sgh-10q_20200228.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended February 28, 2020

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 001-38102

 

SMART GLOBAL HOLDINGS, INC.

(Exact Name of Registrant as Specified in its Charter)

 

Cayman Islands

98-1013909

( State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer
Identification No.)

c/o Maples Corporate Services Limited

P.O. Box 309

Ugland House

Grand Cayman, Cayman Islands

KY1-1104

(Address of principal executive offices)

(Zip Code)

Registrant’s telephone number, including area code: (510) 623-1231

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Ordinary shares, $0.03 par value per share

SGH

The NASDAQ Stock Market LLC

(NASDAQ Global Select Market)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

  

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

  

  

Smaller reporting company

 

 

 

 

 

 

 

 

Emerging growth company

 

 

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  

As of March 31, 2020, the registrant had 23,993,029 ordinary shares outstanding.

 

 

 

 


Table of Contents

 

 

 

Page

PART I.

FINANCIAL INFORMATION

3

Item 1.

Financial Statements (Unaudited)

3

 

Condensed Consolidated Balance Sheets

3

 

Condensed Consolidated Income Statements

4

 

Condensed Consolidated Statements of Comprehensive Income (Loss)

5

 

Condensed Consolidated Statements of Equity

6

 

Condensed Consolidated Statements of Cash Flows

7

 

Notes to Unaudited Condensed Consolidated Financial Statements

8

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

42

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

47

Item 4.

Controls and Procedures

47

PART II.

OTHER INFORMATION

49

Item 1.

Legal Proceedings

49

Item 1A.

Risk Factors

49

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

55

Item 3.

Defaults Upon Senior Securities

55

Item 4.

Mine Safety Disclosures

55

Item 5.

Other Information

55

Item 6.

Exhibits

56

Signatures

57

 

 

1


 

Cautionary Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q includes a number of forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, that involve many risks and uncertainties. Forward-looking statements are identified by the use of the words “would,” “could,” “will,” “may,” “expect,” “believe,” “should,” “anticipate,” “if,” “future,” “intend,” “plan,” “estimate,” “potential,” “target,” “seek,” or “continue” and similar words and phrases, including the negatives of these terms, or other variations of these terms, that denote future events. These statements reflect our current views with respect to future events and our potential financial performance and are subject to risks and uncertainties that could cause our actual results and financial position to differ materially and adversely from what is projected or implied in any forward-looking statements included in this report. These factors include, but are not limited to, the risks described under the caption “Risk Factors” in the documents we file from time to time with the Securities and Exchange Commission, including in our Annual Report on Form 10-K for our fiscal year ended August 30, 2019, and in this report, and in Item 2 of Part I – “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this report. Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the forward-looking events and circumstances discussed in this report may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements. We make these forward-looking statements based upon information available on the date of this report, and we expressly disclaim any obligation to update or alter any forward-looking statements, whether as a result of new information or otherwise, except as required by law.

 

 

2


 

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

SMART Global Holdings, Inc.

and Subsidiaries

Condensed Consolidated Balance Sheets

(In thousands, except per share data)

(Unaudited)

 

 

 

February 28,

 

 

August 30,

 

 

 

2020

 

 

2019

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

141,860

 

 

$

98,139

 

Accounts receivable, net of allowances of $154 and $184 as of February 28, 2020

   and August 30, 2019, respectively

 

 

217,361

 

 

 

217,433

 

Inventories

 

 

161,407

 

 

 

118,738

 

Prepaid expenses and other current assets

 

 

29,279

 

 

 

37,950

 

Total current assets

 

 

549,907

 

 

 

472,260

 

Property and equipment, net

 

 

59,029

 

 

 

68,345

 

Operating lease right-of-use assets

 

 

28,665

 

 

 

 

Other noncurrent assets

 

 

29,991

 

 

 

12,784

 

Intangible assets, net

 

 

62,498

 

 

 

69,325

 

Goodwill

 

 

78,347

 

 

 

81,423

 

Total assets

 

$

808,437

 

 

$

704,137

 

Liabilities and Shareholders’ Equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

