Form 6-K SMART Technologies Inc. For: Aug 04
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 6-K
Report of Foreign Private Issuer
Pursuant to Rule 13a-16 or 15d-16
under the Securities Exchange Act of 1934
For the month of August 2016
Commission File Number 001-34798
SMART TECHNOLOGIES INC.
3636 Research Road N.W.
Calgary, Alberta
Canada T2L 1Y1
(Address of principal executive offices)
Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F.
Form 20-F x Form 40-F ¨
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1): ¨
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7): ¨
THIS REPORT ON FORM 6-K SHALL BE DEEMED FILED WITH THE SECURITIES AND EXCHANGE COMMISSION (THE COMMISSION) AND INCORPORATED BY REFERENCE INTO THE REGISTRATION STATEMENT ON FORM S-8 (FILE NO. 333-181530) OF SMART TECHNOLOGIES INC. FILED WITH THE COMMISSION, AND TO BE A PART THEREOF FROM THE DATE ON WHICH THIS REPORT IS FURNISHED TO THE COMMISSION, TO THE EXTENT NOT SUPERSEDED BY DOCUMENTS OR REPORTS THE REGISTRANT SUBSEQUENTLY FURNISHES TO OR FILES WITH THE COMMISSION.
DOCUMENTS FURNISHED AS PART OF THIS FORM 6-K
In connection with its announcement of the financial results for the first quarter of its 2017 fiscal year, SMART Technologies Inc. is filing the following documents as Exhibits 99.1-99.4 to this Report on Form 6-K.
Managements Discussion and Analysis of Financial Condition and Results of Operations;
Interim consolidated financial statements;
Certification of its principal executive officer; and
Certification of its principal financial officer.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SMART TECHNOLOGIES INC. | ||
By: | /s/ Matt Sudak | |
Name: | Matt Sudak | |
Title: | Vice President, Legal & General Counsel, and Corporate Secretary |
Date: August 4, 2016
Exhibit Index
99.1 | Managements Discussion and Analysis of Financial Condition and Results of Operations. | |
99.2 | Interim consolidated financial statements of SMART Technologies Inc. for the three months ended June 30, 2016 and 2015. | |
99.3 | Rule 13a-14(a) Certification of principal executive officer of SMART Technologies Inc. | |
99.4 | Rule 13a-14(a) Certification of principal financial officer of SMART Technologies Inc. |
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Q1 2017 |
First Quarter Report
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for the three months ended June 30, 2016
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MANAGEMENTS DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following interim managements discussion and analysis (MD&A) should be read in conjunction with our unaudited interim consolidated financial statements and the accompanying notes of SMART Technologies Inc. (the Company) for the three months ended June 30, 2016 and our audited consolidated financial statements and accompanying notes, MD&A and Annual Report on Form 20-F for the fiscal year ended March 31, 2016. The consolidated financial statements have been presented in United States (U.S.) dollars and have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). Unless the context otherwise requires, any reference to the Company, SMART Technologies, SMART, we, our, us or similar terms refers to SMART Technologies Inc. and its subsidiaries. Because our fiscal year ends on March 31, references to a fiscal year refer to the fiscal year ended March 31 of the same calendar year. For example, when we refer to fiscal 2017, we mean our fiscal year ended March 31, 2017. Unless otherwise indicated, all references to $ and dollars in this MD&A mean U.S. dollars. Certain amounts in our MD&A may not add up due to rounding. All percentages however, have been calculated using unrounded amounts. Unless otherwise noted, this MD&A is presented in millions. Capitalized terms used in this MD&A but not defined will have the meanings given to them in our unaudited interim consolidated financial statements. Certain reclassifications have been made to prior years figures to conform to the current years presentation.
is a registered trademark in Canada, the U.S. and in member countries of the European Union. SMART Board®, SMART Notebook, SMART Meeting Pro, kapp®, kapp iQ®, SMART Room System, SMART Learning Suite, SMART amp, smarttech, the SMART logo and all SMART taglines are marks, common law or registered, of SMART Technologies ULC, a wholly owned subsidiary of SMART Technologies Inc., in the U.S. and/or other countries. All third-party product and company names are for identification purposes only and may be trademarks of their respective owners.
The following table sets forth the period end and period average exchange rates for U.S. dollars expressed in Canadian dollars that are used in the preparation of our unaudited interim consolidated financial statements and this MD&A. These rates are based on the closing rates published by the Bank of America.
Period End Rate |
Period Average Rate |
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Year-ended March 31, 2016 |
1.2965 | 1.3113 | ||||||
Monthly Fiscal 2017 |
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April |
1.2553 | 1.2823 | ||||||
May |
1.3047 | 1.2941 | ||||||
June |
1.2933 | 1.2905 | ||||||
Monthly Fiscal 2016 |
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April |
1.2013 | 1.2366 | ||||||
May |
1.2449 | 1.2176 | ||||||
June |
1.2389 | 1.2339 |
Forward-Looking Statements
This MD&A includes forward-looking statements within the meaning of the U.S. federal and applicable Canadian securities laws. These forward-looking statements relate both to us specifically and the technology product industry and business, demographic and other matters generally, and reflect our current views with respect to future events and our financial performance. Statements that include the words expanding,
expect, continuing, intend, plan, believe, project, estimate, anticipate, may, will, continue, further, seek, should and similar words or statements of a future or forward-looking nature identify forward-looking statements for purposes of the applicable securities laws or otherwise. The forward-looking statements in this MD&A pertain, among other matters, to our business, financial condition, financial performance, cost structure, results of operations, cash flows and plans, including in particular, but without limitation: (i) the continuing shift of education end-users from interactive whiteboards to interactive flat panels; (ii) the closing of the Arrangement with Foxconn Technology Group; (iii) our ability to refinance our long-term debt and credit facility in connection with the Arrangement, which management believes should alleviate any substantial doubt about the Companys ability to continue as a going concern; (iv) substantial variations of future quarterly operating results; and (v) slower than anticipated SMART kapp sales and significant declines in education sales, which may result in additional net losses.
All forward-looking statements address matters that involve known and unknown risks, uncertainties and assumptions, many of which are beyond our control. Accordingly, there are and will be important factors and assumptions that could cause our actual results and other circumstances and events to differ materially from those indicated in such statements. We believe that these risk factors and assumptions include, but are not limited to, the following:
| our ability to maintain sales, including sales to the education market that continue to decline; |
| sales of our new products and services may not be sufficient to offset the overall decline in sales; |
| difficulty in predicting our sales and operating results; |
| our ability to raise additional funds, manage cash flow, foreign exchange risk and working capital; |
| our substantial debt could adversely affect our financial condition; |
| changes to our business model; |
| our ability to execute and consummate any strategic opportunities that may be identified as a part of our strategic review, including specifically our ability to consummate the announced transaction with Foxconn Technology Group; |
| our ability to successfully manufacture, distribute, market and sell kapp as a new product in the market; |
| our ability to manage our market distribution channel, including changes related to establishing new relationships as well as managing our existing relationships with our resellers and distributors; |
| our ability to attract, retain and motivate qualified personnel; |
| the continued service and availability of a limited number of key personnel; |
| the potential for additional costs or liabilities arising from our inventory and purchase commitments within our supply chain, including raw material components; |
| competition in our industry, including the potential for our competitors and/or partners to form strategic alliances; |
| our ability to increase sales in the enterprise market; |
| our ability to successfully execute our strategy to expand and monetize our software and service offerings; |
| possible changes in the demand for our products; |
| the continuing shift in product mix from interactive whiteboards to interactive flat panels; |
| our ability to grow our sales in global markets; |
| our ability to enhance current products and develop and introduce new products; |
| the potential negative effect of product defects; |
| reduced spending by our customers due to changes in the spending policies or budget priorities for government funding, including the potential shift to other technology products; |
| the potential negative effect of disruptions of certain business functions provided by third parties; |
| the potential negative effects of system failures or cybersecurity attacks; |
| the reliability of component supply and product assembly and logistical services provided by third parties, including their compliance with environmental laws; |
| the development of the market for interactive learning and collaboration products; |
| our ability to manage risks inherent in foreign operations; |
| our ability to manage our systems, procedures and controls; |
| the potential of increased costs, including any to future restructuring and related charges; |
| our ability to protect our brand; |
| our ability to achieve the benefits of strategic partnerships; |
| our reliance upon a strategic partnership with Microsoft; |
| our ability to successfully obtain patents or registration for other intellectual property rights or protect, maintain and enforce such rights; |
| third-party claims of infringement or violation of, or other conflicts with, intellectual property rights by us; and |
| our ability to manage, defend and settle litigation. |
Although we believe that the assumptions inherent in the forward-looking statements contained in this MD&A are reasonable, undue reliance should not be placed on these statements, which only apply as of the date hereof. We undertake no obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments or otherwise, except as required by law.
Overview
SMART Technologies Inc. is one of the leading providers of technology solutions that are redefining the way the world works and learns. SMART solutions include large-format interactive displays, collaboration software and services that enable highly-interactive, engaging and productive teaching, learning and work experiences in schools and workplaces around the world. SMART is differentiated by complete, integrated solutions that are easy to use while focused on freeing people from their desks and computer screens to make collaboration and learning digitally more natural and engaging. We introduced the worlds first interactive whiteboard in 1991, and we remain one of the global leaders in the interactive display market with over 3.3 million interactive displays shipped to date. Our award-winning solutions are the result of more than 20 years of technological innovation supported by our core intellectual property. In the education market, we have transformed teaching and learning in classrooms worldwide, reaching millions of students and teachers. In the enterprise market, we have improved the way people work and collaborate worldwide, enabling them to be more productive and reduce costs.
