awards (RSAs) and restricted stock unit awards (RSUs) outstanding as of December 27, 2020 and changes during the six months then ended is as follows:

(awards and units in thousands) Number of RSAs/RSUs Weighted Average

4 unchanged sentences

Forfeited ( 137 ) $ 41.39

Nonvested at September 27, 2020 2,774 $ 55.10

Nonvested at December 27, 2020 2,698 $ 55.50

Stock-Based Compensation Valuation and Expense

16 unchanged sentences

Total stock-based compensation expense was classified in the consolidated statements of operations as follows:

Three months ended

Three months ended Six months ended

(in millions of U.S.

Dollars) September 27, 2020 September 29, 2019

Dollars) December 27, 2020 December 29, 2019 December 27, 2020 December 29, 2019

Cost of revenue, net $ 3.7 $ 2.4 $ 7.1 $ 4.4

9 unchanged sentences

and (iii) projected tax credits generated.

The Company did not record an income tax benefit related to the goodwill impairment described in Note 8, “Goodwill and Intangible Assets,” as the impairment is non-deductible for income tax purposes.

The Company did not record an income tax benefit related to the goodwill impairment expenses described in Note 2, “Discontinued Operations,” as the impairment is non-deductible for income tax purposes.

The Company assesses all available positive and negative evidence to estimate if sufficient future taxable income will be generated to utilize the existing deferred tax assets by jurisdiction.

The Company has concluded that it is necessary to recognize a full valuation allowance against its U.S.

and Luxembourg deferred tax assets, as of the three months ended September 27, 2020.

and Luxembourg deferred tax assets, as of the six months ended December 27, 2020.

GAAP requires a two-step approach to recognizing and measuring uncertain tax positions.

2 unchanged sentences

As of June 28, 2020, the Company's liability for unrecognized tax benefits was $ 7.4 million.

During the three months ended September 27, 2020, the Company did no t record any material movement in its unrecognized tax benefits.

As a result, the total liability for unrecognized tax benefits as of September 27, 2020 was $ 7.4 million.

During the six months ended December 27, 2020, the Company did no t record any material movement in its unrecognized tax benefits.

As a result, the total liability for unrecognized tax benefits as of December 27, 2020 was $ 7.4 million.

If any portion of this $ 7.4 million is recognized, the Company will then include that portion in the computation of its effective tax rate.

5 unchanged sentences

state tax returns, the Company is generally no longer subject to tax examinations for fiscal years prior to 2016.

For foreign purposes, the Company is generally no longer subject to examination for tax periods prior to 2010.

For foreign purposes, the Company is generally no longer subject to

examination for tax periods prior to 2010.

Certain carryforward tax attributes generated in prior years remain subject to examination, adjustment and recapture.

12 unchanged sentences

The annual cost of satisfying the objectives of the GDA and the SUNY Agreement, excluding the direct and indirect costs associated with employment, varies from $ 1.0 million to $ 5.2 million per year through fiscal 2031.

Note 14 – Reportable Segments

Reportable segments are components of the Company that the Chief Operating Decision Maker (CODM) regularly reviews when allocating resources and assessing performance.

The Company’s CODM reviews segment performance and allocates resources based upon segment revenue and segment gross profit.

The Company's identified CODM is the Chief Executive Officer.

The Company’s operating and reportable segments are:

• LED Products

The Wolfspeed segment includes silicon carbide materials, power devices and RF devices and the LED Products segment includes LED chips and LED components.

Financial Results by Reportable Segment

The tables below reflect the results of the Company's reportable segments as reviewed by the CODM for the three month periods ended September 27, 2020 and September 29, 2019.

The Company used the same accounting policies to derive the segment results reported below as those used in the Company’s consolidated financial statements.

The Company’s CODM does not review inter-segment transactions when evaluating segment performance and allocating resources to each segment, and inter-segment transactions are not included in the segment revenue presented in the table below.

As such, total segment revenue in the table below is equal to the Company’s consolidated revenue.

The Company’s CODM reviews gross profit as the lowest and only level of segment profit.

As such, all items below gross profit in the consolidated statements of operations must be included to reconcile the consolidated gross profit presented in the table below to the Company’s consolidated loss before income taxes.

In order to determine gross profit for each reportable segment, the Company allocates direct costs and indirect costs to each segment’s cost of revenue.

The Company allocates indirect costs, such as employee benefits for manufacturing employees, shared facilities services, information technology, purchasing, and customer service, when the costs are identifiable and beneficial to the reportable segment.

The Company allocates these indirect costs based on a reasonable measure of utilization that considers the specific facts and circumstances of the costs being allocated.

Unallocated costs in the table below consisted primarily of manufacturing employees’ stock-based compensation, expenses for quarterly or annual incentive plans, and matching contributions under the Company’s 401(k) plan.

These costs were not allocated to the reportable segments' gross profit because the Company’s CODM does not review them regularly when evaluating segment performance and allocating resources.

For the first quarter of fiscal 2021, unallocated costs include incremental costs relating to operating manufacturing operations during the COVID-19 pandemic.

These incremental costs are primarily comprised of increased cleaning costs, cleaning supplies and protective equipment, as well as the costs from implementing preventative safety measures, including increased wellness checks and time off policies.

Additionally, unallocated costs for the first quarter of fiscal 2021 included underutilization charges related to transitioning certain LED Products operations to Wolfspeed operations.