217,256

 

 

$

164,866

 

Accrued liabilities

 

 

58,425

 

 

 

48,980

 

Current portion of long-term debt

 

 

1,546

 

 

 

24,054

 

Total current liabilities

 

 

277,227

 

 

 

237,900

 

Long-term debt

 

 

191,593

 

 

 

182,450

 

Long-term operating lease liabilities

 

 

24,440

 

 

 

 

Other long-term liabilities

 

 

8,126

 

 

 

10,327

 

Total liabilities

 

$

501,386

 

 

$

430,677

 

Commitments and contingencies (see Note 10)

 

 

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

 

 

 

Ordinary shares, $0.03 par value. Authorized 200,000 shares; issued and

   outstanding 23,993 and 23,617 as of February 28, 2020 and August 30, 2019,

   respectively

 

 

723

 

 

 

712

 

Additional paid-in capital

 

 

350,086

 

 

 

285,994

 

Accumulated other comprehensive loss

 

 

(198,882

)

 

 

(177,866

)

Retained earnings

 

 

155,124

 

 

 

164,620

 

Total shareholders’ equity

 

 

307,051

 

 

 

273,460

 

Total liabilities and shareholders’ equity

 

$

808,437

 

 

$

704,137

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

3


 

SMART Global Holdings, Inc. and Subsidiaries

Condensed Consolidated Income Statements

(In thousands, except per share data)

(Unaudited)

 

  

 

Three Months Ended

 

 

Six Months Ended

 

 

 

February 28,

 

 

March 1,

 

 

February 28,

 

 

March 1,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Net sales (1)

 

$

272,042

 

 

$

304,063

 

 

$

544,060

 

 

$

697,942

 

Cost of sales

 

 

220,536

 

 

 

246,932

 

 

 

438,234

 

 

 

555,742

 

Gross profit

 

 

51,506

 

 

 

57,131

 

 

 

105,826

 

 

 

142,200

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

14,702

 

 

 

11,238

 

 

 

29,588

 

 

 

23,054

 

Selling, general, and administrative

 

 

28,648

 

 

 

23,442

 

 

 

62,201

 

 

 

48,896

 

Total operating expenses

 

 

43,350

 

 

 

34,680

 

 

 

91,789

 

 

 

71,950

 

Income from operations

 

 

8,156

 

 

 

22,451

 

 

 

14,037

 

 

 

70,250

 

Interest expense, net

 

 

(4,150

)

 

 

(5,273

)

 

 

(8,642

)

 

 

(11,148

)

Other income (expense), net

 

 

(12,386

)

 

 

252

 

 

 

(13,226

)

 

 

(3,077

)

Total other expense

 

 

(16,536

)

 

 

(5,021

)

 

 

(21,868

)

 

 

(14,225

)

Income (loss) before income taxes

 

 

(8,380

)

 

 

17,430

 

 

 

(7,831

)

 

 

56,025

 

Provision for income taxes

 

 

1,340

 

 

 

4,644

 

 

 

1,665

 

 

 

12,263

 

Net income (loss)

 

$

(9,720

)

 

$

12,786

 

 

$

(9,496

)

 

$

43,762

 

Earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.41

)

 

$

0.56

 

 

$

(0.40

)

 

$

1.93

 

Diluted

 

$

(0.41

)

 

$

0.55

 

 

$

(0.40

)

 

$

1.88

 

Shares used in computing earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

23,906

 

 

 

22,872

 

 

 

23,809

 

 

 

22,733

 

Diluted

 

 

23,906

 

 

 

23,359

 

 

 

23,809

 

 

 

23,314

 

 

(1)

Includes sales to affiliates of $18,597 and $35,553 in the three and six months ended February 28, 2020, respectively, and $32,917 and $68,214 for the same periods ended March 1, 2019, respectively (see Note 3).

See accompanying notes to unaudited condensed consolidated financial statements.