We offer a number of interactive display products, including the SMART Board interactive whiteboards and interactive flat panels, the kapp digital capture boards, and the kapp iQ multi-way whiteboards. By touching the surface of a SMART interactive display, the user can control computer applications, access the Internet and our learning content ecosystem, write in digital ink, and save and distribute work. Our interactive displays serve as the focal point of a broad classroom and meeting-room technology platform and are augmented with a range of
modular and integrated interactive technology products and solutions, including hardware, software and content created by both our user community and professional content developers. kapp is a modern replacement for traditional dry-erase boards and flip charts that enables users to capture and digitally share information in high-quality formats. kapp iQ is an ultra HD display with a built-in whiteboard that enables multi-way inking between any combination of devices from anywhere in the world. Our collaborative learning solutions for education combine collaboration software with a comprehensive line of interactive displays and other hardware, accessories and services that further enhance learning. Our enterprise solutions facilitate collaborative decision making with industry-leading interactive displays, intuitive software and other high-quality components, including cameras, microphones and speakers.
Highlights
| On May 26, 2016, the Company announced that it entered into an arrangement agreement under which Foxconn Technology Group agreed to acquire all of the outstanding Common Shares of the Company for a cash payment of US$4.50 per Common Share (the Arrangement Agreement). In connection with the Arrangement Agreement, the Board has approved the accelerated vesting of all outstanding in-the-money options and restricted share units, subject to closing. The Arrangement Agreement is subject to customary conditions for a transaction of this nature, which include court and regulatory approvals and the approval of 66 2/3% of the votes cast by the Companys shareholders. At a Special Meeting of the Companys shareholders held on July 22, 2016, the Arrangement Agreement was approved by approximately 96.2% of the votes cast by the Companys shareholders. The Court of Queens Bench of Alberta granted a final order approving the Arrangement Agreement on July 28, 2016. The Arrangement Agreement provides that in the event of its termination under specified circumstances, the Company will be required to pay Foxconn a termination fee of $8.9 million. The Arrangement Agreement is expected to close in the second quarter of fiscal 2017, after which time the Common Shares will be delisted from the Toronto Stock Exchange and the NASDAQ Stock Market. |
| Revenue decreased by $17 million from $99 million in the first quarter of fiscal 2016 to $82 million in the first quarter of fiscal 2017. Gross margin percentage was 37% in the first quarter of fiscal 2016 compared to 32% in the first quarter of fiscal 2017. Adjusted EBITDA, which is defined in the Non-GAAP measures section below, decreased by $5 million from $3 million in the first quarter of fiscal 2016 to $(2) million in the first quarter of fiscal 2017. |
Results of Operations
Revenue
Three months ended June 30, | ||||||||||||
2016 | 2015 | Change | ||||||||||
Revenue |
$ | 82.1 | $ | 98.7 | (16.9 | )% | ||||||
Revenue by geographic location |
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North America |
$ | 64.4 | $ | 71.9 | (10.5 | )% | ||||||
Europe, Middle East and Africa |
14.7 | 24.6 | (40.4 | )% | ||||||||
Rest of World |
3.0 | 2.2 | 40.3 | % | ||||||||
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$ | 82.1 | $ | 98.7 | (16.9 | )% | |||||||
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Revenue decreased by $17 million in the first quarter of fiscal 2017 compared to the same period in fiscal 2016, primarily due to lower revenue from interactive whiteboards and interactive projectors, partly offset by increases in revenue from interactive flat panels.
Revenue in North America and EMEA was negatively impacted by declines in our education and enterprise solutions sales. The increase in revenue in Rest of World was due to increases in education solutions sales.
Gross Margin
Three months ended June 30, | ||||||||||||
2016 | 2015 | Change | ||||||||||
Gross margin |
$ | 26.1 | $ | 36.3 | (28.1 | )% | ||||||
Gross margin percentage |
31.7 | % | 36.7 | % | (5.0 | )pt |
Gross margin decreased by $10 million in the first quarter of fiscal 2017 compared to the same period in fiscal 2016, due to lower revenue as discussed above. The decrease in period-over-period gross margin percentage was due to a continuing shift in product mix from interactive whiteboards to interactive flat panels, which carry a lower gross margin percentage.
Operating Expenses
Selling, Marketing and Administration Expense
Three months ended June 30, | ||||||||||||
2016 | 2015 | Change | ||||||||||
Selling, marketing and administration |
$ | 21.0 | $ | 25.0 | (15.9 | )% | ||||||
As a percent of revenue |
25.6 | % | 25.3 | % | (0.3 | )pt |
Selling, marketing and administration expenses decreased by approximately $4 million in the first quarter of fiscal 2017 compared to the same period in fiscal 2016, primarily due to cost reduction initiatives undertaken last fiscal year. Selling, marketing and administration expense included costs related to the Arrangement Agreement of $2 million.
Research and Development Expense
Three months ended June 30, | ||||||||||||
2016 | 2015 | Change | ||||||||||
Research and development |
$ | 7.0 | $ | 11.0 | (36.6 | )% | ||||||
As a percent of revenue |
8.5 | % | 11.1 | % | (2.6 | )pt |
Research and development expenses decreased by $4 million in the first quarter of fiscal 2017 compared to the same period in fiscal 2016, primarily due to the impact of the Fiscal 2016 October restructuring activities.
Depreciation and Amortization
Three months ended June 30, | ||||||||||||
2016 | 2015 | Change | ||||||||||
Depreciation and amortization |
$ | 1.5 | $ | 2.5 | (38.0 | )% |
The decrease in depreciation and amortization of property and equipment in the first quarter of fiscal 2017 compared to the first quarter of fiscal 2016 was due to decreases in the net book value of these assets as a result of declining capital expenditures.
Non-Operating Expenses (Income)
Three months ended June 30, | ||||||||||||
2016 | 2015 | Change | ||||||||||
Interest expense |
$ | 4.4 | $ | 4.7 | (6.3 | )% | ||||||
Foreign exchange loss (gain) |
$ | 0.5 | $ | (2.0 | ) | * | ||||||
Other expense (income) |
$ | 0.0 | $ | (0.1 | ) | * | ||||||
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$ | 4.9 | $ | 2.6 | 89.8 | % | |||||||
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* | Not Meaningful |
Interest Expense
In the first quarters of fiscal 2017 and fiscal 2016, interest expense primarily related to our long-term debt and capital lease.
Foreign Exchange Loss (Gain)
The change in foreign exchange loss (gain) from the first quarter of fiscal 2016 to the first quarter of fiscal 2017 primarily related to the conversion of our U.S. dollar-denominated debt into our functional currency of Canadian dollars. From March 31, 2016 to June 30, 2016, the U.S dollar weakened by 0.2% against the Canadian dollar, compared to a weakening of 2.3% for the same period last year.
Income Tax Recovery
Three months ended June 30, | ||||||||||||
2016 | 2015 | Change | ||||||||||
Income tax recovery |
$ | (0.5 | ) | $ | (2.7 | ) | (80.1 | )% | ||||
Effective tax rate |
6.5 | % | 55.5 | % | (49.0 | )pt |
The decrease in income tax recovery in the first quarter of fiscal 2017 compared to the same period in fiscal 2016 was due primarily to an increase in the valuation allowance related to Canadian losses generated in the quarter.
Our tax provision is weighted towards Canadian income tax rates as substantially all our taxable income is Canadian-based. In calculating the tax provision, we adjusted income before income taxes by the unrealized foreign exchange loss from the revaluation of the U.S. dollar-denominated debt. This is treated as a capital item for income tax purposes.
Non-GAAP measures
As used in this MD&A, GAAP means generally accepted accounting principles in the United States that are in effect from time to time. This MD&A discloses certain financial measures, such as Adjusted Revenue, Adjusted Gross Margin, Adjusted Gross Margin percentage, Adjusted Net (Loss) Income, Adjusted Net (Loss) Income per share and Adjusted EBITDA.
Adjusted Revenue, Adjusted Gross Margin, Adjusted Gross Margin percentage, Adjusted Net (Loss) Income, Adjusted Net (Loss) Income per share and Adjusted EBITDA are non-GAAP measures and should not be considered as alternatives to revenue, gross margin, gross margin percentage, net loss or any other measure of financial performance calculated and presented in accordance with GAAP. Adjusted Revenue, Adjusted Gross Margin, Adjusted Gross Margin percentage, Adjusted Net (Loss) Income, Adjusted Net (Loss) Income per share, and Adjusted EBITDA have inherent limitations, and the reader should therefore not place undue reliance on them.
We define Adjusted Revenue as revenue adjusted for the accelerated deferred revenue recognized as a result of the change in accounting estimate beginning in the third quarter of fiscal 2014.
We calculate Adjusted Gross Margin by subtracting cost of sales, excluding the kapp Inventory Charge, from Adjusted Revenue.
Adjusted Gross Margin percentage is calculated by dividing Adjusted Gross Margin by Adjusted Revenue.
We define Adjusted Net (Loss) Income as net (loss) income before stock-based compensation (recovery) expense, restructuring costs, foreign exchange gains or losses, accelerated deferred revenue recognized, amortization of intangible assets, gains or losses related to the liquidation of foreign subsidiaries, gains or losses related to the sale of long-lived assets and the kapp Inventory Charge, all net of tax.
We calculate Adjusted Net (Loss) Income per share by dividing Adjusted Net (Loss) Income by the average number of basic and diluted shares outstanding during the period.
We define Adjusted EBITDA as Adjusted Net (Loss) Income before interest expense, income taxes, depreciation and other income.
We use Adjusted Net (Loss) Income to assess the performance of the business after removing the after-tax impact of stock-based compensation (recovery) expense, restructuring costs, foreign exchange gains and losses, accelerated deferred revenue recognized, amortization of intangible assets, gains or losses related to the liquidation of foreign subsidiaries, gains or losses related to the sale of long-lived assets and the kapp Inventory Charge. We also use Adjusted EBITDA as a key measure to assess the core operating performance of our business after removing the after-tax effects of both our leveraged capital structure and the volatility associated with the foreign currency exchange rates on our U.S. dollar-denominated debt. We use both of these measures to assess business performance when we evaluate our results in comparison to budgets, forecasts, prior-year financial results and other companies in our industry. Many of these companies use similar non-GAAP measures to supplement their GAAP disclosures, but such measures may not be directly comparable to ours. In addition to its use by management in the assessment of business performance, Adjusted EBITDA is used by our Board of Directors in assessing managements performance and is a key metric in the determination of payments made under our incentive compensation plans. We believe Adjusted Net (Loss) Income and Adjusted EBITDA may be useful to investors in evaluating our operating performance because securities analysts use metrics similar to Adjusted Net (Loss) Income and Adjusted EBITDA as supplemental measures to evaluate the overall operating performance of companies.
