Penguin Solutions (PENG) 8-K/A Financial Statements and Exhibits

Exhibit 99.2

PENGUIN COMPUTING, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Three Months Ended

March 31, 2018

PENGUIN COMPUTING, INC. AND SUBSIDIARY

Three Months Ended

March 31, 2018

Table of Contents

	Page
Condensed Consolidated Balance Sheets	1
Condensed Consolidated Statements of Income	2
Condensed Consolidated Statements of Cash Flows	3
Notes to Unaudited Condensed Consolidated Financial Statements	4-25

PENGUIN COMPUTING, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

	March 31,			December 31,
	2018			2017
ASSETS
CURRENT ASSETS
Cash and Cash Equivalents	$	7,257,629		$	6,378,942
Accounts Receivable, Net		21,053,780			17,499,833
Inventories, Net		49,422,459			41,592,742
Deferred Tax Assets, Net		1,100,000			1,100,000
Prepaid Expenses and Other Current Assets		3,445,121			1,341,257
TOTAL CURRENT ASSETS		82,278,989			67,912,774
PROPERTY AND EQUIPMENT, NET		4,868,057			5,371,182
OTHER NONCURRENT ASSETS		125,021			30,000
TOTAL ASSETS	$	87,272,067		$	73,313,956
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES
Accounts Payable	$	20,432,422		$	25,278,573
Accrued Expenses and Other Current Liabilities		4,354,509			3,692,754
Customer Deposits		2,728,066			863,703
Line of Credit		31,508,882			16,173,296
Current Portion of Deferred Revenue		7,000,845			5,448,820
Current Portion of Term Loan		-			1,666,519
TOTAL CURRENT LIABILITIES		66,024,724			53,123,665
LONG-TERM LIABILITIES
Deferred Revenue, Net of Current Portion		5,675,668			4,532,196
TOTAL LONG-TERM LIABILITIES		5,675,668			6,665,529
TOTAL LIABILITIES		71,700,392			59,789,194
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS’ EQUITY
Convertible Preferred Stock, $0.0005 Par Value;
11,000,000 Shares Authorized; 10,231,392 Shares Issued and Outstanding
(Aggregate Liquidation Preference of $30,495,202 at March 31, 2018)		29,698,344			29,698,344
Common Stock, $0.0005 Par Value;
40,560,000 Shares Authorized; 1,534,804 and  1,512,366 Shares
Issued and Outstanding at March 31, 2018 and December 31, 2017, Respectively		768			756
Additional Paid-In Capital		24,148,763			24,146,175
Accumulated Deficit		(38,276,200	)		(40,320,513	)
TOTAL STOCKHOLDERS’ EQUITY		15,571,675			13,524,762
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	87,272,067		$	73,313,956

See accompanying notes to unaudited condensed consolidated financial statements. Page 1

PENGUIN COMPUTING, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(UNAUDITED)

	Three Months Ended March 31,
	2018		2017
NET REVENUES	$	48,450,357	$	26,887,851
COST OF REVENUES		38,186,507		21,116,762
GROSS PROFIT		10,263,850		5,771,089
OPERATING EXPENSES
Research and Development		2,055,642		1,490,187
Sales and Marketing		4,221,722		2,823,521
General and Administrative		1,068,487		850,716
TOTAL OPERATING EXPENSES		7,345,851		5,164,424
INCOME FROM OPERATIONS		2,917,999		606,665
OTHER EXPENSE
Interest Expense, Net		240,228		113,953
Other Expense		22,458		33,841
TOTAL OTHER EXPENSE		262,686		147,794
INCOME BEFORE INCOME TAXES		2,655,313		458,871
PROVISION FOR INCOME TAXES		611,000		37,000
NET INCOME	$	2,044,313	$	421,871

See accompanying notes to unaudited condensed consolidated financial statements. Page 2

PENGUIN COMPUTING, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

NET INCREASE IN CASH AND CASH EQUIVALENTS

	Three Months Ended March 31,
	2018			2017
CASH FLOWS FROM OPERATING ACTIVITIES			��
Net Income	$	2,044,313		$	421,871
Adjustments to Reconcile Net Income to
Net Cash Used in Operating Activities:
Depreciation and Amortization		554,548			333,012
Provision for Obsolete Inventories		74,400			117,176
Reduction of Warranty Reserve		(187,532	)		(11,442	)
Changes in Operating Assets and Liabilities:
Accounts Receivable		(3,553,947	)		(7,307,256	)
Inventories		(7,904,117	)		(2,856,876	)
Prepaid Expenses and Other Assets		(2,198,885	)		109,009
Accounts Payable		(4,846,151	)		8,885,981
Accrued Expenses and Other Current Liabilities		849,287			(150,764	)
Customer Deposits		1,864,363			(1,201,037	)
Deferred Revenue		2,695,497			140,616
NET CASH USED IN OPERATING ACTIVITIES		(10,608,224	)		(1,519,710	)
CASH FLOWS FROM INVESTING ACTIVITY
Purchases of Property and Equipment		(51,423	)		(349,756	)
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings on Line of Credit, Net		15,335,586			2,761,568
Proceeds from Term Loan		-			1,176,487
Repayments of Term Loan		(3,799,852	)		-
Payments on Capital Lease Obligations		-			(8,026	)
Proceeds from Issuance of Common Stock Upon Exercise of Options		2,600			568
NET CASH PROVIDED BY FINANCING ACTIVITIES		11,538,334			3,930,597
NET INCREASE IN CASH AND CASH EQUIVALENTS		878,687			2,061,131
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD		6,378,942			1,895,401
CASH AND CASH EQUIVALENTS, END OF PERIOD	$	7,257,629		$	3,956,532
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash Paid (Refunded) During the Period for:
Interest	$	255,482		$	159,735
Income Taxes	$	4,960		$	(2,429	)