4


 

SMART Global Holdings, Inc. and Subsidiaries

Condensed Consolidated Statements of Comprehensive Income (Loss)

(In thousands)

(Unaudited)

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

February 28,

 

 

March 1,

 

 

February 28,

 

 

March 1,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Net income (loss)

 

$

(9,720

)

 

$

12,786

 

 

$

(9,496

)

 

$

43,762

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation

 

 

(10,772

)

 

 

2,839

 

 

 

(21,016

)

 

 

5,941

 

Comprehensive income (loss)

 

$

(20,492

)

 

$

15,625

 

 

$

(30,512

)

 

$

49,703

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

5


 

SMART Global Holdings, Inc. and Subsidiaries

Condensed Consolidated Statements of Equity

(In thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

other

 

 

 

 

 

 

Total

 

 

 

Ordinary shares

 

 

paid-in

 

 

comprehensive

 

 

Retained

 

 

shareholders’

 

 

 

Shares

 

 

Amount

 

 

capital

 

 

loss

 

 

earnings

 

 

equity

 

Balances as of August 31, 2018

 

 

22,480

 

 

$

678

 

 

$

250,191

 

 

$

(175,995

)

 

$

112,254

 

 

$

187,128

 

Share-based compensation expense

 

 

 

 

 

 

 

 

4,055

 

 

 

 

 

 

 

 

 

4,055

 

Issuance of ordinary shares from exercises

 

 

210

 

 

 

6

 

 

 

2,396

 

 

 

 

 

 

 

 

 

2,402

 

Issuance of ordinary shares from release of

   restricted stock units (RSUs)

 

 

55

 

 

 

2

 

 

 

(2

)

 

 

 

 

 

 

 

 

 

Issuance of ordinary shares from employee share

   purchase plan (ESPP)

 

 

36

 

 

 

1

 

 

 

967

 

 

 

 

 

 

 

 

 

968

 

Effect of adopting ASC 606

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,034

 

 

 

1,034

 

Foreign currency translation

 

 

 

 

 

 

 

 

 

 

 

3,102

 

 

 

 

 

 

3,102

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

30,976

 

 

 

30,976

 

Balances as of November 30, 2018

 

 

22,781

 

 

 

687

 

 

 

257,607

 

 

 

(172,893

)

 

 

144,264

 

 

 

229,665

 

Share-based compensation expense

 

 

 

 

 

 

 

 

4,148

 

 

 

 

 

 

 

 

 

4,148

 

Issuance of ordinary shares from exercises

 

 

87

 

 

 

3

 

 

 

1,068

 

 

 

 

 

 

 

 

 

1,071

 

Issuance of ordinary shares from release of RSUs

 

 

67

 

 

 

1

 

 

 

(1

)

 

 

 

 

 

 

 

 

 

Withholding tax on RSUs

 

 

(8

)

 

 

 

 

 

(219

)

 

 

 

 

 

 

 

 

(219

)

Foreign currency translation

 

 

 

 

 

 

 

 

 

 

 

2,839

 

 

 

 

 

 

2,839

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

12,786

 

 

 

12,786

 

Balances as of March 1, 2019

 

 

22,927

 

 

$

691

 

 

$

262,603

 

 

$

(170,054

)

 

$

157,050

 

 

$

250,290

 

 

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

other

 

 

 

 

 

 

Total

 

 

 

Ordinary shares

 

 

paid-in

 

 

comprehensive

 

 

Retained

 

 

shareholders’

 

 

 

Shares

 

 

Amount

 

 

capital

 

 

loss

 

 

earnings

 

 

equity

 

Balances as of August 30, 2019

 

 

23,617

 

 

$

712

 

 

$

285,994

 

 

$

(177,866

)

 

$

164,620

 

 

$

273,460

 

Share-based compensation expense

 

 

 

 

 

 

 

 

5,956

 

 

 

 

 

 

 

 

 

5,956

 

Issuance of ordinary shares from exercises

 

 

86

 

 

 

2

 

 

 

1,164

 

 

 

 

 

 

 

 

 

1,166

 

Issuance of ordinary shares from release of RSUs

 

 

69

 

 

 

2

 

 

 

(2

)

 

 

 

 

 

 

 

 

 