We compensate for the inherent limitations associated with using Adjusted Revenue, Adjusted Gross Margin, Adjusted Gross Margin percentage, Adjusted Net (Loss) Income, Adjusted Net (Loss) Income per share and Adjusted EBITDA through disclosure of such limitations, presentation of our financial statements in accordance with GAAP, and reconciliation of Adjusted Revenue, Adjusted Gross Margin, Adjusted Gross Margin percentage, Adjusted Net (Loss) Income per share, Adjusted Net (Loss) Income, and Adjusted EBITDA to the most directly comparable GAAP measures: revenue, gross margin, gross margin percentage, net (loss) earnings per share and net (loss) income.
Reconciliation of GAAP and Non-GAAP Results
The following table shows the reconciliations of net loss to Adjusted Net Loss and Adjusted EBITDA and basic and diluted loss per share to Adjusted Net Loss per share.
Three months ended June 30, | ||||||||
2016 | 2015 | |||||||
Net loss |
$ | (7.8 | ) | $ | (2.2 | ) | ||
Adjustments to net loss |
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Amortization of intangible assets |
0.0 | 0.0 | ||||||
Foreign exchange loss (gain) |
0.5 | (2.0 | ) | |||||
Stock-based compensation |
(0.8 | ) | 1.1 | |||||
Restructuring costs |
0.0 | 0.2 | ||||||
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(0.3 | ) | (0.6 | ) | |||||
Tax impact on adjustments(1) |
0.0 | 0.1 | ||||||
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Adjustments to net loss, net of tax |
(0.3 | ) | (0.7 | ) | ||||
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Adjusted Net Loss |
$ | (8.1 | ) | $ | (2.9 | ) | ||
Additional adjustments to net loss |
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Income tax recovery(2) |
(0.5 | ) | (2.6 | ) | ||||
Depreciation in cost of sales |
0.4 | 1.0 | ||||||
Depreciation of property and equipment |
1.5 | 2.5 | ||||||
Interest expense |
4.4 | 4.7 | ||||||
Other expense (income) |
0.0 | (0.1 | ) | |||||
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Adjusted EBITDA |
$ | (2.4 | ) | $ | 2.5 | |||
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As a percent of revenue(3) |
(2.9 | )% | 2.5 | % | ||||
Adjusted Net Loss per share |
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Loss per sharebasic |
$ | (0.64 | ) | $ | (0.18 | ) | ||
Adjustments to net loss, net of tax, per share |
(0.03 | ) | (0.06 | ) | ||||
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Adjusted Net Loss per sharebasic |
$ | (0.67 | ) | $ | (0.24 | ) | ||
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Loss per sharediluted |
$ | (0.64 | ) | $ | (0.18 | ) | ||
Adjustments to net loss, net of tax, per share |
(0.03 | ) | (0.06 | ) | ||||
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Adjusted Net Loss per sharediluted |
$ | (0.67 | ) | $ | (0.24 | ) | ||
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(1) | Reflects the tax impact on the adjustments to net (loss) income. A key driver of our foreign exchange gain is the conversion of our U.S. dollar-denominated debt that was originally incurred at an average rate of 1.03 into our functional currency of Canadian dollars. When the unrealized foreign exchange amount on the U.S. dollar-denominated debt is in a net gain position as measured against the original exchange rate, the gain is tax-effected at current rates. When the unrealized foreign exchange amount on the U.S. dollar- denominated debt is in a net loss position as measured against the original exchange rate and the loss cannot be carried back to a previous year, a valuation allowance is taken against it and as a result no net tax effect is recorded. |
(2) | Income tax recovery of $(0.5) million for the three months ended June 30, 2016 (June 30, 2015$(2.7) million) per consolidated statement of operations, net of tax impact on adjustments to Adjusted Net Loss of $(0.0) million for the three months ended June 30, 2016 (June 30, 2015$(0.1) million). |
(3) | Adjusted EBITDA as a percent of revenue is calculated by dividing Adjusted EBITDA by revenue. |
Selected Quarterly Financial Data
The following tables set forth the Companys unaudited quarterly financial information and non-GAAP measures for each of the eight most recent quarters, including the quarter ended June 30, 2016. The information in the table below has been derived from our unaudited interim consolidated financial statements. Our quarterly operating results have varied substantially in the past and may vary substantially in the future. Accordingly, the information below is not necessarily indicative of future results.
2017 | 2016 | 2015 | ||||||||||||||||||||||||||||||
First Quarter |
Fourth Quarter |
Third Quarter |
Second Quarter |
First Quarter |
Fourth Quarter |
Third Quarter |
Second Quarter |
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Revenue |
$ | 82.1 | $ | 68.4 | $ | 77.7 | $ | 103.6 | $ | 98.7 | $ | 99.6 | $ | 126.6 | $ | 129.2 | ||||||||||||||||
Gross margin |
26.1 | 23.7 | 3.9 | 37.5 | 36.3 | 49.4 | 57.1 | 62.5 | ||||||||||||||||||||||||
Net (loss) income |
(7.8 | ) | (0.2 | ) | (49.5 | ) | (9.0 | ) | (2.2 | ) | (9.6 | ) | 9.3 | 12.3 | ||||||||||||||||||
Earnings (loss) per share |
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Basic |
$ | (0.64 | ) | $ | (0.02 | ) | $ | (4.05 | ) | $ | (0.74 | ) | $ | (0.18 | ) | $ | (0.79 | ) | $ | 0.77 | $ | 1.01 | ||||||||||
Diluted |
$ | (0.64 | ) | $ | (0.02 | ) | $ | (4.05 | ) | $ | (0.74 | ) | $ | (0.18 | ) | $ | (0.79 | ) | $ | 0.74 | $ | 0.97 | ||||||||||
Non-GAAP measures: |
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Adjusted Revenue |
$ | 82.1 | $ | 68.4 | $ | 77.7 | $ | 103.6 | $ | 98.7 | $ | 85.8 | $ | 111.3 | $ | 113.1 | ||||||||||||||||
Adjusted Gross Margin |
26.1 | 23.7 | 24.4 | 37.5 | 36.3 | 35.5 | 41.8 | 46.4 | ||||||||||||||||||||||||
Adjusted EBITDA |
(2.4 | ) | (2.9 | ) | 1.7 | 6.8 | 2.5 | 1.8 | 10.9 | 12.9 | ||||||||||||||||||||||
Adjusted Net (Loss) Income |
(8.1 | ) | (10.0 | ) | (23.1 | ) | (1.3 | ) | (2.9 | ) | (5.2 | ) | 2.2 | 4.8 | ||||||||||||||||||
Adjusted Net (Loss) Income per share |
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Basic |
$ | (0.67 | ) | $ | (0.82 | ) | $ | (1.89 | ) | $ | (0.11 | ) | $ | (0.24 | ) | $ | (0.43 | ) | $ | 0.18 | $ | 0.39 | ||||||||||
Diluted |
$ | (0.67 | ) | $ | (0.82 | ) | $ | (1.89 | ) | $ | (0.11 | ) | $ | (0.24 | ) | $ | (0.43 | ) | $ | 0.17 | $ | 0.38 |
Liquidity and Capital Resources
For the three months ended June 30, 2016, we reported a net loss of $8 million and a shareholders deficit of $70 million at the end of the period, as a result of continued declines in education and enterprise sales during the period and slower than anticipated SMART kapp sales. In addition, our asset-based loan matures in July 2017. These circumstances indicate that there exist events or conditions that cast substantial doubt on our ability to continue as a going concern. In response to these events and conditions, we entered into the Arrangement Agreement with Foxconn Technology Group, which has been approved by our shareholders and the Court of Queens Bench of Alberta, and is expected to close in the second quarter of fiscal 2017. As a result of the announced Arrangement Agreement, our long-term debt and credit facility are expected to be refinanced, and managements plan alleviates any substantial doubt about our ability to continue as a going concern.
See Forward-Looking Statements and the Risk Factors section of our fiscal 2016 Annual Report on Form 20-F, including but not limited to, the risk factors titled:
| Our sales, including sales to the education market, are in decline and may continue to decline; |
| Sales of our new products and services may not be sufficient to offset the decline in our overall sales, and if sales of new products and services continue to be weak, our liquidity may be materially and adversely affected; |
| Our sales and operating results are difficult to predict; |
| The level and upcoming maturities of our current and future debt could have an adverse effect on our business; |
| Our working capital requirements and cash flows are subject to fluctuation, which could have a material adverse effect on our business, financial condition or results of operations. |
As of June 30, 2016, our outstanding debt balance was as follows:
Issue Date | Maturity Date | Interest Rate | Amount Outstanding |
|||||||||||||
Term loan, net of unamortized debt discount of $2.4 million and deferred financing fees of $1.3 million |
July 31, 2013 | Jan 31, 2018 | LIBOR + 9.25% | $ | 93.9 million | |||||||||||
Asset-based loan credit facility |
July 31, 2013 | July 31, 2017 | LIBOR + 2.50% | $ | 10.0 million |
All of our debt and credit facilities are denominated in U.S. dollars, contain standard borrowing conditions, and could be recalled by the lenders if certain conditions are not met.
We hold a four-and-a-half year, $125 million senior secured term loan (the Term loan) maturing on January 31, 2018 and a four-year, $50 million asset-based loan (the ABL) maturing on July 31, 2017. The Term loan bears interest at LIBOR plus 9.25% with a LIBOR floor of 1.25% and is repaid, on a quarterly basis, 10% per annum over the last two years of its term. The ABL bears interest at LIBOR plus 2.5% and $10 million was drawn as of June 30, 2016. The availability of the ABL is limited by certain accounts receivable balances calculated on a monthly basis and the outstanding standby letter of credit totaling $1 million as at June 30, 2016 (March 31, 2016$1 million). We had $30 million of availability from the ABL facility as at June 30, 2016.
The following table shows a summary of our cash flows provided by (used in) operating activities, investing activities and financing activities.