See accompanying notes to unaudited condensed consolidated financial statements. Page 3

PENGUIN COMPUTING, INC. AND SUBSIDIARY

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2018

NOTE 1 – DESCRIPTION OF BUSINESS

Penguin Computing, Inc. (“Penguin”) was incorporated in California in 1999. In 2016, Penguin established a wholly-owned subsidiary in the United Kingdom. References herein to the “Company” include Penguin and its subsidiary.  The Company develops, configures, assembles and sells highly scalable Linux high performance computing cluster systems (commonly known as “Supercomputers”), server systems and cluster management software based on open standard technologies designed to optimize clustering performance. The Company also provides professional services and support to help its customers in implementing, supporting and maintaining their Linux-based computer systems. Complementing Penguin Computing’s hardware and software solutions is Penguin Computing on Demand, a public high performance computing cluster cloud that provides virtual supercomputing capabilities on-demand on a pay-as-you-go basis. The Company’s customers are located primarily in the United States of America and include government agencies, academic institutions and major corporations.

The Company’s operations may be adversely affected by business risks inherent to the technology industry, which include intense competition characterized by rapid technological advances in hardware, software and service offerings, and vendor and customer concentrations.  The Company’s operations may also be adversely affected by factors such as the ability to obtain sufficient financing, successfully execute growth strategies, implement cost efficiencies and attract and retain qualified management and technical personnel.

On June 8, 2018, Penguin entered into an Agreement and Plan of Merger (the “Merger Agreement”), by and among the SMART Global Holdings, Inc. (“SMART”), Glacier Acquisition Sub, Inc., a wholly-owned indirect subsidiary of SMART Global Holdings, Inc. (“Merger Sub”), Penguin Computing, Inc., (“Penguin”) and Fortis Advisors LLC, solely in its capacity as the representative of the holders of the securities of Penguin (see Note 10).

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PENGUIN COMPUTING, INC. AND SUBSIDIARY

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2018

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Accounting and Presentation – The condensed consolidated financial statements are prepared on the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America; however, certain information and footnote disclosures normally included in complete annual financial statements in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. Accordingly, these condensed consolidated interim financial statements should be read in conjunction with the audited consolidated financial statements as of and for the year ended December 31, 2017. In the opinion of management, these 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.

Use of Estimates – The preparation of condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.

Principles of Consolidation – The condensed consolidated financial statements include the accounts of Penguin and its wholly owned subsidiary, Penguin Computing Limited. The subsidiary was established in the United Kingdom in 2016 and has had no significant activity from the date of its inception through March 31, 2018.  Intercompany balances and transactions are eliminated upon consolidation.

Cash and Cash Equivalents – Cash and cash equivalents include highly liquid investments with original maturities of three months or less at the time of purchase.

Accounts Receivable – The Company extends credit to its customers and generally does not require collateral. Management performs ongoing credit evaluations of its customers and establishes an allowance for estimated losses to reduce accounts receivable to the amount management expects to collect. Historically, actual collections have been within management’s expectations. The allowance for doubtful accounts reflects management’s analysis of receivables and the probability of collecting those accounts.  Trade accounts receivable are charged against the allowance when the Company determines that payments will not be received.  The Company’s allowance for doubtful accounts was $82,060 as of both March 31, 2018 and December 31, 2017. No provision for doubtful accounts were recorded for the three months ended March 31, 2018 and 2017.

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PENGUIN COMPUTING, INC. AND SUBSIDIARY

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2018

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Concentrations – Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash and accounts receivable. Substantially all of the Company’s cash at March 31, 2018 and December 31, 2017 is on deposit with U.S. financial institutions. Such deposits at times exceed the federally insured limits. The Company has not experienced any losses on its deposits of cash.  For the three months ended March 31, 2018 and 2017, the Company’s top ten customers accounted for approximately 87% and 83% of net revenues, respectively.  For the three months ended March 31, 2018 and 2017, four customers accounted for approximately 63% and 56% of net revenues, respectively. At March 31, 2018 and December 31, 2017, two and three customers accounted for approximately 71% and 62% of accounts receivable, respectively.   For the three months ended March 31, 2018 and 2017, the Company purchased approximately 63% and 74% of its component parts from three and four suppliers, respectively.  At March 31, 2018, four vendors accounted for approximately 78% of accounts payable. At December 31, 2017, two vendors accounted for approximately 58% of accounts payable.

Inventories – Inventories consist primarily of component parts. Effective January 1, 2017, the Company adopted the Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) 2015-11, Inventory: Simplifying the Measurement of Inventory. Accordingly, beginning January 1, 2017, inventory is measured at the lower of average cost and net realizable value.  Prior to this date, inventory was measured at the lower of average cost or market. This change did not have a significant impact.  The Company provides an allowance for obsolete and slow moving inventory to reduce inventory to its estimated net realizable value.  The allowance reflects management’s analysis of inventory and the probability of selling the inventory. Inventory write-offs are charged against the allowance when the Company determines that the inventory is obsolete and no longer saleable. As of March 31, 2018 and December 31, 2017, the allowance was $5,237,906 and $5,163,506, respectively. For the three months ended March 31, 2018 and 2017, the provision for obsolete inventory amounted to $74,400 and $117,176, respectively.