Issuance of ordinary shares from ESPP

 

 

67

 

 

 

2

 

 

 

1,240

 

 

 

 

 

 

 

 

 

1,242

 

Withholding tax on RSUs

 

 

(1

)

 

 

 

 

 

(20

)

 

 

 

 

 

 

 

 

(20

)

Foreign currency translation

 

 

 

 

 

 

 

 

 

 

 

(10,244

)

 

 

 

 

 

(10,244

)

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

224

 

 

 

224

 

Balances as of November 29, 2019

 

 

23,838

 

 

 

718

 

 

 

294,332

 

 

 

(188,110

)

 

 

164,844

 

 

 

271,784

 

Share-based compensation expense

 

 

 

 

 

 

 

 

4,647

 

 

 

 

 

 

 

 

 

4,647

 

Issuance of ordinary shares from exercises

 

 

49

 

 

 

1

 

 

 

640

 

 

 

 

 

 

 

 

 

641

 

Issuance of ordinary shares from release of RSUs

 

 

117

 

 

 

4

 

 

 

(4

)

 

 

 

 

 

 

 

 

 

Withholding tax on RSUs

 

 

(11

)

 

 

 

 

 

(351

)

 

 

 

 

 

 

 

 

(351

)

Equity component of convertible notes due 2026, net

 

 

 

 

 

 

 

 

50,822

 

 

 

 

 

 

 

 

 

50,822

 

Foreign currency translation

 

 

 

 

 

 

 

 

 

 

 

(10,772

)

 

 

 

 

 

(10,772

)

Net income (loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(9,720

)

 

 

(9,720

)

Balances as of February 28, 2020

 

 

23,993

 

 

$

723

 

 

$

350,086

 

 

$

(198,882

)

 

$

155,124

 

 

$

307,051

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

6


 

SMART Global Holdings, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

 

  

 

Six Months Ended

 

 

 

February 28,

 

 

March 1,

 

 

 

2020

 

 

2019

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net income (loss)

 

$

(9,496

)

 

$

43,762

 

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

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

18,979

 

 

 

13,335

 

Share-based compensation

 

 

10,603

 

 

 

8,203

 

Provision for doubtful accounts receivable and sales returns

 

 

(27

)

 

 

(70

)

Deferred income tax benefit

 

 

(360

)

 

 

(247

)

Gain on disposal of property and equipment

 

 

(60

)

 

 

(1

)

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

 

 

4,795

 

 

 

 

Loss on extinguishment of debt

 

 

6,630

 

 

 

 

Amortization of debt discounts and issuance costs

 

 

1,781

 

 

 

1,379

 

Amortization of operating lease right-of-use assets

 

 

2,282

 

 

 

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(4,490

)

 

 

(83,772

)

Inventories

 

 

(45,549

)

 

 

47,660

 

Prepaid expenses and other assets

 

 

6,496

 

 

 

4,242

 

Accounts payable

 

 

56,656

 

 

 

31,557

 

Operating lease liabilities

 

 

(2,140

)

 

 

 

Accrued expenses and other liabilities

 

 

2,501

 

 

 

8,358

 

Net cash provided by operating activities

 

 

48,601

 

 

 

74,406

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Capital expenditures and deposits on equipment

 

 

(9,368

)

 

 

(19,616

)

Proceeds from sale of property and equipment

 

 

96

 

 

 

53

 

Acquisition of business, net of cash acquired

 

 

 

 

 

(148

)

Net cash used in investing activities

 

 

(9,272

)

 

 

(19,711

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Long-term debt payments

 

 

(7,232

)

 

 

(3,369

)

Purchase of capped call

 

 

(21,825

)

 

 

 

Proceeds from convertible notes due 2026, net of discount

 

 

243,125

 

 

 

 

Payment for extinguishment of long-term debt

 

 

(204,904

)

 

 

 

Proceeds from borrowings under revolving line of credit

 

 

18,500

 

 

 

168,000

 

Repayments of borrowings under revolving line of credit

 

 

(18,500

)

 

 

(168,000

)

Proceeds from issuance of ordinary shares from share option exercises

 