Three months ended June 30, | ||||||||
2016 | 2015 | |||||||
Net cash provided by (used in) operating activities |
$ | 8.5 | $ | (15.0 | ) | |||
Net cash used in investing activities |
$ | (0.6 | ) | $ | (1.3 | ) | ||
Net cash used in financing activities |
$ | (3.4 | ) | $ | (2.6 | ) |
Net Cash Provided by (Used in) Operating Activities
The increase in net cash provided by operating activities was primarily due to an increase in period-over-period working capital, primarily related to increases in accounts payable and decreases in inventory, partly offset by higher trade receivables.
Net Cash Used in Investing Activities
The decrease in net cash used in investing activities was due to lower capital expenditures in the first quarter of fiscal 2017 compared to the same period in fiscal 2016.
Net Cash Used in Financing Activities
The increase in net cash used in financing activities was due to higher principal payments on the Term loan in the first quarter of fiscal 2017 compared to the same period in fiscal 2016.
Contractual Obligations, Commitments, Guarantees and Contingencies
Contractual Obligations and Commitments
We have certain fixed contractual obligations and commitments that include future estimated payments for general operating purposes. Changes in our business needs, contractual cancellation provisions, fluctuating foreign exchange and interest rates, and other factors may result in actual payments differing from estimates. The following table summarizes our outstanding contractual obligations in millions of dollars as of June 30, 2016.
12 months ended June 30, | ||||||||||||||||||||||||||||||||
2017 | 2018 | 2019 | 2020 | 2021 | 2022 | 2023 and thereafter |
Total | |||||||||||||||||||||||||
Operating leases |
$ | 1.8 | $ | 1.7 | $ | 1.5 | $ | 1.1 | $ | | $ | | $ | | $ | 6.1 | ||||||||||||||||
Capital lease |
4.6 | 4.7 | 5.0 | 5.0 | 5.0 | 5.0 | 60.5 | 89.8 | ||||||||||||||||||||||||
Long-term debt |
12.5 | 95.2 | | | | | | 107.7 | ||||||||||||||||||||||||
Future interest obligations on long-term debt |
10.2 | 5.2 | | | | | | 15.4 | ||||||||||||||||||||||||
Purchase commitments |
47.3 | 2.4 | | | | | | 49.7 | ||||||||||||||||||||||||
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Total |
$ | 76.4 | $ | 109.3 | $ | 6.5 | $ | 6.1 | $ | 5.0 | $ | 5.0 | $ | 60.5 | $ | 268.8 | ||||||||||||||||
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The operating lease commitments relate primarily to office and warehouse space and represent the minimum commitments under these agreements.
The capital lease commitment relates to our headquarters building and represents our minimum capital lease payments (including amounts representing interest) and management fees under the lease agreement.
Long-term debt commitments represent the minimum principal repayments required under the Term loan and the ABL.
Our purchase commitments are for finished goods from contract manufacturers, certain information systems management services and licensing costs.
Commitments have been calculated using foreign exchange rates and interest rates in effect at June 30, 2016. Fluctuations in these rates may result in actual payments differing from those in the above table.
Guarantees and Contingencies
In the first quarter of fiscal 2017, our financial results were impacted by an unfavorable outcome in a legal proceeding under which certain inventory is expected to be returned to us in the future. Based on managements best estimate, we have recognized an allowance for stock return that reduced revenue by $3 million. The gross margin impact of this revenue reduction, in combination with managements best estimate of other potential costs, reduced Adjusted EBITDA by $2 million in the first quarter of fiscal 2017.
We are also involved in various other claims and litigation from time to time arising in the normal course of business. The outcome of these matters is uncertain, and there can be no assurance that such matters will be resolved in our favor. Accordingly, we are not able to make any determination with respect to the amount of any damages that might be awarded against us in connection with such matters. We do not believe, however, that the outcome of such claims and litigation, or the amounts we may be required to pay by reason thereof, would have a material adverse impact on our financial position, results of operations or liquidity.
Indemnities and Guarantees
In the normal course of business we enter into guarantees that provide indemnification and guarantees to counterparties to secure sales agreements and purchase commitments. Should we be required to act under such agreements, it is not expected that any material loss would result.
Off-Balance Sheet Arrangements
As of June 30, 2016, we had no off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on our consolidated financial condition, results of operations, liquidity, capital expenditures or capital resources.
Changes in Internal Control Over Financial Reporting
During the three months ended June 30, 2016, no changes were made to the Companys internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Companys internal control over financial reporting.
Quantitative and Qualitative Disclosures about Market and Other Financial Risks
In the normal course of our business, we engage in operating and financing activities that generate risks in the following primary areas.
Foreign Currency Risk
Foreign currency risk is the risk that fluctuations in foreign exchange rates could impact our earnings. We are exposed to foreign exchange risk primarily between the Canadian dollar and the U.S. dollar, the Euro and British pound sterling. This exposure relates to our U.S. dollar-denominated debt, the sale of our products to customers globally and purchases of goods and services in foreign currencies. A large portion of our revenue and purchases of materials and components are denominated in U.S. dollars. However, a substantial portion of our revenue is denominated in other foreign currencies, primarily the Canadian dollar, Euro and British pound sterling. If the value of any of these currencies depreciates relative to the U.S. dollar, our foreign currency revenue will decrease when translated to U.S. dollars for financial reporting purposes. In addition, a portion of our cost of goods sold, operating costs and capital expenditures are incurred in other currencies, primarily the Canadian dollar and the Euro. If the value of either of these currencies appreciates relative to the U.S. dollar, our expenses will increase when translated to U.S. dollars for financial reporting purposes.
We continually monitor foreign exchange rates and periodically enter into forward contracts and other derivative contracts to convert a portion of our forecasted foreign currency denominated cash flows into Canadian dollars for the purpose of paying our Canadian dollar-denominated operating costs. We target to cover between 25% and 75% of our expected Canadian dollar cash needs for the next 12 months through the use of forward contracts and other derivatives with the actual percentage determined by management based on the changing exchange rate environment. We may also enter into forward contracts and other derivative contracts to manage our cash flows in other currencies. We do not use derivative financial instruments for speculative purposes. We have also entered into and continue to look for opportunities within our supply chain to match our cost structures to our foreign currency revenues.
These programs reduce, but do not entirely eliminate, the impact of currency exchange movements. Our practice is to use foreign currency derivatives without hedge accounting designation. The maturity of these instruments generally occurs within 12 months. Gains or losses resulting from the fair valuing of these instruments are reported in foreign exchange loss (gain) in our consolidated statements of operations.
Interest Rate Risk
Interest rate risk is the risk that the value of a financial instrument will be affected by changes in market interest rates. Our long-term debt and revolving credit facilities bear interest based on floating market rates. Changes in these market rates result in fluctuations in the cash flows required to service this debt. In the past, we partially mitigated this risk by periodically entering into interest rate swap agreements to fix the interest rate on certain long-term variable-rate debt, and we may continue to do so in the future. Our practice is to use interest rate derivatives without hedge accounting designation. In the three months ended June 30, 2016, we did not enter into any interest rate derivatives. Changes in the fair value of these interest rate derivatives are included in interest expense in our consolidated statements of operations.
Credit Risk
Credit risk is the risk that the counterparty to a financial instrument fails to meet its contractual obligations, resulting in a financial loss to us.
We sell to a diverse customer base over a global geographic area. We evaluate collectability of specific customer receivables based on a variety of factors including currency risk, geopolitical risk, payment history, customer stability and other economic factors. Collectability of receivables is reviewed on an ongoing basis by management and the allowance for doubtful receivables is adjusted as required. Account balances are charged against the allowance for doubtful receivables when we determine that it is probable that the receivable will not be recovered. We believe that the geographic diversity of the customer base, combined with our established credit approval practices and ongoing monitoring of customer balances, mitigates this counterparty risk.
We may also be exposed to certain losses in the event that counterparties to the derivative financial instruments are unable to meet the terms of the contracts. Our credit exposure is limited to those counterparties holding derivative contracts with positive fair values at the reporting date. We manage this counterparty credit risk by entering into contracts with large established counterparties.
Liquidity Risk
Liquidity risk is the risk that we will not be able to meet our financial obligations as they come due, and we continually monitor our actual and projected cash flows to ensure that we have sufficient funding to meet all working capital and financing needs. See Liquidity and Capital Resources for additional information regarding liquidity risk.
Critical Accounting Policies and Estimates
We believe our critical accounting policies are those related to revenue recognition, inventory valuation and purchase commitments, product warranty costs, income taxes, restructuring costs and legal and other contingencies. We consider these policies critical because they are both important to the portrayal of our financial condition and operating results, and they require us to make judgments and estimates about inherently uncertain matters.
The preparation of financial statements and related disclosures in conformity with GAAP requires us to make judgments, assumptions and estimates that affect the amounts reported in our consolidated financial statements and accompanying notes. We base our estimates on historical experience and assumptions we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ from these estimates and such differences may be material.
Our critical accounting policies and estimates used in the preparation of our financial statements are reviewed regularly by management and have not changed from those disclosed in the March 31, 2016 audited consolidated financial statements, except as disclosed in Note 1Basis of presentation and significant accounting policies in the unaudited interim consolidated financial statements for the three months ended June 30, 2016.