Property and Equipment – Property and equipment, including software, are stated at cost.  Depreciation is provided using the straight-line method over the estimated useful lives of the related assets, principally over three years for office, computer equipment, and software, and five years for furniture and fixtures. Leasehold improvements are depreciated over the shorter of their estimated useful life or the lease term.

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PENGUIN COMPUTING, INC. AND SUBSIDIARY

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2018

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Software Development Costs–Under the Software topic of the FASB Accounting Standards Codification (“ASC”), costs incurred subsequent to the attainment of technological feasibility are capitalized until the product is available for general release to customers, and then subsequently reported at the lower of amortized cost or net realizable value. Under this guidance, the Company has expensed all software development costs as research and development costs.

Long-Lived Assets – The Company evaluates the carrying value of long-lived assets, such as property and equipment, whenever events or changes in circumstances indicate that the carrying value of the asset may not be recoverable. An impairment loss is recognized when estimated undiscounted future cash flows expected to result from the use of the asset, including disposition, are less than the carrying value of the asset. The impairment to be recognized is measured by the amount by which the carrying amount exceeds the fair value of the assets in accordance with the Property, Plant, and Equipment topic of the FASB ASC.  No impairment of long-lived assets was recognized for the three months ended March 31, 2018 and 2017.

Customer Deposits – For new customers with limited credit history, the Company may require a deposit of the full or partial amount of the sale prior to shipping the product.  Customer deposits as of March 31, 2018 and December 31, 2017 were $2,728,066 and $863,703, respectively.

Warranty Costs – The Company provides a standard warranty with the sale of its hardware products.  The term of the standard warranty is generally three years and provides for technical support, replacement parts and labor.  In 2014, the Company started to provide extended warranty covering an additional two years.  Factors that affect warranty liability are the ongoing product failure rates, product return privileges and service delivery cost.  The warranty reserve was $634,502 and $822,034 as of March 31, 2018 and December 31, 2017, respectively.

Income Taxes – The Company accounts for income taxes in accordance with the Income Taxes topic of the FASB ASC, which requires an asset and liability approach in accounting for income taxes. Under this method, the tax provision includes taxes currently due plus the net change in deferred tax assets and liabilities. Deferred tax assets and liabilities arise from the temporary differences between the tax basis of an asset or liability and its reported amount in the condensed consolidated financial statements, as well as from net operating loss and tax credit carryforwards.  Deferred tax amounts are determined by using the tax rates expected to be in effect when the taxes will actually be paid or refund received, as provided for under currently enacted tax law. A valuation allowance is provided for the amount of deferred tax assets that, based on available evidence, are not expected to be realized. The Company accounts for uncertain income tax positions as prescribed by the Income Taxes topic of the FASB ASC.

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PENGUIN COMPUTING, INC. AND SUBSIDIARY

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2018

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Revenue Recognition – The Company derives its revenues substantially from the sale of computer hardware. The remaining revenues consist of software licenses and services.  Service revenues include hardware maintenance and support, software maintenance and support, professional consulting services and subscriptions for access to the Company’s high performance computing environment.  These products and service offerings can be sold separately or as part of multiple-element arrangements.  

Computer Hardware: For hardware only transactions, revenue is recognized in accordance with FASB ASC Topic 605, Revenue Recognition, which requires that revenue not be recognized until (1) persuasive evidence of an arrangement exists; (2) shipment has occurred and/or title has transferred; (3) the sales price is deemed fixed or determinable and free of contingencies or significant uncertainties; (4) collection of the resulting receivable is deemed probable; and (5) all significant obligations, contingencies and uncertainties have been resolved. Generally, this occurs at the time of shipment.

Revenue related to hardware sold with software or services is considered a multiple-element arrangement. The accounting for multiple-element arrangements is addressed below.

Software Licenses: The Company’s software license arrangements do not require significant modification or customization of the underlying software and, accordingly, the Company recognizes revenue for transactions including only software or software and other software related components under the provisions of FASB ASC Topic 985, Software.  Under these requirements, software license revenue for software only transactions is recognized when (1) persuasive evidence of an arrangement exists; (2) delivery of the software has occurred; (3) the arrangement fee is deemed fixed or determinable and free of contingencies or significant uncertainties; (4) collection of the resulting receivable is deemed probable; and (5) all significant obligations, contingencies and uncertainties have been resolved.  

If a software license arrangement includes other software related components, e.g. software maintenance and support and other software-related services, the residual method of revenue recognition is used.  Under the residual method, the fair value of the undelivered elements, typically the service elements, is deferred and the remaining portion of the arrangement fee is allocated to the delivered elements, typically the software, and is recognized as revenue when the criteria for revenue recognition of those delivered elements has been met.  