 

1,807

 

 

 

3,473

 

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

 

 

(371

)

 

 

(219

)

Proceeds from issuance of ordinary shares from ESPP

 

 

1,242

 

 

 

968

 

Net cash provided by financing activities

 

 

11,842

 

 

 

853

 

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

 

 

(7,450

)

 

 

2,392

 

Net increase in cash, cash equivalents and restricted cash *

 

 

43,721

 

 

 

57,940

 

Cash, cash equivalents and restricted cash at beginning of period *

 

 

98,139

 

 

 

37,234

 

Cash, cash equivalents and restricted cash at end of period *

 

$

141,860

 

 

$

95,174

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

 

 

 

Cash paid during the period:

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

9,754

 

 

$

9,958

 

Cash paid for income taxes, net of refunds

 

 

3,546

 

 

 

7,739

 

Noncash activities information:

 

 

 

 

 

 

 

 

Capital expenditures included in accounts payable at period end

 

 

845

 

 

 

935

 

Unpaid debt fees related to convertible notes due 2026

 

 

1,115

 

 

 

 

 

 

 

 

 

 

 

 

 

* Cash balance was adjusted to include restricted cash upon adoption of ASU 2016-18 in fiscal 2019.

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

7


 

SMART Global Holdings, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Note 1. Basis of Presentation and Principles of Consolidation

(a)

Overview

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 Holdings is domiciled in the Cayman Islands and has U.S. headquarters in Newark, California. The Company has operations in the United States, Brazil, Malaysia, Taiwan, Hong Kong, Scotland, Singapore, India, Netherlands and South Korea.

(b)

Basis of Presentation

The accompanying condensed consolidated financial statements comprise SMART Global Holdings and its wholly owned subsidiaries. Intercompany transactions have been eliminated in the condensed consolidated financial statements.

The Company uses a 52- to 53-week fiscal year ending on the last Friday in August. The six months ended February 28, 2020 and March 1, 2019 were both 26 week fiscal periods.

The accompanying unaudited condensed consolidated financial statements and related notes have been prepared in accordance with U.S. generally accepted accounting principles (U.S. GAAP) and in conformity with the rules and regulations of the Securities and Exchange Commission (SEC) applicable to interim financial information. As such, certain information and footnote disclosures normally included in complete annual financial statements prepared in accordance with U.S. GAAP have been omitted in accordance with the rules and regulations of the SEC. In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments, consisting of normal recurring accruals, necessary to present fairly the financial position of the Company and its results of operations and cash flows for the interim periods presented. The financial data and other information disclosed in these notes to the condensed consolidated financial statements related to the interim periods are unaudited.

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 condensed consolidated financial statements on a one-month lag because their fiscal years begin August 1 and end July 31.

(c)

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 useful lives of long-lived assets, the valuation of deferred tax assets and inventory, share-based compensation, the estimated net realizable value of Brazilian tax credits, income tax uncertainties and other contingencies.

8


 

(d)

Revenue

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 has transferred 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 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.  

9


 

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 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):

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

February 28,

 

 

March 1,

 

 

February 28,

 

 

March 1,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Service revenue, net

 

$

8,417

 

 

$

11,013

 

 

$

16,358

 

 

$

25,651

 

Cost of purchased materials - service (1)

 

 

148,863

 

 

 

279,910

 

 

 

294,889

 

 

 

596,533

 

Gross billings for services

 

 

157,280

 

 

 

290,923

 

 

 

311,247

 

 

 

622,184

 

Product net sales

 

 

263,625

 

 

 

293,050

 

 

 

527,702

 

 

 

672,291

 

Gross billings to customers

 

$

420,905

 

 

$

583,973

 

 

$

838,949

 

 

$

1,294,475

 

Product net sales

 

$

263,625

 

 

$

293,050

 

 

$

527,702

 

 

$

672,291

 

Service revenue, net

 

 

8,417

 

 

 

11,013

 

 

 

16,358

 

 

 

25,651

 

Net sales

 

$

272,042

 

 

$

304,063

 

 

$