Recent Accounting Guidance Adopted
In April 2015, the FASB issued a new accounting standard update to simplify the presentation of debt issuance costs. The amendments in this update require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. In August 2015, the FASB issued clarification that debt issuance costs related to line-of-credit arrangements could be presented as an asset and amortized, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. This guidance was adopted beginning April 1, 2016, and previously reported deferred financing fees, classified under non-current assets, have been reclassified as a direct deduction from long-term debt to reflect the retrospective application as follows as at March 31, 2016:
March 31, 2016 | ||||
Deferred financing fees, as reported |
$ | 1,515 | ||
Reclassification of deferred financing fees |
(1,515 | ) | ||
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Deferred financing fees, as reclassified |
$ | | ||
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March 31, 2016 | ||||
Long-term debt, as reported |
$ | 95,434 | ||
Reclassification of deferred financing fees |
(1,515 | ) | ||
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Long-term debt, as reclassified |
$ | 93,919 | ||
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Recent Accounting Guidance Not Yet Adopted
In May 2014, the FASB issued a comprehensive new revenue recognition standard, as well as subsequent updates, which will supersede existing revenue recognition guidance. The standard creates a five-step model for revenue recognition that requires companies to exercise judgment when considering contract terms and relevant facts and circumstances. The five-step model includes (1) identifying the contract, (2) identifying the separate performance obligations in the contract, (3) determining the transaction price, (4) allocating the transaction price to the separate performance obligations and (5) recognizing revenue when each performance obligation has been satisfied. The standard also requires expanded disclosures surrounding revenue recognition. The standard is effective for fiscal periods beginning after December 15, 2017 and allows for either full retrospective or modified retrospective adoption. Early adoption is not permitted prior to fiscal periods beginning after December 15, 2016. The new standard will be effective for us beginning April 1, 2018. We are currently evaluating the impact of the adoption of this standard on our consolidated financial statements.
In February 2016, the FASB issued a new accounting standard on leases which will supersede existing leases guidance. The standard requires companies to include the majority of their lease obligations in their balance sheet, including a dual approach for lessee accounting under which a lessee would account for leases as finance leases or operating leases. Both finance leases and operating leases will result in the lessee recognizing a right-of-use (ROU) asset and corresponding lease liability. The standard also requires expanded disclosures surrounding lease transactions. The standard is effective for annual reporting periods beginning after December 15, 2018, including interim periods within that reporting period, and allows for modified retrospective adoption. Early adoption is permitted. The new standard will be effective for us beginning April 1, 2019. We are currently evaluating the impact of the adoption of this standard on our consolidated financial statements.
In March 2016, the FASB issued a new accounting standard update to simplify the accounting for share-based payments. The amendments in this update simplify several aspects of the accounting for share-based payment award transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statements of cash flows. The guidance is effective for interim and annual periods beginning after December 15, 2016. Early adoption is permitted. This new guidance will be effective for us beginning April 1, 2017. We are currently evaluating the impact of the adoption of this standard on our consolidated financial statements.
In June 2016, the FASB issued a new accounting standard update that replaces the incurred loss impairment methodology for recognizing credit losses that delays recognition until it is it is probable a loss has been incurred, with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The guidance is effective for interim and annual periods beginning after December 15, 2019. Early adoption is permitted for annual reporting periods and interim periods therein beginning after December 15, 2018. The new standard will be effective for us beginning April 1, 2020. We are currently evaluating the impact of the adoption of this standard on our consolidated financial statements.
SMART Technologies Inc.
Interim Consolidated Financial Statements (unaudited)
Three months ended June 30, 2016 and 2015
SMART Technologies Inc.
Consolidated Statements of Operations (unaudited)
(thousands of U.S. dollars, except per share amounts)
Three months ended June 30, | ||||||||
2016 | 2015 | |||||||
Revenue |
$ | 82,069 | $ | 98,737 | ||||
Cost of sales |
56,019 | 62,487 | ||||||
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Gross margin |
26,050 | 36,250 | ||||||
Operating expenses |
||||||||
Selling, marketing and administration |
20,990 | 24,964 | ||||||
Research and development |
6,955 | 10,965 | ||||||
Depreciation and amortization |
1,530 | 2,469 | ||||||
Restructuring costs |
10 | 211 | ||||||
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29,485 | 38,609 | |||||||
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Operating loss |
(3,435 | ) | (2,359 | ) | ||||
Non-operating expenses (income) |
||||||||
Interest expense |
4,388 | 4,682 | ||||||
Foreign exchange loss (gain) |
521 | (1,965 | ) | |||||
Other expense (income) |
18 | (121 | ) | |||||
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4,927 | 2,596 | |||||||
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Loss before income taxes |
(8,362 | ) | (4,955 | ) | ||||
Income tax (recovery) expense |
||||||||
Current |
354 | 411 | ||||||
Deferred |
(900 | ) | (3,159 | ) | ||||
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(546 | ) | (2,748 | ) | |||||
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Net loss |
$ | (7,816 | ) | $ | (2,207 | ) | ||
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Loss per share |
||||||||
Basic |
$ | (0.64 | ) | $ | (0.18 | ) | ||
Diluted |
$ | (0.64 | ) | $ | (0.18 | ) |
See accompanying notes to consolidated financial statements
SMART Technologies Inc.
Consolidated Statements of Comprehensive Loss (unaudited)
(thousands of U.S. dollars)
Three months ended June 30, | ||||||||
2016 | 2015 | |||||||
Net loss |
$ | (7,816 | ) | $ | (2,207 | ) | ||
Other comprehensive loss |
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Unrealized (loss) gain on translation of consolidated financial statements to U.S. dollar reporting currency |
(291 | ) | 207 | |||||
Unrealized losses on translation of foreign subsidiaries to Canadian dollar functional currency, net of income taxes of $(31) for the three months ended June 30, 2016 (June 30, 2015$190)) |
(129 | ) | (756 | ) | ||||
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(420 | ) | (549 | ) | |||||
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Total comprehensive loss |
$ | (8,236 | ) | $ | (2,756 | ) | ||
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See accompanying notes to consolidated financial statements
SMART Technologies Inc.
Consolidated Balance Sheets (unaudited)
(thousands of U.S. dollars, except number of shares)
June 30, 2016 | March 31, 2016 | |||||||
ASSETS |
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Current assets |
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Cash and cash equivalents |
$ | 24,155 | $ | 19,960 | ||||
Trade receivables, net of allowance for receivables of $4,248, and $4,205 |
59,166 | 46,572 | ||||||
Income taxes recoverable |
5,216 | 5,349 | ||||||
Inventory |
38,048 | 42,651 | ||||||
Other current assets |
5,705 | 6,661 | ||||||
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132,290 | 121,193 | |||||||
Inventory |
4,403 | 5,242 | ||||||
Property and equipment |
42,832 | 44,094 | ||||||
Deferred income taxes |
3,779 | 3,150 | ||||||
Other long-term assets |
515 | 528 | ||||||
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$ | 183,819 | $ | 174,207 | |||||
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LIABILITIES AND SHAREHOLDERS DEFICIT |
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Current liabilities |
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Accounts payable |
$ | 30,446 | $ | 8,929 | ||||
Accrued and other current liabilities |
35,512 | 36,575 | ||||||
Deferred revenue |
17,422 | 16,458 | ||||||
Current portion of capital lease obligation |
1,174 | 1,152 | ||||||
Current portion of long-term debt |
12,500 | 12,500 | ||||||
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97,054 | 75,614 | |||||||
Long-term debt |
91,410 | 93,919 | ||||||
Capital lease obligation |
51,297 | 51,470 | ||||||
Deferred revenue |
13,831 | 13,608 | ||||||
Deferred income taxes |
| 247 | ||||||
Other long-term liabilities |
584 | 635 | ||||||
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254,176 | 235,493 | |||||||
Commitments and contingencies |
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Shareholders deficit |
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Share capital |
||||||||
Common Sharesno par value; unlimited shares authorized; issued 12,242,992 |
696,506 | 696,506 | ||||||
Treasury Shares (Common Shares)41,050 |
(840 | ) | (840 | ) | ||||
Accumulated other comprehensive income |
211 | 631 | ||||||
Additional paid-in capital |
43,643 | 44,478 | ||||||
Accumulated deficit |
(809,877 | ) | (802,061 | ) | ||||
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(70,357 | ) | (61,286 | ) | |||||
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$ | 183,819 | $ | 174,207 | |||||
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See accompanying notes to consolidated financial statements
SMART Technologies Inc.
Consolidated Statements of Shareholders (Deficit) Equity (unaudited)
(thousands of U.S. dollars)
Three months ended June 30, | ||||||||
2016 | 2015 | |||||||
Share capital amount |
||||||||
Balance at beginning of period |
$ | 695,666 | $ | 695,311 | ||||
Participant Equity Loan Plan |
| 2 | ||||||
Shares issued under stock plans |
| 312 | ||||||
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|
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Balance at end of period |
695,666 | 695,625 | ||||||
Accumulated other comprehensive income |
||||||||
Balance at beginning of period |
631 | 2,672 | ||||||
Other comprehensive loss |
(420 | ) | (549 | ) | ||||
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|
|||||
Balance at end of period |
211 | 2,123 | ||||||
Additional paid-in capital |
||||||||
Balance at beginning of period |
44,478 | 48,630 | ||||||
Stock-based compensation (recovery) expense |
(835 | ) | 1,146 | |||||
Shares issued under stock plans |
| (312 | ) | |||||
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|
|||||
Balance at end of period |
43,643 | 49,464 | ||||||
Accumulated deficit |
||||||||
Balance at beginning of period |
(802,061 | ) | (741,158 | ) | ||||
Net loss |
(7,816 | ) | (2,207 | ) | ||||
|
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|
|||||
Balance at end of period |
(809,877 | ) | (743,365 | ) | ||||
|
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Total shareholders (deficit) equity |
$ | (70,357 | ) | $ | 3,847 | |||
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|
See accompanying notes to consolidated financial statements
SMART Technologies Inc.