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PENGUIN COMPUTING, INC. AND SUBSIDIARY

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2018

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Revenue Recognition (Continued)

Software Licenses (Continued):The fair value of the undelivered elements is determined by “vendor specific objective evidence” (“VSOE”) which is based on the normal pricing for those services when sold separately.  The Company has a long sales history and has been able to establish VSOE based on consistent renewal rates for maintenance and support and consistent pricing for its software services. Softwaremaintenance and support revenues are deferred and recognized over the contract period and revenue from other services is recognized when the service has been performed.

Service Revenue: Service revenue related to maintenance and support contracts is deferred and recognized over the contract term, typically from one to three years. Professional consulting services revenue is recognized as the services are performed. Subscription revenue for access to the Company’s high performance computing environment is recognized based on usage.

Multiple-Element Arrangements: The Company’s multiple-element arrangements typically include (1) hardware along with any combination of hardware related services and software licenses and software related services and (2) software licenses and software related services.  The Company accounts for multiple-element arrangements involving only software licenses and software related services in accordance with FASB ASC Topic 985, as described above. The Company recognizes revenue for all other multiple-element arrangements under the provisions of FASB ASC Topic 605, Revenue Recognition. The Company evaluates each deliverable in an arrangement to determine whether they represent separate units of accounting. The delivered item constitutes a separate unit of accounting when it has standalone value and there are no customer-negotiated refunds or return rights for the delivered elements.

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PENGUIN COMPUTING, INC. AND SUBSIDIARY

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2018

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Revenue Recognition (Continued)

Multiple-Element Arrangements (Continued): FASB ASC Topic 605 provides guidance on how the deliverables in an arrangement should be separated and requires an entity to allocate revenue using the relative selling price method. The standard establishes a hierarchy of evidence to determine the stand-alone selling price of a deliverable based on VSOE, third-party evidence (“TPE”), and the best estimate of selling price (“BESP”). If VSOE is available, it would be used to determine the selling price of a deliverable. If VSOE is not available, the entity would determine whether TPE is available. If so, TPE must be used to determine the selling price. If TPE is not available, then BESP would be used.

The Company allocates the revenue for multiple-element arrangements consisting of hardware and other hardware related elements to the separate elements based on BESP for the hardware and hardware maintenance and support and VSOE for the hardware related professional services. The Company uses BESP for the Company’s computer hardware products and hardware maintenance and support because VSOE and TPE of fair value have not been established due to the high degree of customization and pricing based on cost plus margin. The objective of BESP is to determine the price at which the Company would transact a sale if a product or service were sold on a stand-alone basis. The Company determines BESP for computer hardware and hardware support and maintenance services by considering multiple factors including profit objective and pricing practices.  VSOE of fair value for hardware professional services is based upon the normal pricing for those services when sold separately.

The Company allocates revenue for multiple-element arrangements consisting of both hardware and software elements to the separate elements of the transaction based on the relative fair value of each element (VSOE, TPE or BESP).  The evidence used for hardware elements is discussed above.  The Company uses BESP for software licenses and VSOE for software maintenance and support and professional services. The revenue related to the non-software elements is then recognized in accordance with FASB ASC 605 and the revenue related to the software elements is recognized in accordance with FASB ASC 985.

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PENGUIN COMPUTING, INC. AND SUBSIDIARY

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2018

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Shipping Costs – The cost of shipping and handling is charged to cost of revenues as incurred.

Research and Development – Research and development costs on hardware are expensed as incurred in accordance with the Research and Development topic of the FASB ASC.

Advertising Expense – Advertising expense is charged to operating expense as incurred.  Advertising expense for the three months ended March 31, 2018 and 2017 was $38,930 and $162,676, respectively.

Leases – Leases that substantially transfer the rights and obligations of ownership are accounted for as capital leases.  Such leased assets and related liabilities are recorded at amounts equal to the present value of the minimum lease payments at the inception of the lease.  Assets under capital leases are amortized ratably over the shorter of their related lease terms or their economic lives.  Interest expense relating to the lease obligation is recorded to result in a constant rate of interest over the terms of the leases.

Leases that do not meet the capital lease criteria are classified as operating leases. Rental expense for operating leases is determined on a straight-line basis over the term of the lease based on the total amount of rent to be paid over the term.  Accordingly, the impact of rent concessions, if any, is recognized over the lease term.

Stock-Based Compensation – The Company accounts for share-based payments, including grants of employee stock awards, in accordance with the Compensation – Stock Compensation topic of the FASB ASC, which requires the fair value of compensatory stock awards at grant date to be recognized as expense. Accordingly, the fair value of the estimated number of shares ultimately expected to vest is recognized as compensation expense on a straight-line basis over the requisite service period, which is typically the vesting period of each award. The fair value of stock-based awards was estimated using the Black-Scholes model.

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PENGUIN COMPUTING, INC. AND SUBSIDIARY

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2018

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Recent Accounting Pronouncements – In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers. ASU No. 2014-09 provides comprehensive guidance on the recognition of revenue from customers arising from the transfer of goods and services.  The ASU also provides guidance on accounting for certain contract costs, and requires new disclosures.  Nonpublic entities must adopt this ASU for annual reporting periods beginning after December 15, 2018. ASU 2014-09 is required to be adopted either a) retrospectively to each prior reporting period presented or b) retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application.  Subsequent to the issuance of ASU 2014-09, the FASB has issued additional ASUs related to revenue recognition which provide further clarification on various matters. These ASUs become effective concurrently with ASU 2014-09. Management is currently evaluating the impact of adopting this guidance on the Company’s condensed consolidated financial statements.