Revenue, gross profit and gross margin for each of the Company's segments were as follows:

Three months ended

September 27, 2020 September 29, 2019

Wolfspeed revenue $ 115.5 $ 127.7

LED Products revenue 101.1 115.1

Total revenue $ 216.6 $ 242.8

Gross Profit and Gross Margin:

Wolfspeed gross profit $ 42.3 $ 59.0

Wolfspeed gross margin 36.6 % 46.2 %

LED Products gross profit 22.4 22.1

LED Products gross margin 22.2 % 19.2 %

Total segment gross profit 64.7 81.1

Unallocated costs (1)

( 10.7 ) ( 6.9 )

Consolidated gross profit $ 54.0 $ 74.2

Consolidated gross margin 24.9 % 30.6 %

(1) Unallocated costs for the three months ended September 27, 2020 include $ 0.9 million in incremental manufacturing costs relating to COVID-19.

Geographic Information

The Company conducts business in several geographic areas.

Revenue is attributed to a particular geographic region based on the shipping address for the products.

Disaggregated revenue from external customers by geographic area is as follows:

Three months ended

September 27, 2020 September 29, 2019

(in millions of U.S.

Dollars) Revenue % of Revenue Revenue % of Revenue

United States $ 56.7 26.2 % $ 55.4 22.8 %

China 64.4 29.7 % 73.2 30.1 %

Europe 51.0 23.5 % 63.0 25.9 %

Other 44.5 20.6 % 51.2 21.2 %

Total $ 216.6 $ 242.8

Assets by Reportable Segment

Inventories are the only assets reviewed by the Company’s CODM when evaluating segment performance and allocating resources to the segments.

The CODM reviews all of the Company's assets other than inventories on a consolidated basis.

Unallocated inventories in the table below were not allocated to the reportable segments because the Company’s CODM does not review them when evaluating performance and allocating resources to each segment.

Unallocated inventories consisted primarily of manufacturing employees’ stock-based compensation, profit sharing and quarterly or annual incentive compensation, matching contributions under the Company’s 401(k) plan, and acquisition related costs.

Inventories for each of the Company's segments were as follows:

September 27, 2020 June 28, 2020

Wolfspeed $ 106.7 $ 97.3

LED Products 71.7 76.2

Total segment inventories 178.4 173.5

Unallocated inventories 8.9 5.6

Consolidated inventories $ 187.3 $ 179.1

Note 14 - Restructuring

9 unchanged sentences

The Company expects approximately $ 70.0 million in restructuring charges related to the factory optimization plan to be incurred through 2024.

For the three months ended September 27, 2020 and September 29, 2019, the Company expensed $ 1.6 million and $ 1.2 million of restructuring charges related to the factory optimization plan, respectively, of which $ 0.2 million is accrued for as of September 27, 2020.

For the three and six months ended December 27, 2020, the Company expensed $ 0.9 million and $ 3.1 million of restructuring charges associated with the movement of equipment related to the factory optimization plan, respectively, of which $ 0.1 million is accrued for as of December 27, 2020.

Additionally, the Company expensed $ 0.4 million and $ 0.8 million of restructuring charges associated with disposals of certain long-lived assets for the three and six months ended December 27, 2020.

For the three and six months ended December 29, 2019, the Company expensed and paid $ 1.2 million and $ 2.4 million, respectively, of restructuring charges associated with the movement of equipment related to the factory optimization plan.

Corporate Restructuring

In September 2020, the Company realigned certain resources to further focus on areas vital to our growth while driving efficiencies.

As a result, the Company recorded $ 3.2 million in severance-related costs during the three months ended September 27, 2020, of which $ 1.5 million is accrued for as of September 27, 2020.

As a result, the Company recorded $ 0.0 million and $ 2.8 million in severance-related costs during the three and six months ended December 27, 2020.

The plan has concluded and all expenses have been paid as of December 27, 2020.

Sales Representatives Restructuring

In July 2019, the Company realigned its sales resources as part of the Company's transition to a more focused semiconductor company.

As a result, the Company recorded $ 0.8 million in contract termination costs during the three months ended September 29, 2019, all of which has been paid as of September 27, 2020.

Note 16 - Subsequent Events

On October 18, 2020, the Company entered into an Asset Purchase Agreement (the Purchase Agreement) with SMART with respect to the LED Business Divestiture.

The transaction is targeted to close in the first calendar quarter of 2021, subject to customary closing conditions and governmental approvals.

(collectively, the LED Business);

and (ii) assume certain liabilities related to the LED Business.

The Company will retain certain assets used in and pre-closing liabilities associated with the LED Products segment.

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 a unsecured promissory note of SGH (the Earnout Note), and (iv) the assumption of certain liabilities.

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 closing of the LED Business Divestiture, the Company and SMART will also enter into certain ancillary and related agreements, including (i) an Intellectual Property Assignment and License Agreement, which will assign to SMART certain intellectual property owned by the Company and its affiliates and license to SMART certain additional intellectual property owned by the Company, (ii) a Transition Services Agreement, which is designed to ensure a smooth transition of the LED Business to SMART, (iii) a Wafer Supply and Fabrication Services Agreement, pursuant to which the Company will supply SMART with certain silicon carbide materials and fabrication services for four years, and (iv) a Real Estate License Agreement, which will allow SMART to use certain premises owned by the Company to conduct the LED Business for a period of up to 24 months after closing.

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

As a result, the Company recorded $ 0.0 million and $ 0.8 million in contract termination costs during the three and six months ended December 29, 2019.

The plan has concluded and all expenses have paid as of December 27, 2020.

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

What changed 10-Q

Item 1. Financial Statements