Consolidated Statements of Cash Flows (unaudited)
(thousands of U.S. dollars)
Three months ended June 30, | ||||||||
2016 | 2015 | |||||||
Cash provided by (used in) |
||||||||
Operations |
||||||||
Net loss |
$ | (7,816 | ) | $ | (2,207 | ) | ||
Adjustments to reconcile net loss to net cash provided by (used in) operating activities |
||||||||
Depreciation and amortization |
1,882 | 3,454 | ||||||
Amortization of deferred financing fees |
223 | 235 | ||||||
Amortization of long-term debt discount |
396 | 396 | ||||||
Non-cash recovery in other liabilities |
(43 | ) | (6 | ) | ||||
Stock-based compensation (recovery) expense |
(835 | ) | 1,146 | |||||
Unrealized loss (gain) on foreign exchange |
561 | (2,187 | ) | |||||
Deferred income tax recovery |
(900 | ) | (3,159 | ) | ||||
Changes in operating assets and liabilities: |
||||||||
Trade receivables |
(12,884 | ) | (8,662 | ) | ||||
Inventory |
5,571 | (21,520 | ) | |||||
Other current assets |
945 | (1,010 | ) | |||||
Income taxes recoverable |
187 | (406 | ) | |||||
Accounts payable, accrued and other current liabilities |
20,080 | 17,538 | ||||||
Deferred revenue |
1,109 | 1,408 | ||||||
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|
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Cash provided by (used in) operating activities |
8,476 | (14,980 | ) | |||||
Investing |
||||||||
Capital expenditures |
(643 | ) | (1,344 | ) | ||||
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|
|||||
Cash used in investing activities |
(643 | ) | (1,344 | ) | ||||
Financing |
||||||||
Repayment of long-term debt |
(3,125 | ) | (2,344 | ) | ||||
Repayment of capital lease obligation |
(283 | ) | (279 | ) | ||||
Participant equity loan plan, net |
| 4 | ||||||
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Cash used in financing activities |
(3,408 | ) | (2,619 | ) | ||||
Effect of exchange rate changes on cash and cash equivalents |
(230 | ) | 890 | |||||
|
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|
|
|||||
Net increase (decrease) in cash and cash equivalents |
4,195 | (18,053 | ) | |||||
Cash and cash equivalents, beginning of period |
19,960 | 54,465 | ||||||
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Cash and cash equivalents, end of period |
$ | 24,155 | $ | 36,412 | ||||
|
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|
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Cash and cash equivalents are comprised as follows |
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Cash |
$ | 15,636 | $ | 23,435 | ||||
Cash equivalents |
8,519 | 12,977 | ||||||
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|
|
|||||
$ | 24,155 | $ | 36,412 | |||||
|
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|
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Supplemental cash flow disclosures: |
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Interest paid |
$ | 3,313 | $ | 3,532 | ||||
Income taxes paid |
$ | 121 | $ | 554 | ||||
Changes in non-cash capital expenditures in accounts payable and accrued and other current liabilities |
$ | (151 | ) | $ | 485 |
See accompanying notes to consolidated financial statements
SMART Technologies Inc.
Notes to Consolidated Financial Statements (unaudited)
(thousands of U.S. dollars, except per share amounts, and except as otherwise indicated)
For the three months ended June 30, 2016 and 2015
1. Basis of presentation and significant accounting policies
The unaudited interim consolidated financial statements of SMART Technologies Inc. (the Company) have been prepared by management in accordance with accounting principles generally accepted in the United States of America (GAAP) applied on a basis consistent with those disclosed in the Companys annual audited consolidated financial statements except as discussed below. They do not include all the disclosures required by GAAP for annual financial statements and should be read in conjunction with the Companys audited consolidated financial statements for the year ended March 31, 2016, which have been prepared in accordance with GAAP. All normal recurring adjustments considered necessary for fair presentation have been included in these financial statements.
Future Operations
These financial statements have been prepared on a going concern basis which assumes that the Company will be able to discharge its obligations and realize its assets in the normal course of operations for the foreseeable future. For the three months ended June 30, 2016, the Company reported a net loss of $7,816, and has a shareholders deficit of $70,357, as a result of continued declines in education and enterprise sales during the period and slower than anticipated SMART kapp sales. In addition, the Companys asset-based loan matures in July 2017. These circumstances indicate that there exist events or conditions that cast substantial doubt on the Companys ability to continue as a going concern. In response to these events and conditions, on May 26, 2016, the Company entered into an Arrangement Agreement with Foxconn Technology Group (the Arrangement Agreement), which is expected to close in the second quarter of fiscal 2017. As a result of the announced Arrangement Agreement, the Companys long-term debt and credit facility are expected to be refinanced. Managements plan alleviates any substantial doubt about the Companys ability to continue as a going concern, and management believes that the going concern assumption is therefore appropriate for these financial statements.
Pending Arrangement with Foxconn Technology Group
In connection with the Arrangement Agreement, Foxconn Technology Group (Foxconn) agreed to acquire all of the outstanding Common Shares of the Company for a cash payment of US$4.50 per Common Share. In connection with the Arrangement Agreement, the Board has approved the accelerated vesting of all outstanding in-the-money options and restricted share units, subject to the closing of the Arrangement Agreement.
The closing of the Arrangement Agreement is subject to customary conditions for a transaction of this nature, which include court and regulatory approvals and the approval of 66 2/3% of the votes cast by the Companys shareholders. The Arrangement Agreement was approved by approximately 96.2% of the votes cast by the Companys shareholders at the special meeting held on July 22, 2016. The Court of Queens Bench of Alberta granted a final order approving the Arrangement Agreement on July 28, 2016. The Arrangement Agreement provides that in the event of its termination under specified circumstances, the Company will be required to pay Foxconn a termination fee of $8,900.
(a) Recent accounting guidance adopted
In April 2015, the Financial Accounting Standards Board (FASB) issued a new accounting standard update to simplify the presentation of debt issuance costs. The amendments in this update require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. In August 2015, the FASB issued clarification that debt issuance costs related to line-of-credit arrangements could be presented as an asset and
SMART Technologies Inc.
Notes to Consolidated Financial Statements (unaudited)
(thousands of U.S. dollars, except per share amounts, and except as otherwise indicated)
For the three months ended June 30, 2016 and 2015
amortized, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. This guidance was adopted beginning April 1, 2016, and previously reported deferred financing fees, classified under non-current assets, have been reclassified as a direct deduction from long-term debt to reflect the retrospective application as follows as at March 31, 2016:
March 31, 2016 | ||||
Deferred financing fees, as reported |
$ | 1,515 | ||
Reclassification of deferred financing fees |
(1,515 | ) | ||
|
|
|||
Deferred financing fees, as reclassified |
$ | | ||
|
|
March 31, 2016 | ||||
Long-term debt, as reported |
$ | 95,434 | ||
Reclassification of deferred financing fees |
(1,515 | ) | ||
|
|
|||
Long-term debt, as reclassified |
$ | 93,919 | ||
|
|
(b) Recent accounting guidance not yet adopted
In May 2014, the FASB issued a comprehensive new revenue recognition standard, as well as subsequent updates, which will supersede existing revenue recognition guidance. The standard creates a five-step model for revenue recognition that requires companies to exercise judgment when considering contract terms and relevant facts and circumstances. The five-step model includes (1) identifying the contract, (2) identifying the separate performance obligations in the contract, (3) determining the transaction price, (4) allocating the transaction price to the separate performance obligations and (5) recognizing revenue when each performance obligation has been satisfied. The standard also requires expanded disclosures surrounding revenue recognition. The standard is effective for fiscal periods beginning after December 15, 2017 and allows for either full retrospective or modified retrospective adoption. Early adoption is not permitted prior to fiscal periods beginning after December 15, 2016. The new standard will be effective for the Company beginning April 1, 2018. The Company is currently evaluating the impact of the adoption of this standard on its consolidated financial statements.
In February 2016, the FASB issued a new accounting standard on leases which will supersede existing leases guidance. The standard requires companies to include the majority of their lease obligations in their balance sheet, including a dual approach for lessee accounting under which a lessee would account for leases as finance leases or operating leases. Both finance leases and operating leases will result in the lessee recognizing a right-of-use (ROU) asset and corresponding lease liability. The standard also requires expanded disclosures surrounding lease transactions. The standard is effective for annual reporting periods beginning after December 15, 2018, including interim periods within that reporting period, and allows for modified retrospective adoption. Early adoption is permitted. The new standard will be effective for the Company beginning April 1, 2019. The Company is currently evaluating the impact of the adoption of this standard on its consolidated financial statements.
In March 2016, the FASB issued a new accounting standard update to simplify the accounting for share-based payments. The amendments in this update simplify several aspects of the accounting for share-based payment award transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statements of cash flows. The guidance is effective for interim and annual periods beginning after December 15, 2016. Early adoption is permitted. The new standard will be effective for the Company beginning April 1, 2017. The Company is currently evaluating the impact of the adoption of this standard on its consolidated financial statements.
SMART Technologies Inc.
Notes to Consolidated Financial Statements (unaudited)
(thousands of U.S. dollars, except per share amounts, and except as otherwise indicated)
For the three months ended June 30, 2016 and 2015
In June 2016, the FASB issued a new accounting standard update that replaces the incurred loss impairment methodology for recognizing credit losses that delays recognition until it is probable a loss has been incurred, with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The guidance is effective for interim and annual periods beginning after December 15, 2019. Early adoption is permitted for annual reporting periods and interim periods therein beginning after December 15, 2018. The new standard will be effective for the Company beginning April 1, 2020. The Company is currently evaluating the impact of the adoption of this standard on its consolidated financial statements.
2. Restructuring costs
Restructuring activities from fiscal 2012 to 2016 included cost reduction initiatives primarily related to kapp sales and marketing activities and related research and development spend, merging the Education and Enterprise segments and outsourcing of the Companys information technology function, the closure of the Ottawa business location, the exit of the optical touch sensor business for desktop displays and restructuring of NextWindow, increased focus on target markets, streamlined corporate support functions and cost reductions, the transfer of interactive display assembly operations to contract manufacturers and a change in business focus for specific regions including movement to a leaner organizational structure with additional reliance placed on key channel partners.
Changes in the accrued restructuring obligation associated with these restructuring activities were as follows:
Three months ended June 30, 2016 | ||||
Employee Termination Costs | ||||
Balance at beginning of period |
$ | 900 | ||
Restructuring costs paid |
(46 | ) | ||
Adjustments |
10 | |||
Currency translation adjustment |
(32 | ) | ||
|
|
|||
Balance at end of period |
$ | 832 | ||
|
|
Three months ended June 30, 2015 | ||||||||||||||||
Employee Termination Costs |
Facilities Costs |
Other Restructuring Costs |
Total | |||||||||||||
Balance at beginning of period |
$ | 5,110 | $ | 217 | $ | 40 | $ | 5,367 | ||||||||
Restructuring costs paid |
(1,992 | ) | | (31 | ) | (2,023 | ) | |||||||||
Adjustments |
(34 | ) | 245 | | 211 | |||||||||||
Currency translation adjustment |
125 | (17 | ) | | 108 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Balance at end of period |
$ | 3,209 | $ | 445 | $ | 9 | $ | 3,663 | ||||||||
|
|
|
|
|
|
|
|
At June 30, 2016, the Company has incurred total restructuring costs to date of $51,193 since the commencement of the restructuring activities discussed above, comprised of employee termination benefits of $35,790, facilities costs of $12,651, and other restructuring costs of $2,752.