In November 2015, the FASB issued ASU 2015-17, Income Taxes: Balance Sheet Classification of Deferred Taxes, which requires entities with a classified balance sheet to present all deferred tax assets and liabilities as noncurrent. ASU 2015-17 may be applied either prospectively or retrospectively and is effective for annual periods beginning after December 15, 2017. Early adoption is permitted. Management is currently evaluating the impact of adopting this guidance on the Company’s consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, Leases, which requires, among other things, lessees to recognize a right-of-use asset and a lease liability for virtually all of their leases (other than leases that meet the definition of a short-term lease).  The liability will be equal to the present value of lease payments.  The asset will be based on the liability, subject to adjustment, such as for initial direct costs.  For income statement purposes, the FASB retained the current dual model whereby leases are classified as either operating or finance.  Operating leases will result in straight-line expense while finance leases will result in a front-loaded expense pattern. This is similar to the current income statement treatment for leases. ASU 2016-02 is effective for nonpublic entities for annual reporting periods beginning after December 15, 2019, with early adoption permitted.  The new standard must be adopted using a modified retrospective transition, and provides for certain practical expedients. Transition will require application of the new guidance at the beginning of the earliest comparative period presented.  Management is currently evaluating the impact of adopting this guidance on the Company’s condensed consolidated financial statements.

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PENGUIN COMPUTING, INC. AND SUBSIDIARY

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2018

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Recent Accounting Pronouncements (Continued) – In March 2016, the FASB issued ASU 2016-09, Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.  This ASU is part of the FASB’s Simplification Initiative and involves amendments to several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows.  Transition methods vary depending on the aspect of accounting impacted. The Company adopted the ASU beginning January 1, 2018 and it did not have a material impact on these condensed consolidated financial statements.

In August 2016, the FASB issued ASU 2016-15, Classification of Certain Cash Receipts and Cash Payments, which adds or clarifies guidance on the classification of certain cash receipts and payments in the statement of cash flows.  ASU 2016-15 is effective for nonpublic entities for annual reporting periods beginning after December 15, 2018, with early adoption permitted. Upon adoption, the guidance in this ASU should be applied retrospectively to all periods presented. Management is currently evaluating the impact of adopting this guidance on the Company’s condensed consolidated financial statements.

NOTE 3 – PROPERTY AND EQUIPMENT

Property and equipment consist of the following at:

	March 31, 2018			December 31, 2017
Office and Computer Equipment	$	9,310,964		$	9,284,641
Software		94,789			94,789
Furniture and Fixtures		131,988			131,988
Leasehold Improvements		1,022,135			997,035
Property and Equipment, at Cost		10,559,876			10,508,453
Less: Accumulated Depreciation and Amortization		(5,691,819	)		(5,137,271	)
Property and Equipment, Net	$	4,868,057		$	5,371,182

Depreciation and amortization expense, including depreciation of assets under capital lease, was $554,548 and $333,012 for the three months ended March 31, 2018 and 2017, respectively.

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PENGUIN COMPUTING, INC. AND SUBSIDIARY

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2018

NOTE 4 – ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

Accrued expenses and other current liabilities consist of the following at:

	March 31, 2018		December 31, 2017
Wages, Bonuses and Payroll Taxes	$	1,570,267	$	1,771,449
Sales, Use and Income Taxes Payable		1,168,688		740,146
Warranty Reserve		634,502		822,034
Deferred Rent		92,368		99,315
Other Accrued Expenses		888,684		259,810
Total Accrued Expenses and Other Current Liabilities	$	4,354,509	$	3,692,754

NOTE 5 – BUSINESS FINANCING AGREEMENT

At December 31, 2017, the Company had a loan and security agreement with a bank for borrowings and letters of credit up to a commitment amount of $20,000,000 as defined in the agreement. Loans may be made based on a borrowing base, which is the lesser of $20,000,000 or 85% of eligible accounts receivable and 85% of the appraised net orderly liquidation value of eligible inventory up to $5,000,000.  The loan and security agreement requires the Company to comply with certain financial and reporting covenants.  Borrowings bear interest at the Prime Rate plus 1.00% which was 5.50% as of December 31, 2017.

The loan and security agreement also provide for a term loan up to $4,000,000. The term loan bears interest at 1.5% plus the Prime Rate which was 6.00% as of December 31, 2017. The term loan matures on October 1, 2020. Principal payments plus all accrued interest are payable in equal monthly installments. Borrowings under the agreement are collateralized by all assets of the Company.

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PENGUIN COMPUTING, INC. AND SUBSIDIARY

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2018

NOTE 5 – BUSINESS FINANCING AGREEMENT (Continued)

On January 8, 2018, the Company entered into a new credit agreement with a new bank for borrowings and letters of credit up to a commitment amount of $33,000,000. Borrowings bear interest at the London Interbank Offered Rate (“LIBOR”) rate plus applicable margin as defined in the agreement.  The new credit agreement requires the Company to comply with certain financial and reporting covenants. On February 1, 2018, the Company terminated its existing loan and security agreement and paid in full all outstanding borrowings from the existing loan and security agreement. The applicable interest rate was 4.88% as of March 31, 2018.

The outstanding borrowings under the revolving line of credit agreements amounted to $31,508,882 and $16,173,296 as of March 31, 2018 and December 31, 2017, respectively.  Interest expense for the three months ended March 31, 2018 and 2017 under these business financing agreements amounted to $202,005 and $114,639, respectively.