At June 30, 2016, $832 (March 31, 2016$900) of the accrued restructuring obligation was included in accrued and other current liabilities.
SMART Technologies Inc.
Notes to Consolidated Financial Statements (unaudited)
(thousands of U.S. dollars, except per share amounts, and except as otherwise indicated)
For the three months ended June 30, 2016 and 2015
3. Inventory
The components of inventory were as follows:
June 30, 2016 | March 31, 2016 | |||||||
Finished goods |
$ | 41,327 | $ | 47,139 | ||||
Raw materials |
1,124 | 754 | ||||||
Non-current inventory |
(4,403 | ) | (5,242 | ) | ||||
|
|
|
|
|||||
Current inventory |
$ | 38,048 | $ | 42,651 | ||||
|
|
|
|
4. Property and equipment
The components of property and equipment were as follows:
June 30, 2016 | March 31, 2016 | |||||||
Cost |
||||||||
Asset under capital lease, net of deferred gain |
$ | 45,866 | $ | 45,604 | ||||
Information systems, hardware and software |
51,222 | 50,953 | ||||||
Assembly equipment, furniture, fixtures and other |
21,981 | 21,398 | ||||||
Assets under development |
233 | 418 | ||||||
|
|
|
|
|||||
$ | 119,302 | $ | 118,373 | |||||
Accumulated depreciation and amortization |
||||||||
Asset under capital lease, net of deferred gain |
$ | (8,814 | ) | $ | 8,094 | |||
Information systems, hardware and software |
(48,083 | ) | 47,268 | |||||
Assembly equipment, furniture, fixtures and other |
(19,573 | ) | 18,917 | |||||
|
|
|
|
|||||
$ | (76,470 | ) | $ | 74,279 | ||||
Net book value |
||||||||
Asset under capital lease, net of deferred gain |
$ | 37,052 | $ | 37,510 | ||||
Information systems, hardware and software |
3,139 | 3,685 | ||||||
Assembly equipment, furniture, fixtures and other |
2,408 | 2,481 | ||||||
Assets under development |
233 | 418 | ||||||
|
|
|
|
|||||
$ | 42,832 | $ | 44,094 | |||||
|
|
|
|
5. Product warranty
Changes in the accrued warranty obligation, which is included in accrued and other current liabilities, were as follows:
Three months ended June 30, | ||||||||
2016 | 2015 | |||||||
Balance at beginning of period |
$ | 12,787 | $ | 11,448 | ||||
Actual warranty costs incurred |
(2,041 | ) | (2,133 | ) | ||||
Warranty expense |
917 | 1,979 | ||||||
Currency translation adjustment |
36 | 261 | ||||||
|
|
|
|
|||||
Balance at end of period |
$ | 11,699 | $ | 11,555 | ||||
|
|
|
|
SMART Technologies Inc.
Notes to Consolidated Financial Statements (unaudited)
(thousands of U.S. dollars, except per share amounts, and except as otherwise indicated)
For the three months ended June 30, 2016 and 2015
6. Long-term debt and credit facilities
The components of long-term debt were as follows:
June 30, 2016 | March 31, 2016 | |||||||
Term loan |
$ | 97,656 | $ | 100,781 | ||||
Unamortized debt discount |
(2,450 | ) | (2,847 | ) | ||||
Deferred financing fees |
(1,296 | ) | (1,515 | ) | ||||
Current portion of long-term debt |
(12,500 | ) | (12,500 | ) | ||||
Asset-based loan |
10,000 | 10,000 | ||||||
|
|
|
|
|||||
$ | 91,410 | $ | 93,919 | |||||
|
|
|
|
All debt and credit facilities are U.S. dollar facilities. The Companys debt and credit facilities contain standard borrowing conditions, and could be recalled by the lenders if certain conditions are not met.
The Company holds a four-and-a-half year, $125 million senior secured term loan (the Term loan), which matures on January 31, 2018 and bears interest at LIBOR plus 9.25% with a LIBOR floor of 1.25% at June 30, 2016. The Term loan requires mandatory repayments, on a quarterly basis, of 10.0% per annum over the last two years of its term. In addition, the Term loan is subject to an annual excess cash flow sweep, as defined under the credit agreement. The Company is required to repay amounts under the facility ranging between zero and 50% of annual excess cash flows, contingent upon the Companys leverage ratio at the time.
The Company also has a $50,000 asset-based loan (the ABL) that bears interest at LIBOR plus 2.5% at June 30, 2016. The ABL matures on July 31, 2017 and $10,000 was drawn from the ABL facility at June 30, 2016 (March 31, 2016$10,000). The availability of the ABL is limited by certain accounts receivable balances calculated on a monthly basis and the outstanding standby letter of credit totaling $1,000 at June 30, 2016 (March 31, 2016$1,000). The Company had $30,275 of availability from the ABL facility at June 30, 2016.
7. Share capital
The Companys authorized share capital consists of an unlimited number of Common Shares and an unlimited number of Preferred Shares issuable in series.
The share capital activity was as follows:
Amount | Number of Shares | |||||||
Common Shares |
||||||||
Balance at March 31, 2016 |
$ | 696,506 | 12,242,992 | |||||
|
|
|
|
|||||
Balance at June 30, 2016 |
$ | 696,506 | 12,242,992 | |||||
Common SharesTreasury Shares |
||||||||
Balance at March 31, 2016 |
$ | (840 | ) | (41,050 | ) | |||
|
|
|
|
|||||
Balance at June 30, 2016 |
$ | (840 | ) | (41,050 | ) | |||
|
|
|
|
|||||
Total share capital |
$ | 695,666 | 12,201,942 | |||||
|
|
|
|
8. Income taxes
Income tax expense differs from the amount that would be computed by applying the combined Canadian federal and provincial statutory income tax rates to income before income taxes.
SMART Technologies Inc.
Notes to Consolidated Financial Statements (unaudited)
(thousands of U.S. dollars, except per share amounts, and except as otherwise indicated)
For the three months ended June 30, 2016 and 2015
The reasons for these differences are as follows:
Three months ended June 30, | ||||||||
2016 | 2015 | |||||||
Loss before income taxes |
$ | (8,362 | ) | $ | (4,955 | ) | ||
Combined tax rate |
27.00 | % | 26.50 | % | ||||
|
|
|
|
|||||
Expected income tax recovery |
$ | (2,258 | ) | $ | (1,313 | ) | ||
Adjustments |
||||||||
Non-deductible, non-taxable items |
(258 | ) | (8 | ) | ||||
Tax rate variance |
174 | (1,174 | ) | |||||
Change in valuation allowance |
2,251 | 97 | ||||||
Investment tax credits |
(401 | ) | (423 | ) | ||||
Other |
(54 | ) | 73 | |||||
|
|
|
|
|||||
Income tax recovery |
$ | (546 | ) | $ | (2,748 | ) | ||
|
|
|
|
The Company and its Canadian subsidiaries file federal and provincial income tax returns in Canada, its U.S. subsidiaries file federal and state income tax returns in the U.S. and its other foreign subsidiaries file income tax returns in their respective foreign jurisdictions. The Company and its subsidiaries are generally no longer subject to income tax examinations by tax authorities for years before March 31, 2009. Tax authorities in various jurisdictions are conducting examinations of local tax returns for various taxation years ending after March 31, 2009. Notwithstanding managements belief in the merit of the Companys tax filing positions, it is possible that the final outcome of any audits by taxation authorities may differ from estimates and assumptions used in determining the Companys consolidated tax provision and accruals, which could result in a material impact on the consolidated income tax provision and the net income (loss) for the period in which such determinations are made.
Notwithstanding managements belief in the merit of the Companys tax filing positions, it is possible that the Companys unrecognized tax benefits, if any, could significantly increase or decrease within the next twelve months, although such a change is not likely to have a material impact on the Companys effective tax rate. Future changes in managements assessment of the sustainability of its tax filing positions may impact the Companys income tax liability.
9. Loss per share amounts
Basic loss per share is computed based on the weighted average number of Common Shares outstanding during the period. Diluted loss per share is computed based on the weighted average number of Common Shares plus the effect of dilutive potential Common Shares outstanding during the period using the treasury stock method. Dilutive potential Common Shares include outstanding stock options, deferred share units and restricted share units.
The components of basic and diluted loss per share were as follows:
Three months ended June 30, | ||||||||
2016 | 2015 | |||||||
Net loss available to common shareholders |
$ | (7,816 | ) | $ | (2,207 | ) | ||
Weighted-average number of shares outstanding |
12,201,942 | 12,182,739 | ||||||
Effect of dilutive securities |
| | ||||||
|
|
|
|
|||||
Weighted-average diluted shares |
12,201,942 | 12,182,739 | ||||||
|
|
|
|
|||||
Basic loss per share |
$ | (0.64 | ) | $ | (0.18 | ) | ||
Diluted loss per share |
$ | (0.64 | ) | $ | (0.18 | ) |
SMART Technologies Inc.
Notes to Consolidated Financial Statements (unaudited)
(thousands of U.S. dollars, except per share amounts, and except as otherwise indicated)
For the three months ended June 30, 2016 and 2015
No dilutive securities were included in the diluted earnings per share calculation for the three months ended June 30, 2016 or 2015 due to net losses reported.
10. Commitments and contingencies
In the normal course of business, the Company enters into guarantees that provide indemnification and guarantees to counterparties to secure sales agreements and purchase commitments. It is not anticipated that the Company would suffer a material loss in the event it is required to honor these guarantees.