On August 7, 2018, the outstanding borrowings under this credit agreement were paid in full and on August 8, 2018, the Company terminated this credit agreement (see Note 10).

NOTE 6 – STOCKHOLDERS’ EQUITY

Authorized Capital Stock

As of March 31, 2018, the authorized number of shares of common and preferred stock was 40,560,000 and 11,000,000, respectively.  The par value of both shares of common and preferred stock is $0.0005 per share.  

Convertible Preferred Stock

The authorized number of shares of convertible preferred stock was designated by series as follows at both March 31, 2018 and 2017:

Series A-3	630,000
Series B-3	560,000
Series C-3	600,000
Series D	7,550,000
Series E	1,660,000
Total	11,000,000

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PENGUIN COMPUTING, INC. AND SUBSIDIARY

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2018

NOTE 6 – STOCKHOLDERS’ EQUITY (Continued)

Convertible Preferred Stock (Continued)

Certain information by series of convertible preferred stock at March 31, 2018 is as follows:

	Designated Shares		Shares Issued and Outstanding		Carrying  Amount		Aggregate Liquidation Preference		Per Share Original Issue Price
Series A-3		630,000		416,374	$	8,628,436	$	8,598,123	$	20.65
Series B-3		560,000		416,882		9,049,035		8,608,614		20.65
Series C-3		600,000		349,027		2,965,416		2,792,216		8.00
Series D		7,550,000		7,549,109		7,527,805		7,549,109		1.00
Series E		1,660,000		1,500,000		1,527,652		2,947,140		1.00
		11,000,000		10,231,392	$	29,698,344	$	30,495,202

As described below, the per share original issue prices are relevant in determining liquidation preferences and conversion rates and dividends of the preferred stock (except series E).  The per share original issue prices are subject to adjustment for any stock splits, stock dividends or distributions, recapitalizations and similar events.  The carrying amount of the convertible preferred stock at March 31, 2018 includes additional paid-in capital from the issuance of warrants and is net of issuance costs.

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PENGUIN COMPUTING, INC. AND SUBSIDIARY

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2018

NOTE 6 – STOCKHOLDERS’ EQUITY (Continued)

Convertible Preferred Stock (Continued)

Dividends: From and after the date of the issuance of any shares of series E preferred stock, annual dividends at the rate of $0.15 per share shall accrue on such shares of series E (subject to appropriate adjustment in the event of any stock dividend, stock split, combination or any other similar recapitalization with respect to the series E preferred stock).  The dividends shall accrue whether or not declared and shall be cumulative; provided, however, that except as defined in the articles of incorporation, such dividends shall be payable only when, as and if declared by the board of directors and the Company shall be under no obligation to pay such dividends. Total cumulative dividends on the series E preferred stock were approximately $1,447,140 at March 31, 2018 and are included in the aggregate liquidation preference amount of $2,947,140 above.

The holders of the series D, series C-3, series B-3, and series A-3 preferred stock (collectively, the “Junior Preferred”), shall be entitled to receive, when and as declared by the board of directors, dividends out of funds legally available therefore, prior and in preference to any declaration of payment of any dividend on the common stock, at a rate of 8% per annum of the original issue price on each outstanding share of the Junior Preferred. Such dividends shall not be cumulative and no right to such dividends shall accrue to holders of the Junior Preferred unless declared by the board of directors.

Liquidation Preference: Before any distribution or payment shall be made to the holders of any common stock and any other series of preferred stock, the holders of series E preferred stock shall be entitled to be paid out of the assets of the Company legally available for distribution for each share of series E preferred stock held by them, an amount per share of series E preferred stock equal to the original issue price of the series E preferred stock, plus all accrued or declared and unpaid dividends on the series E preferred stock. If, upon such event, the assets of the Company are insufficient to make payment in full to all holders of series E preferred stock, then such assets, shall be distributed ratably in proportion to the full amounts they would otherwise be respectively entitled.

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PENGUIN COMPUTING, INC. AND SUBSIDIARY

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2018

NOTE 6 – STOCKHOLDERS’ EQUITY (Continued)

Convertible Preferred Stock (Continued)

Liquidation Preference (Continued): After the distribution or payment to the holders of series E preferred stock described above, and before any distribution or payment shall be made to the holders of any common stock and any other series of preferred stock, the holders of the Junior Preferred shall be entitled to be paid out of the assets of the Company legally available for distribution for each share of Junior Preferred held by them, an amount per share of Junior Preferred equal to the original issue price of such series of Junior Preferred, plus all accrued or declared and unpaid dividends. If, upon such event, the assets of the Company are insufficient to make payment in full to all holders of Junior Preferred, then such assets, shall be distributed ratably in proportion to the full amounts they would otherwise be respectively entitled.

Remaining assets of the Company, if any, are to be distributed to the holders of preferred stock and common stock prorata based on the number of shares of common stock held by each on an as-if converted to common stock basis.

Voting: Each holder of preferred stock has voting rights equal to an equivalent number of shares of common stock into which it is convertible and vote together as one class with the common stock.

Conversion: Each share of preferred stock is convertible, at the option of the holder, into fully paid and nonassessable shares of common stock. Each share of preferred stock automatically converts into common stock upon: (1) the closing of a public offering of common stock with net proceeds exceeding $25 million or (2) upon the approval of the holders of not less than two thirds (2/3’s) of the then-outstanding shares of preferred stock (voting together as a single class and not as separate series, and on an as-converted basis).  The conversion rates are determined by dividing the original issue prices over a conversion price of $1.00.  The conversion rates are subject to adjustments for diluting issues as defined in the articles of incorporation.

Based on the number of shares of preferred stock outstanding, the number of shares of common stock issuable upon conversion was 29,698,344 at March 31, 2018.

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PENGUIN COMPUTING, INC. AND SUBSIDIARY

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2018

NOTE 6 – STOCKHOLDERS’ EQUITY (Continued)

Warrants

The following table summarizes the warrants outstanding at March 31, 2018:

	Number of Shares		Exercise Price		Expiration
Share Class	Warrants Represent		Per Share		Dates
Preferred Stock Warrants:
Series C-3		20,113	$	8.00	May 30, 2018
Series E		62,200	$	1.00	August 8, 2018 to February 27, 2020
Common Stock Warrants		707	$	0.10	March 30, 2019

Stock-Based Compensation

In May 2009, the Company’s stockholders approved the 2009 Equity Incentive Plan (the “2009 Plan”). The 2009 Plan provides for the grant of the following stock awards: (i) incentive stock options (“ISO”), (ii) non-statutory stock options (“NSO”), (iii) Restricted Stock Awards, (iv) Restricted Stock Unit Awards, and (v) Stock Appreciation Rights. Stock awards other than ISOs may be granted to employees, directors and consultants. A 10% stockholder shall not be granted an ISO unless the exercise price of such option is at least 110% of the fair value of the common stock on the date of the grant and is not exercisable after the expiration of five (5) years from the date of grant. Generally, options have a maximum term of ten (10) years.

Options granted generally vest over a period of four years at a rate of 25% on the one-year anniversary of the option vesting start date and ratably thereafter over the remaining three (3) years.

In the event the option holder ceases to be employed by the Company, all unvested options are forfeited and all vested options are forfeited if not exercised within three (3) months following the termination of the option holder or the period specified in the option agreement which shall not be less than thirty (30) days.

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PENGUIN COMPUTING, INC. AND SUBSIDIARY

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2018

NOTE 6 – STOCKHOLDERS’ EQUITY (Continued)

Stock-Based Compensation (Continued)

A previous stock incentive plan expired in 2009.  Certain stock options issued pursuant to that plan remain outstanding.

The restricted stock awards, restricted stock unit awards and stock appreciation rights may be granted in consideration for past services or any other form of legal consideration acceptable to the Board. These awards may be granted with an accelerated vesting schedule and are subject to restrictions and repurchase limitations.

A summary of stock option activity and stock options outstanding as of and for the three months ended March 31, 2018 is as follows:

	Shares Available for Grant			Number of Outstanding Share Options			Weighted-Average Exercise Price Per Share
Balance at January 1, 2018		17,907			5,384,277		$	0.11
Stock Options Authorized		45,000		-			-
Stock Option Grants		(36,500	)		36,500		$	0.67
Exercised	-				(22,450	)	$	0.09
Canceled		8,907			(8,907	)	$	0.37
Balance at March 31, 2018		35,314			5,389,420		$	0.11

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PENGUIN COMPUTING, INC. AND SUBSIDIARY

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2018

NOTE 6 – STOCKHOLDERS’ EQUITY (Continued)

Stock-Based Compensation (Continued)

The following table summarizes outstanding and exercisable stock options at March 31, 2018:

	Outstanding				Vested and Exercisable
Exercise Price	Number of Shares		Weighted-Average Remaining Contractual  Life (Years)		Number of Shares
$0.02		2,190,479		4.41		2,190,479
$0.15		1,903,173		6.13		1,804,280
$0.17		1,015,667		7.60		610,096
$0.30		246,101		8.27		45,808
$0.67		34,000		9.87	-
		5,389,420				4,650,663

The Company recognizes compensation expense for all stock options on a straight-line basis over the requisite service period, net of forfeitures.

The fair value of stock-based awards was estimated using the Black-Scholes model with the following weighted-average assumptions for the three months ended March 31:  

	2018	2017
Risk-free Interest Rates	2.74%	2.29%
Expected Term	6.25 Years	6.25 Years
Expected Volatility	51%	40%
Expected Dividends	None	None

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PENGUIN COMPUTING, INC. AND SUBSIDIARY

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2018

NOTE 6 – STOCKHOLDERS’ EQUITY (Continued)

Stock-Based Compensation (Continued)

Volatility was determined using the calculated value method. Under this method the volatility of a peer group of public companies was used as an estimate of the Company’s volatility. The expected term of options granted during the three months ended March 31, 2018 and 2017 was estimated by taking the average of the vesting term and the contractual term of the option as provided by the Securities and Exchange Commission Staff Accounting Bulletins No. 107 and 110 (SAB 107 and 110). Based on these assumptions, the average fair value of each option granted in 2018 and 2017 was approximately $0.344 and $0.127, respectively. The total fair value of the stock-based compensation awards granted during the three months ended March 31, 2018 and 2017 was approximately $12,000 and $6,000, respectively, after accounting for the impact of estimated forfeitures.