11. Segment disclosure
Revenue information relating to the geographic locations in which the Company sells products was as follows:
Three months ended June 30, | ||||||||
2016 | 2015 | |||||||
Revenue |
||||||||
United States |
$ | 57,318 | $ | 64,062 | ||||
Canada |
7,033 | 7,877 | ||||||
Europe, Middle East and Africa |
14,702 | 24,648 | ||||||
Rest of World |
3,016 | 2,150 | ||||||
|
|
|
|
|||||
$ | 82,069 | $ | 98,737 | |||||
|
|
|
|
For the three months ended June 30, 2016, one distributor and one reseller accounted for 14% and 13% of total revenue, respectively. For the three months ended June 30, 2015, one distributor accounted for 14% of total revenue.
12. Financial instruments
The Companys financial instruments consist of foreign exchange and interest rate derivative instruments and other financial instruments including cash and cash equivalents, trade receivables, accounts payable, accrued and other current liabilities and long-term debt.
The Company uses derivatives to partially offset its exposure to foreign exchange risk and interest rate risk. The Company enters into derivative transactions with high credit quality counterparties and, by policy, seeks to limit the amount of credit exposure to any one counterparty based on an analysis of the counterpartys relative credit standing. The Company does not use derivative financial instruments for trading or speculative purposes.
(a) Foreign exchange rate risk
Foreign exchange rate risk is the risk that fluctuations in foreign exchange rates could impact the Company. The Company operates globally and is exposed to significant foreign exchange risk, primarily between the Canadian dollar and the U.S. dollar (USD), the Euro (EUR), and British pound sterling (GBP). This exposure relates to our U.S. dollar-denominated debt, the sale of our products to customers globally and purchases of goods and services in foreign currencies. The Company seeks to manage its foreign exchange risk by monitoring foreign exchange rates, forecasting its net foreign currency cash flows and periodically entering into forward contracts and other derivative contracts to convert a portion of its forecasted foreign currency denominated cash flows into Canadian dollars for the purpose of paying Canadian dollar-denominated operating costs. The Company may also enter into forward contracts and other derivative contracts to manage its cash flows in other currencies.
SMART Technologies Inc.
Notes to Consolidated Financial Statements (unaudited)
(thousands of U.S. dollars, except per share amounts, and except as otherwise indicated)
For the three months ended June 30, 2016 and 2015
These programs reduce but do not entirely eliminate the impact of currency exchange movements. The Company does not apply hedge accounting to its currency derivatives. The maturity of these instruments generally occurs within 12 months. Gains or losses resulting from the fair valuing of these instruments are reported in foreign exchange loss (gain) in the consolidated statements of operations.
(b) Interest rate risk
Interest rate risk is the risk that the value of a financial instrument will be affected by changes in market interest rates. The Companys financing includes long-term debt and revolving credit facilities that bear interest based on floating market rates. Changes in these rates result in fluctuations in the required cash flows to service this debt. The Company partially mitigates this risk by periodically entering into interest rate swap agreements to fix the interest rate on certain long-term variable-rate debt. The Company does not apply hedge accounting to its interest rate derivatives.
(c) Credit risk
Credit risk is the risk that the counterparty to a financial instrument fails to meet its contractual obligations, resulting in a financial loss to the Company.
The Company sells hardware and software to a diverse customer base over a global geographic area. The Company evaluates collectability of specific customer receivables based on a variety of factors. The geographic diversity of the customer base, combined with the Companys established credit approval practices and ongoing monitoring of customer balances, partially mitigates this credit risk.
Fair value measurements
ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date and establishes a three-tier value hierarchy, which prioritizes the inputs in the valuation methodologies in measuring fair value:
Level 1Unadjusted quoted prices at the measurement date for identical assets or liabilities in active markets.
Level 2Observable inputs other than quoted market prices included in level 1, such as quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets in markets that are not active or inputs that are observable or can be corroborated by observable market data.
Level 3Significant unobservable inputs which are supported by little or no market activity and typically reflect managements estimates of assumptions that market participants would use in pricing the asset or liability.
The fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.
SMART Technologies Inc.
Notes to Consolidated Financial Statements (unaudited)
(thousands of U.S. dollars, except per share amounts, and except as otherwise indicated)
For the three months ended June 30, 2016 and 2015
The following table presents the Companys assets and liabilities that are measured at fair value on a recurring basis:
June 30, 2016 | ||||||||||||||||
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
Assets |
||||||||||||||||
Money market funds |
$ | 8,519 | $ | | $ | | $ | 8,519 | ||||||||
Derivative instruments |
| 721 | | 721 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total assets |
$ | 8,519 | $ | 721 | $ | | $ | 9,240 | ||||||||
|
|
|
|
|
|
|
|
March 31, 2016 | ||||||||||||||||
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
Assets |
||||||||||||||||
Money market funds |
$ | 8,629 | $ | | $ | | $ | 8,629 | ||||||||
Derivative instruments |
| 726 | | 726 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total assets |
$ | 8,629 | $ | 726 | $ | | $ | 9,355 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Liabilities |
||||||||||||||||
Derivative instruments |
$ | | $ | 125 | $ | | $ | 125 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Total liabilities |
$ | | $ | 125 | $ | | $ | 125 | ||||||||
|
|
|
|
|
|
|
|
(a) Fair value of derivative contracts
June 30, 2016 | ||||||||||||||||||||
Asset (liability) fair value |
Contract term | Rates | Notional amounts of quantity |
Buy/Sell | ||||||||||||||||
Foreign exchange forward |
$ | 71 | Aug 2016 to Jan 2017 | 1.3067 1.3067 | USD 6,000 | Sell | ||||||||||||||
302 | Jul 2016 to May 2017 | 1.4648 1.592 | EUR 5,500 | Sell | ||||||||||||||||
348 | Jul 2016 to Sep 2016 | 2.0201 2.0201 | GBP 1,500 | Sell | ||||||||||||||||
|
|
|||||||||||||||||||
$ | 721 | |||||||||||||||||||
|
|
|||||||||||||||||||
March 31, 2016 | ||||||||||||||||||||
Asset (liability) fair value |
Contract term | Rates | Notional amounts of quantity |
Buy/Sell | ||||||||||||||||
Foreign exchange forward derivative contracts |
$ | (48 | ) | Apr 2016 to Jun 2016 | 1.2492 1.2946 | USD 4,000 | Sell | |||||||||||||
293 | Apr 2016 to Oct 2016 | 1.3762 1.5920 | EUR 9,000 | Sell | ||||||||||||||||
356 | Apr 2016 to Sep 2016 | 2.0201 2.0201 | GBP 3,000 | Sell | ||||||||||||||||
|
|
|||||||||||||||||||
$ | 601 | |||||||||||||||||||
|
|
The Company enters into foreign exchange forward derivative contracts to economically hedge its risks in the movement of foreign currencies against the Companys functional currency of the Canadian dollar. At June 30, 2016, the fair value of foreign exchange derivative contracts includes $721 in other current assets (March 31, 2016$726) and nil in accrued and other current liabilities (March 31, 2016$125). Changes in the
SMART Technologies Inc.
Notes to Consolidated Financial Statements (unaudited)
(thousands of U.S. dollars, except per share amounts, and except as otherwise indicated)
For the three months ended June 30, 2016 and 2015
fair value of these contracts are included in foreign exchange loss (gain). The Company recorded a gain of $630 and a loss of $709 on these contracts for the three months ended June 30, 2016 and 2015, respectively.
The estimated fair values of foreign exchange and interest rate derivative contracts are derived using complex financial models with inputs such as benchmark yields, time to maturity, reported trades, broker/dealer quotes, issuer spreads and discount rates.
Considerable judgment is required in developing the estimates of fair value. Therefore, estimates are not necessarily indicative of the amounts the Company could expect to realize in a liquidation or unwinding of an existing contract.
(b) Long-term debt
The estimated fair value of the Companys Term loan has been determined based on current market conditions by discounting future cash flows under current financing arrangements at borrowing rates believed to be available to the Company for debt with similar terms and remaining maturities.
The fair value of the Term loan was measured utilizing Level 3 inputs. The Level 3 fair value measurements utilize a discounted cash flow model. This model utilizes observable inputs such as contractual repayment terms and benchmark forward yield curves and other inputs such as a discount rate that is intended to represent the Companys credit risk for secured or unsecured obligations. The Company estimates its credit risk based on the corporate credit rating and the credit rating on its variable-rate long-term debt and utilizes benchmark yield curves that are widely used in the financial industry.
The carrying value and fair value of the Companys Term loan are as follows:
June 30, 2016 | March 31, 2016 | |||||||||||||||
Carrying amount | Fair value | Carrying amount | Fair value | |||||||||||||
Variable-rate long-term debt, excluding debt discount |
$ | 97,656 | $ | 97,625 | $ | 100,781 | $ | 99,671 |
(c) Other financial assets and liabilities
The fair values of cash and cash equivalents, trade receivables, accounts payable and accrued and other current liabilities approximate their carrying amounts due to the short-term maturity of these instruments. A portion of these items are denominated in currencies other than the Canadian dollar functional currency of the Company including the U.S. dollar, Euro and British pound sterling and are translated at the exchange rate in effect at the balance sheet date.
Exhibit 99.3
Certification of Principal Executive Officer Pursuant to Exchange Act Rule 13a-14(a)
as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Neil Gaydon, certify that:
1. | I have reviewed the financial statements of SMART Technologies Inc. for the fiscal quarter ended June 30, 2016 and the related MD&A (together, the report); |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. | The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
(a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
(b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
(c) | Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
(d) | Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and |
5. | The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions): |
(a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and |
(b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting. |
Dated this 4th day of August, 2016.
/s/ Neil Gaydon |
Neil Gaydon President & Chief Executive Officer |
Exhibit 99.4
Certification of Principal Financial Officer Pursuant to Exchange Act Rule 13a-14(a)
as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Steve Winkelmann, certify that:
1. | I have reviewed the financial statements of SMART Technologies Inc. for the fiscal quarter ended June 30, 2016 and the related MD&A (together, the report); |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. | The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
(a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
(b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
(c) | Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
(d) | Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and |
5. | The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions): |
(a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and |
(b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting. |
Dated this 4th day of August, 2016.
/s/ Steve Winkelmann |
Steve Winkelmann Interim Vice President, Finance & Chief Financial Officer |
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