At March 31, 2018, there was approximately $65,000 of total unrecognized cost related to outstanding option awards to be recognized over a weighted average period of 1.5 years.

NOTE 7 – INCOME TAXES

The provision for income taxes consists of the following for the three months ended March 31, 2018 and 2017:

	2018		2017
Total Provision for Income Taxes	$	611,000	$	37,000

The provision for income taxes includes a provision for federal and state taxes based on the annual estimated effective tax rate applicable to the Company.

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PENGUIN COMPUTING, INC. AND SUBSIDIARY

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2018

NOTE 7 – INCOME TAXES (Continued)

Provision for income taxes for the three months ended March 31, 2018 increased by approximately $574,000 as compared to the same period in the prior year primarily due to higher income subject to tax.

Management believes that, based on a number of factors, it is more likely than not that a portion of the deferred tax assets will not be utilized and accordingly, as of March 31, 2018, the Company has a provided a valuation allowance to reduce its net deferred tax assets to $1,100,000.  The amount of the deferred tax asset considered realizable could be adjusted if significant positive evidence increases.

Determining the consolidated provision for income tax expense, income tax liabilities, and deferred tax assets and liabilities involves judgment. The Company calculates and provides for income taxes, which involves estimating current tax exposures, as well as making judgments regarding the recoverability of deferred tax assets.  The estimates used could differ from actual results, which may have a significant impact on operating results in future periods.

Internal Revenue Code Section 382 places a limitation (the “Section 382 Limitation”) on the amount of taxable income that can be offset by NOL carryforwards after a change in ownership control (generally greater than 50% change in ownership) of a loss corporation. California has similar rules. Generally, after a control change, a loss corporation cannot deduct NOL carryforwards in excess of the Section 382 Limitation. Due to these “change in ownership” provisions, the Company’s ability to utilize its NOL carryforwards prior to 2007 is subject to the Section 382 Limitation.

NOTE 8 – COMMITMENTS

The Company leases its corporate office and production facility under an operating lease that requires minimum monthly rental payments ranging from approximately $22,700 to $31,200 plus monthly expenses of $6,300.  This lease expires in May 2020.  On January 11, 2018, the Company entered into an additional operating lease to expand its corporate office and production facility. This new lease requires minimum monthly rental payments ranging from approximately $61,960 to $71,830 and the tenant’s share of operating expenses and real property taxes.  This lease expires in May 2023. The Company also leases three office facilities under operating leases that require minimum monthly rental payments ranging from approximately $1,700 to $2,700.  These leases expire in 2020.  The Company is also a party to facility leases with month-to-month and quarter-to-quarter terms.

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PENGUIN COMPUTING, INC. AND SUBSIDIARY

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2018

At March 31, 2018, future minimum lease payments under non-cancelable operating leases are as follows:

Year Ending December 31,
Reminder of year 2018	$	824,935
2019		1,132,862
2020		861,034
2021		675,064
2022		695,316
Thereafter		213,388
	$	4,402,599

Rent expense under all operating leases for the three months ended March 31, 2018 and 2017 was $125,434 and $120,838, respectively.

NOTE 9 – EMPLOYEE BENEFIT PLANS

The Company has a defined contribution retirement plan under Section 401(k) of the Internal Revenue Code (“IRC”), which covers substantially all employees. Eligible employees may contribute amounts to the plan, via payroll withholding, subject to certain limitations. For the three months ended March 31, 2018 and 2017, the Company contributed $40,192 and $28,484, respectively, in discretionary matching contributions to the plan.

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PENGUIN COMPUTING, INC. AND SUBSIDIARY

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2018

NOTE 10 – SUBSEQUENT EVENTS

On June 8, 2018, Penguin entered into an Agreement and Plan of Merger (the “Merger Agreement”), by and among the SMART Global Holdings, Inc. (“SMART”), Glacier Acquisition Sub, Inc., a wholly-owned indirect subsidiary of SMART Global Holdings, Inc. (“Merger Sub”), Penguin Computing, Inc., (“Penguin”) and Fortis Advisors LLC, solely in its capacity as the representative of the holders of the securities of Penguin.  Pursuant to the Merger Agreement, on June 8, 2018, Merger Sub was merged with and into Penguin, with Penguin surviving as a wholly-owned indirect subsidiary of the SMART Global Holdings, Inc. (the “Merger”).

The aggregate consideration payable by SMART for the Merger is up to $85 million, which includes up to $25.0 million of potential cash earn-out payments based on Penguin’s achievement of specified gross profit levels through December 31, 2018, pursuant to the provisions of the Merger Agreement.  SMART paid $60 million at closing (subject to certain adjustments as provided in the Merger Agreement), which included the assumption by SMART of Penguin’s outstanding indebtedness.

At the closing of the Merger, SMART deposited $6.0 million of the purchase price into escrow as security for Penguin’s indemnification obligations during the escrow period of one year. SMART also deposited $2.0 million of the purchase price into escrow as security for customary post-closing adjustments to the purchase price. The Merger Agreement contains customary representations and warranties of Penguin and SMART. The parties have agreed to indemnify each other for certain breaches of representations, warranties and covenants.

On August 7, 2018, the outstanding borrowings under the Company’s existing credit agreement were paid in full and on August 8, 2018, the Company terminated such credit agreement.

The Company has evaluated subsequent events through August 20, 2018, the date the unaudited condensed consolidated financial statements were available to be issued.

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